Summons Power to Force Summonsed Party to Gather Records from Third Parties

NOTE TO READERS - PLEASE SEE THE UPDATE AT THE END OF THIS BLOG

In a recent summons enforcement case (United States v. Bright, 2009 U.S. Dist. LEXIS 84577 (D. Haw. Sept. 15, 2009), and predecessor case, United States v. Bright, 2009 U.S. Dist. LEXIS 70911 (D. Haw. 2009)), the summonsed party (the taxpayer in the case) was held in contempt for failing to make proper efforts to secure information from a tax haven bank for credit card information related to her account. The court seems to have assumed that it had the contempt power to force the taxpayer to gather the records for the IRS.

I was surprised based on my anecdotal experience that the IRS could force the witness to retrieve information for the IRS. Certainly, the witness would have to produce documents within the scope of the summons held by the witness' agent (such as an attorney or an accountant). Any documents constructively in the witness' possession through agents are certainly fair game. So, the issue is whether the summons power includes the power to direct the summonsed party to use his or her best efforts to get the documents from third parties who are not agents simply because they can.

For example, can the IRS issue a summons to me for today's New York Times that I do not possess and thereby force me to go buy one that I can then produce? I do not think so.

Now, let's focus on bank records. At least for U.S. banks, the historical practice that I have encountered is for the IRS to summons the bank and not the a depositor (usually the taxpayer being investigated) to force him to retrieve the bank records and turn them over. Now, of course, for foreign banks -- tax haven banks in particular -- the IRS usually has no way to summons them or otherwise pressure them for the documents. (In countries with some type of exchange of information agreement, such as the standard double tax treaty, the U.S. with the proper information (taxpayer, bank, etc.,) can get the treaty partner to get the documents, but that is a hassle that can be short circuited through the process discussed here.) Should it make a difference whether the bank is a U.S. bank or a foreign bank or a tax haven bank in terms of defining the proper scope of the summons and contempt power?

One aspect of this type of summons that might be explored in particular cases is that the IRS would have to have very specific information about the existence of the bank account (as it did in Bright). Otherwise, if the IRS is just "fishing," the summons would suffer the same Fifth Amendment infirmities as the grand jury subpoena in the infamous Hubbell case (United States v. Hubbell, 530 U.S. 27 (2000)) and would implicate the concerns presented with the consent directive (see Doe v. United States, 487 U.S. 201 (1988)).

Let's consider some examples to test just how far the concept can go. Keep in mind the concept is that the summons power can force the taxpayer to gather documents otherwise not within his possession to deliver to the IRS.

Example 1: The IRS summonses the taxpayer ("T") to produce records that are, in fact, owned, possessed and controlled by a business associate ("BA") in England. T has no right to force BA to give him the documents (or a copy), but the truth is that, if T asked sincerely, BA would probably deliver them to T. Can the IRS use the summons power to force T to make the request?

Example 2: T does not have his cell phone records for the last 3 years (he gets them digitally by email and routinely destroys them after reviewing them). The cell phone company would deliver them to T upon request. The IRS summonses T for the records. Is T required to request them from the cell phone company so that T can respond to the request? Does or should it make a difference if the cell phone company is a foreign company?

Do the readers have any further thoughts? I have not undertaken to research the issue, so if any reader has, I would appreciate receiving their thoughts and, if possible, the authorities addressing the issue.

UPDATE AS OF 10/7/2009

I now think courts would enforce a summons (or other compulsory process) to require a summonsed party to make good faith efforts to obtain the summonsed parties offshore bank account records. I received enought anecdotal feedback from readers (including comments below), that I am convinced that it happens and summonsed parties dance to the tune called by the judge threatening to put the in jail if they don't go get the records. I still have not found any authority directly on point (suspect some may be out there but just have not spent the time looking). Some of the issues are, however, addressed in United States v. Norwood, 420 F.3d 888 (8th Cir. 2005). I provide the pertinent part of the Norwood decision (pp. 895 and 896):

Norwood argues that his Fifth Amendment privilege against self-incrimination would be violated by enforcement of the IRS summons. The Fifth Amendment provides that "no person . . . shall be compelled in any criminal case to be a witness against himself." U.S. Const. Amend. V. This language has been interpreted to prohibit compelled production of evidence where the communicative aspects of such production are testimonial and incriminating. Fisher v. United States, 425 U.S. 391, 408, 48 L. Ed. 2d 39, 96 S. Ct. 1569 (1976); United States v. Teeple, 286 F.3d 1047, 1049 (8th Cir. 2002).

The district court found that because the IRS already knew of the existence of the two Leadenhall cards and a corresponding account, the existence of the documents associated with the cards and account was a "foregone conclusion." The production of documents the existence of which is a foregone conclusion is not testimony for purposes of the Fifth Amendment. Fisher, 425 U.S. at 411. When the existence of documents is a foregone conclusion, the taxpayer's concession that he has the documents would add "little or nothing" to the government's information, and the "the question is not of testimony but of surrender." Id. (internal quotation omitted). Whether the existence of documents is a foregone conclusion is a question of fact, subject to review for clear error. United States v. Doe, 465 U.S. 605, 613-14, 79 L. Ed. 2d 552, 104 S. Ct. 1237 (1984).

