FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

DJB HOLDING CORPORATION; TAX

MATTERS PARTNER; WB PARTNERS,

FKA WB Acquisition Partners,

Petitioners-Appellants,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee.

No. 12-70574

Tax Ct. No.

29106-07

WB ACQUISITION & SUBSIDIARY,

Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee.

No. 12-70575

Tax Ct. No.

26187-06
2 DJB HOLDING CORP. V. CIR

WB ACQUISITION, INC.,

Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee.

No. 12-70576

Tax Ct. No.

5039-08

OPINION

Appeal from a Decision of the

Tax Court

Argued and Submitted

December 9, 2014—San Francisco, California

Filed October 7, 2015

Before: Alex Kozinski, Johnnie B. Rawlinson,

and Mary H. Murguia, Circuit Judges.

Opinion by Judge Murguia
DJB HOLDING CORP. V. CIR 3

SUMMARY*

Tax

The panel affirmed three Tax Court decisions involving

federal income tax deficiencies and accuracy-related

penalties.

Greg Watkins and Daren Barone, owners of asbestos

removal business Watkins Contracting,Inc.(WCI),structured

WCI’s sale and reacquisition via various holding corporations

to limit their personal exposure. WCI and one of the holding

corporations, WB Partners, then formed the NTC Joint

Venture for an environmental remediation project.

The panel held that the Tax Court did not clearly err in

finding no intent to operate the NTC Joint Venture as a bona

fide partnership, and in taxing profits from the venture as

income only to WCI. 

As part of the sale of WCI assets to Kuranda Capital, LP,

Watkins, Barone, and WCI agreed not to compete with

Kuranda in the environmental remediation business. The

panel held that Watkins’s and Barone’s non-competition

agreement with Kuranda may not be imputed to WBPartners,

and that the Tax Court did not clearly err in not assigning any

portion of the proceeds of the noncompetition agreement to

WB Partners.

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.
4 DJB HOLDING CORP. V. CIR

Finally, the panel held that the Tax Court did not commit

reversible error in assessing an accuracy-related penalty,

because taxpayers identified no substantial authority or

reasonable cause for their positions.

COUNSEL

Lacey Strachan and Steven Toscher (argued), Hochman,

Salkin, Rettig, Toscher & Perez, P.C., Beverly Hills,

California, for Petitioners-Appellants.

Andrew Weiner (argued) and Teresa Ellen McLaughlin,

Attorneys, and Gilbert Steven Rothenberg, Deputy Assistant

Attorney General, United States Department of Justice,

Washington, D.C.; William J. Wilkins, Chief Counsel,

Internal Revenue Service, Washington D.C., for RespondentAppellee.

OPINION

MURGUIA, Circuit Judge:

Daren Barone and Gregory Watkins drew upon their

experience in asbestos removal to establish a successful

environmental remediation company, Watkins Contracting,

Inc (“WCI”). With success came risk—in particular, the

danger that Barone and Watkins would be held personally

liable for the cost of completing any projects that WCI was

unable to finish. To shield themselves from this risk, the two

men restructured WCIso that several corporate entities stood

between them and the company. Barone and Watkins each

formed a holding corporation, and the two corporations
DJB HOLDING CORP. V. CIR 5

entered a partnership, Appellant WB Partners. Barone and

Watkins also formed a third holding company, Appellant WB

Acquisition, Inc., and transferred their interest in WCI to this

company. Finally, WB Partners purchased all shares of WB

Acquisition. As a result, WCI was owned by WB

Acquisition, which was owned byWBPartners, which in turn

was owned by Barone’s and Watkins’s holding corporations. 

This elaborate corporate structure provided Barone and

Watkins with multiple levels of protection from personal

liability. See Appendix.

An opportunity arose to do environmental remediation

work for a massive redevelopment project at the San Diego

Naval Training Center (“NTC”). To win the contract,

however, WCI would have to post a large bond against the

possibility that it would be unable to complete the work. To

ensure that WCI could afford the bond, Barone and Watkins

caused WCI and WB Partners to form a joint venture, dubbed

the NTC Joint Venture. Under the terms of the joint venture

agreement, WCI would do the environmental remediation

work, and WB Partners would supply financial guaranties. In

exchange for these services, WCI would receive thirty

percent of the venture’s profits, and WB Partners would

receive seventy percent.

The joint venture’s structure had significant federal

income tax consequences. WCI would have to pay corporate

income tax on its thirty-percent share of the venture’s profits. 

As a general partnership, WB Partners would pay no income

tax on its seventy-percent share; instead, that income would

pass through to WB Partners’ owners, the two holding

corporations. The holding corporations were S corporations,

whose income is treated in the same manner as that of a

general partnership—it passes through to the S corporations’
6 DJB HOLDING CORP. V. CIR

shareholders. And because all shares of Barone’s and

Watkins’s holding corporations were owned by tax-exempt

retirement savings plans, WBPartners’ seventy-percent share

of the NTC Joint Venture’s profits would only be subject to

federal income tax if and when the retirement plans

distributed benefits to their holders.

While the NTC project was ongoing, WCI sold its assets

to Kuranda Capital, LP (“Kuranda”). The purchase

agreement allocated a portion of the sales price as

consideration for a noncompetition agreement, whereby

Watkins, Barone, and WCI agreed not to compete with

Kuranda in the environmental remediation business. WB

Partners claimed all of the proceeds of the noncompetition

agreement on its tax returns.

This action began when Appellants WB Partners, WB

Acquisition, and Barone’s holding corporation (collectively,

“Taxpayers”) challenged certain tax deficiencies identified by

the Commissioner of Internal Revenue. In three consolidated

decisions, the Tax Court found that the NTC Joint Venture

was not a valid partnership for tax purposes, and therefore

that all of the joint venture’s profits were taxable income to

WCI. The Tax Court determined that all of the proceeds from

the noncompetition agreement were income to WCI as well. 

Because WCI had substantially understated its income, the

Tax Court upheld the Commissioner’s assessment of

accuracy-related penalties. Taxpayers appealed.

For the reasons that follow, we affirm the decisions of the

Tax Court.
DJB HOLDING CORP. V. CIR 7

BACKGROUND

I. History of Watkins Contracting, Inc.

In the early 1980s, Barone and Watkins worked in the 

asbestos removal business in Hawaii. Watkins later returned

home to San Diego, where he went to work for his father’s

asbestos removal company. The company soon expanded

into other areas of environmental remediation. When Barone

joined the company in the early 1990s, he and Watkins

purchased it themselves, renaming it Watkins Contracting,

Inc. (“WCI”).

Barone was uncomfortable with the degree of personal

liability involved in the environmental remediation business. 

In 1997, Barone and Watkins sold WCI’s stock to REXX

Environmental Corp. (“REXX”), another environmental

remediation company, thereby relieving themselves of any

personal liability on future projects. REXX in turn hired

Barone and Watkins to manage WCI. Barone became WCI’s

CEO, and was responsible for “[t]he day-to-day business

affairs, . . . anything from managing employees to handling

financing to business development.” Watkins “oversaw a lot

of the field.”

REXX soon encountered financial difficulties, and

approached Barone and Watkins to gauge their interest in

repurchasing WCI. Barone and Watkins entered an

agreement to buy WCI’s shares on June 10, 1999. The

purchase closed on September 19, 2000.
8 DJB HOLDING CORP. V. CIR

II. Birth of WB Partners

Barone wanted to structure the purchase agreement to

afford “(1) [p]ersonal protection from creditors; (2) layers of

liability protection to operate WCI; (3) the ability to invest

both together [with Watkins] and separately, depending on

the risks involved in each project; (4) . . . qualified retirement

plans; and (5) avoid[ance of] probate.” To accomplish these

goals, Barone and Watkins stacked a number of holding

companies between them and WCI to form a multi-layered

liability shield.

Barone and Watkins created WB Acquisition, Inc., and

arranged for the company to receive WCI’s shares when the

repurchase from REXX closed. They created two S

corporations1—DJB HoldingCorporation (“DJB”) and GSW

Holding Corporation (“GSW”). Barone and Watkins then

entered employment agreements with DJB and GSW,

respectively, and each corporation adopted an employee stock

ownership plan2(“Plan”). The DJB Plan purchased all shares

of DJB, and the GSW Plan purchased all shares of GSW. 

DJB and GSW then formed a general partnership called WB

1 An “S corporation” is “a corporation that ha[s] elected to be taxed

under Subchapter S of the [Internal Revenue] Code.” Gitlitz v. Comm’r,

531 U.S. 206, 209 (2001). Like a general partnership, an S corporation

does not pay income tax on its profits, but passes the profits through to its

shareholders. Id.

2 An “employee stock ownership plan” is “a type of pension plan that

invests primarily in the stock of the company that employs the plan

participants.” Fifth ThirdBancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2463

(2014). The earnings of such a retirement plan are exempt from income

tax, and participants in the plan pay tax on their benefits only when the

benefits are distributed. 26 U.S.C. §§ 401(a), 402(a), 501(a); McDaniel

v. Chevron Corp., 203 F.3d 1099, 1104 (9th Cir. 2000).
DJB HOLDING CORP. V. CIR 9

Partners, in which each corporation owned a fifty-percent

interest. Finally, WB Partners acquired all shares of WB

Acquisition. All the necessary documents were executed in

September 2000.3

According to Barone, the Plans were intended to provide

qualified retirement plans, personal protection from creditors,

and avoidance of probate. The holding corporations, DJB

and GSW, permitted Barone and Watkins to pursue separate

endeavors, while WBPartners allowed them to work together

if they wished. Another consequence of the arrangement was

that WB Partners’ income would escape taxation until the

Plans distributed benefits: WB Partners, DJB, and GSW are

all “pass-through” entities, 26 U.S.C. §§ 701, 1363(a),

1366(a)–(c), and valid employee stock ownership plans are

tax exempt, 26 U.S.C. §§ 401(a), 501(a), 4975(e)(7); T.D.

9081, 68 Fed. Reg. 42970, 42970 (July 21, 2003).4

As part of their employment agreements, Barone and

Watkins agreed to render “construction management,

indemnity, and financing services” exclusively for DJB and

GSW, respectively. “Indemnity and financing services”

include “providing personal guarantees required in order for

clients of [DJB and GSW] to obtain a required performance

bond.” In turn, DJB and GSW agreed on September 20,

2000, to provide these services to WB Partners to the extent

3 The Commissioner concedes that “WB Partners, [GSW], and [DJB]

exist for Federal income tax purposes.”

4 As a general partnership, WB Partners does not pay income tax on its

profits, but passes its earnings on to its partners, DJB and GSW. See

26 U.S.C. § 701. As noted, DJB and GSW are S corporations that pass

their income on to their shareholders, the Plans, and the Plans are tax

exempt. See supra nn.2, 3.
10 DJB HOLDING CORP. V. CIR

“necessary to manage and conduct the business of the

Partnership.”

The Tax Court found, and Taxpayers do not dispute, that

Barone and Watkins performed the same roles for WCI after

forming WB Partners as before. Watkins continued to

oversee WCI’s work on a “day-to-day basis.” Barone

continued to handle “business development” and “the

financing.”

In short, after the restructuring, WCI became a subsidiary

of WB Acquisition, which was owned byWBPartners, which

in turn was owned by the holding corporations DJB and

GSW. Barone and Watkins became employees of their

respective holding corporations rather than WCI, but

continued to provide services to WCI according to the terms

of their employment agreements. And WB Partners’

structure ensured that Barone and Watkins would pay no tax

on any of the partnership’s income until they began to receive

benefits from their respective retirement plans.

III. The NTC Joint Venture

In 1999 or 2000, the Corky McMillin Companies

(“McMillin”), the Harper-Nielsen-Dillingham Joint Venture

(“Harper”), and WCI joined forces to bid on a large

redevelopment project at the San Diego Naval Training

Center (“NTC”). The work would include removing various

hazardous materials from nearly two hundred buildings. The

City of San Diego awarded the contract to McMillin, who

hired Harper as construction manager. WCI entered a

subcontractor arrangement withHarper on December 1, 2000,

for a lump-sum amount of $17,001,073. McMillin and

Harper also required WCI to sign an indemnity agreement
DJB HOLDING CORP. V. CIR 11

and post a full performance bond, as neither entity was

willing to do so itself.

Barone worried that assuming personal liability on a $17

million bond could bankrupt him and WCI. In order to

isolate the proceeds of the NTC project from WCI’s other

work, Barone conceived the NTC Joint Venture.

A. The Joint Venture’s Structure

WCI and WB Partners executed the NTC Joint Venture

Agreement on September 20, 2000, a week after WBPartners

was formed and just over a month before WCI won the

subcontract from Harper. Under the agreement, WCI would

perform the actual remediation work and WB Partners would

supply indemnity and financial guaranty services. The

agreement further provided that WB Partners would receive

seventy percent of the profits, and WCI would receive thirty

percent.

The tax consequences of this arrangement bear

mentioning. Because the joint venture agreement entitled

WCI only to thirty percent of the profits, WCI would have to

pay income tax only on that portion.5 The remaining seventy

percent of the profits would pass to WB Partners, whose

income, as mentioned above, was not subject to taxation

unless and until the Plans distributed benefits. In short, if the

NTC Joint Venture were valid for tax purposes, only thirty

percent of its income would be subject to tax now.

5 A joint venture is considered a “partnership” for tax purposes. 

26 U.S.C. § 761(a). Accordingly, the NTC Joint Venture would pay no

tax on its income, but pass that income on to its members, WCI and WB

Partners. See 26 U.S.C. § 701.
12 DJB HOLDING CORP. V. CIR

The agreement also provided that the joint venture would

reimburse WCI for costs incurred in the remediation work,

plus five percent. The agreement obligated the joint venture

to keep books and records and to file income tax returns. It

contemplated that Harper would award the subcontract to

WCI, not to the joint venture, and make payments directly to

WCI.

B. The Joint Venture’s Conduct

On September 20, 2000, the same day the NTC Joint

Venture was created, WCI, WB Partners, Barone’s and

Watkins’s holding corporations, and the NTC Joint Venture

executed a general indemnity agreement with the American

International Group of Companies (“AIG”). The same

entities entered a second indemnity agreement with

Greenwich Insurance Company on January 2, 2002. Pursuant

to the agreements, the NTC Joint Venture and all the entities

that constituted it agreed to indemnify AIG and Greenwich

against any costs incurred in executing a bond.

The Insurance Company of the State of Pennsylvania

issued a performance bond on October 18, 2000, and replaced

it soon after with a superseding bond. The bond named WCI

as principal, the insurance company as surety, and both

McMillin and Harper as obligees. The face amount was

$17,001,073, the value of WCI’s lump-sum subcontract with

Harper.

The NTC Joint Venture obtained an employer

identification number and its own bank account. The joint

venture also tracked its own financing and prepared its own

progress reports. As the joint venture agreement

contemplated, WCI received payment from Harper directly. 
DJB HOLDING CORP. V. CIR 13

Notwithstanding the terms of the agreement, the joint

venture’s accountant opted not to file a tax return for the

venture. Instead, the accountant believed that separately

reporting WCI’s and WB Partners’ income from the NTC

project was sufficient.

As of September 30, 2002, WCI had billed Harper for

$14,100,332, and incurred costs (plus five percent) of

$5,822,738. This yielded a profit of $8,277,599, of which

WB Partners was entitled to a seventy-percent share, or

$5,794,319. In reality, a WCI invoice reflects that WCI paid

WB Partners only $4,172,000, and kept for itself the

remaining $1,622,319. As a result, WB Partners received

only 50.4% of the profits, not 70%. Barone testified that the

extra $1.6 million was a “bonus” to WCI in recognition of “a

job well done.”

IV. Sale of WCI’s Assets to Kuranda Capital

WCI entered an asset purchase agreement with Kuranda

Capital, LP (“Kuranda”),6on April 18, 2003. The parties

agreed upon a purchase price for WCI’s assets of $4,923,091

in cash and a $500,000 promissory note. As part of the

transaction, Watkins, Barone, and WCI agreed not to compete

with Kuranda in the environmental remediation business. 

The asset purchase agreement allocated $3.4 million of the

purchase price to the noncompetition agreement. Taxpayers’

accountant reported all of the noncompetition agreement’s

proceeds, including interest from the note, on WB Partners’

tax returns.

6 Kuranda later changed its name to Watkins Contracting, L.P., and

finished the environmental remediation portion of the NTC project as

WCI’s subcontractor.
14 DJB HOLDING CORP. V. CIR

V. Tax Court

The Commissioner notified WB Acquisition and WB

Partners of tax deficiencies for the years 2002 through 2005. 

Taxpayers filed petitions for adjustment. The Tax Court held

that (1) the NTC Joint Venture was not a valid partnership for

tax purposes, (2) onlyWCI was bound by the noncompetition

agreement, and the $3.4 million allocated to the agreement

was income only to WCI, and (3) accuracy-related penalties

applied.

JURISDICTION

This Court has jurisdiction over Taxpayers’ 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 findings of fact for clear error. Custom Chrome,

Inc. v. Comm’r, 217 F.3d 1117, 1121 (9th Cir. 2000). 

Whether a valid partnership existed for tax purposes turns on

whether the parties intended in good faith to act as partners. 

Comm’r v. Culbertson, 337 U.S. 733, 741–42 (1949).

Whether there was such an intent is a question of fact.

Comm’r v. Tower, 327 U.S. 280, 287 (1946). To which party

to attribute an item of income is a mixed question of law and

fact, reviewed de novo “unless the question is primarily

factual.” Sparkman v. Comm’r, 509 F.3d 1149, 1157 (9th

Cir. 2007).

