Tax Court Rejects SCE’s Hail Mary Jarkesy Pass (8/21/25)

In Silver Moss Properties, LLC v. Commissioner, 165 T.C. ___, 1No. 3 (2025) (T.C. Dkt. No. 10646-21, here, at Entry # 109, GS [here])), the Court acting as referee called out that Taxpayer’s Hail Mary pass* to avoid the civil fraud penalty. Since the Tax Court (or someone for it) has already stated the essence of the case in a Headnote, I just copy and paste it here:

           A partnership subject to the audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, 96 Stat. 324, donated a conservation easement and claimed a charitable contribution deduction under I.R.C. § 170. P, the tax matters partner, timely petitioned this Court challenging the IRS’s Notice of Final Partnership Administrative Adjustment. R later amended his Answer to assert a civil fraud penalty against the partnership under I.R.C. § 6663(a).

          P filed a Motion for Partial Summary Judgment, citing SEC v. Jarkesy, 144 S. Ct. 2117 (2024), and contending that this Court is barred from adjudicating the civil fraud penalty because U.S. Const. amend. VII guarantees a right to trial by jury in such actions, which is not an option in this Court.

          Held: U.S. Const. amend. VII does not apply to suits against the sovereign, and Congress has not otherwise consented to trial by jury in TEFRA partnership-level actions.

          Held, further, the “public rights” exception to U.S. Const. amend. VII applies to a civil fraud penalty under I.R.C. § 6663(a).

          Held, further, this Court may adjudicate an I.R.C. § 6663(a) civil fraud penalty.

This plaintiff in the case appears to be a Tax Matters Partner for an LLC taxed as a partnership, which appears to be the favored format for the flurry of bullshit Syndication Conservation Easement ("SCE") tax shelter cases plaguing the Tax Court now with wholly inappropriate drains on the Tax Court's , the IRS’s and the public fisc resources. I don't know if this particular case involves an abusive tax shelter, but it seems to have the same earmarks, including the same lawyers involved in some of the abusive shelter cases. 

 JAT Comments:

1. (Warning, this is a multi-paragraph comment #1): In this case, the IRS did not originally assert the civil fraud penalty, §6663, in its FPAA. The Court granted the IRS motion for leave to file the amended answer asserting the fraud penalty based on discovery from the petitioner. (See Docket entry # 37.) I presume that the FPAA originally asserted the 40%  gross overvaluation penalty. §6662(h), a penalty that is almost always finally applied by the Tax Court in these  SCE cases, if properly asserted, because well simple mathematics shows a gross overvaluation. So, the difference is 25% (which, like civil penalties, generally accrues interest from the date the return was due). Which means that the cost of playing the audit lottery can be more than the taxpayers (encouraged by the promoters who promoted bogus valuations and bogus legal opinions) counted on.

Tax Court Rejects a Bullshit Tax Shelter False Valuation Claim with Warning of Sanctions for Taxpayers, their Counsel, and Expert Witness Proffering the Bullshit (7/16/25; 9/10/25)

Note a significant addition was made on 9/10/25 @ 5:30pm at end of this blog entry.

I write today on a “dictated” oral decision at the conclusion of trial in Veribest Vesta, LLC, True North Resources, LLC, v. Commissioner (T.C. Dkt # 9158-23; docket entries here at docket # 199). Bottom line, the taxpayer’s (only because they got caught) claim went “True South.”

Note on Tax Court Orders: Orders can be relatively short dealing with routine procedural matters or may be longer when they serve the same function as T.C.M. opinions. Juge Buch’s opinion is the latter sort where he enters as an a one-page order attaching his lengthy findings of fact and conclusions dictated into the record at the close of the lengthy trial. This Order serves as the report (same as T.C. and T.C.M. opinions) required by § 7459(a), here. One difference between an Order and the other Tax Court opinions is that the Order does not list counsel. Readers can identify counsel for the parties by clicking the docket entries link above and clicking at the box on upper right for a printed docket sheet.

Veribest involved a standard plain vanilla bullshit Syndicated Conservation Easement shelter, with many Tax Court opinions and Circuit Court affirmances in other similar cases preceding Veribest in essence calling out the bullshit. Some cases have been decided on other grounds, but there was always a common problem of false hyper-inflated valuations of the easements; often (I can’t say always) the valuations claimed were many, many times the real cost of the whole property (including the easement) reasonably close to the date the easement was carved out and “donated” to a willing “charity.” There could be several procedural footfaults for claiming deductions, but false overvaluations have been a common feature of many bullshit tax shelters since the days of Jackie Fine Arts and Barrister. Old timers will remember those shelters from the 1970s and 1980s.

In the SCE cases that have barraged the Tax Court dockets with much wasted resources involving many lawyers making lots of money, one feature has been the taxpayers (through their lawyers making lots of money) proffering expert witnesses who lack credibility. I include at the end of this blog some earlier blog offerings in bullshit tax shelters (including one-off rather than syndicated) with valuations that were not credible.

Today, I want to note Judge Buch’s warning of the potential for Section 6673 penalties. Section 6673, here, is titled “Sanctions and costs awarded by courts.” The Section permits the Tax Court to award costs:

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.

Court Dismisses Bivens Claim Against IRS Agents for Asserting Accuracy-Related Penalties (4/21/25)

In Ray v. Priver, et al., 2025 U.S. Dist. LEXIS 71600, 2025 WL 1113406 (D. D.C. 4/15/25), CL here and GS here, The Court dismissed Ray’s Bivens actions against IRS agents that, he claimed, violated his constitutional rights in the IRS’s assertion of the accuracy-related penalty under § 6662(b)(1) and (2) and then in improperly influencing the Tax Court’s sustaining of the penalties in Ames v. Commissioner, T.C. Memo. 2019-36, GS here, aff’d in part and reversed in part with respect to a portion of the penalties, Ray v. Commissioner. 13 F.4th 467 (5th Cir. 2021), after remand motion to Reopen the Record denied in Tax Court (10/28/22), aff’d on appeal Ray v. Commissioner, 2023 U.S. App. LEXIS 21799, 2023 WL 5346067 (5th Cir. 8/18/23), GS here*, and petition for rehearing denied Ray v. Commissioner, 2023 U.S. App. LEXIS 27464 (5th Cir. 10/16/23). At the end of all that commotion from the main Tax Court case in 2019, Ray was liable for some of the accuracy-related penalty but not for a portion for which the Court of Appeals reversed the Tax Court on its denial of the “reasonable cause” defense.

I asked Gemini, Google’s AI Tool, to summarize the case. The following is the result which I have massaged somewhat (reminder these AI Tools, while good, need to be carefully reviewed and revised as appropriate).

