Shasta Strategic Investment Fund LLC et al v. United States of America, No. 3:2004cv04264 - Document 247 (N.D. Cal. 2014)

Court Description: ORDER GRANTING RESPONDENT'S MOTIONS FOR SUMMARY JUDGMENT AND DENYING INTERVENORS' MOTIONS FOR SUMMARY JUDGMENT. Signed by Judge Richard Seeborg on 7/31/14. (cl, COURT STAFF) (Filed on 7/31/2014)

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Shasta Strategic Investment Fund LLC et al v. United States of America Doc. 247 1 2 3 4 5 6 7 IN THE UNITED STATES DISTRICT COURT 8 FOR THE NORTHERN DISTRICT OF CALIFORNIA 9 SAN FRANCISCO DIVISION 11 For the Northern District of California United States District Court 10 12 13 14 15 16 17 SHASTA STRATEGIC INVESTMENT FUND, LLC; AND PRESIDIO GROWTH LLC, No. C-04-04264-RS (Related to Case Nos. C-04-4309-RS, C04-4398-RS, C-04-4964-RS, C-05-1123RS, C-05-1996-RS, C-05-2835-RS, and C05-3887-RS) Petitioners, v. ORDER GRANTING RESPONDENT’S MOTIONS FOR SUMMARY JUDGMENT AND DENYING INTERVENORS’ MOTIONS FOR SUMMARY JUDGMENT UNITED STATES OF AMERICA, Respondent. ____________________________________/ 18 19 20 I. INTRODUCTION Petitioners brought this action to challenge an IRS determination concerning the tax 21 treatment of certain partnership items reflected in petitioners’ 1999 and 2000 tax returns. The 22 government previously moved for summary judgment, as did two intervening partners. Those 23 motions were withdrawn after argument in order for the government to conduct further discovery. 24 The government has now renewed its motion for summary judgment, arguing the subject 25 transactions lacked economic substance and should therefore be disregarded for tax purposes. 26 Petitioners oppose the government’s motion, arguing the transactions carried both an objective 27 economic substance and a subjective profit motive. The government also moves for summary 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 1 Dockets.Justia.com 1 judgment against the intervenors, seeking a determination that the agency’s actions were timely. 2 The intervenors each separately oppose the government’s motion and also bring separate motions to 3 dismiss or for summary judgment on the same basis. For the reasons stated below, the 4 government’s motion for summary judgment against petitioners is granted. The intervenors’ 5 motions for summary judgment are denied, and the government’s motion against the intervenors is 6 granted. II. BACKGROUND 7 8 9 Petitioners are each a limited liability company, treated for tax purposes as a partnership. John Larson, Robert Pfaff, and David Amir Makov were the managers and principals of the parent of Presidio Growth, LLC (“Presidio”), petitioners’ managing partner and tax matters partner 11 For the Northern District of California United States District Court 10 (“TMP”). David Rivkin was a senior manager for KPMG, an accounting firm that marketed the 12 investment product at issue in this case, a “Bond Linked Issue Premium Structure” or “BLIPS.” 13 Rivkin Decl. ¶¶ 5, 12. Intervenors J. Paul Reddam and Tom Gonzales were each clients of Presidio 14 whose wholly-owned limited liability corporations, Clarence Ventures, LLC, and Birch Ventures 15 LLC, respectively, invested in strategic investment funds (“SIFs”) managed by Presidio. 16 A. Presidio and Presidio Advisory 17 In 1997, Larson and Pfaff left KPMG to form an investment advisory firm, Presidio 18 Advisory, with Makov as its investment advisor. Pfaff Decl. ¶ 8. Presidio was formed as a 19 subsidiary to Presidio Advisory. See Munk Decl. Ex. 17. Its members were Hayes Street 20 Management, Inc. (“Hayes Street”) and Norwood Holdings, Inc. (“Norwood”). Munk Decl. Ex. 3. 21 Larson and Pfaf were tax accountants with law degrees; neither was certified as a financial analyst, 22 credentialed as a broker, nor licensed to sell investment products. Confid. Mem. at 6, Ex. C to Pet.; 23 Larson Dep. 10:20–11:7. Pfaf then reached out to KPMG, proposing a “close relationship” with the 24 accounting firm to provide a variety of “turn-key,” “tax-advantaged” products. Weaver Decl., Ex. 25 JL-29 at 1–2, 4. After learning in 1998 that KPMG “was interested in offering a new tax-driven 26 product” to its clients, Larson and Pfaf presented a strategy to KPMG involving the use of a 27 premium loan. Larson Dep. 27:2–11, 291–32:15. 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 2 In the spring of 1999, Rivkin learned he had been assigned to a “task force” for KPMG’s 1 2 newest tax product for individual taxpayers: BLIPS. Rivkin Decl. ¶ 7. In that context, he attended a 3 training session in Dallas also attended by Makov and Larson on behalf of Presidio. Id. ¶¶ 7, 10. A 4 handout provided at the meeting described the BLIPS investment strategy as “designed to generate 5 significant investment returns through strategic investments in emerging market currencies.” Rivkin 6 Decl., Ex. B-93, p. 2. The actual presentation, however, described BLIPS as a tax loss generator. 7 Rivkin Decl. ¶ 12. Larson and Makov explained to the attendees that they planned to invest in 8 foreign currencies that were pegged to the U.S. dollar. Rivkin Decl. ¶ 29. Investors stood to profit 9 if the foreign currencies broke away from their pegs and plummeted in value, a prospect Makov characterized during the presentation as very, very low or remote during such a short period of time, 11 For the Northern District of California United States District Court 10 an assessment which Rivkin in turn conveyed to potential BLIPS clients. Id. at ¶¶ 26–27; Makov 12 Depo. 48–50, 58–74. BLIPS ostensibly consisted of three stages: an initial 60-day stage, in which the client’s 13 14 funds would be used to invest in low-risk investment strategies; a second 120-day stage, in which 15 slightly riskier investments would be pursued with more of the SIF’s capital; and a third stage 16 lasting the remainder of the 7-year term, in which the SIF would pursue investment strategies that 17 had the potential for greater rewards with substantially greater risk.1 See Makov Depo. Ex. 19. 18 Rivkin declares he was told at the meeting in Dallas that investors were not expected to stay in the 19 program beyond the first sixty-day stage, but that the seven-year term was required to construct the 20 large premium that would result in a tax loss. Rivkin Decl. ¶¶ 29, 42. KPMG’s Washington National Tax Practice and the law firm of Brown & Wood each 21 22 provided legal opinion letters concerning the predicted tax treatment of the investment program. 23 Pfaff Decl. ¶ 11.2 Many investors also retained their own tax advisors. Id. Presidio and its 24 25 26 27 28 1 Makov explained that the tiered-risk strategy provided clients with an opportunity to develop increased trust in his investment strategies over time. Makov Depo. at 205. 2 In one such opinion letter, KPMG opined “there is a greater than 50 percent likelihood (i.e. it is “more likely than not”)” that a variety of positions will be upheld if challenged by the Internal Revenue Service. See Larson Decl. Ex. W. This opinion was based on representations made by the parties to the transaction, such as “Presidio believed there was a reasonable opportunity for Investor No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 3 1 investors purportedly relied on these opinions in choosing to offer and participate in the BLIPS 2 investment strategy. Id. at 11, 13. 3 4 B. BLIPS Transactions To participate in the BLIPS program, each client established a single-member limited 5 liability corporation (referred to here as an “LLC-1”). Rivkin Decl. Ex. B-93. The LLC-1 would 6 take out a premium loan from one of the participating lenders: Deutsche Bank, Hypo Vereinsbank 7 (“HVB”), and National Westminster Bank (“NatWest”), a subsidiary of The Royal Bank of 8 Scotland.3 Id. In exchange for agreeing to an interest rate much higher than the market rate (a rate 9 to be determined later in the transaction) the lender would extend to the borrower both the principal amount of the loan as well as a substantial additional “premium” amount.4 Significantly, the 11 For the Northern District of California United States District Court 10 premium was set to equal the client’s desired tax loss; the principal was calculated so that the 12 premium equaled approximately 60% of the principal. See DeRosa Decl. ¶ 10; DeRosa Rpt. ¶¶ 30, 13 34, 57–63; Rivkin Decl. ¶¶ 22, 24; Larson Dep. 38:3–8, 116:15–117:2. The client would then make 14 an additional cash contribution to the LLC-1 equal to approximately 7% of the premium. See 15 DeRosa Decl. ¶¶ 9–10, 27–28; DeRosa Rpt. ¶¶ 30, 93–99; DeGiorgio Dep. 243:6–244:14; DeRosa 16 Rpt. Appx. 3, ¶ 26; Rivkin Decl. ¶¶ 21–23. 17 Seven to twelve days later, the LLC-1 would contribute all of these funds to a strategic 18 investment fund (“SIF” or “LLC-2”) managed by Presidio. See DeRosa Decl. ¶ 10; DeRosa Rpt. 19 ¶ 30; see also Rivkin Decl. ¶¶ 21–23, 33 & Ex. B-93, p. 7; Confid. Mem. 12, Ex. C to Pet. The 20 LLC-2 in turn assumed the obligation to repay the loan principal to the bank but, for purposes of 21 calculating the client’s outside basis in the LLC-2 partnership, any obligation to repay the loan 22 23 24 25 26 27 28 to earn a pre-tax profit, in excess of all associated fees and costs, and without regard to any tax benefits that may occur, by participating in the Investment Fund.” Id. at 11. 3 Deutsche Bank was the first to participate in BLIPS; it served as the accommodating bank for 56 SIFs in 1999. HVB served as the accommodating bank for 11 SIFs in 1999 and 18 in 2000. NatWest served as the accommodating bank for 1 SIF in 1999 and seven in 2000. In total, 93 SIFs were established through which 186 taxpayers engaged in BLIPS transactions. Gee Decl. ¶¶ 4-6. 4 The loan was a seven-year, fixed-interest rate, interest-only until maturity loan, comprising the stated principal and an initial unamortized premium. See Larson Decl. Ex. I. §1.01. It included a prepayment penalty that declined over time. See id. at § 3.02. It also included a “breakage fee” if prepayment was made within the first six months after the borrowing date. See id. at § 3.03. No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 4 1 premium was treated as contingent and not a liability for tax basis purposes.5 In other words, each 2 client’s outside basis in the LLC-2 was equal to the original loan premium plus his or her capital 3 contribution. One or more of the LLC-1s contributed to each of the 93 SIFs managed by Presidio. 