Article on Prosecuting Tax Professionals to Leverage Deterrence (5/7/13)

Scott A. Schumacher, here, a co-author of Tax Crimes, here, has published on SSRN an article titled Magnifying Deterrence by Prosecuting Professionals.  The article  on SSRN is here.  The abstract from the SSRN page is:

Magnifying Deterrence by Prosecuting Professionals 

Scott A. Schumacher 

University of Washington - School of Law 

March 1, 2013 

89 Ind. L.J. ___ (2014) Forthcoming 

Abstract:  

This article examines the recent series of criminal prosecutions against tax professionals and offshore bankers. These criminal cases, brought against the largest Swiss bank (UBS), the oldest Swiss bank (Wegelin), one of the largest accounting firms in the world (KPMG), as well as numerous lawyers and accountants, was a dramatic shift for the U.S. Department of Justice. After decades of tolerating abusive tax shelters and tax haven banks, the Government changed its policy. However, rather than indicting the individuals and corporations who invested in tax shelters or hid money in offshore accounts, the Justice Department indicted the lawyers, accountants, and bankers who advised them. This article will analyze those prosecutions from a theoretical, historical, and practical perspective, and will examine the impact the new prosecution policy will have on the legal professional, the tax system, and international relations. 

This is the first article to examine these issues, and it is a combination of my prior scholarship involving tax shelters and criminal tax matters, including my casebook TAX CRIMES. The article will be of great interest to anyone teaching or practicing in the areas of taxation, criminal law, and criminal theory. It will also appeal to those interested in the role of lawyers and other professionals within the legal system. It therefore should have wide appeal amongst faculty readers, as well as practitioners and policy-makers. 

Number of Pages in PDF File: 53
Keywords: Tax havens, tax shelters, prosecuting professionals, tax crimes, criminal theory

The Table of Contents gives the scope of the article:

Daugerdas Related Defendant Is Sentenced for Bullshit Tax Shelter Work (3/2/13)

Donna Guerin, a member of the Daugerdas team of bullshit tax shelter purveyors, has been sentenced "to eight years in prison on conspiracy and tax evasion charges stemming from her work on the design, marketing, and implementation of fraudulent tax shelters that allowed her clients to claim billions of dollars in fraudulent tax losses." USAO SDNY press release, here.  (For the earlier blog on Ms. Guerin's guilty plea, see Guerin, Daugerdas Sidekick, Pleads Guilty (Federal Tax Crimes Blog 9/14/12), here.)

The press release on her sentencing describes her conduct:

GUERIN was a partner at Altheimer & Gray (“A&G”), a Chicago law firm, between 1994 and 1998, and later moved with a small group of A&G attorneys to the newly-formed Chicago office of Jenkens & Gilchrist (“J&G”), a Texas-based law firm with offices throughout the United States. At different times between 1999 and 2005, GUERIN was a shareholder or partner at J&G. 

Between 1996 and 2004, GUERIN and other attorneys at J&G worked on the design, marketing and implementation of high-fee tax strategies for individual clients. Those strategies, or “tax shelters,” were designed to allow high-net-worth clients to eliminate, reduce, or defer taxes on significant income or gains. GUERIN and other J&G attorneys worked together with brokers from a financial institution, partners and employees of the accounting firm BDO Seidman, and other entities, in marketing and implementing the tax shelters. 

Among the fraudulent tax shelters designed, marketed, and implemented by GUERIN and her co-conspirators were “Short Sales,” “Short Options Strategy” (“SOS”), “Swaps,” and “HOMER.” The Short Sale tax shelter was marketed and sold from 1994 through 1999 to at least 290 wealthy individuals, and generated at least $2.6 billion in false and fraudulent tax losses. The SOS tax shelter was marketed and sold from 1998 through 2000 to at least 550 wealthy individuals, and generated at least $3.9 billion in false and fraudulent tax losses. The Swaps tax shelter was marketed and sold in 2001 and 2002 to at least 55 wealthy individuals, and generated more than $420 million in false and fraudulent tax losses. 

In return for receiving a fee from tax shelter clients based on a percentage of their purported tax losses – usually 5% for ordinary losses and 4% for capital losses – GUERIN and others at J&G assisted clients in implementing all of the stages of the fraudulent tax shelters, including setting up bank accounts and entities such as corporations and partnerships. GUERIN and others at J&G also provided the tax shelter clients a “more likely than not” legal opinion from J&G.

Mr. Cummings' Defense of Aggressive Tax Shelter Professionals (2/28/13)

I write to offer readers the following article:  Jasper L. Cummings, Jr., DOJ Criminal Tax Overreach, 138 Tax Notes 745 (Feb. 11, 2013), here, permitted with the permission of Tax Analysts.  I also offer below a brief summary and my comments.

Mr. Cummings, a frequent commentator on the tax law and its ripples (including criminal tax law), advises right up front that his principal points are:

This article makes the following principal points: 

•  The tax bar should have been somewhat more concerned about the way the Department of Justice Tax Division has prosecuted selected major law and accounting firm tax professionals who participated in the planning of, opinions on, or audit defense of some structured transactions during the most recent tax shelter boom that ended in the early 21st century. 

•  The type of arguments that the DOJ pursued against defendants like those in the Coplan case, recently affirmed in part and reversed in part by the Second Circuit, n1 might produce numerous convicted felons if applied to activities in which many readers have participated in.
   n1 United States v. Coplan, No. 10-583 (2d Cir. 2012), Doc 2012-24490, 2012 TNT 231-17 . [JAT Note:  the citation for Coplan is 703 F.3d 46 (2d Cir. 20122) and the opinion is here.]

•  The most troubling aspect of the Coplan and other prosecutions is that they follow a trend to criminalize advising, and even defending, a transaction that the DOJ believes does not produce the desired tax results under the (civil) economic substance doctrine.

Mr. Cummings uses the Coplan case as a point of departure.  (For my prior blogs on Coplan, see Major CA2 Decision on E&Y Tax Shelter Convictions (11/29/12), here, with links to the 8 other blogs on aspects of the Second Circuit's decision in Coplan.) He laments that the tax bar has just rolled over to prosecutions and convictions in tax shelter cases as a way to do damage control for their franchise in the aggressive tax planning area.  (Let a few be prosecuted so that the others can continue to play with relatively minor risk because only a few can be prosecuted).  He says (footnote omitted):

Thoughtful Article on the Meek and Aggressive Tax Practitioner (10/1/12)

In the UH Tax Procedure class, we studied the gradations in confidence in tax reporting positions.  I cut and paste this from the Tax Procedure book:

The tax law has developed the following jargon in quantifying levels of confidence in reporting return positions, with the percentage being the projected chances for success if litigated:
nonfrivolous = 10 percent or better chance of winning
reasonable basis = 20 to 25 % or better chance of winning
realistic possibility of success = 33 1/3 % or better chance of winning
substantial authority = perhaps 35 to 40 % chance of winning
more likely than not = more than 50 % chance of winning
probable = 70 to 80 % chance of winning 

These standards can be stated in the inverse:
nonfrivolous = 90% chance of losing
reasonable basis = 75-80% chance of losing
realistic possibility of success = 66 2/3 % chance of losing
substantial authority = perhaps 60 to 65% chance of losing
more likely than not = less than 50 % chance of losing
probable = 20-30 % chance of losing