                                              106 LTD., DAVID PALMLUND, TAX MATTERS PARTNER,
                                                  PETITIONER v. COMMISSIONER OF INTERNAL
                                                            REVENUE, RESPONDENT
                                                        Docket No. 14586–05.                  Filed January 10, 2011.

                                                 Partnership P entered into a Son-of-BOSS transaction. This
                                               generated more than $1 million in artificial losses which P’s
                                               partners claimed on their 2001 returns. R adjusted various
                                               partnership items and determined a penalty under sec.
                                               6662(h), I.R.C., for a gross-valuation misstatement of P’s
                                               inside basis in an asset distributed by P. P now contests only
                                               that penalty, alleging it has a reasonable-cause-and-good-faith
                                               defense. Held: The Court has jurisdiction over the penalty in
                                               this partnership-level proceeding after Petaluma FX Partners
                                               v. Commissioner, 135 T.C. 581 (2010), because the penalty
                                               relates to an adjustment to inside basis, a partnership item,
                                               that results in a computational adjustment to the partner’s
                                               tax return that can be assessed without a partner-level
                                               affected items proceeding. Held, further, we agree with the
                                               Court of Appeals for the Seventh Circuit in American Boat Co.
                                               LLC v. United States, 583 F.3d 471 (7th Cir. 2009), that a
                                               partnership can assert its own reasonable-cause-and-good-
                                               faith defense in a partnership-level proceeding. Held, further,
                                               P cannot reasonably rely in good faith on the tax advice given
                                               by a ‘‘promoter’’, defined as an adviser who participates in
                                               structuring the transaction or who is otherwise related to, has
                                               an interest in, or profits from the transaction.

                                       William A. Roberts and Kyle R. Coleman, for petitioner.
                                       Nancy B. Herbert, Richard Hassebrock, and Jadie T.
                                      Woods, for respondent.
                                        HOLMES, Judge: David Palmlund bought into a bad deal to
                                      lose money but save on taxes. He has since filed an amended
                                      return and paid the tax he was trying to avoid. But he con-
                                      tests the penalty that the Commissioner asserts against him;
                                      he argues that he relied in good faith on professional
                                      advisers.
                                                                                                                                      67




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                                      68                 136 UNITED STATES TAX COURT REPORTS                                         (67)


                                                                          FINDINGS OF FACT

                                      I. Palmlund
                                         David Palmlund started his professional life in upstate
                                      New York. In 1964 he graduated with a dual degree in
                                      industrial engineering and management accounting from
                                      Syracuse University, then took a job in Rochester with East-
                                      man Kodak as a cost engineer. After a year in the corporate
                                      world, duty called; he served in the Army as an ordnance
                                      officer stationed at the Aberdeen Proving Grounds, but also
                                      spent time in Vietnam with the State Department on mat-
                                      ters he ‘‘can’t talk about in Asia.’’ Then he returned to Syra-
                                      cuse, completed his M.B.A. in 1968, and went back to East-
                                      man Kodak.
                                         But the draw of a larger city proved irresistible. Palmlund
                                      moved to New York to work for American Cyanamid Chem-
                                      ical Company from 1968 to 1972. He started out as an oper-
                                      ations analyst—finding ways to improve the operations of
                                      subsidiaries—and moved up to become a budget analyst
                                      involved in major acquisitions. His entrepreneurial spirit
                                      caught the attention of like-minded young men, and together
                                      they formed a home-warranty company, American Home
                                      Shield, in 1972. As chief administrative officer, Palmlund set
                                      up American Home Shield’s operations, developed the com-
                                      pany’s pricing model, and hired the contractors who would
                                      perform the covered home repairs. American Home Shield
                                      grew to be a successful, $800 million-a-year company.
                                         Palmlund then moved to Merrill Lynch in 1975. He eventu-
                                      ally became vice president and controller, as well as CEO of
                                      several Merrill subsidiaries. At one of these, Merrill Lynch
                                      Realty, Palmlund had 10,000 employees under his direction
                                      working in New York and London. He then returned to
                                      American Home Shield as chief operating officer. In 1980 he
                                      took four months off to care for his wife and moved to Dallas
                                      to be closer to her family.
                                         Palmlund contacted some of the executive recruiters he
                                      met while working for Merrill—he got to know them well
                                      during the time he hired about one manager a week—to see
                                      what jobs there might be for him in Dallas. Instead, the
                                      recruiters recruited him to join their company. Palmlund
                                      wasn’t interested at first because he didn’t like the way
                                      recruiters operated, but the recruiters replied: ‘‘Fine, come in




