SCOTUS Reports

Tag: 26 U.S.C. 6662

  • McGuire v. Comm’r, 149 T.C. No. 9 (2017): Advance Premium Tax Credits and Taxpayer Obligations under the Affordable Care Act

    McGuire v. Commissioner of Internal Revenue, 149 T. C. No. 9 (2017)

    In McGuire v. Comm’r, the U. S. Tax Court ruled that excess advance premium tax credits received under the Affordable Care Act (ACA) must be repaid as an increase in tax, despite the taxpayers’ lack of awareness due to administrative errors. The McGuires, who were overpaid credits because of unprocessed income changes, were not liable for penalties due to their reasonable reliance on the health exchange and their tax preparer, highlighting the complexities and potential pitfalls of ACA implementation.

    Parties

    Steven A. McGuire and Robin L. McGuire, Petitioners, v. Commissioner of Internal Revenue, Respondent. The McGuires were the taxpayers and petitioners at the trial level before the United States Tax Court.

    Facts

    In 2014, Steven and Robin McGuire applied for and received advance premium tax credits under the Affordable Care Act through Covered California, a health insurance exchange. Initially, their eligibility was determined based on Steven’s income of approximately $800 per week. However, Robin began working in late 2013, increasing their household income above 400% of the federal poverty line, which disqualified them from receiving the credit. Despite notifying Covered California of the income change, the McGuires’ eligibility was not re-evaluated, and they continued to receive the credits, totaling $7,092 for the year. The McGuires did not receive Form 1095-A, which is necessary to reconcile the credits received with the credits to which they were entitled. They also did not report the excess credits as an increase in tax on their federal income tax return for 2014.

    Procedural History

    The Commissioner of Internal Revenue issued a notice of deficiency to the McGuires on August 8, 2016, disallowing the $7,092 in advance premium tax credits and determining an accuracy-related penalty. The McGuires, residing in California, petitioned the United States Tax Court for a redetermination of the deficiency. The Tax Court reviewed the case de novo, focusing on the statutory requirements under the Internal Revenue Code and the McGuires’ liability for the tax and penalty.

    Issue(s)

    Whether excess advance premium tax credits received under the Affordable Care Act must be repaid as an increase in tax, even if the taxpayers did not receive Form 1095-A and were unaware of the excess credits due to administrative errors by the health insurance exchange?

    Whether the McGuires are liable for an accuracy-related penalty under section 6662(a) for the understatement of their tax liability resulting from the unreported excess advance premium tax credits?

    Rule(s) of Law

    Under section 36B(f)(2) of the Internal Revenue Code, if the amount of the advance premium tax credit exceeds the amount to which the taxpayer is entitled, the excess must be repaid as an increase in tax. There is no limit to the amount of the tax increase for taxpayers with income above 400% of the federal poverty line.

    Section 6662(a) imposes an accuracy-related penalty for any portion of an underpayment of tax required to be shown on a return, which is attributable to negligence or a substantial understatement of income tax. However, section 6664(c)(1) provides a defense to this penalty if the taxpayer can show that the underpayment was due to reasonable cause and the taxpayer acted in good faith.

    Holding

    The Tax Court held that the McGuires were liable for the $7,092 deficiency resulting from the excess advance premium tax credits they received, as mandated by section 36B(f)(2) of the Internal Revenue Code. However, the court also held that the McGuires were not liable for the accuracy-related penalty under section 6662(a) due to their reasonable cause and good faith in relying on Covered California and their tax preparer.

    Reasoning

    The court reasoned that it lacked the equitable power to override the clear statutory language of section 36B(f)(2), which treats excess advance premium tax credits as an increase in tax. The McGuires’ failure to report the excess credits was not excused by their lack of knowledge, as the statute imposes a clear obligation on taxpayers to reconcile the credits received with those to which they are entitled.

    Regarding the penalty, the court found that the Commissioner failed to meet the burden of production for the negligence penalty under section 6662(a). For the substantial understatement penalty, the court acknowledged that the McGuires’ understatement exceeded the threshold but determined that they had reasonable cause and acted in good faith. The McGuires’ nonreceipt of Form 1095-A, coupled with their reliance on Covered California to properly adjust their eligibility and on their tax preparer, contributed to their reasonable cause defense. The court cited cases such as Frias v. Commissioner and Rinehart v. Commissioner, where nonreceipt of information returns and reliance on third parties contributed to reasonable cause and good faith defenses.

    Disposition

    The Tax Court entered a decision for the respondent (Commissioner) as to the tax deficiency of $7,092 and for the petitioners (McGuires) as to the accuracy-related penalty.

    Significance/Impact

    McGuire v. Comm’r underscores the strict liability imposed on taxpayers for repaying excess advance premium tax credits under the ACA, regardless of administrative errors or lack of notification. The decision highlights the importance of taxpayers’ proactive engagement with health exchanges and the necessity of receiving and acting on Form 1095-A. The case also emphasizes the potential for reasonable cause and good faith defenses to penalties when taxpayers rely on third parties and do not receive required information returns. This ruling may influence future cases involving ACA tax credits and underscores the need for clear communication and efficient administration by health exchanges to prevent similar issues.

  • Graev v. Commissioner, 147 T.C. No. 16 (2016): Procedural Requirements for Penalty Assessments

    Graev v. Commissioner, 147 T. C. No. 16, 2016 U. S. Tax Ct. LEXIS 33 (U. S. Tax Ct. 2016) (including reporter, court, and year)

    In Graev v. Commissioner, the U. S. Tax Court ruled that the IRS’s inclusion of a 20% accuracy-related penalty in a notice of deficiency complied with statutory requirements, despite the absence of written supervisory approval for the initial determination of the penalty. The court held that the penalty’s assessment would be premature to consider without an actual assessment, and affirmed the penalty on grounds of substantial understatement of income tax, while reversing the 40% valuation misstatement penalty. This case underscores the importance of procedural compliance in tax penalty assessments and impacts the IRS’s practices in asserting penalties.

    Parties

    Lawrence G. Graev and Lorna Graev, the petitioners, were the taxpayers who challenged the IRS’s determination of tax deficiencies and penalties. The respondent was the Commissioner of Internal Revenue, representing the IRS. The Graevs filed their petition in the U. S. Tax Court, contesting the IRS’s notice of deficiency issued on September 22, 2008, which determined deficiencies in their 2004 and 2005 tax returns.

