                           In the

United States Court of Appeals
              For the Seventh Circuit

No. 09-1109

A MERICAN B OAT C OMPANY, LLC, and
A MERICAN M ILLING, LP, its tax matters partner,

                                             Plaintiffs-Appellees,
                               v.


U NITED S TATES OF A MERICA,
                                            Defendant-Appellant.


           Appeal from the United States District Court
               for the Southern District of Illinois.
           No. 06 CV 788—G. Patrick Murphy, Judge.



      A RGUED M AY 28, 2009—D ECIDED O CTOBER 1, 2009




 Before B AUER, F LAUM, and K ANNE, Circuit Judges.
  K ANNE, Circuit Judge. This is a tax case involving
another example of the now infamous Son of BOSS
tax shelter. The Internal Revenue Service (IRS) deter-
mined that American Boat, LLC implemented an illegal
tax shelter and misstated certain information on its tax
documents, resulting in significant tax underpayment by
2                                               No. 09-1109

its owners. On July 18, 2006, the IRS issued American
Boat a Notice of Final Partnership Administrative Adjust-
ment (FPAA). American Boat, through its tax matters
partner American Milling, LP, sued the United States
seeking judicial review of the FPAA. The district court
agreed with the IRS that American Boat’s transactions
were invalid and that the related tax benefits were im-
proper—conclusions American Boat does not appeal.
The government, however, appeals the district court’s
determination that American Boat and its members are
not subject to accuracy-related penalties. Although we
see merit in some of the government’s arguments, we
find no reversible error below.


                     I. B ACKGROUND
  This case arose from a series of transactions con-
stituting an example of what is now known as a “Son of
BOSS” tax shelter. The shelter, which was aggressively
marketed by law and accounting firms in the late 1990s
and early 2000s, is a younger version of its parent—the
equally illegal BOSS (bond and options sales strategy)
shelter. See Kligfeld Holdings v. Comm’r, 128 T.C. 192, 194
(2007) (providing a description of the Son of BOSS
tax shelter). A Son of BOSS shelter may take many
forms, but common to them all is the transfer to a part-
nership of assets laden with significant liabilities. Id.
The liabilities are typically obligations to purchase securi-
ties, meaning they are not fixed at the time of the trans-
action. The transfer therefore permits a partner to
No. 09-1109                                                     3

inflate his basis 1 in the partnership by the value of the
contributed asset, while ignoring the corresponding
liability. Id.; see also Clearmeadow, 87 Fed. Cl. at 514. The
goal of the shelter is to eventually create a large, but not
out-of-pocket, loss on a partner’s individual tax return.
This may occur when the partnership dissolves or sells
an over-inflated asset. In turn, this artificial loss may
offset actual—and otherwise taxable—gains, thereby
sheltering them from Uncle Sam.
   In this case, American Boat does not challenge the
district court’s determination that the particular transac-
tions and tax structure violated tax law. Fortunately
for those of us less mathematically inclined, we need not
dwell on the finer details of American Boat’s transactions.
The IRS will receive its delinquent taxes. The real
question in this case is whether American Boat, managed
by David Jump, had reasonable cause for its underpay-
ment. If it did, then no accuracy-related penalty applies;
if it did not, American Boat’s owners will be liable for


1
  A “basis” refers to “[t]he value assigned to a taxpayer’s
investment in property and used primarily for computing
gain or loss from a transfer of the property.” Black’s Law Dictio-
nary 161 (8th ed. 2004). Each partner’s basis in his or her
partnership interest is known as the “outside basis.” Kornman
& Assocs., Inc. v. United States, 527 F.3d 443, 456 n.12 (5th
Cir. 2008). The partnership, as an entity, also calculates its
partnership items (income, credit, gain, loss, deduction, etc.) to
determine its basis in its assets, called its “inside basis.”
Clearmeadow Invs., LLC v. United States, 87 Fed. Cl. 509, 519
(2009); see also Kornman, 527 F.3d at 456 n.12.
4                                              No. 09-1109

forty percent of the underpayment of $1,260,544. See
26 U.S.C. § 6662(h).
  Jump is a St. Louis businessman who has developed a
large grain and commodities business in central Illinois.
He has owned a variety of business interests, including
a fleet of towboats operating on the Mississippi River.
In 1996, as Jump’s wealth continued to grow, his
Chicago banker advised him to consider planning his
estate. At his banker’s recommendation, Jump contacted
Erwin Mayer, an attorney at the Chicago law firm of
Altheimer & Gray.
  Mayer developed an estate plan that reorganized
Jump’s operating entities into a number of limited partner-
ships. Mayer also established the Jump Family Trust,
which eventually owned more than ninety-eight percent
of Jump’s many business assets. As part of the reorgani-
zation, Mayer recommended that Jump engage in a short-
sale version of the Son of BOSS tax shelter. The shelter
permitted one of Jump’s entities to report a large loss,
thereby allowing Jump to offset gains earned from the
dissolution of another of his entities. Altheimer & Gray
provided a written opinion regarding the validity of the
transaction, upon which Jump’s accountants relied in
preparing subsequent income tax returns. Although
Jump’s 1996 transactions were likely an invalid Son of
BOSS tax shelter, the IRS did not discover them until
after the statute of limitations had expired.
  Jump’s next encounter with the Son of BOSS shelter
came in 1998, purportedly as an indirect result of a near-
disaster of titanic proportions. One of Jump’s towboats,
No. 09-1109                                             5

with multiple loaded barges in tow, struck a bridge
near downtown St. Louis. Some of the barges
broke free from the towboat, floated down river, and
crashed into the Admiral, a floating casino in the
St. Louis harbor.
  The 2,000 passengers aboard were in grave danger as
the Admiral’s moorings began to break. With no means
of navigation, the steamboat-turned-casino would be
left to the currents of a flood-stage Mississippi River.
The ship was too tall to fit under the next bridge,
meaning that the inevitable collision would either
capsize the boat or tear it to pieces. Either outcome
could have resulted in one of the worst maritime
disasters in United States history. But, fortunately, one
of the Admiral’s moorings held; the towboat released its
remaining barges and pinned the casino against the
riverbank until assistance arrived.
  The wayward towboat was owned by American
Milling, LP, which at that time was the overarching
entity that owned most of Jump’s businesses. American
Milling’s potential liability from an accident such as the
one that nearly occurred would have easily exceeded the
company’s insurance coverage. As a result, Jump was
advised that he should readjust the ownership structure
of his companies to limit potential liability.
  In addition to his admiralty attorneys, Jump contacted
Mayer again, who was still at Altheimer & Gray. Mayer,
familiar with Jump’s various businesses, advised Jump
that he isolate the towboats from his companies’
remaining assets. As a result, American Boat Company,
6                                                   No. 09-1109

LLC was born. It eventually came to own and operate
Jump’s Mississippi River towboats.
  Mayer’s reorganization advice, however, was not what
attracted the IRS’s attention. In addition to restructuring,
Mayer advised Jump to conduct another short-sale
version of the Son of BOSS tax shelter. To do so, Mayer
created two other companies for Jump in late 1998: Gate-
way Grain, LLC, and Omaha Pump, LLC. Sometime
thereafter, Jump transferred his eighteen towboats,
which were owned by various entities, to American Boat.2
  On December 15, 1998, Gateway Grain and Omaha
Pump engaged in short sales of short-term United States
Treasury Notes,3 resulting in proceeds totaling approxi-
mately $30 million. Both companies also entered into


2
  The government disputes that Jump, through his various
entities, actually transferred title of all eighteen towboats to
American Boat.
3
   A short sale involves two distinct transactions. First, the
investor typically borrows securities from a broker—depositing
margin cash in an account to cover any eventual losses—and
sells them for proceeds. Second, the investor must return the
borrowed securities to the broker, meaning that he must at
some point repurchase the same amount. The investor is
therefore counting on a drop in the price of the securities,
meaning that he will not have to exhaust his proceeds from
the short sale to replace them. The difference in the cost of the
securities is his profit; should the price of the securities rise,
the additional expense of replenishing the borrowed securities
is his loss. See generally Kornman, 527 F.3d at 450; Zlotnick v.
TIE Commc’ns, 836 F.2d 818, 820 (3d Cir. 1988).
No. 09-1109                                                    7

repurchase agreements with Morgan Stanley, their
broker, using the proceeds as collateral until the Notes
were replaced.
  The next day, Gateway Grain and Omaha Pump trans-
ferred their brokerage accounts—now fat with more than
$30 million—to American Boat. Along with the short-sale
proceeds, however, came the obligation to close the short-
sale transactions. On December 18, American Boat used
the $30 million proceeds to close the short sales,
resulting in an overall economic loss of just $15,213.86.
  The next steps were a series of complex transactions
that are largely irrelevant to the issues in this case.4
Suffice it to say that Jump was able to increase the basis
of the eighteen towboats owned by American Boat to
match the partners’ newly inflated outside basis. The
basis in the towboats increased from what American
Milling had originally claimed was $3,280,783 to a com-
bined total of $31,594,334.
  American Boat accomplished this feat by claiming
that the contribution of the short-sale proceeds increased
the partners’ basis by $30 million, but that American
Boat’s assumption of the corresponding $30 million
obligation to close the short sales was not a “liability” that


4
   For a more detailed explanation of precisely this type of
Son of BOSS transaction, see Kornman, 527 F.3d 443. In that case,
the Fifth Circuit held that a partnership’s obligation to close
a short sale of United States Treasury notes was a partnership
liability, thereby invalidating the Son of BOSS tax shelter. Id.
at 462.
8                                               No. 09-1109

reduced the partners’ basis under § 752 of the Internal
Revenue Code. See 26 U.S.C. § 752. The result was a
drastic artificial increase in the basis that permitted Jump
and his entities to claim much higher deductions for the
depreciation of the towboats and to offset taxable gains
earned by later sales of some of the boats. Based on
the structure of the various entities, the consequences
of these tax benefits flowed through to Jump’s individual
tax return.
  In addition to the reorganization, Mayer, who had
since moved his practice to the law firm of Jenkens &
Gilchrist, provided Jump with an opinion letter
regarding the validity of the above-described transac-
tions. Among other things, Mayer opined that the in-
creased partnership basis was permissible because the
obligation to close the short sales was not a “liability”
under § 752. The opinion further stated that the
taxpayer had a business purpose for the transferring
the short-sale positions to American Boat and that it
likewise had a reasonable expectation of making a profit—
premises that the government claims were shams.
  Beginning in the taxable year 1999, American Milling
and Jump claimed substantial tax benefits on their re-
spective returns as a result of the Son of BOSS shelter. In
doing so, Jump provided Mayer’s opinion letter to his
accountants at Deloitte and Touche. Although Deloitte
was not asked to opine on the validity of American
Boat’s short-sale transactions in 1996 or 1998, the accoun-
tants informed Jump that they considered the legal posi-
tion taken by Jenkens & Gilchrist to be accurate. Deloitte
No. 09-1109                                              9

