A Lesson for Practitioners?

A recent tax shelter civil case presents a fact pattern that should be considered by criminal tax attorneys. In Palm Canyon X Investments LLC v. Commissioner, T.C. Memo. 2009-288, decided 12/15/09, the court rejected the claimed tax benefits for a variation of a Son-of-Boss transaction that exploited what some practitioners imagined was offered by the Helmer decision. I have blogged previously on Helmer (see here), so want digress on Helmer in this blog. (I do note that the Court in Palm Canyon deferred addressing whether the Helmer claim was technically sufficient, because it decided the case based on lack of economic substance, and meted out penalties accordingly.) What I want to focus on is the taxpayer's consideration of the shelter transaction.

The individual, one Hamel, behind the TEFRA entity (Palm Canyon) had a lot of tax to shelter, of course (a given in this type case). (As an aside, the individual was married to Suzanne Sommers aka Suzanne Somers, an actress featured in the advertisements for the Thighmaster, the cash cow generating the need for shelter.) The infamous Notice 2000-44, 2000-2 C.B. 255, was issued on August 13, 2000. This pretty much put the quietus on Son-of-Boss deals. KPMG, for example, throttled back on its variations after this notice. Nevertheless, some did not quite get it.

In 2001, the taxpayers' CPA began looking for shelter for Hamel and latched onto two promoters more than willing to accommodate the need by presenting "high end tax products for big losses." We call such products tax shelters. The promoters discussed "foreign markets and foreign currencies." (Apparently a variation of the FX shelter and certainly a kissing cousin to BLIPS, but both relying on the perception of magic in Helmer.) Although I was not familiar with the promoters (the Skyline Group and their lawyers, Cantley & Sedacca, LLP), the others quickly joining the adventure, Deutsche Bank AG and Craig Brubaker, were active players in the abusive tax shelter market.

Hamel's CPA had the initial reaction that the proposed Son-of-Boss strategy was "too good to be true." But, the CPA then reviewed a "tax opinion by the law firm of Bryan Cave, LLP." Bryan Cave is a national law firm of some general good repute. But, as I have noted elsewhere, a distinguishing feature of this round of tax shelters was that the brand name law firms which eschewed participating in earlier rounds of tax shelter excesses were attracted to and did lend a hand in this round drawn by the siren song of fees directly proportional to the mega tax needing shelter this round.

Taxpayers then instructed their CPA to contact Kenneth Barish an attorney with a well known local tax firm. The CPA faxed Barish his notes of his review of Bryan Cave's penalty discussion. Barish then investigated the promoters, including hiring a private investigator. (Notwithstanding, the Court later says that "Barish conducted only a superficial investigation of the parties involved.") Barish then reviewed the Bryan Cave opinion.

Taxpayer's CPA then met with another attorney, Marc Kushner of Pryor, Cashman, Sherman & Flynn, LLP, who had been referred by the promoter. Pryor Cashman had issued an opinion on the tax shelter. Barish and a promoter had a telephone call with Kushner. The promoter also gave Barish a copy of the Pryor Cashman 6662 penalty discussion. The Court later found that Barish relied on this Pryor Cashman opinion as well as the Bryan Cave opinion (the suggestion is that he relied on the full opinion, which presumably he received later in the process of consideration.)

The CPA then recommended that the taxpayers proceed with the transaction. Then something strange occurred. The court had earlier found as follows:

Through 2001 none of the Hamel [taxpayers’] companies operated a business or owned any manufacturing, storage, or sales facilities in a foreign country. In 2001 the Hamel companies' international activities consisted primarily of sales through the Internet. The Hamel companies also ordered a significant portion of the materials used to make their products from Asia and had some of their products manufactured there.

None of the Hamel companies' businesses had any contracts due in 2001 or 2002 that required payments in foreign currencies. Additionally, Thighmaster had no direct or indirect ownership interest in any foreign entity or bank account and paid no foreign taxes.

Then, later in the findings of fact, the court found that:

Following [certain meetings], Mr. Lamb [the CPA] recommended that Mr. Hamel proceed with the proposed MLD transaction. Mr. Barish noted that the MLD strategy represented an "aggressive tax opinion" that worked "from a technical standpoint", and he recommended creating a paper trail memorializing discussions concerning offshore expansion and currency transactions before executing the MLD strategy. On October 4, 2001, Thighmaster held a management meeting for which Herb Schmidt, Thighmaster's chief financial officer (CFO) and director of operations, prepared a memorandum regarding "Business Opportunity/Business Plan" and Jim England, Thighmaster's president, prepared a memorandum regarding International Marketing". The memoranda recommended expanding the Hamel companies' business operations into foreign markets and outlined potential strategies. n21 Around this time, Mr. Hamel decided to proceed with executing the MLD transaction.

n21 The only recommendation contained in the memoranda that the Hamel companies implemented in 2001 was a recommendation in Mr. Schmidt's memorandum related to measures designed to guard against foreign currency fluctuations.

Do the readers see any issues in this fact pattern?

There are many analogs as to this type of advice that I have encountered over the years. The classic is perhaps documenting future business plans in order to mitigate the possibility of an accumulated earnings problem. (Of course the one that practitioners studiously avoided in the old contemplation of death days was having a donor write a letter to a donee stating the "This gift is not in comtemplation of death.") The question, of course, is what the practitioner can do to create a contemporaneous paper trail that may, particularly in hindsight, be viewed as other than a straightforward recounting of the truth. Although the judge does not say so explicitly, I infer that the judge had some concerns about the action.

[I caution my readers that the foregoing is taken from the opinion as reported. I take no position on whether the facts and law recounted in an opinion have any necessary relationship to a fair and balanced recounting of the truth; take the facts as recounted only for purposes of discussion.]