RICO Claim Dismissed Against Bullshit Tax Shelter Promoters (11/19/19; 11/22/19)

In Menzies v. Seyfarth Shaw LLP, __ F.3d ___ (7th Cir. 2019), here, the Court dismissed a RICO claim arising out of an alleged fraudulent tax shelter peddled to the taxpayer (Menzies) by a lawyer, law firm and two financial services firms.  The Court held that fraudulent tax shelters can be subject of RICO claims, but Menzies had failed to properly assert the claims in the pleadings.

The particular shelter involved was of the bullshit shelters, often a topic discussed on this blog.  Here is my definition from my Tax Procedure books (Practitioner Edition p. 905 (footnotes omitted); Student Edition p. 616):

Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work and cascade of words designed to mask the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including IRS auditors, if they stumble across the transaction(s)) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, offer a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters (and other enablers) of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate potential penalty risks by shifting them to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.   

More succinctly, Michael Graetz, a Yale Law Professor, has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”  Others have described the abusive tax shelters as “too good to be true.” 

I could not ascertain precisely what the steps in the fraudulent tax shelter scheme were other than, like Son-of-Boss transactions, the scheme created artificial losses that, presumably, offset the gain on sale of AUI stock, although it is not clear whether that gain was ever reported in order to use artificial losses. (I perhaps just missed something there.)  Here is the best explanation from Judge Hamilton’s dissenting opinion (Slip Op. 33-35):

The Scariest Tax Form? Scary Is in the Eye of the Beholder (3/3/14)

Robert Wood has a timely reminder that certain forms, if not filed or filed properly, can create major statute of limitations problems for U.S. taxpayers.  Robert W. Wood, Scariest Tax Form? Skip It, And IRS Can Audit Forever (Forbes 3/l3/14), here. The particular form he focuses on is the Form 5471.  The Form 5471 is here.  The instructions for the form are here (in pdf format) and here (in html format).  Here is the key excerpt:

The IRS normally gets three years to audit. Sometimes, say if you mess up with offshore account reporting, the IRS gets six. Having a foreign bank account and unreported income is tough to resolve. The safest approach is going into the IRS Offshore Voluntary Disclosure Program, although some clients opt for more aggressive approaches. 

What many people find surprising is that having a company that holds a foreign account is even more sensitive. Yes, we’re talking about controlled foreign corporations, also called CFCs. When a U.S. shareholderdholds more than 50 percent of the vote or value of a foreign corporation, the company is a controlled foreign corporation or CFC. A U.S. shareholder is a U.S. person who owns 10 percent or more of the foreign corporation’s total voting power. 

That triggers reporting, including filing an annual IRS Form 5471. It is an understatement to say this is an important form. Failing to file it means penalties, generally $10,000 per form. A separate penalty can apply to each Form 5471 filed late, and to each Form 5471 that is incomplete or inaccurate. 

What’s more, this penalty can apply even if no tax is due on the return. That seems harsh, but the next rule—about the statute of limitations—is even more surprising. If you have a CFC but fail to file a required Form 5471, your tax return remains open for audit indefinitely. Normally, the statute expires after three or six years, depending on the issue and its magnitude. 

This statutory override of the normal statute of limitations is sweeping. The IRS not only has an indefinite period to examine and assess taxes on items relating to the missing Form 5471. In fact, the IRS can make any adjustments to the entire tax return with no expiration until the required Form 5471 is filed. You might think of a Form 5471 like the signature on your return. Without it, it really isn’t a return.

This is scary.  But there are many returns and return filing obligations that are scary.  Picky and choosing is a matter of personal preference.  Mr. Woods is concerned about an unlimited civil statute of limitations -- or at least a civil statute suspension until the information is provided.  The criminal statute of limitations is not suspended.

A Stupid -- At Least Unfair -- IRS OVDI/OVDP Trick; Denying Overpayment Credit for Barred Years (8/13/12)

I write to rant about a practice inside the OVDI/OVDP civil penalty structure.  I start with the relevant Code sections, 6501, here, and 6511, here.  Section 6501(a) provides a 3 year statute of limitations for assessments.  Section 6501(c) provides certain exceptions to the 3 year limitations on assessments.  The key exception for present purposes is the Section 6501(c)(1) "a false or fraudulent return with the intent to evade tax," for which there is no statute of limitations.  (I ignore the 6 year statutes of limitations that might apply, and assume for present purposes they do not apply.)  Section 6511(a) provides a statute of limitations for refunds.  Basically, the taxpayer filing a timely original return and paying the tax has 3 years in which to file a claim for refund of the tax.

The OVDI/OVDP programs have involved a lookback window from 2003 forward.  (I ignore the possibility of a later starting date under 2012 OVDP but even if a later starting date were involved, the concepts discussed in this blog would still apply.)  The taxpayer is required to file amended returns during that lookback period and pay all applicable taxes.

Commenters to other blog entries have noted that, if there are refunds due for years for which refund is barred under the above rules, the IRS will not give the taxpayer credit for those refunds against taxes reported on the amended returns for years in the lookback window.  Here is an example:

2003 – additional tax reported on the OVDP/OVDI amended return - $1,000.
2004 – refund of tax paid with original return but claimed for first time on OVDP/OVDI amended return – ($1,000)
2005 – additional tax reported on the OVDP/OVDI amended return - $1,000.

Assume the years 2003-2005 are closed for assessments and refunds.  As to assessments, assume that the IRS has not made a specific finding of fraud as to the taxpayer and, should it investigate, could not prove fraud by clear and convincing evidence so as to invoke Section 6501(c)(1).   In this case, the IRS will not give the taxpayer credit for the $1,000 overpayment for 2004, even though it collects the underpayments for 2003 and 2005.