Case 1:06-cr-00001-ESH Document 70 Filed 05/27/14 Page 1 of 11 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA UNITED STATES OF AMERICA, 06cr001 (ESH) v. JACK A. ABRAMOFF DEFENDANT S MOTION FOR RETURN OF SEIZED TAX REFUND IN ORDER TO PAY OUTSTANDING STATE TAXES AND ACCOUNTING AND LEGAL FEES I. Introduction 1 On February 7 and 14, 2014, the government, acting without this Court s authorization, in clear violation of this Court s previously imposed restitution order, and contrary to the government s explicit prior representations made to this Court, seized and forfeited two IRS refunds totaling $448,135.02 which were payable to Mr. Abramoff. The government has indicated that it has no intention of returning any portion of these refunds, despite the fact that 1 Government counsel has expressed, at least initially, some reservation regarding whether present counsel s appearance on behalf of Mr. Abramoff in this matter is appropriate, given my prior participation in United States v. David Safavian, 05-cr-00370, while I was employed at the Public Integrity Section of the Department of Justice. See, generally, 5 C.F.R. Sec. 2641.201. Because Mr. Safavian and Mr. Abramoff were never co-defendants (Mr. Safavian was charged with obstruction of justice and false statements) and present counsel never assisted in any fashion in the prosecution of Mr. Abramoff, and because the instant matter solely concerns an issue of restitution that was ordered on September 9, 2008 more than one year after present counsel left DOJ the instant representation is not covered by 5 C.F.R. Sec. 2641.201, as counsel never participated personally and substantially in the prosecution of Mr. Abramoff, much less any issues pertaining to his sentencing or, even more particularly, his restitution payments.
Case 1:06-cr-00001-ESH Document 70 Filed 05/27/14 Page 2 of 11 Mr. Abramoff has fulfilled all of the terms of the Court s Restitution Order and has documented for the government that he currently owes the State of Maryland back income taxes in the amount of $172,000 (for tax years 2001, 2002 and 2012), and $13,670 in State taxes for 2013. As a result of past-due taxes, a tax lien has been filed against Mr. and Mrs. Abramoff by the State of Maryland. In addition, Mr. Abramoff owes a substantial sum to his accountants, who have been unpaid for their work the past five years and who are solely responsible for obtaining the refund that the government has now seized and forfeited. Because the government has refused to negotiate the return of any portion of the seized tax refunds, and because without those funds Mr. Abramoff faces the prospect of losing his ability to drive 2 -- which would greatly impact his ability to earn a living we respectfully request this Court to order the government to return the seized funds so that Mr. Abramoff can pay his outstanding Maryland tax liabilities, his accountants, and counsel. Mr. Abramoff is not seeking the return of any funds for his personal use. He requests only that the funds be first applied to all outstanding taxes due, and, second, that the remaining funds be applied to the outstanding professional fees of his accountants and counsel who have been responsible for getting the IRS to issue the refund in the first place. II. Background On September 4, 2008, this Court sentenced Mr. Abramoff to 48 months incarceration, to be followed by three years of Supervised Release. Docket 48. In addition, the Court ordered 2 On April 19, Mr. Abramoff was advised that the Comptroller of Maryland had notified the Motor Vehicle Administration that because of the outstanding taxes due, Mr. Abramoff would not be permitted to renew his or his wife s drivers licenses or vehicle registrations, effective June 1, 2014. Ex. 1. If not permitted to drive, Mr. Abramoff s ability to work and generate funds with which to pay his Court ordered restitution would be severely impacted, if not curtailed entirely. 2
Case 1:06-cr-00001-ESH Document 70 Filed 05/27/14 Page 3 of 11 restitution of $23,134,695. 3 Docket 48-1. The Order mandated that Mr. Abramoff, upon his release from prison, shall pay restitution at the rate of 10 percent of monthly gross earnings up to $50,000, 20 percent of monthly gross earnings up to $100,000 and 30% of monthly gross earnings over $100,000, until such time as the court may alter the payments in the interest of justice. Id. (emphasis supplied). Since his release from his half-way house in December, 2010, Mr. Abramoff has been faithfully adhering to the order of restitution and has made all required monthly payments. On February 7, 2014, Mr. Abramoff received a notice from the Department of the Treasury that, at the direction of the United States Attorney s Office of the District of Columbia (USAO), it was seizing $62,786.62 4 due to Mr. Abramoff from the Internal Revenue Service as a tax refund. Ex. 2. On February 14, 2014, Mr. Abramoff received a second notice, otherwise identical to the first; this one indicated that the USAO was seizing an additional $385,528.95, which also had been due Mr. Abramoff as a tax refund. Ex. 3. The total amount seized by the government was $448,315.57. 5 Mr. Abramoff currently owes the State of Maryland $186,422.79 for past due income taxes. Specifically, Mr. Abramoff owes $159,710 for tax years 2001 and 2002, which is the result of negotiations that have occurred between Mr. Abramoff s accountants, Mendelson & Mendelson, and the State of Maryland Office of the Comptroller. As a result of these 3 In addition to the restitution in the instant case, Mr. Abramoff was ordered to pay $21,701,015.45 in the Southern District of Florida case. 4 The notices provided indicated that the government was seizing the money in two tranches -- $62,606.25 and $184.37, for a total of $62,786.25. 5 These seized refunds constituted the remaining funds left from a refund of taxes and interest that originally totaled $1,768,195.13. This amount was reduced by the imposition of enormous fraud and interest penalties imposed by the government totaling approximately $1.3 million. 3
Case 1:06-cr-00001-ESH Document 70 Filed 05/27/14 Page 4 of 11 negotiations, the Comptroller agreed to accept $159,710 as a settlement for tax liability for tax years 2001 and 2002. 6 Ex. 4. In addition, the State of Maryland has placed a Lien of Judgment for unpaid income tax for 2012, which will now require a payment of $13,042.79 to be lifted. Ex. 5. In addition, for tax year 2013, Mr. Abramoff currently owes $13,670 in Maryland taxes. Ex. 6. In addition to State taxes due, Mr. Abramoff owes his accountants $241,498.56 for their years of work handling Mr. Abramoff s criminal and civil issues before the IRS. 7 Ex. 7. The accountants have received no payment for their work on behalf of Mr. Abramoff since 2009. 8 The government has refused, despite repeated requests, to return any portion of the forfeited tax return. Hence, the filing of the instant motion. Because the seizure of the IRS tax refunds violates the Restitution Order imposed by this Court and also is contrary to on-the-record representations made by the government during a 2009 hearing about how it would treat any future tax refunds made to Mr. Abramoff, we respectfully request that this Court order the Government to release the seized funds to permit Mr. Abramoff to pay his outstanding Maryland taxes, as well as permit the payment to his 6 The State of Maryland originally contended that the amount owed was $223,650.45. The $159,710 amount represents a negotiated settlement. 7 This work included representation of Mr. Abramoff in connection with tax fraud audits with the Internal Revenue Service, including: the preparation of several personal tax appeals of adverse audit determinations; the filing of a successful Tax Court case to establish Mr. Abramoff s right to the 2004 loss carry back that resulted in the large federal tax refund at issue; negotiating the Maryland tax settlement; and representing Mr. Abramoff in the successful tax appeal of $950,000 in Federal Excise taxes levied against the Abramoffs by the Not-For-Profit Division of the US Treasury. 8 In addition, present counsel s unpaid fees associated with three months worth of calls and emails to the government in an unsuccessful attempt to persuade it to return at least a portion of the seized funds, and filing the instant pleading, have also accumulated, and are now approximately $15,000. 4
Case 1:06-cr-00001-ESH Document 70 Filed 05/27/14 Page 5 of 11 accountant and current counsel. Mr. Abramoff is not requesting he be permitted to keep any portion of refunds for his own or his family s personal use. 9 III. Prior Representations by the Government On May 20, 2009, the government was notified by Mr. Abramoff s then-counsel that Mr. Abramoff, who was still incarcerated, had received an IRS tax refund of $520,189. After receiving this refund, Mrs. Abramoff, on behalf of her husband, made and sought to make a number of critical expenditures, including the payment of back taxes owed to the State of Maryland for 2001 and 2002 10 ; payments to Mr. Abramoff s accountant; the repayment of a loan to Mr. Abramoff s father; legal expenses to several law firms; a tuition payment to his child s school; and payment for the repair of the roof of the Abramoff home. The government moved the Court for an order to freeze any further payments, and sought a formal accounting of all payments that had been already made. Docket 51. After filings by both the government and Mr. Abramoff, the Court held a hearing on August 11, 2009, in order to determine what payments it would authorize to be made from the IRS refund. During that hearing, the Court noted that the payments that had been made already had been properly documented, and that nobody is pocketing money here and doing something they re not supposed to. They did pay a portion of the legal fees, a portion of the accounting fees, and some living expenses. Tr. p. 13 (Ex. 8). The Court, without objection from the 9 Mr. Abramoff has no objection if the disbursements in question are issued directly by the government, rather than by Mr. Abramoff himself. 10 The government s pleading (Docket 51) indicated that it had been informed that Mrs. Abramoff had paid $50,000 in back taxes to the State of Maryland, and $22,000 for property taxes. In fact, the Abramoffs paid $30,000 to the State of Maryland representing a down payment on their overdue state taxes and $20,000 for property taxes. 5
Case 1:06-cr-00001-ESH Document 70 Filed 05/27/14 Page 6 of 11 government, let these payments stand. Tr. p. 20. 11 The Government further proposed that the parties submit a plan, for the Court s approval, regarding the distribution of the remaining funds, recognizing Mr. Abramoff owed both income and property taxes that had to be paid, and that the Abramoff s roof needed to be repaired. 12 Tr. p. 24, 26. The government s suggestion was ultimately implemented and, with the agreement of all parties, the Court authorized that i) $35,000 of the tax refund could be used for the repair of the roof of the Abramoff home; ii) that $35,000 would go to restitution, split evenly between restitution creditors in the Southern District of Florida, and the District of Columbia case; and iii) the remaining funds were to be used by the Abramoff family to cover ordinary living expenses and professional services. Docket 59. The parties also recognized the possibility that there could be future tax refunds, and there was a colloquy between the government and the Court about how the government would handle such an occurrence: 11 THE GOVERNMENT: The simple solution is for the Court today to decide whether those checks that have been prepared but not sent for income tax, property tax and private school tuition can be paid. If your Honor says they should be, then we re THE COURT: You object to those? THE GOVERNMENT: Well you Honor, we could quibble with private school tuition, but the other payments we re not quibbling about. Tr. p. 20. 12 THE GOVERNMENT: We would expect there is some portion of that [remaining $175,000] that should be given to restitution creditors. But we are realistic about the likely the fact that there is income tax owed, property tax owed. And likely there is some problem with the roof. * * * * But our proposal for going forward is number one, with regard to the remaining balance, Mr. Lowell should submit a plan for the Court s approval. And some portion of this money should be attributed to the victims. Tr. p. 24, 26. 6
Case 1:06-cr-00001-ESH Document 70 Filed 05/27/14 Page 7 of 11 THE GOVERNMENT: Going forward from there -- THE COURT: You want notice. THE GOVERNMENT: Yes, because we don t have, even now we have taken steps to place Mr. Abramoff in the program where he would never get control of his tax refund before the government knew about it. Before, he was not in that program for a variety of reasons. One of which is, it is so rare for an incarcerated defendant to actually get a substantial tax refund, that the practice has not been uniform in every District. So going forward now, it is our understanding that steps have been taken in the Southern District of Florida and in the U.S. Attorney[ s] Office in D.C. so that any future federal tax refunds will be held. There will be notice but it will be held. THE COURT: Held by the IRS. THE GOVERNMENT: Yes, pending the Court s authorization about the distribution of the funds. Tr. p. 26-27 (emphasis added). Contrary to the government s representations to this Court at the August 11, 2009 hearing, the IRS did not freeze Mr. Abramoff s refund pending this Court s authorization of permitted expenditures. Rather, the US Attorney s office seized the money directly from the IRS, and applied 100% of it to the outstanding restitution liability. See Ex. 2 & 3 (indicating that the government was collect[ing] the debt [owed] by intercepting any Federal payments made to you ). In addition, rather than holding these funds pending the Court s authorization about the distribution of the funds as it represented at the hearing that it would do, the government has indicated that it intends to keep all of the seized funds, and not permit any of those funds to be applied to the tax obligations or third-party professionals whose work was instrumental in securing the tax refund. 13 13 To be clear, Mr. Abramoff does not object to the fact that the tax refund was not paid to him directly. His objection is to the unilateral forfeiture of 100% of those funds without any authorization by the Court. It would have been perfectly appropriate for the IRS to have frozen the refund checks and then the U.S. Attorney s office, after consultation with counsel, sought 7
Case 1:06-cr-00001-ESH Document 70 Filed 05/27/14 Page 8 of 11 IV. Argument The government should be bound by the outstanding Restitution Order, the Court s prior order regarding the 2009 tax refund, and the representations it made to this Court at the August 11, 2009 hearing. At the August 11, 2009 hearing, the government acknowledged that [i]t is entirely up to the Court to decide which creditors would be paid from the IRS refund, and that the decision was not the government s to make. Tr. p. 9. In proceeding as it has by unilaterally seizing 100% of Mr. Abramoff s tax refund and applying all of it to restitution leaving nothing for payment of the outstanding tax liabilities and other creditors the government is circumventing this Court's Restitution Order of September 9, 2008. Docket 48-1. Any deviation from the existing Restitution Order should only be done with the explicit authorization of this Court. The Court's Restitution Order requires Mr. Abramoff to pay $23,134,695, but the Court, when it imposed that Order, understood that Mr. Abramoff could not pay that amount in full, all at once, and that he would need to earn a living to support his family at the same time he worked to pay his restitution obligations. Accordingly, upon release from prison, the Court ordered Mr. Abramoff to pay a percentage of his income toward restitution that is graduated by how much money he would earn. Docket 43 2. In setting a schedule for payments that balances a defendant's need to both pay restitution and support himself (and his family), the Court did precisely what the law requires. 18 U.S.C. 3664(f) (requiring the Court to set a "schedule" for making restitution payments in consideration of the defendant's assets, income and other authorization from the Court to dispense the funds as it thought appropriate. In other words, the government should simply have done what it told the Court it was planning to do, rather than take unilateral action. 8
Case 1:06-cr-00001-ESH Document 70 Filed 05/27/14 Page 9 of 11 "financial obligations"). At no point did the government ever object to this schedule for making restitution payments upon Mr. Abramoff's release and, even now, the government has not sought the modification of the Restitution Order explicitly. Instead, the government has taken actions that, in effect, constitute an unauthorized, unilateral modification of this Court s Order. 14 The restitution creditors are not Mr. Abramoff s only creditors. Pursuant to governing law, Mr. Abramoff s creditors are entitled to equal weight and none of the creditors is entitled to funds the Abramoffs need to pay ordinary living expenses. See 18 U.S.C. 3613(c) & (d) (restitution orders permit a lien to be filed and, when properly filed, to act as a federal tax lien with respect to other creditors.). Mr. Abramoff understands his restitution obligations and has been dutifully making the restitution payments in accordance with the schedule set by the Court. In any event, as the government itself previously acknowledged at the 2009 hearing, the Restitution Order can only be modified by the Court. Mr. Abramoff reasonably and detrimentally relied upon the government s prior representations at the August 11, 2009 hearing when the government advised the Court that any future tax refund would be held by the IRS and distributed only upon this Court s order. Had the government not made those representations, or had indicated that it intended to seize 100% of all future tax returns, Mr. Abramoff could have objected and sought relief from the Court at that time. 14 If the government could unilaterally seize whatever funds a criminal defendant obtains possession of so long as any restitution debt is still owed, Section 3664(f)'s provision for making a schedule for restitution payments that accounts for a defendant's other "financial obligations" would be meaningless. 9
Case 1:06-cr-00001-ESH Document 70 Filed 05/27/14 Page 10 of 11 Therefore, we respectfully request that the Court order the government to return the seized funds, and authorize the expenditure of the following amounts: $159,710 for Maryland State taxes for tax years 2001 and 2002; $13,042.79 to Maryland for tax year 2012; $13,670 for 2013 Maryland State taxes; $15,000 to present counsel 15 ; $239,994 to Mendelson & Mendelson. The remaining amount should be distributed among the restitution creditors. Although the proposed distribution leaves only a very small remaining portion to restitution creditors, the nature of the tax refund, and the amount paid to Mr. Abramoff s accountants, needs to be considered in context. First, the refund itself can hardly be considered a windfall to Mr. Abramoff, tantamount to lottery or gambling winnings, or an unexpected inheritance. In fact, the refund is the result of the fact that Mr. Abramoff had overpaid his taxes by several million dollars. It took years of work by tax professionals to convince the IRS of this fact, which is what ultimately let the IRS to refund a portion of the money minus enormous penalties owed to Mr. Abramoff. Second, but for the years of work by Mr. Abramoff s accountants all of it unpaid since 2009 Mr. Abramoff would be saddled with crushing tax liabilities that would have effectively prevented Mr. Abramoff from paying anything to his restitution creditors. It is only because of the fact that his accountants were able to persuade the relevant tax authorities that Mr. Abramoff was entitled to a refund rather than owe an enormous tax debt that Mr. Abramoff is in a position to make monthly restitution payments to his victims in the first place which he has done, as required, since his release from prison. Permitting these tax professionals to be paid for 15 Counsel repeatedly pointed out to the government that its refusal to negotiate the disposition of the seized funds, thereby forcing the filing of the instant motion, would cause Mr. Abramoff to unnecessarily incur legal expenses and thereby further reduce the amount of money potentially available to pay to restitution creditors. 10
Case 1:06-cr-00001-ESH Document 70 Filed 05/27/14 Page 11 of 11 their work is therefore entirely appropriate. V. Conclusion Courts have long governed the applicable rules for IRS refunds issued to defendants ordered to pay restitution. The government has previously acknowledged that this Court s authorization is required for distribution of those funds. The government then unilaterally seized and forfeited the funds without seeking the Court s authorization. The government should not be permitted to take unilateral actions in contravention of the Court s order. This Court should find that the government s seizure of Mr. Abramoff s tax refund was invalid and order the government to release funds sufficient to allow Mr. Abramoff to pay his Maryland taxes, as well as his accountants and counsel. 16 Dated: May 27, 2014 Respectfully submitted, /s/ Peter R. Zeidenberg Peter R. Zeidenberg (D.C. Bar No. 440803) ARENT FOX LLP 1717 K Street, NW Washington, DC 20036 202.857.6139 16 Mr. Abramoff would also request that the Court require the government to provide Mr. Abramoff with a full accounting of the restitution made thus far in this case. The Court ordered that restitution in the instant case to be joint and severable with his co-defendants (case no. 05- cr-411 (EHS)). Docket 48-1. Mr. Abramoff has been provided no information as to how much restitution, if any, has been made thus far by his co-defendants and, therefore, how much more money is still owed to the restitution creditors. 11