Posts Tagged ‘Paul Daugerdas’

Tax Roundup, 6/26/14: Misdirected e-mail edition. And: 15 years for tax fairy medium Daugerdas.

Thursday, June 26th, 2014 by Joe Kristan
Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

The IRS scandal finally found a way to get the Des Moines Register’s attention.  Lois Lerner of IRS sought audit of Grassley, emails say:

The emails show Lerner mistakenly received an invitation to an event that was meant to go to Grassley, a Republican.

The event organizer apparently offered to pay for Grassley’s wife to attend the event.

Instead of forwarding the invitation to Grassley’s office, Lerner emailed another IRS official to suggest referring the matter for an audit, saying it might be inappropriate for the group to pay for his wife.

“Perhaps we should refer to exam?” Lerner wrote.

It was unclear from the emails whether Lerner was suggesting that Grassley or the group be audited — or both.

Grassley-090507-18363- 0032A reader who relies on the Des Moines Register for news might be puzzled over who Lois Lerner is.  A search of the word “Lerner” on the Register’s website only uncovers two other stories related to her role in the scandal: “Steve King calls for abolishing the IRS on Tax Day” (4/15/14) and “Critics: Progress scant after IRS scandal” (3/27/13).  It appears that today’s article would have been the first time Register readers would have learned anything about the mysterious mass deletion of emails relating to the Tea Party scandal.  A devoted Register fan might have been puzzled as to why this seemingly important news hadn’t been mentioned before.

I think there’s a hint down in the article (my emphasis):

Lerner headed the IRS division that processes applications for tax-exempt status. The IRS has acknowledged that agents improperly scrutinized applications by tea party and other conservative groups before the 2010 and 2012 elections. Documents show that some liberal groups were singled out, too.

Nobody buys that last sentence.  While a few “liberal” words were on the list of buzzwords to identify political organizations, no liberal outfits had their donor lists illegally released, or had their exemption applications held up indefinitely with demands for ridiculous detail of the organizations — including the content of their prayers.   Here are the stats:


Now maybe the Register will begin to get its readers up to speed.  If not, the Tax Update is available to Register subscribers at no extra charge!

Meanwhile, the IRS will have to explain to senior Senate taxwriter Grassley just why it needs more resources.  That may be slightly awkward.

TaxProf, The IRS Scandal, Day 413

Russ Fox, Lerner Appears to Have Targeted Iowa Senator Grassley  “Of course, President Obama said earlier this year just that–that there is not even a smidgen of corruption…”


tax fairyThe Tax Fairy fails a true believer.  Paul Daugerdas, the Jenkens & Gilchrist attorney who generated over $90 million in fees selling tax shelters, was sentenced to 15 years in federal prison yesterday for his troubles.  Bloomberg reports:

The tax shelters at the center of the case were sold from 1994 to 2004 to almost 1,000 people, creating $7 billion in fraudulent tax deductions and more than $1 billion in phony losses for customers, the U.S. said.

It appears unlikely that Mr. Daugerdas will come out ahead on his tax shelter efforts:

Daugerdas was ordered to forfeit $164.7 million and help pay restitution, with other conspirators, of $371 million. 

While he wasn’t the only Tax Fairy guide during the great turn-of-the-century Tax Shelter frenzy, he was perhaps the most prominent, inventing tax shelters with names like HOMER and COBRA.  The shelters found eager customers among businesses and individuals looking for the Tax Fairy, the legendary sprite believers insist will wave her magic wand and make taxes go away, for a very reasonable fee.    Now Jenkens & Gilchrist is dead, the believers are out their money, plus penalties, and there still is no Tax Fairy.

The Tax Analysts story on the sentencing ($link) had one item that I hadn’t seen before:  “The jurors said that Daugerdas was convicted solely on counts for which the government presented evidence of backdating, when Daugerdas agreed to prepare false tax returns that reported as 2001 losses transactions that occurred in 2002, the defense memo says.”  Way back in 2009, I said this could be his biggest problem at trial: Is backdating the fatal flaw for Daugerdas?:

If the government can prove backdating, it might be much easier for a juror to vote for conviction. Tax is hard, and a good defense lawyer has a lot of opportunities to give jurors a reasonable doubt in a case involving short sales, derivatives and currency options. But anybody can understand backdating.

This sort of thing separates “aggressive tax planning” from plain fraud.


Department of Justice Press Release

Jack Townsend, Daugerdas Gets 15 Year Sentence

TaxGrrrl, Daugerdas Sentenced To Prison, Ending Biggest Tax Prosecution Ever

This one is probably coincidental, but Jason Dinesen, 138 Years Ago Today: Custer’s Last Stand



William Perez, Single Filing Status.  “A person is considered unmarried for tax related purposes if on the last day of the year the person is not married to any other person or is legally separated from a spouse under a divorce or separate maintenance decree.”

Kay Bell, Kids, summer camp tax breaks and our personal X Games site

Peter Reilly, Facade Easement Valuation Cannot Be Percentage Rule Of Thumb 

Cara Griffith, Ohio Enacts Legislation Allowing Creation of Captive Insurance Companies (Tax Analysts Blog).

