The Williams Offshore Account Saga Continues - You Win Some, You Lose Some

I have previously blogged on the saga of Joseph B. Williams who earned income offshore and played the offshore game (offshore financial accounts and entities). Presented chronological key events in his saga are:

1. Williams earlier pled guilty to a Klein conspiracy and one count of tax evasion for the years 1993 through 2000. The conviction related to income rolling through his foreign financial accounts.

2. In the income tax phase of this saga (involving the years 1993-2000), the Tax Court earlier held that he was collaterally estopped by his conviction by plea for tax evasion for those years, so that the statute of limitations was open and he was subject to the fraud penalty. Williams v. Commissioner, T.C. Memo. 2009-81. I previously blogged on this Collateral Estoppel after Tax Evasion Conviction (4/17/09).
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Judge Finds Ambassador's Tax Shelter Transactions Bullshit (Actually Worse Than That)

I have previously noted here that a Claims Court judge, in effect, held that a tax shelter transaction was bullshit. Another case does the same thing, although it does not exactly use the BS word. Judge F. Dennis Saylor, District Judge for Massachusetts, has handed down a whopping – both in length and effect on the taxpayers – opinion in Fidelity International Currency Advisor A Fund, LLC v. United States (4:05-cv-40151), a TEFRA proceeding involving Son-of-Boss tax shelters. The taxpayers involved (when the drill down on the partnerships is made) were Richard and Maureen Egan. Richard Egan was former Ambassador to Ireland. He and his wife made too much money. He and his wife did not like to pay tax. They entered phony transactions to shelter large gains.  They did not pay the tax. They tried to hide their activity from the IRS.  They were caught.  His estate and his wife will have to pay the tax, interest on the tax, apparently the accuracy related penalties, and interest on the accuracy related penalties. (I would think that, given the strength of the judge's view of the taxpayers' misbehavior, the Government / IRS might be sorely tempted to assert the civil fraud penalty when the action moves to the taxpayer level; note that if fraud was involved as the court held and the partnership is a sham, everything could drill down to the taxpayers' returns and the civil statute would be open indefinitely (see prior posts here and here); I haven't thought this through yet, so maybe someone will comment on it.)

The opinion is 357 pages long as issued by the court. The only copy of the opinion that I have is a whopping scanned pdf the original which is large, not easy to read and is not searchable. Hence, I offer up here an OCR'd version that I hope has been reasonably OCR'd (I have not tried to proof read it; note that when you click, the document will come up in google docs which I find difficult to work with; I recommend that you download the document (click on top of screen in Google Docs) and view it in regular pdf format which is both bookmarked and searchable.).

I won't try to summarize the opinion, because the Court does that for us as follows:

I. INTRODUCTION

A. Summary of Facts

Richard J. Egan was one of the founders of EMC Corporation, a large, publicly-traded manufacturer of computer storage devices. By the year 2000. Richard Egan and his wife Maureen had amassed enormous personal wealth, the great majority of which was in the form of EMC stock.

The Egans were highly sophisticated taxpayers; Richard Egan was one of the most successful businessmen in the history of the United States. His personal and family financial affairs, including the management of his wealth and the payment of his taxes, occupied an entire organization of twenty or so employees, which included his three sons, at least two certified public accountants, and a variety of other business and financial specialists. Richard and Maureen Egan expressly delegated power over their tax affairs to their son Michael, and explicitly and implicitly delegated authority for those matters throughout the family organization.

With the Egans' wealth and income came potentially large tax liabilities. As of 2000, the Egans beneficially owned approximately 25 million shares of EMC stock. At its peak in September 2000, EMC shares traded at more than $100 per share. Because the Egans' basis in those shares was extremely small -- approximately two cents per share -- the sale of any substantial portion of that stock would have produced huge capital gains, subject to a long-term capital gains tax at a rate of 20%.

