On April 27, 2008, the Ninth Circuit issued a revised opinion in United States v. Easterday, ___ F.3d ___ (9th Cir. 2009) and denied petition for rehearing. In Easterday, the Ninth Circuit finally and explicitly sounds the death knell for taxpayer hopes founded on United States v. Poll, 521 F.2d 329 (9th Cir. 1975). Section 7202 of the Code imposes a criminal penalty on parties having an obligation to withhold tax and pay over to the Government. Section 7202 is the criminal analog tto the civil Trust Fund Recovery Penalty in § 6672 (often called the TFRP or the responsible person penalty). The Government has ramped up the use of § 7202 recently in order to increase compliance with the underlying obligation to withhold and pay over.
Persons within an organization who failed in their responsibility to have the organization withhold and pay over perceived an opportunity in Poll to avoid criminal liability where, as is often the case, the organization does not have the cash to pay over. This can occur where the organization, facing cash flow problems, is paying net wages to the employees -- perhaps using available cash for other purposes (i.e., paying the squeakier wheels) -- and thus, from that perspective, does not have and cannot payover the actual cash representing the tax that it is deemed to have withheld from the employees. Poll held that the Government must prove that the organization did have the available cash before the person can be convicted under § 7202. This holding in Poll was addressed to the "willfully" element of the statute on the notion that the person cannot have acted willfully if the cash wasn't there.
In Easterday, the Ninth Circuit held that Poll was no longer good law, having been eroded by subsequent Supreme Court and Ninth Circuit authority. The Ninth Circuit held that the holding in Poll was effectively overturn by subsequent Supreme Court refinements -- particularly in Pomponio and Cheek -- to the definition of willfully as being the intentional violation of a known legal duty. In the particular context, paying net wages where the taxpayer is not able to pay over the amount deemed withheld is a violation of a known legal duty. The employer has the option of either not paying wages at all (hence incurring no obligation to withhold and pay over) or by reducing the net wage to the employees leaving sufficient cash to pay over to the Government.
Practition Caveat: Do not be lulled into a false sense of security by the Ninth Circuit's statement that "§ 7202 [is] a fairly rarely invoked provision." That may have been true years ago, but not recently and, with the downtown in the economy and pressing needs to stem the erosion of the federal fisc, I and many practitioners believe that § 7202 prosecutions will be a key component of the Government's criminal enforcement initiative.
Wednesday, April 29, 2009
Tuesday, April 28, 2009
Senate Passes Bill on Tax Crimes Money Laundering
UPDATE AS OF MAY 26 2009: The House version of this bill did not include the expansion of money laundering for tax crimes and the House prevailed in conference. The proposal is thus defeated for now. Senator Grassley, however, indicated that he will pursue this issue "at every available opportunity."
As I reported earlier here, DOJ Tax is promoting on the hill legislation to expand the money laundering provisions to include certain crimes - tax evasion and the § 7206 crimes (principally tax perjury and aiding and assisting). Tax Notes Today reports that the Senate passed the bill yesterday 92-4. The bill including the provision also increases funding for financial fraud investigations, including a $5 million increase for DOJ Tax which has proved to be a strong force in the IRS initiatives against offshore evasion.
This provision, if enacted, will substantially up the criminal penalty and offer the IRS an opportunity to forfeit which is typically not available for tax evasion.
As I reported earlier here, DOJ Tax is promoting on the hill legislation to expand the money laundering provisions to include certain crimes - tax evasion and the § 7206 crimes (principally tax perjury and aiding and assisting). Tax Notes Today reports that the Senate passed the bill yesterday 92-4. The bill including the provision also increases funding for financial fraud investigations, including a $5 million increase for DOJ Tax which has proved to be a strong force in the IRS initiatives against offshore evasion.
This provision, if enacted, will substantially up the criminal penalty and offer the IRS an opportunity to forfeit which is typically not available for tax evasion.
Monday, April 27, 2009
Get in Line Brother #5
We have previously blogged here the Department of Justice initiative to squeeze UBS for its alleged illegal assistance to U.S. taxpayers' tax evasion. The Wall Street Journal Law Blog reports here that, incident to the new negotiation of a tax treaty with the U.S., the Swiss Government wants relief for past sins (as well as continuing to hide the names of its clients). Specifically, it wants the DOJ John Doe Summons case dropped.
Here are the pertinent parts of a press release:
In addition, independent of the UBS John Doe Summons initiative, Tax Notes Today reports that the IRS claims to already have the names of more than 250 tax evaders using offshore accounts and that there will be further initiatives beyond UBS.
I don't know the likelihood of the relief UBS is seeking. Those potentially at risk for these off-shore adventures with UBS as well as other foreign banks or intermediaries still have to face the very real and pressing question of whether to do a voluntary disclosure while waiting for this manna to fall from heaven (if it ever does or, if it does, it is less tasty than imagined). Taxpayers can get certainty at a significant financial cost via voluntary disclosure. Get in Line Brother.
Here are the pertinent parts of a press release:
Meeting between President Merzand
the US Secretary of the Treasury
Timothy Geithner
Bern, 25.04.2009 -- Today President Merz met the US Secretary of the
Treasury Timothy Geithner on the fringes of the Annual Meetings of the Bretton Woods institutions in Washington. Mainly bilateral issues were discussed.
The focus of the discussions was the forthcoming negotiations between Switzerland and the US on a new double taxation agreement. resident Merz outlined to Treasury Secretary Geithner the decision of the Federal Council to extend international cooperation on tax issues and, to this end, to fully adopt the OECD standard. The negotiations on the new double taxation agreement will start in Bern on 28 April.
The situation concerning UBS in the US was also discussed during the meeting. In particular President Merz raised the issue of the pending civil action against UBS, through which the US tax authority, the IRS, is requesting the release of a large amount of data on clients. He expressed his hope to the US Treasury Secretary that a solution can be found for this matter no later than when the new double taxation agreement is to be put before parliament. There was agreement that a solution should be found rapidly which is equitable to both sides.
* * * *
Adresse für Rückfragen:
Roland Meier,
FDF Press spokesman,
tel. 079 208 12 87
In addition, independent of the UBS John Doe Summons initiative, Tax Notes Today reports that the IRS claims to already have the names of more than 250 tax evaders using offshore accounts and that there will be further initiatives beyond UBS.
I don't know the likelihood of the relief UBS is seeking. Those potentially at risk for these off-shore adventures with UBS as well as other foreign banks or intermediaries still have to face the very real and pressing question of whether to do a voluntary disclosure while waiting for this manna to fall from heaven (if it ever does or, if it does, it is less tasty than imagined). Taxpayers can get certainty at a significant financial cost via voluntary disclosure. Get in Line Brother.
Friday, April 24, 2009
May It Please the Court
This New York Times presentation called May it Please the Court will make you feel good, particularly if you have been weighed down on tax crimes subjects all day.
Tax Evasion to Money Laundering - Upping the Ante / Risk
I just became aware of the petition for certiorari in the Yusuf case (United States v. Yusuf, 536 F.3d 178 (3d Cir. 2008), cert. pending by petition for cert filed 1/30/2009), which I previously discussed here). Readers will remember that the concern arising from Yusuf and other Government noisings is that DOJ Tax will loosen the strings on its previous policy to approve only sparingly the packaging of tax evasion as mail or wire fraud as a predicate act for money laundering.
The petition for cert in Yusuf is here. Among other things, the petition alleges a conflict with United States v. Khanani, 502 F.3d 1281, 1296-97 (11th Cir. 2007). DOJ Tax discusses Yusuf and acknowledges the conflict in its Criminal Tax Manual ("CTM"), which may be viewed here, as follows:
Note, how DOJ Tax interprets Yusuf narrowly so as to, potentially, mitigate the broad concerns the tax community has voiced that ordinary tax evasion would be bootstrapped into money laundering via mail or wire fraud, one or both of which are almost always present in tax evasion and other tax crimes. Still, even with the possibility that courts will buy into a narrower construction, the tax community is rightly concerned and needs to watch the developments.
The Government's response to the petition for cert is due 5/6/09. You can check the status in the Supreme Court's docket sheet here.
Historically, at least back in the old days, clear conflicts were often the key factor in the Supreme Court to take cert. Conflicts alone will not do it, however, as in situations where the conflict could resolve itself by more bubbling around in the courts of appeals. Still, given the uncertainties inherent in Santos, this looks like a good opportunity for further clarification in this important area.
Finally, I remind my readers that DOJ is promoting a legislative expansion of the money laundering provisions to include some tax crimes. I have previously discussed that initiative here.
The petition for cert in Yusuf is here. Among other things, the petition alleges a conflict with United States v. Khanani, 502 F.3d 1281, 1296-97 (11th Cir. 2007). DOJ Tax discusses Yusuf and acknowledges the conflict in its Criminal Tax Manual ("CTM"), which may be viewed here, as follows:
In United States v. Yusuf, No. 07-3308, 2008 WL 2875332, at *8 (3d Cir. July 21, 2008), the Third Circuit held that unpaid Virgin Islands Gross Receipts Taxes, which were unlawfully disguised and retained by means of the filing of false Virgin Islands Gross Receipts Tax Returns through the U.S. mail, are “proceeds” of mail fraud for purposes of stating a money laundering offense. The tax at issue in Yusuf was not income tax, but a non-federal tax calculated as a straight percentage of sales, which helped satisfy the limited circumstances under which the Tax Division will authorize such charges. In addition to holding that the retained taxes were the proceeds of mail fraud, the Third Circuit further held that the retained taxes amounted to "profits," thus satisfying United States v. Santos, 2008 WL 2229212 (June 2, 2008), in which the Supreme Court held that the term "proceeds," at least in some money laundering contexts, means profits, not gross receipts. Yusuf created a conflict with United States v. Khanani, 502 F.3d 1281, 1296-97 (11th Cir. 2007), in which the Eleventh Circuit held that the definition of "proceeds" is limited to "something which is obtained in exchange for the sale of something else," and thus does not include retained taxes.
Note, how DOJ Tax interprets Yusuf narrowly so as to, potentially, mitigate the broad concerns the tax community has voiced that ordinary tax evasion would be bootstrapped into money laundering via mail or wire fraud, one or both of which are almost always present in tax evasion and other tax crimes. Still, even with the possibility that courts will buy into a narrower construction, the tax community is rightly concerned and needs to watch the developments.
The Government's response to the petition for cert is due 5/6/09. You can check the status in the Supreme Court's docket sheet here.
Historically, at least back in the old days, clear conflicts were often the key factor in the Supreme Court to take cert. Conflicts alone will not do it, however, as in situations where the conflict could resolve itself by more bubbling around in the courts of appeals. Still, given the uncertainties inherent in Santos, this looks like a good opportunity for further clarification in this important area.
Finally, I remind my readers that DOJ is promoting a legislative expansion of the money laundering provisions to include some tax crimes. I have previously discussed that initiative here.
Friday, April 17, 2009
Just In -- Another Big Loss for Big Brother in a Tax Case
The Government's much ballyooed prosecution of Indy driver Castroneves has fizzled. See the article here. Perhaps are related read is this article from the WSJ's Tom Herman, the WSJ's tax column writer who, upon his retirement, notes that the tax system is broken and needs fixin'.
Major 3d Circuit En Banc Decision on Booker Sentencing in Tax Case
Thanks to the Doug Berman's Sentencing Law & Policy Blog, I learned of the Third Circuit's en banc decision in United States v. Tomko, ___ F.3d ___ (3d Cir. 2009). There is lots of good stuff there, and I will probably pontificate on it after I have thoughtfully considered it (perhaps even one or two beers deep). However, my initial impression is that, perhaps, just perhaps, the Courts of Appeals and the Supreme Court (is that the right order?) do not believe that it is or should be their duty to micromanage sentencing decisions. Sure, there are policy arguments back and forth on that issue, but, really guys, is micromanagement of those decisions at the appellate level any way to run a justice system (with emphasis on justice), particularly with our history which, after all, informs us of who we are and who we ought to be?
Someone has said that, perhaps, post-Booker, we are back in the wild, wild west days of sentencing. I would not say wild, wild west. I would say that the judges are given the discretion to fashion the punishment to fit both the crime and the person.
Someone has said that, perhaps, post-Booker, we are back in the wild, wild west days of sentencing. I would not say wild, wild west. I would say that the judges are given the discretion to fashion the punishment to fit both the crime and the person.
Collateral Estoppel after Tax Evasion Conviction
The law is clear that, upon conviction for tax evasion, the taxpayer is estopped in the inevitable civil proceeding from asserting that civil fraud was involved. Two consequences then flow from the presence of civil fraud -- (i) liability for the civil fraud penalty in Section 6663 and (ii) an open statute of limitations if the statute of limitations for assessment is otherwise barred under the normal 3 and 6 year rules.
Normally, the application of the rule is straigtforward. For example, assume that the taxpayer is charged in the criminal case with 4 counts of tax evasion -- one count each for years 1 - 4 and that he is convicted for years 1 & 2 and acquitted for years 3 & 4. This rule says that the taxpayer is collaterally estopped to deny civil fraud for years 1 & 2, thus being subject to the penalty and an open statute of limitations for years 1 & 2. The IRS may still assert civil fraud for years 3 & 4 for which the taxpayer was acquitted of tax evasion, but the IRS will have to meet the predicate requirement that the IRS prove civil fraud by clear and convincing evidence.
In Williams v. Commissioner, T.C. Memo 2009-81, these concepts were applied in a context that I have not yet personally encountered or even seen in my readings. In that case, in the superseding indictment, the Government charged Williams with one count of conspiracy and one count of tax evasion. These charges arose from the use of offshore accounts to evade tax on large amounts of unreported income exceeding $8MM over eight years from 1993 to 2000. The tax evasion count included those 8 tax years in the single tax evasion count rather than in mutliple counts, one for each year. The taxpayer pled guilty to that single count. The straightforward application of the collateral estoppel rule suggests, that absent some other factor, Williams would be collaterally estopped as to civil fraud for those years. Williams argued otherwise. As best I understand Williams' argument, he was asserting that his plea meant only that, in one or more but less than all of the 8 years, he committed tax evasion and thus there is no collateral estoppel as to any particular year. That is not the way the tax evasion count to which he pled was worded, of course, and that ultimately made his argument untenable. (This intepretation of the wording of the count was supported by the plea allocution.)
This was a straightforward holding and hardly worthy of comment. The only reason I even mention the case at all is the inclusion of 8 years of tax evasion in a single count. I have observed tax evasion (and other tax crimes, such as Section 7206(1) charges for tax return crimes) for multiple years charged as a separate count for each tax year. Perhaps others have other experience in this regard.
I was trying to imagine why the Government would have asserted the eight years evasion in a single count. Since this was a superseding indictment it was probably the result of a plea agreement. By pleading to only two 5 year counts, Mr. Williams capped his risk of incarceration to 10 years. But, my rough and ready calculation of the sentence under the 2000 sentencing guidelines would suggest that, with a 3 level reduction for acceptance of responsibility, he would have had a Guidelines sentence (considering both the conspiracy count and the tax evasion count) well below 10 years, so he probably did not need to cap his sentence at 10 years. But, from the Government's perspective, it did not need any more than one count of tax evasion which coupled with the conspiracy count would give the court up to 10 years in which to sentence. Usually, in my experience, the way that would be done is to charge the 8 counts of tax evasion, have the defendant plead to one, and drop the remainder upon the acceptance of the plea. Then, for sentencing purposes, all of the tax losses involved in the dropped counts would be considered as relevant conduct and included in the Guidelines calculations anyway. So, the result in the criminal case was not affected at all by charging the tax evasion in one count rather than 8. Where it could make a difference is where additional counts of conviction are required in order to achieve an appropriate sentence. Let's say, for example, that three years of tax evasion are involved and $100,000,000 of tax loss is involved. The current -- i.e., 2008 -- Guidelines sentence with only a 3 level reduction for acceptance of responsibility would produce an offense level of 29 which produces a sentencing range of 87-108 months. Then, of course, more than one count of conviction would be required to achieve a Guidelines sentence (assuming, of course, that the sentencing court wanted a Guidelines sentence or wanted a Booker sentence exceeding the 5 years available for one count).
And, of course, by including the 8 counts in a single count to which the taxpayer pled, the Government did get collateral estoppel in the ensuing civil case. In my experience, the Government now imposes a restitution agreement in the plea agreement (i.e., the taxpayer is not forced to agree to restitution, but if it wants a plea deal, he must). Depending upon how the restitution agreement is worded, the taxpayer may be foreclosed from trying to avoid civil fraud with respect to any dismissed counts that are included as amounts required to be paid as restitution.
Normally, the application of the rule is straigtforward. For example, assume that the taxpayer is charged in the criminal case with 4 counts of tax evasion -- one count each for years 1 - 4 and that he is convicted for years 1 & 2 and acquitted for years 3 & 4. This rule says that the taxpayer is collaterally estopped to deny civil fraud for years 1 & 2, thus being subject to the penalty and an open statute of limitations for years 1 & 2. The IRS may still assert civil fraud for years 3 & 4 for which the taxpayer was acquitted of tax evasion, but the IRS will have to meet the predicate requirement that the IRS prove civil fraud by clear and convincing evidence.
In Williams v. Commissioner, T.C. Memo 2009-81, these concepts were applied in a context that I have not yet personally encountered or even seen in my readings. In that case, in the superseding indictment, the Government charged Williams with one count of conspiracy and one count of tax evasion. These charges arose from the use of offshore accounts to evade tax on large amounts of unreported income exceeding $8MM over eight years from 1993 to 2000. The tax evasion count included those 8 tax years in the single tax evasion count rather than in mutliple counts, one for each year. The taxpayer pled guilty to that single count. The straightforward application of the collateral estoppel rule suggests, that absent some other factor, Williams would be collaterally estopped as to civil fraud for those years. Williams argued otherwise. As best I understand Williams' argument, he was asserting that his plea meant only that, in one or more but less than all of the 8 years, he committed tax evasion and thus there is no collateral estoppel as to any particular year. That is not the way the tax evasion count to which he pled was worded, of course, and that ultimately made his argument untenable. (This intepretation of the wording of the count was supported by the plea allocution.)
This was a straightforward holding and hardly worthy of comment. The only reason I even mention the case at all is the inclusion of 8 years of tax evasion in a single count. I have observed tax evasion (and other tax crimes, such as Section 7206(1) charges for tax return crimes) for multiple years charged as a separate count for each tax year. Perhaps others have other experience in this regard.
I was trying to imagine why the Government would have asserted the eight years evasion in a single count. Since this was a superseding indictment it was probably the result of a plea agreement. By pleading to only two 5 year counts, Mr. Williams capped his risk of incarceration to 10 years. But, my rough and ready calculation of the sentence under the 2000 sentencing guidelines would suggest that, with a 3 level reduction for acceptance of responsibility, he would have had a Guidelines sentence (considering both the conspiracy count and the tax evasion count) well below 10 years, so he probably did not need to cap his sentence at 10 years. But, from the Government's perspective, it did not need any more than one count of tax evasion which coupled with the conspiracy count would give the court up to 10 years in which to sentence. Usually, in my experience, the way that would be done is to charge the 8 counts of tax evasion, have the defendant plead to one, and drop the remainder upon the acceptance of the plea. Then, for sentencing purposes, all of the tax losses involved in the dropped counts would be considered as relevant conduct and included in the Guidelines calculations anyway. So, the result in the criminal case was not affected at all by charging the tax evasion in one count rather than 8. Where it could make a difference is where additional counts of conviction are required in order to achieve an appropriate sentence. Let's say, for example, that three years of tax evasion are involved and $100,000,000 of tax loss is involved. The current -- i.e., 2008 -- Guidelines sentence with only a 3 level reduction for acceptance of responsibility would produce an offense level of 29 which produces a sentencing range of 87-108 months. Then, of course, more than one count of conviction would be required to achieve a Guidelines sentence (assuming, of course, that the sentencing court wanted a Guidelines sentence or wanted a Booker sentence exceeding the 5 years available for one count).
And, of course, by including the 8 counts in a single count to which the taxpayer pled, the Government did get collateral estoppel in the ensuing civil case. In my experience, the Government now imposes a restitution agreement in the plea agreement (i.e., the taxpayer is not forced to agree to restitution, but if it wants a plea deal, he must). Depending upon how the restitution agreement is worded, the taxpayer may be foreclosed from trying to avoid civil fraud with respect to any dismissed counts that are included as amounts required to be paid as restitution.
Thursday, April 16, 2009
Federal Prosecutors Feeling the Heat
Persons practicing in the White Collar Crime area, including the federal tax crime area, have viewed with great interest the recent mutiple missteps by federal prosecutors in major criminal prosecutions. In the tax area, we were treated to the KPMG prosecution where the Government forced KPMG to quit paying attorneys fees and suffered the dismissal of 13 defendants when the Judge called foul. It was bad enough that the Government had engaged in that sort of extortion, but worse when the prosecutors dissembled about it in trying to get the judge to avoid looking into the sordid conduct. Happenings of the same genre -- convict at any cost -- seem to keep surfacing. E.g., the whole Senator Stevens prosecution involving the prosecutors' Brady disclosure violations among other footfaults. Today's Wall Street Journal has an interesting article here on the abuses in the disclosure area and how to mitigate them.
Tax Defiers - Is Texas Governor Perry One?
Jonathan Turley this morning posted here a very interesting piece on Texas Governor Perry's rantings about Texas' right to secede from the union. Governor Perry of course hopes to fan the flames of discontent of the rabid conservative base to propel him into a potent national force in the Republican Party. Of course, you might guess that a major discontent among this group is the belief that they are being abused by taxes, which, as Justice Holmes said, are the cost of the a civilized society (apparently, their belief is that the United States' society is not civilized so they do not or should not have to pay the cost). Governor Perry is just pandering to a tax defier base (hopefully just a fringe subset -- albeit vocal subset -- of his party). Isn't this just another form of tax defiance which has given the IRS and DOJ so much angst and drawn civil and criminal cases? Certainly, these genre of ranting is just as societally objectionable as the mainstream, non-governor tax defiance claims. Should the IRS / DOJ bring out its anti-tax defier weapons here or should they just let the Governor rant into irrelevance?
Wednesday, April 15, 2009
Get in Line Brother & Righten That Wrong #4
The IRS continues to press the offshore issue, using a tried and true technique -- the John Doe summons -- for gathering information from U.S. resident companies in the credit and debit card processing businesses. You will recall that some years back the IRS used the John Doe summons in this context to blast out information identifying credit and debit card customers of tax haven banks.
The IRS is now back with a related John Doe summons initiative directed to identifying U.S. merchants who deposit proceeds from credit, debit, and other payment card sales directly into offshore accounts, thereby facilitating tax evasion. The summons was issued to a credit and debit card processor.
The petitioner asserts:
The IRS is now back with a related John Doe summons initiative directed to identifying U.S. merchants who deposit proceeds from credit, debit, and other payment card sales directly into offshore accounts, thereby facilitating tax evasion. The summons was issued to a credit and debit card processor.
The petitioner asserts:
5. The "John Doe" summons relates to the investigation of an ascertainable group or class of persons, that is, United States taxpayers who have established Merchant Sales Agreements with First Data Corporation or any of its subsidiaries or affiliates, to process debit card, credit card, charge card, or other payment card transactions pursuant to a referral or any other business arrangement involving or software provided by First Atlantic Commerce, Ltd., a Bermuda Corporation that results in Net Payments being deposited into an account at a Merchant/Acquiring Bank located outside the United States, at any time during the period January 1, 2002, through the date of service of the "John Doe" summons. There is a reasonable basis for believing that such group or class of persons may fail, or may have failed, to comply with one or more provisions of the Internal Revenue laws. The information sought to be obtained from the examination of the records or testimony (and the identity of the persons with respect to whose tax liabilities the summonses have been issued) is not readily available from other sources.
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