FRE 404( b) Order on Motion in Limine for Charges under § 7214(a)(5) & (7) (4/30/16)

This posting will be for students and new practitioners.  Most experienced practitioners will have encountered the key FRE 404(b), here, issue before.

In United States v. English, 2016 U.S. Dist. LEXIS 54352 (ED 2016), the Court ruled on the Government's Motion in :imine involving, in part, FRE 404(b).  A motion in limine is a pre-trial motion filed to address some matter, usually evidentiary, that is expected to arise during the trial and that may efficiently be handled prior to trial.  I have stated the case name as United States v. English, which is the style of the key Order on Motion in Limine that I discuss here.  The indictment, however, stated her name as Kimberly Brown-English.  I don't know why the subsequent Order uses only English, but for convenience I refer to her as English here as did the Order rather than Brown-English.

First I will offer some background.

The relevant documents are:

1. Docket Entries through 4/29/16, here.
2. Indictment filed 10/9/14, here.
3. Government's Motion in Limine, here.
4. Defendant's Opposition to Government's Motion in Limine, here.
5. Government's Reply to Defendant's Opposition to Government's Motion in Limine, here.
6. Order on Government's Motion in Limine, here.

The defendant, Kimberly English (English), was charged with six counts of violating § 7214(a)(5) & (7), here, which provides in relevant part:

26 U.S. Code § 7214 - Offenses by officers and employees of the United States
(a) Unlawful acts of revenue officers or agents. Any officer or employee of the United States acting in connection with any revenue law of the United States—
* * * *
(5) who knowingly makes opportunity for any person to defraud the United States, or
* * * *
(7) who makes or signs any fraudulent entry in any book, or makes or signs any fraudulent certificate, return, or statement, * * * *
shall be dismissed from office or discharged from employment and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both. The court may in its discretion award out of the fine so imposed an amount, not in excess of one-half thereof, for the use of the informer, if any, who shall be ascertained by the judgment of the court. The court also shall render judgment against the said officer or employee for the amount of damages sustained in favor of the party injured, to be collected by execution.

According to the indictment, English was an employee of the IRS.  During the relevant period,

her primary duty was to provide assistance to taxpayers throughout the United States that were under IRS examination by educating taxpayers on tax laws and helping them resolve IRS examination issues. To hold the position, defendant KIMBERLY BROWN-ENGLISH was required to complete training courses that included, among other topics, the Earned Income Credit, Child Tax Credits, claimed dependents, and filing status (e.g., status as Head of Household).

The indictment charges that she filed her 2011 and 2012 income tax returns claiming as dependents persons who were not dependents, thereby obtaining undue refunds.  This is the basis for two counts under § 7214(a)(7) -- one for each year.

In addition, the indictment charges that English filed false returns for others in which she falsely claimed as dependents persons who were not dependents of the taxpayers.  This is the basis for four counts under 7214(a)(5).

The first thing to note about the charges is that, as is usually the case, the Government could have charged the defendant under a number of other provisions -- such as

• as to all counts, tax evasion, 7201, here.
• as to the first two counts, tax perjury, 7206(1), here.
• as to the latter four counts, aiding and assisting, 7206(2), here.

And there could be more.  Section 7214(a) is a five year felony offense, as is tax evasion, but taxpayer perjury and aiding and assisting are three year felony counts.  Judging by the prescribed period of incarceration, only tax evasion is as offensive, so to speak, as the § 7214(a) offense.  And, given that English was an IRS employee at the time, § 7214(a) is the more targeted offense to charge.  (I suppose that she could have been charged under the other provisions in addition to § 7214(a) since the elements of those offenses are not the same as § 7214(a), but that is another story involving piling on of charges without any effect upon sentencing that I will not address here.)

In the Motion in Limine, the Government made the following motions that the Court resolved:

A. Motion in Limine #1: The Defendant Should Be Precluded From Introducing Her Own Self-Serving Statements Unless She Testifies Subject to Cross-Examination. 

B. Motion in Limine #2: The Defendant Should Be Prohibited From Eliciting Testimony From Lay Witnesses on Their Opinion of the Defendant’s State of Mind. 

C. Motion in Limine #3: The Government Should Be Permitted to Introduce the Following Nine Tax Returns In Its Case-In-Chief, As They Are Inextricably Intertwined With The Charged Conduct Or, Alternatively, Pursuant To Federal Rules of Evidence 402, 403, and 404(b).

A Fourth Motion in Limine was subsequently withdrawn, so I do not offer it here.

In the order, the Court addresses the admission of certain tax returns prepared by English.  The controversy arises under FRE 404(b) which provides:

(b) Crimes, Wrongs, or Other Acts.
   (1) Prohibited Uses. Evidence of a crime, wrong, or other act is not admissible to prove a person’s character in order to show that on a particular occasion the person acted in accordance with the character.
   (2) Permitted Uses; Notice in a Criminal Case. This evidence may be admissible for another purpose, such as proving motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of accident. On request by a defendant in a criminal case, the prosecutor must:
      (A) provide reasonable notice of the general nature of any such evidence that the prosecutor intends to offer at trial; and
      (B) do so before trial — or during trial if the court, for good cause, excuses lack of pretrial notice.

