Monday, May 29, 2017

Yet Another Offshore Account Conviction But With DOJ Agreement of No Sophisticated Means (5/29/17; 5/31/17)

DOJ Tax announced Friday here the guilty plea of Joyce Meads of College Station, TX.  Meads was charged in SD FL.  Meads pled to one count of the Klein / defraud conspiracy, a five-year felony.  I link the following document:  docket entries as of today here; the guilty plea here. and the Stipulated Facts here. Notice from the docket sheet that she was charged by information and that she waived indictment, which use indicate a plea agreement in the making.

The key items in the plea agreement are

1. Tax Loss:  Between $250,000 and $550,000.

2.  Sophisticated Means:  "[T]he defendant's efforts to defraud the United States did not involve sophisticated means' within the meaning of the Sentencing Guidelines."  (See my comment below.)

3.  No other factors that would increase the offense level.  Of course, she will get the acceptance of responsibility adjustment (2 or 3 level downward adjustment).

On the basis of the foregoing, my rough and ready calculation of the offense level is 15 with an indicated sentencing range of 18-24 months.  Based on the same calculation, if the sophisticated means adjustment were to apply, the offense level would be 15 with an indicated sentencing range of 24-30 months.

Key items in the stipulated facts, which are pretty much bare bones, are:

1. From 1997 to 2010, Meads "conspired with co-conspirators Marc Harris, Boyce Richard Griffin, and others to defraud the United States."  I will provide some additional information Harris and Griffin at the end of this blog.  One of the others is a person identified as "C.M." with Harris' entity, The Harris Organization in Panama City, Panama.

2. Meads sought to avoid tax on her income from U.S. oil royalties she had recently received from her parents as a gift and would receive as a gift.

3. Harris and the Harris Organization set up entities to implement the offshore structure.  The entities included a Delaware corporation and a Panama corporation.  Meads transferred her royalty interest to the Delaware corporation and he parents transferred to remaining interest to the Delaware corporation.  The royalty income apparently flowed through the Delaware corporation and then out to the Panama corporation.  In 1998, she caused the Panama corporation to distribute $25,000 to her disguised as a scholarship.

4.  In 1999, Meads shifted the operation from the Harris Organization to Griffin's Offshore Management Alliance Ltd., which, like the Harris Organization, assisted U.S. persons seeking to avoid U.S. tax.  Apparently, incident to that shift, Meads caused the royalty payor (Chesapeake Energy) to forward royalty checks to a private post box in Miami.  The royalty checks were forwarded by to Panama where Griffin deposited them in a Panamanian bank account for Meads' benefit.

5.  Meads failed to report the income on her 1997-2009 1040s and, as a result, filed false tax returns.

JAT Comments:

Sunday, May 28, 2017

Fifth Circuit Joins Majority Decisions that § 7212(a) Requires No Pending Investigation (5/28/17)

In United States v. Westbrooks, ___ F.3d ___, 2017 U.S. App. LEXIS 9073 (5th Cir. 2017), here, the Fifth Circuit held that (1) § 7212(a), here, tax obstruction, requires no pending investigation and (2) restitution for a tax crime based solely as a condition of supervised release cannot require restitution prior to the supervised release.

All the commotion was created by the Sixth Circuit's holding in See United States v. Kassouf, 144 F.3d 952, 955-58 (6th Cir. 1998), subsequently reaffirmed in United States v. Miner, 774 F.3d 336, 345 (6th Cir. 2014).  But, since Kassouf, every court other than the Sixth Circuit that has addressed the issue has disagreed with Kassouf.

