Wednesday, September 21, 2016

Daugerdas Conviction and Sentencing Affirmed by Second Circuit Court of Appeals (9/21/16)

The Second Circuit affirmed today the conviction and sentencing of Paul M. Daugerdas, promoter en mass of bullshit tax shelters.  United States v. Daugerdas, ___ F.3d ___, 2016 U.S. App. LEXIS 17219 (2d Cir. 2016). The opinion is here.

The opinion, by Judge John M. Walker, starts with a summary of the convictions:
(1) one count of conspiracy to defraud the Internal Revenue Service (“IRS”) in violation of 18 U.S.C. § 371; see 26 U.S.C. § 7201 and 18 U.S.C. § 1343; (2) four counts of client tax evasion in violation of 26 U.S.C. § 7201 and 18 U.S.C. § 2; (3) one count of IRS obstruction in violation of 26 U.S.C. § 7212(a); and (4) one count of mail fraud in violation of 18 U.S.C. §§ 1341 and 1342.  
He was then "sentenced principally to 180 months’ imprisonment, three years’ supervised release, $164,737,500 in forfeiture, and $371,006,397 in restitution."

Then, he argued on appeal that
(I) the evidence was insufficient to support his convictions; (II) the indictment was constructively amended; (III) the indictment was duplicitous; (IV) the accumulation of errors at trial violated his due process right to a fair trial; (V) the district court’s supplemental instruction on the Annual Accounting Rule misled the jury; (VI) his sentence was procedurally and substantively unreasonable; and (VII) the government failed to establish the requisite nexus between his crimes and the property sought in forfeiture. 
The Court of Appeals rejects all arguments and affirms.

The opinion is 37 pages long and is fairly straight-forward.

Basically, Daugerdas designed and participated, directly and through others, in the implementation the some variation of the bullshit shelters based on an aggressiv, too aggressive, interpretation of various strategies promoted by prominent law and accounting firms in the late 1990s and early 2000s.   He did this for his or his firm's clients and also did some of them for himself to shelter the large amount of income that he was earning.  As the Court notes,
As an essential part of the marketing of all the tax shelters, Daugerdas and his colleagues issued “more‐likely‐than‐not” opinion letters to clients who purchased the shelters.  Such letters state that “under current U.S. federal income tax law it is more likely than not that” the transactions comprising the shelters are legal and will have the effect sought by the clients.  They protect clients from the IRS’s imposition of a financial penalty in the event that the IRS does not permit the losses generated by the shelter to reduce the client’s tax liability.    Paralegals or attorneys who worked for Daugerdas generated these letters and Daugerdas often reviewed and signed them himself.  The letters stated that the clients had knowledge of the particular transactions underlying the shelter and that the clients were entering into the shelter for non‐tax business reasons.  Multiple clients testified that they never made representations of knowledge to Daugerdas or his associates and that, in any event, these representations were false because the clients knew little or nothing about the underlying transactions and entered into the shelters only to reduce their tax liability.   
Because Daugerdas and his colleagues designed the transactions with a focus on their tax consequences rather than their profitability, they generally did not generate meaningful returns.  [Examples omitted]  Nevertheless, Daugerdas chose to proceed and even issued “more‐likely‐than‐not” opinion letters falsely stating that some of the transactions had a 15 reasonable possibility of producing a profit.  Moreover, the already‐ 16 low profit potential of all the shelters disappeared entirely when the 17 fees charged by J&G, BDO, and DB for the shelters were taken into account.  
Then, there was some backdating of transactions and documents to correct errors in the implementation.

I found the opinion rather dull reading, blazing no new trails in the law and seeming to me for the most part superficial.  I will consider it further, but I don't think now that there is any particular wisdom to glean from the opinion or worth commenting on.  I post it principally because it is the end of the criminal prosecution of Daugerdas which has occupied many blog entries since the inception of the blog.  For other entries about or mentioning Daugerdas, see here.

I do have one comment, though, which is more of a pet peeve for me.  The first quote above as to the convictions has this one:
(2) four counts of client tax evasion in violation of 26 U.S.C. § 7201 and 18 U.S.C. § 2.
This cryptic statement can be read as meaning that Daugerdas was liable as a principal of the crime of tax evasion only as a deemed principal through 18 U.S.C. § 2, which establishes aider and abettor and causer liability.  I have blogged on this subject before with regard to theories of tax evasion liability for the tax professional or other enabler of the tax evasion.  Basically, in a simplified version of my concerns, they that (i) the professional or other enabler can be directly liable as a principal for tax evasion without need the need for the deemed "principal" status conferred upon aiders and abettors or for causers under 18 U.S.C. § 2,  here, (ii) the actions which would make a person liable for tax evasion as a deemed principal through aider and abettor or causer status under 18 U.S.C. § 2 would make the person directly liable for tax evasion as a principal under § 7201, and (iii) hence, instructing the jury on separate potential liability as an aider and abettor or causer will merely confuse the jury and should not be done.  Judge Pauley grasped those concepts in the first Daugerdas trial.  My principal blogs on this subject are:

  • Even More on Principals, Accomplices, Causers and Pinkerton Conspirators - the Daugerdas Case (5/10/11), here.  This relates to the first trial.
  • Daugerdas Retrial Jury Instructions - Part 07 Tax Evasion Instructions Part 2 Tax Evasion and Conspiracy to Commit Tax Evasion - Derivative Liabilities (11/25/13), here.

See also my longer article, John A. Townsend, Theories of Criminal Liability for Tax Evasion (May 15, 2012), available at SSRN, here.

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