One Step in Attacking Lack of Transparency in U.S. (1/13/16)

A complaint sometimes made on the comments to blog entries on this blog is that the U.S. attacks tax havens (particularly those that permit U.S. persons to hide money in financial institutions or through trusts, corporations or other entities) while the U.S. permits lack of transparency for foreign persons bringing money into the U.S.  See e.g., Financial Secrecy in the U.S. - A NonTax Example Illustrating the Law Enforcement Problem (11/7/15), here.  The New York Times today has this article:  Louise Story, U.S. Will Track Secret Buyers of Luxury Real Estate (NYT 1/13/16), here.

Of course, there is transparency in U.S. financial institutions because of know your customer rules.  But other forms of wealth, particularly U.S. real estate can be effective ways to hide wealth, ill-gotten or otherwise, from foreign tax administrators and collectors, as well as foreign and U.S. law enforcement with respect to money laundering and other illegal activity.  This is an attempt to address that issue, in part.

Key excerpts from todays NYT article:

Concerned about illicit money flowing into luxury real estate, the Treasury Department said Wednesday that it would begin identifying and tracking secret buyers of high-end properties. 

The initiative will start in two of the nation’s major destinations for global wealth: Manhattan and Miami-Dade County. It will shine a light on the darkest corner of the real estate market: all-cash purchases made by shell companies that often shield purchasers’ identities. 

It is the first time the federal government has required real estate companies to disclose names behind all-cash transactions, and it is likely to send shudders through the real estate industry, which has benefited enormously in recent years from a building boom increasingly dependent on wealthy, secretive buyers. 

The initiative is part of a broader federal effort to increase the focus on money laundering in real estate. Treasury and federal law enforcement officials said they were putting greater resources into investigating luxury real estate sales that involve shell companies like limited liability companies, often known as L.L.C.s; partnerships; and other entities.

Officials said the new government efforts were inspired in part by a series last year in The New York Times that examined the rising use of shell companies as foreign buyers increasingly sought safe havens for their money in the United States. 

The use of shell companies in real estate is legal, and L.L.C.s have a range of uses unrelated to secrecy. But a top Treasury official, Jennifer Shasky Calvery, said her agency had seen instances in which multimillion-dollar homes were being used as safe deposit boxes for ill-gotten gains, in transactions made more opaque by the use of anonymous shell companies. 

“We are concerned about the possibility that dirty money is being put into luxury real estate,” said Ms. Calvery, the director of the Financial Crimes Enforcement Network, the Treasury unit running the initiative. “We think some of the bigger risk is around the least transparent transactions.” 

The department will focus on sales that are both paid for all in cash and conducted using shell companies. The government is requiring title insurance companies, which are involved in virtually all sales, to discover the identities of buyers and submit the information to the Treasury. The government will put the information into a database for law enforcement. 

The Treasury’s program will affect billions of dollars in real estate transactions. In Manhattan, the initiative requires buyers in sales of more than $3 million to be reported; in Miami-Dade County, it requires reporting on sales of more than $1 million. In Manhattan, 1,045 residential sales cost more than $3 million in the second half of 2015, worth some $6.5 billion in aggregate, according to PropertyShark, a real estate data company. 

In addition to starting in only two markets, the requirement runs from March through August. If Treasury officials find that many sales involved suspicious money, Ms. Calvery said, they would develop permanent reporting requirements across the country.

Hawaii Businessman Sentenced to 46 Months (1/7/16)

I have written before on the conviction of Hawaii businessman, Albert S.N. Hee.  See After Guilty Verdict, District Court Denies Motions for Dismissal and New Trial in Tax Crimes Case (Federal Tax Crimes Blog 11/13 /15; 11/15/15), here, and Court Holds that Civil Agent Did Not Continue Investigation Too Long and Even If Deceptive Did Not Prejudice Defendant (Federal Tax Crimes Blog 5/2/15), here.  As I noted in one of the blogs, the jury convicted Hee of one count of tax obstruction, § 7212(a), here, and 6 counts of tax perjury, § 7206(1), here.

DOJ Tax has announced here his sentencing to 46 months in prison.  The actual sentence served will be subject to mitigation under the good time credit (about 15%).

It is not clear what the guidelines calculation was.  It is interesting that, based on a rough and ready guidelines calculation assuming restitution equal to the tax loss (the primary driver of the guidelines calculations), the Base Offense Level would be 18 and, even with some adjustments, it is not likely the offense level for applying the sentencing table was in excess of 23.  An offense level of 23 has a sentencing range of 46-57 months.  So, it is possible that the judge could have given a bottom of the range guidelines sentence.  (Readers will note that there is considerable uncertainty in this calculation, particularly the assumption that the restitution amount equaled the tax loss used in the calculations, and thus the conclusion.)

It is interesting to note that, had he pled rather than go to trial, he could have certainly pled to only one or two felony counts and, assuming 23 was his final offense level as speculated in the prior paragraph, with the acceptance of responsibility 3-level downward adjustment, his offense level would have been 30 with an indicated guidelines range of 33-41 and with a good shot at a Booker downward variance.  (The variance too is speculation but a good acceptance of responsibility often sets the judge up to make a downward variance in tax convictions; again speculating, a plea might have result in a sentence less than half that given after trial.)

The links guidelines tables are:  §2T4.1.Tax Table, here, and 5A Sentencing Table here.

To Group or Not to Group Under the Guidelines (1/7/16)

United States v. Doxie, 2016 U.S. App. LEXIS 5 (11th Cir. 2016), here, that deals with the Sentencing Guidelines' concept of grouping.  First, the facts relevant to this discussion.

