8th Circuit Rejects Wells Fargo Bullshit Tax Shelter (4/27/20)

In Wells Fargo & Company v. United States, ___ F.3d ___ (8th Cir. 2020), here, the Eight Circuit rejected the taxpayer’s claim of entitlement for bullshit tax shelter benefits and claim that it should not be subject to the negligence penalty for claiming the supposed benefits of the bullshit tax shelter.

On the merits of the bullshit tax shelter, I just observe that it had a common characteristic for such nonsense - considerable complexity that served both to create a superstructure designed in part to hide the sham nature of the transaction.  The Eighth Circuit said (Slip Op. 4):

Turning to the facts of this case, we note that STARS is a sophisticated financial transaction with a fairly complex structure. See Wells Fargo & Co. v. United States (Wells Fargo I), 143 F. Supp. 3d 827, 831 (D. Minn. 2015) (“The STARS transaction was extraordinarily complicated—so complicated, in fact, that it almost defies comprehension by anyone (including a federal judge) who is not an expert in structured finance.”); Santander Holdings USA, Inc. v. United States, 977 F. Supp. 2d 46, 48 (D. Mass. 2013) (noting that STARS was “surpassingly complex and unintuitive; the sort of thing that would have emerged if Rube Goldberg had been a tax accountant”).

In my Federal Tax Procedure Book, I describe characteristics of abusive tax shelters as follows (footnotes omitted):

Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work and cascade of words designed to mask the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including IRS auditors, if they stumble across the transaction(s)) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, offer a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters (and other enablers) of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate potential penalty risks by shifting them to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive. 

Moving to the penalty issue, the bottom line holdings are:

1.  The negligence penalty in § 6662 applies to conduct including “any failure to make a reasonable attempt to comply with the provisions of this title, and the term “disregard” includes any careless, reckless, or intentional disregard.”  § 6662(c).  The regulations flesh this out by providing a “reasonable-basis” defense if the taxpayer’s return reporting position was “reasonably based on one or more of the authorities set forth in § 1.6662-4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments).” 26 C.F.R. §§ 1.6662-3(b)(1), (3).  The issue was whether, in order to invoke the defense, the taxpayer must have actually based the return reporting position on authorities recognized by the regulation or whether, in the absence of such actual reliance, the taxpayer can ex post facto assert that the authorities render the position reasonable.  The majority held that actual reliance was required.  The majority based its holding on a de novo interpretation of the regulation text, which it found unambiguous on the issue, without any deference to the IRS’s interpretation of the regulation.

2.  The Court held that § 6751(b)’s written supervisor approval requirement did not apply because the Government asserted the penalty as a setoff in a refund suit in which no assessment was made (perhaps because beyond the statute of limitations).

JAT Comments:

1.  Professor Leslie Book has an excellent discussion of the case:  Leslie Book, In Wells Fargo 8th Circuit Holds Reasonable Basis Defense to Negligence Penalty Requires Taxpayers Prove Actual Reliance on Authorities (Procedurally Taxing Blog 4/27/20), here.

2.  For those who like dancing on the head of pins, one might focus on the difference in deference aspect of the interpretive strategies by the majority and the dissenting judge.  The majority held that the regulation was not ambiguous as to whether actual reliance on the authorities was required, so that the majority made the de novo interpretation of the reliance requirement.  The dissent apparently thought the regulation was ambiguous and, since the IRS was interpreting the regulation to require actual reliance, performed an Auer analysis (a la Kisor) to (i) determine that Auer deference did not apply and (ii) the best interpretation of the ambiguous regulation was that actual reliance was not required.

3.  I have to wonder why, for such a blatantly sham transaction, the Government did not assert the civil fraud penalty as an offset.

4.   Of course, often bullshit tax shelter promoters will provide or arrange for an opinion that will, so the taxpayers are promoted or otherwise belief, will also shelter them from penalties if the underlying bullshit tax shelter fails.  Those opinions are often, let's say, result oriented and lacking in intellectual and research rigor.  Nevertheless taxpayers anticipate that they may be able to rely on the opinions to avoid penalties.  To do that, of course, they have to produce the opinions and subject them to the scrutiny of the IRS and the courts (and to the public if they litigate the issue).  For  bullshit tax shelters, those opinions are also bullshit.  And might well only succeed in avoiding the criminal penalty, but will not withstand analysis for the civil penalties.  Hence, although Wells Fargo certainly had at least one law or accounting firm opinion, it did not rely on the supposed authorities cited.