Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Yung v. Grant Thornton, LLP

Supreme Court of Kentucky

December 13, 2018

WILLIAM J. YUNG, MARTHA A. YUNG, AND THE 1994 WILLIAM J. YUNG FAMILY TRUST APPELLANTS/CROSS-APPELLEES
v.
GRANT THORNTON, LLP APPELLEE/ CROSS-APPELLANT

          ON REVIEW FROM COURT OF APPEALS CASE NO. 2014-CA-001957-MR KENTON CIRCUIT COURT NO. 07-CI-02647

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

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

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

          AMICUS CURIAE: KENTUCKY DEFENSE COUNSEL, INC.; KENTUCKY CHAMBER OF COMMERCE; AND KENTUCKY BANKERS ASSOCIATION: Aaron John Silletto Goldberg Simpson, LLC

          KENTUCKY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS: Mark Allen Loyd, Jr. Bailey Roese Bingham Greenebaum Doll, LLP Christopher R. Healy Kevin M. Dinan Patricia L. Maher Ashley C. Parrish King 85 Spalding, LLP

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

          OPINION

          HUGHES, JUSTICE.

         AFFIRMING IN PART AND REVERSING IN PART

         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 million[1] 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.

         RELEVANT FACTUAL[3] AND PROCEDURAL BACKGROUND

         I. THE PARTIES AND Lev301

         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.

         II. TAX SHELTER SCRUTINY

         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 shelters[7] 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 maturity.
3) After the distribution, but before the note matures, the corporation would pay off the debt.

         Obviously, the Bossy product had the same essential characteristics as Lev301.

         C. The "More Likely Than Not" Tax Opinion

         Customarily tax shelter participants obtain a "more likely than not" tax opinion to satisfy the standard set forth in the Internal Revenue Code to avoid penalties for a substantial understatement of income tax. The U.S. Court of Federal Claims, in Alpha I, L.P. v. United States, 93 Fed. CI. 280 (2010), effectively explains the role the tax opinion serves for tax shelter items.

If an item is determined to be a tax shelter item, it may nevertheless be eligible for a reduction [in the amount subject to the understatement penalty] if there is substantial authority for the tax treatment of that item and the taxpayer reasonably believed at the time the return was filed that the tax treatment of the item was more likely than not the proper treatment. [Treas. Reg.] § 1.6662-4(g)(1). A taxpayer is considered reasonably to believe that the tax treatment of an item is more likely than not the proper tax treatment if "[t]he taxpayer analyzes the pertinent facts . . . and in reliance upon that analysis, reasonably concludes in good faith that there is a greater than 50-percent likelihood that the tax treatment will be upheld if challenged by the Internal Revenue Service." Id. § 1.6662-4(g)(4)(i)(A).
[Alternatively, ] a taxpayer is considered reasonably to believe that the tax treatment of an item is more likely than not the proper tax treatment if . . . [t]he taxpayer reasonably relies in good faith on the opinion of a professional tax advisor, if the opinion is based on the tax advisor's analysis of pertinent facts and authorities . . . and unambiguously states that the tax advisor concludes that there is a greater than 50-percent likelihood that the tax treatment of the item will be upheld if challenged by the Internal Revenue Service.
Id. § 1.6662-4(g)(4)(i).

93 Fed. CI. at 304. As the Alpha I, L.P., court noted

[i]t is well established since [United States v. Boyle, 469 U.S. 241 (1985)] that reliance on the advice of a competent and independent professional adviser is a common means of demonstrating reasonable cause and good faith. Boyle, 469 U.S. at 251, 105 S.Ct. 687; see Treas. Reg. § 1.6664-4(b)(1); American Boat [Co., LLC v. United States, 583 F.3d 471, 481 (7th Cir. 2009)]; Stobie Creek [Investments, LLC v. United States, 82 Fed. CI. 636, 717-18 (2008), affd, 608 F.3d 1366 (Fed. Cir. 2010)].

