Prominent Convicted Tax Shelter Lawyer Fails on Appeal in CDP Case Involving Restitution Based Assessments (4/1/26)

 I start with a caveat: although this posting is on April 1, sometimes called April Fools Day, this is intended as a serious discussion.

In Daugerdas v. Commissioner, ___ F.4th ___ (7th Cir. 2026), CA7 here and GS here [to come], the Court held that § 6201(a)(4)(A), which authorizes the IRS  to assess and collect restitution awarded in a criminal proceeding for unpaid tax, was a stand-alone collection authority unaffected by the payment schedule the district court imposed for the restitution behind the tax assessment. The assessment is sometimes called “restitution based assessment,” and acronymed to RBA which I use here. The holding seems like a straight-forward holding. But there are some issues lurking in the case that tax procedure enthusiasts may enjoy or at least understand.

First, I offer background worthy of note:

1. Daugerdas, a lawyer, is a notorious promoter of bogus tax shelters who was convicted. The Court says (pp. 2-3, emphasis supplied by JAT):

          In 2013 a federal jury in Manhattan found Daugerdas guilty of one count of conspiracy to defraud the IRS (18 U.S.C. § 371), one count of mail fraud (18 U.S.C. § 1341), four counts of client tax evasion (26 U.S.C. § 7201), and one count of obstructing the internal revenue laws (26 U.S.C. § 7212(a)). His sentence brought with it an obligation to pay restitution of $371,006,397 jointly and severally with his co-conspirators for the tax losses resulting from the fraud perpetrated on the U.S. Treasury. The district court established a schedule of payments requiring Daugerdas to pay 10% of his gross monthly [*3] income starting 30 days after his release from prison. The Second Circuit affirmed Daugerdas’s convictions and sentence. See United States v. Daugerdas, 837 F.3d 212 (2d Cir. 2016).

I have not tried to break down the components of the restitution amount. Specifically, I have not tried to determine whether the restitution relates to Daugerdas’ tax liabilities (he did make a whopping amount of gross income that he likely attempted to shelter with similar bullshit strategies) or includes in whole or in part the liabilities of other persons reporting on the basis of bullshit tax shelters he promoted with legal opinions and related services. I don’t know that the difference makes a difference in terms of the RBA.

I have written on Daugerdas several times on my Federal Tax Crimes Blog, here (the results are initially by relevance but may be sorted by date).

2. The Seventh Circuit opinion arises from a Tax Court CDP proceeding, Daugerdas v. Commissioner (T.C. No. 7350-20L), here. The Tax Court bench opinion with oral findings of fact and opinion is at Dkt # 126. In the bench opinion in this CDP case, Judge Goeke sustained the IRS filing of the notice of federal tax lien but did not sustain the IRS levy against Daugerdas that could be effective against the only available asset—a residence in the wife’s name—only under a nominee theory requiring the IRS to assert the nominee liability against the wife. In other words, the Court held that, under the facts, the IRS could not use a levy against Daugerdas to levy the residence in the wife’s name. The IRS did not appeal that holding. (I include relevant portions of the bench opinion below.)

3. In this light, it seems to me that the Seventh Circuit panel's opening statement of the issue it is deciding is imprecise. The Court frames the issue in the opening sentence:

This appeal presents an issue of first impression for us and indeed all circuit courts: whether the Tax Code, and specifically 26 U.S.C. § 6201(a)(4)(A), authorizes the Internal Revenue Service to assess and collect restitution following a person’s conviction of a federal tax-related crime under Title 18. We hold that the answer is yes, * * * *

Of course, the clear and obvious answer to that question is yes.

4. In my mind the tougher issue perhaps not directly addressed because the IRS did not appeal the Tax Court’s rejection of the levy is whether the IRS could levy the otherwise proper RBA in a way that is not consistent with the conditions the district court placed on the collection of the underlying restitution. My instinct is that the IRS should not levy on a 6201(a)(4)(A) assessment inconsistently with the district court conditions on collection of restitution. Whether that is a technically correct reading of the text or a providential consideration, that just seems right to me. Of course, since the Tax Court rejected the levy (see below), that was not an issue the Seventh Circuit panel had to address.

5. One issue inherent in considering the foregoing is whether, if an asset is titled in the name of a person who is a nominee of the taxpayer (holding title for the beneficial owner-taxpayer), can the IRS treat the asset as the taxpayer’s asset permitting the levy (assume that the levy is not inconsistent with the conditions imposed by the district court)? Of course, the IRS could have some protection by filing a nominee lien, in this case against the residence. Here is a copy and paste of the text (no footnotes) in my Federal Tax Procedure book (2026 Practitioner edition, pp. 838-839; and 2026 Student Edition, p. 553).

          The nominee lien is not specifically authorized by the Code but is authorized administratively and recognized by the courts. The nominee lien names the third party who the IRS has determined is acting as nominee for the taxpayer and identifies the taxpayer and the property to which the nominee lien attaches. The nominee lien is filed to preserve the IRS’s interest in the property allegedly so held. In contrast to the general tax lien filed against the taxpayer, the nominee lien requires special approval within the IRS. The effect of the nominee lien is to put the public on notice that the IRS believes the property may be property of someone other than the nominal title owner, thereby clouding title of the third party (the putative nominee) and effectively preventing that third party from dealing with the property. Obviously, this could be a major problem to a third party who really owns the property and is not in fact acting as nominee.

Now, focusing on the nominee levy issue, Judge Goeke addressed the issue (Bench Opinion, pp. 18-23):

          We now turn to discuss the levy, which is primarily based upon Respondent's analysis that Respondent has an opportunity to collect funds through the nominee lien. Basic case law, as applied by the Northern District of Illinois, is helpful in considering Respondent's argument. Stone v. United States, 2014 Westlaw 1289788, (Northern District of Illinois, 2014), finds that Illinois State Courts have not specifically addressed the nominee theory. In the absence of specific guidance from the State courts, Federal courts have used a multi-factor standard to determine whether an individual is a delinquent taxpayer's nominee. See United States v. Cohen, 930 Fed.Supp.2d, 962, 979 (C.D. Ill., 2013); and United States v. N. States Investment, Inc., 670 F.Supp.2d 778, 788-89 (N.D. Ill., 2009).

          The applicable standard, as determined in Stone [*19] v. United States, is as follows. Whether a title holder is a nominee depends on the facts and circumstances of each case, including whether; (1), a close personal relationship exists between the nominee and the transferor; (2), the nominee paid little or no consideration for the property; (3), the parties placed the property in the name of the nominee in anticipation of collection activity; (4), the parties did not record the conveyance; and (5), the transferor continues to exercise  dominion and control over the property. See United States v. Schaut, 2001 WL 1665314, at 3 (N.D. Ill., December 28th, 2001); United States v. McClellan, 1994 Westlaw 374471, at 3 (S.D. Ill., May 17th, 1994). In Stone, the Court weighed the factors and held that the wife was the husband's nominee. It called the recording of the deed the least significant factor, because the other factors were not so easily manipulated.

          Of importance, in the present matter, the Northern District of Illinois in Foreman v. Department of Treasury, 2005 WL 928508 (March 3rd, 2005), held that the taxpayer did not have standing to oppose a nominee lien, because he would not be legally injured if the IRS took the nominee's property. And that he can only benefit because the tax would be paid. This statement in this holding is consistent with the general concept of nominee [*20] liens, that the collection action is on the nominee, and that generally it begins with the service of a Notice of Federal Tax Lien on the nominee. And the nominee then has the right to pursue defenses, including that the underlying taxpayer has no interest in the subject property. However, the action begins with service upon the nominee, and does not directly involve the taxpayer.

          This case is not an appropriate forum to decide the nominee issue, because Petitioner's wife is not a party to the case. It is not appropriate to adjudicate her rights in the Wilmette property without her participation. The Notice of Federal Tax Lien at issue here does not attach to the Wilmette property, because Petitioner does not hold legal title to the property. If the IRS files a nominee lien, Petitioner's wife would have an opportunity to assert her ownership and to litigate the question in an appropriate forum. Jewell v. Commissioner, T.C. Memo 2016-239 at 19.

          As stated previously, Rule of Procedure 121(d) provides that when a Motion for Summary Judgment is made and supported as set forth in this rule, the nonmovant may not rest on the allegation or denial of that party's pleadings. The nonmovant must respond, setting forth specific facts, and supporting those facts as required by Rule 121(c) to show that there is a genuine dispute.

[*21]   We conclude that regarding the use of the nominee lien as a basis for the underlying levy in Respondent's opposition to Petitioner's Motion for Summary Judgment, Respondent has not provided sufficient evidence to sustain a rebuttal argument to Petitioner's Motion for Summary Judgment regarding collection by levy, because the facts Respondent alleges concerning the nominee lien are mere allegations, and are inconsistent with established facts in the administrative record. Respondent's allegations are not sufficient to sustain the denial of a Summary Judgment under our Rule 121(d).

          Secondly, levy is not necessary for the IRS to pursue the only collection Respondent has suggested. The nominee lien, the case law establishes, is pursued by serving a Notice of Federal Tax Lien on the owner of the property, which in this case would be Petitioner's wife. The IRS would seek to collect the nominee lien from her, and a levy on Petitioner would serve no purpose, even if Respondent could establish the elements of the nominee lien against Petitioner's wife, which we believe Respondent has failed to do so in the administrative record in the present case.

          Likewise, it is not necessary to resolve the nominee lien issue to decide whether Appeals abused its discretion to sustain the proposed levy. Given the [*22] contradictory determinations regarding whether to sustain the proposed levy, we cannot say the Appeals determination was reasonable, especially in light of the fact that that determination was not based upon any significant facts.

          And there were no significant facts to support the determination in either the undated Supplemental Notice of Determination, nor in the later dated Notice of Determination.

          We find that the inconsistent Appeals determinations regarding Petitioner's ability to pay, based upon the threat of a nominee lien on the Wilmette property, to be inconsistent with the assertion that the Court should not decide whether, in fact, Petitioner's wife holds the property as Petitioner's nominee. The IRS believes that Petitioner's wife is the nominee. It should pursue that action against the property in the appropriate forum, and not as some ad hoc basis for supporting the levy in this case, because levy is not the remedy generally used to pursue a nominee lien. And a levy on the Petitioner clearly is misplaced, based upon the precedent, especially the precedent in the Northern District of Illinois and other district courts in the State of Illinois. We believe that the change of position by the Settlement officer between the initial Supplemental Notice and the later dated Supplemental Notice is not [*23] supported by the law, nor the facts. And therefore, it is an abuse of discretion.

Judge Goeke assumes that the IRS can levy on an alleged nominee based solely on the RBA against the taxpayer rather than based on the nominee lien. The particular notice of intent to levy, however, failed on the facts that were insufficient to support the prudence of the levy.

This blog entry is cross-posted on the Federal Tax Crimes Blog here.