further told Jump that it had implemented the same
strategy for some of its other clients, and it could
have easily done so for him.
  Jump and his companies later changed their
accounting firm from Deloitte to a regional firm, Scheffel
& Companies, which also prepared and signed their tax
returns. Like Deloitte, Scheffel was not asked to advise
as to the propriety of the short-sale transactions, but it
raised no objection or concern about the increased tax
basis in Jump’s towboats.
  According to American Boat, Jump did not know or
have reason to know in 1998 that Mayer, Altheimer
& Gray, or Jenkens & Gilchrist had structured similar
transactions for other taxpayers. From Jump’s perspective
at that time, he was merely returning to the same
reputable attorney who restructured his businesses two
years prior. The government points out, however, that
Jenkens & Gilchrist offered similar tax shelters to thou-
sands of wealthy individuals, and the opinion letters
were often formulated using a template that ignored
the economic realities of the transactions.
   As the number of taxpayers using variations of the
Son of BOSS tax shelter rose over the next several years,
so too did the scrutiny from the IRS, and Jenkens &
Gilchrist was at the heart of it. Opinion letters from
Mayer and two other lawyers at Jenkens & Gilchrist—Paul
Daugerdas and Donna Guerin—not only “led to the
firm’s demise,” Cemco Investors, LLC v. United States,
515 F.3d 749, 750 (7th Cir. 2008); see also Nathan Koppel,
How a Bid to Boost Profits Led to a Law Firm’s Demise, Wall
10                                               No. 09-1109

St. J., May 17, 2007, at A1, but their roles in the trans-
actions also resulted in a federal criminal indictment
for each of them. See Chad Bray, In BDO Case, 7 Charged
With Fraud, Wall St. J., June 10, 2009, at C2.
   The IRS discovered American Boat’s 1998 Son of BOSS
transaction during its investigation of Jenkens & Gilchrist,
and it issued an FPAA on July 18, 2006. The IRS deter-
mined that American Boat’s tax shelter was invalid, and
it adjusted the company’s basis of its towboats by ap-
proximately $30 million. The IRS also imposed a forty
percent accuracy-related penalty due to underpayment
resulting from a gross valuation misstatement. See 26
U.S.C. § 6662(h).
   American Milling, the tax matters partner for American
Boat, deposited the challenged tax with the IRS and
sought judicial review of the FPAA in the Southern
District of Illinois. See 26 U.S.C. § 6226(a)(2), (e)(1). The
district court held that American Boat’s Son of BOSS
transactions were invalid and lacked economic
substance, particularly after we indicated that a similar
transaction was invalid, see Cemco Investors, 515 F.3d at 751,
and the Fifth Circuit determined that the same version
of the tax shelter was illegal, see Kornman, 527 F.3d at 456.
American Boat does not appeal the court’s decision that
its shelter was invalid.
  On the issue of penalties, however, the district court
found that American Boat, through its managing partner
David Jump, had reasonable cause for inflating the basis
in the tugboats, and the accuracy-related penalty in
26 U.S.C. § 6662 therefore did not apply. See 26 U.S.C.
No. 09-1109                                               11

§ 6664(c); Treas. Reg. 1.6664-4(a). The court found that
Jump turned to Mayer, who was already familiar with
Jump’s businesses, for legitimate advice following the
1998 maritime accident. At that time, there was no
reason for Jump to know that Mayer’s advice was risky
or incorrect, and the tax shelter, although invalid, was
but one component of an overall business readjustment.
Furthermore, two accounting firms, Deloitte and Scheffel,
did not raise any objection to the tax ramifications of
the short-sale transactions.
   The government now appeals the district court’s ruling
that American Boat demonstrated reasonable cause for
its underpayment. We find no error in the district
court’s ruling.


                       II. A NALYSIS
 Before turning to the primary dispute in this case—
whether American Boat established reasonable cause—
we must first address our jurisdiction to consider the issue.


  A. Jurisdiction
  The parties both agree that the district court had juris-
diction to determine whether American Boat had reason-
able cause for its tax underpayment. But a recent decision
of the Court of Federal Claims has called our juris-
diction into question. See Clearmeadow, 87 Fed. Cl. 509.
12                                                No. 09-1109

  First, a bit of background is in order.5 Partnerships
do not pay federal income taxes; the entity, however,
must file an annual information return stating the part-
ners’ distributive share of the partnership’s income,
deductions, and other tax items. See Grapevine Imps., Ltd.
v. United States, 71 Fed. Cl. 324, 326 (2006); see also 26
U.S.C. §§ 701, 6031. The individual partners then report
their distributive share of taxable items on their
personal income tax returns. See 26 U.S.C. §§ 701-704.
  To avoid the inefficiency associated with requiring
the IRS to audit and adjust each partner’s tax return,
Congress created a unified partnership-level procedure
for auditing and litigating “partnership items.” See Tax
Equity and Fiscal Responsibility Act (TEFRA) of 1982 § 402,
26 U.S.C. §§ 6221-6234; see also New Millennium Trading,
LLC v. Comm’r, 131 T.C. No. 18, 2008 WL 5330940, at *3-4
(U.S. Tax Ct. Dec. 22, 2008); Grapevine Imps., 71 Fed. Cl. at
327. The treatment of all partnership items should
be determined at the partnership level, 26 U.S.C.
§§ 6211(c), 6221, 6230(a)(1), and any nonpartnership item
is resolved during a partner-level proceeding, id.
§§ 6212(a), 6230(a); see also Grapevine Imps., 71 Fed Cl.
at 327.
  Prior to 1997, all penalties—even those relating to a
partnership item—were assessed at the partner level. New
Millennium Trading, 2008 WL 5330940, at *7. In 1997, as
part of the Taxpayer Relief Act, Pub. L. No. 105-34,