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                                      and change it.’’ He agreed to give it a try, with the under-
                                      standing that he could do things his way for a while; if it
                                      didn’t work out, he would leave.
                                         His way was based on personal contact. He would meet
                                      each candidate face to face, never offering anyone for a posi-
                                      tion whom he hadn’t met in person. This was labor inten-
                                      sive—Palmlund accumulated over 10 million frequent-flyer
                                      miles—but his approach paid off. He became a partner at his
                                      firm, his firm became the world’s largest, and he placed more
                                      senior executives than anyone else at it. All of his place-
                                      ments stayed in their new jobs at least a year; every other
                                      partner had to redo some.
                                         Palmlund’s success made his tax reporting complicated,
                                      and for many years he relied on Arthur Andersen. In the
                                      early ‘90s, his firm hired a financial planner who rec-
                                      ommended setting up limited partnerships, living trusts, and
                                      other entities to help Palmlund meet his financial goals—and
                                      who also recommended, as the lawyer to set it all up, one Joe
                                      Garza. Palmlund ended up using Garza off and on over the
                                      next 20 years not only for the financial-planning-entity-cre-
                                      ation work, but for all his legal needs. Garza in turn rec-
                                      ommended Turner & Stone to Palmlund as a more affordable
                                      alternative to Arthur Andersen for tax preparation. But even
                                      at those lower rates, Palmlund was an active and frugal
                                      client who carefully reviewed every return—and noticed
                                      when one year Turner & Stone nearly doubled its fee to
                                      $2,700. He credibly testified that he ‘‘moaned and groaned’’
                                      until it was reduced.
                                      II. The Transaction
                                        Sometime early in 2001, Garza called Palmlund to briefly
                                      pitch an ‘‘investment’’ in foreign currency. Palmlund dis-
                                      missed the idea because he didn’t have much experience in
                                      the field. 1 But he was no neophyte investor—he ran a real-
                                      estate investment partnership, actively picked stocks, and
                                      formed a Texas family limited partnership named Palmlund,
                                      Ltd., with the stated business of ‘‘investments.’’ He also had
                                      numerous personal bank and brokerage accounts that he
                                      actively managed.
                                        1 His only experience was ordering his staff at Merrill Lynch’s London office to hedge against

                                      a threatened devaluation of the pound. He did not personally implement the transaction.




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                                         Palmlund says that he warmed up to the transaction after
                                      receiving a ‘‘hot tip’’ at a cocktail party in mid-2001. But this
                                      tip came from his business partner’s daughter, who men-
                                      tioned that ‘‘the yen is weak and is going to get weaker.’’ We
                                      do not think this is a credible explanation for Palmlund’s
                                      interest in foreign-currency speculation, and instead find
                                      that his interest was really sparked when Garza resurfaced.
                                         Garza, however, was not really urging a speculative foray
                                      into foreign currency—he was pitching a particular trans-
                                      action that he explained had significant tax benefits. The
                                      deal was a variation of the Son-of-BOSS transaction that has
                                      produced so much litigation in recent years. 2 He tried to
                                      explain its basic structure, though on this topic Palmlund
                                      credibly testified that the explanation, with its use of foreign-
                                      currency digital options and the ‘‘super sweet spot’’—alleg-
                                      edly a way to make a large profit if the dollar-to-yen
                                      exchange rates worked out just right—was not entirely com-
                                      prehensible. But Garza’s tutorials never really got Palmlund
                                      interested in the theory of how to make foreign-currency
                                      options trading profitable. What got him interested—and we
                                      specifically find this based on the trial testimony—was the
                                      alluring tax benefit. Palmlund ran Garza’s suggestion by his
                                      accountants at Turner & Stone. The accountants gave him
                                      the green light, telling him they themselves had used the
                                      same transaction. And Garza personally guaranteed the deal,
                                      promising to cover any taxes, penalties, or litigation costs if
                                      the transaction blew up.
                                        2 We lay out only the barest of bones, because Palmlund has conceded the tax and fights only

                                      the penalty. Very similar deals have been dissected elsewhere. See, e.g., Highwood Partners v.
                                      Commissioner, 133 T.C. 1 (2009). For an explanation of Son-of-BOSS deals, see Kligfeld Hold-
                                      ings v. Commissioner, 128 T.C. 192 (2007); see also, e.g., BLAK Invs. v. Commissioner, 133 T.C.
                                      431 (2009); 3K Inv. Partners v. Commissioner, 133 T.C. 112 (2009); Olesen v. Commissioner, T.C.
                                      Memo. 2009–307; Bergmann v. Commissioner, T.C. Memo. 2009–289; LVI Investors, LLC v.
                                      Commissioner, T.C. Memo. 2009–254; UTAM, Ltd. v. Commissioner, T.C. Memo. 2009–253; Ti-
                                      gers Eye Trading, LLC v. Commissioner, T.C. Memo. 2009–121; Napoliello v. Commissioner, T.C.
                                      Memo. 2009–104; Fears v. Commissioner, T.C. Memo. 2009–62.
                                        Son-of-BOSS deals come in different varieties. But they all involve the transfer of assets along
                                      with significant liabilities to a partnership, with the goal of increasing basis in that partnership.
                                      The liabilities are not completely fixed at the time of transfer, so the partnership ignores them
                                      in computing basis. This results in high-basis assets that produce large tax—but not out-of-pock-
                                      et—losses. Son-of-BOSS transactions usually yield capital losses, but Palmlund offset ordinary
                                      income because he attached the high basis to Canadian dollars, and on his original return took
                                      the position that certain foreign-currency transactions may produce an ordinary loss. See sec.
                                      988(a); sec. 1.988–3(a), Income Tax Regs. (Unless we say otherwise, all section references are
                                      to the Internal Revenue Code in effect for the year at issue.)




