Filed: Mar. 29, 2013
Latest Update: Mar. 28, 2017
Summary: UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 10-2072 ROBERT J. NAGY, Plaintiff - Appellant, v. UNITED STATES OF AMERICA, Defendant - Appellee. Appeal from the United States District Court for the District of South Carolina, at Charleston. David C. Norton, District Judge. (2:08-cv-02555-DCN) Argued: December 4, 2012 Decided: March 29, 2013 Before GREGORY, AGEE, and WYNN, Circuit Judges. Affirmed in part, reversed in part, and remanded by unpublished per curiam opinion. AR
Summary: UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 10-2072 ROBERT J. NAGY, Plaintiff - Appellant, v. UNITED STATES OF AMERICA, Defendant - Appellee. Appeal from the United States District Court for the District of South Carolina, at Charleston. David C. Norton, District Judge. (2:08-cv-02555-DCN) Argued: December 4, 2012 Decided: March 29, 2013 Before GREGORY, AGEE, and WYNN, Circuit Judges. Affirmed in part, reversed in part, and remanded by unpublished per curiam opinion. ARG..
More
UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 10-2072
ROBERT J. NAGY,
Plaintiff - Appellant,
v.
UNITED STATES OF AMERICA,
Defendant - Appellee.
Appeal from the United States District Court for the District of
South Carolina, at Charleston. David C. Norton, District Judge.
(2:08-cv-02555-DCN)
Argued: December 4, 2012 Decided: March 29, 2013
Before GREGORY, AGEE, and WYNN, Circuit Judges.
Affirmed in part, reversed in part, and remanded by unpublished
per curiam opinion.
ARGUED: John B. Kern, Charleston, South Carolina, for Appellant.
Anthony T. Sheehan, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee. ON BRIEF: Kathryn Keneally,
Assistant Attorney General, Bridget M. Rowan, Tax Division,
UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; William
N. Nettles, United States Attorney, Columbia, South Carolina,
for Appellee.
Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:
Robert J. Nagy (“Nagy”) appeals from the district court’s
grant of partial summary judgment to the government, certain
evidentiary rulings at trial, certain of the jury instructions,
and the jury verdict against him imposing civil penalties under
§ 6700 of the Internal Revenue Code. 1 For the reasons set forth
below, we affirm the judgment of the district court in part,
reverse in part, vacate the jury verdict, and remand this case
for a new trial.
I
Nagy, a certified public accountant, advised Charles
Cathcart and his various Derivium companies (“Derivium”) in the
development and marketing of an investment scheme termed the
“90% Loan Program” (the “90% Loans”). 2 As part of this scheme,
customers of Derivium would transfer appreciated securities to
Derivium as “collateral” and receive in return a “loan” equal to
90% of the value of the securities. Derivium represented to its
customers that it would cause hedging transactions to be
1
All citations herein are to the Internal Revenue Code of
1986 as codified in volume 26 of the United States Code.
2
As best we can tell from the record, Nagy was a paid
accounting and tax consultant to Derivium and had no ownership
or equity interest in it.
2
undertaken so as to protect against market fluctuations the
securities given as “collateral.” Further, Derivium represented
that the 90% Loan payments would be made by a separate offshore
entity or entities that would also engage in the hedging
transactions. Under the terms of the 90% Loan agreements,
Derivium could not demand repayment prior to the maturity date
of the “loan,” the customer could not repay the principal early,
and Derivium would apply any dividends received on the
“collateral” securities to repayment of “loan” interest. At
maturity of the “loan,” the customer had the option to repay the
principal and recover the “collateral” securities, to renew the
loan, or to forfeit the stock without any further liability on
the “loan” even if the remaining principal balance and accrued
interest of the “loan” exceeded the value of the forfeited
securities.
In reality, upon consummation of a 90% Loan, Derivium would
not hold the securities received as collateral, but would
immediately sell the customer’s securities. Derivium thus funded
the 90% Loan payments out of the sales proceeds, while Derivium
principals kept the remaining 10% of the sales proceeds, which
they used for expenses and their own investments (which failed).
