Justice Department Files Appeal Brief in Beanie Babies Case

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Today’s blog post is authored by Jed Silversmith, a former federal prosecutor and member of the Washington State bar who recently joined Blank Rome in its Philadelphia office.  Mr. Silversmith has applied to reactivate his Pennsylvania bar license and is awaiting approval of that application.

Two weeks ago, the Government filed its appeal brief in the case of United States v. Ty Warner, a case out of the Northern District of Illinois.  It is rare for the United States to appeal a sentence, let alone a sentence in a tax case.  The outcome of the case will likely have a significant impact on future sentences in other criminal tax cases.

In January 2014, Ty Warner, who had pled guilty to evading about $5.6 million in federal income tax, received a downward variance from 46 months to probation.  Warner is well known as the owner and creator of the Beanie Baby toys.  Given the large tax loss, Warner’s prominence, and the size of the variance, the sentence of probation was widely publicized.

The district court’s decision had come on the heels of a number of offshore cases yielding short or no terms of probation.  Most notably, the sentence of Mary Curran in Palm Beach, whose term of probation was revoked by the district court judge only seconds after he pronounced sentence.  Ms. Curran likely received one of the shortest sentences in the history of the criminal justice system.

Warner’s case was more significant than many of the other UBS clients who were prosecuted.  Generally, the United States had proceeded under a theory of failing to disclose the existence of these accounts on the Schedule B.  The theory being that this misstatement yielded no tax loss.  Further, many of these clients debriefed with the IRS and identified the names of the bankers who helped them establish the clandestine Swiss accounts.

This was not the case with Warner.  The plea agreement identified a tax loss of $5.6 million yielding a guideline range of 46 to 57 months. Warner also never debriefed with the United States.  To the contrary, he moved to quash the Title 31 grand jury subpoena issued for his foreign bank records during the investigation.

Despite the significant tax, the district court downward varied to a term of probation.  The court based its variance on several factors.  However, the court’s primary focus was Warner’s extensive donation of Beanie Babies to under privileged children as well as other charitable works.  The Court noted that it had received approximately 70 letters on his behalf.  In reaching its decision, the district court characterized the question before it as “whether society would be better off with Mr. Warner in jail or whether it would be best served by utilizing his talents and beneficence to help make this a better world.”

In its appeal brief, the Government argued that Warner’s donation of these toys, which it valued at $35.7 million, was not that significant when one considers his net worth of $1.7 billion, writing:

Charitable donations over the course of fourteen years that equal approximately two per cent of current net worth are not extraordinary. The median household net worth was $68,828 in 2011; if that household gave 2% of its net worth, or $1,377, over fourteen years (less than $100 per year), it would not be deemed an ‘exceptional’ amount.

The Government does have some favorable precedent in this Circuit.  It pointed to Judge Posner’s decision in United States v. Vrdolyak, 593 F.3d 676, 682-83 (7th Cir. 2010) where Judge Posner found:

The judge appears to have given no weight to the fact that the defendant is by normal standards (not Warren Buffett or Bill Gates standards) wealthy; his annual income in recent years has sometimes exceeded $1 million.  Wealthy people commonly make gifts to charity.  They are to be commended for doing so but should not be allowed to treat charity as a get-out-of-jail card. … People who donate large sums because they can should not gain an advantage over those who do not make such donations because they cannot.

When the government appeals, it may do so on substantive or procedural grounds.  The latter involves errors in the sentencing guidelines while the former involves “unreasonableness.”  The government is usually pretty cautious about selecting which cases to appeal especially substantive challenges.  Precedent like Vrdolyak will help the government on appeal.  Nonetheless substantive reasonableness is subject to a discretionary standard, so it can be difficult to persuade an appellate panel to overturn a district court judge.

Because the government is a “repeat player” it needs to focus on the negative repercussions of a loss.  It can best be said that it is better that one guilty man go free than thousands of defendants enjoy the benefit a “bad” precedent.

When appealing substantive reasonableness, the government needs to point to something so arbitrary that it cannot withstand scrutiny.  For example, in United States v. Engle, in the Fourth Circuit, the government appealed a variance from 27 months to probation.  The district court in handing down a probationary sentence focused on the need of the defendant to pay restitution.  The Fourth Circuit remanded for a new sentence noting that this rationale meant that “rich tax-evaders will avoid prison, but poor tax-evaders will almost certainly go to jail.”

Substantive reasonableness challenges are tough to win.  The government, when it appeals, usually focuses on procedural error.  In United States v. Bill Melot, handed down in October of last year, the Tenth Circuit reversed the trial court’s decision to award acceptance of responsibility after the defendant testified at trial.  The defendant had testified that he was duped by trust promoters.  The Tenth Circuit found that such testimony was fundamentally inconsistent with acceptance of responsibility.  It remanded with instructions to resentence the defendant without awarding acceptance.

The defendant, a serial non-filer who had maintained overseas bank accounts, had a tax loss of over $25,000,000.  The defendant’s guideline range was 210 to 262 months.  The Court had originally imposed a sentence of five years.  On remand, it imposed a sentence of 14 years, which was consistent with the government’s allocution.  However, the defendant’s post-sentencing misconduct – including a contempt citation for fraud in a related civil case – strengthened the government’s hand substantially.  Perhaps, had the defendant not been held in contempt, the government might not have appealed a procedural error that otherwise did not impact the overall variance.

Discretion is always the better part of valor.  Five years ago, the government appealed a term of home confinement in United States v. Tomko.  After prevailing on appeal in the Third Circuit, the defendant successfully petitioned for rehearing en banc. The en banc panel reinstated the original sentence noting:

If any one of a significant number of the members of this Court—including some in today’s majority—had been sitting as the District Judge, Tomko would have been sentenced to sometime in prison. But “[t]he fact that the appellate court might reasonably have concluded that a different sentence was appropriate is insufficient to justify reversal of the district court.” Gall v. United States reminds us that “[t]he sentencing judge is in a superior position to find facts and judge their import under § 3553(a) in the individual case. [Accordingly,] we must give due deference to the district court’s decision that the § 3553(a) factors, on a whole, justify the extent of the variance.”

In Tomko, the tax loss was $228,557. The case now serves as a primary authority (if not the primary authority) cited by criminal tax defendants throughout the country.

In short, the Government has a strong case to argue on appeal.  However, district courts have broad discretion, which has been recognized time and time again by appellate courts.  The district court’s variance was not in line with the circuit precedent, but these precedents have been eroding as appellate courts have continued deferring to district courts.  Any appeal can open up a Pandora’s box of more precedent, which the Government cannot close.

 

Topics:  Criminal Prosecution, DOJ, Income Taxes, Tax Evasion

Published In: Criminal Law Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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