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                                        This was good enough for Palmlund. He directed Garza to
                                      handle all the paperwork and told his secretary to forward
                                      any correspondence about the deal directly to Garza. Here
                                      are the mechanics:
                                        • In November 2001, Palmlund formed three entities: 32,
                                      LLC (32 LLC); 7612, LLC (7612 LLC); and 106, Ltd. (106). The
                                      owners of 106 were David Palmlund (99 percent) and 32 LLC
                                      (1 percent). Palmlund’s Texas family limited partnership,
                                      Palmlund, Ltd., is also involved in this case. Its partners
                                      were David Palmlund (49.5 percent), Suzanne Palmlund
                                      (49.5 percent) and the David Channing Palmlund Trust (1
                                      percent).
                                        • Also in November 2001, 7612 LLC bought offsetting long
                                      and short foreign-currency options. The termination date for
                                      both options was December 12, 2001, when they would expire
                                      out-of-the-money.
                                        • On November 26, 2001, 7612 LLC transferred both long
                                      and short options to 106.
                                        • On December 5, 2001, 7612 LLC bought Can$6,207.82 for
                                      US$4,000.
                                        • On December 24, 2001, 7612 LLC transferred the
                                      Canadian currency to 106 as a capital contribution.
                                        • On December 26, 2001, 106 tried to assign all of its
                                      Canadian currency to Palmlund, Ltd., but actually distrib-
                                      uted only Can$2,172.74. Can$4,035.08 remained with 106
                                      until it sold the currency in October 2002.
                                      Palmlund testified that he earned $10,000 in two weeks.
                                      Deutsche Bank paid out $40,000 on the options and charged
                                      a $30,000 net premium. 3 If these had been the only expenses
                                      involved, the deal would have been profitable. But Palmlund
                                      doesn’t include Garza’s fees in his profit calculation. Those
                                      fees shrink the $10,000 ‘‘profit’’ to a loss of somewhere
                                      between $32,000 and $85,000. 4

                                         3 The premiums on the long and short option positions were $3 million and $2,970,000, respec-

                                      tively.
                                         4 The exact amount of Garza’s fee is unclear from the record. It was either $72,000 or $95,000,

                                      and the $30,000 net premium may or may not have been included in the fee. Assuming the low-
                                      est possible Garza fee—$72,000 with the net premium included—Palmlund would have lost
                                      $32,000 on the deal ($40,000 option payout less $72,000 for Garza’s fee). At the other end of
                                      the spectrum—$95,000 not including the net premium—Palmlund would have lost $85,000
                                      ($40,000 option payout less the $30,000 net premium and the $95,000 Garza fee).




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                                      III. Reporting the Transaction
                                         Palmlund used Turner & Stone to prepare his 2001 return.
                                      A critical part of that preparation was the opinion letter
                                      Garza wrote, which Palmlund forwarded to them. The
                                      opinion letter contains a 4-page introduction tailored to the
                                      deal, but the remaining 85 pages consist mostly of generic
                                      boilerplate on tax-law doctrines—running the gamut from
                                      partnership-basis rules, treatment of foreign-currency con-
                                      tracts, the step-transaction doctrine, economic substance, dis-
                                      guised-sale provisions, and partnership anti-abuse regula-
                                      tions. In the letter, Garza concluded that the tax treatment
                                      he proposed would ‘‘more likely than not’’ withstand IRS scru-
                                      tiny. 5 To reach this conclusion, Garza had to clear a few hur-
                                      dles. In the introductory pages, he states that Palmlund rep-
                                      resented that he
                                         • ‘‘independently reviewed the economics underlying the
                                      investment,’’
                                         • ‘‘believed there was reasonable opportunity to earn a
                                      reasonable pre-tax profit * * * in excess of all associated fees
                                      and costs,’’ and
                                         • received ‘‘[t]he foreign currency and financial instruments
                                      * * * as Partnership liquidating distributions.’’ (Emphasis
                                      added.)
                                      Here’s the first stumble—we find that Palmlund did no such
                                      things. But even if he had, Garza still didn’t get it right—
                                      he failed to customize the opinion letter to fit the facts of the
                                      transaction. Here are a few of the mistakes:
                                        • The foreign currency was distributed to Palmlund in liq-
                                      uidation of his partnership interest.
                                        • No it wasn’t; it was a nonliquidating distribution in 2001.
                                        • Unrelated partners confirmed the partnership’s legit-
                                      imacy.
                                        • All the partners were related—and Palmlund controlled
                                      them.
                                        5 One factor to consider in determining whether the good-faith-reliance defense applies is the

