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The tax law: it's not rocket science. That would be too easy.

December 23, 2008

David Altman surely has a big brain, but even smart people can come to grief with taxes, as he found out yesterday in Tax Court. Mr. Altman is an actual rocket scientist:

After World War II, Dr. Altman worked for 11 years for the Jet Propulsion Laboratory at the California Institute of Technology where he investigated a variety of chemicals, fuels, and oxidizers for use in rocket motors. Following a 3-year stint as head of the propulsion department at Aeronutronic Systems, Inc., a defense and aerospace subsidiary of the Ford Motor Co., he went to United Technologies Corp. There, he eventually became vice president of the Research and Engineering Departments at the Chemical Systems Division, before retiring in June 1981.

Oh, and he has other credentials:

He received a Ph.D. in physical chemistry from the University of California at Berkeley in 1943, where Dr. J. Robert Oppenheimer was one of his thesis advisers.2 Dr. Oppenheimer offered Dr. Altman a position as an associate chemist working for the Manhattan Project, which Dr. Altman accepted.

But none of this prepared him for the jojoba bean tax shelters of the late 1970s and early 1980s. Dr. Altman bought into one, "CAL-NEVA." Like so many of these, it turned into a tax quagmire. The IRS disallowed the claimed tax benefits and assessed negligence penalties.

Dr. Altman made a valiant effort to show that he shouldn't be penalized, but the judge wasn't persuaded:

Dr. Altman's own financial analysis does not support a reasonableness defense because it was based on projected cashflows taken from the private placement memorandum -- projections which were preceded by a conspicuous warning that they were not to be relied upon. This factual situation resembles the factual situation in Kellen v. Commissioner, supra, in which the taxpayer, a "well- educated and successful attorney and a sophisticated investor", prepared an analysis based on projections set forth in an offering memorandum that were coupled with a warning that they had been prepared for the general partner, were unaudited, and were not to be relied upon. We held that "Any reliance on those projections was unreasonable." Moreover, Dr. Altman testified that he invested in CAL-NEVA knowing that the investment would provide a tax benefit -- indeed, the anticipated tax benefit was part of his financial analysis.

The moral? No matter how smart you are, a flaky tax shelter is a flaky tax shelter.

Cite: Altman, T.C. Memo. 2008-290

Tags: tax shelters.