T.C. M em o . 2 0 1 8 -1 0

UNITED STATES TAX COURT
DAVID L. BRUNER, Pet i ti o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 3 6 51 -1 6
. Fi l edJ an uary3 0 , 2 0 1 8
.
Yal e F. Go l dberg , Dav i dR. J o jo l a, an dDerekW
. Kaczm arek , fo r p et i t i o n er. Do reen M ari e Su si , Rach ael J . Zep ed a, Ri ckV. Ho s l er, an dKat el yn n M
. W i nk l er, fo r res p o n d en t .

M EM ORANDUM OPINION LAUBER, J u d g e: Th i s cas e i s b efo re t he Co urto n p et i t i o n er’ s m ot i o n fo r awardo f l i t i g at i on an dad m i n i s trat i v e co s ts p u rs uan tt o s ect i o n 7 4 3 0 an dRu l e- 2
-

[* 2 ] 2 3 1
. 1 Nei th er p arty

req u es t eda h eari n g o n th i s m at t er, an d n o m at eri al facti s i n d i s p u t e. W e wi l l th erefo re d eci d e p et i t i o n er’ s m o ti o n o n th e b as i s o f t h e p art i es ’ s ub m i s s i o n s an dth e ex i s t in g reco rd . See Ru l e 2 32 (a)(1 ). W e co ncl u d e t h at p et i ti o n er i s n o tthe “ p rev ai l i n g p art y ” u nd er s ect i o n 7 4 3 0 (a) an d (c)(4 ) b ecau s e t h e p o s i t i o n o f t h e Un it edSt at es was “ s ub s t an t i al l y ju s t ifi ed ” wi th in th e m ean i n g o f s ect i o n 7 4 3 0 (c)(4 )(B). W e wi l l acco rd in g l y d en y p et i t i o n er’ s m o t io n fo r fees an d co s t s . Back gro u n d Th e fo l l o w i n g fact s are d eri vedfro m th e p art i es ’ p l ead i n g s an dm ot i o n p ap ers , i n cl u di n g th e d ecl arat i o n s an dth e ex h i b i ts at t ach edtheret o. Pet i t i o ner res i d
edi n Ari zo n a wh en h e fi l edh i s p et i t i o n. Du ri n g 2 0 1 1 an d2 0 1 2 , th e rel ev an tt ax y ears , p et i ti o ner was a m em b er o f Ci rcl e Ro adFi n an ci al , LLC (Ci rcl e Ro ad ), a t wo -m em b er LLC fo rm ed i n 2 0 0 4
. Atal l rel ev an tt im es Ci rcl e Ro adh as b een treat edas a p art ners h i p fo r Fed eral i n co m e t ax p u rp o ses . Ci rcl e Ro ad ’ s o ri g i nal o p erat i n g ag reem en t, d at edDecem
1 Un l es s o th erwi s e n o t ed , al l s t atu t o ry referen ces are t o th e In tern al Rev en u e Co d e i n effect atal l rel ev an t t i m es , an dal l Ru l e referen ces are t o th e Tax Co u rt Ru l es o f Pract i ce an dPro cedu re. W e ro un dal l m o n et ary am o un t s t o th e n eares t d o l l ar.- 3
-

[* 3 ] b er 1 , 2 0 0 4 , p ro v i d edth at each m em b er h ada 5 0 % “p art ici p at i o n p ercen t ag e”
an d th atp ro fi t s , l o s s es , an dd edu ct i o n s wo ul db e al l o cat ed5 0 % t o each m em b er. OnJ an u ary

1 , 2 0 0 6 , Ci rcl e Ro ades t ab l i sh eda d efi n ed b en efi t p l an u n d er wh i ch i tm ad e co n tri b u t i o n s t o ret i rem en tacco u n t s s etup fo r t h e m em bers ’ b en efi t . Ci rcl e Ro adco n tri b u t edt o th atp l an $ 2 8 8,8 9 7 i n 2 01 1 an d $ 65 0 , 4 5 4 i n 2 0 1 2
an d cl ai m edd edu ct i o n s fo r t h o s e co nt ri b u t i on s . OnSch edu l es K-1 , Part n er’ s Sh are o f In co m e, Dedu ct i on s , Cred i t s , et c., Ci rcl e Ro adal l o cat edt o p et i t i o n er ap p ro x im at el y 9 2 % o f t h e 2 0 1 1 co n tri b u t io n 2 (v i z., $ 2 6 5,5 6 0 ) an d1 0 0 % o f t h e 2 01 2
co n tri b u t i o n (v i z., $ 6 5 0,4 5 4). Onh i s Fo rm s 1 0 40 , U.S. In d i v idu al In co m e Tax Retu rn , fo r 2 01 1 an d2 0 12 , p et i t i o ner rep o rt edfl o w-t hro u g h d edu ct i o n s o f $ 2 6 5 ,5 6 0 fo r 2 0 1 1 an d$ 6 4 0,4 5 4 fo r 2 0 1 2
. 3 Th e IRS s el ect edCi rcl e Ro ad ’ s an d p et i t i o n er’ s 2 01 1 an d 2 0 1 2 retu rn s fo r
ex am i n at i o n . Duri ng i t s ex am i n at i o n th e IRS ch al l en g edCi rcl e Ro ad ’ s al l o cat i o n t o p et i ti o n er o f am o u n t s ex ceed i n g 5 0 % o f t h e ret i rem en tp l an co n tri b u t i o n s . Ci rcl e Ro ad h adam en dedi ts o p erat i n g ag reem en tfi v e t i m es b etween 2 0 0 8 an d2 0 1 2

2 Th e b al an ce o f Ci rcl e Ro ad ’ s 2 0 1 1 co n tri b u t io n was m ad e o n b eh al f o f i t s o th er m em

b er, En eas Kan e, an dth atp o rt io n o f t h e co n tri b u ti o n was al l o cat edt o h i m . 3 It i s u ncl ear wh y p et i t io n er fo r 2 0 1 2 rep o rt eda fl o w-t h ro ug h d edu ct i o n o f $ 6 4 0 ,4 5 4 , o r $ 1 0 ,0 0 0 l es s than th e am o u n trep ort edt o h im o n th e Sch edu l e K-1
.- 4
-

[* 4 ] t o m ak e ex cep ti o n s t o th e 5 0 -5 0 al lo cat i on o f cert ai n p art n ers h ip i t em s . Bu t
n o n e o f t h es e am en dm en t s ad dres s edal lo cat i o n o f ret i rem en tp l an co n tri b u t i o n s , an d p et i t i o n er p ro v id edn o d ocu m en t at i o n t o s ubs t an ti at e t h atan am en d m en t ad dres s i n g th i s s ub

jecth adb een m ad e. OnM arch 2 3 , 2 0 1 6 , th e IRS s en tp et i t i o n er a n o t ice o f d efi ci en cy d et erm i ni n g d efi ci en ci es o f $ 46 ,4 7 3 fo r 2 0 1 1 an d$ 1 1 0 ,3 3 0 fo r 2 0 1 2 . Th es e d efi ci en ci es refl ect edp art i al d i s al l o wan ce o f fl o w-t h ro u g h d edu ct io n s fro m Ci rcl e Ro adat t ri b
u t ab l e t o th e ret i rem en tp l an co n t ri b u t i o n s . Onth e at t ach edFo rm 8 8 6 A, Ex p l an at i on o f It em s , the IRS s t at ed : Becau s e y o u r d i s tri b u t i ve s h are o f t h e d edu ct i o n s fo r t h e co n tri
b u t i on s t o th e ret i rem en t p l an s p o ns o red b y Ci rcl e Ro adFi n an ci al , LLC are l i m i t ed t o th e am o u n t s al l o w edi n th e o perat in g ag reem en t fo r Ci rcl e Ro adFi n an ci al , LLC, y o uare al l owedd educt i o ns fo r t h e co n tri b u t i o n s t o th e Pl ani n th e am o u n t s o f $ 1 3 2 ,7 80 an d $ 3 2 5 ,2 2 7 , fo r t h e t ax ab le y ears 2 0 1 1 an d 2 01 2 , res p ect i v el y . Th erefo re, y o u r t ax ab l e i n co m e i s i n creas edb y $ 1 3 2 ,7 80 an d$ 3 15 ,2 2 7 , fo r t h e t ax ab l e y ears 2 0 1 1 an d2 0 1 2 , res pect i vel y . Fo r 2 0 1 1 t he IRS al l owedp et i t i o n er a d edu ct i o n fo r 5 0 % o f th e am o u n tth at Ci rcl e Ro adh adco nt ri b ut edan dal l o cat edt o h im ($ 2 6 5 , 5 60 ÷ 2 = $ 1 3 2,7 80 ). Fo r 2 0 1 2 the IRS al lo w edp et it i o n er a d edu ct i o n fo r 5 0% o f t h e t o t al am o un tth atCi rcl e Ro ad h adco nt ri b ut edan dal l o cat edt o h im ($ 6 5 0 , 4 54 ÷ 2 = $ 3 2 5,2 27 ). Be-- 5
-

