                        T.C. Memo. 2009-175



                      UNITED STATES TAX COURT



CANTERBURY HOLDINGS, LLC, CHRISTOPHER B. AND SUSAN L. WOODWARD,
  PARTNERS OTHER THAN THE TAX MATTERS PARTNER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

 CANTERBURY HOLDINGS, LLC, CHRISTOPHER B. WOODWARD, TAX MATTERS
    PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE,
                           Respondent


     Docket Nos. 17064-04, 14580-06.    Filed July 27, 2009.


     Charles P. Rettig, Edward M. Robbins, Jr., and David Roth,

for petitioners.

     Margaret A. Martin, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HOLMES, Judge:   Christopher Woodward, David Teece, and

Kenneth Klopp were partners in Canterbury Holdings, LLC.
                                   2

Canterbury mounted a takeover of an old New Zealand clothing

company in 1999.     Its ride turned rough, and the shell company

that Canterbury was using had to pony up more money in 2000 and

2001 to make the deal go through.      That money actually came from

Canterbury itself, but Canterbury argues that these payments are

deductible nonetheless.     The Commissioner disagrees, and would

also saddle Canterbury’s partners with an accuracy-related

penalty.

                           FINDINGS OF FACT

        Woodward and his partners formed Canterbury in 1999 as a

limited liability company.1    Teece held by far the biggest share:

At the end of 2001, he owned 89 percent; and Woodward, Klopp,

Woodward’s Keogh plan,2 and a family trust owned the rest.3

    1
      Although the first domestic limited liability company (LLC)
was created in 1977 in Wyoming, the rise of the LLC as a
widespread tax-saving entity is relatively new. The LLC offers
the best of both worlds--the limited liability of a corporation
and the favorable tax treatment of a partnership. See Hamill,
“The Story of LLCs: Combining the Best Features of a Flawed
Business Tax Structure”, in Business Tax Stories: An In-Depth
Look At Ten Leading Developments In Corporate and Partnership
Taxation (Bank & Stark, eds., Foundation Press, 2005).
    2
      A Keogh plan is an income-tax-deferred qualified pension
plan for the self-employed or those who are owner-employees of
unincorporated businesses.
    3
      The initial percentages of ownership among the members was
slightly different, and by the end of 2001 the family trust no
longer had an interest. And although Canterbury is an LLC whose
owners are called “members” under state law, both parties agree
                                                   (continued...)
                                   3

Teece was a New Zealander with extensive business experience;

Woodward was an investment banker; and Klopp was the founder of

North Face, the successful sports-apparel company.     The partners

planned to buy undervalued companies in the sports-apparel

industry and work at restoring their profitability.

        Canterbury shared its name with a 104-year-old brand that

sponsored the world’s top rugby teams--including the famed New

Zealand national team, the All Blacks.     Woodward and his partners

thought they saw hidden value in the brand.     Its owner, LWR

Industries, Ltd., had higher costs than other apparel companies

because it continued to manufacture the goods it sold.     With

liberalized world-trade rules coming into effect, and


    3
     (...continued)
that Canterbury is a TEFRA partnership under the Code. (TEFRA is
the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L.
97-248, 96 Stat. 324, one part of which governs the tax treatment
and audit procedures for most partnerships. See TEFRA secs. 401-
406, 96 Stat. 648. TEFRA requires the uniform treatment of all
“partnership items”--a term defined by section 6231(a)(3) and
(4)--and its general goal is to treat all partners alike when the
IRS adjusts partnership items. Each TEFRA partnership is
supposed to designate one of its partners as TMP--tax matters
partner--to handle TEFRA issues and litigation for the
partnership. (Woodward is Canterbury’s TMP.)) Congress
frequently amends TEFRA, but all the section references in this
opinion are to the Internal Revenue Code and regulations as in
effect for years in issue. The one reference to a Rule is to the
Tax Court’s Rules of Practice and Procedure.
                                  4

globalization encouraging the migration of manufacturing, it

seemed to the partners that they could make the brand more

profitable by taking production offshore of New Zealand and

shifting LWR’s focus to marketing and sales.   But taking over LWR

meant aiming at two targets:    BIL (NZ Holdings), Ltd. and the New

Zealand public, because BIL owned about two-thirds of LWR’s stock

and the rest was held and publicly traded on New Zealand’s stock

exchange.

