New Tax Shelter Enabler Indictments - More About the Lie (6/8/09)

On June 4, 2009, the Federal District Court in Seattle unsealed a previously sealed indictment of certain Quellos-related individuals. A Wall Street Law Blog article is here, and the indictment is here. Quellos was a bona fide investment company that got in the tax shelter business. The indictment contains the same pattern as the KPMG related indictment -- (1) conspiracy as the ubiquitous Count One and 8 Counts of Tax Evasion. But the indictment and goes beyond that pattern to add 3 counts of wire fraud and one count of money laundering conspiracy. Wire fraud and money laundering conspiracy often accompany traditional tax crimes (including the general defraud conspiracy), but are not often charged together in the same indictment. See Tax Division Directive No. 128. And, such piling on of charges addresses a concern that Congress recently stated in FERA (see the prior discussion here)).

I focus in this blog not on the charging decisions (how many crimes can a creative prosecutor imagine and charge), but rather upon the basic pattern of conduct that is reported to be behind the indictment. I have previously discussed here the common feature -- the lie -- of tax shelter crimes. See prior blogs here and here. If tax shelter crimes are really about the lie, who is the target of the lie? It is not a lie unless it is told to someone who might rely upon the lie. Let's take the quintessential lie that the Government claims in tax shelters -- that the taxpayer has a business or profit motive independent of the tax benefits. The lie is intended for IRS consumption to distract the IRS from the truth -- no profit motive and no right to the tax benefits claimed. In all events, it is imagined, the lie might avoid penalty relief if all else fails. The lie is also intended for persons in the tax shelter chain who might not know the truth otherwise and relies upon the lie as truth as a condition to their participation in the chain.

The WSJ Law Blog today asks the question of whether attorneys for the taxpayers entering Quellos shelters were also the intended targets of such lies in order to give them the comfort they needed to, in turn, give the taxpayers whatever comfort they needed. In other words, in the simple example posited above, the lie about the intended business or profit motive might be required for the taxpayers' lawyers to bless the deal. That is the focus of the WSJ Law Blog discussion.

But in the simple example I posit, what lie is being told? It is true that in these deals, the promoters require the taxpayer to make the independent business or profit motive representation. But who is making the representation? It is the taxpayer. The taxpayer has the relationship with his own counsel -- i.e., the taxpayer's lawyer is not in bed with the tax shelter promoters but truly an independent lawyer representing only one person, the taxpayer. The taxpayer's lawyer is supposed to understand the overall structure including any of its components relevant to the taxpayer's representation as to independent business or profit motive. If the taxpayer believes the representation and his lawyer believes that, properly counseled by that lawyer, the taxpayer believes the representation, there should be no criminal conduct on behalf of either the taxpayer or the lawyer. Of course, even if the taxpayer's lawyer believes that the taxpayer believes the representation and nevertheless, based on the lawyer'sw independent review of the structure, believes that the taxpayer is misguided as to the belief, the lawyer's job is to counsel the client that the facts do not support the belief, however sincerely held, and the taxpayer should reconsider. But, if the taxpayer persists in his belief after proper counseling, however misguided that belief may be, it is not the taxpayer's lawyer's job to call his client a lier. It is, after all, a subjective belief, and there is no litmus test of a subjective belief. (Of course, the lawyer will surely advise the taxpayer that the risk is that, if the belief is not credible, the lawyer and the taxpayer take the risk that no one -- specifically the IRS, a prosecutor or a juror -- will believe that the taxpayer really believed he had an independent business or profit motive or that the lawyer really believed that the taxpayer had that belief, and the Government may convict the taxpayer and the lawyer for hiding behind the known lie to particpate.)


As noted in the article, the taxpayers and their lawyers in the Quellos shelters have not been indicted, although they are pseudonymically identified in the indictment. In apparent explanation for why the taxpayers and their lawyers have not been indicted, a prosecutor is quoted as saying:

“It would be impossible to show that any of the taxpayers had knowledge that this was a criminal scheme,” said Mark Bartlett, an assistant U.S. attorney in Seattle. “What the evidence has shown is the lies that were told to the IRS were also told to the taxpayer, and also told to attorneys for the taxpayers.”

I am not familiar with the Quellos deals. Some do have the same acronyms of shelters I am familiar with, but my experience has been that they are variations of a common theme that I observed in other cases, particularly the KPMG indictments. In the KPMG indictments, the Government charged the promoters, but did not charge the taxpayers or their lawyers. In the particular shelters in which my client participated, the taxpayers were represented by highly competent lawyers who understood the deal and, so far as I know, were told no lies. On the business or profit motive issue, the promotoers may have made some generic general conclusions that the investment aspect of the deal was designed to permit a highly speculative profit after covering the all-in costs of the deal if some event, albeit unlikely, occurred. But the taxpayers and their attorneys and, in some cases, their financial advisors, were given the specifics of the trading strategy behind the generic general conclusions and thus were able to make their own assessments. The Government did believe that any representation of a business or profit motive could not be credibly made, but as I noted in an earlier blog I don't think the Government proved that, in fact, all of the taxpayers did not have the subjective belief, even if that belief was not justified. So, where was the lie, unless the promoters knew that the taxpayers were subjectively lieing, in which case their attorneys probably knew also or certainly should have known that their clients were lieing. In other words, the promoters could and did not make the representation that the Government claims is false; only the taxpayers could do that. Of course, if the promoters lied to the taxpayers about the potential for risks and rewards in the underlying investment program (e.g., in the case of BLIPS, if the promoters had assured the taxpayer that the chance of the Argentinan peg breaking being 50% rather than minor), that could be a problem for the promoters, but so far as I am aware in the KPMG deals there were no such lies told by the promoters. All of the taxpayers and their advisors (lawyers and financial advisors) knew the risks and the potential for reward and on that basis made their own independent determination of whether that permitted the taxpayers to represent that they had an independent business or profit motive.

And, to close the loop, if it is the lie that is really involved, people of reasonable intelligence and experience should be able to recognize the lie. If that is true, the taxpayers and their advisors (both lawyers and financial advisors) should have recognized the lie and the Government should be able to prove it. Yet the quote above from the Quellos prosecutor indicates that the Government knows it cannot prove the lie -- the taxpayer's own representation -- that was the central feature of all the Government imagines is bad about these shelters.

The underlying problem, I think, is that no one really knew the precise paramaters of the business or profit motive requirement. Did it mean a certain threshold probability over covering the all-in costs and have some profit potential beyond that? Does one who "invests" in a lottery ticket have a profit motive? Does the profit motive play in the deal have to relate directly to the tax play that produces the shelter? (For example, in some of the shelters, the investment aspect was really separate from the tax play, often based on Helmer, producing the shelter.) So different taxpayers even being counseled by competent lawyers and advisers might indeed reach a conclusion that, while not acceptable to the prosecutors, really was their conclusion based on the independent advice they received from their highly competent lawyers and, in some cases, independent financial advisors.

I hope that readers will also see in this level of confusion / uncertainty about the law's commands issues related to the certainty required in the law to set the legal duty (a la James/Critzer/Garber/Dahlstrom/Pirro), as well as issues of Cheek willfulness.