Tuesday, July 22, 2014

More on Recklessness as Cheek Willfulness (Includinig for FBAR Civil Penalty) or Willful Blindness (7/22/14)

Yesterday, I wrote a blog titled Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here.  In that blog, I concluded that willful blindness for purposes of the income tax and the FATCA willful penalty did not include gross negligence or its parallel recklessness.  A reader pointed out that the Fourth Circuit had concluded that recklessness could meet the definition of willfulness.  United States v. Williams, 489 Fed. Appx. 655; 2012 U.S. App. LEXIS 15017 (4th Cir. 2012).  (For my prior blog on the Williams case, see Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here.)  Today's blog addresses this aspect of the Williams holding.

I will focus on the FBAR side of the issue here.  The FBAR willfulness civil penalty is as follows (Section 5321(a)(5)(C), here:
(C) Willful violations.— In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
    (i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—
        (I) $100,000, or
        (II) 50 percent of the amount determined under subparagraph (D), 
So, the key statutory term is willfully.  As the Courts have noted on many occasions, when Congress uses the term willfully in statutory schemes, it may mean different things.  See Bryan v. United States, 524 U.S. 184, ___ (1998), here.  However, as Cheek noted, in the federal tax criminal provisions, it means intent to violate a known legal duty.  Cheek v. United States, 498 U.S. 192 (1991), here.  In Ratzlaf v. United States, 510 U.S. 135 (1994), here, the Supreme Court held that willfully as used in Section 5322(a), here, the criminal provision for willfully violating the antistructuring provisions, should be interpreted the same as in Cheek -- intent to violate a known legal duty.  Ratzlaf had to know that structuring was illegal and intend to violate the law in order to be prosecuted.  In the course of so holding, the Court said:
A term appearing in several places in a statutory text is generally read the same way each time it appears. See Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 479, 120 L. Ed. 2d 379, 112 S. Ct. 2589 (1992). We have even stronger cause to construe a single formulation, here § 5322(a), the same way each time it is called into play. See United States v. Aversa, 984 F.2d 493, 498 (CA1 1993) (en banc) ("Ascribing various meanings to a single iteration of [§ 5322(a)'s willfulness requirement] -- reading the word differently for each code section to which it applies -- would open Pandora's jar. If courts can render meaning so malleable, the usefulness of a single penalty provision for a group of related code sections will be eviscerated and . . . almost any code section that references a group of other code sections would become susceptible to individuated interpretation.").
The FBAR criminal penalty is in Section 5322(a) also. The FBAR civil willfullness penalty is part of the same regulatory scheme, incorporated in the immediately  preceding Code section, Section 5321.  Significantly, Section 5321(d) says that the civil penalty can apply "notwithstanding the fact that a criminal penalty is imposed with respect to the same violation."  So, referring to the above quote from Ratzlaf, willfulness for purposes of the civil penalty would have the same interpretation of willfully -- intent to violate a known legal duty.  Hence, the IRM  says that, for purposes of the FBAR civil penalty, "The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.  (07-01-2008) FBAR Willfulness Penalty - Willfulness, here.  We thus do not have to pick among possible meanings of willfully, we know the meaning of willfully.

Monday, July 21, 2014

Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (7/21/14)

Readers are aware of the willful blindness concept.  (Willful blindness goes by various labels, such as willful ignorance, conscious avoidance, etc.)  For most tax crimes and the FBAR crimes, willfulness -- defined as specific intent to violate a known legal duty -- is required.  Ignorance is an excuse.  In the context of tax crimes requiring willfulness, the willful blindness construct says that, if a trier of fact is otherwise unable to find the requisite specific intent for willfulness, the trier may consider the fact that the defendant deliberately acted in a way to be – or appear to be – ignorant of the facts or the law applicable to the facts and treat that real or feigned ignorance as either (i) the equivalent of the specific intent required or (ii) an inference of the specific intent which, with the other evidence, will permit the trier to find the required specific intent beyond a reasonable doubt.  (As I note below, I think the second of these is the only legally permissible application of the concept; willful blindness is not the equivalent of specific intent.)  In either event, if permitted, it can lead to a conviction of a crime requiring specific intent where the evidence might otherwise be insufficient for the trier to find the requisite specific intent.  In the FBAR civil penalty context, the willful blindness concept can permit the application of the FBAR willful civil penalty.

I have discussed before how uncertain the application of the willful blindness concept is.  The uncertainty has presented itself again in the certification for Streamlined relief -- offshore with a 0% penalty and domestic with a 5% penalty.  In each case, the U.S. person must certify that he or she was not willful in failing to report income or failing to file FBARs.   The certification is:
My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
I will demonstrate in the remainder of this blog that this definition of nonwillfulness is incomplete unless it is meant to state a special definition of nonwillfulness for the program (which I doubt).

Let's start with a discussion of the conceptual problem with the concept.  If the concept means that, as to a crime or penalty requiring specific intent, anything less than specific intent can be willful, then it expands the scope of the criminal statute or civil penalty by judicial interpretation.  For this reason, if willful blindness is to be in the landscape for tax crimes or FBAR crimes and penalties, the better interpretation for its application is the second alternative noted above – it merely permits an inference of specific intent which, with the other evidence, will permit the trier to find the required specific intent to the required level -- beyond a reasonable doubt in criminal cases and either preponderance or clear and convincing in a civil case.  E.g., United States v. Stadtmauer, 629 F.3d 238 (3d Cir. 2010) (approving jury instruction that "A finding beyond a reasonable doubt of a conscious purpose by the defendant to avoid knowledge that the tax returns at issue were false or fraudulent as to a material matter would permit an inference that he had such knowledge.") In other words, a finding of willful blindness is not a substitute for statutorily required specific intent.  As the DOJ CTM 8.08[4], here, warns prosecutors regarding conscious avoidance (same as willful blindness)

Article on Swiss Bank Attempts to Reduce DOJ Penalty (7/21/14)

