The Ernie Ryder Case and When Tax Safety Promoters Have Their Personal Koolaid Drink

Ernie Ryder’s Tax Shelters worked just as well for him as they did for his clients


In Ernest S. Ryder & Assoc., Inc. v. CIR ruled the U.S. tax court against a noted proponent of aggressive tax strategies in the San Diego area, Ernie Ryder, over questionable deductions he and his wife have taken for many years. However, his wife was not held liable for the penalties and some of the penalties requested by the IRS were lost because the service occasionally messed up procedures.

The Court’s Opinion is 191 pages long and you can read it here. Suffice it to say that Judge Holmes drafts this opinion in an interesting and readable way, and it is well worth the time for tax professionals to digest this time.

Judge Holmes puts forward IRS allegations that Ernie Ryder founded a company called Ryder & Associates, Inc., APLC (“R&A”) that marketed six aggressive tax strategies from 2003 to 2011, generating $ 31 million in revenue – and have not yet paid any income tax. Instead, the revenue flowed into a maze of around 560 bank accounts, other Ryder affiliates, a staggering 1,100 ESOPs, and Ryder’s ranches in Arizona and New Mexico. Ernie and Patricia Ryder eventually received more than $ 15 million in dividends, “but only paid $ 31,000 in income tax in the disputed years.”

Ryder marketed six tax strategies, the first being a disability insurance policy made through an alleged proprietary insurance company called American Specialty Insurance Group, Ltd. (“ASIG”) in the Turks and Caicos Islands with a post office box in Las Vegas that relayed mail to Ryder. One person using this strategy sent a premium for the DI policy, 2% of which was an annual policy fee and the remainder went to a Charles Schwab account. The idea was that the DI policy would be deductible at the front end, but the subscriber could withdraw the money tax-free at a later date if they became disabled or only turned 60. The IRS challenged at least one of these policies in the Barnhorst estate v Commissioner, TC Memo case. 2016-177, noting that the arrangement was basically just a deferred compensation arrangement (where the money from the policy was actually taxable) “despite the title given”. Nonetheless, sales of these policies generated sales of just over $ 1.28 million for Ryder from 2003 to 2011.

Ryder’s second tax strategy was known as the “group factoring” strategy, and it also resulted in at least one of Ryder’s clients blowing up the strategy in Pacific Management Group vs. Commissioner, TC Memo. 2018-131. This strategy seemed like a legitimate factoring arrangement, but the funds actually went back to Ryder’s clients who participated in the transaction, “with some leading to R&A itself”. Judge Holmes summed it up: “Instead of factors paying for these accounts and then collecting them, customers kept billed and collected these accounts themselves as if they had never sold them. The factors were straw men who received no significant economic benefit “in return for the money they paid customers.” The IRS claimed Ryder’s fees for the deal were a little less than $ 1.85 million.

Moving on to Ryder’s third tax strategy, Judge Holmes outlined a leasing agreement in which Ryder’s clients essentially terminated their employees and had them immediately reinstated by a leasing company that leased them back to Ryder’s clients and then skimmed off the profits for the benefit of the clients (and Ryder) thereafter. The gross receipts for R&A for this deal were nearly $ 5.17 million.

Ryder’s fourth tax strategy was known as the “Recruiting Product,” and was similar to Ryder’s leasing contract, but attached an ESOP to the agreement so Ryder’s clients could try to avoid even more taxes. That deal was even more lucrative for Ryder, at least according to the IRS, as it generated more than $ 6.69 million in gross revenue paid to Ryder affiliates.

We now come to the fifth Ryder strategy, known as the General Counsel Office, which Judge Holmes described as “unusually creative,” and further:

“He started hundreds of new businesses, none of which existed but on paper, with a plan to turn them into a reserve army awaiting their use in his clients’ battle against taxes. He developed a uniform pattern he had every S The company’s board of directors (of which he was sole director) appoints him vice president / general counsel and R&A employee DeAun Castro to vice president / ESOP administration. Ryder then filed federal income tax returns on December 31, 2001 for the companies that haven’t yet Assigned to a customer. Each return showed gross receipts of $ 100 and expenses of $ 97. None of them reported a tax liability on the resulting $ 3 of taxable income. “

In essence, a Ryder customer had to join the agreement and only then would they have access to one of the shelf companies of R&A and related ESOPs that Ryder held and a $ 25,000 “documentation fee” to another with Ryder affiliate to pay. Apparently the idea here was that these pre-made shelf companies and ESOPs would either be available for filings from the past few years or they would move over to the older, cheaper rules should the ESOP rules change. But as Judge Holmes noted, “This product was quite short-lived because the IRS found out about such deals and made them a publicly traded transaction.” Ryder then made changes to the deals, but in any case the IRS claimed that they earned Ryder an additional $ 3.5 million in fees.

Now that brings us to Ryder’s sixth and final tax strategy, which was Ryder’s version of the infamous Son Of Boss tax protection that basically used a pile of paper to generate losses out of the fog that Ryder’s clients would then use to offset profits elsewhere. That deal earned a little less than $ 1.64 million in fees for Ryder affiliates.

Ultimately, none of Ryder’s six tax strategies worked under technical tax law, except perhaps for those of his clients who won the exam lottery because the IRS discovered their havens too late. But these six tax deals not only describe the low-tax Koolaid that Ryder sold to his lazy customers, but they also describe in part the same Koolaid that Ryder himself drank to avoid his taxes on the massive fees he received – and put it on found that Ryder’s tax treaty not only worked for his customers, but also for him and his wife.

Ryder eventually bought five ranches in Arizona and New Mexico and then looked for ways to bring money (tax-free, of course) to those ranches. To do this, Ryder used what are known as “blocker entities” to try to disguise the true flow of cash and credit from his tax savings businesses to the ranches. These were merely companies that were indirectly owned or controlled by Ryder, but which appeared to be independent third parties. Funds from Ryder’s tax protection operations got into the ranches through a multitude of transactions, and he largely avoided paying taxes on them.

Then, in 2003, the IRS first showed up with interest because “someone noticed that the company had applied to qualify more than 800 ESOPs at the same time”. This led to further IRS investigations and then to what Judge Holmes called an “over-audit” and when questioned by the IRS, Ryder argued for his fifth amendment against self-incrimination. Then the California Franchise Tax Board got involved and issued a search warrant for the offices of R&A in 2010. Note: As far as I know, Ryder has not been charged with anything.

Ultimately, the IRS denied many of the deductions made by Ryder and its affiliates, and also imposed a variety of penalties on Ryder and his wife. Judge Holmes dismissed the penalties against Ryder’s wife and some of the penalties against Ryder himself, but by the end of the opinion Ryder was left with sound liability for taxes and penalties owed – all for the sale and subsequent use of a variety of junk tax strategies that didn’t work in the first place.


As I’ve been describing for well over 20 years, the United States has something of a tax protection industry – a finite segment of the economy that focuses only on paying deductions and losses on whole materials. This industry exists for three reasons, the first two out of greed and stupidity regarding the users of these accommodations, and the last is that the IRS audit rates are so low that some users actually use them, at least for some tax years. The main weapon the US has in dealing with the tax protection industry is injunction, but it is too seldom used to have any dissuasive value. Thus, the US Treasury Department loses a ton of revenue to tax havens each year simply because its audits, investigations, and ultimately enforcement and tax judgments are made years, if not decades, after the act. Take this case as an example: Ryder sold his junk back in 2003, but we are now 18 years later before it is found that Ryder is only responsible for the taxes on the fees he made of it. For example, a tax protection promoter like Ryder can make tens of millions of dollars in fees, but he could die of old age before anything happens to him.

Quite simply, Congress urgently needs to empower, fund, and mandate that the IRS and the U.S. Department of Justice (which instigates the promoter’s injunctions) act much faster to get tax backgrounds in the bud and dismantled before they turn into huge taxpayers’ money For the government. The IRS Office of General Counsel also needs to be quicker in identifying and listing transactions as abusive havens – rather than an amorphous “transaction of interest” label like certain 831 (b) proprietary insurance companies.

For taxpayers who might otherwise be drawn into these businesses, the solution is the same as it has been since US income tax: get a truly independent second opinion from a qualified tax professional. Probably no suspected Ryder client who got an independent second opinion on Ryder’s junk would have carried out any of his transactions, but Greed got the best of all of its clients and they happily wrote Ryder checks to help them reach Uncle’s reach Sam in their wallets. To the extent that they were caught paying their taxes and fines, they got what they deserved. But that could easily have been avoided by allowing someone unrelated to Ryder to re-examine his suggestions.

Anyway, and as mentioned earlier, the opinion on this case is very long, but it is good read and probably a necessary one for tax professionals. Notice Judge Holmes’ discussion of “economic substance” – that means something.


Ernest S. Ryder & Assoc., Inc. v CIR, TC Memo 2021-88 (July 14, 2021).