                   Case: 11-15406          Date Filed: 09/28/2012   Page: 1 of 41

                                                                                    [PUBLISH]


                      IN THE UNITED STATES COURT OF APPEALS

                                   FOR THE ELEVENTH CIRCUIT
                                    ________________________

                                            No. 11-15406
                                      ________________________

                                           Agency No. 19668-06



WILLIAM E. GUSTASHAW, JR.,
NANCY D. GUSTASHAW,

lllllllllllllllllllllllllllllllllllllll                              l Petitioners-Appellants,


                                                  versus

COMMISSIONER OF IRS,

llllllllllllllllllllllllllllllllllllllll                                Respondent-Appellee.

                                     ________________________

                               Petition for Review of a Decision of the
                                            U.S. Tax Court
                                    ________________________

                                           (September 28, 2012)

Before HULL, MARCUS and HILL, Circuit Judges.

HULL, Circuit Judge:
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       Although a tax shelter can be legitimate, Petitioner William Gustashaw, Jr.,1

participated in one that was not. Gustashaw claimed substantial tax benefits from

the shelter on four consecutive tax returns. The IRS later disallowed Gustashaw’s

claim and determined deficiencies in tax and accuracy-related penalties, including

gross valuation misstatement penalties and a negligence penalty. Gustashaw

conceded the deficiencies in tax, but contested the penalties. The Tax Court

affirmed the IRS’s imposition of the penalties. After review and oral argument,

we affirm.

                                    I. BACKGROUND

A.     Gustashaw’s Education and Business Background

       Petitioner Gustashaw is a college-educated, successful businessman.

Gustashaw, who married his wife Nancy in college, graduated from Gannon

University in 1973 with a bachelor of science degree in industrial management.

While in college, Gustashaw took business-related courses, including managerial

cost accounting and the principles of accounting.

       Following graduation, Gustashaw embarked on a nearly thirty-year business



       1
        For purposes of this appeal, we refer to William Gustashaw, Jr., alone as “petitioner.”
His wife Nancy Gustashaw is a party solely because the Gustashaws filed joint returns, but
Nancy Gustashaw relied on her husband to prepare their taxes and took no part in the
investigation and reporting of the transactions at issue.

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career. From 1973 to 1993, Gustashaw held management positions with various

companies in the food and beverage industry. Then, in 1994, Gustashaw became

vice-president of operations at Merck Medco Managed Care (“Merck Medco”) in

Tampa, Florida. As vice-president of operations, Gustashaw was responsible for

large-scale prescription processing in a mail-order pharmacy. Subsequently,

Merck Medco promoted Gustashaw to vice-president and general manager, which

expanded his responsibilities to all operations of two mail-order pharmacies.

Merck Medco also provided Gustashaw with generous stock options.

B.    Gustashaw’s Early Retirement Plan

      In 1995, Gustashaw, who was then 45 years old, began planning for an early

retirement. Gustashaw had a conservative investment history and handled nearly

all of his and his wife’s investment decisions himself. In addition, Gustashaw had

filed all of the couple’s joint federal income tax returns. However, to assist with

his retirement plan, Gustashaw decided to hire a financial planner.

      To that end, Gustashaw hired Ralph Maulorico, a financial planner at New

England Financial who represented wealthy individuals. Gustashaw wanted to

exercise his Merck Medco stock options by 2000, and sought Maulorico’s advice

on whether the stock option exercise would generate enough income to fund the

Gustashaws’ retirement. Maulorico recommended the stock option exercise.

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Thus, in 1996, Gustashaw sold some of the acquired stock and invested the

proceeds in mutual funds.

      The next year, 1997, Gustashaw decided to hire a tax accountant to review

the Gustashaws’ tax returns, which Gustashaw would continue to prepare until

2000. On Maulorico’s recommendation, Gustashaw hired William Gable,

Maulorico’s college friend. Gable, who owns an accounting practice in Florida, is

an enrolled agent and accountant, but not a certified public accountant. Gable

received both an undergraduate and a master’s degree in accounting, with the

master’s degree specializing in taxation, at LaCrosse University. Gable reviewed

the Gustashaws’ self-prepared joint returns for 1997 through 1999, before they

were filed.

      In 1999, Merck Medco underwent a reorganization and offered Gustashaw

an option to retire early. Gustashaw accepted and retired that same year. The

following year, 2000, Gustashaw exercised his remaining Merck Medco stock

options and sold the stock, generating $8,077,376 in income. For that year, Gable

prepared the tax return, at Gustashaw’s request. The 2000 return claimed tax

benefits through a complicated financial transaction known as “CARDS,” as

explained in the next section.

C.    The CARDS Tax Shelter

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       In early 2000, Maulorico learned from a colleague about the Custom

Adjustable Rate Debt Structure (“CARDS”) transaction and its use as a tax shelter.

The colleague learned of the CARDS transaction through Roy Hahn, a certified

public accountant and founder of Chenery Associates, Inc. (“Chenery”). Chenery

developed and promoted the CARDS shelter. At the time, Maulorico, who had

experience in tax shelters, believed the transaction offered both profit potential

and a tax shelter for the income from Gustashaw’s stock option exercise. Thus,

Maulorico suggested the CARDS transaction to Gustashaw, who became

interested in it.

       During the 1990s and early 2000s, the CARDS transaction was promoted to

high net worth individuals both as an investment-financing mechanism and a tax

shelter. In the CARDS transaction, a U.S. taxpayer, facilitated by a newly created

company, uses a bank loan to create a tax loss based on an artificially high basis

(or cost) in assets, which then allows the taxpayer to generate a tax benefit by

offsetting real, taxable income.

       There are three steps to create the CARDS tax shelter.2 First, in the loan

origination step, a foreign bank loans currency to the borrower, a Delaware limited



       2
       For a fuller discussion of the CARDS transaction, see Kerman v. Comm’r, 2011 WL
839768 (T.C. 2011), appeal pending, No. 11-1822 (6th Cir.).

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liability company owned 100% by nonresident alien individuals. Importantly, the

foreign ownership of the borrower ensures the borrower is not subject to U.S.

taxation. The loan is for a 30-year term with annual interest payments due, but not

principal payments. The bank deposits the loan proceeds directly into the

borrower’s account at the bank. However, to use the loan proceeds, the borrower

must meet collateralization requirements by acquiring valuable, stable assets such

as government bonds.

      Second, in the loan assumption step, a U.S. taxpayer and the borrower enter

into an agreement whereby the U.S. taxpayer assumes joint and several liability for

the borrower’s entire loan. In exchange, the U.S. taxpayer receives only a small

percentage of the loan proceeds from the borrower, e.g., 15% for our purposes.

