Jerry Rawls should join in the last line of the Alma Mater with a loud voice and true thankfulness, after he reads Rawls Trading, L.P., Rawls Management Corporation, Tax Matters Partner, 2012 T. C. Memo. 340, filed 12/5/12, as his trusty accountant, a graduate of the Cornell Law School (just like me), saves him from the Section 6662(a) accuracy penalties in the cited case, a follow-up to Judge Vasquez’s earlier decision; on background, see my blogpost “Finishing the Play”, 3/26/12.

This is a son-of-BOSS, Section 752 unrecognized cover of a short sale, to build phony outside basis to bury a big-time capital gain. Needless to say, it gets shot down on a TEFRA FPAA, notwithstanding a tax opinion from Lewis, Rice & Fingersh, L.C., a St. Louis white-shoe, which says the deal works.

Jerry was a Texas Tech engineering graduate, who quit his job and hocked his house to start a fiber optic company with the unprepossessing name of Finisar before anyone had ever heard of fiber optics. It wound up being worth hundreds of millions, and when it went public, Jerry had a ginormous capital gain.

Solicited by a sheltermonger called Heritage who introduced him to Lewis Rice, Jerry signed with Heritage (who got 2% of the tax savings) after he consulted his brother Walter the CPA, who said it looked okay. “Mr. Rawls believed the Heritage strategies were ‘investments where you had to put up real money but you had the real opportunity to profit.’ Furthermore, Mr. Rawls entered into the Heritage agreement to increase the diversification of his holdings and reduce the economic risk related to the volatility of the market price of his Finisar common stock.” 2012 T. C. Memo. 340, at p. 7.

Lewis Rice prepared all the transactional documents and oversaw the implementation. Jerry claims he relied on Lewis Rice, but Judge Vasquez isn’t buying: “…the Lewis Rice lawyers were not being paid to evaluate a deal or to tweak it; they were being paid to make the transactions happen. They did more than simply evaluate Heritage’s strategies; they implemented them. They created the entities involved and prepared all the paperwork involved. Therefore, Mr. Rawls cannot rely on the advice of Lewis Rice because it was a promoter of the transactions involved.” 2012 T. C. memo. 340, at p. 33. Oh yes, and Lewis Rice got a six-figure flat fee for their trouble.

Promoters, upon whose advice taxpayers cannot rely, are those who “make it happen”. And this is additional support to my argument that the authors of marketed opinions should make it clear that their opinions cannot be relied upon for Section 6664 purposes, so IRS, keep at least part of Circular 230 §10.35.

So does Jerry have to take the Section 6662(a) hit? No, because Larry Poster was his accountant. Jerry’s former accountant had only done his routine tax returns for years, did not understand the heavy complexities of Jerry’s newly-gained wealth, and anyway was getting ready to retire. So Heritage gave Jerry a list of accountants, and Jerry chose Larry.

Larry never paid Heritage for referrals and never charged above his normal low hourly rates for the work he did, which was to look over the paperwork and prepare the returns. So he wasn’t a promoter.

But can Jerry rely on Larry’s advice? Yes, if he’s competent. Judge Vasquez:  “We find that Mr. Poster was a competent professional. Mr. Poster graduated from Cornell Law School, was a certified public accountant, and had almost 30 years of experience in tax when Mr. Rawls hired him, including 13 years as a tax partner at a major accounting firm. Not only was Mr. Poster a competent tax return preparer; he also had knowledge of the relevant aspects of Federal tax law. He had experience evaluating short sales involving section 752 issues.” 2012 T. C. Memo. 340, at p. 35 (emphasis added.)

IRS argued that Larry was incompetent because he gave Jerry the wrong advice. To require the taxpayer to cross examine one with much more expertise than he, and evaluate complicated tax plans, negates the whole purpose of hiring an adviser.

Moreover, Jerry told Larry the whole story. IRS says Larry should have sweated Jerry more, but it’s not the taxpayer’s fault if the expert, who should know what questions to ask, doesn’t ask them. How can the taxpayer know what the expert should ask?

Finally, Jerry was acting in good faith, even though IRS claims he should have known the Heritage deal was too good to be true. “Mr. Rawls is not a sophisticated investor and is not familiar with tax law. Before the success of Finisar, Mr. Rawls’ wealth consisted of the equity in his home, which was subject to two mortgages in order to finance Finisar. Mr. Rawls was not familiar with managing a large fortune and, as of early 2000, he did not have an estate plan or even a will. We find that Mr. Rawls did not have the background or experience necessary to have known that the Heritage plan was too good to be true.” 2012 T. C. Memo. 340, at p. 39.

Larry the Cornell Law alum (from a later class than mine) saves the day for Jerry. Hail, all hail, Cornell!