I posted this blog entry on my Federal Tax Procedure Blog, here. I posted the predicate blog entry on both Blogs, so I thought this follow-through should be on both blogs because it deals with the consequences of tax fraud, albeit civil tax fraud which gives rise to a potential civil fraud penalty and an actual unlimited statute of limitations (albeit the IRS may never know about it). So, here it is:
My last post involved the IRS raising the civil fraud penalty as new matter by amended answer and prevailing. IRS Raises Fraud In Tax Court Amended Answer and Prevails (Federal Tax Crimes Blog 7/9/19), here. The key point of the blog entry was the danger of unspotted issues after an audit and the risks of petitioning the Tax Court for redetermination.
First, on that issue, I offer the relevant portion of the working draft of my Federal Tax Procedure Book will be published on SSRN in early August 2019 (footnotes omitted):
New Matters [In the Tax Court].
The IRS can raise new issues in its answer that seek to increase the amount of the deficiency on a basis not asserted in the notice of deficiency or to justify the deficiency asserted (or part thereof) on some basis not asserted in the notice of deficiency. Jurisdictionally, the Tax Court case is a case to redetermine the correct amount of tax liability for the year(s) involved, thus permitting it to determine a higher deficiency amount or an overpayment. § 6214(a) & 6512(b). So the IRS can seek additional taxes and penalties not previously asserted. The statute of limitations will be open because, to reprise what we learned earlier, the statute is suspended during the period the Tax Court case is pending. §§ 6213(a) and 6503(a). This is one of the dangers in proceeding in the Tax Court where the IRS has not previously spotted an issue. Since the statute of limitations is suspended upon issuance of the notice of deficiency (§ 6503(a)), all new matters may be raised, assuming that the statute of limitations did not bar the notice of deficiency in the first place.
The IRS's ability to raise new issues after its original answer is, however, limited by rules of fairness. If the IRS does assert new matters after filing its original answer, it will formally do so by moving to amend the original answer. The Tax Court rules, like the Federal Rules of Civil Procedure applicable in district courts and the Court of Federal Claims' Rules, permit amended pleadings, usually requiring the approval of the Court which is liberally granted to promote justice on the underlying merits. New issues cannot be inserted too late in the process so as to deny the taxpayer the effective opportunity to respond. And, as to "new matters," the IRS bears the burden of persuasion. (Of course, if the new matter is the civil fraud penalty not asserted in the notice of deficienty, the IRS would have the burden of persuasion anyway to prove civil fraud by clear and convincing evidence, so asserting civil fraud as a new matter has no affect on the burden of persuasion.)
The IRS is allowed to raise a new theory or ground in support of an issue raised in the notice of deficiency without the theory or ground being a new matter. Depending upon how much variance the new theory or ground has with the notice of deficiency, the variance might be considered a new matter subject to the foregoing new issues discussion. Certainly, if it is raised so late that the taxpayer cannot fairly respond with evidence addressing the new issue, the Court should deny the IRS's attempt to assert the new issue.
If the IRS asserts an affirmative defense (such as estoppel), it will be deemed denied and the taxpayer need not file a responsive pleading, which is usually called a "reply." If, however, the IRS raises "new matter" either in an answer or an amended answer, the taxpayer should file a reply providing the IRS notice as to the taxpayer's position on the new matter. This is frequently done via a simple denial of the various matters pled with respect to the new matter.
I think it would be helpful to illustrate the new matter issue. Recall that § 6662 provides a 20% substantial understatement penalty that is then increased to 40% if the understatement is attributable to a gross valuation misstatement. If the notice of deficiency asserted the 20% penalty but, in its answer, the IRS asserts the 40% penalty, the IRS will have the burden of proof on the increase in the penalty. That seems to be the straight-forward reading of the rule shifting the burden of proof to the IRS. But, let's focus on one issue raised in this setting. The taxpayer can avoid the accuracy related penalties if there was reasonable cause for the position on the return. This is like an affirmative defense to the penalty. Thus, as to the 20% penalty asserted in the notice and contested in the petition, the taxpayer bears the burden of proving reasonable cause even after the IRS meets its production burden under §7491(c); as to the increased 40% penalty, however, the IRS bears the burden of proof, including establishing absence of reasonable cause.
Finally, an even worse case for the taxpayer who improvidently petitions for redetermination is that the IRS can raise as new matter a civil fraud penalty. Say in the above example, the notice of deficiency asserted either the 20% or 40% accuracy related penalty in § 6662 and then in the answer (or amended answer), the IRS asserts the 75% civil fraud penalty in § 6663. Note in this regard that, if the IRS raises the civil fraud penalty as a new matter, its burden of proof is not affected because, as to civil fraud, the IRS bears the burden of persuasion by clear and convincing evidence anyway, just as it the civil fraud penalty had been asserted in the notice of deficiency. So, if the IRS prevails, the taxpayer will be even worse off for having filed a petition for redetermination. Thus, taxpayers and practitioners should think carefully about unspotted potential issues before filing a petition for redetermination in the Tax Court.
Now let's work this a little more. This IRS favorable result works because the statute of limitations is still open in Tax Court proceedings.
Labels: 6212(c)(1), 6662, 6663, Civil Fraud, Civil Penalties - Fraud, Tax Court - New Matter
In Wegbreit v. Commissioner, T.C. Memo. 2019-82, here, the taxpayer husband went through some deceptive shenanigans to hide the income from the sale of his interest in a business. There were some other issues. The numbers are large. I won't get into the detailed facts, but what caught my eye was this (slip op., at 2-3, 44-45):
After the petitions were filed, respondent filed an amended answer asserting that Samuel Wegbreit (S. Wegbreit) and Elizabeth J. Wegbreit (E. Wegbreit) were each liable for penalties for fraud pursuant to section 6663 for 2005 through 2009.
See also slip op. 44-45 for some more detailed on the amended answer allegations of fraud.
The Opinion section starts with general discussion and swings to the fraud issue as follows (slip op. 47-49):
The Commissioner has the burden of proving by clear and convincing evidence that (1) an underpayment exists for the year in issue and (2) some portion of the underpayment is due to fraud. See sec. 7454(a); Rule 142(b). The Commissioner also has the burden of producing evidence in relation to other penalties. Sec. 7491(c). Thus in analyzing the evidence in this case we have considered whether it is clear and convincing as to the elements of underpayment of tax for each year and of fraudulent intent. We conclude that the evidence is sufficient under that standard.
Many of the critical documents in the record reflect "effective as of" dating and do not reveal when they were executed. Most of the documents were also prepared or notarized by Palardy. Palardy admitted that at Agresti's request she would backdate documents and notarize documents stating incorrect dates. That any backdating occurred suggests a willingness to manipulate the relevant chronology in a way that undermines the credibility of petitioners Wegbreit's evidence.
The "effective as of" dating and the backdating of relevant documents also impede our review of the substance of the transactions involving SWTF, Threshold, and Acadia and lead us to conclude that the chronology reflected in those documents is not credible. The number of documents in the record that are on their face unreliable has made this case considerably more difficult. Our chore is compounded because the parties included numerous duplicate copies of key documents without explanation or analysis. Notwithstanding the Court's comments and directions at the conclusion of the trial, the briefs of the parties failed to focus on the material facts. Respondent's proposed findings of fact merely summarize testimony and documents and generally fail to analyze the transactions and entities involved. See Rule 151(e). Respondent continues to use the shotgun approach to theories of the case rather than selecting the strongest arguments and focusing on them. Petitioners Wegbreit's briefs misstate the record and are unreliable. After dealing directly with the record with little aid from the parties' briefs, we conclude that the reliable evidence is clear and convincing as to unreported income and fraudulent intent.
Well, the IRS prevailed despite the shortcomings of the cohort of IRS lawyers.
General Lesson
The obvious general lesson from a case like this is to remember that filing a case in the Tax Court can open upon issues not previously set up by the IRS in the notice of deficiency. This can be substantive issues involving additional tax or can be penalties, both of which, if asserted as new matter, can draw interest from the due date of the return.
Beyond the General Lesson
There is more in the details as lessons to trial counsel. As noted above, the Court found that the "Petitioners Wegbreit's briefs misstate the record and are unreliable." Presumably those briefs were submitted by their trial counsel.
Moreover, beyond misstating the record, the case should remind trial counsel to vet the evidence the taxpayer introduces through the lawyer (or if by testimony, upon cross-examination). Let's go back to the opinion.
Labels: 6663, Civil Fraud, Tax Court Procedure
Two New FBAR Opinions -- Nothing New Here (6/27/19)
I report two unremarkable FBAR willful civil penalty cases. I don't provide links, but provide the court and docket numbers for those wanting to go to Pacer to get the cases.
