A federal tax court judge issued a ruling Feb. 14 finding three personal injury lawyers in the Rio Grande Valley used an improper tax shelter to reduce tax liabilities from contingent fees they received in 2001 from Firestone tire litigation.
In a Memorandum Findings of Fact and Opinion, U.S. Tax Court Judge Mark V. Holmes of Washington, D.C., found Larry Lawrence of Lawrence Law Firm in McAllen; Roberto Salazar of The Law Office of Roberto Salazar of McAllen, and Ricardo Garcia of The Law Office of Garcia & Karam of McAllen reduced their tax bills in 2001 using a "complicated transaction" that does not pass muster.
"Each of these lawyers was in the business of estimating risk and reward in evaluating every case he considered, but in this instance each sought refuge in a tax shelter whose builders used flawed designs and constructed it from bad materials that do not survive close inspection," Holmes wrote in the 79-page opinion in 6611, LTD., Ricardo Garcia, Tax Matters Partner, et al. v. Commissioner of Internal Revenue, which was consolidated for opinion with tax cases filed against Salazar and Lawrence.
Holmes wrote that all three lawyers received large contingent fees in products liability suits filed after Bridgestone/Firestone Inc. recalled tires in 2000. Holmes wrote that in 2001, Lawrence received a fee of about $1 million, Salazar got $1.5 million (with additional fees coming in subsequent years) and Garcia received $2.2 million.
Holmes found that all three lawyers used tax planning recommended by Dallas attorney Joe Garza that involved a variant of the "now notorious Son-of-BOSS" tax shelter.
"The purpose of all Son-of-BOSS tax shelters is to create ‘artificial tax losses designed to offset income from other transactions,’ " Holmes wrote, citing a 2011 9th U.S. Circuit Court of Appeals opinion in Napoliello v. Commissioner.
According to the findings of fact, Garza provided opinion letters for the three lawyers dated Dec. 30, 2001, that concluded the "tax treatment" would " ‘more likely than not’ withstand IRS scrutiny."
"Garza, however, relied on certain ‘facts’ to reach his ‘more likely than not’ conclusion, and these ‘facts’ were just plain wrong," Holmes wrote.
Kyle Coleman, a partner in Roberts, Coleman, Anastopulos & Jackson of Dallas who represented all three lawyers at a Dallas trial in 2010 before Holmes, says his clients have 90 days to decide if they will appeal. The lawyers filed petitions in U.S. Tax Court after the commissioner of internal revenue in 2005 issued "notices of final partnership administrative adjustment" that effectively would increase their 2001 tax bill.
"The tax court found them liable on the merits of the case and also found they were liable for penalties. We argued that we relied on professionals — tax attorneys and CPAs — to advise us, so we should not be held responsible for a penalty," Coleman says.
In the opinion, Holmes determined that Garza was a tax shelter "promoter," so Lawrence, Salazar and Garcia could not rely on him in good faith. "The case law is clear on this point — promoters take the good-faith out of good-faith reliance," Holmes wrote.
Holmes also found that a CPA in McAllen who prepared partnership documents for the lawyers in connection with the tax planning did not provide them with a tax opinion "as to whether the perceived tax benefits would stand up."
Coleman says he is disappointed Holmes found that his clients could not rely in good faith on advice from the CPA and says that’s a potential ground for appeal.
"We reasonably relied in good faith on [the CPA] and should not be subject to penalties," Coleman says.
Coleman says that under the opinion, the IRS will notify the lawyers of their tax deficiency and penalty.
"The penalty is very severe," he says.
Garza, a partner in Garza & Harris, did not return a telephone message. Neither did the three McAllen lawyers
The lead trial lawyer for the IRS, Jeffrey Bassin, who works at the IRS chief counsel office in Cincinnati, says he cannot comment without permission. Julianne Breitbeil, a spokesperson for the IRS in Washington, D.C., says the IRS does not comment on pending litigation.