                        T.C. Memo. 2010-175



                      UNITED STATES TAX COURT



                RANDAL W. HOLDNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                WILLIAM F. HOLDNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 10367-08, 10375-08.     Filed August 4, 2010.



     Randal W. Holdner and William F. Holdner, pro sese.

     Kelley A. Blaine, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   Petitioners, father and son, have run a

farming operation (Holdner Farms) since 1977.   Each petitioner

effectively reported one-half of Holdner Farms’ gross income for

2004, 2005, and 2006 on Schedules F, Profit or Loss From Farming,
                              - 2 -

and Schedules D, Capital Gains and Losses, of their respective

Federal income tax returns for those years, but they did not

split the expenses equally or file Federal partnership returns.

Petitioner William F. Holdner (William Holdner) deducted most of

Holdner Farms’ expenses on Schedules F attached to his 2004-2006

returns.

     In separate notices of deficiency issued to petitioners,

respondent determined that (1) Holdner Farms was a partnership

(or a joint venture taxed as a partnership) for Federal income

tax purposes in 2004-2006, (2) petitioners were equal partners in

the partnership, and (3) William Holdner was liable for the

section 66621 accuracy-related penalty for 2004-2006.   To protect

against a whipsaw situation, respondent allocated 100 percent of

Holdner Farms’ income to each petitioner, disallowed all

expenses,2 and determined the following deficiencies and

penalties:




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code), as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
     2
      Respondent’s counsel explained at trial that respondent
took these positions to avoid a potential whipsaw situation and
to bring the entire case before the Court. Respondent’s counsel
acknowledged that each petitioner should be allocated only one-
half of Holdner Farms’ gross income and that each petitioner
should be allowed to deduct one-half of Holdner Farms’ expenses.
Respondent does not intend to pursue deficiencies and penalties
in the amounts shown on the notices of deficiency.
                                   - 3 -

                          Deficiency             Sec. 6662 Penalty
                     Randal W. William F.       Randal W. William F.
     Year             Holdner   Holdner          Holdner   Holdner
                 1
     2004         $192,731    $264,016             --      $52,803
     2005          136,443     215,211             --       43,042
     2006          197,999     296,554             --       59,311
     1
      All monetary amounts have been rounded to the nearest
dollar.

     Petitioners timely petitioned this Court to review

respondent’s determinations.      Respondent moved to consolidate

petitioners’ cases for trial, briefing, and opinion, and we

granted respondent’s motion.      The issues for decision are:   (1)

Whether petitioners’ Holdner Farms activity was a partnership (or

a joint venture taxed as a partnership) for Federal income tax

purposes during 2004-2006; (2) if so, whether partnership

expenses must be allocated in accordance with partnership income;

i.e., 50 percent to each petitioner; and (3) whether William

Holdner is liable for the section 6662 accuracy-related penalty

for 2004-2006.

                             FINDINGS OF FACT

     Some of the facts have been stipulated.       We incorporate the

stipulated facts into our findings by this reference.

Petitioners resided in Oregon when their petitions were filed.

William Holdner, a certified public accountant, is the father of

petitioner Randal W. Holdner (Randal Holdner).
                                 - 4 -

I.   Background:   1968-77

     In 1968 or 1969 William Holdner purchased two cows, a bull,

and a horse (collectively, livestock).      His daughter and his son,

Randal Holdner, bred the cattle and showed the livestock at 4-H

and Future Farmers of America events, and the children’s

livestock activity expanded each year.

     The family kept the livestock at the Home Place, a 3.36-acre

property in Scappoose, Oregon, that was improved by petitioners’

home,3 a barn, and an equipment shed and included a pasture.      The

Home Place was titled in William Holdner’s name.      The record does

not disclose when William Holdner purchased the Home Place or how

much he paid for the property.

     In 1972 William Holdner purchased the Chapman property, a

17-acre parcel in Scappoose, Oregon, consisting of a testing

station and a pasture, for $17,000.      William Holdner later

purchased a mobile home for the Chapman property for around

$10,000.   In 1974 William Holdner purchased the Dutch Canyon

property, a 100-acre parcel in Scappoose, Oregon, consisting of a

barn, a cattle processing facility, a pollution control system,

and a pasture, for $100,000.   The Chapman property and the Dutch

Canyon property were titled in William Holdner’s name.      For




     3
      William Holdner still owns the Home Place property, but
petitioners no longer live there.
                                - 5 -

convenience, we shall refer to the Home Place, the Chapman

property, and the Dutch Canyon property collectively as the

separately owned properties.

II.   Holdner Farms’ Formation: 1977

      In 1977 Randal Holdner graduated from high school.    He

showed little interest in college, so his father offered him a

deal-–in lieu of paying for a college education, William Holdner

would invest in a farming business for him.   Specifically,

William Holdner proposed that Randal Holdner manage the day-to-

day farming activity on the separately owned properties in

exchange for a share of the profits from cattle sales.     Randal

Holdner accepted his father’s offer.    Petitioners did not commit

their agreement to writing.

      Under their informal oral agreement, each petitioner had

certain duties and responsibilities with respect to the farming

operation known as Holdner Farms.   Randal Holdner was responsible

for managing the farm, and his duties included feeding the

cattle, maintaining farm equipment, and tending to sick animals.

William Holdner was primarily responsible for Holdner Farms’

financial affairs, and his duties included arranging cattle

sales, making payments to suppliers, and obtaining financing to

purchase new farm properties.   William Holdner also agreed, at

least initially, to contribute money to the farm, though it is
                              - 6 -

unclear how much money he actually contributed or whether he

expected to be repaid.4

     Petitioners also agreed to certain financial terms.   They

agreed that Randal Holdner would be entitled to one-half of

Holdner Farms’ gross proceeds from cattle sales and that Randal

Holdner would have an equity interest in Holdner Farms, though

the precise nature of that interest is unclear.   The record does

not contain any credible evidence that petitioners discussed the

allocation of other items of income and expense when the Holdner

Farms activity began, nor is there any credible evidence that

petitioners reached any agreement regarding the allocation of

such items in the early years of Holdner Farms.

     When the Holdner Farms activity began, William Holdner did

not transfer an interest in the separately owned properties to

his son, and petitioners took no steps to clarify their

respective interest in the farm equipment or the livestock.

However, petitioners had an understanding that all property used

in the Holdner Farms enterprise, including the separately owned

properties, would be devised to Randal Holdner upon William




     4
      William Holdner testified at trial regarding his estimate
of the respective contributions to Holdner Farms made by him and
Randal Holdner, but he did not introduce any documentation to
support his estimates. On the record before us we cannot
quantify petitioners’ respective contributions to Holdner Farms
since 1977, and we decline to do so solely on the basis of
William Holdner’s undocumented and self-serving estimates, which
we do not find credible.
                              - 7 -

Holdner’s death,5 in part to assure that Holdner Farms would

remain a viable business upon William Holdner’s death.6

III. Holdner Farms’ Expansion: 1977-2004

     William Holdner believed the key to developing a successful

farming operation was to acquire income-producing property under




     5
      William Holdner explained at trial that he wanted Holdner
Farms to remain intact upon his death in order to increase the
likelihood that the farm would remain a profitable business for
his son.
     6
      Randal Holdner certainly believed he had an equity interest
in Holdner Farms. When Randal Holdner’s mother claimed that
Holdner Farms was marital property in connection with her divorce
from William Holdner, Randal Holdner filed a lawsuit against his
parents seeking a judicial declaration recognizing and enforcing
his interest in Holdner Farms, including the separately owned
properties. See Holdner v. Holdner, 29 P.3d 1199 (Or. Ct. App.
2001). During the trial Mrs. Holdner testified that she was not
a party to any alleged agreement between petitioners, and the
trial court found her testimony credible. Id. at 1202-1204. The
trial court also found that Mrs. Holdner received no
consideration for the alleged contract between petitioners. Id.
at 1203. On appeal, the Court of Appeals of Oregon affirmed the
trial court’s judgment, concluding that Randal Holdner had failed
to establish the alleged contract by a preponderance of the
evidence. Subsequently, petitioners and Mrs. Holdner entered
into a settlement agreement under which Mrs. Holdner released her
claims to any part of Holdner Farms and any other marital
property in exchange for $400,000, which was paid by Holdner
Farms out of its income from timber sales, and other
consideration.

     Neither petitioners nor respondent contend that the judgment
in Holdner v. Holdner, supra, is binding on this Court, and we
are satisfied that the doctrine of collateral estoppel, or issue
preclusion, is not applicable. See Ron Lykins, Inc. v.
Commissioner, 133 T.C. 87, 100-101 (2009). This case involves
later years and different issues, and the facts relating to the
operation of Holdner Farms have changed.
                               - 8 -

land sales contracts.7   That way the properties were available to

generate income that could be used to repay the loans.     Between

1984 and 1992 petitioners jointly purchased several properties

under land sales contracts.8

     In 1984 petitioners purchased the Sattler property, a

178.96-acre property in Scappoose, Oregon, consisting of

timberland and pasture for $175,000.9   Petitioners completed

payments under the contract sometime before 2000, and on

October 9, 2006, they received a warranty deed from the seller’s

estate.   Petitioners also jointly leased 90 acres of pasture

adjacent to the Sattler property during the years at issue.




     7
      A land sales contract is a contract that uses seller
financing to enable a purchaser to acquire property over time by
permitting the purchaser to pay the seller in installments. The
purchaser takes possession of the property immediately but does
not acquire title to the property until the loan is completely
repaid. See Black’s Law Dictionary 371 (9th ed. 2009).
     8
      Several of the jointly purchased properties are close or
adjacent to one another, and there is some ambiguity in the
record regarding the exact size and location of some of the
properties. For example, the stipulation of facts refers to the
Ernest property and the Johnson Landing Road property as separate
properties, but Randal Holdner referred to the properties at
trial as a single property. Moreover, the stipulation of facts
states that the Ernest property and the Johnson Landing Road
property consisted of 54.24 and 115.32 acres, respectively, but
Randal Johnson testified that the combined property was 204
acres. The details regarding the property or properties do not
affect our resolution of the issues in this case. For
simplicity, we shall treat the Ernest and Johnson Landing Road
properties as a single property.
     9
      The purchase price was allocated $125,000 to the land and
$50,000 to the timber.
                              - 9 -

     In 1988 or 1989 petitioners purchased the Ernest property, a

54.24-acre farm in Scappoose, Oregon, for $265,000.   The Ernest

property consists of croplands and pasture and includes land that

petitioners lease to a nursery.10   The property is improved by

two houses,11 two barns, and a cattle processing facility.

Petitioners built the two barns using Holdner Farms’ profits.

Around the same time petitioners purchased the Johnson Landing

Road property, a 115.32-acre property that is zoned for farm use.

As mentioned above, see supra note 8, petitioners refer to the

Ernest and Johnson Landing Road properties as a single property.

     In 1989 petitioners purchased the Dike Road property, a

33.22-acre farm property in Scappoose, Oregon.   In 1992

petitioners purchased an adjacent 7-acre parcel known as the

Hayes property, which includes a house and a pasture.   Finally,

between 1997 and 2006, petitioners jointly leased 543 acres of

pastureland in Vancouver, Washington, across the Columbia River

from Oregon.

     With the exception of the jointly leased properties,

petitioners purchased all of the above-described properties

jointly under land sales contracts, with title passing only after

the purchase prices were fully paid.   Petitioners generated funds



     10
      During 2004-2006 petitioners received $5,000 per month in
rent from the nursery.
     11
      Randal Holdner has lived in one of the houses since the
mid-1990s.
                                - 10 -

to make payments under the land sales contracts by renting out

the properties or parts thereof.    All of the aforementioned land

sales contracts were paid in full before 2004.    For convenience

we shall refer to the properties petitioners purchased or leased

jointly as the jointly owned properties.

      Petitioners hold title to the jointly owned properties

equally as tenants in common.    Although a tenancy in common

typically does not include the right of survivorship,12

petitioners had an understanding that Randal Holdner would

inherit the farm, including the jointly owned properties, upon

his father’s death.13

IV.   Holdner Farms’ Operations:   2004-2006

      By 2004 Holdner Farms had grown into a profitable cattle

farming operation.   Petitioners owned as many as 2,000 head of

cattle at any given time, and they used all of the separately

owned properties and all of the jointly owned properties in the

cattle farming business.   Petitioners’ total gross revenue from

cattle sales in 2004-2006 was nearly $1 million.    In addition,


      12
      A tenancy in common is “A tenancy by two or more persons,
in equal or unequal undivided shares, each person having an equal
right to possess the whole property but no right of
survivorship.” Black’s Law Dictionary 1604 (9th ed. 2009).
      13
      Once again, petitioners never put their agreement in
writing, though William Holdner told his daughter that upon his
death she would not inherit anything from the Holdner Farms
operation. Instead, William Holdner explained to his daughter
that the farm operation would remain intact. Petitioners
apparently never considered what would happen to the properties
in the event Randal Holdner predeceased his father.
                               - 11 -

Holdner Farms had developed two additional sources of income--

rental income from leasing parts of the jointly owned properties

(totaling $283,800 for 2004-2006) and income from logging the

Sattler property (totaling $869,116 for 2004-2006).14

     Throughout 2004-2006 Randal Holdner managed Holdner Farms’

day-to-day operations, often working 16-18 hour days, while

William Holdner was primarily responsible for Holdner Farms’

finances and accounting.    William Holdner devoted approximately

50 percent of his professional time to Holdner Farms in 2004-

2006, and Randal Holdner devoted all of his worktime to Holdner

Farms.    During 2004-2006 petitioners shared equally in Holdner

Farms’ gross income from cattle sales.    At some point before 2004

petitioners also agreed to share equally in Holdner Farms’ gross

rental income and gross income from timber sales, and during

2004-2006 they divided these additional sources of income

equally.

