Tenth Circuit Case on Sentencing Guidelines Tax Loss as Object of the Offense (7/3/16)

In United States v. Sing, 2016 U.S. App. LEXIS 12110 (10th Cir. 2016), unpublished, here, the Tenth Circuit affirmed an appeal questioning the calculation of the tax loss, the principal driver of the Sentencing Guidelines for tax crimes.  SG § 2.1.1(c)(1), here, provides:

(1)       If the offense involved tax evasion or a fraudulent or false return, statement, or other document, the tax loss is the total amount of loss that was the object of the offense (i.e., the loss that would have resulted had the offense been successfully completed).

The Background provides:

Background:  This guideline relies most heavily on the amount of loss that was the object of the offense. Tax offenses, in and of themselves, are serious offenses; however, a greater tax loss is obviously more harmful to the treasury and more serious than a smaller one with otherwise similar characteristics. Furthermore, as the potential benefit from the offense increases, the sanction necessary to deter also increases.

The key concept in the foregoing is the "object of the offense."  The guidelines use the term "object of the offense" in other nontax provisions.  E.g., § 2P1.2 ("If the object of the offense was the distribution of a controlled substance")  Further, the Guidelines use the term object in apparent reference to object of the offense.  E.g., 2S1.1 Commentary ¶ 3(c) ("sole object of that conspiracy).  (It is interesting, in this regard, that the other major financial crime provision, §2B1.1, here, dealing with larceny, embezzlement, other forms of theft, etc., uses the simpler concept of "loss" rather "loss that was the object of the offense.")

In any event, the Tenth Circuit seemed to be troubled enough to comment on its view that the formulation in the tax guideline -- "loss that was the object of the offense" -- did not fit neatly into the Model Penal Code ("MPC") provisions of mens rea.  The Tenth Circuit said:

Ms. Sing and Mr. Timmerman argue that the district court's tax loss estimate is fatally flawed and that this error infected the whole of the sentencing process. It's not entirely clear from the text of § 2T1.1(c)(1) what mens rea the government must prove with respect to a tax loss. Rather than employing [4]  the standard and rigorous mens rea categories discussed in the Model Penal Code or much of contemporary criminal law, the guidelines say the government must show the loss amount was the "object of the [defendants'] offense (i.e., the loss that would have resulted had the offense been successfully completed)." And you might well wonder whether, translated into the more helpful heuristics of the Model Penal Code, this means the government must show the defendant intended, knew of, or perhaps was recklessly indifferent to or negligent about the amount of loss the government would have suffered "had the offense been successfully completed." But, as the defendants concede, they, the government, and the district court in this case have all proceeded on the assumption that to qualify as the "object of the offense" the loss in question must have been intended. See United States v. Manatau, 647 F.3d 1048, 1048 (10th Cir. 2011). And that much, they say, the government failed to prove in this case.

So, the Tenth Circuit raised the concern but did not develop the issue or resolve it.  Although the comment is somewhat cryptic, I have tried to develop it as best I could.  Bottom-line, thought, I agree that the intended loss is the concept.

The Court does not cite the provision in the MPC to which it refers.  I will provide here some background  to the MPC and the apparent provision to which the Tenth Circuit referred.

The MPC is a model code developed by the American Law Institute "to stimulate and assist legislatures in making an effort to update and standardize the penal law of the United States of America."  See Wikipedia entry on Model Penal Code, here.  The MPC offers some fundamental concepts, including, in § 2.02, the General Requirements of Culpability.  See the reprinting by Professor Vernelia R. Randall, here.  In relevant part, the "Minimum Requirements of Culpability" for a criminal offense is that the person "acted purposely, knowingly, recklessly or negligently, as the law may require, with respect to each material element of the offense."  MPC § 2.02(1).  Each of the types of culpability are further defined in MPC § 202(1).  The Sentencing Guidelines term "object of the offense" seems to be an intent concept, as the parties agreed in Sing and thus fit within the concepts of "purposely" and "knowingly" in the MPC.  Hence, the sentencing court and the parties agreement that intent was required for the tax loss in the object of the conspiracy resolved any issue as to the concept in the Sentencing Guidelines.

In this regard, since the reference is to the object of the offense, like the offense conspiracy, it probably imports the mens rea element of the offense (including relevant conduct).  Tax crimes are specific intent crimes.  See Cheek v. United States, 498 U.S. 192 (1991) (the statutory element of willfulness in most Title 26 tax crimes requires specific intent to violate a known legal duty).  Hence, the mens rea element seems to be the same as the underlying offense -- the Cheek willfulness.

Another concept defined in the MPC for some types of culpability is "recklessly."  See MPC § 2.02(c).  A question presented by the Cheek willfulness element is whether willful blindness (or a related concept of reckless conduct) is a nonstatutory expansion of the specific intent concept in the "willfully" element for tax crimes or, instead, merely permits a jury to infer the specific intent from finding conduct that might be characterized as reckless.  I will just link below some of the blogs in which I discuss the issue.

• Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here, discussing the concepts in the criminal context.
• More on Recklessness as Cheek Willfulness (Including for FBAR Civil Penalty) or Willful Blindness (Federal Tax Crimes Blog 7/22/14), here, discussing the concepts in the civil willfulness context.

IRM Guidance on Processing SDOP - On Flagging Returns for Scrutiny and IRM Redactions (7/2/16)

In a prior posting in 2014, I discussed some internal guidance on the IRS web site for processing Streamlined Submissions.  New IRS Internal Guidance on Processing Streamlined Submissions (8/29/14; 8/30/14), here.  A reader of the Blog, Andrew Jones, here, advised me that the IRS has taken down the link to the guidance and incorporated some of the guidance, with some modifications, in IRM 21.8.1.27.2.1  (05-01-2015), Adjusting Streamlined Filing Compliance Domestic Accounts - (Streamlined Domestic Offshore - SDO), here.  I have revised that prior blog entry to so indicate.

Andrew also noted that a key part of the guidance as I had posted it in 2014 related to flagging the presence of "5 or more information returns" in SDOP submissions appears to have been redacted in IRM 21.8.1.27.2.1 (linked above). but Andrew recounts his sleuthing on this issue and significance of the redaction as follows:

I was spending some time working up some advice for a client re: the "5 or more information returns" metric imposed on Streamlined Domestic filings (maybe SFOP too).  I was stumped for some time because I couldn't find that language that you cited at http://federaltaxcrimes.blogspot.com/2014/08/new-irs-internal-guidance-on-processing.html.   

When I visited the IRS' posting of the IRM (https://www.irs.gov/irm/part21/irm_21-008-001r-cont03.html), that phrase was nowhere to be found.

I was finally able to discover that the IRS has redacted this detail (you'll find the === notations obscuring the original text, right below the line, "Allow the adjustment notices to generate and serve as the closing correspondence."  That position in the IRM is exactly where your blog post cited, and the May 1, 2015 date of the section posting to the IRM is also after the posting date of your blog entry which mentioned that language. 

I'd tend to think that anything which the IRS decides - after the fact - to redact, is probably of some significance.  In that case, you seemed to feel (and I definitely agreed) that this was an important insight into how/why Streamlined filings are or are not accepted as filed.  In the context of what is otherwise a largely 'black box' process, the IRS' efforts to hide their rules-of-thumb is particularly valuable.

Thanks to Andrew for calling it to my attention so that I can pass it on to readers of this blog.

On Foreign Enabler Indictments, Sealed Indictments and INTERPOL Red Alerts (6/29/16)

I am told that a number of Swiss bankers and other enablers during the heyday of their U.S. tax games (up to the UBS resolution in 2009 and even beyond that who tried to continue the scam) now fear to leave Switzerland.  Those that have already been indicted will be concerned because of what happened to Raoul Weil, the indicted Swiss banker who ventured out of Switzerland after indictment and was arrested in Italy on an Interpol red notice and was detained and extradited to the U.S. for trial.  (Weil was tried and acquitted.)  So, certainly, those whose indictments have been publicly announced have a choice of trying to resolve their indictment or taking risk should they leave Switzerland.

But,  those who have not been publicly indicted should also be concerned.  The U.S. can have sealed indictments -- and my speculation is that there are some sealed indictments out there for Swiss enablers (bankers and otherwise).  The U.S. can have INTERPOL issue a Red Notice (an INTERPOL device  "identifying and locating these persons with a view to their arrest and extradition or similar lawful action").  With sealed indictments, the enablers may not have a reason to suspect that the U.S. has requested a Red Notice.  See e.g., USAO MD FL press release of 8/31/15, here, stating that there was a sealed indictment and arrest based upon an INTERPOL Red Notice); Jeremy Evans & Andrewas Stargard, Executives Beware: The Long-Arm of the U.S. Government Strikes Again (Paul Hastings Client Alert April 2014) (reporting an extradition in antitrust case, noting that the procedure "likely followed" was the one in an earlier case "using Pisciotti’s sealed indictment to obtain an Interpol red notice, effectively an international arrest warrant" and further noting that "a sealed indictment may leave the [foreign] executive ignorant of any potential risk [of travel]."); and Steven F. Cherry, Leon B. Greenfield, Kurt G. Kastorf, Department of Justice’s First Antitrust Extradition Highlights the Danger of Foreign Travel for Executives Under Investigation (ABA Business Law Today April 2014) (reporting on the same incident).

And, this is not just a Swiss enabler concern.  DOJ has noised for a long time that it is looking beyond Switzerland.

Readers might be interested in the U.S. Attorney Manual provision on Interpol Red Notices, here.  The provsion is short so I quote it in full:

611. Interpol Red Notices 

An Interpol Red Notice is the closest instrument to an international arrest warrant in use today. Interpol (the International Criminal Police Organization) circulates notices to member countries listing persons who are wanted for extradition. The names of persons listed in the notices are placed on lookout lists (e.g., NCIC or its foreign counterpart). When a person whose name is listed comes to the attention of the police abroad, the country that sought the listing is notified through Interpol and can request either his provisional arrest (if there is urgency) or can file a formal request for extradition. 

Please be aware that if a Red Notice is issued, the prosecutor's office is obligated to do whatever work is required to produce the necessary extradition documents within the time limits prescribed by the controlling extradition treaty whenever and wherever the fugitive is arrested. Further, the prosecutor's office is obliged to pay the expenses pursuant to the controlling treaty. Those expenses, which can be quite high, will typically include the costs of translating the extradition documents and may include the costs of hiring local counsel to represent the United States. Further, these obligations, which remain until the fugitive is arrested or the Red Notice is withdrawn, may result in prosecutors who have succeeded the Assistant United States Attorney who originally requested the Red Notice having to prepare the documents and arrange for payment of hefty fees years after the fugitive originally fled from the United States. Therefore, it is important for prosecutors to make certain that the case is significant enough to warrant placing their offices under such a burden in deciding whether or not to request issuance of a Red Notice.

For more on INTERPOL Red Alerts, see:

• INTERPOL Web Site on "Notice," here.
• Wikipedia on Interpol Notice, here.

For More on Sealed Indictments

• Sealed Indictments - A Primer (Federal Tax Crimes Blog 7/11/12; revised 6/19/16), here.
• Sealing an Indictment Pending Arrest in Tax Cases (Federal Tax Crimes Blog 7/3/14), here.

Credit Suisse Banker, Fugitive from Indictment, Pleads Guilty for Offshore Enabler Misbehavior (6/29/16)

I am late in reporting this guilty plea by a previous indicted Swiss banker who was a fugitive until his guilty plea.  The DOJ Press Release is here.

Michele Bergantino, 48, a citizen of Italy and a resident of Switzerland, pleaded guilty before U.S. District Judge Gerald Bruce Lee to conspiring to defraud the United States by assisting U.S. taxpayers to conceal foreign accounts and evade U.S. tax during his employment as a banker working for Credit Suisse AG on its North American desk. 

“Mr. Bergantino is now the third fugitive to come to the United States and plead guilty to charges in this case,” said Acting Assistant Attorney General Ciraolo. “To those who have actively assisted U.S. taxpayers in using offshore accounts to evade taxes, the message is clear:  staying outside the United States will provide little comfort.  We will investigate and charge you, and will work relentlessly to hold you to account for your actions.” 

“Hiding assets and creating secret accounts in an attempt to evade income taxes is a losing game,” said U.S. Attorney Boente. “Today’s plea shows that we will continue to prosecute bankers and U.S. citizens who engage in this criminal activity. I want to thank our law enforcement partners and prosecutors for their work on this important case.” 

Bergantino admitted that from 2002 to 2009, while working as a relationship manager for Credit Suisse in Switzerland, he participated in a wide-ranging conspiracy to aid and assist U.S. taxpayers in evading their income taxes by concealing assets and income in secret Swiss bank accounts.  Bergantino oversaw a portfolio of accounts, largely owned by U.S. taxpayers residing on the West Coast, which grew to approximately $700 million of assets under management.  Bergantino admitted that the tax loss associated with his criminal conduct was more than $1.5 million but less than or equal to $3.5 million.   

During his time as a relationship manager, Bergantino assisted many U.S. clients in utilizing their Credit Suisse accounts to evade their U.S. income taxes and to facilitate concealment of the U.S clients’ undeclared financial accounts from the U.S. Treasury Department and the Internal Revenue Service (IRS).  Among the steps taken by Bergantino to assist clients in hiding their Swiss accounts were the following:  assuring them that Swiss bank secrecy laws would prevent Credit Suisse from disclosing their undeclared accounts to U.S. law enforcement; discussing business with clients only when they traveled to Zurich to meet him; structuring withdrawals from their undeclared accounts by sending multiple checks, each in amounts below $10,000, to clients in the United States; facilitating the withdrawal of large sums of cash by U.S. customers from their Credit Suisse accounts at Credit Suisse offices in the Bahamas, in Switzerland, particularly the Credit Suisse branch at the Zurich airport and at a financial institution in the United Kingdom; holding clients’ mail from delivery to the United States; issuing withdrawal checks from Credit Suisse’s correspondent bank in the United States; and taking actions to remove evidence of a U.S. client’s control over an account because the U.S. client intended to file a false and fraudulent income tax return.  Moreover, Bergantino understood that a number of his U.S. clients concealed their ownership and control of foreign financial accounts by holding those accounts in the names of nominee tax haven entities, or structures, which were frequently created in the form of foreign partnerships, trusts, corporations or foundations. 

A good article is David Voreacos, Ex-Credit Suisse Banker Pleads Guilty in Tax Evasion Case (Bloonberg 6/22/16), here.

Bergantino did not have to subject himself to U.S. criminal jurisdiction.  He was a resident of Switzerland which does not extradited for tax crimes.  He could have remained in Switzerland; Switzerland is a good place to live but it can be confining for people used to traveling in Europe and beyond.  (As I have noted, it can operate sort of as a "Club Fed."  See Switzerland as Club Fed for Swiss Enablers of U.S. Tax Crimes (Federal Tax Crimes Blog 10/24/13), here; for other Federal Tax Crimes Blogs mentioning or discussing "Club Fed", see here).  I infer that, in his assessment of whether to subject himself  to U.S. criminal jurisdiction and plead, Bergantino must have determined that the benefits outweighed the costs and risks.  The major risk for him is that the Court would impose material incarceration period.  But, I suspect that his very able lawyer mitigated the risk of that in the plea agreement, so that he will obtain either no incarceration period or a very short period, and that mitigation was key to Bergantino's cost/risk assessment.

One of the risks if he did not subject himself to U.S. jurisdiction voluntarily is that, should he leave Switzerland, he  might be subjected involuntarily through the INTERPOL Red Notice.  I discuss the INTERPOL Red Notice in a blog immediately following this blog entry.

Fifth Circuit Opinion Reversing Tax Evasion Conviction Because Evasive Acts Did Not Have Tax Evasion as Goal And Affirming on Wire Fraud (6/26/16)

In United States v. Biyiklioglu, 2016 U.S. App. LEXIS 10847, at *5 (5th Cir. June 15, 2016), unpublished, per curiam, here, Biyiklioglu appealed "his conviction and sentence for wire fraud, aggravated identity theft, tax evasion, and money laundering."  In the underlying scheme, Biyiklioglu "transferred money online among his bank accounts and numerous fraudulent PayPal accounts and then disputed certain transactions so as to cause double payments to his bank accounts and corresponding losses to PayPal."  The scheme is more complex, but that is a good summary for purposes of this blog entry.  On appeal, he raised several arguments.  I address only some of the arguments and the Court's resolution.

TAX EVASION - AFFIRMATIVE ACT OF EVASION

Although the gravamen of the scheme was transactions designed to defraud Pay Pal, two charges involved tax evasion which often accompanies schemes to defraud.  In furtherance of the scheme to defraud, the taxpayer undertook some evasive acts to avoid detection of the fraud.  An element of tax evasion is an affirmative act of evasion which, according to the Court, the Government attempted to prove via evasive acts to avoid detection of the fraud.  The Court held that such a showing of evasive acts to avoid detection of the fraud was not sufficient to show an affirmative act of tax evasion.  The Court's analysis was (Slip Op. 15-16):

Biyiklioglu also argues that the government did not prove the second element required for a conviction under § 7201, an affirmative act constituting an evasion or attempted evasion of tax. The indictment identifies his "affirmative acts of evasion" as "concealing and attempting to conceal from all proper officers of the United States [*23]  of America his true and correct income, opening multiple bank accounts, opening and using PayPal accounts in other people's names, and forming Big Stake Investments LLC and opening bank accounts in its name." Biyiklioglu argues that: (1) he did not file any tax returns or make false reports of any kind so as to affirmatively conceal his income; (2) the bank accounts were opened using his name and social security number, and the fact that there were multiple accounts did not result in greater secrecy; (3) opening and using PayPal accounts in other people's names did not conceal income because all of the transfers occurred between PayPal and Biyiklioglu's bank accounts and could be easily traced by reviewing his bank statements; and (4) Big Stake Investments and all of the bank accounts opened for it were opened with Biyiklioglu's name and social security number, so there was no increase in secrecy. 

"The mere failure to pay a tax voluntarily when due, even if willful, does not establish a criminal attempt to evade." United States v. Nolen, 472 F.3d 362, 379 (5th Cir. 2006). "Affirmative acts that satisfy the second element [of § 7201] may include keeping double sets of books, concealment of assets, or 'any conduct, the likely effect of which would be to mislead or to conceal.'" Miller, 588 F.3d at 907 (quoting Spies v. United States, 317 U.S. 492, 499, 63 S. Ct. 364, 87 L. Ed. 418, 1943 C.B. 1038 (1943)). "If the tax-evasion motive plays any part in such conduct the offense may be made out even though the conduct may also serve other purposes such as concealment of other crime." Spies, 317 U.S. at 499. 

