Shasta Strategic Investment Fund LLC et al v. United States of America

Filing 252

ORDER REGARDING SUPPLEMENTAL ISSUES. Further Case Management Conference set for 9/25/2014 10:00 AM in Courtroom 3, 17th Floor, San Francisco. Signed by Judge Richard Seeborg on 9/11/14. (cl, COURT STAFF) (Filed on 9/11/2014)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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SAN FRANCISCO DIVISION

For the Northern District of California

United States District Court

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SHASTA STRATEGIC INVESTMENT
11 FUND, LLC; AND PRESIDIO GROWTH
LLC (Tax Matters Partner),
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Plaintiff,

Case No. C-04-4264-RS
(Related to Case Nos. C-04-4309-RS, C04-4398-RS, C-04-4964-RS, C-05-1123RS, C-05-1996-RS, C-05-2835-RS, and C05-3887-RS)

v.
UNITED STATES OF AMERICA,

ORDER REGARDING
SUPPLEMENTAL ISSUES

Defendants.
____________________________________/

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In an order dated July 31, 2014, the Court granted judgment in favor of the government

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on the majority of the issues presented in its motions for summary judgment in this decade-old

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tax shelter case. In particular, the Court found that the BLIPS transaction at issue lacked

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economic substance and therefore should be disregarded for tax purposes. On that basis, the

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Court found the government was entitled to a judgment that the accuracy-related penalty for

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substantial valuation misstatements is applicable at the partnership level and that the LLC-2s

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constituted tax shelters as defined in the relevant regulation for purposes of any subsequent

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underpayment penalties. The Court concluded, however, that the government was not entitled

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to a finding that the negligence misstatement penalty applies as a matter of law, a decision that

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does not preclude the government from seeking such a penalty at any subsequent partner-level

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ORDER

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proceeding. The Court instructed the government to file an election by August 31, 2014, if it

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intended to pursue a finding of negligence in this partnership proceeding. If not, judgment

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would be entered in favor of the government on the remainder of the issues determined in July

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31, 2014 Order and the case would be closed.

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The government responded with what can only be understood as a request for partial

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reconsideration of the Court’s prior order coupled with a request for further summary judgment

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proceedings on an issue not presented in the government’s prior motions. At the Court’s request,

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petitioners submitted a response objecting to the government’s request on both procedural and

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substantive grounds.
To the extent the government’s letter might be construed as a request for reconsideration,

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For the Northern District of California

United States District Court

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it is procedurally improper. Civil Local Rule 7-9 requires that a party seeking reconsideration

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must first make a motion requesting that the Judge grant the party leave to file such a motion.

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The government has not done so here. Nevertheless, it does appear that two minor corrections

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are warranted to the Court’s order granting summary judgment in order to clarify the

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applicability of “reasonable cause” in this partnership proceeding:

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Paragraph two on page seven of the Court’s July 31, 2014 Order is hereby amended to

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read as follows: It is an absolute defense to accuracy-related penalties “with respect to any

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portion of an underpayment if it is shown that there was a reasonable cause for such portion and

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that the taxpayer acted in good faith with respect to such portion.” I.R.C. § 6664. To the extent

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petitioners argue the taxpayers themselves (i.e., the BLIPS investors) demonstrated reasonable

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cause and good-faith in reporting their losses from the BLIPS transactions, that is a partner-level

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defense not applicable to the instant proceeding. See, e.g., NPR Investments, L.L.C. ex rel.

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Roach v. United States (NPR), 740 F.3d 998, 1014 (5th Cir. 2014) (district courts lack

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jurisdiction to adjudicate individual partners’ defenses, including “reasonable cause,” in a

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partnership proceeding). To the extent petitioners have asserted a partnership-level defense of

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reasonable cause on behalf of Presidio, such an argument fails for the reasons set forth below.

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CASE MANAGEMENT SCHEDULING ORDER

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In addition, the first full paragraph on page nineteen of the Court’s July 31, 2014 Order is

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hereby amended to read as follows: Petitioners’ sole response to the government’s request for a

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finding on the misstatement penalty is to refer to their arguments concerning negligence,

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asserting conclusorily that “[f]or similar reasons the gross valuation misstatement penalty cannot

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be applied as well.” (Response, at p. 28.) Unlike the penalty for negligence, however, it is not

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necessary to resolve any factual questions of intent in order to find that the misstatement penalty

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applies, provisionally, at the partnership level. To the extent petitioners have asserted a

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partnership-level defense of reasonable cause and good faith on the part of Presidio, they have

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not established such a defense at this juncture for the reasons set forth below concerning the
“objective substantial authority” of the BLIPS opinion letters from KPMG and Brown & Wood.

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For the Northern District of California

United States District Court

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See 26 C.F.R. § 1.6664-4(c)(1) (2000) (“in no event will a taxpayer be considered to have

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reasonably relied in good faith on advice unless the requirements of this paragraph (c)(1) are

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satisfied”); 26 C.F.R. § 1.6664-4(c)(1)(ii) (2000) (“The advice must not be based on

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unreasonable . . . legal assumptions”). If the partners have individual defenses, they may assert

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those defenses at the separate and subsequent partner-level proceedings. The government is

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therefore entitled to a finding that the substantial valuation penalty applies at the partnership

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level (at either 20% or 40%, as provided in the relevant FPAAs), subject to any defenses that

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may apply at subsequent partner-level proceedings.

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The remainder of the government’s letter appears to be a request to initiate a further

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round of summary judgment proceedings on the issue of whether an accuracy-related penalty

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attributable to a substantial understatement of tax is provisionally applicable at the partnership

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level. Seriatim motions for summary judgment are generally disfavored. The government

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should therefore be prepared to explain what would justify an additional motion in this matter at

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the further Case Management Conference to be held on September 25, 2014 at 10:00 a.m. in

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Courtroom 3 on the 17th Floor of the United States Courthouse, 450 Golden Gate Avenue, San

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Francisco. The parties shall file a Joint Case Management Statement at least one week prior to

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the Conference to address the scheduling of further proceedings in this case, as well as the issue

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CASE MANAGEMENT SCHEDULING ORDER

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of the government’s suggestion of a further motion for summary judgment. Parties or counsel

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may appear personally or file a request to appear by telephone. If any party files such a request,

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all parties shall appear telephonically at 11:00 a.m. and must contact Court Conference at

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866/582-6878 at least one week prior to the Conference.

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IT IS SO ORDERED.

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DATED: September 11, 2014
_______________________________
RICHARD SEEBORG
United States District Judge

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For the Northern District of California

United States District Court

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CASE MANAGEMENT SCHEDULING ORDER

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