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 Bullshit Grossly Overvalued Conservation Easement Claim (7/19/24)

In Corning Place Ohio, LLC v. Commissioner, T.C. Memo. 2024-72, JAT Google Docs here and GS here, the Court (Judge Lauber) denied a charitable deduction for an alleged conservation easement and imposed accuracy-related penalties. The Court’s opening paragraph tells the story of a bullshit tax shelter, as so often these days, in the guise of a conservation easement (footnote omitted):

          This case presents what might be called the urban version of the conservation easement tidal wave that has deluged this Court. A partnership acquired a historic office building in downtown Cleveland, Ohio, and proceeded to renovate it into luxury [*3] apartments. The renovation was undertaken pursuant to a “rehabilitation plan” approved by the National Park Service (NPS) and the State of Ohio, both of which awarded historic preservation tax credits. The partnership used the tax credits to finance the renovation.

          Gilding the lily, the partnership then granted a conservation easement over the very same property, claiming a $22.6 million charitable contribution deduction on the theory that it had relinquished valuable development rights. The “lost development rights” allegedly consisted of the notional opportunity to add a 34-story vertical addition on top of the historic building. Apart from being structurally implausible and economically unsound, adding 34 floors of steel and concrete atop the building would have required the partnership to forfeit the Federal and Ohio tax credits upon which it relied to finance the renovation. As a condition of receiving those credits, it had pledged that the rehabilitation plan would entail no rooftop improvements “visible from the street.”

          Needless to say, a 34-story addition on top of the building would have been visible from the street. Finding that the 34-story tower was a chimerical concept ginned up solely to support a wildly inflated appraisal, we will sustain the Commissioner’s disallowance of the charitable contribution deduction and his imposition of a 40% penalty under section 6662(h) for a “gross valuation misstatement.”

I include at the end of this blog entry several quotes from the opinion that I thought particularly good to show the perfidy of the actors involved in the drama. First, I will address two tax procedure issues:

Tax Court Rejects Another 2000 era Bullshit Tax Shelter and Imposes Accuracy Related Penalty (4/22/24)

In PICCIRC, LLC v. Commissioner, T.C. Memo. 2024-50, GS Dkt 4308-12, here, at #75 4/22/24 and GS here, the Court (Judge Gale) rejected the petitioner’s claim for artificial tax benefits (fantasy exorbitant basis) in a contrived sale of distressed Brazilian trade receivables. In other words, yet another variant of a bullshit tax shelter common in the early 2000s; the underlying transaction here was in 2002 and reported on the 2002 partnership return. The facts found make the result inevitable. The Court found a basis of “at the most, $300,164,” whereas the reporting position was that the basis was “$23,075,495.” (Slip Op. 12.)

I note this case because the partnership used the standard shield of the tax professional opinion letters that incentivized taxpayers blessed with significant income to play the audit lottery, which they hoped was cost-free with liability if caught only for tax and interest but no penalty (civil or criminal). Under the scenario without a penalty if caught, it still made sense to play the audit lottery because the upside if not caught was the avoided/evaded tax less the transaction costs (including legal opinions).

One opinion from Proskauer Rose, LLP, a player in the tax shelter arena at the time, opined “that the transaction had the requisite economic substance and business purposes to be respected under the authorities discussed in the opinion letter.” (Slip Op. 5.) Proskauer Rose charged $100,000 for issuing the opinion. (Id.)

The other opinion was from BDO, opining “that no penalty should apply to the transaction pursuant to section 6662(b)(2) or (3).” (Slip op. 5.) The opinion does not state what BDO charged for the opinion. The Code sections cited are for “substantial understatement” penalty at §§ 6662(b) and (d) and the “substantial valuation understatement penalty at §§ 6662(b)(3) and (f) and (h).

Both opinion letters, in the final analysis, were worth nothing despite the market at the time pricing them at substantial amounts (e.g., $100,000 to Proskauer Rose). Even so, the opinion letters arguably prevented a potential criminal charge or civil fraud penalty, so maybe in the final analysis, this partnership and its flow-through partners got something for their money.