The danger to which the Rule is addressed is that proof of character or, as some say, propensity is not proof that the defendant committed the crime charged.

The Court's opinion is fairly short, so, although it is linked above, I just quote it here in full (with just a brief omission at the beginning):

Those motions came on for hearing before the court on April 12, 2016. Assistant U.S. Attorneys Patrick R. Delahunty and Angela L. Scott appeared for the government and attorney Marc Days appeared for the defendant. The court ruled from the bench, granting the government's * * * contested motions in limine #1, #2 and #3 to the extent the latter pertained to three tax returns filed by defendant on her own behalf. (See Doc. No. 39.) n1 The court took government motion in limine #3 under submission to the extent it sought leave to introduce in its case in chief, seven 2011-12 tax returns allegedly prepared by defendant on behalf of others, which conduct is not charged in the pending indictment. (Id.) 

This final aspect of the government's motions in limine will be denied. The government first argues that the seven other tax returns prepared by defendant should be admitted in its case in chief because they are inextricably intertwined with the criminal conduct charged in the indictment. The court is not persuaded. The Ninth Circuit has stated: 

We have recognized two categories of evidence that may be considered "inextricably intertwined" with a charged offense and therefore admitted without regard to Rule 404(b). See United States v. Vizcarra—Martinez, 66 F.3d 1006, 1012 (9th Cir.1995). First, evidence of prior acts may be admitted if the evidence "constitutes a part of the transaction that serves as the basis for the criminal charge." Id. Second, prior act evidence may be admitted "when it was necessary to do so in order to permit the prosecutor to offer a coherent and comprehensible story regarding the commission of the crime." Id. at 1012-13. 

United States v. DeGeorge, 380 F.3d 1203, 1220 (9th Cir. 2004). 

Here, defendant's preparation of the seven other, uncharged, tax returns does not fit into the first category described by the court in DeGeorge. The government made clear at the hearing that it is not prepared to prove that those seven returns were false or fraudulent. Thus they certainly cannot be said to be part of a "single criminal episode." United States v. Lilliard, 354 F.3d 850, 854 (9th Cir. 2003). Nor does the government need the introduction of these seven returns which defendant allegedly prepared for others to offer a "coherent and comprehensive story" of defendant's commission of the charged offenses. DeGeorge, 380 F.3d at 1220. The government presumably intends to present evidence at trial that defendant willfully filed false returns for the 2011 and 2012 tax years on her own behalf and willfully prepared four returns for others in those same years knowing them to contain false information as well. The fact that defendant also prepared seven other returns, which the government is not prepared to prove contained false information, is clearly not necessary for the jury to understand the government's theory as to the six counts charged. Therefore, those seven returns are not admissible as inextricably intertwined with the charged criminal conduct. See United States v. Anderson, 741 F.3d 938, 949 (9th Cir. 2013) ("Where the evidence . . . is not part of the charged transaction and the prosecution would encounter little difficulty in presenting the evidence relevant to its case against the defendant without it, the evidence is not admissible as being intrinsic to the charged offense.") (citing United States v. King, 200 F.3d 1207, 1215 (9th Cir. 1999). 

  Alternatively, the government argues that the seven returns prepared on behalf of others by defendant are admissible under Federal Rule of Evidence 404(b). Once again, at the hearing the government made clear that they do not intend to prove that these returns contained false information. n2 While evidence may not necessarily have to be of "bad acts" per se to be admissible under 404(b), it still must be probative as to an issue in the case other than propensity or character. Here, the government's general claim that admission of these seven returns is probative of defendant's willfulness in preparing and filing the six false or fraudulent tax returns charged in the indictment is simply not compelling.
   n2 Though the government does take the position that the seven returns in question contain claims of exemptions and deductions similar to the ones that government has alleged are false in the charged counts. In the court's view, this raises a heightened concern regarding the potential for unfair prejudice were the uncharged returns to be admitted in the government's case in chief.

Finally, the government indicates that it is seeking to introduce the seven uncharged returns in its case in chief in order to counter an anticipated defense based upon a claim of mere mistake or accident and to establish that defendant was familiar with tax laws in general and held herself out to be a tax preparer. Of course, if defendant elects to testify on her own behalf at trial and were to do so in the manner anticipated by the government, her preparation and filing of these seven returns will likely be the appropriate subject of cross-examination. Likewise, if a defense (with or without the defendant's own testimony) is presented based upon mistake, accident or lack of knowledge regarding the tax laws, the seven returns would no doubt be offered in the government's rebuttal case. However, the court is not persuaded that the evidence is admissible for any proper purpose in the government's case in chief. 