    Facts

    In 2004, Lawrence Graev purchased property in New York City and donated a facade conservation easement to the National Architectural Trust (NAT). The Graevs claimed charitable contribution deductions on their 2004 and 2005 tax returns for this donation. The IRS, after examining the returns, determined deficiencies and assessed both a 40% gross valuation misstatement penalty under section 6662(h) and an alternative 20% accuracy-related penalty under section 6662(a). The IRS’s examining agent obtained approval for the 40% penalty but not the 20% penalty, which was later suggested by a Chief Counsel attorney and included in the notice of deficiency without further approval. The Graevs challenged the penalties, asserting that the IRS failed to comply with the supervisory approval requirement under section 6751(b).

    Procedural History

    The IRS issued a notice of deficiency to the Graevs on September 22, 2008, which included both the 40% and 20% penalties. The Graevs timely filed a petition with the U. S. Tax Court on December 19, 2008. The IRS later conceded the 40% penalty but maintained the alternative 20% penalty. The Tax Court issued an opinion in Graev I, sustaining the disallowance of the charitable contribution deductions. The court then addressed the procedural requirements for the 20% penalty in the current case, focusing on compliance with sections 6751(a) and 6751(b).

    Issue(s)

    Whether the IRS’s notice of deficiency complied with the requirement under section 6751(a) to include a computation of the 20% penalty?

    Whether the IRS’s failure to obtain written supervisory approval for the initial determination of the 20% penalty under section 6751(b) barred its assessment?

    Whether the Graevs were liable for the 20% accuracy-related penalty under section 6662(a) due to a substantial understatement of income tax?

    Rule(s) of Law

    Section 6751(a) requires the IRS to include with each notice of penalty information with respect to the name of the penalty, the section of the Code under which the penalty is imposed, and a computation of the penalty.

    Section 6751(b)(1) prohibits the assessment of any penalty unless the initial determination of such assessment is personally approved in writing by the immediate supervisor of the individual making such determination or a higher level official designated by the Secretary.

    Section 6662(a) imposes a 20% accuracy-related penalty on any portion of an underpayment of tax due to negligence or substantial understatement of income tax.

    Holding

    The Tax Court held that the IRS’s notice of deficiency complied with section 6751(a) by including the 20% penalty as an alternative with a computation, albeit reduced to zero to avoid stacking with the 40% penalty. The court also held that the issue of compliance with section 6751(b)(1) was premature since no penalty had yet been assessed. Finally, the court sustained the 20% accuracy-related penalty under section 6662(a) on the basis of the Graevs’ substantial understatement of income tax.

    Reasoning

    The court reasoned that the notice of deficiency clearly informed the Graevs of the 20% penalty and its computation, satisfying section 6751(a). Regarding section 6751(b)(1), the court found that the statute requires written supervisory approval before the assessment is made, which had not occurred at the time of the case. The court rejected the Graevs’ argument that the lack of approval invalidated the penalty, citing that the statute does not specify a consequence for noncompliance and that the Graevs were not prejudiced by the lack of approval. On the merits of the 20% penalty, the court found that the Graevs had a substantial understatement of income tax due to disallowed charitable contribution deductions and that they failed to establish reasonable cause, substantial authority, or adequate disclosure to avoid the penalty.

    Disposition

    The court sustained the 20% accuracy-related penalty under section 6662(a) and entered a decision under Rule 155, reflecting the holdings in both Graev I and the current case.

    Significance/Impact

    This case is significant for clarifying the procedural requirements for penalty assessments under sections 6751(a) and 6751(b). It impacts IRS practices by emphasizing the necessity of written supervisory approval before assessment and the importance of including penalty computations in notices of deficiency. The decision also underscores the importance of taxpayers’ compliance with disclosure and substantiation requirements to avoid accuracy-related penalties. The case has been influential in subsequent litigation concerning the IRS’s procedural compliance with penalty assessments.

  • Kenna Trading, LLC v. Commissioner, 143 T.C. 322 (2014): Economic Substance Doctrine and Sham Transactions in Tax Shelters

    Kenna Trading, LLC v. Commissioner, 143 T. C. 322 (U. S. Tax Ct. 2014)

    The U. S. Tax Court rejected a tax shelter scheme involving Brazilian receivables, ruling that it lacked economic substance and was a sham. The court disallowed bad debt deductions claimed by partnerships and trusts, affirming that no valid partnership was formed and the transactions were effectively sales. This decision underscores the importance of economic substance in tax planning and the judiciary’s scrutiny of complex tax shelters.

    Parties

    Kenna Trading, LLC, Jetstream Business Limited (Tax Matters Partner), and other petitioners at the trial court level; Commissioner of Internal Revenue, respondent. The case involved multiple partnerships and individual taxpayers who invested in a tax shelter scheme.

    Facts

    John Rogers developed and marketed investments aimed at claiming tax benefits through bad debt deductions on distressed Brazilian receivables. In 2004, Sugarloaf Fund, LLC (Sugarloaf), purportedly received receivables from Brazilian retailers Globex Utilidades, S. A. (Globex) and Companhia Brasileira de Distribuição (CBD) in exchange for membership interests. Sugarloaf then contributed these receivables to lower-tier trading companies and sold interests in holding companies to investors, who claimed deductions. In 2005, Sugarloaf used a trust structure to sell receivables to investors. The IRS challenged the validity of the partnership, the basis of the receivables, and the economic substance of the transactions, disallowing the claimed deductions and assessing penalties.

    Procedural History

    The IRS issued Notices of Final Partnership Administrative Adjustment (FPAAs) to the partnerships involved, disallowing the claimed bad debt deductions and adjusting income and deductions. The partnerships and investors filed petitions with the U. S. Tax Court for readjustment of partnership items and redetermination of penalties. The Tax Court consolidated these cases for trial, and most investors settled with the IRS except for a few, including John and Frances Rogers and Gary R. Fears. The court’s decision was appealed to the Seventh Circuit, which affirmed the Tax Court’s decision in a related case.

    Issue(s)

    Whether the transactions involving Sugarloaf and the Brazilian retailers constituted a valid partnership for tax purposes? Whether the receivables had a carryover basis under Section 723 or a cost basis under Section 1012? Whether the transactions had economic substance and were not shams? Whether the trading companies and trusts were entitled to bad debt deductions under Section 166? Whether Sugarloaf understated its gross income and was entitled to various deductions? Whether the partnerships were liable for gross valuation misstatement and accuracy-related penalties under Sections 6662 and 6662A?

    Rule(s) of Law

    The court applied Section 723 of the Internal Revenue Code, which provides for a carryover basis of property contributed to a partnership, and Section 1012, which governs the cost basis of property acquired in a sale. The court also considered the economic substance doctrine, the step transaction doctrine, and the rules governing the formation of partnerships and trusts under Sections 761 and 7701. Section 166 governs the deduction of bad debts, while Sections 6662 and 6662A impose penalties for gross valuation misstatements and reportable transaction understatements.

    Holding

    The Tax Court held that no valid partnership was formed between Sugarloaf and the Brazilian retailers. The transactions were collapsed into sales under the step transaction doctrine, resulting in a cost basis for the receivables rather than a carryover basis. The transactions lacked economic substance and were shams, leading to the disallowance of the claimed bad debt deductions under Section 166. Sugarloaf understated its gross income and was not entitled to the claimed deductions. The partnerships were liable for gross valuation misstatement penalties under Section 6662(h) and accuracy-related penalties under Section 6662(a). Sugarloaf was also liable for a reportable transaction understatement penalty under Section 6662A for the 2005 tax year.

    Reasoning

    The court reasoned that the parties did not intend to form a partnership as required under Commissioner v. Culbertson, and the transactions were designed solely to shift tax losses from Brazilian retailers to U. S. investors. The court applied the step transaction doctrine to collapse the transactions into sales, finding that the contributions and subsequent redemptions were interdependent steps without independent economic or business purpose. The court determined that the transactions lacked economic substance because their tax benefits far exceeded any potential economic profit. The court also found that the partnerships failed to meet the statutory requirements for bad debt deductions under Section 166, including proving the trade or business nature of the activity, the worthlessness of the debt, and the basis in the receivables. The court rejected the taxpayers’ arguments regarding the validity of the trust structure, finding it was not a trust for tax purposes. The court upheld the penalties, finding no reasonable cause or good faith on the part of the taxpayers.

    Disposition

    The Tax Court issued orders and decisions in favor of the Commissioner, disallowing the claimed deductions and upholding the penalties against the partnerships and trusts involved.

    Significance/Impact

    This case reaffirms the importance of the economic substance doctrine in evaluating tax shelters and the judiciary’s willingness to apply the step transaction doctrine to recharacterize transactions. It highlights the necessity of proving the existence of a valid partnership and meeting statutory requirements for deductions. The decision has implications for tax practitioners and taxpayers engaging in complex tax planning involving partnerships and trusts, emphasizing the need for transactions to have a genuine business purpose beyond tax benefits. The court’s ruling also reinforces the IRS’s ability to challenge and penalize transactions that lack economic substance.

  • Chandler v. Comm’r, 142 T.C. 279 (2014): Valuation of Conservation Easements and Reasonable Cause for Penalties

    Chandler v. Commissioner, 142 T. C. 279 (2014)

    In Chandler v. Commissioner, the U. S. Tax Court ruled that taxpayers Logan M. Chandler and Nanette Ambrose-Chandler could not claim charitable contribution deductions for facade easements on their historic homes due to lack of proof of value. The court also addressed penalties, allowing a reasonable cause defense for misvaluations in 2004 and 2005, but not for 2006 due to statutory changes. This case underscores the complexities of valuing conservation easements and the stringent application of penalty rules following tax law amendments.

    Parties

    Logan M. Chandler and Nanette Ambrose-Chandler were the petitioners throughout the litigation. The respondent was the Commissioner of Internal Revenue. The case was heard in the United States Tax Court.

    Facts

    Logan M. Chandler and Nanette Ambrose-Chandler owned two single-family residences in Boston’s South End Historic District. They granted facade easements on these properties to the National Architectural Trust (NAT), claiming charitable contribution deductions for 2004, 2005, and 2006 based on appraised values of the easements. The deductions were claimed over several years due to statutory limitations. In 2005, they sold one of the homes and reported a capital gain, claiming a basis increase due to improvements. The Commissioner disallowed the deductions and basis increase, asserting the easements had no value and imposing gross valuation misstatement and accuracy-related penalties on the underpayments. The Chandlers argued they had reasonable cause for any underpayments.

    Procedural History

    The Chandlers filed a petition with the United States Tax Court contesting the Commissioner’s determinations. The court’s review involved the application of de novo standard for factual findings and a review of legal conclusions for correctness. The court considered the valuation of the easements, the basis increase on the sold property, and the applicability of penalties under the Internal Revenue Code.

    Issue(s)

    Whether the charitable contribution deductions claimed by the Chandlers for granting conservation easements exceeded the fair market values of the easements?

    Whether the Chandlers overstated their basis in the property they sold in 2005?

    Whether the Chandlers are liable for accuracy-related penalties under section 6662 of the Internal Revenue Code?

    Rule(s) of Law

    Under section 170 of the Internal Revenue Code, taxpayers may claim charitable contribution deductions for the fair market value of conservation easements donated to certain organizations. Section 6662 imposes accuracy-related penalties for underpayments resulting from negligence, substantial understatements of income tax, or valuation misstatements. The Pension Protection Act of 2006 amended the rules for gross valuation misstatement penalties, eliminating the reasonable cause exception for charitable contribution property for returns filed after July 25, 2006.

    Holding

    The Tax Court held that the Chandlers failed to prove their easements had any value, and thus were not entitled to claim related charitable contribution deductions. The court also held that the Chandlers adequately substantiated a portion of the basis increase they claimed on the home they sold, entitling them to reduce their capital gain by that substantiated amount. The Chandlers were liable for accuracy-related penalties for unsubstantiated basis increases in 2005 and for gross valuation misstatement penalties for their 2006 underpayment, but not for 2004 and 2005 underpayments due to reasonable cause and good faith.

    Reasoning

    The court’s reasoning on the valuation of the easements focused on the credibility of expert appraisals. The Chandlers’ expert, Michael Ehrmann, used the comparable sales method, but the court found his analysis flawed due to the inclusion of properties outside Boston and significant subjective adjustments. The Commissioner’s expert, John C. Bowman III, failed to isolate the effect of the easements from other variables affecting property values. The court concluded that the easements did not diminish property values beyond existing local restrictions, leading to the disallowance of the deductions.

    Regarding the basis increase, the court acknowledged the Chandlers’ substantiation of $147,824 in improvement costs but disallowed the remaining claimed increase due to lack of documentation. The court rejected the Commissioner’s argument that the Chandlers may have already deducted the renovation costs on their business returns, as the Commissioner did not provide sufficient evidence during the examination.

    On penalties, the court applied the pre-Pension Protection Act rules for 2004 and 2005 underpayments, finding that the Chandlers had reasonable cause for their misvaluations due to their reliance on professional advice and lack of valuation experience. However, for the 2006 underpayment, the court applied the amended rules, denying a reasonable cause defense and upholding the gross valuation misstatement penalty. The court also found the Chandlers negligent in not maintaining adequate records for the full basis increase, thus upholding the accuracy-related penalty for 2005.

    Disposition

    The Tax Court’s decision was to be entered under Rule 155, sustaining the Commissioner’s disallowance of the charitable contribution deductions, allowing a partial basis increase, and imposing penalties as outlined in the holding.

    Significance/Impact

    Chandler v. Commissioner highlights the challenges taxpayers face in valuing conservation easements and the importance of maintaining thorough documentation for basis increases. The case also illustrates the impact of statutory changes on penalty assessments, particularly the elimination of the reasonable cause exception for gross valuation misstatements. This decision has implications for taxpayers claiming deductions for conservation easements, emphasizing the need for credible and localized valuation analyses. Subsequent cases have cited Chandler in discussions of easement valuation and penalty application, reinforcing its doctrinal significance in tax law.

  • AD Inv. 2000 Fund LLC v. Comm’r, 142 T.C. 248 (2014): Implied Waiver of Attorney-Client Privilege in Tax Penalty Cases

    AD Inv. 2000 Fund LLC v. Commissioner of Internal Revenue, 142 T. C. 248 (U. S. Tax Ct. 2014)

    In a landmark ruling, the U. S. Tax Court determined that the attorney-client privilege is waived when taxpayers assert good-faith defenses in tax penalty disputes. The case involved AD Investment and AD Global 2000 Funds, which used a Son-of-BOSS tax shelter. The court compelled the production of legal opinion letters, ruling that by asserting that the partnerships reasonably believed their tax treatment was proper, the taxpayers forfeited their privilege. This decision impacts how taxpayers can defend against penalties and underscores the tension between privilege and disclosure in tax litigation.

    Parties

    AD Investment 2000 Fund LLC and AD Global 2000 Fund LLC, both partnerships, were the petitioners. Community Media, Inc. , and Warsaw Television Cable Corp. , as partners other than the tax matters partner, were also petitioners. The respondent was the Commissioner of Internal Revenue. The case was heard in the United States Tax Court.

    Facts

    AD Investment 2000 Fund LLC (ADI) and AD Global 2000 Fund LLC (ADG) were involved in a Son-of-BOSS tax shelter strategy for the tax year 2000. The Commissioner of Internal Revenue adjusted partnership items and imposed accuracy-related penalties under Section 6662, alleging the adjustments were due to a tax shelter, substantial understatement of income tax, gross valuation misstatement, or negligence. The partnerships contested these adjustments and penalties, claiming they had reasonable cause and acted in good faith. The Commissioner moved to compel production of opinion letters from the law firm Brown & Wood LLP, asserting that these letters, which discussed the likelihood of the tax benefits being upheld, were relevant to the partnerships’ state of mind and good faith defense. The partnerships objected, claiming attorney-client privilege.

    Procedural History

    The case was brought before the U. S. Tax Court. The Commissioner filed motions to compel production of the opinion letters and for sanctions if the partnerships failed to comply. The partnerships objected to these motions, arguing that the letters were protected by attorney-client privilege. The Tax Court considered the motions and objections and ruled on them.

    Issue(s)

    Whether the assertion of a good-faith defense to accuracy-related penalties results in an implied waiver of the attorney-client privilege, thereby requiring the production of opinion letters related to the partnerships’ understanding of the law?

    Rule(s) of Law

    The attorney-client privilege exists to encourage full and frank communication between attorneys and clients, but it can be waived under the doctrine of implied waiver when a party’s assertion of factual claims necessitates disclosure to ensure fairness to the adversary. Specifically, when a taxpayer asserts a defense based on good faith and reasonable belief in the legality of their actions, they may forfeit the privilege over communications relevant to their legal knowledge, understanding, and beliefs. This principle is supported by the Federal Rules of Evidence and case law such as United States v. Bilzerian, 926 F. 2d 1285 (2d Cir. 1991), and Cox v. Adm’r U. S. Steel & Carnegie, 17 F. 3d 1386 (11th Cir. 1994).

    Holding

    The Tax Court held that the partnerships’ assertion of a good-faith defense to accuracy-related penalties resulted in an implied waiver of the attorney-client privilege. The court ordered the production of the opinion letters, finding that the partnerships’ claims of reasonable belief and good faith put their legal knowledge and understanding into contention, making the letters relevant and subject to disclosure.

    Reasoning

    The court reasoned that the partnerships’ defenses required an examination of their legal knowledge, understanding, and beliefs regarding their tax positions. By asserting that they reasonably believed their tax treatment was more likely than not to be upheld, the partnerships placed their state of mind and good faith efforts into issue. The court found that fairness required allowing the Commissioner to inquire into the bases of these beliefs, including the opinion letters, which were relevant to understanding the partnerships’ legal analysis and conclusions. The court distinguished this case from Pritchard v. Cnty. of Erie, 546 F. 3d 222 (2d Cir. 2008), noting that the partnerships here did assert a good-faith defense, unlike the petitioners in Pritchard. The court also considered the potential for sanctions if the partnerships failed to comply with the order to produce the letters, indicating that noncompliance could lead to restrictions on their ability to present evidence of their reasonable beliefs and good faith.

    Disposition

    The Tax Court granted the Commissioner’s motion to compel production of the opinion letters. The court set the motion for sanctions for a hearing, indicating that noncompliance with the order to produce the letters could result in the court prohibiting the partnerships from introducing evidence of their reasonable beliefs and good faith.

    Significance/Impact

    This case establishes a significant precedent in tax law regarding the implied waiver of attorney-client privilege when taxpayers assert good-faith defenses to accuracy-related penalties. It clarifies that such defenses can place the taxpayer’s legal knowledge and understanding into contention, thereby justifying the disclosure of otherwise privileged communications. The ruling may influence how taxpayers approach penalty defenses and how they manage communications with legal counsel in tax planning and litigation. Subsequent courts have referenced this decision in similar disputes, indicating its impact on the interpretation of privilege in tax cases. The decision also highlights the ongoing tension between the need for full disclosure in tax litigation and the protection of privileged communications.

  • Whitehouse Hotel Ltd. P’ship v. Comm’r, 139 T.C. 304 (2012): Valuation of Conservation Easements and Gross Valuation Misstatement Penalties

    Whitehouse Hotel Limited Partnership v. Commissioner of Internal Revenue, 139 T. C. 304 (2012)

    In Whitehouse Hotel Ltd. P’ship v. Comm’r, the U. S. Tax Court reevaluated the value of a conservation easement and upheld a penalty for a gross valuation misstatement. The court determined that the partnership overstated the value of the donated easement by more than 400%, leading to a penalty under Section 6662(h) of the Internal Revenue Code. The case underscores the importance of thorough valuation methods and the legal requirements for claiming charitable deductions on conservation easements.

    Parties

    Whitehouse Hotel Limited Partnership (Petitioner), a Louisiana limited partnership, with QHR Holdings–New Orleans, Ltd. as the Tax Matters Partner, challenged the Commissioner of Internal Revenue (Respondent) regarding the value of a qualified conservation contribution and the applicability of an accuracy-related penalty.

    Facts

    Whitehouse Hotel Limited Partnership (W) acquired the Maison Blanche Building and later the Kress Building in New Orleans. On December 29, 1997, W donated a perpetual conservation restriction on the Maison Blanche Building to Preservation Alliance of New Orleans, Inc. (PRC). W claimed a charitable contribution deduction of $7. 445 million on its 1997 Form 1065. The Commissioner examined the return and reduced the deduction by $6. 295 million, asserting a gross valuation misstatement penalty due to the overstated value of the easement.

    Procedural History

    The initial Tax Court decision in 2008 (131 T. C. 112) was vacated and remanded by the U. S. Court of Appeals for the Fifth Circuit (615 F. 3d 321, 2010). The Appeals Court instructed the Tax Court to reconsider the valuation of the easement and the penalty. On remand, the Tax Court reviewed the case and issued its supplemental opinion in 2012.

    Issue(s)

    Whether the value of the conservation easement was overstated, leading to a gross valuation misstatement?

    Whether the partnership’s overstatement of the easement’s value subjects it to an accuracy-related penalty under Section 6662(a) of the Internal Revenue Code?

    Rule(s) of Law

    The value of a conservation easement is determined by the difference between the fair market value of the property before and after the easement is granted, as per Section 1. 170A-14(h)(3)(i) of the Income Tax Regulations. A gross valuation misstatement occurs if the value claimed on the tax return is 400% or more of the correct value, as defined in Section 6662(h)(2)(A)(i). The reasonable cause exception under Section 6664(c) requires a qualified appraisal and a good-faith investigation into the value of the contributed property.

    Holding

    The court held that the value of the conservation easement was overstated by approximately 401%, constituting a gross valuation misstatement. The partnership failed to demonstrate reasonable cause for the underpayment of tax, leading to the application of the accuracy-related penalty under Section 6662(a).

    Reasoning

    The Tax Court rejected the cost approach and income approach used by the partnership’s expert, Richard J. Roddewig, due to their unreliability. The court relied on the comparable-sales approach, which provided a more accurate valuation. The court found that the partnership did not adequately investigate the value of the easement beyond obtaining the Cohen appraisal, which was deemed insufficient for the reasonable cause exception. The court emphasized that the partnership’s reliance on professional advice alone did not meet the statutory requirement for a good-faith investigation. The court also noted that the partnership’s failure to reconcile the claimed deduction with the property’s purchase price indicated a lack of due diligence.

    Disposition

    The court affirmed the application of the accuracy-related penalty under Section 6662(a) based on a gross valuation misstatement.

    Significance/Impact

    This case reinforces the stringent requirements for claiming charitable deductions for conservation easements, emphasizing the need for a qualified appraisal and a thorough investigation of the property’s value. It also highlights the importance of the comparable-sales approach in valuation disputes and the potential consequences of failing to meet the reasonable cause standard for penalty avoidance. The decision serves as a reminder to taxpayers to conduct comprehensive due diligence when claiming large charitable deductions.

  • Bergmann v. Comm’r, 137 T.C. 136 (2011): Qualified Amended Return and Gross Valuation Misstatement Penalties in Tax Law

    Bergmann v. Commissioner of Internal Revenue, 137 T. C. 136 (2011)

    In Bergmann v. Comm’r, the U. S. Tax Court clarified that the period to file a qualified amended return (QAR) ends when the IRS initiates a promoter investigation, regardless of whether penalties are imposed. The court also ruled that tax underpayments due to deductions disallowed for lack of economic substance or tax avoidance do not trigger a 40% gross valuation penalty. This decision impacts tax practitioners by defining the termination of QAR filing periods and the scope of gross valuation penalties.

    Parties

    Jeffrey K. Bergmann and Kristine K. Bergmann (Petitioners) v. Commissioner of Internal Revenue (Respondent)

    Facts

    Jeffrey K. Bergmann, a former tax partner at KPMG, participated in two Short Option Strategy (SOS)-like transactions in 2000 and 2001. These transactions, facilitated by KPMG’s David Greenberg, were intended to generate tax losses by artificially inflating basis. The Bergmanns claimed deductions for these losses on their 2001 federal income tax return. In 2004, they filed an amended return, removing the losses but not conceding their invalidity. The IRS, investigating KPMG for promoting abusive tax shelters, issued a summons in 2002 specifically concerning transactions described in Notice 2000-44, which included the Bergmanns’ 2000 transaction.

    Procedural History

    The IRS issued a notice of deficiency to the Bergmanns for 2001 and 2002, asserting tax deficiencies and accuracy-related penalties. The Bergmanns conceded the 2002 penalties and the invalidity of their 2001 deductions but contested the penalties. The case was tried before the U. S. Tax Court, which ruled on two main issues: whether the Bergmanns filed a QAR and whether they were liable for the gross valuation penalty.

    Issue(s)

    1. Whether the Bergmanns filed a qualified amended return (QAR) for 2001 under section 1. 6664-2(c)(3), Income Tax Regs.
    2. Whether the Bergmanns’ tax underpayment for 2001 was attributable to a gross valuation misstatement under section 6662(h), I. R. C.

    Rule(s) of Law

    1. A QAR is an amended return filed before certain terminating events, including the IRS’s first contact with a person regarding a promoter investigation under section 6700, I. R. C. (section 1. 6664-2(c)(3)(ii), Income Tax Regs. ).
    2. The gross valuation penalty under section 6662(h), I. R. C. , applies to underpayments attributable to gross valuation misstatements.
    3. Under Ninth Circuit precedent, the gross valuation penalty does not apply when deductions or credits are disallowed for lack of economic substance or tax avoidance (Keller v. Commissioner, 556 F. 3d 1056 (9th Cir. 2009)).

    Holding

    1. The Bergmanns did not file a QAR for 2001 because the period to file a QAR terminated before they filed their amended return due to the IRS’s summons to KPMG regarding a promoter investigation.
    2. The Bergmanns’ tax underpayment for 2001 was not attributable to a gross valuation misstatement, and thus they were not liable for the 40% gross valuation penalty but were liable for the 20% accuracy-related penalty they conceded.

    Reasoning

    The court held that the IRS’s summons to KPMG regarding transactions described in Notice 2000-44 terminated the period for filing a QAR, as it was a promoter investigation under section 6700, I. R. C. The court rejected the Bergmanns’ argument that the IRS needed to establish KPMG’s liability for promoter penalties to terminate the QAR period, finding no such requirement in the regulations. The court also determined that Greenberg’s actions in facilitating the Bergmanns’ transactions were attributable to KPMG, as he was acting within the scope of KPMG’s business.

    Regarding the gross valuation penalty, the court followed Ninth Circuit precedent (Keller v. Commissioner) that such penalties do not apply when deductions are disallowed for lack of economic substance or tax avoidance, even if overvaluation is involved. The Bergmanns had conceded the invalidity of their deductions on these grounds, so the court found their underpayment was not attributable to a gross valuation misstatement.

    Disposition

    The court entered a decision for the respondent, holding the Bergmanns liable for the 20% accuracy-related penalty they conceded but not for the 40% gross valuation penalty.

    Significance/Impact

    Bergmann v. Comm’r clarifies the termination of the QAR filing period under the promoter investigation provision, impacting tax practitioners’ strategies for amending returns. It also highlights a circuit split on the applicability of gross valuation penalties to transactions lacking economic substance, with the Ninth Circuit taking a narrower view than other circuits. This decision affects how tax shelters and penalties are litigated, particularly in the Ninth Circuit’s jurisdiction.

  • 106 Ltd. v. Commissioner of Internal Revenue, 136 T.C. 67 (2011): Partnership-Level Penalties and Reasonable Cause Defense in Tax Law

    106 Ltd. v. Commissioner of Internal Revenue, 136 T. C. 67 (2011)

    In 106 Ltd. v. Commissioner, the U. S. Tax Court ruled that it had jurisdiction over a partnership-level penalty dispute related to a Son-of-BOSS tax shelter transaction. The court held that the partnership could assert a reasonable cause and good faith defense at the partnership level, but found that the partnership could not rely on advice from promoters involved in structuring the transaction. This decision underscores the limits of relying on professional advice to avoid penalties in tax shelter cases and clarifies the Tax Court’s jurisdiction over partnership-level penalties.

    Parties

    106 Ltd. was the petitioner in this case, with David Palmlund serving as the tax matters partner. The respondent was the Commissioner of Internal Revenue. The case was heard in the United States Tax Court.

    Facts

    David Palmlund, the tax matters partner for 106 Ltd. , engaged in a Son-of-BOSS transaction in 2001, which generated over $1 million in artificial losses claimed on the partners’ tax returns. The transaction involved the formation of several entities, including 32 LLC, 7612 LLC, and 106 Ltd. , and the purchase and subsequent distribution of foreign currency options and Canadian dollars. Palmlund relied on the advice of Joe Garza, his attorney, and the accounting firm Turner & Stone. The IRS issued a Final Partnership Administrative Adjustment (FPAA) that adjusted various partnership items to zero and asserted a gross-valuation misstatement penalty under section 6662(h) of the Internal Revenue Code. Palmlund conceded the tax due but contested the penalty, arguing that he relied in good faith on professional advice.

    Procedural History

    The IRS issued an FPAA to 106 Ltd. , which adjusted various partnership items and asserted penalties. Palmlund, as the tax matters partner, timely petitioned the U. S. Tax Court. The court granted partial summary judgment to the Commissioner on two issues: (1) that the 2001 asset distribution from 106 Ltd. was nonliquidating, and (2) that there was a gross-valuation misstatement in excess of 400% on the partnership return. The remaining issue was whether the partnership had a reasonable cause and good faith defense to the penalty.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction over the gross-valuation misstatement penalty in this partnership-level proceeding?

    Whether a partnership can assert a reasonable cause and good faith defense in a partnership-level proceeding?

    Whether the partnership can reasonably rely in good faith on the tax advice given by a promoter?

    Rule(s) of Law

    The Tax Court has jurisdiction over penalties in partnership-level proceedings if the penalty relates to an adjustment to a partnership item that can be assessed without a partner-level affected items proceeding. See Petaluma FX Partners v. Commissioner, 135 T. C. 29 (2010). A partnership can assert its own reasonable cause and good faith defense in a partnership-level proceeding. See American Boat Co. LLC v. United States, 583 F. 3d 471 (7th Cir. 2009). A taxpayer cannot reasonably rely in good faith on the advice of a promoter, defined as an adviser who participates in structuring the transaction or has an interest in, or profits from, the transaction. See Tigers Eye Trading, LLC v. Commissioner, T. C. Memo 2009-121.

    Holding

    The U. S. Tax Court held that it had jurisdiction over the gross-valuation misstatement penalty in this partnership-level proceeding because the penalty related to an adjustment to the partnership’s inside basis, a partnership item. The court also held that the partnership could assert a reasonable cause and good faith defense at the partnership level but found that the partnership could not reasonably rely in good faith on the advice of Joe Garza and Turner & Stone, who were deemed promoters of the transaction.

    Reasoning

    The court’s reasoning focused on three main points. First, it distinguished the case from Petaluma FX Partners, which held that the Tax Court lacked jurisdiction over penalties related to adjustments to a partner’s outside basis. Here, the penalty related to the partnership’s inside basis, which is a partnership item under the regulations, and thus within the court’s jurisdiction. Second, the court followed the Seventh Circuit’s decision in American Boat Co. in holding that a partnership can assert a reasonable cause and good faith defense in a partnership-level proceeding, rejecting the contrary view in Clearmeadow Investments, LLC v. United States. Finally, the court found that Palmlund could not rely on the advice of Garza and Turner & Stone because they were promoters of the transaction. The court adopted the definition of promoter from Tigers Eye Trading and found that both advisers participated in structuring the transaction and profited from its implementation. Additionally, the court noted Palmlund’s business sophistication and the inaccuracies in Garza’s opinion letter as further evidence of a lack of good faith reliance.

    Disposition

    The court entered its decision for the respondent, upholding the gross-valuation misstatement penalty against 106 Ltd.

    Significance/Impact

    This case is significant for clarifying the Tax Court’s jurisdiction over penalties in partnership-level proceedings and affirming that partnerships can assert a reasonable cause and good faith defense at that level. It also underscores the importance of the nature of the professional advice received, particularly from advisers who are promoters of the transaction in question. The decision impacts the ability of taxpayers to rely on professional advice to avoid penalties in tax shelter cases and highlights the need for independent, non-conflicted advice to establish a reasonable cause defense. The case has been cited in subsequent decisions addressing similar issues in the context of partnership-level proceedings and the application of penalties.

  • Historic Boardwalk Hall, LLC v. Commissioner, 136 T.C. 1 (2011): Economic Substance Doctrine and Historic Rehabilitation Tax Credits

    Historic Boardwalk Hall, LLC v. Commissioner, 136 T. C. 1 (U. S. Tax Ct. 2011)

    The U. S. Tax Court ruled that Historic Boardwalk Hall, LLC, was not a sham partnership and upheld the validity of a transaction allowing Pitney Bowes to invest in the rehabilitation of Atlantic City’s East Hall, a historic structure. The court found that the partnership had economic substance and that the rehabilitation tax credits were a legitimate incentive for the investment. This decision reinforces the use of tax credits to spur private investment in public historic rehabilitations, impacting how such partnerships are structured and scrutinized for tax purposes.

    Parties

    Historic Boardwalk Hall, LLC (Petitioner) and the Commissioner of Internal Revenue (Respondent). Historic Boardwalk Hall, LLC, was formed by New Jersey Sports and Exposition Authority (NJSEA) and Pitney Bowes (PB) to rehabilitate the East Hall in Atlantic City, New Jersey. NJSEA was the managing member, while PB was the investor member with a 99. 9% interest. The Commissioner challenged the partnership’s tax treatment at the partnership level.

    Facts

    Historic Boardwalk Hall, LLC, was formed on June 26, 2000, with NJSEA as the sole member. On September 14, 2000, PB was admitted as a member, contributing approximately $18. 2 million in capital over several years. The East Hall, a historic structure in Atlantic City, underwent a significant rehabilitation project costing around $100 million, part of which was funded by PB’s investment. The rehabilitation allowed PB to claim historic rehabilitation tax credits under section 47 of the Internal Revenue Code. NJSEA managed the project and received a $14 million development fee from the partnership. The East Hall was successfully rehabilitated and operated as an event space, though it incurred operating losses. The Commissioner issued a notice of final partnership administrative adjustment (FPAA) challenging the tax treatment of the partnership, alleging it was a sham and that PB was not a genuine partner.

    Procedural History

    The Commissioner issued an FPAA on February 22, 2007, challenging the tax years 2000, 2001, and 2002. The FPAA asserted that the partnership items should be reallocated from PB to NJSEA and imposed accuracy-related penalties under section 6662. Historic Boardwalk Hall, LLC, filed a petition in response on May 21, 2007. A trial was held from April 13-16, 2009, in New York, New York. The Tax Court’s jurisdiction was limited to partnership items and penalties as per section 6226(f).

    Issue(s)

    Whether Historic Boardwalk Hall, LLC, is a sham partnership lacking economic substance?

    Whether Pitney Bowes became a partner in Historic Boardwalk Hall, LLC?

    Whether NJSEA transferred the benefits and burdens of ownership of the East Hall to Historic Boardwalk Hall, LLC?

    Whether the section 6662 accuracy-related penalties apply?

    Rule(s) of Law

    The economic substance doctrine requires that a transaction have both objective economic substance and subjective business motivation. See IRS v. CM Holdings, Inc. , 301 F. 3d 96, 102 (3d Cir. 2002). The Tax Court must consider whether the partnership is bona fide and whether the tax benefits are consistent with the intent of subchapter K of the Internal Revenue Code. See Sec. 1. 701-2, Income Tax Regs. The determination of partnership items, including whether a partnership is a sham and whether a partner’s interest is genuine, is made at the partnership level under the Tax Equity and Fiscal Responsibility Act (TEFRA). See Sec. 6226(f).

    Holding

    The Tax Court held that Historic Boardwalk Hall, LLC, was not a sham partnership and did not lack economic substance. The court found that PB became a partner in the partnership, and NJSEA transferred the benefits and burdens of ownership of the East Hall to Historic Boardwalk Hall, LLC. The section 6662 accuracy-related penalties were not applicable.

    Reasoning

    The Tax Court analyzed the economic substance of the transaction by considering both the objective economic substance and the subjective business motivation. The court found that the partnership had objective economic substance because it affected the net economic positions of both NJSEA and PB. The rehabilitation of the East Hall was successful, and PB’s investment facilitated the project, which would have been more costly to the state without PB’s participation. The court rejected the Commissioner’s argument to ignore the rehabilitation tax credits in evaluating economic substance, noting that Congress intended such credits to spur private investment in historic rehabilitations. The court also found that PB had a meaningful stake in the partnership, as it faced risks related to the rehabilitation’s completion and potential environmental hazards. The court determined that the partnership’s structure and operations were consistent with the intent of subchapter K, as exemplified by Sec. 1. 701-2(d), Example (6), Income Tax Regs. , which allows for partnerships to facilitate the transfer of tax benefits. The court concluded that the partnership was valid, and the tax benefits were appropriately allocated to PB.

    Disposition

    The Tax Court entered an appropriate decision upholding the partnership’s tax treatment and denying the Commissioner’s adjustments and penalties.