[* 5 ] cau s e p et it i on er fo r 2 0 1 2 h adcl ai m eda d edu ct i on o f o n l y $ 6 4 0 ,4 54 , th e ad ju s t m en tt o h i s i n co m e fo r t h aty ear was $ 3 1 5 , 2 2 7
. Pet i t i o ner t i m el y

p et it i o n edth i s Co u rtfo r red et erm in at i o n . Inh i s p et i t i o n h e al l eg edth atCi rcl e Ro ad ’ s m em b ers h ad m o d i fi edth e o perat i n g ag reem en tt o p erm i t“ a s p eci al al l o cat i o n o f t h e d edu ct i o n ati ss u e” an dth atthei r “ es t ab l i s h ed
co u rs e o f d eal in g an dp erfo rm an ce was t o s p eci al ly al l o cat e” t h i s d edu ct i o n. On J u l y 1 3 , 2 0 1 6, res p o n d en tfi l edh i s an s wer, d en y i n g fo r l acko f s ub s t an t i at i o n p et i ti o n er’ s al l eg at i o n th atCi rcl e Ro ad ’ s o p erat i n g ag reem en th adb een m o d i fi edi n th i s way . OnDecem

b er 6 , 2 0 16 , p et i ti o ner p ro v id edt o th e IRS Ap peal s Offi ce a d ecl arat i o n fro m

Ci rcl e Ro ad ’ s o th er m em b er, En eas Kan e. In th at d ecl arat i o n M r. Kan e av erred thatCi rcl e Ro adh ads p eci al l y al l o cat edt o p et i t i o ner “ b o th the co s t
an d acco m

pan y i n g d edu ct i on at tri b u t ab l e t o t h e p en s io n b en efi t.” He al s o av erred th at : (1 ) Ci rcl e Ro ad ’ s “ s p eci al al l o cat i o n s were refl ect edi n th e res p ect iv e m em b er’ s cap i t al acco un t s ”; (2 ) h e “ ag reedt o t h e s p eci al al l o cat i o n s an dth e way th ey
were m ad e”; (3 ) t he s p eci al al lo cat i o n s were “ co n s i s t en twi th o u r eco n o m i c s h ari n g arran g em en ts an d* * * [t h e] o p erat i ng ag reem en t as m o di fi ed ”; an d (4 ) Ci rcl e Ro ad ’ s “ es tab l i s hedco u rs e o f d eal i n g an d p erfo rm an ce was t o s p eci al l y al l o cat e th e p en s i o n d educt i o n . ” Th e IRS Ap p eal s Offi ce accep t edM r. Kan e’ s d ecl arat i o n- 6
-

[* 6 ] as es t ab l i s h in g thath e an d p et i ti o n er h ado ral l y m o d i fi edCi rcl e Ro ad ’ s
o p erat i n g ag reem en tt o al lo w a s p eci al al l ocat i o n o f t h e d efi n edb en efi tp l an
co n tri b u t i o n s. Onthatb as i s, th e p art i es b eg and i s cu s s i n g a s et tl em en t o f th e
u n d erl y i n g t ax i ss u es . OnAp ri l 1 0 , 2 0 1 7, res p o n d en tfi l eda m ot i o n fo r l eav e t o fi l e an am en d m en t t o an s wer, wh i ch we g ran tedo n M ay 1 , 2 0 1 7
. Inth e am en d m en tt o an s wer res p o n den tn o t edth atp et i t i o n er’ s al l o wab l e d edu ct io n s were s ub jectt o th e “ earn ed i n co m e” l i m i t at i o n i n s ect io n 4 0 4 (a)(8 )(C). (Th ats ect i o n p ro v i d es i n p artth atcert ai n ret i rem en tp l an co n tri b u t i on d edu ct i o n s are l i m i t edt o the earn edi n co m e an i n d i v i du al d eri v es fro m

