After Guilty Verdict, District Court Denies Motions for Dismissal and New Trial in Tax Crimes Case (11/13 /15; 11/15/15)

I previously reported on the denial of the Tweel type claim that the IRS civil agent been conducting a criminal investigation.  See Court Holds that Civil Agent Did Not Continue Investigation Too Long and Even If Deceptive Did Not Prejudice Defendant (5/2/15), here, discussing United States v. Hee, 2015 U.S. Dist. LEXIS 54971 (D. HI Apr. 27, 2015).  Hee sought in that pre-trial motion to have the indictment dismissed or, alternatively, to suppress certain evidence.  Usually, this type of claim, if valid, would suppress statements that defendant made to the civil agent who conducted a criminal investigation in the guise of a civil investigation.  As reported in the prior blog, the Court denied the motion (as well as other motions).

The case went to trial.  The jury convicted Hee of one count of tax obstruction, § 7212(a), here, and 6 counts of tax perjury, § 7206(1), here.  Hee then filed post-trial motions on several issues.  The Court rejected the post-trial motions.  United States v. Hee, 2015 U.S. Dist. LXIS 145406 (D. HI 2015), here. The Court also rejected a pre-conviction motion that had been deferred.  I only discuss the ones I found most interesting.

1.  Renewed Tweel Claim.

Hee renewed his Tweel Claim.  The Court discusses the renewed claim, including a focus on the relevant facts and law, and denies the motion for the same reasons noted in the earlier blog.  I will not discuss this denial of the renewed claim, but it is interesting reading even though substantially redundant to the prior discussion.

2. Grand Jury Abuse.

Hee argued that the charges "the charges should be dismissed because the Government allegedly provided the grand jury with erroneous instructions regarding three issues."  Because of the focus of my comments, it is not important to get into merits of the alleged error in the instructions offered the grand jury.  I will start with this recitation of this motion's history (docket citations omitted for easier readability):

Hee's trial commenced on June 23, 2015. On July 6, 2015, as the trial was nearing conclusion, Hee submitted his motion concerning grand jury issues. The court discussed with the attorneys the scheduling of briefing and a hearing on the motion. Attorneys for the Government and for Hee noted that the motion could be heard following trial, and Hee's attorney expressly stated that the trial did not need to be interrupted for a decision on the motion. Briefing and a hearing were therefore scheduled for dates following the completion of the trial. With the motion awaiting further briefing, the petit jury returned a verdict of guilty beyond a reasonable doubt on all counts.

I emphasize in bold the key fact.

The question I focus on is the standard for review of this type of claim as stated by the Court:

In Mechanik [United States v. Mechanik, 475 U.S. 66 (1986)], the Court held that any error in a grand jury proceeding was rendered harmless by the petit jury's verdict of guilty. 475 U.S. at 67. The Court noted, "[T]he petit jury's verdict of guilty beyond a reasonable doubt demonstrates a fortiori that there was probable cause to charge the defendants with the offenses for which they were convicted." Id. 

The Ninth Circuit applied the Mechanik standard to the very situation at issue here. In Navarro [United States v. Navarro, 608 F.3d 529 (9th Cir. 2010)], the Ninth Circuit said that when "the error is brought to the district court's attention before the verdict, but the court did not rule on the motion to dismiss until after the jury returned a verdict . . . the conviction establishes that the error was harmless." 608 F.3d at 539; accord United States v. Hunter, 445 F. App'x 998, 1003 (9th Cir. 2011) ("Even if error in the grand jury proceedings (other than the structural errors [of race and gender discrimination]) was brought to the attention of the district court prior to trial, where the motion was denied and a guilty verdict was returned, the error is rendered harmless by the verdict." (brackets in the original)); United States v. Harmon, No. 08-CR-00938-LHK, 2014 U.S. Dist. LEXIS 74381, 2014 WL 2465504, at *2 (N.D. Cal. May 30, 2014) ("A grand jury is convened in order to determine whether probable cause exists to force a criminal defendant to suffer the hardship of a criminal trial. Because a trial jury is tasked with determining actual guilt, once a trial jury has found guilt beyond a reasonable doubt, it is presumed that any error during the grand jury proceedings was harmless beyond a reasonable doubt.").

The post-conviction standard of review is stricter than the pre-conviction standard, referred to as the Bank of Nova Scotia standard.  Bank of Nova Scotia v. United States, 487 U.S. 250 (1988).  The Court describes the Bank of Nova Scotia standard as providing:

that dismissal of the indictment "is appropriate only if it is established that the violation substantially influenced the grand jury's decision to indict or if there is grave doubt that the decision to indict was free from the substantial influence of such violations." Navarro, 608 F.3d at 539.

So why did the attorneys -- particularly Hee's attorney -- agree that resolution of the pre-conviction motion await the jury verdict?  If the jury reached a not guilty verdict, the motion would be moot; if it reached a guilty verdict, the postponement moved Hee from an arguably lesser standard to a more stringent standard.  It is not clear exactly why either the prosecution or Hee's attorney agreed to defer action on the motion.  The Court does delve into the issue and says that it just does not know why they did that.  For example:

The court cannot discern whether either party had the Mechanik issue expressly in mind in the midst of trial. For all this court knows, the Government and Hee may have been unfamiliar with the effect of a conviction on Hee's motion and may not have been addressing a waiver of Mechanik. Certainly the court, unaware of Mechanik or Navarro during Hee's trial, was not, in setting a post-trial hearing on Hee's motion, intending to suspend the applicability of Mechanik and Navarro. Under these circumstances, this court applies Mechanik and Navarro here.

Hee made other arguments in support of the motion.  Applying the Mechanik standard, the Court rejected the motion.  The Court said, however, that even applying the Bank of Nova Scotia standard, the Court would have rejected the motion:

Recognizing the lack of absolute clarity on the issue of whether the Government offered to suspend Mechanik and Navarro, this court turns to whether, if the court applied the Bank of Nova Scotia standard, Hee's motion would succeed. This court concludes that the errors Hee alleges would not be grounds to dismiss the charges under Bank of Nova Scotia. 

3.  Hee's Evidentiary Claim.

Hee claimed that the Court erred in denying his attorney the right to elicit testimony from defense witnesses that would have, he alleged, inferred that he had the type of good faith belief that would negate the element of intent to violate a known legal duty.  The Court explains:

The gist of Hee's complaint is that the court prevented witnesses from testifying about their understandings of why Hee did certain things. The court ruled that such [54]  testimony was impermissible if the understanding was based on something Hee had said to the witness. See, e.g., Testimony of Adrianne Hee, ECF No. 198-16, PageID # 3665 (sustaining hearsay objection when witness was asked, "What was your understanding as to why you were put on salary?"). The court did not completely disallow testimony about the witnesses' understandings. Instead, the court indicated the witnesses could testify about their understandings upon laying a foundation that the understandings were based on something other than out-of-court statements by Hee. 

For example, Adrianne Hee, one of Hee's daughters, was asked, "What was your understanding as to why you were put on salary?" When the Government raised a hearsay objection, the court explained that, "to the extent that her understanding is based on what somebody else told her, I'm not going to let her answer. If you want to lay a foundation that she had some independent way to know this, you can go ahead and do that."  

* * * * 

When the court refused to allow Hee's daughter to answer a question about her understanding of why she was on Waimana's payroll, it was concerned that any answer would have been tantamount to a statement that "my father told me the reason I was on salary was . . . ." The Government would have been able to cross-examine only Hee's daughter with respect to the accuracy of her recollection, without examining Hee as to the validity of the purported reason, or as to whether Hee truly believed what he purportedly told his daughter. This is quintessential hearsay. Had there been a proper foundation for Hee's daughter's understanding of why she was on salary, she would have been allowed to testify that, for example, she was on salary because she worked twenty hours per week for the company, or had performed certain duties on the company's behalf. The absence of a proper foundation was telling.

