Background
Michael Kohn and Catherine Chollet, tax attorneys and partners in The Kohn Partnership in St. Louis, Missouri, worked with insurance broker David Simmons to develop and market a “Gain Elimination Plan” (GEP) targeting wealthy clients seeking to reduce their tax liability. Under the scheme, the defendants would form client-specific limited partnerships nominally owned mostly by charitable organizations and advise clients that they could deduct royalties and management fees allegedly paid to these partnerships. To complete the fraud, Simmons obtained life insurance policies on clients by providing false personal and financial information to insurers, then shared approximately $1.1 million in commissions with Kohn and Chollet.
The critical fraud: the limited partnerships never actually existed. No partnership agreements were signed, the charitable organizations never agreed to participate, no services were provided, and clients made no payments to the partnerships. Despite this, the defendants helped clients claim fabricated business expense deductions that reduced taxable income across more than a decade. The scheme cost the government over $22 million in evaded income taxes. Chollet herself used the fraudulent GEP to reduce her own taxable income by $350,000 over five years, while Kohn and Chollet also prepared Simmons’ tax returns with substantially underreported income, causing an IRS loss exceeding $480,000.
A jury in the Western District of North Carolina convicted all three defendants of conspiracy to defraud the federal government and multiple counts of assisting in the filing of false tax returns. The district court sentenced Kohn to 84 months, Simmons to 60 months, and Chollet to 48 months imprisonment, and ordered restitution of over $22.5 million. The defendants appealed on multiple constitutional and procedural grounds.
The Court’s Holding
The Fourth Circuit comprehensively rejected the defendants’ Appointments Clause challenge, holding that the prosecution was properly authorized by Acting Deputy Assistant Attorney General Stuart Goldberg, to whom the Assistant Attorney General for the Tax Division had validly delegated prosecutorial authority under Tax Division Directive No. 138. The court found no constitutional violation in a principal officer delegating authority to a subordinate through an internal policy directive, as authorized by 28 U.S.C. § 510, which permits the Attorney General to delegate functions to “any other officer, employee, or agency” of the Department of Justice. The regulation cited by the defendants, 28 C.F.R. § 0.70, confers powers on the AAG-Tax but contains no language preventing delegation to subordinates.
On the venue question, the court held that prosecution in the Western District of North Carolina was proper. Although Kohn and Chollet prepared and filed the tax returns from Missouri, the statute at issue, 26 U.S.C. § 7206(2), criminalizes aiding, assisting, procuring, counseling, or advising the preparation of false returns—conduct elements that clearly occurred in North Carolina. The defendants transmitted signature forms to clients there, received information from North Carolina clients (directly or through Simmons), sent draft returns for client approval, and registered some partnerships in North Carolina. Because multiple conduct elements of the crime occurred in the district where the clients lived, venue was proper under 18 U.S.C. § 3237(a).
The court rejected the defendants’ “literal truth” defense to the tax return charges. Defendants argued that because the “total income” lines on tax forms accurately calculated the sums of preceding lines (following form instructions), those lines were literally true even if underlying deductions were fabricated. The court held that accurate arithmetic does not render a total true when its components are false: “an accurate calculation does not render the total true when the components themselves are false.” The comparison was apt—the defendants’ claim that “1+2=3 is literally true” when 1 and 2 themselves were fabricated numbers did not survive scrutiny.
Key Takeaways
- Delegation of prosecutorial authority from the AAG to subordinate officials within the Department of Justice does not violate the Appointments Clause when authorized by statute and properly documented.
- Venue for tax crimes extends beyond where returns are filed; it encompasses any district where defendants aided, advised, or assisted clients in preparing false returns, including through interaction with North Carolina-based clients and intermediaries.
- Defendants cannot escape tax fraud liability by claiming literal truth in calculations; false underlying data makes the resulting total false regardless of arithmetic accuracy.
- A multi-year tax fraud scheme involving false partnership structures, fictitious deductions, and fabricated insurance applications presents no novel legal issues sufficient to overturn convictions on appeal.
Why It Matters
This decision clarifies critical procedural protections for tax fraud prosecution and rejects sophisticated defenses that sophisticated defendants—especially those with legal training—might construct. Tax attorneys and brokers who design aggressive tax-avoidance schemes cannot rely on Appointments Clause technicalities or argue that mathematically correct entries on forms shield them from criminal liability when the underlying tax positions lack economic substance. The ruling also confirms that venue in tax cases is flexible and defendant-centered, not tied rigidly to where documents originate, exposing promoters of nationwide schemes to prosecution in districts where their schemes actually harm taxpayers or operate.
The affirmance sends a clear signal that the government will vigorously prosecute professional tax fraud involving coordinated schemes with charitable organization facades and insurance kickback components. For attorneys and accountants, the case underscores that participation in GEP-style arrangements—even in advisory rather than operational roles—carries substantial criminal exposure, including prison sentences in the range of 4–7 years and restitution obligations that can exceed tens of millions of dollars when aggregated across client losses.