Tax Court Rejects Another 2000 era Bullshit Tax Shelter and Imposes Accuracy Related Penalty (4/22/24)

In PICCIRC, LLC v. Commissioner, T.C. Memo. 2024-50, GS Dkt 4308-12, here, at #75 4/22/24 and GS here, the Court (Judge Gale) rejected the petitioner’s claim for artificial tax benefits (fantasy exorbitant basis) in a contrived sale of distressed Brazilian trade receivables. In other words, yet another variant of a bullshit tax shelter common in the early 2000s; the underlying transaction here was in 2002 and reported on the 2002 partnership return. The facts found make the result inevitable. The Court found a basis of “at the most, $300,164,” whereas the reporting position was that the basis was “$23,075,495.” (Slip Op. 12.)

I note this case because the partnership used the standard shield of the tax professional opinion letters that incentivized taxpayers blessed with significant income to play the audit lottery, which they hoped was cost-free with liability if caught only for tax and interest but no penalty (civil or criminal). Under the scenario without a penalty if caught, it still made sense to play the audit lottery because the upside if not caught was the avoided/evaded tax less the transaction costs (including legal opinions).

One opinion from Proskauer Rose, LLP, a player in the tax shelter arena at the time, opined “that the transaction had the requisite economic substance and business purposes to be respected under the authorities discussed in the opinion letter.” (Slip Op. 5.) Proskauer Rose charged $100,000 for issuing the opinion. (Id.)

The other opinion was from BDO, opining “that no penalty should apply to the transaction pursuant to section 6662(b)(2) or (3).” (Slip op. 5.) The opinion does not state what BDO charged for the opinion. The Code sections cited are for “substantial understatement” penalty at §§ 6662(b) and (d) and the “substantial valuation understatement penalty at §§ 6662(b)(3) and (f) and (h).

Both opinion letters, in the final analysis, were worth nothing despite the market at the time pricing them at substantial amounts (e.g., $100,000 to Proskauer Rose). Even so, the opinion letters arguably prevented a potential criminal charge or civil fraud penalty, so maybe in the final analysis, this partnership and its flow-through partners got something for their money.