From the desk of David M. Garvin, Esq.
Volume 115.	Page 1 of 6	April  2011

Tax Return Preparers Under Siege

Tax preparers are now caught in the middle of a high stakes game of political hot potato.     About ten years back politicians seeking to be elected argued that everyone should be given an opportunity to own a home, the "American Dream." No one could argue against this statement. To encourage banks to make the loans the FDIC regulations were relaxed.  Loans were now available with "zero down" and "no income verification."    Billions of dollars of loans were made. The banks packaged and sold most of these loans through Wall Street. When the loans went into default in record numbers the real estate market collapsed.     The government stepped in with the "First Time Home Buyer Credit."  Buy a home, get $9,000. This was intended to spur real estate sales. Once again, to make the credit available for everyone,  the government suggested that the property only needed to be under contract to qualify for the credit. In this way the credit could be used as part of the down payment.     Thousands of returns were prepared by return preparers relying upon taxpayers' representations that they would soon close on their new home.     Unfortunately, many of these first time home buyers spent the $9,000 on other necessities when they received the funds and they never closed on the new homes.        The IRS is now attempting to hold the return preparers responsible for the problems that have arisen.

David M. Garvin, Esq.

The IRS is proposing prepare penalties ranging from $1,000 up to$10,000 for each return prepared claiming the First Time Home Buyer Credit, if the taxpayer failed to close. In certain cases the IRS has threatened to seek the "business death penalty" in the form of a permanent injunction preventing the preparer from preparing any further returns.  The IRS has also suggested that criminal prosecution remains an enforcement option.    Tax return preparers are not guarantors of their clients' expenses and deductions. However, the IRS appears intent to make return preparers the fall guys for this political faux pas. To fight a preparer penalty the return preparer is generally required to pay 15% of the penalty and sue in District Court for a refund after a properly filed claim for refund has been denied.

U.S.  v. RICHARDS 2011 U.S. Dist. LEXIS 37367 (E.D.Cal. 2011)

Defendant James Richards was charged with a single count of attempting to evade and defeat federal income tax in  violation of 26 U.S.C. § 7201. On February 2, 2011, Defendant filed a Motion to Dismiss the Indictment on

grounds that the indictment was duplicitous, and that some or all of the tax returns in question should be barred from prosecution based upon the statue of limitations. The United States  filed a timely opposition, and a hearing on the matter was held before the Court on March 3, 2011.  The Motion to Dismiss the Indictment was granted     On March 11, 2010, the Grand Jury returned an indictment against Defendant, charging him with one count of evading and defeating federal income tax. Specifically, the indictment alleged that Defendant owed the IRS $177,875 in back taxes from successive tax years 1994 through 2003. The Government contended that the Defendant concealed, and attempted to conceal, the "nature of his income, assets, and the locations thereof," in violation of § 7201. Among other acts, the Government stated that from 2001 through 2008, Defendant failed to disclose ownership of property, concealed the purchase of a yacht by placing it in a nominee's name, and falsely represented the amount and whereabouts of various cash and cashier's checks Defendant had access to.     Defendant argued that the indictment should be dismissed because the statute of limitations barred prosecution for the tax years in question, and that the indictment was duplicitous. The Government argued that the indictment was valid on its face, was timely filed, and was not duplicitous.     A conviction for felony tax evasion requires the government prove the following: "(1) the existence of a tax deficiency, (2) willfulness, and (3) an affirmative act of                       (Continue)

From the desk of David M. Garvin, Esq.
Volume 115	Page 2 of 6	April  2011

U.S.  v. RICHARDS (Continued)

evasion or affirmative attempt to evade." United States v. Carlson, 235 F.3d 466, 468 (9th Cir. 2000).     Section 7201 is widely interpreted to include two crimes: the offense of "willfully attempting to evade or defeat the assessment of a tax as well as the offense of willfully attempting to evade or defeat the payment of a tax." United States v. Mal, 942 F.2d 682, 687 (9th Cir. 1991) (quoting Sansone v. United States, 380 U.S. 343, 354, 85 S. Ct. 1004, 13 L. Ed. 2d 882 (1965)). Evasion of assessment generally affects the filing of a return, either through concealing income or falsifying the return in some way.    Evasion of payment, on the other hand, "generally involves conduct designed to place assets beyond the government's reach after a tax liability has been assessed," through various means such as "transferring assets abroad, placing assets in the names of others, or using cash transactions to conceal the existence of assets."     The United States Code requires the Government bring claims for "the offense of willfully attempting in any manner to evade or defeat any tax or the payment  thereof" within six years of the offense's commission. 26 U.S.C. § 6531(2). The statute of limitations for evasion of  assessment under § 7201 runs "from the  occurrence of the last act necessary to complete the offense, normally a tax deficiency." Carlson, 235 F.3d at 470.    The Court agrees with the Government's interpretation of Carlson

that "it is no the date the taxes were filed or due that controls, but rather the last date the defendant engaged in affirmative acts to evade payment of his tax liability.     The court cautioned against using the statute of limitations as a "rule of evidence," limiting the type of evidence necessary to prove the elements of tax evasion. Carlson, 235 F.3d at 470.In the instant case, the information included in the indictment listed 1994-2003 as the relevant tax years in question. Defendant allegedly conducted further evading activity in 2005, 2006, and as recently as 2008. However, nothing on the face of the indictment indicates how Defendant's more recent behavior, falling in the appropriate statutory period, constitutes affirmative acts to attempt to evade, or actually evade, paying taxes from 1994 through 2003, years well outside the relevant statutory period. The Court held that it could not piece together, on the face of the indictment, how Defendant's yacht purchase in 2005 constitutes   an affirmative act to evade payment of arrears from his earlier tax returns.     While the Court is not to consider outside information, the Court finds it additionally troubling that the Government conceded that the tax returns themselves were not fraudulent, but instead relied on this later activity to justify the charge of attempted evasion of payment.

The Court did not foreclose the possibility that the last affirmative act Defendant took to evade proper payment of his 1994 tax return occurred in 2008, however on the face of the indictment, it was impossible to ascertain such a connection between 1994 (or other previous years outside the statute of limitations) and any acts Defendant allegedly affirmatively conducted to evade payment during the relevant statutory period.     Since the indictment on its face lacked sufficient information to justify prosecution, the Court declines to address the argument that the indictment was duplicitous. While no clear authority exists in the 9th Circuit on this issue, Carlson seems to suggest that the evasion of tax payment for each individual tax year may constitute a single and sole offense. See Carlson, 235 F.3d at 470.     The motion to dismiss  the indictment was GRANTED.

U.S. v. GALLINA 2011 U.S. Dist. LEXIS 26839 (E.D.N.Y. 2011)

On September 23, 1997, the United States brought an action pursuant to 26 U.S.C. §§ 7401, 7402(a), and 7403 against Giovanni and Epifania Gallina, Caterina Mignano, Francesca Pipitone, Astoria Federal Savings and Loan Association, Ideal Mutual Insurance Company, and the New York State Department of  Taxation    and Finance.     The complaint consisted of four counts.   Under Count I, the government  sought to reduce to judgment certain                                         (Continue)

From the desk of David M. Garvin, Esq.
Volume 115	Page 3 of 6	April  2011

U.S. v. GALLINA (Continued)

assessed and unpaid income  tax liabilities against the Gallinas. Under Count II, the United States sought a determination that federal tax liens had attached to and would remain upon the Gallinas' interest in certain real property. Count III alleged that the Gallinas had conveyed certain  property to their daughters, Caterina Mingano and Francesca Pipitone. Count IV alleged that any conveyance to the daughters was made fraudulently under New York law.         The government moved for partial summary  judgment as to Counts I, II, and III of the complaint. The Court referred the motion to the magistrate judge for a report and recommendation.     The magistrate judge issued an R&R recommending that the Court grant the government's  motion for partial summary judgment and allow the government to foreclose on the liens upon the property. The daughters filed timely objections to the R&R.    The Court reviewed the objection de novo.        The defendants’ objected to the Magistrate Judge's description of the recommendation as a grant  of a "partial" summary judgment.     Defendants explained, that the recommendations if adopted  by the Court  would, in fact, be summary judgment as to all issues.  The Court found that the recommended  order was "partial," in that it addressed only the government's first three claims.     However, the Court acknowledged that