In United States v. Schoenfeld, 2019 U.S. Dist. LEXIS 105906 (M.D. Fla. No. 3:16-cv-1248-J-34PDB 6/25/2019), an FBAR collection case, the Court denied the defendant's motion for summary judgment holding (Slip Op. pp. 20-21):
In short, none of Defendant's arguments persuade the Court that in failing to update the BSA implementing regulations after Congress's amendment to the statute in 2004, the Secretary intended to prohibit the IRS from being able to use its discretion and impose the maximum penalty allowed by the statute, "particularly given the IRS's clear statements to the contrary." Garrity, 2019 WL 1004584, at *4. Indeed, in its 2008 version of the Internal Revenue Manual (IRM), the IRS specifically recognized the conflict between the statute and the regulation, and stated that although "the regulations at 31 C.F.R. § [1010.820] have not been revised to reflect the change in the willfulness penalty ceiling . . . the statute is self-executing and the new penalty ceilings apply." See IRM § 4.26.16.4.5.1 (July 1, 2008), available at 2008 WL 5900930. Similarly, the current version of the IRM provides that "[f]or violations occurring after October 22, 2004, the statutory ceiling is the greater of $100,000 or 50% of the balance in the account at the time of the violation." See IRM § 4.26.16.4.5.1 (Nov. 6, 2015), available at 2007 WL 9418679. Although the IRM does not "have the force of law," it does provide "persuasive authority" suggesting that the Secretary did not intend to limit the willful FBAR violation penalty to $100,000. See Griswold v. United States, 59 F. 3d 1571, 1576 (11th Cir. 1995) ("While the IRS Manual does not have the force of law, . . . the manual provisions do constitute persuasive authority as to the IRS's interpretation of the statute and the regulations."); see also Romano-Murphy v. C.I.R., 816 F.3d 707, 719 (11th Cir. 2016) (same). Thus, for all of the reasons explained above, the Court declines to reduce the penalty assessed against Steven Schoenfeld for an alleged willful FBAR violation to $100,000.
I previously reported on an earlier opinion in Schoenfeld. Court Holds That Liability for FBAR Civil Willful Penalty Survives Death (9/26/18), here.
In United States v. Dadurian, 2019 U.S. Dist. LEXIS 104683 (S.D. Fla. 9:18-cv-81276 6/24/2019), also an FBAR collection suit, the Court denied the defendant's motion for summary judgment, noting the differing definitions of willful for the FBAR civil penalty (i.e., intent to violate a known legal duty, knowing and reckless) but found that under any of these definitions the facts were sufficiently contested to reject summary judgment. The facts that are recounted by the court do not look good for the defendant, but the court was only dealing with defendant's motion for summary judgment.
Labels: 31 USC 5321(a)(5)(C), FBAR Willful Penalty, Willfulness
Virtual Currency Held in Foreign Accounts Not FBAR Reportable (6/27/18; 7/2/18)
I am not an expert on virtual currency or reporting requirements for virtual currency. One issue is whether virtual currency or holding virtual currency on a foreign third-party exchange was reportable on the FBAR, FinCEN Form 114.
I link here a report from the AICPA Virtual Currency Task Force which obtained some input from the IRS on the issue. Kirk Phillips, Virtual currency not FBAR reportable (at least for now) (Journal of Accountancy 6/19/19), here.
FinCEN responded that regulations (31 C.F.R. §1010.350(c)) do not define virtual currency held in an offshore account as a type of reportable account. Therefore, virtual currency is not reportable on the FBAR, at least for now.
The report caveats that only FBAR reporting is addressed. Reporting on Form 8938, Statement of Specified Foreign Financial Assets, is not addressed.
James Creech (Guest Blogger), Virtual Currency, FBAR, and the Ripple Effect (ProcedurallyTaxing Blog 7/2/19), here.
Labels: Bitcoins, Virtual Currency
Advising Clients on "How To Do Time" (6/26/19)
I picked up this offering that Tax Crimes fans might be interested in. Alan Ellis and J. Michael Henderson, How to Do Time, Parts 1-4. Many of criminal defense lawyers really do not get into the details of the prison experience. These authors offer useful insights that will be helpful in preparing clients for the experience. This was published in Law 360 but is available on Allan Ellis' sight, here.
The introduction from an email from Allan Ellis:
How To Do Time, Parts 1-4
Most lawyers understandably are unable to advise a first-time federal inmate as to what it will be like in prison. Rarely do they ever get beyond an attorney visiting room. In this four-part series of articles, Alan Ellis and J. Michael Henderson, the co-authors of the Federal Prison Guidebook, with the help of Phillip S. Wise, retired Bureau of Prisons Assistant Director of Health Services, offer answers to many questions that attorneys, their clients, and their clients' family and friends may have.
Labels: Incarceration
Ninth Circuit Rejects Inclusion of Reckless Conduct in Willful Requirement for § 6694(b)(2) Preparer Civil Penalty (6/25/19)
I and other commentators have lamented courts expansion of the concept for willful for the FBAR civil penalty that can be draconian (although the IRS limits its application as a matter of discretion). Specifically, I and others have urged that the definition of willful for FBAR civil penalty purposes should be the same as the definition of willful in the parallel criminal proceedings (see Ratzlaf v. United States, 510 U.S. 135 (1994), adopting the Cheek standard (Cheek v. United States, 498 U.S. 192, 200-201 (1991)) applicable for tax crimes).
The courts have decided otherwise. See e.g., today's other posting in Court Finds Taxpayer Willfully Failed to File FBARs (Federal Tax Crimes Blog 6/25/19), here.
In Rodgers v. United States (9th Cir. 6/21/2019) (unpublished), here. The Court addressed another civil penalty with a statutory willful requirement. The penalty was the § 6694(b) preparer penalty which provides:
(b) Understatement due to willful or reckless conduct
(1) In general. Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a conduct described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of—
(A) $5,000, or
(B) 75 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.
(2) Willful or reckless conduct. Conduct described in this paragraph is conduct by the tax return preparer which is—
(A) a willful attempt in any manner to understate the liability for tax on the return or claim, or
(B) a reckless or intentional disregard of rules or regulations.
The district court in Rodgers defined "willful" in § 6694(b)(2)(A) to include "recklessness." Of course, reckless conduct under this statute must mean something different than willful, otherwise (b(2)(B) would be redundant, and certainly there is nothing in the statute to indicate a congressional understanding the reckless was included in the definition of willful.
The Court of Appeals reversed for the district court to determine whether the correct definition of willful would affect the outcome in some cases. Addressing the correct definition of will, the Court said:
1. We agree with Rodgers that the district court applied the wrong definition of "willful" in § 6694(b)(2)(A). As we explained in Richey v. IRS, 9 F.3d 1407, 1411 (9th Cir. 1993), willfulness under § 6694(b)(2)(A) requires "a conscious act or omission made in the knowledge that a duty is therefore not being met." Id. (quoting Pickering v. United States, 691 F.2d 853, 855 (8th Cir. 1982)). We further noted that the definition of "willful" in § 6694(b) is the "same" as the definition used in 26 U.S.C. § 7206. Id. As the Supreme Court has explained, that definition does not include recklessness. See United States v. Bishop, 412 U.S. 346, 354 (1973).
The reason I call this case to readers' attention is that, like the 6694/7206 analogy, the FBAR willful civil penalty drawn in the same language as the criminal penalty for failure to file FBARs and other BSA violations. The criminal violations clearly require intent to violate a known legal duty, conduct that is more than reckless conduct. Yet the courts apply a different standard for BSA civil penalties (FBAR penalties here). The Courts may take some comfort for a more relaxed definition and burden of proof (e.g., preponderance rather than clear and convincing) because the penalty is civil and thus not as punitive as a criminal penalty which, so the notion goes, should require more egregious conduct (specific intent rather than reckless conduct). Yet, the courts applying willful in the tax preparer civil penalty context reach what appear to be opposite conclusions.
Of course, the FBAR willful penalty does not have a statutory alternative reckless standard like § 6694(b)(2). But, I just wonder whether, if that alternative were not in § 6694(b)(2), the courts would have reached a different result (i.e., include reckless conduct in definition of willful) simply because a civil rather than a criminal penalty were involved.
Labels: 7206(2), FBAR Willful Penalty
Court Finds Taxpayer Willfully Failed to File FBARs (6/25/19)
In United States v. Flume (S.D. TX No. 5:16-cv-00073 Order dated 6/11/19 Dkt. No. 86), here, the Court held Flume liable for the willful FBAR penalty. The case continues the holdings that, even if Flume did not have the intent to violate a known legal duty, his recklessness with regard to knowledge of the duty establishes liability for the penalty.
The key points that I gathered in my quick read are:
1. The Court found that Flume was not a credible witness. That alone creates a huge hurdle in a case where his intent and knowledge and testimony about his intent and knowledge are at issue.
