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.

Deutsche Bank's Amazing Magnificent Adventure -- Again -- into the Land of Bullshit Tax Shelters (10/3/15)

In United States v. Deutsche Bank, 2015 U.S. Dist. LEXIS 134367 (SD NY 2015), here, Judge Kaplan of SDNY denies Deutsche Bank's motion to dismiss the United States' suit against Deutsche Bank and others arising from what appears to be a bullshit tax shelter gambit from 2000.  Judge Kaplan introduces the context as follows:

The United States brings this action on state law fraudulent conveyance and unjust enrichment theories to recover over $190 million in unpaid tax, penalties and interest allegedly owed by Deutsche Bank A.G. and affiliates (collectively, "DB"). Broadly speaking, it claims that DB in 2000 conducted a series of transactions with the purpose and effect of leaving a special purpose vehicle owing tends of millions of dollars of federal taxes that it was unable to pay while DB profited as a result of the non-payment of the taxes. DB moves to dismiss the complaint on the theory that it is barred by the New York statute of limitations, fails to state a legally sufficient claim, and fails to allege fraud with the particularity required by Fed. R. Civ. P. 9(b). In the alternative, it seeks to limit the government's recovery.

Just for background, this general introduction is reminiscent of the wave of Midco transactions that proliferated in the 1990s and early 2000s.  In those transactions, one or more shareholders in a corporation having substantial built-in gain in assets would have shares that were worth only the value the corporate assets less all liabilities, including the tax on the expected tax on the built-in gain.  Some buyer would buy the stock from the selling shareholders, paying them more than that value.  The buyer could pay more because, supposedly, it had some way to eliminate or mitigate the gain, thus avoiding the corporate level tax.  In effect, to the extent of the excess price paid the selling shareholders, the buyer and the selling shareholders would share the tax benefit of eliminating or mitigating the tax.  The problem in the abusive transactions was that the elimination or mitigation of the tax did not work (often because the buyer sought to eliminate the gain with bullshit tax shelters or some other similar bullshit mechanism).  The IRS and the citizens of the U.S. were left holding the bag with, so the schemers hoped and, in many cases, I am sure, prayed, nowhere to collect the tax. The Midco transactions were structured variously, often with an attempt to obscure the skulldugggery, but that was the essence.

Judge Kaplan makes short shrift of Deutsche Bank's attempt to avoid justice in this case.  But, I would like in the balance of this blog entry to deal with the Midco-like quality of the transactions based on the allegations in the U.S. complaint, here,  Here is the Introduction from the complaint.

Deutsche Bank Settles Liability for Enabling Bullshit Tax Shelter -- A Midco Variation (1/5/17)

I previously reported on one of Deutsche Bank's bullshit tax shelter adventures.  Deutsche Bank's Amazing Magnificent Adventure -- Again -- into the Land of Bullshit Tax Shelters (Federal Tax Crimes Blog 10/3/15), here.  That blog reported on Judge Kaplan's rejection of DB's motion to dismiss the case filed by the Government with respect to the bullshit tax shelter -- a variation on the Midco shelter theme.  The case has now been resolved.  See Settlement and Dismissal Order here.  The key facts, which DB admits in the settlement document, are covered in the prior blog, so I won't repeat them here.  Suffice it to say that DB admits that it participated knowingly in a scheme to avoid payment of taxes.

The settlement requires DB to pay $95 million.  The settlement does not state how that figure was derived.  I could speculate but I suspect there would be a high chance that my speculation would be misfocused.

The agreement says that the following claims of the U.S. are not released:

a.  Any claim for conduct other than the Covered Conduct.

b.  "Any criminal liability."

c.  A broad swath of potential liability in a paragraph that I am not sure I understand the full scope of (so I quote that paragraph, ¶ 5.c.):

Except as expressly stated in this Stipulation, any administrative liability (other than (i) the collection, assessment, or adjustment of any income tax,  including any interest thereon and any penalties for failure to report or failure to pay such income tax, arising from the Covered Conduct and (ii) BMY's unpaid tax liability, including any interest thereon and any penalties for failure to report or failure to pay such income tax, resulting from the sale of the Bristol-Myers shares), including the suspension and debarment rights of any federal agency;

The settlement further states (¶ 7):

7. Deutsche Bank waives and will not assert any defenses it may have to any criminal prosecution or administrative action relating to the Covered Conduct that may be based in whole or in part on a contention that, under the Double Jeopardy Clause in the Fifth Amendment of the United States Constitution, or  under the Excessive Fines Clause in the Eighth Amendment of the United States Constitution, this Stipulation bars a remedy sought in such criminal prosecution or administrative action.

JAT Comments:

Tax Shelters, Economic Substance and Tax Crimes (11/13/09)

On November 10, the Fifth Circuit decided Enbridge Energy Company, Inc. v. United States, 2009 U.S. App. LEXIS 24713 (5th Cir. 2009). The guts of the holding was that (i) the district court properly denied the tax benefits from a common so-called midco transaction because of lack of economic substance and (ii) the district court properly imposed the accuracy related penalty because the transaction lacked substantial authority and, in any event, the transaction was a tax shelter for which even the presence of substantial authority could avoid the penalty.

The decision is per curiam and unpublished (meaning that it's precedential status is limited), nevertheless I think the opinion is interesting – and perhaps cautionary – because of its tenor and relationship to some of my other blogs on economic substance. I have questioned the use of the economic substance concept in criminal cases, but the government and courts in criminal cases do use it.

Focusing on Enbridge, the Fifth Circuit and the district court viewed the structure employed to avoid tax as lacking economic substance. The question I ask my readers is whether the Enbridge gambit should or at least could have been a criminal case? Wouldn't a few criminal cases with this genre of allegedly abusive tax shelters go a long way toward getting at least the major players (taxpayers and their enablers) out of the hokey tax shelter market?

Third Circuit on Crime-Fraud Exception to Attorney-Client and Work-Product Privileges (12/12/12)

The Third Circuit yesterday issue a major opinion involving assertions of the attorney-client and work-product privileges and the application of the crime-fraud exception to those privileges.  In Re: Grand Jury John Doe 1; John Doe 2; ABC Corporation, 705 F.3d 133 (3d Cir. 12/11/12), here.  The introduction of the majority opinion is (footnotes omitted):

ABC Corp., John Doe 1, and John Doe 2 are subjects of an ongoing grand jury investigation into an alleged criminal tax scheme.1 As part of that scheme, ABC Corp., under the direction of John Doe 1 and John Doe 2, purchased and subsequently sold numerous companies. These consolidated appeals concern whether documents and testimony relating to legal advice obtained by ABC Corp. in connection with these transactions are shielded by the attorney-client and work product privileges. 

When ABC Corp. objected that the Government had improperly served a subpoena for documents on ABC Corp., the Government issued grand jury subpoenas for those documents to ABC Corp.'s current outside counsel—LaCheen, Wittels & Greenberg, LLP, and Blank Rome, LLP. Later, it also served subpoenas for documents and testimony on three attorneys formerly employed by ABC Corp. as in-house counsel. In each instance, the firms and counsel asserted attorney-client and work product privileges on ABC Corp.'s behalf, the Government moved to enforce the subpoenas, and ABC Corp. opposed the motion as the purported privilege holder. 

The District Court granted the Government's motions to enforce based in part on the crime-fraud exception, which permits the Government to obtain access to otherwise privileged communications and work product when they are used in furtherance of an ongoing or future crime. Finding that the requested communications and work product either did not qualify as privileged or that any protection afforded was vitiated by this exception, the Court largely rejected ABC Corp.'s privilege claims and issued corresponding disclosure orders—the first directed to ABC Corp., LaCheen Wittels, and Blank Rome in March 2012 (the "March Order"), and the second directed to the three in-house counsel in June 2012 (the "June Order").