Yung v. Grant Thornton, LLP

Citation563 S.W.3d 22
Decision Date13 December 2018
Docket Number 2017-SC-000151-DG,2016-SC-000571-DG
Parties William J. YUNG, Martha A. Yung, and The 1994 William J. Yung Family Trust, Appellants/Cross-Appellees v. GRANT THORNTON, LLP, Appellee/Cross-Appellant
CourtUnited States State Supreme Court (Kentucky)

COUNSEL FOR APPELLANTS/CROSS-APPELLEES, WILLIAM J. YUNG AND MARTHA A. YUNG: Michael D. Risley, Bethany A. Breetz, Matthew W. Breetz, Louisville, Stites & Harbison, PLLC.

COUNSEL FOR APPELLANT/CROSS APPELLEE, THE 1994 WILLIAM J. YUNG FAMILY TRUST: Gerald F. Dusing, Covington, Adams, Stepner, Woltermann & Dusing, PLLC.

COUNSEL FOR APPELLEE/CROSS-APPELLANT, GRANT THORNTON, LLP: Sheryl G. Snyder, Griffin Terry Sumner, Theresa Agnes Canaday, Jason Patrick Renzelmann, Louisville, Frost Brown Todd, LLC.


KENTUCKY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS: Mark Allen Loyd, Jr., Bailey Roese, Louisville, Bingham Greenebaum Doll, LLP, Christopher R. Healy, Kevin M. Dinan, Patricia L. Maher, Ashley C. Parrish, King & Spalding, LLP.

KENTUCKY JUSTICE ASSOCIATION: Kevin Crosby Burke, Louisville, Jamie Kristin Neal, Burke Neal PLLC.


William J. Yung, Martha A. Yung, and the 1994 William J. Yung Family Trust (collectively, the Yungs) participated in a tax shelter marketed by their accounting firm, Grant Thornton LLP (GT or the Firm). The shelter, Lev301, purportedly would allow funds held in the Yungs' Cayman Island-based companies to be distributed to shareholders in the United States without federal tax liability. After the Internal Revenue Service (I.R.S.) disallowed the tax shelter, the Yungs settled with the I.R.S. in early 2007. Later that year, the Yungs commenced this action to recoup approximately $20 million, the combined total paid to the I.R.S. in back taxes, interest and penalties and paid to GT for fees. Following a bench trial, the trial court found GT liable for fraud and gross professional negligence in the marketing and sale of the tax shelter and awarded approximately $20 million1 in compensatory damages and $80 million in punitive damages.

The Court of Appeals affirmed the circuit court’s judgment in favor of the Yungs on liability and compensatory damages. Partially reversing, that court reduced the punitive damage award to equal the compensatory damage award, having concluded that a punitive damage award in excess of the approximately $20 million compensatory damage award (a 1:1 ratio) was manifestly unreasonable and exceeded the amount justified to punish GT and to deter like behavior.2

The Yungs moved for discretionary review seeking to reinstate the $80 million punitive damage award and GT requested discretionary review regarding its liability and the compensatory and punitive damages. Having granted both motions, we affirm the Court of Appeals' decision that GT is liable for its fraudulent conduct and approximately $20 million in compensatory damages. We reverse, however, the appellate court’s decision that the $80 million punitive damage award is unreasonable and reinstate the trial court’s award.


William J. Yung (Yung) is an experienced businessman who owns hotels and casinos in the Cayman Islands and in the United States. Columbia Sussex Corporation (CSC), owned by Yung and the 1994 William J. Yung Family Trust (Family Trust), is a privately held hospitality company headquartered in Crestview Hills, Kentucky. CSC is the primary organization for the Yungs' hotel businesses, and at the time of trial owned approximately 40 hotels in the U.S.

Yung also owns hotels and casinos through two Cayman Island holding corporations, Wytec, Ltd. (Wytec) and Casuarina Cayman Holdings, Ltd. (Casuarina). Casuarina is owned by William J. Yung and the Family Trust. Wytec is owned by Yung and two Grantor Retained Annuity Trusts (GRATs) created in 1997, one for the benefit of Yung and one for Martha A. Yung. The Cayman corporations are not obligated to make distributions to their shareholders, and consequently, profits accumulate in the Caymans without federal tax consequences. In 2000, the Yungs, in conjunction with these Cayman corporations, purchased the Grant Thornton Leveraged Distribution Product (Lev301), which is the tax shelter at the center of this litigation.

Grant Thornton LLP (GT) is a public accounting firm headquartered in Chicago, Illinois, with revenues in excess of $1 billion from 2000 through 2003. GT provided tax advice to the Yungs and their business organizations from the mid-1990s through some time in 2007, and the parties developed what the trial court found to be "a comfortable and trusting business relationship."

GT created the Lev301 as a strategy designed to allow corporations to make certain types of monetary distributions with a minimum of tax consequences to their shareholders. GT marketed the Lev301 to the Yungs and other clients beginning in 2000.4

As to the Yungs, the Lev301 involved moving money from the Cayman Islands into the U.S. by distributing the Cayman corporations' profits to the shareholders as fully encumbered securities. First, the Cayman corporations bought $30 million in Treasury notes (T-notes) using borrowed money, with the T-notes serving as security for that debt. Next, the corporations transferred the T-notes to the shareholders in the U.S. Because they were 100% encumbered, the T-notes ostensibly had no taxable value, and accordingly, the shareholders would not report the distributions on their federal tax returns. The Cayman corporations would then pay off the debt six months to a year later, but the loan repayment would also not result in reportable income to the shareholders because they were not co-obligors for the loan’s repayment. This tax shelter strategy, Lev301, theoretically allowed the shareholders to avoid tax consequences on $30 million in profits brought into the U.S. by means of the eventually unencumbered T-notes.

Prior to the events at issue in this litigation, the Yungs brought income into the U.S. from the Cayman corporations when it could be done in "a tax efficient manner." The Yungs looked for ways to accelerate this process, but, with a concern for the risks involved, vetted possible means closely; consequently, they did not engage in various tax strategies presented to them by other accounting firms. Because the Yungs were in the casino business, a highly-regulated industry, they were particularly sensitive to tax issues.5 The Yungs maintained a very conservative risk level as to income tax reporting.

A. The BOSS Notice

At the time GT began to develop Lev301, the U.S. Treasury Department (Treasury) was cracking down on products perceived as abusive tax shelters. In December 1999, the I.R.S. issued Notice 99-59 (BOSS Notice). 1999-52 I.R.B. 761. The BOSS (Bond and Option Sales Strategy) Notice described a tax product designed to create an artificial tax loss that was being sold at that time by several accounting firms.6 A BOSS transaction (described in the footnote) allegedly did not create taxable income under Internal Revenue Code (I.R.C.) § 301. Distribution of encumbered securities by a foreign corporation to a partnership where the securities were distributed "subject to" the bank debt, meant the value of the securities was reduced by the amount of the bank debt. With the bank debt equal in value to the securities, the value of the securities under I.R.C. § 301 was zero for tax purposes. The I.R.S. Notice warned that the BOSS transaction tax loss was not allowable for federal income tax purposes and that the I.R.S. could impose various penalties, including the accuracy-related penalty.

B. New Tax Shelter Disclosures

In early 2000, the Treasury issued additional regulations targeting the promotion of, and participation in, abusive and potentially abusive tax shelters. T.D. 8875, 2000-11 I.R.B. 761; T.D. 8876, 2000-11 I.R.B. 753; T.D. 8877, 2000-11 I.R.B. 747. As a result, organizers and promoters of tax shelters were required to maintain a list of investors in potentially abusive tax shelters7 and to make the list available for inspection upon the Treasury’s request. Organizers and promoters of corporate tax shelters were also required to register with the I.R.S. tax shelters which met the requirement of being "listed transactions," a term the I.R.S. used to identify transactions that were the same or substantially similar to BOSS transactions. Corporate taxpayers filing U.S. income tax returns were also obligated to disclose participation in "reportable transactions."8

In August 2000, the I.R.S. issued the Son of BOSS Notice (Notice 2000-44). 2000-36 I.R.B. 255. Addressing a BOSS derivative, the Notice declared that arrangements which purport to give taxpayers an artificially high basis in partnership interests and thereby give rise to deductible losses on disposition of those interests will not be recognized as bona fide losses reflecting actual economic consequences. Therefore, the losses are not allowable as deductions and may be disallowed under other I.R.C. provisions. The Notice also provided that such arrangements are listed transactions and are subject to tax shelter registration and list maintenance requirements.

During this timeframe, GT was aware of an April 2000 "Tax Notes" article entitled Corporate Tax Shelters: More Plain Brown Wrappers, written by noted tax law commentator Lee Sheppard. Sheppard described a so-called "Bossy" product being marketed by Arthur Andersen LLP and anticipated the I.R.S.’s disallowance of the product. The Bossy transaction involved the following steps:

1) A corporation borrows to buy a T-note that has a term of three to five years.
2) The corporation would then distribute the T-note, subject to bank debt, to its shareholders who would hold the note and collect the principal at

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