The Fifth Circuit has finally issued its opinion in NPR (as reflected in our prior coverage, this case was argued almost two years ago), a case involving a Son-of-BOSS tax shelter in which the district court absolved the taxpayers of penalties. The taxpayers were not as fortunate on appeal, as the Fifth Circuit handed the government a complete victory.
The court’s consideration of the two issues before the court of broadest applicability were overtaken by events — specifically, the Supreme Court’s December 2013 decision in United States v. Woods. See our report here. In line with that decision, the NPR court held that the penalty issue could be determined at the partnership level and that the 40% penalty was applicable because the economic substance holding meant that the basis in the partnership was overstated. This latter holding reversed the district court, which had relied on the Fifth Circuit precedents that were rejected in Woods.
The other issues resolved by the Court were mostly of lesser precedential value. First, the court affirmed the district court’s conclusion that a second FPAA issued by the IRS was valid because NPR had made a “misrepresentation of a material fact” on its partnership return.
Second, the court rejected the district court’s holding that the taxpayers could avoid penalties on the ground that there was “substantial authority” for their position. It criticized the district court for basing its “substantial authority” finding in part on the existence of a favorable tax opinion from a law firm (authored by R.J. Ruble who eventually went to prison as a result of his activities in promoting tax shelters). The court explained that a legal opinion cannot provide “substantial authority”; that can be found only in the legal authorities cited in the opinion. Here, the legal opinion had relied on the “Helmer line of cases,” which establish that contingent obligations generally do not effect a change in a partner’s basis. The court of appeals held that Helmer did not constitute substantial authority in a situation in which the transactions lack economic substance and in which the partnership lacked a profit motive. The court also observed that the IRS was correct in arguing that its Notice 2000-44 should be considered as adverse “authority” for purposes of the “substantial authority” analysis — albeit entitled to less weight than a statute or regulation.
Finally, the court overturned the district court’s finding that the taxpayers had demonstrated “reasonable cause” for the underpayment of tax. With respect to the partnership, the court stated flatly that “the evidence is conclusive that NPR did not have reasonable cause.” With respect to the individual partners, the court left a glimmer of hope, ruling that an individual partner’s reasonable cause can be determined only in a partner-level proceeding. Thus, the court merely vacated the district court’s finding of reasonable cause and left the individual partners the option of raising their own individual reasonable cause defenses (whatever those might be) in a partner-level proceeding.
It has been almost two years since the Fifth Circuit heard oral argument in the NPR Investments case, which involves a “son-of-BOSS” tax shelter and associated questions regarding penalties and jurisdiction under TEFRA. See our previous reports on the oral argument and describing the issues. Last week, the court issued an order directing the parties to file short “letter briefs,” answering some specific questions involving TEFRA jurisdiction over penalties. In particular, the court asked the parties to address how NPR compares to the Petaluma (D.C. Cir.) and Jade Trading (Fed. Cir.) cases in which the courts found a lack of jurisdiction in partnership-level proceedings to impose a valuation misstatement penalty where a basis-inflating transaction was found to lack economic substance. As we have reported, the Supreme Court is preparing to hear argument in U.S. v. Woods, which involves the validity of such a penalty and the same jurisdictional issue addressed in Petaluma and Jade Trading.
It is not clear whether the Fifth Circuit panel considering NPR was aware that the Supreme Court is poised to decide these questions in Woods (though Woods is a case that comes from the Fifth Circuit), but it certainly is aware of it now. The government’s response to the court’s order points the court to the government’s brief in Woods and explicitly states that “the issue whether Petaluma and Jade Trading were correctly decided is at the heart of the jurisdictional issue before the Supreme Court in Woods, scheduled for argument on October 9.” Given that a Supreme Court decision will be coming down in the next several months that, at a minimum, will bear closely on the issues in NPR Investments and quite possibly resolve them definitively, it is hard to see why the Fifth Circuit would press ahead to decide the NPR case. Most likely, it will continue to sit on the case until Woods is decided. But that is not certain. The responses to the court’s request for supplemental briefs demonstrated some level of agreement between the government and the taxpayer. If the Fifth Circuit has an opinion almost ready to go, but for a couple of areas of uncertainty that have now been cleared up by the supplemental briefs, it might go ahead and issue its opinion. If it does, however, the ultimate result in the case likely will still remain in play until the Supreme Court speaks in Woods.
On December 7th, oral argument was held in the Fifth Circuit in the NPR case before Judges Dennis, Clement, and Owen. You can find a detailed explanation of the issues here but in summary the questions involve whether, in the context of a Son of BOSS case: the gross valuation penalty applies when the basis producing transaction is not invalidated solely due to a bad valuation; whether other penalties apply; how the TEFRA jurisdictional rules function as to those penalties; and whether an FPAA issued after a non-TEFRA partnership no-change letter falls afoul of the no-second-FPAA rule.
Although both parties appealed, as the initial appellant DOJ began the argument. DOJ counsel argued that the Supreme Court’s decision in Nat’l Cable & Telecomm. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 982 (2005), allowed Treas. Reg. § 1.6662-5(d) to override the Fifth Circuit’s position in Heasley v. Commissioner, 902 F.2d 380 (5th Cir. 1990), that a valuation misstatement cannot apply where there are grounds for invalidating the transaction other than an incorrect valuation — such as where the transaction is totally disallowed under economic substance or on technical grounds. In this regard, DOJ requested that the court submit the matter for en banc review to address this issue and to consider the impact of Weiner v. United States, 389 F.3d 152 (5th Cir. 2004), which counsel characterized (as DOJ had in the brief) as calling the “total disallowance” rule into question.
As to the substantive application of penalties, DOJ argued that the complete concession by the taxpayer of the substance of the transaction compelled the conclusion that the position lacked substantial authority. Furthermore, counsel argued that there was no substantial authority at the time the transaction was reported on the taxpayer’s return. In this regard, DOJ posited that although Helmer v. Commissioner, 34 T.C.M. (CCH) 727 (1975), had held that a contingent liability was not a liability for purposes of section 752, it did not address the questions of buying and selling offsetting options and of contributing them to a partnership only to arrange for a distribution and sale. As to these points, the only authority on point was Notice 2000-44, which stood for the proposition that the transaction did not work. This appears to be a repackaged version of the argument that there can never be substantial authority for transactions lacking economic substance.
Argument transitioned to the question of whether the district court had jurisdiction to consider a penalty defense put on by the partners and not by the partnership in this partnership action. For a prior discussion of this confusing question see our analysis here. Citing Klamath Strategic Inv. Fund, LLC v. United States, 568 F.3d 537 (5th Cir. 2009), DOJ counsel argued that the Fifth Circuit had already decided that an individual reasonable cause argument (such as one based on a legal opinion issued to the partner) cannot be raised in a TEFRA proceeding. The court seemed to recognize the impact of Klamath on this point. DOJ counsel then attempted to box the partnership in (as it had in the brief) on the question of whether the defense was raised by the partner or the partnership (several statements in the district court’s opinion seem to view the defense as a partner-level defense).
Moving on to the question of the merits of the reasonable cause position, DOJ argued that the district court erred in considering reliance on the tax opinion (which was written by R.J. Ruble) to be reasonable. Initially, counsel questioned whether the partners’ testimony that they did not believe Ruble had a conflict was reasonable in light of the partners’ knowledge of fee sharing and of the fact that Ruble had written opinions for other shelters for the same promoter. The court seemed to be honed in on this question. In closing, DOJ attempted to poison the well of partner good faith by reminding the Court that the partners in this case were repeat tax-shelter offenders and had attempted to hide the Son-of-BOSS losses as negative gross revenue from their law firm business.
