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

Note: This is posting to the Tax Procedure Blog of an earlier posting on my Federal Tax Crimes Blog, that I decided to copy and post here because relevant to tax procedure issue.

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):

Article on Deterrence Through Criminal Enforcement and Defining Tax Shelters (3/8/13)

The following is a copy of a blog from my Federal Tax Crimes Blog, Article on Deterrence Through Criminal Enforcement and Defining Tax Shelters (3/7/13), here.

A recent article in Tax Notes summarizes a recent PLI conference on tax penalties.  Marie Sapirie, Revised Guidance on Tax Shelter Definition on the Way, 2013 TNT 42-9 (3/4/13).

Perhaps most importantly for tax crimes afficionados are statements made by Daniel W. Levy, AUSA SDNY, who is a prominent player in the Government's offshore crimes juggernaut.  The article discusses Mr. Levy's comments as follows:

"What we're trying to do is drive deterrence," said Daniel W. Levy, assistant U.S. attorney, Southern District of New York. At some point people who pay their housekeepers and nannies off the books will be prosecuted for criminal tax fraud, he said. "If it all revolves around housekeepers, I've already got my snappy code name in the can and it's Operation Clean Sweep," he joked.  

For now, however, "we're looking for clear violations of law, clear evidence of willfulness, cases that don't involve the possibility of negligence," Levy said. "We want the strongest possible evidence of willfulness because those are the strongest possible criminal cases we have." But that doesn't mean that the government shies away from complex cases, he added.  

Offshore bank accounts sometimes presented situations of relatively low tax loss and low evidence of willfulness. "We've had to make hard judgment calls about whether it's worth prosecuting that person given relatively limited tax evasion -- that is, relatively limited tax loss to the United States," Levy said. "There are some people who just passed into the night."

Yet Another Bullshit Tax Shelter Bites the Dust (2/27/13)

We have yet another court rejection of a bullshit tax shelter.  Chemtech Royalty Associates LP et al. v. United States, 2013 U.S. Dist. 26329 (MD LA 2013), here  This time it is Dow Chemical who tried unsuccessfully to underpay its taxes and thus shift its share of the burden of Government to the citizens of this country.  This bullshit tax shelter was cooked up by Goldman Sachs in league with lawyers at King & Spalding.

The trial judge says:  "Both arrangements are enormously complicated in their construction and operation."  Which brings me to the features of a tax shelter.  I address this in my Federal Tax Procedure Book and this is a portion of that discussion (footnotes omitted):

Tax shelters are many and varied.  Some are outright fraudulent wrapped in what is disguised as a real deal.  The more sophisticated, however, are often without substance but do have some at least tenuous 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 specifically IRS auditors) 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, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters 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 in the final analysis is simply a premium for putting the reputations and perhaps their freedom at risk to give a comfort opinion that the deal which will not work if discovered, 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, 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.”

Another Bullshit Tax Shelter Bites the Dust (2/12/13)

Note to readers, this is a cut and paste from a blog entry on my Federal Tax Crimes Blog, here.  The subject overlaps, so I have put it here as well.

In Bank of New York Mellon Corp. v. Commissioner, 140 T.C. No. 2 (2013), here, the Tax Court knocked down yet another another bullshit tax shelter.  It is a complex case, and for purposes of this blog, I will not get into the weeds (this genre of tax shelter usually has many weeds designed to obscure the big picture what is really going on -- i.e., pretty much nothing except paper and money shuffling and re-shuffling, with net effect mostly to the promoters).  I will just summarize the gravamen of the opinion:

The Court opens the opinion (after finding the bullshit facts) as follows (emphasis supplied):

This complex transaction presents a case of first impression in this Court. We are asked to decide whether petitioner is entitled to foreign tax credits and certain expense deductions from the STARS transaction and also whether petitioner is entitled to report income generated from the STARS assets as foreign source income. Respondent argues that the STARS transaction lacked economic substance. Respondent asserts consequently that the foreign tax credits and expenses attributable to STARS should be disallowed and the income from the STARS assets should be characterized as U.S. source. n7 Petitioner, in contrast, contends the STARS transaction had economic substance. In this regard, petitioner asserts that BNY entered into STARS to obtain low-cost funding for its banking business and that it reasonably expected to earn a pre-tax profit from STARS. Additionally, petitioner contends that the U.S. foreign tax credit was intended for transactions like STARS.
   n7 Respondent also argues that the foreign tax credits BNY claimed are disallowed under substance over form doctrines (including the step transaction doctrine) and under the statutory anti-abuse rule in sec. 269(a). We need not decide these arguments because of our other holdings.

