                  T.C. Memo. 2009-121



                UNITED STATES TAX COURT



   TIGERS EYE TRADING, LLC, SENTINEL ADVISORS, LLC,
           TAX MATTERS PARTNER, Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 14510-05.              Filed May 27, 2009.


     In a notice of final partnership administrative
adjustment (FPAA) issued to TET regarding a transaction
of the type the IRS determined in Notice 2000-44, 2000-
2 C.B. 255, is a “listed transaction”, R determined
inter alia that TET was not a partnership, had no
business purpose other than tax avoidance, lacked
economic substance, and was an economic sham for
Federal income tax purposes. In the FPAA R determined
that amounts reported on the 1999 partnership return
for contributions, distributions, other deductions, and
other losses were reduced to zero, that TET’s partners’
outside bases in their partnership interests were zero,
and that accuracy-related penalties determined at the
partnership level should be imposed at the partner
level.

     L and one of the three grantor trusts (PP) L used
to engage in the transaction challenge the proposed
adjustments in the FPAA and wish in this partnership-
level proceeding to raise L’s reasonable cause defenses
                          -2-

to accuracy-related penalties applicable to any
deficiency resulting from the FPAA adjustments to
partnership items. L claims that, in reporting losses
from the transaction on his return, he relied on the
advice of professionals, including two attorneys and a
C.P.A., and a written legal opinion of CM to L and the
three grantor trusts on the tax consequences of the
transaction.

     PP has filed a motion for partial summary judgment
to declare invalid sec. 301.6221-1T(c) and (d),
Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3838
(Jan. 26, 1999) (the temporary regulation), on the
ground that it would prevent PP and L from raising in
this partnership-level proceeding partner-level
reasonable cause defenses to accuracy-related penalties
applicable to any deficiency of L resulting from the
FPAA adjustments to partnership items.

     R has filed a motion in limine to exclude from
evidence PP’s expert report prepared by SS that the
legal opinion of CM on the tax consequences of the
transaction was of such quality and character that PP
and L could reasonably rely on the opinion in preparing
their income tax returns. R argues that the report
should be excluded on the alternative grounds that it
relates solely to PP’s partner-level defenses and that
it expresses legal conclusions. Alternatively, R
asserts that portions of the report should be excluded
because they constitute advocacy. R is also asserting
that CM was a promoter of TET and the transaction, that
L and his grantor trusts could not reasonably rely on
the opinion of a promoter, and that the status of CM as
a promoter should be determined in this partnership-
level proceeding.

     Held: Following New Millennium Trading, LLC v.
Commissioner, 131 T.C. ___ (2008), the temporary
regulation is valid and potentially applicable in the
case at hand, so that, should the Court sustain R’s
determinations in the FPAA that TET or PP’s
transactions with TET should be disregarded and that
all other requirements for application of the accuracy-
related penalties have been satisfied, PP may not
assert in this partnership-level proceeding any
partner-level defenses to application of the penalties;
PP’s motion for partial summary judgment will be
denied.
                               -3-

          Held, further: We have jurisdiction in this
     partnership-level proceeding to decide whether CM was a
     promoter.

          Held, further: If the Court should decide that CM
     is not a promoter of the transactions at issue, the
     reasonableness of L’s reliance on the CM opinion, as
     well as his reliance on the advice of his personal
     attorneys and C.P.A., would be a partner-level defense
     as defined in the temporary regulation that would not
     be assertable in this partnership-level proceeding
     because it would require the Court to consider factors
     that are personal to L, such as his education and
     business experience and the nature and length of his
     relationship with the adviser, and would require the
     production of evidence unrelated to the underlying
     adjustments in the FPAA.

          Held, further: PP’s expert report consists of
     legal discussion and argument; R’s motion in limine
     will be granted and the expert’s report excluded from
     evidence, irrespective of whether CM is determined to
     be a promoter.



     Felix B. Laughlin and Mark D. Allison, for petitioner,

Sentinel Advisors, LLC, tax matters partner.

     David De Coursey Aughtry, Hale E. Sheppard, and William E.

Buchanan, for A. Scott Logan, Trustee, A. Scott Logan Grantor

Retained Interest Annuity Trust I, a partner other than the tax

matters partner.

     James E. Gray, William Bogardus, Timothy B. Heavner, and

David B. Flassing, for respondent.
                                 -4-

                              CONTENTS

Background   . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Discussion   . . . . . . . . . . . . . . . . . . . . . . . . .           19

I.    TEFRA Procedures and Partnership Items . . . . . . . . .           19

      A.   Partnership Items . . . .   . . . . . . . . . .   .   .   .   20
      B.   Affected Items . . . . .    . . . . . . . . . .   .   .   .   21
      C.   Penalties and Defenses to   Penalties   . . . .   .   .   .   22
      D.   Exceptions to Application   of TEFRA Procedures   .   .   .   26

II.   Petitioner’s Motion To Invalidate Temporary Regulation .           29

III. Respondent’s Motion in Limine     . . . . . . . . . . . . .         33

      A.   Reasonable Cause Defense to Accuracy-Related
           Penalties . . . . . . . . . . . . . . . . . . .       . .     33
      B.   Respondent’s Position in Motion in Limine . . .       . .     36
      C.   Status as Promoter of Partnership Determined in
           Partnership-Level Proceeding . . . . . . . . .        . .     38
      D.   Tax Court’s Jurisdiction To Decide Defenses to
           Applicability of Penalty That Are Not Partner-
           Level Defenses Defined by Temporary Regulation        .   .   43
      E.   Partner-Level Defense: Definition . . . . . . .       .   .   45
           1.   Personal to the Partner . . . . . . . . .        .   .   46
           2.   Depends on Partner’s Separate Return . . .       .   .   48
           3.   Cannot Be Determined at Partnership Level        .   .   50
           4.   If Curtis Mallet Was a Promoter . . . . .        .   .   52
           5.   If Curtis Mallet Was Not a Promoter . . .        .   .   54
           6.   Conclusion . . . . . . . . . . . . . . . .       .   .   54
      F.   Legal Conclusions and Advocacy of Mr. Logan’s
           Position in the Smith Report . . . . . . . . .        . .     55

Afterword . . . . . . . . . . . . . . . . . . . . . . . . . .            60



                         MEMORANDUM OPINION


      BEGHE, Judge:   This proceeding to determine the validity of

respondent’s notice of final partnership administrative

adjustment (FPAA) is before the Court on two interrelated
                                -5-

motions:   Motion for partial summary judgment filed under Rule

1211 on behalf of participating partner; and motion in limine

filed under Rules 50 and 143(f) by respondent.

     By the partial summary judgment motion, A. Scott Logan (Mr.

Logan) as Trustee for A. Scott Logan Grantor Trust I (Logan Trust

I or participating partner), a partner other than the tax matters

partner, asks us to declare invalid section 301.6221-1T(c) and

(d), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3838 (Jan.

26, 1999) (sometimes the temporary regulation), implementing

section 6221 as amended by the Taxpayer Relief Act of 1997 (TRA

1997), Pub. L. 105-34, sec. 1238(a), 111 Stat. 1026, because it

would prevent participating partner and Mr. Logan from

interposing partner-level defenses to accuracy-related penalties

in this partnership-level proceeding.2   For convenience and

simplicity, we sometimes refer to participating partner as Mr.

Logan.



     1
      Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for 1999,
the year at issue.
     2
      Participating partner also filed a motion for partial
summary judgment “regarding confirmation of Code and caselaw as
to contingent obligations”, seeking a ruling that Helmer v.
Commissioner, T.C. Memo. 1975-160, requires a holding that “a
contingent obligation such as the Sold Euro Option each of the
Logan Trusts sold to AIG falls short of a fixed ‘liability’ for
section 752 and other federal income tax purposes”. By order
dated Aug. 5, 2008, we denied the motion for a variety of
reasons.
                               -6-

     By the motion in limine respondent asks us to exclude from

evidence an expert report and testimony that a legal opinion on

the tax consequences of the transactions at issue was of such

quality and character that Mr. Logan could reasonably rely on it

in preparing his income tax returns.   By respondent’s response to

Mr. Logan’s motion, Mr. Logan’s reply to that response, Mr.

Logan’s opposition to respondent’s motion, respondent’s reply to

that opposition, and respondent’s supplement to respondent’s

motion, the parties have joined issue on the subjects of the

motions.

     Petitioner, Sentinel Advisors, LLC (Sentinel), the tax

matters partner of Tigers Eye Trading, LLC (Tigers Eye), has no

direct financial interest in the outcome of this case.   Thus, Mr.

Logan, as trustee of Logan Trust I, is wielding the laboring oar

in this proceeding.

     In his motion for partial summary judgment Mr. Logan asserts

that in preparing his income tax returns he reasonably relied on

the opinions of personal advisers--attorneys and his accountant--

as well as an opinion letter and memorandum of the law firm of

Curtis, Mallet-Prevost, Colt & Mosle LLP (Curtis Mallet) on the

income tax consequences of the transactions at issue.    Mr. Logan

submitted to the Court a notice of expert witness in which he

identified Attorney Stuart A. Smith (Mr. Smith) as a witness who

may aid the Court in evaluating whether the Curtis Mallet opinion
                                 -7-

was of such quality and character that Mr. Logan and Logan Trust

I could reasonably rely on it in preparing their income tax

returns.

       By the motion in limine respondent asks us to exclude from

evidence Mr. Smith’s expert report and testimony on the

alternative grounds that the report:    (1) Pertains exclusively to

Mr. Logan’s partner-level defenses, an issue not properly before

the Court, pursuant to the temporary regulation; (2) consists of

legal conclusions; and (3) contains advocacy.

       Respondent indicated, in respondent’s response to Mr.

Logan’s motion for partial summary judgment, that respondent is

asserting in this proceeding that Curtis Mallet was a promoter of

the transactions in issue.    Respondent asserts that no

participating partner of Tigers Eye could reasonably rely on an

opinion issued by a promoter and that the status of Curtis Mallet

as a promoter of Tigers Eye should be determined in this

partnership-level proceeding.

       Following New Millennium Trading, LLC v. Commissioner, 131

T.C.       (2008) (upholding the validity and applicability of the

temporary regulation), we will deny Mr. Logan’s motion for

partial summary judgment.    Thus, should we sustain respondent’s

determinations in the FPAA that Tigers Eye or the Logan Trusts’

transactions with Tigers Eye should be disregarded and that the

accuracy-related penalties otherwise apply, Mr. Logan’s partner-
                                -8-

level defenses to those penalties will not be assertable in this

partnership-level proceeding.

     We conclude that whether Curtis Mallet was a promoter of the

transactions in issue is to be decided in this partnership-level

proceeding.   We also conclude that, if we should determine that

Curtis Mallet was a promoter of the transactions at issue,

reliance on the Curtis Mallet opinion would not be a defense to

the penalties.   Moreover, Mr. Logan’s reliance on the advice of

his personal advisers is a partner-level defense that is not

assertable in this partnership-level proceeding.   See New

Millennium Trading, LLC v. Commissioner, supra.    Similarly, if we

should decide that Curtis Mallet was not a promoter, Mr. Logan’s

reliance on the Curtis Mallet opinion would be a partner-level

defense not assertable in this proceeding.

     Since there are unresolved issues whether reliance on and

the reliability of the Curtis Mallet opinion are partner-level

defenses, respondent’s motion in limine cannot be granted on that

ground.   However, we will grant respondent’s motion to exclude

Mr. Smith’s expert report and testimony because the report

consists of legal discussion and argument.

     An Afterword notes that TRA 1997, as implemented by the

temporary regulation, has created problems of judicial

administration in the case at hand and similar pending cases that

will not be resolved by recently proposed regulations.
                                  -9-

                            Background

     The facts recited in this statement are based on the

parties’ first and second stipulations of fact and accompanying

exhibits and on matters admitted in the pleadings or in the

motion papers or set forth in affidavits submitted by the parties

or in judicially noticed records of the Court.    For the purpose

of deciding these motions, we view the facts in the light most

favorable to the nonmoving party; the facts recited have not been

found to be true after a trial.