Perhaps indicating a weakness on the penalty issues raised by DOJ, taxpayer’s counsel spent most of his time on the question of whether the second FPAA was invalid. The Court focused counsel on the fact that an error on the tax return (the Form 1065 did not check the TEFRA box although it did check the flow-through partner box (which would indicate a TEFRA partnership)) led the agent originally to pursue the case as non-TEFRA. Undeterred, counsel argued that this error was not material and that the agent had indicated in a deposition that he eventually learned that the partnership was TEFRA. Testimony was also offered in the district court that the reporting was an innocent mistake and not negligent or deceptive. The Court spent significant time questioning why the agent did not testify at trial (which appears to have been due to a mix-up on the part of DOJ). In summarizing his position, taxpayer’s counsel tried to focus the court on the language of the partnership no-change letter but to us it appears that the real question has to be whether the agent intended this to be a TEFRA audit. An FPAA simply cannot come out of a non-TEFRA audit. Based on the agent’s deposition transcript it seems clear that he did not believe he was involved in a TEFRA audit when he opened the audit and thus it is impossible that the initial notice was an FPAA.
Rebutting DOJ’s reasonable cause position, taxpayer’s counsel focused on the trial testimony and factual determinations by the district court that the taxpayers were acting reasonably and in good faith. On the question of jurisdiction, the taxpayer reverted to the tried and true (but not very strong) argument that requiring a later refund suit to address the reasonable cause question would be a waste of judicial resources and, in essence, a meaningless step. A cynic might say that the purpose of TEFRA is to waste judicial resources and create meaningless steps.
In rebuttal, DOJ counsel focused on the no-second-FPAA question and did a good job from our perspective. He noted that you have to have a TEFRA proceeding to have a TEFRA notice. Undermining the district court’s determination that the finality of the notice is relevant, counsel noted that all non-TEFRA notices are “final” but that doesn’t mean they are FPAAs. TEFRA is a parallel audit procedure and it is simply not enough that the IRS intended a final determination in a non-TEFRA partnership audit. The question is whether the IRS intended to issue a final notice in a TEFRA proceeding; since there was no “first” TEFRA proceeding, there was no “first” FPAA. We think this argument is right on target.
With limited questions coming from the Court it is difficult to see where this is headed. Our best guess is that the partnership will prevail on the reasonable cause position (it is difficult for an appellate court to overturn credibility determinations of witnesses) but lose on everything else including the no-second-FPAA issue.
The NPR case (involving penalty application and TEFRA issues in the context of a Son of BOSS transaction: see latest substantive discussion here) has been calendared for argument in New Orleans on December 7th in the East Courtroom.
As we mentioned in our last post, the only brief remaining to be filed in NPR was the taxpayer’s reply brief. That brief has now been filed and with it a DOJ motion to strike part of that reply as an inappropriate sur-reply. The motion concerns a section in the reply in which the taxpayer takes on DOJ for arguing (in its previously filed reply brief ) that the only relevant factor in determining the incidence of the valuation misstatement penalty (between partnership and partner) is whether there are partnership items involved and not where the specific misstatement results in a loss.
The taxpayer’s view is that DOJ is trying to have its cake and eat it too – arguing that the penalty applies at the partnership level because it is related to partnership items but refusing to allow section 6664 arguments to be heard on the grounds that those are specific to the partner. DOJ’s position is that it would be barred from raising the penalty outside of the context of a partnership proceeding because the penalty relates to a partnership item (or items) and that it is not inconsistent to require section 6664 intent to be evaluated at the partner level (and, in any event, it is required by the regulations). All of this, as we have extensively discussed, is intertwined in the silliness of trying to separate partner and partnership intent between TEFRA levels something the regulations perhaps should not have done but clearly do. It will be interesting to see how the Fifth Circuit handles the case.
It has been a while since we published an update on NPR (please no comments on Supreme Court Justices, schoolchildren, and bloggers taking summers off). Since our last post discussing the government’s opening brief, the taxpayer filed its brief responding to the government and opening the briefing on their cross-appeal. The government also filed its response/reply. All that remains now is the taxpayer’s reply brief on its cross-appeal, currently due on August 15. There are a slew of technical TEFRA issues that are raised by the parties. The taxpayer is appealing the district court’s rulings regarding whether a no change letter can ever be an FPAA and, if it can be, whether an erroneously checked box on the tax return (claiming that the partnership was not a TEFRA partnership) can constitute a misrepresentation of a material fact such that the no-second-FPAA rule of section 6223(f) is inapplicable. As we discussed last post, the parties are jointly briefing — in the government’s appeal — the application of the Heasley/Weiner line of cases to the taxpayer’s concession strategically made to circumvent the gross valuation misstatement penalty. Mayo is implicated by the application of Treasury Regulation section 1.6662-5(d) (DOJ relies on Brand X to argue that the regulation controls over the contrary rule previously announced in Heasley).
However, as we discussed in prior posts, the main issue here is good faith reliance on counsel — R.J. Ruble — by the taxpayer for purposes of the section 6664 reasonable cause defense and when, procedurally, that defense can be raised. The government continues to hew to the line that reliance is inappropriate (because of a technical conflict and because reliance was just not reasonable under the circumstances). DOJ also argues that the defense can be raised only in a partner-level proceeding pursuant to then Temporary Treasury Regulation section 301.6221-1T(d) (the judges may want to get a cholesterol test with all of this Mayo being spread around). For its part, the taxpayer argues that the district court already determined — after seeing the witness testimony — that the reliance was in good faith. Furthermore, since one of the partners is the TMP, the reasonable cause defense is being raised by the partnership as much as by the partners. Setting aside whether you believe the testimony (which the district court judge did), if we could decide cases based on the fact that section 301.6221-1T(d) of the TEFRA penalty regulations is stupid, this would be easy. As we have said before, separating partner and partnership intent in a transaction involving a partnership that was purposefully created by the partners to implement that very same transaction is like trying to dance on a headless pin. With deference under Mayo, however, “stupid is as stupid does” is not the test for striking down regulations. We will just have to wait and see how much patience the Fifth Circuit has for this Forrest Gump of a regulation.
The Government has filed its brief in its Fifth Circuit appeal from the denial of penalties in the NPR Investments case (for prior discussion go here). There are no surprises. The Government takes the position that the district court’s reliance on Heasley v. Commissioner, 902 F.2d 380 (5th Cir. 1990) (likely abrogated by Treas. Reg. § 1.6662-5(g) and certainly weakened on these facts by Weiner v. United States, 389 F.3d 152 (5th Cir. 2004)) is misplaced. Thus, the government argues that the mere fact that the taxpayer’s entire transaction (and not just a valuation or basis item) was concededly devoid of substance is not a bar to valuation misstatement penalties. The Government also takes issue with the alleged consideration by the district court of the partners’ (as opposed to the partnership’s) reasonable cause defenses in this TEFRA proceeding contrary to Temp. Treas. Reg. § 301.6662-1T(c)-(d). At a big picture level, the Government is still none-too-pleased with the district court’s open reliance on an R.J. Ruble opinion as contributing to such defenses, an act of reliance that it argues is contrary to case law prohibiting a taxpayer from relying on conflicted advisers for reasonable cause and also contrary to, among other things, the restriction on relying on a legal opinion that is based on representations the taxpayer knows are untrue. Treas. Reg. Sec. 1.6662-4(c)(1)(i).
This case has the potential to be another Mayo/Brand X battle-royale (what tax case doesn’t these days?) given that there are at least three regulations explicitly relied on by the Government some of which post-date contrary court opinions. But at bottom the case is just about a district court judge who looked into the eyes of the taxpayers and found not malice but, rather, an objectively good faith belief in the adviser who was hired to bring them safely past the landmines and snipers that fill the no-man’s land also known as the tax code. Although they didn’t make it across (the taxpayers abandoned defense of the claimed tax benefits and R.J. – metaphorically shot – is serving time), the district court apparently couldn’t fault them for trying. The government’s view is much harsher. In essence, it thinks that in trying to find a way to make it to the tax-free promised land, the taxpayers should have tried a little harder to explore the obstacles in their way before taking their guide’s word for it. At least their place shall never be with those cold and timid souls who know neither victory nor defeat.
