Wednesday, January 18, 2017

Additional Pleas to Offshore Account Tax Crimes (1/18/17)

DOJ Tax announces, here, the plea to three U.S. offshore account holders.  The banks are the usual suspects -- UBS, Credit Suisse, Bank Leumi and others -- in Switzerland and Israel.  Each of the three related persons -- Dan Farhad Kalili, David Ramin Kalili and David Shahrokh Azarian -- pled to one count of failure to file FBARs, a five year felony.  Sentencing is later.

The key excerpts are:
Beginning in May 1996, and continuing through at least 2009, Dan Kalili opened and maintained several undeclared offshore bank accounts at Credit Suisse Group (Credit Suisse) in Switzerland. He also opened and maintained several undeclared offshore bank accounts from at least 1998 through 2008 at UBS AG (UBS) in Switzerland. Similarly, David Kalili opened and maintained several undeclared accounts at Credit Suisse in Switzerland, from February 1999 through at least 2009, and at UBS in Switzerland, from October 1993 through at least 2008. Dan and David Kalili also maintained joint undeclared Swiss bank accounts at both UBS and Credit Suisse beginning in 2003 and 2004, respectively. Meanwhile, Azarian opened and maintained several of his own undeclared accounts at Credit Suisse in Switzerland from May 1994 through at least 2009, and at UBS in Switzerland from April 1997 through at least 2008. 
In July 2006, Dan Kalili, with the assistance of Beda Singenberger (Singenberger), a Swiss citizen who owned and operated a financial advisory firm called Sinco Truehand AG, opened an undeclared account at UBS in the name of the Colsa Foundation, an entity established under the laws of Liechtenstein. Singenberger was indicted in the Southern District of New York on July 21, 2011, for conspiring to defraud the United States, evade U.S. income taxes, and file false U.S. tax returns. Singenberger remains a fugitive. As of May 2008, the Colsa Foundation account at UBS held approximately $4,927,500 in assets. 
Each of the defendants took affirmative steps to prevent their assets in UBS and Credit Suisse from being discovered. Dan Kalili opened an undeclared account at Swiss Bank A in the name of the Colsa Foundation and in May 2008, transferred his assets from the UBS Colsa Foundation account to Swiss Bank A. He later made partial disclosure of the Swiss Bank A Colsa account on his individual income tax returns. In 2009, Dan Kalili opened undeclared accounts at Israeli Bank A and at Bank Leumi, both in Israel. In June 2009, he closed the joint undeclared account at Credit Suisse he held with David Kalili, as well as his own undeclared account, and transferred the funds. Shortly before its closure, the undeclared joint account of Dan and David Kalili at Credit Suisse held approximately $2,561,508 in assets. As of December 2009, Dan Kalili’s undeclared account at Israeli Bank A held assets valued at approximately $1,569,973, and his undeclared account at Bank Leumi held assets valued at approximately $2,497,931.

Similarly, in August 2008, David Kalili opened an undeclared account at Israeli Bank A in Israel, into which he transferred funds from his UBS accounts. He later partially declared the Israeli Bank A account on his individual income tax returns. As of August 2009, David Kalili’s undeclared account at Israeli Bank A held assets valued at approximately $1,369,489. 
In August 2008, Azarian, also opened an undeclared account at Israeli Bank A in Israel, and in May 2009, he closed his undeclared account held at Credit Suisse and transferred the funds to Israeli Bank A. Azarian later partially declared this Israeli Bank A account on his individual income tax returns. At the time of its closure, Azarian’s undeclared account at Credit Suisse held assets valued at approximately $1,903,214. 
For each year from 2006 through 2009, Dan Kalili, David Kalili, and Azarian, as U.S. citizens, were required, but willfully failed, to report their ownership and control over foreign bank accounts through the timely filing of FBARs with the IRS disclosing their signatory or other authority over the various undeclared accounts held at UBS, Credit Suisse, Israeli Bank A, and Bank Leumi, each having an aggregate value of more than $10,000 during each of these years. 
* * * *  
* * * In addition [to the criminal exposure], each defendant agreed to pay a civil penalty for willfully failing to file FBARs. Dan Kalili agreed to pay a civil penalty of $2,674,329, David Kalili agreed to pay a civil penalty of $1,325,121 and Azarian agreed to pay a civil penalty of $951,607.
The civil penalty is the willful FBAR penalty, which is 50% of the high amount in the accounts.

The plea agreements and docket entries for each defendant are here:

  • Dan Kalili docket entries, here.
  • Dan Kalili plea agreement, here.
  • David Kalili docket entries, here.
  • David Kalili plea agreement, here.
  • Azarian docket entries, here.
  • Azaraian plea agreement, here.

Tuesday, January 17, 2017

Congressional Staffer Achieves Booker Downward Variance for Failure to File That Could Have Been Charged as Evasion(1/17/17;11/20/17)

I previously reported that a congressional aide, Issac Lanier Avant, had been charged with 5 counts of failure to file income tax returns, in violation of § 7203, here.  Congressional Staffer Charged with Failure to File (Federal Tax Crimes 8/25/16), here.  Failure to file is a misdemeanor offense, permitting a maximum sentence of 1 year per count.  Since then, Avant pled guilty to 1 count of failure to file.  See DOJ Press Release of 11/16/16, here.  The plea to a single count meant that, since § 7203's maximum incarceration period for a single count is 1 year, his sentence could not exceed one year.  The other counts were dropped.  Today, according to a DOJ press release, here, Avant was sentenced to "a prison term of approximately 4 months, consisting of 30 days incarceration, followed by incarceration every weekend for 12 months."

JAT Comments:  Before I get into the comments, I caveat that I have not scoured the record to see if publicly available information on Pacer would explain the sentence.  I therefore work off the DOJ press releases and the indictment linked in my original blog on the indictment.  So, with that caveat, here is what I offer.

1.  The Guidelines calculations seem to be as follows:
Base offense level for a tax loss of $153,122 - 16
Less: Acceptance of responsibility - (3)
Offense level for sentencing table - 15
Indicated Guidelines Range - 12-18 months.
Based on these calculations, it appears that the judge gave a significant downward variance (1/3 of the Guidelines range bottom) under the discretion allowed by Booker.  Nothing particularly notable on the bare fact of a downward Booker variance in a tax sentencing.  It is worth noting that, by pleading to a single count, the parties precluded the judge from imposing any sentence above the bottom of the Guidelines range.

2.  Perhaps more significant is the substantial charging break that Avant achieved.  Avant did not just fail to file his returns, he also filed a false W-4 with his employer to exempt himself from tax, thus avoiding withholding.  This is a frequent gambit for persons who try to evade tax, often in the guise of protestor positions.  In United States v. King, 126 F.3d 987 (7th Cir. 1997), here, the defendant filed false W-4's claiming too many exemptions.  He was convicted of tax evasion.  DOJ's CTM states that case where the taxpayer fails to file tax returns can be prosecuted as evasion (a five-year felony per count) where the taxpayer files a false W-4.  DOJ CTM 8.06[1] Attempt To Evade Assessment, here, provides:

Monday, January 16, 2017

Statistics from the 2016 Whistleblower Office Report (1/16/17)

The IRS Whistleblower Program Fiscal Year 2016 Annual Report to Congress, here, reports the following statistics:

Table 1: Amounts Collected and Awards under Section 7623, Fiscal Years  2014 to 2016
Total Claims Related to Awards
Total Number of Awards fn4
Total IRC 7623(b) Awards
Collections over $2,000,000 fn5
Total Amount of Awards fn6
Amounts Collected  fn7
Awards as a Percentage of Amounts Collected
Average Awards
fn4  For Table 1, “Total Number of Awards” reflects the number of payments to whistleblowers. In some cases, awards can
include proceeds from multiple taxpayers, which are reflected in the “Total Claims Related to Awards.”
fn5  This row includes pre-enactment section 7623(a) claims that were greater than $2 million and section 7623(b) claims.
fn6 The “Total Amount of Awards” is prior to sequestration reductions.
fn7  The “Total Amount of Awards” [for FY2015] was overstated by $441.84 on the FY 2015 Annual Report, and Table 1 has been revised to
reflect the correct amount.

JAT Comments on the Statistics:

My own calculations the following averages per award from the numbers above:

Average Awards

These average award numbers are low because of the large number of § 7623(a) awards which generally tend to be significantly less than the § 7623(b) awards.  My inference is that the § 7623(b) awards – 0 in FY 2014, 19 in FY2015, and 18 in FY2016 - would average much more than the indicated average for all awards.  Indeed, I suspect that, although § 7623(b) awards made are a low percentage of total awards, the lion's share of the Total Amount of Awards is under § 7623(b).

These numbers for claims awarded under § 7623(b) may seem low, but § 7623(b) is still relatively new (enacted effective 2007) and processing whistleblower claims to fruition with collected proceeds (collections after the refund statute of limitations has expired) takes a long time.  So, the number of awards and the amounts awarded are probably not indicative of the future where awards may be in the pipeline for claims already made or will be received and processed in later years. 

Back to the Report:

The Report contains a discussion of "Other Issues of Interest."

Saturday, January 14, 2017

Tax Attorney Sentenced to 48 Months of § 7202 Convictions (1/14/17)

I previously reported on a tax attorney, Steven Lynch, being convicted of charges for employment tax fraud under § 7202, here.  See Tax Attorney Convicted of Employment Tax Fraud (Federal Tax Crimes Blog 9/8/16; 9/10/16), here.  The defendant has now been sentenced to 48 months in prison (48 months on each count to be served concurrently)  See the judgment here.  Also see the docket entries here.

Prior to the sentencing, the sentencing judge ruled only various post-trial motions, some of which merely restated motions or claims made before or during trial.  See Memorandum Order Denying Defendant's Motion for Judgment of Acquittal or, in the Alternative, Motion for New Trial in United States v. Lynch, 2017 U.S. Dist. LEXIS 634 (WD PA 2017), here.  The matters dealt with in the Order and the rulings are more or less garden variety, so I won't discuss them here.  Rather, I just point out certain matters that caught my eye in the Order.

1.  The defendant is described as "a highly skilled tax attorney and sophisticated businessman * * * The evidence at trial fairly established that Lynch possessed superior knowledge of tax and corporate laws which he used to keep Internal Revenue Service ("IRS") agents from being able to collect taxes due for several entities that make up the Iceoplex - - a collection of businesses related to an indoor ice skating rink - - by shifting assets and employees among several entities."

2.  The defendant was charged with tax obstruction, § 7212(a), here, in addition to several counts of willful failure to pay over, § 7202.  He was acquitted of tax obstruction and some of the willful failure to pay over counts.  He was convicted of some of the willful failure to pay over counts.

3.  The Court cites as among the evidence from which the jury could have convicted Lynch of the willful failure to pay over the following (bold face supplied by JAT):
The FBI's interview of Lynch in March of 2011, during which he was notified that he was the subject of a criminal investigation for willful failure to pay employment taxes. Doc. No. 223, p. 216-218. After the FBI interview, Lynch made full, timely payments for three subsequent quarters and substantial partial payments for two more subsequent quarters before failing to make any payment towards the taxes owed for the quarters related to the Counts for which he was convicted. See Doc. No. 201, pp. 44-49.
The inference that could be drawn from the FBI interview and subsequent events is, I think, fair.  The question I have is why the FBI would have been conducting a tax crimes investigation as seems to be the  import of the first sentence.  As I have discussed in several blog entries, the ability of the DOJ (including its FBI component) to investigate tax crimes is at least questionable.  See DOJ Tax Division Criminal Tax Investigation Authority (Federal Tax Crimes Blog 6/5/09; 12/29/14), here; and Even More on DOJ Authority to Investigate Tax Crimes (Federal Tax Crimes Blog 7/20/10), here.  I find that the IRS continues to claim that exclusive investigative authority on its web page titled Financial Investigations - Criminal Investigation, here, where it states:  "IRS is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code."  I suppose that the FBI's interview could have been incident to a grand jury investigation in which the grand jury could have been investigating other nontax crimes as well, but the opinion does not state that.

The Downside of Booker Discretion to Vary -- Upward Variance in a Tax Perjury Case (1/14/17)

In United States v. Hayes, 2017 U.S. App. LEXIS 251 (6th Cir. 2017) (unpublished), here, the Sixth Circuit affirmed a sentence with an upward variance in a tax conviction under § 7206(1), tax perjury.  The upward variance sentence was to 15 months which was 2 1/2 times the upper range of the Guidelines calculation (that high end being 6 months based on the stipulated tax loss).  Readers will recall that United States v. Booker, 543 U.S. 220  (2005) caused a sea change in the role of the Guidelines -- changing them from mostly mandatory to advisory with the ability of the sentencing judge to exercise discretion to vary outside the Guidelines now advisory sentencing ranges.  In tax cases, variances are not uncommon and, by far the majority of the time, are downward variances making the sentence less than the low end of the Guidelines range.  Upward variances are rare.  Viewed one way, Hayes might be seen as just another rare upward variances which are driven by unique bad facts.  Viewed another way, the sentence may be viewed as practically achieving a proper sentence consistent with the Guidelines rather than varying from them.  Let me explain.  

First, as an introduction to the explanation below, I will refer to the opinion, to the parties' briefs and to the oral argument.  The opinion is linked above.  The parties' briefs and the oral argument are linked here:

Hayes, Appellant's Brief, here
United States Appellee's Brief, here
Hayes' Reply Brief, here
Oral Argument, here
Court of Appeals Docket Sheet, here.

Hayes' tax perjury charge arose from a false Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, filed under penalty of perjury with respect to an unpaid tax liability of $125,753.62.  I have not been able to determine exactly how that tax liability was assessed -- whether assessed by a tax return or returns without payment or after audit of a tax return or returns not reporting the liability.  All the facts I know was that he had the tax liability when he filed the false Form 433-A.  From the Court of Appeals opinion (emphasis supplied by JAT):
On the form, Hayes attested that he had not "transferred any assets for less than their full value" in the past ten years. That was untrue, for in 2007-08 Hayes had given his mother nearly $140,000 worth of antiques, artwork, and jewelry for no cost. Based in part on that misrepresentation, the IRS closed its collection case, concluding that, if Hayes were forced to pay his tax debt, he would be unable to afford basic living expenses. 
Months later, Hayes's misrepresentation came to light, and he pled guilty to making a false statement on his Form 433-A. As part of the plea agreement, the parties stipulated that "no tax loss resulted from [Hayes's] offense."

Monday, January 9, 2017

Finews Article on Swiss Bank Shenanigans (Including the Recently Publicized U.S. Tax Shenanigans) (1/9/17)

I picked up this offering:  Dormant Accounts: How a Theft Changed Swiss Banking ( 1/9/17), here.  The article is not very flattering of Swiss banks' attempts over the years to steal money from their customers, their relatives, and in the case of its tax shenanigans, through customer fees that were payments for raiding their respect home country fiscs.  Finews is a swiss media outlet.  There was a time when Swiss media outlets would not have offered such articles.  Before getting into some of the contents of the article I first present something on this particular news  outlet.

According to the "About" page on its web site:
Where Finance Meets is Switzerland’s leading news site for all professionals in the financial sector. delivers real-time news about the financial industry: breaking news, feature stories, industry developments, opinions plus the latest on people and trends. was founded by an independent team of journalists and writers with extensive experience covering global financial services from a Swiss perspective.
Of course, these are promo statements.  I don't know whether is Switzerland's leading news site for professionals in the financial sector.  On a quick Google search, I did not immediately spot a source that I felt reliable as to the credibility of finews.  I suppose that this could be so-called "fake news."  Nevertheless, I decided to post this article because it does provide, in summary fashion, an accurate review of some of the Swiss bank shenanigans with which I am familiar -- the Holocaust gambit and the raid on U.S. and other countries' fiscs by helping customers hide assets and income.  So, I turn to the article and, since I presume readers of this blog already know about the Holocaust gambit and the the raid on U.S. and other countries' fiscs by helping customers hide assets and income, I only cut and paste an excerpt about one I had not previously known -- one that preceded the Holocaust.
It is twenty years now that a night guard stole documents destined for the shredder at the predecessor of UBS in Zurich. The theft indirectly caused one of the biggest ever crisis for Swiss banking. And is exemplary for the woes of a once proud industry. 
Christoph Meili was doing his shift at Union Bank of Switzerland in the night to January 9, 1997, when he spotted documents ready for destruction. He (falsely) assumed they were proof for banking relations with victims of the Holocaust and removed the documents.  
The employee of Wache AG missed the fact that the documents dated back to the years of 1897 through 1927 and thus couldn’t possibly be proof for the dormant accounts. He gave the files to a Jewish organization, which in turn handed them over to the police. 
The theft of the documents prompted an escalation of the simmering conflict over the so-called dormant accounts at Swiss banks. It also proved to be the catalyzer for one of the crisis Swiss banking has ever seen, with a now infamous class-action lawsuit engineered by a group of New York-based lawyers. UBS and Credit Suisse settled the conflict at the end of the century with the payment of $1.25 billion. 
So, this is a good read, albeit quite summary.  I cannot speak to the accuracy of it, except as it relates to the Holocaust and the the raid on U.S. and other countries' fiscs by helping customers hide assets and income, which is basically right.

As an aside, long ago, I asked more than once somewhat tongue in cheek:  How do you tell a Swiss Banker from a Somali Pirate?  My set up answer was that the Swiss Banker was the one wearing a suit.  Subsequent events have even knocked down that answer, as the investigations into the Swiss banks and bankers' U.S. tax shenanigans brought to light Swiss bankers traveling in camouflage (e.g., Hawaiian shirts when coming into the U.S. to make the customs authorities think their story of vacationing in the U.S. credible, when in fact they were set on doing their part in the tax conspiracy).  I suppose they might even dress like Somali Pirates if necessary to get the business of Somali "Pirate King" (not like the Pirate King, here, in Gilbert & Sullivan's Pirates of Penzance).

Saturday, January 7, 2017

DOJ Swiss Bank Program NPAs Spike the Data for Overall NPAs in 2015 (1/7/17)

Corporate Nonprosecution Agreements Plummet in 2016, but DOJ Still Willing to Make a Deal (National Law Journal 1/6/17), here.

From the opening:
Corporate nonprosecution agreements dropped dramatically in 2016 from the previous year, but the government is still offering deals to penitent white-collar defendants, according to a recent study by Gibson, Dunn & Crutcher. 
Last year the U.S. Department of Justice and the U.S. Securities and Exchange Commission collectively entered into 35 corporate nonprosecution agreements (NPAs) or deferred prosecution agreements (DPAs). That compares with 102 such agreements in 2015, according to the report. 
But there's a big caveat to what appears to be a steep slide in corporate NPAs and DPAs. It follows a dramatic spike in 2015, driven by the Justice Department's Swiss Bank Program. Most of the 2015 agreements were offered by the DOJ's Tax Division as part of a structured agreement to bring foreign bank accounts into compliance with U.S. tax law, which brought in $6.4 billion in recoveries, according to the report. 
ast year, of the 35 NPAs and DPAs, the majority, 26, involved matters other than tax-related and monetary transaction offenses. In all, they brought in $4.6 billion in recoveries, according to the report. 
Chart 2 illustrates the total monetary recoveries related to NPAs and DPAs from 2000 through today. Monetary recoveries associated with 2016 NPAs and DPAs also were consistent with recoveries in years past. Where 2014 and 2015—with 30 and 102 agreements, respectively—saw $5.1 billion and $6.4 billion in recoveries, 2016 saw $4.6 billion. 
[Graphic omitted - but recommend that readers see it in the original] 
"If you back out 2015, the numbers are essentially in the heartland of what NPAs and DPAs have been for nearly a decade," said F. Joseph Warin, chair of Gibson Dunn's Washington, D.C., office's litigation department. "On balance is what we're seeing is this vehicle has become an alternative to a plea of guilty for businesses that are in a regulated industry."
JAT Comment:  One open question is whether the Swiss Bank Program will be a template for resolutions of similar behavior in other countries.   And, even if there is no publicly announced program, whether DOJ/IRS will be willing to settle cases with other country banks on that basis in one on one negotiations.  Of course, the other countries may require some cooperation from their Governments in order to avoid privacy commands in their laws in order to divulge the data required under this template and that would likely require some public notice of a general program.  I anyone knows whether DOJ/IRS is willing to resolve other country banks' exposures on this or any other basis, please let me know either by email ( or by comments to this blog entry.

Also, readers interested in the general subject of NPAs and DPAs should check regularly with Professor Brandon Garretts' (UVA Law) database presentation here.

Thursday, January 5, 2017

Deutsche Bank Settles Liability for Enabling Bullshit Tax Shelter -- A Midco Variation (1/5/17)

I previously reported on one of Deutsche Bank's bullshit tax shelter adventures.  Deutsche Bank's Amazing Magnificent Adventure -- Again -- into the Land of Bullshit Tax Shelters (Federal Tax Crimes Blog 10/3/15), here.  That blog reported on Judge Kaplan's rejection of DB's motion to dismiss the case filed by the Government with respect to the bullshit tax shelter -- a variation on the Midco shelter theme.  The case has now been resolved.  See Settlement and Dismissal Order here.  The key facts, which DB admits in the settlement document, are covered in the prior blog, so I won't repeat them here.  Suffice it to say that DB admits that it participated knowingly in a scheme to avoid payment of taxes.

The settlement requires DB to pay $95 million.  The settlement does not state how that figure was derived.  I could speculate but I suspect there would be a high chance that my speculation would be misfocused.

The agreement says that the following claims of the U.S. are not released:

a.  Any claim for conduct other than the Covered Conduct.

b.  "Any criminal liability."

c.  A broad swath of potential liability in a paragraph that I am not sure I understand the full scope of (so I quote that paragraph, ¶ 5.c.):
Except as expressly stated in this Stipulation, any administrative liability (other than (i) the collection, assessment, or adjustment of any income tax,  including any interest thereon and any penalties for failure to report or failure to pay such income tax, arising from the Covered Conduct and (ii) BMY's unpaid tax liability, including any interest thereon and any penalties for failure to report or failure to pay such income tax, resulting from the sale of the Bristol-Myers shares), including the suspension and debarment rights of any federal agency;
The settlement further states (¶ 7):
7. Deutsche Bank waives and will not assert any defenses it may have to any criminal prosecution or administrative action relating to the Covered Conduct that may be based in whole or in part on a contention that, under the Double Jeopardy Clause in the Fifth Amendment of the United States Constitution, or  under the Excessive Fines Clause in the Eighth Amendment of the United States Constitution, this Stipulation bars a remedy sought in such criminal prosecution or administrative action.
JAT Comments:

Monday, January 2, 2017

IRS Designates Syndications Exploiting Improper Valuations for Conservation Easement Deductions (1/2/17)

I note at a couple of places in the Federal Tax Procedure Book that some of the most abusive tax shelters do not fail because the legal positions are faulty.  Rather, they fail because the legal positions are all based false facts, often a false valuation of property.  For example, in discussing the substantial and gross valuation misstatement penalties in §§ 6662(e) and (h), here, I state:
Section 6662(e)’s substantial valuation misstatement penalty and § 6662(h)’s gross valuation misstatement penalty are directed to return reporting positions where the law is correctly applied but a critical valuation is grossly erroneous, resulting in the substantial understatement of the tax liability.  In many of the abusive tax shelters over the years, the Achilles heel has been and continues to be inflated valuations.  The legal superstructure had some facial merit, but it was built on a factual house of cards because of gross overvaluation.  A facet of this problem was that, since tax professionals were not valuation experts, they could render their opinions without taking responsibility for the key valuation facts that supported the whole purported tax shelter superstructure.  For example, as to property otherwise qualifying for the old investment tax credit (10 percent of qualifying investment in property), tax shelter promoters would sometimes inflate the value of property to 10 or 20 times its true value and sell it to investment partnerships (where the partners were tax shelter investors) for the inflated value.  Of course, only crazy people would pay the inflated value, so the tax shelter investors paid only a small amount down and “paid” the balance by nonrecourse indebtedness (before the rules related to nonrecourse indebtedness and passive losses).  Assuming that the value was correct, the taxpayers would be entitled to the credit; the problem was in the valuation.  Many, many tax issues, not just tax shelter issues, rely upon valuations.  Thus, for example, estate and gift tax returns rely upon reasonably correct valuations.  The purpose of this penalty is to put some sting in overly aggressive valuations.
I have posted on variations of this theme.  Court Sustains Use of Regular Summons to Appraiser Investigated Even Though Third Party Taxpayers May be Identified (Federal Tax Crimes Blog 1/14/16), here.  See also Prominent and Very Rich Investor Indicted in SDNY (Federal Tax Crimes Blog 5/24/16), here.

Such overvaluations carry risk of criminal prosecution and significant civil penalties.

The IRS strikes again at a valuation shelter in a different package, this one syndications -- promoted "investments" -- offering conservation easement deductions.  Notice 2017-10, 2017-04 IRB, here.  The Notice describes the problem:
The promoters (i) identify a pass-through entity that owns real property, or (ii) form a pass-through entity to acquire real property. Additional tiers of pass-through entities may be formed. The promoters then syndicate ownership interests in the passthrough entity that owns the real property, or in one or more of the tiers of pass-through entities, using promotional materials suggesting to prospective investors that an investor may be entitled to a share of a charitable contribution deduction that equals or exceeds an amount that is two and one-half times the amount of the investor’s investment. The promoters obtain an appraisal that purports to be a qualified appraisal as defined in § 170(f)(11)(E)(i) but that greatly inflates the value of the conservation easement based on unreasonable conclusions about the development potential of the real property. After an investor invests in the pass-through entity, either directly or through one or more tiers of pass-through entities,  the pass-through entity donates a conservation easement encumbering the property to a tax-exempt  entity. Investors who held their direct or indirect interests in the pass-through entity for one year or less may rely on the pass-through entity’s holding period in the underlying real property to treat the donated conservation easement as long-term capital gain property under § 170(e)(1). The promoter receives a fee or other consideration with respect to the promotion, which may be in the form of an interest in the pass-through entity. The IRS intends to challenge the purported tax benefits from this transaction based on the overvaluation of the conservation easement. The IRS may also challenge the purported tax benefits from this transaction based on the partnership anti-abuse rule, economic substance, or other rules or doctrines.

SD NY District Court Rejects Partial Payment § 6707 Penalty Refund Suit (1/2/17; 1/9/17)

In Larson v. United States, 2016 U.S. Dist. LEXIS 179314 (SD NY 2016), here, the Court rejected an attempt by a promoter assessed a very, very large § 6707 penalty to avoid the Flora full payment rule for refund litigation.  The principal holding is that the § 6707 penalty is not a divisible penalty that could benefit under divisible tax exception to Flora's full payment rule.  This aspect of the case is consistent with prior holdings such as Diversified Group Inc. v. United States, 841 F.3d 975, 981 (Fed. Cir. 2016), here.

The full bore application of the Flora full payment exception is troubling on these facts with very, very large § 6707 penalties.  The IRS assessed a $24,745,026 penalty for the FLIP/OPIS shelter and a $135,487,056 penalty for the BLIPS shelter.  The total was thus $160,232,026.  The IRS did reduce the penalty by amounts paid by other co-promoters.  The aggregate amount of that reduction was $96,820,667, leaving Larson liable for $63,411,359.  (Co-promoters also might be liable for the unpaid balance.)

Larson made a partial payment of $1,432,735, hence his refund suit alleging a divisible tax as a basis for not paying all.  The Court's basic analysis as to why the § 6707 penalty is not divisible is fairly straight-forward.  I think the following discussion relating to the claims of hardship because of the amount of the penalty is interesting.
Indeed, at oral argument, Larson did not dispute that the failure to register a tax shelter was "only one act," or "one act per shelter," Tr. at 17:22-23; rather, Larson seeks to limit the applicability of the full-payment rule to his particular circumstances. In a due process challenge to the application of the full-payment rule, Larson argues that the full-payment rule violates "the Fifth Amendment where there is no alternative forum having jurisdiction over pre-payment challenges to such penalties and where an individual does not have the financial means to pay the penalties in full." Opp. Br. at 7. Foreclosed from review in Tax Court, Larson argues that because he cannot pay the penalty, and he cannot seek review for his claim without paying the penalty, the imposition of the full-payment rule violates his Fifth Amendment right to due process. n9
   n9 Larson did not assert a Due Process claim in his Complaint, but he makes arguments based on the Due Process Clause in opposing the Government's motion to dismiss. 
Larson argues that the Supreme Court in Flora I and Flora II never intended for the full-payment rule to apply in circumstances in which Tax Court review is unavailable and the challenged penalty amount is unaffordable to the taxpayer. Larson's reading of Flora I and Flora II strains to find due process arguments where none exists. In reviewing the legislative history of 26 U.S. § 1346(a)(1) and the legislative history that led to the creation of Tax Court, the Supreme Court noted that Congress created the Tax Court as a prepayment forum to ameliorate "the hardship of prelitigation payment." Flora I, 357 U.S. at 74, 75; Flora II, 362 U.S. at 158. But it is clear that Congress created the Tax Court out of legislative grace, not because it was a constitutionally-required response to the full payment rule. See Flora I, 357 U.S. at 75; Flora II, 362 U.S. at 158. Flora I and Flora II held that, in district court, a taxpayer must "pay first and litigate later," and Larson points to no authority that supports his argument that the unavailability of the Tax Court vitiates the full-payment rule in district court. Carving a "when Tax Court is unavailable" exception into the full-payment rule would subvert the full-payment rule's purpose in "promot[ing] the smooth functioning of [the tax litigation] system." See Flora II, 362 U.S. at 647. Although this Court is sympathetic to Larson's circumstances, this Court declines to recognize such an exception to well-settled jurisdictional limits.

Thursday, December 29, 2016

Categories 3 and 4 Banks in U.S. DOJ Swiss Bank Program Have Been Resolved (12/29/16)

DOJ issued a press release regarding the status of the Swiss Bank Program:  Justice Department Reaches Final Resolutions Under Swiss Bank Program: Information Received Continues to Drive Civil and Criminal Enforcement Efforts (12/29/16), here.

The resolution of Category 2 have been previously announced.  This press release indicates the resolution of Categories 3 and 4.  That leaves only the Category 1 banks some of which have been resolved.  The Category 1 banks were those banks already under criminal investigation when the Swiss Bank Program was first announced.

I am traveling through January 2, so any postings will necessarily be cryptic.

Wednesday, December 28, 2016

On Structuring and Forfeiture and Grand Juries (12/28/16)

In United States v. Fisher, 2016 U.S. Dist. LEXIS 176719 (WD NY 2016), here, the defendant is a woman whose husband had previously been convicted by plea agreement for mail fraud and filing false returns.  He had been sentenced to 36 months imprisonment and ordered to pay $969,647.09 in restitution.  Subsequently, while he was incarcerated, in a series of transactions of less than $3,000, the wife purchased money orders from a financial institution.  The purchases aggregated over $300,000.  The Government obtained an indictment and then a superseding indictment from the grand jury charging multiple "counts of causing a financial institution to fail to file a transaction report—i.e., structuring—in violation of 31 U.S.C. § 5325(a)(2)."  The superseding indictment alleged that she purchased $74,000 in money orders with the intent of evading the identification requirements.  Those identification requirements could have led to the institutions filing reports of the purchases.  The superseding indictment also included a forfeiture allegation.  Pursuant to the forfeiture allegation, the Government filed a notice of lis pendens on the house, thus, she alleged, impairing funds that could have been available for her defense.

Section 5325, here, requires a financial institution to require identification upon the purchase of "a bank check, cashier’s check, traveler’s check, or money order to any individual in connection with a transaction or group of such contemporaneous transactions which involves United States coins or currency (or such other monetary instruments as the Secretary may prescribe) in amounts or denominations of $3,000."

Pursuant to defendant's motion to dismiss the superseding indictment, the magistrate judge recommended dismissal and, in the alternative, dismissing the forfeiture notice.
[Magistrate] Judge Scott makes these recommendations because, during grand jury proceedings in this case, the Assistant United States Attorney (AUSA) made several references to the Defendant's ex-husband's criminal conduct. Judge Scott also recommends dismissal because, in response to grand juror questions, the AUSA and the IRS Special Agent who testified before the grand jury discussed whether and how Fisher's home could be forfeited in the event of a conviction.
The district judge, in this decision and order linked above, rejects that recommendation and sustains the superseding indictment.  I post on the district judge's order because it offers a fascinating look into the grand jury, a look usually denied because of the grand jury secrecy rules.  In summarizing the relevant parts of the grand jury proceeding, the Court said (Slip Op. 3, n3 (carries over to p. 4):

Monday, December 26, 2016

Year End Review of A Top News Story on Panama Papers (12/26/16)

It is the time of year for media outlets to start recycling their choices of top news of the year.  Here is one from BBC on the Panama Papers disclosures.  Panama Papers: What happened next? (BBC 12/26/16), here.  This is a pretty good, if brief, article summarizing the global fall out from an interview with the two top journalists originally accessing the data and pulling together the consortium of journalists to analyze it.  The article focuses not just on hiding for tax purposes but for all sorts of nefarious -- aka illegal -- purposes.

Some excerpts (bold-face supplied by JAT):
Mr Obermaier said the Panama Papers had shown how the offshore world could be used to help aid terrorism. 
"It is striking for me that Europol found 3,469 probable matches between their own files and the Panama Papers - 116 between them on a project on Islamic terrorism alone." 
Mr Obermayer agrees and said the leak had revealed that the offshore world was not only a place for rich people to avoid taxes. He said the Panama Papers showed the secrecy of shell companies could be used to hide criminal activity. 
"I wasn't shocked that rich people use offshore to dodge taxes. I was shocked that there were so many crimes. I think the vast amount of offshore companies are used because someone wants to hide something." 
Mr Obermayer argues there have been concrete changes as a result of the leak's publication. 
"A lot has changed, in Germany. Our finance minister just introduced a new 'Panama Law' (requiring citizens to declare if they are using a shell company) and Panama itself is more open for change now. 
"Some countries have announced registers for beneficial owners and others are also arguing for that for the first time ever. 
"The pressure on tax havens is as high as never before and the Panama Papers have done that. They have directed the spotlight at the problem. 
"But still, what hasn't changed is that the very industry that helps tax dodgers is still alive and kicking. They have huge influence, huge power, huge lobby groups. We don't see the end of offshore - but we do see that offshore is shrinking." 
A potential solution? 
Both journalists argue for a global register of beneficial owners to end tax secrecy. A beneficial owner is the person who has significant control of a company and its profits. 

Sunday, December 25, 2016

Q. How Many IRS Special Agents Brandishing Guns Does It Take to Execute a Tax Crimes Search Warrant? A. 73 (12/25/16; 12/26/16)

Carpenter v. Commissioner, IRS, 2016 U.S. Dist. LEXIS 172675 (D CN 2016) here), is an interesting case involving a Bivens action, Bivens v. Six Unknown Fed. Narcotics Agents, 403 U.S. 388, 91 S. Ct. 1999, 29 L. Ed. 2d 619 (1971).  Bivens authorizes an implied federal cause of action based on constitutional violations where there is no statute authorizing the action.  The action is against the individuals causing the violation rather than against the Government.  Bivens actions are not available where, for the alleged violation, Congress has provided a remedy by statute.

The Carpenter decision relates to a motion to dismiss based on inadequacies in the complaint.  Motions to dismiss test the adequacy of the complaint.  Basically, the Court declined to dismiss the main thrust of the claim in order to permit discovery to proceed, with the recognition that, after discovery, some or all of the issues could be resolved by summary judgment.  There will be further trial level proceedings in the matter.  But, some aspects of the decision caught my attention.

The factual background is interesting because, according to the allegations in the complaint not yet tested in discovery, the IRS agents executing the search warrant at Carpenter's place of business were way over the top in the manner in which they executed the search warrant.

The affidavit in support of the search warrant alleged that the agents would search for "for evidence that Carpenter was engaging in criminal tax offenses, including conspiracy to impede the lawful function of the IRS, 18 U.S.C. § 371, and aiding and assisting the preparation of false income tax returns, 26 U.S.C. § 7206(2)."  The affidavit did not mention "any specific dangers anticipated in executing the proposed search nor any exigent circumstances justifying a highly armed raid on the property."

The Facts (Principally as Alleged by Carpenter)

Here is a description from the case of how the IRS agents executed the search warrant:
On April 20, 2010, Schrader and 72 unknown IRS agents (the "John Doe" defendants) executed the search warrant at 100 Grist Mill Road in order to obtain evidence against Daniel Carpenter and GMC. Carpenter alleges that the IRS agents wore "black Kevlar bullet-proof vests and were brandishing automatic weapons" during the execution of the search, which was conducted in the same manner as a SWAT operation. Id. at ¶¶ 8. During the search, Carpenter and the other GMC employees were not informed of which crime they were suspected of committing, nor were they provided with the search warrant affidavit or any other document indicating which crimes were at issue. Id. 
During the search, the government seized 322 banker boxes of documents over the course of eighteen hours, a period in excess of what was authorized by the warrant. Id. at ¶ 9. During the search, the agents held numerous employees against their will for long periods of time and interrogated them. Id. Carpenter was "placed in custody, threatened with handcuffs, and questioned, despite his invocation of his right to have counsel present." Id. at ¶ 10. He was also "threatened with arrest" when he attempted to speak to counsel or leave the room to make a call. Id. Carpenter also alleges that the government "ransacked" his office during the search. Id. at ¶ 28. 
Carpenter alleges that Schrader had a duty to supervise the John Doe defendants in their use of force and the manner in which they carried out the search, and that he failed to do so. Id. at ¶¶ 21, 24. Specifically, he alleges that Schrader failed to supervise or instruct the agents on what was appropriate conduct during the search, and that Schrader was either "directly responsible" for the intimidating tactics or "deliberately indifferent" to the possibility that the search would be carried out in an unconstitutional manner. Id. at ¶ 21. Carpenter alleges that Schrader also "consciously disregarded the substantial risk that he had authorized the custodial interrogation" of Carpenter without reading him his Miranda rights in violation of his Fifth and Sixth Amendment rights to have counsel present. Id. at ¶ 28. 
Carpenter alleges that Schrader's acts were intentional and motivated by animus against Carpenter because of his reputation as an "anti-government" actor and his litigation against the government in the Massachusetts case. Id. at ¶ 26. Accordingly, Carpenter alleges that the manner in which the search was carried out was deliberately intended to "harass, intimidate and humiliate" him. Id. Carpenter further claims that the IRS has a policy and practice of using armed agents to enforce search warrants for [*8]  tax documents, despite the fact that the IRS manual "requires investigations to be carried out with the least intrusive means necessary." Id. at ¶ 22; see also id. at ¶ 25. Carpenter does not allege, however, that Schrader had any responsibility for setting IRS policies. 
To date, Carpenter and his related entities have not been indicted for the tax offenses alleged in the warrant affidavit.

Saturday, December 24, 2016

Protecting the Contingency Fee in IRS Whistleblower Representation (12/24/16)

The issue I discuss today is how an attorney may protect his contingency fee in an IRS Whistleblower case.  The background is the substantial awards available under § 7623(b), here.  Based on my experience and anecdotal information from others, contingency fees with respect to IRS whistleblower claims is the norm.  I have not heard of any hourly rate representations.  The reason, I think, is that there are too many contingencies involved in the representation that encourages the client to avoid the financial cost of hourly representation that may not produce any award.  For more on the contingency fees in legal representation, see Adam Shajnfeld, A Critical Survey of the Law, Ethics, and Economics of Attorney Contingent Fee Arrangements, 54 NYLS Law Rev. 774 (2009/2010), here.

In Begelman & Orlow, P.C. v. Ferara, 2016 U.S. Dist. LEXIS 169788 (D NJ 2016), here, the attorney firm had a 1/3 contingency fee, but apparently the agreement had no protection mechanisms if the client received an award.  The attorney firm could sue the client and, provided there were no debilitating problems in the representation, presumably obtain a judgment in some amount.  But, in Begelman, the client fired the attorney firm and withdrew its power of attorney when, according to the facts, she was on the verge of obtaining a recovery.  Thinking that the client had obtained a recovery, the attorney firm sued the client and the client countersued.  (It is an oft encountered phenomenon that a suit against a client for fees will provoke a counter-action -- either separate suit or, more likely, a counterclaim alleging attorney skullduggery or malpractice.)  The case, filed in 2012, has been pending for some time now.  The docket entries as of 12/9/16 are here.  The decision resolves cross motions for summary judgment.  The decision notes that the defendant denies that she has received an award and limits the attorney firms' recovery to quantum meruit -- value of services received -- which will take into consideration defendant's claims of inappropriate representation.

One of the problems in Begelman is that, because of the withdrawal of the POA, the IRS Whistleblower Office could not tell the attorney firm whether an award had been given and discovery against the IRS was unavailing.  And the client insisted that she received no award.  Her insistence raises a credibility issue (because other proof is stymied unless discovery fleshes it out), so the matter will go to trial and could be resolved because there was no award (if the judge, at trial, finds her a credible witness).

I won't try to summarize the factual intrigues reflected in the decision.  (It is a good read.)  Instead, I want to ask readers the question of how an attorney protects his fees from this type of client gambit?  I have represented whistleblowers and have entered a rather plain vanilla contingency fee arrangement.  I have not protected my fees against this type of client gambit but, fortunately, have not had a client go rogue.  The issue, though, is that the client can fire the attorney midstream or even on the cusp of an award and withdraw the POA.

So, what to do?  One solution I have heard is to make the attorney a joint whistleblower on the Form 211.  A POA would still be required to represent the other filing whistleblower (the client) and the client can withdraw the POA.  But, the attorney's personal interest in the claim would then give him access to the status of the claim and a share of the award.  That will not protect against the client making claims of deficient representation as presented in the Begelman case, but the client would have to institute that suit to recover the fee from the attorney.  Or the client desiring to withdraw midstream could perhaps sue the lawyer seeking inter alia that the client withdraw with respect to the original claim and cede the interest to the client.

I would appreciate hearing from readers how they deal with this possibility.  Please do that by comment or by email to

Defense Counsel Lesson: Always Object to a Willful Blindness Instruction Before Moving to Damage Control (12/24/16)

In United States v. Toth, 2016 U.S. App. LEXIS 22193 (4th Cir. 2016), here, Toth was convicted of conspiracy to commit money laundering and six counts of money laundering concealment.  At the trial, the Court gave the following willful blindness instruction:
In determining whether the defendant acted knowingly, you may consider whether the defendant deliberately closed his eyes to what would otherwise have been obvious to him. If you find beyond a reasonable doubt that the defendant acted with, or that the defendant's ignorance was solely and entirely the result of a conscious purpose to avoid learning the truth, then this element may be satisfied. A person who preserves a lack of actual knowledge of a subjectively obvious fact is just as culpable as a person who has actual knowledge of that fact. This is referred to as willful blindness. 
A showing of negligence is not sufficient to support a finding of willfulness or knowledge. I caution you that the willful blindness instruction does not authorize you to find that the defendant acted knowingly because he should have known what was occurring or that in the exercise of hindsight he should have known what was occurring or because he was negligent in failing to recognize what was occurring, or even because he was reckless or foolish in failing to recognize what was occurring. 
Instead, the government must prove beyond a reasonable doubt that the defendant purposefully and deliberately contrived to avoid learning all the facts. 
If you find that the defendant was aware of a high probability that a conspiracy, agreement, or understanding to launder money existed and that the defendant acted with deliberate disregard to those facts, you may find that the defendant acted knowingly. However, if you find that the defendant actually believed that there was not a conspiracy, agreement, or understanding to launder money, he may not be convicted. 
It is entirely up to you whether you find that the defendant deliberately closed his eyes and any inferences to be drawn from the evidence on this issue.
On appeal, Toth asserted that the trial court should not have instructed the jury on willful blindness.  The Court rejected the argument. The Court's reasoning was that the invited error doctrine applied to preclude complain on appeal because the defendant "invited the error of which he now complains by requesting a willful blindness instruction in the proceedings below."  I found it odd that a defendant would have requested a willful blindness instruction.  I don't recall that I have seen that happen before.  So, I dug deeper.

Friday, December 23, 2016

Statistics on Reversals by Courts of Appeals in Criminal Cases (12/23/16)

These U.S. Court statistics, here, offer an interesting statistic on percentage of reversals by the federal Courts of Appeals in All Cases (Total) and in Criminal cases.

Year Total Criminal
2011 8.7 6.5
2012 6.7 6.9
2013 6.8 5.8
2014 7.3 6.1
2015 8.6 6.9

The basis for the statistics is not clear from the presentation of the data.  For example, if the defendant were convicted on 3 counts of tax evasion, each count of which permits a sentence up to 5 years, and the sentence in the case on appeal, was less than 5 years, the reversal of two of the counts might not affect the sentence (because the tax loss for the Guidelines calculation is determined by including tax loss on even acquitted counts).

Still, even assuming that the reversal resulting in all counts of conviction being eliminated and no retrial, the statistical probability for such a reversal is pretty low.

Clarification: Vontobel Was Not in Swiss Bank Program (12/23/16; 12/29/16)

As rewritten 12/29/16.

On the original blog, I had reported that Vontobel had completed its processing under the DOJ Swiss Bank Program as a Category 3 bank.  I misread the information I had.  Others may have as well.  At any rate, Vontobel has issued a subsequent press, here, release clarifying that its prior release was not intended to indicate that it had proceeded as a Category 3 Swiss Bank.  The clarifying press release is as follows:
It has come to our attention that the Bank's press release of December 22 (Link to media release) may be unclear and may be read as implying that the Bank resolved its case pursuant to the Program for Swiss banks or otherwise received a disposition from the Department of Justice. That is not the case. The first sentence of that release was merely intended to make clear that, in 2013, the Bank and its lawyers determined that the Bank had not committed any offenses under US tax law and proactively engaged in discussions with the Department of Justice prior to the announcement of the U.S. Program. The Bank did not seek a nonprosecution agreement or apply for a non-target letter, and has received neither.