Tax Attorneys Indicted for Fraudulent Tax Shelter and Related Conduct (11/18/22)

DOJ announced indictments in a press release, here, titled as follows: Tax Attorneys and Insurance Agent Indicted for Promoting and Selling Fraudulent Tax Shelter. The indictment is here (CL).

The charges are

• defraud conspiracy 18 USC 371 (Count One),
• aiding and assisting 7206(2) (Counts Two through Twelve and Eighteen through Twenty-two),
• tax perjury via false tax return 7206(1) (Counts Thirteen through Seventeen), and
• wire fraud 18 USC 1343 (Count Twenty-Three). 

The indictment also alleges a Notice of Forfeiture and Finding of Probable Cause.

The pattern of conduct alleged in the press release as:

According to the indictment, from 2011 to the present Michael Elliott Kohn and Catherine Elizabeth Chollet, both attorneys and residents of St. Louis, Missouri, and David Shane Simmons, a licensed insurance agent and broker based out of Jefferson, North Carolina, conspired to defraud the United States by promoting, marketing, and selling to clients a fraudulent tax scheme known as the Gain Elimination Plan (“GEP”). The defendants allegedly designed the GEP to conceal clients’ income from the IRS by fraudulently inflating business expenses through fictitious royalties and management fees. These fictitious royalties and management fees allegedly were paid, on paper, to a limited partnership largely owned by a charitable organization. In reality, Kohn and Chollet allegedly fabricated the royalties and management fees. In total, the defendants allegedly caused a tax loss to the IRS of tens of millions of dollars.

 The indictment further alleges that Kohn and Simmons engaged in a scheme to defraud an insurance company by providing false information on insurance applications on behalf of their clients. The false information allegedly included fraudulent representations concerning the clients’ financials and the purpose of the insurance policies. In total, Kohn and Simmons allegedly caused the insurance company to issue more than $200 million in insurance policies based on false application information. Simmons allegedly earned large commissions for selling the insurance policies, many of which he split with Kohn and Chollet. Simmons also allegedly filed false personal tax returns by underreporting his business income and inflating his business expenses.

The press release alleges sentencing matters as follows:

D.C. Circuit Swats Down Bullshit Tax Shelter (11/29/19)

In Endeavor Partners, LLC v. Commissioner, ___ F.3d ___ (D.C. Cir. 2019), here, the Court affirmed the Tax Court’s strike-down of yet another bullshit tax shelter, Endeavor Partners, LLC v. Commissioner, T.C. Memo. 2018-96, here.  In broad overview without getting into the weeds, these shelters do very large highly leveraged offsetting trades with relatively little cash outlay and no real economic risk.  The resulting transactions produce very large nominal gains with offsetting nominal losses, with in net no material risk and no material gain.  The nominal gains are allocated to tax indifferent parties, and the nominal losses are allocated to wealthy taxpayers with high taxable income to offset their income and thus avoid (or, in many cases, evade) tax on their income.

I start with the marvelous Tax Court opinion by Judge Lauber because he does get into the weeds.  Here is the overview from p. 3 of the Slip Op.:

Finding that the transactions lacked any economic substance whatsoever, we will sustain respondent’s disallowance of the loss deductions in question. But we are unable to sustain the accuracy-related penalties determined under section 6662(a). Although the partnerships’ conduct is plainly deserving of penalty, respondent has conceded that the IRS did not secure, prior to the issuance of the FPAAs, written supervisory approval of the penalties as required by section 6751(b)(1). 

Basically, the principal behind one of the promoters was Andrew D. Beer, but he had many enablers, including prominent accounting firms (Arthur Andersen and Ernst & Young), at least one prominent law firm (Arnold & Porter, whose more likely than not opinion was highly marketable), and Deutsche Bank ("DB", which implemented the illusory financial transactions and made the purported loans backing them).  Arnold & Porter alone was paid about $10 million for something.  I started to call them legal fees, but that gives them a dignity they do not deserve.  A better description is that they were insurance premiums sold to wealthy participants in the shelter to protect them (they hoped) from criminal and civil penalties for claiming tax shelter benefits that any reasonable and half-way intelligent person would have known were too good to be true.

So, the Tax Court in 66 pages lays bare the perfidy of these actors, albeit dressed in tax lingo that somehow detracts from the fact that these bullshit shelters, and this one specifically, were simply fraudulent raids on the U.S. Treasury.

So, how does one defend such nonsense?  I have not looked through the Tax Court briefs, but the Tax Court did find Mr. Beer and the expert witnesses not credible on any issue in the case.  So, further obfuscation was the defense.  It did not work at the trial level.

To their credit, the attorneys for the bullshit shelter in their appellate brief opened as follows:

Delta and its affiliates (collectively the “Delta Group”) were involved with certain so-called “tax shelters” that we recognize this Court has viewed with disfavor. At issue here, however, is not whether any transaction was a “tax shelter” or whether any “tax shelter” was valid. Rather, the issues on this appeal are principled ones of evidence and fundamental procedural fairness. We respectfully urge the Court to focus on how the Tax Court applied the rules of evidence rather than on the subject matter to which it applied them.

Just as the shelter dodged the bullet on the accuracy related penalty because of the IRS’s footfault on the § 6751(b) written manager approval requirement, it tried to avoid the consequence of its bullshit because, it alleged, the Tax Court treated it unfairly from a procedural perspective.

Report of IRS Criminal Interest in Captive Insurance Shelters (11/17/19)

It is reported that the IRS is looking to make criminal referrals to CI in § 831(b) captive insurance cases.  Jay Adkisson, IRS Suggests Criminal Referrals To Be Made In Abusive 831(b) Captive Tax Shelter Cases (Forbes 11/17/19), here.  The article cites as its source an article written by Aysha Baghi in Bloomberg's Tax Management Weekly Report™ which in turn cites SB/SE Commissionier Eric Hylton at a conference.

