By Gary Wolfe and Muthupandi Ganesan
In the Mel Brooks film, The Producers, the promoters of a Broadway play set up a “sure failure” to leave their investors with a tax loss while they absconded with the money raised for the show (too bad the show was a big hit and the promoters wound up in jail). In “Life Imitating Art” we now witness what may become the Producers II i.e. 7 Arts Film Co has apparently been involved in a failed tax shelter involving 150+ investors and $160m lost.
In London/UK ten promoters lawyers and CPAs involved have been criminally indicted. So far the case appears not to have spread to the US but given the serious legal issues involved which may include tax evasion, money laundering, wire fraud/mail fraud and the role of a Hollywood film company it appears inevitable that US legal authorities may become involved and disgruntled investors may file legal actions to recoup their damages.
Matthew Cahill, a high flying lawyer and a former Structured Finance and Capital Markets Partner at US international law firm Sidley Austin LLP, is currently standing trial in England charged with two offences of conspiracy to cheat the Public Revenue and one offence of Cheating Her Majesty’s Revenue & Customs (HMRC). There are nine co-defendants in this trial including well known financial industry figures such as Richard Hughes, the co-founder of Zeus Capital and Patrick McCoy, former Head of Investment Advisory at KPMG. It is understood the remainder of the defendants includes an investment banker and other professionals such as lawyers, accountants and finance advisors. The precise nature and scope of the evidence against Matthew Cahill and others is not currently known, as the Crown Prosecution Service and HMRC will not publish details of the indictment and evidence prior to the trial.
Based on the limited amount of information available, it appears that Matthew Cahill is accused of conspiring with others to evade tax by the creation of aggressive illegal tax avoidance schemes, involving investment in the region of £134 million ($165 million) by wealthy individuals in film production in particular financing of projects for Seven Arts Pictures, based in the USA. The allegations appear to be that, in 2008, the scheme operated so that the wealthy investors (150+ investors) borrowed substantial amounts of money to invest in film projects, which all turned out be loss making, which then allowed the investors to obtain tax relief on the borrowed money. It appears to be that HMRC and the Crown Prosecution Service allege that the scheme had been designed with the intention and expectant result that there will be a loss, which then allow investors to seek and obtain tax relief on the borrowed money.
Specifically, US taxpayers involved in receiving tax benefits may be subject to three separate US tax crimes: criminal evasion of tax (a five year felony), obstructing/impeding tax collection (a three year felony) and filing a false tax return (a three year felony). Any US taxpayers involved in the planning or perpetration of the film “tax shelter” may also face criminal tax charges for conspiracy to commit tax evasion known as a “Klein conspiracy” (when two or more people conspire to commit tax evasion).
Any US taxpayers who may be among the 150+ investors in the Zeus partners film project should promptly consider with their US legal advisors the implications of their investment and whether or not to amend their US federal/state tax returns to eliminate any tax losses from the film investment and recalculate their tax due.
If they have been defrauded, they may wish to consider a fraud/theft lawsuit against those responsible which may enable them to avoid US civil tax fraud/criminal tax evasion penalties (if they were misled by third parties), and by declaring a theft tax loss on their federal and state income tax returns (if in the US state in which they reside fraud is classified as theft under penal statutes, as in California and New York).
This fraud tax theft loss may create an ordinary income tax loss which can be carried back for 3 tax years (and may allow claims for tax refunds) or can be carried forward for 20 years (and may produce tax-free income up to the amount of their losses). Moreover, if the lawsuit filed for fraud against responsible third parties is successful they may recoup all or part of their damages, which include actual and/or punitive damages.
Mr. Muthupandi Ganesan is a dual qualified Barrister-at-Law and an Indian Advocate based in London, England. His practice is in the areas of taxation, international regulatory and financial crime. www.scarmans.co.uk
Gary S. Wolfe, US lawyer: firstname.lastname@example.org
Please address UK questions to Mr. Ganesan; US questions to Mr. Wolfe.