     The partners knew that BIL was interested in selling LWR--

BIL itself was an extremely large company by New Zealand

standards, and its management thought its own portfolio of

businesses featured many with stronger growth prospects than an

old clothing company could possibly provide.   BIL’s commanding

ownership also meant a hostile takeover was out of the question.

So the partners approached BIL for a friendly deal, and quickly

came to terms.   Canterbury would take two steps:   The first would

be a tender offer for the 34 percent of LWR’s shares held by the

New Zealand public.   And, if that worked, LWR would be delisted

and Canterbury would buy the remaining shares from BIL.

     Canterbury then formed a New Zealand corporation, dubbed

Canterbury Holdings, Ltd., New Zealand (Canterbury NZ), and made

it a wholly owned subsidiary.    Canterbury’s partners meant

Canterbury NZ to be a shell whose only purpose was to acquire and
                                   5

hold LWR stock.     Making their shell corporation a New Zealand

company was important to the deal--the partners feared a wholly

foreign deal would spur negative public reaction to the expected

sale of an iconic New Zealand brand.     The partners also thought

it would help the deal survive New Zealand’s own legal obstacles

to overseas investment in existing New Zealand businesses.

        The deal took off in late May 1999, when BIL granted

Canterbury NZ an option to buy BIL’s 66-percent stake in LWR.

That same day, BIL and Canterbury NZ also signed a Memorandum of

Understanding.     The Memorandum provided that Canterbury NZ would

be capitalized by its shareholders to NZ$ 10 million4 to buy the

publicly held shares of LWR.     If the tender offer were to exceed

NZ$ 10 million, BIL promised to lend the necessary funds to

Canterbury NZ for one year.     Canterbury NZ’s LWR stock would

secure the loan.

        With financing in hand, Canterbury NZ announced its offer

and by October 1999 almost all the publicly held stock had been

tendered.     Canterbury capitalized Canterbury NZ by wiring NZ$ 10


    4
      Throughout this opinion we specifically identify amounts
stated in New Zealand dollars (NZ$). All our other mentions of
amounts are in U.S. dollars. During 1999, the New Zealand dollar
traded at an average of 0.5294 per U.S. dollar. It weakened to
an average of 0.4568 the next year. See Federal Foreign Reserve
Statistical Release, Foreign Exchange Rates (Annual) (Jan. 8,
2001) available at:
http://www.federalreserve.gov/releases/g5a/20010109/.
                                   6

million to it in exchange for 10 million Canterbury NZ shares.

At the time, these Canterbury NZ shares were Canterbury’s only

significant asset.

        Owning one-third of LWR’s shares and holding an option for

the rest, Canterbury NZ effectively controlled LWR.      But the

partners knew that they could not take over LWR’s management all

at once.     To ensure a smooth transition, Canterbury NZ signed a

Joint Interest Agreement with BIL.     Under its terms, Canterbury

NZ would share management of LWR with BIL until it exercised the

option.     But BIL was not volunteering its time.   The Joint

Interest Agreement provided that LWR would pay for BIL’s

services, and the amount LWR would pay was set--somewhat

curiously--as a percentage of the price Canterbury NZ had agreed

to pay for BIL’s LWR stock: 5 percent (plus GST) for the first

year and 17.5 percent plus GST for a second year.5     This worked

out (in U.S. currency) to $500,000 the first year and $1,750,000

for the second.     Canterbury NZ guaranteed LWR’s obligation to

BIL; but with its capital all spent on acquiring LWR stock

through the public tender offer, could not possibly back that

guaranty if LWR faltered.     Everyone involved understood (and we

so find) that it was Canterbury’s partners who were actually

    5
      GST is the goods and services tax, New Zealand’s value-
added tax.
                                 7

guaranteeing LWR’s obligation to pay the fees to BIL by promising

to inject capital into Canterbury NZ if necessary to complete the

transaction.

