Altria # 4 - Second Circuit Declines Altria's Invitiation to Sustain a BS Tax Shelter (9/30/11)

The Second Circuit recently rejected another hokey tax shelter in Altria Group, Incorporated v. United States, 658 F.3d 276 (2d Cir. 2011), here. I have previously blogged on the trial level results in the following blogs: (i) Altria # 1 - Frank Lyon and tax shelters (3/20/10), here, (2) Altria #2 - Economic Substance and Juries (3/22/10), here, and (iii) Altria #3 - What Were Those Guys Smoking? (3/23/10), here.

The only question I have about the appeal is whether Altria really harbored the fantasy that, having failed to smoke these these shelters past the jury and then the district judge, the Second Circuit just would not be paying attention? Altria's goofy adventures -- first in getting into these shelters and then thinking that it could con the jury and the judges -- should be the best refutation that if we just let business people be business people they will make good decisions.

Altria #2 - Economic Substance and Juries (3/22/10)

In Altria (see blog here for introduction), Judge Holwell submitted the issues to the jury as follows:

The Court instructed the jury to analyze the transactions under the two common law disallowance methods relied on by the Government: the "substance over form" doctrine, and the "economic substance" doctrine. With respect to substance-over-form, the Court instructed the jury to put aside the labels used or names given to the documents and transactions, and decide whether Altria actually acquired and retained a genuine ownership interest in the Seminole, Oglethorpe, and Vallei facilities, and a genuine leasehold interest in the MTA facility. The jury was to consider "all the relevant facts and circumstances surrounding the transactions," including eight non-exclusive factors identified by the Court. 4 (Charge to the Jury, at 33-34 (Docket No. 146).) At the same time, the Court cautioned the jury that its analysis should turn on the facts as it found them, including its understanding of how the transactions were designed to unfold: "You must consider and give the appropriate weight to all the relevant facts and circumstances. In the end, the question is whether Altria retained significant and genuine attributes of traditional owner (or lessor) status." (Id. at 34.)

Altria # 1 - Frank Lyon and tax shelters (3/20/10)

I write today about a decision in a refund suit because it involves a jury verdict in a highly structured tax shelter. I have spent some words in this blog discussing concerns about the task a criminal jury faces in determining criminal liability for structured tax shelters, so I think this case is notable for this blog. In Altria Group, Inc. v. United States, 2010 U.S. Dist. LEXIS 25160 (S.D.N.Y. 2010), the jury was tasked to determine whether the substance over form or the economic substance doctrines (or both) applied to deny the taxpayer the tax benefits of ownership.

As introduction to the case and today's topic, I quote Judge Holwell's introductory summary of the case:

This case concerns federal income tax deductions plaintiff Altria Group Inc. and its subsidiary Phillip Morris Capital Corp. ("PMCC" or "Altria, " collectively with plaintiff) generated by leasing big pieces of infrastructure from tax-indifferent counterparties. These tax shelter transactions are known in the leasing industry as SILOs ("Sale-In-Lease-Out") and LILOs ("Lease-In-Lease-Out"). Following a two-week trial, the jury concluded on the facts presented to it that plaintiff's SILOs and LILOs lacked economic substance and failed to transfer tax ownership of the properties to Altria, thereby justifying disallowance by the IRS of certain deductions claimed by Altria. Several courts and another jury have reached similar conclusions in other jurisdictions. See BB&T Corp. v. United States, 523 F.3d 461 (4th Cir. 2008); AWG Leasing Trust v. United States, 592 F. Supp. 2d 953 (N.D. Ohio 2008); Fifth Third Bancorp & Subs. v. United States, 05 Civ. 350 (S.D. Ohio, April 18, 2008) (jury verdict); Wells Fargo & Co. v. United States, 91 Fed. Cl. 35 (Fed. Cl. 2010). But see Consolidated Edison Co. v. United States, 90 Fed. Cl. 228 (Fed. Cl. 2009).

Altria #3 - What Were Those Guys Smoking? (3/23/10)

Today is my final installment on Judge Holwell's Altria decision. I today have nothing to offer of tax substance (without making any claims that I have previously offered anything of tax substance). I do provide editorial comment. I caution my readers that, if they are looking for tax crimes nuggets, they won't find them in today's blog.

First, I went to Altria's web site here. The web site tell us that Altria, the maker of Phillip Morris cigarettes (including Marlboro, remember the Marlboro man -- actually more than one -- but three of whom, according to Wikipedia, died of lung cancer caused by, well, I don't have to say), supports regulation of cigarettes. If you believe that, Altria would have liked to have had you on the jury in its case.

Second, I just happen now to be teaching a series at my Church on the History of English Bible Translations. A pivotal focus of the series is, of course, the King James or so-called authorized version of the Bible. King James gets a lot of credit for that version. King James also was quite prescient about the horrors of smoking tobacco. In 1604 shortly after the Hampton Conference which started the process leading to the printing of the KJV in 1611, King James wrote a treatise called "A Counterblaste to Tobacco." The whole treatise (which may be viewed here); see also Wikipedia here) is a great read (and relatively short), but here is a snippet for flavor (in what is now called Early Modern English, about the same time Shakespeare was on his stage):

Have you not reason then to bee ashamed, and to forbeare this fllthie noveltie, so basely grounded, so foolishly received and so grossely mistaken in the right use thereof? In your abuse thereof sinning against God, harming your selves both in persons and goods. and raking also thereby the markes and notes of vanitie upon you: by the custome thereof making your selves to be wondered at by all forraine civil Nations, and by all strangers that come among you. to be scorned and contemned. A custome lothsorne to the eye, hatefull to the Nose, harmefull to the braine, dangerous to the Lungs, and in the blacke stinking fume thereof, neerest resembling the horrible Stigian smoke of the pit that is bottomelesse.