For the reasons set forth above, the government's contested motion in limine #3 (Doc. No. 33) with respect only to the seven tax returns prepared for others which were not charged in the indictment is denied.

I think the Court made a good decision here.  Most of these types of decisions represent judgment calls which the trial judge makes in the overall context of the case.  Often they can go either way, and there is no way to "split the difference."  The most that can be hoped for is that the judge is fair.  And, I suspect that, if the Government has a case on the merits of the charges it made in the indictment (well, the grand jury made in the indictment), it can make it without this evidence.

An Interesting CDP Case with Foreign Bank Aspects (4/29/16)

The Tax Court (Judge Cohen) yesterday decided Brown v. Commissioner, T.C. Memo. 2016-82, here.  It is a jeopardy assessment and collection due process case.  The taxpayer (the husband) "is a life insurance salesman with a high-net worth clientele."  The IRS issued notices of deficiency for a number of years, the taxpayer petitioned the Tax Court for redetermination.  The Court the said (bold-face supplied by JAT):

Pursuant to settlements made by the parties on May 4, 2012, the IRS subsequently calculated petitioners’ total tax liability, including penalties and interest, at approximately $33.5 million for the years in issue (2003 was not included as there remained an outstanding issue for trial). 

Prompted by the amount of petitioners’ liability and IRS-determined factors such as petitioner’s foreign bank accounts in tax haven jurisdictions, his concealment of assets through nominees, and his having listed petitioners’ personal residence for sale at $17.7 million, the IRS decided to make a jeopardy assessment regarding the years in issue.

After the jeopardy assessment, the taxpayer started a collection due process (CDP) proceeding.  The taxpayer then offered to make full payment under a long-term complex arrangement described as follows.

After granting petitioners an extension to provide their proposal by December 9, 2013, the settlement officer received a 300-plus-page document on December 12, 2013, which presented a payment arrangement alternative to the collection actions. The first five pages of the proposal outlined how the arrangement would work, as follows in part:
Typically, a policy is purchased from the elderly person at a discount from the death benefit (thus, giving the elderly person the opportunity to spend or invest the cash during their lifetime) and then packaged by the purchaser into a portfolio of such policies. The portfolio can then be sold on the open market to investors. 

A typical portfolio consists of approximately 10 policies with an aggregate death benefit of approximately $50 million. The average age of the insured individuals is typically around 82 years, with an average life expectancy of about 8 years. (Obviously, some of the insured individuals will die in less than 8 years and some will live [*8] longer than 8 years.) An investor who purchases a portfolio of policies can either take a risk as to the mortality rate of the insured individuals, or the investor can purchase insurance, known as Mortality Protection Insurance Coverage (“MPIC”), which will insure that 75% of the forecasted death benefit will be paid out in each of the first 15 years of the MPIC coverage.  

The cost to acquire a $100 million portfolio is around $10 million and the cost of the MPIC coverage on such a portfolio is around $2 million. Bank financing from a bank in Germany, North Channel Bank, is available to cover half of those costs. In addition, the bank financing will also cover 100% of the premiums that will be due on the policies.

The document went on to explain that insurance payment proceeds would be distributed as determined by two contracts, a Securities Account Control and Custodian Agreement (SACCA), which would retain Wells Fargo Bank to act as a custodian of the proceeds, and an Intercreditor and Security Agreement. These agreements would cause the insurance funds to be distributed in the following priority: (1) Wells Fargo Bank fees; (2) pro rata repayment of the bank loan, including interest; (3) reimbursement to the MPIC insurer if death benefits were to exceed MPIC insurance payments already made; (4) additional payment on the bank loan if the loan-to-value ratio goes below 50%; and (5) distribution to the holder of the Net Insurance Benefit (NIB) that, under these circumstances, would most likely be a Luxembourg entity known as a “SARL” that is indirectly controlled by the underlying investor. The example projected an expected return [*9] of $33.8 million over a 15-year period, which, at a 3% discount rate, would have a net present value of approximately $26.15 million, an amount estimated to be about the same as petitioners’ current tax liability.

The document explained how petitioner proposed to satisfy the tax liability by first borrowing $6 million from an unidentified source and $6 million from North Channel Bank. With those funds he would acquire, through a SARL, two $50 million portfolios of life insurance policies insuring individuals of approximately 82 years of age. Each portfolio would have an accompanying MPIC policy, as well as a SACCA with Wells Fargo Bank that, in effect, would direct NIBs to be paid to an intermediary who in turn would be legally obligated to pay the IRS. This provision was deemed necessary because it would be “impractical to name the IRS as the holder of the NIBs”. Because they needed to make payments over a 15-year period, petitioners offered to consent to an extension of the period of limitations under section 6502.