The borrower agrees to retain all interest obligations, and the U.S. taxpayer agrees

to repay the unpaid principal amount. The U.S. taxpayer then could, in theory, use

the assumed loan proceeds to make an investment, but the bank maintains

discretion on whether to release any funds. To access the loan proceeds, the U.S.

taxpayer must deposit equivalent, substitute collateral with the bank.

      And third, in the currency exchange step, the U.S. taxpayer exchanges his

15% portion of the foreign-currency loan for U.S. dollars. This currency exchange

is a taxable event generating tax benefits. To achieve the benefits, the U.S.

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taxpayer claims that his basis in the exchanged currency is the entire amount of the

loan, not the 15% of the loan that the taxpayer actually received from the tax-

exempt borrower. This discrepancy creates a permanent tax loss of 85% of the

original loan amount, which permits the U.S. taxpayer to shelter other unrelated,

taxable income.

      In August 2000, the Internal Revenue Service (“IRS”) issued a notice

warning taxpayers against claiming tax benefits through tax shelters similar to the

CARDS shelter, because such benefits would be subject to penalties. See I.R.S.

Notice 2000-44, 2000-2 C.B. 255. In March 2002, the IRS issued another, similar

notice that was targeted specifically at the CARDS shelter. See I.R.S. Notice

2002-21, 2002-1 C.B. 730. The 2002 notice also advised taxpayers who had used

the shelter to file amended returns. Id. Then, in 2005, the IRS offered a

settlement initiative whereby taxpayers could pay a reduced penalty by conceding

the claimed tax benefits. See I.R.S. Announcement 2005-80, 2005-2 C.B. 967.

D.    Gustashaw’s Investigation of the CARDS Transaction

      After Maulorico suggested the CARDS transaction, Gustashaw began to

investigate it. Maulorico arranged for Gustashaw to speak with Hahn, and most of

Gustashaw’s understanding of the transaction was from oral discussions with

Maulorico, Gable, and Hahn. According to Gustashaw, the CARDS shelter

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appeared attractive because it provided both tax advantages and investment

opportunities. These opportunities included (1) elimination of his year 2000 tax

liability by creating a tax loss, (2) access to investment funds over 30 years, and

(3) leverage of the euro against the dollar by drawing down a euro-denominated

loan and repaying it in dollars.

      Over several months, Gustashaw, Maulorico, and Gable had multiple

conversations about the CARDS transaction with Hahn, the transaction’s

promoter. Hahn explained how the CARDS transaction worked, including that the

transaction would generate a permanent tax loss of approximately 85% of the

original loan amount. Chenery, Hahn’s firm, would set up the transaction, and

Hahn stated that Gustashaw’s only out-of-pocket expense would be Chenery’s

investment banking fee.

      In June 2000, Gustashaw met with Maulorico and Gable to discuss both the

CARDS transaction and an executive summary about CARDS that Hahn had

prepared. After the meeting, Maulorico opined that Gustashaw could make a 16%

return on his investment in the CARDS transaction, based on Maulorico’s

“anecdotal[]” review of the transaction’s economics and past Standard & Poor’s

compound annual returns. Maulorico did not provide a written analysis.

Ultimately, Gustashaw and Maulorico concluded that Gustashaw would benefit

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from the CARDS transaction and the tax benefits it would generate for his 2000

tax return.

      Gable, however, refused to prepare Gustashaw’s 2000 tax return without a

tax opinion letter affirming the legitimacy of the CARDS transaction and the

resultant permanent tax loss. Gable was unfamiliar with the Internal Revenue

Code (“Code”) provisions implicated by the transaction and was reluctant to opine

on the transaction’s tax ramifications. Accordingly, Gable asked Hahn, the

promoter of the CARDS transaction, to obtain a tax opinion letter on the

transaction’s federal income tax consequences.

      Hahn offered to provide a model opinion letter prepared by the law firm of

Brown & Wood LLP. When Chenery, Hahn’s firm, began developing the CARDS

transaction in 1999, it retained Brown & Wood to write a model opinion letter on

the transaction’s tax consequences. Brown & Wood then maintained and updated

this model opinion letter, which it either sent directly to persons interested in the

CARDS transaction or permitted Chenery to distribute it. Hahn also knew that

Brown & Wood “stood available” to write individual, formal tax opinion letters

for CARDS participants.

      Gable relayed Hahn’s offer to Gustashaw and explained that because the

model opinion letter was written by a major and reputable law firm, it would more

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likely than not protect Gustashaw from substantial tax penalties if the IRS

ultimately disregarded the CARDS transaction for federal tax purposes.

Gustashaw asked to see the model opinion letter.

      The model opinion letter explained that the CARDS transaction was a tax

shelter and that the CARDS transaction “has not been before a court of law

addressing the issues addressed herein.” Nonetheless, the letter concluded that,

based on authority in analogous contexts, a taxpayer, “more likely than not,” could

claim the permanent tax loss promised by Chenery. The letter further opined that:

(1) the transaction—the transfer of the euro-denominated deposit proceeds to the

U.S. taxpayer in exchange for his assumption of the borrower’s obligations to the

bank—would constitute a sale of the foreign currency by the borrower to the

taxpayer; (2) the taxpayer’s tax basis in the foreign currency would equal the

principal amount of the loan, plus the amount of cash and the fair market value of

other consideration paid by the taxpayer to the borrower; (3) any gain or loss

resulting from the foreign currency’s disposition would be characterized as

ordinary income or loss under I.R.C. § 988; and (4) the taxpayer would recognize

no income upon the borrower’s payment of the loan to the bank.

      Gustashaw met with Maulorico and Gable to review the model opinion

letter’s conclusions. Although Chenery, the CARDS transaction’s promoter, had

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retained and paid Brown & Wood to provide the model opinion letter, Gable

viewed the letter as an “honest opinion of the viability of [the CARDS]

transaction” because Brown & Wood was a major, reputable law firm. Gable then

insisted Gustashaw obtain a formal tax opinion letter from Brown & Wood.

However, Gable did not recommend obtaining an opinion from a different attorney

or law firm, as he believed it was an unnecessary expense. Gustashaw, relying

partly on Gable’s assurance that Brown & Wood had expertise in foreign

transactions, had Chenery obtain an opinion letter only from Brown & Wood.

Chenery paid for the formal opinion letter out of its fee agreement with

Gustashaw, but Gustashaw did not know how much Chenery paid. Gustashaw

never had any individualized discussions or conversations with anyone at Brown

& Wood.

