Friday, September 12, 2014

More on Bullshit Corporate Tax Shelters (with Some Rantings) (9/12/14)

Today, I posted a blog entry titled Another Bullshit Tax Shelter Bites the Dust on Appeal Also (9/12/14), here, in that article I addressed, perhaps obliquely, the IRS propensity to assert only accuracy related penalties for tax shelters that are nothing more than scams and raids on the fisc by playing the audit lottery.  I said:
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), hereBank of New York Mellon Corp. v. Commissioner, 140 T.C. No. 2 (2013) (as indicated), hereSalem 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.


  1. Jack,

    In hindsight I realize the mistakes I have made as a self-filer answering questions asked by
    the software. I answered Schedule B foreign account question without fully understanding its import.

    Simply put my reason is ignorance. I guess IRS would see this ignorance a result of my being negligent.

    My accounts are in my country of origin where I still have significant family ties. Since SDOP certification requires taxpayer to state specific reasons for missing to report tax and FBAR, I am wondering how best to state this ignorance.

    I am thinking of making my case stressing these two key points:
    - as a immigrant with strong family ties had need to hold funds in that country
    - being self-filer, only recently became aware of my global income reporting obligations



  2. Tax Walla,

    Your facts are not sufficiently flushed out that I could make a meaningful comment on whether you can make a certification explanation that the IRS will accept. Moreover, the program is so new that practitioners would be speculating in most cases.

    The Schedule B question is a concern. On the one hand, the IRS says that answering that question wrong alone does not establish willfulness. But, combined with all the other nuance in the tapestry, it might be a material factor in establishing willfulness.

    Keep in mind that the Schedule B question is a straightforward question about a fact -- Did you have an interest in a foreign financial account? You do not have to understand the implications of that question, since it is purely factual (there are some definitions of interest, foreign financial account, etc.), but the question is itself sufficient to alert one as to the general nature of the question. Then, if the answer is yes, Schedule B directs the taxpayer to the FBAR.

    So, at one level the No answer to the Schedule B question can be damning, but only in the context of other facts and nuances.

    Every opt out I have had and almost every I have heard about has answered the question no or failed to answer the question at all and have achieved good opt out results, which means that the IRS did not determine willfulness. So, your No to the Schedule B question can be overcome if you have a some plausible explanation for the no question and have other facts that suggest nonwillfulness.

    Jack Townsend

  3. Jack - here the nonwillfulness is in context of failing to report income or failing to file FBAR?


  4. Jack, I am curious if the below sound like a plausible explanation for wrongly answering the sch-B question.

    a temporary worker in the US on a work visa for many years
    with uncertain plans to relocate back home to India & having self-filed
    taxes always, I did not have the remotest clue
    that global income is reportable/taxable per US tax law till recently. I had sent smaller portions of my savings back home to an account in my name. Parents had POA & practically managed it & created some CDs. Banks never sent statements to me nor did I monitor those accounts.

    this back drop, when the tax software used to present the question
    "...Did you have a financial interest in or signature authority over a
    financial account… in a foreign country?", I simply dismissed it with a No
    thinking that it likely applies for taxpayers who are either permanent
    residents or US citizens or someone with a business interest overseas etc. In hindsight, I realize that I was
    wrong/mistaken. Since I selected No, the tax software never bought up the screen about the fbar requirement."

  5. The first question is whether the statement is true. Then, the issue is whether it is consistent with the other facts that bear upon failure to report worldwide income and failure to file the FBARs.

    I can't assess whether the IRS will find it plausible based upon the facts it will know when it has to make the determination.

    Jack Townsend

  6. Can you confirm that you had checked No to the schedule B question about having a foreign interest?

  7. Yeah, Anon, as Anonymous asks, would you please confirm what your answer to Schedule B was? I hear most of us said NO. I said NO. And most of us have a good reason or another. Imagine mine! I had this account in Euros (not in dollars) and it typically was around 6K to 7K Euros, it never occurred to me to check it and tanslate to dollars to see if it was going over 10K . So I did not think I had to say YES when I "knew" the account was below 10K. Of course I had never heard the word FBAR.
    Thanks so much!

  8. Also, how many of us did fully and clearly know of the $10K reporting limit? In my case, again, it was at best a foggy idea, some distant thing I had once heard and was not sure what it truly was about.

  9. Jenn Innocent,

    The certification is: "My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct." So, strictly speaking the certification is not time limited. However, in the context of submitting specific amended returns and FBARs, one can reasonably infer that it is limited to the 3 year income period and the 6 year FBAR period.

