Yet Another BullShit Tax Shelter Goes Down Flaming (1/25/14)

In NPR Investments, LLC v. United States, 740 F.3d 998 (5th Cir. 2014), here, following the Supreme Court's lead in United States v. Woods, ___ U.S. ___, 134 S. Ct. 557 (2013), here, the Fifth Circuit applied the 40% gross valuation misstatement penalty to the partnership's bullshit tax shelter (the Son-of-Boss (SOB) type shelter).  For discussion of Woods, see Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (Federal Tax Crimes Blog 12/3/13), here. The 40% penalty will, of course, be applied to the partners, which will then permit them to assert in a separate refund proceeding any partner level defenses they may be entitled to.

I could perhaps leave it at that, but there are some interesting features of the case.

Let's start with some the facts recounted by the Court:

Harold Nix, Charles Patterson, and Nelson Roach are partners in the law firm of Nix, Patterson & Roach, LLP. They represented the State of Texas in litigation against the tobacco industry and in 1998 were awarded a fee of approximately $600 million that is to be paid over a period of time. They also received fees totaling approximately $68 million in connection with tobacco litigation in Florida and Mississippi. Nix, Patterson, and Roach share the fees 40%, 40%, and 20%, respectively. 

Nix and Patterson have participated in at least two "Son-of-BOSS" tax shelters. BOSS stands for "Bond and Options Sales Strategy." Courts, including our court and the district court in this case, have described a Son-of-BOSS transaction as "a well-recognized 'abusive' tax shelter." Artificial losses are generated for tax deduction purposes. 

Before creating NPR and engaging in the transactions at issue in this appeal, Nix and Patterson invested in another Son-of-BOSS tax shelter, known as BLIPS. It involved sham bank loans, and our court considered various tax issues related to Nix's and Patterson's transactions with regard to that shelter in Klamath Strategic Investment Fund ex rel. St. Croix Ventures v. United States.

Further, here is a critical fact conceded apparently for strategic reasons:

The joint pre-trial order in the district court reflects that NPR, Nix, Patterson, and Roach conceded that NPR lacked a profit motive during 2001.

 All of the "investors" in SOB shelters claimed that their profit motive inhered in some long-shot investment razzle-dazzle which they called the "sweet spot," wherein the economic circumstances would line up to generate a profit from the adventure. Some of the taxpayers involved, although having large otherwise uncovered income, claimed that they did not consider the tax consequences at all but focused instead solely on the sweet spot opportunity.  However, the taxpayers in NPR (the ultimate taxpayers were involved by the attorney R.J. Ruble (since convicted of tax crimes for his participation in tax shelters, including SOB shelters) apparently did consider the tax consequences (duh!):

First Circuit Speaks on Estoppel Against the IRS (2/14/13)

In Shafmaster v. United States, 707 F.3d 130 (1st Cir. 2013), here, the taxpayers urged, inter alia, that the the IRS was estopped from collecting the failure to pay penalty the IRS asserted under § 6651(a)(3).  The Shafmasters claimed that the IRS, in its various dealings with them and various documents, had agreed not to assert the penalty.  The problem was that there was certainly not a closing agreement that said that.  Nor was there even a Form 870-AD that said that.  Nor did the other dealings really establish the claim.  The Court disposed of the argument as follows and expressed skepticism, but declined to hold, that estoppel could apply against the IRS.  The key part of the holding is as follows (footnote omitted):

The Shafmasters argue that the IRS was equitably estopped from assessing the failure-to-pay penalty because the agency had, through Hamilton and through the various documents that the Shafmasters signed, agreed not to assess such a penalty, and the Shafmasters had relied on that promise. The argument fails, for a number of reasons. We need not reach the question of whether equitable estoppel can ever bind the IRS in informal settlements reached apart from the §§ 7121-7122 procedures. 

In Botany Worsted Mills v. United States, 278 U.S. 282 (1929), the Supreme Court interpreted the predecessor of 26 U.S.C. §§ 7121-7122 as providing the "exclusive method" for compromising tax liability, holding that Congress "did not intend to in trust the final settlement of such matters to the informal action of subordinate officials in the [IRS]." Id. at 288-89. As a result, the Court concluded, informal settlements are not binding on either the taxpayer or the government. Id. at 288. However, the Court went on to note that it was not "determining whether such an agreement, though not binding in itself, may when executed become, under some circumstances, binding on the parties by estoppel." Id. at 289. The Court thus left the door open for the argument that some informal agreements between taxpayers and the IRS might give rise to claims of estoppel -- at least when, as in Botany Worsted, the government asserts estoppel against a taxpayer.