This is an unusual win for the taxpayer, so practitioners wanting to replicate the win should pray for similar facts and Judge Vasquez to decide the issue when litigated.
In a case like this, the facts are critical, and Judge Vasquez states the facts in a way that supports his conclusion (it seems to be a factual conclusion so will be bullet proof on appeal unless a panel so strongly disagrees that it is will to find that Judge Vasquez clearly erred on finding reasonable cause). After finding the facts, Judge Vasquez's money conclusions (repeating some of the facts) are:
D. Good-Faith Reliance
We conclude that Mr. Rawls relied in good faith on Mr. Poster's advice. Mr. Rawls credibly testified that he was "very emphatic with Larry that we should absolutely be compliant with the Tax Code and complete in our disclosure, and he said we absolutely were." This is consistent with Mr. Poster's testimony that they had "always assumed that these transactions would be audited."
We find that Mr. Rawls relied in good faith on Mr. Poster, because there was nothing to suggest to a person of Mr. Rawls' education and experience that the advice was wrong or that the transactions were too good to be true. In Stobie Creek Invs., LLC v. United States, 608 F.3d 1366, 1383 (Fed. Cir. 2010), the Court of Appeals for the Federal Circuit found that the taxpayer should have known the Son of BOSS transaction was "too good to be true" because of his "extensive experience in finance, having worked as an investment banker and as the manager of his family's complex finances". The taxpayer, as manager of his family's complex finances, had "helped implement a number of sophisticated tax-planning strategies, giving him sufficient knowledge and experience to know when a tax planning strategy was likely 'too good to be true.'" Id. In SAS Inv. Partners v. Commissioner, T.C. Memo. 2012-159, we concluded that the taxpayer, because he had an accounting degree and was a certified financial planner, should have known that the Son of BOSS transaction was improper.
Mr. Rawls is an accomplished engineer and has cofounded a very successful fiber optics company; however, unlike the taxpayers in Stobie Creek and SAS Inv. Partners, Mr. Rawls is not a sophisticated investor and is not familiar with tax law. Before the success of Finisar, Mr. Rawls' wealth consisted of the equity in his home, which was subject to two mortgages in order to finance Finisar. Mr. Rawls was not familiar with managing a large fortune and, as of early 2000, he did not have an estate plan or even a will. We find that Mr. Rawls did not have the background or experience necessary to have known that the Heritage plan was too good to be true.
Furthermore, the sizable tax savings do not automatically create a "too good to be true situation". Mr. Rawls did find the results of Heritage's strategies impressive, but he also testified that he understood Heritage's strategies to be "investments where you had to put up real money but you had the real opportunity to profit". See Am. Boat Co., LLC v. United States, 583 F.3d 471, 485 (7th Cir. 2009) (finding reasonable cause when taxpayer was a credible witness and he did not know the transaction held no profit potential). In Am. Boat, the Government argued that the taxpayer should have known the Son-of-BOSS transaction was too good to be true on account of the "substantial tax benefit" he received from the short-sale transactions. Id. The Court of Appeals rejected the Government's argument, stating: "There is no doubt that the benefit * * * [the taxpayer] received was large, and this is the argument that gets the government the nearest to undermining * * * [the taxpayer's] assertion that he had reasonable cause. But, in general, 'it is axiomatic that taxpayers lawfully may arrange their affairs to keep taxes as low as possible.'" Id. (quoting Neonatology Assocs., P.A. v. Commissioner, 299 F.3d at 232-233 (citing Gregory v. Helvering, 293 U.S. 465, 469 (1935))).
Furthermore, we do not find it unreasonable for Mr. Rawls to have relied on Mr. Poster's advice to report the Group transactions on Family's return even though Lewis Rice declined to issue an opinion letter. Mr. Rawls was aware that Mr. Kornman disagreed with Lewis Rice's concerns regarding the Group transactions and that Mr. Kornman was confident the transaction was valid and in compliance with the Code. Faced with a difference of opinion between Heritage and Lewis Rice, Mr. Rawls discussed with Mr. Poster whether the Group transactions should be reported on Family's return. Mr. Poster informed Mr. Rawls that after reviewing the Lewis Rice opinion letter regarding the Trading transactions he thought it was proper to also report the Group transactions on Family's return. It was reasonable for Mr. Rawls to rely on his accountant when faced with the question of whether to report the Group transactions on Family's return.This is an unusual win for a taxpayer in these hokey tax shelters that are really too good to be true. Congratulations on Mr. Rawls' legal team, led by Todd Welty, here, of SNR Denton, that earned their keep on this one.
Respondent argues that Mr. Rawls did not in good faith rely on Mr. Poster because he hid the transactions from Mr. Payne, his personal income tax return preparer. We do not find that Mr. Rawls lacked good faith because he decided to use Mr. Poster instead of Mr. Payne for more complicated income tax returns. There were several legitimate reasons for Mr. Rawls' not using Mr. Payne that have nothing to do with hiding information from Mr. Payne. By 2000 Mr. Rawls was living in California and subject to California income tax, with which Mr. Payne was unfamiliar. Furthermore, Mr. Rawls' income tax returns had gone from being "very uncomplicated and very straightforward" to more complex after the success of Finisar, and Mr. Payne was nearing retirement. Mr. Rawls decided it was best to hire an accountant who was familiar with California law, short sales, section 752, and the entities involved, and that is why he hired Mr. Poster. Mr. Poster continued to do work for Mr. Rawls, and Mr. Poster has been preparing Mr. Rawls' personal income tax return since 2006. Mr. Rawls was not acting in bad faith when he hired Mr. Poster to prepare the tax returns involved.