Superseding Indictment for Dr. Ahuja Adding Conspiracy Count (9/28/11)

Jeff Neiman posted a blog this morning in the superseding indictment for Dr. Ahuja. See Jeff Neiman, Superseding Indictment: HSBC India Customer Charged (9/28/11), here. Jeff's Blog entry has a good discussion and link to the superseding indictment, so I recommend it and will not repeat it here, other than to note that the allegations which flesh out any conspiracy charge are quite interesting. I have previously blogged the original indictment which did not include the conspiracy charge, here.
I do note the nature of conspiracy charges in this context by this cut and paste from my book (footnotes omitted):

Not surprisingly, therefore, the Government trots out the conspiracy charge whenever it can imagine more than one bad guy behind the tree – it is so easy to do. The conspiracy count allegations are framed as a cascade of allegations telling a damning story (if true and, although literally true, not misleading), but sometimes producing more heat than light. This contrasts with counts for the tax offenses which are dry, sparse, boring, and usually not even flowered up for dramatic effect. The benefits for the Government are great, and the downsides are few; after all, the prosecutors’ life and liberty are not at stake. This means, of course, that the Government’s power to tack on conspiracy charges can be abused, particularly with a weapon as potent and elastic as conspiracy. The Supreme Court has noted that:

We agree that indictments under the broad language of the general conspiracy statute must be scrutinized carefully as to each of the charged defendants because of the possibility, inherent in a criminal conspiracy charge, that its wide net may ensnare the innocent as well as the culpable.

Addendum on 9/29/11:
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The Object of a Klein Conspiracy and Specificity (9/17/11)

In United States v. Mubayyid, ___ F.3d ___, 2011 U.S. App. LEXIS 18215 (1st Cir. 2011), here, the First Circuit addressed the issue of the nature of the Klein conspiracy when the object alleged indictment went beyond the usual general allegation of impairing and impeding the lawful functions by specifically alleged how the object was achieved.
The Court introduces the case as follows:

This complex appeal arises out of the joint criminal prosecution of Emadeddin Muntasser, Muhamed Mubayyid, and Samir Al-Monla for conspiring to defraud the United States by obstructing the functions of the Internal Revenue Service ("IRS"), for corruptly endeavoring to obstruct the due administration of the Internal Revenue laws,  for filing false tax returns, for making false statements to agents of the Federal Bureau of Investigation ("FBI"), and for scheming to conceal material facts from a federal agency. The charges stem from each defendant's involvement with Care International, Inc. ("Care"), a charitable organization incorporated by Muntasser in 1993 with a stated purpose of providing worldwide humanitarian aid.

The defendants' twenty-four day jury trial focused on the circumstances motivating Muntasser's formation of Care in 1993; the defendants' failure to disclose some of Care's activities, such as the publication of certain newsletters from 1993 to 1997; and Care's support for, and promotion of, Islamic jihad and fighters known as "mujahideen." n1 The government's central theory at trial was that Muntasser had established Care in order to fraudulently obtain a tax exemption, so that contributions being used to finance mujahideen overseas could be deducted from individual tax returns as charitable donations.
n1 At trial, witnesses for the government testified that "jihad" means "holy struggle," and specifically refers to the duty to fight against the enemies of Islam, while "mujahideen" refers to Islamic [*3] "holy warriors." In its own materials, Care defined "mujahideen" as "[t]hose who are going out for Jihad, fighting in the path of Allah."

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Tax Obstruction Crimes -- Section 7212 and Klein Conspiracy (5/26/11)

Today, I pick up a thought I threw out in a comment in my blog entry titled "Jury speaks in the Daugerdas Case -- Guilty! (5/24/11)" regarding the overlapping tax obstruction under Section 7212 and the Klein conspiracy crimes and convictions. Here are Judge Pauley's instructions on these crimes in Daugerdas. I present the tax obstruction charge first, although it was presented second in the charge to the jury:

Tax Obstruction Charge (Section 7212)

Counts 20 and 21: Corruptly Endeavoring to Obstruct and Impede the Functions of the IRS

Count 20 of the Indictment charges that, from in or about 1994 to in or about October 2005, defendants Guerin, Field, Brubaker, and Parse corruptly obstructed and impeded, and endeavored to obstruct and impede, the due administration of the Internal Revenue Laws.

Count 21 charges that, from in or about 1994 to in or about October 2005, defendant Daugerdas corruptly obstructed and impeded, and endeavored to obstruct and impede, the due administration of the Internal Revenue Laws.

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First Sentencing in Offshore Case that Went to Trial

Maricio Cohen Assor and Leon Cohen-Levy, previously blogged here, were sentenced yesterday. I include below links to the SD FL USAO press release and some articles, but here are the bullet points I found interesting:

1. Each was convicted of one count of conspiracy (Klein conspiracy) under 18 USC 371 and 2 counts of filing false tax returns under 26 USC 7212.  The maximum permissible sentence for those counts of conviction was 11 years each.

2. Each received 10 years incarceration (mitigated only if they qualify for the rather minimal good time benefit).

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Corruptly in Obstruction Crimes (Including Tax Obstruction) Really Means Something

In United States v. Doss, 630 F.3d 1181 (9th Cir. 2011), a nontax case, the Ninth Circuit addressed the circuit split over the term "corruptly persuades" in 18 USC 1512(b)(1). Section 1512 is captioned "Tampering with an witness, victim or informant." The crime defined in Section 1512 is not a tax crime, nor is it a crime normally encountered in criminal tax trials. Still, as I have developed in an article, the crime's corruptly element may help define the similar element in the tax obstruction statute, 26 USC Section 7212(a). Both crimes are derived from the concepts in 18 USC Section 1503, the traditional obstruction of justice crime. See John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 334-335 (2009)).

