United States v. Josephberg, No. 07-3958-cr (2d Cir. April 9, 2009) (Kearse, Sack, Katzmann, CJJ)
Background - Multiple Acts of Tax Fraud and Evasion
A “straddle” is a type of tax shelter transaction involving the simultaneous ownership of a contract to buy a commodity for delivery in a future month and a contract to sell the same amount of the same commodity in a different future month. Either the purchase or sale contracts can be sold at a loss. Josephberg’s company sold interests in limited partnerships that invested in such straddle transactions. The partnership owned both contracts to buy and contracts to sell, and each year it would sell the type of contract that had decreased in value, to realize the losses. Individual partners would claim their shares of the losses as deductions on their tax returns for that year, and the partnership would defer the sale of the offsetting profitable contracts until the following year. The amounts of the transactions would escalate each year so that the next year’s sales losses would offset the gains that had been straddled from the year before.
An ordinary straddle transaction is not risk free because there is no assurance that the gain on the second leg will be equal in amount fo the loss on the first. But Josephberg and his associates sought to structure their transactions in ways that would ensure that any profit was always the same as the loss. In 1981, Josephberg’s partnerships’ accumulated deferred gains were $140 million; absent an offsetting loss, they would have owed taxes on those gains in 1982. However, due to a change in the 1981 tax law, the gains could not be offset by further straddle tax shelters. Instead, Josephberg agreed with a bond dealer to artificially generate tax losses in T-bill transactions by using repurchase agreements. These arrangements were used to “simulate” a straddle.
Overall, the straddles were rigged to avoid any true risk; the transactions were engaged in not to produce profits but to generate losses that investors could deduct from their income at tax time. Indeed, the Josephberg’s tax returns for the relevant nine-year period showed only $41,000 in tax liability on more than $3.6 million in income.
In 1986, IRS billed Josephberg for $372,000 in taxes based on its rejection of losses from some of the straddle transactions. He appealed administratively, and lost. By 1993, the IRS wanted that sum plus an additional $548,000 for a different tax year. Ultimately, the tax court entered judgment against him, and also sought additional taxes for other years. In response to the IRS’ effort to collect the debt, Josephberg repeatedly maintained that all his assets had already been seized by the IRS.
In truth, however, he was hiding his income by, for example, running it through shell entities and securities accounts in the names of his wife and children.
For a period of 20 years, from 1979-1998, Josephberg claimed or carried over a substantial net operating loss stemming from the straddle transactions. Even after a 1993 notice from the IRS that those tax shelters were disallowed because they were rigged, risk-free transactions that “generated artificial tax losses” and not “bona fide economic transactions,” he continued to do so.
In 1997 and 1998, Josephberg he failed to pay any employment taxes for his family’s live-in housekeeper, and he neither filed tax returns nor paid any taxes from 1999 to 2003.
Josephberg also engaged in health care fraud, by submitting false tax forms to Oxford to provide coverage for his wife and charge a group insurance rate to his company.
Josephberg was convicted of seventeen counts of tax evasion and both tax and health care fraud. By this time, his tax debt, including interest and penalties was $17,000,000.
The Appeal
Josephberg’s primary challenges on appeal were to the sufficiency of the evidence. All were unsuccessful, and only two are summarized here.
He first argued that there was insufficient evidence of “substantial tax due” with respect to the tax evasion counts because he “mounted a strong challenge” to the IRS tax assessment certificates that showed the tax debt. But this was merely a challenge to the weight of the evidence, not its sufficiency. Nor did the government’s case rest on the certificates alone. The government also introduced notices of deficiency sent to Josephberg informing him of the amounts due and tax court judgements rejecting his challenges to some of the assessments.
Josephberg also claimed that there was insufficient evidence that he engaged in any affirmative act of evasion, claiming that the government’s witnesses retracted their direct testimony on cross-examination. Not only did the court disagree with this characterization of the testimony, it again noted that the claim itself was poorly disguised challenged to the weight of the evidence.
Next, he claimed that the charge that he willfully failed to file tax returns or pay taxes between 1999 and 2003 violated the Fifth Amendment. He argued that, since in those years he was the subject of an ongoing investigation into the propriety of his continued claims of a net operating loss, the very filing of returns for those years would incriminate him. But it is “well settled that the Fifth Amendment does not provide a blanket defense for a failure to file tax returns,” even where there is an ongoing investigation into the taxpayer’s affairs.
At sentencing, Josephberg disputed the court’s use of the 2006 guideline manual, under which the tax loss included interest and penalties because he was convicted of willful evasion of payment. Until a 2001 amendment, the tax guideline always excluded interest and penalties, and Josephberg argued that since his tax evasion offenses were completed by 1998 it violated the Ex Post Facto Clause to use the 2006 manual. The district court held that he had committed a “continuing offense which straddled the dates of the guidelines,” and the circuit found no abuse of discretion. It noted that Josephberg’s failure to file from 1999 to 2003, by his own account, was an effort to avoid assisting in his prosecution for having claimed net operating losses through 1998.