    Jack Townsend

  10. Jack/All, this is about transitioning from OVDP to SDOP. I guess it's been about 3 months now since the new streamlined program? How much is known by now about the treatment of those applying for transition. I have read about most being pushed back on the basis of "willful blindness"? So, in such a case, if the taxpayer says he is nonwilfull but the IRS disagrees and says he is willfully blind, does this equate to the IRS saying:
    a) the certification was fraudulent?
    b) the taxpayer committed perjury?
    c) criminal and civil fines and prosecution possible?

    OR INSTEAD OF THE ABOVE - Is the taxpayer simply sent back to the OVDP and pay his 27.5% penalty?

  11. Based on my own docket and others that I have heard from, the IRS has approved the certifications and is completing the transition. I understand that, in other cases, the IRS has not approved and offered the taxpayer the option of completing OVDP through Form 906 or opting out.

    You do raise the issue of whether there is any downside to seeking transition relief by making the certification. Downside would be doing something more than just denying the certification / transition. For example, prosecution for perjury or false statement, kicking out of OVDP with regular audit penalties (including willful FBAR penalties), etc. I don't know and I believe we won't know if the IRS is doing that for a while. If the IRS wants to take such extra measures in some cases, I don't think it will be many cases and the process will not be open, so we may not know about it for some time, perhaps a yea or two unless some taxpayer or his professionals share the information.

    Jack Townsend

  12. Jack,

    I have spoken with a few other immigrants
    (some here on this forum and other my personal friends) and their stories are
    almost identical. It goes like this:

    - After immigrating to country, saved money and sent it back home for at least last 5 years
    - Funds were all post-tax savings
    - Failed to answer schedule B correctly over the year and not filed FBAR
    - Discovered import of that question in the past few months and working on fixing it now
    - The amounts are well below $400K
    - Reason for sending funds overseas are family related (buy real-estate for family, help provide financial security to parents, etc)
    - Just CDs or Mutual funds with banks in home country. No exotic investment instruments or schemes to hide accounts or evade taxes in tax-haven countries.
    - Fully tax compliant otherwise in the prior years. Good clean compliance record

    Two questions:
    - Assuming this is all there is to the tapestry, what do you say is probability of his/her SDOP certification being accepted?
    - If the taxpayer is okay with the risk, would such a taxpayer (again assuming there is nothing more to the tapestry) may get better result in a post-QD audit than the 5% SDOP penalty?

    I know you have said so many times that a lot depends on other details and there can be
    many others. That’s why I am asking you assume these set of facts being complete. I completely understand this is an educated guess and could be incorrect but I am interested anyway.

    Thank you so much!

    Tax Walla

  13. Tax Walla

    First, I will treat this as hypothetical. I can assure you that no one is going to have a situation where the assumed facts are the only relevant facts. So, this drill is for analysis only that each individual, with proper counsel, will have to calibrate with further facts. It would be a big mistake to assume that this analysis is all anyone would need to reach a decision in this area.

    Second, there is a key fact missing. That is the amount of tax in some reasonable window (say 5, 6 or 8 years). You say that all deposits into the account are fully U.S. tax paid, so that the only unpaid income arises from internal earnings on the accounts (which, for analysis, we assume are simple deposits or CDs earning interest. Assuming the high value for an 8 year window is less than $350,000 and given that the interest rate since 2008 has been very low, I would infer that the net earnings on the accounts might be 2%, perhaps 3%, so that the net earnings for, say a 6 year period, is less than $70,000 in the aggregate and less than $12,000 per year (on average). I know you say that there might be mutual funds involved, but they add a level of complication in the calculaton of income that I can't assess because of the PFIC rules. It is better for analysis purposes to assume an interest earning account because I can make assumptions about interest. Again, on my assumptions, there is less than $12,000 income per year, perhaps substantially less.

    Third, I will assume that the country involved is not a tax haven country (e.g., Switzerland, Panama, Caymans, etc.) but a country like India (which I think is a prototypical country for this pattern).

    On those facts and no others, I would think that a taxpayer making the certification with that explanation would have a pretty good chance that the IRS will not contest the SDOP certification. (I am not talking about the transition certification, because the IRS has a lot of facts that it does not have in the SDOP certification, including the amended returns and delinquent FBARs.

