Manhattan U.S. Attorney Obtains Civil Injunction Against New York City Accountant Barring Him From Organizing, Promoting, Or Selling Abusive Tax Shelters

Geoffrey S. Berman, the United States Attorney for the Southern District of New York announced today that the United States has simultaneously filed and settled a civil injunction lawsuit against MICHAEL N. SCHWARTZ, a certified public accountant in New York City, to permanently enjoin him from organizing, promoting, or selling abusive tax shelters.  The tax shelters that SCHWARTZ organized, promoted and sold, exploited foreign currency options contracts and U.S tax rules to generate artificial losses that taxpayers could claim on their tax returns.  As part of the settlement, approved on Thursday, August 8, 2019, in Manhattan federal court by U.S. District Judge Vernon S. Broderick, SCHWARTZ agreed to be permanently enjoined from organizing, promoting, or selling any illegal tax shelter. 

Manhattan U.S. Attorney Geoffrey S. Berman said: “These illegal tax avoidance schemes cheated the Government out of hundreds of millions of dollars in taxes.  This Office will hold accountable those professionals who abuse their expertise to promote this type of fraud on the United States.”

As alleged in the complaint filed with the settlement agreement:

The abusive tax shelter transactions organized, promoted, and sold by SCHWARTZ involved complex foreign currency transactions designed to generate artificial losses.  Under these schemes, investors entered into foreign currency options contracts, with long and short positions that largely offset each other.  The investors then transferred some or all of the foreign currency options, and, exploiting certain tax rules, purportedly generated large losses without also realizing the offsetting gains.  SCHWARTZ’s tax shelters therefore resulted in taxpayers claiming large phony tax losses, though they suffered no real economic loss.  All told, more than one hundred taxpayers participated in these shelters, which yielded them over $400 million in purported losses.

As part of the settlement, SCHWARTZ admitted, among other things, that he developed several of these transactions:

• Schwartz admitted that he developed the so-called Deerhurst Trading Strategies transaction (the “DTS Transaction”), which involved the use of foreign currency options contracts in an effort to generate losses that taxpayers could claim on their tax returns through reliance on specific tax rules.

• This transaction was examined by the Tenth Circuit Court of Appeals in Sala v. United States, 613 F.3d 1249 (10th Cir. 2010), which found that the transaction lacked economic substance in light of the fact that the loss generated “was designed to be entirely artificial.”  Id. at 1253.

• Schwartz also admitted that he developed the so-called Castle and MM-MNS Transactions (the “Major-Minor Transactions”), which involved the use of foreign currency options contracts in an effort to generate losses that taxpayers could claim on their returns through reliance on specific tax rules.

• One of these transactions was examined by the Sixth Circuit Court of Appeals in Wright v. Commissioner, 809 F.3d 877, 880 (6th Cir. 2016), which found that “[a]lthough these transactions involve large sums of dollars, euros, and krones, [they] appear to have subjected the [taxpayers] to little actual economic risk because the four options in the major-minor transactions offset each other,'' and concluded that "the [taxpayers] appear to have engaged in the major-minor transactions primarily to generate the desired tax loss.”  Id. at 884.

In July and August 2015, the IRS assessed penalties against SCHWARTZ pursuant to Section 6707 of the Internal Revenue Code that have been the subject of litigation in the Chapter 7 bankruptcy proceeding In re Schwartz, 15-12746 (MKV) (Bankr. S.D.N.Y.).   Through a stipulation approved by the bankruptcy court on June 4, 2019, SCHWARTZ agreed to pay $650,000 to satisfy these penalties, having demonstrated an inability to pay the full amount, and further agreed to be subject to the injunction that is the subject of this district court action. 

Mr. Berman thanked IRS for its invaluable assistance in this matter.

The case is being handled by the Office’s Tax and Bankruptcy Unit.  Assistant United States Attorneys Mónica P. Folch and Samuel Dolinger are in charge of the case.