In the Courts

In 2008, the DOJ initiated a program to “aggressively combat offshore tax evasion,” and spearheaded its initiative with investigations of UBS. Id . In exchange for signing a deferred prosecution agreement, UBS turned over information related to its U.S. clients. Id. Moreover, in March 2009, the IRS established a voluntary disclosure program (OVDP) for taxpayers with offshore accounts who had not paid taxes on those assets. Cooperation with the IRS allowed the taxpayer to avoid criminal charges by paying back taxes, interest, and penalties. Warner, having heard of the UBS investigation, attempted to take advantage of the OVDP program, but his disclosure came too late, as the government had already commenced a criminal investigation against him. Id. Four years later, Warner was charged with one-count of willful tax evasion. Id. at *3. Warner pleaded guilty and, as part of his plea agreement, admitted similar wrongdoing between 1996 and 2007, which both parties agreed would be considered at sentencing. Id. Warner further agreed to pay a civil FBAR penalty totaling $53.6 million. Id.

“Beyond stipulating to the guidelines calculation, the plea agreement left each side free to argue for whatever sentence it deemed appropriate.” I . The government requested incarceration of one year and one day and Warner advocated for probation and community service. See id . Ultimately, the district court imposed a below-guidelines sentence of two years probation and community service due to “the nature and circumstances of the offense and the history and characteristics of the defendant.” Id. at *4. The government appealed, citing the unreasonableness of Warner's sentence. Id. at *6.

On appeal, the Seventh Circuit stated that “no statute expressly required the district court to send Warner to prison,” as the guidelines are “merely advisory” in nature. The Seventh Circuit's analysis centered on whether Warner's sentence was “substantively reasonable.”

First, the court considered Warner's past and characteristics, which were significantly bolstered by a multitude of letters written to the district court about Warner's philanthropy and lack of criminal history. Id. at *9. The district court emphasized that it had never encountered “a defendant in any case ' white collar or otherwise ' [that] demonstrate[d] the level of humanity and concern for the welfare of others.” Id. at *5. According to the Seventh Circuit, “[t]his was the primary mitigating factor that drove the district court toward a lenient sentence.” Id. at *9. Second, the court addressed the government's argument that Warner's sentence reflected “mere lip service” to “promot[ing] respect for the law.” Id. at *10. The court, however, suggested that probation was a severe enough restriction on freedom and mobility and not a punishment that should be discounted. Id. at *11. Third, the court affirmed the importance of enforcing a punishment that deters future criminal conduct. Id. at *12. This factor, the court recognized, was especially important with respect to white-collar criminals. Id. Given the sizeable civil fine he already paid (nearly 10 times the tax loss the government incurred), the court found the economic punishment adequately satisfied the deterrence objective. Id. at *13.

In the Courts and Business Crimes Hotline were written by Colleen Snow, an associate at Mayer Brown LLP, Houston.

Seventh Circuit: Below Guidelines Tax Evasion Sentence for Beanie Babies Founder Upheld

On July 10, 2015, the U.S. Court of Appeals for the Seventh Circuit upheld the district court's sentence of probation and a civil fine ' with no jail time ' for willful tax evasion, despite the recommendation of imprisonment pursuant to the Sentencing Guidelines. U.S. v. Warner' 2015 WL 4153651 (7th Cir. July 10, 2015). In light of what the district court called a “unique” set of circumstances, billionaire H. Ty Warner (the creator of Beanie Babies) walked out of the courtroom a free man, even after costing the government over $5 million in tax revenue.

In 1996, Warner traveled to Switzerland, where he opened an offshore bank account at UBS AG (UBS). Id' at *1. After UBS entered into an agreement with the IRS in 2001, imposing strict tax reporting obligations, Warner took his business to another Swiss bank, Zuercher Kantonalbank (ZBK). Id. at *2.

In 2008, the DOJ initiated a program to “aggressively combat offshore tax evasion,” and spearheaded its initiative with investigations of UBS. Id . In exchange for signing a deferred prosecution agreement, UBS turned over information related to its U.S. clients. Id. Moreover, in March 2009, the IRS established a voluntary disclosure program (OVDP) for taxpayers with offshore accounts who had not paid taxes on those assets. Cooperation with the IRS allowed the taxpayer to avoid criminal charges by paying back taxes, interest, and penalties. Warner, having heard of the UBS investigation, attempted to take advantage of the OVDP program, but his disclosure came too late, as the government had already commenced a criminal investigation against him. Id. Four years later, Warner was charged with one-count of willful tax evasion. Id. at *3. Warner pleaded guilty and, as part of his plea agreement, admitted similar wrongdoing between 1996 and 2007, which both parties agreed would be considered at sentencing. Id. Warner further agreed to pay a civil FBAR penalty totaling $53.6 million. Id.

“Beyond stipulating to the guidelines calculation, the plea agreement left each side free to argue for whatever sentence it deemed appropriate.” I . The government requested incarceration of one year and one day and Warner advocated for probation and community service. See id . Ultimately, the district court imposed a below-guidelines sentence of two years probation and community service due to “the nature and circumstances of the offense and the history and characteristics of the defendant.” Id. at *4. The government appealed, citing the unreasonableness of Warner's sentence. Id. at *6.

On appeal, the Seventh Circuit stated that “no statute expressly required the district court to send Warner to prison,” as the guidelines are “merely advisory” in nature. The Seventh Circuit's analysis centered on whether Warner's sentence was “substantively reasonable.”

First, the court considered Warner's past and characteristics, which were significantly bolstered by a multitude of letters written to the district court about Warner's philanthropy and lack of criminal history. Id. at *9. The district court emphasized that it had never encountered “a defendant in any case ' white collar or otherwise ' [that] demonstrate[d] the level of humanity and concern for the welfare of others.” Id. at *5. According to the Seventh Circuit, “[t]his was the primary mitigating factor that drove the district court toward a lenient sentence.” Id. at *9. Second, the court addressed the government's argument that Warner's sentence reflected “mere lip service” to “promot[ing] respect for the law.” Id. at *10. The court, however, suggested that probation was a severe enough restriction on freedom and mobility and not a punishment that should be discounted. Id. at *11. Third, the court affirmed the importance of enforcing a punishment that deters future criminal conduct. Id. at *12. This factor, the court recognized, was especially important with respect to white-collar criminals. Id. Given the sizeable civil fine he already paid (nearly 10 times the tax loss the government incurred), the court found the economic punishment adequately satisfied the deterrence objective. Id. at *13.

In the Courts and Business Crimes Hotline were written by Colleen Snow, an associate at Mayer Brown LLP, Houston.