Readers of this blog will likely be interested in this article.  Jesse Drucker, An Accidental Disclosure Exposes a $1 Billion Tax Fight With Bristol Myers (NYT 4/1/21), here.  The article recounts Bristol Myers’s use of a highly complex offshore arrangement to avoid (perhaps evade) over $1 billion in U.S. tax.

The thing that I think is particularly interesting for those who have watched bullshit tax shelters over the years is the use of professionals (accounting firm and law firm) to attempt to insulate wealthy taxpayers from penalty consequences of their abusive behavior.  As recounted in the article, Bristol Meyers obtained lengthy opinion letters from PWC, the accounting firm, and from White & Case, the law firm.  The article says that the opinion letters omitted a key discussion that might have cast a pall on the opinion and reliance on the opinion.  The article says:

In addition to detailing the offshore structure, the I.R.S. report revealed the role of PwC and White & Case in reviewing the deal. While both firms assessed the arrangement’s compliance with various provisions of the tax law, neither firm offered an opinion on whether the deal violated the one portion of the tax law — an anti-abuse provision — that the I.R.S. later argued made the transaction invalid.

Tax experts said they doubted the omission was inadvertent. The I.R.S. can impose penalties on companies that knowingly skirt the law. By not addressing the most problematic portion of the law, Bristol Myers’s advisers might have given the company plausible deniability.

Both firms “appear to have carefully framed the issues so that they could write a clean opinion that potentially provided a penalty shield,” Professor Burke said.

David Weisbach, a former Treasury Department official who helped write the regulations governing the tax-code provision that Bristol Myers is accused of violating, agreed. PwC and White & Case “are giving you 138 pages of legalese that doesn’t address the core issue in the transaction,” he said. “But you can show the I.R.S. you got this big fat opinion letter, so it must be fancy and good.”

Over the years, many have observed that such opinion letters serve the sole function of insulating the taxpayer (or, in the case of entities, its officers or managers) from potential penalty liability, including criminal liability.  Those taxpayer knows it is misbehaving but, armed with an opinion from “experts,” the taxpayer can say that he reasonably believed he was not misbehaving and thus avoid penalty exposure, at least the serious penalty exposure of criminal liability or the more significant civil penalty liability (civil fraud penalty).  Then with only perhaps imagined exposure only to perhaps a 20% or 40% civil penalty, it may be worth rolling the dice in the hopes that the IRS would never discover the matter.  This is likely a cost/benefit analysis.  What are the costs and potential benefits?  Say for a $1 billion in tax, a  downside (if able to mitigate the more serious penalties) so that only a 20% accuracy related penalty could apply, the downside cost is $1.2 billion with interest (fairly low for a $1 billion “borrowing” from the Government).  The upside is $1 billion in avoided (perhaps evaded) taxes.  And, with powerful and expensive in house and out house professionals helping to lower the risk of audit of the transaction, that may seem to some like a pretty good deal.

And, for offering this opportunity to the taxpayer to behave badly, the professionals are rewarded with outsized fees to compensate them for their own risks (legal and reputational) in enabling the misbehavior.  From the taxpayer’s perspective, the outsized fees are simply like premiums on insurance to avoid risk to the taxpayer and shift it tot professional if the Government feels that someone needs serious penalty consequences from the transaction.  That was the phenomenon that I observed in the heyday of bullshit tax shelters in the late1990s and early 2000s (exemplified by the BLIPS shelters).  Virtually all of  the taxpayers (most of whom engaged independent counsel) knew that they were misbehaving, as evidenced by the requirement for getting an opinion that they state (falsely in most case) that they entered the transactions involved for business or profit motives independent of a tax savings motive.  As a result, for their bad behavior, those taxpayers avoided criminal prosecution but were subject to some civil penalties.  The insurance plan wrapped in guise of  a tax shelter transaction thus worked for those taxpayers. So far as I am aware, taxpayers were not prosecuted.  Some of the more egregious professionals were prosecuted  and convicted.  

Of course, one of the keys to avoiding audit is avoiding the disclosure of an uncertain tax position, Form 8275, and also avoiding any type of disclosure on audited financial statements that may tip off  the IRS and thus increase the audit risk.  I would imagine that, with this type of gambit, Bristol Meyers had to avoid such disclosure or  disguise whatever disclosure was made.  If Bristol Meyers knew it would have to disclose the transaction in such a way that the IRS would audit it and understand it, then it had to know that the cost/benefit analysis might tilt against doing the transaction.

This blog post is cross-posted on the Federal Tax Crimes Blog, here.