Where the Tax Court imposed an accuracy-related

penalty, we review de novo whether substantial authority

supported the taxpayer’s position. Little v. Comm’r, 106 F.3d
DJB HOLDING CORP. V. CIR 15

1445, 1449 (9th Cir. 1997). Whether the taxpayer acted with

reasonable cause and in good faith is a finding of fact

reviewed for clear error. See Hansen v. Comm’r, 471 F.3d

1021, 1029–30 (9th Cir. 2006) (holding that the Tax Court

did not clearly err in finding a lack of reasonable cause and

good faith).

Under the clear error standard, the Tax Court’s fact

findings are upheld if its “account of the evidence is plausible

in light of the record viewed in its entirety.” Wolf v. Comm’r,

4 F.3d 709, 712–13 (9th Cir. 1993) (quoting Serv. Emps. Int’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)).

DISCUSSION

I. Income from the NTC Project Attributed to WB

Partners Was in Fact Income to WCI.

Taxpayers raise two arguments in the alternative. First,

they argue that the Tax Court clearly erred in finding that the

NTC Joint Venture was not a valid partnership for tax

purposes. Second, they argue that, even if the joint venture

was not a valid partnership, WCI and WB Partners reached a

bona fide agreement to compensate WB Partners for

providing financial guaranties. We conclude that the Tax

Court properly taxed WCI on all income from the NTC

project.
16 DJB HOLDING CORP. V. CIR

A. The NTC Joint Venture Was Not a Valid

Partnership for Tax Purposes.

For tax purposes, a “partnership” is “a syndicate, group,

pool, joint venture, or other unincorporated organization” that

carries on “any business, financial operation, or venture” and

that is not “a corporation or a trust or estate.” 26 U.S.C.

§§ 761(a), 7701(a)(2). To determine whether a purported

joint venture is a valid partnership, courts ascertain whether

“the parties in good faith and acting with a business purpose

intended to join together in the present conduct of the

enterprise.” Culbertson, 337 U.S. at 742. The Tax Court

distilled from Culbertson eight factors to consider in

measuring the parties’ intent:

[(1)] [t]he 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 proprietary interest in the net profits

and having an obligation to share losses, or

whether one party was the agent or employee

of the other, receiving for his services

contingent compensation in the form of a

percentage of income; [(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
DJB HOLDING CORP. V. CIR 17

maintained for the venture; and [(8)] whether

the parties exercised mutual control over and

assumed mutual responsibilities for the

enterprise.

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

Here, the Tax Court concluded that the Luna factors

weighed against the conclusion that the NTC Joint Venture

was a valid partnership. Regarding the first factor, the court

noted that the parties violated the terms of the joint venture

agreement both by imposing a 50.4% profit cap on WB

Partners and by failing to file a tax return. These deviations

from the agreement suggested to the Tax Court that WCI and

WB Partners did not intend in good faith to act as partners. 

Second, the court found that WBPartners contributed nothing

of value to the joint venture because the performance bond

was issued based not on WB Partners’ financial guaranties,

but on the collective net worth of WCI, WB Partners, Barone,

Watkins, DJB, and GSW as related entities. The marginal

value of WB Partners’ guaranty suggested that WB Partners

did not make a meaningful contribution to the joint venture. 

Third, the venture’s imposition of a profit cap on WB

Partners demonstrated that WB Partners exercised no control

over income and capital, further suggesting that WB Partners

did not act as a bona fide partner.

Fourth, the profit cap and the joint venture agreement’s

provision guaranteeing reimbursement of WCI’s costs

showed that WCI and WB Partners did not intend to share

profits and losses as bona fide partners would. Concerning

the eighth factor, the court found that WB Partners’

concession of a large portion of the profits to which it was

entitled showed that the parties did not exercise mutual
18 DJB HOLDING CORP. V. CIR

control over the enterprise. The court found the remaining

factors neutral in light 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 appeal, Taxpayers take issue only with the Tax

Court’s finding regarding the second Luna factor—that WB

Partners contributed nothing of value to the NTC Joint

Venture. They do not dispute the Tax Court’s application of

the Luna factors in any other respect, except to assert that the

court’s assessment of WB Partners’ contribution to the

venture “infected” its analysis of the other factors.

Before the Tax Court, Taxpayers argued that WB

Partners’ financial guaranty was an essential contribution to

the NTC Joint Venture because WCI could not have won the

NTC project without it. The Tax Court disagreed. It

specifically noted that WCI won the NTC bond based on “the

combined net worth and financial guaranties of each of WCI,

WB Partners, Barone, Watkins, DJB, and GSW,” not based

on WB Partners’ guaranty alone. Moreover, the court

reasoned that WB Partners would have supplied a guaranty

even if the joint venture had never existed, by virtue of being

the parent entity of WCI. Finally, the court noted that only

7

 The Tax Court found the fifth factor “mixed” because the NTC Joint

Venture obtained and used its own employer identification number as a

legitimate entity would, but WCI dealt with Harper, the construction

contractor, entirely in its own name. The sixth factor was neutral because,

while the joint venture did not file its own tax return, it dealt with various

banks as an entity separate from WCI and WB Partners. Finally, the Tax

Court found the seventh factor neutral because the joint venture

maintained its own bank account, income statements, and progress reports,

but did so using WCI employees and did not keep “other books of account

that may normally be expected in the operation of a business.”
DJB HOLDING CORP. V. CIR 19

WB Partners received compensation for its financial

guaranty, while Barone, Watkins, DJB, and GSW each

guaranteed the bond without receiving a share of the NTC

project’s profits. If WB Partners’ guaranty warranted

compensation to the tune of seventy percent of the profits, the

Tax Court reasoned, then surely the other entities’ guaranties

also called for some share of the proceeds.

On appeal, Taxpayers argue that WB Partners’ financial

guaranty and those of its owners and their employees were in

fact a valuable contribution because WCI could not otherwise

have posted a performance bond. They contend that Tax

Court case law supports this conclusion. In Maxwell v.

Commissioner, 29 T.C.M. (CCH) 1356 (1970), a bridge

construction corporation and its majority owner formed a

joint venture to bid on a lucrative contract. Id. at 1358. The

corporation supplied all the materials and labor, and the

owner provided a personal financial guaranty to enable the

corporation to post a bond. Id. Because the corporation’s net

worth was not alone sufficient to secure the bond, the Tax

Court found that the owner’s guaranty was a valuable

contribution showing intent to form a partnership. Id. at

1362.

