T.C. M em o . 2 0 1 8 -6 1

UNITED STATES TAX COURT

DYNAM O HOLDINGS LIM ITED PARTNERSHIP, DYNAM O, GP, INC., TAX M ATTERS PARTNER, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

BEEKM A

N VISTA, INC., Pet i t i o ner v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 2 6 8 5 -1 1 , 8 3 9 3-1 2
. Fi l edM ay 7 , 2 0 1 8
.

M art i n R. Pres s , EdwardA. M aro d, Cl i n t o n R. Lo s eg o , Lu -An n M
. Do m i n g u ez, Al an S. Led erm an , an dJ o h n W . Terwi l l eg er, fo r p et i ti o n ers . Dav i dB. Fl as s i ng , Li s a M . Go l db erg , W i l l i am G. M erk l e, Ti m ot h y A. Sl o an e, an dG. Ro g er M ark l ey , fo r res p o n d en t.- 2
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[* 2 ] M EM ORANDUM FINDINGS OF FACT AND OPINION BUCH, J u d g e: Th e M o o g fam i l y h as b een v ery

s u cces s fu l i n real es t at e d ev el o p m en t . Th ei r real es t at e b u s i n es s o ri g i nat edi n Can ad a. Wh eni tex p an d ed i n t o th e Un i t edSt at es , they creat ed U.S. s ubs i d i ari es u n d er t h e Can ad ian s tru ctu re. Ov er t i m e s o m e fam i l y

m em b ers an db en efi ci al o wn ers o f t he Can ad i ans tru ctu re
m o vedt o th e Un i t edSt at es . Th e Can ad i an s tru ctu re p ro v edt o b e v ery t ax i n effi ci en t , p art i cu l arl y wh en i n co m e was d i st ri b u t ed(o r d eem edt o b e d i s tri bu t ed ) up th e Can ad i an o wn ers h i p ch ai n . To cu re t hi s i n effi ci en cy , th e fam i l y creat eda U.S.-b as eds tru ctu re an d b eg ans h i ft i n g as s et s t o th atn ew s tru ctu re. Th e as s ettran sfers t o o kp lace d u ri n g 2 0 0 5 , 2 0 0 6 , an d 2 0 0 7, the y ears i n i s s u e i n th es e cas es . 1 Inp art i cu l ar, U.S.
s ub s i d i ari es wi th i n t h e Can ad i an s tru ctu re m ad e ad v an ces t o en t i t i es wi th i n th e U.S.-b as eds tru ctu re t o fu ndDy n am o ’ s o p erat i o n s . Al s o , en t i t ies wi thi n th e Can ad i an s tru ctu re s o l di n co m e-p ro du ci n g as s et s t o en ti t i es wi th i n t h e U.S.-b as ed
s tru ctu re. Ov er t i m e, t h e effect was t o s h i ftth e U.S.-b as edi n co m e t o t h e U.S.- b as eds tru cture.

1 Th e y ears i n i s s u e fo r Dyn am o Ho l d i n gs Li m i t edPart n ers h i p are 2 0 0 5 , 2 0 0 6 , an d2 0 0 7 . Th e y ears i n i s s u e fo r Beek m an Vi s t a, In c., are 2 0 0 5 an d2 0 0 6
.- 3
-

[* 3 ] Th e Co m

m is s i o n er arg u es th atth i s p l an ni n g was i m pro p er. Th e Co m m i s s i o n er m ak es two p ri n ci p al arg u m en t s . Fi rs t , th e Co m m i s s i o n er arg u es th atth e ad van ces t o th e U.S.-b as eds tru cture were n o t b o n a fi d e l o an s . In s t ead , th e Co m m i s s i o n er arg ues th atwe s h o u l dtreat th e ad v an ces as g ift s . Th e Co m m i s s i o n er arg u es th atth i s treat m en two u l d res u lti n d eem edd i s tri b ut i o n s up th e Can ad i an o wn ers h ip ch ai n fo l lo wed b y d eem edg i ft s t o t h e o wn ers o f t h e U.S.- b as eds tru cture an d d eem edco nt ri bu t i o n s t o th e U.S.-b as eds tru cture. Th e Co m m i s s i o n er arg u es th atwi th h o ld i n g t ax es wo ul dap p l y wh en th e d eem ed d i s tri b u t i o n s m ad e t h ei r way acro s s th e b o rd er. In ad d it i on , th e Co m m i s s i o n er arg u es th ats o m e o f t h e as set s t h atwere s o l dt o th e U.S.-b as ed b us i n es s were s o ld b el o w fai r m ark etv al u e, g i v i ng ri s e t o g i ft s t h atare s ub jectt o th i s tri an g u l ar d i s tri b u t i o n th eo ry . W e fi n dth atth e ad v an ces were b on a fi d e l o an s. So m e o f t h e as set s , h o wev er, were t ran sferred atl es s th an fai r m ark etv al u e. FINDINGS OF FACT I. Th e M oo g Fam il y Th e M oo g fam i ly

m em b ers are s u cces s fu l real es t at e d ev el o p ers . Del i a M o o g i s a weal thy