The answer is clearly more tax credits.  The New Jersey Casino That Tax Credits Could Not Save  (Adam Michel, Tyler Dennis, Joseph Henchman, Tax Policy Blog)

Renu Zaretsky, Expanding a Credit, Simplifying a Break, and Cutting Off a Nose to Spite a Face.  Today’s TaxVox headline roundup covers  IRS funding, student debt, and same-sex marriage complications.




Tax Roundup, 12/4/2013: Justice Scalia doesn’t believe in the Tax Fairy. And sure, the IRS can run another tax credit!

Wednesday, December 4th, 2013 by Joe Kristan


tax fairyThe Supreme Court wrapped a bow around the IRS victories in the turn-of-the-century tax shelter wars by unanimously ruling that the 40% “gross valuation misstatement” penalty applied to a tax understatement caused by the “COBRA” tax shelter.

COBRA relied on contributing long and short currency options to a partnership, but claiming basis for the long position, and ignoring the liability caused by the short position.  The shelter was cooked up in Paul Daugerdas’ tax shelter lab at now-defunct Jenkens & Gilchrist and marketed by Ernst & Young.  The shelter was designed to generate $43.7 million in tax losses for a cash investment of $3.2 million.

COBRA, like so many other shelters of the era,  was ruled a sham and the losses disallowed, but the Fifth Circuit Court of Appeals ruled that the 40% penalty did not apply.  Other circuits ruled that it did, so the Supreme Court took the case to settle the issue.

Writing for a unanimous court, Justice Scalia disposed of the Fifth Circuit’s position (citations omitted, my emphasis):

     In the alternative, Woods argues that any underpayment of tax in this case would be “attributable,” not to the misstatements of outside basis, but rather to the determination that the partnerships were shams — which he describes as an “independent legal ground.”  That is the rationale that the Fifth and Ninth Circuits have adopted for refusing to apply the valuation-misstatement penalty in cases like this, although both courts have voiced doubts about it.

We reject the argument’s premise: The economic substance determination and the basis misstatement are not “independent” of one another. This is not a case where a valuation misstatement is a mere side effect of a sham transaction. Rather, the overstatement of outside basis was the linchpin of the COBRA tax shelter and the mechanism by which Woods and McCombs sought to reduce their taxable income. As Judge Prado observed, in this type of tax shelter, “the basis misstatement and the transaction’s lack of economic substance are inextricably inter twined,” so “attributing the tax underpayment only to the artificiality of the transaction and not to the basis over valuation is making a false distinction.”  In short, the partners underpaid their taxes because they overstated their outside basis, and they overstated their outside basis because the partnerships were shams. We therefore have no difficulty concluding that any underpayment resulting from the COBRA tax shelter is attributable to the partners’ misrepresentation of outside basis (a valuation misstatement). 

tack shelterI see the basis-shifting shelters of the 1990s as elaborate incantations designed to to get the Tax Fairy to magically wish away tax liabilities.  Like any good witch doctor, the shelter designers relied on lots of elaborate hand-waving and dark magic to do their work, and they collected a lot of cash for their work.  But there is no Tax Fairy.  Justice Scalia has let Tax Fairy believers know that pursuing her is not just futile, but potentially very expensive.


Cite: United States v. Woods, Sup. Ct. No. 12-562.

The TaxProf has a roundup and an update.  Stephen Olsen weighs in at Procedurally Taxing.



Blue Book Blues.   One digression by Justice Scalia in Woods is worth a little extra attention.   From the opinion (citations omitted, my emphasis):

Woods contends, however, that a document known as the “Blue Book” compels a different result…Blue Books are prepared by the staff of the Joint Committee on Taxation as commentaries on recently passed tax laws. They are “written after passage of the legislation and therefore d[o] not inform the decisions of the members of Congress who vot[e] in favor of the [law].” While we have relied on similar documents in the past, …our more recent precedents disapprove of that practice. Of course the Blue Book, like a law review article, may be relevant to the extent it is persuasive.

Back in the early national firm days of my career, one of my bosses was a former national firm lobbyist who was exiled to The Field when a merger with another firm left room in Washington for only one lobbyist in the combined firm.  I remember him telling clients that he could get around unpleasantness in the tax code by arranging for helpful language in the Blue Book.  From what Justice Scalia says, he would have done as well by writing a law review article.

Jack Townsend also noticed this.


A new tax credit for the IRS to administer.  What could possibly go wrong?  A lot, as the IRS’s experience with the fraud-ridden refundable credits and ID-theft fraud has shown.  Now a new Treasury Inspector General’s report warns that IRS systems aren’t yet prepared to stop premium tax credit fraud under Obamacare, reports Tax Analysts ($link):

EITC error chart     While the IRS has existing practices to address ACA-related fraud, the agency’s approach is not part of an established fraud mitigation strategy for ACA systems, the report says. The IRS has two systems under development to lessen ACA tax refund fraud risk, but until those systems are completed and tested, “TIGTA remains concerned that the IRS’s existing fraud detection system may not be capable of identifying ACA refund fraud or schemes prior to the issuance of tax return refunds,” it says.

