While the major news outlets were busy churning out story after story about the countdown to FATCA and the government’s aggressive pursuit of U.S. taxpayers with undisclosed offshore bank accounts last October, a criminal tax case with far-reaching consequences was brewing off in the distance. And that storm was largely ignored.  In fact, almost eight months later it has received scant media coverage.

To be sure, this wasn’t any old criminal tax case.  On the contrary, it has been called “the largest tax shelter case” in U.S. history.  It is high time to bring this case out of the shadows and shine a spotlight on it.

A Chicago lawyer and certified public accountant was convicted last October of running a tax shelter scheme that created $ 7 billion in fraudulent tax deductions and more than one billion in phony losses.  Paul Daugerdas, the former head of the Chicago office of the now defunct law firm Jenkens & Gilchrist, was found guilty of conspiring to defraud the IRS, evade taxes, commit mail and wire fraud and other crimes after a jury trial in federal court in Manhattan.  Mr. Daugerdas was on trial for a second time, after his 2011 conviction was overturned when a juror lied about her background to get on the case.

How was this perpetuated? The defendants used shelters named “Short Sales,” “Short Options Strategy,” “Swaps,” and “Homer” to generate fraudulent tax losses for almost one thousand wealthy clients.  Among the clients were the late sports entrepreneur Lamar Hunt, trust fund recipients, investors, and a man who was one of the earliest investors in Microsoft Corporation.

Mr. Daugerdas made $ 95 million in fees from creating and marketing tax shelters for wealthy clients.  In doing so, he gave the government the “Italian Victory Salute,” paying less than $ 8,000 in taxes when he owed more than $ 32 million.  Not very endearing, indeed.

While Mr. Daugerdas went down hard, that does not mean that criminal tax shelter cases are indefensible.  Defenses do exist.  However, developing successful defenses involve thinking outside of the box.  Below is a hypothetical that mirrors the facts of United States v. Paul Daugerdas.  This hypothetical comes from the textbook, “Tax Crimes,” by Jack Townsend. It is a brilliant problem that covers the unique issues that are raised in these types of cases.

If you’re feeling bold, you might want to try your hand at solving it.  But even if you are feeling a bit apprehensive, you have nothing to lose by giving it the old college try.  At the end is my analysis.  The only word of caution that I make is to hold onto your hat as the secret world of tax shelters and the aggressive tax attorneys that inhabit it unfolds right before your very eyes.

“Carlton Smith and his wife, Tanya, filed joint federal income tax returns for all years relevant to this problem.  Carlton founded and was the sole owner of a corporation by the name of “CSC.”  In January 2000, Carlton sold all of his CSC stock to an unrelated person, realizing long-term capital gain of slightly over $ 50 million.

Realizing that he and Tanya were facing substantial federal income tax liability, Carlton let his friends and associates know that he would be receptive to tax planning to reduce his potential tax liability for 2000.  Specifically, Carlton told Hank Haverstock, his accountant: “I don’t want to get into trouble with the IRS, of course, but something creative, maybe even a bit aggressive could be in order.  And what the IRS doesn’t know won’t hurt it – or me.”

Carlton’s “feelers” were rewarded.  In October 2000, he was contacted by Amanda Armitage, a partner in ABCD, one of the largest accounting and business consulting firms in the country.  Mr. Haverstock knew Ms. Armitage, and he contacted her on Carlton’s behalf.

On October 10, 2000, a meeting took place between Carlton, Mr. Haverstock, and Ms. Armitage.  At the meeting, Ms. Armitage explained that she was part of ABCD’s High Net Worth or Tax Advantaged Investments Group, and that her Group had a “tax product” that would meet Carlton’s needs.

