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:

If convicted, Kohn, Chollet, and Simmons each face a maximum sentence of five years in prison for conspiring to defraud the United States and three years in prison for each of multiple counts of aiding and assisting in the preparation of false tax returns. Kohn and Simmons both also face a maximum sentence of 20 years in prison for wire fraud, and Simmons faces a maximum sentence of three years in prison for several counts of filing false personal tax returns, if convicted. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.

Of course, as the last sentence implies, the sentences will likely not be anywhere near the maximums that could be imposed if the counts of conviction were “stacked.” Still, with the amounts of intended tax loss alleged, the Guidelines range will have significant incarceration periods for the counts of conviction. Remember that in calculating the Guidelines range, the principal factor will be the tax loss which can include: (i) losses involved in the counts of conviction; (ii) losses involved in even counts of acquittal; and (iii) losses involved in other years (even years outside the criminal statute of limitations) or even with other taxpayers if within the scope of relevant conduct.

Some of the interesting items in the indictment are:

1. Kohn prior conviction:

26. KOHN misrepresented his educational background to bolster his credentials, including his academic performance at NYU. KOHN also told the clients false and incomplete information about his previous guilty plea in 2002 to endeavoring to obstruct the due administration of the Internal Revenue laws, in violation of 26 U.S.C. § 7212(a).

27. As a result of his conviction, KOHN was barred from practicing before the IRS and has not been reinstated. Neither KOHN nor CHOLLET disclosed this to their clients.

There is no information as to whether he was disbarred from practicing law for any period of time.

2. Penalty Insurance.

28. As part of the scheme, KOHN and CHOLLET promised to provide opinion letters to protect clients from penalties in the event of an IRS audit. In practice, KOHN and CHOLLET often failed to provide these opinion letters or provided the opinion letters after the clients had already entered into the GEP. Additionally, some clients received opinion letters that were inapplicable to the transaction-for example they were written by other law firms, for other clients, and about other transactions.

JAT Comment: Often overly aggressive practitioners hawking fake shelters (aka bullshit shelters) will use some type of penalty protection or insurance as an inducement via the opinion letters or other reliance on counsel as part of their marketing scheme.

JAT Comment: Why were not the taxpayers or at least some of schemes indicted?

3. IRS Sting Operation:

Most importantly, the IRS did a sting operation and got some damning information and admissions. (See pp. 5-7, pars. 30-46.)  The allegations regarding the sting are interesting reading. Part of the sales pitch was to have Kohn obtain prior years tax returns from prospective or new clients and promise to amend them to obtain refunds. And, for the new partnership structure, although the income generated by the sham partnership would match the improper deductions, the income would be “allocated” to the tax exempt charitable "partner" (thus increasing its capital account), but in fact as a practical matter the money in the partnership was the taxpayers and would not go in major part to the partnership. Some type of insurance was offered to have some relatively small amount of assets that might eventually go to the charity.

JAT Comment:  There is at least the inference that the charitable partner might have been a willing player or willing dupe in the scheme, but the charity is not identified or charged.

4, Emails.

There are also some damning emails with clients. See page 7-9  pars. 48-52.  Emails are often forever and can be quite damning in prosecutions of this type of bullshit tax shelters.

5, Stupidity.

And there is much more.  Basically, a pattern of incredible stupidity, particularly by a tax lawyer (even with misrepresented academic performance) and brazenness.