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.

FDA Releases Factors for Determining High-Risk Status for Domestic Food Facilities

As we previously reported, the FDA Food Safety Modernization Act (“FSMA”) created many new obligations for both U.S. Food and Drug Administration (FDA) and the food industry. One such obligation is found in section 201 of the FSMA, “Targeting of Inspection Resources for Domestic Facilities, Foreign Facilities, and Ports of Entry.” This section requires that FDA inspect food facilities at a frequency based upon a facilitys status as either high-risk (“HR”) or non-high-risk (“NHR”). FDA has just published FDA Domestic Facility Risk Categorization for FY 2012, which sets out the criteria FDA will be using to determine whether a domestic food facility is HR or NHR.

Status as either HR or NHR will determine a food facilitys frequency of inspection by FDA. HR facilities must be inspected at least once in the first five years following enactment of the FSMA and then once every three years thereafter. NHR facilities, on the other hand, must be inspected only once in the first seven years following enactment of the FSMA and then once every five years thereafter. These are minimum guidelines and some facilities may be inspected more frequently.

In the FDA Domestic Facility Risk Categorization for FY 2012, FDA is identifying HR food facilities based on the six risk factors identified in section 421(a)(1) of the Food, Drug, and Cosmetic Act (“FDCA”), which are as follows:

  • The known safety risks of the food manufactured, processed, packed, or held at the facility;
  • The compliance history of a facility, including with regard to food recalls, outbreaks of foodborne illness, and violations of food safety standards;
  • The rigor and effectiveness of the facilitys hazard analysis and risk-based preventive controls;
  • Whether the food manufactured, processed, packed or held at the facility meets the criteria of priority under section 801(h)(1) of the FDCA, which relates to the prioritization to detect intentional adulteration in food offered for import into the U.S.;
  • Whether the food or the facility that manufactured, processed, packed, or held such food has received a certification as described in section 801(q) (for imported foods only) or 806 (voluntary qualified importer program) of the FDCA, as appropriate; and
  • Any other criteria deemed necessary and appropriate by the FDA for purposes of allocating inspection resources.

However, for Fiscal Years (FY) 2011-13 for domestic food facilities, FDA is determining of whether a domestic food facility is HR based upon the following four factors:

  • The known safety risks of the food manufactured, processed, packed, or held at the facility. The “known safety risks” of food “are based on broad, industry-level food commodity categories, e.g., bakery, leafy vegetables, spices.”
  • The compliance history of a facility, including with regard to food recalls, outbreaks of foodborne illness, and violations of food safety standards. The “compliance history” of a facility is “based on inspection results for a facility from the previous five fiscal years.” Specifically, facilities with a history of non-compliance with food safety requirements, i.e., a history of three or more “Voluntary Action Indicated” (“VAI”) within the five year time period, and those facilities with food safety violations of regulatory significance, i.e., one or more “Official Action Indicated” (“OAI”) in the five year time period, will be categorized as an HR facility.
  • The type of establishment and type of activity conducted at the facility (e.g., manufacture/processor, repacker/packer, etc.)
  • The number of years since the last inspection.

The last two factors have been identified as “other criteria deemed necessary and appropriate” for purposes of allocating inspection resources.

As FDA implements the FSMA and gathers more information, FDA will most likely need to make modifications and adjustments for FY 2014. At this time, food facilities should begin to evaluate any known safety risks associated with the food they manufacture, process, pack or hold and understand whether they are likely to be categorized as HR or NHR.

Please contact us at (305) 350-5690 or contact@fidjlaw.com to learn more about how FDA may categorize your food facility or if you have any questions regarding FSMA.

FinCEN Issues Advisory To Financial Institutions Regarding SAR Confidentiality

On March 2, 2012, the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury issued an advisory to counsel of financial institutions advising them of the requirement to maintain the confidentiality of Suspicious Activity Reports (“SARs”). FinCEN issued the advisory because of a growing concern that private parties who are not authorized to know of the existence of a filed SAR are seeking information on SAR filings for a variety of purposes including civil litigation. FinCEN believes that unauthorized disclosure could undermine its investigations by tipping off suspects and threaten the safety and security of financial institutions and personnel who file such reports. A copy of FinCENs advisory can be read here.

Pursuant to the Bank Secrecy Act, codified partially at 31 U.S.C. §§ 5311-5332, the Secretary of the Treasury is authorized to require financial institutions to keep records and file reports that the Secretary determines to have a high degree of usefulness in criminal and tax matters as well as counter-terrorism and anti-money laundering compliance. One such report is the SAR. Generally speaking, a SAR is a report prepared by a financial institution regarding suspicious activity which may be indicative of a possible violation of law or regulation. See 31 U.S.C. § 5318 (g). Financial institutions submit completed SARs to FinCEN, the organization responsible for implementing the BSA. More information on FinCEN and its use of SARs can be found on its website here.

The unauthorized disclosure of a SAR is a violation of federal law. More specifically, financial institutions and their current and former directors, officers, employees, agents, and contractors are prohibited from disclosing: 1) that a SAR has been filed and 2) any information that would reveal the existence, or non-existence, of a SAR. Thus, financial institutions must be aware that the scope of potential unauthorized disclosures is broad. Violators can be subject to both civil and criminal liability.  31 U.S.C. § 5321 provides for civil penalties of up to $100,000 for each violation. See also 31 C.F.R. § 1010.820. Criminal penalties include fines of up to $250,000 and/or imprisonment of up to 5 years. See 31 U.S.C. § 5322; 31 C.F.R. § 1010.840. In addition, financial institutions can be subject to civil money penalties for anti-money laundering (“AML”) compliance program deficiencies that led to the unauthorized disclosure of up to $25,000 for each day the AML program deficiency existed or continues.

FinCEN advises that financial institutions provide information relating to the requirement and scope of confidentiality of SAR and SAR related information as part of the institutions employee training programs. In addition, FinCEN advises that financial institutions take other risk reducing measures to reduce the risk of unauthorized disclosure including: 1) limiting access to SARs, 2) logging access to SARs, 3) using cover sheets on SAR and SAR relating information, and 4) providing electronic notices that highlight confidentiality requires before a person can access or disseminate the information. FinCEN also advises that if a financial institution or its counsel receives a subpoena or other request for a SAR from anyone other than an authorized government authority or a self-regulatory organization, then counsel should contact FinCENs Office of Chief Counsel.

If you have questions pertaining to SAR confidentiality, the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com.

Update: Court Rules that FDA’s Graphic Smoking Warning Labels Violate First Amendment

On February 29, 2012, Judge Richard Leon of the United States District Court for the District of Columbia issued an Order finding that the FDAs new graphic cigarette warning labels are a violation of the First Amendment and therefore unconstitutional. A copy of the Courts opinion can be read here.

As we previously reported, on June 21, 2011, pursuant to the authority granted to it by the Family Smoking Prevention and Tobacco Control Act to regulate tobacco, the FDA issued a final rule that requires each cigarette package and advertisement to bear one of nine new textual warning statements and an accompanying graphic image (see FDAs approved images here).  Additionally, the rule required these warnings to appear on every pack of cigarettes sold in the US and in every cigarette advertisement starting no later than September 2012.

As we reported here,< on August 16, 2011, five tobacco companies filed a complaint against the U.S. Food and Drug Administration (FDA) in the U.S. District Court for the District of Columbia challenging the Agencys rule requiring new textual and graphic warning labels on cigarette packaging and advertisements. The five tobacco companies (R.J. Reynolds Tobacco Company, Lorillard Tobacco Company, Commonwealth Brands, Inc., Liggett Group LLC, and Santa Fe Natural Tobacco Company, Inc.) sought a declaratory judgment that the FDAs final rule violates the First Amendment and Administrative Procedure Act (APA), and declarative and injunctive relief that the new textual and graphic warnings not become effective until 15 months after FDA issues regulations "that are permissible under the United States Constitution and federal laws."

On November 7, 2011, Judge Leon granted a preliminary injunction in favor of the five tobacco companies finding that the tobacco manufacturers had a substantial likelihood of success on the merits of their constitutional and APA challenges because the FDAs labeling requirements are likely violative of the First Amendment. Our complete report on the Courts preliminary injunction can be read here.

In its Complaint, the tobacco companies alleged that the requirement to place graphic images on its labels unconstitutionally compels speech. Generally speaking, compelled speech is presumptively unconstitutional and will only be upheld if it passes “strict scrutiny,” i.e.: 1) the government has a compelling interest it seeks to protect; and 2) the regulation is narrowly tailored to achieve that interest. However, as explained by the Court, narrow exceptions apply in the area of commercial speech. The government may require disclosure of only “purely factual and uncontroversial information” to protect consumers from “confusion or deception,” unless such a disclosure is “unjustified or unduly burdensome.” A lower level of scrutiny applies in cases where government- compelled speech meets this narrow exception. See generally Zauderer v. Office of Disciplinary Counsel of Sup. Ct. of Ohio 471 U.S. 626 (1985).

In granting the tobacco companies motion for summary judgment, the Court first determined that the FDAs rules did not meet the narrow exception for compelled commercial speech. The Court found that the images were not designed to protect consumers from confusion or deception. Rather, “they were crafted to evoke a strong emotional response calculated to provoke the viewer to quit or never start smoking.” Thus, the Court found that objective and purpose of the warnings were not the dissemination of purely factual and uncontroversial information. Therefore, strict scrutiny and not a lower, more deferential standard applied.

Here, when evaluating whether the FDAs labeling rule passed constitutional muster, just as the Court noted when it granted the tobacco companies preliminary injunction, the Court found that regardless of whether the governments asserted interests were compelling, the FDAs rule is not narrowly tailored to achieve such a purpose. The Court found that “the sheer size and display requirements for the graphic images,” (the top 50% of the front and back of all cigarette packages manufactured and distributed in the US), were not designed to achieve an informative purpose. Instead, the Court found that the dimensions were designed to promote a government sponsored anti-smoking agenda.

Furthermore, the Court found that the Government could achieve its purpose of educating the public on the risks of smoking by using several less restrictive and burdensome alternatives, each of which would not unconstitutionally compel speech. These alternatives include: 1) an increase in anti-smoking advertisements disseminated by the Government; 2) increases in cigarette taxes; and 3) improved efforts by the Government to prevent the unlawful sale of cigarettes to minors. Additionally, the Court found that less restrictive and burdensome alternatives existed for the proposed warnings themselves such as “reduc[tion] [of] space appropriated for the proposed Ëœwarnings to 20% of the packaging or require[ing] Ëœwarnings only on the front or back of the packages,” and using “graphics that convey[] only purely factual and uncontroversial information rather than gruesome images designed to disgust the consumer.”

In addition to finding the current FDA labeling rules unconstitutional, the Court also issued a permanent injunction enjoining the FDA from enforcing any textual and graphic warnings required by the Tobacco Control Act until 15 months after the issuance of new regulations which are compliant with the U.S. Constitution and federal law. Fuerst Ittleman will continue to monitor the FDAs regulation of tobacco products and advertising. For more information, please contact us 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.

The Supreme Court Adds Tax Crimes under IRC §7206 to the List of Aggravated Felonies Requiring Deportation of an Offending Alien

On February 21, 2012, in Kawashima v. Holder, the Supreme Court affirmed the deportation of Mr. Kawashima, who pleaded guilty to one count of “willfully making and subscribing a false tax return” in violation of IRC §7206(1), and Mrs. Kawashima, who pleaded guilty to one account of “aiding and assisting in the preparation of a false tax return” in violation of IRC §7206(2).  A copy of the courts decision is available here.

Specifically, the Supreme Court found that convictions under IRC §§7206(1) and (2) where the Governments revenue loss exceeded $10,000, qualified as aggravated felonies pursuant to 8 U.S.C. §1101(a)(43)(M).  Because 8 U.S.C. §1227(a)(2)(A)(iii) provides that “[a]ny alien who is convicted of an aggravated felony at any time after admission is deportable,” the Supreme Court found that the Kawashimas convictions necessitated deportation. 
8 U.S.C. §1101(a)(43)(M) defines an aggravated felony as:

  1. Involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or
  2. Is described in section 7201 of title 26 in which the loss to the Government exceeds $10,000. 

Notably, the provision specifically cites to crimes under IRC §7201 and does not mention IRC §7206, the statute relating to the Kawashimas convictions.  Consequently, the classification of the Kawashimas crimes as “aggravated felonies” occurred pursuant to 8 U.S.C. §1101(a)(43)(M)(i) as crimes “involving fraud and deceit.”

The Kawashimas asserted that “textual differences between Clause (i) and Clause (ii) [of 8 U.S.C. §1101(a)(43)(M)] indicate that Congress intended to exclude tax crimes from Clause (i).”  Kawashima at 7.  The Supreme Court appeared to find Congresss specific mention of tax crimes under IRC §7201 in Clause (ii) of 8 U.S.C. §1101(a)(43)(M) to be insignificant in its analysis.   