As in Maxwell, Taxpayers argue, WCI could not have

secured the necessary $17 million bond on its own. WB

Partners’ guaranty, along with those of its partner holding

corporations and their employees, made obtaining that bond

possible. Because WB Partners’ financial guaranty, as well

as those of Barone, Watkins, and their holding corporations,

enabled WCI to obtain a performance bond, Taxpayers argue

that the Tax Court clearly erred in finding that WB Partners

contributed nothing valuable to the joint venture.
20 DJB HOLDING CORP. V. CIR

We conclude that the record supports the Tax Court’s

finding that WB Partners contributed no value to the NTC

Joint Venture. Had the joint venture never existed, WB

Partners would still be obligated to offer Barone’s and

Watkins’s guaranties because both men promised to provide

financial services as necessary to support WB Partners’

business. As WB Partners’ wholly owned subsidiary, WCI

would have been entitled to Barone’s and Watkins’s

guaranties even if WB Partners did not promise to provide

those guaranties to the joint venture.

In September of 2000, in their employment agreements

with the holding corporations DJB and GSW, Barone and

Watkins promised to provide guaranties to enable the

corporations’ clients to post performance bonds. Later that

month, DJB and GSW amended WB Partners’ general

partnership agreement to offer Barone’s and Watkins’s

services as “necessary to manage and conduct the business of

[WB Partners].” The amendment offered Barone’s and

Watkins’s services not only to WB Partners itself, but also to

any “third parties in connection with” WBPartners’ business.

WCI’s environmental remediation work for the NTC

redevelopment project was part of WB Partners’ business

because WB Partners wholly owned WB Acquisition, which

in turn wholly owned WCI. Because WCI’s work on the

NTC project was part of WB Partners’ business, the

partnership agreement required Barone and Watkins to

provide any financial guaranties necessary to permit WCI to

obtain the bond it needed to perform the work. Accordingly,

WBPartners was obligated to furnish Barone’s and Watkins’s

guaranties independently of the joint venture agreement. WB

Partners’ commitment to provide guaranties to the NTC Joint

Venture therefore was superfluous.
DJB HOLDING CORP. V. CIR 21

Not only did Barone’s and Watkins’s guaranties

contribute no value to the joint venture independent of what

they were already obligated to provide, but the record also

belies any argument that WB Partners’ own guaranty, or

those of DJB and GSW, held independent value. An

employee of AIG, one of the companies that executed an

indemnity agreement with the NTC Joint Venture, remarked

that the performance bond issued because WCI, Barone, and

Watkins were “financially sound indemnitors.” The

employee recalled that WCI’s financial condition was “very

good” and that Barone and Watkins both had a “pretty high”

net worth. He did not remember WB Partners’ financial

condition (or that of DJB and GSW) at all. Moreover, at the

time WBPartners provided its guaranty, it had no other assets

outside its equity in the NTC Joint Venture and WB

Acquisition. This evidence supports the Tax Court’s

conclusion that WB Partners’ guaranty contributed no

additional value to the NTC Joint Venture. Only Barone’s

and Watkins’s guaranties enhanced WCI’s ability to secure a

performance bond, and they were obligated to provide the

guaranties purely by virtue of their employment agreements

and the amended partnership agreement. Maxwell is

therefore inapposite, as the majority shareholder in that case

was not obligated to offer his personal guaranty by any

contract outside of the partnership agreement. See 29 T.C.M.

(CCH) at 1358.

Because Barone and Watkins were contractuallyobligated

to provide any guaranties necessaryto permit WCIto perform

environmental remediation work, WB Partners’ separate

commitment to provide those guaranties to the joint venture

was superfluous. The Tax Court therefore did not clearly err

in concluding that WB Partners contributed nothing of value

to the NTC Joint Venture. Because Taxpayers do not
22 DJB HOLDING CORP. V. CIR

challenge the Tax Court’s analysis of any of the other Luna

factors, it necessarily follows that the Tax Court did not

clearly err in finding that Taxpayers did not intend to operate

the NTC Joint Venture as a bona fide partnership. See Luna,

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

B. WCI and WB Partners Did Not Agree in Good

Faith To Share Profits.

Of course, if the NTC Joint Venture was not a valid

partnership for tax purposes, then WB Partners does not have

a partnership interest entitling it to declare as income a share

of the profits from the NTC project. Taxpayers argue in the

alternative that WCI agreed in good faith to assign WB

Partners a share of the profits in exchange for WB Partners’

signing the indemnity agreement.

Where a taxpayer agreed to pay a portion of the profits

from an enterprise in exchange for financial assistance from

another, that portion of the profits is income to the entity

providing the assistance, not to the taxpayer. See Stevens

Bros. & Miller-Hutchinson Co., Inc. v. Comm’r, 24 T.C. 953,

956–57 (1955). In Stevens Brothers, the taxpayer, a

corporation in the heavy construction business, was unable to

bid on a public works project because it had insufficient

capital to obtain a loan. Id. at 954. Another corporation

agreed to loan the taxpayer the necessary additional capital in

exchange for a one-half share of the profits from the project. 

Id. at 955. In accordance with the agreement, the taxpayer

declared only half of the profits as income. Id. at 956. The

Tax Court held that this was proper. Id. The risk of loss to

the second corporation was real, the terms of the agreement

were fair, and the interests of both corporations were

sufficiently “adverse” to permit the conclusion that the
DJB HOLDING CORP. V. CIR 23

contract was “bona fide.” Id. In addition, the corporations

actually shared the profits at the agreed-upon fifty-percent

division, further demonstrating that the agreement was

genuine. Id.

Taxpayers argue that, as in Stevens Brothers, WCI and

WB Partners agreed that WB Partners would receive a

portion of the profits from the NTC project in exchange for

providing necessary financial assistance to WCI—in this

case, a financial guaranty. As in Stevens Brothers, WB

Partners assumed substantial financial risk by agreeing to

indemnify the surety on the performance bond. Also as in

Stevens Brothers, Taxpayers assert, the parties to the joint

venture agreed that WB Partners would receive a percentage

share of the profits in exchange for its guaranty.

To the contrary, Taxpayers’ conduct shows that WCI and

WB Partners did not reach a bona fide agreement to transfer

a share of the profits to WB Partners in exchange for its

guaranty. According to the joint venture agreement, WB

Partners was to receive seventy percent of the profits for this

service. Instead, as reflected in an invoice, WCI unilaterally

reduced WB Partners’ share to 50.4%. It is questionable that

a company dealing with WCI at arms’ length would give up

a nearly twenty-percent share of the profits—approximately

$1.6 million—so casually. This disregard for the joint

venture agreement’s terms demonstrates that WCI and WB

Partners did not intend in good faith to be bound by that

agreement.8 Accordingly, the Tax Court did not clearly err in

8 Taxpayers argue in the alternative that they are entitled to deduct WB

Partners’share “as an ordinary and necessary bond guaranty expense.” See

A.A. & E.B. Jones Co. v. Comm’r, 19 T.C.M. (CCH) 1561, 1563 (1960)

(permitting the taxpayer to deduct as a business expense a share of profits
24 DJB HOLDING CORP. V. CIR

finding that WCI and WB Partners did not reach a bona fide

agreement to share profits. Cf. Stevens Bros., 24 T.C. at 956

(noting that the lending corporation received “payment of the

agreed amounts”).

The record supports the Tax Court’s finding that WB

Partners contributed no value to the NTC Joint Venture, and

therefore that WB Partners and WCI did not act as bona fide

partners. See Luna, 42 T.C. at 1077–79; Culbertson, 337 U.S.

at 742. WCI’s arbitrary reduction of WB Partners’ share of

the proceeds further supports the Tax Court’s finding that the

two entities did not reach a bona fide agreement to share

profits. Cf. Stevens Bros., 24 T.C. at 956. Accordingly, the

Tax Court properly determined that all of the profits from the

NTC Joint Venture were income to WCI.

II. Proceeds from the Noncompetition Agreement Were

Income to WCI Rather Than WB Partners.

The “first principle of income taxation” is “that income

must be taxed to him who earns it.” Culbertson, 337 U.S. at

739–40. When a commercial transaction includes a

noncompetition agreement, the portion of the proceeds

allocated to that agreement is income to the persons who

promised not to compete. For example, when an agreement

to sell a corporation’s assets includes promises by its

shareholders that they will not compete with the purchaser,

the shareholders must declare as income the consideration

paid to shareholders who indemnified a bond surety). Because we affirm

the Tax Court’s conclusion that the parties did not intend in good faith to

transfer a share of the profits to WB Partners in exchange for its

guaranties, we must also reject the suggestion that WCI is entitled to

deduct that share as a business expense.
DJB HOLDING CORP. V. CIR 25

they receive for their promises. See Beals’ Estate v. Comm’r,

82 F.2d 268, 270 (2d Cir. 1936) (holding that stock

transferred in exchange for a taxpayer’s agreement not to

compete was income to the taxpayer, and not merely

“ancillary” to a larger reorganization plan); Cox v. Helvering,

71 F.2d 987, 988 (D.C. Cir. 1934) (holding that money paid

in exchange for a shareholder’s agreement not to compete

was income to the shareholder). By promising not to

compete with the purchaser’s business, the shareholders

“earn” the consideration that the purchaser offers in exchange

for the promise. See Cox, 71 F.2d at 988 (“If [a person]

refrains from exercising his skill and ability in a particular

line for a definite period, what he receives in compensation

. . . is income.”).

Of the roughly $5.5 million price at which Kuranda

agreed to purchase WCI’s assets, the Tax Court concluded

that the $3.4 million portion allocated to the noncompetition

agreement was income to WCI, not WB Partners. The

noncompetition clause prohibits Barone, Watkins, and WCI

from engaging in “Competing Services,” which are defined

to include any

(i) service that has been provided, performed

or offered by or on behalf of WCI (or any

predecessor of WCI) at any time on or prior to

the date of this Noncompetition Agreement

that involves or relates to asbestos, mold, and

lead abatement in residential, commercial and

government properties; (ii) service that is

substantially the same as, is based upon or

competes in any material respect with any

service referred to in clause “(i)” of this

sentence.
26 DJB HOLDING CORP. V. CIR

(alterations omitted). To summarize, Barone, Watkins, and

WCI agreed not to compete with Kuranda in providing any

service related to “asbestos, mold, and lead abatement.”

The Tax Court noted that WCI was the only signatory to

the noncompetition agreement ever to perform “asbestos,

mold, and lead abatement” services. Moreover, it was the

only entity bound by the agreement that “had the proper

licenses and permits to perform the necessary construction

and excavation work.” While Barone’s and Watkins’s

services were necessary to WCI’s operations, the court found

that WCI was entitled to those services because both men

were WCI officers. As the only entity capable of competing

with Kuranda in providing environmental remediation

services, the court found, WCI was the only party truly bound

by the agreement. The Tax Court therefore concluded that

WCI earned all of the proceeds. Accordingly, it found that

the interest on Kuranda’s $500,000 promissory note was also

income to WCI, not WB Partners. Because the Tax Court’s

analysis was “primarily factual,” we review its assignment of

the proceeds of the noncompetition agreement to WCI for

clear error. See Sparkman, 509 F.3d at 1155, 1157.

As Taxpayers correctly observe, the Tax Court erred in

finding that only WCI was bound by the noncompetition

agreement. Instead, the agreement also bound Barone and

Watkins personally. Contrary to the Tax Court’s reasoning,

Barone’s and Watkins’s status as WCI officers does not

entitle WCI to their services because Barone and Watkins

were employees of their holding corporations, DJBand GSW,

not of WCI. Further, even if they were employees of WCI,

Barone and Watkins were free to terminate their relationship

with WCI at any time. Because California is an at-will

employment state, WCI was not entitled to Barone and
DJB HOLDING CORP. V. CIR 27

Watkins’s services in the future absent a contractual

agreement to that effect. See Cal. Lab. Code § 2922 (“An

employment, having no specified term, may be terminated at

the will of either party on notice to the other.”); Guz v.

