United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 24, 2012 Decided June 22, 2012
No. 11-1242
106 LTD., DAVID PALMLUND, TAX MATTERS PARTNER,
APPELLANT
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLEE
Appeal from the United States Tax Court
Kyle R. Coleman argued the cause for the appellant.
Patrick J. Urda, Attorney, United States Department of
Justice, argued the cause for the appellee. Tamara W.
Ashford, Deputy Assistant Attorney General, and Kenneth L.
Greene, Attorney, were on brief.
Before: SENTELLE, Chief Judge, HENDERSON and
GARLAND, Circuit Judges.
Opinion for the Court filed by Circuit Judge HENDERSON.
KAREN LECRAFT HENDERSON, Circuit Judge: 106 Ltd.
(Partnership), a limited partnership, appearing through its tax
matters partner David Palmlund (Palmlund), appeals a
decision of the United States Tax Court (Tax Court)
2
upholding the imposition of a forty per cent accuracy-related
penalty by the Internal Revenue Service (IRS). See 106 Ltd.
v. Comm’r, 136 T.C. 67 (2011). The IRS determined that the
Partnership had utilized a so-called “Son of BOSS” tax shelter
to overstate its basis in Partnership interests by approximately
$3 million and to thereby reduce Palmlund’s individual
federal income tax liability by nearly $400,000. The sole
issue before us is whether the Tax Court erred in determining
that the Partnership failed to establish a reasonable cause
defense to the accuracy-related penalty pursuant to 26 U.S.C.
§ 6664(c)(1). As set forth below, we affirm the Tax Court.
I.
A “Son of BOSS” tax shelter “employs a series of
transactions to create artificial financial losses that are used to
offset real financial gains, thereby reducing tax liability.”
Petaluma FX Partners, LLC v. Comm’r, 591 F.3d 649, 650
(D.C. Cir. 2010). 1 In 2000, the IRS identified the Son of
BOSS tax shelter as an abusive transaction if used to generate
artificial (i.e., non-economic) losses for tax purposes. Tax
Avoidance Using Artificially High Basis, Notice 2000-44,
2000-36 I.R.B. 255 (Sept. 5, 2000). The IRS also indicated
1
The shelter is a “variant of the Bond and Options Sales
Strategy (‘BOSS’) shelter,” hence the name. Napoliello v. Comm’r,
655 F.3d 1060, 1062 (9th Cir. 2011). The shelter
involve[s] the transfer of assets along with
significant liabilities to a partnership, with the goal
of increasing basis in that partnership. The
liabilities are not completely fixed at the time of
transfer, so the partnership ignores them in
computing basis. This results in high-basis assets
that produce large tax—but not out-of-pocket—
losses.
106 Ltd., 136 T.C. at 70 n.2.
3
that “purported losses from these transactions (and from any
similar arrangements designed to produce noneconomic tax
losses by artificially overstating basis in partnership interests)
are not allowable as deductions for federal income tax
purposes.” Id. at 255.
Palmlund is an executive recruiter and business
consultant in Dallas, Texas. 2 He has previously held
executive positions at several companies, including American
Home Shield, Eastman Kodak and Merrill Lynch Realty.
Palmlund also operated a real estate investment partnership,
formed a family limited partnership called Palmlund Ltd. with
the stated purpose of “investments” and actively managed
several personal bank and brokerage accounts. 106 Ltd., 136
T.C. at 69. For the 2001 tax year, he reported nearly
$2 million in income. Since the early 1990s, Palmlund has
used Joe Garza as his personal lawyer, including for legal
work related to wills and trusts. He has used Turner, Stone &
Company, LLP (Turner & Stone), an accounting firm, to
prepare his tax returns for more than ten years. According to
the Tax Court’s findings, Palmlund was an active client who
reviewed carefully every return Turner & Stone prepared.