the t rad e o r b u s i n es s wi th res p ectt o wh i ch th e p l an i s es t ab l i s h ed .) Th e p art i es s ub s equ en t l y ag reedth atthi s l i m i t at i o n d o es n o tap p l y fo r 2 0 1 1 b ecau s e p et i t i o n er’ s ad ju st edearn edi nco m e ($ 5 2 0 ,0 53 ) ex ceed ed th e al l o cat i on t o p et i t i on er t h atth e p art i es ag ree i s p ro p er ($ 2 6 5,5 60 ). Th e p art i es ag ree t h at th i s l i m i t at i o n d o es ap p l y fo r 2 0 1 2 b ecau s e p et i t i o ner’ s ad ju s t edearn edi n co m e ($ 4 8 9,6 8 7 ) was l o wer t h an th e al l o cat i o n t o p et i t i o ner up o n wh i ch th e p art i es h av e ag reed($ 6 4 0 ,4 5 4 ). OnM ay 1 5 , 2 0 1 7 , th e p art i es fi l eda s t ip u lat i o n o f s et t l edi s s u es i n wh i ch th ey ag reedth at : (1 ) p et i t i o n er’ s d i s tri b u t i v e s h are o f t h e d edu ct io n at tri b u t ab l e t o Ci rcl e Ro ad ’ s ret i rem en tp l an co n tri b u t i o n s i s $ 26 5 ,5 6 0 fo r 2 0 1 1 an d$ 64 0 ,4 5 4 fo r- 7
-

[* 7 ] 2 0 1 2 ; (2 ) p et it i o n er i s en t i t l edt o fl o w-t h ro u g h d edu ct i o ns o f $ 2 65 ,5 6 0 fo r 2 0 1 1 an d$ 4 8 9 ,6 8 7 fo r 2 0 1 2; (3 ) t h ere i s n o d efi ci en cy fo r 2 0 1 1 ; an d(4 ) t h ere i s a d efi ci en cy

o f $ 5 2 , 7 6 9 fo r 2 0 1 2 . Th i s s ti p u lat i o n “ res o l v e[d ] al l i s s ues i n th i s cas e
o th er t han p et i t i on er’ s cl ai m fo r l i t i g at i o n an dad m i n i s trat iv e co s t s . ” OnJ u n e 1 4 , 2 0 1 7 , p et i t i o n er fi l eda m o t i on fo r reas o n ab l e l i t i g at i o n an dad m i n i s trat iv e co s t s , an d fu rth er b ri efi n g en s ued
. Di s cu ss i o n A. Go v ern in g St atut ory Fram ewo rk Sect io n 7 4 3 0 p ro v i des fo r t h e awardo f l i t i g at io n an d/ o r ad m i n is trat i v e co st s t o a t ax p ay er i n a p ro ceed in g i nv o l v i n g th e d et erm i n at i o n o f an y t ax , i n t eres t , o r p en al ty . Su ch an awardm ay b e m ad e wh ere t h e t ax p ay er can d em o n s trat e t h ath e: (1 ) i s th e “p rev ai l i n g p art y ”; (2 ) h as ex h au s t ed ad m i ni s trat i v e rem ed i es wi th i n th e IRS; (3 ) h as n o tu n reas o n ab l y p ro tract edth e p ro ceed i n g ; an d(4 ) h as cl ai m ed“ reas o n ab l e” co s t s . Sec. 7 4 30 (a), (b )(1 ), (3 ), (c)(1 ) an d(2 ); Po l z v . Co m m is s i o n er, T.C. M em o . 2 01 1 -1 1 7 ; Ng u y en v . Co m m i s s io n er, T.C. M em o . 2 0 0 3 -3 1 3
. Th es e req u i rem en t s are co n

j un ct i v e; fai l u re t o s at i s fy an y o n e p recl u d es an awardo f
co s t s t o t h e t ax p ay er. See M in ah an v . Co m m i s si o n er, 8 8 T.C. 4 9 2 , 4 9 7 (1 9 8 7 ); M art en v . Co m

m i ss i o n er, T.C. M em o . 2 0 0 0 -1 8 6 . Res po n d en tco n ced es th atth e- 8
-

[* 8 ] s eco n d , th i rd , an dfo u rt h req u i rem en t s are s at i s fi ed h ere. Th u s , th e o nl y qu es ti o n i s wh et her p et i ti o n er i s th e “ prev ai l i ng p art y .” To b e t h e “ p rev ai l i ng p art y ,” a t ax pay er m u s ts at is fy

a n etwo rth req u i rem en t . Sect i o n 7 4 3 0 (c)(4 )(A)(i i ) p ro v id es , wi th refi nem en ts i n ap p o s i t e h ere, t h ata t ax p ay er can n o t b e a “ prev ai l i n g p art y ” u n l es s h e i s a “ p art y ” wi th i n th e m ean i ng
o f 2 8 U.S.C. s ec. 2 41 2 (d )(2 )(B). Th at s ect i o n p ro v i d es i n p ert i n en tp artas fo l l o w s :

