Notice to Readers: Irrelevant and Political or Anti-IRS Comments Will Not Be Approved (1/22/16; 1/28/16)

I have in the past routinely approved most irrelevant and political and anti-IRS comments to blog entries.  Today, I received another and my tolerance for such comments has worn thin.  I post below the comment that has provoked my reaction. 

I remind readers that this is a federal tax crimes blog.  It is not a political blog or tax policy blog or any other kind of blog except federal tax crimes.  Hence, I will no longer approve comments that are not relevant to the blog entry and that present more political argument or anti-IRS argument than analysis of the law relevant to federal tax crimes issues.

For those of you who want to make political comments or anti-IRS, I recommend that you find another blog which welcomes those comments.  For example, you might try the Tax Prof Blog, here, where Professor Paul Caron posts each day one entry labeled The IRS Scandal, Day xxx (the entry today is The IRS Scandal, Day 988).  Each day you will find a posting and, so long as you want to make political or anti IRS comments, he seems more than willing to post such comments on his blog.

Thus, for readers who may be inclined to want to make these comments, please note that henceforth they will not be approved for publication on the Federal Tax Crimes Blog.

Here is the comment provoking this response.

Breaking News: The IRS rabbit hole of corruption goes even deeper. 

http://www.forbes.com/sites/robertwood/2016/01/20/irs-wipes-another-hard-drive-defying-court-order-but-you-must-keep-tax-records/#128fd9ac726b 

There are several very annoying things about the IRS in this article but this quote I find very revealing: 

Despite a court order to preserve documents, the IRS wiped the hard drive of an important IRS official, Mr. Samuel Maruca. Controversially, Mr. Maruca helped the IRS hire Quinn Emanuel, an outside law firm tasked with pursuing Microsoft. Hiring outsiders at over $1,000 an hour (!) angered Senate Finance Committee Chairman Orrin Hatch, who wrote a letter to the IRS complaining about strange deal and the $2.2 million fee. 

So once again we have an internal IRS cover up of their own wilful criminality.  Any honest person working at the IRS must realize that this it has turned into a political crime racket, and that's probably why so many rats are jumping ship.   

Compare this to how the IRS hounds  law abiding Swiss wealth advisers who were merely following Swiss law and the QI agreements in the course of doing their jobs.  Even worse for these honest Swiss citizens, the IRS is going to pay $1000/hr lawyers from crony political law firms to extract the IRS's pound of flesh.... for following the laws of the country they are citizens of and live in. 

For US tax payers this is even worse news on the heals of the latest bill that allows the IRS to outsource its tax collection.  We know these firms will be crony political K-street tax collectors providing campaign kickbacks to the Democratic party.  And we know that these extra costs will be paid for by the US tax donkeys through higher fees and penalties.   

But even worse, we know that this 2-way street of corruption will be used by the Clinton machine to guarantee that anyone running against Hillary will be fighting the IRS too.  That is certainly is one formidable wall of corruption.

Addendum 1/28/16 6:15pm:

Other blogs have posted on this blog and offered their readers opportunities to comment..

• Maple Sandbox, here.
• Isaac Brock Society, here.

Should Proof of No Tax Evaded Be Admissible as Defense in Crime Not Requiring Tax Evaded as an Element (1/20/16)

Tax evasion, § 7201, here, requires proof of a tax evaded as an element of the crime.  Other prominent tax crimes do not require proof of tax evaded as an element of the crime. E.g., tax perjury, § 7206(1), here, and tax obstruction, § 7212(a), here.  But, a tax evaded is at the heart of most tax crimes, even when not an element of the crime, because of the Sentencing Guidelines which key the principal punishments -- incarceration and fines -- to the tax evaded.  See e.g., John A. Townsend, Tax Evaded in the Federal Tax Crimes Sentencing Process and Beyond, 59 Vill. L. Rev. 599 (2014), here.

The question sometimes presented is whether the presence or absence of tax evaded is an issue that can be presented to the jury in a trial for a crime not requiring a tax evaded as an element of the crime.  Obviously, from the Government's perspective informing the jury that taxes were evaded is important to supply the motive for the conduct that requires willfulness as an element or, as with tax obstruction, corrupt action as an element.  I suspect that most courts would routinely admit the Government's evidence of tax evaded.  But the defendant might try to admit evidence that no taxes were evaded in the case in chief in order to make conviction less palatable to the jury and as mitigating or disproving other elements of the crime -- e.g., the ubiquitous willfulness requirement for tax crimes and corruptly element of § 7212(a)?

In United States v. Giambalvo, ___ F.3d ___, 2016 U.S. App. LEXIS 478 (8th Cir. 2016), here, the defendant was convicted of one count of tax obstruction, § 7212(a), and eight counts of tax perjury, § 7206(1).  As previously noted, tax evaded is not an element of either crime.  In the case in chief, the defendant called as an expert an H&R Block accountant to testify that, based on her review, the defendant owed no tax.  (That evidence would clearly be appropriate at the sentencing phase where tax loss is the primary driver for the Sentencing Guidelines calculations.)  The district court excluded the proffered testimony.  On appeal, defendant raised the issue.  The Court of Appeals resolved the issue as follows:

Prior to trial, Giambalvo notified the government of his intent to call H&R Block accountant Claudia Bradshaw as an expert witness. Bradshaw would testify that, based on her preparation of Giambalvo's tax returns dated May 31, 2014, for the tax years at issue in the case, Giambalvo did not owe any taxes on January 26, 2011. According to Bradshaw's proposed testimony, Giambalvo would have been due a substantial tax refund had he filed proper and timely federal income tax returns. The government moved in limine to exclude evidence of Giambalvo's tax returns and tax-loss data prepared and filed post indictment. 

The district court granted the government's motion in limine during a pretrial motion hearing, concluding that "the suddenly filed tax returns under the established law clearly doesn't come in" because these tax returns were filed "[m]ore than ten years later, more than three and a half years after the indictment [was] issued." As a result, the court found the probative value of such returns "minimal," but the prejudice to be "great." According to the court, under § 7206(1), "the amount of tax loss isn't probative" to whether Giambalvo's misstatements could have hindered the IRS in carrying out its "functions as to verification or the accuracy of the return or unrelated tax return." The court concluded that the parties would not "get into tax loss" because "[a]ll we are looking at is whether [Giambalvo] made misstatements on his tax returns at the time he made the returns, because it is a perjury related statute. It is irrelevant whether or not there was a tax deficiency." 

The court later reiterated that "[w]e are not getting into tax loss, or subsequently filed tax returns," even though the court did suggest that it "would keep the door slightly ajar for conversation." Giambalvo's counsel then asked whether the court's ruling was that the evidence was "also not relevant for corruptly" under 26 U.S.C. § 7212(a). The court responded, "As to the entry of the zero, yes, I'm keeping it out. I'm overruling all of the arguments that you made." 

During trial, Giambalvo counsel's asked the court to reconsider this ruling after Officer Laramie testified that his job description included collecting taxes, arguing that the government had opened the door to Bradshaw's testimony by "cross-examining [Officer Laramie] on the fact that Mr. Giambalvo, objectively speaking, did not actually owe the taxes the revenue officer was seeking to collect is proper both impeachment and substantive evidence that was injected into this trial by the prosecution." He also argued that the government opened the door to introduction of the lack of a tax deficiency through Officer Laramie's testimony "that Mr. Giambalvo called and asked about paying taxes," which "suggest[ed] that Mr. Giambalvo actually owed taxes." The court rejected this argument, explaining that "this case is about—in its most simple, stay-focused terms—whether or not the number [that Giambalvo] wrote on that tax return at zero was correct or if [his] defense that he honestly believed it to be correct, and that's it." The court noted that Officer Laramie never discussed collections even though that is included in his job description. According to the court, Officer Laramie "simply went through what was on the documents that [Giambalvo] submitted" without "express[ing] his thoughts about those numbers or his interpretation of those numbers." The court characterized Officer Laramie's testimony as "lay[ing] the foundation for the records coming into evidence" without expressing any "efforts to collect anything." The court advised Giambalvo's counsel that he could "cross-examine [Officer Laramie] on what he received but not . . . to his efforts to collect taxes" because "[h]e never talked about that." 

On appeal, Giambalvo argues that the district court's exclusion of evidence that he did not actually owe any income taxes for the tax years at issue violated his right to due process by prohibiting him from establishing a complete defense. Giambalvo intended to prove his lack of tax liability through tax returns prepared and filed after he was indicted for impeding administration of the tax laws and filing false returns. 

The Constitution affords "criminal defendants a meaningful opportunity to present a complete defense." United States v. Petters, 663 F.3d 375, 381 (8th Cir. 2011) (quotations and citations omitted). But a criminal defendant's "right to present relevant testimony is not without limitation. The right may, in appropriate cases, bow to accommodate other legitimate interests in the criminal trial process." Id. (quotation and citations omitted). "For instance, '[t]he accused does not have an unfettered right to offer testimony that is incompetent, privileged, or otherwise inadmissible under standard rules of evidence.'" Id. (alteration in original) (quoting Taylor v. Illinois, 484 U.S. 400, 410 (1988)). As a result, "the 'Constitution leaves to the judges who must make these decisions wide latitude to exclude evidence that is repetitive . . . , only marginally relevant or poses an undue risk of harassment, prejudice, [or] confusion of the issues.'" Id. (alterations in original) (quoting Crane v. Kentucky, 476 U.S. 683, 689-90 (1986)). 

As discussed supra, Count 1 charged Giambalvo with obstructing or impeding the administration of the internal revenue laws, in violation of 26 U.S.C. § 7212(a). Counts 2-9 charged Giambalvo with making and subscribing a false income tax return, in violation of 26 U.S.C. § 7206(1), which provides that an individual will be guilty of a felony if he or she "[w]illfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter." 

Neither §§ 7212(a) nor 7206(1) require proof of a tax deficiency. See, e.g., United States v. Floyd, 740 F.3d 22, 32 (1st Cir. 2014) ("A conviction for violation of section 7212(a) does not require proof of . . . a tax deficiency . . . ." (citation omitted)); United States v. Young, 804 F.2d 116, 119 (8th Cir. 1996) ("In a section 7206(1) prosecution, however, the government need not establish an actual tax deficiency." (citation omitted)). 

Because the government need not establish an actual tax deficiency to prove a violation of §§ 7212(a) or 7206(1), the question arises whether a defendant may put on evidence that he did not owe any taxes as a defense to such charges. Like our sister circuits, we conclude that the answer is no. This is because "the amount of taxes owed is irrelevant to a prosecution for tax fraud." United States v. Minneman, 143 F.3d 274, 279 (7th Cir. 1998) (emphasis added) (citing United States v. Marashi, 913 F.2d 724, 736 (9th Cir. 1990) ("Section 7206(1) is a perjury statute; it is irrelevant whether there was an actual tax deficiency." (citation omitted)). 

Here, the district court excluded Bradshaw's expert testimony that Giambalvo did not owe any taxes and was due a substantial refund on the date that he mailed 11 "zero" income tax returns to the IRS. The court held that evidence of subsequently prepared and filed tax returns is inadmissible in a criminal tax prosecution unrelated to tax deficiency collection. The district court found that the probative value of such evidence is much less than the associated unfair prejudice. 

The district court's ruling is in accord with our precedent. "We have previously said that 'there is no doubt that self-serving exculpatory acts performed substantially after a defendant's wrongdoing is discovered are of minimal probative value as to his state of mind at the time of the alleged crime.'" United States v. Ellesfen, 655 F.3d 769, 778 (8th Cir. 2011) (quoting United States v. Radtke, 415 F.3d 826, 840-41 (8th Cir. 2005) (holding that the district court did not abuse its discretion in excluding evidence that the defendant filed an amended tax return after he had been indicted for willfully subscribing to a known false tax return)). 

Giambalvo additionally argues that evidence of the non-existence of tax loss should have been admitted to enable him to contest the element of materiality in the § 7206(1) counts. (Citing United States v. Clifton, 127 F.3d 969, 971 (10th Cir. 1997) ("For instance, if a taxpayer's allowable deductions exceed taxable income in a taxable year, no income tax will be due for that year. Therefore, taxpayer's failure to report all taxable income will not affect the computation of tax, which in turn might very well affect the jury's deliberations on the element of materiality. For these reasons, we hold that materiality in a § 7206(1) prosecution is an element of the crime which the district court must submit to the jury, unless of course defendant waives the right."); United States v. Uchimura, 125 F.3d 1282, 1285 n.5 (9th Cir. 1997) ("That no additional tax is owed of course has a bearing on materiality, but the question is ultimately one for the jury to decide.").) According to Giambalvo, Clifton and Uchimura are "the only legal authority on point." 

We disagree. Subsequent to Clifton and Uchimura, the Supreme Court explained that 

[t]o obtain a conviction on the [§ 7206(1)] tax offense at issue, the Government must prove that the defendant filed a tax return "which he does not believe to be true and correct as to every material matter." 26 U.S.C. § 7206(1). In general, a false statement is material if it has "a natural tendency to influence, or [is] capable of influencing, the decision of the decisionmaking body to which it was addressed." United States v. Gaudin, 515 U.S., at 509, 115 S. Ct. 2310 (quoting Kungys v. United States, 485 U.S. 759, 770, 108 S. Ct. 1537, 99 L. Ed. 2d 839 (1988) (internal quotation marks omitted)).
Neder v. United States, 527 U.S. 1, 16 (1999) (third alteration in original) (emphasis added). 

We have recognized that "the government need not establish an actual tax deficiency to demonstrate that [a defendant's] false statements in [his tax] returns were material." United States v. Peiker, 2 F. App'x 685, 687 (8th Cir. 2001) (per curiam) (citing Young, 804 F.2d at 119). Similarly, the Seventh Circuit has held "that proof of a tax deficiency was not essential to prove materiality." United States v. Bouzanis, 2003 WL 920717, at *2 (N.D. Ill. Mar. 7, 2003) (citing United States v. Peters, 153 F.3d 445, at 461-62 (7th Cir. 1998)). 

Giambalvo also argues that evidence of the lack of a tax deficiency was relevant to showing that he did not act "corruptly" under § 7212(a). 26 U.S.C. § 7212(a) ("Whoever corruptly . . . endeavors to intimate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly . . . obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title . . . ."). We have previously indicated our inclination to reject the argument "that the term corruptly is limited to situations in which the defendant wrongfully sought or gained a financial advantage." United States v. Yagow, 953 F.2d 423, 427 (8th Cir. 1992) (citing United States v. Reeves, 782 F.2d 1323, 1325 (5th Cir. 1986)). 

More recently, the Fifth Circuit has held that, § 7212(a) does not require that the defendant obtain benefits or advantages "under the tax laws." United States v. Saldana, 427 F.3d 298, 305 (5th Cir. 2005). The Fifth Circuit observed that "the language of the statute itself does not require that an individual intend to procure a benefit for himself under the tax laws to have formed the requisite mens rea." Id. Similarly, "the Sixth Circuit [has] affirmed a defendant's conviction for violation of § 7212(a) when the defendant had filed false 1099 and 1096 forms for the sole purpose of intimidating and harassing his creditors." Id. (citing United States v. Bowman, 173 F.3d 595, 596-97 (6th Cir. 1999)). The Sixth Circuit "held that the defendant's conduct fell within the [27]  ambit of § 7212(a)'s proscribed conduct even though he sought no financial advantage or benefit for himself under the tax laws." Id. (citing Bowman, 173 F.3d at 600). 

In line with the Fifth Circuit's and Sixth Circuit's more recent conclusions, we now hold—as we were inclined to do in Yagow—that "corruptly" is not limited to situations where the defendant wrongfully sought or gained a financial advantage under the tax laws. If the government was not required to prove that the benefit that Giambalvo sought by his "corrupt" actions to obstruct or impede the IRS was financial in nature, then evidence of the non-existence of a tax loss was not relevant to refute the "corruptly" element of § 7212(a). 

Additionally, Giambalvo argues that evidence of the lack of a tax deficiency was relevant to showing that he did not act "willfully" under § 7206(1). See 26 U.S.C. § 7206(1) ("Any person who . . . [w]illfully makes and subscribes any return, statement, or other document . . . ."). According to Giambalvo, he is permitted to present circumstantial evidence tending to show his good faith as a defense. Giambalvo asserts that, for approximately eight years, he "subscribed to a belief that was so against his financial interest that it literally cost him more than $30,000—i.e. [28] , had he filed proper tax returns, he would have been entitled to receive more than $30,000 back in tax refunds." He maintains that such evidence was admissible evidence of his good-faith belief because his actions were against his financial interest. 

Giambalvo does not have "'an unfettered right to offer testimony that is . . . otherwise inadmissible under the standard rules of evidence.'" Petters, 663 F.3d at 381 (quoting Taylor, 484 U.S. at 410). As explained supra, because the issue of tax deficiency is not an element that the government must prove—or attempted to prove—then the existence of such deficiency is irrelevant in such prosecutions. While the district could have admitted Giambalvo's evidence of no tax deficiency, it was not an abuse of discretion to exclude it. 

Finally, Giambalvo argues that the government opened the door to the admission of tax-loss evidence by IRS Revenue Officer Laramie's testimony that his "[p]rimary duties are to collect taxes and returns." Officer Laramie testified, "[W]e try to determine if returns are due, if there are balances that may be owed on previously filed returns. We then try to collect on those or determine if the person has the ability to pay, you know." The trial record reveals that Officer Laramie did not describe his efforts to collect taxes from Giambalvo; instead, he was only giving his general job description. Therefore, we hold that the district court did not err in rejecting Giambalvo's argument that the government opened the door to admission of tax-loss evidence through Officer Laramie's testimony.

JAT Comment:  I am unconvinced that the judge properly excluded the evidence.  Still, I suppose, that in the discretion to manage the boundaries of a case, so long as the defendant is given a fair trial, these type of evidentiary rulings, even if technically incorrect, may not require reversal.  But, when they go to the heart of a defense in tax crimes -- usually the defense of nonwillfulness or, for tax obstruction, noncorruptness -- I think the defendant's right to a broad defense is appropriate.

Prosecuting Corporate Employees and Officers, with Focus on Swiss Banks (1/15/16)

I have previously blogged on Professor Brandon Garrett (UVA Law) who have carved out an academic niche on how the Government deals with corporate crime, particularly large corporate crime (the too big to jail group).  See e.g., Judge Jed Rakoff Reviews Brandon Garrett's Book on Too Big to Jail: How Prosecutors Compromise with Corporations (Federal Tax Crimes Blog 2/10/15), here.  At the risk of oversimplifying his arguments, I summarize them in part relevant to this blog entry:  When the Government goes after corporate misconduct, it too often focuses only on the corporation in terms of criminal sanctions and not the individuals, particularly those higher up the chain, who committed the underlying conduct.  Corporations cannot go to jail; individuals can. Prosecuting and convicting individuals in addition to corporations could, he thinks, provide more front-end incentive for individuals to forego illegal conduct within the corporations.  However, as fans of tax crimes know at least anecdotally, it is hard to convict higher level corporate officers for conduct that their underlings actually commit.  The poster child example is the acquittal of Raoul Weil, a high-level UBS banker who "remoted" himself from the dirty work of actually servicing U.S. taxpayers seeking to evade U.S. tax.  See e.g., Raoul Weil Found Not Guilty (Federal Tax Crimes 11/3/14; 11/6/14), here.

One might turn a common phrase and say that lifeless, breathless, unthinking, unfeeling corporations do not commit crimes; people do.  Still in our jurisprudence, corporations can commit crimes.  They just can't be jailed.  To the extent that actual incarceration incentivizes people to avoid misconduct, people should be jailed.  In September of 2015, DOJ announced a new policy of more aggressively pursuing people for misconduct in corporations.  See the DAG memo here and my blog entry, New DOJ Policy on Prosecuting Individuals Beyond Corporate Crime (Federal Tax Crimes Blog 9/10/15), here.

