An earlier news item finally reached my consciousness this morning and gave me a déjà vu experience. A Freshfields (prominent law firm) former tax partner who gave legal advice for clients to exploit an abusive tax shelter (aka bullshit tax shelter) was sentenced to 3 ½ years incarceration for his role. The shelter has attracted the name “Cum-Ex.” See e.g., Tom Sims & Kirstin Ridley, Former Freshfields partner sentenced to jail for German tax fraud (Reuters 1/30/24), here; and Olaf Storbeck, Freshfields’ former tax partner sentenced to 3½ years in jail (Financial Times 1/30/24), here.
I don’t know exactly how the scheme worked but the generic description is summarily described in the Reuters article:
Using such dividend stripping schemes, banks and investors would swiftly trade shares of companies around their dividend payout day, blurring stock ownership and allowing multiple parties to falsely reclaim tax rebates on dividends.
The following is from the Financial Times article:
The fraud centred on share deals executed before and after a stock’s dividend payments that duped governments to reimburse taxes that were never paid in the first place.
Maple Bank’s cum-ex transactions were equivalent to “organised [financial] crime”, Gröschel [the judge' said, adding that they were highly organised, took part over several years and led to “ludicrous” financial damage.
The aim of the transactions, said Gröschel, was not just to cut the amount of tax paid but to steal from the government. Johannemann’s legal advice was “a central contribution” to that crime, he added.
“Paying [a tax] once but reclaiming [it] twice just does not work,” he said, and that “a halfway talented elementary school pupil” was able to understand that concept.
* * * *
During the trial, Johannemann acknowledged he had “glossed over the fact that my legal advice was used for illegal means”, and said he had “totally failed” as a lawyer. The judge took issue with that assessment, saying he was certain Johannemann had been aware of all relevant details of the fraudulent transactions when giving his advice.
In his ruling Gröschel also took aim at Freshfields, accusing the tax practice of one of the world’s most prestigious law firms of having developed “its own business model” that specialised in giving affirmative advice on cum-ex transactions. The fees the law firm generated from such business were “almost ridiculously low”, he said.
The latter on fees caught my eye. My experience from the abusive tax shelter era was that the fees were very large compared to the hours expended delivering the opinions when they were "cookie-cutter" opinions marketed to many taxpayers. The excess fees were a form of “get out of jail free’ insurance premium to the taxpayers paying the fees. Viewed alone from a single transaction, the excess fee would be ridiculously low, but when marketed widely among wealthy and high-income earners, the fees really could add up to ridiculous amounts. See e.g., More on the Daugerdas Case - The Role of Nonpromoter Enablers (Federal Tax Crimes Blog 6/5/11), here.
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