Id. at 315.

         III. Lev301: GTS LEVERAGED DISTRIBUTION PRODUCT

         In the spring of 2000, GT began developing Lev301, which it introduced to local offices of the firm in June 2000. Structured to avoid tax liability on shareholder distributions, the steps of the Lev301 were substantively identical to those of the "Bossy" product described in the Sheppard article. GT's identified risks and exposures associated with the product included: 1) § 357(c) and legislative regulations thereunder; 2) I.R.S. Notice 99-59 (BOSS transaction); 3) corporate tax shelter regulations/I.R.S. Notice 2000-15; 4) the business purpose doctrine;[9] 5) the economic substance doctrine;[10] 6) the sham transaction doctrine;[11] and 7) the potential retroactivity of Congressional action.[12], [13]

         About six months before GT introduced the Lev301, Sara Williams, previously employed by GT, returned to GT after serving as the Yungs' tax director. During her tenure with the Yungs, Williams became aware of the Cayman corporations' cash and the Yungs' tax risk reasons for rejecting proposals (including a KPMG proposal) for transferring that cash to the U.S. Upon her return, she shared her knowledge with John Michel (J. Michel) of GT, a central figure in this litigation. J. Michel, [14] a tax partner in GT's Cincinnati office, began marketing Lev301 to his clients immediately upon its release. He communicated to others within GT that the product had a "short shelf life" and that all concerned had to react to opportunities quickly to ensure a successful sale.[15]

         IV. GT MARKETS, SELLS, AND MAINTAINS Lev301 AS A VIABLE TAX SHELTER TO THE YUNGS AND OTHERS

         In July 2000, J. Michel and Dean Jorgensen[16] met with Ted Mitchel (T. Mitchel)[17] at the Fort Mitchell CSC office and introduced the Lev301 product. They did not disclose that Lev301 was substantially similar to the BOSS; that the February 2000 tax shelter regulations imposed disclosure and listing requirements on corporate participants in such transactions; that the Treasury would likely retroactively make Arthur Andersen's equivalent "Bossy" product unlawful; or that GT believed that there was a 90% chance that the I.R.S. would disallow the Lev301 tax benefits on audit.

         Jorgensen led the presentation of the Lev301 to William J. Yung himself nineteen days later. During the interim, Lev301 's so-called "Think Tank" members, inclusive of Jorgensen, met. They anticipated that in two weeks an internal tax opinion letter would be written and reviewed and, additionally, that an outside law firm's review of the opinion would be obtained. At this point, J. Michel was sending emails to high level partners and others concerning Lev30 l's "short shelf life" and the need for its fast delivery for the client.

         Despite GT's internal deliberations and reservations, Lev301 was presented to the Yungs as a lawful tax strategy. While Jorgensen and J. Michel explained the need for a non-tax related "business purpose" to use Lev301, the Yungs were never told that the non-tax business purpose had to be the primary motivation.

         A. The "Worst Case Scenario" Representation

         Early on, Jorgensen and J. Michel represented to the Yungs and their advisors that with a Lev301 opinion letter from GT (which at this time had not been written), the "worst case scenario" was that if the I.R.S. audited them it could require the Cayman corporations' shareholders to pay taxes and interest on the Lev301 distributions - but the I.R.S. would not assess penalties. As the trial court later found, Jorgensen and J. Michel understood this advice would be relied upon not only by the Yungs on behalf of the Cayman corporations but also by the shareholders of the companies. Jorgensen and J. Michel further knew when they made the "worst case" representation that it was untrue, and that because of the BOSS Notice, there was a 90% likelihood that the I.R.S. would disallow the tax benefits and assess penalties regardless of whether the participant had an accounting firm's opinion letter. They also knew that federal authorities were likely to change the law retroactively so as to foreclose GT's interpretation of § 301's "subject to" language, [18] which its opinion was relying on.

