It is clear from the tenor of the decision that the Court of Appeals like the Tax Court (Judge Laro) was not impressed with the taxpayer's arguments.
I think some portion of the penalty discussion is worth excerpting (partially cleaned up):
One common method of demonstrating reasonable cause is to show reliance on the advice of a competent and independent professional advisor. American Boat, 583 F.3d at 481 (citing United States v. Boyle, 469 U.S. 241, 251 (1985) ("When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.")).
Simply relying on a professional does not necessarily relieve a taxpayer of penalties. To constitute reasonable cause, the reliance must have been reasonable in light of the circumstances. This is a fact-specific determination with many variables, but the question turns on the quality and objectivity of the professional advice obtained." To establish the defense the taxpayer, at a minimum, must show that the advice was (1) based on all relevant facts and circumstances, meaning the taxpayer must not withhold pertinent information[;] and (2) not based on unreasonable factual or legal assumptions, including those the taxpayer knows or has reason to know are untrue. The taxpayer's education, sophistication, business experience, and purpose for entering the questioned transaction are also relevant factors to be considered.
In the instant case, the tax court sustained the Commissioner's imposition of penalties based on its findings that the underpayments for those years were attributable to Exelon's negligence or disregard of rules or regulations. In doing so, the court necessarily rejected Exelon's "reasonable cause" defense of reliance on its professional advisors. In particular, the court found that Exelon did not rely in good faith on Winston's tax opinions because Exelon "knew or should have known" that Winston's conclusions were flawed in light of the "obvious inconsistency" of the physical return condition specified in the contracts and the capacity factors projected by Deloitte for the plants at the end of the subleases, which made exercise of the purchase options more likely. The tax court found that Exelon must have appreciated that it would be very expensive for the sublessees to sufficiently upgrade the plants to meet the return capacity requirements. Thus, the court concluded that Exelon must have understood that Winston's tax opinions, based on the Deloitte appraisals, were flawed.
Exelon's attack on this finding mimics its argument that the tax court confused capacity factor with availability factor and thus compared apples to oranges in its determination that the sublessees were reasonably likely to exercise their purchase options. We rejected that argument above and we reject it again here. We agree with the tax court that as a sophisticated plant operator, Exelon knew or should have known that, given the way these transactions were structured and given what the tax court found to be tainted appraisals, it was reasonably likely, or even highly likely, that the sublessees would exercise their options.
Exelon continues to argue that the Deloitte appraisals were not tainted by Winston's input. More importantly, it argues that even if the appraisals were tainted, Exelon had no way of knowing that and cannot be penalized for its reliance on Winston's opinions. The record is replete, however, with evidence that Exelon knew full well that Winston was supplying Deloitte with the necessary conclusions. Both Walter Hahn and Robert Hanley of Exelon were copied on the emails sent by Winston first to Stone and Webster and then to Deloitte. Indeed, it was Hahn who concluded that most of the requested conclusions were items for Deloitte, and sent the list of Winston's necessary appraisal conclusions to Deloitte multiple times.
Whether reasonable cause exists, and the finding underlying that determination, are questions of fact which we review for clear error. We find no such error and affirm the tax court's conclusion that penalties are warranted under § 6662.JAT Comments:
1. That tax shelter, that's bullshit! That reasonable cause, that's bullshit.
2. The taxpayer, as in many and most bullshit tax shelters, hoped to create indecipherable smog by complex documents that, in the final analysis when deciphered, meant that the taxpayer did not enter the type of transaction for which Congress intended the benefits claimed. Lawyers get a lot of money by trying the hide the true economic effect of transactions in unnecessary complexity. And, taxpayers are willing to hire them to do so because those taxpayers, not themselves unsophisticated, think they are buying (i) indecipherable fog or (ii) at least insurance from penalties. But, when the IRS deploys the resources to get to the real deal rather than the paper deal, nothing of tax substance is found. The taxpayer thus just lost the audit lottery as to the tax and the penalty.
3. I am still amazed that these complex transactions which, known to all involved, are nothings from which large tax benefits are claimed do not attract criminal investigation and prosecution. But, our country's politicians and thus its administrators are in thrall of large taxpayers and their major law and accounting firms who feel themselves entitled to play games with their tax obligations. Only by increasing the costs of such games beyond a potential 20% accuracy related penalty if caught will corporate behavior change, particularly in an era of declining IRS resources. In this environment where the likelihood of getting caught is decreasing, the penalties ought to increase for those who are caught.
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