There is nothing particularly newsworthy in the holding other than the Fifth Circuit joining the majority of courts which it lists as follows (bold face supplied by JAT):
United States v. Floyd, 740 F.3d 22, 32, 32 n.4 (1st Cir. 2014) ("A conviction for violation of section 7212(a) does not require proof of either a tax deficiency . . . or an ongoing audit," so "the filing of false tax documents" or "concealment of income or other assets from the IRS can form the basis for a violation of the statute"); United States v. Marinello, 839 F.3d 209, 222 (2d Cir. 2016) ("[S]ection 7212(a)'s omnibus clause criminalizes corrupt interference with an official effort to administer the tax code, and not merely a known IRS investigation."); United States v. Massey, 419 F.3d 1008, 1010 (9th Cir. 2005) ("[T]he government need not prove that the defendant was aware of an ongoing tax investigation to obtain a conviction under § 7212(a); it is sufficient that the defendant hoped 'to benefit financially' from [his] conduct."); United States v. Sorensen, 801 F.3d 1217, 1232 (10th Cir. 2015), cert. denied, 136 S. Ct. 1163, 194 L. Ed. 2d 176 (2016) ("7212(a) does not require an ongoing proceeding . . . .'").
The Court also rejected the argument that the holding rendered § 7212(a) unconstitutionally vague.  That was a concern that contributed to the Kassouf holding.  The Fifth Circuit rejected it, reasoning in part:
Westbrooks rightly argues that, after Johnson v. United States, 135 S. Ct. 2551, 192 L. Ed. 2d 569 (2015), section 7212(a) is not saved by the fact that some conduct clearly falls within a statute's prohibition. Id. at 2561. But as several circuits have held, Johnson did not change the rule that a defendant whose conduct is clearly prohibited cannot be the one making that challenge. See United States v. Bramer, 832 F.3d 908, 909 (8th Cir. 2016) ("Though Bramer need not prove that § 922(g)(3) is vague in all its applications, our case law still requires him to show that the statute is vague as applied to his particular conduct."); Arrigoni Enters., LLC v. Town of Durham, 629 F. App'x 23, 26 (2d Cir. 2015); Maages Auditorium v. Prince George's Cty., 2017 U.S. App. LEXIS 4532, 2017 WL 1019060, at *6 (4th Cir. Mar. 15, 2017); United States v. Huff, 630 F. App'x 471, 487 (6th Cir. 2015); United States v. Zagorovskaya, 628 F. App'x 503, 504 (9th Cir. 2015); Miranda v. U.S. Att'y Gen., 632 F. App'x 997, 1000 (11th Cir. 2015); Flytenow, Inc. v. FAA, 808 F.3d 882, 895 (D.C. Cir. 2015).
Finally, as to the restitution issue, the Court held that Title 26 tax crimes do not permit restitution unless agreed to in a plea agreement or as a condition for supervised release.  The sentencing court had ordered restitution as a condition of supervised release after incarceration but ordered restitution to commence while incarcerated.  The Fifth Circuit said that was not consistent with the condition.

Wells Fargo Wins Some, Loses Most in its Iteration of the Stars Bullshit Tax Shelter (5/28/17)

In Wells Fargo & Company v. United States, 2017 U.S. Dist. LEXIS 80401 (D MN 2017), here, the court held that yet a tax shelter -- the Stars variety often discussed on this blog --  was, well, bullshit.  Actually, the jury had previously held that the transaction was sham (a politically correct euphemism for the concept embodied in the concept of bullshit as I and Vinny use it (for Vinny's iteration, see here)).  In short, Wells Fargo reached for the Stars, but its reach exceeded its grasp (well, it got the Stars, it just did not get the  principal tax benefit).  Its loss of the principal substantive tax benefit is not particularly exceptional (the appellate courts addressing the gambit had denied the principal benefit, but even without the benefit of those decisions, a taxpayer considering the shelter should have known it was bullshit, which raises the penalty issue also resolved in the case, which, to me, is the more important issue.

The decision gives Wells Fargo, part of the loaf, although not nearly half, on the substantive tax benefits claimed from the overall transaction.  How so?  The credit gambit in the overall transaction was done via a trust that the jury declared sham.  So, Wells Fargo  lost that part of the transaction (although I suspect it will renew the almost inevitable quixotic appeal).  The part it won was the interest deduction part.  The Court found that there was a real loan transaction with economic substance.  This was consistent with the jury's partial verdict and consistent with the holdings in the other courts of appeals' cases.  In this regard, the Court complimented the jury as follows (fn 4):
   n4 The Court pauses to note that a jury of laypersons resolved this case in a manner that parallels the decisions of three separate federal appellate panels in similar cases—a credit to how seriously the jurors took their responsibilities and how hard they worked to understand the extremely complicated evidence.
As an aside, that has been my experience with juries -- both as an advocate and as a juror.  They don't necessarily always reach the right result, but they do always work very hard  and most of the time get the right -- or at least a fair -- result.

The Court then moved to the issue:
Notwithstanding the fact that all three courts of appeals to have considered its argument have rejected it, the government continues to insist that the loan is a sham and that Wells Fargo is not entitled to deduct its interest expenses. The government contends that, even if a transaction has objective economic substance, it must be treated as a sham unless the taxpayer actually had at least one subjective, non-tax business purpose. To resolve this issue, it is necessary to predict which approach to the sham-transaction doctrine the Eighth Circuit will choose to adopt. 
Having considered the parties' arguments, the Court concludes that the Eighth Circuit is likely to treat the objective and subjective components of the sham-transaction test as two factors in a single flexible analysis rather than as two separate, rigid tests. After all, courts created the sham-transaction doctrine in recognition of the fact that taxpayers display endless ingenuity in exploiting the tax code, making it impossible for Congress to anticipate and prevent all abuse. A doctrine that is intended to counter the creative and ever-evolving abuse of the tax code must necessarily be flexible. Reducing the sham-transaction doctrine to two mechanical, all-or-nothing tests would deprive the doctrine of the flexibility needed to accomplish its purpose. n5
   n5 The Court acknowledges that, after Wells Fargo's STARS transaction concluded, Congress codified what the government calls the "conjunctive" approach—that is, a requirement that a transaction have both objective economic substance and a subjective non-tax business purpose. See 26 U.S.C. § 7701(o)(1). Importantly, however, the statute states that it applies "[i]n the case of any transaction to which the economic substance doctrine is relevant," and goes on to say that "[t]he determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if this subsection had never been enacted." 26 U.S.C. § 7701(o)(1), (o)(5)(C). This suggests some flexibility in determining a threshold requirement of relevance before applying the doctrine.

