The Tax Court yesterday ruled that a taxpayer who invested in a bad tax shelter couldn’t rely on the opinion of his lawyer — who got a fee for selling the deal — to avoid penalties. Judge Holmes explains how the advice of attorney Garza and accountants Turner and Stone fell short (my emphasis):
We find that both these advisers not only participated in structuring the transaction, but arranged the entire deal. Garza set up the LLCs, provided a copy of the opinion letter, and coordinated the deal from start to finish. And both Garza and Turner & Stone profited from selling the transaction to numerous clients. Garza charged a flat fee for implementing it and wouldn’t have been compensated at all if Palmlund decided not to go through with it. He wasn’t being paid to evaluate the deal or tweak a real business deal to increase its tax advantages; he was being paid to make it happen. And Turner & Stone charged $8,000 for preparing Palmlund’s tax returns — $6,500 more than usual. The extra fees were not attributable to an extraordinarily complex return — Palmlund’s returns were always complex due to his various business interests — but, we find, were the firm’s cut for helping to make the deal happen. Because Palmlund’s advisers structured the transaction and profited from its implementation, they are promoters. Palmlund therefore could not rely on their advice in good faith.
The moral? If the drug dealer tells you it’s legal, you’ll still get in trouble for smoking dope, and if the promoter tells you the tax shelter is legit, that doesn’t help if the judge finds otherwise.
Cite: 106 Ltd., 136 T.C. No. 3
