United States: Focus On Tax Controversy And Litigation - July 2014

In addition to a discussion of the Supreme Court's recent decision in Clarke, this month's issue features articles regarding the Southern District of New York's decision in Schaeffler, which denied attorney-client privilege and work product protection to a tax memorandum circulated to a bank consortium, the IRS's recent announcement to expand the OVDP streamlined program to include resident US taxpayers, developments in connection with OECD's BEPS Action Plan, welcomed changes to Circular 230 covered opinion rules, and criminal sentencing of a former partner at Jenkens & Gilchrist in connection with tax shelter activities.

Supreme Court Limits A Taxpayer's Ability To Examine The IRS At A Summons Enforcement Hearing

By Richard A Nessler

On June 19, 2014, the United States Supreme Court held that a taxpayer has a right to examine IRS officials regarding their purpose of issuing a summons.1 However, in reversing and vacating an Eleventh Circuit's decision, the Supreme Court did not recognize a taxpayer's right to a formal hearing based on unsupported allegations that the summons was issued in bad faith. The Supreme Court found that the Eleventh Circuit erred in ruling that a bare allegation of improper purpose was sufficient to question IRS officials and remanded the case to the circuit court for further consideration in light of the Supreme Court's decision.

The summons dispute arose from an IRS examination of the tax returns of Dynamo Holdings Limited Partnership (Dynamo) for the 2005–2007 tax years. The IRS questioned interest expenses that those returns had reported. As its investigation proceeded, Dynamo agreed to two year-long extensions of the usual 3-year limitations period for assessing tax liability. In 2010, with that period again drawing to a close, Dynamo refused to grant the IRS a third extension. Shortly thereafter, in September and October 2010, the IRS issued summonses to the respondents, four individuals associated with Dynamo whom the Service believed had information and records relevant to Dynamo's tax obligations. None of the respondents complied with those summonses.

In December 2010 (within the limitations period), the IRS issued a Final Partnership Administrative Adjustment proposing changes to Dynamo's returns that would result in greater tax liability. Dynamo responded by filing suit in the United States Tax Court to challenge the adjustments. While that litigation was pending, a few months later, the IRS instituted proceedings in District Court to compel the respondents to comply with the summonses. In the enforcement proceeding respondents disputed the IRS's reasons for issuing the summonses. The IRS submitted the usual investigating agent's affidavit attesting to the Powell factors; among other things, the declaration maintained that the testimony and records sought were necessary to "properly investigate the correctness of [Dynamo's] federal tax reporting" and that the summonses were "not issued to harass or for any other improper purpose."2 In reply, the respondents pointed to circumstantial evidence that, in their view, suggested "ulterior motive[s]" of two different kinds.3

In response, the respondents asserted that the IRS issued the summonses to punish the taxpayer for refusing to agree to a further extension of the applicable statute of limitations. In particular, respondents alleged in sworn declarations that after Dynamo refused to grant a third extension of time, the IRS, "despite having not asked for additional information for some time, . . . suddenly issued" the summonses.4 In addition, the respondents asserted that the IRS sought to enforce the summonses, subsequent to Dynamo's filing suit in Tax Court, to "evad[e] the Tax Court['s] limitations on discovery" and thus gain an unfair advantage in that litigation.5 In support of the allegations, the respondents submitted an affidavit from the attorney of another Dynamo associate, who had chosen to comply with a summons issued at the same time. In light of those submissions, the respondents asked for an opportunity to question the IRS agents about their motives.

The District Court denied the respondents' request and ordered compliance with the summonses. The court found that the respondents' theory was "mere conjecture" and "ha[d] made no meaningful allegations of improper purpose" warranting examination of the IRS agents.6

On appeal, the Eleventh Circuit reversed, holding that the District Court's refusal to allow the respondents to examine IRS agents constituted an abuse of discretion. In support of that ruling, the circuit court cited binding Circuit Court precedent holding that a simple "allegation of improper purpose," even if lacking any "factual support," entitles a taxpayer to "question IRS officials concerning the Service's reasons for issuing the summons."7

In reversing the Eleventh Circuit, the Supreme Court first noted that a taxpayer who receives a summons is entitled to contest it in an enforcement proceeding.8 But summons enforcement proceedings are to be "summary in nature." According to the Court, the purpose of a summons is "not to accuse," much less to adjudicate, but only "to inquire." Accordingly, it is well established that courts may ask only whether the IRS issued a summons in good faith, and must eschew any broader role of "oversee[ing] the [IRS's] determinations to investigate."9 A simple affidavit from the investigating agent can satisfy the IRS's burden.

