Federal Tax Crimes

Criminal Restitution for Employment Taxes and Trust Fund Liability Under Section 6672 (6/18/13)

noreply@blogger.com (Jack Townsend) — Tue, 18 Jun 2013 18:24:00 +0000

In Ross v. United States, 2013 U.S. Dist. LEXIS 83665 (D DC 2013), here [to come], the defendant had been convicted of tax evasion under Section 7201, here, for failure to pay employment taxes of a corporation he owned. (Note that the other principal felony charge that for nonpayment of employment taxes is Section 7202, here, which is a criminal counterpart to a civil liability for the trust fund portion of employment taxes under Section 6672, here; presumably, the defendant could have been charged under that Section 7202, but was instead charged with evading the corporation's liability for trust fund taxes.)

Pursuant to the plea agreement, the court ordered restitution for the corporation's liability for the employment taxes in the amount of "the actual [employment] tax of $203,651.43 and the resulting interest."

At this point, it is helpful to note the components of employment taxes that were the subject of restitution. Employment taxes consist of: (i) withholding income tax from the employees' wages and the employee's share of FICA and Medicare tax, also withheld from the employee's wages, referred to as the trust fund portion; and (ii) the employer's share of FICA and Medicare taxes, referred to as the nontrust fund portion. (In other words, the trust fund portion is the amounts withheld from employee for remission to the IRS for application against the employee's tax liabilities for income tax, FICA and Medicare tax. The restitution was for the corporation's employment tax without any differentiation between trust fund and nontrust fund portions.

The plea agreement did not provide as to how the restitution payments would be allocated between trust fund and nontrust fund portions. Therein lay the rub. (Outside the criminal context, the standard gambit is to insure, if possible, that taxes paid be applied first to the trust fund portion of the tax liability, but neither the plea agreement nor the restitution order addressed that issue.)

The IRS assessed the Section 6672 penalty, referred to as the trust fund recovery penalty ("TFRP"), against the defendant. As a result, the defendant obviously preferred that the restitution payments be applied first to the trust fund portion because that was the only portion of the corporation's employment tax liability that he was personally liable for. That was an issue in the case.

The Court held against the defendant, reasoning as follows:

Plaintiff further appears to challenge the IRS's application of the bulk of the restitution payments to Spectrum's outstanding employment taxes, rather than to his 6672 assessments. See Opp. at 14. In so arguing, Ross points to no authority — either in the plea agreement or from anywhere else — that dictates where the IRS must direct restitution payments. Courts have held, on the contrary, that the IRS may direct payments "in the best interest of the United States." Concert Staging Serv., Inc. v. Comm'r, 102 T.C.M. (CCH) 315, No. 3050-09L, 2011 WL 4448911, at *8 (U.S. Tax Ct. Sept. 26, 2011) (internal citation omitted); see also Davis v. United States, 961 F.2d 867, 879 (9th Cir. 1992) ("Involuntary payments, like undesignated payments, may be credited as the IRS desires."); In re Tecson, 291 B.R. 199, 200 (Bankr. M.D. Fla. 2003) ("[I]f the payment is made involuntarily, the payments will be allocated in a manner serving the best interest of the IRS.") (internal quotation marks and citation omitted).

In Concert Staging, the Tax Court further observed that the IRS's "practice of prioritizing the payment of non-trust-fund taxes is reasonable because, consistent with the purpose of section 6672, it enables the Commissioner to reach those responsible for the corporation's failure to pay the taxes which are owing." 2011 WL 4448911, at *8 (internal quotation marks and citations omitted). Here, the IRS directed most of Ross's restitution payments to non-trust-fund taxes and penalties assessed to Spectrum (as well as interest on both), and the sum recovered did not even fully satisfy that figure.

The IRS transcripts, furthermore, show the Service was careful not to double count. In other words, when Ross's restitution payments were applied towards Spectrum's employment taxes, any payments directed to the trust-fund portion of Spectrum's liability were subtracted from the balance Ross owed on the 6672 penalties. For example, on August 30, 2010, the IRS applied $37,871.30 of Ross's criminal restitution payments to Spectrum's liability. See Exh. 44. On the same day, the IRS reduced Mr. Ross's 6672 liability for a portion of the $37,871.30 that it attributed to the trust-fund portion. See Exh. 15 (on 8/30/2010, two adjustments — $7,247.04 and $6,970.94 — are credited to Ross's account under code 241 ("Miscellaneous penalty adjustment IRC 6672 Trust Fund Recovery Penalty Balance Due to Payment by Related Business Entity")). Similarly, when Ross made payments towards the 6672 penalties, those amounts were correspondingly removed from Spectrum's outstanding employment taxes. See Exhs. 16, 45 (on June 21, 2010, Peter Ross paid $25,422.05 toward his 6672 liability for Q4 1999 and IRS reduced Spectrum's liability by same amount ("Balance adjusted trust fund recovery cases" for $18,022.35 and $7,399.70)).

In sum, because the IRS was not required to direct the restitution payments to the trust-fund portion of Spectrum's outstanding employment taxes, Ross did not pay the same taxes twice.

The lesson, of course, is that practitioners need to be careful in structuring such restitution payments, if possible, to apply to the trust fund portion. I doubt that such an attempt will be successful where the charge is under Section 7201 for the employer's employment taxes in the aggregated (including both trust and nontrust fund portions). If this is not done in the plea agreement, the IRS will take the position that the restitution payments are not voluntary and therefore that it can apply the payments against the portion of the employment tax that best suits the IRS -- the nontrust fund portion as in the case. (Note that restitution is not permitted when the only counts of conviction are Title 26 offenses, as in this case, except if restitution is provided by plea agreement.)

Practitioners should note that the problem would not have arisen under Section 7202 because the crime there, like the Section 6672 civil penalty, is the willful failure to pay over the trust fund taxes. Hence, the restitution would have included only trust fund portion and all payments of restitution would have been applied to the trust fund portion. Perhaps in negotiating a plea, it might be possible to take the plea under Section 7202 rather than 7201. The Government will really lose nothing in its criminal case by doing so, because the nontrust fund portion will be included in the tax loss because its nonpayment is relevant conduct.

Silence in Response to Questions Without Miranda Warning in NonCustodial Setting May Be Evidence of Guilt (6/18/13)

noreply@blogger.com (Jack Townsend) — Tue, 18 Jun 2013 12:40:00 +0000

Two days ago, I posted a blog discussing a case where the defendant argued that the prosecution had improperly used his failure to respond to the IRS during the IRS investigations against him in a criminal case. See Third Circuit Speaks on Fifth Amendment and Willfulness in Tax Case (Federal Tax Crimes Blog 6/16/13), here, discussing United States v. Bean, 2014 U.S. App. LEXIS 11810 (3d Cir. 2013), here. Yesterday, the Supreme Court decided a case involving a variation of that issue. The case is Salinas v. Texas, ___ U.S. ___, 2013 U.S. LEXIS 4697 (2013), here. The gravamen of the case is reflected in the Syllabus, which I quote in full, omitting case citations, quotation marks and page citations for better readability):

Petitioner, without being placed in custody or receiving Miranda warnings, voluntarily answered some of a police officer’s questions about a murder, but fell silent when asked whether ballistics testing would match his shotgun to shell casings found at the scene of the crime. At petitioner’s murder trial in Texas state court, and over his objection, the prosecution used his failure to answer the question as evidence of guilt. He was convicted, and both the State Court of Appeals and Court of Criminal Appeals affirmed, rejecting his claim that the prosecution’s use of his silence in its case in chief violated the Fifth Amendment.

Held: The judgment is affirmed.

369 S. W. 3d 176, affirmed.

JUSTICE ALITO , joined by THE CHIEF JUSTICE and JUSTICE KENNEDY, concluded that petitioner’s Fifth Amendment claim fails because he did not expressly invoke the privilege in response to the officer’s question.

(a) To prevent the privilege against self-incrimination from shielding information not properly within its scope, a witness who desires the protection of the privilege . . . must claim it at the time he relies on it. This Court has recognized two exceptions to that requirement. First, a criminal defendant need not take the stand and assert the privilege at his own trial. Petitioner’s silence falls outside this exception because he had no comparable unqualified right not to speak during his police interview. Second, a witness’ failure to invoke the privilege against self-incrimination must be excused where governmental coercion makes his forfeiture of the privilege involuntary. Petitioner cannot benefit from this principle because it is undisputed that he agreed to accompany the officers to the station and was free to leave at any time.

(b) Petitioner seeks a third exception to the express invocation requirement for cases where the witness chooses to stand mute rather than give an answer that officials suspect would be incriminating, but this Court’s cases all but foreclose that argument. A defendant normally does not invoke the privilege by remaining silent. And the express invocation requirement applies even when an official has reason to suspect that the answer to his question would incriminate the witness. For the same reasons that neither a witness’ silence nor official suspicion is sufficient by itself to relieve a witness of the obligation to expressly invoke the privilege, they do not do so together. The proposed exception also would be difficult to reconcile with [a prior case], where this Court held in the closely related context of post-Miranda silence that a defendant failed to invoke his right to cut off police questioning when he remained silent for 2 hours and 45 minutes.

Petitioner claims that reliance on the Fifth Amendment privilege is the most likely explanation for silence in a case like his, but such silence is “insolubly ambiguous.” To be sure, petitioner might have declined to answer the officer’s question in reliance on his constitutional privilege. But he also might have done so because he was trying to think of a good lie, because he was embarrassed, or because he was protecting someone else. Not every such possible explanation for silence is probative of guilt, but neither is every possible explanation protected by the Fifth Amendment. Petitioner also suggests that it would be unfair to require a suspect unschooled in the particulars of legal doctrine to do anything more than remain silent in order to invoke his right to remain silent. But the Fifth Amendment guarantees that no one may be compelled in any criminal case to be a witness against himself, not an unqualified right to remain silent. In any event, it is settled that forfeiture of the privilege against self-incrimination need not be knowing.

(c) Petitioner’s argument that applying the express invocation requirement in this context will be unworkable is also unpersuasive. The Court has long required defendants to assert the privilege in order to subsequently benefit from it, and this rule has not proved difficult to apply in practice.

JUSTICE THOMAS, joined by JUSTICE SCALIA , concluded that petitioner’s claim would fail even if he invoked the privilege because the prosecutor’s comments regarding his precustodial silence did not compel him to give self-incriminating testimony. [Prior case], in which this Court held that the Fifth Amendment prohibits a prosecutor or judge from commenting on a defendant’s failure to testify, should not be extended to a defendant’s silence during a precustodial interview because Griffin lacks foundation in the Constitution’s text, history, or logic.

JAT Comment: The law is clear that, whether under oath or responding to a federal agent's questions, the witness's choice is to tell the truth or stay silent; he has no right to tell a lie which would be a crime. So, in the course of the many contacts a taxpayer may have with the IRS, his choice is to tell the truth or stay silent. Salinas establishes is some risk that staying silent without specifically invoking a Fifth Amendment privilege. Of course, the silence to be persuasive as evidence of guilt will have to permit a reasonable inference of guilt from the silence. Not all silences, in context, would permit a reasonable inference of guilt. But some silences could.

For example, let's say a tax relevant document is back dated and the fact of being back-dated would probably defeat the tax benefit the taxpayer claimed that was being audited. During the course of the audit, the agent asks the taxpayer whether the document was backdated. Certainly, if the taxpayer invokes his Fifth Amendment to answer the question, the prosecutors cannot rely upon his refusal to answer the question as evidence of guilt. But, if the taxpayer does not answer the question or evades the question, then the prosecutors might be able to rely on any inference of guilt that the conduct permits.

For a good initial commentary, see Jonathan Turleys blog, The Price of Silence: Supreme Court Rules That Pre-Miranda Silence Can Be Used Against Defendant To Prove Guilt (Jonathan Turley Blog 6/17/13), here, calling Salinas (1) "a major loss for individual rights vis-a-vis the police;" and (2) "In my view, it was one of the most significant rulings of the term. (Of course, given the result is was “significant” in a negative way — the way that the Hindenburg was a 'significant' moment for airship travel)." The comments to Professor Turley's blog entries are usually pretty good, and this entry is no exception.

Court Holds Criminal Restitution Trumps Bankruptcy Automatic Stay Against Debtor and Bankruptcy Estate (6/17/13)

noreply@blogger.com (Jack Townsend) — Mon, 17 Jun 2013 16:01:00 +0000

In United States v. Robinson, 2013 U.S. Dist. LEXIS 83915 (WD TN 6/14/13), here, the District Court, reversing the Bankruptcy Court, held that criminal restitution trumps the bankruptcy automatic stay, so that criminal restitution could be collected from the bankrupt and the bankruptcy estate. The case does not involve restitution for taxes, but the principal would apply to restitution for taxes. Restitution for taxes, of course, would not be dischargeable in bankruptcy, but here the question is whether the restitution is collectible more quickly than indefinitely, if at all, in the future simply because the restitution was not discharged. The opinion is very well reasoned, and that is the reason I offer it here. I commend it to readers desiring to pursue the issue of the interface of criminal restitution and bankruptcy and quote here just the two final paragraphs:

To the extent the Bankruptcy Court held that the criminal actions and proceedings exception allowed the United States to enforce a criminal fine or restitution order as against the debtor in bankruptcy (or his property) personally, the Court agrees. Where the Bankruptcy Court found public policy mandated the protection of property of the bankruptcy estate as against the United States government when continuing a criminal action, the Court believes the Bankruptcy Court struck the wrong balance. Section 3613(a) provides a clear congressional mandate: despite the operation of other law, the United States must be able to enforce criminal fines and restitution orders against the property of criminal defendants ordered to pay them. Congress, in enacting the Bankruptcy Code, noted that it did not intend the Bankruptcy Code to interfere with the swift and sure operation of justice. In light of these Congressional statements of public policy, the Court cannot agree with the Bankruptcy Court that public policy now demands it allow a criminal defendant, adjudged guilty in a competent court and ordered to pay restitution, to delay justice by taking refuge under the Bankruptcy Code.

CONCLUSION

Because the Court finds Congress' plain language indicates it intended § 3613(a) to sweep aside the protections of the Bankruptcy Code, the Court determines the United States may enforce its restitution orders against Robinson's property, whether nominally held by Robinson or Robinson's bankruptcy estate. Therefore, the Court VACATES the portions of the Bankruptcy Court's Order inconsistent with this Order, and REMANDS this case to the Bankruptcy Court for further proceedings.

IT IS SO ORDERED.

SEC Suit for Disgorgement of Federal Income Tax Related to Securities Fraud (6/16/13)

noreply@blogger.com (Jack Townsend) — Sun, 16 Jun 2013 20:57:00 +0000

In SEC v. Wyly, 2013 U.S. Dist. LEXIS 83897 (SD NY 6/13/13), here, the SEC sued the Wyly brothers (Wikipedia entries for the two here and here) for certain securities violations related to holdings in offshore trusts designed to avoid / evade federal income tax and the securities laws. Their offshore trust holdings were investigated by the Senate Finance Permanent Subcommittee on Investigations and a report issued titled Tax Haven Abuses: The Enablers, the Tools and Secrecy, which can be downloaded here. (See the end of this blog for a newspaper summary of the Report's discussion of the Wylys.)

Among the relief sought by the SEC was disgorgement of income tax avoided / evaded by certain offshore shenanigans, apparently within scope of the Senate Report, that were at the center of the alleged securities violations. The question presented in the opinion I discuss here is whether the SEC can sue for disgorgement of their tax savings.

The first issue is one of disgorgement as a remedy at all. The district court had previously held that the SEC's penalty claims were time-barred. See a Reuter's article on the previous holding, here. However, that holding was not dispositive of the issue of disgorgement which, although not a penalty, is a remedy that is available to the SEC if it can prove fraud. The Court said (footnote omitted):

In an Opinion and Order dated June 6, 2013 ("June 6 Opinion"), I held, among other things, that the Securities and Exchange Commission's ("SEC") penalty claims against defendants in this case were time barred insofar as they accrued more than five years before tolling agreements with the SEC took effect. Therefore, for those claims against the Wylys that accrued prior to February 1, 2001, the only monetary relief available is disgorgement. For the Wylys' alleged failure to disclose their beneficial ownership of certain securities in SEC filings, the SEC contends that the measure of disgorgement is the amount of federal income taxes that the Wylys allegedly avoided by transferring stock options to the Offshore Corporations1 and failing to disclose their control over the options. The sole issue addressed in this Opinion is whether the SEC has the authority to seek disgorgement measured as the amount of federal income taxes it claims the Wylys would have been required to pay if they had disclosed their beneficial ownership of the securities in question, or whether such relief impermissibly impinges upon the Secretary of the Treasury's ("Secretary") exclusive authority to assess and collect taxes.

The Court described the applicable law as follows (most quotation marks and all footnotes omitted for better readability):

The securities law violations at issue arise from the Section 13(d) requirement that any person who acquires "beneficial ownership" of more than five percent of a class of registered securities must file a statement disclosing such ownership with the SEC. It is well-established that once the district court has found federal securities law violations, it has broad equitable power to fashion appropriate remedies, including ordering that culpable defendants disgorge their profits. The primary purpose of disgorgement is to deprive violators of their ill-gotten gains, thereby effectuating the deterrence objectives of those laws. The authority to order disgorgement includes the authority to calculate the amount to be disgorged, and that calculation need only be a reasonable approximation of profits causally connected to the violation. District courts are given wide latitude in approximating the losses avoided by defendants that are causally connected to the securities fraud violations. Moreover, any risk of uncertainty in calculating disgorgement should fall on the wrongdoer whose illegal conduct created that uncertainty.

At the same time, Congress has granted exclusive authority to assess and collect taxes to the Secretary and mandates compliance with specific procedures in exercising this authority. Assessment of taxes must be done by recording the liability of the taxpayer in the office of the Secretary in accordance with the rules or regulations prescribed by the Secretary. The Secretary also has exclusive authority to "collect the taxes imposed by the internal revenue laws." The Internal Revenue Code ("Tax Code") states that no civil action for the collection or recovery of taxes, or of any fine, penalty or forfeiture, shall be commenced unless the Secretary authorizes or sanctions the proceedings and the Attorney General or his delegates directs that the action be commenced.

This frames the issue which the court described (footnotes omitted):

Whether the SEC has the authority to seek disgorgement in the form of unpaid federal income taxes is truly an issue of first impression — no court has ever addressed the question, indeed the SEC acknowledges that it has never before sought unassessed federal taxes as a measure of disgorgement.

As a formal matter, this is not a "civil action for the collection or recovery of taxes," which would clearly fall within the exclusive authority of the IRS under Section 7401 of the Tax Code. Rather, this is a civil action for securities law violations, the remedy for which is measured by the amount of taxes avoided. There is no explicit prohibition, either in the Tax Code or in the Exchange Act, on using tax benefits as a measure of unjust enrichment in other contexts. Nor is there any express limitation on the SEC's authority to calculate and disgorge any reasonable approximation of profits causally connected to the violation. The cases on which Defendants rely to argue that this remedy is barred are therefore inapposite.

The Court then analyzed the scant authority even remotely in point and found no limitation on the SEC's ability to seek disgorgement even if it is disgorgement of unassessed taxes.

Finally, the Court analyzed the evidence and (footnote omitted):

I find that the SEC has produced sufficient evidence of a causal connection between the taxes allegedly avoided and the alleged securities violations. Therefore, if the SEC is successful on its fraud claims, the parties will have the opportunity to litigate to the Court whether there is a sufficient causal connection between the securities violations and the tax avoidance.

The Court concluded by addressing the threat of the defendants having to pay taxes twice.

This Opinion would be incomplete if it did not address the potential for double enforcement by both the IRS and the SEC. As the SEC points out, the IRS was investigating these Offshore Trusts as early as 2003, and ultimately declined to pursue tax liability against the Wylys on the basis of these trusts. Neither the SEC nor Defendants could answer definitively whether the IRS would be foreclosed by the governing statute of limitations from pursuing an action against the Wylys now. I would welcome the Secretary's input on the question. However, the specter of the IRS reversing its previous decision not to pursue tax liability against the Wylys does not warrant precluding the SEC from pursuing its own mission of deterring securities fraud.

I am surprised that the parties could not provide some information on the statute of limitations for the IRS to collect the taxes that the SEC now seeks to disgorge. The Court says that they could not answer the question definitively, but not many issues can be answered definitively until a court rules on the issues (the issue being here whether the tax assessment statute of limitations is still open). There has to be a huge back story there, but I don't know what it is.

One question that comes to mind is whether, in order to obtain disgorgement, the SEC will have to prove that the Wylys committed civil tax fraud so that the civil tax statute of limitations is still open and the IRS could, if it chose, assess the tax. In this regard, the tax statutes of limitations in Section 6501, here, seem to require a timely assessment, with, seemingly, a denial of the IRS's right to collect or retain tax if the assessment is not timely made. (I will look at this issue in more detail later when I have time.) But, assuming that is the case, even if the SEC were to obtain disgorgement, when it was turned over to the IRS, then would the IRS would have to return it the Wylys because it could not apply it to a properly assessed tax. So, one way or another, there will have to be a determination of civil tax fraud to obtain an open statute of limitations. And, if so, then the Wylys would also be subject to the 75% civil fraud penalty (and interest). I admit, I have not traced all this through and am speculating a bit. Isn't this fun?

Enjoy!

Addendum on 6/17/13 1:30pm:

I have just posted a discussion / speculation about some of the civil tax procedure issues presented by this case: Tax Procedure Aspects of SEC Disgorgements For Taxes Underpaid (Federal Tax Procedure Blog 6/17/13), here.

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

The following are excerpts from David Cay Johnston, Tax Cheats Called Out of Control (NYT 8/1/06), here.

So many superrich Americans evade taxes using offshore accounts that law enforcement cannot control the growing misconduct, according to a Senate report that provides the most detailed look ever at high-level tax schemes.

* * * *

The Wyly brothers told the committee that they would invoke their Fifth Amendment right against self-incrimination and thus were not called to testify. The report characterizes them as active participants in tax schemes.

* * * *

The report also dissects deals by the Wyly brothers of Texas, showing how they made at least $190 million through stock option exercises offshore but had yet to pay taxes on most of the money. They then borrowed against their offshore accounts to buy jewelry, pay for portraits of family members, buy homes and operate properties named Rosemary’s Circle R Ranch, LL Ranch, Stargate Horse Farm, Cottonwood Galleries and 36 Malibu Colony.

Senator Levin said he might propose limiting or barring the transferring of executive stock options to others, as well as more disclosure when they are exercised.

The report says that Credit Suisse First Boston, Lehman Brothers and Bank of America “all knew that the offshore entities” for which they made trades were associated with the Wylys, but ignored rules requiring disclosure of these transactions and helped them hide the true ownership of the assets. Only when Robert M. Morgenthau, the New York District attorney, issued subpoenas in 2004 did Bank of America close the Wyly accounts.

William Brewer, a Dallas lawyer for the Wylys, said that while the Senate report “intends to present a balanced view, the committee report is reflective of a number of misunderstandings.”
“The Wylys believe they have paid all taxes due,” he added. “And in any event, as the report makes clear, the Wylys were counseled by an armada of lawyers, brokers, financial professionals and offshore service providers to ensure that they were at all times fully meeting their obligations.”

Third Circuit Speaks on Fifth Amendment and Willfulness in Tax Case (6/16/13)

noreply@blogger.com (Jack Townsend) — Sun, 16 Jun 2013 19:21:00 +0000

In United States v. Bean, 2014 U.S. App. LEXIS 11810 (3d Cir. 2013), here [a nonprededential opinion, the defendant, an accountant, appealed his convictions for tax obstruction (§ 7212(a)), tax evasion (§ 7201), and failure to file (§ 7203). The actus rea occurred after he had become enthralled with one of the various trust schemes that many taxpayers fall prey to. Taxpayers convince themselves that the tax evasion trust scheme will be sufficient at least to avoid a criminal prosecution because, they think, they really believe it works and therefore cannot act willfully. These criminal prosecutions establish that a jury will usually not believe that the taxpayers really believe that nonsense. On appeal, the defendant raised two interesting arguments that I address in this blog. He did raise a sufficiency of the evidence, but that is routine and not interesting as presented in the opinion. I write this blog primarily to students, since most practitioners will be familiar with the context and holdings of the court.

I do note at the outset that this is a nonprecedential decision and hence the Court of Appeals says:

We write principally for the parties, who are familiar with the factual context and legal history of this case. Therefore, we will set forth only those facts necessary to our analysis.

So, the Court says it is giving us the facts necessary for the issues it decides, but there is undoubtedly nuance (e.g., helpful facts) not presented. Still for the issues I discuss, I think we have everything we need. With that caveat, let's go!

First, the defendant made an interesting Fifth Amendment argument. During the course of the IRS audits and collection activity forming the basis for the criminal proceedings, the defendant had obstructed the investigation, in part, by not responding to the IRS and not showing up for scheduled meetings. During the trial, the prosecutors adduced evidence of that conduct and argued it to the jury. The defendant says that, through such conduct, he was exercising his Fifth Amendment privilege and that, therefore, the prosecutors should not have been allowed to comment on that exercise, either by testimony, argument or otherwise. Here is how the Court handled that argument:

Beam also challenges the government's comments during trial on his silence with respect to the IRS audits. Specifically, Beam asserts that "IRS Agents Thomas Kurtz and William Welsh testified that they called, sent letters and made appointments to meet with Troy Beam, but that he would never respond or show up for meetings," and that "[b]ecause Troy Beam had a right to remain silent, the Government's use of his silence against him violates the Fifth Amendment." Appellant's Br. at 20. Beam admits that this alleged error was not brought to the District Court's attention, and thus our review is for plain error.

This Court may, in its discretion under Rule 52(b) of the Federal Rules of Criminal Procedure, correct an error not raised at trial where the appellant demonstrates that "(1) there is an error; (2) the error is clear or obvious, rather than subject to reasonable dispute; (3) the error affected the appellant's substantial rights, which in the ordinary case means it affected the outcome of the district court proceedings; and (4) the error seriously affects the fairness, integrity, or public reputation of judicial proceedings." United States v. Marcus, 130 S. Ct. 2159, 2164 (2010) (internal quotation marks omitted).

The question of whether the government's comments were inappropriate under the Fifth Amendment invokes sub-issues of whether Beam actually invoked his right to remain silent and whether the Fifth Amendment's prohibition on comments pertaining to a defendant's silence extends to non-custodial situations, such as an IRS audit. However, in this case, we do not need to decide whether the government's comments were in error, or whether the error was clear or obvious, because, given the totality of the evidence presented to the jury, the government's alleged error cannot be said to have affected the outcome of the District Court proceedings. Hence, the alleged error did not affect Beam's substantial rights.

Thus, we hold that the government's commenting during trial on Beam's silence with respect to the IRS audits was not plain error.

Notice the appellate-speak in ithe final holding. The alleged error was not "plain error" and therefore not reversible. So, was it error in the first place or did it escape reversal only because the error was not plain so as to warrant reversal?

Second, the defendant objected to the trial court's refusal to give his particular "theory of the defense" instruction on willfulness. Theory of the defense jury instructions are quite important to rivet the jury on the defendant's defense. I quote the Court's discussion and resolution of this argument:

Beam also alleges that the District Court erred in declining to instruct the jury as he proposed. Beam, at trial, requested the following instructions:

"An American citizen such as the defendant has a right to rely upon representations and statements made by the government and appearing in official publications or documents . . . . If you find in this case that the IRS has created uncertainty regarding the taxability of the income of 'pure trust organizations' and that Defendant Beam has relied on these statements of the IRS, then it shall be your duty to acquit the Defendant of the charges set forth in the indictment. When the law is vague or highly debatable, a defendant - actually or imputedly - lacks the requisite intent to violate it."

App. at 3902 & 3908. The District Court, however, instructed the jury in a manner similar to that contemplated by the Third Circuit Model Criminal Jury Instructions § 5.05, stating as follows:

"Willfully refers to a voluntary and intentional violation of a known legal duty. This means that the government must prove beyond a reasonable doubt that Mr. Beam knew his conduct was unlawful and intended to do something that the law forbids. To find that Mr. Beam acted willfully you must find that the evidence proved beyond a reasonable doubt that Mr. Beam acted with a purpose to disobey or disregard the law . . . . Mr. Beam's conduct was not willful if he acted through negligence, mistake, accident, or due to a good faith misunderstanding of the requirements of the law."
App. at 3589-90.

"A defendant is entitled to a theory of defense instruction if (1) he proposes a correct statement of the law; (2) his theory is supported by the evidence; (3) the theory of defense is not part of the charge; and (4) the failure to include an instruction of the defendant's theory would deny him a fair trial." Hoffecker, 530 F.3d at 176 (citation omitted).

Here, the District Court's decision to exclude Beam's preferred instruction did not deny him a fair trial. The District Court did not abuse its discretion in deciding that Beam's proposed instruction was "unnecessary and superfluous," App. at 3353, and that the issue of willfulness "is adequately described in the model Third Circuit instructions." Id. at 3448.

I encourage students to consider the defendant's theory of the defense and why it would have been important to have that theory presented to the jury. Of course, it is implicit -- perhaps even stronger than that -- in the standard model instructions given in these cases. And, therefore, courts of appeals will usually reject a theory of defense instructions on willfulness covered by standard tried and true instructions. Still, the trial judge could have given the instruction and, at the margins, defendant probably would have had a better shot at acquittal if the trial judge had given the instruction. The lesson is to press for a fine-tuned theory of the defense instruction. All the judge can do is deny it. And, just maybe, in the context of the evidence on which the fine-tuned theory of the defense instruction was proffered, might find it prejudicial error to have denied the proffer.

Also, note the attempt through the proffered instruction to present -- albeit obliquely -- the uncertainty of the law theory into the case. The last sentence of the proferred instruction to the jury is: "When the law is vague or highly debatable, a defendant - actually or imputedly - lacks the requisite intent to violate it." I have written other blogs on this defense based on the Supreme Court's opinions in James, noting that the argument is really an argument for the judge rather than the jury. If, on an objective level, the law is uncertain so that the law's command is uncertain, the defendant cannot be charged with a crime requiring willfulness -- defined as intentional violation of a known legal duty. As interpreted, that breaks down to a known legal duty (a factual issue within the ken of the jury) and a knowable legal duty (a legal issue as to the knowability of the law's command). Hence, as in James, a legal duty that is uncertain as an objective matter of law cannot be prosecuted even if the particular defendant actually had the intent to violate what he thought was a knowable and known legal duty. I don't think from the limited words in the proferred instruction, a jury would have a clue what that meant.

An OVDI Odyssey - an Opt Out Success Story (6/16/13)

noreply@blogger.com (Jack Townsend) — Sun, 16 Jun 2013 18:39:00 +0000

A reader of this blog with whom I have corresponded during her journey through the maze of a couple of iterations of the ODVP/OVDI has offered to share her journey with other readers. She ultimately received a favorable outcome -- on opt out, a no FBAR penalty letter (Letter 3800). Her journey was tortuous. I think in part that was due to the design of the program that was a bit simplistic (still is in many respects) and both practitioners and the IRS had to deal with the nuances and uncertainties that had not been considered in designing the program. This resulted in long delays and twists and turns in her case -- also experienced by others in their respective situations. Ultimately, after a lot of grief and angst, this reader got assigned an agent to process the case within the program penalty structure and then for opt out. And the right result prevailed.

This reader has offered a narrative of her journey and the key documents in the hope that other readers will find them useful and be encouraged that, at the end of their respective journeys which, hopefully, will have fewer twists and turns, they too will achieve a fair result. In the process, she hopes that others will not be frightened to opt out because of the mere remote possibility of hypothetical onerous penalties.

Here are the links to her documents. The key document is the summary. It is extended (16 pages), but well worth the read. She presents the materials well.

A summary (actually detailed) presentation of her journey, here.
Her opt out letter, here.
Her opt out reasonable cause arguments, here.
A Streamlined Program acceptance letter, here.
Her Letter 3800, here.
A spreadsheet with the Agent calculation of mitigated Level II Non-Willful Penalties, here.

I think that there are some in the OVDI/OVDP programs who should opt out but do not because they fear what the IRS could do. For example, many of the agents are trained when asked about what penalties could apply on opt out to assert that the IRS could, depending on the facts, assert the maximum willful penalties for up to six years (depending on the FBAR statute of limitations still open). This is truly scary that an agent will tell his customer -- in the IRS metaphor -- that this could happen. Yet, although apparently telling this reader that whopping amount, the agent immediately said:

The agent then clearly stated, at least 3 times, that in more than a decade of the agent’s experience in international individual tax, the agent “had never seen anyone receive more than one year of FBAR penalties”. I repeat, the agent told me this at least 3 times.

Based on my experience and the experiences other practitioners have shared with me, the agent was clearly giving her a good signal. Unfortunately, many agents do not give taxpayers -- their customers -- that signal.

At any rate, this reader's experience I hope will be helpful to other readers going through the process. And it appears the IRS personnel involved in her experience have learned something about how to run the program and I hope other IRS personnel who read her story will learn something. Hopefully, although it is fairly late in the processing of these various initiatives, they can improve the program to make it fairer.

Thanks to this reader for sharing her journey.

IRS Makes Treaty Request for Wegelin Information Involving Asset Management Companies (6/15/13)

noreply@blogger.com (Jack Townsend) — Sat, 15 Jun 2013 20:40:00 +0000

The IRS has filed a treaty request for U.S. taxpayer information from Wegelin & Company, the company that pled and went under. See US continues hunt for tax dodgers in Swiss banks (6/14/13), here. The following are key excerpts:

The United States tax authorities have filed a request for legal assistance to identify former American clients of the private bank Wegelin who are suspected of tax dodging. It is the fourth such request against a Swiss financial institute.

Wegelin, which announced at the beginning of this year it would close its doors, on Friday confirmed reports that it had received notification by Switzerland’s Federal Tax Authorities to comply with the US request, based on a 1996 double taxation agreement.

A bank official added that Wegelin would submit the necessary information.

The request focuses on former Wegelin clients who were listed as beneficiaries of asset management companies between 2002 and 2012 and are suspected of fiscal fraud, according to the Neue Zürcher Zeitung newspaper on Friday.

* * * *

It is the fourth such demand against Swiss banks. The country’s two main banks, UBS and Credit Suisse, have also faced requests against a particular group of clients over the past few years.

JAT Comments:

1. Note that the request "focuses" on those clients "listed as beneficiaries of asset management companies between 2002 and 2012 and are suspected of fiscal fraud."The report does not indicate what either of these conjunctive descriptions are.

2. By contrast, the Julius Baer request I previously reported, see U.S. Treaty Request for Julius Baer Domiciliary Company Accounts with U.S. Beneficiaries (Federal Tax Crimes Blog 5/28/13), here, asked for information on "domiciliary company accounts." I think I understand at least to some extent what that "domiciliary company accounts" means -- i.e., the U.S. taxpayer inserted one or more entities between him and the account to obscure ownership. But, apparently, that was not the request made to Wegelin, at least as described in the report.

3. It seems to me that "asset management companies" could mean either the companies (or entities, however described) which the client owned through which the client beneficially owned the bank account(s) or it might mean the Swiss asset management companies who managed bank accounts for U.S. taxpayers. I would appreciate a reader or readers either commenting or emailing me with an understanding of what information is being requested.