     The case at hand is one of many Son-of-BOSS cases pending in

this Court.3   It is one of a subset of such cases of transactions

promoted by Sentinel that used a limited liability company

(treated as a partnership for income tax purposes) to enable an

investor (Mr. Logan in the case at hand) to claim losses that

substantially offset millions of dollars of long-term capital

gain realized on the sale of a business interest.

     Mr. Logan was a cofounder of Wood Logan Associates, Inc.

(WLA), a wholesale marketing and sales organization that

distributed variable annuities.    WLA was wholly owned by

Manufacturers Life Wood Logan (MLWL), a holding company.     Until

early 1999 Mr. Logan owned 53,690 shares of MLWL directly and



     3
      “BOSS” is an acronym for “Bond and Option Sales Strategy”,
which the Commissioner regards as an abusive tax shelter. See
Notice 2000-44, 2000-2 C.B. 255, 256; see also Kligfeld Holdings
v. Commissioner, 128 T.C. 192 (2007).
                                 -10-

240,000 shares of MLWL through a family limited partnership

(SKL).   Mr. Logan, directly and through three grantor trusts,

Logan Trust I and two other such trusts (collectively the Logan

Trusts), held a more-than-99-percent interest in SKL.

     In early 1999 Mr. Logan sold all the MLWL shares he owned,

directly and indirectly, to a large Canadian life insurance

company for $94 per share, resulting in proceeds of $22,560,000

to SKL and direct proceeds of $5,046,860 to Mr. Logan.   The

shares of MLWL had an average basis in the hands of SKL and Mr.

Logan of approximately $1 per share.    Mr. Logan reported total

long-term capital gain of $27,438,537 on his and the Logan

Trusts’ sales of the MLWL shares.

     During the taxable year ended December 31, 1999, Tigers Eye

was a limited liability company organized under Delaware law,

formed not earlier than September 21, 1999.   Sentinel was the tax

matters partner of Tigers Eye.    Banque Safra, a nominee partner

for Brazilian investors, obtained a 7.5-percent capital and

profits interest in Tigers Eye for a cash contribution of

$58,000, and New Vista, an entity owned by Sentinel and its legal

adviser, obtained a 0.5-percent profits interest in Tigers Eye

for a cash contribution of $3,000.

     On October 1, 1999, each of the three Logan Trusts bought

from and sold to American International Group (AIG) a pair of

substantially similar options on the euro--an option to buy
                                    -11-

 184,537,700 from AIG (the purchased option) and an option to

sell    184,537,700 to AIG (the sold option).       The terms of the

purchased options were identical to the terms of the sold options

with respect to the number of euro, the exercise and expiration

date (October 3, 2000), and counterparty (AIG).           The exercise

prices and premiums of the purchased and sold options differed

slightly as shown below:

                           Exercise Price                      Gross
 Option       Premium         per Euro       Euro          Exercise Price

Sold         $9,405,027        $1.092       184,537,700    $201,515,168.40
Purchased     9,500,030         1.091       184,537,700     201,330,630.70
Net              95,003                                         184,537.70

The $95,003 difference in the premiums payable on each pair of

options amounted to 1 percent of the higher premium on the

purchased option.       The difference in the exercise prices of the

purchased and sold options amounted to one-tenth of 1 cent per

euro; the $184,537.70 gross difference in the exercise prices of

the purchased and sold options amounted to .0009155, or less than

one-tenth of 1 percent of the higher exercise prices of the sold

options.

       Because AIG was the counterparty on both options, each of

the Logan Trusts did not actually pay $9,500,030 of its own funds

to AIG for the purchased option, nor did it receive $9,405,027

from AIG for the sold option.       Instead the Logan Trusts and AIG

netted their respective payment obligations with respect to the
                               -12-

option premiums, and each Logan Trust paid the net $95,003 to AIG

with respect to each pair of purchased and sold options.4

     On or about October 9, 1999, in exchange for a partnership

interest in Tigers Eye, each of the Logan Trusts contributed its

purchased option and assigned its obligations under the sold

option to Tigers Eye, along with $40,600 cash (a total of

$121,800 for the three trusts).   Tigers Eye recorded that each

trust contributed $133,743 to capital (total $401,229).

     On December 15, 1999, about 65 days after the Logan Trusts

had contributed and assigned their interests and obligations in

the options to Tigers Eye, Tigers Eye distributed to the Logan

Trusts in liquidation of their partnership interests euro5 and

10,419 shares of Xerox Corp., having a combined value of

$229,992.42.   In computing the net amounts the Logan Trusts were

entitled to and did receive in liquidation of their interests in

Tigers Eye, the obligations of Tigers Eye to deliver euro if AIG

should exercise the sold options were netted and offset against

the rights of Tigers Eye to demand and receive euro if it should

exercise the purchased options.   SKL received the 10,419 shares


     4
      This statement disregards other payments by or on behalf of
Mr. Logan to AIG and others to enable the Logan Trusts to
participate in the transactions at issue.
     5
      Although the first stipulation of facts that has been
lodged does not specify the exact number of euro distributed to
the Logan Trusts, it appears that the dollar value of the
distributed euro and their proceeds of sale realized on behalf of
Mr. Logan before yearend 1999 amounted to less than $14,000.
                               -13-

of Xerox Corp. from the Logan Trusts and sold those shares on

December 31, 1999, for $227,447.36.

     The Batts Group LTD (The Batts Group), another partner in

Tigers Eye unrelated to Mr. Logan, entered into and carried out

transactions in a pair of euro options with AIG and Tigers Eye

that were similar to the transactions of the Logan Trusts.

     Curtis Mallet issued a 16-page opinion letter (the first

letter) and 122-page legal memorandum, both dated March 31, 2000,

to Mr Logan individually and as trustee of the Logan Trusts.

Curtis Mallet issued a separate 10-page opinion letter, also

dated March 31, 2000, on the subject of penalties, to Mr. Logan

and the Trusts.   By fax, dated April 7, 2000, and letter, dated

November 6, 2000, Curtis Mallet revised and supplemented the

first letter and the legal memorandum.   In Mr. Logan’s opposition

to respondent’s motion in limine, Mr. Logan’s counsel asserts

that Curtis Mallet provided the same analysis in two opinion

letters and a 122-page memorandum to all Tigers Eye partners “who

reported basis/‘partnership item’ and who face the 40 percent

penalty”.

     Mr. Logan and the Logan Trusts claimed an aggregate basis in

the Xerox Corp. shares of more than $27 million.   This resulted

in a claimed aggregate loss on the sale of the shares of more

than $26 million, which Mr. Logan reported on his 1999 Federal

income tax return as short-term capital losses offsetting the
                              -14-

bulk of the long-term capital gains he reported on his same-year

direct and indirect sales of MLWL stock.

     Respondent timely sent Tigers Eye the FPAA in issue,

comprising (1) Letter 1830, Notice of Final Partnership

Administrative Adjustment, (2) Form 870-PT, Agreement for

Partnership Items and Partnership Level Determinations as to

Penalties, Additions to Tax, and Additional Amounts, including a

Schedule of Adjustments, and (3) an exhibit A setting forth

respondent’s various determinations.   The schedule of adjustments

adjusted to zero the following five items:

     A.   Capital contributions (Sched. M-2, line 2)      $698,595

     B.   Distributions of property other than
            money (Sched. M-2, line 6b)                   $365,446

     C.   Outside partnership basis                    $24,500,059

     D.   Other deductions (Sched. K, line 11)            (11,314)

     E.   Other income (loss) (Sched. K, line 7)          (242,186)

     Unlike items A, B, D, and E, each of which is identified as

the adjustment of a line item on the Tigers Eye 1999 Form 1065,

U.S. Partnership Return of Income, the item C amount (Outside

partnership basis) does not appear on the partnership return, nor

can we trace it to any entry on the Schedules K-1, Partner’s

Share of Income, Credits, Deductions, etc., to the partners, and

it does not tie into or relate to any item on the partnership
                               -15-

return of which we have been apprised.6   Items A and B are the

sums of the net amounts of property initially contributed and

later received as liquidating distributions by The Batts Group

and the Logan Trusts.   It appears that the option premiums on the

purchased (long) options were netted against the option premiums

on the sold (short) options in arriving at the gross amounts

shown on the 1999 partnership return as having been contributed

by and distributed to The Batts Group and the Logan Trusts.

     In exhibit A, respondent determined that:

     1.   Neither Tigers Eye nor its purported partners

established its existence as a partnership as a matter of fact;

     2.   even if Tigers Eye existed as a partnership, it had no

business purpose other than tax avoidance, lacked economic

substance, and constitutes an economic sham for Federal income

tax purposes, so that the partnership and the transactions are

disregarded in full and any purported losses resulting from the

transactions are not allowable as deductions and are not allowed

for Federal income tax purposes;

     3.   under section 1.701-2, Income Tax Regs., Tigers Eye was

formed and availed of in connection with a transaction or

transactions in taxable year 1999, a principal purpose of which



     6
      In a supplement to respondent’s response to Mr. Logan’s
motion, respondent asserts: “All partnership items that feed
into the Tigers Eye participants’ outside bases in Tigers Eye are
properly raised by this line item”.
                               -16-

was to reduce the present value of its partners’ aggregate

Federal tax liability in a manner that is inconsistent with the

intent of subchapter K of the Internal Revenue Code;

     4.   the purported partners of Tigers Eye did not enter into

the option positions and Tigers Eye did not purchase the foreign

currency or stock with a profit motive for purposes of section

165(c)(2);

     5.   even if the foreign currency options are treated as

having been contributed to Tigers Eye, the amount treated as

contributed by the partners under section 722 with respect to the

purchased options is reduced by the amounts received by the

contributing partners from the contemporaneous sales of the sold

options to the same counterparty, thus reducing the basis of the

contributed options in the hands of both Tigers Eye and the

contributing partners so that any corresponding claimed increases

in the outside bases in Tigers Eye resulting from the

contributions of the sold options are disallowed;

     6.   the adjusted bases of the purchased options and other

property purportedly contributed by the partners to Tigers Eye

have not been established under section 723 so that the partners

of Tigers Eye have not established adjusted bases in their

respective partnership interests in an amount greater than zero;

     7.   in the case of a sale, exchange, or liquidation of

Tigers Eye partners’ partnership interests, neither the purported
                               -17-

partnership nor its purported partners have established that the

bases of the partners’ partnership interests were greater than

zero for the purpose of determining gain or loss to such partners

from the sale, exchange, or liquidation of the partnership

interest;

     8.   accuracy-related penalties are determined at the

partnership level and will be imposed at the partner level.

     Sentinel, the tax matters partner, filed a petition during

the time it was entitled to do so as a notice partner.     See

Barbados #6 Ltd. v. Commissioner, 85 T.C. 900, 903-905 (1985).

Sentinel’s petition assigned error to all of respondent’s

determinations set forth in the FPAA.   Respondent’s answer

categorically denied all the assignments of error; by amendment

to answer respondent advanced two additional theories, under

section 465(b)(4) and section 1.988-2(f), Income Tax Regs.

     The Court granted Mr. Logan, as trustee of Logan Trust I,

leave to file a notice to participate in this proceeding.     Banque

Safra, as well as Sentinel, has no stake in the outcome of this

proceeding.   The Batts Group settled its case with the Internal

Revenue Service (IRS) arising from the FPAA in the case at hand

and also has no stake in the outcome.

     Mr. Logan asserts that in reporting losses from the

transactions at issue on his return, he relied on the advice of

professionals, including two attorneys and a certified public
                               -18-

accountant, as well as the Curtis Mallet opinion.   He wishes to

raise his reliance on that advice as a defense to the application

of accuracy-related penalties if we should sustain respondent’s

determinations in the FPAA that either Tigers Eye or the Logan

Trusts’ transactions with Tigers Eye should be disregarded so

that the accuracy-related penalties would otherwise apply.

     Mr. Logan submitted to the Court and served on Sentinel and

respondent a notice of expert witness in which he identified Mr.

