Duane Crithfield and Stephen Donaldson led the captive insurance promoter Foster & Dunhill, which marketed a Business Protection Plan (BPP) that the government alleges was fraudulent. In the latest twist in the prosecution of the two promoters, a judge in the U.S. district court for the Middle District of Florida has rejected a plea agreement reached by the defendants and the prosecution, even though the Court had previously accepted it, because there was no “meeting of the minds.”1 This unconventional move by the judge is not only surprising, but offers a cautionary tale and some lessons for defense counsel.
In May 2013, Crithfield and Donaldson were indicted for promoting a tax shelter scheme relating to their marketing of a captive insurance arrangement, known as the Business Protection Plan (BPP). Both were charged with conspiracy to evade taxes, and aiding and assisting fraud and false statements pertaining to two particular clients (each client constituted a separate count).
The scheme is laid out in the indictment but is also discussed in substantial detail in the Salty Brine case2 in which Foster & Dunhill clients John Thomas and Lee Kidd challenged the Service’s disallowance of the tax benefits claimed under the arrangement. The arrangement is further described in court filings in lawsuits against Donaldson and Crithfield by disgruntled clients.3 The arrangement involved the following. Clients, through their business entities, set up offshore cash-value life insurance accounts that they owned or controlled (often through various entities and/or trusts). These were known as segregated accounts and were maintained entirely separately from other insurance accounts, for the purpose of receiving the profits from the clients’ investments in BPPs. Clients then paid insurance premiums for Business Protection insurance policies that insured them against what the government alleges were remote and unlikely risks, virtually guaranteeing that no claims would be paid out, in a purported captive insurance arrangement. Clients’ funds, however, were segregated, and risk was not distributed among the various contributors. At the end of the year, the client’s share of the BPP profits (85% of the premiums paid, consisting of profit less a management fee) would be transferred into the client’s own cash-value life insurance account. After transfer of the funds to the cash-value policies, the client business would have access to the funds through tax-free loans from the life insurance policy account. Meanwhile, client businesses deducted the premium payments to BPP as ordinary and necessary business expenses.
In the Salty Brine case, the Court found that the arrangement marketed by Foster & Dunhill did not qualify as a captive insurance arrangement, as it was neither insurance in the traditional sense nor a means of risk distribution or risk shifting; instead, it was merely a conduit used to funnel income from the business to its owners tax free.
The indictment alleged facts relating to Crithfield and Donaldson’s promotion of the BPP plan more generally under its conspiracy count, but also laid out facts specifically pertaining to two different clients in separate charges in the indictment.
On August 11, 2015, Donaldson and Crithfield entered guilty pleas to one count of aiding and assisting fraud and false statements pertaining to one particular client’s tax return and a $60,000 deduction attributable to BPP premiums, which the Court accepted by order on September 2, 2015. The crime to which the defendants pled guilty (26 U.S.C. § 7206(2)) carried a maximum sentence of three years. In exchange, prosecutors dropped a conspiracy to defraud count and a separate count of aiding and assisting fraud and false statements pertaining to a second client. Unlike many plea deals, the parties did not agree to a tax loss computation for purposes of the Sentencing Guidelines, but instead agreed to reserve arguments on the tax loss issue for sentencing.
Donaldson and Crithfield’s sentencing hearings were scheduled for February 23 and 24, 2016. However, in court filings before sentencing, the parties submitted widely variant calculations of the tax loss attributable to the offense, specifically including contrasting interpretations of what, if any, “relevant conduct” should be considered under the Sentencing Guidelines. Two months after the acceptance of the pleas, defense counsel submitted a memorandum regarding their relevant conduct analysis. Defense counsel argued that the tax loss should be limited to the tax loss stemming from the conduct pertaining to the single client and single charge to which the defendants had pled (i.e. the $60,000 deduction, with a resulting tax loss of just $4,500, up to a maximum of $16,000).4 Prosecutors, on the other hand, argued in their Sentencing Memorandum that the total tax losses “attributable to the offense” were between $8 million and $13.8 million once all relevant conduct pertaining to the BPP scheme was considered (including the facts alleged in the conspiracy count to which defendants did not plead guilty).5 The United States’ tax loss computation would have supported the maximum statutory sentence available.
In response to the United States’ tax loss calculations, the defendants moved to enforce the plea agreement, arguing that they had only pled to a singular and distinct instance of selling an insurance policy to a taxpayer who, the defendants knew, lied on one insurance policy application about not participating in an excluded and dangerous activity (motorcycle racing), which meant the business deduction for that particular insurance premium (1 of the 4 insurance policies the taxpayer had purchased) was not an ordinary and necessary expense.6 As a result, according to defendants, the conduct relevant for the tax loss only included the tax loss stemming from that particular improper deduction for just a single policy, and at most, for the four policies relating to that single client.
The United States responded in turn that while the defendants did plead guilty to a discrete instance of selling the BPP to that particular client, that offense was emblematic of and implicated the entire scope of the BPP as to all clients, so all of those instances should be considered as relevant conduct in calculating the tax loss for sentencing purposes.7 The United States indicated it planned to prove, at a two-to three-week hearing, that the defendants’ conduct with all of its BPP customers should be considered and that its tax loss computation was proper.
The Court held a hearing on the defendants’ motion to enforce the plea agreement and the loss calculation issue on February 16, 2016. Following the hearing, the Court concluded that, “despite the execution of a plea agreement, the parties have not agreed, that is, have no ‘meeting of the minds,’ on matters essential to the plea agreement.”8 As a result, the Court vacated its prior orders accepting the plea agreement and instead rejected the plea agreement, ruling that the case was to proceed to trial. A bench trial has now been set for June 6, 2016.
While the judge’s rejection of the plea agreement is unusual, this case presents a cautionary tale and offers some lessons for defense counsel. First, while potential disagreements over the scope of relevant conduct and the appropriate tax loss figures are bound to happen, it may be advisable to attempt to secure an upfront agreement on the tax loss issues in the plea itself. As a general matter, courts are fairly liberal in permitting the government to include the tax loss from similarly situated customers in prosecutions of tax shelter promoters, so it is unclear how much is gained as a tactical matter in reserving disputes over the tax loss for sentencing. The judge’s decision to reject the plea may have been driven in part by the fact that the court was essentially going to have a mini-trial (if a two week hearing can be called a mini-trial) on the tax loss issue, which not only undermines the efficiency of the plea process, but also perhaps suggested little or no agreement had been reached between the parties.
Furthermore, it is possible that defendants may now be in a worse position, not only because they have no plea agreement in hand that limits their exposure to three years and may instead be found guilty of all the charges and thus increase their exposure to 11 years (not to mention the legal fees that will be required to try the case), but also because this tactic likely frustrated both the prosecution and the court. In attempting to parse out as entirely singular the conduct in the one count to which the defendants pled for purposes of the tax loss calculations, perhaps being a little too clever for the judge’s taste, defense counsel now must try the case before the court where credibility may have been lost. Further, this conduct probably incensed and alienated the prosecutors (now forced to prepare again for trial) against whom they must try the case or potentially secure another plea.
Had the tactic succeeded, it would have been an astonishing victory for the defendants. However, its failure did not simply result in a return to status quo ante (where the defendants retained the protection of a three-year maximum sentence in the plea agreement), but rather generated some real consequences, and offers a warning in a world where it has otherwise been rare for judges to reject a plea agreement. ■
1 United States v. Crithfield, et al. No. 8:13-cr-00237 (M.D. Fla.).
3 See, e.g., Vento v. Crithfield, et al., No. 09-174 (D. U.S.V.I. filed Dec. 4, 2009); Wendt v. Handler, Thayer & Duggan, LLC, et al., No. 08-3612 (E.D. Ill. filed June 24, 2008).
4 Memorandum in support re Plea Agreement—Regarding Defendant’s Relevant Conduct Analysis, United States v. Crithfield, et al. No. 8:13-cr-00237 (M.D. Fla. filed Nov. 13, 2015) PACER # 252.
5 The prosecution cited USSG § 2T1.1, comment (n.2) and USSG § 2T1.4 comment (n.1). See Sentencing Memorandum, United States v. Crithfield, et al. No. 8:13-cr-00237 (M.D. Fla. filed Nov. 27, 2015) (PACER # 259).
6 Motion for Miscellaneous Relief, specifically to Enforce Plea Agreement and Memorandum of Law, United States v. Crithfield, et al. No. 8:13-cr-00237 (M.D. Fla. filed Jan. 28, 2016) (PACER # 264).; Amended Motion for Miscellaneous Relief, specifically to Enforce Plea Agreement and Memorandum of Law, United States v. Crithfield, et al. No. 8:13-cr-00237 (M.D. Fla. filed Jan. 30, 2016) (PACER # 265).
7 Response in Opposition, United States v. Crithfield, et al. No. 8:13-cr-00237 (M.D. Fla. filed Feb. 15, 2016) (PACER # 273).
8 Order as to Duane Crithfield and Stephen Donaldson, Sr.: withdrawing acceptance of plea agreements and rejecting plea agreements at 3, United States v. Crithfield, et al. No. 8:13-cr-00237 (M.D. Fla. ordered Feb. 16, 2016) (PACER # 275).