         B. The GE and P&G Representation

         After being informed that GT had yet to complete a Lev301 transaction, Yung told Jorgensen and J. Michel that he did not want to be its "guinea pig." At some point afterward, without any factual basis, J. Michel told Joe Yung[19] that a local jet-engine manufacturer (which Joe Yung understood to be General Electric (GE)) and a local consumer products manufacturer (which Joe Yung understood to be Proctor 85 Gamble (P&G)) had successfully used the strategy to transfer funds to the U.S.

         C. GT's Internal Discussion and Halt of Lev301 Sales

         At the time a draft Engagement Letter with GT was being considered by the Yungs, the August 11, 2000 I.R.S. Son of Boss Notice and modifications to the February 28 regulations were issued. GT's "Think Tank" members exchanged emails expressing concern. Jorgensen tried to distinguish Lev301. He admitted Lev301 created an artificial high basis in the hands of the shareholders that did not reflect economic reality but relied on the application of an unambiguous statute with its loopholes and the doctrine of "judicial restraint" to support his thesis that Lev301 would work. Jorgensen's draft opinion letter was sent to Richard Voll[20] for review shortly thereafter. Within a matter of days, on August 21, 2000, the Wall Street Journal (WSJ) published an article about the BOSS transaction and Price Waterhouse Cooper's decision to stop selling it. GT removed the Lev301 from its "Client Matrix," which in effect stopped all sales of the Lev301.[21]

         In light of the Son of Boss Notice and the WSJ article, Jorgensen indicated a decision needed to be made if the Lev301 "is a go or not" and suggested an approach for increasing fees for the Lev301 opinions, which would now need to be updated, and alerting the taxpayer to "assume ideas such as ours to be on the I.R.S. radar screen." The record contains no evidence that such concerns were shared with the Yungs. Instead, when T. Mitchel of CSC, having read the WSJ article, contacted Jorgensen expressing concern about the legality of the Lev301, Jorgensen conveyed there was no cause for concern. Jorgensen likewise represented that the Son of Boss Notice caused no concern. He did not inform T. Mitchel that GT suspended Lev301 sales in response to the WSJ article.

         D. The Final Engagement Letter

         In September 2000, after this conversation, J. Michel sent a revised version of the draft Engagement Letter between GT and the Yungs to the Yungs, having discussed with them their concerns about risk sharing in the event the final outcome was not successful and also CSC's unwillingness to pay for something which they had not seen fully written up. Prior to sending the letter to the Yungs, Jorgensen emailed J. Michel that GT, because of the BOSS notices, could not back up its representation that its opinion letter would preclude the I.R.S. from assessing penalties. Jorgensen and J. Michel, however, knew that without this "no penalties" representation the Yungs would not go through with the Lev301 transaction. Jorgensen suggested alternatives to soften the removal of the guarantee language.[22]

          The Final Engagement Letter language was altered; it did not put T. Mitchel of CSC on notice that GT would not limit the downside risk to "taxes and interest" as previously represented. The Letter included the following new statement: "Our written tax opinion should preclude the successful imposition of penalties by the U.S. Internal Revenue Service against the shareholders or Companies." T. Mitchel understood the language to be a reaffirmation of the "worst case" representation and recommended the Yungs execute the Final Engagement Letter on September 15, 2000. GT's engagement fee for the Lev301 was $900, 000, with the bulk of the payment not due until after GT delivered its post-transaction opinion letters.

         The Final Engagement Letter also stated, "If, based on preliminary conclusions, the Firm cannot express an opinion on the federal income tax matters specifically identified in this engagement letter, the Firm reserves the right to withdraw from this engagement." This Final Engagement Letter obligated GT to determine prior to the Lev301 distributions that it could issue an opinion in support of the transaction. GT was also obligated to provide the Yungs with its "preliminary conclusions" regarding the tax matters before advising the Yungs to proceed with the distributions.