The taxpayer’s brief is due May 17th. We will keep you posted.
In our prior post on these cases, we compared the different factual findings made by the courts in analyzing penalty exposure under section 6664 and discussed the very factual nature of a reasonable cause and good faith penalty defense. Both cases were subsequently appealed. Canal Corp.looks like it is going to settle with the Fourth Circuit granting a motion to hold the appeal in abeyance pending finalization of that settlement (the company is in bankruptcy). Thus, those hoping for an appellate smack-down of the penalty supporting opinion from the Tax Court will be disappointed. NPR Investments is a different story. Briefs are due in that appeal (which lies in the Fifth Circuit) starting on February 19th. So Government hopes of another Son-of-Boss penalty success live on. If we see anything interesting, we will report on it.
We have been promising a post on the application of the section 6664 reasonable cause and good faith defense to tax penalties as it relates to reliance on tax advisers. Here it is.
There has been much activity in this area in the district courts and the Tax Court and not much winnowing or rule setting in the circuits. This is understandable; the application of the standards is highly factual and is well-placed in the hands of trial judges. We will analyze here some potential inconsistencies in two recent high-profile section 6664 decisions, Canal Corp. v. Commissioner, (Slip Op. attached) (August 5, 2010) (which found reasonable cause and good faith lacking) and NPR Invs., LLC v. United States, (E.D. Tex. Aug. 10, 2010) (which found reasonable cause and good faith met).
In Canal Corp., the Tax Court considered the application of section 6664 to a should-level PricewaterhouseCoopers opinion. (In the parlance, a “should-level” opinion means that the transaction “should” be upheld; it is a higher standard than more-likely-than-not, which means only that the transaction is more, perhaps only 51% more, likely to be upheld than not.) The Canal Corp. transaction emerged from the decision of a predecessor of Canal Corp., Chesapeake Corporation, to dispose of its tissue business, WISCO. After seeking advice from PwC and others, Chesapeake decided to dispose of the business by forming a partnership with Georgia Pacific to which WISCO would contribute its assets and liabilities and from which WISCO would receive a distribution of cash. The cash was funded by the new partnership borrowing money, and that debt was indemnified by WISCO. In essence, the substantive question presented to the court was whether the contribution/distribution amounted to the formation of a partnership (which would not trigger the built-in gain on the WISCO assets) or, rather, a sale of those assets to GP (which would).
In addition to helping structure and advise on the transaction, PwC was asked to prepare the aforementioned opinion. The partner writing the opinion was not the historic PwC engagement partner but rather an expert from the Washington National Tax group of PwC. PwC charged a flat fee of $800,000 for the opinion. Because the area of the law was relatively unclear, the opinion relied on analogy and analytics to reach its conclusions (including a withdrawn revenue procedure that set out tests to apply for advance rulings in a different area); there was apparently little direct authority available to cite. The parties effectuated the transaction on the day that PwC issued the opinion.
The Tax Court determined that the transaction was a disguised sale. This was based largely on the court’s conclusion that the indemnity by WISCO was illusory and thus that WISCO should not be allocated any amount of the partnership’s liabilities. If WISCO had been allocated these partnership liabilities then the transaction would be viewed as a financing transaction and not a sale. After all, you can’t call something a sale if the seller gets left holding the bag for the purchase price. But the court found WISCO’s bag empty and proceeded to penalties.
