Fourth Circuit Calls Out a Bullshit Tax Evasion/Avoidance Gambit (6/24/20)

In Est. of Kechijian v. Commissioner, ___ F.3d ___ (4th Cir. 6/23/20), here, the Court affirmed the Tax Court’s holding that the bullshit transaction to avoid tax on ordinary income -- $41.2 million of such income -- did not work and that the 20% accuracy related penalty applied.  This particular bullshit transaction was different from other similar genre transactions I have discussed, in the sense that it appears to have been a one-off rather than mass-marketed (although, I am sure components were packaged by various promoters into other bullshit deals).

I won't get into the twists and turns to gerrymander the result the taxpayers and their advisors went through to hide what really happened.  However, I did find the following (Slip Op. 15-16) particularly on point:

            Surprisingly, petitioners double down on their position in this appeal. They candidly acknowledge that the only reason they executed the Surrender Transactions was to enable UMLIC S-Corp. to avoid withholding and remitting approximately $33 million in state and federal payroll and income taxes. Petitioners maintain that this course of action was necessary to ensure UMLIC S-Corp.’s continued viability as a going concern. This is  [*16] because, according to petitioners, UMLIC S-Corp. did not have enough cash on hand to cover its tax withholding obligations, an assertion that the Tax Court found to be unsupported by the evidence at trial. See Austin, T.C. Memo. 2017-69, at *40 n.13. But even if that were true, it does nothing to change the fact that the sole purpose for the Surrender Transactions was the avoidance of tax obligations, both those of UMLIC S-Corp. and, by extension, those of petitioners. Under our case law, that is enough to satisfy the first prong of the economic substance test. See Friedman v. Comm’r, 869 F.2d 785, 792 (4th Cir. 1989) (noting that the first prong “requires a showing that the only purpose for entering into the transaction was the tax consequences”).

On the penalty issue and reasonable cause, the following is also noteworthy after finding that the taxpayers had done nothing to determine their correct liability (Slip Op. 19):

            Petitioners’ argument that the tax law issues in this case are novel does nothing to change our conclusion. For one thing, we have never recognized novelty as a stand-alone defense to the imposition of accuracy-related penalties. See Baxter, 910 F.3d at 168. More importantly, there is nothing novel about the legal issues presented by or doctrines applied in this case. That the law prohibits a taxpayer from avoiding tax liability by means of a sham transaction is a rule almost as old as the federal income tax system. See, e.g., Gregory v. Helvering, 293 U.S. 465, 468–70 (1935); see also Baxter, 910 F.3d at 168 (rejecting a similar novelty argument on the grounds that “it [is] well-established that transactions lacking economic substance must be disregarded for tax purposes”). There is no reason that petitioners, sophisticated businessmen who were clearly cognizant of the tax consequences of their actions, could have reasonably expected that the Surrender Transactions would be exempted from this longstanding rule. See Treas. Reg. § 1.6664-4(b)(1) (noting that “the experience, knowledge, and education of the taxpayer” is relevant in assessing accuracy-related penalty defenses).

 Well, as Vincent Laguardia Gambini said here:  “Everything That Guy Just Said Is Bullshit.”

Gambini made that assessment of the opposing argument in a trial before a jury.  I am not sure that would be a good argument in an appellate court as was involved in the case above.  But that is the gist of the Court's holding.  (Actually, without getting into the details, I did make a similar argument in a prominent case when I was with DOJ Tax Appellate Section where, rather than filing an amicus brief, a prominent tax lawyer who had exposed clients if the Government won the appeal, wrote a law review article in the premier tax publication, NYU's Tax Law Review, after all the briefs had been submitted.  At oral argument, I advised the Seventh Circuit of the article publication and said that the argument in the article was bullshit (actually, I said that the article was just wrong and that Government could respond to all of the arguments in the article if the court of appeals wanted the Government to do so).  The Government won the case without further ado.