The document stated that this “arrangement would be treated as an installment agreement for purposes of the limitation on the late payment penalty in IRC § 6661(h)”. Petitioners also wanted the IRS to agree that it would take no enforced collection actions while this agreement was in effect.

[*10] The document also stated that petitioners understood their proposal to be considerably more complex than a typical taxpayer proposal. Nevertheless, it concluded that it would be in the best interest of the IRS to receive these sporadic payments “that, over a period of time, approximately 15 years, should provide sufficient cash payments for full payment of the outstanding tax liabilities.

The taxpayer was arguing that, if the IRS gave him enough time and a low interest rate, there would be a risk-free and cash-flow free way that he could pay the taxes, interest and penalties through a financial scheme of great complexity.  The taxpayer lost the CDP case.

I offer this case primarily because of the taxpayer's use of offshore accounts and the curiosity of the funding sources:  "first borrowing $6 million from an unidentified source and $6 million from North Channel Bank."  In addition, the plan contemplated use of an SARL in Luxembourg.

Praises for My Cousin Vinny as a Teaching Tool for Law Students and Young Lawyers (4/28/16)

In December 2015, I finished many years of teaching at the University of Houston Law School.  My courses for most of that time were Tax Procedure and Tax Fraud and Money Laundering (Tax Crimes for short).  In those courses, I recommended to those interested in doing serious trial work that they watch the movie My Cousin Vinny several times.  There are some interesting trial techniques.  Even when exaggerated, they make important points.  For that reason, I have sometimes referred to My Cousin Vinny in blog entries.  (The collected blog entries mentioning the movie are here.)

I was thus quite interested to see this article:  Nick Vedala, New Jersey’s US attorney praises accuracy of 'My Cousin Vinny’ (Philly.com 4/28/16), here.  One good excerpt is:

Fishman specifically referenced a scene from the movie in which Pesci’s character questions a witness who says he saw the murder in question occur. In that scene, the argument comes down to the preparation of grits, with Pesci uttering the famous line, “Are we to believe that boiling water soaks into a grit faster in your kitchen than anywhere else on the face of the Earth?” 

“I have taught trial techniques for 15 years using that because his cross [examination] is terrific," Fishman said. “Go back and watch it and see. It’s over the top, it’s outrageous, but the way he does it is great.”

JAT Note: Great cross-examination from a random fact Pesci aka Vinny learned earlier in the movie.  And while on grits, there is a saying in the South that a day without grits is a day wasted.  Taking that expression to heart, I enjoyed grits for dinner last night at the Old Ivy Inn (actually the menu item was shrimp and grits, but I got the chef to make the grits far removed from the shrimp; very good.)  And, this morning, Irene made me grits.  Good living here in Charlottesville.

Two Participants in BullShit Tax Shelter Sue the Government for Colluding to Protect the Promoter (EY) from the Participants (4/28/16; 5/15/16)

On 5/15/16, I added a link at the bottom of this blog entry to an excellent discussion of the case in the Procedurally Taxing Blog.

Two former Sprint Executives who participated in a bullshit tax shelter are suing the IRS for aiding and abetting EY's breach of conflict of interest with respect to their investment in the shelters and the fallout from their investment in the shelters.  The complaint is here.

The gravamen of the claims are:

1. EY was the outside auditor for Sprint, a public corporation.

2. The plaintiffs were executives of Sprint.

3. The plaintiffs on their own initiative and with no compulsion from or even knowledge of Sprint invested in abusive tax shelters that EY promoted to executives such as them.  EY may also have designed or participated in the design of the shelters, but that is not alleged and is probably irrelevant.

4. The IRS discovered EY's promotion of the shelters.  The IRS conducted a civil penalty examination of EY as a result of which EY made penalty payments to the IRS.  EY negotiated with the IRS and the IRS collusively agreed to not mention in the press release that the payment was for a penalty.

5. The two were apparently aware of the settlement payment but, because of the IRS's collusion with EY in not describing the payment as a penalty, the plaintiffs did not know it was a penalty.

6.  The IRS began a civil audit of the investors in these shelters.  The plaintiffs were included.  EY represented the plaintiffs in the audits.  Apparently, EY failed to disclose to the plaintiffs that the civil investigation and settlement created a potential conflict of interest with the plaintiffs whose IRS audits EY was handling.  Further, the IRS knew EY was representing plaintiffs at the same time that it was conducting an audit of plaintiffs.  The IRS should have prevented that conflict.  (Paragrpah 54 of the complaint, however, indicates that the audit was of a partnership rather than the partners; not clear that the allegations are consistent.)

7.  Sprint's Board got wind of this somehow and the potential for a conflict of interest between EY and the plaintiffs at the same time that EY was auditing Sprint's financials.  That put Sprint in a bind, requiring that it either terminate EY or the plaintiffs, or perhaps both.  Sprint terminated the executives, an action which would not have occurred had the executives not invested in the bullshit tax shelter EY promoted to plaintiffs.

