F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

DJ B H O L D I

N G C O R P O R A T I O N ; T A

X M A T T E R S P A R

T N E R ; W B P A R

T N E R S , F KA W B Acquisition Partners,

Petitioners-Appellants
,

v

.

C O M M I S S I O N E R O F I

N T E R N A L R E V E N U E , Respondent-Appellee

. N o. 12-70574

Tax Ct. No. 29106-07

W B A C Q U I S I T I O N & S U B S I D I A R Y , Petitioner-Appellant
,

v

.

C O M M I S S I O N E R O F I

N T E R N A L R E V E N U E , Respondent-Appellee

. N o. 12-70575

Tax Ct. No. 26187-06D J B H O L D I N G C O R P

. V

. CI R 2

W B A C Q U I S I T I O N , I

N C ., Petitioner-Appellant
,

v

.

C O M M I S S I O N E R O F I

N T E R N A L R E V E N U E , Respondent-Appellee

. N o. 12-70576

Tax Ct. No. 5039-08

OPI NI ON

Appeal from a Decision of the

Tax Court

Arg ued and Submitted December 9, 2014—San F r ancisco, California

F iled October 7, 2015

B efore: Alex Koz inski, J ohnnie B . Rawlinson, and Mary H. Murg u ia, Circuit J udg es.
Opinion by

J u dg e Murg uiaD J B H O L D I N G C O R P

. V

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SUMMARY *

Tax

The panel affirme d three T ax Court decisions involving federal income tax deficiencies and accura cy -related penalties.

Greg W a tkins and Daren B a rone, owners of asbestos removal business W atkins Contracti n g , I n c

. ( WC I )
, s t

r u c tured W CI ’s sale and reacquisition v ia various holding c o r p o rations
to limit their p ersonal e x posure. W CI and one o f the holding corporations, W B Partners, then formed the NTC J oint Venture for an environmental remediation project.

The panel held that the Tax Court d id no t c l ea r l y err in finding no intent to operate the NTC J oint Venture as a bona fide partnership, and in tax ing profits from the v e n t u r e a s income only

to W CI

.

As part of the sale of W CI assets to Kuranda Capital, L P, W a tkins, B arone, and W CI a g reed n o t to compete with Kuranda in the envi r o n mental remediation business. The panel h eld that W atkins’s and B arone’s non

- c o mpetition
ag reement with Kuranda may not be imputed to W B Partners, and that the Tax Court d id not clearly err in not assig ning any portion of the proceeds of the noncom p e tition a g reement to W B Partners.

* T h is su m m ary co n stitu

tes n o part o f th e o p in io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.D J B H O L D I N G C O R P

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F inally
, the panel held that the Tax Court did not commit reversible error in a ssessing an accuracy -related penalt y , because tax pay ers identified n o substantial aut h o r i ty o r reasonable cause for their positions.

COUNSEL

L acey Strach a n and Steven Toscher ( arg ued), Hochman, Salkin, Rettig
, Toscher & Perez
, P

. C

. , B everly H ills, California, for Petitioners-Appellants.

And rew W einer (arg

ued) and Teresa Ellen McL aug hlin, Attorney s, and Gilbert Steven Rothenberg
, Deputy Assistant Attorney General, United S t a tes Department of J ustice, W a shing ton, D.C.; W illiam J

. W ilkins, C hief Counsel, I nternal Revenue Service, Washing ton D.C., for RespondentAppellee.

OP INION

MURGUI A, Circuit J udg e:

Daren B a ro ne and Greg ory W atkins drew upon their

ex p erience in asbes t o s removal to establish a successful environmental remediation company , W atkins Contracting
, I nc (“W CI ”). W ith success came risk—in p articular, the d a n g er that B arone and W atkins would be held persona l l y liable f or the cost of c o mpleting any projects that W CI was unable to finish. To shield themselves from this risk, the two

men restructured W CI so that several corporate entities stood b e t w een them and the company

. B arone and W atkins ea c h forme d a h olding corporation, a nd the two corporationsD J B H O L D I N G C O R P

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entered a partnershi p , Appellant WB Partners. B arone a nd W a tkins also f

ormed a third holding company , Appellant W B Acquisition, I nc., a

n d transferred their interest in WCI to this
company . F inally , W B Partners purchased all shares of W B Acquisition. As a re s u l t, W CI was owned by W B Acquisition, which was owned by W B Partners, which in turn

was o wned by B a

rone’s a nd W atkins’s holding corporations. This elaborate corporate s t ructure provided B arone a nd W a tkins with multiple levels of protection from personal liability

. See Appendix

.

An opportunity arose to do environmental remediation work for a massive redevelopment p r oject at the San Dieg o Naval Tr a i n i ng Center (“NTC”). To win the c ontract, however, W CI would have to post a larg e bond ag ainst the possibility that it would be unable to complete the work. T o

ensure that W CI could afford the bond, B arone and W atkins caused W CI and W B Partners to form a joint venture, d ubbed the NTC J oint Venture. Under the terms of the joint venture ag reement, W CI would do the environmental remediation work, and W B Partners would supply f inancial g uaranties. I n

ex c h a ng e for these services, W CI would receive thirty percent o f the venture’s profits, and W B Partners would receive seventy

percent.

The joint v e nture’s structure had sig nificant federal income tax consequences. W CI would have to pay corporate income tax on its thirty

- percent share of the venture’s profits. As a g eneral p artnership, W B Partners would pay no income
tax on its seventy -percent share; instead, that inco m e w o uld
pass throug h to W B Partners’ o wners, th e t w o holding corporations. T he holding c o rporations were S corporations, wh o s e i n c o me is treated in the same manner as that of a g eneral partnership—it passes throug h to the S c orporations’D J B H O L D I N G C O R P

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shareholders. And because a ll shares of B a rone’s and W a tkins’s ho l d ing corporations were owned by tax -ex empt retirement saving s plans, W B Partners’ seventy -percent share of the N TC J o int Venture’s p r o f i ts would only be subject to f ederal income tax if and when the retirement p l a n s distributed benefits to their holders.

W h ile the NTC project w as o ng oing
, W CI sold its a ssets to Kuranda Capital, L P (“Kuran da”). T he purchase
ag reemen t a llocated a portion of the sales price a s consideration for a noncompetition ag reement, whereby W a tkins, B arone, and W CI a g reed no t t o compete with Kuran d a i n the environmental remediation business. W B Partners claimed a ll of the proceeds of the noncompetition
ag reement on its tax returns.

This a ction beg an w h en Appellants W B Partners, W B Acquisition, a

nd B arone’s holding corporation (collectively
,
“ T a xp a y ers”) challeng ed c e rtain tax d eficiencies identified b y the Commissioner of I nternal Revenue. I n three consolidated decisions, the Tax Court found that the N T C J oint Venture

was n ot a valid p a

r tnership for t a x p u rposes, and therefore that all o f the joint ventu r e ’ s p rofits w ere tax able income to W CI

. The Tax Court determined that all of the proceeds from the noncompetition ag reement were income to W CI as well. B ecause W CI had substantially understated its income, the Tax Court upheld the Commissioner’s assess ment o f
accuracy -related penalties. Tax

pay ers appealed.

F or the reasons that follow, we affirm the decisions of the Tax Court.D J B H O L D I N G C O R P

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BACK G ROUND

I. History of

Watkins Contracting, Inc.

I n the early 1 9 8 0 s , B a

rone a n d W a tkins w orked in the asbestos removal business in Hawaii. W atkins later r eturned home to San Dieg o, where h e went to work for his father’s asbestos removal c ompany

. T h e company soon ex p a nded into other areas of environmental r emediation. W hen B arone joined the company in the early 1990s, he and W atkins purchased it themselves, renam i n g it W atkins Contracting
, I nc. (“W CI ” ).

B a rone w a s uncomfortable with the deg ree of personal liability involved in the e nvironmental remediation business. I n 1997, B arone and W atkins so l d W CI ’s stock to REXX Environmental Corp. (“REXX”), another environmen t al remediation company , thereby r elievi ng themselves of any personal liability on future projects. R E X X in turn hired B arone and W a tkins to manag e W CI

. B a rone became W CI ’s C E O, a nd was responsible for “[ t] he day

- to-day busin e s s affairs,

. . . a

ny thing from mana ging employ ees to handling financing to business development.” W atkins “oversaw a lot of the field.”

REXX soon e ncountered fin ancial difficulties, a nd
approac h ed B arone and W a tkins to g aug e their interest in

re p u r c hasing W CI

. B arone and W atkins entered an ag reement to buy W C I ’s s hares on J u ne 10, 1999. The purchase closed on September 19, 2000.D J B H O L D I N G C O R P

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II. Birth of

WB P artners

B a rone wanted to structure the purchase a g reement to afford “(1) [p] ersonal protection from creditors; (2) lay ers o f lia b i l i t y protection to operate W CI ; (3) the a bility to invest both tog e ther [with W atkins] and separately
, depending on the r isks involved in each project; ( 4)

. . . qualified retirement plans; and (5) avoid[ ance of] probate.” T o accomplish these
g oals, B arone and W a tkins stacked a number of holding companies between them and W CI to form a m u lti-lay ered liability shield.

B a rone and W atkins created W B Acquisition, I n c., and
arrang ed f

or the company to recei ve W CI ’s shares when the repurchase from REXX closed. They created two S corporations 1

— DJ B Holding Corporation (“DJ B ”) and G SW Holding Corporation (“GSW ”). B arone a n d W atkins then entered employ

ment ag re ements with DJ B and GSW
, respectively
, and each corporation adopted an e mploy ee stock ownership plan 2 (“Plan”). The DJ B Plan purchased all shares of DJ B
, and the GSW P lan purchased all shares of GSW

. DJ B and GSW then formed a g e neral partnership called W B

1 A n “ S co rp o ratio n ” is “ a co rp o ratio n th a t h a[s] elected to b e tax ed

u n d er Su bch ap ter S o f th e [In tern al Rev en u e] Co d e.” Gitlitz v. C o mm’r
, 5 3 1 U

. S

. 2 0 6
, 20 9 (2 0 0 1 ). L ik e a g en eral p artn ersh ip
, an S co rp o ratio n d o es n o t p ay in co m e tax o n its p ro f its, b u t p asses th e p ro f

its th ro u g h to its sh areh old ers. Id

.

2 A n “ em p lo y ee sto ck o w

n ersh ip p la n ” i s “a ty

p e o f pen sio n p lan th at in v ests p rim arily in th e sto ck o f th e co m pan y th a t e m

p l o y s th e p lan
p articip an ts.” Fifth Th ird Ba n co rp v. Du d en h o effer
, 1 3 4 S. Ct. 24 5 9
, 2 4 6 3 (2 0 1 4). T h e earn in g s o f

su ch a retirem en t plan are ex em p t f ro m in co m e t a x , a nd p articip an ts in th e p lan p ay tax o n th eir b en ef its o n ly w h en th e b en ef its are d i strib u ted . 2 6 U.S.C. § § 4 0 1(a), 4 0 2 (a), 5 0 1 (a); McDa n i el v. Ch evro n Co rp

. , 2 0 3 F.3 d 1 0 9 9 , 1 1 0 4 (9 t h Cir. 2 0 0 0).D J B H O L D I N G C O R P

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Partners, in which e a c h c orporation owned a fifty -percent interest. F inally
, W B Partners acquired all shares of W B A c q u isition. All the necessary documents were ex ecuted i n September 2000. 3

According to B a

r one, the Plans were intended to provide qualified retirem e nt plans, p ersonal protection f rom creditors, and av o i dance of probate. T h e holding corporations, DJ B and GSW
, permitted B arone and W a tkins to pursue separate endeavors, while W B Partners allowed them to work tog ether if they wished. Another c onsequence of the a rrang ement was that W B Partners’ i n come would escape tax ation until the Plans distributed benefits: W B Partners, DJ B
, and G SW a re all “pass-throug h ” e n tities, 26 U.S.C. §§ 701, 1363(a), 1366(a)–(c), and valid employ ee stock o wnership plans a re tax ex empt, 26 U.S.C. §§ 401(a), 501(a), 4975(e)(7); T.D. 9081, 68 F ed. Reg

. 42970, 42970 (J uly 21, 2003). 4

As part of their employ ment ag reement s , B arone a nd W at k ins ag reed to render “construction manag ement, indemnity
, and financing services” ex clusively f or DJ B a nd GSW
, respectively

. “I ndemnit y and financing services” include “providing personal g uarantees required in order for clients of [ DJ B a

nd GSW ] to obtain a requir e d performance bond.” I n turn, DJ B and G S W ag reed on September 20, 2000, to provide these services to W B Partners to the ex tent

3 T h e C o m

m issio n er co n ced es t

h at “ W B P artn ers, [GSW ]
, a n d [DJ B ]

ex ist f o r Fed eral in co m e tax p u rp o ses.”

4 A s a g en eral p artn ersh ip
, WB Partn ers d o es n o t p ay in co m e tax o n its
p ro f i ts, b u t p asses its earn in g s o n t o its p artn ers, D J B an d GSW

. S ee 2 6 U

. S

. C

. § 7 0 1

. A s n o ted
, DJ B an d G SW are S co rp oratio n s th at p a s s th eir in co m e o n t o t h e i r s h areh o ld ers, th e P lan s, an d t h e P lan s are tax

ex em p t. S ee su pra n n .2 , 3

.D J B H O L D I N G C O R P

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“necessary to manag e a n d conduct the b usiness of the Partnership.”

The Tax Court f

ound, a nd Tax pay ers do not dispute, that B arone and W atkins performed the same roles for W CI a fter forming WB Partners as b e fo r e. W atkins continued to

oversee W CI ’s work on a “ day -to-day b asis.” B arone continued to handle “business dev elopment” and “the financing .”

I n short, a fter the restructuring
, W CI became a subsidiary of W B Acquisition, which w as o wned by W B Partners, which i n t u r n w as owned by the holding corporations DJ B a nd GSW

. B arone and W a tkins b ecame employ ees of their respective holding c o rporations rather than W CI
, but continued to provide services to W CI according to the terms of their employ

ment a greements. And W B Partners’
structure e nsured that B arone and Watkins would pay n o tax

on any of the partnership’s income until they beg an to receive benefits from their respective retirement plans.

