A tax shelter can be legitimate — if the reported transaction has economic substance. But the shelter Mark Kerman participated in lacked such substance. The transaction had no purpose other than the creation of an income tax benefit. After Kerman claimed the benefit on his tax return, the IRS disallowed the deduction and imposed a valuation misstatement penalty pursuant to 26 U.S.C. § 6662(e), which was increased to 40 percent of the unpaid tax pursuant to § 6662(h). The tax court affirmed the IRS's decision. Kerman appeals, contending that the shelter was legitimate and that, even if it was not, the penalty should not be imposed. Because the transaction lacked economic substance and Kerman lacked reasonable cause or good faith to believe that it did, we AFFIRM.Toward the end of the opinion another key signal dot is connected as follows:
Mark Kerman is a college-educated multi-millionaire.
Finally, Kerman argues, the tax court gave him too much credit. He's just a simple man, "utterly uneducated in the complex tax arena — let alone the more byzantine tax-shelter realm." Appellant's Br. 48. Consequently, he was forced to rely on personal advisors. And, he argues, his reliance was reasonable even if his advisors had conflicts of interest.So, what should I say about the opinion? Prudence and respect for my readers time counsels that I should not say anything except the bullet points from the case. So, I won't.
- Kerman lost his adventure into bullshit tax shelter "investments." (Of course, like most of these, they only had the trapping of investments; they were tax plays, not investments looking for an investment return; which is why they are not sustained.)
- Kerman also lost on the valuation overstatement penalty. He was, after all, facing contrary authority in the Sixth Circuit and, not only contrary authority, but contrary authority that represents the clear trend in authority elsewhere. To be sure, the Supreme Court has taken the issue for cert in United States v. Woods (5th Cir. 2012), see Supreme Court Will Decide Whether Bullshit Tax Shelters with Basis Overstatements Draw the 40% Penalty (3/25/13), here. While I don't normally underestimate the Supreme Court's propensity to screw up the tax law, my prediction is that Woods will be decided consistent with the clear trend in the Circuits, exemplified by Kerman.
- The bullshit tax shelter opinion was written by R. J. Ruble, formerly with the NY firm of Brown & Wood, which merged into Sidney & Austin LLP, a larger firm with NY offices. The Court of Appeals said: "Because of its involvement in the CARDS strategy, Sidley was investigated by the federal government and paid a civil penalty. Mr. Ruble is currently serving a 78-month sentence in federal prison for his tax shelter activities." The key point in the opinion Ruble was an party who was conflicted between the promoters and Kerman in rendering an opinion. Kerman was not reasonably in "relying" on an opinion of a lawyer with a known conflict.