In those cases where the IRS discovered the shenanigans, it audited if it thought the statute of limitations was still open and assessed tax accordingly. The taxpayer lost the lottery. As is human nature, the taxpayers wanted a scapegoat to ease the consequences of their own misconduct. So, the only scapegoat around to sue was the enablers, many of whom had very deep pockets. I have written occasionally about those suits before, for the courts in some cases did not appear sympathetic to making one skulldugger pay another skulldugger. See e.g., The Role and Culpability of the Taxpayers Participating in Bullshit Tax Shelters (Federal Tax Crimes Blog 5/4/14), here, and Taxpayer Playing the Bullshit Tax Shelter Game Tries to Shift Blame to the Enablers (Federal Tax Crimes Blog 1/16/14), here.
I report today on another attempt by the taxpayer to shift his own blame to an enabler. In GG Capital v. Deutsche Bank, 2014 U.S. Dist. LEXIS 59540 (CD CA 4/28/14), here, the court dismissed the claims for being untimely under civil cause of action statute of limitations. Most claims in U.S. law have a statute of limitations. Sometimes the statute of limitations "tolls" until the taxpayer has either discovered or had reason to discover the conduct underlying the claim. This is known as the discovery rule. The court applied that rule to pour the defendant out.
The particular bullshit tax shelter was one apparently hawked by David Greenberg, although his precise role is not made totally clear in the case. For purposes of the case, the Court seems to treat Greenberg as the representative of the taxpayer vis-a-vis the transactions in issue. By way of background, Greenberg was among the crowd of 19 defendants in the first big tax shelter prosecution related to KPMG, United States v. Stein (SDNY), in 2005. The common core of the prosecution was bullshit tax shelters hawked by KPMG and certain related enablers. Greenberg, associated with KPMG during some of the relevant period, was among the defendants because of, in part, some "off the books" -- at least off KPMG's books and allegedly unknown to KPMG -- shelters. The shelter in GG Capital may have been one of that he hawked or sponsored independently.
The shelter was the digital options shelter which paired long and short options to eliminate, practically, any risk because of their offsetting nature (if the long fell in value, the short would rise and vice-versa), so that with the possibility of risk practically eliminated, the possibility of gain was likewise eliminated, at least practically. (This is an economic variation of the mantra, no pain, no gain.) This variation of the SOB shelter was, in other contexts, called the Short Option Strategy or SOS.
The shelter taxpayer "bought" required financial transactions in exceedingly large amounts, the amount of which were offset by the leveraged nature of the offsetting positions, permitting the taxpayers to enter the transactions with very little down and, as noted, very little, if any, risk to anyone -- the taxpayers or the financial institution sitting on the offsetting positions for the taxpayer.
According to the taxpayer's allegations, when hawking their role in the deal to the taxpayer, Deutsche Bank represented that the financial transactions (options) were appropriately based on the Black-Scholes formula, with the probability of hitting a "sweet spot" was between 0.051 and 0.091, depending on the option pairing. For that alleged represented sweet spot opportunity, taxpayer paid the enablers really big bucks, further impairing the possibility that the long-shot sweet spot could return their costs, much less produce a cash-on-cash profit justifying the costs. Without a taxpayer profit motive for the transactions, the taxpayer could not claim the alleged tax benefits. So, the taxpayer alleged that he had the profit motive based on what Deutsche Bank represented. But, the taxpayer alleges, Deutsche Bank's representations were lies and that he did not have reason to know they were lies until later, within the discovery period for the statute of limitations.
In the tax shelter investigations giving rise to the KPMG prosecutions and others, Deutsche Bank A.G. showed up as a major enabler which orchestrated the financial shenanigans to give the transactions the appearance, but not the reality, of being real deals. Hence, Deutsche Bank was not just an enabler -- which does not necessarily imply criminality -- but was a co-conspirator and, likely, committed substantive tax crimes and Title 18 crimes as well. For its misbehavior, on December 21, 2010, Deutsche Bank entered an NPA. See Another Chapter Closes in the Tax Shelter Wars - Deutsche Bank Admits Crimes and Takes $553,633,153 Hit (Federal Tax Crimes Blog 11/22/10), here. In that NPA, Deutsche Bank admitted that the ostensibly separate long and short trades were not independent, were priced as a unified transaction, were priced by manipulation, and a meaningful profitable payout on the play -- referred to as the "sweet spot" -- had "virtually no chance."
Plaintiffs then filed their complaint against Deutsche Bank on December 26, 2012. This was well outside the statute of limitations from the date of the taxpayer's actual injury which would ordinarily start the statute of limitations. However, the taxpayer urged that the statute of limitations was tolled until it discovered or had reason to discover Deutsche Bank's skullduggery in hiding the truly impossible possibility of the sweet spot that, allegedly, its representatives had represented to taxpayer when the original transaction was hawked. It did not have knowledge or reason to know until Deutsche Bank's NPA was disclosed in 2010.
The Court simply concluded that taxpayer was on notice before the earliest date to permit the filing on December 26, 2012. Indeed, there was not anything really new in the NPA that taxpayer did not already know (footnote omitted):
Plaintiffs contend the disclosure that "there was virtually no chance that the sweet spot would be hit" plausibly contradicts the statement in the Original Representations that the probability of hitting the sweet spot was "low"—approximately 0.051% for the majority of the option pairs. (FAC ¶¶ 19-B, 29-E.) To the extent the NPA states that the sweet spot for any given option pair had virtually no chance of hitting, it does not plausibly contradict the Original Representations. As Plaintiffs knew of essentially the same facts when they entered into the transactions, claims premised on this disclosure would also be time-barred.
Plaintiffs have amended their pleading to suggest that the same "virtually no chance" language means that the combined odds that any of the hundreds of option pairs sold to anyone would hit was "virtually no chance," when there allegedly was approximately a 20% chance that one of those hundreds of option pairs would hit the sweet spot. (FAC ¶¶ 29-E-F, 32-A; Opp'n at 17.) However, this is not what the NPA says. As is clear from the context of the statement provided in the Background section, the NPA discusses how the individual option pairs worked, including what it meant for an option pair to have a "sweet spot." The "virtually no chance" language refers to the odds of a particular option pair hitting the sweet spot. It does not refer to the combined probability that one of the hundreds of option pairs would hit the sweet spot. (NPA ¶ 24.) Accordingly, Plaintiffs' interpretation is not plausible.JAT Comment: There is nothing really new here. Just another example of sophisticated taxpayers with the aid of sophisticated enablers trying to game the tax system with smoke and mirrors of no substance.
I do note that, in these transactions, foreign banks were involved in virtually all that I spent substantive time on after they blew up. I understand that Credit Suisse is being investigated in New York for tax shelters, although it is unclear whether they are the cookie cutter shelters of the SOB genre or more custom designed shelters marketed to the really big hitters.