The evidence at trial proved that Biyiklioglu created numerous bank accounts and structured elaborate transactions to defraud PayPal and to conceal his fraud from PayPal and the banks. The government, relying on this evidence, conclusorily argues that "[t]he evidence sufficiently established the affirmative acts supporting [Biyiklioglu's] conviction" for tax evasion. However, the government has not identified any evidence suggesting that a motive to evade taxes contributed to this deception, nor does the court's own review of the trial record reveal any such motive. Indeed, the government fails even to argue that Biyiklioglu was motivated by a desire to evade taxes. In United States v. Jones, we held that a defendant's "placing money on circuitous paths of cashier's checks and funneling it into a house purchased through a convoluted scheme designed to put it out of reach" was sufficient to support his conviction for tax evasion. 459 F. App'x 379, 384 (5th Cir. 2012). Jones, however, took these actions "while his tax file was in active collection," and the evidence supported the government's contention that the only conceivable reason for his conversion of fees into cashier's checks—which Jones failed to report in his financial statement to the IRS—was to evade taxes. Id. Here, in contrast, the obvious explanation for Biyiklioglu's complex and circuitous transactions was the perpetuation of his fraud, and there is no evidence that he took any action for the purpose of evading tax liability. Accordingly, we reverse Biyiklioglu's conviction for tax evasion as to counts 21 and 22.

JAT Comments on Tax Evasion.  Often the taxpayer's defense to evasion is that he did not willfully evade his tax liability.  This is because the Government would not make the charge if it could not show the more objective elements of tax due and affirmative act of evasion..  But all acts of evasion may not be acts of tax evasion.  Here, the evasion was of detection of the underlying fraud.  Hence, the Court reversed.

WIRE FRAUD INSTRUCTIONS - WHAT DOES DEFRAUD MEAN?


I quote the Court's entire discussion of this issue and then discuss that discussion (footnote omitted):

Biyiklioglu first argues that the district court erred when it instructed the jury that "[a] specific intent to defraud means a conscious, knowing intent to deceive or cheat someone" because the word "deceive" did not require the jury to find that Biyiklioglu acted for the purpose of obtaining financial gain. The district court's instruction defining "specific intent to defraud" followed the Fifth Circuit pattern jury instruction verbatim. See Pattern Crim. Jury Instr. 5th Cir. 2.57. Moreover, the instruction is consistent with our precedent. See United States v. Rivera, 295 F.3d 461, 466 (5th Cir. 2002) ("A conviction for wire fraud requires proof of the specific intent to defraud or deceive."). Accordingly, the district court did not err in its definition of "specific intent to defraud" when instructing the jury on the elements of wire fraud.

JAT Comments:

1.  I think that the Court gave too short shrift to the argument.  Tax crimes enthusiasts will recall United States v. Coplan, et al., 703 F.3d 46 (2d Cir. 11/29/12), here, where the Court discussed the meaning of the word "defraud" in the conspiracy statute.  I will just state in summary the issue, although I have more detailed discussion in  the Federal Tax Crimes Blog Entries and articles linked below.

2. The short version is that the word defraud used in the wire fraud statute and the same word in the defraud conspiracy statute have two different meanings via the history of their interpretations. It might help to quote each in relevant part.

18 U.S. Code § 1343 - Fraud by wire, radio, or television
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both.  

18 U.S. Code § 371 - Conspiracy to commit offense or to defraud United States
If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.

The same word "defraud" is used in both statutes.  Yet, as the Second Circuit in Coplan correctly observed, the word defraud in the two statutes came to be interpreted differently in respects here critical.  As respects the wire fraud statute involved in Biyiklioglu, the Second Circuit in Coplan said:

Enacted in 1867, the original federal conspiracy statute was appended to "An Act to amend existing Laws relating to Internal Revenue and for other Purposes." (quoting Act of March 2, 1867, ch. 169, § 30, 14 Stat. 484). In the 1875 codification, the statute was moved from its place among the internal revenue measures and included among the general penal provisions. Id. at 418 n.36. In United States v. Hirsch, 100 U.S. 33 (1879), the Supreme Court held that the conspiracy provision was generally applicable to the whole body of federal law. In so holding, the Court described the prohibited fraud as "any fraud against [the United States]. It may be against the coin, or consist in cheating the government of its land or other property." Id. at 35. 

"It is a well-established rule of construction that where Congress uses terms that have accumulated settled meaning under . . . the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms." Neder v. United States, 527 U.S. 1, 21 (1999) (internal quotation marks and alterations omitted) (omission in the original). At common law, the words "to defraud" meant to deprive another of property rights by dishonest means.17 See Hammerschmidt v. United States, 265 U.S. 182, 188 (1924); Porcelli v. United States, 303 F.3d 452, 457 n.1 (2d Cir. 2002) (noting that the "familiar common law meaning" of the term '"fraud"' involved "using falsity to do the victim out of money or property interests"). Other federal criminal statutes are generally in accord. See, e.g., United States v. Pierce, 224 F.3d 158, 165 (2d Cir. 2000)  ("In the context of mail fraud and wire fraud, the words 'to defraud' commonly refer 'to wronging one in his property rights by dishonest methods or schemes' . . . ." (quotation marks omitted)).
   n17 In the authoritative dictionary of the day, "defraud" was defined as "[t]o deprive of right by fraud, deception or artifice." The American Dictionary of the English Language 347 (1864). "Fraud" was defined as "[d]eception deliberately practiced with a view to gaining an unlawful or unfair advantage; artifice by which the right or interest of another is injured; injurious stratagem; deceit; trick." Id. at 541. The American Dictionary of the English Language, published by Noah Webster in 1864, is, of course, not to be confused with the American Heritage Dictionary of the English Language, published by Houghton Mifflin in 1969, or any modern dictionary bearing the surname of the great American lexicographer. 

Nonetheless, the word "defraud" in § 371 has been interpreted much more broadly. [Balance of Coplan discussion of § 371 omitted.]

Now, going back to the instruction quoted in Biyiklioglu:   "[a] specific intent to defraud means a conscious, knowing intent to deceive or cheat someone" (emphasis supplied by JAT).  As Biyiklioglu argued, mere deception alone is not sufficient; it has to be deception with an intent to defraud -- to cheat someone.  And, I would have thought, a defendant is entitled to that instruction.  It is true that the Fifth Circuit cites its pattern jury instructions as being consistent, but I think that mere deception absent an intent to defraud is not an intent to defraud.  If the pattern jury instructions are wrong, they are just wrong.  As to the Fifth Circuit precedent, I don't doubt that the specific words were used, but not in the context of definitively resolving the issue Biyiklioglu raised.

For more reading on this defraud issue (albeit in the context of discussing the defraud conspiracy), see.

Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here.

Further on the Second Circuit Detour on the Interpretation of the Defraud / Klein Conspiracy (Federal Tax Crimes Blog 12/18/12), here.

John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here.  (Although I note  that the best article is Abraham S. Goldstein, Conspiracy to Defraud the United States, 68 Yale L.J. 405 (1959)).

Another Crack in Foreign Account Secrecy - UBS Delivers Singapore Affiliate Records Pursuant to IRS Summons (6/22/16; 6/23/16)

Correction:  The blog has been corrected as a result of new information:  UBS has indicated that the client consented to the disclosure of Singapore account information, thus mooting the summons enforcement issue.  Corrections are made in this blog entry where appropriate, and are specifically noted.

I previously reported that the IRS has summonsed UBS for records from a Singapore affiliate and had sought judicial enforcement of the summons. U.S. Summonses Singapore Bank Records from UBS (3/4/16 & 3/5/16), here.  DOJ Tax has announced in a press release, here, that UBS "has now produced all Singapore-based records responsive to the request and the IRS determined that UBS complied with the summons, the Justice Department has voluntarily dismissed its summons enforcement action against the bank." The press release explained, somewhat cryptically:

The IRS served an administrative summons on UBS for records pertaining to accounts held by Ching-Ye “Henry” Hsiaw.  According to the petition, the IRS needed the records in order to determine Hsiaw’s federal income tax liabilities for the years 2006 through 2011.  Hsiaw transferred funds from a Switzerland-based account with UBS to the UBS Singapore branch in 2002, according to the declaration of a revenue agent filed at the same time as the petition.  UBS refused to produce the records, and the United States filed its petition to enforce the summons.

JAT Comments: 

1.  According to the U.S.'s Motion for Voluntary Dismissal,(Dkit. 16), there was no formal show cause hearing or order to enforce.  Rather,

Shortly after the petition was filed, the parties engaged in discussions to determine if they could resolve the matter amicably and without the necessity of any further court involvement. Upon completion of those discussions, UBS AG advised the United States that it would comply with the IRS summons and produce all Singapore-based bank records responsive to the IRS  summons. On May 31, 2016, UBS AG served its initial document production and, thereafter, supplemented its production on June 10, 2016. On June 17, 2016, after reviewing the bank’s document production, the IRS determined that UBS AG has complied with the IRS summons. In view of the above, the United States voluntarily dismisses its petition with prejudice. 