The Canal Corp. court began its analysis of section 6664 by recognizing that “[r]easonable cause has been found when a taxpayer selects a competent tax adviser, supplies the adviser with all relevant information and, in a manner consistent with ordinary business care and prudence, relies on the adviser’s professional judgment as to the taxpayer’s tax obligations.” Slip Op. at 31. However, the court noted that such advice “must not be based on unreasonable factual or legal assumptions” and cannot be relied upon when given by an advisor “tainted by an inherent conflict of interest.” Id. at 32. Citing Pasternak v. Commissioner, 990 F.2d 893 (6th Cir. 1993), a case involving promoters of master recording leasing programs, the Court concluded that a “professional tax adviser with a stake in the outcome has such a conflict of interest.” Id.
Applying these conceptual standards to the PwC opinion, the Tax Court found it lacking. At the outset, the court thought it incredible that significant time had been spent on an opinion so “littered with typographical errors, disorganized and incomplete.” Id. at 33. The Court’s confidence in the opinion was further undermined by the fact that only a draft could be found and the author (even after presumably being prepared for trial) did not recognize parts of the opinion when asked about them in court. On the question of assumptions generally, the lack of specific citation in support of the opinion’s premises and the frequent use of terms such as “it appears” in the place of hard analysis was also troubling for the court, which found it unreasonable that anyone would issue a should-level opinion on analogy and analytics with no direct support for the position. The Court found the author’s testimonial responses to challenges on these points unsettling and bluntly concluded that the only reason the opinion was issued at the should level was that “no lesser level of comfort would have commanded the $800,000 fixed fee that Chesapeake paid for the opinion.” Id. at 35.
On the question of a conflict of interest, the Court found a large one. Commenting that it “would be hard pressed to identify which of his hats” the author was wearing when he rendered the opinion, the Court concluded that the author’s work in developing, planning, structuring, and implementing the transaction took away too much of his independence (which the Court found to be “sacrosanct to good faith reliance”) to allow him to objectively analyze the merits of the transaction. Slip Op. at 36-38. Given that the only hurdle to closing the transaction was, in the end, the $800,000 flat fee opinion, the Court found that Chesapeake was attempting to buy “an insurance policy as to the taxability of the transaction.” Id. at 37. The Court voided the policy.
NPR involved a transaction the IRS characterized as a “Son of BOSS” transaction involving offsetting foreign currency options. As explained by the Court, the IRS’s view of a Son of BOSS transaction is “a series of contrived steps in a partnership interest to generate artificial tax losses designed to offset income from other transactions.” Slip Op. at 2 n.3. It is fair to say that Son of BOSS transactions are considered by the IRS to be one of the “worst of the worst,” so much so that they are the only transaction that is specifically barred from being considered by IRS Appeals. See Announcement 2004-46, Sec. 5 (May 24, 2004). Indeed, NPR conceded the merits of the transactions at issue prior to the decision. Accordingly, the only items considered by the district court were a period of limitations issue (which we will not discuss here) and the penalties.
After working through the background elements of section 6662, the district court in NPR began its analysis in a similar way to the Tax Court in Canal Corp., setting out both the restrictions on relying upon unreasonable assumptions and on a conflicted adviser. Slip Op. at 24-26. The conclusion, however, was quite different. Finding that the taxpayers were “not tax lawyers” and were not “learned in tax law” the court held that their reliance on the more-likely-than-not opinion of R.J. Ruble (who, at the time of the court’s ruling, had already been convicted of tax evasion associated with the rendering of tax opinions) was reasonable based on its findings that the opinion reached “objectively reasonable conclusions” and detailed a “reasonable interpretation of the law” (albeit one that the taxpayers conceded before trial). Id. at 27-28. Critically, the Court found persuasive the taxpayer’s plea that they, as unsophisticated men, sought out the advice of professionals who they did not know were conflicted and followed that advice; “what else could we have done except follow their advice?” Id. at *28.
As shown above, the differences between Canal Corp. and NPR are not differences in legal standards but differences in fact-finding. Both courts invoked and applied the same standards and prior interpretations of those standards; they just applied them to different facts as each judge found those facts. That is exactly what trial courts are supposed to do; take legal standards and do the hard work of applying them to the myriad fact patterns that arise. Viewed from that perspective, there is nothing in conflict between the two rulings; different facts support different results.
