US appeals court backs government in tax shelter case
FAIRFIELD, Conn. Aug 17 (Reuters) - A federal appeals court has upheld a ruling against a former senior tax lawyer at Grant Thornton LLP and Coopers & Lybrand that banned him from selling bogus tax shelters costing the United States government up to $800 million in unpaid taxes.
A three-judge panel for the 8th U.S. Circuit Court of Appeals on Tuesday rejected an appeal filed by A. Blair Stover Jr., who had sought to overturn a Missouri federal court decision in August 2010 barring him from promoting three tax schemes deemed abusive by the Internal Revenue Service.
The Justice Department, which sued Stover in 2008 over the shelters, later hailed the 2010 victory as one of its leading efforts to crack down on the tax-shelter industry.
Stover had appealed the initial ruling, citing technical readings of IRS language, but the appeals panel found he had distorted and misread the language.
Stover worked at Coopers & Lybrand, the former national accounting firm now part of PricewaterhouseCoopers, in Kansas City, Mo., in the early 1990s, where he wrote requests for IRS rulings and researched and drafted opinions and memoranda on tax issues.
In 1993, he joined Grant Thornton, a national accounting firm, where he rose to senior tax manager and principal in the Kansas City office. In 2001, he left Grant Thornton to become an equity party and "rainmaker," according to court papers, at Kruse Mennillo LLP, a small accounting firm which he has since left.
The three tax shelters, known as Parallel C, ESOP/S and Roth/S, had a common thread. For each, Stover would form a management company to sell services to an existing operating company owned by a client. He then falsely told his clients that fees paid by the operating company to the management company were deductible from the operating company's income.
Stover also told clients that income from the management company could be almost entirely deferred through employee-stock option plans, Roth savings plans and accounting moves involving accrual methods.
In its decision upholding the ruling, the appeals court wrote that "these schemes would soon pose numerous tax law problems. It is undisputed that the management companies did not provide any management services to the operating companies ... In some cases the management company had no employees or bank accounts, and the management fees were recorded only on paper."
The judges also wrote that "there is a wealth of record evidence that Stover's clients purchased his tax arrangements in large degree because of the tax advantages he promoted. He promised to reduce his clients' taxable income by hundreds of thousands of dollars."
Court papers show the IRS estimated the three shelters to have cost the U.S. Treasury from $100 million to $800 million in taxes. A single IRS agent spent 3,000 man-hours, or more than a year's normal work, unraveling just two of the deals, court papers said.
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