A Taxing Explanation, Con't

Here's an interesting scenario from Just Security's Martin Sheil: the court fight over Trump's tax returns between Manhattan DA Cyrus Vance and the Trump regime isn't over the returns themselves, but the fact that what Vance subpoenaed was the copy of Trump's returns filed by accounting firm Mazars USA. 

The goal here isn't what's in the federal returns, but what's not in them, mainly any defense that Trump could use to blame Mazars themselves for his tax issues. Sheil proposes that the state tax returns are a huge, huge clue that there's fraud, and that the Mazars copy is needed to prove the accountant didn't do it...and that Trump did.

This term, the Supreme Court declined President Donald Trump’s attempts to shield personal financial records from congressional and judicial subpoena. The ruling’s impacts on executive powers and attorney-client privilege have been widely reported, and litigation over access to the documents will likely soon reach critical mass.

But Cy Vance Jr., the Manhattan District Attorney (DA), may have already obtained the pertinent New York state tax returns for the Trump Organization and its executives, including Trump and his family.

Should this be the case, then why the fuss over the Mazars USA subpoena that has already been appealed and opined upon by the Supreme Court and sent back to the federal District Court in Manhattan for further argument and appeal? What other surprises can the public expect?

It is a routine internal procedure for agents of the New York state tax authority assigned to criminal tax investigations authorized by the New York Attorney General’s (AG) office (of which the Manhattan DA is a part) to obtain business and personal state tax returns that are material to their inquiry. It is likely that the experienced criminal tax investigator on the DA’s team has followed this routine protocol, and obtained the state tax returns early in their investigation.

But the tax returns alone would not be sufficient to establish criminal tax fraud. Criminal tax investigators for New York traditionally include retired Internal Revenue Service (IRS) criminal investigators working towards a second pension. These experienced forensic accountants would be most concerned with the classic tax fraud defense historically posed by the accused, wherein the taxpayer attempts to shift responsibility for the alleged fraud to the accountants who prepared the tax returns in question. Tax crooks have long raised their hands in innocence and then pointed their fingers at the hired hands claiming, “it was all their idea” with regard to any alleged tax fraud.
A viable tax fraud indictment cannot proceed until this defense is cut off. This may explain the intense legal struggle over the Mazars USA subpoena. The Mazars USA files will include much more than completed tax returns. Draft tax returns, financial statements, correspondence, emails, texts, and notes to the file containing direction from the taxpayer client to the preparer will likely be found in the Mazars USA files accompanied by the accountant’s work papers and notes to the file.

This type of evidence will not only cut off a potent defense of the taxpayer but it will also likely provide the investigators with a trove of evidence of intent or mens rea, demonstrating to a potential jury that the fraud committed was, in fact, intentional and not some type of accident, negligence, or innocent mistake. Paul Manafort’s accountant testimony at trial was so devastating that his attorney famously cried out in open court “only a fool would provide their accountant this type of information.” It is precisely this type of information that Vance is seeking from the Mazars USA subpoena.

If the investigative team has pursued normal protocols, then we can make the rebuttable presumption that the Manhattan DA has already outlined a potential tax fraud indictment based on tax returns already in their possession and evidence previously obtained.

And the key to all this is Michael Cohen.

The DA’s team likely has all the grand jury information (documents and testimony) generated by the Southern District of New York (SDNY) investigation of Michael Cohen. All that would be needed to obtain the above SDNY grand jury evidence would be for an individual from the office of the Manhattan DA or New York AG to be placed on what is known as the 6(e) list which is a record of individuals authorized for disclosure of grand jury information. The prosecutor maintains this listing and adds individuals who are needed as the inquiry progresses.

Indeed, information sharing between federal and state prosecutors has already been established in related cases. Early in his investigation, Robert Mueller traveled to New York to meet with state prosecutors and to establish cooperation between the offices (likely including adding state prosecutors to the 6(e) list) – thus ensuring that state inquiries could continue even if the New York-based targets of Mueller’s investigations were federally pardoned or if Mueller were fired. Cohen was part of the Mueller investigation and it is likely that the 6(e) list for his grand jury included authorized officials from the New York AG’s offices.

Additionally, and notably, Deutsche Bank has cooperated with Vance’s subpoena for critical bank documents which can be used by the Manhattan DA to further corroborate tax fraud allegations. The DA may also look to use the records to pursue bank fraud violations that were referenced in Cohen’s congressional testimony; Cohen stated that the Trump Organization had submitted falsified financial statements to banks when applying for loans. The material gathered from a successful Mazars USA subpoena may also be used to corroborate these potential bank fraud charges as Mazars USA reportedly refused to certify the financial statements provided by the Trump Organization that were then submitted to the bank. Instead, Mazars USA included an unusual disclaimer with the financials: “Users of this financial statement should recognize that they might reach different conclusions about the financial condition of Donald J. Trump.”

Clearly, the Vance team will want to drill down on just why Mazars USA would include such a disclaimer with any financial statement that the company prepared for the Trumps.

Which may mean that the bulk of what Cyrus Vance's office already needs to make the case on Trump came from the Cohen investigation, shared by Mueller.

Vance likely possesses substantial evidence and investigative leads gathered in the Mueller and SDNY inquiry into Cohen. This would no doubt include information as to who directed Cohen to submit false invoices to the Trump Organization; these false invoices led to Cohen receiving checks totaling $420,000 to reimburse him for his hush-money payments to Stormy Daniels et al, a total which was “’grossed up’ for tax purposes,” according to SDNY.

The inclusion of taxes in the reimbursement payments by the Trump Organization indicates that these payments were treated as a business expense on the Trump business records, which would then flow through to the tax returns unless flagged by some executive prior to submission to the relevant tax authorities. If the deduction were not corrected then, flagrantly false tax returns would have been prepared, subscribed to, and submitted, based on the prior falsification of the business deduction for legal expenses.

Thus, the alleged tax fraud was committed in association with the cooking of the books of the Trump Organization stemming from the posting of the false invoices. This fraud elevates the state misdemeanor of falsification of business books and records to felony status since it is in coordination with the commission of another felony – tax fraud. Mail fraud and/or wire fraud charges could also be contemplated since the false invoices were either mailed or wired as were the reimbursement payments.
Trump signed one reimbursement check while in the White House. He further misrepresented these payments as ‘personal’ on his 2018 financial disclosure form in an attempt to characterize these payments as both business expenses (in the tax returns) and as personal expenses (in his financial disclosure form). This misrepresentation adds to the evidence of deliberate intent to defraud in any prospective Vance prosecution.

Vance has also referenced ‘patterns’ of illegal conduct when justifying the Mazars USA subpoena which requested Trump-related tax returns going back eight years. Patterns of financial impropriety have long been held to be evidence of ‘intent’ on the part of the defendant. Pro Publica published an analysis pointing out tax and loan discrepancies on the part of the Trump Organization relative to the 40 Wall St. building going back to 2012 and 2013. Cohen’s congressional testimony suggested that the falsification of business expense invoices was not an isolated case but part of a pattern on the part of Trump and his business to alter his business records at will.

Cooking the books to hide Trump's payoffs to Stormy Daniels is felony fraud at the state level, not just the federal one.  If Cyrus Vance gets his hands on the Mazars USA copy of Trump's tax returns, and Mazars is able to provide the documentation that they followed the law in preparing the returns and that the Manhattan DA's office can crunch the numbers Trump gave them, finding they were fraudulent, it's prison time for the Tangerine Tyrant.

Without the Mazars returns specifically, Trump's defense is that "the accountants ripped me off".

That's why this fight has literally gone to the Supreme Court.

This makes an amazing amount of sense to me.