May 2011 - Tax Fraud Case Report


From the desk of David M. Garvin, Esq.
Volume 116	Page 3 of 4	May 2011

to resolve a split among the United States Courts of Appeals over the application of Sections 301 and 316(a) to informally transferred or diverted corporate funds in criminal tax proceedings.

The question was whether a distributee accused of criminal tax evasion could claim return-of-capital treatment without producing evidence that either he or the corporation intended a capital return when the distribution occurred. The lower court's view was that a criminal Defendant could not treat a distribution as a return of capital without evidence of a corresponding contemporaneous intent. That view was inconsistent with the language of Sections 301 and 316(a) which stated that the tax consequences of a distribution by a corporation with respect to stock depended on whether the corporation had earnings and profits and the amount of the taxpayer's basis in his stock.

The lower court's view also created a tax limbo or forced resort


From the desk of David M. Garvin, Esq.
Volume 116	Page 1 of 4	May 2011

This issue of the Tax Fraud Case Report contains a few cornerstone cases that every attorney should be aware of in addition to recent decisions.

U.S. v. Thorson
633 F.3d 312
(4^th Cir. 2011)

A jury convicted defendant on one count of conspiring to defraud the United States of tax revenue, in violation of 18 U.S.C. § 371, and on three counts of aiding and assisting in the preparation and presentation of false income tax returns, in violation of 26 U.S.C. § 7206(2). The United States District Court for the District of Maryland, at Greenbelt, sentenced defendant to 108 months' imprisonment. Defendant appealed his sentence.

Defendant contended that the four-level enhancement under U.S. Sentencing Guidelines Manual § 3B1.1(a) based on his being an organizer or leader was not supported by the evidence. The court found that the record contained more than ample evidence to support the district court's finding that defendant was an organizer or leader because defendant prepared the paperwork, designed the legal mechanisms for claiming the fraudulent deductions, answered questions, issued directions in implementing the fraudulent scheme, and was critical to the recruitment of investors.

David M. Garvin, Esq.

There was no error in the application of the enhancement under U.S. Sentencing Guidelines Manual § 3C1.1 for obstruction of justice, based on defendant's production of fabricated or backdated documents to the grand jury, because defendant did more than simply respond to a grand jury subpoena by producing previously falsified documents; rather, during the civil Internal Revenue Service investigation of his offense, he created documents to thwart the investigation. The district court considered the 18 U.S.C. § 3553(a) factors in extensive detail. The court found no error or abuse of discretion in the sentence imposed.

The judgment of the district court was affirmed.

U S v. Reed
Lexis 9274
(2nd. Cir. 2011)

Defendant Terry Reed pleaded

guilty to one count of conspiracy to defraud the United States by falsely and fraudulently obtaining income tax refunds in violation of 18 U.S. § 286. On April 16, 2009, the District Court for the Northern District of New York, sentenced Reed to thirty-three months' imprisonment, to run consecutively with the sentence Reed was serving on unrelated state charges, followed by three years of supervised release. The court also ordered Reed to pay a mandatory assessment of $100, and restitution in the amount of $33,292.18. Reed appealed.

    Reed raised two central challenges to the sentence imposed by the district court. First, Reed claimed that the district court erred in imposing the three-level management role sentencing enhancement pursuant to U.S.S.G. § 3B1.1(b) because it was not supported by the evidence, and the court failed to make a specific finding upon which the enhancement was based. Second, Reed claims that certain standard and special supervised release conditions imposed by the court were in error.
Beginning with Reed's second contention, Reed argues that the conditions imposed by the district court at sentencing were improper. At sentencing, the court imposed six special conditions of supervised release, and fourteen general conditions adopted by the Northern District of New York. Conditions of supervised release are typically
                                   (continue)


From the desk of David M. Garvin, Esq.
Volume 116	Page 2 of 4	May 2011

charged that defendant committed overt acts of conspiracy and tax evasion within West Virginia and elsewhere, including the creation and
execution of the employee leasing contract, and the payment of funds into various entities. The magistrate further found that transfer to Maryland was not warranted, particularly as the alleged scheme involved a West Virginia entity, concerned funds earned in West Virginia, and involved acts that occurred in West Virginia. Dismissal of the indictment was inappropriate since defendant's intent to violate the tax laws was a matter to be resolved by the jury, and the indictment was not time-barred since the last affirmative act was committed five months before it was filed. The allegations of the indictment were not multiplicitous and were sufficiently informative such that defendant was not entitled to a bill of particulars.

