Opinion ID: 167170
Heading Depth: 2
Heading Rank: 4

Heading: The Bales decision

Text: 59 Throughout their brief, the Van Scotens argue that the negligence penalty should not apply because they acted reasonably in relying on the Tax Court's decision in Bales as a basis for claiming the DSBS 87-C loss. In rejecting this argument, the Tax Court started by noting that the Bales case involved different investors, different partnerships, different taxable years, and different issues than those underlying the present case. It went on to find that the Van Scotens did not establish that they relied on Bales in claiming the DSBS 87-C loss. It concluded instead that if the Van Scotens relied on Bales to any degree, they relied on the interpretation of it provided by Mr. Hoyt and his organization, which it found to be objectively unreasonable. 60 The Van Scotens first argue that the Tax Court's observed differences between the Bales case and the current litigation not only ignores fundamental principles of stare decisis, but imposes a burden on [them] that is completely unreasonable, especially given their lack of sophistication in tax matters. Aplt. Br. at 33. They maintain that because Bales addressed essentially identical partnerships operated and promoted in the same manner as DSBS 87-C, it was not unreasonable for Mr. Van Scoten to form his belief that the Tax Court validated the legitimacy of the Hoyt partnerships and the tax position taken by them. 61 Reference to the lengthy Bales opinion reveals some noticeable differences between the issues involved therein and the positions taken by the Van Scotens in the 1991 tax year. See Aplee. Br. at 48-49. Moreover, Bales was hardly the last word on the subject given the aggressive pursuit by the IRS publicized by Mr. Hoyt. We need not catalog those differences or repeat that history, however, because we find that the Tax Court was not clearly erroneous in its factual determination that Mr. Van Scoten did not personally rely on Bales but relied instead on the Hoyt organization's interpretation of it. At trial, Mr. Van Scoten testified that his understanding of Bales was that a partnership either similar to his or like it had been unsuccessfully challenged in the Tax Court. See I Tr. at 30. Yet, his trial testimony also establishes that he did not read the entire Bales opinion, know the partnerships involved, or have an independent professional review it with him. Id. at 109-10. Instead, when asked by his counsel why he thought Bales had relevance to him, he responded in reference to the Hoyt organization's interpretation of it. See id. at 129. Based on this record, we cannot conclude that the Tax Court's determination was clearly erroneous. 62 The Van Scotens argue next that they need not have known every detail of the Bales opinion to have reasonably relied on it because they obtained professional advice from Mr. Hoyt as to its application to their own tax reporting positions. They further maintain that the Tax Court was in error to conclude that such reliance was objectively unreasonable, again emphasizing Mr. Hoyt's role as an enrolled agent and his success in the Bales case. As discussed, we have already determined that the Tax Court did not err in determining that the Van Scotens' reliance on Mr. Hoyt was unreasonable. We need not revisit that holding. 63 Last, the Van Scotens argue that a significant omission from the Tax Court's finding as to the applicability of Bales in its negligence determination is the Commissioner's own determination that investor reliance on Bales was not unexpected or unreasonable. The finding in question appeared in an Appeals Transmittal and Case Memo (Appeals Memo). The Appeals Memo was prepared by an IRS Appeals Officer in 1997 when reviewing, among other things, whether to impose a negligence penalty on investors in a Hoyt partnership. In the Appeals Memo, the Appeals Officer stated: 64 Bales seemed to affirm the propriety of most of the Hoyt programs.... I would suggest that the taxpayers involved in Hoyt's program have learned a great deal during our recent dealings with them, that many of them are still confused about who—the IRS or Hoyt—is telling them the whole truth; and that they are anxious to comply with the tax laws, if they can just figure out what compliance means. And ... the Tax Court's decision in Bales has only added to the investor's confusion. 65 R. Ex. 502-P at 26-27. 66 It is not at all surprising that the Tax Court did not mention the Appeals Memo in its negligence analysis given its conclusions that the Van Scotens did not personally rely on the Bales opinion and that their reliance on Mr. Hoyt's interpretation thereof was unreasonable. 7 The Tax Court did not, therefore, err in omitting a discussion of the Appeals Memo from its negligence determination. 8 67