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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Jury speaks in the Daugerdas Case -- Guilty! (5/24/11)

I have blogged previously on various aspects of the Daugerdas trial. See here. The jury has just spoken. Guilty. I link below to some of the early articles from the web. The pundits will speak and this is just a preliminary and limited report.  For more information, see the articles linked below.

Update 5/25/11 9:50 AM:
From the USAO SD NY Press Release (setting aside the puffing):

DAUGERDAS, 60, of Wilmette, Illinois; GUERIN, 50, of Elmhurst, Illinois; and FIELD, 53, of Naples, Florida were each convicted of conspiring to defraud the IRS and to evade taxes, and of corruptly endeavoring to obstruct and impede the internal revenue laws. The defendants were also convicted on multiple counts of tax evasion relating to the use of various tax shelters for specified clients, and of mail fraud. DAUGERDAS also was convicted of tax evasion based on his use of fraudulent tax shelters to eliminate or reduce his personal income tax liabilities between 1999 and 2001. PARSE 49, of Elmhurst, Illinois, was found guilty of mail fraud and obstructing internal revenue laws.

On the conspiracy charge, each defendant faces a maximum penalty of 5 years in prison; 3 years' supervised release; a fine of the greatest of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS; and restitution. On the mail fraud charge, each defendant faces a maximum penalty of 20 years in prison. Each count of tax evasion carries a maximum penalty of 5 years in prison; 3 years' supervised release; a fine of the greatest of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS; and costs of prosecution. Each defendant also faces a maximum penalty of 3 years in prison; 1 year supervised release; and a fine of the greatest of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS on the charge of corruptly endeavoring to obstruct and impede internal revenue laws.

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Even More on Principals, Accomplices, Causers and Pinkerton Conspirators - the Daugerdas Case (5/10/11)

I have previously written on derivative criminal liability for the enablers in the tax shelter game (lawyers, CPAs, financial wizards). See here. I have just today read the transcript for the instruction conference on 5/5/11 in the Daugerdas criminal case.  Daugerdas involved the same basic pattern as the Larson and Coplan cases (previously discussed here and here). That pattern is the prosecution of the enablers but not the taxpayers (or taxpayer advisors), with even a concession that for purposes of the submission to the jury the taxpayers are not guilty of the crime of evasion. In these cases, the prosecutors trot out several redundant or just not applicable theories of liability as if they were different than criminal liability for the underlying criminal offense of tax evasion.  They are not.

Judge Pauley, the trial judge in Daugerdas, gets it. My bullet point summary of the charging conference is: (i) the prosecutors may have abandoned 2(a) accomplice liability, (ii) Judge Pauley wants to conflate 2(b) causer liability directly into the substantive offense, and (iii) Judge Pauley is not enamored with Pinkerton liability. Judge Pauley defaults to the real issue -- either these defendants are guilty as direct principals of tax evasion or they are not guilty of tax evasion at all (regardless of what theory is used).
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Of Principals, Accomplices, Causers and Pinkerton Conspirators

I have drafted an article on concepts of criminal liability in the federal system. The crime I address is tax evasion. Tax evasion has three elements -- tax due and owing, an affirmative act, and willfulness of the actor. The actor liable for this crime is usually the taxpayer but others may also be liable even when the taxpayer is innocent (or at least not guilty). The setting for discussion is the promotion of tax shelters such as involved in the spate of Son-of-Boss shelters in the late 1990s and early 2000s. The Government finds these shelters offensive and has prosecuted multiple promoters related to KPMG, E & Y, BDO Seidman and Jenkens & Gilchrist in the promotion of such SOB shelters. My theses are:

1. In the setting addressed in the article (promoters prosecuted with guilty or innocent taxpayers), the conduct required to make the promoter defendants principals in the crime of tax evasion is the same conduct that would make them derivatively liable as accomplices and causers and perhaps, depending on the facts, as Pinkerton conspirators as well. Stated alternatively, the conduct required to make them principals directly in the commission of the crime is the same conduct that would make them derivatively liable, and vice-versa. If they are not direct principals in the commission of the crime, they are not liable under any derivative theory, and vice-versa.
2. If the first thesis is valid, then instructing the jury as to the derivative theories of criminal liability for the crime of tax evasion is not helpful.
3. Indeed, instructing the jury on these alternative theories -- particularly if they are presented as something different from principal liability -- risks jury confusion and erosion of confidence in the system.

Before sending the article out for consideration of publication, I would greatly appreciate the critique of any reader having the time and interest to read the article. For a copy of the draft article, readers can email me at jack@tjtaxlaw.com.

Imposing FBAR Civil Penalties on Foreign Financial Institutions

An anonymous poster alerted me to Lynnley Browning's article, Overseas Banks Could Face Novel Penalty From U.S. (New York Times 4/12/11). The poster suggested that I do a blog on the topic of the article -- whether the U.S. could assert the FBAR penalties against the foreign financial institutions ("FFI") in addition to or in lieu, perhaps, of the U.S. taxpayer having foreign financial accounts. I address that issue today, but caution readers that my answer is based on only limited research -- the statute and some additional research in the types of criminal liability that enablers can draw in the context of tax evasion. I plan to have an article on the latter issue in the near future, but that research informs the discussion I present here.

First, I start with the statute. The penalties are found in 31 USC 5321(a)(5)(A) which provides:

(5) Foreign financial agency transaction violation.
(A) Penalty authorized. The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314 [31 USCS § 5314].

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A Third Theory for Conviction in the Larson, Pfaff and Ruble Cases -- Aiding and Abetting / Accomplice Liability

As I noted in an earlier blog titled More on 18 USC § 2(b) Liability from the Larson / Pfaff / Ruble Case, the Government asserted criminal liability for tax evasion directly under 7201 and also asserted liability under 18 USC § 2(b).  Judge Kaplan described these as the first and second theories of criminal liability for evasion. There was a third theory -- aiding and abetting liability -- often called accomplice liability -- under 18 USC § 2(a). Accomplice liability requires that a principal commit the crime; if a defendant aids and abets the actual principal, the accomplice is deemed a principal.

I thought I would offer readers the Judge Kaplan's instructions on accomplice liability (from pp. 5243-5246 of the transcript).
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Heavy Handedness in Charging and Forcing Pleas

I point readers to an excellent article in yesterday's Wall Street Journal, John A. Emshwiller and Nathan Koppel, Plea Bargains Get Renewed Scrutiny (WSJ 12/19/09). I previously blogged here that the Judge had dismissed indictments against some broadcom defendants for prosecutorial abuse. At the same time, the Judge voided a prior guilty plea in the case. Here is the article's intro:

A surprise twist in the criminal case against Broadcom Corp. co-founder Henry Samueli again raises questions about plea bargains, one of the most important and controversial aspects of the justice system.

In a Santa Ana, Calif., court last week, federal Judge Cormac Carney dismissed the criminal complaint charging Mr. Samueli with lying to the Securities and Exchange Commission in its investigation of whether Broadcom misstated its earnings by improperly accounting for executive stock options. Judge Carney's dismissal came even though Mr. Samueli had stood before him in 2008 and pleaded guilty to that very crime.

Mr. Samueli did what lawyers and legal scholars fear a disturbing number of other people have done: pleaded guilty to a crime they didn't commit or at least believed they didn't commit. These defendants often end up choosing that route because they feel trapped in a corner, or fear getting stuck with a long prison sentence if they go to trial and lose.

I have previously blogged on facets of this matter here. The major aspect of the problem is the combination of the Government's virtually unlimited charging decisions permitting the piling or stacking on of counts and the large amounts involved in some white collar crimes. The defendant is at risk of major incarceration if he does not plea and, as in Samueli, may be convinced that he is guilty when he is really not in order to make the required allocation.

I obvserved this phenomenon in the KPMG criminal case. The defendants through their own alleged conduct and Pinkerton conspiracy concepts faced draconian Guidelines calculations driven principally by the alleged tax loss. Pre-Booker that was a major problem that the Government sought to exploit by offering a plea first to two counts and then to one. The Government forced out one guilty plea while sentencing was in flux. Even after Booker, the problem was only mitigated by the discretion given judges, because they started with the Guidelines calculations.

Fortunately, as in the broadcom case, Judges can mitigate that Government's abuse of power in forcing plea agreements. For Samueli, the Judge simply overturned the guilty plea. In KPMG criminal tax case, the Judge sentenced David Rivkin to one year of probation, using the Booker discretion to effectively nullify all but the collateral consequences and stigma of the guilty plea.

A Guilty Plea Too Soon!

I am in the process of reviewing David Rivkin's sentencing memorandum. I will have a subsequent post on Rivkin's memo and the Government's memo when I receive it but for now make only an initial comment as to the setting.

Many, perhaps most, readers will not recognize the name David Rivkin. Rivkin was one of the original 19 defendants on the superseding indictment in United States v. Stein arising from KPMG's tax shelter activity. The indictments included both KPMG personnel (15, including Rivkin and David Greenberg, although he was an outlier) and the outside implementers (attorney (1) and the principals (3) with the financial firm helping devise the strategies and implement the trading for them). (For previous posts on Stein, see here.) The superseding indictment charged all defendants with one count of conspiracy and 40 counts of tax evasion. Additional counts were charged to separate defendants. Focusing on the common conspiracy and 40 counts of tax evasion, under Pinkerton and Guidelines relevant conduct concepts, all defendants on these common counts were at risk of maximum Guidelines base offense levels which would place their sentencing levels in the 25+ year range with expected upward adjustments. Relatively early in the drawn out proceedings in the case, the Government made offers to some of the defendants that included a 2 5-year felony count plea (conspiracy and one count of evasion) with the assertion (untrue in retrospect) that it just won't get any better than that. All of those to whom this offer was made declined, except Rivkin. Therein lies the drama.

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Scoping the Conspiracy -- Upton Redux

I have previously written here about the First Circuit's decision in Upton. I subsequently refined those comments and publised them in a Tax Notes article, John A. Townsend, Scoping the Conspiracy, 123 Tax Notes 1047 (May 25, 2009), which may be viewed or downloaded here. This publication in Tax Notes, as well as the companion web publication Tax Notes Today, is part of a series that I and the other authors of Tax Crimes (LEXIS-NEXIS 2008) (see here) are publishing in Tax Notes. The other authors are Larry Campagna, Steve Johnson and Scott Schumacher. Articles in this series will come out about once a month and will be posted here as well as being available through Tax Notes or Tax Notes Today.