Bechtel Nat’l, Inc., 8 P.3d 1089, 1110 (Cal. 2000) (“The mere

existence of an employment relationship affords no

expectation, protectible by law, that employment will

continue . . . unless the parties have actually adopted such

terms.”). The record contains no evidence of such an

agreement. Accordingly, under California law, Barone and

Watkins were free to sever their ties to WCI and perform

environmental remediation services for another company. 

The noncompetition agreement therefore bound Barone and

Watkins personally not to compete with Kuranda in the

environmental remediation business.

Taxpayers go on to argue that the noncompetition

agreement binds Barone and Watkins alone, not WCI, and

that WB Partners, not Barone and Watkins, is entitled to the

proceeds of the agreement. This argument rests on two

fundamental misapprehensions. First, by its plain terms, the

agreement forbids “[e]ach of Seller, Watkins and Barone”

from performing competing services. The agreement goes on

to provide that the $3.4 million amount be “allocated as

partial consideration for Seller’s and the Shareholders’

obligations” not to compete. The asset purchase agreement

defines “Seller” as WCI, and “Shareholders” refers to Barone

and Watkins. The terms of the noncompetition agreement

demonstrate that Barone, Watkins, and WCI each earned a

share of the $3.4 million proceeds.

Second, the proceeds of the noncompetition agreement

are not income to WB Partners because the partnership, like

WCI, has no future claim to Barone’s and Watkins’s services. 
28 DJB HOLDING CORP. V. CIR

It is true that Barone and Watkins agreed to provide their

services exclusively for their holding corporations, DJB and

GSW. DJB and GSW, in turn, agreed to provide Barone’s

and Watkins’s services to WB Partners. However, Barone’s

and Watkins’s employment agreements with DJB and GSW

provide that either party may terminate employment at any

time with ninety days’ notice to the other. Accordingly,

Barone and Watkins were free to leave DJB and GSW and go

off to perform environmental services for another company. 

Because WB Partners had no right to expect Barone and

Watkins to continue to provide their services into the future,

Barone’s and Watkins’s agreement not to compete with

Kuranda may not be imputed to WB Partners. WB Partners

therefore earned no part of the consideration for the

noncompetition agreement.

WCI, Barone, and Watkins each are individually bound

not to compete with Kuranda, and therefore are each entitled

to a share of the noncompetition agreement. See Beals’

Estate, 82 F.2d at 270; Cox, 71 F.2d at 988. Because WB

Partners has no claim to Barone’s and Watkins’s future

services, WB Partners is entitled to no share at all. See

Culbertson, 337 U.S. at 739–40. Accordingly, the Tax Court

did not clearly err in declining to assign any portion of the

proceeds of the noncompetition agreement to WB Partners.9

 

9

 Were the question before us, we may be inclined to hold that the Tax

Court clearly erred in failing to assign any share of the noncompetition

agreement’s proceeds to Barone and Watkins individually. Neither party

has asked that we do so.
DJB HOLDING CORP. V. CIR 29

III. The Tax Court Properly Assessed AccuracyRelated Penalties.

The Internal 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

substantial understatement, however, the taxpayermayescape

the penalty if one or both of two conditions applies. First, a

taxpayer does not owe a penalty where the taxpayer can

identify “substantial authority” supporting its treatment of an

item of income. 26 U.S.C. § 6662(d)(2)(B)(i). Second, to the

extent that the taxpayer had reasonable cause for its position

and acted in good faith, the penalty does not apply. 26 U.S.C.

§ 6664(c)(1).

The Tax Court assessed penalties against Taxpayers for

substantially understating their income. Taxpayers argue that

the Tax Court’s decisions in Maxwell and Stevens Brothers

furnish substantial authority for their positions that the NTC

Joint Venture was a valid partnership and that the parties to

the venture agreed in good faith to share profits. They also

contend that they relied reasonably and in good faith on the

advice of their accountant in reaching those positions. 

Finally, they assert that their positions are reasonable in light

of the complexity of the law governing the validity of

partnerships for tax purposes. For the reasons discussed

below, we reject Taxpayers’ arguments and affirm the district

court’s imposition of accuracy-related penalties.

A. Maxwell and Stevens Brothers Do Not Furnish

Substantial Authority for Taxpayers’ Position.

“The substantial authority standard” is somewhat less

stringent than the “more likely than not standard.” Treas.
30 DJB HOLDING CORP. V. CIR

Reg. § 1.6662-4(d)(2). Substantial authority supports the

taxpayer’s position if, taking into account all relevant

authorities, “the weight of the authorities supporting” the

taxpayer’s position is “substantial” when compared to the

weight of authorities that are contrary to the taxpayer’s

position. § 1.6662-4(d)(3)(i). The weight that a court should

assign to an authority “depends on its relevance and

persuasiveness, and the type of document providing the

authority.” § 1.6662-4(d)(3)(ii). A TaxCourt disposition may

be relevant authority, but is “not particularly relevant” if it “is

materially distinguishable on its facts.” Id.

Taxpayers advance two Tax Court opinions as substantial

authority for their position that the share of the profits from

the NTC project transferred to WB Partners is properly WB

Partners’ income. One is Maxwell, in which the court found

that a corporation and its majority shareholder formed a valid

partnership when the shareholder agreed to guarantee a

necessary bond in exchange for a share of the profits. 29

T.C.M. (CCH) at 1362. The second is Stevens Brothers, in

which the court held that a corporation properly declared only

half the profits from a project as income where it agreed to

pay the other half to another corporation in exchange for a

capital loan. 24 T.C. at 955–56.

Maxwell and Stevens Brothers do not amount to

substantial authority because they are materially

distinguishable. In each case, the taxpayer reached a bona

fide agreement to share the profits from an endeavor in

exchange for a financial guaranty or loan. In this case, the

joint venture’s decision to cap WB Partners’ share at a rate

apparently plucked from thin air shows that the profit-sharing

agreement was not bona fide. The absence of a good-faith

profit-sharing agreement distinguishes this case from
DJB HOLDING CORP. V. CIR 31

Maxwell and Stevens Brothers, and leaves Taxpayers’

position unsupported by substantial authority. See Treas.