The Wall Street Journal has an interesting article on Swiss banks' attempts to reduce the DOJ penalties for their misbehavior in assisting clients' hide untaxed funds.  John Letzing, Swiss Banks Use Carrot and Stick in Addressing Hidden Accounts (WSJ Markets 7/18/14), here.  Key excerpts:

Swiss banks are seeking to chip away at potential penalties from the U.S. Justice Department by offering to compensate American clients who disclose their hidden accounts, according to people familiar with the matter. 
More than 100 Swiss banks have signed up for a self-reporting program offered last year by the Justice Department, which can result in penalties for harboring undeclared American accounts. Banks can mitigate penalties by encouraging clients to pre-emptively disclose those accounts to the U.S. Internal Revenue Service. 
Some banks have dangled financial incentives in front of current and former clients to entice them to divulge accounts to the IRS. In some instances token amounts of around $5,000 are being offered, attorneys and financial advisers say. In other cases significantly larger offers are selectively being made to share the legal and accounting costs that accompany the voluntary disclosure process. 
* * * * 
The Justice Department is aware of such transactions, but hasn't offered guidance on whether or not they may ultimately be objectionable. "We are currently looking at all the factors that contribute to a bank's compliance with the program," a Justice Department spokeswoman said. 
* * * * 
Category 2 banks have until mid-September to provide proof that they encouraged clients to enter the IRS's disclosure regime. Hidden funds disclosed by those clients could then be subtracted from a bank's penalty amounts, which may be severe. A single, undeclared account containing $2 million opened after early 2009 could result in a penalty of $1 million, for example. 
* * * *  
Switzerland's financial regulator, Finma, says banks in the program are free to mitigate penalties as they choose.

Wednesday, July 16, 2014

Court of Appeals Rejects Arguments that Instructions on Willfulness and Good Faith Were Reversible Error (7/16/14)

In United States v. Basile, 2014 U.S. App. 12388 (3d Cir. 2014), here, the defendants, husband and wife, chiropractors, engaged an asset protection firm who put them into offshore entities and bank accounts to avoid tax.  The defendants took other actions to obscure their income and avoid tax.  The defendants were intransigent in dealing with the IRS; their intransigence led to criminal prosecution.

As often the case, their  principal defense was the Cheek willfulness defense -- that did not intend to violate a known legal duty.  The jury convicted.  On appeal, the defendants asserted that the instructions were deficient.  The Court of Appeals held (one footnote omitted; bold face supplied by JAT):
First, the Basiles argue that the instructions wrongly permitted the jury to reject their good-faith defense if jurors found their beliefs objectively unreasonable, in violation of Cheek v. United States, 498 U.S. 192 (1990). We disagree. 
The  jury instructions stated: 
A belief need not be objectively reasonable to be held in good faith; nevertheless, you may consider whether the Defendant's stated belief about the tax statutes was reasonable as a factor in deciding whether the belief was honestly or genuinely held. 
A1685 (emphasis added). This is an accurate statement of law under Cheek, which held that a jury instruction cannot require a tax evasion defendant's claimed good-faith belief to be objectively reasonable to negate the government's evidence of willfulness. 498 U.S. at 203. As "[k]knowledge and belief are characteristically questions for the factfinder," such an instruction erroneously transforms a fact question into a legal one. Id. However, even though a good-faith belief need not be objectively reasonable, the jury can still consider reasonableness in determining whether the belief was honestly held. As the Cheek Court noted, "[o]f course, the more unreasonable the asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing more than simple disagreement with known legal duties imposed by the tax laws and will find that the Government has carried its burden of proving knowledge." Id. at 203-04. 
The Basiles also contend that the District Court erred by instructing the jury that they did not act in good faith 
if, even though they honestly held a certain opinion or belief or understanding, they also knowingly made false statements, representations, or promises to others. 
A1686. This sentence comes from the Third Circuit's model instruction on the good faith defense generally, which also states that in tax cases, "the trial judge should give Instruction 6.26.7201-4 (Tax Evasion — Willfully Defined), n5 supplemented if need be under the circumstances of the case, by this instruction." See Third Circuit Model Criminal Jury Instruction 5.07.
   n5 The entire instruction reads as follows:
The third element the government must prove beyond a reasonable doubt is that (name) acted willfully. "Willfully" means a voluntary and intentional violation of a known legal duty. (Name)'s conduct was not willful if (he)(she) acted through negligence, mistake, accident, or due to a good faith misunderstanding of the requirements of the law. A good faith belief is one that is honestly and genuinely held. 

Saturday, July 12, 2014

HSBC India Client Sentenced Ever So Lightly Given Facts and Trial Conviction Rather than Plea (7/12/14)

Ashvin Desai, an offshore account taxpayer, who was previously convicted after tiral was sentenced to six months in prison and six months and one day of home confinement.  See DOJ Press Release, here.  See DOJ Press Release, here.  I reported the jury conviction at this blog:  HSBC Depositor Convicted (Federal Tax Crimes Blog 10/12/13), here.