      In July 2000, Gustashaw asked Gable to determine his estimated year 2000

tax liability and to make projections about his potential tax savings as a result of

the CARDS shelter. To make the report, completed in August 2000, Gable relied

on information provided by Hahn, the CARDS transaction’s promoter. Gable’s

report included projections on the necessary CARDS investment schedule needed

to create a loss sufficient to offset Gustashaw’s 1998, 1999, and 2000 tax

liabilities, and projections for the potential costs of the transaction, using

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reasonable rates of return if the IRS disallowed the generated deductions. The

report assumed that the CARDS transaction would terminate, prompting the loan’s

repayment, on April 30, 2004. That date was chosen because it was outside the

period of limitations of assessing additional tax for the 2000 tax return.

      Following the conclusion of his investigation, Gustashaw decided to enter

into a CARDS transaction. Gustashaw never investigated whether he could obtain

a similar credit arrangement from other sources. Gustashaw also did not seek a

ruling from the IRS on the CARDS transaction’s tax consequences, or any

independent opinion regarding the transaction’s legality. Rather, according to

Gustashaw, he believed Maulorico’s and Gable’s assurances about the

transaction’s legitimacy, even though Gable and Maulorico themselves relied on

Hahn’s representations about the transaction. Gable and Maulorico were

impressed that a major law firm and a major bank would be involved, thinking

neither would engage in illegitimate transactions.

E.    The CARDS Transaction for Gustashaw

      Hahn and Chenery agreed to arrange the CARDS transaction for Gustashaw

for an $800,000 fee. Gustashaw paid Chenery $10,000 up front, with the balance

to be paid upon the loan’s termination.

      The CARDS transaction for Gustashaw worked as follows. Bayerische

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Hypo- und Vereinsbank AG (“HVB”), a large German bank, served as the lender.

A newly formed Delaware L.L.C., Osterley Financial Trading L.L.C. (“Osterley”),

served as the borrower. Osterley was wholly owned by two nonresident alien

individuals.

      On December 5, 2000, the bank HVB entered into an agreement with

Osterley to lend €12,900,000 to Osterley for a 30-year term with interest payments

(but not principal payments) due annually. HVB deposited the loan proceeds

directly into Osterley’s account at HVB, with 85% invested in government bonds,

and 15% on short-term deposit. All of these funds served as collateral for the

loan, and no funds ever left the bank. To withdraw the loan proceeds, Osterley

was required to deposit substitute collateral.

      Next, the bank HVB sent Gustashaw a letter, dated December 21, 2000,

confirming his interest in assuming joint and several liability for the euro-

denominated loan to Osterley. The letter stated that HVB made no guarantee or

representation about any aspect of the CARDS transaction, including its tax

ramifications. Further, the letter stated that Gustashaw represented that his own,

independent legal counsel had advised him and that he would comply with U.S.

tax laws.

      On December 21, 2000, Gustashaw executed the documents to participate in

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the CARDS transaction. Gustashaw read the documents before signing them, but

he admitted that he did not fully understand them. Gustashaw assumed most of

the language was boilerplate and formalized his discussions with Hahn. Thus,

Gustashaw did not have Gable, Maulorico, or an attorney review the CARDS

transaction documents.

      The CARDS transaction documents executed by Gustashaw provided that

Osterley agreed to transfer 15% of the loan proceeds on short-term deposit to

Gustashaw. In exchange, Gustashaw agreed to assume joint and several liability

for Osterley’s obligations to the bank HVB, including repayment of the entire

loan. Osterley and Gustashaw also agreed that, as between them, Gustashaw

would repay the unpaid principal amount of the loan at maturity and Osterley

would retain all interest obligations. There was no provision for a euro-dollar

conversion opportunity in the first year.

      After Gustashaw executed the agreement, the bank HVB transferred the

15% portion of the loan to an HVB account in Gustashaw’s name and converted it

to dollars. HVB maintained discretion on whether Gustashaw could access those

funds. If Gustashaw desired to access the funds, HVB required him to deposit

substitute collateral with the bank that was at least equivalent to the amount of

funds withdrawn. In other words, the entire amount of the loan would remain

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fully collateralized at all times. At each annual interest date, HVB at its discretion

could permit Gustashaw to purchase more of the loan proceeds, up to the full

principal amount of the loan, by his providing additional collateral. HVB had

discretion to call the loan.

      Sometime after Gustashaw executed the agreement, he received Brown &

Wood’s formal tax opinion letter, dated December 31, 2000. This letter set out the

details of Gustashaw’s CARDS transaction, including the roles played by

Chenery, HVB, and Osterley, as well as the amount borrowed. The tax analysis

contained in the letter, however, was identical to that contained in the Brown &

Wood model opinion letter that Chenery used to promote the CARDS transaction,

and was not particularized to Gustashaw’s CARDS transaction. Accordingly,

Gustashaw’s letter from Brown & Wood reached the same “more likely than not”

conclusions as the firm’s model opinion letter. Gable also reviewed the letter and

read the cited Code sections, but performed no independent analysis. Gable

assumed the letter was correct.

F.    The Termination of the CARDS Transaction

      Gustashaw did not attempt to access the funds for several months. Then, on

April 2, 2001, he pledged substitute collateral with a value of $2,550,850. The

bank HVB wired $1,008,465 to Gustashaw’s HVB account, and $735,000 to

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Chenery for fees associated with the CARDS transaction.

      On November 13, 2001, HVB issued a mandatory prepayment election

notice to Gustashaw. The notice stated that the entire outstanding principal

amount of the loan, including any interest accrued, would be due and payable as of

December 5, 2001. Maulorico asked Chenery’s Hahn whether another bank would

provide the same credit arrangement, but all other banks declined. On December

17, 2001, Gustashaw’s CARDS transaction terminated, with all debts satisfied.

G.    Gustashaw’s Tax Returns and the Notice of Deficiency

      On his 2000 tax return, Gustashaw reported the CARDS transaction as a

foreign currency transaction, pursuant to I.R.C. § 988. The return stated that

Gustashaw had acquired property in a foreign currency transaction with an alleged

basis of $11,739,258 on December 5, 2000, and sold it on December 21, 2000, at

an alleged sales price of $1,800,934. That generated an ordinary loss of

$9,938,324. Gable, who prepared Gustashaw’s 2000 return, relied on Hahn to

calculate the amounts reported.

      The claimed ordinary loss offset all of Gustashaw’s reported income for

2000, resulting in $1,784,462 of negative adjusted gross income. Gustashaw then

claimed net operating loss carryforward deductions related to the CARDS

transaction of $1,231,106, $785,986, and $498,860 on his 2001, 2002, and 2003

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returns, respectively.