Norwood asserts that the summons did not specifically identify documents the existence of which was a foregone conclusion, and that it therefore fell short of the specificity required by United States v. Hubbell, 530 U.S. 27, 44-45, 147 L. Ed. 2d 24, 120 S. Ct. 2037 (2000). In Hubbell, the Court held that the existence of "general business and tax records" possessed by the defendant was not a foregone conclusion for Fifth Amendment purposes where the government could not show that "it had any prior knowledge of either the existence or the whereabouts" of the documents in question. Id. at 45. Here, Norwood does not dispute that the IRS has prior knowledge of two Leadenhall payment cards and one Leadenhall account controlled by him. He contends that the summons includes documents outside the IRS's prior knowledge, however, because the language of the summons is not restricted to Leadenhall cards and account. It is true that the summons as written is not restricted to records associated with Norwood's Leadenhall cards and account, but the government seeks enforcement of the summons only to the extent that the documents requested are a foregone conclusion. (Br. of Appellee at 10 n.2). The district court's memorandum, moreover, relied on the government's knowledge of the Leadenhall cards and account as the basis for its decision that complying with the summons would not implicate the Fifth Amendment. We therefore interpret the district court's order to enforce the summons only to the extent the summoned records pertain to Norwood's Leadenhall cards and account.

The existence of the requested records relating to Norwood's Leadenhall cards and account is a foregone conclusion. The summons seeks records such as account applications, periodic account statements, and charge receipts, all of which are possessed by the owners of financial accounts as a matter of course. Norwood does not [*896] contend that he does not possess any of these documents, and the government knows far more about the documents associated with Norwood's Leadenhall cards and account than it did about the defendant's business records in Hubbell. 530 U.S. at 44. In Hubbell, the government could not show "any prior knowledge of either the existence or whereabouts" of the documents sought. Id. (emphasis added). Here, by contrast, the government knows the name and location of the bank that created the records sought, Norwood's payment card numbers, and even the details of a number of discrete transactions involving the cards and his Leadenhall account. Accordingly, the district court's conclusion that "Norwood's production of the records has no testimonial significance," (Add. at 4), is not clearly erroneous.

DOJ Tax's Further Attempts to Drum Up Business / Revenue

Notice: This Blog will be supplemented from time to time as I receive reports of the occurrences at the ABA Tax Section that I feel worthy of passing on.

DOJ Tax is on a public relations blitz to drum up business / revenue by incentivizing taxpayers with unreported offshore bank accounts to join the IRS voluntary disclosure initiative ending 10/15. A key facet of the blitz is the high profile indictments recently obtained. At last week's ABA Tax Section meeting, DOJ Tax rolled out its mouthpiece, Kevin Downing himself at the forefront of the prosecution side of this juggernaut, to remind practitioners and, through them and the press attendin, the public that they should pony up in the voluntary disclosure program. Here are a few highlights from the ABA Tax Section meeting (which I will supplement as more come to my attention):

1. Announcements of new prosecutions -- probably coupled with guilty pleas -- will be "a few every couple of weeks," according to Downing. Obviously, DOJ Tax wants to keep the matter in the public eye to encourage the mass of offshore account holders to open their pocketbooks and come into the fold of the voluntary disclosure initiative which expires October 15.

2. DOJ Tax and the IRS will target U.S. enablers such as banks and financial advisors. Reuters reports that, "on the sidelines," Downing advised Reuters specifically "that U.S. banks that helped U.S. clients hide money off-shore are a target."

3. The U.S. is making headway with a lot of foreign banks other than UBS. He is reported to have said: "Let your clients know if they think it's just UBS they are mistaken."

Items beginning at par. 4 were added on 9/29/09

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).

6. DOJ "has 150 UBS customer cases headed to grand juries." Sheppard, supra. JAT Comment: I guess non-UBS customers should get some comfort from this -- at least UBS customers are keeping them busy. And perhaps all of the other regular tax cheats should be happy that the Government is devoting a major portion of its criminal tax enforcement efforts elsewhere.

7. Banks other than UBS will be targeted. This includes both Swiss banks and non-Swiss banks such as Hong Kong, Panama and Singapore (mentioned specifically). Sheppard, supra. See my point above; is this just a token threat designed to incentivize those non-UBS tax cheats to get into the program? How many cases like this can the Government really prosecute?

8. Downing countered the rumor that some non-UBS Swiss banks are actively seeking the tax cheat business by touting their lack of U.S. presence which brought UBS down. "Downing reported the opposite -- that some Swiss banks are coming forward proactively, offering to push American account holders to disclose in order to protect their qualified intermediary status." Sheppard, supra.

9. Further, Downing reported: "The Swiss government is now willing to be much more cooperative. They really appear to be committed, at least at this point in time." Sheppard, supra. As I have reported previously, the key is whether the Swiss Government will use the UBS template for disclosures under the treaty by the other Swiss banks.

10. Downing announced that DOJ honors voluntary disclosures, although it does not have to do so. Sheppard, supra. Now, isn't that nice. But, I wonder whether DOJ can really prosecute a tax crime if the IRS does not approve? Maybe the man on the mission will test that notion some time.

11. On the subject of quiet disclosures, Sheppard reports:

Practitioners and government speakers agreed that choosing quiet disclosure is risky. The IRS is mining returns to look for quiet disclosures to pursue for civil violations. And quiet disclosure does not protect the filer from criminal prosecution -- that is the promise of the IRS amnesty program. "You might as well go noisy," said [Mark] Matthews.

One of the key points to note is that the quiet disclosures are being mined "for civil violations." Does that mean the quiet disclosure is still effective for avoiding criminal prosecution, with the only risk of the quiet disclosure in the current context being no certainty as to the quantum of civil penalties? See my prior blog here. And, of course, the IRS's panoply of civil violations alternatives may be limited. At least as to the returns, aren't these qualified amended returns subject to penalty only if the IRS establishes fraud (a very difficult burden that would require even greater use of limited IRS resources)? And to get the more onerous FBAR penalties, the IRS would have to prove the equivalent of civil fraud -- willfulness (same standard) -- although resource intensive.
12. Downing also warned that U.S. UBS clients who invoke Swiss legal procedures to try to stave off disclosure of their names to the U.S. should not be tempted to forego notifying the U.S. of that action (which, of course, would defeat the major purpose of taking the Swiss action). He is reported to have announced: "We'll prosecute that as an overt act of conspiracy or an affirmative act of evasion." Id. Ah, the ubiquitous conspiracy charge. Permit me one final quote: In United States v . Reynolds, 919 F.2d 435, 439 (7th Cir. 1990), Judge Easterbrook lamented that the conspiracy add-ons are “inevitable because prosecutors seem to have conspiracy on their word processors as Count I; rare is the case omitting such a charge.”

Another UBS Related Plea Agreement

Juergen Homann pled guilty. The DOJ press release is here. The key points are:

1. The plea agreement is to one count of willful failure to file the FBAR in violation of 31 U. S. C. §§ 5314 and 5322(a). This is a 5 year count.

2. The defendant is relieved of criminal prosecution for tax crimes related to his UBS accounts. For my students, I offer some nuance on this. Normally, one U.S. Attorney's office (USAO) cannot bind other USAOs, but this agreement joins DOJ Tax as a contracting party. DOJ Tax must approve tax and tax related crimes. Thus, as a practical matter, this binds the DOJ (which includes all USAOs). Nice. But, in true cautionary fashion, the agreement later provides that the agreement is limited only the USAO for DNJ and "cannot bind other federal, state or local authorities." The Government will, however, "bring this agreement to the attention of other prosecuting offices, if requested to do so."

3. The judge may order restitution. Note that the plea is to a nontax crime. Restitution is not allowed for a tax crime unless contractually agreed to in the plea agreement or imposed as a condition to some sentencing benefit. The other parts of the agreement suggest that the "victim" -- the United States -- may be paid before sentencing, so restitution may not be a practical issue.

4. The Government retains the right to bring appropriate sentencing factors to the sentencing court (subject to the stipulated sentencing factors discussed below). The form of this agreement is:

Rights of the Offices Regarding Sentencing
Except as otherwise provided in this agreement, the Offices reserves its right to take any position with respect to the appropriate sentence to be imposed on Juergen Homann by the sentencing judge, to correct any misstatements relating to the sentencing proceedings, and to provide the sentencing judge and the United States Probation Office all law and information relevant to sentencing, favorable or otherwise. In addition, the Offices may inform the sentencing judge and the United States Probation Office of: (1) this agreement; and (2) the full nature and extent of Juergen Homann's activities and relevant conduct with respect to this case.

5. As noted, the parties stipulate as to certain sentencing factors, but the Government reserves the right to avoid any stipulation that it subsequently determines to be untrue. Furthermore, the stipulations do not prevent the Government from responding to questions from the Court or correcting misinformation provided to the Court.

6. The civil income tax aspects are not resolved in the plea. However, the civil liability for the FBAR penalty is resolved by an agreement to pay 50% of the highest amount in the account for 1 year in the period from 2001 through 2007. Note that the FBAR penalty exposure at least for the years after 2004 is 50% of the highest amount in the account, so this civil settlement is quite a deal for this convicted FBAR felon. Note in this regard that the civil penalty is in no way limited by the fact that the defendant pled to only one count involving one year.

7. The parties stipulate as follows: "Pursuant to U.S.S.G. §2S1.3(c)(1), since this offense was committed for the purposes of violating the Internal Revenue laws, the applicable guidelines are U.S.S.G. §§ 2T1.1 and 2T4.1." I have previously addressed before concerns I have about this particular genre of stipulation to funnel the sentence into the tax guidelines, so shall not repeat them now. The bottom-line, of course, is that, if this stipulation is accepted, Homann gets sentenced the same as if he had entered plea to the common tax crime used in this context -- tax perjury under § 7206(1) -- except that his potential sentence is 5 years rather 3 years. Of course, just focusing on the Guidelines, his amount involved may be low enough that the risk involved in the extra exposure is not that great. (Note that according to my calculations below, Homann may be close to the 36 months (depending on where the judge sentences in the guidelines range), that the plea to a 5 year rather than a 3 year count could make a difference.)

