Joseph A. DiRuzzo, III OF Fuerst Ittleman convinces Third Circuit to reverse District Court regarding ineffective assistance of counsel allegations

On May 2, 2012, Circuit Judge Aldisert, in writing for a panel of the U.S. Court of Appeals for the Third Circuit in the case of United States v. James Russell, reversed the decision of the U.S. District Court for the Eastern District of Pennsylvania, and remanded the case for the District Court to hold an evidentiary hearing on the Appellants ineffective assistance of counsel claim. A full copy of the opinion is available here.

The facts are as follows:  James Russell appealed the judgment of the United States District Court for the Eastern District of Pennsylvania, entered on November 17, 2010, denying Russells motion to vacate, set aside or correct his sentence pursuant to 28 U.S.C. § 2255.  At the April 19, 2007 sentencing hearing, the District Court imposed a term of 41 months imprisonment, but did not specify whether the term was to run concurrently or consecutively. Russell timely appealed his sentence to the Third Circuit. The government agreed that the case should be remanded, and, based upon the agreement of the parties, the Third Circuit dismissed Russells appeal on December 20, 2007.

Russell was subsequently resentenced. At that time, Russells newly appointed attorney, Joseph Mitchell III, urged the District Court to impose a concurrent sentence and to show leniency. Mitchell also urged the District Court to grant the renewed motion for a downward departure. The District Court denied the motion and imposed a sentence of 33 months, to run consecutively to Russells other federal sentence.  At the conclusion of the hearing, Russell informed the Court: “And for the record, Im satisfied with the sentence. Thank you. And I would not be filing an appeal on that. Thank you very much.” Russell soon realized, however, that he was not, in fact, satisfied with his sentence. Russell asserts that two days after the sentencing hearing, on April 9, 2009, he notified Mitchell that he had changed his mind and directed him to file an appeal on his behalf.  Mitchell did not file an appeal.

On October 13, 2009, Russell filed a pro se § 2255 motion presenting six arguments: (1) that the District Court failed to properly apply the Sentencing Guidelines; (2) that Mitchell was ineffective for failing to argue that the Guidelines required a concurrent sentence; (3) that the prosecution misled the District Court regarding its authority to impose a concurrent sentence; (4) that Mitchell was ineffective for failing to counter the governments argument; (5) that the District Court erred in failing to credit his time already spent in federal custody toward his sentence; and (6) that Mitchell was ineffective for failing to seek an award of such credit. Russell wrote on the form motion that none of the grounds were presented previously because his “counsel Ëœrefused to raise them.”

In its November 15, 2010 opinion and order, the District Court denied Russells motion. In relevant part, the Court explained the effect of Russells counsels failure to file an appeal as follows: 

Russell alleges that his failure to directly appeal is the fault of his counsel, who refused to raise the issues on appeal. “A successful claim of ineffective assistance of counsel . . . satisfies the Ëœcause prong of a procedural default inquiry.” United States v. Garth, 188 F.3d 99, 107 (3d Cir. 1999) (citation omitted). Because the Court finds that Russell cannot satisfy the “prejudice” prong of the default inquiry, it will not consider whether Russell has demonstrated requisite cause.

On May 19, 2011, the Third Circuit granted Russells application for a certificate of appealability, limited to the following issue: “whether the counsel was ineffective for failing to file a direct appeal.”

The Third Circuit, in response to the governments contention that the certificate of appealability was improvidently granted, stated:  We decline the governments invitation to review our grant of the certificate of appealability. See Gatlin v. Madding, 189 F.3d 882, 887 (9th Cir. 1999), available here. (“[O]nce a [certificate of appealability] has been issued without objection by this court, the procedural threshold for appellate jurisdiction has been passed and we need not revisit the validity of the certificate in order to reach the merits.”)

Addressing the merits of Russells claim of ineffective assistance of counsel, the Third Circuit stated:  “[W]hen counsels constitutionally deficient performance deprives a defendant of an appeal that he otherwise would have taken, the defendant has made out a successful ineffective assistance of counsel claim entitling him to an appeal.” Roe v. Flores-Ortega, 528 U.S. 470, 484 (2000), available here.

A case in which a lawyer fails to file a direct appeal, contrary to the clients instructions, “is quite different from a case in which it is claimed that counsels performance was ineffective. As [the Supreme Court] stated in Strickland, the Ëœ[a]ctual or constructive denial of the assistance of counsel altogether is legally presumed to result in prejudice.” Penson v. Ohio, 488 U.S. 75, 88 (1988), available here; citing Strickland v. Washington, 466 U.S. 668, 692 (1984)), available here.

The Third Circuit concluded that:  “On the record before us, however, we are unable to adjudicate the merits of this claim.” As a result, “Inasmuch as these questions can be decided only after an evidentiary hearing, however, and because the district court did not hold such a hearing, we shall remand the case for this purpose.” United States v. Ackerman, 619 F.2d 285, 288 (3d Cir. 1980), available here.

The attorneys at Fuerst Ittleman have extensive experience litigating both civil and criminal appeals before the United States Circuit Courts of Appeals.  You can contact us at 305.350.5690 or by email at contact@fidjlaw.com.

Fourth Circuit Creates Circuit Split in Virgin Islands Tax Case

On April 16, 2012, the Fourth Circuit Court of Appeals based in Richmond, Virginia affirmed the decision of the Tax Court denying the motion to intervene filed by the Government of the U.S. Virgin Islands (“GVI”) in McHenry v. Commissioner of Internal Revenue, case nos. 11-1239, 11-1366.  As we previously blogged, the Tax Court held that the GVI could not intervene in a Tax Court case of a taxpayer who was a resident (or former resident) of the USVI and claimed tax credits under the USVI’s economic development program.  In the McHenry case, the Tax Court held that its prior opinion in Appleton v. Comm’r, 135 T.C. 461 (2010) available here, was controlling and that the GVI could not intervene to challenge the IRS’s position that the statute of limitations contained in IRC Section 6501 applied to those taxpayers residing in the USVI. 

Previously, the Third Circuit Court of Appeals and the Eight Circuit Court of Appeals had reversed the Tax Court’s ruling on the issue of whether the GVI could intervene. According to the Third and Eighth Circuits, the GVI should have been permitted to intervene. The Third Circuit’s opinion is available here, and the Eight Circuit opinion is available here.

In its ruling in McHenry, the Fourth Circuit gives the Third and Eighth Circuit decisions little more than lip service, relegating both to a single footnote.  According to the Fourth Circuit, because the GVI does not administer IRC sections 932 (which provides for a tax filing with the USVI) or 934 (which authorizes the USVI to provide tax credits under the economic development program), intervention would be inappropriate.  The Fourth Circuit distinguished the Third Circuit’s opinion in Appleton by noting that the Third Circuit “stated conclusorily” that Rule 24(b)(2)’s requirement that the Virgin Islands administer the statute at issue "appears to be satisfied, as Appleton’s tax assessments are based on an income calculation which takes into account credits created pursuant to 26 U.S.C. § 934, under the [Virgin Islands’ Economic Development Program]."  Slip op. at 13. 

The Fourth Circuit further held: “Moreover, we conclude that the Third Circuit was incorrect in assuming that the tax credits claimed by Appleton were ‘credits created pursuant to I.R.C. § 934.’ Instead, they were credits created by the Virgin Islands for taxes payable to the Virgin Islands pursuant to the Economic Development Program and the Virgin Islands’ tax laws. Those Virgin Islands credits were in no way implicated in Appleton’s statute of limitations defense under U.S. tax laws, nor are they in McHenry’s defense.”  Slip op. at 14.

A full copy of the Fourth Circuit opinion is available here.

The most obvious takeaway from the McHenry opinion is that now in USVI residency cases, the GVI will be allowed to intervene in the Third and the Eight Circuits, but not in the Fourth.  There are currently 3 cases pending in the 11th Circuit on this same issue, so it is yet to be determined how this issue will be resolved in the Court. We will monitor this issue closely and update our blog with more information as soon as it is available 

The attorneys at Fuerst Ittleman have extensive experience litigating against the IRS and the Tax Division of the U.S. Department of Justice, including USVI residency cases.  You can contact an attorney by calling us at 305.350.5690 or by emailing us at: contact@fidjlaw.com.

Foreign Corrupt Practices and International Trade

Robert J. Becerra, Esq. of Fuerst Ittleman PL was one of the two presenters in the Florida Bar, International Law Section Continuing Legal Education webinar entitled, "Managing Criminal Exposure under the FCPA and Other Laws Impacting International Trade", held March 15, 2012. The webinar reviewed and highlighted the criminal laws most likely to ensnare the companies and executives involved in international trade, such as exporters, importers of food, drugs, and other regulated products, and logistics companies. The webinar presentation will soon be available from the Florida Bar. Mr. Becerra and Fuerst Ittleman PL concentrate on representing clients involved in all facets of international trade and advising them on compliance with the law and defending against accusations of violations by the government.

Update: Sackett v EPA: Supreme Court Declares EPA Compliance Orders “Final Agency Action” Subject to Judicial Review Under the APA.

On March 21, 2012, the Supreme Court of the United States issued its opinion in the case of Sackett v. Environmental Protection Agency. In a unanimous decision, the Court held that compliance orders issued by the Environmental Protection Agency (“EPA”) constitute final agency action subject to review in federal court pursuant to the Administrative Procedure Act (“APA”). A copy of the Courts opinion can be read here.

As we previously reported, the Sacketts fight with the EPA centers on a small 0.63 acre property located near Priest Lake, Idaho and an EPA compliance order prohibiting its development. In May of 2007, the Sacketts began to fill in the property with dirt and rocks in preparation for construction of a three-bedroom home. However, in November of that year, the EPA issued a Compliance Order that ordered construction to be halted claiming that the Sacketts land was a wetland, was subject to EPA jurisdiction under the Clean Water Act (“CWA”), and that the construction could not continue without first obtaining a permit from the Army Corp of Engineers. The Compliance Order also required the Sacketts to remove all fill material, restore the property to its original condition, and replant the property with wetland vegetation no later than April 30, 2008. Additionally, the Compliance Order threatened civil penalties as high a $32,500 per day for each day the Sacketts did not comply with the Order. A copy of the EPAs news release announcing the issuance of the Compliance Order can be read here.

In its opinion, the Court focused on three issues in determining whether EPA compliance orders are final agency action subject to review under the APA: 1) whether a compliance order constituted “final agency action” under the APA; 2) whether “no other adequate remedy in a court” exists for challenging the compliance order, see generally 5 U.S.C. § 704; and 3) whether the judicial review of compliance orders pursuant to the APA is precluded by the CWA.

In holding that compliance orders were “final agency action,” the Court relied on three factors. First, the Court found that through the issuance of the compliance order, the agency “determined rights or obligations” of the Sacketts. The Court found that in order for the Sacketts to be in compliance with the compliance order, the Sacketts were legally obligated to, among other things, restore their property according to an EPA approved restoration plan and grant the EPA access to the property and records related to the conditions of the site.

Second, the Court found that because the failure to comply with a compliance order exposes a party to additional penalties above and beyond those for violating the CWA, “legal consequences flow” from the EPAs issuance of the order. Third, the Court noted that the “order also mark[ed] the consummation of the agencys decisionmaking process” because the findings and conclusions contained within it were not subject to further agency review. The Court rejected the Governments argument that the compliance order did not mark such a consummation because the order invited the Sacketts to engage in informal discussions regarding the terms stating that such an invitation “confers no entitlement to further agency review” and “the mere possibility that an agency might reconsider in light of Ëœinformal discussions. . . does not suffice to make an otherwise final agency action informal. Thus, the Court found that the compliance order “has all of the hallmarks of APA finality that our opinions establish.”

The Court also held that “no other adequate remedy in a court” existed to challenge validity of a compliance order in court other than through a challenge pursuant to the APA. Outside of a direct challenge under the APA, the Court found that only two other possible paths to judicial review existed, neither of which was adequate: 1) a civil enforcement action brought by the EPA for failure to comply with an order issued; or 2) apply to the Army Corp of Engineers for a permit to fill a wetland, and if rejected seek judicial review of that decision pursuant to the APA. However, the Court found that because the Sacketts could not initiate the civil enforcement action and were subject to additional penalties for each day of noncompliance with the order, this was not an adequate remedy for challenging the orders validity. With regard to judicial review of a permit denial by the Army Corps of Engineers, the Court stated “the remedy for denial of action that might be sought from one agency does not ordinarily provide an Ëœadequate remedy for action already taken by another agency.” Thus, no other adequate remedy existed.

Additionally, the Court held that the CWA does not preclude judicial review of compliance orders pursuant the APA. Judicial review of final agency action is precluded under the APA “to the extent that [other] statutes preclude judicial review.” See 5 U.S.C. § 701(a)(1). However, the Court has long recognized that the APA creates a “presumption favoring judicial review of administrative actions.” Block v. Community Nutrition Institute, 467 U.S. 340, 345 (1984).Here, the Court found that nothing in the statutory scheme of the CWA precludes judicial review of compliance orders pursuant the APA. Therefore, the Court found that compliance orders are subject to review.

The Court also directly addressed the Governments argument that the agency would be less likely to use compliance orders in the future and voluntary compliance could suffer. Writing for the Court, Justice Scalia noted:

The Government warns that the EPA is less likely to use the orders if they are subject to judicial review. That may be true “ but it will be true for all agency actions subjected to judicial review. The APAs presumption of judicial review is a repudiation of the principle that efficiency of regulation conquers all. And there is no reason to think that the [CWA] was uniquely designed to enable the strong-arming of regulated parties into Ëœvoluntary compliance without the opportunity for judicial review “ even judicial review of the question of whether the regulated party is within the EPAs jurisdiction. Compliance orders will remain an effective means of securing prompt voluntary compliance in those many cases where there is no substantial basis to question their validity.”

Ultimately, rather than focusing on the merits of the dispute between the Sacketts and the EPA, the Court focused on whether a party to a final agency action may seek judicial review of the jurisdiction and authority of the agency to act when review of such action has not otherwise been precluded. While the Courts holding may not have revolutionized private parties ability to sue the federal government, the case will undoubtedly lead to further disputes between federal agencies and private parties regarding its true significance. These disputes, we suspect, will help to develop the jurisprudence of the lower courts regarding when, and under what circumstances, a private entity may sue the federal government.

Fuerst Ittleman will continue to monitor the impact the Courts decision on administrative law jurisprudence. For more information on how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com.

U.S. District Court Strikes Down FDA’s Qualified Health Claim for Green Tea and Breast and Prostate Cancer

After nine years of ongoing litigation, on February 23, 2012, the U.S. District Court for the Northern District of Connecticut struck down the U.S. Food and Drug Administrations (“FDA” or the “Agency”) proposed qualified health claim (“QHC”) regarding the relationship between green tea and the risk of breast and prostate cancer. The FDA generally requires the use of qualified health claims on a food or dietary supplement product labeling when a claim characterizes a relationship between a substance in the food or dietary supplement and a disease or health-related condition that does not meet the Agencys significant scientific agreement standard. If a manufacturer chooses to make such a claim, the manufacturer must use a disclaimer that limits or “qualifies” the statement in such a way that does not mislead consumers about the nature of the products underlying scientific support. (See the FDAs position on qualified health claims here.)

Fleminger, Inc., a manufacturer of green tea products, proposed a QHC to the FDA, which read: “Green tea may reduce the risk of breast and prostate cancers. The FDA has concluded that there is credible evidence supporting this claim although the evidence is limited.” The FDA, however, modified the proposed claim to state: “Green tea may reduce the risk of breast or prostate cancer. FDA does not agree that green tea may reduce the risk because there is very little scientific evidence for this claim.” In its decision, the court ruled that the FDAs proposed disclaimer effectively negated Flemingers claim, and constituted an impermissible restriction on commercial speech in violation of the First Amendment. In applying the Central Hudson test, this court held that “there are less burdensome ways in which the FDA could indicate in a short, succinct and accurate disclaimer that it has not approved the claim without nullifying the claim altogether.” Furthermore, the court held that in order for the FDAs disclaimer to be constitutional, it must “strike a reasonable fit between the governments ends and the means chosen to accomplish those ends.”

As a result, the FDA must now either start anew and develop a QHC that is consistent with the courts findings or take an appeal. Although the court ultimately decided that the FDA overstepped its constitutional limitations by requiring Fleminger to use an overly restrictive qualified claim, the courts decision does not entirely disfavor the FDA. The courts decision emphasized the FDAs authority to impose appropriate disclaimers for QHCs due to the Agencys substantial interest in preventing consumer confusion and protecting the public health. In addition, the FDA is not required to permit the use of a proposed disclaimer that is inaccurate or misleading to consumers. Rather, the FDA, through its expert analysis and judgment, may use its statutory and regulatory authority to determine the appropriate level of scientific evidence required to maintain and uphold its protective goals. This case highlights the caution with which the FDA must approach its future development of QHCs. Now, courts will likely closely scrutinize the phrasing of the FDAs proposed QHCs to ensure that the Agency does not infringe on a manufacturers constitutionally protected commercial speech.

For more information on qualified health claims for food and dietary supplement products, please contact us at (305) 350-5690 or contact@fidjlaw.com.  

Park Doctrine Insurance Offered to Cover Responsible Corporate Officer Liability

The FDA has made clear that prosecuting individuals for strict liability misdemeanors under the Park Doctrine, also known as the “Responsible Corporate Officer Doctrine” (“RCO”), is a priority amid the clamor for the FDA to get “tough” on persons and companies in regulated industries, such as food and drug. The Park Doctrine allows a corporate official to be convicted of a misdemeanor based entirely on his or her position and responsibility in a corporation. There is no requirement that a person had any criminal intent or acted personally in any wrongdoing, or for that matter, was even aware of a violation. We have previously blogged about the re-discovery of the Park Doctrine by the FDA, here and here.

Now, given the heightened risk of Park Doctrine prosecutions by the government, Allied Insurance Company commenced issuing its “RCO Policy,” designed to provide coverage for control group executives for defense costs during an investigation or misdemeanor criminal proceeding, including potential losses resulting from debarment or exclusion from contracting with federal programs as a result of a misdemeanor conviction. Debarments or exclusions would result in substantial loss of income and livelihood for an RCO executive convicted of a misdemeanor under the Park Doctrine. However, the policies do not provide coverage for offenses for which the executive exhibited criminal intent, such as intent to defraud.

Under most current Directors & Officers (D&O) indemnity policies, coverage is provided for defense costs until there is a finding of criminal liability against the insured.  Under the Park Doctrine, such criminal liability can occur without the insured being shown to have intended or even been aware of the existence of the criminal violation. Under such a scenario, the insurer can deny coverage for the executive at the most critical stages of a criminal investigation, thereby leaving the executive to fend for him or herself in funding a defense, to his or her financial ruin.  This is tantamount to having no D&O coverage at all. It is often at the investigation stage where an adequately funded defense is most critical in order to stave off indictment.  Preventing indictment in the first place is paramount since post-indictment approximately 95 % of federal criminal cases result in a criminal conviction, either by plea or verdict.  It appears that this new RCO Policy could go a long way toward ensuring an adequately funded defense and avoiding the worst case scenario for executives.

The recent emphasis on Park Doctrine prosecutions by the Department of Justice and FDA, with the idea of increasing the deterrent effect of criminal prosecutions for violation of our nations food and drug laws, has elevated the potential liability of executives in regulated industries. The market is responding to these liability concerns by offering products insuring against these risks, although it remains to be seen whether the necessary premiums for such coverage will be acceptable to insurance customers.  Perhaps the best medicine is prevention”heightened recurrent training, invigorated compliance programs and revised policies and procedures to prevent violations in the first place.

Fuerst Ittleman PL is experienced in providing legal services to FDA regulated entities to address the prevention of violations and mitigation of potential Park Doctrine liability.  In this heightened enforcement environment, an ounce of prevention is worth more than a pound of cure.

Tax Court Rules that U.S. Virgin Islands Partnerships are Corporations under “Check the Box” Regulations

On March 19, 2012, Judge Jacobs in speaking for the Unitd States Tax Court ruled that a United States Virgin Islands (USVI) limited liability company (LLC) is treated under the “check the box” regulations as a foreign corporation and that the unified audit provisions of the Internal Revenue Code, commonly referred to as the TEFRA provisions, do not apply.  As a result, the Tax Court did have jurisdiction over the notice of deficiency that the IRS issued, and the taxpayers motion to dismiss was denied.

The facts of the case summarized as follows:

The taxpayer filed income tax returns with the USVI Bureau of Internal Revenue (BIR) for 2002, 2003, and 2004. During those years the taxpayer was a member of NASCO, LLC a USVI Economic Development Commission (EDC) approved beneficiary.  The IRS claimed that the taxpayers was only involved with NASCO as a tax avoidance scheme in order to claim a tax credit under Internal Revenue Code (IRC) section 932.

Joseph A. DiRuzzo, III, a senior tax associate at Fuerst Ittleman, moved to dismiss the case on the grounds that the Tax Court lacked the jurisdiction necessary to adjudicate a notice of deficiency issued to an individual taxpayer that attempted to adjust partnership items.  The taxpayer argued that (1) NASCO was a valid LLC organized under the laws of the Virgin Islands, was recognized as such by the BIR, and should be respected for Federal tax purposes, and (2) this case involves a partnership item and hence the IRS should have issued an Final Partnership Administrative Adjustment (FPAA) to the Tax Matters Partner (TMP) of NASCO pursuant to the procedural rules of TEFRA, as opposed to a notice of deficiency.   

The Tax Court held as follows:

Business entities are generally classified for Federal tax purposes by section 7701 and the “check-the-box” regulations of sections 301.7701-1 through 301.7701-5, Proced. & Admin. Regs.8 The Virgin Islands, and the businesses established therein, are generally considered foreign for purposes of the Code because the Virgin Islands is not one of the 50 States or the District of Columbia. See sec. 7701(a)(4), (5), (9).

***

To conclude, because NASCO did not file a Federal partnership return and because NASCO is classified as a foreign corporation for Federal tax purposes, the TEFRA procedural rules do not apply. Consequently, we hold that (1) respondent was not required to issue an FPAA, and (2) respondent issued a valid notice of deficiency.

A full copy of the opinion can be found here. 

The opinion presents some interesting opportunities for taxpayers litigating against the IRS.  Because a USVI partnership is treated as a corporation (absent an affirmative election under the check the box regulations), and assuming that the USVI partnership is not a controlled foreign corporation (CFC) with Subpart F income, if the USVI partnership is found to be a valid business entity, any tax liability will be the liability of the USVI partnership and not of its members.  It is thus critical that the issue as to the validity of the USVI entity be properly litigated and tried.

The attorneys at Fuerst Ittleman have extensive experience litigating against the IRS before the Tax Court, the District Courts, the Court of Federal Claims, and the U.S. Circuit Courts.  Joseph A. DiRuzzo, III, is licensed to practice in a host of jurisdictions including the USVI and actively litigates and tries a wide variety of cases there.  You can contact an attorney by calling us at 305.350.5690 or by emailing us at contact@fidjlaw.com.

Third Circuit Court of Appeals Affirms Conviction for Tax Offenses

On March 8, 2012, Judge Fisher for the U.S. Court of Appeals for the Third Circuit issued an opinion in the case of United States of America v. Lawrence Murray affirming the judgment of conviction but remanding for resentencing.

The facts are as follows:

On January 7, 2000, a federal grand jury returned a nineteen-count indictment charging Lawrence Murray (“Murray”) with conspiracy to defraud the Internal Revenue Service (“IRS”), in violation of 18 U.S.C. § 371 (Count 1); aiding, assisting and counseling the filing of false tax returns, in violation of 26 U.S.C. § 7206(2) (Counts 2-14); bank fraud, in violation of 18 U.S.C. § 1344 (Count 15); wire fraud and aiding and abetting wire fraud, in violation of 18 U.S.C. §§ 1343, 1349, and 2 (Count 16); making false statements to U.S. Citizenship and Immigration Services (“CIS”), in violation of 18 U.S.C. § 1001 (Count 17); and filing false tax returns, in violation of 26 U.S.C. § 7206(1) (Counts 18 and 19).

Between 2005 and 2010, Murray operated a tax consulting business known as the Tax Doctor Corporation (“TDC”). According to testimony of TDC clients and employees, Murray advised high-income taxpayers how to fraudulently structure personal and business finances to maximize tax deductions and minimize tax burdens. Among other services, TDC would form shell corporations for its clients, and Murray would advise clients in deducting personal living expenses as business expenses of these corporations and in moving money between shell corporations in order to fabricate “expenses” for “contracted services” or “management fees.” Murray also advised clients in the creation of false corporate board minutes for the shell corporations. Murrays goal for his clients was to reduce their taxable income to zero, and he charged his clients between 20 and 35 percent of the tax savings they could expect to realize in the first year. He used the same techniques to reduce his own tax burden.

Murray also aided clients who, because their tax returns showed zero income, encountered difficulties in obtaining loans. For two clients, Murray created false tax returns showing higher income than the returns filed with the IRS so that they could use the false returns in applying for mortgage and business loans. Though Murray prepared and sent these returns to his clients, the clients never used them in their loan applications.

Ultimately, Murray was convicted and sentenced to 170 months imprisonment and five years of supervised release. The District Court also ordered Murray to pay restitution of $3,331,825.53.

The Third Circuit affirmed Murrays conviction, but agreed with Murray that his sentence was at least partially entered in error:

[The] 2T1.1(b)(1) enhancement for criminally derived income was erroneously applied in this case. A two-level enhancement under § 2T1.1(b)(1) is called for “[i]f the defendant failed to report or to correctly identify the source of income exceeding $10,000 in any year from criminal activity . . . .” (emphasis added). This enhancement compensates for offenses where the amount of criminally derived income is “difficult to establish” and “substantially understated.” U.S.S.G. § 2T1.1 background. The PSR applied the enhancement because the TDC tax returns “include deductions totaling $428,521 and $792,439,” and therefore, did not correctly identify the income generated by TDC. However, as the Government observes, although Murray filed false tax returns, he did not fail to identify TDC as the source of criminally derived income. Rather, he claimed improper deductions under “contracting services” to reduce taxable income, which protected the income from taxation, but did not make it difficult to ascertain. Accordingly, the enhancement was not applicable.

A full copy of the decision can be found here.

The case of Lawrence Murray can teach high net worth individuals, return preparers, investment advisors, lawyers and CPAs a host of lessons. As it relates to his criminal prosecution, the case should serve as a reminder that in criminal tax litigation, a defendant needs to engage a trial team that can navigate both criminal law and tax law.  Having one without the other can place the defendant in a position where critical issues are not identified, and potential opportunities to minimize (or eliminate) criminal exposure are lost.

The attorneys are Fuerst Ittleman have extensive substantive tax and criminal law experience.  The firm regularly handles matters involving civil tax litigation, criminal defense, and criminal tax defense (at the trial and appellate levels, include U.S. Supreme Court litigation).  You can contact an attorney via telephone by calling us at 305.350.5690 or via email at contact@fidjlaw.com.

11th Circuit Court of Appeals Decision Regarding “Act of Production” Doctrine Has Implication for Bank Secrecy Act and Foreign Bank Account Report (FBAR) Cases

On February 23, 2012, the 11th Circuit Court of Appeals reversed an order of the U.S. District Court for the Northern District of Florida holding in contempt the target of a grand jury (“John Doe) who had asserted his Fifth Amendment privilege after receiving a grand jury subpoena.

The relevant facts are as follows.  On April 7, 2011, John Doe was served with a subpoena duces tecum requiring him to appear before a Northern District of Florida grand jury and produce the unencrypted contents located on the hard drives of his laptop computers and five external hard drives. Doe informed the United States Attorney for the Northern District of Florida that, when he appeared before the grand jury, he would invoke his Fifth Amendment privilege against self-incrimination and refuse to comply with the subpoena. Because the Government considered Does compliance with the subpoena necessary to the public interest, the Attorney General, exercising his authority under 18 U.S.C. § 6003, authorized the U.S. Attorney to apply to the district court, pursuant to 18 U.S.C. §§ 6002 and 6003, for an order that would grant Doe immunity and require him to respond to the subpoena.

18 U.S.C. section 6002 can be found here. 18 U.S.C. section 6003 can be found here.

On April 19, 2011, the U.S. Attorney and Doe appeared before the district court. The U.S. Attorney requested that the court grant Doe immunity limited to “the use [of Does] act of production of the unencrypted contents” of the hard drives. Thus, Does immunity would not extend to the Governments derivative use of contents of the drives as evidence against him in a criminal prosecution.  The court accepted the U.S. Attorneys position regarding the scope of the immunity to give Doe and granted the requested order. The order “convey[ed] immunity for the act of production of the unencrypted drives, but [did] not convey immunity regarding the United States [derivative] use” of the decrypted contents of the drives.

After the hearing adjourned, Doe appeared before the grand jury and refused to decrypt the hard drives. The U.S. Attorney immediately moved the district court for an order requiring Doe to show cause why Doe should not be held in civil contempt. The court issued the requested order, requiring Doe to show cause for his refusal to decrypt the hard drives. In response, Doe explained that he invoked his Fifth Amendment privilege against self-incrimination because the Governments use of the decrypted contents of the hard drives would constitute derivative use of his immunized testimony which was not protected by the district courts grant of immunity. An alternative reason Doe gave as to why the court should not hold him in contempt was his inability to decrypt the drives. The court rejected Does alternative explanations, adjudged him in contempt of court, and ordered him incarcerated.

The 11th Circuit held that Does decryption and production of the hard drives contents would trigger Fifth Amendment protection because it would be testimonial, and that such protection would extend to the Governments use of the drives contents. According to the 11th Circuit, the district court therefore erred in two respects. First, it erred in concluding that Does act of decryption and production would not constitute testimony. Second, in granting Doe immunity, it erred in limiting his immunity under 18 U.S.C. §§ 6002 and 6003 to the Governments use of his act of decryption and production, but allowing the Government derivative use of the evidence such act disclosed.

This ruling is significant to those individuals who are currently under IRS and/or U.S. Department of Justice Investigation for failure to comply with the Bank Secrecy Acts requirement that U.S. Taxpayers who have foreign bank accounts with more than $10,000.00 must file Form TD 90.22-1, commonly referred to as an FBAR.  A copy of an FBAR can be found here.

The 11th Circuits decision appears to support Taxpayers position that a grand jury subpoena requiring them to identify (and produce bank statements of) foreign bank accounts in which they have signatory authority over or a financial interest in, is in violation of the 5th Amendment.  As the 11th Circuit put it:  “What is at issue is whether the act of production may have some testimonial quality  sufficient to trigger Fifth Amendment protection when the production explicitly or implicitly conveys some statement of fact.”  Slip op. at 13.  “An act of production can be testimonial when that act conveys some explicit or implicit statement of fact that certain materials exist, are in the subpoenaed individuals possession or control, or are authentic.”  Slip op. at 20.

A full copy of the decision can be found here.

In respect to FBAR cases, the act of production of the foreign bank account statements conveys an explicit statement that the taxpayer has a financial interest in, or signatory authority over, an undisclosed foreign bank account; the bank statements are within the taxpayers possession or control; and that the bank statements (and the information contained therein) is authentic.  This case present a potential arrow in the quiver of taxpayers that are currently (or may be soon to be) litigating against the government.  However, a timely challenge to a grand jury subpoena is crucial, as a failure to timely assert the 5th Amendment may  result in waiving this valuable constitutional right.

The attorneys at Fuerst Ittleman, PL have experience contesting grand jury subpoenas issued to taxpayers for their foreign bank account information.  Senior Tax Associate, Joseph A. DiRuzzo, III, is currently counsel of record in one case in Florida where the government has sought foreign bank records of taxpayers through the use of a grand jury subpoena.  You can contact an attorney by calling us at 305.350.5690 or by email at contact@fidjlaw.com.

Department of Justice Prosecutes for Failure to Remit Employment Taxes Collected From Employees

On December 7, 2011, Louis Alba pled guilty to criminal tax charges (Internal Revenue Code section 7202) for failing to remit to the IRS employment taxes (FICA and/or FUTA) withheld from employee wages in the amount of almost $780,000 over approximately six years.   The case is United States v. Alba, case # 2:11-cr-730 (Eastern District of New York).

While the incident leading to Mr. Albas conviction is not uncommon, the prosecution is nevertheless instructive. Indeed, in tough economic times, business owners sometimes view employment taxes as a way to improve cash flow and use money collected from employees in the form of FICA and/or FUTA taxes as a de facto government bridge loan.  However, as revealed by this case, the IRS views this as stealing money from the employees who have contributed to social security, and the IRS can, and has, prosecuted those “responsible persons” in the business who have the obligation to ensure that employee withholdings go to the IRS.

The language of Internal Revenue Code section 6672(a) states:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 [IRC Sec. 6653] or part II of subchapter A of chapter 68 [IRC Sections 6662 et seq.] for any offense to which this section is applicable.

The language of Internal Revenue Code section 7202 states:

Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $ 10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.

As these statutory provisions make clear, section 6672(a) substantially tracks section 7202, and make available to the government criminal penalties for those that failure to collect and/or remit employment taxes.

If you have serious questions about this case or how it may apply to you or your business, feel free to contact us via telephone 305.350.5690 or email  contact@fidjlaw.com for a confidential consultation.