Tax evasion
I have previously written about one of the tax schemes where folks would donate the interests in their LLCs or partnerships to a charity so that they could distribute the tax liability to the charity but retain the cash for themselves. These schemes are wired so that folks would get their interests back in the end, as opposed to a real charitable donation, so it was all just a scam. One of these schemes was described in my article Gain Elimination Plan Causes Three Promoters To Gain Convictions (May 18, 2024), and now we get to see the outcome for these promoters.
This outcome comes courtesy of Tax Attorneys And Insurance Agent Sentenced To Prison In Tax Shelter Scheme (Press Release of U.S. Attorney, W.D.N.C., Nov. 13, 2024). For the two tax attorneys involved, Michael Elliott Kohn and Catherine Elizabeth Chollett, they received seven and four year sentences respectively. The insurance agent involved (the three were sharing in the commissions), being David Shane Simmons, was sentenced to five years. Collectively, the three were also required to pay over $22.5 million in criminal restitution. The press release also states:
“According to court documents and evidence presented at trial, from 2011 to November 2023, Kohn and Chollet, both of St. Louis, and Simmons, who is based out of Jefferson, North Carolina, promoted, marketed and sold to clients the Gain Elimination Plan, a fraudulent tax scheme.
“The defendants designed the plan to conceal clients’ income from the IRS by inflating business expenses through fictitious royalties and management fees. These fictitious fees were paid, on paper, to a limited partnership largely owned by a charity. In reality, Kohn and Chollet fabricated the fees.
“Kohn and Chollet advised clients that the plan’s limited partnership was required to obtain insurance on the life of the clients to cover the income that was allocated to the charitable organization. The death benefit was directly tied to the anticipated profitability of the clients’ businesses and how much of the clients’ taxable income was intended to be sheltered.
“Simmons earned more than $2.3 million in commissions for selling the insurance policies, splitting the commissions with Kohn and Chollet. Kohn and Chollet received more than $1 million from Simmons. Simmons also filed false personal tax returns that underreported his business income and inflated his business expenses, resulting in a tax loss of more than $480,000.
“In total, the defendants caused a tax loss to the IRS of more than $22 million.”
This particular form of tax fraud has grown in popularity over the past couple of decades and this will frankly not be the last time that we see it. The prosecution of the promoters of these schemes may, however, at least deter other folks from setting up their own schemes.
It is also worth noting that in this particular case most of the money received by the promoters came by way of life insurance premiums. A good rule of thumb is that whenever life insurance is blended with something that purports to save income taxes, it is probably a questionable tax scheme.
As always, the best way to avoid being caught up in one of these schemes is to seek an independent second opinion by qualified tax counsel, with independent meaning to find your own tax counsel and not rely upon somebody suggested by the promoter and thus probably in on the scheme.