8. In the stipulations, the parties agree to a tax loss for sentencing purposes of between $400,000 to $1,000,000. That tax loss under the Guidelines produces a Base Offense Level of 20. Curiously, the parties limit that stipulate to a specific UBS account disclosed to the Government pursuant to the UBS deferred prosecution agreement. Were there other accounts that, presumably, Homann should have disclosed to the Government and should disclose to the Probation Office and be considered by the sentencing court in determining the tax loww? Are the parties attempting to push such other accounts, if they even exist, under the rug?

9. The parties stipulate, rightly, that the sophisticated means 2 level enhancement applies. Nothing unusual here.

10. The parties stipulate that the 2 level acceptance of responsibility reduction applies and that defendant will be entitled to the additional 1 level acceptance of responsibility if applicable. Nothing unusual here.

11. The parties then stipulate that, with the foregoing adjustments, the sentencing level is 19 and further stipulate:

7. The parties agree not to seek or argue for any upward or downward departure, adjustment or variance not set forth herein. The parties further agree that a sentence within the Guidelines range that results from the agreed total Guidelines offense level of 19 is reasonable.

Note in this stipulation that the parties will not "seek or argue" for a "departure" (in the jargon a departure authorized by the Guidelines) or a "variance" (in the jargon a sentence outside the range otherwise determined under the post-Booker regime for sentences outside the Guidelines after departures). So that the apparent expectation is that the sentence will be within the range determined by the offense level of 19.

12. The parties do not stipulate a sentencing history, and this is curious to me. The parties do stipulate that they "reserve any right they may have under 18 U.S.C. § 3742 to appeal the sentencing court's determination of the criminal history category." This suggests that there is a sentencing history issue that the parties could not resolve.

13. So, given the offense level of 19, the indicated range under the 2008 Guidelines which the parties stipulated is: 30-37 months at Criminal History I or 33-41 months at Criminal History II.

14. It is lore among practitioners that the Government's particular prosecutorial angst will be directed against those persons who created additional subterfuge beyond the mere establishment of a foreign bank account. The DOJ Tax press release here spells this out with respect to Homann. With the assistance of a previously indicted Swiss enabler (Mattias Rickenbach), Homann established a foreign entity to appear as the nominal account owner. Further, with the assistance of Rickenbach, Homann "conducted a sham loan by transferring $5 million from an account in the name ELM Finance Limited to a second Hong Kong entity in order to obtain financing for Homann's U.S. business without alerting authorities that he controlled the assets in the ELM at UBS." Finally, "Rickenbach and a Swiss banker persuaded the defendant not to seek out and enter into the IRS's Voluntary Disclosure program."

15. The DOJ Press Release drums up business / revenue for the IRS as follows by reminding those with such offshore accounts that (i) the voluntary disclosure program is available to avoid prosecution and (ii) absent voluntary disclosure, they can be prosecuted. As further inducement, the release identifies those already prosecuted.

DOJ Tax Goes Wild for Girls Gone Wild Promoter

On the eve of trial for tax evasion, Girls Gone Wild promoter, Joseph Francis, has pled guilty to two crimes. First, he pled to two counts of the lesser, much lesser tax misdemeanor (i.e., one year or less) offense of § 7207 (willful submission of a materially false return or statement). Second, he pled to a bribery offense under 18 U.S.C. § 201(c)(1)(A). The tax offenses have a maximum 2 year sentence (i..e., 1 year for each count), and the bribery offense has a maximum 2 year sentence. Hence, his maximum incarceration exposure is 4 years.

As not unusual, the parties try to steer the court to their desired result by agreeing that “the appropriate disposition of this is that the Court impose a sentence of” (i) incarceration of 301 days, being the 301 days Frances had already served, (ii) a one-year period of supervised release, and (iii) restitution of $249,705. Interestingly, perhaps in a further attempt to keep the Court on the reservation, the parties request immediate sentencing without a presentencing investigation report by the probation office. I guess the parties hope that the Judge just does not go wild.

By attachment to the plea agreement (Exhibit C), the parties stipulate a significant criminal history which hardly seems the type that would endear Mr. Francis to a sentencing court. I include the content of Exhibit C below. I would not hazard a guess as to what a court will do in Mr. Francis’ case, but I extrapolate / speculate from my own anecdotal experience (a highly selective and wholly inadequate sample) that most judges would be suspicious of the parties’ proffered 301 day sentence (not for the tax offenses alone, but for the bribery offense when considered with the tax offenses and the criminal history). We’ll see.

