Bakare v. Commissioner

Amrit Bakare, Norman Katz (plaintiff), and others (investors) invested in a tax shelter that involved purported uranium-mining exploration and drilling. The Internal Revenue Service (IRS) issued deficiency notices against the investors after determining that the shelter lacked economic substance. Represented by attorney Gregory Altman, 34 investors filed separate petitions against the IRS commissioner (defendant) with the United States Tax Court challenging this determination. Altman and the commissioner designated nine petitions as test cases to be consolidated for trial. Altman signed a settlement stipulation in Katz’s case in which Katz agreed to be bound by the test-case results. After trial, the Tax Court concluded that the shelter’s transactions should be disregarded because they were shams and thus the taxpayer-investors were not entitled to mining-development or mining-exploration deductions. Specifically, the Tax Court found that (1) the drilling company that was supposed to work on the project received very little from the claimed shelter-investment funds and (2) the test-case investors were liable for additions to tax (i.e., penalties) for negligence because it was inconceivable that they reasonably believed the shelter would work as promised or that they believed in the shelter’s authenticity. The court of appeals affirmed. Katz moved the Tax Court to set aside his stipulation because Altman allegedly provided incompetent trial representation due to a health problem. Katz explained that if the court permitted him to go to trial, Katz would be the sole witness and would testify that his investment was motivated by the requisite genuine desire to earn a profit, that the investment was reasonably prudent, and that he relied on Altman’s representations that the shelter involved legitimate profit-seeking. Katz also contended that the Tax Court should trace the shelter’s expenditures, which would show that drilling commenced, establishing the shelter’s economic substance. However, Katz did not possess the relevant records and had made no effort to obtain them. Regarding Altman’s trial performance, Katz submitted a post-trial letter in which Altman stated that he was closing his law practice due to a life-threatening brain condition. Katz supplied no additional evidence regarding Altman’s health or claimed incompetence, except Katz’s averment that he personally observed disturbing signs concerning Altman’s trial performance.