         After the Son of Boss Notice and the changes to the regulations, GT concluded that individual investors in the Lev301 would have to be included on GT's promoter list.[23] Although J. Michel was advised to disclose the list maintenance requirement to the Yungs, J. Michel decided not to because he knew that disclosure would kill his sale. While other GT personnel insisted on written notice of the list maintenance requirement so no one played "professional roulette," J. Michel argued that GT should make a business decision to not maintain a list so that they (as a Firm) would not need to disclose the requirement to potential Lev301 clients. The record contains no evidence that anyone at CSC had knowledge of, or had been informed of, a list maintenance requirement.

         The Final Engagement Letter did not include any disclosures regarding the risks stemming from the Lev301 's substantial similarity to BOSS or reflecting that the I.R.S. was likely to deem the Lev301 to be an abusive tax shelter.

         E. The "More Likely Than Not" Representation

         In September 2000, GT had outside legal counsel at the New York City office of Baker 85 McKenzie (B&M) review the first draft of the Lev301 opinion letter. Two B&M tax attorneys expressed serious concern about the Lev301 's ability to satisfy the "business purpose, economic substance and step transaction"[24] judicial doctrines and neither was willing to opine that GT had reached the targeted "more likely than not" confidence level for surviving an I.R.S. challenge. GT ignored the legal advice and continued its Lev301 sales course. The Yungs were not informed that the Lev301 was reviewed by outside counsel or that it received adverse feedback.

         Although GT had a November 30 delivery date for the opinion letter, delivery did not occur at that point. Discussions were ongoing among GT personnel about how a "more likely than not" opinion could be reached. For example, although questions remained as to whether the lien on the securities was a liability from the point of view of the shareholders and whether it could be said that the parties viewed the step of encumbering the securities as anything other than a transitory step, Voll maintained that I.R.C. § 301's unambiguous language was the strongest argument for the product.

         The trial court would later find that the discussions between Jorgensen and Voll, the primary opinion writers, reflected the use of different words to describe the borrowing instruments and, as a consequence, the nature and structure of the debt was not clarified. The requirement that the Lev301 must have a nonrecourse liability was never clearly defined or communicated within GT. The trial court found this failure to define "loan" versus "lien" versus "liability" led to "confusion in determining whether the distribution of the Treasury notes is 'subject to' the lien and/or 'assumed by' the shareholders." The trial court found this was "a fatal confusion for the determination of the taxation of the distribution and, thus, the viability of the Lev301 product."

         After receiving outside legal counsel's opinion (the B&M review), Jorgensen communicated that "creative hats" should be put on to further CSC's business purpose for the bank debt and more specifically the business purpose for distributing encumbered property. The trial court found GT's decision to get creative and strengthen the "business purpose" for CSC (which GT had acknowledged as a requirement at the July 5 meeting) reflected GT's concern that they did not have sufficient authority "to author a 'more likely than not' opinion and that they would have to fabricate a CSC 'business purpose' to try to accomplish that goal."

         In preparation for obtaining the bank loans for the Lev301 transaction, Jorgensen and J. Michel of GT and T. Mitchel of CSC met on October 3, 2000. "Business purpose" was discussed and T. Mitchel cited it as working capital for future actions, a purpose no more substantial than that discussed prior to B&M's review. Although GT's September communications confirmed that GT was aware that the Lev301 was a step transaction (like the BOSS transaction), GT did not discuss with T. Mitchel the multiple steps necessary to complete the transaction, the recourse/nonrecourse nature of the lien/loan/liability or the issues of list maintenance and the reporting requirement.

         The day after this meeting, Voll communicated within GT that he had yet to reach a "more likely than not" confidence level conclusion. Voll indicated that B&M counsel suggested using a lower standard and Voll thought that threshold could be reached using at least the statutory construction argument, the argument which Voll used to describe the "more likely than not" opinion as hovering around 50%. When others expressed surprise that the statutory construction argument did not provide a 60% or 70% probability of surviving an I.R.S. challenge and would prevent a court from moving through to attack the "business purpose" argument, Voll advanced another approach (60-70% probability combined with a 30-40% confidence interval) which would establish a percentage of over 50.1% to reach the level of "more likely than not." In November, Voll and others were still researching the statutory premise to achieve a "more likely than not" confidence level. As compared to the draft initially provided and reviewed by B&M in September, Voll sent a significantly revised opinion to Jorgensen on December 12.

