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Will Marinello Be The McDonnell Of Tax Crimes?

According to Law360, Carlo Marinello will argue to the U.S. Supreme Court next month that a vague tax law gives prosecutors power to criminalize anything that makes the IRS' job harder, in a case that could see the high court continue limiting broad criminal laws as it did last year in U.S. v. McDonnell.

Marinello was convicted in 2014 for failing to file tax returns for his New York freight business. He was also found guilty of “corruptly” obstructing the “due administration” of the tax code, a crime under the so-called omnibus clause.

But where some see a tool allowing prosecutors to more accurately capture a scheme to thwart tax enforcement, others like U.S. Circuit Judge Dennis Jacobs see a “capacious, unbounded and oppressive opportunity for prosecutorial abuse.”

The Second Circuit upheld Marinello's conviction and then rejected his bid for a rehearing before the full court. Judge Jacobs penned a scathing dissent, comparing the omnibus clause to broad criminal statutes like the one that formed the basis for Virginia Gov. Bob McDonnell's corruption conviction, which the high court overturned last year.

Jurors in both McDonnell's and Marinello's cases were told they could find guilt based on a number of acts. Prosecutors had said McDonnell was bribed in exchange for official acts including arranging meetings, hosting events and contacting constituents.

Similarly, in Marinello's case, the jury was told it could find him guilty of obstruction for taking any of eight actions, including destroying or failing to keep adequate records and not giving records to his own accountant. The Second Circuit said the verdict stands under the law, and that prosecutors were not required to allege that Marinello acted with knowledge of an IRS investigation.

“If this is the law,” Judge Jacobs wrote in the
Marinello dissent, “Nobody is Safe.”
Attorneys who agree with that assessment say the omnibus clause covers not just arguably innocent conduct, but also acts that constitute standalone tax crimes, letting prosecutors do an end run around higher criminal intent standards in those laws.

Former tax division head Kathy Keneally, now a partner at Jones Day, said the omnibus clause carries a lower standard of criminal intent than other tax crimes, as the violator only need act “corruptly” rather than “willfully.” The rest of the criminal tax laws are aimed directly at specific conduct like tax evasion, but the omnibus clause is vague enough to cover the same ground, Keneally said.

“If interpreted too broadly, the omnibus clause can subsume the rest," Keneally said. "And if you let that happen, you undercut the clear intention of the tax statutes."


 A judge in a recent case agreed with that line of thinking. U.S. District Judge Richard Leon cut a tax obstruction charge against Patricia Driscoll, the former director of a veterans' charity.

Judge Leon said he had found Judge Jacob's dissent in Marinello persuasive, and ruled that violating the omnibus clause requires knowing about and trying to thwart a pending audit — a view the Sixth Circuit has espoused.

“As a practical matter, I note that little is lost to the government in this case by affording a narrow construction to the omnibus clause,” Judge Leon said at an August hearing dismissing the count. The judge said the alleged false statements underlying the obstruction charge were the basis for other charges that “do not raise the same due process concerns.”


Not all experts agree the obstruction law is too broad. Jay Nanavati, who worked in the tax division between 2005 and 2012 and now practices at Kostelanetz & Fink LLP, said he’d be surprised if the Supreme Court overturns the Marinello ruling. Nanavati said overlap between criminal laws is the nature of the beast.

“There are actions that people take that, in theory, violate lots of statutes,” Nanavati said. “It's hard to draw perfect boundaries between each separate offense.”

The DOJ’s tax division initially tried to draw a line in its charging policies. A memo dating to the late 1980s advised prosecutors to save the tax obstruction charge “for conduct occurring after a tax return has been filed.”

However, the memo allowed for omnibus clause charges in cases involving “numerous large-scale violations,” like helping a large number of taxpayers file false returns. Cases like that square with the “overall purpose” of the section, “to penalize conduct aimed directly at IRS personnel in the performance of their duties,” the head of the tax division wrote at the time.

In 2004, then-tax division head Eileen J. O’Connor issued a new memo superseding the old guidance. Prosecutors were no longer told the omnibus clause should be generally reserved for post-tax return mischief. The new memo suggested the clause applied to a broader set of conduct including “providing false information” and “destroying evidence.”

While the 2004 memo reiterates that the clause shouldn't be used in lieu of other, more direct charges, it notes that tax evaders who try to cover their tracks after the fact can be “punished more severely” than those who have not attempted obstruction.

