Saturday, January 25, 2014

Yet Another BullShit Tax Shelter Goes Down Flaming (1/25/14)

In NPR Investments, LLC v. United States, 740 F.3d 998 (5th Cir. 2014), here, following the Supreme Court's lead in United States v. Woods, ___ U.S. ___, 134 S. Ct. 557 (2013), here, the Fifth Circuit applied the 40% gross valuation misstatement penalty to the partnership's bullshit tax shelter (the Son-of-Boss (SOB) type shelter).  For discussion of Woods, see Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (Federal Tax Crimes Blog 12/3/13), here. The 40% penalty will, of course, be applied to the partners, which will then permit them to assert in a separate refund proceeding any partner level defenses they may be entitled to.

I could perhaps leave it at that, but there are some interesting features of the case.

Let's start with some the facts recounted by the Court:
Harold Nix, Charles Patterson, and Nelson Roach are partners in the law firm of Nix, Patterson & Roach, LLP. They represented the State of Texas in litigation against the tobacco industry and in 1998 were awarded a fee of approximately $600 million that is to be paid over a period of time. They also received fees totaling approximately $68 million in connection with tobacco litigation in Florida and Mississippi. Nix, Patterson, and Roach share the fees 40%, 40%, and 20%, respectively. 
Nix and Patterson have participated in at least two "Son-of-BOSS" tax shelters. BOSS stands for "Bond and Options Sales Strategy." Courts, including our court and the district court in this case, have described a Son-of-BOSS transaction as "a well-recognized 'abusive' tax shelter." Artificial losses are generated for tax deduction purposes. 
Before creating NPR and engaging in the transactions at issue in this appeal, Nix and Patterson invested in another Son-of-BOSS tax shelter, known as BLIPS. It involved sham bank loans, and our court considered various tax issues related to Nix's and Patterson's transactions with regard to that shelter in Klamath Strategic Investment Fund ex rel. St. Croix Ventures v. United States.
Further, here is a critical fact conceded apparently for strategic reasons:
The joint pre-trial order in the district court reflects that NPR, Nix, Patterson, and Roach conceded that NPR lacked a profit motive during 2001.
 All of the "investors" in SOB shelters claimed that their profit motive inhered in some long-shot investment razzle-dazzle which they called the "sweet spot," wherein the economic circumstances would line up to generate a profit from the adventure. Some of the taxpayers involved, although having large otherwise uncovered income, claimed that they did not consider the tax consequences at all but focused instead solely on the sweet spot opportunity.  However, the taxpayers in NPR (the ultimate taxpayers were involved by the attorney R.J. Ruble (since convicted of tax crimes for his participation in tax shelters, including SOB shelters) apparently did consider the tax consequences (duh!):
At this meeting, Ruble explained the potential tax benefits of the transaction. He told Patterson and Cohen [Taxpayer's lont-time accountant] that hitting the sweet spot was unlikely.
* * * * 
Forty days after becoming partners in NPR, the Taxpayers withdrew, receiving cash and foreign currencies, although the expiration dates of the options were months in the future. Each of the Taxpayers knew that withdrawing from NPR eliminated any possibility of "hitting the sweet spot" and therefore that a profit was impossible. They each contributed the foreign currencies to the Nix, Patterson & Roach, LLP law firm. All gains or losses from the foreign currencies were specially allocated to the respective contributing partner on the law firm's books and on the tax returns, although only the dollar amounts of losses, not the currencies or the currency transactions, were identified. On the law firm's tax returns, the losses were identified under a heading "Business Risk Division." Foreign currencies were sold in 2001, 2002, and 2003, and the law firm offset the losses against income allocated to each Taxpayer to reduce the earned income shown on Schedules K-1 issued to the Taxpayers.
I supplied the bold face in the foregoing paragraph to draw your attention to it.  First, they eliminated any possibility of the sweet spot supposed opportunity, which was the only nontax justification they had.  Of course, as I note above, they conceded that they had no such profit motive anyway.  Second, they hid the artificial losses in their partnership tax returns which had the large amounts of the income they wanted to "shelter."  [These are not taxpayers turning square corners with their Government; but then we knew that since they participated in the bullshit tax shelters in the first place.]

The Partnership "No Change" Letter Issue

The first issue addressed by the Court was the claim that the IRS had improperly issued a second FPAA adjustment.  Section 6223(f), here, bars a second FPAA notice except for "fraud, malfeasance, or misrepresentation of a material fact.".  The IRS had earlier sent a "no change" letter to the partnership.  The Government argued that a no change letter was not an FPAA.  Alternatively, the Government argued and the district court had held that "NPR made a "misrepresentation of a material fact" on its partnership return, and therefore the August 2005 FPAA is valid."  The  Fifth Circuit agreed.

