Lessons from United States V. Stein: Is the line between criminal and civil sanctions for illegal tax shelters a dot?

Northwestern University Law Review

Volumn 102, Issue 2, 2008, Pages 903-943

  Hsue, Patricia B ^a  

^a NORTHWESTERN UNIVERSITY SCHOOL OF LAW   (United States)

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EID: 49849092890     PISSN: 00293571     EISSN: None     Source Type: Journal    
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References (267)

1. Id. Helvering v. Gregory is one of the most cited tax cases of all time. See JOSEPH M. DODGE, J. CLIFTON FLEMING, JR. & DEBORAH A. GEIER, FEDERAL INCOME TAX: DOCTRINE, STRUCTURE, AND POLICY 860 (3d ed. 2004).
2. The cost of annual compliance (recordkeeping and learning tax rules) rose from $112 billion in 1995 to $265 billion in 2006. Chris Edwards, CATO Says Income Tax Too Complex, Inefficient, TAX NOTES TODAY, Apr. 7, 2006, 2006 TNT 67-40 (LEXIS). In 2005, sixty-one percent of tax filers used a paid tax preparer and spent a total of 6.4 billion hours on tax compliance. Id. H&R Block revenues from United States tax preparation rose from $740 million in 1996 to $2.2 billion in 2005. Id.
3. John Cranford, IRS Struggles to Mind the Gap, CQ WEEKLY, Feb. 4, 2006, at 326,326-27; Press Release, IRS, New IRS Study Provides Preliminary Tax Gap Estimate, IR-2005-38 (Mar. 29, 2005), available at http://www.irs.gov/newsroom/article/0,,id=137247,00.html [hereinafter IRS, The Tax Gap]; IRS, Tax Gap Facts and Figures 5 (Mar. 2005), available at http://www.irs.gov/pub/irs-utl/tax_gap_facts-figures.pdf [hereinafter IRS, Tax Figures]. The discrepancy between the amount of tax collected and that actually due is commonly referred to as the "tax gap." Cranford, supra, at 326. Understated individual incomes comprise over eighty percent of individual underreporting as opposed to overstated deductions. IRS, The Tax Gap, supra.
4. See IRS, The Tax Gap, supra note 3.
5. IRS, Tax Figures, supra note 3, at 8.
6. Commentators began keeping track of corporate scandals starting in 2002. See, e.g., Penelope Patsuris, The Corporate Scandal Sheet, FORBES.COM, Aug. 26, 2002, http://www.forbes.com/2002/07/25/ accountingtracker.html. In keeping with this trend, the government indicted four current and former partners at Ernst & Young for selling and marketing tax shelters in May 2007. Lynnley Browning, U.S. Prosecutors Plan New Indictment in Tax Shelter Case, N.Y. TIMES, Sept. 12, 2007, at C2. The government is currently working on a superseding indictment. Id.
7. The original superseding indictment named as defendants sixteen former KPMG partners and one former KPMG senior manager. Superseding Indictment at 2, United States v. Stein, No. S1 05 Cr. 0888 (S.D.N.Y. Oct. 17, 2005), available at http://www.usdoj.gov/usao/nys/pressreleases/October05/ taxshelterfraudsupercedingsteinetal.pdf. Since then, two partners have agreed to a plea. Lynnley Browning & Colin Moynihan, KPMG Partner Pleads Guilty in Tax Case, INT'L HERALD TRIB., Mar. 29, 2006, at 13; Paul Davies, Defendant in KPMG Tax Case Pleads Guilty, Agrees to Cooperate, WALL ST. J., Sept. 11, 2007, at A16. KPMG LLP is the U.S. member firm of KPMG International, one of the Big Four accounting firms. KPMG, L.L.P., in HOOVER'S IN-DEPTH COMPANY RECORDS (Hoover's, Inc. Oct. 18, 2006), available at 2006 WLNR 18059125. They offer a wide range of accounting, audit, consulting, and tax-related services to customers in industries such as banking, communications, consumer products, health care providers, insurance, and pharmaceuticals. Id. In 2004, they employed 18,200 people with sales of $4.1 billion and a growth rate of roughly eight percent. Id. The other Big Four accounting firms are Deloitte Touche Tohmatsu, Ernst & Young, and PricewaterhouseCoopers. Id. For a detailed history of KPMG's rise to the top and fall from grace, see Tanina Rostain, Travails in Tax: KPMG and the Tax Shelter Controversy, in LEGAL ETHICS: LAW STORIES 90 (Deborah L. Rhode & David J. Luban eds., 2006).
8. Superseding Indictment, supra note 7, at 10-11; Press Release, U.S. Attorney's Office, S. Dist. of N.Y, 19 Individuals Charged in Superseding Indictment Filed in Criminal Tax Case Related to KPMG Tax Shelters (Oct. 17, 2005), available at http://www.usdoj.gov/usao/nys/pressreleases/ October05/kpmgsupersedingindictmentpr.pdf; see also Greg Farrell, Former KPMG Officials to Be Arraigned in Tax Case, USA TODAY, Oct. 24, 2005, at 3B. This case was originally scheduled for trial in September 2006 but was stayed pending determination of the defendants' civil suit against KPMG for attorney fees. United States v. Stein, 461 F. Supp. 2d 201, 202, 204 (S.D.N.Y. 2006); Lynnley Browning, Judge Delays KPMG Tax Trial Over Legal Fees Dispute, N.Y. TIMES, Nov. 15, 2006, at C1. On May 23, 2007, the Second Circuit held that the district court did not have ancillary jurisdiction to determine the civil suit over attorney fees. Stein v. KPMG, LLP, 486 F.3d 753, 764 (2d Cir. 2007). Consequently, the district court dismissed the indictment against thirteen of the remaining sixteen former KPMG employees, stating that the government had improperly coerced KPMG's cooperation and interfered with the defendants' Sixth Amendment rights. United States v. Stein, 495 F. Supp. 2d 390, 427 (S.D.N.Y. 2007). Some speculate that the government strategically asked for dismissal so that it could immediately seek appellate review of the district court's holding that it had violated the defendants' constitutional rights. Paul Davies & David Reilly, Prosecutors Urge Dismissal of KPMG Indictments, WALL ST. J., June 25, 2007, at C3. The remaining four defendants were scheduled to begin trial on October 16,2007. United States v. Stein, 497 F. Supp. 2d 565, 566, 571 (S.D.N.Y. 2007); Davies, supra note 7, at A16. Due to a conflict of interest, Judge Kaplan barred attorney Steven Bauer from representing John Larson, one of the remaining defendants. Lynnley Browning, Judge Bars a Defense Lawyer in KPMG Case, N.Y. TIMES, Oct. 19, 2007, at C6. As a result, the trial has been postponed indefinitely. Id.
9. David Cay Johnston, Changes at KPMG After Criticism of Its Tax Shelters, N.Y. TIMES, Jan. 13, 2004, at C1.
10. See Epsolon Ltd. ex rel. Sligo (2000) Co., Inc. v. United States, 78 Fed. Cl. 738, 741-48 (2007) (detailing IRS efforts to obtain the identities of KPMG and Sidley Austin LLP clients who utilized the tax shelters). Starting in 2002, investors began to sue accounting firms that sold them tax shelters that were later disallowed. Donald L. Korb, Shelters, Schemes and Abusive Transactions: Why Today's Thoughtful U.S. Tax Advisors Should Tell Their Clients to "Just Say No," in TAX PLANNING FOR DOMESTIC & FOREIGN PARTNERSHIPS, LLCS, JOINT VENTURES & OTHER STRATEGIC ALLIANCES 2006, at 9, 76-77 (PLI Tax Law and Estate Planning Course, Handbook Series No. 9068, 2006), WL 707 PLI/TAX 9; Tanina Rostain, Sheltering Lawyers: The Organized Tax Bar and the Tax Shelter Industry, 23 YALE J. ON REG. 77, 88 n.47 (2006). Since KPMG came under investigation, the IRS has declared three of the four tax shelters illegal and enforced penalty payments against taxpayers, causing numerous clients who had purchased the allegedly illegal shelters to file suit. See, e.g., Amato v. KPMG LLP, 433 F. Supp. 2d 460 (M.D. Pa. 2006); Shalam v. KPMG LLP, No. 05-112732, 2006 WL 2589917 (N.Y. Sup. Ct. Sept. 8, 2006); Simon v. KPMG LLP, No. 05-CV-3189, 2006 WL 1541048 (D.N.J. June 2, 2006); see also Senate Subcommittee Minority Staff Releases Report on Tax Shelter Industry, TAX NOTES TODAY, Nov. 19, 2003, at 20, 91 n.64, 2003 TNT 223-20 (LEXIS) [hereinafter U.S. Tax Shelter Industry]; Lynnley Browning, Suit Accuses KPMG and Others of Selling Illegal Tax Shelters, N.Y. TIMES, Aug. 17, 2004, at C3. In 2005, KPMG and a law firm agreed to pay $195 million to settle a class action brought against the firms for promoting and selling abusive tax shelters. Lynnley Browning, Law Firm and KPMG Settle Suit by Tax Clients, N.Y. TIMES, Sept. 30, 2005, at C1.
11. See sources cited supra note 10.
12. The Thompson Memorandum, issued in 2003 by the Department of Justice, sets certain policy guidelines for determining whether to charge a corporation for criminal activity. Memorandum from Larry D. Thompson, Deputy Attorney Gen., to Heads of Dep't Components and U.S. Attorneys (Jan. 20, 2003), available at http://www.usdoj.gov/dag/cftf/business_organizations.pdf. The Thompson Memorandum was replaced in part by the McNulty Memorandum in December 2006 to minimize prosecutorial discretion in using corporate prosecutions to seek waiver of attorney-client privilege. Memorandum from Paul J. McNulty, Deputy Attorney Gen., to Heads of Dep't Components and U.S. Attorneys (Dec. 12, 2006), available at http://www.usdoj.gov/dag/speeches/2006/mcnulty_memo.pdf. The guidelines established in these two memoranda have prompted much debate regarding prosecutorial tactics and their impact on attorney-client privilege and standard corporate policies of advancing employee legal fees. Lynnley Browning, U.S. Tactic on KPMG Questioned, N.Y. TIMES, June 28, 2006, at C1; see, e.g., Lisa Kern Griffin, Compelled Cooperation and the New Corporate Criminal Procedure, 82 N.Y.U. L. REV. 311, 316-26, 347-58 (2007) (arguing that the policies in the McNulty and Thompson memoranda lead the government to commandeer internal corporate investigations, turning them into government investigations that compel waiver of attorney-client privilege and violate an individual employee's constitutional rights); Rebecca Walker, The Thompson Memo: Implications of the Stein Decision for Corporate Compliance, in CORPORATE COMPLIANCE AND ETHICS INSTITUTE 2007, at 483, 495-96 (PLI Corp. Law and Practice, Course Handbook Series No. B-1595, 2007), WL 1595 PLI/CORP 483 (arguing that companies should reevaluate their policies of advancing legal fees given the Thompson Memorandum's corporate compliance requirements); Andrew Weissmann & David Newman, Rethinking Criminal Corporate Liability, 82 IND. L.J. 411, 440-45, 449-51 (2007) (arguing that the Thompson and McNulty memoranda policies regarding corporate liability delineate compliance programs that properly incentivize self-regulation and that criminal vicarious liability should not apply unless the government proves the corporation failed to implement such programs). In Stein, Judge Kaplan held the prosecutorial tactics employed under the Thompson guidelines were unconstitutional as applied against the defendants. United States v. Stein, 435 F. Supp. 2d 330, 363-65 (S.D.N.Y. 2006); Browning, supra, at C1.
13. Superseding Indictment, supra note 7, at 45-66. The remainder of the indictment charges defendant Ruble with four counts of tax evasion for his personal income taxes and defendants Smith, Gremminger, and Eischeid with two counts of obstruction of the IRS. Id. at 66-69.
14. United States v. Stein, 429 F. Supp. 2d 633, 637 (S.D.N.Y. 2006); Superseding Indictment, supra note 7, at 8-9.
15. Superseding Indictment, supra note 7, at 9.
16. Id. at 9-10.
17. Government's Memorandum in Opposition to Defendants' Pretrial Motions at 8-11, Stein, 429 F. Supp. 2d 633 (No. S1 05 CRIM. 0888), 2006 WL 1930266 (arguing that the tax shelters are shams); Judge Rules Against IRS in 'Son of Boss' Tax Case: A Federal Jurist Finds that the Agency Went Too Far in Retroactively Banning a Shelter that Cost the Government Billions of Dollars, L.A. TIMES, July 21, 2006, at C4 [hereinafter Judge Rules Against IRS] (reporting that the government will also argue that the tax shelters lacked economic substance).
18. Superseding Indictment, supra note 7, at 63.
19. See Jonathan D. Glater, 8 Former Partners of KPMG are Indicted, N.Y. TIMES, Aug. 30, 2005, at C1 (stating that KPMG acknowledged its involvement in developing and implementing tax shelters and using opinion letters to fraudulently approve and misrepresent the transaction in a statement of facts); Sheryl Stratton, Shelters Fraudulently Designed and Concealed, Government Says in KPMG Trial, TAX NOTES TODAY, Apr. 25, 2006, 2006 TNT 79-3 (LEXIS) ("Echoing what tax officials have been insisting since the indictments were handed down last August and October, the government maintains that the defendant's criminal conduct lies not in the merits of the shelter transactions themselves, but in the packaging."). At the request of Judge Kaplan, the government explained in an eight-page document how the four tax shelters were designed fraudulently and how the opinion letters concealed the fraud. Stratton, supra. The letters misled and concealed the fraud not only in misrepresenting the factual bases of the transactions but also in applying the law to the facts and for concluding the transactions would pass the more-likely-than-not standard. Id. The government also alleges that the defendants obstructed the subsequent investigations and tried to hide the nature of the transactions by '"failing to register the shelters, using sham attorney-client privilege claims, and concealing documents and providing false and misleading information in response to IRS and Senate investigations.'" Stein, 429 F. Supp. 2d at 637 (citing Superseding Indictment, supra note 7, at 50); see also Robert Weisberg & David Mills, A Very Strange Indictment, WALL ST. J., Oct. 12, 2005, at A16 (Stanford Law School professors questioning the indictment of the Stein defendants and the imposition of criminal liability based on providing opinion letters).
20. See infra Part II.D.
21. See infra Part II.B.
22. See infra Part III.A.1.
23. See infra Part II.B-C.
24. Joseph Bankman, The New Market in Corporate Tax Shelters, 83 TAX NOTES 1775, 1776-77, 1782-83 (1999); James M. Delaney, Where Ethics Merge with Substantive Law - An Analysis of Tax Motivated Transactions, 38 IND. L. REV. 295, 315 (2005) ("At least one commentator has pointed out that the creation of the six largely unrelated attributes suggests that the IRS lacks a well-defined principle for distinguishing between legitimate and illegitimate transactions."); W. Richard Sherman & Thomas M. Brinker, Jr., Tax Shelter Reporting Requirements: Am I My Brother's Keeper?, J. INT'L TAX'N, May 2006, at 38, 41.
25. A tax shelter can be a legal and appropriate method of reducing taxes. Martha Neil, Tax Reform Reaches Out: New Rules on Shelters May Affect More than Just Tax Lawyers, A.B.A. J., July 2004, at 62. Professors Michael Graetz and Deborah Schenk identify two categories of tax shelters, and Donald Korb, Chief Counsel for the IRS, identifies a third: (1) legitimate tax shelters; (2) gray area tax shelters; and (3) abusive tax shelters. Korb, supra note 10, at 15. A legitimate tax shelter involves tax-favored investments clearly identified by tax laws, such as oil exploration. Id. A gray area tax shelter is a preference sought by the taxpayer unintended by the tax laws, such as corporate-owned life insurance. Id. An abusive tax shelter involves a transaction that, if the facts were known, would not be upheld by a court. Id. Taxpayers play the "audit lottery," saving on taxes if the IRS does not examine their returns. Id. However, if their returns are examined, the tax cost is deferred at a low interest cost. Id.
26. Bankman, supra note 24, at 1776-77. Compare ABA Comm. on Ethics & Prof 1 Responsibility, Formal Op. 346, at 131 n.1 (rev. 1982), reprinted in FORMAL AND INFORMAL ETHICS OPINIONS: FORMAL OPINIONS 316-348, INFORMAL OPINIONS 1285-1495 (1985) [hereinafter Formal Op. 346] ("A 'tax shelter'. . . is an investment which has as a significant feature for federal income or excise tax purposes either or both of the following attributes: 1) deductions in excess of income from the investment being available in any year to reduce income from other sources in that year and 2) credits in excess of the tax attributable to the income from the investment being available in any year to offset taxes on income from other sources in that year."), with Rostain, supra note 10, at 83 (identifying some common characteristics that classify a tax shelter transaction: (1) it "creates a tax loss through an investment with little financial risk and no significant potential for profit" that is readily "apparent from a close examination of the underlying economics of the transaction," (2) "it involves a domestic corporation and a tax indifferent party," permitting the allocation of the excess income to the tax indifferent party, giving the taxpayer an economic loss, and (3) it has been developed by a promoter and marketed to numerous taxpayers), and 26 U.S.C. § 6662(d)(2)(c)(ii) (Supp. IV 2006) (redefining tax shelter as "(I) a partnership or other entity, (II) any investment plan or arrangement, or (III) any other plan or arrangement, if a significant purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of Federal income tax").
27. Sherman & Brinker, supra note 24, at 41; see sources cited supra note 26.
28. Rostain, supra note 10, at 84.
29. Id. at 83.
30. Id.; see also Sheldon D. Pollack, Blessing Sham Shelters, LEGAL AFF., July-Aug. 2002, at 20. A passive loss is a loss deduction from business activity the taxpayer does not materially participate in. Robert J. Peroni, A Policy Critique of the Section 469 Passive Loss Rules, 62 S. CAL. L. REV. 1, 1 (1988).
31. Rostain, supra note 10, at 83; see also Peroni, supra note 30, at 81 (arguing that exemption of C corporations from passive loss limitation transfers tax sheltering activity generated from the individual tax system to the corporate tax system).
32. Pollack, supra note 30, at 20; see also Rostain, supra note 10, at 83 & n.23.
33. Rostain, supra note 10, at 88-94. "Rather than providing tax planning advice to individual clients based on their particular circumstances, these transactions were developed in a way that made them easy to replicate and promote to a variety of clients and non-clients alike." Korb, supra note 10, at 23. The desire by the big public accounting firms, investment bankers, and some law firms to generate revenues based on contingency or premium fees led to the development of the corporate tax shelter industry. Id. at 22; see also Janet Novack & Laura Saunders, The Hustling of X-Rated Shelters, FORBES, Dec. 14, 1998, at 198 ("[T]tax advisors are no longer just devising specific strategies to deal with a client's tax needs as they arise . . . . [T]hey sell them methodically and aggressively, using a powerful distribution network unlike the armies of pitchmen who sold cattle and rail-car tax shelters to individuals in the 1970s and 1980s.").
34. See Korb, supra note 10, at 22 (noting the availability of contingency fees for corporate tax shelter products marketed by accounting firms, investment bankers, and some law firms). Accounting firms changed their business practices to offer tax services as a main service instead of being ancillary to independent audits. Rostain, supra note 10, at 89-90. Revenue from tax services grew by twenty percent, representing roughly $800 million to $1 billion in 1998. Id. at 91. In 2002, after the accounting firms divested their consulting services, revenues from tax services made up between twenty-one to thirty-six percent of total revenues, representing $1.1 and $1.6 billion. Id.
35. Although development costs can run as high as $1 million, promoters can recoup these costs by marketing the shelter to multiple customers. See Bankman, supra note 24, at 1781; Rostain, supra note 10, at 88.
36. Bankman, supra note 24, at 1780-81; Rostain, supra note 10, at 88.
37. Pollack, supra note 30, at 21. Many of the accounting firms heavily recruited tax lawyers by increasing starting salaries in the late 1990s. Rostain, supra note 10, at 91.
38. Rostain, supra note 10, at 92-94.
39. Bankman, supra note 24, at 1782. This role is juxtaposed with that of tax lawyers who act as shelter organizers and promoters and generally work in accounting firms, investment banks, or tax shelter boutiques. Id. at 1782-83. Since the profits mainly go to promoters and organizers, there are significant incentives for tax attorneys to forgo working in law firms and become promoters. Id. at 1783.
40. There are many types of opinion letters that cover a range of industries, including "corporate law, banking, real estate transactions, securities, litigation, taxation, bankruptcy, and international law, to name a few." Anand Mohan, Current Development, The No-Litigation Opinion Letter After Dean Foods v. Pappathanasi: Should Law Firms Be Held to Higher Ethical Standards?, 19 GEO. J. LEGAL ETHICS 859, 861 (2006). Generally, these opinion letters are used to mitigate risks in these areas and normally are requested by a third party or the client. Id.
41. 41 See infra text accompanying notes 42-50.
42. Prior to the proliferation of the modern tax shelter industry, some companies were hesitant to take advantage of the lax regulations and promote tax shelters. Novack & Saunders, supra note 33, at 198 (reporting that, "despite the frenzy, not all companies are biting" and that Intel's tax vice president, Robert Perlman, said he avoided the fray to maintain Intel's standard of '"[i]f what we did and why appeared on the front page of the paper, would Andy Grove be embarrassed?'"). This suggests that opinion letters played an important role in inducing reluctant corporations to engage in tax shelter transactions when they otherwise might not have done so.
43. Substantial authority includes the tax code, other statutes and regulations, court cases, tax treaties, statements of congressional intent, and administrative pronouncements such as private letter rulings. 34 AM. JUR. 2D Federal Taxation ¶ 71640 (2007).
44. The standards for complying with accuracy-related penalties include (in ascending order of heightened standards): not frivolous, reasonable basis, realistic possibility of being sustained on the merits, substantial authority, and more likely than not the proper treatment. Paul M. Predmore, New Reasonable Basis Standard for Return Disclosure Likely to Be Troublesome, 80 J. TAX'N 22, 23-24 (1994). Meeting the not frivolous standard merely requires a position to be arguable and not patently improper. Treas. Reg. § 1.6694-2(c)(2) 2007; see also id. § 1.6662-3(b)(3). The reasonable basis standard requires a position to be arguable but not necessarily likely to prevail in court. Id. The realistic possibility standard means a reasonable and well-informed analysis by a knowledgeable person in the tax law that the position has a one in three or greater chance of being sustained on the merits. Id. § 1.6694-2(b)(1). Substantial authority is an objective standard defined as "an analysis of the law and application of the law to the relevant facts." Id. § 1.6662-4(d)(2). Finally, the more-likely-than-not standard requires a position to have a greater than fifty percent chance of being sustained on the merits. Id. § 1.6662-4(g)(4)(i)(A).
45. 26 U.S.C. § 6662(d)(2)(B) (Supp. IV 2006).
46. 26 U.S.C. § 6664.
47. Treas. Reg. § 1.6664-4.
48. See 26 U.S.C. § 6664(d)(3)(B)(ii)-(iii) (defining a disqualified tax advisor and a disqualified opinion).
49. Protection from penalty payments assumes that the client can show that, in deciding to enter into the transaction, she reasonably relied on both the opinion letter and the attorney's analysis of a reasonable basis for the tax treatment. Id. § 6664(d)(3). The provision also prohibits penalty exclusions for transactions that are tax shelters as defined in the statute. Id. § 6662(d)(2)(C); see also infra notes 113-15 and accompanying text.
50. Bankman, supra note 24, at 1782.
51. This service can cost from $500,000 to millions of dollars per opinion letter. Pollack, supra note 30, at 20; Rostain, supra note 10, at 94; Novack & Saunders, supra note 33, at 198. Brown & Wood LLP earned more than $23 million for issuing opinion letters related to the KFMG tax shelters, charging $74,000 per letter. Carl Levin, Sen. Levin Suggests Changes to Proposed Circular 230 Amendments, TAX NOTES TODAY, Mar. 4,2004, at 3, 2004 TNT 43-62 (LEXIS).
52. Not all lawyers agree with the actions of those who provide opinion letters. Bankman, supra note 24, at 1783; Rostain, supra note 10, at 80-81. Some are upset by the ethical issues raised by involvement in the tax shelter industry, while others simply disapprove of implicitly competing with accountants and investment bankers. Bankman, supra note 24, at 1783. Professor Tanina Rostain argues that the tax bar's initiative to heighten deterrence in the tax shelter industry is "to reinforce the professional authority of elite tax lawyers, which had been eroded by the tax shelter market" and "to reassert the primacy of judicially created doctrines and, by extension, lawyers' role in applying them." Rostain, supra note 10, at 81.
53. See infra note 65.
54. Bankman, supra note 24, at 1782.
55. See Sherman & Brinker, supra note 24, at 42 (noting that the primary problem with attacking tax shelters using judicial doctrines is "arguing that the tax shelter lacked economic substance or a business purpose").
56. See infra Part II.C.
57. See Bankman, supra note 24, at 1782 (quoting a practitioner as stating, "You can guess how [the judge that decided a similar case] will rule on the deal, but what about the next judge?").
58. Id. (stating that though variance could be due to different interpretive theories, even attorneys with the same interpretive approach will disagree); see also Pollack, supra note 30, at 20 ("Given the complexity of the tax code, that means a lot of close calls.").
59. Tax shelter opinions require a confidence level of more likely than not while non-tax shelter transactions only require a confidence level of a reasonable possibility of success. 31 C.F.R. §§ 10.33-.34 (1997); see supra note 44 and accompanying text for definitions.
60. See 31 C.F.R. § 10.35(c)(4)(ii), (e)(4) (2007).
61. Considering the difficulty in even defining a tax shelter, two tax attorneys could disagree on (1) whether a specific transaction is a tax shelter, and (2) if it is a tax shelter, whether it is similar enough to a listed transaction that disclosure is required. See infra notes 101, 104.
62. 31 C.F.R. § 10.35(b)(4)(i) (2007); Bankman, supra note 24, at 1782.
63. Bankman, supra note 24, at 1782.
64. See supra note 10 and accompanying text.
65. See Bankman, supra note 24, at 1783 ("[T]he 'more likely than not' standard and the confused nature of the tax law work against any potential liability. 'It really comes down to a malpractice standard,' notes one tax lawyer. 'You opine the likelihood of success is 51-49 but it turns out that maybe it really was 45-55. Is being 6 points off malpractice?'" (internal quotation marks added)).
66. Delaney, supra note 24, at 312; see also Spitz v. Comm'r, 2006 T.C.M. (RIA) ¶ 2006-168, at 1144, 1150-51. Courts are more likely to impose penalty provisions in modern tax shelter marketing. See Ackerman v. Schwartz, 947 F.2d 841, 846-48 (7th Cir. 1991) (noting that an attorney is liable to investors who relied on an opinion letter even when the letter was written for a client and tax shelter promoter rather than for the investors). Still, because promoters employ independent firms, these cases raise concerns about the independent attorney's duty and the investor's reliance on the opinion letter. See id.
67. For example, assume that because the client knew of a false representation in the transaction, she could not have reasonably relied on the opinion letter, and accordingly, the court imposed penalty payments. If the attorney drafted the opinion letter in reliance on the client's representation of the facts, the client would have a difficult time arguing malpractice. This scenario would have had to occur prior to the changes in the regulations requiring heightened standards of due diligence. See infra Part II.C. There are also other factors restricting the likelihood of recovery, such as the statute of limitations. Jacob L. Todres, Investment in a Bad Tax Shelter: Malpractice Recovery from the Tax Advisor Is No Slam-Dunk, 107 TAX NOTES 217 (2005).
68. See, e.g., Charlton v. Comm'r., 1990 T.C.M. (P-H) ¶ 90,402, at 1903, 1938 ("We have examined the tax opinion and find that it is replete with cautions and waivers. Based on language contained in the tax opinion, the Charltons could not have believed that they would have more than a 50-percent chance of prevailing in the event of litigation.").
69. See, e.g., Ackerman, 947 F.2d at 846-48 (holding that an attorney could not avoid responsibility to investors who purchased a fraudulent tax shelter based on the grounds that the attorney owed no duty to the investors); Gregory v. Home Ins. Co., 876 F.2d 602, 603, 606 (7th Cir. 1989) (holding that an attorney could be sued for drafting a tax and security opinion letter when the IRS disagreed with the letter about the predicted tax advantages). Although a number of cases do exist, they are not well known, and lawyers generally do not anticipate being liable for writing opinion letters. See Rostain, supra note 10, at 94 n.79; see also Susan Beck, Gimme Shelters, AM. LAW., Nov. 1999, at 106 ("No one interviewed for this article could point to a law firm sued by a client or penalized by the government.").
70. See infra notes 92, 94, 108 & 110 and accompanying text.
71. See infra notes 74-90.
72. Formal Op. 346, supra note 26.
73. See infra notes 94-95.
74. DODGE, FLEMING & GETER, supra note 1, at 861 (stating that if a transaction lacks a business purpose, the government can argue that it should be taxed "as though it were structured in a less favorable form that better reflects the 'substance ' of the transaction").
75. Daniel J. Glassman, "It's Not a Lie if You Believe It": Tax Shelters and the Economic Substance Doctrine, 58 FLA. L. REV. 665, 681-82 (2006) (stating that the Supreme Court found that the statute did not require that a transaction have economic substance for the statute to apply and that the Court was attempting to analyze congressional intent instead of applying statute as written); see Kristin E. Hickman, Of Lenity, Chevron, & KPMG, 26 VA. TAX REV. 905, 924-33 (2007) (using Stein as an example and arguing that criminalization of tax shelters may result in less deference by courts to Treasury interpretation of the tax code in the civil context because courts tend to apply the rule of lenity rather than the Chevron doctrine to statutes that have both criminal and civil sanctions). See generally Steven A. Dean & Lawrence M. Solan, Tax Shelters and the Code: Navigating Between Text and Intent, 26 VA. TAX REV. 879 (2007).
76. DODGE, FLEMING & GEIER, supra note 1, at 861.
77. Korb, supra note 10, at 32.
78. Id. at 30 (emphasis omitted). Helvering v. Gregory, 69 F.2d 809 (2d Cir. 1934), is the most oftcited case for establishing the foundation of this doctrine. Since then, many modern cases have followed this approach. See, e.g., ACM P'ship v. Comm'r, 157 F.3d 231, 246-48 (3d Cir. 1998) (noting that the transaction satisfies all elements of the relevant statute, but the court must look beyond the form of transaction because if the transaction lacks economic substance, it is not recognized for federal taxation purposes).
79. See supra note 76 and accompanying text. Under the economic substance doctrine, a court generally examines whether the transaction has an economic purpose aside from the tax benefits, and this doctrine requires the court to balance the risks of the transaction against the potential profits. Korb, supra note 10, at 30-31.
80. Rice's Toyota World, Inc. v. Comm'r, 752 F. 2d 89, 91-95 (4th Cir. 1985). Although the Fourth Circuit states that it is using a "sham inquiry," commentators have cited this case as implementing the business purpose test. See Barnette v. Comm'r, 63 T.C.M. (CCH) 3201 (1992); Korb, supra note 10, at 31.
81. See supra note 80 and accompanying text.
82. Korb, supra note 10, at 31 (quoting Frank Lyon Co. v. United States, 435 U.S. 561, 583-84 (1978)) (internal quotation marks omitted).
83. In United States v. Knetsch, the Supreme Court affirmed the trial court, finding that "[w]hile in form the payments to Sam Houston were compensation for the use or forbearance of money, they were not in substance. As a payment of interest, the transaction was a sham," 364 U.S. 361, 365 (1960) (quoting the district court opinion) (internal quotation marks omitted), in "disallowing deductions for prepaid interest on a nonrecourse, riskless loan to purchase deferred annuity savings bonds." Korb, supra note 10, at 28-29.
