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.