8. The plaintiffs discovered later that the IRS had colluded with EY.

9.  Such collusion (or aiding and abetting) is actionable under New York law.

10.  As a result, the US is liable under the Federal Tort Claims Act.

A lot of interesting stuff should come out of this case.  The U.S. has not yet filed an answer.

Notably, however, plaintiffs make no attempt in the complaint to discuss the bullshit tax shelter or defend their participation in such bullshit tax shelters.  One would have thought that such astute taxpayers (suggested by the damage model for $42,550,000 and $116,800, respectively) would have invested in bullshit tax shelters.  When that comes up, as it undoubtedly will, they will surely claim that they relied on EY and whatever other professionals were involved.  But whether anyone will believe it may be another issue.

The pdf of the complaint is linked above.  Here is a table of the relevant complaint paragraphs.  The allegations in the complaint are in the left hand column.  My comments to some of the paragraphs are in the right hand column.

INTRODUCTION
1. In 2002, the Internal Revenue Service (“IRS”) Criminal Investigation Division (“CID”) and the United States Attorney’s Office for the Southern District of New York (“SDNY”) began to investigate the promotion of tax shelters by Ernst & Young LLP (“EY”) to its clients. The IRS also began a civil audit of EY’s promotion of tax shelters to those same clients.	1.       I am surprised that a criminal investigation started this early. 2.       In any event, legally, the CID and USAO cannot both investigate a tax crime at the same time.  Either the CID investigates and USAO is not involved or the USAO (DOJ) investigates through a grand jury (often with IRS CID agents assigned to assist the grand jury but must act independently of IRS) and CID is not otherwise involved.
2. EY’s clients who had been sold these tax shelters included plaintiffs William T. Esrey (“Esrey”) and Ronald T. LeMay (“LeMay”) (collectively, the “Plaintiffs”). At the time, Esrey was the Chief Executive Officer (“CEO”) of Sprint Corporation (“Sprint”), and LeMay was Sprint’s Chief Operating Officer (“COO”). In addition to the criminal and civil investigations of EY’s conduct, the IRS began audits of Esrey and LeMay in the 2002 timeframe.	1. Was the IRS auditing the plaintiffs or partnerships in which the plaintiffs were at least purported partners?  See paragraph 54 below.
3. EY knew during 2002 and 2003 that its conduct was under investigation by SDNY, CID, and/or IRS. These investigations created a conflict of interest between EY and the Plaintiffs.
4. In July 2003, EY settled the civil audit of its tax shelter promotion activities for $15 million, which – unbeknownst to Esrey and LeMay at the time – included a $1.4 million additional payment to induce the IRS not to call the $15 million a “penalty” in the IRS press release.	1.       David Cay Johnston, Ernst & Young To Pay U.S. $15 Million In Tax Case (NYT 7/3/03), here:  “Neither the firm nor the I.R.S. characterized the payment, other than to say it would not be tax deductible, which suggests that it was a penalty.” 2.       I think it is fair to say that every reasonably knowledgeable person knew this was a penalty.
5. EY withheld material information from Esrey and LeMay about the civil and criminal investigations of EY and EY’s agreement to resolve the IRS tax shelter promoter audit. As their long-standing tax advisor, EY owed the Plaintiffs fiduciary duties, including duties of candor, loyalty, and performance. Instead, EY represented to Plaintiffs that it would be able to favorably settle their individual audits and did not disclose the extent or seriousness of the investigations into its conduct. Plaintiffs reasonably relied on EY’s representations and  advice and trusted that it was telling them the truth.  Likewise, Plaintiffs relayed these representations to their employer, Sprint.	1. I presume that, based on the allegations, the material information EY withheld was that the payment was for a penalty.  Did the plaintiffs have any professional advice independent of EY? 2.  There is no information about what the material information was (although I think #1 nails it), nor what the defendants would have done with the information if they had it.
6. The IRS knew of EY’s fiduciary duties to Plaintiffs, and of EY’s conflict of interest, but nonetheless helped EY to hide information from Plaintiffs knowing that such information would have been critical to Plaintiffs’ evaluation of whether to trust EY and whether to continue to tell Sprint that EY was trustworthy and devoted to helping Plaintiffs resolve their tax audits with the IRS. The IRS also permitted EY to continue to represent Plaintiffs before the IRS, notwithstanding that this continued representation violated Treasury Department Circular No. 230, 31 C.F.R. §§ 10.0-10.93 (2003).