2. Flume was a successful business man and thus, if indeed he had not reviewed the return and understood the Schedule B question, he acted with extreme recklessness. Indeed (Slip Op. 16):
His testimony that he was simply "careless with the reading of everything on the tax return" is not credible. (RT2 5:10–11.) Moreover, Schedule B's question about foreign bank accounts is simple and straightforward and requires no financial or legal training to understand. See McBride, 908 F. Supp. 2d at 1211 ("[B]ecause the federal tax returns contain a plain instruction regarding the disclosure of interests in foreign financial or bank accounts, the risk of failing to disclose an interest in such a foreign account is obvious."). Even the most cursory review of his tax return would have alerted Flume to the foreign-account reporting requirement.
3. The Court confirmed (Slip Op. 11 n. 11) its earlier rejection of a "constructive knowledge" theory that "every taxpayer, merely by signing a tax return, is presumed to know of the need to file an FBAR." See Robert S. Horwitz, Kimble–A New FBAR Willful Penalty Case, Some Further Thoughts on Bedrosian, Willfulness and the Overlooked Opinion in Flume (Tax Litigator Blog 1/4/19), here.
4. The attempt to claim reliance on his tax preparers was unavailing because (i) Flume did not advise his tax preparers of the UBS account, and (ii) Flume, a successful businessman, "was reckless in failing to investigate the credentials of the people he claims to have entrusted with his tax liability."
JAT Comments:
Former DOJ Tax Attorney Pleads to Tax Perjury (6/21/19; 6/22/19)
DOJ Tax announced here that James F. Miller, a former Tax Division attorney, pled guilty to willfully filing a false tax return that "underreported his gross income on his 2010 through 2014 tax returns by approximately $2,215,587." The plea count was § 7206(1) which is a three year felony. The announcement indicates that he agreed to pay $735,933 restitution.
I calculated the Guidelines range on the following assumptions: (i) the restitution amount is the tax loss; there is no sophisticated means adjustment, and the maximum 3 point reduction for acceptance of responsibility. On that basis, my rough calculation indicates an aggregate sentencing level of 17 and a guidelines range of 24-30 months. (JAT Note: I corrected the calculation on 6/22/19 to take out the sophisticated means addition which I had not caught in the spreadsheet.)
The plea documents are:
1. The plea agreement, here.
2. The Criminal Information for the plea, here.
3. The Statement of Facts, here.
Update 6/22/19 10:15am: Peter Reilly, a frequent and interesting commentator on the tax scene, has posted an entry on Miller's plea and some of the background information. Peter J. Reilly, Tax Lawyer Turned Lobbyist Pleads Guilty To Leaving Over $2M Off Tax Returns (Forbes 6/22/19), here. I highly recommend Peter's discussion. Peter offers links for further information on Miller.
Labels: 7206(1), DOJ Tax, Tax Perjury
Court Suppresses Witness Interview Given Pursuant to IRS Summons (6/14/19)
In United States v. Patterson (E.D. La. No. 19-27, Order and Reasons dated 6/11/19 (Dkt. 64)), here, the court ordered suppression of statements made in one of three communicative encounters with IRS CI agents. I call them communicative encounters because one of the encounters was by text and the other two were traditional CI agent interviews. During the process of these encounters and before the third one, Patterson said that she was consulting with an attorney, but no attorney was otherwise involved in the process.
After the first encounter (an interview) in which IRS CI's standard noncustodial warnings were given, an IRS CI Special Agent issued a summons. The second encounter was by texting between Patterson and the Agent about her appearance at the time and place designated in the summons. Patterson said she could not. The agent then texted
I can authorize one extension on the summons but I need to remind you that the summons is a legal document. Please read the section entitled Enforcement of Summons. Failure to appear will result in an attachment and arrest. Since you've been fully cooperative, I don't want that to happen.
They then agreed upon a rescheduling of the summons appearance.
The third encounter was Patterson's appearance as rescheduled pursuant to the summons. The third encounter is described as follows (Slip Op. 8-9, footnotes omitted):
The IRS Summons ordered Patterson to appear at the F. Edward Hebert Federal Building, room 1037. Once she arrived at the Hebert Building, she walked through metal detectors and past security officers to get to room 1037. She did not bring the nameless lawyer she had referred to in her communications with Agent Nuss; instead, she came alone. At the IRS's office she met with Agent Nuss and she was introduced to Special Agent Cary Davis. The Special Agents were not in uniform, but Davis provided her badge and credentials for Patterson's inspection. Unlike when Special Agents Boyles and Nuss had interviewed her at her mother's home, this time the agents did not read Patterson the statement of non-custodial rights, despite the Internal Revenue Manual's admonition that they do so. It appears that the agents did not advise Patterson of any of her rights; they did not tell her she could terminate the interview or that she could leave at her discretion. The interview took place in a conference room and began at 3:19 p.m.
According to the IRS memorandum, the agents began the interview by giving Patterson a spreadsheet entitled "2012 Returns Deposited to Crown Bank Account," which Patterson had previously reviewed. The agents asked her to identify the customers she had referred to Butler; she did so. Then, the agents gave Patterson client folders for tax year 2012 which had been summoned from Butler; Patterson proceeded to identify the false items in returns prepared by Butler and her former co-worker, Dana Alvarez. The agents then gave Patterson print-outs of transmitted returns that Patterson had prepared for her No Limit Tax Refund business in 2014 for tax year 2013 and asked her to identify false items. Patterson reviewed the print outs and identified approximately fifty-three false items in thirty-one returns she had prepared. She was asked to do the same with tax returns she had prepared for tax year 2014, both for her own company and for Pelican Income Tax, and she identified many more false items in tax returns she had prepared. The interview lasted until 7:07 p.m.33 Patterson was not arrested at the conclusion of the interview and was allowed to leave.
The issue with respect to all of the communicative encounters was whether they were in a custodial setting. A custodial setting requiring full-blown Miranda warnings is usually obvious, but can also exist in other settings. As explained by the court (Slip Op. p. 14)
Taxpayer Waived Argument that § 6501(c)(1) Requires Taxpayer's Fraud for Unlimited Statute of Limitations (6/14/19)
In Finnegan v. Commissioner, ___ F.3d ___ (11th Cir. 2019), here, the 11th Circuit held that the taxpayers had waived the right to assert the the § 6501(c)(1) required the taxpayer's own fraud for the unlimited statute of limitations. Readers will recall that § 6501(c)(1) provides as an exception to the normal 3 year civil statute of limitations:
"In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time."
The Tax Court held in Allen v. Commissioner, 128 T.C. 37 (2007) that the taxpayer's own fraud was not required. The Court of Federal Claims held in BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), that the taxpayer's fraud was required.
The substantive issue is, of course, important because tax preparers can commit fraud on a return without the taxpayer engaging in the fraud on the return. In addition, any number of enablers (such as preparers and tax shelter promoters) can commit fraud that finds it way on a return. In either event, if all that is required is fraud on the return without the taxpayer's own participation in the fraud, then there is an unlimited statute of limitations.
The 11th Circuit did not address the merits of the split between the Tax Court in Allen and the Court of Federal Claims in BASR. So, the merits of the issue is still open. The important thing is that the Government is still asserting that Allen was correct -- that the taxpayer's fraud is not required for the unlimited statute of limitations in § 6501(c)(1). The Government's brief is here. I offer some brief excerpts from that brief stating the argument (but without the detail support for the argument):
[*2]
"2. Whether the fraud exception under I.R.C. § 6501(c)(1), requiring 'a false or fraudulent return with the intent to evade tax,' applies where, as here, the taxpayer's return preparer, and not the taxpayer, possessed the requisite intent."
Labels: 6501(c)(1), Statutes of Limitations - Civil Fraud
Ninth Circuit Holds for Government in Altera (6/8/19)
Although this is not a tax crimes issue, it is a hot topic in the tax law relating to one of the most revenue potential sources--transfer pricing. The tax world has anxiously awaited yesterday's decision by Ninth Circuit's reconstituted panel in Altera Corp. v. Commissioner, ___ F.3d ___ (9th Cir. 2019), here. In a sister blog (Federal Tax Procedure) I have posted a blog entry on the decision: Ninth Circuit Reverses Unanimous Tax Court in Altera (Federal Tax Procedure Blog 6/7/19; 6/8/19), here. For those interested in the intersection of administrative law (particularly the APA) and tax law, the case is a good read with a lot more nuance than one might otherwise imagine, and I hope my blog entry helps understand the decision.
As always, I appreciate comments. Please leave a comment to this blog or email me at jack@tjtaxlaw.com.
Labels: APA, Chevron Deference, legislative v interepretive
TIGTA Report on IRS Use of Form 3949-A, Information Referral (5/30/19)
TIGTA issued this report: Improvements Are Needed to Correct Continued Deficiencies in the Processing of Taxpayer Referrals of Suspected Tax Fraud (Ref. No. 2019-40-040 5/23/19), here. (The Highlights are in the report but separately offered here.)
Key points are:
1. Taxpayer referrals of suspected tax fraud are on Form Form 3949-A, Information Referral, here. The instructions say: "Purpose of the Form: Use Form 3949-A to report alleged tax law violations by an individual, a business, or both." As indicated below, the actual use of the information reported seems to be in the civil audit area.
2. The report focuses principally on the use of the reported information to collect revenue and compares to collection of revenue from other sources (more below). It is not clear how successful the forms are in pursuing criminal investigations and prosecutions. (See the routing information in paragraph 5 below.) I note in this regard that, since criminal investigations usually require larger amounts, persons with evidence of tax fraud will likely pursue the whistleblower opportunities by filing Form 211 instead of Form 3949-A.
3. In FYs 2016 - 2018, the information on Forms 3949-A resulted in over $246 million in assessed taxes. (I'm not sure how much actual revenue was collected.) For FYs 2015 - 2018, 290,742 Forms were received.
4. The report makes suggestions on improvements in the use of the Form. The report notes that the instructions provide that the, for reports on individual taxpayers, the Form is to be sent to the IRS's Submission Processing Function which routes them to the appropriate functional area for further review. The report explains the process from receipt to referral to the appropriate functional area. IRS employees "continue to erroneously route a significant number of Forms 3949-A to the wrong IRS function for review."
5. The routing data for 2018 from W&I and SB/SE indicate that 2,665 cases were routed to CI out of 61,164 total received. See Figure 3, p. 3.
6. The assessment statistics presented in Figure 4, p. 4 are:
1st Circuit Affirms Money Laundering and Tax Convictions and Discusses Difference Between SG Loss and Restitution (5/27/19)
In United States v. Flete-Garcia, ___ F.3d ___ (1st Cir. 2019), here, a tax crimes false refund case at heart although money laundering of the proceeds of tax crimes was the more serious charges, the court (Judge Selya) opens with this paragraph (useful at least for encountering some uncommonly used words):
Having identified defendant-appellant Fulvio Flete-Garcia as the architect of a massive swindle, the government charged him with a litany of fraud-based crimes. Following four days of trial, Flete-Garcia threw in the towel and entered a straight guilty plea to all 48 counts of the indictment. Prior to sentencing, though, Flete-Garcia experienced buyer's remorse and attempted to withdraw his guilty plea. The district court denied this motion, as well as sentencing-related motions for discovery and for an evidentiary hearing. It then sentenced Flete-Garcia to 132 months' imprisonment and ordered him to make restitution in the amount of $7,737,486.10. Flete-Garcia appeals, raising a gallimaufry of alleged errors. Finding his asseverational array long on perfervid rhetoric but short on substance, we affirm.
As I said, the opinion was written by Judge Selya. For more on Judge Selya's and his writing style, see the Wikipedia entry here.
The opinion is 49 pages and has other uses of words not commonly encountered (in my experience). But that's all beside the point.
Now, what might be useful for readers of this blog? Let me say that it is all interesting even (in my case beyond the challenge of encountering uncommonly-used words). But what is really useful for readers of this blog (or at least my target readers of this blog)?
The outline of the opinion with local page cites and links is
I. BACKGROUND (p. 3, here)
II. WITHDRAWAL OF GUILTY PLEA (p. 8, here.)
III. CERTAIN SENTENCING RELATED MATTERS (p. 13, here,)
A. Enhancement for Number of Victims. (p. 13, here.)
B. Enhancement for Amount of Loss. (p. 18, here.)
C. Discovery. (p. 31, here.)
D. Evidentiary Hearing. (p. 35, here)
E. The Due Process Claim. (p. 38, here.)
IV. RESTITUTION (p. 40, here.)
V. INEFFECTIVE ASSISTANCE OF COUNSEL (p. 46, here.)
VI. CONCLUSION (p. 49, here.)
I think readers might be interested in the discussion on restitution starting on op. 40, here, where Judge Selya addresses the differences between the loss calculation and restitution. In brief, the loss calculation determines the Guidelines Sentencing Range ("GSR") calculation which may include intended loss in excess of actual loss; the restitution calculation is to quantify the actual loss so that the victim may be compensated. In this case, the loss was calculated under the money laundering guideline but basically it appears to be the same quantity as the tax loss since illegal tax refunds were the object of the crimes. (That is just to say that if the loss had been calculated under the tax guidelines, the loss amount would have been the same.)
Here is Judge Selya's discussion of restitution (or at least the excerpts from that discussion that I think would be helpful for fans of tax crimes). Note that I used the cleaned up technique:
Labels: 6201(a)(4), Restitution, Sentencing - Tax Loss
11th Circuit Affirms Convictions for Wire Fraud, Tax Perjury and False Statement (5/27/19)
In United States v. Beverley, 2019 U.S. App. LEXIS 14617 (11th Cir. 2019) (unpublished), here, Beverly, a previously convicted felon, appealed his convictions and sentence for four counts of wire fraud, 18 U.S.C. § 1343; four counts of filing a false tax return, 26 U.S.C. § 7206(1); and five counts of making a false statement to the United States, 18 U.S.C. § 1001.
The conduct drawing the convictions is garden variety conduct and the claims made on appeal are garden variety as well. Here is an outline of the opinion.
I. BACKGROUND
II. DISCUSSION
A. Evidentiary Rulings
B. Sufficiency of the Evidence
C. Guidelines Calculations
III. CONCLUSION
The tax convictions were for tax perjury, § 7206(1). Beverley failed to report income that he shunted through others. Beverly also claimed he had an $8 million NOL carryover. He was convicted of tax perjury -- some known falsehood that he willfully presented on his tax return. The omission of the income was sufficient to convict on the tax perjury counts. But Beverly insisted that this $8 million NOL carryover should negate the convictions. The Court rejected the argument as follows:
Beverley also argues that, with respect to his tax returns, the government failed to prove that he knew he was not entitled to report as negative income the $8 million net operating loss. But that argument is a red herring. Beverley's failure to report as positive income the funds he diverted from his employer supplied, on its own, sufficient evidence to sustain the tax fraud convictions.
Posted by Jack Townsend at 12:04 PM 0 comments Links to this post
Labels: 7201, 7206(1), Tax Evasion, Tax Perjury
District Court Rejects Argument that JDS Seeking Law Firm Client Identities Violates Attorney-Client Privilege (5/25/19)
In Taylor Lohmeyer Law Firm PLLC v. United States, 2019 U.S. Dist. LEXIS 81809 (W.D. Tex 2019), here, the district court (i) dismissed a law firm ("Firm") challenge to an IRS John Doe Summons (JDS) for client identities and (ii) enforced the JDS.
Based on information from an audit which resulted in substantial tax liability, the IRS obtained the JDS, which is an ex parte proceeding, seeking "names of and other information related to the Firm's clients between 1995-2017 to investigate the tax liability of those who used the Firm to 'create and maintain foreign bank accounts and foreign entities that may have been used to conceal taxable income in foreign countries.'"
The Court held that the JDS easily met the Powell factors (United States v. Powell, 379 U.S. 48, 57-58 (1964)) which it stated as:
the Government must establish that the summons: (1) is issued for a legitimate purpose; (2) seeks information which may be relevant to that purpose; (3) seeks information that is not already within the IRS's possession; and (4) satisfies all administrative steps required by the Internal Revenue Code.
The Court recounted the evidence as follows:
But the bar for "reasonable basis" is not high and the affidavit of Russell-Hendrick from the ex parte proceeding establishes a reasonable basis. She details her conclusion that Taxpayer-1 concealed his connection to offshore structures—for which Taxpayer-1 remained the beneficial owner—created under the advice of the firm. Taxpayer-1 entered an agreement with the IRS in June 2017, admitting that Taxpayer-1 owned all assets owned by the offshore trusts and earned over $5 million in unreported income between 1996 and 2000. Taxpayer-1 accepted liability for civil fraud penalties and penalties for failing to file the required forms for reporting foreign income.
Russell-Hendrick then states the basis for her opinion that the Firm provided similar advice to other clients. Among other pieces of evidence, she states that in an interview with John Taylor, former partner of the firm, Taylor estimated that he structured offshore entities for tax purposes for 20 to 30 clients between the 1990s and early 2000s. Russell-Hendrick states in part that:
Taylor Lohmeyer PLLC's services to their U.S. clients, as described by Taxpayer-I and Taylor himself, are the kinds of activities that, in the experience of the IRS, are hallmarks of offshore tax evasion, including: (1) structures of offshore trusts with compliant trustees, and foundations and anonymous corporations managed by nominee officers and directors, (2) the use of "straw men" to contribute nominal funds to foreign trusts to create the false appearance that such trusts have foreign grantors, and (3) the concealment of beneficial ownership of foreign accounts and assets in jurisdictions with strong financial secrecy laws and practices.