the order could render the remaining count moot. Defendants also took issue  with a statement made in the concluding  paragraphs of the R&R that,  " In the almost three years since [the government's motion for  default judgment was denied], extensive discovery had failed to yield any evidence that Caterina and Francesca acquired a valid interest in the property."       Defendants argued that at the government's request discovery was bifurcated and did not proceed on the government's fraudulent conveyance theory wherein the validity of the daughter's interest would be determined pursuant to state law. The Court found that the magistrate judge did not rely, however, on the extent of discovery conducted, but on the pleadings, affidavits, and any discovery and disclosure  materials on file, as required by Rule 56 of the Federal Rules of Civil Procedure.      The Court rejected Defendants’ arguments that a determination that the daughters were not “purchasers” was premature. The Court found that Rule 56 permitted a party to move for summary judgment at any time until 30 days after the close of all discovery.      The government  made clear both in

its letter requesting a pre-motion conference and in its moving papers that it intended to move on its lien theory and that resolution of such a theory  would  require a determination as to whether the daughters were "purchasers," under 26 U.S.C. § 6323.  Defendants could have submitted affidavits or other materials contesting the government's submissions or requested the opportunity for further discovery. Defendants instead submitted response papers arguing that there was a material dispute of fact as to the daughter's status as bona fide purchasers pursuant to state law.           Finally, the defendants argued that the Court should reject the R&R because they now seek to pursue a theory that they had an equitable interest in the  property. Defendants cited no case law to explain why such an interest would render the lien invalid.     The Court adopted the Magistrate recommendation. The government's motion for partial summary judgment was granted, and the government was permitted to foreclose the liens upon the property.     Based on information from a reliable informant, who observed cannabis sales inside and outside certain business premises, a  warrant was issued authorizing a search of the business' premises for evidence of unlawful possession of cannabis. In addition to seizing drugs, currency,  and weapons, officers executing the warrant seized documents located in an office area at the back of the store.                       (Continue)

From the desk of David M. Garvin, Esq.
Volume 115	Page 4 of 6	April  2011

From the desk of David M. Garvin, Esq.
Volume 115	Page 5 of 6	April  2011

GANGI v. U.S. LEXIS 19165 (D. Kan. 2011)

The government provided an affidavit from an IRS Revenue Agent which stated that the IRS was investigating the federal tax liabilities of Frank Gangi for the years 2000 through 2004. Gangi did not file a United States federal income tax return for those years, and the affidavit stated that the investigation was ongoing as to whether Gangi was a bona fide resident of the U.S. Virgin Islands during the years in issue. In addition,  the IRS was investigating whether Gangi was obligated to report income for the years 2000 through 2004 on a U.S. tax return and the amount of that income, and whether Gangi reported the proper amounts of income earned and the source of such income during these tax years on tax returns filed with the Bureau of Internal Revenue for the U.S. Virgin Islands ("BIR").     The agent stated that, in furtherance of the investigation, she issued an administrative summons to Cessna directing it to produce books, records, papers and other data. The agent stated that it was necessary to obtain the materials sought and described in the summons to properly investigate Gangi's tax liabilities because it was relevant to shed light upon the liabilities and issues under  investigation.   Cessna had some sort of business relationship with Gangi or

From the desk of David M. Garvin, Esq.
Volume 115	Page 6 of 6	April  2011

U.S. v.  ASAD 739 F. Supp. 2d 1127 (NE. D. IL. 2010)

The Defendants were charged  with various offenses including: conspiracy to defraud the United States and violate the tax laws, in violation of 18 U.S.C. § 371; tax evasion, in violation of 26 U.S.C. § 7201; signing false corporation income tax returns, in violation of 26 U.S.C. § 7206(1); mail fraud, in violation of 18 U.S.C. § 1341; witness tampering, in violation of 18 U.S.C. § 1512(b); making false statements to obtain health care benefits, in violation of 18 U.S.C. § 1035(a); and making false statements to federal agents, in violation of 18 U.S.C. § 1001(a).     Defendants moved to suppress certain evidence seized during the execution of a search warrant. The government  contested the motion.         The court found that one defendant failed to establish that he had a legitimate expectation of privacy to the office area because the seized documents were in an unlocked desk in an area without a door and through which all employees had to walk to reach the rest room.     The court further found that the search warrant was valid under the Fourth Amendment because the informant's information was adequate to establish probable cause of drug trafficking. Seizure of the documents did not exceed the scope of the warrant, which described the items to be seized with the required particularity and did not allow unfettered discretion. In any event, the good faith exception applied because the officers executing the warrant acted in good faith reliance on the warrant. The court denied the motions to suppress.