Grossly Overvalued Conservation Easement Disallowed in Full and Gross Valuation Misstatement Penalty Applied (2/24/24)

In Oconee Landing Property, LLC v. Commissioner, T.C. Memo. 2024-25 (2/21/24), GS here, the Court (Judge Lauber) denied the charitable contribution deduction because

• the allegedly relied upon appraisers were not “qualified appraisers” because the petitioners knew the property was worth only a fraction of the appraisers’ opined values (Slip Op. 39-48; and
• the property was “ordinary income property” in the hands of the promoters and that character carried over to the partnership, thus limiting the charitable deduction to the promoters basis. Petitioner supplied “no evidence” of that basis. (Slip Op. 48-57.)

Further, the Court held that, although entitled to no deduction, the Court still had to determine the value of the contributed easement to determine whether the valuation misstatement penalties applied. § 6662(a), (b)(3). The penalties are 20% if the valuation is substantial—i.e., 150% or more of the correct value--and 40% if the valuation is gross—200% or more of the correct value. (Slip Op. 74, citing § 6662(h) and § 6662(h)(2)(A)(i), respectively.) The value of the easement claimed on the return was $20.67 million but the value determined “was no greater than $4,972,002, thus the claimed value “exceeded the correct value by 416%.” (Slip Op. 74-75.)

In support of the first holding (not qualified appraisers), the Court said (Slip Op. pp. 45-46):

A person who achieves an advance agreement with an appraiser that property will be overvalued—knowing that it is being overvalued—cannot establish good faith reliance on professional advice that the appraisal is acceptable. n14

But there is more in the indicated footnote, the Court said (Slip Op. 46):

   n14 In its opening post-trial brief petitioner asserted that the regulations governing qualified appraisals and qualified appraisers “did not go through a proper notice-and-comment process and are, therefore, invalid.” That assertion occupied a single sentence; petitioner supplied no argument in support of that assertion, stating that “the Court need not reach that issue in this case.” And in its post-trial Answering Brief petitioner did not mention any challenge to the validity of Treasury Regulation § 1.170A-13(c)(5)(ii), or any other provision of the regulations, based on the Administrative Procedure Act (APA). Under these circumstances, petitioner has not properly presented or preserved an APA challenge to any regulation discussed in this Opinion.

Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (12/3/13)

In United States v. Woods, ___ U.S. ___ , 134 S. Ct. 557 (12/3/13), here, the Court rejected procedural arguments and applied the special 40% accuracy related penalty for valuation and basis overstatements.  §§6662(a), (b)(3), (e)(1)(A), (h).  The unanimous opinion is written  by Justice Scalia, the plain language justice, who not surprisingly concludes:  "The penalty’s plain language makes it applicable here."

I am sure others and even I will have a lot to say about the opinion and its ramifications later. (Here is my follow through post, More on the Supreme Court's Opinion in Woods on TEFRA and the 40% Basis Overstatement Penalty (Federal Tax Procedure Blog 12/4/13), here.

For now, this caught my eye as Justice Scalia jabs at the use of the Blue Book (what else could he do with such a tempting target):

Woods contends, however, that a document known as the “Blue Book” compels a different result. See General Explanation of the Economic Recovery Tax Act of 1981 (Pub. L. 97–34), 97 Cong., 1st Sess., 333, and n. 2 (Jt.Comm. Print 1980). Blue Books are prepared by the staff of the Joint Committee on Taxation as commentaries on recently passed tax laws. They are “written after passage of the legislation and therefore d[o] not inform the decisions of the members of Congress who vot[e] in favor of the [law].” Flood v. United States, 33 F. 3d 1174, 1178 (CA9 1994). We have held that such “[p]ost-enactment legislative history (a contradiction in terms) is not a legitimatetool of statutory interpretation.” Bruesewitz v. Wyeth LLC, 562 U. S. ___, ___ (2011) (slip op., at 17–18); accord, Federal Nat. Mortgage Assn. v. United States, 379 F. 3d 1303, 1309 (CA Fed. 2004) (dismissing Blue Book as “a post-enactment explanation”). While we have relied on similar documents in the past, see FPC v. Memphis Light, Gas & Water Div., 411 U. S. 458, 471–472 (1973), our more recent precedents disapprove of that practice. Of course the Blue Book, like a law review article, may be relevant to the extent it is persuasive. But the passage at issue here does not persuade. It concerns a situation quite different from the one we confront: two separate, non­overlapping underpayments, only one of which is attributable to a valuation misstatement. 

In my Federal Tax Procedure book (not yet revised for the above, which, I doubt, is the last word on the issue), I discuss the Blue Book as follows (footnotes omitted):

SCOTUS Blog on Woods Supreme Court Case on Basis Overstatement Penalty (10/3/13)

The SCOTUS Blog has a nice write up on United States v. Woods (Sup. Ct. No. 12-562), here, set for argument on October 9.  The case involves the Section 6662(e), here, substantial basis overstatement 20%/40% penalty.  The statutory text is:

(e) Substantial valuation misstatement under chapter 1
  (1) In general. For purposes of this section, there is a substantial valuation misstatement under chapter 1 if—
     (A) the value of any property (or the adjusted basis of any property) claimed on any return of tax imposed by chapter 1 is 150 percent or more of the amount determined to be the correct amount of such valuation or adjusted basis (as the case may be), * * * *

The author thinks that the argument may not be as dry as its tax subject might suggest at first blush.  I think that the author is enamored of the lawyer for the taxpayer in the case.

The objective facts is that the current circuit split is 8-2.  And, even judges within the 2 minority circuits have questioned the validity of those circuit's minority holding.  While the Supreme Court does not just pick the majority circuit holding, that large a split has to have some effect.

And, of course, the merits seem to me to be in the Government's favor.  Congress clearly intended the penalty to apply to basis overstatements.  The genre of tax shelters in which these cases arise clearly have egregious basis overstatements.  Why should the penalty not apply just because the shelters were so bad that they would fail on any number of grounds other than basis overstatement.  At the end of the day they had basis overstatements.  The penalty should apply, in my judgment.

Yet Another Bullshit Tax Shelter Bites the Dust (2/27/13)

We have yet another court rejection of a bullshit tax shelter.  Chemtech Royalty Associates LP et al. v. United States, 2013 U.S. Dist. 26329 (MD LA 2013), here  This time it is Dow Chemical who tried unsuccessfully to underpay its taxes and thus shift its share of the burden of Government to the citizens of this country.  This bullshit tax shelter was cooked up by Goldman Sachs in league with lawyers at King & Spalding.

The trial judge says:  "Both arrangements are enormously complicated in their construction and operation."  Which brings me to the features of a tax shelter.  I address this in my Federal Tax Procedure Book and this is a portion of that discussion (footnotes omitted):

Tax shelters are many and varied.  Some are outright fraudulent wrapped in what is disguised as a real deal.  The more sophisticated, however, are often without substance but do have some at least tenuous 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 specifically IRS auditors) 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, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters 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 in the final analysis is simply a premium for putting the reputations and perhaps their freedom at risk to give a comfort opinion that the deal which will not work if discovered, 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, 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.”

Yet Another Bullshit Tax Shelter Bites the Dust (2/26/13)

In Crispin v. Commissioner, ___ F.3d ___, 2013 U.S. App. LEXIS 3852 (3d Cir. 2013), here, as had the Tax Court, the Third Circuit smacked down yet another Bullshit tax shelter, this one of the CARDS variety.  Also, as had the Tax Court, the Third Circuit addressed the credibility of the taxpayer's representations of profit motive.

The CARDS Shelter.  Although the patched together CARDS transactions have nuances, here is the broad overview by the Third Circuit:

      A CARDS transaction is a tax-avoidance scheme that was widely marketed to wealthy individuals during the 1990's and early 2000's. It purports to generate, through a series of pre-arranged steps, large "paper" losses deductible from ordinary income. First, a tax-indifferent party, such as a foreign entity not subject to United States taxation, borrows foreign currency from a foreign bank (a "CARDS Loan"). Then, a United States taxpayer purchases a small amount, such as 15 percent, of the borrowed foreign currency by assuming liability for a an equal amount of the CARDS Loan. The taxpayer also agrees to be jointly liable with the foreign borrower for the remainder of the CARDS Loan and so the taxpayer purports to establish a basis equal to the entire borrowed amount. n3 Finally, the taxpayer exchanges the foreign currency he purchased for United States dollars. That exchange is a taxable event, and the taxpayer claims a loss equal to the full amount of his supposed basis in the CARDS Loan, less the proceeds of the relatively small amount of currency actually exchanged. The taxpayer uses that loss to shelter unrelated income. n4
   n3 The Commissioner contends that that step in the CARDS transaction "is predicated on an invalid application of the ... basis provisions of the Internal Revenue Code." (Appellee's Br. at 4.) Specifically, I.R.C. § 1012 provides that a taxpayer's basis in property is generally equal to the purchase price paid by the taxpayer. That purchase price includes the amount of the seller's liabilities assumed by the taxpayer as part of the purchase, on the assumption that the taxpayer will eventually repay those liabilities. See Comm'r v. Tufts, 461 U.S. 300, 308-09 (1983) (noting that a loan must be recourse to the taxpayer to be included in basis). But in a CARDS transaction, the Commissioner argues, the taxpayer and the foreign borrower agree that the taxpayer will repay only the portion of the loan equal to the amount of currency the taxpayer actually purchases.
   n4 The general structure of a CARDS transaction is well and thoroughly set forth in Gustashaw v. Commissioner, 696 F.3d 1124, 1127-28, 1130-31 (11th Cir. 2012).