III. The NTC Joint Venture

I n 1999 or 2 000, the Corky McMillin C o m panies (“McMillin”), the Harper-Nielsen-Dilling ham J oint Venture (“Harper”), and W CI joined forces to bid on a larg e redevelopment projec t a t the San Dieg o N aval Training Center (“NTC”). The work w ould include removing v arious haz a rdous materials from nearly two hundred building s. The City of San Dieg o awarded the c ontract to McMillin, w ho hired Harper as construction manag er. W C I entered a subcontractor arrang ement w i t h H a r p er on December 1, 2000, f o r a lump-sum amount of $17,001,073. McMillin a nd Harper a l so required WCI to sig n a n indemnity ag reementD J B H O L D I N G C O R P

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and pos t a f

ull performance bond, as neither entity was willing to do so itself.

B a rone worried that assuming personal liability on a $17 million bond could bankrupt him an d W C I

. I n o rder to i solate the p roceeds of the NTC p roject from W CI ’s other work, B arone conceived the NTC J oint Venture.

A. The Joint Venture’s Structure

W CI and W B Partne r s e x e cuted the NTC J oint Venture Ag reement on September 20, 2000, a week after W B Partners

was formed and just over a month before W CI won the subcontract from Harper. U nder the ag reement, W CI would perform the actual remediation work and W B Partners would supply indemnity and finan c ial g uaranty services. The
ag reement further provided that W B P a rtners would receive seventy percent of the p rofits, and W CI would receive thirty percent.

The tax consequences o f this arrang ement bear mentioning

. B ecause the joint venture agr e ement entitled W CI only to thirty p ercent of the profits, W CI would have to pay income tax only on that portion. 5 T h e remaining seventy percent of the pr o f

i ts would pass to W B Partners, whose income, as mentioned a b ove, was not subject to tax ation unless and until the Plans distributed benefits. I n short, if the NTC J oint Venture were v alid f o r tax p urposes, o n ly thirty percent of its income would be subject to tax now.

5 A j oin t v en tu re i s co n s id ered a “p a r tn ersh ip ” f o r tax p u rp o ses. 2 6 U.S.C. § 7 6 1 (a). A cco rd in g l y , th e NT C J o in t Ven t u re w o u ld p a y n o tax o n its in co m e, b u t p ass th at in co m e o n to its m em

b ers, W CI an d W B P artn ers. S

ee 2 6 U.S.C. § 7 0 1

.D J B H O L D I N G C O R P

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The ag reement also p r ovided that the joint v enture would reimburse W CI for cos t s i n curred in the remediation work, plus five percent. The a g reement o blig ated the joint venture to keep b ooks and records and to f ile income tax returns. I t contemplated that Harper wo u l d award the subcontract to W CI
, not to the joint venture, and make pay ments directly to W CI

.

B. The Joint Venture’s Conduct

On September 20
, 2 0 00, the same day the NTC J oint Venture was created, W CI
, W B Partners, B arone’s a nd W a tkins’s holding corporations, and the NTC J oint Venture

ex e c uted a g eneral indem n i ty ag reement with the American I nternational G roup of C o m panies (“AI G”). The same entities e ntered a second indemnity ag reem e n t with Greenwich I nsurance Company o n J a nuary 2, 2002. Pursuant
to the a g r eements, the NTC J oint V enture and a ll the entities that constituted it ag reed to indemnif y AI G and Greenwich
ag ainst any costs incurred in ex ecuting a bond.

The I n surance Company of the Sta t e o f Pennsy lvania issued a performance bond on October 18, 2000, and replaced it soon after with a superseding bond. The bond named W CI

as principal, the i n s u r ance company as surety , and both McMillin an d Harper as o blig ees. The face amount was $17,001,073, the value of W CI ’s lump-sum subcontract with Harper.

The NTC J oint V e n ture obtained an employ er identification number and i t s own bank account. T he joint

ven t ure also tracked its own financing and prepared its o wn prog r ess reports. As the joint venture ag r eem ent contemplated, W CI received p ay ment from Harper directly

.D J B H O L D I N G C O R P

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N o t w ithstanding the terms of the ag reement, the joi n t venture’s accountant opted not to f i le a tax return for the
venture. I n stead, the accountant b elieved that separately

re p o r t i n g W CI ’s a

n d WB Partners’ income from the NTC project was sufficient.

As of September 30, 2 0 0 2
, W CI had billed Harper for $14,100,332, and incurre d costs (plus five percent) o f $5,822,738. This y ielded a profit of $8,277,599, o f wh i ch W B Partners was entitled to a seventy -percent share, o r $5,794,319. I n reality
, a W CI invoice reflects that W CI p aid W B Partners only $4,172,000, a nd kept f

o r itself the remaining $1,622,319. As a result, WB Partners received only 50.4% of the p rofits, n ot 70%. B a r one testified that the

ex tra $1.6 million w as a “ bonus” to W CI in recog n ition of “a job well done.”

IV. Sale of

WCI’s Assets to Kuranda Capital

W CI entered an asset p u r c h ase ag reement with Kuranda Capital, L P (“Kuranda”), 6 on April 1 8
, 2003. The parties
ag reed upon a purchase price for W CI ’s assets of $4,923,091 in cash a n d a $500,000 promissory note. As p art o f the transaction, W atkins, B arone, and W CI ag reed not to compete with Kuranda in t h e e n v ironmental remediation business. The asset purchase ag r eement all o c a t ed $3.4 million of the purchase p rice to the noncompetition ag r eement. Tax pay ers’
accountant reported all of the noncompetition a g reement’s proceeds, including interest from the n ote, on W B Partners’
tax returns.

6 K u ran d a later ch an g ed its n am e to W atk in s Co n tractin g , L

. P

. , a n d f in ish ed t h e en v iro n m en tal rem ed iatio n po rtio n o f th e NT C p ro j ect as W CI’ s su b co n tracto r.D J B H O L D I N G C O R P

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V. Tax Court

The Commissioner notified WB Acquisit i o n and W B Partners of tax deficiencies for the y ears 2002 throug h 2005. Tax pay e rs filed p etitions for adjustment. The Tax Court h eld that (1) the N TC J oint Venture w as not a valid p artnership for
tax purposes, (2) only W CI was bound by the noncompetition
ag reement, and the $3.4 million allocated to the ag reement

was income only to W CI
, and (3) accuracy -related p e n alties applied.

JURISDICTION

This Court has jurisdiction over T ax pay ers’ timely appeal under 26 U.S.C. § 7482.

STANDARD OF REVIEW

This Court reviews the Tax Court’s conclusions of law de

novo and its finding s of fact for clear error. Custom Chrome, Inc. v. Comm’r
, 217 F .3d 1117, 11 2 1 ( 9 t h Cir. 2000). W h ether a valid partnership e x isted for tax purposes turns on whether the p a

rties intende d i n g ood faith to act as p artners. Comm’r v

. Culbertson
, 3 37 U.S. 733, 741–42 (1949). W h ether there was such an intent is a question of fact. Comm’r v. Tower
, 327 U.S. 2 80, 287 (1946). To which party to attribute an item of income is a mix e d question of law a nd fact, reviewed de novo “unless the question is p rimarily factual.” Sparkman v. Comm’r
, 509 F

. 3 d 1 1 49, 1157 (9th Cir. 2007).

