Second Circuit Affirms Civil Liability for Bullshit Tax Shelter Participants Defrauding Denmark by Abusing the Tax Treaty (9/1/26)

In Skatteforvaltningen v. Markowitz, __ F.4th ___ (2d Cir. 2026), CA2 here and GS here [to come], the panel affirms the district court’s judgment based on a jury verdict holding the defendants civilly liable to the Danish government for participating in a massive fraud using the strategy sometimes called “cum-ex”. I have previously written on variations of this fraud here. Basically, through hocus-pocus, the defendants claimed to have stock in Danish companies on their dividend date which would have meant that they would be entitled to the dividends and those dividends would require withholding at 27%. However, under the U.S.-Denmark income tax treaty, dividends paid by a Danish company to U.S “shareholders that are United States pension plans, which are exempt from [U.S.] taxation” (Slip Op. 9)  may be refunded to the qualifying shareholders. Basically, the principals or agents of the taxpayers figured out (i.e., created ex nihilo) a way to claim the refunds with respect to stock they never owned and with respect to dividends they never received and thus withholding tax that was never paid in. In this civil suit, Denmark seeks to recover from the participants and beneficiaries of this fraud on its fisc. Denmark succeeded at trial and prevailed on appeal.

The underlying events are straight-forward fraud wrapped in a supposed refund claim. The principal issue on appeal is whether the suit sought liability that was subject to the so-called “revenue rule” where, in Anglo-American jurisprudence, the courts of one sovereign (here the U.S.) will not enforce another sovereign’s tax laws. (See Federal Tax Crimes Blog posts on the revenue rule here.) The panel rejects the defendants’ revenue rule argument. (Slip Op. 20-35.) The Court’s lengthy consideration of that issue is, I think, correct. As suggested above, the refund claims were simple fraud in the guise of refund claims and had nothing to do with Danish tax law. Another way of looking at it is that the transactions were an abuse of the U.S.-Denmark tax treaty which U.S. courts should not be precluded from considering and providing appropriate relief.

In any event, at trial and on appeal, the defendants conceded that they did not own the stocks and hence were not entitled to the refunds they claimed. They instead argued that they had no reason to know that their refund claims were bogus. Without that knowledge, they claimed, their claims were not fraudulent. The jury decided that they had the requisite mens rea for liability. Of course, that argument was bullshit given the red-flags involved and babies-come-in-baskets nature of their claims.

There were other arguments based on trial court evidentiary decisions and sufficiency of the evidence as to two defendants. (Slip Op. 36-61.) The issues are run of mine in criminal cases so I do not discuss them, but I do point interested readers to two discussions:

1. Exclusion of rejection of a legal opinion. (Slip Op. 42-44, bold-face supplied by JAT.) “[D]efendants argue (wishfully) as to probative value that the “opinion confirmed Richard’s understanding that Solo Capital would acquire Danish shares and showed that the dividend arbitrage trading strategy worked, further allaying any potential concerns.” Appellants’ Br. at 37.” The panel concluded that, if error, the exclusion was harmless.

2. Application of agency or agency-like liability to the spouses of the two defendants who put together the scheme for the defendants. The spouses were not quite so innocent as they claimed.

Finally, the trial-level judge was Judge Lewis Kaplan (Wikipedia here). I had trial-level experience with Judge Kaplan in a case that produced several prominent opinions, including a major opinion in United States v. Stein, 541 F.3d 130 (2d Cir. 2008), here. The trial-level proceedings were protracted for a host of reasons, but (at least for a number of defendants, including my client) terminated in that appellate opinion. I found Judge Kaplan to be an exceptionally capable judge with characteristics that I find most appealing in trial judges. He is smart, very smart, he is attentive, he is decisive, turns out quality opinions fast after the last brief, and basically does not put up with trial lawyer bullshit. I did a ChatGPT Plus inquiry on Judge Kaplan that readers may review here.

I am characterizing the scheme involved in the case above as a bullshit tax shelter because it was promoted and used by other to cheat on their taxes. 

Added 9/1/26 5:15pm: Technically, the scheme is not a "shelter" in the sense of sheltering otherwise taxable income. Rather, it is just stealing money that the scheme players are not entitled to. But it is not far in concept from the traditional bullshit tax shelters. Both are ways of stealing.

Query: Since, the bogus refunds were not qualified under the treaty and represent stolen funds, shouldn't the defendants be subject to tax on the amounts they received? Of course, they might be sugject to some mitigation on the income tax consequences based on factors not evident in this opinion, but still proceeds of theft are taxable income. Follow the money.