The 9th U.S. Circuit Court of Appeals has accused the IRS of committing fraud and acting deceptively with regard to the agency's favored treatment of two pilots who ratted out 1,300 other pilots, all of whom participated in a flaky investment scheme over 20 years ago.
The IRS is accused of setting up secret agreements with the two pilots, John Thompson and John Cravens, in exchange for testimony against the other pilots. Mr. Thompson's deal included a waiver of taxes owed and help from the IRS in preparing bogus tax returns that netted him approximately $80,000, enough money to pay his legal fees and then some.
As a result of the appeals court decision, the IRS will be required to pay tens of millions of dollars in tax refunds, interest, and legal fees to the pilots who participated in the tax shelter. The shelter, an investment program designed by a Honolulu businessman named Henry Kersting, enabled participants to claim interest deductions on their tax returns. The IRS claims the deductions were not appropriate and attempted to assess the pilots back taxes and more than $2 billion in penalties. A Tax Court ruling supported the IRS position.
The appeals court has ordered the IRS to give each of the participating pilots the same deal it gave the informers. The IRS has not yet commented on the situation.