IRS Chief Technology Officer Terence Milholland said in a response included in the report that fraud prevention plans will be put in place as ACA systems are released.

The IRS loses $10 billion annually to Earned Income Tax Credit Fraud alone.  This isn’t reassuring.


Paul Neiffer, Losses Can Offset Investment Income:

  1. If you have a net capital loss for the year, the regular tax laws limit this loss to $3,000.  The final regulations allow this up to $3,000 loss to offset other investment income.
  2. If you have a passive loss such as Section 1231 losses, as long as that loss is allowed for regular income tax purposes, you will be allowed to offset that against other investment income.
  3. Finally, if you have a net operating loss carry forward that contains some amount of net investment losses, you will be allowed to use that portion of the NOL to offset other investment income.

A big improvement over the propsed regulations.


20120920-3Jason Dinesen,  Same-Sex Marriage, IRAs and After-Tax Basis:

It’s clear that for 2013 and going forward, couples in same-sex marriage will only need to apply “married person” rules to IRAs (and to everything else relating to their taxes).

What’s less clear is what happens with differences between federal and state basis for prior years.


Robert D. Flach,  A YEAR END TIP FOR MUTUAL FUND INVESTMENTS.  “If you want to purchase shares in a mutual fund during the fourth quarter of the year, wait until after the capital gain dividend has been issued, and the NAV has dropped, before purchasing the shares.”


Janet Novack,  Insurance Agent To Forbes 400 Concedes Understating Taxable Income By $50 Million

David Brunori, Indexing the State Income Tax Brackets Makes Sense (Tax Analysts Blog)

Missouri Rep Paul Curtman (R) wants to index his state’s income tax brackets to inflation. Of all the tax ideas presented this year, this is among the best. Missouri imposes its top rate of 6 percent on all incomes over $9,000. Nine grand was a lot of money in 1931 – and the top tax rate was aimed at the very wealthiest Missourians. But that threshold hasn’t changed since Herbert Hoover was president. 

Or they could just go with one flat rate.


TaxProf, The IRS Scandal, Day 209

William McBride, Summary of Baucus Discussion Draft to Reform International Business Taxation (Tax Policy Blog)

Kay Bell, Where do your residential property taxes rank nationally? 

Howard Gleckman,  The Supreme Court Opens The Door to Sales Tax Collections by Online Sellers (TaxVox)

They were too busy fighting the shelter wars to notice.  The Cold War Is Over, but No One Told the IRS  (Joseph Thorndike, Tax Analysts Blog)

Career Corner: A Friendly Reminder to Slobbering Drunks: Be Less Slobbery and Drunk at Your Company Holiday Party (Going Concern)



Tax Roundup, 11/4/13: The price of being acquitted. And more on the Hatch Iowa tax plan.

Monday, November 4th, 2013 by Joe Kristan


Chilling effects.  Tax Analysts story ($link) about last week’s conviction of tax shelter figure Paul Daugerdas, and the acquittal of the former chairman of BDO on related charges, has a sobering final paragraph:

Regarding Field, Edward M. Robbins Jr. of Hochman, Salkin, Rettig, Toscher & Perez PC noted the difficulty in obtaining an acquittal in the face of multiple tax-related conspiracy counts in federal court. “I looked at the . . . docket sheet for the entire case and wondered how much it cost Mr. Field for his acquittal,” Robbins said. “I’d say at least a couple of million dollars. That’s what it takes to beat a case like this at trial.”

It doesn’t help at all when the government freezes your assets before trial, as they did here.  And if justice can only be had for $2 million, what chance does somebody have who lacks the the kind of wealth these defendants have?

TaxProf, Daugerdas (Jenkens & Gilchrist) Convicted, Field (BDO) Acquitted in Tax Shelter Case

Jack Townsend,  On Retrial, Daugerdas Convicted and Field Acquitted


Source: The Tax Foundation

Source: The Tax Foundation

Kathie Obradovich:  Hatch tax-cut proposal has winners, losers (Des Moines Register):

The second thorny issue is that Hatch has decided to raise taxes significantly for the highest income groups. For people making between $250,000 and $1 million, the percentage increase is in the range of 33 percent to 45 percent. That’s a major sticker shock for high-income Iowans. That’s less than 5 percent of taxpayers. But even if it were 1 percent or less, Hatch loses the ability to argue that he won’t raise Iowans’ taxes.

Hatch says he’s trying to make Iowa’s income tax fairer, not just lower. The highest wage-earners are paying a lower percentage of their income, he said. His plan also increases the per-child deduction from $40 to $500 and gives married couples who are both employed a credit of $1,000.

That’s attractive, to be sure, but a plan that at least held higher-income Iowans harmless would have broader political appeal. The arguments about the wealthy paying their fair share just don’t resonate the same way during a time of budget surpluses as they do on the national level in the face of enormous debt.

Of course, a tax on “the rich” means a tax on “business.”  A 33 to 45 percent increase on taxes on Iowa businesses doesn’t promise much in the way of either “fairness” or employment growth in Iowa.

It could be a good thing to have Iowa’s horrible income tax system be a big campaign issue.  It would be nice to get a mandate for serious tax reform, like the Tax Update’s Quick and Dirty Iowa Tax Reform Plan.  Probably too much to hope for.


Andrew Lundeen, Scott HodgeTop One Percent Pays Twice Income Tax Rate of All Taxpayers (Tax Policy Blog):

20131104-1Despite conventional wisdom that the Bush-era tax cuts disproportionately benefited the wealthy, the reality is that the tax burden on the bottom 99 percent has been falling for more than two decades. Indeed, the average tax rate for the bottom 99 percent of taxpayers is now below 10 percent—well below the average for all taxpayers—thanks to years of targeted tax cuts aimed at the middle class. Meanwhile, the top 1 percent of taxpayers still pays an effective tax rate that is roughly twice the average for all taxpayers.

But politicians insist that raising taxes on “the rich” is always somehow “fairness.”


#Paul Neiffer,  Some Thoughts on Section 179 & Bonus Depreciation:

Remember that Section 179 is allowed for new AND used equipment, while bonus is only on NEW equipment.  You cannot take Section 179 on trade-in basis of old equipment, but can use it for bonus.  Section 179 applies to farm equipment and single purpose farm structures and land improvements.  Bonus applies to all farm assets including buildings.

I give about a 60% chance of 2013 bonus depreciation being extended into 2014, and about 80% on Sec. 179.  For planning purposes, though, it’s wise to try to get the assets in service in 2013 if you can.


Peter Reilly,  When Planning Never Forget The Alternative Minimum Tax:

I’m hoping that I get some commenters who tell me that they keep meticulous track of all AMT carryovers for their clients and do a detailed reconstruction whenever they take on a new client.  I bet they floss regularly too.

Well, yes and yes.

Tony Nitti, The Definitive Questions And Answers On The New Net Investment Income Tax   


TaxGrrrl, 11 Uses For Leftover Halloween Candy (And The Resulting Tax Consequences)

Russ Fox, Bubba Paris Sacked, Pleads Guilty to Not Filing a Tax Return

Robert D Flach, 2014 INFLATION-ADJUSTED NUMBERS.  Also, his Friday Buzz last week went up late, but is always worth the wait!


Phil Hodgen’s series on expatriate taxation: Chapter 5 – Mark-To-Market Taxation 

Janet Novack, IRS Says Race Car Driver Juan Pablo Montoya Used Sham To Wrongly Deduct Millions

TaxProf, The IRS Scandal, Day 179

Tax Justice Blog, Paul Ryan Says No to Any Revenue Increase, Again.  Good.



Tax Roundup, 11/1/13: Unhappy Halloween for tax shelter maven. And: clunk!

Friday, November 1st, 2013 by Joe Kristan


tax fairyGuilty again.  Former Jenkens and Gilchrist tax shelter wizard Paul Daugerdas was again convicted on tax crime charges yesterday arising out of the great tax shelter frenzy of the Clinton and Bush II years.   A previous conviction was overturned on grounds of juror misconduct.  Bloomberg Businessweek reports that he was convicted on seven of 16 counts.

A co-defendant, former BDO Seidman CEO Denis Field, was acquitted.

Mr. Daugerdas built a fortune around tax shelters with clever names like “HOMER,” “CARDs” and “BLISS.”  The shelters typically involved offsetting investment positions, with losses allocated to shelter customers and gains allocated to tax-indifferent offshore entities.  The shelters have fared poorly on exam and in the courts, with a nearly unbroken record of failure in litigated cases.

Mr. Daugerdas built a fortune around selling access to the Tax Fairy, the magical sprite who waves her wand to make tax problems go away.  The news that there is no tax fairy proved costly to his clients, and probably also to him.

Link: Prior Tax Update Daugerdas coverage.


20121212-1Clunk.  Cash for Clunkers was an expensive boondoggle, reports the Brookings Institution.  The study estimates that the program cost $1.4 million per “job created” while destroying thousands of perfectly good vehicles and raising transportation costs for those who rely on used cars.

Related:  Braley: “Cash for Clunkers” phenomenally successful (Radio Iowa)

Kyle Pomerleau,  Cash for Clunkers: Not Much of a Stimulus (Tax Policy Blog)


TaxGrrrl, IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More   


Paul Neiffer,  Calculating Cost Basis Wrong Can Be Costly!

Peter Reilly,  Actuary In Tax Court Beats Northwestern And IRS On Accuracy Of 1099-R.

Janet Novack, Top Social Security Tax To Rise 2.9% In 2014; Benefits Going Up 1.5%

Tax Trials, IRS Resumes Field Exams & Collections.  The shutdown is truly over.

Phil Hodgen’s  series on the expatriate exit tax continues with Chapter 4 – Are You A Covered Expatriate?

TaxProf,  The IRS Scandal, Day 176

Robert D. Flach is celebrating his 60th birthday with a sale.


Howard Gleckman,  As Budget Talks Start, Beware the Bogus Revenue Hikes (TaxVox) “But behind the scenes, Washington’s wink-and-nod crowd thinks it has a solution: Raise new tax revenue—at least on paper—without actually increasing taxes. In fact, some of the gimmicks on the table create even darker Halloween magic.”

Tax Justice Blog, Kansas: Dispatches from a Failing Experiment


Going Concern,  Career Conundrum: Is a Master’s Degree Worth It?  It’s all relative.  To me it was, because my it was in Accounting, while my  B.A. was in History — a noble field, but one with grim employment prospects.  If you have an undergrad degree, I’m not so sure it’s worth forgoing a year or two of salary.  If you don’t have a job anyway, it may be the edge you need.


Kay Bell, A colorful way to ease IRS notice fears:

Adam Chodorow, however, has an idea of how to ease such tax correspondence induced panic attacks.

Chodorow, a professor at Arizona State’s Sandra Day O’Connor College of Law, suggests color-coding so that taxpayers will immediately know the amount of tax trouble they are in. This, he says, could abate taxpayer stress.

If the IRS could be relied on to issue accurate notices, that would be lovely, but incorrect “red” notices would probably induce a rash of taxpayer heart episodes.



Tax Roundup, 11/28/2012: Did you report that 1099-K income? Also: tax deductions and giving levels.

Wednesday, November 28th, 2012 by Joe Kristan

IRS starts data-mining the 1099-Ks.  From Tax Analysts ($link):

     A new IRS compliance program aimed at finding underreporting of gross receipts by taxpayers who receive Form 1099-K information returns from credit card companies or third-party transaction networks launches this week, a senior IRS official confirmed November 27.

     Ruth Perez, deputy commissioner of the IRS Small Business/Self-Employed Division, told Tax Analysts that the first notices under the program will be sent out later in the week of November 26. “Our initial footprint in this area is going to be small while we learn,” she said, adding that the initiative will touch a variety of businesses of different sizes.

If prior matching programs are any guide, many of the notices will be incorrect, giving gray hairs to compliant taxpayers.  Even so, it’s likely to smoke out some eBay entrepreneurs who haven’t bothered to report their income.  If that sounds like you, now is a good time to get into compliance.


Learning From a Wrongful Criminal Tax Prosecution.  Tax Analysts has made available to nonsubscribers a great piece by a New York attorney who defended a business owner from a baseless state tax prosecution that was later recanted by the district attorney.  It’s the piece I mentioned earlier this week; kudos to Tax Analysts for making it more widely available.  Sobering reading for practitioners and entrepreneurs.


Via the TaxProfThe Millionaires Who Pay the Highest Tax Rate:

 The more your make, the more taxes you pay as a percentage of your income. According to new data from the IRS, people who make $1 million or more had an average tax rate of 20.4% in 2010. Tax filers who earned $30,000 to $50,000 paid an average rate of 4.8%, while those who made between $50,000 and $100,000 paid 7.7%. Those making under $30,000 had a negative effective rate, meaning they paid no federal income taxes after deductions and credits. Put another way, millionaires pay a rate that’s more than four times that of the middle class.

The millionaires pay a higher rate than Warren Buffett’s secretary, I’d wager.


Kay Bell,  Would a limit on tax deductions mean less charitable giving?  Of course it would.  The only question is how much.

The guy quoted by Kay doesn’t think it would have a big impact.  I think it would, especially for bigger gifts.   We can’t know for sure, but a paper in the December 11 National Tax Journal estimates that capping the rate benefit of contributions at 12% would reduce individual giving by 5.8% to 14.2%.  A hard deduction cap would reduce the tax benefits of large gifts much more drastically than the 12% credit.


Patrick Temple-West,  On ‘fiscal cliff,’ both sides lay groundwork, and more

Wall Street Journal, Dividends Come Early to Avoid Fiscal Cliff:

Faced with a possible tax increase on dividends next year, boards are approving bigger payouts and cutting checks faster to avoid 2013 rates.

On Monday, retailer Dillard’s Inc. and casino operator Las Vegas Sands Corp.  LVS -0.26% said they would pay new, one-time dividends next month. Dillard’s also broke with long practice to pay its regular fourth-quarter dividend in December after paying it in the new year for at least a decade.

Wal-Mart did the same thing last week.  (Via Tax Break)


Jack Townsend,  Daugerdas Denied Access to Funds Subject to Forfeiture.  Mr. Daugerdas, whose conviction on tax charges was thrown out based on juror misconduct, says he needs the money to pay for his defense in his retrial.

Jason Dinesen,   Are Donations to a 501(c)(4) Deductible? (No.)

Tax Trials,  Tax Court: Legal Fees Not Deductible for Conduct of S Corp. Sole Shareholder.  This is a great case that I plan to write up in the next few days.

Both?  Education Foundation Or Estate Tax Dodge – Remains To Be Seen (Peter Reilly)

 Jim MauleTithing and Taxing: What is (Gross) Income?

Andrew Mitchel,  Summary of Form 8938 Filing Thresholds

Joseph Henchman,  Connecticut Revenue Commissioner Admits that “Amazon” Tax Has Raised Zero Revenue

In other news, Wednesday ends with “y”:  Another South Carolina Politician Guilty of Tax Charges (Russ Fox)


David Brunori, Fetal Craziness:

The recent craziness in Michigan illustrates all that is wrong with tax policy in America. A group of Republican lawmakers have proposed (HB 5684 and HB 5685) a tax credit for unborn fetuses of 12 weeks gestation. What is wrong with such a measure? Everything. First, Adam Smith, who I doubt was pro choice, said that the tax laws should be used to raise revenue. They should not be used to make political statements.  Why do we know this is political statement? Because only a nincompoop would think the tax laws could be administered in such a manner.