Smith as a witness who may aid the Court in evaluating whether

the Curtis Mallet opinion “is of the quality and character upon

which the Logan Trust could reasonably rely in preparing its tax

returns”.   A copy of “Petitioner’s Expert Report of Stuart A.

Smith” (the Smith report) was attached to Mr. Logan’s notice.

Mr. Logan would have the Smith report entered into evidence to

support his claim that his reliance on the Curtis Mallet opinion

was reasonable.

     On May 20, 2008, the first stipulation of facts, with

exhibits, was lodged with the Court.   Included among those

exhibits were Exhibits 125-J, 126-J, 127-J, 128-J, and 130-J,

comprising copies of the Curtis Mallet opinion, as revised and

supplemented, and the 122-page legal memorandum.

     On September 26, 2008, the second stipulation of facts, with

exhibits, was lodged with the Court.   Included among those

exhibits are copies of communications among representatives of
                               -19-

Sentinel and BDO Seidman and attorneys at Curtis Mallet that

would indicate that Curtis Mallet played a role in the

preparation of the forms of documents used to implement the

transactions at issue.   Mr. Logan asserts that he did not receive

a copy of any such communications included among such exhibits

before this litigation commenced.

     Neither the first stipulation of facts nor the second

stipulation of facts nor any document yet lodged or filed in this

proceeding refers to or includes a copy of any retainer agreement

between Mr. Logan and Curtis Mallet or to any Curtis Mallet

opinion to The Batts Group nor to whether, when, and in what

circumstances Tigers Eye disposed of its interests and

obligations in the paired options contributed and assigned to

Tigers Eye by the Logan Trusts.

                            Discussion

I.   TEFRA Procedures and Partnership Items

     The unified partnership audit and litigation procedures set

forth in sections 6221 through 6234 were originally enacted by

the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),

Pub. L. 97-248, sec. 402(a), 96 Stat. 648.    TEFRA provisions

divide disputes arising from “partnership items”7 from those


     7
      Sec. 6231(a)(3) defines “partnership item” as:

     with respect to a partnership, any item required to be
     taken into account for the partnership’s taxable year
                                                   (continued...)
                               -20-

arising from “nonpartnership items”.8   Maxwell v. Commissioner,

87 T.C. 783, 787 (1986) (citing section 6231(a)(3) and (4)).    If

the tax treatment of a partnership item is at issue, the statute

requires the matter to be resolved at the partnership level.

Sec. 6221; Maxwell v. Commissioner, supra at 787-788.

     A.   Partnership Items

     In a partnership-level proceeding the Court has jurisdiction

to determine “all partnership items of the partnership for the

partnership taxable year to which the notice of final partnership

administrative adjustment relates, the proper allocation of such

items among the partners, and the applicability of any penalty,

addition to tax, or additional amount which relates to an

adjustment to a partnership item.”    Sec. 6226(f).   “While TEFRA

defines a ‘partnership item’ in technical terms, the provision

generally encompasses items ‘more appropriately determined at the

partnership level than at the partner level’”.    Weiner v. United

States, 389 F.3d 152, 154 (5th Cir. 2004) (quoting section

6231(a)(3)).   The determination of partnership items in a

partnership-level proceeding is binding on the partners and may


     7
      (...continued)
     under any provision of subtitle A to the extent
     regulations prescribed by the Secretary provide that,
     for purposes of this subtitle, such item is more
     appropriately determined at the partnership level than
     at the partner level.
     8
      Sec. 6231(a)(4) defines the term “nonpartnership item” as
“an item which is (or is treated as) not a partnership item.”
                              -21-

not be challenged in a later partner-level proceeding.    Secs.

6230(c)(4), 7422(h).

     B.   Affected Items

     The term “affected item” means “any item to the extent such

item is affected by a partnership item.”   Sec. 6231(a)(5).    An

affected item is by definition not a partnership item.     Dial USA,

Inc. v. Commissioner, 95 T.C. 1, 5 (1990).   An affected item,

rather than being universally applicable to every partner, is

peculiar to a particular partner’s tax position.     Maxwell v.

Commissioner, supra at 790.

     Affected items have two essential aspects.    The first

involves a partnership issue and the second involves a

nonpartnership issue; i.e., the partner’s personal items.

Partners must raise any partnership item that “affects” their

personal items at the partnership-level proceeding.    See, e.g.,

GAF Corp. & Subs. v. Commissioner, 114 T.C. 519, 528 (2000);

Dubin v. Commissioner, 99 T.C. 325, 328 (1992); Maxwell v.

Commissioner, supra at 792-793.   If a partner does not pursue his

rights in a partnership-level proceeding, he may not later seek a

redetermination of partnership items as they relate to his

affected item in a later partner-level proceeding.    See, e.g.,

GAF Corp. & Subs. v. Commissioner, supra at 526-527.

     After the partnership-level proceeding is concluded and the

partnership administrative adjustments have become final, the
                                -22-

Commissioner makes a “computational adjustment”, a change in the

tax liability of a partner that properly reflects the treatment

of a partnership item.    See sec. 6231(a)(6).   If a computational

adjustment results in a deficiency in a partner’s tax stemming

from an affected item that requires a factual determination at

the partner level, the normal deficiency procedures outlined in

sections 6212 and 6213 apply.    Sec. 6230(a); sec. 301.6231(a)(6)-

1T(a)(2), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3840

(Jan. 26, 1999).9   On the other hand, if the computational

adjustment of a partner’s tax liability can be made without

making any additional partner-level determinations, the

Commissioner may directly assess the change without issuing a

notice of deficiency.    Sec. 6231(a)(6), (c); N.C.F. Energy

Partners v. Commissioner, 89 T.C. 741, 744 (1987); sec.

301.6231(a)(6)-1T(a)(1), Temporary Proced. & Admin. Regs., 64

Fed. Reg. 3840 (Jan. 26, 1999).    If the partner believes that the

computational adjustment was erroneous, he may file a claim for

refund after payment, sec. 6230(c), and, upon its denial, sue for

the refund in a District Court or the Court of Federal Claims.

     C.   Penalties and Defenses to Penalties

     Any penalty, addition to tax, or additional amount

(collectively penalty) related to adjustments stemming from an



     9
      With the exception of penalties.   See infra pt. C.
immediately following.
                                -23-

adjustment to partnership items has generally been treated as an

affected item that often requires a factual determination at the

partner level.   See N.C.F. Energy Partners v. Commissioner, supra

at 744; sec. 301.6231(a)(5)-1T(d), Temporary Proced. & Admin.

Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987).   Before Congress enacted

TRA 1997 the Court did not have jurisdiction in a partnership-

level proceeding to decide the applicability of partnership-item

penalties.10   See N.C.F. Energy Partners v. Commissioner, supra;

Crystal Beach Dev. of Destin Ltd. v. Commissioner, T.C. Memo.

2000-170.    Rather, partnership-item penalties were determined at

the partner level as affected items in a deficiency proceeding

after the related partnership-level proceeding had been

completed.

     TRA 1997 section 1238(a) amended section 6221 to provide

that “the applicability of any penalty, addition to tax, or

additional amount which relates to an adjustment to a partnership




     10
      The Taxpayer Relief Act of 1997 (TRA 1997), Pub. L.
105-34, sec. 1238, 111 Stat. 1026, amended the partnership
procedures regarding penalties by (1) amending sec. 6221 to
require the applicability of any partnership-item penalty to be
determined at the partnership level, (2) amending sec.
6230(a)(2)(A)(i) to exclude partnership-item penalties from the
deficiency proceeding, and (3) amending sec. 6230(c)(4) making
conclusive the partnership level determination regarding the
applicability of any partnership-item penalty but allowing the
partner to assert in a refund claim any “partner-level” defenses.
                               -24-

item” be determined at the partnership level.11    Although the

applicability of a penalty usually requires consideration of any

defenses to the penalty, section 301.6221-1T(c) and (d),

Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3838 (Jan. 26,

1999), prohibits “partner level defenses” to any partnership-item

penalty from being litigated in the partnership-level proceeding

and allows such a penalty attributable to the treatment of

partnership items to be assessed as a computational adjustment

irrespective of whether partner-level determinations are

required.   A partner who wishes to assert a partner-level defense

to such a penalty must do so in a separate refund action

following assessment and payment.     Sec. 6230(c); sec. 301.6221-

1T(d), Temporary Proced. & Admin. Regs., supra.12    Although


     11
      In its report underlying the amendments, the House
Committee on Ways and Means explained that it had proposed the
amendment because:

          Many penalties are based upon the conduct of the
     taxpayer. With respect to partnerships, the relevant
     conduct often occurs at the partnership level. In
     addition, applying penalties at the partner level
     through the deficiency procedures following the
     conclusion of the unified proceeding at the partnership
     level increases the administrative burden on the IRS
     and can significantly increase the Tax Court’s
     inventory. [H. Rept. 105-148, at 594 (1997), 1997-4
     C.B. (Vol. 1) 319, 916.]
     12
      The temporary regulation is consistent with the
legislative history. The House committee report explained that
the proposed amendment “provides that the partnership-level
proceeding is to include a determination of the applicability of
penalties at the partnership level. However, the provision
                                                   (continued...)
                              -25-

partner-level defenses may be raised only in a refund action,

defenses to any penalty that are not partner-level defenses must

be determined in the partnership-level proceeding.   See, e.g.,

Klamath Strategic Inv. Fund, LLC v. United States, ____ F.3d ___,

____ (5th Cir., May 15, 2009) (slip op. at 14-16) (considering

reasonable cause and good faith defenses at partnership level by

looking to actions of managing member), affg. in part, vacating

in part, and remanding 472 F. Supp. 2d 885, 902-904 (E.D. Tex.

2007); Whitehouse Hotel Ltd. Pship. v. Commissioner, 131 T.C. ___

(2008) (reasonable cause exception for qualified appraisal in

section 6664(c)(1) is a partnership-level defense); Santa Monica

Pictures, LLC v. Commissioner, T.C. Memo. 2005-104 (looking to

actions of partnership through managing member in considering

partnership’s reasonable cause and good faith defenses); Stobie

Creek Invs., LLC v. United States, 82 Fed. Cl. 636 (2008)

(partnership-level reasonable cause defense to any of the

penalties under section 6664(c)); Jade Trading, LLC v. United

States, 80 Fed. Cl. 11, 60 (2005) (partnership’s reasonable cause

defenses were not raised and, therefore, were not considered by

the court); Long Term Capital Holdings v. United States, 330 F.

Supp. 2d 122, 205-212 (D. Conn. 2004) (considering partnership’s


     12
      (...continued)
allows partners to raise any partner-level defenses in a refund
forum.” H. Rept. 105-148, at 594 (1997), 1997-4 C.B. (Vol. 1)
319, 916.
                                -26-

reasonable cause and good faith defenses at partnership level by

looking to actions of general partner), affd. 150 Fed. Appx. 40

(2d Cir. 2005); see also sec. 301.6221-1T(c), Temporary Proced. &

Admin. Regs., supra (partnership-level determinations include all

legal and factual determinations underlying the determination of

partnership-level penalties, including partnership-level defenses

but not partner-level defenses).

     D.     Exceptions to Application of TEFRA Procedures

     For completeness and to prepare for concluding observations

in the Afterword about problems of judicial administration

created by TRA 1997 and the temporary regulation, we note two

circumstances under section 6231 in which what would have

otherwise been partnership items may be treated as nonpartnership

items.    In these circumstances, application of the TEFRA

procedures may be avoided so that the traditional deficiency and

assessment procedures will apply to both deficiencies and

penalties.

     Under section 6231(a)(1)(B), there is an exception for small

partnerships (having fewer than 10 partners, each of whom is a

U.S. resident individual, C corporation, or estate of a decedent

partner).    Although Tigers Eye had fewer than 10 partners, it was

purportedly owned by a number of passthrough entities, and so it

did not qualify for the exception and remained subject to TEFRA.

See Primco Mgmt. Co. v. Commissioner, T.C. Memo. 1997-332; Rev.
                                 -27-

Rul. 2004-88, 2004-2 C.B. 165.    Son-of-BOSS partnerships with

fewer than 10 partners, for the most part, but not invariably,

see New Phoenix Sunrise Corp. & Subs. v. Commissioner, 132 T.C.

____ (2009), do not qualify for the small partnership exception

because individuals participating in the transaction use

disqualified entities such as grantor trusts and LLCs to hold

their interests and other disqualified persons such as foreign

individuals or entities are partners.   As we observed in New

Phoenix Sunrise Corp. & Subs. v. Commissioner, supra at         n.3

(slip op. at 20) (quoting Wadsworth v. Commissioner, T.C. Memo.

2007-46), “‘The small partnership exception permits this Court to

review in a deficiency suit items that otherwise would be subject

to partnership-level proceedings’”.

     Under section 6231(c) the Secretary is authorized to

promulgate regulations with respect to special enforcement areas.

Partnership items may be treated as nonpartnership items under

section 6231(c) if by such regulations the Secretary determines

and provides that to treat such items as partnership items will

interfere with the effective and efficient enforcement of the

revenue laws.   Special enforcement areas mentioned in section

6231(c)(1) include (A) termination and jeopardy assessments, (B)

criminal investigations, (C) indirect methods of proof of income,

(D) foreign partnerships, and (E) “other areas that the Secretary

determines by regulation”.   Among such areas that have been
                              -28-

designated by regulation, in addition to those specified in

section 6231(c)(1),13 are bankruptcy and receivership, sec.

301.6231(c)-7, Proced. & Admin. Regs., and requests for prompt

assessment, sec. 301.6231(c)-8, Proced. & Admin. Regs.

     The following comment appears in 1 McKee et al., Federal

Taxation of Partners and Partnerships, par. 10.02[4], at 10-16

(4th ed. 2007):

          Converting partnership items to nonpartnership
     items may have the salutary effect of freeing the
     Service and the partnership from the potentially
     cumbersome procedures of the partnership audit rules in
     appropriate cases. * * *

     On February 12, 2009, the Secretary proposed regulations

that would determine that treating items related to listed

transactions within the meaning of section 1.6011-4(b)(2), Income

Tax Regs., as partnership items “interferes with the effective

and efficient enforcement of the internal revenue laws”.   Notice

of proposed rule making, 74 Fed. Reg. 7206 (Feb. 13, 2009).    In

Notice 2000-44, supra, 2000-2 C.B. at 256, the IRS had announced

that Son-of-BOSS transactions using the paired-option partnership

contribution/disposition arrangement are “listed transactions”.

However, the proposed regulations would not become effective

until adopted as final regulations, applicable to partner taxable

years ending on or after the date of publication of the proposed



     13
      No such designation has been made by regulation with
respect to foreign partnerships.
                                 -29-

regulations in the Federal Register.    Sec. 301.6231(c)-9(c),

Proposed Proced. & Admin. Regs., 74 Fed. Reg. 7208 (Feb. 13,

2009).   Under the proposed regulations, as under the current

regulations related to designated enforcement areas, the

conversion of partnership items to nonpartnership items would

occur only if the Commissioner sent a written notice to that

effect to a partner before issuing an FPAA.    A hearing was set

for June 4, 2009, and comments were requested by May 14.

However, the hearing has been canceled because no requests to

speak on the proposal have been received, see 74 Fed. Reg. 25177

(May 27, 2009), and only one comment has been received, see 99

DTR G-5 (May 27, 2009).

II.   Petitioner’s Motion To Invalidate Temporary Regulation

      We now turn to Mr. Logan’s motion for partial summary

judgment that section 301.6221-1T(c) and (d), Temporary Proced. &

Admin. Regs., supra, is invalid because it would prevent him from

interposing his partner-level defenses to accuracy-related

penalties in this partnership-level proceeding.

      The issue is important.   It not only has implications for

taxpayer rights; it has practical consequences for judicial

administration generally and the conduct of the trial in the case

at hand, and also--as we shall see--for resolution of

respondent’s motion in limine.
                                -30-

     Mr. Logan’s counsel represented the taxpayer in Jade

Trading, LLC v. United States, 80 Fed. Cl. 11 (2007) on appeal

(Fed. Cir., Feb. 25, 2008),14 another Son-of-BOSS case of

transactions promoted by Sentinel that appears to follow the same

format as New Millennium Trading, LLC v. Commissioner, 131 T.C.

(2008), and the case at hand.   In Jade Trading, there was a 3-

week trial that was devoted in large part to the introduction of

evidence of the participating partners’ alleged due diligence and

good faith reliance on financial and tax advisers.

     In Jade Trading, Judge Williams first held, on the merits,

that the paired-option transactions lacked economic reality,

notwithstanding her view, under Helmer v. Commissioner, T.C.

Memo. 1975-160, and its offspring, that the obligations to

satisfy the sold call options assigned to and assumed by the




     14
      In Evergreen Trading, LLC v. United States, Fed. Cl. No.
06-123T, involving another Sentinel-promoted Son-of-BOSS
partnership, Judge Allegra, in an order dated Sept. 23, 2008, has
stayed all further proceedings pending final resolution on appeal
of Jade Trading, LLC v. United States, 80 Fed. Cl. 11 (2007).
Previously, Judge Allegra had issued Evergreen Trading, LLC v.
United States, 80 Fed. Cl. 122 (2007), a detailed and
comprehensive opinion (21 single-spaced pages and 20-page
appendix), granting in part and denying in part the Government’s
motion to compel production of more than 140 documents that
plaintiff had withheld from discovery. See also Nussdorf v.
Commissioner, 129 T.C. 30 (2007).
                                 -31-

partnership would not be considered liabilities under section

752.15

     Second, Judge Williams determined that the partnership-level

elements for the application of the 40-percent gross valuation

misstatement penalty and other accuracy-related penalties had all

been satisfied because the transaction was an abusive tax

shelter.     In Jade Trading, LLC v. United States, 81 Fed. Cl. 173,

176 (2008), denying Sentinel’s motion for reconsideration, Judge

Williams stated that the penalties that the Court had determined

clearly related to

     the inflated basis [that] the spread transaction in the
     partnership generated on the * * * [partners’]
     individual returns * * *

     * * * it was only the construct of forming the partnership
     and contributing the spread to the partnership that
     permitted the tax losses to be realized. Had the
     * * * [partners] simply done the spread transactions on
     their own without contributing them to * * * [the
     partnership] there would have been no substantial losses.
     As the Court recognized: “packaging the investment in the
     partnership vehicle was an absolute necessity for securing
     the tax benefits.” Jade [Trading], 80 Fed. Cl. at 14.
     [Emphasis supplied.]

     Third, Judge Williams upheld the validity of the temporary

regulation.     Notwithstanding that a substantial part of the Jade

Trading trial had been devoted to the introduction of evidence to

support the participating partners’ defenses to the penalties,

Judge Williams held that the temporary regulation was valid and

prevented the Court from considering those defenses.    As a



     15
          See supra note 2.
                               -32-

result, if Jade Trading should be affirmed on the pending appeal

to the Court of Appeals for the Federal Circuit, the Commissioner

will be able to assess by computational adjustments not only the

deficiencies (only some part of which has already been paid) but

also the 40-percent penalties, and the participating partners

will be required to file claims and suits for refund in order to

obtain judicial review of their partner-level defenses/claims for

refund of the penalties.   To similar effect is Stobie Creek

Invs., LLC v. United States, 82 Fed. Cl. 636 (2008) (Court of

Federal Claims held partnership, through its managing partner,

did not act with reasonable cause and good faith in regard to tax

underpayment so as to preclude accuracy-related penalties) on

appeal (Fed. Cir., Sept. 29, 2008).   But compare Klamath

Strategic Inv. Fund, LLC v. United States, ___ F.3d at ___-___

(slip op. at 21-23) (Court of Appeals affirmed District Court’s

holding that penalties did not apply because managers of

partnership reasonably relied on advice of professionals, but

reversed District Court’s ordering a refund because District

Court did not have jurisdiction to grant refund in partnership-

level proceeding).

     In New Millennium Trading, LLC v. Commissioner, supra, this

Court, on the participating-partner-tax-matters-partner’s motion

for partial summary judgment, has held that the temporary

regulation is valid and applicable to prevent the participating

partner from interposing his partner-level defenses in the
                                -33-

partnership-level proceeding if the Court should sustain the

Commissioner’s FPAA determinations that the partnership or the

participating partner’s transactions with the partnership should

be disregarded.    We are bound to follow New Millennium Trading;

we shall therefore deny Mr. Logan’s motion for partial summary

judgment.

III. Respondent’s Motion in Limine

     Mr. Logan asserts that he and the Logan Trusts reasonably

relied on the Curtis Mallet opinion in taking their return

positions that (1) their obligations under the sold options did

not reduce the bases of their partnership interests in Tigers Eye

and (2) in the liquidation of their partnership interests they

received high-basis assets whose sales created capital losses

that offset the long-term capital gains Mr. Logan realized

earlier in 1999 on the sales of MLWL shares.

     A.     Reasonable Cause Defense to Accuracy-Related Penalties

     Section 6664(c)(1) provides a reasonable cause defense to

application of accuracy-related penalties.   Pursuant to section

6664(c)(1), the accuracy-related penalty under section 6662(a)

does not apply to any portion of an underpayment if the taxpayer

shows that there was reasonable cause for, and that he acted in

good faith with respect to, such portion.    See Higbee v.

Commissioner, 116 T.C. 438, 448-449 (2001); sec. 1.6664-4(a),

Income Tax Regs.   The determination of whether the taxpayer acted

with reasonable cause and in good faith depends on the pertinent
                               -34-

facts and circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.

“Generally, the most important factor is the extent of the

taxpayer’s effort to assess the taxpayer’s proper tax liability.

Circumstances that may indicate reasonable cause and good faith

include * * * the experience, knowledge, and education of the

taxpayer.”    Id.

     Under some circumstances, a taxpayer may avoid liability for

the accuracy-related penalty by showing reasonable reliance on a

competent professional adviser.   See United States v. Boyle, 469

U.S. 241, 250-251 (1985); Freytag v. Commissioner, 89 T.C. 849,

888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.

868 (1991).   For reliance on professional advice to excuse a

taxpayer from negligence, the taxpayer must show that the

professional had the requisite expertise, as well as knowledge of

the pertinent facts, to provide informed advice on the subject

matter.   See David v. Commissioner, 43 F.3d 788, 789-790 (2d Cir.

1995), affg. T.C. Memo. 1993-621; Freytag v. Commissioner, supra

at 888.   The validity of the reliance turns on “the quality and

objectivity of professional advice which they obtained”.     Swayze

v. United States, 785 F.2d 715, 719 (9th Cir. 1986).

     “In order for reliance on professional tax advice to be

reasonable, however, the advice must generally be from a

competent 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.
                                 -35-

2004-279.   Courts have routinely held that taxpayers could not

reasonably rely on the advice of promoters or other advisers with

an inherent conflict of interest such as one who financially

benefits from the transaction.    See, e.g., 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. 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 transaction’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) (noting “that 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
                                -36-

obtaining an objective, independent opinion on its validity”),

affg. T.C. Memo. 2000-339.    A promoter’s self-interest makes such

“advice” inherently unreliable.

     B.     Respondent’s Position in Motion in Limine

     Mr. Logan identified Mr. Smith as a witness whose testimony

and expert report might aid the Court in evaluating whether the

Curtis Mallet opinion “is of the quality and character upon which

the Logan Trust could reasonably rely in preparing its tax

returns”.    Respondent filed respondent’s motion in limine to

exclude the Smith report and filed a supplement to the motion.

     Respondent advances two alternative grounds for excluding

the Smith report from evidence in its entirety:    (1) The Smith

report relates solely to Mr. Logan’s partner-level defenses that

cannot not be raised in this partnership-level proceeding under

section 301.6221-1T(c) and (d), Temporary Proced. & Admin. Regs.,

supra; and (2) the Smith report expresses legal conclusions.     If

we should reject both alternatives, respondent asserts that

portions of the Smith report should be excluded because they

constitute advocacy.16




     16
      With respect to respondent’s argument about advocacy, we
observe that Mr. Smith successfully represented the plaintiffs in
a partner-level proceeding, Allison v. United States, 80 Fed. Cl.
568 (2008), in establishing their rights to refunds of negligence
penalties assessed against them because of deductions and credits
they claimed from their participation in a plastics recycling
partnership that had been determined in a partnership-level
proceeding to be an abusive tax shelter.
                                -37-

     Respondent has also taken the position that Curtis Mallet

was a promoter of the transactions in issue and that the status

of Curtis Mallet as a promoter of Tigers Eye should be determined

in this partnership-level proceeding.17   Mr. Logan filed an

opposition to respondent’s motion in limine, and respondent filed

a reply to the opposition by Mr. Logan to respondent’s motion in

limine as supplemented.

     There seems to be incongruity between respondent’s position

that Mr. Logan’s alleged reliance on the Curtis Mallet opinion is

a partner-level defense over which we lack jurisdiction in this

partnership-level proceeding and respondent’s assertion that in

this same proceeding we should determine that Curtis Mallet was

one of the promoters of the transactions in issue on whose

opinion Mr. Logan was not entitled to rely.   We therefore

consider whether we have jurisdiction in this partnership-level

proceeding to decide whether Curtis Mallet was a promoter because

it relates to the issue of raising defenses to partnership-item

penalties in this proceeding.




     17
      Respondent served notice (in n.7 of respondent’s response
to Mr. Logan’s motion for partial summary judgment to declare the
temporary regulation invalid) that respondent asserts that (1)
Curtis Mallet was one of the promoters of the transactions in
issue, (2) as a matter of law, citing sec. 6664(d), a partner
cannot reasonably rely on the opinion issued by a promoter, and
(3) we should address the status of Curtis Mallet as a promoter
in this partnership-level proceeding.
                                 -38-

     C.     Status as Promoter of Partnership Determined in
            Partnership-Level Proceeding

     In the FPAA respondent determined, inter alia, that Tigers

Eye should be disregarded for Federal income tax purposes because

it “had no business purpose other than tax avoidance, lacked

economic substance, and constitutes an economic sham for Federal

income tax purposes”.    A “partnership item” includes “the legal

and factual determinations that underlie the determination of the

amount, timing, and characterization of items of income, credit,

gain, loss, deduction, etc.”      Sec. 301.6231(a)(3)-1(b), Proced.

& Admin. Regs.    Among such determinations are whether partnership

activities have been engaged in with the intent to make a profit

for purposes of section 183.     Id.18   The characterization of a

partnership as a sham or as lacking economic substance is a legal

determination that directly bears on the amount and

characterization of items of income, credit, gain, loss,

deduction, etc. and falls within the definition of partnership

item.     Petaluma FX Partners, LLC v. Commissioner, 131 T.C.

(2008); see also RJT Invs. X v. Commissioner, 491 F.3d 732, 737

(8th Cir. 2007).




     18
      We also note that par. 4 of exhibit A to the FPAA asserts
that the “purported partners of Tigers Eye did not enter into the
option positions and Tigers Eye did not purchase the foreign
currency or stock with a profit motive for purposes of section
165(c)(2)”. Notice 2000-44, 2000-2 C.B. 255, 255, cites Fox v.
Commissioner, 82 T.C. 1001 (1984), for the proposition that “in
the case of individuals, these [paired-option] transactions may
be subject to challenge under § 165(c)(2)”.
                                -39-

     To prove that Tigers Eye engaged in the transactions at

issue for profit, Sentinel and participating partner must show

that the activity was undertaken with an actual and honest

objective of making a profit.   While a reasonable expectation of

profit is not required, there must be a bona fide objective of

making an economic profit, independent of tax savings.     Taube v.

Commissioner, 88 T.C. 464, 478-479 (1987) (and cases cited

thereat); Beck v. Commissioner, 85 T.C. 557, 569-570 (1985) (and

cases cited thereat).

     The analysis of profit objective must be made at the

partnership level.   Klamath Strategic Inv. Fund, LLC v. United

States, ___ F.3d at ___ (slip op. at 19); Polakof v.

Commissioner, 820 F.2d 321, 323 (9th Cir. 1987), affg. T.C. Memo.

1985-197; Hulter v. Commissioner, 91 T.C. 371, 393 (1988);

Brannen v. Commissioner, 78 T.C. 471, 502-505 (1982), affd. 722

F.2d 695 (11th Cir. 1984).   The proper focus is on the activities

and intent of the general managers and promoters who effectively

organize and operate the partnership.   Klamath Strategic Inv.

Fund, LLC v. United States, supra at ___ (slip op. at 19) (citing

Agro Science Co. v. Commissioner, 934 F.2d 573, 576 (5th Cir.

1991), affg. T.C. Memo. 1989-687); Surloff v. Commissioner, 81

T.C. 210, 233 (1983); Kelley v. Commissioner, T.C. Memo.

1993-495.   In determining whether the partnership engaged in the

activity for profit, we must take into account all of the facts

and circumstances with respect to the activity.   Some courts have
                                -40-

held that evidence concerning other investor transactions

involving the same tax shelter product or program is relevant.

See, e.g., Sochin v. Commissioner, 843 F.2d 351, 355 & n.8 (9th

Cir. 1988) (and cases cited at n.8), affg. Brown v. Commissioner,

85 T.C. 968 (1985); Jade Trading, LLC v. United States, 65 Fed.

Cl. 188, 191-192 (2005).    “A consideration of the entire

investment program directly relates to the analysis of Taxpayers

probable economic benefits.”    Sochin v. Commissioner, supra at

355.

       Mr. Logan’s counsel states in the opposition to respondent’s

motion in limine that the universe of partners in Tigers Eye who

face the accuracy-related penalties received two opinions and a

122-page memorandum of law from Curtis Mallet and that

       While it is absolutely true that Mr. Smith states his
       analysis in terms of whether the Curtis Mallet opinion
       was of the type on which Mr. Logan could reasonably
       rely, that reality is true for the universe of those
       partners who reported the basis/”partnership item” and
       who face the 40 percent penalty asserted by the FPAA
       because they all received the same type of analysis
       from Curtis Mallet. [Emphasis added.]

       It appears to the Court that Curtis Mallet may have provided

substantially identical tax opinions to investors in other

Sentinel-promoted Son-of-BOSS transactions and that, like Mr.

Logan, each investor was required to pay $100,000 to obtain a

Curtis Mallet opinion.    See, e.g., Jade Trading, LLC v. United

States, 80 Fed. Cl. at 14 n.3.19   The Government is also arguing


       19
      See also Carlisle v. Curtis, Mallet-Prevost, Colt & Mosle,
LLP, 521 F.3d 597, 599 (6th Cir. 2008) (plaintiffs, who
                                                   (continued...)
                               -41-

on the appeal of Jade Trading that there is evidence in the

record of that case that Mr. Bricker (the Curtis Mallet partner

responsible for the opinion therein and the subject opinion in

the case at hand) understood that prospective clients would

retain Curtis Mallet only if it rendered a favorable tax opinion.

There are also indications in the Exhibits to the Second

Stipulation of Facts that has been lodged with the Court that

Curtis Mallet attorneys may have played a role in preparing the

forms of documents that were used to implement the transactions

in issue in this and other cases.

     Whether Curtis Mallet was a promoter of the transactions at

issue such that no investor could reasonably rely on the Curtis

Mallet opinion requires factual findings properly determined in a

partnership-level proceeding, similar to factual findings

necessary to determine that a partner has no basis in his

partnership interest because the partnership is a sham or lacks

economic substance.    See Petaluma FX Partners, LLC v.

Commissioner, 131 T.C. ___(2008).

     If, as respondent contends, Curtis Mallet was a promoter of

Tigers Eye, our focus in deciding whether Tigers Eye engaged in

the activities for profit must include the activities and intent

of Curtis Mallet.   Whether Curtis Mallet was a promoter is a


     19
      (...continued)
participated in a tax shelter promoted by Arthur Andersen LLP and
others, had signed individual retainer agreements with Curtis
Mallet for a fee of $100,000 each), revd. and remanded sub nom.
Arthur Andersen LLP v. Carlisle, 556 U.S. ___, 77 U.S.L.W. 4474
(May 4, 2009).
                               -42-

partnership-level issue to be determined in this proceeding as

part of our review of the issues raised by the FPAA concerning

the creation and operation of the partnership and the means and

manner by which it and participating interests in it were created

and sold.   Therefore the Curtis Mallet opinion, and the

circumstances in which it was arranged and provided for, prepared

and produced, and obtained, received, and paid for by Mr. Logan,

are properly the subject of evidence in this proceeding.20

     Although respondent has taken the position that Curtis

Mallet was a promoter of the transactions at issue, respondent

asserts that Mr. Logan’s claim that he and the Logan Trusts

reasonably relied on the Curtis Mallet opinion is a partner-level

defense that cannot be raised in this partnership-level

proceeding under the temporary regulation.   Respondent asserts

that the Smith report relates solely to Mr. Logan’s partner-level

defenses and asks the Court to exclude the Smith report from

evidence in this partnership-level proceeding.   We disagree; the



     20
      In this regard, any similar evidence of Curtis Mallet
opinions to The Batts Group and to participating partners in
other Sentinel-promoted Son-of-BOSS transactions would be
relevant to establishing a pattern of activity of Curtis Mallet
in concert with Sentinel and any other alleged promoter or
promoters that would tend to support respondent’s contention that
Curtis Mallet acted as a promoter in the case at hand. See,
e.g., Sochin v. Commissioner, 843 F.2d 351, 355 (9th Cir. 1988)
(Tax Court properly admitted evidence of transactions of other
investors in the promoter’s program who were not before the Court
as relevant to the sham determination), affg. Brown v.
Commissioner, 85 T.C. 968 (1985).
                              -43-

analysis that follows shows that the definition of partner-level

defense in the temporary regulation does not necessarily

encompass Mr. Logan’s and the Logan Trusts’ reliance on the

Curtis Mallet opinion.

     D.   Tax Court’s Jurisdiction To Decide Defenses to
          Applicability of Penalty That Are Not Partner-Level
          Defenses Defined by Temporary Regulation

     Section 6226(f), as amended by TRA 1997 section 1238(b), 111

Stat. 1026, gives this Court jurisdiction to decide the

applicability of any partnership-item penalty, and generally, the

applicability of a penalty depends on the absence or existence of

a valid defense to its application.    Section 6226(f) neither

specifically permits nor prohibits the Court’s consideration of

the partnership’s or partners’ defenses to partnership-item

penalties in the partnership-level proceeding.    However, the

temporary regulation prohibits partner-level defenses to any

partnership-item penalty from being asserted in the partnership-

level proceeding but allows them to be asserted in a separate

refund proceeding as permitted in section 6230(c)(4).    Although

section 6230(c)(1) and (4) and the temporary regulation make

clear that partner-level defenses cannot be decided at the

partnership level, by implication all other defenses may be

determined at the partnership level.

     The temporary regulation specifically limits partner-level

defenses to those defenses “that are personal to the partner or
                               -44-

are dependent upon the partner’s separate return, and cannot be

determined at the partnership level.”   Sec. 301.6221-1T(d),

Temporary Proced. & Admin. Regs., supra.    Examples of

partner-level defenses include “whether any applicable threshold

underpayment of tax has been met with respect to the partner or

whether the partner has met the criteria of section 6664(b)

(penalties applicable only where return is filed), or section

6664(c)(1) (reasonable cause exception)”.     Id.

     A defense based on the reasonable cause exception under

section 6664(c)(1), including reasonable reliance on the opinion

of a professional, may be raised in a partnership-level

proceeding if it is not a partner-level defense.    See, e.g.,

Santa Monica Pictures, LLC v. Commissioner, T.C. Memo. 2005-104

(Court considered substantial authority standard as defense to

application of understatement penalty, reasonable reliance by tax

matters partner on opinion of a professional, and reasonable

cause exception).   Respondent has taken the position that, in

deciding whether the section 6664(c)(1) reasonable cause defense

applies, the Court may consider only whether the partnership had

reasonable cause.   That position, however, is more restrictive

and gives a broader definition to partner-level defenses than the

temporary regulation.

     E.   Partner-Level Defense: Definition

     In section 6231(a)(3) Congress vested the Secretary with

authority to ascertain which items are more appropriately
                               -45-

determined at the partnership level than at the partner level.

See RJT Invs. X v. Commissioner, 491 F.3d at 738 n.8 (“Congress

vested in the Secretary of the Treasury, not in the federal

courts, the authority to weigh and decide what items are most

suitably ascertained at the partnership level”).   In the

temporary regulation the Secretary has determined that the only

defenses that are not suitably ascertainable at the partnership

level are defenses that are “personal to the partner or are

dependant upon the partner’s separate return and cannot be

determined at the partnership level.”   Sec. 301.6221-1T(d),

Temporary Proced. & Admin. Regs., supra.   All defenses that are

neither personal to the partner nor dependent on the partner’s

separate return are suitably ascertainable at the partnership

level.   In a partnership-level proceeding, the Court has

jurisdiction to decide the applicability of a penalty including

any defenses to the penalty that are suitably determined at the

partnership level; i.e., all defenses that are neither personal

to the partner nor dependent upon the partner’s separate return

and can be determined at the partnership level.

     Mr. Logan’s and the Logan Trusts’ reasonable cause defense

to partnership-item penalties, their reliance on the Curtis

Mallet opinion, is not a partner-level defense if it is personal

neither to Mr. Logan nor to the Logan Trusts, does not depend on

their separate returns, and can be determined at the partnership

level.
                               -46-

          1.    Personal to the Partner

     The term “personal” is defined as “1: of or relating to a

particular person:   affecting one individual or each of many

individuals:   peculiar or proper to private concerns:   not public

or general * * * 6: exclusively for a given individual”.

Webster’s Third New International Dictionary 1686 (2002).   In the

context of a partnership, a defense is personal to a partner when

it relates exclusively to that partner and requires the Court to

consider facts that are unique to that partner.

     Partner-level defenses include only those defenses that are

personal or unique to a particular partner; i.e., only those

defenses that require factual findings that are generally

unrelated to the promotion of the transaction or formation of the

partnership that would be relevant to all partners--factual

findings unique to the relationship between a particular partner

and the adviser on whose advice he claims to rely.   Partnership-

level defenses are not limited to defenses of the partnership.

Rather they include all defenses that require factual findings

that are generally relevant to all partners or a class of

partners and not unique to any particular partner.

     There are situations, as in this case, where the

participating partner asserts reasonable reliance on materials

and opinions provided to all participating partners (as well as

investors in other partnerships promoted by the same persons) by

persons who may have been promoters of the transaction.    Reliance
                                 -47-

on such opinions would not be personal to a particular partner.

       The determination of whether a taxpayer acted with

reasonable cause and in good faith with respect to an

underpayment that is related to a partnership item is made on the

basis of all pertinent facts and circumstances.       Sec.

1.6664-4(b)(1), Income Tax Regs.    “Circumstances that may

indicate reasonable cause and good faith include * * * the

experience, knowledge, and education of the taxpayer.”       Id.   “In

order for reliance on professional tax advice to be reasonable,

however, the advice must generally be from a competent and

independent advisor unburdened with a conflict of interest and

not from promoters of the investment.”       Mortensen v.

Commissioner, 440 F.3d at 387.    Taxpayers cannot reasonably rely

on the advice of promoters or other advisers with an inherent

conflict of interest such as one who financially benefits from

the transaction.    See, e.g., Goldman v. Commissioner, 39 F.3d at

408.    A promoter’s self-interest makes such “advice” inherently

unreliable.

       If a partner’s defense is reliance on expert or legal advice

from an adviser who is unrelated to, and has no interest in, the

transaction, that defense requires factual findings unique to the

relationship between that partner and that adviser, and the Court

has no jurisdiction in a partnership-level proceeding to decide

the applicability of the defense.       On the other hand, if a

partner’s defense is reliance on advice from an adviser who
                                 -48-

participated in structuring the transaction or is otherwise

related to, has an interest in, or profits from the transaction,

i.e., is considered a “promoter” of the transaction, that defense

requires factual findings that would be generally relevant to all

similarly situated partners and not unique to that particular

partner.   A defense that relates to all such partners and is an

integral part of the investment program is not personal to a

particular partner.   The Court has jurisdiction in a partnership-

level proceeding to decide the applicability of that defense.

           2.   Depends on Partner’s Separate Return

     A defense to a partnership-item penalty is a partner-level

defense if it depends on the partner’s separate return.    A

defense depends on the partner’s separate return if relevant

facts can be established only by examination of or reference to

the partner’s separate return.    An example of a defense that

depends on the partner’s separate return is the adequate

disclosure exception to the accuracy-related penalty for a

substantial understatement of income tax under section

6662(d)(2)(B).21   Deciding whether the relevant facts affecting


     21
      Generally, there is a substantial understatement of income
tax for any taxable year if the amount of the understatement
exceeds the greater of 10 percent of the tax required to be shown
on the return for the taxable year or $5,000 ($10,000 in the case
of a corporation other than an S corporation or a personal
holding company). Sec. 6662(d)(1). In this context, the term
“understatement” is defined as the excess of the amount of the
tax required to be shown on the return over the amount of the tax
imposed which is shown on the return, reduced by any rebate.
                                                   (continued...)
                               -49-

the partnership item’s tax treatment were adequately disclosed in

the partner’s separate return or in a statement attached to that

return requires an examination of the return and is a partner-

level defense that cannot be asserted in the partnership-level

proceeding.   Another example would be a claim by a partner that

the penalty for substantial understatement of tax does not apply

because the tax reported on his return is not a substantial

understatement of the correct tax owed.   These defenses require

an examination of the partner’s separate return.

     By contrast, deciding whether a particular partner

reasonably relied on the advice of a competent tax adviser

generally would not require the Court to examine that partner’s

return.   Deciding whether Mr. Logan and the Logan Trusts--and The

Batts Group, if it also received a Curtis Mallet opinion--were

entitled to rely on the Curtis Mallet opinion would not require

an examination of their separate returns; the facts necessary to

prove they were entitled to rely on the Curtis Mallet opinion and

that such reliance was reasonable to support a reasonable cause

defense to partnership-item penalties would not depend on their

separate returns.


     21
      (...continued)
Sec. 6662(d)(2)(A). In determining whether an understatement of
income tax is substantial, the amount of the understatement is
reduced by any portion attributable to an item if there is or was
substantial authority for the taxpayer’s treatment of the item,
or if the relevant facts affecting the item’s tax treatment are
adequately disclosed in the return or in a statement attached
thereto. Sec. 6662(d)(2)(B).
                               -50-

          3.   Cannot Be Determined at Partnership Level

     A partner-level defense is a defense that cannot be

determined at the partnership level.   Defenses that are personal

to the partner or depend on the partner’s separate return cannot

be decided at the partnership level because the Court is unable

to decide on the basis of the evidence necessary and relevant to

deciding the underlying adjustments in the FPAA whether the

defense applies.

     The temporary regulation provides examples of partner-level

defenses that cannot be raised in the partnership-level

proceeding, including, inter alia, whether the partner has

satisfied the criteria of the reasonable cause exception under

section 6664(c)(1) subject to partnership-level determinations as

to the applicability of section 6664(c)(2).22   The example is

appropriate and applies to situations where the partner claims

reasonable cause and good faith on the basis of opinions and

actions by advisers unrelated to the transaction.   This is

because the validity of the defense cannot be decided on the



     22
      In Stobie Creek Invs., LLC v. United States, 82 Fed. Cl.
636, 703-704 (2008), the Court of Federal Claims held that the
example in the temporary regulation did not permit the partners
to raise similar defenses in the partnership-level proceeding.
The Court of Federal Claims applied the example in the temporary
regulation without considering the fact that the temporary
regulation limits partner-level defenses to those defenses “‘that
are personal to the partner or are dependent upon the partner’s
separate return and cannot be determined at the partnership
level.’” Id. at 703 (quoting sec. 301.6221-1T(d), Temporary
Proced. & Admin. Regs., supra).
                               -51-

basis of the evidence necessary and relevant to deciding the

underlying adjustments in the FPAA.

     On the other hand, the nature and character of a

partnership’s transactions are more appropriately determined at

the partnership level than at the partner level.   They are within

the Court’s scope of review in a partnership-level proceeding and

the Court has jurisdiction to make findings concerning the

character of the partnership’s transactions.   See River City

Ranches #1 Ltd. v. Commissioner, 401 F.3d 1136, 1144 (9th Cir.

2005), affg. in part and revg. in part T.C. Memo. 2003-150.     The

status of an adviser as a promoter is a partnership-level issue

when it is relevant to issues raised by the FPAA concerning the

creation and operation of the partnership and the means and

manner by which the partnership and partnership interests were

created and sold.   The opinion provided by a promoter to

investors in the transactions and the circumstances in which the

opinion was arranged for and provided to the investors are

relevant to the underlying adjustments in the FPAA and are

properly the subject of evidence in the partnership-level

proceeding.   Such matters are within the Court’s scope of review

in a partnership-level proceeding, as in the case at hand, and

the Court has jurisdiction to make findings concerning the

relationships of the putative promoter to the partnership.

     Whether the adviser upon whose opinion the partner claims to

have relied is a promoter of the transactions and, if so, whether
                                -52-

the adviser’s opinion is inherently unreliable can be decided on

the basis of the evidence necessary and relevant to deciding the

underlying adjustments in the FPAA; they would be more

appropriately determined at the partnership level.

          4.   If Curtis Mallet Was a Promoter

     We have held that whether Curtis Mallet was a promoter of

the transactions at issue is to be decided in this partnership-

level proceeding.   Curtis Mallet may have provided opinions to

The Batts Group substantially similar to its opinions to Mr.

Logan and the Logan Trusts.   Indeed, respondent may prove that

Curtis Mallet provided substantially identical opinions to all,

most, many, or some of the other investors who participated in

Sentinel-promoted paired-option partnership transactions.      In

that event, the Curtis Mallet opinion and the circumstances in

which it was arranged, provided for, prepared, and produced by

Curtis Mallet and obtained, received, and paid for by Mr. Logan,

the Logan Trusts, The Batts Group, and other investors who

participated in similar Sentinel-promoted paired-option

partnership transactions would be proper subjects of evidence in

this proceeding.    See supra note 20.   In considering that

evidence, the Court has jurisdiction to decide whether Curtis

Mallet was a promoter and whether the circumstances in which the

Curtis Mallet opinion was arranged for and provided to investors

in the paired-option partnership transactions promoted by

Sentinel prove that the opinion is inherently unreliable.      If the
                               -53-

Court should decide that Curtis Mallet was a promoter of the

transactions at issue and that the Curtis Mallet opinion was

inherently unreliable, reliance on the opinion would not be a

partner-level defense.   In that event, the Court would have

jurisdiction to decide whether Mr. Logan and the Logan Trusts

could reasonably rely on the Curtis Mallet opinion.

     By contrast, Mr. Logan might well have partner-level

defenses to the partnership-item penalties on the basis of advice

he may have received and relied on from other tax, legal,

financial, and accounting advisers, defenses that the temporary

regulation prevents him from raising in this partnership-level

proceeding.

          5.   If Curtis Mallet Was Not a Promoter

     If we should decide in this partnership-level proceeding

that Curtis Mallet was not a promoter, deciding whether Mr. Logan

and the Logan Trusts reasonably relied on the Curtis Mallet

opinion would require an examination of facts personal to Mr.

Logan and the trusts, including Mr. Logan’s education and

business experience and the nature and extent of his relationship

with Curtis Mallet.   It would be a partner-level defense as

defined by the temporary regulation that we would not have

jurisdiction to decide in this partnership-level proceeding.

