Posted by: evanjdavis | November 21, 2017


A United States tax lawyer is going to return home after being on an extended vacation in Canada for ten years. But he isn’t returning willingly.  

When I was at the Department of Justice Tax Division from 1998 through 2005, I spent much of my time shutting down abusive tax schemes through getting courts to enjoin the promoters. The late 1990s through mid-2000s were the heyday for tax shelter promoters, as the government taken its eye off the ball in the mid-1990s and allowed tax planners to step closer and closer to the line between aggressive tax planning and tax evasion. Not surprisingly, planners thought the IRS wasn’t looking, and many chose to step over the line from mere planning into criminal conduct.

In 2007, David L. Smith, a tax lawyer and CPA, was indicted for tax and conspiracy charges along with another tax planner and four Ernst & Young, LLP, partners, for having designed and sold tax schemes to E&Y’s clients as well as cheating on his own taxes and failing to report his foreign bank account. The indictment alleged that Smith conspired with the other defendants to market a tax scheme and created false and misleading documents to lull the IRS into believing that the tax scheme was instead a real business transaction.

The second planner quickly pled guilty and Smith’s four other co-defendants were found guilty of all charges in a 2009 trial, although two of the four had their convictions reversed on appeal. Smith never showed up to court.

Instead, it appears Smith decided that 2007 was a good time to check out the beautiful scenery of British Columbia, and he became very attached to the province. So attached, it seems, that when the United States government tried to force him to return to New York to face his charges, Smith hired a Canadian lawyer who made a novel arguments against extradition, including two that a tax protestor would be familiar with.

The US-Canada extradition treaty only permits extradition to the United States where the defendant is charged with a crime that’s also a crime in Canada. The analogous Canadian law prohibits fraud on the public or a person. Smith’s lawyer claimed that Smith was charged with defrauding the IRS, which isn’t a person or “the public.”

The Canadian court didn’t buy that the IRS isn’t a “person” or a proxy for “the public,” because, as it pointed out, the IRS collects tax revenue for the government, and in Canada it is illegal to defraud “her Majesty in Right of Canada,” meaning the government of Canada. Tax fraud is illegal in Canada as well, so Smith could be extradited to the United States on tax fraud charges.

The court also didn’t buy Smith’s two tax-protestor-esque arguments: that the government hadn’t shown that he had an obligation to pay taxes on his income, and that a Klein conspiracy (conspiracy to defraud the government) has been found in the United States to be unconstitutional. Unfortunately for our clients, Klein conspiracy charges are constitutional, and the tax code is quite clear that income earned is taxable.

The story isn’t over yet for Smith, because he can appeal the extradition order to the British Columbia Court of Appeal, and then to the Supreme Court of Canada. In my experience from the government side, it can take many, many years for a well-financed defendant to be extradited from Canada to the United States and they usually remain free on bond while they are waiting. Given that three of his five co-conspirators (including the other promoter) were convicted, Smith likely prefers to remain in Canada rather than find out whether the AUSAs in New York can continue to bat above .500 in obtaining convictions on the case.      

EVAN J. DAVIS – For more information please contact Evan Davis – or 310.281.3288. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax, and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the USAO’s Criminal Division, and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white collar criminal investigations. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).

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