Excepting civil fraud penalties that perhaps ought to come along with such scams, the penalties at play in these well-papered and well-lawyered scams are the accuracy related penalties of 20% or in particularly egregious cases 40%.Now, I want to focus on the fraud penalties (with a brush at criminal fraud) and the broader environment. The background for this blog entry is a recent book on the dynamics that played out as prominent tax professional firms -- accounting and law firms -- became an integral part of the tax shelter scams to raid the fisc. See Tanina Rostain and Milton C. Regan, Jr., Confidence Games: Lawyers, Accountants and the Tax Shelter Industry (The MIT Press 5/2/14), here on Amazon. For a good summary of the principal thrust of Confidence Games, I cite readers to Dana A. Remus, Confidence Breach: A Breakdown in Professional Self-Regulation, 92 Texas L. Rev. 1599 (2014), here.
Probably, the best I could do is to just point readers to these sources and stop. This would be a good blog if I did stop. But, I won't stop, recognizing that I may not improve on the blog.
Let me add some comments.
1. One of the core insights in the book and the article is that there were institutional and organizational contributors that permitted individuals to push the envelop into inappropriate behavior.
2. The large(r) Accounting firms developed substantial practice groups that, overtime (over time also), became an echo chamber that caused or contributed to individuals doing things that they would not do individually. (For background, this is a major reason that conspiracy is a separate crime.) Because individuals in these groups were in a echo chamber, they slowly begin to believe the bull shit of the echo chamber. Had they not been in the echo chamber, they likely would not have done what they did. But they were in the echo chamber; conduct become less evil or illegal or morally wrong because all these smart people and honorable people were participating in the venture. Of course, the views of those at senior and more experienced levels were often substantially influenced by the extravagant money that could be made by participating.
3. Even within the institutions, those who did not participate had a number of warning signals (excess revenue and profits) for these groups shrouded in some secrecy that they chose to ignore because they participated directly or indirectly in the excess revenue and profits. In the Government's expansive imagination of willful blindness, those in an oversight function in these institutions may have deliberately ignored the criminality inherent in the practices.
4. The shelters that constitute the background for Confidence Games were principally shelters promoted to very wealthy individuals. However, as Professor Remus notes, there are other shelters that are promoted to corporations (or other analogous entities) where the in-house counsel serve much the same role as law firms in advising the corporate client. And corporations participated in shelters that were equally as egregious the individual tax shelters. Under the guidance of corporate in-house and out-house counsel, the corporations attempted to exploit those bullshit shelters, seeking in the final analysis to win the audit lottery or, if they lost the audit lottery, at least avoid penalties for tax shelters that were nothing more than shams / scams. (I could not find that those two words were etymological cognates or otherwise related, but in this context, I am not sure there is an practical difference even if ultimate not traceable to the same Indo-European word.)
5. So what were some of the tax shelter shams / scams that corporate counsel guided their corporations into? Of course, Chemtech Royalty Associates v. United States, 2014 U.S. App. LEXIS 17490 (5th Cir. 2014) was one, involving Dow Chemical Co.. And, the Chemtech points to another prominent sham / scam -- TIFD III-E, Inc. v. United States (Castle Harbour II), 459 F.3d 220 (2d Cir. 2006), involving GE which "is often referred to as the world’s best tax law firm." See Donald Kocieniewski, G.E.’s Strategies Let It Avoid Taxes Altogether (NYT 3/24/11), here (for some of my previous musing on GE's dalliances into the dark side of tax scamming, see Thoughts on the the Corporate Audit Lottery (Federal Tax Crimes Blog 2/11/12), here; and Second Circuit Strikes Down Another BS Tax Shelter (Federal Tax Crimes Blog 1/24/12), here). There are others: Consolidated Edison Company of New York v. United States, 703 F.3d 1367 (Fed. Cir. 2013) (as indicated), here; Bank of New York Mellon Corp. v. Commissioner, 140 T.C. No. 2 (2013) (as indicated), here; Salem Financial, Inc. v. United States, 112 Fed. Cl. 543 (9/20/13) (BB&T), here. There were more, but these make the point.
My question is why the corporations and their in-house counsel (and their law firms) have been let of the hook for these shelters which are not materially distinguishable from the shelters in the prosecutions discussed in Confidence Games? And the corporations have been let off the hook for the civil fraud penalty, with the playing field being relegated to the accuracy related penalties. The accuracy related penalties are so low that they would hardly dissuade the conduct by those willing to play the audit lottery risk reward game when the bullshit transaction is papered over by a fog of documents which in the final analysis served only to obscure the bullshittedness of the transactions.
Addendum 9/13/14 2:00 am:
I picked this up from a tax analysts article Amy S. Elliott, Tax Planning Pioneer John Samuels to Leave General Electric, 2014 TNT 178-5 (9/15/14). The article is on the retirement of John M. Samuels, "General Electric Co.'s vice president and senior tax counsel for tax policy and planning." The following is an excerpt:
Samuels, who started at GE in 1988, is widely regarded as one of the most influential tax lawyers in the country for his mastery of the complex rules that apply to U.S. corporations and for his ability to straddle the worlds of business, government, and academia, observers told Tax Analysts.
But his tenure at GE hasn't been without its critics.
The Washington Post recently named Samuels "the master of corporate tax avoidance" and a 2011 article in The New York Times drew attention to Samuels's team and its work to enable GE to "avoid taxes altogether."The referenced Washington Post article is apparently, Lori Montgomery, Should Treasury act to deter corporate inversions? GE’s tax chief says no (Washington Post Wonkblog 9/8/14), here. The New York Times article is cited above.