Adkisson notes the potential targets:

1. Promoter (captive manager) who could have been subject to promoter examination and continued to market the product even after Notice 2016-66.

2. Actuaries who provided studies making “unsupportable predictions about claims and losses, i.e., so-called ‘whore actuaries’.”

3. The captive owners who continued to take deductions after the Notice.

Adkisson speculates that, while referral to CI is one thing, as to referral from CI to DOJ Tax, the target environment is “ not so rich since DOJ-TAX would have to prove tax fraud beyond a reasonable doubt, which is a much higher standard than that something is a mere tax shelter.”  Adkisson notes:

Here, it would likely be a captive manager and their client who was caught fabricating claims after-the-fact so as to try to justify the premiums paid to the captive, or the IRS had audio tapes or other evidence of the captive manager selling the captive as a tax shelter but then later falsely testifying that there were no tax motivations for the arrangements.

Adkisson notes that the IRS may seek promoter injunctions, but that “the forecast for a criminal injunction before 2020 is probably pretty low.”  I think he means criminal prosecution rather than criminal injunction.

Two "Investors" in BullShit Tax Shelters Lose FTCA Claims on Appeal (1/13/18)

In Esrey v. United States, 2018 U.S. App. LEXIS 252 (2d  Cir. 2018) (summary order), here, the Second Circuit affirmed a dismissal of a Federal Tort Claims Act ("FTCA") complaint against the United States by investors in a bullshit tax shelter.  I previously wrote on the complaint when it was filed.  Two Participants in BullShit Tax Shelter Sue the Government for Colluding to Protect the Promoter (EY) from the Participants (4/28/16; 5/15/16), here.  I did not write on the lower court dismissal of the complaint, but the key facts are set for in the Second Circuit summary order which I excerpt virtually in full below:

The FTCA's broad waiver of sovereign immunity for tort claims against the government is subject to several exceptions. See Kosak v. United States, 465 U.S. 848, 851-52, 104 S. Ct. 1519, 79 L. Ed. 2d 860 (1984). As relevant here, the FTCA does not waive sovereign immunity for claims "arising out of . . . misrepresentation." 28 U.S.C. § 2680(h). For purposes of this exception, "a misrepresentation may result from the failure to provide information, as well as from [the] provi[sion] [of] information that is wrong." Ingham v. E. Air Lines, Inc., 373 F.2d 227, 239 (2d Cir. 1967) (emphasis added). And the exception "applies to claims arising out of negligent, as well as intentional, misrepresentation." Block v. Neal, 460 U.S. 289, 295, 103 S. Ct. 1089, 75 L. Ed. 2d 67 (1983). 

The plaintiffs' complaint alleges that the Internal Revenue Service ("IRS"), in violation of the laws of New York, aided and abetted Ernst & Young ("EY") in breaching a fiduciary duty EY owed to the plaintiffs. Essentially, the plaintiffs claim that the IRS took steps to conceal from the plaintiffs the fact that EY was the subject of a criminal investigation that created a conflict of interest for EY in its representation of the plaintiffs in a civil audit before the IRS. The plaintiffs claim that they were injured by this concealment because, if they had known at the time of their audit that EY was under criminal investigation, they could have used that information to (1) convince their then-employer, an EY client that eventually terminated the plaintiffs over concerns arising from the audit, to instead terminate EY; and (2) pursue their arbitration claim against EY for fiduciary-duty breach in a more cost-effective manner. 

"A plaintiff may not by artful pleading avoid [§ 2680(h) of the FTCA]." Dorking Genetics v. United States, 76 F.3d 1261, 1265 (2d Cir. 1996). "In determining the applicability of the § 2680(h) exception, a court must look, not to the theory upon which the plaintiff elects to proceed, but rather to the substance of the claim which he asserts." Lambertson v. United States, 528 F.2d 441, 443 (2d Cir. 1976). 

Although the plaintiffs style their claim as one for "aiding and abetting a fiduciary-duty breach," the gravamen of that claim is that the IRS wrongfully withheld information from them. Indeed, in their complaint, the plaintiffs allege that they suffered their principal injuries because the "IRS . . . helped EY to hide information" and "[a]s a result of . . . the IRS's active concealment" of its criminal investigation and audit of EY's tax practices. App'x at 8-9. The alleged conduct that was "essential" to the plaintiffs' claimed injuries was the IRS's non-communication of information. Block, 460 U.S. at 297. Accordingly, the claim "aris[es] out of . . . misrepresentation" under 28 U.S.C. § 2680(h), and no court is statutorily accorded jurisdiction to hear it. 

The plaintiffs attempt to evade the misrepresentation exception by identifying two "non-concealment" acts that they allege in their complaint. Appellant's Br. at 24. First, they point to allegations that the IRS removed the word "penalty" from a press release regarding the IRS's audit of EY. Second, the plaintiffs contend that the IRS's failure to prohibit EY from representing them in audit proceedings due to a conflict of interest was not an act involving a representation. 