    Significance/Impact

    This case reaffirms the legitimacy of using partnerships to facilitate private investment in public historic rehabilitations, supported by tax incentives like the section 47 rehabilitation credit. It clarifies that such transactions can have economic substance even if primarily motivated by tax benefits, as long as they achieve the legislative intent of encouraging investment in otherwise unprofitable projects. The decision impacts how partnerships are structured for similar projects and how the economic substance doctrine is applied in the context of tax credits. It also underscores the importance of considering the legislative purpose behind tax incentives when evaluating the economic substance of transactions.

  • Canal Corp. v. Comm’r, 135 T.C. 199 (2010): Disguised Sales and Tax Deferral in Partnership Transactions

    Canal Corporation and Subsidiaries, formerly Chesapeake Corporation and Subsidiaries v. Commissioner of Internal Revenue, 135 T. C. 199 (2010)

    In Canal Corp. v. Comm’r, the U. S. Tax Court ruled that a transaction structured as a partnership contribution and distribution was a disguised sale, requiring immediate tax recognition. Chesapeake Corporation, through its subsidiary WISCO, transferred assets to a joint venture with Georgia-Pacific, receiving a large cash distribution. The court found that Chesapeake’s attempt to defer tax on the transaction failed due to WISCO’s lack of economic risk, impacting how businesses structure tax deferral strategies and the reliance on professional tax opinions.

    Parties

    Canal Corporation and Subsidiaries (formerly Chesapeake Corporation and Subsidiaries), Petitioner, v. Commissioner of Internal Revenue, Respondent. The case proceeded through trial before the U. S. Tax Court.

    Facts

    Chesapeake Corporation sought to restructure its business and divest its tissue business operated by its subsidiary, Wisconsin Tissue Mills, Inc. (WISCO). Chesapeake engaged Salomon Smith Barney and PricewaterhouseCoopers (PWC) to advise on strategic alternatives. PWC suggested a leveraged partnership structure with Georgia-Pacific Corporation (GP), where WISCO would transfer its tissue business assets to a newly formed LLC in exchange for a 5% interest and a special cash distribution. GP would contribute its tissue assets to the LLC in exchange for a 95% interest. The LLC obtained a bank loan, with GP as guarantor, and WISCO indemnified GP against the principal of the loan. The transaction closed on the same day PWC issued a “should” opinion that the transaction would be tax-free. Chesapeake treated the transaction as a sale for accounting purposes but not for tax purposes, deferring the recognition of a $524 million gain. The partnership ended in 2001 when GP sold its interest to comply with antitrust regulations, and Chesapeake reported the gain in 2001.

    Procedural History

    The Commissioner of Internal Revenue issued a deficiency notice to Chesapeake for 1999, asserting that the transaction should have been treated as a disguised sale in 1999, triggering a $524 million gain. Chesapeake filed a petition with the U. S. Tax Court. The Commissioner amended the answer to assert an additional accuracy-related penalty for a substantial understatement of income tax. The Tax Court applied a de novo standard of review and found for the Commissioner.

    Issue(s)

    Whether WISCO’s transfer of its tissue business assets to the LLC and the simultaneous receipt of a cash distribution should be characterized as a disguised sale under Section 707(a)(2)(B) of the Internal Revenue Code, requiring Chesapeake to recognize a $524 million gain in 1999?

    Whether Chesapeake is liable for an accuracy-related penalty for a substantial understatement of income tax under Section 6662(a) of the Internal Revenue Code?

    Rule(s) of Law

    A transaction where a partner contributes property to a partnership and soon thereafter receives a distribution of money or other consideration may be deemed a disguised sale if, based on all the facts and circumstances, the distribution would not have been made but for the partner’s transfer of property. See 26 C. F. R. § 1. 707-3(b)(1). The regulations provide a two-year presumption that such transactions are sales unless the facts and circumstances clearly establish otherwise. See 26 C. F. R. § 1. 707-3(c)(1). The debt-financed transfer exception applies if the distribution does not exceed the distributee partner’s allocable share of the partnership liability. See 26 C. F. R. § 1. 707-5(b)(1). A partner’s share of a recourse liability is determined by the portion for which the partner bears the economic risk of loss. See 26 C. F. R. § 1. 752-1(a)(1). The anti-abuse rule may disregard a partner’s obligation if it creates a facade of economic risk of loss. See 26 C. F. R. § 1. 752-2(j)(1). An accuracy-related penalty applies for substantial understatement of income tax unless the taxpayer shows reasonable cause and good faith. See 26 U. S. C. § 6662(a), (d)(1); 26 C. F. R. § 1. 6664-4(a).

    Holding

    The U. S. Tax Court held that WISCO’s transfer of assets to the LLC and the simultaneous receipt of a cash distribution constituted a disguised sale under Section 707(a)(2)(B) of the Internal Revenue Code, requiring Chesapeake to recognize a $524 million gain in 1999. The court also held that Chesapeake is liable for an accuracy-related penalty for a substantial understatement of income tax under Section 6662(a) of the Internal Revenue Code.

    Reasoning

    The court applied the disguised sale rules, finding that WISCO’s transfer of assets and the simultaneous receipt of a cash distribution triggered the two-year presumption. Chesapeake failed to rebut this presumption as WISCO did not bear the economic risk of loss for the LLC’s debt. The court disregarded WISCO’s indemnity obligation under the anti-abuse rule because it lacked substance and economic reality. WISCO’s assets post-transaction were insufficient to cover the indemnity, and Chesapeake could cancel WISCO’s main asset at its discretion. The court found that Chesapeake’s reliance on PWC’s tax opinion was unreasonable due to PWC’s inherent conflict of interest in structuring the transaction and issuing the opinion. The opinion was based on dubious legal assumptions and lacked thorough analysis. The court concluded that Chesapeake did not act with reasonable cause or in good faith in relying on the opinion, thus sustaining the accuracy-related penalty.

    Disposition

    The U. S. Tax Court entered a decision for the Commissioner, requiring Chesapeake to recognize the $524 million gain in 1999 and imposing an accuracy-related penalty for a substantial understatement of income tax.

    Significance/Impact

    Canal Corp. v. Comm’r is significant for its application of the disguised sale rules and the anti-abuse rule in partnership transactions. The case highlights the importance of economic substance in structuring tax deferral strategies and the scrutiny applied to indemnity obligations. It also underscores the limitations of relying on professional tax opinions when the adviser has a conflict of interest. Subsequent cases have cited Canal Corp. for its analysis of disguised sales and the standards for reasonable reliance on tax advice. The decision impacts how businesses structure transactions to achieve tax deferral and the importance of maintaining economic substance in such arrangements.