As a consequence, Hee alleged, he was improperly forced to waive his Fifth Amendment privilege. The prosecutor objected on the basis of hearsay.  The Court denied that line of inquiry because it felt that it was an indirect way for the defendant to testify without having to take the stand, thus permitting the defendant's out of court statements -- classic hearsay.  The defense made some good arguments that the desired testimony was not hearsay because it would not have been elicited to prove the truth of the defendant's good faith, just to state the witness's understanding of why they were paid compensation.

For background on this issue, I will quote from Saltzman's treatise on Tax Procedure, ¶ 12.05[2][b] Willfulness and Good Faith, online edition viewed 11/13/15, some footnotes omitted (which I substantially drafted):

Defendants who want to argue the good-faith defense will want an instruction to the jury making that clear to the jury. Generally, courts will give the specific good-faith instruction only if the evidence somehow affirmatively puts good faith in play — making it a real issue for the jury. How does the defendant do that? The most direct way is for the defendant to testify as to his or her good faith. But, in order to do that, the defendant must waive his Fifth Amendment right not to testify and be subject to cross-examination; frequently, the defense team will conclude that the potential benefits of the defendant testifying (including the good-faith opportunity) do not justify the downside risks of the defendant testifying. So, the defendant will not testify. Notwithstanding some noises that the defendant is required to testify to put good faith in play, the courts soundly reject that notion. n518 Other circumstantial evidence, including perhaps lay opinion evidence as to the defendant's mental state, n519 may be sufficient to put that issue in play and, if it does, the trial judge should give the instruction. n520
   n518 United States v. Kokenis, 662 F3d 919, 929 (7th Cir. 2011) , citing United States v. Lindo, 18 F3d 353, 356 (6th Cir. 1994) ; and United States v. Phillips, 217 F2d 435, 442 (7th Cir. 1954) .
   n519 For example, lay opinion testimony as to the defendant's mental state, including presumably good faith, might be admissible under FRE Rule 701. See United States v. Goodman, 633 F3d 963, 968 (10th Cir. 2011); and United States v. Abramson-Schmeiler, 2011 US App. LEXIS 23789 (10th Cir. 2011). For a good case where such lay opinion evidence was used by the government, see United States v. Rea, 958 F2d 1206 (2d Cir. 1992) .
   n520 See United States v. Wisenbaker, 14 F3d 1022, 1027 (5th Cir. 1994) . See also CTM 40.05[1][a] (2012 ed.), dealing with the reliance on professional subset of the good-faith defense: “A reliance-on-advice-of-accountant instruction may be warranted even without per se testimony that the defendant relied on the accountant's advice, so long as the circumstances support an inference that he did so rely.”

In this case, Hee was at the first step of trying to lay the foundation for an good faith defense through the testimony of family members receiving compensation.  Hee just wanted to get the evidence in without having to testify, so that under he could get a good faith defense instruction and argue the matter to the jury.

Here is the guts of the Court's rejection of the claim:

In sustaining the hearsay objections, this court was cognizant that Hee's family members were not being asked to testify that Hee said that it looked as if it were about to rain, or that Hee was sad. Instead, the family members were being asked to recount what Hee claimed he believed. 

Each statement that Hee says the court should have allowed contained Hee's opinion or belief. Although state of mind evidence may be admitted, see Fed. R. Evid. 803(3), Hee's statements of belief were akin to statements such as "I am not doing anything illegal," which even Hee conceded at the hearing on his motion would be distinguishable from what Rule 803 would allow. Hee was in essence stating a legal opinion that "I have a good reason for paying my nonworking children salaries." Such self-serving justifications, if admissible under Rule 803(3), would induce individuals committing crimes to repeatedly tell those around them, "I am acting within the law." 

Interestingly, while referring to the state of mind exception, Hee does not actually analyze how statements that are tantamount to declarations of innocence fall under Rule 803(3). Hee does not, for example, even attempt to fit the excluded statements under evidence of motive, intent, or plan. A court might admit a declarant's statement that "I have to keep this a secret so no one stops me from doing what I plan to do," or "I intend to cut my wife out of my will," or "I plan to leave this town." By contrast, the statements in issue in this case appear to have reflected what Hee claims were longstanding beliefs. If Hee's statements of belief that he was acting within the law are not admissible under Rule 803(3), Hee's evidentiary argument fails because Hee does not identify any other hearsay exception that his statements fall under. 

Although the purported statements were indeed hearsay and properly excluded, the court notes that, even if they were improperly excluded, that assumed error did not affect the trial outcome. Not only did the court [60]  invite Hee to lay a proper foundation for the testimony, the evidence of Hee's guilt introduced at trial was overwhelming. Hee was not prejudiced by the court's evidentiary rulings such that the interest of justice requires a new trial. To the extent Hee's Motion for New Trial is based on the court's evidentiary rulings, the motion is denied.

I am not sure the Court made the right call on that. I think that the evidence should have been admitted.  The prosecution could have easily dealt with any implicit testimony from the defendant. However, even if that was an erroneous ruling in trial, I am not sure that it would entitle Hee to a new trial.  Erroneous evidentiary rulings are made all the time without affecting the fundamental fairness of the trial.  The key issue here is whether Hee's Fifth Amendment right to not testify was fundamentally impaired by the ruling.

For readers further consideration, I provide links to the briefing on the issue.

• Hee's Memorandum in Support of the Motion, here.
• Hee's Transcript Submission (with summary table), here.
• The U.S. Answering Memo, here.
• Hee's Reply, here.

Addendum 11/15/15:

In connection with establishing good faith without the defendant having to waive his Fifth Amendment privilege by testifying, readers might consider the recent case of United States v. Wilson, 2015 U.S. App. LEXIS 19362 (6th Cir. 2015) (unpublished), here,  The good faith defense there related to reliance on the accountant.  The defendant's own credible testimony could have established the defense.  But the defendants did  not want to testify.

Before trial, the Wilsons indicated their intention to call only one witness, the accountant, who purportedly would testify that the amounts paid to Maxine Pochmara were properly reported as a return on her investment in the store, rather than as wages. The district court was skeptical, since Robert Pochmara received nothing at all for his labor, and Maxine Pochmara was said to have received a return on her investment, although it had been reported in the form of W-2 wages. The government objected to permitting the defendants to raise the defense solely on the accountant's testimony that the income was a return on Maxine Pochmara's investment and, perhaps, that he had so advised defendants. The government further expressed concern that, since it believed the accountant was an unindicted co-conspirator in the fraudulent scheme, if he were called to testify he might invoke his Fifth Amendment right not to incriminate himself.

The elements of the good faith reliance on accountant are: (1) full disclosure of relevant facts to the accountant and (2) actual good faith reliance on the accountant's advice.  Based on the briefing and proffer, the trial court was not sure that accountant's testimony would satisfy the first element but was particularly concerned that the accountant's testimony alone could establish the second.  The trial court reasoned:

. . . It is unclear whether [the accountant's] testimony alone could satisfy the Wilsons' burden of demonstrating he possessed all of the pertinent information when he provided the advice. What is clear, however, is that his testimony, without more, will not be enough to show that the Wilsons actually, and in good faith, relied upon him. . . . There must be evidence they provided him all the pertinent facts for making disclosures to the government, and evidence to demonstrate they relied upon his advice in good faith. Unless the Wilsons can provide this evidence, either through their testimony or that of another, there is no foundation for [the accountant's] testimony.

