Omega Forex Group v. USA

MOTION for Summary Judgment and Memorandum in Support

D. UtahSeptember 30, 2016

1 JOHN W. HUBER, United States Attorney (#7226) JOHN K. MANGUM, Assistant United States Attorney (#2072) 185 South State Street, Suite 300 Salt Lake City, Utah 84111-1506 Telephone: (801) 524-5682 LANDON YOST Trial Attorney, Tax Division, U.S. Department of Justice P.O. Box 683, Ben Franklin Station Washington, D.C. 20044 Tel: (202) 307-2144 Fax: (202) 307-0054 Landon.M.Yost@usdoj.gov Attorneys for the United States of America IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH, CENTRAL DIVISION OMEGA FOREX GROUP, LC; Petitioner, v. UNITED STATES OF AMERICA; Respondent. ____________________________________ Case No. 2:14-CV-00915-BSJ UNITED STATES’ MOTION FOR SUMMARY JUDGMENT Respondent the United States of America respectfully moves the Court for summary judgment against Petitioner Omega Forex Group, pursuant to Federal Rule of Civil Procedure 56 and DUCivR 7-1 and 56-1. This motion is based on the grounds set forth in this motion, the grounds set forth in the United States’ prior motion for summary judgment, Docket No. 19, the pleadings and papers already on file in this action, documents and testimony from the related criminal case United States v. Evanson et al, 2:05-CR-805-TC, (D. Utah), and the exhibits attached hereto. Pursuant to DUCivR 56-1(f) the United States is concurrently filing an appendix with all exhibits. Finally, the United States certifies that, in compliance with DUCivR 7- Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 1 of 63 2 1(a)(3)(A), this motion does not exceed twenty-five pages, exclusive of the table of contents, table of authorities, statement of relief sought, introduction, statements of issues and elements, statement of undisputed material facts, and appendix with exhibits. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 2 of 63 3 TABLE OF CONTENTS TABLE OF AUTHORITIES .......................................................................................................... 4 STATEMENT OF RELIEF SOUGHT ........................................................................................... 6 INTRODUCTION .......................................................................................................................... 7 STATEMENT OF ISSUES AND ELEMENTS ........................................................................... 10 STATEMENT OF UNDISPUTED MATERIAL FACTS ........................................................... 11 MEMORANDUM OF POINTS AND AUTHORITIES .............................................................. 36 I. The Omega Forex losses were the result of fraud and Evanson’s intent to evade tax for his clients ......................................................................................................................................... 36 A. Legal standard for fraud ................................................................................................. 36 B. The evidence shows that the Omega Forex losses are the result of Evanson’s attempt to evade taxes for his clients ...................................................................................................... 38 II. The Court should uphold the IRS’s assertion of a fraud penalty ....................................... 42 A. There is no jurisdiction for a reasonable cause defense to the fraud penalty ................. 47 III. Evanson’s intent to evade tax keeps the statute open under Section 6501(c)(1) ........... 48 A. The plain meaning of Section § 6501(c)(1) does not require that Flath himself had the intent to evade tax .................................................................................................................. 49 B. Section 6501(c) is not displaced by Section 6229(c)(1) ................................................ 56 IV. Flath’s intent to evade tax also keeps the statute open under Section 6501(c)(1) ......... 57 CONCLUSION ............................................................................................................................. 62 Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 3 of 63 4 TABLE OF AUTHORITIES Cases AD Global Fund, LLC ex rel. North Hills Holding, Inc. v. United States, 481 F.3d 1351 (Fed. Cir. 2007) ............................................................................................................................. 48, 57 Allen v. Commissioner, 128 T.C. 37 (2007) ..................................................................... 52, 53, 56 American Boat Co. v. United States, 583 F.3d 471 (7th Cir. 2009) ............................................. 47 Anaya v. Commissioner, 983 F.2d 186 (10th Cir. 1993) ........................................................ 54, 56 Anaya v. Commissioner, T.C. Memo. 1991-91............................................................................. 54 Andantech L.L.C. v. Commissioner, 331 F.3d 972 (D.C. Cir. 2003) ............................................ 57 Arbitrage Trading, LLC v. United States, 108 Fed. Cl. 588 (2013) ............................................. 43 Badaracco v. Commissioner, 464 U.S. 386 (1984) ................................................................ 48, 51 Ballard v. Commissioner, 740 F.2d 659 (8th Cir. 1984) .............................................................. 54 BASR Partnership by and through Pettinati v. United States,795 F.3d 1338 (Fed. Cir. 2015) ... 55, 56 Biaggi v. Commissioner, 79 T.C.M. 1488, 2000 WL 146797 (2000) .......................................... 39 Browning v. Comm’r, 102 T.C.M. (CCH) 460, 2011 WL 5289636 (2011) ................................. 56 Bufferd v. Commissioner, 506 U.S. 523 (1993) ............................................................................ 50 Cabell v. Markham, 148 F.2d 737 (2d Cir. 1945)......................................................................... 50 California Radomes, Inc. v. Commissioner, 593 F. App’x 635 (9th Cir. 2015) ........................... 10 Candyce Martin 1999 Irrevocable Trust v. United States, 822 F.Supp.2d 968 (N.D. Cal. 2011) 46 City Wide Transit, Inc. v. Commissioner, 709 F.3d 102 (2d. Cir. 2013) .................... 51, 52, 56, 57 Connecticut Nat’l Bank v. Germain, 503 U.S. 249 (1992) ........................................................... 49 Curr-Spec Partners, L.P. v. Commissioner, 579 F.3d 391 (5th Cir. 2009) .................................. 57 Estate of Upshaw v. Commissioner, 416 F.2d 737 (7th Cir.1969) ............................................... 54 Garcia v. Commissioner, 103 T.C.M. 1829, 2012 WL 1957703 (2012) ...................................... 10 Jade Trading, LLC ex rel. Ervin v. United States, 81 Fed.Cl. 173 (Fed. Cl. 2008) ...................... 46 Klein v. Commissioner, 880 F.2d 260 (10th Cir. 1989) .......................................................... 10, 38 NPR Investments, L.L.C. ex rel. Roach v. United States, 740 F.3d 998 (5th Cir. 2014) .............. 11 Ohio v. Akron Ctr. for Reprod. Health, 497 U.S. 502 (1990)....................................................... 37 Polakof v. Commissioner, 820 F.2d 321 (9th Cir.1987) ............................................................... 43 Prati v. United States, 603 F.3d 1301(Fed. Cir. 2010) ................................................................. 57 Public Citizen v. United States Dep’t of Justice, 491 U.S. 440 (1989) ........................................ 51 Recklitis v. Commissioner, 91 T.C. 874 (1988) ............................................................................ 38 Rhone–Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533 (2000) ............ 37 Rhone-Poulenc Surfactants and Specialties, L.P. v. Commissioner, 114 T.C. 533 (2000) .......... 57 Ruidoso Racing Ass’n, Inc. v. Commissioner, 476 F.2d 502 (10th Cir. 1973) ............................. 37 Shasta Strategic Investment Fund, LLC v. United States, 2014 WL 3852416 (N.D. Cal. July 31, 2014) .................................................................................................................................... 44, 46 Simon v. Commissioner, 830 F.2d 499 (3rd Cir. 1987) ................................................................ 43 Spies v. United States, 317 U.S. 492 (1943) ................................................................................. 57 Stobie Creek Investments, LLC v. United States, 82 Fed.Cl. 636 (Fed. Cl. 2008) ....................... 46 Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 4 of 63 5 Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67 (2012) ............................................ 43, 45 Transpac Drilling Venture, 1983-2 by Dobbins v. United States, 83 F.3d 1410 (Fed. Cir. 1996) 50 United States v. Evanson et al, 2:05-CR-805-TC, D. Utah) ................................................. 1, 6, 41 United States v. Evanson, 584 F.3d 904 (10th Cir. 2009) ............................................................ 18 United States v. Klausner, 80 F.3d 55 (2d Cir. 1996) ................................................................... 57 United States v. Woods, 134 S.Ct. 557 (2013) .............................................................................. 42 Vannaman v. Commissioner, 54 T.C. 1011 (1970) ....................................................................... 54 Woods v. Standard Ins. Co., 771 F.3d 1257 (10th Cir. 2014)....................................................... 49 Statutes 26 U.S.C. § 6221 ..................................................................................................................... 43, 44 26 U.S.C. § 6226 ........................................................................................................................... 42 26 U.S.C. § 6229 ............................................................................................................... 49, 55, 56 26 U.S.C. § 6230 ........................................................................................................................... 46 26 U.S.C. § 6501 .................................................................................................................... passim 26 U.S.C. § 6653 ........................................................................................................................... 38 26 U.S.C. § 6662 ........................................................................................................................... 42 26 U.S.C. § 6663 ................................................................................................................. 6, 10, 36 26 U.S.C. § 6664 ........................................................................................................................... 46 26 U.S.C. § 7201 ........................................................................................................................... 37 26 U.S.C. § 7206 ........................................................................................................................... 38 Other Authorities H.R. Rept. 105–148 (1997) ........................................................................................................... 37 Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 5 of 63 6 STATEMENT OF RELIEF SOUGHT In its prior motion for summary judgment, Docket No. 19, submitted before any discovery had been conducted in this case, the United States moved for summary judgment on three issues: (1) that the adjustments in the Notices of Final Partnership Administrative Adjustment (“FPAA”) that the IRS issued to Omega Forex Group disallowing the fraudulent foreign currency losses that Omega had claimed in 1998 and 1999 should be upheld; (2) that the fraud penalty pursuant to 26 U.S.C. § 6663 asserted at the partnership level in these FPAAs should be determined to be applicable; and (3) that the statute of limitations to make the assessments proposed in the FPAAs is still open. The United States asserted that all three issues must be resolved in the government’s favor if the Omega Forex losses were fraudulent and claimed with the intent to evade tax. The United States further asserted that the jury in the related criminal proceeding, United States v. Evanson et al, 2:05-CR-805-TC, D. Utah, had already necessarily determined that these losses were indeed fraudulent and that Dennis Evanson had the intent to evade tax with respect to these losses, and that Omega Forex was therefore collaterally estopped from contesting these three issues. The Court denied this motion for summary judgment, stating that it was premature to rule on these issues and that factual discovery was necessary. Docket No. 32. The United States renews its motion on these three issues, and incorporates herein its legal arguments and factual submissions from its prior motion, with the exception of the arguments with respect to collateral estoppel. Although the United States still believes that Omega Forex should be collateral estopped from challenging the issue of whether the Omega Forex losses were the result of Evanson’s fraud, it no longer moves for summary judgment on Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 6 of 63 7 this basis, as it believes that the clearer basis for summary judgment is that the undisputed evidence presented in this motion, including the criminal convictions, compel such a finding. Additionally, in its previous motion for summary judgment, the United States noted that the statute of limitations to make assessments was also kept open by Robert Flath’s intent to evade tax with respect to his individual returns. But, because no discovery had been conducted, the United States did not move for summary judgment on this basis. The undisputed material facts developed through discovery now demonstrate that Flath had the intent to evade tax and the United States moves for summary judgment on the statute of limitations issue on this basis as well in this motion. Finally, Flath has asserted a reasonable cause defense to the imposition of the fraud penalty. There is no jurisdiction for the Court to consider this partner-level defense in this partnership proceeding, but even if the Court were to consider the defense, the undisputed facts demonstrate that Flath did not have reasonable cause to claim the Omega Forex losses. INTRODUCTION Dennis Evanson, along with several others, was criminally convicted for running a tax evasion scheme that employed a variety of methods to enable his clients, among them Robert Flath, to evade taxes on their individual income returns. His convictions included conspiracy to defraud the United States, multiple counts of tax evasion, and multiple counts of aiding and assisting in the preparation of false income tax returns. Some of the entities he used to perpetrate this fraud included Omega Forex Group, Euro Pacific Commodities, Commonwealth Professional, and Children’s Charities International. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 7 of 63 8 Using Omega Forex and Euro Pacific Commodities, Dennis Evanson fabricated large and repeated “foreign currency losses” for his clients. The method was simple. Evanson would simply record a large loss for a foreign currency trade on Omega Forex’s ledger, as well as a corresponding gain for Euro Pacific Commodities, ostensibly a foreign entity. No money would exchange hands, however, as Evanson would simply record a promissory note due Euro Pacific Commodities from Omega Forex in the amount of the loss, a note that Omega Forex never paid and that Euro Pacific Commodities never attempted to collect on. Furthermore, there was not even any money that could have exchanged hands, as the majority of clients, including Flath, never contributed anything of value to Omega Forex with which it could have legitimately purchased foreign currency positions. Using Commonwealth Professional, Evanson manufactured the avoidance of income recognition for his clients, as well as exorbitant deductions for premiums paid for ostensible malpractice and disability insurance. Clients such as Flath would have their professional practices make large payments to Commonwealth Professional, hundreds of thousands of dollars a year in many cases, and those practices would then deduct those payments as insurance premiums, even though they already had legitimate third-party insurance, and even though the clients were able to effectively control and use the money paid to Commonwealth Professional as they saw fit. And despite the fact that the payments made by the professional practices went to the clients’ accounts for the clients to effectively control, clients such as Flath would not report these payments as income from their professional practices on their tax returns. Children’s Charities International was an entity that Evanson and his clients such as Flath used to return the clients’ money without tax consequences after they had, for example, Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 8 of 63 9 contributed it to an Evanson-related entity such as Commonwealth Professional. After the clients had avoided income recognition and generated deductions by contributing money to Commonwealth Professional, they could get the money back without tax consequences by disguising the returned money as phony “scholarships” paid by Children’s Charities International to the client’s children. Clients such as Flath were well aware of the tax evasive nature of these schemes. After all, it is what they were paying Evanson for, as they had to pay fees to Evanson for each of these schemes that were calculated as a percentage of the tax savings – typically 20%. Indeed, for example, Flath himself sent Evanson a fax that outlined the circular nature of the Omega Forex transaction, detailing how his money would be cycled through Evanson’s program, thereby generating a tax loss, and then come back to Flath, less the 20% fee paid for the tax evasion service. Flath was also aware that he had contributed nothing of value to Omega Forex that would give him a basis to claim a loss from Omega Forex. He was also aware that this was a problem, and to cover up this problem he lied to his accountant and told him that he had contributed value to Omega Forex so that his accountant would claim the loss for him, and he maintained this lie throughout the early part of this litigation. Flath also admitted that he had full control of the payments made to Commonwealth Professional by his endodontic practices as ostensible insurance premiums, and that once Evanson’s fees for tax savings had been deducted, that these funds were his to do with as he pleased. Yet he did not report these payments, which averaged $8,000 to $10,000 a month, as income from his endodontic practice. Instead, he actually deducted them as insurance payments. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 9 of 63 10 Flath was financially savvy and sophisticated, tracked his money carefully, was well educated, and knew what he was paying for: a tax loss. Because both he and Evanson had the intent to evade tax through the use of these fraudulent tax evasion schemes, the Court should uphold the adjustments in the Omega Forex FPAAs that disallow the fraudulent foreign currency losses, determine that the fraud penalty is applicable to these losses, and find that the statute of limitations is still open to make the assessments relating to these adjustments. STATEMENT OF ISSUES AND ELEMENTS “The existence of fraud is a question of fact to be resolved upon consideration of the entire record,” and the “taxpayer’s entire course of conduct may establish the requisite fraudulent intent.” Garcia v. Commissioner, 103 T.C.M. 1829, 2012 WL 1957703 *6 (2012), aff'd sub nom. California Radomes, Inc. v. Commissioner, 593 F. App’x 635 (9th Cir. 2015). (internal citations omitted. Accordingly, the issues and elements below are supported by the entire factual record laid out in the succeeding section. 1. The 1998 and 1999 Omega Forex FPAAs’ adjustments disallowing Omega’s foreign currency losses should be upheld on the grounds that the undisputed material facts show that these losses were false and fraudulent. Klein v. Commissioner, 880 F.2d 260, 262 (10th Cir. 1989). 2. The 1998 and 1999 Omega Forex FPAAs’ assertions of a Section 6663 fraud penalty relating to Omega’s fraudulent foreign currency losses should be upheld on the grounds that the undisputed material facts show that these losses were false and fraudulent and a result of Dennis Evanson’s intent to evade tax. Id. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 10 of 63 11 3. Evanson’s intent to evade tax by perpetrating the Omega Forex fraud keeps the statute open under Section 6501(c)(1) for the IRS to make the assessments on Flath’s 1998 and 1999 income tax returns relating to that fraud. 26 U.S.C. § 6501(c)(1). 4. Flath’s intent to evade tax relating to his 1998 and 1999 income tax returns also keeps the statute open under Section 6501(c) for the IRS to make assessments on these returns. Id. 5. Flath is jurisdictionally barred from asserting a partner-level reasonable cause defense to the Section 6663 fraud penalty in this partnership-level proceeding, but even if he were not, the undisputed material facts demonstrate that he did not have reasonable cause. NPR Investments, L.L.C. ex rel. Roach v. United States, 740 F.3d 998, 1014 (5th Cir. 2014). STATEMENT OF UNDISPUTED MATERIAL FACTS 1. Omega Forex Group was owned and operated by Dennis Evanson as part of a scheme to defraud the United States of over $20 million in tax revenue.1 2. Evanson did this by manufacturing fraudulent foreign currency losses for Omega Forex and his clients. In 1998, Omega Forex claimed a loss of $4,698,325 for what it deemed a “Section 988 transaction loss,” and in 1999, it claimed a Section 988 transaction loss in the amount of $3,058,405. The Omega partnership returns claiming these losses were signed by Evanson, on behalf of Omega’s Tax Matters Partner, Capital West, L.C., in 1998 and Forex Trade Management, L.C. in 1999.2 Both of these entities were owned and operated by Evanson.3 1Ex. LY-1 (Indictment ¶¶ 8 and 9); Ex. LY-2 (Utah State documents relating to Omega Forex); Ex. LY-3 (1-30-08 criminal trial testimony) at 7:25-9:4; Ex. LY-4 (2-1-08 criminal trial testimony) at 19:1-9; Ex. LY-5 (Jury Verdict Form); Exs. LY-6, LY-7, and LY-8 (Statements by Defendants Metcalf, Barker, and Petersen, respectively, in Advance of Plea of Guilty). 2 Exs. KK-1 and KK-2 (Depo Exs. 17 and 23), Schedules K, Lines 7. 3 Ibid. at footnote 6; SUMF #1. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 11 of 63 12 3. These losses flowed through to Omega Forex “partners,” including Flath, who then claimed these losses on their income tax returns.4 Most of Omega Forex’s partners did not contribute cash value to Omega Forex, however, only promissory notes. For example, for 1998, out of total “member contributions” of $5,328,745.14, only $439,841 came into Omega Forex’s checking account as cash value; the remainder was simply recorded on Omega Forex’s general ledger as “Notes Receivable,” including a $200,000 Note Receivable from Flath.5 No interest was charged, and for the most part, no payments were made, on these notes, and the balances kept rolling over year after year, as reflected on Omega Forex’s general ledger to the end of 2001.6 4. The losses generated by Omega Forex did not correspond to any actual economic losses, or to any actual investments of value by Omega Forex’s partners. Instead, Evanson generated them out of whole cloth by constructing a paper-only transaction between Omega Forex and another entity that Evanson effectively controlled and owned, Euro Pacific Commodities. In other words, Evanson was on both sides of a fictional transaction.7 5. Euro Pacific Commodities, along with other Evanson-related entities discussed more below, such as Commonwealth Professional Reinsurance and Children’s Charities International, were wholly owned subsidiaries of Euro Pacific Corporation.8 6. Although Evanson tautologically claims that he did not control and own Euro Pacific Corporation because his “guarantee membership specifically excluded [him] from having any control of Euro Pacific Corporation,” the evidence belies this claim.9 4Exs. KK-1 and KK-2 (Depo. Exs. 17 and 23), Schedules K-1. 5 Ex. LY-18 (Depo Ex. 18). 6 Ex. LY-19 (Depo. Ex. 95). 7 SUMF, ## 4-17. 8 Ex. LY-20 (Depo Ex. 91); Ex. LY -16, Deposition of Dennis Evanson (“Evanson Depo.”), pp. 30:7-31:4. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 12 of 63 13 7. First, the only issued and outstanding guarantee membership of Euro Pacific Corporation was issued to Evanson.10 8. Second, despite his claims otherwise, Evanson had the ability, and exercised that ability, to appoint corporate officers for Euro Pacific Corporation.11 9. Third, on the confidential opening forms for International Capital Group, the entity which Evanson claims owned Euro Pacific Corporation, Evanson was listed as the beneficial owner of International Capital Group, although an individual name S.A. Bodden was listed as the official owner.12 For this reason, the management company for Euro Pacific Corporation, and the banks that provided the accounts for these companies, requested that Evanson execute a nominee agreement appointing S.A. Bodden as his nominee.13 10. Fourth, a deed of release and indemnity for Press Services Limited (another Euro Pacific Corporation entity) provided to Evanson by the management company for Euro Pacific Corporation listed Evanson as the beneficial owner, and Evanson handwrote a note clarifying that he was the beneficial owner “of all outstanding guarantee memberships of the parent company of the company,” which was Euro Pacific Corporation.14 Evanson was asked to sign as the beneficial owner on this document, which he did, adding again the handwritten note that he was the “guarantee member of the Euro Pacific Corporation, parent to Press Services Limited.”15 11. Fifth, and perhaps most tellingly, in November of 2000, Evanson orchestrated the transfer of Euro Pacific Corporation from its first nominee owner, S.A. (Aileen) Bodden, to 9 Ex. LY-16, Evanson Depo., p. 34:8-15. 10 Ex. LY-21 (Depo Ex. 92), p. 2; Ex. LY-16, Evanson Depo., pp. 33:19-34:7. 11 Ex, LY-21 (Depo Ex. 92), p. 3; Ex. LY-16, Evanson Depo., p.36:4-20. 12Ex. LY-16, Evanson Depo., p. 25:6-9; Ex. LY-22 (Depo. Ex. 94); Ex. LY-16, Evanson Depo., p. 38:1-21. 13 Ex. LY-22 (Depo Ex. 94). 14 Ex. LY-23 (Depo Ex. 98); Ex. LY-16, Evanson Depo., pp. 41:13-43:4. 15 Ibid. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 13 of 63 14 another nominee owner – Evanson’s brother R. Kent Evanson, who lived in Canada.16 Evanson then directed his brother to sign documents and transact the business of Euro Pacific Corporation, as needed.17 12. Sixth, Evanson transacted with banks on behalf of Euro Pacific Commodities by representing himself as the “sole manager of the company,” as well as the “protector” of Euro Pacific Corporation, and he had control over its bank accounts.18 13. All the Omega Forex “losses” came from “trades” with Euro Pacific Commodities. The Omega Forex “loss” for 1998 came from what was simply listed in its general ledger as a “12/18/1998 trade loss (3 trades)” for $5,221,515.19 These purported three trades were all with Euro Pacific Commodities, but no money actually changed hands; instead, Omega Forex’s general ledger simply recorded that there was a note due Euro Pacific Commodities in the amount of $5,221,515, recorded on 12/18/98 for those purported three trades.20 14. The Omega Forex “loss” for 1999 came from what was simply listed in its general ledger for 11/1/99 as “99 currency loss – ordinary loss” for $3,240,432.21 The counterparty on the “trade” giving rise to this “loss” was again Euro Pacific Commodities, but, again, no money changed hands; instead, Omega Forex’s general ledger simply recorded another note due Euro Pacific Commodities in the amount of $3,240,432.22 The ending balance on the money Omega Forex owed Euro Pacific Commodities for 1999 was $8,672,501.23 16 Ex. LY-24 (Depo. Ex. 87); Evanson Depo., pp. 44:5-46:7. 17 Ex. LY-25 (Depo. Ex. 90). 18 Ex. LY-26 (Depo. Ex. 88); Evanson Depo., 46:9-13. 19 Ex. LY-18 (Depo. Ex. 18), p. 14. 20 Ex. LY-18 (Depo Ex. 18), p. 11; Evanson Depo., pp. 49:25-50:20. 21 Ex. LY-24 (Depo. Ex. 24), p. 21. 22 Ex. LY-24 (Depo. Ex. 24), p. 19. 23 Ibid. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 14 of 63 15 15. This pattern of Evanson generating losses for one of his entities, Omega Forex, while recording the gains due to another of his entities, Euro Pacific Commodities, as notes receivable, continued into 2000 and 2001, and by the end of 2001 Omega Forex owed Euro Pacific Commodities $17,837,788.26, at least on paper.24 16. When asked if there was any concern on the part of Euro Pacific Commodities over the fact that Omega Forex kept accumulating millions of dollars more in ostensible debt owed to Euro Pacific Commodities year after year, without any demonstrated ability to pay, reaching almost $18 million in 2001, Evanson responded that he did not “recall discussions raising that.”25 Nor did Evanson recall any effort by Euro Pacific Commodities to ever collect on these balances due.26 17. The members of Omega Forex appeared uninterested in Omega Forex’s purported trading activity, as Evanson never sent out any kind of information about what kind of trading activity Omega Forex had been engaged in throughout the year.27 18. Reed Barker was an accountant from Colorado who introduced several clients to Evanson, Omega Forex, and the fraudulent Section 988 program, and he also participated personally in this program.28 19. Brent Metcalf was an accountant hired by Evanson in 1994 or 1995, and he kept the books and ledgers for the entities Evanson used to perpetrate tax evasion schemes, including Omega Forex.29 24 Ex. LY-19 (Depo. Ex. 95), p. 44. 25 Evanson Depo., p. 52:9-53:5. 26 Evanson Depo., p. 53:17-19. 27 Evanson Depo., p. 23:1-13. 28 Ex. LY-4: 9:12-17, 11:8-16:7. 29 Ex. LY-9 (1-29-08 criminal trial testimony): 181:4-185:3. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 15 of 63 16 20. Stephen Petersen was an accountant who introduced clients to Evanson, Omega Forex, and the fraudulent Section 988 program, and he also participated personally in this program.30 Petersen was paid over $1.1 million for referring clients to Evanson.31 21. One of Petersen’s clients who participated in Omega’s Section 988 program in 1999 was William Schjelderup.32 As Schjelderup describes it, he was not interested in foreign currency investments, but “one day [he] was told that [he] had done that” with Omega. He knew that the only purpose of this transaction was to create a tax loss, and he testified that he had not actually contributed any money to enter this transaction, just a promissory note that was “essentially a note to [himself].”33 22. Evanson was convicted for aiding and assisting in the preparation of false income tax returns for Schjelderup’s 1999 and 2000 income tax returns for his role in reducing Schjelderup’s income through the fraudulent Omega Forex losses.34 For 1999, both the Commonwealth Professional insurance transaction, as well as the Omega Forex losses appeared on Schjelderup’s return, and for 2000, the only Evanson-related transaction on Schjelderup’s return was the Omega Forex losses.35 23. One of Barker’s clients who participated in the Omega foreign currency program in 1998 was Parvez Malik. Malik also entered this program to obtain the promised tax loss, but did not pay any actual money to enter this program – just the promissory note. Barker prepared 30 Ex. LY-10 (2-6-08 criminal trial testimony): 82:9-89:8; Exs. KK-1 and KK-2 (Depo Exs. 17 and 23). 31 Ex. LY-8, ¶ 11. 32 Ex. LY-10: 126:23-129:2. 33 Ibid. at 50:9-52:3. 34 Ex. LY-1, Count 28; Ex. LY-11 (2-7-08 criminal trial testimony) at 26:10-27:5; Ex. LY-5. 35 Ex. LY-10, Dkt. # 20-11, 126:23-129:2 Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 16 of 63 17 Malik’s 1998 income tax return which reflected this Omega Forex loss.36 In fact, the only Evanson-related transaction for this return was the Omega Forex, or Section 988, transaction.37 24. Evanson was convicted for aiding and assisting in the preparation of a false income tax return for Malik’s 1998 income tax return for his role in reducing Malik’s income through the fraudulent Omega Forex losses.38 25. For their part, Barker, Metcalf, and Petersen all pled guilty to conspiring to defraud the United States, admitting that the Omega Forex foreign currency losses were fraudulent.39 The following, from Petersen’s Statement in Advance of Plea of Guilty, is representative of their admissions: “Beginning in approximately 1996, and continuing until at least April 2005, I agreed with Dennis Evanson and others to conceal some of my clients’ income from the IRS and to create false deductions for the purpose of reducing the income tax paid by my clients. The various methods we used include the methods described in the indictment including: creating false currency losses… I knew that the deductions on the tax returns were false in that they reflected transactions that had not actually taken place, and that on at least one occasion the transactions reported on a tax return filed with the IRS were not even contemplated until after the year for which the taxes were due…. As part of this scheme we were paid a fee that was typically equal to 30 percent of the tax evaded by the clients as a result of participation in the fraud scheme.”40 26. Although Petersen and Barker attempted to recant or change some aspects of their testimony and statements in advance of plea of guilty in either affidavits that they submitted to 36 Ex. LY-4 at 42:5-47:6 37Ex. LY-4, 42:5-47:6, Dkt. # 22-5. 