Updates on Forfeiture and Civil Penalty in Bullshit Tax Shelter Cases (6/18/18)

I write on two unrelated topics today.  Neither are directly related to federal tax crimes, so I write in summary only.

1.  In United States v. Daugerdas, ___ F.3d ___, 2018 U.S. App. LEXIS 15823 (2d Cir. 2018), here, the Second Circuit held that the petitioner-appellant, the wife of Paul Daugerdas who was convicted for bullshit tax shelter activity, could have the opportunity to amend her pleadings in the criminal forfeiture in Paul's case against funds in which she claimed an interest.  I have previously posted a number of blog entries on Paul.  A general search, here, on Daugerdas will show those entries.  Here is the Second Circuit's summary of the case:

Petitioner-appellant Eleanor Daugerdas appeals from an order of the United States District Court for the Southern District of New York (William H. Pauley III, J.), dismissing her petition asserting a third-party interest in certain accounts (the "Accounts") preliminarily forfeited in the underlying criminal proceedings against her husband, Paul M. Daugerdas. The parties agree that Paul initially funded the Accounts, at least in part, with money he was paid by the law firm through which he conducted his fraudulent activities, and that he gratuitously transferred ownership of the Accounts to his wife over a period of years. Eleanor contends that the law firm irreversibly commingled the income it received from Paul's fraudulent-tax-shelter clients with untainted money before it paid Paul, and accordingly the funds in the Accounts cannot easily be traced to her husband's fraud. Eleanor therefore asserts that the Accounts cannot now be taken from her to satisfy her husband's forfeiture obligations; instead, she argues, equivalent amounts must be collected from her husband's own assets in the same manner that a judgment creditor would enforce any personal money judgment. 

We conclude that Eleanor's petition does not currently contain sufficient plausible allegations to sustain her position; however, at oral argument, she claimed to be able to plead additional facts, and such repleading would not necessarily be futile. Because denying Eleanor the ability to assert the argument she raises here could potentially permit the government to deprive her of her own property without due process of law, we VACATE the district court's order and REMAND the case for proceedings consistent with this opinion.

The opinion contains a good discussion of the differences between criminal forfeiture (in personam) and civil forfeiture (in rem).

2.  In Greenberg v. Commissioner, Tax Ct. Memo LEXIS 79, here, the Court rejected Greenberg's bullshit tax shelter claims but held that, although it would otherwise have sustained the 40% accuracy related penalty, it would not do so because the IRS had not met the requirement that it meet a production burden with respect to the written supervisor approval required by § 6751(b).  The Tax Court's opening two paragraphs project the result:

These cases are about a lawyer and a tax accountant who used a series of complex option spreads to generate millions in tax savings for themselves and their clients. The Commissioner says these transactions look too much like Son-of-BOSS deals--a type of deal this Court has consistently said doesn't work. n2 He argues that the taxpayers made a fortune selling tax shelters and tried to shelter their shelter income with the same kind of shelter. He also takes issue with a large tax loss that the taxpayers say was generated when they abandoned their interest in a mysterious partnership--even though there is no paperwork to prove any such abandonment.
   n2 Son-of-BOSS is a variation of a slightly older alleged tax shelter known as BOSS, an acronym for "bond and options sales strategy." There are a number of different types of Son-of-BOSS transactions, but what they all have in common is the transfer of assets encumbered by significant liabilities to a partnership with the goal of increasing basis in that partnership or the assets themselves. The liabilities are usually obligations to buy securities, and are typically not completely fixed at the time of transfer. This may let the partnership treat the liabilities as uncertain, which may let the partnership ignore them in computing basis. If so, the result is that the partners will have a basis in the partnership or the assets themselves so great as to provide for large--but not out-of-pocket--losses on their individual tax returns. We have never found a Son-of-BOSS deal that works. See, e.g., CNT Inv'rs, LLC v. Commissioner, 144 T.C. 161, 169 n.7 (2015); BCP Trading & Invs., LLC v. Commissioner, T.C. Memo. 2017-151, at *2 n.2. 

The Commissioner issued two rounds of notices of deficiency. The first disallowed losses from option spreads claimed through the taxpayers' partnership, GG Capital, as well as the abandonment loss. The second disallowed losses the Commissioner says the taxpayers claimed from another partnership--AD Global-- through the same type of transaction. The taxpayers say they never claimed these losses. They also say the Commissioner got the procedure wrong--he should have issued notices of final partnership administrative adjustment (FPAAs), not notices of deficiency--and that he missed the statute of limitations. If those arguments fail, they say these transactions were legitimate investments, not Son-of-BOSS deals. The Commissioner thinks this sounds too good to be true.

It is interesting to me that the IRS did not assert the civil fraud penalty.  Greenberg was one of the defendants in the infamous KPMG related prosecution for abusive tax shelters.  That prosecution spawned a number of opinions under the caption United States v. Stein, et al. (E.g., United States v. Stein, 541 F.3d 130 (2d Cir. 2008))  There were 19 original defendants.  Two pled guilty.  Thirteen were dismissed for prosecutorial abuse ("forcing" KPMG to quit paying attorneys fees).  Four went to trial.  Three were convicted at trial.  Greenberg was acquitted.  However, acquitting Greenberg would not mean that he could not be determined to owe the civil fraud penalty since the Government's burden of proof is clear and convincing which is less stringent than the beyond a reasonable doubt applicable in the criminal acquittal.  Still, the IRS asserted only the 40% penalty, a penalty that clearly could apply as the Tax Court held.  Nevertheless, the IRS lost the penalty issue because it had a procedural footfault in not meeting the burden of production imposed by § 7491(c) as to the written supervisor approval of the penalty under § 6751(b).

There is some recent history regarding the interplay of § 7491(c) and § 6751(b).  The Tax Court covers that ground in the opinion, so I won't repeat it.  For those wanting more discussion, the Procedurally Taxing Blog has a number of entries that may be found with a search of 6751(b) and Graev, here.  Suffice it to say that the Tax Court is grappling with what to do with cases that were in the pipeline when the Second Circuit, later joined by the Tax Court itself, decided that the IRS must meet the § 7491(c) burden of production for the required written approval under § 6751(b), which had not been required before the Second Circuit decision.  Some taxpayers, such as Greenberg, are now avoiding a clearly applicable penalty because the record was closed before the Tax Court adopted the position of the Second Circuit.  As Judge Holmes notes in Greenberg, however, there may be an appeal that could make the penalty issue a live one, in which case Greenberg certainly loses.

The IRS has recently issued CCN 2018-006 (6/6/18), here, giving IRS attorneys guidance on cases involving the interplay of §§ 6751(b) and 7491(c).