In CNT Investors, LLC v. Commissioner, 114 T.C. No. 11 (2015), the Tax Court recently held that a retired mortician reasonably relied on the advice of his long-time corporate and estate planning attorney in participating in a Son-of-BOSS tax shelter transaction to divest real estate holdings. Although the court ruled that the transaction was a sham, it declined to impose valuation misstatement penalties due to the taxpayer acting with reasonable cause by relying on his “go-to attorney and trusted counselor.” The three-prong test for determining whether a taxpayer acted with reasonable cause, and thus avoid penalties, is: (1) the adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser’s judgment. The most interesting part of this case is that the court held that under the first prong the question is not whether the adviser is a tax expert and has sufficient tax expertise from the perspective of the IRS or other tax experts, but instead whether the adviser would appear to be a competent professional with sufficient expertise from the taxpayer’s layperson perspective. In this case, the court found that the taxpayer justifiably viewed his long-time corporate and estate planning attorney of 20 years as competent and with sufficient expertise, even though the attorney was not a tax expert.
A copy of the opinion can be found here: