Opinion ID: 3046521
Heading Depth: 1
Heading Rank: 2

Heading: Tax Court Trial and Opinion

Text: In light of HVB’s admissions of fraudulent behavior, Gustashaw conceded the deficiencies in income tax for all four years in issue. Gustashaw challenged only the penalties in the Tax Court. The case proceeded to trial in the Tax Court. At trial, Gustashaw admitted that he did not suffer a $9,938,324 economic loss associated with the $9,938,324 tax loss claimed on the 2000 tax return. Gustashaw continued to contend that he was not liable for the penalties, in part because he had “reasonable cause,” pursuant to I.R.C. § 6664, to believe the CARDS transaction was legitimate. Gustashaw also argued that because the IRS 18 Case: 11-15406 Date Filed: 09/28/2012 Page: 19 of 41 disregarded the transaction on economic-substance grounds, the valuation misstatement penalty should not apply as a matter of law, pursuant to a minority rule interpretation of I.R.C. § 6662. After a trial, the Tax Court upheld the 40% gross valuation misstatement penalties for 2000 through 2002 and the 20% negligence penalty for 2003. The Tax Court applied the majority rule interpretation of I.R.C. § 6662 and rejected Gustashaw’s reasonable-cause defense. 1. Valuation Misstatement Penalties The Tax Court first addressed the valuation misstatement penalties. It explained that I.R.C. § 6662(a) and (b)(3) impose a penalty of 20% of the portion of the underpayment of tax that is attributable to a substantial valuation misstatement.4 Such a misstatement exists if the taxpayer claims that the value or adjusted basis of any property is 200% or more of the amount determined to be the correct amount of such valuation or adjusted basis. I.R.C. § 6662(e)(1)(A). If the misstatement is 400% or more of the correct amount, a gross valuation misstatement exists and the penalty increases to 40%. Id. § 6662(h). The Tax 4 As indicated by the Tax Court, “[u]nless otherwise stated, section references are to the Internal Revenue Code in effect for the years in issue.” Likewise, in their briefs the parties refer and cite to the version of the Code that was in effect during the relevant years. Accordingly, unless otherwise stated, we do the same herein. 19 Case: 11-15406 Date Filed: 09/28/2012 Page: 20 of 41 Court explained that Treasury Regulation § 1.6662-5(g) provides that the “value or adjusted basis claimed on a return of any property with a correct value or adjusted basis of zero is considered to be 400 percent or more of the correct amount.” The Tax Court found that Gustashaw was liable for the 40% gross valuation misstatement penalty for 2000 through 2002, concluding that his underpayments in tax for those years resulted from his claiming a basis in foreign currency on his 2000 return of $11,739,258, rather than a basis of zero, which is the correct amount when a transaction lacks economic substance. In the notice of deficiency, the Commissioner determined that the correct basis for the asset was zero, and the Tax Court found that Gustashaw “effectively accepted” that determination “as accurate in conceding all of the deficiencies in tax.” It further noted that a line of cases from the Fifth and Ninth Circuits supported Gustashaw’s argument that a valuation misstatement penalty is not applicable when the entire transaction is disregarded on lack-of-economic-substance grounds, but pointed out that those cases represented the minority rule and declined to follow them. Because the proper basis was zero, the Tax Court concluded that the basis claimed on Gustashaw’s 2000 return exceeded the correct basis by 400% or more. Additionally, because that grossly inflated basis gave rise to losses that Gustashaw 20 Case: 11-15406 Date Filed: 09/28/2012 Page: 21 of 41 carried forward to his 2001 and 2002 years, the Tax Court concluded that the underpayments in tax for those years were also attributable to a gross valuation misstatement. 2. Negligence Penalty For 2003, in which Gustashaw’s carryover loss was too small for a gross valuation misstatement penalty to apply, the Tax Court upheld the 20% negligence penalty. It reasoned that “[n]egligence is strongly indicated where ‘[a] taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction, credit or exclusion on a return which would seem to a reasonable and prudent person to be “too good to be true.’”” The Tax Court explained that a return position is not negligent if it is reasonably based on certain enumerated authorities, but that conclusions reached in opinion letters written by tax professionals are not considered authority. The Tax Court further explained that a reasonable and ordinarily prudent person would have considered carryforward deductions from the CARDS transaction “too good to be true” when he did not suffer an associated economic loss and invested only $800,000 in the transaction. As such, he would have conducted a thorough investigation before claiming the deduction on his tax return. The Tax Court found that Gustashaw, despite his education and experience, did not attempt to understand the mechanics of the 21 Case: 11-15406 Date Filed: 09/28/2012 Page: 22 of 41 CARDS transaction, executed transaction documents without an attorney’s review, and, although aware of the transaction’s untested tax ramifications, declined to seek a ruling from the IRS. The Tax Court concluded that, presented with such a “too good to be true” situation, Gustashaw was negligent in failing to more closely scrutinize the CARDS transaction. 3. The Reasonable Cause and Good Faith Defense The Tax Court further concluded that Gustashaw had failed to show that there was reasonable cause for his underpayment or that he acted in good faith, as required for him to avoid penalties under I.R.C. § 6664(c). It rejected Gustashaw’s arguments that he reasonably relied on Gable or Maulorico because neither actually opined on the tax issues involved. It concluded that the only tax advice Gustashaw sought concerning the CARDS transaction was from Brown & Wood, as neither Gable nor Maulorico proffered an opinion on the tax issues involved, and Gustashaw’s reliance on Brown & Wood’s advice was unreasonable because he should have known about the firm’s inherent conflict of interest. The Tax Court noted that Chenery referred Gustashaw to Brown & Wood and supplied him with the firm’s model opinion letter, which described a CARDS transaction that was not unique to Gustashaw’s situation. Gustashaw also proffered no evidence that he had an engagement letter with Brown & Wood, spoke to any 22 Case: 11-15406 Date Filed: 09/28/2012 Page: 23 of 41 attorney at the firm, or compensated Brown & Wood for either opinion letter. On these facts, the Tax Court held that Gustashaw could not have reasonably believed that Brown & Wood was an independent adviser. Based on this decision, the Tax Court entered a judgment in favor of the Commissioner, upholding the penalties for the years 2000 through 2003 imposed against Gustashaw under § 6662. Gustashaw now appeals.