On the Manafort Tax, FBAR and Bank Fraud Trial - Complex White Collar Crimes Are About the Lie (8/16/18)

In the Manafort prosecution, each side claims that lies from the other side entitles it to win.  During the closing arguments yesterday, WAPO had a running commentary of the oral arguments and the lie word (or some variant) came up early and often on both sides.  See Rachel Weiner, Matt Zapotosky, Lynh Bui and Tom Jackman, Paul Manafort trial Day 12: Case heading to jury, deliberations start Thursday (WAPO 8/15/18), here.

Of course, the defendant who rests without putting on evidence has few defenses he can credibly argue. As I noted earlier, the defendant's lawyer can argue that the Government's evidence does not prove guilt beyond a reasonable doubt.  The defendant can make that argument credible if he can convince the jury that key government witness(es) lied.  So, not surprisingly, Manafort's lawyer, Kevin Downing (formerly of tax prosecution repute, Wikipedia here) makes that claim.

From the prosecution perspective, these complex financial crimes cases are about lies, which is why the prosecution hammered that claim home.  Juries may not understand complex financial, accounting and tax rules, but they do understand lies.

I have had a number of posts about "The Lie."  Those posts are collected here but the key ones for purposes of this discussion with appropriate excerpts (in chronological order) are:

• DOJ Tax's Further Attempts to Drum Up Business / Revenue (Federal Tax Crimes Blog 12/26/09), here.

4. Another good snippet reputedly from Downing consistent with his man on a righteous mission persona is: "I want to go after the privileged people who've had the benefits of this country and are cheating their taxes, get them in front of local juries and convict them." Lee A. Sheppard, The UBS Endgame, 2009 TNT 186-1 (9/29/2009). Even the crusty Lee Sheppard is enthralled by Himself, following up with: "It is reasonable to assume that the blasé Swiss and the complacent rich American tax cheats never counted on meeting up with a guy like Kevin Downing, senior trial counsel in the Justice Department's Tax Division, who has been leading the prosecutions against Swiss bank UBS AG. Downing, a former Marine." 

5. Jeff Neiman, an AUSA for SD Florida who is prominently involved in these prosecutions, said that he wanted to "avoid technical tax issues." Sheppard paraphrased: "Whether the defendant is lying, cheating, and stealing is what the argument to the jury boils down to for Neiman." See my earlier blogs on The Lie. This statement echoes the theme of the Enron prosecutions: "This is a simple case. It is not about accounting. It is about lies and choices." John C. Hueston, Behind the Scenes of the Enron Trial: Creating Decisive Moments, 44 Am. Crim. L. Rev. 197, 207 (2007). See also Stuart P. Green, Lying, Cheating, and Stealing: A Moral Theory of White Collar Crime 246-48 (2006)

And, in case you did not already know, that is the same Kevin Downing who is the lead defense lawyer.

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

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

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

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

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

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

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

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

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

Lying, cheating, and stealing. 

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

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

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

The Role and Culpability of the Taxpayers Participating in Bullshit Tax Shelters (5/4/14)

I write today to collect and update some thoughts I have expressed before on this blog.  The background is the bullshit tax shelters on which I have written and even fulminated, if not eloquently, at least often.  I start with my own definition from my Tax Procedure Book (footnotes omitted).

  Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work designed to present the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (i) the transaction is incredibly complex in its structure and steps so that not many (including specifically IRS auditors) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate shift potential penalty risks to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.  More succinctly, Michael Graetz, a Yale Law Professor, has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”

The bullshit tax shelter with which I am most familiar is the Son-of-Boss shelter.  That shelter purported to generate offsets to taxable income.  The offsets were wrapped in commotion but ultimately simply created from thin air -- very thin, indeed a perfect vacuum.  Bullshit shelters appear in many guises other than Son-of-Boss.  The commotion they are wrapped in serve two purposes:  (i) creating the illusion of some basis for the magical tax benefits and (ii) hiding the fact that the illusion is an illusion.  Bottom-line, several courts have characterized the imagined benefits as "too good to be true" and indeed recognizably "too good to be true."

As readers of this blog know, many bullshit tax shelter promoters have been convicted for their participation in the bullshit tax shelters.  Taxpayers themselves have not been prosecuted or convicted.  I do understand that some taxpayers have been named targets or subjects of grand jury investigations for their participation but those investigations ended in only promoter prosecutions.

Economic Substance Doctrine Tax Felonies (6/1/11)

I write today to provide viewers access to Jasper Cummings' article, Jasper L. Cummings, Jr., Economic Substance Doctrine Felonies, 131 Tax Notes 977 (May 30, 2011) and 2011 TNT 104-10 (5/31/11). (This article is provided with the permission of Tax Analysts.)  Mr. Cummings writes on the use of the economic substance doctrine in criminal tax cases. Most particularly, he writes about Mr. R. J. Ruble who was convicted in the first round of Son-of-Boss criminal prosecutions. In that case, Ruble, a tax lawyer, was convicted along with John Larson and Bob Pfaff who provided financial services in the conceptualization and implementation of the shelters. Two prominent subsequent shelter prosecutions have also used the economic substance doctrine in the charges to the jury.

First, let me disclose that I represented one of the dismissed defendants in the sprawling prosecution that ended up in the conviction of Messrs. Ruble, Larson and Pfaff. Once my client was dismissed along with 12 others before trial, I no longer had an immediate interest in the case but I did observe the progress of the proceedings through conviction and appeal and now pending petition for certiorari in the Supreme Court. I was particularly interested in whether and how the economic substance doctrine would be presented to the jury.

Economic Substance in Tax Crimes (10/14/09)

In American Boat LLC v. United States, ___ F.3d ___ (7th Cir. 2009), here, the Seventh Circuit affirmed a district court's holding that a taxpayer in a Son of Boss transaction was not liable for civil penalties for claiming the tax shelter on his return (I need not differentiate the civil penalties for present purposes). The essence of the relief granted was that the taxpayer had reasonable cause because of the tax lawyer's involvement and opinion (essentially like the other opinions for Son of Boss). The shelter was Jenkens & Gilchrist shelter of the type for which the lawyers promoting it have been indicted. (See discussion of indictment here.)

Echoing the mantra in the Nixon Watergate debacle, the Court said that "Again, the focus is on what Jump [the taxpayer] knew or should have known at the time he obtained the opinion letter." Focusing on the issuer of the opinion in a criminal context, it seems to me that the issue is the same -- to paraphrase, the focus is on what the lawyer knew or should have known at the time he issued the opinion letter. I don't think my paraphrasing is particularly insightful, but I do think it is helpful to state the truism from time to time, for I think it will help focus on the issue I raised in my earlier blog yesterday (see here). Keep in mind that the lawyer is guilty of a tax crime only if he knew the law (i.e., the crime was both knowable and he knew it) and he intended to violate the law.

Update on the Daugerdas indictment -- Guilty Plea by Defendant Greisman (BDO)

Robert S. Greisman, former DBO Seidman former partner, pleads guilty. See the USAO SDNY press release here. The plea is to three counts - (i) the (ubiquitous) defraud / Klein conspiracy (18 USC § 371), (ii) tax evasion (§ 7201), and (iii) tax obstruction (§ 7212). The parts of the press release that addresses the big issue - the lie - previously discussed in the blogs here are:

Tax Crimes -- the Role of the Lie (6/20/09)

In several prior blogs I have asserted that tax crimes -- particularly tax shelter crimes -- are about the lie. Some who have read the Title 26 criminal tax provisions and the common Title 18 provisions used in prosecutions of what are at the core tax crimes will not find the word lie mentioned. Some of the tax crimes do require a lie via false statement under penalty of perjury (tax perjury, §7206(1) or false document (aiding and assisting, §7206(2)), but as I develop in this blog, the lie is the common feature critical for proscution of tax crimes even where the text of the criminal provision does not have some similar meaning.

I divide the universe of the crimes usually charged in tax crimes into two categories as follows:

The Daugerdas Indictment - Part #4 - The Lie (6/16/09)

I have blogged before that tax shelter prosecutions are about the lie. Often, the claim is that the tax shelters lack economic substance, but in these prosecutions the real complaint is the lie that is designed to give an appearance of economic substance. The jury will not understand the complex, convoluted tax structure and byzantine legal analysis, but the jury will understand the lie. In this blog, I will look principally at the indictment's claims as to the big lie. I caution readers that I address here only my understanding of the Government's unilateral claims about the lie in the indictment. I make no attempt here to develop nuance or present defenses to those claims that the defendants may have.

The Big Lie

The big lie is the taxpayers' representations that they had a nontax business reason for participating in the shelter. "In truth and fact," the indictment asserts repeatedly, the taxpayers participated in order to achieve the touted artificial tax benefit and not for a nontax business reason (sometimes the indictment alleges "substantial" nontax business reason). And, in truth and fact, the promoters knew the taxpayers' real tax motivation, despite their formalistic reliance on the taxpayers' "representations" of business reason.

More on the Quellos Individuals Indictment - It is About the Lie (6/8/09)

I have now had the opportunity to review the Quellos indictment in more detail. It is all about the lie that, if the allegations are proved, a jury will understand. A jury almost certainly would not understand -- or need to understand -- the complex tax rules which might have applied if the key factual underpinning were true. The jury will understand the lie. And, the gravamen of the instructions to the jury will be that, if the jury finds that prosecutors prove the lie they allege, the defendants should be found guilty.

Let's look at the counts and the lie. At the risk of oversimplication, I simplify and thus omit much of the detail.

Tax Shelter Crimes Are About Lies (5/10/09)

At the Civil and Criminal Penalties Section meeting (at the larger ABA Tax Section May Meeting), a panel discussed tax crimes in a tax shelter context. Kevin Downing, a DOJ attorney heavily involved in these prosecutions, pronounced that tax shelter prosecutions are not about complex tax interpretations; rather, those prosecutions are about the "lie." The lie may appear in the context of complex tax interpretations, but it is still the lie that is the criminal problem. Of course a lie may be a flat out falsehood as to the law, but these shelters often appear in contexts that, even when they approach the too good to be true category, they have some semblance of tax superstructure to avoid being a flat out lie. Usually, in this context, it is the assumptions of the factual underpinnings for the legal interpretation superstructure that is the problem. Prominently mentioned in this context are factual representations from the taxpayer that he or she has a business or profit motive independent of the tax benefits sought and has a reasonable prospect of making a profit in excess of the transaction costs.