Imagine some guy who used to work for Arthur Andersen & Co. pitching you his amazing tax-elimination product.
All you've got to do is form a partnership, an LLC and an S corporation, none of which have any real business purpose. Then you short some U.S. Treasuries, go long on some foreign stocks and bonds, shuffle these instruments like marked cards in a magic trick, pay enormous fees to some fancy lawyers and tax accountants to obfuscate, and abracadabra, no tax.
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Anyone who'd sell this scheme -- which the IRS calls an abusive tax shelter -- has got to be as kooky as those guys who say not to pay income tax because it's unconstitutional. Or maybe just blinded by the prospect of millions in easy profits.
Why would anyone go to such extremes to avoid paying taxes? America sustains the free-market capitalist system that makes people rich enough to owe taxes, yet they don't want to support it? Instead they turn to highly evolved charlatans such as Paul M. Daugerdas and his Rube Goldberg tax-dodging machinations?
A jury in Manhattan on Tuesday convicted Daugerdas, a 60-year-old lawyer from Wilmette, Ill., as the mastermind of a multibillion-dollar tax fraud. Also convicted were Denis M. Field, 53, of Naples, Fla., former CEO of accounting firm BDO Seidman; David Parse, 49, of Elmhurst, Ill., a former Deutsche Bank broker; and an attorney and associate of Daugerdas, Donna M. Guerin, 50, of Elmhurst, Ill. Sentencing is Oct. 14. They each face more than 20 years in prison.
Several others already pleaded guilty in the case, including other former BDO Seidman executives. And in December, Deutsche Bank AG (NYSE:DB) admitted guilt as part of a nonprosecution agreement and agreed to pay nearly $554 million to the U.S.
"These privileged professionals wove an intricate web of deceit that spanned nearly a decade, enabling them to enrich themselves and their well-heeled clients," said Preet Bharara, U.S. Attorney in New York. "Surely there are many Americans who dread April 15th, but they put their checks in the mail nonetheless."
The scheme demolished Dallas-based law firm Jenkens & Gilchrist, which paid tens of millions to settle charges and lawsuits. The firm had been around for 56 years. It employed more than 600 lawyers. Yet it couldn't resist hiring Daugerdas and selling his questionable tax shelters for amazing profits.
Bharara said Daugerdas and the three other defendants who were just convicted netted more than $130 million in profits for themselves while generating more than $7 billion in fraudulent tax losses for their clients between 1994 and 2004.
Clients reportedly included a grandson of the late industrialist Armand Hammer, the late sports entrepreneur Lamar Hunt, trust-fund recipients, family business owners and even an early investor in Microsoft Corp. (NASDAQ:MSFT).
The case is a leftover from the free-wheeling Internet age. In 2005, a report from the Government Accountability Office estimated that 207 of the Fortune 500 companies used tax shelters from 1998 to 2003, resulting in a $56 billion decline in revenue to the federal government.
One of the more-notable tax-shelter abuse cases came to light in 2003, when Overland, Kan.-based Sprint (NYSE:S) fired Chairman William Esrey and President Ronald LeMay for their use of the vehicles. Another involved federal prosecutors reaching a $465 million deferred-prosecution agreement with accounting giant KPMG LLP in 2005.
Despite the billions Daugerdas's case cost the U.S. Treasury amid a $14.3 trillion national debt and a stymied debate on the debt ceiling, his trial drew little attention. It was overshadowed by another trial in the same courthouse, that of convicted insider trader Raj Rajaratnam.
At least The American Lawyer stopped by to capture some color.
"Daugerdas is a heavyset man whose hair is grayer than it was when he was on the cover of The American Lawyer early in the last decade," the legal industry publication reported May 1. "Daugerdas .. headed to the eighth-floor cafeteria. .. Daugerdas had evidently become a regular. He handed three cards to the cashier -- a credit card, a drink card, and a meal club card. Buy 11, get one free."
Hey, who says there's no free lunch? Daugerdas soon may be getting all of his meals free.
(Al's Emporium, written by Dow Jones Newswires columnist Al Lewis, offers commentary and analysis on a wide range of business subjects through an unconventional perspective. Contact Al at email@example.com or tellittoal.com)