The difference in language does not establish Congress intent to remove tax crimes from the scope of Clause (i).  Clause (i) covers a broad class of offenses that involve fraud or deceit.  Clause (i) thus uses correspondingly broad language to refer to the wide range of potential losses and victims. Clause (ii), on the other hand, is limited to the single type of offense described in IRC §7201 (relating to tax evasion), which, by definition, can be only one type of loss (revenue loss) to one type of victim (the Government.)  Congress decision to tailor Clause (ii)s language to match the sole type of offense covered by Clause (ii) does not demonstrate that Congress also intended to implicitly circumscribe the broad scope of Clause (i)s plain language.

Id. (emphasis added).

Furthermore, the Supreme Court found it irrelevant that neither fraud nor deceit are formal elements to procure a conviction under IRC §7206. 

IRC §7206 provides in pertinent:

Any person who”

(1) Declaration under penalties of perjury
Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or

(2) Aid or assistance
Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document;
. . . shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution.

With regard to Mr. Kawashimas conviction under IRC §7206(1), the Supreme Court stated:

Although the words Ëœfraud and Ëœdeceit are absent from the text of IRC §7206(1) and are not themselves formal elements of the crime, it does not follow that his offense falls outside of [8 U.S.C. §1101(a)(43)(M)(i)].  The scope of that clause is not limited to offenses that include fraud or deceit as formal elements.  Rather Clause (i) refers more broadly to offenses that “involve” fraud or deceit “ meaning offenses that necessarily entail fraudulent or deceitful conduct . . . Because Mr. Kawashimas conviction established that Ëœhe knowingly and willfully submitted a tax return that was false as to a material matter, he therefore committed a felony that involved Ëœdeceit. 

Id at 5. (emphasis added).

With regard to Mrs. Kawashimas conviction under IRC §7206(2), the Supreme Court stated that her conviction “establishes that, by knowingly and willfully assisting her husbands filing of a materially false tax return, Mrs. Kawashima also committed a felony that involved Ëœdeceit.”  Id. at 6.

In its holding, the Supreme Court has refused to acknowledge the ambiguity of 8 U.S.C. §1101(a)(43)(M), is facially open to more than one interpretation.  While recognizing this ambiguity, Justice Ginsberg stated in her dissent:  

If the two proffered constructions of subparagraph (M) are plausible in roughly equal measure, than our precedent directs us to construe the statute in the Kawashimas favor . . .  We resolve doubts in favor of the alien because deportation is a drastic measure. 

Id. at 3.  (emphasis added).
In her dissent, Justice Ginsberg also identified numerous other offenses, which pursuant to the Courts analysis, would now be deemed “aggravated felonies” requiring deportation.

Many federal tax offenses, like IRC § 7206 involve false statements or misleading conduct.  See, e.g., §7202 (failing to truthfully account for and pay taxes owed).  Conviction of any of these offenses, if the Courts construction were correct, would render an alien deportable.  So would conviction of state and local tax offenses involving false statements . . . [S]ee, e.g., Del. Code Ann., Tit. 30 §574 (2009) (submitting a tax return false as to any material matter is a criminal offense); D.C. Code §47-4106 (2001-2005) (same); Ala. Code §40-29-114 (2003) (same); Va. Code Ann. §58.1-1815 (2009) (willfully failing to account truthfully for or pay certain taxes is a criminal offense.).

Id. at. 8. (emphasis added).

Following Justice Ginsburgs logic, it becomes likely that immigration proceedings may now be initiated in a variety of instances where deportation was previously little more than a remote threat.  Not only foreign persons residing in the U.S., but return preparers, accountants, immigration lawyers, tax lawyers, and criminal defense lawyers should be aware of this decision and govern themselves accordingly.

If you have any questions regarding tax crimes under IRC §7206, IRC §7201, or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.

Joseph A. DiRuzzo, III of Fuerst Ittleman petitions the Supreme Court of the United States for a Writ of Certiorari

On February 22, 2012, Joseph A. DiRuzzo, III, Esq., CPA, a senior tax associate at Fuerst Ittleman, filed a Petition for Writ of Certiorari in the United States Supreme Court in United States v. John M. Crim. Mr. Diruzzos Petition is available here.

The Petition seeks to review a decision of the Third Circuit Court of Appeals, which affirmed in part, and vacated and remanded in part, a judgment of conviction for a violation of 18 U.S.C. section 371 (a Klein conspiracy) and a violation of 26 U.S.C. section 7212(a) (interfering with the due administration of the Internal Revenue Code).  The Third Circuits decision is available here.

The background of the case is as follows.  On November 28, 2006, an indictment was filed against John Michael Crim (“Crim”) and other co-defendants, charging them in Count One with conspiracy to defraud the United States in violation of 18 U.S.C. § 371.  On April 24, 2007, a superseding indictment was filed against the Crim and other co-defendants, charging them again with conspiracy to defraud the United States in violation of 18 U.S.C. § 371.  Crim was also charged in Count Two of the Superseding Indictment with corruptly endeavoring to interfere with the administration of the Internal Revenue laws in violation of 26 U.S.C. § 7212(a). 

Count One of the superseding indictment alleged that Crim was the co-founder of an organization known as the Commonwealth Trust Company (“CTC”).  Count One charged as follows: “[f]rom at least January 2000 through at least July 2003, in the Eastern District of Pennsylvania and elsewhere, defendants [Crim and co-defendants] conspired and agreed, together with others known and unknown to the grand jury, to commit an offense against the United States, that is, to defraud the United States by impeding, impairing, obstructing, and defeating the lawful functions of the [IRS] of the Department of the Treasury, in the ascertainment, computation, assessment, and collection of income taxes.”

Count One further alleged that: “CTC marketed two domestic fraudulent trust packages and one offshore fraudulent trust package to its clients. The domestic trust packages consisted of a Pure Trust Organization (“PTO”) and a Private Company Trust (“PCT”). The offshore trust package consisted of an Internationally-based Corporation (“IBC”). In the domestic trust PCT system, CTC instructed clients to remove funds earned from legitimate businesses and, instead of paying income tax on those funds, to divert that income through a series of domestic trusts under the clients control. CTC represented to its clients that, by diverting the income through a series of trusts, the clients could escape paying taxes on that income or could significantly reduce the amount of taxes they owed. CTC also instructed clients to transfer assets they already owned into CTCs other domestic fraudulent trust package, the PTO, to conceal and protect real and personal property from IRS levies and seizure attempts.” Count One alleged that Crim was the Head Trustee of CTC, a member of the CTC Executive Board, and a promoter of CTC trust products.

In the “manner and means” segment of the superseding indictment, Count One alleged that it was part of the conspiracy that Crim and others “met with taxpayers within the Eastern District of Pennsylvania and elsewhere to solicit and maintain clients for CTCs offshore and domestic trust packages by falsely representing that taxpayers could lawfully avoid paying income taxes by placing their income and assets into CTCs trust packages.”

Count Two charged that, on May 10, 2002, in Lancaster, Pennsylvania, Crim and other co-defendants corruptly endeavored to obstruct and impede the due administration of the Internal Revenue laws by speaking at a conference to CTC clients at which the defendants intended to cause the fraudulent use of CTC products by teaching the CTC clients how to engage in sham paper transactions that would result in the concealment from the IRS of clients property and of their receipt of income.  According to the Superseding Indictment, all of this violated 26 U.S.C.  § 7212(a).

On January 7, 2008, the trial began against Crim and co-defendants Taylor, Paul Crim, and Brownlee, before the Honorable Anita B. Brody and a petit jury.  On January 25, 2008, the District Court charged the jury. On January 28, 2008, the jury returned guilty verdicts against Crim on Count One (18 U.S.C. § 371) and Count Two (26 U.S.C. § 7212(a)).  On July 7, 2008, the District Court sentenced Crim to 96 months imprisonment on Count One and Count Two, with each count to be run concurrently.  Restitution was ordered to the government in the amount of $17,242,806.57. 

Mr. DiRuzzo did not represent any of the defendants at trial but was retained by Mr. Crim for representation before the United States Supreme Court. The Petition for Writ of Certiorari presents the following discrete questions:

Whether, in light of the Courts holding in United States v. Aguilar, 515 U.S. 593, 132 L. Ed. 2d 520, 115 S. Ct. 2357 (1995), and its progeny, the Court of Appeals erred in failing to conclude that the “Omnibus Clause” of 26 U.S.C. § 7212(a) requires the prosecution prove that a criminal defendant have (i) knowledge of some pending Internal Revenue Service action of which the criminal defendant was aware, and (ii) that there be a “nexus” between a criminal defendants actions and the actions taken by a third-party, which is also contrary to a decision of another circuit.

The Petition argues that the Third Circuits opinion is contrary to the decisions of the Supreme Court of the United States, in Aguilar, and is in conflict with the Sixth Circuit Court of Appeals decision in United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998), which held that “due administration of the Title [26] requires some pending IRS action of which the defendant was aware.”  Id. at 957. 