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Another Swiss Bank Enabler is Charged with Tax / Klein Conspiracy

On December 15, 2010, another Swiss Bank enabler, one Renzo Gadola, was charged with a tax / Klein conspiracy to defeat the lawful functioning of the IRS by assisting United States clients evade U.S. taxes through the use of Swiss banks. The U.S. Attorney Press Release (containing a link to the criminal information is here).

At all relevant times, Gadola was a citizen and resident of Switzerland and a registered investments advisor with the U.S. SEC. He was employed as a private banker by UBS from 1995 through August 2008. In February 2009, he began working as an independent investment adviser under the business name of RG Investment Partner AG. For the matters alleged in the indictment, he partnered with an unindicted co-conspirator names in the indictment under the pseudonym SWISS BANKER, who is alleged to have been executive director UBS's North American business until 2003 and then an investment advisor in Switzerland after that. Gadola and SWISS BANKER assisted U.S. clients in establishing and maintaining undeclared accounts (i.e., accounts not declared to the U.S. in the tax returns or FBARs). Gadola and SWISS BANKER had numerous U.S. clients and met frequently with some of these clients in the U.S.
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Sixth Circuit on Klein Conspiracy and Tax Evasion

On September 15, 2010, the Sixth Circuit decide United States v. Damra, 621 F.3d 474 (6th Cir. 2010). The decision is long (51 pages) and addresses a number of issues. I deal here only with three of them that I think are in the mainstream for readers of this blog.

1. Klein Conspiracy - Is Willfulness An Element of the Crime?

Damra was convicted of a Klein conspiracy. Most readers will know that the federal conspiracy statute, 18 USC 371, defines two types of conspiracies -- an offense conspiracy and a conspiracy to defraud, known in the tax arena as a Klein conspiracy. If the offense underlying the offense conspiracy has a willfulness element, that element is imported as an element of the offense conspiracy. Specifically, a conspiracy to commit a tax crime having a willfulness element must meet the Cheek spin of intentional violation of a known legal duty. But, the Klein conspiracy has no reference point to import a willfulness element. So the question is what is the mens rea required in a Klein conspiracy?

Damra complained on appeal that the trial court did not instruct the jury that the Government must have proved that the defendant acted "willfully." Bottom line, the Sixth Circuit held that the instructions as given sufficiently conveyed the concept to the jury that the trial court did not commit reversible error. In the process of reaching that bottom line, the Sixth Circuit reiterated a prior holding willfulness is a required element of a Klein conspiracy, quoting an earlier case (United States v. Beverly, 369 F.3d 516, 532 (6th Cir. 2004) (citations omitted)) as follows (p. 498).

To establish a conspiracy, in violation of 18 U.S.C. § 371, the government must prove beyond a reasonable doubt that there was "an agreement between two or more persons to act together in committing an offense, and an overt act in furtherance of the conspiracy." This requirement has been broken down into a four-part test, which requires the government to prove that: "1) the conspiracy described in the indictment "was wilfully [sic] formed, and was existing at or about the time alleged; 2) the accused willfully [sic] became a member of the conspiracy; 3) one of the conspirators thereafter knowingly committed at least one overt act charged in the indictment at or about the time and place alleged; and 4) that overt act was knowingly done in furtherance of some object or purpose of the conspiracy as charged."

Notwithstanding that holding, the Sixth Circuit's pattern jury instructions defined the crime in terms of "knowingly and voluntarily" participating in the conspiracy rather than willfully doing so. In effect, Court held that these terms are sufficient to convey the willfulness concept, concluding (p. 500):

As the district court's instructions tracked our pattern instructions, as we have repeatedly approved of the "knowingly and voluntarily" formulation of the second element of conspiracy to defraud the government under 18 U.S.C. § 371, and as "willful" is in fact defined in part as "voluntary," we find that the district court did not omit the willfulness element of § 371 conspiracy when it instructed the jury, and so did not commit plain error in issuing its instructions as to Count 1.

JAT Comment: I think the Court did not crisply address or resolve the issue. The issue is whether, if indeed willfulness, at least in the Cheek sense, is an element of the Klein conspiracy, the words "intentionally and voluntarily" cover the same ground adequately to inform the jury. I don't believe that the Government believes that it does. I address that notion in my article, See John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009). As I note in that article, the Government has taken the position that the Klein conspiracy is free of the Cheek willfulness spin that the defendant intend to violate a known legal duty but simply has to intend to join the conspiracy to defraud (defraud encompassing acts that are not necessarily illegal). And, if you parse the language of Beverly quoted above, the use of the word willfully does not seem to address the Cheek willfulness requirement in the sense of an intentional violation of a known legal duty. Indeed, in a later footnote (footnote 7), the Sixth Circuit says: ""The intent element of § 371 does not require the government to prove that the conspirators were aware of the criminality of their objective . . . ." United States v. Khalife, 106 F.3d 1300, 1303 (6th Cir. 1997) (quoting United States v. Collins, 78 F.3d 1021, 1038 (6th Cir. 1996))."

