Taxpayer Reasonably Relied Upon Advice of Attorney in Fact Specific Son of BOSS Case

Even though the attorney in question had been actively involved in promoting Son of BOSS shelters and, in fact, was later indicted for his involvement in structuring such transactions, the taxpayer in the case of American Boat Company, LLC (CA7, 10/1/09) was held to have reasonably relied upon the attorney’s advice when reporting the result of a Son of BOSS transaction. However, the case may not offer much solace to others similarly situated, for the Seventh Circuit Court of Appeals, in sustaining the holding of the District Court went to great lengths to point out unique features of this particular case that rendered reliance reasonable.

David Jump is the taxpayer ultimately involved in this transaction who would, if the penalty were sustained, end up writing a check. Mr. Jump owned a variety of business interests. In 1996 his Chicago banker advised Mr. Jump that he should seek assistance in estate planning and referred him to an attorney with a local firm, Erwin Mayer. Mr. Mayer, as part of the estate plan, reorganized Mr. Jump’s holdings into a number of limited partnerships. As part of the reorganization, Mr. Mayer advised Mr. Jump to engage in a short-sale version of a Son of BOSS transaction. Son of BOSS transactions purportedly resulted in an inflation of basis of assets that can then either reduce a gain on the sale of the assets or produce a loss to offset other gains. This allowed Mr. Jump to shelter gains that were otherwise being generated by the reorganization taking place as part of his estate plan. The IRS did not examine Mr. Jump’s returns for 1996.

In 1998 Mr. Jump again sought Mr. Meyer’s assistance, this time due to an event that nearly exposed Mr. Jump to a huge damage award. A towboat of Mr Jump’s, loaded with several barges, ran into a bridge near downtown St. Louis, causing a number of the barges to break free. Those loose barges rammed a moored floating casino in the St. Louis harbor, and the moorings holding the casino in place began to break. Had they broken, the casino, with 2,000 passengers aboard, would have drifted with no means of navigation towards a nearby bridge which it could not clear. In that case, the casino would have either capsized or been torn apart, creating what the court noted “could have resulted in one of the worst maritime disasters in United States history.” Fortunately one of the moorings held long enough for the towboat to release its remaining barges and pin the casino against the riverbank until help arrived.

Mr. Jump sought Mr. Meyer’s advice again, this time regarding how to attempt to minimize the risk exposure involved in the tug boat operation. Again Mr. Meyer went to work on the matter, and once more, in addition to handling the liability exposure issue, proposed that Mr. Jump engage in another Son of BOSS transaction, this time managing to inflate the basis of the towboats as they were moved into a better liability shield.

The IRS did examine this transaction, and found that the Son of BOSS transaction itself had no economic substance―a holding the taxpayer was not challenging here. Rather the taxpayer disputed the IRS’s contention that Mr. Jump owed an accuracy related penalty on the understatement. Mr. Jump contended that he had reasonably relied on the advice of Mr. Meyer, advice provided in an opinion Mr. Meyer issued on the transaction after the had joined the lawfirm of Jenkins & Gilchrist, a letter that included that the short-sale transactions entered into as part of the Son of BOSS transactions had a “reasonable expectation of making a profit”–something that, frankly, would seem rather unlikely given the structure of these deals.

The IRS contended the Mr. Jump’s reliance was unreasonable. The IRS pointed out that Jenkins & Gilchrist had been actively involved in marking such shelters, profited from the marketed transactions, and were so deeply involved as to make reliance on their opinions unreasonable. The fact that a taxpayer is barred from relying on a professional who has a strong vested interest in a transaction moving forward is conceded by the Seventh Circuit, noting the Neonatology Assocs., P.A. v. Comm’r, 299 F.3d 221, 234 (3d Cir. 2002) case. However, the Court noted that in both cases where Mr. Jump got involved in a Son of BOSS tranasction, he had sought Mr. Meyer’s advice for a matter not related to seeking a tax shelter and Mr. Meyer had not approached Mr. Jump unsolicited attempting to sell him a shelter.

The court noted that Mr. Jump had previously engaged in such a transaction in an unrelated consultation on a different matter, and that transaction had not been challenged by the IRS. While the facts were that a profit on the transaction was not likely, the court held that Mr. Jump credibly testified he believed such a gain was possible when he read Mr. Meyer’s letter, and the court found that his legitimate belief made reliance reasonable.

The Court also found that the mere fact that Mr. Jump paid Mr. Meyer a fee did not show that Mr. Jump should have known that Mr. Meyer had an impermissible conflict of interest when rendering the opinion. Fees have to be paid to obtain legal advice, and Mr. Jump was clearing paying for a number of legal services. The Court found that to accept the IRS’s position would be to hold a taxpayer could never rely on the advice of a tax professional that was involved in any way with assisting in implementing a transaction, and the court found that to be an unreasonable burden on taxpayers.

Neither of the accounting firms that prepared Mr. Jump’s returns for the years in question objected to the tax treatments. While they were not called upon to render an opinion on the matter by Mr. Jump, they were aware of the transaction and prepared the returns taking the positions as outlined in Mr. Meyer’s letter. In fact, an international firm that was one of the two firms that prepared his return during the years in question took it upon themselves to tell Mr. Jump that, effectively, he should have to come to them because they had set up similar transactions for a number of clients. The actions of the accounting firms certainly failed to give Mr. Jump any inkling that he could not rely on the opinion regarding the treatment of the transactions.

The IRS also argued that the result here was simply “too good to be true” and that Mr. Jump should have realized that. The decision indicates this is where the IRS comes closest to having the Circuit Court of Appeals overturn the District Court. But the appeals felt that it was bound to defer to the District Court’s interpretation of Mr. Jump’s credibility when testifying about his beliefs, and while the court noted that they may have reached a different conclusion regarding whether Mr. Jump had reasonably believed it was possible to make money with the transaction, that was not a matter it was allowed to decide.

The panel concludes by noting that they would not necessarily reach the same conclusion had Mr. Jump taken the same actions today. The opinion noted that in 1998 there had not been any significant publicity regarding the marketed shelter matters or the potential problems with Son of BOSS transactions. As well, the law firm Mr. Meyer was associated with was apparently an upstanding, well respected firm that had not yet gone through later controversy regarding its involvement in Son of BOSS transaction that eventually, with signifcant help from Mr. Meyer, led “to the firm’ demise” as the Court cited from the Cemco Investors case. Today it would likely not be reasonable for Mr. Jump to rely on such an opinion―but that is today, and the case needs to be decided on Mr. Jump’s actions in 1998.