Blum v. Comm'r
2012 T.C. Memo. 16
Tax Ct.2012Background
- Blum and spouse filed 1998–2002 tax returns through a grantor Blum Trust.
- Petitioners engaged in an Offshore Portfolio Investment Strategy (OPIS) promoted by KPMG to realize large losses.
- OPIS involved foreign entities Benzinger LP/GP and Alfaside, with QA Investments advising the Blum Trust.
- UBS stock purchases and a complex set of options and collateral transfers were used to manufacture a $45M loss.
- IRS challenged the losses; court held OPIS lacked economic substance and penalties applied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does OPIS lack economic substance, disallowing the claimed losses? | Blum asserted losses were valid under tax laws with attribution rules. | IRS contends OPIS lacked economic substance, i.e., no genuine economic profit; losses improper. | Yes; OPIS lacked economic substance and losses are disallowed. |
| Are petitioners liable for accuracy-related penalties for gross valuation misstatement? | Losses arose from complex but lawful steps; penalties should not apply. | Disallowed losses show gross valuation misstatement under §6662(h). | Yes; 40% penalty for gross valuation misstatement applies. |
| Are petitioners liable for accuracy-related penalties for negligence? | Reliance on professional advisers should negate penalties. | Petitioners were negligent; transaction too good to be true and not reasonably investigated. | Yes; 20% negligence penalty applies. |
| Was there reasonable cause or good faith reliance on tax advisers to avoid penalties? | Relied on KPMG’s representations and advice. | Reliance was unreasonable; KPMG was a promoter with conflicts of interest. | No; reliance not reasonable; penalties sustained. |
Key Cases Cited
- Sala v. United States, 613 F.3d 1249 (10th Cir. 2010) (unitary analysis of economic substance requiring losses to be linked to real economic effects)
- Keeler v. Commissioner, 243 F.3d 1212 (10th Cir. 2001) (losses must be tied to actual economic losses; prearranged schemes lack substance)
- Coltec Indus., Inc. v. United States, 454 F.3d 1350 (Fed. Cir. 2006) (economic substance doctrine applied to deny tax benefits from sham transactions)
- Leema Enters., Inc. v. Commissioner, T.C. Memo. 1999-18 (T.C.) (disallowance of losses when transaction lacks economic substance; basis-shifting not preserved)
- New Phoenix Sunrise Corp. & Subs. v. Commissioner, 132 T.C. 161 (2009) (economic substance doctrine applied to corporate tax shelters)
- Neonatology Assocs., P.A. v. Commissioner, 299 F.3d 221 (3d Cir. 2002) (reliance on competent professional advice for penalties analysis; promoter conflicts)