The vast monies generated by the litigation industry continue to spawn ancillary issues and cases. One of ancillary issues now surfaces as the Obama Administration continues its crack down on tax cheats. One of the cases is an interesting new 5th Circuit opinion granting the US significant relief in its effort to impose significant fines arising from tax fraud claims involving multiple members of a prominent plaintiff’s tobacco and toxic tort firm – Nix Patterson & Roach.
The Nix, Patterson & Roach case is covered in detail in a new post on the Federal Tax Crimes blog. The blog is written by Jack Townsend, and he never minces words in describing tax cheats. (It’s a shame that ill-advised budget sequester votes keep reducing the budgets for the IRS and the US Attorneys needed to prosecute large fines and/or jail time for tax cheats.) The Son of Boss tax scam is well-known and was much used by a wide range of wealthy people. During the last presidential campaign, there were significant reports indicating that Mitt Romney and Marriott were involved with the same tax shelter. Ultimately, the Jenkins & Gilchrist law firm collapsed under the weight of indictments related to its wide role in tax scams, including Son of Boss.
Jack Townsend’s blog post opens with the following information on the activities of Nix, Patterson & Roach:
"In NPR Investments, LLC v. United States, ___ F.3d ___, 2014 U.S. App. LEXIS 1320 (5th Cir. 2014), here, following the Supreme Court’s lead in United States v. Woods, ___ U.S. ___, 134 S. Ct. 557 (2013), here, the Fifth Circuit applied the 40% gross valuation misstatement penalty to the partnership’s bullshit tax shelter (the Son-of-Boss (SOB) type shelter). For discussion of Woods, see Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (Federal Tax Crimes Blog 12/3/13), here. The 40% penalty will, of course, be applied to the partners, which will then permit them to assert in a separate refund proceeding any partner level defenses they may be entitled to.
I could perhaps leave it at that, but there are some interesting features of the case.
Let’s start with some the facts recounted by the Court:
Harold Nix, Charles Patterson, and Nelson Roach are partners in the law firm of Nix, Patterson & Roach, LLP. They represented the State of Texas in litigation against the tobacco industry and in 1998 were awarded a fee of approximately $600 million that is to be paid over a period of time. They also received fees totaling approximately $68 million in connection with tobacco litigation in Florida and Mississippi. Nix, Patterson, and Roach share the fees 40%, 40%, and 20%, respectively.
Nix and Patterson have participated in at least two "Son-of-BOSS" tax shelters. BOSS stands for "Bond and Options Sales Strategy." Courts, including our court and the district court in this case, have described a Son-of-BOSS transaction as "a well-recognized ‘abusive’ tax shelter." Artificial losses are generated for tax deduction purposes.
Before creating NPR and engaging in the transactions at issue in this appeal, Nix and Patterson invested in another Son-of-BOSS tax shelter, known as BLIPS. It involved sham bank loans, and our court considered various tax issues related to Nix’s and Patterson’s transactions with regard to that shelter in Klamath Strategic Investment Fund ex rel. St. Croix Ventures v. United States."
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