The government’s record in criminal tax cases against promoters is spotty. The largest criminal prosecution was against 19 KPMG employees, but it fizzled out when 13 of the defendants were removed because of government pressure on the issue of attorney fees. In December 2008 three defendants were convicted of tax evasion, including R.J. Ruble. They were acquitted of conspiracy charges.
A major criminal case, which had to be retried because of juror misconduct, ended on Halloween, when a jury acquitted BDO Seidman CEO Denis Field of charges that he led and participated in fraudulent tax shelters. The same jury convicted Paul Daugerdas (formerly of the notorious firm Jenkens & Gilchrist) of seven of the 16 charges he faced, including conspiracy, tax evasion, and mail fraud. Another codefendant, Donna Guerin of Jenkens & Gilchrist, pleaded guilty and was sentenced to serve eight years in prison and to pay $190 million in restitution.
The KPMG and Daugerdas prosecutions are only the highest-profile among numerous attempts to criminalize the promotion and structuring of tax shelters, but they illustrate the problems with these types of actions. The tax community generally has not been supportive of the government’s efforts. Many practitioners questioned why the KPMG matter was ever undertaken. The prosecution was ambitious, but poorly structured. In the end, it probably cost the government more credibility than it gained in deterrence.
The Daugerdas case was slightly more successful, but it still serves to show why these types of criminal tax actions are more trouble than they’re worth. The Justice Department isn’t just looking to criminalize outright fraud (and lies). It seems to be targeting faulty or inadequate legal advice as well. "I'm afraid that what happens in these convictions is rather than focusing on the lie, the government wants to quibble with the legal analysis," Jasper L. Cummings, Jr., of Alston & Bird said. Cummings doesn’t believe that providing legal analysis that violates the economic substance doctrine rises to the level of criminal conduct. And he’s probably right.
Although the government has had trouble securing convictions in these types of cases, that doesn’t mean defendants don’t suffer. It can be extremely expensive and time-consuming to fight back. Field probably spent millions in legal fees and had to endure two different trials. Taking a case all the way to a jury might give a defendant a good chance of winning a case, but the costs can be enormous.
So what can be learned from Daugerdas and Ruble? The government is very angry about tax shelter promotion and will use every weapon at its disposal to stop it. Taxpayers and their advisers have only themselves to blame for that. The types of transactions promoted by KPMG and Jenkens & Gilchrist are almost comically outlandish in the tax benefits promised and (temporarily) delivered. Taxpayers and practitioners should be very careful about promoting, structuring, and engaging in transactions with little to no business purpose and massive tax benefits.
But the government should also be judicious in how it chooses to attack tax shelters. While it might have secured a few convictions, and even jail time, in the KPMG and Daugerdas cases, it also lost face, along with time and resources, for its relatively modest success. Instead of spending many years to secure partial convictions on a few practitioners, perhaps the government’s time would be better spent attacking tax shelter transactions on the front end, at the exam and regulatory drafting levels.