2. [Corrected 6/23/16] UBS has indicated that "complied with the summons based on client consent in accordance with Singapore law."  David Voreacos, UBS Gives IRS Records on U.S. Citizen’s Account in Singapore (Bloomberg 6/22/16), here..  In an earlier posting of this blog I stated that it was not clear on the documents I reviewed why UBS provided the documents required by the summons.  [End of Correction]  Readers will likely recall the earlier UBS proceeding involving a John Doe Summons to UBS that was the starting point for the IRS and DOJ's offshore account initiative starting around 2008.  The summons in this case was a regular summons, although since it was for financial account records, it might have been a third party recordkeeper summons.  The summons is here.  The key difference would be that, in a criminal investigation,  regular summonses require no notice to the taxpayer but third party recordkeeper summonses do. § 7609(c)(2)(E). [Addition 6/24/16]  Asher Rubinstein noted in the comment below that the summons was a Bank of Nova Scotia Summons, which, I understand is just a regular summons to an affiliated entity of a foreign bank for records of the affiliated foreign bank.  I discussed this issue when originally reporting on the case.  U.S. Summonses Singapore Bank Records from UBS (Federal Tax Crimes Blog 3/4/16 & 3/5/16), here, see particularly paragraph 1 under JAT Comments.  [End of Addition]

3.  Normally, in high stakes summonses, if the summonsed third party has an interest in not producing the documents (and certainly, given UBS's role as a player in the offshore account market, it has that interest), it might await a formal order from the Court.  This would then give the summonsed party some cover with the client and perhaps, in this case, with the regulatory authorities in the foreign jurisdiction whose bank secrecy laws may be implicated. [Clarification 6/23/16]  In this case, however, since the client apparently consented to the disclosure, UBS did not need such cover. [End of Clarification]

4.  [Correction 6/212/16] As note noted in the corrections above, UBS did not cave and therefore this brouhaha is mooted in terms of its future effects, but I have to think that, if the IRS did it once, it will do it again in either a regular summons (perhaps of the thirdparty recordkeeper genre) or a John Doe Summons. [End of Correction]

5.  Singapore does not have a tax treaty or mutual legal assistance with the U.S., for exchange of such tax information, so there is no formal mechanism for exchange of information that might permit a specific request to a named taxpayer or what has become known as a group request for unidentified U.S. taxpayers meeting certain characteristics.  (I call such group requests under a treaty request a John Doe Treaty Request.)

6.  It is interesting that the press release specifically mentions that Hsiaw apparently moved his account from UBS Switzerland to the UBS affiliate in Singapore in 2002.  The IRS has been obtaining so-called leaver lists from Swiss Banks, but I was not aware that they would go all the way back to 2002.  Of course, UBS is a special situation so that the IRS may have obtained such a leaver list or even the UBS bank records on U.S. clients from 2002.

TIGTA Report on Improvement in Some Features of OVDP (6/21/16)

The Treasury Inspector General for Tax Administration has released a report titled Improvements Are Needed in Offshore Voluntary Disclosure Compliance and Processing Efforts (June 2, 2016 Reference Number: 2016-30-030), here.  The key highlights presented are:

WHAT TIGTA FOUND 

The IRS needs to improve its efforts to address the noncompliance of taxpayers who are denied access to or withdraw from the OVDP. TIGTA reviewed a stratified random sample of 100 taxpayers from a population of 3,182 OVDP requests that were either denied or withdrawn from the OVDP. Although 29 of these 100 taxpayers should have been potentially subject to FBAR penalties, the IRS did not initiate any compliance actions. Projecting the sample results to the population of denied or withdrawn requests, the IRS did not assess approximately $21.6 million in delinquent FBAR penalties. 

TIGTA also identified internal control weaknesses that led to delayed or incorrect processing of OVDP requests through poor communication among IRS functions involved in the OVDP. These weaknesses include the use of separate inventory controls and two separate IRS addresses for taxpayers to send correspondence, which contributed to incorrect processing of some taxpayer disclosure requests. In addition, the IRS does not have a process to determine the appropriate skill level needed for revenue agents to work OVDP request certifications. OVDP cases are not equivalent to audits of taxpayers’ returns and generally do not require as much technical analysis as traditional tax audits. 

WHAT TIGTA RECOMMENDED 

TIGTA recommended that the IRS: 1) review all denied or withdrawn offshore voluntary disclosure requests identified in this report for potential FBAR penalty assessments and criminal investigation; 2) develop procedures for reviewing denied and withdrawn cases for further compliance actions; 3) centrally track and control OVDP requests; 4) establish one mailing address for taxpayer correspondence; 5) ensure that employees adhere to timeliness guidelines throughout the entire OVDP process; and 6) classify OVDP certifications so that some can be worked by lower-graded revenue agents.  

IRS management agreed with all six recommendations and has taken or plans to take corrective action on five of them. Although the IRS agreed with the potential value of establishing one mailing address for taxpayer correspondence, this recommendation has been put on hold until a decision is made about the future status of the OVDP.

The report has a summary of the development of the various programs over the years since 2009 and the processing system.  The report focuses on taxpayers who were denied access to OVDP or who, having entered, withdrew or opted out.  Those persons were subject at a minimum to civil audit and some were potentially subject to criminal investigation and prosecution.  The report concludes that the IRS should have better following-through mechanisms.  Based on what it believes was an appropriate representative sample, the report suggests that there is some revenue from auditing and/or investigating those individuals.  I have not analyzed the report otherwise, but do find the following interesting.

1. Withdrawn OVDP Requests.  The sample selected included 50 taxpayers out of a total population of 781 withdrawn OVDP requests.  Only 20% of those in the sample had some form of compliance action or were included in the Streamlined Procedure.  "Of the Streamlined Procedure cases that have closed, 10 taxpayers were assessed $142,711 in penalties."  (JAT Note:  It is not clear to me what the group that withdrew and then were accepted in Streamlined Procedure is comprised of; my understanding was that those who were in OVDP up to the point of the intake letter could not withdraw and must either seek Streamlined Transition within OVDP or must opt out (different than witndrawing); I suppose it could include the class of people who had passed preclearance but not yet submitted the intake letter.)

2. Denied OVDP Request.  TIGTA reviewed 50 of 2,401 taxpayers who were denied entry to OVDP.  Only 12 of the 50 "were denied participation in the OVDP were either subjected to further criminal investigation or examination efforts, or were deceased."  Then, these is some detail behind the 34 (68 percent) of taxpayers in the sample.  (JAT Comment:  I have to say that I have had only taxpayer who failed preclearance because he had been scheduled for NRP audit; he ultimately got the OVDP result without formally being in the program.)

3. Recommendation to Review Denied or Withdrawn Requests. TIGTA recommended that the LB&I Division review all denied or withdrawn requests for FBAR penalty assessments and possible referral to CI.  In the Management's Response the IRS agreed and had technical specialists review all withdrawn and denied requests, with follow up indicated for 17.  The IRS disagreed with the revenue potential from such follow-throughs.

4. Recommendation for Immediate Review of Denied or Withdrawn Requests  TIGTA recommended (Recommendation 2) that "The Commissioner, LB&I Division, and the Chief, CI, should develop procedures to require the immediate review of any future denied or withdrawn offshore voluntary disclosure requests for further compliance actions."  IRS agreed.

5.  Other Administrative Recommendations. The balance of the recommendation dealt with processing and administration procedures.  However, I did find that, in response to a recommendation (Recommendation 4) that the IRS have one mailing address for submitting offshore voluntary disclosure requests and related documentation:

The IRS agreed with this recommendation, but is putting the recommendation on hold until a decision is made about the future status of the OVDP. While the IRS agreed with the potential value in this recommendation, at this time and in light of the nonpermanent status of the OVDP, it cannot commit the resources needed for making this change.

I infer from this that there is some current consideration being given about "the future status of the OVDP."  The IRS has always said that it could modify or withdraw the terms of OVDP at any time (although it would be expected to be prospective only and may even have a delayed effective date).

The Tax Court Sticks to Its Allen Holding that the Taxpayer's Fraud is not Required for § 6501(c)(1)'s Unlimited Statute of Limitations (6/17/16; 6/20/16)

I have previously blogged on the issue of whether the unlimited statute of limitations for fraud in § 6501(c)(1), here, requires the taxpayer's personal fraud or, on the other hand, merely a fraudulent position as a result of someone else's fraud (such as a return preparer).  The issue rose to prominence after the Tax Court's decision in Allen v. Commissioner, 128 T.C. 37, 40 (2007) which held that the taxpayer's personal fraud was not required; all that was required, according to Allen, was fraud on the return without regard to the taxpayer's personal culpability.  The Second Circuit seemed to agree in City Wide Transit, Inc. v. Commissioner, 709 F.3d 102 (2d Cir. 2013).  But, the Court of Appeals for the Federal Circuit did not agree (at least two of three judges on the panel did not agree).  BASR P'ship v. United States, 795 F.3d 1338 (Fed. Cir. 2015).  The Government did not seek rehearing or certiorari in BASR, so that matter seemed to be practically resolved because taxpayers could choose to litigate the issue in the Court of Federal Claims (governed by its Court of Appeals, the Court of Appeals for the Federal Circuit).

But, there will be cases with the issue that are not litigated in the Court of Federal Claims.  One just was.  Finnegan v. Commissioner, T.C. Memo. 2016. 118, here.  There, the return preparer fraudulently prepared the return.  Allen of course was the governing authority in the Tax Court, so the Tax Court was bound to follow Allen unless it chose to reconsider Allen.  It chose not to.  The relevant portion of the opinion is short, so I quote it in full (Slip Op. pp. 17-18):

OPINION 

We must decide whether respondent has proved that petitioners’ returns were prepared falsely or fraudulently with the intent to evade tax.

I. Limitations Period 

We begin with an analysis of the limitations period for assessment of income tax. The Commissioner generally must assess any income tax within the three-year period after a taxpayer files his or her return. Sec. 6501(a). In the case of a false or fraudulent return with the intent to evade tax, however, tax determined to be due may be assessed at any time. Sec. 6501(c)(1). In Allen v. Commissioner, 128 T.C. at 42, we held that section 6501(c)(1) applies even if it is the preparer of the return, and not the taxpayer, who falsely or fraudulently  prepared the return with the intent to evade tax. But see BASR P’ship v. United States, 113 Fed. Cl. 181 (2013), aff’d, 795 F.3d 1338 Fed. Cir. (2015). n6
   n6 We see no reason to revisit Allen v. Commissioner, 128 T.C. 37 (2007), on account of BASR P’ship v. United States, 113 Fed. Cl. 181 (2013), aff’d, 795 F.3d 1338 (Fed. Cir. 2015). In the Court of Appeals for the Federal Circuit’s opinion, a persuasive dissent was filed, as well as a concurring opinion that relied on sec. 6229, a provision inapplicable in the instant case. Accordingly, even in cases appealable in the Federal Circuit, it is unclear whether, in the absence of the application of sec. 6229, which interpretation of sec. 6501(c)(1) would prevail. Moreover, there is no jurisdiction for appeal of any decision of the Tax Court to the Court of Appeals for the Federal Circuit. Sec. 7482(a)(1). Additionally, the parties have not cited BASR P’ship and do not contend we should revisit Allen. Thus, Allen is controlling precedent in the instant case, and we do not revisit the analysis and conclusion in that Opinion.

This is a cautionary tale.  First, practitioners must help their clients in forum choices.  Where this issue is presented, the best forum choice is the Court of Federal Claims which, under Flora, requires full pre-payment of some amount, perhaps the full tax in issue.  Second, taxpayers going to the Tax Court either by petition for redetermination of a deficiency or in a CDP hearing where liability can be contested (not all CDP cases if an opportunity to contest was previously available) will not fare well. Third, since sporadic litigation will continue in forums other than the Court of Federal Claims (particularly the Tax Court), it would appear that this issue will bubble up to other Circuits and, unless the IRS gives up the issue, a conflict may develop that might cause the Supreme Court to grant certiorari.  The Finnegan case is appealable to the Eleventh Circuit which has not yet addressed the issue.  My sense is that the Eleventh Circuit will be a taxpayer-friendly venue on this issue.  Still, the Eleventh Circuit could create a conflict with the Court of Appeals for the Federal Circuit..

Finally, just a coincidence having nothing to do with the merits, Allen was decided by Judge Kroupa, who resigned from the Tax Court and was recently indicted.  See Former US Tax Court Judge Kroupa Indicted (Federal Tax Crimes Blog 4/4/16; 4/5/16), here.

Les Book has an excellent discussion of Finnegan at Tax Court Sticks to Its Guns and Holds Fraud of Preparer Can Indefinitely Extend Taxpayer’s SOL on Assessment (Procedurally Taxing Blog 6/20/16), here.

JAT Correction: An earlier version of this blog entry indicated that the Finnegans lived within the Second Circuit which would make City Wide an influential, if not controlling, authority on appeal.  Actually, at the time of filing the petition, they lived in the Eleventh Circuit which has yet to speak on this issue.

Attorneys as Witnesses Against Clients (6/15/16)

I recently posted on an aspect of the Zukerman Indictment.  See Update on the Zukerman Indictment - Potential Waivable Conflicts of Interest of Advocate as Witness (Federal Tax Crimes Blog 5/28/16; 6/9/16), here.  NYT has a related article: Peter Henning, When Lawyers Testify Against a Client (NYT DealBook 6/13/16), here.

The key points of Henning's article are:

1.  Henning opens:

There may be no more fertile ground for obtaining damaging information in an investigation than from a lawyer about a client. People tend to be more open with their lawyers, or perhaps worse, try to lie to them to use legal advice to keep from getting caught.

JAT Note:  There is a third possibility. Some clients may be using the lawyer in a way that can implicate the lawyer in the skulduggery, so as make the lawyer a bargaining chip with prosecutors if the client needs it later.  In this regard, a standard first meeting line I have with clients in criminal matters is that, if anyone in this room is going to jail, it will not be me.  Client representation in criminal cases requires warm zeal for the client, but warm zeal does not require that the lawyer improperly extend himself for the client.

2.  Henning discusses what prosecutors can do to get to the lawyer's information.  In Zukerman, of course, they got to the lawyer's information by successfully asserting the crime-fraud exception to the attorney-client privilege.  That put the lawyers in the uncomfortable position of testifying against the client.  And, it put the lawyers in an uncomfortable position with respect to their continuing representation of a valuable client.

3.  Henning suggests that the presence of lawyers in offshore planning raises the possibility that otherwise confidential communications might be pierced.  He mentions specifically the Panama Papers disclosures.

4.  Henning questions the use of this prosecutor tool as leverage by prosecutors to chill the attorney-client relationship, discussing certain ethical rules applicable to prosecutors.

Third Circuit Reminders on the Limits of the Cheek "Defense" (6/15/16)

In United States v. Tuka, 2016 U.S. App. LEXIS 10742 (3d Cir. 2016), unpublished here, the taxpayer was convicted for "multiple counts of tax evasion, in violation of 26 U.S.C. § 7201, and multiple counts of willful failure to file tax returns, in violation of 26 U.S.C. § 7203."  The Court of Appeals affirmed the taxpayer's conviction and sentence.

The taxpayer, an airline pilot on disability, sought to avoid including certain airline disability payments in his income and paying tax on those payments. Prior to 2003, he apparently made the claim on the notion that the tax was unconstitutional, leading the Court of Appeals to call him a "tax protestor."  In 2003, however, he lost the issue in the Tax Court and in the Third Circuit Court of Appeals.  Tuka v. Commissioner, 120 T.C. 1, aff’d 85 F. App’x 875 (3d Cir. 2003). He persisted, leaving in place instructions to the plan administrator not to withhold and then, in 2005, filing new instructions with the new plan administrator. That persistence after 2003 led to his criminal indictment, conviction and sentencing.

The Court of Appeals held first that the evidence was sufficient to support the convictions for tax evasion and failure to file.  As is frequently the case in criminal tax cases that go to trial, the taxpayer's defense was that the Government had not proved that he acted willfully.  This is sometimes called the "Cheek" defense, after Cheek v. United States, 498 U.S. 192 (1991), also involving an airline pilot asserting that his income was not taxable.  Cheek established the principle that a subjective belief that the law does not impose income tax is not willful under the criminal tax statutes regardless that it is not an objectively reasonable belief.  But, Cheek added some twists that tax protestors do not like.  First, if it is a constitutional claim that income is not taxable, the Cheek defense does not work.  Second, in assessing whether the taxpayer had a sincerely held belief, the jury is entitled to consider the reasonableness of the belief -- the more unreasonable, the less likely it is to be sincerely held.  On this second point, the Court of Appeals held:

After this Court in 2003 affirmed the Tax Court’s decision that Tuka’s disability benefits were taxable, any subjective belief that Tuka’s disability benefits were not taxable became objectively unreasonable. And while an honestly held belief, regardless of its reasonableness, will still negate the element of willfulness in a tax prosecution such as this, the jury was free to infer from this unreasonableness that Tuka did not actually hold such a belief. Cheek v. United States, 498 U.S. 192, 203-04 (1991) (“[T]he more unreasonable the asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing more than simple disagreement with known legal duties imposed by the tax laws and will find that the Government has carried its burden of proving knowledge.”). 

Thus, we will uphold Tuka’s convictions under 26 U.S.C. §§ 7201 and 7203.

The Court of Appeals next affirmed the sentencing court's application of the obstruction enhancement in U.S.S.G. § 3C1.1 for the Sentencing Guidelines calculation.  The Court held:

Perjury is one form of obstruction of justice. See U.S.S.G. § 3C1.1 cmt. n.4(B). A defendant qualifies for the perjury enhancement by giving “false testimony concerning a material matter with the willful intent to provide false testimony . . . .” United States v. Dunnigan, 507 U.S. 87, 94 (1993). In assessing whether Tuka’s testimony at trial satisfied the elements of perjury, the District Court was required “to accept the facts necessarily implicit in the verdict.” United States v. Boggi, 74 F.3d 470, 478-79 (3d Cir. 1996) (internal quotation marks and citation omitted). And while “it is preferable for a district court to address each element of the alleged perjury in a separate and clear finding, express separate findings are not required.” Id. at 479 (internal quotation marks and citation omitted). 

