                       T.C. Memo. 2011-19



                     UNITED STATES TAX COURT



            TONY L. ROBUCCI, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 17309-08, 17310-08,   Filed January 24, 2011.
                 17311-08.



          TR, a psychiatrist, sought advice from C, a C.P.A.
     specializing in tax planning for small businesses, as
     to how he might minimize the tax liability arising from
     his practice. C restructured TR’s practice from a sole
     proprietorship to a limited liability company (LLC)
     with two members: TR, owning 95 percent, and a
     “manager” corporation (PC), owning 5 percent. C also
     organized a second corporation (W) to perform services
     associated with TR’s practice. TR’s 95-percent
     interest in LLC was divided between a 10-percent
     general partner interest and an 85-percent limited
     partner interest attributable to intangibles associated
     with the practice. TR paid self-employment tax only on
     distributions associated with his 10-percent general


     1
      Cases of the following petitioners are consolidated
herewith: T.L. Robucci & Associates, M.D., P.C., docket No.
17310-08; and Westsphere Management Corp., docket No. 17311-08.
                               - 2 -

     partner interest, whereas, as a sole proprietor, he was
     required to pay self-employment tax on the entire net
     income from his psychiatric practice. See secs. 1401
     and 1402, I.R.C.

          R alleges that PC and W are without substance and
     must be disregarded for Federal tax purposes. As a
     result, LLC becomes a single-member LLC, which, because
     it did not elect association status, also must be
     disregarded for Federal tax purposes, and, therefore,
     TR’s practice must be treated as a sole proprietorship
     for 2002-04. See sec. 301.7701-3(b)(1)(ii), Proced. &
     Admin. Regs. R’s disregard of PC, W, and LLC would
     result in tax deficiencies against TR for 2002-04. R
     also seeks to impose a sec. 6662(a), I.R.C., penalty on
     TR.

          1. Held: Because the organization of PC and W
     accomplished no significant business purpose and
     because PC and W were, in substance, hollow corporate
     shells formed primarily for tax avoidance, they are
     disregarded for Federal tax purposes and TR is taxable
     as a sole proprietor for 2002-04.

          2. Held, further, TR is subject to the sec.
     6662(a), I.R.C., penalty for 2002-04.



     Howard O. Bernstein and Arlene M. French, for petitioners.

     Matthew A. Houtsma, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HALPERN, Judge:   These cases have been consolidated for

purposes of trial, briefing and opinion.   By notices of

deficiency, respondent determined deficiencies in income tax and

accuracy-related penalties as follows:
                              - 3 -

                                                       Penalty
         Petitioner         Year       Deficiency   Sec. 6662(a)

Tony L. Robucci             2002        $21,292       $4,258
  (Dr. Robucci)             2003         19,978        3,996
                            2004         15,755        3,151

T.L. Robucci &          FYE 11/30/02      1,788           358
  Associates, M.D.,     FYE 11/30/03        834           167
  P.C. (Robucci P.C.)   FYE 11/30/04      1,020           204

Westsphere Management   FYE 11/30/02      6,256         1,251
  Corp. (Westsphere)    FYE 11/30/03      4,322           864
                        FYE 11/30/04      3,246           649

     Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years in issue, and Rule

references are to the Tax Court Rules of Practice and Procedure.

Dollar amounts have been rounded to the nearest whole dollar.

     The issues for decision are (1) whether Robucci P.C. (the

comember, along with Dr. Robucci, in Tony L. Robucci, M.D. LLC

(Robucci LLC)) and Westsphere, two corporations wholly owned by

Dr. Robucci (sometimes the corporations) should be disregarded

for Federal income tax purposes, with the result that all of the

income of Robucci LLC is taxable directly to Dr. Robucci as

compensation subject to self-employment tax2 and (2) whether Dr.


     2
      Respondent argues, alternatively, that (1) if the
corporations are respected for Federal income tax purposes, he
may allocate all of their income and expenses and all of the
income and expenses of Robucci LLC to Dr. Robucci under the
authority of sec. 482, and (2) if the corporations are respected
for tax purposes and respondent’s application of sec. 482 is
deemed arbitrary and capricious, respondent may allocate all of
the income and expenses of the corporations and Robucci LLC to
                                                   (continued...)
                              - 4 -

Robucci is liable for the accuracy-related penalty under section

6662(a) for each of the years in issue.3

                        FINDINGS OF FACT

     Some facts are stipulated and are so found.   The stipulation

of facts, with accompanying exhibits, is incorporated herein by

this reference.




     2
      (...continued)
Dr. Robucci under sec. 269A. We need not consider respondent’s
alternative arguments because we shall sustain respondent’s
adjustments with respect to Dr. Robucci on the basis of our
determination to disregard the corporations for Federal income
tax purposes. Moreover, we need not otherwise concern ourselves
with respondent’s determinations of deficiencies and penalties
with respect to the corporations because respondent concedes on
brief that those determinations “are whipsaw positions that
should be sustained only if the Court finds that the two
corporations should be respected for federal income tax
purposes.”
     3
      The deficiency notices issued to all three petitioners
disallow certain deductions, for the most part, on the ground
that the expenses in question either were not ordinary and
necessary expenses of any trade or business deductible under sec.
162 or on account of lack of substantiation. The deficiency
notice issued to Dr. Robucci treats a portion of the expenses
deducted by Robucci LLC as deductible expenses of a sole
proprietorship operated by Dr. Robucci. The largest expenses not
so treated (i.e., expenses disallowed to Robucci LLC and not
treated as deductible by Dr. Robucci) are the management fees
allegedly paid by Robucci LLC to the corporations (the management
fees). The management fees remain the only expenses the
deductibility of which is still at issue. Petitioners concede,
however, that if the management companies (i.e., the
corporations) are disregarded, the disallowance of the deductions
for the management fees is proper. Since we shall disregard the
corporations, we accept petitioners’ concession that the
disallowance of those deductions is proper.
                               - 5 -

     At the time the petitions were filed, Dr. Robucci resided in

Denver, Colorado.   The corporations’ alleged principal places of

business were also in Denver, Colorado.

Background

     Dr. Robucci has been a practicing psychiatrist since he

completed his residency in 1996.   He conducted his psychiatric

practice as a sole proprietorship until 2001, and, during that

period, he reported the income and expenses of his practice on

his personal income tax returns.

Dr. Robucci’s Meeting With Mark Carson

     In the fall of 2001, a friend referred Dr. Robucci, who

wanted to explore the benefits, if any, of incorporating his

practice, to Mark Carson (Mr. Carson), an attorney and certified

public accountant (C.P.A.), who conducted an accounting practice

in Colorado through his firm, Mark H. Carson & Associates, P.C.

At the time of the trial, Mr. Carson’s C.P.A. firm had a client

list of some 3,500 clients, mostly small businesses.   Choice-of-

entity planning for those clients constituted a significant

portion of the firm’s practice.

     During his first meeting with Mr. Carson, Dr. Robucci stated

that he wanted to do what was best from the standpoint of his own

personal tax planning; i.e., he wanted to minimize the amount of

taxes he was paying.   After discussing various options to achieve

that goal, Mr. Carson recommended, and persuaded Dr. Robucci to
                               - 6 -

adopt, the organizational structure, involving an LLC and two

corporations, that is at issue herein.    That initial discussion

also covered the possibility of structuring Dr. Robucci’s

practice in such a way as to reduce the amount of self-employment

tax that he was paying while also minimizing any other tax

liabilities that he might incur.    Dr. Robucci did not seek a

second opinion from any other C.P.A.s or attorneys assessing the

merits of Mr. Carson’s recommendations, nor did Mr. Carson

provide him with a written explanation of the need to form three

separate entities.   He did explain orally to Dr. Robucci that the

LLC would conduct the practice, that (for reasons not made clear

to Dr. Robucci) it needed to have two members (Dr. Robucci and

what became Robucci P.C.), and that Westsphere would be

considered a business management corporation, uninvolved in

patient care.

Implementation of Mr. Carson’s Recommended Organizational
Structure

     On November 2, 2001, Mr. Carson incorporated Westsphere, and

on December 20, 2001, he organized Robucci LLC and incorporated

Robucci P.C.

     During the years at issue, Dr. Robucci was the sole

shareholder of both corporations.    During that same period,

Robucci LLC was 95-percent owned by Dr. Robucci and 5-percent

owned by Robucci P.C.   Robucci P.C.’s interest was as a limited
                                 - 7 -

partner.4   Dr. Robucci’s 95-percent ownership interest was

reflected on Robucci LLC’s partnership returns as split between

an 85-percent interest as a limited partner and a 10-percent

interest as a general partner.    Mr. Carson determined the

ownership percentages, and he also determined the 85-percent-10-

percent split in Dr. Robucci’s ownership interest between that of

limited and general partner.   Mr. Carson, who has testified as an

expert in valuation matters since 1976, based his determination

of an 85-percent limited partner ownership interest for Dr.

Robucci on what he determined to be the value of Dr. Robucci’s

goodwill and what would be a reasonable rate of return on that

goodwill at the time he formed Robucci LLC.    Mr. Carson never

discussed with Dr. Robucci the basis for the 85-percent-10

percent allocation between his limited and general partner

interests in Robucci LLC (although Dr. Robucci did understand

that his 10-percent general partnership interest represented his

interest as a provider of medical services and his 85-percent

limited partnership interest represented his interest

attributable to his capital contribution of intangibles), nor did

Mr. Carson prepare a written valuation in support of his



     4
      Pursuant to sec. 301.7701-3(b)(1)(i), Proced. & Admin.
Regs., a multimember LLC that does not elect association status
(which describes Robucci LLC) is treated, for Federal tax
purposes, as a partnership. Thus, Robucci LLC’s members would
constitute partners for Federal tax purposes if it were respected
as a two-member entity.
                               - 8 -

attribution of an 85-percent limited partner interest to

transferred intangibles.   Dr. Robucci did not make any written

assignment of the tangible or intangible assets of his practice

to Robucci LLC.

     Dr. Robucci (as president of Westsphere) executed a loan

agreement, effective November 2, 2001, whereby he (as “employee”)

was authorized to borrow money from Westsphere “from time to

time” under certain specified terms and conditions.

     Dr. Robucci executed an “Employee Business Expense

Reimbursement Plan”, effective as of November 2, 2001, whereby

Westsphere agreed to reimburse its employees for “all employment

related expenses” upon submission of the proof of expenditure

documentation specified in the plan.   The plan provides a formal

review procedure for denied claims.

     Dr. Robucci executed documents for two additional plans,

also effective as of November 2, 2001:   (1) A “Medical

Reimbursement Plan of Westsphere Management Corp.” whereby

Westsphere, “in addition to providing any basic medical insurance

coverage for its employees”, agreed to reimburse employee medical

expenses, as defined in section 213, and (2) a “Diagnostic

Medical Reimbursement Plan” whereby Westsphere, “in addition to

providing any basic medical insurance coverage for its officers”,
                               - 9 -

agreed to reimburse them and their families for expenses of

“diagnostic medical procedures” incurred at certain specified

medical facilities and not otherwise covered by insurance.

     Mr. Carson also drafted a document entitled “Operating

Agreement of * * * [Robucci LLC]”, whereby Robucci P.C. was

designated as manager of Robucci LLC.   It is uncertain whether

Dr. Robucci ever executed that agreement on behalf of either of

the parties, Robucci P.C. and Robucci LLC.

     Dr. Robucci had a limited understanding of the need for the

entities formed and the agreements and other documents drafted by

Mr. Carson.   He relied on Mr. Carson’s representations that the

actions taken would legitimately result in the tax minimization

that he sought.

The Operation of Robucci LLC and the Corporations

     During the years in issue Robucci LLC and Westsphere had

bank accounts; Robucci P.C. did not.    Dr. Robucci did not have an

employment agreement with any of those three entities, nor did

any of them have employees during the years in issue.   Neither

Robucci P.C. nor Westsphere paid a salary to Dr. Robucci or to

anyone else during those years.   Dr. Robucci did not keep records

of any time he might have spent working for Westsphere.   Although

Robucci LLC deducted “management fees” for each of the years in

issue ($31,475, $25,500, and $38,385 for 2002, 2003, and 2004,

respectively), its returns do not specify to whom they were paid
                              - 10 -

or for what services.5   Dr. Robucci was aware that Westsphere

charged management fees to Robucci LLC, but he did not know the

nature of those charges, other than that they probably related to

his time spent performing functions related to his medical

practice that did not involve actual patient care.

     Both before and after the formation of Robucci LLC, Debbie

Williams (Ms. Williams) was the billing assistant for Dr.

Robucci’s practice.   During the years in issue, although she

received instructions from Dr. Robucci in letters with a

letterhead that referred to “Tony L. Robucci, M.D., A

Professional L.L.C.”, she still considered herself to be in the

employ of Dr. Robucci.   Dr. Robucci paid Ms. Williams a

percentage of what she collected from patients, which amounted to

more than $8,500 for 2002 and 2003 and more than $10,500 for

2004.

     During the years in issue, Dr. Robucci continued to bill

Medicare and Medicaid (a relatively small portion of his

practice) as an individual practitioner under his own Social




        5
      No such payments are identifiable on the 2002-04 bank
statements for either Robucci LLC or Westsphere. Nor are they
identifiable as gross income on the returns filed by Robucci PC
and Westsphere for their taxable years ending Nov. 30, 2002,
2003, and 2004, although that may be attributable to timing
differences because Robucci LLC is a calendar year taxpayer.
                                - 11 -

Security number because both were uninformative as to the

procedures necessary to establish Robucci LLC as the provider of

Medicare and Medicaid eligible psychiatric services.

     Beginning with their dates of organization and throughout

the years in issue, Robucci LLC and the corporations used the

same business address, although there was no written lease

agreement between Robucci LLC and either of the corporations.

     The corporations did not (1) have separate Web sites or

telephone listings, (2) pay rent to Dr. Robucci or Robucci LLC,

(3) have customers other than Robucci LLC or contracts with any

other third parties, or (4) advertise.       Westsphere did not have

separate dedicated space in Dr. Robucci’s office.

     During the years in issue, Robucci LLC was a calendar year

taxpayer and the corporations reported on the basis of fiscal

years ending November 30.

Dr. Robucci’s Payment of Self-Employment (SECA) Taxes

     Dr. Robucci’s 2002, 2003, and 2004 Forms 1040, U.S.

Individual Income Tax Return, show the following distributions to

him of “passive” and “nonpassive” income from Robucci LLC:

          Year              Passive Income        Nonpassive Income

          2002                 $48,153                  $5,665
          2003                  57,446                   6,851
                               1
          2004                   95,143                 11,193
     1
      Dr. Robucci’s 2004 return actually reported this amount as
nonpassive income on Schedule E, Supplemental Income and Loss,
but that was, doubtless, an unintentional error as the 2004
Schedule K-1, Partner’s Share of Income, Deductions, Credits,
                               - 12 -

etc., issued to him by Robucci LLC in connection with his 85-
percent limited partnership interest lists $95,143 as the
distribution attributable to that (passive) interest, and Dr.
Robucci’s 2004 Schedule SE, Self-Employment Tax, includes only
$11,193 as net earnings from self-employment.

Dr. Robucci’s Schedule SE, Self-Employment Tax, filed for each of

those years, lists only the nonpassive income as gross earnings

from self-employment subject to self-employment tax.    The

nonpassive income amounts correspond to Dr. Robucci’s 10-percent

general partner interest in Robucci LLC.

                               OPINION

I.   Whether Robucci PC and Westsphere Should Be Disregarded for
     Federal Income Tax Purposes

     A.   Introduction

     Dr. Robucci is not the first and, most certainly, he will

not be the last individual to attempt to conduct his business

affairs, in this case a medical practice, in a manner that he

hopes will minimize his Federal income tax liability arising

therefrom.    That he may do so has become axiomatic.   As famously

stated by the Supreme Court in Gregory v. Helvering, 293 U.S.

465, 469 (1935):    “The legal right of a taxpayer to decrease the

amount of what otherwise would be his taxes, or altogether avoid

them, by means which the law permits, cannot be doubted.”

Directly after that statement, however, the Court added the

admonition:    “But the question for determination is whether what

was done, apart from tax motive, was the thing which the statute

intended.”    Id.
                             - 13 -

    In Chisholm v. Commissioner, 79 F.2d 14, 15 (2d Cir. 1935),

revg. 29 B.T.A. 1334 (1934), Judge Learned Hand elaborated upon

the Supreme Court’s admonition in Gregory, stating:   “The

question always is whether the transaction under scrutiny is in

fact what it appears to be in form”.

    The issue in these cases is whether the corporations,

Robucci P.C. and Westsphere, are entitled to respect as viable

business corporations or whether, as in Judge Hand’s description

of the facts in Gregory, the incorporator’s “intent, or purpose,

was merely to draught the papers, in fact not to create

corporations as the court * * * [understands] that word.”    Id.

In other words, were Robucci P.C. and Westsphere corporations in

fact as well as in form; i.e., were they “the thing which the

statute intended” when referring to corporations?

    A corporation will be recognized as a separate taxable

entity if (1) the purpose for its formation is the equivalent of

business activity or (2) the incorporation is followed by the

carrying on of a business by the corporation.   Moline Props.,

Inc. v. Commissioner, 319 U.S. 436, 438-439 (1943); Achiro v.

Commissioner, 77 T.C. 881, 901 (1981).6   If neither of those


     6
      See also Natl. Investors Corp. v. Hoey, 144 F.2d 466, 468
(2d Cir. 1944), in which Judge Hand described the rule for
corporate viability as follows:

     to be a separate jural person for purposes of taxation, a
     corporation must engage in some industrial, commercial, or
                                                   (continued...)
                              - 14 -

requirements is satisfied, the corporation will be disregarded

for Federal tax purposes, and all of its income will be

attributed to the true earner.   Shaw Constr. Co. v. Commissioner,

35 T.C. 1102, 1114-1117 (1961), affd. 323 F.2d 316 (9th Cir.

1963); Aldon Homes, Inc. v. Commissioner, 33 T.C. 582, 597-607

(1959).   Should we decide to disregard the corporations in these

cases, the true earner of the income from his practice would be

Dr. Robucci because Robucci LLC, upon our disregard of Robucci

P.C., would become a single-member noncorporate entity that did

not make an election to be treated as an association.   As such,

it too would be disregarded under the so-called check-the-box

regulations.   See sec. 301.7701-3(b)(1)(ii), Proced. & Admin.

Regs.7

    B.    Burden of Proof

    If a taxpayer introduces credible evidence with respect to

any factual issue relevant to ascertaining the taxpayer’s tax

liability and the taxpayer complies with all substantiation

requirements, maintains all required records, and cooperates with

the Commissioner’s reasonable requests for witnesses, section


     6
      (...continued)
     other activity besides avoiding taxation: in other words,
     * * * the term “corporation” will be interpreted to mean a
     corporation which does some “business” in the ordinary
     meaning; and * * * escaping taxation is not “business” in
     the ordinary meaning.
     7
      Respondent does not seek to disregard Robucci LLC on the
basis that it is a sham entity.
                              - 15 -

7491(a) places the burden of proof on the Commissioner with

respect to that issue.   See sec. 7491(a); Rule 142(a)(2).

Respondent alleges that “petitioners did not even attempt to

substantiate the great majority of the [disallowed] expenses” as

required by section 7491(a)(2)(A).

    We need not decide whether section 7491(a) applies to the

material factual issue in these consolidated cases (the viability

of Robucci P.C. and Westsphere) because we find that a

preponderance of the evidence supports our resolution of that

issue.   Therefore, resolution of that issue does not depend on

which party bears the burden of proof.   See, e.g., Estate of

Bongard v. Commissioner, 124 T.C. 95, 111 (2005).

    C.   Arguments of the Parties

    Petitioners argue that as “managing member” of Robucci LLC,

Robucci P.C. “performed oversight and management” services and

that Westsphere was established to (1) “provide oversight, and to

manage certain overheads and indirect expenses, including

employee benefits such as health insurance”, (2) “track business

expenses and overheads”, and (3) create a “group” for group

sickness and accident insurance coverage under Colorado law.

Petitioners also argue that the formation of a multimember LLC,

including a corporate member, afforded Dr. Robucci superior

protection, under Colorado law, against personal liability for
                                - 16 -

acts of Robucci LLC, and that Robucci P.C.’s interest in Robucci

LLC was necessary to accomplish that goal.

    Respondent argues that (1) the corporations “were created

solely for the purpose of reducing * * * [Dr. Robucci’s] tax

liability” and, more specifically, to help him “avoid income and

self-employment taxes”; (2) petitioners “did not offer any

credible explanation of the business purpose for forming the

corporations”; and (3) petitioners “did not demonstrate that

either corporation engaged in any business activity after it was

formed.”

    For the reasons that follow we agree with respondent.

    D.     Analysis

            1.   Business Purpose

            a.   Introduction

    In order to satisfy the first prong of the alternative two-

prong test of Moline Props., Inc. v. Commissioner, supra at 439,

the evidence must demonstrate that the corporations were

incorporated for a purpose that “is the equivalent of a business

activity”.    Petitioners’ evidence fails to establish that such a

purpose motivated the organization of either corporation.

            b.   Robucci P.C.

    Petitioners state two reasons for the formation of Robucci

P.C.:    (1) Its role as the “managing member” of Robucci LLC (a

role not reflected in Robucci P.C.’s articles of incorporation,
                              - 17 -

which state that its “sole purpose” is to practice medicine

“through persons licensed * * * [in Colorado] to practice

medicine” in that State) and (2) the superior protection against

personal liability that would be afforded to Dr. Robucci by the

formation of a multimember LLC.

    In support of the first reason, petitioners cite provisions

of Colorado law that permit the management of an LLC to be vested

in one or more managers or managing members.   See Colo. Rev.

Stat. secs. 7-80-204(e), 7-80-402 (2010).   Assuming arguendo that

Robucci P.C. was properly organized under Colorado law, it does

not follow that it performed any function that would warrant its

recognition as a viable entity for Federal tax purposes.    E.g.,

Noonan v. Commissioner, 52 T.C. 907, 909 (1969), affd. 451 F.2d

992 (9th Cir. 1971).   Although Robucci P.C. may have been a party

to an “operating agreement” with Robucci LLC whereby it was

appointed Robucci LLC’s “manager”, and although its corporate

income tax returns for its fiscal years ending November 30, 2003

and 2004, indicate that it received payments from Robucci LLC of

$3,425 and $2,833 in those years, respectively, there is no

evidence that Robucci P.C. actually performed any management (or

other) services for Robucci LLC.   Robucci P.C. had no assets

(other than its interest in Robucci LLC) or employees, it had no

service contract with Robucci LLC, and it paid no salary to Dr.

Robucci or anyone else during the years in issue.   That Robucci
                              - 18 -

P.C. was intended to perform no management services or other

business activities is further indicated by Mr. Carson’s

handwritten note, written while his firm was preparing the

Robucci P.C. and Westsphere returns for one of the years in

issue, in which he states:   “We need P.C. to be a partner in LLC

only Westsphere is the mgmt. corp. P.C. does nada [nothing]”.

    In support of the second reason, petitioners cite In re

Albright, 291 Bankr. 538 (Bankr. D. Colo. 2003), in which the

court permitted the trustee in bankruptcy to liquidate all of the

property of a single-member LLC on behalf of creditors.    The

court reasoned that (1) the absence of other members in the LLC

meant that “the entire membership interest passed to the

bankruptcy estate, and the Trustee became a ‘substituted member’”

under Colo. Rev. Stat. sec. 7-80-702 governing the

transferability of LLC interests, and (2) as the sole member of

the LLC, “the Trustee now controls * * * all governance of that

entity, including decisions regarding liquidation of the entity’s

assets.”   In re Albright, supra at 540-541.

    Petitioners’ reliance upon Albright is misplaced.     That case

does not involve a creditor’s right to hold the sole member of a

single-member LLC personally liable for the LLC’s debts.    Rather,

it holds that all of the LLC’s assets are available to satisfy

the claims of the sole member’s creditors (and not that the sole
                             - 19 -

member’s assets are available to the LLC’s creditors).8    The

trustee did not attempt to pierce the “corporate” veil to reach

the member’s personal assets to satisfy the LLC’s debts.

Moreover, as the name suggests, members of a Colorado limited

liability company generally are not personally liable for the

debts of the company; i.e., their liability is, in fact, limited

to their investment in the LLC.   See Colo. Rev. Stat. sec. 7-80-

705 (2010) (“Members * * * of limited liability companies are not

liable * * * for a debt, obligation, or liability of a limited

liability company.”).9




     8
      In a footnote, the court notes that the right, under Colo.
Rev. Stat. sec. 7-80-702, of the nondebtor LLC members to
prohibit a transferee of the debtor member’s interest to govern
or to participate in the management of a multimember LLC:

     does not create an asset shelter for clever debtors. To the
     extent a debtor intends to hinder, delay or defraud
     creditors through a multi-member LLC with “peppercorn” co-
     members, bankruptcy avoidance provisions and fraudulent
     transfer law would provide creditors or a bankruptcy trustee
     with recourse. * * *

In re Albright, 291 Bankr. 538, 541 n.9 (Bankr. D. Colo. 2003).
     9
      Colorado does, however, permit courts to hold LLC members
personally liable for alleged improper acts of the LLC by
applying “case law which interprets the conditions and
circumstances under which the corporate veil of a corporation may
be pierced under Colorado law.” See Colo. Rev. Stat. sec. 7-80-
107(1) (2010). There does not appear to be any distinction in
the application of that provision between single and multimember
LLCs; and, even if there were, our implicit conclusion herein
that Robucci P.C. is, in substance, a “peppercorn” member of
Robucci LLC would arguably negate any such distinction in the
eyes of the Colorado bankruptcy court. See supra n.8.
                               - 20 -

    We find that Robucci P.C. was not formed for a purpose that

“is the equivalent of a business activity” within the meaning of

Moline Props., Inc. v. Commissioner, 319 U.S. at 439.

          c.    Westsphere

    Petitioners list three purposes for the organization of

Westsphere, the first two being the management and the tracking

of overhead and indirect expenses.      The idea was to assist Dr.

Robucci to “‘think more like a business’” and to “group overheads

and general and administrative costs separately from the direct

costs of a professional services operation.”      Here again, the

evidence refutes the notion that those alleged purposes

constituted bona fide nontax purposes for the organization of

Westsphere.    Although, unlike Robucci P.C., Westsphere had a

checking account, like Robucci P.C., it had no employment

agreement with Dr. Robucci and no employees.      Nor did it perform

any management or other services for Robucci LLC in the person of

Dr. Robucci.    Rather, Dr. Robucci continued to conduct his

practice as he always had, including the retention of Ms.

Williams as his billing assistant.

    The only activity allegedly attributable to Westsphere

during the audit years was its reimbursement of various expenses

incurred by Dr. Robucci and Robucci LLC pursuant to the various

plans requiring those reimbursements.      Dr. Robucci testified that

that activity consisted of electronic transfers of funds between
                              - 21 -

bank accounts.   Thus, Dr. Robucci continued, as in prior years,

to pay the expenses of his practice, but allegedly out of Robucci

LLC’s bank account.   Westsphere’s only alleged “service” was to

reimburse those expenses by electronic transfers of funds from

its account to Robucci LLC’s account.10    The bank account

statements in the record provide scant evidence that there were,

in fact, regular interaccount transfers from Westsphere to

Robucci LLC.   For example, Westsphere’s bank statement dated

January 23, 2003, shows debits of $5,097.60 and $1,114.84 for a

“2002 Medical Expenses Reimbursement” and a “Health Insurance

Premium Reimbursement”, respectively, but the absence of

corresponding credits to Robucci LLC’s account on the same date

or thereafter indicates that the transfer of funds may have been

to Dr. Robucci’s personal account.     In fact, the bank statements

in evidence demonstrate virtually no correlation between debits

to Westsphere’s bank account and credits to Robucci LLC’s bank

account.   In any event, because Dr. Robucci controlled both

entities, those interaccount transfers, to the extent they

occurred, were the equivalent of taking money from one pocket and

putting it into another.   Such a procedure hardly qualifies as a

“business activity” within the contemplation of Moline Props.,

Inc. v. Commissioner, supra at 439.


     10
      Dr. Robucci testified that he did not know why expenses
were paid by Robucci LLC and reimbursed by Westsphere rather than
paid by Westsphere directly.
                               - 22 -

    Petitioners also argue that the organization of Westsphere

was essential in order to create a “group” eligible for “group

sickness and accident insurance” within the meaning of Colo. Rev.

Stat. sec. 10-16-214 (2010).    They also cite Colo. Rev. Stat.

sec. 10-16-105.2(1)(c)(I) (2010), which provides in part that the

provisions governing “small group plans shall not apply to an

individual health benefit plan newly issued to a business group

of one that includes only a self-employed person who has no

employees”.    The alleged concern was that, “from an insurer’s

perspective, a single member * * * LLC may present an ambiguity

as to that member’s status as ‘self-employed.’”    Whatever the

merits of petitioners’ concerns in that regard, it is not clear

how the formation of Westsphere alleviated those concerns.     The

“groups” to be afforded coverage are “groups of persons”,

generally, under policies issued to an employer for the benefit

of the employees, which include officers, managers, and other

employees of the employer.    See Colo. Rev. Stat. sec. 10-16-

214(1)(a).    It is difficult to see how the organization of

Westsphere, which neither is an employee of Robucci LLC nor has

employees of its own, could serve to alleviate petitioners’ fears

of not qualifying for small group or small employer health

insurance.    More importantly, there is no evidence that Robucci

LLC made any effort to obtain group health insurance for its sole

operative, Dr. Robucci.    The evidence shows that Dr. Robucci or
                                 - 23 -

Robucci LLC continued to pay premiums for health insurance, but

it is not clear that the policy in question differed from the one

Dr. Robucci had as a sole proprietor.

       Petitioners have not persuaded us that Westsphere was

organized for a purpose that “is the equivalent of a business

activity” under Moline Props., Inc. v. Commissioner, supra at

439.

             2.   Business Activities

       The fact that both Robucci P.C. and Westsphere were,

essentially, hollow corporate shells also leads us to conclude

that neither carried on a business after incorporation, the

second alternative prong for corporate viability under Moline

Properties.

       E.   Conclusion

       Robucci LLC’s deduction of over $95,000 in management fees

for the years in issue resulted in a substantial tax benefit to

Dr. Robucci by reducing (by that amount) Robucci LLC’s potential

distribution to him of income at least a portion of which

otherwise would have been subject to self-employment tax.

Because Robucci P.C. and Westsphere served no significant purpose

or function other than tax avoidance, we agree with respondent

that they should be disregarded.        What we said in Aldon Homes,

Inc. v. Commissioner, 33 T.C. at 598, in disregarding 16 so-

called alphabet corporations is equally applicable to this case:
                               - 24 -

      The alleged business purposes impressed us simply
      as a lawyer’s marshaling of possible business
      reasons that might conceivably have motivated the
      adoption of the forms here employed but which in
      fact played no part whatever in the utilization of
      the * * * [structure employed]

      Our disregard of Robucci P.C. for Federal tax purposes

leaves Robucci LLC as a single-member LLC; and because of its

failure to make a protective election under section 301.7701-

3(a), Proced. & Admin. Regs., to be classified as an association,

i.e., as a corporation, see sec. 301.7701-2(b)(2), Proced. &

Admin. Regs., it too is disregarded for Federal tax purposes

under section 301.7701-3(b)(1)(ii), Proced. & Admin. Regs.     The

result is that Dr. Robucci is treated as a sole proprietor for

Federal tax purposes, which was his status before the formation

of Robucci LLC and the corporations.    It follows, and we hold,

that the net income arising from his psychiatric practice during

the years in issue, including any amounts paid to Robucci P.C.

and Westsphere, was self-employment income of Dr. Robucci subject

to self-employment tax under section 1401.

II.   Imposition of the Accuracy-Related Penalty

      A.   Applicable Law

      Section 6662(a) and (b)(1)-(3) provides for an accuracy-

related penalty (the penalty) in the amount of 20 percent of the

portion of any underpayment attributable to, among other things,

negligence or intentional disregard of rules or regulations

(without distinction, negligence), any substantial understatement
                              - 25 -

of income tax, or any substantial valuation misstatement.

Although the notice issued to Dr. Robucci states that respondent

bases his imposition of the penalty upon “one or more” of the

three above-referenced grounds, it is clear that only the first

two (negligence and substantial understatement of income tax) are

potentially applicable herein.

    A substantial understatement of income tax exists for an

individual if the amount of the understatement exceeds the

greater of 10 percent of the tax required to be shown on the

return or $5,000.   See sec. 6662(d)(1)(A).   Respondent has

established that Dr. Robucci’s understatements of income tax for

the years in issue are substantial as they exceed both 10 percent

of the correct tax and $5,000.   Therefore, we need not consider

the grounds for determining whether Dr. Robucci was negligent

within the meaning of section 6662(b)(1).

    Section 6664(c)(1) provides that the penalty shall not be

imposed with respect to any portion of an underpayment if a

taxpayer shows that there was reasonable cause for, and that the

taxpayer acted in good faith with respect to, that portion.

    The determination of whether a taxpayer acted with
    reasonable cause and in good faith is made on a
    case-by-case basis, taking into account all
    pertinent facts and circumstances. * * *
    Circumstances that may indicate reasonable cause
    and good faith include an honest misunderstanding
    of * * * law that is reasonable in light of all of
    the facts and circumstances, including the
    experience, knowledge, and education of the
    taxpayer. * * * Reliance * * * on the advice of a
                                - 26 -

       professional tax advisor * * * does not
       necessarily demonstrate reasonable cause and good
       faith. * * *

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

       Reasonable cause has been found when a taxpayer selects a

competent tax adviser, supplies the adviser with all relevant

information and, in a manner consistent with ordinary business

care and prudence, relies on the adviser’s professional judgment

as to the taxpayer’s tax obligations.    United States v. Boyle,

469 U.S. 241, 251 (1985); Neonatology Associates, P.A. v.

Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir.

2002); sec. 1.6664-4(b)(1), Income Tax Regs.    A taxpayer may rely

on the advice of any tax adviser, lawyer, or accountant.     United

States v. Boyle, supra at 251.    Reliance on a professional tax

adviser will not be considered reasonable, however, if the

adviser is a promoter of the transaction or suffers from “a

conflict of interest * * * that the taxpayer knew of or should

have known about.”    Neonatology Associates, P.A. v. Commissioner,

299 F.3d at 234; Pasternak v. Commissioner, 990 F.2d 893, 903

(6th Cir. 1993), affg. Donahue v. Commissioner, T.C. Memo. 1991-

181.    “[T]he taxpayer’s education, sophistication and business

experience will be relevant in determining whether the taxpayer’s

reliance on tax advice was reasonable and made in good faith.”

Sec. 1.6664-4(c)(1), Income Tax Regs.
                                - 27 -

    B.   Analysis

    Under section 7491(c), respondent bears the burden of

production, but not the overall burden of proof, with respect to

Dr. Robucci’s liability for the section 6662(a) penalty.      See

Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).       We have

previously stated that the “burden imposed by section 7491(c) is

only to come forward with evidence regarding the appropriateness

of applying a particular addition to tax or penalty to the

taxpayer.”     Weir v. Commissioner, T.C. Memo. 2001-184.    By

demonstrating that Dr. Robucci’s understatements of income tax

exceed the thresholds for a finding of “substantial

understatement of income tax” under section 6662, respondent has

satisfied his burden of production.

    Respondent argues that there was no reasonable cause for the

positions taken by Dr. Robucci and that he did not act in good

faith.   In respondent’s view, “[p]etitioner should have requested

a second opinion after getting advice that was clearly too good

to be true”.    Respondent views Mr. Carson as “the promoter of the

arrangement, who earned substantial fees for incorporating the

various sham entities and preparing the tax returns at issue”.

Petitioners deny that Mr. Carson was a promoter and argues that,

in the light of Mr. Carson’s status as an independent,

experienced C.P.A., Dr. Robucci was under no obligation to obtain
                               - 28 -

a second opinion before he could reasonably rely on Mr. Carson’s

advice.

    Even if we were to agree with petitioner that Mr. Carson was

not a promoter, we agree with respondent that the tax result

afforded by implementing Mr. Carson’s suggestions, i.e., the

dramatic reduction in Dr. Robucci’s self-employment taxes, was

“too good to be true”.   See, e.g., Neonatology Associate, P.A. v.

Commissioner, 299 F.3d at 234 (“When * * * a taxpayer is

presented with what would appear to be a fabulous opportunity to

avoid tax obligations, he should recognize that he proceeds at

his own peril.”); McCrary v. Commissioner, 92 T.C. 827, 850

(1989) (stating that no reasonable person should have trusted the

tax scheme in question to work).   It is not that Mr. Carson’s

goal of directing some of Dr. Robucci’s income to a third-party

corporate management service provider and bifurcating Dr.

Robucci’s interest in Robucci LLC so that he would be separately

compensated for the use of his intangibles was obviously

unreasonable.   On the contrary, had it been more carefully

implemented, it well might have been realized, at least in

part.11   The problem for Dr. Robucci is that Mr. Carson’s


     11
      Although it is apparently respondent’s position that
profit distributions to service-providing members of a
multimember, professional service LLC (which is what Robucci LLC
was designed to be) are never excepted from net earnings from
self-employment by sec. 1402(a)(13), which so excepts
distributions to a limited partner other than sec. 707(c)
                                                   (continued...)
                              - 29 -

strategy for implementing his tax minimization goal was patently

inadequate to the task, a fact that should have been obvious to

Dr. Robucci and have prompted him to either question Mr. Carson

or seek a second opinion.   Although Robucci P.C. and Westsphere

were properly formed under Colorado law to carry out legitimate

corporate functions, the fact that they were nothing more than

empty shells, devoid of property, personnel, or actual day-to-day

activities, i.e., of substance, should have sent warning signals

to Dr. Robucci that those corporations were not effecting any

meaningful change in the prior conduct of his medical practice.

Although Dr. Robucci may have had some vague notion that he was

acting on behalf of Westsphere when performing services other

than actual patient care, there is little or no evidence as to

the precise nature of those services, the time Dr. Robucci may

have spent performing them, or their value.   In short, there is

no support for any charge from Westsphere to Robucci LLC for such

services or for the claim that Dr. Robucci was wearing a

Westsphere hat when he performed them.   For Dr. Robucci, aside

from signing a raft of documents and shifting some money between



     11
      (...continued)
guaranteed payments for services rendered, the Secretary has yet
to issue definitive guidance with respect to that issue, and the
law remains in a state of uncertainty. See, e.g., Kalinka, 9A
La. Civ. L. Treatise, Limited Liability Companies and
Partnerships: A Guide to Business and Tax Planning, sec. 6.2, at
423 (3d ed. 2001); Chase, Self-Employment Tax and Choice of
Entity, 34 Colo. Law. 109, 112 (Dec. 2005).
                              - 30 -

two new bank accounts, it was business as usual.   Moreover,

although he might have been justified in relying upon Mr.

Carson’s expert valuation of his intangibles as the basis for the

85-10 split between his limited and general partnership interests

in Robucci LLC, the lack of any formal transfer of those

intangibles to Robucci LLC should have been cause for concern.

Under those circumstances, it was incumbent upon Dr. Robucci,

even though he was not a tax professional, to question the

efficacy of the arrangement that purported to minimize his taxes

while effecting virtually no change in the conduct of his medical

practice.   By not doing so, Dr. Robucci failed to exercise the

ordinary business care and prudence required of him under the

circumstances.   But cf. United States v. Boyle, 469 U.S. at 251;

Haywood Lumber & Mining Co. v. Commissioner, 178 F.2d 769, 770-

771 (2d Cir. 1950), modifying 12 T.C. 735 (1949), which involve

circumstances exemplifying the exercise of ordinary business care

and prudence.
                              - 31 -

    C.   Conclusion

    Dr. Robucci is subject to the section 6662(a) penalty for

each of the years in issue.


                                        Decision will be entered

                                   for respondent in docket No.

                                   17309-08 and for petitioners

                                   in docket Nos. 17310-08 and

                                   17311-08.