There was no separate offshore entity purchasing the “loans” or
performing any hedging transactions. Derivium engaged in no
3
hedging transactions on its own and maintained no capital
reserves.
By December 2005, Derivium had sold more than $1.25 billion
of its customers’ securities as part of the 90% Loan scheme. As
time passed, many of the Derivium customers’ securities
increased in value, and the underlying “loans” matured.
Customers whose securities had increased in value repaid the
“loans” and demanded the return of their securities. As Derivium
no longer had the securities or any capital reserves, its entire
Ponzi-like scheme eventually collapsed.
Nagy’s role in the Derivium saga was to give Derivium his
opinion, as a CPA, that the 90% Loans were bona fide loans and
not sales of securities, which would have been subject to
federal (and state) income tax at the time of the sales.
Derivium used Nagy’s tax advice in its marketing to customers
(it would have had few takers for a taxable transaction) that it
offered a tax-free “loan” program. Nagy reviewed and commented
on the Derivium marketing materials before their publication to
customers with an eye to minimizing any mention of an income tax
risk related to the 90% Loans.
The Internal Revenue Service (“IRS”) conducted audits of
Derivium beginning in late 2001 that concluded with the issuance
of no-change letters to Derivium. In 2004, however, both the IRS
and California tax authorities began audits of Derivium’s 90%
4
Loan customers, eventually determining that the Derivium 90%
Loans were sales for income tax purposes and therefore taxable
to the customer at the time the securities were transferred. The
IRS assessed penalties under I.R.C. § 6700 against Nagy and
others who participated in the marketing of the 90% Loans. 3
Nagy paid 15% of the assessed penalties and filed refund
claims pursuant to I.R.C. § 6703(c)(1), which the IRS denied. He
then filed the present action in the United States District
Court for the District of South Carolina, claiming, among other
things, refund of the penalties paid. The government filed a
counterclaim against Nagy, asserting Nagy’s liability for the
unpaid balance of its assessed penalties.
The district court bifurcated the trial into two phases—a
liability phase and a penalty amount phase. During the liability
phase, the government moved for partial summary judgment on the
limited issue of whether the 90% Loans were bona fide loans or
sales for tax purposes. The district court granted partial
summary judgment in favor of the government, concluding that the
90% Loans were sales for tax purposes.
The case then proceeded to trial by jury. On June 30, 2010,
the jury rendered its verdict on liability in favor of the
3
I.R.C. § 6700 authorizes civil penalties against certain
persons “[p]romoting abusive tax shelters.”
5
government, finding by a preponderance of the evidence that Nagy
was subject to the I.R.C. § 6700 penalty. By separate verdict,
the jury set the amount of the penalty at $2.636 million.
Nagy timely appealed, and we have jurisdiction under 28
U.S.C. § 1291.
II
We review a district court’s grant of summary judgment de
novo. Maracich v. Spears, 675 F.3d 281, 291 (4th Cir. 2012). We
review a district court’s evidentiary rulings for an abuse of
discretion. Creekmore v. Maryview Hosp.,
662 F.3d 686, 690 (4th
Cir. 2011). We review the adequacy of a district court’s jury
instructions for an abuse of discretion, while we review the
statements of law contained in jury instructions de novo. United
States v. Jefferson,
674 F.3d 332, 360 (4th Cir. 2012).
III
Nagy raises six issues on appeal: (A) whether the district
court erred in granting partial summary judgment to the
government on the limited issue of whether the 90% Loans were
sales for tax purposes and not loans, (B) whether the district
court erroneously instructed the jury that Nagy’s tax advice to
Derivium that the 90% Loans were loans and not sales was a
“false or fraudulent” statement as a matter of law for purposes
6
of § 6700, (C) whether the district court abused its discretion
in excluding certain evidence submitted by Nagy, (D) whether the
district court abused its discretion in admitting certain
evidence offered by the government, (E) whether the district
court erroneously admitted certain of Nagy’s personal tax return
information into evidence, and (F) whether the district court
erroneously instructed the jury regarding the calculation of the
penalty.