         The morning before the December 29, 2000, Lev301 bank loan closing, GT promised to send the Yungs that afternoon its "model opinion" which would serve as GT's "preliminary conclusions" pursuant to the parties' Final Engagement Letter. On December 28 at 8:56 p.m., J. Michel was still communicating about an attachment which was the draft of the December 28, 2000 opinion letter; the letter contained "Background" and "Proposed Transaction" sections, but not an "Opinion" section. The "Opinion" section was not contained in prior drafts because of concerns about disseminating it electronically. The December 28 letter, or "short form opinion," was not delivered to the Yungs until the following morning. J. Michel signed the letter on behalf of GT.

         The December 28 letter represented that GT intended to issue its written tax opinion by January 15, 2001, and that the opinion would be in substantially the same form as the model opinion. GT represented in the "Opinion" section of the letter that the Firm was of the opinion that it was "more likely than not" that its conclusions would be upheld in litigation with the I.R.S. The letter did not contain any disclosures regarding, and the Yungs were not told before the loan closing about, the list maintenance requirement or the risks stemming from BOSS-like transactions. After the "more likely than not" statement, GT listed these seven opinions:

1) The Company will recognize taxable income as a result of the leveraged distribution only to the extent that the fair market value of the assets distributed exceeds the Company's tax basis in such assets. For this purpose, the fair market value of the distributed assets is deemed to be at least equal to the amount of liabilities to which the distributed assets are subject.
2) The Company will reduce its earnings and profits by the excess, if any, of the fair market value of the assets distributed over the amounts of the liabilities to which the distributed assets are subject ("an excess distribution").
3) A shareholder will recognize taxable income only to the extent of an excess distribution. Furthermore, a shareholder will reduce his or her tax basis of the stock held in the Company as a result of the leveraged distribution only to the extent of an excess distribution.
4) A shareholder will have a tax basis in the assets distributed equal to the fair market value of such assets at the date of the distribution. Such tax basis will not be reduced by any liabilities to which the distributed assets are subject.
5) A shareholder will not be in constructive receipt of a distribution, e.g., a dividend, upon any later payment by the Company of the liabilities to which the distributed assets are subject.
6) Judicial doctrines will not override opinions expressed on the aforementioned issues.
7) A shareholder or the Company will not be subject to any tax penalties in relying in good faith upon the opinions expressed on the aforementioned issues.

(Emphasis supplied).

         On December 29, 2000, the Yungs carried out the first two steps of the Lev301 strategy in reliance on GT's representations regarding the Lev301. They executed a $30 million loan from Firstar Bank and purchased $30 million in T-notes with the loan money. On the same day, the Cayman corporations held board meetings to declare a dividend of the encumbered securities, and the T-Notes were transferred from the Cayman corporations' bank accounts to the custodial accounts for the Yungs. (Later the same day, another Lev301 client also made a distribution to its shareholders using the Lev301 strategy pursuant to J. Michel's advice.) At the time GT made its December 28 representations, Voll had not yet concluded that a "more likely than not" confidence level was possible regarding favorable I.R.S. treatment of the transaction.

         At the same time the Lev301 distributions were being made, the Yungs were in the process of acquiring Lodgian, Inc., a publicly traded hospitality company. As the trial court later found, that acquisition was not the "business purpose" underlying the Lev301, and the Yungs would not otherwise have transferred the Cayman corporations' cash at that time.

