Federal Tax Crimes

IRS Reminders for Foreign Income Reporting (5/24/13)

noreply@blogger.com (Jack Townsend) — Fri, 24 May 2013 12:06:00 +0000

The IRS has posted a web page reminding U.S. taxpayers with foreign assets of their U.S. tax and related obligations. See IR-2013-54 (5/23/13), titled IRS Reminds Those with Foreign Assets of U.S. Tax Obligations, here.

Among the reminders (with links for further information) are:

The filing dates for nonresident U.S. citizens and resident aliens.
Filing obligations of nonresident aliens with U.S. source income.
U.S. worldwide tax system requiring the reporting of income whereever it is earned or sourced, along with the Schedule B question about ownership or signatory authority over foreign financial accounts.
The obligation to file Form 8938 with Form 1040 to report specified foreign financial assets.
The obligation to file FBARs.
The opportunity for efiling, including Free File for taxpayers earning less than $57,000.

Tax Perjury and FBAR Charges Related to Illegal Income Fake Art Case (5/22/13)

noreply@blogger.com (Jack Townsend) — Wed, 22 May 2013 12:35:00 +0000

Glafira Rosales, a Manhattan art dealer, has been charged by complaint with tax perjury, 3 counts, and failure to file FBARs, 5 counts. The complaint, based on the sworn affidavit of an IRS CI Agent, is here; the USAO SDNY press release is here. The key features are:

Defendant (Taxpayer): Glafira Rosales
Charges: Tax Perjury (3 counts); Failure to file FBAR (4 counts)
Maximum Sentence: 34 Years (3 counts times 3 years, plus 4 counts times 5 years); but, the sentence will ultimately be determined under the Sentencing Guidelines subject to variances as the sentencing judge deems warranted. (See discussion below))
Banks: Caja Madrid [Wikipedia entry here.]
Tax Loss: 3.5 million (See discussion below)
Entities: Yes

Ms. Rosales was arrested incident to the complaint. I don't recall that arrests were involved in many prior indictments. But, then, for the reasons noted below, this is not the ordinary tax case. Other potential nontax misconduct may be animating treatment outside the tax crimes mainstream.

According to the indictment, although the investigation started "in or about 2009" -- criminal allegation speak for 2009 with some fuzziness, the investigation was an FBI investigation was into "the sale of various works of art that have been alleged to be counterfeit." Ms. Rosales was heavily involved in the activity investigate. The IRS agent became involved in the investigation in 2012. (As noted above, she was not charged for any crime the FBI has authority to investigate (i.e., the FBI can't investigate tax crimes); hence the involvement of the IRS may have been to get a quick charge and arrest with perhaps an expanded indictment to follow (although the general five year statute of limitations for non-tax crimes may have been a factor, since tax crimes generally have a six-year statute of limitations, see Section 6531, here, which does not include the time the person is out of the country, which I suspect was significant in Ms. Rosales' case.) Alternatively, as noted below in the New York Times article perhaps the art works even if fake were good enough that the Government might have difficulty proving they are fake in a criminal trial. As is not uncommon, if they are not sure of making another criminal charge for a pattern of conduct, a tax crime may be the way to go (a la Al Capone). Of course, if it proceeds as a tax case only, whether the pattern of conduct from which the income arose was otherwise illegal will come up in the two level upward adjustment to the Base Offense Level where the Government need prove the illegality only by a preponderance of the evidence and that likely will have been proved in the trial itself if she does not plead. Of course, the sentencing range is already so high that adding the two level adjustment is probably irrelevant to the sentence she will receive.
Key parts of the USAO SDNY Press Release are:

Manhattan U.S. Attorney Preet Bharara said: “As alleged, Glafira Rosales gave new meaning to the phrase ‘artful dodger’ by avoiding taxes on millions of dollars in income from dealing in fake artworks for fake clients. Her arrest shows that no matter how clever the scheme, attempts to hide income from the government to avoid paying taxes on that income will be discovered and prosecuted.”

IRS Special Agent-in-Charge Toni Weirauch said: “The sale of a piece of art for profit is a taxable event and the seller is responsible for paying his or her fair share of tax, even if the art is counterfeit. The allegations in this investigation illustrate a ‘double-barreled’ tax evasion scheme: disguising who was actually selling the art and profiting from the sales, through the creation of a fictitious seller and the use of the name of a collector not associated with the transactions, and further concealing the proceeds by depositing them in an unreported foreign bank account.”

FBI Assistant Director-in-Charge George Venizelos said: “As alleged, Glafira Rosales committed tax fraud in falsely reporting that she was selling art on behalf of clients. In truth, those clients were just part of the picture she painted to perpetrate her multi-million dollar scheme. There is consistency in the scheme, however: The artwork Rosales sold appears to be as fake as her story about the clients she claimed to represent.”

According to the allegations in the Complaint unsealed today in Manhattan federal court:

In the 1990’s, ROSALES, an art dealer, began selling previously unknown paintings that had never been exhibited before, and that she claimed were painted by some of the most famous artists of the 20th century, including Jackson Pollock, Mark Rothko, and Willem de Kooning. From 2006 through 2008, ROSALES sold approximately one dozen of these paintings to two prominent Manhattan galleries for over $14 million. In selling most of the paintings to the two galleries, she purported to represent a client with ties to Switzerland who had inherited the paintings and wanted to sell them, but who also wished to remain anonymous (the “Purported Swiss Client”). For the remainder of the paintings, she purported to represent a Spanish collector (the “Purported Spanish Collector”). ROSALES also claimed that a portion of the price paid by the Manhattan galleries would be her commission for selling the paintings, and that the remainder would be passed along to her clients.

In contrast to the claims made by ROSALES, the investigation has revealed that:

• experts in the fields of art, art history, and materials science have concluded that at least several of the paintings sold by her are counterfeit;
• the Purported Swiss Client on whose behalf she claimed to sell most of the paintings to the Manhattan galleries never existed;
• the Purported Spanish collector on whose behalf she claimed to sell the remainder of the paintings to the Manhattan galleries never owned the paintings; and
• instead of passing along a substantial portion of the proceeds of the sale of the various paintings, she kept all or almost all of the proceeds, and transferred substantial portions to an account maintained by her then-boyfriend.

ROSALES filed tax returns that falsely claimed she had not kept all, or almost all of the proceeds from the sale of the purported clients’ paintings, when, in fact, she had. Further, there was no Swiss client and no Spanish collector. In total, she failed to report the receipt of at least $12.5 million of income for the years 2006 through 2008.
In addition, ROSALES received most of the proceeds from the sale of the paintings in a foreign bank account that she hid from, and failed to report to, the IRS. U.S. taxpayers are required to report the existence of any foreign bank account that holds more than $10,000 at any time during a given year by the filing of a Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (“FBAR”). ROSALES failed to file FBARs for the years 2007 through 2011.

JAT comments on the Tax Loss Number and Sentencing Guidelines above: The tax loss of $3.5 million is estimated from the Guidelines presumption of 28% of omitted income, here $12.5 million. The $12.5 million only includes the charged years. The pattern occurred in earlier years as well (perhaps beyond the criminal statute of limitations) and would be included in the Guidelines calculation as relevant conduct, so that the tax loss for sentencing purposes is certainly going to be higher. Of course, fine tuning the tax loss is not relevant to the merits of the charge made (tax perjury as to the omitted income) and becomes material only at sentencing where the tax loss is the principal driver in calculating the Guidelines sentencing range. My rough cut on the sentence range for the amount of tax alleged $3.5 million is 78-87 months if she goes to trial and is convicted. The range is 57-71 months if she pleads guilty and gets the 3 level downward adjustment for acceptance of responsibility.

As suggested in the complaint and the press release, Ms. Rosales has achieved some degree of notoriety. Some of the notoriety is laid out in the New York Times article, Graham Bowley, William K. Rashbaum and Patricia Cohen, Dealer at Center of Art Scandal Arrested on Tax Charges (NYT 5/21/13), here. Excerpts from the article are:\

[Referring to the press release's allegations of "fake artworks"]

The case drew attention in the art world because it illustrated the vulnerability of a market where value is based on authenticity but can be difficult for experts to determine with complete precision. Dealers who sold the works, often for millions of dollars, said they believed in their authenticity even after many of their clients began to challenge those assertions.

But according to the government’s case, an apparently talented forger — or forgers — confounded the art world for years by turning out realistic-looking works said to be by masters including Jackson Pollock and Willem de Kooning. Authorities declined to comment on whether they have identified a forger, but a person briefed on the matter, who spoke on condition of anonymity because he was not authorized to comment, said the investigation is continuing and that any leads on the forgeries will be pursued.

* * * *

Beginning in the mid-1990s, Ms. Rosales sold most of the disputed works through the East 70th Street offices of Knoedler & Company, which was at the time New York’s oldest gallery. The works, all new to the market and many said to be from a collector based in Zurich and Mexico City whom Ms. Rosales initially refused to name, were embraced by Knoedler, which sold them for millions. They became an important source of revenue for the gallery.

But then several experts called the works fake, and the F.B.I. began an investigation. In 2011, after 165 years in business, Knoedler closed and was later sued by a half-dozen clients who had bought the Rosales works.

The scandal cast a shadow over Ann Freedman, a former president of Knoedler, who has not been criminally charged but has been named in several of the lawsuits. She has maintained that the works are authentic. Her lawyer, Nicholas Gravante Jr., said the case showed no evidence otherwise.

Mr. Gravante said that if the government’s assertion that the works are fake is based on the reviews by experts cited in the civil cases, “it is not surprising that Rosales was not charged with selling fake art.”

“We have yet,” he continued, “to see a credible expert report asserting that any of the works are fake.”

The Knoedler gallery has said that, like Ms. Freedman, it never knowingly sold fakes. Charles D. Schmerler, a lawyer for the gallery, noted too that the government had also not charged Ms. Rosales with knowingly selling fakes.

Federal authorities declined to comment on the decision not to charge Ms. Rosales with anything related to the sale of counterfeits. But the complaint they filed discussed in some detail their reasons for believing them to be fake and focused on holes in her accounts of how she had obtained them from two collectors. The first collector did not exist, investigators said, and the second denied ever owning the paintings in an interview with the F.B.I. In addition, authorities said that much of the money Ms. Rosales received as the broker in the sale should have been turned over to a collector, if one existed, but instead was largely kept by her.

Can Tax Evasion Be a Misdemeanor? (5/21/13)

noreply@blogger.com (Jack Townsend) — Tue, 21 May 2013 19:49:00 +0000

I suppose this blog should begin with "Not to put too fine a point on it." See Grammaphobia blog here. The object of this blog is Judge Proctor's decision in United States v. Lyerly, 2013 U.S. Dist. LEXIS 67588 (ND AL 5/13/13), here [link to be added later]. The question is whether there is a material difference between tax evasion in Section 7201, here, a felony, and failure to pay criminalized by Section 7203, here, a misdemeanor, beyond just the punishments that make one a felony and one a misdemeanor and the different elements of the two crimes. Most tax lawyers would be careful to describe Section 7201 as "tax evasion," a term of art limited to Section 7201. So, is failure to pay in Section 7203, tax evasion albeit of the misdemeanor variety. So here is Judge Proctors' discussion of the parameters of the terms here:

Defendant has moved the court to amend its previous Order and Memorandum Opinion with regard to three sections. First, Defendant objects to the use of the terms "tax evasion" and "failing to pay" in the first sentence of the second paragraph of the Memorandum Opinion (Doc. #49 at 1). (Doc. #55 at 1). * * *

1. Use of the Terms "Tax Evasion" and "Failing to Pay"

The relevant sentence in the court's previous Memorandum Opinion which Defendant questions states, in full, that:

Defendant has been charged with three counts of misdemeanor tax evasion under 26 U.S.C. § 7203 for failing to pay his personal income taxes in 2006, 2007, and 2008.
(Doc. #49 at 1) (filed under seal). Defendant objects to the use of the terms "tax evasion" and "failing to pay," both on the ground that they misrepresent the Information. The arguments related to each of these terms are slightly different, so the court will address each term separately.

First, Defendant argues that use of the term "tax evasion" is inappropriate because Defendant was not charged with felony "tax evasion" under § 7201, but with a misdemeanor violation of § 7203. (Doc. #55 at 1-2). This is a strawman argument. The court did not say that Defendant is charged with felony tax evasion under § 7201, but that he is "charged with three counts of misdemeanor tax evasion under 26 U.S.C. § 7203." (Doc. #49 at 1). The court is well aware that a § 7201 violation is a felony and a § 7203 violation is a misdemeanor. Courts have long distinguished the two by referring to the former as "felony tax evasion" and the latter as "misdemeanor tax evasion." n1 The term "misdemeanor tax evasion" is, of course, a shorthand for "willful failure to file return, supply information, or pay tax in violation of 26 U.S.C. § 7203." To help ensure that a reader might not accidentally read "misdemeanor tax evasion" to mean "felony tax evasion," the court specifically indicated that Defendant was charged with three violations of 26 U.S.C. § 7203. (Doc. #49 at 1).
n1 See e.g. United States v. Winfield, 960 F.2d 970, 972 (11th Cir. 1992); United States v. Brown, 548 F.2d 1194, 1199 (5th Cir. 1977); United States v. Schafer, 580 F.2d 774, 781 (5th Cir. 1978); United States v. Thompson, 518 F.3d 832, 866 n.18 (10th Cir. 2008).

Defendant next argues that the Memorandum Opinion incorrectly asserts that he is being prosecuted for wilfully failing to "pay" his taxes when, in fact, the Information charges that he willfully failed to "file" his tax return. n2 (Doc. #55 at 2) (filed under seal). Indeed, Defendant further asserts, he had actually filed and paid his 2005, 2006, and 2007 tax returns on October 13, 2010. (Id.). Defendant's argument does not hold water.
n2 Whether a person can pay his taxes without filing a tax return is a question the court will leave for philosophers to resolve.

The Information clearly and explicitly charges Defendant with three violations of 26 U.S.C. § 7203. (Doc. #1 at 1-3). The relevant provisions of the statute state that:

Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor...

26 U.S.C. § 7203 (emphasis added). As the statute makes clear, Defendant is charged with willfully failing to pay his taxes. Furthermore, whether Defendant, in October 2010, paid taxes that were years overdue is irrelevant; he is required by statute to have paid them at the time or times required by law or regulations.

I avoid the use of the term "misdemeanor tax evasion," because I think it is confusing. Here is the short discussion I just added as a footnote in my Federal Tax Crimes book:

In this regard, some courts described the § 7203 failure to pay crime as “misdemeanor tax evasion.” E.g., United States v. Thompson, 518 F.3d 832, 865-866 (10th Cir. 2008). So long as the misdemeanor description accompanies “tax evasion” when referring to § 7302, I suppose that description is harmless. I think most practitioners and courts refer to the § 7203 crime as failure to pay (or file, as appropriate) rather an as “misdemeanor tax evasion,” and refer to the crime in §7201 as tax evasion. In other words, when they say tax evasion, they mean the felony crime of tax evasion and adding felony would be redundant in the common understanding. So, I think it breeds confusion to speak of the § 7203 offense of failure to pay as “misdemeanor tax evasion.” In any event, so long as it is clear that § 7203 is being referenced, referring to the crime as “misdemeanor tax evasion” is harmless. See United States v. Lyerly, 2013 U.S. Dist. LEXIS 67588 (ND AL 2013).

Navigating Offshore Tax Hazards: An Update (5/21/13)

noreply@blogger.com (Jack Townsend) — Tue, 21 May 2013 18:56:00 +0000

Many of this blog's readers will be interested in Bill Sharp's recent article. William M. Sharp Sr, Navigating Offshore Tax Hazards: An Update 655 (TNI 2013), here. All of his article is very good and worthy of reading. I incorporate only a couple of anecdotal excerpts below that I found particularly interest.

1. Regarding quiet disclosures:

Another beneficial aspect of the OVDP addresses the once-questionable "quiet" submissions, which were generally discouraged in the 2009 and 2011 programs. n11 In its frequently asked questions, the 2012 program clarifies that submissions under the IRS voluntary disclosure "practice" may still constitute valid voluntary disclosures as far as resolving criminal tax exposure but does not guarantee that criminal treatment will be avoided. The OVDP also cautions that those submissions will not be eligible for the certainty of the OVDP's penalty framework. n12 This good news raises the question of when the noncompliant client should pursue remedial relief under the IRS voluntary disclosure "practice" instead of filing under the OVDP.
n11 See FAQs 15 and 16 of the 2012 OVDP and 2011 offshore voluntary disclosure initiative, as well as FAQs 10 and 49 of the 2009 OVDP.
n12 Id.