In early 2001, Garza approached Palmlund about a
foreign currency investment opportunity that was a variation
of a Son of BOSS shelter. Although initially uninterested,
Palmlund later warmed up to the idea. After Garza explained
the mechanics of the shelter and its tax advantages, Palmlund
told Garza that he wanted to consult with Turner & Stone
about it. Garza encouraged Palmlund to do so, telling
Palmlund that he had worked with Turner & Stone on similar
transactions in the past. Turner & Stone advised Palmlund
that it had worked on similar shelters and recommended that
2
Unless otherwise noted, the facts are taken from the Tax
Court’s decision and from the parties’ Stipulation of Facts.
4
he proceed. Garza also “guaranteed” the transaction,
promising to pay Palmlund’s litigation costs if the shelter
were challenged and to refund his fee if the shelter were
invalidated. Eventually, Palmlund directed Garza to take the
necessary steps to implement the tax shelter.
Using the Tax Court’s unchallenged description, we
provide a brief summary of the shelter’s details. In November
2001, Palmlund executed documents forming three entities,
all of which he controlled: (1) the Partnership, (2) 32, LLC
and (3) 7612, LLC. 7612, LLC bought offsetting long and
short foreign currency digital options with premiums of $3
million and $2.97 million, respectively, from Deutsche Bank. 3
The actual cost of the options, however, was only $30,000—
the difference in the premiums. 7612, LLC transferred both
digital options to the Partnership. Next, 7612, LLC bought
$4,000 worth of Canadian currency that it then transferred to
the Partnership. Finally, on December 26, 2001, the
Partnership distributed thirty-five per cent of the Canadian
currency—with a value of $1,400—to Palmlund Ltd., the
family limited partnership previously formed by Palmlund.
Meanwhile, at Palmlund’s request, the Partnership terminated
the digital options on December 4 for a profit of $10,000,
excluding fees owed to Garza for implementing the shelter
(which fees totaled either $72,000 or $95,000).
On the Partnership’s 2001 tax return prepared by Turner
& Stone, it reported a basis in the distributed Canadian
currency of $2,974,000. On Palmlund’s individual tax
return—also prepared by Turner & Stone—he claimed a flow-
through loss of $1,030,491 from the distribution of the
3
An option is digital if its “pay-off [is] a fixed amount if the
option expire[s] ‘in the money’ or nothing at all if the option
expire[s] ‘out of the money.’ ” Stobie Creek Invs. LLC v. United
States, 608 F.3d 1366, 1372 (Fed. Cir. 2010).
5
Canadian currency. In effect, Palmlund used the Son of
BOSS tax shelter to reduce his total income by over
$1 million and thereby reduce his tax liability by nearly
$400,000. 4 Turner & Stone initially understated Palmlund’s
loss attributable to the distribution of the Canadian currency
because it assumed a distribution of only thirty-three per cent
to Palmlund Ltd. Palmlund noticed the error and instructed
Turner & Stone to increase the loss to reflect the thirty-five
per cent distribution. Trial Tr. at 383. 5 Turner & Stone
charged Palmlund $8,000 for preparing the 2001 tax returns
for the Partnership, for 32, LLC, for 7612, LLC and for
Palmlund individually. In previous years, it had charged
Palmlund $1,500 for tax return preparation services,
notwithstanding the fact that Palmlund’s tax returns before
2001—given his wealth and investments—were complex.
Part of Garza’s $72,000 or $95,000 fee was for the
preparation of a tax opinion letter regarding Palmlund’s Son
of BOSS tax shelter. Dated December 30, 2001, the letter
consisted of four pages specific to Palmlund’s shelter and
over eighty pages about general topics like partnership law,
disguised-sale provisions and the treatment of foreign
currency options. Garza’s letter concluded that Turner &
Stone’s tax treatment of Palmlund’s Son of BOSS
4
As the Tax Court explained, “Son of BOSS transactions
usually yield capital losses, but Palmlund offset ordinary income
because he attached the high basis to Canadian dollars, . . . [taking]
the position that certain foreign-currency transactions may produce
an ordinary loss.” 106 Ltd., 136 T.C. at 70 n.2. Palmlund’s
reported loss from the Canadian currency was partially offset by
other gains and his total reported loss from his interest in Palmlund
Ltd. was $1,026,322.
5
The Partnership distributed the remaining sixty-five per cent of
the Canadian currency in October 2002 but no loss was ever
claimed for it.
6
transactions—including the overstated basis in the Canadian
currency—would “more likely than not” withstand IRS
scrutiny.
In May 2004, the IRS first communicated with Palmlund
by sending him a copy of IRS announcement 2004-46 which
outlined the IRS’s proposed terms of settlement for any
taxpayer utilizing a Son of BOSS tax shelter. After meeting
with Garza and with Turner & Stone to discuss his response,
Palmlund decided to amend his individual tax return. He
removed the $1,030,491 loss attributable to the distribution of
the Canadian currency and paid an additional $394,329 in
taxes. Palmlund did not amend the Partnership’s tax return.
After initiating an administrative proceeding in February
2005 regarding the Partnership’s asserted basis in the
distributed Canadian currency, the IRS issued a final
partnership administrative adjustment (FPAA) to the
Partnership on May 5, 2005. The FPAA adjusted the
Partnership’s basis from $2,974,000 to $0 and, pursuant to 26
U.S.C. § 6662, 6 imposed a forty per cent accuracy-related
penalty to the underpayment of taxes resulting from the
Partnership’s overstatement of its basis in the Canadian
currency. The Partnership timely petitioned the Tax Court for
a readjustment under 26 U.S.C. § 6226.7 Subsequently, the
Partnership conceded the tax adjustment and the Tax Court
granted partial summary judgment to the IRS Commissioner
on that issue. The Tax Court also granted partial summary
judgment to the Commissioner on the issue of whether the
6
See infra p.9.
7
32, LLC was the original petitioner because it was the tax
matters partner for the Partnership. It dissolved in February 2002
and the Tax Court appointed Palmlund as the Partnership’s tax
matters partner pursuant to Rule 250 of its Rules of Practice and
Procedure.
7
Partnership had committed a gross valuation misstatement
meriting the forty per cent accuracy-related penalty. 8 The
only remaining issue before the Tax Court for trial was
whether the Partnership had a reasonable cause defense under
26 U.S.C. § 6664(c)(1) to defeat the penalty.
After a trial, the Tax Court concluded that the Partnership
had not established the reasonable cause defense because
Palmlund, acting on behalf of the Partnership, did not
establish his “actual good-faith reliance on Garza’s, and
Turner & Stone’s, professional advice” in overstating the
Partnership’s basis in the Canadian currency. 106 Ltd., 136
T.C. at 78. According to the Tax Court, Palmlund “could not
rely on their advice in good faith” because Garza and Turner
& Stone were promoters of the shelter, Garza’s opinion letter
contained obvious inaccuracies, Palmlund should have known
the transaction was improper given his business experience
and Palmlund entered into the transaction with the intent to
lose money. Id. at 81. The Partnership timely appeals. 9
8
A “gross valuation misstatement” occurs if “the price for any
property . . . claimed on any . . . return in connection with any
transaction . . . is [400] percent or more . . . of the amount
determined . . . to be the correct amount of such price.” 26 U.S.C.
§ 6662(e)(1)(B)(i) and (h)(2)(A)(ii)(I). The Tax Court concluded—
and the Partnership does not appeal—that the Partnership
committed a gross valuation misstatement because the Partnership’s
reported basis of $2,974,000 in the distributed Canadian currency
was more than 400 per cent of the Partnership’s actual basis of
$1,400.
9
Palmlund first appealed to the Fifth Circuit but, because the
Partnership no longer existed—and therefore had no principal place
of business—at the time Palmlund filed the petition for
readjustment, the Fifth Circuit granted the Commissioner’s motion
to transfer the appeal here pursuant to 26 U.S.C. § 7482(b). See 26
U.S.C. § 7482(b)(1) (“in the case of a petition under section 6226,”
8
II.
As noted earlier, the only question before us is whether
the Tax Court erred in deciding that the Partnership, acting
through Palmlund, failed to establish the reasonable cause
defense for using a $2,974,000 basis in the distributed
Canadian currency. 10 “Whether a taxpayer had reasonable
cause [under section 6664(c)(1)] is a question of fact decided
on a case-by-case basis” and “[w]e review this determination
and the findings underlying it for clear error.” Stobie Creek
Invs. LLC v. United States, 608 F.3d 1366, 1381 (Fed. Cir.