From a tax perspective, the interesting feature of the plea is the downgrading of the offense of conviction from the charged felony tax evasion to the § 7207 misdemeanor offenses. Most practitioners have argued for, pleaded, cajoled, etc. (but not bribed) tax prosecutors for such a downgrade without any success. (For DOJ’s policies on this, see here.) I imagine that DOJ Tax would have declined to do that here except for the bribery plea. My gut tells me that, in terms of sentencing, the sentencing judge is likely to focus more on the bribery plea and perhaps the criminal history; the maximum 4 year incarceration for the combined pleas will give the judge ample room to do justice.

--------------------------------

EXHIBIT C

The defendant's Criminal History is as follows:

(1 ) On September 26, 2006, the defendant pled guilty in the Central District of California to two counts of 18 U.S.C. § 2257(f)(1) (Failure to Make and Maintain Required Records; Aiding and Abetting and Causing an Act to Be Done);

(2) On April 23, 2007, the defendant pled guilty in the Northern District of Florida to one count of Criminal Contempt pursuant to 18 U.S.C. § 401; and

(3) On March 12, 2008, the defendant pled no contest in Panama City, Florida, to one felony count of Child Abuse, in violation of Fl. Stat. Ann. § 827.03(1)(c), two misdemeanor counts of Prostitution in violation of Fl. Stat. Ann. § 796.07(2)(f), and two misdemeanor counts of Violating a Posted Jail Rule.

Golf Pro Pleads Guilty to Tax Crime

A plea announcement published in this morning’s Tax Notes Today (2009 TNT 182-26) grabbed my attention. On September 22, 2009, the U.S. Attorney for the Middle District of Florida announced a plea agreement with a professional golfer, one Jimmie L. Thorpe. The announcement has not yet been posted to the press release page of the U.S. Attorney’s web site. The press release page for September is here and presumably the posting will appear today or, at least, soon.

I am not a big golf fan, so don't know who he is and where or even if he ranks in the pantheon of golfers. His celebrity status, if any aside, the plea agreement is interesting on several points of interest to the criminal tax afficionado.

First, the plea is for two counts of failure to pay under § 7203. Failure to pay is a misdemeanor (i.e., maximum sentence of one year per count). On the facts stated in the announcement, it would appear that failure to pay and/or perhaps failure to file (also criminalized under § 7203) were the crimes in play. The plea is only to failure to pay. The facts contained in the announcement establish that three years were in play. I surmise the compromise to reach agreement was that only two years / counts would be admitted, hence capping the possible punishment to 2 years incarceration. This capping of the possible sentence was likely important to the defendant because, in his case, the tax loss numbers and other sentencing considerations could easily produce a sentence greatly in excess of 2 years. I have previously published an article addressing the use of counts to cap a sentence that could otherwise go much higher. John A. Townsend, Analysis of the Fastow Plea Agreements, 2004 TNT 44-46.

Second, a subtext in some of these cases is tax evasion through failure to file and/or failure to pay (as well as at least one other affirmative act). The Government will sometimes try to make a tax evasion case where the failure to file or failure to pay is a prominent element in the attempt to evade tax. But such cases are often more difficult for the Government to make, and the Government can fall back on the more easily proved case of failure to file or failure to pay. By charging the “lesser crime,” the Government can more easily extract a guilty plea in such cases, thus satisfying its imperative to get the maximum number of convictions and prominent publicity. Thus, had the Government pursued tax evasion (a 5 year incarceration period per count), it may have had difficult incentivizing Mr. Thorpe to plead where he faced the realistic possibility of more than 2 years incarceration.

Third, the announcement indicates that the defendant may be subject to a fine of up to $4,125,152.52. The basis for the fine is not stated in the plea agreement but can be easily derived. My students will remember that the Code provisions state a maximum fine. Section 7203 states a maximum fine of $25,000 for an individual, so that with two counts the Code maximum fine would be $50,000, far short of the fine agreed to in this case. My students will also remember, however, that the real fine provision is § 3571 which permits a maximum fine for a class A misdemeanor of $100,000 for individuals or, if greater, double the pecuniary gain to the defendant or the pecuniary loss to the victim. According to the announcement, the fine amount is just double (rounded) the stipulated tax loss amount of $2,062,576.27. So, this facially explains the large amount of the potential fine. In my experience fines do not play a significant role in tax cases because the taxpayer will often have paid the tax, penalties and interest before or during the prosecution phase or will agree to contractual restitution.

Finally, the announcement implies that defendant was a repeat offender . He had previously been investigated by IRS CI for the years 1993 and 1994. The announcement notes that he had asserted a reliance on accountants defense, although the announcement does not say that this defense is why he was not prosecuted for those years. (OK, the implication is that this defense was a material part of the reason for nonprosecution, but announcement does not say that.) But, this guy was put on notice of his tax obligations and could not have reasonably expected that type of defense to fly twice, particularly given the repeated pattern for the years involved in this prosecution.

Errata: The above discussion has been amended as of 5:20pm 9/23/05 to correct a misstatement about the fine. Before revision, the statement was that the defendant had agreed to the large fine. He had not. The accouncement merely said that the fine could be up to the amount. Thanks to the readers for tolerating my hopefully infrequent errors.

IRS Extends FBAR / Foreign Entity Relief Deadline to 10/15/09

The IRS has extended to 10/15/09 the deadline for joining its special initiative voluntary disclosure practice with respect to foreign bank accounts and entities. The announcement is here. The IRS updated its FAQs here with this extension (see opening unnumbered paragraphs).

I think this will be win-win for the IRS. There will still be plenty of taxpayers who choose not to try to enter the program or, if they try, will be disqualified. The initiative and this extension will thus flush out a lot of tax dollars with relatively little IRS audit / criminal investigatiove costs, and much of the dollars might have otherwise escaped the IRS's radar screen or willingness to pursue.

I think it will also be win-win for the taxpayers involved. The taxpayers entering the practice and not disqualified will receive a pass on criminal prosecution and will pay taxes, penalties and interest that are far less than might otherwise be the case.

Scalia on My Cousin Vinny

I head off in about an hour to San Francisco for baby sitting chores for the weekend. Since I have been crunched lately with the voluntary disclosure initiative expiring 9/23 (which, by the way, is my birthday), I have been silent for a while, but today I offer something on the lighter side. I cover civil and criminal tax litigation in my classes at UH Law and recommend to my students. If nothing else, it is great entertainment, but it also, even though exaggerated has has some good things about litigation.

In this morning's ABA Journal here, I picked up the following:

During his Chevy Chase, Md., appearance, [Justice] Scalia also offered some personal information about himself, revealing that his favorite legal movie is My Cousin Vinny * * *.

And, the justice added, the character played in the movie by actress Marisa Tomei is "a killer."

The politico article from which this came is here.

And the ABA Journal here has another article referencing My Cousin Vinny. A good reade.

Certainty of the Law's Command and Willfulness

In my last blog here, I concluded as follows:

In this proposed instruction, the court pre-empts the issue of uncertainty in the law. Once the court finds the uncertainty in the law, then, as in James, any conviction based on the defendant’s intent to violate the law is irrelevant. (I will discuss this aspect of James in my next blog.)

The James point is that, if the law is uncertain in some objective sense, the defendant can have the blackest, darkest, most evil specific subject intent to violate the law, and that will be irrelevant. Anglo-American jurisprudence simply does not permit convictions for evil intent alone. The following is from my recent article (John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260, 263-4 (2009)):

In its third meaning - i.e., in the Cheek meaning applicable to substantive tax crimes generally [that the defendant know the law and intend to violate it] - the requirement of willfulness has both objective and subjective components. 47 Objectively, as a matter of law, the law's command must be knowable - the law's command is sufficiently certain that it is capable of being known by a citizen. 48 Subjectively, the defendant must have actually known the rule and have intended to violate it. 49

The objective component invokes the court's function to determine whether the law is sufficiently certain that it sets an appropriate standard to guide and judge conduct where the law requires that the defendant know that he or she is violating the law. If it does not, then even if the defendant clearly intended to violate some law that he mistakenly thought was certain, he cannot be tried for it. 50

n47. See supra note 46 and accompanying text.
n48. See, e.g., United States v. Pirro, 212 F.3d 86, 91 (2000) ("Because only willful conduct is criminal under § 7206 and because willfulness requires a voluntary intentional violation of a known duty, the duty involved must be knowable.") (internal quotations omitted); see also James v. United States, 366 U.S. 213, 224, 82 S. Ct. 1052, 1058 (1961) (describing what a "knowable" legal duty is); United States v. Critzer, 498 F.2d 1160, 1162-63 (4th Cir. 1974); Garber v. United States, 607 F.2d 92, 97-98 (5th Cir. 1979) (en banc); United States v. Dahlstrom, 713 F.2d 1423, 1428 (9th Cir. 1983), cert. denied, 466 U.S. 980 (1984); United States v. Mallas, 762 F.2d 361, 363 (4th Cir. 1985); United States v. Harris, 942 F.2d 1125, 1131 (7th Cir. 1991). Uncertainty of the law's requirements, often the by-product of tax law complexity and ambiguity, can defeat willfulness as a matter of law. See, e.g., Harris, 942 F.2d at 1131. The civil penalty regime of the tax law includes concepts for analysis in dealing with uncertainty in the law. The tax world deals daily with concepts such as frivolous, non-frivolous but not reasonable, reasonable basis, substantial authority, more likely than not, should, will or what have you. See infra note 75. By analogy to the willfulness requirement of the criminal tax laws, only the frivolous position would seem to support an environment where, as a matter of law, the taxpayer or the practitioner could be willful. This knowability standard is closely related to the rule of lenity, discussed below. See infra Part VII.
n49. See Cheek, 498 U.S. at 201; Bryan, 524 U.S. at 193-94.
n50. This point is established by the majority, concurring, and dissenting opinions in James v. United States, 366 U.S. 213, 221-22, 224-25, 246 (1961), a tax evasion case. After trial, the jury found the defendant guilty, which necessarily meant that the jury found he intended to violate the tax law. Id. The Supreme Court said that the law was sufficiently uncertain that a defendant could not be held to the standard even if he may have intended to violate the law. Id.

Uncertainty in the Law As a Defense in Tax Cases

Recently, I posted a blog here on our firm’s sister site, Tax Controversy Update, which deals principally with the civil side of tax controversy practice. My partner, Larry Jones, takes the laboring oar for the Tax Controversy Update blog, but sometimes I make contributions. The topic of my recent blog was the Tax Court’s rebuff of a taxpayer’s request for discovery of the many MLTN opinions regarding Son-of-Boss shelters in the IRS’s possession. The taxpayer urged that this discovery was relevant to the taxpayer’s reasonable cause defense against the assertion of the accuracy related penalty. The taxpayer’s rationale for relevance was that the fact that there were many supposedly reputable law firms giving MLTN opinions for the Son-of-Boss transaction somehow supported the reasonableness of the taxpayer’s reliance on the particular MLTN opinion that the taxpayer allegedly relied upon. The Tax Court rejected the request for discovery based on relevance grounds and based on the general prohibition of Section 6103.

I would like in this Federal Tax Crimes Blog to expand that discussion into the criminal arena. I will try to be brief, but caution that it is a large subject and thus being brief necessarily entails painting in broad strokes.

The starting point is the seminal rule in tax crimes that, if the law is not certain, there can be no criminal conviction. This concept has developed from a line of Supreme Court cases from James to Cheek to a host of lower court cases (Dahlstrom, Critzer, Garber, Harris, Pirro). For a taxpayer to be convicted, the law must first be knowable (an objective standard) and the taxpayer must in fact know the law and intend to violate the law (a subjective standard).

The Son-of-Boss shelters exploited Helmer v. Commissioner, 34 T.C.M. (CCH) 727 (1975), a case in which the Tax Court adopted the IRS position as that contingent liability was not a liability. The precise parameters and potential scope of the Helmer holding (and cases with other similar holdings) was uncertain for years and became the basis for a number of shelter manipulations, including the Son-of-Boss shelters. The IRS finally began shutting down Son-of-Boss by a Notice in 2000 by making them listed transactions. The IRS thereafter adopted its position in regulations that, under Chevron, may adopt among competing positions and establish the law. But before that occurred, as several courts have noted, Helmer was a fair interpretation of the state of the law.

Prior to at least the 2000 Notice, Helmer was a fair interpretation of the law. I doubt that, under the knowable standard, shelters exploiting Helmer alone could be considered criminal on the notion that the world should know that Helmer was not the law. And, certainly, given the uncertainty in the law and its common use in shelters designed by prominent legal professionals, I am certain that many people participating in the shelters would have known that Helmer was not the law. I would think that the state of interpretation of the law among many practitioners should be considered by the Court in determining knowability and is relevant to the issue of whether the particular defendants knew that knowable law and intended to violate that known law.

The problem with these shelters, as I have noted earlier, is the lie. They, like many of the earlier shelters, had plausible – noncriminal – legal constructs; the problem was that the facts – often the economics – simply did not support the legal constructs. In Son-of-Boss, because of the economics of the shelter, the lie presented itself in the profit motive representation that was the infirm foundation for the whole superstructure. The Helmer legal foundation itself was criminal. Unless that distinction is made clear to the jury, the jury might convict simply because it believes that the defendant(s) criminally behaved by participating in a something too good to be true – artificial basis by a legal fiction of contingent liability. The lie may not be the reason the jury convicts or it may convict because of mixed legal reasons. Unless carefully instructed the jury could convict because the jury believes that the Helmer legal fiction was not true and the defendants knew it was not true. I think that the instruction should be something like (more artfully worded but the concept is here).

In determining whether the defendant(s) is guilty of the crime of tax evasion (or whatever crime is alleged), you must assume that the law does or should permit a taxpayer to create artificial basis by use of contingent liability of the type alleged in this case. You are only to convict if you find that the defendants knew that the purported factual basis supporting the use of the contingent liability here was in fact false.

Sure, the court should fluff it up and flesh it out, but that is the concept.

In this proposed instruction, the court pre-empts the issue of uncertainty in the law. Once the court finds the uncertainty in the law, then, as in James, any conviction based on the defendant’s intent to violate the law is irrelevant. (I will discuss this aspect of James in my next blog.)

Confusion about the Defraud Conspiracy

Conspiracy is a frequent charge in tax related indictments. Indeed, Judge Easterbrook of the Seventh Circuit has lamented, with some hyperbole, that, in federal crimes generally, a conspiracy charge is “inevitable because prosecutors seem to have conspiracy on their word processors as Count I; rare is the case omitting such a charge.” United States v. Reynolds, 919 F.2d 435, 439 (7th Cir. 1990) (Reynolds is important in the tax crimes area for other reasons, but I won't digress).

The general conspiracy statute (18 U.S.C. § 371) defines two types of conspiracy -- an offense conspiracy and a defraud conspiracy. The offense conspiracy is a conspiracy to commit an act otherwise defined in the law as an offense. A tax example is a conspiracy to commit tax evasion; tax evasion is a substantive offense defined in 26 U.S.C. § 7201. The defraud conspiracy is not a conspiracy to commit a substantive offense, but in a tax setting is a conspiracy to impair or impede the lawful functioning of the IRS in the administration of the tax law. In a tax setting, the defraud conspiracy is often referred to as a Klein conspiracy, named after the leading case of United States v. Klein, 247 F.2d 908, 920 (2d Cir. 1957), cert. denied 355 U.S. 924 (1958).

In a recent article (cited at the end of this blog), I note the importance of distinguishing between the two types of conspiracy in tax crimes because the offense conspiracy requires the same proof of mens rea as the substantive offense that is the object of the conspiracy. Although the conspiracy statute says nothing about willfulness, when tax crimes are the object of the offense conspiracy, a willfulness element is imported as an element of the offense conspiracy because tax crimes require willfulness. Willfulness is a high standard of proof -- that the defendant knew the law and intended to violate the law. (By contrast to other areas of the law, the crime is committed if the defendant knew he was doing the activity that the law defines as criminal whether or not he knew that the law so defined the activity as criminal; ignorance of the law is no excuse; in tax crimes, however, ignorance of the law is an excuse.) The defraud conspiracy, like the offense conspiracy, has no textual requirement of willfulness but, unlike the offense conspiracy, has no referrant from which to import a requirement of willfulness.

For purposes of this blog, I just want the reader to understand that the offense conspiracy requires an offense as the object of the conspiracy whereas the defraud conspiracy does not. So, with that background, consider the following statement in a case I read today:

To establish conspiracy to defraud the United States in violation of 18 U.S.C. § 371, "there must be proof (1) of an agreement among two or more persons (2) to accomplish something that constitutes an offense against the United States, and (3) an overt act by one of them in furtherance of the conspiracy." United States v. Lichenstein, 610 F.2d 1272, 1276 (5th Cir. 1980). Furthermore, "the government must prove the requisite intent to commit the substantive offense." United States v. Charroux, 3 F.3d 827, 831 n.4 (5th Cir. 1993) (internal quotation and citation omitted).

United States v. Blockett, 324 Fed. Appx. 402 (5th Cir. Miss. 2009) (unpublished opinion). Blockett was not a tax case, but the distinction between offense and defraud conspiracies applies to the general conspiracy statute. Basically, the court blew it. The defraud conspiracy does not require proof of an agreement "to accomplish something that constitutes an offense against the United States." The case cited by the court for the proposition (Lichtenstein) was an offense conspiracy case. (Lichtenstein was a very interesting case, but I won't digress here to discuss it.) This error by the court was not outcome determinative in the case, and the error was committed in a nonprecedential decision so that, hopefully, the error will not have a life beyond the case. (One of the dangers that commentators have note about nonprecedential decisions is that, perhaps, judges are less careful about what they say in nonprecedential cases.)

The key point for students of the tax crimes, of course, is not to make this rather elementary mistake about the defraud / Klein conspiracy. For nuance, however, as I develop in my article, the defraud conspiracy, as interpreted, does have some significant requirement of proof that one might not discern from simply reading the statute – a requirement that deceit be involved in the attempt to impair or impede the administration of a government agency. This requirement serves an important limiting role for the defraud conspiracy, much as the willfulness element at least in tax crimes serves an important limiting role for the offense conspiracy.

My article that I cite in this blog is John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009) and may be viewed on line here.

Get in Line Brother #25 - IRS Plans for Life After Voluntary Disclosure

In an article in today's Tax Notes Today, David Stewart reports that the IRS is creating "a new group within its Large and Midsize Business Division to examine wealthy taxpayers who use offshore arrangements for tax evasion."

The focus of the new group is "on examinations involving webs of entities and arrangements controlled by the high wealth taxpayer segment."

This development should be considered by those still sitting on the fence as to whether to join the IRS's voluntary disclosure initiative which ends 9/23/09. For those who had already decided to just hunker down for the long haul (hoping the statutes of limitations expire without discovery) rather than join the inititive, this might be a reason to reconsider that decision. Of course, many who have made the decision to hunker down are individuals with direct ownership involving no foreign entities or maneuverings to further obscure their ownership. In the current groupthink, these individuals with, to use sentencing jargon, less sophisticated means / culpability, may not be the focus of this particular follow-through, but the unquantifiable risk is that many of these persons will be discovered in the process of the new IRS group's activities. Their ability to hunker down without discovery for the long-term may be impaired. Moreover, at least for banks in Switzerland and even other countries in the ambit of influence of the OECD, the same imperatives that caused relaxation of treaty interpretation for Switzerland may encourage them to be more open than they previously have. Keep in mind that there is a long statute of limitations on potential civil and criminal penalties, so hunkering down involves years of a long period of potential risk, even if they clean up their acts on a go-forward basis.

Article citation: David D. Stewart, New IRS Group to Examine Wealthy Individuals Using Offshore Arrangements for Evasion, 2009 TNT 168-1.

9/2/2009 9:20 - see also a Bloomberg News article here.