n10 Our conclusion that a substantial understatement penalty is properly imposed on the taxpayer makes it unnecessary for us to consider whether the district court correctly determined that (1) Castle Harbour was not a tax shelter, see § 6662(d)(2)(C) (1993) (providing that the substantial authority defense is unavailable with respect to items attributable to a tax shelter); and (2) that the taxpayer is not subject to a negligence penalty, see Treas. Reg. § 1.6662-2(c) (barring imposition of a negligence penalty in addition to a substantial understatement penalty for the same understatement of tax)
And, a related observation. Was GE's conduct in this case any more morally upright or commendable than most of the persons who have been herded into OVDP 2009 and OVDI 2011 with far more draconian penalties? Yet, GE drew a relatively light 20% penalty. Is that fair (to play a theme from President Obama)?
Indeed, the slap on the wrist 20% penalty raises serious questions about the civil penalty regime. One could argue that a 20% penalty is too light a punishment for GE's conduct. Surely GE, which reputedly has the the "world's best tax law firm." (David Kocienewski, G.E.'s Strategies Let It Avoid Taxes Altogether (NYT 3/24/11), here,)) realized that the deal it cobbled together at great expense would be challenged on audit if it were discovered and understood and, I suspect, fully realized that it was not likely to prevail in in litigation. (Maybe GE had some type of MLTN opinioin, but the quality of the opinion might have been suspect which may be why GE apparently did not assert reliance on professional advice as an out for the penalty.)