Background:

• In 2014, the IRS audited Ray and issued a notice of deficiency, including a penalty under 26 U.S.C. § 6662(a) & (b)(1) (negligence or disregard) (b)(2) (substantial understatement).
• Ray claims this penalty was unwarranted, alleging that two other IRS agents found insufficient evidence for it. He asserts that Lawson and Priver knew this but still pursued the penalty and falsified evidence in his administrative file.
• Ray initially challenged the penalty in Tax Court, where he alleges Priver and Lawson repeatedly lied and falsified evidence. The Tax Court upheld the penalty, but the Fifth Circuit reversed finding Ray not liable for some of the penalty based on reasonable cause. On remand, the Tax Court entered decision sustaining the deficiency and the portion of the penalty approved by the Fifth Circuit.
• Ray later obtained files through a FOIA request, which he claims revealed that Priver and Lawson maliciously prosecuted the penalty claim and concealed exculpatory evidence.

Claims:

• Ray sued Priver and Lawson in their individual and official capacities, alleging what he called a Bivens action:
• Count I: Malicious prosecution in violation of the Fourth Amendment.
• Count II: Denial of a fair trial under the Fifth Amendment's Due Process Clause.

Defendants' Motion to Dismiss:

• Defendants moved to dismiss, arguing:
• Improper service (later moot due to government acceptance of service).
• Sovereign immunity bars official-capacity claims (conceded by Ray).
• Failure to state a claim against individual defendants under Bivens v. Six Unknown Named Agents of Federal Bureau of Narcotics.

Court's Ruling:

• The Court GRANTED the Defendants' motion to dismiss.
• The Court agreed that Ray's claims against Priver and Lawson in their official capacities are barred by sovereign immunity.
• Regarding the individual-capacity claims, the Court applied the two-step Bivens analysis:
• New Context: The Court found that Ray's claims arise in a "new context" because they involve IRS employees, a different statutory mandate (Internal Revenue Code), and do not align with the specific constitutional violations in the three previously recognized Bivens cases (Fourth Amendment unreasonable search and seizure, Fifth Amendment sex discrimination, and Eighth Amendment cruel and unusual punishment).
• Special Factors: The Court found "special factors" counseling against a new Bivens remedy, primarily the existence of a comprehensive alternative remedial scheme within the Internal Revenue Code. This scheme includes administrative review, the ability to sue for a refund, challenging assessments in Tax Court, and the Treasury Inspector General for Tax Administration (TIGTA) for investigating employee misconduct. The Court emphasized that even if these remedies don't provide complete relief (like monetary damages), their existence is sufficient to preclude a new Bivens action. 

• JAT Addition: The Court relied significantly on the Supreme Court’s admonition that expansions from past Bivens applications is “now a ‘disfavored’ judicial activity.” Hernandez v. Mesa, 589 U.S. 93, 102 (2020); and Ziglar v. Abbasi, 582 U.S. 120, 135 (2017) (citing Ashcroft v. Iqbal, 556 U. S. 662, 675 (2009)). 

Conclusion:

The Court concluded that Ray's case presents a new Bivens context, and the presence of an existing remedial scheme within the Internal Revenue Code constitutes a "special factor" that makes it inappropriate for the judiciary to imply a new damages remedy against individual IRS employees. Therefore, the Court dismissed Ray's amended complaint.

JAT Comments:

Another Bullshit Tax Shelter Goes Down; On Frank Lyon (4/17/25)

Judge Lauber nails another bullshit tax shelter in GWA, LLC v. Commissioner, T.C. Memo. 2025-34, TC here at Dkt # 357, GS here [to come] and TN here. Suffice it to say that Judge Lauber was not confused by the smoke and mirrors the taxpayer threw up on the proverbial wall. The key issue is whether the financial contract was an option contract or an ownership contract. For the tax benefits, the taxpayer wanted to treat it as an option contract, the form in which it appeared; the taxpayer argued it was an option contract that permitted deferral and ultimate favorable tax treatment; the IRS asserted it was an ownership contract not allowing such treatment. Other issues were (i) whether the treatment as an ownership contract was, under the facts, a change of accounting requiring a § 481 adjustment (it did) and (ii) whether the taxpayer was subject to penalties (it is).

I write to discuss the role of Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1978) in the opinion. Frank Lyon was a disaster of an opinion, and my principal poster child as to why tax cases are too important to have the Supreme Court decide them. (That is hyperbole, of course, but not much.) In Frank Lyon, the Court, while nominally honoring the venerable tax concept of substance over form, entered a fact-intensive multi-element inquiry to bless the form of a sale-leaseback transaction with tax ownership benefits (depreciation) going to the nominal lessor (Frank Lyon). I think that most careful observers of Frank Lyon believe that Frank Lyon was incorrectly decided. E.g., Charles I. Kingson, How Tax Thinks, 27 Suffolk U. L. Rev. 1031, 1034-35 (2004). “few [tax] shelters are shoddier than those approved by the Court in Lyon and Brown [Commissioner v. Clay B. Brown, 380 U.S. 563 (1965)]”; and Bernard Wolfman, The Supreme Court in the Lyon's Den: A Failure of Judicial Process, 66 Cornell L. Rev. 1075, 1098 (1981). Still, perhaps saving the day, courts generally find enough in Frank Lyon to reject bullshit tax shelters, as Judge Lauber did in GWA, LLC v. Commissioner.

I won’t get into a back story on Frank Lyon in which I was peripherally involved at DOJ Tax. Perhaps I will write on it sometime, in order to explain why, in my judgment, the Court imprudently granted the petition for certiorari in the first place and then wrote the opinion the way it did (in my view imprudently, rather than DIG the case). Nevertheless, that should not detract from the opinion on its four corners. Since Frank Lyon, most of the bullshit tax shelter legal opinions cite and claim to rely on Frank Lyon. Most judicial opinions cite Frank Lyon in shooting down bullshit tax shelters.

Tax Court Rejects Bullshit Syndicated Conservation Easement Shelter for the Usual Reasons (3/31/25)

In Ranch Springs, LLC v. Commissioner, 164 T.C. ___, No. 6 (3/31/25), links below *, the Tax Court rejected another bullshit tax shelter, here of the syndicated conservation easement ilk. The fact pattern for this ilk of bullshit tax shelter may be simply stated: a grossly overvalued property contributed to charity for charitable easement purposes. The holding highly summarized is:

• the real value is determined in an amount grossly less (joining grossly and less may not be good English, but readers will get the concept); and
• the 40% gross valuation misstatement penalty applies because, well, the valuation was grossly misstated.