In a sense, the “inconsistencies” give a certain comfort in the decisions of both courts. Judges say what the law is, that is true. But more relevant to a trial lawyer, in a bench trial, they say what the facts are. In both Canal Corp. and NPR, the judges reached a conclusion based on their common-sense perceptions of what happened in the courtroom. While they can (and likely will) be second-guessed, that is their job. The NPR court was not swayed by all of the IRS’s anti-Son-of-BOSS rhetoric. Rather, the court evaluated the honesty and integrity of the specific taxpayers before it, their options (not the foreign currency kind) and their knowledge, and decided that no more could reasonably be asked of them. Similarly, the Canal Corp. court wasn’t swayed by the involvement of a major accounting firm in a business transaction between two large, sophisticated companies. Instead, the court looked at the analytics and thoroughness of the opinion, the involvement of the author in the transaction (including what he was paid), and his credibility on the stand, and concluded that it was unreasonable for a sophisticated consumer of tax advice to rely on his opinion. Whether you agree with the fact-finding (which is tough to do if you didn’t sit through both trials), the fact-finding has to be separated from the analytics; the analytics were sound (and consistent).
Viewed from the perspective of the tax planner, however, justifying the different outcomes on the basis of different fact-finding does not provide much comfort. Most tax planners would turn up their nose at a Son of BOSS opinion given to a group of individual investors to generate relatively large foreign currency options losses on a relatively minor investment. Yet a significant number have criticized the Tax Court’s opinion in Canal. Perhaps the distinction is just based on an “I know [a good transaction] when I see it” analysis, but many view what Canal Corp. did as “legitimate” tax planning and believe that a PwC advisor from the esteemed Washington National Tax group should have been viewed as more credible than a convicted felon. However, when a judge looks into the eyes of the adviser and doesn’t like what she sees, the taxpayer is at grave risk on penalties. Similarly, when the written product is capable of being analytically questioned, even undermined, based on sloppiness and lack of support or detail, a judge can be expected to have a negative reaction to that work product. That negative reaction will carry over to the credibility of its author, particularly where a substantial fee was received. On the flip side of the coin, if the judge finds the taxpayer honest and forthcoming about what he believed and what he tried to do to confirm that belief, the judge is likely to find reasonable cause and good faith. In short, the way the judge perceives the facts determines the outcome; that is why they call it a facts and circumstances based test.
Asking for “consistency” in such matters amounts to nothing less than the neutering of the trial court. “The ordinary lawsuit, civil or criminal, normally depends for its resolution on which version of the facts in dispute is accepted by the trier of fact.” NLRB v. Pittsburgh S.S. Co., 337 U.S. 656, 659 (1949). Indeed, rather than chasing the siren song of legal consistency, it is better to accept that fact-based tests like section 6664 belong to the trial lawyers to prove and to the trial judges to find. While that may appear to create a lack of consistency, it doesn’t. As we have shown, the inconsistency some see in Canal Corp. and NPR does not flow from an inconsistency in the law. Rather, there is always unpredictability as to how the facts will be perceived by different decision-makers. That is merely the uncertainty of litigation: the risk that a given judge on a given day may or may not believe your witnesses or your theory of the case. This is necessarily so; “[f]indings as to the design, motive and intent with which men act depend peculiarly upon the credit given to witnesses by those who see and hear them.” United States v. Yellow Cab Co., 338 U.S. 338, 341 (1949). Said differently, what a lawyer (or a client) thinks the facts are doesn’t matter if they can’t convince the judge they draw to perceive the facts as they see them. Making choices between “two permissible views of the weight of evidence” (id.) is precisely what trial judges are supposed to do and precisely what both of the judges in these cases did. Appeals in both cases, if they are filed, will have to take this into account.