Notwithstanding this low threshold of proof required by the IRS, as part of the adversarial process concerning a summons's validity, the taxpayer is entitled to examine an IRS agent when he can point to specific facts or circumstances plausibly raising an inference of bad faith. The court provided guidance to the Eleventh Circuit and for future disputes over the availability of such hearings. According to the Supreme Court, the standard to be applied by a court in considering the summoned party's right to a hearing must focus on whether the summoned party has pointed "to specific facts or circumstances plausibly raising an inference of improper motive."10 It elaborated on that standard and stated:

[T]he taxpayer is entitled to examine an IRS agent when he can point to specific facts or circumstances plausibly raising an inference of bad faith. Naked allegations of improper purpose are not enough: the taxpayer must offer some credible evidence supporting his charge. But circumstantial evidence can suffice to meet that burden; after all, direct evidence of another person's bad faith, at this threshold stage, will rarely if ever be available. And although bare assertion or conjecture is not enough, neither is a fleshed out case demanded: the taxpayer need only make a showing of facts that give rise to a plausible inference of improper motive. That standard will ensure inquiry where the facts and circumstances make inquiry appropriate, without turning every summons dispute into a fishing expedition for official wrongdoing.11

Court Determines Tax Memo not Protected by Attorney-Client Privilege and Work Product Doctrine

By Judy Fisher

The Southern District of New York, in Schaeffler v. United States12, recently denied a petition to quash an IRS summons for a tax memorandum prepared by the petitioner's accounting firm in connection with a complex refinancing and corporate restructuring on the part of the Schaeffler Group, determining that (i) the tax memorandum was not protected by the work product doctrine, and (ii) attorney-client and tax practitioner privilege was waived when the tax memorandum was shared with a consortium of banks that funded the original transaction being refinanced and restructured.

The Schaeffler Group believed an IRS audit and possible dispute as to at least some of the US tax consequences of the proposed transactions was likely, and therefore engaged outside tax and legal advisors to assist with the US tax implications of the transactions. As part of its engagement, Ernst & Young LLP prepared a memorandum that identified potential US tax consequences of the proposed transactions, as well as possible IRS challenges to the Schaeffler Group's treatment of the transactions (the "E&Y memo").

Because the US tax consequences of the proposed refinancing and restructuring transactions could materially affect the Schaeffler Group's ability to repay the bank consortium's debt, the consortium and its law firm worked closely with the Schaeffler Group's outside tax advisors in effectuating the transactions and analyzing the US tax consequences of them. In this regard, the Schaeffler Group and the bank consortium signed an agreement whereby they agreed to share privileged, protected and confidential documents and their analyses without waiving those privileges, protections or the confidentiality of the information. After the execution of this agreement, the Schaeffler Group shared with the bank consortium, among other things, the E&Y memo.

The IRS, in conjunction with an audit of the Schaeffler Group's tax returns for 2009 and 2010, issued a number of IDRs requesting all tax opinions and analyses that discussed the US tax consequences of the Schaeffler Group's restructuring, and, eventually, an administrative summons to Ernst & Young requiring it to provide all legal opinions that it provided to parties outside the Schaeffler Group. The Schaeffler Group petitioned to quash this summons on the grounds that it sought legal opinions and other confidential advice protected by both the work product doctrine and the attorney-client privilege, as extended to Ernst & Young by the tax practitioner privilege.

With respect to attorney-client privilege, the petitioners argued that no waiver of the privileged tax memorandum occurred when the documents were provided to the bank consortium because the Schaeffler Group and the consortium had a common legal interest. The court disagreed, holding that the shared interest between the two parties was economic, not legal. The consortium may have shared the desire that the transactions receive favorable tax treatment from the IRS so that the Schaeffler Group could service its debt to the bank consortium, but there was no common legal stake in the Schaeffler Group's putative litigation with the IRS. The court noted that this result would be different if the bank consortium could have been named as a co-defendant in the anticipated dispute with the IRS. Accordingly, the court held that the common interest rule did not apply and, therefore, petitioners waived any attorney-client or tax practitioner privilege that attached to the E&Y memo when they shared it with the bank consortium. The fact that the parties had previously signed an agreement that sought to preserve privilege did not affect the court's analysis on this point.

The petitioners also argued that the E&Y memo was protected from disclosure to the IRS under the work product doctrine. The court rejected an argument by the Government that the Schaeffler Group had waived work product protection by sharing the E&Y memo with the bank consortium. The court held that, because the parties had a shared commercial incentive in keeping the details of the refinancing negotiations from the Schaeffler Group's potential adversaries, including the IRS, and because the bank consortium was contractually required to keep the disclosed information confidential, the disclosure of the E&Y memo to the consortium did not materially increase the likelihood of disclosure to an adversary. Accordingly, to the extent the E&Y memo was entitled to work product projection, the court held that the disclosure did not waive the protection.

On the merits of the work product protection claim the court followed the requirement set out in United States v. Adlman, 134 F. 3d 1194 (2d Cir. 1998), that documentation protected by the work product doctrine would have been created in essentially similar form had litigation not been anticipated. The court determined that, as a sophisticated businessperson engaging in a complex financial transaction, the petitioner would likely have sought out the same sort of tax advice Ernst & Young provided to ensure that advantageous tax strategies were employed to their fullest potential, even in the absence of anticipated litigation. The court noted that petitioners had presented no facts suggesting that Ernst & Young would have acted any differently had it known no audit or litigation would ensue. Furthermore, the court focused on the requirement of Treasury Department Circular 230 that tax practitioners cannot allow the possibility that a tax return will remain unaudited to affect the advice they give, concluding that when Ernst & Young provided legal advice on the tax treatment of the transactions, it had a responsibility to consider in full the relevant legal issues regardless of whether they anticipated an audit and ensuing litigation with the IRS. The court held that the E&Y memo would have been produced in the same form irrespective of any concern about litigation, and therefore, that it was not protected from disclosure under the work product doctrine.

Streamlined OVDP Expanded To Resident US Taxpayers

By Richard A Nessler

On June 18, 2014, the IRS announced that it will permit resident US taxpayers to participate in its streamline OVDP filing compliance program. Taxpayers currently participating in OVDP who meet certain eligibility requirements for the expanded Streamline Filing Compliance Procedures will benefit from a more favorable penalty structure under the Streamline Program – a 5 percent offshore penalty, rather than the current penalty of 27.5 percent.

In June 2012, effective September 1, 2012, the IRS announced the streamlined program ("Program"), which was limited to US taxpayers living abroad. Eligibility was limited to non-resident non-filer taxpayers who could demonstrate a low level of compliance risk and who did not owe more than $1,500 of tax for each of the three years covered by the Program. Resident US taxpayers were not eligible for the Program. Non-resident US taxpayers who utilized the Program were required to file delinquent tax returns for the past three years and to file delinquent FBARs for the past six years. To be eligible, the non-resident US taxpayer must have resided outside the US since January 1, 2009 and who did not file a US tax return during the same period, and who presented a low level of compliance risk. Low risk was predicated on simple returns with little or no US tax due. The IRS considered risk to be high if, in part, (i) the taxpayer demonstrated material activity in the United States; (ii) the taxpayer was under audit or investigation by the IRS, or (iii) if the taxpayer had US source income, or any indication of sophisticated US tax planning or avoidance.

For taxpayers who presented low compliance risk, the IRS agreed to expedite the review and no penalties were asserted. Non-resident US taxpayers who sought to file amended tax returns were not accepted into the program. Notably, the streamlined program did not provide protection from criminal prosecution if the IRS and the DOJ determined that the taxpayer's particular circumstances warrant such prosecution.

Under the IRS's recent announcement, US resident taxpayers living in the United States who qualify may apply to the streamlined program rather than the traditional Offshore Voluntary Disclosure Program ("OVDP"). The Program's expansion also includes changes, which includes eliminating the cap on outstanding taxes owned (formerly $1,500 or less unpaid each year), doing away with the risk questionnaire, and adding a requirement that participants certify that their previous failure to comply with their obligations was due to non-willful conduct.

Returns submitted under the streamlined program will not automatically be subject to IRS audit, but may be selected for audit under existing audit selection applicable to any US tax return, and may be subject to verification procedures against information received from banks and other sources. The streamlined program is only available to taxpayers who actions did not result from willful conduct. The IRS has not provided a list of factors to demonstrate willful behavior, but prior actions brought by the IRS asserting willful conduct includes (i) opening foreign accounts in an entity or foundation name; (ii) providing false information to taxpayer's tax accountant, or (iii) knowing at the time of filing the tax return that the taxpayer should have reported both the existence of the account and the income earned from it.13 A taxpayer could be subject to criminal liability and/or substantial monetary penalties if a taxpayer's behavior was willful.

Resident US taxpayers who filed under the OVDP program prior to June 30, 2014, are eligible to seek to participate in the streamlined program if the eligibility requirements of the program are met. A taxpayer seeking such treatment does not need to opt out of OVDP. To participate in the streamlined program, the taxpayer must submit a written statement signed under penalty of perjury certifying their non-willfulness with respect to all foreign activities, and specifically describe the reasons for the failure to report all income and file timely FBARs. Upon IRS approval, US resident taxpayers currently participating in OVDP will not be required to pay the 27.5 percent offshore penalty at the OVDP rate, but will instead be subject to the streamlined penalty rate of 5 percent.

Taxpayers who have not entered OVDP by June 30, 2014 must decide whether to submit to OVDP or the streamlined program. Once a taxpayer makes a submission under the streamlined program, the taxpayer may not participate in OVDP. Similarly, a taxpayer who submits an OVDP voluntary disclosure letter pursuant to OVDP on or after July 1, 2014 is not eligible to participate in the streamlined procedures. Those taxpayers that enter OVDP after June 30, 2014 may face a civil penalty of 50 percent based on the highest balance of the foreign account during the past 8 years, if the account was held at a bank under investigation by the IRS or Department of Justice.

The streamlined program will continue to be offered to US taxpayers residing outside the United States. For nonresident US taxpayers, the IRS has eliminated the cap on outstanding taxes and no longer requires the risk questionnaire. To qualify as a nonresident, the taxpayer must not maintain a US abode and the individual must be physically present outside the United States for at least 330 full days. Nonresident taxpayers eligible for the streamlined program will not be subject to failure to file and failure to pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.

OECD Moves Forward On BEPS Action Plan

By Ryan Roberts

The Organization for Economic Cooperation and Development ("OECD") recently held its annual tax conference in Washington, DC focusing on the progress of implementation of its Action Plan on Base Erosion and Profit Shifting (the "BEPS Action Plan").

Overview of the BEPS Action Plan

The OECD published the BEPS Action Plan in July 2013 to bring about discussion of and to correct perceived problems with base erosion and profit shifting ("BEPS"), tax planning strategies of multinational entities and other international taxpayers that exploit gaps in domestic tax law systems and that shift profits to low tax rate jurisdictions where relatively little economic activity is actually taking place. The Action Plan called for member nations to, among other things, shore up their domestic tax rules where interaction between domestic tax systems has unintentionally led to gaps in corporate taxation (double non-taxation or less than single taxation). The Action Plan (i) identifies 15 actions needed to address BEPS, (ii) sets a timeline of deadlines to implement the actions and (iii) identifies the resources needed, the methodology, and certain output deliverables required to implement the actions. The Action Plan can be viewed on the OECD website.

The 15 action items to be addressed identified by the BEPS Action Plan are as follows: (1) address the tax challenges of the digital economy, (2) neutralize the effects of hybrid mismatch arrangements, (3) strengthen CFC rules, (4) limit base erosion via interest deductions and other financial payments, (5) counter harmful tax practices more effectively, taking into account transparency and substance, (6) prevent treaty abuse, (7) prevent the artificial avoidance of Permanent Establishment status, (8) assure that transfer pricing outcomes regarding intangibles are in line with value creation, (9) assure that transfer pricing outcomes regarding risks and capital are in line with value creation, (10) assure that transfer pricing outcomes regarding high-risk transactions are in line with value creation, (11) establish methodologies to collect and analyze data on base erosion and profit shifting and the actions to address it, (12) require taxpayers to disclose their aggressive tax planning arrangements, (13) re-examine transfer pricing documentation and country by country reporting, (14) make dispute resolution mechanisms more effective, and (15) develop a multilateral instrument to enable jurisdictions to implement these actions items.

Key Upcoming Dates and US Comments

Action items (1), (2), (5), (6), (8), (13) and (15) currently have a September 2014 target delivery date. The OECD expects to present final output reports reflecting fulsome recommendations for additional work to be done regarding these 7 action items at its G20 Finance Ministers Meeting in September 2014. Draft reports for many of these action items were released in February and March, and related comments have been collected. The OECD has admitted that it is working at a frantic pace to deliver the final reports by September and to pre-empt the development of unilateral BEPS legislation and regulation in OECD and G20 member nations.

In light of the quickly approaching target delivery dates, US lawmakers and regulators have publicly expressed doubt about the progress and effectiveness of the project. A joint statement was released by Senate Finance Committee Ranking Minority Member Orrin Hatch and House of Representatives Ways and Means Committee Chairman Dave Camp in late June 2014 regarding the time frame and progress of the implementation of the BEPS Action Plan as well as concerns that the plan is being used by other member nations to increase taxation on American taxpayers. According to Hatch and Camp, the September 2014 deadline for implementation of the 7 early action items (as well as the timeframe for the remaining action items) is "extremely ambitious," and it limits the ability to review, analyze and comment on the rules being proposed. Accordingly, Hatch and Camp believe the process "raises serious questions about the ability of the United States to fully participate in the negotiations." Camp and Hatch nevertheless suggest comprehensive US federal income tax reform by lowering the corporate income tax rate to a level which is internationally competitive and modernizing the US international tax system.14

Robert Stack, US Treasury Deputy Assistant Secretary for International Tax Affairs for the Office of Tax Policy, similarly expressed concerns regarding the implementation of the BEPS Action Plan in the United States, recently. Specifically, Stack criticized the BEPS Action item (15) call for the development of a multilateral instrument as an idea that is "not well-defined" in terms of its process and substance. He doubts whether such a document is even "doable."15

IRS Issues New Circular 230 Regulations

By Richard A Nessler

Circular 230 contains the ethical rules that govern practice before the IRS. On June 9, 2014 the IRS issued new regulations that make significant changes to Circular 230 and should reduce costs of practitioner compliance. The regulations had been anticipated since being issued in proposed form on September 17, 2012. As expected the final regulations eliminated the Covered Opinion rules in Section 10.35, and replaced the rule with one standard for all written tax advice under Section 10.37. The Covered Opinion provisions contained burdensome requirements for written tax advice, which went into effect in 2005. These rules apply only to practice before the IRS and do not change or replace other ethical or legal standards applicable to individuals subject to Circular 230.

Revised Section 10.35

The Covered Opinion provisions were contained in Section 10.35. Covered Opinions included written advice concerning:

1. A listed transaction;

2. A transaction with the principal purpose of tax avoidance or evasion; or

3. A transaction with a significant purpose of tax avoidance or evasion, if the advice is a reliance opinion, marketed opinion, subject to conditions of confidentiality, or subject to a contractual protection.

Section 10.35 provided that, to issue a covered opinion, a tax practitioner must determine the facts, relate the facts to the law, evaluate the significant federal tax issues, reach a conclusion about each one, and reach an overall conclusion about the tax treatment of the transaction. Covered Opinions include those concerning listed and substantially similar transactions, transactions principally intended to avoid or evade tax, marketed opinions, and those subject to confidentiality or contractual protection. The covered opinion must also assess the taxpayer's likelihood of success on the merits of each significant federal tax issue considered in the opinion. In arriving at that conclusion, the practitioner could not take into account the possibility that the return will not be audited or that the issue will not be raised or, if raised, will be resolved through settlement.