The information obtained by the IRS and discussed in this Declaration suggests that the still-unknown U.S. taxpayers doing business with Taylor Lohmeyer PLLC may not have reported their offshore accounts, entities, or structures. Instead, they have likely relied on the assistance of Taylor, and the fact the structures are hidden offshore to support a decision not to report the existence of those entities and accounts, expecting that the IRS would not discover the accounts, omitted income, and/or the existence of the entities.
18-MC-1046, docket no. 1-2 at 37. Thus, assuming for argument that the Firm could challenge the ex parte proceeding at this stage, issuance was proper.
The minimal Powell standards were clearly met. The real issue was not whether the IRS abused the JDS process (per the Powell factors) but whether the information sought--the identities of clients--implicated the attorney-client privilege. Normally, client identity is not within the purview of the attorney-client privilege because, except in rare circumstances, the mere identification of the client does not disclose any client confidential communication for obtaining legal services. The law firm argued that this was a rare circumstance where the facts indicate that identifying the client will identify the client communications regarding the advice, then the attorney-client privilege may apply. One now rather old tax case so held. United States v. Liebman, 742 F.2d 807 (3d Cir. 1984). The court rejected the argument as follows:
Labels: IRS Summons-John Doe, Privilege - Attorney Client
IRS 2018 Data Book Release; Table 18 on Criminal Investigation Program Statistics (5/201/19)
The IRS has released its 2018 Data Book. The Data Book may be accessed here.
For readers of this blog, the key data are presented in Table 18: Criminal Investigation Program, by Status or Disposition.
The link to Table 18 for each of the years 1995-2018 is here for those wanting a deep dive into the data from year to year.
The Table 18 spreadsheet for 2018 for may be downloaded on that page. Here is a cut and paste of the data. (Note that the formatting is a little off, but the data should be easily understood.
Table 18. Criminal Investigation Program, by Status or Disposition, Fiscal Year 2018
Status or disposition [1] Total Legal source
tax crimes [2] Illegal source
financial crimes [3] Narcotics-related
financial crimes [4]
Investigations initiated 2,886 1,099 1,064 723
Investigations completed 3,051 1,197 1,086 768
Referrals for prosecution 2,130 680 816 634
Investigations completed without prosecution 921 517 270 134
Indictments and informations [5] 2,011 636 765 610
Convictions 1,879 668 725 486
Sentenced 2,111 774 787 550
Incarcerated [6] 1,732 614 635 483
Percentage of those sentenced who were incarcerated [6] 82.0 79.3 80.7 87.8
[1] Investigations may cross fiscal years. An investigation initiated one fiscal year may not be indicted, convicted, or sentenced until a subsequent fiscal year. Therefore, the disposition (completions, indictments/informations, convictions, sentences) of investigations shown in this table may be related to investigations initiated, completed, indicted, or convicted in prior fiscal years.
[2] Under the Legal Source Tax Crimes Program, IRS Criminal Investigation identifies, investigates, and assists in the prosecution of crimes involving legal industries, legal occupations, and, more specifically, legally earned income associated with the violation of Title 26 (tax violations) and Title 18 (tax-related violations) of the U.S. Code. The Legal Source Tax Crimes Program also includes employment tax cases and those cases that threaten the tax system, such as Questionable Refund Program cases, unscrupulous return preparers, and frivolous filers/nonfilers who challenge the legality of the filing requirements.
[3] Under the Illegal Source Financial Crimes Program, IRS Criminal Investigation identifies, investigates, and assists in the prosecution of crimes involving proceeds derived from illegal sources other than narcotics. These encompass all tax and tax-related violations, as well as money laundering and currency violations under the following statutes: Title 26 (tax violations); Title 18 (tax-related and money laundering violations); and Title 31 (currency violations) of the U.S. Code. The utilization of forfeiture statutes to deprive individuals and organizations of illegally obtained assets is also linked to the investigation of criminal charges within this program.
[4] Under the Narcotics-Related Financial Crimes Program, IRS Criminal Investigation seeks to identify, investigate, and assist in the prosecution of the most significant narcotics-related tax and money laundering offenders. The IRS derives authority for this program from the statutes for which it has jurisdiction: Title 26 (tax violations); Title 18 (tax-related and money laundering violations); and Title 31 (currency violations) of the U.S. Code. IRS Criminal Investigation also devotes resources to high-level multiagency narcotics investigations warranting Organized Crime Drug Enforcement Task Force (OCDETF) designation in accordance with OCDETF Program reimbursable funding.
[5] Both "indictments" and "informations" are accusations of criminal charges. An "indictment" is an accusation made by a Federal prosecutor and issued by a Federal grand jury. An "information" is an accusation brought by a Federal prosecutor without the requirement of a grand jury.
[6] The term "incarcerated" may include prison time, home confinement, electronic monitoring, or a combination thereof.
SOURCE: Criminal Investigation, Communications and Education Division.
1. On the 2018 data, I have no comments.
2. I have a spreadsheet whereby I compare certain of the line items from year to year. The caveat is that statistics may be misleading. All I do is compile the data (and in two lines derive the percentages which compares in the one percentage the IRS offers). Here it is
Total 2005-2018 Total 2012-2018
2005-2018 Average 2012-2018 Average
1 Indictments 13,816 987 8,264 1,181
2 Convictions 12,445 889 7,688 1,098
3 Percentage Convicted (l. 2 / l. 1) 90.1% 90.1% 93.0% 93.0%
4 Sentenced 12,419 887 7,678 1,097
5 Incarcerated 9,862 704 6,108 873
6 Percentage Incarcerated (l. 4 / l. 5) 79.4% 79.4% 79.6% 79.6%
Labels: Criminal Tax Enforcement, Statistics
I have expressed concern about the willful blindness instruction (which also goes by other names, such as deliberate ignorance, conscious avoidance and ostrich instruction). So, I decided to look through the pattern jury instructions on willful blindness for the Circuits that have them to see what they may offer. Among the ones I could find, I think the best one is the First Circuit's from the document titled "2019 Revisions to Pattern Criminal Jury Instructions for the District Courts of the First Circuit, pp. 47-49, from the District of Maine web site,here. I bold face the part that I recommend readers pay attention to:
2.16 "Willful Blindness" As a Way of Satisfying "Knowingly"
[Updated: 12/15/17]
In deciding whether [defendant] acted knowingly, you may infer that [defendant] had knowledge of a fact if you find that [he/she] deliberately closed [his/her] eyes to a fact that otherwise would have been obvious to [him/her]. In order to infer knowledge, you must find that two things have been established. First, that [defendant] was aware of a high probability of [the fact in question]. Second, that [defendant] consciously and deliberately avoided learning of that fact. That is to say, [defendant] willfully made [himself/herself] blind to that fact. It is entirely up to you to determine whether [he/she] deliberately closed [his/her] eyes to the fact and, if so, what inference, if any, should be drawn. However, it is important to bear in mind that mere negligence, recklessness or mistake in failing to learn the fact is not sufficient. There must be a deliberate effort to remain ignorant of the fact.
(1) This instruction is drawn from the instructions approved in United States v. Gabriele, 63 F.3d 61, 66 n.6 (1st Cir. 1995), and United States v. Brandon, 17 F.3d 409, 451-52 & n.72 (1st Cir. 1994). The First Circuit quoted and approved the last seven sentences (without mention of "recklessness") in United States v. Jesús-Viera, 655 F.3d 52, 59 (1st Cir. 2011). The instruction was also approved in United States v. Denson, 689 F.3d 21 (1st Cir. 2012), where the court reiterated: "[t]he focus of [a] willful blindness instruction must be on the particular defendant and not on the hypothetical reasonable person." Id. at 24 (quoting United States v. Griffin, 524 F.3d 71, 80 (1st Cir. 2008)). Indeed, it is erroneous to use "reasonable person" language. United States v. Bray, 853 F.3d 18, 24, 30 (1st Cir. 2017) (Although not finding plain error, the court stated that an instruction that a "reasonable person in [the defendant's] shoes would certainly have known" mistakenly suggested that the jury could find the defendant guilty even if the defendant had not "consciously and deliberately avoided learning" about the violation.).
(2) Although in United States v. Anthony, 545 F.3d 60, 66 (1st Cir. 2008), the First Circuit said that it was not error to omit reference to "recklessness," we have nevertheless added the statement that "recklessness" in failing to learn a fact is not enough because of the Supreme Court's decision in Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060 (2011). Although GlobalTech was a patent case, it described the doctrine of willful blindness as "well established in criminal law," id. at 2068, and spoke approvingly of the circuits' approach as "giv[ing] willful blindness an appropriately limited scope that surpasses recklessness and negligence." Id. at 2070. In Denson, 689 F.3d at 24-25, the First Circuit recognized the authority of Global-Tech for a willful blindness instruction, but the issue there was not about recklessness. Following Global-Tech, the Fourth Circuit has agreed that recklessness is not sufficient. United States v. Jinwright, 683 F.3d 471, 480 (4th Cir. 2012); see also United States v. Goffer, 531 Fed. Appx. 8, 20-21 (2d Cir. 2013) (endorsing the standard that recklessness is insufficient, but finding that the jury instruction satisfied that standard without using the term "reckless").
(3) The rule in the First Circuit is that: A willful blindness instruction is warranted if (1) the defendant claims lack of knowledge; (2) the evidence would support an inference that the defendant consciously engaged in a course of deliberate ignorance; and (3) the proposed instruction, as a whole, could not lead the jury to conclude that an inference of knowledge was mandatory. Gabriele, 63 F.3d at 66 (citing Brandon, 17 F.3d at 452, and United States v. Richardson, 14 F.3d 666, 671 (1st Cir. 1994)); accord United States v. Valbrun, 877 F.3d 440, 445 (1st Cir. 2017); United States v. Figueroa-Lugo, 793 F.3d 179, 191 (1st Cir. 2015); United States v. Appolon, 695 F.3d 44, 63 (1st Cir. 2012); United States v. Mitrano, 658 F.3d 117, 123 (1st Cir. 2011); United States v. Coviello, 225 F.3d 54, 70 (1st Cir. 2000); United States v. Camuti, 78 F.3d 738, 744 (1st Cir. 1996). "The danger of an improper willful blindness instruction is 'the possibility that the jury will be led to employ a negligence standard and convict a defendant on the impermissible ground that he should have known [an illegal act] was taking place.'" Brandon, 17 F.3d at 453 (quoting United States v. Littlefield, 840 F.2d 143, 148 n.3 (1st Cir. 1988)). "[T]he government is not required to prove willful blindness by direct evidence." United States v. Valbrun, 877 F.3d 440, 446 (1st Cir. 2017). The government "may satisfy its burden of production by adducing evidence that red flags existed that the defendant consciously avoided investigating." Id.
Labels: Jury Instructions, Pattern Jury Instructions, Willful Blindness
In United States v. Daneshvar, 2019 U.S. App. LEXIS 12773 (6th Cir. 2019) (unpublished), here, involving healthcare fraud, Daneshvar complained about the following jury instruction (emphasis supplied by JAT):
If you are convinced there was a criminal agreement, then you must decide whether the government has proved that the defendant knowingly and voluntarily joined that agreement. To convict the defendant, the government must prove that he knew the conspiracy's main purpose, that he voluntarily joined it intending to help or achieve its goals.
This does not require proof that the defendant knew everything about the conspiracy or everyone else involved or that he was a member of it from the very beginning. Nor does it require proof that the defendant played a major role in the conspiracy or that his connection to it was substantial. A slight role or connection may be enough.
As I note at the bottom of this blog, the bold-faced language, although a variation of one often used in the past, is now disfavored. That was the complaint that Daneshvar raised. Here is the Court's discussion:
This instruction is identical to the Sixth Circuit Pattern Jury Instruction 3.03. Daneshvar argues that we "should take this opportunity to disavow the jury instruction" (Appellant Br. at 40), and in doing so, he makes the same argument as in United States v. Mahbub, 818 F.3d 213, 230 (6th Cir. 2016), where the defendant contended that the jury instruction lowers the burden of proof.
In Mahbub, we held:
[The defendant's] contention lacks merit. The instruction states, and the district court read, "[a] slight role or connection may be enough" to link a defendant to a conspiracy, which is an accurate legal proposition. See United States v. Price, 258 F.3d 539, 544 (6th Cir. 2001) ("The connection of the defendant to the conspiracy need only be slight, if there is sufficient evidence to establish that connection beyond a reasonable doubt."); United States v. Betancourt, 838 F.2d 168, 174 (6th Cir. 1988) ("The existence of a connection to the conspiracy must be shown beyond a reasonable doubt, but the importance of the connection need not be great."). To the extent that the disputed language lowers the burden of proof to support a conviction, we note that "no single provision of the jury instruction can be read in isolation;" instead, "the charge must be considered as a whole." United States v.Horton, 847 F.2d 313, 322 (6th Cir. 1988).
Id. We determined that "the district court made it abundantly clear that the reasonable-doubt standard applied in determining whether [the defendant] should be found guilty of criminal conspiracy" by using the phrase "beyond a reasonable doubt" in the jury instructions. Id.
Daneshvar argues that unlike in Mahbub, "the rest of the jury instructions in this case combined to relieve the government of its high standard of proof and replace it with speculation and probabilities." (Appellant Br. at 39.) We do not find that Daneshvar's argument has merit, let alone establishes that the district court committed plain error. As in Mahbub, the district court here repeatedly used the reasonable-doubt standard. Before beginning the conspiracy section, the court stated: "A conspiracy is a kind of criminal partnership. For you to find the defendant guilty of the conspiracy charge, the government must prove each and every one of the following elements beyond a reasonable doubt . . . ." (Trial Tr. Vol. 8, R. 121, Page ID # 1816.) Again, the court stated, "You must be convinced that the government has proved all of these elements beyond a reasonable doubt in order to find the defendant guilty of the conspiracy charge." (Id. at Page ID # 1817.)
Although Daneshvar points out that other circuits do not use the phrase "slight evidence," our circuit continues to do so, so long as, considering the jury instructions as a whole, the instructions do not lower the burden of proof. See Mahbub, 818 F.3d at 230; see also United States v. Price, 258 F.3d 539, 544 (6th Cir. 2001)("The connection of the defendant to the conspiracy need only be slight, if there is sufficient evidence to establish that connection beyond a reasonable doubt."). Upon reviewing the jury instructions as a whole, including the district court's repeated use of the reasonable-doubt standard, we find that the instructions did not lower the burden of proof. Thus, we find no error in the use of the conspiracy jury instruction.
Labels: Conspiracy, Conspiracy - Slight Evidence
Fifth Circuit on Willful Blindness / Deliberate Ignorance as Circumstantial Evidence of Intent Element (5/2/19)
In United States v. Ricard, ___ F.3d ___, 2019 U.S. App. LEXIS 12598 (5th Cir. 2019), here, "Ricard was convicted by a jury of one count of conspiracy to pay and receive kickbacks for referring Medicare patients to a particular health care provider, three counts of receiving such kickbacks for such referrals, three counts of identity theft, and one count of making false statements to a federal agent." Although this is a nontax case, the case has some good discussion on issues that arise in criminal tax cases, particularly regarding the willful blindness jury instructions.
The Court explained the crime involved:
Willfulness in the Medicare kickback statute "means that the act was committed voluntarily and purposely with the specific intent to do something the law forbids; that is to say, with bad purpose either to disobey or disregard the law." United States v. Davis, 132 F.3d 1092, 1094 (5th Cir. 1998) (quoting United States v. Garcia, 762 F.2d 1222, 1224 (5th Cir. 1985)). Under this definition of willfulness, "knowledge that the conduct is unlawful is all that is required." n8 Bryan v. United States, 524 U.S. 184, 196, 118 S. Ct. 1939, 141 L. Ed. 2d 197 (1998).
n8 In contrast, a heightened willfulness standard applies in certain tax and currency structuring cases. Those statutes "carve out an exception to the traditional rule that ignorance of the law is no excuse and require that the defendant have knowledge of the law." Bryan, 524 U.S. at 195 (internal quotation marks and footnotes omitted).
At this point, I am not sure what the Court means by "In contrast." The Court says the crime is a "specific intent" crime requiring that the defendant know the law and intend to violate it. I am not sure that, as articulated, it is distinguishable from the tax and currency structuring cases. I don't think this need detain us, other than those digging into the issue might want to dig deeper on that.
The willful blindness / deliberate ignorance instruction the trial court gave was from the Fifth Circuit's Pattern Jury Instructions § 1.37A (2015).:
You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him. While knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless, or foolish, knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.
The trial court also gave an "inferring mental state" charge as follows (this time from the Sixth Circuit pattern jury instruction § 2.08 (2013 ed.):
But a defendant's state of mind can be proved indirectly from the surrounding circumstances. This includes things like what the defendant said, what the defendant did, how the defendant acted, and any other facts or circumstances in evidence that show what was in the defendant's mind.
You may also consider the natural and probable results of any acts that the defendant knowingly did or did not do, and whether it is reasonable to conclude that the defendant intended those results. This, of course, is all for you to decide.
At trial:
Ricard objected to the deliberate ignorance instruction, arguing that it was "covered by" the instruction concerning "inferring [the] required mental state" and that only one or the other charge should be given. The district court overruled the objection, saying that "while they both deal with the mental element" the deliberate ignorance instruction "is a different charge."