The Court  then concludes that, on the facts, there was no economic substance.  That holding seems solid.

Incentives for Corporate Tax Planning and Avoidance (10/17/12)

John R. Graham, Michelle Hanlon, Terry Shevlin and Nemit Shroff, Incentives for Tax Planning and Avoidance: Evidence from the Field (SSRN 9/12/12), here.

Abstract: 

We analyze survey responses from nearly 600 corporate tax executives to investigate firms’ incentives and disincentives for tax planning. While many researchers suspect that reputational concerns affect the degree to which managers engage in tax planning, this hypothesis is difficult to test with archival data because it is only possible to observe the firms that engage in tax planning and that get caught. Our survey allows us to investigate reputational influences and indeed we find that reputational concerns are important – 69% of executives rate reputation as important and the factor ranks second in order of importance among all factors explaining why firms do not adopt a potential tax planning strategy. We also find that financial accounting incentives play a role. For example, 84% of publicly traded firms respond that top management at their company cares at least as much about the GAAP ETR as they do about cash taxes paid and 57% of public firms say that increasing earnings per share is an important outcome from a tax planning strategy. Finally, we examine whether FIN 48 and SOX affected tax planning and relationships with auditors, as conjectured in prior research. Executive responses confirm these conjectures.

Thoughtful Article on the Meek and Aggressive Tax Practitioner (10/1/12)

In the UH Tax Procedure class, we studied the gradations in confidence in tax reporting positions.  I cut and paste this from the Tax Procedure book:

The tax law has developed the following jargon in quantifying levels of confidence in reporting return positions, with the percentage being the projected chances for success if litigated:
nonfrivolous = 10 percent or better chance of winning
reasonable basis = 20 to 25 % or better chance of winning
realistic possibility of success = 33 1/3 % or better chance of winning
substantial authority = perhaps 35 to 40 % chance of winning
more likely than not = more than 50 % chance of winning
probable = 70 to 80 % chance of winning 

These standards can be stated in the inverse:
nonfrivolous = 90% chance of losing
reasonable basis = 75-80% chance of losing
realistic possibility of success = 66 2/3 % chance of losing
substantial authority = perhaps 60 to 65% chance of losing
more likely than not = less than 50 % chance of losing
probable = 20-30 % chance of losing

First Circuit Rejects IRS Regulations Interpretation With Caveat to Taxpayers About Penalties (7/20/12)

In Kaufman v. Shulman, ___ F.3d ___, 2012 U.S. App. LEXIS 14858 (1st Cir. 2012), here, the First Circuit reversed the Tax Court's acceptance of the IRS regulations' interpretation of the requirements for claiming a charitable contribution for a facade easement.  The substantive issue was whether the statute's requirement that the easement be granted "in perpetuity" (§ 170(h)(2)(C)) was not met if there was a remote chance that the charity could abandon the easement.  The substantive issue is more nuanced than that, but is not critical for a discussion of the procedure issues.  I focus here on the two procedure issues I think important in the case:  First, the Court rejected the IRS's interpretation of its regulations.  This is a Chevron issue in the case (Chevron is not mentioned but the Mayo interpretation of Chevron is, Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704, 711-13 (2012)).  Second, the Court had cautionary warnings for taxpayers claiming aggressive valuations fore easements.

Regarding the IRS's proferred interpretation of the regulations, the Court noted the absurdity of the position which, if traced to the logical extreme, would defeat almost all charitable contributions of easements that Congress clearly intended to allow.  The Court then noted:

We normally defer to an agency's reasonable reading of its own regulations, e.g., United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 220 (2001), but cannot find reasonable an impromptu reading that is not compelled and would defeat the purpose of the statute, as we think is the case here. Cf. Grunbeck v. Dime Sav. Bank of N.Y., FSB, 74 F.3d 331, 336 (1st Cir. 1996).

In rejecting the interpretation, the First Circuit aligned itself with the D.C. Circuit in Commissioner v. Simmons, 646 F.3d 6, 10 (D.C. Cir. 2011).  The Court then reasoned: