Hundreds of airline pilots invested in tax shelters run by a Hawaiian businessman in the 1970s. The Internal Revenue Service cracked down in the 1980s. Two IRS attorneys working on the case were accused of fraud in the 1990s.
And this month, the U.S. Tax Court ordered the IRS to give refunds – or discounts on unpaid taxes and interest – to those pilots.
The ruling could result in a multimillion-dollar penalty against the IRS, according to Declan O’Donnell, a tax attorney in Castle Rock.
O’Donnell said Tuesday he represents more than 100 of the pilots, including three dozen who live in Colorado.
O’Donnell estimated that the IRS will eventually refund about $36 million to the 500 pilots who have already paid what the IRS said they owed.
“It just simply is a landmark case,” he said. “It’s a real wake-up call to government lawyers.”
The IRS can appeal the judgment. Henry O’Neill, an attorney who represents the IRS, said he couldn’t comment. Local IRS spokeswoman Jean Carl didn’t return calls seeking comment.
The case stems from investments that hundreds of commercial airline pilots made during the 1970s in ventures promoted by Henry Kersting, a Honolulu businessman who died in 2000.
Kersting’s program allowed the pilots to claim interest deductions from investments on their tax returns. But in 1981, the IRS discovered the scheme and disallowed the deductions.
A judge ordered the pilots to pay back taxes, interest and penalties. The pilots initially were found to owe $27.4 million in unpaid taxes, which has multiplied several times because of accrued interest, according to court records.
However, a federal appeals court in San Francisco determined in 2003 that two IRS attorneys had committed fraud by cutting secret deals with two pilots in return for their testimony against the others.
The U.S. Tax Court on May 2 enforced the appeals court’s sanctions against the IRS attorneys.
About 500 of the pilots had already made payments to the IRS, so they will get a 63.3 percent refund for a total of about $36 million, O’Donnell said.
Another 800 pilots – who never paid the IRS – will receive a reduction of 63.3 percent in the amount they still owe.
Staff writer Andy Vuong can be reached at 303-820-1209 or avuong@denverpost.com.
Staff writer Greg Griffin can be reached at 303-820-1241 or ggriffin@denverpost.com.
