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TAX TRENDS
Analysis of and reflections on
recent cases and rulings.
Author: investment fund set up and partially
James A. Beavers, CPA, CGMA, Gross Income owned by an entity of the shelter pro-
J.D., LL.M. moter (here Presidio Growth) and make
Illegal tax shelter seller finds a premium loan consisting of a principal
no shelter in stock forfeiture amount and a substantial additional
provision premium with an above-market interest
A taxpayer’s stock in an S corporation rate. The promoter would use the loan
was not subject to a substantial risk of proceeds to place a short position, specu-
S corporation stock forfeiture due to a forfeiture provision lating that certain foreign currencies
was not subject in a restricted stock agreement because would lose value.
The investor in the BLIPS invest-
it was unlikely the forfeiture provision
to a substantial would ever be enforced. ment would treat the obligation to
risk of forfeiture Background repay the premium portion of the loan
because the stock John M. Larson, a CPA and a senior as contingent and not as a liability for
outside basis purposes. This ostensibly
forfeiture provision manager at a large accounting firm, and would allow the investor to claim a
was unlikely to John Pfaff, a CPA and partner with the highly inflated basis in assets distrib-
uted to the investor from the strategic
same firm, left their firm in 1997 and
be enforced; an formed Presidio Advisors LLC. Another investment fund, which was created as
accountant’s failure employee of the accounting firm, Kerry part of each BLIPS investment, and
to timely e-file Bratton, joined them. David Makov, a claim large losses on the sale of those
assets. Larson, Pfaff, and Makov sold
stockbroker, also joined these three at
an extension and Presidio Advisors a short time later. over 100 BLIPS investments in 1999
On Aug. 10, 1999, Larson incor-
reliance on his porated Morley, an S corporation for and 2000.
On Aug. 10, 1999, Morley formed an
erroneous advice federal income tax purposes during the employee stock ownership plan (ESOP)
regarding late-filing years relevant to this case. On the same and a related trust for its employees,
with Larson, Pfaff, Makov, and Brat-
day, Larson, Pfaff, and Makov, through
penalties were not Morley, formed Presidio Advisory ton as trustees. The IRS recognized
reasonable cause Services LLC (Presidio). They also later the ESOP in May 2000. Larson, as
for the late filing formed Presidio Growth LLC (Presidio president of Presidio, adopted the
Morley ESOP on behalf of Presidio as a
Growth). Through Presidio and Presidio
of taxpayers’ tax Growth, the three men began to market “participating employer.” As of Dec. 31, PHOTO BY ARCHEOPHOTO/ISTOCK
return. a tax shelter using the bond linked issue 1999, and Dec. 31, 2000, there were nine
participating employees vested in the
premium structure (BLIPS) strategy.
In a BLIPS tax shelter, investors Morley ESOP, including Larson, Pfaff,
would buy an interest in a strategic and Makov. Except for these three, the
42 April 2022 The Tax Adviser
