U.S. v. Stover

• Decision Date: 26 October 2011
• Docket Number: No. 10–3012.,10–3012.
• Citation: 2011 USTC P 50582,108 A.F.T.R.2d 2011,650 F.3d 1099
• Parties: UNITED STATES of America, Plaintiff–Appellee,v.A. Blair STOVER, Jr., Defendant–Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

650 F.3d 1099

108 A.F.T.R.2d 2011-5837

2011-2 USTC P 50,582

UNITED STATES of America, Plaintiff–Appellee,

v.A. Blair STOVER, Jr., Defendant–Appellant.

No. 10–3012.

United States Court of Appeals, Eighth Circuit.

Submitted: June 17, 2011.Filed: Aug. 16, 2011.Rehearing Denied Oct. 26, 2011.

Charles H. Stitt, Shaffer Lombardo Shurin, Kansas City, MO, argued (Richard F. Lombardo, James D. Myers, Shaffer Lombardo Shurin, Kansas City, MO, Leonard Sharenow, Law Offices of Leonard Sharenow, P.C., Los Angeles, CA, on the brief), for appellant.Curtis C. Pett, Tax Div., U.S. Dept. of Justice, Washington, DC, argued (John A. Dicicco, Acting Asst. Atty. Gen., Bruce R. Ellisen, Tax Div., U.S. Dept. of Justice, Washington, DC, Beth Phillips, U.S. Atty., Kansas City, MO, on the brief), for appellee.Before MURPHY and SMITH, Circuit Judges, and SCHREIER,¹ District Judge.MURPHY, Circuit Judge.

The United States brought this civil action under 26 U.S.C. § 7408 to enjoin A. Blair Stover, Jr. from promoting several fraudulent tax schemes. After a court trial the district court ² permanently enjoined Stover from promoting his schemes, ordered him to advise the Internal Revenue Service (IRS) of any tax arrangements or business entities formed at his direction, and required him to provide a copy of its order to his clients. On appeal, Stover argues that the injunction was not supported by adequate factual findings and legal conclusions, and that it was overbroad, an impermissible delegation of Article III power, and an unconstitutional prior restraint. We affirm.

I.

In all material respects the following facts are undisputed and were recounted by the district court. For many years Stover has worked for several accounting firms in Missouri. He received undergraduate and graduate degrees in business administration with an emphasis in marketing and finance and has earned a law degree from the University of Missouri at Kansas City. He has been licensed to practice law in Missouri since 1990 and remains a member of the Missouri bar. Stover has also taken courses towards an L.L.M. in taxation and has passed the tests to become a certified public accountant (CPA), but he does not have his CPA license.

For several years in the early 1990s, Stover worked for the accounting firm of Coopers and Lybrand. His duties included preparing requests for IRS rulings as well as researching and drafting opinions and memoranda on tax issues. In 1993 Stover began working at the accounting firm of Grant Thornton LLP as a tax manager. Over the next eight years he rose to senior tax manager and tax principal at Grant Thornton. Then in 2001 Stover joined Kruse Mennillo LLP, another accounting firm, as an equity partner. Stover's role at Kruse Mennillo was to be a “rainmaker” who promoted new business ventures to reduce clients' tax liability.

During his time at Grant Thornton and Kruse Mennillo, Stover promoted, sold, and organized several different tax arrangements, three of which are the focus of this appeal. Each was premised on a small business owner transferring income from his business, labeled the “operating company,” to a separate and newly created entity denominated as a “management company.” Under each scheme the operating company would retain the management company to perform “management services.” Fees paid by the operating company to the management company would be deducted from the operating company's taxable income. The management company's income would then be deferred or completely excluded from taxation through devices such as the accrual method, employee stock ownership plans (ESOPs), and Roth IRAs.

These schemes would soon pose numerous tax law problems. It is undisputed that the management companies did not provide any management services to the operating companies; instead, the management fees would be set by Stover at a “defensible” amount necessary to offset a large portion of the operating company's income. In some cases the management company had no employees or bank accounts, and the management fees were recorded only on paper. As explained below, the district court found that deferral or exclusion from taxation of these fees violated laws defining when services are properly accrued, “top heavy” rules for ESOPs, and contribution and income limits for Roth IRAs.