One fact “necessarily implicit” in the jury’s verdict is that Tuka did not have a good-faith belief that his disability benefits were not taxable, for if he did have such a belief, the jury would not have convicted him. Thus, his testimony asserting such a good-faith belief must have been false and material. Cf. id. (concluding that the defendant’s testimony at trial “was necessarily material” because the jury would not have convicted him if it had believed the testimony). In explaining why it was applying the enhancement, the District Court stated, “I’m disappointed in you, Mr. Tuka, to have testified in the fashion that you did . . . . I agree[ ] with th[e] finding [that you were not truthful].” App. 597. Though the court could have more clearly enunciated its findings as to each individual element, these statements sufficiently indicated that it thought Tuka’s testimony satisfied these elements. 

Thus, the court did not commit error, clear or otherwise, in applying the enhancement under § 3C1.1.

JAT Comments:

1. The first holding on the sufficiency of the evidence is not exceptional.  I discuss it principally to remind students and practitioners of the limits of the Cheek defense.  In this regard, although Cheek established the key element of the defense that the sincerely held belief need not be reasonable, on remand, Cheek was convicted after a new jury was properly instructed as to that element of the offense.  Moreover, remember that the Cheek defense is not really a defense.  A defense suggests that a defendant must prove some exculpatory factor.  That is not true for the Cheek nuance on willfulness.  The Government must prove willfulness which means that the evidence must negate that the defendant had a sincerely held belief.  Of course, as discussed in other blog entries, the defendant wanting to remind the jury that the Government must negate the claim will want a specific instruction to that effect which will mean that he or she must put on some evidence as to the sincerely held belief claim.  That is usually done by the defendant testifying to that effect.  But, as the second holding indicates, there are risks in a defendant testifying.  The defendant does not have to testify, but it may be difficult -- but not impossible -- to present the sincerely held belief claim without the defendant's testimony.

2.  The second holding is important.  One of the dangers that lurks in having a defendant testify in his defense on any issue is that the testimony may subject him or her to the obstruction enhancement for perjury.  Perjury is hard to prove, of course, but students and practitioners should remember that, for sentencing, perjury need be proved only by a preponderance of the evidence (OK, perhaps in some cases in some circuits by clear and convincing evidence).  But the sentencing judge will have heard the now convicted defendant testify.  Hence, the sentencing judge's assessment that the defendant perjured himself will have some critical weight.  And, focusing on the element at issue in Tuka -- willfulness, which is to say whether defendant had a reasonable belief -- it is necessarily implicit in the jury's guilty verdicts that the defendant did not and therefore that he perjured himself in claiming that he did.

Two Tax Crimes Cases on Plea Rejections After Previously Accepted (6/10/16)

Plea agreements are contracts, well like contracts anyway.  Contracts (or like contracts) in order to be enforceable require a meeting of the minds (certainly as indicated by the words of the "contract" (or like contract)).  Today, I discuss, by referring to another article, that aspect of a plea bargain in an earlier case in which the judge withdrew a plea pursuant to a plea agreement where there probably was a meeting of the minds as to the matters covered in the plea agreement but the parties clearly were not in agreement as to a critical component of the plea agreement (the tax loss which is the principal driver of the guidelines sentencing range in tax cases).  I also discuss a case where the judge withdrew a plea pursuant to a plea agreement because, in his mind, the parties' agreement did not establish the elements of the crime to which a plea was made.

The ABA's Tax Times for June 2016 has this article:  John Colvin and Claire H. Taylor, U.S. District Judge Rejects Tax Promoters’ Plea Agreement in United States v. Crithfield: A Rare Event, but a Warning to Defense Counsel (June 2016), here or, if that does not work, here.  I will try to summarize the case, hoping to do justice to the longer presentation by two very good attorneys.  The conduct involved in the criminal indictment involved promotion by two  defendants of an abusive captive insurance scheme, called a Business Protection Plan (BPP).  Essentially, the product they promoted was an investment scheme wrapped up in a package made to appear as insurance.  The indictment charged one count of conspiracy (defraud/Klein conspiracy under 18 USC 371, here, a five-year count), and two counts of aiding and assisting (26 USC 7206(2), here, each 3-year counts).  As is typical, the resulting plea agreement dropped two counts in return for the defendants plea to another count -- aiding and assisting, a 3-year count.  So, under the plea agreement, the defendants could not be incarcerated for more than 3 years, but they could be incarcerated for less, all the way down to no incarceration, depending upon the judge's Booker sentencing discretion after respectful consideration of the guidelines calculations.

As readers of this blog know, the principal driver in the advisory guidelines sentencing range is the tax loss.  The more tax loss (within certain brackets), the more the guidelines sentencing range.  Often the prosecutor and the defendant reaching a plea agreement will stipulate all or certain key factors, including tax loss.  See e.g., Fourth Circuit Holds Defendant to His Tax Loss Stipulated in the Plea Agreement (Federal Tax Crimes Blog 7/24/13), here. In this case, the parties did not stipulate as to the tax loss.  The sentencing court is required, in any event, in reaching the sentence to make the tax loss calculation to make the sentencing guidelines calculation and is not necessarily bound by the parties' agreements as to sentencing factors.  Where the parties do not agree, they essentially are leaving it up to the Court, with the assistance of the Probation Officer and the parties, by a sentencing hearing if necessary, to determine the sentencing factors.  But, provided the plea agreement or the agreed colloquy at the plea hearing is otherwise sufficient to justify the plea, even without agreement as to the sentencing factors, the plea should be accepted and should stand. Perhaps the only exception to that would be a plea that was a result of ineffective assistance of counsel. (That's a bigger subject than I can address right now, so just assume that that is not directly the issue in the case discussed in the linked blog, although it might be at heart of the court's decision to reject this plea.)

In the case, the defendants wanted to limit the tax loss at sentencing to the tax loss attributable to the conduct involved in the count of conviction.  But, as every lawyer representing criminal clients in financial crimes cases knows, the loss for sentencing guidelines purposes can include loss attributable to the count of conviction (in this case the single aiding and assistance count) and the loss from "relevant conduct."  Therein lies the rub.  The defendants here insisted that only the loss from the count of conviction was included in the tax loss calculation for sentencing guidelines purposes.  The prosecutor insisted that the relevant conduct tax loss -- and there was a lot of loss attributable to relevant conduct -- was includible in the calculation.  That would result in a high guidelines range calculation, limited to the three years maximum for the count of conviction pursuant to the plea.  The spat during the sentencing phase as to whether the relevant conduct was includible probably alerted the Court that an ineffective assistance of counsel issue was in the making, so that it just reversed its acceptance of the plea agreement and sent the parties back to square one.  As the authors of the blog entry note, that may or may not be good for the defendants, for if they go to trial and are convicted or all counts, the overall tax loss would be includible either directly as conspiracy tax loss or as relevant conduct tax loss.

I refer readers to the discussion by Colvin and Taylor for a lot more nuance.

On to the next case.

In United States v. Jenkins, 2016 U.S. Dist. LEXIS 72383 (DC CT 2016), here, Judge Underhill, after approving a plea agreement, upon further consideration, rejected the plea agreement.  The reason he stated was that the plea agreement and the prosecutor's colloquy at the original plea proceeding supporting the plea did not present sufficient facts to support a finding of guilt.  Judge Underhill's opinion is short, so I am going to quote it in full with only minor deletions:

Upon review of the documents submitted for Jenkins's sentencing hearing, however, I became concerned that the facts underlying the offense conduct did not satisfy the mens rea element for the charged offense. At Jenkins' sentencing on August 12, 2014, I noted that the underlying factual information provided in the U.S. Probation Office's Presentence Investigation Report ("PSR") and the plea colloquy did not appear to set forth a sufficient factual basis for Jenkins to be culpable of violating section 7206(2). I accordingly continued the sentencing hearing and invited counsel submit additional briefing on the sole issue of mens rea and criminal culpability under section 7206(2). Defense counsel submitted an undocketed letter brief arguing that mens rea could be established under a "conscious avoidance" or "willful blindness" theory of culpability, and the government joined Jenkins on that letter brief. 

For the following reasons, I must reject Jenkins' guilty plea as failing to establish the requisite mens rea for the underlying offense. 

I. Background 

Jenkins worked at a tax return preparer at Tax Express, where she assisted in the preparation and submission of individuals' federal income tax returns. Presentence Investigation Report ("PSR") ¶¶ 6-7. The government alleges that Jenkins prepared thirty-one deficient or false tax returns for tax years 2009 and 2010 without the knowledge of her clients, resulting in a tax loss of $131,670 to the federal government. Id. ¶ 7. Those returns included submissions for inappropriate or inapplicable tax credits—such as education and child/dependent care credits—and erroneous Schedule C (business losses) attachments. Id. Significantly, Jenkins did not receive a financial benefit from the returns, nor did she collude with clients who filed erroneous returns to commit fraud or share in their proceeds. Def.'s Sentencing Mem. 6 (doc. 19). n1
   n1 The PSR indicates that employees may have received bonuses based on the number of returns they completed. There is no indication that the bonus was based on the existence of a credit/refund received by a client, or on the dollar amount of the return or the potential refund. PSR ¶ 65. Ostensibly Jenkins would have received a commission on the thirty-one "false" returns even if the information in those returns had been accurate. 

