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March 28, 2007

Record sentence (with a loophole) for tax cheat

Thanks to this post at TaxProf, I noticed this Washington Post article reporting on a record (and timely) sentence in a tax case:

Eccentric Washington telecommunications mogul Walter C. Anderson was sentenced yesterday to nine years in prison for failing to pay $200 million in taxes -- but a federal judge ruled the Internal Revenue Service won't be repaid for now because prosecutors botched the plea agreement.

Anderson, the biggest convicted tax cheat in U.S. history, received the longest punishment ever given in a tax crime case for his admitted effort to hide $365 million in personal income in the 1990s.  He avoided paying taxes by using aliases, shell companies, offshore tax havens and secret drop boxes abroad.   "I agree I'm responsible for what I did . . . but I'm not a criminal person," Anderson told U.S. District Judge Paul L. Friedman before he was sentenced. "I believe I've tried to do the right thing most of my life."

In a major embarrassment to the government's seven-year prosecution of Anderson, the judge ruled he could not order Anderson to make restitution to the IRS for an estimated $140 million of his unpaid federal income taxes.  Friedman blamed prosecutors for making a sloppy plea agreement with Anderson.

So, the lessons of this story are (1) pay your taxes, and (2) the Justice Department under AG Gonzales apparently cannot even write plea agreements without costing the government hundreds of millions of dollars.  (Indeed, a botched plea agreement costing the government $140 million sounds like a very legitimate performance-related reason to take a prosecutor to task.)

UPDATE:  This AP story provides more details on DOJ's $100 million blunder in this case:

U.S. District Judge Paul Friedman said he couldn't order Anderson to repay the federal government $100 million to $175 million because the Justice Department's binding plea agreement with Anderson listed the wrong statute.  Friedman said he could have worked around that problem by ordering Anderson to repay the money as part of his probation. But prosecutors omitted any discussion of probation — a common element of plea deals — from Anderson's paperwork.  "I've come to the conclusion, very reluctantly, that I have no authority to order restitution," Friedman said. "I hope the government will appeal me."

It is a sad and telling commentary on the state of modern sentencing realities that the government in this case likely spent a lot more time making sure that a non-violent tax cheat spends years behind bars (at taxpayer's expense) than it spent making sure the tax cheat actually had to pay the money he owes.

March 28, 2007 at 07:13 AM | Permalink

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Comments

I would like to see a copy of the botched agreement. My guess is that it was signed off on by the Tax Division (at main justice) as well.

Posted by: S.cotus | Mar 28, 2007 7:58:17 AM

Hold on, the "fat lady" has not sung yet. We will see if the Circuit Court rescues the government. See United States v. Miller, 406 F.3d 323, 328-30 (5th Cir. 2005). By the way, you should be able to access the plea agreement on PACER.

Posted by: doug | Mar 28, 2007 8:41:37 AM

I got a tax cheat out of restitution once. There's a weird omission of tax crimes in the restitution statutes that puts an extra burden on the prosecution to get a commitment to pay restitution in the plea agreement that isn't usually necessary. If they don't, the government's out of luck.

Posted by: David in NY | Mar 28, 2007 9:15:46 AM

Too bad for this guy Clinton isn't still president, he'd probably get a Marc Rich style pardon.

Posted by: Brian | Mar 28, 2007 9:53:25 AM

Brian, Do you even know what Mr. Rich was accused of doing?

Posted by: S.cotus | Mar 28, 2007 9:58:17 AM

S.cotus, my post was intended as a joke. And yes, I do know what Rich was accused of doing ( I tend to read newspapers and the like, and have for quite awhile, at least since the early 90s ;>) )

From wikipedia: Marc Rich (born Marc David Reich on December 18, 1934) is an international commodities trader. He fled the United States in 1983 to live in Switzerland while being prosecuted on charges of tax evasion and illegally making oil deals with Iran during the hostage crisis.

He received a presidential pardon from United States President Bill Clinton in 2001, which required him to pay a $100 million fine before the charges would be dropped.

Actually, the more I think about it, it's not so incredibly far-fetched. If Walter Anderson agreed to pay the fine, he might actually get a pardon from Clinton.

Posted by: Brian | Mar 28, 2007 10:20:07 AM

doug, My guess is that the agreement here did not have the clause that the agreement in Miller had -- agreeing to restitution of losses due to all "relevant conduct," not just of the loss in the crime of conviction -- and that was the problem here.

Posted by: David in NY | Mar 28, 2007 10:22:01 AM

The problem was that the plea agreement was a binding 11(c)(1)(C) and it listed two statutes under which the Court was authorized order restitution: one federal and one D.C. Unfortunately, the federal statute listed was the wrong one.

Posted by: | Mar 28, 2007 10:34:08 AM

Weird mistake.

Posted by: David in NY | Mar 28, 2007 10:36:41 AM

"It is a sad and telling commentary on the state of modern sentencing realities that the government in this case likely spent a lot more time making sure that a non-violent tax cheat spends years behind bars (at taxpayer's expense) than it spent making sure the tax cheat actually had to pay the money he owes."

Come on Professor, in theory you are right, but are you saying that if he was able to repay the money (money he acquired through his theft) then he shouldn't spend any material time in jail?

Posted by: Brian | Mar 28, 2007 10:39:22 AM

Anon at 10:34, how could the AUSA forget to cite #3663A?

Posted by: Brian | Mar 28, 2007 10:41:03 AM

Brian: I am not saying he should not be in prison. Rather, I am just saying DOJ's first priority should be to get all the money he owes (and more), and then focus on how long he should go to prison. It is a matter of priorities, which seem especially backwards when dealing with white-collar crimes. There is every reason to believe that economic and shaming sanctions could be MUCH, MUCH more effective than imprisonment for detering these sorts of crimes.

Posted by: Doug B. | Mar 28, 2007 10:47:16 AM

Prof. Berman,
Again, you are right in theory, but it's a fact the vast majority of convicted defendants facing major restitution amounts will never pay them back, as most convicted defendants are destitute (after paying for all their legal fees) when they enter the federal prison system.

In this particular case, it seems like Anderson does have money that could be used to pay the restitution back in full, but in most cases, these restitution awards never get paid back.

It also sounds like I'm playing both sides of the fence, considering what I've written about restitution, but I really wonder about the true worth of restitution.

Posted by: Brian | Mar 28, 2007 10:56:51 AM

Plea agreement, paragraph 4.

Restitution: Mr. Anderson agrees that the Court may order restitution pursuant to 18 U.S.C. 3572 and 16 D.C. Code 711.

Posted by: | Mar 28, 2007 11:06:57 AM

Brian, Do you know what conduct Mr. Rich was accused of ? Not just "tax evasion" but do you really know 1) what this conduct was; 2) how it is generally prosecuted ?

(I do not read newspapers of general circulation, because the reports lack the expertise to say anything meaningful . For example, based on your quotations, you were unable to even state what sort of "evasion" he engaged in. The wikipedia article simply says "trading with Iran" which is too vague to be meaningful.)

Thankfully, you can read the indictment here:
http://www.thesmokinggun.com/archive/markrich1.html

But, what amuses me, is besides being represented by Scooter Libby, a policy decision was later made to not criminally prosecute what the indictment alleges, and in most similar cases now, the IRS simply proceeds via an assessment.

(I don't care one way or the other about him.)

Posted by: S.cotus | Mar 28, 2007 11:27:45 AM

S.cotus.
It seems like an assessment by the IRS is a better way to go about things, as opposed to a restitution order, mainly because they seem like a better and more interested party in actually seeing their assessment be fulfilled.
People I know who have outstanding restitution orders against them haven't paid a dime towards it, even though they currently receive an on the books salary.

Regardless, the Marc Rich post was a flippant comment, so I really don't see the need to be mildly chastised by you for my reading habits.

Posted by: Brian | Mar 28, 2007 11:34:49 AM

Anon at 11:06,
thanks for the cite. 3572 is entitled "Imposition of a sentence of fine and related matters"
(a) Factors To Be Considered. - In determining whether to impose a fine, and the amount, time for payment, and method of payment of a fine, the court shall consider, in addition to the factors set forth in section 3553(a) - ........
(4) whether restitution is ordered or made and the amount of such restitution;

This is quite a blunder.

Posted by: Brian | Mar 28, 2007 11:38:11 AM

I am an attorney for the Service and have looked at this issue over the course of several years. I beleive the correct statutes for restitution are 18 USC 3663 and 3663A. A peculiar aspect of those sections is that a defendant cannot be sentenced to pay the tax evaded if the conviction is under title 26. The defendant can only be required to make restitution as a condition of probation. Moreover, if one takes a restrictive view of the assessment authority provided to the Service under section 6201, section 6201 does not state that the Service may assess amounts ordered as restitution. Arguably therefore the Service cannot assess unless the defendant consents to waive the restrictions on assessment. I find it hard to imagine any defendant would agree to consent to the assessment unless required by the sentencing court to do so. I do not beleive this problem can be solved without legislation.

Posted by: BDusenberry | Mar 28, 2007 12:01:50 PM

Bdusenberry,
by the 'Service' you mean the IRS?

Posted by: Brian | Mar 28, 2007 12:04:37 PM

"Service" is nice for "IRS."

Oh, you are also a "customer."

(Don’t get me wrong, I would rather deal with IRS attorneys any day of the week then attorneys from most other agencies.)

Posted by: S.cotus | Mar 28, 2007 12:19:54 PM

S.cotus, a "customer," that's a good one.
That reminds me of an old George Carlin suggested response to a police officer who stops you for speeding.
Just tell the officer, "You're a civil servant, aren't you? Go get me a glass of water then."

Posted by: Brian | Mar 28, 2007 12:24:22 PM

Doesn't the judge get a look at the plea agreement beforehand, so he (or his law clerk) can catch errors like this? I think I'd get my ass handed to me if I let this one slip through.

Posted by: Law Clerk | Mar 28, 2007 12:39:25 PM

Law Clerk,
I can see why the mistake was made, 3572 and 3663 and 3663A are so often bandied about in the context of restitution and fines, but you're probably right that somebody's ass is in the process of being handed to them over this little incident.

Posted by: Brian | Mar 28, 2007 1:23:30 PM

Brian, S.cotus, yes, Service means IRS. If I say IRS, people tend to back away holding garlic and crosses.:-).

Law Clerk, I'm not sure a judge has to approve the plea agreement before it is exceuted by the parties. The document is filed with the clerk of the court and the judge has to agree to the terms, but the actual document is probably in the form of a letter.

Posted by: BDusenberry | Mar 28, 2007 2:22:52 PM

Law Clerk, Parties make errors in agreements all the time. In fact, they occur in plea agreements. I don't see what the big deal is. The government screwed up, but unless there is evidence of fraud or some kind of manifest injustice (and, since the sentence is long, I don't think one can argue that there is), there is no reason to help the government out.

If I was the judge in that position, I would figure that the defendant didn't have any money, anyway, and the government wisely figured that there wasn't any reason to get blood from a stone.

Posted by: S.cotus | Mar 28, 2007 4:27:55 PM

I don't practice in federal court. But why, when the judge realized the mistake in the plea agreement, couldn't he just reject the agreement and offer the defendant a chance to withdraw his plea? If the defendant withdrew, the problem could have been fixed via a new agreement or a trial. If he didn't withdraw, then the judge is free to do whatever he wants, right?

Posted by: Anon | Mar 29, 2007 12:24:48 AM

The claim that this was the longest criminal tax sentence ever imposed is b/s from the U.S. Attorney's Office public affairs officer. I personally have had two defendants on appeal with longer sentences imposed in tax cases, so I'm sure there are plenty more. As for "restitution," it is for good reasons that tax cases are excluded from the coverage of 18 USC 3663 and 3663A. No way at sentencing should a federal judge be put in the position of calculating someone's tax liability, and the "criminal numbers" generated for and used at trial are not accurate at all (can be too high or too low, depending). Amount of tax due is not an element of the offense, just that the amount is "substantial" in the vaguest sense. IRS can use the criminal judgment to get a shortcut civil assessment with penalties via collateral estoppel, and the judge as a condition of supervised release (not likely "probation") can order the defendant to "cooperate" with the IRS in that process. Funny that Doug in his comment should mention the Fifth Circuit -- the Fifth doesn't allow restitution in criminal tax cases at all, unless the amount has been civilly determined or is admitted by the defendant. Most recent case is US v Nolen (2006).

Posted by: Peter G | Mar 29, 2007 2:18:14 AM

To Anon, you are correct, the judge could have rejected the plea agreement and allowed the defendant to withdraw the plea of guilty and "go forward" with the case. To Peter, thank you for mentioning the Fifth Circuit. If nothing else, Miller highlights the fact that the defense attorney MUST preserve errors; should, more often than not, plead straight to the Indictment when involved in a case that falls under U.S.S.G. sections 2B1.1, 2D1.1, and many other sections of the Guidelines; and should write the factual resume him or herself. Too many defense attorney sign broadly worded plea agreements when they should just plead to the indictment. For those who do not know why, section 1B1.3 is, most often, going to allow Probation to include all of the "relevant conduct" to be factored into the sentence no matter how many charges are dropped.

Posted by: doug | Mar 29, 2007 8:35:30 AM

S.cotus.
Trust me, I know that parties make mistakes in plea agreements all the time. I catch these errors on a regular basis. I'm not talking about helping the government out--I'm talking about making sure that the defendant knows what he's pleading guilty to. Specifically, I'm talking about a little thing called a Rule 11 colloquy.

Would you really think that a multi-millionaire really didn't have any money to make restitution? We're not talking about a fine here, which can be--and usually is--waived by the court because of the defendant's inability to pay. This is restitution, which is generally mandated by statute, regardless of ability to pay.

Maybe the judge I work for is more anal than most, but we go over the plea agreements with a fine-tooth comb. Just seems to me like that didn't happen in this case.

Posted by: Law Clerk | Mar 29, 2007 9:33:01 AM

"I am just saying DOJ's first priority should be to get all the money he owes (and more), and then focus on how long he should go to prison."

DOJ Tax does not consider civil tax liability or payment of such liability in approving tax prosecutions! Form the USAM:

6-4.360 Compromise of Criminal Liability/Civil Settlement

While statutory authority under 26 U.S.C. Sec. 7122(a) does exist for the Attorney General, after referral of a case to the Department, to enter into agreements to compromise criminal tax cases without prosecution, as a matter of longstanding policy, such authority is very rarely exercised. If it is concluded that there is a reasonable probability of conviction and that prosecution would advance the administration of the internal revenue laws, any decision to forego prosecution on the ground that the taxpayer is willing to pay a fixed sum to the United States, would be susceptible to the attack that the taxpayer was given preferential treatment because of his ability to pay whatever amount of money the government demanded.

Consequently, proposed criminal tax cases are reviewed without any consideration being given to the matter of civil liability or the collection of taxes, penalties, and interests. In short, proposed criminal tax cases are examined with the view to determining whether a violation has occurred to the exclusion of any consideration of civil liability.

Absent extraordinary circumstances, such as permanent loss of tax revenues unless immediate protective action is taken, settlement of the civil liability is postponed until after sentence has been imposed in the criminal case, except when the court chooses to defer sentencing pending the outcome of such settlement. In this event, the IRS should be notified so that it can begin civil negotiations with the defendant.

However, the Tax Division strongly encourages, but does not require, that a plea agreement include certain civil admissions by the defendant, including: (1) admission of either receipt of enumerated amounts of unreported income or claimed enumerated amounts of illegal deductions or improper credits for years set forth in the plea agreement; (2) a stipulation that defendant is liable for the fraud penalty imposed by the Internal Revenue Code (26 U.S.C. Sec. 6663) on the understatements of liability for the years involved; and (3) an agreement by the defendant to file, prior to sentencing, complete and correct initial or amended personal returns for the years subject to the above admissions and, if requested, to provide the IRS with information regarding the years covered by the returns and to pay, at sentencing, all additional taxes, penalties and interest which are due and owing and (4) an agreement by the defendant not to file thereafter any claims for refund of taxes, penalties, or interest for amounts attributable to the returns filed incident to the plea. See Memorandum, United States Department of Justice, Tax Division, "Civil Settlements in Plea Agreement," June 3, 1993, in the Tax Resource Manual.

Posted by: lawdevil | Mar 29, 2007 4:27:59 PM

I do not know if the A.P. is quoting the judge or not, but, for the record, the defendant received a term of imprisonment so he could not receive probation. The defendant could, however, receive a term of supervised release. Arguably, if the judge imposed a term of supervised release pursuant to Title 18, United States Code, Section 3583, under 3583(d)(1)-(3), which cross references with sections 3553 and 3563 and Title 28, United States Code, 994(a), the judge might have been able to shoehorn the payment of the back taxes as a condition of supervised release. Unless the plea agreement specifically excluded the payment of the taxes in question, arguably, there is no reason why the judge could not have imposed payment of taxes as a condition of supervised release.

Posted by: doug | Mar 30, 2007 8:41:17 AM

The government originally requested restitution as a condition of supervised release under 3583 and the other statutes you cited. On Friday of the sentencing hearings, the defense pointed out that the binding 11(c)(1)(C) plea agreement mentioned imprisonment, but did not mention supervised release. Under the D.C. Circuit opinion in Ginyard, where the parties have entered into an 11(c)(1)(C) plea, the court cannot impose any supervised release because it would constitute punishment not agreed to by the parties. Therefore, because the Judge could not impose supervised release, he could not impose a condition of supervised release, i.e. restitution. The government then changed its argument on Monday to request restitution pursuant to 3663(a)(3) as being authorized by the plea agreement. But the plea agreement, as discussed above, cited the wrong statute.

Posted by: | Mar 30, 2007 11:15:53 AM

The government originally requested restitution as a condition of supervised release under 3583 and the other statutes you cited. On Friday of the sentencing hearings, the defense pointed out that the binding 11(c)(1)(C) plea agreement mentioned imprisonment, but did not mention supervised release. Under the D.C. Circuit opinion in Ginyard, where the parties have entered into an 11(c)(1)(C) plea, the court cannot impose any supervised release because it would constitute punishment not agreed to by the parties. Therefore, because the Judge could not impose supervised release, he could not impose a condition of supervised release, i.e. restitution. The government then changed its argument on Monday to request restitution pursuant to 3663(a)(3) as being authorized by the plea agreement. But the plea agreement, as discussed above, cited the wrong statute.

Posted by: | Mar 30, 2007 11:15:54 AM

Corrected sentence: where the parties have entered into an 11(c)(1)(C) _that does not mention supervised release_, the court cannot impose it.

Posted by: | Mar 30, 2007 11:17:37 AM

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