The blogosphere – well, at least those of us who find tax entertaining – is alive with the news that the Tax Court cited to Monty Python in a recent decision. What everyone seems to have missed is the more entertaining cite, buried in a footnote: South Park’s Underpants Gnomes. Seriously.

The cites come in Shao v. Commissioner. Cecilia Shao was an employee of Veritas Software when she began receiving stock grants and options. Not being a financial whiz, she sought out the advice of Jovita Honor at Wade Financial. Jovita encouraged Ms. Shao to use margin loans – a very risky investment indeed, just ask the Duke Brothers – to hedge her options. All was well for a while, but when the ship started to sink, so to speak, Ms. Shao wanted protection. Enter Derivium, a company which gave 90% loans on the value of a stock. Little did Ms. Shao know that Derivium’s game was to take the stock, sell it, and use the proceeds to fund ‘dividends’ to those clients whose stock (the one they’d just sold) actually paid them, or some other purpose. According to the court,

Derivium’s asserted hedging activity apparently masked the fact that their long-term strategy, reminiscent of South Park’s Underpants Gnomes, relied on a business plan of “Step 1: Make 90% loans. Step 2: ? Step 3: Profit.”

Of course, the long and short of all this is that the IRS wanted Shao to be held responsible for accuracy-related penalties, as other taxpayers involved in Derivium-related transactions (most notablyCalloway v. Commissioner) have been. But the court refused to play along, and said Shao’s actions were consistent with that of someone who believed that the transaction was a loan, not a sale. And to reinforce the point, they cited to Monty Python:

In Shao’s case we don’t find the circumstances that led the Court to penalize Calloway–there is no evidence of a wink-wink-nudge-nudge-say-no-more arrangement with Derivium. See Monty Python’s Flying Circus: How To Recognise Different Types of Trees From Quite a Long Way Away (BBC1 television broadcast Oct. 19, 1969).

Although it is entertaining to see the Tax Court – which most people would consider to be dry and humorless – show that it is capable of a funny side, I’m waiting for the day when the Court cites to the Simpsons. I imagine there’s a wealth of material from which the court can draw (As in an entire episode, perhaps? “Mr. Simpson, this government computer can process over nine tax returns per day. Did you really think you could fool it?”).