5
  For a more thorough explanation of the procedures that
follow, see Tigers Eye Trading, LLC v. Comm’r, T.C. Memo. 2009-
121, 2009 WL 1475159, at *9-10 (U.S. Tax Ct. May 27, 2009).
No. 09-1109                                                13

§ 1238(a), 111 Stat. 788, 1026, Congress amended
TEFRA to provide that penalties related to adjustments
of partnership items should also be determined during
the partnership-level proceeding. See 26 U.S.C. §§ 6221,
6226(f); see also New Millennium Trading, 2008 WL 5330940,
at *7. Section 6221 now provides that “the tax treatment
of any partnership item (and the applicability of any penalty,
addition to tax, or additional amount which relates to an
adjustment to a partnership item) shall be determined at
the partnership level” (emphases added). Similarly,
§ 6226(f) states that a court has jurisdiction “to
determine . . . the proper allocation of [partnership] items
among the partners, and the applicability of any penalty,
addition to tax, or additional amount which relates to
an adjustment to a partnership item.”
  On the other hand, if an individual partner wishes
to raise a partner-level defense to the imposition of a
penalty, he must do so in a refund proceeding under
§ 6230(c). A court does not have jurisdiction to consider
a partner-level defense in a partnership-level proceeding.
See New Millennium Trading, 2008 WL 5330940, at *8;
Jade Trading, LLC v. United States, 80 Fed. Cl. 11, 60 (2007).
  The question, then, is whether the reasonable cause
defense in § 6664(c) is a partnership- or partner-level
defense (or both). Although TEFRA defines a “partnership
item” in various ways, the definition broadly includes
items “required to be taken into account for the partner-
ship’s taxable year,” as well as those “more appropriately
determined at the partnership level than at the partner
level.” 26 U.S.C. § 6231(a)(3); see also Tigers Eye Trading,
14                                              No. 09-1109

2009 WL 1475159, at *19 (noting that partnership-
level defenses “include all defenses that require factual
findings that are generally relevant to all partners or a
class of partners and not unique to any particular part-
ner”). The relevant Treasury Regulation defines the term
to include “the legal and factual determinations that
underlie the determination of the amount, timing, and
characterization of items of income, credit, gain, loss,
deduction, etc.” Treas. Reg. § 301.6231(a)(3)-1(b); see
also Treas. Reg. § 301.6221-1(c).
  In contrast, a defense at the partner-level is “limited to
those that are personal to the partner or are dependent
upon the partner’s separate return and cannot be deter-
mined at the partnership level.” Treas. Reg. § 301.6221-1(d);
see also Tigers Eye Trading, 2009 WL 1475159, at *18-19. The
Treasury Regulation notes that one example of a partner-
level determination is whether the individual partner
has reasonable cause as provided by § 6664(c)(1).
Treas. Reg. § 301.6221-1(d).
  Despite the inclusion of reasonable cause in Treasury
Regulation § 301.6221-1(d), the vast majority of courts
have held or indicated that a partnership may also
raise such a defense on its own behalf, based on the
conduct of its general or managing partner. See Klamath
Strategic Inv. Fund ex rel. St. Croix Ventures v. United
States, 568 F.3d 537, 548 (5th Cir. 2009); Stobie Creek
Invs., LLC v. United States, 82 Fed. Cl. 636, 703-04 (2008);
see also Long Term Capital Holdings v. United States, 330
F. Supp. 2d 122, 205-12 (D. Conn. 2004) (considering,
without discussing the jurisdictional question, whether
No. 09-1109                                                15

the partnership had reasonable cause to claim large
losses); Santa Monica Pictures, LLC v. Comm’r, T.C. Memo.
2005-104, 2005 WL 1111792, at *101-12 (U.S. Tax Ct. May 11,
2005) (addressing, without reference to jurisdiction, the
reasonable cause defense at the partnership level).
  A number of other courts have not directly addressed
the issue but have held that a partner may not raise a
partner-level reasonable cause defense in a partnership-
level proceeding, leaving open the possibility that a
partnership might raise the defense on its own behalf. See
AWG Leasing Trust v. United States, 592 F. Supp. 2d 953, 996
(N.D. Ohio 2008) (referring separately to a “partnership-
level reasonable cause defense” and a similar partner-
level defense, and finding that the court lacked juris-
diction because the plaintiff trust “did not present
any evidence in support of a reasonable cause defense
on behalf of the Trust” (emphasis added)); Tigers Eye
Trading, 2009 WL 1475159, at *18 (“A defense based
on the reasonable cause exception under section
6664(c)(1) . . . may be raised in a partnership-level pro-
ceeding if it is not a partner-level defense.”); New Millen-
nium Trading, 2008 WL 5330940, at *7 (noting that
courts have considered the reasonable cause defense
when presented through a general or managing partner,
but not at the partner-level); Whitehouse Hotel Ltd. P’ship
v. Comm’r, 131 T.C. No. 10, 2008 WL 4757336, at *37
(U.S. Tax Ct. Oct. 30, 2008) (stating that § 6664(c)(1)’s rea-
sonable cause defense is a partnership-level determina-
tion, but refusing to apply it because plaintiff did not
meet prerequisites in § 6664(c)(2)); Jade Trading, 80 Fed. Cl.
at 60 (noting that non-managing plaintiffs asserted a
16                                            No. 09-1109