                                      existence of an ‘‘opinion of a professional tax advisor * * * as to the treatment of the taxpayer
                                      * * * under Federal tax law.’’ Sec. 1.6664–4(c)(1), Income Tax Regs. In analyzing corporate tax
                                      shelters, citing the ‘‘more likely than not’’ standard—defined as ‘‘a greater than 50-percent likeli-
                                      hood that the tax treatment of the item will be upheld if challenged by the Internal Revenue
                                      Service’’—is a necessary, but not sufficient, condition in such opinions. Sec. 1.6664–4(e)(2)(i)(B),
                                      (3), Income Tax Regs. Since 106 isn’t a corporation, the ‘‘more likely than not’’ conclusion might
                                      not strictly be necessary, but Garza still cited the standard in his opinion letter.




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                                         • Palmlund doesn’t know if he will be called upon to satisfy
                                      his obligations under the sold digital option.
                                         • The options had already been terminated by the time the
                                      opinion was drafted.
                                         Relying on the opinion letter, Turner & Stone prepared
                                      returns for 106, 32 LLC, Palmlund, Ltd., and Palmlund in
                                      2002. They charged $8,000 for return preparation; Palmlund
                                      didn’t complain. He didn’t review the returns or ask any
                                      questions, claiming that he ‘‘wouldn’t even know what to
                                      ask’’ about the returns. The result was happy for a time—a
                                      noneconomic loss of about $1 million flowed through to his
                                      personal return.
                                         Palmlund did get concerned when the IRS sent him a copy
                                      of Announcement 2004–46, 2004–1 C.B. 964, in May 2004.
                                      The announcement outlined terms of settlement for Son-of-
                                      BOSS transactions. Palmlund met with Garza and his
                                      accountants to figure out what he should do, and what he
                                      decided to do was amend his personal return. (No one ever
                                      amended 106’s return.) Turner & Stone finished the
                                      amended return in August 2004, and Palmlund signed it in
                                      September. This return removed the $1 million loss attrib-
                                      uted to the disallowed transaction, and Palmlund paid the
                                      taxes and interest he conceded were due.
                                         The IRS issued an FPAA to 106 that adjusted various part-
                                      nership items (including contributions and distributions) to
                                      zero and asserted penalties. Palmlund, as 106’s tax matters
                                      partner, timely petitioned the Tax Court. In the course of
                                      preparing for trial, the Commissioner subpoenaed Charles
                                      Denson, Palmlund’s private banker. Denson was curious
                                      about the subpoena and set up a lunch with Palmlund. He
                                      asked about the case, and Palmlund explained that he got
                                      into a tax strategy ‘‘and the intent was to lose money.’’
                                         Before trial began, we issued two orders. In the first, we
                                      granted the Commissioner partial summary judgment on the
                                      issue of whether the 2001 asset distribution from 106 was
                                      nonliquidating. As a result, the adjusted basis for 106’s dis-
                                      tribution to Palmlund, Ltd., in 2001 is limited to the partner-
                                      ship’s adjusted basis (i.e., inside basis) 6 in the Canadian cur-
                                      rency. See sec. 732(a); 7050, Ltd. v. Commissioner, T.C.
                                      Memo. 2008–112. In our second order, we granted the
                                           6 Inside   basis is a partnership’s basis in property that it owns.




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                                      Commissioner’s motion for partial summary judgment on the
                                      issue of whether there was a gross-valuation misstatement in
                                      excess of 400 percent on the 106 return. This second order
                                      required little more than a bit of math, because 106’s assets
                                      were Canadian dollars bought for US$4,000. The partnership
                                      distributed some of those Canadian dollars in 2001, so 106’s
                                      basis—the inside basis—in those distributed dollars was
                                      $1,400. The return claimed a $2.974 million basis in the dis-
                                      tribution, which is significantly more than 400 percent of
                                      $1,400, and was reduced by the FPAA to zero. 7
                                         Because Palmlund conceded the taxes related to the under-
                                      lying transaction, the only remaining question is whether the
                                      partnership has a section 6664(c) reasonable cause/good faith
                                      defense—based upon reliance on Garza and Turner &
                                      Stone—to the 40 percent gross-valuation-misstatement pen-
                                      alty the Commissioner asserts under section 6662(h). This
                                      penalty relates to inside basis—106’s overvaluation of its
                                      basis in the Canadian dollars it distributed to Palmlund Ltd.
                                                                                   OPINION