38 Ex. LY-1, Count 28; Ex. LY-11 at 26:10-27:5; Ex. 5. 39 Exs. LY-6-LY-8. 40 Ex. LY-8, ¶ 11. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 17 of 63 18 support Evanson’s subsequent motion to vacate his conviction and sentence, or in testimony at a hearing on this motion, they later pled guilty of perjury, false declarations before a court, and false statements for these attempts, and Judge Tena Campbell found that their changed testimony was not credible and/or of little importance.41 27. With the exception of the specific changes to his testimony referred to above, Petersen’s current testimony does not vary from the testimony he gave at trial.42 This testimony includes describing an early meeting with a client and Evanson in which Evanson presented Omega Forex as an entity that would be used to generate a tax loss through a foreign currency transaction in which it “was intended that there would be a loss,” in exchange for various fees to Evanson, including one that would be a percentage of the tax savings.43 28. Evanson was indicted, and after a weeks-long jury trial in front of Judge Campbell, convicted, of conspiracy to defraud the United States under 18 U.S.C. § 371, of multiple counts of tax evasion under 26 U.S.C. § 7201, and of multiple counts of aiding and assisting in the preparation of false income tax returns that claimed these Omega Forex losses under 26 U.S.C. § 7206(2).44 Two of the counts of tax evasion for which Evanson was convicted were for filing his own personal income tax returns in 1998 and 1999 that reported the fraudulent Omega Forex losses.45 29. On October 19, 2009, the Tenth Circuit Court of Appeals affirmed Evanson’s convictions.46 41 Ex. LY-28 (Depo. Ex. 86), Ex. LY-29. 42 Deposition of Stephen Petersen, Ex. LY-45, pp. 18:16-21:2. 43 Ex. LY-10, pp. 12-14. 44 Exs. LY-1 and LY-5. 45 Ex. LY-1, Counts 5 and 6; Ex. LY-5; Exs. KK-1 and KK-2 (Depo. Exs. 17 and 23), Capital West K-1s. 46 United States v. Evanson, 584 F.3d 904 (10th Cir. 2009). Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 18 of 63 19 30. On November 9, 2009, the IRS issued to Evanson, as Tax Matters Partner for Omega Forex, a Notice of Beginning of Administrative Proceeding (“NBAP”), notifying Evanson that the IRS was beginning an audit of Omega Forex’s partnership returns.47 The NBAP was also sent to Flath.48 31. On or about August 11, 2014, the IRS issued FPAAs for Omega for the 1998 and 1999 tax years to Evanson and all the notice partners in Omega, including Flath.49 32. Omega’s Tax Matters Partner did not file a petition for readjustment within the 90 days allowed for by 26 U.S.C. § 6226(a), and no partner of Omega other than Flath has filed a petition or intervened in this case to challenge the FPAA. 33. Out of all the members of Omega Forex in 1998 and 1999, Flath alone challenges the FPAAs, and filed the instant petition on December 18, 2014.50 Flath’s Involvement 34. Robert Flath was first introduced to Dennis Evanson by John Coats, a fellow endodontist and co-owner of Rocky Mountain Endodontics.51 Coats introduced Flath to Evanson because of Evanson’s ability to help with “tax planning.”52 35. Prior to introducing Flath to Evanson, Coats had entered into an agreement with Evanson that Coats would be paid “finders fees for introducing clients who participate in offshore activities.”53 These fees were, in part, based on the amount of the clients’ designed tax losses, and on the “amounts paid to offshore companies arising from tax saving calculations of 47 Ex. KK-7 (NBAP). 48 Ex. KK-8 (List of taxpayers sent NBAP). 49Dkt. ## 2-2 and 2-3 to Petition. 50 See generally Petition, Dkt. # 2. 51 Deposition of Robert Flath, Ex. LY-15 to the Yost Decl., (“Flath Depo.”), p. 14:13-18. 52 Deposition of John Coats, Ex. LY-17 to the Yost Decl., p. 22:19-23:2. 53 Ex. LY-30 (Depo. Ex. 39). Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 19 of 63 20 the client.”54 Allocation reports maintained by Evanson show that Coats was regularly credited with these finders fees, up to $15,000 in one month, based on the purported tax savings of clients involved in Evanson’s programs.55 36. After being introduced to Evanson by Coats, Flath met with Evanson in a one-on-one meeting in which “Evanson gave [him] more of a structured educational presentation.”56 Flath does not recall any discussion from this meeting about how the purchase of foreign currency positions would be funded, but does recall that the fees for participating in the program would be “20 percent of the tax savings.”57 37. On November 9, 1998, Flath sent Evanson a fax in which he summarized his understanding of Evanson’s presentation from this meeting.58 According to Flath, the Omega Forex program involved the following steps in a circular flow of money that resulted in a purported tax savings from a purported loss: (1) establishing a “container” in “Cayman at cost of 18-20K set up fee;” (2) moving “Pretax Dollars … into container;” (3) conducting business “in Cayman not subject to IRS rules;” (4) moving the “Dollars … back to onshore with different label;” (5) paying Evanson the resulting “20% of tax savings.”59 38. Flath’s summary of his understanding of the Omega Forex program in this fax did not discuss what type of foreign currency trading the program entailed, how that trading would be funded, or what would happen in the event of a profit from that trading, but instead simply assumed that there would be a tax savings from a purported loss.60 54 Ibid. 55 Ex. LY-31 (Depo. Ex. 79). 56 Flath Depo, Ex. LY-15, p. 20:21-21:1. 57 Ibid., 23:23-24:28. 58 Ex. LY-32 (Depo. Ex. 10); Flath Depo., Ex. LY-15, pp. 25:13-26:18. 59Ex. LY-32 (Depo. Ex. 10). 60 Ibid. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 20 of 63 21 39. Flath paid a flat fee of $19,700 to enter Evanson’s tax evasion programs, and deducted this amount on his individual 1998 income tax return, claiming that this was an ordinary and necessary expense of his Schedule C business, Rock Springs Endodontics, which was Flath’s endodontic practice in Wyoming.61 Flath does not recall whether he advised the accountant who prepared his individual returns for 1998 and 1999, Gail Anger, whether this $19,700 was paid to enter into Evanson’s programs, but Gail Anger testifies that, had he been apprised of the nature of this deduction, he would not have claimed it on the Schedule C as an allowable deduction.62 40. Flath initially claimed in this litigation that he entered the foreign currency program and obtained an interest and basis in Omega Forex by transferring a “stock portfolio owned by him to Omega” in “December of 1998.”63 41. Flath later revised the claim that he had transferred stock to Omega Forex in December of 1998, and claimed only that he had “transferred securities to an entity though [sic] Evanson in late 1998 or early 1999,” and that the “purpose for the transfer was to fund Flath’s initial contribution to Omega.”64 42. At his deposition, Flath initially claimed that his basis in Omega Forex that allowed him to deduct a loss from Omega Forex of over $149,000 on his 1998 tax return came from his “contribution of stocks” to “the container.”65 61 Ex. LY-33 (Depo. Ex. 13), p. 5, line 17; Flath Depo, Ex. LY-15, 132:19-134:11. 62 Flath Depo, Ex. LY-15, p. 134:12-21; Ex. LY-34, Deposition of Gail Anger (“Anger Depo”), p. 25:5-15. 63 Ex. LY-35 (Depo. Ex. 77), p. 4. 64 Ex. LY-36 (Depo. Ex. 78), p. 4. 65 Flath Depo, Ex. LY-15, p. 48:1-22. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 21 of 63 22 43. In fact, Flath did not contribute stocks, or anything else of value, to Omega Forex in 1998, and he had no basis to claim a foreign currency loss from Omega Forex in that year, a fact of which Flath was well aware. 44. The statements from Flath’s stock account with Datek demonstrate that it was not until March of 1999 that Flath transferred roughly $165,000 worth of stocks to an Evanson- related entity, a fact that Flath admitted when confronted with these statements and other records.66 45. Flath’s transfer of stocks in March of 1999 appears to have been prompted by the questioning of his accountant, Gail Anger, during the course of Anger’s preparation of Flath’s 1998 income tax return, regarding the deductibility of the Omega Forex loss. On March 19, 1999, Anger sent Flath a letter in which he told Flath that he had claimed the Omega Forex loss of $149,857 on Flath’s return, but that he had only done so “based on [Flath’s] statement that [he] had contributed at least that much to [Omega Forex.]”67 46. One of Anger’s concerns involved the “at-risk provisions” of the Internal Revenue Code – that is, whether Flath had actually put any real money into the Omega Forex program.68 47. Anger testified that, if he recalls correctly, Flath had told him that he had actually contributed substantially more than the $149,857 loss, perhaps $300,000-$500,000.69 In reality, Flath had not contributed anything of value to Omega Forex before March 19, 1999, let alone $149,857 in value. 66 Ex. LY-37 (Depo Ex. 41); Ex. LY-38 (Depo Ex. 43); Flath Depo, Ex. LY-15, pp. 52:12-59:1. 67 Ex. LY-39 (Depo Ex. 54). 68 Ex. LY-40 (Depo. Ex. 31), ¶ 7; Anger Depo. Ex. LY-34, p. 21:3-15. 69 Anger Depo., Ex. LY-34, pp. 22:13-23:2. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 22 of 63 23 48. Shortly after receiving the March 19 letter from Anger, on March 24, 1999, Flath transferred roughly $165,000 of stock to an Evanson-related entity.70 On March 25, 1999, Flath faxed the March 19 letter from Anger to Evanson, requesting that he review and comment upon it.71 49. Not long after Flath faxed the March 19 letter to Evanson, Anger and Evanson had a conversation about the Omega Forex program. In that conversation, Evanson was extremely upset with Anger for challenging the Omega Forex loss and for asking Evanson to explain it.72 Evanson even accused Anger of committing malpractice by writing that letter, and he threatened to sue him.73 When Anger told Flath about this threat, Flath told Anger that he agreed with Evanson.74 50. Flath was upset that Anger had questioned Evanson.75 He told Anger “that he had no business questioning it,” that “Evanson was one of the sharpest guys in Utah,” and that Anger should “mind his [own] business.”76 51. The only person that Flath looked to for professional advice about whether he could deduct the Omega Forex losses was Anger.77 52. Within a couple of years, Anger stopped preparing Flath’s returns, as Flath was “not happy” with Anger.78 70 Exs. LY-37 and LY-38 (Depo. Exs. 41 and 43). 71 Ex. LY-39 (Depo Ex. 54). 72 Ex. LY-40 (Depo. Ex. 31), ¶ 8; Anger Depo., Ex. LY-34, pp. 18:20-19-20. 73 Anger Depo., Ex. LY-34, pp.40:25-41:9. 74 Anger Depo., Ex. LY-34, p. 13-17. 75 Ex. LY-40 (Depo. Ex. 31), ¶¶ 6-9; Anger Depo., Ex. LY-34, pp. 19-21:-21-2. 76 Anger Depo., Ex. LY-34, p. 19:@1-21:2. 77 Flath Depo., Ex. LY-15, pp143:24-144:10. 78 Anger Depo., Ex. LY-34, pp. 23:-24-6. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 23 of 63 24 53. According to Anger, both Evanson and Flath told him that Flath had invested value into Omega Forex for the amount of the loss claimed.79 This was untrue, as Flath had invested no value in Omega Forex. 54. Anger would not have claimed the Omega Forex loss on Flath’s individual return had he known that it was only several days after he sent the March 19 letter to Flath that Flath had transferred anything of value to Evanson or Omega Forex.80 55. The 1998 K-1 that Flath received from Omega Forex that reported the loss of $149,877 also reported that Flath had contributed $200,000 in capital to Omega Forex during 1998.81 Flath has no knowledge of what the $200,000 in contributed capital refers to.82 Omega Forex’s general ledger lists a promissory note from Flath in that amount in 1998, but Flath was not aware of any note in that amount, nor did he ever recall making payments on a note in that amount, or any other amount.83 Nor did Evanson or Flath ever mention any sort of promissory note related to Omega Forex to Gail Anger in their discussions of Flath’s basis in Omega Forex.84 56. The 1999 K-1 that Flath received from Omega Forex that reported the loss of $85,793, a loss which Flath largely reported on his 1999 income tax return as a loss of $86,724, also reported that Flath had contributed $100,000 in capital to Omega Forex for that year.85 Flath has no knowledge of what that $100,000 refers to, and does not recall contributing $100,000 to 79 Ex. LY-40 (Depo. Ex. 31), ¶7; Anger Depo., pp. 21:16-23:2. 80 Anger Depo., Ex. LY-34 p. 23:3-9. 81 Ex. KK-1 (Depo. Ex. 17), IRS005890. 82 Flath Depo., pp. 71:2-72:21. 83 Ex. LY-18 (Depo. Ex. 18); Flath Depo., Ex. LY-15, pp. 70:16-72:21. 84 Anger Depo., Ex. LY-34, p. 42:17-43:7. 85 Ex. LY-41 (Depo. Ex. 19); Ex. KK-2 (Depo. Ex. 23). Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 24 of 63 25 Omega Forex in capital in that year.86 Omega Forex’s ledger lists a promissory note from Flath in the amount of $100,000 for 1999, but, again, Flath had no knowledge of any such note, and never made any payments on any such note.87 57. According to Evanson, the amount of loss that was reported to each client on the Omega Forex K-1 issued to that client was ultimately dependent on the amount of the capital account with Omega Forex for each client.88 In turn, clients could determine for themselves how much “capital” they wanted to contribute, in effect determining the size of their own tax loss.89 58. Flath signed the 1998 income tax return that claimed the Omega Forex loss of $149,877 on March 25, 1999.90 When asked how he could claim on March 25, 1999, that he had lost over $149,000 from foreign currency transactions with Omega Forex in 1998, when he had only transferred value to Omega Forex the previous day, on March 24, 1999, Flath testified that he simply relied on Evanson, and that he does not recall whether he himself had any thoughts about whether it was proper to claim a loss from Omega Forex in those circumstances.91 59. Flath paid Evanson a 20% fee on the tax savings from the $149,847 loss from Omega Forex, as he did for all of the purported tax savings generated from Evanson’s programs.92 Flath never told Anger that he was paying Evanson a fee that was calculated as a percentage of the tax savings that he was getting from Omega Forex and other Evanson programs.93 86 Flath Depo., Ex. LY-15 p. 73:5-16. 87 Flath Depo., Ex. LY-15, p. 166:11-14; 88 Evanson Depo., Ex. LY-16, pp. 55:6-57:4; 89 Evanson Depo., Ex. LY-16, p. 57:5-21. 90 Ex. LY-33 (Depo. Ex. 13). 91 Flath Depo., Ex. LY-15, p. 65:5-16. 92 Flath Depo., Ex. LY-15, p. 35:14-16. 93 Anger Depo., Ex. LY-34, p. 25:16-20. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 25 of 63 26 60. Throughout his involvement with Evanson’s programs Flath received a monthly document titled “Protector’s Fund Allocation Working Report,” with the “Protector” being named as International Capital Group (“ICG Reports”).94 61. These ICG Reports provided Evanson’s clients with an “accounting of the container,” or “hybrid,” terms for an umbrella entity that encompassed all of a client’s activity with Evanson. These ICG Reports showed all of the client’s money that was coming in and coming out of all of Evanson’s programs, including the Omega Forex program and the Commonwealth Professional program discussed below, as Flath confirmed in his deposition testimony.95 Brent Metcalf, who was the one who prepared these monthly reports, also confirmed that the purpose of these reports was to document all of the client’s activity, whether it took place through Omega Forex or Commonwealth Professional or any other of Evanson’s programs.96 62. The activity on the ICG Reports was mirrored on the general ledger for International Capital Management that was also maintained by Metcalf, the purpose of which was to track the total balance that a particular client had with all of Evanson’s entities cumulatively.97 63. Thus, for example, the ICG Report and the ICM ledger show that Flath was given full credit for the roughly $165,000 in stock that he transferred to Evanson in March of 1999, less a debit of $14,478, which is equivalent to roughly 20% for the tax savings from the related $149,847 Omega Forex loss.98 The allocation reports that calculated the tax savings for purposes 94 Ex. LY-42 (Depo. Ex. 53); Flath Depo., Ex. LY-15, pp. 81:1-83:13. 95 Flath Depo., Ex. LY-15, pp. 81:1-82:17. 96 Metcalf Depo., Ex. LY-43, pp. 57:13-58:20. 97 Ex. LY-44 (Depo. Ex. 25); Metcalf Depo., Ex. LY-43, pp. 41:1-42:16, 57:1-6. 98 Ex. LY-44 (Depo. Ex. 25); Ex. LY-42 (Depo. Ex. 53), p. 1. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 26 of 63 27 of distributing finders fees listed Flath’s tax rate as .48, and so 20% of a $149,847 loss would equal a tax savings of .48*.2*149,847, or $14,385.99 64. Flath’s basis in the roughly $165,000 worth of stocks he transferred to Evanson was considerably less than $165,000, yet Flath did not pay any capital gains tax on the transfer of proceeds from those stocks, despite being given full credit for the $165,000, less tax savings.100 65. In July of 1999, Flath sent Evanson a fax with some comments on the monthly ICG Reports.101 One of his comments was that he had “been patient since the sale of the Everen stock in March but [that he] would like to reentry [sic] the equity arena with those proceeds. What’s the delay with Datek?”102 66. Everen, which later became part of Wachovia, was the brokerage firm associated with Wayne DeMeester, who was indicted for his part in the conspiracy to evade tax, and it was the firm used by other clients for their stock trades; Flath, however, objected to the high commissions charged by Everen for stock trading and had pushed Evanson to open up an account with Datek that would allow him to use his funds in the container or hybrid to trade stocks through Datek.103 67. When asked if it ever caused him any concern that he would be re-entering the equity arena and purchasing stocks through Datek with the very same proceeds from the March 1999 stock transfer that he claimed gave him basis in Omega Forex to claim a loss of $149,000, Flath 99 Ex. LY-31 (Depo. Ex. 79). 100 Ex. LY-46 (Depo. Ex. 44); Flath Depo., Ex. LY-15, pp. 65:17-69:15. 101 Ex. LY-47 (Depo. Ex. 55). 102 Ex. LY-47 (Depo. Ex. 55). 103 Flath Depo., Ex. LY-15, pp. 79:22-80:23, 126:9-18. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 27 of 63 28 responded that he “did not connect those dots,” that he did not recall, and that he did not “know how the black box worked.”104 68. Once the money Flath transferred to Evanson, such as the proceeds from the March 1999 stock transfer, showed up in the hybrid or container, as accounted for on the ICM ledger or ICG reports, Flath confirmed that it was “[his] to do with what [he] want[ed].”105 69. One of the things that Flath did with the money he transferred to Evanson was to purchase stocks by directing Evanson to purchase stock in Flath’s Datek account, ostensibly held in the name of some Evanson-related entity.106 According to Flath’s confirmation, he could “just send [Evanson] instructions on what to purchase and he would purchase it.”107 70. Despite the fact that he could direct Evanson which stocks to purchase, and despite the fact that the money for the purchase of the stocks came from Flath, Flath did not report any of the dividends or gains from the stocks on his contemporaneous personal returns because he claimed that he did not have ownership of those stocks.108 71. One way Flath transferred money into the hybrid or container was to make payments to an Evanson-related entity called Commonwealth Professional. For instance, in September of 1999, Flath directed a payment of $8,000 to Commonwealth Professional, $6,000 of which came from Rocky Mountain Endodontics, and $2,000 of which came from Rock Springs Endodontics.109 This payment is reflected in the ICM ledger, termed “September Com Pro Premium,” and there is a corresponding debit for 20% of the tax savings associated with this 104 Flath Depo, Ex. LY-15, pp. 127:3-128-15. 105 Flath Depo., Ex. LY-15, p. 91:13-15. 106 Ex. LY-48 (Depo. Ex. 2); Ex. LY-49 (Depo. Ex. 4); Flath Depo., Ex. LY-15, p. 122:2-13. 107 Flath Depo., Ex. LY-15, pp. 119:25-120:2; 122:2-13. 108 Flath Depo, Ex. LY-15, p. 124:1-9. 109 Ex. LY-50 (Depo. Ex. 5), Evanson001727; Ex. 1; Flath Depo., Ex. LY-15, pp. 86:19-21; 104:9-22. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 28 of 63 29 payment in the amount of $761.80 termed “Sept tax alloc.”110 The allocation report shows how this fee was calculated to be $761.80.111 Flath’s September 1999 payment to Commonwealth Professional of $8,000 then shows up as a credit in his ICG Report as a credit of $7,238.20 ($8,000 less the fees for tax savings of $761.80) with a description of “Allocation of net stock dividend.”112 72. Flath continued to pay $8,000 a month to Commonwealth Professional throughout 1999, and this amount increased to $10,000 a month and more in 2000.113 73. All of these payments to Commonwealth Professional were deducted as premiums for malpractice insurance – the payments from Rocky Mountain Endodontics were deducted on its Form 1120 U.S. Corporation income tax returns, and the payments from Rock Springs Endodontics were deducted on Schedule C of Flath’s personal income tax returns.114 74. Flath, however, already had a primary malpractice insurance policy from CNA, a national and reputable company that was licensed to sell malpractice insurance, and Flath paid an annual premium of about $1,400 a year to CNA for this malpractice insurance.115 75. Commonwealth Professional was not licensed to issue insurance policies.116 When Flath was asked why he was paying over $100,000 a year for malpractice insurance, when he already had a legitimate malpractice insurance policy for $1,400 a year, and could have purchased dozens more supplemental policies from legitimate insurance companies for less than he was paying Commonwealth Professional, Flath testified that it was for “[p]eace of mind,” 110 Ex. LY-44 (Depo. Ex. 25), DEW36-13-0206-00002. 111 Ex. LY-32 (Depo. Ex. 79), p. 4. 112 Ex. LY-43 (Depo. Ex. 53), p. 1. 113 Ex. LY-43 (Depo. Ex. 53), p. 2; Ex. 71; Flath Depo., Ex. LY-15, p. 103:8-10. 114 Flath Depo., Ex. LY-15, p. 104:9-22; Ex. LY-51 (Depo. Ex. 76); Exs. LY-33 and KK-1 (Depo. Exs. 13 and 17). 115 Flath Depo., Ex. LY-15, pp. 97:3-98:19. 116 Evanson Depo., Ex. LY-16, pp. 59:18-60:5. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 29 of 63 30 because “insurance companies might not have [his] best interests at heart,” because “[i]nsurance companies go out of business frequently,” because he “trusted himsel[f] more than [he did] insurance companies,” etc.117 76. In reality, Flath was paying Commonwealth Professional premiums because he could deduct the money he paid in “premiums” on his tax returns, and then turn right around and use that money as he saw fit. 77. Flath testified that he owned the insurance policy and could control it because it “was in the vehicle of that container,” and that when he made payments to Commonwealth Professional it would go into that container and then “those payments were [his] to do with whatever [he] wanted.”118 78. Thus, for example, when “Rocky Mountain Endodontics pays Commonwealth Professional $6,000, that shows up in [Flath’s] ICG account less the tax fees that go to Evanson,” and that “money’s [Flath’s] to do what [he wants] with,” including spending that money on Flath’s “daughter’s tuition at Yale.”119 79. Flath never told his accountant Gail Anger that Rocky Mountain Endodontics was effectively paying him $6,000 a month in unreported income by paying Commonwealth Professional this money, money which then showed up in Flath’s ICG account or container for Flath to do with as he pleased, although Flath believes that the accountant who prepared the tax returns for Rocky Mountain Endodontics, Bryce Olson, was aware of this.120 117 Flath Depo., Ex. LY-15, pp 103:11-104:8. 118 Flath Depo., Ex. LY-15, pp. 101:5-102:6. 119 Flath Depo., Ex. LY-15, p. 107:7-18. 120 Flath Depo., Ex. LY-15, pp. 107:7-109:24. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 30 of 63 31 80. When Olson was asked at his deposition whether he did enough due diligence into the reasonableness of deducting several hundreds of thousands of dollars in purported premiums for malpractice insurance on Rocky Mountain Endodontics’ tax returns, he refused to answer the question and invoked his rights against self-incrimination under the Fifth Amendment.121 81. Included among the purported premiums Rocky Mountain Endodontics paid to Commonwealth Professional that Olson deducted on returns he prepared is a deduction for $466,000 in purported “disability insurance” in 2000, which was up from the $5,000 in disability insurance premiums that Rocky Mountain Endodontics had paid in 1999.122 Half of this amount, or $230,000, was for purported disability insurance for Flath from Commonwealth Professional, and the other half was for Coats.123 82. When asked why Flath’s reported compensation from Rocky Mountain Endodontics decreased by almost $100,000 from 1998 to 1999, even though Rocky Mountain Endodontics’ total income increased by roughly $300,000 during the same time period, Olson answered that Flath’s total compensation included things like actual salary plus malpractice and disability insurance premiums, and that because Rocky Mountain Endodontics was paying Commonwealth Professional monthly payments of $6,000 in 1999, Flath’s reported compensation would be decreased by that much.124 83. This compensation disguised as insurance premiums would not be reported as income to Flath, but even Olson agrees that if Flath had been able to control the money paid into Commonwealth Professional, something Flath has admitted he could do, then those insurance 121 Olson Depo., Ex. LY-52, p. 31:10-32:20. 122 Ex. LY-51 (Depo Ex. 76), 2000 return, p. 11; Olson Depo, Ex. LY-52, p. 41:1-17. 123 Flath Depo., Ex. LY-15, p. 116:3-17 124 Olson Depo., Ex. LY-52, p. 44:3-24. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 31 of 63 32 premium payments should have been recognized as income to Flath and reported on his individual income tax returns.125 84. Flath, however, did not report the Commonwealth Professional payments as income to him; on the contrary, these payments were deducted as expenses.126 85. An email exchange between Evanson and another of his clients, Dr. Craig Kiser, also reveals how the Commonwealth Professional program worked as a tax evasion scheme, how clients actually thought about the ostensible “premiums,” and how Evanson endeavored to maintain a veneer of legitimacy for these “insurance” payments. In January of 2000 Kiser emailed Evanson regarding the ICG Reports, noting that he was sending in monthly checks to Commonwealth Professional for $3,960, but that only $3,625.60 was showing up on the ICG Reports. Kiser also stated that he was considering “increasing [his] monthly contribution to $5,000,” referring to the payments for purported malpractice insurance, and directed Evanson to not communicate with him at his work address because he did “not want [his] office staff knowing much about the Commonwealth account.” Evanson emailed back, explaining that once Keiser sent in $3,960 to Commonwealth Professional, 20% of that would be deducted as Evanson’s fees for “anticipated tax savings,” and that the rest would then show up in the ICG account. Evanson also made sure to correct Kiser’s careless but truthful statement about simply increasing his “monthly contributions” by telling Kiser that if he wanted to increase his “monthly premium,” that he could “request increased coverage that will have increased premiums associated with the increased coverage.”127 125 Olson Depo., Ex. LY-52, pp.44: 25-45: 24. 126 Exs. KK-1, KK-2, LY- 51 (Depo Exs. 13, 17, and 76). 127 Ex. LY-53 (Depo. Ex. 93); Evanson Depo., Ex. LY-16, pp. 60:22-63:14. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 32 of 63 33 86. Once Flath had generated deductions and avoided the recognition of income by transferring money into the container by methods such as payments to Commonwealth Professional, he employed various means to get the money back out without triggering tax obligations or recognition of income. One such method involved the use of phony scholarships awarded by an entity called Children’s Charities International. In short, Flath would see the ICG Reports, verify that the amount of funds he had in the container was enough to cover the amount of whatever tuition payment he wanted to make, and then direct Evanson to make payments for his daughter’s tuition at Yale University, and for his son’s tuition at Rowland Hall.128 Evanson would issue the payments, which were disguised as “scholarships,” to the student from Children’s Charities International, thereby allowing Flath to avoid recognizing income for the payments.129 87. For example, on June 29, 1999, Flath faxed Evanson a letter from Yale University with instructions for wiring a payment for his daughter’s tuition, along with a handwritten note instructing Evanson or Brent Metcalf to “transfer $10,000 to Yale from the 165K” (the same $165k in stock that Flath claimed form his basis for claiming losses from Omega Forex).130 Evanson then told an individual named Lewis Rowe to send Yale $10,000 (and to withdraw the funds from Commonwealth Professional if necessary), along with a cover letter that identified Flath’s daughter as the recipient of an anonymous scholarship from Children’s Charities International.131 128 Flath Depo., Ex. LY-15, pp. 129:14-131:5 129 Flath Depo., Ex. LY-15, pp. 129:14-131:5. 130 Ex. LY-54, (Depo. Ex. 60); Evanson Depo., Ex. LY-16, p. 111:10-116:15. 131 Ex. LY-55 (Depo. Ex. 61). Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 33 of 63 34 88. Flath effectively withdrew money without recognizing tax consequences by this method several times, including a follow up fax on October 3, 1999, in which he directed Evanson to make another $10,000 tuition payment to Yale, praising Evanson’s “outstanding two week performance in July.”132 89. Flath never told Anger that the money that he contributed to the hybrid through Commonwealth Professional and other Evanson entities would be available to him use for whatever purpose he saw fit, such as to purchase stocks or to fund his children’s education.133 90. It appears that Flath, in addition to deducting hundreds of thousands of dollars in purported “premiums” to Commonwealth Professional that should have been reported as income to him, also deducted fees paid to Evanson for tax savings as expenses of Rocky Mountain Endodontics. For example, deductions for management consulting fees jumped up from $14,000 in 1998 to $65,000 in 1999, deductions for legal fees jumped up from $2,000 to $21,000, and deductions for “professional assistance” jumped up from less than $1,000 to almost $60,000, which coincides with the beginning of Flath’s involvement with Evanson.134 In 2000 these types of professional assistance deductions jumped up to roughly $370,000 in total.135 Neither Flath nor Olson nor Coats can explain these deductions.136 91. In 2002 Flath ceased his involvement with the Evanson programs, and Evanson made it clear to Flath that he should structure his exit in such a way as to withdraw all of Flath’s funds 132 Ex. LY-62 (Depo. Ex. 65). 133 Flath Depo., Ex. LY-15, p. 148:5-12. 134 Olson Depo., Ex. LY-52, pp. 39:14-40:17; Ex. LY-51 (Depo Ex. 76). 135 Coats Depo., Ex. LY-17, p. 40:2-8; Ex. LY-51 (Depo Ex. 76). 136 Olson Depo., Ex. LY-52, pp. 39:14-40-17; Flath Depo., Ex. LY-15, pp. 112:7-113; Coats Depo., Ex. LY-17, pp. 37:21-40:16. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 34 of 63 35 in the container or hybrid through methods like the “scholarships,” because this would keep the withdrawn funds from being taxable.137 92. Dennis Evanson received an opinion letter from Graham Taylor regarding Euro Pacific Corporation, along with a two-page summary of that legal opinion.138 Graham Taylor later pled guilty to conspiracy to defraud the United States in regard to this opinion letter.139 Flath had never even seen this opinion letter until his deposition in this case, but he did receive the two-page summary.140 Neither the summary nor the opinion letter itself, however, even mention Omega Forex or foreign currency losses, Commonwealth Professional or deductions for malpractice insurance, or Children’s Charities and disbursements of money disguised as scholarships.141 Instead, it concerned itself solely with the “federal income tax consequences to [Evanson] in connection with the Euro Pacific Corporation 93. According to Evanson, Flath was a “qualified professional and somebody who was well educated and understood what was going on,” as well as financially savvy.142 According to Wendy Flath, Flath’s ex-wife, Flath was financially sophisticated and savvy, “was constantly talking about finances in general,” “absorbed himself at home with the stock market,” “researches things thoroughly,” “knows what he’s doing,” and tracked his money carefully.143 94. Indeed, after exiting Evanson’s programs, Flath demonstrated his financial savvy, as well as his mindset toward tax evasion, by creating an entity called Pinebrook Springs Professional Reinsurance, which was apparently modeled after Commonwealth Professional 137 Ex. LY-57 (Depo. Ex. 8). 138 Ex. LY-58 (Depo. Ex. 45). 139 See Docket, United States v. Evanson et al, 2:05-CR-805-TC, D. Utah. 140 Flath Depo., Ex. LY-15, pp. 144:11-145:7. 141 Ex. LY-58 (Depo. Ex. 45). 142 Evanson Depo., Ex. LY-16, pp. 72:25-73:7. 143 Wendy Flath Depo., Ex. LY-59, p. 25:5-23. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 35 of 63 36 Reinsurance, as it operated in a similar manner to Commonwealth, generating deductions and avoidance of income recognition through extraordinarily high premiums paid to Pinebrook, ostensibly for malpractice and disability insurance.144 These premiums were deducted on Flath’s tax returns, despite the fact that they went into a “container” where they were available for Flath’s use.145 95. Flath paid roughly $10,000 a month into Pinebrook Springs over an eight-year period.146 This is roughly one million dollars that should have been reported by Flath as income, but was instead deducted as expenses. MEMORANDUM OF POINTS AND AUTHORITIES I. The Omega Forex losses were the result of fraud and Evanson’s intent to evade tax for his clients The Court should uphold the IRS’s disallowance of the Omega Forex losses because these losses were not legitimate economic losses suffered by Omega Forex’s partners. Rather, the undisputed evidence, including the criminal convictions of the major players involved with Omega Forex, shows that these losses were sham losses generated by Evanson in an attempt to evade income taxes for his clients. Furthermore, because these losses were the result of Evanson’s fraud and attempt to evade tax, the Court should also uphold the IRS’s assertion of the fraud penalty with respect to these losses. A. Legal standard for fraud First, as an initial matter, the “definition of fraud for purposes of section 6501(c)(1) is the same as the definition of fraud for purposes of section 6663 (which imposes a penalty for fraud).” Rhone–Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533, 548, 144 Flath Depo., Ex. LY-15, pp.117:2-119:17. 145 Ibid. 146 Ibid. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 36 of 63 37 (2000). Thus, this discussion of the legal standard for fraud applies to: (1) whether there was fraud such that the IRS’s disallowance of the Omega Forex losses and assertion of a fraud penalty under Section 6663 with respect to these losses should be upheld on this basis; and (2) whether there was the “false or fraudulent return” under Section 6501(c)(1) necessary to keep the statute open under this provision, in addition to the intent of either Evanson or Flath to evade tax. The United States “has the burden to prove fraud for each year by clear and convincing evidence.” Ruidoso Racing Ass’n, Inc. v. Commissioner, 476 F.2d 502, 505 (10th Cir. 1973). Clear and convincing evidence is “that measure or degree of proof which will produce in the mind of the trier of facts a firm belief or conviction as to the allegations sought to be established. It is intermediate, being more than a mere preponderance, but not the extent of such certainty as is required beyond a reasonable doubt in criminal cases. It does not mean clear and unequivocal.” Ohio v. Akron Ctr. for Reprod. Health, 497 U.S. 502, 516 (1990). To meet its burden to prove fraud, the United States “must establish by this level of proof both (1) that there was an underpayment of tax for the taxable year in issue and (2) that at least some portion of such underpayment was due to fraud.” Peyton v. Commissioner, 85 T.C.M. 1345, 2003 WL 21205250 *5 (2003) (internal citations omitted). The United States need not prove the precise amount of underpayment on a tax return that results from fraud, “but only that ‘any part’ thereof is attributable to fraud.” Ruidoso Racing, 476 F.2d at 505. The United States’ burden applies separately to each of the years at issue in this case, 1998 and 1999. Garcia, 103 T.C.M. 1829, 2012 WL 1957703 at *6. “The existence of fraud is a question of fact to be resolved upon consideration of the entire record,” and the “taxpayer’s entire course of conduct may establish the requisite fraudulent Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 37 of 63 38 intent.” Id. (internal citations omitted). “Because direct proof of a taxpayer’s intent is rarely available, fraud may be proved by circumstantial evidence and reasonably inferred from the facts.” Id. (internal citations omitted). “Fraud is established by proving that the taxpayer intended to evade tax believed to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such tax.” Recklitis v. Commissioner, 91 T.C. 874, 909 (1988). The United States “need not establish that tax evasion was a primary motive of [a taxpayer], but may satisfy [its] burden by showing that a ‘tax-evasion motive played any part’ in [the taxpayer’s] conduct.” Id. B. The evidence shows that the Omega Forex losses are the result of Evanson’s attempt to evade taxes for his clients An examination of the entire record and Evanson’s entire course of conduct leaves no doubt that the Omega Forex losses were the result of Evanson’s attempt to evade taxes for his clients and therefore fraudulent. i. The criminal convictions related to Omega Forex and Evanson’s other tax evasion programs are powerful evidence of intent to evade Evanson was convicted of tax evasion under 26 U.S.C. § 7201 for filing personal income tax returns in 1998 and 1999 that reported the Omega Forex losses. (SUMF # 28). Evanson, as well as the entity he controlled, Omega Forex, would thus be collaterally estopped from denying that Evanson had fraudulent intent with respect to these returns under the “well established rule that a conviction under 26 U.S.C. § 7201 for federal income tax evasion collaterally estops a taxpayer from denying fraud in a subsequent civil proceeding under 26 U.S.C. § 6653(b).” Klein v. Commissioner, 880 F.2d 260, 262 (10th Cir. 1989). Although the United States is not arguing in this motion that Omega Forex is collaterally estopped from denying fraud with respect to the Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 38 of 63 39 1998 and 1999 Omega Forex returns, these convictions are nevertheless powerful evidence of such fraud. Evanson was also convicted under 26 U.S.C. § 7206(2) of multiple counts of aiding and assisting in the preparation of false income tax returns that claimed the Omega Forex losses. (SUMF # 28). At least two of these convictions were for preparing returns for which the only allegedly fraudulent transactions were the Omega Forex foreign currency transactions. (SUMF ## 22-24). A conviction under Section 7206(2) is for assisting in preparing a return that is “fraudulent or is false,” and Evanson and Omega Forex are therefore likely collaterally estopped from contesting fraud for the 1998 and 1999 Omega Forex returns. However, even if Section 7206(2), like Section 7206(1) (which does not contain language about being “fraudulent” or “false”), did not operate to collaterally estop Evanson and Omega Forex from contesting fraud under Sections 6653 and 6501(c)(1) (a doubtful proposition), it nevertheless would “create powerful inferences that [Evanson] possessed the willfulness necessary to satisfy the intent element of section 6653(b)(1).” Biaggi v. Commissioner, 79 T.C.M. 1488, 2000 WL 146797 *4 (2000), aff’d, 8 F. App’x 66 (2d Cir. 2001); see also Peyton, 85 T.C.M. 1345, 2003 WL 21205250 *7 (2003) (convictions under Section 7206(1) are “fact[s] to be considered and may give rise to an inference of intent to evade” for purpose of determining fraud under Section 6663). Finally, Evanson, along with Taylor, Barker, Metcalf, and Petersen, were convicted of conspiring to defraud the United States under 18 U.S.C. § 371. (SUMF ## 25, 28, 92). These convictions, along with statements made in advance of plea of guilty such as Petersen’s statement that he “agreed with Dennis Evanson and others to conceal some of my clients’ Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 39 of 63 40 income from the IRS and to create false deductions for the purpose of reducing the income tax paid by my [by] creating false currency losses,” are also strong evidence that Evanson attempted to evade taxes for his clients by means of the Omega Forex losses. (SUMF # 25). ii. The “trades” themselves are evidence of fraud The mechanics of the “trades” themselves are clear evidence of fraud and Evanson’s intent to evade tax. This was not a legitimate investment vehicle where members contributed money to a partnership that went out into the real world and engaged in actual foreign currency transactions with an arms-length third party and then suffered some actual economic losses from unfortunate trading decisions. Instead, it was quite obviously nothing more than Evanson generating tax losses for his clients by shuffling paper around. To take 1998 as an example, the “contributed capital” of Omega Forex members was mostly just Evanson recording “notes receivable” from its members in the amount of roughly $5 million on Omega Forex’s general ledger. (SUMF # 3). Omega Forex’s “foreign currency transactions” consisted of Evanson simply making a notation on Omega Forex’s ledger of “12/18/1998 trade loss (3 trades)” for over $5 million. (SUMF # 13). The “third party” on the other end of Omega Forex’s trades was actually just another one of the entities that Evanson controlled, Euro Pacific Commodities. (SUMF ## 4-13). Omega Forex’s “economic losses” were non-existent – there was no money changing hands, and Evanson simply recorded Omega Forex’s losses as notes due Euro Pacific Commodities, which never made any attempt to collect from Omega Forex and allowed it to keep racking up these big notes due through year after year of sustained “losses.” (SUMF ## 13-16). Finally, Omega Forex’s members appeared uninterested in the details of any foreign currency trading, and the only information they sought, and that was provided to them, was about the amount of tax losses. (SUMF # 17). Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 40 of 63 41 iii. The circumstances surrounding the Omega Forex losses are evidence of fraud The circumstances surrounding the Omega Forex losses also show that these losses were not actual economic losses resulting from legitimate foreign currency trading aimed at earning a profit, but were rather part of Evanson’s attempt to evade taxes for his clients. First, Omega Forex was designed from the outset to generate a tax loss, something that Evanson explicitly told clients when pitching his tax evasion services to them. (SUMF ## 27, 36- 38). This fact alone should settle the matter of whether there was fraud with the intent to evade. Second, Evanson charged his clients fees to participate in Omega Forex that were calculated as a percentage of the amount of the tax savings associated with the “losses” generated by Omega Forex, clearly demonstrating that tax losses were the purpose and intent of the Omega Forex program, not the opportunity to make money through investing in foreign currencies. (SUMF ## 25, 37, 59, 63); see also United States v. Evanson, No. 2:05CR00805 TC, 2008 WL 3107332 *4-8 (D. Utah) (Aug. 4, 2008) (J. Campbell) (good summary of the evidence regarding the fees). Third, not only did Omega Forex’s members largely not contribute any cash or similar value to Omega Forex, there was no interest charged on the notes to Omega Forex that ostensibly constituted their capital contributions, and, for the most part, no payments were ever made on these notes. (SUMF #3). Fourth, as discussed below in more detail with regard to Flath’s intent to evade tax, clients could get an Omega Forex tax loss to claim on their individual tax return without contributing anything whatsoever to Omega Forex, not even the pro forma promissory note. (SUMF ## 40-53). Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 41 of 63 42 In sum, the undisputed facts leave no room for doubt that the Omega Forex losses were fraudulent and the product of Evanson’s intent to evade taxes for his clients, which is precisely what they were paying him for. II. The Court should uphold the IRS’s assertion of a fraud penalty Because the Omega Forex losses were fraudulent, the IRS also asserted a fraud penalty for these losses in the FPAAs issued to Omega Forex. In its petition, Omega Forex argued that penalties that require “underpayments” (i.e. most penalties) could not be asserted at the partnership level on the theory that taxes are paid at the partner level, and that the penalty’s applicability is determined by whether Flath committed fraud with the intent to evade tax, and not by whether Omega Forex through Evanson committed fraud with the intent to evade tax. Petition, ¶¶ 48-50. The parties have briefed the legal issues regarding the determination of the applicability of the fraud penalty in prior briefing, but Omega Forex’s current position on these issues is unclear and the United States therefore re-addresses the relevant issues in this motion. In its motion for summary judgment, Docket No. 19, the United States explained that, just like the tax liabilities asserted in the FPAA (and just like all other penalties asserted in other FPAAs), the fraud penalty is not actually assessed against Omega Forex, but against the partners, who did have underpayments on their returns due to the fraudulent Omega Forex losses they claimed, but courts nevertheless routinely determine the applicability of underpayment-based penalties asserted in FPAAs in TEFRA proceedings as the relevant statutes require, even though this determination of applicability may be provisional depending on what subsequently happens at the partner level once the penalty is imposed and assessed. E.g. United States v. Woods, 134 S.Ct. 557, 563-65 (2013) (dealing with the applicability of a 40% gross valuation misstatement Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 42 of 63 43 penalty under § 6662)(b)(3) and definitively ruling that the applicability of such penalties is determined at the partnership level, even if there are still determinations to be made at the partner level). Furthermore, the Code specifically provides that the Court has the jurisdiction to determine the applicability of the fraud penalty that relates to the fictitious Omega Forex losses. 26 U.S.C. § 6226(f); see also Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67, 89–91 (2012) (discussing the history of jurisdiction for penalty determinations under TEFRA). The United States further explained that the penalty’s applicability is determined by whether Evanson and Omega Forex committed fraud and had the intent to evade tax since the relevant fraud in this partnership level proceeding for a penalty asserted at the partnership level is clearly the fraud of the partnership, not that of Flath. See Arbitrage Trading, LLC v. United States, 108 Fed. Cl. 588, 598, 608 (2013) (citing “the legislative intent that penalties be applied to partnership conduct in partnership-level proceedings”); Tigers Eye Trading, 138 T.C. at 89– 91, 133–34 (addressing negligence penalty and citing the TEFRA legislative history for the proposition that “[w]ith respect to partnerships, the relevant conduct often occurs at the partnership level”); H.R. Rept. 105–148, at 594 (1997), 1997–4 C.B. (Vol.1) 319, 915–916. The intent of the partnership is determined not by Flath’s intent, but by the partnership’s intent as evidenced by the intent of those partners running the partnerships, in this case Evanson. See, e.g., Simon v. Commissioner, 830 F.2d 499, 507 (3rd Cir. 1987) (holding that the determination of a partnership’s profit motive “can only be made with reference to the actions of those individuals who manage the partnership affairs”); Polakof v. Commissioner, 820 F.2d 321, 323 (9th Cir.1987), cert. denied, 484 U.S. 1025 (1988) (looking to intent of managing general partner and holding that “partnership’s intent,” not individual’s, is determinative); Shasta Strategic Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 43 of 63 44 Investment Fund, LLC v. United States, 2014 WL 3852416 *10 (N.D. Cal. July 31, 2014) (For purposes of determining the applicability of the negligence penalty, “[i]n this partnership-level proceeding, the issue is whether the partnership itself was negligent.”) Omega Forex argued in its response that the fraud penalty is not a partnership-level item, citing “prior law” that treated some penalties as “affected items.”(Response, Dkt. # 22, p. 20). However, as Omega Forex itself acknowledged, the statute was changed and penalties are now treated as items that are resolved in partnership-level proceedings.147 26 U.S.C. § 6221 now provides that “the tax treatment of … any penalty … which relates to an adjustment to a partnership item … shall be determined at the partnership level,” and 26 U.S.C. § 6226(f) provides that courts, in partnership proceedings such as this one, “shall have jurisdiction to determine” such penalties. Thus, if the fraud penalty asserted against Omega Forex “relates to an adjustment to a partnership item,” then its applicability is a partnership-level determination to be made by this Court in this proceeding by examining the conduct and intent of the partnership, Omega Forex. Id. And there can be no dispute that the fraud penalty does relate to an adjustment to a partnership item, because it relates to the IRS’s adjustment disallowing the Omega Forex losses as fraudulent, which are clearly partnership items. Thus, this Court clearly has jurisdiction to determine its applicability. Concerning the statute, case law, and relevant legislative history that provide that the relevant intent and conduct for partnership-level penalties is that of the partnership, Omega Forex also argued in response that “subsequent law still appears to distinguish accuracy penalties 147 The two cases cited by Omega Forex on this point, N.C.F. Energy Partners and Allen Family Foods, involved tax years prior to the 1997 change in statute, as Omega Forex itself acknowledged by citing it as “prior law,” and are therefore inapplicable. See e.g. Logan Trust v. Tigers Eye Trading, LLC, --- Fed.Appx. ----, 2015 WL 3915993 *1 (D.C. Cir. June 26, 2015) (noting the 1997 change in law that treats penalties as items to be resolved in partnership- level proceedings). Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 44 of 63 45 from intent-based penalties,” implying that this law is only relevant to accuracy-related penalties, such the substantial understatement and substantial valuation misstatement penalties (Sections 6662(b)(2)-(3), respectively), and not to the intent-based penalties, such as the negligence and fraud penalties (Sections 6662(b)(1) and 6663, respectively).148 (Response, Dkt. No. 22, p. 20). But the only authority Omega Forex cited to support its claim that the law somehow treats these penalties differently, and that the intent-based penalties should be determined by the various partners’ intents, and not by the partnership’s intent, was the quotation from Tigers Eye Trading that “[t]he recitation makes clear that the applicability of the accuracy-related penalty or penalties that relate to the adjustment of partnership items would henceforth be determined in the partnership-level proceeding.” Tigers Eye Trading, 138 T.C. at 91 (emphasis added). But even this quotation is merely restating the statutory language that provides that “the tax treatment of … any penalty … which relates to an adjustment to a partnership item … shall be determined at the partnership level,” and this language, far from excluding an intent-based penalty, includes such penalties, as long as they relate to partnership items. See 26 U.S.C. §§ 6221, 6226(f). Moreover, even Tigers Eye acknowledges that the applicability of intent-based penalties, such as the negligence penalty, is determined in partnership proceedings by looking to the intent and conduct of the partnership. Tigers Eye Trading, 138 T.C. at 89–91, 133–34 (addressing negligence penalty and citing the TEFRA legislative history for the proposition that “[w]ith respect to partnerships, the relevant conduct often occurs at the partnership level”). Moreover, numerous courts besides the Tigers Eye court have held that the applicability of intent-based penalties such as the negligence penalty is determined in a partnership 148 There is no question that the negligence penalty, like the fraud penalty, is also an intent-based penalty, as it can be imposed for the “careless, reckless, or intentional disregard” of rules and regulations. 26 U.S.C. § 6662(c) Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 45 of 63 46 proceeding by looking to the partnership’s intent and conduct. See, e.g., Jade Trading, LLC ex rel. Ervin v. United States, 81 Fed.Cl. 173, 175-176 (Fed. Cl. 2008); Candyce Martin 1999 Irrevocable Trust v. United States, 822 F.Supp.2d 968, 1013-14 (N.D. Cal. 2011) (reversed in part on other grounds); Stobie Creek Investments, LLC v. United States, 82 Fed.Cl. 636, 708 (Fed. Cl. 2008); Shasta Strategic Investment Fund, LLC v. United States, 2014 WL 3852416 *10 (N.D. Cal. July 31, 2014). The court’s analysis in Jade Trading is particularly instructive here, as it found that “[t]he Code dictates that the Court assess the applicability of the negligence penalty with respect to the partnership in the context of this partnership proceeding” because, among other reasons, Sections 6621 and 6226(f) give the “Court jurisdiction to determine the applicability of any penalty which relates to the adjustment of a ‘partnership item.’” Jade Trading, 81 Fed. Cl. at 176 (emphasis in the original). The above-cited courts all looked at the negligence of the partnership, typically as evidenced by the intent and conduct of the managing partner of the partnership. Here, in this context, this means that the Court should look to the fraud of Omega Forex, as evidenced by the intent and conduct of Evanson, the managing partner of Omega Forex. Although no court appears to have addressed the specific question of whether the applicability of the fraud penalty is determined in a partnership proceeding by looking to the partnership’s conduct and intent, or that of the individual partners, there is no good reason why the fraud penalty should be treated differently than other intent-based penalties, such as the negligence penalty, and there is no support in the case law for treating this penalty differently.149 In fact, doing so would contradict the plain statutory language and the legislative intent behind TEFRA, as discussed above. 149 All the cases that Omega Forex cites on page 19 of its response regarding the fraud penalty merely state the standard for the fraud penalty. None of them deal with the fraud penalty in a partnership context and are irrelevant to Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 46 of 63 47 A. There is no jurisdiction for a reasonable cause defense to the fraud penalty Flath has asserted an individual reasonable cause defense to the fraud penalty under 26 U.S.C. § 6664(c), based upon the information and advice he alleges to have relied upon in filing his returns. Petition, ¶ 51. Flath has argued that it would somehow be unfair for the Court to determine the provisional applicability of the fraud penalty without addressing this partner-level defense to the fraud penalty. However, while it may be inefficient for the Court to not consider this penalty in a partnership level case like this that involves only one partner, “[i]t is well-settled that a district ‘court does not have jurisdiction to consider a partner-level defense in a partnership-level proceeding.’” NPR Investments, v. United States, 740 F.3d at 1014 (citing American Boat Co. v. United States, 583 F.3d 471, 478 (7th Cir. 2009)). Flath will, however, have the opportunity to bring a subsequent refund suit in which he can argue that the fraud penalty should not apply to him because he acted in good faith without fraudulent intent and had reasonable cause to claim to the Omega Forex losses. 26 U.S.C. §§ 6230(c)(4) and 6664(c)(1). At any rate, Flath’s reasonable cause defense lacks merit. Flath testified that the only person whom he looked to for professional advice about whether he could deduct the Omega Forex losses was his accountant Gail Anger. (SUMF # 51). Yet, to name just one problem with Flath’s defense, Flath lied to Anger about one of the most critical aspects of the Omega Forex program – whether he had actually contributed anything of value to Omega Forex – and Anger testified that if Flath had told him the truth that Anger would not have allowed the Omega Forex losses to be deducted on the returns he prepared for Flath. (SUMF ## 40-54). the question of whether the relevant conduct and intent for purposes of a partnership-level fraud penalty are the partnership’s or the individual partners’. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 47 of 63 48 III. Evanson’s intent to evade tax keeps the statute open under Section 6501(c)(1) 26 U.S.C. § 6501(c)(1) provides that there is an unlimited amount of time for the IRS to assess tax on a return in the “case of a false or fraudulent return with the intent to evade tax.” As discussed above, Flath’s individual returns were clearly false or fraudulent because they claimed the Omega Forex losses, among other fraudulent items. Thus, if there is also “intent to evade tax” present on these returns, the IRS may assess tax on these returns at any time. The United States has argued that Section 6501(c)(1) does not specify who must have the intent to evade tax with respect to the false or fraudulent return, and that if the fraud on Flath’s returns was the result of either Evanson’s or Flath’s intent to evade tax, that the statute of limitations is still open under this section. Flath has argued that only his intent to evade tax can keep the statute open. Because the United States is moving in this motion for summary judgment on the grounds that both Flath and Evanson had the intent to evade tax, and that either intent is sufficient, it first revisits the legal argument that Evanson’s intent to evade tax can keep the statute open under Section 6501(c)(1). First, in construing the limitation statute at issue here, Section 6501(c)(1), it is important to bear in mind that “‘limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government.’” Badaracco v. Commissioner, 464 U.S. 386, 392 (1984) (addressing Section 6501(c)(1)). Section 6501 describes the period of limitations applicable to all assessments of tax imposed by the Code, including those that result from an FPAA and TEFRA partnership proceeding. AD Global Fund, LLC ex rel. North Hills Holding, Inc. v. United States, 481 F.3d 1351, 1354 (Fed. Cir. 2007). The “general rule” under this section is that “the amount of any tax Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 48 of 63 49 imposed by [the Code] shall be assessed within 3 years after the return was filed.” 26 U.S.C. § 6501(a). This general period is subject to various exceptions and extensions, including the fraud exception under Section 6501(c)(1), which provides that “[i]n the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed . . . at any time.” 26 U.S.C. § 6501(c)(1). A. The plain meaning of Section § 6501(c)(1) does not require that Flath himself had the intent to evade tax “In interpreting [Section 6501(c)(1)], [the Court’s] analysis must begin and end with the language of the statute itself, for where the statute’s language is plain, the sole function of the courts is to enforce it according to its terms.” Woods v. Standard Ins. Co., 771 F.3d 1257, 1263 (10th Cir. 2014) (internal quotation marks and alterations omitted). ”The “cardinal canon” of statutory interpretation is that “courts must presume that a legislature says in a statute what it means and means in a statute what it says there.” Connecticut Nat’l Bank v. Germain, 503 U.S. 249, 253-54 (1992). The plain language of Section 6501(c)(1) clearly does not require that Flath himself had personally intended to evade tax in order for this section to apply. Instead, the statute focuses entirely on the fraudulent nature of the return, without regard to who intended the fraud. To reiterate, this section simply requires “a false or fraudulent return with the intent to evade tax.” 26 U.S.C. § 6501(c)(1). Congress easily could have specified that the fraudulent intent must be that of a particular person, and, in fact, has done so in a related statutory section. See, e.g., 26 U.S.C. § 6229(c)(1) (requiring that the intent to evade tax must be that of one of the partners who signed or participated in the preparation of the tax return, in order for the statute to be extended under that provision). That Congress did not similarly specify in Section 6501(c)(1) who must Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 49 of 63 50 possess the intent to evade is further evidence that this section’s plain language is purposive and should be given effect. C.f., e.g., Transpac Drilling Venture, 1983-2 by Dobbins v. United States, 83 F.3d 1410, 1414 (Fed. Cir. 1996) (analyzing Section 6229(c)(1) and holding that although it must be a partner who has the intent to evade, “there is no requirement in § 6229(c)(1) that the taxes the signer of the partnership return intended to evade must have been the signer’s own,” because “[t]here is no such limitation in the statute itself: it refers only to the ‘intent to evade taxes.’”). Furthermore, and importantly, it would be particularly inappropriate to read any additional requirement into the language of Section 6501(c)(1), because “limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government.” Badaracco, 464 U.S. at 392 (addressing Section 6501(c)(1)). In this vein, even if Section 6501(c)(1) were ambiguous, which it is not, the government’s interpretation of this section is certainly at least reasonable and should therefore be accepted. Bufferd v. Commissioner, 506 U.S. 523, 527 n.6 (1993) (“Even if it could credibly be argued that § 6501(a) is ambiguous, … the Commissioner’s construction of the section is a reasonable one to say the least, and we should accept it absent convincing grounds for rejecting it.”) Thus, since Section 6501(c)(1) does not specify who must have intended to evade tax, it should not be read as imposing a restriction on whose intent to evade tax can trigger the statute extension. i. The purpose of Section 6501(c)(1) underscores its plain meaning Even if this Court were to consider Section 6501(c)(1) as ambiguous, then its “purpose or object . . . is the surest guide to [its] meaning.” Cabell v. Markham, 148 F.2d 737, 739 (2d Cir. 1945) (Hand, L., J.), quoted in Public Citizen v. United States Dep’t of Justice, 491 U.S. 440, Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 50 of 63 51 455 (1989). And the purpose of Section 6501(c)(1) is to provide unlimited time for the IRS to assess the correct tax liability in the case of a false or fraudulent return because of the “special disadvantage” the IRS faces in detecting and investigating these types of returns. Badaracco, 464 U.S. at 398-99, 403. The IRS’s need for an unlimited period for assessments related to fraudulent returns should not hinge on whose intent to evade created the fraudulent return. “This makes intuitive sense because the special disadvantage to the Commissioner in investigating fraudulent returns is present” regardless of whether it was the taxpayer who had the intent to evade tax, or someone else involved in the tax return preparation. City Wide Transit, Inc. v. Commissioner, 709 F.3d 102, 107 (2d. Cir. 2013). And indeed, this case provides a good example of the IRS’s special disadvantage when dealing with fraudulent returns, and of one of the “substantial policy considerations [that] support [Section 6501(c)(1)’s] literal language.” Badaracco, 464 U.S. at 398. As the Supreme Court has noted: [T]he difficulties that attend a civil fraud investigation are compounded where … the Commissioner’s initial findings lead him to conclude that the case should be referred to the Department of Justice for criminal prosecution. The period of limitations for prosecuting criminal tax fraud is generally six years. See § 6531. Once a criminal referral has been made, the Commissioner is under well-known restraints on the civil side and often will find it difficult to complete his civil investigation within the normal three-year period…. As a practical matter, therefore, the Commissioner frequently is forced to place a civil audit in abeyance when a criminal prosecution is recommended. Id. at 399. This is precisely what occurred here. The civil audit could not proceed while the criminal investigation and ultimately, prosecution and trial, were proceeding. After Evanson’s 2008 conviction was upheld by the Tenth Circuit in October of 2009, the IRS promptly proceeded with the civil audit and issued a Notice of Beginning of Administrative Proceeding for Omega Forex in November of 2009. Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 51 of 63 52 It would completely contravene the purpose and policy considerations behind Section 6501(c)(1) to read into this section the additional requirement of taxpayer-specific intent. This would hinder and even prevent the IRS from making civil assessments against partners in situations like this that involve lengthy criminal investigations and prosecutions for fraud and tax evasion at the partnership level. ii. Other courts have consistently found Section 6501(c)(1) to be applicable when persons other than the taxpayer had the intent to evade Given the plain language of Section 6501(c)(1), as well as its purpose, it is not surprising that most case law addressing the scope of this statute finds that this section is not confined to extending the statute only for taxpayers who themselves had the intent to evade tax. First, decisions by the Second Circuit, in City Wide, 709 F.3d at 107, and by the Tax Court, in Allen v. Commissioner, 128 T.C. 37, 40 (2007), support this plain language construction of Section 6501(c)(1). Both of these decisions hold that fraud on a taxpayer’s return that was perpetrated not by a taxpayer, but by a hired tax professional, indefinitely extends the limitations period for making an assessment against the taxpayer, even though the taxpayers themselves did not have the intent to evade tax. The Tax Court in Allen opined that Section 6501(c)(1) applies “[i]n the case of a false or fraudulent return with the intent to evade tax” without qualification: “Nothing in the plain meaning of the statute suggests the limitations period is extended only in the case of the taxpayer’s fraud. The statute keys the extension to the fraudulent nature of the return, not to the identity of the perpetrator of the fraud.” Allen, 128 T.C. at 40. Beyond the plain language, the Tax Court was concerned about “the special disadvantage to the Commissioner in investigating” fraudulent returns, and was also concerned that taxpayers not be allowed to “hide behind an Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 52 of 63 53 agent’s fraudulent preparation” to avoid assessment. Id. at 41. The same concerns apply here. Flath and other partners should not be allowed to hide behind Evanson’s fraud and subsequent criminal conviction to avoid assessment, particularly since these partners were aware of Evanson’s intent to evade tax. The Second Circuit, in City Wide, agreed with Allen in all respects. 709 F.3d at 107. In City Wide, the taxpayer did not have the intent to evade and the fraud perpetrated by the actor who did have that intent was actually perpetrated at the expense of the taxpayer, yet the Second Circuit still found that since there was a fraudulent return with intent to evade, the statute was open under Section 6501(c)(1). Id. The taxpayer in City Wide had hired an agent named Beg to resolve to resolve its outstanding payroll tax liabilities with the IRS, and provided Beg with returns and corresponding payments with the understanding that Beg would deliver them to the IRS. Beg instead deposited the payments in his own account and prepared fraudulent returns, along with smaller payments, for delivery to the IRS. In this way, Beg embezzled hundreds of thousands of dollars in tax payments from the taxpayer, and left the taxpayer with an ever-larger unpaid tax liability. Yet the Second Circuit concluded that Section 6501(c)(1) held open the limitations period against the taxpayer because the intent to evade was present since Beg had intended to understate the taxpayer’s taxes – albeit for his own benefit. This case, of course, presents a much stronger argument than City Wide, because Evanson was not perpetrating the fraudulent Omega Forex losses that understated Flath’s tax liability so that he could embezzle the difference, like Beg. Rather, Evanson was perpetrating the fraud that understated Flath’s liability at Flath’s behest and with his complicity. In fact, Flath was paying Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 53 of 63 54 Evanson a handsome fee for this very service, knowing full well that he was purchasing a tax loss, not a risky foreign currency investment. Further support for this plain language interpretation can be found in a long line of cases that hold that Section 6501(c)(1) applies to extend the statute against both spouses who filed a joint fraudulent return, even when one spouse was innocent and did not have the intent to evade. See, e.g., Estate of Upshaw v. Commissioner, 416 F.2d 737, 742–43 (7th Cir.1969) (holding the innocent wife liable for deficiencies on a joint return that her husband filed fraudulently and with the intent to evade tax); Vannaman v. Commissioner, 54 T.C. 1011, 1018 (1970) (“[E]ven if the joint-filing husband is the only one who committed fraud in filing the return and making any underpayment … the bar of the statute of limitations is still removed from the deficiencies determined against the wife.”); Ballard v. Commissioner, 740 F.2d 659, 663 (8th Cir. 1984) (noting that Section 6501(c)(1) “lifts the limitations bar ‘[i]n the case of a false or fraudulent return with the intent to evade tax’ … [and] does not require fraudulent intent on the part of both spouses”) (emphasis in the original). The Tenth Circuit appears to agree with this line of cases. Anaya v. Commissioner, 983 F.2d 186, 189 (10th Cir. 1993). Although it appears that the only intent to evade tax that the Tax Court had found in the Anaya case below was the husband’s, there is arguably some ambiguity on this point. Anaya v. Commissioner, T.C. Memo. 1991-91. What is unambiguous, however, is that the Tenth Circuit was unconcerned with the question of whose intent to evade tax was on the fraudulent return. Without inquiring into which spouse had the intent to evade tax, the Anaya court simply found that an intent to evade tax, coupled with a fraudulent return, “forever tolls the Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 54 of 63 55 limitation period,” creating liability for both spouses, even if the spouse did not have the intent to evade tax. Anaya, 983 F.2d at 189. There is a case that runs counter to the above cases: BASR Partnership by and through Pettinati v. United States, 795 F.3d 1338 (Fed. Cir. 2015). In BASR, in a split decision, the Federal Circuit held that it must be the taxpayer’s intent to evade tax. However, the BASR opinion suffers from several defects, many of which were noted by Chief Judge Sharon Prost, in her persuasive dissenting opinion. First, far from accepting the “the obvious construction of the statutory text,” in which there is no taxpayer-specific intent requirement, a fair reading of the majority opinion reveals a rather extraordinary search of “the entire tax code” in order to justify reading into this statute such a requirement. Id. at 1358. This violates both the “‘cardinal canon’ of statutory construction that ‘courts must presume that a legislature says in a statute what it means and means in a statute what it says there,’” as well as the “pro-government canon of construction for statutes of limitations.” Id. Second, the BASR majority ignored the purpose of the fraud exception to the statute of limitations by construing the statute in such a way, and “ties the IRS’s hands behind its back—without impossibly speedy sleuthing or smoking gun evidence, the IRS cannot collect taxes owed and the perpetrators make away scot free.” Id. at 1361. Finally, some aspects of the BASR majority opinion are incorrect or overstated. For example, the BASR opinion argues that the plain language construction that does not require taxpayer-specific intent would somehow shift the burden from the IRS to prove fraud to the taxpayer to disprove fraud. Id. at 1344-45. But this is simply not the case. To take this case, the burden to prove intent to evade does not simply disappear because a non-taxpayer’s intent to evade satisfies the statute, because the government still must prove fraud and intent to evade on the part of Evanson. The Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 55 of 63 56 majority opinion’s assertion that “City Wide did not actually address the question of whether the tax preparer’s intent was sufficient” similarly overstates the case. Id. at 1347. City Wide clearly analyzed Section 6501(c) and, citing the canon that limitations statutes should be construed in the government’s favor, held that “we conclude that the limitations period for assessing [the taxpayer’s] taxes is extended if the taxes were understated due to fraud of the preparer.” City Wide, 709 F.3d at 107 (quoting Browning v. Comm’r, 102 T.C.M. (CCH) 460, 2011 WL 5289636, at *13 n. 14 (2011) (quoting Allen, 128 T.C. 37)). The issue that City Wide avoided addressing because of the taxpayer’s concession is whether there can exist certain factual circumstances in which the fraudulent intent of a third party tax return preparer would not keep the statute open under Section 6501(c)(1). In other words, City Wide made a specific holding endorsing Allen and holding that the fraudulent intent of a non-taxpayer can keep the statute open, but then, because of a concession, declining to consider whether there could be an exception to that general rule because of factual circumstances. B. Section 6501(c) is not displaced by Section 6229(c)(1) To the extent that Flath attempts to make a second argument made by the taxpayer in BASR – that Section 6501(c) does not apply in this partnership proceeding because Section 6229(c)(1) is allegedly the exclusive means of extending the limitations period for making assessments against partners as a result of a fraudulent partnership return – the court should reject this argument. The argument that Section 6229 can somehow be asserted in isolation to shorten the limitation period provided for in Section 6501 has been rejected by several courts, including even the Federal Circuit in BASR. BASR, 795 F.3d at 1340 fn. 1. As the Federal Circuit has Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 56 of 63 57 described it, Section 6229 “does not create an independent statute of limitations,” but instead “creates a minimum period during which the period for tax assessments for partnership items may not end,” and which “may expire before or after the maximum period provided in § 6501.” AD Global, 481 F.3d at 1354; see also Curr-Spec Partners, L.P. v. Commissioner, 579 F.3d 391, 396 (5th Cir. 2009) (Section 6501 creates a limitation period that Section 6229 “can never shorten”); Andantech L.L.C. v. Commissioner, 331 F.3d 972, 976-77 (D.C. Cir. 2003) (The plain language of § 6501 compels its applications to all assessments.”); Rhone-Poulenc Surfactants and Specialties, L.P. v. Commissioner, 114 T.C. 533, 542-43 (2000); see also Prati v. United States, 603 F.3d 1301, 1307 (Fed. Cir. 2010) (“Sections 6501 and 6229 do not operate independently to allow a taxpayer to assert one in isolation and thereby render an otherwise timely assessment untimely.”). IV. Flath’s intent to evade tax also keeps the statute open under Section 6501(c)(1) The statute is also kept open under Section 6501(c)(1) if Flath had the “intent to evade, that is avoid, paying a tax otherwise due.” City Wide Transit, 709 F.3d at 107–08. Moreover, if a “‘tax evasion motive plays any part’ in certain conduct, an ‘affirmative willful attempt’ to evade taxes may be inferred from that conduct.” Id. (citing United States v. Klausner, 80 F.3d 55, 63 (2d Cir. 1996) (quoting Spies v. United States, 317 U.S. 492, 499 (1943)). Here, looking at Flath’s entire course of conduct, the undisputed facts show that Flath had the intent to evade, or avoid, paying otherwise due taxes. A motive to evade tax certainly played a part in Flath’s initial decision to transact business with Evanson. First, Flath was introduced to Evanson by Coats for help with “tax planning,” something for which Coats would receive “finders fees” based on the amount of Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 57 of 63 58 Flath’s designed tax loss. (SUMF ## 34-35). Flath then met with Evanson in a meeting in which he does not recall any discussion about foreign currency trading (or what would be done if a profit was made from such trading), but does recall that there would be a loss leading to a tax savings, for which he would pay Evanson a commission of 20%. (Id. # 36). Flath then sent Evanson a fax that clearly demonstrated that Flath understood that Evanson’s program involved nothing more than the circular flow of money that inevitably resulted in a tax loss, but not an actual economic loss. (Id. # 37). In Flath’s telling, he would pay Evanson $18,000 to $20,000 to set the program up, money would be moved into a Cayman Islands “container,” then the money would come back onshore with a “different label,” and a tax loss would somehow thereby be generated, for which he would pay Evanson 20% of the resulting tax savings. (Id.). This fax alone shows that tax evasion was part of Flath’s motive for entering into the Omega Forex program, and that Flath knew that this program was nothing more than a way to generate a tax loss, without a corresponding economic loss. Flath then continued to demonstrate that he knew that he was involved in a tax evasion program by paying Evanson a 20% fee on all the tax savings that Evanson generated from the Omega Forex program and other programs, such as the Commonwealth Professional reinsurance program. (Id. # 59). There was never any discussion of profit, or of how Evanson’s fees would be calculated if there was a profit, but it was simply understood by Flath that a foreign currency loss would be generated in whatever amount Flath paid for. (Id. ## 36-38, 57, 59). Despite apparently deducting these fees, Flath never told his accountant that he was paying Evanson a fee that was calculated as a percentage of tax savings. (Id. ## 59, 90). Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 58 of 63 59 The above facts alone demonstrate that tax avoidance was Flath’s primary motive for entering into the Omega Forex program. But perhaps the most damning facts concern Flath’s lack of basis in Omega Forex, and his lying to his accountant about this issue, as detailed in the statement of facts above, paragraphs 40 through 58. In short, Flath contributed nothing to Omega Forex in 1998, and therefore had no basis to claim a foreign currency loss from Omega Forex for that year, a fact of which Flath was well aware. (Id. ## 40-58). But when questioned by his accountant Gail Anger about whether he had contributed anything of value to Omega Forex, Flath lied to Anger and assured him that he had contributed to Omega Forex a basis sufficient to at least cover the $149,857 loss he was claiming. (Id. ## 43-47). In reality, it was only after Anger had questioned Flath about this issue that Flath attempted to contribute anything of value, when he transferred $165,000 of stock to an Evanson-related entity in March of 1999. (Id. ##45- 47). Flath continued his misrepresentations about what value he had contributed to Omega Forex, and when, well into this litigation, until he was confronted at his deposition with documents showing the true course of events. (Id. ## 40-44). To make matters even worse, Flath knew that even for the 1999 tax year the $165,000 in stocks he contributed to an Evanson-related entity in March of 1999 could not possibly have given him basis in Omega Forex, or have been used by Omega Forex to conduct foreign currency trades, because Flath treated this $165,000, less the 20% fee paid to Evanson, as his own, directing Evanson to create an account with Datek for Flath to trade stocks using this money. (Id. ## 65-66). Flath went so far as to complain to Evanson in July of 1999 that “he had been patient” since the March 1999 transfer of stocks but that it was time for him to re-enter the “equity arena with those proceeds.” (Id.). Furthermore, despite effectively controlling these Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 59 of 63 60 proceeds, Flath did not pay any capital gains tax upon the sale of the $165,000 in stocks, nor any tax upon the stocks he was trading within the Datek account through Evanson. (Id. ##64-70). Besides the intent to evade tax with respect to the Omega Forex transaction, Flath had the intent to evade with respect to other Evanson programs that affected the amount of tax due reported on his individual tax returns, which also keeps the statute open on those returns. The Commonwealth Professional program was particularly egregious, as was the phony “scholarship” program through Children’s Charities. In the Commonwealth Professional program, Flath had Rocky Mountain Endodontics, as well as Rock Springs Endodontics, pay unreasonably high premiums ($8,000 to $10,000 a month) to Evanson’s Commonwealth Professional, ostensibly for malpractice or disability insurance, despite the fact that these entities already had insurance policies with legitimate third party entities, and despite the fact that Commonwealth Professional was not licensed to issue insurance payments. (Id. ## 71-75). These payments then showed up as funds in Flath’s account with Evanson, less the fees paid to Evanson for tax savings, and Flath then controlled these funds and could do whatever he wanted with them. (Id. ## 76-78). Thus, this was effectively hundreds of thousands of dollars in income paid to Flath by his endodontic practices that was not reported by him on his individual returns. (Id. ## 75-84). Even worse, it was actually deducted by his endodontic practices as ordinary and necessary expenses of doing business, which means that Flath was effectively “double-counting” an already undeserved and fraudulent tax benefit. (Id.). Despite deducting these payments and not reporting them as income, Flath never told his accountant, Gail Anger, about this scheme. (Id. # 79). The accountant who prepared the returns for Rocky Mountain Endodontics, Bryce Olson, invoked the Fifth Amendment in response to questioning about his deducting several Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 60 of 63 61 hundreds of thousands of dollars through the Commonwealth Professional program, and even he admitted that if Flath could control the funds paid to Commonwealth Professional that they should have been reported as income to him. (Id. ## 80-83). Furthermore, showing his financial sophistication and understanding of the (unlawful) effectiveness of the Commonwealth Professional program as a tax evasion device, Flath subsequently set up his own similar reinsurance program, Pinebrook Springs, through which Flath deducted roughly one million dollars over an eight-year period that should have instead been reported as income. (Id. ##94-95). Children’s Charities International purported to offer educational scholarships. In reality, Flath understood very well that it was nothing more than a way for him to withdraw money from his container without tax consequences by disguising it as “anonymous scholarships” to pay for his children’s education, and Flath knew that it was his money paying for his children’s education, simply routed through Evanson. (Id. ## 86-88). For example, Flath directed Evanson to” transfer $10,000 to Yale from the 165K” (the same $165k in stock that Flath claimed form his basis for claiming losses from Omega Forex, which then was sent to Yale along with a cover letter that identified Flath’s daughter as the recipient of an anonymous scholarship from Children’s Charities International. (Id.). In the words of Evanson, Flath was a “qualified professional and somebody who was well educated and understood what was going on,” and Flath himself demonstrates that knowledge. Flath knew that he was paying for tax losses, he knew that the flow of money was circular, he knew that he had not contributed anything of value to Omega Forex and that he was lying to his accountant, he knew that he controlled the ostensible “insurance” premiums and that Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 61 of 63 62 this should be income to him, not deductions, and he knew that “scholarships” to his children were nothing more than payments from Flath for his children’s education. In short, Flath made affirmative willful attempts to evade tax. CONCLUSION For the above reasons, the Court should enter summary judgment in favor of the United States, upholding the adjustments in the Omega Forex FPAAs that disallow the fraudulent Section 988 losses, determining that the fraud penalty is applicable to these losses, and finding that the statute of limitations is still open to make the assessments relating to these adjustments. Respectfully submitted this 30th day of September, 2016. JOHN W. HUBER United States Attorney /s/ Landon M. Yost LANDON YOST Trial Attorney, Tax Division U.S. Department of Justice Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 62 of 63 63 CERTIFICATE OF SERVICE IT IS HEREBY CERTIFIED that service of the foregoing UNITED STATES’ MOTION FOR SUMMARY JUDGMENT was made the 30th day of September, 2016, via the Court’ CM/ECF system to the following parties: Michael D. Black PARR BROWN GEE & LOVELESS 101 South 200 East, Suite 700 Salt Lake City, UT 84111 Attorney for Petitioner /s/ Landon M. Yost LANDON YOST Trial Attorney, Tax Division U.S. Department of Justice Case 2:14-cv-00915-BSJ Document 54 Filed 09/30/16 Page 63 of 63 1 JOHN W. HUBER, United States Attorney (#7226) JOHN K. MANGUM, Assistant United States Attorney (#2072) Attorneys for the United States of America 185 South State Street, Suite 300 Salt Lake City, Utah 84111-1506 Telephone: (801) 524-5682 LANDON YOST Trial Attorney, Tax Division, U.S. Department of Justice P.O. Box 683, Ben Franklin Station Washington, D.C. 20044 Tel: (202) 307-2144 Fax: (202) 307-0054 Landon.M.Yost@usdoj.gov Attorneys for the United States of America IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH, CENTRAL DIVISION OMEGA FOREX GROUP, LC by and through Robert K. Flath, a Partner other than a Tax Matters Partner; Petitioner, v. UNITED STATES OF AMERICA; Respondent. ____________________________________ Case No. 2:14-CV-00915-BSJ DECLARATION OF LANDON YOST I, Landon Yost, pursuant to 28 U.S.C. § 1746, declare that: 1. I am a trial attorney with the United States Department of Justice, Tax Division, located in Washington, D.C. I have been assigned to the above-captioned matter and I am in possession of the Department of Justice files concerning this matter. I submit this Declaration in support of the United States’ Motion for Summary Judgment, and to place certain evidence before the Court. Case 2:14-cv-00915-BSJ Document 54-1 Filed 09/30/16 Page 1 of 10 2 2. Attached hereto as Exhibit LY-1 is a true and correct file-stamped copy of the criminal indictment filed on November 02, 2005 in United States v. Evanson et al, 2:05-CR-805- TC (D. Utah). 3. Attached hereto as Exhibit LY-2 are true and correct copies of all the documents available on State of Utah’s website relating to Omega Forex Group, LC, as accessed on May 1, 2015 at https://secure.utah.gov/bes/. 4. Attached hereto as Exhibit LY-3 is a true and correct file-stamped copy of selected pages from the transcript of proceedings of the criminal trial in United States v. Evanson et al, 2:05-CR-805-TC (D. Utah) on January 30, 2008. 5. Attached hereto as Exhibit LY-4 is a true and correct file-stamped copy of selected pages from the transcript of proceedings of the criminal trial in United States v. Evanson et al, 2:05-CR-805-TC (D. Utah) on February 1, 2008. 6. Attached hereto as Exhibit LY-5 is a true and correct file-stamped copy of the jury verdict form filed on February 12, 2008 in United States v. Evanson et al, 2:05-CR-805-TC (D. Utah). 7. Attached hereto as Exhibit LY-6 is a true and correct file-stamped copy of the Statement by Defendant Brent Metcalf in Advance of Plea of Guilty filed on January 25, 2008 in United States v. Evanson et al, 2:05-CR-805-TC (D. Utah). 8. Attached hereto as Exhibit LY-7 is a true and correct file-stamped copy of the Statement by Defendant Reed Barker in Advance of Plea of Guilty filed on January 18, 2008 in United States v. Evanson et al, 2:05-CR-805-TC (D. Utah). Case 2:14-cv-00915-BSJ Document 54-1 Filed 09/30/16 Page 2 of 10 3 9. Attached hereto as Exhibit LY-8 is a true and correct file-stamped copy of the Statement by Defendant Stephen Petersen in Advance of Plea of Guilty filed on January 18, 2008 in United States v. Evanson et al, 2:05-CR-805-TC (D. Utah). 10. Attached hereto as Exhibit LY-9 is a true and correct file-stamped copy of selected pages from the transcript of proceedings of the criminal trial in United States v. Evanson et al, 2:05-CR-805-TC (D. Utah) on January 29, 2008. 11. Attached hereto as Exhibit LY-10 is a true and correct file-stamped copy of selected pages from the transcript of proceedings of the criminal trial in United States v. Evanson et al, 2:05-CR-805-TC (D. Utah) on February 6, 2008. 12. Attached hereto as Exhibit LY-11 is a true and correct file-stamped copy of selected pages from the transcript of proceedings of the criminal trial in United States v. Evanson et al, 2:05-CR-805-TC (D. Utah) on February 7, 2008. 13. Attached hereto as Exhibit LY-15 is a true and correct copy of the deposition of Robert Flath dated June 1, 2016. 14. Attached hereto as Exhibit LY-16 is a true and correct copy of the deposition of Dennis Evanson dated June 29, 2016. 15. Attached hereto as Exhibit LY-17 is a true and correct copy of the deposition of John Coats dated June 3, 2016. 16. Attached hereto as Exhibit LY-18 is a true and correct copy of the general ledger of Omega Forex for the 1998 year, marked as Exhibit 18 in depositions in this case. 17. Attached hereto as Exhibit LY-19 is a true and correct copy of the general ledger of Omega Forex for the 2000-2001 time period, marked as Exhibit 95 in depositions in this case. Case 2:14-cv-00915-BSJ Document 54-1 Filed 09/30/16 Page 3 of 10 4 18. Attached hereto as Exhibit LY-20 is a true and correct copy of a letter from Dennis Evanson to Lewis Rowe dated April 5, 2000, marked as Exhibit 91 in depositions in this case. 19. Attached hereto as Exhibit LY-21 is a true and correct copy of a letter from Dennis Evanson to Sean Cotter dated November 17, 2000, marked as Exhibit 92 in depositions in this case. 20. Attached hereto as Exhibit LY-22 is a true and correct copy of a letter from Dennis Evanson to Lewis Rowe dated November 6, 1998, marked as Exhibit 94 in depositions in this case. 21. Attached hereto as Exhibit LY-23 is a true and correct copy of a deed of release for Press Services Limited signed by Dennis Evanson, marked as Exhibit 98 in depositions in this case. 22. Attached hereto as Exhibit LY-24 is a true and correct copy of a letter with referenced attachments from R. Kent Evanson to Zephyr International dated November 28, 2000, marked as Exhibit 87 in depositions in this case. 23. Attached hereto as Exhibit LY-25 is a true and correct copy of a handwritten letter from Dennis Evanson to R. Kent Evanson, marked as Exhibit 91A in depositions in this case. 24. Attached hereto as Exhibit LY-26 is a true and correct copy of a letter from Dennis Evanson to Sherry Nelson dated March 22, 2002, marked as Exhibit 88 in depositions in this case. Case 2:14-cv-00915-BSJ Document 54-1 Filed 09/30/16 Page 4 of 10 5 25. Attached hereto as Exhibit LY-27 is a true and correct copy of a portion of the general ledger for Omega Forex for the 1999 year, marked as Exhibit 24 in depositions in this case. 26. Attached hereto as Exhibit LY-28 is a true and correct copy of a judgment in a criminal case related to Stephen F. Petersen dated May 23, 2013, marked as Exhibit 86 in depositions in this case. 27. Attached hereto as Exhibit LY-29 is a true and correct copy of an order from Judge Campbell in the Civil Case NO. 2:11-cv-62 dated August 3, 2012. 28. Attached hereto as Exhibit LY-30 is a true and correct copy of a memorandum from Dennis Evanson to Lowell Anderson, John Coats, and Richard Taylor, marked as Exhibit 39 in depositions in this case. 29. Attached hereto as Exhibit LY-31 is a true and correct copy of an allocation report, marked as Exhibit 79 in depositions in this case. 30. Attached hereto as Exhibit LY-32 is a true and correct copy of a fax dated November 8, 1998 from Robert Flath to Dennis Evanson, marked as Exhibit 10 in depositions in this case. 31. Attached hereto as Exhibit LY-33 is a true and correct copy of the 1998 federal income tax return for Robert Flath, marked as Exhibit 13 in depositions in this case. 32. Attached hereto as Exhibit LY-34 is a true and correct copy of the deposition of Gail Anger dated June 8, 2016. Case 2:14-cv-00915-BSJ Document 54-1 Filed 09/30/16 Page 5 of 10 6 33. Attached hereto as Exhibit LY-35 is a true and correct copy of Robert Flath’s Responses to United States’ First Set of Interrogatories, signed January 12, 2016, marked as Exhibit 77 in depositions in this case. 34. Attached hereto as Exhibit LY-36 is a true and correct copy of Robert Flath’s Supplemental Responses to United States’ First Set of Interrogatories, signed April 13, 2016, marked as Exhibit 78 in depositions in this case. 35. Attached hereto as Exhibit LY-37 is a true and correct copy of account statements for a Datek trading account held by Robert Flath, marked as Exhibit 41 in depositions in this case. 36. Attached hereto as Exhibit LY-38 is a true and correct copy of a document to be faxed from Dennis Evanson to Robert Flath, marked as Exhibit 43 in depositions in this case. 37. Attached hereto as Exhibit LY-39 is a true and correct copy of a fax from Robert Flath to Dennis Evanson dated March 25, 1999, marked as Exhibit 54 in depositions in this case. 38. Attached hereto as Exhibit LY-40 is a true and correct copy of a memorandum of interview of Gail Anger dated July 30, 2003, marked as Exhibit 31 in depositions in this case. 39. Attached hereto as Exhibit LY-41 is a true and correct copy of the 1999 federal income tax return for Robert Flath, marked as Exhibit 19 in depositions in this case. 40. Attached hereto as Exhibit LY-42 is a true and correct copy of Protector’s Fund Allocation Working Reports, or ICG Reports, marked as Exhibit 53 in depositions in this case. 41. Attached hereto as Exhibit LY-43 is a true and correct copy of the deposition of Brent Metcalf dated June 7, 2016. Case 2:14-cv-00915-BSJ Document 54-1 Filed 09/30/16 Page 6 of 10 7 42. Attached hereto as Exhibit LY-44 is a true and correct copy of a portion of the general ledger for International Capital Management for the 1999 year, marked as Exhibit 25 in depositions in this case. 43. Attached hereto as Exhibit LY-45 is a true and correct copy of the deposition of Stephen Petersen, dated August 24, 2016. 44. Attached hereto as Exhibit LY-46 is a true and correct copy of a handwritten cover page from Robert Flath to Dennis Evanson attaching a spreadsheet with cost basis information, marked as Exhibit 44 in depositions in this case. 45. Attached hereto as Exhibit LY-47 is a true and correct copy of a letter from Robert Flath to Dennis Evanson dated July 25, 1999, marked as Exhibit 55 in depositions in this case. 46. Attached hereto as Exhibit LY-48 is a true and correct copy of an email from Robert Flath to Dennis Evanson dated January 24, 2000, marked as Exhibit 2 in depositions in this case. 47. Attached hereto as Exhibit LY-49 is a true and correct copy of an email from Robert Flath to Dennis Evanson dated February 15, 2002, marked as Exhibit 4 in depositions in this case. 48. Attached hereto as Exhibit LY-50 is a true and correct copy of checks of Rocky Mountain Endodontics, marked as Exhibit 5 in depositions in this case. 49. Attached hereto as Exhibit LY-51 is a true and correct copy of the 1998-2002 U.S. Corporation Income Tax Returns of Rocky Mountain Endodontics, marked as Exhibit 76 in depositions in this case. Case 2:14-cv-00915-BSJ Document 54-1 Filed 09/30/16 Page 7 of 10 8 50. Attached hereto as Exhibit LY-52 is a true and correct copy of the deposition of Bryce Olson, dated June 3, 2016. 51. Attached hereto as Exhibit LY-53 is a true and correct copy of an email from Craig Kiser to Dennis Evanson dated January 22, 2000, marked as Exhibit 93 in depositions in this case. 52. Attached hereto as Exhibit LY-54 is a true and correct copy of a faxed letter with a handwritten note from Robert Flath to Dennis Evanson dated June 29, 1999, marked as Exhibit 60 in depositions in this case. 53. Attached hereto as Exhibit LY-55 is a true and correct copy of letter from Dennis Evanson to Lewis Rowe dated July 12, 1999, marked as Exhibit 61 in depositions in this case. 54. Attached hereto as Exhibit LY-56 is a true and correct copy of a letter from Robert Flath to Dennis Evanson dated October 3, 1999. 55. Attached hereto as Exhibit LY-57 is a true and correct copy of an email exchange between Robert Flath and Dennis Evanson dated May 21, 2002, marked as Exhibit 8 in depositions in this case. 56. Attached hereto as Exhibit LY-58 is a true and correct copy of an opinion letter from Graham Taylor to Dennis Evanson dated December 31, 1997, along with a two-page summary of that opinion dated December 15, 1997, marked as Exhibit 45 in depositions in this case. 57. Attached hereto as Exhibit LY-59 is a true and correct copy of the deposition of Wendy Flath, dated June 6, 2016. Case 2:14-cv-00915-BSJ Document 54-1 Filed 09/30/16 Page 8 of 10 9 58. Attached hereto as Exhibit KK-1 is a true and correct copy of Omega Forex’s 1998 Form 1065, U.S. Partnership Return of Income. Exhibit KK-1 was attached to the Declaration of Kurt Kotter previously filed on May 15, 2015 in support of the United States’ motion for summary judgment, Docket No. 19. 59. Attached hereto as Exhibit KK-2 is a true and correct copy of Omega Forex’s 1999 Form 1065, U.S. Partnership Return of Income. Exhibit KK-2 was attached to the Declaration of Kurt Kotter previously filed on May 15, 2015 in support of the United States’ motion for summary judgment, Docket No. 19. 60. Attached hereto as Exhibit KK-7 is a true and correct copy of a Notice of Beginning of Administrative Proceeding (“NBAP”) for Omega Forex Group dated November 9, 2009, Bates-stamped IRS003205-07. Exhibit KK-7 was attached to the Declaration of Kurt Kotter previously filed on May 15, 2015 in support of the United States’ motion for summary judgment, Docket No. 19. 61. Attached hereto as Exhibit KK-8 is a true and correct copy of an internal IRS record Bates-stamped IRS000341, with tax identification numbers redacted, that reflects that the NBAP referred to in paragraph 60, above, had been sent to certain taxpayers, including Robert Flath, by December 28, 2009. Exhibit KK-8 was attached to the Declaration of Kurt Kotter previously filed on May 15, 2015 in support of the United States’ motion for summary judgment, Docket No. 19. // Case 2:14-cv-00915-BSJ Document 54-1 Filed 09/30/16 Page 9 of 10 10 I declare under penalty of perjury that the foregoing is true and correct. Dated this 30th day of September, 2016, /s/ Landon Yost______ LANDON YOST Trial Attorney, Tax Division U.S. Department of Justice Case 2:14-cv-00915-BSJ Document 54-1 Filed 09/30/16 Page 10 of 10