Now, if you like the way those guys expressed themselves in those days, you have the King James Bible 1611 edition, available from any number of sources, but I point particularly to the KJV Translator's Preface here.

Third, now, I just wonder whether those Altria guys were smoking when they got into this goofy deal and then when they decided to litigate it -- particularly before a jury and, if so, what were they smoking?

Courts Reject More BS Tax Shelters (10/5/11)

DOJ Tax is touting the stunning phenomenon of three major victories in BS tax shelters all in a single day. See Press Release, Justice Department Prevails in Three Tax Shelter Cases on Same Day (10/4/11), here (with links to the pdf files for the opinions). All of these cases were tried to judges in U.S. district courts. (Note the Altria case I discussed in the prior blogs here was tried to a jury with the same outcome.)

The common thread of these tax shelter is captured in Michael Graetz's famous characterization of a tax shelter as: "a deal done by very smart people that, absent tax considerations, would be very stupid." That is not a complete definition -- it is more like Potter Stewart's famous quotation (presented here in full):

I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description ["hard-core pornography"]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.

Well, these courts knew abusive tax shelters when they saw them, as did the jury and judges in Altria.

Further Comments on the Briefing in the Larson, Pfaff and Ruble Cert Petitions (6/21/11)

I have just received the Government's Brief in Opposition to Certiorari in the Larson and Pfaff cases (Sup. Ct. Dkt No. 10-1049) and Brief in Opposition to Certiorar in the Ruble Case (Sup. Ct. Dkt No. 10-1061). I have previously blogged on the Petitions for Certiorai in those cases in the following blog entries: Petitions for Cert in US v. Pfaff, Ruble & Larson and The Conduct Too Remote Is Not Evasion Argument in the Larson & Pfaff Petition for Certiorari . I have just a few points that I wish to make on the documents documents I just received:

1. The issue that I think is worthy of certiorari is whether the economic substance doctrine draws a sufficiently knowable criminal line. (I have previously blogged on facets of this issue here.)  The problem, in my mind, is that the Supreme Court itself has botched the analysis and approved civilly transactions that lack economic substance relative to the taxpayer's participation in the shelters / arrangements. Charles Kingson, are respected observer in this area, has said pungently:

Daugerdas Retrial Jury Instructions - Part 07 Tax Evasion Instructions Part 3 Economic Substance (11/27/13; 11/29/13)

I address in this blog the relationship to the defendants served as enablers and the taxpayers whose taxes were allegedly evaded.  In the prior cases, as I recall it, the Government conceded that the taxpayers themselves were innocent.  That would mean that the enabler defendants could not have aided and abetted the taxpayers' tax evasion.  It is not clear to me that the Government made that concession in this Daugerdas retrial.  So, I suppose, the jury could have applied an aiding and abetting construct to say that the enabler defendants aided and abetted some or all guilty taxpayers, but I think on the instructions given which did not develop the aiding and abetting concept, they would have had to find the defendants directly guilty of the crime of tax evasion which they could do because tax evasion can apply to enablers directly without the help of derivative liability provisions.

But, I want to focus on the taxpayers because it was their taxes that had to be evaded in all events for the crime of tax evasion as charged in Daugerdas.  What would it require for their taxes to have been evaded via the tax shelters promoted by the enabler defendants?  In the Tax Due and Owing instruction, Judge Pauley explained that the critical issue as to whether there was a tax due and owing was whether the shelters lacked economic substance.  (I have previously written on what I perceive as major difficulties in presenting the concept of economic substance to juries; they can be reviewed via the "Economic Substance" link.)  One uncertainty is whether the two component tests commonly applied to determine economic substance are in the disjunctive or the conjunctive.  That uncertainty has existed for a long time.  So, Judge Pauley asked the jury to apply the test in the conjunctive -- the most defendant-friendly application of the economic substance test.

Judge Pauley explained in explaining Tax Due and Owing:

The Government claims that the reason the taxpayers * * * * owed more taxes than they reported is that the losses they claimed on their tax returns as a result of the Short Sale, SOS, Swap, or HOMER tax shelters were not allowable. The Government contends that these losses were not allowable because they stemmed from transactions that lacked “economic substance.” 

A transaction that lacks economic substance cannot enter into tax computations. Any deduction claimed for a tax loss allegedly sustained in such a transaction is not properly claimed on a tax return. 

In order to establish that a transaction lacks economic substance, the Government must prove, beyond a reasonable doubt, two components. 

The first component is that the relevant taxpayer had no genuine business purpose for engaging in the transaction in question apart from the creation of the tax deduction.  

The second component is that there was no reasonable possibility that the transaction would result in a profit.