What is the Foregone Conclusion To Overcome the Fifth Amendment Act of Production Doctrine? (7/27/10)

The IRS summons is a substantial tool in the investigation of tax liabilities and of crimes related to taxes. The summons is compulsory process; to that extent, is like a grand jury subpoena. It is not as powerful a tool as the grand jury subpoena (because, in part, of timing and procedural predicates in enforcing the summons not present for grand jury subpoenas), but in its compulsoriness is like a grand jury subpoena. The Supreme Court held in a line of cases culminating United States v. Hubbell, 530 U.S. 27 (2000) that, although there is no Fifth Amendment privilege for the contents of documents, compulsory process may implicate the Fifth Amendment where the witness's act of producing is inherently testimonial. It is testimonial where the existence of the documents is not a "foregone conclusion" and thus the witness would, in effect, "testify" under compulsion as to the existence of the documents, their authenticity and the witness's possession of the documents. The question is what facts rise to the level of "foregone conclusion" as to the existence and possession of the documents the IRS has summonsed (or, in the case of a grand jury subpoena, that the grand jury has subpoenaed)?

In a recent opinion in a summons enforcement case, United States v. Shadley 2010 U.S. Dist. LEXIS 81651 (ND CA 2010), the Court held that the witness need not produce checkbook deposit slips for a bank account that the IRS knew about and even already had obtained the bank's records. Thus, the IRS certainly knew of the existence of a bank account, that the witness had made deposits into the account, and that the bank would have given the defendant a stamped deposit slip in normal course of accepting the deposits reflected on the deposit slips. Yet the Court held that the witness had a Fifth Amendment privilege because the act of production was testimonial and the Government had not shown that existence and possession of the deposit slips that the witness surely received was a foregone conclusion.

If Shadley is correctly decided, it is hard to imagine a case where the taxpayer cannot assert the privilege, thus turning the act of production doctrine into a Fifth Amendment privilege for the contents of the documents. So, let's explore a bit more about what level of knowledge is required for the Government to have sufficient knowledge for the foregone conclusion that precludes the assertion of the Fifth Amendment.

In United States v. Norwood, 420 F.3d 888 (8th Cir. 2005). the IRS had instituted a much heralded initiative to discover foreign bank accounts by issuing John Doe summonses to credit card processing agencies within the United States who would have records of processed charges for foreign bank accounts. From those records, the IRS obtained evidence that a particular taxpayer, the taxpayer- defendant in this summons enforcement proceeding had a foreign credit card, The IRS issued the summons for the taxpayer's bank and credit card records and related documents. The taxpayer appeared pursuant to the summons and asserted privileges. The Government then brought the summons enforcement proceeding and requested that the Court also issue an order requiring compliance with a consent directive directing the offshore bank to disclose information to the IRS. In the affidavit in support of the summons, the IRS Agent recounted the following evidence : (i) the taxpayer had a foreign bank account with two associated credit cards; (ii) the bank account number for that account; and (iii) the taxpayer had answered no to the foreign bank account question on Schedule B of his 1040.

One of the taxpayer’s defenses to compliance was the Hubbell defense. The district court and the court of appeals rejected the defense on the basis that the information the IRS already had made the existence of the foreign bank account virtually a “foregone conclusion,” sufficient to meet Hubbell’s requirements. The court of appeals reasoned:

The existence of the requested records relating to Norwood's [foreign bank credit] cards and [related foreign bank] 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 contend that he does not possess any of these documents, and the government knows far more about the documents associated with Norwood's [foreign bank] 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 [foreign bank] account. Accordingly, the district court's conclusion that “Norwood's production of the records has no testimonial significance,” is not clearly erroneous.

United States v. Ponds, 454 F.3d 313 (D.C. Cir. 2006) addressed some of the issues left open by Hubbell in holding that the Fifth Amendment was implicated in a compelled document production. Focusing on the spectrum usually encountered between the frames of the two cases – Fisher where the documents were reasonably known to exist (no Fifth Amendment privilege) and Hubble where the Government was just fishing (Fifth Amendment privilege) – the court said (pp. 320-321):

Although the Supreme Court did not adopt the “reasonable particularity” standard in affirming our decision, it emphasized that the applicability of the Fifth Amendment turns on the level of the government's prior knowledge of the existence and location of the produced documents. See Hubbell, 530 U.S. at 44-45. Post-Hubbell, another circuit has applied the reasonable particularity standard to determine whether an act of production is sufficiently testimonial to implicate the Fifth Amendment. See In re Grand Jury Subpoena Dated April 18, 2003, 383 F.3d 905, 910 (9th Cir. 2004). Because that standard conceptualizes the Supreme Court's focus in a useful way, so do we.

The Ponds court found that, under the facts, the prosecutors did not have the required particularity of knowledge as to some of the documents and, accordingly, that Ponds had a Fifth Amendment right to not produce the documents. As is sometimes the case where the subpoenaed party properly asserts a Fifth Amendment privilege, the prosecutors in Ponds obtained an immunity order and, as in Hubbell, the immunity order is ultimately what propelled the issue forward when the taxpayer claimed, in effect, that, because his Fifth Amendment privilege was implicated, the prosecutors used the “testimony” thus compelled in a way not permitted by the grant of immunity.

