UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 10-2072

ROBERT J. NAGY,

Plaintiff - Appellant,

v.

UNITED STATES OF AMERICA,

Defendant - Appellee.

Appeal from the United States District Court for the District of 

South Carolina, at Charleston. David C. Norton, District Judge. 

(2:08-cv-02555-DCN)

Argued: December 4, 2012 Decided: March 29, 2013

Before GREGORY, AGEE, and WYNN, Circuit Judges.

Affirmed in part, reversed in part, and remanded by unpublished 

per curiam opinion.

ARGUED: John B. Kern, Charleston, South Carolina, for Appellant. 

Anthony T. Sheehan, UNITED STATES DEPARTMENT OF JUSTICE, 

Washington, D.C., for Appellee. ON BRIEF: Kathryn Keneally, 

Assistant Attorney General, Bridget M. Rowan, Tax Division, 

UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; William 

N. Nettles, United States Attorney, Columbia, South Carolina, 

for Appellee.

Unpublished opinions are not binding precedent in this circuit.
2

PER CURIAM:

Robert J. Nagy (“Nagy”) appeals from the district court’s 

grant of partial summary judgment to the government, certain 

evidentiary rulings at trial, certain of the jury instructions, 

and the jury verdict against him imposing civil penalties under 

§ 6700 of the Internal Revenue Code.1 For the reasons set forth 

below, we affirm the judgment of the district court in part, 

reverse in part, vacate the jury verdict, and remand this case 

for a new trial.

I

Nagy, a certified public accountant, advised Charles 

Cathcart and his various Derivium companies (“Derivium”) in the 

development and marketing of an investment scheme termed the 

“90% Loan Program” (the “90% Loans”).2 As part of this scheme, 

customers of Derivium would transfer appreciated securities to 

Derivium as “collateral” and receive in return a “loan” equal to 

90% of the value of the securities. Derivium represented to its 

customers that it would cause hedging transactions to be 

 1 All citations herein are to the Internal Revenue Code of 

1986 as codified in volume 26 of the United States Code.

2 As best we can tell from the record, Nagy was a paid 

accounting and tax consultant to Derivium and had no ownership 

or equity interest in it.
3

undertaken so as to protect against market fluctuations the 

securities given as “collateral.” Further, Derivium represented 

that the 90% Loan payments would be made by a separate offshore 

entity or entities that would also engage in the hedging 

transactions. Under the terms of the 90% Loan agreements, 

Derivium could not demand repayment prior to the maturity date

of the “loan,” the customer could not repay the principal early, 

and Derivium would apply any dividends received on the 

“collateral” securities to repayment of “loan” interest. At 

maturity of the “loan,” the customer had the option to repay the 

principal and recover the “collateral” securities, to renew the 

loan, or to forfeit the stock without any further liability on 

the “loan” even if the remaining principal balance and accrued 

interest of the “loan” exceeded the value of the forfeited

securities.

In reality, upon consummation of a 90% Loan, Derivium would 

not hold the securities received as collateral, but would 

immediately sell the customer’s securities. Derivium thus funded 

the 90% Loan payments out of the sales proceeds, while Derivium 

principals kept the remaining 10% of the sales proceeds, which 

they used for expenses and their own investments (which failed). 

There was no separate offshore entity purchasing the “loans” or 

performing any hedging transactions. Derivium engaged in no 
4

hedging transactions on its own and maintained no capital 

reserves. 

By December 2005, Derivium had sold more than $1.25 billion 

of its customers’ securities as part of the 90% Loan scheme. As 

time passed, many of the Derivium customers’ securities 

increased in value, and the underlying “loans” matured. 

Customers whose securities had increased in value repaid the 

“loans” and demanded the return of their securities. As Derivium 

no longer had the securities or any capital reserves, its entire 

Ponzi-like scheme eventually collapsed.

Nagy’s role in the Derivium saga was to give Derivium his 

opinion, as a CPA, that the 90% Loans were bona fide loans and 

not sales of securities, which would have been subject to 

federal (and state) income tax at the time of the sales. 

