Tax Court Rejects Too Good to be True Tax Shelter Defense Based on Tax Opinion Purchased to Support a Reasonable Cause Defense (5/17/25)

In Stevens v. Commissioner, T.C. Memo. 2025-45, TCM here * & GS here [to come] the court rejected the taxpayer’s arguments for the merits of the bullshit, “too good to be true,” tax shelter. Most of the findings of facts and opinion relate to the merits. As usual, the shelter was effected through a shroud of complex financial documents that, in the end, signified nothing that was cognizable for tax purposes. 

* Readers wishing to access the opinion through the docket entries may do so here at docket # 199.]

I find the penalties interesting because the taxpayers recognized that the shelter might be subject to penalties and, for that reason, “purchased” a tax opinion that, they hoped, would protect them against penalties if the IRS saw through the smoke and mirrors in the documents and disallowed the tax benefits of the shelter. Here are some quotes from the opinion (boldface supplied by JAT):

In July 2014 Shannon Stevens [the wife-taxpayer] became concerned with the risk of tax penalties if SLS engaged in the Dermody transaction and claimed interest deductions related to it. Shannon Stevens was the longtime owner and operator of her own accounting firm. She had substantial experience preparing tax returns for individuals and small businesses. She discussed with both Dermody and Witten her concern about tax penalties.

 On July 29, 2014, Dermody sent Shannon Stevens a sample tax opinion letter relating to a transaction of a different type from the Dermody transaction. Dermody recommended that she obtain a tax opinion letter about the Dermody transaction.

 On July 30, 2014, Gopman spoke to Witten and recommended to Witten that petitioners obtain a tax opinion letter from Jeffrey Rubinger, a tax attorney. On July 30, 2014, Witten emailed Shannon Stevens with a copy to Kirk Stevens and Gopman. Witten recommended that petitioners obtain a tax opinion letter for their “protection.” Witten stated that a tax opinion letter could be obtained from Rubinger “for a reasonable price.” In a separate communication with Shannon Stevens, Witten specifically suggested that a tax opinion letter could be obtained from Rubinger for $10,000.

The estimated cost of the opinion letter was too low; the opinion letter ultimately cost $40,000.

          On August 4, 2014, Shannon Stevens emailed Gopman with a copy to Kirk Stevens and Witten. Shannon Stevens stated that “we need an opinion letter.” She further explained: “I would want a quality firm that I could fall back if there ever was a problem.”

           On August 4, 2014, Witten emailed Shannon Stevens with a copy to Kirk Stevens and Gopman. Witten stated that she agreed with Shannon Stevens’s last email. Witten stated that an important part of the transaction was a legal opinion “for your protection.”

           On August 4, 2014, Gopman emailed Shannon Stevens and Witten with a copy to Kirk Stevens. Gopman affirmed that an “important component[] to move forward with this transaction” is a “[l]egal opinion from a qualified attorney and firm.”

 * * * *

           On November 24, 2014, Rubinger sent Shannon Stevens the final version of his tax opinion letter. The letter concluded, among other things, that the 2014 note would be treated as indebtedness for federal [*14] income tax purposes so that SLS would be able to deduct interest on the note as it accrued. The letter was addressed to Kirk Stevens as president of SLS.

 * * * *

           Bill McDermott, a certified public accountant, began preparing SLS’s tax return for the tax year 2014. McDermott had a copy of Rubinger’s tax opinion letter. On or before August 21, 2015, McDermott suggested to Shannon Stevens that it was advisable for taxpayers to disclose “certain tax shelter” transactions to the IRS and asked her whether she thought such a disclosure was warranted with respect to the deductions for interest accruing on the 2014 note. On August 21, 2015, Shannon Stevens asked Gopman about McDermott’s inquiry. Gopman in turn sought Rubinger’s views. Rubinger explained to Gopman that he would advise against claiming the interest deductions at all. Rubinger asked Gopman not to reveal this advice to petitioners. Gopman refused. He explained to Rubinger: “We cannot keep the advice between you and me though as we have to advise them [i.e., petitioners] the right way.” Gopman made petitioners aware that Rubinger advised against claiming the interest deductions.

          By the time SLS filed its return for tax year 2014, petitioners knew that Rubinger had advised against claiming deductions for interest accruing on the 2014 note. 

Note: that after paying handsomely for the legal opinion, Rubinger opined that the Stevens should not claim the tax shelter benefit of deducting smoke and mirrors interest.

The taxpayers filed Form 8275, Disclosure Statement, for the 1120S income tax returns for 2015 through 2016, but reported the results on their individual returns, Form 1040, without further disclosure. The taxpayers then filed an amended individual tax return, Form 1040X, for 2013, carrying back losses from 2014 allegedly resulting from the shelter.

The foregoing are the facts relating to the issue I discuss here—i.e., liability for the penalties. I now turn to the opinion discussion of penalties (Slip Op. 45-47). I quote part of that discussion:

          Section 6664(c)(1) provides that no penalty is imposed under section 6662 “with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.” Treasury Regulation § 1.6664-4(b)(1) provides that the most important factor in determining whether a taxpayer acted with reasonable cause and in good faith is the “extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability.” Treasury Regulation § 1.6664-4(b)(1) provides that reliance on professional advice may constitute reasonable cause and good faith if such reliance is reasonable and the taxpayer acted in good faith. Treasury Regulation § 1.6664-4(c)(1) characterizes that inquiry as whether a “taxpayer has reasonably relied in good faith on . . . the opinion of a professional tax advisor . . . as to the treatment of the taxpayer (or any entity, plan, or arrangement) under Federal tax law.”

          Petitioners contend they are not liable for penalties under sections 6676(a) and 6662(a) because they “relied on Mr. Rubinger as a tax professional,” their “reliance was reasonable,” and their “reliance was in good faith.”

          Petitioners’ liability for the section 6662(a) penalties is predicated on the theory that they were negligent in claiming deductions for interest on the 2014 note and the 2016 note. Section 7491(c) provides that the IRS shall have the burden of production with respect to the liability of any individual for a penalty. Therefore, respondent has the burden of producing evidence that petitioners were negligent in claiming the interest deductions. See Carlebach v. Commissioner, 139 T.C. 1, 16 (2012). To meet  this burden, the IRS introduced evidence showing that petitioners commissioned the tax opinion letter to protect themselves from penalties rather than to comply with the tax law. The evidence also showed that, knowing that Rubinger did not stand behind that opinion letter, they claimed the deductions anyway. Securing the tax opinion letter was therefore not a “reasonable attempt” to comply with the Code. See Treas. Reg. § 1.6662-3(b)(1). Furthermore, respondent has produced evidence that petitioners should have known that the tax benefits claimed were “too good to be true.” See Treas. Reg. § 1.6662-3(b)(1)(ii). The economic cost to petitioners of the relevant transactions [*47] was limited to the $890,000 cash payment.22 But petitioners claimed millions of dollars of deductions: Over $6 million for 2014, over  $20 million for 2015, and over $7 million for 2016. These tax benefits are too good to be true. Respondent has produced evidence the underpayments were attributable to negligence, and petitioners have failed to persuade us they were not. We hold that the underpayments for these years were attributable to negligence.

          Petitioners have the burden of persuasion with respect to establishing reasonable cause and good faith under section 6664(c)(1). See Carlebach, 139 T.C. at 16. Petitioners have not met their burden. Soliciting Rubinger’s tax opinion letter was designed to protect petitioners from penalties, not to assess their “proper tax liability.” See Treasury Regulation § 1.6664-4(b)(1). Petitioners did not rely on the letter as to the “treatment” of the 2014 note under “Federal tax law.” See id. para. (c)(1). Therefore, we conclude that petitioners did not have reasonable cause for claiming the disputed interest deductions and that they did not act in good faith with respect to the deductions.

          Likewise, as to section 6676(a), petitioners have not proven that they had reasonable cause for the excessive amount of their refund claim for tax year 2013. The issuance of the tax opinion letter did not make it reasonable for petitioners to file the Form 1040X, which was predicated on the validity of the interest deductions. Although the tax opinion letter attested to the validity of the deductions, petitioners knew when they filed the Form 1040X that Rubinger did not stand behind the letter. Furthermore, petitioners should have known that the claimed interest deductions were too good to be true given the gross disparity between the (1) amounts of the interest deductions and the (2) economic cost of the transactions.

JAT Comments:

1. My forays into bullshit tax shelters leads me to believe that many taxpayers were willing to pay exorbitant opinion letter costs in order, they hoped, to play the audit lottery on the transactions with no cost other than the transaction fees they incurred to do the transactions; specifically, if caught by the IRS, they would be required to pay the tax and interest but could avoid the penalty (or at least hoped)  by claiming reliance on the opinion. I suspect but do not know, that many of the taxpayers involved tried an extra layer of protection by engaging a tax attorney separate from the one issuing the opinion letter to opine as to the transaction and potential for penalty protection.

2, Although there is no indication that the Stevens sought such an independent opinion, it is clear from the facts that they viewed the opinion as penalty protection. And, perhaps that might have worked, had the attorney (Rubinger) not effectively retracted the opinion.

3. Stevens is an object lesson about emails. Emails have played a major part in prosecuting tax professionals who put together the bullshit tax shelters. Emails also play a significant part in prosecution of white collar crime generally. And, as Stevens indicates, emails can be a major factor in civil litigation over the merits of tax shelters and penalties.

4. (Added 5/17/25 @ 6:15 pm) Bob Steinberg, here, forwarded this poem which he wrote and submitted to an ABA publication (Robert S. Steinberg, It was Too Good to be True, 35 ABA Tax Times (October 2015), here):

IT WAS TOO GOOD TO BE TRUE

(To tune of “Can’t Take My Eyes Off of You,” by Bob Crewe & Bob Gaudio and made popular by Frankie Valli)

Verses

It was too good to be true  

He said no tax would be due

Still I bought into his deal

Greed has a cunning appeal

With blinkers over my eyes

No tax for me was the prize

In all this nothing is new

It was too good to be true

Yet for two years it was grand

Just as that tax lawyer planned

Who knew that he was a crook

Selling me gobbledygook

Till IRS trolled the facts

And told me I owed the tax

And I owed penalties too

It was too good to be true

 

Chorus

I should have told him

That he was full of crap

I should have told him

That I’m no shelter sap

I should have told him

But I didn’t tell him that.

Should have known better

And recognized a kitsch

Should have known better

Swung for the sucker’s pitch

Should have known better

I should have known better.

 

Verse

It was too good to be true

Taxpayers I’m warning you

Don’t fall right into the trap

Don’t be a tax shelter sap

Beware of those who would sell

In your head should ring a bell

Telling you caution is due 

When it’s too good to be true.