I will provide a summary below, but note first that the holding is interesting because rarely did the Government put in play the issue of taxpayer fraud with respect to the reporting of the BLIPS and similar Helmer inspired shelters, all of which, the Government claimed, were hokey ("too good to be true") and all of which ultimately failed when tested. Many of the shelters involved in the current Supreme Court brouhaha over the 6 year statute of limitations were basis boost shelters such as these shelters that positioned the taxpayers to argue that income was not omitted so as to trigger the 6 year statute. But, if fraud were involved with respect to the reporting, then there is no statute of limitations. Interestingly, the fraud does not even have to be the taxpayer's fraud to trigger the unlimited statute of limitations; it can be the preparer's fraud (Allen v. Commissioner, 128 T.C. 37 (2007)) or, presumably someone else such as a promoter. But, certainly the taxpayer's fraud -- the type of fraud involved alleged and found in In re Vaughn -- suffices to trigger the unlimited statute of limitations. And, of course, fraud gives rise to a 75% civil fraud penalty. And, of course, as in In re Vaughn, fraud can preclude bankruptcy discharge for a tax liability. (Although interestingly, the civil fraud penalty can be discharged in bankruptcy.) So with all of these incentives to the Government to assert fraud against the taxpayer, why don't we see the issue arise more often. I don't know the answer to that question, but the dearth of cases is noteworthy.
Now, let's look more closely at the In re Vaughn case. The court signals the result at the beginning with the following:
This matter involves the rise and fall of James Vaughn, an obviously intelligent man who made an extremely unintelligent decision. Through hard work and entrepreneurial talent, he gained experience in the options trading, venture capital, and cable television industries, rising to executive positions in several companies. In 1995, he started a successful cable company and began acquiring small cable companies with an eye to selling to a larger entity. The venture was sold in 1999 for a gross sales price of $2.1 billion, of which Mr. Vaughn received approximately $34 million in cash and stock. Sadly, this inspiring business success story then took a very negative turn when Mr. Vaughn made the investment which forms the subject of this action.I need not get into the details. The critical features fit the pattern of all of the BLIPS type shelters of which I am aware. The taxpayer had a lot of gain he wanted to shelter and was willing to pay the promoters (KPMG, RJ Ruble of Brown & Wood, Robert Pfaff and David Makov of Presidio, all of whom played prominently in the KPMG individual defendant criminal prosecution) handsomely. For a fee inflated because of the taxes that were thus avoided, the promoters oversaw the "investment" -- if that is the right word -- strategy and produced an opinion letter upon which the taxpayer purported to "rely" in claiming the magical tax benefits that were not legal. Of course, the taxpayer viewed it as a risk free shot at the audit lottery -- i.e., for an acceptable, even if exorbitant, cost (the fees), the taxpayer perceived (and was promoted) a risk of only being audited and, if audited (a big if in perception if not reality), having to pay the tax and interest, because the opinion upon which he purportedly could rely would shield him from more dire consequences -- civil or criminal -- for his tax misbehavior.
The Court found that the taxpayer knew or should have known that the returns were fraudulent. (I am not clear about the should" have known business" as proof of fraud which seems to be the civil equivalent of the broader contours of conscious avoidance in a criminal context.) The Court also found that he willfully attempted to evade because of his lavish expenditures after unquestionably knowing of the tax liability and before declaring bankruptcy. Since the Section 523(a)(1)(C) test is in the disjunctive, either of those findings would preclude discharge.
The Court concluded it detailed discussion of the facts and law with the following:
Throughout this case, Vaughn has argued he is an innocent victim of the machinations and misrepresentations of KPMG and persons in the employ of or hired by KPMG. This Court does not disagree that such machinations and misrepresentations took place. However, a taxpayer cannot reasonably rely on the advice of a professional who has an inherent conflict of interest, such as the promoter or marketer of a tax investment. KPMG, its employees, and even the law firm employed by KPMG to issue “opinion letters” had such a conflict, because KPMG was the marketer of the BLIPS investment. It is simply not credible that an individual of Vaughn’s extensive business background and demonstrated business skill would have reasonably relied on any such representations, and would not have, if he were seriously considering BLIPS as a legitimate investment, obtained a truly independent opinion as to its potential and its tax implications.
For these reasons,
IT IS ORDERED Vaughn’s tax debts arising from the sale of Frontier Vision are not dischargeableJAT FURTHER COMMENT (1/10/9 @ APP. 9:30PM):
1. Anonymous on January 10, 2012 6:24 PM opened with an excellent comment. I strongly urge readers of this blog to read that comment and hopefully the further comments.. Anonymous has indicated that he / she may make further comments, and I strongly encourage him / her to do so. I urge interested readers to join in the discussion.
2. Anonymous in that opening comment refers to the Hawkins case (Hawkins v. Franchise Board (Bankr Ct. ND CA No. 07-3139 4/23/10)), here. I blogged that case here for further background. As Anonymous notes in his comment, the Hawkins court declined to find that the tax shelter claims on the return were fraudulent, for it moved to the evasion prong and found evasion present. I should note that the shelters involved in Hawkins were FLIP and OPIS, KPMG marketed shelters that preceded BLIPS. As in In re Vaughn, the taxpayer in Hawkins urged that the opinion letters created enough fog to eliminate the taxpayers' fraud.
3. I will make further comments in the comments section since that will permit the discussion to proceed in an orderly fashion.