Now, back to Shadley, the question as to an, if not the, appropriate standard -- the reasonable particularity standard -- appears close to the standard for search warrants. Thus, if you framed the question as to whether the Government had sufficient evidence to seek and sustain a search warrant for the deposit slips, then there would be no Fifth Amendment privilege. It seems to me that the combination of the Norwood analysis and Ponds suggests that Shadley was improperly decided.

Nevertheless, Shadley does suggest in this genre of context that it is not a foregone conclusion that a district court will enforce the summons so a taxpayer with documents too risky to disclose voluntarily would be well advised to assert the act of production doctrine and put the IRS to its proof in an enforcement proceeding.  There should be no downside to doing so, and the taxpayer may prevail.

The Limits of Literal Truth as Defense to Perjury (or Even 18 USC 1001)

Bronston v. United States, 409 U.S. 352 (1973) is frequently cited for the proposition that literal truth is a defense to a charge of perjury. Actually, Bronston involved an unresponsive literal truth to a question not asked with the answer intended to mislead (or at least avoid the question that was not asked). Usually, the battle ground is not the unresponsive answer where the defendant raises Bronston as a defense to perjury but the responsive answer that the defendant argues is literally true. Consider this example based on United States v. Thomas, 612 F.3d 1107 (9th Cir. 2010) involving a charge of perjury from a Q&A in a grand jury room.

Q. Did the drug dealer give you the drugs?

A. No.

Read more »

Certificate of Innocence and Damages for Wrongful Incarceration

A wrongfully convicted defendant may sue for damages arising from the incarceration under certain very narrow conditions specified in 28 U.S.C. §§ 2513 and 1495. I had never really focused on the provisions before, because they would seem rarely to apply in criminal tax cases, where the standards for bringing a case are generally very rigorous and the sustained conviction rate is very high. (I will perhaps do a later blog on those statistics, but suffice it to say here that they are high, even if possibly misleading.) Notwithstanding, though, this could be a useful in tax case, and indeed in the case I discuss here a tax charge was among the original charges that all of which were ultimately found insufficient (most were so found in the criminal trial and the remainer on appeal).

In United States v. Graham, 608 F.3d 164 (4th Cir. 2010), the Court summarized the scope of this relief, so I thought I would just cut and paste the general discussion of the provisions for the readers' consideration. Please note that I substantially edited this cut and paste for readability by omitting case citations and many of the quotations marks where it is clear that the Court adopted the quoted language as its own.

Thus, the plain language of § 2513 requires that one seeking a certificate of innocence (who has not been pardoned) prove three predicates. He must prove that (1) “the record . . . of the court setting aside or reversing” his conviction demonstrates that it did so “on the ground that he is not guilty of the offense of which he was convicted,” § 2513(a)(1); (2) he “did not commit any of the acts charged” or those acts “constituted no crime against the United States, or any State, Territory or the District of Columbia,” § 2513(a)(2); and (3) “he did not by misconduct or neglect cause or bring about his own prosecution,” id.

After setting forth these three requirements, § 2513 specifically characterizes them as “requisite facts.” § 2513 (b). Then, the statute expressly sets forth the only way (again absent pardon) that a person can demonstrate these “requisite facts” in the Court of Federal Claims – by a certificate from the court in which “such facts are alleged to appear.” Id. This intricate statutory scheme renders several conclusions inescapable.

First, Congress clearly did not provide in the unjust conviction and imprisonment act an avenue for monetary compensation to all whose criminal convictions are reversed after incarceration. Rather, the phrasing of the Act and its legislative history proclaim the care with which its framers guarded against opening wide the door through which the treasury may be assailed by persons erroneously convicted. Congress enacted this statute to provide only “certain innocent persons” the ability “to present a claim for financial indemnity” upon “showing their innocence.” Section 2513 compensates only the truly innocent. n2

n2 The legislative history of § 2513 clearly demonstrates a congressional desire to limit the class of persons entitled to relief under the statute. In commenting on the proposed legislation, Attorney General Homer Cummings noted that “[i]deal justice would seem to require that in the rare and unusual instances in which a person who has served the whole or part of a term of imprisonment, is later found to be entirely innocent,” he should “receive some redress.” The Attorney General went on to distinguish the “entirely innocent,” who would merit a certificate of innocence, from those who would not – the “more frequent[ ]” cases in which reversal was based “on the ground of insufficiency of proof or on the question as to whether the facts charged and proven constituted an offense under some statute.” Id. He concluded that any proposed legislation should “necessar[ily] . . . separate from the group of persons whose convictions have been reversed, those few who are in fact innocent of any offense whatever.”

Second, and just as clear as its intent to permit only the “truly innocent” to receive a § 2513 certificate, Congress expressly directed that one seeking the certificate bear the burden of not only “alleg[ing]” but also “prov[ing]” entitlement to the certificate. 28 U.S.C. § 2513(a). Moreover, because it constitutes a waiver of sovereign immunity, the unjust conviction statute has always been strictly construed. Thus, § 2513 imposes a rigorous burden on those who seek a certificate of innocence.

Third, as every court to consider the question has held, the decision to deny a certificate of innocence is committed to the sound discretion of the district court. Accordingly, we review a district court's denial of a certificate of innocence for abuse of discretion, and must affirm that decision unless the court abused its discretion, or unless the findings underlying its decision were clearly erroneous. When a district judge has exercised his substantial discretion to deny a certificate of innocence, we cannot require him to stultify himself by certifying an opinion contrary to his real conviction – no matter what our own view might be – except, perhaps, in a case in which the refusal to certify innocence was completely capricious and without rational basis.