* * * *

Submitting a practice filing (versus entering the formal program) can turn into a nightmare for all involved if the practitioner has been given incorrect information, misinterprets the law as applicable to the facts, or does not have a complete file of what actually occurred regarding the noncompliant offshore activities. Omitting a single offshore account from the disclosure package could not only cause the practice submission to be rejected during the assumed examination process, but depending on the facts, could also lead to a criminal investigation with a follow-on criminal referral to the DOJ, as well as expose the taxpayer to substantially higher taxes and penalties. Although having an incomplete file or other glitch in the context of an OVDP case filing does not insulate the filing taxpayer from criminal or increased civil exposure, in the context of a "defective" practice filing, the IRS may be less forgiving. And as a practical matter, some practitioners who advise clients to pursue the practice alternative incorrectly believe that merely filing amended tax returns and late FBARs will be sufficient and that such a filing requires less critical thinking than a submission under the OVDP. This is not so.

2. Rejection after admission:

It seems that the IRS now reserves the unilateral right to decline any taxpayer based on information that it might later receive. This shift is unwarranted and smacks of a bait and switch. Perhaps more troublesome is a potential case in which the IRS, after the taxpayer comes in, initiates an examination the week before the taxpayer signs Form 906. Would that justify a declination? According to informal comments made by IRS and DOJ officials, one example of when a taxpayer may be declined from the OVDP after receiving a pre-clearance is when the DOJ possessed information before the pre-clearance was issued but shared the information with the IRS only after either pre-clearance was issued or after the clearance letter was issued in reply to the taxpayer submitting the OVDL (but before a closing agreement was completed).

On the latter point (#2), see the immediatley preceding post, New York State Bar Letter to Treasury to Restore OVDP Integrity by Not Ejecting Precleared Taxpayers (5/21/13), here.

New York State Bar Letter to Treasury to Restore OVDP Integrity by Not Ejecting Precleared Taxpayers (5/21/13)

noreply@blogger.com (Jack Townsend) — Tue, 21 May 2013 14:04:00 +0000

The Personal Income Taxation Committee of the New York City Bar Association, here, has sent the IRS a letter, here, asking that the IRS reconsider disqualification of taxpayers previously accepted into OVDP.

Key excerpts are:

Based on public reports, it appears that the total number of taxpayers directly affected by the disqualification seems to be relatively few -- about 50 or so who held unreported accounts at Bank Leumi in Israel. However, the incident has received attention in the mainstream media and among practitioners. The implications for the IRS are much broader than those taxpayers directly affected and are likely to have a much greater impact on the OVDP which has been an overwhelming success.

* * * *

The IRS's disqualification of taxpayers who were previously accepted into the OVDP and in some cases had provided detailed information to the IRS in reliance on their "pre-clearance" to participate in the program, will inevitably affect the ongoing success of the OVDP as a whole. Thus, by reversing its pre-clearance and preliminary acceptance of these taxpayers, the IRS has undermined the ability of practitioners to advise their clients with certainty as to how the program works. In fact, the Model Rules of Professional Responsibility governing the conduct of attorneys requires attorneys to "explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation." See Rule 1.4 Client-Lawyer Relationship-Communication. Attorneys will now have to advise their clients and prospective clients that they may be disqualified from participating in the OVDP even after they were admitted into the program and disclosed detailed information about their foreign bank account(s). This information will lead some (if not many) clients to hesitate (or decline) to come forward with additional disclosures. Moreover, the IRS's failure to abide by the "rules of the road" in connection with the OVDP may affect the willingness of taxpayers to make voluntary disclosures relating to non-compliance outside the offshore account area.

The disqualification was apparently caused by a lack of communication between the IRS (which pre-clears and accepts taxpayers into the OVDP) and the Department of Justice, which presumably had the taxpayers' names prior to the taxpayers being pre-cleared for the program. Assistant Attorney General Kathryn Keneally's comments to Forbes last month that the disqualified taxpayers would be treated with "fairness," in any determination by DOJ to prosecute, is insufficient at best and injects an aspect of arbitrariness that is inconsistent with the principal benefits of the program: clarity and certainty. Moreover, any attempt by the DOJ to prosecute such taxpayers will undoubtedly be subject to motions relating to the conduct of the IRS and DOJ, including motions to suppress information provided by the taxpayer after he/she had received "pre-clearance" to participate in the OVDP. Additionally, the IRS has not indicated how those disqualified taxpayers will be treated from a civil penalty perspective: whether they are eligible for the single 27.5% miscellaneous penalty currently applicable in the OVDP.

To resolve the situation and restore the integrity of the OVDP, we urge the IRS (a) to readmit the disqualified taxpayers into the program, subject to the conditions set forth in the guidelines published on the IRS's website; and (b) to institute new safeguards to avoid such a situation from occurring again. Finally, we would appreciate the inclusion of a description of the proposed safeguards on the IRS's website and submit that providing such information will enable tax practitioners to appropriately advise clients seeking to rectify past non-compliance regarding the benefits of making a voluntary disclosure and to reassure those clients regarding the minimal risk of being disqualified from the program after admission. These steps are critical so that the OVDP continues to have vitality.

Second Denial of Petition for Certiorari in Foreign Bank Account Required Records Case (5/18/13)

noreply@blogger.com (Jack Townsend) — Sat, 18 May 2013 15:14:00 +0000

On May 13, 2013, the Supreme Court denied certiorari in In re Special February 2011-1 Grand Jury Subpoena dated September 12, 2011, T.W. v. United States, 691 F.3d 903 (7th Cir. 2012). See Supreme Court Docket Entries, here. The context was a grand jury subpoena for the records that the Bank Secrecy Act "requires" the owner of an offshore account to maintain. There has been an earlier denial of certiorari in In re M.H., 648 F.3d 1067, 1079 (9th Cir. 2011), cert. den. ___ U.S. ___ (2012), but taxpayers' and practitioners' hopes were up on this second petition because of the quality of the presentation in Paul Clement's petition and reply brief in chronicling the shifting Fifth Amendment jurisprudence after the required records doctrine was established and, I think, forcefully arguing that Supreme Court guidance is necessary. See Petition for Certiorari and Briefs on the Required Records Case Presently Before the Court on Petition (5/7/13), here.

I have just revised the current draft of my Federal Tax Crimes book as follows: "The two denials of petitions for certiorari would indicate that there is little likelihood of Supreme Court review unless a split occurs in the Circuits, which one can infer from the consistent Circuit holdings is unlikely."

Although unlikely, I do think a Circuit split could occur. I think a good argument can be made -- and was made in Paul Clement's petition and reply brief -- that the developments in Fifth Amendment jurisprudence since the Supreme Court's last consideration of the required records doctrine could be read as inconsistent with the required records doctrine. Hence, since all the Supreme Court did was deny certiorari, the Supreme Court has yet to speak on the issue of whether the developments in Fifth Amendment jurisprudence undermine a full bore application of the required records doctrine. Critical mass in the Circuits appears to hold that the required records doctrine survives the broader Fifth Amendment conceptual shift, but that would not foreclose some other Circuit from holding that the required records doctrine does not survive, at least in its full bore application. I don't hold out a lot of hope for that, but I would like to see some discussion and reconciliation of the developments in Fifth Amendment jurisprudence to the required records doctrine. For now, the best discussion of that is in Paul Clement's reply brief on the T.W. petition for ceriorari.

For All required records discussions on this blog, click here.

Interesting Article With Inviting Opening on Upjohn Warnings (5/17/13)

noreply@blogger.com (Jack Townsend) — Fri, 17 May 2013 18:54:00 +0000

Professional and law student readers will likely know what "Upjohn warnings" are. In the classic internal investigation, lawyers representing the entity may interview individuals within the entity. In order to insure that the individuals are not confused about who the investigating lawyers represent -- they represent the entity and not the individual -- good form and ethics require that the lawyers give adequate notice to the individual. The notice is commonly referred to as "Upjohn warnings." See Upjohn Co. v. United States, 449 U.S. 383 (1981). I previously wrote on the issue Upjohn Warnings in Entity Investigations (Federal Tax Crimes Blog 10/14/09), here.

The current New York Times Magazine has an interesting article which begins with an Upjohn warning. Anita Raghavan, Rajat Gupta’s Lust for Zeros (NYT 5/17/13), here. I excerpt that opening:

Late one Friday morning, Rajat Gupta was rushing through security at Philadelphia International Airport, carry-on in tow, when his cellphone rang. When Gupta heard from Goldman Sachs, on whose board he sat, it was often from its chief executive, Lloyd Blankfein. But on this morning, it was Gregory K. Palm, his old Harvard Business School classmate and the bank’s general counsel, on the line. Palm sounded unusually serious. So Gupta asked if he could call him back from the other side of security.

When he did, Palm quickly made two odd disclosures. First, he told Gupta that he had arranged for a colleague to listen in on their conversation. Then he said, “We are representing the corporation, and not you.” Palm wanted to make sure that there was no doubt that this was not a privileged conversation. If the matter evolved into something bigger, their discussion could be handed over to law-enforcement officers.
As Gupta listened, Palm stuck to the script that he worked out beforehand. “What can you tell me about Raj Rajaratnam, and have you ever provided him with information about what we do?” he asked.

Of course Gupta knew Raj Rajaratnam, the billionaire head of the Galleon Group hedge fund and No. 236 on the Forbes 400 list. He had worked with him on a number of projects since stepping down from the top job at McKinsey, the consulting giant, in 2003. But Rajaratnam’s name had turned radioactive since his arrest, on Oct. 16, 2009, for trading on closely guarded corporate information.

“What are you talking about?” Gupta asked, seemingly taken aback.

Palm explained that Goldman officials had come to believe Gupta may have provided Rajaratnam with crucial information about the firm. Ever cool, Gupta calmly denied that he had given Rajaratnam confidential information about Goldman. Then Gupta said that he and Rajaratnam had indeed been business partners on an investment fund called New Silk Route. Teaming up with Rajaratnam seemed to be his plan for a spectacular career finale — a bid not only to stay vital after stepping down from McKinsey but also to establish himself in the elite circle of billionaires, like the private-equity giant Henry Kravis, that made up his new coterie.

Gupta didn’t say all that to Palm, of course. Instead, he explained why it would have been ludicrous for him to give Rajaratnam information: the two had had a falling out over a soured $10 million investment. Gupta told Palm that he had hired accountants and lawyers and was planning to sue his former partner; he would have done so already, he said, were it not for Rajaratnam’s arrest. “Why would I help out someone with whom I had a dispute?” he asked rhetorically. He said he was happy to discuss the issue more, but he had to catch a flight to Boston.

Over the course of the day, Palm and Gupta had a number of follow-up conversations. In one, Palm recommended that Gupta get his own lawyer. Gupta eventually retained the renowned defense attorney Gary Naftalis — not out of any real concern, he would later say, but as a precautionary measure. Indeed, Gupta seemed so unconcerned with the call he received that Friday, Dec. 11, 2009, that he never even mentioned it to business associates.

There are a lot of prominent players in the article in addition to Gupta, some of which most readers will be familiar with: Goldman Sachs, Lloyd Blankfein, Jeffrey Skilling, Raj Rajaratnam, Gary Naftalis, Warren Buffett, Mckinsey & Co., Bill Clinton, Bill Gates, Henry Kreavis, Henry M. Paulson, Jr., Stephen A. Schwarzman, Sandy Weill, Pete Peterson,

This is only the lead to catch the reader's interest with an Upjohn warning. Mr. Gupta was in trouble from the get-go. And the article gives a count account of his trajectory through the stratosphere of great success and then the fall.

For those wanting more on Upjohn itself, here is cut and paste from my Federal Tax Crimes book:

2. Attorney-Client Privilege in a Corporate Setting.

a. General - the Upjohn Case.

The question is who is the client in a corporate setting? Whose communications to a lawyer engaged by the corporation are entitled to this protection? In Upjohn Co. v. United States, the Supreme Court rejected the seemingly objective test that would allow the privilege only to communications by persons within the corporate control group. The Supreme Court instead applied a less formulaic approach based upon factors such as whether the communications to the attorney were otherwise within the scope of the employee’s duties to the corporation, whether the employee’s superiors within the corporation directed the employee to make the communications in order to assist the attorney in representing the corporation, whether the corporation otherwise kept the information confidential, and whether the information was otherwise available.

The privilege is, of course, the corporation’s privilege with respect to communications to a corporation’s lawyer. It is not the employee’s privilege, even if the employee is a member of a control group (e.g., officer or director). The danger is that the officer may confuse the corporation’s privilege with his own privilege, on some misguided notion that the attorney is somehow also the attorney for the officer or director. And, so long as the officer is in the control group, he or she may have some assurance that the corporation will assert the privilege, thus protecting the officer’s communications to the attorney, but if the officer is not within the group or leaves the group (e.g., by leaving the corporation, willingly or not so willingly), the then former officer may find that the new control group is not so interested in asserting a privilege to help the former officer.

This phenomenon is aptly shown in the recent accounting scandals (Enron, et al.). Corporations appear increasingly willing to trade their privileges for more favorable treatment by prosecutors investigating or prosecuting the corporation’s misdeeds through its officers, usually former officers. Often, because of the Government’s prosecution policies for corporations, the Government will be reluctant to charge the corporation because the inevitable effect will be to further harm shareholders or other innocent employees or interested parties that have already been burned by the underlying fraudulent conduct. In order to encourage the Government not to prosecute the corporation, the corporation may be required to waive the privileges (attorney-client, as well as the work product privilege) that might otherwise apply with respect to the underlying conduct. Furthermore, in the event the corporation is charged, its sentencing will be reduced when it discloses all pertinent information. In short, officers of corporations take substantial risk in undertaking risky behavior that the corporation will not act to protect them.

One of the side effects of the corporation’s waiver of the attorney-client privilege in order to curry favor with the prosecutors is, to state the obvious, it has waived the privilege. For the attorney-client privilege, any waiver is a waiver in all contexts. Thus, for example, corporations have made disclosures of attorney-client privileged information to the Government subject to a reservation of the privilege; courts have rejected the reservation of the privilege, saying that if that nuance is to be recognized, Congress rather than the courts must do it. Of course, as in other areas where the attorney-client privilege fails, the proponent may still be able to assert work product privilege which is not subject to the unconditional waiver rule.

b. Problems in Internal Investigations.

Delicate issues regarding the attorney-client provisions can arise in any setting where a person may be confused as to whether the lawyer is representing him or her. This is often encountered in the corporate setting, particularly with respect to internal investigations into actions that may have criminal aspects. The entity, often a corporation but other types of entities are included, may have an outside legal team conduct the investigation pursuant to an appropriate attorney-client privilege with the corporation. As noted above, under Upjohn, that privilege may extend to certain high-level officers. But, within its normal contours, it would not apply to many of the persons within the entity that would be interviewed within the scope of the internal investigation. But, in order to avoid confusion in the employee’s mind (thus potentially affecting his or her valuable right to remain silent), the better part of wisdom is for the attorney conducting the internal investigation to warn the employee at the outset that the attorney represents the entity and not that individual being interviewed. This warning is commonly referred to as an Upjohn warning, for reasons that should be obvious. Indeed, the Upjohn warning, properly given, can be quite elaborate with several components, which in the aggregate is often referred to in the plural as Upjohn warnings, so I use the plural here.

The Upjohn warnings are particularly important for three reasons. First, most obviously, is to put the interviewee on clear notice that the attorney doing the interview is not the interviewee’s attorney and therefore the interviewee cannot rely upon the attorney to protect his or her interests or to keep the statements confidential. Second, and related, the lawyer ethically is bound to make sure the interviewee understands that the lawyer is not representing him or her. Third, although the statements would be at least attorney work product and, in context, even confidential attorney-client communications as to the entity, the entity can make the choice to waive any protections afforded by the attorney-client or work product privileges. Indeed, as noted above, in many criminal investigations where the entity is a potential target, there may be great pressure on the entity to waive these privileges and even where the prosecutor may not be formally exerting the pressure, the entity could believe that waiving the privileges would be in its best interests. The employee’s statements could then be delivered up to the prosecutors on a silver platter and be used against the employee. But, by the same token, a prosecutor’s ability to use the statements may be compromised if the interview had not been properly warned that the interviewing attorneys were not representing him or her and, where there is murkiness about whether the proper warning had been given, the entity’s bargaining power with the prosecutor may be compromised.

