Tucker v. Comm'r
| Decision Date | 18 September 2017 |
| Docket Number | Docket No. 12307-04.,T.C. Memo. 2017-183 |
| Parties | KEITH A. TUCKER AND LAURA B. TUCKER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
George M. Clarke III, Robert H. Albaral, David Gerald Glickman, Phillip J. Taylor, Mireille R. Oldak, Vivek A. Patel, John D. Barlow, and Kathryn E. Rimpfel, for petitioners.
Donald Kevin Rogers, Charles Buxbaum, Christopher Fisher, and John J. Boyle, for respondent.
GOEKE, Judge: Respondent issued a notice of deficiency disallowing petitioners' claimed loss deduction of $39,188,666 for the 2000 tax year. This adjustment resulted in a $15,518,704 deficiency and a $6,206,488 section 6662 penalty.1 The claimed loss deduction arises from a series of offsetting foreign currency digital options that petitioner Keith A. Tucker entered into through passthrough entities. One set of offsetting foreign currency options generated the loss, and a second set of offsetting foreign currency options generated a tax basis in an S corporation through which petitioners claimed the loss deduction. Through a technical application of statutory and regulatory provisions, Mr. Tucker separated the loss and gain from the offsetting options and claimed only the loss portion as U.S. source. Before trial petitioners conceded the basis component but continue to assert the deductibility of a $2,024,700 loss for 2000 based upon their purported cash basis in the S corporation. Petitioners seek to carry forward the remainder of the loss deduction to the extent of stock basis in future years.
On the basis of the concession, the issues for decision are: (1) whether petitioners are entitled to deduct a loss for 2000 on the offsetting foreign currency options. We hold that they may not because the underlying option transactionslacked economic substance; and (2) whether petitioners are liable for an accuracy-related penalty under section 6662. We hold that they are not.
At the time the petition was timely filed, petitioners resided in Texas.2 Mr. Tucker received a bachelor of business administration degree with a major in accounting and a minor in finance in 1967 and a juris doctor degree in 1970 from the University of Texas. Mr. Tucker was licensed as a certified public accountant (C.P.A.). He never practiced law. After his college graduation and while attending law school, Mr. Tucker worked at KPMG or its predecessor (KPMG) and became a partner in 1975. Mr. Tucker started his KPMG career preparing individual tax returns and then life insurance company returns and eventually began to provide technical advice on life insurance company tax matters. He successfully developed his life insurance tax practice and a national reputation. In 1981 Mr. Tucker became the national director of KPMG's insurance practice. In 1984 Mr. Tucker left the insurance taxation field and joined the investment banking firm Stephens, Inc., as a senior vice president, becoming involved inmergers, acquisitions, public and private placements, and corporate finance. In 1987 Mr. Tucker joined the private equity firm Trivest, Inc., as a partner, working on middle-market leveraged buyouts. In 1991 Mr. Tucker left Trivest to become an executive at Torchmark Corp., an insurance, financial services, and real estate holding company. In 1992 Mr. Tucker became the chief executive officer (CEO) of a Torchmark subsidiary, Waddell & Reed Financial, Inc. (Waddell & Reed), a national mutual fund and financial services company targeting middle-class individual investors and small businesses. In 1998 Torchmark spun off Waddell & Reed as a publicly traded company. Mr. Tucker remained the CEO and served as a director and the chairman of the board. Mr. Tucker remained in these positions until his forced resignation in 2005. After leaving KPMG in 1984, Mr. Tucker continued to maintain a relationship with the firm. KPMG served as his personal tax adviser and return preparer. KPMG prepared petitioners' returns for 1984 through 2000 and advised Mr. Tucker on various investment, income, and estate planning issues.
After Waddell & Reed went public in 1998, Waddell & Reed established a company-sponsored personal financial planning program for its senior executives (WR executive program) that provided financial, estate, and income tax planning and tax return preparation services. Part of Waddell & Reed's reasoning for adopting the WR executive program was concern with its own reputation and client relationships as affected by the ethical conduct of its executives, including tax compliance issues. Waddell & Reed also wanted to ensure that senior executives focused their attention on shareholder matters rather than their own tax and investment affairs. Upon Mr. Tucker's recommendation, Waddell & Reed engaged KPMG to manage the WR executive program. KPMG also served as Waddell & Reed's auditor. Mr. Tucker recommended a friend and former KPMG colleague, Eugene Schorr, to run the WR executive program. Bruce Wertheim, a senior manager at KPMG, assisted Mr. Schorr as a principal adviser.
Mr. Schorr has a bachelor's degree in accounting and a master's degree in taxation and is a C.P.A. and a personal financial specialist. He worked in KPMG's tax compliance group and specialized in individual tax and financial planning, gifts and estates, trust planning, and charitable contributions. Mr. Schorr worked at KPMG (or its predecessors) from 1966 until he retired in 2003, becoming a partner in 1976. During his career Mr. Schorr served as partner in charge of KPMG's New York individual tax practice and as partner in charge of its national personal financial planning practice. During 2000 and 2001 he served as partner in charge of KPMG's national financial planning corporate program. Mr. Schorr taught an undergraduate estate and gift tax course for 10 years and lectured on income tax, trust, and estate planning issues at various conferences and institutes. He wrote tax articles and served on the editorial board of Taxation for Accountants and as a director of the New York State Society of Certified Public Accountants. Throughout this career Mr. Schorr emphasized the importance of client relationships. In his experience, many senior executives lacked time to handle their own financial and estate planning and tax matters. Mr. Schorr had extensive experience in the development and administration of executive financial planning programs such as the WR executive program. Mr. Tucker considered Mr. Schorr trustworthy and knowledgeable and viewed him as the preeminent person at KPMG for coordinating tax return compliance, tax planning, estate planning, and financial planning for executives.
From 1999 through 2001 KPMG provided Waddell & Reed's senior executives, including Mr. Tucker, with individual tax and financial planning services pursuant to the WR executive program. As part of the WR executive program, KPMG asked Waddell & Reed's senior executives to complete a comprehensive information-gathering document relating to the executives' financial and tax situations and financial and nonfinancial goals. KPMG used the information to develop specific recommendations for the executives.
During his employment with Waddell & Reed, Mr. Tucker participated in an executive deferred compensation stock option plan (WR stock options plan). By 2000 Waddell & Reed's stock had significantly appreciated in the short time since it had gone public in 1998. KPMG anticipated that Waddell & Reed's executives, including Mr. Tucker, would exercise their WR stock options during 2000 to take advantage of the increased stock value and would experience significant increases in their 2000 incomes as a result of exercising the WR stock options. KPMG advised Mr. Tucker on timing and restrictions upon the exercise of the WR stock options. On August 1, 2000, Mr. Tucker exercised 1,776,654 WR stock options. On that same date he exercised 119,513 WR stock options via the Keith A. Tucker Children's Trust Agreement, dated February 21, 2000. On their 2000 joint income tax return, petitioners reported $44,187,744 in wages and salaries, which included $41,034,873 in gain from the exercise of WR stock options. Waddell & Reed withheld Federal income tax of approximately $11.4 million from Mr. Tucker's compensation relating to the exercise of the options.
In May 2000 before exercising the WR stock options, Mr. Tucker met with KPMG advisers to discuss his financial and tax planning for 2000 including his exercise of the WR stock options. They discussed the need to withhold income tax upon the exercise of the WR stock options. Mr. Schorr also explained the need for Mr. Tucker to diversify his investments. Mr. Tucker viewed his WR investments as conservative and wanted to diversify into riskier investments. Mr. Schorr advised Mr. Tucker that KPMG offered various investment programs that could mitigate his income tax resulting from exercising the WR stock options. Mr. Tucker viewed his conversations with KPMG as part of the WR executive program. KPMG had trained and directed its partners to refer clients with income over a certain threshold to KPMG's Innovative Strategies Group. Mr. Schorr identified Mr. Tucker as a potential client for the Innovative Strategies Group in the spring of 2000 on the basis of Mr. Tucker's 2000 income from his exercise of the WR stock options. Mr. Schorr conferred with Timothy Speiss, the northeast partner in charge of KPMG's Innovative Strategies Group, and with other KPMG partners with respect to Mr. Tucker. Mr. Schorr asked Mr. Speiss to meet with Mr. Tucker to discuss tax strategies to mitigate his 2000 income tax. Mr. Speiss has a bachelor's degree in business with a major in accountancy and a master of science degree in taxation. He began working at KPMG in 1983 and became a partner in 1999...
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