                                      I. Jurisdiction
                                         In January 2010, the D.C. Circuit 8 decided Petaluma FX
                                      Partners v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010),
                                      affg. in part, revg. in part, vacating in part and remanding
                                      on penalty issues 131 T.C. 84 (2008). 9 It held that the Tax
                                      Court lacks jurisdiction in partnership-level proceedings to
                                      determine a partner’s basis in the partnership or whether
                                      penalties related to that basis apply. Id. at 655–56. 10 After
                                      the D.C. Circuit issued its opinion, we asked the parties in
                                      this case to brief the question of whether we have jurisdic-
                                      tion, and both tell us that we do.
                                         At first glance, Petaluma seems strikingly similar to 106.
                                      Like the tax shelter in Petaluma, the transaction has the for-
                                      eign-currency-option flavor of a Son-of-BOSS deal. Accuracy-
                                           7 The
                                              parties did not dispute this calculation and holding.
                                           8 106
                                              was a Tax Equity and Fiscal Responsibility Act of 1982 partnership without a principal
                                      place of business when it filed its petition, because it no longer existed. Any appeal therefore
                                      may go to the D.C. Circuit. See sec. 7482(b)(1).
                                        9 In March 2010, the Federal Circuit followed Petaluma in Jade Trading, LLC v. United

                                      States, 598 F.3d 1372, 1379–80 (Fed. Cir. 2010), making essentially the same holding on almost
                                      identical facts.
                                        10 We recently reanalyzed the problem in response to the D.C. Circuit’s mandate in Petaluma.

                                      See Petaluma FX Partners v. Commissioner, 135 T.C. 581 (2010).




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                                      related penalties are at stake in both cases. But there’s a key
                                      distinction—Petaluma held that the Tax Court had no juris-
                                      diction over penalties springing from an adjustment to a
                                      partner’s outside basis, 11 but the parties here agree that out-
                                      side basis is not an issue. In the FPAA that provoked this
                                      case, the Commissioner determined that ‘‘the accuracy-
                                      related penalty under section 6662(a) of the Internal Rev-
                                      enue Code applies to all underpayments of tax attributable
                                      to adjustments of partnership items of 106.’’ (Emphasis
                                      added.) And the specific item at issue in this case is 106’s
                                      own basis in the Canadian dollars that it distributed to its
                                      partners. This kind of basis is ‘‘inside’’ basis, not the ‘‘out-
                                      side’’ basis that was at issue in Petaluma. And this is the
                                      kind of basis that the regulation defines as a partnership
                                      item. See sec. 301.6231(a)(3)–1(c)(3)(iii), Proced. & Admin.
                                      Regs. This is a key distinction—Petaluma didn’t address our
                                      jurisdiction over penalties based on adjustments to inside
                                      basis.
                                         We also agree with the parties and hold that partner-level
                                      proceedings are not necessary to determine the gross-valu-
                                      ation-misstatement penalty in this case: The parties have
                                      stipulated that the adjustment to inside basis at the partner-
                                      ship level here allows a numerical adjustment at the partner
                                      level and agree that this ‘‘is a flow through item to the
                                      Palmlunds’ individual return.’’ Stip. par. 27. Because it is
                                      possible to derive through such an adjustment alone the
                                      reduction in the claimed loss on the sale of the Canadian dol-
                                      lars that 106 distributed, and the consequent increase in the
                                      reportable gain and resulting deficiency—all without any
                                      need for an affected-item deficiency notice, see Petaluma, 135
                                      T.C. at 584—we conclude that we do have jurisdiction over
                                      the penalty in this partnership-level case after Petaluma. 12
                                      Partnership items specifically include ‘‘the adjusted basis to
                                      the partnership of distributed property.’’ Sec. 301.6231(a)(3)–
                                      1(c)(3)(iii), Proced. & Admin. Regs. Under section 6226(f), we
                                           11 Outside
                                                    basis is an individual partner’s basis in his interest in the partnership itself.
                                           12 ‘‘As
                                               it is not clear from the opinion, the record, or the arguments before this court that the
                                      penalties asserted by the Commissioner and ordered by the Tax Court could have been com-
                                      puted without partner-level proceedings to determine the affected-items questions concerning
                                      outside bases, we are unable to uphold the court’s determination of the penalty issues. While
                                      it may be that some penalties could have been assessed without partner-level computations, we
                                      cannot affirm a decision that has not yet been made.’’ Petaluma FX Partners v. Commissioner,
                                      591 F.3d 649, 655–56 (D.C. Cir. 2010), affg. in part, revg. in part, vacating in part and remand-
                                      ing on penalty issues 131 T.C. 84 (2008).