Sunday, May 21, 2017

Restitution Permits Double Assessments But Only One Collection (5/21/17)

In Muncy v. Commissioner, T.C. Memo. 2017-83, here, the Court updated its prior opinion in Muncy v. Commissioner, T.C. Memo 2014-251, because of a reversal and remand in Muncy v. Commissioner, 637 Fed. Appx. 276 (8th Cir. 2016).  Now that's a lot of commotion, and I don't intend here to get into the twists and turns.  Suffice it to say that the issue on remand was whether the IRS had shown that the person issuing the notice of deficiency had the proper delegated authority to do so.  For purposes of this blog (and my interest), the more important part of the current opinion was what it  repeats from its prior opinion that I had not previously paid sufficient attention to.  And, what I discuss here is all in the most recent opinion linked above, so I do not provide links to the prior opinions.

In high-level summary, the taxpayer had been convicted for tax crimes (which ones are not important here), with a punishment including restitution for tax.  The IRS summarily assessed the restitution as permitted by § 6201(a)(4) and §6213(b)(5), which avoids the necessity for a notice of deficiency and prevents the taxpayer form contesting the assessment.  Then, determining that the taxpayer owed more tax for the periods than reflected in the restitution award that had been assessed (this is not uncommon since the restitution amount is often less than the total tax deficiency), the IRS issued the taxpayer a notice of deficiency.  In issuing the notice of deficiency, however, the IRS reduced the amount of the deficiency by the restitution assessed, so that the amount of deficiency in the notice was for the net amount.  The taxpayer petitioned the Tax Court for redetermination.  The IRS moved to increase the deficiency to eliminate the reduction for the restitution assessment.

The problem with which the Court grappled, at bottom, was whether so increasing the deficiency amount to include the amount already assessed would permit the IRS to assess the increased amount if "redetermined" by the Court and thus have two assessments that, in part, are for the same tax liability.  Bottom line, without getting into the technical maze the Court navigated, the Court held that the deficiency was the gross amount rather than the net amount.  That will mean that the amount determined in the Tax Court's decision document that is then assessed will be doubled up, but the Court said (bold-face supplied by JAT):
This leaves us with the question of whether respondent should reduce his deficiency determinations by amounts of restitution previously ordered by the District Court. The restitution statute expressly contemplates that a civil claim may be brought after the criminal prosecution by providing that the amount paid under a restitution order "shall be reduced by any amount later recovered as compensatory damages for the same loss by the victim in * * * any Federal civil proceeding". 18 U.S.C. 3664(j)(2)(A) (2012). The reverse applies as well: Any amount paid to the IRS as restitution for taxes owed must be deducted from any civil judgment the IRS obtains to collect the same tax deficiency. United States v. Tucker, 217 F.3d 960, 962 (8th Cir. 2000). Accordingly, a civil judgment must be entered before the IRS reduces a taxpayer's tax liability by amounts of restitution paid.
So, bottom-line, the defendant will not have to pay twice for the same tax amounts due.

Saturday, May 20, 2017

Article on Justice Gorsuch's Approach to Criminal Tax Cases (5/20/2017)

I think readers will be interested in this excellent article by Jeremy Temkin:  Reading Tea Leaves: Justice Gorsuch and Criminal Tax Cases, 257 NYLJ (5/18/17), here.  The data set for the article is slim -- principally  United States v. Farr, 536 F.3d 1174 (10th Cir. 2008), here (note that the link is to the case on the UVA Law School website titled the Neil Gorsuch Project).  I have written before on the subsequent trajectory in Farr and provide the principal blog links at the end of this blog. Basically, in the 2008 case decided by then Judge Gorsuch, Farr argued successfully on the appeal that the charging document incorrectly charged her for evading "her" employment taxes (which were not her liability) rather than the trust fund penalty for which she was liable.

Here is an excerpt from Temkin's Lessons Learned:
It is, of course, necessary to exercise caution in reading tea leaves, and a narrow  sampling of cases is insufficient to conclude with confidence that Justice Gorsuch will show the same willingness as Justice Scalia to defend (certain) criminal rights. After all, Farr was a fairly unusually (sic) case, and Judge Gorsuch left open the possibility that the government could have avoided the constructive amendment problem that it had created by drafting a bare-bones indictment. That solution, of course, will not help criminal defendants who will be forced to rely on rarely granted bills of particulars to draw out the government’s case. 
In that way, Farr presents an interesting tension with Justice Scalia’s dissent in United States v. Resendiz-Ponce, 549 U.S. 102, 111 (2007). Resendiz-Ponce was convicted of illegally attempting to reenter the country based on an indictment that failed to allege that he had committed any overt act in connection with his reentry. An eight-justice majority concluded that the indictment was sufficient, reasoning that “attempt” necessarily connotes both intent and some overt act. Justice Scalia refused to give the government the benefit of that doubt. Instead he found the indictment faulty on the straightforward view that it failed to satisfy the requirement that it allege the two elements of  attempted reentry: both intent to commit the underlying crime and some act toward its commission. Thus, while both Judge Gorsuch in Farr and Justice Scalia in Resendiz-Ponce showed themselves  committed to construe indictments strictly, the former did so by encouraging the government to allege fewer particulars, while the latter concluded that more details were necessary.
JAT Note:  Of course, Farr could have been convicted of evading the employer's employment taxes (including even the employer's portion), but the charging document should not have said she evaded "her" taxes.

Prior blogs on Farr:

  • Charging Decisions for Trust Fund Tax Violations (Federal Tax Crimes Blog 11/17/16), here.
  • Charging Decisions for Trust Fund Tax Crimes - 7202 or 7201 (Federal Tax Crimes Blog 12/22/12), here.
  • Evasion of Trust Fund Taxes and Charging Decisions (Federal Tax Crimes Blog 1/23/2012), here.
  • Tenth Circuit Summarizes Double Jeopardy in Rejecting the Argument (Federal Tax Crimes Blog 1/16/10), here.


Monday, May 15, 2017

CCA on Application of Refund Statute of Limitations in OVDP (5/15/17)

In CCA 201719026 (4/12/17, released 5/12/17), here, an IRS Senior Technician Reviewer responds to the following:
Your office has received a number of questions from OVDP examining agents about taxpayers who report additional income and tax on their amended returns for most of the years in the disclosure period, but report an overpayment on their amended return for at least one of the years at issue. A typical fact pattern might involve a taxpayer for whom the disclosure period is tax years 2003 through 2010. For tax years 2003 through 2007 and 2009 and 2010, the taxpayer reports additional income and tax. But the amended return submitted for tax year 2008 includes a large loss, resulting in an overpayment for that tax year. After reviewing the amended return, the examining agent confirms the claimed loss and the resulting tax computations show an overpayment for tax year 2008. The taxpayer then requests that the overpayment for tax year 2008 be credited against increases in tax for the other tax years in the disclosure period or the miscellaneous offshore penalty. You have asked for advice regarding how I.R.C. §§ 6511 and 6514 affect the Service’s ability to credit the overpayment as requested by the taxpayer.
The author then discusses the law apply under certain possible scenarios.  Since the analysis is succinct, I will just refer readers to it.

A short summary of the answer to the "typical fact pattern" disclosed is that, assuming the original 2008 return was timely filed, the period for claiming a the refund expires 3 years after the date of the filing (or deemed filing).  Hence, if the amended return filed in OVDP was submitted on or before that 3 year period expired, then the refund is timely and the refund can be resolved in the OVDP proceeding (either by refund or credit against other years).  And, depending upon the facts, the filing of the claim for refund by amended return in the OVDP proceeding might be timely.

Although the author of the CCA does a very good job of discussing the rules, I offer the following from the current operating draft for the next edition of my Federal Tax Procedure book:
Just as there are statutes of limitation on assessment and collection taxes, there are also statutes of limitation on taxpayers claiming tax refunds from the Government.  There are two applicable rules. 
First, there is a statute of limitations for filing the claim for refund.  A claim for refund must be filed within three years from the date the return was filed or two years from the date the tax was paid, whichever is later, and, if no return is filed, within two years from the date of payment.  § 6511(a).  Read literally, this means that a taxpayer can file a return 40 years late and qualify under this first rule. I hope readers will instinctively say something must be missing here, for statutes of limitations do not normally allow such lengthy lapses before the claim must be pursued.  The answer to that concern is in the second rule to which I now turn. 
Second, there is a statute of limitations on the amount of tax that can be refunded if the claim is timely under the first rule.  The IRS may only refund the amount of tax paid within three years plus the period of any extension and, if the foregoing rule does not apply, then it may only refund the tax paid within two years of the date of the claim.  § 6511(b)(2).  This is called the “lookback” rule. 

Saturday, May 13, 2017

District Court Denies Sufficiency Motion for Tax Evasion and Tax Obstruction (5/13/17)

In United States v. Pflum, 2017 U.S. Dist. LEXIS 72422 (D KS 2017), here, Pflum had been convicted of two counts - evasion, § 7201, and tax obstruction, § 7212(a).  In a prior prosecution in 2004, Pflum had been convicted of "multiple tax code violations, including three counts of failing to file income tax returns for the tax years 1997 through 1999."  As a condition of supervised release on that conviction, the court ordered Pflum to file "truthful and complete federal and state income tax returns in a timely manner, according to law, and cooperate with the Internal Revenue Service and state tax authorities regarding any manner related to the defendant's past or present tax liability during the term of supervision."  As recounted in the facts in the current case, Pflum continued to misbehave.  Hence, Pflum was again indicted, this time for evasion and tax obstruction.  During the pretrial proceedings, Pflum thrashed around in various ways, including representing himself pro se at times. The jury convicted.  Pflum filed post-trial motions.  In the order linked above, the Court denied the post-trial motions.

The only part Memorandum and Order that I think worthy of comment is the denial of the Motion for Acquittal based on insufficiency of the evidence.  Before excerpting that portion of the Order, I first offer the following regarding the jury verdict from the factual background:
After the court submitted the case, the jury deliberated and returned guilty verdicts for both of the counts charged in the Indictment. Doc. 179. The jury completed a special verdict form for each charge. The jury agreed that Mr. Pflum had committed affirmative acts to evade the payment of income taxes by submitting false financial statements, instructing third parties to ignore IRS collection efforts, and threatening legal action against third parties who complied with the IRS's collection efforts. Id. at 2-3. The jury also agreed that Mr. Pflum committed affirmative acts to obstruct the due administration of the Internal Revenue laws by submitting false financial statements, filing a grant deed attempting to transfer ownership interest of property located at 500 MacDonald, San Juan, Washington, instructing third parties to ignore IRS collection efforts, and threatening legal action against third parties who complied with the IRS's collection efforts. Id. at 6-7.
Now, turning to the excerpt where the Court discusses and denies the Motion for Acquittal.
Mr. Pflum asserts that the government presented insufficient evidence for a rational jury to convict him beyond a reasonable doubt of the counts charged. The court addresses the two counts of conviction separately, below. 
1. Count 1: Attempting to Evade and Defeat the Payment of Income Tax 
Count 1 charged Mr. Pflum with attempting to evade and defeat the payment of income tax in violation of 26 U.S.C. § 7201. To secure a conviction under § 7201, the government must prove beyond a reasonable doubt that: (1) the defendant owed substantial income tax; (2) the defendant intended to evade and defeat the payment of that tax; (3) the defendant committed an affirmative act in furtherance of this intent; and (4) the defendant acted willfully, that is, with the voluntary intent to violate a known legal duty. See 10th Cir. Crim. Pattern Jury Instruction No. 2.92 (2011); see also United States v. Meek, 998 F.2d 776, 779 (10th Cir. 1993) ("To obtain a conviction for evasion, the government must prove three elements: 1) the existence of a substantial tax liability, 2) willfulness, and 3) an affirmative act constituting an evasion or attempted evasion of the tax.") 
For the first element, the government need not prove the exact amount of the tax due—just that the tax liability is substantial. See United States v. Mounkes, 204 F.3d 1024, 1028 (10th Cir. 2000) (holding that the government had proved substantial tax liability because the "evidence showed that the [defendants'] bank deposits and cash expenditures exceeded their reported income after adjustments for applicable exemptions and deductions. Such evidence supports an inference that defendants had unreported income."). "Whether the tax evaded was substantial is a jury question and generally not susceptible to a precise definition." 10th Cir. Crim. Pattern Jury Instruction No. 2.92 cmt. (2011); see also Canaday v. United States, 354 F.2d 849, 851-52 (8th Cir. 1966) ("The word 'substantial,' as applicable here, is necessarily a relative term and not susceptible of an exact meaning."). 
The third element—the requirement of an affirmative act—"distinguishes the offense of evasion from the misdemeanor offense of willful failure to file a tax return." Meek, 998 F.2d at 779. "An affirmative act requires more than the passive failure to file a tax return; rather, it requires a positive act of commission designed to mislead or conceal." Id. The misstatement of one's income is an affirmative act sufficient to sustain a jury's conviction for tax evasion. See United States v. Jones, 816 F.2d 1483, 1488 (10th Cir. 1987) ("Defendant's filing of his tax returns with the knowledge that he should have reported more income is sufficient to sustain the jury's conclusion that defendant willfully attempted to evade taxes." (citing Sansone v. United States, 380 U.S. 343, 351-52, 85 S. Ct. 1004, 13 L. Ed. 2d 882 (1965))). 
Here, the government presented evidence sufficient for a reasonable jury to find that the government proved each one of the elements essential to a tax evasion conviction under 26 U.S.C. § 7201. At trial, the government presented evidence that Mr. Pflum owed substantial income tax. The evidence included the federal income and employment tax returns that Mr. Pflum had filed for tax years 1997 through 2007. By his own admission, the tax returns reported Mr. Pflum's total income as $7,700,494.00 and claimed he owed $2,663,854.23 in federal income and employment taxes. The government also presented evidence that Mr. Pflum had earned income from the sale of his business in 2006. The government thus presented sufficient evidence of the first element. 
The government also presented sufficient evidence of the second, third, and fourth elements. The government presented evidence that Mr. Pflum committed affirmative acts in furtherance of his intent to evade and defeat the payment of the tax that he owed the government. And, the jury could infer from the circumstantial evidence that Mr. Pflum's conduct was willful. Indeed, the jury specifically found that the government had presented evidence of and proved beyond a reasonable doubt that Mr. Pflum committed certain affirmative acts. Specifically, this evidence included the affirmative acts of: (1) "submitting false financial statements claiming $472.75 in assets and $470.00 per month income, when in truth and in fact [Mr. Pflum] owned over $2 million in real estate and received monthly income of over $16,000;" (2) "instructing third parties, such as renters, potential buyers, and others indebted to [Mr. Pflum] to ignore collection efforts by the Internal Revenue Service;" and (3) "threatening legal action against third parties who complied with the Internal Revenue Service's collection efforts." Doc. 179 at 2-3. Viewing the evidence in the light applied to a Rule 29(c) motion, the court concludes that a rational jury could have reached the very same verdict that this jury reached. 
2. Count 2: Corruptly Endeavoring to Obstruct and Impede the Due Administration of the Internal Revenue Laws 

Friday, May 12, 2017

New DOJ Charging and Sentencing Recommendation Guidance (5/12/17)

AG Sessions has issued a new Memorandum, dated May 10, 2017, titled Department Charging and Sentencing Policy.  The memorandum is here, and the DOJ press release is here.

The memorandum is short, so readers might want to go directly to it.  My bullet points as to what is covers:

  • "[P]rosecutors should charge and pursue the most serious, readily provable offense."  That is stated as a general rule for which exceptions may be allowed if approved.
  • "[P]rosecutors must disclose to the sentencing court all facts that impact the sentencing guidelines or mandatory minimum sentences, and should in all cases seek a reasonable sentence under the factors in 18 U.S.C. § 3553."  Sentencing recommendations to the court within the guidelines range are appropriate, with recommendations for departures and variances requiring approvals.

From some of the early comment on the new guidance:

Joseph Tanfani, Sessions orders return to tough drug war policies that trigger mandatory minimum sentences (LA Times 5/12/17), here.
He [AG Sessions] rescinded two policy memos signed by a predecessor, former Atty. Gen. Eric H. Holder Jr., that told prosecutors to be cautious in their use of methods that can produce dramatically harsher jail terms. 
In a memo released Friday, Sessions instructed Justice Department lawyers to “charge and pursue the most serious, readily provable offense." 
By definition, he added, the most serious offenses “carry the most substantial guidelines sentence, including mandatory minimum sentences.” 
* * * * 
With the rise of federal mandatory sentencing laws in the 1980s and 1990s, judges were stripped of much of their discretion on how to sentence drug users. 
Decisions made by prosecutors often effectively determine how long offenders will spend in prison. 
For example, if federal prosecutors include the amount of drugs in their written charges, that can trigger a mandatory minimum sentence. 
They also have the discretion to file motions for so-called sentence “enhancements,” which can effectively double drug sentences for repeat offenders. 
Some prosecutors use these tough tools as a hammer in plea negotiations, or to force offenders to cooperate. 
Starting in 2013, Holder instructed federal prosecutors to use that power more sparingly and to reserve the toughest charges for high-level traffickers and violent criminals. 
“As a nation, we are coldly efficient in our incarceration efforts,” Holder said in a speech decrying the growth in America’s prison population. 
The Obama-era policies led to a sharp decline in the number of drug offenders hit with mandatory minimum sentences, from 62% in 2013 to 44% last year, according to U.S. Sentencing Commission data compiled by a sentencing reform group, Families Against Mandatory Minimums. 

Tuesday, May 9, 2017

Government FBAR Willful Penalty Suit Survives Motion to Dismiss (5/9/17)

In United States v. Toth, 2017 U.S. Dist. LEXIS 66664 (D MA 2017), here, the Court denied the defendant's motion to dismiss the Government suit for judgment on a FBAR willful penalty.  I attach the docket entries, here, which indicate that the Government filed the case in September 2015 and there have been many twists and turns to the date of the order.  Among those twists was a default judgment because Toth did not accept or avoided service of the complaint.  And, perhaps driving the twists and turns is that in this suit involving an FBAR willful penalty of $2,173,703, Toth is representing herself pro se. (I suppose there is redundancy there but I wanted it to be clear.)

According to the complaint, here:
  • Toth opened the UBS account in 1999 and it had remained open continuously since.  
  • At all times, Toth had control and a financial interest in the account.  
  • "The balance of the Account in calendar year 2007 was approximately $4,000,000."  
  • "As of June 30, 2008, the balance of the Account was at least $4,347,407."  
  • The FBAR penalty is $2,173,703, which is 50% of the amount on 6/30/08.  
  • The complaint contains two spare statements of the basis for liability:
21. Monica Toth failed to file an FBAR disclosing the existence of the Account for the 2007 calendar year on or before June 30, 2008.
22. Monica Toth voluntarily and intentionally violated a known duty to appropriately and timely disclose the existence of the Account to the Internal Revenue Service and the Department of the Treasury.
23. The failure of Monica Toth, to timely file the FBAR with regard to the 2007 calendar year was willful within the meaning of 31 U.S.C. § 5321(a)(5).
I don't think Toth filed an answer.  At least my search of the docket entries did not pick one up.  However, she did file the motion to dismiss which led to the order.

There is nothing in the order particularly important other than to the litigants.  Apparently in the mix, however, was whether the FBAR willful penalty violated the 8th Amendment's Excessive Fines prohibition.  On that issue, the court said:
Toth also argues that the fine imposed by the Government violates the Excessive Fines Clause of the Eighth Amendment. "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 U.S.C. § 5321(a)(5)(A). The penalty may not exceed $10,000 unless the violation is willful. Id. § 5321(a)(5)(B)—(C). Whether Toth, in fact, violated § 5314, and, if so, whether that violation was willful is a question of fact that the Court cannot resolve at this stage. Accordingly, the Court does not address whether the fine to be imposed, if any, violates the Eighth Amendment.
For further context on the 8th Amendment, I attach the Government's Opposition, here, addressing the Eight Amendment issue.  The Opposition is dated December 14, 2016. The opening of that Opposition says:
By way of background, the United States alleged in the complaint that defendant Monica Toth willfully failed to file an FBAR as required by statute because she had a bank account in Switzerland which contained over $4 million. Ms. Toth moved to dismiss the action on several theories, from defective service of process, to delayed service, to failure to state a claim on which relief could be granted. These are meritless and were addressed in a prior brief filed by the United States. But Ms. Toth also argued in one or two sentences that the Excessive Fine Clause in the 8th Amendment to the U.S. Constitution precluded judgment from being entered. She cited no authority for her argument. 
Undersigned counsel recognized that a similar argument was pending before the Ninth Circuit and sought (and received) an extension of time to brief the issue until the briefs were filed in the Ninth Circuit to ensure that the Tax Division was taking a consistent position. The Ninth Circuit brief has now been filed and this brief thus responds to the 8th Amendment issue Ms. Toth raised. The remainder of the arguments presented by Ms. Toth were addressed in a prior filing by the United States. For the reasons set forth below, the Excessive Fines Clause of the U.S. Constitution does not preclude entry of judgment of approximately $2 million against Ms. Toth for willfully failing to file an FBAR.
The Opposition then sets forth the Government's detailed argument that on which the Court deferred action.

One issue that struck me was that the Government demanded a jury in its original complaint.  I just wonder whether, strategically, demanding a jury is a good idea in any penalty case and particularly where there is a pro se defendant.  At a minimum, with a jury, the demands of the case will go up and efficiency will be sacrificed.  Of course, the defendant could have demanded a jury if the Government did not and, in any event, the parties can waive the jury later.

Saturday, May 6, 2017

Lawyer, Alleged Offshore Account Enabler, Loses Motion to Dismiss Indictment (5/6/17)

I have previously written about Michael Little, a British and U.S. lawyer and U.S. permanent resident, who was indicted for enabling offshore evasion for U.S. taxpayers.  (I list at the end of this blog entry the principal prior blog entries mentioning Little.)  The superseding indictment is here; the extensive docket entries in the case are here.  The superseding indictment charges:
  • Count 1 Tax Obstruction, § 7212(a) (Pages 1-10)
  • Counts 2 through 7 Failure to File for 2005-2010, § 7203 (Page 11)
  • Count 8 Willful Failure to File FBAR, 31 USC § 5313 and 5322(a); Title 31 CFR §§ 103.24, 103.27(c,d) and 103.59(b); 18 USC § 2. (Page 12)
  • Count 9 Conspiracy (Pages 12-16
  • Counts 10-19 Aiding and Assisting the filing of false Forms 3520, § 7206(2) (Pages 16-18)
In United States v. Little, 2017 U.S. Dist. LEXIS 67580 (SD NY 2017), here, the Court denied Little's motion to dismiss.  The gravamen of the Court's action is stated in the opening paragraph:
Defendant Michael Little moves for partial dismissal of the Second Superseding Indictment on the grounds that his prosecution for failure to file individual income tax returns and Reports of Foreign Bank and Financial Accounts ("FBARs") would deprive him of due process of law in violation of the Fifth Amendment to the United States Constitution. Little asserts that at the time of the events charged in the indictment he was a U.K. citizen and a lawful permanent resident of the U.S. He argues that the statutes and regulations requiring U.K. citizens with permanent residence status under U.S. immigration law to file U.S. income tax returns and FBARs, when read in conjunction with the U.S./U.K. Tax Treaty (the "Treaty"), are ambiguous, such that a person of ordinary intelligence lacks notice as to what constitutes compliance with the law. The Court finds that none of the relevant statutes or regulations, whether read in isolation or together, or in conjunction with the Treaty, are so ambiguous that they could properly be found unconstitutionally vague as applied to the charged conduct. Defendant's motion for partial dismissal of the indictment is thus denied.
The standard for void for vagueness is stated:
"As generally stated, the void-for-vagueness doctrine requires that a penal statute define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement." United States v. Rybicki, 354 F.3d 124, 129 (2d Cir. 2003) (quoting Kolender v. Lawson, 461 U.S. 352, 357, 103 S. Ct. 1855, 75 L. Ed. 2d 903 (1983)). Because the First Amendment is not implicated, the Court assesses Little's challenge as applied, i.e., "in light of the specific facts of the case at hand and not with regard to the statute's facial validity." Id. (quoting United States v. Nadi, 996 F.2d 548, 550 (2d Cir. 1993)). Courts examine as-applied vagueness claims in two steps: "a court must first determine whether the statute gives the person of ordinary intelligence a reasonable opportunity to know what is prohibited and then consider whether the law provides explicit standards for those who apply it." Rubin v. Garvin, 544 F.3d 461, 468 (2d Cir. 2008) (quoting Farrell v. Burke, 449 F.3d 470, 486 (2d Cir. 2006)). The "novelty" of a prosecution does not bolster a vagueness challenge, for the lack of a prior "litigated fact pattern" that is "precisely" on point is "immaterial." United States v. Kinzler, 55 F.3d 70, 74 (2d Cir. 1995). 
"A scienter requirement may mitigate a law's vagueness, especially where the defendant alleges inadequate notice." Rubin, 544 F.3d at 467 (citing Vill. of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 499, 102 S. Ct. 1186, 71 L. Ed. 2d 362 (1982)). Where "the punishment imposed is only for an act knowingly done with the purpose of doing that which the statute prohibits, the accused cannot be said to suffer from lack of warning or knowledge that the act which he does is a violation of law." United States v. Tannenbaum, 934 F.2d 8, 12 (2d Cir. 1991) (quoting Screws v. United States, 325 U.S. 91, 102, 65 S. Ct. 1031, 89 L. Ed. 1495 (1945) (plurality opinion)) (Bank Secrecy Act provision requiring reporting by financial institutions not void for vagueness when applied to an individual because the Act defined financial institutions to include "[a] person who engages as a business in dealing in or exchanging currency" and defendant knew he was "committing a wrongful act.")

Tuesday, May 2, 2017

Fascinating Case on Jury Instructions on Definition of Element of the Crime Beyond the Statutory Definition (5/2/17)

Today's case, United States v. Hastie, ___ F.3d ___, 2017 U.S. App. LEXIS 7237 (11th Cir. 2017), here, is a criminal case, but is not a tax case.  I offer it because the most interesting holding in the case involved a prior tax crimes case and the setting of when a jury instruction might turn into  a directed verdict.

The Driver's Privacy Protection Act ("DPPA), 18 U.S.C. § 2721(a), here, provides that "A state department of motor vehicles and any officer, employee or contractor thereof, shall not knowingly disclose "personal information," which is defined as "information that identifies an individual."

Hastie was the License Commissioner of Mobile County, Alabama.  The License Commissions issues driver's licenses and auto titles for the county.  The Commission maintains a website for online transactions.  Use of the website requires the user to provide his or her email addresses.  In addition, the tellers in the office are instructed to obtain email addresses for in-office transactions.  Both the website and the policy manual for the Commission advise about the DPPA.

Hastie, asked the Commission's information technology guy to do a mass email with her endorsement for mayor.  That, of course, was not Commission business.  He refused to do so, but did provide her a flash drive with the email addresses.  Hastie provides the email address to the candidate's campaign and the campaign emailed the endorsement.

Hastie was indicted for 18 counts.  Count 17 charged violation of the DPPA.  (I don't know the other counts.)  The statute defines "personal information" as (18 U.S.C. § 2725(3)):
information that identifies an individual, including an individual's photograph, social security number, driver identification number, name, address (but not the 5-digit zip code), telephone number, and medical or disability information, but does not include information on vehicular accidents, driving violations, and driver's status.
Note that the statutory definition does not specify email addresses as personal information.  But, the district court instructed the jury as follows (bold-face supplied by JAT):
The term "personal information" means information that identifies an individual, including an individual's E-mail address, photographs, Social Security number, driver's license, name, address, telephone number, medical or disability information. Personal information does not include information on vehicular accidents, driving violations, and a driver's status.
The Jury then asked the judge whether "whether it had to follow the definition of "personal information" found in the DPPA or the definition set forth in the jury instructions."  This interesting fact is found in the dissent's opinion in a footnote (fn. 3 on p. 29, the end of the dissenting opinion).  There is no indication of the judge's answer to the jury.  (I am surprised that this fact was not mentioned by the majority and more prominently by the dissent.)

After first determining that the License Commission was a "State Department of Motor Vehicles" as used in the statute, the Court turned to the issue of whether email addresses are "personal information" under the statute.  In fairly straight-forward statutory interpretation, the Court held that "personal information" did or at least could include emails.  I urge readers to review that portion of the decision (pp. 9-15).

The Court then turned to the subtler issue of whether the wording of the specific instruction improperly directed a verdict on that question.  On that issue, the majority and the dissent turned to a tax case,  United States v. Goetz, 746 F.2d 705 (11th Cir. 1984), here, a tax case involving whether a crank return was a return requiring that it not be a return to support a failure to file conviction.  The majority discussed that issue as follows: