Bullshit Tax Shelter "Investors" Reach the End Game on Tax Dodging from 1999 BLIPS "Transaction" (2/20/25)

Yesterday, the Tax Court (Judge Goeke) entered its opinion in Blum v. Commissioner, T.C. Memo. 2025-18, TN here, GD here*, and GS [to come]**. The opinion is 48 pages long. After reading Slip Op. pp. 1 & 2, I had the sense that Judge Goeke would have made it much shorter except for inappropriate arguments made by the Blums (really their counsel), which he apparently felt necessary to address. So that readers might get that same sense, I quote pages 1 & 2 in their entirety (footnote omitted):

This affected items case deals primarily with the responsibility of taxpayers and the Internal Revenue Service (IRS) to update information about the partners of a partnership under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97- 248, §§ 401–407, 96 Stat. 324, 648–71. The Treasury regulations 1 explicitly and clearly state the requirements for partnerships and their partners to update names and addresses of the partners as well as the IRS’s obligations when mailing a notice of Final Partnership Administrative Adjustment (FPAA).

           Petitioners did not adhere to the regulations; the IRS did. Petitioners did not properly identify Scott Blum as an indirect partner in the TEFRA partnership or update the address for sending the FPAA with respect to his partnership interest. Instead, they try to place the blame for their alleged nonreceipt of the FPAA on the revenue agent (RA) who audited their personal and partnership returns. Petitioners do this because they want to avoid a district court’s decision in the TEFRA partnership case that held that Mr. Blum engaged in a tax shelter and improperly deducted a $78.5 million artificial loss (tax shelter loss). They knew about the partnership case while it was ongoing in district court and are obviously unhappy with the outcome. We find not only that the IRS mailed the required FPAA with respect to Mr. Blum’s partnership interest to the correct address but also that petitioners received it.

          Throughout this case, petitioners have concocted numerous unfounded theories about the IRS’s alleged failure to follow proper procedure. They have also made multiple misrepresentations to the Court and omitted important information. Testimony by IRS employees clearly and credibly establishes that the IRS indeed followed proper procedures and that the IRS mailed the FPAA as required by the Code and the regulations.

          Apart from their argument about their alleged nonreceipt of the FPAA, petitioners also make multiple baseless arguments to avoid paying the tax that they owe pursuant to the district court’s decision.  They argue that the district court did not really disallow the tax shelter loss and that they resolved the disallowance of the $78.5 million tax shelter loss in a prior Tax Court case for a mere $373,641 in tax. They also challenge the timeliness of the FPAA and the affected items Notices of Deficiency that precipitated the filing of the Petition. Each of these arguments fails. Accordingly, we find, in accordance with the district court’s decision in the TEFRA case, that petitioners are not entitled to deduct the $78.5 million tax shelter loss.

          Respondent also determined section 6662(h) penalties for gross valuation misstatements for 1999, 2007, and 2010, and a section 6651(a)(1) addition to tax for failure to file a return timely for 2007. We dismiss the section 6662(h) penalties for lack of jurisdiction and hold that petitioners are liable for the section 6651(a)(1) addition to tax for 2007.

Having read the opinion (all 48 pages of the Slip Op., including 26 footnotes), I recommend the opinion to readers who want to refresh their knowledge of some of the TEFRA basic procedures. In assessing whether to spend time in reading the opinion, readers should consider that we have new partnership procedures, the BBA Centralized Partnership Audit Regime (“CPAR”), effective for years starting in 2018. Of course, as Blum shows, TEFRA regime procedures years (prior to 2018) can be in play long after 2018. The underlying years in Blum related 1999 when Mr. Blum indirectly “engaged in the Bond Linked Issue Premium Structure (BLIPS) tax shelter through Democrat Strategic Investment Fund, LLC (DSIF), a TEFRA partnership for federal tax purposes.” (Slip Op. 3.) Blum did not hold a partnership interest in DSIF, rather Blum’s single-member LLC, Bogan Ventures LLC, held the partnership interest in DSIF. Blum was thus an indirect partner which triggered special reporting or identification requirements. Through the arrangement, Blum claimed a “$78.5 million in artificial tax loss.” (Slip Op. 4.) The lengthy time auditing DSIF and then working through the procedural morass to get the tax consequences to Blum is what took so long (from 1999 to 2025).

I will not try to summarize the opinion or even ask one of the AI tools to summarize the opinion. Judge Goeke is a very good judge. So he wants to give the Blums their due process by addressing their arguments which he has already signaled on pp. 1&2 lack merit and worse. I think the opinion would be reading in a class on the TEFRA partnership procedures because it ticks through the possibilities for IRS footfaults none of which occurred except in the Blums’ (or their attorneys’) imaginations. I won’t tick through all of that. I will just focus lightly on some of the things that caught my interest. The Slip Op. pages are presented with [*pageno].

1. [*3] A discussion of protracted and unnecessary discovery disputation:

2. [*19-20] A discussion of actual receipt of the FPAA, in which the Court said: “we find it highly suspect that petitioners did not appear before this Court to give their testimony that they did not receive the notice partner FPAA,” particularly with the proof rules that work against a party with relevant purportedly favorable information that does not put that information in evidence. Judge Goeke notes in footnote 12 that the taxpayer’s written declaration that they did not receive the FPAA was not sufficient.

3. [*20-34] The Blums raise various contorted arguments about mailing of the FPAA and the validity of the Regulations. On the latter attack on the Regulations (Slip Op. 34), the Court notes:

          Petitioners did not seriously challenge the validity of the regulations. They did not cite Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), and have not articulated a basis to challenge the efficacy of the regulation. Section 6223(c)(2) expressly delegates authority to the Secretary of the Treasury to promulgate regulations for furnishing updated partner and address information to the IRS. We find that the regulation is consistent with the statute and is valid.

          Petitioners also argue that respondent’s interpretation of the regulation is not permissible. We disagree. Respondent interprets the regulation in accordance with its plain, unambiguous meaning, that the IRS is not obligated to search its records for information not provided in accordance with the Code and the written statement requirement of the regulations. We find that the IRS satisfied the requirements of the Code and the regulations by mailing a copy of the notice partner FPAA to Bogan at the Schedule K–1 address.

 If Blum (and his attorneys) did not have more sophisticated arguments based on Loper Bright, they apparently did not develop them and really could not have developed them if they did not cite or discuss Loper Bright.

4. In a prior proceeding Blum v. Commissioner, T.C. Memo. 2012-16, here (referred to in the opinion as Blum I) involving the same year but not involving any partnership adjustments because the partnership TEFRA adjustments were still in process, the stipulated decision was made according to the "Munro Computation" which, as I understand, is to calculate any deficiency without regard to the partnership loss because the partnership loss, as claimed (and if valid), would have otherwise wiped out the deficiency. (See Slip Op. 15 and 38-39.) The Munro Computation is based on Munro v. Commissioner, 92 T.C. 71 (1989). Section 6234 was amended after Munro to permit a notice of adjustment in the case of an oversheltered return. (See Federal Tax Procedure (2024 Practitioner Ed.) pp. 971-972) and (2024 Student Edition p. 661). Basically, the Computation is used to permit the first nonpartnership deficiency proceeding, Blum I, can be resolved and later a separate adjustment can be made as a result of the TEFRA partnership audit and litigation.

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* The reference to GD is to Google Docs. I downloaded the opinion and uploaded it to my Google Docs because DAWSON offers no direct permalink to the opinion until it is incorporated in pamphlets (see here) which are in pdf format with the appropriate pagination in the final T.C. reports. By uploading to my GD, I can make appropriate references to Slip Op. pages. When Google Scholar first picks up the case (sometime in the next few days, I will provide the Google Scholar link (which offers slip opinion pagination) and delete the Google Docs Link.

** GS is Google Scholar. For Tax Court Memorandum decisions, the GS version is posted a few days after the decision and is a permanent link.