     BIL was not alone in charging LWR during this transition

period.   The Agreement also let Canterbury NZ charge LWR for its

services.   If the transition ran into a second year, LWR would

pay Canterbury NZ 7.5 percent of the call price plus GST–-about

$750,000.   Canterbury NZ had a strong incentive to exercise the

option quickly, because the Agreement allowed these management

fees to be reduced ratably if Canterbury NZ exercised the option

sooner than the end of the two-year transition.

     After signing the Joint Agreement, Canterbury’s partners

took up positions in Canterbury NZ, and Canterbury NZ also paid

Canterbury for their services.   Canterbury in turn distributed

the money to the partners as wages.   LWR also paid Canterbury’s

partners directly as contractors.

     So the cash was flowing reasonably well, both directly and

indirectly, from LWR to the partners.   But the cashflow to BIL

dried up.   Despite the express terms of the Joint Agreement, BIL

was not getting paid for its management services to LWR.   BIL

noticed and sent a letter to LWR in October 2000 reminding it

that management fees were due November 8, 2000.   Teece responded

on behalf of Canterbury with a complaint that BIL had
                                  8

misrepresented LWR’s financial situation before signing the Joint

Agreement, making LWR unable to fund the payments.     The same

letter was sent to BIL from Canterbury NZ.

     BIL, though, was eager to unhitch itself from LWR, and

proved willing to renegotiate both the Joint Agreement and the

call option.   The changes were very much to Canterbury’s

advantage--the option price was marked down from NZ$ 22.7 million

to only NZ$ 6.25 million.    And to settle the dispute over

management fees, BIL agreed to accept NZ$ 4,010,000 as payment in

full.   And here we come to the first expense whose deductibility

we must analyze:   Canterbury NZ, though it was the entity that

owed BIL the management fees, wasn’t the entity that paid it.

Instead, Canterbury itself paid BIL directly.     Canterbury

converted these payments to U.S. currency and deducted them on

its 2000 and 2001 returns.

     With these new arrangements in place, Canterbury NZ

exercised its option and paid BIL NZ$ 6,250,000 for its LWR

shares on May 10, 2001.   Of this sum, NZ$ 1,250,000 was paid to

BIL at closing, leaving a balance of NZ$ 5 million subject to a

mortgage of securities.   The interest on this remaining NZ$ 5

million debt was unusual as well.     The NZ$ 5 million principal

was not owed until late 2004, with no further interest owed

unless Canterbury NZ failed to pay.     And Canterbury NZ allegedly
                                   9

assigned this debt to Canterbury itself, though the assignment

wasn’t reflected on the books of either firm until 2003.       But

whatever was paid and owed, and by whom, the compromise worked:

BIL withdrew its managers and LWR hired others to replace them.

        The Commissioner audited Canterbury’s returns and issued

notices of final partnership administrative adjustment for 2000

and 2001 denying Canterbury’s deductions for management fees and

interest.6    He also asserted penalties under section 6662.    We

tried the case in San Francisco--Canterbury had its principal

place of business in California when it filed its petition.

                                OPINION

I. Deductibility of Expenses Paid

        As a general rule, shareholders who pay their corporation’s

expenses don’t get a deduction--the Code treats them as

investors, not as engaged in their corporation’s trade or

business themselves.     Betson v. Commissioner, 802 F.2d 365, 368

(9th Cir. 1986), affg. in part and revg. in part T.C. Memo. 1984-

264; Grauman v. Commissioner, 357 F.2d 504, 505-06 (9th Cir.

1966), affg. T.C. Memo. 1964-226; Madden v. Commissioner, T.C.