Reg. § 1.6662-4(d)(3)(ii).

B. Taxpayers May Not ClaimReasonable Reliance on

Their Accountant’s Opinion Because the

Accountant Was Not Involved in Designing the

NTC Joint Venture’s Structure.

Reliance on professional advice may establish reasonable

cause and good faith. Treas. Reg. § 1.6664-4(b)(1). The Tax

Court requires a taxpayer to prove three elements in order to

show that reliance on advice was reasonable: “(1) The adviser

was a competent professional who had sufficient expertise to

justify reliance, (2) the taxpayer provided necessary and

accurate information to the adviser, and (3) the taxpayer

actually relied in good faith on the adviser’s judgment.” 

Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43, 99

(2000). Once the Commissioner produces evidence showing

that an accuracy-related penalty applies, the burden of

proving the existence of reasonable cause and good faith falls

on the taxpayer. Higbee v. Comm’r, 116 T.C. 438, 449

(2001); cf. Sparkman, 509 F.3d at 1161 (noting that the

taxpayer bears the burden of overturning the Commissioner’s

imposition of a negligence penalty under 26 U.S.C. § 6662).

Taxpayers argued before the Tax Court that they

reasonably relied on the advice of their accountant in

deciding how to treat the proceeds from the NTC Joint

Venture. The Tax Court noted that the accountant had not

participated in any way in structuring the joint venture or any

of the entities that comprised it, but merely prepared

Taxpayers’ tax returns based on information given him. 

Accordingly, the court found that Taxpayers had not supplied
32 DJB HOLDING CORP. V. CIR

the accountant with “all the necessary and accurate

information,” and therefore that their reliance on the

accountant’s tax returns was not reasonable.

Taxpayers argue that the Tax Court clearly erred in failing

to specify what necessary information they neglected to

provide to the accountant. They assert that the accountant

was “fully aware of the NTC Joint Venture and the allocation

of income between WCI and WB Partners.”

The Tax Court did not clearly err. “The mere fact that a

certified public accountant has prepared a tax return does not

mean that he or she has opined on any or all of the items

reported therein.” Neonatology Assocs., 115 T.C. at 100. 

Nothing in the record suggests that the accountant knew

Barone’s reasons for erecting the NTC Joint Venture,

information the accountant would need in order to opine on

its validity for tax purposes. See Treas. Reg. § 1.6664-

4(c)(1)(i) (listing the taxpayer’s purpose for a transaction as

information the adviser must consider). More importantly,

nothing in the record indicates that Taxpayers even asked the

accountant for such an opinion. Instead, the record reveals

only that the accountant prepared tax returns for the entities

involved in the joint venture based on data supplied to him. 

Taxpayers have not met their burden of showing reasonable

reliance on the accountant’s advice. See Treas. Reg.

§ 1.6664-4(b)(1); Higbee, 116 T.C. at 449.
DJB HOLDING CORP. V. CIR 33

C. Taxpayers Cannot Show That the Understatement

of Income Was Due to a Reasonable

Misunderstanding of Tax Law Because the

Principles Governing Whether a Partnership Is

Valid Are Well Settled.

A taxpayer may show reasonable cause and good faith

where the law governing its position “w[as] not settled” when

the taxpayer asserted it. See Patel v. Comm’r, 138 T.C. 395,

417 (2012) (finding that a taxpayer reasonably claimed a

deduction where the law governing the deduction’s

availability was in an “uncertain state”). Taxpayers argue

that their position that the NTC Joint Venture was a valid

partnership is reasonable because the law governing it is

complex. They have missed the point of Patel. The law may

be complex, but it is not unsettled. The Luna factors have

been the law for fifty years. See Luna, 42 T.C. at 1067; see

also Bergford v. Comm’r, 12 F.3d 166, 168–69 (9th Cir.

1993) (applying the Luna factors). Taxpayers offer no

authority for their suggestion that the complexity of the Luna

factors alone should excuse their failure to conduct the NTC

Joint Venture as a valid partnership.

We conclude that the Tax Court did not err in upholding

the Commissioner’s assessment of accuracy-related penalties.

CONCLUSION

WB Partners offered nothing to the NTC Joint Venture

that it was not already contractually obligated to provide, and

WCI’s arbitrary reduction of WB Partners’ share of the

profits demonstrated that the parties did not intend to adhere

to the terms of the joint venture agreement. The Tax Court

therefore did not clearly err in finding that WCI and WB
34 DJB HOLDING CORP. V. CIR

Partners did not intend to operate the joint venture as a bona

fide partnership, and taxing all profits from the venture as

income to WCI accordingly. See Luna, 42 T.C. at 1077–79;

Culbertson, 337 U.S. at 742.

Further, though Barone and Watkins and their holding

corporations agreed to supply services to WB Partners,

Barone and Watkins were entitled to terminate their

employment with ninety days’ notice. Because Barone and

Watkins could leave WB Partners and provide services to

another environmental remediation company at any time,

their agreement not to compete with Kuranda may not be

imputed to WB Partners. The Tax Court therefore did not

clearly err in assigning WB Partners no portion of the $3.4

million proceeds of the noncompetition agreement. See

Beals’ Estate, 82 F.2d at 270; Cox, 71 F.2d at 988;

Culbertson, 337 U.S. at 739–40.

Finally, because Taxpayers have identified no substantial

authority or reasonable cause for their positions, the Tax

Court did not commit reversible error in assessing an

accuracy-related penalty. See 26 U.S.C. §§ 6662(a), (b)(2),

(d)(2)(B)(i), 6664(c)(1).

The decisions of the Tax Court are AFFIRMED.
Barone DJB Plan GSW Plan Watkins 

DJB GSW 

WB

Partners 

WB

Acquisition 

WCI 

100% 100%

50% 50%

100%

100%

NTC 

JV

70%

30%

Participant Participant 

DJB HOLDING CORP. V. CIR 35

APPENDIX