2. Tax Evasion - Separate Good Faith Instruction?

The defendant argued that the trial court erred in failing to give a good faith instruction on the tax evasion charge. Bottom line, the Court said that the standard Cheek willfulness instructions adequately covered the ground. The Court reasoned (p. 502):

As the Supreme Court has held, where a trial judge "adequately instructed the jury on willfulness" in a case concerning whether the defendants had filed fraudulent tax returns,"[a]n additional instruction on good faith was unnecessary." United States v. Pomponio, 429 U.S. 10, 13 (1976). Willfulness, the Court explained, "in this context simply means a voluntary, intentional violation of a known legal duty." Id. The clear implication of Pomponio is that where a district court presiding over a criminal tax-evasion case issues an instruction defining willfulness in this fashion, the good-faith requirement is effectively bundled into the willfulness instruction. Here, the district court instructed the jury that in order to sustain its burden of proof as to Count 2, "the government must prove beyond a reasonable doubt that defendant acted willfully. To act willfully means to act voluntarily and deliberately, and intending to violate a known legal duty." (Trial Tr. at 816-17.) By matching the language approved of in Pomponio, the district court effectively and correctly instructed the jury as to this element. As we have explicitly held, moreover, a jury's conclusion that a defendant acted "willfully" in this manner "would necessarily negate any possibility" that the defendant acted in good faith. United States v. Tarwater, 308 F.3d 494, 510 (6th Cir. 2002); see also United States v. Ervasti, 201 F.3d 1029, 1041 (8th Cir. 2000) (holding that the district court did not abuse its discretion in refusing the defendant's request for a good-faith instruction where the court instructed the jury that "[a]n act is done willfully if it is done voluntarily and intentionally with the purpose of violating a known legal duty.").

3. Klein Conspiracy or Offense Conspiracy?

The defendant raised the Minarik defense. United States v. Minarik, 875 F.2d 1186 (6th Cir. 1989). The gravamen of the defense is that the Government cannot dress up what is in reality a tax offense conspiracy as a Klein conspiracy. I am sure all of us know that given the breadth of the defraud object for the Klein conspiracy, any tax offense conspiracy is also a Klein conspiracy. (As noted above, the Government imagines a lesser burden of proof for the Klein conspiracy, so it may be sorely tempted in weaker cases to charge a Klein conspiracy rather than an offense conspiracy.) The Sixth Circuit continued its retreat from Minarik, thus essentially limiting it to the Minarik facts.

As we have concluded in other cases in which defendants have made this argument, "[b]ecause the unique circumstances found in Minarik do not apply here, we decline to depart from the general rule that the defraud and offense clauses are not mutually exclusive." See United States v. Tipton, 269 F. App'x 551, 556 (6th Cir. 2008). Accordingly, we find that Damra could appropriately be charged under § 371's "defraud" clause, and that therefore Count 1 does not fail to allege an offense pursuant to 18 U.S.C. § 317.

As a result, the Government has broad latitude as to how to charge a tax conspiracy. Indeed, the Government will often charge both the offense conspiracy and Klein conspiracy in a single count -- the ubiquitous Count One -- and urge that the failure to prove the offense conspiracy can still permit conviction of the Klein conspiracy.

Kottwitz -- a Long Rambling Tax Opinion Covering Most of the Major Tax Crimes

I write about the Eleventh Circuit's recent decision in United States v. Kottwitz, 614 F.3d  1241 (11th Cir. 2010). The decision is per curiam so we don't know which judge or which judge's clerks took the laboring oar for the opinion. Judge Birch does dissent, so the other two who formed the majority are Circuit Judge Edmondson and assigned District Judge Terrell Hodges, although I suppose Judge Birch could have written the majority opinion and dissented the part inserted at the insistence of the other two. The per curiam opens with a summary:

Defendants Theresa L. Kottwitz ["Kottwitz"], Gerard Marchelletta, Sr. ["Senior"], and Gerard Marchelletta, Jr. ["Junior"] appeal their convictions and sentences for tax fraud-related charges. We find the evidence sufficient to support the jury's verdict regarding their conspiracy convictions and that the general good faith jury instruction that was provided by the district court fully encompassed Kottwitz and the Marchellettas' theory of defense on this charge. We find, however, that the district court erred in refusing to give Kottwitz's and the Marchellettas' requested special instruction to the jury on their good faith reliance on their accountant's advice. Because the evidence was sufficient for a properly instructed jury to convict on the charges of filing materially false personal income tax returns for 2000 as to Junior and Senior and for evading taxes as to Senior, we vacate and remand for retrial in light of the jury instruction error. Because the evidence was insufficient for a properly instructed jury to convict on the charge of aiding and assisting in the filing of a materially false corporate tax return for 2001, we reverse the convictions of Kottwitz, Junior, and Senior and remand with directions to enter a judgment of acquittal on this count.

