Tax Crimes and Money Laundering (Particularly Defense Attorney Fees) (9/24/11)

In United States v. Blair, ___ F.3d ___, 2011 U.S. App. LEXIS 19326 (4th Cir. 2011), here, the Fourth Circuit opens with a high level summary of the case:

Walter L. Blair, a Maryland attorney, concocted and executed a scheme to launder drug proceeds that he obtained from a client. Blair was tried and convicted on eight counts of concealment money laundering in violation of 18 U.S.C. § 1956(a)(1)(B)(i); one count of laundering in violation of 18 U.S.C. § 1957(a); one count of tampering with a witness in violation of 18 U.S.C. § 1512; one count of obstructing justice in violation of 18 U.S.C. § 1503(a); one count of making a false statement in violation of 18 U.S.C. § 1001(a)(2); and two counts of failing to file an income tax return in violation of 26 U.S.C. § 7203.1 He received a 97-month sentence. Blair appeals several counts of conviction for money laundering as well as his obstruction of justice conviction. Blair also challenges the ruling of the district court denying his motion to sever the failure-to-file counts. We affirm the convictions for money laundering under §§ 1956 and 1957, and we affirm the district court's denial of Blair's motion to sever. We reverse, however, Blair's conviction on the obstruction-of-justice charge (Count 11 of the superseding indictment) for insufficient evidence. We remand for resentencing in light of this opinion.

The facts were, in their essence (at the expense of detail and nuance): (1) a drug dealer left the proceeds of the drug dealing with a third party otherwise uninvolved in the drug dealing; (2) after much violence related to the drug dealer's associates and the drug dealer's disappearance, the third party contacted Blair, a lawyer and, at his request, delivered the proceeds to his office; (3) Blair then orchestrated the deployment of the proceeds, in part in ways to (a) launder a portion of the proceeds and in part to pay for the legal representation of two of the drug dealer's associates. Blair was charged with a panoply of money launder, tax and obstruction offenses. Blair was convicted on these charges and appealed.
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Prominent Lawyer Pleads to Mainstream Tax Crimes (8/5/11)

I have spent a disproportionate number of blogs on the foreign account / asset issue (principally the offshore voluntary disclosure initiatives). But mainstream criminal tax issues proceed apace. I do not normally pay much attention to general failures to file, tax or pay evasion, tax perjury, Klein defraud conspiracies, except in those cases where there is something unusual.

So, today, I bring something that is mainstream but unusual. A lawyer has pled guilty to two counts of failure to file income tax returns and two counts of failure to pay income tax. The USAO SDNY press release is here.  The maximum sentence when these 1 year counts are stacked is 4 years. (The Sentencing Guidelines range will sure indicate a fulsome sentence.) The lawyer is not just any lawyer -- he was a partner during most of the years that he failed to file tax returns with a very prominent law firm, Sullivan & Cromwell LLP (website here). He is John J. O'Brien, formerly a partner specializing in mergers and acquisitions at Sullivan & Cromwell LLP. 

The guts of the press release (cut and paste) is :
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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.

Odd Aiding and Assisting Case

In United States v. Davis, ___ F.3d ___ (5th Cir. 2010), Davis was a preparer who assisted taxpayers by preparing false returns. At Davis' recommendation, the taxpayer added near the signature and jurat the phrase "without prejudice." Davis and the taxpayer were indicted -- one count of conspiracy, 4 counts of tax perjury for the taxpayer, and 4 counts of aiding and assisting for Davis. After a bench trial, Davis was convicted on 3 counts of aiding and assisting.

On appeal, Davis argued that the addition of the without prejudice language negated the jurat, thus precluding him from being guilty of the aiding and assisting charge. Davis relied on certian civil tax cases that held that altering the jurat might in some cases negate it sufficiently that the taxpayer has not filed a return.

Section 7206(2) is the aiding and assistance statute, and says:

Any person who--

(2) Aid or assistance

Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document;

shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution.

So, as the court of appeals notes in a footnote at the conclusion of its discussion of Davis' argument, it does not matter whether the purported returns were or were not returns, for § 7206(2) covers other documents which are false as to any material matter. (See footnote 4.) Notwithstanding that Davis' argument was a nonsequitur that could have been (and I submit should have been) disposed of for that reason alone, the Court does address the merits of the argument as to whether the purported returns were returns.

After discussing the authority which, in civil cases, gives the IRS some leeway to speak from both sides of its mouth on the issue of whether a document is or is not a return because of alterations to the jurat, the Court concludes:

In cases such as this, where there is some ambiguity as to language's effect on the jurat, we agree with the Seventh Circuit that the IRS "should be entitled to construe alterations of the jurat against the taxpayer, at least when there is any doubt." Sloan, 53 F.3d at 800. "We refuse to require [the IRS] to engage in guessing games to determine what disclaimers like this one mean. To require such would drastically hinder the [IRS's] ability to process returns effectively and efficiently." Williams v. Comm'r., 114 T.C. 136, 142 (2000). Here, the IRS did not reject Oden's Forms 1040 based on the additional language. We therefore hold that the Forms 1040 were valid, though fraudulent, tax returns.

The problem, of course, in the case at hand was that the Government had determined that it was in the Government's interest to treat the purported returns as returns because it wanted to charge the taxpayer with tax perjury which, of course, requires returns. But, I wonder whether on these facts, a court might also sustain a failure to file, § 7203, charge against the taxpayer. In other words, does the ambiguity give the Government an election as to how to charge?

In this particular case, the Government would not have wanted to charge the taxpayer with failure to file because the really bad guy appears to have been the preparer and thus it needed an aiding and assisting charge to guard against Davis getting off with a full acquittal (assuming it was unable to sustain a conspiracy charge).

Save-A-Patriot Did Not Save a Doctor

Yesterday, the Fifth Circuit decided a case, United States v. Miller, ___ F.3d ___ (5th Cir. 2009) sustaining a medical doctor's conviction for tax evasion, § 7201. The issues decided are not novel, but should reinforce what the practitioner or student probably already knows. The key points are:

1. A misdemeanor failure to file case became a felony evasion case because, in addition to failure to file, there were significant affirmative attempts to evade. The Court of Appeals said in addressing the lower court’s denial of the motion for acquittal:

The evidence at trial sufficiently demonstrates Miller's evasion. It is undisputed that he failed to file tax returns for tax years 2000 and 2001, as charged in the indictment. Further, Miller acted affirmatively when he converted payments made to the clinic to cash, money orders, and cashier's checks. Witnesses testified that Miller's practice of converting payments made to the clinic made it difficult for the IRS to determine his income. These affirmative acts had the "likely effect of mislead[ing]" the IRS, and precluded the agency from effectively assessing his tax liability. Spies, 317 U.S. at 399; Robinson, 974 F.2d at 577. Moreover, Wolff testified that the Medical Manager software on Miller's clinic's computers included double sets of billing records. Viewing the evidence in the light most favorable to the verdict, the affirmative acts of keeping double records and conversion, coupled with the failure to file, support a finding of evasion.

2. The doctor joined a tax protestor / defier movement, called "Save-A-Patriot" to give his evasion some semblance of legitimacy, at least in giving his evasion the opportunity to assert the Cheek defense. He was the sole defense witness, testifying

that in 1995, after being audited by the IRS, he joined Save-A-Patriot. He also studied materials provided by Save-A-Patriot. Based on his study of the materials and of the Internal Revenue Code, he believed that the income tax system was voluntary and that he was not required to pay taxes, though he had filed tax returns in the past.

The jury did not believe him and convicted him. (There was a deliberate ignorance instruction, so that the jury could have convicted him on that basis rather than finding that he had an affirmative expressly formulated intention to violate a known legal duty.) The key part of the deliberate ignorance instruction (from the Fifth Circuit pattern instructions) was:

You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him. While knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless, or foolish, knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.

Note in this regard that the doctor's ex-wife who gave otherwise damaging testimony did testify that the doctor "decided not to file tax returns after joining Save-a-Patriot because he felt that filing was unnecessary and unconstitutional." Cheek does not permit the unconstitutional argument; indeed, by asserting nonliability based on unconstitutionality of the law, a defendant virtually admits that he knows the law and intentionally violated violate it. (There may perhaps be some logical lapses here, but I think they may be inherent in the Cheek case, Cheek v. United States, 498 U.S. 192 (1991) which is worth re-reading (with concurrence and dissent) from time to time.)

Further as to his knowledge of the duty to pay, the Court of Appeals said:

In addition, the evidence supports the jury's finding of willfulness under the Cheek standard. Miller testified that he withheld taxes after becoming a member of Save-A-Patriot and studying the tax laws in late 1995. Miller, however, permitted taxes to be withheld from his earnings prior to 1996, which demonstrates that he knew of the duty to pay appropriate income tax. Miller also did not consult with any tax professionals regarding his failure to file taxes for 2000 and 2001, though he had done so in the past. Based on this evidence, the jury could have reasonably determined that Miller knew he had a duty to pay taxes and knowingly violated that duty.

3. The doctor complained on appeal that evidence of a settlement negotiation had been improperly excluded. The court of appeals found that the excluded evidence (i) was not relevant, a threshold requirement in all events, and (ii) had minimum probative value that was offset by the potential to confuse the jury, citing FRE 403. Interestingly, the court of appeals noted in a footnote:

n9 The district court also ruled that the negotiations evidence was not admissible under FRE 408, which forbids the admission of offers of compromise or negotiations for compromise in certain civil cases, or its exceptions. FED.R.EVID.408. Though we have held that Rule 408 applies in criminal cases, see United States v. Hays, 872 F.2d 582, 588-89 (5th Cir. 1989), there is a split in authority in our sister circuits on this issue. See United States v. Bailey, 327 F.3d 1131, 1144-47 (10th Cir. 2003) (discussing circuit split). We decline to address the applicability of FRE 408 to this criminal case, however, because the evidence regarding settlement negotiations is excludable on the grounds of relevance.

The Bailey case is a worthy read for those encountering this issue.

4. The Court discusses the two marital privileges. I quote just the portion of the opinion that describes these privileges (citations omitted):

The marital privilege encompasses two distinct privileges. The first permits a married witness to refuse to testify adversely against his or her spouse. The witness may neither be compelled to testify nor foreclosed from testifying. The second bars one spouse from testifying as to the confidential marital communications between the spouses. The confidential communications privilege survives the marriage and may be asserted by either spouse with respect to communications that occurred during the marriage even after the marriage has terminated. The privilege applies only to communications; it does not apply to acts.

Under the facts, the parties were not married at the time, so the first privilege was not applicable. The second was applicable as to qualifying marital communications. However, as with many rules, there is an exception, and the exception in this case was for "conversations between husband and wife about crimes in which they are jointly participating." (Citation omitted.) The key testimony was his ex-wife's admission that her failure to file committed the crime of failure to file. Defendant's concern on appeal was that he was convicted of guilty by association to his ex-wife.

Obama's Tax Proposals Relating to Tax Crimes

I have briefly reviewed the so-called "Greenbook," which is the common name for a tome titled "General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals" dated May 2009. Based on my limited review, here are the items that are most relevant to the general topic of federal tax crimes (including civil penalties that often accompany tax crimes). I present here the proposals themselves without discussion of the current law or reasons for the change. Most practitioners reading this blog will already know the current law and can easily imagine reasons for the change. Perhaps in subsequent blogs where I address the proposals in more detail. In this blog, however, I just alert practitioners to the proposals.

1. FBAR and Related Foreign Account Provisions

This blog's readers certainly know by now what the FBAR is, but as a reminder it is the form due by June 30 of each year with respect to foreign financial accounts over which a U.S. taxpayer had certain powers during the preceding year (the year for which the report is made). (For the FBAR form, click here and for IRS FAQs on the FBAR, click here.) Suffice it to say significant numbers of U.S. taxpayers do not comply with the FBAR requirement or answer properly the related questions on Form 1040 Schedule B about foreign bank accounts. Taxpayers failing to file the FBAR also often -- indeed generally -- do not pay U.S. tax (income or estate and gift tax with respect to such accounts). The IRS has a major enforcement initiative with respect to foreign accounts and these obligations for FBARs and income tax return reporting. The Obama proposal is to require U.S. individual taxpayers to disclose on their 1040s information paralleling the disclosures on the FBAR.

As a backup to the foregoing obligations, the Obama proposal will require U.S. financial intermediary firms to report (i) transfers with a value of more than $10,000 to a foreign bank, brokerage, or other financial account on behalf of a U.S. person and (ii) receipts with a value of more than $10,000 from a from a foreign bank, brokerage, or other financial account on behalf of a U.S. person. A U.S. financial intermediary that opens a foreign account for a U.S. person will be required to report regarding the account and transfers to the account. Treasury would be given regulatory authority to promulgate rules and exemptions.

A negative presumption will apply in civil cases that a person having a foreign account had the amount required to have an FBAR obligation. A related negative presumption would treat the taxpayer's failure to report foreign accounts with over $200,000 as willful, thus attracting the more draconian FBAR penalties unless the taxpayer rebuts the negative presumption. A related provision extends the statute of limitations for failure to report until 6 years after the taxpayer reports the information required to be reported.

The accuracy related penalty for failure to report income for accounts required to be reported would be doubled from 20% to 40%.

2. Tax Restitution

Restitution is not permitted (absent the defendant's agreement or in exchange for a benefit given by the sentencing court) for Title 26 (Internal Revenue Code) offenses. Restitution is permitted for tax flavored crimes charged under Title 18 (e.g., defraud conspiracy). But, the IRS has no authority to assess the amounts in the restitution obligation and thus cannot use its substantial collection powers with respect to such amounts because restitution amounts have not been assessed as a tax. The proposal is (i) to give the IRS authority to assess immediately the amount of the restitution (without a notice of deficiency) and (ii) to deny the defendant taxpayer the right to collaterally attack liability for the restitution as tax in a civil tax proceeding.

3. Make repeated Failure to File a Tax Felony.

A U.S. taxpayer failing to file for 3 out of 5 years involving an aggregate tax liability of $50,000 or more could be charged as a felony rather than the normal misdemeanor attaching to failure to file. This enhanced felony status would be called an aggravated failure to file. The maximum incarceration period would be five years and the maximum fine would be $250,000 ($500,000 in the case of a corporation).

4. Investigative disclosures

The proposal will give IRS agents authority to identify themselves, their organizational affiliation, and the nature and subject of an investigation, when contacting third parties in connection with a civil or criminal tax investigation.