Two More UBS Depositors Indicted; Big Numbers Involved (5/17/13)

noreply@blogger.com (Jack Townsend) — Thu, 16 May 2013 22:05:00 +0000

Two Florida Doctors have been indicted "for conspiring to defraud the Internal Revenue Service (IRS) by concealing millions of dollars in assets and income in offshore bank accounts at UBS and other foreign banks." The DOJ Tax Press release is here; the indictment is here. They were enabled by Beda Singenberger, a person who has figured prominently in my blogs and a previously indicted enabler, see blogs on Singenberger, here. The key information is below::

Defendants: Drs. David Leon Fredrick and Patricia Lynn Hough, husband and wife.
Charges: Conspiracy (1); Tax Perjury (4)
Maximum Incarceration: Conspiracy - 5 years; Tax Perjury 12 years (4 counts times 3 years each), but actual sentence will be determined by the Sentencing Guidelines subject to departures or Booker variances which are common.
Enablers: Beda Singenberger an unnamed UBS banker ("UBS Banker D.L.")
Banks: UBS, "Swiss Bank No. 1" (Geneva Private Bank), "Swiss-Liechtenstein Bank No. 1" (Swiss subsidiary of Liechtenstein Bank 1), "Liechtenstein Bank No. 1" (a Private Bank and parent of SLB #1), Swiss Cantonal Bank No. 1 (providing banking services), UK Private Bank No. 1.
Entities/Nominees: Yes. A number were involved, both real entities and "Nominee Entities" (these were incorporated in various jurisdictions).

The key portions of the press release:

According to the indictment, Fredrick and Hough, married doctors, served on the Board of Directors of two Caribbean-based medical schools – one located on Saba, Netherlands Antilles, and one located on Nevis, West Indies. Fredrick had an ownership interest in the medical school on Nevis until 2007, when both medical schools were sold.

The indictment alleges that Fredrick and Hough conspired with each other and with Beda Singenberger, a citizen and resident of Switzerland who is under indictment in the Southern District of New York, and a UBS banker to defraud the IRS. They carried out the conspiracy by creating and using nominee entities and undeclared bank accounts in their names and the names of the nominee entities at UBS and other foreign banks to conceal assets and income from the IRS, including the sale of real estate associated with the medical school on Saba and shares they owned in the medical school on Nevis. The real estate was sold for more than $33 million, all of which was deposited into one of their undeclared accounts in the name of a nominee entity.

It is further alleged in the indictment that Fredrick and Hough used emails, telephone and in-person meetings to instruct Swiss bankers and asset managers to make investments and transfer funds from their undeclared accounts at UBS. It is alleged that Fredrick and Hough caused funds from the medical schools’ undeclared accounts to be transferred to undeclared accounts in their individual names or in the names of nominee entities. Fredrick and Hough then used the funds in their undeclared accounts to purchase an airplane, two homes in North Carolina and a condominium in Sarasota, Fla. Fredrick also transferred more than $1 million to his relatives.
Fredrick and Hough were also charged with four counts of filing false tax returns for 2005, 2006, 2007 and 2008. The indictment alleges that Fredrick and Hough filed false tax returns which substantially understated their total income and failed, on Schedule B, Parts I and III, to report that they had an interest in or signature or other authority over bank, securities or other financial accounts located in foreign countries. U. S. citizens, resident aliens and legal permanent residents of the United States have an obligation to report to the IRS on the Schedule B of a U.S. Individual Income Tax Return, Form 1040, whether they had a financial interest in, or signature authority over, a financial account in a foreign country in a particular year by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained. U. S. citizens and residents also have an obligation to report all income earned from foreign bank accounts on their tax returns.

The indictment itself alleges much of the gory detail. I don't have the time to do a detailed analysis, nor do I think it would be helpful except perhaps to a few readers. My other priorities thus require that I focus my attention elsewhere. The numbers are big, though. The pattern I see should put the defendants very high up and even possibly at the top of the Sentencing Guidelines. Accordingly, it would require an incredibly huge downward variance to get to no or minimum incarceration.

I will provide more detail as I get the detail or when and if I get to further review of the indictment.

I will update the spreadsheet at least by the weekend.

IRS to Require Search Warrants for All Emails from ISPs (5/15/13)

noreply@blogger.com (Jack Townsend) — Wed, 15 May 2013 21:44:00 +0000

There has been a brouhaha recently about the IRS accessing older emails on an ISP's site without a search warrant. I previously wrote about the issue in this blog entry: Are Emails Stored on the ISP's Computer Subject to Fourth Amendment Protections? (7/28/12), here, discussing the holding in United States v. Warshak, 631 F.3d 266 (6th Cir. 2010). Briefly, the wording of the Electronic Communications Privacy Act of 1986 gave the IRS the argument that a warrant is not needed to obtain electronic communications older than 180 days, That eventually caused a firestorm just recently. As a result of the heat about the issue, the IRS has announced, here, the following policy statement:

Policy Statement 4-120
Approved: May 3, 2013
(1) Policy Regarding Requests for the Content of Email Communications under the Electronic Communications Privacy Act and the Stored Communications Act.
(2) The IRS will follow the holding of United States v. Warshak, 631 F.3d 266 (6th Cir. 2010), and obtain a search warrant in all cases when seeking from an internet service provider (ISP) the content of email communications stored by the ISP. Accordingly, such information will not be sought from an ISP in any civil administrative proceeding.
(3) Any existing IRS guidance that is not in accord with the foregoing policy statement will be updated.

The following is from a TNT article discussing this development (Eric Kroh, IRS Says It Will Obtain Search Warrants for All Emails, 2013 TNT 90-2 (5/9/13)):

An IRS spokesman, when asked whether the May 8 statement applies to all electronic communications or to e-mails only, replied, "We are currently aware of and reviewing this issue, our policies, and our guidance, and will update them as appropriate."

Allen Charge Issues - Jurors, You Can / Must Decide (5/15/13)

noreply@blogger.com (Jack Townsend) — Wed, 15 May 2013 21:04:00 +0000

In United States v. Walshe, 2013 U.S. App. LEXIS 9149 (10th Cir. 5/6/13), here, an unpublished opinion, the Court dealt with some typical but unexceptional issues in a case involving tax and theft issues. I thought readers might be interested in the Allen Charge instruction which derives from Allen v. United States, 164 U.S. 492 (1896). For some background on the Allen charge, see the Wikipedia entry here. The Allen charge is usually given to a jury when it has difficulty reaching a unanimous verdict. That means that it is given after the jury has deliberated for a while and advised the court it is having difficulty. The charge comes in several variations, depending on circuit, but essentially tells that jury that they have heard the evidence and should with diligence and care be able to reach a unanimous verdict. I offer more general material on the Allen charge at the end of this blog entry after presenting the discussion of Walshe.

Here is the example of the Fifth Circuit's pattern Allen charge which is quoted in the Wikipedia entry:

"Members of the Jury:
I'm going to ask that you continue your deliberations in an effort to reach agreement upon a verdict and dispose of this case; and I have a few additional comments I would like for you to consider as you do so.
This is an important case. The trial has been expensive in time, effort, money and emotional strain to both the defense and the prosecution. If you should fail to agree upon a verdict, the case will be left open and may have to be tried again. Obviously, another trial would only serve to increase the cost to both sides, and there is no reason to believe that the case can be tried again by either side any better or more exhaustively than it has been tried before you.
Any future jury must be selected in the same manner and from the same source as you were chosen, and there is no reason to believe that the case could ever be submitted to twelve men and women more conscientious, more impartial, or more competent to decide it, or that more or clearer evidence could be produced.
If a substantial majority of your number are in favor of a conviction, those of you who disagree should reconsider whether your doubt is a reasonable one since it appears to make no effective impression upon the minds of the others. On the other hand, if a majority or even a lesser number of you are in favor of an acquittal, the rest of you should ask yourselves again, and most thoughtfully, whether you should accept the weight and sufficiency of evidence which fails to convince your fellow jurors beyond a reasonable doubt.
Remember at all times that no juror is expected to give up an honest belief he or she may have as to the weight or effect of the evidence; but, after full deliberation and consideration of the evidence in the case, it is your duty to agree upon a verdict if you can do so.
You must also remember that if the evidence in the case fails to establish guilt beyond a reasonable doubt the Defendant should have your unanimous verdict of Not Guilty.
You may be as leisurely in your deliberations as the occasion may require and should take all the time which you may feel is necessary.
I will ask now that you retire once again and continue your deliberations with these additional comments in mind to be applied, of course, in conjunction with all of the other instructions I have previously given to you."

One problem with the charge is that, depending upon how it is worded, it can be subtly -- perhaps not so subtly -- coercive to the jury. And, to the extent that it might be coercive, one would want to avoid giving the charge before it was clear that the jury was having difficulty. Hence, timing is as noted when the jury deliberates and announces it cannot come to a unanimous verdict. Some courts, however, encourage the charge to be given in the original charges; hence, if the charge is coercive and the jury is paying attention to all of the original charge, then there are potential problems. These issues were dealt with in Walshe. Here's the Court's discussion of Walshe's complaint about the Allen charge.

B. The Allen Charge Was Not Impermissibly Coercive

Mr. Walshe contends that the modified Allen charge given by the court was impermissibly coercive. As background, after partial deliberation, the jury informed the court that it had not been able to reach a decision on Counts 12-18—the counts involving theft from an employee benefit plan. The Government requested that the court provide the jury with the modified Allen charge contained in Tenth Circuit Pattern Jury Instructions. The defense raised objections to the modified Allen charge, including arguments that the charge was essentially contained in Instruction No. 26 and that the charge would have a "coercive effect." (ROA Vol. II at 918-19.) Accordingly, the court decided to refer the jury to Instruction No. 26 and to read a paragraph from the pattern modified Allen charge that was not included in Instruction No. 26. After bringing the jury to the courtroom, the court said the following:

Let me advise you that it is not uncommon in the course of jury deliberation to believe that you have reached an impasse; but most often, jurors can get past an impasse.
I will be allowing you to retire again to continue your deliberations. In doing, so I remind you of the provisions in Instruction No. 26. It reads:
It is your duty as jurors to consult with one another and to deliberate with a view to reaching an agreement if you can do so without violence to individual judgment. You must each evaluate the evidence for yourself but only after impartially considering it with your fellow jurors.
In the course of your deliberations, do not hesitate to reexamine your own views and change your opinion if you're convinced it is erroneous. However, do not surrender your honest conviction as to the weight or effect of evidence solely because of the opinion of your fellow jurors or for the mere purpose of returning a verdict.

(ROA Vol. II at 922-23.) The court continued by reading to the jury an additional paragraph from the Tenth Circuit pattern Allen charge:

You should remember that the defendant is presumed innocent and that the Government, not the defendant, has the burden of proof and it must prove the defendant guilty beyond a reasonable doubt. Those of you who believe that the Government has proved the defendant guilty beyond a reasonable doubt should stop and ask yourselves if the evidence is really convincing enough, given that other members of the jury are not convinced. And those of you who believe that the Government has not proved the defendant guilty beyond a reasonable doubt should stop and ask yourselves if the doubt you have is a reasonable one, given that other members of the jury do not share your doubt. In short, every individual juror should reconsider his or her own views.

(ROA Vol. II at 923.) Before excusing the jury to continue its deliberations, the court concluded by saying the following, which also mirrors the pattern modified Allen charge:

Now, what I've just said is not meant to rush or to pressure you into agreeing on a verdict. Take as much time as you need to discuss things. There is no hurry.
I'll ask you now that you retire once again and continue your deliberations with these additional comments in mind to be applied, of course, in conjunction with all of the instructions that I have previously given you.

(ROA Vol. II at 923.)

Approximately 53 minutes after receiving these instructions from the court, the jury returned a verdict of guilty on all counts. Subsequently, the court sentenced Mr. Walshe and entered final judgment, and Mr. Walshe timely filed his notice of appeal.

In determining whether an Allen charge was impermissibly coercive, "[s]ome of the factors we consider . . . include: (1) the language of the instruction, (2) whether the instruction is presented with other instructions, (3) the timing of the instruction, and (4) the length of the jury's subsequent deliberations." Arney, 248 F.3d 988. We will consider each in turn.

1. The Language of the Charge

In considering the language of the Allen charge, "[t]he inquiry in each case is whether the language used by the judge can be said to be coercive, or merely the proper exercise of his common law right and duty to guide and assist the jury toward a fair and impartial verdict." Id. (internal quotation marks omitted). We have held that "the following cautionary language should be incorporated to balance the potential coercive effect of [an Allen] charge." United States v. McElhiney, 275 F.3d 928, 949 (10th Cir. 2001). First, "that no juror should relinquish his or her conscientiously held convictions simply to secure a verdict." Id. And second, "that [*23] every individual juror should reconsider his or her views, whether in the majority or in the minority." Id.

In this case, the language that the court read from Instruction No. 26 and the pattern modified Allen instruction was not coercive. Instead, it was evenhanded, it emphasized that jurors should not relinquish their conscientiously held beliefs, n2 and it instructed all jurors to reconsider their views. n3 Indeed, the language was very similar to the language contained in Allen charges that this court has upheld in other cases. See, e.g., United States v. Reed, 61 F.3d 803, 805 (10th Cir. 1995). Accordingly, we conclude that the language at issue in this case was not coercive.
n2 Mr. Walshe complains that the court omitted language contained in the pattern Allen instruction, "which is designed to maintain individual jurors beliefs and prevent them from caving into pressure." (Aplt. Br. at 21.) But the language the court read from Instruction No. 26 substantially mirrors the omitted language from the pattern Allen instruction. Specifically, Instruction No. 26 informs the jurors: "[D]o not surrender your honest conviction as to the weight or effect of evidence solely because of the opinion [*24] of your fellow jurors or for the mere purpose of returning a verdict." (ROA Vol. II at 922-23.)
n3 Mr. Walshe particularly objects to court's admonition that each juror should "reconsider his or her own views." (Aplt. Reply Br. at 12.) But this argument is foreclosed by the court's holding in McElhiney. 275 F.3d at 949 (holding that courts should include in an Allen charge "that every individual juror should reconsider his or her views, whether in the majority or in the minority").

2. The Timing and Context of the Charge

"In order to temper the potential coercive effect of an Allen charge, this court has recommended that the instruction be incorporated with the other jury instructions—in other words, that it be given as part of the original jury instructions." McElhiney, 275 F.3d at 942. "In this position, the Allen instruction is less likely to be coercive because (1) it does not stand out or receive particular emphasis and (2) it is given before the jury has reached a deadlock." Id. Nonetheless, "the[e] positioning of the instruction does not by itself establish coercion." Id.; see also United States v. McKinney, 822 F.2d 946, 951 (10th Cir.1987) ("[A]lthough it is a preferred rule of procedure that an Allen instruction be given the jury at the same time as other instructions, it is not a per se rule.").

In this case, the context and timing of the modified Allen charge indicate that it was not coercive. Much of the language in the charge was contained in written Instruction No. 26, which the jury received with all of the other jury instructions before trial. Although the court did read additional language from the pattern Allen instruction, it instructed the jury to "continue [its] deliberations with these additional comments in mind to be applied, of course, in conjunction with all of the instructions that I have previously given." (ROA Vol. II at 923.)

Moreover, although the court read a portion of pattern Allen charge for the first time after the jury was deadlocked, in light of the noncoercive language of the instruction, that alone is insufficient to establish that the instruction was coercive. See Reed, 61 F.3d at 804 (rejecting defendant's argument that it was "error for the trial court to give this instruction after the jury had twice announced it could not reach a verdict," because "the Allen charge eventually given was evenhanded; it did not presume that [*26] the majority favored a guilty verdict; and it emphasized that no juror was expected to yield a conscientious conviction on the evidence"). Thus, the context and timing of the instruction do not indicate that it was coercive.

3. Length of Subsequent Deliberations

We will consider "the length of the jury's subsequent deliberations" as a factor in determining if an Allen charge was coercive. Arney, 248 F.3d 988. But even a relatively short period of deliberation following an Allen charge may not necessarily establish that the charge was coercive. See Reed, 61 F.3d at 804-05.

In this case, after receiving the Allen charge, the jury deliberated for approximately fifty-three minutes before returning a verdict. But in context, this deliberation period does not imply that the jury was coerced. The record indicates that, before it received the Allen charge, the jury had already reached its decision regarding the counts relating to failure to pay withholding tax; thus, it only had to consider the counts relating to theft from an employee benefit plan. And the court specifically instructed the jury that the Allen charge was "not meant to rush or to pressure you into agreeing on a verdict," and the court advised the jury to "[t]ake as much time as you need to discuss things," and that "[t]here is no need to hurry." (ROA Vol. II at 923.)

Thus, the factors in this case do not indicate that the Allen charge given by the court was coercive. Accordingly, we conclude that the court did not abuse its discretion.

------------

I now offer some background on the Allen charge generally. The following is from the Annual Review of Criminal Procedure: III Trials, 40 Geo. L.J. Ann. Rev. Crim. Proc. 515, 594-599 (2011) (some footnotes omitted).

If a jury in federal court indicates that there is a deadlock in returning a verdict, the judge may make reasonable inquiries to determine whether the jury is truly deadlocked but may not inquire into the numerical division of the jury or its deliberative processes. * * * * A judge who concludes that the jury cannot overcome a deadlock may, after informing counsel, declare a mistrial. In Allen v. United States, the Supreme Court approved the trial court's practice of admonishing a deadlocked jury to make a further effort to reach a verdict. n1763 Some circuit courts have either rejected the use of the Allen charge or adopted modified versions. n1764 Most circuit courts that use the Allen charge or a modified version allow the use of a second Allen charge under certain circumstances. n1765 Any change in an Allen charge must meet the requirement that such instructions not be coercive. n1766 The amount of time the jury deliberates following an Allen charge, although often a factor, will not in itself indicate coercion. n1767

n1763 164 U.S. 492, 501-02 (1896) (judge may instruct jurors that absolute certainty not expected and that object of jury system is to obtain unanimous verdict through consideration of others' views); see, e.g., U.S. v. Hernandez-Albino, 177 F.3d 33, 38 (1st Cir. 1999) (no abuse of discretion to give Allen charge only 2 1/2 hours into deliberations because jury continued deliberation for hour after Allen charge and verdict's internal consistency reflected nuanced analysis, thus negating any threat of coercion); U.S. v. Henry, 325 F.3d 93, 106 (2d Cir. 2003) (no abuse of discretion to give Allen charge because jury note indicated deadlock and asked whether jury should continue deliberations); U.S. v. Trala, 386 F.3d 536, 543 (3d Cir. 2004) (no abuse of discretion though judge indicated court prepared to order dinner in response to jury question concerning potential deadlock and jury returned verdict 3 hours later), vacated on other grounds, 546 U.S. 1086 (2006); U.S. v. Hylton, 349 F.3d 781, 788 (4th Cir. 2003) (no abuse of discretion to give Allen charge though judge mentioned costs of retrial because charge not unduly coercive); U.S. v. Fields, 483 F.3d 313, 340 (5th Cir. 2007) (no abuse of discretion to give Allen charge in capital murder trial though jury handed down a unanimous sentence of death approximately 1 hour after receiving the instruction because instruction contained no language suggesting that the result should be obvious to jury and instruction set no time limit on deliberations); U.S. v. Reed, 167 F.3d 984. 989-91 (6th Cir. 1999) (no abuse of discretion to give Allen charge after 6 days of deliberations and allegations of jury misconduct because jury deliberated several more days and delivered both convictions and acquittals); U.S. v. Fouse, 578 F.3d 643, 652-53 (7th Cir. 2009) (no abuse of discretion to give Allen charge 11 hours after deliberations began because, in part, jury indicated it was deadlocked, charge was substantially the same as model instructions, judge did not know the identity of holdout jurors, and charge did not dissuade jurors from returning acquittal on one count); U.S. v. Evans, 431 F.3d 342, 347 (8th Cir. 2005) (no abuse of discretion to give Allen charge 4 hours after deliberations began because jury informed court it was deadlocked, court used Model Jury Instruction, and jury deliberated 5 additional hours following Allen charge in uncomplicated trial); U.S. v. Berger, 473 F.3d 1080, 1089 (9th Cir. 2007) (no abuse of discretion to give Allen charge while meeting informally with jury because judge instructed jurors to hold onto individual beliefs and did not coerce jury to arrive at unanimous verdict); U.S. v. Alcorn, 329 F.3d 759, 764-68 (10th Cir. 2003) (no abuse of discretion to give Allen charge because not coercive and judge indicated jurors should maintain "honest conviction[s]" about evidence); U.S. v. Woodard, 531 F.3d 1352, 1364 (11th Cir. 2008) (no abuse of discretion to give Allen charge because instruction given only after jury informed court for second time that it was deadlocked and court did not poll jury before giving the charge). But see, e.g., U.S. v. Paniagua-Ramos, 135 F.3d 193, 198 (1st Cir. 1998) (abuse of discretion to give Allen charge because charge contained insufficient language to inform jury of right to fail to agree and coerced jury into conviction though jury had informed judge on 3 prior occasions it was unable to reach verdict); Tucker v. Catoe, 221 F.3d 600, 611 (4th Cir. 2000) (abuse of discretion to give Allen charge because court knew numerical division of jury, charge singled out minority juror and emphasized need for unanimity without instructing that lone holdout permitted by law, and qualification that no juror expected to give up opinion based on reasoning satisfactory to him was not enough to balance overall charge); Weaver v. Thompson, 197 F.3d 359, 365-66 (9th Cir. 1999) (abuse of discretion to give Allen charge because given through bailiff after full day of trial and deliberations and jurors not told they could hold onto their beliefs even if it resulted in hung jury; instead only told they had to be unanimous); U.S. v. Zabriskie, 415 F.3d 1139, 1148 (10th Cir. 2005) (abuse of discretion to give Allen charge because given privately to holdout juror).

n1764 See, e.g., U.S. v. Hernandez-Albino, 177 F.3d 33, 38 (1st Cir. 1999) (although circuit court refrains from offering definite wording for Allen charge, charge allowed if court instructs both minority and majority to reexamine positions, instruction acknowledges jury has right not to agree, and court reminds jury that burden of proving guilt beyond a reasonable doubt remains with government); Spears v. Greiner, 459 F.3d 200, 204-07 (2d Cir. 2006) (no abuse of discretion to give modified Allen charge without cautionary language because charge not impermissibly coercive and charge did not cause jurors to sacrifice individual opinions to reach result); U.S. v. Graham, 758 F.2d 879, 883 (3d Cir. 1985) (expressly rejecting Allen charge and refusing to let stand verdict "which may have been influenced in any way by an Allen Charge" on grounds that charge directs juror to distrust own judgment); Tucker v. Catoe, 221 F.3d 600, 610-11 (4th Cir. 2000) (granting judges discretion in formulating Allen charge to suit jury but requiring that charge incorporate specific reminder to minority and majority jurors to reconsider views in light of other side; judge may not single out minority jurors; Allen charge found coercive because instructed minority to reconsider position without making similar order to majority and singled out minority juror without instructing that 1 holdout permitted); U.S. v. Allard, 464 F.3d 529, 535 (5th Cir. 2006) (trial court has broad discretion to give modified Allen charge as long as not coercive); U.S. v. Clinton, 338 F.3d 483, 487-88 (6th Cir. 2003) (although circuit has not mandated a specific form of Allen charge, strong preference for Sixth Circuit Pattern Instruction, which directs both majority and minority jurors to reconsider positions and cautions jurors not to surrender their personal convictions merely to achieve consensus by acquiescing to majority opinion); U.S. v. Degraffenried, 339 F.3d 576, 580 (7th Cir. 2003) (no abuse of discretion when court only restates instruction that was given previously to jury and if only given when judge convinced jury reached deadlock); U.S. v. Warfield, 97 F.3d 1014, 1022 (8th Cir. 1996) (no abuse of discretion to use modified Allen instruction because it was nearly identical to 8th Circuit model jury instruction); U.S. v. Nelson, 137 F.3d 1094, 1110 (9th Cir. 1998) (no abuse of discretion to use modified Allen instruction asking jury to attempt to reach unanimous verdict if possible); Gilbert v. Mullin, 302 F.3d 1166, 1174 (10th Cir. 2002) (no abuse of discretion to use modified Allen instruction if not coercive); U.S. v. Chigbo, 38 F.3d 543, 544 n.1, 546 (11th Cir. 1994) (no abuse of discretion to use modified Allen charge, which is not coercive if carefully worded, though jury was polled prior to receiving charge and returned guilty verdict within 15 minutes of hearing instruction); U.S. v. Thomas, 449 F.2d 1177, 1184 n.45, 1187 (D.C. Cir. 1971) (en banc) (adopting, in lieu of other Allen-type charges, American Bar Association standard, which strongly emphasizes no juror should surrender honest convictions).

n1765 See, e.g., U.S. v. Barone, 114 F.3d 1284, 1304-05 (1st Cir. 1997) (no abuse of discretion to give second modified Allen charge because it came quickly after first and district court concluded jury had not seriously deliberated after first Allen charge); U.S. v. Crispo, 306 F.3d 71, 77 (2d Cir. 2002) (no abuse of discretion to give second Allen charge because jury did not return a verdict immediately afterwards but continued to deliberate suggesting that instruction was not coercive as to end all discussion); U.S. v. Cropp, 127 F.3d 354, 360 (4th Cir. 1997) (no abuse of discretion to give second Allen charge when jury indicated inability to reach verdict after first because court told jurors in second charge not to give up firmly held convictions and after second charge jury deliberated 7 more hours before returning verdict); U.S. v. Reed, 686 F.2d 651, 652-53 (8th Cir. 1982) (per curiam) (no abuse of discretion to give second Allen charge because given 1 hour after first, defendant did not object to either charge, and jury deliberated for 1 hour after receiving second charge); U.S. v. Ailsworth, 138 F.3d 843, 851-52 (10th Cir. 1998) (no abuse of discretion to give multiple Allen charges though jury received first prior to deliberations, second after 4 days of deliberations, and third after returning partial verdict and announcing deadlock because after third time, jury deliberated 2 additional days but still unable to reach unanimous verdict on last 2 counts). But see, e.g., U.S. v. Fossler, 597 F.2d 478, 485 (5th Cir. 1979) (abuse of discretion to give second Allen charge because jury indicated 3 times over 3 days that it could not reach unanimous verdict, defendant objected to second Allen charge, and jury reached verdict 1 hour after second charge given).
The Ninth Circuit has a per se rule against multiple Allen charges. See U.S. v. Seawell, 550 F.2d 1159, 1163 (9th Cir. 1977) ("[I]t is reversible error to repeat an Allen charge in a federal prosecution in this circuit after a jury has reported itself deadlocked and has not itself requested a repetition of the instruction.").

n1766 See Jenkins v. U.S., 380 U.S. 445, 446 (1965) (per curiam) (appropriate inquiry is whether "in its context and under all the circumstances" modified Allen charge coercive); see, e.g., U.S. v. Vanvliet, 542 F.3d 259, 266-69 (1st Cir. 2008) (no coercion though modified Allen charge regarding reasonable doubt failed to allow for positive belief of defendant's innocence and jury voluntarily revealed its numerical division to court because reasonable doubt instruction was traditional and court both did not know each individual juror's views and admonished jury not to reveal division again); Spears v. Greiner, 459 F.3d 200, 204-07 (2d Cir. 2006) (no coercion though court gave modified Allen charge that failed to include cautionary language because charge did not encourage jurors to listen to other jurors, opposing counsel did not object to instruction, and jury continued deliberating for over a day after charge was given); U.S. v. Fields, 483 F.3d 313, 338-40 (5th Cir. 2007) (no coercion though modified Allen charge did not include protective language reminding jurors not to forego conscientiously held views because charge not coercive or prejudicial and did not suggest obvious result); U.S. v. Brika, 416 F.3d 514, 522 (6th Cir. 2005) (no coercion because modified Allen charge "an accessible explanatory expansion" and not confusing, misleading, or prejudicial); U.S. v. Rodriguez, 67 F.3d 1312, 1319-20 (7th Cir. 1995) (no coercion though court responded to jury note indicating deadlock with supplementary instructive that omitted admonishment against surrendering honest convictions because judge made oral statements urging same), amended by 2002 U.S. App. LEXIS 9597 (7th Cir. 2002); U.S. v. Whatley, 133 F.3d 601, 604 (8th Cir. 1998) (no coercion though Allen charge given without paragraph reiterating prosecution's burden of proof because instructions otherwise correct and complete, and judge directed jurors to deliberate with view toward reaching verdict so long as it could be reached without violating any juror's convictions about ultimate truth of matter); U.S. v. Hernandez, 105 F.3d 1330, 1334 (9th Cir. 1997) (no coercion though modified Allen charge given after 4 1/2 hours of deliberations because Allen charge milder than model used by Ninth Circuit and did not instruct jurors to reexamine and change opinions or to consider questioning correctness of present positions); U.S. v. Arney, 248 F.3d 984, 988 (10th Cir. 2001) (no coercion when modified Allen charge given separately to each juror because separate charges lowered possibility of coercion); U.S. v. Woodward, 531 F.3d 1352, 1364 (11th Cir. 2008) (no coercion when court issued modified Allen charge because charge was carefully formulated to comport with precedents in that jurisdiction). But see, e.g., U.S. v. Manning, 79 F.3d 212, 222-23 (1st Cir. 1996) (coercion when judge responded to jury's indication of deadlock by asking if rereading testimony would help resolve deadlock because instruction coerced jurors into thinking they must deliberate until unanimous verdict reached); U.S. v. Burgos, 55 F.3d 933, 938 (4th Cir. 1995) (coercion when modified Allen charge stated judge not asking jurors to give up firmly held beliefs but asked jurors to "think about it" because such remarks may more strongly influence jurors holding minority view); U.S. v. Robinson, 953 F.2d 433, 436-38 (8th Cir. 1992) (coercion when, in modified Allen charge, judge twice admonished jury minority to yield to majority but never admonished majority to consider yielding to minority and judge gave impression hung jury unpatriotic); U.S. v. McElhiney, 275 F.3d 928, 948 (10th Cir. 2001) (coercion when supplemental Allen charge given because court did not admonish jury regarding conscientiously held convictions and court emphasized desire to have verdict reached because of expense of trial and danger involved in trying case); U.S. v. Strothers, 77 F.3d 1389, 1391 (D.C. Cir. 1996) (coercion when Allen charge given because court issued anti-deadlock charge that omitted required admonition against any juror surrendering his or her honest beliefs still thought to be correct).
The Sixth Circuit has stated that a modified Allen charge must: (1) include the reminder that no juror should merely acquiesce in the majority opinion; (2) not inform jurors that they are required to agree; (3) direct both majority and minority jurors to reconsider their positions; (4) not advise the jury that they are the only ones who can decide the case; and (5) not ask the jury to consider the external effects of their inability to reach a verdict. See U.S. v. Brika, 416 F.3d 514, 521-22 (6th Cir. 2005).
The Eighth and Ninth Circuits have adopted a four-part test for determining the coerciveness of an Allen charge. The court must evaluate: (1) the form of the instruction; (2) the length of deliberation following the Allen charge; (3) the total time of jury deliberations; and (4) indicia of pressure on the jury. See U.S. v. Walrath, 324 F.3d 966, 970 (8th Cir. 2003); U.S. v. Freeman, 498 F.3d 893, 908 (9th Cir. 2007).
The Tenth Circuit has stated that relevant factors to consider in evaluating an Allen charge include: (1) the language of the instruction; (2) whether it was presented with other instructions; (3) the timing of the instruction; and (4) the length of the jury's subsequent deliberations. See Darks v. Mullin, 327 F.3d 1001. 1012, 1016 (10th Cir. 2003).
For a habeas corpus petition challenging an Allen charge, the coercion must rise to the level of a constitutional violation rather than merely to the plain error standard used on direct review. See, e.g., Boyd v. Scott, 45 F.3d 876, 883 (5th Cir. 1994) (per curiam) (no coercion though Allen charge given to deadlocked jury by state trial court after 4 1/2 hours of deliberation advised jurors they should reach agreement if possible but also stated that "verdict must be the verdict of each individual juror and not mere acquiescence" because judge neither gave deadline for decision nor pressured jury to reach verdict in any other way); Williams v. Parke, 741 F.2d 847, 850 (6th Cir. 1984) (no coercion though Allen charge given because court did not single out the minority but simply urged all jurors to consider each other's opinion and position, causing no violation of constitutional rights).

n1767 See, e.g., U.S. v. Vanvliet, 542 F.3d 259, 269-70 (1st Cir. 2008) (no coercion though court gave Allen charge after 6 hours of deliberations and jury reached verdict less than 3 hours later); Trala v. U.S., 386 F.3d 536, 543 (3d Cir. 2004) (no coercion though court gave Allen charge after 7 1/2 hours of deliberations and jury reached verdict 3 hours later), vacated on other grounds, Trala v. U.S., 546 U.S. 1086 (2006); U.S. v. Fields, 483 F.3d 313, 340 (5th Cir. 2007) (no coercion though jury returned unanimous death sentence verdict 1 hour after receiving modified Allen charge); U.S. v. Tines, 70 F.3d 891, 896-97 (6th Cir. 1995) (no coercion though court gave Allen charge after 1 1/2 days of deliberations and jury returned partial verdict 6 hours later); U.S. v. Fouse, 578 F.3d 643, 652-53 (7th Cir. 2009) (no coercion though court gave Allen charge after 11 hours of deliberation and jury reached verdict 2 hours later); U.S. v. Aldridge, 413 F.3d 829, 833 (8th Cir. 2005) (no coercion though court gave Allen charge after 2 hours and 20 minutes of deliberations and jury reached verdict 20 minutes later); U.S. v. Freeman. 498 F.3d 893, 908 (9th Cir. 2007) (no coercion though court gave Allen charge after 3 hours of deliberations and jury reached verdict 2 hours later); U.S. v. Ellzey, 936 F.2d 492, 501 (10th Cir. 1991) (no coercion though court gave Allen charge after 4 1/2 hours of deliberations and jury reached verdict 1 1/2 hours later); U.S. v. Chigbo, 38 F.3d 543, 546 (11th Cir. 1994) (no coercion though jury returned verdict 15 minutes after receiving Allen charge). But see, e.g., U.S. v. Mejia, 356 F.3d 470, 477 (2d Cir. 2004) (coercion because jury returned verdict 50 minutes after court gave Allen charge); Tucker v. Catoe, 221 F.3d 600, 612 (4th Cir. 2000) (coercion because jury returned verdict 1 1/2 hours after court gave Allen charge following 10 1/2 hours of deliberations); U.S. v. Webb, 816 F.2d 1263, 1267 (8th Cir. 1987) (coercion because jury returned verdict 15 minutes after court gave Allen charge); Weaver v. Thompson, 197 F.3d 359, 366 (9th Cir. 1999) (coercion because jury returned verdict 5 minutes after court gave Allen charge).

On Res Judicata in Criminal Case from Prior Civil Case and On Criminal Statute of Limitations (5/15/13)

noreply@blogger.com (Jack Townsend) — Wed, 15 May 2013 16:55:00 +0000

In United States v. Wanland, 2013 U.S. Dist. LEXIS 64598 (ED CA 5/6/13), here, the Court denied three defense motions to dismiss. I don't think there is anything particularly important about the holdings, but one of the issues permits me to digress on related concepts and another issue offers a good analysis of the law. So, I offer the case and further discussion here.

1. Res Judicata.

Prior to indictment, the defendant had received a bankruptcy court "final judgment discharging the Defendant's debts and liabilities to the Internal Revenue Service ('IRS')." As quoted in footnote one, 11 U.S.C. § 523(a) (1) (C) provides that

[a] discharge . . . of this title does not discharge an individual debtor from any debt . . . with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.

The defendant was not entitled to an order of discharge of his tax liabilities that he attempted to evade. He did get the discharge. Presumably the IRS was represented in the proceeding. The case does not state whether the IRS asserted nondischargeability because of evasion and lost the assertion in the bankruptcy court.

The defendant argued that, based on principles of res judicata or claim preclusion, the bankruptcy discharge precluded the IRS from asserting any crime related to the taxes discharge which required that the defendant have evaded tax, an issue that the defendant urged had already been resolved against the Government in the bankruptcy case. The Court held that the criminal prosecution could not have occurred in the bankruptcy proceeding and therefore that the Government was not precluded from bringing the counts based on evasion of the taxes discharged. The Court reasoned:

Because the Government could not have brought its criminal charges against Defendant in the prior bankruptcy proceeding, res judicata does not prohibit the instant criminal action against Defendant. See United States v. Tatum, 943 F.2d 370, 382 (4th Cir. 1991) (holding that "a discharge in bankruptcy entered in a bankruptcy proceeding to which the IRS is a claimant does not, under the doctrine of res judicata, preclude a subsequent criminal prosecution for bankruptcy fraud when the IRS never pursued a claim to set aside the discharge in bankruptcy on grounds of fraud"); United States v. Kunzman, 125 F.3d 1363, 1366 (10th Cir. 1997) (finding that a bankruptcy court's discharge order did not preclude subsequent criminal prosecution under res judicata principles because "[t]he claims raised in defendant's bankruptcy were not identical to those raised in the criminal case") (citing Tatum); cf. In re Gruntz, 202 F.3d at 1085-87 ("The purpose of bankruptcy is to protect those in financial, not moral, difficulty. . . . The fresh start afforded debtors in bankruptcy does not include release from jail.") (citations omitted) (finding that the Bankruptcy Code's automatic stay provision, § 362(a), does not automatically extend to all state criminal proceedings).

I now digress. This issue has been approached in a different direction for a long time now. A taxpayer's conviction of tax evasion will preclude the taxpayer is settings other than a criminal case on the issue of evasion and specifically with respect to the civil fraud penalty in a civil case after the criminal conviction. Helvering v. Mitchell, 303 U.S. 391 (1938). My understanding of that holding is based on the notion that the parties had litigated the issue of evasion before, the Government had already proved evasion beyond a reasonable doubt, and therefore in a civil proceeding involving the same issue (evasion/fraud) where the Government's burden is lesser than beyond a reasonable doubt, the issue may not be litigated again. That analysis is why the Government can assert the civil fraud penalty after an acquittal of evasion -- the criminial acquittal simply means that the Government did not prove evasion beyond a reasonable doubt and is therefore not preclusive of the same issue (evasion) where the Government's burden is less than beyond a reasonable doubt.

Now, extending that notion to the bankruptcy situation, if in fact evasion were in issue -- i.e., if the IRS had raised evasion as a ground for nondischargeability -- and the Court held against the IRS, thus ordering the taxes discharged, then it would seem that the Government has failed to meet its burden to prove evasion at some lesser standard (whether preponderance or clear and convincing) and hence should be precluded in making a claim anywhere, including in a criminal case, where its burden is at least as great in the case in which no evasion was decided.

At least that seems logical to me.

2. Improper Levy.

The defendant urged dismissal based on an improper levy. I won't address that issue.

3. Statute of Limitations.

The defendant urged dismissal based on an untimely indictment, urging that the indictment was filed after the applicable 3-year statute of limitations. Readers will recall that Section 6531, here. creates a general 3-year statute of limitations, but then excepts from the 3-year statute certain offenses for which a 6-year statute is provided. Virtually all tax crimes are charged as crimes with a 6-year statute of limitations. The key 6-year statute of limitations for present purposes is Section 6531(1) which applies to "offenses involving the defrauding or attempting to defraud the United States or any agency thereof, whether by conspiracy or not, and in any manner."

In the case, the defendant was charged with violation of Section 7206(4), titled "Fraud and false statements," which creates a crime for "Any person who --":

(4) Removal or concealment with intent to defraud
Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title;

The Court's analysis is a good presentation of the state of the law:

In United States v. Workinger, 90 F.3d 1409 (9th Cir. 1996), the Ninth Circuit addressed the scope of 26 U.S.C. § 6531(1), specifically as it applied to Internal Revenue Code crimes categorized as, "Attempts to interfere with administration of internal revenue law." See 26 U.S.C. § 7212(a). The Ninth Circuit explained that:

Section 6531(1), by its own terms, does not require that a defendant be expressly indicted for tax fraud. Indeed a reading which so limited it would be inconsistent with the overall structure of the statute. The § 6531 exceptions start out with two very broad formulations. The first broad exception, as already mentioned, is any offense which "involves" defrauding the United States in any manner. See § 6531(1). . . . These two exceptions appear to cover most acts that a person could perform in an attempt to avoid paying taxes. . . . Nevertheless, § 6531 does go on and list other more specific exceptions . . . . [because] Congress wanted to be sure that mere technical distinctions would not make a difference in the statute of limitations. That underscores rather than undercuts the breadth of § 6531(1). Thus, in § 6531(1) Congress applied the six-year limitations period to offenses other than those mentioned in sections which were labeled "fraud," if those offenses did reflect fraudulent activity. . . . § 6531(1) covers all offenses where fraud is an essential ingredient.

Workinger, 90 F.3d at 1413-14.

The Ninth Circuit's reasoning in Workinger appears dispositive as to the question of whether 26 U.S.C. § 7206(4) falls within the ambit of 26 U.S.C. § 6531(1), and thus, carries a six-year statute of limitations. That is, because the Circuit determined that the breadth of § 6531(1) went beyond merely encompassing defendants "expressly indicted for tax fraud," and extended to "offenses other than those mentioned in sections which were labeled 'fraud,'" then those defendants indicted for tax crimes that fall within the sections specifically labeled "fraud," such as 26 U.S.C. § 7206 (4) ("Removal or concealment with intent to defraud"), surely fall under the umbrella of § 6531(1) as well.

Defendant correctly notes that the Ninth Circuit has provided that "where the meaning of a statutory provision is clear, we do not rely upon the location the legislature chose for it in its system of codification . . . just as we do not rely upon the headings and titles of sections in such circumstances." Deutsch v. Turner Corp., 324 F.3d 692, 707-08 (9th Cir. 2003) (finding that, for purposes of federal preemption, a statute located within the "Code of Civil Procedure, in Title Two: Time of Commencing Civil Actions" was not "purely procedural," but was, instead "substantive in nature"). Nevertheless, where, as here, it is not made explicit whether the element of § 7206 (4) requiring an "intent to evade or defeat the assessment or collection of any tax imposed by this title" sufficiently "involv[es] the defrauding or attempting to defraud the United States . . . in any manner," § 6531(1), the title of § 7206(4) is, at least, instructive.

Defendant makes a worthy point in arguing that such an interpretation of § 6531(1) causes the assumed breadth of the six-year statute of limitations exceptions to swallow the general rule of § 6531, providing a three-year statute of limitations. The Ninth Circuit in Workinger, however, did not appear particularly troubled by this reading of the statute, and instead merely noted the ineffectual nature of the three-year statute of limitations and forged ahead. See Workinger, 90 F.3d at 1413 ("Although [§ 6531] states the general rule as being a 3-year period, there are numerous exceptions which render the 3-year period almost irrelevant.") (citing Patricia T. Morgan, Tax Procedure and Tax Fraud in a Nutshell, § 13.1.7 (1990)).

Thus, this court finds that the tax crime of "Removal or concealment with intent to defraud"), 26 U.S.C. § 7206(4), falls under this Circuit's broad interpretation of § 6531(1), and therefore the six-year statute of limitations applies. The Government's Superseding Indictment is not untimely filed.

JAT Note: The Court's reference to the Superseding Indictment may mean that the Counts in issue were added by the Superseding Indictment and were not in the original indictment.

The Dangers of the Unrecorded Interview by Criminal Agents -- FBI or IRS (5/14/13)

noreply@blogger.com (Jack Townsend) — Tue, 14 May 2013 12:18:00 +0000

A crime often trotted out in criminal tax cases is 18 USC 1001(a)(2), here, the crime of false statements. Often, for example, the first time the taxpayer knows that he is under investigation is when two IRS CI Special agents show up at his home or office, unannounced. The taxpayer is caught off-guard and often will respond to the questions without preparation and often without concern for precision in the words -- either in listening carefully to the questions asked or in formulating the answers given. That interview can be a disaster. It is true that the agents will -- at least should -- give the modified Miranda warnings that the taxpayer is not required to answer questions and may consult an attorney. But too many taxpayers just try to muddle through. The taxpayers answer's -- at least as perceived by the agents -- then sometimes become the subject of a false statements charge. Often the taxpayers perception of his answers is very different than the agents. After the interview, one of the agents will prepare a memorandum of the interview with the Agents' version of what the taxpayer said, and have the other agent sign off on it -- so there is a contemporaneous record verified by two witnesses (not wholly disinterested witnesses, I might add). The taxpayers' version of what he was asked and what he said may be very different, but he does not have a witness and often either does not remember crisply or does not contemporaneously commit to writing what he believes he said. The Agents' memorandum and their memories reinforced by the memorandum can then be powerful evidence against the taxpayer. So, it has been asked, when the stakes are so high, why don't the CI Agents voice record the interview so that anyone in the future will then know the question asked and the answer given and something of the ambiance as permitted by the voice recording?

David Drumm, a guest blogger on the Jonathan Turley Blog, addresses this question in the context of interviews by FBI agents. Why the FBI Doesn't Record Interrogations (Jonathan Turley Blog 5/11/13), here. He starts off:

At a time when recording a conversation is as easy as whipping out a cellphone or iPod, the FBI policy on electronic recording of witness interviews is: “agents may not electronically record confessions or interviews, openly or surreptitiously, unless authorized by the SAC or his or her designee.” Instead FBI agents take notes and later type up a summary report called a form 302. The interview takes place with two FBI agents and the single interviewee. The FBI has eschewed the objective for the subjective.

Mr. Drumm then discusses the policy, its rationale and problems that have arisen in the Form 302 context and offers a very good video discussion by a lawyer named Harvey Silvergate. I strongly recommend that you read Mr. Drumm's blog and watch the video (and for those with the time, the comments to Mr. Drumm's guest blog are pretty good also).

The bottom line is that uncounseled interviews are risky business, which is, of course, why CI agents like surprise uncounseled interviews. And even counseled interviews are risky. Although there is no iron-clad rule, the better part of wisdom in an interview is to insist upon a voice recording or, if refused and the taxpayer still wants to participate in the interview (properly counseled, of course), to have two witnesses other than the taxpayer present in the interview to take notes that can be incorporated in a memorandum and attested by both of the witnesses.

Guest Blog: Analysis of the Data in the GAO Report (5/13/13)

noreply@blogger.com (Jack Townsend) — Mon, 13 May 2013 20:29:00 +0000

Introduction: I previously posted a blogged on the recent GAO Report on the OVDI/P initiatives. See GAO Report Targets Strategies Other than OVDP (4/26/13), here, and More on the GAO Report on IRS Offshore Disclosure Initiatives (4/27/13), here. A reader made some comments to one of those blogs and, thinking that the comments might be refined by the reader and useful to other readers as a stand-alone blog, I invited the anonymous reader to do a guest blog on his comment. The reader agreed to do so, but has chosen to remain anonymous. Accordingly, the remainder of this blog is the Anonymous reader's comments as refined for this blog entry. I have not attempted to verify the statements and conclusions of the reader by tracking them to the GAO Report, so I encourage those interested to do so and post any of their thoughts as comments for the benefit of all readers.

Particular thanks to this anonymous reader. The balance of this blog entry is the Anonymous reader's offering. I have not done anything other than cut and paste the offering and provided the full link to the GAO publication.

---------------------

Finally, the GAO report on the 2009 OVDP has some data which strongly suggests that a large majority of those who entered the OVDP had tax-compliant principal and only the earnings had not been taxed. It also shows how disproportionate the FBAR penalty has been.

Link: http://www.gao.gov/assets/660/653369.pdf

Table 2 divides participants into categories based on account size. For the 10th percentile group, with median account size of $78,315 the total unpaid taxes over the six-year 2003-2008 lookback period were $103 (or $17 per year.) It would be hard to imagine anyone wilfully setting up and maintaining a foreign account to cheat for such an insignificant amount of money, yet the average FBAR penalty for this group was $13,320 or 129 times the amount of unpaid tax. Had this been unreported domestic income the fraud penalty would have been 75% of $103, or $77.

If unpaid taxes were $107 and assuming a 35% marginal tax rate, this means that there was $306 of unreported income, which would mean that the account principal raised no tax issues and only the account earnings had escaped taxation.

Let's not forget that these people had to spend time and money amending six years of returns, and perhaps even spent money on legal fees.

A $13,320 FBAR penalty in a case with $107 in previously unpaid taxes is grossly disproportionate in such cases.

For larger accounts the penalty is also disproportionate.

The 25th percentile group with a high balance of $190,365 had $1,661 total unpaid taxes over six years, and paid a penalty of $35,670.For this group, $1,661 in unpaid taxes results in unreported income of about $4,745 over six years,, or $791 per year, using a 35% marginal tax rate for this group also, the numbers suggest that the entire principal was tax compliant and only earnings had escaped taxation.

The median account had a high balance of $568,735 and unpaid taxes of $12,748. This suggests untaxed total income of $36,422 over the six years, or $6,070 per year. This is about 1.1% of the principal per year, which again suggests that in most cases there was unreported interest or dividend income, but the principal raised no tax issues. The penalty for this group was $107,949, about 8.5 times the previously unpaid taxes.

The 75th percentile group had a high balance of $1,595,805, and owed $60,449 in taxes over the six years, or $10,075 per year, which results in $28,786 untaxed income per year. This is approximately 1.8% of the principal per year, so it would be a reasonable conclusion that in most cases the principal was tax compliant, and only earnings had escaped taxation. . The OVDP penalty of 310,476 for this group is more than five times previously unpaid taxes.

The 90th percentile, those with the largest accounts, had a high balance of $4,054,505. Total additional tax owed for the six years was $190,399 or around $31,733 per year, which suggests unreported income of $90,665 per year, using a 35% marginal tax rate. This is approximately 2.2% of the principal per year. This is an average, and it is likely that in some cases the unpaid tax pertains to untaxed principal, but it would appear that in most cases it was only account earnings that had previously not been taxed. For this group the OVDP penalty was $793,166 or more than four times previously unpaid taxes.

Just how many of the 90th percentile group, those with the largest accounts, were cases in which the entire balance consisted of unreported income? The data shows that it can only be a small minority, because if it were one in seven accounts, that account alone would have $1,419,077 in unpaid taxes (35% of the $4,054,505 account balance.) Dividing $1,419,077 by seven participants would yield average unpaid tax of $202,725. But since the actual average unpaid tax for this group is $190,399, the number of accounts in which both principal and interest were noncompliant must be less than one in seven, barring some very unusual individual results that would skew the average figures.

If one out of ten of the largest accounts consisted entirely of tax noncompliant funds, that one case would account for $1,419,077 of the total $1,903,990 in unpaid taxes for ten participants (using the average of $190,399 per participant) leaving $484,913 to be allocated among the other nine. This would result in average tax liability for the remaining nine participants of $53,799 each, or $8,967 per year, which translates into $25,620 unreported income per year, or annual pretax yield of 0.6% per account.

If one in twenty of the largest accounts consisted solely of unreported income, one person would account for $1,419,077 of the total $3,807,920 unpaid taxes for twenty participants, leaving $2,388,843 to be spread among the remaining 19 OVDP participants. Each of these nineteen would have $125,729 total unpaid taxes, or $20,953 per year, which results in $59,871 unreported income, or 1.5% of total principal per year. This result is roughly consistent with the yield implied in the smaller accounts, so it would not be unrealistic to expect that only one in twenty of the largest accounts consisted solely of previously untaxed principal and earnings. It would also seem, given the low average earnings for the smaller accounts, that accounts in which there were tax issues with the principal would be a very small percentage of the total.

There may be cases in which untaxed principal was deposited into an account prior to the 2003-2008 period, but not during 2003 or thereafter. But given that during the 2003-2008 period the data suggests that only a small percentage of the accounts consisted of untaxed principal, it would seem logical to assume that most of the funds that escaped taxation prior to 2003 were untaxed earnings, and that most of the principal was tax compliant.

Even for the largest accounts, the OVDP penalty seems disproportionately large, as it is far greater than the 75% penalty which would ordinarily be assessed in cases of domestic fraud. It also appears that except for a minority of the largest account holders, it was only account earnings that had been unreported. The OVDP penalty is in addition to back taxes, accuracy related penalty on the back taxes, and interest thereon which OVDP participants have also paid.

Anecdotal observation suggests that subsequent programs, with 25% and 27.5% penalties, appear to have attracted smaller accounts with relatively more innocuous facts, so the penalties in such programs are even more disproportionate to past nonfiling of the FBAR.

More on Conviction Rates in Tax Cases (5/12/13)

noreply@blogger.com (Jack Townsend) — Mon, 13 May 2013 01:27:00 +0000

I have had several blogs on statistics, sometimes quoting the famous quote attributed to Benjamin Disreali that "There are three kinds of lies: lies, damned lies, and statistics." Those various blogs may be viewed under the key word statistics below, here.

In some of the blogs I have questioned DOJ Tax's claims over the years of a 95% conviction rate in the tax prosecutions it brings. Today, I address that issue again.

This past week, the IRS released its Annual Business Report on Fiscal Year 2012 National Operations, here. That report has some statistics for 3 years that are consistent with the IRS data book, Table 18 which may be accessed here for the years back to 1995. More about that in a minute.

On p. 4 of the 2012 Annual Report, the following statement appears:

Conviction rate is the percentage of convictions compared to the total number of convictions, acquittals, and dismissals. The conviction rate for FY 2012 is 93.0%, 0.3% more than the FY 2011 rate (92.7%).

This claim of 92.7% for 2011 and 93.0% for 2012 is not materially different from DOJ Tax's claims of a 95% conviction rate. So, I will refer to the claims as a 95% conviction rate claim.

My first reaction was that perhaps I have been wrong to question such a high conviction rate, since, although not backed with data, the IRS's indicated methodology for calculating the conviction rate seemed sound. But, being the skeptic, I decided to dig deeper. I therefore offer the following analysis from the IRS's own detailed data for a longer number of years to see if I could get to the same or roughly the same indicated conviction rate. My analysis below summarizes the more detailed analysis in a spreadsheet I offer for download here (a zip file).

I first attempted a limited analysis, analyzing legal source tax prosecutions over the period from 2005 through 2010. According to Table 18 for each of those years, the following is the aggregate raw numbers of prosecutions and convictions for legal source income cases:

Prosecutions (Indictments, etc.) 6,713
Convictions 5,649
Conviction Rate 84.2%

The number of prosecutions generally rose over the years, so that the lag between prosecution and conviction might account for some of the difference between the 95% claimed rate of conviction and the statistical data presented in Table 18, but it surely would not account for all of it or perhaps not even most of it. If it does not account for the difference, then there must be something I am not accounting for. I don't know what that is. But then, I thought, the 95% claimed rate is for all prosecutions rather than just legal source.

I then said, well, I need a broader set of numbers to test the 95% conviction rate claim. That number could be found in the IRS data book Table 18 for each year, but a reasonable proxy is found in an IRS web site called Enforcement Statistics presenting IRS CI Investigation Data, here. This page presents select data for years 2003 through 2013. I chose the same years for my analysis - 2005 - 2012. That page does not indicate the number of convictions, but it does indicate the number of sentencings which should roughly equate to convictions, with a somewhat greater time lag between prosecution and sentencing. But, over a long time frame (2005-2012 should be sufficient) and subject to an increasing number of prosecutions that might cause the indicated conviction rate to be a little lower, here are my results:

Prosecutions (Indictments, etc.) 9,908
Sentencings 8,678
Conviction Rate 87.6%

So, back to the claimed 95% conviction rate. Several years ago when I asked DOJ Tax to explain, DOJ Tax declined to explain. I have not asked the IRS to explain, but as noted above the IRS says that it calculated its 93% 2012 conviction rate as "the percentage of convictions compared to the total number of convictions, acquittals, and dismissals." That sounds like the right way to do the calculation, but unfortunately I can't find reported statistics on acquittals and dismissals to verify the 93% claim. All I could find are the statistics noted above which, when analyzed, do not seem to support the claim. Maybe the statistics I present are consistent with the claim. Maybe not.

I realize that there may be differences in DOJ Tax's data set and the IRS's data set. DOJ Tax may prosecute some cases that have not been investigated by the IRS and thus might not appear in the IRS data set. But, even so, DOJ Tax would have to have a significantly greater conviction rate in the cases not investigated by the IRS than 95% in order to move the overall statistics upward from the IRS's statistics.

Also, the 95% claim if made in the manner the IRS describes it accounts only for convictions, acquittals and dismissals in the year involved and hence eliminates any distortion from the lag time from prosecution to the disposition event (conviction, acquittal or dismissal) that is inherent in the data I analyze. So, it would be interesting to see the IRS data and, of course, the DOJ Tax data which might use the same methodology. And, even if the 95% rate is correct, the analysis I have above would suggest that the conviction rate in legal source crimes is probably less than the average rate (meaning the illegal source and other financial crimes convictions are probably more than the average).

If any reader is aware of the data supporting the DOJ Tax and the IRS conviction rate claims, I would very much appreciate hearing either by comment to this post or by email to jack@tjtaxlaw.com.

Thanks,

Jack Townsend

Cheating is Cheating, Except When Offshore Accounts Are The Means (5/10/13)

noreply@blogger.com (Jack Townsend) — Fri, 10 May 2013 14:55:00 +0000

I was quoted recently in a Wall Street Journal article. Laura Saunders, Leniency for Offshore Cheats (WSJ 5/5/13), here, subtitled Courts Hand Down Lighter Sentences Than in Other Types of Tax-Shelter Cases. Unfortunately, the link I have requires subscription, but I think readers of this blog will get the gist of the article from the title and subtitle.

I have received some comments that I seemed to be advocating for stiffer criminal penalties for offshore cheats. I thought I would use my blog to give the nuance I actually intended. I simply was saying that the discrepancy in sentencing in the two classes of cases seems inconsistent.

The particular quote that has drawn attention is:

"The cases involving offshore bank accounts are drawing lighter sentences than other criminal tax cases," said Mr. Townsend, who practices at Townsend & Jones LLP in Houston. He calls the discrepancy "troubling, because cheating is cheating."

The point I was making is that, based on my understanding of the law (particularly the Sentencing Guidelines), the difference should not exist. I will give an example:

Assume a taxpayer cheats on his taxes without any offshore involvement. Say he skims from his wholly owned corporation and thus evaded tax of $500,000 without any extraordinary means to hide the evasion. The Government charges him with either evasion or tax perjury. He pleads guilty, with the Government agreeing to maximum reduction for acceptance of responsibility. These are the only sentencing factors under the Guidelines. The Guidelines calculations are as follows: Base Offense Level - 20; reduction for acceptance of responsibility - 3; offense level for the Chapter 5 Sentencing Table - 17; sentencing range per the Sentencing Table (with no criminal history) - 24-30 months.

Now compare that to the offshore cheater. This taxpayer socks sufficient money in a foreign account (that may or may not have been taxed before) that then earns in the account sufficient income to generate a U.S. tax of $500,000. The Government charges him with either evasion or tax perjury. He pleads guilty. These are the only sentencing factors under the guidelines -- except that because a foreign account was involved the sophisticated means enhancement likely should apply. SG 2T1.1, Application Note 4 says (emphasis supplied):

4. Sophisticated Means Enhancement.— For purposes of subsection (b)(2) [the 2-level sophisticated means enhancement], "sophisticated means" means especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense. Conduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts ordinarily indicates sophisticated means

With all other things equal, the sophisticated means enhancement makes the offshore cheater's Offense Level for the sentencing table 19 for an indicated sentencing range of 30-37 months.

It is true that the Booker sentencing regime makes the Guidelines calculation of sentencing ranges advisory only. But, they are advisory. Advice is still advice and does reflect the considered judgment of the Sentencing Commission over a number of years after detailed study, including in particular how tax crimes should be sentenced. The "advice" the Sentencing Commission has given is that offshore cheaters should generally get, if anything, a higher sentence that onshore cheaters. Even if the onshore cheating has sophisticated means, the indicated sentences should generally be the same. This does not take into account various individual characteristics that sentencing judges may consider under Booker to vary from the guidelines ranges, but in the aggregate those factors should smooth out and there should, in the aggregate, either be little difference between the onshore cheater and the offshore cheater or the differences, if any, should be against the offshore cheater because of the sophisticated means enhancement.

Yet, the observation of the bar, including my own observations, is that offshore cheaters get a better deal.

I could speculate about why that phenomenon occurs. Maybe in a future blog I will. But for present purposes, I just wanted to lay out the phenomenon and note that there is no reason apparent to me why there should be lighter sentences for offshore tax cheats. As I said, cheating is cheating.

Now, back to the point of whether offshore cheaters should be treated the same as onshore cheaters. As best I see it, assuming the Guidelines calculations are made correctly, there should not be better treatment under the Guidelines. The difference should be in the Booker variances. In the aggregate, those variances should not be significantly disparate unless the Government just chooses to prosecute offshore cheaters with better Booker factors than onshore cheaters (a phenomenon which I doubt). So, the bottom-line sentences should be brought into rough conformance. That can happen by moving offshore cheaters' sentences up or moving onshore cheaters sentences down. Either way works.

I reserve the right to argue for onshore cheaters I represent that they should get the lighter sentences that the offshore cheaters get. Or, if I represent the offshore cheaters, I will argue that they should get the same lighter treatment that the other offshore cheaters have gotten.

I will state finally that I think DOJ Tax has been complicit in the existence of the phenomenon. As I said, I won't speculate why that occurred, but I question whether it sends the right message to the general public that some forms of tax evasion are better than others. And, I suspect that in the aggregate, the demographics of the offshore cheaters that the Government prosecutes are different than onshore cheaters who the Government prosecutes. Is that the right message to the general public?

Addendum 5/13/13:

I thought I would add some data to the key point I make above that sentencings in offshore cases in the IRS's latest initiative post UBS are lighter than general tax sentences. The following sentencing data are from the U.S.. Sentencing Commission's 2012 Sourcebook of Federal Sentencing Statistics, here. The statistics here are based on the primary offense category. The data is for cases where tax offense is the primary offense charged. If some other federal offense is the primary charge, the data appears under that category of offense.

1. There were 608 tax cases in FYE 2012. (Some tables say 605.)

2. Guilty Pleas are achieved in 93.9% of the tax cases; 6.1% went to trial. See Table 11, here.

3. Tax cases with imprisonment - 64.3%, broken down as follows: Prison only - 54.2%; Prison/Community Split Sentence: 10.1%. Table 12, here.

4. Tax cases with probation 35.7%, broken down as follows: Probation and confinement 16.2%; probation only 19.5%. Table 12, here.

6. The Length of Imprisonment for Offenders in Tax Cases is: For all tax cases: Median 23 months and mean 18 months. For Category One Criminal History Offenders: The same median and mean. Table 14, here.

7. Tax cases sentenced within Guidelines range: 36.9%. Table 27, here.

8. Tax cases with 5K.1 downward departures. 13.6%. Table 27, here.

9. Tax cases with downward departures with Booker. 2%. Table 27, here.

10. Tax cases with below range with Booker. 33.6%. Table 27, here.

So, the question is whether the above data is consistent with the conclusion that offshore cases receive better sentences. There are perhaps two factors that make comparison of my data in the spreadsheet more complicated.

First, some offshore sentences are included in the Sentencing Commission data, so my data about offshore sentences alone may not be directly compared. But the number of offshore sentences in the Sentencing Commission data is very small, so I think a fair comparison can be made.

Second, in many cases, my data does not have all of the sentencing factors (both Guidelines factors and Booker factors). But, I do have the bottom-line sentence. I realize that at least some of the defendants in offshore cases might qualify for 5K1 departures by assisting in building cases against their enablers, so they might get both 5K1 and Booker.

As noted in paragraph 4 above, tax cases with probation (including probation only and probation with home confinement) are 35.7%. My comparable statistic for offshore sentences is 48%. (I have revised my spreadsheet to include some statistics related to these issues.) More strikingly, the length of imprisonment for category One Criminal History offenders in paragraph 6 above is median 23 months and mean 18 months. My stats for all offshore cases (including guilty pleas and verdicts and including enablers as well as taxpayers) is mean of 13.8 months and median of 0 months. And for guilty pleas for taxpayers only, the mean is 5.6 months and the median, not surprisingly is 0. I think this is too stark a difference to be accounting for by considering the complicating factors above.

Although these are not head-to-head comparisons, I believe the data is consistent with the general practitioner perception that sentencing of offshore bank tax cheats are materially lighter than for onshore tax cheats.

One explanation for the phenomenon that offshore cheaters get better treatment might be that this has been a game which is most egregiously exploited by the very rich. Sure, there are a lot of minnows and near rich in the game with varying locations on the spectrum from innocent to guilty. But the very rich do it best because of their easy access to the enablers, banks and their minions, who enable them.

Along this line, a guest blogger on the Jonathan Turley Blog has an interesting analysis stating the obvious -- the most egregious offshore offenders are the very wealthy who always get better deals than the rest of us. Lawrence E. Rafferty, Tax Havens For the Wealthy, But What About the Rest of Us? (Jonathan Turley Blo 5/12/13), here. The phenomenon of the wealthy getting better treatment, of course, is not unique to offshore tax cheating, but it does seem to be a phenomenon in offshore tax cheating, at least in the stratosphere of the amounts involved.

Which reminds me of a famous misquote about the rich. The misquote is a reputed exchange between F. Scott Fitzgerald and Ernest Hemingway as follows:

Fitzgerald: The rich are different from you and me.
Hemingway: Yes, they have more money.

A Fitzgerald short story actually began with the following:

Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft where we are hard, and cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to understand. They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves. Even when they enter deep into our world or sink below us, they still think that they are better than we are. They are different.

For more detail, seen this following from Quote/Counterquote, here.

IRS, UK and Australia Joint Efforts on Offshore Accounts (5/9/13)

noreply@blogger.com (Jack Townsend) — Thu, 09 May 2013 22:29:00 +0000

Reports are that the IRS is teaming with UK and Australian tax authorities to chase down taxes on income in offshore accounts. Michael Cohn, IRS, UK and Australian Tax Authorities Uncover Information on Offshore Tax Evaders and Advisors (Accounting Today 5/9/13), here. Exceprts are:

The Internal Revenue Service is teaming up with tax authorities in the United Kingdom and Australia to battle offshore tax havens after uncovering new information on specific taxpayers and advisors.

The tax administrations from the U.S., Australia and the U.K. announced a plan Thursday to share tax information involving trusts and companies that hold assets on behalf of residents in jurisdictions throughout the world. The IRS said the three nations have each acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands.

The data they have acquired purportedly contains both the identities of the individual owners of these entities, along with the advisors who assisted in establishing the entity structure.

The IRS said it has been working together with the Australian Tax Office and the U.K.’s HM Revenue & Customs to analyze the data they have acquired and have already uncovered information that may be relevant to the tax administrations of other jurisdictions. The IRS said they have also developed a plan for sharing the data, along with their preliminary analysis, if requested by those other tax administrations.

I did not realize this earlier, but the key new information in the article is pretty much taken from IR-2013-48, May 9, 2013, titled "IRS, Australia and Unite Kingdom Engaged in Cooperative Effort to Combat Offshore Tax Evasion," here.

Eight Circuit Denies Claim for Restitution Reduction for Unconvicted Wife's Alleged Share of Tax Liability (5/8/13)

noreply@blogger.com (Jack Townsend) — Wed, 08 May 2013 20:30:00 +0000

In United States v. Perry, ___ F.3d ___, 2013 U.S. App. LEXIS 9210 (8th Cir. 2013), here, the defendant was convicted for four counts of evasion (Section 7201) for years in which he received kick backs. The taxpayer raised a number of garden-variety points on appeal, and all were rejected by the Court of Appeals. I address only one today because I had not seen it before and thought students might find it interesting. Apparently, during the years he took the kickbacks and failed to pay report and pay the taxes, the defendant was married and filed a joint return with his wife. The sentencing court required that he pay restitution (principal and interest) on the tax liability as a condition of supervised release. That liability, of course, was a joint and several liability (unless the wife qualified for innocent spouse relief, which was not indicated in the case). But, if the defendant had to pay the restitution, then his wife would have to pay nothing on their joint and several liability. That annoyed him because, he claimed, they were now divorced and she benefited from the income and taxes not paid and equitably should pay some (meaning, in the context in which he raised the claim, the amount of the award for restitution should be decreased).

Here is the entire discussion of the claim and the Eighth Circuit's resolution:

4. Finally, Perry argues the district court should have "split" his restitution tax liability because it is "grossly unfair" to permit ex-wife Tammy to reap more than half the benefits from their joint tax evasion in the subsequent divorce, while making Perry repay the IRS's entire loss. This is not an issue of law because the restitution statutes only grant authority to "apportion liability" among multiple defendants, and Tammy was not a co-defendant. See 18 U.S.C. § 3664(h). Therefore, we question whether the district court had discretion to order Perry to pay an amount of restitution less than the IRS's entire tax loss; joint filers are jointly and severally liable for income tax deficiencies. See 26 U.S.C. § 6013(d)(3). But even if the court had such discretion, it was not abused. Noting that the IRS may seek recovery of taxes owed from either Tammy or Perry, the district court eliminated any risk of double recovery by expressly providing that "[t]he restitution amount attributable to the tax deficiency shall be reduced by any portion of the tax deficiency received by the Internal Revenue Service from Tammy Perry, Mr. Perry's ex-wife." That was an eminently fair ruling.

Of course, if the wife were an innocent spouse, the defendant would have to foot the entire tax, interest and penalties anyway. But, if she were not an innocent spouse and if the IRS chases the restitution first, both under general remedies and the relatively new Code provisions permitting immediate assessment of tax restitution against a defendant, the IRS will move against the husband and collect it all if it can. (See my blog on the new Code provisions, New Statute for Civil Effect of Restitution in Tax Cases (at Least Title 26 Crimes of Conviction) (Federal Tax Crimes 2/11/11), here.)

HSBC India Reported to be Cooperating with DOJ and IRS and Projecting Significant Penalty (5/8/13)

noreply@blogger.com (Jack Townsend) — Wed, 08 May 2013 14:50:00 +0000

The Times of India has this article: HSBC fears 'significant' penalty in NRI tax evasion probe (Times of India 5/8/13), here. Excerpts are:

Global banking major HSBC has said it may face "significant" penalties from the US authorities with regard to an ongoing probe into suspected tax evasion by the US-based clients of its Indian unit, among other cases.

The US tax department is investigating possible evasion of federal income taxes by the American residents of Indian origin through use of their accounts with HSBC India.

HSBC said in a regulatory filing last night that it is cooperating with the US Department of Justice and the Internal Revenue System (IRS) in their probes into whether certain HSBC companies and employees acted appropriately in relation to certain customers with US tax reporting requirements.

The article also addresses another exposure due to an SEC investigation "related to HSBC Private Bank Suisse SA's cross-border policies and procedures and adherence to US broker-dealer and investment adviser rules and regulations when dealing with US resident clients."

Petition for Certiorari and Briefs on the Required Records Case Presently Before the Court on Petition (5/7/13)

noreply@blogger.com (Jack Townsend) — Tue, 07 May 2013 22:15:00 +0000

I recently wrote on the filing of a petition for certiorari a case raising the issue of the continuing viability of the required records doctrine that the courts of appeals have recently applied in offshore bank record subpoena cases to override the Fifth Amendment privilege through the Act of Production doctrine. See Petition for Cert filed in FBAR Required Records Case (Federal Tax Crimes Blog 1/18/13), here. The case is In re Special February 2011-1 Grand Jury Subpoena dated September 12, 2011, T.W. v. United States, 691 F.3d 903 (7th Cir. 2012), petition for cert (Sup. Ct. No. 12-853). The Supreme Court docket on the case is here. In my prior posting, I provided a link to the petition for certiorari. I write today to provide that link again, along with links on the other filings, including amicus briefs.

T.W.'s Petition for Writ of Certiorari, here.

Government Brief in Opposition, here.

T.W.'s Reply Brief, here.

Amicus Briefs

Briefs of Counsel for Similarly Situated Jane and John Does, here.
Brief of Former Officials with the Department of Justice, Tax Division, and Internal Revenue Service, here.
Brief of New York County Lawyers' Association, here.

For those with limited time, I do recommend T.W.'s Reply Brief.

Article on Collateral Compliance That May Attend Criminal Tax Misconduct (5/7/13)

noreply@blogger.com (Jack Townsend) — Tue, 07 May 2013 20:53:00 +0000

Joshua D. Blank, here, has published an article titled Collateral Compliance on SSRN. The SSRN page is here. The following is the abstract:

Collateral Compliance

Joshua D. Blank

New York University School of Law

February 25, 2013

University of Pennsylvania Law Review, Forthcoming

NYU Law and Economics Research Paper No. 12-06

Abstract:

As most of us are aware, the failure to comply with the tax law can lead to civil and criminal tax penalties. But tax noncompliance has other consequences as well. Collateral sanctions for tax noncompliance, which are imposed on top of tax penalties and are often administered by agencies other than the taxing authority, increasingly apply to individuals who have failed to obey the tax law. They range from denial of hunting permits to suspension of driver’s licenses to revocation of passports. Further, as the recent Supreme Court case Kawashima v. Holder demonstrates, some individuals who are subject to tax penalties for committing tax offenses involving “fraud or deceit” may even face deportation from the United States. Criminal law scholars have written dozens of articles on the collateral consequences of convictions. Yet tax scholars have virtually ignored collateral tax sanctions, even though their use by the federal and state governments is growing.

This Article offers a comprehensive analysis of collateral consequences in the taxation context. While many criminal law scholars have proposed ways to alleviate collateral consequences, this Article argues that, when applied in connection with violations of the tax law, collateral consequences may offer previously unappreciated social benefits. In many cases, collateral tax sanctions can promote voluntary tax compliance more effectively than additional monetary tax penalties, especially if governments increase public awareness of collateral tax sanctions. Governments should therefore embrace these sanctions as a means of tax enforcement and taxing authorities should publicize them affirmatively.

After considering the effects of collateral tax sanctions under each of the predominant theories of voluntary compliance, I propose principles that governments should consider when designing collateral tax sanctions. These principles suggest, for example, that initiatives to revoke driver’s licenses from individuals who have failed to pay outstanding taxes or professional licenses from individuals who have failed to file tax returns would likely promote tax compliance. However, whether the sanction of deportation for tax offenses involving fraud or deceit will have positive compliance effects is far less certain. Finally, I suggest how taxing authorities should publicize these sanctions to foster voluntary compliance.

Number of Pages in PDF File: 73

Keywords: collateral consequences, sanctions, tax compliance, tax delinquent, Kawashima, tax enforcement, deterrence

The Table of Contents is:

I. INTRODUCTION
II. THE RISE OF COLLATERAL TAX SANCTIONS
A. Collateral Consequences Generally .
B. Collateral Tax Sanctions Defined
C. Examples
1. Federal Examples
a. Passports
b. Residency
c. Housing Assistance
d. Government Contracts and Employment
2. State and Local Examples
a. Driver’s Licenses and Vehicle Registration
b. Professional Licenses
c. Recreational Licenses
III. WHY COLLATERAL TAX SANCTIONS PROMOTE COMPLIANCE
A. Why Do People Pay Taxes?
B. Collateral Tax Sanctions and Motivations of Compliance
1. Deterrence
2. Reciprocity
3. Signaling
4. Duty of Citizenship
C. Drawbacks
1. Spillover Effects
2. Brute Deterrence
3. Tax Privacy
4. Observability
IV. WHEN SHOULD COLLATERAL TAX SANCTIONS APPLY?
A. Proposed Principles
1. Tax Offense Is Violation of Tax Rule, Not Tax Standard
2. Tax Offense Defined by Tax Law and Identified by Taxing Authority
3. Collateral Tax Sanction Is Proportionate to Tax Offense
B. Beyond Tax Delinquency?
1. Non-Filing and Professional Licenses
2. Household Employment Taxes and FDIC Insurance
3. “Fraud and Deceit” Tax Offenses and Deportation
C. Publicity by Taxing Authorities
V. CONCLUSION

Article on Prosecuting Tax Professionals to Leverage Deterrence (5/7/13)

noreply@blogger.com (Jack Townsend) — Tue, 07 May 2013 20:28:00 +0000

Scott A. Schumacher, here, a co-author of Tax Crimes, here, has published on SSRN an article titled Magnifying Deterrence by Prosecuting Professionals. The article on SSRN is here. The abstract from the SSRN page is:

Magnifying Deterrence by Prosecuting Professionals

Scott A. Schumacher

University of Washington - School of Law

March 1, 2013

89 Ind. L.J. ___ (2014) Forthcoming

Abstract:

This article examines the recent series of criminal prosecutions against tax professionals and offshore bankers. These criminal cases, brought against the largest Swiss bank (UBS), the oldest Swiss bank (Wegelin), one of the largest accounting firms in the world (KPMG), as well as numerous lawyers and accountants, was a dramatic shift for the U.S. Department of Justice. After decades of tolerating abusive tax shelters and tax haven banks, the Government changed its policy. However, rather than indicting the individuals and corporations who invested in tax shelters or hid money in offshore accounts, the Justice Department indicted the lawyers, accountants, and bankers who advised them. This article will analyze those prosecutions from a theoretical, historical, and practical perspective, and will examine the impact the new prosecution policy will have on the legal professional, the tax system, and international relations.

This is the first article to examine these issues, and it is a combination of my prior scholarship involving tax shelters and criminal tax matters, including my casebook TAX CRIMES. The article will be of great interest to anyone teaching or practicing in the areas of taxation, criminal law, and criminal theory. It will also appeal to those interested in the role of lawyers and other professionals within the legal system. It therefore should have wide appeal amongst faculty readers, as well as practitioners and policy-makers.

Number of Pages in PDF File: 53
Keywords: Tax havens, tax shelters, prosecuting professionals, tax crimes, criminal theory

The Table of Contents gives the scope of the article:

I. A Brief History of Tax Prosecutions
A. Tax Shelters
B. Tax Havens
II. A Sea Change
A. The Tax Shelter War
B. The Swiss and Liechtenstein Tax Haven Cases
1. Liechtenstein and LGT
2. The Other Tax Haven Scandal – UBS
III. The New Prosecution Policy and Criminal Theory
A. The Ambiguity of Tax Crimes
B. Inconsistent Enforcement
C. The Problems with All this Vagueness
D. Prosecution Policies
IV. Analysis of The New Prosecution Policy
A. Tax Shelter
1. Relative Culpability
2. Compensating the Victim
3. Deterrence
4. Preserving the Integrity of the Tax System
5. Summary
B. Tax Shelter
1. Relative Culpability
2. General Deterrence
3. Compensating the Victim: Tax Haven Abuse Developing World
4. Preserving the Integrity of the Tax System
5. Summary
V. Conclusion

Third Circuit Holds Foreign Bank Documents Admissible (5/6/13)

noreply@blogger.com (Jack Townsend) — Mon, 06 May 2013 15:29:00 +0000

In United States v. Turner, ___ F.3d ___, 2013 U.S. App. LEXIS 8870 (3rd Cir. 2013), here, the Third Circuit affirmed a tax conviction in which foreign bank documents were admitted in the Government's case in chief. At trial, the defendant objected to the admission of those documents. On appeal, the defendant renewed his objections. The defendant raised two objections -- authenticity and admissibility. The Third Circuit affirmed.

The background was as follows: The defendant was the author of a tax evasion program to "escape federal and state income taxation." The defendant sold the program to a veterinarian named Leveto. The program was essentially a mirage, with Leveto retaining control of the income which apparently found its way to foreign and domestic bank accounts. The IRS obtained and executed a search warrant on Leveto's home and business. In that search, the IRS seized certain documents, including foreign and domestic bank records. The grand jury indicted the defendant, Leveto and the Leveto's wife for a Klein / defraud conspiracy.

At trial, over defendant's objection, the court admitted (i) recorded conversations of the veterinarian with an IRS sting agent under FRE 801(d)(2)(E); and (ii) the bank documents. I focus here on the bank documents.

1. Authenticity.

Documents require authentication. The defendant argued that the foreign bank documents were not authenticated. The record showed only that they were seized from the veterinarian's premises. The Court held that the authentication requirement had been met:

Federal Rule of Evidence 901(a) requires the authentication of evidence before a district court may admit it. The standard for authenticating evidence is "slight," McQueeney v. Wilmington Trust Co., 779 F.2d 916, 928 (3d Cir. 1985), and may be satisfied by "evidence sufficient to support a finding that the item is what the proponent claims it is." Fed. R. Evid. 901(a). This Court does not require conclusive proof of a document's authenticity, but merely a prima facie showing of some competent evidence to support authentication. McQueeney, 779 F.2d at 928; United States v. Goichman, 547 F.2d 778, 784 (3d Cir. 1976) (per curiam). "Once a prima facie case is made, the evidence goes to the jury and it is the jury who will ultimately determine the authenticity of the evidence, not the court." Goichman, 547 F.2d at 784.

Federal Rule of Evidence 901(b) provides examples of appropriate methods of authentication, including reliance on "[t]he appearance, contents, substance, internal patterns, or other distinctive characteristics of the item." Fed. R. Evid. 901(b)(4). This list is not exhaustive, however, and it is clear that the Government may authenticate documents with other types of circumstantial evidence, including the circumstances surrounding the documents' discovery. See McGlory, 968 F.2d at 329 (considering that notes were found in trash outside of defendant's residence as evidence of authenticity); McQueeney, 779 F.2d at 929 (considering that documents were produced in response to a discovery request as evidence of authenticity) (citing Burgess v. Premier Corp., 727 F.2d 826, 835-36 (9th Cir. 1984) (holding that exhibits found in defendant's warehouse were adequately authenticated simply by their being found there)). We have also considered whether the information included in the evidence is widely known. See McQueeney, 779 F.2d at 929-30 (concluding that small number of people who knew the information in the evidence supported finding of authenticity).

The Government easily met its slight burden here. First, the appearance of the documents support their authentication: the documents have the official appearance of bank records. They bear the insignia of foreign banks, see, e.g., A. 1735, A. 1784, and contain the type of transaction data typically present on bank records, see, e.g., A. 1727, A. 1785. The documents are also internally consistent in their appearance. Compare A. 1689 with A. 1693.

Second, the contents of the documents provide evidence of their authenticity. The documents were addressed to Leveto's home and business addresses and post office box. See, e.g., A. 1718, A. 1722. Several of the documents were responsive to faxes that Leveto sent. And the Government reconciled many of the foreign bank documents with domestic bank records—the authenticity of which Turner does not challenge. Moreover, the bank records included information that was not widely-known, including Leveto's personal account information and aliases.

Third, the IRS seized the records from Leveto's home and office and safes inside Leveto's office, which strongly supports a finding of authenticity because it is likely that Leveto would have stored his bank records there, and his possession of the documents indicates his belief that they were important.

Finally, although we agree with Turner that it is the Government's burden to prove authentication, Turner has not suggested any reason why the Court should doubt the authenticity of the documents. This only bolsters our conclusion that the District Court did not abuse its discretion in concluding that the documents were properly authenticated. As such, we will affirm the District Court's holding that the documents were properly authenticated.

2. Admissibility

The defendant argued that, well, even if the foreign bank documents were properly authenticated, they still were not admissible because they were hearsay that did not qualify under an exception to the hearsay rule. The Court's analysis is (footnotes omitted):

Turner argues that the District Court erred in admitting the foreign bank documents under Federal Rule of Evidence 807 because the Government did not prove that the documents had exceptional guarantees of trustworthiness. We review for clear error a district court's finding that evidence was sufficiently trustworthy to be admissible under Rule 807. United States v. Wright, 363 F.3d 237, 246 (3d Cir. 2004).

The residual hearsay exception permits a district court to admit an out-of-court statement not covered by Rules 803 or 804 if the court determines that:

(1) the statement has equivalent circumstantial guarantees of trustworthiness; (2) it is offered as evidence of a material fact; (3) it is more probative on the point for which it is offered than any other evidence that the proponent can obtain through reasonable efforts; and (4) admitting it will best serve the purposes of these rules and the interests of justice.

Fed. R. Evid. 807. The exception is "'to be used only rarely, and in exceptional circumstances' and 'appl[ies] only when certain exceptional guarantees of trustworthiness exist and when high degrees of probativeness and necessity are present.'" Wright, 363 F.3d at 245 (quoting United States v. Bailey, 581 F.2d 341, 347 (3d Cir. 1978)). The determination of whether a document is sufficiently trustworthy to be admitted under Rule 807 is a highly fact-specific inquiry. Id. at 246. In making this determination, the district court may not rely exclusively on corroborating evidence. See Bailey, 581 F.2d at 349.

In United States v. Pelullo, we analyzed whether bank records should be admissible under the residual hearsay exception and noted that in general, bank records "provide circumstantial guarantees of trustworthiness because the banks and their customers rely on their accuracy in the course of their business." 964 F.2d 193, 202 (3d Cir. 1992). Other courts of appeals have similarly concluded. See United States v. Wilson, 249 F.3d 366, 376 (5th Cir. 2001) (admitting foreign bank records under the residual hearsay exception), abrogated on other grounds by Whitfield v. United States, 543 U.S. 209, 125 S. Ct. 687, 160 L. Ed. 2d 611 (2005); United States v. Nivica, 887 F.2d 1110, 1127 (1st Cir. 1989) (same); Karme v. Comm'r, 673 F.2d 1062, 1064-65 (9th Cir. 1982) (same).

The District Court concluded that the same evidence that supported the foreign bank documents' authenticity was also sufficient to support the documents' trustworthiness, and therefore, admissibility under Rule 807. Turner contends that this was error for three reasons. First, relying on Bohler-Uddeholm America, Inc. v. Ellwood Group, Inc., 247 F.3d 79 (3d Cir. 2001), Turner asserts that it is "impossible" to admit the records under Rule 807 because the declarants of the bank documents are unknown. Second, Turner argues that Karme and Wilson are distinguishable because in those cases, the sources of the documents were banks—in contrast to here, where the IRS seized the documents from Leveto's residence and business. Third, Turner maintains that the District Court improperly relied only on corroborating evidence in admitting the documents.

We find that Turner's arguments lack merit and that the District Court did not clearly err in concluding that the documents possessed sufficient indicia of trustworthiness. First, contrary to Turner's assertion, the Government is not required to identify the declarant of the foreign bank documents in order for the documents to be admissible under Rule 807. See Wilson, 249 F.3d at 375-76 (admitting bank records under the residual hearsay exception with no mention of declarant); Nivica, 887 F.2d at 1127 (same); Karme, 673 F.2d at 1064-65 (same); see also Fed. R. Evid. 807. Bohler-Uddeholm does not suggest otherwise. In Bohler-Uddeholm, this Court affirmed the district court's ruling admitting the affidavit of a person who died before trial under Rule 807. We explained that the factors that the district court analyzed in admitting the affidavit, including whether the declarant was known and whether the statements were based on personal observation, were sufficient for this Court to uphold the district court's order. Bohler-Uddeholm, 247 F.3d at 113. We did not hold, however, that these factors were necessary for hearsay evidence to be admissible under Rule 807, and we decline to require those factors here where many of the documents were computer-generated.

Second, as discussed supra, that the IRS seized the documents from Leveto's residence, office, and safes within his office, weighs in favor of the reliability of the documents—not against it. Turner does not dispute that the IRS seized the documents from Leveto. He does not identify any break in the chain of custody of the documents. And he does not suggest any reasons why Leveto would have been storing false bank documents that implicated him in tax fraud.

Third, the District Court did not improperly rely only on corroborating evidence in admitting the bank records. As detailed above, the District Court relied on: (1) the appearance of the records, including their internal consistency; (2) the contents of the records; and (3) the circumstances surrounding the discovery of the records. Those grounds are entirely legitimate.

Finally, it bears repeating that Turner has not identified any document that he claims is a forgery or in any way inaccurate. Accordingly, we will not disturb the ruling of the District Court.

Article on Singapore Crackdown on Singapore Bank Accounts Used for Other Country Evasion (5/5/13)

noreply@blogger.com (Jack Townsend) — Mon, 06 May 2013 11:43:00 +0000

A Reuters article reports that Singapore is cracking down on the use of its banks by citizens of other countries to evade their home country tax. Rachel Armstrong, Saeed Azhar and John O'Callaghan, Banks in Singapore Agonize Over Rich Clients in Tax Evasion Clampdown (Reuters 5/5/13), here. This Singapore initiative is the logical and inevitable response to the worldwide initiative, fronted by the U.S., to locate sources of revenue and evaders. Excerpts are:

Banks in Singapore are urgently scrutinizing their account holders as an imminent deadline on stricter tax evasion measures forces them to decide whether to send some of their wealthiest clients packing.

The Southeast Asian city-state has grown into the world's fourth-biggest offshore financial center but, with U.S. and European regulators on the hunt for tax cheats, the government is clamping down to forestall the kind of onslaught from foreign authorities that is now hitting Switzerland's banks.

Before July 1, all financial institutions in Singapore must identify accounts they strongly suspect hold proceeds of fraudulent or wilful tax evasion and, where necessary, close them. After that, handling the proceeds of tax crimes will be a criminal offence under changes to the city-state's anti-money laundering law.

"Because of banking secrecy, Singapore used to be an attractive place to put money if you didn't want the authorities back home to know about it," said Erik Wilgenhof Plante, head of compliance at Germany's DZ Privatbank in Singapore.

"That has left legacy problems for some banks."

Singapore officials have said the city-state's secrecy rules were aimed at safeguarding investors' legitimate interest in privacy and did not mean it was a haven for illicit funds. The tighter rules are intended to fall in line with new global standards announced last year that treat tax crimes as a money-laundering offence.

Article on Bank Leumi Depositors Pre-Cleared in Error (5/3/13)

noreply@blogger.com (Jack Townsend) — Fri, 03 May 2013 12:14:00 +0000

Jeremy Temkin, here, has published a Forbes article titled: Bank Leumi Snafu Jeopardizes DOJ-IRS Offshore Enforcement Initiatives (Forbes 5/1/13), here. See my prior blog on the subject, Bank Leumi U.S. Clients Rejected from OVDP (Federal Tax Crimes Blog 3/8/13), here. Excerpts are:

While the most recent offer – the 2012 Offshore Voluntary Disclosure Program (OVDP) – remains open indefinitely, the IRS’s recent decision to disqualify approximately 50 taxpayers who disclosed Bank Leumi accounts could undermine the program’s continued success.

* * * *

The about-face was evidently caused by miscommunication between the IRS, which administers the OVDP, and the DOJ, which apparently obtained the names of these accountholders through a separate investigation. Rather than living with its mistake, the IRS disqualified these individuals from the program. While taxpayers who were disqualified after they had been “pre-cleared,” but before they completed the next stage of the process arguably were not prejudiced by the IRS’s reversal, taxpayers who had relied on the pre-clearance and submitted detailed information will be materially worse off in the event criminal charges are brought.

Perhaps recognizing the potential hazards caused by the snafu, Assistant Attorney General for the Tax Division Kathryn Keneally publicly assured the disqualified taxpayers that the DOJ would “consider the facts and circumstances under which any substantive disclosures were made, and the fairness of proceeding” criminally. Precisely what this means is unclear; at a minimum it likely means the DOJ will not use information obtained from the OVDP submission in the event it prosecutes any of these taxpayers.

* * * *

[i]t is doubtful that the Bank Leumi accountholders who not only applied for the OVDP, but had been pre-cleared or preliminarily accepted only to find themselves bounced from the program, will face incarceration if prosecuted. Under the circumstances, perhaps the IRS should reconsider its treatment of the Bank Leumi accountholders, readmit them to the OVDP and thus restore confidence that it is administering the program fairly and consistently.

Petition for Certioirari Seizing the Gauntlet Laid Down by the Second Circuit Majority Panel to Question the Klein Conspiracy (5/2/13)

noreply@blogger.com (Jack Townsend) — Fri, 03 May 2013 04:24:00 +0000

In United States v. Coplan, et al., 703 F.3d 46 (2d Cir. 11/29/12), here, the Second Circuit entered a remarkable decision on many fronts, but the one I found most fascinating was the majority panel's questioning of the scope of the so-called Klein / defraud conspiracy. I previously blogged on the majority's Klein conspiracy analysis in this blog entry -- Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here. (I wrote a number of blogs on other aspects of Coplan; a roadmap to those other blogs is in this blog entry: Major CA2 Decision on E&Y Tax Shelter Convictions (Federal Tax Crimes Blog 11/29/12), here.

Mr. Coplan has petitioned for certiorari on the blockbuster Klein conspiracy issue. The petition is here; the docket sheet is here. Mr. Coplan has assembled a formidable team for this frontal assault, including Dennis P. Riordan of Riordan & Horgan, San Francisco, here, who wrote the Second Circuit brief that captured the Second Circuit majority's interest, and Paul Clement of Bancroft LLC, former Solictor General and a major player in Supreme Court practice, here.

For background on the expansive scope of the Klein conspiracy, see my prior blog Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here; see also my earlier article, John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here, and its companion online Appendix, here.

In a nutshell, the argument raised by the petition is that the key statutory word "defraud" has a settled meaning but that, over the years, that word in the conspiracy statute has expanded through judicial opinions to mean something much broader and sufficiently ill-defined to permit more mischief than the Constitution allows -- i.e., it is has become a common law rather than a statutory crime.

I excerpt certain key portions of the petition.

QUESTION PRESENTED

18 U.S.C. § 371 makes it a crime to participate in a conspiracy “to commit any offense against the United States, or to defraud the United States, or any agency thereof.” At common law, “to defraud” meant to deprive another of money or property by dishonest means. That common-law definition has been incorporated into most federal fraud statutes. Under the so-called “Klein conspiracy” doctrine, however, the fraud provision of § 371 has been interpreted much more broadly to cover any interference with a lawful government function by dishonest means. See United States v. Klein, 247 F.2d 908, 916 (2d Cir. 1957).

The question presented is whether the Klein conspiracy doctrine is consistent with the text, history, and purpose of 18 U.S.C. § 371, and whether that doctrine remains viable in light of this Court’s decision in Skilling v. United States, 130 S. Ct. 2896 (2010).

* * * *

INTRODUCTION

* * * *

The Klein conspiracy doctrine is wholly unmoored from the text and history of § 371. The language of the statute is as plain as can be: it prohibits any conspiracy to “defraud” the United States. Because the word “defraud” is undefined, it is presumed to have its longstanding common-law meaning of taking the property of another through deceitful or dishonest means. But through a remarkable accumulation of dicta beginning in the late 1800s, this straightforward anti-fraud provision morphed into a sweeping criminal prohibition on any conspiracy to make the government’s job more difficult. The Klein conspiracy doctrine has now been recognized by every circuit, and is a powerful tool that prosecutors routinely deploy in criminal tax cases.

In Skilling v. United States, 130 S. Ct. 2896, 2928 (2010), this Court found it necessary to “pare” the doctrine of honest services fraud “down to its core” in order to avoid serious constitutional concerns regarding vagueness and fair notice. The Court’s reasoning in Skilling applies with equal or greater force to the judicially created Klein doctrine, which provides little notice about the scope of the offense and reaches broad swaths of conduct that do not remotely constitute “fraud.” Indeed, the lower courts are currently split over several important questions about the scope of a Klein conspiracy; given that this judicially created doctrine has no basis in the text of § 371 or the common-law definition of fraud, it is unsurprising that courts have struggled over how to apply it. And this inherent uncertainty only reinforces the serious vagueness concerns with the Klein conspiracy doctrine and the urgent need for an answer from this Court about the ongoing validity of that doctrine.

The Second Circuit concluded that it was compelled by stare decisis to affirm Mr. Coplan’s conviction for participating in a Klein conspiracy. At the same time, however, the court emphasized that the Klein doctrine is not based on anything “recognizable as statutory interpretation,” and is long overdue for review by a “higher authority.”

This Court should grant certiorari to address whether the judicially created Klein conspiracy doctrine remains viable in light of modern principles of statutory interpretation and serious constitutional concerns about vague and expansive federal criminal statutes.

For what it is worth (not much), I think the Klein conspiracy in its modern iteration is the product of incrementalism and sloppy dicta. In short, it is wrong, as most courts articulate it. The question, though, is whether the Supreme Court will make a sea change in Klein conspiracy jurisprudence. The Klein conspiracy is such a common feature of the tax crimes landscape that upsetting Klein jurisprudence it is likely to create havoc. Those types of reversals have occurred before (e.g., United States v. Gaudin, 115 S.Ct. 2310 (1995) (holding that materiality for most crimes is a jury issue rather than a judge issue as previously commonly assumed and held), but it will be a major problem that may be reason alone for the Supreme Court to let sleeping dogs lie.