7. As a result of EY’s breach of fiduciary duty and of the IRS’s active concealment of the criminal investigation and the truth about the tax shelter promoter audit, Esrey and LeMay could not defend themselves against allegations by Sprint and Sprint shareholders regarding their participation in the EY-promoted transactions. For instance, Plaintiffs were unable to tell Sprint that EY’s tax shelter promotion activities were being criminally investigated. Instead, the blame for the tax shelters fell on Plaintiffs and they were ultimately forced to resign from Sprint in 2003.	1.  There is no allegation that the IRS improperly concealed the criminal investigation; the only allegation I see is that the IRS concealed the nature of the civil penalty settlement. 2.  Surely the plaintiffs told Sprint that they had participated in a tax shelter promoted by EY.  As I understand the facts (some facts from outside the investigation), they were terminated / forced to resign because of their tax shelter activity with EY.  The board knew about that.
BACKGROUND
A. EY’s Fiduciary Relationship with the Plaintiffs.
12. Esrey was employed by Sprint from 1980 through 2003. Esrey was Sprint’s CEO from 1985 through 2003 and Sprint’s Chairman from 1990 to 2003
13. LeMay was employed by Sprint from 1985 through 2003. LeMay was Sprint’s President and Chief Operating Officer from 1996 to 2003, except for a period of approximately one hundred days during which Mr. LeMay left Sprint to serve as Chairman and Chief Executive Officer of Waste Management, Inc.
14. EY is a global accounting firm and one of the largest accounting firms operating in the United States.
15. EY had been Esrey’s tax advisor and financial planner for over two decades as of 2002. EY had been LeMay’s tax advisor and financial planner for over one decade as of 2002.
16. EY was in a fiduciary relationship with Esrey and LeMay. That fiduciary relationship included the duty of candor, the duty of loyalty, the duty of performance, and the duty to act in the best interests of Esrey and LeMay.
17. During the time that Esrey and LeMay were employed by Sprint, EY was Sprint’s certified public accountant.
18. On the advice of EY, Esrey and LeMay engaged in two transactions promoted by EY, the Contingent Deferred Swap (“CDS”) transaction in 1999 and 2000 and the CDS Add-On (“Add-On”) transaction in 2000 and 2001.
B. The IRS Investigations of EY.
19. The IRS initiated an audit of EY’s promotion of certain tax shelters (the “Promoter Audit”) in March 2002.
20. IRS employees conducting the Promoter Audit worked at an IRS office located in New York, New York.
21. During 2002, the IRS also began to audit taxpayers who had participated in tax shelters promoted by EY, including entities owned by Esrey and LeMay (the “Investor Audits”). IRS employees located in New York, NY worked on the Investor Audits.
22. EY represented Esrey and LeMay before the IRS in connection with the Investor Audits.
23. The IRS dealt directly with EY as representatives of Esrey and LeMay during the Investor Audits.
24. On June 21, 2002, the United States Attorney’s Office for the SDNY informed EY that it was initiating an investigation into EY’s conduct in promoting tax shelters.	1.  This is odd because, apparently, as alleged, the IRS has not requested the grand jury investigation and the AUSA just started it sua sponte.  At least as alleged.  SDNY acts in strange and mysterious ways (which may be why it is sometimes called the "Sovereign District of New York."
25. At that time, EY retained Gerald Feffer (“Feffer”), an esteemed criminal tax lawyer with the law firm of Williams & Connolly.	Feffer was in fact one of the very best criminal tax lawyers ever.
26. On June 24, 2002, EY’s General Counsel, Kathryn Oberly (“Oberly”), informed certain EY employees of the investigation and placed a litigation hold on all materials related to EY’s promotion of tax shelter transactions (the “Litigation Hold”).
27. On June 28, 2002, Shirah Neiman (“Neiman”), a senior Assistant U.S. Attorney at SDNY, contacted Oberly about the investigation. Neiman requested, among other things, a letter confirming that EY had placed a litigation hold on relevant documents and information about the criminal statute of limitations.	Shirah Neiman has her ways.
28. On July 2, 2002, Feffer faxed to Neiman a copy of the Litigation Hold pursuant to Neiman’s June 28 request.
29. Prior to this litigation hold being put into place, EY personnel had already destroyed documents relating to EY’s tax shelter activities.
30. On July 9, 2002, Neiman informed EY’s criminal counsel that the IRS had declined to authorize the opening of a grand jury proceeding at that time, but that her office would continue to monitor the matter. The Litigation Hold was never lifted.	This is odd.  See paragraph 24 above.  If DOJ can investigate independently of IRS, why would this have stopped SDNY?
31. Throughout 2003, the IRS CID pursued a criminal investigation of EY’s conduct in promoting tax shelters.
32. In June 2003, IRS agents involved in the EY Promoter Audit told EY that CID was investigating the conduct of certain EY employees and that the Promoter Audit team was sharing documents with CID.
33. EY agreed in concept to settle the Promoter Audit with the IRS for approximately $13 million.
34. During June 2003, EY and the IRS negotiated over use of the term “penalty” in the IRS press release announcing the settlement of the Promoter Audit. The IRS initially insisted that the word “penalty” be used to accurately describe the settlement payment in the IRS press release. EY told the IRS it was concerned that the fact it paid a penalty would be “discovered by clients” and used in litigation against EY. At least one in-person settlement meeting between EY and the IRS took place in New York.