          6.   Conclusion

     If we should sustain the FPAA determinations that Tigers Eye

or Mr. Logan’s transactions with Tigers Eye must be disregarded
                                  -54-

and that the accuracy-related penalties otherwise apply, reliance

on the Curtis Mallet opinion by Mr. Logan and the Logan Trusts

would be assertable and decided in this partnership-level

proceeding only if the Court should decide that Curtis Mallet was

a promoter and that the Curtis Mallet opinion was inherently

unreliable.     If we should hold that Curtis Mallet was not a

promoter, Mr. Logan’s and the Logan Trusts’ reliance on the

Curtis Mallet opinion would be a partner-level defense that could

not be decided in this partnership-level proceeding.        Since

reliance on the Curtis Mallet opinion would not be a partner-

level defense should we decide that Curtis Mallet was a promoter,

at this time we cannot conclude that Mr. Smith’s report must be

excluded on jurisdictional grounds.

     F.      Legal Conclusions and Advocacy of Mr. Logan’s Position
             in the Smith Report

     Respondent next argues that the Smith report should be

excluded because it consists of legal conclusions.        We agree.

     Proceedings in this Court are conducted in accordance with

the Federal Rules of Evidence.        Pursuant to Rule 143(a) expert

testimony is admissible under rule 70223 of the Federal Rules of


     23
          Fed. R. Evid. 702 states:

          If scientific, technical, or other specialized
     knowledge will assist the trier of fact to understand
     the evidence or to determine a fact in issue, a witness
     qualified as an expert by knowledge, skill, experience,
     training, or education, may testify thereto in the form
     of an opinion or otherwise, if (1) the testimony is
                                                   (continued...)
                                 -55-

Evidence if it assists the Court to understand the evidence or to

determine a fact in issue.     Sunoco, Inc. & Subs. v. Commissioner,

118 T.C. 181, 183 (2002).    Expert opinion about what the law is

or how to apply law to facts does not “assist the trier of fact

to understand the evidence or to determine a fact in issue”.    See

Fed. R. Evid. 702.    “Each courtroom comes equipped with a ‘legal

expert,’ called a judge”.    Burkhart v. Wash. Metro. Area Transit

Auth., 112 F.3d 1207, 1213 (D.C. Cir. 1997); see also Specht v.

Jensen, 853 F.2d 805, 807 (10th Cir. 1988) (“‘There being only

one applicable legal rule for each dispute or issue, it requires

only one spokesman of the law, who of course is the judge’”

(quoting Stoebuck, “Opinions on Ultimate Facts: Status, Trends,

and a Note of Caution”, 41 Denv. L. Ctr. J. 226, 237 (1964))).

“This holds just as true when the finder of fact is the court, if

not more so; the court is well equipped to instruct itself on the

law.”     Stobie Creek Invs., LLC v. United States, 81 Fed. Cl. 358,

360-361 (2008).    Courts routinely exclude expert opinion on legal

issues.    See, e.g., Nieves-Villanueva v. Soto-Rivera, 133 F.3d

92, 100 (1st Cir. 1997) (ruling inadmissible expert testimony

regarding holdings of cases on statutory categorization of public

employees, but upholding trial verdict as product of harmless


     23
      (...continued)
     based upon sufficient facts or data, (2) the testimony
     is the product of reliable principles and methods, and
     (3) the witness has applied the principles and methods
     reliably to the facts of the case.
                              -56-

error); Burkhart v. Wash. Metro. Area Transit Auth., supra at

1213 (reversing trial court’s admission of expert testimony on

legal issues at trial whether legal standards of Americans with

Disabilities Act satisfied); Peterson v. City of Plymouth, 60

F.3d 469, 475 (8th Cir. 1995) (finding reversible error in trial

court’s admission of expert testimony on whether police conduct

violated fourth amendment standards); United States v. Leo, 941

F.2d 181, 196 (3d Cir. 1991) (upholding trial court’s limiting of

expert testimony regarding credibility and stating that “While it

is not permissible for a witness to testify as to the governing

law”, trial court did not abuse discretion in allowing expert to

testify on relevant industry practice); Montgomery v. Aetna Cas.

& Sur. Co., 898 F.2d 1537, 1541 (11th Cir. 1990) (finding abuse

of discretion where trial court allowed expert testimony on legal

duty to hire tax counsel); Adalman v. Baker, Watts & Co., 807

F.2d 359, 365-368 (4th Cir. 1986) (reversing and remanding trial

court’s admission of expert testimony on meaning and

applicability of securities laws), abrogated on other grounds by

Pinter v. Dahl, 486 U.S. 622, 650 (1988)); United States v.

Vreeken, 803 F.2d 1085, 1091 (10th Cir. 1986) (ruling trial court

properly excluded expert testimony of complexity of tax and

banking law); United States v. Curtis, 782 F.2d 593, 599 (6th

Cir. 1986) (affirming lower court’s grant of motion in limine to

exclude expert testimony on unsettled nature of tax law regarding

willfulness); Owen v. Kerr-McGee Corp., 698 F.2d 236, 240 (5th
                               -57-

Cir. 1983) (affirming trial court for properly overruling

objection to expert’s testimony on factual cause of accident and

admitting testimony which did not concern legal cause of

accident); Ward v. Westland Plastics, Inc., 651 F.2d 1266, 1270

(9th Cir. 1980) (holding trial court judge correctly excluded

expert testimony that plaintiff was discriminated against on

account of sex); Marx & Co. v. Diners’ Club, Inc., 550 F.2d 505,

509-510 (2d Cir. 1977) (reversing and remanding trial court’s

admission of expert testimony concerning legal obligations of

parties to contract); Loeb v. Hammond, 407 F.2d 779, 781 (7th

Cir. 1969) (finding no error in trial court’s exclusion of expert

testimony on legal significance of documents, a matter of

contract interpretation).

     In support of the second ground for complete exclusion,

respondent’s supplement cites Judge Miller’s Memorandum Opinion

and Order in Stobie Creek Invs., LLC v. United States, 81 Fed.

Cl. 358 (2008), excluding the testimony of Mr. Smith and

Professor Ira B. Shepard offered in the partnership-level

challenge to the FPAA in that Son-of-BOSS case.24   Judge Miller


     24
      Recently, in an unpublished opinion of the U.S. Court of
Federal Claims, Murfam Farms, LLC v. United States, No. 1:06-cv-
00245 (Sept. 19, 2008), then Chief Judge Damich in a partnership-
level proceeding granted in part and denied in part the
Government’s motion to exclude an expert report of Mr. Smith that
opinions provided to the taxpayers by the Proskauer Rose law firm
“were of the type, character, and quality upon which a taxpayer
could reasonably rely”. Chief Judge Damich allowed the bulk of
Mr. Smith’s report to be introduced into evidence on the ground
                                                   (continued...)
                              -58-

found that the plaintiff’s legal experts, including Mr. Smith,

whose report was similar in many respects to the Smith report in

the case at hand, were in effect applying law to the facts and,

in expressing legal conclusions, purporting to tell the trier of

fact how it should decide a disputed issue.   Therefore Judge

Miller held that the reports did not “assist” the trier of fact

in the manner contemplated by rule 702 of the Federal Rules of

Evidence and were inadmissible.

     In the case at hand the Smith report analyzes how the Curtis

Mallet opinion fulfills the requirements of Treasury Department

Circular No. 230, 31 C.F.R. secs. 10.0-10.93, and concludes that

the Curtis Mallet opinion for Mr. Logan and the Logan Trusts is


     24
      (...continued)
that it “merely analyzes whether the Proskauer Rose opinions
contain enough factual information and legal analysis such that a
taxpayer could rely upon it [sic],” but excluded two selected
passages of the report as containing unhelpful legal analysis and
advocacy. The Murfam Farms opinion did not address the
possibility that the report should be excluded as being proffered
in aid of partner-level defenses to penalties that the Court of
Federal Claims lacked jurisdiction to consider in the pending
proceeding. Soon thereafter, however, on Oct. 31, 2008, Judge
Damich issued an order in the Murfam Farms case denying the
plaintiffs’ motion to confirm jurisdiction to hear their
reasonable cause defenses to the accuracy-related penalties
determined in the FPAA. The ground of the motion was that each
plaintiff was the managing partner of his respective partnership
and thus would be mounting a partnership-level defense to the
penalties determined against him. Judge Damich was not willing
to accept at face value the characterization in the governing
agreements that every member partner was a manager; Judge Damich
concluded that each partner’s involvement in and knowledge of the
transactions conducted by the partnerships should be explored at
trial. Judge Damich found that there was a genuine issue of
material fact as to the identity of the managing member partners
and therefore denied plaintiffs’ motion.
                                 -59-

of the quality and character upon which taxpayers such as they

could reasonably rely in preparing their tax returns.     The Smith

report does not assist the Court in understanding the evidence or

determining a fact in issue.    It merely advocates Mr. Logan’s

position and is not admissible for such purposes.    Sunoco, Inc. &

Subs. v. Commissioner, 118 T.C. at 183-184; Alumax, Inc. v.

Commissioner, 109 T.C. 133 (1997), affd. 165 F.3d 822 (11th Cir.

1999); Hosp. Corp. of Am. v. Commissioner, 109 T.C. 21 (1997);

Snap-Drape, Inc. v. Commissioner, 105 T.C. 16, 20 (1995), affd.

98 F.3d 194 (5th Cir. 1996); Estate of Halas v. Commissioner, 94

T.C. 570, 577 (1990); Laureys v. Commissioner, 92 T.C. 101, 129

(1989); Estate of Carpenter v. Commissioner, T.C. Memo. 1993-97.

We conclude that the Smith report does not assist the Court in

understanding the factual questions in issue and is not

admissible.   Accordingly, we shall grant respondent’s motion in

limine.

                               Afterword

     In addition to deciding the issues directly raised by the

parties’ motions, we have held that we have jurisdiction in this

partnership-level proceeding to decide whether the Curtis Mallet

firm was a promoter of the transactions in issue.   Our decision

on the promoter issue will have an impact on whether reliance on

the Curtis Mallet opinion by Mr. Logan and the Logan Trusts is a

partnership-level defense (over which we have jurisdiction) or a

partner-level defense (over which we lack jurisdiction).    We have
                                -60-

also recognized that Mr. Logan may have other partner-level

defenses to the partnership-item penalties on the basis of advice

he may have received and reasonably relied on from other tax,

legal, financial, and accounting advisers that he could raise

only in a refund action. See sec. 301.6221-1T(c) and (d),

Temporary Proced. & Admin. Regs., supra.

     Against the background of our holdings and their

implications, it bears noting that TRA 1997 has created problems

of judicial administration that Congress may not have

anticipated.25   The problem faced by Mr. Logan and other

investors who participated in Sentinel-promoted transactions or

other Son-of-BOSS transactions is not the temporary regulation

(now permanent)--which gives effect to what would appear to be

the legislative intent.   Rather, it is TRA 1997, which, for the

first time since 1924, denies taxpayers a prepayment forum for

the determination of penalties on income tax deficiencies.26

     Although deficiency procedures continue to apply to other

affected items, deficiency procedures do not apply to

partnership-item penalties regardless of whether further

partner-level determinations are required.   Sec.



     25
      See comments in a somewhat similar vein in the concluding
paragraphs of Domulewicz v. Commissioner, 129 T.C. 11, 23-24
(2007).
     26
      See Pisem, “What Happened to My Prepayment Forum? The
Penalty Problem in TEFRA Partnership Audit Cases”, 108 J. Tax.
269 (May 2008).
                               -61-

6230(a)(2)(A)(i); Domulewicz v. Commissioner, 129 T.C. 11, 23

(2007); see also Fears v. Commissioner, 129 T.C. 8 (2007).

Consequently, although the Court has jurisdiction in a

partnership-level proceeding to decide whether a partnership-item

penalty applies and in a partner-level proceeding to decide the

amount of the deficiency to which a partnership-item penalty

applies, it does not have jurisdiction to decide the amount of

the penalty or to consider any partner-level defenses in either

proceeding.   Domulewicz v. Commissioner, supra.   The Commissioner

may assess a partnership-item penalty before the deficiency to

which the penalty relates is adjudicated, id. at 23; the partner

must pay the assessed penalty and raise his partner-level

defenses in a refund proceeding, sec. 6230(c)(4); sec. 301.6221-

1T(c) and(d), Temporary Proced. & Admin. Regs., supra.

     As observed supra Part II, this splitting of the procedure

for determining penalties not only has implications for taxpayer

rights; it also has practical consequences for judicial

administration generally and the conduct of the trial in the case

at hand.

     The original purpose of TEFRA was “to promote increased

compliance and more efficient administration of the tax laws.”

H. Conf. Rept. 97-760, at 600 (1982), 1982-2 C.B. 600, 662.    To

that end, TEFRA provided a procedure making it unnecessary for

the Commissioner to initiate multiple proceedings against all the

partners of a partnership.   Instead, by means of the FPAA, he
                               -62-

could determine in one proceeding at the partnership level the

income tax consequences to the partners of the actions of the

partnership.   In TEFRA title IV, Congress provided that the tax

treatment of any “partnership item” of certain partnerships

should be decided at the partnership level.   Sec. 6221.   After

the partnership-level proceedings had been completed, the

Commissioner would be able to assess and collect against the

partners directly deficiencies attributable to computational

items based on adjustments of partnership items.    But the

Commissioner was required, with respect to affected items,

including penalties, to issue a notice of deficiency to each

partner, thereby giving the partner the right to file a Tax Court

petition and to postpone (and perhaps avoid) assessment and

collection of the deficiency and penalties until the Tax Court

should decide those aspects of the case at the partner level.

See sec. 6230(a)(2); sec. 301.6231(a)(5)-1T(c), Temporary Proced.

& Admin. Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987).

     Even if a petition challenging the FPAA were filed in a

court other than the Tax Court, with the effect that any tax

deficiency attributable to the FPAA adjustments could be assessed

without further judicial review, penalties attributable to

partnership items still required application of the deficiency

procedures after completion of partnership-level proceedings.

     TRA 1997 represents a partial return to the Revenue Act of

1924, which created the Board of Tax Appeals.   Under the Revenue
                                -63-

Act of 1924, if the Government prevailed before the Board, the

deficiency could be immediately assessed and collected.     Although

the taxpayer could not directly appeal the Board’s decision to a

higher court, the taxpayer could file a claim for refund with the

predecessor of the IRS and, upon denial of the claim, bring a

refund action in a District Court or the Court of Claims.    See

Dubroff, The United State Tax Court--An Historical Analysis 77-78

(1979).    This approach was promptly repealed by the Revenue Act

of 1926, which provided for Court of Appeals review and finality

of Board decisions.    Id. at 118.   The approach adopted by the

Revenue Act of 1926 has continued to apply to the Tax Court to

the present day, with the exception carved out by TRA 1997 with

respect to penalties in TEFRA cases.

     TRA 1997 and the regulations promulgated thereunder give the

Tax Court the task of determining in a partnership-level

challenge to an FPAA whether penalties apply to any deficiency

that would result from a decision in favor of the Government on

the merits and then provide for the assessment against and

collection of both the deficiency and the penalties from each

partner.   Only thereafter do they allow a partner to assert his

individual partner-level reasonable cause defenses to the

penalties in a refund action in a District Court or the Court of

Federal Claims.   TRA 1997 and the regulations thereby result in

“splitting a cause of action” with respect to penalties in TEFRA

proceedings.   As defined in Black’s Law Dictionary 1937 (8th ed.
                               -64-

2004), “splitting a cause of action” is:   “Separating parts of a

demand and pursuing it piecemeal; presenting only a part of a

claim in one lawsuit, leaving the rest for a second suit.     This

practice has long been considered procedurally impermissible.”

     The prohibition against splitting a cause of action is

common law doctrine.   Magnolia Petroleum Co. v. Hunt, 320 U.S.

430, 460-461 (1943) (Black, J., dissenting).   Congress, of

course, has the power to define and restrict the jurisdiction of

the Federal courts, Stoneridge Inv. Partners, LLC v.

Scientific-Atlanta, Inc., 552 U.S. ___, 128 S. Ct. 761, 773

(2008) (“The decision to extend the cause of action is for

Congress, not for us.”); Wilder v. Va. Hosp. Association, 496

U.S. 498, 509, n.9 (1990) (requirement of congressional intent

“reflects a concern, grounded in separation of powers, that

Congress rather than the courts controls the availability of

remedies for violations of statutes”), particularly a statutory

court such as the Tax Court, sec. 7442 (“The Tax Court * * *

shall have such jurisdiction as is conferred on * * * [it] by

this title”); Estate of Smith v. Commissioner, 429 F.3d 533, 537

(5th Cir. 2005) (“The Tax Court may exercise jurisdiction only to

the extent that jurisdiction has been conferred upon it by

Congress.” (citing Commissioner v. McCoy, 484 U.S. 3, 7 (1987))),

vacating 123 T.C. 15 (2004).
                               -65-

     The TRA 1997 rationale to add penalty determinations to

partnership-level proceedings and to split them from the partner-

level defenses to the penalties was stated as follows:

“applying penalties at the partner level through the deficiency

procedures following the conclusion of the unified proceeding at

the partnership level increases the administrative burden on the

IRS and can significantly increase the Tax Court’s inventory.”

H. Rept. 105-148, at 594 (1997), 1997-4 C.B. (Vol. 1) 319, 916.

     This rationale obviously applies to “middle class” tax

shelter partnerships with scores of partners, such as the Hoyt

cattle and sheep-breeding partnerships.   See, e.g., River City

Ranches #1 Ltd. v. Commissioner, 401 F.3d 1136 (9th Cir. 2005);

see also Durham Farms #1, J.V. v. Commissioner, T.C. Memo. 2000-

159, affd. 59 Fed. Appx. 952 (9th Cir. 2003); River City Ranches

#4, J.V. v. Commissioner, T.C. Memo. 1999-209, affd. 23 Fed.

Appx. 744 (9th Cir. 2001); cf. Ertz v. Commissioner, T.C. Memo.

2007-15.   Although the tax deficiencies implicating accuracy-

related penalties were attributable to events at the partnership

level, the Hoyt partnerships have required multiple affected

items partner-level proceedings to address the penalty

determinations against individual partners.   See, e.g., Hansen v.

Commissioner, 471 F.3d at 1028-1033; Mortensen v. Commissioner,

440 F.3d 375 (6th Cir. 2006); Van Scoten v. Commissioner, 439
                              -66-

F.3d 1243 (10th Cir. 2006); Sanders v. Commissioner, T.C. Memo.

2005-163.27

     The TRA 1997 rationale makes less sense in Son-of-BOSS

transactions and other tax shelters sold to multimillionaires,

where each partnership usually has no more than one or two

individuals or family groups as participants.   The new procedure

under TRA 1997 makes it necessary, in cases in which the

partnership-level determinations are sustained, to educate two

different courts (or at least two different judges) in the

operation of the same complex set of transactions.   One court has

the task of determining the validity of the FPAA determinations

which, if sustained, will lead to deficiency and penalty

assessments by way of computational adjustments.   Another court,

in a refund suit to recover the penalties, must determine the

validity of the participating partner’s partner-level defenses to


     27
      Another type of tax shelter antedating TRA 1997 that has
spawned numerous affected items proceedings to determine
additions to tax have been the jojoba tax shelter TEFRA
partnerships. See Utah Jojoba I Research v. Commissioner, T.C.
Memo. 1998-6 (partnership-level proceeding sustaining FPAA
adjustments); see also Altman v. Commissioner, T.C. Memo. 2008-
290; Watson v. Commissioner, T.C. Memo. 2008-276; Helbig v.
Commissioner, T.C. Memo. 2008-243; Bass v. Commissioner, T.C.
Memo. 2007-361, affd. without published opinion 2009-1 USTC par.
50,332, 103 AFTR 2d 2009-1624 (11th Cir. 2009); Finazzo v.
Commissioner, T.C. Memo. 2002-56; Welch v. Commissioner, T.C.
Memo. 2002-39; Christensen v. Commissioner, T.C. Memo. 2001-185;
Serfustini v. Commissioner, T.C. Memo. 2001-183; Carmena v.
Commissioner, T.C. Memo. 2001-177; Nilsen v. Commissioner, T.C.
Memo 2001-163 (affected items proceedings sustaining additions to
tax arising from failed investments in jojoba tax-shelter
partnerships). But see Swanson v. Commissioner, T.C. Memo. 2009-
31.
                                -67-

those penalties.   If the partnership-level adjustments should

require an affected items partner-level proceeding to determine

the deficiencies and penalties, three proceedings would be

required, because the partner-level defenses to the penalties

could not be raised in the affected-items deficiency proceeding.

     The new procedure also creates complex logistical problems

in the conduct of trials by the first court in the FPAA

proceeding.    Particularly where a participating partner acted as

the managing partner or tax matters partner, the new procedure

aggravates the problem of deciding whether each item of that

partner’s proffered testimony relates to partnership-level or

partner-level matters and defenses.    Cf. Murfam Farms order of

Oct. 31, 2008, supra note 24.    Rather than promote efficiency and

economical use of judicial, party, and attorney resources, the

new regime would appear to have increased substantially the

burdens on the judicial branch and costs and delay to

litigants.28

     It might be objected that a similar splitting of deficiency

determinations obtains under the original TEFRA procedures:



     28
      Notwithstanding that taxpayers have no constitutional
right to a prepayment forum, see Phillips v. Commissioner, 283
U.S. 589, 596-597 (1931), the availability of the Tax Court as
the prepayment forum to redetermine liabilities for Federal
income taxes and associated penalties, although it originated in
an act of legislative grace, has acquired--over the more than 70-
year period since its inception--the status of a prescriptive
right in the minds of tax practitioners and members of the
public. See supra note 26.
                               -68-

between the partnership-level proceeding to determine the

validity of the FPAA adjustments and the partner-level affected

items proceeding that may be needed to determine the deficiencies

and the penalties of the individual partners.    But at least under

the original TEFRA procedure both the legal and factual

requirements for the imposition of the accuracy-related penalties

and the partner’s defenses to those penalties were considered in

the same proceeding in one court.     It also bears observing that

the original TEPRA procedures were the product of a legislative

judgment that the benefits of having partnership-level

adjustments made by the FPAA apply across the board to multiple

partners outweighed the problems that might be encountered in

applying these adjustments to the individual partners in multiple

affected items proceedings.

     The foregoing observations lead to the question whether any

technique might be available under which “one-stop shopping”

could be made available in partnership cases in which the

partnership has no more than a handful of participating partners.

“One-stop shopping” in the case at hand would mean that all

issues relating to the tax and penalty liabilities of a

participating partner or partners could be decided in one court

in one proceeding.   One example, of course, is where the small

partnership exception of section 6231(a)(1)(B) applies.     New

Phoenix Sunrise Corp. & Subs. v. Commissioner, 132 T.C.

(2009), exemplifies the efficiencies of one-stop shopping where
                               -69-

the small partnership exception applies; both the deficiency and

the penalties were redetermined in one proceeding in this Court.

     These musings have been cut short by the realization that

the Secretary appears to have recently recognized and responded

to the observed problems.   The Secretary has proposed regulations

that would enable the Commissioner to convert partnership items

to nonpartnership items in the case of listed transactions and

thereby provide for “one-stop shopping” through application of

the traditional deficiency procedures to such transactions.     See

supra Part I.D.   It is regrettable that the proposed regulations

would not provide relief in the case at hand or the myriad of

other pending Son-of-BOSS cases subject to the TEFRA procedures

as amended by TRA 1997 and implemented by the regulations

currently in effect.29

     On the basis of the rulings in the foregoing discussion,


                                      Appropriate orders will be

                               issued, denying participating

                               partner’s motion for partial

                               summary judgment and granting

                               respondent’s motion in limine.



     29
      Timely application of the procedures provided by the
proposed regulations might also reduce opportunities for gaming
the statutes of limitations where multiple passthrough entities
have interests in what would otherwise remain a TEFRA
partnership. Cf., e.g., JTUSA, LP. v. Commissioner, 131 T.C. ___
(2008).