partner-level defense, as compared to a similar defense by
the partnership or managing partner).
  As these cases indicate, there has been little dispute
previously that a partnership—as well as an individual
partner—could raise its own reasonable cause defense.
But the Court of Federal Claims recently held that the
reasonable cause exception in § 6664(c) is only a partner-
level determination that a court may not consider
during a partnership-level proceeding. See Clearwater,
87 Fed. Cl. at 520-21.
  To the extent that the court’s holding in Clearwater
wholly forecloses a partnership from raising an entity-
level reasonable cause defense, we disagree. The court’s
primary premise is correct: a partner may not raise a
partner-level defense during a partnership-level pro-
ceeding. But we see nothing that would prevent a partner-
ship from raising its own reasonable cause defense,
permitting a court to consider the conduct of its
managing partner on behalf of the partnership. As the
above cases have held, a partnership might raise such
a defense based on facts and circumstances common to
all partners and which relies on neither an individual
partner’s tax return nor his unique conduct.
  The Clearwater court relied on Treasury Regulation
§ 301.6221-1(d), which defines a partner-level defense,
finding that cases such as Klamath and Stobie Creek are
“directly contrary.” 87 Fed. Cl. at 520. Although the
Regulation cites § 6664(c)(1) as an example of a partner-
level defense, it does not foreclose a similar defense
No. 09-1109                                                  17

on behalf of the partnership; it only states that “whether
the partner has met the criteria of . . . section 6664(c)(1)” is
a partner-level defense. Treas. Reg. § 301.6221-1(d). The
Fifth Circuit concluded that this language did not rule
out a partnership-level reasonable cause defense, see
Klamath, 568 F.3d at 548, and we agree.
  In this case, the IRS adjusted American Boat’s partner-
ship items arising out of its U.S. Return of Partnership
Income (Form 1065), filed in the name of American Boat
Company, LLC. The adjustment focused on American
Boat’s inside basis. To the extent that Jump raises a
partner-level defense or seeks a personal refund, we do
not have jurisdiction. But American Boat claims that the
partnership, through its general partner, had reasonable
cause for its tax position. Accordingly, we find that the
district court had jurisdiction to consider this issue.


  B. Merits of the Government’s Appeal
  With our jurisdiction intact, we now turn to the sub-
stance of the government’s argument that American
Boat did not demonstrate reasonable cause for its tax
position. Specifically, the government asserts that the
company could not have reasonably relied on Mayer’s
advice due to his inherent conflict of interest and that,
in any event, Mayer’s opinion letter did not meet the
threshold requirements of Treasury Regulation § 1.6664-
4(c)(1).
18                                               No. 09-1109

    1. Background—Penalties Under 26 U.S.C. § 6662
  Section 6662 of the Internal Revenue Code imposes a
mandatory accuracy-related penalty for certain tax under-
payments that meet the statutory requirements. 26 U.S.C.
§ 6662(a), (h); see also Thompson v. Comm’r, 499 F.3d 129, 134
(2d Cir. 2007). If the underpayment is due to a “gross
valuation misstatement,” that is, a misstatement of the
correct adjusted basis by 400 percent or more, the tax-
payer must pay a penalty of forty percent of the
delinquent tax. 26 U.S.C. § 6662(a), (h).
  But not every tax underpayment is subject to § 6662’s
penalties. A taxpayer who had “a reasonable cause” for
the underpayment, and acted in good faith with respect
to that portion, has a valid defense.6 26 U.S.C. § 6664(c)(1);
see also Treas. Reg. § 1.6664-4(a). Whether a taxpayer
had reasonable cause depends on all of the pertinent
facts and circumstances of a particular case, with the
most important factor being the taxpayer’s effort to
assess his proper tax liability. Treas. Reg. § 1.6664-4(b)(1).
  A common means of demonstrating reasonable cause
is to show reliance on the advice of a competent and
independent professional advisor. See id.; United States
v. Boyle, 469 U.S. 241, 251 (1985) (“When an accountant
or attorney advises a taxpayer on a matter of tax law, such
as whether a liability exists, it is reasonable for the tax-


6
  The district court determined that American Boat and Jump
had acted in good faith. The government does not contest this
ruling on appeal, and we therefore discuss only whether
American Boat had reasonable cause.
No. 09-1109                                                  19

payer to rely on that advice.”); Stobie Creek Invs., 82 Fed. Cl.
at 717 (“[T]he concept of reliance on the advice of pro-
fessionals is a hallmark of the exception for reasonable
cause and good faith.”).
  Relying on a professional, however, will not always
get a taxpayer off the hook. To constitute reasonable
cause, the reliance must have been reasonable in light of
the circumstances. Treas. Reg. § 1.6664-4(b)(1), (c)(1); see
also Stobie Creek Invs., 82 Fed. Cl. at 717. This is a fact-
specific determination with many variables, but the
question “turns on ‘the quality and objectivity of the
professional advice obtained.’ ” Klamath Strategic Inv.
Fund, LLC v. United States, 472 F. Supp. 2d 885, 904 (E.D.
Tex. 2007), aff’d sub nom. Klamath Strategic Inv. Fund ex rel.
St. Croix Ventures v. United States, 568 F.3d 537 (5th Cir.
2009) (quoting Swayze v. United States, 785 F.2d 715, 719
(9th Cir. 1986)).
  At a minimum, the taxpayer must show that the
advice was (1) based on all relevant facts and circum-
stances, meaning the taxpayer must not withhold
pertinent information, and (2) not based on unreasonable
factual or legal assumptions, including those the tax-
payer knows or has reason to know are untrue. Treas.
Reg. § 1.6664-4(c)(1); see also Stobie Creek Invs., 82 Fed Cl.
at 717-18. Other relevant considerations are the tax-
payer’s education, sophistication, business experience,
and purposes for entering the questioned transaction.
Treas. Reg. § 1.6664-4(c).
  As a general principle, a taxpayer need not challenge
an independent and competent adviser, confirm for
20                                              No. 09-1109

