Shalam v. Llp

• Decision Date: 27 October 2011
• Citation: 931 N.Y.S.2d 592,2011 N.Y. Slip Op. 07590,89 A.D.3d 155
• Parties: John J. SHALAM, Plaintiff–Respondent,v.KPMG LLP, et al., Defendants,Bayerische Hypo–Und Vereinsbank AG, et al., Defendants–Appellants.
• Court: New York Supreme Court — Appellate Division

89 A.D.3d 155
931 N.Y.S.2d 592
2011 N.Y. Slip Op. 07590

John J. SHALAM, Plaintiff–Respondent,
v.
KPMG LLP, et al., Defendants,Bayerische Hypo–Und Vereinsbank AG, et al., Defendants–Appellants.

Supreme Court, Appellate Division, First Department, New York.

Oct. 27, 2011.

[931 N.Y.S.2d 592]

Kasowitz, Benson, Torres & Friedman LLP, New York (Mark W. Lerner, Mark P. Ressler and Jon Avins of counsel), for appellants.Fensterstock & Partners LLP, New York (Blair Courtney Fensterstock, Eugene D. Kublanovsky, Allison M. Charles and Michael T. Phillips, II of counsel), for respondent.PETER TOM, J.P., DAVID B. SAXE, KARLA MOSKOWITZ, ROLANDO T. ACOSTA, SHEILA ABDUS–SALAAM, JJ.SAXE, J.

[89 A.D.3d 156] Plaintiff John J. Shalam paid $3.85 million to participate in a tax shelter, on the recommendation of a financial advisor, in order to avoid paying taxes on capital gains of approximately $50 million. After the IRS disallowed the scheme, plaintiff claimed he had been defrauded by defendants into believing that the scheme was legal. Based on what plaintiff admittedly knew and what he should have known, we hold that he has no viable claim of fraud, because he cannot establish reasonable reliance on the claimed misrepresentations or omissions.

The complex tax avoidance structure at issue, known as “Bond Linked Issue Premium

[931 N.Y.S.2d 593]

Structure,” or BLIPS, was created, orchestrated and operated by defendants. According to the complaint, between 1999 and 2000, defendants solicited the participation in BLIPS of hundreds of taxpayers, including plaintiff. In April 2000, facing the prospect of having to pay taxes on capital gains of approximately $50 million he earned as a result of a public offering of securities for a company he founded and owned, plaintiff decided to participate in BLIPS so that he could claim capital losses to offset those capital gains.

Plaintiff's federal tax return for the year 2000 claimed $57.8 million in BLIPS-generated losses; his 2001 federal tax return claimed a carry-over deduction of $9.9 million in BLIPS losses.

In March 2002, plaintiff received a letter informing him of an IRS voluntary disclosure program in which taxpayers who reported their participation in questionable tax shelters were offered protection from the imposition of penalties “if an underpayment of tax attributable to the questionable item [was] [89 A.D.3d 157] found upon audit.” Plaintiff disclosed to the IRS his participation in BLIPS, and, in 2004, the IRS disallowed his deduction of losses from BLIPS. Plaintiff then entered into a negotiated agreement with the IRS to pay additional federal taxes and interest.

Plaintiff sued all the parties that participated in the creation, orchestration, or operation of BLIPS, claiming as losses the fee he...