August 24, 2019

Archives for December 20, 2013

Surviving a Personal Apocalypse — Part 2: He-Who-Must-Not-Be-Named

rhodesArch-villain Lord Voldemort of the Harry Potter stories is so unspeakably evil that just saying his name can bring his wrath upon yourself. Better be safe and refer to him as “He-Who-Must-Not-Be-Named.” And keep your voice down, would you?

We have a Lord Voldemort of our own in the legal world: a possibility so scary that most lawyers won’t say it to themselves, let alone anyone else. What is it? It’s the idea that our next career move might be out of the law entirely.

We usually limit our options for curing the law career blues: first is to find a new job in a different practice area or environment; second is to use our legal training for something other than practicing law. There’s plenty of help for either option, from headhunters and career coaches to books about what else you can do with your law degree.

Anything else is a voyage into uncharted seas, out where there be dragons. It’s madness, a straight shot to Doom’s doorway, a personal apocalypse waiting to happen. We have WAY too much invested the law, or at least in our legal training – financially, socially, intellectually, emotionally – to risk it. And guides are hard to find. (Although not impossible: consider people like ex-lawyers Tama Kieves and Jonathan Fields.).

Sure, John Grisham, Scott Turow, and Dean Koontz all parlayed their lawyering days into mega-bestsellers, but really, how much room at the top is there? For the rest of us, to admit the possibility of getting out is to betray the profession and risk bringing its wrath upon ourselves. Lawyers just don’t talk about getting out; it’s an unwritten ethics rule.

Consider, for example, the torrent of angry backlash when Justice Sotomayor told Oprah that “Any lawyer who is unhappy should go back to square one and start again”. (Much of the outrage derived from the crippling effect of law school loans – a sentiment that would meet with sympathy here in Colorado, where the 2013 Lawyer Satisfaction and Salary Survey revealed that 39% of respondents said law school debt has a significant effect (32%) or controls (7%) their career choices.)

Calling our personal He-Who-Must-Not-Be-Named by its real name is not for the faint-hearted, but it might be for you. And if it is, the good news is that the stages of personal apocalypse are predicable. They’ve been studied and articulated. They can be taught and learned. There is a path to the Other Side of Over, no matter how Over comes upon us.

Plus, stifling our passions and dreams and visions isn’t such a hot idea either. In my experience, people who might want out of the law already suspect it, but are well-practiced at holding their tongues and hearts in check. Doing that will hurt us in the long run, and might even hasten our own personal apocalypses. More on that another time.

So go ahead, say it out loud if you dare. Harry Potter did it, and remember: in the end, Voldemort lost.

To be continued.

Tenth Circuit: Actions of Tax Court Invalidating Offshore OPIS Shelter Upheld

The Tenth Circuit Court of Appeals published its opinion in Blum v. Commissioner of Internal Revenue on Wednesday, December 18, 2013.

This case came to the Tenth Circuit on appeal from a decision of the Tax Court upholding the actions of the IRS Commissioner invalidating a financial transaction as lacking economic substance and imposing two penalties for underpayment of taxes. The Tenth Circuit concluded that the intricacies of this offshore financial transaction and the fog of plausible deniability surrounding it could not make up for the clarity of the big picture: this was a transaction designed to produce nothing more than tax advantages, and the Tax Court was right to uphold the Commissioner’s actions.

The taxpayer, Mr. Blum, was a successful businessman who founded In August 1998, he made two sales of stock resulting in $45 million in capital gains. A KPMG accountant who previously worked on Mr. Blum’s tax returns who was aware of Mr. Blum’s possible capital gains referred him to Carl Hasting, also of KPMG. Mr. Hasting pitched to Mr. Blum a transaction called OPIS (Offshore Portfolio Investment Strategy). The transaction, it is now widely acknowledged, is a tax shelter. However, KPMG recommended the transaction to Mr. Blum before the IRS revealed this information to the public.

The OPIS shelter was designed to create large, artificial losses for taxpayers by allowing them to claim a large basis in certain assets. These artificial losses offset actual capital gains, reducing the tax liability of the taxpayer.

Because of OPIS, Mr. Blum claimed $45 million in losses on his 1998 income tax returns, and it caught the attention of the IRS. The IRS disallowed OPIS and similar transactions in 2001. Rather than individually prosecute each OPIS scheme, the IRS settled with over 90 percent of OPIS purchasers. Mr. Blum did not accept the settlement offer. In 2005, the IRS sent a deficiency notice to Mr. Blum regarding his 1998 and 1999 federal income tax returns. Mr. Blum challenged this notice in the Tax Court. The Tax Court rejected his challenge and Blum appealed.

In his appeal to the Tenth Circuit, Mr. Blum made three arguments: (1) the Tax Court erred when it disallowed the OPIS losses under the economic substance rule; (2) the Tax Court erred by imposing a penalty for a gross valuation misstatement after it concluded the underlying transaction lacked economic substance; and (3) the Tax Court erred by imposing penalties for negligent underpayment, because Blum relied in good faith on KPMG’s representations.

First, Blum maintained that the OPIS transaction presented a reasonable probability of generating a profit, and that the Commissioner was therefore wrong to disallow the losses he claimed as a result of the transaction. The Tenth Circuit was unconvinced, and held that the OPIS transaction was a sham designed to reduce Mr. Blum’s tax liability. First, the $45 million loss associated with the transaction was grossly disproportionate to the $6 million Mr. Blum invested. Moreover, Mr. Blum did not lose $45 million; the loss was fictional. Second, the OPIS transaction was planned and executed in a way that was designed to generate a massive tax loss. Third, the evidence showed OPIS did not provide a reasonable expectation of profit. Fourth and finally, what profit potential OPIS presented was de minimis when compared to the tax benefits of declaring capital losses of $45 million. This disparity indicated a lack of economic substance. Further, Mr. Blum’s actions during and after the OPIS transaction indicated that his sole motive was tax avoidance. For these reasons, the OPIS transaction lacked objective economic substance and the Tax Court was correct in disallowing the loss.

Second, the Commissioner assessed penalties against Mr. Blum for his underpayment of taxes associated with OPIS. One of these penalties was a gross-valuation misstatement penalty. Blum argued that the penalty was inapplicable because the underlying transaction had been invalidated by the economic substance doctrine. The Supreme Court resolved the split on this issue: invalidation of a transaction under the economic substance doctrine does not prohibit the imposition of the penalty. Therefore, the Tenth Circuit upheld the Tax Court’s decision allowing the penalty.

Finally, the Commissioner imposed a 20 percent penalty on Mr. Blum for negligent underpayment of taxes on his 1999 return. Section 662(b)(1) of the Tax Code allows the IRS to impose a 20% penalty if the taxpayer’s underpayment resulted from negligence. Mr. Blum recited a litany of reasons why his reliance on KPMG’s advice should excuse him from paying this penalty. The court stated that although KPMG may have acted nefariously, that did not excuse Mr. Blum’s negligence.


Colorado Court of Appeals: Announcement Sheet, 12/19/13

On Thursday, December 19, 2013, the Colorado Court of Appeals issued four published opinions and 43 unpublished opinions.

Hansen v. American Family Mutual Insurance Co.

People v. Crouse

Foundation for Human Enrichment v. Industrial Claim Appeals Office

Barry v. Bally Gaming

Summaries for these cases are forthcoming, courtesy of The Colorado Lawyer.

Neither State Judicial nor the Colorado Bar Association provides case summaries for unpublished appellate opinions. The case announcement sheet is available here.

Tenth Circuit: Unpublished Opinions, 12/18/13

On Wednesday, December 18, 2013, the Tenth Circuit Court of Appeals issued two published opinions and four unpublished opinions.

United States v. Stanley

Angell v. Fairmount Fire Protection District

United States v. Zaccardi

Glover v. Fox

Case summaries are provided for unpublished opinions. However, published opinions are summarized and provided by Legal Connection.