Ervin et al v. United States of America

Filing 138

MEMORANDUM OPINION AND ORDER Signed by Chief Judge Joseph H. McKinley, Jr. on 8/23/2017 denying 132 Renewed Motion for Judgment as a Matter of Law. cc: Counsel(JBM)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
OWENSBORO DIVISION
CIVIL ACTION NO. 4:13-CV-00127-JHM
GARY ERVIN, et al.

PLAINTIFFS

V.
UNITED STATES OF AMERICA

DEFENDANT

MEMORANDUM OPINION AND ORDER
This matter is before the Court on Defendant’s Renewed Motion for Judgment as a
Matter of Law under Rule 50(b) [DN 117]. Fully briefed, this matter is ripe for decision. For the
following reasons, Defendant’s Motion is DENIED.
I. BACKGROUND
Plaintiffs, the Ervin brothers and their wives, originally filed this suit as a refund action
against the Defendant, the United States, seeking a refund of the valuation misstatement penalty
and penalty interest payments paid to the IRS on their tax returns in the years 1999 and 2000. As
a basis for the suit, the Ervins asserted the reasonable cause defense, in which they alleged that
they had reasonable cause to claim their tax losses because they relied in good faith upon the
advice of competent tax advisors who advised them to do so. They purportedly relied on four
advisors: BDO Seidman (an accounting firm), Curtis Mallet (a tax law firm), Jesse Mountjoy
(their longtime attorney), and Martin McElroy (their longtime accountant).
The reasonable cause defense is a “narrow exception” to liability for a tax-related
penalty. Kerman v. Commissioner, 713 F.3d 849, 868 (6th Cir. 2013); see Stobie Creek Invs.,
LLC v. United States, 82 Fed. Cl. 636, 716–17 (2008), aff’d, 608 F.3d 1366 (Fed. Cir. 2010).
This defense required the Ervins to prove “by a preponderance of the evidence . . . each of the

following elements with respect to any advisor they claim reliance upon”: 1) “The advisor was a
competent professional who had sufficient expertise to justify reliance”; 2) “The Ervins provided
necessary and accurate information to the advisor”; and 3) “The Ervins actually received advice
and relied in good faith on the advisor’s judgment.” (Jury Instr. 4 [DN 115] at 8.)
A trial was held beginning on March 13, 2017. At the close of proof, Defendant moved
for entry of judgment as a matter of law pursuant to Fed. R. Civ. P. 50(a) on the theory that
because the Ervins never received advice as to the economic substance of the transaction they
could not adequately establish their reasonable cause defense. The Court considered and orally
denied the motion. From there, the jury concluded that the Ervins reasonably relied on three of
their four advisors: BDO Seidman, Curtis Mallet, and Jesse Mountjoy. Defendant has renewed
its motion for judgment as a matter of law under Fed. R. Civ. P. 50(b), which is now before the
Court.
II. STANDARD OF REVIEW
Fed. Civ. R. 50(b) provides that judgment as a matter of law may be granted when “a
party has been fully heard on an issue and there is no legally sufficient evidentiary basis for a
reasonable jury to find for that party on that issue.” Imwalle v. Reliance Med. Prod., Inc., 515
F.3d 531, 543 (6th Cir. 2008) (quoting Reeves v. Sanderson Plumbing Prod., Inc., 530 U.S. 133,
149 (2000)).

In reviewing such motions, the Court views the evidence in the light most

favorable to the non-moving party and gives him the benefit of all reasonable inferences. West
v. Tyson Foods, Inc., No. CIV.A. 4:05-CV-183M, 2008 WL 5110957, at *2 (W.D. Ky. Dec. 3,
2008), aff’d, 374 F. App’x 624 (6th Cir. 2010) (citing Tarrant Serv. Agency, Inc. v. Am.
Standard, Inc., 12 F.3d 609, 613 (6th Cir. 1993)). The Court should “not weigh the evidence,
evaluate the credibility of the witnesses, or substitute its judgment for that of the jury.”