The parties stipulated to the following facts: Jenkins's work environment was "like a bar" in that employees frequently drank at work (or utilized other substances) with the knowledge and consent of management. Id. Jenkins noted that she drank on the job and that her workplace was "more like a bar than a place of business." Id. Tax Express's preparation software, however, had a known glitch that would populate forms for new clients with information from previously prepared returns (i.e., the software did not "reset" its values for each new tax return). Id. Jenkins was aware of this glitch, but in part because she was alcohol-impaired, she did not double-check returns for accuracy. Id. As a result, she often overlooked fields in which certain tax credits were improperly included in her clients' individual federal income tax returns. Id. 

The offense with which Jenkins was charged requires a mens rea of willfulness. See 26 U.S.C. § 7206(2). During the plea colloquy before Judge Garfinkel, the AUSA stated that the willfulness element was met because: "Ms. Jenkins had notice of the higher probability that the tax returns she prepared contained false information. Despite this knowledge, she consciously failed to verify that it was true and accurate." Colloquy Tr. at 18 (Jan. 7, 2014); see also id. at 31. Judge Garfinkel adopted the same language when questioning Jenkins about the adequacy of her plea: "And would you agree with [the AUSA's] representation that these returns had information of which there was at least a high probability of them being inaccurate? The information being inaccurate and that you knowingly, consciously did not make any effort to verify them, verify the information as true and accurate?" Id. at 35. Jenkins agreed with that characterization. Id. at 35-36. Her attorney, however, specifically stated that Jenkins "doesn't have a specific recollection of" the tax return referenced in the information. Id. at 34. The AUSA did not challenge that assertion or suggest that he had evidence to rebut it. 

At the truncated sentencing hearing, the parties argued that, although her behavior was not intentional, Jenkins had either "consciously avoided" exercising care or had been grossly negligent or reckless in her preparation of the allegedly false returns. Jenkins's counsel noted that Jenkins would not stipulate to offense conduct considered to be more than "grossly negligent" or reckless, and Jenkins would not stipulate that she had a specific intent to violate a known legal duty. Instead, defense counsel noted that Jenkins had abrogated her duty of care as a tax preparer, invoking a common law theory of civil, not criminal, negligence. 

II. Discussion 

Pursuant to Rule 11 of the Federal Rules of Criminal Procedure, "[b]efore entering judgment on a guilty plea, the court must determine that there is a factual basis for the plea." 

Jenkins was charged under 26 U.S.C. § 7206(2), which requires a mens rea of willfulness. The Supreme Court has defined "willfulness" as "a voluntary, intentional violation of a known [legal] duty." United States v. Pomponio, 429 U.S. 10, 12 (1976). In the context of tax fraud, that specific intent requires proof beyond a reasonable doubt that the defendant sought to evade or otherwise interfere with the federal government's tax enforcement efforts. United States v. Bishop, 412 U.S. 346, 360 (1973); Ingram v. United States, 360 U.S. 672, 680 (1959) (violator's objective must include evasion of federal taxes); United States v. Aracri, 968 F.2d 1512, 1523 (2d Cir. 1992) (specific intent required); United States v. Gurary, 860 F.2d 521 (2d Cir. 1988) (same). A showing of recklessness or gross negligence is not sufficient. See United States v. MacKenzie, 777 F.2d 811, 818 (2d Cir. 1985), cert. denied, 476 U.S. 1169 (1986) (upholding a "conscious avoidance" instruction for the knowledge prong of the willfulness element of tax fraud where "the charge clearly informed the jury that actual knowledge was required and that recklessness was not adequate to prove willfulness"). 

In the present case, the government has failed to show that Jenkins had anything more than a reckless mens rea. The evidence discussed in the plea colloquy does not show that Jenkins was "practically certain" that her conduct would result in a false return because it appears that the incorrect tax credits occurred at random. Instead, at best, the government has thus far shown only that Jenkins knew that some of the returns would likely have errors if she failed to check them. That kind of probabilistic "knowledge" does not rise above the level of recklessness, and it certainly does not meet the high standard required for a showing of "willfulness," particularly as required for tax fraud. See, e.g., Ratzlaf v. United States, 510 U.S. 135, 141 (1994) (in the context of 31 U.S.C. § 5322(a), explaining that the "willfulness" element includes, inter alia, "a specific intent to commit the crime, i.e., a purpose to disobey the law") (internal quotation marks and citation omitted); Bryan v. United States, 524 U.S. 184, 194-96 (1998) (explaining that the need for a heightened willfulness standard for tax crimes arises from a risk of "ensnaring individuals" with highly technical statutes). And that inference is bolstered by the strong similarity between the language used during the colloquy and the recklessness definition in the Model Penal Code. Compare Model Penal Code § 2.02 (defining recklessness as "consciously disregard[ing] a substantial and unjustifiable risk"), with Colloquy Tr. at 35 ("[T]here was at least a high probability of [the information in the returns] being inaccurate? The information being inaccurate and that you knowingly, consciously did not make any effort to verify them . . . ?"). 

Because the government has failed to show an adequate factual basis for the mens rea element of the offense, I cannot accept Jenkins' guilty plea. My initial acceptance of Jenkins' guilty plea is vacated. The parties should be prepared to discuss the implications of this order during a conference call to be scheduled shortly. 

So ordered.

This is truly an amazing development.  At a minimum, it shows that, in the plea colloquy, the prosecutor screwed up.  If, in the colloquy, the  prosecutor laid out the Government's "best case," then the judge is saying that "best case" is inadequate, and "the implications of this order" is that the prosecutor should dismiss the case or the court will.  If, on the other hand, the prosecutor just misspoke and the prosecutor and the defendant can agree upon a plea agreement or a colloquy that states the elements of the offense,  then the judge may accept the plea.  Another alternative is that the Government will insist that it can prove the elements of the offense and the defendant will not agree, in which case the prosecution will proceed to trial.

Excellent Article on the Lobbying Attempts to Protect the Offshore Evasion Industry (6/10/16)

The Washington post has an excellent investigative journalism article on a U.S. lobbying firm that solicited Mossack  Fonseca, the Panama "law" firm at the center of the Panama Papers, and others to support its lobbying efforts to thwart the U.S. law enforcement, including IRS, efforts to force open the kimono on offshore evasion and other skullduggery.  Scott Higham, Ana Swanson and Debbie Cenziper, How an obscure nonprofit in Washington protects tax havens for the rich (WAPO 6/10/16), here.  Here are some excerpts that may get your interest in reading the whole article:

In May 2007, during a global crackdown on offshore tax havens, an obscure nonprofit lobbying group in Northern Virginia sent a fundraising pitch to a law firm in one of the biggest tax havens in the world — Panama. 

The Center for Freedom and Prosperity promised to persuade Congress, members of the George W. Bush administration and key policymakers to protect the players of the offshore world, where hundreds of thousands of shell companies had been created, often to hide money and evade taxes. 

To reach out to American officials and fund its U.S. operations, the center said it needed an infusion of cash for an eight-month campaign: at least $247,000. 

“We hope you can support this effort with a donation,” the center wrote in a document sent to Mossack Fonseca, the law firm at the heart of an international financial scandal known as the Panama Papers. 

* * * * 

In the eight-page fundraising document discovered by The Post, the Center for Freedom and Prosperity in Alexandria, Va., said that it had already persuaded the Bush administration to thwart an international effort to require more transparency from tax havens. Now the center was promising to derail similar reforms in legislation before Congress. 

Among those it planned to contact: lawmakers, key figures in the Bush White House, the Treasury Department, the State Department and the Office of Management and Budget.
At the time, the center was leading a coalition of Washington’s most vocal anti-tax groups seeking to defeat the reforms. 

The center said it counted “allies and friends in more than 50 countries” and had “a major impact on the international tax competition debate.” The document contained a contribution sheet with suggested gift levels ranging from $500 to $20,000, along with a routing number to the center’s Wachovia bank account in Northern Virginia. 

The pitch, emails and other documents reviewed by The Post offer an inside look at how a little-known nonprofit, listing its address as a post office box in Alexandria, became a persistent opponent of U.S. and global efforts to regulate the offshore world. Led by two U.S. citizens — one an economist, the other a tax expert for a Republican congressman — the center met again and again with government officials and members of the offshore industry around the world, while issuing hundreds of funding pleas and peddling its connections to Washington’s power brokers. 

The entire article is highly recommended for those wanting to dig into details and review good investigative journalism.

Follow the money.

Further on the Foregone Conclusion Exception to the Fifth Amendment Act of Production Doctrine (6/7/16; 6/8/16)

Professor Oren Kerr has this excellent posting today:  The Fifth Amendment limits on forced decryption and applying the ‘foregone conclusion’ doctrine (The Volokh Conspiracy 6/7/16), here.  He discusses a case on that issue that is teed up in the Third Circuit and perhaps in an off the record amicus brief fashion, points the Third Circuit in the direction that it should hold.