W h ere the Tax Court imposed an accu racy -related penalty
, we r eview de nov o whether substantial authority supported the tax pay e r’s position. Little v. Comm’r
, 106 F .3dD J B H O L D I N G C O R P

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1445, 1449 (9th Cir. 1997). W hether the tax pay er acted with reasonable c au s e a n d in g ood faith is a finding of fact reviewed f

or clear err o r

. S

e e Hansen v. Comm’r
, 471 F .3d 1021, 1029–30 (9th Cir. 2 0 0 6) (holding that the Tax Court did not clearly err in finding a l a c k of reasonable cause a nd
g ood faith).

Under the clear error standard, the Tax Court’ s fact finding s a re upheld if its “account of the evidence is plausible in lig ht of the r ecord v iewed in its e ntirety .” W o lf v. Comm’r
, 4 F .3d 709, 712–13 (9th Cir. 1 993) (quoting Serv. Emps. I nt’l Union, AFL-CIO, CLC v. Fair Political Practices Comm’n
, 955 F .2d 1312, 1317 n.7 (9th Cir. 1992), implied overruling recognized on other grounds by Mont. Right to Life Ass’n v. Eddleman , 343 F .3d 1085, 1091 n.2 (9th Cir. 2003)).

D ISCUSSION

I. Incom e from the N TC P roject Att r i b uted to WB P artners Was in F act Incom e to WCI.

Tax pay e rs raise two arg uments in the alte rn a t i v e. F irst, they arg ue that the Tax Court clearly erred in finding that the NTC J o int Venture was not a valid partnership for tax purposes. S e c ond, they a r g u e that, even if the joint venture

was not a valid partnership, W CI a nd W B Partners reached a bona f ide ag reement to compensate W B Partn ers for providing financial g uaranties. W e conclude th a t t h e Tax C o urt properly tax ed W CI on all income from the NTC project.D J B H O L D I N G C O R P

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A. The NTC J oint Venture Was Not a Va l id P artnership f

or Tax P urposes

.

F or tax purposes, a “pa rtnership” is “a sy ndicate, g roup, pool, joint venture, or other unincorpo rated org aniz ation” that carries on “any business, financial operation, or venture” a nd that is n ot “a corporation or a trust o r estate

. ” 2 6 U.S.C. §§ 761 ( a ), 7701(a)(2). To determine whether a purported joint venture is a valid part n e r s hip, courts ascertain whether “the parties in g ood faith and acting with a business purpose in tended to join tog ether in the present conduct of the enterprise.” Culbertson
, 337 U

. S

. at 742. The Tax Court disti l l e d f

rom Culbertson eig ht factors to consider in measuring the parties’ intent:

[ ( 1)] [t] he ag reement of the parties and the i r conduct in ex ecuting its terms; [ (2) ] the contributions, if any , which e a c h party has made to the venture; [(3)] the p arties’ c ontrol over income and capital and the rig ht of each
to make withdrawals; [ ( 4)] whether each party

was a principal and coproprietor, sharing a mutual proprietary interest in the net profit s and having an oblig a tion t o s h a re losses, o r whether one party

was the ag ent or employ ee of the other, receiving for his s ervices conting ent compensation in t h e form of a percentag e of income; [(5)] whether business

was conducted in t h e j o int names of the parties; [ (6)] whether the parties filed F ederal partnership returns or otherwise r e p r e s e n ted to respondent o r t o p ersons with whom they dealt that they were joint venturers; [ (7)] whether separate books of acco u n t wereD J B H O L D I N G C O R P

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maintained for the venture; and [ (8)] whether the p arties ex ercised mutual control over a nd assumed mutual responsibilities for the enterprise.

Luna v. Comm’r , 42 T.C. 1067, 1077–78 (1964).

Here, the Tax Court concluded tha t t h e Luna f actors weig hed a g ainst the c onclusi o n t hat the NTC J oint Venture

was a valid partnership. Reg arding the first factor, the court noted that t h e p a

rties violated the terms of the joint venture ag reement both by imposing a 50.4% profit cap on W B Partners and b y f

ailing to file a tax return. These deviations from the ag reement sug g e sted to the Tax Court that W CI a nd W B Part n e rs did not intend in g ood faith to act as p artners. Second, the court found that WB Partners contributed nothing of value to the joint v enture because the p e r f o r mance bond

was issued based not on W B Partners’ fin a n c ial g uaranties, but on the collective net worth of W CI
, W B Partners, B arone, W a tkins, DJ B
, and G SW as related entities. T h e marg inal value of W B Partners’ g

uaranty sug g ested that W B Partners did n ot make a meaning ful contribution to the joint venture. Third, the venture’s imposition of a p r o f i t cap on W B Partners demonstrated that W B Partners ex ercised no control

over income and capital, further sug g esting that WB Partners did not act as a bona fide partner.

F ourth, th e profit c ap and the joint venture ag reement’s
p rovision g uaranteeing reimbursement of W CI ’ s costs showed that W CI and W B Partners did not in t e n d to share profit s a nd losses as bona fide p artners would. Concerning
t h e eig hth factor, the court found that W B Partner s ’ concession of a larg e portion of the p r o f i t s to which it was entitled showed that the par t i es did n ot ex ercise mutualD J B H O L D I N G C O R P

. V

. CI R 18

control over the enterprise. The cou r t found the remaining factors neutral in lig ht of the joint venture’s efforts to conduct itself as a valid partnership, such as opening a separate bank account and keeping its own records. 7

On a ppeal, Tax p ay ers take is sue only with the Tax Cou r t’s finding reg arding the second Luna factor—that W B Partners c ontributed not h ing of value to the N TC J oint Venture. They do not dispute the Tax Court’s application o f the Luna factors in any other respect, ex cept to assert that the court’s a ssessment of WB Partners’ contributi on to the venture “infected” its analy sis of the other factors.

B e fore the Tax Court, Tax pay e r s arg ued that W B Partners’ financial gu a r anty was an essential contribution to the NTC J o int Venture because W CI could not have won the NTC project without it. The Tax Cou r t d isag reed. I t specifically noted that W CI won the NTC bond based on “the combined net w orth and financial g uaranties of each o f W CI
, W B P a rtners, B arone, W atkins, DJ B
, and GSW ,” n ot based

on W B Partners’ g uaranty alone. Moreover, the court reasoned that WB Partners would have supplied a g uaranty

even if the joint venture h ad never ex isted, by virtue of being the parent entity o f W C I

. F inally
, the court noted that only

7 T h e T ax Co u rt f

o u n d th e f

if th f acto r “ m ix ed ” b ecau se th e NT C Jo i n t Ven tu re ob tain ed an d u sed its o w n em p lo y e r id en tif

icatio n n u m ber as a leg i tim ate en tity w o u l d, b u t WCI d ealt w ith H arp er, th e co n str u ctio n

co n tracto r, en tirely in its o w n n am e. T h e s ix t

h f acto r w as n eu tral becau se,

w h ile th e j o in t v en tu re d id n o t f i le i ts o w n t ax retu rn , it d ealt w ith v ario u s b an k s as an en tity sep arate f ro m W CI an d W B P artn ers. Fin ally
, th e T ax C o u r t f o u n d th e sev en th f

acto r n eu tral b ecau se th e j o in t v en t u r e

m ain tain ed its o w

n b an k acco u n t, in co m e statem en ts, an d p ro g ress rep o rts, b u t d id so u s in g W CI em

plo y ees an d d id n o t k eep “ o th er b o o k s o f acco u n t th at m ay n o rm ally b e ex pected in th e o peratio n o f a b u sin ess.”D J B H O L D I N G C O R P

. V

. CI R 19

W B Partners r eceived c ompensation for its fi n a n c ial
g uaranty , while B arone, W atkins, DJ B
, and GSW e ach
g uaranteed the bond without receiving a share o f the NTC project’s profits. I f W B Partners’ g uaranty warra n t ed compensation to the tune of seventy percent of the profits, the Tax Court reasoned, then surely the other entities’ g uaranties also called for some share of the proceeds.

