Trump, Tax Crimes, and Tilting at Windmills

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We welcome guest blogger Scott A. Schumacher. Professor Schumacher is the Associate Dean of the University of Washington Law School and has for many years headed the low income taxpayer clinic there as well as its graduate tax program. Prior to joining the faculty at the University of Washington Professor Schumacher worked for several years in the Criminal Section of the Tax Division of the Department of Justice. His work in his prior life provides him with an insider’s view of the workings of criminal tax cases which he shares with us today. Some of us are old enough to remember a criminal tax case that ended the political career of Vice President Spiro Agnew. While President Trump’s taxes continue to be the focus of much discussion, Professor Schumacher explains why the recent news story does not signal anything of current tax significance. Usually we leave the discussion of criminal taxes to the excellent federal tax crimes blog written by Jack Townsend but the currency of the recent article concerning the taxes of the President’s family causes us to veer temporarily into a different procedural area. Keith

Earlier this month, the New York Times published an extensive expose on the tax strategies allegedly employed by President Trump and his family in the 1990s. New York State tax authorities quickly announced that they were beginning an investigation into these matters, and the typical political and media firestorm followed. Among the questions raised were: Can Trump be prosecuted for this conduct? Can both the State of New York and the U.S. government prosecute him for the same conduct? If he is continuing to engage in similar strategies, can he be prosecuted for tax crimes? Are Fred Trump and former Secretary of State Dean Acheson the same person?

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As to the first question, there is virtually no chance of the conduct discussed in the New York Times article resulting in either a federal or New York State tax prosecution.  Under federal law, the statute of limitations for tax evasion and other tax crimes is six years, and it’s five years under New York law. The statute begins to run from the last act of evasion, which generally means the filing of the tax return for the year at issue. As noted, all of the events discussed in the Times article occurred in the 1990s, and the statute of limitations has long since run on those years.

As to the second question, there is nothing that absolutely bars both a federal and state tax prosecution for the same tax year. The laws of separate sovereigns have been violated, and the conduct involves separate criminal conduct –the filing of two different tax returns. Hence, the Double-Jeopardy Clause is not implicated.

Nevertheless, parallel or sequential federal and state tax prosecutions are rare. Under the Department of Justice’s Petite Policy (named after Petite v. United States, 361 U.S. 529 (1960)), federal prosecutors will generally not bring a case following a prior state prosecution based on substantially the same acts. The purpose of the policy is to promote the efficient use of resources, to encourage federal and state cooperation, and to protect persons from multiple prosecutions and punishments for essentially the same conduct. The Petite Policy is followed by the Tax Division of DOJ, which must approve indictments for all federal crimes.  As a result, it is extremely rare for a federal prosecution to follow a state prosecution in tax matters.  In reality, even without a formal policy, given that there are so few tax prosecutions, if someone has been convicted by either a state or federal government, it is highly unlikely that another prosecution for essentially the same conduct would be brought. They have bigger fish (or at least other fish) to fry.

What if the conduct described in the Times article continues to today, couldn’t that form a successful tax prosecution? Without getting into the specifics of the alleged conduct, which is well beyond the scope of the PT Blog, such a prosecution is highly unlikely. The heart of any tax prosecution is the mental state that the government is required to prove – willfulness. Willfulness is defined as an “intentional violation of a known legal duty.” Thus, the taxpayer and putative defendant must know what the law provides and intentionally violate the law. In this regard, reliance on the advice of a professional generally constitutes a complete defense to the element of willfulness.

Given the complexity of the tax laws, it is difficult for prosecutors to prove that someone who was advised by lawyers and accountants knew that their conduct violated the law and intentionally engaged in that conduct. Despite the President’s claim that he understands the complex tax laws better than anyone who has run for president, he has always been well represented by competent tax professionals.

Okay, nobody asked the final question, but Google it.

 

Comments

  1. Scott, great post! Some questions/comments:

    1. Assume that the criminal statute of limitations has expired and there has been no intervening conduct which refreshes the criminal statute of limitations. The civil statute of limitations could be open if there is either civil fraud or some returns not filed (a la Sumner Redstone). IRS starts a civil audit of the conduct described in the NYT article. IRS summonses documents from Trump and then interviews Trump. Trump lies in the interview (let’s set aside whether he submits false documents either contemporaneously prepared or prepared incident to the audit). Could he then be prosecuted for the original evasion?

    2. In any event, if he makes false statements in the audit interview, he could be prosecuted for a new crime, 18 USC 1001 or, conceivably, tax obstruction, 7212(a), since lying would likely be intended to impair or impede the audit. His prior lawyer, John Dowd, thought that Trump was at high risk of lying in an interview. Of course, he could use the “I do not recall” mantra. If he does recall and states that he does not recall, that would be prosecutable under 18 USC 1001, but that might be very difficult to prove. Older readers may recall, however, that the “do not recall” defense has been tried before with varying success. See Darren Samuelson, The weakest defense in Washington? Saying ‘I don’t recall’ (Politico 6/25/17), here.

    https://www.politico.com/story/2017/06/25/washington-defense-trump-russia-239914

    3. You are correct about the disincentive to prosecuting Trump by the willfulness standard for most tax crimes (or more or less equivalent standards where the criminal statute has some mens rea element other than willfulness, such as § 7212(a) or 18 USC 371, defraud/Klein conspiracy). That depends upon whether he lied to his lawyers or kept them deliberately out of the loop so as to see the big picture. For example, if there were something odd about his loans from Deutsche Bank or other dealings with those in the orbit of Russia and he did not fully disclose that to his lawyers, then asserting the reliance on lawyers defense will open all of that up and might support prosecution.

    4. All of this would depend upon whether there is the will within the IRS and DOJ to prosecute for tax or related crimes. I doubt that the will is there now. And, if he is impeached (whether or not convicted), the will may not be there in the future. Unless, he had, for example, an reportable interest ub foreign bank accounts that he did not disclose to his lawyers or his tax return preparers.

    • Jack,

      Thanks for the very thoughtful reply. I think you are correct that a lie during an audit of the original return would likely be charged under sec. 1001 or 7212. That would be an easier theory of the case than trying to prove it was an affirmative act of evasion for the original return. The government might also run into a Grunewald-type argument if it tried to make the cover-up part of the original evasion.

      I agree that the reliance on the advice of a professional presupposes that all relevant facts were shared with the professional. If not, the reliance defense would not be effective.

  2. Carl Smith says:

    For those who wonder why I care about the President’s removal power over Tax Court judges, although I began the litigation while Mr. Obama was President, I had in the back of my mind, “What if a Richard Nixon type became President again and did not like the Tax Court judges appointed by Presidents of the other party?”

    Now that we have Mr. Trump as President, what if a civil notice of deficiency asserting fraud penalties gets issued to President Trump and/or his family members concerning transfers from Fred Trump? Of course, if fraud can be proved (perhaps by anyone who helped prepare the return — see the Tax Court’s Allen opinion not requiring fraud by the taxpayer), then 6501(c) leaves the assessment statute open. What if Chief Judge Foley (who was appointed and reappointed by Democratic Presidents) assigns the Trump v. Commissioner case to himself because of its importance. Wouldn’t we all be worried about President Trump’s right to remove Judge Foley under 7433(f) for “inefficiency, neglect of duty, or malfeasance in office”, simply after holding a public hearing (where there is no statutory right of Judge Foley to appeal the removal)? As then-Chief Justice Berger observed with respect to another similar removal power that he held unconstitutional, these three statutory grounds for removal are not really very limiting, but enable “very broad” removal authority “for any number of actual or perceived transgressions” of the removing authority’s will. Bowsher v. Synar, 478 U.S. 714, 727 n. 5 (1986).

    As I have argued before, if it is true that, per Freytag v. Commissioner, the Tax Court exercises a portion of the Judicial Power of the United States (unlike the typical Executive Agency, which only has quasi-judicial powers), then should a potential litigant subject to such power — i.e., President Trump — constitutionally be permitted to remove his judge until he got one that he liked? I don’t think one needs to know the Department in which the Tax Court is located to say that the Executive Power should not be removing the Judicial Power under a statute providing for such flimsy limits. Only Congress, through impeachment and conviction, should have the right to remove Judge Foley in my not-far-fetched hypothetical.

  3. Norman Diamond says:

    Do the criminal section and civil section ever talk with each other? For instance when the criminal section boasts the conviction of an IRS employee who embezzled payments, could they tell the civil section that maybe the IRS should contact withholding agents and credit the legitimate beneficiaries?

    Is the Assistant Attorney General, Tax Division, in the criminal section or civil section? Commenters aren’t allowed to name names, but there was an AAG who told Congress that the IRS will always make good to victims of Stolen Identity Refund Fraud, while at the same time the same AAG was busy persuading Court of Federal Claims and the Federal Circuit to refuse to take jurisdiction so the IRS wouldn’t make good to victims of a convicted IRS embezzling data clerk.

    • The AAG is head of the entire Tax Division. All of the civil and criminal sections report to him/her.
      The criminal and civil sections can/do talk, but there are limitation on the disclosure of information obtained as part of a grand jury proceeding.

  4. Norman Diamond says:

    “there are limitation on the disclosure of information obtained as part of a grand jury proceeding”

    I don’t think that would be an issue when an IRS data entry clerk was jailed for embezzlement and the withholding agents/payers haven’t been contacted yet to verify who the legitimate beneficiaries were on the original Forms 1099.

    (I guess if someone starts investigating oddities in the handling of Forms 1042-S, the information might not be disclosable until someone gets jailed.)

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