Avoiding the Stipulations in a Plea Agreement for Purposes of Sentencing

In United States v. Gillen, 2011 U.S. Dist. LEXIS 12606 (WD PA 2/9/11), the defendant entered a plea agreement in which he stipulated to the tax loss involved for purposes of the Guidelines Offense level in S.G. 2T1.1 and 2T1.4 (Tax Table). This is all routine stuff. Prior to sentencing, however, the defendant notified the Government that he would attempt at sentencing to prove a lower tax loss. The Government cried foul and move to enforce the stipulation.

The district court agreed that the defendant's attempt to avoid his stipulation for purposes of the Guidelines calculation would be foul. But, the court reasoned, the Guidelines are just advisory and the court has an obligation to determine a fair sentence under 18 USC § 3553(a). The plea agreement did permit the defendant to urge a variance under 18 USC § 3553(a). So, the district court concluded (footnote omitted):
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Holder Memo on DOJ Policy on Charging and Sentencing

AG Holder issued a memo on charging and sentencing dated May 19, 2010. The memo is here. The memo is full of glittering generalities about the need for fair sentencing based on a defendant's individual circumstances. Holder proclaims:

Indeed, equal justice depends on individualized justice, and smart law enforcement demands it. Accordingly, decisions regarding charging, plea agreements, and advocacy at sentencing must be made on the merits of each case, taking into account an individualized assessment of the defendant's conduct and criminal history and the circumstances relating to commission of the offense (including the impact of the crime on victims), the needs of the communities we serve, and federal resources and priorities.

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Consistent with the statute and with the advisory sentencing guidelines as the touchstone, prosecutors should seek sentences that reflect the seriousness of the offense, promote respect for the law, provide just punishment, afford deterrence, protect the public, and offer defendants an opportunity for effective rehabilitation. In the typical case, the appropriate balance among these purposes will continue to be reflected by the applicable guidelines range, and prosecutors should generally continue to advocate for a sentence within that range. The advisory guidelines remain important in furthering the goal of national uniformity throughout the federal system. But consistent with the Principles of Federal Prosecution and given the advisory nature of the guidelines, advocacy at sentencing -- like charging decisions and plea agreements -- must also follow from an individualized assessment of the facts and circumstances of each particular case. All prosecutorial requests for departures or variances -- upward or downward -- must be based upon specific and articulable factors, and require supervisory approval.

In an article on the memo, Law.com quotes that ND GA U.S. Attorney's presentation at a Sentencing Commission hearing as saying that, despite Booker and its progeny, federal prosecutors had, prior to the memo, all too often been "the only ones in the courtroom who were still acting like the guidelines were mandatory." Further:

That harmed the department's ability to influence sentencing decisions. Prosecutors, Yates said, "ended up out of the conversation" because they would argue, somewhat robotically, that the government is recommending a guideline sentence. The conversation would then proceed between the judge and the defense attorney. "We need to be part of that conversation," Yates said.

Still, the Justice Department will continue to advocate for guideline sentences "because in the majority of cases we believe that is the fair and appropriate sentence," Yates said. But the Department, she insisted, must also adapt.

Time will tell what all of this means in the real world.  But it may mean that prosecutors relax a little, although I suspect that most sentencing courts were already there, at least in tax cases.

Discussions of the memo may be found at:

Sentencing Law and Policy Blog

Law.com 

WSJ Law Blog

Proposed Modifications to the Sentencing Guidelines -- More Latitude

New more lenient Sentencing Guidelines, effective 11/1/2010. The new / proposed guidelines permit a judge more leeway to consider factors not previously considered considered in the mainstream: criminal defendants’ military service, age, and mental and emotional conditions. Congress could still modify or even rejcect the proposals, but I don't think that is likely.

I think most of the phenomena that led to the change are not prominent in federal tax cases, but there is still some room for skillful and creative lawyering the sentencing phase in these cases.