Derivium used Nagy’s tax advice in its marketing to customers 

(it would have had few takers for a taxable transaction) that it 

offered a tax-free “loan” program. Nagy reviewed and commented 

on the Derivium marketing materials before their publication to 

customers with an eye to minimizing any mention of an income tax 

risk related to the 90% Loans.

The Internal Revenue Service (“IRS”) conducted audits of 

Derivium beginning in late 2001 that concluded with the issuance 

of no-change letters to Derivium. In 2004, however, both the IRS 

and California tax authorities began audits of Derivium’s 90% 
5

Loan customers, eventually determining that the Derivium 90% 

Loans were sales for income tax purposes and therefore taxable 

to the customer at the time the securities were transferred. The 

IRS assessed penalties under I.R.C. § 6700 against Nagy and 

others who participated in the marketing of the 90% Loans.3

Nagy paid 15% of the assessed penalties and filed refund 

claims pursuant to I.R.C. § 6703(c)(1), which the IRS denied. He

then filed the present action in the United States District 

Court for the District of South Carolina, claiming, among other 

things, refund of the penalties paid. The government filed a 

counterclaim against Nagy, asserting Nagy’s liability for the 

unpaid balance of its assessed penalties.

The district court bifurcated the trial into two phases—a 

liability phase and a penalty amount phase. During the liability 

phase, the government moved for partial summary judgment on the

limited issue of whether the 90% Loans were bona fide loans or 

sales for tax purposes. The district court granted partial 

summary judgment in favor of the government, concluding that the 

90% Loans were sales for tax purposes.

The case then proceeded to trial by jury. On June 30, 2010, 

the jury rendered its verdict on liability in favor of the 

 3 I.R.C. § 6700 authorizes civil penalties against certain 

persons “[p]romoting abusive tax shelters.”
6

government, finding by a preponderance of the evidence that Nagy 

was subject to the I.R.C. § 6700 penalty. By separate verdict, 

the jury set the amount of the penalty at $2.636 million.

Nagy timely appealed, and we have jurisdiction under 28 

U.S.C. § 1291.

II

We review a district court’s grant of summary judgment de 

novo. Maracich v. Spears, 675 F.3d 281, 291 (4th Cir. 2012). We 

review a district court’s evidentiary rulings for an abuse of 

discretion. Creekmore v. Maryview Hosp., 662 F.3d 686, 690 (4th 

Cir. 2011). We review the adequacy of a district court’s jury 

instructions for an abuse of discretion, while we review the 

statements of law contained in jury instructions de novo. United 

States v. Jefferson, 674 F.3d 332, 360 (4th Cir. 2012).

III

Nagy raises six issues on appeal: (A) whether the district 

court erred in granting partial summary judgment to the 

government on the limited issue of whether the 90% Loans were 

sales for tax purposes and not loans, (B) whether the district 

court erroneously instructed the jury that Nagy’s tax advice to 

Derivium that the 90% Loans were loans and not sales was a 

“false or fraudulent” statement as a matter of law for purposes 
7

of § 6700, (C) whether the district court abused its discretion 

in excluding certain evidence submitted by Nagy, (D) whether the 

district court abused its discretion in admitting certain 

evidence offered by the government, (E) whether the district 

court erroneously admitted certain of Nagy’s personal tax return 

information into evidence, and (F) whether the district court 

erroneously instructed the jury regarding the calculation of the 

penalty.

A. Partial Summary Judgment

We first conclude that the district court properly granted 

summary judgment to the government on the issue of whether the 

90% Loans were sales and not loans for tax purposes. The 

district court correctly applied the doctrine of substance over 

form and concluded that the 90% Loans were in substance sales 

for tax purposes because the “benefits and burdens of ownership”

had passed from the 90% Loan customers to Derivium. Nagy v. 

