I discussed United States v. Daugerdas, ___ F.3d ___, 2016 U.S. App. LEXIS 17219 (2d Cir. 2016), here, recently, Daugerdas Conviction and Sentencing Affirmed by Second Circuit Court of Appeals (Federal Tax Crimes Blog 9/21/16), here. I quoted the part of the opinion relevant to today's discussion, but will present the quote again here:
As an essential part of the marketing of all the tax shelters, Daugerdas and his colleagues issued "more-likely-than-not" opinion letters to clients who purchased the shelters. Such letters state that "under current U.S. federal income tax law it is more likely than not that" the transactions comprising the shelters are legal and will have the effect sought by the clients. They protect clients from the IRS's imposition of a financial penalty in the event that the IRS  does not permit the losses generated by the shelter to reduce the client's tax liability. Paralegals or attorneys who worked for Daugerdas generated these letters and Daugerdas often reviewed and signed them himself. The letters stated that the clients had knowledge of the particular transactions underlying the shelter and that the clients were entering into the shelter for non-tax business reasons. Multiple clients testified that they never made representations of knowledge to Daugerdas or his associates and that, in any event, these representations were false because the clients knew little or nothing about the underlying transactions and entered into the shelters only to reduce their tax liability.Daugerdas' shelters were clearly of the abusive -- aka bullshit -- variety. In essence, for the tax shelters Daugerdaus and his partners in crime hawked, the play in the shelter gave the taxpayer a shot at the audit lottery and some way potentially to mitigate the penalty damage if he did not win the audit lottery. But, as it turns out, these shelters were so bad, that they did not really offer much in the way of penalty mitigation except, sometimes, through IRS amnesty programs. In essence, most of the taxpayers -- certainly the more sophisticated taxpayers who had millions and millions of income to shelter -- got into the shelter on a wink and a nod, hoping for the best with some downside protection.
In Exelon Corp. v. Commissioner, 147 T.C. ___, No. 9 (2016), here, the taxpayer had $1.6 billion in gain that it perceived a need to shelter -- i.e., avoid paying tax on. The transactions are convoluted (as in the case of many tax shelters where the convolutions masks lack of substance). (The complexity of the opinion is suggested by the fact that the substantive discussion concludes on p. 161 of the slip opinion.) The details of the transactions are not important for purposes of this blog, but they are variations on leveraged leases with their own acronym that is familiar to affionados of bullshit tax shelters -- SILOs (to be contrasted from related tax shelters called LILOs). In the opinion, Judge Laro offers the following "Primer on Leveraged Leases, LILOs, and SILOs:"