In a recently filed civil case, a prominent and sophisticated taxpayer is suing Deutsche Bank and BDO Seidman over the taxpayer's investment in a bullshit tax shelter of similar genre to the one involved in Blum. See Deutsche Bank, BDO Seidman Sued by Lane Over Tax Shelter (Bloomberg News 1/3/14), here. The case is R. J. Lane v. Deutsche Bank AG, et al. (Cook Cty Circuit Court). The opening paragraph describes the key background for Lane's desire to engage in the maneuver which brought him woe:
1. Plaintiff R.J. Lane ("Lane" or "plaintiff") is the former president and chief operating officer of a Fortune 100 computer software company ("Software Company"). In the year 2000, Lane exercised a portion of his stock option holdings in the Software Company. The Software Company reported this option exercise to the Internal Revenue Service as more than $250,000,000 in ordinary income to Lane. Lane, like many well-compensated executives, relied on a variety of tax and legal advisors to help him manage and account for his income -- such as the income reported to the IRS from the options he exercised in 2000.
2. By the time the Software Company paid Lane his year 2000 compensation, Lane had already established a tax planning and financial advisory relationship with an attorney, Michael S. Kerekes ("Kerekes"). Kerekes was, at the time, a senior tax partner and attorney at the accounting and financial services firm known in the United States as BDO Seidman, LLP (now known as BDO USA, LLP and referred to herein as "BDO").
3. Lane trusted Kerekes and believed that Kerekes possessed the type of investment, tax and legal expertise necessary to help him make good financial decisions. Even though Lane was a very successful businessman and corporate executive, he nonetheless relied on Kerekes and BDO to provide him with the best and most current advice with respect to tax planning and complex financial investments. Put another way, Lane's corporate acumen did not make him a tax or financial planning expert.Kerekes previously pled to conspiracy and tax evasion for his role in promiting bullshit tax shelters. Judge Apportions Restitution in a Massive Tax Shelter Case (8/20/12), here, and The Daugerdas Indictment - Part #1 - the Players (6/11/09), here. And, of course, as alleged ad nauseum in the lengthy complaint, other prominent players involved in Lane's adventures have been subject to the criminal justice system. Most prominently, Deutsche Bank entered a NonProsecution Agreement, BDO Seidman entered a Deferred Prosecution Agreement and a prominent partner in a prominent law firm pled guilty. So there is no doubt that the tax shelter was a fraudulent tax shelter and that the parties who promoted the shelter to Lane misbehaved.
The question in the Lane's case is whether Lane is quite the innocent that he alleges. I don't know the other side of the story. But, like Blum, Lane is a sophisticated person.
Again, I don't know Lane's facts but I can speak generally from my observations of the investors in bullshit tax shelters. In most cases, they knew the gambit was too good to be true and paid the big bucks to the promoters in order to get one or more "opinions" that, they hoped, would give them some imagined defense to penalties -- civil and criminal -- for playing the too good to be true game. Blum got called out on the gambit by the Tax Court and the District Court. Lane hopes to fare better.
Addendum: Remember that, in this genre of tax shelter, the taxpayer was required to make a representation as to his purpose for participating -- that he engaged for profit independent of tax savings. The shelter would not have been implemented without that representation. As sophisticated as these taxpayers were, they must have known that the representation -- which requires no special tax expertise -- is untruthful. So the shelter went forward because they told a lie. That lie could have been the basis for criminal charges, at least in the more egregious cases, but it appears that none of the investors have not been prosecuted for the big lie. So, they got the major benefit for which they paid the enablers -- at least no criminal prosecution.
How many of these taxpayers would have entered these shelters -- paying exorbitant fees for the steps in the shelters -- solely for the alleged profit potential independent of the purported tax benefits? Not one, I dare say.
And, many of these taxpayers had independent advisers who certainly must have told them that all they were really getting for the exorbitant fees was some type of potential reliance argument to avoid civil and criminal penalties. And the good independent advisers would have told them that even the penalty protection might not work. And, on the merits, good independent advisors would have told them that they could not conclude that the shelters would more likely than prevail.