     Although petitioners never committed their revised agreement

to writing, petitioners took other steps in years preceding 2004

to formalize their business arrangement.    First, petitioners

created a separate bank account for Holdner Farms (the Holdner

Farms account), which was in existence throughout 2004-2006.

Each petitioner was an authorized signatory on the Holdner Farms

account and could sign checks and withdraw funds from the


     14
      Petitioners reported their gain from timber sales on
Schedules D of their Federal income tax returns.
                               - 12 -

account.    Petitioners deposited all proceeds from cattle sales,

rental activity, and timber sales into the Holdner Farms account,

and they used the Holdner Farms account to pay most farm

expenses.   Petitioners also took draws from the account.

     Second, petitioners purchased an insurance policy for

Holdner Farms.   When the policy required a rewrite in 2003,

petitioners’ insurance broker, Raymond Schumacher, who testified

at trial, recommended that petitioners register Holdner Farms as

a partnership for insurance purposes.    Petitioners accepted

Schumacher’s suggestion and purchased a commercial umbrella

insurance policy.    The policy’s declarations page describes the

form of business insured as a partnership.

     Finally, on January 23, 2003, petitioners registered Holdner

Farms as a partnership with the State of Oregon.    Petitioners

renewed the registration on December 14, 2004, and again on

December 26, 2006.

V.   Petitioners’ 2004-2006 Federal Income Tax Returns

     In addition to his involvement with Holdner Farms, William

Holdner maintained an active accounting practice in 2004-2006

which he conducted as a partnership with several other partners.

On his Federal income tax returns for 2004, 2005, and 2006,

William Holdner reported on Schedules K-1, Partner’s Share of

Income, Deductions, Credits, etc., income from his accounting

partnership of $264,516, $232,156, and $263,423, respectively.
                                       - 13 -

     William Holdner prepared his and his son’s Federal income

tax returns for 2004-2006.        For 2004-2006 petitioners reported

Holdner Farms’ income and expenses from cattle sales and rental

activity on Schedules F of their income tax returns, and they

reported Holdner Farms’ income and expenses from timber sales on

Schedules D of the returns.        Each petitioner effectively reported

one-half of Holdner Farms’ gross income.15            However, William

Holdner deducted most of Holdner Farms’ expenses in 2004-2006 on

his personal income tax returns for those years.               As a result,

William Holdner’s income tax returns for 2004-2006 claimed net

losses from his involvement in Holdner Farms, as illustrated by

the following table:

                         2004                   2005                 2006
               Randal        William      Randal    William    Randal   William
               Holdner       Holdner      Holdner   Holdner    Holdner Holdner

Cattle income  $138,966     $138,966     $91,695   $91,695    $250,405   $250,405
                                                   1                      1
Rental income    47,175       47,175      53,875     53,875     40,850      40,850
Timber sales    237,966      237,966     196,592   196,592       -–           --
Total income    424,107      424,107     342,162   342,162     291,255    291,255
Total expenses  158,797      477,991     167,320   431,219     261,473    551,032
Net gain (loss) 265,310      (53,884)    174,842   (89,057)     29,782   (259,777)
      1
        Both petitioners testified that they divided income from cattle sales,
rental income, and timber sales generated by Holdner Farms equally during the
years at issue, and their testimony is generally consistent with their tax
returns. However, William Holdner, who prepared the tax returns, would
sometimes report 100 percent of certain income (such as rental income in 2005
and 2006) and then claim an offsetting deduction for the 50-percent share owed


     15
      In some instances, William Holdner reported 100 percent of
Holdner Farms’ gross income from a particular item on his returns
and then deducted Randal Holdner’s 50-percent share as an
expense. On his 2004 Schedule F, for example, William Holdner
reported $277,932 in sales of livestock and deducted $138,966 as
cost or other basis. Similarly, on his 2004 return William
Holdner reported $94,350 of rental income related to the Holdner
Farms activity, and he deducted $47,175 as a rent or lease
expense attributable to land.
                                   - 14 -
to Randal Holdner. Regardless of how the income was actually reported on the
relevant returns, however, the net effect of petitioners’ reporting positions
is that all income from Holdner Farms was divided equally between them during
the years at issue. The above table reflects each petitioner’s net share of
the gross income generated by cattle sales, rentals, and timber sales.

     In a few instances petitioners shared expenses in the same

way they shared gains; i.e., 50-50.         In most instances, however,

William Holdner allocated Holdner Farms’ expenses between himself

and his son as he saw fit.       Indeed, the allocation of Holdner

Farms’ expenses between petitioners did not bear any apparent

relationship to petitioners’ respective ownership interests in,

or their respective levels of involvement with, Holdner Farms.

In fact, the allocation of expenses made by William Holdner had

no apparent rational basis16 and appeared completely arbitrary,

as illustrated by the following table showing William Holdner’s

allocation of depreciation, interest, and animal feed expenses

during the years at issue:




     16
      William Holdner appeared to assert at trial that his
allocation of expenses was related to his and Randal Holdner’s
respective investments in Holdner Farms and to their agreements
regarding specific Holdner Farms expenses, although the testimony
in question was often unclear and confused. William Holdner’s
assertions are not substantiated in the record, and we reject
them as self-serving and not credible.
                              - 15 -

Depreciation Expense

                      Randal Holdner          William Holdner
          Year     Amount    Percentage    Amount    Percentage
                   1
          2004     $88,566       89        $11,357       11
          2005      12,907       21         49,710       79
          2006     133,576       53        119,584       47

Interest Expense

                      Randal Holdner          William Holdner
          Year     Amount    Percentage    Amount    Percentage

          2004     $1,900         8       $23,005       92
          2005     28,276        49        29,180       51
          2006     20,134        50        20,134       50

Animal Feed Purchased

                      Randal Holdner          William Holdner
          Year     Amount    Percentage    Amount    Percentage

          2004       -0-        -0-       $224,932      100
          2005       -0-        -0-        118,338      100
          2006     $54,144       29        134,433       71
     1
      All monetary amounts have been rounded to the nearest
dollar, and all percentages have been rounded to the nearest
whole number.

     Following an examination of petitioners’ returns for

2004-2006, respondent determined that Holdner Farms was a

partnership for Federal income tax purposes and that petitioners

were equal partners who must allocate partnership income and

expenses accordingly.   Respondent also determined that William

Holdner was liable for the accuracy-related penalty under section

6662 for each of the years at issue.   Petitioners timely filed

petitions challenging respondent’s determinations.
                              - 16 -

                              OPINION

I.   Evidentiary Matters

     Respondent reserved objections to Exhibits 26-P through 33-

P, which relate to respondent’s examination of petitioners’

2004-2006 Federal income tax returns, on various grounds.

Respondent objects to Exhibits 26-P through 31-P on the ground

that they attempt to go behind the notice of deficiency.

Respondent also objects to Exhibits 26-P, 27-P, 29-P, and 31-P

through 33-P on the ground that they contain hearsay.    Finally,

respondent objects to Exhibit 32-P, an introductory letter from

William Holdner to respondent’s district counsel, on the ground

that it is irrelevant.

     A trial of a deficiency case in the Tax Court is a

proceeding de novo.   Our decision in a deficiency case is based

on the record that is developed at trial, not on any previous

record developed at the administrative level.   Greenberg’s

Express, Inc. v. Commissioner, 62 T.C. 324, 328 (1974).

Ordinarily, we do not go behind the notice of deficiency.     Id.

We have, however, recognized two limited exceptions to the

general rule that we will not look behind the notice of

deficiency.   One is where there is substantial evidence of

unconstitutional conduct by the Commissioner, and the other is in

so-called naked assessment cases where the Commissioner

introduces no evidence but rests on the presumption of
                               - 17 -

correctness and the taxpayer challenges the notice of deficiency

on the grounds that it is arbitrary.    Graham v. Commissioner, 82

T.C. 299, 308-309 (1984), affd. 770 F.2d 381 (3d Cir. 1985); see

also United States v. Janis, 428 U.S. 433, 441 (1976).

       Neither exception is applicable in these cases.    Petitioners

have not alleged that respondent engaged in unconstitutional

conduct with respect to the determinations, and respondent does

not rely solely on the presumption of correctness.       Petitioners

have not convinced us that the exhibits in question are relevant

or otherwise admissible, and we hold that they are not.

Respondent’s objections to Exhibits 26-P through 31-P are

sustained.

       With respect to respondent’s objections to Exhibits 32-P and

33-P on grounds of relevance and hearsay, we note that

proceedings in the Tax Court are conducted in accordance with the

Federal Rules of Evidence.    See sec. 7453; Rule 143(a).    Rule 402

of the Federal Rules of Evidence provides that all relevant

evidence is admissible unless otherwise provided, and all

evidence that is not relevant is not admissible.    Relevant

evidence is any evidence that has any tendency to make any fact

of consequence to the determination of the action more or less

probable than it would be without the evidence.    Fed. R. Evid.

401.    However, even relevant evidence may be excluded if its

probative value is substantially outweighed by, inter alia,
                               - 18 -

“considerations of undue delay, waste of time, or needless

presentation of cumulative evidence.”    Id. 403.

      Rule 801(c) of the Federal Rules of Evidence defines hearsay

as any statement, other than one made by the declarant while

testifying at trial, offered in evidence to prove the truth of

the matter asserted.    Hearsay is not admissible, except as

provided by the Federal Rules of Evidence, by other rules

prescribed by the Supreme Court pursuant to statutory authority,

or by Act of Congress.    Id. 802.

      We agree with respondent that Exhibit 32-P, an introductory

letter from William Holdner to respondent’s district counsel, and

Exhibit 33-P, a memorandum from William Holdner to the Appeals

Office, are irrelevant.   Moreover, Exhibit 33-P is an advocate’s

document containing arguments and citations made by William

Holdner during the consideration of his case by the Appeals

Office.   To the extent Exhibit 33-P references financial

information regarding Holdner Farms, most if not all of that

information is already in evidence through other sources.

Consequently, we sustain respondent’s objections to Exhibits 32-P

and 33-P.

II.   Burden of Proof

      As a general rule, the Commissioner’s determinations in a

notice of deficiency are presumed correct, and the taxpayer has

the burden of proving that the determinations are incorrect.
                                - 19 -

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).      In

certain circumstances, if the taxpayer introduces credible

evidence with respect to any factual issue relevant to

ascertaining the taxpayer’s liability for tax, section 7491(a)

shifts the burden to the Commissioner but only if the taxpayer

establishes that he has complied with the requirements of section

7491(a)(2).    See Weaver v. Commissioner, 121 T.C. 273, 275

(2003); Baker v. Commissioner, 118 T.C. 452, 461 (2002), affd.

338 F.3d 789 (7th Cir. 2003).

     Petitioners have neither alleged that section 7491 applies

nor established that they complied with the requirements of

section 7491(a)(2) to substantiate items, to maintain required

records, and to fully cooperate with respondent’s reasonable

requests.   Nevertheless, petitioners argue that respondent’s

determinations are not entitled to the presumption of

correctness.   Although petitioners’ argument is not entirely

clear, petitioners appear to object to the fact that respondent

has taken inconsistent positions by allocating 100 percent of the

income from petitioners’ Holdner Farms activity to both

petitioners and disallowing all deductions even though respondent

concedes that petitioners’ Holdner Farms’ expenses were

substantiated.   Petitioners’ argument is without merit.

     It is well established that the Commissioner may take

inconsistent positions in order to protect the public fisc and
                              - 20 -

ensure against a potential whipsaw effect.17    Fayeghi v.

Commissioner, 211 F.3d 504, 508 n.3 (9th Cir. 2000), affg. T.C.

Memo. 1998-297; Centel Commcns. Co. v. Commissioner, 92 T.C. 612,

626 n.7 (1989) (citing Gerardo v. Commissioner, 552 F.2d 549,

555-556 (3d Cir. 1977), affg. in part and revg. in part T.C.

Memo. 1975-341, and Estate of Goodall v. Commissioner, 391 F.2d

775, 782-783 (8th Cir. 1968), vacating T.C. Memo. 1965-154),

affd. 920 F.2d 1335 (7th Cir. 1990); Doggett v. Commissioner, 66

T.C. 101, 103 (1976).   In Estate of Goodall v. Commissioner,

supra at 783, the Court of Appeals for the Eighth Circuit

explained the rationale behind allowing the Commissioner to take

inconsistent positions, stating:

     Inconsistency in determinations, when they are not made
     in bad faith, does not equate with an absence of the
     statutorily required determination, as the taxpayers
     suggest. Each taxpayer, even though there are several
     related ones, by the determination and notice made for
     him, knows the position the Commissioner is taking with
     respect to his tax situation. So long as the ultimate
     resolution of the issues is consistent for all, we see
     no legal wrong.

     The same reasoning applies to this case.    To prevent a

potential whipsaw, respondent has taken inconsistent positions by

allocating 100 percent of Holdner Farms’ income to each

petitioner and disallowing all expenses.   Respondent acted in


     17
      “A whipsaw occurs when different taxpayers treat the same
transaction involving the same items inconsistently, thus
creating the possibility that income could go untaxed, or two
unrelated parties could deduct the same expenses on their
separate returns.” Maggie Mgmt. Co. v. Commissioner, 108 T.C.
430, 446 (1997).
                                - 21 -

good faith, respondent’s determinations clearly informed each

petitioner of respondent’s position with respect to each

petitioner’s tax situation, and respondent seeks a consistent

resolution for both petitioners; i.e., respondent concedes that

only one-half of Holdner Farms’ income should be allocated to

each petitioner and that each petitioner should be allowed to

deduct one-half of Holdner Farms’ expenses.     We therefore reject

petitioners’ argument, and we conclude that petitioners have the

burden of proof with respect to disputed factual issues in this

case.

III. Petitioners’ Holdner Farms Activity Was a Partnership (or a
     Joint Venture Taxed as a Partnership) for Federal Income Tax
     Purposes

        The existence of a partnership for Federal income tax

purposes is a question of Federal law and does not depend on

whether an enterprise is recognized as a partnership under local

law.     Commissioner v. Culbertson, 337 U.S. 733, 741 (1949);

Commissioner v. Tower, 327 U.S. 280, 287-288 (1946); see also

Bergford v. Commissioner, 12 F.3d 166, 169 (9th Cir. 1993), affg.

Alhouse v. Commissioner, T.C. Memo. 1991-652; Frazell v.

Commissioner, 88 T.C. 1405, 1412 (1987).     Section 7701(a)(2)

defines a partnership as “a syndicate, group, pool, joint

venture, or other unincorporated organization, through or by

means of which any business, financial operation, or venture is

carried on, and which is not     * * * a trust or estate or a
                                 - 22 -

corporation”.     See also sec. 761(a) (defining a “partnership” the

same way).18    A partnership is created for Federal income tax

purposes when persons join together their property, labor, or

skill for the purpose of carrying on a trade, profession, or

business and there is a community of interest in the profits and

losses.     Commissioner v. Tower, supra at 286.   In Commissioner v.

Culbertson, supra at 742, the Supreme Court identified the task

that a court must undertake in deciding whether a partnership

exists for Federal tax purposes:

     The question is not whether the services or capital
     contributed by a partner are of sufficient importance
     to meet some objective standard * * * but whether,
     considering all the facts--the agreement, the conduct
     of the parties in execution of its provisions, their
     statements, the testimony of disinterested persons, the
     relationship of the parties, their respective abilities
     and capital contributions, the actual control of income
     and the purposes for which it is used, and any other
     facts throwing light on their true intent--the parties
     in good faith and acting with a business purpose
     intended to join together in the present conduct of the
     enterprise. * * *

See also Luna v. Commissioner, 42 T.C. 1067, 1077-1078 (1964).

     Generally, each partner in a partnership contributes

property or services, or both.     Commissioner v. Culbertson, supra

at 741.19    In addition, a valid partnership is generally formed


     18
       The definition of a partnership for Federal income tax
purposes is basically the same as the definition of a partnership
for commercial law purposes but more detailed. 1 Willis &
Postlewaite, Partnership Taxation, par. 1.03[1], at 1-31 (6th ed.
2009).
     19
          Where one partner contributes property and the other
                                                       (continued...)
                                - 23 -

with a business purpose--to conduct an enterprise for profit.

Madison Gas & Elec. Co. v. Commissioner, 633 F.2d 512, 514-517

(7th Cir. 1980), affg. 72 T.C. 521 (1979); Frazell v.

Commissioner, supra at 1412; see also Cusick v. Commissioner,

T.C. Memo. 1998-286; Estate of Winkler v. Commissioner, T.C.

Memo. 1997-4.    Mere coownership of property does not create a

partnership for Federal income tax purposes, but coowners of

property may become partners if they carry on a business activity

for profit.     Cusick v. Commissioner, supra; see also Estate of

Winkler v. Commissioner, supra.

     We conclude that petitioners’ Holdner Farms activity was a

partnership for Federal income tax purposes in 2004-2006 for

several reasons.    First, both petitioners contributed capital and

labor to Holdner Farms.    William Holdner contributed the

separately owned properties in 1977, as well as his 50-percent

share of the jointly owned properties as each was acquired, for

use in a farming operation with his son.    Although the record

does not disclose whether Randal Holdner contributed any property



     19
      (...continued)
contributes services, a partnership is formed, but additional tax
complications may arise. See 1 McKee, et al., Federal Taxation
of Partnerships and Partners, par. 5.01, at 5-2 (4th ed. 2007).
For example, receipt of a partnership interest solely in exchange
for past services or anticipated future services does not qualify
for nonrecognition under sec. 721. Id. par. 5.02. Thus, the
value of a partnership interest received solely in exchange for
services may constitute gross income to the partner on receipt.
Id. Respondent does not raise any such issue with respect to
either petitioner for the years at issue.
                              - 24 -

to Holdner Farms in 1977, he contributed his 50-percent share of

the jointly owned properties to Holdner Farms as the properties

were acquired.   Moreover, both petitioners contributed labor to

and performed services for Holdner Farms.    Randal Holdner has

spent the past three decades managing the farming enterprise full

time, while William Holdner has spent considerable time managing

Holdner Farms’ business affairs part time.

     Second, Holdner Farms has conducted a business activity for

profit since 1977 when it was formed.   From 1977 to the years at

issue, Holdner Farms’ farming operation grew steadily in scope

and size and during 2004-2006 was active and profitable.

Petitioners correctly note that mere coownership of property or a

joint undertaking to share expenses alone is not sufficient to

satisfy the business activity requirement.    However, petitioners’

Holdner Farms enterprise clearly was more than a mere coownership

of property or a means to share expenses.

     Third, petitioners shared Holdner Farms’ gross income from

cattle sales, timber sales, and rental income equally.    Randal

Holdner testified that he did not regard his share of the income

as salary or wages, and William Holdner apparently agreed, as he

did not prepare a Form W-2, Wage and Tax Statement, or a Form

1099-MISC, Miscellaneous Income, for his son for any of the years

at issue.   The record overwhelmingly demonstrates that Holdner
                              - 25 -

Farms was a business activity for profit that was jointly

conducted by petitioners.20

     An examination of the factors enumerated in Luna confirms

our conclusion.   In Luna v. Commissioner, supra at 1077-1078, we

identified eight factors that are relevant to determining whether

an enterprise is a partnership for Federal income tax purposes:

     [1] The agreement of the parties and their conduct in
     executing its terms; [2] the contributions, if any,
     which each party has made to the venture; [3] the
     parties’ control over income and capital and the right
     of each to make withdrawals; [4] whether each party was
     a principal and coproprietor, sharing a mutual * * *
     obligation to share losses * * *; [5] whether business
     was conducted in the joint names of the parties; [6]
     whether the parties filed Federal partnership returns
     or otherwise represented to respondent or to persons
     with whom they dealt that they were joint venturers;
     [7] whether separate books of account were maintained
     for the venture; and [8] whether the parties exercised
     mutual control over and assumed mutual responsibilities
     for the enterprise.

     Seven of the eight Luna factors support our conclusion that

Holdner Farms was a partnership for Federal income tax purposes,

and one factor neither supports nor weighs against it.   First,

petitioners agreed to split Holdner Farms’ gross income from

cattle sales, timber sales, and leasing activity, and they


     20
      With respect to Holdner Farms’ expenses, the record does
not establish that petitioners agreed to or even discussed any
specific division or allocation of Holdner Farms’ expenses. The
record does support a conclusion that William Holdner arbitrarily
and unilaterally allocated farm expenses between himself and his
son primarily to shelter William Holdner’s other income, most
particularly his substantial income from his accounting practice.
That allocation was made on an annual basis without any apparent
input from Randal Holdner.
                                - 26 -

faithfully executed this agreement.      Second, both petitioners

contributed capital and services to Holdner Farms.      Third,

petitioners had equal access to and control over the Holdner

Farms account, and each petitioner had unlimited power to make

withdrawals.   Fourth, petitioners shared a mutual proprietary

interest in Holdner Farms’ profits, while petitioners’

proprietary interest in Holdner Farms’ losses, if any, is simply

unclear.   Fifth, the name “Holdner Farms”, while ambiguous,

suggested an enterprise that was not limited to one particular

member of the Holdner family.    Sixth, although petitioners did

not file a Form 1065, U.S. Return of Partnership Income, on

behalf of Holdner Farms, they represented to their insurer and to

the State of Oregon that Holdner Farms was a partnership.

Seventh, petitioners maintained a separate bank account for

Holdner Farms, and William Holdner kept meticulous records for

the enterprise.   Finally, petitioners exercised mutual control

over and responsibility for Holdner

Farms.   Although petitioners had different responsibilities, each

played a crucial role in the enterprise, and each regarded

himself as an owner.   In summary, our examination of the Luna

factors confirms our conclusion that Holdner Farms was a

partnership for Federal income tax purposes.

     Although petitioners’ arguments are not entirely clear,

petitioners appear to argue that their Holdner Farms’ enterprise
                                - 27 -

was a joint venture between two individual proprietorships; i.e.,

between William Holdner’s individual proprietorship and Randal

Holdner’s individual proprietorship.     Petitioners call our

attention to Bialock v. Commissioner, 35 T.C. 649 (1961), in

which we held that a purported partnership between a taxpayer and

his two minor children was not a valid partnership for Federal

income tax purposes.    Petitioners’ argument is unavailing for

several reasons.

     First, the facts do not support petitioners’ argument.

There is no evidence, for example, that petitioners maintained

separate bank accounts for their purportedly separate individual

proprietorships, nor is there evidence that petitioners computed

their gain and loss separately (other than for Federal income tax

purposes).   On the contrary, for the reasons discussed above, the

record strongly indicates that petitioners regarded Holdner Farms

as a single entity in which they each had an interest.

     Second, the case cited in support of petitioners’ argument

is factually and legally distinguishable.     In Bialock, the

taxpayer planned to create a partnership among himself and two

trusts established for the benefit of his two minor children,

ages 9 and 15.     Bialock v. Commissioner, supra at 650.   The

taxpayer planned to donate $2,500 to each trust in 1952 or 1953;

the children were not expected to contribute any additional

capital or any services to the partnership.     Id. at 658.
                                 - 28 -

However, the trusts were never created, and the taxpayer’s minor

children never contributed any capital or services to the

enterprise.   Id. at 656, 658.    We therefore held that no

partnership was formed because the parties did not in good faith

and acting with a business purpose intend to join together in the

present conduct of an enterprise.     Id. at 659.   By contrast, both

petitioners made bona fide contributions of capital and labor to

Holdner Farms, and both petitioners intended in good faith and

with a business purpose to join together in the conduct of an

enterprise.

     Finally, even if we were to accept petitioners’ argument

that Holdner Farms was a joint venture of two individual

proprietorships, we would still conclude that Holdner Farms was a

partnership for Federal income tax purposes.    A joint venture

“has been defined as a ‘special combination of two or more

persons, where in some specific venture a profit is jointly

sought without any actual partnership or corporate designation,’

and also as ‘an association of persons to carry out a single

business enterprise for profit.’”     Beck Chem. Equip. Corp. v.

Commissioner, 27 T.C. 840, 848-849 (1957) (citing 48 C.J.S. Joint

Adventures, secs. 1 and 2, Estate of Koen v. Commissioner, 14

T.C. 1406 (1950), and Osborn v. Commissioner, 22 B.T.A. 935, 945

(1931)).   The existence of a joint venture “is a question of fact

to be determined by reference to the same principles that govern
                               - 29 -

the question of whether persons have formed a partnership * * *

for tax purposes.”    Luna v. Commissioner, 42 T.C. at 1077.

“[T]here are four basic attributes which are indicative of a

joint venture:   (1) A contract, express or implied, that a joint

venture be formed; (2) the contribution of money, property and/or

services by the venturers; (3) an agreement for joint

proprietorship and control; and (4) an agreement to share

profits.”    S. & M. Plumbing Co. v. Commissioner, 55 T.C. 702, 707

(1971).   A joint venture may create a separate entity for Federal

income tax purposes if the participants carry on a trade,

business, financial operation, or venture and divide the profits

therefrom.   Sec. 301.7701-1(a)(2), Proced. & Admin. Regs.; see

also Allum v. Commissioner, T.C. Memo. 2005-177, affd. 231 Fed.

Appx. 550 (9th Cir. 2007).

     Even if Holdner Farms were a joint venture rather than a

partnership, the joint venture would create a separate entity for

Federal income tax purposes because petitioners carried on a

farming business.    Sec. 301.7701-1(a)(2), Proced. & Admin. Regs.

As a domestic separate entity with at least two members, Holdner

Farms would be treated as a partnership for Federal income tax

purposes unless petitioners elected for the enterprise to be

taxed as a corporation.    Sec. 301.7701-3(b)(1)(i), Proced. &

Admin. Regs.   Petitioners did not file an election with respect

to Holdner Farms.    Thus, even if petitioners are correct that
                               - 30 -

Holdner farms was a joint venture, the activity would still be

treated as a partnership for Federal income tax purposes.

IV.   Petitioners Were Equal Partners in Holdner Farms in 2004-
      2006 and Must Allocate Expenses Equally

      Partnerships are not subject to tax as such.      Sec. 701.

Persons carrying on business as partners are liable for tax only

in their separate and individual capacities.      Id.   To determine

income tax liability, each partner shall take into account his

distributive share of partnership income, gain, loss, deduction,

and credit.   Sec. 702(a).   A partner’s distributive share of

income, gain, loss, deduction, and credit is determined by the

partnership agreement.   Sec. 704(a).     If the partnership

agreement does not state how a partner’s distributive share of

income, gain, loss, deduction, or credit is to be determined, or

if the allocation provided in the partnership agreement does not

have substantial economic effect, the partner’s distributive

share shall be determined according to the partner’s interest in

the partnership.   Sec. 704(b).

      A partner’s interest in a partnership refers to the manner

“in which the partners have agreed to share the economic benefit

or burden * * * corresponding to the income, gain, loss,

deduction, or credit (or item thereof) that is allocated.”       Sec.

1.704-1(b)(3)(i), Income Tax Regs.      A partner’s interest in a

partnership is determined by taking into account all the facts

and circumstances.   Sec. 704(b); Vecchio v. Commissioner, 103
                                - 31 -

T.C. 170, 193 (1994); sec. 1.704-1(b)(3)(i), Income Tax Regs.

Partners are presumed to have equal per capita interests in the

partnership.   Sec. 1.704-1(b)(3)(i), Income Tax Regs.21   However,

the presumption may be rebutted by the taxpayer or the

Commissioner by establishing that the partners’ interests in the

partnership were other than equal.       Id.

     In determining the partners’ interests in the partnership,

the following factors are relevant: (1) The partners’ relative

contributions to the partnership, (2) the partners’ respective

interests in partnership profits and losses, (3) the partners’

relative interests in cashflow and other nonliquidating

distributions, and (4) the partners’ rights to capital upon

liquidation.   Sec. 1.704-1(b)(3)(ii), Income Tax Regs.; see also

Estate of Ballantyne v. Commissioner, T.C. Memo. 2002-160, affd.

341 F.3d 802 (8th Cir. 2003).    An examination of these factors

supports respondent’s argument that petitioners have presented

insufficient evidence to rebut the presumption of equal

partnership interests and that, therefore, petitioners must

allocate both income and expenses equally.


     21
      Sec. 1.704-1(b)(3)(i), Income Tax Regs., was amended in
2008. T.D. 9398, 2008-1 C.B. 1143. The regulation as amended no
longer contains the presumption that all partners’ interests in a
partnership are equal, on a per capita basis. See id., 2008-1
C.B. at 1146-1147. Sec. 1.704-1(b)(3)(i) as amended by T.D.
9398, supra, applies to partnership taxable years beginning on or
after May 19, 2008. Id., 2008-1 C.B. at 1147. Accordingly, the
amended regulation does not apply to this case. We apply the
version of sec. 1.704-1(b)(3)(i), Income Tax Regs., in effect for
the years at issue.
                              - 32 -

      A.   Petitioners’ Contributions to Holdner Farms

      The first factor requires an examination of petitioners’

relative contributions to Holdner Farms.   At trial William

Holdner estimated that he had contributed approximately $2.5

million to Holdner Farms since its formation and that Randal

Holdner had contributed approximately $800,000, but he did not

introduce any documentation to support his estimates.    Relying

solely on his self-serving estimates, he argued that he should be

treated as owning a 75-percent interest in Holdner Farms.

Neither petitioner quantified his contribution of labor to

Holdner Farms.

      William Holdner’s estimate of his and Randal Holdner’s

capital contributions to Holdner Farms since 1977 is unsupported

by any documentation in the record or by corroborating testimony.

Petitioners did not maintain capital accounts for Holdner Farms,

nor did they offer evidence concerning the relative values of the

separately owned properties or the jointly owned properties at

the time they were contributed to Holdner Farms.   Moreover,

William Holdner’s estimate fails to account for his son’s

contribution of services to Holdner Farms.   The record strongly

suggests that Randal Holdner regarded his decades of work for

Holdner Farms as “sweat equity”, and he worked 16-18 hour days on

the farm in part because he believed he had an equity interest in

it.
                              - 33 -

     Perhaps the most telling problem with petitioners’ argument

is that it is inconsistent with their own tax accounting.

Petitioners contend that William Holdner, as a 75-percent

partner, was entitled to 75 percent of Holdner Farms’ losses, but

William Holdner’s actual share of Holdner Farms’ total expenses,

as reported on petitioners’ 2004-2006 Federal income tax returns,

ranged from 67.8 percent to 75.1 percent, and his share of

Holdner Farms’ gross income was only 50 percent.   A closer look

at petitioners’ treatment of particular items only makes matters

more confusing:   For example, William Holdner deducted 11.4

percent of Holdner Farms’ depreciation and section 179 expenses

in 2004, 79.4 percent in 2005, and 47.2 percent in 2006.

Petitioners have presented no credible evidence of any special

allocations that would adequately explain these variations.

     We simply cannot estimate petitioners’ relative

contributions to Holdner Farms solely on the basis of evidence

that is inconsistent, unsubstantiated, and self-serving.    Thus,

we conclude that petitioners have failed to rebut the presumption

of equal partnership interests with respect to this factor.

     B.   Petitioners’ Respective Interests in Holdner Farms’
          Profits and Losses

     The second factor requires us to examine petitioners’

relative interests in Holdner Farms’ economic profits and losses.

Petitioners had equal interests in Holdner Farms’ gross income in

2004-2006 and previous years, but petitioners’ relative interests
                               - 34 -

in Holdner Farms’ expenses is less clear.   For tax purposes, the

allocation of Holdner Farms’ expenses between petitioners that

William Holdner made each year was heavily weighted in his favor.

However, the record suggests that William Holdner did not bear

the economic burden of the disproportionate allocation of farm

expenses.   The record reveals that all farm expenses during 2004-

2006 were paid from farm revenue, which as we know was divided

equally between petitioners.   Consequently, we believe that the

economic reality of petitioners’ arrangement is that petitioners

bore the economic burden of farm expenses equally despite the

disproportionate allocation of expenses reflected on the tax

returns William Holdner prepared for 2004-2006.   We therefore

conclude that petitioners have failed to rebut the presumption of

equal partnership interests with respect to this factor.

     C.     Petitioners’ Relative Interests in Cashflow and Other
            Nonliquidating Distributions

     The third factor we consider is petitioners’ relative

interests in cashflow and other nonliquidating distributions.

The record establishes that petitioners had equal interests in

Holdner Farms’ cashflow and nonliquidating distributions.    During

2004-2006 petitioners were entitled to draws from the Holdner

Farms account.   Petitioners each also had an unlimited right to

withdraw funds from the Holdner Farms account at any time.   The

only limit on petitioners’ rights to withdraw funds from the

Holdner Farms account was their apparent agreement not to
                                - 35 -

overdraw it.    Petitioners did not offer any evidence that either

of them exercised greater control over cashflow and

nonliquidating distributions than the other.    Moreover, there is

no evidence that Holdner Farms ever made a disproportionate

distribution to either partner.    Thus, we conclude that

petitioners had an equal interest in Holdner Farms’ cashflow and

nonliquidating distributions.

     D.     Petitioners’ Rights to Capital Upon Liquidation

     Finally, petitioners offered no credible evidence regarding

their rights to liquidating distributions from Holdner Farms.

Although petitioners agreed that the entire Holdner Farms

enterprise would be devised to Randal Holdner upon the death of

William Holdner, petitioners apparently never considered how the

property used in the enterprise would be distributed in the event

that Holdner Farms were liquidated while both partners were still

alive.    Randal Holdner testified that he believed he had an

interest in the separately owned properties as early as 1977, and

that belief seems to be supported by the fact that income

generated by timbering on one of the separately owned properties

was divided equally between petitioners.    However, like many

parts of the record, the testimony on this point was vague and

uncertain and not sufficient to rebut the presumption of equal

partnership interests.
                              - 36 -

     We conclude on the basis of the entire record that

respondent properly determined that Holdner Farms was a

partnership for Federal income tax purposes and that in the

absence of substantial proof rebutting the presumption of

equality, petitioners had equal interests in partnership income,

expenses, and other partnership items.

V.   Section 6662 Accuracy-Related Penalty

     Section 6662(a) and (b)(1) authorizes the Commissioner to

impose an accuracy-related penalty equal to 20 percent of the

underpayment attributable to negligence or disregard of rules or

regulations.   For purposes of section 6662, negligence is any

failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code, and disregard includes

any careless, reckless, or intentional disregard.   Sec. 6662(c);

see also Neely v. Commissioner, 85 T.C. 934, 947 (1985)

(negligence is lack of due care or failure to do what a

reasonable and prudent person would do under the circumstances);

sec. 1.6662-3, Income Tax Regs.   Negligence also includes any

failure to exercise ordinary and reasonable care in the

preparation of a tax return or any failure to keep adequate books

and records and to properly substantiate items.   Sec. 1.6662-

3(b)(1), Income Tax Regs.   Negligence is strongly indicated

where, inter alia, “A taxpayer fails to make a reasonable attempt

to ascertain the correctness of a deduction * * * which would
                                  - 37 -

seem to a reasonable and prudent person to be ‘too good to be

true’ under the circumstances”.       Sec. 1.6662-3(b)(1)(ii), Income

Tax Regs.     A return position that has a reasonable basis is not

attributable to negligence.       Sec. 1.6662-3(b)(1), Income Tax

Regs.     A reasonable basis standard is a relatively high standard

that is significantly higher than a not frivolous standard.           Sec.

1.6662-3(b)(3), Income Tax Regs.       The reasonable basis standard

is not satisfied where a return position is merely arguable or

colorable.     Id.

     Section 6662(a) and (b)(2) authorizes the Commissioner to

impose a 20-percent penalty if there is a substantial

understatement of income tax.22      An understatement of tax is the

excess of the amount of tax required to be shown on the return

for the taxable year over the amount of tax actually shown on the

return.     Sec. 6662(d)(2)(A).    In the case of an individual, a

substantial understatement is an understatement that exceeds 10

percent of the tax required to be shown on the return for the

taxable year, or $5,000, whichever is greater.         Sec.

6662(d)(1)(A).       However, the amount of an understatement is

reduced to the extent the taxpayer has “substantial authority”

for the position taken.       Sec. 6662(d)(2)(B)(i).    Substantial


     22
      Only one sec. 6662 accuracy-related penalty may be imposed
with respect to any given portion of an underpayment, even if
that portion is attributable to more than one of the types of
conduct listed in sec. 6662(b). New Phoenix Sunrise Corp. &
Subs. v. Commissioner, 132 T.C. 161, 187 (2009); sec.
1.6662-2(c), Income Tax Regs.
                              - 38 -

authority is an objective standard requiring an analysis of the

law and an application of the law to the relevant facts.     Sec.

1.6662-4(d)(2), Income Tax Regs.

     The Commissioner bears the initial burden of production with

respect to a taxpayer’s liability for the section 6662 penalty;

i.e., the Commissioner must first produce sufficient evidence to

establish that imposition of the section 6662 penalty is

appropriate.   Sec. 7491(c); Kikalos v. Commissioner, 434 F.3d

977, 986 (7th Cir. 2006), affg. T.C. Memo. 2004-82.    If the

Commissioner satisfies his initial burden of production, the

burden of producing evidence to refute the Commissioner’s

evidence shifts to the taxpayer.    See Higbee v. Commissioner, 116

T.C. 438, 447 (2001).

     Respondent has satisfied his burden of production with

respect to negligence by establishing that William Holdner failed

to make a reasonable attempt to comply with the Code.

Specifically, respondent has established that William Holdner

failed to make a reasonable attempt to ascertain the correctness

of his reporting positions with respect to Holdner Farms.     As a

practicing accountant with decades of experience, William Holdner

knew that a disproportionate allocation of Holdner Farms’

expenses to him would allow him to shelter hundreds of thousands

of dollars in unrelated income.    William Holdner did not

introduce any credible evidence that he acted reasonably in doing
                                 - 39 -

so or that he conducted any research on the proper classification

of Holdner Farms for tax purposes before he decided to prepare

the 2004-2006 returns as he did.      Although petitioners assert

that William Holdner is not liable for the section 6662 accuracy-

related penalties, their arguments amount to little more than a

recitation of arguments we have previously rejected, e.g.,

Holdner Farms was, in fact, two individual proprietorships,

petitioners never formed a partnership, etc.       Because we conclude

that William Holdner is liable for the 20-percent accuracy-

related penalty for negligence, we need not consider whether he

is also liable for the section 6662 penalty for a substantial

understatement.

VI.   Conclusion

      We have considered the parties’ other arguments, and to the

extent not discussed herein, we conclude the arguments are

irrelevant, moot, or without merit.       In summary, we hold that

Holdner Farms was a partnership for Federal income tax purposes

in 2004-2006.      Further, we hold that petitioners were equal

partners in the partnership during the years at issue and that

Holdner Farms’ income, expenses, and other partnership items must

be allocated accordingly.      Finally, we hold that petitioner

William Holdner is liable for the section 6662 accuracy-related

penalty for 2004-2006.
                        - 40 -

To reflect the foregoing,


                                 Decisions will be entered

                            under Rule 155.