4 The LLC-1s, individually or collectively, held a 90% interest in each SIF, each with a tax basis 5 equal to the loan premium plus the client’s cash contribution. Rivkin Decl. ¶ 36. Presidio, acting as 6 the managing member and TMP held a 1% interest, while Presidio Resources, LLC held the 7 remaining 9% interest in each SIF. At the same time the funds were transferred from the LLC-1 to the LLC-2, the LLC-2 and 8 this point in the transaction that the fixed-interest rate was set on the original premium loan. In the 11 For the Northern District of California the original lending bank would enter into an interest rate swap. DeRosa Decl. ¶10. It was only at 10 United States District Court 9 interest rate swap, the above-market rate of interest on the principal amount was swapped for a 12 floating market rate of interest to be paid on the entire amount extended, both the principal and the 13 premium. See Deutsche Bank SOF ¶ 10; DeRosa Decl. ¶¶ 10, 18; DeRosa Rpt. ¶¶ 30, 39, 41–43, 14 67; Weaver Decl., Ex. KB-8 at IRSDBBLIPS00203. This effectively converted the premium loan 15 into a standard floating rate loan for the full amount advanced. Smith Decl., Ex. 516 at RBS41441; 16 Weaver Decl. Ex. DDG-5 at HVB000149; Deutsche Bank SOF ¶ 10; DeRosa Decl. ¶¶ 10(e), 14–18, 17 44–51; DeRosa Rpt. ¶¶ 64–70. On behalf of the LLC-2s, Presidio entered into low-risk forward contracts for future delivery 18 19 of Argentine pesos and Hong Kong dollars.6 DeRosa Decl. ¶¶ 21–22; DeRosa Rpt. ¶¶ 92, 104–09. 20 The bank required the loan client to leave on deposit at least 101.25% of the original loan 21 disbursement (principal plus premium). See DeRosa Decl. ¶19. These funds were rolled into 22 23 24 25 26 27 28 5 Section 722 generally governs the calculation of a partner’s outside basis in a partnership. As relevant here, a partners’ outside basis in a partnership is equal to the partner’s capital contribution less any liability assumed by the partnership on the partner’s behalf. §§ 722, 752. 6 The borrowed funds could be used for a limited number of investments, including (1) Dollar based time deposits at the lending institution of short duration; (2) Fixed income securities of government or corporate issues with maturities of less than 90 days; (3) Interest rate swap transactions for which the lending bank would be the counterparty; and (4) Foreign current spot, forward, or option transactions entered into with the lending bank as the counterparty and requiring settlement in not more than six months. See, e.g., Larson Decl. Ex. I §§ 1.01 and 7.04(b). No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 5 1 “synthetic dollar deposits,” a low-risk, low-profit investment of off-setting trades in the Euro and 2 U.S. dollar. DeRosa Decl. ¶ 20. 3 When the client chose to exit the program, the assets received from the transaction would be 4 sold off. Rivkin Decl. ¶ 37. The loan would be repaid to the bank with interest, along with a pre- 5 payment penalty and early breakage fee. Larson Decl. Ex. U. The pre-payment penalty and early 6 breakage fee were set at the time of the loan swap such that those payments, together with any 7 interest payments made to the bank, equaled the loan premium. At this time, the LLC-2 was 8 terminated and a small amount or currency or stock was distributed to the client. Id. Those 9 distributed assets would then be sold, generating a loss that the client would attribute to his or her outside basis in the LLC-2. Rivkin Decl. ¶19. The net result, after accounting for management fees, 11 For the Northern District of California United States District Court 10 was a tax loss for the client approximately equal to the original loan premium. 12 13 C. IRS Investigation The IRS launched an investigation into tax returns associated with BLIPS and other tax 14 strategies promoted by KPMG, Presidio Advisory, and their principals. See United States v. Stein, 15 435 F. Supp. 2d 330, 338 (S.D.N.Y June 26, 2006) aff’d 541 F.3d 130 (2d Cir. 2008). In early 2002, 16 the Service issued summons to KPMG. In October 2002, the U.S. Senate began its own 17 investigation into the “development, marketing, and implementation of abusive tax shelters” and 18 held a public hearing on the issue in November 2003. Id. 19 In early 2004, the IRS referred the criminal investigation of BLIPS to the DOJ. 20 Subsequently, several KPMG partners were indicted in a criminal tax fraud conspiracy to defraud 21 the IRS. Makov pled guilty to one count, and Larson and Pfaff were convicted by a jury on twelve 22 counts of attempted tax evasion, ten of which involved BLIPS. The case against the remaining 23 defendants, including Hasting, was dismissed on the grounds that the government had interfered 24 with their Sixth Amendment rights. See United States v. Stein, 495 F.Supp.2d 390 (S.D.N.Y. July 25 16, 2007). The present case was stayed from 2005 to June 2011 as a result of those criminal 26 proceedings. 27 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 6 III. LEGAL STANDARD 1 A. Jurisdiction 2 These related actions were brought pursuant to the Tax Equity and Fiscal Responsibility Act 3 4 of 1982 (“TEFRA”), enacted by Congress to achieve consistent treatment of all partners in a 5 partnership. See 26 U.S.C. §§ 6221–6233. 7 Where the IRS disagrees with a partner’s tax treatment 6 of any partnership item, it must issue a Final Partnership Administration Adjustment (“FPAA”) to 7 the TMP of the partnership. § 6223. The TMP then has ninety days in which to file a petition for 8 readjustment. § 6226. Such a petition may be brought in the district court only if the partner 9 deposits with the Secretary of the Treasury the amount by which the tax liability of the partner would be increased if adjustments were made consistent with the FPAA. § 6226(e)(1); see 11 For the Northern District of California United States District Court 10 Schumacher Trading Partners II v. United States, 72 Fed. Cl. 95, 100 (2004).8 The court in which 12 such a petition is filed has jurisdiction to determine all partnership items of the partnership for the 13 relevant taxable year, the allocation of such items among the partners, and the applicability of any 14 penalty. § 6226(f). 15 The IRS determination of the partnership adjustments set forth in the FPAAs is reviewed de 16 novo. See Murfam Farms, LLC ex rel. Murphy v. United States, 94 Fed. Cl. 235, 245 (2010). That 17 determination is, however, presumptively correct, and it is the taxpayer’s burden to prove the 18 transaction is not a sham. See Goldberg v. United States, 789 F.2d 1341, 1343 (9th Cir. 1986); 19 Coltec Indus., Inc. v. United States, 454 F.3d 1340, 1355 (Fed. Cir. 2006). B. Summary Judgment 20 Summary judgment is appropriate “if the movant shows that there is no genuine dispute as to 21 22 any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. Proc. 23 56(a). The moving party bears the initial burden of demonstrating the absence of a genuine issue of 24 material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); see also Fed. R. Civ. Proc. 25 26 27 28 7 8 All statutory references herein are to Title 26 of the U.S. Code unless otherwise specified. In this case, both petitioners and intervenors have satisfied this jurisdictional requirement by submitting proof of such deposits, and petitioners do not dispute this court’s jurisdiction. Intervenors’ arguments concerning the applicable statute of limitations are addressed below. No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 7 1 56(c)(1)(A). If the movant succeeds, the burden then shifts to the nonmoving party to “set forth 2 specific facts showing that there is a genuine issue for trial.” Id. at 322 n.3; see also Fed. R. Civ. 3 Proc. 56(c)(1)(B). A genuine issue of material fact is one that could reasonably be resolved in favor 4 of the nonmoving party, and which could “affect the outcome of the suit.” Anderson v. Liberty 5 Lobby, Inc., 477 U.S. 242, 248 (1986). The Court must view the evidence in the light most 6 favorable to the nonmoving party and draw all justifiable inferences in its favor. See id. at 255. IV. DISCUSSION 7 8 9 A. Economic Substance Doctrine The Ninth Circuit applies the “economic substance” doctrine to determine if a transaction was a “sham” that should be disregarded for tax purposes. See Keller v. Comm’r, 568 F.3d 710, 724 11 For the Northern District of California United States District Court 10 (9th Cir. 2009); Reddam v. Comm’r, No. 12-72135, 2014 WL 2619692, at *6 (9th Cir. June 13, 12 2014). This doctrine asks whether “the taxpayer has shown 1) a non-tax business purpose (a 13 subjective analysis), and 2) that the transaction had ‘economic substance’ beyond the generation of 14 tax benefits (an objective analysis).” Keller, 568 F.3d at 724 (citations omitted). Under the 15 objective inquiry, the Court must determine “whether from an objective standpoint the transaction 16 was likely to produce economic benefits aside from a tax deduction.” Casebeer v. Comm’r., 909 17 F.2d 1360, 1365 (9th Cir. 1990) (emphasis added); see also Black & Decker Corp. v. United States, 18 436 F.3d 431, 441 (4th Cir. 2006) (a transaction must “appreciably” affect the taxpayer’s beneficial 19 interest in addition to reducing his or her tax). The subjective inquiry “involves an examination of 20 the subjective factors which motivated a taxpayer to make the transaction at issue.” Bail Bonds by 21 Marvin Nelson, Inc. v. C.I.R., 820 F.2d 1543, 1549 (9th Cir. 1987). 22 In the Ninth Circuit, the objective and subjective inquiries are not applied in a “rigid two- 23 step analysis.” Casebeer, 909 F.2d at 1363. Rather, they “are simply more precise factors to 24 consider in the application of [the Ninth Circuit’s] traditional sham analysis; that is, whether the 25 transaction had any practical economic effects other than the creation of income tax losses.” Sochin 26 v. Comm’r, 843 F.2d 351, 354 (9th Cir. 1988) abrogated in part on other grounds as recognized by 27 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 8 1 Keane v. Comm’r, 865 F.2d 1088, 1092 n. 8 (9th Cir. 1989); see also Reddam, 2014 WL 2619692, 2 at *7. The government’s motion focuses on the objective prong. The government argues, first, that 3 4 the premium loan structure of the BLIPS investment program served no purpose other than 5 artificially to increase a client’s basis in an LLC-2. Second, it argues the investment strategy served 6 no objective economic purpose other than generating tax losses. Petitioners focus primarily on the 7 subjective prong of the analysis. Even taking all inferences in favor of petitioners, the evidence 8 proffered concerning subjective intent is insufficient to overcome the government’s evidence that no 9 rational investor would pursue this strategy for any business reason other than tax avoidance. 1. Premium Loan and Interest Rate Swap 11 For the Northern District of California United States District Court 10 As described above, the tax advantages conferred by BLIPS depend on the characterization 12 of the premium component of the loan package. The initial loan from the banks to the LLC-1s was 13 structured such that the loan premium always equaled the client’s desired capital or ordinary loss. 14 The client, through the LLC-1, then transferred the entire loan proceeds, along with an additional 15 client contribution, to the LLC-2. A partner’s basis in a partnership interest generally increases by 16 contributions of money and property and decreases by the amount of any of his or her liabilities 17 assumed by the partnership. The clients, however, did not treat the “premium” portion of the loan 18 as a liability assumed by the LLC-2, ostensibly because there was no obligation to repay that 19 amount to the bank. The client’s tax basis in the LLC-2 was therefore reported as the full 20 contribution (loan principal plus premium plus client contribution) less the principal obligation 21 assumed by the LLC-2. In other words, the client’s basis in the LLC-2 was equal to the loan 22 premium plus the client contribution, the latter equal to approximately 7% of the loan premium. 23 According to the government, the sole purpose of the loan structure was simply to create an 24 artificially high tax basis in the LLC-2 for the client. 25 Petitioners proffer three purported business reasons for the premium loan. First, petitioners 26 argue the loans were used to provide leverage for the SIFs to buy foreign currency contracts. Both 27 sides agree these were highly leveraged investments. The government’s expert, however, explains 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 9 1 that only a fraction of the notional amount of these investments would be necessary to keep on 2 deposit as “margin” with the bank, an amount well-within the cash contribution of each client. 3 (DeRosa Decl. ¶¶ 21–27). The government also offers evidence from officers at the participating 4 banks that the margins required for forward trades of this nature would be covered by the clients’ 5 equity contributions. See, e.g., DB SOF ¶ 8 (Deutsche Bank); DeGiorgio Dep. 241:16–247:10 6 (HVB). 9 A contemporaneous email sent from a NatWest employee confirming the BLIPS 7 transaction for investor Tom Gonzalez noted that he made a reduced 6.5% capital contribution, 8 observing, “[R]emember that only around 3% of the equity is really needed to fund our margins and 9 spread costs—the rest is fees that Presidio and KPMG get.” Smith Decl. ¶¶ 1 & 5 & Ex. 526 (RBX21033).10 In response, petitioners point to Makov’s deposition testimony, where he suggested the loan 11 For the Northern District of California United States District Court 10 12 proceeds provided leverage for the investment strategy. Makov Dep. 45:22–46:23 (“because we 13 have leverage in this transaction, because the premium loan provides you with leverage, we will 14 then be—have the ability to benefit and amplify the benefit from a devaluation in—in—in Brazil”). 15 If anything, Makov’s testimony at this point describes a loan in search of a strategy. See also 16 Makov Dep. 139:4–8 (“Again, I was given and I was told that I was . . . to design an investment 17 program such that utilizes a loan and utilizes a premium loan. In designing the investment program, 18 I made economic sense and I made profit reasons for both of those inputs.”). According to Makov, 19 the notional amount on the forward contracts would typically be 15 times the amount of the client’s 20 cash contribution; the loans were, thus, necessary for these “highly leveraged” transactions. (Makov 21 Dep. 137:1–139:19; see also id. 45:22–46:23).11 Both parties agree the investments were highly 22 23 24 25 26 27 28 9 Petitioners object to this evidence, arguing correctly that none of these witnesses can claim personal knowledge of the subject transactions. The statements do, however, provide additional corroboration of DeRosa’s expert opinion as to the general practice and collateral requirements of such transactions. 10 The email from NatWest is properly considered as a business record. 11 The government urges the court to disregard Makov’s deposition testimony offered in this case in 2005 as he later testified in the separate criminal proceeding that he perjured himself in that deposition. The government may, of course, proffer Makov’s later trial testimony as a basis to impeach any inconsistent statements in his deposition; however, such a credibility determination cannot be made in conjunction with a motion for summary judgment where all inference and credibility judgments must be drawn in favor of the non-moving party. No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 10 1 leveraged, but other than Makov’s conclusory statement that “a loan and the proceeds of it were 2 needed to satisfy forward contracts,” id. at 137:17–19, petitioners offer no evidence that the loan 3 proceeds were either necessary as collateral to pursue the investment strategy or actually used as 4 such. Larson’s deposition testimony that “major banks would not permit investors to enter the 5 BLIPS large currency forward contracts without significant collateral on deposit” lacks credibility as 6 he admitted in the same deposition he had no personal knowledge or expertise on the required 7 margin for forward contracts. Compare Larson Dep. 211:10–20 with Larson Dep. 162:18–163:25, 8 Weaver Reply Decl. Ex. JL. 9 Second, petitioners argue the banks required investors to make the loan proceeds available to cover losses on the foreign currency contracts in the event of an appreciation event. As discussed 11 For the Northern District of California United States District Court 10 above, the investment strategy was essentially a bet that the foreign currencies would depeg from 12 and depreciate against the U.S. dollar. It was theoretically possible, however, that a currency might 13 depeg and appreciate against the U.S. dollar. The government does not dispute that in such an 14 event, the investor would risk substantial losses in excess of whatever margin the banks required on 15 the contracts. The risk, according to the government’s expert, was remote and readily addressed by 16 hedging such a risk rather than paying the fees and expenses for non-recourse loans to cover the 17 investment risk. See DeRosa Decl. ¶ 35 (suggesting out-of-the money call options to hedge this risk 18 could be obtained for “next to nothing”). Petitioners offer no explanation as to why the banks 19 would require the clients to maintain such large cash balances in order to pursue this strategy or, 20 more relevantly, why any reasonable investor would choose to assume a high cost loan to cover 21 potential losses. Nor do they explain why the banks would choose to rely on the deposit of non- 22 recourse loans to cover potential losses. 23 Third, petitioners point to the notion of “convexity,” or a benefit to the client of balancing 24 the LLC-2’s risk portfolio by placing more interest rate risk early in the seven-year investment 25 program (when the risks associated with the investment strategy were small) and decreasing interest 26 27 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 11 1 rate risk later (when investment risks were greater).12 Weaver Decl. Ex. JL-36 at KPMG006045–46. 2 This is the only rationale offered by petitioners for the premium loan structure itself. According to 3 the government, this rationale holds water only if the BLIPS participants intended to remain in the 4 program more than 60 days. The intention, however, was for clients to stay in BLIPS only through 5 the first 60 days. Rivkin Decl. ¶ 29; 47. In fact, virtually all of the clients performed as expected 6 and exited BLIPS within that period. Only two of the 183 taxpayers who engaged in BLIPS 7 transactions remained past 60 days; neither made any additional capital contributions thereafter and 8 each withdrew at day 120. Gee Decl. ¶¶ 4–6; DeRosa Decl. ¶ 11; DeRosa Report ¶ 30 & n.5. bank and the LLC-2. As recounted above, in each swap the bank agreed to pay the LLC-2 a fixed 11 For the Northern District of California In any event, the front-loaded aspect of the loan was ameliorated by the swap between the 10 United States District Court 9 interest rate on a notional amount equal to the stated principal of the original loan. In turn, the LLC- 12 2 agreed to make interest rate payments at a floating rate on a notional amount equal to the stated 13 principal of the loan plus the premium. Upon termination of the swap, the LLC-2 agreed to make a 14 payment equal to the premium amount. The end result was a floating rate loan with a principal 15 amount equal to the funding amount (stated principal plus premium), equivalent to a standard 16 commercial loan for the funding amount. The loan swap, along with other features of the BLIPS 17 transactions, differentiates the tax scheme at issue in this case from that at issue in Klamath 18 Strategic Investment Fund, LLC v. United States (Klamath I), 440 F. Supp. 2d 608 (E.D. Tex. 2006), 19 in which the district court, considering a similar premium loan product, determined that neither the 20 loan premium nor the prepayment amount were “liabilities” under the statute governing tax 21 treatment of partnership liabilities. Klamath I did not consider the issue presented here of whether a 22 premium loan carried any economic substance in the context of a transaction like BLIPS. Other 23 than arguing that such loans are legal—a point not disputed by the government—petitioners offer no 24 plausible economic explanation for this loan structure in the context of the BLIPS transactions. 2. 25 26 27 28 Investment Strategy 12 As recounted above, the investment aspect of the BLIPS program consisted of three stages: stage one would last 60 days, stage two would last 120 days, and stage three would last the balance of a seven year term. Rivkin Decl. ¶ 28. No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 12 The government further argues the currency trading component offered no realistic chance of 1 2 investor profit in light of the speculative nature of the investments, the high costs and fees, and the 3 structure that encouraged investors to exit after the initial 60-day period. By contrast, petitioners 4 insist the currency trading aspect offered a real opportunity for profit. Indeed, they note, the 5 Argentine peso did break from the U.S. dollar just a few years after the investments in question. 6 While Makov turned out to be half correct in his belief that the two designated currencies would 7 (eventually) devalue and break from their pegs, the structure of the transactions did not encourage 8 the kind of long-term investment necessary to realize economic gains.13 Optimism in investments is 9 appropriate and does not subject an investor to tax penalties; the speculative nature of the investment, however, must not be “so great as to cast doubt on [his or her] profit motive.” Sacks v. 11 For the Northern District of California United States District Court 10 Comm’r., 69 F.3d 982, 991 (9th Cir. 1995). The suggestion that investors hoped a particular foreign 12 currency would break from its U.S. dollar peg within sixty days of entering the investment simply 13 stretches the bounds of optimism too far and undermines any claim of a real economic purpose. The standard by which to judge the economic substance of a transaction is not that it merely 14 15 be possible to profit, but rather that the transaction be likely to result in economic benefits. See 16 Casebeer, 909 F.2d at 1365; Bail Bonds, 820 F.2d at 1549. As the Ninth Circuit has explained, this 17 is a “pragmatic total inquiry” that considers the potential magnitude and probability of any profits or 18 losses as well as how such investment returns would be reported for tax purposes. Reddam, 2014 19 WL 2619692, at *8. In Reddam, the court upheld the tax court’s finding that a transaction lacked 20 economic substance where “the magnitude of even the most optimistic gain is dwarfed by the 21 magnitude of the tax loss it was designed to generate and the strong possibility of a pretax loss.” Id. 22 Showing that it was theoretically feasible to profit as a result of purchasing the BLIPS investment 23 product, therefore, does not satisfy petitioners’ burden. The government’s expert amply 24 demonstrates the remote likelihood of any profit during such a short investment window, and 25 26 27 28 13 The Ninth Circuit recently upheld the tax court’s conclusion in a similar case that “the mere hint of future profitability”—even a 10 or 25% likelihood—did not compel the conclusion that an investment was “likely” to produce benefits aside from substantial capital losses. Reddam, 2014 WL 2619692, at *6. No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 13 1 petitioners offer no contradictory evidence. Although neither party offers evidence directly 2 comparing BLIPS to the tax strategy contemplated by the Ninth Circuit in Reddam, it appears the 3 BLIPS transactions offered a much lower probability of correspondingly greater profit. 4 Petitioners rely on Sacks v. Commissioner, 69 F.3d 982 (9th Cir. 1995) to argue that, just 5 because an investment is speculative, does not mean that it is a sham. In Sacks, the Ninth Circuit 6 reversed the tax court’s disallowance of depreciation deductions and tax credits on the basis that the 7 transactions were shams. Id. at 983. In so holding, the Ninth Circuit noted that Sacks had a 8 personal obligation to repay the loan, the tax benefits he obtained were the result of the 9 Congressional incentives to invest in alternative energy, and the underlying business of putting solar water heaters in consumers’ homes was genuine. Id. at 988. The court further noted that “[n]on- 11 For the Northern District of California United States District Court 10 recourse financing is a common indicator of a sham transaction.” Id. Unlike in Sacks, the loans at 12 issue in this case were non-recourse and there was no non-paper business underlying the transaction. 13 Although Sacks confirmed that a transaction does not become a sham simply because its (potential) 14 profitability is based on after-tax rather than pre-tax projections, the BLIPS transactions simply 15 were not likely to profit on either a pre- or post-tax basis. Petitioners’ reliance on this precedent is 16 therefore inapt. 17 Petitioners also rely on Northern Indiana Public Service Company v. Commissioner, 115 18 F.3d 506 (7th Cir. 1977), in which the Seventh Circuit affirmed a finding that a transaction 19 involving a foreign corporation was not a sham. The court noted the entity was “managed as a 20 viable concern” and “conducted recognizable business activity—concededly minimal activity, but 21 business activity nonetheless.” Id. at 513. Petitioners argue that here, as in Northern Indiana, the 22 SIFs were appropriately managed and conducted business transactions, however minor, in the form 23 of making foreign currency investments. A tax avoidance motive, they conclude, is therefore “not 24 inherently fatal to a transaction.” Id. at 511. The Seventh Circuit’s analysis, however, focused 25 primarily on the meaningful economic activity engaged in by entities in question; here, the only 26 economic transactions entered into by the SIFs were for the purpose of maintaining the façade of 27 economic activity. The duration of the investments, the source of investment money, and the 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 14 1 structure of the loans belie any true economic substance. The fact that these LLC-1s and SIFs 2 complied with the proper corporate form does not endow the transactions with economic 3 substance.14 4 3. Subjective Inquiry considered. See Wolf v. Comm’r, 4 F.3d 709, 713 (9th Cir. 1993). Here, petitioners point to various 7 corporate records demonstrating that the partnerships were formed under state laws and maintained 8 proper records. Evidence of corporate form alone, however, is insufficient to demonstrate an 9 economic purpose as it may just as likely reflect an intent to disguise a transaction’s true purpose. 10 See e.g., Gregory v. Helvering, 293 U.S. 465, 469 (1935) (“a transaction with no economic effects, 11 For the Northern District of California In analyzing the partnership’s intent, “objective indicia” of an intent to profit may be 6 United States District Court 5 in which the underlying documents are a device to conceal its true purpose, does not control the 12 incidence of taxes.”). In any event, proper corporate form indicates nothing about the likelihood of 13 producing economic benefits. As subjective indicia of intent to profit, petitioners point to statements by the principals of 14 15 Presidio suggesting they intended to generate profits from the BLIPS investment strategy and 16 believed they could. See, e.g., Larson Dep. 78:21–79:16, 202:20–203:10, 305:23–206:15; Makov 17 Dep. 79:10–84:12. In the face of overwhelming evidence to the contrary, however, these self- 18 serving declarations are insufficient to support a finding of subjective intent to profit. So, too, are 19 the various marketing representations to investors suggesting that BLIPS was designed to generate 20 significant investment returns insufficient to establish subjective intent, particularly when agents of 21 22 23 24 25 26 27 28 14 The government further argues that because petitioners acknowledged in other forums that the BLIPS transactions are structurally equivalent to those on which courts have previously ruled, they are estopped from re-litigating those issues in this case as well. A court in this district relied on collateral estoppel in holding that the question of whether the BLIPS transactions lacked economic substance was actually and necessarily decided in the criminal prosecution. See Princeton Strategic Inv. Fund, LLC, v. United States, C-04-04310 JW, 2011 WL 6176221 at *6 (N.D. Cal. 2011) (“The convictions of Pfaff and Larson, and the guilty plea of Makov, therefore conclusively determine that none of Petitioners’ controlling managers had a legitimate business purpose for the BLIPS transaction. From that, it necessarily follows that Petitioners lacked a business purpose for the transaction.”). While it is not necessary to rely on collateral estoppel in this matter, it is instructive to note that courts have previously concluded in similar cases the BLIPS transactions lacked economic substance. No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 15 1 the BLIPS promoter KPMG conducted training sessions at which they acknowledged investment 2 returns were not the true goal in marketing BLIPS. Furthermore, the fact that investors sought to 3 “invest” under the BLIPS strategy immediately after realizing substantial gains suggests the 4 investors too were primarily motivated by the product’s tax benefits. Finally, the nearly universal 5 exodus of investors at the 60-day mark belies any subjective intent to pursue an economic profit 6 from this schedule. 7 Whatever limited questions might remain as to the partners’ subjective intent are insufficient 8 to “affect the outcome of this suit” and thereby defeat the government’s motion for summary 9 judgment. Anderson, 477 U.S. at 248. The government is not required to prove the transaction lacks both objective economic substance and a subjective business purpose. Coltec Indus., Inc. v. 11 For the Northern District of California United States District Court 10 United States, 454 F.3d 1340, 1355 n.14 (Fed. Cir. 2006). As the Federal Circuit has explained, 12 “[A] lack of economic substance is sufficient to disqualify the transaction without proof that the 13 taxpayer’s sole motive is tax avoidance.” Id. at 1355. The petitioner’s failure to satisfy the 14 objective prong, coupled with only the slimmest evidence regarding the partnership’s subjective 15 intent, is fatal for petitioners. The government is therefore entitled to summary judgment on this 16 issue and a determination that the BLIPS transactions should be disregarded for tax purposes as 17 provided in the FPAAs. 