On appeal, Ricard made a different argument -- that the elements required for the deliberate ignorance instruction were absent, so that Court reviewed for plain error, noting that, in any event, "even if a deliberate ignorance charge is error, it is harmless where substantial evidence of actual knowledge exists." (Internal quotation marks omitted.)
Labels: Cheek Willfulness, Pattern Jury Instructions, Willful Blindness
Another Case Holding that Marinello's Pending or Expected Proceeding Requirement for Tax Obstruction Does Not Apply to the Defraud / Klein Conspiracy (5/2/19)
In United States v. Herman, 2019 U.S. Dist. LEXIS 70151 (W.D. Tex. No. AU-17-CR-301-XR 4/24/19) [no link available], the somewhat cryptically rejected the defendant's argument that the pending or expected proceeding reasoning of Marinello v. United States, 138 S. Ct. 1101 (2018) on the tax obstruction crime (§ 7212(a)) applied to the defraud / Klein conspiracy under 18 USC § 371(a). The Court's holding on that issue is:
Defendants argue that Marinello v. United States, 138 S. Ct. 1101, 200 L. Ed. 2d 356 (2018) mandates the dismissal of count one. In Marinello, the Supreme Court interpreted 26 U.S.C. § 7212(a) and concluded that "to secure a conviction under the Omnibus Clause [of that statute], the Government must show (among other things) that there is a 'nexus' between the defendant's conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action." Id. at 1109. "In addition to satisfying this nexus requirement, the Government must show that the proceeding was pending at the time the defendant engaged in the obstructive conduct or, at the least, was then reasonably foreseeable by the defendant." Id. at 1110. Defendants argue that "it is now clear that with regard to 'obstruction conviction[s], the government would need to prove beyond a reasonable doubt that a person, acting with corrupt intent, engaged in obstructive conduct with a sufficient nexus to a pending or contemplated proceeding.'" Defendants further argue that the Indictment fails to include this essential element. This Court rejects Defendants' argument for the same reasons as stated by the Court in United States v. Flynn, No. CR 16-347 ADM/KMM, 2019 U.S. Dist. LEXIS 3317, 2019 WL 135701, at *7 (D. Minn. Jan. 8, 2019). The limitations on the substantive offense of 26 U.S.C. § 7212(a) do not apply to Klein conspiracies charged under the general conspiracy statute of 18 U.S.C. § 371. See also United States v. Parlato, No. 15-CR-149-FPG, 2019 U.S. Dist. LEXIS 33035, 2019 WL 988450, at *2 (W.D.N.Y. Mar. 1, 2019) (declining to apply Marinello to a statute the Supreme Court did not consider). The motions are denied (docket nos. 73 and 76).
I previously reported on Flynn: Two Cases Involving Marinello (Federal Tax Crimes Blog 1/15/19), here. I also reported on Parlato. District Court Rejects Argument that Marinello Applies to Defraud / Klein Conspiracy (3/7/19), here.
Labels: 18 USC 0371, 7212(a), Conspiracy - Defraud, Klein Conspiracy
In United States v. Gorrell, ___ F.3d ___, 2019 U.S. App. LEXIS 12758 (10th cir. 2019), here, "Gorrell was convicted of three counts of wire fraud, 18 U.S.C. § 1343, and three counts of tax evasion, 26 U.S.C. § 7201." Gorrell appealed only his convictions of tax evasion. As interpreted by the Court, his argument on appeal was that "the jury was improperly instructed because the alleged affirmative acts contained in the jury instructions (as set forth in the Superseding Indictment) are legally insufficient in light of the evidence presented at trial." The Court concludes that the alleged affirmative acts were sufficient to support the general jury verdict of guilt on the tax evasions charges.
The instruction on tax evasion was:
To find the defendant guilty of tax evasion, you must be convinced that the government has proved each of the following elements beyond a reasonable doubt:
FIRST: The Defendant owed substantial income tax in addition to the tax liability which he reported on his income tax return for the year charged in a particular Count;
SECOND: The Defendant intended to evade and defeat payment of that additional tax;
THIRD: The Defendant committed an affirmative act in furtherance of this intent, as charged in the Superseding Indictment; and
FOURTH: The Defendant acted willfully, that is, with the voluntary intent to violate a known legal duty.
The Court of Appeals presents the separate jury instruction on the affirmative acts of evasion as follows:
Jury Instruction Number 19 defines an "affirmative act of evasion" and further explains that "[t]he government needs only to prove one act of evasion to satisfy this element of the offense, but you must unanimously agree on which act or acts were committed." Id. at 118. Jury Instruction Number [*8] 17 lists six actions which the government asserts satisfy the affirmative act element of tax evasion. The same six affirmative acts are found in each count of tax evasion. n4 Gorrell argues that four of these alleged affirmative acts are legally insufficient to sustain a conviction for tax evasion based on the evidence produced at trial. The four affirmative acts at issue are:
a. GORRELL caused investor funds to be deposited into various accounts at banks and E*TRADE that he maintained in his own name and in the name of his financial services company, Gorrell Financial, Inc., thereby commingling the investor funds with his personal funds and converting them to his own use;
b. GORRELL caused the payment of personal expenses from investor funds that had been deposited into the various financial accounts that he maintained at banks and at E*TRADE;
c. GORRELL caused the withdrawal of large amounts of cash from the various financial accounts that he maintained at banks and at E*TRADE;
d. GORRELL stopped using tax preparation services provided to him for free by his father, who was an accountant in Tulsa, Oklahoma, and instead engaged new tax preparers, located in Florida, who were previously unfamiliar with his business ventures, financial accounts, personal income, and expenses . . . .
[Note that the latter listing is from the Superseding Indictment.]
The Court describes the argument as follows:
Labels: 7201, Jury Instructions, Tax Evasion
DOJ Tax Obtains a John Doe Summons for U.S. Bank Information at Treaty Request by Finnish Tax Administration (5/1/19)
DOJ Tax announced that it had obtained a district court order to serve John Doe Summonses (JDS) on Bank of America, Charles Schwab, and TD Bank. See press announcement here. The JDS's were sought at the request of the Finnnish Tax Administration pursuant to the tax treaty between Finland and the U.S., which has an exchange of information and commitment to use each country's tax enforcement processes (such a summonses). The following are key excerpts:
"The Department of Justice and the IRS are committed to working with the United States' international treaty partners to identify and stop individuals using hidden offshore accounts to evade tax laws," said Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department's Tax Division. "The United States does not tolerate offshore tax evasion, nor does it sanction tax evasion committed through U.S. financial institutions."
"Our continued success in combatting offshore tax noncompliance has been helped by the assistance we receive through the network of tax treaties around the globe," said IRS Commissioner Charles Rettig. "Yesterday's effort reflects that the U.S. will return this help by working under the law with tax administrators in other nations to help them in their fight against tax evasion and avoidance. A global economy should not be allowed to serve as a possible vehicle for tax evasion in any country."
The United States petitioned the United States District Court for the Western District of North Carolina to authorize the summons at the request of the government of Finland under the tax treaty between Finland and the United States. That treaty allows the two countries to cooperate in exchanging information that is necessary for carrying out each country's tax laws. The IRS summons seeks the identities of Finnish residents who have payment cards linked to bank accounts located outside of Finland so that the Finnish government can determine if those persons have complied with Finnish tax laws. Finland has advised the IRS that, in circumstances where the payment cards are used only at ATMs or in other transactions where authorization is by PIN code, and the cardholder need not identify himself or herself to the merchant, the cardholders cannot be identified from sources in Finland.
The filing does not allege that Bank of America, Charles Schwab, or TD Bank violated any U.S. or Finnish laws with respect to these accounts.
As described in the petition and supporting documents filed by the United States, the request is part of a foreign payment project being conducted by the Finnish Tax Administration (FTA), in which information on the use of payment cards issued by foreign financial institutions is used to identify non‑compliant Finnish taxpayers. Earlier FTA investigations of approximately 120 to 150 Finnish taxpayers who used foreign payment cards in a similar manner have yielded extremely high rates of tax non-compliance, as noted in the United States' memo in support of the petition, which indicates that it is likely that the John Does sought by the summons are Finnish residents who are failing to report these foreign accounts and associated income.
The court order in this case authorizing this enforcement action is part of ongoing international efforts by the United States and its treaty partners to stop persons from using foreign financial accounts to evade taxes. Courts have previously approved John Doe summonses allowing the IRS to identify individuals using offshore accounts to evade their U.S. obligations, and have also approved John Doe summonses to be used to identify individuals using U.S. financial institutions or accounts to evade foreign tax obligations.
The Ex Parte Petition for Leave to Serve "John Doe" Summonses and Memorandum in Support are linked on the announcement and are here.