So, what is the issue?.  The issue is whether, after the Government obtains a search warrant for the contents of an encrypted hard disk drive that it is unable to decrypt without a password, the Government can require the person with the password, under penalty of contempt, to provide the password over his Fifth Amendment assertion.  (I suppose the same issue might be presented for any computer related storage that the Government is unable to supply the password for access.)  In Fifth Amendment analysis merely producing documents under some compulsory process (usually a subpoena) requires a testimonial act merely in the act of production.  This has given rise to the Act of Production doctrine whereby a party under compulsory process can claim the Fifth Amendment privilege not as to the documents under compulsion (there is no Fifth Amendment privilege for documents) but as to the testimony inherent in the act of production.  But, perhaps inconsistently with the Fifth Amendment privilege, the Supreme Court has recognized a concept that, if Government can establish that the testimony inherent in the compulsion is a "foregone conclusion" then the testimony in the act of production is irrelevant and the Act of Production doctrine does not apply,  (I think that the way I phrased the "foregone conclusion" concept tilts in favor of the argument Professor Kerr makes, but bear with me here.)  The issue is important for a number of criminal cases.  In the case at issue, it is pornography, but it easily presents itself in tax cases where the documents evidencing the crime may be in encrypted storage.

Professor Kerr sets it up by pointing out the error, a prior Eleventh Circuit opinion, in his opinion, is incorrect.  That opinion is:  In re: Grand Jury Subpoena Duces Tecum Dated March 25, 2011, 670 F.3d 1335 (11th Cir. 2012), here,  (I blogged that case Fifth Amendment Act of Production Privilege and Encrypted Data Files (2/25/12), here; but do not recommend that readers go there because Professor Kerr has a good discussion.)  Professor Kerr picks on the Eleventh Circuit for misapplying the "foregone conclusion" exception to the application of the Fifth Amendment in an Act of Production setting.  Basically (and I urge everyone to read his discussion of the Eleventh Circuit case), he says that the Eleventh Circuit focused its foregone conclusion analysis on the existence of the documents rather than on the testimony being compelled.  Professor Kerr excepts this quote:

[U]nder the “foregone conclusion” doctrine, an act of production is not testimonial — even if the act conveys a fact regarding the existence or location, possession, or authenticity of the subpoenaed materials — if the Government can show with “reasonable particularity” that, at the time it sought to compel the act of production, it already knew of the materials, thereby making any testimonial aspect a “foregone conclusion.”

Professor Kerr's argument, directed not just at criticizing the Eleventh Circuit, but to the Third Circuit in the pending case is that the Eleventh Circuit's analysis misses the point.  It is not the underlying documents that is the focus of the foregone conclusion analysis but the actual testimony being compelled.  When that compulsion is as to a password to a hard drive rather than as to the contents of the hard drive, the only compulsion in issue is the password so that all the foregone conclusion analysis need show is that the compelled party knows the password.  That is all he is compelled to tell.  The compelled person, so the reasoning goes, is giving no testimony beyond the password and the requirement that the Government show that he knows the password with reasonable particularity should satisfy the Fifth Amendment concerns under traditional foregone conclusion analysis.

I think it helpful to quote Professor Kerr's key reasoning:

V. The 11th Circuit’s Error 

In my view, the 11th Circuit’s error was failing to see the big difference between two different kinds of cases. In prior cases like Fisher [Fisher v. United States, 425 U.S. 391 (1976). and Hubbell [United States v. Hubbell, 530 U.S. 27 (2000)], the government had issued subpoenas describing documents that the suspect had to turn over. The testimony implicit in compliance with such subpoenas is very different from the testimony implied by entering in a password. 

Here’s a hypothetical to explain what I mean. Imagine a court order says you must “hand over records of your tax fraud crimes from 2013 to the present.” Assume that if you comply, you will go home and come back with a box of records. There is a lot of testimony implicit in that act. Your implicit testimony includes the following: 

1) You believe that you committed tax fraud in that time window.
2) Each of the records in the box exist and were in your possession.
3) You believe that each of the records you are handing over show that you committed tax fraud in the relevant time window. 

Of these, the third is the most important. When the government issues an order requiring you to hand over a general category of records, you have to go back and decide which of your records fits within the general category and which does not. Handing over the records amounts to testimony that the records you are handing over are within that general class of records sought by the order. 

The 11th Circuit’s error was in applying language from cases compelling disclosure of broad classes of documents to the very different case of an order to enter a password to unlock a computer. The error is subtle but critical. It’s subtle because both cases involve steps that lead to the government accessing a lot of documents. If you look at the cases from 30,000 feet, they look kind of similar. But the error is critical because the testimonial aspects of production in the two cases are vastly different. 

In particular, the idea that the government must have some idea about what files exist and where they are located makes sense when the government has an order requiring the suspect to hand over a described set of files — but it makes no sense when the government is requiring the suspect to enter a password to access those files itself. When the government is relying on the target to go through his stuff and say which files are responsive to a request, the government is obtaining the suspect’s testimony about what files exist and which files are responsive. The suspect has a Fifth Amendment privilege unless that testimony about existence and location of the sought-after files is a foregone conclusion. 

When the court order only compels the suspect to enter a password, on the other hand, the government is not obtaining the suspect’s testimony about what documents exist, where they are, and whether they comply with the court order. The only implicit testimony is, “I know the password.” What files exist, where, and what they say is distinct from that. The government has to find that out on its own. The government has to search the computer and look for the records described in the warrant. It isn’t relying on the defendant’s testimony about what is on the computer because entering in the password does not imply any testimony about that.

I think that, perhaps, Professor Kerr's analysis is too facile.  I say perhaps because he is a lot smarter and more knowledgeable in this area than I am.  So rather than categorically attempting a rebuttal, I will just state my concern.  The password is meaningless unless it is the compelled party's computer or hard drive or at least one that he has sufficient access to to permit a testimonial like implication of some relationship to the contents of the computer or hard drive.  That implication under Act of Production analysis is testimonial it seems to me, and Professor Kerr's analysis simply jumps past that.

I would appreciate comments on the issue to help me think it through.

ADDENDUM 6/8/16 9:00 PM.  I asked for comments, but received none as of this time.  However, there have been some exceptionally good comments on Professor Kerr's blog entry linked above.  So, if you are really interested in this issue, go to that entry and spend some time reviewing both the blog entry and the comments.

Excellent NYT Article on the Panama Papers Law Firm and Some of their U.S. Clients and How the System Worked (6/5/16)

Eric Lipton & Julie Creswell, Panama Papers Reveal How Wealthy Americans Hid Millions Overseas (NYT 6/5/16), here.

The article opens with an explanation of the relationship between a wealthy U.S. person and the Panama law firm, Mossack Fonseca, at the center of the Panama Papers phenomenon.

Thus began a relationship that would last at least through 2015 as Mossack Fonseca managed eight shell companies and a foundation on the family’s behalf, moving at least $134 million through seven banks in six countries — little of which could be traced directly to Mr. Ponsoldt or his children. 

These transactions and others like them for a stable of wealthy clients from the United States are outlined in extraordinary detail in the trove of internal Mossack Fonseca documents known as the Panama Papers. The materials were obtained by the German newspaper Süddeutsche Zeitung and the International Consortium of Investigative Journalists, and have now been shared with The New York Times.

The article has a link to a graphic page titled How Mossack Fonseca Helped Clients Skirt Or Break U.S. Tax Laws With Offshore Accounts (NYT 6/5/16), here, authored by Guilbert Gates.  This page is highly recommended.

The Times’s examination of the files found that Mossack Fonseca also had at least 2,400 United States-based clients over the past decade, and set up at least 2,800 companies on their behalf in the British Virgin Islands, Panama, the Seychelles and other jurisdictions that specialize in helping hide wealth. 

But the documents — confidential emails, copies of passports, ledgers of bank transactions and even the various code names used to refer to clients — show that the firm did much more than simply create offshore shell companies and accounts. For many of its American clients, Mossack Fonseca offered a how-to guide of sorts on skirting or evading United States tax and financial disclosure laws. 

If the compliance department at one foreign bank contacted by Mossack Fonseca on behalf of its clients started to ask too many questions about who owned the account, the firm simply turned to other, less inquisitive banks. 

And even though the law firm said publicly that it would not work with clients convicted of crimes or whose financial activities raised “red flags,” several individuals in the United States with criminal records were able to turn to Mossack Fonseca to open new companies offshore, the documents show. 

* * * * 

Experts in federal tax law, money laundering and offshore accounts — asked by The Times to examine certain documents or at least to identify legal issues raised by the money management techniques that Mossack Fonseca advocated — said the law firm at times had come up with creative, but apparently legal, strategies to save clients money. A common tactic: selling real estate as a shift of corporate assets, instead of as a piece of property subject to transfer taxes. 

While the experts were reluctant to declare that the law firm or its clients had broken any laws given that no charges have been filed, they said they were surprised at how explicitly Mossack Fonseca had offered advice that appeared carefully crafted to help its clients evade United States tax laws.

[JAT Disclaimer: I was not an expert consulted by the authors, but -- read on ...]

“The more correspondence that you have between a U.S. person and a bank or law firm discussing tax issues and efforts at concealment, the stronger the government will see it as a potential case worth prosecuting,” said Kevin M. Downing, the lead Justice Department prosecutor in the UBS offshore banking and tax evasion cases, now at the Washington law firm Miller & Chevalier.

The article then goes on to discuss some of the Mossack Fonseca U.S. clients.  I am sure neither Mossack Fonseca nor the U.S. clients are happy, but suspect that the U.S. clients -- at least the smart ones among them -- have moved quickly to OVDP if they have not done so already.  (I doubt that they would want to risk the certification of nonwillfulness required for Streamlined, but it will be interesting to see whether any of the MF clients attempted Streamlined and will now find that these disclosures cause the IRS or DOJ Tax to look at the nonwillful certification.)