         F. The Sheppard Predictions Become Reality

         Five days after the Cayman corporations' Lev301 distributions to their shareholders, the U.S. Treasury Department issued temporary and proposed regulations. The effect was to invalidate GT's argument that a shareholder who received a T-Note distribution "subject to" a liability that was recourse to the distributing corporation could reduce the value of the T-Notes by the amount of the liability. GT internal discussions lacked consensus, but several GT partners expressed the view that the regulations killed the Lev301. Jorgensen circulated a "301 regulation" memo; among other concerns, he stated that under the new regulations, the shareholders would probably be treated as receiving a "constructive dividend" when the corporation paid on the loan and consequently, this outcome would destroy the Lev301. J. Michel received this memo but continued to promote the Lev301 product. A few days later, GT again ended the sale of the Lev301 until further notice.

         G. The "It's All Good" Representation

         Days before GT's final opinion was due to the Yungs, and even though GT had not reached these conclusions, J. Michel nevertheless told the Yungs that GT was of the opinion that the January 4, 2001 regulations did not adversely affect the Cayman corporations' Lev301 distributions because the distributions were finalized prior to the effective date of the regulations. J. Michel also represented that GT believed that "such Regs may more favorably impact the favorable tax status for the 2000 year transaction." J. Michel did not disclose to the Yungs that GT was no longer selling the Lev301 in response to the January 4 regulations. J. Michel later admitted that he made the statement that the January 4 regulations did not impact the Lev301 transaction to "buy time with the client."

         Voll concluded on or about January 23, 2001, that the January 4 regulations were retroactive and applicable, i.e., the Lev301 was substantially similar to the BOSS. GT did not inform the Yungs or their advisors about this determination. Specifically, GT did not advise the Yungs to unwind the transaction at this time, even though that was a viable course of action. Three days after Voll's conclusion that the regulations were retroactive, the Yungs, however, emailed J. Michel asking him whether the Cayman corporations should pay off the bank loans since no opinion had been delivered yet and whether GT would pay the interest "if the deal never finalize[d] as planned."

         Voll then shared a draft of the opinion letter with J. Michel. Voll informed J. Michel not to share the draft opinion as he was still researching for ways to strengthen the Yungs' "business purpose." J. Michel pressed Voll not to over-emphasize "business purpose" in discussions with the Yungs as he was unsure if they would sign the representation they had already been given. The draft Opinion Letter did not have the December 28 letter's seventh tax opinion (quoted and emphasized above) regarding penalties, and it also did not disclaim the prior representation regarding penalties.

         On February 6, 2001, to prevent the Yungs from paying off the loan and terminating the Lev301 engagement, J. Michel sent the Yungs an incomplete draft of the Wytec Opinion Letter. This was the first full-length opinion provided to the Yungs. J. Michel explained missing verbiage would be incorporated related to the new regulations which would only serve to strengthen the opinion. T. Mitchel did not review the Wytec opinion to identify risks related to the transaction because he assumed that any material risks would have been disclosed to them by GT, their accounting firm and tax expert, before the Yungs authorized the Lev301 distribution.

         On February 19, GT's Jorgensen warned in internal emails that for completed Lev301 transactions GT should consider a "rescind and restore" strategy and that prospects should be told of the material and significant risk that the regulations would result in a constructive dividend to shareholders. He stated that in the Yungs' case, accelerating the bank debt retirement would assure completion of the Lev301 strategy before the issuance of the constructive dividend regulation, which would not have a retroactive effect. Voll responded that the clients were already told about potential changes to the law and regulations, so "That covers us. . . . We advise the client on regulatory activity. Beyond that - what we say about what could happen is conjecture."

         GT never told the Yungs that they might have to accelerate payment on the bank debt to save the transaction. On February 20, Voll agreed with Jorgensen to leave the Lev301 product out there. But while Jorgensen's position was to further inform clients of litigation risks, Voll's position was that in the unlikely event the I.R.S. caught the transaction, the GT opinion should stop a penalty, which is "what the client paid for." Emails among various GT personnel acknowledged that the viability of the Lev301 had not yet been determined because Jorgensen and Voll had not yet agreed on the constructive dividend issue and, further, that undoing a Lev301 transaction might not be simple.