himself that the advice is correct, or seek a second
opinion. Boyle, 469 U.S. at 251. This is particularly so
where the taxpayer is relying on advice of counsel con-
cerning a question of law (as opposed to, for example,
meeting a statutory deadline). See id. at 250. As the Su-
preme Court has noted, “Most taxpayers are not
competent to discern error in the substantive advice of
an accountant or attorney. To require the taxpayer to
challenge the attorney . . . would nullify the very purpose
of seeking the advice of a presumed expert in the first
place.” Id. at 251.
  A taxpayer is not reasonable, however, in relying on an
adviser burdened with an inherent conflict of interest
about which the taxpayer knew or should have known.
See, e.g., Neonatology Assocs., P.A. v. Comm’r, 299 F.3d 221,
234 (3d Cir. 2002); Chamberlain v. Comm’r, 66 F.3d 729, 732-
33 (5th Cir. 1995); Pasternak v. Comm’r, 990 F.2d 893, 902
(6th Cir. 1993); cf. Carroll v. LeBoeuf, Lamb, Greene &
MacRae, LLP, 623 F. Supp. 2d 504, 511 (S.D.N.Y. 2009) (“[I]f
a law firm had an interest in the sale of a particular tax
product, a court could conclude that its opinion
would not provide protection from IRS penalties.”).
What exactly constitutes an “inherent” conflict of interest
is somewhat undefined, but when an adviser profits
considerably from his participation in the tax shelter,
such as where he is compensated through a percentage
of the taxes actually sheltered, a taxpayer is much less
reasonable in relying on any advice the adviser may
provide.
  In cases involving Son of BOSS shelters or similar
transactions, courts have upheld the imposition of penal-
No. 09-1109                                             21

ties on taxpayers who relied on advisers involved in
implementing the strategy, including Jenkens &
Gilchrist. See Stobie Creek, 82 Fed. Cl. at 715; see
also Maguire Partners-Master Invs., LLC v. United States,
Nos. 06-07371, 06-0774, 06-7376, 06-7377, 06-7380, 2009
WL 279100, at *21 (C.D. Cal. Feb. 4, 2009); New Phoenix
Sunrise Corp. v. Comm’r, No. 23096-05, 2009 WL 960213, at
*22-23 (U.S. Tax Ct. Apr. 9, 2009). Even though “prior to
the events leading to its public disgrace and dissolution
of the law firm, . . . [Jenkens & Gilchrist] enjoyed a
vaunted reputation in legal and tax matters,” at
least some courts have found that their involvement in
structuring the tax shelters constituted an inherent
conflict of interest. See Stobie Creek, 82 Fed. Cl. at 715.
Important to the court’s decision in Stobie Creek was that
the taxpayer’s advisers received fees calculated as a
percentage of the capital gains sheltered by their strate-
gies. Id. (noting that the taxpayer’s knowledge that the
firms were financially interested in the implementation of
the strategy diminished the reasonableness in relying on
their advice). Likewise, in New Phoenix, the court found
that Jenkens & Gilchrist “actively participated in the
development, structuring, promotion, sale, and implemen-
tation of the [tax shelter] transaction”; the firm had a
conflict of interest; the taxpayer expressed multiple
concerns about the proper reporting of the transaction; the
firm only then issued him an opinion letter; and the
taxpayer knew of recent developments in tax law that
called the firm’s advice into question. 2009 WL 960213,
at *22-23.
  At the other end of the spectrum, a district court has
determined that a taxpayer had reasonable cause for an
22                                               No. 09-1109

underpayment where he relied on advice from
attorneys regarding a transaction similar to a Son of
BOSS shelter. Klamath, 472 F. Supp. 2d at 904-05, aff’d, 568
F. 3d 537.7 In Klamath, the plaintiffs engaged in a three-
stage investment strategy, partnering with an advisory
firm purporting to specialize in foreign currency trading.
Id. at 889-90. The plaintiffs obtained a large loan to fund
the first stage of the strategy and then withdrew, generat-
ing large tax losses. Id. at 893. The plaintiffs sought
advice about their tax basis from two law firms—both of
which also represented the partner advisory firm
that implemented the investments. Id. at 893-94.
Although the court determined that the transactions
lacked economic substance, it declined to impose
penalties based on the plaintiffs’ reasonable cause. Id. at
904-05. The court rejected the government’s argument
that the law firms had an inherent conflict of interest
simply because they represented the investment firm
that implemented the transactions. Id. at 905.