I suspect the miscarriage rate would go through the roof, at least as reported on tax returns.


A 529 plan would have worked better:  Attorney Disbarred For Submitting Falsified Tax Returns For Financial Aid (TaxGrrrl)


Tax Roundup, 9/14/2012: Jenkens partner pleads guilty ahead of re-trial. And a David Cay Johnston – Tax Policy Blog cage match!

Friday, September 14th, 2012 by Joe Kristan

After winning a new trial, Jenkens partner pleads guilty in tax shelter case, one of the Jenkens & Gilchrist attorneys accused of crimes in connection with the tax shelter frenzy of the late ’90s and early ’00s gave up the fight yesterday.  The Wall Street Journal reports:

Donna M. Guerin, 52 years old, admitted she wrote false opinion letters designed to justify complex financial transactions that reduced the potential taxes to be paid by the firm’s clients. The overall scheme created more than $400 million in false tax losses, she said.

“I knew in my heart then, and I acknowledge to Your Honor today, many of our clients were only interested in reducing their tax liabilities,” Ms. Guerin said.

At a hearing in Manhattan federal court on Thursday, Ms. Guerin pleaded guilty to conspiracy to defraud the U.S. and tax evasion. She faces up to five years in prison on each charge. Sentencing is set for Jan. 11.

Ms. Guerin had been convicted of the charges last year, but the verdict was thrown out because of a juror’s misconduct, and a new trial was set.  Two of her partners still face charges, including the prosecutor’s biggest target, Paul Daugerdas, who was the mastermind of tax shelters that created hundreds of millions of dollars of tax losses.  Many of these shelters failed in court.

The TaxProf has a roundup.


How good is your state’s credit rating (Tax Policy Blog)

Anthony Nitti,  Can An S Corporation Make Disproportionate Distributions?

This is a commonly misunderstood area of tax law. In short, S corporations have more flexibility than you realize to make distributions that are not perfectly pro-rata to its shareholders. That being said, I wouldn’t tempt fate.

S corporations can only have one class of stock, which means that all distributions must be equal among shares (though differences in voting rights are allowed).  The hair-trigger proposed rules that would have terminated S elections for trivial  violations of the one-class-of-stock rule were never enacted, thank goodness.  But disproportionate distributions should be avoided, and if they happen, they should be corrected with make-up distributions or reimbursements.


Howard Gleckman,  Who Pays the Corporate Income Tax? (TaxVox).  Mr. Gleckman is with the Tax Policy Center, an influential center-left think tank.  Their conclusion is important:

The bottom line: For the first time, TPC assumes that workers bear some of the corporate tax burden.

In newly-published assumptions, TPC figures 20 percent of the corporate income tax is borne by labor and 80 percent by capital. TPC further refines the capital share by dividing it into two chunks.  Twenty percent of the levy is reflected in normal returns (essentially, equal to the return from low-risk bonds) and 60 percent in any additional returns received by shareholders.

The revision, similar to adjustments made recently by the Treasury Department and the Congressional Budget Office, will be important as TPC analyzes tax reform plans that reduce corporate rates.

That’s because, until now, TPC assumed investors ultimately paid the entire corporate tax in the form of lower returns to capital. Now, TPC concludes that labor also pays through lower wages. As a result, workers, as well as shareholders and other owners of capital, would benefit from any cut in the corporate tax. Similarly, both would take a hit if corporate taxes are hiked.

So corporations are people, too.  No, corporations don’t bleed, but corporations are ultimately voluntary organizations of cooperating individuals.  If you take money from a big evil corporation, you don’t hurt some insensate Balrog.  You hurt shareholders, retirement investors and employees.


Jim Maule,  Building It With Publicly-Funded Tax Breaks:

It amuses me to listen to the private sector claim that “we built it.” Surely the private sector has built things, but the public funding of sports arenas and other private enterprise facilities, such as warehouses, factories, and office buildings, makes it impossible to consider the private sector claim as anything other than, at best, a gross exaggeration, and at worst, a calculated lie.

When the well-connected pull strings to get government money to build stadiums, they are using the power of the state to take money from the rest of us for themselves.  That’s an argument agains the power of the state, and its bureaucrats and elected officials who facilitate the looting, not against the unsubsidized who get up early, stay late and grow their businesses without special favors.


Paul Neiffer,  Mistakes to Avoid In Lifetime Giving – Part 1

Trish McIntire,  Gift Tax

TaxProf,  NY Times: A Tax Tactic That’s Open to Question.  Shockingly, the Times has problems with Mitt Romney.