The reasons for the shift aren't completely clear. Scott Schumacher, the tax program director at University of Washington School of Law who worked at the DOJ's tax division in the 1990s, said he remembered hearing the omnibus clause referred to at a panel presentation around that time as “the government's new weapon.”

“They must have said, why are we limiting it?” Schumacher said of the broader interpretation.

Often referred to as a “one-man conspiracy” charge, the omnibus clause allows prosecutors to bring in evidence of a longer scheme that would not necessarily be admitted for one-off tax charges.

Morgan Lewis & Bockius LLP partner Nathan Hochman, who led the tax division after O’Connor, said the omnibus clause allows prosecutors to “fill in gaps” and charge the corrupt actions around a tax fraud.

“A lot of the statutes require a tax return as the centerpiece. But they don't encompass the actions before or after to conceal money or falsify documents, particularly if those documents are not submitted directly to the IRS,” Hochman said.

Hochman said the division has many "weapons" at its disposal. If the Supreme Court limits use of the omnibus clause, “I don't see it crimping tax enforcement by any significant degree,” Hochman said.

That's a scenario that tax prosecutors may want to get ready for, said Schumacher, who thinks the high court will overturn the conviction.

"They are taking it for a Reason, and it's Not to Say 'AFFIRMED,'" Schumacher said.

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Minority Shareholders Have Transferee Liability for Unpaid Corporate Taxes Due to Wrongdoing of Majority Shareholders!

The Eleventh Circuit affirmed the Tax Court's determination that petitioner was liable as a transferee under 26 U.S.C. 6901 for his former employer's unpaid taxes, in Kardash v. Commissioner of IRS, US Court of Appeals for the Eleventh Circuit, Docket: 16-14254.

The Tax Court had previously found two minority shareholders liable to return several million of dividends they received from a corporation when the corporation failed to pay federal income taxes at the direction of majority shareholders, which majority shareholders also drove the company into insolvency by siphoning off corporate funds.

The minority shareholders were found liable under the Internal Revenue Code transferee liability statute (Code Section 6901). Since the application of that statute is predicated under the applicable state law, the fraudulent conveyance aspects of the case would likewise apply to create similar liabilities for the minority shareholders as to amounts due to creditors by the corporation other than the IRS. Here, the state at issue was Florida.

Besides the somewhat “unfair” result of the minority shareholders suffering for the sins of the bad actor majority shareholders, some other interesting aspects of this case include:

1.    The shareholders did not have to return amounts “advanced” to them under a bonus program in years before the corporation became insolvent. Such amounts related to a continuation of a prior bonus compensation plan, that converted to loans when the company was not doing so well. Even those these amounts were initially treated as loans, and then later recast by the IRS as taxable dividends under audit, the Tax Court nonetheless treated them as compensation for services provided. As such, the corporation was treated as having received fair value for its payments, in that circumstance, a fraudulent conveyance does not arise.

2.   In trying to force a repayment of the above advances, the IRS also tried to argue that the minority shareholders committed actual fraud in receiving those payments. The Tax Court ran through a “badges of fraud” analysis, and ultimately concluded that there was not enough indicia of fraud to support a finding of actual fraud.

3.   The Tax Court found that dividends received by the minority shareholders in the years that the corporation was insolvent did constitute fraudulent conveyances subject to repayment. Keep in mind that a constructive fraudulent conveyance does not require actual fraud or intent to defraud. It can be enough that the payor is insolvent at the time of payment, and the payor did not receive fair value for its payment. A dividend from a corporation does not involve an exchange for fair value.

And in determining whether the corporation is insolvent, the funds inappropriately taken from the corporation must be deducted from the balance sheet, making it easier for the creditor to show insolvency.

4.   In accordance with Florida law, the creditor, the IRS, was not obligated to exhaust its collection efforts first against the corporation, or the majority shareholders, before seeking to collect from the minority shareholders. Perhaps the minority shareholders have a cause of action against those other persons for any amounts paid to the IRS, but I suspect collectability against them may be a big issue.  (See William J. Kardash, Sr., et al., TC Memo 2015-51).
Transferee liability for unpaid employer taxes can be brought under state legal rules or in equity. If the IRS brings the case in equity, exhaustion is required. If not, state legal rules control the exhaustion issue.
Even if an employee-owner is innocent of an actual fraud that caused the insolvency, that employee-owner can still be held liable under section 6901’s transferee liability provision.
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How Will The IRS Know? – The Paradise Papers Exposes US Clients of Asiaciti Trust!