Preparer Can Be Guilty of Aiding and Assisting Despite Not Being Subject to Circular 230 (6/15/13)

noreply@blogger.com (Jack Townsend) — Sat, 15 Jun 2013 20:11:00 +0000

In criminal cases, lawyers need to be creative, always being careful not to go too far on the wild side in the arguments they make. I illustrate creativity to in a case raising an argument I have not seen before. The argument is perhaps on the wild side.

In United States v. Tomlinson, 2013 U.S. Dist. LEXIS 82436 (D KS 2013) [link to come], the defendant, a return preparer, was tried for aiding and assisting, under Section 7206(2), here. One of the arguments the defendant made was that she could not be convicted for Section 7206(2) because, at the time of the alleged offense, as a preparer, she was not subject to Circular 230, the regulation guiding persons practicing before the IRS; therefore she urged she could not have willfully violated Section 7206(2). What's wrong with this argument? The Court tells us as follows:

As for the fourth element, willfulness, the defendant argues that (1) she was under no legal duty to prepare and present the returns truthfully and (2) even if she was under a legal duty, she did not prepare and present the false returns intentionally. The defendant's first argument focuses primarily on the applicability of a Treasury Department regulation commonly referred to as Circular 230, which contains duties and restrictions relating to practice before the IRS. Loving v. I.R.S., No. 12-385, 2013 U.S. Dist. LEXIS 7980, 2013 WL 204667, at *3 (D.D.C. Jan. 18, 2013). These regulations are published in the Code of Federal Regulations, Title 31, part 10 and reprinted under the name "Treasury Department Circular No. 230." Id. Before 2011, Circular 230 applied only to attorneys, CPAs, and other specified tax professionals (collectively, "practitioners"). Id. The defendant argues that Circular 230 did not apply to her when she prepared the false returns from 2008 through 2009 because at that time she was simply a return preparer and not a practitioner. Therefore, the defendant argues, according to IRS rules and regulations, she was under no legal duty to aid in the preparation and presentation to the IRS of tax returns that were not false as to any material matter.

The court finds this argument utterly unpersuasive. Circular 230 is a regulation that establishes duties for practitioners in addition to, and not in place of, duties already existing under the law (e.g., practitioners must register with the Secretary of the Treasury, pay a fee, and pass a qualifying exam). See id. In other words, Circular 230 is not the sole basis for the legal duty willfully breached by the defendant. The plain language of 26 U.S.C. § 7206, under which the defendant was convicted, establishes a duty for "any person" to abide by its provisions. According to the defendant's argument, tax return preparers not subject to regulation under Circular 230 would have no legal duty to abide by the provisions of § 7206. n1 This interpretation would effectively change "any person" in § 7206 to "any person subject to Circular 230." Moreover, the declaration on each form 1040 signed by the defendant establishes the existence of a legal duty. See Cheek, 498 U.S. at 202. Therefore, as a matter of law, when the defendant aided in the preparation and presentation of the returns, she was under a legal duty to do so in accordance with the provisions of § 7206(2).
n1 According to the defendant, this would have included approximately 600,000 to 700,000 tax return preparers with no legal duty to file non-fraudulent tax returns under the old version of Circular 230. Dkt. 51 at 5.

The court also finds unpersuasive the defendant's argument that she did not intentionally prepare and present the false returns. The evidence sufficiently established that the defendant had knowledge of her legal duty and acted intentionally to violate it. First, the defendant had extensive education and experience pertinent to tax preparation. See United States v. Guidry, 199 F.3d 1150, 1157-58 (10th Cir. 1999) (holding the jury can consider education and experience to support a finding of willfulness). She had a bachelor's degree in accounting from Wichita State University and a master's degree in business from Baker University. Before starting her own tax preparation business in 2006, she worked for both H&R Block and Compro Tax as a tax preparer. Second, each form 1040 bore the defendant's name, address, phone number, PTIN, and signature. As mentioned above, no evidence suggested that the defendant accidentally signed the returns or that her PTIN was used without her permission. Viewing this evidence in the light most favorable to the government, a reasonable jury could find beyond a reasonable doubt that the defendant had knowledge of her legal duty and acted intentionally to violate it.

New Indictment Related to Offshore Accounts (6/15/13)

noreply@blogger.com (Jack Townsend) — Sat, 15 Jun 2013 13:54:00 +0000

DOJ Tax has announced, here, the indictment of a Wyoming couple, Robert and Judy Sathre, for filing a false tax return for 2007. The indictment (with attached penalty summary) is here. He had a substantial amount of income in the mid-1990s which he concealed from the IRS and failed to pay tax. Those years are, of course, beyond the criminal statute of limitations. But, for years within the statute he further concealed income in an offshore bank and thus filed a false tax return. The following is the description of the allegations from the DOJ Tax Press release:

According to the indictment, the Sathres concealed assets by opening a foreign bank account in the Caribbean island of Nevis and by using purported trusts. In a ten-month period spanning 2005-2006, Mr. Sathre sent over $500,000 to the account in Nevis to keep the funds out of reach from the IRS. When Robert Sathre sold the Rock Stop in 2007, he had over $1,250,000 from the sale proceeds wired to the trust account of a Wyoming law firm. Later the Sathres directed the law firm to wire $900,000 from the trust account to their account at the Bank of Nevis. They also provided a false declaration and false promissory note to the Bank of Nevis to conceal the source of this transfer. Robert Sathre obtained a debit card linked to the foreign account to access funds locally. He also provided the Bank of Sheridan with an IRS form on which he falsely claimed that he was neither a citizen nor a resident of the United States.

The indictment also alleges that the Sathres tried to conceal their ownership of real estate. They used a purported trust to encumber their residence at Troon Place in Sheridan and to conceal their ownership of property in Hennepin County in Minnesota. To conceal ownership of the Rock Stop, they similarly used a second purported trust, at one point resigning as trustees and appointing their teenage daughter as the trustee.

The indictment also charges Judy Sathre with one count of filing a false tax return for 2007. The indictment alleges that the return was false both for reporting only $42 in interest income and for failing to disclose that she had a financial interest and signatory authority over the bank account at the Bank of Nevis.

It is unclear why, with this fact pattern, the indictment would charge a single count. Of course, these offshore cases often ultimately plead to a single count. But, why would there not be additional tax perjury counts and/or FBAR counts pending the plea? Perhaps the plea bargain is wired into the original indictment, but that can usually be handled a different way.

U.S. Civil Suit for 4 Years of Willful Penalty of 50% Per Year (6/14/13)

noreply@blogger.com (Jack Townsend) — Fri, 14 Jun 2013 21:53:00 +0000

In United States v. Zwerner (SD FL No. 13-cv-22082-CMA), the IRS is suing to obtain judgment on an FBAR willful penalty assessment for 4 years. The civil Complaint is here. Here is a cut and paste of paragraph 18:

18. Due to Zwerner’s willful failure to file FBARs reporting his financial interest in the Swiss bank account during 2004-2007, a delegate of the Secretary of the Treasury of the United States assessed penalties against him under 31 U.S.C. § 5321(a)(5) in the amount of 50% of the balance of his account at the time of the violations for each year, as follows:
(a) 2004 – $723,762, assessed on June 21, 2011.
(b) 2005 – $745,209, assessed on August 10, 2011.
(c) 2006 – $772,838, assessed on August 10, 2011.
(d) 2007 – $845,527 assessed on August 10, 2011.

Many practitioners, myself included, have operated on the assumption that the worst FBAR violation cases would draw a civil penalty not exceeding the 50% high year, which is the penalty required in the criminal cases that have been prosecuted and convicted. Indeed, I have heard even one prominent Government official say that the delta between the then 25% OVDI in lieu of penalty and the "worst case" FBAR penalty was 25% (on similar reason would be 22 1/2% based on the 27 1/2% in lieu of penalty).

And, my mea culpa, I was just this week ragging on an IRS manager about the worst case scenario the agent provided upon our request incident to considering opt out. The computation sent by the agent was the 50% per year for six years (the civil statute of limitations). While speaking with the manager on another issue, I kicked in on this issue by noting that providing that information of a risk of a 6-year 50% penalty was absolutely useless information since there was no possibility that the IRS would assert that multi-year penalty and indeed, from a practical perspective, the max would be 50% high year. I argued that she should pass on to the powers that be that the IRS should not be promulgating useless, theoretical only information and that, if they provided any information, perhaps it could be something like that, in practice, they have not asserted more than 50%. Even the latter limited information -- if true -- would be useful to taxpayers considering opt out because they could then bracket their situations with known cases of the 50% penalty -- i.e., in simplified analysis, I am only 50% as bad (no entities, etc.) as that 50% penalized case, so my worst willful case would be 25% (the same as the OVDI in lieu of penalty), with a possibility of less on opt out. (This is rough and ready and needs to be fine-tuned, but that type of analysis should be taken on opt out if we can determine the high end of the spectrum.)

At any rate, here is the civil suit that the IRS may exceed a single year willful penalty -- and not just exceed but substantially exceed -- ratcheting up to 4 years. On a static amount that should be reported on the FBAR (say $1,000,000 per year for six years), the maximum theoretical penalty would be $3,000,000, or 300%.

I don't mean to scare the community of taxpayers and practitioners. Indeed, I suspect that there is a back story to the assertion of such an aggressive penalty that, hopefully, will come out and permit some reasonable bracketing by persons considering an opt out.

Finally, of course, there is the question of whether this aggressive assertion of the penalty will be sustained either on the facts (not yet known) or because of Constitutional limitations. Readers might click the link below for Excessive Fines Clause and look particularly at Steve Toscher's and Barbara Lubin's article on the issue discussed and linked at the Blog entry FBAR Penalties and Excessive Fines (Federal Tax Crimes Blog 3/5/10), here.

Addendum #1 6/14/13 7:50 PM:

I have heard some comment that this is another move to put fear into the community as a way of herding taxpayers into the OVDP 2012. It will have the effect of doing that. I think because of the "nuclear threat" it may have the effect of herding into the program people who should not be in OVDP 2012. They will join because the IRS and DOJ Tax have made the nuclear threat and they are unable to asses whether they are the targets of the threat. The reason -- the IRS and DOJ Tax are opaque about to whom the threat should really apply. Then, the second level of threat to which this nuclear bomb is tossed is those persons considering an opt out. I have to believe that the IRS fully intended this to both herd taxpayers into the program and keep them in the penalty structure. (The IRS and DOJ Tax could not have missed this as the effect of their actions.) I have no doubt that many -- perhaps most -- should opt out after they have been herded (perhaps I should say forced and extorted) in. But I also have no doubt that many of those who don't deserve the inside the program penalty structure on all noncompliant offshore assets should not be subject to the in lieu of 27 1/2% penalty. Yet, the IRS will extract that penalty from them because the IRS has not been forthcoming about how they will apply the FBAR penalty if they opt out. These taxpayers do not have the information necessary to make an informed decision, at least those taxpayers who do not have counsel with "inside" information about what the IRS is doing. Shame on the IRS and DOJ Tax for being complicit in this. I hope they will exercise some grace at some point and offer more guidance on when it is appropriate to join the program and when it is appropriate to opt out. Until they do that, in my view, they are disserving both these taxpayers and as a result disserving the citizens of this country.

In the meantime, I hope that a court -- as did the Supreme Court in Bajakajian -- reject the application of draconian penalties. But by that point, the IRS and DOJ Tax will have put good taxpayers through hell. They have really screwed this one up. That is just my opinion.

And, maybe that particular taxpayer deserved something really bad and onerous to happen to him that deserves radically different treatment than many taxpayers are entitled to. We just don't know. And the IRS and DOJ Tax so far aren't telling. They are just threatening.

Addendum #2 6/15/13 8:34am:

I offer a few more details from the complaint:

The bank involved was ABN AMRO Bank in Switzerland (Par. 7).
"On or about October 13, 2008, Zwerner filed a delinquent FBAR reporting his financial interest in the Swiss bank account during 2007, along with an amended income tax return for 2007. On or about March 27, 2009, Zwerner filed amended income tax returns and delinquent FBARs for 2004, 2005, and 2006." (Par. 11)
Zwerner used entities and the nominal holder of the account of which he was the beneficial owner. (Par. 13.)
"In a letter dated August 9, 2010, Zwerner admitted to the IRS that he was aware that he should have reported both the existence of the account and the income he earned from it." (Par. 16.)

The admission, of course, could be pretty damning. It is unclear why Zwerner would have made the admission.

I don't think the Complaint gives us any idea why the IRS and DOJ Tax chose to exercise such fury against Zwerner.

I don't think that the IRS' real message here is to show forcefully that it was not just noising when it said that it disfavors quiet disclosures rather than joining OVDI. Obviously, Zwerner's profile would have made him an good candidate for the program (in its various iterations), but he appears to have effected his quiet disclosure before the first round of OVDP. Of course, once the program was first announced (I believe around May 2009), he could have then joined the program. There is only the slightest of hint that he may have joined (see the admission he made, which is so cryptic on this point that perhaps it is not even a slight hint). Other than the fact of having an noncompliant foreign bank account (a fact common to the universe of taxpayers with this concern), the only bad objective fact was his use of entities to obscure his ownership. But, that fact has been present in virtually every case prosecuted that I am aware of. (My spreadsheet indicates that only Dr. Ahuja may not have used entities). And yet, every single one of them, so far as I am aware, got a single FBAR 50% penalty. So it is not evident from the Complaint why the IRS and DOJ Tax exercised their fury against Zwerner.

I hope we will learn more soon in order to put this initiative in a proper perspective so that uncounseled and counseled taxpayers facing the decisions of whether to join OVDP and whether to opt out can make better informed decision

Addendum #3 6/15/13 4:00pm:

I received from a reader some indication that Mr. Zwerner may and likely is wealthy. For example, he is reported to have given $5M to his alma mater in 2007. This information prompted me to ask whether wealth is part of the consideration for asserting multi-year willful penalties.

Consider this example: Assume 2 taxpayers – A and B. Both have foreign accounts and for all years the foreign accounts were $1,000,000 (static at all time; all income swept out to keep the $1,000,000 base). They were both tax noncompliant and FBAR willful. Hence, if all years were included, each would be subject to a $3,000,000 penalty. A, however, is worth $100 million; B is worth $3 million. Should their FBAR penalties be the same? Should the IRS consider this wealth factor in determining the FBAR penalty? Certainly, for A, a $3,000,000 FBAR penalty is not “punishing” in any material sense and will hardly deter any type of aggressive tax conduct in the future. (I assume that there will be little opportunity left in the offshore bank area.) But, for B, the $3,000,000 penalty would be devastating and would punish B far more in a proportionality sense than A and would certainly be far more of a deterrent to B than A. Would equal FBAR penalties be fair? Would equal FBAR penalties be lawful? In this regard, would it even be fair to limit B and A’s penalty to a single year 50% willful penalty (or should B always get a lesser willful FBAR penalty than A)?

Addendum #4 6/18/13 8:15am:

I recommend to readers Chuck Rettig's Forbes article on the Zwerner.. Charles Rettig, DoJ Files Action to Collect Multiple 50 Percent Civil FBAR Penalties in U.S.A. vs. Zwerner (Forbes 6/17/13), here. Excerpts:

Time will tell the extent, if any, to which the filing in Zwerner may impact others who similarly attempt to come into compliance outside the OVDP. The government will not and can not pursue such actions against everyone. Many factors likely come into play in the exercise of government discretion on which matters to pursue, or not.

Given the complexities of the Internal Revenue Code, other relevant statutes and life in general, many of the indiscretions associated with an income tax return or FBAR are anything but willful or intentional and definitely not fraudulent in nature. It is also likely that long-term residents of the U.S. might be deemed to have a higher degree of knowledge and will be treated differently than long-term non-residents of the U.S. In each situation, the actual facts and circumstances of each matter must be carefully reviewed before anyone can determine the appropriate method of coming into compliance with the various filing and reporting requirements associated with offshore financial accounts.

* * * *

Zwerner may represent more than an effort to collect civil FBAR penalties. Worldwide respect for the integrity of the U.S. system of tax administration depends, at least in part, upon how the government continues to treat those who pursue some type of timely and truthful voluntary compliance with the filing and reporting requirements associated with their foreign financial accounts. A system of tax administration based in large part on voluntary compliance can not ignore the potential impact associated with the manner in which those who voluntarily comply, even if in a somewhat tardy fashion (but before any contacts by the government), are treated.

Supreme Court Reminds that Judges Should Not Participate in Plea Negotiations (6/14/13)

noreply@blogger.com (Jack Townsend) — Fri, 14 Jun 2013 20:37:00 +0000

In United States v. Davila, ___ U.S. ___, 2013 U.S. LEXIS 4541 (2013), a criminal tax case, here, decided yesterday, the defendant was charged with multiple counts of tax fraud and conspiracy. As is typical, the Government indicated a willingness to accept a plea for one count of conspiracy (referred to by the DOJ CTM as the major count) and dismiss the remaining counts. As I have noted before, achieving a dismissal of such remaining counts upon plea often achieves nothing practical for the defendant because of the operating of the Sentencing Guidelines, but the plea agreement itself can be rewarded under the Sentencing Guidelines by downward adjustment for Acceptance of Responsibility. The defendant finally did accept a plea, but not before he initially resisted and received some inappropriate advice to plead from the Magistrate Judge.