Carlton asked Ms. Armitage how much tax help he could expect from her product.  She replied: “I understand that you’re looking at $ 50 million of taxable gains.  We can set it up to generate $ 50 million of losses for you, which you can use to offset your $ 50 million of gains.”  Slow to catch on, Carlton said that he didn’t want to lose $ 50 million, to which Ms. Armitage replied: “No, these are paper losses, tax losses.  Beyond paying our fees, you would be out-of-pocket almost nothing.”

Carlton asked Ms. Armitage how it was possible to accomplish these results.  She said: “I’ll be happy to lay it out for you, but this tax product is proprietary.  Before I describe the details, you’ll need to sign this agreement.”

[“Tax Crimes,” Townsend, Jack, Adjunct Professor, University of Houston Law Center; Campagna, Larry, Adjunct Professor, University of Houston Law Center; Johnson, Steve, E.L. Wiegand Professor of Law, University of Nevada, Las Vegas, William S. Boyd School of Law; Schumacher, Scott, Assistant Professor of Law, Director, Federal Tax Clinic & Acting Director, Clinical Law Program, University of Washington School of Law; LexisNexis, 2008.]

Let’s make a slight digression to discuss this agreement.  The first step in virtually any shelter deal is the execution of a very restrictive confidentiality agreement.  Such agreements have four main provisions.  And this one was no exception.

“The conditions were as follows.  First, the taxpayer and his representative had to agree that they would not reveal the nature of the arrangement to anyone, beyond claiming tax losses from it on the taxpayer’s returns; second, ABCD would provide instructions as to how to report the losses on the taxpayer’s returns; and third, the taxpayer and his representative had to represent that they were not employees of the IRS or any state revenue authority and were not working with, cooperating with, or assisting the IRS or any state revenue authority.

After reading the agreement, Mr. Haverstock said: “I have to be blunt.  I don’t know of anything legal that could produce the results you promise, and I’m not getting a good vibe from this.  Carlton, if I were you, I’d walk away from this thing right now.”  Carlton declined saying, “I want to hear more.”

Mr. Haverstock left immediately.  He had no further involvement except that he prepared the bulk of the Smith’s 2000 Form 1040.  However, he did not prepare the part of that return that pertained to the ABCD tax product.  Instead, Ms. Armitage prepared that part of the return.

During subsequent meetings, Carlton learned that the tax product involved dealings in options in foreign currencies affected through partnerships, in a variation of the Son of BOSS tax shelter.  For purposes of this problem, you need not familiarize yourself with the details of this shelter.

Ultimately, Carlton decided to participate in the shelter.  He paid $ 3 million in fees to ABCD.  In return, ABCD did the following.  First, it provided Carlton with a tax opinion.  Second, it handled all the currency and related transactions.  And third, it prepared the portions of the Smith’s 2000 Form 1040 which dealt with losses through the shelter.

As a result, the Smith’s 2000 Form 1040, which was filed in August 2001 under an extension, reported a $ 50 million gain from the sale of the business but offset that gain with over $ 50 million of losses from the shelter.  This resulted in no reported taxable income and no reported tax due.

The tax opinion that Carlton received from ABCD was written by Beth Baccus, an experienced tax attorney and another ABCD partner.  Carlton never met or spoke with Beth.  The opinion recounted a number of representations allegedly made by Carlton, even though Carlton never made any such representations.

One of the representations attributed to Carlton was that he was participating in the transactions with the objective of realizing an economic profit and not solely to produce tax savings.  Based on these alleged representations and on an extensive (although not necessarily accurate) discussion of legal authorities, the opinion concluded that the claimed tax losses were “more likely than not” to be upheld in the event they were challenged by the IRS.

In August 2000, almost a year before the Smith’s filed their 2000 Form 1040, the IRS issued Notice 2000-44: “Tax Avoidance Using Artificially High Basis.”  The notice described transactions like the one Carlton engaged in.  It said that losses claimed through such transactions were not allowed for federal income tax purposes.  In addition, the IRS could assert penalties on taxpayers claiming such losses.  Carlton was aware of Notice 2000-44, having read it in late 2000.