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Hogancamp v. Callaway, No. 5:08CV-00152-JHM, 2012 WL 2994264, at *2 (W.D. Ky. July 20,
2012) (citing Hometown Folks, LLC v. S & B Wilson, Inc., 643 F.3d 520, 530 (6th Cir. 2011);
Adam v. J.B. Hunt Transp., Inc., 130 F.3d 219, 231 (6th Cir. 1997); Tarrant, 12 F.3d at 613). “A
trial court must affirm the jury verdict unless there was “no legally sufficient evidentiary basis
for a reasonable jury to find for [the prevailing] party.” White v. Burlington Northern & Santa
Fe R. Co., 364 F.3d 789, 794 (6th Cir. 2004) (quoting Fed. R. Civ. P. 50(a)). In other words,
“[t]he district court must ‘indulge all presumptions in favor of the validity of the jury’s verdict,’
and ‘should refrain from interfering with a jury’s verdict unless it is clear that the jury reached a
seriously erroneous result.’” Williams v. Nashville Network, 132 F.3d 1123, 1131 (6th Cir.
1997) (quoting Brooks v. Toyotomi Co., 86 F.3d 582, 588 (6th Cir. 1996)).
III. DISCUSSION
The United States argues that there was insufficient evidence adduced at trial to support
the Ervins’ reasonable cause defense, arguing: 1) that the Ervins never received any advice from
their advisors regarding the economic substance of the transaction; 2) that any advice rendered
was based on unreasonable assumptions as to future events by Gary Ervin; and 3) that these three
advisors were not independent and therefore incapable of rendering advice upon which the
Ervins could have reasonably relied.
To combat this Motion, the Ervins assert that the United States waived its right to bring
the first and third arguments because it did not address them in its oral Motion for Judgment as a
Matter of Law under Rule 50(a). In making the Rule 50(a) Motion, the United States expressly
stated that it wished to preserve and incorporate all arguments made in its pre-trial brief into its
Rule 50(a) motion, which include the arguments that the Ervins were never advised as to the
economic substance of the transaction and that the advisors were not truly independent. The

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Court permitted the United States to do this rather than requiring counsel to detail each argument
after the close of proof. Because the Court allowed counsel this flexibility, the Court declines to
treat these arguments as waived and will address each of the United States’ arguments herein.
A. Advice Regarding Economic Substance
The United States first argues that the Ervins never received any advice from their
advisors as to the economic substance of the transactions that form the basis of this tax refund
suit. Rehashing a familiar argument, the United States begins its analysis by asserting that the
transactions lacked economic substance. This issue was previously litigated and conclusively
established by the Federal Court of Claims in Jade I, the Court of Appeals for the Federal Circuit
in Jade II. Specifically, the Federal Court of Claims held that the “transaction’s fictional loss,
inability to realize a profit, lack of investment character, meaningless inclusion in a partnership,
and disproportionate tax advantage as compared to the amount invested and potential return,
compel a conclusion that the spread transaction objectively lacked economic substance.” Jade
Trading, LLC v. United States, 80 Fed. Cl. 11, 14 (2007) [hereinafter Jade I], aff’d in part,
vacated in part, rev’d in part sub nom. Jade Trading, LLC ex rel. Ervin v. United States, 598 F.3d
1372 (Fed. Cir. 2010) [hereinafter Jade II]. The Federal Circuit affirmed, stating “[t]he Ervin
LLCs’ transfer of the spread transactions to Jade lacked economic substance.” Jade II, 598 F.3d
1372, 1377. As seen, these decisions, and the Court’s jury instructions that reflected this
determination, it is well-understood that the transactions lacked economic substance. (Jury Instr.
2 [DN 115] at 6 (“[T]he transaction failed to meet the economic substance test.”).) Much of the
parties’ briefs are spent discussing whether or not the transaction had economic substance at the
time the Ervins executed it. However, this was not the subject of the jury’s inquiry and the Court

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will not consider these arguments to show that the advisors themselves did not consider and
include an analysis of economic substance in their overall advice.
The jury was simply charged with determining whether it was reasonable for the Ervins
to rely on their advisors’ advice. This advice, as the jury instructions directed, required the
advisors to have “considered and concluded whether the transaction held economic substance as
a part of their overall advice.” (Jury Instr. 4 [DN 115] at 9.) The United States contends that
none of the advisors provided any advice regarding a non-tax purpose for the structure of the
transactions, and, therefore, the Ervins’ reasonable cause defense must fail as a matter of law.
Despite this contention, the Ervins presented ample evidence upon which a jury could reasonably
conclude that each of the advisors considered and concluded that the transaction had economic
substance as a part of their overall advice.
First, Jesse Mountjoy, the Ervins’ longtime tax attorney, described in detail how he
considered the economic substance of the transaction. He specifically stated that he follows “a
general philosophy that says you don’t do anything just to be tax motived” and that “profits,”
“good business,” “and a lot of things” besides taxes are important in structuring a transaction.
(Trial Tr. Vol. IV [DN 129] at 93:7–15.)