Professor Garrett has a new article that updates in summary fashion his research.  The Year Banks Finally Paid (Slate 1/13/16), here.  The following are excerpts:

Nevertheless, we need to keep asking whether this strategy of chasing dollars rather than changing practices and prosecuting executives makes any sense. In the past decade, data I have collected show that federal prosecutors have set new records each year in corporate fines. For all their success and zeal, however, it’s not clear that fines alone are stopping bad actors on Wall Street. 

* * * * 

A remarkable number of banks, 80 of them, finalized cases with federal prosecutors. Most were Swiss banks that settled out of court as part of a DOJ Tax Division program designed to incentivize them to come clean or face the music. Next year we will see still more cases with less-cooperative Swiss banks that won’t get such lenient deals. More mammoth bank cases lumber along in the courts; last spring, several major banks, including Wall Street giants JPMorgan Chase and Citicorp, agreed to plead guilty in cases relating to foreign-exchange currency manipulation. Those cases have not resulted in sentencing yet, but when they do, prosecutors will rake in $5 billion more in fines. 

* * * * 

Banks pay the fines, but bankers don’t usually do any time. I have found that among the 66 cases of financial institutions that received deferred or nonprosecution agreements from federal prosecutors from 2001 to 2014, only 23 of them—33 percent—had any employees prosecuted. 

Now, I don't have Professor Garrett's expertise and have not spent enough time on his marvelous web site at UVA Law, here, but I thought I would add some thoughts from my even narrower niche of the universe in which he teaches -- the offshore account and enabler activities.

As all of the readers of this blog know, offshore banks and other financial institutions -- poster children being Swiss Banks -- have for years enabled U.S. taxpayers to evade tax.  The U.S. taxpayers evading tax committed tax and tax-related (including FBAR) crimes; the Swiss Banks, their employees and related enablers committed crimes.  The Government has prosecuted and entered a number of DPAs and NPAs with Swiss Banks, and has prosecuted a number of Swiss bankers and other enablers.  My latest count of the Swisss bankers shows over 40 individual "enablers", many of whom are or were Swiss bankers.  Many of these remain fugitives (about which more later).

An important requirement of US DOJ Swiss Bank program is that the participating Category 2 Banks must rat on their employees committing misconduct.  So, since the Category 2 part of the program is now winding up in terms of reaching NPAs with the Banks, I expect that DOJ will be bringing more indictments of Swiss Bank employees.  Those employees may not be able to avoid indictment, but they can avoid the prosecution by not coming into the U.S.  But, as Mr. Weil found out, traveling outside Switzerland is risky.  So, as I have noted before, many Swiss bankers (and other enablers, such a lawyers) have constrained their travel or take risk when they travel.  I have said before that this risk and fear may make Switzerland (which will not extradite for tax crimes) a kind of Club Fed -- a great place to be but somewhat confining if you can't leave it.

One issue inspired by Professor Garrett's research is whether higher-ups with the banks can be prosecuted successfully.  I mentioned Mr. Weil, the high level UBS officer, who mounted a successful defense that he was too remote from the criminal conduct to be responsible for it.  DOJ had the full cooperation of UBS and still could not convict Weil.  In the Swiss banker context, I will refer to that defense as the Weil defense.  My suspicion -- based on no real hard information -- is that in serving up the gory details of its employees' misconduct to DOJ, the Swiss Banks liberally applied the Weil defense to the fullest possible in order to avoid incriminating the higher ups.  In other words, I suspect, they served up minions and deflected from the higher ups to the extent they could with the Weil defense.  If that happened, I suspect it happened by omitting key information on the notion that, under the Weil defense, the higher-up conduct was not criminal.

One final note. the statute of limitations for tax crimes is suspended while the person "is outside the United States or is a fugitive from justice within the meaning of section 3290 of Title 18 of the United States Code."  26 USC 6531 (flush language), here.  So the risk of prosecution for this group is likely to be indefinite.  And, if DOJ does start with the minion employees, it may deploy the usual prosecution tactic of working their way up toward the top on the back of the minion employees.

Procedurally Taxing Discusses President's State of the Union Comment on Offshore Accounts (1/15/16)

Leslie Book, professor at Villanova and blogger at Procedurally Taxing, has this review of tax issues in the President's State of the Union address.  State of the Union: Tax Administration a Small But Important Part of the Speech (Procedurally Taxing 1/15/15), here.  In part here relevant, he discusses the President's comment:  It’s sure not the average family watching tonight that avoids paying taxes through offshore accounts."  Book then launches the following discussion (excerpts only):

Offshore Evasion 

* * * * 

I recently read an interesting article on offshore evasion by Professor Cass Sunstein in the New York Review of Books, called Parking the Big Money. The article reviewed Professor Gabriel Zucman’s The Hidden Wealth of Nations: The Scourge of Tax Havens as well as a film called The Price We Pay. Zucman’s book takes a crack at putting a price tag on offshore evasion, using an approach that compares the world’s liabilities to the world’s assets, noting that “as far back as statistics go, there is a ‘hole’; if we look at the world balance sheet, more financial assets are recorded as liabilities than as assets, as if planet Earth were in part held by Mars.” 

Sunstein continues:\ 

In 2015, for example, the nations of the world reported $2 trillion as mutual fund holdings in Luxembourg; this is the total of recorded liabilities. But Luxembourg’s own statisticians calculated that worldwide, $3.5 trillion in mutual fund holdings were kept in Luxembourg; that is the total of recorded assets. What happened to the missing $1.5 trillion? In global statistics, that amount had no owners. For Zucman’s purposes, the anomaly is a revealing one: the amount by which assets exceed liabilities is a measure of wealth hidden in offshore accounts. 

Using some detective skills, Zucman estimates that the effects of offshore evasion are severe, with the cost annually at $200 billion in lost revenues, with the US out about $35 billion.  Zucman’s proposal to address the problem is a far-reaching international registry of ownership, though he is a big fan of our own FATCA and that law’s requirement that foreign banks identify their US clients and disclose them to the IRS. 

At around the same time I read the Sunstein review, I also received via email a report by the American Citizens Abroad that was based on a survey it and researchers at the University of Nevada Reno conducted on Americans abroad.  The survey revealed how overseas Americans believe FATCA should be reformed to address some of its negative consequences. Those consequences include some overseas financial institutions no longer dealing with Americans and among those that still do, higher costs of doing business. 

FATCA, as Sunstein notes, is a blunt tool and to the Americans abroad who are complying or who are small fish, the law imposes heavy costs.  But as the State of the Union reflects, there should be little sympathy for Americans who stash cash and the like in tax havens. Given the extent of the problem that Zucman via Sunstein lays out, I suspect that FATCA will not be going away soon though there are proposals that minimize costs without giving away too much in terms of the law’s effort to bring accounts into the sunshine. 

The issue is politicized. FATCA and the IRS for that matter have been part of the presidential campaign, with Senator Paul for example suing to stop FATCA (see a post in Forbes by Robert Goulder discussing that unusual approach) and Senator Cruz noting that recent laws have contributed to the “weaponization” of the IRS leading to his calls to abolish the agency.

Court Sustains Use of Regular Summons to Appraiser Investigated Even Though Third Party Taxpayers May be Identified (1/14/16)

In Clower v. United States, 2015 U.S. Dist. LEXIS 174254 (N.D. Ga. Dec. 17, 2015), here, the IRS issued a summons to Jim R. Clower, an appraiser, for "documents including, among other things, appraisal work files, documents reflecting customers for whom he prepared appraisals, and correspondence related to appraisals completed for the purpose of valuating real property for conservation or historical easements."  Those who observe the tax scene will recognize that there is a lot of abuse of overvaluation of conservation and historical easements for purposes of claiming charitable deductions.  And, the fatal flaw in many promoted tax schemes/shelters have for many years been grossly inflated valuations.  I infer that the IRS suspected Clower of doing multiple valuations that might require investigation for the possible assertion of penalties against Clower.  See § 6695(a),  Substantial and gross valuation misstatements attributable to incorrect appraisals, here.  The summons in question was clearly addressed to Clower with respect to his potential liability.  The summons was thus a regular IRS summons.

Should Clower respond to the summons, however, he would likely identify the clients for whom he had given appraisals.  In such cases, the IRS may not otherwise know who many of those clients were.  Presumably, the IRS already knew of at least one such client because the IRS had Clower's name.  Normally, if multiple potential taxpayers of an IRS investigation are unknown but identifiable through some common participant in an aggressive scheme (such as shelter promoters or even foreign banks), the IRS can issue a John Doe Summons ("JDS") to that common participant.  See § 7609(f), here.  The JDS requires court approval.  It is far less convenient for agents than issuing a regular summons where the regular summons could produce the same information.  That is apparently what happened in Clower.  The IRS issued the summons to Clower with respect to his potential liability and would thereby discover the identities of taxpayers using his services.  So this overlap of the regular summons and the JDS creates some tension, particularly if the IRS were to use the regular summons to avoid the hassle of the JDS.  As we say in the Saltzman & Book, Tax Practice & Procedure ¶ 12.05[4][b][v] John Doe Summons.(online, viewed 1/14/16) [footnotes in brackets, with links to the cited cases added by JAT]:

The Service sometimes finds that the John Doe Summons procedures slow it down. The Service must first convince DOJ Tax that it is worth seeking the district court's approval of the John Doe Summons. DOJ Tax must gear up and present the matter to an often skeptical and almost always overworked District Court who must play devil's advocate to the government's ex parte application for the summons. Obviously, the Service would much prefer to use its regular administrative summons, which has no such cumbersome steps. 

In United States v. Tiffany Fine Arts, Inc. [469 US 310 (1985), here], the Supreme Court blessed the Service's use of the regular administrative summons rather than the John Doe Summons where the target of the summons was a shelter promoter. The administrative summons was issued with the promoter identified as the taxpayer being investigated, but the information and documents sought could also identify otherwise unknown shelter investors who dealt with the promoter. The Service could then open investigations of the shelter investors. The Supreme Court blessed that gambit and refused to require the John Doe Summons procedure. 

After Tiffany Fine Arts, the Service saw an escape from the annoyances of the John Doe Summons procedures — simply find a reason to audit the third party with information or documents identifying otherwise unidentified taxpayers that arguably were relevant to a tax investigation of the third party. Tiffany Fine Arts says that will work. However, where the allegation of investigation of the third party is merely pretextual to get information about unidentified taxpayers with whom the third party dealt, courts are open to quashing the general administrative summons, thus relegating the Service to the John Doe Summons procedure.[United States v. Gertner, 65 F3d 963 (1st Cir. 1995), here]

Clower appeared to be making the Gertner argument.  The Court identified Clower's arguments as (bold face supplied by JAT:

According to the petition, Clower is a certified general appraiser who has performed independent fee appraisals since 1969. In his petition, Clower avers that the IRS summons violates the requirements of 26 U.S.C. § 7609(b)(2) because (1) it is at least in part a John Doe Summons, n1 and the IRS did not follow the requirements for issuing such a summons; (2) it is a fishing expedition designed to produce evidence [2]  that could expose Clower to penalties and probable prosecution; (3) it fails to specify the projects being investigated or the targets of those investigations; (4) it requires disclosure of sensitive personal and/or privileged documents and information belonging to persons who are not a part of the investigation; and (5) it is unreasonable and irrelevant because it asks for information outside the statute of limitations. Clower avers that the Court has jurisdiction to hear his petition pursuant to 26 U.S.C. § 7609(h)(1).

The first is the relevant one.  The Court dealt cryptically with the argument as follows:

The summons attached to the petition was issued to Jim R. Clower, "In the matter of Jim R. Clower under 26 USC Secs. 6694, 6695, 6700, 6701, 6707 and 6708."  Although Clower contends in his petition and his motion to strike that the summons is a John Doe summons and that it fails to specify the targets of the investigation(s), he has not offered any arguments or evidence to support this or to contradict the plain language of the summons.

Unlike Gertner where the summonsee established to the satisfaction of the district court judge that the IRS was not interested in the liability of the summonsee but just wanted to identify the otherwise unidentified taxpayer.  The facts of Gertner are unusual and anyone wanting to make a Gertner-like argument are well advised to obtain copies of the briefs and submission (including affidavits) in that case..  Of course, the summonsee of the regular summons will not be able to mount the attack in a direct motion to quash but must fail to comply and then assert the Gertner-like argument in a summons enforcement proceeding.

In this regard, the Court does note in footnote 2:

The fact that the summons may serve a "dual purpose" of determining a known taxpayer's liabilities and "discovering information that would aid in identifying unnamed taxpayers and investigating their liabilities" does not make it a John Doe summons subject to the procedures in § 7609(f). See United States v. Gottlieb, 712 F.2d 1363, 1367-68 (11th Cir. 1983) (quoting United States v. Barter Sys., Inc., 694 F.2d 163, 169 (8th Cir. 1982)).

Clower and Tiffany Fine Arts illustrate that, if the IRS has a legitimate reason to investigate the common party and can fashion summonses seeking information and documents relevant to that investigation, the IRS can use the regular summons to, in part, identify third parties for investigation in the same process.

The other claims Clower made were also rejected.  Among the reasons is that the summons was issued to Clower with respect to his liability and the person to whom the summons is issue is not authorized to move to quash under § 7609 which deals with summonses to third parties.  This does not mean that the summonsee identified as being investigated cannot assert appropriate defenses.  It just means that the defenses are asserted in a summons enforcement proceeding initiated by the Government after the summonsee fails to comply.  Noncompliance with the summons will not itself draw sanctions; rather only noncompliance with the district court's enforcement order, if granted, can be sanctioned  Also, the seminal decision in United States v. Powell, 379 U.S. 48 (1964) sustaining the broad scope of the IRS summons, although not cited by the Court, really disposes of the balance of Clower's claims.

The docket entries indicate that Clower appealed on December 25, 2015 (presumably by online filing since I doubt the cleark's office was opened).

Fifth Circuit Reverses Sentencing Court on Conditions of Restitution and Prohibition of Employment (1/14/16)

In United States v. Thody, 2016 U.S. App. LEXIS 298 (5th Cir. 2016) (unpublished), here, the defendant (Thody) was convicted of "multiple counts of tax evasion."  The Fifth Circuit panel holdings seem fairly routine, which is why the decision is unpublished.  Nevertheless, I offer some comments on the opinion.

First, although not further addressed in the opinion, the Court makes this factual statement:

Thody believed he was a "sovereign citizen" not subject to federal law. He therefore believed that the Internal Revenue Code did not require him to pay taxes. 

Did the Court really mean what it said?  Specifically, since a bona fide belief that a defendant does not owe tax is a complete defense to a crime requiring willfulness, as tax evasion surely does, the Court stated a complete defense for Thody.  See Cheek v. United States, 498 U.S. 192, 201 (1991). The Court could have said that Thody claimed that he did not believe the the Internal Revenue Code did not require him to pay tax, but that the jury did not accept that claim and therefore he acted willfully.  But, that is not what the Court said in the quote.  Maybe that is implicit, so maybe I am just too picky.

OK, moving on.

Second, the opinion holds that the sentencing court can stack sentences (make them run consecutively) to achieve the appropriate sentence, whether in the Guidelines range or outside it (here by variance upward, as noted below).  In the case, the court imposed a 90 month sentence comprised of two 45 month sentences for counts one and two (tax evasion counts with aggregate sentences of 60 months each).

Third, the Court reversed the sentencing court's imposition of restitution for the tax crimes convictions.  Restitution is not available for Title 26 convictions except as a condition of some benefit offered the defendant, such as supervised release.  The court remanded to have the district court determine whether to impose restitution as a condition of supervised release.

Fourth, the Court reversed the sentencing court prohibition "from contracting with the Government as a condition of his supervised release."  Although contracting with the Government produced the income involved in the case, the condition here did not meet the criteria as follows (footnote omitted):

A district court has discretion to impose conditions on supervised release, but only if the condition is reasonably related to: the nature and circumstances of the offense, the need to afford adequate deterrence, the need to protect the public from future crimes, and the need to provide treatment to a defendant. Moreover, if a condition is required, it must be imposed to the "minimum extent necessary."

Fifth, the Court held that the sentencing court's upward variance from the Guidelines range was reasonable.  In the course of so holding, the Court said (footnote omitted):

Here, the district court imposed a non-Guideline sentence. The Guidelines, with exceptions not here relevant, require that a sentence on multiple counts run concurrently. In this case, when the district court imposed a ninety-month sentence, by imposing two terms of forty-five months to run consecutively, it varied from the Guidelines recommendation of a forty-one to fifty-one month sentence.

Note that the sentencing court gave a substantial upward Booker variance.  Variances up or down require explanation.  The sentencing court gave a very short explanation.  Here is what the Court of Appeals panel said:

Because it imposed a non-Guidelines sentence, the district court needed to provide a more detailed explanation of its reasoning. The court gave the following reasons: 

the defendant is a person that questions and challenges the jurisdiction of the Court, [and] does not acknowledge the validity of the statute of which he was convicted of. [Therefore][,] [w]ithout an adequate and sufficient sentence, the defendant will not be deterred and will continue his unlawful activities in an identical or similar fashion. 

The district court's reasons adequately explained the basis for Thody's sentence. First, the court explained that Thody's sovereign citizen beliefs caused him to reject  federal law and also reject the notion that it applied to him. Second, because Thody continued to believe that federal taxes were voluntary, the district court explained that an above-guideline sentence was needed to motivate him to pay taxes in the future. Thus, even applying the more burdensome standard of a non-Guideline sentence, under plain error review, the district court gave an adequate explanation.

Updated FAQs for SFOP and SDOP Streamlined Processes (1/13/16)

The IRS has updated the FAQs for the Streamlined Domestic and Streamlined Foreign Offshore Procedures.  The are here:  SFOP FAQs, here, and SDOP FAQs, here.  Both were last reviewed and updated on 1/7/16.

My review indicates that the important items are:

1.  More detail on what the IRS expects from the narrative supporting the certification of nonwillfulness.  (SFOP FAQ 6; SDOP FAQ 13.)  In some cases, the IRS was getting narratives that did not contain enough detail to support the taxpayers' certifcations of nonwillfulness.  Most practitioners regularly working in this area already knew that the narrative had to have sufficient details -- not just conclusory allegations -- to support the certification.  So, for those practitioners, I am not sure that the new FAQs add to what they already knew and implemented in making submissions.  But other practitioners may find the new FAQs helpful, and certainly taxpayers going through the process without representation will get a sense of what the IRS will need to process the certifications.  In sum, the narrative must include "the whole story including favorable and unfavorable facts."  (Bold face supplied by JAT.)  The process is one of persuasion from the facts -- favorable and unfavorable -- and that's where a practitioner regularly engaged in the art of persuasion may be able to add value in the submission.  Also, a tip given to me by an IRS person working in the area -- larger or multiple foreign accounts usually require more explanation than smaller or fewer accounts.  Thus, for example, a single $200,000 account owned directly rather than through an entity would likely not require as much detail supporting the certification as would accounts aggregating $10,000,000 owned by foreign entities.

2.  Process for handling joint returns requiring amendment where the other spouse may not participate by signing the amended returns or joint certification.  (SFOP FAQ 7; SDOP FAQ 14.)  The spouse participating in SFOP and SDOP may submit amended returns with only his or her signature (and not the nonparticipating spouse's signature) if the amended return reports additional tax due.  The submission should explain the inability to obtain the other spouse's signature with a prominent reference to the FAQ in issue.  The IRS will routinely request that the other spouse's signature be obtained, but if the other spouse still will not sign, the participating taxpayer notifies the IRS of this.  However, if the amended return indicates a refund for the year, this procedure is not available.