United States, No. 2:08-cv-2555-DCN, 2009 WL 5194996, at *3 

(D.S.C. Dec. 22, 2009).4

 4 As the district court properly found in its partial 

summary judgment opinion: the 90% Stock Loan Program did not 

generate genuine indebtedness because: 

(a) Derivium had to sell the securities to fund the 

“loan”; (b) the customer could not repay his “loan” 

prior to maturity and Derivium could not force a 

(Continued)
8

B. Liability Phase Jury Instruction

Next, Nagy argues on appeal that the following jury 

instruction at the liability phase of his trial was erroneous: 

“In December 2009, this court determined that the 90% Loan 

transaction was a sale, and not a loan. Thus, statements 

indicating that the 90% Loan transactions were loans are false.” 

(J.A. 210.) Yet Nagy made no objection to this jury instruction 

at trial. We conclude that, as Nagy failed to “make timely and 

sufficient objections” to these jury instructions at trial, he 

failed to preserve the issue for appeal. See Belk, Inc. v. Meyer 

Corp., U.S., 679 F.3d 146, 153 n.6 (4th Cir. 2012). Moreover, it 

is worth noting that the district court twice instructed the 

jury that it could find Nagy liable under § 6700 regarding the 

false sale/loan statement only if they found “Nagy knew or had 

 

repayment; (c) the customer was never required to 

repay the “loan proceeds” he received; (d) the only 

collateral Derivium ever retained, if any, was 10% of 

the value of the sale of the securities; (e) the 

customer retained a contractual return-of-stock right; 

and (f) because a customer would only repay his “loan” 

and get his securities back (securities Derivium would 

have to purchase on the open market) if their value 

had increased, Derivium would only lose if the 

customer repaid the “loan,” which stands in stark 

contrast to the ordinary risk assumed by a lender, 

i.e., not being repaid by the borrower.

Nagy, 2009 WL 5194996, at *3.
9

reason to know that these statements were false at the time they 

were made.” (J.A. 210 (emphasis added).)

C. Exclusion of Certain Evidence Submitted by Nagy

Nagy also argues that the district court abused its 

discretion in sustaining the government’s objections to certain 

evidence he sought to present to the jury. At trial, Nagy 

attempted to introduce the expert testimony of Mark Altemose, a 

former IRS tax auditor; a letter written by B. John Williams, a 

tax attorney; and various internal IRS communications. Nagy 

argues these items of evidence should have been admitted to 

disprove that he knew or had reason to know that his tax advice 

was false. We do not believe the district court abused its 

discretion in excluding this contested evidence. 

Neither the Williams letter nor the internal IRS 

communications were in existence at the time Nagy gave his tax 

advice to Derivium so he could not have relied upon it in 

forming his advice. Therefore neither the Williams letter nor 

the IRS communications were relevant to show what Nagy knew at 

the time he gave his tax advice. While Nagy could have offered 

testimony from Mr. Altemose for a relevant purpose, he chose to 

offer that expert testimony only regarding the legal import of 

an IRS no-change letter as well as IRS audit procedures, neither 

of which have any relevance to show what Nagy knew or should 
10

have known at the time he gave his tax advice and would have 

likely confused the jury. We conclude the district court did not 

abuse its discretion in excluding the foregoing from 

consideration as evidence in this case.

D. Pfleiderer Testimony

Nagy also contends that the district court abused its 

discretion in admitting into evidence the testimony of Paul 

Pfleiderer, an expert on behalf of the government, regarding the 

economic effect of the 90% Loans. To the extent Nagy has 

presented a challenge to Pfleiderer’s testimony, we find it to 

be meritless, and the district court did not abuse its 

discretion in admitting Pfleiderer’s testimony.

E. Nagy’s Personal Tax Information

At trial, the government sought to put before the jury, as 

part of its case-in-chief, evidence that Nagy failed to timely 

file his personal income tax returns in certain years while he 

was giving the 90% Loan tax advice to Derivium and timely pay 

the tax due for some of those years. Nagy timely objected to the 

introduction of that evidence as general bad acts evidence that 

was not relevant to the § 6700 penalty determination and should 

be excluded under Rule 404(b) and/or Rule 403 of the Federal 

Rules of Evidence. The district court overruled Nagy’s 
11

objections and permitted the information regarding Nagy’s 

failure to timely file and pay his taxes in certain tax years to 

come before the jury. Under the circumstances of this case, we 

conclude that the district court abused its discretion in 

permitting this evidence before the jury and that its effect was 

highly prejudicial. We also conclude that the error was not 

harmless.

