Paul M. Daugerdas, a 63 year-old tax attorney and certified public accountant, was sentenced on June 25, 2014 to serve 15 years in prison for orchestrating a massive fraudulent tax shelter scheme in which he and his co-conspirators designed, marketed, and implemented fraudulent tax shelters used by wealthy individuals to evade over $1.6 billion in taxes.
After an almost two-month long trial, Daugerdas was convicted of the following offenses: (1) conspiring to defraud the IRS, (2) conspiring to evade taxes, (3) conspiring to commit mail and wire fraud, (4) corruptly endeavoring to obstruct and impede the internal revenue law, (5) tax evasion (four counts relating to the use of various tax shelters for specified clients), and (6) mail fraud.
The 20-year scheme, which Daugerdas hatched while working at Arthur Andersen and then continued while a partner at two law firms – Altheimer & Gray and then Jenkens & Gilchrist (J&G) – generated over $7 billion in fraudulent tax losses and yielded approximately $95 million in fees to Daugerdas personally.
As part of the scheme, the government argued that Daugerdas and others plotted to defraud the IRS by preventing the IRS from:
- Detecting their clients’ use of these shelters;
- Understanding how the transactions operated to produce the tax results reported by the clients;
- Learning that, rather than serving as legitimate investment transactions, the tax shelters lacked economic substance in that they were designed and marketed as cookie-cutter products intended exclusively to eliminate or reduce large tax liabilities;
- Learning that the clients were not seeking profit-making investment opportunities, but were instead seeking huge tax benefits; and
- Learning that, from the outset, all of the clients intended to complete a pre-planned series of steps that had been designed to lead to the specific tax benefits they sought.
Daugerdas and others created and assisted in creating transactional documents and other materials that falsely misrepresented their clients’ motivations for entering into the tax shelters and for taking various steps in order to yield the tax benefits.
As part of the scheme, Daugerdas and his co-conspirators also backdated some of the tax shelter transactions. Specifically, he and his co-defendants learned that certain tax shelter transactions had been implemented incorrectly during the year of the transactions in that they failed to produce the amount or type of tax losses requested by the clients. Rather than reporting these tax shelter results as they occurred – as required by the Internal Revenue Code – Daugerdas and others engaged in corrupt “correcting” transactions after the close of the pertinent tax years. He then backdated the tax shelter documents to make it appear that the amount and type of tax losses sought by the clients had in fact been generated during the pertinent tax years.
Daugerdas also authored fraudulent tax opinion letters that falsely described when certain aspects of the transactions had actually occurred. As a result of the fraudulent backdating, tax shelter clients filed tax returns that falsely and fraudulently claimed tens of millions of dollars of tax losses to which they were not entitled.
The scheme netted Daugerdas and his co-conspirators millions of dollars in fees and bonuses. Daugerdas himself made $95 million in profits but used tax shelters to reduce the taxes he paid to less than $8,000. But for the shelters, he would have owed over $32 million in taxes.
In addition to the prison term, Judge Pauley ordered Daugerdas to forfeit $164,737,500 in proceeds from the offenses, which included certain assets that had been seized and frozen at the time Daugerdas was indicted. The forfeited proceeds included a lakefront home on Lake Geneva in Wisconsin, and over $20 million in various securities and financial accounts. Judge Pauley also ordered Daugerdas to pay $371,006,397 in restitution to the IRS. At sentencing, Judge Pauley said that Daugerdas “was at the apex of tax shelter racketeers who tapped into the greed of the super wealthy who did not want to pay taxes.”