U.S. Second Circuit - The FindLaw 2nd Circuit Court of Appeals Opinion Summaries Blog

Tax Shelter Salesman Can't Stop IRS From Looking Into Wife's Assets

James Haber and his tax shelter boutique, Diversified Group Inc, were fined $25 million by the Internal Revenue Service for their alleged failure to register offshore tax shelters. Haber handed over $18,370 and his company paid out $15,500, and that was it. To collect the significant balance remaining, the IRS turned to assets controlled by Haber's wife, Jill.

Haber sued, contesting the administrative summons issued by the IRS to Ms. Haber's bank. But, the Second Circuit ruled last Friday, that summons was well within the Service's power, allowing the IRS investigation into Haber's wife to continue ahead.

The $25 Million Penalty

Haber, through Diversified Group Inc., helps companies and individuals avoid federal taxes. Jack Townsend's Federal Tax Crimes blog describes DGI's work thusly:

Among DGI's offerings of [expletive] tax strategies was a transaction commonly called a "Midco transaction." I won't get into the details of the Midco transaction... suffice it to say that it was a multi-party transaction designed to rip off the corporate level tax from the federal fisc and share it among the parties structuring it.

Eventually, one of Haber's tax schemes came back to bite him, landing Haber and DGI a $25 million fee. When Haber handed over only a tiny fraction of that cash, the IRS placed a federal tax lien against him for the balance. And while Haber is battling that fine and lien in court, IRS revenue offers began looking into his wife's assets.

Jill Haber's assets, according to an IRS investigator, "suggest that [Haber] may have access to, and use of, a bank account or bank accounts held in the name of Jill Haber at Signature Bank, and that such account or accounts may be held in the name of Jill Haber to shield them from the IRS."

The Lady Haber's assets were to be treated "as the nominee or alter-ego or transferee" of Haber and could be collected to repay the IRS penalty, the Service determined.

No Help From the First Circuit

The IRS then issued an administrative summons to Signature Bank, leading to Haber's suit.

Haber moved to quash the summons, arguing that the IRS could not pursue the summons while a criminal investigation was pending against him. The Second Circuit rejected that claim, however. In an odd twist of luck (or unluck, depending on your perspective), the IRS had produced evidence showing that it had dropped its criminal inquiry -- a win for Haber on one hand, but a loss on the other, as it allowed the Service to continue pursuing Haber's assets through his wife.

Further, the Second Circuit and the district court both agreed that there was no jurisdiction to hear Haber's complaints. As they noted, the federal government has "not waived sovereign immunity to allow suits to quash summonses" issued pursuant to the collection of an assessment.

The Second Circuit rejected Haber's argument that, because of Haber's many lawsuits with the Service, the IRS "cannot begin actual collection of the assessment," thus making the summons not pursuant to the collection. The law, the court explains, only requires that an assessment is made in order for the IRS to issue a summons -- the Service's ability to collect on that assessment immediately or not does not play a role.

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