Memo. 1980-350.     The Code and regulations usually treat such

expenditures as loans or capital contributions.     Sec. 263;
    6
      An FPAA, as a notice of final partnership administrative
adjustments is abbreviated, is the TEFRA equivalent of a notice
of deficiency, in that it triggers the start of the time for
filing a case in Tax Court.
                                 10

sec. 1.263(a)-2(f), Income Tax Regs. (voluntary contributions by

shareholder for any corporate purpose are nondeductible capital

expenditure); see also Betson, 802 F.2d at 368.    Canterbury’s

payments on behalf of Canterbury NZ, therefore, look like they

would fall within this general rule and be considered

nondeductible loans or capital contributions.

     Canterbury understands this, but invokes an exception.

Section 162 permits deductibility of “ordinary and necessary

expenses paid or incurred during the taxable year in carrying on

any trade or business.”     And there’s nothing in the Code that

bars a shareholder from deducting payments of his corporation’s

expenses, if those expenses are also ordinary and necessary to

his own trade or business.    Lohrke v. Commissioner, 48 T.C. 679,

688-89 (1967).

     The main question thus amounts to which of two groups of

cases is a better fit for the facts before us.    The rules are a

little bit different for the management fees and the interest

deductions, and we examine them separately.   But there are a

great number of cases in this area, and very little custom

tailoring is needed.

     A.   Management Fees

     Lohrke is the key case in the field, summarizing the

exception to the general rule of nondeductibility to require that
                                 11

a shareholder who wants a deduction for paying his corporation’s

expenses must show two things:   (1) that his purpose was to

protect or promote his own business, and (2) that the expenses

paid were ordinary and necessary to that business.      Id. at 688.

      The problem is that Canterbury itself didn’t benefit

directly from BIL’s management of LWR.     LWR received the

services, but Canterbury itself looks like it benefited only

indirectly--the services presumably improved LWR’s value, which

presumably increased the value of Canterbury NZ’s LWR stock and

option to buy more, which presumably increased the value of

Canterbury’s Canterbury NZ stock.     Recognizing that this would

make payment of the fees look more like a capital transaction,

Canterbury argues instead that the fees were also “ordinary and

necessary” to its own business because their payment protected

its own reputation and credit, and thus promoted its own

business.   This argument has persuaded us in the past--Canterbury

cites Coulter Elecs., Inc. v. Commissioner, T.C. Memo. 1990-186,

affd. without published opinion 943 F.2d 1318 (11th Cir. 1991),

where we allowed a parent company to deduct reimbursements made

to a wholly owned Canadian subsidiary for the cost of warranty

services because those services would affect the parent’s sales

and its own business reputation.      See also Lutz v. Commissioner,

282 F.2d 614 (5th Cir. 1960), revg. T.C. Memo. 1959-32; Dinardo
                                12

v. Commissioner, 22 T.C. 430 (1954); Scruggs-

Vandervoort-Barney, Inc. v. Commissioner, 7 T.C. 779 (1946).

And, of course, there is the landmark case of Jenkins v.

Commissioner, T.C. Memo. 1983-667, where we waxed lyrical on (and

found deductible) Conway Twitty’s payments of corporate debt to

protect his own reputation.

     But we have to agree with the Commissioner that Canterbury

runs into a snag in trying to fit itself into this line of cases.

In cases where we’ve allowed a deduction to an owner who has paid

his company’s expenses, the owner himself had an independent

operating business or, in the case of Conway Twitty, a high-

profile reputation requiring the good will of the public to

sustain sales.   Such payors have a longstanding reputation

separate from that of their subsidiary.   See Dinardo, 22 T.C. at

431-32 (20 years of practicing medicine); Scruggs-Vandervoort-

Barney, 7 T.C. at 780-81 (35 years of running a department

store); Coulter Electronics, T.C. Memo. 1990-186 (two decades of

manufacturing advanced medical equipment).