The Court of Appeals then said:

In ruling on the Government's motion in limine, the district court held that the Wilsons' accountant could not testify because his testimony alone could not establish the second element of the good faith defense, which is that "the Wilsons actually, and in good faith, relied upon [the accountant]." However, the accountant's testimony could have established both elements of the defense. First, to find that the Wilsons disclosed all pertinent facts to the accountant, the jury could have compared the information provided to the accountant with the Government's evidence. Second, the jury could have also found that the Wilsons acted in good faith reliance on the accountant's advice based on the fact that the Wilsons provided information to the accountant and acted in accordance with his advice. 

After concluding that it was improper to exclude the accountant's testimony, the Court said (fn. 1):

   n1 The question whether the accountant's testimony would have provided a foundation for an instruction on the good faith defense is a separate issue not raised by the facts in this appeal. See United States v. Lindo, 18 F.3d 353, 356 (6th Cir. 1994).

Of course that would depend upon the actual testimony, but if it came out in a way that the Court of Appeals said was possible to support both element of the reliance on professional "defense," the testimony would support the instruction.

The point is that the other testimony and evidence can at least lay the proper foundation for the defense without the defendant having to testify.  Returning to Hee, it seems to me that the witnesses should have been able to testify as to their understandings.

Two More Banks Obtain NPAs under DOJ Swiss Bank Program (11/12/15)

On November 12, 2015, DOJ announced here that Banque Internationale à Luxembourg (Suisse) SA (BIL Switzerland) and Zuger Kantonalbank (ZGKB) have entered NPAs under the DOJ program for Swiss banks, here.  The penalties are:

Banque Internationale à Luxembourg (Suisse) SA (BIL Switzerland)	$9.71 million
Zuger Kantonalbank (ZGKB)	$3.798 million

BIL Switzerland is a Swiss private bank with offices in Zurich and Geneva.  BIL Switzerland is wholly owned by Banque Internationale à Luxembourg, a Luxembourg bank founded in 1856.  In 1996, BIL Switzerland’s ultimate parent underwent a merger to form the Dexia Group, headquartered in Belgium.  In connection with this merger, BIL Switzerland was renamed Dexia Privatbank (Schweiz) AG.  In 2011, the Dexia Group dissolved, and BIL Switzerland came under new ownership, at which time it reverted to the BIL Switzerland name.  BIL Switzerland provided private banking and asset management services principally through private bankers based in Zurich, Geneva and Lugano, Switzerland. 

BIL Switzerland opened, maintained, serviced and profited from accounts that were held or beneficially owned by U.S. taxpayer clients.  BIL Switzerland opened several accounts for U.S. taxpayers who were leaving other Swiss banks that were being investigated by the department, including UBS and Credit Suisse. 

BIL Switzerland offered a variety of traditional Swiss banking services – including hold mail and numbered accounts – that assisted and enabled certain of its U.S. taxpayer clients to conceal their assets and income, file false federal tax returns with the Internal Revenue Service (IRS) and evade their U.S. tax obligations.  BIL Switzerland also provided Swiss travel cash cards to U.S. clients, enabling them to access and spend funds from undeclared accounts in the United States. 

In the period since Aug. 1, 2008, BIL Switzerland maintained at least 145 accounts, comprising an aggregate value of more than $64 million, that were owned by insurance companies and which held assets relating to insurance products that were issued to U.S. taxpayer clients of the respective insurance companies.  Such accounts, known commonly as insurance-wrappers, were titled in the names of insurance companies, but were funded with assets that were transferred to the accounts for the beneficial owners of the insurance products (the policy holders).  The assets in these accounts, while titled in the names of insurance companies, were managed by external asset managers for the ultimate benefit of the policy holders, through powers of investment that were given by the insurance companies to the external asset managers. 

The assets of some insurance-wrapper accounts originated from undeclared accounts at BIL Switzerland.  These undeclared accounts were closed, and their assets were transferred to newly-opened accounts at BIL Switzerland in the name of an insurance company and managed by various external asset managers.  At account opening, the new accounts held the same assets that the U.S. taxpayer clients had previously held directly at BIL Switzerland.  One of the undeclared accounts did not hold U.S. securities, but the recipient insurance-wrapper account acquired U.S. securities at a later date. 

In addition to the 145 insurance-wrapped accounts, BIL Switzerland also acted as a custodian to more than 30 U.S.-related accounts, comprising an aggregate value of approximately $83 million, that were maintained by external asset managers for U.S. taxpayers. 

BIL Switzerland closed U.S.-related accounts in ways that concealed the U.S. beneficial owners of those accounts.  Upon request of the accountholders, BIL Switzerland removed the names of its U.S. taxpayer clients from joint accounts, leaving only non-U.S. persons as accountholders, or moved their assets into new BIL Switzerland accounts that were held in the names of non-U.S. persons, including non-U.S. relatives.  BIL Switzerland thereafter treated the recipient accounts as non-U.S.-related accounts, despite some relationship managers continuing to take and execute instructions given directly from the U.S. taxpayers formerly associated with the accounts, or the U.S. taxpayer clients retaining effective beneficial ownership over the transferred funds.
BIL Switzerland maintained three accounts, beneficially owned by two different U.S. taxpayers, that held U.S. securities in the names of three offshore entities.  The U.S. taxpayer’s interest in each of these accounts was not reported to the IRS even though BIL Switzerland knew or had reason to know that such offshore entity accounts were operated without strict adherence to corporate formalities.  Two of the offshore entities were organized in the British Virgin Islands, and the third was organized in the United Arab Emirates.  In effect, these offshore entities were used by the U.S. taxpayer beneficial owners as sham, conduit or nominee entities.  BIL Switzerland relationship managers associated with these accounts, while outside the United States:

• Met with or took instructions from the U.S. taxpayer beneficial owners of these offshore entity accounts, instead of the directors or other authorized parties of the account;
• Acted on instructions from an external asset manager, who received them directly from a U.S. taxpayer, without first knowing whether corporate formalities were observed;
• Followed instructions that allowed a U.S. taxpayer to withdraw cash directly from the account, despite such withdrawals being contrary to the corporate purposes of the entity that owned the account; and
• Executed transactions that allowed a U.S. taxpayer to make several significant wire transfers to unaffiliated Swiss banks for the U.S. taxpayer’s personal use or benefit, without first knowing or inquiring whether corporate formalities were satisfied.

BIL Switzerland accepted certifications from the directors of these entities that falsely declared that the entity was the beneficial owner of the assets deposited in the accounts.
From 2001 through February 2010, BIL Switzerland had a wholly-owned subsidiary, Experta AG, a Swiss company.  Experta AG provided a number of services, including accounting services, legal and tax advice, as well as the creation and management of entities such as offshore corporations, trusts and foundations.  During the time that Expert AG was affiliated with BIL Switzerland, Experta AG provided services that assisted and enabled certain U.S. taxpayers in the concealment of their assets and income and in the evasion of their U.S. tax obligations. 

BIL Switzerland has fully cooperated with the department in relation to the Swiss Bank Program.  Among other things, BIL Switzerland required its relationship managers to submit declarations setting forth their knowledge concerning the U.S. taxpayer status of each account that they managed. BIL Switzerland also reviewed leaver lists from other banks to identify additional U.S.-related accounts. 

Since Aug. 1, 2008, BIL Switzerland maintained 267 U.S.-related accounts having a maximum aggregate dollar value in excess of $182 million.  BIL Switzerland will pay a penalty of $9.71 million. 

ZGKB was founded in 1892 and is headquartered in Zug, Switzerland.  Organized under the laws of the canton of Zug, all of ZGKB’s 14 branches are located within the canton.  The canton owns 51 percent of ZGKB and guarantees its deposits.