       On June 29, 2006, the IRS issued a notice of deficiency to Gustashaw,

assessing deficiencies in tax and accuracy-related penalties under I.R.C. § 6662(a)

for his 2000, 2001, 2002, and 2003 tax returns. The IRS assessed a 40% gross

valuation misstatement penalty for 2000 through 2002, and a 20% negligence

penalty for 2003. Specifically, the penalties were: $1,275,290 for 2000; $63,910

for 2001; $34,260 for 2002; and $898 for 2003.3

       The IRS disallowed the $9,938,324 loss claimed on the 2000 tax return on

the ground that, inter alia, Gustashaw failed to establish the claimed $11,739,258

basis and that the CARDS transaction lacked economic substance. Further, the

IRS stated that the transaction “was entered into for the primary purpose of tax

avoidance, and/or was prearranged and predetermined.” The IRS also disallowed

the 2001, 2002, and 2003 claimed net operating loss carryforward deductions

because of the adjustments to the 2000 tax return.

H.     HVB’s Admission of Fraudulent Behavior

       On February 13, 2006, the bank HVB entered into a deferred prosecution

       3
        In the original notice of deficiency, the IRS assessed 20% negligence penalties against
Gustashaw for the years 2001 and 2002, in the amounts of $31,955 and $17,130, respectively.
After proceedings commenced in the Tax Court, the IRS filed an “Amendment to Answer to
Amended Petition” in which it asserted that Gustashaw was liable for 40% gross valuation
misstatement penalties for both years, rather than just the 20% negligence penalties. The
increased 40% penalty amounts were $63,910 for 2001 and $34,260 for 2002.

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agreement with the United States in which it admitted that it participated in several

tax shelter transactions, including CARDS, between 1996 and 2002. HVB

admitted that loans entered in connection with the CARDS shelter purported to

involve 30-year loans, when all parties, including the borrowers, knew that the

transactions would be unwound in approximately one year so as to generate false

tax benefits for the participants. HVB acknowledged that the transactions had no

purpose other than to generate tax benefits for the participants. HVB further

admitted that it engaged in activities with others, including Brown & Wood,

“related to the CARDS tax shelter with the intention of defrauding the United

States.”

I.    Tax Court Trial and Opinion

      In light of HVB’s admissions of fraudulent behavior, Gustashaw conceded

the deficiencies in income tax for all four years in issue. Gustashaw challenged

only the penalties in the Tax Court. The case proceeded to trial in the Tax Court.

      At trial, Gustashaw admitted that he did not suffer a $9,938,324 economic

loss associated with the $9,938,324 tax loss claimed on the 2000 tax return.

Gustashaw continued to contend that he was not liable for the penalties, in part

because he had “reasonable cause,” pursuant to I.R.C. § 6664, to believe the

CARDS transaction was legitimate. Gustashaw also argued that because the IRS

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disregarded the transaction on economic-substance grounds, the valuation

misstatement penalty should not apply as a matter of law, pursuant to a minority

rule interpretation of I.R.C. § 6662.

       After a trial, the Tax Court upheld the 40% gross valuation misstatement

penalties for 2000 through 2002 and the 20% negligence penalty for 2003. The

Tax Court applied the majority rule interpretation of I.R.C. § 6662 and rejected

Gustashaw’s reasonable-cause defense.

       1.    Valuation Misstatement Penalties

       The Tax Court first addressed the valuation misstatement penalties.

It explained that I.R.C. § 6662(a) and (b)(3) impose a penalty of 20% of the

portion of the underpayment of tax that is attributable to a substantial valuation

misstatement.4 Such a misstatement exists if the taxpayer claims that the value or

adjusted basis of any property is 200% or more of the amount determined to be the

correct amount of such valuation or adjusted basis. I.R.C. § 6662(e)(1)(A). If the

misstatement is 400% or more of the correct amount, a gross valuation

misstatement exists and the penalty increases to 40%. Id. § 6662(h). The Tax



       4
         As indicated by the Tax Court, “[u]nless otherwise stated, section references are to the
Internal Revenue Code in effect for the years in issue.” Likewise, in their briefs the parties refer
and cite to the version of the Code that was in effect during the relevant years. Accordingly,
unless otherwise stated, we do the same herein.

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Court explained that Treasury Regulation § 1.6662-5(g) provides that the “value

or adjusted basis claimed on a return of any property with a correct value or

adjusted basis of zero is considered to be 400 percent or more of the correct

amount.”

      The Tax Court found that Gustashaw was liable for the 40% gross valuation

misstatement penalty for 2000 through 2002, concluding that his underpayments

in tax for those years resulted from his claiming a basis in foreign currency on his

2000 return of $11,739,258, rather than a basis of zero, which is the correct

amount when a transaction lacks economic substance. In the notice of deficiency,

the Commissioner determined that the correct basis for the asset was zero, and the

Tax Court found that Gustashaw “effectively accepted” that determination “as

accurate in conceding all of the deficiencies in tax.” It further noted that a line of

cases from the Fifth and Ninth Circuits supported Gustashaw’s argument that a

valuation misstatement penalty is not applicable when the entire transaction is

disregarded on lack-of-economic-substance grounds, but pointed out that those

cases represented the minority rule and declined to follow them. Because the

proper basis was zero, the Tax Court concluded that the basis claimed on

Gustashaw’s 2000 return exceeded the correct basis by 400% or more.

Additionally, because that grossly inflated basis gave rise to losses that Gustashaw

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carried forward to his 2001 and 2002 years, the Tax Court concluded that the

underpayments in tax for those years were also attributable to a gross valuation

misstatement.

      2.     Negligence Penalty

      For 2003, in which Gustashaw’s carryover loss was too small for a gross

valuation misstatement penalty to apply, the Tax Court upheld the 20% negligence

penalty. It reasoned that “[n]egligence is strongly indicated where ‘[a] taxpayer

fails to make a reasonable attempt to ascertain the correctness of a deduction,

credit or exclusion on a return which would seem to a reasonable and prudent

person to be “too good to be true.’”” The Tax Court explained that a return

position is not negligent if it is reasonably based on certain enumerated

authorities, but that conclusions reached in opinion letters written by tax

professionals are not considered authority. The Tax Court further explained that a

reasonable and ordinarily prudent person would have considered carryforward

deductions from the CARDS transaction “too good to be true” when he did not

suffer an associated economic loss and invested only $800,000 in the transaction.

As such, he would have conducted a thorough investigation before claiming the

deduction on his tax return. The Tax Court found that Gustashaw, despite his

education and experience, did not attempt to understand the mechanics of the

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CARDS transaction, executed transaction documents without an attorney’s review,

and, although aware of the transaction’s untested tax ramifications, declined to

seek a ruling from the IRS. The Tax Court concluded that, presented with such a

“too good to be true” situation, Gustashaw was negligent in failing to more closely

scrutinize the CARDS transaction.

      3.     The Reasonable Cause and Good Faith Defense

      The Tax Court further concluded that Gustashaw had failed to show that

there was reasonable cause for his underpayment or that he acted in good faith, as

required for him to avoid penalties under I.R.C. § 6664(c). It rejected

Gustashaw’s arguments that he reasonably relied on Gable or Maulorico because

neither actually opined on the tax issues involved. It concluded that the only tax

advice Gustashaw sought concerning the CARDS transaction was from Brown &

Wood, as neither Gable nor Maulorico proffered an opinion on the tax issues

involved, and Gustashaw’s reliance on Brown & Wood’s advice was unreasonable

because he should have known about the firm’s inherent conflict of interest. The

Tax Court noted that Chenery referred Gustashaw to Brown & Wood and supplied

him with the firm’s model opinion letter, which described a CARDS transaction

that was not unique to Gustashaw’s situation. Gustashaw also proffered no

evidence that he had an engagement letter with Brown & Wood, spoke to any

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attorney at the firm, or compensated Brown & Wood for either opinion letter. On

these facts, the Tax Court held that Gustashaw could not have reasonably believed

that Brown & Wood was an independent adviser.

      Based on this decision, the Tax Court entered a judgment in favor of the

Commissioner, upholding the penalties for the years 2000 through 2003 imposed

against Gustashaw under § 6662. Gustashaw now appeals.

                         II. STANDARD OF REVIEW

      We review the Tax Court’s legal conclusions de novo, and its factual

findings for clear error. See Campbell v. Comm’r, 658 F.3d 1255, 1258 (11th Cir.

2011). Whether a taxpayer acted with reasonable cause and in good faith with

regard to an underpayment of tax is a question of fact that we review for clear

error. Id.
                                III. DISCUSSION

A.    Gross Valuation Misstatement Penalty in I.R.C. § 6662

      Gustashaw argues that the Tax Court erred in upholding the IRS’s

imposition of the 40% gross valuation misstatement penalties for 2000 through

2002. See I.R.C. § 6662(a)–(h). Specifically, Gustashaw contends that because

the CARDS transaction lacked economic substance, there was no value or basis to

misstate as to trigger the valuation misstatement penalties, and the penalties


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should not apply as a matter of law. Gustashaw also argues that Congress has

penalized lack-of-economic-substance transactions by enacting I.R.C. §§ 6662A

and 6663, and therefore, he should not be subject to gross valuation misstatement

penalties under § 6662.5

        The Internal Revenue Code establishes penalties for underpayment of tax.

Section 6662(a) of the Code imposes an accuracy-related penalty of 20% of the

portion of an underpayment of tax “attributable to,” inter alia, negligence, any

substantial understatement of income tax, or any substantial valuation

misstatement. I.R.C. § 6662(a), (b)(1)–(3). Under the applicable regulations, only

one penalty may apply to a particular underpayment of tax, even if the IRS

determines accuracy-related penalties on multiple grounds. Treas. Reg. § 1.6662-

2(c).

        The 20% penalty increases to 40% if there is a gross valuation misstatement.

I.R.C. § 6662(h)(1). A gross valuation misstatement exists if “the value of any


        5
         Gustashaw additionally argues that his general concession of his underpayment of tax
immunizes him from the imposition of gross valuation misstatement penalties. He argues that
when the IRS disallows a transaction on several alternative bases, not all of which involve a
valuation misstatement, and the taxpayer makes a general concession of underpayment, the
underpayment is not “attributable to” a gross valuation misstatement within the meaning of
I.R.C. § 6662. Gustashaw did not raise this argument before the Tax Court, and we therefore
decline to consider it for the first time on appeal. Access Now, Inc. v. Sw. Airlines Co., 385 F.3d
1324, 1331 (11th Cir. 2004). Even if we were to consider this argument, it is substantially
intertwined with and relies on a minority line of cases whose reasoning we reject infra.

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property (or the adjusted basis of any property) claimed on any return of tax . . . is

[400] percent or more of the amount determined to be the correct amount of such

valuation or adjusted basis (as the case may be).” I.R.C. § 6662(e)(1)(A),

(h)(2)(A)(i). By contrast, a “substantial valuation misstatement,” which receives

only the 20% penalty, occurs when the “value of any property (or the adjusted

basis of any property) claimed on any return of tax . . . is 200 percent or more of

the amount determined to be the correct amount of such valuation or adjusted

basis (as the case may be).” Id. § 6662(e)(1)(A). Treasury Regulations further

provide that a gross valuation misstatement exists when the correct or adjusted

basis of property is zero. Treas. Reg. § 1.6662-5(g). However, unless the portion

of the underpayment attributable to the valuation misstatement exceeds $5,000, no

substantial valuation misstatement penalty may be imposed. I.R.C. § 6662(e)(2).

      The Internal Revenue Code provides a narrow exception to the imposition

of accuracy-related penalties for an underpayment if the taxpayer shows that he

acted with reasonable cause and in good faith. I.R.C. § 6664(c)(1). This

exception is detailed in section E, below.

B.    Majority Rule: The Penalty Applies When the Deduction is Totally
      Disallowed for Lack of Economic Substance

      There is no question that the CARDS transaction lacked economic


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substance. Indeed, Gustashaw admitted as much at trial, and concedes this on

appeal. The correct basis of the foreign currency, then, was not $11,739,258, as

Gustashaw reported on his 2000 tax return, but zero. This reduction of basis to

zero in turn eliminated the $9,938,324 loss that Gustashaw had claimed on his

2000 return. With the loss eliminated, the IRS properly determined Gustashaw’s

underpayments in tax, and Gustashaw conceded the deficiencies.

      The question we now confront, for the first time in this Circuit, is whether

Gustashaw is liable for the assessed gross valuation misstatement penalties when

the IRS disregarded the CARDS transaction in its entirety because it lacked

economic substance. It seems the obvious and sensible conclusion is that

Gustashaw’s tax underpayments were “attributable to” a gross valuation

misstatement within the meaning of § 6662. That is, the underpayments resulted

from Gustashaw’s reporting an artificially inflated basis in currency, which was

not $11,739,258, but zero. And, pursuant to the regulations, the basis claimed by

Gustashaw ($11,739,258) was 400% more than the correct basis of the property

(zero), making Gustashaw liable for the 40% gross valuation misstatement

penalty. See Treas. Reg. § 1.6662-5(g).

      The statute speaks in mandatory terms—the valuation misstatement penalty

“shall be added” “to any portion of an underpayment of tax required to be shown

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on a return . . . which is attributable to . . . [a]ny substantial valuation

misstatement” or “gross valuation misstatement.” I.R.C. § 6662(a), (b)(3), (h)(1).

We can discern no exception for when the valuation or basis misstatements are so

egregious that the entire tax benefit is disallowed, and no suggestion that the

penalty should not apply when the correct basis or value is determined to be zero

because the transaction is completely lacking in economic substance.

       Our interpretation is in accord with the majority of circuits to have

considered the question. See, e.g., Alpha I, L.P., ex rel. Sands v. United States,

682 F.3d 1009, 1026–31 (Fed. Cir. 2012); Fidelity Int’l Currency Advisor A Fund,

LLC, ex rel. Tax Matters Partner v. United States, 661 F.3d 667, 671–75 (1st Cir.

2011); Merino v. Comm’r, 196 F.3d 147, 155, 157–59 (3d Cir. 1999); Zfass v.

Comm’r, 118 F.3d 184, 190–91 (4th Cir. 1997); Illes v. Comm’r, 982 F.2d 163,

167 (6th Cir. 1992); Gilman v. Comm’r, 933 F.2d 143, 149, 151 (2d Cir. 1991);

Massengill v. Comm’r, 876 F.2d 616, 619–20 (8th Cir. 1989). Only two circuits,

the Fifth and the Ninth, have gone the other way. See Gainer v. Comm’r, 893 F.2d

225 (9th Cir. 1990); Todd v. Comm’r, 862 F.2d 540 (5th Cir. 1988). Notably,

both circuits have since questioned the soundness of their interpretation. See

Bemont Invs., L.L.C. ex rel. Tax Matters Partner v. United States, 679 F.3d 339,

351 (5th Cir. 2012) (panel specially concurring); Keller v. Comm’r, 556 F.3d

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1056, 1061 (9th Cir. 2009).

      Here, we find the majority rule to be the better interpretation and will apply

it in this case. That rule holds that the penalty applies even if the deduction is

totally disallowed because the underlying transaction, which is intertwined with

the overvaluation misstatement, lacked economic substance. See, e.g., Fidelity,

661 F.3d at 673–74. This rule rests upon the fact that the abusive tax shelter is

built upon the basis misstatement, and the transaction’s lack of economic

substance is directly attributable to that misstatement. As Judge Boudin stated in

Fidelity, that “alternative grounds with lower or no penalties existed for

disallowing the same claimed losses hardly detracts from the need to penalize and

discourage the gross value misstatements.” Id. at 673.

C.    Minority Rule

      As for the minority rule, we think it important to note that the Fifth and the

Ninth Circuits have questioned the wisdom of their positions. The Fifth Circuit

has stated that, under its rule,

      by crafting a more extreme scheme and generating a deduction that is
      improper not only due to a basis misstatement, but also for some other
      reason (e.g., a lack of economic substance), the taxpayer increases his
      chance of avoiding the valuation-misstatement penalty—because, per
      the Todd/Heasley hierarchy whereby the overvaluation penalty is
      subordinated to any other proper adjustment, disallowing the deduction
      on the other ground could block the penalty. Amplifying the

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      egregiousness of the scheme—to the point where the transaction is an
      utter sham—could thus, perversely, shield the taxpayer from liability for
      overvaluation. . . . By creating this perverse incentive structure, the
      Todd/Heasley rule frustrates the purpose of the valuation-misstatement
      penalty, which is to deter taxpayers from inflating values and bases to
      generate large, improper tax benefits. . . .

Bemont, 679 F.3d at 355 (panel specially concurring) (citing Heasley v. Comm’r,

902 F.2d 380, 383 (5th Cir. 1990); Todd, 862 F.2d at 542–45). The Ninth Circuit

also has recognized that its decision in Gainer, which rested in large part on the

Fifth Circuit’s reasoning in Todd, leads to the same anomalous result, and thus

encourages a taxpayer to engage “in behavior one might suppose would implicate

more tax penalties, not fewer.” Keller, 556 F.3d at 1061.

      The Fifth Circuit has further questioned the soundness of its reasoning in

Todd, insofar as the reasoning was based on a misinterpretation of the legislative

history surrounding I.R.C. § 6659 (repealed 1989), the predecessor to § 6662. See

Bemont, 679 F.3d at 351–53 (panel specially concurring); see also Alpha I, 682

F.3d at 1028–30 (discussing this issue and declining to adopt the Fifth Circuit’s

approach); Fidelity, 661 F.3d at 673–74 (same). The concurring panel in Bemont

noted that the Todd Court had relied on and interpreted the 1981 “Blue Book,” a

post-enactment summary of tax legislation prepared by the staff of the Joint

Committee on Taxation, in analyzing § 6659’s penalties assessed against tax



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underpayments that were “attributable to” a valuation misstatement. Bemont, 679

F.3d at 351 (citing Todd, 862 F.2d at 542–43; Staff of the Joint Comm. on

Taxation, 97th Cong., General Explanation of the Economic Recovery Tax Act of

1981 333 (Comm. Print 1981) (“Blue Book”)). In relevant part, the Blue Book

states that

       [t]he portion of a tax underpayment that is attributable to a valuation
       overstatement will be determined after taking into account any other
       proper adjustments to tax liability. Thus, the underpayment resulting
       from a valuation overstatement will be determined by comparing the
       taxpayer’s (1) actual tax liability (i.e., the tax liability that results from
       a proper valuation and which takes into account any other proper
       adjustments) with (2) actual tax liability as reduced by taking into
       account the valuation overstatement. The difference between these two
       amounts will be the underpayment that is attributable to the valuation
       overstatement.

Fidelity, 661 F.3d at 673–74 (quoting Blue Book at 333). Through the use of

further examples, the Blue Book concludes that when the IRS disallows two

different deductions, but only one disallowance is based on a valuation

misstatement, the valuation misstatement penalty should apply only to the

deduction taken on the valuation misstatement, and not to the other deduction that

is unrelated to valuation misstatement. See Bemont, 679 F.3d at 351–52 (panel

specially concurring) (quoting Blue Book at 333 & n.2).

       In Todd, however, the Fifth Circuit misapplied this guidance to a situation



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in which the IRS disallowed a single deduction on several grounds, only one of

which related to a valuation misstatement. Todd, 862 F.2d at 543–44. The

Bemont Court correctly recognized that the reasoning contained in the Blue Book

does not extend to a scenario in which “overvaluation is one of two possible

grounds for denying the same deduction and the ground explicitly chosen is not

overvaluation,” but that it was nevertheless bound to follow Todd as the rule of

decision. Bemont, 679 F.3d at 352, 355 (panel specially concurring). As other

courts have noted in addressing this situation, the Blue Book’s guidance is

designed to avoid attributing to a basis or value misstatement an upward

adjustment of taxes that is unrelated to the overstatement, and is instead due solely

to some other, independent tax reporting error. See Alpha I, 682 F.3d at 1029–30;

Fidelity, 661 F.3d at 674. This is entirely different from excusing an

overstatement because it is one of two independent, rather than the sole, cause of

the same underpayment error. We therefore agree with the majority of the other

Circuits that have addressed this issue, and decline to adopt the reasoning of the

Fifth and Ninth Circuits with regard to the application of valuation misstatement

penalties in the present case.