Can ad i an wh o , du ri n g t h e y ears i n i s s u e, was i n h er s ev en t i es . M rs . M o o g ’ s d au g h t er i s Ch ri s t i n e M o o g , an dh er n ep hew i s Ro b ertJ u l i en . Fo r- 4
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[* 4 ] o v er h al f a cen tury , th e fam i l y s u cces s fu l l y

d ev el op edreal es t at e i n Can ad a,
an d fo r o v er 2 0 y ears , th ey s u cces s fu l ly

d ev el o p edreal es t at e i n th e Un it edSt at es . Ov er t h e y ears , M rs . M o o g en g ag ed i n es t at e p l an n i n g . Sh e b eg an m ak i n g g i ft s o f l arg e p o rt i o n s o f h er es t at e i n th e 1 9 9 0 s , an d s he co n ti n u edt o d o s o aft er th e y ears i n i s s u e. Sh e s tru ctu red m an y o f th e g ift s as 6 0 / 4 0 s pl i t s , g i v in g 6 0 % t o h er d au g h t er, Ch ri s t i n e, an d4 0 % t o h er n ep h ew, M r. J ul i en . 2 II. Beek m an Du ri n g th e y ears i n i ss u e, Beek m an Vi s t a, In c. (Beek m an Vi s t a), was a
co rp o rat i o n wh ol ly

o wn edb y

a Can ad i an en ti ty

co n tro l l edb y

M rs . M o o g . Beek m an Vi s t a was a h o l d i n g co m p an y thato wn eds ev eral p ro p ert y d ev el o p m en t
co m p an i es i n th e Un i t edSt at es . W e u s e “ Beek m an ” t o refer t o t h e g ro up o f
en t i t i es co n s i s t i n g o f Beek m an Vi st a an d i t s U.S. s ub s id iari es . Beek m an Vi s t a was o rg an i zedas a Del aware co rp o rat io n i n 1 9 8 4 t o en t er th e U.S. real es t at e m ark et . Beek m an Vi s ta was a wh ol l y o wn eds ub s i d i ary

o f a Can ad i an co rp o rat io n, Can ad a Sq u are M an ag em en t, Lt d . (Can ad a Squ are). Can ad a Sq u are was a wh o l l y o wn eds ubs i d i ary o f Ko l t er Pro p ert y

Co . Ko l t er Pro p erty Co .’ s p referred s h ares were h el d b y 1 2 3 10 2 4 On t ari o , In c., an dKo l t er

2 To av o idco nfu si o n , we refer t o Del ia M o o g as M rs . M o o g an dh er d au gh t er Ch ri s t i n e M o og as Ch ri s t i n e.- 5
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[* 5 ] Pro p ert y

Co .’ s co m

m o n s h ares an d o wn ers h i p co n tro l were h el db y 2 0 2 0 0 7 2 On t ari o , Lt d . 1 2 3 1 02 4 On tari o, In c.’ s co m m o n s t o ck

was h el di n a 6 0 / 4 0 s p l i t , wi th Del ia M o o g Fam i l y

Tru sth o l d i n g 6 0 % an dRo b ertJ u li en Fam i l y Tru s t h o l d i n g 4 0 %; M rs . M o o g o wn edal l o f i t s p referred s h ares . 2 02 0 0 7 2 On t ari o , Lt d.
was wh o ll y

o wn edb y

2 0 2 0 0 6 4 On t ari o , Lt d . 2 0 20 0 6 4 On t ari o, Lt d .’ s n o n v o t i ng
co m m o n s t o ckwas h el d i n a 6 0 / 4 0 s p l i twi th Del i a M o o g Fam il y Tru s t# 2 h o l d i n g 6 0 % an d Ro b ertJ u l i en Fam i l y Tru s t# 2 h o ld i n g 4 0 %; M rs . M oo g h el dal l o f i t s
v o t i n g co n tro l . M rs . M o o g ’ s o wn ers h i p o f t h e v o ti n g s to cko f 2 0 2 0 0 6 4 On t ari o , Lt d . g av e h er i n d irect co n tro l o v er Beek m an . M rs . M o o g , M r. Jul i en , an dCh ri s ti n e were am o n g th e b en efi ci ari es o f t h e tru s t s . Ch ri s t i ne was o n e o f t h e b en efi ci ari es o f t h e Del ia M o o g Fam i l y Tru s t , an d Ro b ert J ul i en was o n e o f t h e b en efi ci ari es o f t h e Ro b ertJ u l i en Fam il y Tru s t . Th e b en efi ci ari es o f t he Del i a M o o g Fam i l y Tru s t # 2 an d t h e Ro bert J u l i en Fam i l y Tru s t# 2 were M rs . M o og , Ch ri s t i n e an dh er d es cen d an t , an d M r. J u l i en an dh i s i m m ed i at e fam i ly . M r. Ju l i enan dM rs . M o o g were am o n g th e t ru s t ees o f t h e Ro b ert J ul i en Fam i l y

