TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

We are pleased to announce that Jonathan Kalinski will be speaking at the upcoming Strafford webinar, “Taxation of Digital Asset Transactions: Impact of New Infrastructure Bill, Cash Transactions, Reporting, Tax Planning” on Thursday, March 3, 2022, 10:00 a.m. – 11:30 a.m. (PST).

On Nov. 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act which includes significant provisions impacting digital asset transactions and reporting requirements. Tax professionals must understand the impact of the new Act on digital assets and critical issues regarding the tax treatment of digital asset transactions to properly advise and implement planning techniques to minimize tax liability to taxpayers.

The Infrastructure Investment and Jobs Act broadens the definition of “digital asset” as such relates to blockchain and redefines “broker” to include persons providing services to transfer digital assets, in addition to other vital provisions. Tax professionals must evaluate the transactions and practices of taxpayers engaged in digital assets and cryptocurrency.

In addition, current tax regulations and the existing IRS guidance have significant implications on cross-border transactions, providing that the source of income from digital transactions is the place where the transaction occurred, potentially subjecting taxpayers to multijurisdictional tax obligations.

Furthermore, taxpayers must also consider the impact of other federal tax provisions, such as the base erosion anti-abuse tax (BEAT) regime, the U.S. tax treatment under the controlled foreign corporation (CFC) regime, and the foreign-derived intangible income (FDII) regime.

Listen as our panel discusses key provisions and challenges of the Infrastructure Investment and Jobs Act on digital asset transactions, IRS tax treatment reporting requirements, potential issues stemming from BEAT, GILTI, FDII rules, and other essential items impacting taxpayers engaging in digital asset transactions.

We are also pleased to announce that we will be able to offer a limited number of complimentary and reduced cost tickets for this program on a first come first serve basis. If you are interested in attending, please contact Sharon Tanaka at sht@taxlitigator.com. 

Click Here for More Information.

“The appointment underscores how pervasive cryptocurrency and other forms of digital monetary exchange have become in our financial system and the importance of coordinated and robust enforcement needed to insure the integrity of these important tools of modern commerce,” says Steve Toscher, a tax litigator with Hochman Salkin Toscher Perez P.C.”

Click Here for Full Article.

A famous baseball player once said: “It ain’t over until it‘s over.“[i]  Apparently, as the 9^th Circuit recently reminded us, in addressing the question of when the statute of limitation starts anew in a tax evasion case, this quote rings equally true outside of baseball.

In the case United States v. Orrock, No. 19-10388 (9^th Cir. 1/26/2022),[ii] the 9^th Circuit, acknowledging the need for clarification, held not only that the statute of limitation for evasion of assessment cases under § 7201 runs from the last act necessary to complete the offense but that later affirmative acts serve to refresh the applicable limitation period.  

Orrock involved allegations stemming from the evasion of defendant’s personal taxes for the tax year 2007 arising from income received from the sale of a vacated lot.  The defendant, a former IRS attorney, persuaded a friend to purchase a vacant lot, which defendant then directed to be transferred to a partnership set up by, and solely owned by, the defendant.  The lot was sold in 2007 for $1.5 million and sometime thereafter defendant found himself under audit by the IRS.  In 2011, during the audit of defendant’s 2007 personal tax return, which did not report any income from the sale of the lot, defendant took “corrective” action by filing a partnership return reporting the sale.  In filing the partnership return, defendant reported a sales price of $1.4 million instead of $1.5 million and also claimed a tax base of $1.2 million instead of the basis of $90,000.

The government claimed that the defendant was the true owner of the property, and thus, the income from the sale should have been reported on his 2007 personal tax return.  Ultimately, the defendant was charged, pursuant to 26 U.S.C. §7201, with evading the assessment of his 2007 personal income tax, along with other tax offenses.

On appeal, defendant argued the six year statute of limitation applicable to criminal tax offenses (26 U.S.C. §6513(2)) barred his conviction for evasion of the assessment of taxes as his 2007 personal return was filed on February 19, 2009, more than six years before the indictment was returned on April 12, 2016.  As such, if the 6-year period had run from the date of filing the personal 2007 tax return, the date arguably when defendant had completed all steps necessary for a charge to be filed under Section 7201, the conviction would have been barred by the six year statute of limitation.

The 9^th Circuit began its opinion in Orrock by acknowledging the arguable lack of clarity to the running of a statute of limitations for affirmative acts, an element necessary for the charge of an evasion of the assessment of a tax, under Section 7201:

“Although some language in our prior cases may seemingly support Orrock’s argument, we take this opportunity to clarify that the statute of limitations for evasion of assessment cases under § 7201 runs from the last act necessary to complete the offense, either a tax deficiency or the last affirmative act of evasion, whichever is later. See United States v. Carlson, 235 F.3d 466, 470 (9th Cir. 2000).” (Footnote omitted)

Stated another way, as the government argued, the statutes of limitation for Section 7201 can start not only once all the elements of the offense are satisfied, but, alternatively, the statute of limitations can run anew from the last affirmative act furthering the tax evasion.  Thus, while defendant may have satisfied all the elements of tax evasion when he filed his 2007 personal tax return in 2009, in committing a further affirmative act in 2011 by filing the partnership tax return in furtherance of the evasion of his true 2007 personal tax liability, the defendant started the six year clock all over again from that later act.  

Ultimately, agreeing with the government and with the trial court’s position that the filing of the later company’s false tax return was an affirmative act furthering the evasion of a correct assessment of the defendant’s 2007 personal tax liability which was within the six year statute of limitation, the 9^th Circuit affirmed defendant’s conviction, holding that “26 U.S.C. § 6531(2) and § 7201 do not determine that the statute of limitation only starts once all element have been first met but rather can start also when a further act to evade the assessment occurs.”  See also, United States v. DeTar, 832 F.2d 1110, 1113 (9^th Cir. 1987) (Even if the taxes evaded were due and payable more than six years before the return of the indictment, the indictment is timely so long as it is returned in within six years of an affirmative act of evasion.)

While corrective action may be advisable in many tax situations, when it comes to tax evasion consideration of what might qualify as an “affirmative act” of evasion and thus, may ultimately refresh a limitations period merits caution.  E.g., see United States v. Kassouf, 959 F. Supp. 450 (N.D. Ohio 1997), aff’d 144 F.3d 952 (6^th Cir. 1998) (falsely claimed net operating loss carried forward and used in later years). 

While Yogi Berra was speaking to the game of baseball when he said, “It ain’t over till it’s over”, it wasn’t his only clever baseball quote that applies when it comes to the statute of limitations for criminal tax evasion.  Yogi also hit the mark when he said: “It’s like deja-vu all over again.”[iii]

Steven Toscher is a Principal at Hochman Salkin Toscher Perez P.C., and specializes in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation.

Sandra R. Brown is a Principal at Hochman Salkin Toscher Perez P.C., and former Acting United States Attorney, First Assistant United States Attorney, and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal). Ms. Brown specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court. 

Philipp Behrendt is an Associate at Hochman Salkin Toscher Perez P.C., and a graduate of University of Southern California (USC) Gould School of Law (LL.M.) and a former associate of the leading German tax firm.  Philipp’s prior experience includes representing wealthy individuals and companies in global tax settings, cross-border investigations and audit matters, as well as handling complex voluntary disclosure issues for U.S. and other international companies, stemming from tax avoidance structures as well as crypto assets.. 

[i] https://www.bbc.com/news/magazine-34324865#:~:text=%22It%20ain’t%20over%20till,to%20win%20the%20division%20title

[ii] https://cdn.ca9.uscourts.gov/datastore/opinions/2022/01/26/19-10388.pdf

[iii] https://www.bbc.com/news/magazine-34324865#:~:text=%22It%20ain’t%20over%20till,to%20win%20the%20division%20title.

We are very pleased to announce that our friend and colleague Robert Horwitz has been recognized for his outstanding contributions in the field of taxation by the Orange County Bar Association Tax Section.  

Robert has over 40 years of experience as a tax attorney specializing in the representation of clients in civil and criminal tax cases, including civil audits and appeals, tax collection matters, criminal investigations, administrative hearings and in civil and criminal trials and appeals in federal and state courts.  He has served as a member of the Executive Committee of the Taxation Section of the State Bar of California and was Chair of the Taxation Section for 2015-2016 year. He was previously Chair of the Tax Procedure and Litigation Committee of the State Bar Taxation Section.

Prior to joining Hochman Salkin Toscher Perez P.C., Robert served as a Trial Attorney with the Tax Division of the United States Department of Justice, an Assistant United States Attorney in the Central District of California and was with a boutique tax controversy firm in Orange County, where he represented clients in civil and criminal tax cases in the U.S. Courts of Appeal, U.S. district courts, California superior courts, and before the Internal Revenue Service, the California Franchise Tax Board, the Board of Equalization, the Employment Development Department and the Unemployment Insurance Appeals Board.

Robert has also represented clients in complex civil and white-collar criminal cases, including civil and criminal bank fraud, wind and thermal energy tax shelters, tax fraud and tax collection matters, trademark, trade secrets, securities, and insurance coverage cases. He was also appointed by the United States District Court in Los Angeles to represent a death row inmate in habeas corpus proceedings.

Philipp Behrendt is a graduate of University of Southern California (USC) Gould School of Law (LL.M.) and a former associate of the leading German tax firm Flick Gocke Schamburg.  

Philipp’s prior experience includes representing wealthy individuals and companies in global tax settings, cross-border investigations and audit matters, as well as tax compliance issues arising from internationally functioning matrix structures. His experience includes handling complex voluntary disclosure issues for U.S. and other international companies, including crypto assets, representing clients in German tax and criminal courts as well as in international money laundering investigations stemming from tax avoidance structures of the client’s business partners and customers. Philipp has also worked with client tax teams throughout Europe, the US as well as in the Arabic region.  

We are pleased to announce that Steven Toscher, Michel Stein and Sandra Brown will be speaking at the upcoming Lorman Educational Services Webinar on Form 8300 Reporting Requirements, Wednesday, February 23, 2022, 10:00 a.m. – 11:40 a.m. (PST).

The law requires that trades and businesses report cash payments of more than $10,000 to the federal government by filing Form 8300. This course will explain the Form 8300 filing obligations of those accepting cash payments in their businesses, best practices surrounding the filing of Form 8300, the current civil and criminal enforcement environment surrounding Form 8300 non-compliance, and the voluntary disclosure and mitigation practices surrounding the non-compliant. Do not be caught unprepared!

Click Here for more information.

We are pleased to announce that Steven Toscher will be speaking at the upcoming Florida Tax Institute on Audits and Tax Controversy, Thursday February 3, 2022, 10:00 a.m. – 11:30 a.m. (EST).

The IRS continues to prioritize examinations of high-wealth individuals and inbound and outbound investment and business transactions.  The reviews are expected to include the individual tax return of the sophisticated taxpayer as well as related partnerships, foundations, trusts, retirement plans, and other business structures. In the past year, the IRS also reaffirmed its interest in cross border activities with the announcement of three new campaigns targeting Nonresident Aliens who receive rental income from U.S. real property; FIRPTA compliance in connection with the withholding of tax and reporting obligations on the disposition of U.S. real property interests; and the U.S. activities of financial service entities and whether foreign investors participating in “inbound” lending transactions were engaged in a U.S. trade or business and generated income effectively connected with a U.S.-situs lending trade or business. The panel will discuss these and other current developments and their implications for high wealth foreign and domestic taxpayers.

Click Here for more information.

We are pleased to announce that Sandra R. Brown will be presenting at the upcoming American Bar Association Virtual 2022 Midyear Tax Meeting, Tuesday, February 1, 2022, 2:30 p.m. – 3:00 p.m. (ET).  Sandra will provide updates on “Important Criminal Developments” on behalf of the Tax Section’s Civil and Criminal Tax Penalties (CCTP) Sentencing Subcommittee.  

The ABA’s Section of Taxation Civil and Criminal Tax Penalties committee (CCTP) provides exceptional programs relating to criminal and civil tax enforcement issues. The various CCTP subcommittees are responsible for reporting all aspects of the criminal enforcement of the tax laws, as well as related criminal provisions of Title 18, such as money laundering, currency transactions, and forfeiture issues, as well as also focusing on civil penalties, primarily the civil fraud and accuracy-related penalties.

For additional information, please visit: https://www.americanbar.org/groups/taxation/

The dirty little secret, that isn’t so secret after the release of the Pandora Papers (Pandora Papers – ICIJ), is that the United States is a tax and money-laundering haven for much of the world because, unlike most countries, many U.S. states allow persons to own entities without revealing their ownership to authorities.  Last month, Treasury’s Office of Financial Crimes Enforcement Network (“FinCEN”) issued proposed regulations to put meat on the bones of the 2020 Corporate Transparency Act (“CTA”).  The CTA, which was part of a larger anti-money-laundering act, was designed to address the lack of required reporting of beneficial ownership information.  Many states, such as South Dakota and Nevada, allow what amounts to anonymous ownership of limited liability companies (“LLCs”).  The CTA will eventually require that all new and existing businesses meeting certain broad standards report their beneficial ownership and those having “substantial control” to FinCEN, as well as who applied for entity, subject to civil and criminal penalties.  FinCEN has cast a wide net and built in “flexibility” to ensure they don’t miss anyone trying to fly under the radar.   But what FinCEN sees as flexibility, others will see as ambiguity that will leave advisors scratching their heads and prosecutors lamenting the lack of a bright-line rule that will make their jobs easier.  The only upside for business owners: Congress has effectively doubled FinCEN’s workload without increasing its budget, and no one does more with less.  The CTA merely spread FinCEN’s resources even thinner.   

Six months after the CTA was passed, I was on an ABA panel with the head of the Justice Department’s money-laundering section and a senior advisor to FinCEN’s Director, and the primary question was: what will FinCEN’s CTA regulations look like?  The panelists and audience were concerned with a number of topics:

• what does “substantial control” mean, to trigger reporting obligations?
• will the new reporting requirements be burdensome?
• how would the IRS and others be able to use the information?
• what safeguards would exist to protect the information from hackers? and
• how will the new power to punish foreign banks with a US “correspondent account” (which they all have) for not complying with a subpoena be used?   

On December 8, 2021, FinCEN answered the first tranche of those questions with its proposed regulations.  https://www.federalregister.gov/documents/2021/12/08/2021-26548/beneficial-ownership-information-reporting-requirements.  The regulations establish two categories of reporting companies, namely domestic and foreign (non-US entities that have registered to do business here), and list 23 exemptions from the reporting requirements.  In answer to the question about how they will define beneficial owner and substantial control, the regulations set a test of owning or controlling at least 25 percent of an entity, or if the person exercises substantial control over the entity.  The regulations also define which “applicants” have to register, which generally means the individual who files the documents forming the entity (domestic) or registering it to do business in the United States (foreign).  Registration will only require name and “tax residential” address, but more-detailed information is “encouraged,” whatever that means.  However, FinCEN also will require an image of a passport or similar document that includes a photograph.  The rationale for requiring this sort of identification makes clear that FinCEN is looking for crooks, and wants the crooks to leave a copy of their passport with the feds.            

The most interesting part of the proposed regulations (you know you’re a lawyer when you say something like that) is the discussion of how to determine whether someone has substantial control.  FinCEN wanted to identify persons with both title-derived power as well as exercised or exercisable power over important decisions.  It rejected a proposal to limit beneficial owners to one person per entity, which had been proposed to minimize the reporting burden, further signaling that FinCEN wants the database to be as usable as possible for law enforcement purposes.  FinCEN also used its experience and public comments to anticipate and shut down ways in which persons could try to circumvent the 25% rule by avoiding ownership on paper but “controlling” more than 25% of a company. 

As much effort as regulators put in to anticipating how persons will try to avoid or evade regulations, the regulators know that they can’t anticipate the next innovation in crime.  FinCEN included flexibility in the regulations in the form of “catch-all” language that requires reporters to consider all the facts and circumstances.  On the face, these broad regulations will ensure that everyone who is supposed to report, will report.  But, inherent in broad language is ambiguity, and where the government can impose civil and criminal penalties, ambiguity means full employment for lawyers.

Speaking of civil and criminal penalties, one wonders whether all these regulations are simply the roar of a paper tiger.  Despite substantially expanding FinCEN’s obligations through the CTA, Congress hasn’t provided the additional funding needed to monitor enforcement and implement the CTA.  The resulting frustration was evident from my co-panelist, and the FinCEN Director has made his needs clear as well.  Meanwhile, FinCEN will roll out the second and third tranches of regulations while hoping that Congress puts its money where its CTA mouth is.    

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis has been a principal at Hochman Salkin Toscher Perez P.C. since November 2016.  He spent 11 years as an AUSA in the Office of the U.S. Attorney (C.D. Cal), spending three years in the Tax Division where he handed civil and criminal tax cases and eight years in the Major Frauds Section of the Criminal Division where he handled white-collar, tax, and other fraud cases through jury trial and appeal.  As an AUSA, he served as the Bankruptcy Fraud coordinator, Financial Institution Fraud coordinator, and Securities Fraud coordinator.  Among other awards as a prosecutor, he received an award from the CDCA Bankruptcy Judges for combatting Bankruptcy Fraud and the U.S. Attorney General awarded him the Distinguished Service Award (DOJ’s highest litigation award) for his work on the $16 Billion RMBS settlement with Bank of America.  Before becoming an AUSA, Mr. Davis was a civil trial attorney in the Department of Justice’s Tax Division in Washington, D.C. for nearly 8 years, the last three of which he was recognized with Outstanding Attorney awards.  He is a magna cum laude and Order of the Coif graduate of Cornell Law School and cum laude graduate of Colgate University. Mr. Davis represents individuals and closely held entities in federal and state criminal tax (including foreign-account and cryptocurrency) investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and white-collar criminal investigations including campaign finance, FARA, money laundering, and health care fraud.

Please join us January 24-26, 2022 for the USC Gould School of Law 2022 Tax Institute virtual event.
Meet with fellow tax professionals and address the cutting-edge tax issues affecting the industry. This three-day institute includes discussions, networking opportunities, breakout sessions and workshops led by heavy hitters in the field.

We have an excellent line up of programs –

Tips on Trying a Civil Tax Fraud Case
Featuring Dennis Perez

The Three Enforcement Cs (Conservation Easements, Cryptocurrency, Captive Insurance Arrangements)
Featuring Michel Stein

Promoter Investigations; Both Sides of the Table
Featuring Sandra Brown

CLICK HERE for more information.