In November 2003, the Smith’s filed an amended return for tax year 2000.  That amended return withdrew the $ 50 million of losses claimed on the original return.  It was accompanied by full payment of the resulting tax liability and interest on it.  The IRS had not contacted the Smith’s about their original return before they filed their amended return.

In February 2004, the Smith’s reversed course yet again.  They filed a refund claim with the IRS, seeking refund of all of the taxes and interest paid in November 2003 as to the 2000 tax year.  Not surprisingly, the IRS denied the refund claim.  Outraged, the Smith’s filed a refund suit in federal district court in 2004.

In the meantime, in early 2003, the Government launched a criminal investigation into ABCD and some of its partners, with respect to their roles in promoting abusive tax shelters.  As a result of that investigation, the Government obtained indictments against ABCD, Ms. Armitage, Ms. Baccus, and several other ABCD partners.

The indictments did not specify Carlton’s transaction, but it did identify many similar ones.  ABCD pleaded guilty.  Ms. Armitage, Ms. Baccus, and the other partners pleaded “not guilty.”  At the times relevant to this problem, they had not yet come to trial.”

[“Tax Crimes,” Townsend, Jack, Adjunct Professor, University of Houston Law Center; Campagna, Larry, Adjunct Professor, University of Houston Law Center; Johnson, Steve, E.L. Wiegand Professor of Law, University of Nevada, Las Vegas, William S. Boyd School of Law; Schumacher, Scott, Assistant Professor of Law, Director, Federal Tax Clinic & Acting Director, Clinical Law Program, University of Washington School of Law; LexisNexis, 2008.]

1. What might have been the criminal charges that the Government brought against ABCD and its’ partners? What would have been the best way for the government to investigate and develop these charges?

A. Who are the players?

The problem identifies Ms. Armitage, an ABCD partner, who introduced Carlton to the deal. Beth Baccus, an experienced tax attorney and partner, wrote the tax opinion on which Carlton may or may not have relied. There are other unidentified ABCD personnel.

ABCD handled all of the currency and related transactions. ABCD personnel prepared the parts of Carlton and Tanya’s return which dealt with losses claimed through the shelter.

B. Who will the government pursue?

The big fish, not the little fish. In other words, the people who actually had some kind of control over the shelter that Carlton invested in. For example, 6694 is a civil penalty that pertains to tax return preparers. Tax return preparers do not include clerical staff (i.e., secretaries, clerks). These people are involved in some way but clearly they’re not the ones that the government will pursue.

C. On what grounds?

Recall the Stein indictment – the KPMG indictment. Some of the defendants in Stein invested in the very shelters that they themselves created. There is no indication that the ABCD businesspeople did that. That said, the ABCD defendants cannot be prosecuted for falsifying their own tax returns. Instead, they can be prosecuted for assisting Carlton – and other people like Carlton – with respect to their tax returns.

D. What would the charges be?

(i) I.R.C. § 7201, Tax Evasion: An individual can be convicted of tax evasion even if he helps someone else evade his taxes – it doesn’t have to be the individual’s own tax liability.

(ii) Conspiracy is a possibility.

(iii) I.R.C. § 7206(2), Aiding or Assisting the Preparation of a False or Fraudulent Document: This crime is a possibility. In other words, willful assistance in the understatement of tax.

(iv) I.R.C. § 7212, Attempts to Interfere with the Administration of the Internal Revenue Laws: This crime is a possibility. The government tends to apply I.R.C. § 7212 in the orchestrated-kind of tax effort (i.e., tax shelter cases).

The government must be careful in the way it develops this case to make sure that it is truly a criminal matter and not a civil matter. When the government attacks tax shelters, its arguments typically fall into one of two categories:

1. Technical argument: Carlton’s shelter involves the interpretation of a specific code section (752).
2. Substance over form argument: Regardless of the form, even if the taxpayer literally and theoretically complied with the code section, if the transaction was a sham (i.e., just paper and no real deal or if the deal had no tax consequences), the government will pursue it.

In criminal cases, however, the government prefers the second category. It’s universally recognized that if the government brings a criminal case involving technical tax issues, it will lose. Why? First, because the IRS’s technical interpretation might be wrong. And second, because even if its’ technical interpretation is correct, the issue might not be sufficiently settled, therefore allowing the defendant to invoke the Harris-Garber line of cases that the law is too unclear.

If the government pursues the ABCD personnel, it will be on the grounds of substance over form. Specifically, the government will prosecute if it believes that it can prove: (1) that the alleged currency transactions never occurred (in some of these shelters, there were no real transactions); or (2) that if the transactions did occur, the prices of the currency transactions were rigged by ABCD to achieve a pre-determined tax outcome; or (3) that the ABCD personnel wrote the tax opinion in a way that they knew was materially false. These are the grounds on which the government would make its case against the ABCD personnel.

E. If you’re the defense attorney for the ABCD defendants, what is your principal effort?

To persuade CI or DOJ that this is a civil case, not a criminal case. At what point in the process do you make that argument? Sometimes throughout. At other times, you should pick and choose your spots.

Is this argument best made at one particular phase in the process? The danger of making your argument early on is that it gives the government the opportunity to develop facts to counter your argument. If the defendant’s argument has been rejected during two of the earlier stages of the process, then it becomes harder for it to be accepted during the third stage.

If you decide to pick your spot, refrain from making your argument until you conference the case with the AUSA. Main Justice people are tax-types. The AUSAs, on the other hand, tend to be tax generalists, and not tax specialists. It’s easier to make the following argument to a generalist than to a specialist: “This is only a technical civil tax case, not a criminal case.”

F. How would the government develop the facts?

There are two routes: the traditional administrative route and the grand jury route. This case screams out grand jury! Criminal investigations could go the traditional route but in a situation like this where there are many potential witnesses and many potential transactions, relying upon an administrative summons would make little sense because it would be much too time-consuming. Recall that an IRS summons is not itself enforceable. If a person disregards the summons, the government has to get a district court judge to enforce it. In contrast, grand jury subpoenas are self-enforcing. When there are multiple actors, the best course of action is to go the grand jury route. Undoubtedly, the government would proceed in that fashion.

Faced with the possibility of prosecution, the investors might be willing to enter into cooperation agreements with the government to provide information that can be used to “take down” ABCD personnel. Although these deals were marketed to a fairly small number of people, rarely was it just one client per deal. Attorneys for the investors will be in a race to get to the Assistant U.S. Attorney first with salacious information since only the early bird gets the worm. The facts mentioned IRS notice 2000-44, in which losses claimed through such transactions are not allowable for income tax purposes. Some investors in these shelters may have responded to that notice by going to the IRS and telling them how the transactions worked.

There are all kinds of differences between how these abusive shelters were set up to operate on “paper” (i.e., as if everything was Kocher) versus how they actually operated. For example, the tax opinions contain the following representations: “We are issuing this opinion based upon the taxpayer’s representation that he is participating in these transactions with the objective of realizing an economic profit and not solely to produce tax savings.” Although the tax opinion recited that, it nonetheless was false. Frequently, the attorney who writes the tax opinion never even speaks to the investor, let alone obtains such a representation before writing the opinion.

Of course, most if not all of these investors would deny ever being asked such questions, let alone giving any answers. That would allow the government to prove that the representations attributed to the investors were fabricated. Or the investors might recount conversations with ABCD personnel where they were told: “You can pick whatever level of tax reduction you want. The bigger the tax reduction you want, the higher the fee you have to pay us.”

Or the investors might deny ever signing the documents. In that case, there signatures were forged. Bogus documents were created to create the appearance of legitimate paper transactions that never occurred. As the government is developing this case, investors might come forward to proffer this kind of information.

Sometimes the government engages in undercover operations, even in sophisticated tax shelter cases like this. For example, they engaged in undercover operations in the first wave of tax shelters – i.e., those marketed to doctors and lawyers. In contrast, the current wave of tax shelters is marketed to a smaller demographic of wealthy folks. An IRS agent might pose as a doctor and say, “I’m interested in a shelter.” The idea is to learn what the tax shelter promoter is telling investors that doesn’t appear in the documents.

This approach doesn’t work as well now. With a wealth of information available on the internet, it’s simply too difficult for an IRS special agent to fool a tax shelter promoter into believing that he is actually a wealthy businessman who just sold a company for $ 150 million. As a preliminary matter, there aren’t too many people like that out there. And second, it’s too easy to look this up on the internet and discredit it. For these reasons, it’s a lot harder to organize a successful undercover operation. Therefore, an undercover operations is not a valuable technique.

2. In November 2004, Carlton was contacted by an IRS Special Agent investigating the Smith’s with respect to 2000. You are the Smith’s attorney.

A. What charges might CI be considering against the Smiths? Why?

• The government may be thinking about I.R.C. § 7201, Tax Evasion, with respect to the original Form 1040.

Of course, the first issue is to determine whether the statute of limitations is still open. The Smiths filed their 2000 return in August 2001. Six years later is August 2007. The Special Agent contacted Carlton in November 2004, within the statute of limitations period.

Might the government be able to extend the statute of limitations beyond August 2007? Possibly, if the government pleads an affirmative act after the filing of the return. That potentially can extend the statute of limitations. Here, the government will argue that the refund claim filed in February 2004 was sufficiently related to the original 2000 return. Therefore, it was an affirmative act with respect to 2000 and restarted the statute of limitations – i.e., six years from February 2004.

Note that the target of this inquiry is Carlton, not Tanya. Tanya filed a joint return with Carlton. But a person can’t go to jail by virtue of filing a joint return with their spouse. If the government intends to prosecute Tanya, it has to prove the elements of I.R.C. § 7201 against Tanya – it can’t just vicariously assert that liability based on Carlton’s behavior. Here, it doesn’t look like Tanya has any criminal liability.

• Can Carlton be convicted under I.R.C. § 7201?

Assuming that the shelter was invalid, that the return was inaccurate, and that there was an underpayment of tax, willfulness would be a key issue.

Several facts in this problem deal with willfulness. This is all about the marshaling of evidence by both sides.

As a preliminary matter, Carlton spread the word that he was receptive to tax planning to reduce his tax liability for tax year 2000. He didn’t say that he wanted an economically profitable opportunity. Thus, by reading between the lines, the government will argue that what Carlton wanted was a tax shelter.

Second, Carlton told Mr. Haverstock, “I don’t want to get in trouble with the IRS, but something creative, maybe even a bit aggressive, could be in order. And what the IRS doesn’t know won’t hurt it – or me.” Does that help or hurt Carlton on the element of willfulness? It depends on what part of the statement is emphasized. Defense counsel will emphasize the part that says, “I don’t want to get into trouble with the IRS.” The government attorney will argue that the totality of the statement – wink and nudge – suggests that Carlton was being less than sincere.

Third, at the meeting with Ms. Armitage, Carlton asked, “How much tax help can I expect from your product?” In response, Ms. Armitage said, “These are paper losses, tax losses. You’d be out of pocket almost nothing.” At some point, too good to be true kicks in.

Fourth, there were red flags that were impossible for Carlton to have missed:

(i) The confidentiality agreement: Carlton had to pledge that he would keep this agreement confidential. That’s not fatal. Carlton’s attorney will argue: “Of course there was a confidentiality provision. That was so ABCD could protect its commercial interests. ABCD didn’t want other people finding out about this brilliant idea and then copying it.” Additionally, Carlton had to attest to the fact that he was not an IRS employee or an agent of any state revenue authority. It’s not easy to put a benign face on that. That’s not a common provision in a commercial transaction.