The following is the gravamen of the smack down on the merits -- actually lack of merits (footnote omitted):

IRS Chief Counsel Remarks Involving Tax Procedure (11/20/12)

Tax Notes Today published prepared remarks of William J. Wilkins, IRS Chief Counsel.  The prepared remarks are for the BNA Bloomberg Tax Policy & Practice Summit on 11/14/12.  The prepared remarks may be viewed here.  I excerpt below the items I think are particularly important or interesting for a tax practice practice.

1. "There is also a Circuit split on the application of the 40% substantial overvaluation penalty in certain settings, so we are watching that."  This split is as to whether, if the case is resolved by some predicate issues (such as economic substance before getting to the overvaluation), the overvaluation penalty can apply.  The split is with virtually every circuit applying the penalty except the Fifth and Eleventh Circuits, both of which may be ready to join the crowd.

2.  The Chief Counsel is also concerned about tax avoidance in so-called Midco transactions:

Earlier in the litigation chain, we are working to develop the law of transferee liability as it applies to intermediary or Midco transactions -- in particular transactions where a closely held C corporation sells its assets but winds up not paying the corporate tax, because a "Midco" purchaser of the shares of the cash-rich company essentially disappears without causing the correct tax to be paid. The government has had a difficult time holding the selling shareholders responsible in these cases, and we are urging different outcomes in both trial and appellate settings. There is a clear tax administration interest, both in getting the correct tax paid in old transactions and in eliminating the feasibility of future generations of dishonest Midco promoters from succeeding. We believe that current law, when correctly applied, provides the needed tools, but we will also be open to legislative solutions should the courts take different views.

3.  He is also concerned  about FATCA implementation:

Substantial / Gross Valuation or Basis Misstatement Majority Rule Case (9/29/12)

I write this blog to advise readers of an important decision -- Gustashaw v. Commissioner, 696 F.3d 1124 (11th Cir. 2012), here, which continues the majority trend holding that the significant / gross valuation or basis misstatement penalty can apply even if there is some basis other than valuation misstatement for knocking out the shelter -- such as lack economic substance or, in lay terms, just bullshit.

The taxpayer, of course, got into a bullshit tax shelter.  I won't go into it, but suffice it to say that it was bad at many levels and, of course, lacked economic substance (and was therefore bullshit in lay terms).  Bullshit shelters usually go by acronyms or initialisms; this was was called CARDS (I won't tell you what that stands for).  Here is the guts of the holding (footnotes omitted):

A. Gross Valuation Misstatement Penalty in I.R.C. § 6662

Gustashaw argues that the Tax Court erred in upholding the IRS's imposition of the 40% gross valuation misstatement penalties for 2000 through 2002. See I.R.C. § 6662(a)—(h). Specifically, Gustashaw contends that because the CARDS transaction lacked economic substance, there was no value or basis to misstate as to trigger the valuation misstatement penalties, and the penalties should not apply as a matter of law. Gustashaw also argues that Congress has penalized lack-of-economic-substance transactions by enacting I.R.C. §§ 6662A and 6663, and therefore, he should not be subject to gross valuation misstatement penalties under § 6662. 

The Internal Revenue Code establishes penalties for underpayment of tax. Section 6662(a) of the Code imposes an accuracy-related penalty of 20% of the portion of an underpayment of tax "attributable to," inter alia, negligence, any substantial understatement of income tax, or any substantial valuation misstatement. I.R.C. § 6662(a), (b)(1)—(3). Under the applicable regulations, only one penalty may apply to a particular underpayment of tax, even if the IRS determines accuracy-related penalties on multiple grounds. Treas. Reg. § 1.6662-2(c).