106 Ltd. v. Commissioner, IRS
401 U.S. App. D.C. 288
| D.C. Cir. | 2012Background
- 106 Ltd. appeals a Tax Court ruling upholding a 40% accuracy-related penalty under 26 U.S.C. §6662 for overstating basis in Canadian currency via a Son of BOSS shelter.
- Palmlund, as partnership tax matters partner, relied on Garza (promoter) and Turner & Stone (tax adviser) to implement and prepare returns for the shelter.
- Shelter structure involved three entities (Partnership, 32, LLC, 7612, LLC), with 7612 funding digital options whose apparent cost vastly exceeded true cost, and transfer of Canadian currency to the Partnership and Palmlund Ltd.; options were terminated with a small profit.
- Tax Court concluded Palmlund’s reliance on Garza’s and Turner & Stone’s advice was not reasonable under §6664(c)(1) due to conflicts of interest and the promoters’ involvement in the shelter.
- Court of Appeals reviews for clear error on factual determinations regarding reasonable cause and reiterates that reliance on professional advice can establish reasonable cause only if it was reasonable under all circumstances.
- The court affirms, holding Palmlund’s motive to lose money and the advisors’ conflicts negate reasonable reliance and the opinion letter’s inaccuracies eliminate possible reasonable reliance.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Palmlund’s reliance on advisers constitutes reasonable cause. | Palmlund’s reliance on Garza and Turner & Stone was reasonable. | Advisors were promoters with conflicts; reliance was unreasonable. | No; reasonable reliance not established. |
| Whether Garza’s promoter role defeats reasonable reliance as to the shelter’s basis. | Garza’s involvement does not bar reliance if advice is sound. | Promoter role inherently undermines independent advice. | Yes; promoter conflict defeats reasonable reliance. |
| Whether Garza’s opinion letter was a valid basis for reliance given inaccuracies. | Letter relied upon for tax treatment and basis. | Letter contained inaccuracies showing lacks of compliance with §1.6664-4(c)(1). | No; letter inaccuracies negate reliance. |
| Whether Palmlund’s intent to lose money undermines the defense. | Intent not relevant to reasonable cause. | Intent to lose money shows lack of good faith reliance. | No; Palmlund’s motive supports lack of good faith and reasonable cause. |
Key Cases Cited
- Stobie Creek Invs. LLC v. United States, 608 F.3d 1366 (Fed. Cir. 2010) (reasonable-cause analysis hinges on all facts and advisory independence)
- Am. Boat Co. v. United States, 583 F.3d 471 (7th Cir. 2009) (reliance on professional advice must be reasonable under the circumstances)
- United States v. Boyle, 469 U.S. 241 (1985) (elements of reasonable cause; what is required for reliance)
- Napoliello v. Comm’r, 655 F.3d 1060 (9th Cir. 2011) (son-of-BOSS variant; promoter involvement and basis issues)
- Van Scoten v. Comm’r, 439 F.3d 1243 (10th Cir. 2006) (unreasonable reliance when advisor directly affiliated with promoter)
- Pasternak v. Comm’r, 990 F.2d 893 (6th Cir. 1993) (tax avoidance schemes and reasonable reliance despite sophistication)