Wednesday, March 17, 2010

Restitution in the Coplan Tax Shelter Enabler Case (3/17/10)

In United States v. Coplan (SD NY No. (S1) 07 Cr. 453 (SHS), the Government wanted to prove the restitution amount through the closing agreements with the taxpayers involved. (Note in regard to restitution that, although restitution is normally not available in tax cases, the defendants were convicted of the Klein / defraud conspiracy, which is a Title 18 offense permitting restitution.) Since the taxpayers involved had paid the tax agreed upon in the closing agreement, the restitution amount was the difference between the supposedly correct tax and the amount the IRS agreed to take to induce the taxpayers to settle.  Here's how the judge responded (Transcript pp. 7-8 (for full transcript see here)):
I believe it is the first section I read that is operative here, that is, 18 U.S.C. 3663A(c)(3), but both sections are essentially saying the same thing. And I am making the requisite findings under each that it is clear that determining complex issues of fact related to the cause or the amount of the IRS's losses here would substantially prolong the sentencing process to a degree that the need to provide restitution to the IRS is outweighed by the burden on the sentencing process. And, similarly, I determine that the complication and prolongation of the sentencing process that would result from fashioning an order of restitution here outweighs the need to provide restitution to the IRS.

That's especially true here. It is extremely difficult to figure out on a taxpayer-by-taxpayer basis exactly what the specific loss to the IRS is. As we discussed with only one taxpayer, I think it was back in November when we had the argument on the common issues, it's very difficult to figure out the specific loss. The closing agreements here with the taxpayers are quite complicated. Under the closing agreements individual taxpayers were able to keep part of the loss, and then the taxpayer also had to recognize a certain amount of income. There was a reallocation by the IRS in the example that we looked at of short-term and long-term gain, which in turn had implications for the following tax year. So there was recharacterization of various income/loss items over the next tax year. It would be far too great a burden on the process to try to fashion that order of restitution.

In addition, the government here is seeking restitution in hundreds of millions of dollars, and to impose restitution in addition to the other aspects of the judgments that I am going to direct be entered here would truly be unnecessarily punitive. So my conclusion is I am not imposing restitution on any of the four defendants for the reasons stated.
I have three observations here. 

1.  I understand that there was a legal issue lurking in the Government's attempt to use the closing agreements as it did.  An argument can be made based on the closing agreement statute that, once a closing agreement is reached, the amount in the closing agreement is the correct tax.  The tax is what the closing agreement says it is and, accordingly, there is no unpaid amount for restitution purposes.  The court's resolution by punting avoided having to deal with this issue.  (The same argument cannot be made for purposes of the tax loss calculation because even if the agreed upon amounts were the amounts that were the intended object of the crime and the settlements could be anticipated, the amount agreed upon in the closing agreements still pumped the intended tax loss up to the highest Base Offense Level.)

2.  As noted in an earlier blog, the jury was tasked to find a substantial tax due, although it was not required to come up with a number. As I also noted in that blog, the Government's case rested upon it, in effect, proving that each of the taxpayers involved committed tax fraud. If there had been a sentencing proceeding for each of those taxpayers, I have little doubt that a court would have been up to the task of coming up with a proper amount for restitution (although the defendant probably would have negotiated contractual contractual restitution in the plea agreement). I think the problem was that the Government attempted to short-circuit the proof required by a preponderance of the evidence with closing agreements signed by an out of court party (the taxpayer) and precious little else. Certainly, there may be an inference that the amount in the closing agreement is correct (perhaps as a minimum), but whether that inference alone should be relied upon for important criminal consequences -- whether the burden is preponderance, clear and convincing, or beyond a reasonable doubt -- is quite another matter. At least, that's my story and I am sticking to it (until corrected).

3.  In any event the amount of restitution sought by the Government was probably moot anyway.

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