Teruya Brothers, Ltd.,
v. C. I. R.
580 F.3d 1038
(9th Cir. 2009)

Petitioner taxpayer sought judicial review of the decision of the tax court that denied his petition for a re-

U S v. Reed
(Continued)

reviewed for abuse of discretion. United States v. Dupes, 513 F.3d 338, 342-43 (2d Cir. 2008). Here, however, the government agues that the appropriate standard of review is "plain error," as Reed did not object to the conditions.

The Court affirmed and the case is remanded for further proceedings.

U S v. Kritt
Lexis 127275
(S.D. W. VA 2009)

Defendant, an attorney who was charged, along with a doctor, of several crimes based on an alleged conspiracy to defraud the U.S. of income taxes through an employee leasing scheme, moved to dismiss the indictment for lack of venue, or alternatively, to transfer venue, and for a bill of particulars. The government contested both motions, which were referred to a magistrate for issuance of a report and recommendation.

Defendant, a Maryland resident, provided the doctor, who maintained a practice in West Virginia, with tax advice as to establishing an employee leasing and deferred compensation program, with accounts and entities based in Ireland and elsewhere. Under Rule 18, venue was proper in West Virginia because the indictment

determination of respondent Commissioner of Internal Revenue Service's non-recognition treatment of a 26 U.S.C.S. § 1031 like-kind exchange and the imposition of a notice of deficiency.

    The taxpayer along with other related entities structured a property exchange for two properties and sought to have them qualify for non-recognition treatment under Section 1031. The IRS determined that the related parties used these exchanges to cash out of an investment in low-basis real property. In so doing, the taxpayers and the others decreased their investment in real property by approximately $ 13.4 million, and increased their cash position by the same amount. The appellate court found that the tax court did not err in determining that the transactions were structured to avoid the purposes of 1031(f). Under the guise of a like-kind exchange, the transactions allowed related parties to receive non-recognition treatment while cashing out of investments using 1031's basis-shifting provisions. Precluding this type of tax result was one of Congress's primary aims in enacting section 1031(f)(4). The record supported the tax court's determination that the improper avoidance of federal income tax was one of the principal purposes behind these exchanges.

    In conducting our analysis, we are mindful of the fact that tax classifications "turn on 'the objective economic realities of a
                                    (Continue)

Teruya Brothers, Ltd.,
v. C. I. R.
(Continued)

transaction rather than . . . the particular form the parties employed.'" See Boulware v. United States.

Exceptions to the general rule requiring the recognition of all gains and losses on property dispositions are to be "strictly construed and do not extend either beyond the words or the underlying assumptions and purposes of the exception." CFR 1.1002. Thus, "non-recognition is accorded by the Code only if the exchange is one which satisfies both (1) the specific description in the Code of an excepted exchange, and (2) the underlying purpose for which such exchange is excepted from the general rule."

The judgment was affirmed.

Boulware v. U. S.
552 U.S. 421
128 S. Ct. 1168
(2008)

The United States Court of Appeals for the Ninth Circuit affirmed defendant's convictions for criminal tax evasion, Section 7201, and filing a false tax return, under section 7206. Certiorari was granted

to an atextual stopgap as the interpretation created a disconnect between civil and criminal liability. In sum, Sections 301 and 316(a) were found to govern the tax consequences of constructive distributions made by a corporation to a shareholder with respect to its stock. A defendant in a criminal tax case did not need to show a contemporaneous intent to treat diversions as returns of capital before relying on those sections to demonstrate no taxes were owed.

The distributions were a return of capital, and not required to be reported by Boulware in his gross income. Moreover, if there is no gross income, there is no tax deficiency on Boulware’s return. The court indicated that there can’t be any criminal tax evasion unless there is a deficiency. Thus, Boulware was not guilty of criminal tax evasion.

