In the Courts

In 2010, in the wake of Skilling v. United States, 130 S. Ct. 2896 (2010), Scanlon filed a motion in the district court arguing that the plea agreement should be amended because the honest services fraud violation for which he pled guilty could no longer be maintained. The district court denied Scanlon's motion, but noted that his sentence and restitution would be materially affected if Skilling prevented an honest services charge under the circumstances. Scanlon was ultimately sentenced to 20 months' imprisonment and ordered to pay $20 million in restitution.

Scanlon appealed his sentence to the D.C. Circuit, asking the court to reverse his conviction and direct the district court to calculate his sentence without considering the honest services fraud portion of his plea. The circuit court found that it lacked the authority to modify or amend the plea agreement, holding that the role of the courts in reviewing plea agreements is strictly limited under Rule 11 of the Federal Rules of Criminal Procedure to accepting, rejecting or deferring a decision. While the court noted that it could have reviewed a motion to withdraw the plea agreement, it upheld the district court's denial of Scanlon's motion without considering the merits of his argument that Skilling barred honest services charges under the circumstances.

GE Subsidiary Held Liable for Abusive Tax Shelter

On Jan. 24, 2012, in a case that has ping-ponged between the district and appellate courts since 2004, the Second Circuit held that the IRS may impose penalties against a General Electric (GE) subsidiary based on the company's application of an abusive tax shelter. TIFD III-E, Inc. v. United States, –F.3d.–, 2012 WL 18159 * 2 (2d Cir. Jan. 24, 2012). The case involved a 1993 transaction through which the company attempted to form a partnership with two Dutch banks in order to hold a fleet of leased commercial aircraft. Under a complex partnership arrangement, the GE subsidiary would receive the majority of the leasing income while the banks were allocated 98% of the taxable income. The government argued that the banks were not true partners and, therefore, that the company owed more than $62 million in taxes. In 2004, the U.S. District Court for the District of Connecticut rejected this argument, but the Second Circuit reversed the district courts opinion and remanded the case for further consideration. After consideration on remand, the district court again held that the banks could be considered true partners for tax purposes, further holding that, even if the banks were not true partners, the IRS could not impose a penalty because “substantial authority” supported the company's tax treatment of the partnership. Id. The Second Circuit again reversed the district court's decision, holding that debt does not qualify as a partnership interest such that the banks could be considered partners for tax purposes. The court further held that substantial authority did not exist to support the GE subsidiary's tax treatment of the partnership and, therefore, that the substantial understatement penalty could be imposed.

In the Courts and Business Crimes Hotline were written by Associate Editors Jamie Schafer and Matthew J. Alexander, respectively. Both are associates at Kirkland & Ellis LLP, Washington, DC.

Courts Not Authorized to Amend Plea Agreements

On Jan. 20, 2012, the D.C. Circuit Court of Appeals issued an opinion refusing to amend or modify the plea agreement of Michael Scanlon, an associate of Jack Abramoff who pled guilty in 2005 to conspiracy to bribe federal officials, money-or-property mail and wire fraud, and honest services mail and wire fraud in violation of 18 U.S.C. ' 1346. United States v. Scanlon, –F.3d.–, 2012 WL 164064 *1 (D.C. Cir., Jan. 20, 2012). The court held that the courts are authorized under Rule 11 of the Federal Rules of Criminal Procedure only to accept, reject or defer plea agreements, but not to amend or modify them. Id. at *2.

In 2005, Scanlon pled guilty to charging clients inflated prices for the purpose of generating funds that he then used to bribe public officials, as well as to provide kick-backs to lobbyists who referred clients to his firm. Id. at *1. Along with his plea, Scanlon also agreed to pay restitution to the victims of his crimes, with estimated losses of approximately $20 million. Id. The plea agreement was accepted by the district court, and for five years prior to sentencing, Scanlon cooperated with the government in its investigation of Capitol Hill corruption, pursuant to the agreement.

In 2010, in the wake of Skilling v. United States , 130 S. Ct. 2896 (2010), Scanlon filed a motion in the district court arguing that the plea agreement should be amended because the honest services fraud violation for which he pled guilty could no longer be maintained. The district court denied Scanlon's motion, but noted that his sentence and restitution would be materially affected if Skilling prevented an honest services charge under the circumstances. Scanlon was ultimately sentenced to 20 months' imprisonment and ordered to pay $20 million in restitution.

Scanlon appealed his sentence to the D.C. Circuit, asking the court to reverse his conviction and direct the district court to calculate his sentence without considering the honest services fraud portion of his plea. The circuit court found that it lacked the authority to modify or amend the plea agreement, holding that the role of the courts in reviewing plea agreements is strictly limited under Rule 11 of the Federal Rules of Criminal Procedure to accepting, rejecting or deferring a decision. While the court noted that it could have reviewed a motion to withdraw the plea agreement, it upheld the district court's denial of Scanlon's motion without considering the merits of his argument that Skilling barred honest services charges under the circumstances.

GE Subsidiary Held Liable for Abusive Tax Shelter

On Jan. 24, 2012, in a case that has ping-ponged between the district and appellate courts since 2004, the Second Circuit held that the IRS may impose penalties against a General Electric (GE) subsidiary based on the company's application of an abusive tax shelter. TIFD III-E, Inc. v. United States, –F.3d.–, 2012 WL 18159 * 2 (2d Cir. Jan. 24, 2012). The case involved a 1993 transaction through which the company attempted to form a partnership with two Dutch banks in order to hold a fleet of leased commercial aircraft. Under a complex partnership arrangement, the GE subsidiary would receive the majority of the leasing income while the banks were allocated 98% of the taxable income. The government argued that the banks were not true partners and, therefore, that the company owed more than $62 million in taxes. In 2004, the U.S. District Court for the District of Connecticut rejected this argument, but the Second Circuit reversed the district courts opinion and remanded the case for further consideration. After consideration on remand, the district court again held that the banks could be considered true partners for tax purposes, further holding that, even if the banks were not true partners, the IRS could not impose a penalty because “substantial authority” supported the company's tax treatment of the partnership. Id. The Second Circuit again reversed the district court's decision, holding that debt does not qualify as a partnership interest such that the banks could be considered partners for tax purposes. The court further held that substantial authority did not exist to support the GE subsidiary's tax treatment of the partnership and, therefore, that the substantial understatement penalty could be imposed.

In the Courts and Business Crimes Hotline were written by Associate Editors Jamie Schafer and Matthew J. Alexander, respectively. Both are associates at Kirkland & Ellis LLP, Washington, DC.