From at least 2001 to 2012, ZGKB opened and maintained accounts for certain of its U.S. clients while aware of the risk that such clients were not declaring income earned in these accounts or the existence of such accounts.  In doing so, ZGKB ignored red flags of wrongful intent on the part of U.S. clients who sought to open such accounts.  ZGKB offered a variety of traditional Swiss banking services – including hold mail and numbered accounts – that it knew could assist, and did assist, U.S. taxpayers in concealing their identity from the IRS by minimizing the paper trail associated with their undeclared assets and income.  ZGKB also accepted funds from a small number of UBS accountholders who had likely been forced to close their UBS accounts because of a U.S. tax-fraud investigation of UBS. 

ZGKB assisted its U.S. clients in sending money to themselves, relatives, business partners, or other businesses in the United States by issuing checks drawn on a ZGKB account at a bank in New York.  In one case, the accountholder requested and received checks in excess of $90,000 on several occasions.  ZGKB cashed out the balances of U.S. residents’ accounts in substantial amounts.  In one instance, at the request of the U.S. client, ZGKB permitted the client to withdraw the entire account balance of approximately $665,000 in cash.  For several U.S. accountholders, ZGKB transferred funds from their accounts in multiple withdrawals – for example, 12 in one month – of amounts just under $10,000.  In at least one case, ZGKB was instructed to do so in order to evade a report to the IRS. 

Since Aug. 1, 2008, ZGKB maintained and serviced 434 U.S.-related accounts having a maximum aggregate dollar value of $220 million.  ZGKB will pay a penalty of $3.798 million. 

In accordance with the terms of the Swiss Bank Program, each bank mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.  While U.S. accountholders at these banks who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased. 

Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts.  On Aug. 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement.  With today’s announcement of these non-prosecution agreements, noncompliant U.S. accountholders at these banks must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

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.) *	17	5	$3,470,550,000
U.S. / Swiss Bank Initiative Category 2 **	86	51	$420,095,990
U.S. / Swiss Bank Initiative Category 3	14		$0
U.S. / Swiss Bank Initiative Category 4	8		$0
Swiss Bank Program Results	125		$3,890,645,990
* 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.

U.S. Senate Foreign Relations Commitee Hearing on Tax Treaties and Protocols, Including Swiss (11/8/15)

On October 29, 2015, the Senate Foreign Relations Committee had a hearing on pending amendments to several tax treaties and tax protocols, including one for the Switzerland-U.S. tax treaty.  The hearing can be viewed here.  Two key witnesses testified.  One was Robert Stack, Treasury deputy assistant secretary (international tax affairs).  Stack's prepared opening statement is here.  The other was Thomas Barthold, chief of staff, Joint Committee on Taxation.  Barthold's statement can be downloaded here.

Both statements offer excellent introductions to the U.S. tax treaty system and to the specific treaties and protocols being considered.  I highly recommend them.  Given the focus on Switzerland in this blog, I thought it might be helpful to excerpt the portions of the statements dealing with Switzerland.

From Stark's statement:

[*5 ff] 

Combating Tax Evasion and Improving Transparency through Full Exchange of Information 

As noted above, effective information exchange to combat tax evasion and ensure full and fair enforcement of the tax laws is a top priority for the United States. A key provision found in all modern U.S. tax treaties is a rule that obligates the competent authorities of the two countries to obtain and exchange information that is foreseeably relevant to tax administration in the requesting country. In recent years there has been a global recognition of the need to strive for greater transparency and for full exchange of information between revenue authorities to combat tax evasion. The United States has taken a leading role in this movement. 

The proposed protocols amending the bilateral tax treaties with Switzerland and Luxembourg and the Multilateral Convention that are before the Committee today are intended to ensure full exchange of information to prevent tax evasion and enhance  transparency. These proposed protocols incorporate the modern international standards for exchange of information, which require countries to obtain and exchange information for both civil and criminal matters, and which require the tax authorities to obtain and exchange information held by banks or other financial institutions. 

The international standards on transparency and exchange of information for tax purposes are now virtually universally accepted in the global community. Indeed, all jurisdictions surveyed by the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) are now committed to implementing these standards. The Global Forum, now the largest international tax group in the world with 126 member jurisdictions (and fifteen observing members), endorses exchange of information. The Global Forum uses a robust and comprehensive monitoring and peer review process by evaluating the compliance of jurisdictions with the international standards of transparency. Initiated by the Organization for Economic Cooperation and Development (OECD), the Global Forum has been a driving force behind the acceptance and implementation of international standards. The United States actively participates in the Global Forum. Treasury’s Offices of Tax Policy and General Counsel, and IRS’s Office of Chief Counsel and its Large Business and International Division have devoted substantial resources over the past two years both to the peer review of U.S. rules and procedures and to our role as members of the Steering Group and Peer Review Group of the Forum. 

In addition, the G-20 has, for the past several years, stressed the importance of quickly implementing the international standards for transparency and exchange of information. It has also requested proposals to make it easier for developing countries to secure the benefits of the new cooperative tax environment, including a multilateral approach for the exchange of information.  

Against the backdrop of the Global Forum and the G-20 process, the proposed Protocol to the Multilateral Convention was opened for signature on May 27, 2010. The Multilateral Convention is an instrument that permits its signatories to exchange information for tax purposes. However, because it was signed in 1989, its provisions are out-of-date in many respects and do not conform to current international standards for transparency and exchange of information. In addition, prior to its amendment by the proposed protocol, the Multilateral Convention was open for accession only to member countries of either the Council of Europe or the OECD. The proposed protocol to the Multilateral Convention conforms the existing agreement to the current international standards for exchange of information, and opens the agreement for signature by any country, provided that the Parties have provided unanimous consent. This important agreement is therefore a centerpiece to the global effort to improve transparency and foster full exchange of information between tax authorities. 

* * * *

[*21]  

Switzerland 

The proposed protocol to amend the existing tax treaty with Switzerland and related agreement effected by exchange of notes were negotiated to bring the existing treaty, signed in 1996, into closer conformity with current U.S. tax treaty policy regarding exchange of information. There are, as with all bilateral tax conventions, some variations from these norms. In the proposed protocol, these minor differences reflect particular aspects of Swiss law and treaty policy, and they generally follow the OECD standard for exchange of information. 

The proposed protocol replaces the existing treaty’s information exchange provisions with updated rules that are consistent with current U.S. tax treaty practice and the current international standards for exchange of information. The proposed protocol will also allow the tax authorities of each country to exchange information that may be relevant to carrying out the provisions of the agreement or the domestic tax laws of either country, including information that would otherwise be protected by the bank secrecy laws of either country. In addition, it will allow the United States to obtain information from Switzerland whether or not Switzerland needs the information for its own tax purposes, and provides that requests for information cannot be declined solely because the information is held by a bank or other financial institution.  

The proposed protocol amends a paragraph of the existing protocol to the existing treaty by incorporating procedural rules to govern requests for information and an agreement between the United States and Switzerland that such procedural rules are to be interpreted in order not to frustrate effective exchange of information.  

The proposed protocol and related agreement effected by exchange of notes update the provisions of the existing treaty with respect to the mutual agreement procedure by incorporating Switzerland are unable to resolve after a reasonable period of time.
Finally, the proposed protocol updates the provisions of the existing treaty to provide that individual retirement accounts are eligible for the benefits afforded to pensions under the existing treaty. 

The proposed protocol would enter into force when the United States and Switzerland exchange instruments of ratification. The proposed protocol would have effect, with respect to taxes withheld at source, for amounts paid or credited on or after the first day of January of the year following entry into force. With respect to information exchange, the proposed protocol would have effect with respect to requests for bank information that relate to any date beginning on or after the date the proposed protocol is signed. With respect to all other cases, the proposed protocol would have effect with respect to requests for information that relates to taxable periods beginning on or after the first day of January next following the date of signature. The mandatory arbitration provision would have effect with respect both to cases that are under consideration by the competent authorities as of the date on which the proposed protocol enters into force and to cases that come under consideration after that date.

