DOJ Settlement with JP Morgan:   Another Federal Financial Gap &More Fines and Penalties/Offshore Account Style Enforcement
                                              

               The Department of Justice (DOJ) announced a settlement on its “Financial Fraud Enforcement Task Force Website” which read strikingly similar to the DOJ announcements regarding offshore disclosure “victories” for the government. Its no coincidence that the tones in the press releases are similar.   The Financial Fraud Enforcement Task Force (“FFETF”) was created by President Obama, and was announced on November 17, 2009. Its membership consists of many governmental departments, including the IRS-Criminal Investigation and the Financial Crimes Enforcement Network (FINCEN). The DOJ Tax Division’s current offshore enforcement program began in 2008, with the investigation of UBS AG, Switzerland's largest bank. Most of the offshore tax enforcement is carried out by the DOJ Tax Division, working closely with United States Attorneys' offices.
These statements of government officials regarding the JP Morgan settlement sound very much like those of the DOJ and IRS remarks after a significant offshore “victory” in the form of a settlement or prosecution (See http://www.stopfraud.gov/iso/opa/stopfraud/2013/13-ag-1237.html for entire JP Morgan DOJ press release)

                  "JPMorgan was not the only financial institution during this period to  knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior.  The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over.  No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability,” said Attorney General Eric Holder;

           "Through this $13 billion resolution, we are demanding accountability and requiring remediation from those who helped create a financial storm that devastated millions of Americans,” said Associate Attorney General Tony West.

                  “Today’s global settlement underscores the power of FIRREA and other civil enforcement tools for combating financial fraud,”... “The Civil Division, working with the U.S. Attorney’s Offices and our state and agency partners, will continue to use every available resource to aggressively pursue those responsible for the financial crisis,” said Assistant Attorney General for the Civil Division Stuart F. Delery, co-chair of the RMBS Working Group.

                  “This settlement resolves only civil claims arising out of the RMBS packaged, marketed, sold and issued by JPMorgan, Bear Stearns and Washington Mutual.  The agreement does not release individuals from civil charges, nor does it release JPMorgan or any individuals from potential criminal prosecution. In addition, as part of the settlement, JPMorgan has pledged to fully cooperate in investigations related to the conduct covered by the agreement.”

       As to the use of the fine to assist with its current “gap” in funds, the press release cited the following allocations of the settlement proceeds:

                      “of the record-breaking $13 billion resolution, $9 billion will be paid to settle federal and state civil claims by various entities related to RMBS.  Of that $9 billion, JPMorgan will pay $2 billion as a civil penalty to settle the Justice Department claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), $1.4 billion to settle federal and state securities claims by the National Credit Union Administration (NCUA), $515.4 million to settle federal and state securities claims by the Federal Deposit Insurance Corporation (FDIC)....”

      Here are some DOJ comments made in an August 29, 2013 press release regarding a newly announced a program designed to encourage Swiss banks to voluntarily cooperate in turning over names of U.S. account holders (See http://www.justice.gov/tax/2013/txdv13975.htm):

                   "This program will significantly enhance the Justice Department's ongoing efforts to aggressively pursue those who attempt to evade the law by hiding their assets outside of the United States...In addition to strengthening our partnership with the Swiss government, the program's requirement that Swiss banks provide detailed account information will improve our ability to bring tax dollars back to the U.S. treasury from across the globe," said Attorney General Eric Holder.      

                   "This program will provide us with additional information to prosecute those who used secret offshore bank accounts and those here and abroad who established and facilitated the use of such accounts...Now is the time for all U.S. taxpayers who hid behind Swiss bank secrecy laws or have undeclared offshore accounts in other foreign countries to come forward and resolve their outstanding tax issues with the United States," said Deputy Attorney General James M. Cole.

     Since the United States Attorney General is the same person directly responsible for both the FIRREA and offshore tax enforcement, it is not surprising that record-breaking fines and criminal penalties, and threats of criminal penalties  are the primary tools being used to combat both "evils" and to reduce the "Tax Gap" as well as the "gaps" resulting from the federal and state financial banking crisis.

           Whether the record setting fines and criminal sanctions are good tax and financial policy will be seen.  

  

Closing the Offshore Tax Gap: “John Doe” Summons Upon Citibank NA and Bank of New York Mellon For Identification of Persons Who Transacting Business With Accounts At Swiss Banks–11/7/2013 and 11/12/2013

The Department of Justice has been using the “John Doe” summons as an investigative technique for the IRS to use in its efforts to close that part of the tax gap attributable to unreported income and accounts in offshore financial institutions.

    Information as to the identity of U.S. persons maintaining Swiss accounts has been an area of emphasis since 2008 when the IRS received authority to issue a “John Doe” summons on UBS from the U.S. District Court in the Southern District of Florida.  The United States and Switzerland and many Swiss Banks have since entered into agreements of various kinds, all of which are intended to do at least the following: identify U.S. persons using Swiss accounts to avoid U.S. tax payment and reporting obligations.

    A “John Doe” summons is a summons which is issued pursuant to the Code Section 7609(f). Unlike an “ordinary summons” issued pursuant to Code Section 7602,  “John Doe” summonses do not identify the person or persons with respect to whose liability the summonses are issued. They may be served only after a court proceeding in which the U.S. establishes that the following three tests are met:

                    1. The summonses must be shown to relate to an investigation of an ascertainable group or class of persons,

                    2. The U.S. must establish that there is a reasonable basis for believing that such group or class of persons have failed to comply with any provision of any internal revenue law, and

                    3. The U.S. must establish that the information sought to be obtained from the examination of the records or testimony (and the identities of the persons with respect to whose liability the summonses are issued) and not readily available from other sources.

    On November 7th and 12th, 2013, two U.S. federal district courts in New York granted the ex parte motions of United States and issued orders permitting the IRS to issue “John Doe” summonses to the following U.S. banks:  JP Morgan Chase, Bank of New York Mellon, HSBC Bank, and Citibank.

    The caption of the matter shown on the Orders granting leave to the summons petitions sets forth the scope of the summonses:

             1.  Years.  The summonses requested names of persons for years ended December 31, 2004, through December 31, 2012.

            2. Signature or Control Over Financial Accounts. The persons must have directly or indirectly had interests in or signatures or other authority (including authority to withdraw funds; trade or give instructions or receive account statements, confirmations, or other information, advice or solicitations) with respect to the subject financial accounts.

            3. Specified Bahamian and Swiss Banks and their Affiliates and Specified U.S. Banks Which Transacted Business With Said Foreign Banks. 

                        A. Bahamian and Swiss Banks. The accounts subject to the summonses were those maintained at, monitored by, or managed through: (1) Butterfield & Son, Limited (a/ka/ Butterfield Bank and Bank of Butterfield) and (2) Zurcher Kantonalbank (ZKB), which together, have banks in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom.

                    B.  U.S. Banks Which Were Served Summonses. The summons were served on and will be responded to by the following correspondent U.S. banks which did business with Butterfield and Kantonalbank: JP Morgan Chase, Bank of New York Mellon, HSBC, Bank of America or Citibank.

        The Department of Justice (DOJ) press release regarding the above (press release of 11/12/2013,on DOJ web site) made it clear that there is a concerted and serious effort to bring U.S. taxpayers with offshore accounts into compliance, reading in part as follows:

            “These cases once again demonstrate the department’s resolve to uncover and identify taxpayers who tried to hide money overseas as a way to avoid federal taxes,” said Assistant Attorney General Keneally.  “These John Doe summonses will provide information about individuals using financial institutions from Switzerland to the Cayman Islands to Hong Kong to avoid their U.S. tax obligations.  U.S. taxpayers still holding accounts who have not come clean should come forward and do the right thing before it’s too late.

             Today’s action show that the use of foreign banks for tax evasion remains a high investigative priority of this office and U.S. citizens should understand that loud and clear,” said U.S. Attorney Bharara.  “By issuing these John Doe summonses, we continue our joint efforts with the IRS to identify and hold accountable those who try to evade their legal responsibility to pay taxes.

            International issues remain a major focus for the IRS, and we are continuing our efforts to fight tax evaders who use offshore accounts to skirt the law,” said IRS Acting Commissioner Werfel.  “These John Doe summonses for correspondent account records show our determination to pursue evaders using offshore accounts, even if the person hiding money overseas chooses a bank that has no offices on U.S. soil.”

     The above DOJ press release then discussed the IRS’ Offshore Voluntary Disclosure Initiatives (OVDI), which the U.S. is relying upon the “close the tax gap” by effectively making “voluntary compliance” the only practical choice for U.S. taxpayers who are not complying with U.S. tax laws at this time, for whatever reason. The release stated:

            “IRS Offshore Voluntary Disclosure programs and initiatives enable U.S. taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution by voluntarily disclosing previously undisclosed foreign accounts and income.  To date, U.S. taxpayers have identified 371 previously undisclosed accounts at ZKB and 81 such accounts at Butterfield.  In addition, a number of U.S. taxpayers with beneficial ownership and control over funds held in accounts at ZKB and Butterfield have admitted failing to report income earned from their offshore accounts on their federal tax returns.  The IRS has reason to believe that other U.S. taxpayers who held or presently hold similar accounts at ZKB, Butterfield, and their affiliates have done the same in violation of federal tax law.  In December 2012, three employees of ZKB were indicted for conspiring with U.S. taxpayers and others to hide at least $423 million from the IRS in secret Swiss bank accounts.”

    The Tax Gap and John Does Summons are just one part of the interrelated activities being pursued by the IRS to close the Tax Gap resulting from unreported offshore accounts and offshore income. Offshore enforcement activities are indeed today a major focus is a major part of IRS tax enforcement activities today. We can tell in our practice, when areas are “hot” enforcement areas and this area is on the front burner which is set on “high.” Seminars around the country addressing offshore enforcement are the ones which are filling, a sure indication of a  this is the “hot” topic for taxpayers and tax attorneys.

     We will continue to emphasize foreign account enforcement efforts and taxpayer and foreign country compliance and non-compliance.

Shifting the Burden of Proof in a Tax Refund Case

    After a federal district court bench trial, it was determined that the Estate of George Batchelor was entitled to refund of income taxes, plus interest, because the IRS had erroneously determined that Mr. Batchelor had under-reported almost $5.8 million in interest income from an installment sale in the year 2000. Batchelor-Robjohns vs. United States, Case No. 12-20038-Civ-Moreno (11/13/2013, Miami, Florida).

    The procedural history of the case was as follows: In 2004, in the midst of an earlier trial between the United States and the Batchelor Estate involving the very same sale transaction which generated the interest income at issue (United States v. Batchelor-Robjohns, Case. No. 03-20164, herein referred to as “Batchelor #1").  In the midst of Batchelor #1 proceedings, the IRS began an income tax examination of Mr. Batchelor’s 2000 income tax return. In spite of being provided with extensive documentation to support Mr. Batchelor’s return position for 2000, the IRS issued a notice of deficiency for 2000 finding that approximately $5.8 million in interest was not reported. The Estate elected to pay the asserted deficiency rather than to contest it (without first paying the asserted tax) in Tax Court.  Thereafter, in 2006 the Estate filed a refund claim for the entire amount it had paid.  The refund claim was denied after being reviewed by a Revenue Agent in yet another examination during which the Batchelor Estate met with the Revenue Agent and provided him with all requested documents. The claim was finally disallowed by IRS Appeals in 2011. Thereafter, the Estate filed its refund suit in District Court.

     At trial, the United Stated admitted that it erroneously had asserted that the $5.8 million in interest had been omitted from income in the year 2000. However, during the refund suit, the United States raised a brand new theory to maintain its position that the Estate was not entitled to a refund.

    In granting the Estate’s refund claim, the court found first that under Code Section 7491 shifted the burden of proof to the United States because the Estate proved that it met the requirements under Section 7491 necessary to shift the burden to the government. In particular, despite the position of the United States that documentation had not been provided to it,  the court found that the Estate was able to demonstrate that it cooperated with all reasonable requests for documents, information and meetings as requested by the IRS.  The IRS, having raised a new theory at trial was unable to present “facts” to carry its burden.

    The court then concluded that the United States was prevented by res judicata or “claim preclusion” from contesting the Estate’s refund claim,  because the claims of the United States in the 2013 refund trial could have been brought in Batchelor #1, but were not.  The elements of res judicata were met because: Batchelor #1 had: (1) was between the identical parties, i.e., the United States and the Batchelor Estate, (2) involved the same installment sale transaction and payments, (3) concerned the same cause of action and the same operative nucleus of facts, and (4) had been resolved in favor of the Batchelor Estate in 2005 by a final summary judgment on its merits.

    This decision is one in which the United States was unable to prove it case on the facts, in part because it could not carry its burden of proof. Further, due to res judicata, the United States was unable to prevail as it was barred from doing so by law. 

Purpose for "JOTTG" - Welcome

In 1989, my late law partner and friend, Marvin Gutter and I decided to limit our federal tax practice to tax controversy matters. Over the years we were never able to carry out that mission of exclusivity. Instead, we bowed to the pressures of our active tax practice taking on the not only tax controversy matters but many tax planning and transactional matters which we could not seem to "turn away."

Now, almost 15 years later, its time to return to the passion of tax controversy, and in particular the "tax gap."   The "tax gap" is the focus of the federal tax compliance and enforcement issues which are in the forefront of my practice today,  impacting our clients and our system of tax administration.

The "tax gap" is defined by the IRS as the amount of taxes due but not paid on time. In this Blog, and at this time, the "tax gap" will refer to the following:

          1. Gross income which is unquestionably reportable but not reported on income tax returns, for example: income from offshore accounts the subject of current IRS efforts;

        2. Taxable income not reported and not determined to be due during the statutory period for assessment and collection of taxes, for example: income "sheltered" by deductions which would be determined improper if examined and determined judicially;

        3. Taxes other than income taxes which would be due if transactions were reported during the statutory period for assessment and collection of taxes, for example: (i) gift or estate taxes reduced or eliminated due to improper valuations or, (ii) self-employment taxes which, if examined and determined judicially, would be imposed on an S corporation’s sole shareholder who is a professional (such as an attorney, physician, or engineer), and reports no earned income subject to self-employment tax; and

        4.  Tax which is shown as due and owing on tax returns but is not paid in, for example: (i)  payroll taxes shown as collected on the employer’s employment tax returns, but not paid in and as to which the employer’s principals are hopelessly "responsible" or, (ii) amounts owed for whatever and stated as not reasonably collectible in an "offer-in-compromise."

Civil compliance will be emphasized although criminal enforcement and penalties will be included when necessary.


I am hopeful that some of the posts and comments which will find their place in this Blog will spur further thoughts which will motivate positive changes in our federal tax system.

Your thoughts and comments are welcome and will be appreciated.