The Red-Face Test

Does it even exist anymore?

The advance sheets today let me to this case, involving a scheme to generate tax losses to offset gains recognized on an unrelated transaction. In this case, the company implementing the scheme was wholly-owned by a tax advisor that had sold the scheme to other clients:

Petitioner admits that courts have consistently found similar tax avoidance schemes lacking in economic substance. However, petitioner attempts to distinguish its transaction. First it attempts to differentiate the economics of its transaction....

Petitioner also attempts to distinguish its transaction on the basis that it did not initiate the scheme on the advice of a tax shelter promoter. Courts have often found that a taxpayer's involvement with a tax shelter promoter indicated that tax avoidance primarily motivated a disputed transaction. [cases] Petitioner argues that the absence of a promoter in this case demonstrates that its transaction represented legitimate tax planning. We disagree. Mr. Haber is a tax shelter promoter. He did not need to consult a third-party promoter, because he knew the scheme well enough to execute it himself.

The guy who argued this case before the Tax Court is a senior partner at a major international law firm.  He's been practicing longer than I have.  It's shocking to me that he actually made such a stupid argument.

Unbelievable.