By way of background, most criminal tax cases, as most criminal cases generally, are resolved by plea agreement. (See the addendum below on a recent article on statistics dealing with the role of pleas in the federal criminal system.) For example, assume that potential client A comes into your office the day after he was indicted for several tax crimes. A announces that he came to you because you had the reputation of being the best criminal tax lawyer in the universe (you modestly but not totally candidly disavow that reputation). A then outlines his cryptic view of why he is innocent. He then asks what are the chances of you obtaining an acquittal for him. All you know is his cryptic account which or may not be a fair representation or summary of the facts, but that cryptic account proclaims his complete innocence, at least on the willfulness element of the tax crimes charged because he says he is innocent. So, you remind him that he is asking you to state conclusions based on cryptic facts which may or may not be true and which you have not investigated. On that basis, you advise first that, if the cryptic statement is a fair representation of the case that will be presented at trial, then he has a very good chance of being acquitted. You then state that your experience is that such cryptic initial accounts generally are too cryptic for anyone to feel comfortable that that is the way it will play out at trial. You then state that, given the highly selective systemic selection of criminal tax cases, culminating in DOJ Tax and AUSA review before indictment, the facts may well not play out that nicely at trial. You then tell him, that given that selectivity, the posted rates of conviction in tax cases are very high -- exceeding 90% (maybe, see my several other postings on the conviction rates in tax cases). You then tell him, based on that statistic alone, and discounting his cryptic proclamation of innocence, there is a 90+% chance he will be convicted. You finally tell him there is a systemic preference in the federal criminal system generally and in the tax crimes subset of that system to resolve cases by plea -- indeed a defendant is given a substantial benefit in the Sentencing Guidelines by resolving the case by plea. The combination of likely conviction and the benefit of pleading for a reduced sentence is a powerful incentive to plead. (Indeed as others have noted, it may be so powerful in some cases that the innocent plead, provided that they can clear the hurdle of allocution of guilt.)

Now, with that background, the defendant in Davila was unhappy with his attorney who, apparently with more facts in hand as to how the trial would play out, advised the Davila to accept the plea proffered by the prosecutor. Davila interpreted that recommendation as being a reflection of the fact that the attorney had no defensive strategy. That is probably a fair lay interpretation, but criminal defense lawyer would characterize the recommendation as a conclusion that the defendant almost certainly would be convicted. Davila's strategy then was to request new counsel. An ex parte hearing or meeting on that request was held with the U.S. Magistrate Judge. The prosecutor was not present (not clear why, but that was a no-no.). During the course of the hearing or meeting, the Magistrate Judge advised that defendant that he would not get another court-appointed attorney and that his best course, given the strength of the Government's case, was to accept the plea. Davila was not convinced. Time passed. Finally, he became convinced and pled with a full allocution saying that he was guilty of the crime to which he pled and that nothing had been promised him in return, etc., etc.

The issue was whether the Magistrate Judge inappropriate advised or suggested that the defendant plead, despite a prohibition in the Federal Rules of Criminal Procedure that prevents judges from participation in such plea discussion. I think that the key point for readers is discernible from the "Syllabus" which I quote in its entirety:

Federal Rule of Criminal Procedure 11 governs guilty pleas. Rule 11(c)(1) instructs that “[t]he court must not participate in [plea] discussions,” and Rule 11(h) states that a “variance from the requirements of th[e] rule is harmless error if it does not affect substantial rights.” Rule 52(a), which covers trial court errors generally, similarly prescribes: “Any error . . . that does not affect substantial rights must be disregarded.”

Respondent Davila, while under indictment on multiple tax fraud charges, wrote to the District Court, expressing dissatisfaction with his court-appointed attorney. Complaining that his attorney offered no defensive strategy, but simply advised him to plead guilty, Davila requested new counsel. A Magistrate Judge held an in camera hearing at which Davila and his attorney, but no representative of the United States, appeared. At the hearing, the Magistrate Judge told Davila that he would not get another court-appointed attorney and that his best course, given the strength of the Government’s case, was to plead guilty. More than three months [*2] later, Davila pleaded guilty to a conspiracy charge in exchange for dismissal of 33 other charges. He stated under oath before a U. S. District Judge that he had not been forced or pressured to enter the plea, and he did not mention the in camera hearing before the Magistrate Judge. Prior to sentencing, however, Davila moved to vacate his plea and dismiss the indictment, asserting that he had entered the plea for a “strategic” reason, i.e., to force the Government to acknowledge errors in the indictment. Finding that Davila’s plea had been knowing and voluntary, the District Judge denied the motion. Again, Davila said nothing of the in camera hearing conducted by the Magistrate Judge. On appeal, the Eleventh Circuit, following Circuit precedent, held that the Magistrate Judge’s violation of Rule 11(c)(1) required automatic vacatur of Davila’s guilty plea, obviating any need to inquire whether the error was prejudicial.

Held: Under Rule 11(h), vacatur of the plea is not in order if the record shows no prejudice to Davila’s decision to plead guilty. Pp. 7-14.

(a) Rule 11(c)(1)’s prohibition of judicial involvement in plea discussions was included in the 1974 Amendment to the Rule out of [*3] concern that a defendant might be induced to plead guilty rather than risk antagonizing the judge who would preside at trial. Rule 11(h) was added in the 1983 Amendment to make clear that Rule 11 errors are not excepted from Rule 52(a)’s harmless-error inquiry. Rule 52 also states, in subsection (b), that a “plain error that affects substantial rights may be considered even though it was not brought to the [trial] court’s attention.” When Rule 52(a) governs, the prosecution has the burden of showing harmlessness, but when Rule 52(b) controls, the defendant must show that the error affects substantial rights. See United States v. Vonn, 535 U. S. 55, 62, 122 S. Ct. 1043, 152 L. Ed. 2d 90.

As clarified in Vonn and United States v. Dominguez Benitez, 542 U. S. 74, 124 S. Ct. 2333, 159 L. Ed. 2d 157, Rule 11 error may be of the Rule 52(a) type or the Rule 52(b) kind, depending on when the error was raised. In Vonn, the judge who conducted the plea hearing failed to inform the defendant, as required by Rule 11(c)(3), that he would have “the right to the assistance of counsel” if he proceeded to trial. The defendant first objected to the omission on appeal. This Court held that “a silent defendant has the burden to satisfy [Rule 52(b)’s] plain-error rule.” 535 U. S., at 59, 122 S. Ct. 1043, 152 L. Ed. 2d 90. [*4] In Dominguez Benitez, the error first raised on appeal was failure to warn the defendant, as Rule 11(c)(3)(B) instructs, that a plea could not be withdrawn even if the sentence imposed was higher than the plea-bargained sentence recommendation. The Court again held that Rule 52(b) controlled, and prescribed the standard a defendant silent until appeal must meet to show “plain error,” namely, “a reasonable probability that, but for the [Rule 11] error, he would not have entered the plea.” 542 U. S., at 83, 124 S. Ct. 2333, 159 L. Ed. 2d 157. Pp. 7-9.

(b) Here, the Magistrate Judge plainly violated Rule 11(c)(1) by exhorting Davila to plead guilty. Davila contends that automatic vacatur, while inappropriate for most Rule 11 violations, should attend conduct banned by Rule 11(c)(1). He distinguishes plea-colloquy omissions, i.e., errors of the kind involved in Vonn and Dominguez Benitez, from pre-plea exhortations to admit guilt. The former come into play after a defendant has decided to plead guilty, the latter, before a defendant has decided to plead guilty or to stand trial. Nothing in Rule 11’s text, however, indicates that the ban on judicial involvement in plea discussions, if dishonored, demands automatic vacatur [*5] without regard to case-specific circumstances. Nor does the Advisory Committee commentary single out any Rule 11 instruction as more basic than others. And Rule 11(h), specifically designed to stop automatic vacaturs, calls for across-the-board application of the harmless-error prescription (or, absent prompt objection, the plain-error rule).

Rule 11(c)(1) was adopted as a prophylactic measure, not one impelled by the Due Process Clause or any other constitutional requirement. Thus, violation of the Rule does not belong in the highly exceptional category of structural errors—e.g., denial of counsel of choice or denial of a public trial—that trigger automatic reversal because they undermine the fairness of the entire criminal proceeding. United States v. Marcus, 560 U. S. 258, ___, 130 S. Ct. 2159, 176 L. Ed. 2d 1012. Instead, in assessing Rule 11 errors, a reviewing court must take account of all that transpired in the trial court. Had Davila’s guilty plea followed soon after the Magistrate Judge’s comments, the automatic-vacatur rule would have remained erroneous. The Court of Appeals’ mistake in that regard, however, might have been inconsequential, for the Magistrate Judge’s exhortations, if they immediately elicited [*6] a plea, would likely have qualified as prejudicial. Here, however, three months distanced the in camera meeting conducted by the Magistrate Judge from Davila’s appearance before the District Judge who examined and accepted his guilty plea after an exemplary Rule 11 colloquy, at which Davila had the opportunity to raise any questions he might have about matters relating to his plea. The Court of Appeals, therefore, should not have assessed the Magistrate Judge’s comments in isolation. Instead, it should have considered, in light of the full record, whether it was reasonably probable that, but for the Magistrate Judge’s comments, Davila would have exercised his right to go to trial. Pp. 10-14.

(c) The Court of Appeals, having concluded that the Magistrate Judge’s comments violated Rule 11(c)(1), cut off further consideration. It did not engage in a full-record assessment of the particular facts of Davila’s case or the case-specific arguments raised by the parties, including the Government’s assertion that Davila was not prejudiced by the Magistrate Judge’s comments, and Davila’s contention that the extraordinary circumstances his case presents should allow his claim to be judged under Rule 52(a)’s harmless-error standard rather than Rule 52(b)’s plain-error standard. The Court decides only that the automatic-vacatur rule is incompatible with Rule 11(h) and leaves all remaining issues to be addressed on remand. P. 14.

664 F. 3d 1355, vacated and remanded.

Addendum (of uncertain relevance to the topic of the blog):

On the issue of statistics and the conviction rate, I have posted several blogs on the issue. Those blogs can be gathered for review by clicking the link below on Statistics. I just came across this article: Robert Weinberg, Letter to the Editor: What is the Percentage of Federal Criminal Defendants Who Are Not Convicted? Why Are So Many Cases Dismissed?, 37 Champion 4 (2013). Here are key excerpts:

The Wall Street Journal and the Washington Post recently presented some sobering statistics on the high rate of uncontested federal convictions. The editorial in the Post (Oct. 4, 2012) both copied and adopted the Journal's figures: "The Wall Street Journal reported recently that 97 percent of cases the Justice Department prosecuted last year ended with guilty pleas."

Both papers were misreading Justice Kennedy's opinion for the Court in Missouri v. Frye, 132 S. Ct. 1399 (2012). The opinion observed that guilty pleas account for "97 percent of federal convictions," not "97 percent of cases the Justice Department prosecuted" as the Post and Journal said.

The Journal's statistic overlooks the substantial number of cases that are not prosecuted to conviction at all. The Bureau of Justice Statistics Sourcebook for 2009, to which Justice Kennedy's opinion cites for the guilty plea figures, shows that guilty pleas were secured in only about 88 percent of the cases disposed of in 2009 (83,707 out of 95,206), not 97 percent. In the remaining 12 percent of the federal prosecutions, the Sourcebook's Table shows about 3 percent of the total number of defendants were found guilty at a trial, and about one-half of 1 percent won acquittals at trial from the jury or the court. That leaves about 8V2 [sic - apparently 8 1/2] percent of the cases that are listed in the Statistical Table as Dismissed.

But the Department of Justice's published statistics give no breakdown of the grounds on which these numerous defendants (about 1 in every 12 charged, or 8,408 of the 95,206 dispositions in 2009) secured dismissal of their cases.

It would be of great interest, especially to the defense bar, to have a breakdown of the large "case dismissed" category. For example, among the 8,408 dismissals in 2009, what number or percentage of the dismissals were secured through a successful defense motion to dismiss the indictment for (1) failure to charge an offense against the United States, (2) discriminatory or otherwise improper grand jury selection practices, (3) violation of grand jury procedural rules, (4) prosecutorial misconduct, or (5) other defects in the indictment or prosecution? And how many of the cases were dismissed on motion of the government under Fed. Rule Crim. P. 48 because (1) the prosecution believed it lacked sufficient credible evidence to win a conviction at trial, (2) defense counsel presented persuasive argument, or new exculpatory or favorable evidence, to the counsel for the government, (3) the government moved to dismiss the indictment pursuant to a plea bargain, or in return for supplying testimony against others, or (4) the defendant died or had otherwise become unavailable?

I probably will return to this statistics subject again. I have emailed a request to Professor Weinberg to discuss the issue and have not yet heard back. I would definitely like his feedback on my concern about the statistics in the criminal tax prosecution arena.

Keep in mind also that Professor Weinberg's comments relate to federal criminal cases generally and not just the tax crimes subset. The immediate question his comments raise is whether the tax crimes case selection process is that much more rigorous than the overall federal criminal case selection process?

Jury Instructions -- the Process, Including Waiver and Forfeiture of Objections (6/14/13)

noreply@blogger.com (Jack Townsend) — Fri, 14 Jun 2013 17:23:00 +0000

Today I write on a nontax case because I focus on an issue that is presented in all criminal jury trials, tax criminal trials as well. I focus on the process and how objections can be preserved or lost intentionally or unintentionally.

In United States v. Natale, ___ F.3d ___, 2013 U.S. App. 11765 (7th Cir. 2013), here, The defendant, a surgeon, was convicted of making false statements to Medicare. On appeal, the defendant objected to the jury instructions on the false statements counts. The counts involved in the instructions was for violation of 18 USC 1035, False statements relating to health care matters, here. That crime requires several elements that the Court of Appeals ultimately found not to have been adequately presented in the jury instructions. The Court of Appeals, however, affirmed the conviction because the error, in layman's terms, was not sufficient prejudicial to warrant reversal. I won't say anything more about the substance of the jury instructions and their deficiencies. Rather, I want to present here the Court of Appeals' discussion about the process courts undertake -- or should undertake -- to determine the jury instructions that will be given, counsel's role in that process and then a defendant's right to challenge, after conviction, the instructions that were given. This process applies in all criminal cases including tax cases. Accordingly, this information from the case will be useful to students and new practitioners.

Natale's primary challenge to his conviction focuses on the jury instructions that the trial judge issued on the false statement counts. The government responds that Natale has waived any challenge to these instructions because he affirmatively approved of them at the jury instruction conference. Moving through the proposed instructions one by one, the district court asked, "[Proposed Instruction] No. 29 is making false statements instruction out of 18 United States Code, Section 1001, and 18 United States Code, Section 1035. Any problem with that?" Defense counsel's response: "No." Counsel engaged in a similar question-and-answer colloquy regarding the remainder of the instructions on the false statements counts, with the trial court asking counsel if he "had any problem with" each proposed instruction. Each time, counsel affirmatively expressed having no problem with the proposed instruction. The government now suggests that the defense attorney's comments during this exchange affirmatively approved the jury instruction, resulting in waiver.

Ordinarily, when a defendant does not object to a jury instruction before the jury retires to deliberate, the defendant may later attack that instruction only for plain error. Fed. R. Crim. P. 30(d); Johnson v. United States, 520 U.S. 461, 465-66, 117 S. Ct. 1544, 137 L. Ed. 2d 718 (1997). However, a defendant who waives—rather than forfeits—his objection cannot avail himself of even the demanding plain error standard of review. See United States v. Olano, 507 U.S. 725, 732-33, 113 S. Ct. 1770, 123 L. Ed. 2d 508 (1993) ("Deviation from a legal is 'error' unless the has been waived."); United States v. DiSantis, 565 F.3d 354, 361 (7th Cir. 2009) ("Waiver 'extinguishes any error' and 'precludes appellate review.'" (citing United States v. Pree, 408 F.3d 855, 872 (7th Cir. 2005)). He has no recourse and generally must live with his earlier decision not to press the error. Such waiver occurs only when a defendant makes a "knowing and intentional decision" to forgo a challenge before the district court. United States v. Jaimes-Jaimes, 406 F.3d 845, 848 (7th Cir. 2005). In contrast, when the "defendant negligently bypasses a valid argument," he has merely forfeited the claim and can raise it on appeal, subject to plain error review. United States v. Vasquez, 673 F.3d 680, 684 (7th Cir. 2012) (citing United States v. Anderson, 604 F.3d 997, 1001 (7th Cir. 2010)). We generally construe waiver "liberally in favor of the defendant." Jaimes-Jaimes, 406 F.3d at 848.

Although passive silence with regard to a jury instruction permits plain error review, see Fed. R. Crim. P. 30(d); see, e.g., United States v. Mitan, 966 F.2d 1165, 1177 (7th Cir. 1992), a defendant's affirmative approval of a proposed instruction results in waiver, e.g., United States v. Courtright, 632 F.3d 363, 371 (7th Cir. 2011). Our cases have strictly applied this to affirmative expressions of approval without examining whether the statements were a "knowing and intentional decision" or resulted from "negligently bypass[ing] a valid argument." n2 See Courtright, 632 F.3d at 371; United States v. O'Connor, 656 F.3d 630, 644 (7th Cir. 2011); DiSantis, 565 F.3d at 361; United States v. Griffin, 493 F.3d 856, 863 (7th Cir. 2007) [hereinafter Griffin I]; United States v. Anifowoshe, 307 F.3d 643, 650 (7th Cir. 2002); United States v. Salerno, 108 F.3d 730, 742 (7th Cir. 1997); United States v. Lakich, 23 F.3d 1203, 1207-08 (7th Cir. 1994); United States v. Canino, 949 F.2d 928, 940 (7th Cir. 1991). As a result, affirmative statements as simple as "no objection" or "no problem" when asked about the acceptability of a proposed instruction have resulted in waiver. See O'Connor, 656 F.3d at 644; Griffin I, 493 F.3d at 863; Anifowoshe, 307 F.3d at 650; United States v. Griffin, 84 F.3d 912, 923-24 (7th Cir. 1996) [hereinafter Griffin II]. But see United States v. Roglieri, 700 F.2d 883, 888 (2d Cir. 1983) (applying plain error review where defense counsel explicitly expressed no objection to the jury instruction). We have applied this strictly because of the difficulty in teasing out the subjective motivations behind the "no objection" statement—from that statement alone, a court cannot easily discern whether the attorney bypassed a challenge for strategic reasons (which would result in waiver) or whether the attorney simply failed to recognize error that he otherwise would have raised. As Anifowoshe explained, failure to find waiver from affirmative statements of "no objection" and the like would "create an almost insurmountable standard to proving waiver." 307 F.3d at 650.
n2 Other circuits have not applied this rigid and instead have analyzed whether a deliberate, strategic reason could have justified the attorney's affirmative approval of a jury instruction. United States v. Rucker, 417 F. App'x 719, 721-22 (10th Cir. 2011) (non-precedential decision); Virgin Islands v. Rosa, 399 F.3d 283, 291 (3d Cir. 2005); United States v. Perez, 116 F.3d 840, 845-46 (9th Cir. 1997) (en banc); United States v. Drougas, 748 F.2d 8, 30 (1st Cir. 1984) ("Defense counsel explicitly approved the reasonable doubt instruction and is thus precluded . . . from now objecting absent plain error."); United States v. Wiggins, 530 F.2d 1018, 1020, 174 U.S. App. D.C. 166 (D.C. Cir. 1976) (applying plain error standard when defense counsel expressed satisfaction with jury instruction).

