When I read of a sentence that includes eight years at ClubFed and restitution of $190 million, that gets my interest. Donna Guerin is the former attorney who was sentenced yesterday in New York.
Ms. Guerin was an attorney who pleaded guilty last September for running a tax shelter scheme that allegedly created $7 billion in phony deductions leading to a $92 million loss to the government. The Justice Department’s press release has some interesting reading about the tax shelters that Ms. Guerin and others peddled.
Ms. Guerin was a principal in designing tax shelters called, “Short Sales,” “Short Options Strategy (SOS),” “Swaps,” and “HOMER” They sold these strategies to nearly 900 wealthy individuals, and the phony losses total over $6.5 billion. But what gets me is the pricing of the shelters and the legal opinion that the shelter was good:
In return for receiving a fee from tax shelter clients based on a percentage of their purported tax losses – usually 5% for ordinary losses and 4% for capital losses – GUERIN and others at J&G assisted clients in implementing all of the stages of the fraudulent tax shelters, including setting up bank accounts and entities such as corporations and partnerships. GUERIN and others at J&G [the law firm where she was a partner] also provided the tax shelter clients a “more likely than not” legal opinion from J&G.
Let’s count the red flags. First, except for amended returns, tax professionals are not supposed to charge based on the outcome of a return. If I prepare your return, I cannot say, “I’ll take x% of the refund as my fee.” That should have been a red flag to those involved.
Second, if you are looking at a purported tax shelter, is it wise to believe the authors of the shelter that all is well? If someone has truly come up with a method to turn, say, $100 million of income to $0 of tax, he or she would be more than willing to have an outside attorney bless the shelter. Indeed, if I ever can come up with such a shelter (an occurrence with about a 0% chance of happening), I’d want every attorney out there to give it thumbs up. There’s also the regulations under Circular 230 (which is how tax professionals are regulated); these dictate best practices and using reasonable factual efforts.
Finally, there’s the basic rule of economic substance. In order for a transaction to be considered having economic substance, the transaction needs to impact outside of federal income tax effects the economic substance of a taxpayer.
Are there legitimate tax shelters? Of course; one of the most basic is investing in something that loses money today but has a chance of making money tomorrow. Many wealthy individuals will become “angel investors.” They’ll invest in ten projects, hoping that one of those ten becomes hugely successful. The other nine become legitimate capital losses. There’s economic substance and real risk involved.
Most of the phony tax shelters I’ve read about invent purported trades and business entities that are will-o-the-wisps. That’s because it’s hard to make $100 million turn into a tax loss without real transactions occurring. But I digress….
For Ms. Guerin, she has eight years at ClubFed to think about her “relatively minor” (in the words of her attorney) involvement in, in the words of Judge William Pauley, “[A] tax shelter fraud consipracy [that] was breathtaking in its scope and in the damage it caused our nation…Ms. Guerin played a central role, she was not a mindless automaton.”