A more detailed summary is found in the Syllabus and, for those wanting more, in the 66-page opinion (actually 64 excluding the caption and the Syllabus), but that is the guts of the holdings.

These are unexceptional holdings, in my opinion, so I am not sure why the Court designated this a “T.C.” opinion rather than a “T.C. Memo.” opinion. The parts I found interesting (set forth below) are hardly the stuff of which T.C. opinions are usually made. Perhaps the reason is in the third “Held” conclusion in the Syllabus relating to the proffered “before value” found to be erroneous as a matter of law as follows:

Held, further, assuming arguendo that limestone mining was a permissible use, the version of the income method P’s experts used to determine the “before value” of the property is erroneous as a matter of law because it equates the value of raw land with the net present value of a hypothetical limestone business conducted on the land. A knowledgeable willing buyer would not pay, for one of the assets needed to conduct a business, the entire projected value of the business.

. Oh well…..

So, what did I find interesting?

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 here**. 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.

Court Cannot Determine on Motion to Dismiss Malpractice and Related Claims from Bullshit Tax Shelter that the Statute of Limitations from 1997 Was Not Tolled (9/24/24)

In Cáceres v. Sidley Austin LLP (N. D. GA No 1:23-cv-00844 Dkt # 35 Opinion & Order dated 9/17/24), TN here and CL here, the Court denied the motion to dismiss filed by Sidley Austin (“Sidley,” the giant law firm, here). The Cáceres engaged R.J. Ruble, then a partner at the predecessor firm of Brown & Wood, to opine about a 1997 Midco transaction, an abusive tax shelter transaction in which the Cáceres sought to avoid the double tax upon sale of their corporate business. For an explanation of the Midco transaction, see FTP Practitioner Edition pp. 797-798 and Student Edition p. 537; and for Federal Tax Procedure Blog discussions of Midco transactions, here. Basically, tax shelter promoters use a variety of abusive techniques to avoid the built-in corporate level gain and then the sellers and the promoters share the tax thus illegally evaded, leaving the IRS without the tax. Usually, the promoters use a bullshit tax shelter to try to shield the corporate level tax, and when that tax shelter is denied, there is no money to pay the tax, requiring the IRS to seek the tax from third party such as the Cáceres.

At the motion to dismiss stage, the well-pled pleadings are analyzed to see if they pled sufficiently that, if the allegations and claims are true, a case had been stated. (This is before any factual development by discovery and cannot consider facts outside the complaint that a party may know; it is just a test of the sufficiency of the complaint.) The issue on the motion to dismiss was whether on the facts pled the statute of limitations barred the suit. The underlying transactions (including the legal opinion) were in 1997; this particular suit was brought in state court in 2023 and removed to federal court in 2023. Various claims in the complaint had statutes of limitations that were much shorter than the 20+ years that intervened from the 1997 accrual of the actions claim in the complaint. The question was whether, on the facts pled and claims made, the relevant statutes of limitations were tolled because of Sidley’s actions in hiding its alleged misconduct. The Court held that, on the facts pled, it could not determine that the statute of limitations had not tolled, so the case survived the motion to dismiss.

Perhaps the key fact was the IRS commencement in 2018 of a transferee liability suit under § 6901 against the plaintiffs as shareholders wrongfully sharing the corporate-level tax illegally avoided. See United States v. Henco Holding Corp., 985 F. 3d 1290 (11^th Cir. 2021), here. (Of course, significant audit commotion would have likely preceded for years the filing of the transferee liability suit, but the issue was whether on the facts pled,  the plaintiffs had been fairly put on notice as to the causes of action at a time outside the limitations period.) As described by the Court, the Cáceres alleged (Slip Op. 14-15)

Substantial § 6700 Promoter Penalty Case Involving Refund Suit and Counterclaim Settled for $5,200,000 (5/25/24)

In Clark v. United States (S.D. Fla. 9:21-CV-82056), CL docket entries here, the taxpayer, Celia R. Clark, an attorney active in the promotion of microcaptive insurance companies for certain claimed tax advantages, brought a suit for refund of § 6700 penalties in the amount of $1,745,544. That amount represented 15% of the aggregate § 6700 penalties of $11,636,919 required in order to meet the jurisdictional requirement (special rule to avoid the Flora full payment requirement) for refund suits for the § 6700 penalties. See Complaint, here, paragraphs 65-67). (Actually, the aggregate amount paid was slightly in excess of 15% of the aggregate penalties.)

The 6700 penalty here for false or fraudulent misstatements as to a material matter is 50% of the gross income derived or to be derived from the penalized conduct. The penalized conduct is the organization or participation in a plan or arrangement in which the person furnishes or causes to be furnished a statement that the person “knows or has reason to know is false or fraudulent as to any material matter.”  being the organization or participation in the sale of a plan or arrangement that claims false tax benefits. I discuss the  § 6700 penalty and the § 6703(c) relief from Flora full payment requirement in my Federal Tax Procedure Book (Practitioner Ed. 2023.2), here, at pp. 853-856.

In the Government’s Answer and Counterclaim, here, the Government responded to the allegations in the complaint and sought judgment for $10,095.359 (Answer pp. 26-27, which seems to be the net amount after application of Clark’s payments with some add-ons.) Among the allegations in the Answer and Counterclaim are (i) a mélange of facts implying or proving (if proved) that Clark knew or had reason to know of the falsity of the scheme and documents implementing the scheme (Answer pp. 16-25, ¶¶ 16-85) and (ii) “From 2008 through 2016, Clark, through her law firm, earned over $23 million in fees from the microcaptive insurance programs.” (Answer p. 25 ¶ 87.) I infer that the alleged aggregate fee amount was the basis for the penalties exceeding $11 million.

Taxpayers Should Be Prosecuted Along with Enablers of Abusive Tax Shelters (3/8/24)

This blog entry is an opinion piece. Individual taxpayers should be prosecuted along with their enablers who promote and implement the abusive shelters (particularly enablers from the tax professions).

The following is from a report of Attorney General Garland's comments (Kerry K. Walsh Deborah A. Curtis Amy Jeffress, “Swift” Justice: Attorney General Garland Vows To Uphold DOJ Priorities in Fireside Chat (Arnold & Porter 3/6/24), here):

Additionally, AG Garland explained how DOJ’s three co-equal priorities — upholding the rule of law, keeping America safe, and protecting civil liberties — implicated corporate accountability. AG Garland stressed that the greatest deterrent of white collar crime is holding individual corporate executives to account. AG Garland also reiterated the importance of applying the rule of law equally, regardless of rank or position of power.

I supplied the bold-face to emphasize the point. There has been a perception that, by delivering up the corporation (or other entity) for criminal consequences, the people in the corporations (collectively, the executives) could escape accountability.

A similar perception and resulting phenomenon exists in the tax area where the promoters of abusive tax shelters (think, for example, the Son-of-Boss shelters in the late 1990s and early 2000s) were prosecuted, but the taxpayers generally were not. Yet all of those taxpayers or at least most of them knew that they were violating the law and participated in the fraud. For example, the abusive shelters wrapped in complex structures and voluminous more-likely-than-not opinions, required at the minimum that the taxpayers represent to the promoters that they had a nontax profit motive when, in fact, they did not. That was a lie that was essential to abusive tax shelter. Moreover, most of those wealthy taxpayers had independent counsel (other than the ones supplied or recommended by the promoters) before buying into the deal. Assuming that most of those independent counsel were competent, those taxpayers knew that the deals were bogus, but nevertheless sought to buy fraud insurance through the legal opinions rendered by the promoter’s supplied or recommended counsel (as opposed to their own independent counsel). That worked as insurance.

My argument has been that the way to discourage abusive tax shelters is to prosecute the taxpayers along with the promoters. This would discourage the tax professional penalty insurance industry and abusive tax shelters generally.

This blog entry is cross-posted on the Federal Tax Crimes Blog here.

Tax Court Denies Petitioner Summary Judgment on Transferee Liability (2/6/24)

In Meyer, Transferee v. Commissioner, T.C. Memo. 2024-15 (2/5/24), TC Dkt Entry # 44, here, TN here, and GS here, the Court denied the petitioner’s motion for summary judgment in a transferee liability case. The petitioner argued that (i) the statute of limitations for the IRS’s transferee liability claim was not timely under the statute of limitations, (ii) collateral estoppel precluded the IRS claim, and (iii) judicial estoppel precluded the IRS claim. The estoppel claims denials are straightforward. I focus here on the first claim about the statute of limitations.

The underlying transaction at issue was a typical Midco abusive tax shelter transaction (I have often called abusive tax shelter transactions bullshit tax shelters). I assume readers are familiar with Midco transactions. An example with a good discussion is in Tax Court (Judge Lauber) Rejects Shareholders' Attempts to Reduce Transferee Liability (Federal Tax Procedure 2/10/22). I will offer a high level overview of the Midco transactions (which have variants but with common result of an empty corporation with a very large tax liability). A Midco transaction involves a third party purchasing, directly or indirectly, stock of a corporation with very large built-in gain from shareholders for a price exceeding what they would obtain if the corporation sold the assets and distributed the cash. After the purchase, the buyer sells the assets and enters an abusive tax shelter transaction (such as the Son-of-Boss involved in this case) to supposedly offset the gain, and then strips out to assets (mostly cash) to leave the corporation empty when the IRS audits and disallows the tax shelter transaction. The supposed tax “savings” is shared by the shareholders (through the purchase price) and the promoters, leaving the IRS (and the country’s taxpayers) holding the bag in the empty corporation. Remember for the balance of this discussion that all of this hinges on the fraudulent Son-of-Boss transaction. In other words, the initial corporate transferor with the unpaid tax liability engaged in fraudulent reporting.

In Meyer, Transferee, the IRS asserted transferee liability under § 6901 by treating the corporate-level transactions as including a deemed transfer to the petitioner as transferee (rather than as a seller of the stock to a third party). For an initial transferee, such as the petitioner, the statute of limitations for transferee liability does not expire until one year “after the expiration of the period of limitation for assessment against the transferor.” § 6901(c)(1).

As posited by the Court, the first step is to establish when the statute of limitations expired on the deemed transferor—the sold corporation engaging in the Son-of-Boss transaction and fraudulently reporting the transaction to zero out the gain on the return. Normally, the limitations period is 3 years. And, the Court worked on the assumption that the 3-year period would have applied and counted certain other extensions or suspensions that extended the corporate transferor’s limitations period. The Court’s analysis is fairly straightforward, so I won’t rehash that here.

Promoters of Abusive Conservation Easement Deductions Enjoined from Similar Conduct (3/23/23)

The Court entered Final Judments of Permanent Injunctions against promoters of abusive conservation easement tax shelters (a genre of bullshit tax shelters). The promoters enjoined are Ecovest Capital,   Ecovest Capital, Inc., Alan N. Solon, Robert M. McCullough, and Ralph R. Teal, Jr and Claud Clark III. The Final Judgments are (i) for Claud Clark III here; and (iii) for the remaining defendants here.  The Courtlistener docket entries with links to the pertinent documents most of the key documents in the proceeding are here. The terms summarized are:

(i)  enjoined from participating in any way in a plan or arrangement that involves a deduction for a qualified conservation contribution under 26 U.S.C. § 170(h)”,

(ii)  provide annual statements under penalty of perjury to the IRS and DOJ Tax for the next six years that they have not so participated,

(iii) contact all persons for whom appraisals were provided and all employees or other persons participating in the appraisals, provide them a copy of the Final Judgment of Permanent Injunction, and provide a list of such persons to DOJ Tax;

(iv)  prominently display on the website a copy of the Final Judgment of Permanent Injunction and

(v)  allow, through the Court’s retained jurisdiction, DOJ Tax to take civil discovery to monitor compliance.

I have not focused on the relief requested in the amended complaint (Doc 225 in the docket entries), but I did note that DOJ Tax sought disgorgement in Court V and Relief Sought ¶ m.  The Final Judgment of Permanent Injunction does not address disgorgement. Further in the complaint, the request for the injunction was to enjoin conduct subject to certain IRC penalty provisions (§ 6700, § 6695A, § 6694).  Those specific references are not included in the Final Judgment of Permanent Injunction but the description of the enjoined conduct probably covers conduct under the sections. There is no admission of liability for the penalties.

 A similar consent judgment was previously entered for Nancy Zak. (See Doc 271 and Doc 167 Attachment  1.) 

Court Sustains Almost $350 Million Jeopardy Assessment Arising from Sham / Bullshit Tax Shelter (9/18/21)

In Kalkhoven v. United States, 2021 U.S. Dist. LEXIS 175844 (E.D. Cal. 9/15/21), CL here, the Court sustained the IRS’s jeopardy assessment against Kevin Kalkhoven, a venture capitalist (Wikipedia, here).   Section 6861 allows the IRS to assess tax, such as income tax, which is otherwise subject to the prohibition on assessment in § 6213(a).  Students will recall that § 6213(a), the central feature of the deficiency notice preassessment litigation system, prohibits assessment before the issuance of a notice of deficiency and, if the taxpayer petitions the Tax Court for redetermination, until the Tax Court decision becomes final.  The delay in assessment, particularly if a Tax Court petition is filed, can be substantial.  And, when the tax liability relates to a TEFRA partnership, as here, further delays are encountered if the partnership litigates as it did here.

