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)

In Midco Transaction Malpractice Case, Oregon Court Applies Issue Preclusion From Tax Court Opinion To Dismiss Accounting Firm But Not Law Firm (2/3/22)

A reader of this blog sent me two related opinions decided by the Oregon Court of Appeals in malpractice and related litigation against two advisors—a law firm and an accounting firm advising the shareholders in a firm with a large tax liability in a Midco transaction. The plaintiffs, the Marshalls, were shareholders selling in the Midco transaction that avoided tax liability. The advisers, the defendants, were Schwabe Williamson & Wyatt, P.C. (law firm) and PricewaterhouseCoopers (accounting firm) that advised the Marshalls in the transaction. The opinions are: Marshall v. PricewaterhouseCoopers, Ltd. Liab. P'ship, 316 Or. App. 610, 2021 Ore. App. LEXIS 1845 (2021), here (involving the accounting firm,  PWC); and Marshall v. Pricewaterhousecoopers, Ltd. Liab. P'ship, 316 Or. App. 416, 2021 Ore. App. LEXIS 1775 (2021), here (involving the law firm, Schwabe Williamson & Wyatt, P.C).

In part here pertinent, the Oregon Court of Appeals held that the findings in the Tax Court litigation holding the Marshalls liable for the tax as transferees were (i) issue preclusive as to the accounting firm but (ii) were not issue preclusive as to the law firm. The findings in question were Estate of Marshall v. Commissioner, T.C. Memo. 2016-119, here. The following overview of the Tax Court opinion is from the LEXIS-NEXIS report for the case summarizes the key holdings:

HOLDINGS: [1]-The record supported the Commissioner's decision requiring individual taxpayers who sold a construction company they owned to pay $15,482,046 in income tax the company owed, accuracy-related penalties of $6,192,818 under I.R.C. § 6662, and $9,592,446 in interest; [2]-The taxpayers knew or should have known that the sale of their company was constructively fraudulent under Or. Rev. Stat. § 95.240 because it left the company without sufficient assets to pay its federal tax liability, and the Commissioner had the power under I.R.C. § 6901(a)(1) to collect taxes the company owed from the taxpayers because the company's assets were transferred to them; [3]-The taxpayers' claim that they should not have to pay taxes the company owed because they acted in good faith lacked merit because, inter alia, the good faith defense in Or. Rev. Stat. § 95.270 did not apply to § 95.240.

The Tax Court’s opinion included damning fact-finding regarding the shareholders’ knowledge and/or constructive knowledge that the Midco promoter would strip the target company of assets from which to pay the tax. The Tax Court concluded from the facts that

The Marshalls, Schwabe, and PwC had constructive knowledge of the entire scheme. John [shareholders representative] knew that Essex [the promoter company] was interested 35*35 in buying MAC [the target company with the tax liability] only for its tax liability; that Essex intended to use high-basis low-value assets to offset MAC's income; that Essex intended to obtain a refund of MAC's prepaid taxes, a plan he was leery about; and that Essex was splitting MAC's avoided taxes with the Marshalls.