The first structure Stover promoted was the “Parallel C” scheme, which had been developed and promoted by others at Grant Thornton before Stover began working there. Parallel C structures were sold to small business owners who owned subchapter S corporations and used a January 1 to December 31 tax year. ³ In December, near the end of the tax year, the operating company would pay a large “management fee” to a management company newly created at Stover's direction for bogus management services the company did not actually provide.⁴

The operating company would accrue these purported management fees for the following year to offset most or all of its income for the current year. In turn, the management company would elect to follow a December 1 to November 30 fiscal year, and would not become liable for tax on the income until the end of its tax year. In effect this arrangement allowed the operating companies improperly to defer taxation on most or all of their income for eleven months. See also United States v. Davison, No. 08–0120–CV–W–GAF, 2010 WL 1935951, at *1 (W.D.Mo. May 11, 2010) (describing a similar Parallel C scheme by Stover's former business partner).

The district court found that two particular Parallel C structures set up by Stover violated tax laws, but noted that there was evidence of “many others.” It determined that the Parallel C structures violated rules for accrual of fees for services, see 26 U.S.C. § 461(h), requirements for the deduction of ordinary and necessary business expenses, see 26 U.S.C. § 162(a), and the principle that structures creating tax benefits must have economic substance. See Gregory v. Helvering, 293 U.S. 465, 469–70, 55 S.Ct. 266, 79 L.Ed. 596 (1935).

While at Grant Thornton and for a short time at Kruse Mennillo, Stover sought to defer his clients' tax liability further using a second scheme known as an “ESOP/S” structure. The ESOP/S worked similarly to the Parallel C structure, with an added element: the management company would elect subchapter S status and Stover would create an employee stock ownership plan (ESOP) as the owner of the management company's stock. The ESOP's sole beneficiary would be the owner or owners of the operating company. Because an ESOP's income is not subject to taxation until distribution, this second scheme indefinitely deferred taxation on income until the money was distributed from the ESOP. See Davison, 2010 WL 1935951, at *1.

The district court identified five particular ESOP/S structures that violated various tax laws but stated that the record showed that Stover sold “more than twenty” of them. It found that the ESOP/S arrangements “suffered from a lack of business purpose,” “failed to insure the requirements for arm's length transactions were satisfied,” and violated so called “top heavy” rules regulating ESOPs. See 26 U.S.C. §§ 414(b), 416, 1563(a)(2). It also pointed out that after Congress expressly outlawed ESOP/S schemes, see 26 U.S.C. § 409(p), Stover created an arrangement by which a previously created “shelf corporation” was used to create an ESOP, in an effort to backdate the ESOP and avoid the effective date of the new legislation.

After he began working at Kruse Mennillo and Congress had outlawed the ESOP/S structures, Stover developed and promoted the “Roth/S” structure. Like the two other schemes, the Roth/S involved creating a management company eligible for a subchapter S election. A Roth IRA would then purchase the management company's stock, and the Roth IRA's sole beneficiary was the owner of the operating company. The management fees would reduce the operating company's income, the management company's income would not be taxed because it passed through to its owners because of the subchapter S election, and the income allocations to the IRA would not be taxed because a Roth IRA's earnings are not taxable so long as any distributions are made after age 59 1/2. As the district court explained, any amount Stover designated as management fees “would forever escape taxation.”

The district court identified two specific Roth/S arrangements Stover promoted, but found that a conservative estimate indicated that he “sold between thirty-five and forty Roth/S arrangements.” The district court determined that these arrangements failed to have any economic substance, violated contribution and income limits governing Roth IRAs, see 26 U.S.C. § 408A(c)(2)–(3), and contravened IRS Notice 2004–8. That notice had expressly declared that similar schemes were “abusive” and had required those owning and promoting them to disclose them to the IRS and to register them as tax shelters. See Notice 2004–8, 2004–1 C.B. 333 (2004).

As Stover promoted and sold these tax schemes, several of his clients raised questions about their validity. Daria Ussary, an office manager for one of his clients, told Stover that she was not comfortable making journal entries requested by him for the company's books because they “didn't make any sense” to her. She left her position as office manager because of her concern about his schemes' validity. Other clients testified that Stover described the deductions for management fees as mere “paperwork transaction[s],” because the management companies “really didn't provide us any services.” When one of his clients questioned whether it was a “legal and standard practice” to use management companies to deduct large, bogus management fees, Stover replied that it was. Stover told Ussary that he was “educated and he had gone to the best schools” and that she should just let Stover do his job.

The IRS conducted a lengthy and costly investigation into Stover's...