Ex-Arthur Andersen Exec Sues IRS After Tax Shelter Fight

By Jimmy Hoover

Law360, Washington (August 25, 2017, 5:51 PM EDT) — A onetime executive of defunct accounting
firm Arthur Andersen LLP has sued the IRS for legal fees after he fought off its $1.6 million penalty
over alleged tax-shelter promoting in the late 1990s, saying the agency espoused “fake facts and
frivolous legal mumbo-jumbo” in its penalty assertion.

Mark C. Klopfenstein, currently a managing director of Corporate Finance Associates Worldwide Inc.,
petitioned the U.S. Tax Court earlier this month to order the IRS to compensate him for the $160,000
in legal fees and administrative costs he incurred defending against the tax agency’s promoter
penalty for transactions between 1998 and 2001. Klopfenstein, who had left Arthur Andersen’s
Atlanta office during that period, alleges the IRS did not justify its decision to deny his fee
application.  The government’s behavior in the case “is an example of the Internal Revenue Service at its worst,”
counsel for Klopfenstein writes in the Aug. 15 petition. It says that the IRS agents handling the case
“overreached and acted inconsistently with the facts, law, administrative policy, and any notion of a
fair and just tax system.”

The IRS had investigated Klopfenstein for promoting tax shelters in 2005 and 2009, but reopened its
inquiry in 2014 and slapped the accountant with promoter penalties under Section 6707 of the
Internal Revenue Code, which deals with the failure to report certain transactions. Klopfenstein,
through his counsel, challenged the penalties in the IRS Office of Appeals, maintaining that he made
only referrals as an independent intermediary between accounting firms. The agency ultimately
agreed to reduce his penalty to $169,000, a sum Klopfenstein considers to be “nuisance value.”
Klopfenstein then applied for fees and costs on Feb. 27, 2017, which was denied in a succinct letter
from the agency on May 19 that also threatened to impose an additional penalty for a frivolous filing.

Klopfenstein’s petition to the Tax Court makes several arguments about why the IRS should pay for
his fees to counsel John E. Williams, Stuart J. Bassin, and Alston & Bird LLP. First, Klopfenstein
argues that he was the “prevailing party” in light of the IRS’ decision to reduce the asserted penalty
by nearly 90 percent.  He also argues that the agency completely failed to consider his argument  that the promoter penalty

did not apply under a recent decision by a Texas bankruptcy court captioned  In re William Canada.  That court

found that promoter penalties do not apply to sales of an “idea, but only to
types of actual investments considered tax shelters by Section 6111 of the tax code.
Next, he argues that the IRS flaunted the statute of limitations by “making its penalty assertion and
assessment more than a decade after the alleged conduct occurred and more than nine years after it
began its audit of the alleged conduct.”  Klopfenstein also says the IRS targeted him for “minor referral

roles in the underlying transactions, while allowing major participants who promoted the disputed

transactions (Jenkens & Gilchrist, Arthur Andersen, KPMG, or their partners) to pay little or no penalty.”

Counsel for Klopfenstein declined to comment Friday. The IRS does not comment on pending
litigation.

Klopfenstein is represented by John E. Williams and Stuart J. Bassin.
Counsel information for the IRS was not available Friday.