The defendant defrauded his employer by submitting fictitious invoices for which the employer periodically mailed checks to company of $642,196.  In addition, the defendant charged the employer for false work-related expenses aggregating $287,466.33.  He did not report the income on his tax returns for 2008-2011, underpaying taxes in those years by $299,750.  For this misconduct, he "pled guilty to 21 counts of mail fraud for the false invoices (Counts 1 to 21), 41 counts of wire fraud for the false credit card charges (Counts 22 to 62), and 4 counts of filing a false tax return for the four tax years (Counts 63 to 66)."  Each of the mail and wire fraud counts carries a 20 year maximum sentence.  So, the maximum incarceration time for the fraud charges by stacking the counts would be 3,720 months.  18 USC § 1341, here, and § 1343, here.  The tax charges are tax perjury with a 3 year maximum incarceration (§ 7206(1), here), so the 4 counts would add another 144 months maximum.  The aggregate maximum sentence would thus be 3,864 months, well over 322 years.

Readers know that, where the counts of conviction are only for tax crimes, the major factor in the sentencing is the tax loss.  See S.G.  § 2T1.1(a)(1), here, and the tax loss table, here.  The nuance is that multiple counts of conviction for tax and tax related crimes (e.g., the defraud / Klein conspiracy under 18 USC 371, here), the tax loss is aggregated (including tax loss for relevant conduct outside the counts of conviction) and the calculation made accordingly.  Accordingly, for the initial Base Offense Level calculations in § 2T1.1(a)(1), it makes no difference whether there are multiple counts of conviction.  The counts of conviction are principally relevant in determining the maximum period that can be imposed if the guidelines calculation exceeds that maximum.

Chapter Three of the Guidelines contains adjustments that must be considered.  Part D deals with multiple counts of conviction.  As noted above, multiple counts are not considered in a pure tax case in calculating the Base Offense Level.  Where the counts of conviction are solely tax and tax-related, multiple counts of conviction do not require any adjustment to the calculations.  However, where there are multiple counts of conviction included unrelated offenses, there may be an adjustment.

To follow the Guidelines, the Court "groups" the counts of conviction into "distinct Groups of Closely Related Counts," determines the Guidelines calculations for each group and then makes adjustment if there is more than one Group.  In the example I just posited for only tax and tax-related crimes, there is only one Group, hence there is no further adjustment under Part D.  But, in cases illustrated by Doxie, there may be more than one Group -- (i) the nontax financial crime with sentencing calculations under S.G. § 2B1.1(a)(1) and § 2B1.1(b)(1)(I), here, and (ii) the tax crime with calculations under § 2T1.1(a)(1).  In such cases, if the Guidelines for only one of the Groups were considered, there would be no consideration of the convictions in the other Group.  The purposes of Part D are two-fold:  First, by grouping related counts of conviction, prevent the prosecutor from affecting the sentence by inflating the number of charges for a common pattern of conduct.  Second, to provide some level for incremental punishment by increases in the offense level that then increases the guidelines ranges under the sentencing table.

Now, let's turn to Doxie.  The key question in Doxie was whether there really were two groups to permit some level of incremental consideration under the grouping rules:  I cut and paste the key parts of the Court's resolution of the issue:.

A. Grouping Counts Under U.S.S.G. § 3D1.2 

* * * * 

In Part D of Chapter 3, the Sentencing Guidelines provide rules for grouping multiple counts together. According to the Introductory Commentary, the underlying goals of Part D are "to provide incremental punishment for significant additional criminal conduct," and "to limit the significance of the formal charging decision and to prevent multiple punishment for substantially identical offense conduct." See U.S.S.G. ch.3, pt. D, introductory cmt. To that end, when a defendant is convicted of multiple counts, the Sentencing Guidelines instruct the district court to group "closely related" counts of conviction according to the rules in § 3D1.2 before determining each group's offense level and the combined offense level for all the counts. See U.S.S.G. § 3D1.1; see also United States v. Marseille, 377 F.3d 1249, 1254 (11th Cir. 2004). 

Under § 3D1.2 "counts are to be grouped together for purposes of calculating the appropriate guideline range whenever they involve 'substantially the same harm.'" United States v. Register, 678 F.3d 1262, 1266 (11th Cir. 2012) (quoting § 3D1.2). Section 3D1.2 further provides circumstances in which counts involve substantially the same harm, as follows: 

(a) When counts involve the same victim and the same act or transaction.
(b) When counts involve the same victim and two or more acts or transactions connected by a common criminal objective or constituting part of a common scheme or plan.
(c) When one of the counts embodies conduct that is treated as a specific offense characteristic in, or other adjustment to, the guideline applicable to another of the counts.
(d) When the offense level is determined largely on the basis of the total amount of harm or loss, the quantity of a substance involved, or some other measure of aggregate harm, or if the offense behavior is ongoing or continuous in nature and the offense guideline is written to cover such behavior. 

U.S.S.G. § 3D1.2(a)-(d). "Counts involving different victims (or societal harms in the case of 'victimless crimes') are grouped together only as provided in subsection (c) or (d)." U.S.S.G. § 3D1.2 cmt. background. Because the "decision as to whether to group [multiple counts] together may not always be clear cut," the Background Commentary to § 3D1.2 instructs courts to "look to the underlying policy of this Part as stated in the Introductory Commentary" when "interpreting this Part and resolving ambiguities." Id. 

The issue in Doxie was whether the tax crimes, a financial crime, should be grouped with the mail and wire fraud crimes, also financial crimes.  The fight was over whether the tax crime involved "substantially the same harm" as the nontax financial crime so that it should be grouped with the financial crime. Now normally, since different victims were involved, they would not be treated as substantially the same under §3D1.2(a) which looks to the commonality of the victim.  But, under SG §3D1.2(c) and (d) provide:

(c)       When one of the counts embodies conduct that is treated as a specific offense characteristic in, or other adjustment to, the guideline applicable to another of the counts.
(d)      When the offense level is determined largely on the basis of the total amount of harm or loss, the quantity of a substance involved, or some other measure of aggregate harm, or if the offense behavior is ongoing or continuous in nature and the offense guideline is written to cover such behavior.

And, §3D1.2 provides that

"Offenses covered by the following guidelines are to be grouped under this subsection:
* * * *
§§2B1.1, 2B1.4, 2B1.5, 2B4.1, 2B5.1, 2B5.3, 2B6.1;
* * * *
§§2T1.1, 2T1.4, 2T1.6, 2T1.7, 2T1.9, 2T2.1, 2T3.1.

That created the tension the Court needed to resolve.

The Court held that the two types of crimes were not closely related as required for grouping, that there were two groups and that the incremental adjustments of Part D could apply.  The Court held:

We note that the majority of circuits to address this issue have concluded that fraud counts and tax offense counts involving the proceeds of the fraud should not be group together under subsection (c) or (d) of § 3D1.2. See, e.g., United States v. Vucko, 473 F.3d 773, 779-80 (7th Cir. 2007) (addressing subsections (c) and (d)); United States v. Martin, 363 F.3d 25, 43-44 (1st Cir. 2004) (same); United States v. Shevi, 345 F.3d 675, 681 (8th Cir. 2003) (addressing only subsection (d)); United States v. Peterson, 312 F.3d 1300, 1304 (10th Cir. 2002) (addressing subsection (c)); Weinberger v. United States, 268 F.3d 346, 354-55 (6th Cir. 2001) (addressing subsections (c) and (d)); United States v. Lindsay, 184 F.3d 1138, 1142-43 (10th Cir. 1999) (addressing subsection (d)); United States v. Vitale, 159 F.3d 810, 815 (3rd Cir. 1998) (addressing subsection (c)); United States v. Seligsohn, 981 F.2d 1418, 1425-26 (3d Cir. 1992) (addressing subsection (d)). We agree with the majority of circuits.  n3
 n3 The only circuit to conclude that fraud counts and tax offense counts should be grouped under § 3D1.2(c) is the Fifth Circuit. See United States v. Haltom, 113 F.3d 43, 45-47 (5th Cir. 1997). Other circuits have roundly criticized Haltom. See, e.g., Vucko, 473 F.3d at 777; Martin, 363 F.3d at 43 n.31; Peterson, 312 F.3d at 1303; Weinberger, 268 F.3d at 354; Vitale, 159 F.3d at 815.
   The only circuit to conclude that fraud counts and tax offense counts should be grouped together under § 3D1.2(d) is the Second Circuit. See United States v. Fitzgerald, 232 F.3d 315, 318-21 (2d Cir. 2000). Two circuits, the Sixth and the Seventh, have declined to follow Fitzgerald. See Weinberger, 268 F.3d at 355 n.2; Vucko, 473 F.3d at 780. And, at least one Second Circuit judge has since suggested that Fitzgerald may be wrongly decided and has called on the Sentencing Commission to "cut through this morass and tell us in plain English whether it wants tax offenses grouped with the offenses that produced the income on which the taxes were evaded." See United States v. Gordon, 291 F.3d 181, 197-98 (2d Cir. 2002) (Newman, J, concurring).

As to subsection (c), Doxie's mail and wire fraud counts in Group 1 governed his offense level because they produced the highest offense level. See U.S.S.G. § 3D1.4 (explaining that the combined offense level is determined by taking the offense level for the group with the highest offense level and increasing it based on a table). Under § 2B1.1, the mail  and wire fraud counts do not have a specific-offense-characteristic increase based on the tax offense conduct. That is, under § 2B1.1, Doxie's offense level was not increased because Doxie failed to report his income obtained from the mail and wire fraud. See generally U.S.S.G. § 2B1.1. 

As Doxie points out, the guideline for tax offenses, U.S.S.G. § 2T1.1, imposes a two-level specific-offense-characteristic increase if the unreported income is from criminal activity. See U.S.S.G. § 2T1.1(b)(1) & cmt. n.4. But Doxie's offense level ultimately was not determined by § 2T1.1, but by § 2B1.1, so the specific offense characteristic increase in § 2T1.1(b)(1) did not increase his sentence. n4
   n4 We note that the two-level increase under § 2T1.1(b)(1) from level 18 to level 20 did not affect the number of Units used to calculate Doxie's combined offense level under § 3D1.4. See U.S.S.G. § 3D1.4(b) (counting as "one-half Unit any Group that is 5 to 8 levels less serious than the Group with the highest offense level"). Stated another way, if Doxie's tax offenses had not involved a failure to report income derived from criminal activity, his Group 2 offense level of 18 still would have resulted in one-half Unit under § 3D1.4(b) and his combined offense level would have remained 26 under § 3D1.4. This fact distinguishes Doxie's case from the defendant's in Haltom. See Haltom, 113 F.3d at 46-47 & n.5 (concluding that the defendant's mail fraud "counted twice toward his sentence" because "the enhanced tax evasion count was directly responsible for the ultimate 2-level increase" under § 3D1.4). 

In any event, the specific offense characteristic in § 2T1.1(b)(1) does not address fraud conduct in particular nor adjust depending on the seriousness of the underlying criminal activity. Instead, the two-level increase applies regardless of the type of criminal activity that resulted in unreported income. See U.S.S.G. § 2T1.1(b)(1) & cmt. n.4. The purpose of the two-level increase is not to account for the underlying criminal activity, but rather to adjust for the fact that "[c]riminally derived income is generally difficult to establish," making the tax loss "tend to be substantially understated." Id. § 2T1.1 cmt. background. Thus, Doxie's fraud counts are not "embodie[d]" by the conduct treated as a specific offense characteristic in § 2T1.1(b)(1), and grouping the tax and fraud counts separately does not result in double counting. Id. § 3D1.2(c) & cmt. n.5.n5
   n5 In 2001, the Sentencing Commission proposed an amendment to the official commentary to § 2T1.1 that would have called for grouping a tax evasion count with the count charging the offense that provided the income under § 3D1.2(c), but that proposed amendment was never promulgated. See Notice of Proposed Amendments to the Sentencing Guidelines, 66 Fed. Reg. 7962, 8004 (Jan. 26, 2001). Notably, the Sentencing Commission has managed to promulgate a similar amendment indicating that money laundering counts are to be grouped with the counts for an underlying offense that generated the laundered funds under § 3D1.2(c). See U.S.S.G. app. C, amend. 634; U.S.S.G. § 2S1.1 cmt. n.6. In light of this history, it appears "the Sentencing Commission does not support a categorical rule requiring courts to group fraud and tax evasion counts." Martin, 363 F.3d at 44 n.32. 

As for subsection (d) of § 3D1.2, although both guidelines—§ 2B1.1 and § 2T1.1—are included in the "to be grouped" list, they are not "of the same general type." The tax offenses are governed by the Internal Revenue Code in Title 26, rather than the criminal code in Part I of Title 18. Likewise, the offense level for the tax offenses are governed by a different part of the Sentencing Guidelines, Part T rather than Part B. Cf. Register, 678 F.3d at 1267 (concluding the defendant's failure-to-pay-over and filing false returns counts were "of the same general type" in part because they were both governed by the Internal Revenue Code and Part T of the Sentencing Guidelines). 

Further, the loss for the tax offenses is determined differently under the Guidelines. Specifically,§ 2T1.1 determines the base offense level based on tax losses, not on fraud losses. Also, to the extent § 2T1.1 accounts for fraud losses, it does so only as a two-level increase, so the fraud losses are not aggregated with the tax losses to set an offense level. See U.S.S.G. § 2T1.1(b)(1) (providing for a two-level increase "[i]f the defendant failed to report or to correctly identify the source of income exceeding $10,000 in any year from criminal activity"). 

Perhaps most important for both subsections (c) and (d) of § 3D1.2, Doxie's fraud and tax offenses are not "closely related" on the facts of this case. Doxie's tax crimes involved not just different victims, but distinct offense behavior. The circumstances of Doxie's wire and mail fraud—submitting false invoices and making fraudulent credit card charges at his work—are different in kind from his failure to report all of his income on his federal tax returns. Further, Doxie's fraud and tax crimes were not interrelated in a way that made them "integral cogs in continuing [a] scheme." Cf. United States v. Mullens, 65 F.3d 1560, 1564 (11th Cir. 1995) (explaining that the defendant's money laundering of the proceeds of the Ponzi scheme promoted the Ponzi scheme by "returning false profits to some investors and paying expenses to maintain the façade of success [which in turn] enabled [the defendant] to attract new investors and keep old investors from discovering his deceit"). In fact, the only connection between Doxie's unreported income and his fraud was that "the money represented the proceeds of the fraud," which by itself is insufficient for grouping under § 3D1.2. See McClendon, 195 F.3d at 602 (concluding that money laundering and fraud counts should not be grouped under § 3D1.2(d) merely because the laundered money was the proceeds of the fraud). n6
   n6 Had the district court grouped all 66 counts together in one group under either U.S.S.G. § 3D1.2(c) or (d) as Doxie urged, the adjusted offense level would have remained 25 under § 3D1.3(a) or (b). The only difference is there would have been no multi-count enhancement under § 3D1.4. The total offense level after the acceptance-of-responsibility reduction would have been 23. With a total offense level of 23 and a criminal history category of I, Doxie's advisory guidelines range would have been 46 to 57 months, instead of the 51 to 63 months used by the district court. 

Finally, any ambiguity as to whether to group Doxie's fraud and tax counts together under § 3D1.2(c) or (d) is resolved by reference to the Sentencing Guidelines' stated goals for grouping counts. Regardless of how Doxie's counts are grouped, his offense level ultimately is determined by his wire and mail fraud counts because they produce the highest adjusted offense level (25 as opposed to 20). See U.S.S.G. § 3D1.3(a)-(b). Because the Group 1 adjusted offense level of 25 did not include a specific-offense-characteristic increase for Doxie's tax counts, there was no double counting of Doxie's tax offense behavior when the district court applied the one-level increase under § 3D1.4 to determine the combined offense level. By imposing § 3D1.4's one-level increase for the four tax counts, the resulting advisory guidelines range furthered the goal of providing "incremental punishment for significant additional criminal conduct." See U.S.S.G. ch. 3, pt. D, introductory cmt. 

Had the district court done as Doxie urged and placed all 66 counts into one group, there would have been no additional punishment for Doxie's tax crimes reflected in the advisory guidelines range. In short, the only way to achieve the stated goals of providing incremental punishment for additional crimes while preventing double counting for substantially the same conduct is to refuse to group the tax counts with the wire and mail fraud counts. 

For these reasons, we conclude the district court did not err when it grouped Doxie's tax counts separately for purposes of calculating his offense level and advisory guidelines range. Accordingly, Doxie has not shown that his sentence is procedurally unreasonable. 

Government Asserts Wylys' Fraud in Bankruptcy Court (1/7/16)

Sam Wyly, about whom I have written before, here, is back in the news today over his offshore tax gambits.  See Lisa Maria Garza, Texas tycoon Wyly engaged in massive tax fraud, IRS tells court (Reuters 1/6/16), here.  This iteration of the dispute over taxes, penalties and interest alleged to exceed $3 billion is in bankruptcy court in the Northern District of Texas where the formerly fabulously wealthy Wylys seek mitigation of the tax liabilities claimed by the IRS.  Federal tax procedure enthusiasts will know that sometimes interesting and complex tax issues are resolved in the bankruptcy court.  The article the lawyers high level summary of the case as follows:

Texas tycoon Sam Wyly engaged in "lies, deception and fraud" in a years-long scheme to dodge taxes on $1.1 billion held in offshore trusts, a lawyer for the Internal Revenue Service said on Wednesday. 

The IRS made those claims at the start of a trial in federal bankruptcy court in Dallas in which the agency is seeking $3.22 billion in back taxes, penalties and interest from Wyly and the widow of his late brother Charles, Caroline Wyly. 

Cynthia Messersmith, a U.S. Justice Department lawyer representing the IRS, said the Wylys had since 1992 used offshore trusts to avoid paying taxes on $1.1 billion in proceeds while exercising stock options and warrants of four companies on whose boards the brothers sat. 

"This is a case of lies, deception and fraud," she said. "This is not about tax avoidance but rather tax evasion."

Don Lan, the Wylys' lawyer, countered that the family "left the details to their advisers," relying on lawyers who vetted the offshore system and advised them on their taxes. 

Regarding Sam Wyly, Lan said: "He's a brilliant man, but he's not a tax guy."

The emphasis on the lie as the central issue in a white collar crime case is a theme I have discussed before in various blogs, here.  The case as presented is the civil analog to a criminal case.  Tax criminal trials, like white collar criminal trials generally, are about "lying, cheating and stealing."  See e.g., the FBI's web page on white collar crime, here:

Lying, cheating, and stealing. 

That’s white-collar crime in a nutshell. The term—reportedly coined in 1939—is now synonymous with the full range of frauds committed by business and government professionals.

As to the fraud and fraud-like issues, the Government will try the case like a white collar crime case, as indicated by the reports of the opening arguments at trial and the Government's pretrial brief (linked and quoted below).

So, I thought I would present the issues as framed by the parties in their pretrial briefs (Wylys 132 pages, here, and Government 156 pages, here).  I do not have time to scour these lengthy tomes for any nuggest buried therein, but perhaps readers with an interest can make comments on the nuggets they fined.  The issues as framed are:


Wylys' Statement of the Issues

Issues Presented n2
   n2 Dee also claims that she is entitled to relief under the innocent spouse provisions of I.R.C. § 6015(b) and (c) for all income tax deficiencies and interest. 

(1) What is the correct income tax liability given this Court’s acceptance by collateral estoppel of the District Court’s finding that the IOM trusts are “grantor trusts” to the Wylys?\ 

(2) Were any taxable gifts made by the Wylys during the tax years at issue? If so, what were they and what are the amounts of any such gifts? 

(3) Are the Wylys liable for the civil fraud penalty regarding:
(a) any income tax deficiency?
(b) any gift tax deficiency? 

(4) What tax years are open for the Wylys absent fraud? 

(5) Are the Wylys liable for failure to file Forms 3520, 3520-A, and/or 5471? If so, what are the reportable transactions and what is the amount for each such failure? 

(6) Which party has the burden of proof for each claim and defense? 

(7) Are the IRS Proofs of Claim adequate, and, if not, what impact does this have on the burden of proof?\ 

(8) What is the proper calculation of interest in light of the suspension of interest under Internal Revenue Code § 6404(g)? 

(9) If they apply, are the failure to file penalties excessive fines barred by the Eighth Amendment? 

(10) Are laches or estoppel defenses applicable by the Wylys to the IRS claims?

The Government's Statement of the Issues (with a high level summary of its arguments):

The United States believes the issues in this matter can be narrowed into two general categories. The first category involves the Debtors’ liability for income and gift taxes and for international penalties due to their failure to file required IRS forms relating to the Debtors’ grantor trusts located in the Isle of Man. The second category relates to the Debtors’ liability for the civil tax fraud penalty under I.R.C. Section 6663 (for the income tax) and Ms. Wyly’s liability under Section 6651 relating to the failure to file gift tax returns. Specifically, the issues in this matter can be described as follow: 

Income/Gift Tax/International Penalty Liability: 

The Court must determine the correct amount of (1) income tax liability for the Debtors for the tax years 1992-2013;3 (2) gift tax liability for (a) Sam Wyly for the tax years 2000-2005, and (b) Dee and Charles Wyly for the tax years 2001-2005 and 2010; and (3) liability for international penalties due to the Debtors’ failure to file Forms 3520, 3520-A, and 5471. The United States does not believe Dee Wyly is entitled to innocent spouse relief from any of the income tax or gift tax deficiencies, but will defer the substantive discussion of this issue pursuant to the extension of time the Court has given Ms. Wyly on this issue. 

Statute of Limitations: 

The United States asserts that the statute of limitations for the income and gift tax periods at issue is open due to the fact that the Wylys committed civil tax fraud. Notwithstanding the fraud issue, however, the United States asserts, and the Wylys admitted, that I.R.C. § 6501(c)(8) keeps open the statute of limitations for tax years 1998-2013. Thus, the fraud issue is only necessary to keep the statute of limitations open for tax years 1992-1997. The United States is not subject to the defense of laches in enforcing its rights. United States v. Summerlin, 310 U.S. 414, 416 (1940); see also Redstone v. Comm’r, T.C. Memo 2015-237, at *23-24 (Dec. 9, 2015) (“The inapplicability of the laches doctrine is especially clear where (as here) the Government seeks to enforce tax claims that are governed by an express statute of limitations.”); Jacksonville Paper Co. v. Tobin, 206 F.2d 333, 334 (5th Cir. 1953). 

Grantor Trusts 

In SEC v. Wyly, the District Court found that the IOM Trusts were “grantor trusts” from their inception through 2004. The United States contends that this finding applies to years after those in the SEC litigation, i.e., 2005-2013, because the Debtors failed to identify material factual or legal changes relating to the IOM Trusts beyond 2004 (the final year addressed in the District Court’s findings). 

Fraud 

In this self-reporting system, the United States relies upon taxpayers’ own disclosures for the collection of its income tax. The Debtors engaged in intentional wrongdoing with the specific intent to avoid taxes. The Debtors’ fraud is established, in part, by several badges of fraud, including (1) their understatement of income; (2) inadequate records; (3) failure to file tax returns; (4) implausible or inconsistent explanations of behavior; (5) concealing assets; and (6) failure to cooperate with tax authorities. 

The Debtors’ reasonable cause defense fails because:  

a. they relied on the opinions of the promoters who designed the offshore system and drafted the documents used to implement the offshore system in the first place; 

b. the Wylys, as the principals, are charged with the knowledge that their agents Michael French, Sharyl Robertson, Michelle Boucher, and Keeley Hennington had concerning
the opinions and advice of various legal counsel employed by the Wylys; 

c. the Wylys were on notice from their attorneys as early as 1993 of the significant risks of the aggressive tax posture encompassed in their offshore system; 

d. the Wylys failed to provide all of the necessary facts to the legal and tax professionals upon whom they rely as their defense in this matter; and/or 

e. the Wylys misrepresented facts to, or disregarded factual assumptions made by, their legal and tax professionals upon whom they rely as their defense in this matter. 

Fraud as related to Dee Wyly  

Dee Wyly does not escape the fraud penalties merely because she purposefully engaged in a pattern of “willful blindness” seeking to ignore the tax fraud being used to finance her opulent lifestyle. 

Also with respect to Ms. Wyly, the United States asserts that the joint income tax returns Ms. Wyly signed with her late husband, Charles Wyly, beginning in 1992 until his death, were fraudulent returns without regard as to whether Ms. Wyly is liable for the fraud penalty. 

Security Capital Limited 

As part of their fraudulent scheme, the Wylys created and employed an entity, Security Capital Limited, merely as an intermediary of their Offshore System to funnel money the IOM to the Wylys.

One More Swiss Bank Achieves NPA Under Swiss Bank Program (1/6/16)

On December 31, 2015, DOJ announced, here, that 1 more bank has entered an NPA under the DOJ program for Swiss banks, her

Union Bancaire Privée, UBP SA

$187.767 million

The banks will be added to the IRS's Foreign Financial Institutions or Facilitators, here.  As indicated in the last quoted paragraph, accountholders in the listed banks joining OVDP after one of their banks are listed will be subject to the 50% penalty in OVDP (provided that they do not opt out, in which case, who knows).

Here are the updated statistics for the Swiss Bank Program:

US DOJ Swiss Bank Program	Number	Number Resolved	Total Costs
U.S. / Swiss Bank Initiative Category 1 (Criminal Inv.) *	16	4	$3,470,550,000
U.S. / Swiss Bank Initiative Category 2 **	96	79	$1,313,426,990
U.S. / Swiss Bank Initiative Category 3	14		$0
U.S. / Swiss Bank Initiative Category 4	8		$0
Swiss Bank Program Results	134		$4,783,976,990
* Includes subsidiary or related entities counted as separate entities, so the numbers may exceed the numbers the IRS and DOJ posted numbers which combine some of the entities.
** DOJ says original total was 106 but that it expects about 80 to complete the process.

Judge Criticizes Prosecutor's Use of Language Directing Secrecy for Receipt of Grand Jury Subpoena (1/4/16)

I hope that all readers of this blog know that grand jury proceedings are generally secret and the grand jurors and government actors in the process must keep them secret.  FRCrP 6(e)(2), here.  But the obligation of secrecy is not imposed on witnesses before the grand jury.  They may discuss their testimony before the grand jury and the documents they produced under grand jury subpoena.

In United States v. Gigliotti, 2015 U.S. Dist. LEXIS _____ (ED NY 12/23/15), here, Judge Dearie denied a motion to suppress evidence obtained pursuant to grand jury subpoena that unlawfully contained the following:

YOU ARE HEREBY DIRECTED NOT TO DISCLOSE THE EXISTENCE OF THIS SUBPOENA, AS IT MAY IMPEDE AN ONGOING INVESTIGATION.

When the Gigliottis first raised the issue, the prosecutors conced that the language was unlawful.  That alone was not satisfying, so the the Court ordered

Given the defenses’ persistent and understandable objections to language added to grand jury subpoenas, the Court orders the government to file a report detailing: (1) how extensively this or similar language has been used in grand jury subpoenas by the United States Attorney’s Office, (2) what training or procedures the Office has initiated to review grand jury subpoenas, and (3) what steps the Office has taken to ensure that similar language is not used in the future, absent specific judicial authorization.

The Court described the prosecutors' submission in response:

First and foremost, the government acknowledged (as it had before1) that its use of the Non-Disclosure Language was improper. ECF No. 107. The government asserted that it is not the practice and policy of the United States Attorney’s Office for the Eastern District of New York (the “Office”) to include such language in grand jury subpoenas to witnesses. Id. at 2. Rather, “Office and Departmental training instructs that non-disclosure may not be imposed on a grand jury witness absent statutory authority or judicial order.” Id. at 4. The government stated that absent such legal authority, the Office’s policy has been to include a request, not a command, for non-disclosure. Id. at 3.

Nevertheless, the government informed the Court that three of the thirty-eight grand jury subpoenas issued in connection with this case included the Non-Disclosure Language “in violation of [the Office’s] practice and policy.” Id. at 3-4. The government offered the curious representation to the Court that “[t]he inclusion of such language was inadvertent and unintentional,” having been “missed by undersigned counsel when the subpoenas were finalized by support staff.” Id. at 3. 

The government stated that “in light of the error revealed by the present motion, the government has issued letters to the three recipients of the grand jury subpoenas in question notifying them of the error and advising them that they are under no legal obligation not to disclose their receipt or responses to the subpoenas.” Id. at 3. The government also stated that following this Court’s order dated October 7, 2015, the Office directed all Assistant United States Attorneys (“AUSAs”) not to include requests for non-disclosure on the face of subpoenas. Id. Instead, such requests will now be made in a separate cover letter “[t]o avoid any appearance that such language carries with it judicial authority.” Id.

The Court then started its discussion:

The government’s improper directions to subpoena recipients are cause for serious concern. As the government acknowledges, Fed. R. Crim. P. 6(e)(2) imposes no obligation of secrecy on grand jury witnesses. See Fed. R. Crim. P. 6(e)(2)(A) (“No obligation of secrecy may be imposed on any person except in accordance with Rule 6(e)(2)(B).”); Fed. R. Crim. P. 6(e)(2)(B) (not including witnesses among the list of persons bound by an obligation of secrecy).  As the United States Supreme Court summarized in United States v. Sells Engineering, Inc., 463 U.S. 418 (1983), 

Rule 6(e) of the Federal Rules of Criminal Procedure codifies the traditional rule of grand jury secrecy. Paragraph 6(e)(2) provides that grand jurors, government attorneys and their assistants, and other personnel attached to the grand jury are forbidden to disclose matters occurring before the grand jury. Witnesses are not under the prohibition unless they also happen to fit into one of the enumerated classes. 

Id. at 425. As these authorities make clear, it was improper for the government to include the Non-Disclosure Language in grand jury subpoenas issued to witnesses.

The Court then held that suppression was not the appropriate remedy.

The Court, however, had the closing caution to the prosecutors:

A word of caution, however, to the government. This ruling is not meant to suggest that suppression, as drastic a remedy as it may be, or other significant sanctions, might not be available to a court should practices of this sort persist. Indeed, now that the government is unambiguously on notice of this problem and the need to correct it, continued violations could well warrant severe remedies. 

This admonition is triggered, in part, by the government’s disappointing response to the Court’s October 7, 2015, request for a delineation of the scope of this problem and the Office’s plan to address it. The Court takes little comfort in the fact that the Office’s official policy conforms to Rule 6(e); such policy was violated multiple times here, and it is apparent that such violations are not isolated to this case.4 And the Court is, frankly, bemused by the government’s rather glib explanation that the violations were simply “inadvertent and unintentional.”  

The Court’s bigger concern, however, is that the Office has not yet taken adequate steps to prevent violations of this sort from happening again. The Office’s direction to all AUSAs that grand jury subpoenas no longer include, on their face, non-disclosure requests is a step in the right direction. But the government has yet to explain, in specific terms, how it will ensure compliance with its policy moving forward, and it has yet to reassure the Court that it has adequately conveyed the seriousness of this issue to all of its AUSAs. The government proceeds at its peril.

JAT Comments:

1.  Obviously Judge Dearie was not pleased with either the original misconduct or the adequacy of the prosecutors' response.

2.  The decision has gathered significant press.  See e.g., Stephanie Clifford, Prosecutors’ Secrecy Orders on Subpoenas Stir Constitutional Questions (DealBook 12/31/05), here, and Andrew Keshner, Judge Denied Suppression Bid but Cautions U.S. Prosecutors (New York Law Journal 1/4/16), here.  The following is from the NYT DealBook

It is not unusual for prosecutors on the state and federal levels to include a sentence in a subpoena requesting a witness not disclose its existence. The law does not allow them to make it mandatory, however, unless a judge approves it. 

“You can always ask; you just can’t direct somebody not to disclose it without a judge’s order,” said Daniel R. Alonso, a former state and federal prosecutor. 

Mr. Alonso said prosecutors have good reasons for trying to keep subpoenas quiet, especially in organized crime cases. Once targets of an investigation know to whom investigators have spoken, they may try to destroy evidence or intimidate witnesses. Serving subpoenas, in essence, tips the government’s hand. 

“They don’t want them to know because of the risk they will tamper with evidence,” Mr. Alonso said. 

But defense lawyers say these requests, if followed, also hamstring a defendant’s legitimate ability to challenge a subpoena or mount a defense. The law is intended to create a higher bar for imposing a gag order on witnesses, forcing prosecutors to make a case to a judge that such a measure is necessary and obtain a court order.

3.  I have seen grand  jury subpoenas with the precatory "requests" rather than directions.  These requests are usually in a letter with the subpoena or, in some cases, might be oral.  So, long as the wording and context is sufficient to insure that the recipient of the subpoena would understand that it is not compulsory, I suppose it is OK.  Many witnesses might want to comply rather than irritate the prosecutor.

DOJ Tax Authorization of Tax-Related Charges (1/1/16)

This is an interesting opinion out of Minnesota.  United States v. Belfrey, 2015 U.S. Dist. LEXIS 170711  (D. Minn. 11/17/15) (Magistrate Report and Recommendation), adopted by district court, 2015 U.S. Dist. LEXIS 170709 (D. Minn. 12/22/15) [no link available].  The case involves a superseding indictment of two brothers, Thurlee and Roylee Belfrey. The principal charge is health care fraud.  As with many types of financial crimes, tax misconduct is involved.  Accordingly, the superseding indictment included the Klein/defraud conspiracy under 18 USC 371, here.  As explained in the magistrate's report:

The original two count indictment (Doc. No. 1) contained charges of health care fraud and conspiracy to defraud the United States with regard to claims for payments for health care services under Medicare and Medicaid. The superseding indictment added a third charge of conspiracy to defraud the United States with respect to the assessment and collection of income and employment taxes (Doc. No. 64).

The magistrate's report, adopted by the district court, rejects the Roylee's claim that the prosecutors failed to advise the grand jury of exculpatory evidence.  The alleged exculpatory evidence was that DOJ Tax did not authorize a Title 26 charge.  The discussion is interesting and short, so I include it in full:

B. Exculpatory Evidence.  

Counsel for Defendant Roylee Belfrey asserts by way of affidavit (Doc. No. 82, Devore Aff.) that he participated in discussions with attorneys from the Department of Justice - Tax Division regarding a request by the Minnesota U.S. Attorney's Office to bring Title 26 tax charges  n1 against Defendant Roylee Bailey. Counsel states his understanding that Title 26 charges would have been prosecuted by the Department of Justice ("DOJ"), and that the DOJ must have declined to prosecute a Title 26 fraud charge, thereby leaving the Minnesota U.S. Attorney's Office only the option of pursuing fraud conspiracy charges under 18 U.S.C. § 371, n2 as alleged in the superseding indictment. Id. Counsel contends that the DOJ's decision to decline prosecution of Title 26 charges is exculpatory evidence that should have been presented to the grand jury. In opposition, the government argues that the prosecutor had no obligation to present exculpatory evidence to the grand jury, and the failure to do so as alleged by the Defendants is of no consequence. Also, the government acknowledges that tax prosecutions must be approved by the Tax Division of the DOJ pursuant to 28 C.F.R. § 0.70, but states that such charges are typically prosecuted by the local U.S. Attorney's Office, not the DOJ, and that approval of a charge of conspiracy to defraud under 18 U.S.C. § 371 was in fact given in this case by the DOJ Tax Division. n3
   n1 Title 26 of the United States Code is the Internal Revenue Code. Defendants do not indicate any specific provision of Title 26 that might have been under review by the DOJ - Tax Division. Counts 1 and 2 of the original indictment and the superseding indictment allege health care fraud in violation of Title 18 U.S. Code, §§ 286 and 1347.
   n2 18 U.S.C. § 371 generally prohibits conspiracy to commit any offense against the United States, or to defraud the United States, or any agency of the United States. "A charge of conspiracy to defraud the United States by impeding the function of the Internal Revenue Service in the function of assessing and collecting taxes, commonly known as a 'Klein conspiracy,' is not brought under Title 26, but under 18 U.S.C. § 371." (Gov't Suppl. Br., n.2 (Doc. No. 87).
   n3 At the hearing the government submitted a redacted letter from the U.S. DOJ - Tax Division to the Minnesota U.S. Attorney's Office expressly stating that the Tax Division had determined that the prosecution of Thurlee Belfrey and Roylee Belfrey pursuant to 18 U.S.C. § 371, conspiracy to defraud, is authorized. Defendants moved for production of the entire, unredacted letter (Doc. No. 86). This Court will address that motion in a separate order.

The Supreme Court has unequivocally held that the prosecutor is not required to present exculpatory evidence to the grand jury. United States v. Williams, 504 U.S. 36, 51-54 (1992) (discussing the historical role of the grand jury). In Williams, the Court reiterated its opinion in Costello v. United States, 350 U.S. at 364 that review of facially valid indictments on grounds that the prosecutor's presentation was incomplete or misleading "would run counter to the whole history of the grand jury institution[,] [and] [n]either justice nor the concept of a fair trial requires [it]." Williams at 54. Even the dissent in Williams agreed that the prosecutor is not required to place all exculpatory evidence before the grand jury, Id. at 69, but took the position that an indictment would be properly dismissed "if the withheld evidence would plainly preclude a finding of probable cause." Id. at 70. Even if the DOJ Tax Division declined to approve charging the Defendants with a Title 26 tax crime, such as income tax evasion, false statements in tax documents, or failure to pay over withheld employment taxes, the prosecution was not required to present this allegedly exculpatory evidence to the grand jury. Nor was the prosecution required to present to the grand jury any prior efforts by the Defendants to negotiate a tax payment plan with the IRS. Defendants' motions to dismiss the superseding indictment for failure by the prosecution to present exculpatory evidence to the grand jury should be denied.

JAT Comments:

1. The discussion of the the defendant's claim suggests at least confusion in the defendant's attorney who apparently was not familiar with procedures for authorizing tax-related crimes, which the Klein conspiracy surely is,  DOJ Tax must approve the charge.  See e.g., USAM 6-4.122 - United States Attorney's Grand Jury Investigations and Prosecutions, subparagraph C, here; and DOJ Tax CTM 1.01[4][a] Authority of the Tax Division, here.  Hence, as it turns out, as noted in footnote 3, DOJ Tax did approve the Klein conspiracy charge.

2.  Most tax criminal conduct can be charged under more than one provision of title 26 or Title 18.  Decisions as to which crimes to charge are in the prosecutorial of the prosecutors.  DOJ Tax can thus authorize a tax related charge under either title depending upon a host of factors.  For charges such as this where the gravamen of the conduct is health care fraud, DOJ Tax would authorize the tax-related charge or charges that most closely fit the prosecution needs for the gravamen of the conduct.  I surmise that someone made the decision that a conspiracy is a better fit for the overall prosecution than the specific crimes in Title 26.  For this reason, a decision not to charge the Title 26 crimes is most certainly not exculpatory evidence.

3.  The discussion of the defendant's claim seems to suggest that the claim was that, had Title 26 charges been authorized, the prosecution would have been by DOJ Tax criminal attorneys rather than by an AUSA in the local USAO.  That claim, if made that way, is simply contrary to the practice, as many tax charges, even stand alone tax charges unrelated to other principal charges, are prosecuted by AUSAs, depending upon how DOJ deploys its resources.  Local AUSA prosecution would particularly occur when the gravamen of the conduct alleged in the indictment is a nontax crime, with one or more tax crimes also being charged incident to the larger misconduct.

4.  As noted in footnote 3, the prosecutor did present a redacted copy of DOJ Tax's authorization of the Klein conspiracy charge.  The defendant requested the entire, unredacted copy.  The court deferred action on that request.  I have not seen any action on that request.  I would be surprised, however, if the court required the production of the entire, unredacted copy.

5.  I suppose that one defense gambit this suggests is to always inquire into the authorization of the tax charges in an indictment and, specifically, request that the authorization be produced.  There may be something to learn there.  Maybe not, but you don't know until you look under that stone.