TEFRA is still with us. Despite the coming launch of new partnership procedures in the Bipartisan Budget Act (BBA), TEFRA will remain relevant, as old cases work their way through the courts and also likely continuing to inform interpretations of many statutory holes in BBA. A recent Tax Court case, BCP Trading and Investments v Commissioner, explores whether alleged conflicts of interest taint what was an otherwise valid extension to the SOL on assessment.
I will skip the sordid details, but the case involves Son of Boss transactions implicating asset transfers to partnerships, with liabilities attaching to the assets in an effort to increase basis in the partnership and thus produce super sized partner tax losses. (Judge Holmes’ opinion describes the transactions for those who like that sort of thing).
The main procedural issue in the case involved claims that the consents to extend to the SOL on assessment that the tax matters partner (TMP) executed were invalid. The argument focused on how the TMP, Bolton, was under the influence of E&Y. E&Y was under criminal investigation for its role in structuring the transactions. That control, according to the argument, meant that the TMP had a conflict of interest, which invalidated the SOL extensions.
There is precedent for invalidating a TMP consent to extend the SOL. Transpac is a Second Circuit case which held that a TMP’s SOL extension did not have effect when IRS turned to a TMP who himself was under criminal investigation, when the partners individually would not extend the SOL.
The BCP Trading opinion (citations removed) describes Transpac further:
The TMP [in Transpac] s were, unsurprisingly, more receptive to the Commissioner’s request. They had “a powerful incentive to ingratiate themselves to the government,” and worked with the IRS in a criminal prosecution of the Transpac promoter because their immunity or suspended sentence depended on it. The TMPs signed the extensions right about the time they were especially trying to coax the government into granting them immunity or agreeing to lighter sentences.
The Second Circuit in Transpac held that the Commissioner couldn’t use these consents to bind the partners because he knew the TMPs had a strong incentive to cooperate with the government and had conflicting interests with the partners.
As BCP discusses, the issue is “very fact dependent.” The opinion distinguishes Transpac for two main reasons: 1) in BCP many of the individual partners did not turn IRS down in the face of individual requests to extend the SOL and 2) the TMP was not under criminal investigation when the IRS turned to him to sign the original extension.
BCP also argued that the E&Y role in the transactions should bring its actions into the lens as to whether the TMP had an impermissible conflict. One of the partnership employees, who started out working at the slippery sounding E&Y group with the acronym VIPER (which stood for Value Ideas Produce Extraordinary Results) went to BCP as a BCP employee to be a liaison with E&Y. BCP argued that the TMP was in effect controlled by the former E&Y/VIPER employee. The opinion gives that pretty short shrift, noting that the former E&Y employee left for messy reasons and that in any event the individual partners also signed consents to extend the SOL.
E&Y’s conduct, beyond its former employee’s role in the partnership, was not irrelevant to a related issue, however. BCP argued that the consents to extend were not valid because E&Y breached its fiduciary duty and exercised undue influence in getting the TMP to sign the consents. The opinion notes that while the consents to extend are not contracts (and should be treated as a waiver of a defense, rather than as a contract itself), contract principles are key to this inquiry. In light of those principles, the argument fell short, looking at contract principles to define undue influence:
Undue influence is unfair persuasion by a person who dominates a party or when, because of their relationship, a party justifiably assumes the person won’t do anything against his welfare.
It was here that the sophistication and extent of the partners’ other advisors worked against the undue influence argument. The opinion details the parade of high-profile advisors other than E&Y that were involved in looking over the shoulder of E&Y. In light of that, the opinion concludes that the evidence did not support a finding that E&Y manipulated the TMP to sign the consents to extend.
As we have discussed before it is difficult to argue against a signed consent to extend. The argument in BCP was a long shot, especially given the partners’ sophistication and the less than appealing atmosphere of a reviled tax shelter.