From Thomas A. Barthold Statement:

[*11] 

Exchange of information issues in all pending protocols 

* * * * 

Although the United States has long had bilateral income tax treaties in force with Hungary, Luxembourg, and Switzerland, the United States has engaged in relatively limited exchange of information under these tax treaties. With Luxembourg and Switzerland, the limitations stem from strict bank secrecy rules in those jurisdictions. The proposed protocols with Luxembourg and Switzerland are a response to that history as well as part of the international trend in exchange of information. 

 The inability of the United States to provide information about beneficial ownership of entities formed in the United States has been criticized in the past and led to pressure to eliminate policies that provide foreign persons with the ability to shelter income. n16 Because the information obtained through information exchange relationships with other jurisdictions has been central to recent successful IRS enforcement efforts against offshore tax evasion, the Treasury Department has included in its budgets for fiscal years 2015 and 2016 a proposal to address the perceived shortcoming by requiring certain financial institutions to report the account  [*13] balance (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) for all financial accounts maintained at a U.S. office and held by foreign persons. n17 The Committee may wish to explore the extent to which either the existing U.S. know-your-customer rules or the corporate formation and ownership standards prevent the United States from providing information about beneficial ownership on a reciprocal basis with its treaty countries. The Committee may also consider whether there are steps to take that would help refute the perception that the United States permits States to operate as tax havens and that would help the United States better respond to information requests from treaty countries who suspect that their own citizens and residents may be engaging in  illegal activities through U.S. corporations and limited liability companies. n18
   n16 Financial Action Task Force, IMF, Summary of the Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism United States of America, pp. 10-11 (June 23, 2006); Government Accountability Office, Company Formations: Minimal Ownership Information Is Collected and Available, a report to the Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, U.S. Senate GAO-06-376 (April 2006); Government Accountability Office, Suspicious Banking Activities: Possible Money Laundering by US Corporations Formed for Russian Entities, GAO-01-120 (October 31, 2006)
   n17 [Omitted]
   n18 E.g., the “Incorporation Transparency and Law Enforcement Assistance Act,” S. 569, 111th Congress (2009), would require States to obtain and periodically update beneficial ownership information from persons who seek to form a corporation or limited liability company. 

The Committee may wish to inquire as to the extent to which a request that a treaty country provide information in response to a John Doe summons  n19 is a specific request within the meaning of the Article 26, and whether protracted litigation similar to that which occurred in the UBS litigation n20 can be avoided or shortened. A “specific” request refers to an exchange which occurs when one treaty country provides information to the other treaty country in response to a specific request by the latter country for information that is relevant to an ongoing investigation of a particular tax matter. One problem with specific exchange has been that the proposed treaties and protocols, treaty countries are required to exchange information in response to specific requests that are comparable to John Doe summonses under domestic law.22 some treaty countries have declined to exchange information in response to specific requests intended to identify limited classes of persons. n21 Your committee may wish to seek assurances that, under the proposed treaties and protocols, treaty countries are required to exchange information in response to specific requests that are comparable to John Doe summonses under domestic law. n22 
   n19 When the existence of a possibly noncompliant taxpayer is known but not his identity, as in the case of holders of offshore bank accounts or investors in particular abusive transactions, the IRS is able to issue a summons to learn the identity of the taxpayer, but must first meet greater statutory requirements, to guard against fishing expeditions. Prior to issuance of the summons intended to learn the identity of unnamed “John Does,” the United States must seek judicial review in an ex parte proceeding. In its application and supporting documents, the United States must establish that the information sought pertains to an ascertainable group of persons, that there is a reasonable basis to believe that taxes have been avoided, and that the information is not otherwise available
   n20 See, United States v. UBS AG, Civil No. 09-20423 (S.D. Fla.), enforcing a “John Doe summons” which requested the identities of U.S. persons believed to have accounts at UBS in Switzerland. On August 19, 2009, the United States and UBS announced an agreement (approved by the Swiss Parliament on June 17, 2010) under which UBS provided the requested information.
   n21 For example, a petition to enforce a John Doe summons served by the United States on UBS, AG was filed on February 21, 2009, accompanied by an affidavit of Barry B. Shott, the U.S. competent authority for the United States-Switzerland income tax treaty. Paragraph 16 of that affidavit notes that Switzerland had traditionally
taken the position that a specific request must identify the taxpayer. See United States v. UBS AG, Civil No. 09-20423 (S.D. Fla.). On August 19, 2009, after extensive negotiations between the Swiss and U.S. governments, theUnited States and UBS announced that UBS had agreed to provide information on over 4,000 U.S. persons with accounts at UBS.
   n22 Under a John Doe summons, the U.S. Internal Revenue Service (“IRS”) asks for information to identify unnamed “John Doe” taxpayers. The IRS may issue a John Doe summons only with judicial approval, and judicial approval is given only if there is a reasonable basis to believe that taxes have been avoided and that the information  sought pertains to an ascertainable group of taxpayers and is not otherwise available.  

[*14]

Information exchange with Luxembourg and Switzerland 

The existing treaties with Luxembourg and Switzerland include exchange of information articles that do not comply with the U.S. Model treaty, the terms of U.S. tax treaties currently in force, or the international norms on transparency. To date, neither jurisdiction has achieved a satisfactory rating under the peer review process of the Global Forum on Transparency and Exchange of Information, the international body organized within the OECD to conduct its work on exchange of information standards (“Global Forum”). The peer review is conducted in two phases: Phase I evaluates the legal and regulatory aspects of exchange, that is, whether or not the domestic law and administrative structures exist in a jurisdiction to enable it to exchange information. In Phase II, the peer review evaluates the actual practice of exchange of information.23 Both jurisdictions have made progress in addressing the deficiencies, according to the Global Forum, but neither has yet been rated to be compliant or largely compliant.
23 Certain OECD conclusions about information exchange with Luxembourg and Switzerland are noted below. The OECD peer reviews of Chile and Hungary found that although those jurisdictions generally are compliant with OECD standards, each country had certain deficiencies preventing fully effective information exchange.  

Switzerland 

The exchange of information article in the 1951 U.S.-Swiss treaty was limited to “prevention of fraud or the like.” Under the treaty, Switzerland applied a principle of dual criminality, requiring that the purpose for which the information was sought also be a valid purpose under local law. Because “fraud or the like” was limited to nontax crimes in Switzerland, information on civil or criminal tax cases was not available. The provision was substantially revised for the present treaty, signed in 1996, and accompanied by a contemporaneous protocol that elaborated on the terms used in the exchange of information article. That 1996 Protocol was intended to broaden the circumstances under which tax authorities could exchange information to include tax fraud or fraudulent conduct, both civil and criminal. It provided a definition at paragraph 10 of “tax fraud” to mean “fraudulent conduct that causes or is intended to cause an illegal and substantial reduction in the amount of tax paid to a contracting state.” In practice, exchange apparently remained limited, leading the competent authorities to negotiate a subsequent memorandum of understanding that included numerous examples of the facts upon which a treaty country may base its suspicions of fraud to support a request to exchange information. n24
   n24 “Mutual Agreement of January 23, 2003, Regarding the Administration of Article 26 (Exchange of Information) of the Swiss-U.S. Tax Convention of October 2, 1996,” reprinted at paragraph 9106, Tax Treaties, (CCH 2005).   