84. Korb, supra note 10, at 29; see Goodstein v. Comm'r, 267 F.2d 127, 131 (1st Cir. 1959) (holding that a taxpayer is not entitled to a tax deduction for interest on a loan when the interest was never paid); see also Goldstein v. Comm'r, 364 F.2d 734, 737-40 (2d Cir. 1966) (holding that the loans were not clearly shams, but the deduction was not allowed because the transactions lacked economic substance).
85. Korb, supra note 10, at 32-33.
86. Penrod v. Comm'r, 88 T.C. 1415, 1429-30 (1987).
87. Id. This test is normally called the "binding commitment test."
88. Id. This test is called the "end result test."
89. Id. (quoting Redding v. Comm'r, 630 F.2d. 1169, 1177 (7th Cir. 1980)) (internal quotation marks omitted). This is known as the "interdependence test."
90. Cases in which the government won include ACM Partnership v. Commissioner, 157 F.3d 231, 246-48 (3d Cir. 1998) and Long Term Capital Holdings, L.P. v. United States, 330 F. Supp. 2d 122 (D. Conn. 2004). Cases in which it lost include Compaq Computer Corp. & Subsidiaries v. Commissioner, 277 F.3d 778 (5th Cir. 2001); IES Industries, Inc. v. United States, 253 F.3d 350 (8th Cir. 2001); and United Parcel Service v. Commissioner, 254 F.3d 1014 (11th Cir. 2001). See Marvin A. Chirelstein & Lawrence A. Zelenak, Tax Shelters and the Search for a Silver Bullet, 105 COLUM. L. REV. 1939, 1946-47 (2005) (stating that the government almost lost the ACM case, winning by a split decision on the luck of the judicial draw, and that there are "rumblings that the courts may deny the very existence of the [economic substance] doctrine"); Glassman, supra note 75, at 683-702 (analyzing contradictory application of the economic substance doctrine); Korb, supra note 10, at 33-36 (providing a comprehensive list of cases won and lost by the IRS).
91. See cases cited supra note 90.
92. See Formal Op. 346, supra note 26.
93. Id.
94. 31 C.F.R. § 10.33 (1984) (requiring practitioners who write tax opinions to exercise responsibility in establishing the accuracy of facts, applying the law to those facts, and providing an evaluation of the likely outcome); 31 C.F.R. § 10.34 (1994) (updating Circular 230 in 1994 to add new standards for tax returns that conform with the standards set in section 6694 of the Internal Revenue Code of 1986); see also Linda M. Beale, Tax Advice Before the Return: The Case for Raising Standards and Denying Evidentiary Privileges, 25 VA. TAX REV. 583, 626 (2006) (stating that the ABA model rules lack legal force unless adopted by another authority).
95. 31 C.F.R. § 10.33 (1984); id. § 10.34 (1994).
96. Id. § 10.33 (1984).
97. Id. § 10.34 (1994).
98. Id. § 10.33(a)(ii) (1984).
99. Id. § 10.34(1994).
100. The revisions were in response to the American Jobs Creation Act of 2004, Pub. L. No. 108-357, §§ 811-822, 118 Stat. 1418 (codified as amended in scattered sections of 26 U.S.C.). Because the revisions were enacted in 2005, they do not apply to Stein.
101. A covered opinion includes an opinion for a transaction that either (1) is substantially similar to a listed transaction; (2) has a principal purpose of avoiding or evading tax; or (3) has a significant purpose of avoiding or evading tax and satisfies a few additional requirements. 31 C.F.R. § 10.35(b)(2) (2005). Under the last category, to be considered a covered opinion, the opinion must be either a reliance opinion (more-likely-than-not opinion), a marketed opinion (to be used in promoting or marketing a transaction), or subject to conditions of confidentiality or contractual protections. Id.
102. Written advice is any opinion that is not a covered opinion. Id. § 10.35(f)(2).
103. Id. § 10.35(e); id. § 10.52 (stating that a practitioner may be censured, suspended, or disbarred for willfully violating any regulations other than § 10.33 covered in this part, or for recklessly or through gross incompetence violating § 10.34 or § 10.35); see also Michael I. Saltzman, Circular 230: Proposed and Final Regulations (Revised), IRS PRACTICE AND PROCEDURE ¶ 1.12[4][a]-[b] (2007 Cumulative Supp. No. 2).
104. 26 U.S.C. § 6707A(C) (Supp. IV 2006) (defining "listed transaction").
105. See id. (making listed transactions reportable transactions); see also I.R.S. Announcement 2000-12, 2000-12 I.R.B. 835 (announcing creation of the OTSA to "serve as the focal point for efforts to gather information relating to tax shelter activity and coordinate appropriate responses"); Korb, supra note 10, at 36-40; Rostain, supra note 10, at 95-96 (noting that the 1999 Clinton Administration recommended a more systematized approach to regulating tax shelters, including "increasing disclosures," "strengthening the penalty scheme," and "imposing sanctions on . . . promoters"). The IRS requires taxpayers to make disclosures for listed transactions in accordance with Treasury Regulation § 1.6011-4 (2006) and 26 U.S.C. §§ 6011, 6707A (Supp. IV 2006). Korb, supra note 10, at 36-40.
106. Sherman & Brinker, supra note 24, at 43-44; see Douglas v. United States, No. C 03-04518 JW, 2006 WL 2038375, at * 1-2 (N.D. Cal. July 17, 2006).
107. Sherman & Brinker, supra note 24, at 44.
108. The American Jobs Creation Act of 2004, Pub. L. 108-357, §§ 811-822, 118 Stat. 1418 (codified as amended in scattered sections of 26 U.S.C.).
109. Sherman & Brinker, supra note 24, at 45 (quoting Richard A. Shaw, Enhanced Reporting Penalties Are the Newest IRS Weapons, BUS. ENTITIES, Mar.-Apr. 2005, at 6, 17).
110. Sections 6111 and 6112 were originally enacted in the Tax Reform Act of 1984, Pub. L. No. 98-369, 98 Stat. 494. Korb, supra note 10, at 41-42 (stating that the IRS and Treasury Department revised §§ 6111 and 6112 to reflect the statutory revisions that require material advisors to disclose reportable transactions).
111. 26 U.S.C. § 6707A (Supp. IV 2006).
112. Korb, supra note 10, at 62.
113. 26 U.S.C. § 6662A(a) (imposing a twenty percent penalty on a taxpayer if she has a reportable understatement).
114. Id. § 6662A(c) (imposing a thirty percent penalty if a taxpayer fails to disclose the reportable transaction). These penalties are in addition to the penalty imposed under § 6662. Delaney, supra note 24, at 313.
115. 26 U.S.C. § 6662A(c) (imposing a thirty percent penalty if the transaction meets requirements of 26 U.S.C. § 6664(d)(2)(A)).
116. Id. § 6664(d)(3); see also Delaney, supra note 24, at 314. A taxpayer cannot rely on an opinion letter to establish "reasonable belief if the tax advisor is a material advisor or the opinion is a disqualified opinion. Delaney, supra note 24, at 314-15. A material advisor is a promoter or a person who is involved in organizing the transaction. Id. A disqualified opinion is an opinion that is based on unreasonable factual assumptions or taxpayer representations, or fails to identify and consider all the relevant facts. Id.; see also 26 U.S.C. § 6664(d)(3)(B)(iii).
117. 26 U.S.C. § 6700(a)(2)(B).
118. Delaney, supra note 24, at 317. The AJCA also includes a penalty for aiding and abetting in the understatement of tax liability, but the penalty amounts to $1000 per taxable period. 26 U.S.C. § 6701.
119. For an in-depth analysis of how the IRS has increased regulation of tax shelters by focusing on tax professionals, see Armando Gomez, Victor Hollender & Brian Duncan, Detection & Dissection: How the IRS Identifies and Combats Tax Shelters and Regulates Those Who Advise on Aggressive Transactions, in TAX PLANNING FOR DOMESTIC & FOREIGN PARTNERSHIPS, LLCS, JOINT VENTURES & OTHER STRATEGIC ALLIANCES 2007, at 807 (PLI Tax Law and Estate Planning Course, Handbook Series No. 11539, 2007) WL 758 PLI/TAX 807.
120. Novack & Saunders, supra note 33, at 198.
121. Rostain, supra note 10, at 78-79 n.2.
122. U.S. Tax Shelter Industry, supra note 10, at 3. According to the Superseding Indictment, the IRS also began investigating KPMG around the same time, at the end of 2001. Superseding Indictment, supra note 7, at 36-37.
123. U.S. Tax Shelter Industry, supra note 10, at 4.
124. Id.
125. Id. Three of the tax shelters - OPIS, BLIPS and SC2 - were chosen from a list of KPMG's nineteen top revenue-producing tax products. Id. at 20. FLIP, an earlier tax product, a precursor to OPIS and BLIPS that KPMG stopped selling in 1999, was also added for further study. Id. The defendants in Stein were eventually indicted for their involvement in designing and promoting BLIPS, FLIP, OPIS, and Short Option Strategies (SOS, and a replacement of BLIPS). Id. at 46; see also Superseding Indictment, supra note 7, at 10-11; Lynnley Browning, Prosecutors Lay Out the Case Against KPMG Defendants, N.Y. TIMES, Apr. 24,2006, at C2; Press Release, supra note 8, at 3.
126. U.S. Tax Shelter Industry, supra note 10, at 4.
127. Id.
128. Lynnley Browning, Report Gives New Details on KPMG Shelters, N.Y. TIMES, Feb. 11, 2005, at C3. 129 KPMG's resistance to requests for documents that included the names of tax-shelter clients lasted for several years. Lynnley Browning, KPMG Ordered to Disclose Data on Tax-Shelter Buyers, N.Y. TIMES, May 5, 2004, at C8. The nine summonses were first issued between January 28, 2002 and May 3, 2002. Korb, supra note 10, at 59. KPMG was so effective in stonewalling the IRS that the Justice Department filed a civil lawsuit in December 2002 to force it to comply. United States v. KPMG LLP, 316 F. Supp. 2d 30 (D.D.C. 2004); United States v. KPMG LLP, No. 02-0295, 2003 WL 22336072 (D.D.C. Oct. 10, 2003); United States v. KPMG LLP, 237 F. Supp. 2d 35 (D.D.C. 2002). Some have speculated that KPMG's resistance was one of the reasons the government decided to pursue criminal charges against the firm and its employees. Lynnley Browning, How an Accounting Firm Went from Resistance to Resignation, N.Y. TIMES, Aug. 28, 2005, at 1 [hereinafter Browning, Resistance to Resignation]. Ernst & Young was under similar investigation but agreed to settle a civil claim with the IRS for a $15 million penalty in 2003. Id.
129. Michael Rozbruch, Timeline Shows Stronger Scrutiny by IRS of Cheats, SAN FERNANDO VALLEY BUS. J., Mar. 13, 2006, at 27.