On November 15, 2017 we posted More Then 31,000 US Taxpayers Exposed in Paradise Papers! 

where we discussed that Appleby, an Offshore Law Firm/Corporate Agent's Recent Data Breach is yet Another Example of How the IRS Can Discover your Unreported Foreign Account and how the Super-rich clients of offshore law firm Appleby are bracing themselves for the exposure of their financial secrets, after the firm admitted data had been stolen in a cyber attack last year.
Now the International Consortium of Investigative Journalists (ICIJ) has issued the Paradise Papers which is a global investigation into the Asiaciti files. These Paradise Papers include files from a smaller, family-owned trust company, Asiaciti, and from company registries in 19 secrecy jurisdictions.  

The leak of 556,000 files from Asiaciti passed largely unnoticed within the Paradise Papers, a trove of 13.4 million documents that reveal offshore secrets of politicians, celebrities, billionaires and companies whose brands are household names. Asiaciti’s emails, trust application forms, faxes and bank statements are vastly outnumbered by leaked documents from Appleby, a law firm and corporate services provider with offices around the globe.

Yet the files from Asiaciti – a trust specialist headquartered in Singapore, with branches in tax havens such as the Cook Islands and Samoa in the Pacific and Nevis in the Caribbean, shine a light on the practices of offshore clients ranging from the ultra-wealthy to the unremarkable, with a host of questionable clients in between.

Founded in 1978 by Graeme Briggs, an Australian accountant, Asiaciti expanded throughout the 1980s and 1990s. It has described itself as “one of the leading offshore trust groups in the Asia-Pacific region.”

Asiaciti’s Files Include A Significant US Client Base:
a California Dentist, an Alabama Grocer, a U.S. Handgun & Rifle Manufacturer, and a Food-Truck Entrepreneur from LA.
Also found are Chinese millionaires and clients from Switzerland, Romania, Nigeria, Thailand and South Africa, in addition to an Israeli “branding” expert, an Egyptian gynecologist and a 26-year-old British eye serum and moisturizer salesman.

Asiaciti’s services range from tax, accounting and “wealth protection” services for individuals to secretarial services for global corporations. A major moneymaker is trusts.

Offshore trusts are often inscrutable legal instruments with blurred official ownership. The details are rarely a matter of public record. Trusts allow the publicity-shy to act out of sight of creditors, ex-spouses or courts.

Asiaciti has specialized in establishing trusts in Samoa and the Cook Islands, nations of 200,000 and 11,000 people, respectively. Within 24 hours and for less than $300, a client could buy “ ‘state of the art’ offshore products” to build and preserve wealth, according to an archived version of Asiaciti’s website.

“The sad fact is that Cook Islands trusts are routinely used by people to cheat legitimate creditors,” said Jay Adkisson, an attorney and expert witness in a fraud case that involved Asiaciti’s trust division.

It’s difficult and expensive for creditors, attorneys or the tax office to access funds held by a client’s trust, Adkisson said.

Among Asiaciti’s other U.S. Trust Clients were Sean Novis and Gary Denkberg, Marketing Executives who Targeted Pensioners in a Mail-Fraud Scheme, according to a civil complaint filed by the U.S. Justice Department.
Novis, Denkberg and others told elderly victims that they had won more than $1 million and asked them to pay a fee, “generally in the range of $19.99 to $24.99,” to receive the prize, the 2016 civil complaint alleges. Victims often received nothing in return, according to the complaint. Over four years, the marketers and others allegedly pocketed more than $30 million.

Novis and Denkberg had one trust each with Asiaciti that at one stage held more than $1 million each, according to Asiaciti’s files. In February 2007, Novis asked the firm to help him find a bank that did not have “a presence in the USA.” Both men’s trusts were active in 2016 when Asiaciti learned of the civil case.

In 2016, a court imposed an injunction that prohibited Novis and Denkberg from mailing prize offers and sweepstakes in the United States. The Justice Department took no further action, a spokesman told ICIJ.

Denkberg told ICIJ that his trust was not involved in the civil case and that, to his knowledge, it had not held more than $1 million. The trust complied with the law and was declared to tax authorities, he said. Novis did not reply to requests for comment.

Gold and juice trader  Sherman Unkefer III in the Phoenix New used his Cook Islands trust, called the Mango Trust and set up by Asiaciti, to “conceal his accumulated wealth,” according to a county prosecutor in Arizona who brought a civil racketeering claim in 2014.

During and after his eight years in prison on a previous fraud conviction, Unkefer concealed assets to avoid repaying $18 million to more than 1,300 fraud victims, the prosecutor alleged.

Asiaciti was listed as a co-defendant in the case and was served with the complaint in the Cook Islands in June 2014, emails show.

The racketeering claim against Unkefer has been dropped, although alleged victims continue to seek compensation, a spokeswoman for the county prosecutor told ICIJ. Reached by phone, Unkefer’s partner said the couple had no comment.

The money in the Mango Trust was returned to the United States in 2014, said Michael FitzGibbons, the court-appointed officer who is seeking compensation for Unkefer’s victims.

The Paradise Papers Files Include Far More Information
About U.S. Taxpayers, At least 31,000 of Them,
Than Previous ICIJ Investigations!
ICIJ Journalists tracked down court records, obtained financial disclosures of politicians in Africa, Europe, and Latin and North America, filed freedom of information requests and conducted hundreds of interviews with tax experts, policymakers and industry insiders.   
Marini & Associates, PA has assisted several hundred clients with coming into U.S. tax compliance and avoiding the draconian penalties that the IRS may impose on U.S. persons with undisclosed foreign accounts.

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House Passes Tax Bill With Deep Cuts For Businesses & Territorial Tax for Multinationals

According to Law360, House Republicans on Thursday succeeded in passing wide-reaching tax legislation, overcoming Democrats’ criticisms that it would significantly lower taxes for corporations and the wealthy while short-changing middle-income earners.

The Tax Cuts and Jobs Act, or H.R. 1, was approved by a vote of 227-205 just two weeks after it was introduced. The legislation would have a significant impact on a wide range of industries including technology, energy, pharmaceuticals and real estate, but lawmakers must first iron out differences between the House bill and a companion version under consideration in the Senate.

Democrats dubbed the tax plan a “tax scam” that is being rushed through the legislative process to provide the most benefits to corporations, upper-income earners and President Donald Trump himself. House Republican leaders, meanwhile, said the bill would benefit the middle class, grow the economy and boost jobs.

“This bill is about — for the first time in decades — providing the American people with a simple and fair tax system,” House Ways and Means Chair Kevin Brady, R-Texas, said. “It’s about finally rewarding hard work, growing jobs and paychecks, and allowing Americans to keep more of their hard-earned money to use on whatever is important to them.”

The vote took place after Trump, who has pushed for the bill’s passage, delivered private remarks to the House Republican Conference at the U.S. Capitol.

The House bill would lower the top corporate rate of 35 percent to a flat 20 percent. Pass-through businesses, which pass their income on to owners to be taxed at individual rates as high as 39.6 percent, would see 30 percent of qualified business income taxed at a top rate of 25 percent.

A new 9 percent rate would also be introduced for the first $75,000 of pass-through business income earned by owners or shareholders making less than $150,000.

For multinational corporations, the bill would implement a territorial tax system, under which income earned abroad by U.S. parent corporations would not be taxed within the U.S. A company’s “foreign high returns,” which are frequently attributable to intangible property and risks, would be taxed at 10 percent, and a 20 percent excise tax would be imposed on payments from U.S. companies to foreign affiliates, with a credit for foreign taxes paid contingent upon the foreign affiliate's agreement to have those payments treated as effectively connected with a U.S. trade or business.

To encourage multinational corporations to bring already existing offshore profits to the U.S., a one-time repatriation tax of 14 percent for cash and 7 percent for illiquid assets would be permitted.

On the individual side, the bill would collapse the existing seven income tax brackets to four, with rates of 12 percent, 25 percent, 35 percent and 39.6 percent, and it would roughly double the standard deduction. The bill would also limit the home mortgage interest deduction to $500,000 for newly purchased homes; cap state and local property tax deductions at $10,000 while eliminating the deductions for other state and local taxes; and double estate tax exemptions for seven years before fully repealing the tax in 2025.

The bill would add approximately $1.44 trillion to the deficit, according to the Joint Committee on Taxation, Congress’ official nonpartisan scorekeeper for tax bills.

The ranking member of the House Ways and Means Committee, Rep. Richard Neal, D-Mass., labeled the bill as “H.R. 1 percent” before the vote and said that the benefits the richest 1 percent of the population would receive under the plan would not trickle down to middle-class workers.

“Republicans have produced a deeply flawed bill that will hurt the teacher who spends his own money to buy school supplies for their students, students trying to responsibly pay back their student loans, the wife trying to afford her husband’s Alzheimer’s care and the janitor who wants to retire with dignity so he can spoil his grandchildren,” Neal said.

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