On appeal, Tax pay e r s a

rg u e that W B Partners’ financial
g uaranty a

nd those of its owners and their employ ees were in fact a valuable contribution because W CI could n o t otherwise h a ve p osted a performance bond. They contend that Ta x Court case l a w s u p ports this c onclusion. I n Maxwell v

. Commissio ner , 2 9 T .C.M. (CCH) 1356 (1970), a bridg e construction corporation an d its majority owner f ormed a joint venture to bid on a lucrative contract. Id. at 1358. The corporation supplied all the materia l s a nd labor, a nd the

owner provided a personal f inancial g uar a n t y to enable the corporation to post a bond. Id. B ecause the corporation’s net worth was n ot alone sufficient to secu r e the b ond, the Tax Court found that the owner’s g uaranty was a valuable contribution showing intent to form a p a r tnership. Id. at 1362.

As in M axwell
, T ax pay ers a

r gu e , W CI could not have secured the necessary $17 million bond on i t s o wn. W B Partners’ g uaranty , a l o n g with those of its partner holding corporations and their employ e es, made obtaining that bond possible. Be c au se W B Partners’ financial g uaranty , as w ell

as those of B arone, W atkins, and their holding corporations, enabled W CI to obtain a performance bond, Tax pay ers a rg ue that the Tax Court clearly erred in findin g t h a t W B Partners contributed nothing valuable to the joint venture.D J B H O L D I N G C O R P

. V

. CI R 20

W e conclude that the r e c ord supports the T ax Court’s finding that W B Partners c o ntributed no valu e t o the NTC J oint Venture. Had the joint v enture never ex isted, W B Partners would still b e o blig ated to offer B arone’s a nd W a tkins’s g uaranties because both men promised to provide financial services as necessary to support W B Partners’ business. As W B Partners’ wholly own e d s ubsidiary
, W CI would have been e n titl e d to B a rone’s and W atkins’s
g uaranties e ven if W B Partne rs d id not promise to provide those g uaranties to the joint venture.

I n September of 2000, in their employ m e n t a g reements

w i t h t he holding corporations DJ B and GSW
, B arone a nd W a tkins promised to provide g uaranties to e nable the
corpora t i o n s’ clients to post performance bonds. L ater that month, D J B and GSW amended W B Partners’ g eneral partnership ag reement to offer B aron e ’ s and W atkins’s services as “necessary to manag e and conduct the business o f [ W B Partners] .” The amendment offered B arone’s a nd W a tkins’s services not only to W B Partners itself, but a lso to any “third parties in connection with” W B Partners’ business.

W CI ’s environmental remediation work for the NTC redevelopmen t p roject w as part of W B Partners’ business because W B Partners wholly owned W B Acquisition, which in turn wholly owned W CI

. B ecause W C I ’ s w o r k on the NTC pro j e ct was part of W B Partners’ business, the partne r ship ag reement required B arone and W atkins to provide any

financial guaranties necessary to permit W CI to obtain the bond it n e e ded to p erform the work. A c cording ly
, W B Par t n e rs was oblig a ted to furnish B arone’s and W atkins’s
g uaranties independently of the joint venture ag reement. W B Partners’ commitment to provide g uaranties to the NTC J oint Venture therefore was superfluous.D J B H O L D I N G C O R P

. V

. CI R 21

Not o nly did B arone’s a n d W atkins’s g uaranties contribute no v alue to the joint venture independent of what they were already o blig ated to p r o v i d e, but the r ecord also belies any arg ument that W B Partners’ own g uaranty , o r those of DJ B and GSW
, held independent value. An employ e e o f A I G
, one of the c ompanies that ex ecuted an indemnity ag reement w ith the NTC J oint Venture, remarked that the performance bond issued because W CI
, B arone, a nd W a tkins were “financially sound indem n itors.” The employ e e recalled that W CI ’ s financial condition w as “very
g ood” and that B arone and W atkins both had a “pretty hig h”

n e t worth. He did not remember W B Partners’ financi al condition (or that of DJ B and GSW ) at all. Moreover, at the time W B Partners provided its g uaranty , it had no other a ssets outside its equity in the N T C J o i nt Venture and W B Acquisition. This evidence supports t he T ax Court’s conclusion that WB Partners’ g uaranty contributed no additional value to the N TC J oint Ven t u r e

. Only B arone’s and W atkins’s g uaranties enhanced W CI ’s ability to secure a performance bond, and they were o blig ated t o provide the
g uaranties purely b y virtue of their e m p loy ment ag reements and the amended partnership ag re e m e n t

. Maxwell is therefore inapposite, as the majority shareholder in that case

was not o bli ga t e d to offer his personal g uaranty by any contract o utside o f the p artnership ag reement. See 29 T.C.M. (CCH) at 1358.

B e cause B arone and Watkins were c o n t r a c t u a l l y o b l i g ated
to p rovide any g uaranties necessary to permit W CI to perform environmental remediation work, W B Partners’ se p ar ate commitment to provide those g uaranties to the joint venture

was superfluous. The Tax Court therefore did not clearly err in concluding that W B Partners contributed nothing o f value
to the NTC J oint Venture. B e cause Tax pay ers do notD J B H O L D I N G C O R P

. V

. CI R 22

challeng e the Tax Court’s analy sis of any of the other Luna factors, it necessarily follows that the Tax Court did not clearly err in f

inding that Tax pay ers did not intend to operate the NTC J oint Venture as a bona fide partnership. See Luna
, 42 T.C. at 1077–79; Culbertson , 337 U.S. at 742.

B. WCI and WB P artners D i d Not Agree in G ood F aith To Share P rof

its.

Of c ours e , if the NTC J oint Venture was not a valid partnership for tax purposes, then W B Partners does not have

a partnership interest entitling it to d e c lare as income a share of the p rofits from the NTC project. Tax pay ers arg ue in the alternative that W CI ag reed in g ood faith to a ssig n W B Partner s a share of the profits in ex chang e for W B Partners’ sig ning the indemnity

ag reement.

W h ere a tax pay er a g reed to pay a port i o n o f the p rofits from an enterprise in ex chang e for financial assistance from another, that portion o f the profits is in c o m e to the entity providing the assistance, not to the tax pay er. See Stevens Bros. & M

iller-Hutchinson Co., Inc. v. Comm’r
, 24 T.C. 953, 956

– 57 ( 1955). I n Stevens Brothers
, the tax pay er, a corporation in the heavy construction business, was unable to bid on a p ublic works project because it had insufficient capital to o b tain a l o a n

. Id. at 954. Another corporation
ag reed to loan the tax pay e r the n ecessary additional capital in

ex c h a ng e for a one-half share o f the profits from the project. Id. a t 955. I n accordance with the ag reement, the tax pay er declared only half of the p r o fits as income. Id. at 956. The Tax Court held th at this was proper. I d. The risk of loss to the s e c o n d corporation was r eal, the terms of the ag reement

were fair, and the interests of both c o r porations were sufficiently “adverse” to pe rm i t the conclusion that theD J B H O L D I N G C O R P

. V

. CI R 23

c o n t ra ct was “bona f

ide.” Id. I n a d dition, the corporati o n s actually sha r ed t he p rofits at the ag r eed-upon fifty -percent division, further demonstrating that the agr e ement was g enuine. Id.