This approach can sometimes produce especially harsh results. Just as the district court did in Natale's case, a thorough district court judge will almost always hold a jury instruction conference and put up the proposed instructions, one by one, for discussion by the attorneys. See United States v. Hollinger, 553 F.2d 535, 542 (7th Cir. 1977) ("An on-the-record instructions conference . . . clearly enables the trial judge, in advance of instructing the jury, to have erroneous aspects [of the instructions] pointed out to him."). The result: A trial court will almost always require of counsel some affirmative response—such as "no objection" or "no problem"—that will operate as waiver on appeal. Only rarely will a jury instruction conference provide the opportunity for agnostic silence that preserves plain error review. In short, as our cases have applied this , a defense attorney who has not objected to a proposed instruction will nearly always waive any potential objection, regardless of whether his "no objection" resulted from a reasoned, strategic decision or from a negligent failure to recognize the error. n3
n3 Such harshness is only magnified by the importance of the jury instruction in a trial. Even though erroneous jury instructions are not the type of structural error that necessarily creates harm in a criminal trial, see United States v. Griggs, 569 F.3d 341, 344 (7th Cir. 2009), the Rules of Civil Procedure recognize the weighty role jury instructions fill: In all but the context of jury instructions, a party who fails to preserve an error in a civil trial has no recourse on appeal. In contrast, a party can still challenge a jury instruction in a civil case for plain error notwithstanding his earlier failure to object. Fed. R. Civ. P. 51(d).

An approach that might mitigate this harshness and leave open a wider window for forfeiture than our cases have previously done could be considered when, as in this case, defense counsel's affirmative approval of the jury instruction is nothing more than a simple "no" or "no objection" during a rote call-and-response colloquy with the district judge. In such an instance, we could more closely examine whether the defendant has truly waived his challenge to the jury instruction or merely forfeited it. Cf. United States v. Alcala, 678 F.3d 574, 579 (7th Cir. 2012) ("[N]arrative responses in a plea colloquy are superior to inquiries from the court that elicit 'yes' or 'no' answers[.]"); United States v. Groll, 992 F.2d 755, 760 n.7 (7th Cir. 1993) ("[S]imple affirmative or negative answers to the court's rote interrogatories give us pause in finding that [the defendant] entered her plea knowingly."); United States v. Fountain, 777 F.2d 351, 356 (7th Cir. 1985) ("Simple affirmative or negative answers or responses which merely mimic the indictment or the plea agreement cannot fully elucidate the defendant's state of mind as required by Rule 11.").

Additionally, we note that waiver is not an absolute bar on our consideration of issues not preserved below, even if intentionally foregone for strategic reasons. When the "interests of justice" so require, we may reach the merits of a waived issue. See Fleishman v. Cont'l Cas. Co., 698 F.3d 598, 608 (7th Cir. 2012) (citing Judge v. Quinn, 624 F.3d 352, 360 (7th Cir. 2010)). Perhaps erroneous jury instructions—especially jury instructions that inaccurately state the law by minimizing or omitting elements required for conviction—would more readily present the circumstances that allow consideration of waived issues: a "miscarriage of justice," "equities heavily preponderat[ing] in favor of correcting" the error, or "plain error that seriously affected the fairness, integrity, or public reputation of the judicial proceedings." Id. at 608-09 (citing 36 C.J.S. Federal Courts § 458)); see also Olano, 507 U.S. at 736 (noting that "conviction or sentencing of an actually innocent defendant" qualifies as a "miscarriage of justice").

In any event, we need not reach any of these issues in this case for even in applying plain error review to the instructions in Natale's case, we find no error requiring a new trial. Thus, we leave open the question of whether Griffin I, Anifowoshe, and our other waiver cases have drawn too confining a line by viewing affirmative approval so expansively as to include "no objection" in response to a trial court's inquiry. And neither do we address today whether Rule 30(d) requires the more searching analysis used by other circuits that dives into the subjective motivations of counsel, hoping to discern whether strategy or inadvertence motivated the affirmative approval. Finally, we express no opinion on whether the erroneous instructions in this case present the interests of justice that require our consideration notwithstanding any waiver. In short, when reviewing the jury instructions under plain error as Natale asks of us, we see no reason to vacate his conviction.

Quiet Disclosures That Don't Stay Quiet - Civil Examinations (6/13/13)

noreply@blogger.com (Jack Townsend) — Thu, 13 Jun 2013 15:02:00 +0000

Chuck Rettig, a major player in representing taxpayers through the thicket of correcting offshore account noncompliance, has written a very good summary article of the quiet disclosure that is discovered and examined by the IRS. Charles Rettig, IRS FBAR Voluntary Disclosure Program: Taxpayer Interviews (Forbes 6/12/13), here.

The problem, he notes, is that "Many taxpayers continue to enter the OVDP. Others have bypassed the OVDP and simply amended returns or begun filing accurate returns on a prospective basis."

After discussing, the GAO report (previously blogged here), Chuck says that for persons filing amended returns -- quiet disclosures -- in lieu of joining OVDP:: " It should be anticipated that the IRS will pursue examinations of these amended returns in some manner."

With respect to the interviews in those examinations, Chuck says

When discovered, U.S. taxpayers who have bypassed the OVDP by filing amended or delinquent returns and FBARs should anticipate detailed IRS examinations likely to include interviews of the taxpayer, their return preparer and pehaps others. Numerous taxpayers having previously undisclosed interests in foreign financial accounts have recently been interviewed by representatives of the IRS as well as many having been interviewed by prosecutors associated with the Tax Division of the Department of Justice.

He then describes the types of questions and inquiries made. He concludes:

Taxpayers continuing to have undisclosed interests in foreign financial accounts must consult competent tax professionals before deciding to participate in the OVDP. Some may decide to risk detection by the IRS and the imposition of substantial penalties, including the civil fraud penalty, numerous foreign information return penalties, and the potential risk of criminal prosecution. If discovered before any voluntary disclosure submission, the results can be devastating.

I recommend Chuck's article to those contemplating or having made a quiet disclosure.

JAT comments:

Of course, the big uncertainty with the quiet disclosures for those taxpayers with material criminal investigation and prosecution risk is that, according to the IRS's rhetoric, quiet disclosures for offshore accounts are not "voluntary disclosures" subject to the voluntary disclosure program to mitigate or eliminate such risk. The message -- or risk -- that the IRS intends to convey is, dammit, join the program or take the risk.

Despite the IRS's rhetoric, one has to ask the question whether a taxpayer otherwise have criminal investigation and prosecution risk can eliminate or mitigate the risk with a good quiet disclosure (whatever that is, but I know it when I see or do it)? I think many practitioners think that the taxpayer can do that; that there are good reasons that the IRS and DOJ Tax would make the call at least not to criminally prosecute a good quiet disclosure. Of course, I approach it a different way. If the taxpayer has material criminal investigation and prosecution risk, joining the program is the way to go and the taxpayer should not be doing a quiet disclosure upon the uncertain hope that it will not be discovered and, if discovered, it will mitigate or eliminate the criminal investigation and prosecution risk. Having said that, however, I suspect that, in the final analysis, for good quiet disclosures, the IRS will exercise discretion to conduct just a civil examination. I suspect that the real risk is in the amount of the civil penalties that will be asserted and the number of income tax years that will be put in play. And for those taxpayers will real criminal prosecution risk, there is a major risk of severe penalties and thus should join without quiet disclosure to get better penalties or, if the quiet disclosure was made and not yet discovered by the IRS, join the program.

The Swiss Offshore Bank Solution Drags On - the Swiss Way (6/13/13)

noreply@blogger.com (Jack Townsend) — Thu, 13 Jun 2013 11:54:00 +0000

According to reports, Switzerland continues to drag its feet on a solution with the U.S. The reports come fast and furious, although, from my perspective, mostly cumulative information, some incremental information, but no break-throughs. Switzerland has been stymying the process for some time now, so I guess we should not be surprised. I have seen little use posting daily information about the foot-dragging, but every now and then I will, as I do today, just as a reminder, that should it continue, we might expect some action from the U.S.

Reuters has this posting. Katharina Bart, Swiss upper house backs U.S. tax deal to protect banks (Reuters 1/12/13), here. Excerpts are :

The protection of client information has helped to make Switzerland the world's biggest offshore financial center, with $2 trillion in assets. But that haven has come under fire as other countries have sought to plug budget deficits by clamping down on tax evasion, with authorities probing Swiss banks in Germany and France as well as the United States.

* * * *

The bill would allow banks to hand over information and strike settlement deals with U.S. prosecutors, which one lawmaker called a "choice between the plague and cholera." Such deals would avert the threat of criminal prosecution, but are still expected to include heavy fines that could cost the industry as much as $10 billion.

* * * *

The legislation approved by the upper house would pave the way for Swiss banks to disclose their U.S. dealings, including names of bank staff and third parties such as accountants and tax lawyers who helped Americans to evade taxes.

Banks will still not be allowed to hand over client names - protected by the Swiss secrecy law of 1934 - but the proposal, valid for a year only, would allow banks to hand over so much information on customers' behavior that U.S. officials should be able to identify American tax dodgers.

The Swiss government has warned that the United States could indict another bank, a move seen as the death knell for virtually any business. Lawmakers were swayed by concern U.S. prosecutors could indict one of the state-backed cantonal banks in their constituency.

Rubinstein on the State of Offshore Bank Account Compliance (6/12/13)

noreply@blogger.com (Jack Townsend) — Wed, 12 Jun 2013 21:14:00 +0000

Asher Rubinstein, here, has posted an article titled, Offshore Update: The Door to Foreign Account Amnesty Can Close At Any Time, here. Key points that interested me are:

1. After naming certain Swiss banks in the IRS and DOJ cross-hairs, he says:(par. 3) that IRS may and presumably will "close the door" on U.S. depositors in those banks qualifying for OVDP.

2. He says the following about Singapore banks becoming targets:

The inclusion of Singapore is significant because of the rise of Singapore as a major international financial center. The flow of funds from Switzerland to Singapore when Swiss banking secrecy evaporated was substantial. According to one report, the amount on deposit in Singapore has grown more than fifty percent over the last five years, which is precisely the period of time since UBS was sued by the DOJ. Although there have been suggestions that Singapore might be “the next Switzerland”, this is unlikely. Singapore would not risk its financial reputation (depending on the report, either the fourth or fifth largest world financial center, after New York, London, Tokyo and Hong Kong) to be a harbor for non-compliant accounts. Singapore makes a significant amount of money from legitimate international banking and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago. To this end, Singapore has recently announced that it is in talks with the US on a FATCA-type of agreement. In addition, a new regulation requires Singapore banks to identify all accounts that may harbor the proceeds of tax evasion, and close them. Failure to abide by this new law will result in criminal charges for the Singaporean bankers under Singapore law.

He later says:

Recently, the IRS and tax authorities in the UK and Australia agreed to exchange information regarding offshore trusts and corporations. In its press release announcing this agreement, the IRS specifically noted that the three countries have already “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 contains both the identities of the individual owners of these entities, as well as the advisors who assisted in establishing the entity structure.”

He concludes:

In light of the above, there can be no expectation or even hope of banking secrecy. US taxpayers with undisclosed foreign assets have little choice but to voluntarily come into tax compliance, before the IRS comes to them.

Merely closing a foreign account is not an alternative, because DOJ and IRS never limit their investigations to only current accounts. In the case of UBS, DOJ’s John Doe Summons sought banking records back to 2000. In the case of Liechtensteinische Landesbank, DOJ requested records back to 2004. In the case of Julius Baer, the investigation goes back to 2002. In other words, closing an account today does nothing to remedy the non-compliant past, and DOJ and the IRS focus on past non-compliance. In addition, a wire transfer or bank check from the foreign account to a US account (or account elsewhere) creates an easy trail back to the foreign account, and would also give rise to due diligence, “know your client” and source of funds inquiries by the recipient bank. Using the non-compliant funds to buy real estate or other assets also creates a trail and does nothing to undo the non-compliant past, which will be the focus of the IRS investigation.

Moreover, the IRS has taken a particular interest in the transfer of funds from a non-compliant account as an attempt to continue to avoid or keep a step ahead of the IRS. For instance, once UBS cooperated with the IRS, the IRS followed the flow of funds from UBS to banks such as Wegelin in Switzerland and Leumi in Israel. Wegelin was criminally indicted for its acceptance of funds from UBS, and Leumi is under investigation for the same reason. In fact, evidence of such transfers could be used by DOJ prosecutors in building a case that a taxpayer willfully evaded the IRS and, rather than bringing a foreign account into tax compliance, proactively took steps to continue the hiding of assets and income from the IRS. Such facts would have profound consequences in a criminal tax fraud prosecution, settlement possibilities and punishment.

In most cases, the only viable path forward is to take advantage of the current IRS amnesty program and bring the foreign account into tax compliance. The IRS 2012 Offshore Voluntary Disclosure Program remains open, although the IRS can end the program at any time. Equally important, the IRS can announce at any time that US clients of a specific foreign bank or banks under investigation are no longer eligible to participate in the OVDP. Thus, US taxpayers who still own foreign accounts that are not tax compliant must not take a “wait and see” attitude because it might be too late, as the door to amnesty – - and lower penalties – - could be abruptly closed.

Offshore Items from Report on NYU Tax Controversy Forum (6/11/'13)

noreply@blogger.com (Jack Townsend) — Tue, 11 Jun 2013 19:42:00 +0000

Jeremiah Coder of Tax Analysts reported on NYU's annual Tax Controversy Forum in Jeremiah Coder, U.S. Able to Find Jurisdiction for Foreign Bank Prosecutions, 2013 TNT 111-7 (6/10/13). Here are some key points and excerpts:

1. Daniel Levy, AUSA SDNY, prominently involved on offshore bank and related prosecutions, said that the prosecutions of foreign bankers and banks is intended to send a message even if there is no ability to arrest and try the defendants because they will not be extradited to the U.S.. In my view, this sends a relatively cheap message when only an indictment is involved because large and costly systemic resources never have to be deployed (trial, sentencing and incarceration). In addition, as Levy noted, the charges " produce strong sanctions such as preventing individuals from traveling internationally."

2. Levy noted the following with respect to Wegelin & Co."

For example, the Justice Department indicted Swiss bank Wegelin & Co. despite its having only a correspondent account in the U.S., because there was clear proof that the bank had marketed and assisted taxpayers in hiding money offshore, Levy said. Indictments create stiff sanctions that will help deter financial institutions from helping tax evaders, he said.
Levy added that in Wegelin's case, the U.S. government took control of the entire amount in the correspondent account, not just what could be traced to tax evasion. He explained that the DOJ believed that the entire Wegelin correspondent account was "facilitating" tax evasion. That was "a very creative theory" that "sent a message," according to Levy.

3. John McDougal, an IRS attorney prominently involved in the offshore juggernaut, said that "the IRS has more summonses in the pipeline seeking taxpayer data from financial institutions."

4. On a complaint "that many nonresident taxpayers may find they owe a lot of tax but otherwise lack fraud indicia," "McDougal responded that taxpayers with deficiencies larger than $1,500 might as well try the streamlined disclosure program provided they have no other risk factors."

5. On the notion that Singapore is "the next Switzerland," McDougal noted that Singapore "will sign the Convention on Mutual Administrative Assistance in Tax Matters, will sign an intergovernmental agreement with the United States, and is making tax evasion a predicate offense to money laundering."

Ex Post Facto "Correction" by Delinquent or Amended Returns After the CI Agent Shows Up (6/10/13)

noreply@blogger.com (Jack Townsend) — Mon, 10 Jun 2013 22:23:00 +0000

One of the tough issues practitioners face when a criminal investigation starts is whether to attempt to "correct" the issue ex post facto by filing delinquent original returns (if failure to file is the potential crime being investigated) or amended returns (if evasion or tax perjury are the crimes being investigated). Conceptually, such ex post facto gambits are generally suspect; otherwise, the IRS criminal tax enforcement efforts would be in shambles. And, of course, the filing of such returns ex post facto does prove several elements other than willfulness that the Government must prove to make a case. For example, in the case of failure to file, the filing of delinquent returns will admit that the taxpayer was required to file a return and the income admitted on the returns can be compelling to a jury. Likewise, in the case of evasion or tax perjury, the filing of amended returns showing a tax due -- substantial tax due in virtually all cases that would be criminally prosecuted -- the taxpayer is admitting that element of the crime (either the tax due for evasion or the tax or components leading to tax, such as the omitted income, for tax perjury).

In United States v. Sperrazza, 2013 U.S. Dist. LEXIS 77901 (MD GA 2013), here, the defendant made tax payments after he learned of the IRS criminal investigation. The defendant was subsequently charged with structuring financial crimes and evasion. As to the evasion charges, the defendant intended to rely upon his tax payments when he "learned" that they were underpaid (i.e., after he learned of the criminal investigation). Obviously, he wanted the jury to infer that he acted in good faith from the beginning by showing that he corrected the problem when he learned of it. That is one inference the jury could make; the competing inference is that the defendant was just trying to create an improper inference. The Government moved in limine to prevent him from introducing evidence of payment. The Court denied the motion, thus allowing the defendant to introduce that evidence and get that inference before the jury. The Court's reasoning is short and sweet, so I included it in whole here:

Presently pending before the Court is the Government's Motion in Limine to Exclude Irrelevant Evidence (Doc. 51). The Government seeks to preclude Defendant from arguing or introducing documents or testimony related to tax payments he made to the IRS after he became aware of the criminal investigation. (Doc. 51 at 1.) The Government argues that Defendant filed his tax payments for a self-serving purpose after being informed of the criminal investigation, rendering Defendant's late payment of taxes irrelevant to the issue of whether Defendant had the requisite criminal intent to commit the crime. The Government also argues that admission of evidence of the payments is greatly prejudicial as it will confuse the jury and distract from the charged crimes. Defendant asserts that he never received an audit notice for the years in question, was presumably unaware of the criminal investigation until notified, and filed his amended returns and payments in 2009 upon notification, well before the Indictment was returned on March 15, 2012.

On June 3, 2013, the Court held a hearing on the Government's Motion. At the hearing, the parties agreed that evidence of the late tax payments was irrelevant to the charges of structuring financial transactions (Counts Four and Five). Thus, the only question is whether the Court should exclude evidence of the late tax payments as to the tax evasion charges under 26 U.S.C. § 7201 (Counts One, Two, and Three).

In light of the binding precedent set forth in Hill v. United States, 363 F.2d 176 (5th Cir. 1966), the Court will permit the admission of evidence of the late tax payments only as to Counts One, Two, and Three. In Hill, a tax evasion case under 26 U.S.C. § 7201, the Fifth Circuit ruled that "[o]n the issue of willfulness the prompt correction of errors...by making tax payments is relevant...[and] where a defendant has an opportunity to correct his return and is put on notice that such correction is necessary, his failure to take steps to file an amended return is a proper matter for a jury to consider in determining intent or lack of intent." Hill, 363 F.2d at 180. Thus, the evidence of tax payments post-notice can be of probative value in establishing a defendant's state of mind at the time of the alleged criminal acts. United States v. Tishberg, 854 F.2d 1070, 1073 (7th Cir. 1988) ("Tishberg's subsequent conduct may demonstrate a good faith effort to correct his previous mistakes."). In the instant case, where Defendant was put on notice of his flawed tax returns only after being informed of the criminal investigation, his resulting tax payments may have probative value on the question of willfulness as to Counts One, Two, and Three. While the Government argues that such evidence will be prejudicial and confuse the jury, none of the cases cited support the Government's position. Each case cited by the Government involves a prosecution under 26 U.S.C. § 7203, which addresses willful failure to file an income tax return or pay taxes. Under § 7203, evidence of late filings and payments of taxes have generally been considered inadmissible, as the conduct of a defendant in the years subsequent to a failure to file tax returns has little relevance to the original failure to file a tax return, and "the intent to report...income and pay...tax in the future does not vitiate the wilfulness required by [§ 7203]." Sansone v. United Stated, 380 U.S. 343, 345 (1965). The same cannot be said of § 7201, where the original crime is of tax evasion and subsequent conduct can implicate willfulness or support the lack of willfulness as the Court noted in Hill. The Government's argument that the payments in this case were self-serving goes to the weight of the evidence, not its admissibility, and of course, the Government is free to argue that the payments were self-serving. Ultimately, what weight, if any, to be given to the tax payments is for the jury to determine together with all the other evidence.

Accordingly, the Court DENIES IN PART the Government's Motion in Limine (Doc. 51) to the extent that the Court will permit the admission of evidence of the late tax payments only as to Counts One, Two, and Three. The Court GRANTS IN PART the Government's Motion in Limine (Doc. 51) to the extent that the Court will not permit admission of evidence of the late tax payments as to Counts Four and Five. The Court will also issue an appropriate instruction to the jury that they are not to consider the matter of late payments as to Counts Four and Five.

JAT Comments:

1. I am not sure I understand or, to the extent that I do understand, agree with the court's distinction between failure to file and tax evasion relative to ex post facto corrective action. If a defendant can raise an inference of lack of willfulness in his original conduct by ex post facto amended returns or payments of taxes, it is not clear to me why the same reasoning would not apply to willfulness in failing to file a return. Perhaps readers will respond either by email or comment to enlighten me on that.

2. Obviously, the Government can argue to the jury that the inference is misplaced because the defendant did not initially do the right thing and only sought to create a smokescreen of good faith when he saw he was going down. But, good faith in light of all the circumstances is uniquely an issue for the jury to decide.

3. Even if this type of ruling can be anticipated at the ensuing criminal trial, this type of ex post facto correction -- delinquent returns or amended returns -- is dicey. I don't think it happens in most cases because of the risks and uncertainties involved, particularly if there is some doubt about the Government being able to prove elements of the crime that will be admitted by the filings.

4. Query, assume a guilty client (actually guilty of all elements of the tax crimes in issue). Could the filing of the delinquent or amended returns in order to create an improper inference that his original conduct was not willful be considered an affirmative act for the original evasion or even a new act or evasion or even an attempt to impair or impeded the IRS, constituting a separate crime under tax obstruction (Section 7212) or tax conspiracy (18 USC 371, the defraud/Hammerschmidt/Klein conspiracy? Editorially, the latter possibility, certainly within the sweeping scope of the Klein / Hammerschmidt rhetoric, is a good reason that the defraud conspiracy should be reined in.

5. The foregoing paragraph raises some nice theoretical issues, Perhaps the more practical issue is whether, after the defendant has been found guilty of the willfulness he sought to avoid by the ex post facto conduct, he can be found liable for obstruction in the investigation or prosecution with a resulting 2 level increase under Sentencing Guidelines §3C1.1., Obstructing or Impeding the Administration of Justice., here. Certainly, to use the easiest example, if a defendant takes the stand at trial and testifies falsely that he did not willfully do the actus reus, the court can impose this sentencing level enhancement if the jury finds him guilty which, perforce, means that he testified falsely. Why? That enhancement cannot apply to the defendant who simply puts the Government to its proof of guilt beyond a reasonable doubt, a constitutional mandate in criminal cases. But, whenever the defendant does something affirmative in the defense -- illustrated most clearly by false testimony -- that seeks to mislead the jury, then this enhancement can apply. Thus, in this case, when the defendant affirmatively introduces evidences of the ex post facto conduct of payment for the sole reason of raising an inference -- in effect, "testifying" to that effect through the conduct he insists putting before the jury -- then, has the defendant gone beyond his constitutional right to require the Government to prove guilt beyond a reasonable doubt and proffered evidence intended to mislead and thus obstruct justice? Perhaps I will write another blog on that subject later. For now, I raise the possibility and would appreciate readers thoughts.

Addendum on 6/11/13:

6. I am a bit troubled by the quote from Hill that suggests that the Government may be able to introduce an ex post facto failure to correct as evidence of the original willfulness in making the error needing correction. Here is the entire discussion in Hill from which the excerpt above was taken. Here is Hill's complete discussion (pp. 180-181), and have bold-faced some of it for emphasis in this context:

The corporation's accountant prepared both the corporation's return and Hill's personal return. The corporation's return was filed on April 16, 1958 and Hill's return was filed on March 25, 1958. The accountant testified that in May of 1958 he met with Hill, White and Marcussen, at which time he was informed by White that Hill, White and Marcussen had cashed checks belonging to the corporation and divided the proceeds among themselves, as reimbursement for business expenses which each previously had incurred. The accountant then testified that he advised White, Hill and Marcussen to file amended personal returns to report the receipt of their respective shares of the proceeds of the cashed checks; and that he cautioned them to claim reimbursement for business expenses only by using journal entries properly supported by expense statements. Hill contends that this testimony was inadmissible because it dealt with events which occurred after the returns in question had been filed. Hill assumes that because the offense of tax evasion was complete upon the filing of his tax return, all statements, acts and omissions which occurred thereafter are inadmissible. We do not agree.
In proof of criminal tax evasion the defendant's intent is a necessary element. Evidence which is relevant and otherwise admissible to determine willfulness is not made inadmissible merely because the act or omission offered occurred shortly after the returns in question were filed. United States v. Northern, 329 F.2d 794 (6th Cir. 1964), cert. den. 377 U.S. 991, 84 S. Ct. 1915, 12 L. Ed. 2d 1044 (1964). On the issue of willfulness the prompt correction of errors by filing amended returns and by making tax payments is relevant. See Berkovitz v. United States, 213 F.2d 468, 472 (5th Cir. 1954) and Heindel v. United States, 150 F.2d 493, 497 (6th Cir. 1945). Conversely, where a defendant has an opportunity to correct his return, and is put on notice that such correction is necessary, his failure to take steps to file an amended return is a proper matter for a jury to consider in determining intent or lack of intent. In United States v. Alker, 260 F.2d 135, 157 (3rd Cir. 1958), it was said:

The law is well settled that prior and subsequent acts whether they portray criminality or not when substantially similar to the subject matter forming the basis of the indictment are probative to negate the inference that the crucial conduct was unintentional, innocent, inadvertent or the product of [a] mistake.

We reject this assigned error for a second and entirely different reason. When Hill testified in his own behalf, he substantially repeated the accountant's testimony which is complained about in this assignment. If there was any error in the admission of the accountant's testimony, it was cured by Hill's testimony to the same facts. See Barshop v. United States, 192 F.2d 699 (5th Cir. 1951), cert. den., 342 U.S. 920, 72 S. Ct. 367, 96 L. Ed. 688 (1952). Thus we find no prejudicial error in the admission of the accountant's testimony, or the trial court's refusal to withdraw it from the jury's consideration.

I am troubled by the notion that the Government could rely on such an omission in the context of a CI investigation a couple of years after the acts in question as evidence of original willfulness. There may be a number of reasons the taxpayer would not file an amended return in that context and thus any inference of guilt from the omission is attenuated. Of course, the reverse is true -- if the taxpayer corrects, any inference of innocence may be attenuated. I would appreciate the readers' comments on this issue.

Supreme Court Opinion of Ex Post Facto Issue in Using Guidelilnes after Acts of Crime(s) of Conviction (6/10/13)

noreply@blogger.com (Jack Townsend) — Mon, 10 Jun 2013 19:32:00 +0000

The Supreme Court just decided Peugh v. United States, 569 U. S. ____ (2013), here, holding that, in sentencing, the Constitution's Ex Post Facto Clause requires use latest Guidelines in effect at the time of the commission of the offense 1f later Guidelines increased the punishment. Some courts and practitioners had thought that Booker had solved that problem.

Here is the syllabus which captures the Supreme Court equivalent of a sound bite of its reasoning -- OK more than a sound bite, but no substitute for reading the entire opinions. I will read the entire opinions later and offer any comments that i think would be helpful. In the meantime, here is the syllabus:

Petitioner Peugh was convicted of five counts of bank fraud for conduct that occurred in 1999 and 2000. At sentencing, he argued that the Ex Post Facto Clause required that he be sentenced under the 1998 version of the Federal Sentencing Guidelines in effect at the time of his offenses rather than under the 2009 version in effect at the time of sentencing. Under the 1998 Guidelines, Peugh’s sentencing range was 30 to 37 months, but the 2009 Guidelines assigned more severe consequences to his acts, yielding a range of 70 to 87 months. The District Court rejected Peugh’s ex post facto claim and sentenced him to 70 months’ imprisonment. The Seventh Circuit affirmed

Held: The judgment is reversed, and the case is remanded.

675 F. 3d 736, reversed and remanded.

JUSTICE SOTOMAYOR delivered the opinion of the Court, except as to Part III–C, concluding that the Ex Post Facto Clause is violated when a defendant is sentenced under Guidelines promulgated after he committed his criminal acts and the new version provides a higher sentencing range than the version in place at the time of the offense. Pp. 4–13, 15–20.

(a) Though no longer mandatory, see United States v. Booker, 543 U. S. 220, the Guidelines still play an important role in sentencing procedures. A district court must begin “by correctly calculating the applicable Guidelines range,” Gall v. United States, 552 U. S. 38, 49, and then consider the parties’ arguments and factors specified in 18 U. S. C. §3553(a). 552 U. S., at 49–50. The court “may not presume that the Guidelines range is reasonable,” id., at 50, and must explain the basis for its sentence on the record, ibid. On appeal, a sentence is reviewed for reasonableness under an abuse-of-discretion standard. Id., at 51. A district court is to apply the Guidelines “in effect on the date the defendant is sentenced,” §3553(a)(4)(A)(ii), but, per the Guidelines, is to use the Guidelines in effect on the date the offense was committed should the Guidelines in effect on the sentencing date be found to violate the Ex Post Facto Clause. Pp. 4–7

(b) The Constitution forbids the passage of ex post facto laws, a category including, as relevant here, “[e]very law that changes the punishment, and inflicts a greater punishment, than the law annexed to the crime, when committed.” Calder v. Bull, 3 Dall. 386, 390. The “scope of this Latin phrase” is given “substance by an accretion of case law.” Dobbert v. Florida, 432 U. S. 282, 292. The touchstone of the inquiry is whether a given change in law presents a “ ‘sufficient risk of increasing the measure of punishment attached to the covered crimes.’ ” Garner v. Jones, 529 U. S. 244, 250. Pp. 7–8.

(c) The most relevant prior decision is Miller v. Florida, 482 U. S. 423. There, the Court found an ex post facto violation when the petitioner was sentenced under Florida’s new sentencing guidelines,which yielded a higher sentencing range than the guidelines in place at the time of his crime. The pre-existing guidelines would have required the sentencing judge to provide clear and convincing reasons in writing for any departure, and the sentence would have been reviewable on appeal. But under the new guidelines, a sentence within the guidelines range required no explanation and was unreviewable. Variation in the sentence, though possible, was burdensome; so in the ordinary case, a defendant would receive a within-guidelines sentence. Thus, increasing the applicable guidelines range created a significant risk of a higher sentence.

The same principles apply to the post-Booker federal sentencing scheme, which aims to achieve uniformity by ensuring that sentencing decisions are anchored by the Guidelines. Normally, a “judge will use the Guidelines range as the starting point in the analysis and impose a sentence within the range.” Freeman v. United States, 564
U. S. ___, ___. That the court may impose a sentence outside that range does not deprive the Guidelines of force as the framework for sentencing. Uniformity is also promoted by appellate review for reasonableness with the Guidelines as a benchmark. Appellate courts may presume a within-Guidelines sentence is reasonable, see Rita v. United States, 551 U. S. 338, 347, and may “consider the extent of the deviation” from the Guidelines as part of their reasonableness review, Gall, 552 U. S., at 51. The sentencing regime also puts in place procedural hurdles that, in practice, make imposition of a non-Guidelines sentence less likely. Florida’s scheme and the federal regime differ, but those differences are not dispositive. Common sense indicates that the federal system generally will steer district courts to more within-Guidelines sentences, and considerable empirical evidence suggests that the Guidelines have that effect. A retrospective increase in an applicable Guidelines range thus creates a sufficient risk of a higher sentence to constitute an ex post facto violation. Pp. 9–13.

(d) The Government’s contrary arguments are unpersuasive. Its principal claim is that the Sentencing Guidelines lack sufficient legal effect to attain the status of a “law” within the meaning of the Ex Post Facto Clause. Changes in law need not bind a sentencing authority for there to be an ex post facto violation, and “[t]he presence of discretion does not displace the protections of [that] Clause.” Garner, 529 U. S., at 253. As for contrasts between the Federal Guidelines and the Florida system in Miller, the difference between the two systems is one in degree, not in kind. The attributes of post-Booker sentencing fail to show that the Guidelines are but one among many persuasive sources a sentencing court may consult in making a decision.Recognizing an ex post facto violation here is consistent with post-Booker Sixth Amendment cases. The Court’s Sixth Amendment cases, which focus on when a given finding of fact is required to make a defendant legally eligible for a more severe penalty, are distinct from its ex post facto cases, which focus on whether a change in law creates a “significant risk” of a higher sentence. The Booker remedy was designed, and has been subsequently calibrated, to exploit precisely this distinction: promoting sentencing uniformity while avoiding a Sixth Amendment violation. Nothing in this case undoes the holdings of such cases as Booker, Rita, and Gall. Pp. 15–19.

SOTOMAYOR, J., delivered the opinion of the Court, except as to Part III–C. GINSBURG, BREYER, and KAGAN, JJ., joined that opinion in full, and KENNEDY, J., joined except as to Part III–C. THOMAS, J., filed a dissenting opinion, in which ROBERTS, C. J., and SCALIA and ALITO, JJ., joined as to Parts I and II–C. ALITO, J., filed a dissenting opinion, in which SCALIA, J., joined.

For students -- A Good Summary of Where we Are on Booker

The opinion has a good summary on the state of sentencing after Booker, as refined by the later cases. I quote here that summary, with case citations except Booker and quotation marks omitted so that the flow of the reasoning is better comprehended:

Prior to 1984, the broad discretion of sentencing courts and parole officers had led to significant sentencing disparities among similarly situated offenders. To address this problem, Congress created the United States Sentencing Commission. The Sentencing Reform Act of 1984, eliminated parole in the federal system and directed the Sentencing Commission to promulgate uniform guidelines that would be binding on federal courts at sentencing. The Commission produced the now familiar Sentencing Guidelines: a system under which a set of inputs specific to a given case (the particular characteristics of the offense and offender) yielded a predetermined output (a range of months within which the defendant could be sentenced).

In United States v. Booker, 543 U. S. 220, 244 (2005), however, this Court held that mandatory Guidelines ran afoul of the Sixth Amendment by allowing judges to find facts that increased the penalty for a crime beyond the maximum authorized by the facts established by a plea of guilty or a jury verdict. The appropriate remedy for this violation, the Court determined, was to strike those portions of the Sentencing Reform Act that rendered the Guidelines mandatory. Under the resulting scheme, a district court is still required to consult the Guidelines. But the Guidelines are no longer binding, and the district court must consider all of the factors set forth in §3553(a) to guide its discretion at sentencing. The Booker remedy, while not the system Congress enacted, was designed to continue to move sentencing in Congress’ preferred direction, helping to avoid excessive sentencing disparities while maintaining flexibility sufficient to individualize sentences where necessary.

Our subsequent decisions have clarified the role that the Guidelines play in sentencing procedures, both at the district court level and when sentences are reviewed on appeal. First, a district court should begin all sentencing proceedings by correctly calculating the applicable Guidelines range. As a matter of administration and to secure nationwide consistency, the Guidelines should be the starting point and the initial benchmark. The district court must then consider the arguments of the parties and the factors set forth in §3553(a). The district court may not presume that the Guidelines range is reasonable, and it may in appropriate cases impose a non-Guidelines sentence based on disagreement with the Sentencing Commission’s views. The district court must explain the basis for its chosen sentence on the record. A major departure from the Guidelines should be supported by a more significant justification than a minor one.

On appeal, the district court’s sentence is reviewed for reasonableness under an abuse-of-discretion standard. Failure to calculate the correct Guidelines range constitutes procedural error, as does treating the Guidelines as mandatory. The court of appeals may, but is not required to, presume that a within-Guidelines sentence is reasonable. The reviewing court may not apply a heightened standard of review or a presumption of unreasonableness to sentences outside the Guidelines range, although it will, of course, take into account the totality of the circumstances, including the extent of any variance from the Guidelines range. We have indicated that a district court’s decision to vary from the advisory Guidelines may attract greatest respect when it is based on the particular facts of a case. n2 Overall, this system “requires a court to give respectful consideration to the Guidelines,” but it “permits the court to tailor the sentence in light of other statutory concerns as well.”
n2 We have left open the question whether closer appellate review of a non-Guidelines sentence may be in order when the sentencing judge varies from the Guidelines based solely on the judge’s view that the Guidelines range fails properly to reflect §3553(a) considerations’ even in a mine-run case. Resolution of this case does not require us to assess the merits of this issue.

Under 18 U. S. C. §3553(a)(4)(A)(ii), district courts are instructed to apply the Sentencing Guidelines issued by the United States Sentencing Commission that are in effect on the date the defendant is sentenced. The Sentencing Guidelines reiterate that statutory directive, with the proviso that if the Court determines that use of the Guidelines Manual in effect on the date that the defendant is sentenced would violate the Ex Post Facto Clause of the United States Constitution, the court shall use the Guidelines Manual in effect on the date that the offense of conviction was committed. Whether the Ex Post Facto Clause was violated by the use of the more onerous Guidelines in effect on the date of Peugh’s sentencing is the question presented here.

* * * *

The post-Booker federal sentencing scheme aims to achieve uniformity by ensuring that sentencing decisions are anchored by the Guidelines and that they remain a meaningful benchmark through the process of appellate review. As we have described, district courts must begin their analysis with the Guidelines and remain cognizant of them throughout the sentencing process. Failing to calculate the correct Guidelines range constitutes procedural error. A district court contemplating a non-Guidelines sentence must consider the extent of the deviation and ensure that the justification is sufficiently compelling to support the degree of the variance.

These requirements mean that in the usual sentencing the judge will use the Guidelines range as the starting point in the analysis and impose a sentence within the range. Even if the sentencing judge sees a reason to vary from the Guidelines, if the judge uses the sentencing range as the beginning point to explain the decision to deviate from it, then the Guidelines are in a real sense the basis for the sentence. That a district court may ultimately sentence a given defendant outside the Guidelines range does not deprive the Guidelines of force as the framework for sentencing. Indeed, the rule that an incorrect Guidelines calculation is procedural error ensures that they remain the starting point for every sentencing calculation in the federal system.

Similarly, appellate review for reasonableness using the Guidelines as a benchmark helps promote uniformity by tending to iron out sentencing differences. Courts of appeals may presume a within-Guidelines sentence is reasonable, and they may further consider the extent of the deviation” from the Guidelines as part of their reasonableness review. The post-Booker sentencing regime puts in place procedural hurdles that, in practice, make the imposition of a non-Guidelines sentence less likely.

A Roadmap for Swiss Banks to Move Forward? (6/10/13)

noreply@blogger.com (Jack Townsend) — Mon, 10 Jun 2013 16:36:00 +0000

Readers might be interested in this Financial Times editorial written by a former chairman of the governing board of Swiss National Bank. Philipp Hildebrand, The sheriff has spoken – and the Swiss must submit (Financial Times 6/9/10), here. Mr. Hildebrand concludes:

First, Swiss banks must quickly settle with the US. Ideally, the government will find a way to avoid drawing in parliament again, after it refused last week to vote on the government’s bill; and the banks can proceed in line with the framework set by the UBS settlement. After all, equal treatment in equal circumstances is a fundamental Swiss constitutional principle.

Second, the government and the banks must quickly recognise that client anonymity for tax purposes is a thing of the past. The specific contours of how information will be exchanged across sovereign borders will have to be worked out. Ideally, this will occur under the auspices of the OECD, a Paris-based think-tank, where Switzerland should demand a robust voice at the table.

Third, and crucially, Bern must settle the problem of undeclared legacy assets, largely of European origin, residing in its private banks. A significant share was deposited a long time ago in a different era with different norms. A pragmatic and morally defensible solution is for clients to pay a one-off tax on them to their respective countries of residence. In return, they would be allowed to preserve their anonymity. The level of tax could be broadly linked to the relevant rates in the European countries in question.

Finally, Bern must be steadfast in demanding access to the EU market for its banking services, enabling it to refocus the sector on its excellence in cross-border wealth management. This is equally in the interest of the EU: any other outcome will drive significant assets out of Switzerland and probably out of Europe.

Joe Thibodeau Receives Jules Ritholz Award (6/9/13)

noreply@blogger.com (Jack Townsend) — Sun, 09 Jun 2013 23:02:00 +0000

Joe Thibodeau, received the Jules Ritholz award, here, at the Civil and Criminal Penalties Section Luncheon on May 10, 2013. As noted on the web site, "The Jules Ritholz Memorial Merit Award is given in recognition of outstanding dedication, achievement, and integrity in the field of civil and criminal tax controversies." I attended that luncheon and asked Joe to write up his remarks because, well, I thought they were remarkable. I have just posted excerpted those remarks on the DOJ Tax Division Alumni Blog, here, but do recommend that readers read the complete remarks here.

In his remarks, Joe gives a lot of credit to those who have influenced his career and character. They include, of course, Jules Ritholz and the late Jerry Feffer, both major players in the tax crimes arena. Thanks, Joe, for reminding us and others about the best our profession has to offer.

Tax Fraud and Money Laundering Examination (6/9/13)

noreply@blogger.com (Jack Townsend) — Sun, 09 Jun 2013 21:58:00 +0000

Larry Campagna, here, and I recently concluded our Tax Fraud and Money Laundering Class at the University of Houston School of Law. (See our course web site, here.) I thought that some readers of this blog might be interested in the examination we gave. The examination in pdf format (with all attachments) is here'. For those desiring to take the examination, please do so and send your answers to me so that I can grade them. (Be sure and read the pdf with the instructions and attachments if you do desire to take the examination.)

The following is a cut and paste of the examination :

1. (50% of total exam grade)

You have entered private practice in Houston, specializing in tax controversy matters. A new client, Chris Cash, comes to your office for an initial visit. He asks whether the information that he will tell you is subject to the attorney/client privilege, and you assure him that it is. Chris then advises you that for the past few years, he failed to include interest income from a Swiss bank account on his individual income tax returns. The first year of the Swiss account income was 2007, and the income was at least $200,000 per year in every year since then. His income tax returns were filed as joint returns, signed by both Chris and his wife. Each return was timely filed on or before October 15 of the following year, pursuant to a timely filed extension. The certified public accountant who prepared the returns also prepared the joint returns that were filed by Chris and his wife for the ten years prior to the six years during which Chris has had the Swiss account income. The CPA/preparer also happened to be Chris’ son, who knew that Chris had invested a significant sum of money in a Swiss account, but did not know how much money or the amount of the income that was left off of the income tax returns. Yesterday, however, Chris visited a new CPA and confessed to having a foreign account, having left the $200,000+ of Swiss interest income off of each year's return, and asked the CPA what to do. The CPA immediately stopped the conversation and advised Chris to make an appointment with you. Chris provides you with a copy of his joint returns for 2007 through 2011, each of which shows income of his salary of $300,000 and his wife's salary of $500,000. Chris tells you that his wife knew that he had made a significant amount of money offshore in 2007, and that he had left the money in an offshore bank account, and she signed some of the account opening documents for the Swiss bank account. But his wife had no idea of the amount of the money he had made and hidden offshore that produced the interest in the foreign account. Chris asks you the following specific questions:

a. (15% of total exam grade) What potential crimes could be charged against Chris? You may limit your answer to the Title 26 crimes, financial reporting crimes, and the conspiracy statute identified in our class materials. No explanation of the crime is necessary. Just identify each potentially applicable crime by Code section; state the elements of the crime; and the prescribed punishment for the crime as set forth in the United States Code (without regard to the punishment that would be determined under the sentencing guidelines). Then state which crimes are most likely to be charged.

b. (15% of total exam grade) Assuming Chris is investigated criminally and then prosecuted regarding the 2007 through 2011 income tax returns, what can he expect as far as the procedure that the government will follow? Assume an administrative investigation conducted by the IRS rather than a grand jury. Discuss briefly the governmental agencies and offices that would be involved, the order in which the matter is likely to proceed, and the role of each government agent and lawyer who ordinarily would be involved.

c. (10% of total exam grade) Chris wants to amend the 2007-2011 returns, and to pay all the tax, civil penalties and interest that may apply. He has had no contact from the Internal Revenue Service about the matter, nor is he under investigation or examination by any agency. Advise Chris on whether an amended return should be filed and what effect the amended return would have on the potential criminal exposure.

d. (5% of total exam grade) Would your answer to the previous question change if Chris' wife filed for divorce and threatened in her deposition to tell the IRS that she recently discovered the Swiss account income?

e. (5% of total exam grade) Chris asks if he should just have his son amend the return. Advise Chris regarding what precautions should be taken, if any, with regard to the accounting work and the preparation of the amended return.

2. (50% of total exam grade)

NOTE TO STUDENTS: THE QUESTIONS ARE ASKED IN SUBPARTS - E.G., 2a, 2b, etc. EACH SUBPART SHOULD BE ANSWERED ONLY CONSIDERING THE INFORMATION BEFORE THE SUBPART; IN OTHER WORDS, QUESTION 2a SHOULD BE ANSWERED CONSIDERING ONLY THE INFORMATION BEFORE Q2a AND NOT ANY OF THE INFORMATION AFTER Q2a.

At all times, the taxpayer operated a business through a regular C Corporation (tax at the corporate and shareholder levels) which generated significant revenue in cash. When the business received payment (whether by cash, check, credit card or otherwise), it would give the customer a receipt acknowledging the amount of the receipt and the payment medium (check, cash, etc.). The taxpayer separated the retained copies of cash receipts from the other receipts. The business receipts given to customers were numerically ordered; hence, by separating out the cash receipts, the business’ retained copies of receipts would have “holes” where the cash receipts would have otherwise appeared (i.e., the receipt number might go from 1101 to 1105, with 1102-1104 missing, etc.) The taxpayer would then bundle the cash business receipts along with the cash and stores them in a highly secure gun safe in a house the taxpayer has in another state for deer hunting purposes. The business deposited the noncash receipts in its regular business operating account at a bank located a block away from its offices.

Shortly after the end of each month, the taxpayer delivered to the accountant the retained copies of noncash receipts (not including the cash receipts stored with the cash in the gun safe). The accountant included as the businesses gross revenue only the receipts he was given -- representing the noncash receipts, or in accountant’s lingo, noncash gross revenue. The gross revenue thus calculated (i.e., not including cash) was used for all purposes (including federal tax on the Form 1120 filed by the Corporation and state franchise tax and sales tax reported by Corporation). Furthermore, in preparing the individual form 1040 for that taxpayer, the preparer did not include the cash receipts. The taxpayer had this pattern of conduct of spiriting away cash receipts for the entire years 01 through 06. For each of the years 01 through 05, the Corporation and the taxpayer filed returns timely – the Corporation, a calendar year taxpayer, by March 15 of the year following, and the taxpayer, also a calendar year taxpayer, by April 15 of the year following.

In January 07, two IRS agents make a surprise visit to taxpayer's home at 8am to “interview” him. The taxpayer is caught off-guard by this IRS expression of interest in him (i.e., he did not know the IRS was interested before). The taxpayer fortunately had the good sense to decline to answer questions once the CI Agents read him his modified Miranda warnings. The taxpayer terminates the interview and He immediately consults you, a tax controversy specialist.

Question 2a (10% of total grade): Explain to the taxpayer whether he should file a year 06 Form 1120 and/or a year 06 1040. Assume that CI investigation is still continuing at the time of the normal due dates for the 06 return (March 15 of year 07 and April 15 of year 07, respectively) and the extended due dates, if an extension is sought (September 15 of year 07 and October 15 of year 07). Explain your answer to the taxpayer. END OF QUESTION 2a.

On March 15 (the Ides of March) of year 09, the grand jury indicts the taxpayer for tax perjury (Section 7206(1)) with respect to the Forms 1120 and 1040 for the years 02 through 05. The following summarizes the Counts in the indictment:

Indict
ment
Count # Crime Charged Gross Revenue
Understated Tax Understated
1 § 7206(1), Tax Perjury for year 02 Form 1120 $70,000 $23,800
2 § 7206(1), Tax Perjury for year 03 Form 1120 $70,000 $23,800
3 § 7206(1), Tax Perjury for year 04 Form 1120 $70,000 $23,800
4 § 7206(1), Tax Perjury for year 05 Form 1120 $70,000 $23,800
5 § 7206(1), Tax Perjury for year 02 Form 1040 $70,000 $19,600
6 § 7206(1), Tax Perjury for year 03 Form 1040 $70,000 $19,600
7 § 7206(1), Tax Perjury for year 04 Form 1040 $70,000 $19,600
8 § 7206(1), Tax Perjury for year 05 Form 1040 $70,000 $19,600
TOTAL $560,000 $173,600
Unindicted year 01 Form 1120 tax loss $23,800
Unindicted year 01 Form 1040 tax loss $19,600
Unindicted State franchise and sales tax $50,000
AGGREGATE TAX LOSS FOR ENTIRE PATTERN OF CONDUCT $267,000

Question 2b (5% of total grade): Explain to the taxpayer why the grand jury did not indict for year 01 for the Forms 1120 and 1040. Assume for purposes of answering this question that, having watched the CI investigation, you know that the IRS fully investigated year 01 and made a tax loss determination for all of the years 01 through 06. END OF QUESTION 2b.

The Government offers a plea deal of two counts of § 7206(1), with the remaining counts being dismissed. The Government will require that (i) the full tax loss for all years be included in the tax loss for sentencing and (ii) require contractual restitution in that full amount (including year 01), along with a 20% accuracy related penalty on the Forms 1120 and 1040 taxes. Advise the taxpayer of the following matters that the taxpayer should consider in assessing the plea deal offered:

Question 2c (2.5% of total grade): What is the maximum possible number of years of incarceration if the taxpayer rejects the plea, goes to trial, and is convicted of all counts? END OF QUESTION 2c.

Question 2d (2.5% of total grade): Is the answer you give in 2c relevant to the taxpayers’ assessment of the plea deal offered? If not, why not. END OF QUESTION 2d.

Assume for purposes of the following questions that the only Sentencing Guideline factors are the base offense level determined under SG § 2T1.1 and SG §2T4.1 (tax loss table), reduction(s) for acceptance of responsibility under SG §3E1.1, and the Sentencing Table under Ch. 5 Part A (with a criminal history of I). Enclosed are copies of the pertinent portions of the Sentencing Guidelines (you can assume that these are the applicable Guidelines).

Question 2e (10% of total grade): Answer the following assuming that the taxpayer accepts the plea:
(1) What is the Tax Loss.
(2) What is the Base Offense Level?
(3) What is the reduction for acceptance of responsibility (assuming the prosecutor recommends the maximum reduction)?
(4) Assuming no other adjustments, what is (i) the Offense Level for purposes of the Sentencing Table and (ii) the indicated sentencing range from the Sentencing Table? END OF QUESTION 2e.

Question 2f (5% of total grade): Does it make any differences to the calculations in 2e if the Government requires that the taxpayer plead to 2 counts rather than 1 count? END OF QUESTION 2f.

Question 2g (10% of total grade): Explain to the taxpayer in lay terms how rigid the application of the indicated sentencing range you calculate in answering Question 2e. END OF QUESTION 2g.

Question 2h (5% of total grade): Advise the taxpayer of the Guidelines calculations if he does not accept the plea and is tried and convicted of all counts. END OF QUESTION 2h. Attachments to 2013 Examination

ATTACHMENTS
SG § 2T1.1 Base Tax Crimes Provision
SG §2T4.1 Tax Loss Table
SG §3E1.1 Acceptance of Responsibility
SG Ch. 5 Part A Sentencing Table (with a criminal history of I)

Obtaining Tax Return Information in Non-Tax Criminal Cases (6/7/13)

noreply@blogger.com (Jack Townsend) — Fri, 07 Jun 2013 21:52:00 +0000

One of the core concepts of our internal revenue law is that the information that IRS gathers from and about taxpayers will not be freely disseminated outside the IRS. IRC Section 6103, here, insures that such information can be viewed and used both within the IRS and outside the IRS only in certain narrow and specific circumstances, and then subject to some controls.

Obviously, in tax cases -- civil and criminal -- that reach a court and tax grand jury investigations that reach the grand jury, the tax information can be shared with DOJ Tax CES personnel and then used by them in presenting cases to the court or grand jury. But, what about cases which are not tax cases. Is the information available to the Government prosecutors or attorneys?

In United States v. Ajudua, 2013 U.S. Dist. LEXIS 73003 (D NM 2013), here, the Court dealt with that issue and discusses a method by which tax return information may be obtained by prosecutors for use in criminal cases (both at the grand jury and at the criminal trial). The defendant was "indicted and charged with a violation of the following: (i) conspiracy to commit wire fraud in violation of 18 U.S.C. § 1349; (ii) aiding and abetting bank fraud in violation of 18 U.S.C. § 1344; and (iii) aiding and abetting aggravated identity theft in violation of 18 U.S.C. § 1028(A)." The charges related to the defendant's "involvement in a conspiracy to steal the identities of unwitting victims and to use those stolen identities to fraudulently obtain access to bank accounts and lines of credit." The United States filed a sealed motion under Section 6103(i) to obtain the defendant's tax return information "in order to establish that the income and return information provided is inconsistent with a legitimate business."

I link to Section 6103 above, but since it is a sprawling provision, I will Court's discussion of the legal background as well as its holding. As summarized by the Court in Ajuda, Section 6103(i) provides:

Subsection (i)(1) authorizes federal officers and employees to obtain a court order to obtain returns and return information from the IRS. Subsection (i)(1) authorizes disclosure by the IRS only to federal officers and employees for their limited use in preparation for specified non-tax criminal proceedings, any investigation which may result in such proceeding, or any federal grand jury proceeding pertaining to such a statute. See 26 U.S.C. § 6103(i)(1)(A). Subsection (i)(1) specifically provides that the information shall be disclosed upon the grant of an ex parte order by a federal district court judge or magistrate judge. See 26 U.S.C. § 6103(i)(1)(A). 26 U.S.C. § 6103(i)(4) governs such disclosure beyond those working on an investigation, and relates to the use of returns and return information in judicial or administrative proceedings. Subsection (i)(4) provides that returns and taxpayer return information may be disclosed in a judicial or administrative proceeding if: (i) the court makes certain findings regarding their probative value; or (ii) disclosure is required by court order pursuant to 18 U.S.C. § 3500 or by rule 16 of the Federal Rules of Criminal Procedure. See 26 U.S.C. § 6103(i)(4)(A). Thus, when the records need to be disclosed to people other than those tasked with the investigation, a specific court finding regarding their probative value, or 18 U.S.C. § 3500,2 or rule 16, governs the disclosure.

With regard to returns or return information that is disclosed to federal officers or employees for the purpose of the administration of federal laws not relating to tax administration, see 26 U.S.C. § 6103(i); 26 C.F.R. § 301.6103(i)-1, returns and taxpayer return information obtained under 26 U.S.C. § 6103(i)(1) or (7)(C) may be disclosed in any judicial or administrative proceeding pertaining to the enforcement of a specifically designated federal criminal statute or related civil forfeiture -- not involving tax administration -- to which the United States or a federal agency is a party if the Court finds that such return or taxpayer return information is probative of a matter in issue relevant in establishing the commission of a crime or the guilt or liability of a party, see 26 U.S.C. § 6102(i)(4)(A). There are, likewise, other ways to secure the information once the matter is the subject of a criminal case. A court in a criminal case may order disclosure of such materials pursuant to a discovery order under 18 U.S.C. § 3500 or rule 16, see 26 U.S.C. § 6103(i)(4)(A)(ii), if the court gives due consideration to the congressional policy favoring the confidentiality of returns and return information, see 26 U.S.C. § 6103(i)(4)(D). Return information other than taxpayer return information obtained under 26 U.S.C. § 6103(i)(1), (2), 26 U.S.C. § 6103(i)(3)(A) or (C), or 26 U.S.C. § 6103(i)(7) may be disclosed in any judicial or administrative proceeding pertaining to the enforcement of a specifically designated federal criminal statute or related civil forfeiture -- not involving tax administration -- to which the United States or a federal agency is a party. See 26 U.S.C. § 6103(i)(4)(B). Except in accordance with a discovery order in a criminal case, no return or return information may be admitted into evidence if the Secretary of the Treasury determines and notifies the Attorney General, or his or her delegate, or the head of the appropriate federal agency, that admission of the evidence would identify a confidential informant or seriously impair a civil or criminal tax investigation. See 26 U.S.C. § 6103(i)(4)(C). It is not proper for a district court to admit return or return information into evidence by entering an order authorizing the disclosure under 26 U.S.C. § 6103(i)(1)(B) after the fact when there has been no application for the order by an appropriate official. See United States v. Mangan, 575 F.2d 32, 38-41 (2d Cir. 1978).

In United States v. Barnes, 604 F.2d 121 (2d Cir. 1979), the United States Court of Appeals for the Second Circuit rejected the argument that the defendants "were entitled to have the information upon which the court issued its order and to a hearing on their motion to obtain it." 604 F.2d at 146. As the Second Circuit related: "There is nothing in the statute providing for notice to the taxpayer, a hearing on the application, or disclosure of the information on which the judge acted. In short, the procedure specified is Ex parte." United States v. Barnes, 604 F.2d at 146. In Weinstein v. Mueller, 563 F. Supp. 923 (D.C. Cal. 1982), the United States District Court for the Central District of California found that objection by a taxpayer who has been arrested on drug related charges, to the disclosure of information by the IRS to the United States Attorney prosecuting the case, on the ground that the court order allowing the disclosure was a "secret order," is without merit where: (i) information was disclosed pursuant to the district court's ex parte order, because 26 U.S.C. § 6103 specifically provides for ex parte orders; and (ii) there were no irregularities in the order itself or the manner in which it was obtained. 563 F. Supp. at 931-32. There is a qualified privilege that limits disclosure of federal tax returns for use in grand jury proceedings. See 26 U.S.C. § 6103(i)(1)(A)(iii); In re Grand Jury Subpoena, 144 F. Supp. 2d 541-42 (W.D. Va. 2001).

The Court granted the application finding:

1. Based upon information furnished by the Federal Bureau of Investigation ("FBI") that is believed to be reliable, reasonable cause exists to believe that specific criminal acts have been committed, namely, violations of 18 U.S.C. § 1349: Conspiracy, 18 U.S.C. § 1344: Bank Fraud, and 18 U.S.C. § 1028(A): Aggravated Identity Theft. See 26 U.S.C. § 6103(i)(1)(B)(i).
2. Reasonable cause exists to believe that the information in the Tax Materials is or may be relevant to a matter relating to the commission of such acts. See 26 U.S.C. § 6103(i)(1)(B)(ii).
3. The Tax Material is sought exclusively for use in a federal criminal investigation or proceeding concerning the above described acts, and the information sought to be disclosed cannot reasonably be obtained, under the circumstances, from another source. See 26 U.S.C. § 6103(i)(1)(B)(iii).
4. The United States Attorney's Office for the District of New Mexico and its assigned attorney(s) are employees of the Department of Justice and one or more of its assigned attorneys are personally and directly engaged in (i) preparation for a judicial or administrative proceeding pertaining to the enforcement of a specifically designated criminal statute (not involving tax administration) to which the United States or such agency is or may be a party; (ii) an investigation relating to such a proceeding; or (iii) an additional federal grand jury proceeding pertaining to enforcement of such a criminal statute to which the United States or such agency is or may be a party. See 26 U.S.C. § 6103(i)(1)(A).

Finally, the Court ordered:

IT IS THEREFORE ORDERED that: (i) the Internal Revenue Service (a) disclose to the United States Attorney's Office, District of New Mexico, the requested certified copies of Tax Materials as to:

returns, return information, and taxpayer information for:
NAME: DAVID AJUDUA
ADDRESS: xxxxxx, Alpharetta, Georgia
DOB: xx/xx/xxxx
SSN: xx-xx-XXXX
[SEALED PORTION REMOVED]

for tax years: 2008, 2009, 2010, and 2011; (b) certify where returns described above have not been filed, or are not on file with the Internal Revenue Service, or that no such returns have been filed or are on file; (c) disclose such returns and return information described above as come into possession of the Internal Revenue Service subsequent to the date of this Order, but for not longer than ninety (90) days thereafter; (d) disclose no tax returns, return information or taxpayer return information; (e) deliver the Tax Materials to the United States Attorney's Office, District of New Mexico, as collected;

(ii) such Tax Material may be disclosed to officers and employees of any Federal agency who are personally and directly engaged in: (a) preparation for a judicial or administrative proceeding pertaining to the enforcement of a specifically designated federal criminal statute (not involving tax administration) to which the United States or such agency is or may be a party; (b) an investigation relating to such a proceeding; or (c) an additional Federal grand jury proceeding pertaining to enforcement of such a criminal statute to which the United States or such agency is or may be a party. Disclosure shall be limited to the use of such officers and employees in such preparation, investigation, or grand jury proceeding. 26 U.S.C. § 6103(i)(l)(A). Authorized use includes necessary disclosure to clerical and supervisory personnel for the Department of Justice or other Federal agency, as well as court reporters. 26 C.F.R. § 301.6103(i)-l (b)(2).

The following personnel from the United States Attorney's Office, are among those authorized to discuss this application and order with IRS disclosure personnel:
John C. Anderson, AUSA

Fred J. Federici, Supervisory AUSA
[SEALED PORTION REMOVED]

Further, to the extent necessary, in connection with any additional federal grand jury proceeding, or the proper preparation for a proceeding (or in connection with an investigation relating to such a proceeding) disclosure of this Tax Material to other persons, regardless whether they are employees of the Department of Justice or other Federal agency, may be made under the following circumstances: (i) to properly obtain the services of persons having special knowledge or technical skills (such as, but not limited to, handwriting analysis, photographic development, sound recording enhancement, or voice identification); (ii) to properly interview, consult, depose or interrogate or otherwise obtain relevant information from, the taxpayer to whom such return or return information relates (or such taxpayer's legal representative) or any witness who may be called to give evidence in the proceeding; or (iii) to properly conduct negotiations concerning, or obtain authorization for, disposition of the proceeding, in whole or in part, or stipulations of fact in connection with the proceeding. Disclosures listed in the preceding sentence may be made only if such purpose or activity cannot otherwise properly be accomplished without making such disclosures. 26 C.F.R. § 301.6103(i)-1(b)(1).

(iii) no disclosures be made to any other person except in accordance with this Order, and the provisions of 26 U.S.C. § 6103, and 26 C.F.R. §301.6103(i)-1.

(iv) upon the United States' request, and it appearing that the United States' application and this Order may reveal the existence of confidential tax information, the Ex Parte Application and this Order for disclosure of Tax Materials are hereby sealed until further order of the Court.

Swiss Enablers Are Worried, As Well They Should Be (6/4/13)

noreply@blogger.com (Jack Townsend) — Tue, 04 Jun 2013 20:52:00 +0000

Swiss enablers are -- or at least perceive that they are -- being thrown under the bus by the Swiss banks. See Matthew Allen, Lawyers cry foul over bank data transfer (Swissinfo.ch 6/4/13), here. The article describes the phenomenon sometimes observed in U.S. corporate criminal investigations. The employees and other agents are thrown under the bus by the corporation who has an incentive to serve them up to prosecutors. The corporations and senior management then are protected by an agreement requiring the corporation to pay a huge fine, variously labeled.

Here are some excerpts.

While Swiss banks are in favour of the deal - at the cost of potentially huge fines - lawyers, tax experts and independent wealth advisors oppose the names of alleged third parties to tax evasion business tied to the banks being handed over to the US authorities. Under the terms of the agreement pitched by the cabinet last week, they would not enjoy the same immunity from US prosecution.

The Chamber of Swiss Tax Advisors immediately condemned the political deal, rushed through by the Swiss government last week to assuage growing US impatience, as “unacceptable” and “disproportionate”.

* * * *

The Swiss Association of Asset Managers said its members would be treated like “second-class citizens” compared to bank executives, who will escape penalty, and lower bank employees who will receive at least some legal protection from the Swiss authorities.

The only consolation for the Association was that the mass release of bank information would probably not lead directly to a “great wave of lawsuits”. But only because the US authorities already have names from an earlier, more limited, handover of Swiss bank business correspondence and a host of self-declarations prompted by tax amnesties.

The Swiss Association of Trust Companies continued the theme of ill-will towards the all-powerful large banks. “The upper echelons of bank managers who made all the decisions will not be liable because they are unlikely to have dealt with clients personally,” Association chairman Alexandre von Heeren told swissinfo.ch. “It is others who will pay the price.”

Von Heeren is confident that most members of the association have steered well clear of business involving untaxed assets. But he added that some rogue trustees that operate in the shadows may have cause to be concerned.

The article also gives an anecdotal example from an indicted Swiss enabler as follows:

The lawyer worked hand-in-hand with a series of Swiss bankers to hide the assets of wealthy US tax dodgers. He set up trusts and sham companies in Liechtenstein, Panama and the British Virgin Islands to conceal the identity of his client, according to the indictment.

The court papers also accused the lawyer of using secretive constructs to move assets from banks under US investigation to other Swiss banks that were thought to be safer.

The Swiss Putting the Best Spin On Coming Out of the Shadows (6/4/13)

noreply@blogger.com (Jack Townsend) — Tue, 04 Jun 2013 20:42:00 +0000

The Swiss claim that the wealthy will continue to harbor their money in Swiss financial institutions even after Swiss bank secrecy fades into history. Emma Thomasson, Swiss stability anchors banks in choppy tax waters (Reuters 6/4/13), here. Maybe. Maybe not. But, in my view, the Swiss bankers will have to compete like other global businesses because the competitive advantage Switzerland had was secrecy for those perceiving the need for secrecy (not just tax cheats). With secrecy going away, they have nothing to offer than other stable countries can't offer; hence, even if they can compete, they won't get the Swiss bank secrecy premium.. And, of course, the stability of Switzerland will not make Swiss Bank guided investments in a global economy subject to the instabilities beyond the Swiss borders.

1. Consider this wishful thinking from the article:

"The worn-out cliche has it that the sector was built on banks offering shelter to tax frauds and illicit money. This is a gross distortion," former Deutsche Bank head Josef Ackermann told the Reuters Global Wealth Management Summit in Geneva.

Ackermann, now chairman of Zurich Insurance, said the success of the Swiss financial industry was a result of enduring political, economic and social stability, as well as factors such as low taxes and a multi-talented workforce.

"That is why the scope and quality of Switzerland's financial sector has been, and continues to be, difficult to replicate abroad," he said.

"The unique blend of factors, much more than tax-related motives, have defined the competitive edge of Swiss private wealth management."

2. Quickly followed by this:

Strict secrecy laws, which protect the identity of bank clients, have helped Switzerland to become the world's biggest offshore financial center, with $2 trillion in assets.

3. And, later, these somewhat inconsistent statements:

UBS, Switzerland's biggest bank, has warned that it could lose up to 10 percent of its European assets of 300 billion Swiss francs ($314.6 billion) as clients come clean about untaxed accounts.

But Juerg Zeltner, head of the UBS private bank, said that trend was not leading to an exodus of clients.

"Most keep the assets where they are ... we are very happy with the retention rate," Zeltner told Reuters, adding that clients wanted to keep their Swiss accounts to diversify their exposure or because they were happy with their advisers.

"Sometimes we sell short the advantages we have here in Switzerland," he said. "There are very, very many good reasons for many, many wealthy clients to bring money into Switzerland."

Though UBS and other global players are likely to attract the fortunes of the newly rich in growing markets such as Asia and Latin America, smaller Swiss banks face a struggle to adjust to life without tax-evading Europeans.

Certainly in the competition for global wealth, the U.S. will benefit from the loss of bank secrecy because it offers the expertise and stability to compete for that business where it is not placed at unfair advantage by countries, such as Switzerland, who formerly could help their clients cheat.

Reminder on FBAR Filing for 2012 Year - Must be Received by June 28, 2012 (6/2/13)

noreply@blogger.com (Jack Townsend) — Sun, 02 Jun 2013 22:15:00 +0000

This is a reminder that 2012 FBARs must be actually filed by June 28. This is because there is no timely-mailinig, timely-filing requirement for FBARs and the 30th faills on a Sunday. This means that, if they are delivered by mail, the mailing should occur perhaps three days earlier -- June 25. 2013.

Probably the best way to file is electronically, here. Other filing information (including nonelectronic filing) is here. Key excerpts are

Reporting and Filing Information

A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income. Checking the appropriate block on FBAR-related federal tax return or information return questions (for example, on Schedule B of Form 1040, the "Other Information" section of Form 1041, Schedule B of Form 1065, and Schedule N of Form 1120) and filing the FBAR, satisfies the account holder's reporting obligation.

The FBAR is not filed with the filer's federal income tax return. The granting, by the IRS, of an extension to file federal income tax returns does not extend the due date for filing an FBAR. You may not request an extension for filing the FBAR. The FBAR is an annual report and must be received by the Department of the Treasury in Detroit, MI, on or before June 30th of the year following the calendar year being reported. While FinCEN strongly encourages individuals to electronically file FBARs, the form can be mailed to one of the two addresses below, provided that the mailing is received by June 30, 2013:

File by mailing the FBAR to:
United States Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621

If an express delivery service is required for a timely filed FBAR, address the parcel to:

IRS Enterprise Computing Center
ATTN: CTR Operations Mailroom, 4th Floor
985 Michigan Avenue
Detroit, MI 48226