Some links to further explore the proposals:

Sentencing Commission Proposals

Wall Street Journal Article

Wall Street Journal Law Blog

Sentencing Law Blog

Ohio Attorney Charged with FBAR violations Among Other Dastardly Deeds

An attorney in Ohio has been charged "with fifteen counts of aiding and assisting in the preparation of false and fraudulent tax returns that related to five different trusts; one count of willfully failing to file a report of foreign bank and financial accounts; one count of conspiracy to commit obstruction of justice; one count of witness tampering; one count of submitting a false statement; and one count of obstruction of justice." Another attorney in Ohio has been charged with a one count charge, coupled with a guilty plea, for making a false statement to federal agents and to DOJ. The DOJ Tax announcement is here.

This is mundane stuff except, of course, for the current hot topic -- offshore accounts. Projecting from the announcement, it appears that the charge for the failure to report on the FBAR is just icing on the cake in the charges and is unlikely to affect sentencing so long as the tax Guideline applies. See here.

Lenient Sentencing in White Collar Crime / Tax Crime Cases

I have previously noted in this blog the lenient sentencing in the offshore financial account sentences to date (see here). The concept of lenient sentencing is a relative concept; lenient means relative to the Guidelines Sentence -- i.e., downward departures and variances from the Guidelines. Booker and its progeny seem to have encouraged lenient sentencing. Sentencing judges realize that they have considerable leeway to fashion an appropriate sentence and often find some reason, particularly in white collar crime cases (of which tax crimes are a subset), to depart downwards, sometimes significantly.

In a case decided yesterday, the Eleventh Circuit reminded sentencing judges (at least those in the Eleventh Circuit) that their discretion is not boundless in white collar crime cases. In United States v. Livesay, ___ F.3d ___ (11th Cir. 2009), the defendant was a player in the "massive accounting fraud conspiracy at Healthsouth Corporation." He participated in "an illegal scheme to artificially inflate HealthSouth’s earnings and to falsely report HealthSouth’s financial condition is at the heart of the fraud." Basically, he would manipulate various financial accounts via fraudulent entries to meet senior Healthsouth officials' earnings goals and the results of these manipulations were reported in public documents filed with the SEC.

Livesay pled to three counts: (i) conspiracy to commit wire fraud, securities fraud, and falsifying books and records; (ii) falsely certifying financial information filed with the SEC; and (iii) a forfeiture count related to count one. The Government's bargain in the plea agreement was (i) to recommend the 3 level reduction for acceptance of responsibility; (ii) recommend that he be sentenced at the low end of the Guidelines range; and (iii) recommend a 5K1 departure.

The sentencing pursuant to the plea then commenced a saga involving three appeals in total in which the sentencing judges (on the third time, the original sentencing judge recused himself) were fixed upon a sentence of probation and the Eleventh Circuit saw it differently and sufficiently differently to reverse. I will let you read the short summary of that saga in the opinion.

In any event, the Guidelines calculations all along was a range of 78 to 97 months (note that this is after the acceptance of responsibility reduction but before the 5K1 departure). The sentence on this third appeal was 5 years probation. The Eleventh Circuit reversed because it found the sentence unreasonable. In a prior opinion involving another defendant from the same conspiracy, the Eleventh Circuit had said that sentencing in white collar crime cases serves important deterrence goals and that "[a] sentence of probation for a high-ranking officer in a corporation where over a billion dollars of fraud was perpetrated on an unsuspecting work force and investing public is not reasonable." The Livesay court emphasized the deterrence factor in white collar crimes and has some good language which I do not cherry pick because the opinion is short and pungent and should be read.

I think this reaction of appellate judges to the deterrence factor is a trend that may well play out in sentencing for tax crimes, which I have noted are merely a subset of white collar crime. Indeed, the Guidelines raise deterrence as a principal factor in tax crimes sentencing. The introductory commentary at S.G. 2T1 says:

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation’s tax system. Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws. Because 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.

Of course, if the Government does not appeal a downward variance that does not serve the deterrence purpose, then the sentencing judges do have free rein. Presumably, the Government is not appealing the lenient variance sentences in the offshore financial account pleas. But those who have cases in the pipeline (or, for that matter, in the future) should be aware of this appellate trend to view such generous downward variances with skepticism. The trend, if it continues, will not go unnoticed by sentencing judges.

Ms. Sheppard's Article on the UBS Mess and its Permutations

Today's Tax Notes Today has an article by Lee Sheppard, a noted commentator on the tax law and fashions and movies and other esoterica as segues into her tax law discussions surrounding the foreign bank account mess. In the article, titled, Now What? Dealing with UBS Account Disclosures, 124 Tax Notes 847 (Aug. 31, 2009) , Ms. Sheppard makes a number of points that I thought I would pass on here. Most of the following points probably of most interest to students of Federal Tax Crimes and not to seasoned practitioners.

1. Ms. Sheppard joins what from my perspective is the mainstream in thinking that the U.S. got the short end of the deal in the bargain with the devil (or as I would call it, with the pirates) -- referring to the Swiss Government and its representative pirate, UBS. (Ms. Sheppard graphically refers to Switzerland as the "whorehouse on the edge of town;" her point, is that Switzerland is still out there earning a living with tax evasion still among the services it offers.) While the U.S. certainly got less than it wanted, I disagree that it was all bad or even a defeat for the U.S. See my prior blog here. In typical hyperbolic fashion, Ms. Sheppard calls the deal a "Grubby Deal."

2. Ms. Sheppard's conclusion as to that bargain is tempered by some of her comments. Consider the following:

This deal does not do anything to help other rich countries deal with their own citizens' tax evasion by means of secret foreign accounts. In typically American unilateral fashion, the agreement would serve to scare American customers away from secret bank accounts while allowing the Swiss to continue selling tax evasion services to rich citizens residing in the rest of the world.

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Should the agreement be counted as a success if it scares potential customers and destroys the Swiss banking business in the United States? It may have done just that.

Ms. Sheppard says that there are two key factors to success for the IRS. First, this particular deal involving UBS must produce a representative number of cases that the U.S. can and will prosecute for maximum publicity / deterrence effect. Second, Switzerland must cooperate similarly (or appear to do so) with respect to other Swiss banks. In this regard, Ms. Sheppard notes that UBS was not the only Swiss bank offering "tax evasion services." Nothing particularly new here. Pirates do have to do something to earn a living. The recent indictments of the two Swiss enablers (I blogged that here) involve another bank.

3. Ms. Sheppard distrusts the Swiss:

It remains to be seen whether the Swiss will give up the business of selling tax evasion services to Americans.

Large outflows from UBS are being reported in the wake of the UBS investigation. Some smaller Swiss banks are declining U.S. customers, but others, including Credit Suisse, appear to be picking up the slack. There is a view that customers are fleeing UBS but not fleeing Switzerland.

4. Recognizing that many U.S. taxpayers preferred Switzerland because of the perception of security for their assets, Ms. Sheppard observes:

Swiss banks may be more secure than other tax haven banks, but it is unlikely that American tax dodgers would continue to pay their steep fees for mere security. It would be a good outcome for U.S. tax enforcement if the Swiss got out of the American market, because then tax evaders would have to put their assets at risk elsewhere.

5. My main point in the prior blog here was the deal with the Swiss Government represented an historic breach in the dam that is likely to grow. Ms. Sheppard addresses the point by asking the following question:

How is it possible that the agreement between the United States and Switzerland to settle the summons enforcement action to obtain the names of U.S. resident holders of UBS accounts is a historic breach of Swiss bank secrecy and a disappointment at the same time?

6. In response to that question, Ms. Sheppard cites two undisclosed documents. The first is a protocol to the U.S.-Swiss double tax treaty the contents of which are not yet disclosed or approved. Presumably the protocol will relax the historic Swiss interpretation of what is required in order to permit Switzerland to disclose to the U.S. The second is the criteria that will be used by UBS and Switzerland in turning over the agreed approximately 4,500 names and accounts. On this latter point, Ms. Sheppard says:

The Swiss government is thought to have agreed to expand its narrow view of the treaty term "tax fraud and the like," allowing disclosure of some account information. The Swiss government also agreed to provide account information without the United States having first provided the name of the taxpayer. The thinking is that the cases tendered by UBS will survive the treaty request process and be disclosed to the U.S. government.

All of this is dependent upon the Swiss Government, which values its tax evasion franchise, in doing right under the agreement. Ms. Sheppard is skeptical.

Those with experience fighting tax evasion are calling the agreement a baby step. They're not wrong. "While the agreement is a reasonable resolution of a particularly egregious case, it will not put Switzerland and its banks out of the cross-border tax evasion business for good," said the Tax Justice Network.

7. Ms. Sheppard notes that, given the sheer number U.S. taxpayers using offshore accounts for U.S. tax evasion, the Government will only be able to prosecute a relative few for the plethora of tax crimes that could be charged. The U.S. just does not have enough systemic resources for investigation, prosecution and incarceration to do attack the problem in large numbers.

8. As a result of factoring in the likelihood of being discovered by the IRS and the likelihood that, if discovered, the IRS would want to focus (i) its limited criminal prosecution resources on them and (ii) its investigation resources to even get the maximum penalties, many taxpayers are just walking away from the current voluntary disclosure initiative. JAT Note: These taxpayers have to be judgmentally impaired or be high risk takers who just prefer not to pay the penalties involved to avoid any risk of criminal prosecution.

9. The Government will prosecute a representative number of the sitting ducks -- at least at first the ones delivered up by UBS -- with a goal of making their cases tight and offering such a sweet deal that the defendant will be forced to plea, and do so quickly. (Nothing new here, because the overwhelming bulk of tax cases (as well as most of types of federal prosecutions) result in a plea.)

10. In picking the sitting ducks, the Government will be looking for a number of highly publicizable convictions by plea. (Those who are in the Government's cross-hairs might find this a particularly good time to strike a quick plea deal.)

If Justice prosecuted 50 UBS cases and 20 cases from other banks, that would create enough of a public impression of likelihood of being caught to qualify as a success. It is important that a fairly large number of UBS cases be brought. It is equally important that cases from other banks be brought, since some tough-minded customers figure that they will escape if UBS is not their Swiss bank. It would be good if some cases could be brought involving customers of banks in other bank secrecy jurisdictions, but that appears unlikely.

11. Notably for a tax article, Ms. Sheppard does give some sense of how the Sentencing Guidelines work in tax cases. She discusses ever so lightly the concept of tax loss (the first step in determining the Base Offense Level) and the Specific Offense Characteristic upward adjustment for "sophisticated means" of which the quintessential example is evasion related to a foreign bank account.

Guidelines Calculations Games -- More on the Chernick Plea

In my recent blog on the Jeff Chernick Guilty plea here, I said, in effect, that Chernick and the Government were playing games with Chernick’s Sentencing Guidelines Calculations. I would like to explore further that issue further by stepping through the relevant Guidelines calculations. Under Booker, of course, the Guidelines are advisory rather than controlling; they must be considered, however, and, in most sentencings since Booker, the Guidelines have been the principal determinant in setting sentences. (Tomko may be seen as an aberration – an important one – in the pattern of still hewing to the Guidelines’ advisory range). So, with that said, let’s calculate the Guidelines range for Chernick.

1. I start first with the plea agreement to a single 3 year count of conviction for § 7206(1). Plea to a single 3 year count caps the possible Guidelines sentence at 3 years. It simply makes no difference whether the Guidelines calculations produces a greater sentence than 3 years; it is capped at three years. I discussed this phenomenon in an earlier article involving the plea by the infamous Andy Fastow of Enron fame back when the Guidelines were mandatory and would have generated a sentence well exceeding 20 years; Fastow capped his possible sentence at 10 years by pleading to only 2 five year counts. John A. Townsend, Analysis of the Fastow Plea Agreements, 2004 TNT 44-46 (3/5/2004).

2. Since the plea was for one § 7206(1) (tax perjury count), the beginning point for the Guidelines calculations is determining the base offense level under SG §2T1.1(a)(2). The base offense level is determined by the tax loss table in § 2T4.1. That table requires that the tax loss be determined. The tax loss is determined by the court by a preponderance of the evidence after receiving recommendations by the probation office and objections by the parties (the Government or the defendant). Normally, in tax cases, the initial calculation of the tax loss is made by the Government in the Special Agent’s Report that is available to the probation office. In addition, in the plea discussions, the parties may negotiate over the proper amount of the tax loss. By that time, the defendant’s counsel will negotiate over the amount that is a proper amount under the Guidelines. If they can reach agreement, they will state their agreement as to the tax loss in the plea agreement. That statement of agreement is not binding on the probation office, and defendant’s counsel must be careful to advise his client that the probation office can determine a larger tax loss which could dramatically affect the sentence. In the Chernick plea agreement, although the parties did not agree as to the tax loss, the parties did try to close some parameters on the issue by agreeing:

a. Tax Loss: The relevant amount of actual, probable, or intended tax loss under Section 2T1.1 of the Sentencing Guidelines resulting from the offense committed in this case and all relevant conduct is the tax loss associated with accounts at UBS that were disclosed to the Government pursuant to the Deferred Prosecution Agreement with UBS, and of which the defendant was the beneficial owner for tax years 2001 through 2007.

Note what that this agreement constricts possible tax loss in two ways: (1) it limits the tax loss to the tax loss associated with the UBS accounts disclosed to the Government and (2) it limits the tax loss to the years 2001 through 2007. As I noted in my earlier discussion of the Chernick plea, both of these limitations are improper. The tax loss is “the total amount of loss that was the object of the offense.” “‘Offense’ means the offense of conviction and all relevant conduct under §1B1.3.” SG § 1B1.1, Appolication Notes (H). Relevant conduct includes conduct which would require grouping (suffice it now to say that all tax crimes would require grouping) “that were part of the same course of conduct or common scheme or plan as the offense of conviction.” In this case, under the Statement of Facts entered along with the guilty plea, Chernick admitted a course of conduct from 1981 forward involving (a) depositing income into foreign bank accounts which he failed to report and pay U.S. tax and (b) earning income on or with respect to those deposits which he failed to report and pay tax. That is precisely the conduct he admitted guilt for the year of conviction. The time frame for the relevant conduct was thus 1981 through 2007 and includes all banks. Nevertheless, the Government and Chernick attempt to limit the time frame to 2001-2007 and then only include the tax on the deposits into and earnings from the UBS accounts.

Now, in my experience, this type of limitation will sometimes occur in a plea agreement where the IRS has not investigated earlier years and there are serious limitations on ability to reconstruct the tax loss for the earlier years. All parties – the Government, the defense, the probation office and the Court – know that there is earlier relevant conduct tax loss that could be included, but it is not because it has not been and cannot reasonably be quantified. One may ask whether that is what happened here which might account for the limitations in the agreement noted above? That could hardly explain omitting the amounts deposited in other banks, at least one of which was stipulated to exist in this time frame. Moreover, the Guidelines provide expressly for estimates where more precise calculations cannot or have not been made. How can they be made in the Chernick case

Chernick admits in his Statement of Facts that, by 2005, the amount in his UBS account was $8 million. Since, under the pattern admitted, tax amounts would not have been deposited into the accounts, we may presume that these are untaxed amounts. Chernick admits further that, not all of his offshore assets connected with this scheme were in UBS. Around 2003, Chernick moved some portion of his UBS assets to another smaller Swiss Bank with no U.S. presence in order to avoid detection in the U.S. How much was moved is not stated, but that should be easily quantifiable given that this conduct was relatively recent. Chernick also admitted that he typically withdrew some $300,000 + per year that was then deposited into his U.S. corporate account. It is unclear whether he reported this amount on the U.S. corporate return, so it is unclear whether these amounts have been taxed. I thus, cannot assume for present purposes that these withdrawn amounts should enter the tax loss calculation. (Timing differences are effectively included by including the earnings on the previously untaxed amounts.) Finally, he did send $700,000 in the U.S. by sham loan in 2004, so this amount would not be on deposit in UBS or any foreign bank, so there is another $700,000 in untaxed income (as well as the relatively minor amount of taxes due on the interest deductions he claimed on the sham loan. So it appears that, on the amounts stipulated, there was at least $8.7 million of untaxed income over all the years.

Even if some precise quantification year by year would be impossible for all of the years involved, it is admitted that all of this cumulative amount was untaxed and the Guidelines permits an estimate as follows (SG § 2T1.1 Notes (A):

If the offense involved filing a tax return in which gross income was underreported, the tax loss shall be treated as equal to 28% of the unreported gross income (34% if the taxpayer is a corporation) plus 100% of any false credits claimed against tax, unless a more accurate determination of the tax loss can be made.

So, based on what we know from the court filings, the tax loss can be calculated as.28 times $8.6 million, for a tax loss of$2.4 million (rounded down). The base offense level under the Tax Table is thus at least 22.

I should note that some portion of the $8.7 million might well have been taxable at lesser capital gains rates, but under the foregoing presumption a court would require that the defendant show which portion in order to make that more accurate determination but it looks like the parties are now unwilling to delve into the pre-2001 years (that may change in the sentencing process). Moreover, under the Tax Table, the tax amount would have to drop by over $1,400,000 to lower the base offense level which I don’t think would be likely on the difference between the capital gains and presumed 28% ordinary income rate.

So, in sum, we have a base offense level of 22.

3. An additional 2 levels are added because the parties stipulated that the offense involved sophisticated means. (That stipulation may also not be binding on the probation office or the court, but it is unimaginable that this 2 level increase does not apply.) So, we are now at level 24.

4. The parties stipulate to the 2 or 3 level acceptance of responsibility reduction under S.G. 3E1.1, so Chernick gets a 3 level reduction. So, we are now at level 21.

5. Chernick admits that he paid – or at least intended to pay – a bribe to a Swiss official for information about whether his accounts would be turned over pursuant to the U.S. Government’s full court press in 2007. This might be considered obstruction of justice which could justify a 2 level increase, but there are not enough facts known now to add that. Leave the offense level at 21.

6. Moving to the sentencing table (Ch. 5, Part A), the indicated sentencing range for offense level 21 at criminal history I is 37-46 months. Note that this indicated level could go up depending on whether additional amounts (deposits in other banks and cash brought back into the United States) are properly included in the tax loss amount, which would ripple down to a higher offense level for sentencing.

7. The low end of the indicated range thus exceeds the maximum incarceration for the sole 3 year count of conviction.

These calculations assume, of course, that the tax loss calculations include all relevant conduct. In the plea agreement, the Government agreed “to recommend that the defendant be sentenced at the low end of the guideline range, as that range is determined by the court.” Either the Government was making the defendant a meaningless promise or, more likely as indicated above, it was willing to ignore tax loss amounts clearly and relatively easily includible and even required by the Guidelines. Maybe the Government is playing that game. However one may view the propriety of the Guidelines, I don’t think that type of game playing speaks well for the Government. At a minimum, the Government should tell the probation office and court when it is playing that game.

Major 3d Circuit En Banc Decision on Booker Sentencing in Tax Case

Thanks to the Doug Berman's Sentencing Law & Policy Blog, I learned of the Third Circuit's en banc decision in United States v. Tomko, ___ F.3d ___ (3d Cir. 2009). There is lots of good stuff there, and I will probably pontificate on it after I have thoughtfully considered it (perhaps even one or two beers deep). However, my initial impression is that, perhaps, just perhaps, the Courts of Appeals and the Supreme Court (is that the right order?) do not believe that it is or should be their duty to micromanage sentencing decisions. Sure, there are policy arguments back and forth on that issue, but, really guys, is micromanagement of those decisions at the appellate level any way to run a justice system (with emphasis on justice), particularly with our history which, after all, informs us of who we are and who we ought to be?

Someone has said that, perhaps, post-Booker, we are back in the wild, wild west days of sentencing. I would not say wild, wild west. I would say that the judges are given the discretion to fashion the punishment to fit both the crime and the person.