(ii) The fee: Carlton paid ABCD $ 3 million in fees. Relatively speaking, that’s not exorbitant when compared to a $ 50 million tax savings. However, it’s still quite large compared to an hourly rate for the services that ABCD performed. There are civil cases in which the size of the fee was so disproportionate to the services performed that the court instantly ruled that the deal was a sham.

(iii) The meeting between Mr. Haverstock, Carlton, and Ms. Armitage. Mr. Haverstock told Carlton, “I’d walk away from this thing right now if I were you.” That doesn’t help Carlton. This statement is not hearsay because it’s not being introduced to prove the truth of the matter asserted. Therefore, it is admissible. The court must look at the surrounding circumstances in an attempt to determine what parts of Carlton’s response is admissible. For obvious reasons, the longer that Mr. Haverstock has been Carlton’s advisor, the more trusted he was likely to have been. Disregarding the opinion of a professional accountant who Carlton had relied on since time immemorial for maintaining the financial well-being of his multi-million company is likely to raise red flags.

There are facts that Carlton can marshal in his favor as well. For example, he’d want to make much ado about the technical nature of the tax law. The more time Section 752 is discussed, the better for the defense. And don’t overlook the obvious: at the end of the day there was a tax opinion upon which Carlton relied.

• Alternatively, the government could charge Carlton under I.R.C. § 7206(1), Declaration Under the Penalties of Perjury, with respect to the original 2000 tax return or with respect to the 2004 claim for refund.

A materially false claim for refund, just like a materially false tax return, is submitted under penalty of perjury and is therefore, punishable.

There might have been some developments between the filing of the original 2000 return and the filing of the 2004 refund claim. For example, there might have been some litigation about the legitimacy of the Son of Boss tax shelter. That potentially is germane to the willfulness matter especially if the government can show that Carlton was aware of the outcome of that litigation.

• Alternatively, the government could charge Carlton under Section 287.

 

• Depending upon what it can prove with respect to conversations between Carlton and other relevant folks, the government could charge Carlton under conspiracy (Section 361).

B. What arguments would you advance on the Smith’s behalf? How do you assess the strength or weakness of those arguments?

Carlton can argue that the shelter was valid as a matter of substantive law.

Recognize that the government isn’t always right when it labels something as an “abusive tax shelter.” Taxpayers have won some cases. This shelter might actually work as a matter of law, in which case the government would simply be wrong. If Carlton can make a credible claim that the shelter works as a matter of law, he would have a colorable defense.

Even if Carlton doesn’t prevail on that ground, he can still argue that the matter is sufficiently unsettled (See the Harris and Garber line of cases), such that there can be no willfulness

Other arguments that Carlton can make to negate willfulness include: First, the law of tax shelters is unclear. To buttress that argument, it would be helpful to introduce evidence of the IRS’s losses in earlier tax shelter cases. Of course, the government will object on the grounds of relevance.

Second, assuming Carlton takes the stand, he is likely to provide the following testimony: “I’m a businessman. I have no more than a layperson’s knowledge of tax. Indeed, this was the first time that I’ve ever encountered a currency transaction deal of this type. Therefore, I had no tax knowledge about it.”

The erratic – i.e. “on again, off again” – behavior of Carlton would undoubtedly be introduced by the government at trial. Initially, Carlton filed the original 2000 tax return claiming $ 50 million of tax losses from the shelter. Recall that that resulted in zero reported taxable income and zero reported tax due. Then Carlton did a complete 180, backing away from the tax losses altogether. Specifically, he filed an amended return withdrawing the $ 50 million of losses claimed on the original return and making full payment of the resulting tax liability and interest on it.