    2. Inherent Conflict of Interest
  The government’s argument relies heavily on Mayer’s
purported inherent conflict of interest. The district court
held that, at the time of the transaction, Jump had no


7
  The Fifth Circuit only affirmed the district court’s holding
that it possessed jurisdiction to determine the partnership’s
reasonable cause defense. Klamath, 568 F.3d at 548. The gov-
ernment did not challenge the substance of the district
court’s finding that the taxpayers had reasonable cause. Id.
No. 09-1109                                           23

reason to suspect that Mayer’s opinion was anything
but proper. The government, however, asserts that
Jump could not have reasonably relied on that advice
because he paid Mayer a large fee to structure the trans-
actions, which ultimately provided a large tax benefit
for minimal risk. At oral argument, the government
suggested that any time an adviser incorporates a
potential tax shelter into a restructuring plan, the
taxpayer may not reasonably rely on that adviser’s legal
advice and must obtain a second opinion. Such a benefit
to the adviser, so the argument goes, should render any
subsequent advice regarding the transaction’s legality
unreliable as a matter of law.
  We find no such bright-line rule in the case law and
decline to implement one here. The government is correct
that in many instances, perhaps even most, a taxpayer
might be unreasonable in relying on an adviser who
stands to gain significantly from a transaction. But one
in need of legal advice almost always has to pay some-
thing for it. Mayer received a flat fee for his services—
which, importantly, included not only an impermissible
transaction, but also significant work restructuring
Jump’s various business entities in response to concerns
about his companies’ liability. To accept the govern-
ment’s argument would mean that a taxpayer may never
rely upon the legal advice of the same adviser who coun-
sels the individual on restructuring. The reasonable
cause determination depends on the particular facts
and circumstances of each case, see Treas. Reg. § 1.6664-
4(b)(1), and we trust that our district courts can apply
the reasonable cause standard accordingly. Thus, Jump’s
24                                               No. 09-1109

reliance on Mayer’s advice was not per se unreasonable
simply because he also advised Jump on restructuring
his businesses.


  3. American Boat’s Reasonable Cause Defense
  With that in mind, we turn to the district court’s finding
that American Boat, through David Jump, had reasonable
cause for its tax position. The standard of review plays
an integral role in this case. Whether reasonable cause
existed—and the findings underlying this determina-
tion—are questions of fact, which we review for clear
error. See Fed. R. Civ. P. 52(a); Anderson v. City of Bessemer
City, N.C., 470 U.S. 564, 573 (1985); ReMapp Int’l Corp. v.
Comfort Keyboard Co., 560 F.3d 628, 633 (7th Cir. 2009).
The trial court is in a better position to evaluate the evi-
dence, and we will overturn a factual finding only
when we are “ ‘left with the definite and firm conviction
that a mistake has been committed.’ ” Anderson, 470 U.S.
at 573 (quoting United States v. U.S. Gypsum Co., 333 U.S.
364, 395 (1948)). We will not redetermine facts as though
hearing the case for the first time, id. at 573-74, and “[w]e
view the evidence in the light most favorable to the tax
court finding.” Square D Co. & Subsidiaries v. Comm’r,
438 F.3d 739, 743 (7th Cir. 2006).
  To the extent that the government appeals the district
court’s determinations of law, we review them de novo.
See id. “Whether the elements that constitute ‘reason-
able cause’ are present in a given situation is a question of
fact, but what elements must be present to constitute
No. 09-1109                                               25

‘reasonable cause’ is a question of law.” Boyle, 469 U.S.
at 249 n.8.
  Turning to this case, the government goes to great
effort to shine the spotlight on Mayer and Jenkens &
Gilchrist, remarking on their many years of faulty tax
advice and their roles in sheltering money from the
public coffers. But the focus of the district court’s inquiry
was, as it should have been, on American Boat and
David Jump. We must consider whether, from Jump’s
perspective and in light of all the circumstances, the
district court clearly erred by finding that Jump had
reasonable cause for his underpayment.
  Traveling back to 1996, when the Son of BOSS was still
in its infancy and before all of the publicity and legal
trouble, Erwin Mayer was a reputable attorney at
Altheimer & Gray. The district court found that
Jump’s banker referred him to Mayer in 1996 to establish
an estate plan. Mayer advised Jump to restructure his
businesses, while at the same time suggesting that he
institute a tax-saving transaction. As the court pointed
out, Jump did not approach Mayer seeking a tax shelter,
nor did he have reason at that time to think that Mayer’s
advice was faulty. Jump paid Mayer a large, flat fee for
his legal services, which included creating a family
trust and reorganizing the assets of several large compa-
nies. Unlike some of the cases cited above, Mayer was not
compensated based on a percentage of the tax benefits
he produced. The sole indicator that Mayer’s advice
might have been unreliable was the divide between the
cost of the transactions and the resulting tax benefits.
26                                             No. 09-1109

But, as we stated earlier, the IRS did not pursue Jump
based on his 1996 transactions.
   Moving forward to 1998, after Jump’s towboat nearly
doomed the Admiral, the court determined that Jump
returned to Mayer for another legitimate reason—advice
about reorganizing his businesses to reduce potential
liability. Jump was not intending to implement a tax
shelter. But Mayer incorporated the second Son of BOSS
transaction as part of the overall reorganization. We
acknowledge the government’s argument that Mayer’s
tax advice was distinct from any advice he may have
provided regarding Jump’s tort liability. Mayer was not
a tort lawyer, but his overarching counsel was to reorga-
nize, and Jump relied in part on Mayer’s recommended
means of doing so. Jump again paid a flat fee, albeit a
larger one, for this reorganization and advice.
  As part of the 1998 transaction, Mayer provided Jump
with a lengthy opinion letter stating that the Son of BOSS
transactions were legal under then-existing tax law.
Despite the government’s protestations to the contrary,
we find that the letter met the requirements of Treasury
Regulation § 1.6664-4(c). The parties do not dispute that
Mayer was a competent tax adviser, nor do they
disagree that Jump provided Mayer with the pertinent
facts. The government claims, however, that the opinion
letter contained representations that Jump knew or
should have known were false, particularly that the short-
sale transactions had a nontax business purpose and
that Jump sought an economic profit.
  Yet again, the government’s position is not meritless. In
retrospect, making a profit on the short-sale transactions
No. 09-1109                                               27