Key excerpts (most of the press release, I bold face some it it):
Ashvin Desai, of San Jose, California, was sentenced yesterday to serve six months in prison and six months and one day of home confinement for concealing more than $8 million in foreign bank accounts, the Justice Department and Internal Revenue Service (IRS) announced.  Prior to yesterday’s sentencing hearing, Desai filed with the court a document indicating that the IRS has assessed and demanded payment of a Reports of Foreign Bank and Financial Accounts (FBAR) penalty against him for $14,229,744. 
In October 2013, a jury convicted Desai, a medical device manufacturer, of failing to report his family’s foreign bank accounts to the government on tax returns and FBARs.  The jury also found that Desai failed to disclose more than $1.2 million in interest income generated by these accounts between 2007 and 2009.  Desai was sentenced by U.S. District Judge Edward J. Davila. 
 According to the evidence presented in court, Desai controlled several foreign bank accounts at HSBC in India and Dubai, including accounts held in the name of his wife and adult children.  Desai invested the funds in these accounts in certificates of deposit, which earned interest at rates as high as nine percent.  Desai funded these accounts by mailing checks from the United States and by transferring money from other undeclared bank accounts in Singapore and the United Kingdom to his family’s accounts in India.  Desai also sold medical devices abroad, and, on at least one occasion, directed that his customer wire funds directly to his undeclared HSBC India account. 
 Between 2007 and 2009, Desai paid approximately $17,000 in taxes.  However, Desai owed an additional $357,783 in taxes to the IRS on his unreported interest income.  Desai’s deposits into his foreign accounts also far exceeded the income he disclosed on his tax returns each year.  In 2008, for example, he deposited nearly $1.1 million into foreign accounts while only reporting income of $115,810.91 on his tax return. 
 The evidence at trial demonstrated the steps Desai took to conceal his family’s foreign accounts from the government.  In addition to failing to report his accounts on tax returns and FBARs, Desai also directed the bank not to mail bank statements to his house.  On one occasion, Desai wrote an email in which he asked an HSBC banker: “Why are all the statements coming to Home address?  I thought we had a different arrangement.”
I am seeking some detail on the sentencing and, if I get it, may post more.  In the meantime, my comments are:

Second Circuit Reverses Aberrational Sentencing of Home Confinement and Probation Because of Government Shutdown (7/12/14)

I write today about a truly aberrational case out of the Second Circuit.  I say that it is aberrational, but obviously that is loaded with my value judgment characterization.

The case is United States v. Park, ___ F.3d ___, 2014 U.S. App. LEXIS 13039 (2d Cir. 2014), here.  Rather than attempt my own summary, I use the Second Circuit's Summary:
The government appeals from the sentence imposed on defendant Young C. Park, pursuant to an October 24, 2013 judgment of the United States District Court for the Eastern District of New York (Frederic Block, Judge), following Park's guilty plea to one count of filing a false corporate tax return in violation of 26 U.S.C. § 7206. 
We consider on appeal whether the District Court erred in sentencing Park to a probationary sentence rather than a term of imprisonment based solely on its belief that the government could not afford the cost of incarceration during a so-called "government shut-down." We hold that the District Court failed to conduct a meaningful review of the sentencing factors enumerated in 18 U.S.C. § 3553(a), and that the cost of incarceration, much less a political phenomenon styled a "government shut-down," is not a permissible factor to consider in determining whether to impose a term of imprisonment. In light of the need for deterrence and just punishment and the District Court's own remarks suggesting that a term of imprisonment was warranted, we also hold that the probationary sentence imposed here was substantively unreasonable. Accordingly, we VACATE the sentence imposed by the District Court and REMAND for plenary resentencing in accordance with this opinion.
In the body of the opinion, the Court offers a good discussion of the requirements for effective appellate review of sentencing via the concepts of procedural error and substantive error.  This particular sentenced flunked both tests (footnotes are omitted except in two instances).
   We review sentences on appeal only for "reasonableness." This type of scrutiny includes two components: "procedural" review and "substantive" review—although in sentencing, as in many areas of the law, the precise line between procedure and substance is often elusive. n7 Whether a sentence satisfies the objectives enumerated in the 18 U.S.C. § 3553(a)—a substantive inquiry—depends upon the explanation given by the District Court pursuant to 18 U.S.C. § 3553(c)—a procedural requirement. Where, as here, a district court relies on an improper factor to justify the sentence imposed, it can be difficult, if not impossible, for a reviewing court to evaluate separately the "procedural" and "substantive" reasonableness of a sentence.
   n7 Indeed, as Justice Holmes famously remarked in a different context, a word like "substance" or "procedure" "is not a crystal, transparent and unchanged, it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used." Towne v. Eisner, 245 U.S. 418, 425, 38 S. Ct. 158, 62 L. Ed. 372, T.D. 2634, 15 Ohio L. Rep. 562 (1918). Justice Brennan, writing for the Supreme Court in 1958, similarly noted that "[t]he words 'substantive' and 'procedural' are mere conceptual labels and in no sense talismanic." Byrd v. Blue Ridge Rural Elec. Coop., Inc., 356 U.S. 525, 549, 78 S. Ct. 893, 2 L. Ed. 2d 953 (1958); see also Laurence H. Tribe, American Constitutional Law 712 (2d ed. 1988) (noting that substance and procedure cannot be "neatly separated"). For this reason, whether an issue "is more appropriately characterized as substantive or procedural is not a matter of overriding significance." Albright v. Oliver, 510 U.S. 266, 302, 114 S. Ct. 807, 127 L. Ed. 2d 114 (1994).
A. "Procedural" Unreasonableness 
The procedural review focuses on whether the sentencing court followed all the necessary steps in deciding upon a sentence. A district court normally begins all sentencing proceedings by calculating the applicable Guidelines range, and will then consider the factors listed in 18 U.S.C. § 3553(a), as required by statute, before imposing a final sentence. Although "[a] judge need not utter 'robotic incantations' repeating each factor that motivates a sentence[,] . . . the judge must explain enough about the sentence for a reviewing court both to understand it and to assure itself that the judge considered the principles enunciated in federal statutes and the Guidelines."Further, when a district court imposes a sentence outside the recommended range, as the Court did here, it "must consider the extent of the deviation and ensure that the justification is sufficiently compelling to support the degree of the variance." 
The problem was that the sentencing judge considered only a Section 3553(a) non-authorized factor -- government shutdown -- and did not consider the authorized factors.  Not only did the judge not consider the authorized factors, he refused to do so.  That was procedural error.  In the discussion the court says:

Enabler Guilty Pleas from Sting Operation (7/12/14)

DOJ Tax has announced here the pleas of three enablers.  For the initial blog entry on the indictments, see IRS Sting Investigation Nabs Offshore Bank Account Enablers (Federal Tax Crimes Blog 3/24/14), here.  The enablers pleading are:  Joshua Vandyk, a U.S. citizen, and Eric St-Cyr and Patrick Poulin, Canadian citizens,  Here are key excerpts from the press release (bold face added by JAT):
According to the plea agreements and statements of facts, Vandyk, St-Cyr and Poulin conspired to conceal and disguise the nature, location, source, ownership and control of property believed to be the proceeds of bank fraud, specifically $2 million. Vandyk, St-Cyr and Poulin assisted undercover law enforcement agents posing as U.S. clients in laundering purported criminal proceeds through an offshore structure designed to conceal the true identity of the proceeds' owners. Vandyk and St-Cyr invested the laundered funds on the clients' behalf and represented that the funds would not be reported to the U.S. government. 
* * * * 
According to court documents, Vandyk and St-Cyr lived in the Cayman Islands and worked for an investment firm based in the Cayman Islands. St-Cyr was the founder and head of the investment firm, whose clientele included numerous U.S. citizens. Poulin, an attorney at a law firm based in Turks and Caicos, worked and resided in Canada as well as the Turks and Caicos. His clientele also included numerous U.S. citizens. Vandyk, St-Cyr and Poulin solicited U.S. citizens to use their services to hide assets from the U.S. government, including the IRS. Vandyk and St-Cyr directed the undercover agents posing as U.S. clients to create an offshore corporation with the assistance of Poulin and others because they and the investment firm did not want to appear to deal with U.S. clients. Vandyk, St-Cyr and Poulin used the offshore entity to move money into the Cayman Islands and used Poulin as a nominee intermediary for the transactions. 
According to court documents, Poulin established an offshore corporation called Zero Exposure Inc. for the undercover agents posing as U.S. clients and served as a nominal board member in lieu of the clients. Poulin transferred approximately $200,000 that Poulin, St-Cyr and Vandyk believed to be the proceeds of bank fraud from the offshore corporation to the Cayman Islands, where Vandyk and St-Cyr invested those funds outside of the United States in the name of the offshore corporation. The investment firm represented that it would neither disclose the investments or any investment gains to the U.S. government, nor would it provide monthly statements or other investment statements to the clients. Clients were able to monitor their investments online through the use of anonymous, numeric passcodes. Upon request from the U.S. client, Vandyk and St-Cyr liquidated investments and transfer money, through Poulin, back to the United States. According to Vandyk and St-Cyr, the investment firm would charge clients higher fees to launder criminal proceeds than to assist them in tax evasion.
Most enablers that I am aware of just played the tax evasion game and did not deliberately engage in money laundering.  That is why most enablers only draw an indictment for a tax conspiracy (5 years maximum), rather than for money laundering or money laundering conspiracy (20 years maximum).  Of course,at least in some cases, it may not be likely that the actual sentence for money laundering will exceed 5 years, but one can expect that, even then, the sentencing would  be greater for the money laundering violation than for the tax conspiracy violation.  And, some will likely get more than 5 years (which would be the maximum for a tax conspiracy violation).

Wednesday, July 9, 2014

Interesting Article from the Swiss Bankers Side (7/9/14)

The New York Times has an interesting article looking at the fallout to Swiss bankers who implemented the offshore evasion of taxes in the U.S. and other countries.  Doreen Carvajal, Swiss Banks’ Tradition of Secrecy Clashes With Quests Abroad for Disclosure (NYT 7/8/14), here.  

After describing the U.S. initiative against offshore banks and the hoped for change in Swiss attitudes on enabling tax evasion, the article continues:
But the impression of change is misleading, regulators and members of the insular banking fraternity here say. The reality, they say, remains closer to business as usual. 
Even as the Swiss authorities have nodded at cooperation with frustrated governments abroad, at home laws on the books since 1934 make violating client confidentiality a crime and require bankers to guard secrecy like priests or lawyers. Bankers who cooperate with foreign officials and violate their “duty of absolute silence,” as it is known here, potentially face home raids, prison, fines for secrecy violations and industrial espionage, and the ostracism of colleagues and friends. 
* * * * 
*** [B]ankers — caught in a vise of competing legal forces — are damned if they help either side. In the meantime, those being pressured to reveal their secrets or those of their clients to American and other foreign authorities investigating tax evasion and other crimes are maintaining their code of silence. For those bankers whose roles have brought legal charges abroad or the threat of them, that means avoiding extradition by staying within Switzerland, living life in legal and personal limbo. 
* * * * 
The situation is particularly galling to bankers — most at the midlevel — who say they are being pressured to take the fall for more powerful superiors in an industry that still jealously guards itself by closing its ranks. 
Describing a life of secretive techniques worthy of James Bond (who quipped in a 1999 film, “If you can’t trust a Swiss banker, then what’s the world come to?”), bankers who were interviewed said that one of the practices under most intensive criminal investigation — the clandestine recruitment of clients in the United States — was not only known to their bosses, but was also part of a business model. 
The bankers roamed the West and East Coasts of the United States with company instructions to recruit rich clients on a luxury circuit of five-star hotels, art exhibitions and tennis matches. Their bonuses, they said, depended on the business they cultivated and protected. 

Friday, July 4, 2014

Convicted Politician Did Not Lay a Proper Foundation For Proferred Indirect Testimony of Lack of Intent (7/4/14).

In United States v. Beavers, ___ F.3d ___, 2014 U.S. App. LEXIS 12469 (7th Cir. 2014), here, the defendant was convicted of multiple counts of tax fraud.  The facts are within a range of what might be expected given his profession -- money flowed to him and he did not report or pay tax on it.