The taxpayer argued that misrepresentation required some culpability on their part -- specifically an intent to deceive, their premise being that whatever misrepresentations made on the partnership return were not culpable misrepresentations related to the bullshit tax shelter.  The Court held that the word misrepresentation did not require culpable misrepresentation, reasoning (footnotes omitted):
The language of the statute is our guidepost in determining whether there was a material misrepresentation. "We follow the 'plain and unambiguous meaning of the statutory language,' interpreting undefined terms according to their ordinary and natural meaning and the overall policies and objectives of the statute." In determining the ordinary meaning of terms, dictionaries are often a principal source. "If the statute is ambiguous, we may look to the legislative history or agency interpretations for guidance." We must strive to give meaning to every term. 
Because "misrepresentation" is not defined by TEFRA, we consider dictionaries for a definition. Black's Law Dictionary defines "misrepresentation" as "[t]he act of making a false or misleading assertion about something, usu[ally] with the intent to deceive." However, as the district court observed, that same dictionary granulates the broad term "misrepresentation" into more specific categories, including "fraudulent misrepresentation," "innocent misrepresentation," "material misrepresentation," and "negligent misrepresentation." The commonly understood term "misrepresentation" can encompass a fraudulent, negligent, or an innocent misrepresentation. In construing § 6223(f), intent to deceive does not appear to be required to establish a "misrepresentation." A successive notice may be mailed when there has been "a showing of fraud, malfeasance, or misrepresentation of a material fact."  "Malfeasance" does not necessarily involve intent to deceive. We will not read an intent to deceive into "misrepresentation" when another standard of conduct set forth in the statute does not require intent to deceive. 
NPR cites several decisions that interpret "misrepresentation" as requiring some sort of culpability. These decisions are inapposite. One Supreme Court case cited by NPR interprets a different statute, and in any event, concludes that negligent misrepresentation is encompassed by the term "misrepresentation." In two other decisions, one by a district court and one by a sister circuit court, "misrepresentation" is used in a different, albeit similar, context, but the list of conduct in which the term "misrepresentation" appears does not include "malfeasance." A fourth decision, which interprets "misrepresentation" in a statute with nearly identical wording, follows a 1935 Board of Tax Appeals decision that concerned setting aside closing agreements, a situation quite different from the case at hand. 
NPR argues that if we hold that "misrepresentation" encompasses innocent misrepresentations, then we should also hold that the IRS must justifiably rely on that misrepresentation for the exception to apply. We decline to do so because there is no basis in the statute for such a requirement. NPR derives its argument from principles of tort law. This is not a tort case, however, and tort principles are inapposite. 
NPR also cites to 26 U.S.C. § 6231(g)(2), which provides, 
[i]f, on the basis of a partnership return for a taxable year, the Secretary reasonably determines that this subchapter does not apply to such partnership for such year but such determination is erroneous, then the provisions of this subchapter shall not apply to such partnership (and its items) for such taxable year. 
This provision does not, however, override § 6223(f), which expressly permits the IRS to mail a second notice of final partnership administrative adjustment for a partnership taxable year if there is "a showing of fraud, malfeasance, or misrepresentation of a material fact." NPR's construction of § 6231(b)(2) would excise § 6223(f) from the Code.
I should note that the key exception in Section 6223(f) is for "fraud, malfeasance, or misrepresentation of a material fact," an exception that is found in other IRS provisions and forms for finality.  See Section 7121(b), here,, involving closing agreement finality or by Form 870-AD, involving closings by written agreement with Appeals,  If this is the case, then all or at least many bullshit tax shelters previously thought closed might still be open.

Lack of Profit Motive

I quoted above that the partnership in this proceeding conceded that neither the partnership nor the ultimate taxpayers had a profit motive.  Of course, they clearly had a  motive to more than cover their costs of the bullshit shelter through the imagined tax savings.  But they had no other profit motive and conceded it.

But, my understanding is that Raymond J. ("R.J.") Ruble tax shelters -- this was one -- always required that the taxpayers represent that they had a profit motive independent of the tax gain.  (For Ruble's role in this genre of fraudulent tax shelter and his conviction therefor, see the Wikipedia entry on KPMG prosecutions, here.)  That representation is objectively false based on their own concession.  And, haven't they now conceded that it was fraudulent so that their claiming of the tax benefits on their individual returns was also fraudulent.  And why can't the IRS now assert the Section 6663, here, civil fraud penalty at the ultimate taxpayer level because that was, after all, the ultimate taxpayer's fraud.  And, of course, the ultimate taxpayers' statutes of limitations would be open based on their own fraud or based on the enablers fraud (remember this was a Ruble fraudulent tax shelter).  See the prior blogs on the Allen issue of whether Section 6501(c)(1)'s unlimited statute of limitations is triggered by fraudulent claims on the return even if the fraud is not the taxpayers.  (I have a number of blogs on this issue under the label 6501(c)(1), here.


  1. Swiss Bank
    Accounts. 2014.

    Is your monies safe
    in these accounts ---- definitely NOT.

    Would you get your
    money back if every body decided to withdraw all their accounts –
    NO WAY.

    Economic Experts
    say that there would only enough money to repay 50% of their clients.

    Are you going to be
    in the 50% --- that loose your money.-- Get it out NOW.

    2012 -- - June.
    -- Published in Anglo INFO .Geneva.--- USA Trust Fund Investors were
    sent false and fraudulent documents by Pictet Bank.Switzerland. in
    order to collect large fees. ( Like MADOFF) ---Even after the SEC in
    the USA uncovered the fraud Pictet continued to charge fees and drain
    whatever was left in these accounts. Estimated that $90,000,000
    million lost in this Pictet Ponzi scheme.

    2012 - - - July.
    -- De – Spiegel. -- states – Pictet Bank uses a letterbox
    company in

    and a tax loophole involving investments in London to gain

    millionaires as clients.

    - - - August ---- German Opposition Leader accuses Swiss Banks of
    "organised crime."

    the fines that crooked Swiss banks have incurred in the last few
    years exceeds £15.Billion.

    is also calculated that the secrecy " agreements" with
    regards to tax evation by their clients will cost the banks another
    £45 Billion.

    banks are panicking --- the are quickly restructuring their banks
    ---- from partnerships --

    " LIMITED COMPANIES." ----- this will probably mean that
    in the future --- they could

    you only 10% of your monies " if you are one of the lucky ones"
    ---- and it be legal.

  2. Sods -----


    For almost two
    decades we have strived to get justice for the injustice we have
    suffered at the hands of a world renowned bank--- PICTET & CIE.

    Two yorkshiremen
    both running their own small family businesses trying to resolve the
    problem by taking all the correct legal procedures to recover their

    The matter was
    raised in Parliament – twice-- the FSA investigated the matter
    concluding that PICTET had rogues operating in their London Bank ---
    but the rogues had left ---saying no one left to prosecute.??? -----
    so there.

    We then
    approached the Financial Ombudsman Service. (FOS) --- our case was
    dealt with by seven different people ---- then our numerous E-Mails
    were ignored --- nobody would speak to us -------so there.

    We then asked the
    SFO ( Serious Fraud Office.) to investigate our case ---- the
    criteria of our case ticked all their boxes. --- we were instructed
    not to send them any documents/evidence.------ in fact they wrote to
    us advising us to go to the Citizen's Advice Bureau.(CAB.)

    Richard Alderman
    the SFO boss ---- who responded to our letter was the same man who
    would not investigate the “ Madoff” scandal or the “Libor”

    The MP's
    committee ---- said he was sloppy--- and the SFO was run like “
    Fred Karno's Circus” ------- so there.

    Our M.P.
    approached our local Chief Constable to investigate----- he was
    called---- Sir Norman Bettison--- Chief Constable of West Yorkshire
    Police ---- a force that made “ Dad's Army” look like the S.A.S.
    They were inept – corrupt ---malicious --- from top to bottom. We
    were criminally dealt with by the Forces Solicitor---- the Head of
    the Economic Crime Unit ----and the Chief Constable ----- so there.

    We were then
    advised to pass our complaint against West Yorkshire Police to the
    I.P.C.C. – which we did --- they advised us to make our complaint
    to ---- the West Yorkshire Police --- we did with reluctance --- all
    we got was abuse and obfuscation. ----- so there.

    Sir Norman
    Bettison ---- The Forces solicitor--- and the Head of the Economic
    Crime ---- have all been removed from their posts and facing criminal

    ------ so there.

    We even sought
    justice through the Courts --- culminating in a visit to the Court of
    Appeal-London.--- On leaving the Courts of Appeal that day our
    barrister a “rising star” informed us --- that if that was
    Justice then you can keep it. He quit the law and moved to Canada
    ----- so there.

    A few years later
    we learned that one of the judges in our case at the Court of Appeal
    was related to a senior executive of the Pictet Bank -----so there.

    Pictet & Cie
    .Bank --- voted private bank of the year 2013.

    Ivan Pictet ----
    Voted banker of the year 2012. ---- the senior partner --- lied on
    numerous occasions and had documents destroyed --- also said genuine
    documents were forgeries. ----- so there.

    Ivan Pictet in
    Oct. 2013 ---- Given the Legion of Honour --- but saying that ----
    honours were given to Hitler --- Eichmann --- Mussolini ---Franco
    --- he's in fitting company. ----so there.

    RAPHAEL.Q.C. -- Peters & Peters.London. They were the banks

    Raphael.Q.C. along with Ivan Pictet withheld crucial documents
    requested by the High Court ---- the FSA ---- and the police Fraud
    Squad. ----so there.

    Raphael.Q.C. became an Honorary Queens Counsellor in March. 2012.

    Raphael.Q.C. became a Master of the Bench in Nov.2012.

    An expert in
    Fraud ---the Doyen of Fraud Lawyers. ----- so there.

    This says a lot
    about Banks --- the consensus of opinion is that they are highly paid
    “crooks” ---- no wonder they voted Ivan Pictet banker of the

    Full Story.----
    “google ”




    Ivan Pictet/Monty


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