A. Partial Summary Judgment
We first conclude that the district court properly granted
summary judgment to the government on the issue of whether the
90% Loans were sales and not loans for tax purposes. The
district court correctly applied the doctrine of substance over
form and concluded that the 90% Loans were in substance sales
for tax purposes because the “benefits and burdens of ownership”
had passed from the 90% Loan customers to Derivium. Nagy v.
United States, No. 2:08-cv-2555-DCN, 2009 WL 5194996, at *3
(D.S.C. Dec. 22, 2009). 4
4
As the district court properly found in its partial
summary judgment opinion: the 90% Stock Loan Program did not
generate genuine indebtedness because:
(a) Derivium had to sell the securities to fund the
“loan”; (b) the customer could not repay his “loan”
prior to maturity and Derivium could not force a
(Continued)
7
B. Liability Phase Jury Instruction
Next, Nagy argues on appeal that the following jury
instruction at the liability phase of his trial was erroneous:
“In December 2009, this court determined that the 90% Loan
transaction was a sale, and not a loan. Thus, statements
indicating that the 90% Loan transactions were loans are false.”
(J.A. 210.) Yet Nagy made no objection to this jury instruction
at trial. We conclude that, as Nagy failed to “make timely and
sufficient objections” to these jury instructions at trial, he
failed to preserve the issue for appeal. See Belk, Inc. v. Meyer
Corp., U.S., 679 F.3d 146, 153 n.6 (4th Cir. 2012). Moreover, it
is worth noting that the district court twice instructed the
jury that it could find Nagy liable under § 6700 regarding the
false sale/loan statement only if they found “Nagy knew or had
repayment; (c) the customer was never required to
repay the “loan proceeds” he received; (d) the only
collateral Derivium ever retained, if any, was 10% of
the value of the sale of the securities; (e) the
customer retained a contractual return-of-stock right;
and (f) because a customer would only repay his “loan”
and get his securities back (securities Derivium would
have to purchase on the open market) if their value
had increased, Derivium would only lose if the
customer repaid the “loan,” which stands in stark
contrast to the ordinary risk assumed by a lender,
i.e., not being repaid by the borrower.
Nagy, 2009 WL 5194996, at *3.
8
reason to know that these statements were false at the time they
were made.” (J.A. 210 (emphasis added).)
C. Exclusion of Certain Evidence Submitted by Nagy
Nagy also argues that the district court abused its
discretion in sustaining the government’s objections to certain
evidence he sought to present to the jury. At trial, Nagy
attempted to introduce the expert testimony of Mark Altemose, a
former IRS tax auditor; a letter written by B. John Williams, a
tax attorney; and various internal IRS communications. Nagy
argues these items of evidence should have been admitted to
disprove that he knew or had reason to know that his tax advice
was false. We do not believe the district court abused its
discretion in excluding this contested evidence.
Neither the Williams letter nor the internal IRS
communications were in existence at the time Nagy gave his tax
advice to Derivium so he could not have relied upon it in
forming his advice. Therefore neither the Williams letter nor
the IRS communications were relevant to show what Nagy knew at
the time he gave his tax advice. While Nagy could have offered
testimony from Mr. Altemose for a relevant purpose, he chose to
offer that expert testimony only regarding the legal import of
an IRS no-change letter as well as IRS audit procedures, neither
of which have any relevance to show what Nagy knew or should
9
have known at the time he gave his tax advice and would have
likely confused the jury. We conclude the district court did not
abuse its discretion in excluding the foregoing from
consideration as evidence in this case.
D. Pfleiderer Testimony
Nagy also contends that the district court abused its
discretion in admitting into evidence the testimony of Paul
Pfleiderer, an expert on behalf of the government, regarding the
economic effect of the 90% Loans. To the extent Nagy has
presented a challenge to Pfleiderer’s testimony, we find it to
be meritless, and the district court did not abuse its
discretion in admitting Pfleiderer’s testimony.
E. Nagy’s Personal Tax Information
At trial, the government sought to put before the jury, as
part of its case-in-chief, evidence that Nagy failed to timely
file his personal income tax returns in certain years while he
was giving the 90% Loan tax advice to Derivium and timely pay
the tax due for some of those years. Nagy timely objected to the
introduction of that evidence as general bad acts evidence that
was not relevant to the § 6700 penalty determination and should
be excluded under Rule 404(b) and/or Rule 403 of the Federal
Rules of Evidence. The district court overruled Nagy’s
10
objections and permitted the information regarding Nagy’s
failure to timely file and pay his taxes in certain tax years to
come before the jury. Under the circumstances of this case, we
conclude that the district court abused its discretion in
permitting this evidence before the jury and that its effect was
highly prejudicial. We also conclude that the error was not
harmless.
Nagy first contends that I.R.C. § 6103(h)(4) did not
authorize the disclosure of Nagy’s personal income tax return
information as evidence in the § 6700 penalty case. While
§ 6103(h)(4)(A) was clearly satisfied (Nagy was a party to the
§ 6700 proceeding), the applicability of subsections (B) and (C)
is much more problematic. But we will assume, without deciding,
that the § 6103(h)(4) restrictions can be applied disjunctively.
See Mallas v. United States, 993 F.2d 1111, 1118, 1121–22 (4th
Cir. 1993) (applying § 6103(h)(4) disjunctively); see also Rice
v. United States,
166 F.3d 1088, 1092 (10th Cir. 1999) (holding
that § 6103(h)(4) allows the disclosure of a person’s tax return
information when that taxpayer “is a party to the proceedings”);
Tavery v. United States,
32 F.3d 1423, 1430 (10th Cir. 1994)
(“The exceptions in § 6103 are stated in the disjunctive.”).
Even if § 6103 does not bar the evidence at issue, however,
that conclusion does not resolve the underlying evidentiary
issue. The § 6103(h)(4) exceptions operate only as a gatekeeper
11
device that allows the disclosure of taxpayer information in
certain situations. If a § 6103(h)(4) exception applies, that
determination removes only the statutory disclosure barrier; it
does not resolve the independent evidentiary determinations of
relevance or prejudice.
Rule 404(b) prohibits the admission of evidence of “a
crime, wrong, or other act . . . to prove a person’s character
in order to show that on a particular occasion the person acted
in accordance with the character.” Fed. R. Evid. 404(b)(1). Such
evidence may be admissible, however, to show, among other
things, “knowledge” and “absence of mistake.” Id. 404(b)(2).
Evidence is admissible under Rule 404(b) only when that evidence
is “(1) relevant to an issue other than character;
(2) necessary; and (3) reliable.” United States v. DeLeon, 678
F.3d 317, 330 (4th Cir. 2012) (internal quotation marks
omitted). Nagy argued to the district court that the evidence of
his failure to meet personal tax obligations was not relevant to
the determination of liability under § 6700 and served no
purpose other than to cast Nagy’s character in a negative light.
The government argues that the evidence of Nagy’s failure to
timely file and pay his taxes in certain years during which he
was advising Derivium was relevant to show an absence of mistake
in his tax advice. Yet the government does not explain, or even
12
attempt to explain, how this evidence was relevant to Nagy’s
state of mind in the rendering of opinions on the 90% Loans.
The government presented no evidence linking Nagy’s failure
to file or pay certain personal taxes to his work for Derivium.
Nothing in the record connects Nagy’s failure to timely file or
pay his personal taxes to any knowing act of fraud or fraudulent
intent in giving tax advice to Derivium. There simply is no
record evidence linking the two. Indeed, Nagy argues that his
failure to file or pay his personal taxes was related to severe
family medical situations and his lack of assets: acts which
would subject Nagy to, at most, negligent failure to file or pay
penalties under § 6651.
The government contends that the evidence of Nagy’s failure
to timely file or pay his personal taxes was relevant to Nagy’s
state of mind at the time he was rendering tax advice to
Derivium. But the government completely fails, as noted above,
to make any remote connection between Nagy’s failure to timely
file and pay his own taxes and his provision of tax advice to
Derivium. Nagy was not a Derivium principal or customer, and the
record contains no evidence that his personal tax returns
depended in any way upon the Derivium scheme.
In short, we are at a loss to see any relevance for Rule
404(b) purposes for the admission of Nagy’s personal tax
information other than “to prove [Nagy]’s character in order to
13
show that on a particular occasion [Nagy] acted in accordance
with the character.” See Fed. R. Evid. 404(b). While Rule 404(b)
is a rule of evidentiary inclusion, United States v. Smith, 441
F.3d 254, 262 (4th Cir. 2006) (“This court has recognized that
Rule 404(b) is primarily a rule of inclusion, not exclusion.”),
any evidence must satisfy the threshold of relevance to an issue
other than character that we find lacking here.
Moreover, for Rule 403 purposes, the admission of Nagy’s
personal tax information was highly prejudicial and quite likely
to influence the jury against him. Had the personal tax
information had some semblance of relevance (which proper
evidence in some other case may well show), a different
balancing for prejudice purposes would be required. But in the
absence of relevance, we conclude that the district court abused
its discretion to admit Nagy’s personal tax information into
evidence, particularly as it bears all the indicia of garden-
variety “bad acts” evidence with no other purpose than to
emotionally inflame the jury against the defendant.
Further, we conclude that the admission of Nagy’s personal
tax information was not a harmless error. Under harmless error
analysis, we will not reverse if we can “say, with fair
assurance, after pondering all that happened without stripping
the erroneous action from the whole, that the judgment was not
substantially swayed by the error.” Kotteakos v. United States,
14
328 U.S. 750, 765 (1946). Nagy presented a cognizable defense as
to his state of mind for the knowledge purposes of § 6700 that
would have permitted a reasonable jury to have rendered a
verdict in his favor. The prejudicial effect on the jury of the
personal tax information about Nagy, however, and the
possibility that it swayed their judgment in their consideration
of this case, cannot be ignored. As the error was not harmless,
the liability verdict must be vacated.
F. Penalty Amount Phase Jury Instruction
Reversal of the liability verdict also invalidates the
penalty determination in so much as there is no longer a
liability finding upon which it could be based. However, in view
of the likelihood, that a penalty calculation issue will arise
again upon remand, we exercise our discretion to address an
assignment of error that Nagy raises. See United States ex. rel.
Drakeford v. Tuomey Healthcare Sys., Inc., 675 F.3d 394, 406
(4th Cir. 2012) (noting that “our precedent is clear that we may
address issues that are likely to recur on remand”).
Nagy contends that the district court erred in its jury
instruction for the calculation of the § 6700 penalty amount for
any § 6700 liability prior to October 23, 2004, the date of an
amendment to the statute, by instructing the jury to “multiply
the total number of transactions for which [Nagy] is liable for
15
each year by $1000” for all transactions occurring before
October 23, 2004. (J.A. 217–18.) The statute plainly states
that, with respect to transactions occurring before October 23,
2004, any person who violates § 6700 “shall pay, with respect to
each activity described in paragraph (1), a penalty equal to the
$1000 or, if the person establishes that it is lesser, 100
percent of the gross income derived (or to be derived) by such
person from such activity.” I.R.C. § 6700(a). Any jury
instruction given in a penalty amount determination trial upon
remand should follow the plain language of the applicable
portion of the statute.
IV
For the aforementioned reasons, we affirm the district
court’s grant of partial summary judgment to the government on
the issue of whether the 90% Loans were sales for federal income
tax purposes. We also affirm the district court’s giving of the
jury instruction relating to whether a statement that the 90%
Loans were not sales for tax purposes would be a false or
fraudulent statement for § 6700 purposes. Further, we hold that
the district court did not abuse its discretion in excluding the
evidence from Altemose and Williams and the internal IRS
communications. Neither did the district court abuse its
discretion in admitting the evidence of Mr. Pfleiderer.
16
The district court did abuse its discretion, however, in
admitting Nagy’s personal tax information and the liability and
penalty verdicts are therefore vacated. The case is hereby
remanded to the district court for further proceedings
consistent with this opinion.
AFFIRMED IN PART,
REVERSED IN PART,
AND REMANDED
17