Except for opinions issued with respect to listed transactions or transactions with the principal purpose of avoiding or evading taxes, practitioners could opt out of the requirements of Section 10.35, by prominently disclosing in the opinion that the advice was not intended or written to be used, and cannot be used, by the taxpayer to avoid tax penalties.

These rules have been deleted and the final regulations have created a new Section 10.35. Section 10.35 now addresses a practitioner's competence. Specifically, under the new rule 10.35, a practitioner must possess the necessary competence to engage in practice before the IRS. Competent practice requires the appropriate level of knowledge, skill, thoroughness and the preparation necessary for the matter at issue. A practitioner may become competent by consulting with experts or studying the relevant law.

Revised Section 10.37

Even though the Covered Opinion provisions will no longer apply to written tax advice, a practitioner's advice cannot be based upon unreasonable assumptions about the facts or the law, or unreasonably rely on representations, statements, findings or agreements. Under the new Section 10.37 in the final regulations, practitioners must make reasonable efforts to ascertain and consider all relevant facts that the practitioner knows or reasonably should know, make reasonable factual and legal assumptions, and exercise reasonable reliance. The practitioner must consider all relevant legal authorities and relate the law to the facts. Moreover, the practitioner, when evaluating a tax matter, may not take into account the likelihood of an audit or settlement. When the IRS evaluates a practitioner's advice, the IRS will apply a "reasonableness" standard.

A significant change made in Section 10.37 is the addition of a definition of certain things that do not constitute "written advice." Written advice was not defined in the proposed or final rules, but the final rules clarify that government submissions on a client's behalf and continuing education presentations are not written advice under the rules.

The final version of Section 10.37 provides that the practitioner need not describe in the written advice the relevant facts (including assumptions and representations), the application of the law to those facts, and the practitioner's conclusion about the law and the facts. Instead, the scope of the engagement and the type and specificity of the advice the client seeks, together with all other appropriate facts and circumstances, are used to determine the extent to which relevant facts, the application of the law to those facts, and the practitioner's conclusion about the law and the facts must be set forth in the written advice. This is a flexible standard, dependent on the facts and circumstances of the engagement. The determination whether a practitioner has failed to comply with Section 10.37 will be based on all facts and circumstances, not on whether each requirement is addressed in the written advice.

A heightened standard of care applies when the practitioner knows or should know that the written advice will be used to promote, market or recommend a course of action that has a significant purpose of avoiding or evading tax. When evaluating a practitioner's advice, the IRS will apply a reasonableness standard which considers all facts and circumstances and places an emphasis on the additional risk associated with a practitioner's lack of knowledge of a taxpayer's particular circumstances.

In addition, a practitioner may rely on the advice of another person if, in light of the facts and circumstances, such reliance is reasonable and made in good faith. Reliance is not reasonable when the practitioner knows or reasonably should know that (1) the opinion of the other person should not be relied upon; (2) the other person is not competent or lacks the necessary qualifications to provide the advice; or (3) the other person has a conflict of interest in violation of Circular 230.

The IRS also stated in the preamble to the regulations that it expects that the current practice by most practitioners of inserting a Circular 230 disclaimer at the conclusion of every email or other writing, whether the disclaimer is necessary or appropriate, will be discontinued because new Section 10.37 does not include the covered opinion disclosure provisions that were in former Section 10.35.

Revised Section 10.36

Practitioners in a position of authority must do more than ensure their own compliance with Circular 230. Practitioners must ensure that all individuals they supervise comply with Circular 230 as it pertains to the preparation of returns or other documents submitted to the IRS. Practitioners must take reasonable steps to ensure that the firm complies with Circular 230.

Under 10.36 a practitioner responsible for implementation of Circular 230 compliance procedures will be subject to disciplinary action if:

1. The practitioner through willfulness, recklessness or gross incompetence does not take reasonable steps to ensure the firm has in effect and follows adequate procedures so as to comply with Circular 230, and one or more individuals who are members of, associated with or employed by the firm engage in a pattern or practice in connection with their practice with the firm, of failing to comply with Circular 230; or

2. The practitioner knows or should know that one or more individuals who are members of, associated with or employed by the firm engage in a pattern or practice, in connection with their practice with firm, that does not comply with Circular 230, and the practitioner, through willfulness, recklessness or gross incompetence fails to take prompt action to correct the noncompliance.

Accordingly, the combination of revised Sections 10.35 and 10.36 require that supervising practitioners have a duty to ensure that their subordinates have the requisite knowledge and skill, and that they appropriately exercise that knowledge and skill in practice before the IRS.

Revised Section 10.82

Under Section 10.82, the IRS may expedite a practitioner's suspension to practice before the IRS for "willful disreputable conduct." Under the final regulations, this phrase now includes the failure to comply with one's own personal tax filing obligations. Note that the new rule pertains to filing tax returns, not payment of tax.

Conclusion

These final regulations apply to written tax advice provided on or after June 12, 2014, the date published as final in the Federal Register. The changes to Circular 230, in particular Rule 10.35, are long overdue and welcome news to tax practitioners. Under the new rules tax practitioners who issue written tax advice must make sure that they are able to demonstrate that their advice is reasonable, and the advice cannot be based upon unreasonable assumptions about the facts or the law.

Former Jenkens & Gilchrist Partner Paul Daugerdas Sentenced To 15 Years In Prison

By Richard A Nessler

On June 25, 2014, Judge William Pauley III in the US District Court for the Southern District of New York sentenced Paul Daugerdas, a former partner at Jenkens & Gilchrist, to 15 years in prison for tax evasion, mail fraud, and tax shelter fraud conspiracy. Daugerdas was also ordered to pay more than $371 million in restitution to the IRS and forfeit almost $65 million in "proceeds" from his criminal offenses. Daugerdas' defense counsel asked for a sentence of no more than 30 months.

Daugerdas was convicted on October 31, 2013 on seven of 16 counts arising out of abusive tax shelters promoted by Jenkens & Gilchrist and other professionals and financial institutions between 1999 to 2004. According to the DOJ, Daugerdas marketed and sold hundreds of tax shelters to high net worth individuals, which generated more than $7 billion in false and fraudulent tax losses. Daugerdas had been convicted in 2011, but was later granted a retrial after it was discovered that a juror had lied about her background during voir dire in the hope of being selected for the jury panel. Daugerdas' former partner, Donna Guerin, pled guilty in September 2012 to conspiracy and tax evasion charges and was sentenced by Judge Pauley to eight years in prison. She was also ordered to pay $190 million in restitution and to forfeit $1.6 million.

In their sentencing report, the DOJ called Daugerdas "the most prolific, pernicious, and utterly unrepentant tax cheat in United States history." Daugerdas has also forfeited his law license in the State of Illinois.

Footnotes

1 United States v. Clarke, 573 US ____ (June 19, 2014, No. 13-301)

2 Slip Opn. at 3.

3 Id.

4 Id. at 4.

5 Id.

6 Id.

7 Id. at 5, citing 517 Fed. Appx. 689, 691 (2013) (quoting United States v. Southeast First Nat. Bank of Miami Springs, 655 F.2d 661, 667 (CA 5 1981)); see Nero Trading, LLC v. United States Dept. of Treasury, 570 F. 3d 1244, 1249 (CA 11 2009) (reaffirming Southeast).

8 Id. citing United States v. Bisceglia, 420 U. S. 141, 146 (1975); Powell, 379 U. S., at 57–58

9 Id. at Powell, 379 US at 56.

10 Id. at 6.

11 Id.

12 No. 1:13-cv-04864 (S.D.N.Y. May 28, 2014)

13 See United States v. Mcbride, 908 F. Supp 2d 1186 (D. Utah 2012).

14 Swinehart, S. (2014, June 2) Camp, Hatch Statement on 2014 OECD Tax Conference. Retreived from www.waysandmeans.house.gov/news.

15 Stewart, D. (2014, June 20). Failure is an Option, says US Treasury Official. Retrieved from www.taxanalysts.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions