In Offshore Tax Case by Nathan J

LOS ANGELES

www.dailyjournal.com FRIDAY, JULY 17, 2015 PERSPECTIVE US gets ‘beaned’ in offshore tax case By Nathan J. Hochman guidelines in United States v. Booker, the 20 percent penalty under the OVDP, and Daniel A. Saunders 543 U.S. 220 (2005). The court found a difference in Warner’s case of over $32 that the sentencing judge properly gave million) in finding that Warner’s failed n July 10, the 7th U.S. Circuit weight to Warner’s impressive history good-faith attempt to enter the OVDP Court of Appeals affirmed the of charitable works, to his unsuccessful was a mitigating factor supporting pro- Oprobationary sentence given to effort to enter the OVDP before learning bation. billionaire Beanie Babies creator H. Ty he was under investigation, and to the Together, these cases offer valuable Warner for evading $5.6 million in U.S. massive FBAR penalty that Warner paid insights for future offshore tax cases. taxes through the use of undisclosed before sentencing — the largest such First, these cases, along with the track Associated Press Swiss bank accounts with balances to- record in other offshore tax prosecutions penalty the government has collected H. Ty Warner, the billionaire creator of Beanie taling over $100 million. United States to date, and nearly 10 times the size Babies, arrives at a federal court in Chicago since 2008, show that courts are will- v. H. Ty Warner, 14-1330. This high-pro- of the tax loss attributable to Warner’s earlier this year. ing to sentence these tax offenders to file defeat for the government in the conduct. Because the sentencing judge’s probation or significantly below-guide- largest of the more than 100 offshore balancing of the aggravating and miti- 2008 (when the Department of Justice lines sentences where defendants plead tax cases brought to date continues the gating factors was within his discretion, began its offshore compliance initia- guilty, pay significant FBAR penalties, trend of courts declining to impose pris- the appellate court gave due deference tive) have received terms of probation have no criminal histories, and are char- on time on top of the harsh financial to the district court’s “reasoned and rather than imprisonment. Many judg- itably active or otherwise contributing penalties that apply in such cases. The reasonable” probationary sentence and es appear to be sending a message that members of the community. Second, en- decision also emphasizes the continuing affirmed it. they view the Sentencing Guidelines tering or attempting to enter the OVDP value of applying to enter the Internal The result in Warner parallels that ranges for these cases as too high, par- has strong positive benefits, either pro- Revenue Service’s ongoing offshore in the Florida case of Mary Estelle ticularly in light of the often exorbitant viding taxpayers with full criminal am- voluntary disclosure program (OVDP), Curran (a case in which these authors FBAR penalties that are imposed — a nesty or offering a powerful argument the third version of which started in served as co-defense counsel). Curran form of financial punishment and deter- for a probationary sentence. Third, 2012 and which provides taxpayers with was a 79-year-old widow who pleaded rence that does not exist in domestic tax where the government overreaches to criminal amnesty and reduced penalties guilty to failing to disclose $43 million evasion cases, where such pronounced pile incarceration on top of a felony con- if they disclose their unreported foreign in a Swiss UBS account that she had deviations from the guidelines are far viction and a draconian FBAR penalty, accounts before the IRS finds them. inherited from her late husband. Like less commonplace. The Warner court courts will often step in to reject the gov- Warner pleaded guilty in 2013 to one Warner, Curran had no criminal history, expressly recognized that the FBAR ernment’s unreasonable position. Lastly, count of tax evasion. In his plea agree- had an extensive record of philanthropic penalty, while technically civil in na- in the post-Booker tax sentencing world, ment, he admitted failing to disclose and charitable work, paid her back tax- ture, may be considered in assessing the defense attorneys need to provide the his accounts at two Swiss banks for es of $667,716 and a substantial $21.6 adequacy of a criminal sentence from court with a robust record of all of the over 10 years and failing to pay $5.6 million FBAR penalty (over 30 times the standpoint of both punishment of the defendant’s good acts and character to million in taxes on over $24.4 million greater than the tax loss), and had tried defendant and deterrence of others. counterbalance the government’s stan- in interest income during that time. to enter the OVDP but had been rejected As noted above, one factor that ap- dard argument that general deterrence in Warner agreed to pay full restitution as because — unbeknownst to her — the peared to greatly bother the sentenc- tax cases always requires incarceration. well as a civil “FBAR” (Foreign Bank government had already secretly ob- ing judges in both of these cases was Account Report) penalty of over $53.5 tained her name from UBS mere weeks that the defendants had tried to “come Nathan J. Hochman is a partner at Mor- million, representing 50 percent of the before she tried to enter the program. clean” and avail themselves of the gan, Lewis & Bockius LLP, deputy chair maximum balance of over $100 million At Curran’s sentencing in April 2013, OVDP before being contacted by the of the firm’s White Collar Litigation and in his offshore accounts. The U.S. Sen- the district judge imposed one year of IRS but were nevertheless prosecuted Government Investigations Group, and tencing Guidelines called for a sentence probation and then immediately termi- because they were among the unlucky a former assistant attorney general in in the 46- to 57-month range. At the nated it, resulting in what the court de- few whose account information had charge of the U.S. Department of Justice’s sentencing in January 2014, the govern- scribed as a “five-second” probationary already been turned over to the IRS by Tax Division. ment sought an incarceration term “in sentence. But the judge went even fur- the Swiss banks. The 7th Circuit noted Daniel A. Saunders is a partner at Mor- excess of a year and a day”; the district ther, strongly chastising the government that thousands of tax-evading taxpay- gan, Lewis & Bockius LLP and former as- court rejected that request and imposed for bringing the case, urging Curran to ers had successfully avoided criminal sistant U.S. attorney. a sentence of two years of probation, apply for a presidential pardon, and ad- prosecution entirely by entering the pro- 500 hours of community service, and monishing the government that it would gram. Indeed, the IRS boasts that over a $100,000 fine. The government ap- be spiteful if it opposed that application. 45,000 taxpayers to date have entered pealed, arguing that a noncustodial sen- (The government did not appeal Cur- the OVDP — and not been criminally tence was substantively unreasonable ran’s sentence.) prosecuted — resulting in the govern- under all the circumstances of the case. These cases continue the demonstra- ment collecting over $6.5 billion in In affirming Warner’s sentence, the ble pattern of probationary or substan- taxes, penalties and interest. The court 7th Circuit emphasized the broad sen- tially below-guidelines sentences im- recognized both the seeming random- tencing discretion given to district judg- posed in offshore tax evasion cases. As ness of this eligibility determination and es ever since the U.S. Supreme Court the 7th Circuit noted in Warner, roughly the attendant financial consequence (a Nathan Hochman Daniel Saunders rejected mandatory application of the half of the defendants convicted since 50 percent FBAR penalty rather than Morgan, Lewis & Bockius Morgan, Lewis & Bockius