Justia U.S. 7th Circuit Court of Appeals Opinion Summaries

The target witness learned in 2009 that the IRS had opened a file on him, and that an IRS special agent and DOJ tax division prosecutor were assigned to investigate whether he used secret offshore bank accounts to evade income taxes. Two years later, a grand jury issued a subpoena requiring that he produce all records required to be maintained pursuant to 31 C.F.R. 1010.420 relating to foreign financial accounts that he had a financial interest in, or signature authority over. The requested records are required under the Bank Secrecy Act of 1970. The Government argued that the Required Records Doctrine overrides the Fifth Amendment privilege. The district court quashed the subpoena, concluding that the required records doctrine did not apply because the act of producing the required records was testimonial and would compel the witness to incriminate himself. The Seventh Circuit reversed, finding the Doctrine applicable. View "In re: February 2011-1 Grand Jury Subpoena" on Justia Law

McKinney and his brother own a construction business. In 2003, the IRS filed notice of tax liens and pursued collection. McKinney avoided payment by transferring money from the business into accounts used for personal expenses. He made false statements about his ability to pay. He failed to pay taxes during 1999, 2000, 2002, 2003, 2004, 2005, and 2006. Because of the tax liens, McKinney was unable to obtain a residential mortgage. His wife obtained a loan to purchase a home, falsely stating that she was a full-time manager of the construction business with a gross monthly income of $15,374.23. Her husband signed a false employment verification; he earned the income used to pay the mortgage. His brother and his brother’s wife acted similarly. McKinney entered a plea to charges of conspiracy to defraud, impede, impair, obstruct, and defeat functions of the IRS in collection of income taxes, 18 U.S.C. 371; tax evasion, 26 U.S.C. 7201; and false statements to revenue agents, 26 U.S.C. 1001. He received a two-level enhancement to his base offense level for failing to report income exceeding $10,000 from criminal activity, U.S.S.G. 2T1.1(b)(1), and a two-level enhancement for obstruction of justice, U.S.S.G. 3C1.1. The Seventh Circuit affirmed. View "United States v. McKinney" on Justia Law

Collins served as a city councilman and vice-mayor of East St. Louis. In 2002 he moved to the suburbs, but continued to use his previous address to vote East St. Louis and to establish residency for election to as precinct committeeman for the Democratic Party. Federal agents checked tax filings to verify his residency and discovered that Collins had not filed federal or state income tax returns for almost two decades. Convicted of multiple counts of tax evasion, willful failure to file tax returns, and voter fraud, he was given a within-guidelines sentence of 50 months. The Seventh Circuit affirmed. The district court used pattern jury instructions for tax evasion, which properly define the required element of willfulness and need no clarification to distinguish tax evasion from negligent failure to file. It is not “remotely plausible” to attribute tax delinquency of almost two decades to negligence. The court properly stated Illinois law regarding requirements for establishing voting residency. The evidence was “easily sufficient” to support the verdict. Collins did not file tax returns, and to hide his income, commingled personal and business accounts, used a false Employer Identification Number, and misappropriated the Social Security Number of his deceased business partner. View "United States v. Collins" on Justia Law

Hill and his wife incorporated a tax service business, run out of their apartment, then obtained the names, birth dates, and social security numbers of real individuals and filed approximately 121 false tax returns for the tax year 2005, amounting to approximately $525,460 in false filings. In total, the IRS issued approximately $353,500 in tax refunds, which were electronically transferred to value cards which Hill was able to redeem for cash. Hill pled guilty to conspiracy to defraud the U.S.,18 U.S.C. 286 and one of 20 charged counts of fraud in connection with identity theft, 18 U.S.C. 1028(a)(7) and was sentenced to 92 months in prison. The Seventh Circuit affirmed, finding the sentence reasonable. View "United States v. Hill" on Justia Law

Defendant owned three restaurants, kept two sets of books, and underreported gross receipts. The government discovered the fraud when he listed a restaurant for sale. A fact sheet prepared by the broker calculated average monthly gross receipts at $170,000 and an average yearly operating profit of $554,840. IRS undercover agents posed as buyers. During meetings, defendant explained how he tracked actual receipts. Agents executed a warrant at the restaurants and seized weekly summary sheets and envelopes detailing nightly sales and cash payouts. The IRS concluded that additional taxes due on defendant’s personal tax returns were: $226,752 for 2001, $244,799 for 2002, $213,186 for 2003, and $152,987 for 2004, for a total tax loss of $837,724. Charged with eight counts, defendant pled guilty to four counts of making false statements in a tax return, but claimed that the government’s figure did not account for deductible expenses, such as costs of DJ/promoters, cash wages, complimentary drinks and food, and transfers to his other restaurants for supplies. He claimed the IRS lost $22,292.27. The district court held that it could not consider unclaimed deductions and imposed a sentence of 24 months (bottom of the guideline range) and ordered restitution in the amount of $837,724. The Seventh Circuit affirmed.

Aegis sold sham “trusts,” promising asset protection and reduced tax liability. Clients paid initially paid $20,000 to $40,000 and an annual fee of $3,000 to $7,000. Defendants continued the scheme, despite a 2000 search of their office, investigation by the IRS and FBI, and participants receiving audit requests. Defendants received over $350,000 in fees and caused tax loss of about $6 million. Wasson was charged in 2006 with aiding in filing a false tax return, 26 U.S.C. 7206(2). The grand jury twice superseded the indictment to add Starns and Wolgamot, add counts under 7206(2), and charge all defendants with conspiracy to defraud the IRS, 18 U.S.C. 371. The third indictment was returned May 2, 2007. The district court made an unopposed finding that the case was complex and warranted excluding time until May 1, 2007, 18 U.S.C. 3161(h)(7)(A). Additional delays were attributable to new defense counsel, Starns’s death, Wolgamot’s plea, and government counsel’s participation in Guatanamo litigation. The district court rejected Wasson’s motion to dismiss under the Speedy Trial Act, 18 U.S.C. 3161-74, found him guilty in December 2009, calculated his advisory guideline range using the 2008 Guidelines, and sentenced Wasson to 180 months, (middle of the range). The Seventh Circuit affirmed on all issues.

The taxpayer, a C-corporation with about 40 employees, claimed that its revenues ($5 million to $7 million a year) were offset by deductions for business expenses, primarily compensation paid to owner-employees, three of the firm's accountants. These founding shareholders owned more than 80 percent of the firm's stock in 2001 and received salaries from the firm that year that totaled $323,076. The firm reported taxable income of only $11,279 that year and, in the following year reported a loss of $53,271. The IRS did not question the salary deductions, but disallowed more than $850,000 in consulting fees paid in each of the three years to three entities owned by the founding shareholders, which passed the money on to the founding shareholders. The IRS reclassified the fees as dividends, resulting in a deficiency in corporate income tax of more than $300,000 for 2001 and similar deficiencies for the following two years. The Tax Court added the 20 percent statutory penalty for substantial understatement of income tax, 26 U.S.C. 6662(a),(b)(2). The Seventh Circuit affirmed, stating: "That an accounting firm should so screw up its taxes is the most remarkable feature of the case."

At age 56, plaintiff left his position as a partner in a law firm and enrolled in school. Employees who depart at age 55 or older may withdraw money from the employer's retirement plan. They must pay income tax, but a 10 percent additional tax imposed on most withdrawals before age 59½ does not apply to distributions "made to an employee after separation from service after attainment of age 55," 26 U.S.C. 72(t)(1), (2)(A)(v). Plaintiff moved the funds from the plan to an individual retirement account then withdrew about $240,000. A rollover is not taxable 26 U.S.C. 402(c). Plaintiff paid income tax. The IRS claimed he owed the 10 percent additional tax, plus a penalty for substantial underpayment of taxes. The Tax Court held that he owed the tax on money not used for tuition. The Seventh Circuit affirmed; the distribution was made to an IRA, not to the employee. Section 6662 excuses the taxpayer if there was substantial authority for the tax return's treatment, but there was no authority for plaintiff's position.

Defendant owned tobacco stores. Currency sales accounted for roughly half of the revenue. He directed employees to separate currency from credit-card and check receipts. He used currency to pay employees and suppliers and failed to report currency receipts on federal and state tax forms from 2002 to 2009. He channeled much of the currency (more than $60 million) to bank accounts in Lebanon, his homeland. He pleaded guilty to mail fraud, 18 U.S.C. 1341, and impeding administration of the Internal Revenue Code, 26 U.S.C. 7212(a). With an upward adjustment of 2 levels for using sophisticated means, U.S.S.G. 2B1.1(b)(10)(C), 2T1.1(b)(2), he was sentenced to 76 months. The Seventh Circuit affirmed. Although defendant did not create phony corporations, use fake names to open accounts, or employ technology to conceal assets, his conduct was sophisticated because he directed employees to separate currency receipts, he withheld funds from corporate bank accounts, and concealed the magnitude of his sales. He secreted money into foreign accounts by carrying currency and cashier’s checks during his travels, avoided reporting by depositing currency in multiple transactions (structuring or smurfing) 31 U.S.C. 5324; and washed money through the accounts of relatives and associates.

Taxpayers purchased a three-acre lakefront property in Chenequa, Wisconsin, demolished the house and built another. They donated the house to the local fire department to be burned down in a firefighter training exercise and claimed a $76,000 charitable deduction on their 1998 tax return for the value of the house. The IRS disallowed the deduction. The decision was upheld by the Tax Court. The Seventh Circuit affirmed, finding that the taxpayers did not show a value for their donation that exceeded the substantial benefit they received in return. When a gift is conditional, the conditions must be taken into account in determining fair market value of the donated property. Proper consideration of the economic effect of the condition that the house be destroyed reduces fair market value of the gift so much that no net value is ever likely to be available for a deduction.