     What we look for here is therefore Canterbury’s ability to

otherwise promote its own business wholly apart from that of its

subsidiary.   The Commissioner stipulated that Canterbury’s

general business was to acquire, manage, and turn around

distressed companies, but the parties also stipulated into
                                13

evidence the Operating Agreement of Canterbury’s partners.    Its

specific terms restricted Canterbury’s business activity to the

investment in LWR.   Article 2.7 of the partners’ Operating

Agreement is seamless evidence of this:

     Without the unanimous consent of the Voting Members
     [i.e., the three partners], the Company may not engage
     in any business other than the following:

               A. directly or indirectly
          managing and disposing of LWR and the assets
          thereof;

               B. purchasing real or personal
          property, making investments, and * * *
          other business activities proposed by the
          Board of Managers in connection with enhancing
          the value of LWR and not prohibited by law
          or this Agreement;

               C. engaging in any other
          activities directly related to LWR * * *
          to further the foregoing business; and

               D. ultimately realizing the value
          and distributing the proceeds from the foregoing.

The Operating Agreement also defined certain events, including a

partner’s termination of employment at LWR, as a termination of

his voting membership in Canterbury.

     Woodward credibly testified that, even as the problems at

LWR took ever larger amounts of the partners’ time, Canterbury at

least nosed around the possibility of doing other deals.   But we

specifically find that, during the years at issue here,

Canterbury itself had no actual business apart from stitching
                                14

together a deal for, and then managing, LWR.   Although Canterbury

indicates that by working with BIL, it hoped to get a “foot in

the door” promoting its consulting business in New Zealand, and

while it describes dire consequences to its reputation had it not

paid the fees to BIL, Canterbury did not have already operating

business, credit standing, or a preexisting reputation to

maintain.   Its desire to build a future reputation is simply not

enough for us to grant its current deductions as “protecting and

promoting its trade or business.”

     The Ninth Circuit has also long recognized that a more

direct connection with an existing business is needed to sustain

a deduction in this area.   When a doctor tried to deduct his

payments to the family pet store’s creditors as a business

expense of his medical practice, our denial of the deduction was

affirmed:

     While community disapproval might well be expected to
     follow from one’s failure to recognize moral
     responsibility for a debt owing to an impoverished
     widow, it would not, in our judgment, necessarily
     result from failure to assume responsibility for such
     impersonal matters as taxes, utility charges or debts
     to distant creditors. * * *

Grauman v. Commissioner, 357 F.2d at 505-06.

     We therefore find that the management fees were capital

investments and not deductible expenses.   Those payments by

Canterbury were not ordinary and necessary expenses of its own
                                15

business, but aimed only at protecting the value of the LWR stock

that Canterbury NZ already owned, as well as its ability to buy

the rest from BIL.

     Canterbury thus fails the first part of the Lohrke test.       If

that were all, we’d have no problem denying the deduction of the

management fees.   But perhaps recognizing the poor fit of this

first argument, Canterbury dons a second--that Canterbury NZ was

a nominee whose separate existence we should ignore.     Canterbury

NZ was certainly not an independent subsidiary with a business of

its own.   It had no assets, no employees, and all of the business

was that of Canterbury.   Its funds were all provided by

Canterbury, and all its management decisions and services were

Canterbury’s alone.   It was Canterbury’s partners who performed

management services for LWR on behalf of Canterbury NZ, and it

was they who were paid for them.     Canterbury orally guaranteed

Canterbury NZ’s obligations to BIL.     Despite the names on the

documents, BIL always looked to Canterbury for payment, because

BIL was aware that Canterbury NZ had no independent means of

payment and was just an acquisition vehicle.

     There is some force, then, in Canterbury’s assertion that

Canterbury NZ was no more than a disregarded or deemed nominee of

Canterbury holding passive title to LWR shares, or maybe an agent

for Canterbury’s business purpose.     But being a shell corporation
                                    16

is not synonymous with being a nominee or an agent.      Unlike the

nominee corporation analyzed in Paymer v. Commissioner, 150 F.2d

334, 337 (2d Cir. 1945), Canterbury NZ was not a mere “passive

dummy.”   We cannot say that it “served no business purpose . . .

and was intended to serve only as a blind to deter the creditors

of one of the partners.”     Id.