         In mid-February, J. Michel informed others at GT that the Yungs' first payment to GT was soon due. He stated the remainder was due at the June bank debt retirement but it could be due sooner than planned in light of the threatened issuance of regulations.

          After having advised T. Mitchel in February how to prepare the tax return regarding the Lev301, in March, J. Michel monitored the Yungs' tax returns to assure they did not disclose income due to the Lev301 transaction. Discussions continued about the business purpose representations that the Yungs were to make for the Lev301 product. In April 2001, GT decided to start selling the Lev301 product again. Internally, GT's Voll expressed concern about strength of a "business purpose" in sales to assure the integrity of a "more likely than not" opinion and referenced the Yungs as having a weak business purpose which GT overcame by using other devices (meaning it was after December 31, 2000 and GT's further inquiry that other shareholder investments were used to develop the Yungs' business purpose). In early July, Voll informed J. Michel he was still working on the Yungs' opinions and still concerned about "business purpose."

         While these internal discussions continued, no one at GT ever expressed their concern about "business purpose" to the Yungs. More than five months after the Cayman corporations' transaction closed, internal GT discussions were ongoing about the list maintenance requirement. Nevertheless, GT did not inform the Yungs of the possibility/probability of that issue even though GT notified its field agents of the requirement to keep an internal list.

         Selling the Lev301 product again, GT continued to omit crucial details about the product's risks and the weaknesses of GT's legal arguments. J. Michel had sold three Lev301 engagements to his clients by this time; he continued to push back on Voll's "business purpose" concerns and stressed pushing "business purpose" to an extreme would result in making the product non-saleable. GT changed the product in the Spring of 2001 in response to adverse feedback from a prospective client who sent the Lev301 proposal to outside legal counsel for review. At that juncture, GT required that the loan between the bank and the distributing company in Lev301 transactions be nonrecourse to avoid application of the January 4 regulations, and required a representation to that effect from the client. Both Voll and J. Michel had reviewed the Yungs' loan documents and knew that GT was repudiating the version of the Lev301 it had advised the Yungs to execute in December 2000.

         On May 21, 2001 and June 19, 2001, the Yungs signed a "Representation Letter for the Opinion Letter of Grant Thornton LLF' as to Wytec and Casuarina, respectively. Although later required for Lev301 product purchasers, the representations did not include a representation that the note/loan/mortgage was "nonrecourse" or the term "bona fide business purpose." On July 11, 2001, besides the "business purpose," GT was also working on the "economic substance" portion of the Yungs' opinion and internal discussions continued about "constructive dividend" and the intricacies of state law defining the nature of the loan transaction and its relationship to the shareholders. On July 13, 2001, the Family Trust filed its 2000 U.S. Income Tax Return which GT reviewed.

         On August 8 and 13, 2001, GT delivered the Final Wytec and Casuarina Opinion Letters. Unlike the Draft Wytec Opinion Letter, the August Opinion Letters contain several attachments, including the bank loan documents. Those documents confirmed the recourse nature of the loans. The six opinions contained in the August Opinion Letters were substantively identical to those in the 2001 Draft Wytec Opinion Letter. T. Mitchel relied on GT as the tax expert and did not review the "Analysis" section or the two appendices of either opinion. To account for the January 4 regulations, Voll characterized the loan obligation as "nonrecourse" in both Opinion Letters, although that was a determination of Ohio law which GT as a public accounting firm was not qualified to make.

         GT's opinions were also premised on the existence of a motivating nontax corporate business purpose, although the Yungs had made no representation of such. Jorgensen, J. Michel and Voll were all aware that the Yungs' primary motivation for making the Lev301 distributions was the avoidance of U.S. federal income tax on the transfer of the Cayman corporations' cash. Although GT could not have reasonably believed this statement, GT's August Opinion Letters were based on the conclusion that the Lev301 would survive application of the step transaction judicial doctrine.