In addition, the Egans owned non-qualified options to purchase more than 8 million shares of EMC stock at very low strike prices. The exercise of those options would generate large amounts of ordinary income, subject to taxes at a marginal rate that approached 40%.

In early 2000, Richard Egan and his son Michael became interested in investing in tax shelters to avoid taxes on the capital gains and ordinary income that was likely to result from the sale of EMC stock and the exercise of the options. With the assistance of an attorney from Chicago named Stephanie Denby, the Egans interviewed several tax shelter promoters in May 2000. They eventually selected the large international accounting firm KPMG. Through KPMG, the Egans were introduced to a small firm called Helios, which (with a related company called Diversified Group International, or DGI) had designed a highly complex tax shelter transaction that it was marketing to wealthy individuals.

The original tax shelter scheme involved the contribution of both paired offsetting options (in large notional amounts) and appreciated assets (such as EMC stock) to an entity taxed as a partnership. In simplified terms, the promoters claimed that the purchased option was an asset, but that the sold option was not a liability; the taxpayer thus supposedly contributed assets to the partnership entity, but not liabilities, creating a grossly inflated basis in his interest in the entity. The taxpayer's interest would then be sold, and the taxpayer would claim that the inflated basis (from the contribution of the options) "eliminated" any gain from the disposition of the stock or other assets. Variations of the scheme were designed to create artificial losses to offset ordinary income.

A significant feature of the scheme was the fact that four major law firms -- including Proskauer Rose and Brown & Wood, eventually Sidley Austin Brown & Wood -- had been recruited by the promoters to provide favorable opinion letters. The taxpayers were told in advance that they could choose one of the four firms for their favorable opinion. The opinion letters were in essence intended to serve as insurance against tax penalties should the IRS ever discover the transactions, and thus to induce investors to invest in the tax shelters.

By early August 2000, the Egans were on the brink of engaging in a transaction with KPMG and DGI/Helios that was designed to eliminate up to $200 million in capital gains by artificially inflating basis, and were considering a follow-up transaction designed to create up to $200 million in artificial losses to offset ordinary income.

In August 2000, the IRS issued Notice 2000-44. That notice directly attacked the types of tax shelter schemes that the Egans were about to enter into, and stated that the IRS would not recognize transactions of the type described in the Notice.

In the wake of Notice 2000-44, the promoters and their law firms concluded that it was too risky to proceed with the ordinary income portion of the scheme in its present form. The promoters and the Egans nonetheless pressed forward with the capital gains strategy, with a transaction designed to create $160 million in artificial basis. The strategy involved an orchestrated series of steps that were principally conducted through Fidelity High Tech Advisor A Fund, LLC. The essential steps of the transaction, other than the sale of the stock, were completed by early 2001. Unfortunately for the Egans, however, the price of EMC stock declined, to the point where they had created a purported "basis" of $160 million without sufficient offsetting assets to take advantage of it. The Egans accordingly decided to "stuff" additional low-basis stock into Fidelity High Tech in an effort to use the artificial basis they had created.

In the meantime, the Egans continued to speak with the promoters about a possible tax shelter strategy for ordinary income from the exercise of the options. By early 2001, the promoters had devised a new variation of the strategy that they called the "Financial Derivatives Investment Strategy," or FDIS. The FDIS strategy, among other things, generated paper "losses" for taxpayers by assigning any offsetting "gains" offshore -- to one of two Irish confederates of the tax promoters (neither of whom, of course, filed U.S. tax returns).

The Egans exercised their stock options at various points in 2001, resulting in a gain of $162.9 million. By early October 2001, the Egans had decided to use the FDIS strategy to shelter that income from taxes. Like the prior transaction, the strategy involved an orchestrated series of steps, this time through Fidelity International Currency Advisor A Fund, LLC. The various steps of the transaction were completed by the end of 2001.

The IRS, however, continued its efforts to crack down on tax shelters. In June 2002 -- before the Egans had filed their individual tax return for the year 2001 -- the IRS adopted a temporary regulation that required the filing of a disclosure statement if a taxpayer had participated in certain tax shelter transactions. KPMG, which was preparing the Egans' return, concluded that such a disclosure statement was required with the Egans' return. Rather than make the disclosure, however, the Egans fired KPMG and hired an accountant at another law firm -- who was also a confederate of the promoters -- to sign their return.

Around the same time, and as promised by the promoters, the Egans received opinion letters from Proskauer Rose (as to the Fidelity High Tech transaction) and Sidley Austin (as to the Fidelity International transaction) purporting to opine that it was "more likely than not" that the proposed tax treatment would be upheld. The Egans also received a separate letter from Proskauer Rose opining that the disclosure insisted upon by KPMG was not required.

The Fidelity International transaction resulted in the creation of artificial "losses" of $158.6 million in 2001, which the Egans used to offset the ordinary income of $162.9 million from the option exercise on their 2001 income tax return that year. The disclosure statement that was prepared by KPMG, and never filed, stated that "expected reduction in federal income tax liability" from the Fidelity International transaction was $65.5 million. The Egans also claimed a loss of $1.7 million from Fidelity International on their 2002 tax return.

The Egans sold all of the stock in Fidelity High Tech in 2002, for $76.2 million in proceeds. The real basis for that stock was $8.7 million; the inflated claimed basis was more than $163 million. Instead of reporting a capital gain of $67.4 million from the sale of that stock for 2002, the Egans reported a huge loss.

The IRS eventually learned of the scheme, and disallowed the treatment of the transaction on the various partnership returns on multiple grounds.

B. Summary of Legal Conclusions

In substance, plaintiffs Fidelity High Tech and Fidelity International seek to overturn the various adjustments made by the IRS to items on the partnership tax returns. The principal argument advanced by the government in response is premised on the economic substance doctrine, sometimes referred to as the sham transaction doctrine.

A fundamental principle of tax law is that transactions without economic substance, or sham transactions, will not be recognized. The precise contours of the economic substance doctrine have not been set, and vary from circuit to circuit. Nonetheless, it is clear that courts are required to consider the substance of a transaction, rather than its mere form, in considering the tax effect to be given to it. In making that determination, courts normally are required to consider two aspects of a transaction: the subjective purpose of the taxpayer (that is, whether the taxpayer actually had a non-tax business purpose for entering into the transaction) and the objective purpose of the transaction (that is, whether the transaction, objectively viewed, had a reasonable possibility of profit or other business benefit).

Here, the Egans claim that the principal purpose of the transactions, viewed objectively, was to serve as a hedge: to mitigate the risk of a decline in the price of EMC stock (in the case of the Fidelity High Tech transaction) or to mitigate the risk of fluctuating interest rates or foreign currency values (in the case of the Fidelity International transaction). From an objective standpoint, however, the transactions were entirely irrational; they were unnecessarily and extravagantly expensive, and did not hedge the purported risks effectively (or at all). The Egans also appear to claim that the transactions were entered into for profit. If so, they were also irrational for that purpose; the transactions were designed and intended to lose money, and in fact did so.

The objective features of the transactions were irrational because, of course, the Egans subjectively had no actual business purpose for entering into them. None of the participants in these complex transactions believed that they were real business transactions, with any purpose other than tax avoidance. Indeed, it is highly doubtful that any participant believed, even for a minute, that the transactions would withstand legal scrutiny if discovered. No one with the slightest understanding of the tax laws could reasonably believe that $160 million in basis could be created cut of thin air, or that $160 million in income could be made to vanish in a puff of smoke. In accordance with that belief, the Egans and their advisors went to great lengths to try to ensure that the IRS would never find out about the transactions -- including, among other things, the filing of partnership and individual tax returns with multiple false and misleading entries.

The Egans contend that their subjective intentions are irrelevant. In substance, they contend that as long as the transactions were not fictitious -- that is, as long as the entities existed, the money was transferred, and the options were purchased and sold -- the economic substance doctrine does not apply. But the transactions at issue were "real" only in the sense that a performance by actors on stage is "real." The actors are real human beings, and the stage sets are made of real wood and real paint. But the actors are reading from a script. No one watching "Macbeth" believes that they are witnessing the murder of a Scottish king, and the actors do not believe it either. Here, too, the participants were simply following a script -- a script that had little or no connection to any underlying business or economic reality.

The Egans also make a number of technical arguments, all of which assume that the transactions were real and should be respected. The linchpin of the scheme from a technical standpoint was a potential anomaly in the tax code: under a line of cases interpreting Section 752, a purchased option is an asset, but a sold option is only a contingent liability. The Egans thus take the position that a taxpayer can purchase offsetting options and contribute them to a partnership entity, and thereby contribute an asset but not a liability. From there, it is but a few steps to use the "asset" to inflate the basis of the partner's interest in the entity. If the tax system depended entirely on form over substance, the argument might well pass muster.

But tax liabilities are not so easy to dodge. It would be absurd to consider offsetting options -- purchased and sold at the same time, and with the same counterparties -- as separate items, and to act as if the one item existed and the other did not. That is particularly true where (as here) the individual option positions were gigantic, and might bankrupt the taxpayer or the options dealer if no offset were in place.

The Egans also point to the longstanding principle that it is perfectly legitimate to arrange one's affairs so as to pay as low a tax bill as possible. That assertion is true, as far as it goes. It is entirely appropriate, for example, for a taxpayer to decide to buy a house rather than to rent, in order to take advantage of the many tax advantages of home ownership. A taxpayer may buy a house with a mortgage in order to take advantage of the deductibility of mortgage interest. But a taxpayer cannot undertake phony or meaningless transactions and claim a tax advantage; he cannot, for example, lend money to himself, pay "interest" on the loan, and claim the interest deduction. If the tax laws permitted such a result, they would be nonsensical, and anyone who paid taxes would be a fool. The tax laws are neither so simple nor so easily evaded.

Finally, the Egans claim that they relied in good faith on formal legal opinions issued by Proskauer Rose and Sidley Austin, two highly prominent law firms. It is true that both firms issued opinions to the Egans. And it is true that both firms opined that it was more likely than not that their tax treatment of the transactions would be upheld.

But those opinions, too, were just additional acts of stagecraft. The lawyers were not in the slightest rendering independent advice; the promoters of the tax shelters had arranged favorable opinions from those firms well in advance, and as part of their marketing strategy. Indeed, the promoters (not the Egans) paid the law firms' fees. More fundamentally, the opinions were themselves fraudulent: they were premised on purported "facts" that the Egans and the law firms knew were false, and reached conclusions that everyone involved knew could not possibly be correct. The opinions had but one purpose: to serve as a form of insurance against the imposition of penalties if the transactions were ever to come to light.

The claim of good faith reliance on counsel is thus wholly without merit. The Egans knew that the opinion letters were simply part of the tax shelter scheme, and did not for a moment believe that they were receiving independent legal advice after a full disclosure of all underlying facts.

In short, the Fidelity High Tech and Fidelity International transactions were complete shams, without any economic substance of any kind. For that reason, and for the other reasons set forth below, the transactions should not be recognized, and the adjustments made by the IRS will be upheld.

Civil Tax Statute of Limitations for Fraudulent Tax Shelters

I address in this blog the civil statute of limitations for tax shelters. I start with the basics:

1. General. The general statute of limitations is 3 years. § 6501(a).

2. 25% Omission. In the case of a 25% omission of income, the statute of limitations is 6 years. § 6501(e). Many of the shelters exploited basis overstatements which, the cases have held, do not invoke this section, but the IRS may have put the quietus on those holdings by Regulation. See T.D. 9466, 2009-43 I.R.B. 551.

3. False Return. "In the case of a false or fraudulent return with the intent to evade tax," the statute of limitations is unlimited. § 6501(c)(1).