2010); see Am. Boat Co. v. United States, 583 F.3d 471, 483
(7th Cir. 2009) (“Whether reasonable cause existed—and the
findings underlying this determination—are questions of fact,
which we review for clear error.”); see also United States v.
Boyle, 469 U.S. 241, 249 n.8 (1985) (“Whether the elements
that constitute ‘reasonable cause’ are present in a given
situation is a question of fact, but what elements must be
if partnership has no principal place of business “as of the time the
petition . . . was filed with the Tax Court,” Tax Court “decision[]
may be reviewed by the Court of Appeals for the District of
Columbia”).
10
The Tax Court’s jurisdiction to decide the accuracy-related
penalty issue arose from the fact that the penalty “relates to an
adjustment to a partnership item”—i.e., the Canadian currency.
Stobie Creek Invs., 608 F.3d at 1380 (internal quotation marks
omitted); see also 26 U.S.C. § 6226(f) (tax court “shall have
jurisdiction to determine all partnership items of the partnership for
the partnership taxable year to which the notice of [FPAA]
relates . . . and the applicability of any penalty . . . which relates to
an adjustment to a partnership item”); id. § 6221 (“[T]he tax
treatment of any partnership item (and the applicability of any
penalty, addition to tax, or additional amount which relates to an
adjustment to a partnership item) shall be determined at the
partnership level.”).
9
present to constitute ‘reasonable cause’ is a question of law.”
(emphases in original)).
A.
Section 6662 of the Internal Revenue Code, 26 U.S.C.
§ 6662, imposes a mandatory accuracy-related penalty for
certain tax underpayments. See 26 U.S.C. § 6662(a) (“If this
section applies to any portion of an underpayment of tax
required to be shown on a return, there shall be added to the
tax an amount equal to 20 percent of the portion of the
underpayment to which this section applies.”). “If the
underpayment is due to a ‘gross valuation
misstatement,’ . . . the taxpayer must pay a penalty of forty
percent of the delinquent tax.” Am. Boat Co., 583 F.3d at 480
(citing 26 U.S.C. § 6662(a), (h)). 11 Section 6664 provides a
defense to an accuracy-related penalty “if the taxpayer proves
it had (1) reasonable cause for the underpayment and (2) acted
in good faith.” Stobie Creek Invs., 608 F.3d at 1381; see 26
U.S.C. § 6664(c)(1) (“No penalty shall be imposed under
section 6662 . . . with respect to any portion of an
underpayment if it is shown that there was a reasonable cause
for such portion and that the taxpayer acted in good faith with
11
Section 6662 provides for other accuracy-related penalties but
the parties stipulated before the Tax Court that the forty per cent
accuracy-related penalty for a gross valuation misstatement was the
only penalty at issue. “Although partnerships do not pay federal
income taxes,” “[t]he partners are . . . responsible for reporting their
distributive shares of the partnership’s income or loss on their
individual federal income tax returns.” Petaluma FX Partners, 591
F.3d at 650. Thus, the forty per cent accuracy-related penalty is
applicable to the understatement of taxes on Palmlund’s individual
income tax return attributable to the Partnership’s gross-valuation
misstatement. As discussed supra note 8, a gross valuation
misstatement is “a misstatement of the correct adjusted basis by 400
percent or more.” Am. Boat. Co., 583 F.3d at 480.
10
respect to such portion.”). “The determination of whether a
taxpayer acted with reasonable cause and in good faith is
made on a case-by-case basis, taking into account all pertinent
facts and circumstances.” 26 C.F.R. § 1.6664-4(b).
One way in which a taxpayer can establish the reasonable
cause defense “is to show reliance on the advice of a
competent and independent professional advisor.” Am. Boat
Co., 583 F.3d at 481; see also Boyle, 469 U.S. at 251 (“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.” (emphasis in original)).
By itself, however, “[r]eliance on . . . the advice of a
professional tax advisor . . . does not necessarily demonstrate
reasonable cause and good faith.” 26 C.F.R. § 1.6664-
4(b)(1). Rather, reliance on professional advice can establish
the defense only “if, under all the circumstances, such
reliance was reasonable and the taxpayer acted in good
faith.” Id.