Update on Swiss Turnover of Documents Pursuant to Treaty Request

I reported earlier today that the Swiss Administrative Court has approved the treaty request, thus opening the door to turnover of the 4,450 U.S. taxpayer UBS records. 

A Tax Notes Today article on 7/23/10, provides some additional information on the turnover status.  David D. Stewart, Swiss Court Blocks Transfer of Two UBS Files Pending Review, 2010 TNT 141-9 (7/23/10).  The author notes that two U.S. taxpayers have gotten a reprieve to the turnover pending further hearing. It is unclear whether this is just a slight temporal victory for those two taxpayers.

The author further notes:

So far, details about 2,500 of the estimated 4,450 UBS accounts of U.S. taxpayers have been transmitted to the IRS, according to a July 19 report in Neue Zurcher Zeitung. Nine hundred files are still being considered, and 850 have been completed but are still within the period during which an appeal can be considered. Ninety-six appeals have been filed, according to the report, and of those, 80 are similar to a separate appeal that was dismissed. * * * *

The agreement requires the FTA to complete the processing of UBS client files by August 26.

Swiss Court Rejects Last Hopes of U.S. Depositors

In perhaps an anticlimax, on July 19, the Swiss Administrative Court formally torpedoed the hopes of anonymous U.S. depositors within the group of 4,450 that Switzerland agreed to disclose to the IRS. The Swiss summary of the holding is here and the official (in German) opinion is here.  The anonymous depositor, representative presumably of a larger group, had hoped that the Court would hold that the agreed upon turnover violated "European Convention on Human Rights, the Federal Constitution and [Swiss[ federal laws." The Court held that the later promulgated agreement and approval by the Swiss Parliament trumped all of those otherwise weighty authorities. I link here an English version of the Summary and here the German version of the opinion.

Those U.S. depositor now will have their documents and identities turned over and will fact possible criminal prosecution for the underlying conduct (because they did not join the voluntary disclosure program) and for bringing action in Switzerland to avoid the turnover. (See discussion of 18 U.S.C. Section 3506 here.) As to the latter, even if the Swiss do not identify the persons who brought these suits to avoid disclosure, DOJ / IRS could probably figure it out.

Finally, I avoid further fulminations over DOJ Tax's claim to have the authority to investigate tax crimes independently of a grand jury investigation, but some are present in this turnover.

Sentencing Judge Off the Sentencing Reservation

I am somewhat behind on this item out of the Second Circuit, United States v. Woltmann, 610 F.3d 37 (2d Cir. 2010), decided July 6. The case is bizarre because of the trial level sentencing. The Second Circuit reverses the sentence for one count of tax evasion which had been set at the low end of the Guidelines range as calculated in the plea agreement which also stated that the defendant would not appeal a sentence in that range. The problem was that, after the plea agreement was reached, the defendant gave substantial assistance to the Government and, as the plea agreement contemplated, the Government made the appropriate 5K.1 request by letter. The sentencing judge refused to give any effect to the 5K.1 request or other Section 3553(a) factors outside the plea agreement on the notion that the parties had agreed to everything in the plea agreement and the 5K.1 request was an improper attempt to change the plea agreement.

I think those interested in this topic should read the Second Circuit's opinion. Suffice it to say that the defendant's cooperation and the 5K.1 request often come after the plea agreement (otherwise the parameters of the 5K.1 factors would be set forth in the plea agreement )-- and thus adds an element for a more defendant-friendly sentence than would have been contemplated by the plea agreement. Furthermore, and in any event, the court has to determine the sentence not just on the factors enumerated in the plea agreement but based on all of the Section 3553(a) factors in context for the defendant before the court, whether or not they are part of the plea agreement. For the judge to behave in the way he did is just bizarre.

Despite the waiver of right to appeal, the Second Circuit reversed the sentence and remanded for new sentencing by a different judge not hampered by the bizarre sentencing notion articulated by the original sentencing judge. The Court summarized:

Applying these principles, we hold that vacatur is required because the district court: (1) improperly "relied" on the Agreement to the exclusion of the 5K1.1 letter and the § 3553(a) factors; and (2) misread the Agreement as manifesting Woltmann's enforceable concession that any sentence at or below 27 months obviated the need to consider the 5K1.1 letter and the § 3553(a) factors. In so doing, the district court failed to give effect to the parties' expectations and deprived Woltmann of the benefit that he (and the government) agreed he would receive from signing the Agreement (i.e., a weighing of the 5K1.1 letter and the § 3553 factors). At the same time, the court also "abdicated" its judicial responsibility in the way posited by Gomez-Perez, 215 F.3d at 319.

Surprisingly, the Second Circuit was not particularly polite in its expressions of disappointment with the original sentencing judge.  \

Even More on DOJ Authority to Investigate Tax Crimes

I have previously blogged this issue here to address DOJ Tax's claims that it has authority to investigate tax crimes. I had cited the Webster Report to the effect that the IRS was the only federal agency authorized to investigate tax crimes. I was reading a new TIGTA Report today titled The Criminal Investigation Division Can Take Steps to Ensure Its Seizure Opportunities Are Maximized, No. 2010-30-058 (6/18/10). The report also says (Background, p. 1):  "The CI Division is the only Federal agency that can investigate potential criminal violations of the Internal Revenue Code."

Well, I thought, perhaps TIGTA is just not as smart or savvy as DOJ Tax and was just talking off the reservation (as was, presumably Judge Webster in the Webster report). So, I just did the trusty Google search and I find that the following sources, among many others, also repeat this notion, perhaps rotely (maybe cloning it from Judge Webster or whoever he cloned it from).

IRS CI

Treasury

Wikipedia

Facebook

You know, I guess if it is said often enough by somewhat credible sources (I am not among them, but can repeat what I read on the internet), someone may begin to believe this stuff.

Wesley Snipes Conviction and Sentence Affirmed

As the world (including likely readers of this blog) know, Wesley Snipes was convicted of 3 counts (years) of failure to file (while being acquitted of more serious offenses). The district court gave him a sentence of 3 years, which is the maximum because the counts of conviction were misdemeanors having a maximum one year sentence and, by stacking them (serving consecutively), he could be sentenced to a maximum sentence of 3 years. Mr. Snipes did not appreciate that. He appealed. The Eleventh Circuit has affirmed here.

The whole case is worthy of reading. I make only a few points of matters that struck me on a quick read.

1. The Court has a good analysis of the importance of venue and why it is an essential element that the Government must prove at trial. One interesting point is that, although it is an essential element of the proof, it is not an element of the crime. Hence, the Government must prove venue only by a preponderance of the evidence.

2. Although all practicing in this area already knew this, use of offshore accounts (the current hot topic) can result in a sentencing enhancement under the Sentencing Guidelines for sophisticated means. (Unless to do so would "double count," although double counting is not addressed in the case.)

3. The Court rejected Snipes' claim that Section 2T1.1 of the Guidelines is invalid because it did not treat a misdemeanor crime (failure to file, of which Snipes was convicted) as a less serious offense than a felony. Those practicing in this know that the key to calculating the Base Offense Level for misdemeanors is the same table that is used for felonies. The benefit of misdemeanor convictions is that the maximum incarceration period will be capped substantially less than felony convictions. Thus, in Snipes' case, his failure to file misdemeanor convictions capped his sentence at 3 years, but had he been convicted of 3 felonies which in the tax arena, have 3 year and 5 year sentences per count of conviction, his maximum sentence (which he would have drawn for reasons noted below) would have been 9 years and 15 years, respectively. But, where the final Offense Level, driven principally by the tax loss, indicates a sentencing range equal to or less than the maximum on the misdemeanor counts of conviction, there is no difference in sentencing if the counts of conviction had been for felonies rather than misdemeanors. This seems odd to me, for in defining the crime and the maximum sentence, Congress seems to have said that a tax misdemeanor is only 1/3 or 1/5 as bad as a tax felony, and yet convictions for tax misdemeanors can in the circumstances noted draw the same sentence as convictions for tax felonies. Again, this is under the Guidelines, and because the Guidelines are no longer mandatory, a sentencing court can take that difference into consideration if it chooses to do so.

4. The sentencing court here did not take that difference into account, apparently. The sentencing court noted that "The district court noted that misdemeanants who, like Snipes, had willfully failed to file their personal income tax returns had engaged in similar behavior to the felons who had received similar sentences." Moreover, it relied upon the exemplary effect of a stiff sentence for Snipes. The court of appeals said:

The district court gave ample consideration to each of the relevant considerations found in 3553(a). Although the discussion about general deterrence was somewhat longer than the discussion of the other factors, its length corresponds with the emphasis the Sentencing Guidelines placed on deterrence in the criminal tax context. The introductory commentary to the Tax section of the Sentencing Guidelines explains that

[b]ecause of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines. Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators.

U.S.S.G. Ch. 2 Pt. T, intro. Comment (emphasis added).

5. So, what was the indicated Guidelines sentence? I haven't calculated it exactly, because the intended tax loss as calculated by the PSI was over $40,000,000 which with enhancements for sophisticated means and obstruction of justice would easily produce a Guidelines range well exceeding the maximum 3 year sentence for 3 misdemeanor counts. Hence, the Judge, with the considerations noted, handily imposed the maximum sentence, and the Court of Appeals sustained it without much ado.

Germany Continues Aggressive Moves Toward the Swiss Tax Cheat Enablers

German authorities are raiding German offices of Credit Suisse. As noted in one article (Reuters from 7/16/10):

Raids at Credit Suisse (CSGN.VX) Germany's private banking offices have been "a success" and will likely help identify bank staff in Switzerland as part of a clampdown on tax evasion, a spokesman for the German prosecutor's office said on Friday.

This article and related articles are linked below.

The Germans are looking for the enablers, just as the United States has done so. (See previous blogs on targeting enablers.) Other countries are interested as well and will undoubtedly follow-suit.  As I noted in an earlier blog today here, the United States is targeting the enablers.  Credit Suisse is surely on its radar screen by now.

Surely the Swiss must by getting a hint that the tax cheat business model, at least as the Swiss have pursued it, no longer works, regardless of how lucrative it has been in the past. Actually, the Swiss are so greedy that they are giving a bad name to tax cheating. They seem not to understand the advantage of evasion in moderation (whatever that is, but it sounds interesting and better than the Swiss have done it).

