In a case that demonstrates the remarkable contrast between the American and Canadian enforcement of tax rules, the United States Court of Appeals, for the Second Circuit, recently upheld a conviction in a sentence of 180 months imprisonment for seven counts of tax fraud and evasion. The severity of the penalty assessed against Paul M. Daugerdas (“Daugerdas”), can only be matched by the huebris of the defendant himself. The case is a cautionary tale for Canadian tax planners in an age of growing tax evasion and fraud enforcement.
Daugerdas was a certified public accountant and tax attorney, first at Arthur Anderson, then at two law firms. Throughout his career, Daugerdas developed, sold, and implemented a variety of tax reduction strategies for wealthy clients. His specialty was the so-called “short sale shelter, short option shelter, swaps shelter, and the HOMER shelter”. Deugerdas’ tax planning and shelters covered a period from 1994 through to 2004. In August of 2000, the Internal Revenue Service announced that transactions like those being offered by Dougerdas no longer provide the favourable tax treatment that he offered to his clients. In response, Deugerdas and his colleagues developed similar transactions with different elements and strategies.
Deugerdas’ huebris was exposed in the appeal decisions when the evidence reveled that part of his tax planning strategy involved intentional back-dating documents to attempt to gain tax advantages for his clients. Also, had his law firms issue “more-likely-than-not” opinion letters falsely stating that the tax shelters had a reasonable possibility of producing a profit, but it was clear that they would not. The letters were held to be entirely dishonest.
Deugerdas also profited personally from his creation of various shelters. From 1993 to 1998, he received more than $26,000.00 of income. He used the short sale shelter yearly during that time period and as a result paid only $7,313.00 in federal personal income tax. From 1999 to 2001, he had over $79 million in income, during those years using short option shelter to offset this income he paid no federal personal income tax at all.
Deugerdas faced charges relating to conspiracy to defraud the Internal Revenue Service (“IRS”), tax evasion on behalf of his clients, one count of obstructing the IRS investigation, and one count of mail fraud. He was convicted of all those offences before jury.
Others were prosecuted along with Deugerdas, including his colleague David Parsc. Parsc ultimately negotiated a deferred prosecution agreement with the government, and testified against Deugerdas.
The panel of the United States Court of Appeals unanimously dismissed the various grounds of appeal on the conviction and the sentence. The trial judge had sentenced of 180 months imprisonment, three year’s supervised release, forfeiture in the amount of $146,737,500.00 and restitution in the amount of $371,006,397.00. Appeal court held that Deugerdas had the requisite mental intent or mens rea to commit the offences that he was convicted of, that there was no basis to reduce the sentence the trial judge had imposed upon him.
The combined length of the jail term and the scathing criticism of the appellant by the Appeals Court showed little sympathy or mercy for the white collar criminal. Although there was no violence or weapons in these crimes, they were nevertheless dealt with firmly and harshly.
In contrast, there have been few prosecutions and even fewer convictions of individuals and corporations in Canada under the Income Tax Act. The Canada Revenue Agency (“CRA”) is making headway in enforcing the Income Tax Act anti-fraud innovation provisions. However, there is not the same degree of resources, intensity, and consistency in the enforcement of tax fraud and evasion rules in Canada. Time will tell whether Canada gets more serious in prosecuting white collar criminals and tax evaders under the new liberal government.
 United States of America v. Paul M. Daugerdas, The United States Court of Appeals, for the Second Circuit, decided September 21, 2016, docket number sign 14-2437, P.4