To be reasonable, reliance on professional tax advice
must meet several requirements. First, “[t]he advice must be
based upon all pertinent facts and circumstances and the law
as it relates to those facts and circumstances.” 26 C.F.R.
§ 1.6664-4(c)(1)(i). Second, “[t]he advice must not be based
on unreasonable factual or legal assumptions,” including “a
representation or assumption which the taxpayer knows, or
has reason to know, is unlikely to be true.” Id. § 1.6664-
4(c)(1)(ii). Third, “the taxpayer’s reliance on the advice must
itself be objectively reasonable,” Stobie Creek Invs., 608 F.3d
at 1381 (emphasis in original), requiring, inter alia, that the
advice not come “from parties who actively promote or
implement the transactions in question,” id. at 1382; see also
Mortensen v. Comm’r, 440 F.3d 375, 387 (6th Cir. 2006) (“In
order for reliance on professional tax advice to be
reasonable, . . . the advice must generally be from a
11
competent and independent advisor unburdened with a
conflict of interest and not from promoters of the
investment.”). “[T]he taxpayer’s education, sophistication
and business experience [are] relevant in determining whether
the taxpayer’s reliance on tax advice was reasonable and
made in good faith.” 26 C.F.R. § 1.6664-4(c)(1). And,
contrary to the Partnership’s suggestion, see Appellant’s Br.
19 (“Determining whether one’s reliance on an individual is
in good faith is purely subjective.”), the inquiry is objective,
“focus[ing] . . . on what [the taxpayer] knew or should have
known at the time he obtained the [advice],” Am. Boat Co.,
583 F.3d at 485.
B.
We find no error—let alone clear error—in the Tax
Court’s determination that the Partnership failed to establish
the reasonable cause defense because Palmlund unreasonably
relied on both Garza’s and Turner & Stone’s advice. To
begin with, the role of Garza “in promoting, implementing,
and receiving fees from the [Son of BOSS] strategy” is more
than sufficient to support the Tax Court’s finding that he was
a promoter and therefore possessed an inherent conflict of
interest. Stobie Creek Invs., 608 F.3d at 1382; see also New
Phoenix Sunrise Corp. v. Comm’r, 408 F. App’x 908, 917
(6th Cir. 2010) (advisor’s “involvement in the preparation of
many of the documents needed to implement the [Son of
BOSS] transaction[] supports [Tax Court] finding” that
advisor was “ ‘promoting’ the tax shelter”); Tigers Eye
Trading, LLC v. Comm’r, 97 T.C.M. (CCH) 1622, 2009 WL
1475159 at *19 (May 27, 2009) (“[A]n adviser who
participated in structuring the transaction or is otherwise
related to, has an interest in, or profits from the transaction . . .
is considered a ‘promoter’ of the transaction . . . .”). Garza
brought the tax shelter opportunity to Palmlund’s attention
and he “coordinated the deal from start to finish.” 106 Ltd.,
12
136 T.C. at 80. Moreover, Garza made money out of the
transaction. Palmlund paid Garza a fee of either $72,000 or
$95,000 to execute the Son of BOSS transaction and Garza
“wouldn’t have been compensated at all if Palmlund decided
not to go through with [the shelter].” Id. at 81. In addition,
Garza “recommended” the transaction to “[m]ore than a
dozen” other clients and used a “[v]ery similar” opinion letter
for each client. Trial Tr. at 299.
With respect to Turner & Stone, it too implemented and
profited from the transaction. Its tax return preparation
services were essential to the execution of the transactions
and it had worked with Garza previously to implement Son of
BOSS tax shelters for other clients. Moreover, the $8,000 it
charged Palmlund for tax return preparation far exceeded its
normal charge of $1,500 and included research costs related
to Son of BOSS transactions that it conducted for a different
client. As the Tax Court found, the inflated fee represented
Turner & Stone’s “cut for helping to make the deal happen.”
106 Ltd., 136 T.C. at 81.
Furthermore, Palmlund knew or should have known that
Garza and Turner & Stone were promoters of the tax shelter.
Garza “recommended” the Son of BOSS shelter to Palmlund,
Trial Tr. at 299, and told Palmlund that he would “do
everything” to implement it, id. at 55; see Stobie Creek Invs.,
608 F.3d at 1382 (unreasonable to rely on professional
advisor if his “role as a promoter of the [Son of BOSS]
strategy was evident”). One of Palmlund’s accountants also
testified that the Son of BOSS shelter “was referred—or
brought to [Palmlund’s] attention by Joe Garza.” Trial Tr. at
314. Garza’s fee statement included Garza’s work in the
“Formation of LLC Disregarded Entity[,] Formation of
Limited Partnership[,] Negotiations with investment bank and
review of transactions[,] Legal Opinion Letter [and] Tax
return preparation and review.” Statement for Services
13
Rendered (Nov. 7, 2001) (Fee Statement). Palmlund also
testified that he went through with the deal despite knowing
that “[Garza] was not a licensed broker.” Trial Tr. at 120.
Finally, Palmlund knew Garza was performing similar
transactions for other clients. Palmlund testified that he knew
Garza had “done this type of [transaction]” in the past, id. at
50, and that Garza told him he was “developing a financial
organization” to handle similar transactions, id. at 120.
Palmlund also knew or should have known that Turner &
Stone was working with Garza to structure and implement the
tax shelter. See Van Scoten v. Comm’r, 439 F.3d 1243, 1253
(10th Cir. 2006) (unreasonable for taxpayer to rely on
professional advisor “directly affiliated with the promoter”).
Garza encouraged Palmlund to seek out Turner & Stone’s
advice regarding the Son of BOSS shelter because Garza
“[had] been doing transactions with them,” Trial Tr. at 50,
and Garza informed Palmlund that “the accountants on [the
transaction] would be Turner [&] Stone,” id. at 55. Garza’s
fee statement “include[d] Mr. John Stone’s tax accounting
fees for [the Partnership].” Fee Statement. John Stone is the
Stone of Turner & Stone. Garza also made clear to Palmlund
that he and Turner & Stone intended to handle all of the
necessary arrangements to execute the Son of BOSS shelter.
According to Palmlund’s testimony, Garza told him that he
“[would not] have to do anything” and that “[w]e will do
everything. We will take care of the taxes. We will take care
of setting up the accounts.” Trial Tr. at 55.
Notwithstanding Palmlund’s earlier bona fide dealings
with Garza and with Turner & Stone, we believe the Tax
Court record establishes that Palmlund unreasonably relied on
Garza and on Turner & Stone in this instance because he
knew or should have known that his “advisors” were not
providing independent advice and that they were in fact
promoters of the tax shelter who possessed an inherent
14
conflict of interest. See Stobie Creek Invs., 608 F.3d at 1383
(if taxpayer knew advisors were promoting Son of BOSS
shelter, taxpayer’s reliance was “not objectively
reasonable . . . , regardless of [his] longstanding relationship
with . . . or the reputations of [the advisors]”). Accordingly,
the Tax Court did not err in concluding that the Partnership
failed to establish the reasonable cause defense to the forty
per cent accuracy-related penalty. See id. at 1382-83; see also
Am. Boat Co., 583 F.3d at 482 (“[C]ourts have upheld the
imposition of penalties on taxpayers who relied on advisors
involved in implementing [Son of BOSS tax shelters] . . . .”).
In addition, the Tax Court did not clearly err in
concluding that Palmlund unreasonably relied on Garza’s
opinion letter as a matter of law because it was “based upon []
representation[s] or assumption[s] which [Palmlund] kn[ew],
or ha[d] reason to know, [were] unlikely to be true.” 26
C.F.R. § 1.6664-4(c)(1)(ii). For instance, the letter relied on
an “inaccurate representation . . . as to [Palmlund’s] purposes
for entering into [the] transaction.” Id. The letter stated that
Palmlund “believed there was reasonable opportunity to earn
a reasonable pre-tax profit from the [Son of BOSS]
transaction,” Opinion Letter at 3 (Dec. 30, 2001), but
Palmlund’s banker, Charles Denson, testified that Palmlund
said he entered the Son of BOSS shelter as a “tax
strategy . . . and the intent was to lose money,” Trial Tr. at
416. The Tax Court specifically credited Denson’s testimony
and a trial court’s “credibility determinations are entitled to
the greatest deference.” United States v. Erazo, 628 F.3d 608,
611 (D.C. Cir. 2011) (internal quotation marks omitted); see
also Pasternak v. Comm’r, 990 F.2d 893, 900 (6th Cir. 1993)
(“Th[e] court must give great deference to the Tax Court’s
determination pertaining to the credibility of witnesses.”
(citing Anderson v. Bessemer City, 470 U.S. 564, 575
(1985))).
15
The letter contained other inaccuracies as well. It stated
that Palmlund received the distributed Canadian currency “as
[a] Partnership liquidating distribution[],” Op. Letter at 3, but
the December 2001 distribution did not liquidate Palmlund’s
partnership interest because it distributed only thirty-five per
cent of the Canadian currency. Importantly, Palmlund
demonstrated his awareness of this fact by directing Turner &
Stone to amend his individual tax return to reflect the
distribution of thirty-five per cent of the Canadian currency.
The opinion letter also claimed that the Partnership “do[es]
not even now know if [it] will be called upon to satisfy [its]
obligations under the [digital options].” Id. at 28. By the
time Garza authored the letter, however, Palmlund had
terminated the options, eliminating the Partnership’s
obligations under them. Accordingly, we see no basis upon
which to conclude that the district court erred in concluding
that Garza’s opinion letter failed to comply with the
requirements of 26 C.F.R. § 1.6664-4(c)(1) and that the
Partnership’s reliance thereon was unreasonable. See 26
C.F.R. § 1.6664-4(c)(1) (“In no event will a taxpayer be
considered to have reasonably relied in good faith on advice
(including an opinion) unless the requirements of this
paragraph (c)(1) are satisfied.”); Long-Term Capital
Holdings, LP v. United States, 150 F. App’x 40, 42 (2d Cir.
2005) (no clear error in concluding taxpayer did not
reasonably rely on professional advice for reasonable cause
defense when “record provides ample support” for finding
that advice “unreasonably rel[ied] on statements that the
taxpayer knew were unlikely to be true”).
Finally, even if Palmlund did not know about Garza’s
and Turner & Stone’s conflicts of interest, we find no error in
the Tax Court’s determination that Palmlund’s motive for
entering into the tax shelter and his business experience
“demonstrate[] [his] lack of good-faith reliance.” 106 Ltd.,
136 T.C. at 81. As noted earlier, the Tax Court credited
16
Denson’s testimony that Palmlund’s “intent was to lose
money” on the tax shelter, id. at 73, and found that Palmlund
participated in the shelter because of the “alluring tax
benefit,” id. at 70. Although Palmlund testified that he made
investments only “to make money” and that he decided to
enter into the Son of BOSS transaction based on a tip from a
business partner’s daughter, Trial Tr. at 54, 44, the Tax Court
“was not required to credit [Palmlund’s] self-serving
explanation of his motives.” United States v. Bolla, 346 F.3d
1148, 1153-54 (D.C. Cir. 2003). Moreover, the improbable
tax advantages offered by the tax shelter—a $1 million dollar
loss from a transaction that earned Palmlund $10,000 (less
Garza’s fees)—should have alerted a person with Palmlund’s
business experience and sophistication to the shelter’s
illegitimacy. See Stobie Creek Invs., 608 F.3d at 1383 (no
reasonable reliance if taxpayer had “sufficient knowledge and
experience to know when a taxplanning strategy was likely
‘too good to be true’ ” and selected strategy “because of a
desire to avoid taxes that would otherwise be owed”); see also
Pasternak, 990 F.2d at 903 (when tax deduction exceeded
amount invested by fifty per cent, “a reasonably prudent
person would have asked a tax advisor if th[e] windfall were
not ‘too good to be true’ ”).
For the foregoing reasons, we affirm the judgment of the
Tax Court.
So ordered.