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McMahan v. Deutsche Bank AG

United States Court of Appeals, Seventh Circuit

June 13, 2018

John McMahan, et al., Plaintiffs-Appellants,
Deutsche Bank AG, et al., Defendants-Appellees.

          Argued April 19, 2018

          Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:12-cv-04356 - Sharon Johnson Coleman, Judge.

          Before Ripple, Manion, and Kanne, Circuit Judges.


         In 2001, John McMahan and his wholly owned corporation, Northwestern Nasal and Sinus Associates, S.C., [1] participated in a tax shelter known as "Son of BOSS." The shelter "is a variation of a slightly older alleged tax shelter known as BOSS, an acronym for 'bond and options sales strategy.'" Kligfeld Holdings v. Comm'r, 128 T.C. 192, 194 (2007). It "was aggressively marketed by law and accounting firms in the late 1990s and early 2000s" and involves engaging in a series of transactions to create an "artificial loss [that] may offset actual-and otherwise taxable- gains, thereby sheltering them from Uncle Sam." Am. Boat Co., LLC v. United States, 583 F.3d 471, 474 (7th Cir. 2009). Unfortunately for McMahan, the Internal Revenue Service (IRS) considers the use of this shelter abusive. See I.R.S. Ann. 2004- 21 I.R.B. 964 ("The Service has determined that Son of Boss transactions are abusive and were designed, marketed, and undertaken solely to create tax benefits unintended by any reasonable interpretation of the tax laws."). The IRS initiated an audit of McMahan's 2001 tax return in 2005. In 2010, the IRS notified McMahan it was increasing his taxable income for 2001 by approximately $2 million.

         In 2012, McMahan filed this lawsuit in Illinois state court against Robert Goldstein (his accountant), American Express Tax and Business Services (Amex) (the firm that prepared his tax return), and Deutsche Bank AG and Deutsche Bank Securities Inc. (collectively, Deutsche Bank) (the entities that facilitated the transactions necessary to perpetrate the shelter). McMahan claims these defendants harmed him by convincing him to participate in the shelter. Deutsche Bank removed the case to the district court, citing the diversity jurisdiction statute, 28 U.S.C. § 1332. After a series of procedural steps described below, the district court dismissed McMahan's claims against Goldstein and Amex for lack of prosecution and granted summary judgment to Deutsche Bank on statute of limitations grounds. McMahan appeals. We affirm.


         A. Background[2]

         In June 2000, McMahan met with Goldstein, who encouraged McMahan to participate in a Son of BOSS tax shelter. He indicated to McMahan that the shelter was legal and legitimate. To implement the shelter, the law firm of Jenkens & Gilchrist was to draft a letter confirming the probable legality of the shelter, and Goldstein told McMahan Deutsche Bank would facilitate the necessary transactions and Amex would prepare McMahan's tax returns. McMahan participated in the shelter in 2000 and 2001. In 2001, McMahan paid fees to Goldstein, Amex, Jenkens & Gilchrist, and Deutsche Bank for their roles in the scheme. He claimed the losses he generated on his 2001 tax returns.

         At some point in 2002, Goldstein told McMahan Son of BOSS was no longer legitimate. This was McMahan's first indication that all was not well with Son of BOSS. But it was not the last.

         In 2003 and 2004, the IRS published notices stating its position that Son of BOSS was illegitimate. See I.R.S. CCN CC- 2003-020 (noting the IRS had listed Son of BOSS "as an abusive tax shelter" since September 5, 2000); I.R.S. Ann. 2004-21 I.R.B. 964 (announcing a settlement initiative for taxpayers who had participated in Son of BOSS shelters). McMahan's tax counsel, Chuhak & Tecson, P.C., forwarded the 2004 notice concerning an IRS settlement initiative to McMahan. In January 2005, McMahan's tax counsel informed him Illinois was offering a compliance program to avoid penalties for participating in abusive tax shelters, including Son of BOSS. Despite these notices, McMahan did not participate in any amnesty, settlement, or compliance program. He claims the defendants told him those programs did not apply to his situation. However, McMahan's counsel did send a letter to Deutsche Bank asking it not to disclose McMahan's name to the IRS.

         In February 2005, McMahan's counsel sent him a letter concerning the settlement of a class action against Jenkens & Gilchrist. The lawsuit, filed in the Southern District of New York in 2003, alleged that Jenkens & Gilchrist breached fiduciary duties by issuing incorrect opinions concerning tax shelters. It also alleged that Deutsche Bank had promoted the shelter and failed to advise about the inaccuracy of Jenkens & Gilchrist's opinions. Jenkens & Gilchrist had agreed to settle the suit against it for $81.5 million. The letter from his counsel informed McMahan that he "should expect to receive an official notification and claim form in the near future."[3]

         On the same day McMahan's counsel sent him that letter, the IRS sent McMahan notice that it was initiating an audit of his 2001 tax returns. Five years later, in October 2010, the IRS issued a deficiency notice to McMahan announcing the IRS was adjusting his taxable income for 2001 upward by approximately $2 million. McMahan ultimately settled with the IRS in May 2012.

         On March 26, 2012, McMahan filed this lawsuit against Deutsche Bank, Goldstein, and Amex in the Circuit Court of Cook County. McMahan alleged a multitude of malfeasance connected with his participation in the shelter: breach of con- tract, accounting malpractice, breach of fiduciary duty, ...

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