his affiliated entities. Apparently, Cessna's parent company, Textron received the summons.      Frank Gangi, Global Naps, Inc., and BABP VI, LLC filed a Petition to Quash IRS Third-Party Summons. They argued that the summons should be quashed because it did not meet the criteria of good faith and it would be an abuse of the Court's process to enforce the summons.    The government filed a Motion to Dismiss the Petition to Quash IRS Third-Party  Summons.   The government filed a Motion to Dismiss the Petition to Quash IRS Third-Party  Summons. It contended that the summons met all of the good faith requirements and that the issuance of the summons would not abuse the court's process.     The government was not seeking to enforce the summons, but rather moved to dismiss the petition to quash the IRS third-party summons. As a result the burden of proof was on the Petitioners.    Finally, Petitioners asserted that enforcement of the summons would be an abuse of process. Examples of an abuse of the court's process include when a summons is issued for an improper purpose, such as harassment, or for any other purpose not reflecting good faith. The burden of showing an abuse of the court's process is on the taxpayer.     Petitioners argue that protracted audits of U.S. citizens who were residents of the US constituted an abuse of the Court's process and demonstrated institutional bad faith by the IRS. The Court rejected Petitioners' arguments, granted the Respondent United States' Motion to Dismiss and  denied Petitioners'  Petition to Quash.

U.S. v. ROCKY MOUNTAIN HOLDINGS LEXIS 25276 (E.D. PA. 2011)

At issue in this action was whether Plaintiff United States could recover, pursuant to Pennsylvania's Uniform Fraudulent Transfer Act, more than $3 million in federal tax liability owed by Rocky Mountain Holdings, Inc. from  Dupont, as the subsequent transferee of an allegedly fraudulent conveyance.         Defendant Dupont, a pension  trust fund located in Delaware, holds and manages pension fund assets for the benefit of employees  of  E.I. du Pont de Nemours & Co. and Conoco, Inc. At the time of the transfers in question Dupont held an 89% limited partnership interest in a Delaware limited partnership known as the Dimeling, Schreiber & Park Reorganization Fund, L.P.         An entity known as Dimeling, Schreiber & Park, L.P.  held the other 10% of the Fund as a limited partner, and also held a 1% interest in the Fund as a general partner.        According to the facts on record, the Fund's purpose was, in part, to create wholly-owned subsidiaries to indirectly  invest in and dispose of assets of companies that were making major  changes to their capital structure.   Between March 1994 and October 2004, Defendant made nearly $57 million in capital contributions to the Fund in its capacity as limited partner.

On August 30, 1994, the Fund formed RMH, a Delaware corporation, for the sole purpose of acquiring an air medical transport business known as Rocky Mountain Helicopter, Inc.,  RMH was to act as a "blocker" corporation to protect Dupont from unrelated taxable business income. Due to the large size of the   acquisition, the Fund brought in American Manufacturing Corporation, Inc., a Delaware corporation, to finance 50% of the equity required to fund the acquisition.  For tax purposes,  RMH and AMC created Rocky Mountain Holdings, LLC ("RMH LLC"), a Delaware flow-through limited liability company, to acquire the Target Entity.      On October 16, 2002 in Philadelphia, Pennsylvania, RMH and AMC sold their membership interest in the target company for $28 million, subject to post-closing adjustments. As a result of the sale, RMH received $15,157,403 in proceeds, representing 50% of the adjusted purchase price. On October 17, 2002, RMH transferred $14,860,895 of these proceeds to the Fund, RMH's only shareholder. that same day, the Fund wired 88.9% of the $14,860,895 (or $13,224,710.46) to the State Street Bank and Trust Company as Trustee of Defendant, and 11% (or $1,636,184.50) to DS&P. Later that day, DS&P transferred its $1,636,184.50 to Defendant in partial repayment of a loan, which was secured by DS&P's interest in the Fund.

On  November 21, 2002, RMH received and immediately transferred to the Fund additional proceeds  in the amount of $296,508. As before, the Fund transferred 88.99% of that amount (or $263,863) to the State Street Bank and Trust Company as Trustee of Defendant, and 11% (or $32,646) to DS&P.  DS&P then wired its share to Defendant In total, RMH transferred approximately $15,157,403 from the proceeds of the October 17, 2002 sale, all of which ended  up in Defendant's account. Since the transfer, the Fund and DS&P have wound down their businesses.     Prior to the sale, RMH  mistakenly believed  it would incur no taxable gain on the transaction. Contrary to this belief, the sale in fact generated over $1.8 million in federal tax liability, plus state tax liability.    Because RMH had sold its only asset  and subsequently wound down its business, it did not have assets  sufficient to pay its tax liability. In September 2003, RMH  filed its federal income tax return for 2002, showing $1,813,601 of taxes due and unpaid.     On November 10, 2003, a delegate of the Secretary of the Treasury of the United States issued corporate income tax, interest, and penalty assessments against  RMH for the  year 2002, based on the corporation's Form 1120 return, in the amount of $1,813,601.     As a result of Rocky Mountain's failure to pay these assessments after due notice and demand, federal tax  liens arose as of the date of each assessment in favor of the United States and against                     (Continue)

U.S. v. ROCKY MOUNTAIN HOLDINGS (Continued)

all property and rights  belonging  to RMH and the Fund. In addition, statutory penalties and interest were assessed against RMH.  To date, Plaintiff has recovered only $15,972.27 of the assessed tax liability.     Plaintiff initiated the current  litigation against  RMH, the Fund, DS&P, and Defendant Dupont seeking to reduce its tax assessment against RMH to judgment and to set aside the alleged fraudulent  transfers by and among the Fund, DS&P, and DuPont. Dupont, DS&P, and the Fund moved to dismiss the fraudulent transfer claim. The Court denied the motion on March 3, 2009.     By order entered on March 25, 2010, RMH consented to judgment  against it   "for unpaid income taxes and statutory  additions to tax for the year 2002 in the amount of  $3,237,969 as of July 21, 2008, plus statutory additions to tax according to law until fully paid."        The Fund and DS&P consented to judgment for the same amount as fraudulent transferees under the Pennsylvania Uniform Fraudulent Transfer Act ("PUFTA"),  These three Defendants were then dismissed from the case.        Plaintiff then sought to collect the full amount of the judgment from Dupont, the only remaining Defendant, as subsequent transferee of a constructively fraudulent  conveyance.   After the remaining parties engaged in discovery, both filed Motions for   Summary Judgment on June 30, 2010.

The Court ruled on these motions and stated: "cross-motions are no more than a claim by each side that it alone is entitled to summary judgment, and the making of such inherently contradictory claims does not constitute an agreement that if one is rejected the other is necessarily justified or that the losing party waives judicial consideration and determination whether genuine issues of material fact exist.”  (quoting Rains v. Cascade Indus., Inc., 402 F.2d 241, 245 (3d Cir. 1968)).     The Court  found cases from other districts, including Delaware, had held that no choice of law conflict exists where both states have adopted the same relevant  portions of the UFTA.  See, Zahn v. Yucaipa Capital Fund, 218 B.R. 656, 666 (Bankr. D.R.I. 1998) ("If there is no conflict between                                the two states' laws, then the Court need not engage in a choice-of law analysis.                                    Ultimately, the Court denied the parties' Cross-motions for Summary Judgment. The Court found that the previous consent judgment between Plaintiff,  the Fund,  and DS&P did  not conclusively establish that the initial transfer was fraudulent for the purposes of Plaintiff's action against Defendant Dupont as a subsequent transferee.

Information on the author

David M. Garvin is an attorney who’s practice concentrates in the area of white collar crime defense. Mr. Garvin was admitted to the Florida Bar in 1982. He holds a Juris Doctor Degree from the University of Miami (1982) and a LLM in Taxation from the University of Miami (1987). Mr. Garvin is certified by the Florida Bar as a Tax Specialist (1990). Mr. Garvin is also a licensed Certified Public Accountant in Florida since 1982. Mr. Garvin is admitted to practice before the United States Supreme Court, the Eleventh Circuit Court of Appeals, the Eight Circuit Court of Appeals, the Sixth Circuit Court of Appeals, the United States District Courts for the Southern, Middle and Northern Districts of Florida, the Florida Supreme Court, and the United States Tax Court.      Mr. Garvin’s Martindale-Hubbell rating is “AV”. He is listed in the Pre-Eminent Bar Register as a criminal attorney and as a tax attorney. He is also listed in Super Lawyers.     Mr. Garvin was selected by the Daily Business Review as the "Most Effective Lawyer for 2010" for complex litigation.

David M. Garvin, Esq. 200 South Biscayne Blvd. Suite 3150 Miami, Florida 33131 (305) 371-8101 www.miami-tax-attorney.com www.davidmgarvin.com