Reuters article (reference)

Swiss Lawyer Indicted for Offshore Account Activity

DOJ Tax has this press release, dated 7/15/10, announcing the indictment of a Swiss enabler: Swiss Lawyer Indicted for Helping to Hide Swiss Bank Accounts and Monies Returned to U.s. Clients. The defendant is Felix M. Mathis. The U.S. taxpayer involved is Dr. Silva. (See previous post on Dr. Silva here.)  The charges against Mathis are the defraud / Klein conspiracy and structuring the importation of currency.

Rumors that Downing May Leave DOJ Tax for More Gainful Employment

Kevin Downing who made such headlines in the KPMG tax shelter criminal case and in the offshore account initiative may be leaving DOJ Tax for more gainful employment. See this WSJ Article - Evan Perez, Prosecutor in UBS Case May Depart (6/24/10). 

Willfulness - Non Tax Contexts

I have written on the willfulness element for most federal tax crimes previously. Yesterday, I read on the White Collar Crime Prof blog here a discussion of a recent Second Circuit case, United States v. Kaiser, ___ F.3d ___ (2d Cir. 2010), discussing the willfulness requirement a securities crime. Willfulness of course means different things in different criminal statutes (see the excerpts from my Federal Tax Crimes book here). Perhaps I confuse more than I help for readers of this blog, but I will provide a few comments on Kaiser.

The fight on appeal was whether the securities crime with a willfulness element required that the Government prove that the defendant knew his conduct was illegal or just that the Government prove that the defendant knew the conduct was wrongful. A person generally knows when he tells a lie that it is wrongful (I set aside the philosophical debate as to whether a lie is always wrongful); what he or she may not know in the specific context is whether the law describes that wrongful conduct (the lie) as a crime. Bottom-line, the court held that the Government need only prove that the defendant know that the conduct -- the lie -- is wrongful. The court summarized its holding:

[W]e conclude that [the prior cases] do not require a showing that a defendant had awareness of the general unlawfulness of his conduct, but rather, that he had an awareness of the general wrongfulness of his conduct.

The opinion is more nuanced than that, so I refer you to it.

One of the interesting points in the decision is the discussion of a specific wrinkle in the securities law is Section 78ff(a) which says: "[N]o person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation." So pronounced the court, this does not mean that, in order to convict, the Government must prove knowledge of illegality; it just means that the convicted defendant cannot be imprisoned unless he knew of the illegality. The court talked about this as a "defense" to incarceration, but presumably in a criminal case, the Government must prove the key fact (knowledge of illegality) beyond a reasonable doubt.  I found this wrinkle odd, but securities law is not my area of practice.  But, as suggested by the excerpts from my book, this additional required element for imprisonment seems to be incorporated in the willfulness element for tax crimes.  (I do caution that there may be some continuing uncertainty about the level of knowledge of the illegality, such as does the defendant really have to know the specific law he is violating?)

The Second Circuit's decision also has a good, succinct discussion of Second Circuit law on the conscious avoidance instruction. (For my earlier blog comments on this instruction, see here.)

Leak From HSBC Suggests U.S. Taxpayers Continuing to Hide Offshore Assets Should Re-Think Their Model

The Wall Street Journal has an interesting article this morning on the leak of information from HSBC to at least some tax authorities. The article is titled "Mass Leak of Client Data Rattles Swiss Banking."

Those U.S. taxpayers who thought they had a beneficial risk / reward ratio in staying out of the IRS voluntary disclosure program need to re-consider their model. The community of persons having potential inside access to tax haven bank data have to know by now that others may be interested in this data and may even pay handsomely for it. Indeed, simply because the IRS (or DOJ Tax, depending upon who is conducting the investigation) might get swamped and unable to process the information for tax collections (and hence rewards), such persons would probably want to get in line early.

I had a saying when I first began posting on offshore accounts and the voluntary disclosure policy - "Get in Line Brother." Those with undisclosed offshore accounts might want to take -- or at least reconsider -- that advice.

More on HSBC Initiative and DOJ Tax Division Authority to Conduct Criminal Tax Investigations

The Wall Street Journal has an article today here with further discussion of the new HSBC initiative which I discussed earlier here. I just want to focus on one picky point in the article. The article quotes the DOJ Tax Division letter (signed by himself, Kevin Downing) as concluding with the following: "You are further advised, that you are the subject of a criminal investigation being conducted by the Tax Division."

As I discussed in a prior blog here, I question the authority of the Tax Division to conduct a criminal tax investigation. A grand jury can certainly conduct a criminal tax investigation, but I presume that, if Mr. Downing were acting as a designated attorney for the grand jury, he would have had to identify himself as doing so and stated that the investigation was a grand jury investigation. That is not what he says. So I guess he is acting, as he says, under some authority that he assumes the Tax Division has to conduct criminal tax investigations. If he is right, then I am wrong.

One other thing I do note with respect to these supposed DOJ Tax criminal tax investigations -- there seems to be a glitch in the secrecy safeguards around tax matters.  Criminal tax investigations conducted by the IRS are covered by Section 6103; criminal tax investigations conducted by the grand jury are covered by Rule 6(e); criminal tax investigations conducted by the Tax Division are not covered, meaning, I suppose, that information and documents gathered in such investigations may be disseminated as DOJ Tax and its attorneys see fit.  I don't think that is the right result if one considers the spirit of Section 6103 and Rule 6(e) in the context of criminal tax investigations.  Which may be a good reason to question DOJ Tax's claim of authority to conduct such investigations.