     We likewise find no merit in Canterbury’s argument that

Canterbury NZ was its agent.       A corporation can, of course, be an

agent--no one would say that a customer of Western Union is

making a capital contribution when he gives it money to wire

abroad.     But “if the corporation is a true agent, its relations

with its principal must not be dependent upon the fact that it is

owned by the principal.”     Natl. Carbide Corp. v. Commissioner,

336 U.S. 422, 437 (1949).    Canterbury NZ’s relations with

Canterbury, in obvious contrast, were wholly dependent on its

ownership by Canterbury--it was useful simply by being a New

Zealand presence for the deal to take over LWR, and conducted

business in its own name as a coowner of LWR throughout the years

in issue.    There was no agency agreement between Canterbury and

Canterbury NZ, and Canterbury at no time identified Canterbury NZ

to BIL as anything other than its subsidiary.      Cf. Commissioner

v. Bollinger, 485 U.S. 340, 349-50 (1988).
                                  17

     The Code and caselaw simply do not allow Canterbury to

ignore its organizational choices when convenient for tax

purposes.   Higgins v. Smith, 308 U.S. 473, 477 (1940); Grothues

v. Commissioner, T.C. Memo. 2002-287.       It was Canterbury NZ that

made the tender offer to the New Zealand public, and it was

Canterbury NZ that appeared on all letterheads and correspondence

and agreements with BIL.   Canterbury’s change of heart in

treating its subsidiary as merely its agent or nominee is also

contrary to the position it took in its 1999 tax return, where

Canterbury listed the capital contributions made to Canterbury NZ

as a capital asset and Canterbury NZ itself as an investment.       It

then reported the payments received from Canterbury NZ for the

partners’ services as income and deducted amounts paid to the

partners as wages and salaries.

     It is something of a puzzle why Canterbury capitalized

Canterbury NZ for the first stage of the takeover plan but then

didn’t do so again when Canterbury NZ needed more money to pay

its obligations to BIL.    The only solution the record supports is

that by that time Canterbury (or more precisely its partners) had

more use for the deductions than did Canterbury NZ.      But even if

we’re wrong about that, another one of the old general principles

of corporate tax law still fits:       “[W]hile a taxpayer is free to

organize his affairs as he chooses, nevertheless, once having
                                18

done so, he must accept the tax consequences of his choice.”

Commissioner v. Natl. Alfalfa Dehydrating & Milling Co., 417 U.S.

134, 149 (1974).

     The expense of acquiring a capital asset generally is not

currently deductible.   By its own admission, Canterbury claims

that it paid the management fees to salvage and preserve a

potentially deteriorating relationship with BIL.   Canterbury’s

payment to BIL should therefore not be viewed in isolation.    When

Canterbury made the payment on December 12, 2000, Canterbury NZ

already had a 34-percent interest in LWR from the successful

tender offer and it wanted the rest.   So we find that

Canterbury’s payment of management fees primarily enhanced the

value of its indirect investment in LWR.    We therefore agree with

Commissioner and find that the payments made by Canterbury to BIL

were directly tied to the purchase of the LWR shares, a separate

and distinct asset, and therefore a capital expenditure.   They

were not an ordinary and necessary expense of Canterbury’s own

trade or business.

     Our finding on this point is also supported by some evidence

that Canterbury and Canterbury NZ themselves described these

“management fees” as repayment of a loan.   When Teece responded

to BIL’s demand letter for management fees, he described them as

“requesting the loan” and noted that “it was always contemplated
                                 19

that the source of the funds for repayments of any advances made

by BIL to [Canterbury NZ] was to be from funds made available

from LWR.”    Teece continued that since LWR’s financial affairs

were worse than presented to them, “LWR is unable to fund the

payments under the loan due on 8 November.”    He went on in his

letter to request an extension of the repayment date and promised

to repay the outstanding balance of about NZ$ 2.8 million by May

8, 2001, reminding BIL it held a mortgage of LWR shares secured

for this repayment of loan.