35. Although the IRS’s initial position was that use of the term “penalty” was not negotiable, the IRS changed its position and agreed to remove the term “penalty” from the press release if EY would “sweeten the deal.”
36. On July 2, 2003, EY and the IRS settled the Promoter Audit. EY paid the IRS a $15 million penalty, which included a $1.4 million increase in the payment in exchange for the IRS’s agreement not to call that payment a “penalty” in the press release announcing the settlement. The IRS knowingly induced or participated in EY’s breach of fiduciary duty when it helped EY conceal the true nature of its settlement payment.
37. By May 2004, SDNY had initiated a federal grand jury investigation of EY’s sale of tax shelters. On May 19, 2004, Justin Weddle, Assistant United States Attorney at SDNY, called EY’s criminal counsel and informed him that SDNY was formally investigating EY’s tax shelter activities.	1. Presumably at the request of the IRS unless DOJ has the power independently to investigate (in which case it would have difficulty getting return information from the IRS). 2.  Justin Weddle also has his ways.
38. On May 24, 2004, newspapers reported that EY was under grand jury investigation for its tax shelter activities.
39. In May 2007, the grand jury indicted four EY employees for participating in a scheme to defraud the IRS by designing, marketing, implementing, and defending fraudulent tax shelters.
40. On May 8, 2009, the four EY employees were convicted of multiple charges, including tax evasion in connection with the tax shelters.n1 The Second Circuit affirmed two of the convictions and reversed the other two convictions. n2    n1 United States v. Coplan, Dkt. No. 1:07-cr-00453-SHS (S.D.N.Y. May 7, 2009).    n2 United States v. Coplan, 703 F.3d 46 (2d Cir. 2012).	1.  The Coplan case cited is well worth a read, but has no real relevance to Plaintiff's case.  Apparently thrown in to give a weak complaint some gravitas.
41. On February 28, 2013, EY entered into a non-prosecution agreement with SDNY, pursuant to which EY agreed to pay $123 million.
42. On March 1, 2013, SDNY issued a press release relating to the non-prosecution agreement touting EY’s cooperation with the government investigation into the tax shelters since approximately 2003, during the time the IRS was helping EY conceal its conflict of interest from Plaintiffs.
C. EY’s Breach of Fiduciary Duty.
43. EY was on notice from June 2002 that its conduct in promoting tax shelters had attracted the attention of federal prosecutors.
44. In June 2003, the IRS explicitly informed EY that a criminal investigation of EY’s conduct, including the conduct of its employees and partners, was ongoing.
45. Larry D. Thompson, Deputy Attorney General, released a memo titled “Principles of Federal Prosecution of Business Organizations” (the “Thompson Memo”) on January 20, 2003. One factor identified in the Thompson Memo to be considered in Department of Justice charging decisions is the organization’s “willingness to cooperate.” The Thompson memo states that organizational immunity or amnesty may be granted in exchange for cooperation.	This is thrown in to show that EY would have a potential conflict of interest with its clients because it would have an incentive to throw clients under the bus.
46. As a result of the IRS criminal investigation of EY’s conduct in promoting tax shelters, EY’s interests conflicted with those of Esrey and LeMay.
47. EY did not tell Esrey or LeMay about the criminal investigation or its conflict of interest.
48. EY represented Esrey and LeMay before the IRS during the time it had an undisclosed conflict of interest associated with the criminal and promoter investigations.
49. Esrey and LeMay did not know about the IRS criminal investigation until the May 25, 2004 public disclosure of that investigation.
50. Prior to May 25, 2004, when the Wall Street Journal published an article about the criminal investigation of EY, Esrey and LeMay believed that EY continued to act in their best interests. Esrey and LeMay believed that their interests were aligned with EY’s interests, in that Esrey, LeMay, and EY all had the same objectives to prevail against the IRS in the Investor Audits.	Why wouldn’t the 2004 public information trigger S/L on plaintiff's claims?
51. The IRS knew that EY was aware of the criminal investigation and that EY’s interests conflicted with its tax shelter clients that it was representing before the IRS, including Esrey and LeMay.	This pops up in several allegations, but the issue is whether the IRS was auditing the plaintiffs or some partnership in which they invested?  That distinction is important.
52. It was IRS policy during 2002 to seek assurances from taxpayer representatives who were tax shelter promoters that their clients were informed of potential conflicts of interest. Internal Revenue Manual part 35.3.12.10 (rev. 5-9-06); NSAR 020331 (Sept. 10, 2002) (“The Manual requires the Service to seek assurances from the POA that the investors have been informed of the potential conflict of interest situation to protect the integrity of the settlement and litigation process.”).