130. Browning, Resistance to Resignation, supra note 129, at 1.
131. KPMG Deferred Prosecution Agreement, Aug. 26, 2005, available at http://www.usdoj.gov/usao/nys/pressreleases/August05/kpmgdpagmt.pdf [hereinafter DPA].
132. See Jonathan D. Glater & Lynnley Browning, U.S. Weighs Prosecutions in Tax Shelter Investigation, N.Y. TIMES, Aug. 4, 2005, at C3 (stating that the indictment of Arthur Andersen "destroyed that firm"). Arthur Andersen was indicted and prosecuted for obstruction of justice based on its involvement in covering up the Enron scandal. See Kurt Eichenwald, Prosecution Concludes Case in U.S. Trial of Andersen, N.Y. TIMES, May 28, 2002, at C1.
133. DPA, supra note 132, at 1. The case was referenced as United States v. KPMG, 05 Cr. 903 (LAP) (S.D.N.Y. Aug. 29, 2005), in the Government's Opposition to Defendants' Pretrial Motions. Government's Memorandum in Opposition to Defendants' Pretrial Motions, supra note 17, at 39.
134. DPA, supra note 132, at 2-3.
135. Id. at 4-9.
136. Id. at 9-12. This last requirement has been a significant source of controversy and criticism. The government has used it to coerce KPMG into departing from its longstanding practice of paying its employees' legal fees for actions arising from their activities on behalf of the firm. See supra note 12 and accompanying text. A district court in the Southern District of New York held that the government violated the Fifth and Sixth Amendment rights of the defendants. United States v. Stein, 435 F. Supp. 2d 330, 336 (S.D.N.Y. 2006) ("KPMG refused to pay because the government held the proverbial gun to its head."). Commentators were concerned that the government would use this last requirement to force KPMG and its personnel to agree to the government's statement of facts regardless of their relevant perspective in the Stein trial. Decision of Interest, Government Has Interest in Preventing Firm's Undermining of Agreement Accepting Its Guilt, N.Y. L.J., Apr. 13, 2006, at 21; Ben Vernia, Here's Your Story, And You're Sticking to It: When Contradicting the Deal Can Mean Prosecution, Companies Must Step Carefully, LEGAL TIMES, Aug. 21, 2006, at 38. In the DPA, KPMG was required to admit and accept the government's version of the statement of facts. DPA, supra note 132, at 2; see Statement of Facts, attached as Ex. C to DPA (Aug. 26, 2005), available at http://www.usdoj.gov/usao/nys/ pressreleases/August05/kpmgstatementoffacts.pdf. However, the government has since dismissed the criminal charge against KPMG, stating that KPMG met its obligations under the DPA. Bloomberg News, Judge Drops KPMG Charge in Tax Case, N.Y. TIMES, Jan. 4, 2007, at C3.
137. Brown & Wood LLP merged with Sidley Austin to form Sidley Austin Brown & Wood LLP in 2001. In 2006, the firm changed its name to Sidley Austin LLP. See Sidley Austin LLP, About Sidley, http://www.sidley.com/ about/about.asp (last visited Nov. 12, 2007). The firm has agreed to pay a $39.4 million fine to avoid a criminal indictment for its role in promoting allegedly abusive tax shelters. Jeremiah Coder, Sidley Austin to Pay $39.4 Million Tax Shelter Penalty, TAX NOTES TODAY, May 24, 2007, 2007 TNT 101-3 (LEXIS).
138. The first indictment originally charged eight KPMG partners and one lawyer. Sealed Indictment, United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006) (No. S1 05 Cr. 0888) [hereinafter Original Indictment], available at http://www.usdoj.gov/usao/nys/pressreleases/August05/kpmgindividualsind. pdf; Press Advisory, U.S. Attorney's Office, S. Dist. of N.Y. (Aug. 29, 2005) (announcing a "significant white collar matter"), available at http://www.usdoj.gov/usao/nys/pressreleases/August05/whitecollarannouncement. pdf; see also Glater, supra note 19, at C1. The government then added eight more KPMG partners, one former KPMG senior manager, and a former financial executive to the case in a superseding indictment filed on October 17, 2005. Superseding Indictment, supra note 7, at 2, 4-8; Press Release, supra note 8, at 1-3.
139. Superseding Indictment, supra note 7, at 45-69; Press Release, supra note 8, at 9.
140. Superseding Indictment, supra note 7, at 8-10 (charging the defendants with "devising, marketing, and implementing fraudulent tax shelters, by preparing and causing to be prepared, and filing and causing to be filed with the IRS false and fraudulent U.S. individual income tax returns containing the fraudulent tax shelter losses, and by fraudulently concealing from the IRS those shelters"); Press Release, supra note 8, at 3.
141. Superseding Indictment, supra note 7, at 9.
142. Id.; Press Release, supra note 8, at 3. The specific shelters allegedly used were FLIP, SOS, OPIS, and BLIPS. Superseding Indictment, supra note 7, at 10-12. The government alleges that FLIP was marketed and sold to at least eighty individuals from 1996 to 1999, generating at least $1.9 billion in phony tax losses. Id. at 11. OPIS (the FLIP successor) was marketed and sold to at least 170 individuals from 1998 to 1999, generating at least $2.3 billion in phony tax losses. Id The OPIS successor, BLIPS, was marketed and sold to at least 186 individuals from 1999 to 2000 and generated at least $5.1 billion in phony tax losses. Id. SOS was marketed and sold to at least 165 individuals from 1998 to 2002, resulting in at least $1.9 billion in phony tax losses. Id. at 11-12.
143. United States v. Stein, 429 F. Supp. 2d 633, 638 (S.D.N.Y. 2006) ("The government intends to prove, for example, that the BLIPS transactions - which defendants claim involved nonrecourse premium loans to tax shelter clients to finance seven-year, multi-stage investments in emerging market currencies - actually were 'designed to be terminated before year-end for tax purposes' and to involve 'no real loan premium', no realistic possibility of making a reasonable pre-tax profit, no contingency to the obligation to repay the loan premium, and no purpose for the purported borrowing except to generate a tax loss.").
144. Superseding Indictment, supra note 7, at 9.
145. Id. at 14-17.
146. Id. at 14.
147. Press Release, supra note 8, at 4-5.
148. Superseding Indictment, supra note 7, at 31-33 ("The defendants John Lanning and Jeffrey Stein and their co-conspirators decided not to register FLIP, OPIS, or BLIPS based on a 'business decision' that to register the shelters would hamper KPMG's ability to sell them, and that the IRS penalties applicable to a failure to register would be dwarfed by the lucrative fees KPMG stood to collect from selling unregistered tax shelters.").
149. Stein raises issues regarding prosecutorial discretion, attorney-client privilege, and undue prosecutorial influence via use of a deferred prosecution agreement. See supra note 12 and accompanying text.
150. Although several law professors and other academics have commented on this issue briefly in op-ed pieces and blogs, or simply in passing when discussing other topics relevant to tax shelters, no one has actually analyzed what the defendants did, whether criminalization is appropriate, or what impact the outcome of this case could have on tax planning in the future. See Darryll K. Jones, Criminalizing Tax Shelters and the 'Damn-Well' Reflex, 110 TAX NOTES 285, 285-87 (2006) (responding to Wall Street Journal editorial, KPMG in Wonderland, criticizing criminalization of Stein defendants); Weisberg & Mills, supra note 19, at A16 (Stanford Law School professors questioning indictment of Stein defendants and use of criminal law); Editorial, KPMG in Wonderland, WALL ST. J., Oct. 6, 2005, at A14 (criticizing use of criminal system against Stein defendants); Posting of Peter Henning & Ellen Podgor to White Collar Crime Prof Blog, http://lawprofessors.typepad.com/ whitecollarcrime_blog//2005/10/is_the_kpmg_tax.html (Oct. 13, 2005) (entitled "Is the KPMG Tax Partner Indictment Bad?" and in response to Weisberg and Mills's article in the Wall Street Journal). Although Lee Sheppard addresses whether the defendants committed a crime, she does not address the government's reliance on civil standards for opinion letters or the appropriateness of using criminal sanctions. Lee A. Sheppard, KPMG: Has the Prosecution Overcharged the Crime?, 112 TAX NOTES 405, 411-16 (2006).
151. See supra notes 149 & 151; but see Calvin Johnson, Tales from the KPMG Skunk Works: The Basis-Shift or Defective-Redemption Shelter, 108 TAX NOTES 431 (2005) (arguing that the FLIP/OPIS tax shelters were illegal shelters and that the defendants should be held criminally accountable for knowingly marketing and selling illegal shelters). It is important to note that Calvin Johnson was the expert witness for plaintiffs in a civil class action against KPMG for the tax shelters analyzed. Johnson, supra, at 443 n.34.
152. The indictment itself is confusingly written, causing Judge Kaplan to require the government to file a "bill of particulars" explaining its theory of the case. Lynnley Browning, Judge Questions Clarity of Prosecution's Tax-Shelter Case, N. Y. TIMES, Mar. 31, 2006, at C4 (reporting that Judge Kaplan was confused about the conspiracy charges, asking whether '"the fraud and evasion [were] in the execution or design' of the shelters").
153. Even assuming the government did prove intent, a source of contention among members of the tax bar is whether criminal liability is warranted or even appropriate in this case. See supra note 151 and accompanying text.
154. From the emails uncovered during the Committee's investigation, it seems fairly clear that the defendants' acts were on the border of acceptable behavior under the regulations at the time. See supra note 149. Because the alleged acts took place between 1996 and 2002, the stricter requirements of the AJCA do not apply. Superseding Indictment, supra note 7, at 8-11 (stating that, even though the indictment references tax fraud from 1996 to 2005, which includes the allegations of obstruction, the laws in effect in 1997 are the relevant standard). Emails produced during discovery demonstrate internal debates regarding whether BLIPS met the technical requirements of the law. U.S. Tax Shelter Industry, supra note 10, at 8. These emails also show that the senior KPMO partners considered the opinion letters to be risky and questioned whether they added enough appropriate limiting "bells and whistles" and whether the partnership was being paid enough to offset the risk of liability because at least one partner considered the transaction to be one that "the IRS would view as falling squarely within the tax shelter orbit." Id at 8-9; see also Johnson, supra note 152, at 442 ("KPMG seems to have lost its internal compass as what was fair game[,] . . . . selling shelters that were below professional standards because the fees were large enough."). However, although they violated the standards for submitting opinion letters, as argued later in this Comment, this does not give the government license to squeeze that type of violation into the statutory language of the United States criminal code.