18 19 B. Statutory Penalties Under § 6226(f), a district court has jurisdiction to determine “the applicability of any 20 penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item,” 21 even though a penalty may not be imposed and assessed until the partner has a chance to present his 22 or her individual defenses at the partner level. United States v. Woods, 134 S. Ct. 557, 564 (2013). 23 “The partnership-level applicability determination, we stress, is provisional: the court may decide 24 only whether adjustments properly made at the partnership level have the potential to trigger the 25 penalty. Each partner remains free to raise, in subsequent, partner-level proceedings, any reasons 26 why the penalty may not be imposed on him specifically.” Id. (emphasis added). 27 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 16 1 Here, the IRS has determined that accuracy-related penalties should be applied for 2 negligence, I.R.C. § 6662(b)(1); substantial understatement of tax, § 6662(b)(2); and substantial 3 valuation misstatement, § 6662(b)(3). These penalties are not cumulative; the maximum accuracy- 4 related penalty imposed on any portion of an underpayment may not exceed 20% (or 40% on the 5 portion attributable to a gross valuation misstatement), regardless of whether the underpayment is 6 attributable to multiple types of misconduct. See Treas. Reg. § 1.6662–2(c) (as amended in 2003); 7 Stobie Creek Investments, LLC v. United States, 82 Fed. Cl. 636, 702–03 (Fed. Cl. 2008) aff'd, 608 8 F.3d 1366 (Fed. Cir. 2010). Thus, each of the penalties is asserted in the alternative, with the 9 maximum potential penalty equal to 40%. The government moves for a finding that both the negligence and substantial valuation misstatement penalties apply to the partnerships as a matter of 11 For the Northern District of California United States District Court 10 law and a finding that BLIPS was a tax shelter for purposes of any subsequent underpayment 12 penalty assessment at the partner level. It is an absolute defense to accuracy-related penalties “with respect to any portion of an 13 14 underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer 15 acted in good faith with respect to such portion.” I.R.C. § 6664. This is, however, a partner-level 16 defense not applicable to the instant proceeding. See, e.g., NPR Investments, L.L.C. ex rel. Roach v. 17 United States (NPR), 740 F.3d 998, 1014 (5th Cir. 2014) (district courts lack jurisdiction to 18 adjudicate individual partners’ defenses, including “reasonable cause,” in a partnership proceeding). 19 20 1. Negligence If a taxpayer underpays his or her tax due to negligence, a 20% penalty applies. I.R.C. 21 § 6662(b)(1); Treas. Reg. § 1.6662-3(a). In this partnership-level proceeding, the issue is whether 22 the partnership itself was negligent. See Arbitrage Trading v. United States, 108 Fed. Cl. 588, 598, 23 608 (2013); Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67, 89–91, 133–34 (2012). 24 Negligence includes the failure “to make a reasonable attempt to comply with the provisions of the 25 internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return.” 26 See § 6662(c); Treas. Reg. § 1.6662-3(b)(1). The intent of a partnership is determined by the intent 27 of its general partners. Wolf v. C.I.R., 4 F.3d 709, 713 (9th Cir. 1993). Here, the Court must look to 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 17 1 the intent and knowledge of Presidio’s principals—Larson, Pfaff, and Makov—to assess the 2 applicability of the penalty for negligence. 3 The government suggests that negligence may be premised on a finding that Presidio’s loan served no purpose, and that the partnership was a 60-day sham. Determinations as to the 6 principal’s profit motives and intent are factual determination not amenable to summary judgment. 7 Although the partners’ subjective intent is not sufficient to overcome the lack of any objective 8 economic purpose in the BLIPS program, that does not equate to an absence of any genuine issue of 9 material fact as to the principals’ subjective intent and knowledge about the transactions. The 10 government is therefore not entitled to a finding at this juncture that the penalty for negligence 11 For the Northern District of California principals knew the currency transactions had minimal possibility of generating a profit, that the 5 United States District Court 4 applies at the partnership level. 12 2. Substantial Valuation Misstatement 13 A 20% penalty applies when a taxpayer underpays tax due to a “substantial valuation 14 misstatement.” See § 6662(b)(3). A substantial misstatement occurs when the taxpayer claims on a 15 tax return that the value of, or basis in, property is at least 200 percent of the actual value. 16 § 6662(e)(1)(A) (2000); Treas. Reg. § 1.6662-5(e)(1) (2000). If the taxpayer’s claimed basis is at 17 least 400% of the actual value, the misstatement is a “gross” one, and the amount of the penalty 18 increases to 40%. § 6662(h)(1). If the statutory threshold is met, the penalty is mandatory and 19 automatic. Stobie Creek Invs. LLC v. United States, 82 Fed. Cl. 636, 704 (Fed. Cl. 2008), aff’d 608 20 F.3d 1366 (Fed. Cir. 2010). 21 The government argues that because there was no economic substance to the purported 22 “premium” loan transaction, the court should (1) reduce the capital contributions attributed to the 23 investor to zero; (2) adjust the LLC-2’s liabilities to reflect the assumption of an obligation to repay 24 the full funding amount; or (3) reduce the investor’s capital contributions to the amount of the 25 participant’s cash contribution. As a result, the government asks the court to hold as a matter of law 26 that the 20% valuation misstatement penalty applies and that, for the three entities against which the 27 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 18 1 IRS has asserted a gross valuation misstatement penalty (Capitol, Churchill, and Democrat SIFs), 2 the court should impose the 40% penalty. Petitioners’ sole response to the government’s request for a finding on the misstatement 3 4 penalty is to refer to their arguments concerning negligence, asserting conclusorily that “[f]or 5 similar reasons the gross valuation misstatement penalty cannot be applied as well.” (Response, at 6 p. 28.) Unlike the penalty for negligence, however, it is not necessary to resolve any factual 7 questions of intent in order to find that the misstatement penalty applies, provisionally, at the 8 partnership level. If the partners have individual defenses, they may assert those defenses at the 9 separate and subsequent partner-level proceedings. The government is therefore entitled to a finding that the substantial valuation penalty applies at the partnership level (at either 20% or 40%, as 11 For the Northern District of California United States District Court 10 provided in the relevant FPAAs), subject to any defenses that may apply at subsequent partner-level 12 proceedings. 13 3. Substantial Understatement of Tax 14 A 20% accuracy-related penalty applies when a taxpayer substantially understates, and 15 therefore underpays, the amount of tax due. I.R.C. § 6662(b)(2). Although the amount of the 16 penalty is calculated at the partner level, the government is asking for a finding that the LLC-2s 17 were “tax shelters,” as defined in Treasury Regulation § 1.662-4(g). Such a finding would limit the 18 defenses available to the taxpayer at any subsequent partner-level proceeding. 19 § 6662(d)(2)(C)(iii).15 The test for whether a partnership is a “tax shelter” within the meaning of 20 § 6662(d)(2)(C) is whether, “based on objective evidence,” the “principal purpose” of the 21 partnership “is to avoid or evade [f]ederal income tax.” § 1.6662-4(g)(2)(i). This objective 22 determination is appropriately made at the partnership level, see § 1.6662-4(f)(5), as the objective 23 purpose of the partnership will not differ between partners, regardless of any individual’s subjective 24 intent. 25 26 27 28 15 For such items, the taxpayer must be able to show both that there was substantial legal authority for the position it took and that it reasonably believed its position was correct. See § 6662(d)(2)(C)(i); Treas. Reg. § 1.6662-4(g)(1)(i) (2000). No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 19 Petitioners did not respond to the government’s argument that, based on objective evidence, 1 2 the principal purpose of the LLC-2s was to avoid or evade federal taxes. Instead, petitioners 3 challenge assessment of the penalty on the basis that the partners reasonably believed, based on 4 substantial authority, that repayment of the loan premium was contingent under § 752 and, 5 therefore, need not be reflected in the partners’ outside bases of the LLC-2s. As to the threshold 6 issue of whether the LLC-2s were tax shelters, presumably petitioners’ position rests on the same 7 arguments addressed above concerning the economic substance doctrine and is equally unpersuasive 8 here. 9 Whether the partners reasonably believed that repayment of the loan premium was contingent under § 752 is a defense which must be asserted, if at all, at any subsequent partner 11 For the Northern District of California United States District Court 10 proceeding. See NPR, 740 F.3d at 1014. However, the question of whether “objective substantial 12 authority” existed for that position is a determination that may properly be made at the partnership 13 level. See id., at 1012. On that issue, petitioners argue they should be entitled to rely on opinion 14 letters regarding BLIPS from KPMG and Brown & Wood. A tax opinion itself, however, cannot 15 provide substantial authority; the appropriate inquiry is whether the authorities upon which the 16 opinion letter rests provide substantial authority. Treas. Reg. § 1.6662–4(d)(3)(iii); NPR, 740 F.3d 17 at 1013 & n.63. For example, the opinion letter from KPMG relies on the tax court’s opinion in 18 Helmer v. Commissioner, 34 T.C.M. (CCH) 727 (1975), for the proposition that contingent 19 obligations (here, the obligation to repay the loan premium through breakage and prepayment fees) 20 are not liabilities under I.R.C. § 752 and thus do not affect the partner’s outside basis in the 21 partnership. Rivkin Decl., Ex. 20-B-2 at p. 24. Other courts, however, have concluded that Helmer 22 is inapplicable in this situation because that decision—like that issued in Klamath I—does not 23 address a transaction found to be lacking in economic substance or where the partnership lacked a 24 profit motive. See, e.g., NPR, 740 F.3d at 1013 & n. 67. KPMG also cites LaRue v. Commissioner, 25 90 T.C. 465 (1988), for the proposition that an obligation is not incurred and taken into account until 26 the tax year in which all events have occurred to fix the amount of the obligation. Rivkin Decl., Ex. 27 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 20 1 20-B-2 at p. 28. LaRue is also inapplicable as all of the BLIPS transactions were, by design, entered 2 and closed within a single tax year. In short, petitioners offer no basis to contest the government’s position that the LLC-2s were 3 4 “tax shelters,” as defined by the relevant regulations, nor have they demonstrated that their tax 5 treatment of the partnership items rested on substantial authority at the time the relevant returns 6 were filed. The government is therefore entitled to a finding that the LLC-2s constituted tax 7 shelters. C. Statute of Limitations 8 Intervenors Reddam and Gonzales each separately move for summary judgment, arguing the 9 IRS failed to obtain a valid consent to extend the statute of limitations and thus the FPAAs are 11 For the Northern District of California United States District Court 10 untimely as to each of them.16 The government also moves for summary judgment against the 12 intervenors, seeking a finding that neither is entitled to a statute of limitations defense at the 13 partnership stage. The statute of limitations is an affirmative defense. Absent some exception, the IRS has 14 15 three years from the date a partnership tax return is filed or due (if the return is filed early) to make 16 an assessment or issue an FPAA determining additional tax liability with respect to a partnership 17 item. § 6229(a). If the taxpayer makes a prima facie showing that the FPAA was mailed after the 18 period had run based on the filing date or due date of the partnership return, the burden of 19 production shifts to the IRS to show that the action is not barred by, for example, presenting 20 evidence that the taxpayer consented to extend the period. See Madison Recycling Associates v. 21 C.I.R., 295 F.3d 280, 286 (2d Cir. 2002). Here, the parties agree that the FPAAs were mailed after 22 the period had run. The government, however, claims three exceptions apply here: consent by the 23 TMP to extend the statutory period, consent by the individual taxpayers, and the fraud exception.17 24 25 26 27 28 16 Reddam styles his motion as one to dismiss or, in the alternative, for summary judgment. His motion, which relies on evidence beyond the face of the petition shall be treated here as a motion for summary judgment under Rule 56 of the Federal Rules for Civil Procedure. 17 The fraud exception provides that “if any partner has, with the intent to evade tax, signed or participated directly or indirectly in the preparation of a partnership return which includes a false or fraudulent item” then tax may be assessed against that partner at any time and against “all other partners” within six years of the date the partnership return was filed or due. § 6229(c). Because No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 21 1 The burden ultimately rests on the taxpayer to show that any such exception is ineffective or 2 inapplicable. Id. As above, summary judgment is appropriate only “if the movant shows that there 3 is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of 4 law.” Fed. R. Civ. Proc. 56(a). 5 1. Reddam and Clarence Ventures a. Factual Background 6 7 Carl Hasting, a tax partner at KPMG, was involved in developing, marketing, and selling the 8 BLIPS investment strategy to high net worth individuals, including J. Paul Reddam. Pursuant to the 9 BLIPS strategy, Reddam formed Clarence Ventures, LLC (“Clarence Ventures”). Reddam Decl. in Support of Motion to Participate, ¶ 3. Clarence Ventures became a partner in Foraker Strategic 11 For the Northern District of California United States District Court 10 Investment Fund, LLC (“Foraker SIF”), one of the sixty-three SIFs on behalf of which Case No. C- 12 05-1123 was brought by Presidio. Id. Presidio was the TMP for Foraker. Id. ¶ 11; Munk Decl. Ex. 13 3 at 38. 14 On April 13, 2000, Foraker timely filed its partnership tax return for taxable year 1999. 15 Munk Decl. Ex. 5. On October 16, 2000, Reddam timely filed his individual tax return for taxable 16 year 1999, which included losses he sustained as a result of his participation in BLIPS. Munk Decl. 17 Ex. 6. Based on these filings, the statute of limitations for the IRS to issue an FPAA to Foraker 18 would have expired on April 15, 2003, while the statute of limitations to seek a deficiency payment 19 against Reddam would have expired on October 16, 2003, absent valid consents to extend these 20 periods. 21 In light of the complexity and magnitude of the investigations into BLIPS and related tax 22 strategy programs, the IRS sought extensions to the limitations period from Presidio for the various 23 SIFs, including Foraker. See Munk Decl. Exs. 7–9; Diaz Decl. ¶ 10. To that end, it obtained 24 consents from Alan Smith, president of HSM Growth Holdings, Inc. (“HSM Growth”), purportedly 25 26 27 28 the individual and TMP consents to extend are sufficient to resolve this issue, as explained below, it is not necessary to address the fraud exception. No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 22 1 signing as the member manager for Presidio and, therefore, the TMP for Foraker SIF. Munk Decl. 2 Exs. 10–12 (collectively extending the statutory period to December 31, 2005). 3 The IRS also sought extensions from the individual partners. See Munk Decl. Exs. 7–9. On Service, signed IRS Form 872-1 on Reddam’s behalf, extending the limitations period for Reddam’s 6 1999 tax return from October 16, 2003 to December 31, 2003. Munk Decl., Ex. 13. In January 7 2003, Hasting submitted a letter to the IRS stating that Hawkins was not authorized to execute the 8 extension and that Hasting, on behalf of Reddam, would like to withdraw the form and instead 9 consent to a more restricted extension. Munk Decl. Ex. 14. This more restricted extension, signed 10 by Reddam himself on April 15, 2003, resulted in a limitations period ending June 30, 2004. Munk 11 For the Northern District of California December 19, 2002, CPA Steven Hawkins, acting with Reddam’s power of attorney before the 5 United States District Court 4 Decl. Ex. 17. Reddam signed an additional five consents, which collectively extended the statute of 12 limitations to June 30, 2008 with respect to his participation in the BLIPS transactions. Gee Decl. 13 Exs. RG-14, RG-15, RG-16, RG-17, RG-18. 14 As previously noted, the government began a criminal investigation in 2002 for tax fraud, 15 targeting KPMG, Presidio Advisory, and their principals. The ongoing criminal proceedings, 16 Reddam argues, created a conflict of interest between Presidio and the SIFs that invalidates any 17 consent subsequently signed by Smith. Reddam further argues the investigation of KPMG created a 18 conflict of interest that invalidates any subsequent extensions signed by him under the advisement 19 of Hasting, a KPMG employee. 20 In support of this argument, Reddam relies on Transpac Drilling Venture 1982-12 v. 21 Commissioner, 147 F.3d 221, 225 (2d. Cir. 1998) in which the Second Circuit held that, because the 22 TMPs were acting under a serious conflict of interest when they consented to extend the statute of 23 limitations for the partnership, the extensions did not bind the limited partners. Id. at 227–28. The 24 court came to this conclusion based on the finding that the IRS knew the TMPs had a “powerful 25 incentive to ingratiate themselves to the government—be it the civil department of the IRS, the 26 criminal division, or even the United States Attorney’s Office.” Id. at 227. 27 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 23 1 The Transpac case, however, is distinguishable from the present matter. In that case, the 2 IRS first sought consents to extend from the individual partners; only after those individuals 3 declined to so consent did it seek consents from the TMPs. Transpac, 147 F.3d at 227. 4 Additionally, when the limited partners inquired into the status of the civil audit, the IRS told them 5 to consult their TMPs, which had been ordered not to disclose the existence of the criminal 6 proceedings against them. Id. Thus, the statute of limitations was extended against the individual 7 partners’ express will and their efforts to stay abreast of the investigation were actively thwarted by 8 the government. Here, by contrast, Reddam personally agreed to extend the statute of limitations on 9 several different occasions. Absent is any evidence the IRS ever sought to preclude Presidio or other investigatory targets from disclosing the fact of investigation to their clients, nor any 11 For the Northern District of California United States District Court 10 indication that the IRS attempted to restrict the advisors from whom Reddam sought guidance and 12 counsel. 13 The existence of a criminal investigation alone does not create a disabling conflict of 14 interest. See, e.g., Phillips v. Comm’r., 272 F.3d 1172, 1173 (9th Cir. 2001) (holding “there is no 15 automatic termination of TMP status by virtue of [a criminal] investigation.”); Madison Recycling 16 Associates v. Comm’r., 295 F.3d 280, 288 (2d Cir. 2002) (finding the existence of a criminal 17 investigation by the IRS does not automatically disqualify a TMP from negotiating or entering into 18 agreements with the IRS, but rather, such disqualification is a fact-based inquiry). Reddam has 19 pointed to no specific facts to suggest Smith acted with intent to “ingratiate” himself or Presidio 20 with the government. He further fails to explain how Presidio’s consent was in conflict with his 21 own, or that of the many other limited partners who signed consents to extend the statute of 22 limitations. 23 It is not necessary in this instance to rely upon the consents signed by Smith because 24 Reddam himself consented to several extensions, first through his accountant, Hawkins, and then 25 personally. Reddam contends that the extensions he personally signed are invalid because he was 26 advised to sign by Hasting, who had a conflict of interest as a result of being under criminal 27 investigation. The cases upon which Reddam relies concerning conflicts of interest contemplate 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 24 1 situations in which a lawyer represented a criminal defendant, not cases in which a lawyer acts as an 2 advisor. See, e.g. United States v. McLain, 823 F.2d 1457, 1463–64 (11th Cir. 1987) overruled on 3 other grounds by United States v. Watson, 866 F.2d 381, 385 n.3 (11th Cir. 1989); United States v. 4 Levy, 25 F.3d 146, 156–57 (2d Cir. 1994). These cases focus on the Sixth Amendment right to 5 competent counsel in the criminal context, a constitutional right that does not extend to individuals 6 involved in civil actions. See United States v. Sardone, 94 F.3d 1233, 1236 (9th Cir. 1996). In any 7 event, Reddam signed a waiver regarding KPMG’s potential conflict of interest in light of the 8 ongoing IRS investigation dated February 4, 2003—two months before Reddam signed his consent 9 to extend. Nevertheless, Reddam insists his waivers are not valid because the government did not 11 For the Northern District of California United States District Court 10 advise him of the potential conflict nor seek his waiver of that conflict. For example, Reddam 12 points to a 2003 email in which the IRS supervising manager advised the revenue agents: 13 14 15 16 For taxpayers who filed a Form 1040, it is strongly recommended that the consent be signed by the relevant taxpayers (i.e., generally the individuals participating in the shelters). Because of the potential conflict of interest, you should not accept a consent that is executed by a POA who is affiliated with any firm that promoted or marketed any tax shelter that is reflected on the relevant tax return. If any POA insists on signing the consents, please contact me immediately for further instructions. Munk Dec., Exhibit 15 at 2 (emphasis added); see Leatherstocking 1983 Partnership v. C.I.R., 296 17 Fed. Appx. 171, 173 (2d Cir. 2008) (finding consents invalid where the government knew the TMP 18 was operating under a conflict of interest arising from an ongoing criminal investigation at the time 19 he consented to an extension). While perhaps the IRS could have informed Reddam of these facts, 20 it does not follow that the statute extensions signed by Reddam himself are invalid. Reddam points 21 to no case law to support the proposition that a mere advisor may create a conflict of interest so 22 great as to invalidate a contractual agreement with the government. Indeed, if the government 23 were required to inquire into whether an individual had been advised prior to accepting a signed 24 document, it would never be able to rely on contractual extensions of the statute of limitations. In 25 fact, in making his recommendation, Hasting made clear that agreeing to extend the statute would 26 forestall the issuance of an FPAA and avoid sending parties prematurely into court. Weaver Decl. 27 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 25 1 Ex. JW-1. There is no evidence this advice was given based on the interests of Hasting, rather than 2 Reddam. Moreover, Reddam’s behavior before and after receiving the allegedly improper advice to 3 4 sign the statutory extensions ratifies his consent. Hawkins, who is not alleged to have any conflict, 5 signed a consent to extend the limitations period on Reddam’s behalf. When Hasting later rescinded 6 that consent, he insisted on making it more narrow, and thereby more favorable to Reddam. 7 Additionally, Reddam subsequently signed an additional five consents. There is no indication that 8 he relied on Hasting’s advice in choosing to sign any consent to extend the statute. See, e.g., 9 Reddam Dep. 266:21–267:12 (“I don’t recall who told me to sign it, so I don’t recall [Hastings] exerting any kind of influence. . . . I certainly don’t recall circumstances forehand, including 11 For the Northern District of California United States District Court 10 anybody pressuring me.”). Rather, Reddam demonstrated his assent to the terms of the extension by 12 attaching his signature to the consents. Reddam has failed to meet his burden to prove that the consents to extend the statute of 13 14 limitations were invalid with respect to him or Clarence Ventures, and that the FPAAs were 15 therefore untimely. 18 As a result, Reddam’s motion for summary judgment must be denied and the 16 government’s corresponding motion for summary judgment granted as to him. 2. 17 Gonzales and Birch Ventures a. Background 18 19 Tom Gonzales co-founded an internet company that was sold in early 2000, resulting in the 20 realization of both long-term and short-term capital gains. Gonzales shortly thereafter met with his 21 accountant and Larson about participating in the BLIPS transactions. Grande Decl. Ex. 91, 22 Gonzales 2003 Dep. 13–16. He recounted being told that the transaction could produce profits as 23 well as tax benefits. Id. at 19–20. Gonzales thereafter formed the wholly-owned Birch Ventures, 24 LLC (“Birch”), which obtained a premium loan and proceeded to invest both the loan proceeds and 25 Gonzales’s own capital contribution in the Logan Strategic Investment Fund, LLC (“Logan SIF”), a 26 27 28 18 Reddam also joins the arguments raised by Gonzales concerning Alan Smith’s authority to sign consents on behalf of Presidio. For the reasons set forth below, these arguments are unavailing. No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 26 1 limited liability company that formed and was dissolved less than six months later. Logan SIF is 2 one of the twenty-two SIFs on behalf of which Case No. 05-2835-RS was brought by Presidio. 3 Logan SIF designated Presidio as its TMP. On April 16, 2001, Logan SIF filed its 2000 partnership 4 return. Grande Decl. Ex. 50. Based on this date of filing, the statute of limitations for the IRS to 5 issue an FPAA would have expired April 16, 2004, absent a valid consent to extend. On December 1, 2003, the IRS obtained a consent to extend the statute of limitations as to 6 7 Logan SIF signed by Alan Smith as president of HSM Growth, purportedly the member manager for 8 Presidio and thereby the TMP for Logan SIF. Grande Decl. Ex. 2. On February 2, 2004, Smith 9 signed a second consent, this time as president of HSM Industries Inc. (“HSM Industries”), again purportedly on behalf of Presidio and Logan SIF. Id. Smith continued to sign subsequent consents, 11 For the Northern District of California United States District Court 10 extending the statute of limitations with respect to Logan’s 2000 tax year through to December 31, 12 2005. Grande Decl. Ex. 5–7. The IRS issued an FPAA to Presidio for Logan SIF’s 2000 tax year 13 on April 28, 2005. Supp. Gee Decl. Ex. M. A generic copy of the notice, addressed to the “Tax 14 Matters Partner” was mailed to the address of record for Logan SIF. Supp. Gee Decl. Ex. N. 15 Gonzales filed his individual tax returns for the 2000 tax year on July 16, 2001. Grande 16 Decl. Ex. 74. He disclosed the details of his participation in BLIPS in April 2002, after the IRS 17 offered to waive accuracy-related penalties associated with the underpayment of tax. See Suppl. 18 Gee Decl. Ex. K. On December 2, 2003 and again on October 20, 2004, Gonzales signed a consent 19 to extend the time to assess tax as well as tax attributable to items of a partnership for his 2000 20 income tax year, extending the statute of limitations through to June 30, 2005. Gee Decl. ¶¶ 83–84; 21 Grande Decl. Ex. 3, 8. The IRS issued a notice of deficiency on April 14, 2005.19 b. Individual Consent 22 23 24 25 26 27 28 19 Gonzales filed a petition in the United States Tax Court, which, pursuant to agreement of the parties, found that Gonzales had a deficiency in the amount of $105,985 for the 2000 tax year. Grande Decl. Ex. 9. That decision did not reach the alleged deficiencies related to Logan SIF, as the agreement provided that the “tax treatment of Gonzales’s partnership items relating to Logan will be resolved in a separate partnership proceeding conducted in accordance with the TEFRA partnership proceedings.” Id. There has, therefore, been no adjudication of the relevant partnership items in the tax court. No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 27 1 As with Reddam, the IRS obtained consents to extend the statutory period from both the 2 individual taxpayer and the TMP. Gonzales presents three challenges to the consents he personally 3 signed on December 2, 2003, and October 20, 2004. 4 First, Gonzales argues these consents do not extend the statute of limitations with respect to 5 partnership items of Logan because Gonzales, as opposed to Birch Ventures, was never a partner in 6 Logan. The tax code, however, defines “partner” for these purposes as either “a partner in the 7 partnership” or “any other person whose income tax liability under subtitle A is determined in whole 8 or in part by taking into account directly or indirectly partnership items of the partnership.” I.R.C. 9 § 6231(a)(2). Gonzales apparently concedes this point, as he does not address the government’s 11 For the Northern District of California United States District Court 10 response in his reply. Second, Gonzales argues his consent is invalid because the IRS never obtained a conflict of 12 interest waiver concerning his accountant, Steve Smith. Although Steve Smith represented 13 Gonzales during the audit that flowed from his 2000 tax return, Gonzales had designated different 14 representation before signing the consents. Gonzales offers no evidence that his decision to consent 15 to extend time was influenced by Steve Smith notwithstanding this latter designation, which 16 explicitly revoked all prior “power of attorney” declarations with the Service. In any event, this 17 argument concerning an advisor’s conflict of interest is subject to the same deficiencies discussed 18 above with regard to Reddam. 