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.

Two Updates on Syndicated Conversation Easements (10/26/20)

I report in brief two recent developments in syndicated easement cases that have been the focus of so much IRS audit and investigation activity and Tax Court cases.

First, In Pine Mountain Preserve, LLLP v. Commissioner, ___ F.3d ___ (11th Cir. 2020), here, the Eleventh Circuit reversed the Tax Court and held “(1) that the 2005 and 2006 easements satisfy § 170(h)(2)(C)’s granted-in-perpetuity requirement, (2) that the existence of an amendment clause in an easement does not violate § 170(h)(5)(A)’s protected-in-perpetuity requirement, and (3) that the Tax Court applied the wrong method for valuing the 2007 easement.”  I will not dive into the legal issues in those holdings since they do not involve tax procedure (independent of the underlying substantive tax law issues).  

The valuation issue is interesting, though, because the Eleventh Circuit said that the Tax Court appeared to just "split the baby" on valuation.  (See Slip Op. pp. 9 & 21-24.)  At least, the myth is that courts having to deal with tough valuation issues often just split the baby (choose a mid-point between the parties' valuation positions) or come close to the midpoint with a variance masking that, really, they did just split the baby.  In valuation lingo, that looks like the fact finder (courts here) are in equipoise on some range of values around that mid-point.  See John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389 (2020), available here on SSRN.

The Eleventh Circuit required that, on remand, the Tax Court value the easement contribution based on the regulations in  § 1.170(A)-14(h)(3)(i) which, as I understand in the case will require that the contribution be valued as follows: (i) value the whole property on the date of the contribution; (ii) value the taxpayer’s remaining interest in the property (as burdened by the easement), and (iii) deduct the difference.  In many of the conservation easement cases and certainly the abusive ones, the devil is in the valuations.  Taxpayers often overstate the “before” value and understate the “after” value resulting in inappropriate charitable contributions.  (That is setting aside unique abuse in unique methodologies other than the methodology in the regulations.)

Second, in AM 2020-010 (10/5/20), here, the IRS attorney gave advice on the following subject:  Determining the Fraud Penalty in TEFRA Syndicated Conservation Easement Cases.  The TEFRA audit and litigating regime has been replaced for years beginning in 2018 by the centralized partnership audit regime enacted in the Bipartisan Budget Act of 2015, but there are still plenty of TEFRA cases in the audit and litigation pipeline that can be subject to the analysis in the memorandum.  The summary conclusion is:

More on the Supreme Court's Opinion in Woods on TEFRA and the 40% Basis Overstatement Penalty (12/4/13)

I offer more detailed comments on United States v. Woods, ___ U.S. ___ (2013), here.  This blog entry is primarily for students.

1.  The opinion has a good summary of the state of the law leading to the original enactment of the TEFRA partnership provisions.  Slip Op. 6 & 7.  This context is important to understand the general nature of the TEFRA partnership provisions and its policy choices.  The context is useful far beyond the context of the immediate issue.

2.  The immediate threshold question was the court's jurisdiction to determine penalty issues in the unified TEFRA proceeding.  The penalty in question was one of the accuracy related penalties.  In 1997, the TEFRA provisions were amended to have such penalties determined at the partnership level with respect to partnership items despite the fact that at least one critical component of the Section 6662 penalty has a defense of reasonable cause and good faith -- see Section 6664(c)(1), here -- that must be asserted by a partner at the partner level and not in the partnership level proceeding.  The statutory solution to this problem is to permit the partner to assert the defense at the partner level but in a separate refund proceeding (rather than in a Tax Court proceeding pursuant to a notice of deficiency).  Justice Scalia said pithily:  "Barring partnership-level courts from considering the applicability of penalties that cannot be imposed without partner-level inquiries would render TEFRA’s authorization to consider some penalties at the partnership level meaningless."  (Slip Op. 9.) Justice Scalia then reasons (Slip Op. 10):

Applying the foregoing principles to this case, we conclude that the District Court had jurisdiction to determine the applicability of the valuation-misstatement penalty — to determine, that is, whether the partnerships’ lack of economic substance (which all agree was properly decided at the partnership level) could justify imposing a valuation-misstatement penalty on the partners. When making that determination, the District Court was obliged to consider Woods’ arguments that the economic-substance determination was categorically incapable of triggering the penalty. Deferring consideration of those arguments until partner-level proceedings would replicate the precise  [*20] evil that TEFRA sets out to remedy: duplicative proceedings, potentially leading to inconsistent results, on a question that applies equally to all of the partners.
To be sure, the District Court could not make a formal adjustment of any partner’s outside basis in this partnership-level proceeding. See Petaluma, 591 F. 3d, at 655. But it nonetheless could determine whether the adjustments it did make, including the economic-substance determination, had the potential to trigger a penalty; and in doing so, it was not required to shut its eyes to the legal impossibility of any partner’s possessing an outside basis greater than zero in a partnership that, for tax purposes, did not exist. Each partner’s outside basis still must be adjusted at the partner level before the penalty can be imposed, but that poses no obstacle to a partnership-level court’s provisional consideration of whether the economic-substance determination is legally capable of triggering the penalty.  n2
   n2 Some amici warn that our holding bodes an odd procedural result: The IRS will be able to assess the 40-percent penalty directly, but it will have to use deficiency proceedings to assess the tax underpayment upon which the penalty is imposed. See Brief for New Millennium Trading, LLC, et al. as Amici Curiae 12-13. That criticism assumes that the underpayment would not be exempt from deficiency proceedings because it would rest on outside basis, an “affected ite[m] . . . other than [a] penalt[y],” 26 U. S. C. § 6230(a)(2)(A)(i). We need not resolve that question today, but we do not think amici’s answer necessarily follows. Even an underpayment attributable to an affected item is exempt so long as the affected item does not “require partner level determinations,” ibid.; see Bush v. United States, 655 F. 3d 1323, 1330, 1333-1334 (CA Fed. 2011) (en banc); and it is not readily apparent why additional partner-level determinations would be required before adjusting outside basis in a sham partnership. Cf. Petaluma FX Partners, LLC v. Commissioner, 591 F. 3d 649, 655, 389 U.S. App. D.C. 64 (CADC 2010) (“If disregarding a partnership leads ineluctably to the conclusion that its partners have no outside basis, that should be just as obvious in partner-level proceedings as it is in partnership-level proceedings”).

Ninth Circuit Sustains Notice of Deficiency for Affected Items Despite No Partnership Level Proceeding (8/18/12)

In Meruelo v. Commissioner, ___ F.3d ___, 2012 U.S. App. LEXIS 17208 (9th Cir. 2012), here, the Ninth Circuit held that a notice of deficiency ("NOD") adjusting partnership affected items which is timely by reference to the individual taxpayer's statute of limitations is proper despite there having been no partnership level TEFRA audit.  The setting and resolution of the case permit me to address an issue I made earlier that, under the Allen holding (which I think is wrongly decided), fraud on the return can keep the statute of limitations for a taxpayer who does not commit the fraud.  In Allen, the fraud of the return preparer was involved, but the sweep of the holding is not limited to the return preparer but to anyone materially involved in a chain of events that support a fraudulent position reported on the taxpayer's return.  I noted particularly that fraud with respect to the abusive tax shelters that ran rampant in the late 1990s and early 2000s and led to criminal prosecution of the enablers should be a potential application of the Allen holding.  See Does the Preparer's Fraud Invoke the Unlimited Statute of Limitations? (8/5/12), here.  This type of fraudulent shelter may have been involved in Meruelo.

In Meruelo, the partnership in question (Intervest) did a foreign currency transaction, probably of a Son-of-Boss variety.  The transaction may have been fraudulent, although that issue was not resolved in Meruelo.  Rather than TEFRA audit the partnership, however, the IRS sent the taxpayers (husband and wife) a NOD disallowing the partner's losses claimed indirectly from the partnership.  (Actually the partner in the tax shelter partnership (Intervest) was a disregarded sole member LLC owned by the taxpayer; I ignore the intervening disregarded entity because, well, for tax purposes it is disregarded.)  The NOD was timely under the taxpayers' statute of limitations.

Although it is clear that, had there been a timely TEFRA audit of the partnership, the IRS could have relied upon TEFRA's statute of limitations period to make a timely assessment of partnership items and partnership affected items, there was in fact no TEFRA audit.  Now, I have just used some TEFRA jargon that I am going to have to explain in order to move.  The following is a good summary from CC-2009-011 "Protective Assessments of Affected Items in TEFRA Partnership Cases, (March 11, 2009),  here.