Kay Bell,  California shoppers, tax offices stocking up in advance of Amazon tax collection

They can be, but they don’t have to be.  Pennsylvania Supreme Court Finds H&R Block Customers Not Necessarily Gullible (Peter Reilly)


Cage Match!  In this corner with the neck beard, David Cay Johnston,  Which tax cuts stimulate the economy?:

Studies examining the impact of cutting personal income tax rates on job growth or economic activity generally have been inconclusive, said Will McBride, chief economist for the Tax Foundation.

 William McBride demurs in Journalists Too Quick to Conclude There is No Tradeoff between Taxes and Growth:

It is true there are a lot of studies that find only a weak statistical connection between personal income taxes and economic growth, including my own regression analysis of OECD countries.  However, in the same study which will be published shortly, I find a strong statistical connection between corporate income taxes and economic growth.   This is in line with other research, such as that by Gordon and Lee

Pass the popcorn.


Tax Roundup, 6/5/2012: New trial for Daugerdas, Waterloo car dealer meets his, and Nazis!

Tuesday, June 5th, 2012 by Joe Kristan

State income tax collections per capita, via Tax Policy Blog

Jenkens tax shelter maven Daugerdas wins new trial because Juror #1 lied about her background.  Paul Daugerdas, the biggest target of the Justice’s Department’s criminal offensive against the tax shelter industry of the early 200os, and two other co-defendants will get a new trial.  If I were on the jury and found my time had been wasted by Juror #1, I’d be irate.  The conviction of another defendant stood because the judge believed that defendant’s lawyers knew that the juror wasn’t being honest.  Background here.  The TaxProf has more.  So does Jack Townsend

Iowa is #16 in per-capita income tax collections (Tax Policy Blog). New York is #1.

Robert D. Flach has some “Unique Tax Deductions” today.  Guess what profession can deduct its body-oil expenses?

William Perez, Revisions to the Offer in Compromise Program

Anthony Nitti: And Then There Were Two: Obama v. Romney, the Tax Proposals.

Paul Neiffer: Another Large Charitable Donation Gets Thrown Out!

Waterloo used car dealer pleads guilty to tax charge.  He apparently helped himself to some of the dealership bank deposits. (Via Russ Fox)

Hitler was a vegetarian!    Loose Talk About Nazis and Tax Policy  (Joseph Thorndike,

“No” mixed with “Hell no”  Plan to Tax Soda Gets a Mixed Reception (New York Times via TaxBreak)

King Pyrrhus, call your office. Tax Protesters Rack Up Another “Victory” (Peter J. Reilly)

Until the Supreme Court says something, anyway: Why A Vote on the Medical Device Excise Tax Is The Biggest Deal Ever for Obamacare (TaxGrrrl)

No “Finders Keepers” with IRS Refunds (TaxDood)

News you can use:  Beware Film and Other Tax Shelter Deals That Go Criminal (Robert W. Wood, Forbes)


Tax shelter maven Daugerdas found guilty

Wednesday, May 25th, 2011 by Joe Kristan

daugerdas.jpgThe government has bagged perhaps its biggest conviction so far of a tax shelter figure with the guilty verdict yesterday of Paul Daugerdas and three others. reports:

Daugerdas, the former head of Jenkins & Gilchrist


Biggest shelter fish trial near finish

Wednesday, May 11th, 2011 by Joe Kristan

daugerdas.jpgThe Wall Street Journal Law Blog has an update on the criminal trial of Paul Daugerdas. Mr. Daugerdas is probably the most prominent figure targeted by federal prosecutors in the aftermath of the mass-marketing of tax shelters in the late 1990s and early part of this century. He is said to have made $95 million in fees as the brains behind now-discredited basis-shifting shelters with names like CARDS and Son of Boss.
Jack Townsend has a technical analysis of the case up today.

I have just today read the transcript for the instruction conference on 5/5/11 in the Daugerdas criminal case. Daugerdas involved the same basic pattern as the Larson and Coplan cases (previously discussed here and here). That pattern is the prosecution of the enablers but not the taxpayers (or taxpayer advisors), with even a concession that for purposes of the submission to the jury the taxpayers are not guilty of the crime of evasion. In these cases, the prosecutors trot out several redundant or just not applicable theories of liability as if they were different than criminal liability for the underlying criminal offense of tax evasion. They are not.

The TaxProf has more.
Prior Tax Update Coverage:
Tax shelter maven Daugerdas indicted
Is backdating the fatal flaw for Daugerdas?


It’s not the law, it’s the lie.

Thursday, September 10th, 2009 by Joe Kristan

This is a great short summary of the problems with the big-firm marketed tax shelters of the late ’90s and early years of this decade:

The problem with these shelters, as I have noted earlier, is the lie. They, like many of the earlier shelters, had plausible


Tax shelters and the big lie

Thursday, June 18th, 2009 by Joe Kristan

Federal Tax Crimes blog says The Big Lie is at the heart of the Daugerdas tax shelter indictment:

I have blogged before that tax shelter prosecutions are about the lie. Often, the claim is that the tax shelters lack economic substance, but in these prosecutions the real complaint is the lie that is designed to give an appearance of economic substance. The jury will not understand the complex, convoluted tax structure and byzantine legal analysis, but the jury will understand the lie.

Federal Tax Crimes Blog is all over this case.