         On August 21, 2001, a WSJ article was published which again called BOSS strategies into question. GT stopped Lev301 sales again pending a full consideration of the article.

         On September 26, 2001, the Yungs paid off the loan which was the basis of the Lev301 transaction. On October 7, 2001, the Yungs' I.R.S. form 1040 was filed after review by GT. GT also prepared the Yungs' 2001 federal income tax returns in September 2002. The Yungs relied on the August Opinion Letters when deciding to not report the $30 million distribution on the 2000 tax return and to not report the repayment of the $30 million on the 2001 federal income tax return.

         H. The I.R.S. Exam of GT and the Yungs' Audit

         In early 2002 the I.R.S. initiated an exam of GT. The exam expressly targeted GT's promotion of potentially abusive tax shelters. GT partners were aware that the exam substantially increased the risk that the I.R.S. would obtain the names of its Lev301 clients and increased the clients' audit risk. Nevertheless, GT did not inform the Yungs of the exam until it became public in September 2003.

         In June 2002, additional tax shelter regulations were issued, and GT again took the Lev301 off the Client Matrix in July. Once again, the Yungs were not informed. Despite internal GT discussion of the regulations' application to the Cayman corporation transactions, no one told the Yungs of these concerns. In September 2002, GT again resumed sales of the Lev301. The product was not permanently removed from the Client Matrix until late November 2004. At the same time, GT stopped issuing opinions to clients for transactions that occurred prior to the removal. As before, the Yungs were not informed in 2004 that GT had stopped selling or defending the Lev301 transaction.

         The I.R.S. exam of GT led to GT identifying to the I.R.S. the Cayman corporations and the Yungs as participants in the Lev301. In Spring 2004, the I.R.S. audited the Yungs concerning the Lev301, and in Spring 2005, the I.R.S.assessed back taxes and penalties. GT continued to represent the Yungs. In February 2007, the Yungs and the I.R.S. reached a settlement.

         I. The Yungs' Lawsuit Against GT

         Shortly afterward, in August 2007, William J. Yung and Martha A. Yung[25] filed their complaint against GT in Kenton Circuit Court requesting a declaration that their September 2000 engagement contract did not limit recovery of damages from GT to the engagement fee or bar reimbursement of reasonable legal fees. Mr. and Mrs. Yung also alleged fraud, negligence and breach of contract. In the June 2008 amended complaint, Mr. and Mrs. Yung requested punitive or exemplary damages as appropriate.

         The bench trial in this action lasted 22 days and included over 40 witnesses and more than 600 documents. The trial court concluded the Final Engagement Letter did not protect GT from negligence, nor did it limit the Yungs' monetary damages, and that GT committed fraud and gross negligence in its scheme to sell and maintain the Lev301 product to the Yungs. The trial court awarded the Yungs the $900, 000 engagement fee paid to GT with prejudgment interest; approximately $19 million in taxes, interest, and penalties ($3, 782, 786 to William and Martha Yung and $14, 632, 441 to the Family Trust); and $80 million in punitive damages ($55, 000, 000 to William and Martha Yung and $25, 000, 000 to the Family Trust). Following the trial court's denial of GT's CR 52.02 motion for additional findings of fact and CR 59.05 motion to alter, amend, or vacate the judgment, [26] GT appealed the trial court's judgment.

         As noted, the Court of Appeals in a 2-1 decision reduced the punitive damage award to $20 million, but affirmed the trial court on the other issues raised by GT. On discretionary review, the Yungs assert that the $80 million punitive damage award does not violate due process. GT asserts that the Yungs cannot show that they justifiably relied on GT's advice; that the compensatory damage award is an improper windfall; and that even if GT is liable, the punitive damage award is improper. For the reasons stated below, we affirm the Court of Appeals' decision except for the reduction of the punitive damage award. Additional facts are presented below as necessary.

         ANALYSIS

         I. LIABILITY AND ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.