The plaintiffs' arguments are unavailing. As to the first argument, the allegation that the IRS decided to remove the word "penalty" amounts to an allegation that the IRS misrepresented to the public the nature of the IRS's concern with EY's tax shelter practices. This claim centers on the "communication of information on which the recipient relies," and is therefore barred by the misrepresentation exception. Block, 460 U.S. at 296. Similarly, the plaintiffs' second argument fails, because the plaintiffs' theory is that by failing to prohibit EY from representing them, the "IRS . . . helped EY to hide information from [the] Plaintiffs[,] knowing that such information would have been critical to [the] Plaintiffs' evaluation of whether to trust EY." App'x at 8. This claim too concerns communicating information to the plaintiffs, and therefore the plaintiffs fail to allege "the breach of a cognizable duty owed to [them] which is 'distinct from any duty to use due care in communicating information.'" Dorking Genetics, 76 F.3d at 1265 (quoting Block, 460 U.S. at 297).

For further reading on the case, I link the following:

• The Joint Appendix (containing the complaint and the decision below, here.
• The Appellant's Opening Brief, here.
• The U.S. Answering Brief, here.
• The Appellant's Reply Brief, here.

Faulty Tax Shelter Opinions and Appraisals and Resulting Civil Penalties (9/24/16)

Two recent cases highlight the role of the tax professionals' legal opinions in so-called tax shelters.  During the abusive tax shelter proliferation in the late 1990s and early 2000s, the linchpin to abusive tax shelters was tax professionals' opinion letters pronouncing that the tax benefits were "more likely than not" to be sustained if the IRS contested.  Those opinion letters -- being just tax professionals' opinions -- did not affect how courts would resolve the issue of whether the tax shelters worked.  They served solely to give the tax shelter "player" some basis to claim exemption from the penalties that might otherwise apply to aggressive tax reporting positions.  Relying on tax professionals' opinions might permit the taxpayers to claim § 6664(c)'s "reasonable cause" and "good faith" exception to the penalties in § 6664(c), here, or, possibly, a reduction in the penalty base for the substantial understatement penalty in § 6662(d), here (in an earlier iteration).  Many of the tax shelter players did not in the final analysis actually rely upon the promoted tax shelter professionals' opinions, but rather discretely had their own independent counsel advise them on the shelter.  As I understand it, many of these independent advisers gave roughly the following advice:  "No way the shelter will be sustained if contested, but at least the promoted tax professionals' opinions will give the taxpayers a pretty good shot at avoiding the penalty."  (Of course, for this to work, the taxpayer would have to successfully keep from the IRS or ultimately the courts, the substance of the independent adviser's opinion.)

I discussed United States v. Daugerdas, ___ F.3d ___, 2016 U.S. App. LEXIS 17219 (2d Cir. 2016), here, recently, Daugerdas Conviction and Sentencing Affirmed by Second Circuit Court of Appeals (Federal Tax Crimes Blog 9/21/16), here.  I quoted the part of the opinion relevant to today's discussion, but will present the quote again here:

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 [6]  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.

Daugerdas' shelters were clearly of the abusive -- aka bullshit -- variety.  In essence, for the tax shelters Daugerdaus and his partners in crime hawked, the play in the shelter gave the taxpayer a shot at the audit lottery and some way potentially to mitigate the penalty damage if he did not win the audit lottery.  But, as it turns out, these shelters were so bad, that they did not really offer much in the way of penalty mitigation except, sometimes, through IRS amnesty programs.  In essence, most of the taxpayers -- certainly the more sophisticated taxpayers who had millions and millions of income to shelter -- got into the shelter on a wink and a nod, hoping for the best with some downside protection.

In Exelon Corp. v. Commissioner, 147 T.C. ___, No. 9 (2016), here, the taxpayer had $1.6 billion in gain that it perceived a need to shelter -- i.e., avoid paying tax on.  The transactions are convoluted (as in the case of many tax shelters where the convolutions masks lack of substance).  (The complexity of the opinion is suggested by the fact that the substantive discussion concludes on p. 161 of the slip opinion.)  The details of the transactions are not important for purposes of this blog, but they are variations on leveraged leases with their own acronym that is familiar to affionados of bullshit tax shelters -- SILOs (to be contrasted from related tax shelters called LILOs).  In the opinion, Judge Laro offers the following "Primer on Leveraged Leases, LILOs, and SILOs:"

IRS Issues Publication Warning of Abusive Tax Shelters and Scams (2/17/16)

The IRS issued  IR-2016-25 (2/16/16), here, titled Abusive Tax Shelters Again on the IRS “Dirty Dozen” List of Tax Scams for the 2016 Filing Season.  In this announcement, the IRS singles out some particularly abusive kinds that appear to be ripe for criminal investigation and prosecution.  They are:

• Abusive Tax Structures (which I call bullshit tax shelters)
• Misuse of Trusts
• Captive Insurance.

I cut and paste just the discussion on Abusive Tax Structures (bullshit tax shelters):

Abusive Tax Structures 

Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions. 

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI's primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme, such as accountants or lawyers. Just as important is the investigation of investors who knowingly participate in abusive tax schemes. 

Multiple flow-through entities are commonly used as part of a taxpayer's scheme to evade taxes. These schemes may use Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. They are designed to conceal the true nature and ownership of the taxable income and/or assets.
Whether something is “too good to be true” is important to consider before buying into any arrangements that promise to “eliminate” or “substantially reduce” your tax liability. 

 If an arrangement uses unnecessary steps or a form that does not match its substance, then that arrangement is an abusive scheme.  Another thing to remember is that the promoters of abusive tax schemes often employ financial instruments in their schemes; however, the instruments are used for improper purposes including the facilitation of tax evasion.

Here is my discussion of the features of abusive tax shelters from the current working draft of my Federal Tax Procedure Book (footnotes omitted):

Algothrims in Service of Tax Compliance (10/30/15)

I missed this article when it came out earlier this month. Lynnley Browning, Computer Scientists Wield Artificial Intelligence to Battle Tax Evasion (NYT 10/9/15), here.  Lynnley Browning is an excellent observer of the tax avoidance / fraud scene.  Her articles are worth reading.

Readers of this blog are aware if the traditional means for identifying tax evasion -- such as civil audits, traditional informants (such as disgruntled special friends, even wifes), etc.  But now, algorithms can be deployed to large available data sets where, without the algorithms, it might be hard to perceive patterns and correlations that can identify the high potential for tax avoidance or evasion.

Here are some relevant excerpts:

“We see the tax code as a calculator,” said Jacob Rosen, a researcher at the Massachusetts Institute of Technology who focuses on the abstract representation of financial transactions and artificial intelligence techniques. “There are lots of extraordinarily smart people who take individual parts of the tax code and recombine them in complex transactions to construct something not intended by the law.”
A recent paper by Mr. Rosen and four other computer scientists — two others from M.I.T. and two at the Mitre Corporation, a nonprofit technology research and development organization — demonstrated how an algorithm could detect a certain type of known tax shelter used by partnerships. 

First, the researchers translated tax regulations governing partnerships, a growing source of tax trickery, into source code. Then they rendered the transactions underpinning a questionable shelter known as “installment-sale bogus optional basis,” or Ibob, as a series of codes. The Ibob shelter artificially inflates the basis value of an asset on a tax return to wipe out taxable gains when that asset is sold. While some of Ibob’s individual transactions are perfectly legal, the collective result is a bogus deduction. 

Next, the researchers mapped out in code the tangle of entities that make up typical partnerships. The results flagged specific combinations of transactions and partnership structures that were likely to produce the Ibob dodge. 

Large corporations attract most of the attention when it comes to tax avoidance and tax evasion, but partnerships, which have separate tax rules, are a growing source of worry for the authorities. Commonly used by hedge funds, private equity funds, real estate outfits and oil and gas concerns, partnerships are far less likely to be audited than corporations. A Government Accountability Office r eport from 2010 said that the I.R.S. knew of one million “networks” involving partnerships and similar entities, adding that “the I.R.S. also knows that many questionable tax shelters and abusive transactions rely on the links among commonly owned entities in a network.” 

Rooting out fraud in corporate tax returns takes place largely through data mining, in which the I.R.S. collects pre-existing data from filed tax returns and analyzes them for patterns. The data goes into a database within the agency’s Office of Tax Shelter Analysis, created in 2000 in the wake of a crackdown on mass-market tax shelters sold by accounting firms, law firms and banks. The data-analytical approach depends upon already having some kind of smoking gun, such as a suspicious deduction on a return.
By contrast, the artificial intelligence approach does not require pre-existing evidence. Instead, it focuses on rule mining, in which individual tax code regulations are lined up against one another to ascertain if they can be used collectively to create a sophisticated tax dodge. 

Rule mining takes advantage of a surprising feature of tax shelters: While their inner workings are convoluted and complex, their general aim at the highest level is usually simple and clear — to lower tax bills by improperly generating bogus losses, deductions, offsets and credits that minus the shelters would not exist. 

“It’s incredibly difficult to have a computer algorithm that duplicates the enormous creativity of taxpayers, but it’s very promising,” said Robert A. Green, a tax professor at Cornell Law School who read the M.I.T./Mitre paper.

The ibob shelter was identified as follows in a 2010 GAO report, here.

Another BullShit Tax Shelter Bites the Dust (9/12/15)

We have yet another great opinion attacking bullshit tax shelters for what they are -- bullshit.  See Bank of N.Y. Mellon Corp. v. Commissioner, ___ F.3d ___, 2015 U.S. App. LEXIS 15993 (2d Cir. 2015), here.  The opinion is by Denny Chin (Wikipedia, here), a truly outstanding judge.

First, here is the unofficial summary:

Appeals and cross‐appeal heard in tandem from a judgment of the United States Tax Court (Kroupa, J.) and an opinion and order of the United States District Court for the Southern District of New York (Stanton, J.) applying the ʺeconomic substance doctrineʺ to transactions involving foreign tax credits.   The Tax Court considered the effect of foreign taxes in its pre‐tax analysis and denied the claimed foreign tax credits as lacking economic substance, but allowed interest expense deductions for the loan associated with the transactions.   The district court held that the economic substance doctrine applies to transactions involving foreign tax credits generally and that foreign taxes are to be included in calculating pre‐tax profit.  
    AFFIRMED.

Well, that's pretty cryptic.  I won't try to summarize the complex facts whereby the parties involved tried to exploit the tax regimes of the countries involved.  The Court summarizes its holdings in the Conclusion as follows:

The Court summarizes all of its holdings in the conclusion:

CONCLUSION 

Accordingly, the decisions of the district court and Tax Court are AFFIRMED. To summarize: 

(1) We reject AIG's contention that foreign tax credits, by their nature, are not reviewable for economic substance. The purpose of the "economic substance" doctrine is to ensure that a taxpayer's use of a tax benefit complies with Congress's purpose in creating that benefit. Accordingly, we hold that the "economic substance" doctrine can be applied to disallow a claim for foreign tax credits. 

(2) In determining whether a transaction lacks economic substance, we consider: (a) whether the taxpayer had an objectively reasonable expectation of profit, apart from tax benefits, from the transaction; and (b) whether the taxpayer had a subjective non-tax business purpose in entering the transaction. Gilman, 933 F.2d at 147-48. In our Circuit, we employ a "flexible" analysis where both prongs are factors to consider in the overall inquiry into a transaction's economic substance. 

(3) The focus of the objective inquiry is whether the transaction "offers a reasonable opportunity for economic profit, that is, profit exclusive of tax benefits." Gilman, 933 F.2d at 146 (internal quotation marks omitted). We conclude, as a matter of first impression in this Circuit, that foreign taxes are economic costs and should thus be deducted when calculating pre-tax profit. We also conclude that it is appropriate, in calculating pre-tax profit, for a court both to include the foreign taxes paid and to exclude the foreign tax credits claimed. In so holding, we agree with the Federal Circuit in Salem and disagree with decisions of the Fifth and Eighth Circuits (Compaq and IES, respectively). 

(4) Under the subjective prong, a court asks whether the taxpayer has a legitimate, non-tax business purpose for entering into the transaction. 

(5) As to AIG's transactions, we hold that there are unresolved material questions of fact regarding the objective factors -- i.e., the economic effects of the cross-border transactions and the reasonableness of AIG's expectation of non-tax benefits. There are also material questions of fact regarding AIG's subjective business purpose for entering the cross-border transactions. Because a reasonable factfinder could resolve these questions in favor of the government and conclude therefrom that the cross-border transactions lacked economic substance, the district court did not err in denying AIG's motion for partial summary judgment. 

(6) As to BNY's transactions, we hold that the Tax Court correctly concluded that the STARS trust transaction lacked economic substance. We also hold that the Tax Court did not err in concluding that the $1.5 billion loan from Barclays had independent economic substance, and that BNY was therefore entitled to deduct the associated interest expenses. Accordingly, we affirm the Tax Court's judgment in its entirety.

I now want to focus on the economic substance holding related to the the foreign tax credit manipulation that the Fifth Circuit and the Eighth Circuit had blessed in Compaq Comput. Corp. v. Commissioner, 277 F.3d 778 (5th Cir. 2001); and IES Indus., Inc. v. United States, 253 F.3d 350 (8th Cir. 2001).  Essentially, in calling the tax shelters in the instant cases bullshit, the Court was, in kinder judicial language, calling Compaq and IES bullshit as well.  So, let's see how it did that:

Kostelanetz & Fink Publication on Criminal Tax Topics (3/3/15)

Kostelanetz & Fink has published its Semi-Annual Publication, here.  Readers of this blog will know that the firm and its practitioners are at the forefront of tax controversy practice, including criminal tax practice and OVDP related practice.  Their publications are worth notice.  The key articles for the subject of this blog are:

Tax Planning on the Edge Part II: Ethical Standards in the International Tax Arena, by Bryan C. Skarlatos.  Bryan's bio is here.

Be sure and go to page 16 which appears to be a continuation of the article and discusses United States practitioners evading foreign taxes and foreign practitioners evading U.S. taxes.

Déjà vu All Over Again: Re-Trial After Conviction,  by Sharon L. McCarthy.  Sharon's bio is here.

I particularly found Sharon's article interesting.  The article recounts her representation of Dinis Field, a co-defendant in the Daugerdas case which involved tax shelters of the bullshit category.  Readers of this blog will recall that the Daugerdas defendants were convicted in what proved to be the first trial of Daugerdas and related defendants,  including Field.  But, because of jury misconduct, the case was re-tried.  On the re-trial, Mr. Field was acquitted.  Sharon recounts particular stratgies that she believes contributed to the successful representation of Mr. Field.   The reason I found all of the major tax shelter criminal cases in NYC particularly interesting was that I represented one of the defendants in the first of those cases brought against 19 KPMG related defendants.  We did not have a first or second trial for my client and 12 others who were dismissed for prosecutorial abuse.  Still, every lawyer who has a first trial end in conviction would always love the opportunity for a re-do.  Sometimes the outcome is the same, but sometimes not.  It was not for Mr. Field and his lawyer, Sharon.

The subtopics in Sharon's article should give an idea of the article.

Motion Practice and Subpoenas

[As an aside, I just read today in Bryan Garner's periodic email that the word subpoena has an alternative spelling, subpena.  See LawProse Lesson #201: "Subpoena" vs. "subpena" [which I think will  appear shortly on his blog, here].  Bottom-line, spellings sometimes come into fashion and go out.  There was a time when subpena was fashionable and was oft-used, for example, in federal statutes.  It is less popular nowadays, with the spelling subpoena being the preferred spelling.]

Limiting Instructions.

Although it is not said specifically, apparently at Sharon and her co-counsel moved early and often that limiting instructions be given to the jury that certain potentially negative evidence about certain acronymed tax shelters was irrelevant to the cases involving their clients.  Then, "in summation, [] we were able to explain to the jury that significant portions of the government’s case, and the testimony of 14 witnesses, were completely irrelevant to Denis Field."

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.)

Another Bullshit Tax Shelter Bites the Dust on Appeal Also (9/12/14; 9/20/14)

In Chemtech Royalty Associates v. United States, 766 F.3d 453 (5th Cir. 2014), here, the Fifth Circuit rejected another audit lottery attempt in the guise of a bullshit tax shelter of the smoke and mirrors variety.  For my blog entry on the district court opinion, see Yet Another Bullshit Tax Shelter Bites the Dust (Federal Tax Crimes Blog 2/27/13), here.  This shelter was was hawked to Dow Chemical by the venerable financial wizardry firm of Goldman Sachs, here.  As with bullshit tax shelters generally, it was know by an acronym -- SLIPs for Special Limited Investment Partnerships.  And as with many bullshit tax shelters it needed one or more tax indifferent parties to appear to earn the taxable income that offset of the tax benefits the taxpayer claims.  The tax indifferent parties for many of the bullshit tax shelters are foreign banks some of whom appear more than willing, for a fee, to assist U.S. taxpayers raid the federal fisc.  (I am not sure how these banks can be distinguished from the Swiss banks that the U.S. DOJ has hammered.)  At any rate, the case was about the U.S. taxpayer at the center of this scam -- called by the courts a sham.  The U.S. taxpayer lost.

An issue ever present when taxpayers do such scams is the penalty exposure.  As readers of this blog know, when such sophisticated taxpayers enter such scams, they look to minimize their penalty exposure with tax opinions from tax professionals upon which they claim to have "relied."  If they can convince a court that they relied, then the cost of playing the audit lottery via the scam is just paying the taxes they owed anyway, interest during the period they used the fisc's money, and the exorbitant fees they paid to implement the scam.  So, as is typical,. this taxpayer got an opinion letter from a prominent law firm, Andrews & Kurth, here, which had helped Goldman Sachs conceptualize the scam.  By the time of trial, for some unexplained reason, the taxpayer did not rely upon the opinion for penalty relief.  The district court in its opinion (fn. 4) said:  "Dow does not rely on the opinion of Andrews & Kurth in this case, and the Court does not take it into consideration in this opinion."

So, after rejecting the scam, the Fifth Circuit turned to the issue of whether the taxpayer could avoid the penalties that come along with bullshit tax shelters.  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%.  The district court imposed the 20% penalty for (i) negligence and (ii) substantial understatement.  The district court declined to assert the gross valuation misstatement penalty based upon outlier Fifth Circuit authority that suggested that, when the shelter was so stinky as a matter of law that it had no substance whatever, any gross misvaluation or basis overstatement can be ignored so the grosss valuation misstatement did not apply.  After the district court so held, the Supreme Court decided United States v. Woods, ___ U.S. ___, 134 S. Ct. 557 (2013), here, which rejected that notion.  For my blog entry on Woods, see Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (Federal Tax Crimes Blog 12/3/13), here. Accordingly, the Fifth Circuit remanded to the district court to reconsider its penalty conclusions in light of Woods.

Addendum 9/20/14 3:00 pm:

As in many bullshit tax shelters, the phantom income that is the consequence of phantom tax benefits need to be deflected, otherwise if that income were left with the taxpayer playing the game, the benefits would be reversed.  So, as is typical, the hunt is on in these deals for a tax indifferent party who can "suffer" the phantom income with no tax cost.  Foreign banks are real accommodating in that respect.  They were ubiquitous in the tax shelter shenanigans of the 1990s and early 2000s, both the individual mass (somewhat) marked individual shelters and the corporate shelters that I have discussed in this blog.  Needless to say they were prominent in Chemtech.  From the Fifth Circuit opinion:

This appeal concerns the tax consequences of two transactions undertaken by Dow Chemical Company  ("Dow") and a number of foreign banks n1 from 1993 through 2006. During those years, Dow and the foreign banks purported to operate two partnerships that generated over one billion dollars in tax deductions for Dow.  * * * *
   n1 Bank of Brussels Lambert, Dresdner Bank A.G., Kredietbank N.V., National West-minster Bank plc, and Rabo Mercent Bank N.V. (collectively, "the foreign banks"). 

Third, the corporation had to entice foreign entities to participate in the transaction. The tax benefits generated by the partnership could be attained only if the partnership's income could be assigned to a tax-indifferent party.

The foreign banks were the tax indifferent parties.  Hence, they entered fake transactions to assist the taxpayer in raiding the fisc.  Shame on them.  Why not more consequences than shame?  At least in the individual tax shelter cases, major penalties were imposed on some of the banks for facilitating the bullshit tax shelters other than the taxpayers suffered any costs for enabling the bullshit tax shelters, except perhaps reputational when called out by name in cases such as Chemtech.  And the corporate tax shelter taxpayers only paid the tax, often a 20% penalty and sometimes a 40% penalty, and interest on the tax and penalty, costs hardly sufficient on a cost benefit basis to really discourage the benefits of winning the audit lottery.  How many of these deals and at what cost to the fisc that were never discovered or if discovered to complex to understand in the blizzard of contrivances in which they were packaged?

Daugerdas Retrial Jury Instructions - Part 05 General Criminal Tax Instructions (11/14/13)

Judge Pauley's general criminal tax law instruction is:

General Instructions on Criminal Tax Law 

I will now turn to the charges in this case. The charges all relate to the federal tax laws and to the defendants’ design, marketing and implementation of the tax shelters that you have heard about at trial.  

I instruct you first that the income tax laws are constitutional and valid and everyone has a legal obligation to pay income taxes. However, as I told you at the outset, a taxpayer is entitled to arrange his or her affairs in any lawful manner to minimize the payment of taxes. One of the ways that people minimize the payment of taxes is through a tax shelter. The term “tax shelter” simply refers to a series of financial and related transactions that offer substantial tax savings as one of its main benefits. Some tax shelters are legal; others are not. It all depends on the facts about the individual taxpayer and the tax shelter involved. It is perfectly proper for a taxpayer to file his or her returns based on an aggressive or debatable tax position. If that position turns out to be incorrect, the taxpayer may be required to pay certain penalties. But this case is not about the actual collection of any income taxes that may be due to the United States or penalties imposed on any of the tax shelter clients. This is a criminal case.  

The Government brings this case to enforce laws that make it a crime to attempt to defeat or evade the payment of income taxes or to conspire to commit tax evasion or other related crimes. In a little while, I will instruct you in detail on the elements of a criminal violation of the tax laws. Overall, what you should keep in mind is that a person cannot be guilty of violating the federal tax laws if he believed that his conduct was lawful, even if it turns out that he was wrong about the law. 