D.    Penalties Under I.R.C. §§ 6662A and 6663

      We also find no merit in Gustashaw’s suggestion that Congress intended to

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penalize taxpayers who engage in transactions devoid of economic substance

solely through I.R.C. §§ 6662A and 6663, rather than through the penalties in

§ 6662. Congress added § 6662A to the Code in 2004, and this provision imposes

a penalty only on certain understatements made regarding reportable transactions.

See American Jobs Creation Act of 2004, Pub. L. No. 108-357, Title VIII,

§ 812(a), 118 Stat. 1577 (codified at I.R.C. § 6662A). This penalty provision does

not apply to instances of gross valuation misstatements, which are still determined

under § 6662(h). See I.R.C. § 6662A(e)(2)(B), cross-referencing id. § 6662(h).

By virtue of both its date of enactment and its terms, therefore, § 6662A is

irrelevant to the present case. Additionally, § 6663 penalizes underpayments

attributable to fraud, and is likewise irrelevant to Gustashaw’s situation.

E.     The Reasonable Cause and Good Faith Defense in I.R.C. § 6664(c)

       As to all the penalties, Gustashaw argues that he reasonably relied on

Gable’s and Maulorico’s advice and the Brown & Wood opinion letters regarding

the legitimacy of the CARDS transaction.6

       The Code contains an exception to otherwise-applicable penalties under

I.R.C. § 6662. See I.R.C. § 6664(c)(1). Section 6664(c)(1) provides that “[n]o

       6
        Gustashaw makes no argument on the negligence penalty for 2003 aside from his
reasonable-reliance argument. Thus, Gustashaw has waived any other argument on the
applicability of the negligence penalty. See Access Now, 385 F.3d at 1330.

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penalty shall be imposed under [section 6662] . . . with respect to any portion of an

underpayment if it is shown that there was a reasonable cause for such portion and

that the taxpayer acted in good faith with respect to such portion.” Id. The

taxpayer bears the burden of establishing that he acted with reasonable cause and

in good faith. Calloway v. Comm’r , — F.3d —, No. 11-10395, 2012 WL

3599606 (11th Cir. Aug. 23, 2012).

      Under the regulations, the determination of whether the taxpayer has

established reasonable cause is made based on all the pertinent facts and

circumstances. Treas. Reg. § 1.6664-4(b)(1). The most important factor in this

determination is the “extent of the taxpayer’s effort to assess [his] proper tax

liability.” Id. A taxpayer may meet his burden by showing that he reasonably

relied in good faith on the advice of an independent professional, such as a tax

advisor, lawyer, or accountant, as to the transaction’s tax treatment. United States

v. Boyle, 469 U.S. 241, 251, 105 S. Ct. 687, 692–93 (1985); Treas. Reg.

§ 1.6664-4(c). The taxpayer’s education and business experience are relevant to

the determination of whether the taxpayer’s reliance on professional advice was

reasonable and done in good faith. Treas. Reg. § 1.6664-4(c)(1).

      The professional’s advice must meet several requirements. First, the

taxpayer must show that the advice was based on “all pertinent facts and

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circumstances and the law as it relates to those facts and circumstances.” Id.

§ 1.6664-4(c)(1)(i). Second, the advice relied upon must not be based on any

“unreasonable factual or legal assumptions,” and must not “unreasonably rely on

the representations, statements, findings, or agreements of the taxpayer or any

other person.” Id. § 1.6664-4(c)(1)(ii). Third, the reasonableness of any reliance

turns on the quality of the advice and whether, under the circumstances, it was

objectively reasonable for the taxpayer to rely on that advice. See 106 Ltd. v.

Comm’r, 684 F.3d 84, 90 (D.C. Cir. 2012); Klamath Strategic Inv. Fund ex rel. St.

Croix Ventures v. United States, 568 F.3d 537, 548 (5th Cir. 2009).

      Reliance is not reasonable if the adviser was a promoter of the transaction or

otherwise had a conflict of interest about which the taxpayer knew or should have

known. Stobie Creek Invs. LLC v. United States, 608 F.3d 1366, 1381–82 (Fed.

Cir. 2010); Chamberlain v. Comm’r, 66 F.3d 729, 732–33 (5th Cir. 1995) (noting

that, to establish good faith reliance on professional advice, “taxpayers may not

rely on someone with an inherent conflict of interest, or someone with no

knowledge concerning that matter upon which the advice is given” (footnotes

omitted)). Reliance on professional advice is likewise unreasonable when the

“taxpayer knew or should have known that the transaction was ‘too good to be

true’” in light of all the circumstances, including the taxpayer’s education,

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sophistication, and reasons for entering into the transaction. Stobie Creek, 608

F.3d at 1382; cf. Barlow v. Comm’r, 301 F.3d 714, 723 (6th Cir. 2002) (noting

“that courts have found that a taxpayer is negligent if he puts his faith in a scheme

that, on its face, offers improbably high tax advantages, without obtaining an

objective, independent opinion on its validity”). In addition, reliance may not be

reasonable or in good faith if the taxpayer knew or reasonably should have known

that the advisor lacked knowledge in the relevant aspects of federal tax law.

Treas. Reg. § 1.6664-4(c)(1). A tax professional’s independence is only one factor

in determining whether a taxpayer acted with reasonable cause and in good faith.

Id.; Stobie Creek, 608 F.3d at 1381–82.

F.    No Clear Error in the Tax Court’s Findings

      We find no clear error in the Tax Court’s findings that Gustashaw failed to

establish that he acted with reasonable cause and in good faith regarding his

underpayment of tax. With regard to Maulorico’s advice concerning the CARDS

transaction, although Maulorico became familiar with the transaction through a

colleague, and originally introduced the transaction to Gustashaw as an investment

opportunity, he was not qualified to offer an opinion on the CARDS transaction’s

tax consequences and expressly declined to do so. Maulorico was not a tax

professional and lacked sufficient knowledge in the relevant aspects of federal tax

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law. To show that he acted with reasonable cause, Gustashaw cannot rely on the

general financial planning advice provided by Maulorico when that advice failed

to encompass the tax consequences of the CARDS transaction and did not analyze

the relevant law as it related to Gustashaw’s particular circumstances. Treas. Reg.

§ 1.6664-4(c)(1).

      Nor do we find persuasive Gustashaw’s arguments that he was entitled to

rely on the advice provided by Gable, and that such reliance was reasonable

because Gable was an independent tax professional whom Gustashaw paid to

render an opinion. As for tax advice, Gable testified that he did not even

understand the particular details of the CARDS transaction and that he did not

have any expertise in the tax law involved. Just as with Maulorico, Gable

expressly declined to offer an independent opinion on the validity of the CARDS

transaction’s tax benefits.