Excessive Fines -- Forfeiture and FBAR Penalties

On July 7, the Second Circuit rendered a significant forfeiture decision (United States v. Castello, 611 F.3d 116 (2d Cir. 2010)), that bears upon the previous discussion of whether the FBAR penalty (maximum of 50% of the highest amount in the account per year, but in practice only, at most, 50% of the highest amount in a single year). (See prior blog discussion here.) In Castello, the defendant ran a check-cashing business through which he cashed more than $600 million in checks over the period of the indictment. Castello failed to file the required CTRs for checks exceeding $10,000. See 31 U.S.C. § 5313(a) and 31 C.F.R. § 103.22(b).

Castello was indicted and tried for

conspiracy to launder money (18 U.S.C. § 1956(h)); failure to file CTRs (31 U.S.C. § 5313(a)); unlawfully structuring financial transactions (31 U.S.C. § 5324); conspiracy to impair, impede, obstruct, and defeat the Internal Revenue Service (18 U.S.C. § 371); tax evasion (26 U.S.C. § 7201); and obstruction of justice (18 U.S.C. § 1512).

He was convicted only of the failure to file CTRs.

The issue on this appeal was the amount of forfeiture, if any. The statute required that "The court in imposing sentence for any violation of section 5313 shall order the defendant to forfeit all property, real or personal, involved in the offense and any property traceable thereto." 31 U.S.C. § 5317(c)(1)(A). The Government sought to forfeit $9,341,051.81, consisting of (i) 4% of the amount of checks in excess of $10,000 for which no CTRs were filed, (ii) $;2,671,872.50 in his wife's account, and (iii) the equity in a family home. On this appeal, the parties did not dispute that the statute required the amount of forfeiture sought by the Government, so the Court moved to whether forfeiture in that amount violated the Excessive Fines Clause. In essence, on this second round appeal, the Second Circuit affirmed the full forfeiture.

The backdrop for consideration is United States v. Bajakajian, 524 U.S. 321 (1998), the essence of which the Second Circuit summarized:

Putting § 5317(c)(1)(A) and Bajakajian together: The proper amount of forfeiture following a § 5313(a) conviction is the total forfeitable amount required by the statute, discounted by whatever amount is necessary to render the total amount not "grossly disproportional" to the offense of conviction. Four factors, distilled from Bajakajian, guide our analysis:

[1] the essence of the crime of the defendant and its relation to other criminal activity, [2] whether the defendant fit[s] into the class of persons for whom the statute was principally designed, [3] the maximum sentence and fine that could have been imposed, and [4] the nature of the harm caused by the defendant's conduct.

(For the wikipedia summary of Bajakajian, see here.)  Applying these factors, after further discussing Bajakajian, the Court concluded that the forfeiture requested by the Government in Castello was constitutional.

I encourage readers of the blog to read the both the Bajakajian and Castello opinions and shall not try to further summarize either here. Suffice it to say that, if put on a spectrum, where Bajakajian is at one end (the end of light forfeiture tolerance under Excessive Fines Clause) and Castello (and some of the cases cited in Castello) at the other end, FBAR violations are clearly in between, although drifting toward the Bajakajian side. Bajakajian involved no illegal activity other than failure to file the report, so a light forfeiture was compelled. So too, in the current FBAR environment, where there is no other illegal activity (to wit, in this context, no unreported and untaxed income), then there is no penalty under the IRS voluntary disclosure program and even at best a light penalty under audit guidelines. So, where there is a failure to report and pay tax on the income, the FBAR violation is clearly not at the Bajakajian end of the spectrum. On the other hand, it is also not at the Castello end either, for Castello's failure to file CTRs effectively hid the likelihood of multiple illegal incidents of the type that the CTR requirements were designed to flush out.

As Castello suggests, fine tuning the location on the spectrum (including either end) requires detailed analysis of the facts and circumstances of a particular case. But, focusing on what the Government has done in the FBAR area, it appears that the maximum fine it is obtaining in the plea deals to date is 50% of the highest amount in a single year in a context of multi-year violations and failure to report income. I don't think Bajakajian or Castello on their face suggest that these fines violate the Excessive Fines Clause.

Addendum #1:

As I reflected on this further, perhaps a better way of comparing the FBAR situation to Castello at least in legal income situations (a la Bajakajian) is to look at the tax that the taxpayer failed to pay from the offshore accounts.  After all, at least in legal income situations, the only purpose of the FBAR filing requirement is to flush out the tax that might otherwise go untaxed.  So, perhaps, the amount of the tax should set the upper limit on the fine.  Thus, in the Zaltsberg case I discussed yesterday (see here), the "claimed" tax loss was $60,000 but the FBAR penalty is $1.3 million.  (See also my discussion of the claimed amount of the tax loss.)

There are other ways of looking at it as well.  I invite readers of this blog to weigh in on the issue.