Greetings, Federal Tax Crimes Blog

Monday, June 15th, 2009 by Joe Kristan

While I just noticed it last week, the Federal Tax Crimes blog has been rolling since February. Its proprietor is Jack Townsend, a Houston attorney who was a defendant attorney in the KPMG case. He has posted a good explanation of the recent indictment of Paul Daugerdas and six others in connection with Jenkens & Gilchrist tax shelters.


Is backdating the fatal flaw for Daugerdas?

Wednesday, June 10th, 2009 by Joe Kristan

daugerdas.jpgLooking over yesterday’s tax shelter indictment of Paul Daugerdas and others, you can see opportunities for the defendants to argue that the IRS is trying to make them criminals for being aggressive advocates for clients in their tax practice — merely for doing their jobs. That’s debatable, but sometimes debatable is enough to avoid prison.
That’s why this part of the government’s case could be the most dangerous for the defendants:

In several instances in 2000 and 2001, J&G caused clients’ tax shelter transactions to be incorrectly implemented at Bank A, which resulted in the wrong amount and/or type of tax loss to be generated for the clients. After the close of the tax year but before the respective tax return was to be filed, defendants PAUL DAUGERDAS and DONNA GUERIN, and Lawyer A, a co-conspirator not named as a defendant herein, discovered or were made ware of the errors and caused new transactions to be effectuated by Bank A through defendant DAVID PARSE and caused them to be backdated to the prior year.

If the government can prove backdating, it might be much easier for a juror to vote for conviction. Tax is hard, and a good defense lawyer has a lot of opportunities to give jurors a reasonable doubt in a case involving short sales, derivatives and currency options. But anybody can understand backdating. If the government convinces the jurors that backdating happened, it should be easier to sell the rest of the government’s case.
Related: Tax shelter maven Daugerdas indicted
The Tax Grrrl has more.


Tax shelter maven Daugerdas indicted

Tuesday, June 9th, 2009 by Joe Kristan

daugerdas.jpgPaul Daugerdas, who reportedly was paid $93 million from 1999 through 2003 as head of the tax shelter practice of law firm Jenkens & Gilchrist, was indicted today on federal tax charges. Six others were also indicted, including two former J&G partners and the former Chairman and CEO of national accounting firm BDO Seidman, according to the Department of Justice press release.
The indictment follows a series of guilty pleas by other figures in tax shelters associated with Mr. Daugerdas. reports:

The indictment stems from a wider U.S. probe of illegal tax shelters. On May 8, four current and former executives of Ernst & Young LLP were found guilty by a federal jury in New York of selling illegal shelters to wealthy clients. On June 3, former BDO Seidman LLP Vice Chairman Charles Bee pleaded guilty to federal charges that he helped clients evade more than $200 million in taxes through illegal shelters.



Another BDO partner makes a tax-shelter plea deal

Thursday, June 4th, 2009 by Joe Kristan

A former vice-chairman of national accounting firm BDO Seidman has pleaded guilty to tax evasion charges. Charles W. Bee Jr., a leader of the firm’s “Wolfpack” tax-shelter group, has pleaded guilty to charges arising out of shelters put together in cooperation with the Jenkens & Gilchrist law firm.
Another “Wolfpack” leader pleaded guilty to tax-shelter-related charges in March.
The deep waters may be closing over Paul Daugerdas, the Jenkens & Gilchrist tax attorney at the center of many of these deals.

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A failure of BLISS

Friday, April 10th, 2009 by Joe Kristan

The Tax Court shot down another Jenkens and Gilchrist/Paul Daugerdas basis-shifting shelter yesterday. The defeat was pretty much total, with the $10 million claimed loss disallowed and a $1,298,284 penalty imposed.
The “Basis Leveraged Investment Swap Spread,” or BLISS, shelter, involving offsetting option positions, may have lacked economic substance, but it left behind a great theme song:

Cite: New Phoenix Sunrise Corp, 132 T.C. No. 9


Leader of BDO ‘Wolfpack’ brought to bay

Thursday, March 19th, 2009 by Joe Kristan

One of the leaders of the now-defunct “Tax Solutions Group” of national accounting firm BDO Seidman, Adrian Dicker, has pleaded guilty to conspiring to sell fraudulent tax shelters. The group, known as the “WolfPack” within BDO, was involved in a number of prominent tax shelters, including the one in the Jade Trading case. The group worked with law firm Jenkens & Gilchrist and Paul Daugerdas, the law firm’s tax shelter maven. From the Justice Department press release:

Dicker and his co-conspirators knew and understood that the clients entering into the tax shelter transactions being marketed and sold with J&G had neither a substantial non-tax business purpose nor a reasonable possibility of earning a profit, given the large amount of fees being charged by the accounting firm and J&G to enter the transaction. Those fees were set by the co-conspirators as a percentage of the tax loss being sought by the tax shelter clients. Dicker also knew that the clients who purchased the tax shelter had no non-tax business reasons for entering into the transactions and their pre-planned steps.

A guilty plea often implies a deal to turn on others. This can’t be good news for clients still trying to defend their tax-shelter deals, and it’s worse news for others involved in the design and marketing of the shelters.
The TaxProf has a roundup.