Opinion ID: 2979340
Heading Depth: 2
Heading Rank: 2

Heading: Reasonable Cause Exception

Text: The Commissioner assessed a 40% underpayment penalty applicable to valuation misstatements of more than 400% against New Phoenix. See I.R.C. § 6662(h). New Phoenix seeks to avoid this penalty by invoking the reasonable cause exception outlined in Treasury Regulation § 1.6664-4, arguing that it reasonably and in good faith relied on the tax opinion it received from Jenkens & Gilchrist in claiming the loss from the BLISS transaction on its tax returns. The tax court determined that New Phoenix could not invoke the reasonable cause defense, concluding that, because Jenkens & Gilchrist “actively participated in the development, structuring, promotion, sale, and implementation of the BLISS transaction,” it was unreasonable for New Phoenix to rely on the tax opinion “in the face of such a conflict of interest.” We review the tax court’s finding on whether a taxpayer acted with reasonable cause for clear error. See Illes v. Comm’r, 982 F.2d 163, 166 (6th Cir. 1992) (citations omitted). Treasury Regulation § 1.6664-4 provides a defense to penalties “upon a showing by the taxpayer that there was reasonable cause for, and the taxpayer acted in good faith with respect to,” the underpayment. Treas. Reg. § 1.6664-4; see also I.R.C. § 6664(c)(1). “‘[T]he determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances.’” Mortensen v. Comm’r, 440 F.3d 375, 387 (6th Cir. 2006) (quoting Treas. Reg. § 1.6664-4(b)(1)). “The most important factor in making 13 this determination is the extent of the taxpayer’s effort to ascertain his proper tax liability.” Id. “When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.” United States v. Boyle, 469 U.S. 241, 251 (1985) (emphasis omitted). Therefore, “good faith reliance on professional advice concerning the tax laws” may establish a reasonable cause defense to penalties. Mortensen, 440 F.3d at 387 (citations omitted). “In order for reliance on professional tax advice to be reasonable, however, the advice must generally be from a competent and independent advisor unburdened with a conflict of interest and not from promoters of the investment.” Id. The taxpayer has the burden of establishing that a reasonable person would have relied on the professional’s advice. Illes, 982 F.2d at 166. The tax court properly upheld the assessment of a penalty. The opinion letter of Jenkens & Gilchrist on which New Phoenix relied was produced by professionals who reasonably appeared to be knowledgeable about the tax law. However, the tax court made a factual finding that the attorneys of Jenkens & Gilchrist “were promoting” the tax shelter when they met Mr. Wray. The attorneys’ involvement in the preparation of many of the documents needed to implement the transactions supports this finding. Because “reliance on the promoters of the investment [is] insufficient to support a good faith defense,” Mortensen, 440 F.3d at 387, New Phoenix cannot rely on the Jenkins & Gilchrist tax opinion to avoid the payment of penalties and the tax court properly upheld the Commissioner’s assessment of a $1,298,284 penalty. 14