19 Third, Gonzales argues, for the first time in these proceedings, that his consents were 20 obtained under duress by IRS Agent Paul Doerr. Gonzales claims that Doerr met with him twice 21 without his attorney present, interacted with him in an aggressive and intimidating manner, and left 22 the impression Gonzales might face jail time. For example, Gonzales reports that Agent Doerr 23 drove from Sacramento to Gonzales’s home in Nevada in order to serve a summons in July 2003 24 and again in October 2003. According to Gonzales, Doerr’s actions lead Gonzales to fear that if he 25 did not sign the waiver, he could and would be subject to criminal and civil penalties. Gonzales 26 testified that this impression was based on Agent Doerr’s words and actions, though he cannot recall 27 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 28 1 any specific threats or conversations. The IRS disputes many of these claims, including the 2 suggestion that Doerr ever met with Gonzales without his attorney present. subjective, fact-based inquiry not usually amenable to resolution on a motion. See, e.g., Stanley v. 5 Commission, 81 T.C. 634, 637–38 (1983); but see United States v. Toyota of Visalia, 772 F. Supp. 6 481, 491 (E.D. Cal. 1991) aff'd sub nom. United States v. Toyota of Visalia, Inc., 988 F.2d 126 (9th 7 Cir. 1993) (finding the government entitled to summary judgment as the taxpayer’s evidence did not 8 amount to duress as that term has been defined in this context). Here, the evidence presented by 9 Gonzales is insufficient to give rise to an inference of duress that would render his consent invalid. 10 Although Gonzales testified, repeatedly, that he was “afraid” of Agent Doerr and the IRS, he cannot 11 For the Northern District of California Whether a taxpayer’s consent to extend the statutory period was obtained under duress is a 4 United States District Court 3 recall a single specific conversation or interaction in which Doerr threatened him with financial or 12 criminal penalties. In fact, Gonzales testified that Doerr never threatened him with imprisonment; 13 rather, Gonzales’s concern seems to have arisen because Doerr never affirmatively assured him he 14 would not face criminal penalties. Gonzales also cannot recall any particular instances when Doerr 15 displayed an aggressive demeanor. Indeed, Gonzales has no memory of any instance in which 16 Doerr implied that he might revoke the penalty waiver letter. Gonzales Dep. 155:15–22. A finding 17 of duress simply cannot reasonably arise solely from Agent Doerr’s position as an agent of the IRS 18 or the fact that the Service might pursue lawful IRS action, even one that might result in serious 19 financial implications for the taxpayer. On this record, Gonzales has failed to introduce any 20 evidence upon which a reasonable fact finder might conclude that his consent was obtained as a 21 result of duress. 22 23 c. TMP Consent As with Reddam, the government need not rely on Gonzales’s individual consents to extend 24 the statutory period because it also obtained consents to extend from Presidio on behalf of the 25 partnerships. Gonzales argues that the consents signed by Alan Smith on behalf of Presidio as the 26 TMP for Logan SIF to extend the statute of limitations are invalid because Smith did not have 27 authority to act on behalf of Presidio. It is undisputed that Presidio converted from a partnership to 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 29 1 a single member LLC in December 2000 when one of its two remaining members, Norwood 2 Holdings, Inc., transferred its entire interest in Presidio to the other member, HSM Growth.20 The 3 record is not clear as to how Smith was named president of HSM Growth and whether he was duly 4 authorized to bind the LLC-2s as a representative of the TMP Presidio.21 It appears, however, that 5 the IRS reasonably relied on various representations from Presidio’s counsel and other agents that 6 the entity was owned by HSM Growth, that Smith had been appointed president of HSM Growth, 7 and that Smith was therefore authorized to sign documents on behalf of HSM Growth and Presidio 8 as TMP for the LLC-2s (including both Foraker SIF and Logan SIF). authority to bind the principal and a third party reasonably relies on that representation, the principal 11 For the Northern District of California Under both California and Delaware law, if a principal represents that an agent has the 10 United States District Court 9 is bound regardless of whether the agent actually had authority. See, e.g., Billops v. Magness Const. 12 Co., 391 A.2d 196, 198 (Del. 1978); Assoc. Creditors’ Agency v. Davis, 530 P.2d 1084, 1100 (Cal. 13 1975). Here, the LLC-2s, through general partner Presidio, held Smith out as their agent, and the 14 IRS reasonably relied on that representation. While the corporate ownership structure remains 15 murky, Gonzales does not dispute that these representations were made or that the IRS reasonably 16 relied on those representations. The fact that the IRS proceeded cautiously by obtaining redundant 17 consents from the taxpayers themselves does not negate this reliance. 18 19 20 21 22 23 24 25 26 27 28 20 In February 2000, Hayes Street assigned its 70% interest in Presidio to HSM Growth in exchange for one hundred shares of common stock of HSM Growth. Munk. Decl. Ex. 20. In December 2000, Norwood sold a 15% interest in Presidio to HSM Growth. Munk Decl. Exs. 19, 22. Norwood then transferred its remaining 15% interest to HSM Growth, converting Presidio into a single member LLC, wholly owned by HSM Growth. HSM Growth stopped paying annual franchise taxes to Delaware after its 2002 year, and its charter was dissolved on March 1, 2004. Larson and Pfaff continued to control Presidio, but Larson testified before the IRS that he did not know who the owners of HSM Growth or the officers of HSM Industries were. See Grande Decl. Ex. 62, Larson Dep. 46, 48, 57. 21 Beginning in 2003, as the IRS continued its investigation of the BLIPS transactions, the IRS sought to determine who had authorization to sign statute extensions on behalf of Presidio. Larson had executed a power of attorney to the law firm Latham & Watkins, first for Presidio Advisory and then for the SIFs. Munk Decl. Exs. 33, 34. An attorney from Latham & Watkins told the IRS that Odd Eckholt was the ultimate beneficial owner of Presidio. Supp. Gee Decl. Ex. R. Bruce Lemons, counsel for Presidio, represented to the IRS that Alan Smith had been appointed president of HSM Growth by Eckholt and was therefore authorized to act on behalf of Presidio. Questions remain, however, concerning the corporate structure. No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 30 1 “The standard for determining the validity of an FPAA is whether the FPAA provides 2 adequate or ‘minimal’ notice to the taxpayer that respondent has finally determined adjustments to 3 the partnership return.” Triangle Investors Ltd. P’ship v. Comm’r., 95 T.C. 610, 613 (1990). 4 Assuming, without deciding, that Presidio had lost its authority to serve as TMP prior to the 5 issuance of the FPAA, the generic FPAA sent to the address on record for Logan meets the minimal 6 notice requirement. See Chomp Associates v. Comm’r., 91 T.C. 1069, 1073 (1988) (“We agree that 7 there must be adequate notice. However, section 6223 does not require that a specific TMP be 8 enumerated on the FPAA.”); Anderson v. United States, C-91-3523 MHP, 1993 WL 204605 at *1 9 n.1 (N.D. Cal. June 3, 1993) aff’d, 50 F.3d 13 (9th Cir. 1995). There is no question Gonzales and Logan received notice of the pending readjustment. Indeed, they timely filed a petition for 11 For the Northern District of California United States District Court 10 readjustment within ninety days. On this basis, Gonzales’s motion for summary judgment must be 12 denied and the government’s corresponding motion for summary judgment granted insofar as 13 Gonzales is not entitled to a statute of limitations defense in this partnership proceeding. 14 V. CONCLUSION 15 For the reasons stated above, the government’s motion for summary judgment against 16 petitioners is granted on the basis that the BLIPS transaction lacked economic substance and 17 therefore should be disregarded for tax purposes. The government is further entitled to a judgment 18 that the accuracy-related penalties for substantial valuation misstatements is applicable at the 19 partnership level and that the LLC-2s constituted tax shelters as defined in the relevant regulation. 20 The motions for summary judgment by intervenors are denied and the government’s motion for 21 summary judgment against intervenors is granted. 22 The government is not, however, entitled to a finding that the negligence misstatement 23 penalty applies as a matter of law. This finding does not preclude the government from seeking 24 such a penalty at any subsequent partner-level proceeding, although a determination that the general 25 partner Presidio was negligent is an appropriate inquiry for a partnership-level proceeding. If the 26 government wishes to pursue this issue further in this proceeding, it must notify the court by August 27 31, 2014, of its election and provide the court with a letter brief setting forth the justification and 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 31 1 legal basis to do so. Petitioners will then be provided with an opportunity to respond, if necessary. 2 If no election is filed on or before that date, judgment will be entered in favor of the government, as 3 set forth above, and the case will be closed. 4 IT IS SO ORDERED. 5 6 7 Dated: July 31, 2014 RICHARD SEEBORG UNITED STATES DISTRICT JUDGE 8 9 11 For the Northern District of California United States District Court 10 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 No. 04-cv-04264-RS ORDER RE. MOTIONS FOR SUMMARY JUDGMENT 32

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