But, I want to focus on the taxpayers because it was their taxes that had to be evaded in all events for the crime of tax evasion as charged in Daugerdas. What would it require for their taxes to have been evaded via the tax shelters promoted by the enabler defendants? In the Tax Due and Owing instruction, Judge Pauley explained that the critical issue as to whether there was a tax due and owing was whether the shelters lacked economic substance. (I have previously written on what I perceive as major difficulties in presenting the concept of economic substance to juries; they can be reviewed via the "Economic Substance" link.) One uncertainty is whether the two component tests commonly applied to determine economic substance are in the disjunctive or the conjunctive. That uncertainty has existed for a long time. So, Judge Pauley asked the jury to apply the test in the conjunctive -- the most defendant-friendly application of the economic substance test.
Judge Pauley explained in explaining Tax Due and Owing:
The Government claims that the reason the taxpayers * * * * owed more taxes than they reported is that the losses they claimed on their tax returns as a result of the Short Sale, SOS, Swap, or HOMER tax shelters were not allowable. The Government contends that these losses were not allowable because they stemmed from transactions that lacked “economic substance.”
A transaction that lacks economic substance cannot enter into tax computations. Any deduction claimed for a tax loss allegedly sustained in such a transaction is not properly claimed on a tax return.
In order to establish that a transaction lacks economic substance, the Government must prove, beyond a reasonable doubt, two components.
The first component is that the relevant taxpayer had no genuine business purpose for engaging in the transaction in question apart from the creation of the tax deduction.
The second component is that there was no reasonable possibility that the transaction would result in a profit.