     Similarly, when Canterbury NZ repeated its allegations that

BIL had lied about LWR’s financial condition, it said that LWR

was unable to fund the repayment of the loans due on November 8,

2001, citing section 5.1 of an October 1999 Memorandum of

Understanding.    Neither party offered that memorandum into

evidence, but we do have an earlier version from May 29, 1999.

This version of the Memorandum Agreement mentions a loan BIL

would advance to Canterbury NZ if the tender offer required more

than NZ$ 10 million to close.    The loan would bear 7.2 percent

interest.    We don’t have to decide from this sketchy evidence

whether the management fees are not deductible because they are

in fact a repayment of loan principal, but we do think it saps
                                20

strength from Canterbury’s argument that what it paid to BIL was

an ordinary and necessary expense of its own business rather than

part of acquiring a capital asset.

     The management fees at issue here are best seen as part of

the whole transaction of the purchase of LWR by Canterbury NZ,

and we therefore find that they should be treated as capital

contributions.

     B.   Interest Expenses

     Section 163 allows a deduction for interest on indebtedness

paid or accrued within the taxable year.   Canterbury claimed a

deduction for interest paid in 2001 according to the Agreement

for Sale and Purchase of Shares that closed on May 10, 2001.   But

this Agreement required Canterbury NZ, not its American parent,

to pay BIL for its LWR stock.   The loan also had curious terms--

BIL agreed to lend NZ$ 5 million to Canterbury NZ, subject to the

terms of another agreement, which the parties called the Facility

Agreement.   The Facility Agreement did not provide for any

interest to be due unless repayment of the NZ$ 5 million was not

made by June 30, 2004.   Although the NZ$ 5 million was paid in

2003 before the loan’s due date, Canterbury presented at trial an

assignment-of-interest agreement between BIL and Canterbury

stating that Canterbury would assume Canterbury NZ’s obligation
                                   21

to pay BIL interest of NZ$ 2,250,000 for the period of May 10,

2001 through June 30, 2004.

        According to credible testimony, this money wasn’t actually

paid and was perhaps deducted from the principal that was repaid

later on--though even this is unclear.       Canterbury nevertheless

reported this amount as its own interest expense on its tax

return.      The Commissioner denied the deduction because he

concluded the indebtedness was not Canterbury’s but Canterbury

NZ’s.     We agree.

        As with the management fees, Canterbury argues once again

that the interest payments were essential to promoting and

protecting its trade or business.       We reject this argument for

the same reasons we rejected it already with regard to the

management fees.      Furthermore, we find that it was part of the

deal that enabled Canterbury NZ to acquire all of LWR’s shares.7

Although Canterbury claims the loan was assigned to it by

Canterbury NZ, there was no such document between Canterbury and

Canterbury NZ admitted into evidence.       The record does include

an Agreement between BIL and Canterbury for Canterbury to pay BIL
    7
      We also note interest incurred on property held for
investment is “investment interest”. Sec. 163(d)(3)(A). Section
163(d)(1) limits the deductibility of investment income of a
noncorporate taxpayer to the amount of net investment income
(excess of investment income over investment expenses.) Sec.
163(d)(2). Canterbury reported only trivial investment income on
its 2000-01 returns, and it could not claim investment-interest
deductions above those amounts.
                                 22

NZ$ 2,250,000 in interest.   But only Canterbury signed it, and

some important blank spaces in the Agreement--especially the one

to record the date of the assignment to Canterbury of the loan

between Canterbury NZ and BIL--remain unfilled.

      We therefore agree with the Commissioner that there was no

reason for Canterbury, as part of its own trade or business, to

assume Canterbury NZ’s obligation.    This isn’t to say that

Canterbury lacked any reason to pay this debt.    We recognized

in a similar case that

      a successful operation of the foreign subsidiary * * * would
      obviously inure to the benefit of the petitioner as parent
      corporation. Petitioner’s willingness to undertake this
      obligation is understandable. But we do not believe that
      these dollar payments of salaries and related payments can
      be construed as petitioner’s own business expense as a part
      of its cost of goods sold.

Columbian Rope Co. v. Commissioner, 42 T.C. 800, 815-16 (1964).

We have no reason to decide this case differently.    A corporation

generally is a separate taxable entity even if it has only one

shareholder who exercises total control over its affairs.      Moline

Props., Inc. v. Commissioner, 319 U.S. 436, 439 (1943).

II.   Accuracy-Related Penalty

      Section 6662 imposes a penalty on underpayments attributable

to gross valuation misstatements, negligence, or a substantial

understatement of income tax.    In this case, the Commissioner

asserted the penalty on two grounds: negligence for the deduction
                                23
of interest, and substantial understatement of income tax for the

deduction of the management fees.8    Both of these grounds for

imposing the penalty are subject to the defense of reasonable

good-faith reliance on professional advice.     Sec. 6664(c)(1); see

also sec. 1.6664-4(a), Income Tax Regs.; Higbee v. Commissioner,

116 T.C. 438, 448 (2001).

        Canterbury argues that it relied on the professional advice

of one Max Gray.     Gray is a CPA and attorney with more than 40

years of experience as a tax consultant.     He was also a KPMG

partner.     We have no doubt that he is a competent professional in

his field--in addition to his experience, his education was also

top-of-the-line.     He has a B.S. in accounting and finance, an

M.A. from Berkeley, and a J.D. from the University of San

Francisco.     While in law school, Gray began to work on the audit

staff of KPMG, and climbed his way up to be a member of the tax

department, until he made partner in 1973.     While working for

KPMG, he even taught tax courses at California State University,

Hayward (now called California State University, East Bay).       And

though he had already retired from KPMG when he was advising

Canterbury, he still had a private practice.

    8
      TEFRA tells us that we should usually examine any
accuracy-related penalties or additions to tax related to
adjustments to partnership items at the partnership level. New
Millennium Trading, LLC v. Commissioner, 131 T.C. ___, ___ (2008)
(slip op. at 8-10); Tigers Eye Trading, LLC v. Commissioner, T.C.
Memo. 2009-121.
                                   24
        Woodward and Teece called Gray in 2000 and asked for his

advice on the U.S. tax consequences of their New Zealand

acquisition.     Canterbury supplied Gray with all the relevant

documentation including its draft tax returns for the 2000 and

2001 tax years and consulted with him on the proper character and

reporting of the management fees and interest expenses paid by

Canterbury to BIL.     Canterbury thereafter followed Gray’s advice.

        Though we disagree with Gray on the merits of this case, we

find that Canterbury reasonably relied in good faith on his

advice.     That is enough to free Canterbury of liability for the

penalties.9    When an accountant or attorney advises a taxpayer on

a matter of tax law, it is reasonable for the taxpayer to rely on

that advice.     United States v. Boyle, 469 U.S. 241, 251 (1985).



                                           Decisions will be entered

                                      under Rule 155.




    9
      The partners’ reasonable reliance on Gray’s advice is also
enough to refute the Commissioner’s new theory that Canterbury
was a tax shelter under section 6662(d)(2)(C) that disguised the
real relationship of the deductions to the partners. This rather
startling argument would require us to find that the purpose the
partners had in forming the LLC was to enable themselves to
deduct the management fees and interest expenses. This is too
much--everything in the record supports Canterbury’s position
that its partners formed the LLC and created Canterbury NZ for
the perfectly understandable and profit-motivated purpose of
acquiring and rehabilitating the Canterbury brand, not evasion or
avoidance of federal income tax.