53. The IRS permitted EY to continue to represent Esrey and LeMay before the IRS, including before IRS employees working in New York, NY.
54. Plaintiffs filed petitions in the Tax Court in 2008 challenging Final Partnership Administrative Adjustments that were issued by the IRS on January 31, 2008 (the “Tax Court Case”).
55. Throughout the Tax Court Case, the IRS failed to disclose information relevant to the case, contrary to its discovery obligations and court order. Instead, the IRS repeatedly represented that documents were destroyed or did not exist, only to locate portions (but not all) of those documents at a later time when faced with sanctions or when additional information was revealed.
56. Pursuant to discovery in the Tax Court Case, on August 21, 2013, five days before trial, the IRS produced to Plaintiffs documents showing that EY told the IRS it was concerned that the fact it paid a penalty would be “discovered by clients” and that the IRS enabled EY to hide this information in exchange for a “sweetener” of $1.4 million. This was the first time Plaintiffs learned of the IRS’s active enabling of EY’s breaches of its fiduciary duties to Esrey and LeMay.	This seems to be the core of the allegation against the IRS
57. Plaintiffs initiated an arbitration action against EY on September 15, 2011 (the “Arbitration”). On November 11, 2013, the Arbitration panel issued an interim award in favor of Esrey and LeMay; a final award was made on February 17, 2014. Plaintiffs incurred attorneys and expert fees and expenses relating to the Arbitration action. The delay in Plaintiffs learning of the extent of EY’s breaches of its fiduciary duties increased their Arbitration costs.	1.  What was the interim awards for the two? 2. What was the final awards for the two? 3. If EY compensated the two for EY’s breach, what kind of derivative claim could they have against the U.S.? 4.  Court the resolution of the EY claim constitute some type of estoppel against the current claim which is derivative?  Would there be some type of privity on the claim the two make, thus permitting some type of estoppel?
INJURY TO PLAINTIFFS
58. On February 26, 2001, Sprint entered into new employment agreements with both Esrey and LeMay. The Sprint Board authorized the contracts with full knowledge that Plaintiffs had entered into the transactions that EY had promoted.
59. LeMay was Esrey’s likely successor as CEO of Sprint. The Board informed LeMay of that fact in writing on October 2, 2002.
60. The Sprint Board and the Sprint Audit  Committee became concerned that there could be a conflict of interest between Esrey and EY and LeMay and EY because of the IRS audits of Esrey and LeMay. Beginning in 2002, Sprint required Esrey and LeMay to certify every quarter that they had no present intention to sue EY.
61. In December 2002, Esrey and LeMay made a presentation to the Sprint Board recommending that Sprint dismiss EY as its auditor because of the Sprint Board’s and Sprint Audit Committee’s concern that there could be a conflict of interest between Esrey and LeMay and EY. At the same time, EY met with the Sprint Board and represented that its advice to Esrey and LeMay was sound and its actions proper. This was at a time when EY knew that same advice and those same actions were under criminal investigation.
62. In December 2002, neither Esrey nor LeMay knew of the criminal investigation of EY.
63. The Sprint Board determined that the potential conflict of interest was too great, and concluded that firing its auditor would result in negative publicity and would negatively impact Sprint.	So, let’s get this right.  The Board of Sprint knew of the potential conflict of interest between EY and the plaintiffs but the plaintiffs did not?  Did the Board of Sprint not explain that its action was based on the conflict?
64. The Sprint Board asked both Esrey and LeMay to resign from their positions at Sprint.
65. LeMay and Esrey left Sprint in April and May 2003, respectively.
66. EY remained Sprint’s auditor until October 2003.
THE IRS’S DENIAL OF PLAINTIFFS’ ADMINISTRATIVE CLAIMS
67. Pursuant to 28 U.S.C. § 2675(a), Esrey presented the IRS with the claim set forth herein on April 29, 2015.
68. On October 22, 2015, the IRS denied the Esrey FTCA Claim.
69. Pursuant to 28 U.S.C. § 2675(a), LeMay presented the IRS with the claim set forth herein on April 29, 2015.
70. On October 22, 2015, the IRS denied LeMay’s claim.
CAUSE OF ACTION (AIDING AND ABETTING A BREACH OF FIDUCIARY DUTY)
71. All preceding allegations are incorporated here as if set forth in full.
72. EY breached its fiduciary duties of loyalty and performance to Plaintiffs.
73. The Defendant knowingly participated in EY’s breaches of its fiduciary duties to Plaintiffs in violation of the laws of New York.
74. Plaintiffs exhausted their administrative remedies with regard to their claims against the Defendant.
PRAYER FOR RELIEF
WHEREFORE, Esrey and LeMay demand judgment against Defendant in the sums of $42,550,000 and $116,800,000, respectively, fees and costs, and such other relief as the Court deems appropriate.	The damage model on this should be real interesting.

Marilyn Ames, a guest blogger, has an excellent discussion of the case:  What Duty/Ability Does the IRS Have to Notify Clients of Professionals It is Auditing? (Procedurally Taxing 5/13/16), here.