He confirmed that, in 1999, he examined the

transaction at issue under the economic substance test: he looked at “investment strategy,
business planning, and tax” consequences of the paired transaction and determined that the
transaction “passed the test.” (Id. at 101:16–19.) He further concluded that in terms of profit, he
determined that “there was a reasonable possibility of making good profits absent tax aspects,”
and “there was a clear profit motive involved;” he did not believe that “the tax structure or the
structure of the business entity detracted from the profit motive the Ervins engaged in.” (Id. at
102:9–15; 107:5–13.) Additionally, he engaged in this independent analysis and determined that

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the transaction was based on a business purpose rather than a tax concept alone. (Id. at 233:3–
22.) He communicated his advice, including the determination that the transaction had economic
substance, to the Ervins by telling them that “this looked like a solid investment and tax-paired
strategy going forward.” (Id. at 99:22–24; Ervin Trial Tr. Vol. I [DN 110] 97:19–20 (“[H]ad Mr.
Mountjoy not been convinced, [Gary Ervin] wouldn’t have proceeded with it.”).) Therefore, the
Ervins presented sufficient evidence such that a jury could reasonably conclude that Jesse
Mountjoy considered the economic substance of the transaction and included it in his overall
advice.
The United States next argues that BDO Seidman did not actually consider the economic
substance of the transactions as a part of its overall advice to the Ervins. This is because, the
United States posits, the BDO “opinion cannot constitute advice because it was based on
hypothetical facts”; but, even if it could be considered advice, “it does not advise that there is a
business reason to purchase the options outside of Jade and then contribute them to Jade”—it
generally “does not identify or explain a non-tax business purpose for the structure of the
transaction.” (Mot. [DN 132] at 9.) The United States focuses on the BDO opinion to prove that
BDO did not consider economic substance even though the opinion states that the Ervins had “a
reasonable expectation of making a profit on the transactions in excess of all associated fees and
costs and not including any tax benefits.” (Id.) The United States alleges that there was no other
evidence of advice provided to Gary Ervin regarding the non-tax business purpose of the
transaction. In so doing, Defendant entirely ignores the advice given by David DiMuzio, Gary
Ervin’s main contact at BDO.
DiMuzio was an accountant employed by BDO. In this role, he advised the Ervins as to
the transactions that form the basis of this tax refund law suit. He took part in many of the

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conversations between BDO, Sentinel (an investment banking firm that participated in the Jade
partnership), and the Ervins. (DiMuzio Trial Test. [DN 137-4] at 1543:4–17; 1544:5–15.)
DiMuzio characterized the transaction as being a “dual purpose investment,” as “there were tax
advantages associated with the investment there were questions raised about tax principles that
were involved.” (Id. at 1514:6–10.) He advised the Ervins and their advisors on these aspects of
the transactions extensively throughout 1999.

(Id. at 1513:16–25; 1514:1–21.)

DiMuzio

understood from these discussions and believed, as an accountant, that the Ervins could double
their money on the purchased and written options that were part of the initial capital contribution.
(Id. at 1545:12–22.) In the partnership, he understood that the Ervins stood to gain “upwards of
38 to one” on their investments, which could yield “several million dollars on a return.” (Id. at
1545:24–25; 1546:1–19.) On average, the Ervins could expect to gain “14 to one . . . for a
significant percentage of time.” (Id. at 1547:1–4.) As a professional accountant, DiMuzio
explained that this meant that, when taking the Ervins’ investments together, at a 10-to-one ratio,
the expected return would be “over $6 million,” at 14-to-one, the expected return would be “$10
million,” and at 38-to-one, the expected return would be “$25 million.” (Id. at 1547:16–22.)
DiMuzio’s testimony indicates that he understood the mechanics of the transactions and
considered the economic substance and profit potential when advising the Ervins. DiMuzio
explained to the Ervins the concepts in the BDO opinion, which included the tax principle that a
transaction must have economic substance distinct from the tax reduction in order to be proper,
all while believing that the transactions at issue had the potential to produce sizable returns. As
such, the Ervins proffered adequate evidence such that a reasonable juror could find that BDO,
by and through DiMuzio, provided advice that considered and concluded whether the transaction
had economic substance as a part of its overall advice.

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Lastly, with respect to Curtis Mallet, the United States principally argues that the opinion
letter rendered by Curtis Mallet did not include any independent assessment of the potential
profits or economic substance. The opinion letter states:
You determined that its investments in foreign currency, foreign currency
options, and the Partnership had a reasonable possibility of profit after expenses
and fees (including the fees under the Consulting Agreement even if such fees are
attributable to your Partnership interest). Therefore, it is more likely than not that
the transactions had a subjective business purpose.
(Jury Trial Ex. 90 at 92.) Rather than conducting its own analysis and considering the profit
potential, the United States contends that this letter establishes that Curtis Mallet exclusively
relied on Gary Ervin’s assessment of the economic substance of the transaction.
However, this argument fails for the same reason the United States’ argument failed as to
BDO. Aside from the opinion letter, William Bricker, the Ervins’ chief contact at Curtis Mallet,
advised Gary Ervin that there were economic gains to be made from the transactions in question
outside of tax avoidance. At the beginning of their relationship, Gary Ervin called Bricker and
asked Bricker to prepare an opinion letter as to the tax consequences as to currency trading
transactions. (Bricker Trial Test. [DN 137-2] at 927:12–15.) Bricker disclosed how he dealt
with some of his prospective clients in his testimony given during the Jade I trial. He stated that
when working with prospective clients, he would first determine their motivation in entering into
certain types of currency transactions.

(Id. at 929:17–23.)

When he felt that they were

motivated only by tax avoidance, he declined to work for them. (Id. at 930:3–6.) Bricker did not
decline working with the Ervins and instead worked closely with Gary Ervin regarding the
transactions at issue. Therefore, it appears that Bricker knew and understood that the Ervins
were not solely seeking to avoid paying taxes and instead sought to derive pecuniary gain from
the currency transactions.

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Further, it was Bricker’s opinion “that even if you took all the New Vista fees, the AIG
opening account fees, the opinions, the fees that were paid to us and what other transaction costs
there may have been, which I don’t think were very significant, there was still an opportunity to
have a net cash-on-cash economic profit.” (Id. at 939:13–19.) Specifically, Bricker asserted that
he had confidence in the opinions that he authored for the Ervins regarding the tax consequences
of the transactions and that he had confidence in the discussions that he had with them about the
economic substance of the transactions and the reasonable expectations of profit.

(Id. at

1023:16–22.) He was convinced that the conclusions and representations that he made to the
Ervins were reasonable in light of the information available and relayed to the Ervins that he
believed that these facts regarding the economic substance and profit expectations were
reasonable.

(Id. at 1023:19–25; 1024:1–2.)

His confidence was based on the “enormous

amount[] of time and effort” he spent developing the basis for the opinions that included “an
exhaustive review of any number of cases, and rulings, regulations, Helmer, et cetera.” (Id. at
940:6–11; 942:13–15.) Though the Curtis Mallet opinion may not have provided the necessary
and conclusive advice necessary for the reasonable cause defense, Curtis Mallet’s employee and
the Ervins’ advisor, Bricker, did “consider and conclude” that the transactions at issue had
independent economic substance for the jury to find reasonable reliance on this advice.
Overall, the Ervins put forth sufficient evidence as to show that the Ervins’ advisors
rendered advice that contemplated and verified the economic substance of the transactions at
issue. Therefore, it cannot be said that the jury rendered a clearly erroneous decision based on
the proffered evidence. As such, the Court will not disturb the jury’s verdict by granting
Defendant’s Motion for Judgment as a Matter of Law on this issue.

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B. Advice Based on Unreasonable Assumptions by Gary Ervin
Alternatively, the United States argues that even if the Ervins had been adequately
advised regarding the economic substance of the transactions, this advice could not support a
reasonable cause defense because it was based on unreasonable assumptions.

The Court

instructed the jury that the advice given “must not be based on unreasonable factual or legal
assumptions (including assumptions as to future events) and must not unreasonably rely on the
representations, statements, findings, or agreements of the taxpayer or any other person.” (Jury
Instr. 4 [DN 115] at 10.) For example, “[t]he advice cannot be based on a representation or
assumption that the Ervins knew, or had reason to know, was unlikely to be true, such as an
inaccurate representation or assumption as to their purpose for entering into a transaction or for
structuring a transaction in a particular manner.” (Id.) While the United States disagrees with
the jury’s conclusion on that subject, there is ample proof in the record to support the jury’s
finding that this advice was not based on unreasonable assumptions.
Specifically, the United States asserts that because the Ervins stood to make a de
minimus profit despite enormous investment costs, their assumptions about the transactions and
future events in regards to the transactions were manifestly unreasonable. In its Motion, the
United States walks the Court through the transactions in which the Ervins participated,
attempting to show how the Ervins only had the chance to make minimal profits at best. After
the first transaction, the United States contends, the Ervins could only have made $0.01 profit on
the investment. Even more, if the Ervins were to reinvest in multiple options by leveraging
multiple reverse knockout options by reinvesting positive returns into additional reverse
knockout options, the Ervins could only have made $28,652 each assuming that they purchased
25 reverse knockout options. The United States calculated this by using a 14-to-1 return ratio.

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The United States presented this evidence to the jury, and, in so doing, explained the fees and
potential profits.
However, the jury found that the Ervins’ assumptions about the transactions were not
unreasonable, as they rendered a unanimous verdict reflecting that finding. The Ervins presented
much evidence that their assumptions were in fact reasonable: three independent tax advisors
reviewed the transactions and determined that they were reasonable; Gary Ervin had experience
with similar transactions and understood the profit potential; the United States’ figures did not
represent the Ervins’ beliefs in the profit potential; and, the United States’ calculations do not
account for certain temporal factors.
First, as discussed in Part A., supra, the Ervins’ advisors considered the economic
substance of the transactions, including the assumptions the Ervins made as to profit potential,
independently determined that the transactions were reasonable, and structured their advice as
such. This meant that they did not base their advice on any assumptions that they considered to
be unreasonable. Because the advisors did not challenge the transactions or indicate that they
were unreasonable, their review goes to show that the assumptions contained within were not
patently unreasonable.
Second, Gary Ervin testified that he planned on making large profits from the transaction
based on his experience with similar transactions. He explained that he had experience with
options from his investments in Dycom stock, which gave him confidence that he could see
another one hundred percent return on his investment rather than the paltry returns the United
States claimed he would make. (Trial Trans. Vol. V [DN 123] at 13:4–10.) Gary Ervin was
convinced that the paired Euro options presented high chances for large profits because of his
familiarity with the concept of restriking from his Dycom stock trades. (Trial Trans. Vol. I [DN

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110] at 66:8–18.) His positive past investment experience afforded him special knowledge and
awareness that aided the formation of his foundational assumptions as to the validity and
reasonableness of the transactions at issue. The fact that his experience led him to believe that he
was participating in a sound investment certainly weighs in favor of reasonableness.
Third, the United States’ calculations reflect figures that do not correspond with the
assumptions that Gary Ervin made. Instead, the figures that the United States utilized were those
that Gary Ervin considered to be part of the “worst case” scenario rather than what he actually
expected to make on the spread transactions. (Trial Trans. Vol. V [DN 123] at 15:1–11.) To
support the reasoning behind his expectations, he explained that the Euro increased by eight
percent after executing the option transactions after September 29, 1999. (Trial Trans. Vol. I
[DN 110] at 105:24–25; 106:1–3.) Based on this success, the Ervins then joined the Jade
Trading partnership and contributed the spread options on October 6, 1999, and once again the
Euro increased by eight percent. (Id. at 106:4–6.) That means the Euro increased sixteen
percent in the first two weeks, so the partnership purchased a knock-out option on October 13,
1999 for $100,000. (Id. at 106:7–13.) The Ervins expected to see between a 14-to-1 and a 30-to1 return on that investment on this option, which would yield over three million dollars. (Id. at
106:14–19.) Though the Euro began to decline at that time, and the Ervins could not execute the
multiple knock-out options they had hoped to, they still presented sufficient evidence to show
that they based their actions on reasonable profit-making assumptions from actual market
conditions rather than transparently unreasonable assumptions.
Lastly, the United States’ argument appears to be somewhat temporally flawed.

It

attempts to lump all of the fees and costs associated with creating the partnership and executing
the transactions together with the actual returns and potential returns when deriving its meager

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profit figures. In reality, the Ervins entered into the first paired option transactions on September
29, 1999 when the Euro was rising in value. (Trial Trans. Vol. I [DN 110] at 101:6–14.) At the
time the transactions were executed, the Ervins were still negotiating the fee for the New Vista
consulting agreement and did not wind up entering into that agreement, which included the
agreed upon fees, until October 6, 1999.

(Id. at 103:6–9; 105:18–25.)

Gary Ervin even

negotiated the terms of the consulting agreement so that he paid $225,000 when the agreement
was signed, another $225,000 at the end of the year, and the final $225,000 at the end of the
following year. (Id. at 105:11–17.) Clearly, the Ervins did not intend on fronting the entirety of
the consulting fee at the outset of the transactions as the United States has assumed in its
calculations.
In conclusion, the Treasury Regulations state that in order to establish a reasonable cause
defense, the advice given by the advisors must not be based on unreasonable assumptions. Gary
Ervin had determined, with the help of Sentinel and New Vista (investment firms), that he stood
to make substantial profits on his knockout options, between 14-to-1 and 30-to-1 returns.
Unreasonable assumptions are illustrated by an example in the Regulations: “the advice must not
be based upon a representation or assumption which the taxpayer knows, or has reason to know,
is unlikely to be true, such as an inaccurate representation or assumption as to the taxpayer’s
purposes for entering into a transaction or for structuring a transaction in a particular manner.”
26 C.F.R. § 1.6664-4. Nothing in the record indicates that the Ervins knew or had reason to
know that the profit representations were untrue or that the Ervins structured the transactions in a
nefarious manner, as Gary Ervin explained at great length his past experience with complex
transactions, his desire to make substantial profits, and his expectation of large returns. The jury
heard this evidence in full and credited the Ervins’ testimony. The jury determined that the

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Ervins did not make unreasonable assumptions and that the Ervins’ advisors did not base their
advice on these unreasonable assumptions. As such, the Court will not disturb this finding.
C. Advisors’ Independence
Lastly, the United States argues that the advisors did not render independent advice to the
Ervins regarding the transactions at issue. The United States contends that the Ervins knew or
should have known that BDO and Curtis Mallet were promoters and that Jesse Mountjoy did not
perform any independent analysis as he simply vouched for the validity of the Curtis Mallet
opinion.
i. Promoters: BDO Seidman and Curtis Mallet
With regard to BDO and Curtis Mallet being promoters, the jury was instructed that
“reliance on the advice of an advisor is not reasonable if the taxpayer knew, or should have
known, that the advisor had an inherent conflict of interest, such as that of a promoter of the
transaction.” (Jury Instr. 4 [DN 115] at 10.) Specifically, “[a] promoter of a transaction is an
advisor who participates in structuring a transaction or is otherwise related to, has an interest in,
or profits from the transaction. An advisor is not a promoter of a transaction when he has a longterm and continual relationship with the taxpayer, does not give unsolicited advice regarding the
tax shelter, advises only within his field of expertise, follows his regular course of conduct in
rendering his advice, and has no stake in the transaction.” (Id.)
a. BDO Seidman
The United States contends that “there is no dispute that BDO promoted the Son-ofBOSS shelter to the Ervins . . . [and] Curtis Mallet helped BDO structure the transaction.” (Mot.
[DN 132] at 26.) BDO marketed the tax shelter to the Ervins using the model opinion in an
effort to win the Ervins’ business. (Id.) It further argues that the Ervins knew or should have

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known of BDO’s status as a promoter because David DiMuzio, of BDO, stated that he believed
that, in their “preliminary discussions,” he mentioned to Gary Ervin that Sentinel was paying
some amount to BDO.” (DiMuzio Dep. [DN 137-5] at 297:4–8.) However, Gary Ervin testified
to the fact that he did not think that BDO was going to be paid for their efforts outside of the tax
preparation that they would perform later that year. (Trial Tr. Vol. II [DN 111] at 117:12–19.)
He explained that when he was discussing the transactions with BDO, he had not yet decided to
engage with them and fees were never discussed. (Id. at 117:23–25; 118:1–2; 119:1–7.) Further,
he did not inquire into why BDO was going through this effort to set up the transactions because
many brokers drove from New York to Kentucky in an attempt to win his business and they were
not compensated for their efforts, so Gary assumed nothing was out of the ordinary in regards to
BDO. (Id. at 118:7–12.) The jury also heard testimony from Jesse Mountjoy, the Ervins’
longtime attorney, and Martin McElroy, the Ervins’ longtime accountant, who both testified to
the fact that BDO never, despite its obligation to reveal potential conflicts of interests to clients,
disclosed that BDO had some form of conflict in the transactions in question. (Trial Tr. Vol. IV
[DN 129] at 67:10–14; 169:3–14.)

Most poignantly, Gary Ervin stated that BDO never

communicated to the Ervins that it was receiving undisclosed payments from the transactions at
issue. (Trial Tr. Vol. II [DN 111] at 59:21–23.)
As seen above, the Ervins submitted competent evidence illustrating the fact that they did
not know that BDO was not a promoter and had no disclosed conflicts of interest. From that, the
jury considered the Ervins’ testimony, their advisors’ testimony, and DiMuzio’s testimony
(representing BDO). They weighed the conflicting evidence and credited accordingly. Because
the record supports the jury’s finding, the Court will not disturb it.

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b. Curtis Mallet
With regard to Curtis Mallet, the United States asserts a similar theory. In essence, it
posits that BDO and Curtis Mallet had a business relationship such that the two firms were
working together to promote and profit from the transactions. (Mot. [DN 132] at 27.) The
United States argues that the Ervins knew or should have known of this conflict because
DiMuzio of BDO recommended that the Ervins get advice from Bricker of Curtis Mallet, Bricker
was familiar with the transactions and seemingly had a business relationship with BDO, and the
Curtis Mallet opinion letter essentially adopted the BDO opinion whole cloth. (Id. at 27–29.)
As to the first point, the United States argues that the Ervins knew or should have known
that Curtis Mallet was promoting the transaction because BDO recommended Curtis Mallet to
Gary Ervin. However, Gary Ervin did not blindly follow BDO’s suggestion to obtain legal
advice from Curtis Mallet regarding the transactions at issue. Instead, he sought the opinions of
Vickie Davis (the Ervins’ general counsel), Jesse Mountjoy (the Ervins’ longtime attorney), and
Mel Shralow (New York based tax attorney with whom the Ervins were familiar). (Trial Tr.
Vol. I [DN 110] at 83:17–25; 84:1–25; 85:1–2.) Each of these attorneys researched Curtis
Mallet and determined that the firm was reputable and had specialized knowledge so as to
properly and knowledgeably advise the Ervins in regards to the Euro call options.

(Id.)

Specifically, Shralow advised Gary Ervin that Curtis Mallet would be a suitable firm for this
particular type of transaction. (Id. at 85:3–9.) Gary Ervin explicitly opted for Curtis Mallet over
White & Williams (with which he was familiar) because Curtis Mallet had “a lot more
experience in this type of trading,” “represented that a lot of cases that were using [their]
opinions” and represented that it “was the one who represented whoever that won the cases.”
(Id. at 85:24–25; 86:1–2.) Gary felt very confident in Curtis Mallet and felt he was “in good

16

hands.” (Id. at 86:4–5.) This evidence points to the fact that the Ervins did not know that Curtis
Mallet was engaged in a business relationship with BDO, as the Ervins specifically researched
Curtis Mallet to ensure that it was a suitable firm to handle these transactions. Had the Ervins
known that BDO and Curtis Mallet were acting in concert, they likely would have sought outside
counsel still, as Jesse Mountjoy specifically advised the Ervins to get legal advice from a firm
independent from BDO.1 (Trial Tr. Vol. IV [DN 129] at 112:13–24.)
As to the second two points, the United States argues that the Ervins should have known
that Curtis Mallet had a conflict of interest because of Bricker’s familiarity with the transactions
and because the Curtis Mallet opinion was similar to the BDO opinion. Despite these assertions,
Bricker assured Gary Ervin emphatically that he was loyal only to the Ervins, specifically stating
that he did not represent BDO or Sentinel—he only represented Gary and his brothers. (Trial Tr.
Vol. II [DN 111] at 12:8–21.) Bricker did not disclose that he had any conflicts with Gary,
including that he did had a business relationship with BDO. (Id. at 12:19–21.) Gary Ervin took
this as true because of his experience with attorneys and their duties to run conflicts checks and
to disclose any conflicts of interest that may result. (Id. at 12:22–25; 13:1.) He even confirmed
with Jesse Mountjoy and Vickie Davis individually that Bricker could not be invested in the
transactions because it would present a conflict of interest that should have been disclosed. (Id.
at 113:19–20.) Gary testified that he “had a very high opinion of the ethics of [Bricker],” so he
believed what Bricker told him and moved forward with the transaction as such. (Id. at 113:9–
20.) These undisclosed conflicts even led to the Ervins filing suit against both BDO and Curtis
1

The United States cites Salem Fin., Inc. v. United States to support the proposition that a taxpayer cannot rely on
advice from an advisor who was recommended to the taxpayer by the promoter of the transaction. 786 F.3d 932,
958 (Fed. Cir. 2015), cert. denied, 136 S. Ct. 1366, 194 L. Ed. 2d 359 (2016). True enough, an advisor
recommended by a promoter creates a conflict of interest of which a taxpayer knows or should know. However,
here, the Ervins presented sufficient evidence to show that they did not know and should not have known that BDO
was a promoter. Therefore, because BDO was not known to be a promoter, the inherent conflict of interest could
not be imputed onto Curtis Mallet as it was in Salem.
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Mallet. (Id. at 47:1–3.) Therefore, despite the unclear business relationship between BDO and
Curtis Mallet and the similar opinion letters, Gary Ervin has shown that he reasonably believed
and trusted that Bricker was wholly independent from BDO, had no conflicts of interest, and was
not a promoter.
The jury heard this testimony from Gary Ervin and Jesse Mountjoy regarding the
research Gary performed in selecting Curtis Mallet and testimony from Gary Ervin regarding
Bricker’s loyalties to the Ervins. The Ervins presented sufficient evidence for the jury to
conclude that the Ervins did not know and should not have known that Curtis Mallet had a
conflict of interest in or promoted the transactions at issue. Therefore, the Court will not disturb
this finding.
ii. Independent Analysis: Mountjoy
The United States additionally argues that Jesse Mountjoy, the Ervins’ longtime attorney,
rendered advice upon which the Ervins unreasonably relied because he did not perform an
independent investigation into the economic substance of the transaction or its tax consequences.
Instead, the United States asserts that he simply relied on the information and analysis contained
within the BDO and Curtis Mallet opinions, agreed with the opinions, and vouched for them in
representations made to the Ervins.
With regard to this argument, the jury was instructed that in order to be successful on
their reasonable cause defense, “the Ervins must show that the advice came from a competent
professional with sufficient expertise to justify reliance.” (Jury Instr. 4 [DN 115] at 8.) This
means that “the advisor must have evaluated the merits of the claimed tax deductions, and
reached an independent decision as to the proper tax treatment of the transaction.” (Jury Instr. 4

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[DN 115] at 9.)

Moreover, the advice rendered “must not unreasonably rely on the

representations, statements, findings, or agreements of the taxpayer or any other person.” (Id.)
The United States principally relies upon both Gary Ervin’s and Jesse Mountjoy’s
characterization of Mountjoy’s role. Both stated that Mountjoy was to critique and second-guess
the BDO and Curtis Mallet opinions. (Mot. [DN 132] at 29.) Because this was his primary role,
the United States explains, Mountjoy simply rendered an opinion on an opinion, and he
performed no independent analysis. (Id.) To this end, the United States cites Mountjoy’s
testimony in which he states that he “came to the conclusion that the Curtis Mallet opinion and
the supporting documents were good, solid law based upon what I understood the law and the tax
law to be at the time.” (Id. at 30 (citing Trial Tr. Vol. IV [DN 129] at 33:20–25; 34:1).)
Additionally, Mountjoy suggested that the Ervins seek advice from a specialist that he could
critique, as he thought that he was best suited for rendering advice in that capacity. (Id. at 30–
31.)
Though the United States arguments are well taken, the Ervins presented considerable
evidence that Mountjoy rendered independent advice apart from the BDO and Curtis Mallet
opinions. Mountjoy testified that between August and September of 1999 he independently
researched the law contained within the BDO opinion, specifically by pulling and reading all
relevant cases cited within. (Trial Tr. Vol. IV [DN 129] at 15:6–9.) Mountjoy formed and
discussed his conclusions as to these cases during the meetings with DiMuzio, Gary Ervin, and
Martin McElroy in a meeting on September 2, 1999, that lasted around five hours. (Id. at 12:3–
8.) During this meeting, Mountjoy discussed with the group the economic substance of the
transactions based on the rule that “a transaction would be respected unless there was no
business purpose and no reasonable possibility of profit.” (Id. at 16:6–18.) Based on his

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research and understanding of the law, Mountjoy was satisfied with DiMuzio’s and BDO’s
opinion on the transactions at issue. (Id. at 14:13–17.) At the end of the meeting, Mountjoy
believed that the investment had “good tax legs to it, so to speak” and that the tax rules would
work to their advantage immediately and down the road after the Ervins exited the partnership
years later. (Id. at 22: 5–15.) As a part of his continuing involvement, Mountjoy received all of
the investment documents that the Ervins received as well. (Id. at 26:12–21.)
In the spring of 2000, the Ervins also engaged Curtis Mallet to provide an opinion as to
the tax treatment of their transactions. (Id. at 28:5–9.) Mountjoy had encouraged the Ervins to
seek advice from a specialist who had experience with these types of complex transactions, as to
best advise the Ervins in a cost-effective manner. (Id. at 29:12–19.) Though Mountjoy had
suggested that the Ervins seek further advice, Mountjoy remained involved. (Id.) His role was
to verify the opinion of the specialists at Curtis Mallet by drawing on his own independent
judgment, as he believed that was the best way to get a “good product.” (Id. at 29:20–25; 301–
6.) After independently analyzing the Curtis Mallet opinion, Mountjoy gave Gary Ervin his own
opinion and conclusions as to the validity of the law and analysis contained within the opinion
and stated that he agreed with Curtis Mallet’s representations. (Id. at 33:20–25; 34:1–22.)
During the trial Mountjoy recounted his understanding of the tax law and how the transactions fit
into that framework by describing the documents and cases he reviewed and how he reached his
conclusions. (Id. at pg. 38–62.)
In sum, Mountjoy considered documents provided by the Ervins, case law, and tax law in
order to render the best advice possible upon which the Ervins could rely. (Id. at 64:23–25;
65:1–25; 66:1–12.) To this end, he extensively studied option and currency investments by
reading relevant literature on the subject. (Id. at 69: 2–10.) After all of his efforts, Mountjoy

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concluded that he gave the Ervins accurate, independent advice based on his analysis of the law
at that time. (Id. at 66:13–15.) To this end, he testified that he performed an “independent
review of the materials,” made “independent inquir[ies]” into the legitimacy of the investment,
and gave “independent conclusions.” (Id. at 68:19–25; 69:1–19.)
Ultimately, it was the role of the jury to hear the evidence and testimony presented and to
decide how much weight to award a witness’s testimony. Here, the Ervins presented evidence
that Mountjoy performed an independent analysis and did not unreasonably rely on any other
advisor’s opinion, and the jury weighed and credited this evidence in the Ervins’ favor. Because
sufficient evidence was presented to support this finding, the Court refuses to disturb it.
Despite the United States’ arguments to the contrary, the Court concludes that the Ervins
presented evidence and testimony to support each of the jury’s findings. Accordingly, because
the verdict has a legally sufficient basis and is not seriously erroneous, the Court will not
overturn this result.
IV. CONCLUSION
For the reasons set forth above, IT IS HEREBY ORDERED that Defendant’s Renewed
Motion for Judgment as a Matter of Law is DENIED.

August 23, 2017

cc: counsel of record

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