U.S. Sues Two California Lawyers & Kentucky Financial Professional to Block Nationwide Promotion of "Intermediary Transaction" Tax Shelter
Lawsuit is Part of Continuing Enforcement Efforts Against Abusive Tax Shelters
WASHINGTON – The United States has sued two Southern California attorneys and a Kentucky financial professional to bar them from promoting an allegedly abusive tax shelter known as an “intermediary transaction,” the Justice Department announced today. The lawsuit was filed in federal court in Camden, N.J., against Charles Klink of Fontana, Calif., Caleb Grodsky of Los Angeles and Steven Block of Louisville, Ky. According to the government’s civil injunction complaint, Klink is a former partner in the Los Angeles office of the law firm Manatt, Phelps & Phillips LLP, while Block has worked in the financial services industry for over two decades. The complaint asserts that Klink, Grodsky and Block have made millions of dollars helping individuals across the country sell corporate assets without paying federal corporate income taxes on the resulting capital gain income.
“Stopping the marketing and use of abusive tax shelters remains one of our top priorities for 2011,” said John A. DiCicco, Acting Assistant Attorney General of the Justice Department’s Tax Division. “White-collar professionals who promote these schemes face the prospect of significant legal sanctions. The IRS and the Justice Department are working diligently to ensure that people who buy into these sophisticated tax dodges ultimately have to pay the taxes they owe, along with interest and appropriate penalties.”
Klink, Grodsky and Block purportedly use an intricate web of trusts and corporations to act as intermediaries between their customers, who own closely held corporations, and buyers who want to buy the customers’ corporate assets. Examples of such assets discussed in the complaint include a $205 million, twelve-story office building in Washington, D.C.; a $3.5 million vineyard in St. Helena, Calif.; and a $22.2 million, six-building office campus in Laguna Hills, Calif.
According to the complaint, the defendants purchase all of the stock in a customer’s corporation shortly before or after the asset sale. The government alleges that they then falsely tell the customer that, following the defendants’ purchase of the corporation, the defendants will restructure the corporation into a profitable new business and have it pay federal income taxes on the capital gain from the asset sale.
However, the complaint alleges, Klink, Grodsky and Block never intend to pay the corporate income taxes on those capital gains. Rather, within days of taking control of the corporation, and following the sale of all its assets, the defendants allegedly implement what is known as a “distressed asset trust” (DAT) tax shelter and claim deductions for sham fees to offset most or all of the capital gains. The defendants also allegedly take steps to siphon off the corporation’s assets, leaving it with no funds to pay any taxes due once the Internal Revenue Service (IRS) learns of the scheme and assesses taxes.
According to the complaint, Klink, Grodsky and Block obtain the DAT tax shelters from John Rogers, a Chicago attorney and former partner at Seyfarth Shaw LLP. In November 2010 the Justice Department sued Rogers to bar him from promoting the DAT tax shelter. According to that lawsuit, Rogers’s DAT scheme involves a foreign business essentially selling low-value debt, such as bad checks, to a U.S. entity created and controlled by Rogers. In return, the U.S. entity allegedly pays the foreign company 1 to 2 percent of the debt’s face value and then contributes portions of the debt to multiple supposed “trusts,” which are also created and controlled by Rogers. Rogers then allegedly sells the trusts to his customers for a price pegged to the tax loss to be generated by the tax shelter.
The complaint against Klink, Grodsky and Block alleges that they have caused the corporations they acquired to deduct improperly over $112 million of distressed consumer receivables. The government estimates that the tax loss resulting from their promotion of the tax schemes at issue in this case exceeds $40 million. The complaint also asks the court to require them to produce any records identifying any persons who have participated in any tax scheme they promoted.
More information about the Tax Division’s enforcement efforts can be found on the Division’s website.