“ [P] art y ” m ean s (i ) an i n d i v idu al wh o s e n etwo rth d i dn ot ex ceed $ 2 ,0 0 0,0 0 0 * * * , o r (i i ) an y o wn er o f an u n i n co rp o rat edb u s i n es s, o r an y p art n ers h i p , co rp o rat i o n , as s oci at i on , u ni to f l ocal g o v ern m en t , o r o rg an i zat i o n , th e n et wo rt h o f wh i ch d i dn o tex ceed $ 7 ,0 0 0 ,0 00 atth e t i m e t h e ci v i l act i o n was fi l ed , an dwh ich h adn o tm o re t h an 5 00 em p l o y ees * * * To b e a “ p rev ai l i ng p art y , ” t h e t ax pay er m u s tal s o es t ab l i s h thath e “ s ub s t an t i al l y p rev ai l ed ” wi th res pect to ei ther t h e am o u n ti n co n tro v ers y o r t he m o s t s i g n i fi can t
s eto f i ss u es p res en t ed . Sec. 7 4 3 0 (c)(4 )(A)(i ). Th e t ax p ay er h as th e b u rd en o f p ro v in g s at i s fact i o n o f b o th req u i rem en t s . Ru l e 2 3 2 (e). B. An al y s i s Th e p art i es i n i t i al l y

d i s p u t e wh et h er p et i t i o n er s at i s fi es th e n etwo rth requ i rem en t . Pet i t i o n er co n ced es th ath i s p ers on al n etwo rt h h as “ ex ceed [ed ] s ev en
m i l l io n d o l l ars atal l t i m es rel ev an tt o s eek i n g an awardo f co s t s i n thi s m at t er.”- 9
-

[* 9 ] Res po n den tco n t en d s th atth e $ 7 m i l l i o n n etwo rt h l i m i t at i o n i n 2 8 U.S.C.
s ec. 2 4 12 (d )(2 )(B)(i i ) ap p l i es t o p et i t i o n er as “ an [] o wn er o f an u n i n co rp orat ed b u s i n es s ” an dth ath e t h erefo re can n o t qual i fy as a “ p rev ai l i n g p art y ” wi th i n th e
m ean i n g o f s ect i o n 7 4 3 0 (c)(4 )(A)(i i ). See s ec. 3 0 1 .7 4 3 0 -5 (g )(3 )(i i ), Pro ced . & Ad m i n . Reg s. Pet i t i o n er co n t en d s th at th e $ 7 m i l l i o n n etwo rt h l i m i t at i o n ap p l i es t o the “ u n i n co rp o rat edb u s i nes s” rat h er t h an i t s o wn er; thatCi rcl e Ro adh ada n et
wo rt h o f l es s than $ 7 m i l l io n an dfewer t h an 5 0 0 em p l o y ees atal l rel ev an tt i m es ;
an d th atp et i t io n er, as an o wn er o f Ci rcl e Ro ad , i s th us a “ p arty ” as d efi n edi n 2 8 U.S.C. s ec. 2 4 12 (d )(2 )(B). Gi ven o ur d i s p os i t i o n, we n eedn o t d eci d e t h i s th res ho l dqu es t i o n. As s u m i ng arg u en d o th atp et i t i o n er co u l dm eetth e n etwo rt h req u i rem en t, h e
wo u l ds t i l l n o tb e t h e “ p rev ai l i ng p art y ” u n l es s h e “ s ub st an t i al l y p rev ai l ed ” wi t h
res p ectt o t h e am o u nti n co n tro v ers y o r t h e m os ts i g n i fi can ts et o f i s su es p res en t ed . A t ax p ay er wi l l n o tb e treat edas th e p rev ai li n g p art y i f “ th e p o si t io n o f th e Un i ted St at es i n th e p ro ceed i ng was s ub st an t i al l y ju s ti fi ed .” Sec. 7 4 3 0 (c)(4 )(B)(i ). Th e p o s i t i o n o f t h e Un i t edSt at es i s “ s ubs t an ti al l y ju st i fi ed ” i f i ti s “

ju s t i fi ed t o a d eg ree t hatco u l ds at i s fy a reas o n ab l e p ers o n ” an dh as a “ reas o n ab l e b as i s b o th i n l aw an d fact .” Swan so n v . Co m m i s s i o n er, 1 0 6 T.C. 7 6 , 8 6 (1 9 9 6) (q u o t i n g Pi erce v . Un d erwo o d , 4 8 7 U.S. 5 5 2 , 5 6 5 (1 9 8 8 )); s ee al so Sh er v . Co m m i ss i o n er,- 1 0 -

[* 1 0 ] 8 6 1 F.2 d1 31 , 1 3 4 -1 3 5 (5 th Ci r. 1 9 8 8 ), aff’ g 8 9 T.C. 7 9 (1 9 87 ); Po wers v . Co m m i s s i o n er, 1 0 0 T.C. 4 5 7 , 4 7 0 (1 9 9 3), aff’ d i n p art , rev ’ di n p art , 4 3 F.3 d1 7 2 (5 th Ci r. 1 9 9 5 ). Th e d et erm i n at i o n o f reas o n ab l en es s i s b as edo n al l th e fact s o f th e cas e an dth e av ai l ab l e l eg al p reced en t . Co as t al Pet ro l . Refi ners , In c. v . Co m m i s s i o n er, 9 4 T.C. 6 8 5, 6 8 8 , 6 94 -6 9 5 (1 9 9 0 ). W h ere a fact u al d et erm i n at i o n i s requ i red , th e p o s i t i o n o f t he Un i t edSt at es i s s ub s t an t i al ly ju s t i fi edu n ti l th e t ax p ay er h as p ro v i d eds ubs t an t i at i o n s uffi ci en tt o ju s t i fy res o l u t i o n o f t hatfact u al i s s u e i n h i s fav o r. Go ert l er v . Co m m i s si o n er, T.C. M em o . 2 0 0 3 -1 3 6 , 8 5 T.C.M . (CCH) 1 2 9 7 , 1 2 9 9
.

“ Th e Co m

m i s s i on er’ s p o s i t i o n m ay b e s ubs t an t i al l y

ju s t ifi edev en i f i n co rrect ‘ i f a reas o n ab l e p ers o n co u l dth i n ki tco rrect .’ ” Fi t zp at ri ckv . Co m m i s s i o n er, T.C. M em o . 2 01 7 -8 8 , at* 5 -* 6 (qu o t i n g M ag g i e M gmt . Co . v . Co m m is s i o n er, 1 0 8 T.C. 4 3 0 , 4 4 3 (1 9 9 7 )). Th e fact th atth e IRS l o s es a cas e o r m ak es a co n ces s i o n

“ d o es n o t b y

i t s el f es tab l i s h th atth e p o s i t i o n t ak en i s u n reas o n ab l e” b u ti s “ a fact
o r t h at m ay

b e co n s i d ered .” M ag g i e M g m t. Co ., 1 0 8 T.C. at4 4 3; s ee W i l fo n g v . Un i ted St at es , 9 9 1 F.2 d3 59 , 3 6 4 (7 th Ci r. 1 9 9 3); So k o l v . Co m m i s si o n er, 9 2 T.C. 7 6 0 , 7 6 7 (1 9 8 9); Fi tzp at ri ck , at* 6
. Wh ere a t ax pay er s eek s b o th l i ti g at io n an dad m i n i s trat i v e co s ts , we ap p l y th e “ sub s t an ti al l y

ju s t i fi ed ” s t an d ardt o th e IRS’ p o s i t i o n o n two s ep arat e d at es .- 1 1 -

[* 1 1 ] Fo r p u rp o ses o f th e ad m i n i s trat i v e p ro ceed i ng , th e IRS’ p o s i t i o n i s that t ak en atth e earl i er o f: (1 ) t h e d at e t h e t ax p ay er recei v es the d et erm i n at i o n o f t he IRS Ap p eal s Offi ce o r (2 ) t h e d at e o f t h e n ot i ce o f d efi ci en cy . Sec. 7 4 3 0(c)(7 )(B). Fo r p urp o s es o f a Tax Co urt p ro ceed i n g , th e IRS’ p o si ti o n g en eral l y i s th att ak en atthe t im e t h e Co m

m i ss i o n er fi l es h i s an s wer. E.g ., Sh er, 8 6 1 F.2 dat1 3 4 -1 3 5
. Res p o n d en tm ai n t ai n edth e s am e p o s i t io n i n th e n o t i ce o f d efi ci en cy an di n h i s an s wer t o th e p et i t io n , v i z., th atp et i t i o ner was n oten t i t l edt o cl ai m fl owth ro u g h d edu ct i o ns fo r am o u n t s ex ceed i n g 5 0 % o f Ci rcl e Ro ad ’ s d efi n edb en efi t p l an co n tri b u t i o n s. W e acco rd i n g l y ev al u at e th os e p o s i t i o n s t og et h er. See Hu ffm an v . Co m

m i s s i on er, 9 7 8 F.2 d1 13 9 , 1 1 4 4 -1 1 4 7 (9 th Ci r. 1 9 9 2 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o. 1 9 9 1 -1 4 4 ; M ag g i e M g m t . Co
. , 1 0 8 T.C. at 4 4 2 ; Co o l ey
v . Co m m i s s i o n er, T.C. M em o . 2 0 1 2 -1 6 4
. Th e reg u l at i o n s p ro v i d e t h at , fo r co n tri bu t io n s t o a d efi n edb en efi tp l an , a p art n er’ s d i s tri b u ti v e s h are o f (i ) co n tri b ut i o n s m ad e o n b eh al f o f s el f-em p l o y ed i n d i v i du al s an d(i i ) d edu ct io ns fo r s u ch co n tri b u t io n s i s d et erm i n edi n th e s am e
m an n er as h is d is tri b u ti v e s h are o f p art n ers h i p t ax ab l e i n co m e. Sec. 1 .4 04 (e)- 1 A(f), In co m e Tax Reg s . Sect i o n 7 0 2(a) p ro vi d es thata p artn er (o r m em ber o f an LLC treat edas a p artn ers h i p ) s h al l t ak e i nt o acco u nth i s d i s tri b u t i v e s h are o f t h e p art n ers hi p ’ s i tem s o f i n co m e an dd edu ct io ns . Sect i o n 7 0 4 (a) p ro v id es th ata p art -- 1 2 -

[* 1 2 ] n er’ s d i s tri bu ti v e s h are g en eral l y s h al l b e d et erm i n edi n acco rd an ce wi th th e p art n ers hi p ag reem en t . Sect i o n 7 6 1 (c) d efi n es a p art n ers h ip ag reem en tt o i n cl u de

“ an y m o di fi cat i o n s * * * m ad e p ri o r t o , o r at , th e t i m e p res cri b edb y l aw fo r t h e fi li n g o f t h e p art n ers hi p retu rnfo r t h e t ax ab l e y ear * * * wh i ch are ag reed t o b y al l th e p art n ers , o r wh i ch are ad o p t edi n s u ch o th er m an n er as m ay b e p ro v id edb y th e p art n ers hi p ag reem en t . ” M o d ifi cat i o n s t o a p art n ers h i p ag reem en tg en eral l y m ay b e m ad e o ral l y

o r i n wri t i n g. Sec. 1 .7 6 1 -1 (c), In co m e Tax Reg s. Onth e Fo rm

8 8 6A, the IRS ex p l ai n edth e ad ju st m en t s i n th e n ot i ce o f d efi
ci en cy b y s t at i ng th atp et i t i o n er’ s d edu ct i o n was “ l i m it edt o t h e am o u n t s al l o wed i n the o p erat i n g ag reem en tfo r Ci rcl e Ro ad .” Th e o p erat i n g ag reem en t s t at edth at p et i t i o n er h ada 5 0 % “p art i ci p at i o n p ercen tag e” an dth atal l p art ners h i p t ax ab l e i n co m e an d d edu ct i o ns , u n les s o th erwi s e s p eci fi ed , were t o b e al l o cat edi n acco rd
an ce wi th th at p art i ci p at io n p ercen t ag e. Th e ad ju s tm en t s th e IRS m ad e, l i m i t i n g p et i t i o n er’ s d edu ct i o n t o 5 0 % o f Ci rcl e Ro ad ’ s co n tri b u t io n s, co m p o rtwi th i t s
u n d ers t an d i n g th ath i s d educt i o n was l i m i t edt o wh atwas s t at edi n th e o p erat i n g ag reem en t . OnDecem

b er 6 , 2 0 16 , ro u g h l y fi v e m o n th s aft er res p o n d en tfi l ed h i s an s wer, co u n s el fo r p et it io n er p ro v i d edt o th e IRS Ap p eal s Offi ce a d ecl arat i o n fro m M r. Kan e, t h e o th er m em b er o f Ci rcl e Ro ad . Inth atd ecl arat io n M r. Kan e av erred- 1 3 -

[* 1 3 ] th ath e an dp et i t io n er h ado ral l y m o d i fi edth e o p erat in g ag reem en tt o au th o ri ze a s p eci al al l o cat i o n fo r ret i rem en tp l an co nt ri bu t i o n s an dthe fl o w-t hro u g h d educt i o n s at tri b u t ab l e t h eret o . Al th o u g h p et i t io n er h adp rev i o u s ly p ro v i d edth e IRS wi th wri t t enam en d m en t s th atm o d ifi edth e o p erat in g ag reem en t i n o th er
res p ect s , th i s was th e fi rs tev id en ce p et i t i o ner h ads up p l i ed o f ano ral am en d m en t affect i n g ret irem en tp l an d edu ct i o n s . 4 Aft er rev i ewi n g M r. Kan e’ s d ecl arat i o n , res p o n d en t ag reedt o co n ced e t h e d efi ci en cy fo r 2 0 1 1 an d reduce t he d efi ci en cy fo r 2 0 1 2 . W e fi ndth is p o s i t i o n t o b e reas o nab l e i n factan di n l aw. Res p o n d en tp ro p erl y

m ad e a p art i al co n ces s i on o f t h i s cas e aft er p et i t i o n er
s up p li eds ub s t an t i at i o n co n cern i n g th e cen tral fact ual i s s u e i n d i s p u te. Befo re res p o n den trecei vedthats ub st an t i at i o n , res p o n den t ’ s p os i t i o n --d i s al lo wi n g p et i t i o n er’ s fl o w-t h ro u g h d edu ct i on s t o th e ex t en tth ey ex ceed ed5 0 % o f Ci rcl e Ro ad ’ s
co n tri b u t i o n s--h ada “ reas o n ab l e b as i s b o th i n l aw an d fact ” an dwas “ j u s t i fi edt o a d eg ree t h atco ul d s at i s fy

a reas o n ab l e p ers o n .” Swan s o n , 1 06 T.C. at8 6 (qu o t i n g

4 Du ri n g th e ex am i n at i on th e IRS h adi s s u edm u l t i p le d o cu m en t req u es t s s eek i n g co p ies o f Ci rcl e Ro ad ’ s o rg an i zat i o n al d o cu m en ts , i n cl u d i n g al l “ am en d
m en t s , m o d i fi cat i on s , s up p lem en t al ag reem en t s , b y l aws , s i d e l et t ers , an dal l o th er ag reem en t s ” an d“ an ex pl an at io n fo r al l s p eci al al l o cat i o n o f th e Sch edu le K i t em s t o the res p ect i v e m em

b ers .” On e d o cu m en treq u es ts p eci fi cal l y s o u g h ti n fo rm at i on “ [t ] o d et erm i n e wh et h er t h e s p eci al al lo cat i o n o f t h e i n co m e an d l o s s i t em s o n Sch edu l e K are ap p ro p ri at e u n der § 7 04 (b ).” Pet i ti o n er p ro v i d edth e IRS wi th Ci rcl e Ro ad ’ s o ri g i n al o p erat i n g ag reem en tan dth e fi v e wri t t en am en d m en t s b u t n o ev i den ce o f an y o ral am en d m en t s .- 1 4 -

[* 1 4 ] Un d erwo o d , 4 8 7 U.S. at5 6 5 ); Ro sari o v . Co m m i s s i o n er, T.C. M em o . 2 0 0 2
- 2 4 7 , 8 4 T.C.M . (CCH) 3 9 2 , 3 9 3 . Becau s e t h e p o s it i on o f t h e Un it edSt at es was

“ s ub s t an t i al l y

ju st i fi ed ” u n der s ect i o n 7 4 3 0 (c)(4 )(B)(i ), p et i t i o ner was n ota

“p rev ai l i n g p art y ” an dth u s i s n o ten t i tl edt o an awardo f fees o r co s ts . See s ec. 7 4 3 0 (a), (c)(4 ). 5 To i m p lem en tth e fo reg o i n g , Anap p ro p ri at e o rd er an dd eci s i o n wi l l b e en t ered
.

5 Pet i t i on er ci t es v ari o u s d o cu m en t s g en erat eddu ri n g th e 2 0 1 1 an d2 0 1 2 au d it s , i ncl u d i n g n o t i ces o f p ro p o sedad j u s t m en t (NOPAs ) i s s u edt o Ci rcl e Ro ad , t o s up p o rth i s co n t en t i on th atth e IRS was p u rs u i n g v ari o u s l eg al th eo ri es , i n cl u d
i n g th eo ri es b as edo n s ect i o n 4 0 4 . Bu tth e t h eo ry o n wh i ch th e IRS u l ti m at el y s et t l edwas th atth e o p erat i n g ag reem en tcap p edp et i t i o n er’ s d edu ct i o n s at5 0 % o f Ci rcl e Ro ad ’ s d efi n edb en efi t p l an co n tri b u t i on s . Th e am en d edNOPA i s s u edt o Ci rcl e Ro ads t at edth at , b ecau s e p et i t i o n er an dM r. Kan e “ each h av e a 5 0 % p ro fi t s s h are, t he d edu ct i on s i n each t ax y ear are al l o cat ed5 0 / 5 0 t o each p art n er.” An das ex p lai n edi n th e t ex t , th e n o t i ce o f d efi ci en cy --t h e k ey d o cu m en ti n qu es t i o n --ad
v an cedthats am e p o s i t i o n .