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December 26, 2012

The Second Circuit Reverses A Conviction For Tax Evasion Based On Insufficient Evidence

Five partners at Ernst & Young - Robert Coplan, Martin Nissenbaum, Richard Shapiro, and Brian Vaughn, and Charles Bolton - were charged with a number of tax crimes in federal court in New York, specifically tax evasion, conspiracy to defraud the United States, and lying to the IRS. The Second Circuit said that the government didn't prove that two of the men were guilty and send the case back.

Ernst & Young had developed a number of tax shelters. Tax shelters - to be clear - are not themselves necessarily legal or illegal. As the jury was instructed, "it depends on the facts."

1102930_piggy_bank_1.jpgThere were five tax shelters at issue. The Second Circuit, in United States v. Coplan, described the tax shelter that was the basis of the tax evasion count this way:

The Add-On shelter was a tax strategy marketed as a means to defer indefinitely income tax liability on capital gains, including the capital gains generated in the second year of [another tax shelter involved in the case, which converted ordinary income to capital gains, which are generally taxed at a lower rate for folks who are using tax shelters .] Add-On involved the purchase of offsetting digital option pairs, followed by a series of transactions designed to generate a tax loss. The offsetting options were structured so that there was a "one-pip" gap between their strike prices, so that, in a theoretical "home run" scenario, a taxpayer could make a multimillion dollar profit. [H]owever, there was no reasonable possibility of earning a profit from Add-On apart from the "home run" scenario, since the Add-On fee structure required payments to [Ernst & Young] and the entity acting as general partner that exceeded the potential payoff.

Four of the men - Mr. Coplan, Mr. Nissenbaum, Mr. Shapiro, and Mr. Vaughn - were charged with, and went to trial on, three charges - conspiracy to defraud the United States, tax evasion, and obstructing the IRS. Mr. Vaughn and Mr. Coplan were also charged with making false statements to the IRS. Mr. Bolton pled guilty.

The government's theory, basically, was this:

At trial, the Government sought to demonstrate that the defendants conspired to conceal the true nature of the five tax shelters by creating a variety of "cover stories" regarding the purported business purpose of the shelters, when in fact the shelters were motivated solely by a desire to avoid taxes. In essence, the Government sought to demonstrate that the defendants hid the truth from the IRS by withholding information and making affirmative misstatements.

After the trial, the jury returned a guilty verdict on all counts.

Bolton, who had entered a plea, was sentenced to 15 months in prison. The folks who went to trial were sentenced to between 20 months to three years.

The Second Circuit reversed the conspiracy charges against Shapiro and Nissenbaum because there was insufficient evidence to support them.

That's a tough standard, to win a sufficiency challenge you've got to show that at least one juror could have reasonably found the person charged guilty. Worse, in a conspiracy case with multiple objects of the conspiracy - as in this case - to win you've got to show that the person wasn't engaged in any object of the conspiracy. Yet that's what the Second Circuit found happened.

The opinion is 95 pages and summarizes a decent bit of the evidence from a multi-week trial. In essence, there wasn't enough evidence that Mr. Shapiro was familiar enough with the details of the tax shelter that the government alleged caused tax evasion.

Here's the important bit from the opinion that will matter to folks not involved in this case (though, by all means, if you have a tax evasion case involving what happened at a company, read the entire opinion). Basically, the government's case was too thin as to Shapiro (internal citations omitted):

Having reviewed the record and the arguments of counsel, we conclude that the evidence against Shapiro is insufficient to support his conviction on Count One. In reaching this conclusion, we are mindful that the absence of direct evidence is not dispositive, since "the government is entitled to prove its case solely through circumstantial evidence." Nevertheless, "[i]f the evidence viewed in the light most favorable to the prosecution gives equal or nearly equal circumstantial support to a theory of guilt and a theory of innocence, then a reasonable jury must necessarily entertain a reasonable doubt." In this case, an essential element of the conspiracy charged in Count One required proof beyond a reasonable doubt that Shapiro joined the alleged conspiracy with the "specific intent" to violate the law. The evidence with respect to Shapiro's intent, viewed in the light most favorable to the Government, remains, at best, in equipoise. Because "[i]t would not satisfy the [Constitution] to have a jury determine that the defendant is probably guilty," we conclude that Shapiro's conviction on Count One must be reversed.

It's nice to see a rejection of the idea that someone is "probably" guilty in a Second Circuit opinion.

The court of appeals reached a similar conclusion for Mr. Nissenbaum.

Because the conspiracy conviction fell, the Second Circuit held that the substantive charges of tax evasion also had to be vacated for Mr. Shapiro and Mr. Nissenbaum. Mr. Nissenbaum's conviction for making a false statement to the IRS was also vacated for insufficient evidence.

The district court also imposed a fine on Mr. Bolton in excess of the statutory maximum. That was reversed so it could be reduced to the statutory maximum.

May 10, 2012

The Third Circuit Says It Is Hard To Abuse The Trust of Someone Who Doesn't Trust You, Especially If That Someone Is The IRS

James and Theresa DeMuro owned an engineering company in New Jersey called TAD Associates.

Not unlike yesterday's tax case from the Eleventh Circuit, TAD Associates withheld money for taxes from its employees paychecks. TAD did not send that money along to the IRS.

The IRS approached the DeMuros about this. It was a civil matter at that point - the IRS required the DeMuros to set up a special trust account where they were to put their employees taxes.

1285834_four_hands.jpgThe DeMuros set up the account. The purpose of the account was to hold money that would be paid to the IRS.

The DeMuros, though, took money out of the account to pay for personal expenses. And they closed the account early, and without the permission of the IRS. They also didn't put as much money into the account as the IRS thought they should, though they did spend a massive sum on items for themselves.

They were indicted for conspiracy to defraud the United States, 21 counts of failure to account for and pay employment taxes, and other tax charges.

They were convicted.

At sentencing, the district court applied a sentencing enhancement for abuse of a position of trust, because the DeMuros had signature authority on the trust account and did not handle it in the way that the IRS wanted them to.

Sentencing Guidelines § 3B1.3 says that:

If the defendant abused a position of public or private trust, or used a special skill, in a manner that significantly facilitated the commission or concealment of the offense, increase by 2 levels.

As the Third Circuit explained, in the appeal of the DeMuros sentence, United States v. DeMuro (and conviction - though that part of the appeal didn't go too well), when deciding whether the enhancement for abuse of position of trust is warranted:

we employ a two-step analysis: (1) whether the defendant occupied a position of public or private trust; and (2) whether the defendant abused this position of trust in a way that significantly facilitated the crime.

In turn, the Third Circuit looks at three things in deciding whether the person occupied a position of trust:

[I]n considering whether a position constitutes a position of trust for purposes of § 3B1.3, a court must consider: (1) whether the position allows the defendant to commit a difficult-to-detect wrong; (2) the degree of authority which the position vests defendant vis-a-vis the object of the wrongful act; and (3) whether there has been a reliance on the integrity of the person occupying the position.

So - did the DeMuros have a position of trust with respect to the IRS that let them not pay their taxes.

The court of appeals said they didn't for three reasons. The bottom line, though, is that the DeMuro's position with the IRS wasn't a position of trust; if anything it was a position of lack of trust.

First, the whole point of the trust account was so the IRS could more easily monitor the DeMuros' tax payments. The enhancement is supposed to apply to people who hide behind an account to do a crime - here, the account made it easier, not harder, for their conduct to be detected by the IRS. That's just not a position of trust.

Second, the trust fund was set up to take away discretion by the DeMuros, not add to it.

Third, the IRS set up the trust account because they didn't want to rely on the integrity of the DeMuros.

Because the trust account was set up not to rely on the IRS's trust of the DeMuros but to hedge against the IRS's complete lack of trust, the guidelines enhancement did not apply.

And back to resentencing the case will go.

May 9, 2012

The Eleventh Circuit On Tax Crimes and Grouping Under the Sentencing Guidelines

Stuart Register ran a business that conducted criminal background checks on people.

He had a number of employees. Employees, of course, have to be paid. To pay them, he used a payroll company - PrimePay. PrimePay withheld taxes from the employees' pay, and told Mr. Register how much he needed to send to the government for those taxes.

Mr. Register did not send money that was withheld to pay taxes.

As you might suspect, that is a federal crime.

Mr. Register also falsified his personal taxes from 2003 until 2006.

That is also a federal crime.

169849_tax.jpgHe was indicted and pled guilty without a plea agreement.

The tax loss - the amount of money the government lost because of the tax crime - for Mr. Register's withholding offense was a little more than $300,000.

The loss for his falsified tax returns was around $115,000.

The question is - should Mr. Register be punished more because he had two separate kinds of tax offenses.

A step back is helpful. Under the federal sentencing guidelines, sometimes, two different offenses "group." And sometimes they don't. Generally, a person being sentenced wants the charges to group.

Intuitively, you can see that if a person robs two banks, those are separate crimes with separate victims. The harm caused by the bank robbery is the fear instilled in the teller, as well as the money taken from the bank.

So, if a person robs a bank on Monday, then on Tuesday robs the same bank again - but with a different teller let's say - you would think there are two separate harms. As a result, you would want the person's sentence to increase based on the second scary thing that happened to the teller.

And the guidelines accommodate that intuition - when there are two separate harms like that the crimes do not group. When things do not group, then each serves to increase the sentence that the sentencing guidelines suggest.

Imagine, though, that the person is just embezzling from the bank. Suppose, let's say, that a teller is slipping money out when counting the receipts. And she does that on Monday and Tuesday. There, the harm is the money being stolen. So, the guidelines count all the money that's taken, and add it together, but do not treat each separate event as something that necessarily should increase the person's sentence - beyond the increase that comes just from more money being added.

For Mr. Register, the question was whether the two tax offenses should group.

The probation officer preparing the presentence report said that they do not group. Both Mr. Register and the government objected, and the probation officer stuck to his or her guns. In response to the joint objection, the probation officer said (with my emphasis added),

The guidelines direct under USSG § 3D1.2 that counts can be grouped together when they involve substantially the same harm. Under subsection (b), counts can be grouped together when they involve the same victim and two or more acts connected by a common criminal objective or common scheme or plan. Under subsection (d) counts can be grouped together when the offense level is determined largely on the basis of the total amount of harm or loss. The defendant has been convicted of 17 counts representing two offenses: Failure to Pay Over Taxes to the [IRS] and Filing Fraudulent Federal Income Tax Returns. During the years 2004 through 2007, the defendant failed to pay over employment taxes to the IRS for his employees. In addition, during the same period, he failed to pay income taxes on his own income and claimed inflated amounts of federal income tax withheld causing the IRS to pay him refunds that he was not entitled to. Although the IRS is the ultimate victim in both endeavors, the probation office views the defendant's criminal behavior as two separate criminal objectives with two separate harms. It does not appear that the defendant committed both acts to specifically defraud the IRS. It does appear that the acts occurred as a result of his lifestyle and/or his personal financial situation. His behavior was not part of a single course of conduct with a single criminal objective.

So, the probation officer concluded that because there was no single course of conduct, there could be no singular harm, even though the one singular entity - the IRS - was out money because of the conduct.

The district court agreed, and sentenced Mr. Register to the high-end of his non-grouped guidelines range - 27 months.

Mr. Register appealed, and the 11th Circuit, in United States v. Register, reversed.

The court of appeals decision tracks closely the language of section 3D1.2 - basically, when the sentencing guidelines range is driven by a loss amount, there is no requirement in the guidelines that the offenses at issue arise out of the same plan or scheme.

So, since there was one victim - the IRS - suffering one harm - the loss of tax revenue - the two different tax crimes group, and Mr. Register goes back for resentencing.

April 12, 2012

A District Court's Statements At A Plea Hearing Can Change The Meaning of A Plea Agreement; Or, Why To Read Junk Mail Carefully


As the Supreme Court reminded us a few weeks ago, most criminal cases end in a plea. United States v. Saferstein, from the Third Circuit, is a stark reminder of how a plea can go sideways, and a lovely example of one feature of federal plea practice - appeal waivers.

GoInternet - They Made Money The New Fashioned Way

Mr. Saferstein was the CEO of GoInternet.

GoInternet may not have had the best business model.

1290864_ethernet_cable.jpgBasically, the folks at GoInternet would cold-call small companies and offer internet services. They'd offer to send the companies a "Welcome packet" for $29.95. Then GoInternet would start charging $29.95 a month through the company's phone bill.

Companies often wouldn't see the charges, since the charges were on their phone bills.

Also, GoInternet wouldn't tell businesses it would charge them monthly, except in the welcome packet's disclosures, which were hard to find.

Also, apparently the welcome packet was designed to look like junk mail, so people would throw it out instead of opening it.

Finally, in my favorite twist, GoInternet didn't hire enough people to be able to process order cancelations. People who tried to cancel were often unable to.

It's like every time a person at GoInternet had an unpleasant call-center experience they thought: "Hey, I can monetize this!"

These sales practices did a great job at generating "customers." By 2003, GoInternet had more than 350,000 businesses signed up. It's annual revenue was more than $49 million.

The FTC Came Calling

The FTC came after GoInternet and Mr. Saferstein. The company and Mr. Safterstein agreed to change it's practices and send a postcard to every customer letting them know that they were being billed by GoInternet.

Mr. Saferstein apparently thought that agreeing to send the postcards was a good idea, because it would solve the problem with the FTC.

The problem with sending these postcards, though, was that then his customers would stop paying his company money for basically no reason.

Mr. Saferstein came up with a better idea. He would agree to send the postcards, then not send them - that way the FTC would go away, and he'd still collect the money from his customers.

He seems to have had a gift for a certain way of thinking.

Mr. Saferstein was charged with mail and wire fraud, conspiracy to commit perjury[FN1], and tax fraud.[FN2]

The Plea Agreement

He reached a plea agreement. He'd plead guilty to one fraud count and two tax counts.[FN3]

The plea agreement had an appeal waiver. In general, a person preserves his right to appeal unless he explicitly waives in it a provision of the plea agreement.

Here's how the Third Circuit described the appeal waiver:

[The plea agreement] contained an appellate waiver provision, which provided that Saferstein "voluntarily and expressly waive[d] all rights to appeal or collaterally attack" his conviction, subject to several exceptions. The waiver was "not intended to bar the assertion of constitutional claims that the relevant case law holds cannot be waived." Further, it provided an exception if the government were to appeal Saferstein's sentence and excepted a small number of enumerated claims that Saferstein would be permitted to raise on appeal: (1) that his sentence exceeded the statutory maximum for that count; (2) that the sentencing judge erroneously departed upward under the Guidelines; or (3) that the sentencing judge imposed an unreasonable sentence above the Guideline range.

At the plea hearing, though, the judge told Mr. Saferstein that the appeal waiver was a little different. Specifically, the district court said that,

the waiver "of course, is not intended to bar you [from] raising constitutional claims, and only the Court can decide whether they are constitutional claims or some other kind of claim."

This is a broader than what was written in the plea agreement.

Because of the massive loss in the case, the district court calculated Mr. Saferstein's offense level under the sentencing guidelines as a 43. With no criminal history, the advisory guidelines range was life.

The district court granted a downward variance though, to 23 years on each count, to run concurrent.

Mr. Saferstein appealed.

The Appeal

The question, of course, is whether he was allowed to appeal in light of the appeal waiver in the plea agreement.

Mr. Saferstein's appeal challenged whether the district court used the correct sentencing guidelines manual. The court used a manual from a date later than the date that Mr. Saferstein committed some of his crimes.

If a law changes to increase a penalty, it can't be used to punish a person for conduct that happened before the law was passed. If it does, that violates the ex post facto clause of the constitution.

Similarly, many circuits have held that using sentencing guidelines that were are more draconian and adopted after a person committed a crime violates the ex post facto clause.

So, based on that, if Mr. Saferstein has preserved his right to appeal constitutional issues, then he can win on appeal and be resentenced.

How Do You Construe An Appellate Waiver In A Plea Agreement?

Under the terms of the plea agreement, Mr. Saferstein had not preserved his right to appeal. As the district court construed the appellate waiver in the plea hearing though, he had a right to bring this appeal.

As the Third Circuit teed up the issue:

As a result [of the district court's statement], Saferstein argues that the agreement he entered into voluntarily and knowingly preserves his right to appeal constitutional claims. The Government contends that this statement is not controlling, since it misrepresents the plain language of the plea agreement, which states that the waiver was "not intended to bar the assertion of constitutional claims that the relevant case law holds cannot be waived." The district court's statement is clearly at odds with the otherwise plain and straightforward language of the agreement. That statement thus created a plausible and tangible ambiguity and seemingly expanded Saferstein's appellate rights.

So, which governs?

The Tenth Circuit has previously looked at this. In lovely language, it wrote that

[L]ogic indicates that if we may rely on the sentencing court‟s statements to eliminate ambiguity prior to accepting a waiver of appellate rights, we must also be prepared to recognize the power of such statements to achieve the opposite effect. If it is reasonable to rely upon the court‟s words for clarification, then we cannot expect a defendant to distinguish and disregard those statements of the court that deviate from the language of a particular provision in a lengthy plea agreement. United States v. Wilken, 498 F.3d 1160, 1168 (10th Cir. 2007).

The government's argument was that a plea agreement is a contract. Normally, parol evidence of a contract - that is evidence outside of the contract itself - can't be used to interpret the contract.

But, a plea agreement, unlike a contract, requires a plea hearing under Rule 11 of the Federal Rules of Criminal Procedure.

Based on that, the court of appeals held,

[P]lea agreements must be construed to protect the defendant as the weaker bargaining party [therefore] we must find that a statement made by the sentencing court during the colloquy can create ambiguity where none exists in the plain text of the plea agreement.

Because there was ambiguity, the Third Circuit construed that ambiguity against the government, and allowed Mr. Saferstein to go forward with his appeal.

So, because of the ex post facto problem, Mr. Saferstein is going back for resentencing.

[FN1] - Mr. Saferstein asked his employees to lie in a court hearing about sending postcards.

[FN2] - Did I forget to mention that Mr. Saferstein didn't report all his income on his tax returns?

[FN3] - If there's an IRS agent assigned, and there's a plea, the government almost always wants the person to plead to a tax count. It's annoying.

December 18, 2011

Tax Restitution Trips Up A District Court Judge In The Seventh Circuit

Justice Scalia recently made headlines by taking a cheap shot at the ranks of federal district court judges.

As the Associated Press reported (hat tip to Sentencing Law and Policy):

Supreme Court Justice Antonin Scalia says the quality of federal judges has suffered because there are too many of them. Testifying before a Senate committee Wednesday, Scalia blamed Congress for making federal crimes out of too many routine drug cases. In turn, that created a need for more judges.

"Federal judges ain't what they used to be," he said during a rare appearance before the Senate Judiciary Committee. The federal judiciary should be an elite group, said Scalia, who has served on the high court for 25 years. "It's not as elite as it used to be," he said.

He was responding to a question about what he sees as the greatest threat to the independence of judges.

369110_taxpapers.jpgFor what it's worth, I go half way with Justice Scalia on this. There are too many federal drug prosecutions, but, from my perspective, the quality of the federal district court bench is still excellent - especially the judges I appear in front of (and who may be (but probably aren't) reading this).

One danger of having too many cases is that it gets hard to look at each case with fresh eyes.

Sentence too many folks on drug crimes, and every person convicted of drug dealing starts to look the same. It's a rare, and good, judge who can treat the 500th drug defendant as an individual in the same way that she did with the first.

Once a judge does, say, 100 sentencing hearings, she can be forgiven, perhaps, for not focusing on the details of each one.

This kind of volume leads to the regrettable sloppiness in the Seventh Circuit's opinion in United States v. Hassebrock.

Mr. Hassebrock earned substantial income from an oil business in 2004. Among other income, he received a taxable settlement of $2.5 million. He neglected, however, to file income tax returns. He was indicted, and, at trial, convicted, of tax evasion and willfully failing to file a tax return.

Tax evasion and failure to file a tax return are odd offenses. While most federal crimes appear in Title 18 of the United States Code, tax offenses are codified in Title 26. Tax evasion is a violation of 26 U.S.C. § 7201 and willful failure to file a tax return is a violation of section 7203.

The difference in which title is the source of the crime changes things in small and subtle ways at sentencing.

In Mr. Hassebrock's case, it changed whether the sentencing court had the power to order Mr. Hassebrock to pay restitution.

To back up, a court can order, as a part of a sentence, a person to pay funds to make his victims whole as restitution. If a person defrauded money, he can be ordered to pay the amount defrauded. If he shot someone, he can be ordered to pay the costs of medical bills, lost wages, and therapy to recover from the injury.

The general restitution statutes, 18 U.S.C. §§ 3663 and 3663A, apply to violations of crimes that appear in Title 18 and drug crimes in Title 21. They do not apply to offenses in Title 26 - that is, they don't apply to tax evasion.

Judges imposing sentence really want to impose restitution. As a practical matter, it makes collecting the taxes that were evaded monumentally easier for the government.

Yet restitution in tax cases is only available in two ways. First, if the person charged with a tax offense pleads guilty, as a condition of a plea agreement he can agree (or be forced to agree) to pay restitution as a part of his sentence. This is authorized by 18 U.S.C. § 3663(a)(3).

Second, if the district court orders that the person be on supervised release, the court can make restitution a condition of that supervised release.

Importantly, a district court cannot make restitution a part of a sentence in federal court.

Given that this blog only addresses cases and issues where the defendant wins, you will not be shocked to learn that the district court in Mr. Hassebrock imposed a restitution order as a part of his sentence.

The government tried to let the sentencing court know it couldn't do it, but the judge, ignoring the government's statement that the court could only impose restitution as a condition of Mr. Hassebrock's post-prison supervised release, imposed restitution as a part of the sentence.

The court directed Mr. Hassebrock to start paying the restitution immediately - while he was serving his 36 month sentence. However, the court doesn't have the power to order him to pay restitution until his prison sentence is over and he is being supervised by the United States Probation Office.

Mr. Hassebrock, to his credit, has apparently starting paying his restitution from prison.

His case was remanded for a new restitution order that starts once he is out of prison.