Tax Court Rejects Everyone is Doing It As Reasonable Cause Penalty Defense In Son-of-Boss case

In 3k Investment Partners v. Commissioner; 133 T.C. No. 6 (9/3/09), the taxpayer, an "investor" in a Daugerdas / Jenkens deal, sought to assert this defense to a penalty and, in support of the defense, sought discovery from the IRS of all the Son-of-Boss opinions in its bowels or wherever. In his typical straight-forward fashion, Judge Thornton opined:

Petitioner alleges and respondent does not dispute that in connection with many Son-of-BOSS transactions, one or more law firms or accounting firms wrote opinion letters to the investors supporting the claimed tax treatment. Petitioner alleges, and respondent does not dispute, that respondent has a large number of these tax opinion letters. Petitioner contends: "The availability of a large number of law firms and accounting firms issuing tax opinion letters determining that so-called 'Son of Boss' transactions * * * would produce the tax results as reported by Petitioner on its subject tax return would bolster Petitioner's position that it had reasonable cause and that Petitioner acted in good faith." Similarly, at the hearing petitioner's counsel argued that "based upon the general consensus of national law firms across the country that were issuing tax opinion letters that were taking the same position as the Petitioner in my case was taking, I wanted to show that reasonable cause does exist to take the position that we took on the tax return."

Petitioner's argument appears to be a variant of the refrain, familiar to parents of teenagers, that "Everyone's doing it." For the same reason that this does not constitute reasonable cause for teenagers, it would not constitute reasonable cause for petitioner. Petitioner must establish the reasonableness of its position on the basis of the facts and merits of its own case. n6 See Avedisian v. Commissioner, supra ("each individual must rest on the validity of his own position under the applicable taxing provisions, independently of others"). The legal analysis, conclusions, and recommendations that some tax advisers may have given other taxpayers are irrelevant to the reasonableness of the positions the partnership took on its return. See P.T. & L. Constr. Co. v. Commissioner, 63 T.C. 404, 414 (1974).

n6 We also reject any suggestion that the requested information, which appears to involve only a small subset of tax advisers, shows any "general consensus" of tax advisers regarding Son-of-BOSS transactions.

With a follow-up punch, the Court held that the opinions were not relevant or likely to lead to the discover of admissible evidence, as required by the discovery rules.

Finally, the court held that the opinions sought were in any event tax return information prohibited from disclosure under § 6103. The court held that redaction of taxpayer identifying information did not make it any the less tax return information subject to the strictures of § 6103. Reliance on cases dealing with § 6110 is misplaced because that code section specifically lifts the veil if § 6103, with appropriate redactions, for the types of IRS general legal interpretation documents that Congress said should be in the public domain once shorn, by redaction, of taxpayer identification information.