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, 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.

Government Files Collection Suit in Liberty Global Raising Procedural Issues (10/8/22; 10/12/22)

I  previously reported on a refund suit in which the court held invalid the IRS’s temporary regulation that, if valid, would have taxed a complex structured transaction designed to avoid tax.  See Court Invalidates Regulation for Invalidity of Good Cause Statement (Federal Tax Procedure Blog 4/6/22), here, discussing Liberty Global, Inc. v. United States (D. Colo. Dkt. 1:20-cv-03501-RBJ #46 Order dtd. 4/4/22), CL here and GS here,  The holding in the case was not a holding that disposed of the entire case, so it remains pending.

On October 7. 2022, the Government filed a complaint and then an amended complaint in a new case seeking to collect additional tax for the same year as involved in the prior case noted in the above paragraph.  See United States v. Liberty Global Inc. (D. Colo. Civ. # 1:22-cv-02622), CL dkt entries here (with the original complaint at dkt entry 1 and the amended complaint at docket entry 4) (I have not compared the original and amended complaints, but focus on the amended complaint here.) The amended complaint seeks judgment in amount (final amount to be determined) of $283,965,223 (including 20% accuracy-related penalty).

I don’t claim to understand the complexity and steps of the transactions at issue, but just note that, according to the amended complaint, it was a structure with 4 steps involving foreign entities related to Liberty Global, with 3 steps being without substance but necessary to facially qualify Liberty Global for the tax benefit claimed at step 4.  The 3 steps, the amended complaint claims, were without substance. should be disregarded for federal tax purposes, and thus the claimed benefit at step 4 should be denied.

The United States asserts in the amended complaint (par. 31) that it will seek to consolidate the case with the earlier refund case.

JAT Comments:

1. This tax strategy--more properly bullshit tax shelter if the Government’s claims are true --appears to have been a promoted shelter by Deloitte rather than something Liberty Global cooked up.  (See Amended Complaint par. 7.)  And, if the Government’s claims are true, the claimed tax benefits of the structure are a gaping loophole to what Congress meant to cover in the statute.  In other words, too good to be true but may be true anyway. (Presumably, as with past such shenanigans, Deloitte got paid based on some “value-added” basis rather than reasonable fees related to the work done.) 

2. As best I understand it, the temporary regulations invalidated in the refund case and also involved in the new collection suit were designed to address the gambit Liberty Global and Deloitte attempted to exploit. According to the complaint (par. 26), Liberty Global reported on its initial 2018 return consistent with the temporary regulations.  Just over 2 months after filing the original return, Liberty Global filed an amended return claiming a refund of $95,783,237 based on the invalidity of the temporary regulation.  As noted above, the court held in that refund suit that the temporary regulation was invalid, but the matter is still pending in the district court apparently to address other issues as to whether Liberty Global is entitled to a refund. I presume that the disclosures on the amended return were adequate to put the IRS on notice of the game being played, although disclosure does .  (I discuss below in paragraph 4 the § 6676 Erroneous claim for refund or credit penalty, which has no relief for adequate disclosure as allowed in some § 6662 accuracy-related penalties, including the economic substance accuracy-related penalty.)

Exxon Strikes Out on Its Tax Refund Claims But Dodges the § 6676(a) Penalty Bullet (8/4/22; 8/8/24)

In Exxon Mobil Corp. v. United States, 43 F.4th 424 (5th Cir. 8/3/22), CA5 here and GS here, Exxon Mobil (“Exxon”) filed a mammoth claim for refund claiming that it had misreported two separate tax matters on its original income tax return.  The first item it misreported (paying more tax than it claims was due) was worth “worth a billion dollars” related to the proper tax treatment of payments arising from an oil and gas transaction.  Related to this first claim, the IRS imposed a § 6676(a) 20% penalty worth about $200 million.  The second item, called by the Court a “purported blunder” (not a good sign to use the purported adjective) “this one worth $300 million,” about how to treat the renewable fuel tax credit.

I have two gut level comments.  

First, Exxon has and has had for a number of years one of the best tax departments ever and certainly the funding to buy the best outside legal talent available.  (General Electric used to claim that it tax department was the best law firm ever, but as those who have been watching, General Electric’s supposed inside best tax firm got them into bullshit tax shelters, so much for the best claim.)  So, why would these supposed legal giants overreport Exxon’s tax liability?  The answer as this new case determines, Exxon did not overreport the tax liability.  

Second, so what is this, shall I call it bullshit, about an amended return claiming that their legal geniuses overreported Exxon’s tax liability by $1.3 billion.  (I am sure those legal geniuses had a sigh of relief over this outcome.) And while many might claim that $1.3 billion for Exxon is pocket change, still that is the stuff that tax department promotions and pay is based on (and for outside counsel litigating aggressive positions, contingency fees).