Labels: IRS Summons-John Doe, Tax Treaties, Tax Treaties - Exchange of Information, Tax Treaties - John Doe Request
Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (4/26/19)
I write today on two cases which are the first I am aware of that has sustained FBAR NonWillful penalties on a per account basis rather than per FBAR basis. One of the cases is a default judgment case that did not discuss the issue of whether the NonWillful penalty should be per account or per FBAR. United States v. Gardner, 2019 U.S. Dist. LEXIS 68032 (CD CA 2019), here. I will not discuss that decision (but those who do read it will see that there is some odd wording in it.)
In United States v. Boyd (CD CA CV 18-803-MWF) Order (4/23/19), here, the Court did directly address the issue. Boyd joined OVDP and then opted out. The IRS then assessed a mitigated NonWillful penalty for 2010 on each of 13 accounts, for an aggregate NonWillful penalty of $47,279.
Just pausing right there, it appears that Boyd's opting out of OVDP penalty structure achieved a substantial savings. Even at the lowest OVDP rate of 20%, the OVDP penalty would have been $155,943 (considering 2010 as the high unreported year with $779,716 aggregate high amount in the accounts).
Boyd felt that the penalty exceeded the amount legally allowed based on the purely legal claim that the NonWillful penalty statute required that the pertinent violation on which the maximum $10,000 penalty is based is the FBAR rather than per account. The statute, 31 U.S.C. 5321(a)(5)(A), bases the penalty on the violation. The maximum penalty is $10,000 per violation. § 5321(a)(5)(B)(i). So the question is what is the violation -- the failure to file the FBAR or the failure to report each account on the FBAR not filed.
The Court resolves the issue as follows:
Labels: 5321(a)(5)(A), FBAR NonWillful Penalty
Fifth Circuit Sustains Willful Blindness / Deliberate Ignorance Jury Instruction As Harmless Error (4/26/19)
In United States v. Martinez, ___ F.3d ___, 2019 U.S. App. LEXIS 11121 (5th Cir. 2019), here, "the defendants were convicted of conspiracy to commit health care fraud and several substantive counts of health care fraud. Individual defendants were convicted of different additional offenses." They raised several arguments on appeal. I address here only the deliberate ignorance instruction. I usually in this blog use the term willful blindness rather than deliberate ignorance, but both terms refer to the same concept; accordingly, I will use the term willful blindness except when quoting.
Readers of this blog will recall that I have expressed concern about the willful blindness instruction. In summary, my concern is whether the willful blindness instruction should require that the jury find the requisite specific knowledge element of a crime where the jury only determines facts of acts of willful blindness. I believe that, more properly, the willful blindness instruction should permit the jury to infer the requisite knowledge but not require the jury to find the requisite knowledge. In other words, the acts of willful blindness are circumstantial evidence that the defendant had the requisite knowledge, but are not a substitute for a jury to find the requisite knowledge from finding only the acts of willful blindness.
The Martinez court addresses some of my concerns but I am not certain that it got it right.
The Court starts with the Fifth Circuit pattern jury instruction which, I think, gets it right (bold face supplied by JAT):
Notice that willful blindness permits the finding of knowledge but does not compel that finding.
The district court did not give that Fifth Circuit pattern instruction but fashioned its own as follows:
The defendants must be found to have acted knowingly and willfully. "Knowingly" means that an act was done intentionally and not because of mistake, accident, or another innocent reason. "Willfully" means an act was done with a conscious purpose to violate the law.
Circumstantial facts tend to be the only kind available [*41] for subjective facts, something about which the jury lacks direct access to the defendant's mind. For instance, the jury may infer knowledge and intent from conduct or context.
Attempts to eliminate or minimize evidence of knowledge may justify an inference of it. Knowledge does not require certainty. The law permits inferred, expected judgments to count as knowledge. These inferences must be beyond a reasonable doubt.
The defendants claimed that this instruction, as given, permitted conviction for negligence. Two defendants urged that the instruction essentially directed verdicts against the defendants. One defendant argued that there was no evidence of "purposeful avoidance."
Labels: Willful Blindness
Obstruction Conviction Affirmed for Presentation of False Documents to AUSA Serving as Attorney for Government for Grand Jury (4/26/19)
In United States v. Sutherland, ___ F.3d ___, 2019 U.S. App. LEXIS 11448 (4th Cir. 2019), here, Sutherland was convicted of "three false tax returns and obstructing a grand jury proceeding." The obstruction charge was under 18 U.S.C. § 1512(c)(2). On the obstruction charge, the facts were that, through his lawyer, he submitted false documents to the AUSA who was the attorney for the government for the grand jury proceeding. E.g., FRCrP 6(d)(1). Sutherland's argument was that the crime required a nexus to the grand jury investigation but the documents were not presented to the grand jury. The Court easily handled the nexus argument under the key authority -- United States v. Aguilar, 515 U.S. 593 (1995) and Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018). Marinello was a tax obstruction case, but dealt with Title 18 obstruction concepts, particularly the nexus to a pending proceeding.
The Court offers an interesting discussion, probably digression, about some distinction between the AUSA's role as attorney assistant to the grand jury. The Court starts with the proposition that an FBI investigation is not an official proceeding subject to obstruction. A grand jury investigation is an official proceeding. The Court said (cleaned up):
Sutherland contends that the government failed to prove a nexus between his conduct and an official proceeding. He was, he says, only "attempting to influence the U.S. Attorney's Office," not the grand jury. He correctly notes—and the government does not contest—that the U.S. Attorney's investigation is not by itself an official proceeding. The term "official proceeding" is defined by 18 U.S.C. § 1515(a)(1) to include, inter alia, "a Federal grand jury" or "a proceeding before a Federal Government agency which is authorized by law." FBI investigations, for example, are not official proceedings because the statutory language including "a proceeding before a Federal Government agency which is authorized by law," § 1515(a)(1)(C), implies 'some formal convocation of the agency in which parties are directed to appear, instead of any informal investigation conducted by any member of the agency. The same logic equally applies to the investigation by the U.S. Attorney's office in this case, meaning that its investigation was not an official proceeding.
The term "official proceeding" thus implies something more formal than a mere investigation. That limiting term prevents a statutory sprawl in which the countless communications of citizens with one agency or another of the federal government lay the groundwork for a potential obstruction prosecution. See Marinello, 138 S. Ct. at 1109-10 (reading tax obstruction statute not to extend to "routine, day-to-day work carried out in the ordinary course by the IRS," id. at 1110). This back and forth between citizens and government works as a general matter to the benefit of both. Much of this activity is a wholly legitimate effort to "influence" the government. See 18 U.S.C. § 1512(c)(2). And indeed it is not far-fetched to think that an obstruction statute encroaching too aggressively on innocent citizen/agency interactions would infringe the basic right to petition guaranteed by the First Amendment of our Constitution. See U.S. Const. amend. I ("Congress shall make no law . . . abridging . . . the right of the people . . . to petition the Government for a redress of grievances."). Then, too, a statute that chills or burdens excessively the right of persons to protest or prove their innocence in the face of a government investigation would run counter to the operation of criminal justice as we have known it.
There are thus important safeguards to prevent the abuse of § 1512(c)(2). As the Court held in Aguilar, "it is not enough that there be an intent to influence some ancillary proceeding, such as an investigation independent of the court's or grand jury's authority." Providing materially false documents with an intent only to influence the U.S. Attorney's investigation, therefore, would not amount to a violation of § 1512(c)(2). See Young, 916 F.3d at 387 ("[T]he Government has similarly failed to provide evidence demonstrating that Young . . . designed his conduct to thwart [the grand jury] investigation, rather than designing his conduct to obstruct an FBI inquiry . . . ."). To be clear, knowingly giving false documents to a prosecutor without the intent to obstruct a grand jury may violate other federal statutes. E.g., 18 U.S.C. §§ 1001(a), 1519. Just not § 1512(c)(2).
Section 1512(c)(2) also requires proof that a particular grand jury proceeding was "reasonably foreseeable" to a defendant who has been charged with obstructing that proceeding. While the grand jury does not yet have to be convened, it is not enough for the government to argue that a defendant could have speculated that some official proceeding lies somewhere in the offing. The Young case illustrates the point. In that case, the defendant had intentionally misled FBI agents. But this court vacated defendant's conviction because "the only way the jury could have concluded he foresaw a particular grand jury investigation would be through speculation."
As so often in law, there is a balance to be struck. Though obstruction statutes are susceptible to abuse, they also exist for good reason. Official proceedings are crucial to the conduct of government. They are entitled to go forward free of corrupting influences that not only delay them but increase the chances of false and unjust outcomes. The federal grand jury investigation in this case is but one example of such an "official proceeding." See J.A. 1066 (jury instruction that the grand jury was an "official proceeding"). The government has every right to prosecute those who would corrupt it. Compromised proceedings in turn diminish public confidence in the workings of government and lead to the sort of creeping cynicism toward it that affects so many nations. Section 1512(c)(2) and other like statutes help to protect against that eventuality here.
Labels: 18 USC 1512, 7212(a), Obstruction, Tax Obstruction
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