      Instead, Gable recommended that Gustashaw obtain a legal opinion

regarding the CARDS transaction’s validity from Brown & Wood, whom both

Gable and Gustashaw knew were Chenery and Hahn’s attorneys. Gable even

solicited the Brown & Wood opinion letters through Hahn, the promoter of the

CARDS transaction. Gable did not pay Brown & Wood, and knew that

Gustashaw did not pay, for either the model opinion letter or the formal opinion

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letter which, in conjunction with Gable’s requests to Brown & Wood being routed

through the promoter, Hahn, demonstrate that Gable should have been aware that

Brown & Wood was not providing objective, disinterested tax advice.

      Ultimately, the only advice that Gable provided was his opinion that

Gustashaw could rely on the Brown & Wood opinion letter because it came from a

major, reputable law firm, and that obtaining a second opinion would be an

unnecessary expense. Yet, as noted above, Gable offered this advice knowing that

Brown & Wood had been retained and paid by Chenery, and that Brown & Wood

had written a model opinion letter for Chenery and Hahn to use in promoting the

CARDS transaction. Further, even to the extent that Gable’s statements

concerning Brown & Wood’s reputation qualify as advice in the traditional sense,

they do not constitute tax advice on which Gustashaw was entitled to rely. In sum,

the fact that Gable was an independent, paid advisor cannot outweigh the fact that

he lacked the requisite knowledge to provide competent advice on the tax

consequences of the CARDS transaction. See Treas. Reg. § 1.6664-4(c)(1).

      Gustashaw argues that by finding that he was not entitled to rely in good

faith on Gable’s advice, the Tax Court effectively required him to second guess

the tax professional whom he paid to provide him with tax advice. Had Gable

been equipped with the relevant tax expertise and rendered his own opinion as to

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the CARDS transaction’s tax consequences, this argument would be more

persuasive. However, in this case, Gable was unprepared to render an independent

opinion, informed Gustashaw of this fact, and went on to obtain the opinion letter

through Hahn, the CARDS transaction’s promoter, from Brown & Wood. See

Chamberlain, 66 F.3d at 732 (holding that a taxpayer cannot rely on someone with

no knowledge of the relevant tax matters to establish good faith reliance on

professional advice). Where, as here, Gable did not have the expertise necessary

to provide an independent opinion regarding the tax consequences of the CARDS

transaction, the Tax Court did not clearly err in determining that Gustashaw could

not reasonably rely in good faith on Gable’s opinion.

      Finally, we find no clear error in the Tax Court’s conclusion that

Gustashaw’s reliance on the Brown & Wood opinion letter fails to demonstrate

that he acted with reasonable cause and in good faith regarding his underpayments

of tax. Despite Gable’s advice that Brown & Wood was a reputable firm and that

obtaining a second opinion was an unnecessary expense, Brown & Wood was not

an independent advisor to Gustashaw, and the opinion letter that the firm sent to

Gustashaw was not tailored to Gustashaw or the CARDS transaction in which he

sought to participate. Although the opinion letter did summarize Gustashaw’s

CARDS transaction and the amounts being loaned and distributed, the legal and

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tax analysis contained in the opinion letter was materially identical to the model

opinion letter and did not contain any particularized legal or tax analysis for

Gustashaw.

      The Tax Court determined that Gustashaw should have known about Brown

& Wood’s inherent conflict of interest caused by its affiliation with Chenery

because Gable’s inquiries regarding obtaining a tax opinion letter were routed

through Chenery’s Hahn, and Brown & Wood had been retained by Chenery to

provide a model opinion letter as well as opinion letters to Chenery’s individual

clients, if needed. Gustashaw did not retain Brown & Wood on his behalf, and

Gustashaw never met with a representative of Brown & Wood individually or

otherwise verified that Brown & Wood was acting as his agent or was fully

apprised of his personal circumstances. Cf. Van Scoten v. Comm’r, 439 F.3d

1243, 1253 (10th Cir. 2006) (holding that it was unreasonable for taxpayers to rely

on tax professionals with whom they did not personally consult and who were

agents of the promoter of the transaction at issue). In addition, Brown & Wood

was paid out of Gustashaw’s fee arrangement with Chenery, and Gustashaw did

not know how much of the $800,000 fee he paid to Chenery was sent to Brown &

Wood in exchange for the firm’s writing of his opinion letter.

      These facts indicate that Gustashaw, if he was not actually aware of it,

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should have known that Brown & Wood labored under a conflict of interest and

that any advice provided by Brown & Wood would not necessarily be objective.

See Klamath, 568 F.3d at 548. This does not mean that Gustashaw was required

to understand the merits of the legal reasoning contained in the opinion letter, but

rather, only shows that Gustashaw could not have relied in good faith on the

opinion of Brown & Wood, an interested party, when he had reason to know about

Brown & Wood’s conflict of interest.

      Furthermore, in light of Gustashaw’s education (which included courses in

accounting), nearly thirty years of business experience, and history of handling his

own finances and preparing his own tax returns, all of which are relevant to the

reasonable cause determination, his reliance on the Brown & Wood opinion letter

becomes less reasonable. Treas. Reg. § 1.6664-4(c)(1). These factors, which

show Gustashaw’s level of tax-related sophistication, are particularly relevant

because Gustashaw was presented with the incredible opportunity, for a fee of

only $800,000, to claim a loss of $9,938,324, which offset the entirety of the tax

liability generated by his exercise in 2000 of his remaining Merck Medco stock

options. See 106 Ltd., 684 F.3d at 93 (concluding that “the improbable tax

advantages offered by the tax shelter” should have alerted a taxpayer, who had

significant business experience, to the shelter’s illegitimacy). As the Tax Court

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concluded, such a scenario, especially in light of Gustashaw’s personal financial

history and business sophistication, was plainly “too good to be true.”

      Taking (1) Gustashaw’s personal experience and characteristics, (2) the

failure of either Maulorico or Gable to offer independent advice on the CARDS

transaction’s tax consequences, (3) Brown & Wood’s conflict of interest, and

(4) the unbelievable benefits offered by the CARDS transaction into account, the

Tax Court did not clearly err in finding that, under this particular combination of

factual circumstances, Gustashaw did not have reasonable cause for his

underpayment of tax or act in good faith with respect to it.

                               IV. CONCLUSION

      The Tax Court correctly concluded that Gustashaw was liable for the 40%

gross valuation misstatement penalties from 2000 through 2002. In addition, we

find no clear error in the Tax Court’s determination that Gustashaw failed to

establish that he acted with reasonable cause and in good faith with respect to his

underpayment of tax. Accordingly, the judgment of the Tax Court is affirmed.

      AFFIRMED.




                                         41