The attorneys at Fuerst Ittleman handle cases involving complex litigation (including income tax litigation) at the District Courts, the Court of Federal Claims, Circuit Courts, and if necessary in the U.S. Supreme Court.  You can reach an attorney by emailing us at contact@fidjlaw.com, or by calling us at 305.350.5690.

U.S. District Court Rejects $50.2M Civil Penalty In False Claims Act Case

Discussing the constitutionality of civil penalties under the False Claims Act (“FCA”), a federal district judge in the Eastern District of Virginia has refused to impose a $50.2 million fine against a company for its fraudulent conduct.

Last summer, a jury found the company liable on two claims, including a government claim for which the company had already paid hundreds of thousands of dollars in a 2003 antitrust case. After the jury made its finding, the government asked the Federal District Court to impose a $24 million civil penalty, instead of the $50.2 million civil penalty mandated by the FCA.  The government took the position that it was “exercising their prosecutorial discretion” in asking for a lesser amount than the $50.2 million, and argued that the $24 million penalty was “unquestionably within the constitutional limit of the Excessive Fines Clause of the Eighth Amendment.” The U.S. District Court, according to the government, had no authority to reduce the number civil penalties below the amount the statute required.

The Court based its decision to award no civil penalty on two factors. First, the Court ruled that the penalty required by the statute was “grossly disproportionate” to allegations that the company defrauded the government.  The Court also ruled that it lacked the power to create a penalty other than the one permitted by statute: “The court is driven to its conclusion that it must simply refuse to enforce the mandated penalty after finding it unconstitutional under the facts of this case, and not substitute its own fashioned penalty, in large part due to the structure and language of the FCA itself.” The Court further wrote that it was unwilling “to rewrite the FCA, as given to this court, in order to fashion a constitutional civil penalty under the facts of this case.”

A full copy of the opinion is available here.

The attorneys at Fuerst Ittleman have extensive experience litigating against the government regarding the False Claims Act.  You can reach an attorney by emailing us at  contact@fidjlaw.com or by calling us at 305.350.5690.

FinCEN Issues Advisory To U.S. Financial Institutions Regarding Providing Financial Services to Foreign-Located MSBs

On February 15, 2012, the Financial Crimes Enforcement Network (“FinCEN”) issued an Advisory to U.S. financial institutions advising them of their obligations under the Bank Secrecy Act (“BSA”) when dealing with foreign-located money services businesses (“MSBs”). A copy of FinCENs advisory can be read here.

The advisory comes several months after FinCEN implemented new rules defining which businesses qualify as MSBs subject to the anti-money laundering regulations of the BSA. As we previously reported, on July 21, 2011, FinCEN published a final rule which amended the definition of “money services business” under 31 C.F.R. § 1010.100(ff) to clarify that it is the activities performed within the U.S. by a business which will cause it to be classified as a MSB regardless of the businesss physical location. The rule change arose out of the recognition that the Internet and other technological advances make it increasingly possible for businesses to offer MSB services in the U.S. from foreign locations.

The definition of MSB has been rephrased to state: “[a] person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States” as a currency dealer, currency exchanger, check casher, money transmitter, and/or a seller, issuer, and redeemer of travelers checks, money orders, or prepaid access cards. As a result of this change, foreign-located businesses engaging in MSB activities within the U.S. are subject to the rigorous requirements of the BSA, even if the foreign based MSB has no physical presence in the U.S. The final rule also required each foreign-located MSB to appoint a person residing in the U.S. as an agent for service of legal process.

In its Advisory, FinCEN advises U.S. financial institutions to reevaluate their own anti-money laundering (“AML”) programs if they provide financial services or engage in financial transactions with foreign-located MSBs. FinCEN further suggests that U.S. financial institutions look to its earlier guidances, such as FinCENs 2005 Intra-agency Interpretive Guidance on Providing Banking Services to MSBs Operating in the U.S. and FinCENs 2010 Advisory on Informal Value Transfer Systems, in order to ensure that the foreign-located businesses they are dealing with are not operating as unregistered or unlicensed MSBs. FinCEN also reminded financial institutions that provide services to foreign-based MSBs of their obligations to file Suspicious Activity Reports (“SARs”) should they become aware that their customers are operating as unregistered or unlicensed MSBs.

If you have questions pertaining to the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com.