    However, the caveat is that I don't know the IRS's criteria for challenging certifications. I can only speculate -- and readers must understand that it is speculation -- that these facts would not be challenged by the IRS. I would think that these facts on the spectrum between willfulness and nonwillfulness would be toward the nonwillfulness end of the spectrum and the IRS would have to be denying certifications almost in mass to challenge these - ON THESE FACTS AND MY ASSUMPTIONS.

    Like any hyptothetical, however, change the facts and the analysis must be reconstructed and may be different.

    I am not sure how much comfort anyone can or should take from my analysis. As I said, the conclusion is speculation because I don't yet know how the IRS is applying the rules of the game that it created.

    Jack Townsend

  14. Jack, why are you saying the Service does not have a lot of facts in the SDOP certification ? Of course they have a lot less than in OVDP but still enough to cross reference that all required FBARs have now been filed and the original 1040s have been amended and Form 8938 or 8621 have been added . That is enough information imo. to come to the same conclusion they would if they had 8 years in front of them.

  15. What I still do not understand is why would you Jack or our immigrants from india through NRI accounts think that paying no income tax on CDs would be a NW fact pattern

  16. Anon, You said

    "What I was told yesterday is that total max. balances above $250K are not just being waved through."

    Where did you hear this and how reliable a source is it?

  17. Jack, I have wondered about the same point Anon makes. Interested in your take on it.

  18. haven country (e.g., Switzerland, Panama, Caymans, etc.) but a country like India..... Jack this stereotype description is outdated in 2014. In Switzerland 75% of the Kantons have the same or higher personal income tax rates as the US.

  19. I think that a key element missing from your list is knowledge of FBAR reporting requirements. At one end of the spectrum, someone who has filed FBARs for the company he works for, is a CPA, and so on would have a harder time showing lack of wilfulness. Someone with little education or knowledge of English would eb at the other end of the scale.

  20. Jack
    How long has it taken the IRS to get back on Transition cases based on your experience and that of others?
    Did the IRS take longer to get back in cases where tranistion was denied?
    Initially an attorney on your site had stated 5 days for a response so I wanted to get a feel. In one case I know of ,the CPA as not heard back in over 6 weeks

  21. Jack - for a guy who has around 100K in his native country India for the past 5+ years and getting taxed deducted at source at 31% on his interest income.. after foreign credit in W2, it hardly comes to around $200 - $300 per year, what are my chances with the Certification? Is it even necessary for me to go thru SDOP or my chances are better with audit?


  22. Keep in mind that I have no special insight on what the IRS is actually doing in these SDOP certifications. I can just infer based on my experience and how these programs need to work.

    If there are no other bad facts (you don't review all pertinent facts, so this is a big if), then your pattern looks pretty good for certification. Keep in mind that the SDOP penalty will be around $5,000 and the net U.S. tax over the 3 year certification period will be less than $1,000.

    Jack Townsend

  23. honestabe1947, I am waiting on my SDOP transition result for almost 2 months now.

  24. not surprised to hear that but could actually be a positive .... I hope your max. balances were below $250K

  25. Thanks MeHere

    Jack, Would you mind sharing with us how long the IRS is taking to get back on OVDP Transition requests with a Yes/ No based on your experience and what you have heard? ie 2 weeks 2 months? , ?

    Any others?
    Its only via sites like this that we can share atleast some information together to overcome the huge advantage the IRS has over individuals

    You state "Based on my own docket and others that I have heard from, the IRS has approved the certifications and is completing the transition."

    Sounds positive - both that the IRS is approving certifications and doing so quickly
    I am now aware of 3 cases- MeHere , 2 months no response and two other cases that I personally know of - 4 and 6 weeks and no response.

  26. I only have one transition request. I submitted the request in early August. The agent called this past week and said that the powers that be wanted certain changes to the certification. The changes are not material. For example, they wanted year end numbers on 39 accounts rather than high point in year numbers. The difference was $2 in the taxpayer's favor. They also wanted the narrative cut and pasted into the certification form rather than attached and incorporated by reference in the form. But the signal -- at least the inference -- was that the certification was acceptable, because, if they were going to deny, they would not have required the changes. And, of course, we were already in opt out, so we would just continue the opt out and end up basically in the same place anyway.

    I have heard that a few others have already been accepted. I have also heard that some have been denied. But, not a whole lot of either category yet.

    Jack Townsend

  27. Notamused, where's the $500K limit coming from?

  28. Did you know that you can create short links with AdFly and make $$$ from every click on your shortened urls.


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