The proposed protocol, by replacing Article 26 (Exchange of Information and Administrative Assistance) of the present treaty and amending paragraph 10 of the 1996 Protocol, closely adheres to the principles announced by Switzerland. It also conforms to the standards, if not the language, of the exchange of information provisions in the U.S. Model treaty in many respects. As a result, the proposed protocol may facilitate greater exchange of information than has occurred in the past, chiefly by eliminating the present treaty requirement that the requesting treaty country establish tax fraud or fraudulent conduct or the like as a basis for exchange of information and providing that domestic bank secrecy laws and lack of a domestic interest in the requested information are not possible grounds for refusing to provide requested information. Lack of proof of fraud, lack of a domestic interest in the information requested, and Swiss bank secrecy laws were cited by Swiss authorities in declining to exchange information. The proposed protocol attempts to ensure that subsequent changes in domestic law cannot be relied upon to prevent access to the information by including in the proposed protocol a self-executing statement that the competent authorities are empowered to obtain access to the information notwithstanding any domestic legislation to the contrary. 

Nevertheless, there are several areas in which questions about the extent to which the exchange of information article in the proposed protocol may prove effective are warranted. The proposed revisions to paragraph 10 of the 1996 Protocol reflect complete adoption of the first element listed above in the Swiss negotiating position,  “limitation of administrative assistance to individual cases and thus no fishing expeditions.” The limitation poses issues regarding (1) the extent to which the Swiss will continue to reject requests that do not name the taxpayer as a result of the requirement that a taxpayer be “typically” identified by name, and (2) the standard of relevance to be applied to requests for information, in light of the caveat against “fishing expeditions.” In addition, the appropriate interpretation of the scope of purposes for which exchanged information may be used may be unnecessarily limited by comments in the Technical Explanation. In particular, although paragraph 2 of Article 26 (Exchange of Information), as modified by the proposed protocol, generally prohibits persons who receive information exchanged under the article from using the information for purposes other than those related to the administration, assessment, or collection of taxes covered by the treaty, the paragraph also allows the information to be used for other purposes so long as the laws of both the United States and Switzerland permit that use and the competent authority of the requested country consents to that use. The Technical Explanation, however, states that one treaty country (for example, the United States) will seek the other treaty country’s (for example, Switzerland’s) consent under this expanded use provision only to the extent that use is allowed under the provisions of the U.S.-Switzerland Mutual Legal Assistance Treaty that entered into force in 1977.  

The extent to which Swiss commitment to transparency in practice is consistent with international norms remains the subject of inquiry by the Global Forum, despite the apparent adoption of the OECD standards on administrative assistance in tax matters in 2009, n25 when it  simultaneously announced key elements that it would require as conditions to be met in any new agreements. The Swiss conditions established by the Federal Council limited administrative assistance to individual cases and only in response to a specific and justified request. Although Switzerland is considered by the OECD to be a jurisdiction that has fully committed to the transparency standards of the OECD, the OECD report on Phase I of its peer review of Switzerland states that the Swiss authorities’ initial insistence on imposing identification requirements as a predicate for exchange of information was inconsistent with the international standards and that additional actions would be needed to permit the review process to proceed to Phase II. Those actions include bringing a significant number of its agreements into line with the standards and taking action to confirm that all new agreements are interpreted in line with the standard. On October 1, 2015, the Global Forum launched the Phase II peer review of Switzerland, signaling that the actions taken by Switzerland to improve its transparency with respect to tax matters since the Phase I report have satisfied the Global Forum.
   n25 See “Switzerland to adopt OECD standard on administrative assistance in fiscal matters,” Federal Department of Finance, FDF (March 13, 2009), available at
http://www.efd.admin.ch/dokumentation/medieninformationen/00467/index.html?lang=en&msg-id=25863 (last accessed March 1, 2011).  

According to advice we received from foreign law specialists at the Global Legal Research Center of the Library of Congress’s Law Library, the actions taken by the Swiss since the initial unfavorable Phase I peer review include its agreement to the international standards on automatic exchange, expansion of its information exchange network, amendment of existing agreements to conform to the international transparency norms, and revision of domestic law to ensure the ability of tax authorities to comply with the exchange of information obligations and safeguards required in its bilateral and multilateral agreements. A report of the recently launched Phase II peer review is expected in 2016. 

Financial Secrecy in the U.S. - A NonTax Example Illustrating the Law Enforcement Problem (11/7/15)

I posted recently on a Tax Justice Network study ranking the U.S. 3rd in financial secrecy.  Tax Justice Network Study of Financial Secrecy with U.S. Third Most Opaque (Federal Tax Crimes Blog 11/14/15), here.  One of the issues is that opacity of U.S. entity structures.  The beneficial owners of corporations and other entities may simply not be known.  And states permitting such entities to be organized usually do not request any representations of ownership.  So, shady actors can easily fly under the law enforcement -- including tax enforcement -- radar screen.  Hence, the U.S. may facilitate evasion of other countries' taxes by offering foreign investors secrecy as to their investments in the U.S.

The New York Times has a related article on the use of such entities -- LLCs in this case -- that permit beneficial owners to hide.  Stephanie Saul, Real Estate Shell Companies Scheme to Defraud Owners Out of Their Homes (NYT 11/7/15), here.  The problem addressed is the use of LLCs to cheat unaware persons out of their properties through simple variations of fraud, with the lack of transparency as to ownership being a key factor in the fraud.  Here are some key excerpts:

“Sham LLCs are a huge problem in terms of their lack of transparency, in terms of who is behind the property and who is behind these schemes,” said Jennifer Sinton, a lawyer with South Brooklyn Legal Services * * * . 

A review by The New York Times of several dozen cases, and interviews with lawyers, prosecutors and others knowledgeable about fraudulent deed transfers, suggests they are accelerating even as officials struggle to address them. The city’s Department of Finance said it was investigating 120 cases, many of them hard to crack because of the role played by LLCs, officials said. Underscoring the rising alarm over the problem, the state attorney general, Eric T. Schneiderman, and the Brooklyn borough president, Eric L. Adams, held a forum last month to warn property owners about it. 

Deed thieves often scan legal notices for mortgages in arrears, typically targeting properties like Ms. Campbell’s that are in poor repair or abandoned. Vulnerable homeowners — including older and disabled adults — are sometimes tricked into signing over their properties, while believing they are getting financial relief.
In other cases, signatures are simply forged on deeds. The thieves, meanwhile, hide behind inscrutable mazes of limited liability companies, rented post office boxes and fake addresses. 

* * * * 

When LLCs are taken to court, those behind them often remain a step ahead — and impossible to find. “They’re shell companies,” said Jomo Gamal Thomas, a lawyer who has represented several deed fraud victims. “There’s no guarantee you’ll get your money back.” 

While this is a different law enforcement problem that encountered in the use of opaque entities to hide ownership of foreign accounts and other foreign assets in order to avoid paying U.S. tax, the theme is the same -- lack of transparency permitting laws to be skirted.  I don't know that there are easy solutions.

The article notes some limited administrative and proposed legislative solutions:

Saying he had been motivated in part by The Times’s findings, New York’s finance commissioner, Jacques Jiha, began last spring to require that all members of LLCs be disclosed to the city for tax auditing purposes when deeds were transferred. Mr. Jiha said that wealthy residents might be able to use a “veil of secrecy” to evade city taxes by claiming to live elsewhere. While the new rules went beyond what many jurisdictions require, experts called them imperfect, because some LLC members are nominees, meaning the true owners remain hidden. 

Mayor Bill de Blasio’s administration is sponsoring legislation in Albany intended to prevent deed theft. The bill’s provisions include a requirement that notaries public be fingerprinted. But the city recently removed a provision that would compel additional disclosure of LLC ownership in real estate transactions. While real estate interests had objected to the requirement, Sonia Alleyne, a spokeswoman for the Finance Department, said that was not why it was dropped. Instead, she said, city officials believed the new requirements imposed by Mr. Jiha had begun to work.

Tax Court Rejects the Frivolous Return Penalty for Fifth Amendment Assertion on Schedule B FBAR Question (11/71/5)

In Youssefzadeh v. Commissioner, Order (11/6/15), here, on Schedule B for 2011, the taxpayer "refused to answer some questions and fill in some values."  Instead, he "invoked his Fifth Amendment privilege against self-incrimination, and wrote that if (sic) his answers to these questions might lead to (or actually be) incriminating evidence against him.."  Later in the order, the Court says that the taxpayer "did black out the source and amount of some interest on Schedule B, but importantly, he included the total amount of interest on line 4."

The IRS asserted a frivolous return penalty under § 6702(a), here.

The taxpayer contested the penalty in a CDP proceeding.  The Tax Court held that he had properly invoked his Fifth Amendment privilege and therefore rejected the IRS's assertion of the frivolous return penalty.

Although this is a nonprecedential order, the discussion of this issue often faced by tax practitioners is very good.  The issue is how does the taxpayer properly invoke his or her Fifth Amendment privilege when some information on the tax return may be potentially incriminating.  In broad strokes, the taxpayer cannot assert the Fifth Amendment privilege by filing no return.  Nor can he assert the privilege by filing a return with no information other than identifying information and the assertion of the Fifth Amendment claim.  Rather, as I stated in the last version of my Federal Tax Crime book (footnotes omitted:

From the above, we derive the conclusion that generally, the proper way to assert the Fifth Amendment on current returns is to selectively assert it on the return in response to the line item requesting information that may be incriminating.  Certainly line items on the return that require disclosure of a source of income or a type of business (as in Schedule C) might permit the assertion of the Fifth Amendment to avoid answering the question.  What about the amount of the income?  Any lawyer worth his or her pay can provide reasons, often tenuous, as to why putting the amount of income would be incriminating even if the Fifth Amendment is asserted as to the source.  But the amount of income is usually not thought of as the quality of information that is incriminating for Fifth Amendment purposes. fn
   fn. E.g., United States v. Goetz, 746 F.2d 705, 710 (11th Cir. 1984); United States v. Brown, 600 F.2d 248, 252 (10th Cir. 1979), cert. denied, 444 U.S. 917 (1979); United States v. Johnson, 577 F.2d 1304, 1311 (5th Cir. 1978).

I am not sure that I picked up all nuances in this concluding statement and Youssafzaeh may be offer some nuance.  So, I include here significant portions of Judge Holmes' Order because it is short, touches all the right bases, and well-stated:

The Commissioner must find three things to assess a frivolous return penalty. First, the document must purport to be a tax return. I.R.C. § 6702(a)(1). Second, the return must either omit enough information to prevent the IRS from judging "the substantial correctness of the self-assessment" or must clearly appear to be substantially incorrect. I.R.C. § 6702(a)(1)(A)-(B). Third, the taxpayer's position must be frivolous or demonstrate a desire to impede the IRS's administration of the Code. I.R.C. § 6702(a)(2)(A)-(B). We limit our review to the face of the return when deciding if the return was frivolous as a matter of law. Callahan, 130 T.C. at 51. The burden of proof is on the Commissioner when he asserts a penalty under I.R.C. § 6702. I.R.C. § 6703(a). 

We can easily check factor one off the list. Youssefzadeh filed the standard Form 1040 and we have no problem saying he meant it to be his tax return (nor does the Commissioner contest this). The second factor isn't so easy, but after examining the face of the return, we ultimately hold that it contained sufficient information. The face of Youssefzadeh's return includes all of a normal return's numerical information -- he's not one of those tax protesters who fills out a return with zeroes on nearly every line. See, e.g., Lindberg v. Commissioner, 99 TCM 1273, 1277 (2010); Hill v. Commissioner, 108 TCM 12, 14 (2014). He did black out the source and amount of some interest on Schedule B, but importantly, he included the total amount of interest on line 4. There don't appear to be any other irregularities. 

The Commissioner argues that he needs the missing information to determine if Youssefzadeh's return is accurate, but he fails to give any reasons why. And it's important that the standard isn't "Is the return completely correct?" but "Is the return substantially correct?" We hold that this return on these undisputed facts is -- considering that the face of the return appears to include the total amount of interest while only redacting the source of one payer. 

The Commissioner stumbles into the third factor too. He argues that Youssefzadeh's return is frivolous because the IRS has identified claiming the Fifth Amendment as a reason for omitting information is a frivolous argument. Notice 2010-33, 2010-17 I.R.B. 609. Therefore, the Commissioner argues, Youssefzadeh's return must've been frivolous. But Notice 2010-33 doesn't say omitting some information because of fear of self-incrimination is frivolous; it says that omitting "all financial information" is frivolous. Id. (emphasis added). This distinction is important and appears elsewhere. The Internal Revenue Manual says it's frivolous when an "individual makes an improper blanket assertion of the Fifth Amendment right against self-incrimination as a basis for not providing any financial information." I.R.M. 4.10.12.1.1(10) (emphasis added). The Manual goes on to say that "judicial precedents clearly establish that failure to comply with the filing and reporting requirements of the federal income tax laws will not be excused based upon blanket assertions of" the Fifth Amendment. I.R.M. 4.10.12.1.2(6) (emphasis added). A review of Youssefzadeh's return reveals that it contains plenty of financial information and isn't covered by any blanket assertions. 

The Supreme Court held a long time ago that the Fifth Amendment doesn't excuse a complete failure to file a tax return. United States v. Sullivan, 274 U.S. 259, 263 (1927). But the Court went on to say in the same opinion that if the form "called for answers that the defendant was privileged from making he could have raised the objection in the return." Id. It later specifically held the privilege does apply to tax returns, provided the taxpayer affirmatively claims the privilege on the return and does so before he files it. Garner v. United States, 424 U.S. 648, 656 (1976). The Commissioner's assertion without further analysis that a claim of the Fifth Amendment privilege on a return must in all cases be frivolous is simply wrong. 

The law doesn't let taxpayers invoke the privilege on a tax return with random and unjustified invocations. Instead, he "must be faced with substantial hazards of self incrimination * * * that are real and appreciable." United States v. Neff, 615 F.2d 1235, 1239 (9th Cir. 1980) (internal quotations omitted). He must have "reasonable cause" to fear that answering a question on a tax return could lead to criminal prosecution. Id. But the answer doesn't have to be so incriminating that it supports conviction itself. Id. All the answer has to do is "provide a lead or clue to evidence having a tendency to incriminate." Id. 

At the same time, a taxpayer must show enough to allow us to conclude that there is at least a risk of self-incrimination (while at the same time not revealing enough information to realize the very risk the taxpayer is trying to avoid). Hoffman v. United States, 341 U.S. 479, 486 (1951). We first determine if we find "a real and appreciable danger of incrimination exists" by examining the "implications of the questions(s) in the setting in which (they are) asked." Neff, 615 F.2d at 1239-40. If we aren't convinced, then it's up to the taxpayer to show us why we're wrong. Id. 

Youssefzadeh correctly tells us here that 31 U.S.C. § 5314 and 31 U.S.C. § 5322 make it a crime to willfully fail to file an FBAR.1 The questions asked on Section B of the Form 1040 elicit information that can easily be used to determine if the taxpayer has filed an FBAR. And, as the Sixth Circuit pointed out, "this section of the return refers taxpayers to a booklet that further outlines their responsibilities for reporting foreign bank transactions. This booklet discusses the duty to file [the FBAR]." United States v. Sturman, 951 F.2d 1466, 1477 (6th Cir. 1991). Because the lines that Youssefzadeh redacted ask for information that triggers the duty to file an FBAR, n2 and because willful failure to file an FBAR is a crime, we hold that Youssefzadeh has shown us a real and appreciable danger of self-incrimination by being compelled to answer the questions on Section B. In other words, Youssefzadeh's return wasn't frivolous by reason of invoking the Fifth Amendment privilege. Because the Commissioner raised no other grounds for imposing the penalty, we hold that Youssefzadeh's return wasn't frivolous or made with an intent to impede the administration of the code.
   n2 Question 7a on Form 1040 asks the taxpayer if he or she is required to file an FBAR. If the taxpayer is forced to answer this as "yes" but has failed to file an FBAR, the answer at least reasonably raises the threat of criminal prosecution.  

We cannot sustain the penalty, which means that we cannot sustain the Commissioner's determination to collect it.

Nonresident Aliens Can Be Subject to the U.S. Estate Tax - But Usually Ignore It (11/6/15)

NBC News offers an investigative report from its affiliate, CNBC, on the common failure on executors (or their equivalent) of nonresident alien decedents to report estate taxes due with respect to U.S. assets.  Eamon Javers, Why Billions of Dollars in Estate Taxes Go Uncollected (NBCNEWS 11/4/15), here; the CNBC report by the same author, titled Look who's getting away with not paying this estate tax, is here..  Key excerpts:

Under U.S. tax law, the estates of foreign holders of U.S. assets, such as stocks, real estate and valuables, are required to pay estate taxes on those assets after the death of the owner. There's even a handy piece of IRS paperwork — form 706-NA — to help calculate the tax. 

But one veteran Swiss banker tells CNBC that this rule is widely ignored around the world, and the U.S. government has no way to know how much money it is owed under its laws. 

* * * * 

Exactly how much money foreigners owe in U.S. estate taxes each year is unclear — it appears to be a blind spot for the IRS. The tax-gathering agency publishes a detailed report every several years on what it calls the "tax gap," or the difference between what taxpayers should pay and what they actually cough up to Uncle Sam. But the report doesn't attempt to estimate overseas estate taxes. 

"There's no estimate for international noncompliance," said an IRS official. "That's kind of the 800-pound gorilla that's not in the room." 

* * * * 

A back-of-the-envelope analysis by CNBC of estate tax payment patterns and total foreign holdings of U.S. stocks and real estate concluded that the IRS is missing several billion dollars in foreign estate taxes each year — money that could help a cash-strapped U.S. Treasury pay the nation's bills. 

The issue emerges at a time when foreign investment in the United States is on the upswing. Goldman Sachs reported in January that foreign ownership of U.S. stocks totaled 16 percent in 2014, the highest rate in the 69 years such records have been kept.
Despite that, publicly available statistics from the IRS show that very few foreign citizens file estate tax paperwork. According to the agency's data, just 849 people worldwide filed nonresident alien estate tax returns in 2014, paying just more than $60 million in net taxes to the IRS. 

Those figures pale in comparison to the breathtaking scale of U.S. assets owned by foreigners. 

Consider two of the asset categories covered by the estate tax on foreigners: U.S. stocks and real estate. 

The U.S. Treasury says that overseas individuals own about $6.7 trillion in U.S. equities. Much of that value could qualify for the estate tax when stockholders die. But according to the IRS, only 59 people in the countries that have tax treaties with the United States filed taxable returns disclosing stock holdings in 2014. The number wasn't much bigger in the countries that do not have tax treaties. Just 93 people in those countries filed such returns. That's less than two people per country.

The report is much offers much more detail as to the potential scope of the tax avoidance and the difficulties the IRS faces in enforcing the tax.  I recommend the full report.

Perhaps the IRS could make a start at enforcing the estate tax by bringing pressure of the sort imposed by FATCA on foreign financial institutions who act in the capacity of executor (or equivalent).  Or, alternatively, perhaps there could be legislation requiring any nominal holder of U.S. assets beneficially owned by nonresident aliens to report the death and related information about the assets nominally held.  These would just be starts.

I offer links to the key form and its instructions.

Form 706-NA, United States Estate (and Generation Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States, here.

Instructions for Form 706-NA (Rev. August 2013), here.  Here are some excepts from the instructions:

Note. In order to complete this return, you must obtain Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and its instructions.  

* * * * 

Who Must File 

The executor must file Form 706-NA if the date of death value of the gross estate located in the United States exceeds the filing limit of $60,000. The total value of the gross estate may be reduced by the sum of: 

• The gift tax specific exemption (section 2521) allowed for gifts made between September 9, 1976, and December 31, 1976, inclusive, and 
• The amount of adjusted taxable gifts made after December 31, 1976.

Not Your Ordinary U.S. Taxpayer With Foreign Accounts (11/4/15)

DOJ Tax announced today here the conviction of an Alaskan plastic surgeon, Dr. Michael Brandner, for "four counts of wire fraud and three counts of tax evasion."  As set forth in the press release:

Doctor Hid Millions in Secret Accounts in Panama 

According to the indictment and evidence introduced at trial, in late 2007, shortly after Brandner’s wife filed for divorce, he collected millions of dollars in marital assets and secretly drove from Tacoma, Washington, to Costa Rica in Central America.  In Costa Rica, he opened two bank accounts into which he deposited more than $350,000 in cash and hid a thousand ounces of gold in a safe deposit box.  He then traveled to Panama where he opened an account under the name of a sham corporation and in 2008,deposited $4.6 million into the account. 

Dr. Brandner concealed both the existence of the bank accounts and the interest he earned on those accounts from the court in the divorce proceedings and from the Internal Revenue Service (IRS).  Dr. Brandner owed the IRS $600,000 in additional taxes for the 2008 through 2010 tax years.  He presented the divorce court with a fabricated promissory note to mislead the court into believing he had invested more than $3 million in the foreign corporation. 

In 2011, once the divorce was final, Dr. Brandner repatriated more than $4.6 million, only to have the funds seized by Homeland Security Investigations agents.  He then lied to federal agents about his control of the funds.

The press release narrative is a bit cryptic, but states the key points -- he cheated and lied to his estranged spouse and then to others including a court and federal agents.

Jay Adkisson wrote about the currency seizure in a Forbes blog:  Brandner: Alaska Plastic Surgeon Faces Forfeiture Of $4.656 Million For Undisclosed Offshore Account Used To Attempt To Cheat Ex-Wife (Forbes / Personal Finance 3/17/12), here.  The blog entry is drawn from the complaint in a civil forfeiture case.  As Adkisson summarizes the allegations in the complaint. Dr. Brandner's actions seem incredibly stupid.  Adkisson summarizes the lessons as follows:

There are quite a few lessons to be had from this case, but the most important is that it is stupid — very stupid — to engage in conduct that has the effect of turning a purely civil dispute (here, a divorce) into potential criminal charges. 

The events related here are nothing like legitimate asset protection planning, but rather is another “Dumb Doctor Case” (the slang acronym is “ DDC’) where a physician wrongly concluded that he could out-smart the system. Probably every real asset protection planner who reads this Complaint will roll their eyes and count Brandner’s numerous missteps as he floundered through his scheme. 

Attempting to cheat spouses out of their share of the marital estate is not a proper part of asset protection planning, either, and is wholly reprehensible conduct. Asset protection against spouses is cheap and easy and totally legitimate: It is called a “Pre-Nupt”, short for pre-nuptial agreement or pre-marital agreement. For those who are already married, most states allow post-marital agreements. Agreements to divide assets are proper; cheating the other spouse by hiding assets is not — that is what sleazy planners do. 

Finally, when it comes to offshore planning, we once again see the truism: “Somebody Knows.” No matter how rock-solid the laws of some offshore jurisdiction seem to be, no matter how tight the security at an offshore bank, and no matter how carefully somebody keeps their paperwork out of the wrong hands, “ Somebody Knows.” Here, that somebody was our still-unknown Mr. X, and Mr. X was “flipped” by law enforcement to turn over his clients such as Brandner.