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                                      have jurisdiction in a TEFRA proceeding to ‘‘determine all
                                      partnership items * * * and the applicability of any penalty,
                                      addition to tax, or additional amount which relates to an
                                      adjustment to a partnership item.’’ Since the overvalued dis-
                                      tribution was a partnership item, the outside basis of indi-
                                      vidual partners is of no consequence. The only issue in dis-
                                      pute is whether 106 had a section 6664 reasonable-cause-
                                      and-good-faith defense for the gross-valuation misstatement.
                                         That leads to the next question: Is the reasonable cause/
                                      good faith defense available at the partnership level? Most
                                      courts that have addressed the issue think so. See, e.g., Am.
                                      Boat Co., LLC v. United States, 583 F.3d 471, 480 (7th Cir.
                                      2009) (court has jurisdiction in partnership-level proceeding
                                      to consider partnership defense to accuracy-related penalty);
                                      Fears v. Commissioner, 129 T.C. 8, 10 (2007) (penalties
                                      relating to partnership-item adjustments generally deter-
                                      mined at partnership level); Santa Monica Pictures, LLC v.
                                      Commissioner, T.C. Memo. 2005–104 (reasonable-cause
                                      defense a partnership-level determination).
                                         On the other hand, the Court of Federal Claims recently
                                      held that the reasonable-cause defense to the gross-valuation
                                      misstatement penalty is exclusively a partner-level defense.
                                      Clearmeadow Invs., LLC v. United States, 87 Fed. Cl. 509,
                                      520–21 (2009). That court interpreted section 301.6221–1(d),
                                      Proced. & Admin. Regs., to prohibit the reasonable-cause
                                      defense at the partnership level. Clearmeadow, 87 Fed. Cl. at
                                      520. The Seventh Circuit disagreed:
                                        To the extent that the court’s holding in Clearmeadow wholly forecloses
                                      a partnership from raising an entity-level reasonable cause defense, we
                                      disagree. The court’s primary premise is correct: a partner may not raise
                                      a partner-level defense during a partnership-level proceeding. But we see
                                      nothing that would prevent a partnership from raising its own reasonable
                                      cause defense * * *
                                        The Clearmeadow court relied on Treasury Regulation § 301.6221–1(d),
                                      which defines a partner-level defense * * *. Although the regulation cites
                                      § 6664(c)(1) as an example of a partner-level defense, it does not foreclose
                                      a similar defense on behalf of the partnership; it only states that ‘‘whether
                                      the partner has met the criteria of * * * section 6664(c)(1)’’ is a partner-
                                      level defense. Treas. Reg. § 301.6221–1(d). The Fifth Circuit concluded that
                                      this language did not rule out a partnership-level reasonable cause
                                      defense, see Klamath, 568 F.3d at 548, and we agree.
                                        [Am. Boat Co., 583 F.3d at 480.]




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                                      We find the Seventh Circuit’s analysis more persuasive than
                                      Clearmeadow’s, and hold that 106 may assert the reasonable-
                                      cause defense at the partnership level. 13
                                      II. Section 6662 Penalty and Defense
                                        The gross-valuation-misstatement penalty can be rebutted
                                      by a showing of reasonable cause and good faith, sec. 6664(c),
                                      and a taxpayer will often argue (as Palmlund does) that he
                                      had reasonable cause and showed good faith by relying on
                                      professional advice. The regulation somewhat unhelpfully
                                      states that reliance on professional advice is ‘‘reasonable
                                      cause and good faith if, under all the circumstances, such
                                      reliance was reasonable and the taxpayer acted in good
                                      faith.’’ Sec. 1.6664–4(b)(1), Income Tax Regs. The caselaw
                                      more helpfully points to three factors to test whether a tax-
                                      payer properly relied on professional advice. Neonatology
                                      Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd.
                                      299 F.3d 221 (3d Cir. 2002).
                                        • First, was the adviser a competent professional who had
                                      sufficient expertise to justify reliance?
                                        • Second, did the taxpayer provide necessary and accurate
                                      information to the adviser?
                                        • Third, did the taxpayer actually rely in good faith on the
                                      adviser’s judgment?
                                           A. Expertise of Professional Advisers
                                        Both Garza and Turner & Stone were licensed and would
                                      have appeared competent to a layman at the time they pre-
                                      pared the return. They would have appeared competent espe-
                                      cially to Palmlund, since Garza had been his personal
                                      attorney for 20 years, and Turner & Stone had prepared his
                                      returns for about 18 years, all without incident. The Commis-
                                      sioner doesn’t dispute their expertise in his brief, and so we
                                      have no trouble finding these advisers to have at least an
                                      adequate level of expertise.



                                        13 The parties have stipulated that only the gross-valuation misstatement penalty for 106 is

                                      at issue, so we do not decide whether other penalties (e.g., negligence) require analyzing adjust-
                                      ments to outside basis or other partner-level facts.