Tax pay e rs arg ue that, as in Stevens Brother s , W C I a nd W B Partners ag reed t h a t WB Partners would receive a portion of the p r ofits from the NTC project in e x chang e for providing necessary financial assistance to W CI

— i n this
case, a f inancial g uaranty

. A s in Stevens Brothers
, W B Partners a ssumed substantial financial risk by a gr e e ing to indemnify the surety on the per f o r m a n c e bond. Also as in Stevens Brothers
, Tax p ay e rs a ssert, the parties to the joint
venture ag reed that W B Partners would receive a percentag e share of the profits in ex chang e for its g u aranty

.

To the contrary , Tax pay ers’ conduct shows that W CI a nd W B Partners did not reach a bona fide ag reement to transfer

a share of the profits to W B Partners i n e x c h a n g e for its
g uaranty

. According to the joint v enture ag ree m e n t , W B Partners was to receive seventy p ercent of the profits f or this service. I nstead, as reflected in an invoice, W CI unilaterally reduced W B Partners’ share to 50.4%. I t is questionable that

a company dealing with W CI a t arms’ leng th would g ive up

a nearly twenty -percent share o f t he profits—approx imately $1.6 million—so casual l y

. This disreg ard for the joint
venture ag reement’s terms demonstrates that W CI a nd W B Partners d id not intend in g ood f aith to be bou n d b y t h at ag reement. 8 According ly
, the Tax Court did not c learly err in

8 T ax p ay ers arg u e in th e altern ativ e th at th ey are en titled to d ed u ct W B P artn ers’ sh are “ as an o rd i n ary an d n ecessary bo n d g u aran ty ex p en se.” S ee A.A. & E.B. Jo n es Co . v. Co mm’r , 1 9 T .C.M. (CCH) 1 5 6 1 , 1 5 6 3 (1 9 6 0) (p erm ittin g th e tax p ay er t o d ed u ct as a b u s in ess ex p en se a sh are o f p ro f itsD J B H O L D I N G C O R P

. V

. CI R 24

finding that W CI and W B Partners did not reach a bona fide
ag reement to share profits. Cf. Stevens Bros.
, 24 T.C. at 956 (noting that the lending corporation received “pay ment of the
ag reed amounts”).

The r ec o r d supports the Tax Court’s finding that W B Partners contributed no value to the NTC J oint Venture, a nd therefore that WB Partners and W CI did not act as b ona fide partners. See Luna
, 42 T.C. at 1077–79; Culbertson
, 337 U.S.
at 742. W C I ’ s arbitrary reduction of W B Partners’ share o f the proceeds further supports the Tax Court’s finding that the
two e ntities d id not reach a bo n a f ide ag reement to share profits. Cf. Stevens B ros. , 24 T.C. at 956. Accordingl y , the Tax Court properly determined that all of the profits f rom the NTC J oint Venture were income to W CI

.

II. P r o c eeds f

rom the Noncom petition Agreem ent Were Incom e to WCI Rather Than WB P artners.

The “first principle o f income tax ation” i s “ that income
must be tax ed to him who e arns it.” Culbertson
, 3 37 U.S. at 739–40

. W hen a commercial transaction includes a noncompetition ag reement, the portion o f the proceeds allocated to that ag reement is income to the persons w ho promised not to compete. F o r ex ample, when an ag reement to sell a corporation’s assets includes promises by its shareholders that t h ey will n ot compete with the purchaser, the shareholders must declare a s income the con s i deration

p aid to sh areh o ld ers w

h o in dem n if ied a b on d s u rety ). B ecau se w e af f irm th e T ax Co u

rt’ s co n clu sio n th at th e parties d id n o t in ten d in g o o d f aith to tran sf er a s ha r e o f th e p ro f

its to W B P artn ers in ex ch an g e f o r its
g u aran ties, w e m

u s t also rej ect th e su g g estio n th at W CI is en titled to d ed u ct th at sh are as a b u sin ess ex p en se.D J B H O L D I N G C O R P

. V

. CI R 25

they r eceive for their promises. See Beals’ Estate v. Comm’r
, 82 F .2 d 268, 270 (2d Cir. 1 936) (holding that stock transferred in ex change for a tax pay er’s ag r eement not to compete was i n c o me to the tax pay er, a nd not merely “ancillary ” to a larg er reorg aniz ation plan); Cox v. Helvering
, 71 F .2d 987, 988 (D.C. Cir. 1934) (holding that money paid in e x chang e f

or a shareholder’s a g reement not to compete

was income to the shareholder). B y promising not to compete with the purchaser’s business, the shar eholders “earn” the consideration that the p urchaser offers in ex chang e for the promise. See Cox
, 71 F.2d a t 988 (“I f [ a person]

re f r a ins from ex ercising his skill and ability in a particular line for a defini t e p e riod, what he receives in compensation . . . is income.”).

Of the roug hly $5.5 million price at which Kuranda
ag reed to purchase W CI ’s assets, the T ax Court concluded that the $3.4 million portion allocated to the noncompetition
ag reement was income to W CI
, not W B P a r t n ers. The noncompetition clause prohibits B arone, W a t k ins, and W CI from e ng a g ing in “Competing Services,” which a r e defined to include any

(i) service that has been provided, p e rformed

or offered by o r o n behalf of W CI (or any predecessor of W CI ) at any time on or prior to the date of this Noncompetition Ag reem e nt that involves or relates to asbestos, mold, a nd lead abatement in residential, commercial a nd
g overnment properties; (ii) service that is substantially the same as , is based upon o r competes in any material r e spect with any service referred to in clause “ (i)” o f t his
sentence.D J B H O L D I N G C O R P

. V

. CI R 26

(alterations omitted). To summariz e, B arone, Watkins, a n d W CI a g reed n ot to compete with Kuranda in providing any service related to “asbestos, mold, and lead abatement.”

The Tax Court noted that W CI was the only sig natory to the noncompetition ag reement ever to perform “asbestos, mold, and lead abatement” s ervices. Moreover, it was the only entity b ound by the ag r e e ment that “h ad the proper licenses and permits to perform the necessary con s t ruction and ex ca v a tion work.” W hile B arone’s and W atkins’s services were necessary to W CI ’s operations, the c ourt f ound that W CI was entit l ed to those services because both men

were WCI officers. As the only entity capable of c ompeting with Kura n d a in providing environmental remediation services, the court found, W CI was the only party truly bound by the ag reement. The Tax Court th e r e f ore concluded that W CI e arned a ll of the p roceeds. According ly
, it f o u n d t hat the interest on Kuranda’s $500,000 promissory note w as also income to W CI
, not W B Partners. B ecause the T a x Court’s analy sis w as “primarily factual,” we review its assig nment o f the proceeds of the noncompetition a g reement to W CI f o r clear error. See Sparkman , 509 F

. 3d at 1155, 1157.

