Part T of the Federal Sentencing Guidelines Manual deals with “Offenses Involving Taxation.” The Introductory Commentary states:

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation’s tax system.  Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws.  Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines.  Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators.

It is difficult to understand how Ty Warner’s sentence of probation comports with the above purpose.  While, as the court stated, Mr. Warner is indeed a “very unique individual,” his gentle treatment before the court gives the impression that the wealthy will be treated differently; that they can flout the law and get off with a monetary penalty that, for them, is not extremely painful and amounts to a very public slap on the wrist.   Mr. Warner must serve 500 hours of community service, must pay a civil penalty of $53 million, $5 million in back taxes and a fine of $100,000.  But, is his punishment commensurate with the severity of the crime?

Mr. Warner, age 69, plead guilty to only one count of tax evasion although he was charged with more.  The maximum sentence for the crime he plead to is 5 years.  The prosecutor sought a sentence of at least one year and one day.  Under the Sentencing Guidelines jail time is increases with the tax loss to the government.  A Forbes article by Janet Novak, “No Jail Time for Beanie Babies Billionaire Tax Evader Ty Warner (Forbes 1/14/14) suggests that the guideline sentence should have been 46 to 57 months of incarceration.  Much of the factual information outlined below about Warner’s sentence and the court’s reasoning is taken from Ms. Novak’s article. The comments are mine.

The Court based its sentence on the following:

  • Mr. Warner is a very unique individual. Comment: Is being unique license to break the law?
  • The good works Warner has done citing his payment of a $20,000 medical bill for a stranger and gift of $20 million charitable donation. Comment:  Just about every white-collar crime defendant cites charitable acts as reason to reduce the sentence.
  •  “Society will be better served by allowing him to continue his good works.” Comment: He could continue his good works after serving some time as punishment for his bad deeds.
  • Warner has already paid a price of public humiliation. Comment: But, he’s still a billionaire and deserves more than embarrassment.  He could afford to pay his share of taxes; but, greed compelled him to attempt to shirk his tax obligations.
  • Warner had tried unsuccessfully to enter the IRS 2009 Offshore Voluntary Disclosure Program but was rejected because the IRS already had his name from those initially disclosed by UBS after it had entered into a deferred prosecution agreement with the DOJ.  More than 39,000 taxpayers have been granted amnesty under the three variations of the program.
  • Warner had accepted responsibility for his mistakes.  Comment: What else could he do having been caught red-handed?

The prosecutor had argued “(without prison time), tax evasion becomes little more than a bad investment.”

There were aggravating factors in this case that did not apparently influence the judge, namely:

  • It is not clear that Warner did not know his name had been submitted when he applied for the 2009 OVDP. Comment: but he certainly knew his name would likely be submitted.  He submitted his name to the program after another UBS client had pleaded guilty and a UBS banker had been indicted.
  •  The other UBS client Jeffrey Chernick, a toy manufacturer, had hidden $8 million offshore and was sentenced to three months in jail.  Comment: I guess he did not hide enough to get off with no jail time.
  • Warner between 1998 and 2008 maintained unreported Swiss bank accounts.
  • Initially the accounts were opened at UBS AG.
  • He had travelled to Zürich in 1996 to open the account.
  • He’d instructed the bank to hold correspondence that no mail could be traced to him.
  • It was no clear whether the initial deposit to the Swiss account was not from funds on which no U.S. tax had been paid which, if true, would substantially increase the tax loss to the U.S. Treasury.
  • After UBS agreed to report information to the IRS in 2001, it advised its clients to move funds out of the bank to Zuercher Kantonalbank (ZKB) in order to retain the secrecy of the account.
  • In 2002 Warner again travelled to Zürich and transferred $93.6 million from UBS to ZKB.  Comment: Thus, he took overt steps to perpetuate the crime.
  • His new account at ZKB was managed by Hansreudi Schumacher, the Swiss banker later indicted.
  • The new account, however, was not opened in Warner’s name but in the name of a nominee entity, the Molani Foundation, a Liechtenstein entity, used to further conceal Warner’s identity.  Comment: This is a biggie for showing wilfulness.
  • Between 1999 and 2007, Warner’s unreported income from the accounts was about $24.5 million. Comment: Wow!
  • Obviously, Warner did not file FBARS for the years in question.
  • Warner had filed amended tax returns in December 2007 for the years 2002 through 2005 but did not report the existence of or income from the ZKB account in those amended returns. Comment:  Thus, for those years he’d filed false original and amended returns.

The facts above appear to show a pattern of behavior aimed at concealing Warner’s hidden offshore accounts until it was clear that, further efforts were futile, and disclosure was imminent.  Then, and only then, did Warner attempt to enter the OVDP.

That Warner was extraordinarily charitable is not unusual for the rich who break the law.  Human nature is such that most people are neither angels nor devils, but represent a collage of good and bad character traits; and, all are prone to making mistakes.  A self-assessment tax system, under which few are audited, requires a belief in the fairness of the regime by taxpayers.  If the perception arises that the wealthy will be treated with kid gloves because of their wealth, how will the little guys who pay a bunch of tax react? Will the small businessman be inclined to report fairly his income?

What is the take away from Ty Warner’s sentence for those still out in the cold?  Ty Warner was given the benefit of the doubt because, among other factors, he tried to enter the program.  Thus, even if rejected from the program, coming forward may be helpful at a later sentencing.  My advice for those still pondering whether to come in from the cold is to stop wavering and take action to enter the OVDP now.

© 2014 by Robert S. Steinberg, Esquire
All rights reserved

This entry was posted in 2011 OVDI, 2012 OVDP, FBARS, NEW OVDP, OFFSHORE BANK ACCOUNTS, TAX, TAX CRIMES, VOLUNTARY DISCLOSURE and tagged , , , , , , . Bookmark the permalink.

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