In In re Vaughn, ___ F.3d ___, 2014 U.S. App. LEXIS 16417 (10th Cir. 2014), here, the Court denied Vaughn a discharge for his tax debt arising from the bullshit tax shelter (the BLIPS variety). In so doing, the court affirmed the bankruptcy court and the district court below.
It appears that, in denying the discharge, the courts relied principally upon the second basis for denial of discharge -- "willfully attempted in any manner to evade or defeat such tax." The 10th Circuit found that Vaughn participated in a shaky shelter and then voluntarily depleted his assets during the long period of time before the Government finally assessed the tax liability. (Readers will recall that substantial periods of time can elapse from the time an unreported tax liability arises and when it finally is assessed.) The taxpayer claimed that his conduct was negligent at best, but not willful as required by the text of the statute, because it was before the IRS assessed the tax. The 10th Circuit rejected the argument, holding as it had previously held that assessment of the tax is not required for the denial of discharge to apply.
Although the 10th Circuit apparently did not rely upon the first basis -- the taxpayer made a fraudulent return -- it appears from the history of BLIPS that the return was fraudulent because the BLIPS shelter was fraudulent. I have noted that in another context -- Section 6501(c)(1), here, which has an unlimited statute of limitations "In the case of a false or fraudulent return with the intent to evade tax." See for the most recent discussion, BASR Briefs On Issue of Unlimited Statute of Limitations for NonTaxpayer Fraud (Federal Tax Crimes Blog 8/27/14), here. There is no textual requirement in Section 6501(c)(1) that the taxpayer make the fraudulent return; the text only requires that the return be fraudulent. Taxpayers, of course, argue that, despite the lack of a textual requirement that the taxpayer be complicit on the fraud on the return, the text properly interpreted has an implicit requirement that the taxpayer have known the return was fraudulent and thus made a fraudulent return. The few courts that have addressed the issue are split, with, as of now, the weight of authority that the taxpayer's fraud is not required.
In any event, the bankruptcy provision does seem textually to require the taxpayer's fraud. Promoter or preparer fraud without the taxpayer's fraud is not sufficient to deny discharge. So, that is not an issue. And, as noted, the 10th Circuit seemed to have relied upon the taxpayer's fraud. Nevertheless, the 10th Circuit did seem to at least advert to the issue of some culpability on Vaughn's part in filing the return claiming the fraudulent benefits of BLIPS (emphasis supplied):
Second, Appellant argues his "reliance on the advice of KPMG, his longtime tax advisor, that the BLIPS transaction was an aggressive but ultimately legitimate tax position might have been at worst unreasonable under the circumstances, making [Appellant] negligent," but not willful. (Appellant's Opening Br. at 23.) Appellant contends that because he innocently, even if unreasonably, relied on KPMG's advice, he cannot be found to have acted willfully. We find this argument unpersuasive under all of the circumstances in this case, particularly in light of the bankruptcy court's finding that Appellant's assertion of innocent reliance was "simply not credible." In re Vaughn, 463 B.R. at 548.