But Carlton was not finished. He then filed a claim for refund of all of the taxes and interest paid as to the 2000 tax year as reflected on the amended return. What is that all about? This strange behavior might reflect the fact that Carlton was confused. Or perhaps that Carlton really did believe that the shelter worked.

An innocent explanation for the filing of the amended return might be that it was merely an attempt to stop the running of interest in case Carlton’s genuine belief that the shelter worked was ultimately rejected by a court. The fact that an amended return was filed does not, by itself, purge this case of fraud. However, it might diminish the jury’s appetite to convict.

Closely related to willfulness is a reliance defense. Carlton could argue that he relied on the favorable opinion letter from Ms. Baccus. On the other hand, Carlton had advice against going into the shelter from his trusted tax advisor, Mr. Haverstock. The defense can argue that Carlton believed Ms. Baccus more than he believed Mr. Haverstock because Ms. Baccus was more of an expert in this area of the law.

Not helpful for Carlton is the fact that Ms. Baccus was employed by ABCD. Therefore, she had a financial interest in seeing Carlton buy into the deal. Would that undermine Carlton’s reliance defense? This matter is frequently litigated when it comes to civil penalties. Some courts prohibit taxpayers from relying on the opinions of financially interested advisors. But again, that applies only within the realm of civil tax controversies and this is, after all, a criminal tax case. The fact that Ms. Baccus was employed by ABCD is certainly relevant. At the same time, she presumably had an obligation to provide professional advice that could be trusted, believed, and relied upon. If the defense can convince the jury that Carlton really did rely on that advice, albeit unwisely, he wins.

Another defense, admittedly weaker than the reliance defense, is a voluntary disclosure defense. The argument could be couched as follows: “The amended return that I filed in 2003 was a voluntary disclosure. Therefore, I shouldn’t be prosecuted.” This argument will likely fail.

The first problem is timeliness. Recall that for a taxpayer to qualify for voluntary disclosure, he must come clean before the IRS is hot on his trail. Here, the likelihood that the government would have found out about Carlton prior to him filing the amended return is high. Indeed, the IRS had already launched an investigation into the Son of Boss shelter. Inevitably, it would have obtained Carlton’s name in response to subpoenas for customer lists that it issued to ABCD. Moreover, Notice 2000-44 suggests that the IRS was particularly interested in auditing this kind of deal.

Nonetheless, Carlton’s voluntary disclosure may still be timely. However, additional fact-finding would be necessary.

The full cooperation requirement is yet another obstacle. The government is likely to argue that Carlton’s filing of the refund claim in 2004 re-instated his original position. And that would be fatal because the original return is the text book definition of a failure to cooperate. Moreover, this is happening in the context of a tax shelter, where doubts are not resolved in a light most favorable to the taxpayer. Therefore, the IRS is likely to conclude that Carlton did not satisfy the conditions of the voluntary disclosure policy.

As a final defense, Carlton might try to offer up someone else as a sacrificial lamb. He might argue, “I’m a small fish. You can get me for civil penalties. The people that you want to get criminally are the ABCD personnel and I can give you all of the dirt on the unlawful things they did.” Naturally, Carlton would ask for immunity from his own criminal prosecution in exchange for offering the heads of the ABCD personnel on a silver platter.

C. When and how will you get to present your arguments? What is your best strategy?

This is a timing question. There are various opportunities for conferences. It is recommended that these arguments be raised at the earliest opportunity and at every opportunity thereafter. The more time that passes, the worse things become for Carlton. Therefore, the defense attorney should act swiftly.

First, if Carlton can offer any kind of appealing case for immunity, the value of this evidence will only diminish over time. As time goes by, the government will undoubtedly get more information about ABCD and its deals from other sources. Therefore, Carlton’s information will be less valuable.

Second, as the IRS gets more information about these deals from other sources, it’s possible that more information – adverse to Carlton – will come to light.

* [These questions accompanied the problem and were published in: “Tax Crimes,” Townsend, Jack, LexisNexis, 2008.]