Tuesday, January 26, 2010

The KPMG Enabler Convictions -- The Role of the Absent Taxpayers (1/26/10)

In the Larson/Pfaff/Ruble case, currently on appeal to the 2d Circuit, the trial Judge instructed the jury:
In order to establish that a transaction lacks economic substance, the government must prove beyond a reasonable doubt both of two factors. The first factor is that the relevant taxpayer had no business purpose for engaging in the transaction apart from creating the tax deduction. The second factor is that there was no reasonable possibility that the transaction would result in a profit.
(See here for the complete instruction.)

I want to focus again on the first element -- the proof beyond a reasonable doubt that the relevant taxpayer had no business purpose for engaging in the transaction apart from creating the tax deduction. (I refer in this blog to this purpose as just business purpose without repeating the formulaic words "apart from the tax deduction.") That instruction, in effect, tells the jury that the jury can convict the indicted enabler defendants of tax evasion if -- and only if -- the jury finds that the unindicted taxpayers were also guilty of tax evasion.

To some, that statement may not seem inevitable. Why can the enabler defendants in the case be convicted only if the unindicted taxpayers were guilty of tax evasion? Well, first off, no one could be convicted of tax evasion unless there is a tax due and owing. I have addressed concerns about tax due and owing in the case before, but I accept that, for purposes of this blog, the Government proved tax due and owing so as to be able to convict the indicted enablers for tax evasion. I now focus on the economic substance charge given above -- that the Government prove beyond a reasonable doubt that the taxpayers involved had no business purpose. Each of those taxpayers represented that they had such a business purpose. So, if the jury could make the finding that each of the taxpayers did not in fact have such a business purpose, they necessarily had to find beyond a reasonable doubt that they had committed tax evasion. They may not have brought back a guilty verdict against those taxpayers (who were not and never have been charged) but that is the inevitable conclusion of the jury's verdict under the instructions given by Judge Kaplan.

The question I now ask is whether the Government really proved a tax evasion case against each of those taxpayers as a necessary, but unstated, requirement to make the finding of guilt of tax evasion against the indicted enablers. I have previously suggested that, at least for some of the counts of conviction for evasion, the Government showed precious little about the subjective intent of the taxpayers and, in fact, only showed that, perhaps, a reasonable taxpayer could have had the intent.

One can fight over the fair inferences from the proof at that particular trial, but I ask you to assume with me now that the gravamen of the proof was as follows: (i) the underlying investment play wrapped into the BLIPS program was such that there was no objectively reasonable possibility of profit (let's not fight either about what reasonable is, or is is for that matter), so that it is fair to infer that a reasonable business-purpose motivated taxpayer would not enter the deal; (ii) Taxpayer B entered into the deal; (iii) Taxpayer B had a lot of income that was sheltered by the deal; (iv) Taxpayer B was a very successful businessman, at least in terms of his ability to earn lots of income as reflected on his returns; and (v) Taxpayer B represented in the deal documents that he did have a subjective business purpose apart from the tax benefit.

I think the question no those bare assumptions is whether there is a criminal jury issue on Taxpayer B's subjective business purpose. Stated otherwise, the question is whether there is sufficient evidence that a reasonable jury could find beyond a reasonable doubt that Taxpayer B did not have the subjective business purpose he represented he had in the deal documents. I think on the bare facts I have posited, the evidence would not be sufficient.

This point can best be made by adding an additional assumed fact -- that it is Taxpayer B who is charged with evasion.  I suggest that tax evasion trials require a whole lot more essential background and proof bearing upon the taxpayer's subjective intent before the jury is permitted to determine whether a taxpayer is guilty of tax evasion. Ultimately, the Government will have to prove that the taxpayer knowingly lied in making the business purpose representation, from which the jury could infer that he intentionally violated a known legal duty. And in order to do that the Government would have to make an individualized showing about the particular taxpayer involved, his education, his business savvy, his advisors on the deal, and other facts from which, in the context of a complete picture about that taxpayer, the jury could infer the lie and the corresponding intent to violate a known legal duty. If all the jury had was the spare facts I have assumed, I doubt that the case would survive a motion for acquittal.

Moreover, there is at least a risk of great unfairness to making an unindicted taxpayer's subjective motives essential to a conviction of other parties.  The indicted parties have little ability to mount an effective defense -- particularly as to charges of tax evasion which required a host of detailed knowledge and proof about a particular taxpayer's motivations.  The Government can get its view of the proof by hauling those unindicted taxpayers into proffer sessions and grand juries and otherwise browbeating them into submission with threat of prosecutions and even inducement -- ultimately promises or, wink-wink, suggestions of nonprosecution -- to admit their culpability and convict others based on the taxpayers' alleged subjective beliefs which might be very malleable with the right inducements / or threats.  The indicted parties, however, can provide no such inducements for the taxpayers' cooperation nor even effectively pursue any discovery from them to make a defense to the essential claim that the taxpayers, by lieing about their business purpose, committed tax evasion.
What do the readers of this blog think about these concerns?

1 comment:

  1. I think you are perfectly correct especially when Taxpayer "B" are head of banks and finance government officials. To claim that did not understand the deal, assumed there is a business purpose to it and then be "surprised" that there isn't although they gained millions in tax saving, is ridiculous.


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