JAT Comment:  The following key points are made:

1. Taxpayer can arrange his affairs to pay the minimum tax.
2. Tax shelters are defined as "simply" referring "to a series of financial and related transactions that offer substantial tax savings as one of its main benefits."
3. The jury is told that some tax shelters are legal, some are not -- with the distinction being dependent "on the facts about the individual taxpayer and the tax shelter involved."
4. The Court says that it will instruct as to the "criminal violation of the tax laws," which is presumably how the jury will distinguish between a legal tax shelter and an illegal tax shelter.
5. The Court ends with the short-form Cheek instruction.  The Court does have a Cheek "good faith" defense instruction later, after instructing about the crimes charged.  I will present a separate blog on that instruction.

The full set of jury instructions is linked here.

UBS in the News Again -- Allegedly Doing What It knows Best (Tax Sheltering) (6/2/13)

Susanne Craig, France Puts UBS Under Investigation for Aiding Tax Evasion (NYT 6/2/13), here.

Excerpts:

A unit of the Swiss bank UBS has been placed under formal investigation in France following allegations that it designed investments to help its clients evade taxes. 

The move comes more than a year after an inquiry was opened regarding the bank’s operations in France, a UBS executive briefed on the matter said Sunday. A handful of UBS executives have been put under investigation since the inquiry began in 2012. 

UBS has been dogged for years by regulators who allege that it has helped wealthy individuals dodge taxes, and has successfully settled some of these charges. For instance, the bank agreed to a $780 million fine in 2009 with the U.S. authorities to settle charges that it had helped its American clients to hide funds. 

But other countries continue to pursue their own cases against UBS. The executive, who was not authorized to speak on the record, said that while the decision was disappointing for the bank, it was not unexpected.

These excerpts are cryptic, but, as described, they echo the types of sophisticated shelters in our recent past where the sheltering was done through complex financial arrangements orchestrated by financial services firms and tax professionals.

Article on Deterrence Through Criminal Enforcement and Defining Tax Shelters (3/7/13)

A recent article in Tax Notes summarizes a recent PLI conference on tax penalties.  Marie Sapirie, Revised Guidance on Tax Shelter Definition on the Way, 2013 TNT 42-9 (3/4/13).

Perhaps most importantly for tax crimes afficionados are statements made by Daniel W. Levy, AUSA SDNY, who is a prominent player in the Government's offshore crimes juggernaut.  The article discusses Mr. Levy's comments as follows:

"What we're trying to do is drive deterrence," said Daniel W. Levy, assistant U.S. attorney, Southern District of New York. At some point people who pay their housekeepers and nannies off the books will be prosecuted for criminal tax fraud, he said. "If it all revolves around housekeepers, I've already got my snappy code name in the can and it's Operation Clean Sweep," he joked.  

For now, however, "we're looking for clear violations of law, clear evidence of willfulness, cases that don't involve the possibility of negligence," Levy said. "We want the strongest possible evidence of willfulness because those are the strongest possible criminal cases we have." But that doesn't mean that the government shies away from complex cases, he added.  

Offshore bank accounts sometimes presented situations of relatively low tax loss and low evidence of willfulness. "We've had to make hard judgment calls about whether it's worth prosecuting that person given relatively limited tax evasion -- that is, relatively limited tax loss to the United States," Levy said. "There are some people who just passed into the night."

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):

Interview of R. J. Ruble, A Tax Lawyer Incarcerated for Tax Shelter Crimes (2/13/13)

The most recent edition, Winter 2013, of the ABA Tax Section NewsQuarterly has an interview of R.J. Ruble by Jasper L. Cummings, Jr.  The interview is here.

Mr. Ruble was the law firm partner convicted in the major KPMG individual defendant tax shelter prosecution, the first of three successive prosecutions of tax shelter promoters associated with major accounting firms and law firms.  Readers of this blog  will remember that that case, in addition to producing convictions of three prominent tax professionals (including Mr. Ruble), had earlier seen the dismissal of thirteen tax professionals associated with KPMG because the prosecutors had pressured KPMG to quit paying their legal fees.  See United States v. Stein, 541 F.3d 130 (2d Cir. 2008), here.  As to Mr. Ruble, I blogged the Second Circuit's affirmance of his conviction in the following blog:  Larson, Pfaff, Ruble Convictions In KPMG Tax Shelters Case Affirmed (Federal Tax Crime Blog 8/27/10), here.  Mr. Ruble remains incarcerated.

I thought that, pending the availability of the full interview, I would offer the final Q&A (hopefully fair use):

Q  Is there anything else you would like your fellow tax attorneys to know about being a lawyer in prison? 

A  Once you’re in prison, it doesn’t matter what you did on the outside, and the skills you had may not be particularly useful in a prison environment. It’s a very humbling experience. I think that, as with all things in life, you need to be  reflective about how you live your life from day to day, to decide what you can do that gives you satisfaction, and to move forward as best you can. For those who have friends or acquaintances inside, realize that for those of us here any positive connection with those on the outside makes life here much more tolerable, and that what may seem as a small act of kindness becomes magnified many times over to the recipient.

Mr. Cummings, the interviewer, has recently written an article that questions the convictions of tax shelter promoters such as Mr. Ruble for the types of shelters involved in these major prosecutions.  Jasper L. Cummings, Jr., DOJ Criminal Tax Overreach, 138 Tax Notes 745 (Feb. 11, 2013).  I have received permission from Tax Analysts to provide that article on February 25 and plan to have a blog on the article on that date.

Another Bullshit Tax Shelter Bites the Dust (2/12/13)

In Bank of New York Mellon Corp. v. Commissioner, 140 T.C. No. 2 (2013), here, the Tax Court knocked down yet another another bullshit tax shelter.  It is a complex case, and for purposes of this blog, I will not get into the weeds (this genre of tax shelter usually has many weeds designed to obscure the big picture what is really going on -- i.e., pretty much nothing except paper and money shuffling and re-shuffling, with net effect mostly to the promoters).  I will just summarize the gravamen of the opinion:

The Court opens the opinion (after finding the bullshit facts) as follows (emphasis supplied):

This complex transaction presents a case of first impression in this Court. We are asked to decide whether petitioner is entitled to foreign tax credits and certain expense deductions from the STARS transaction and also whether petitioner is entitled to report income generated from the STARS assets as foreign source income. Respondent argues that the STARS transaction lacked economic substance. Respondent asserts consequently that the foreign tax credits and expenses attributable to STARS should be disallowed and the income from the STARS assets should be characterized as U.S. source. n7 Petitioner, in contrast, contends the STARS transaction had economic substance. In this regard, petitioner asserts that BNY entered into STARS to obtain low-cost funding for its banking business and that it reasonably expected to earn a pre-tax profit from STARS. Additionally, petitioner contends that the U.S. foreign tax credit was intended for transactions like STARS.
   n7 Respondent also argues that the foreign tax credits BNY claimed are disallowed under substance over form doctrines (including the step transaction doctrine) and under the statutory anti-abuse rule in sec. 269(a). We need not decide these arguments because of our other holdings.

The Court  then concludes that, on the facts, there was no economic substance.  That holding seems solid.

Court of Appeals for the D.C. Circuit Rejects Another BullShit Tax Shelter (1/11/13)

In Consolidated Edison Company of New York v. United States,  703 F.3d 1367 (Fed. Cir. 2013), here, the D.C. Circuit rejected another bull shit tax shelter.  This opinion was presaged in Wells Fargo & Company v. United States, 91 Fed. Cl. 35 (2010), discussed in a prior blog, Court Finds Tax Motivated Transactions are Bullshit (Federal Tax Crimes Blog 1/11/10), here.

I previously described the trial court opinion as " a major, if perhaps temporary, victory."  DC Circuit Discusses Cost / Benefit Analysis for Tax Evasion (Federal Tax Crimes Blog 11/9/09), here.  (In that blog I cite readers to the D.C. Circuit's discussion of cost-benefit analyses in hokey tax shelters and related scams in Mayer Brown LLP v. IRS, 562 F.3d 1190 (D.C. Cir. 2009), here.  This latter case was an attempt by Consolidated Edison's lawyers to get information from the Government that it imagined might help in its and related litigation.  It did not work, perhaps because the underlying genre of shelter had an odor piscatorial, although that particular iteration had not yet been called foul by the D.C. Circuit.  Now it has been called foul.

I have said before that, when major companies hide bull shit behind smoke and mirrors, I don't understand why that is not criminal behavior.  The smoke and mirrors in this and related cases had no real purpose of than hiding the fact that there was no real deal there.  Is this just a different package for the type of ploy that drew criminal penalties in Son-of-Boss?

And, since we spend a lot of time on this blog on offshore conduct, I ask readers to consider whether the conduct of corporations, individuals and others who enter these bullshit tax shelters with the intent to hide them from the IRS are any more praiseworthy than the majority of those with offshore accounts?  Yet, they are not having to give up high percentages of their net worth.  All they are doing is paying the tax they already owed after the IRS lucked into finding the shelter and perhaps some penalty, but not much in terms of the culpability of the conduct.  Shame on the IRS, and shame on Congress for allowing it.

Coplan #8 - Summary (12/6/12)

I have finished my trip through Coplan.  I thought a good summary, without the details, but the gravamen of the  Court of Appeals approach and concerns is this "cut and paste" from the excellent blog of a colleague.  Peter D. Hardy, Second Circuit Vacates Part of Tax Shelter Case (White Collar Crime Prof Blog 12/4/12), here.  Mr. Hardy's commentary is focused principally on the sufficiency of the evidence claims.  Here are some excerpts:

The opinion is lengthy and complex, and resists easy summarization.  It is well worth reading because it discusses in detail a kaleidoscope of issues relevant to any "white collar" criminal trial, from evidentiary rulings to jury instructions to sentencing.  This commentary is limited to the sufficiency of evidence claims, and some of their implications for lawyers as potential defendants. 

The panel in Coplan displayed a remarkable willingness to comb through an extremely complicated trial record and test every nuanced inference that the government urged could be drawn from the evidence in support of the verdicts.  The bottom-line holding of the panel was that, after making all inferences in favor of the government, the convictions had to be vacated because the evidence of guilt was at best in equipose. 

Although this general principle can be stated easily, its practical application in Coplan involved the panel conducting a particularized review of the evidence that appellate courts often forego.  For example, one important fact for Shapiro was that a tax opinion letter provided to shelter clients stated that, for the purposes of the "economic substance" test governing tax-related transactions, the clients had a "substantial nontax business purpose" (OK, per the Coplan panel), rather than stating, as it had before Shapiro’s revisions, that the clients had a "principle" (sic - principal) investment purpose.  Likewise, although Shapiro had reviewed letters and attended phone conferences deemed incriminating by the government, his involvement in such conduct was not "habitual" or otherwise substantial.  As for Nissenbaum’s Section 7212(a) conviction, his response to the IDR that the government characterized as obstructive – a partial explanation of the clients’ subjective business reasons for participating in the　tax shelters – could not sustain the conviction because the IDR drafted by the IRS had sought all reasons held by the clients, rather than their primary reason.  If this sounds somewhat murky and convoluted, it is.  The point is that multiple convictions for very significant offenses were vacated after much effort at extremely fine line-drawing.