WILLIAM J. YUNG, MARTHA A. YUNG, AND THE 1994 WILLIAM J. YUNG FAMILY TRUST APPELLANTS/CROSS-APPELLEES
GRANT THORNTON, LLP APPELLEE/ CROSS-APPELLANT
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
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.
IN PART AND REVERSING IN PART
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 in
compensatory damages and $80 million in punitive damages.
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
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
FACTUAL AND PROCEDURAL BACKGROUND
PARTIES AND Lev301
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.
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.
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
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
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.
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. The Yungs maintained a very
conservative risk level as to income tax reporting.
TAX SHELTER SCRUTINY
The BOSS Notice
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. 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.
New Tax Shelter Disclosures
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 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
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.
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.
the Bossy product had the same essential characteristics as
The "More Likely Than Not" Tax Opinion
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
[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.
Lev301: GTS LEVERAGED DISTRIBUTION PRODUCT
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; 5) the economic substance
doctrine; 6) the sham transaction
doctrine; and 7) the potential retroactivity
of Congressional action., 
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,  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.
GT MARKETS, SELLS, AND MAINTAINS Lev301 AS A VIABLE TAX
SHELTER TO THE YUNGS AND OTHERS
2000, J. Michel and Dean Jorgensen met with Ted Mitchel
(T. Mitchel) 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
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.
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.
The "Worst Case Scenario" Representation
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,
 which its opinion was relying on.
The GE and P&G Representation
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 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.
GT's Internal Discussion and Halt of Lev301
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 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.
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.
The Final Engagement Letter
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.
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.
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
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. 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
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.
The "More Likely Than Not" Representation
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" 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.
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
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
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
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.
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.
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.
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
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
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
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.
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.
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.
The Sheppard Predictions Become Reality
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.
The "It's All Good" Representation
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."
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."
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
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.
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."
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.
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.
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."
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.
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.
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
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.
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.
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.
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
The I.R.S. Exam of GT and the Yungs' Audit
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.
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
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
The Yungs' Lawsuit Against GT
afterward, in August 2007, William J. Yung and Martha A.
Yung 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.
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,
 GT appealed the trial court's
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
LIABILITY AND ...