On the merits, the problem was that the partnerships were ignored. The problem was that each individual taxpayer was the 99% limited partner and a specially created LLC was the 1% general partner; the LLC, being treated by default as a single-member disregarded entity in the absence of an election to be treated as a corporation, meant that the individual taxpayer was treated as being the owner of all the underlying assets and interests because it takes two to tango for a valid partnership.
Since there was no partnership, all of the activities would be treated as the personal activities of the respective individual taxpayer. That was not a good result because manipulating the partnership tax basis rules (with the Helmer gambit) was critical to the tax benefits in issue. Without the partnership tax rules, there was not even a colorable claim for basis enhancement to achieve the taxpayer benefits claimed. And, for jurisdictional purposes, the Court deemed the partnership to exist for purposes of testing their alleged profit motive, which it found lacking.
In sum, the taxpayers lost on the merits in the context of a TEFRA partnership proceeding.
The Court then looked to the gross valuation overstatement penalty which the IRS asserted for each of the taxpayers. The simple mathematical calculation showed that the underpayment was subject to the 40% penalty unless the taxpayer had reasonable cause under Section 6664(c). That too was quickly dispensed with because, even if Garza had the requisite expertise (not conceded by the Court), he might appear to have had the expertise but he was the promoter of the deal.
The caselaw is clear on this point—promoters take the good-faith out of good-faith reliance. See, e.g., 106 Ltd., 684 F.3d at 90-91, aff'g 136 T.C. 67; Neonatology Assocs., 115 T.C. at 98. In 106 (another Garza case), we defined a promoter as "an adviser who participated in structuring the transaction or is otherwise related to, has an interest in, or profits from the transaction." 106, Ltd., 136 T.C. at 79 (quoting Tigers Eye Trading, LLC v. Commissioner, T.C. Memo. 2009-121, 2009 WL 1475159, at *19).
We also decided in 106 Ltd. that we would apply this definition "when the transaction involved is the same tax shelter offered to numerous parties." See id. at 80. Based on the records in all these cases, we find again, as we did in 106 Ltd., that Garza not only participated in structuring the transaction, but arranged the entire deal. It was he who set up the LLCs, provided a copy of the opinion letter, and coordinated the deal from start to finish. And he profited from selling the transaction to numerous clients—not just these three lawyers, but numerous others [*P79] as well. Lawrence, Salazar, and Garcia all knew this. Garza charged each of them a flat fee for implementing it and wouldn't have been compensated at all if they had decided not to go through with it. He wasn't being paid to evaluate the deal or tweak a real business deal to increase its tax advantages; he was being paid to make it happen.
This makes him a promoter. We therefore reject the partnerships' defense to the gross-misvaluation penalty.In short, not a good day for anyone involved on the taxpayer's side.