Section 6861 allows a jeopardy assessment to permit immediate assessment where the IRS determines that the collection of the as yet unassessed tax is in jeopardy.  The IRS determined that collection of tax was in jeopardy because of the large amount of tax to be assessed in the future because of Kalkhoven’s investment in the Son-of-Boss sham (aka, in my words, bullshit) tax shelter in BCP Trading and Investments, LLC v. Commissioner, 991 F.3d 1253 (D.C. Cir. 2021).  He had also invested in another such shelter, Woodside Partners v. Commissioner, docket no. 5685-16 (expected to generate a $25 million tax for Kalkhoven).

As a result of expected tax liabilities from these “investments,” the IRS made jeopardy assessments, under § 6861, totaling almost $350 million  (Gov’t response, Dkt # 22, p. 1.)  The IRS followed the procedure in § 7429 for appropriate approvals.  Kalkhoven invoked his right for expedited internal review in Appeals and then, upon obtaining no relief, for expedited judicial review in the district court.  The Court rejected his claim to relief, thereby sustaining the IRS’s jeopardy assessment.  The opinion is short (12 pages), so I recommend it, particularly for tax procedure students.  

Sustaining the jeopardy assessment is not a determination that the taxpayer actually owes tax in the amount assessed; it is just a determination that, on the facts known to the IRS, it is reasonable to believe that tax is due and collection is in jeopardy.  For more on the jeopardy assessment process, see the discussion on my 2021 Federal Tax Procedure Book (Practitioner Edition), here.

For further background, readers might want to review the docket entries in the case (CourtListener here, which permits some of the key documents to be viewed or downloaded).

 

Corporate Taxpayer (AIG) "Settles" Tax Shelter Litigation Admitting Tax Shelters Were Shams (10/24/20)

 The SDNY U.S. Attorney (Acting) issued this stunning press release yesterday:  Acting Manhattan U.S. Attorney Announces Settlement Of Tax Shelter Lawsuit Against AIG For Entering Into Sham Transactions Designed To Generate Bogus Foreign Tax Credits (USAO 10/23/20), here.   Key excerpts for this blog entry (most of the release) are:

Audrey Strauss, the Acting United States Attorney for the Southern District of New York, announced today the settlement of a tax refund lawsuit brought by insurance and financial services company AMERICAN INTERNATIONAL GROUP, INC. (“AIG”) involving seven cross-border financial transactions that the United States asserted were abusive tax shelters designed to generate bogus foreign tax credits that AIG improperly attempted to use to reduce its tax liabilities in the United States.  AIG filed this tax refund lawsuit in 2009, seeking to recover disallowed foreign tax credits and other taxes related to the 1997 tax year.  The United States obtained overwhelming evidence that these transactions lacked any meaningful economic substance, were devoid of any legitimate business purpose, and instead were designed solely to manufacture hundreds of millions of dollars in tax benefits to which AIG was not entitled.  According to the terms of the settlement, approved yesterday by United States District Judge Louis L. Stanton, AIG agreed that all foreign tax credits that AIG claimed for the 1997 tax year and all later tax years for these same transactions, totaling more than $400 million, would be disallowed in their entirety.  AIG further agreed to pay a 10% tax penalty.

Acting U.S. Attorney Audrey Strauss said:  “AIG created an elaborate series of sham transactions that were designed to do nothing – and in fact did nothing – other than generate hundreds of millions of dollars in ill-gotten tax benefits for AIG.  Our system of taxation is built upon the premise that all citizens and corporations must pay the taxes they owe, no more and no less.  People and companies who game that system to avoid paying their fair share of taxes undermine public trust in our tax laws.  We will continue to be vigilant in holding accountable those who use economically empty transactions to avoid paying their taxes.”

As alleged in filings in Manhattan federal court:

During the mid-1990s, AIG Financial Products Corp. (“AIG-FP”), a wholly-owned subsidiary of AIG, designed, marketed, and entered into seven cross-border structured finance transactions with various foreign banks.  These complicated transactions, involving hundreds of agreements, numerous shell companies, and intricate cash flows, had no economic substance but rather exploited differences in U.S. and foreign tax laws to create profits from U.S. tax benefits.  In particular, the transactions generated more than $400 million in foreign tax credits that AIG used to reduce its U.S. tax liabilities.  The U.S. has a worldwide tax system that taxes companies on income earned abroad, but also grants credits for foreign taxes paid.  AIG, was able to turn a profit by obtaining credits from the U.S. Treasury for foreign taxes it did not actually pay in full.  AIG obtained more than $61 million in foreign tax credits during the 1997 tax year alone, the tax year resolved by the settlement. 

In 2008, the Internal Revenue Service (“IRS”) issued a Notice of Deficiency to AIG that, among other things, disallowed the foreign tax credits AIG had claimed in connection with the seven transactions and asserted a 20% tax penalty.  In 2009, after paying the deficiency, AIG filed a lawsuit against the United States in Manhattan federal court challenging the IRS’s determination and demanding a refund.  In response, the United States asserted that the IRS had correctly disallowed the tax benefits because the transactions had no economic substance, a basic requirement for seeking tax benefits. 

According to the terms of the Settlement, AIG agreed that all foreign tax credits that AIG claimed in connection with the seven cross-border transactions that were the subject of the litigation would be disallowed in full for the 1997 tax year and all subsequent tax years during which the transactions were operating, totaling more than $400 million.  AIG further agreed to pay a 10% penalty.  The settlement allows AIG to retain certain income expense deductions relating to six of the transactions that were structured as borrowings, as well as remove certain amounts related to the transactions from its taxable income.  In addition, the settlement resolves certain of AIG’s tax refund claims unrelated to the cross-border transactions stemming from AIG‘s restatement of its publicly filed financials.

One nuance not in the press release is that the press release suggests that the penalty is 10%.  The IRS originally proposed a substantial understatement penalty and a negligence penalty.  Both of those penalties are 20% but only one can apply, so that the taxpayer's maximum exposure before the settlement was 20%.  Under the settlement, the taxpayer concedes the substantial understatement or negligence penalties for the bullshit transaction.  (See paragraph 7 of the Stipulation and Order of Settlement.)  That might suggest that the settlement could be read to imply some level of merit in the taxpayer's position, although I suspect that, from the Government's perspective, it was viewed that as simply a nuisance cost to the Government to resolve this bullshit litigation without expenditure of resources required to litigate the matter.

Of course, large corporations who should know better making sham (aka bullshit) tax shelter claims are not particularly unusual as I have noted on this blog.  But this litigation has one nuance that jumped out that I had not really focused on before – that is, the role of counsel bringing suits to sustain tax shelters that are shams.  I guess that problem lurked in all of the other civil litigation involving bullshit tax shelters.  But it just hit me here.  (I never personally had to face that issue because over my career of practice, I declined to represent taxpayers or promoters in civil tax cases involving bullshit tax shelters; although I do have an anecdote about that which I recount at the end of the blog.  See JAT Comments par. 2)

The question I ask is how exactly does an attorney sign the initial pleading and otherwise participate in a suit, either in the Tax Court or in one of the refund forums (district court or Court of Federal Claims), alleging that a sham tax shelter is entitled to the claimed tax benefits?  OK, I know, the argument is that sham is in the eye of the beholder so long as the technical tax traps appear to be checked off (even when sometimes they are not)?  The question I ask and cannot answer here is what is the role of the lawyers making such claims in litigation?  But, just think about how much energy (creative and  otherwise), time and resources were spent unnecessarily in creating the sham tax shelter to start with and then marshaling it through the administrative audit process (audit and appeals) and litigation before the taxpayer admitted the whole deal was a sham.  Isn’t there some better way to deploy our resources?

IRS Offers to Settle Abusive Syndicated Conservation Easement Shelters Pending in Tax Court (6/26/20)

In IR-2020-13, here, the IRS announces that it will offer to settle Conservation Easement Syndication shelters of the BS genre that are currently pending in the Tax Court.  The settlement offer will be made by mail in each pending case.  The announcement says that the following will be the key terms.

• The deduction for the contributed easement is disallowed in full.
• All partners must agree to settle, and the partnership must pay the full amount of tax, penalties and interest before settlement.
• "Investor" partners can deduct their cost of acquiring their partnership interests and pay a reduced penalty of 10 to 20% depending on the ratio of the deduction claimed to partnership investment.
• Partners who provided services in connection with ANY Syndicated Conservation Easement transaction must pay the maximum penalty asserted by IRS (typically 40%) with NO deduction for costs.

Keep in mind that these are not all the terms but only the key terms.  And, I suppose, as presented, they may only be summaries of the key terms so that the actual key terms summarized may present different nuances than one can derive from the summaries.  As I learn more details or obtain more documents or links that may be helpful, I will do update revisions to this blog entry.

One of the key points regarding the offer, it will be made only in those cases pending before the Tax Court.  Cases in the IRS administrative pipeline are not within the scope of the offer as stated.  (Query, will Appeals make the same offer because, once a case gets to Appeals, the same incentive to clear the cases will be presented, because the next step will be litigation in the Tax Court?)

Peter Reilly has a good early discussion of the offer:  IRS Victory In Easement Case Prompts An Offer Not To Be Refused (Forbes 6/25/20), here.  Highly recommended.  And, from knowing Peter and his special interested in the abusive Syndicated Conservation Easement Shelters, he is likely to have more posts as the settlement offer plays out.

In email correspondence with Peter, I offered the following off-the-cuff (meaning not fully considered) comments.  I offer those off-the-cuff comments (modified and expanded but again without detail thought) just for early consideration, but if I have time to try to refine them, I will do so here.

1. The key excerpt, I think, is this:

The IRS realizes that some promoters may tell their clients that their transaction is “better” than or “different” from the transactions previously rejected by the Tax Court and that it may be better for the client to litigate than accept this resolution.  When deciding whether to accept the offer, the IRS encourages taxpayers to consult with independent counsel, meaning a qualified advisor who was not involved in promoting the transaction or handpicked by a promoter to defend it.

2. The penultimate paragraph says that taxpayers not excepting should not expect better terms.  But, as suggested by the above quote, what about those taxpayers who really do have better cases than the very bad cases (i.e., their documents meet the technical requirements of the regulation and their valuation is not grossly inflated as much as the more abusive ones)?  They will have better litigating hazards and the IRS should be willing to settle on a litigating hazards of their cases rather than insisting that one size fits all.

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.

8th Circuit Rejects Wells Fargo Bullshit Tax Shelter (4/27/20)

In Wells Fargo & Company v. United States, ___ F.3d ___ (8th Cir. 2020), here, the Eight Circuit rejected the taxpayer’s claim of entitlement for bullshit tax shelter benefits and claim that it should not be subject to the negligence penalty for claiming the supposed benefits of the bullshit tax shelter.

On the merits of the bullshit tax shelter, I just observe that it had a common characteristic for such nonsense - considerable complexity that served both to create a superstructure designed in part to hide the sham nature of the transaction.  The Eighth Circuit said (Slip Op. 4):

Turning to the facts of this case, we note that STARS is a sophisticated financial transaction with a fairly complex structure. See Wells Fargo & Co. v. United States (Wells Fargo I), 143 F. Supp. 3d 827, 831 (D. Minn. 2015) (“The STARS transaction was extraordinarily complicated—so complicated, in fact, that it almost defies comprehension by anyone (including a federal judge) who is not an expert in structured finance.”); Santander Holdings USA, Inc. v. United States, 977 F. Supp. 2d 46, 48 (D. Mass. 2013) (noting that STARS was “surpassingly complex and unintuitive; the sort of thing that would have emerged if Rube Goldberg had been a tax accountant”).

In my Federal Tax Procedure Book, I describe characteristics of abusive tax shelters as follows (footnotes omitted):

Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work and cascade of words designed to mask the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including IRS auditors, if they stumble across the transaction(s)) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, offer a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters (and other enablers) of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate potential penalty risks by shifting them to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive. 

Moving to the penalty issue, the bottom line holdings are:

1.  The negligence penalty in § 6662 applies to conduct including “any failure to make a reasonable attempt to comply with the provisions of this title, and the term “disregard” includes any careless, reckless, or intentional disregard.”  § 6662(c).  The regulations flesh this out by providing a “reasonable-basis” defense if the taxpayer’s return reporting position was “reasonably based on one or more of the authorities set forth in § 1.6662-4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments).” 26 C.F.R. §§ 1.6662-3(b)(1), (3).  The issue was whether, in order to invoke the defense, the taxpayer must have actually based the return reporting position on authorities recognized by the regulation or whether, in the absence of such actual reliance, the taxpayer can ex post facto assert that the authorities render the position reasonable.  The majority held that actual reliance was required.  The majority based its holding on a de novo interpretation of the regulation text, which it found unambiguous on the issue, without any deference to the IRS’s interpretation of the regulation.

2.  The Court held that § 6751(b)’s written supervisor approval requirement did not apply because the Government asserted the penalty as a setoff in a refund suit in which no assessment was made (perhaps because beyond the statute of limitations).

JAT Comments:

1.  Professor Leslie Book has an excellent discussion of the case:  Leslie Book, In Wells Fargo 8th Circuit Holds Reasonable Basis Defense to Negligence Penalty Requires Taxpayers Prove Actual Reliance on Authorities (Procedurally Taxing Blog 4/27/20), here.

2.  For those who like dancing on the head of pins, one might focus on the difference in deference aspect of the interpretive strategies by the majority and the dissenting judge.  The majority held that the regulation was not ambiguous as to whether actual reliance on the authorities was required, so that the majority made the de novo interpretation of the reliance requirement.  The dissent apparently thought the regulation was ambiguous and, since the IRS was interpreting the regulation to require actual reliance, performed an Auer analysis (a la Kisor) to (i) determine that Auer deference did not apply and (ii) the best interpretation of the ambiguous regulation was that actual reliance was not required.

3.  I have to wonder why, for such a blatantly sham transaction, the Government did not assert the civil fraud penalty as an offset.

4.   Of course, often bullshit tax shelter promoters will provide or arrange for an opinion that will, so the taxpayers are promoted or otherwise belief, will also shelter them from penalties if the underlying bullshit tax shelter fails.  Those opinions are often, let's say, result oriented and lacking in intellectual and research rigor.  Nevertheless taxpayers anticipate that they may be able to rely on the opinions to avoid penalties.  To do that, of course, they have to produce the opinions and subject them to the scrutiny of the IRS and the courts (and to the public if they litigate the issue).  For  bullshit tax shelters, those opinions are also bullshit.  And might well only succeed in avoiding the criminal penalty, but will not withstand analysis for the civil penalties.  Hence, although Wells Fargo certainly had at least one law or accounting firm opinion, it did not rely on the supposed authorities cited.

Bullshit Shelter Taxpayers Continuing FOIA Litigation to Identify Informants Turning Them In to IRS (3/30/20)

FOIA requests and litigation have not been featured prominently on this blog.  For this entry, FOIA litigation is front and center, but interesting for a tax crimes blog because of what the FOIA requesters (in the role of taxpayers in this case) seek from the IRS – the identity of the whistleblower, if one exists, who turned them in for attempting a raid on Treasury via a bullshit tax shelter.  In United States v. Montgomery (D. D.C. No. 17-918 (JEB) Memo Op. Dtd 3/25/20), here, the Court starts:

This Freedom of Information Act dispute represents the latest round in Plaintiffs Thomas and Beth Montgomery’s never-ending heavyweight bout with the Internal Revenue Service over their multi-billion-dollar tax-shelter scheme. After settling various financial disputes with the agency, Plaintiffs submitted FOIA requests to Defendant in order to discern whether a whistleblower had incited the agency’s investigation. The Service’s responses, however, did not bring Plaintiffs any closer to discovering the source of their woes. Frustrated in their pursuit of this information, they filed suit in this Court. 

In response to the previous round of summary-judgment motions, the Court held that Defendant had appropriately invoked Glomar with respect to one category of Plaintiffs’ requests but had failed to conduct an adequate search as to the other. History repeats itself here in regard to the current dispositive Motions. Once again, Defendant has justified its invocation of  Glomar as to certain potential documents, but it has otherwise not conducted an adequate search. The Court will therefore grant in part and deny in part the parties’ Motions for Summary Judgment and direct the IRS to renew its search.

A Glomar response a FOIA response that “neither confirms nor denies the existence of documents responsive to the request” because it would cause cognizable harm under a FOIA exception.  E.g., Ctr. for Constitutional Rights v. C.I.A., 765 F.3d 161, 164 (2d Cir. 2014).  Obviously, the IRS does not either want to disclose that there was an informant or the name of the informant if there was an informant.

Then the Court recounts the facts:

The Court has recounted the facts surrounding this prolonged tax saga in several of its prior Opinions, but it will provide a brief recap here. See, e.g., Montgomery v. IRS, 292 F. Supp. 3d 391, 393–94 (D.D.C. 2018). In the early 2000s, Plaintiff Thomas Montgomery helped form several partnerships that were structured so as to facilitate the reporting of tax losses without those entities’ experiencing any real economic loss. Id. at 393. These “tax-friendly investment vehicles” allowed Thomas and his wife Beth, filing jointly, to report the entities’ alleged losses as part of their individual tax returns. Id. (alteration omitted). In other words, Plaintiffs were able to enjoy the tax benefits of experiencing an investment loss without shouldering the consequent burdens of such a loss. Somehow — and the Montgomerys are determined to learn exactly how — the IRS caught wind of their use of these vehicles, setting into motion over a decade of litigation on the issue. 

After examining the structure of the partnerships, the IRS issued “final partnership administrative adjustments” (FPAAs) as to two of them, which resulted in the agency’s imposing certain penalties and disallowing some of the losses the Montgomerys had claimed on their individual returns. Id. at 393–94. Next, the partnerships sued the Service in several separate actions, seeking a readjustment of the FPAAs (for those keeping score at home, this would amount to a readjustment of the adjustments). See Bemont Invs., LLC v. United States, 679 F.3d 339 (5th Cir. 2012); Southgate Master Fund, LLC v. United States, 659 F.3d 466, 475 (5th Cir. 2011). Ultimately, the Fifth Circuit affirmed the IRS’s determination that the partnerships had substantially understated their taxable incomes, Bemont, 679 F.3d at 346, but held that one transaction by the Southgate partnership had a legitimate investment purpose. Southgate, 659 F.3d at 483. With these mixed verdicts in hand, the Montgomerys and the partnerships pursued thirteen separate suits against the IRS, seeking, inter alia, a refund of assessed taxes and penalties. Montgomery, 292 F. Supp. 3d at 394. The cases were ultimately consolidated, and the parties reached a global settlement agreement in November 2014 that entitled the Montgomerys to more than $485,000. Id.

Thus, while the Montgomerys did get a substantial refund, it appears that they lost their claims to even more substantial refunds.  The Montgomerys walked away from the settlement of their tax liabilities with an ax to grind--with an informant causing their woe, if there was an informant.

The Court then addresses the particular skirmish in this long running saga, calling it "Another turn of the hamster wheel."

I don’t know that there is anything more to say about this continuing saga other than that the bullshit tax shelter abusers must have more money than they apparently need.

Cross posted on Federal Tax Crimes Blog, here.

RICO Claim Dismissed Against Bullshit Tax Shelter Promoters (11/22/19)

Note: This is posting to the Tax Procedure Blog of an earlier posting on my Federal Tax Crimes Blog, that I decided to copy and post here because relevant to tax procedure issue.

In Menzies v. Seyfarth Shaw LLP, __ F.3d ___ (7th Cir. 2019), here, the Court dismissed a RICO claim arising out of an alleged fraudulent tax shelter peddled to the taxpayer (Menzies) by a lawyer, law firm and two financial services firms.  The Court held that fraudulent tax shelters can be subject of RICO claims, but Menzies had failed to properly assert the claims in the pleadings.

The particular shelter involved was of the bullshit shelters, often a topic discussed on this blog.  Here is my definition from my Tax Procedure books (Practitioner Edition p. 905 (footnotes omitted); Student Edition p. 616):

Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work and cascade of words designed to mask the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including IRS auditors, if they stumble across the transaction(s)) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, offer a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters (and other enablers) of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate potential penalty risks by shifting them to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.   

More succinctly, Michael Graetz, a Yale Law Professor, has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”  Others have described the abusive tax shelters as “too good to be true.” 

I could not ascertain precisely what the steps in the fraudulent tax shelter scheme were other than, like Son-of-Boss transactions, the scheme created artificial losses that, presumably, offset the gain on sale of AUI stock, although it is not clear whether that gain was ever reported in order to use artificial losses. (I perhaps just missed something there.)  Here is the best explanation from Judge Hamilton’s dissenting opinion (Slip Op. 33-35):

Ninth Circuit Rejects Midco Transaction Twice Blessed by Tax Court (7/29/18)

In Slone v. Commissioner, ___ F.3d ___, 2018 U.S. App. LEXIS 20602 (9th Cir. 2018), here, the Ninth Circuit rejected the Midco variant.  The Midco variant itself has subvariants but this example illustrates the basic idea:

A, an individual, owns Corporation X.  Corporation X has assets of $100 with a basis of $10.  There is a built in gain of $90, with a potential tax of $30.  Corporation X is worth, therefore, $70.  Corporation X sells its assets for $100.  Corporation X then has cash of $100, no liabilities except a tax of $30 that will be reported if nothing else happens.  Corporation X is still only worth $70.  So, Corporation Y purchases the Corporation X stock from A for $85 which it finances with the Corporation X cash (the cash moves around incident to the closing, but the $85 in essence comes from the Corporation X cash).  A and his advisors are not real sure why Corporation Y would offer more than the assets are worth.  Corporation Y hints that he has some technique (perhaps tax attributes) that would permit Corporation X to avoid the tax on the sale of the corporate assets.  Immediately after that closing, once the temporary financing for the Corporation X stock is paid off $85 of Corporation's X cash, Corporation X then has $15 cash.  Corporation X buys a bullshit tax shelter for $5 to avoid reporting the gain and the resulting $30 tax.  Corporation Y then takes the net $10 cash as its profits for structuring the transaction.  When Corporation X's bullshit tax shelter is rejected on audit two years later, the IRS assesses the $30 tax plus penalties and interest. Corporation X has no assets to pay the resulting tax, penalties and interest.  Corporation Y is not around to pay. 

Most of the Midco transactions are more complex than that, but when the veneer is peeled back, that is basically it.

The IRS in this situation wants the tax and will look to all involved to get it.  The IRS will look to A and assert transferee liability under § 6901.  A's defense is that he is not a transferee from Corporation X under the transferee liability provisions.  In furtherance of that argument, A will claim that he did not know the tax would not be paid.  He just thought that, magically, the buyer had some technique to avoid having to pay the tax.

Here is what the Court said (cleaned up):

Reasonable actors in Petitioners' position would have been on notice that Berlinetta intended to avoid paying Slone Broadcasting's tax obligation. Berlinetta communicated its intention to eliminate that tax obligation, and Slone's leaders and advisors, despite their suspicions surrounding the transaction, asked no pertinent questions. In Berlinetta's earliest solicitations to Slone Broadcasting, Berlinetta marketed its ability to pay the shareholders a premium on account of its ability to eliminate the company's tax liabilities. Berlinetta's affiliate company, Fortrend, wrote in a letter to Jack Roberts, Petitioners' longtime accountant, that Fortrend could pay a premium purchase price because of its ability to "resolve liabilities at the corporate level." This proposal raised justified suspicions in Slone Broadcasting's leadership. Mr. Slone, the company's president, testified that upon learning that an entity wanted to purchase Sloan Broadcasting, after it had already been effectively sold to Citadel, he asked Jack Roberts, "can that be done?" Unsure, Roberts replied, "well, I'm going to find out." 

That Berlinetta provided little information regarding how it would eliminate Slone Broadcasting's tax liability, coupled with the structuring of the transactions, provided indications that would have been hard to miss. Slone Broadcasting's advisors understood that the transaction made sense from Berlinetta's perspective only if Slone Broadcasting's tax liability were eliminated. This deal was, after all, an uneven cash-for-cash exchange in which Berlinetta paid Petitioners most of what Slone Broadcasting should have paid in taxes. Yet Petitioners' retained counsel testified that when he and Jack Roberts asked for details, Berlinetta told them "it was proprietary, it was a secret, and it was theirs, and we weren't going to be a party to it, and I said fine." And in a lengthy memo retained counsel prepared in November of 2001 analyzing the subject of potential transferee liability, counsel wrote that Berlinetta would distribute almost all of Slone Broadcasting's cash to repay the loan used to finance the deal. The memo never analyzed how Berlinetta could legally offset Slone Broadcasting's taxable gain from the asset sale. The memo merely concluded that Petitioners would not be liable as transferees of the proceeds of Slone Broascasting's asset sale if the Commissioner successfully challenged the entity's attempt to offset the tax liability. 

The Tax Court misinterpreted Petitioners' suspicions and Berlinetta's reassurances to mean Petitioners lacked actual or constructive knowledge of the tax avoidance purpose of the scheme. This record establishes that the Petitioners were, at the very least, on constructive notice of such a purpose. In reaching a contrary conclusion, the Tax Court confused actual and constructive notice, in effect allowing Petitioners to shield themselves through the willful blindness the constructive knowledge test was designed to root out. It is clear that Petitioners' stock sale to Berlinetta, in which Berlinetta assumed Slone Broadcasting's tax liability, and Berlinetta paid Petitioners an amount representing the net value of the company after the asset sale and most of the amount that should have been paid in taxes on that asset sale, operated in substance as a liquidating distribution by Slone Broadcasting to Petitioners, but in a form that was designed to avoid tax liability. Slone Broadcasting's distribution to Petitioners was thus a constructively fraudulent transfer under the Arizona UFTA. Petitioners are liable to the government for Slone Broadcasting's federal tax obligation as "transferees" under 26 U.S.C. § 6901.
REVERSED and REMANDED for entry of judgment in favor of the Commissioner.