155. The government's theory of tax evasion is vague and unclear. Although it filed a bill of particulars with the court, the bill has not been made available to the public. Defendants also claim the government has changed its theory three times as of March 17, 2006. Memorandum of Law in Reply to Government Opposition to Pretrial Motions at 8-9, United States v. Stein, 429 F. Supp. 2d 633 (S.D.N.Y. 2006) (No. 05 Cr. 0888), 2006 WL 1868188. In its Opposition to Defendants' Pretrial Motions, the government alleges that it is seeking to impose criminal liability because defendants knowingly described the tax shelters in a way that was contrary to how they really operated. Government's Memorandum in Opposition to Defendants' Pretrial Motions, supra note 17, at 4-5. Although Judge Kaplan accepted this theory for purposes of denying Defendants' Motion to Dismiss Substantive Counts of the Indictment, based on the government's argument in its brief as well as the facts alleged in the indictment, the court must still evaluate the substance of the tax shelters to determine whether a sham occurred, essentially deciding whether the tax shelters were illegal or legal as described. Stein, 429 F. Supp. 2d at 637-38 (stating that the government would not need to show whether the tax shelters as described in the opinion letters are legal). For example, the government alleges that the transactions were shams because they involved, for instance, in the case of BLIPS, '"no real loan premium', no realistic possibility of making a reasonable pre-tax profit, no contingency to the obligation to repay the loan premium, and no purpose for the purported borrowing except to generate tax loss." Id. at 638. To resolve these issues, a court must evaluate the economic substance of the transactions under the sham transaction doctrine. Subsequent to this ruling, the IRS indicated the government would be pursuing an alternative theory "challenging the tax shelter on the grounds that it violated a so-called economic substance test, which demanded that tax shelters have an economic purpose other than just reducing tax liability." Judge Rules Against IRS, supra note 17, at C4.
156. 26 U.S.C. § 7201 (2000). Violation of § 7201 requires (1) tax deficiency, (2) willfulness, and (3) an affirmative act constituting tax evasion or attempted tax evasion. Sansone v. United States, 380 U.S. 343, 351 (1965); see generally Keith J. Benes et al., Tax Violations, 35 AM. CRIM. L. REV. 1219, 1230-39 (1998) (discussing the elements and nuances of § 7201 liability).
157. The elements of tax perjury include the following: (1) defendants made or assisted in preparing returns that were false as to material facts; (2) defendants committed these actions under penalty of perjury; (3) defendants did not believe the statements to be true as to every material matter; and (4) defendants did so willfully with intent to violate the law. 26 U.S.C. § 7206(1)-(2); see also Benes et al., supra note 157, at 1248-55. In this case, the government will need to first show that the transactions were shams in order to allege that the defendants filed or caused to be filed fraudulent tax returns.
158. 18 U.S.C. § 371 (2000); Superseding Indictment, supra note 7, at 45-69; Press Release, supra note 8, at 9. There are two types of conspiracies referenced under this statute: (1) offense clause-an agreement to accomplish the goals of the conspiracy, and (2) defraud clause-conspiracy to defraud the United States. 18 U.S.C. § 371. Presumably, the government is alleging conspiracy under the second prong. Superseding Indictment, supra note 7, at 8 (stating that the defendants schemed to defraud the IRS by devising, marketing, and implementing fraudulent tax shelters).
159. To prove conspiracy under the defraud clause, the government must establish three elements: (1) an agreement between two or more people to accomplish an illegal objective against the United States; (2) the defendant knowingly and intentionally became part of the conspiracy; and (3) one member knowingly committed an overt act in furtherance of the collective goal. Ingram v. United States, 360 U.S. 672,677-680 (1959); IAN M. COMISKY, LAWRENCE S. FELD & STEVEN M. HARRIS, TAX FRAUD & EVASION ¶ 3.05[1] (6th ed. 2006); see also Benes et al., supra note 157, 1257-58. Although the alleged agreement at the base of the conspiracy charge involves two separate acts of tax evasion and tax perjury, the act of tax perjury is predicated on the existence of tax evasion. See supra notes 157-58 and accompanying text. Thus, the conspiracy charge is dependant on the existence of at least one defendant committing an act that is in furtherance of the scheme to evade taxes. See supra note 159 and accompanying text. However, the conspiracy charge can also be based on the allegations of obstruction of the IRS investigation.
160. 498 U.S. 192, 199-200 (1991). This discussion assumes the government's tax evasion case is based on the argument that the transactions lacked economic substance. As stated earlier, although the government's theory of tax evasion has changed several times, the way in which the facts are alleged and the information available to the public thus far suggests that lack of economic substance is its current theory. See supra note 156 and accompanying text. However, if the government is alleging that the transactions never occurred in fact and are instead shams, the intent requirement has been met since the factual inaccuracies should be apparent to the defendants.
161. Cheek, 498 U.S. at 199-200. Although there has been debate over whether the subjective willfulness standard is warranted, this line of jurisprudence has been followed fairly uniformly. See Joshua Stein, Criminal Liability for Willful Evasion of an Uncertain Tax, 81 COLUM. L. REV. 1348, 1362-64 (1981);
162. Katherine Tromble, Humpty Dumpty on Mens Rea Standards: A Proposed Methodology for Interpretation, 52 VAND. L. REV. 521, 538-39 (1999);
163. Mark D. Yochum, Cheek is Chic: Ignorance of the Law is an Excuse for Tax Crimes - A Fashion That Does Not Wear Well, 31 DUQ. L. REV. 249, 252-54 (1993);
164. Note, Mens Rea in Federal Criminal Law, 111 HARV. L. REV. 2402, 2405-07, 2416-19 (1998).
165. See supra Part II.B-C; see also Cheek, 498 U.S. at 199-203 (stating that Congress did not intend an individual to be held criminally liable for a bona fide misunderstanding of his tax liabilities because the tax laws make it difficult for an average citizen to decipher their legality (citing United States v. Murdock, 290 U.S. 389 (1933))); United States v. Harris, 942 F.2d 1125, 1135 (7th Cir. 1991) ("[C]riminal prosecutions are no place for the government to try out 'pioneering interpretations of tax law'" (quoting United States v. Garber, 607 F.2d 92, 100 (5th Cir. 1979))); United States v. Mallas, 762 F.2d 361, 363-65 (4th Cir. 1985) (holding that when a point of law is vague or uncertain, no criminal liability can attach); United States v. Dahlstrom, 713 F.2d 1423, 1429 (9th Cir. 1983) (holding that no criminal liability attaches when no statute, regulation, or court decision gives fair warning that the tax shelter would result in criminal prosecution).
166. Cheek, 498 U.S. at 199-200. Ignorance has long been considered excusable when the law is unclear, vague, or ambiguous. United States v. Batchelder, 442 U.S. 114,123 (1979); Grayned v. City of Rockford, 408 U.S. 104, 108 (1972); McBoyle v. United States, 283 U.S. 25, 27 (1931); Connally v. Gen. Constr. Co., 269 U.S. 385, 391 (1926); Harris, 942 F.2d at 1132.
167. Murdock, 290 U.S. at 396.
168. Bouie v. City of Columbia, 378 U.S. 347, 350-52 (1964); see also Colleen Yamaguchi, Uncertainty in the Law: An Uncertain Defense in Criminal Tax Prosecutions, 39 TAX LAW. 387, 392 n.35 (1986) (noting that the uncertainty-in-the-law defense is based on due process underpinnings that are premised on the "judicial concern that a criminal conviction should only result from violation of a known legal duty").
169. Boule, 378 U.S. at 351 (quoting Lanzette v. New Jersey, 306 U.S. 451, 453 (1939)) (internal quotation marks omitted).
170. United States v. Harris, 347 U.S. 612, 617 (1954).
171. Bouie, 378 U.S. at 352 (stating that violation of due process is greater when the statute's uncertainty is not revealed until the court's decision and "a person is not even afforded an opportunity to engage in such speculation before committing the act in question").
172. It is a well-established principle that no person has an obligation to pay the maximum amount of taxes. Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934). It is difficult to square this mentality with finding criminal liability in situations where the defendant has met the strict literal requirements of the law. Historically, statutory regulations have required an element of intent because they are seen as less reprehensible than common law crimes: they are offenses that are "not as universally condemned" and do not represent "generally acknowledged wrongs." Lydia Pallas Loren, Digitization, Commodification, Criminalization: The Evolution of Criminal Copyright Infringement and the Importance of the Willfulness Requirement, 77 WASH. U. L.Q. 835, 880-82 (1999).
173. RJT Investments X, LLC v. Comm'r, No. 011769-05, 2006 WL 2504035 (T.C. Apr. 18, 2006) (holding the Son of Boss tax shelter, of which BLIPS is a variant, illegal for lack of economic purpose in 2006 - almost eight months after the defendants were indicted); see Lynnley Browning, Court Rejects Tax Sheller Once Sold by KPMG, N.Y. TIMES, Feb. 2, 2007, at C4; Lynnley Browning, U.S. Judge Backs I.R.S. Ruling Invalidating Tax Shelter, Possibly Aiding U.S. Criminal Case, N.Y. TIMES, Apr. 22, 2006, at C3.
174. The time period the government focuses on is prior to both a court ruling that the tax shelters were illegal and IRS notice that the tax shelters should be registered. Although there is evidence that the defendants believed the transactions in question would be considered tax shelters by the IRS, U.S. Tax Shelter Industry, supra note 10, at 8, that does not negate the uncertainty about how the tax shelters would be treated by the IRS.
175. See supra Part II.B-C.
176. See United States v. Mallas, 762 F.2d 361, 363-64 (1985) (holding that when a point of law is vague or uncertain, no criminal liability can attach). Defendants may have had doubts and they may have violated the professional standards set by the ABA and the IRS, but that does not mean they knew with certainty that their actions constituted tax evasion.
177. I.R.S. Notice 2000-44, 2000-2 C.B. 2S5 (identifying tax avoidance using an artificially high basis as a listed transaction); I.R.S. Notice 2001-45, 2001-2 C.B. 129 (identifying basis-shifting tax shelters as listed transactions); U.S. Tax Shelter Industry, supra note 10, at 25. BLIPS and SOS are tax shelters that utilize an artificially high basis and were specifically listed in I.R.S. Notice 2000-44 as potentially abusive tax shelters. Government's Memorandum in Opposition to Defendants' Pretrial Motions, supra note 17, at 13; U.S. Tax Shelter Industry, supra note 10, at 25, 45-46, 81. FLIP and OPIS are basis-shifting tax shelters that were identified as illegal transactions in 2001 by the IRS. Johnson, supra note 152, at 433. The government alleges the defendants sold FLIP from 1996 to 1999, OPIS from 1998 to 1999, BLIPS from 1999 to 2000, and SOS from 1998 to 2002. See supra note 143 and accompanying text.
178. I.R.S. Notice 2000-44, 2000-2 C.B. 255; Government's Memorandum in Opposition to Defendants' Pretrial Motions, supra note 17, at 13.
179. I.R.S. Notice 2001-45, 2001-2 C.B. 129; Government's Memorandum in Opposition to Defendants' Pretrial Motions, supra note 17, at 13.
180. U.S. Tax Shelter Industry, supra note 10, at 25, 45-46. KPMG stopped selling FLIP in 1999, several years prior to the issuance of the IRS notice. Id. at 20.
181. A 2004 document revealed internal debate among employees of the IRS over whether KPMG was required to register BLIPS. Lynnley Browning, Document Could Alter KPMG Case, N.Y. TIMES, Sept. 15, 2006, at C1.
182. Government's Memorandum in Opposition to Defendants' Pretrial Motions, supra note 17, at 13-14.
183. Kalamath Strategic Inv. Fund, LLC ex rel. St. Croix Ventures, LLC v. United States, 440 F. Supp. 2d 608, 622-23 (E.D. Tex. 2006) (holding that temporary Treasury regulation expanding liability of partners in partnership did not apply to conduct before August 2000); Judge Rules Against IRS, supra note 17, at C4. The regulation did not become effective until 2005. Treas. Reg. § 1.752-6 (2005).
184. Kalamath, 440 F. Supp. 2d at 624 (stating it was "significant" that plaintiffs could have restructured their transactions if they had "notice of the Service's intentions" in finding that the regulation was not retroactive).
185. These opinion letters are allegedly false for misrepresenting the factual underpinnings of the tax shelters and erroneously concluding that the transactions would more likely than not survive an IRS challenge. Superseding Indictment, supra note 7, at 15-17 (describing false statements in the opinion letters for the FLIP and OPIS tax shelters). The falseness depends on the presumption that the tax shelters lack economic substance.
186. Id. at 8-29. Because opinion letters are not signed under penalty of perjury, this is the only theory in which the government can allege the opinion letters are an overt act in furtherance of tax evasion. Weisberg & Mills, supra note 19, at A16.
187. Cheek v. United States, 498 U.S. 192, 199-200 (1991).
188. Under the government's theory, issuing the opinion letters is an affirmative act of tax evasion because the letters encouraged taxpayers to partake in these shelters. Superseding Indictment, supra note 7, at 63; see also Government's Memorandum in Opposition to Defendants' Pretrial Motions, supra note 17, at 28. However, this theory rests on the assumptions that the taxpayers owed taxes to begin with and that the defendants knew this prior to issuing the opinion letters. Whether an opinion letter consists of true or false statements does not in itself determine whether the underlying transaction results in tax liability. Saying otherwise allows the tail to wag the dog.
189. An opinion letter is only worth something to the taxpayer when the law is uncertain. Once the law is definitive, if the law is in the taxpayer's favor, the opinion letter is not needed. If the law is not in the taxpayer's favor, reliance on an opinion letter may not save a taxpayer from penalties given the requirements of disclosure and factual investigation under Circular 230. 31 C.F.R. § 10.35 (2006); see supra Part II.B-C.
190. Until Cono Namorato became the director of the IRS's Office of Professional Responsibility in December 2003, the office had never brought cases against attorneys or accountants for violations of Circular 230 through involvement with abusive tax shelters. Andrew Parker, Firms in Line of Fire Over Advice: Tax Avoidance: The U.S. Internal Revenue Service Is Cracking Down on Accountants and Lawyers Who Promote Unacceptable Tax Schemes, FIN. TIMES, June 9, 2005, at 12. Now the office has thirty ongoing investigations, but no attorney has yet been charged with civil penalties. Id.
191. Lawyers treated the practice of issuing opinion letters as virtually free of liability prior to 2002. See supra notes 65-69 and accompanying text.
192. Cheek, 498 U.S. at 199-200.
193. Id.
194. Tax penalties and interest are not considered a "tax deficiency." United States v. Wright, 211 F.3d 233, 236 (5th Cir. 2000).
195. Weisberg & Mills, supra note 19, at A16. This distinction is important when the government is alleging that defendants are liable for their clients' tax deficiencies instead of personal ones. To show that defendants are liable for another's tax deficiency, it stands to reason the government must show that the defendants, rather than another source, actually created that deficiency. Note that this reasoning only applies to the tax evasion charges for marketing and structuring the tax shelters. Superseding Indictment, supra 7, at 62-66. It does not apply to, for instance, the charges against Raymond Ruble for personal tax evasion. Id. at 66-68.
196. The government alleges that defendants falsely and fraudulently claimed the transactions would meet the more-likely-than-not standard if they were to be challenged by the IRS. Superseding Indictment, supra note 7, at 17.
197. See supra Part II.B-C. The nebulous standards of Circular 230 have
198. Yamaguchi, supra note 166, at 392 n.35 (uncertainty in the law defense based on due process concerns).
199. Crenshaw, supra note 195, at F1 (reporting that the IRS "keepfs] saying 'Trust us, we're not going to look at you for minor infractions,'" and '"the scary thing is, your whole livelihood is at stake if you make a bad call'"). The Treasury and Congress's speed in continuously heightening regulations and increasing penalties on tax practitioners beginning in the 1980s created anxiety for tax practitioners because of the uncertainty of what standards apply to tax practitioners in executing tax opinions. See Dennis J. Ventry, Jr., Filling the Ethical Void: Treasury's 1986 Circular 230 Proposal, 112 TAX NOTES 691, 697 (2006) (reviewing changes in regulations governing tax shelter opinions in the 1980s and stating that the "Treasury's guidance on [the 2005] Circular 230 revisions that said practitioners should 'just use common sense'" and '"just use reasonable care' were not reassuring," and that "[m]ixed signals . . . contributed to practitioner anxiety").
200. 31 C.F.R. § 10.33 (1997). The government alleges in its indictment that the laws of 1997 are the applicable standards. Superseding Indictment, supra note 7, at 10.
201. Compare 31 C.F.R. § 10.33 (1997), with 31 C.F.R. § 10.35 (2007). For example, under the 1997 guidelines, when drafting tax shelter opinions, a tax practitioner has no duty to independently investigate a client's factual representation unless she reasonably believes that it is false. 31 C.F.R. § 10.33 (1997).
202. Sherman Act, 15 U.S.C. § 1 (2000); United States v. Gypsum Co., 438 U.S. 422, 438 (1978) (stating that the Sherman Act is not interpreted just as a criminal statute: both civil and criminal sanctions are authorized for the same generalized conduct).
203. Gypsum, 438 U.S. at 439.
204. Id. (stating that criminal sanctions should be used only in situations where "the law is clear and the facts reveal a flagrant offense and plain intent to unreasonably restrain trade" (quoting REPORT OF THE ATTORNEY GENERAL'S NATIONAL COMMITTEE TO STUDY THE ANTITRUST LAWS 349 (1955))).
205. Per se cases include: United States v. Topco Associates Inc., 405 U.S. 596 (1972), where territorial allocation of a cooperative buying association was a horizontal restraint and a per se violation of the Sherman Act; United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940), where major oil companies fixing the price of gasoline was a per se violation; and United States v. Trenton Potteries Co., 273 U.S. 392 (1927), where price-fixing of sanitary pottery was a per se violation when agreements were made among horizontal competitors. Boycott cases include: Federal Trade Commission v. Superior Court Trial Lawyers Association, 493 U.S. 411 (1990), where private defense lawyers boycotting taking indigent defendants from district court was a per se violation because the aim of the boycott was to increase hourly compensation - a form of price-fixing-and lawyers are horizontal competitors; and Fashion Originators' Guild of America v. Federal Trade Commission, 312 U.S. 457 (1941), where it was per se illegal for defendants to collectively refuse to sell their products because defendants were horizontal competitors.
206. Sherman Act, 15 U.S.C. § 1; Gypsum, 438 U.S. at 438 (holding Sherman Act is not interpreted as just a criminal statute but that both civil and criminal sanctions are authorized for the same generalized conduct).
207. Considering that the IRS derived opinion standards from the ABA's ethical guidelines without providing much guidance, it is reasonable to assume that in drafting the guidelines, the IRS did not anticipate that the government would use them to impose criminal liability. See supra notes 94 & 197 and accompanying text.
208. The greatest punishment an attorney can receive for violating the guidelines of Circular 230 is disbarment from practicing before the IRS. 31 C.F.R. § 10, 50 (2007). While disbarment is a serious penalty, there is a distinct difference between disbarment and imprisonment. See, e.g., 26 U.S.C. § 7201 (2000) (imprisonment not to exceed five years); 26 U.S.C. § 7206 (imprisonment not to exceed three years); 18 U.S.C. § 371 (2000) (imprisonment not to exceed five years).
209. See supra notes 139-49 and 159-60.
210. Government's Memorandum in Opposition to Defendants' Pretrial Motions, supra note 17, at 31-38.
211. United States v. Klein, 247 F.2d 908 (2d Cir. 1957). Klein established the standards for what is commonly referred to as a "Klein conspiracy." See, e.g., United States v. Fletcher, 322 F.3d 508, 513 (8th Cir. 2003).
212. Ingram v. United States, 360 U.S. 672, 678 (1959) (quoting Developments in the Law - Criminal Conspiracy, 72 HARV. L. REV. 920, 939 (1959)) (internal quotation marks omitted).
213. This references the Cheek level of intent required for tax evasion charges. Cheek v. United States, 498 U.S. 192 (1991).
214. David Gomez & Keith Schomig, Tax Violations, 44 AM. CRIM. L. REV. 1025, 1064-66 (2007); Ingram, 360 U.S. at 677-78.
215. Klein, 247 F.2d at 916 (conspiracy to defraud includes preventing the IRS from collecting money through "deceit, craft or trickery, or at least by means that are dishonest" (citation omitted)); see also Gomez & Schomig, supra note 212, at 1064-66 (noting that there is no need to prove a defendant committed an overt act if the government already proved that a coconspirator did so).
216. This position assumes the opinion letters were not written based on a factual sham.
217. Government's Memorandum in Opposition to Defendants' Pretrial Motions, supra note 17, at 5.
218. Even the IRS internally debated the registration requirements. See Browning, supra note 179, at C1.
219. Cheek v. United States, 498 U.S. 192, 199-200 (1991). This is especially true when the government has evidence that shows that at least some of the defendants believed they were required to register the tax shelters but chose not to do so for business reasons. See U.S. Tax Shelter Industry, supra note 10, at 12. Since the Cheek intent requirements do not apply, defendants would be unable to argue uncertainty in the law or subjective belief regarding the state of the law as defenses because they were unaware at the time that the IRS had doubts about whether registration was required. See Browning, supra note 179, at C1. All the government would need to show is that the defendants intended to hide the transaction from the IRS. 18 U.S.C. § 371 (2000); see also Klein, 247 F.2d at 916.
220. See Klein, 247 F.2d 908; see also COMISKY, FELD & HARRIS, supra note 160, ¶ 3.05[6][c] (noting that a Klein conspiracy only requires proof that the defendants were aware of liability for federal taxes and agreed to interfere with government's ability to collect those taxes, for example, by falsifying IRS documents). Furthermore, the government alleges that defendants committed fraudulent acts to obstruct the IRS investigation. Government's Memorandum in Opposition to Defendants' Pretrial Motions, supra note 17, at 7. The question becomes whether or not the conspiracy can encompass all of the defendants and whether the government would be able to show a collective agreement to interfere with the IRS's ability to collect taxes.
221. David Rivkin, a former KPMG partner, pled guilty in March 2006 to charges of conspiracy and tax evasion. Browning & Moynihan, supra note 7, at 13. David Makov also pled guilty in September 2007 to one count of conspiracy to commit tax fraud. Davies, supra note 7, at A16.
222. Government's Memorandum in Opposition to Defendants' Pretrial Motions, supra note 17, at 41.
223. See supra note 155.
224. See supra notes 159-60 and accompanying text.
225. Considering that registration requirements are difficult to determine and assuming that the tax evasion charges are dismissed, the Stein case raises the question whether a conviction for conspiracy to defraud is appropriate when no actual act of tax evasion occurred. Academics have commented extensively on the increase in corporate fraud cases that result in convictions for charges other than the substantive underlying crime, including perjury, obstruction of justice, conspiracy, and false statements. See, e.g., Stuart P. Green, Uncovering the Cover-Up Crimes, 42 AM. CRIM. L. REV. 9 (2005); Geraldine Szott Moohr, What the Martha Stewart Case Tells Us About White Collar Criminal Law, 43 HOUS. L. REV. 591 (2006); Chris William Sanchirico, Detection Avoidance, 81 N.Y.U. L. REV. 1331 (2006). This case also illustrates the potential use of deferred prosecution agreements to convict the individual employees of a corporation of criminal conspiracy. Because KPMG has already admitted to one count of conspiracy to defraud the 1RS, the government merely needs to prove that each defendant was part of the agreement to satisfy the elements of the conspiracy charge. DPA, supra note 132, at 1-2. Using the Stein case as an example, academics and practitioners have started writing on the impact of deferred prosecution agreements in imposing criminal liability. See Earl J. Silbert & Demme Doufekias Joannou, Under Pressure to Catch the Crooks: The Impact of Corporate Privilege Waivers on the Adversarial System, 43 AM. CRIM. L. REV. 1225 (2006); Christopher A. Wray & Robert K. Hur, Corporate Criminal Prosecution in a Post-Enron World: The Thompson Memo in Theory and Practice, 43 AM. CRIM. L. REV. 1095 (2006); see also William R. McLucas, Howard M. Shapiro & Julie J. Song, The Decline of the Attorney-Client Privilege in the Corporate Setting, 96 J. CRIM. L. & CRIMINOLOGY 621 (2006).
226. See supra Part III.A.2. The relevant facts are determined at the practitioner's discretion. 31 C.F.R. § 10.35(c) (2007).
227. Compare 31 C.F.R. § 10.35(c) (2007), with 31 C.F.R. § 10.33(a) (1997).
228. COMISKY, FELD & HARRIS, supra note 160, ¶ 3.05[3] (noting that a "willful blindness" instruction is appropriate for conspiracy to commit tax evasion when evidence shows defendants were "deliberately ignorant of the illegal goals, objects or purposes of the conspiracy"). The willful blindness instruction has been applied in tax evasion cases. United States v. Martin, 773 F.2d 579, 584 (4th Cir. 1985) (upholding willful blindness jury instruction stating that knowledge could be inferred from willful blindness satisfying the intent requirements for tax evasion).
229. See supra note 223 and accompanying text.
230. Crenshaw, supra note 195, at F1.
231. 31 C.F.R. §§ 10.33-.35 (2007); Crenshaw, supra note 195, at F1.
232. See supra notes 94-118 and accompanying text.
233. Of course, it is possible that Stein presents a unique case because the government had access to a plethora of KPMG's internal documents. See Johnson, supra note 152, at 433 (noting that the KPMG shelters provide a relatively rare window of documentation and internal discussions about a specific tax shelter); U.S. Tax Shelter Industry, supra note 10, at 3 (stating that, during the investigation, staff reviewed 235 boxes and thousands of pages of electronic discovery that included correspondence, tax product descriptions, transactional documents, and marketing materials). The likelihood that the government will have evidence of the same type in other cases is remote unless the company is under investigation.
234. Howard Gleckman, Amy Borrus & Mike McNamee, Inside the KPMG Mess: Why Eight Partners May be Facing Jail Time - and What the Justice Dept.'s Suit Could Mean for the Tax-Shelter Business, BUS. WEEK ONLINE, Sept. 12, 2005, http://www.businessweek.com/bwdaily/dnflash/ sep2005/nf2005091_2144_db016.htm (reporting that the Big Four accounting firms and large law firms, worried about civil suits by clients, have limited their involvement in tax shelter marketing).
235. Commentary on the Stein case has focused on prosecutorial discretion and the influence of deferred prosecution agreements. See supra notes 12 & 223 and accompanying text.
236. The government here is using conspiracy as a catch-all to impose criminal liability on individuals who would otherwise escape it, using the statute like Professor Albert Alschuler has argued the government has used federal mail fraud and RICO statutes. Albert W. Alschuler, The Mail Fraud & RICO Racket: Thoughts on the Trial of George Ryan, 9 GREEN BAG 2d 113, 115 (2006) (arguing that prosecutors use the RICO and mail fraud statutes to prosecute state crimes, turning federalism on its head).
237. See supra note 3 and accompanying text.
238. See sources cited supra note 3.
239. See supra Part II.C.
240. See supra Part III.A. Although the government can potentially impose criminal liability for socalled cover-up crimes, imposing criminal sanctions on the substantive crime would be a much better method of regulation.
241. See supra Part III.A.
242. A number of scholars have criticized the Cheek standard of intent. See, e.g., Yamaguchi, supra note 166, at 402-03 (stating that the uncertainty defense would remove the threat of criminal liability for creative tax evaders); Yochum, supra note 162, at 252 (wishing that the Cheek Court had recognized that the tax statute is no longer arcane and its fundamental obligations are well known).
243. See, e.g., United States v. Murdock, 290 U.S. 389 (1933); see also supra Parts II.B-C, III.A.
244. See supra Part II.B-C.
245. See supra Part III.
246. See Chirelstein & Zelenak, supra note 90, at 1951-62 (proposing a provision that would "disallow noneconomic losses and noneconomic deferrals through the use of foreign (and other tax-indifferent) counterparties"); Rostain, supra note 10, at 109-11 (providing an overview of the tax bar's resistance to codifying the economic substance doctrine).
247. See, e.g., Chirelstein & Zelenak, supra note 90, at 1951-62 (proposing a variation of a codification of the economic substance doctrine); Rostain, supra note 10, at 109-11 (discussing the tax bar's rejection of codifying the economic substance doctrine).
248. See Chirelstein & Zelenak, supra note 90, at 1951-62 (proposing a solution that would reach the § 469 level of effectiveness in eradicating modern day tax shelters, but noting that some illegal shelters would remain); Rostain, supra note 10, at 109-11 (explaining that a codification would require factintensive analysis to distinguish economic losses versus tax-driven losses).
249. 26 U.S.C. § 7206 (2000).
250. Id.; see supra note 158 and accompanying text.
251. See Henry M. Hart, Jr., The Aims of the Criminal Law, 23 LAW & CONTEMP. PROBS. 401, 422-25 (1958) (discussing the purpose of criminal liability and its intersection with strict liability criminal statutes).
252. William H. Widen, Enron at the Margin, 58 BUS. LAW. 961, 999-1001 (2003).
253. J. Kelly Strader, The Judicial Politics of White Collar Crime, 50 HASTINGS L.J. 1199, 1263 (1999) (arguing that the Hart-Devlin debate is the classic dividing line between liberalism and legal moralism).
254. Id.
255. Id.
256. John C. Coffee, Jr., Does "Unlawful" Mean "Criminal?" Reflections on the Disappearing Tort/Crime Distinction in American Law, 71 B.U. L. REV. 193, 193-94 (1991).
257. John C. Coffee, Jr., Paradigms Lost: The Blurring of the Criminal and Civil Law Models - And What Can be Done About It, 101 YALE L.J. 1875, 1882-84 (1992).
258. Id. at 1884.
259. Id. at 1885-86.
260. See Strader, supra note 251, at 1266 (arguing that it is often difficult to identify the harm or victim(s) of many white collar crimes).
261. See Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934).
262. 26 C.F.R § 1.6664-4 (2007).
263. Following a series of inflammatory hearings regarding IRS abuse, Congress passed the IRS Restructuring and Reform Act of 1998. Pub. L. No. 105-206 § 1, 112 Stat. 685 (1998) (codified in scattered sections of the U.S.C.). Both scholars and journalists have commented on this abuse by the IRS. See Eric A. Lustig, IRS, Inc. - The IRS Oversight Board - Effective Reform of Just Politics? Some Early Thoughts From a Corporate Law Perspective, 42 DUQ. L. REV. 725, 731-32 (2004); Cranford, supra note 3, at 327 (noting that congressional hearings in the late 1990s showed IRS agents were overly abusive, aggressive, and worse).
264. See supra note 261 and accompanying text.
265. See, e.g., Chirelstein & Zelenak, supra note 90, at 1951-62; Delaney, supra note 24, at 338-41; Glassman, supra note 75, at 707-10; Rostain, supra note 10, at 100-13; Developments in the Law-Corporations and Society, 117 HARV. L. REV. 2169, 2270 (2004).
266. A gross negligence standard may suffice, but considering the ambiguity in the current standards, it seems that a degree of intent should be included. Some may argue that this revision would result in overdeterrence and that professionals would refuse to provide opinion letters. However, given the proliferation of tax shelters and the difficulty in imposing sanctions, stricter regulations are necessary. Though shifting the penalties from the taxpayer to the tax professional may seem harsh, it is less harsh than criminal sanctions and there are just as many safeguards, such as the Cheek intent standard, that will protect good faith mistakes. Furthermore, it is not necessarily true that the tax bar would oppose such a solution, given Professor Tanina Rostain's argument that the tax bar has generally been in favor of stricter regulations to maintain its position as gatekeeper for the tax system. See generally Rostain, supra note 10.
267. In this situation, the taxpayer is "made whole" because the understatement was what the tax-payer owed to begin with. Allowing her to avoid penalty payments is already benefiting her by giving her an interest-free loan in the form of deferred tax payments. Furthermore, the fee she paid to the attorney for the opinion letter is properly placed on the taxpayer so that she internalizes any costs that are associated with misplaced reliance on an attorney simply because she knows she will not be subject to penalties.