Government Refusal to Grant Immunity Shifts Burden of Proof to IRS in Tax Court Case (9/24/13)

In an Order dated 9/17/13 in AD Investment 2000 Fund LLC v. Commissioner (Dkt Nos. Docket No. 9177-08, 9178-08), here, the Tax Court (Judge Halpern) shifted the burden of proof to the Commissioner because the Government declined to assure the Court that a witness -- allegedly the key witness -- would not be prosecuted.  The term for such assurance is immunity.

The background, highly summarized, is that one James Haber was a promoter of a tax shelter in which the taxpayer, an LLC treated as a partnership, participated.  I cannot say that I am familiar with the particular shelter involved, but I am familiar with Haber's tax shelter activity.  He was long a subject and perhaps a target of the major tax shelter probes and prosecutions in SD NY (those probes, some of which involved Haber shelters, included the KPMG, E&Y and Daugerdas / Jenkens probes beginning in the early to mid-2000s).  For some reason never known to me, Haber was never prosecuted despite the fact that he was at the center of shelters that were prosecuted against others.

The taxpayer in this case argued that Haber was at the center of the shelter and was the key witness.  "Petitioners represent, and respondent does not contradict, that the principal witness having knowledge of these issues is James Haber, the President of The Diversified Group Incorporated. Diversified is the Tax Matters Partner of AD Investment and AD Global.

The Tax Court sustained Haber's assertion of the Fifth Amendment privilege.  The taxpayer urged that it was not fair that the Government's continued threat of prosecution of Haber should prevent it from getting a fair trial based on truth and not failure to meet the normal burden of proof assigned to taxpayers in the Tax Court.

Petitioners represent, and respondent does not contradict, that, in the absence of Mr. Haber's testimony, petitioners will find it difficult or impossible to carry their burden of proof at trial. Petitioners describe Mr. Haber's role in the transactions at issue; they list facts that they will be difficult or impossible to prove without his testimony.

At the Court's suggestion, the IRS attorney asked USAO SDNY "whether the United States Attorney would be willing to grant Mr. Haber immunity in connection with his tax shelter activities."  USAO SDNY responded "that the United States Attorney would not do so 'and would not explain why.'"

The taxpayer urged that, in effect, the  IRS and the USAO for SDNY which refused to grant immunity were agencies of one Government and should not impair the search for truth and the Court's obligation to render justice by forcing on the taxpayer a burden that its own actions prevented it from meeting.

Tax Court Case Where Party In Interest Invokes the Fifth Amendment (3/19/14)

In Humboldt Shelby Holding Corporation v. Commissioner, T.C. Memo. 2014-47, here, decided yesterday, the Tax Court knocked down a digital options bullshit tax shelter relying on the now uniformly discredited interpretation of Helmer v. Commissioner, T.C. Memo. 1975-160, hawked by bogus tax shelter promoters in the mid-to late 1990s through the early 2000s.  The Court starts the opinion as follows:

James Haber is a tax professional who has promoted tax shelters to third parties through a company called the Diversified Group, Inc. (DGI). This case involves a tax scheme Mr. Haber carried out for his personal benefit. Mr. Haber is petitioner's sole shareholder, and his scheme would have allowed petitioner to avoid approximately $25 million of Federal income tax while incurring costs of only $320,000. 

To carry out the tax scheme at issue, petitioner contributed paired options to a partnership to generate an artificially high basis in property the partnership later distributed. Petitioner recognized large capital losses when it sold the stock and reported those losses on its 2003 return to offset capital gains. Respondent disallowed the capital loss deductions and related section 1621 business deductions and determined that petitioner was liable for a section 6662 accuracy-related penalty. The issues for decision are:

1) whether petitioner improperly claimed short-term capital loss deductions of $74,093,688 for its 2003 taxable year. We hold that it did; 

2) whether petitioner improperly claimed section 162 business deductions of $1,249,925 for professional fees it incurred during its 2003 taxable year. We hold that it did; and 

3) whether petitioner is liable for the accuracy-related penalty under section 6662. We hold that it is.

These holdings are straightforward.

An interesting aspect of the case is the following:

Mr. Haber is petitioner's sole owner and the architect of its tax avoidance plan. Mr. Haber is a witness in criminal proceedings in the Southern District of New York involving a former DGI client. The U. S. attorney for that district denied Mr. Haber's request for immunity. Consequently, Mr. Haber has invoked his Fifth Amendment privilege against self-incrimination and declined to testify in these proceedings. Petitioner moved to stay the case until the criminal prosecution's conclusion. We denied the motion after finding that the interests of justice did not support further delaying the trial. 

OPINION 

I. Burden of Proof 

The taxpayer bears the burden of proving by a preponderance of the evidence that the Commissioner's determinations are incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of legislative grace, and a taxpayer bears the burden of proving entitlement to any claimed deductions. Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). The term "burden of proof" includes two distinct concepts: (1) the burden of persuasion, "i.e., which party loses if the evidence is closely balanced", and (2) the burden of production, "i.e., which party bears the obligation to come forward with the evidence at different points in the proceeding". Schaffer v. Weast, 546 U.S. 49, 56 (2005). Before trial we considered shifting the burden of proof to respondent in the light of Mr. Haber's decision to invoke his Fifth Amendment privilege and our decision to move forward with the trial in his absence. We ultimately decided against shifting the burden of persuasion because doing so would have effectively sanctioned the Commissioner for the Federal prosecutor's refusal to grant Mr. Haber immunity. We did shift the burden of production to respondent and requested petitioner to provide an offer of proof regarding the testimony Mr. Haber would have provided if he had been granted immunity. 

Immunity is a statutory creation whose administration Congress bestowed on the executive branch. 18 U.S.C. secs. 6002 and 6003 (2012). Congress has given the Attorney General the authority to exchange the protection of immunity for otherwise incriminating testimony when, in his judgment, a witness' testimony may be in the public's interest. United States v. Quinn, 728 F.3d 243 (3d Cir. 2013). "There is * * * overwhelming judicial and legislative authority for the proposition that review on the merits of a Federal prosecutor's decision to grant immunity is barred by statute." United States v. Herman, 589 F.2d 1191, 1201 (3d Cir. 1978). This bar extends to judicial review on the merits of a prosecutor's decision to withhold immunity. Id. 

Rule 142 permits the Court to shift the burden of proof in its discretion under certain circumstances. Given the prosecutor's broad authority to make immunity decisions without judicial interference, we exercised this discretion cautiously here. After careful consideration of Mr. Haber's circumstances, we determined that he could invoke his Fifth Amendment right to avoid testifying, but we declined to shift the burden of persuasion. After trial it is apparent that the burden of persuasion has no bearing on the resolution of this case. The evidence in the record would support our conclusion even if we had shifted the burden and even if Mr. Haber had testified as petitioner claimed in its offer of proof. Considering the significant objective evidence of his intent here, we would have given little weight to his self-serving testimony. See Faulconer v. Commissioner, 748 F.2d 890, 894 (4th Cir. 1984) ("A taxpayer's mere statement of intent is given less weight than objective facts."), rev'g T.C. Memo. 1983-165.

Bullshit Tax Shelter Salesman Avoids Fraud Finding for Investment in Bullshit Tax Shelter (4/8/15)

In Jacoby v. Commissioner, T.C. Memo. 2015-67, here, the Tax Court relieved a bullshit tax shelter salesperson who drank his own poison from liability for the tax and penalties (and, as a result, the interest thereon).  How did / could that happen?  The short answer is - I don't know.  The opinion is quite cryptic.  Which may be the answer -- it may be just a mystery.

So, let's wade into the cryptic opinion.

1.  Jacoby had an accounting degree and a law degree.

2.  He had a short stint with a major accounting firm doing financial audit (not tax) work.  In 1987, he joined Twenty-First Securities Corp., a major player in the sophisticated tax strategy market.  He focused on strategies for high net worth individuals and large companies.  The strategies he sold were developed by others in the firm or outside the firm.  During the 9 years he worked there, he earned between $5 and $6 million.  Obviously, he learned enough about the working of the strategies to sell them to others.  (JAT comment:  One example of a strategy developed by Twenty-First Securities is the strategy blessed blasted by the Tax Court and then blessed by the Fifth Circuit in Compaq Computer Corp. v. Commissioner, 113 T.C. 214 (1999), rev’d 277 F.3d 778 (5th Cir. 2002); I have no idea whether Jacoby worked on that strategy, but that strategy was apparently in-house while he was with First Securities.

3.  In 1996, Jacoby joined Diversified Group Inc. ("DGI"), a tax shelter boutique run by James Haber.  DGI and Haber were major players in the bullshit tax shelter market.  See also e.g., Ironbridge v. Commissioner, T.C. Memo. 2012-158 (noting that, "Although he has not been indicted or tried, the principal of petitioners, James Haber, believes he was one of the persons involved in the criminal investigation.Mr. Haber stated during deposition testimony that he believes he became a potential “target” of the criminal investigation around “2002 or 2003;" lot more history there, but not developed in the Jacoby opinion, so I pass for now).  The Jacoby opinion says that Jacoby was interviewed in the criminal investigation, agreed to extend the statute of limitations for criminal prosecution, but was never prosecuted.  (Haber was never prosecuted either.)

4. Jacoby's arrangement with DGI was a joint venture agreement ("JVA") with Jacoby's company, SMD Capital Corp. ("SMD"), through which he would get 50% of the net profits from business he brought to DGI.

Another Bullshit Shelter Bites the Dust Even with Variations (5/14/14)

I write today on the defeat of another bullshit tax shelter of the Son-of-Boss ("SOB") variety.  The Markell Company, Inc. v. Commissioner, T.C. Memo. 2014-86, here, decided yesterday.  If it were just another ho-hum SOB, it would be worth noting only in passing.  But, it has a twist -- both the twist and the outcome is projected in the opening two short paragraphs:

This case began when the Commissioner found the remains of a corporation on an Indian reservation in an extremely remote corner of Utah. The tribe claimed not to know how the corporation's stock had ended up in its hands. And there was little or no money or valuable property left inside the corporate shell. 

All signs pointed to the corporation's manager, a sophisticated East Coast moneyman, as the key person of interest. And his method was a series of complex transactions that bore a striking resemblance to Son-of-BOSS deals already examined many times before by this Court -- but with a corporate-partner twist.

The last sentence of the first paragraph resonates with the equally bullshit intermediary transactions.  One of the strategies in shelters is to push tax consequences to an empty shell of a company, so that the IRS is left without anyone to collect tax clearly due.

The Son-of-Boss transactions in their pure bullshit form seemed to promise to the gullible or complicit that the taxable income disappearing from the taxpayer's tax ledger would just go away.  But, every one I know that gave a hard and knowledgeable look knew that, even if the imagined scheme worked to push the income from the original taxpayer (always a doubtful proposition), some taxpayer down the line would be liable for the tax.  Enter the intermediary gambit to make sure that taxpayer down the line had no assets to pay the tax because the taxpayer and the promoters would have sucked all the value out of the company.  Thus, this intermediary was designed to deal with an inherent and blatant flaw in the SOB transactions.  (Of course, SOB transactions had flaws in them before reaching this stage, but the intermediary was a fine artistic touch to put on the bullshit.)

The Merits

What the Egan Court (Judge Saylor) Said About the Lawyers (5/20/10)

In the Egan case I discussed yesterday here, Judge Saylor was tough on the lawyers. I thought lawyers (who I presume are the principal readers of this blog) may find it at least interesting to read his detailed conclusions regarding the lawyers’ behavior.

There were two principal law firms involved in issuing the Egan opinions that would, the parties hoped, give the taxpayers risk-free access to the audit lottery for which they charged large premium fees (sort of like the driver of the get away car for a bank robbery charging a lot more than a tax driver would charge). These firms were Proskauer Rose, LLP ("Proskauer") and Sidley Austin Brown & Wood LLP ("Sidley Austin"). The principal partner at Proskauer was Ira Akselrad. The partner at Sidley was R.J. Ruble. The following portions of the opinion are Judge Saylors' focused factual conclusions (and are based on many detail fact findings earlier in the opinion)

UU. The Egans Did Not Receive Independent Legal Advice from Proskauer and Sidley Austin

1234. Both Proskauer and Sidley Austin had an inherent conflict of interest in purporting to render legal advice to the Egans.

1. Proskauer and Sidley Austin Did Not Provide Independent Legal Advice

1235. As described above, R.J. Ruble of Sidley Austin and Ira Akselrad of Proskauer Rose actively assisted DGI/Helios in the design, development, marketing, and implementation of the tax shelter strategy and its variants. (Exs. 797, 798, 809, 814).

1236. Among other things, Ruble and Akselrad provided input on the strategies, commented on the marketing materials, and provided or commented on model legal opinions to use in the promoting tax shelter strategy.