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                                           B. Provision of Necessary and Accurate Information
                                        We also find that                   Palmlund provided both Garza and
                                      Turner & Stone with                  all the relevant financial data needed
                                      to assess the correct                level of income tax. See sec. 1.6664–
                                      4(c)(1)(i), Income Tax                Regs. The Commissioner doesn’t dis-
                                      pute this either.
                                           C. Actual Reliance in Good Faith
                                         It’s the third point—the issue of Palmlund’s actual good-
                                      faith reliance on Garza’s, and Turner & Stone’s, professional
                                      advice—that’s in dispute. There are at least three factors to
                                      consider:
                                         • Palmlund’s business sophistication and experience,
                                         • the sloppy opinion letter, and
                                         • whether Garza and Turner & Stone were promoters.
                                         Palmlund’s business sophistication and experience tend to
                                      make it harder to believe he didn’t know the transaction was
                                      improper. Even though he wasn’t a tax expert and was
                                      accustomed to relying on professional advisers for tax
                                      preparation, it seems doubtful that he acted in good faith in
                                      light of his ‘‘experience, knowledge, and education.’’ See sec.
                                      1.6664–4(b)(1), Income Tax Regs.
                                         The mistake-ridden opinion letter is problematic as well.
                                      The opinion didn’t accurately describe the transaction in this
                                      case, and the actual transaction was different from the
                                      generic transaction described in the opinion in some key
                                      respects. We don’t, however, always take a close look at
                                      opinion letters when penalties are at issue. See, e.g., Estate
                                      of Goldman v. Commissioner, 112 T.C. 317, 324 (1999)
                                      (opinion letter mentioned, but not scrutinized), affd. without
                                      published opinion sub nom. Schutter v. Commissioner, 242
                                      F.3d 390 (10th Cir. 2000). And the Supreme Court has
                                      touched on this issue as well:
                                      To require the taxpayer to challenge the attorney, to seek a ‘‘second
                                      opinion,’’ or to try to monitor counsel on the provisions of the Code himself
                                      would nullify the very purpose of seeking the advice of a presumed expert
                                      in the first place. * * * ‘‘Ordinary business care and prudence’’ do not
                                      demand such actions. [United States v. Boyle, 469 U.S. 241, 251 (1985).]

                                      On the other hand, at least one district court found that an
                                      opinion letter wasn’t good enough only after taking a hard




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                                      look at it. Long Term Capital Holdings v. United States, 330
                                      F. Supp. 2d 122, 205–12 (D. Conn. 2004) (opinion letter
                                      wasn’t based on all pertinent facts and circumstances and
                                      therefore didn’t protect against penalties), affd. 150 Fed.
                                      Appx. 40 (2d Cir. 2005).
                                         One doesn’t need to look very hard to find problems with
                                      Garza’s opinion. Section 1.6664–4(c)(1)(ii), Income Tax Regs.,
                                      warns taxpayers against relying on advice that itself
                                      unreasonably relies ‘‘on the representations, statements,
                                      findings, or agreements of the taxpayer.’’ Garza’s opinion
                                      letter, as we described in our findings of fact, is filled with
                                      what appear to be (but which were not in fact) Palmlund’s
                                      representations. And many of these ‘‘representations’’ just
                                      weren’t true. Garza shouldn’t have relied on them, and it’s
                                      hard to believe that someone as sophisticated as Palmlund
                                      wouldn’t at least suspect something was amiss.
                                         And Palmlund also can’t rely on Garza or Turner & Stone
                                      if they were promoters of the transaction. The caselaw is
                                      clear on this point—promoters take the good-faith out of
                                      good-faith reliance. See, e.g., Neonatology Associates, 115
                                      T.C. at 98. But what exactly makes a tax adviser a promoter
                                      has been less than clear. A frequently cited promoter-reliance
                                      case explains that ‘‘advice must generally be from a com-
                                      petent and independent advisor unburdened with a conflict of
                                      interest and not from promoters of the investment.’’
                                      Mortensen v. Commissioner, 440 F.3d 375, 387 (6th Cir.
                                      2006), affg. T.C. Memo. 2004–279. But this merely tells us
                                      what a promoter is not, not what a promoter is.
                                         Tigers Eye Trading, LLC v. Commissioner, T.C. Memo.
                                      2009–121, offers a more workable definition of promoter: ‘‘an
                                      adviser who participated in structuring the transaction or is
                                      otherwise related to, has an interest in, or profits from the
                                      transaction.’’ But there’s a catch: This definition wasn’t relied
                                      on or applied to the facts of that case—it’s dictum. In Tigers
                                      Eye, we held only that we had jurisdiction in a partnership-
                                      level proceeding to determine whether a tax adviser was a
                                      promoter. Since the case was only at the summary-judgment
                                      stage, we left for another day the question of whether the tax
                                      adviser there actually was a promoter. Id. Still, the definition




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                                      of ‘‘promoter’’ in that opinion was carefully crafted after con-
                                      sidering relevant precedent. 14
                                         One might need to be careful in applying the definition to
                                      some kinds of transactions—a tax lawyer asked by a
                                      businessman for advice on how to sell the family business
                                      through a tax-favored stock redemption might be said to
                                      have ‘‘participated in structuring the transaction’’—but when
                                      the transaction involved is the same tax shelter offered to
                                      numerous parties, the definition is workable. As we observed
                                      in Countryside Ltd. Pship. v. Commissioner, 132 T.C. 347,
                                      352–55 (2009), a tax adviser is not a ‘‘promoter’’ of a trans-
                                      action when he
                                         • has a long-term and continual relationship with his
                                      client;
                                         • does not give unsolicited advice regarding the tax shelter;
                                         • advises only within his field of expertise (and not because
                                      of his regular involvement in the transaction being scruti-
                                      nized);
                                         • follows his regular course of conduct in rendering his
                                      advice; and
                                         • has no stake in the transaction besides what he bills at
                                      his regular hourly rate.
                                      We therefore adopt the Tigers Eye definition for cases like
                                      this one, and apply it to Garza and Turner & Stone.
                                        We find that both these advisers not only participated in
                                      structuring the transaction, but arranged the entire deal.
                                      Garza set up the LLCs, provided a copy of the opinion letter,
                                      and coordinated the deal from start to finish. And both Garza
                                      and Turner & Stone profited from selling the transaction to
                                         14 Tigers Eye Trading, LLC v. Commissioner, T.C. Memo. 2009–121, drew from the following

                                      cases for its definition of promoter: Goldman v. Commissioner, 39 F.3d 402, 408 (2d Cir. 1994)
                                      (taxpayer could not reasonably rely on professional advice of someone known to be burdened
                                      with an inherent conflict of interest—a sales representative of transaction), affg. T.C. Memo.
                                      1993–480; Pasternak v. Commissioner, 990 F.2d 893, 903 (6th Cir. 1993) (reliance on promoters
                                      or their agents is unreasonable because such persons are not independent of the investment),
                                      affg. Donahue v. Commissioner, T.C. Memo. 1991–181; Illes v. Commissioner, 982 F.2d 163, 166
                                      (6th Cir. 1992) (finding negligence where taxpayer relied on person with financial interest in
                                      the venture), affg. T.C. Memo. 1991–449; see also Hansen v. Commissioner, 471 F.3d 1021, 1031
                                      (9th Cir. 2006) (‘‘a taxpayer cannot negate the negligence penalty through reliance on a trans-
                                      action’s promoters or on other advisors who have a conflict of interest’’), affg. T.C. Memo. 2004–
                                      269; Van Scoten v. Commissioner, 439 F.3d 1243, 1253 (10th Cir. 2006) (‘‘To be reasonable, the
                                      professional adviser cannot be directly affiliated with the promoter; instead, he must be more
                                      independent’’), affg. T.C. Memo. 2004–275; Barlow v. Commissioner, 301 F.3d 714, 723 (6th Cir.
                                      2002) (‘‘courts have found that a taxpayer is negligent if he puts his faith in a scheme that,
                                      on its face, offers improbably high tax advantages, without obtaining an objective, independent
                                      opinion on its validity’’), affg. T.C. Memo. 2000–339.




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                                      numerous clients. Garza charged a flat fee for implementing
                                      it and wouldn’t have been compensated at all if Palmlund
                                      decided not to go through with it. He wasn’t being paid to
                                      evaluate the deal or tweak a real business deal to increase
                                      its tax advantages; he was being paid to make it happen.
                                      And Turner & Stone charged $8,000 for preparing
                                      Palmlund’s tax returns—$6,500 more than usual. The extra
                                      fees were not attributable to an extraordinarily complex
                                      return—Palmlund’s returns were always complex due to his
                                      various business interests—but, we find, were the firm’s cut
                                      for helping to make the deal happen. Because Palmlund’s
                                      advisers structured the transaction and profited from its
                                      implementation, they are promoters. Palmlund therefore
                                      could not rely on their advice in good faith.
                                         Even if the promoter issue was not in the picture,
                                      Palmlund would still have failed to establish his good-faith
                                      reliance. Palmlund’s conversation with Denson—his private
                                      banker—also negates a finding of such reliance. It doesn’t
                                      show good faith to enter into a ‘‘tax strategy’’ with the intent
                                      to ‘‘lose money.’’ We find Denson to be credible. And his testi-
                                      mony, combined with the sloppy opinion letter and
                                      Palmlund’s unusual level of ‘‘experience, knowledge, and edu-
                                      cation’’, demonstrates Palmlund’s lack of good-faith reliance.
                                      See sec. 1.6664–4(b)(1), Income Tax Regs.
                                                                           Decision will be entered for respondent.

                                                                               f




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