Addendum #2:

The bare facts of Zaltsberg do, I think, create a potential Excessive Fines Issue (which, of course, Zaltsberg may have negotiated away in his plea agreement (assuming you can negotiate away such a constitutional issue)).  But, going beyond Zaltsberg, I was working with a related issue today in trying to help a U.S. taxpayer decide whether to get into the post 10/15 voluntary disclosure program.  I am going to use illustrative facts (not the exact facts I am dealing with but illustrative and every a fancy variation of the facts).  Assume that a U.S. taxpayer, Joe Shmoe has a foreign corporation conducting an active trade or business in a foreign country (FC).  The business is such that the margins are thin, but it is all about volume and careful cash flow management.  The cash flow management results in the foreign bank account having very high balances (but most of it is float between the receipt of revenue and the outflow for costs of conducting the business).  The voluntary disclosure program prior to 10/15 required a 20% in lieu of FBAR penalty and post 10/15 requires God know what (perhaps, say 35% to split the baby between 10/15 and the 50% penalty being demanded in the criminal cases to date, of which Zaltsberg is illustrative).  So, for purposes of analysis, some good lawyers might just say that Joe Schmoe might want to model the economic cost of disclosure by assuming a 35% in lieu of FBAR penalty.  But, Joe Schmoe says that 35% of the highest balance for the highest year actually exceeds his profits over all the years (assume also that he entered the business in 2003).  On this basis, Joe Schmoe is getting a worse result than did Castello and he really did not avoid payment of that much tax (let's say his 35% penalty is $1 million and his tax avoided is just $50,000, all on wholly legal income).  Is that fair?  Is it excessive in the Bajakajian sense?  Should the Government only apply the in lieu of FBAR penalty to the real equity in the foreign bank account, not the gross amounts?  I hope that the readers can scope out a lot of variations on this theme that raise the same issue in greater or lesser degrees.  But, the fear among practitioners is that the IRS has a one size fits all, with no thought of nuance even when Excessive Fines concerns are present.

Government Sends Message to Aged and Infirm Offshore Bank Account Owners

The Government squeezed a plea from one Leonid Zaltsberg, a UBS depositor. On some factors, he looked liked a prime target. He had a high balance of $2.6 million, and he used an offshore entity to hide his ownership. Both of these likely made him appear on the initial round of disclosures from UBS. Also, he was an immigrant to the U.S. (the immigrant community being statistically more likely to have foreign bank accounts). He was also an international sports figure, at least in his younger days, and a message may be needed there. But, other factors might make him an unlikely candidate for the full court press in a prototypical criminal tax case. He is 75 years old and reportedly "suffers from bladder and prostate cancer, as well as depression." Is this someone the Government really wants to put in jail? Probably not. The UBS defendants are not generally going to jail anyway, even those much younger and healthier. Presumably, the hapless Mr. Zaltsberg will not either, particularly with the problems that could make his stay at club fed pretty expensive to the Government. So what's the point?

I speculate that the Government wants other aged and otherwise infirm offshore bank holders to pony up to the continuing voluntary disclosure opportunity. Of course, the Government did squeeze its typical 50% highest amount FBAR penalty from the Mr. Zaltsberg, walking away with a nice $1.3 million on the FBAR penalty alone. The income tax, however, appears to be slim pickings, at least relatively, for his lawyer is quoted as saying the "tax loss" was "about $60,000." (More on the income tax loss below.) But, this "return" from civil penalty exaction will be paltry if the message sent to others similarly situated that they should get into the program. For those entering the program after 10/15/09 (when the 20% penalty regime was offered), the penalty is expected to rise but will, it is speculated, be less than 50%, so if the message works there should be a whole lot more coming in to the fisc.

I think the background for the message is that U.S. taxpayers with Mr. Zaltsberg's profile, particularly if they were not UBS depositors, might otherwise be sorely tempted just to ride this tsunami out. The risk / reward ratio where their age and health made them historically unlikely for criminal prosecution might be very attractive. But the Government's message is that that risk / reward ratio is not quite so attractive as one might otherwise speculate. (It is always about speculation anyway.) The offshore bank initiative cannot be measured by historical tax prosecution imperatives.

For more on this plea (if not my speculations about it), see:

US DOJ Press Release
USAO D-NY Press Release
Criminal Information
Bloomberg Business Week Article

I said I was going to say more about the tax loss. I have not a clue as to whether Mr. Zaltsberg's lawyer was right in asserting that the tax loss was only $60,000, nor for that matter do I know what his definition of tax loss is. It seems to me, however, that the potential tax loss might be much greater than that. If fraud were involved (and that has not been conclusively determined because Zaltsberg admitted only tax perjury and not evasion), then the statute of limitations would be open for all years -- going back to the 1990s when, presumably, he socked away the loot perhaps without paying tax on it. Of course, for those taxpayers getting into the voluntary disclosure program, the IRS does not look beyond 2003, but Zaltsberg was not in the voluntary disclosure program so it is at least theoretically possible that a lot more civil tax dollars, penalties and interest could be at stake. Moreover, I presume that the parties negotiated over the sentencing tax loss in the plea agreement, but that does not mean that the Probation Office cannot look at all relevant conduct in calculating the tax loss for sentencing guidelines purposes and, of course, relevant conduct tax loss can go beyond the criminal statute of limitations.

Lawyer Pleads Guilty to Two Misdemeanor Counts of Failure to Pay

Various sources report that so-called celebrity lawyer, Mickey Sherman, has pled to two misdemeanor counts of failing to pay $400,000 in tax. (See the Tax Prof Blog for 7/5/10 here (with further links).) The counts to which he pled are under Section 7203 which provides in material part (words omitted for readability):

Any person required under this title to pay any tax who willfully fails to pay such tax shall be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution.