The judgment was vacated.

U.S. v. James
Lexis 39961
(E.D.Pa. 2011)

The United States of America filed a civil action against Mr. James, seeking to permanently enjoin him from preparing or filing income tax returns for other tax filers. The Government invoked Sections 7402, 7407, and 7408 of Title 26 of the ` (Continue)


From the desk of David M. Garvin, Esq.
Volume 116	Page 4 of 4	May 2011

expenses or attaching IRS Forms Schedule C.;
3. preparing federal tax returns, amended federal tax returns, or claims for refund claiming Schedule A job expenses and certain miscellaneous deductions and other miscellaneous deductions, set forth on Schedule A lines 21 through 28.
4. preparing federal tax returns, amended federal tax returns, or claims for refund with IRS Forms 2106; and
5. misrepresenting any of the terms of this preliminary injunction.

The Court granted the Government's Motion subject to the conditions previously stated.

Notice

The United States reports a conviction rate in excess of 90% in federal white collar crime cases and over 92% in federal criminal tax cases. It is estimated that less than 1% of all attorneys have successfully tried a federal criminal tax case. (Not guilty verdicts on all counts.)

Representative Cases

• U.S. v. HELIO CASTRONEVES
• U.S. v. ARMADOROS
• U.S. v. ELLIOT
• STATE v. ARTHUR TEELE
• U.S. v. UNKLE
• U.S. v. CHAOUI
• U.S. v. CRUZ
• U.S. v. ARGOMANIZ
• SEC v. BORELL

Information
on the author

      David M. Garvin is a Board certified tax attorney whose practice has concentrated in the area of federal white collar crime defense for over 28 years.

    Mr. Garvin was selected by the Daily Business Review as the "Most Effective Lawyer for 2010" for complex litigation.

    Mr. Garvin was admitted to the Florida Bar in 1982. He holds a Juris Doctor Degree from the University of Miami (1982) and a LLM in Taxation from the University of Miami (1987). Mr. Garvin is certified by the Florida Bar as a Tax Specialist (1990). He is also a licensed Certified Public Accountant in Florida since 1982 and is admitted to practice before the United States Supreme Court, the Eleventh Circuit Court of Appeals, the Eight Circuit Court of Appeals, the Sixth Circuit Court of Appeals, the United States District Courts for the Southern, Middle and Northern Districts of Florida, the Florida Supreme Court, and the United States Tax Court.

     Mr. Garvin’s Martindale-Hubbell rating is “AV”. He is listed in the Pre-Eminent Bar Register as a criminal attorney and as a tax attorney. He is also listed in Super Lawyers.

David M. Garvin, Esq.
200 South Biscayne Blvd.
Suite 3150
Miami, Florida 33131
(305) 371-8101
www.miami-tax-attorney.com
www.davidmgarvin.com

U.S. v. James
(Continued)

    United States Code as authority for its effort. The government sought a temporary restraining order against Mr. James to temporarily enjoin him under 26 U.S.C. § 7407 and 7408 from acting as a tax preparer on behalf of other tax filers. In the alternative, the Government moved to temporarily enjoin Mr. James from preparing federal income tax returns and amended returns that claim first-time home buyer credits, Schedule C expenses, or certain Schedule A expenses and miscellaneous deductions, and for the Court to require Mr. James to provide notice to his past and present clients of any injunctive order issued by this Court

    Following an evidentiary hearing on the Government's Motion, the Court found that Mr. James had negligently or willfully understated tax liability on many of the federal income tax returns he prepared for his clients, which is conduct subject to penalty. The Court further determined that temporary injunctive relief under Sections 7407 and 7408 of the IRC was appropriate to prevent Mr. James from further engaging in such conduct.

    The Government's Motion was granted. The Court and order stated that Mr. James, individually and doing business as Frika Tax Services, and his agents, servants, employees, and those persons in active concert or participation with them who receive actual notice of the Order, are restrained and preliminarily enjoined from:

   1. preparing federal tax returns, amended federal tax returns, or claims for refund claiming first-time homebuyer credits;

2. preparing federal tax returns, amended federal tax returns, or claims for refund claiming Schedule C