OMEGA FOREX GROUP, LC, by and through Robert K. Flath, a Partner other than a Tax Matters Partner, Plaintiff - Appellant,
UNITED STATES OF AMERICA, Defendant-Appellee.
from the United States District Court for the District of
Utah (D.C. No. 2:14-CV-00915-BSJ)
Michael D. Black (April M. Medley, with him on the briefs),
Parr Brown Gee & Loveless, P.C., Salt Lake City, Utah,
appearing for Appellant.
Anthony T. Sheehan, Attorney, Tax Division (Richard E.
Zuckerman, Principal Deputy Attorney General, Travis A.
Greaves, Deputy Assistant Attorney General, Gilbert S.
Rothenberg and Bruce R. Ellisen, Attorneys, Tax Division,
with him on the brief), United States Department of Justice,
Washington, DC, appearing for Appellee.
BRISCOE, BALDOCK, and EID, Circuit Judges.
BRISCOE, CIRCUIT JUDGE.
Omega Forex Group LC (Omega), appearing by and through
partner Robert Flath (Flath), appeals from the district
court's decision affirming two Notices of Final
Partnership Administrative Adjustment (FPAA) issued by the
Internal Revenue Service to Omega. The two FPAAs, on the
basis of fraud at the partnership level, eliminated large
losses reported by Omega on its tax returns for years 1998
and 1999, and imposed penalties on Omega. Exercising
jurisdiction pursuant to 28 U.S.C. § 1291, we affirm the
district court's decision.
is a limited liability company organized under the laws of
the State of Utah, with its principal place of business in
Sandy, Utah. Omega was formed on or about June 23, 1994, by
an attorney named Dennis Evanson. Capital West, LLC, another
limited liability company controlled by Evanson, was the
managing partner of Omega.
at all times relevant to this action, was an endodontist in
private practice in Utah. More specifically, Flath was a
corporate officer at Rocky Mountain Endodontic Associations
(RME), where he practiced with other dentists. Flath also
practiced dentistry as a sole practitioner under the name
Rock Springs Endodontics (RSE).
Flath's "investment" in Omega
point in 1997 or 1998, one of the endodontists in Flath's
practice suggested that Flath meet with Evanson. Flath's
partner described Evanson as an expert "in options
trading and general business organization and planning, tax
planning and asset protection." Supp. App. at 51. Flath
and Evanson met in the last quarter of 1998. Evanson provided
Flath with various materials regarding Omega's purported
investment program, including an opinion letter from a law
firm allegedly confirming the validity of the program. Flath
and Evanson continued to talk during the last quarter of 1998
about the Omega program. According to Flath, Evanson
indicated that Flath would have a "chance of making
money" in the Omega program "based on [futures]
contracts" and foreign currencies. Id. at 53.
November 8, 1998, Flath sent a facsimile to Evanson stating
that his goals included reducing his taxes, engaging in
United States transactions while keeping his profits tax
free, and funding his children's educations. Flath
summarized his understanding of Evanson's proposed
investment scheme and noted, in particular, that he would pay
Evanson an initial fee of $18, 000 to $20, 000 and that
Evanson would also receive a fee equal to 20% of Flath's
using his RSE business account, subsequently paid Evanson a
$19, 700 base fee that purportedly gave Flath the right to
become a capital-contributing member of Omega.
December 20, 1998, Flath signed the paperwork to become a
partner in Omega. That paperwork, however, was incomplete. In
particular, it failed to specify the amount of Flath's
capital contribution and Evanson never countersigned the
paperwork to make Flath a partner.
general ledgers for 1998 show that Flath contributed a $200,
000 promissory note to Omega during 1998. There is no
evidence, however, that Flath ever paid this amount to Omega.
Instead, the evidence indicates that on December 22, 1998,
Flath made an oral promise to contribute $165, 000 in stocks
to Omega before the end of 1998. But Flath did not actually
contribute the stocks to Omega until late March of 1999. And
at the time of the actual contribution, the value of the
stocks was approximately $30, 000 greater than its value in
late December of 1998.
in January of 1999, Flath's group and solo practices, RME
and RSE, began making monthly payments totaling $8, 000 to an
Evanson-controlled entity called Commonwealth Professional
Reinsurance Ltd. (Commonwealth) for the ostensible purpose of
purchasing professional liability insurance (this despite the
fact that both RME and RSE already had another malpractice
insurance in place at that time, for which they paid a total
annual premium of $1, 400). Flath treated the monthly
payments by RME as insurance premium payments and deducted
those payments as business expenses on his federal tax
returns for RME. Commonwealth in turn deducted twenty percent
(20%) from each premium payment and then declared a dividend
to another Evanson-controlled entity based in the Cayman
Islands called International Capital Group (ICG). That
dividend was allocated by ICG to Flath's fund in ICG.
through an Evanson-controlled entity called Cottonwood
Financial, was able to receive fake loans that effectively
allowed him to access his "investment" money in the
Omega scheme. In addition, Flath utilized yet another
Evanson-controlled entity, Children's Charities, to
effectively pay his children's school tuition. More
specifically, Flath would make purported tax-deductible
donations to Children's Charities and Children's
Charities in turn would give purported scholarships or loans
to Flath's children.
Flath was able, using the money he had allegedly invested in
Omega, to buy and sell other stocks through ICG in order to
avoid having to report the trading in his tax returns.
Evanson allegedly advised Flath that this process was legal.
Evanson, in exchange for Flath's agreed payments,
"manufactured fictitious transactions to conceal income
[for Flath] and create apparent [tax] deductions [for
Flath]." Evanson, 584 F.3d at 905.
Flath's 1998 and 1999 tax returns
February of 1999, Omega sent Flath a 1998 K-1 tax form
stating that he had contributed capital during 1998 totaling
$200, 000 and that his capital account at the end of 1998 was
$49, 881. On September 27, 1999, Omega filed a Form 1065
United States Partnership Return of Income for the 1998 tax
year indicating, in pertinent part, that Flath had
contributed $200, 000 to join Omega. The K-1 tax form further
stated that Omega had sustained a loss of $4, 698, 325 during
1998 as a result of foreign currency speculation, that
Flath's percentage of that loss was 3.19%, and that the
resulting amount of Flath's loss in dollars was $150,
119. On March 25, 1999, Flath and his wife filed a joint
federal tax return for 1998 in which they claimed a
pass-through loss from Omega in the amount of $149, 856. In
doing so, Flath falsely assured his accountant and tax
preparer, Gail Anger, that he had contributed "at least
that much to" Omega during 1998. Supp. App. at 149.
solo business, RSE, filed a 1998 tax return that listed as an
ordinary and necessary expense the $20, 000 fee that Flath
paid to Evanson. Flath did not inform Anger of the true
nature of the expense.
year 1999, Flath told the IRS that he contributed $100, 000
in cash to Omega. In fact, however, Flath made no such cash
contributions to Omega. Instead, Flath's endodontic
businesses, RME and RSE, paid a total of $72, 000 (comprised
of nine monthly payments of $8, 000 each) to Commonwealth
February of 2000, Omega sent Flath a 1999 K-1 tax form
stating that Flath's share of Omega's
"[q]ualified nonrecourse financing" liabilities was
$249, 713. Id. at 101.
March 13, 2000, Flath and his wife filed a joint federal tax
return for 1999 in which they claimed a pass-through loss
from Omega in the amount of $86, 724.
19, 2000, Omega filed a Form 1065 United States Partnership
Return of Income for the 1999 tax year.
preparing the 1998 and 1999 returns, Flath was not completely
forthcoming with Anger, his tax accountant. For example,
Flath did not tell Anger that Flath was a member of an
offshore company called ICG, or that Flath's businesses
were purportedly paying for supplemental malpractice
insurance through Commonwealth.
Flath's purported withdrawal from Omega
made no further investments in Omega and took no deductions
related to Omega after 1999. In 2002, Flath allegedly ended
his investment in Omega. At no time during his involvement
with Omega, however, did Flath actually take the steps
necessary to become a member of Omega. In particular, Flath
never signed and executed a required Operating Agreement.
Further, although Flath signed a Capital Contribution
Agreement, it was never executed by Evanson, Omega's
managing member. In addition, the Capital Contribution
Agreement "[was] blank where an amount of not less than
$10, 000 must be recorded." Aplt. App. at 90. Lastly,
Flath never made the required $10, 000 capital contribution
in money to Omega.
The indictment of Evanson
2005, a grand jury indicted Evanson and other individuals
related to Omega. In February 2008, Evanson was convicted of
conspiracy to commit mail and wire fraud, tax evasion, and
assisting in the filing of false tax returns.
IRS action against ...