There is but a thin line, if any, between Section 7203 (willful failure to pay) and Section 7201 (tax evasion, in this context called evasion of payment). Any practitioner or law student can recite the differing elements, but in a case such as Sherman's, they appear esoteric. (Maybe Sherman intended to just fail to pay but not to evade?) He apparently did file returns for those years (otherwise, presumably, the charge would have been failure to file), but the reports do not state whether he reported the income and just did not pay which might indeed justify a willful failure to pay plea.

Of course, getting a misdemeanor plea sure beats a felony plea, particularly because Sherman wants to continue to practice law without interruption by disbarment or temporary suspension. And, of course, copping a misdemeanor plea does often cap the sentence under the Sentencing Guidelines which are now advisory. In this particular case, however, I am not sure they produce a cap on the Guidelines Sentencing range. My quick and dirty calculation of the Guidelines range with $400,000 tax loss and acceptance of responsibility shows an indicated sentencing range of 18-24 months. (A tax loss just over $400,000 would have produced a sentencing range of 24-30 months.) Assuming the $400,000 tax loss is correct (and won't be increased during the PSR process), then the sentence under the Guidelines is not affected by whether the plea is to the two misdemeanor counts or to two felony counts or even one felony evasion count. That is to say that the Guidelines do not differentiate between misdemeanor and felony counts, except that, for example, two misdemeanor counts cap the sentence at 2 years whereas two felony counts of evasion would cap the sentence at 10 years (well above the Guidelines range). Thus, for example, if the tax loss had been $10,000,000, negotiating the plea of two misdemeanor counts rather than two evasion counts would achieve a real and major benefit under the Guidelines. But here, with a tax loss of $400,000, the indicated range is the same and within the maximum permitted by the counts of conviction whether the plea is to a misdemeanor or a felony.

Of course, the Guidelines are now just advisory. But, in any event, the maximum period of incarceration is still capped by the two misdemeanor counts of conviction. He is likely to get even less than the range. But it is hard to imagine that he will get probation.

As to why DOJ Tax accepted a misdemeanor rather than a felony plea, perhaps that is what the evidence demanded. On the other hand, perhaps DOJ Tax acted from compassion for this defendant to give him a shot at continuing to practice without interruption.

Another Instance of Government Misconduct in a Tax Case

In United States v. Struckman, ___ F.3d ___ (9th Cir. 2010), the Ninth Circuit, as did the District Court, found that the Government committed egregious misconduct in its zeal to prosecute and convict an abusive tax shelter promoter. The Ninth Circuit’s opening provides a succinct summary of the claimed abuse, saying that the Government charged and apparently proved (Struckman was convicted) the following:

From 1996 to 2002, Global Prosperity offered, for a fee and through middlemen called "Qualified Retailers," an audiotape/CD series and seminars. These products advocated the use of illegal means to avoid paying income tax, including "voluntary withdrawal" from the United States' jurisdiction and the placement of assets in purported foreign or common law trusts without relinquishing control of them. The indictment alleged that Struckman purchased bogus trusts and fraudulently established bank accounts to receive profit distributions from Global Prosperity's more than $ 40 million in gross receipts, and that Global Prosperity and Struckman never reported these distributions to the Internal Revenue Service ("IRS") as income.

The IRS began investigating Struckman for this conduct. In the investigation, the IRS came up with all sorts of information about Struckman, but the sources and means of some of the key information were irregular to say the least. When, in the pretrial skirmishing in the criminal case, the court permitted Struckman to inquire into key Government sources, those sources became highly suspect and, in explanation, the prosecutors and IRS investigators were evasive to say the least. The prosecutors thus were “economical with the truth.” (The quote is from the infamous KPMG tax shelter criminal case, U.S. v. Stein (on which I have written extensively in this blog), where the prosecutors made the mistake of being “economical with the truth.”) The district court thus excluded the evidence in question but declined to dismiss. Struckman, of course, preferred dismissal. But sometimes the exclusion of evidence will result in the Government dropping the case or, alternatively, being unable to prove its case at trial. In this case, neither occurred, and, to his chagrin, Struckman was convicted.
Read more »

U.S. Account Holders at HSBC Now Under Scrutiny

Tax Notes Today reports that some U.S. owners of HSBC accounts are receiving letters from DOJ Tax Criminal Section advising that they are targets of criminal investigations with respect to their offshore accounts. Jeremiah Coder, HSBC Clients Under Criminal Investigation, 2010 TNT 128-1 (7/6/10); for past Blog discussions on HSBC see here.) Excerpts from short article are:

The Justice Department has opened criminal investigations into U.S. taxpayers with suspected unreported offshore accounts in HSBC Holdings PLC, practitioners told Tax Analysts July 2.

The practitioners, who spoke on the condition of anonymity, said the DOJ has sent letters to several taxpayers referencing HSBC as a potential target and notifying the account holders that they could be referred for criminal charges.

The DOJ does not appear to have identified the taxpayers using data received from Switzerland, because several of the contacted taxpayers hold offshore accounts only outside Europe, one practitioner said. Investigators may be using data from India to home in on HSBC accounts, another practitioner said.

Addenda

Additional reports are indicate:

1.  As to the connection with India, some reports (see here) speculate that the Indian Government may have provided the information under information exchange treaty provisions.  The article quotes an unnamed official as saying:  ""In all probability, Indian authorities must have passed on the information to their US counterparts through various exchange of information mechanisms either through bilateral or multilateral agreements,"


Additional Web Resources:

Bloomberg 
Main Justice
New York Times (Reuters)