1. Conspiracy.

The Per Curiam opinion affirms the sufficiency of the evidence on the conspiracy issue. The analysis is rambling, replete with unfocused glittering generalities and string points and quotations, followed by a a summary conclusion that, well, the evidence was sufficient to present to the jury. For flavor, consider the following:

The knowledge requirement must be established by evidence that each alleged conspirator knew that the scheme would culminate in the filing of false tax returns. Adkinson, 158 F.3d at 1155. Evidence of a conspiracy or that a defendant acted in a way that would have furthered "a conspiracy if there had been one" is insufficient; there must also be independent evidence that the defendants knew of the conspiracy in progress and knowingly and voluntarily joined it. Id. (citation omitted). Due to the complexity of the tax laws, specific intent or "willful" conduct is a necessary element of tax offenses. Cheek v. United States, 498 U.S. 192, 200, 111 S. Ct. 604, 609 (1991). "This tax purpose [to interfere with the IRS's lawful functions in collecting taxes] must be the object of a Klein conspiracy, and not merely a foreseeable consequence of some other conspiratorial scheme." Adkinson, 158 F.3d at 1155. The Klein conspiracy to impede the IRS must be the object, or at least an object in a conspiracy with multiple objectives; it is not adequate if the act of impeding the IRS is "only a collateral effect of an agreement." Id. (quotation and citation omitted). Evidence that owners directed their accountant to refer any questions to them and failed to disclose to their accountant payments to some employees or unreported revenue was sufficient to support a conspiracy conviction for IRS fraud. United States v. Useni, 516 F.3d 634, 650 (7th Cir. 2008).

Innocuous even if unfocused.  I do, however, raise a limited issue. Notice how the Per Curiam Opinion weaves into the conspiracy analysis the Cheek willfulness standard. As I have discussed ad nauseum in my article, that is not how the Government in its expansive imagination of the Klein conspiracy offense imagines it. See John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009) .

Addendum on 12/24/10:  On rehearing, the Eleventh Circuit panel reversed the conspiracy conviction for the same reason it reversed other convictions (discussed at paragraph 4, below).  The order on rehearing is here.  Specifically, the good faith reliance on accountant requested instruction.  The panel had already reversed some of the counts on this basis for retrial; since the burden to receive a requested instruction is light, the panel was convinced on rehearing that the requested instruction was proper for the Count One Conspiracy charge.

2. Tax Perjury.

The Per Curiam then says that there was sufficient evidence for the tax perjury charge. This too is based upon a rambling set of the same type stuff that, at least to me, does not convince that the Per Curiam Judges came to grips with the argument. I cannot say the result is wrong. Just that it seems less than focused.

3. Aiding and Assisting.

The Per Curiam then, quite summarily, reverses the aiding and assisting conviction by simply saying that there is no evidence. I guess that, if indeed there were no evidence, there is nothing to talk about. And so the Per Curiam doesn't talk about it [or the not it] other than to note its absence.

4. Failure to Give the Requested Good Faith Instruction.

Now we come to something a bit more meaty. The defense asserted a good faith reliance defense and the record had sufficient evidence to establish that it was a defense to be submitted to the jury. The defense thus properly requested a good faith jury instruction drawn from the Eleventh Circuit's pattern jury instructions. The Per Curiam held that the defense was entitled to that instruction and failure to give it upon proper request was reversible error.

In the course of its glittering generalities and string quotes, the Per Curiam says some curious things. It says, for example, "The requested good faith reliance jury instruction was based on our pattern jury instructions and was, therefore, a correct statement of the law." The Per Curiam cannot be serious in that statement read on its face. Congress never passed the pattern jury instructions nor has the Supreme Court put its imprimature on it, so if the pattern jury instructions misinterpret the law, the pattern jury instructions do not become the law. Cf. United States v. Svete, 521 F.3d 1302, 1310(11th Cir. 2008), reversed en banc 556 F.3d 1157 (11th Cir. 2009) (although reversed because the pattern was found correct, the key point is that pattern jury instructions are not the law).

Once you work past the fluff, the bottom line is that there was sufficient evidence to support the requested jury instruction.

The opinion, including the short dissent, is 70 pages long. Reminds me of the quote attributed to Blaise Pascal (and others), "I would have written a shorter letter, but I did not have the time."

Klein Conspiracy Instruction

In United States v. Coplan (SD NY No. (S1) 07 Cr. 453 (SHS), Judge Stein gave the following jury instruction on the Klein / defraud conspiracy based solidly on the Supreme Courts decision in Hammerschmidt v. United States, 265 U.S. 182 (1924) (see also the Ninth Circuit's decision in United States v. Caldwell, 989 F.2d 1056, 1058 (9th Cir. 1993)), emphasis supplied:

Not all conduct that impedes the lawful functions of a government agency is illegal — to be unlawful such conduct must entail fraud, deceit, or other dishonest means. Thus, it is not illegal simply to make the IRS’s job harder. Only an agreement to engage in conduct that tends to impede the IRS, and also involves fraudulent, deceitful, or dishonest means, does constitute an illegal agreement to defraud the United States.

Judge Stein had variations of this theme in other portion of the Klein / defraud conspiracy instructions.  For the entire set of jury instructions, see here and for the particular set of instructions on the Klein / defraud conspiracy go to pages 29-31.

For a less succinct statement of this concept see my article: John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough?, 9 Hous. Bus. & Tax L.J. 260 (2009).

More on the Honest Services Supreme Court Cases and Tax Obstruction

I have previously blogged here the possibility that the pending cases before the Supreme Court on honest services fraud might portend some constriction of the scope of the Tax Obstruction Crimes. I found this discussion of the issue in the sentencing hearing transcript (pp. 49-59) in United States v. Coplan (SD NY No. (S1) 07 Cr. 453 (SHS) (the full transcript is here); the Judge is Sidney Stein and the attorney is Dennis Riordan of Riordan & Horgan who apparently will work on the appeal but handled the honest services issue connection to the conviction):

MR. RIORDAN: And Nat Lewin, who is going to be appellate counsel for Nissenbaum, are present in court today and we have been in intensive discussions for several months about this juncture that we are reaching here where we would present these questions to the court. I don't know -- and as a result of that we sort of have divided responsibility. So there are issues that I am prepared to address, but we will be cross-referencing each other's presentations and I don't know whether the court would prefer that at the end of the sentencings for Mr. Nissenbaum and Mr. Shapiro the three of us jointly address this question or whether you would like me to present some argument on the issues that I was prepared to address.

THE COURT: Well, I guess the answer to that question is, tell me what substantial question of law or fact is going to be raised on appeal that is likely to result in reversal or an order for a new trial. That's what I want to know. Tell me what your argument is.

MR. RIORDAN: Yes, your Honor. I will do that. There is going to be a major issue in this case, and I don't have the burden of asking the court to find any error on its own part because this issue did not exist at the beginning of this trial and did not really germinate fully until well after the convictions were returned, and that is that when this case is argued in the Supreme Court -- in the Second Circuit, the Second Circuit --

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Guilty Plea in SLOTS Tax Shelter

On December 1, 2009, Michael Parker pled guilty to one count of Klein conspiracy in a tax shelter scheme using the ubiquitous tax shelter trademark -- an acronym, in this case SLOTS for Sale Leaseback of Tenant Improvements Strategy. According to the DOJ press release for the original indictment in October, two parties were indicted -- David Haynor, an accountant/tax partner with KPMG, and Jon Flask, a lawyer. Parker, COO of a "tax-advantaged investments company," was named in a contemporaneous criminal information and entered a plea agreement. The original DOJ Tax press release is here.

According to the DOJ Tax press release on the guilty plea on December 1 here:

According to the plea agreement and statements made during the hearing before United States District Judge Sandra S. Beckwith in Cincinnati, Parker admitted to conspiring with Daryl Haynor, an accountant who was a tax partner at KPMG LLC, in its Tysons Corner, Va., office, and Jon Flask, an attorney for TransCapital, who was a partner at a law firm in Vienna, Va., to defraud the IRS with regard to tax shelter transactions. Parker admitted that he was both a CPA and an attorney, but acted as the Chief Operating Officer of TransCaptial Corporation. In October 2009, Haynor and Flask were indicted for conspiracy to defraud the IRS and for corruptly endeavoring to obstruct and impede the due administration of the internal revenue laws.

According to the plea agreement and statements made during the hearing, from 1998 through 2006, Parker, Haynor and Flask marketed and implemented a tax shelter to KPMG clients called the Sale Leaseback of Tenant Improvements Strategy (SLOTS), which enabled various U.S. corporations to claim tax deductions totaling more than $240 million on corporate income tax returns filed with the IRS. During 2002 through 2004, the IRS audited three U.S. corporations that had claimed losses generated by SLOTS transactions, including The Kroger Company. Parker identified Kroger as the Fortune 500 corporation which did the largest SLOTS tax shelter transaction, and which claimed over $178 million in loss deductions, causing over $64 million in tax loss to the IRS. Parker admitted that he, Haynor and Flask conspired to impede and impair the IRS by making false and misleading statements to IRS agents and attorneys during these audits, including the Kroger audit. Additionally, Parker admitted that he, Haynor and Flask concealed certain aspects of the tax shelter transaction from SLOTS clients, including Kroger, for the purpose of impeding and impairing the IRS. Parker further acknowledged that the SLOTS tax shelter and related transactions were themselves nothing more than devices to disguise and conceal mere financing transactions.

Other than the press releases and the smattering of newspaper articles that I have read, I have no further detail. I do, however, have several comments based on the press release.

1. The plea is to conspiracy which is the sole count in the information as well as in the indictments of the others. It is noteworth, I think, that the Government did not include tax evasion counts. I suppose this can serve as warning to taxpayers and practitioners that the Government stands ready to indict for misbehaving even if the tax shelter is not fraudulent.

2. The plea to conspiracy offers the Government great advantage in the ongoing case against the other two indicted defendants.

3. For students not familiar with the song and dance for DOJ Tax press releases, you will note that the press release is careful to state that the information is from the guilty plea. In press releases such as this DOJ Tax and the IRS have to be careful to provide only information that it has derived from public information such as indictments and guilty pleas in order to not violate Section 6103, the general prohibition on disclosing return information which is defined broadly to include the fruits of IRS investigations. A parallel rule, FRCrP Rule 6(e) prohibits disclosure of grand jury matters, so DOJ Tax and the IRS have to be careful to include in press releases only information that has been made public.

Honest Services Supreme Court Cases Might Portend Constriction of Scope of Tax Obstruction Crimes

I was reading a White Collar Crime Prof Blog's summary here of the two "honest services" cases argued before the Supreme Court today and was struck by the report that the Justices' concerns are so strikingly similar to concerns expressed by courts as to the amorphous reach of the tax obstruction crimes (§ 7212(a) and the Klein / Defraud Conspiracy in 18 USC § 371. In part material, the WCCPB summary includes the following:

4. Two primary concerns stand out from today's argument: (1) all justices expressed unease with identifying what sort of "bad conduct" is covered by the statute in the absence of any meaningful guidance from Congress; and (2) the Solicitor General's proposed test is not going to sufficiently narrow the statute. No one, in fact, seemed particularly inclined to adopt the SG's interpretation of the statute. At one point, Justice Breyer suggested that 140,000,000 people throughout the country had probably violated the honest services law as the SG described it, by fibbing to an employer in order to do something his or her boss wouldn't like. Justice Scalia described a similar scenario in which an employee tells the boss he is going to work hard all afternoon if the boss leaves him alone, but makes this misstatement so the boss will go away and he can sit at his desk and read the racing form. The government had a very hard time explaining why this conduct would not fall within the statute as it had defined it, and ultimately suggested that prosecutors wouldn't bring those sort of cases and/or jurors wouldn't convict. That answer did not engender a positive response. No one seemed comfortable with leaving such broad, undefined discretion in the hands of prosecutors and juries.

I discuss this genre of concern in my article on the tax obstruction crimes -- John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough?, 9 Hous. Bus. & Tax L.J. 260 (2009). The article may be reviewed or downloaded here, and the related online appendix may be reviewed or downloaded here. Two prominent cases discuss this concern in the context of the defraud conspiracy (the Klein conspiracy in a tax setting): Hammerschmidt v. United States, 265 U.S. 182 (1924) and United States v. Caldwell, 989 F.2d 1056, 1058 (9th Cir. 1993). If this concern continues into the decisions in the pending Supreme Court cases, we might see some real and very helpful restrictions on the Government's imagination as to the expansive scope of the tax obstruction crimes. Stay tuned!

Update on 12/12/2009: I refer readers to Tom Kirkendall's Houston Clear Thinkers discussion here of Jeff Skilling (Enron fame) SCOTUS brief on honest services fraud and recommend readers with the inclination substitute Tax Obstructions Statutes for the Honest Services Statute. Frightening!

A Lesson on the Crime-Fraud Exception to Attorney-Client Privilege

On November 20, the Fourth Circuit entered an unpublished decision in United States v. Under Seal & John Doe, 2009 U.S. App. LEXIS 25523 (4th Cir. 2009). The issue was whether the district court properly applied the crime fraud exception to the attorney client privilege, thus permitting the Government to subpoena an attorney's files. The attorney is referred to in the opinion as Counsel.

Such holdings are fact driven, and these facts quoted succincntly by the Fourth Circuit suggest the conclusion:

In 1997, the president of the Corporation established another entity in the Isle of Man ("the Isle of Man Entity"). Two of the Corporation's three directors, one of which is the Corporation's president, were directors of a corporation also established in the Isle of Man ("the Isle of Man Corporation"), which is the trustee of the Isle of Man Entity. Between 1997 and 2000, the Corporation transferred $ 22,523,478 of its assets to the Isle of Man Entity. In 2000, the Corporation dissolved after filing Articles of Termination and Articles of Dissolution with the proper state authorities.

Prior to the Corporation's dissolution and continuing thereafter, the Internal Revenue Service (IRS) conducted an audit of the Corporation. During the audit, the Corporation's president [*3] told the IRS that the transfers from the Corporation to the Isle of Man Entity were made pursuant to opinion letters from several law firms that these transfers were legal. One such letter, which was written by Counsel, was provided to the IRS. Counsel's letter stated that a qualified United States charitable corporation can legally make a grant to a charitable organization in another country so long as the funds are used for charitable purposes. The IRS audit of the Corporation concluded with a finding of "no issue raised."

[I hope you see from just the quoted cryptic summary that something is rotten.]

Back to the case, a grand jury investigation started, and a grand jury subpoena issued. After some sparring and an earlier appeal and remand, the district court held that the Government had established the applicability of the crime fraud exception. The district court based its holding on the ground that the U.S. charitable corporation's return was incorrect, thus potentially violating § 7206(1), in showing no relationship between the U.S. charitable corporation and the Isle of Man charitable corporation.

Counsel appealed, asserting that the statement on the U.S. corporation's return was technically correct, thus, a la Pirro, avoiding the shoals of § 7206(1), because the question only asked about relationship between the U.S. corporation and an individual. (There was of course an individual or individuals behind the lifeless and breathless, wholly fictional (from a legal perspective) Isle of Man corporation, but let's not get hung up on such technicalities.)

The Fourth Circuit summarized the exception and the showings required to invoke it:

The invocation of the crime-fraud exception requires a prima facie showing that "(1) the client was engaged in or planning a criminal or fraudulent scheme when he sought the advice of counsel to further the scheme, and (2) the documents containing the privileged materials bear a close relationship to the client's existing or future scheme to commit a crime or fraud." In re Grand Jury Proceedings # 5, 401 F.3d at 251 (citations omitted). A party invoking the crime-fraud exception can satisfy the first prong of this test by making a prima facie showing of evidence, which, if accepted by the trier of fact, establishes the elements of an ongoing or prospective violation of the law. Id. The second prong of this test is satisfied with a showing of a close relationship between the withheld communications and the alleged violation. Id. Once a sufficient showing has been made, the attorney-client privilege ceases to protect any of the communications related to the alleged violation. In re Grand Jury Subpoena, 419 F.3d 329, 345 (5th Cir. 2005) (citing In re Sealed Case, 676 F.2d 793, 812 n.74, 219 U.S. App. D.C. 195 (D.C. Cir. 1982)).

The Fourth Circuit then reviewed the district court's application of the exception, gliding past the district court's invocation of the potential for violating § 7206(1) and moving to what it perceived was more solid ground in a potential defraud / Klein conspiracy violation under 18 U.S.C. § 371. The court said:

In its ex parte submission, the Government has provided the court with prima facie evidence that the Corporation, its principals and the Isle of Man Entity had an agreement to defraud the United States Government in contravention of § 371. The Government's submission provides prima facie evidence that the Corporation and the Isle of Man Entity entered an agreement to defraud the United States both by concealing the ultimate disposition of the Corporation's funds through the transfer of assets overseas and by using the Corporation's tax-exempt status to circumvent the collection of taxes on the profits of individuals. Such a purpose falls directly within the confines of § 371. The transfer of $ 22,523,478 to the Isle of Man Entity would be an overt act in furtherance of this purpose.

The Fourth Circuit then closed or tightened the noose by holding that the close relationship to that potential violation had been shown.

Things do not look good for the attorney.

Unthinking Criminality - Where is the Line?

Thanks to the Tax Prof Blog, I picked up this article written by prolific tax lawyer and author, Robert W. Wood. The Article is "Ten Ways to Audit Proof Your Return" (published online by Forbes)

The strategies offered by Mr. Wood are variations on a theme I discuss in a recent article, John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009). Some of these strategies I present in more detail in the online appendix to the article.

The issue is whehter a tax obstruction crime exists when a taxpayer performs an otherwise legal act (illustrated by the strategies in Mr. Woods' article and in my article and appendix) with the intent to impair or impede the IRS's administration of the tax laws? Are Mr. Woods' and my examples which are specifically intended to lower the audit profile examples of conduct that should be subject to criminal punishment? Can readers discern a line between such conduct that is criminal and not criminal? Keep in mind that a bedrock principle of the tax law and other types of related crimes is that a hypothetical reasonable actor should be able to discern the line with clarity, otherwise there can be crime. If there is no discernable line, is there only prosecutorial discretion that keeps practitioners (including Mr. Wood and myself) who have engaged in variations on this theme over the years from prosecution? And, finally, would the courts cry foul as did Judge Kozinski in the Caldwell case?

I'll let my readers chew on those questions. I have already spoken ad nausuem. I would appreciate the readers' responses.

Have a great weekend!

Confusion about the Defraud Conspiracy

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

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

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

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

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

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

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

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

Swiss Bank Enablers Indicted

Further ratcheting up the ante, DOJ obtained the indictment of a Swiss Banker and a Swiss Lawyer. The DOJ promo piece on the indictment is here.

The WSJ Law Blog comment (8/21/09) on this case may be viewed here.

Update on the Daugerdas indictment -- Guilty Plea by Defendant Greisman (BDO)

Robert S. Greisman, former DBO Seidman former partner, pleads guilty. See the USAO SDNY press release here. The plea is to three counts - (i) the (ubiquitous) defraud / Klein conspiracy (18 USC § 371), (ii) tax evasion (§ 7201), and (iii) tax obstruction (§ 7212). The parts of the press release that addresses the big issue - the lie - previously discussed in the blogs here are:
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7th Circuit Says Attorneys Fees Do Not Mitigate Sentence

In United States v. Presbitero, ___ F.3d ___ (7th Cir. 2009) (decision here), the Seventh Circuit sustained convictions for two counts of filing false tax returns under § 7206(1) (tax perjury) and one count of Klein / defraud conspiracy under 18 U.S.C. § 371. The district judge tossed the conspiracy convictions on a motion for acquittal, finding that the Government had no evidence tending to show that one of the two alleged conspirators had joined the conspiracy to impair or impeded the IRS. Since it takes two to tango for conspiracy, the judgment of acquittal for that defendant meant that the conspiracy conviction of the other defendant (who had clearly engaged in conduct to impair or impede) must be dismissed also. (That defendant, of course, might have been but was not charged with the obstruction counterpart, § 7212.) The defendants appealed their convictions on the two tax perjury counts and the Government appealed the acquittal on the Klein conspiracy count. The parties also appealed the district judge's sentencing decisions.

The case appears pretty much garden variety for criminal tax cases. I point out here only a few points I thought were interesting:

1. § 7206(1) (tax perjury) does not have as an element that there be any tax loss to the Government. This is a standard holding, and just barely worth commenting on except as a reminder to students.

2. In a variation of the holding, the court said: "it is not a defense to a charge of willfully and knowingly filing a fraudulent tax return that the amount fraudulently deducted could have been deducted for some other reason." citing United States v. Helmsley, 941 F.2d 71, 92-93 (2d Cir. 1991) among others.

3. The court reversed the district court's acquittals on the conspiracy charge, thus reinstating the jury's convictions. The court of appeals recounted more than ample evidence of actions by both defendants to impair or impede the IRS through deceitful means to support the jury's verdict. "That is, from the evidence before it, the jury could have concluded that Velasquez knew that at least one purpose of the agreement to make up the six subcontractors was to reduce PDC's tax liability on false pretenses." Merely that they co-conspirators may have had some other goal (deceiving others) did not detract from their goal to impair or impede the IRS through deceitful means. (For other blogs on the lie as the critical component of tax crimes, click here.)

4. The court of appeals reversed for resentencing because of its reversal noted in #3 and the affect it might have on sentencing enhancements.. In so doing, the court of appeals addressed the notion that attorneys fees might be a factor mitigating the sentence. As suggested in the quote below, it was not clear what weight, if any, the sentencing judge placed on the attorneys fees, but he did comment on them. The background is that the Government had brought earlier nontax charges against one of the defendants for ERISA and mail frud charges upon which he had been acquitted. He had incurred large attorneys fees in that proceeding, and then the Government indicted again in this tax case where he also incurred large attorneys fees. The court said, perhaps gratuitously:

To aid everyone during the resentencing, we also take note of the government's arguments that the district court took impermissible factors into account when it sentenced Presbitero to a below-guidelines sentence. For one, the district court commented on the amount of money Presbitero paid in attorney's fees, stating at the sentencing hearing that Presbitero had spent "probably a good part of his savings defending against charges brought by the Government. That's a long time to be fighting the government. Almost ten years. And a huge amount of stress that's involved with that, and expense." Presbitero maintains that the district court did not actually rely on the amount of attorney's fees incurred when it decided which sentence to impose. Instead, he says, the comments we quoted were just observations that did not factor into his sentence.

It is not clear to us from the record whether the comments regarding attorney's fees and the resulting stress were simply asides at the hearing or whether they factored into the imprisonment term decision. In an opinion issued after Presbitero's sentencing hearing, we explained that the fact "that a defendant spends heavily on lawyers is not a mitigating factor. It would not only encourage overspending; it would be double counting, since the pricier the lawyer that a defendant hires, the less likely he is to be convicted and given a long sentence." United States v. Sriram, 482 F.3d 956, 961 (7th Cir. 2007), vacated on other grounds, 128 S. Ct. 1134 (2008). So the district court on remand should not consider high attorney's fees as a mitigating factor. And while we certainly recognize the emotional and financial tolls of an investigation, indictment, and trial, the resulting stress is not in and of itself an appropriate reason to lower Presbitero's sentence. See Sriram, 482 F.3d at 961 (protracted prosecution not a reason to lower sentence).

Putting on my economic animal hat (as criminal lawyers certainly do in striking the fee arrangements), I find the idea intriguing that, but for the court's rejection of this notion, defense lawyers might have both a success clause for more attorneys fees for acquittal, and a failure clause for more attorneys fees for conviction; either way it would be win, win for the lawyer.

For those wishing to pursue the issue, the Sriram decision, written by Judge Posner, is here.

More on the Quellos Individuals Indictment - It is About the Lie

I have now had the opportunity to review the Quellos indictment in more detail. It is all about the lie that, if the allegations are proved, a jury will understand. A jury almost certainly would not understand -- or need to understand -- the complex tax rules which might have applied if the key factual underpinning were true. The jury will understand the lie. And, the gravamen of the instructions to the jury will be that, if the jury finds that prosecutors prove the lie they allege, the defendants should be found guilty.

Let's look at the counts and the lie. At the risk of oversimplication, I simplify and thus omit much of the detail.
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DOJ Adds Another Notch in Its Abusive Tax Shelter Belt - BDO Vice-Chair Pleads re J&G Shelter

The Government announced here yesterday a guilty plea by Charles W. Bee, a former vice-chair of BDO Seidman, with respect to a Jenkins & Gilchrist shelter marketed by BDO Seidman. The counts to which Bee pled were (i) conspiracy (the standard count in these cases), (ii) tax evasion with respect to a client's reporting of the the shelter, and (iii) giving false deposition testimony. The following is the key part of the press release:

Bee knew that the tax shelter transactions would be allowed by the IRS only if there was a reasonable possibility of a profit. Bee also knew that, given the costs and fees to the clients, and the nature and duration of the transactions, the tax shelters had no reasonable possibility of resulting in a profit. In addition, Bee knew that the clients who purchased the tax shelter had no non-tax business reasons for entering into the transactions, and that the fees were set as a percentage of the tax loss sought by the clients. To make it appear that the tax shelter clients had the requisite business purpose and that there was a possibility of profit, Bee and his co-conspirators reviewed and approved the use of a legal opinion letter issued by J&G that contained false and fraudulent representations purportedly made by the clients about their motivations for entering into the transactions. Bee and other TSG members also developed a consulting agreement containing false and fraudulent statements to disguise the fact that the fees clients would be charged by BDO Seidman were solely for the tax shelters. Finally, Bee and his co-conspirators caused the clients to file false and fraudulent tax returns incorporating the supposed tax shelter benefits. In total, the fraudulent tax shelters implemented by Bee, BDO Seidman, J&G, and the financial institution that assisted them, caused clients to report over $1 billion in false and fraudulent tax losses, resulting in the evasion of over $200 million in taxes.

Bee also specifically admitted criminal responsibility based on the sale by BDO of a tax shelter known as the "short option" transaction to one client, who was charged fees of approximately $133,000 by BDO Seidman and $201,000 by J&G. The short option tax shelter purportedly generated losses sufficient to offset the taxes due on $6.7 million the client had received from a stock sale. In fact, the short option transaction had the reasonable possibility only to net a profit of $67,000, thus resulting in no potential profit to the client. The client nonetheless filed tax returns with the IRS reporting false and fraudulent losses purportedly generated from the short options shelter, thereby evading a substantial amount of taxes that he would otherwise have had to pay.

Finally, Bee admitted that in February 2005, while under oath during a deposition in Jade Trading v. United States, a Court of Federal Claims case involving a tax shelter sold by BDO and another promoter, he knowingly made false material statements concerning BDO's tax shelter practice.

You will note that all three counts relate to the theme in tax shelter criminal cases -- the lie. See my blog posting here about the lie.