was unlikely at best. Jump also stated that the companies
transferred the short-sale positions to provide start-up
funding for American Boat, which would be operating
the towboats. Although this assertion is undermined by
the unavailability of the short-sale proceeds during
the three days before American Boat fulfilled its corre-
sponding obligation to replace the Treasury Notes, the
district court found that Jump was a credible witness and
that he did not know the transactions held no profit
potential. Specifically, the court concluded that Jump
“thought as a part of this that he could make some
money.” Again, the focus is on what Jump knew or
should have known at the time he obtained the opinion
letter, and we must defer to the district court’s credibility
determinations on findings of fact. See Anderson, 470 U.S.
at 573-74. He paid Mayer a large fee for his work, and
the evidence does not compel the conclusion that this
fee was strictly for a favorable opinion letter in the
event that American Boat were audited. Even though
we might have reached a different conclusion, the
district court’s determination that Jump did not know
that certain assertions in the opinion letter were
incorrect was not clearly erroneous.
  Likewise, we do not find that the court clearly erred by
determining that Jump had no reason to know that Mayer
had a disqualifying conflict of interest. Of course, Jump
knew that Mayer was advising him to undertake these
transactions, and Jump paid Mayer a fee. But the fee was
for more than simply sheltering Jump’s taxes; Mayer
performed other legal work by moving significant assets
into newly reorganized companies. The court expressly
28                                              No. 09-1109

stated that “he did not pay that fee thinking that as con-
sideration he was getting a tax shelter.” To Jump, therefore,
the Son of BOSS transactions may have seemed like
another component of such work. Had Mayer required
his compensation to be a percentage of the sheltered
capital gains, perhaps our analysis would be different.
Furthermore, the court found that the shelter was never
marketed to Jump; rather, he sought only expert legal
advice, which was what he thought he was paying for.
  After receiving Mayer’s opinion letter, Jump enlisted
two accounting firms to prepare his personal and
business tax documents. The government is correct that
Jump never asked Deloitte or Scheffel to opine on the
validity of the short-sale transactions. Because of that
failure, it is also correct that Jump could not have rea-
sonably “relied on” these accountants to show rea-
sonable cause. But that does not mean the accountants’
review of American Boat’s and Jump’s tax documents
is irrelevant. That two reputable accounting firms raised
no objection to the tax treatment of Jump’s transactions is
relevant to the overarching inquiry of whether his
reliance on Mayer’s advice was reasonable. Deloitte not
only agreed with Mayer’s analysis, but it even informed
Jump that it was structuring similar transactions for
many of its clients and could have done the same for
him. From Jump’s perspective, no red flag went up in-
dicating that his transactions—or Mayer’s advice
regarding them—were improper.
  Finally, the government points to the substantial tax
benefit that Jump received as a result of the short-sale
No. 09-1109                                               29

transactions, claiming that such a “too good to be true”
transaction should have put him on notice that some-
thing was awry. There is no doubt that the benefit
Jump received was large, and this is the argument that
gets the government the nearest to undermining Jump’s
assertion that he had reasonable cause. But, in general,
“it is axiomatic that taxpayers lawfully may arrange
their affairs to keep taxes as low as possible.” Neonatology,
299 F.3d at 232-33 (citing Gregory v. Helvering, 293 U.S.
465, 469 (1935)).
  Of course, the key term here is “lawfully.” The district
court determined that, as far as Jump was concerned,
Mayer was implementing another transaction in con-
junction with reorganizing his business entities, much like
the one that Mayer had previously instituted in 1996. The
IRS did not inform Jump that the 1996 transaction was
abusive by 1998. Furthermore, prior to the 1996 reorganiza-
tion, Jump held his entities in a domestic international
sales corporation (DISC), which was essentially a shell
corporation permitting his businesses to defer much of
their taxable income obtained from export sales. See
generally Thomas Int’l Ltd. v. United States, 773 F.2d 300,
301 (Fed. Cir. 1985) (providing a thorough background of
the DISC provision of the Internal Revenue Code); see also
Dow Corning Corp. v. United States, 984 F.2d 416, 417
(Fed. Cir. 1993). Of course, the Son of BOSS transactions,
unlike the DISC, were not endorsed by Congress, but
Jump had previously—and legally—organized his busi-
nesses to reduce his tax liability. Perhaps it was not
surprising to him that Mayer suggested another means
of obtaining a similar benefit.
30                                             No. 09-1109

   This is a close case. In the end, we are searching for
clear error in the district court’s factual determinations,
and we are unable to find it. Whether any judge on this
panel might have reached a different conclusion after
hearing the evidence first-hand is not the appropriate
concern. Contrary to the government’s assertion, we
are not insulating from penalties every taxpayer who
obtains an opinion letter from the same adviser who
structures the transaction. And perhaps in today’s day
and age, after a decade of publicized corporate con-
troversy and scandal, such reliance would not be rea-
sonable. But whether one has reasonable cause for a tax
underpayment is a fact-specific inquiry, and we must
consider what Jump knew or should have known in
1998. The district court provided detailed reasons for
reaching its conclusion, all of which were supported by
the evidence before it. We find no clear error in the
district court’s factual findings, and no error of law in
its legal determinations.


                    III. C ONCLUSION
  The district court did not err in finding that American
Boat had reasonable cause for its tax position, and, conse-
quently, that it was not subject to the accuracy-related
penalty in 26 U.S.C. § 6662. We therefore A FFIRM .




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