On February 18, 2015, the United States Tax Court handed down its decision in 436 Ltd. v. Commissioner, in which Robert Heitmeier, the taxpayer, was sunk by the IRS, losing his claimed deductions in a Joe Garza vintage Son-of-BOSS tax shelter. Two takeaways: Son-of-BOSS tax shelters are almost always losers, and, when you think you can take big deductions in any kind of deal, get a second opinion from a competent tax attorney. And remember, you can’t rely on an attorney opinion letter (even if the attorney appears to be competent) if it’s a tax shelter and the attorney is the promoter.
436 Ltd. v. Commissioner
Joe Garza was characterized by the Tax Court as a “quite aggressive tax planning” attorney, citing 6611 Ltd. v. Commissioner, Garcia v. Commissioner, Estate of Hurford v. Commissioner and 7050 Ltd. v. Commissioner, all of which were cases involving Garza. In this case, Heitmeier, a riverboat pilot in New Orleans, made a lot of money providing crews and consulting services to riverboat casinos in the New Orleans and lower Mississippi area. He went along with a plan crafted by Joe Garza to do currency trades and get big tax deductions as a result. The Tax Court notes that Joe Garza promoted this type of transaction and testified that he had sold it to over a dozen other taxpayers. He took a flat fee from Heitmeier of $135,000, and turned out a number of form documents creating LLCs, a limited partnership and a tax opinion letter. Despite the fact that Robert Heitmeier’s CPA had contacted another CPA, Ellis Roussel, and his partner, Vince Giardina, and an attorney, Brian Leftwich, and all of them had expressed doubts about the viability of the deduction, Heitmeier went through with Garza’s transaction.
The IRS brought in their big guns, Richard J. Hassebrock, Nancy B. Herbert, and others, to level a broadside at Heitmeier. The Court’s opinion, with footnotes, is 24 pages long. Basically, Heitmeier lost every argument he put forth. All of his deductions went to zero and he had to pay lots of taxes.
He tried to avoid the penalty, saying he relied on Joe Garza’s tax opinion. With respect to the opinion letter, the Court pointed out that Garza did not say anything in the opinion letter about IRS Notice 2000-44 entitled “Tax Avoidance Using Artificially High Basis” which was exactly the transaction Garza set up for Heitmeier. And the Court spent a lot of time pointing out the inconsistencies and factual misstatements in Garza’s opinion, some of which were outrageous, like saying Heitmeier was dealing in Canadian dollars when the options were in Japanese yen and that Heitmeier made certain factual representations which he didn’t. But most importantly, the Code says a taxpayer cannot claim good faith reliance on an attorney, even if he otherwise appears to be competent (“at least to lawyers not versed in tax law”), if he is the promoter of the tax shelter. Because this deal was a tax shelter and Garza was the promoter, Heitmeier could not rely on Garza’s opinion.
The bottom line is that the Tax Court blew Heitmeier’s deductions out of the water and ended its opinion with this ominous statement, “An appropriate decision will be entered.”
The results could have been radically different if Heitmeier had gotten a second opinion from a tax attorney. The average attorney simply does not know the issues in cases like this. If Heitmeier had gotten a second opinion from another tax lawyer, he probably would have saved himself a fortune in legal fees and penalties.