Mr. Cummings, a frequent commentator on the tax law and its ripples (including criminal tax law), advises right up front that his principal points are:
This article makes the following principal points:
• The tax bar should have been somewhat more concerned about the way the Department of Justice Tax Division has prosecuted selected major law and accounting firm tax professionals who participated in the planning of, opinions on, or audit defense of some structured transactions during the most recent tax shelter boom that ended in the early 21st century.
• The type of arguments that the DOJ pursued against defendants like those in the Coplan case, recently affirmed in part and reversed in part by the Second Circuit, n1 might produce numerous convicted felons if applied to activities in which many readers have participated in.
n1 United States v. Coplan, No. 10-583 (2d Cir. 2012), Doc 2012-24490, 2012 TNT 231-17 . [JAT Note: the citation for Coplan is 703 F.3d 46 (2d Cir. 20122) and the opinion is here.]
• The most troubling aspect of the Coplan and other prosecutions is that they follow a trend to criminalize advising, and even defending, a transaction that the DOJ believes does not produce the desired tax results under the (civil) economic substance doctrine.Mr. Cummings uses the Coplan case as a point of departure. (For my prior blogs on Coplan, see Major CA2 Decision on E&Y Tax Shelter Convictions (11/29/12), here, with links to the 8 other blogs on aspects of the Second Circuit's decision in Coplan.) He laments that the tax bar has just rolled over to prosecutions and convictions in tax shelter cases as a way to do damage control for their franchise in the aggressive tax planning area. (Let a few be prosecuted so that the others can continue to play with relatively minor risk because only a few can be prosecuted). He says (footnote omitted):
By distancing ourselves from the felons, we are proving the wisdom of the DOJ's long-held game plan for criminal tax: prosecute and jail just enough (with substantial publicity) to sufficiently scare the rest into being generally law-abiding. Whether this is a proper, fair, or even effective way to apply the criminal tax laws is a question that someone really should address, but it is for another day. Yet when that game plan is applied to complex legal tax opinions, it becomes relevant to all of us who write complex legal tax opinions.He then says, well, the flat out, bald faced lie to the IRS agent is not acceptable. But, how about the more subtle lie that he seems to defend. He cites Compaq Computer Corp. v. Commissioner, 277 F.3d 778 (5th Cir. 2001), which, to be sure, was an egregious case. In my view, Compaq (at least the Fifth Circuit iteration) is the poster child of a court playing slavish homage to tax tricksters' careful structuring to create magical, too good to be true, tax results. What exactly was the business purpose of that transaction? (OK, the Supreme Court's decision in Frank Lyon is really the poster child, but Compaq comes right behind as the Circuit Court poster child.)
I do agree with Mr. Cummings that "There is no clear dividing line between cases like Compaq and Coplan." But he is assuming in making that statement that (i) Compaq was correctly decided and (ii) it should be expanded to other contexts (poorly decided cases are often limited to the single case). Fortunately, for example, Frank Lyon has been interpreted away from the attitude that drove the opinion; otherwise all contrived tax shelters, so long as wrapped in meaningless reams of paper where things are not called what they really are, would have put the tax system into chaos long ago.
The truth is that most practitioners I am familiar with would have declared the Coplan transactions bullshit from the beginning -- recognizing in tax crime terminology that those who entered the transactions and structured them knew that they had no economic substance and knew, therefore, that, in claiming the tax benefits, the enablers and probably also the taxpayers intentionally violate a known legal duty. And, besides, the tax shelter transactions that get prosecuted almost always -- well really always -- involve the really big lie.. (See my prior blogs involving the role of the lie in tax crime prosecutions, here.) Mr. Cummings thus admits:
The lies described in the Coplan appeal mostly involved professionals stretching for possible business purposes to explain transactions the clients entered into principally but not solely for tax reduction purposes. "There but for the grace of God go I" might be said by every tax professional who has advised on a transaction that had dual business and tax saving purposes, with the tax saving purposes potentially predominating in someone's estimation.Why did the professionals feel it necessary to lie in audits if it were not concern about the stinkiness of the merits of the transaction being audited?
Mr. Cummings then launches into a detailed discussion of the Second Circuit opinion in Coplan. As noted above, I have already posted a number of blogs on that subject and forego address that case furhter here. I do agree with Mr. Cummings that jury instructions on the economic substance doctrine are fraught with danger. See Coplan # 6 - Court Approves the Economic Substance Instruction (Federal Tax Crimes Blog 12/5/12), here.
Mr. Cummings then notes:
The Coplan appeal mostly involved audit activities of the tax professionals, but the transactions involved were not what most of us would view as shams.As noted, then why did the professionals feel compelled to misbehave in the audits?
Of course, it has always been the case that intentional misleading in an audit can draw a criminal prosecution for that conduct regardless of the merits of the transaction itself. But I do disagree with Mr. Cummings that most tax professionals would not have viewed the transactions as shams. I think most would have; at least most good professionals. Did most good tax professionals really think the Coplan shelters would work. I am sure that there may have been some who, were otherwise good, but who trusted too much and got lost in the weeds may have believed it worked. But, I don't think most good tax professionals would think that permanent tax benefits in large -- very large -- numbers could be magically created without corresponding costs and risks (and not just transaction costs).
Mr. Cummings raises good questions about the ethical standards in representing a taxpayer in trying to sustain a hokey deal in audit or litigation. What if the lawyer concludes that the taxpayer had no business purpose other than tax avoidance or evasion? Can the taxpayer enhance claims of business purpose in the hope that the IRS or the court will be convinced of something he or she knows or even strongly believes is not true? Take the Chemtech / Dow Chemical shelter I discussed yesterday (Yet Another Bullshit Tax Shelter Bites the Dust (2/27/13), here). The judge found that the claimed business purpose did not exist. Yet, apparently, the lawyers pressed the nonexistent business purpose. What are their responsibilities in such a case? Can they make full bore claims of business purpose that they have reason to believe is not true? I just raise the questions and do not suggest an answer. I do guess that, since the Judge who had to unnecessarily chase that rabbit trail did not complain about it, perhaps it is acceptable zealous advocacy.
Mr. Cummings concludes:
Nothing short of a Supreme Court reversal is likely to inhibit the DOJ belief, adopted by several lower courts, that when a taxpayer loses under the economic substance doctrine the tax adviser becomes eligible for criminal tax evasion prosecution because in hindsight the transaction did not have sufficient profit potential.I disagree with that. I hope the Supreme Court does not delve into the area because it has a propensity to screw the tax law up. We might get another decision like Frank Lyon that will require the lower courts to correct the course, but in the meantime encourage tax professionals and taxpayers to enable and enter, respectively, bullshit transactions that they really know should not work.
Addendum: I am reminder a recent (2012) book: Matthew Hutson, The 7 Laws of Magical Thinking: How Irrational Beliefs Keep Us Happy, Healthy, and Sane ( Hudson Street Press 2012), here. Perhaps the tax shelter targeted version of the book ought to have the subtitle "How Irrational Beliefs Can Make Us a Lot of Money but Put Us at Risk of Criminal Prosecution."