The interesting part of the case relates to the key element for tax fraud that the defendant act willfully -- with intent to violate a known legal duty.  How does a defendant unwilling to testify as to his intent -- thus invoking his Fifth Amendment privilege -- introduce indirect evidence of his lack of intent to blunt the Government's indirect proof of his intent?  (Similar issues going to the willfulness element are, for example, reliance on tax practitioner (how can the defendant put his reliance in play without testifying).  Can the defendant effectively mount the "defense" without taking the stand? This issue often comes up in the context of a defense request for a jury instruction on good faith -- an instruction meant to emphasize something inherent in the willfulness element, that if the defendant acted in good faith he did not act willfully.  I offer the following from my Federal Tax Crimes Book (footnotes omitted):
The so-called good faith defense – sometimes the Cheek good faith defense – is technically not a defense.  The Government must prove willfulness.  Willfulness does not exist if the defendant acted in good faith with a belief that the law did not impose the legal obligation he is alleged to have violated.  Does that mean that the Government, in order to prove willfulness, must disprove good faith as to the legal requirement?  Logically, it would and, certainly most of the time, the Government’s proof of willfulness will in fact be sufficient to permit the jury to infer beyond a reasonable doubt that the defendant lacked good faith. 
Defendants who want to emphasize their good faith with the hope that the evidence bearing on good faith will at least dissuade the jury from finding willfulness beyond a reasonable doubt.  Thus, they will want the judge, by separate instruction, to instruct that good faith negates willfulness.  That good faith nuance, while implicit in the general willfulness instruction, is not as explicit as defendants desire.  Generally, courts will give the specific good faith instruction only if the evidence somehow affirmatively puts good faith in play – makes 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 will be subject to cross-examination; frequently, the defense team will conclude that the potential benefits of the defendant testifying (including the good faith opportunity) are less than the 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.  Other circumstantial evidence, including perhaps lay opinion evidence as to the defendant’s mental state, may be sufficient to put that issue in play and, if it does, the trial judge should give the instruction.
So, basically, the Government must prove intent beyond a reasonable doubt via circumstantial evidence in the absence of the defendant's testimony.  In appropriate cases, the defendant should be able to do so also, provided that he gets to the jury by laying the proper foundation.

With that, let's turn to Beavers.

BNP Paribas Plea Agreement, Documents, and Non-Resolution of Tax Investigation (7/4/14)

Most readers have already read, at some level, about the BNP Paribas plea agreement for "conspiring to violate the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA) by processing billions of dollars of transactions through the U.S. financial system on behalf of Sudanese, Iranian, and Cuban entities subject to U.S. economic sanctions."  See the DOJ Press Release, dated 6/30/14, here.  Justice Dept press release in BNP Paribas case.  The key documents (plea agreement, etc.) may be found here.  The press release is unusually long, at least compared to press releases in tax crimes and tax crimes related cases. The plea agreement is long as well.  But there is a lot of ground to cover in them.

I include here only certain excerpts from the plea agreement related to tax (I have added the bold facing to emphasize my comment at the end)::
In consideration of the plea of BNPP to Count One of the Information, neither BNPP nor BNP Paribas (Suisse) S.A. shall be further prosecuted criminally by the Offices (except for criminal tax violations as to which the Offices cannot, and do not, make any agreement) for any violations by BNPP of United States economic sanctions laws and regulations, including TWEA and IEEPA, that occurred between 2002 and 2012, to the extent that BNPP has truthfully and completely disclosed such conduct to the Offices as of the date of this Agreement. 
* * * * 
BNPP agrees to pay the Stipulated Fine Amount in full no later than 90 days after the imposition of sentence. BNPP agrees that it shall not claim, assert, or apply for, either directly or indirectly, any tax deduction, tax credit, or any other offset with regard to any US. federal, state, or local tax or taxable income for any fine or forfeiture paid pursuant to this Agreement. 
Note specifically Than BNP Paribas has not resolved the tax investigation of BNP Paribas' Swiss affiliate, BNP Paribas (Suisse) S.A.

Thursday, July 3, 2014

Rumors on the Workings of Streamlined Programs (Including Transitioning in OVDP) (7/3/14; 7/17/14)

I thought I would pass on some rumors that are floating around about the newest OVDP / Streamlined initiative.  I will update this blog as I hear more rumors and, of course, commenters as they hear can advise by comment.  I should note in this regard that a number of commenters have already added some information / rumors about how this works in their various comments, so readers might check out comments for the relevant blog entries.

1.  One practitioner has been told that accounts that are excludable from the OVDP penalty base because there is no U.S. tax noncompliance will be included in the 5% penalty base if the account was not reported on an FBAR.  I think this is right, parsing the Domestic Streamlined announcement says:
A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered FBAR period if the asset should have been, but was not, reported on an FBAR (FinCEN Form 114) for that year. A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset should have been, but was not, reported on a Form 8938 for that year. A foreign financial asset is also subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset was properly reported for that year, but gross income in respect of the asset was not reported in that year.
As stated, therefore, each of the following can cause the account to be included in the 5% penalty base:  (i) not reporting the account on the FBAR or the Form 8938 regardless of whether it is noncompliant (income reported and tax paid); OR (ii) gross income from the account was not reported, regardless of whether the account was reported on the FBAR or Form 8938.

And, the transition FAQ 5 says that those transitioning to the Streamlined result:
will not be required to pay the Title 26 miscellaneous offshore penalty at the OVDP rate to continue participation in OVDP, but will instead be subject the miscellaneous offshore penalty terms of the Streamlined Domestic Offshore Procedures.   
So, presumably, under straight Streamlining or transition Streamlining for the offshore penalty, the offshore penalty base will be as indicated above -- broader than in OVDP.

Those caught in this trap with a good nonwillful argument might want to consider options

Attorney Sentence Properly Considered Attorney Status and Deterrence in Tax Cases (7/3/14)

In United States v. McCord, 2014 U.S. Dist. LEXIS 86436 (SD OH 6/25/14) [no link available], the defendant, an attorney, was sentenced by a Magistrate Judge to 60-days incarceration and 1-year of supervised release.  The defendant appealed to the District Judge, alleging various grounds on why the sentence was too harsh.  In one ground, he urged that the Magistrate Judge improperly considered his profession as an attorney in sentencing; in another ground, he urged that the Magistrate Judge improperly considered deterrence of others.  The district judge rejected all of the claims, along with his other arguments.  Here is what the district court said about the two claims specified:
a. Attorney Status 
McCord argues that "[n]either the statute nor the Sentencing Guidelines take[] into account [McCord's] professional status for sentencing purposes . . ." and therefore, by implication, neither should the sentencing court. Id. at 11. However: 
No limitation shall be placed on the information concerning the background, character, and conduct of a person convicted of an offense which a court of the United States may receive and consider for the purpose of imposing an appropriate sentence. 
18 U.S.C. § 3661 (2012); see also U.S.S.G. § 1B1.4 (2013). Thus, the Magistrate Judge was permitted to consider McCord's "background" as an attorney for the purpose of imposing an appropriate sentence." Id.; see also United States v. Saperstein, No.: 94-5275, 1994 U.S. App. LEXIS 36153, *5-6 (6th Cir. Dec. 19, 1994) (approving some upward departure for a lawyer's violation of 26 U.S.C. § 7203 but reversing on grounds that the district court did not consider each incremental step of the departure imposed); United States v. Barbara, 683 F.2d 164, in passim (6th Cir. 1982) (upholding a more-severe-than-otherwise sentence imposed upon a lawyer and citing other cases doing the same). Moreover, McCord's background as an attorney does, in this Court's opinion, make his offense more worthy of punishment than were he not an attorney. 
McCord has consistently claimed, presumably in an attempt at mitigation, that his failure to file income tax returns for five straight years was a "product of his persistent negligence." (Doc. 40, Appellant's Brief at 15). But most people in the United States are at least peripherally aware that the government has bills and occasionally, at least once a year, expects citizens to ante-up in order to help pay them. Attorneys, who must obtain an undergraduate degree, a Juris Doctor degree, and who, therefore, typically spend 7 years at university before even attempting to pass a multi-day bar exam, are expected to (and generally do) know more about the laws and governance of the United States than the general public. Thus, it is a cringe-worthy absurdity when an attorney, who has been practicing for nearly 20 years, claims that his failure to file taxes for five-consecutive years is a matter of negligence. McCord's status as an attorney destroys his attempt to mitigate and was a perfectly reasonable thing for the Magistrate Judge to have considered. 
* * * * 
c. The Need to Deter Others

Sealing an Indictment Pending Arrest in Tax Cases (7/3/14)

I just saw this interesting case involving a lawyer indicted for tax obstruction, Section 7212(a).  The case is United States v. McBride, 2014 U.S. Dist. LEXIS 89455 (D. MA 2014), here.  The count of the indictment, Section 7212(a), is here.  This specific tax count does not play an important role, other than background, in the following discussion of the sealing of the indictment pending the defendant's arrest.

Briefly, the facts are that the defendant is a disbarred attorney who, the Government alleged did some bad things, much of which were not necessarily tax crimes but were other crimes and skullduggery.  The defendant had known for a long time that he was under criminal investigation and his life otherwise seems to have been falling apart.  So, the Government requested that the indictment be sealed until he was arrested, in order to avoid giving him that information that might cause him to flee.  The Magistrate Judge sealed the indictment.  The defendant was arrested, and the indictment was unsealed.  The issue in the case is whether the Government had properly justified its request to seal the indictment.  The defendant complained about the sealing, and moved to dismiss the indictment.  The Court denied the motion to dismiss.  I offer by cut and paste the entire Discussion in the Memorandum and Order (I supply the bold-faced to draw readers attention to certain portions).
McBride argues that the government violated Rule 6(e)(4) when it moved to seal the indictment without asserting that he posed a  risk of flight or providing any other justification. Further, McBride claims that his arrest constituted an "unreasonable seizure" of his person in violation of the Fourth Amendment and Fed. R. Crim. P. 9 because the warrant was not "properly supported" by a risk of flight. According to McBride, the remedy for these violations is dismissal of the indictment. The government states it requested that the indictment be sealed to secure custody of the defendant. 
Rule 6(e)(4) states: "The magistrate judge to whom an indictment is returned may direct that the indictment be kept secret until the defendant is in custody or has been released pending trial." Fed. R. Crim. P. 6(e)(4). The First Circuit has held that "Rule 6(e) rests on the premise that criminal defendants not yet in custody may elude arrest upon learning of their indictment. . . . [T]he government need not articulate its reasons for requesting that an indictment be sealed, so long as its request is based on a ground set forth in Rule 6(e)." United States v. Balsam, 203 F.3d 72, 81 (1st Cir. 2000). Risk of flight is not the only basis for sealing an indictment. For example, sealing an indictment to protect a key prosecution witness qualifies as a "legitimate prosecutorial objective". Id. 
McBride argues that there is no evidence he posed a risk of flight, pointing out that his whereabouts are well known and he has attended proceedings regularly in Bankruptcy Court. He points out that he has no passport, and has extensive family ties here. The government does not concede that there was no risk of flight, noting: "The government was aware of information about McBride that reasonably raised concerns about a potential risk of flight, including the following: McBride had been disbarred in 2005 after decades of practice; he had filed for bankruptcy in 2009; he had recently lost both of his multi-million dollar homes in Marblehead and Edgartown; he had concealed from his bankruptcy trustee his efforts to fraudulently re-finance his Edgartown property; he had engaged in fraud, fabricated documents, forged signatures, and recorded fraudulent documents at two registries of deeds; and he had recently admitted to sufficient facts on multiple state charges involving identity fraud, credit card fraud and practicing law while disbarred."

Wednesday, July 2, 2014

IRS Letter to Congressman Defending Its Implementation of FATCA; Rebuttal by Professor Christians (7/2/14; 7/5/14)

June 23, 2014

The Honorable Bill Posey
U.S. House of Representatives
Washington, DC 20515

Dear Representative Posey:

Thank you for your letter regarding the interest reporting requirements of 26 C.F.R. §§ 1.6049-4(b)(5) and 1.6049-8 (referred to as bank deposit interest regulations), and the Foreign Account Tax Compliance Act (FATCA) and related intergovernmental agreements (IGAs).

As you know, FATCA was enacted in 2010 with strong bipartisan support. Under FATCA, foreign financial institutions must perform due diligence procedures to identify U.S. account holders and report their account information directly to the Internal Revenue Service (IRS), including the account balance and certain income flows, such as interest. In certain jurisdictions, laws of the foreign country where the financial institution is located would prevent that institution from complying with the requirements of the FATCA statute. For these reasons, the successful implementation of FATCA requires a cooperative international approach that results in foreign countries allowing banks to provide the information required by FATCA.

In order to achieve FATCA's information reporting objectives, the United States worked closely with France, Germany, Italy, Spain, and the United Kingdom to develop a model intergovernmental agreement (referred to as a "Model 1 IGA"). This Model 1 IGA was released in July 2012 to form the basis for bilateral agreements to implement FATCA. These agreements are based on the government-to-government exchange of information pursuant to an existing income tax treaty or tax information exchange agreement. Under a Model 1 IGA, a foreign government agrees to require all the relevant financial institutions located in its jurisdiction to identify U.S. accounts and report the information required under FATCA to the foreign government, which, in turn, will report the information to the IRS. Because a partner government under a Model 1 IGA agrees to establish rules to ensure that the United States will receive all of the FATCA information with respect to U.S. accounts in that jurisdiction, all of the financial institutions in that jurisdiction are treated as compliant with FATCA. The United States also developed a Model 2 IGA, under which a foreign government is required to direct and enable all relevant financial institutions located in its jurisdiction to identify and report information about their consenting U.S. accounts directly to the IRS.

The Model 1 IGA has a reciprocal version and a non-reciprocal version. Under the reciprocal version, the United States agrees to provide to the foreign government the information that U.S. financial institutions currently report with respect to accounts held by residents of the partner jurisdiction, including the information collected under the bank deposit interest regulations. Current U.S. Treasury regulations do not require U.S. financial institutions to report the same scope of information required of foreign financial institutions under FATCA. For example, FATCA requires reporting by foreign financial institutions on the account balance or value of all financial accounts, including bank deposits and custodial accounts, whereas the United States generally only collects information on the U.S. source income paid to those accounts. The United States' commitment to provide bank deposit interest information under the reciprocal Model 1 IGA was a central issue in the negotiations with the five countries that resulted in the Model 1 IGA. Several countries have expressed strong reservations about requiring other countries' financial institutions to provide significantly more information to the United States than U.S. financial institutions were required to provide to the foreign jurisdictions. The United States' agreement to report bank deposit interest information was key to securing agreement from numerous jurisdictions to follow the Model 1 IGA approach.

Monday, June 30, 2014

Good Article on the Non-Willfulness Certification for Streamlined and Related Issues (6/30/14)

I have written on the risks in the non-willful certification to get the Streamlined program benefits.  See The New Streamlined Processes' Requirement of Certifying Non-Willfulness (Federal Tax Crimes Blog 6/19/14; rev'd 6/21/14), here.  Readers interested in this subject will find the following article helpful:  Laura Saunders, The Hazards of Offshore-Account Disclosure (WSJ 6/27/14), here.

Key points:

1.  People certifying non-willfulness can be a risk of "severe penalties and criminal prosecution."

2.  Willful / non-willful is a facts and circumstances test requiring careful judgment.

3.  Loser Arguments for Certification of Non-Willfulness:
Scott Michel, a criminal tax lawyer at Caplin & Drysdale in Washington, says people often assume they weren't willful if they had "compelling emotional reasons for not declaring the account," such as safeguarding assets from expropriation, or that they were told by a relative never to reveal it. "If those are your only reasons, they're losers," he says.
4.  Evidences / indicia of willfulness include:
having an account in a country with bank secrecy rules; holding the account in a trust, foundation or other entity typically used to conceal ownership; moving the account from a firm under U.S. pressure to another, presumably to avoid disclosure; making large cash withdrawals; instructing a firm not to mail statements to the U.S., or communicating in code with it; or having secret meetings with advisers or account representatives.
5.  Size Matters (Maybe, Well Likely but not Certainly):
The amount of money at stake also is important, says Edward Robbins, a criminal tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez in Los Angeles. "In the real world, the biggest factor determining willfulness is the size of the account," he says. "If a person has a $10 million account, I don't want to hear he was nonwillful, and neither does the government."
* * * * 
Mr. Robbins says that although IRS resources are severely strained, he expects the agency will keep an eye out for taxpayers with large accounts making fraudulent claims in the streamlined program and punish them severely to send a warning.
 6.  Evidence of Non-Willful Behavior:
Experts say that evidence of nonwillful behavior could include having a small account, especially in comparison to the taxpayer's other assets; an account on which no U.S. tax is due; a foreign government-sponsored savings or pension account; minimal or no withdrawals; and no prior U.S. tax filings.

Saturday, June 28, 2014

U.S. International Tax Enforcement -- Exchange of Information and Collection (6/28/14)

I often get the question of whether the U.S. can request treaty partner assistance to collect taxes from taxpayers resident in foreign country or against property in a foreign country.  The U.S. can do that by treaty, but that is not a standard provision in the bi-lateral double tax treaties that the U.S. has.  There is a multilateral treaty, called the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, sponsored by the OECD to which the U.S. is a party.  The OECD's resources on this Convention, including the Convention, are here.  The U.S. has made reservations the effect of which is to deny its obligation to collect other countries' taxes and, because reciprocal duties are required, relieve other countries from the obligation collect U.S. taxes.