Nagy first contends that I.R.C. § 6103(h)(4) did not 

authorize the disclosure of Nagy’s personal income tax return 

information as evidence in the § 6700 penalty case. While 

§ 6103(h)(4)(A) was clearly satisfied (Nagy was a party to the 

§ 6700 proceeding), the applicability of subsections (B) and (C) 

is much more problematic. But we will assume, without deciding, 

that the § 6103(h)(4) restrictions can be applied disjunctively. 

See Mallas v. United States, 993 F.2d 1111, 1118, 1121–22 (4th 

Cir. 1993) (applying § 6103(h)(4) disjunctively); see also Rice 

v. United States, 166 F.3d 1088, 1092 (10th Cir. 1999) (holding 

that § 6103(h)(4) allows the disclosure of a person’s tax return 

information when that taxpayer “is a party to the proceedings”); 

Tavery v. United States, 32 F.3d 1423, 1430 (10th Cir. 1994) 

(“The exceptions in § 6103 are stated in the disjunctive.”).

Even if § 6103 does not bar the evidence at issue, however, 

that conclusion does not resolve the underlying evidentiary 

issue. The § 6103(h)(4) exceptions operate only as a gatekeeper 
12

device that allows the disclosure of taxpayer information in 

certain situations. If a § 6103(h)(4) exception applies, that 

determination removes only the statutory disclosure barrier; it 

does not resolve the independent evidentiary determinations of 

relevance or prejudice.

Rule 404(b) prohibits the admission of evidence of “a 

crime, wrong, or other act . . . to prove a person’s character 

in order to show that on a particular occasion the person acted 

in accordance with the character.” Fed. R. Evid. 404(b)(1). Such 

evidence may be admissible, however, to show, among other 

things, “knowledge” and “absence of mistake.” Id. 404(b)(2). 

Evidence is admissible under Rule 404(b) only when that evidence 

is “(1) relevant to an issue other than character; 

(2) necessary; and (3) reliable.” United States v. DeLeon, 678 

F.3d 317, 330 (4th Cir. 2012) (internal quotation marks 

omitted). Nagy argued to the district court that the evidence of 

his failure to meet personal tax obligations was not relevant to 

the determination of liability under § 6700 and served no 

purpose other than to cast Nagy’s character in a negative light. 

The government argues that the evidence of Nagy’s failure to 

timely file and pay his taxes in certain years during which he 

was advising Derivium was relevant to show an absence of mistake 

in his tax advice. Yet the government does not explain, or even 
13

attempt to explain, how this evidence was relevant to Nagy’s 

state of mind in the rendering of opinions on the 90% Loans.

The government presented no evidence linking Nagy’s failure 

to file or pay certain personal taxes to his work for Derivium. 

Nothing in the record connects Nagy’s failure to timely file or 

pay his personal taxes to any knowing act of fraud or fraudulent 

intent in giving tax advice to Derivium. There simply is no 

record evidence linking the two. Indeed, Nagy argues that his 

failure to file or pay his personal taxes was related to severe 

family medical situations and his lack of assets: acts which 

would subject Nagy to, at most, negligent failure to file or pay 

penalties under § 6651.

The government contends that the evidence of Nagy’s failure 

to timely file or pay his personal taxes was relevant to Nagy’s 

state of mind at the time he was rendering tax advice to 

Derivium. But the government completely fails, as noted above, 

to make any remote connection between Nagy’s failure to timely 

file and pay his own taxes and his provision of tax advice to 

Derivium. Nagy was not a Derivium principal or customer, and the 

record contains no evidence that his personal tax returns 

depended in any way upon the Derivium scheme.

In short, we are at a loss to see any relevance for Rule 

404(b) purposes for the admission of Nagy’s personal tax 

information other than “to prove [Nagy]’s character in order to 
14

show that on a particular occasion [Nagy] acted in accordance 

with the character.” See Fed. R. Evid. 404(b). While Rule 404(b) 

is a rule of evidentiary inclusion, United States v. Smith, 441 

F.3d 254, 262 (4th Cir. 2006) (“This court has recognized that 

Rule 404(b) is primarily a rule of inclusion, not exclusion.”), 

any evidence must satisfy the threshold of relevance to an issue 

other than character that we find lacking here.

Moreover, for Rule 403 purposes, the admission of Nagy’s 

personal tax information was highly prejudicial and quite likely 

to influence the jury against him. Had the personal tax 

information had some semblance of relevance (which proper 

evidence in some other case may well show), a different 

balancing for prejudice purposes would be required. But in the 

absence of relevance, we conclude that the district court abused 

its discretion to admit Nagy’s personal tax information into 

evidence, particularly as it bears all the indicia of gardenvariety “bad acts” evidence with no other purpose than to 

emotionally inflame the jury against the defendant.

Further, we conclude that the admission of Nagy’s personal 

tax information was not a harmless error. Under harmless error 

analysis, we will not reverse if we can “say, with fair 

assurance, after pondering all that happened without stripping 

the erroneous action from the whole, that the judgment was not 

substantially swayed by the error.” Kotteakos v. United States, 
15

328 U.S. 750, 765 (1946). Nagy presented a cognizable defense as 

to his state of mind for the knowledge purposes of § 6700 that 

would have permitted a reasonable jury to have rendered a 

verdict in his favor. The prejudicial effect on the jury of the 

personal tax information about Nagy, however, and the 

possibility that it swayed their judgment in their consideration 

of this case, cannot be ignored. As the error was not harmless, 

the liability verdict must be vacated.

F. Penalty Amount Phase Jury Instruction

Reversal of the liability verdict also invalidates the 

penalty determination in so much as there is no longer a 

liability finding upon which it could be based. However, in view 

of the likelihood, that a penalty calculation issue will arise 

again upon remand, we exercise our discretion to address an 

assignment of error that Nagy raises. See United States ex. rel. 

Drakeford v. Tuomey Healthcare Sys., Inc., 675 F.3d 394, 406 

(4th Cir. 2012) (noting that “our precedent is clear that we may 

address issues that are likely to recur on remand”).

Nagy contends that the district court erred in its jury 

instruction for the calculation of the § 6700 penalty amount for 

any § 6700 liability prior to October 23, 2004, the date of an 

amendment to the statute, by instructing the jury to “multiply 

the total number of transactions for which [Nagy] is liable for 
16

each year by $1000” for all transactions occurring before 

October 23, 2004. (J.A. 217–18.) The statute plainly states 

that, with respect to transactions occurring before October 23, 

2004, any person who violates § 6700 “shall pay, with respect to 

each activity described in paragraph (1), a penalty equal to the 

$1000 or, if the person establishes that it is lesser, 100 

percent of the gross income derived (or to be derived) by such 

person from such activity.” I.R.C. § 6700(a). Any jury 

instruction given in a penalty amount determination trial upon 

remand should follow the plain language of the applicable 

portion of the statute.

IV

For the aforementioned reasons, we affirm the district 

court’s grant of partial summary judgment to the government on 

the issue of whether the 90% Loans were sales for federal income 

tax purposes. We also affirm the district court’s giving of the 

jury instruction relating to whether a statement that the 90% 

Loans were not sales for tax purposes would be a false or 

fraudulent statement for § 6700 purposes. Further, we hold that 

the district court did not abuse its discretion in excluding the 

evidence from Altemose and Williams and the internal IRS 

communications. Neither did the district court abuse its 

discretion in admitting the evidence of Mr. Pfleiderer.
17

The district court did abuse its discretion, however, in 

admitting Nagy’s personal tax information and the liability and 

penalty verdicts are therefore vacated. The case is hereby 

remanded to the district court for further proceedings 

consistent with this opinion.

AFFIRMED IN PART,

REVERSED IN PART,

AND REMANDED