William E. Gustashaw, Jr. v. Commissioner of IRS
696 F.3d 1124
| 11th Cir. | 2012Background
- Gustashaw engaged in a CARDS tax shelter promoted as generating large losses for 2000, which the IRS later disallowed.
- Gustashaw relied on promoters, a financial planner, and tax advisor without independent tax analysis.
- Gable prepared the 2000 return; Maulorico and Hahn promoted CARDS; Brown & Wood issued model and formal opinion letters.
- HVB funded the loan to Osterley; Gustashaw assumed 15% of loan proceeds and liability for repayment in exchange.
- The IRS issued notices and penalties for 2000–2003; HVB admitted fraudulent behavior related to CARDS.
- Tax Court held 40% gross valuation misstatement penalties for 2000–2002 and 20% negligence penalty for 2003; Gustashaw appeals.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the gross valuation misstatement penalty applies when the CARDS deduction is entirely disallowed for lack of economic substance | Gustashaw argues no basis to misstate since transaction lacked value | IRS argues penalty applies to the inflated basis even if the deduction is disallowed | Penalty applies; basis misstatement1 is 400%+ and triggers 40% penalty |
| Whether the 2003 penalty should be negligence rather than gross valuation | Gustashaw contends 2003 carryforwards avoid gross misstatement | Penalty should be 20% negligence for 2003 | Negligence penalty upheld for 2003 when gross-valuation not applicable |
| Whether Gustashaw acted with reasonable cause and in good faith to avoid penalties | Relied on Gable and Brown & Wood advisory letters | Reliance unreasonable due to conflicts and lack of independent expertise | No reasonable cause or good faith; penalties affirmed |
| Whether §6662A and §6663 mitigate or replace §6662 penalties | Taxpayer contends newer §§ 6662A/6663 apply | Those sections are inapplicable to Gustashaw's circumstances | §6662 penalties remain applicable; §§6662A/6663 irrelevant |
Key Cases Cited
- Alpha I, L.P. v. United States, 682 F.3d 1009 (Fed. Cir. 2012) (majority rule: penalties apply even where deduction is disallowed for lack of substance)
- Fidelity Int’l Currency Advisor A Fund, LLC v. United States, 661 F.3d 667 (1st Cir. 2011) (supporting majority rule on valuation penalties where lacks economic substance)
- Merino v. Comm’r, 196 F.3d 147 (3d Cir. 1999) (recognizes valuation penalties framework)
- Zfass v. Comm’r, 118 F.3d 184 (4th Cir. 1997) (valuation misstatement standards guidance)
- Illes v. Comm’r, 982 F.2d 163 (6th Cir. 1992) (early jurisprudence on valuation penalties)
- Gilman v. Comm’r, 933 F.2d 143 (2d Cir. 1991) (valuation misstatement framework)
- Massengill v. Comm’r, 876 F.2d 616 (8th Cir. 1989) (historical perspective on penalties)
- Gainer v. Comm’r, 893 F.2d 225 (9th Cir. 1990) (minority rule on penalties; later questioned)
- Todd v. Comm’r, 862 F.2d 540 (5th Cir. 1988) (Todd/Heasley framework for multiple grounds)
- Bemont Invs., L.L.C. ex rel. Tax Matters Partner v. United States, 679 F.3d 339 (5th Cir. 2012) (panel specially concurring; discusses Blue Book guidance)
- Keller v. Comm’r, 556 F.3d 1056 (9th Cir. 2009) (confirms concerns with Todd approach)
- United States v. Boyle, 469 U.S. 241 (1985) (independence and reasonableness standard for reliance on advice)