4. Willful Attempt to Evade Tax. "In case of a willful attempt in any manner to defeat or evade tax," the statute is unlimited. § 6105(c)(2).

I focus here on the third and fourth exceptions – principally the third – because the IRS imagines many of these abusive shelters -- the poster child being Son-of-Boss in its various iterations -- as fraudulent and somebody in the mix among the enablers and taxpayers had fraudulent intent to evade tax and thus necessarily willfully attempted to evade or defeat tax.

In Allen v. Commissioner, 128 T.C. 37 (2007), the Tax Court held that a tax return preparer's fraud would invoke the unlimited period of limitations in § 6501(c)(1) even if the taxpayer had no fraudulent intent. The court applied what it called a plain meaning interpretation of the statutory language quoted above.

The question in the case of fraudulent tax shelters is whether the taxpayer's standard defense that other professionals were involved so that he or she lacked fraudulent intent will avoid the application of the unlimited statute of limitations. Of course, the Government imagines that the taxpayers (or at least most of them who were not comatose) intended to defraud the Government of tax, but has not chosen so far to indict the taxpayers. I hear that the Government simply missed or did not timely pursue many of the abusive tax shelters within the applicable period -- 3 years or 6 years, as appropriate. Can the Government now pursue these shelters under an unlimited civil statute of limitations inspired by the Allen decision? Although certainly not authoritative, the Tax Notes publication of Allen was under the caption "Limitations Period Extended Regardless of Who Commits Fraud." I think a more technical analysis would get there also under Allen.

Let's look at Allen more closely. The Court applied a "plain meaning analysis" (pp. 39-40):

Nothing in the plain meaning of the statute suggests the limitations period is extended only in the case of the taxpayer's fraud. The statute keys the extension to the fraudulent nature of the return, not to the identity of the perpetrator of the fraud. Nor do we read the words "of the taxpayer" into the statute to require the taxpayer to have the intent to evade his or her own tax.
Respondent argues, and we agree, that statutes of limitations are strictly construed in favor of the Government. Badaracco v. Commissioner, 464 U.S. 386, 391, 104 S. Ct. 756, 78 L. Ed. 2d 549 (1984); Lucia v. United States, 474 F.2d 565, 570 (5th Cir. 1973). An extended limitations period is warranted in the case of a false or fraudulent return because of the special disadvantage to the Commissioner in investigating these types of returns. Badaracco v. Commissioner, supra at 398. Three years may not be sufficient for the Commissioner to investigate or prove fraudulent intent. Id. at 399.

We agree with respondent that the special disadvantage to the Commissioner in investigating fraudulent returns is present if the income tax return preparer committed the fraud that caused the taxes on the returns to be understated. Accordingly, taking into account our obligation to construe statutes of limitations strictly in favor of the Government, we conclude that the limitations period for assessing petitioner's taxes is extended if the taxes were understated due to fraud of the preparer.

* * * *

We conclude that the limitations period for assessment is extended under section 6501(c)(1) if the return is fraudulent, even though it was the preparer rather than petitioner who had the intent to evade tax. The plain meaning of the statute indicates that it is the fraudulent nature of the return that extends the limitations period. We therefore find that the limitations period for assessing tax against petitioner is extended indefinitely.

Allen thus clearly stands for the proposition that a preparer's fraudulent intent suffices for the unlimited statute of limitations § 6501(c)(1). And, under the definition of return preparer in the Code and Regulations, a person other than the signing preparer who materially participates in the reporting of a fraudulent item could be a preparer within the scope of the holding. Finally, since all that is needed under the Allen analysis and, seemingly, the statute, is a "a false or fraudulent return with the intent to evade tax," then at least arguably the fraudulent intent of anyone involved materially in the reporting on the return, including the shelter promoters might be sufficient.

Professor Bryan Camp has criticized the Allen holding in two articles. Bryan T. Camp, Presumptions and Tax Return Preparer Fraud, 120 Tax Notes 167 (2008); and Bryan T. Camp, Tax Return Preparer Fraud and the Assessment Limitation Period, 116 Tax Notes 687 (Aug. 20, 2007). Professor Camp argues in his articles that the Tax Court mis-interpreted the plain language of the statute and that, in addition, the history of statute shows it is supposed to reach only bad-acting taxpayers. Professor Camp's analysis would thus not sweep in the fraudulent intent of enablers, whether they fit the technical definition of preparers or not.

So, we have two plain language advocates reaching opposite conclusions; which may suggest that the plain language is not so plain and that therefore resort to something other than plain language is critical and, as Professor Camp notes in his articles, a persuasive case can be made from the sources other than the statutory text that it is the fraudulent conduct of the taxpayer that must control both the unlimited statute of limitations and the civil fraud penalty. Nevertheless, we have Allen as the only direct authority, and it stands for the proposition that the conduct of others than the taxpayers may trigger the unlimited statute of limitations (albeit not the civil fraud penalty).

Professor Camp urges if Allen were correct (which he vigorously disputes) on the bare words of the statute, the IRS should exercise its enormous discretion to "walk away from these new powers that it has been granted [by the Allen case] and focus on the tools that Congress gave it to combat the problem of tax return preparer fraud." Professor Camp is presuming that the wholly innocent taxpayer (and not the bad-acting enablers) is being punished by the unlimited statute of limitations.

In the case of abusive tax shelters, however, the Government's imagination is that the taxpayers may not be wholly innocent. Tax benefits were created from thin air in an environment (often the reports are that the taxpayer or the taxpayer's advisors and even some of the enablers said early on that the shelter was "too good to be true" or some variation of that notion). Hence, if Professor Camp is wrong on the law and the IRS does actually have the tremendous discretion in the application of this interpretation, the IRS may desire to exercise the power in some cases and not in other cases. Are abusive tax shelters a case in which the IRS should or will exercise its powers?

If the Government tries, taxpayers will surely assert vigorously, as has Professor Camp, that Allen is wrongly decided, both as a matter of statutory interpretation and of policy. I think there is a reasonable chance that the Camp interpretation will prevail. I just think that Congress intended the panoply of provisions addressing return preparer and enabler abuses to cover the ground (and prosecutors have plenty of weapons against bad-acting tax shelter enablers) and did not intend to punish innocent taxpayers (which for this purpose includes perhaps not so innocent taxpayers whose intentions were not fraudulent) with an unlimited statute of limitations.

But, if Allen does prevail, the question then, of course, is that the Government can prove by clear and convincing evidence of fraud as to one or more enablers in the tax shelter chain with reasonable nexus to the return reporting position. Even if the Government could not or could but did not prosecute the taxpayers, it could still sweep those taxpayers into an unlimited civil statute of limitations, and put a lot of enablers’ actions in the line of fire. Of course, those innocent and not-so-innocent taxpayers might be able to push all or some of the cost to the bad-acting enablers through malpractice or related fraud claims.

Finally, in such a proceeding involving the unlimited statute of limitations, any of the enablers' convictions will not give rise to res judicata or collateral estoppel because the taxpayers are not in privity with them. But obviously, their convictions will be bad facts and may go a long way to meeting the Government's burden to prove fraud by clear and convincing evidence.

Get in Line Brother #18c - McCarthy, the Financial Side and Bits and Pieces

This will be my last planned foray into the McCarthy indictment.

The Financial Side

1. Civil Taxes, Penalties and Interest. McCarthy agrees to pay the tax, interest and civil fraud penalty on the tax on "the net income on all funds held in foreign bank accounts" for calendar years 2003-2007. He had not yet filed his 2008 tax return, so presumably he will report that correctly and not be subject to any penalty. The amount of tax and thus resulting interest and fraud penalty is not stated, so this promise to pay apparently does permit him to contest the amount of tax on which interest and civil fraud penalty will be based. Note that this agreement assumes other foreign accounts used for tax evasion; by contrast, his sentencing factors are designed to consider only the UBS account disclosed by UBS. He further agrees to cooperate in making the appropriate calculations. The settlement is basically the same as the current voluntary disclosure initiative, except particpants in the initiative pay a 20% accuracy related penalty rather than the 75% fraud penalty.

2. FBAR Penalty. McCarthy agrees to a single FBAR penalty of 50% in the one identified UBS account for the highest amount year during the period from 2003-2008. Why are the other accounts left out of this penalty? He did after all admit willfulness in failing to file them. Note, however, that this settlement is consistent with the current voluntary disclosure initiative, except that the penalty for that single year is 50% rather than 20% as is offered in the voluntary initiative, but the 20% applies to all foreign accounts whereas McCarthy's deal is 50% of a single account. Real comparisons to the financial cost of the current iniative therefore cannot be made because the plea documents do not provide the necessary information.

Bits and Pieces

1. Grand jury matters. The defendant agrees to "give up any and all objections that could be asserted" to the IRS about the IRS recieving "materials or information obtained during the criminal investigation of this matter, include materials and information obtained through the grand jury process." I have blogged facets this issue here. So, I summarily note here, that the agreement is a recognition that these materials were not obtained in an IRS investigation because the IRS can share with other IRS components the fruits of its investigation without any such waiver from the defendant (or taxpayer). This agreement is really an attempt by the Government to end run FRCrP Rule 6(e) which imposes grand jury secrecy. The agreement seems to treat Rule 6(e) as a right that the person to whom the materials relate can waive. My understanding is that the rationale of Rule 6(e) sweeps broader than that and goes to the heart of the grand jury system to keep such matters secret until released in a proper way. The proper way grand jury material gets released is in the courtroom, a public forum, pursuant to a proper proceeding or by a Rule 6(e) order. Because of the plea agreement, there is no public proceeding in which all of these documents will be introduced and thus available to the IRS. (I suppose the IRS could force them into the public record in a sentencing hearing proceeding about the tax loss number and, perhaps, about the proper Section Two Part S calculations.) And, a Rule 6(e) order for the release to the IRS for civil tax purposes is expressly prohibited by Supreme Court authority. (I guess the IRS might be able to thread that needle by having the defendant agree to contractual restitution for these amounts and seeing if the court would have some type of public proceeding to permit it to dump the documents into the public record, but that would be too blatant an end-run around Rule 6(e).) I have had this genre of battle with an AUSA before who requested a similar waiver. I told him that my client would give it, but I did not think a waiver really solved his 6(e) problem. I think he agreed with my analysis because he then backed off the request and found another way to get around 6(e) -- by delivering all the documents back to the defendant whereupon the IRS had access to them through its usual processes. The solution may not be available in the McCarthy case because the documents are probably not the defendant's documents. The IRS would have to release them to UBS and whether or not UBS would then have an incentive -- either by compulsory process or otherwise -- to give them over to the IRS civil division is unknown. However, the agreement could have required McCarthy to request these documents from UBS and then turn them over to the IRS. The point I am making at too much length is that the Government simply solved the problem in the wrong way.

2. Restitution? The plea states that "Defendant understands that the Court may order defendant to pay any additional taxes, interest and penalties that defendant owes to the United States and may order defendant to pay any additional fines that defendant owes to the United States." Plea ¶ 5. The plea cites no authority for the taxes, penalties and interest reimbursement, and I am aware of no authority for it unless the defendant agrees to contractual restitution which would, then, permit court enforcement of the contract. In this regard, independent of contractual restitution, restitution is permitted only for the crime of conviction (tax crimes is not one, but the crime of conviction is not a tax crime). The crime of conviction is the failure to file an information report, and there is no dollar harm to the United States from failure to file an information report. Of course, the IRS does have the full array of tax determination, assessment and collection tools for any tax, interest and penalties.