Now, to the broader subject of U.S. international tax enforcement, I offer the following (footnotes omitted) from a JCT report, titled Joint Committee on Taxation, Explanation of Proposed Protocol to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, (JCX-9-14), February 21, 2014, which may be downloaded here:

The report has a great discussion of the state of the law on international enforcement.  Here are key excepts related to international enforcement mechanisms under Current Law (footnotes omitted; I do not indent because of the length of the material copies; in some cases I have bold-face to draw readers' attention)


* * * *

Ratification of the protocol is not intended to alter the reservation of rights or declarations of understanding that the United States made when it ratified the existing convention in 1991. In its instrument of ratification, the United States reserved the right not to provide (1) assistance for taxes imposed by possessions, political subdivisions, or local authorities of other parties to the convention; (2) tax collection assistance; or (3) assistance in serving documents (except the service of documents by mail). The reservations are reciprocal; to the same extent that the United States will not provide assistance, other parties need not assist the United States. Thus, only the provisions relating to information exchanges and service of documents by mail are in effect for the United States. Those reservations would continue to govern the effect of the treaty with respect to the United States upon ratification of the proposed protocol.

* * * *

A. General Background of OECD 
B. Emerging Consensus on OECD Transparency Standards 
C. Extent of Mutual Assistance Under Present Law

The difficulties one jurisdiction has in piercing the “bank secrecy” of another jurisdiction can be traced to the centuries-long tradition against expecting one jurisdiction to assist another jurisdiction with collection of its taxes. This doctrine, known as the “Revenue Rule,” is rooted in common law and sovereign immunity. It is often referred to as the Lord Mansfield Rule, in recognition of the jurist's statement, “For no country ever takes notice of the revenue laws of another.” Although its vitality and scope have been questioned, most recently in Pasquatino v. United States [544 U.S. 349 (2005), here], the doctrine remains a cornerstone of all common law jurisdictions, as well as many others. To the extent that countries have provided administrative assistance of any sort, including exchange of information, it has been a result of State-to-State negotiations, resulting in a multilateral or bilateral international agreements or treaties, ensuring that any waiver of the principle will be reciprocated.

Sentencing Tales Told in Spreadsheets (6/28/14)

I offer today three spreadsheets offered in two sentencing proceedings from prominent convictions of Beanie Babies founder, Ty Warner, and of lawyer/tax shelter promoter, Paul Daugerdas.  I post below links to the prior blogs dealing with the sentencings of each of them.  Warner was the largest offshore account conviction in terms of dollars.  Daugerdas was the larger tax shelter conviction -- in terms of dollars.  Tax shelter is euphemism for bullshit tax shelter.

  • Defense Spreadsheet in Ty Warner Case, here.  The spreadsheet is a selective reporting of the sentencing characteristics of others prosecuted for use of offshore financial accounts.  Whether the data set is sufficient may be another issue, but it is clear that offshore account sentences generally draw lesser sentences than other tax and tax-related crimes.
  • Gov't Spreadsheet #1 in Daugerdas Case, here.  This spreadsheet is a selective presentation of the sentences imposed in the more egregious bullshit tax shelter cases.
  • Gov't Spreadsheet #2 in Daugerdas Case, here.  This spreadsheet is a selective presentation of general tax crimes sentences.
It is unclear what specific effect these spreadsheets had on the sentencing judges, except to say they contributed to the tone the parties presenting the spreadsheets desired and, in the final analysis, the parties presenting the spreadsheet either got or came close to getting their required sentencings.

Prior Federal Tax Crimes Blogs on the Warner and Daugerdas Sentences are:
  • The Beanie Baby Man, The Tax Evader Adult Man, Ty Warner, Gets Probation! (1/14/14; Updated 1/18/14), here.
  • Daugerdas Gets 15 Year Sentence (6/25/14), here.
Of course, Warner is on Government appeal to the 7th Circuit, and Daugerdas likely will be appealed to the 2nd Circuit.

Thursday, June 26, 2014

False Statements Crime Element of "Knowingly and Willfully" Requires Proving Knowledge that Making False Statement Is Illegal (6/26/14)

Since we have been spending so much time on the term "willfully," a chameleon of a word varying with context, I wanted to offer this development in the interpretation of the false statement statute, 18 USC 1001(a), which also has a "knowingly and willfully" requirement for the crime of making false statements to a Government agent.  This charge is often used in tax related contexts.

The DOJ is reported to have abandoned its prior interpretation that a false statement a prosecution and conviction could be made with proof only that the defendant knew the statement was false.  Rather,  the DOJ has indicated in some briefings that this the DOJ now interprets the provision in position Section 1001(a) to require that the defendant know that making the false statement was illegal.  See Tony Mauro, U.S. gives up a widely decried charging theory (American Lawyer 5/12/14), here.  This interpretation seems to bring this statute and related statutes in line with the tax crimes definition of willfulness and the FBAR crimes and civil penalty definition of willfulness.

In pertinent part, the article states that DOJ has now clarified that:
that to make the case that a defendant acted "willfully," the government must prove that he or she knew the statement was unlawful — not just that it was false. That requires a state-of-mind element that can be hard to nail down. Defendants often claim they were unaware that lying to the government was illegal, especially in casual conversations or when not under oath.
In making such an important shift in the interpretation of a law invoked hundreds of times a year, the department did not shout it from the rooftops. Solicitor General Donald Verrilli Jr. sprinkled mentions of the change into several largely unnoticed briefs filed in March in routine cases before the Supreme Court. Only one reference appears to be available online, on pages 11 and 12 of the government's brief opposing certiorari in Natale v. United States, in which a surgeon was convicted of making false statements in a matter that involved a health care benefits program. 
What's more, none of the cases in which Verrilli confessed error actually involved Section 1001, instead arising under Section 1035, a health care fraud provision that mimics the ­"knowingly and willfully" language of the false-­statements law. 
The Justice Department's change of mind is slowly being felt. On April 21, the Supreme Court sent two cases back to lower courts "for further consideration in light of the confession of error by the solicitor general." The court's orders will likely set in motion a lengthy reassessment of false-statement precedents in most circuit courts.
Hat tip to Lawrence S. Goldman, DOJ Narrows Basis for Section 1001 Prosecutions (White Collar Crime Prof Blog 6/19/14), here.

The DOJ CTM, here, now does not reflect this change in interpretation.  It provides: