On 5/15/16, I added a link at the bottom of this blog entry to an excellent discussion of the case in the Procedurally Taxing Blog.
Two former Sprint Executives who participated in a bullshit tax shelter are suing the IRS for aiding and abetting EY's breach of conflict of interest with respect to their investment in the shelters and the fallout from their investment in the shelters. The complaint is here.
The gravamen of the claims are:
1. EY was the outside auditor for Sprint, a public corporation.
2. The plaintiffs were executives of Sprint.
3. The plaintiffs on their own initiative and with no compulsion from or even knowledge of Sprint invested in abusive tax shelters that EY promoted to executives such as them. EY may also have designed or participated in the design of the shelters, but that is not alleged and is probably irrelevant.
4. The IRS discovered EY's promotion of the shelters. The IRS conducted a civil penalty examination of EY as a result of which EY made penalty payments to the IRS. EY negotiated with the IRS and the IRS collusively agreed to not mention in the press release that the payment was for a penalty.
5. The two were apparently aware of the settlement payment but, because of the IRS's collusion with EY in not describing the payment as a penalty, the plaintiffs did not know it was a penalty.
6. The IRS began a civil audit of the investors in these shelters. The plaintiffs were included. EY represented the plaintiffs in the audits. Apparently, EY failed to disclose to the plaintiffs that the civil investigation and settlement created a potential conflict of interest with the plaintiffs whose IRS audits EY was handling. Further, the IRS knew EY was representing plaintiffs at the same time that it was conducting an audit of plaintiffs. The IRS should have prevented that conflict. (Paragrpah 54 of the complaint, however, indicates that the audit was of a partnership rather than the partners; not clear that the allegations are consistent.)
7. Sprint's Board got wind of this somehow and the potential for a conflict of interest between EY and the plaintiffs at the same time that EY was auditing Sprint's financials. That put Sprint in a bind, requiring that it either terminate EY or the plaintiffs, or perhaps both. Sprint terminated the executives, an action which would not have occurred had the executives not invested in the bullshit tax shelter EY promoted to plaintiffs.
8. The plaintiffs discovered later that the IRS had colluded with EY.
9. Such collusion (or aiding and abetting) is actionable under New York law.
10. As a result, the US is liable under the Federal Tort Claims Act.
A lot of interesting stuff should come out of this case. The U.S. has not yet filed an answer.
Notably, however, plaintiffs make no attempt in the complaint to discuss the bullshit tax shelter or defend their participation in such bullshit tax shelters. One would have thought that such astute taxpayers (suggested by the damage model for $42,550,000 and $116,800, respectively) would have invested in bullshit tax shelters. When that comes up, as it undoubtedly will, they will surely claim that they relied on EY and whatever other professionals were involved. But whether anyone will believe it may be another issue.
The pdf of the complaint is linked above. Here is a table of the relevant complaint paragraphs. The allegations in the complaint are in the left hand column. My comments to some of the paragraphs are in the right hand column.
Showing posts with label Promoter Penalties. Show all posts
Showing posts with label Promoter Penalties. Show all posts
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