CPA’s nonfiling ruled inadmissible for abusive shelter promotion penalty


Evidence of a CPA’s failure to file and pay his own taxes was not properly admissible in determining his penalty for promoting an abusive tax shelter, the Fourth Circuit held. The appellate court thus vacated a $2.6 million penalty and liability verdict against CPA Robert Nagy and reversed and remanded his case to a district court.

Nagy had issued an opinion on the Derivium 90% loan program, in which investors purportedly transferred securities as “collateral” in return for a loan from Derivium of 90% of the securities. His opinion stated that the transactions were bona fide loans and not sales of the securities. Derivium claimed it would use the securities it received in hedging transactions and return them when the investors repaid their loans, but the entire program was in fact a Ponzi scheme in which Derivium immediately sold the securities it received to continue perpetrating the scheme. Upon investigation, the IRS determined that the 90% loans were actually sales of the securities for tax purposes (see, e.g., Calloway, 135 T.C. 26, aff’d, 691 F.3d 1315 (11th Cir. 2012), and Shao, T.C. Memo. 2010-189, and previous Tax Matters coverage, “Stock ‘Loans’ Ruled Sales,” Nov. 2010, page 63).

As a result of Nagy’s involvement in the scheme, the IRS assessed penalties against him under Sec. 6700 for promoting a tax shelter. He paid part of the penalty and sued for a refund in district court. At trial, the district court allowed the IRS to introduce as evidence regarding his Sec. 6700 liability Nagy’s failure to file his personal income tax returns and to pay his taxes.

According to the Fourth Circuit, the rules of evidence prohibit admission of evidence of a crime, wrong, or other act to prove a person’s character to show that on a particular occasion the person acted in accordance with that character. It agreed with Nagy, who argued that this evidence was not relevant to his liability under Sec. 6700 for an unrelated transaction and served only to cast him in a bad light.

The IRS claimed that evidence of his behavior in failing to file his taxes at the same time he was issuing an opinion about the tax shelter was relevant to show an absence of mistake in his tax advice. The Fourth Circuit found that there was no relationship between the two transactions (his returns and the tax shelter) and that the evidence was so prejudicial that it must be excluded. It held that the district court had abused its discretion in admitting the evidence and therefore vacated the liability and penalty verdicts and remanded the case to the district court.

Nagy, No. 10-2072 (4th Cir. 3/29/13)

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