Opinion ID: 3003619
Heading Depth: 3
Heading Rank: 3

Heading: American Boat’s Reasonable Cause Defense

Text: With that in mind, we turn to the district court’s finding that American Boat, through David Jump, had reasonable cause for its tax position. The standard of review plays an integral role in this case. Whether reasonable cause existed—and the findings underlying this determination—are questions of fact, which we review for clear error. See Fed. R. Civ. P. 52(a); Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985); ReMapp Int’l Corp. v. Comfort Keyboard Co., 560 F.3d 628, 633 (7th Cir. 2009). The trial court is in a better position to evaluate the evidence, and we will overturn a factual finding only when we are “ ‘left with the definite and firm conviction that a mistake has been committed.’ ” Anderson, 470 U.S. at 573 (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948)). We will not redetermine facts as though hearing the case for the first time, id. at 573-74, and “[w]e view the evidence in the light most favorable to the tax court finding.” Square D Co. & Subsidiaries v. Comm’r, 438 F.3d 739, 743 (7th Cir. 2006). To the extent that the government appeals the district court’s determinations of law, we review them de novo. See id. “Whether the elements that constitute ‘reasonable cause’ are present in a given situation is a question of fact, but what elements must be present to constitute No. 09-1109 25 ‘reasonable cause’ is a question of law.” Boyle, 469 U.S. at 249 n.8. Turning to this case, the government goes to great effort to shine the spotlight on Mayer and Jenkens & Gilchrist, remarking on their many years of faulty tax advice and their roles in sheltering money from the public coffers. But the focus of the district court’s inquiry was, as it should have been, on American Boat and David Jump. We must consider whether, from Jump’s perspective and in light of all the circumstances, the district court clearly erred by finding that Jump had reasonable cause for his underpayment. Traveling back to 1996, when the Son of BOSS was still in its infancy and before all of the publicity and legal trouble, Erwin Mayer was a reputable attorney at Altheimer & Gray. The district court found that Jump’s banker referred him to Mayer in 1996 to establish an estate plan. Mayer advised Jump to restructure his businesses, while at the same time suggesting that he institute a tax-saving transaction. As the court pointed out, Jump did not approach Mayer seeking a tax shelter, nor did he have reason at that time to think that Mayer’s advice was faulty. Jump paid Mayer a large, flat fee for his legal services, which included creating a family trust and reorganizing the assets of several large companies. Unlike some of the cases cited above, Mayer was not compensated based on a percentage of the tax benefits he produced. The sole indicator that Mayer’s advice might have been unreliable was the divide between the cost of the transactions and the resulting tax benefits. 26 No. 09-1109 But, as we stated earlier, the IRS did not pursue Jump based on his 1996 transactions. Moving forward to 1998, after Jump’s towboat nearly doomed the Admiral, the court determined that Jump returned to Mayer for another legitimate reason—advice about reorganizing his businesses to reduce potential liability. Jump was not intending to implement a tax shelter. But Mayer incorporated the second Son of BOSS transaction as part of the overall reorganization. We acknowledge the government’s argument that Mayer’s tax advice was distinct from any advice he may have provided regarding Jump’s tort liability. Mayer was not a tort lawyer, but his overarching counsel was to reorganize, and Jump relied in part on Mayer’s recommended means of doing so. Jump again paid a flat fee, albeit a larger one, for this reorganization and advice. As part of the 1998 transaction, Mayer provided Jump with a lengthy opinion letter stating that the Son of BOSS transactions were legal under then-existing tax law. Despite the government’s protestations to the contrary, we find that the letter met the requirements of Treasury Regulation § 1.6664-4(c). The parties do not dispute that Mayer was a competent tax adviser, nor do they disagree that Jump provided Mayer with the pertinent facts. The government claims, however, that the opinion letter contained representations that Jump knew or should have known were false, particularly that the shortsale transactions had a nontax business purpose and that Jump sought an economic profit. Yet again, the government’s position is not meritless. In retrospect, making a profit on the short-sale transactions No. 09-1109 27 was unlikely at best. Jump also stated that the companies transferred the short-sale positions to provide start-up funding for American Boat, which would be operating the towboats. Although this assertion is undermined by the unavailability of the short-sale proceeds during the three days before American Boat fulfilled its corresponding obligation to replace the Treasury Notes, the district court found that Jump was a credible witness and that he did not know the transactions held no profit potential. Specifically, the court concluded that Jump “thought as a part of this that he could make some money.” Again, the focus is on what Jump knew or should have known at the time he obtained the opinion letter, and we must defer to the district court’s credibility determinations on findings of fact. See Anderson, 470 U.S. at 573-74. He paid Mayer a large fee for his work, and the evidence does not compel the conclusion that this fee was strictly for a favorable opinion letter in the event that American Boat were audited. Even though we might have reached a different conclusion, the district court’s determination that Jump did not know that certain assertions in the opinion letter were incorrect was not clearly erroneous. Likewise, we do not find that the court clearly erred by determining that Jump had no reason to know that Mayer had a disqualifying conflict of interest. Of course, Jump knew that Mayer was advising him to undertake these transactions, and Jump paid Mayer a fee. But the fee was for more than simply sheltering Jump’s taxes; Mayer performed other legal work by moving significant assets into newly reorganized companies. The court expressly 28 No. 09-1109 stated that “he did not pay that fee thinking that as consideration he was getting a tax shelter.” To Jump, therefore, the Son of BOSS transactions may have seemed like another component of such work. Had Mayer required his compensation to be a percentage of the sheltered capital gains, perhaps our analysis would be different. Furthermore, the court found that the shelter was never marketed to Jump; rather, he sought only expert legal advice, which was what he thought he was paying for. After receiving Mayer’s opinion letter, Jump enlisted two accounting firms to prepare his personal and business tax documents. The government is correct that Jump never asked Deloitte or Scheffel to opine on the validity of the short-sale transactions. Because of that failure, it is also correct that Jump could not have reasonably “relied on” these accountants to show reasonable cause. But that does not mean the accountants’ review of American Boat’s and Jump’s tax documents is irrelevant. That two reputable accounting firms raised no objection to the tax treatment of Jump’s transactions is relevant to the overarching inquiry of whether his reliance on Mayer’s advice was reasonable. Deloitte not only agreed with Mayer’s analysis, but it even informed Jump that it was structuring similar transactions for many of its clients and could have done the same for him. From Jump’s perspective, no red flag went up indicating that his transactions—or Mayer’s advice regarding them—were improper. Finally, the government points to the substantial tax benefit that Jump received as a result of the short-sale No. 09-1109 29 transactions, claiming that such a “too good to be true” transaction should have put him on notice that something was awry. There is no doubt that the benefit Jump received was large, and this is the argument that gets the government the nearest to undermining Jump’s assertion that he had reasonable cause. But, in general, “it is axiomatic that taxpayers lawfully may arrange their affairs to keep taxes as low as possible.” Neonatology, 299 F.3d at 232-33 (citing Gregory v. Helvering, 293 U.S. 465, 469 (1935)). Of course, the key term here is “lawfully.” The district court determined that, as far as Jump was concerned, Mayer was implementing another transaction in conjunction with reorganizing his business entities, much like the one that Mayer had previously instituted in 1996. The IRS did not inform Jump that the 1996 transaction was abusive by 1998. Furthermore, prior to the 1996 reorganization, Jump held his entities in a domestic international sales corporation (DISC), which was essentially a shell corporation permitting his businesses to defer much of their taxable income obtained from export sales. See generally Thomas Int’l Ltd. v. United States, 773 F.2d 300, 301 (Fed. Cir. 1985) (providing a thorough background of the DISC provision of the Internal Revenue Code); see also Dow Corning Corp. v. United States, 984 F.2d 416, 417 (Fed. Cir. 1993). Of course, the Son of BOSS transactions, unlike the DISC, were not endorsed by Congress, but Jump had previously—and legally—organized his businesses to reduce his tax liability. Perhaps it was not surprising to him that Mayer suggested another means of obtaining a similar benefit. 30 No. 09-1109 This is a close case. In the end, we are searching for clear error in the district court’s factual determinations, and we are unable to find it. Whether any judge on this panel might have reached a different conclusion after hearing the evidence first-hand is not the appropriate concern. Contrary to the government’s assertion, we are not insulating from penalties every taxpayer who obtains an opinion letter from the same adviser who structures the transaction. And perhaps in today’s day and age, after a decade of publicized corporate controversy and scandal, such reliance would not be reasonable. But whether one has reasonable cause for a tax underpayment is a fact-specific inquiry, and we must consider what Jump knew or should have known in 1998. The district court provided detailed reasons for reaching its conclusion, all of which were supported by the evidence before it. We find no clear error in the district court’s factual findings, and no error of law in its legal determinations.