As T ax p ay ers correctly obser v e , the Tax Court erred in fi n d i n g that only W CI was b ound by the noncompetition
ag reement. I nstead, the ag reement also bound B arone a nd W a tkins personally

. Contrary to the Tax Court’s reasoning
, B a r o n e’s and W atkins’s status as W CI o fficers does not entitle W CI t o t h e i r services because B arone and W atkins

were employ ees of their hold i ng corporations, DJ B a nd GSW
, n o t of W CI

. F urther, e ven if they were employ ees o f W C I
, B arone and W a tkins were free to terminate their relationship wi t h W CI at any time. B e cause California is an a t-will employ ment state, WC I w as n ot entitled to B arone a ndD J B H O L D I N G C O R P

. V

. CI R 27

W atkins’s services in the f uture absent a c ontractu al
ag reement to that eff

e c t

. See Cal. L a

b. Code § 2922 (“An employ ment, having no specified term, may be terminated at t h e will of either party on notice to the other.”); Gu z v. Bechtel Nat’l, Inc.
, 8 P.3d 1089, 1 110 (Cal. 2000) ( “The mere

ex istence of an employ ment relationship af

f ords no

e x p ectation, protectible by law, that employ ment wil l continue

. . . unless the parties have act u a lly adopted such terms.”). The record c ontains no evidence of such an ag reement. According ly
, u nde r C a l ifornia law, B arone a nd W a tkins were fr e e to sever their ties to W CI and perform environ m ental remediation services for another company

. The n oncompe tition ag reement therefore bound B arone a nd W a tkins p e r s onally not to compete with Kuranda in the environmental remediation business.

Tax pay e rs g o on to arg ue that the n o n c o mpetition
ag reement b inds B a

r one and W atkins alone
, not W CI
, a nd that W B Partners, not B a

rone and W atkins, is entitled to the proceeds of the ag r eement. This arg u ment rests on two fundamental misapprehensions. F irst, by its plain terms, the
ag reement forbids “[ e] ach o f Seller, W atkins and B arone” from performing competing services. T h e ag reement g oes on t o provide that the $3.4 million amount be “allocated a s partial consideration f

or Seller’s and the Shareholders’ oblig ations” n ot to compete. Th e asset purchase ag reement defines “Seller” as W CI
, and “Shareholders” refers to B arone and W atkins. The terms of the n oncompetition ag reement demonstrate that B arone, Watkins, and W C I e ach earned a share of the $3.4 million proceeds.

S e cond, the proceeds of the noncompetition ag reeme n t

are not income to W B Partners because the partnership, like W CI
, has no future claim to B arone’s and W atkins’s services.D J B H O L D I N G C O R P

. V

. CI R 28

I t is true that B arone and W a tkins ag reed to provide thei r services ex c lusively for their holding corporations, DJ B and GSW

. DJ B and GSW
, in turn, ag reed to provi d e B arone’s and W a tkins’s services to W B Partners. However, B arone’s and W a tkins’s employ

ment ag r eements with D J B and GSW provide that either party m a y terminate employ ment at any time with n inety day s’ not i c e to the o ther. A c cording ly
, B arone and W a tkins were f ree to leave DJ B and GSW and g o off to perform environmental services for another company

. B ecause WB Partners had no rig ht to ex pect B a rone a nd W a tkins to continue to provide their services into the future, B arone’s and W atkins’s ag reement not t o c o mpete with Kuranda may n ot be imputed to W B Partners. W B Partners therefore e a rned no part of the consideration for the noncompetition ag reement.

W CI
, B arone, and W atkins each are individ u a l l y bound
not to compete with Kuranda, a nd therefore are each entitled
to a share of the noncompetition ag reement

. S e e Beals’ Estate
, 82 F .2d at 270; Cox
, 71 F .2d at 98 8

. Because W B Partner s has no claim to B arone’s and W atkins’s future services, W B Partners is entitled to n o share at all. See Culbertson
, 337 U.S. at 739–40. According ly
, the Tax Court did not c learly err i n declining to assig n any portion o f the proceeds of the noncompetition ag reement to W B Partners. 9

9 W ere th e q u estio n

b ef ore u s, w e m ay

b e in clin ed to h o ld th at th e T ax C o u rt clearly erred in f

ailin g to assig n an y sh are o f th e n o n co m p eti t i o n ag reem en t’ s pro ceed s t o B aro n e an d W atk in s in div id u ally

. Neith er p arty h as ask ed th at w e d o so

.D J B H O L D I N G C O R P

. V

. CI R 29

III. The Tax Court P roperly Asses sed AccuracyRelated P enalties.

The I n ternal Revenue Code imposes a twenty -percent penalty on “[ a] ny substantial understatement of income tax

. ” 26 U.S.C. § 6662(b)(2), ( a). Even in the event of a

s u b s t a n tial understatement, however, the tax pay e r m a y e s c a p e the penalty if one or both o f two conditions applies. F irst, a tax pay e r does not owe a penalty wh e r e the tax pay er can identify “substantial authority ” supporting its treatment of an item of income. 2 6 U.S.C. § 6 662(d)(2)(B )(i). Second, to the

ex tent that the tax pay er had reasonable cause for its position and acted in g ood faith, the penalty does n ot apply

. 26 U .S.C. § 6664(c)(1).

The Tax Court assessed pen a l t ies ag ainst Tax pay e rs for substantially understating their income. T ax pay e rs a rg u e that the Tax Court’s decisions in Maxwell a n d Stevens Brothers furnish substantial authority for their positions that the NTC J oint V enture was a valid p artnership and that t h e parties to the venture ag r eed in g ood f aith to shar e p r o f

i t s

. They also contend that they relied reasona b l y and in g ood faith on the advice o f their accountant in reaching those p ositions. F inally
, they a ssert that their positions are reasonable in lig ht of the complex ity of the law g overn ing the validity o f partnerships for tax purposes. F or the reaso n s d i s cussed below, we reject Tax p ay ers’ arg uments and affirm the district court’s imposition of accuracy -related penalties.

A. Maxwell and Stevens Brothers Do Not Fu r n i sh Substantial Authority f

or Taxpayers’ P osition.

“The substantial authority standard” i s somewhat less

s t r ing ent than the “more likely than n ot standard.” Tre a s

.D J B H O L D I N G C O R P

. V

. CI R 30

R e g. § 1 .6662-4(d)(2). Substantial authority supports th e tax pay e r’s p osition if, taking into account all relevant authorities, “ the weig ht of the authorities supporting ” the
tax pay e r’s position is “ s u b s tantial” w hen compared to the weig ht of authorities th a t a r e contrary to the tax pay er’s position. § 1.6662-4(d)(3)(i). T h e weig h t that a court should assig n to an authority “depends on i ts relevance a nd persuasiveness, and the t y pe of document providing the authority .” § 1.6662-4(d)(3)(ii). A Tax Court disposition may be relevant authority
, but is “not particularly relevant” if it “ is materially

disting uishable on its facts.” Id.

Tax pay e rs advance two T ax Court opinions as substantial
aut h o r i t y for their position that the share of the p rofits from the NTC project transferred to W B P a r t n e rs is properly W B Partners’ income. One is Maxwell
, in which the court f ound that a corporation and its majority shareholder formed a valid partnership when the shareholder ag r e ed t o guarantee a necessary b o nd in ex c hang e f o r a share o f t he profits. 29 T.C.M. ( CCH) at 1362. The second is St e v e n s Brothers
, in which the court held that a corporation properly declared only half the profits from a project a s i n c o m e where it ag reed to pay the other h alf to another c o r p o ration in ex chang e for a capital loan. 24 T.C. at 955–56.

Maxwell and Stevens Brothers do not amount t o

s u b s t a n t i a l a u t h o r i t y b e c a u s e t h e y a r e m a t e r i a l l y disting uishable

. I n e ach case, the tax pay er reached a bona fide ag reement to share the profits f r o m an endeavor in

ex c h a ng e f or a financial g u aranty or l o a n

. I n this case, the joint venture’s decision to cap W B Partners’ share at a rate apparently plucked from thin air shows that the profit-sharing

a greement w as not bona fide. T he absence of a g ood- f a i t h profit-sharing ag reement disti ng uishes this case fromD J B H O L D I N G C O R P

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. CI R 31

Maxwell and Stevens Brothers
, a nd leaves Tax p a y ers’
p o sition u nsupported b y substantial a u thority

. See Trea s

. Reg . § 1.6662-4(d)(3)(ii).

B. Taxpayers M ay Not Cla i m R e a s o n a ble Reliance on T h e i r A c c o u n t a n t ’ s O p i n i o n B e c a u s e t h e Account a n t Was Not Involved in Designing the NTC Joint Venture’s Structure.

Reliance o n professional advice may establish reasonable

cause and g ood faith. Treas. Reg

. § 1 .6664-4(b)(1). The Tax Court requires a tax pay er to p rove three elements in o rder to show that r eliance o n advice was reasonable: “(1) The adviser

was a competent professional who had sufficient ex pertise to justify reliance, (2) the tax pay er p rovided necessary a nd
accurate information to the adviser
, and (3) the tax pay er actually relied in g ood faith on the a d viser’s judg ment.” N e o n a t ology Assocs., P.A. v. Comm’r
, 1 15 T.C. 43, 99 (2000). Once the Commissioner produces evidence showing that an accuracy

-related penalty applies, the b u rden o f proving the e x istence of reasonable cause and g ood f aith f alls

on the tax pay er. Higbee v. C o m m ’r
, 116 T.C. 4 38, 449 (2001); c f. Sparkman
, 509 F .3d at 1161 (noting that the
tax pay e r bears the b urden of overturning the Commissioner’s imposition of a neg lig ence penalty under 26 U.S.C. § 6662).

Tax pay e rs arg u ed b efore t h e Tax Court that they

re a s o n a bly r elied on the advice of their accountant in deciding how to treat the proceeds f ro m the N T C J oint Venture. The Tax Court noted that the accountant h ad n ot participated in any w ay in structuring the joint venture or any of the entities that c o mprised i t , but merely prepared Tax pay e rs’ tax returns based on infor m a tion g iven him. According ly
, the court f

ound that Tax pay ers had not suppliedD J B H O L D I N G C O R P

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. CI R 32

the accountant with “all the necessary and a c c u rate information,” and therefore that the i r reliance on the accountant’s tax returns was not reasonable.

Tax pay e rs arg ue that the T a x Court clearly erred in failing
to specify what necessary inform a tion they neg lected to provide to the acco u n t a n t

. They assert that the accountant

was “fully aware of the NTC J oint Venture and the allocation of income between W CI and W B Partners.”

The Tax Court did not clearly err. “The mere fact that a certified public accountant has prepared a tax return d oes not

mean that he or she has opined o n a n y or all o f the items reported therein.” Neonatology A s socs. , 115 T.C. at 100. Nothing in the record s ug g ests that the accountant knew B arone’s reasons for erecting the NTC J oint V enture, information the accountant w ould need in o rd e r to opine on its validity f

or tax purposes. See T r e a s

. Reg

. § 1 .6664- 4(c)(1)(i) ( l i s t i ng the tax p ay er’s purpose for a transaction a s information the adviser must c onsider)

. M ore importantly
, nothing in the record indicates that T ax pay ers even a sked the
accountant for such a

n opinion. I n s tead, the record reveals only that the accountant pr e p ared tax r eturns for the entities involved in the joint v en t u re based o n data supplied to him. Tax pay e rs have n ot met their burden of showi n g r e asonable reliance on the a ccountant’s advice. See T reas. Reg

. § 1.6664-4(b)(1); Higbee , 116 T.C. at 449.D J B H O L D I N G C O R P

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C. Ta x payers Cannot Show That the Understatem ent

o f I n c o m e W a s D u e t o a R e a s o n a b l e Misunderstanding of Tax Law Bec a use the P rinciples G overn i n g Whether a P artnership Is Valid Are Well Settled.

A tax pay er may show r e a sonable cause and g ood faith where the law g overning its position “ w [ a s] not settled” when the tax pay er asserted it. See Patel v. Comm’r
, 138 T.C. 395, 417 (2012) ( f

i nding that a tax pay er reasonably claimed a deduction where the law g o verning the deduction’s avai l a b i lity w as in an “uncertain state”). Tax pay ers a rg ue that their position that the NTC J oint V entur e w a s a valid partnership is reasonable because t h e l aw g overning it is complex

. They have missed the point of Patel

. The law may b e complex
, but it is not unsettled. The Luna fact o r s h a v e been th e l aw for fifty y ears. See Luna
, 42 T.C. at 1067; see also Bergford v. Comm’r
, 1 2 F

. 3d 166, 16 8

– 6 9 ( 9 th Cir. 1993) (apply

ing the Luna factors). Tax pay ers o ffer no authority for their sug g estion that the complex ity of the Luna factors alone should e x cuse their failure to conduct the NTC J oint Venture as a valid partnership.

W e conclude that the Tax Court did not err in upholding the Commissioner’ s a s s e s s m e n t o f a ccuracy -related penalties.

CONCLUSION

W B Partners offer ed n othing to the NTC J o int Venture that it was not already contractually oblig ated to p r o vide, a nd W CI ’s arbitrary reducti o n o f W B Partners’ share of the profits demonstrated that the p a r ties did not intend to adhere
t o the terms of the joint venture ag r eement. The Tax Court therefore did not clearly e r r in finding that W CI and W BD J B H O L D I N G C O R P

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Partners did not intend to operate the joint venture a s a bona fide partner s h ip, and tax ing all profits from the venture a s income to W CI

according ly

. S

ee Luna
, 42 T.C. at 1077–79; Culbertson , 337 U.S. at 742.

F urther, thoug h B arone an d W a tkins and their holding corporations ag r e e d t o supply services to W B Partners, B arone and W atkins were entitled to terminate their employ men t with ninety day s’ notice. B ecause B arone a nd W a tkins could leave WB Partners and provide services to another environmental r emediation company a t a n y time,
t h e ir ag reement not to compete w ith Kuranda may not b e imputed to WB Partner s

. T h e Tax Court therefore did not clearly err in assig ning W B Partners no portion of the $3 .4 million p roceeds of t he noncompetition ag reement. See Beals’ Estate
, 82 F .2d a t 270; Cox
, 7 1 F .2d a t 988; Culbertson , 337 U.S. at 739–40.

F inally
, because Tax pay e rs have identified no substantial authority o r reasonable cause for thei r p ositions, the Tax Court did n ot commi t reversible e rror in assessing an accuracy -related penalty

. See 2 6 U. S .C. §§ 6662(a), ( b)(2), (d)(2)(B )(i), 6664(c)(1).

The decisions of the Tax Court are AF F IRMED.DJB H OLDING C ORP

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APPENDIX