Well, one would think that with the thrashing it got in the Second Circuit, GE would just move on to other bullshit tax shelters that it can better hide from the IRS. (Even bullshit tax shelters work when the IRS is unable to get past the fog to discover them.) But no, GE seeks vindication in the Supreme Court for its bullshit tax shelter. On September 17, 2015, a petition for certiorari, here, was filed. [Note to readers, when the link is clicked the document appears but may not be viewable in the browser; download the pdf and it will be viewable; I will try to get a better pdf to post that will be viewable in the browser.] The style of the petition is TIFD III-E, LLC, Tax Matters Partner for Castle Harbour-I Limited Liability Company v. United States (Sup. Ct. No. 15-331). I will post the Government's brief in opposition when it is filed.
I will make a few comments on the petition for certiorari.
First, I cut and paste the "Questions Presented." Stating the question presented is an art form, when practiced at a high level is designed to suggest the desired answer (it is in an advocate's brief, after all):
Over 60 years ago, this Court ruled in Commissioner v. Tower, 327 U.S. 280 (1946), and Commissioner v. Culbertson, 337 U.S. 733 (1949), that a partnership must be respected for purposes of federal taxation if a court finds, based on the totality of circumstances, that the parties in good faith and acting with a business purpose intended to join together in the conduct of the enterprise. In light of that longstanding test, the questions presented are:
1. Whether the Second Circuit erred in ruling that, even when parties form a partnership with real assets to operate a business for a legitimate purpose, courts may nevertheless deem the interests of some partners invalid, and thus ineligible for recognition under the tax laws, based on a judgment that the partners' interests in the partnership are "more akin to debt than equity."
2. Whether a taxpayer can be subject to a penalty under 26 U.S.C. § 6662(a) for underpayment of tax attributable to negligence when the tax return raises a question that is unsettled or reasonably debatable.GE introduces its argument by stating: "In this extraordinary case, which has been the subject of three separate appeals...." Three separate appeals in a single case is unusual, perhaps even extraordinary. But. in my view, it is only extraordinary because GE was able to smoke its claims past a district judge three times, only to be batted down all three times. Indeed, any reasonable district judge would have realized on the first remand that the Second Circuit was not buying into GE's nonsense.
On the merits of its claim, GE quibbles about whether the Second Circuit was remiss in not calling the transaction a sham. But, what GE did was to dress a lending transaction up as a partnership. Is that not a sham even if the word sham is not used? I don't think use of the word sham is necessary to the Second Circuit's holdings.
While the contours of a tax partnership may be necessarily uncertain with precision, this case does not present a proper vehicle to clarify the contours. I would be surprised if the Supreme Court wants to re-visit the issue. The earlier Supreme Court cases properly offer guidance, necessarily general and nonspecific, to the lower courts. No more is needed or likely to be provided in this case.
I do want to spend a little more attention on GE's claim that the negligence penalty is a cert-worthy issue. GE claims that it had reasonable basis, so as to escape the negligence penalty. Both negligence and reasonable basis are inherently fact-based inquiries, hardly worthy of the Supreme Court's attention on certiorari. It appears to me that GE is arguing that it should escape the penalty because the outcome was "reasonably debatable." I think the Second Circuit's opinions on the merits and the negligence penalty conclude that the outcome was not reasonably debatable. I think any knowledgeable person structuring a transaction such as this would have known that the transaction was a lending transaction in partnership guise and thus the position, in light of the facts clearly analyzed, was not reasonably debatable.
Oh, but then we do have the multiple decisions in GE's favor from the district judge -- each of which was dumped by the Court of Appeals. Just because a district judge stubbornly sticks to his conclusions does not make the outcome debatable. And the smart legal team from GE -- by repute the best in the world -- would have known that the transaction, as disguised, was bullshit. Penalties are appropriate. Perhaps even civil fraud penalty which was not asserted. If people who know better intentionally mischaracterize a transaction, why is that not negligence -- indeed, why not civil or criminal fraud?
GE's only hope is that the Supreme Court will be bedazzled as was the district judge and, as in Frank Lyon Co. v. United States, 435 U.S. 561(1978), be so confused that it gives GE the victory. Frank Lyon is, of course, a blemish on the Supreme Court, and hopefully it will not repeat that genre of debacle. One would hope that the Supreme Court will not likely blunder into that genre of morass again.
My prior blogs on the case are (presented in reverse chronological order):
- GE Gets Slapped Down Again for its BullShit Tax Shelter (Federal Tax Crimes Blog 5/20/15), here.
- More on Bullshit Corporate Tax Shelters (with Some Rantings) (Federal Tax Crimes Blog 9/12/14), here.
- GE Ducks Any Penalty for Its Bullshit Tax Shelter -- For Now (Federal Tax Crimes Blog 4/17/14), here.
- Thoughts on the the Corporate Audit Lottery (Federal Tax Crimes Blog 2/11/12), here.
- Second Circuit Strikes Down Another BS Tax Shelter (Federal Tax Crimes Blog 1/24/12), here.
Yet the Ninth Circuit vacated the negligence penalty because the Fosters' position was "reasonably debatable" and the case was one of "first impression with no clear authority to guide the decision makers as to the major and complex issues." Id. at 1439. That is equally true (if not more so) here.
Of course, just speculating, the Fifth Circuit or even the Eight Circuit would have been more likely Circuits to bless the underlying transaction. See Compaq Computer Corp. v. Commissioner, 277 F.3d 778 (5th Cir. 2001); and IES Industries v. United States, 253 F.3d 350 (8th Cir. 2001). But the Compaq and IES decisions are pretty much nonsense outside the Fifth and Eighth Circuit. See Bank of N.Y. Mellon Corp. v. Commissioner, ___ F.3d ___, 2015 U.S. App. LEXIS 15993 (2d Cir. 2015) ("In so holding, we agree with the Federal Circuit in Salem and disagree with decisions of the Fifth and Eighth Circuits (Compaq and IES, respectively.)"); see also Lee A. Sheppard, The Fun Goes Out of Foreign Tax Credit Planning, 148 Tax Notes 1283 (Sept. 21, 2015) (correctly stating that the Second Circuit was "unimpressed with Compaq and IES and hyperbolically asserting that the Second Circuit "essentially reversed the Compaq and IES decisions.")
STATUTES AND REGULATIONS
Bernardo v. Comm'r, T.C. Memo 2004-199
Hood v. Comm'r, 115 T.C. 172 (2000)
Hunt v. Comm'r, 59 T.C.M. (CCH) 635 (1990)
Wiggins v. Comm'r, 92 T.C. 869 (1989), aff'd, 904 F.2d 311 (5th Cir. 1990)