Tru s t# 2 an dth e Del i a M o o g Fam il y Tru s t# 2
. Beek m an ’ s p ri n ci p al b u s i n es s act i v i ty was real es t at e m an ag em en tan d d ev el o p m en t . Beek m an Vi s t a’ s s ub s i d i ari es o wn edan do p erat edo ffi ce b u i l d i n g s i n Dal l as , Tex as , an dd ev el op edres i d en t i al real es t at e i n s o ut h Fl o ri d a. Beek m an- 6
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[* 6 ] al s o h el da h ed g e fu nd p o rt fo l i o , the Dyn am o Fu n d , th atp ro du ced i nv es t m en t i n co m e. Th e h ed g e fu n d h adl o ckup p eri o d s , wh i ch l i m i t an i n v es t o r’ s ab i l i ty t o red eem th e i nv es t m en t. Al l b u to n e l o ckup p eri odex p iredo n J an u ary 1 , 2 0 0 6
. Beek m an ’ s m an ag em en tt eam h as a l o n g trackreco rd o f p ro fi tab l e real
es t at e p ro ject s . Th e m an ag em en tt eam o p erat ed u n d er t h e Ko l ter b ran dn am e
co m m o n t o Beek m an an di ts p aren tco m p an i es . M r. J u l ien an dM rs . M o o g were
am on g th e o ffi cers an dd i rect o rs o f Beek m an Vi s t a. Al tho u g h M rs . M oo g was an
o ffi cer an dd i rect or, M r. J u li en an dh i s t eam p ri m ari l y h an d l edth e d ev el op m en t p ro ject s. Th e Beek m an m an ag em en tt eam m em b ers wo rk ed t og et h er fo r d ecad es . M r. J u l ien h adwo rk edi n real es t at e wi th Ko l ter s i n ce t h e 1 9 8 0s , an deach o f t h e
o th er m em

b ers o f t h e t eam h ads i g ni fi can treal es t at e ex p eri en ce b efo re jo i n i n g Ko l ter. Th e m an ag em en t t eam h ada wel l -d efi n edp ro

j ects el ect i o n p ro ces s ; i t
wo u l dn o tb i do n p ro

ject s u nt i l co m

p l et i n g du e d i l i g en ce an d ru n n i ng fi n an ci al
m o del s t h atd em o n s trat edth atth e p ro jectwo u l db e a wo rth wh i l e i n v es t m en t . By th e earl y 2 0 0 0 s Beek m an ’ s b u s in es s h adch an g eds ub s t an t i al l y . Beek m an s o l d i t s Tex as an d Fl o ri d a ren t al p ro p ert i es , an dth e m an ag em en tt eam d eci d ed to fo cu s i ts effo rt s o n Fl o ri d a real es t at e d ev el o p m en t .- 7
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[* 7 ] In 2 0 0 4 M r. J u l i en m o v edt o Fl o ri d a, an d t h e rem ai n i n g m an ag em en tt eam
m em b ers fo l l o w ed . Beek m anal s o m o v edi t s p ri n ci p al o ffi ce an dm an ag em en t t eam fro m Can ad a t o Fl o ri d a. Fo l l owi n g h i s m o ve, M r. J u l i en d i s cu s s edwi th l eg al co n s ul t an t s h ow t o s et
up a l o ng -t erm b u s i n es s s tru ctu re i n th e Un i t edSt at es . M r. J u l i en b el i ev edth at l en d i n g i n s t i tu t i o n s were u n co m fo rt ab le d oi n g b u s i nes s wi th fo rei g n co m p an i es
s u ch as Beek m an an dth ata U.S.-o wn eds tru ctu re wo u l dp ro v i d e th e l en d i n g i n s t i tu t i o n s ad d i ti o n al co n fi d en ce i n th ei r p ro ject s o r b u si nes s . Th e m an ag em en t t eam was al s o co n cern edwi th t al en tret en t i on an db el i ev edth at a U.S. co m p an y
wo u l db et t er at tract an dret ai n y o u n g er p eo p l e. Th e m an ag em en tt eam was al s o
aware o f th e wi thh o l d in g t ax o n cro s s -b ord er d i s tri b u ti o ns fro m Beek m an Vi s t a t o Can ad a Sq u are. M rs . M o o g d eci d edt o fo rm a U.S. p art n ers hi p . Beek m an co n ti n uedt o o p erat e p ro fi tab l y fro m 2 00 5 t o 2 0 0 7 . Beek m an Vi s t a’ s es t i m at edearn i n gs an dp ro fi t s fo r t ax y ears 2 0 0 5 , 2 0 0 6 , an d2 0 0 7 were $ 3 4 ,5 0 4 ,9 8 0 , $ 1 41 ,1 15 ,2 79 , an d$ 1 3 8 ,4 0 6 ,0 1 1 , res p ect i v el y . 3 III. Dyn am o Dyn am o Ho l d in g s Li m i t edPart n ers h i p was fo rm ed i n earl y 2 0 0 5 as a Del aware l i m i t ed p art n ers h ip . W e u s e “ D yn am o Ho ld i n g s ” t o refer t o Dynam o

3 Al l d o l l ar am ou n t s are ro u n d ed t o th e n eares td o l l ar.- 8
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[* 8 ] Ho l di n g s Li m i t edPart n ers h i p , an d“ D yn am o ” t o refer t o th e g ro up o f en t i t i es
co n si s t i n g o f Dyn am o Ho l di ng s an dth e en t it i es o wn ed b y i t . Dy n am o Ho ld i n g s
was o wn edb y two tru st s th at were l i m it edp art n ers an d a co rp o rat io n th atwas a g en eral p art n er. Th e 2 00 5 Ch ri s t i ne M o o g Fam i l y Del aware Dyn as ty

Tru s th el da 5 9 .9 9 9 5 % l i m it edp art ners h i p i n t eres t , the 2 0 0 5 Ro b ertJ u l i en Fam il y Del aware Dynas ty Tru s th el da 3 9 .9 9 9 5 % l i m i t edp art n ers hi p i n teres t , an dDy n am o GP h el d a .0 0 1 % g en eral p art ners h i p i n t eres t . Th e b en efi ci ari es o f t h e U.S. tru s t s an dth e Can ad i an tru s t s were n o t id en t i cal . Dy n am o GP was o wn ed 6 0 % b y 2 0 2 0 0 7 2 On t ari o , Lt d ., o n e o f t h e Can ad i an co rp o rat io n s i n d i rect ly co n tro l l edb y

M rs . M o o g, an d 4 0 % b y

Ro b ertJ u l ien . 2 0 2 0 07 2 On t ari o , Lt d . was th e co m m o n i n d i rect o wn er o f Beek m an an d Dyn am o . Dyn am o Ho l d in g s was a h o l d i n g co m p an y th at o wn ed , ei th er d i rect l y o r i n d i rect l y , s ev eral s i n g l e-m em ber l i m i t edl i ab i l it y co m

pan i es th at were d i s reg ard ed fo r t ax p u rp o s es . Dy

n am o Ho l d i n g s d i rect ly

h el d Dyn am o , LLC, wh i ch d i rect l y h el dKo l t er Cap i t al , LLC, wh i ch d i rect l y h el d Ko l t er Co m

m u n i t i es , LLC, wh i ch d i rect l y h el dv ari ou s p ro p ert y

d ev el o p m en t co m

pan i es . Wh en Dy n am o Ho l d i n g s was fo rm ed , M rs . M o og fu n ded th e i n i t i al
co n tri b u t i o n b y

g i v i n g cas h t o t h e t wo tru s t s th atfu n dedDy n am o Ho l d in g s . M rs . M o o g g av e t h e t ru st s $ 1 0 0 m i l l i o n i n a 6 0 / 4 0 s p l i t , tran s ferri n g $ 6 0 m i l li o n t o th e- 9
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[* 9 ] Ch ri s t i n e M oo g Dyn as ty Tru s t(Ch ri st in e Dynas ty Tru s t ) an d$ 4 0 m i l l i o n t o th e Ro b ertJ u l i en Dy

n as ty Tru st(J u l i en Dy

n as ty Tru st ). M rs . M o o g recei v edthe $ 1 0 0 m i l li o n as a d i v i d en dfro m th e Can ad i an en t i t i es . Th i s $ 1 00 m i l l i o n p ro v id edDy

n am o wi th t h e m ean s t o b eg i n real es tat e d ev el o p m en ti n th e Un i t ed St at es .Dyn am o ’ s p ri n ci p al b u s i n es s was real es tat e d ev el o p m en tan ds al es i n Fl o ri da. Th e m an ag em en t t eam was th e s am e as the Beek m an t eam , an di t
co n ti n u edt o o p erat e u n d er t h e Ko l t er b ran dn am e. As i t h add o n e b efo re, t h e
m an ag em en tt eam

fo ll oweda wel l -d efi n edp ro ces s t o s el ectan db i do n p ro fi t ab l e p ro ject s. Ital s o p ro v i d edm an ag em en ts erv i ces t o Beek m an . Th e res u ltwas th at , al th o u g h Dyn am o was a n ewl y fo rm eds tru cture, i th adan ex p eri en cedreal es t at e d ev el o p m en tt eam . Fo r effi ci en cy

p u rp o ses , Dy

n am o cen tral i zedi t s o p erat i o n s . Th e
m an ag em en tt eam

h adcen tral i zedo p erat io n s fo r Beek m an an dth e o th er Can ad i an
co m p an i es . W i th the creat io n o f Dyn am o , th ey i m p l em en t edth e s am e ap pro ach
. No t o nl y were t h e em

p l o y ees an do v erh eadcen tral ized , b u tth e g ro up o f en t i t i es al s o cen tral i zedth ei r cas h m an ag em en t . To cen tral i ze t hei r cas h m an ag em en t , o n e en ti ty wo u l dfu n ct io n as th e b an k , an d wh en th e o p erat i n g co m p an i es p ro du cedcas h fro m o perat io ns , th ey

wo u l d- 1 0 -

[* 1 0 ] tran s fer t h o s e p ro fi t s t o th e b an k . Li k ewi s e, t h e b an kwo u l dad v an ce cas h t o th e o p erat i n g en ti t i es th ro u g h i n t erco m pan y ad v an ces . Th e o p erat i n g en t i t i es
wo u l dn o ts ubm i tap p l i cat i on s , u n d erg o cred i t ch eck s , o r ex ecu t e p ro m is s ory
n o t es . Th e m an ag em en tt eam d i dn o tb el i ev e t h atfo rm al p ro cedu res were
n eces s ary . Becau s e t h e b orro w er an dl en d er h adth e s am e m an ag em en tt eam , th e l en d er h adal l th e d et ai l s rel at edt o each p ro jectan dthe ri sk s as s oci at edwi th l en d i n g t o i t s s ub si d i ary o r co rp o rat e co u s i n . Th e i n t erco m p an y ad v an ces were b o o k edt o an as s etacco u n tan dt o an acco u n t l ab el edas “ du e fro m / t o ” b y th e l en d er an dth e b o rro wer an daccru ed i n teres tu n t i l they were rep ai d
. IV. Ad v an ces Bet ween Beek m an an dDy nam o Up o n fo rm at io n an dth ro u g h th e y ears i n i s s u e, Beek m an ad v an cedfu n d s t o Dynam o , an dDy

n am o reco rd edth e fu n d s o n i t s l ed g ers as an acco u n tp ay ab l e t o Beek m an . Th e y earen d b al an ces o f t h e ad v an ces were ap p ro xi m at el y $ 2 4 0
m i l l io n , $ 5 0 1 m il l i o n , an d$ 1 7 6 m i l l i o n i n 2 0 05 , 2 0 0 6 , an d2 0 07 , res pect i v el y . So m e o f t h e fu n ds th atBeek m antran s ferred t o Dyn am o were fu n d s th atBeek m an h ad recei v edas l o an s fro m Can ad a Sq u are. Th e p u rp o ses o f t h e ad v an ces were t o fu n d op erat i n g ex p en s es an dt o acq u i re as set s . Wh en Beek m an ad van cedfu n d s t o Dy n am o , s peci fi cal l y

th ro u g h Ko l t er Cap it al an dKo l ter Co m

m u ni t i es as th e cen tral i zedb an k s, the fu nd s were reco rd ed- 1 1 -

[* 1 1 ] o n th e g en eral l ed g ers i n th e “ du e fro m / t o ” acco un t . In t eres taccru edo n th at b al an ce. An dwh en Dy

n am o m ad e rep aym en ts , th e rep aym en t s were reco rd edo n th e g en eral l ed g ers as w el l
. Beek m an an d D y

n am o d i dn o tfo l l o w m an y cu st o m ary l en di n g p ract i ces . Beek m an d i dn o td em an dp aym en t s , requ i re co l l at eral o r s ecu ri ty , o r p ro v i d e a fi xeddu e d at e. Beek m an wo u l dn o th av e fo rcedDy n am o i n t o b an krup t cy

t o
co l l ectth e d eb t s . Th e Beek m an an dDy

n am o m an ag em en t t eam

d i dn o tb el i ev e t h atfo rm al l en d i n g p ro cedu res were n eces s ary . Th e co m p an i es s h areda s in g le m an ag em en t t eam th ath adfu ll kn owl ed g e o f an dacces s t o b o th co m pan i es ’ i n fo rm at i o n , an d th e co m pan i es h ada t h e l on g h i s t o ry o f ad v an ces an drep aym en t s o v er t h e y ears . Gi v enth atth e m an ag em en tt eam h adco n tro l o v er b o th th e l en ders an dth e b o rro wers , th ey

b el iev edth atfo rm al l en d i n g p ro cedu res were red u n d an tan d
u n n eces sary . Th ey

al s o b el i ev edth ati twas u n neces s ary t o d em an d p aym en t s b ecau s e p as trep aym en t s were m ad e wi th o u td em an d
. Beek m an an d D y

n am o treat ed th e reco rd ed tran s fers as d eb t. Beek m an ’ s
m an ag em en tex p ect edth atth e reco rd edtran s fers wo u l db e rep ai d , an dDy nam o ’ s
m an ag em en tex p ect edt o rep ay th e reco rd edtran s fers
.- 1 2 -

[* 1 2 ] Dyn am o m ad e rep aym en t s t o redu ce t h e o u ts t an d in g b al an ce each y ear, an d Beek m an n ev er t o o kan y

s t ep s t o en fo rce rep aym en t . Dy n am o rep ai dBeek m an wi th p ro ceed s Dy

nam o recei v edfro m

cap i t al co n tri b u t i o n s. Ital s o rep ai d i t s d eb t s t o Beek m an b y

m ak i ng wi re t ran s fers an db y p ay i n g Beek m an ’ s o u t s tan d i ng
o b l i g at i o ns t o th i rdp art i es . Fi nal l y , Dy n am o al s o rep ai db y p ro v i d in g
m an ag em en ts erv ices . Rat h er t h an co l l ect m an ag em en tfees fro m Beek m an o n l y t o return th em as p aym en to n th e d eb t , Dy n am o p ro v i d edm an ag em en ts erv i ces
an d Beek m an dedu ct edth e co sto f t h o se s erv ices fro m Dy n am o ’ s o ut s t an d i n g l oan b al an ce. A. Th e 2 0 0 7 Res tru ctu ri n g In 2 0 0 7 Dy

nam o en g ag edi n a s eri es o f t ran s act i o n s th atres tru ctu redth e ad v an ces t o m o re accu rat el y refl ectth e ad v an ces . As p arto f t h e t ran s act i o n s , Beek m an an d D y

n am o ex ecu t edres tru ctu ri n g d o cu m en t s , i n cl u di n g p ro m i s s o ry
n o t es ev i d en ci n g th e p ri or ad v an ces . Th es e ag reem en t s were ex ecu t edb y Feb ru ary 2 0 0 8 an dwo ul dn o th av e b een creat edi f t h e res tru ctu ri n g t ran s act i o n s h ad n o to ccu rred
.- 1 3 -

[* 1 3 ] In th e res tru ctu ri n g d ocu m en t s, Beek m an an d Dyn am o ag reedth at Beek m an h ad p rev i o u sl y

l en t Ko l t er Cap i t al $ 5 0 0 m i l l i o n . 4 Beek m an an dKo lt er Cap i t al ag reedt o d i v i d e t h e o u t s t an d i n g b al an ce i n t o th ree p art s , wi th Dyn am o , LLC
as s u m in g $ 2 2 0 m il l i o n th ro u g h a Dyn am o , LLC n o t e; RJ -K Newco , a n ewl y fo rm edKo lt er Cap it al s ub s i d i ary , as s u m i n g $ 1 4 6 , 6 6 6 ,6 6 7 th ro u g h an RJ -K Newco
n o t e; an dKo l ter Cap i tal m ai n t ai n i n g th e rem ai n d er, $ 1 3 4 m i l l i o n, o f t h e reco rd ed tran s fers t o Beek m an thro ug h th e Ko l t er Cap i t al n o t e. 5 Th e Ko l t er Cap i t al n o t e
was a rev o l v i n g cred i tfaci l i ty , an dth e Dyn am o , LLC an dRJ -K Newco n o t es were d em an dn o t es . Each n o t e h adreq u i redi n teres tt o accru e at th e Lo n d on In t erb an k Offeri n g Rat e fo r U.S. d o l l ar d ep o s i t s p l us 1 .8 5 %, p ay ab l e o n t h e fi ft h d ay fo l l o w i n g d em an d
. Beek m an an d D y

n am o d i dn o tab i d e b y

St at e l aws th ats erv e t o fo rm al i ze l en d i n g ag reem en t s . Dy

n am o d i dn o t p ay

an y St at e-l ev el d ocu m en t s tam p t ax o n

4 W e n ot e thatth ere i s an ap p ro x im at el y $ 5 3 m i l l i o n d i s crep an cy

b et ween th e am o un treco rd ed o n th e l oan d ocu m en t s an d th e am o un t s reco rd edo n th e g en eral l ed g ers . Th e t ot al am o u n ti n cl u d edi n th e p ro m i s s o ry n o t es fo r th e o u t s t an d i n g ad v an ces was $ 5 0 0,6 6 6 , 6 6 7 , wh ereas th e t o t al o u t s t an d i n g ad v an ces rep o rt edo n Dy

n am o ’ s g en eral l ed g er b efo re t h e res tru ctu ri n g tran s act io n was $ 5 5 4 ,0 3 0 ,2 5 4
.

5 Th e face am o u n t o f t h e RJ -K Newco n o te was $ 1 4 6,6 6 6 ,6 6 7; h o wev er, RJ -K Newco reco rd edo n ly $ 1 4 6 ,0 0 0 ,0 00 . W e fi n dth atth e am o u n to f t h e as s u m pt i o n was o n l y $ 1 4 6,0 0 0 ,0 0 0
.- 1 4 -

[* 1 4 ] th es e n o t es . Al s o as part o f t h e res tru ctu ri n g d o cu m en t s , Dy n am o an d Beek m an ex ecu teda s ecu ri ty ag reem en t ; h o wev er, t h e s ecu ri ty ag reem en twas
n ev er fi l edwi th th e Fl ori d a s ecret ary o f s t at e. In ad d i t i o n t o res tru ctu ri n g th e o u t s t an d i n g b al an ce, Dy n am o Ho l d i n g s d i s tri b u t edi n t eres t s i n d i s reg ard eden t i t i es th ath el dam o u n ts s ub st an t i al l y equ al t o th e am o un t s o f t h e n o t es . Dy n am o Ho l d i n g s d i s tri bu t ed Dyn am o , LLC t o Ch ri s t i n e Dyn as ty

Tru s t . Dy

n am o , LLC h el d t h e Dyn am o Fu n d , wh i ch h adas s et s
wo rt h ap pro xi m at el y

$ 2 20 m i l li o n . An dDy

n am o Ho l d i ng s d is tri bu t edRJ -K Newco t o th e J u l i en Dy

n as ty Tru s t , wh i ch h ad$ 1 4 6 , 6 6 6 ,6 6 7 i n as s et s co n s i s t i n g
o f $ 7 0 m i l l i o n cas h an d a $ 76 ,6 6 6,6 6 7 p ro m i ss o ry n o t e. B. Gen eral Led gers Th e g en eral l ed g ers o f Beek m an an dDy n am o refl ect edth e ad v an ces . Dynam o b o o k edal l o f t h e i n terco m p an y ad v an ces o n i t s g en eral l ed g er i n a “ du e t o / fro m ” acco u n t. Th es e b al an ces ch an g edd ai l y . Th e en tri es o n the g en eral l ed g er co u l dn o t b e eras edo r rep l aced ; i n st ead , i n co rrect en tri es h adt o b e rev ers ed b y ad d i n g ad d i t i o n al ad

j u s t m en ten tri es t o th e g en eral l ed g er. Attri al p et it i on ers cal l edSt ev en M os es t o ex p l ai n Dyn am o ’ s g en eral l ed g ers . M r. M os es h as o v er 3 0 y ears o f ex p eri en ce as a cert i fi edp ub l i c
acco u n t an tan dh as ex p eri en ce i n fo ren s ic acco u n t i n g . M r. M o s es s p en t th o u s an d s- 1 5 -

[* 1 5 ] o f h o u rs an al y zi n g th e fi n an ci al reco rd s o f Dyn am o an dBeek m an an d
s el ect ed reco rd s o f Can ad a Sq u are, each o f wh i ch m ai n t ai n eds ep arat e b o o k s . He p rep areds ch edu l es o f al l th e t ran s act i o n s reco rd edb y Dy nam o an d Beek m an fro m 2 0 0 5 t o 2 0 1 1
. Th ro u g h h i s rev iew o f t he fi n an ci al reco rd s , M r. M o s es d et erm in edth at du ri n g th e y ears i n i s s u e th e y earen d o ut s t an d in g b al an ces were $ 2 4 0 ,7 1 1 , 2 2 5 , $ 5 0 1 ,8 3 4 ,2 4 1 , an d$ 17 6 ,1 9 4 ,0 5 2 fo r 2 0 0 5 , 2 0 0 6 , an d2 0 0 7 , res p ect i v el y . Becau s e
en tri es co u l dn o tb e eras ed , M r. M o s es track edth e en tri es t o d et erm i n e wh et h er th ey h adb een rev ers edo r co rrect ed . He co n cl u d edth at th e o u t s t an di n g b al an ces
were en ti rel y

rep ai db y

2 0 1 1 . He al s o fo u n dth ati n 2 0 0 6 an d2 0 0 7 (as wel l as th e y ears fo ll o wi ng th e res tru ctu ri ng tran s act i o n ), i n t eres twas ch arg ed , accru edt o th e l o an b al an ce, an d p ai d as p art of t h e s at i s fact io n o f t h e l o an s . Fo r 2 0 0 5 M r. M o ses d et erm in edth at th e t o t al o u t s t an d i n g b al an ce du e was $ 2 4 0 ,7 1 1 ,2 2 5 , res u l t i n g fro m $ 3 7 8,2 4 2 ,8 5 1 o f adv an ces th ati n creas edth e b al an ce du e t o Beek m an an d $ 1 37 ,5 3 1 ,6 2 6 i n rep aym en t o r redu ct io n s t hatd ecreas edthe b al an ce du e t o Beek m an . Dy n am o reco rd edal l o f t h es e t ran s act io n s b u to n e o n Decem b er 3 1 , 2 0 05 . Th es e am o u n t s were refl ect edth ro u g h 5 5 t ran s fers b et ween Beek m an an d D y

n am o ; 1 6 o f t h o s e were rep aym en t s o r ad ju s t m en ts thatd ecreas ed- 1 6 -

[* 1 6 ] th e b al an ce o wedt o Beek m an . Dy nam o d i dn o t accru e an y

i n t eres to n th e
o u t s t an d i n g b al an ce i n 2 0 0 5
. Fo r 2 0 0 6 M r. M o ses d et erm in edth at th e t o t al o u t s t an d i n g b al an ce du e was $ 5 0 1 ,8 3 4 ,2 4 1 , res u l t i n g fro m $ 1 ,2 4 8 ,0 6 6 ,5 9 7 i n tran s fers th ati n creas edth e b al an ce du e t o Beek m an an d$ 9 8 6 ,9 4 3 ,5 8 1 i n tran s fers th atd ecreas ed th e b al an ce du e t o Beek m an . Th es e am o u n t s were refl ect edth ro u gh 3 6 7 tran s fers b et ween Beek m an an d D y

n am o ; 2 1 2 o f t h o s e were rep aym en t s o r ad ju s t m en t s th at d ecreas edth e b al an ce o wedt o Beek m an . On e o f t h e t ran sact i o n s th at i n creas ed th e t o t al am o u ntdu e was i n t eres to f $ 2 5 ,6 0 7 , 3 4 0
. 6 Fo r 2 0 0 7 M r. M o ses d et erm in edth at th e t o t al o u t s t an d i n g b al an ce du e was $ 1 7 6 ,1 9 4 ,0 5 2 res ul t i n g fro m $ 18 8 ,0 9 4 , 5 78 o f t ran s fers th ati n creas edth e b al an ce du e t o Beek m an an d $ 5 13 ,7 3 4 ,7 6 7 o f t ran s fers th atd ecreas edth e b al an ce du e t o Beek m an . Th es e am ou n t s were refl ect edth ro u g h 2 ,7 1 8 tran s fers b etw een Beek m an an d D y

n am o ; 2 ,5 45 o f t h o s e were rep aym en t s o r ad ju s t m en t s th at d ecreas edth e b al an ce o wedt o Beek m an . On e o f t h e t ran sact i o n s th at i n creas ed th e t o t al am o u ntdu e was i n t eres to f $ 1 7 ,2 2 0 , 4 9 3
.

6 Al th o ug h th e d es cri p t i o n s ay s “ i n t eres t am o u n t p ai d ”, M r. M os es t es t i fi ed th atth e i n t eres tam ou n taccru edt o th e l o an b al an ce an d was p ai das p arto f t h e s at i s fact i o n o f t h e l o an s .- 1 7 -

[* 1 7 ] M r. M o ses d et erm i nedthatth e ad v an ces were en t i rel y rep ai di ncl u d in g i n t eres ti n 2 0 11 . Th e Co m m is s i o n er d i dn o to ffer an y ex p ertwh o co n trad i ct edM r. M o s es . C. Co m

m erci al Len d i n g Pract ices Attri al th e Co m

m i s s io n er cal l ed Fi l m o re En ger t o ex p l ai n wh et her a
co m m erci al l en d er wo u l d h av e en t eredi n t o l o an s l i k e th o s e b et ween Dyn am o an d Beek m an . M r. En g er h as o ver 2 5 y ears o f ex p eri en ce i n th e co m m erci al l en d i n g
an d b an k i n g i n du s try . A co m m erci al l en d er i s ty

p i cal ly a co m m erci al b an k , b u ta co m

m erci al l en d er can al s o b e a n o n reg u l at edfi n an ci al co m p an y . M r. En g er ex p l ai n edth at th e b as i c el em en t s req ui redfo r a co m m erci al l o anare a s t at edp ri n ci p al am o u n t
an d i n teres trat e, d o cu m en t at i o n th atreq u i res p ri n ci p al an di n teres tt o b e rep ai d , an d a cred i tag reem en tthats p eci fi es th e t erm s an dco n d i t i o n s o f s u ch rep aym en t . He b el i ev edth atn o reas o nab l e co m m erci al l en d er wo u l dh av e g i v enDy n am o l o an s l i k e t h o s e fro m

Beek m an o n J u l y 1 , 2 0 0 5 , an d Decem b er 1 1 , 2 0 0 6, wi th o u t cred i tg u aran t i es o r co l l at eral , cred i tan al y s es , l oan d o cu m en t s, s tat edi n t eres t p aym en t s, o r fi x edm atu ri ty d at es .- 1 8 -

[* 1 8 ] D. Cap i t al A deq u acy Attri al p et it i on ers cal l edIs rael Sh ak edan dW i l l i am Ch am b ers t o t es t i fy

t o Dynam o ’ s ab i li ty

t o rep ay th e ad v an ces . Th e Co m

m i s s io n er cal l edCh ri s t o p h er Lu cas as an ex p ertt o ex p l ai n wh et h er Ko l ter Co m m u n i t ies an dKo l ter Cap i t al
co u ldh av e o bt ai n edth e ad v an ces fro m th i rd -p art y

l en d ers . 1
. Pro fes s o r Sh ak ed Pro fes s o r Sh ak ed i s a p ro fes s o r o f fi nan ce an deco no m i cs wi th al m o s t4 0 y ears o f ex p eri en ce t each i n g d o ct o ral , g radu at e, an du n d erg radu at e co u rs es o n fi nan ce an deco n o m i cs . He h as ex t en si v e v al u at i o n an d fi n an ci al co n s u l t i n g
ex p eri en ce an dh as wri t t en m u lt i p l e b o o k s o n th es e t op i cs . He co n du ct edfi n an ci al an al y s es o f Dy n am o fo r t h e y ears i n i s s u e t o an al y ze th e cred i two rth in es s fro m th e v i ewp o in to f a t h i rd -p art y l en der. He co n du ct ed fo rward -l o ok i n g eco n o m i c an al y s es b as edo n eco no m i c t ren d s an dDy n am o ’ s fi nan ci al s t at em en t s t o ex am i n e Dyn am o ’ s s h ort -t erm an dl o n g -t erm

ab i l i ty t o rep ay , th e d eg ree t o wh i ch th e fai r m ark etv al u e o f Dy n am o’ s as s et s ex ceed edth e
v al u e o f i t s d eb t s , an dDy n am o ’ s cap i t al ad equ acy . Onth e b as is o f h i s rev i ew, Pro fes so r Sh ak edd et erm in edth atDy n am o ’ s fi nan ci al p o si t io n wo u ldh av e b een v i ewedfav o rab l y b y a t hi rd -p art y

l en d er. He
co n cl u d ed th at Dyn am o h adth e ab i l i ty t o rep ay i t s d eb t s i n b o th th e s h o rtt erm an d- 1 9 -

[* 1 9 ] th e l on g t erm . He al s o cal cu l at edth atDy n am o ’ s as s et s ex ceed edth e v al u e
o f i t s d eb t , i n cl u di n g th e ad v an ces fro m Beek m an , b y atl eas t $ 12 4 m i l l i on an das
m u ch as $ 2 9 2 m i ll i on . Fi n al l y , h e d et erm i ned th atDy n am o was ad equ at el y cap i t al i zedo n th e b as i s o f “ n etd eb t ”, wh i ch req u i res s ub tract i ng cas h an d
m ark et ab l e s ecu ri t i es fro m d eb to f t h e b u si n es s en t erp ri s e. He ex p l ai n edth at p o rt fo l i o s co u l db e eas i ly l i qui d at ed
. He co n cl u d ed thatDy nam o’ s l i qui das s et s
ex ceed edi t s d eb tth ro u g h o u tthe y ears ati s su e.

2
. Dr. Ch am

b ers Dr. Ch am b ers i s a p ro fes s o r o f Fi n an ce wi th o v er 3 0 y ears o f cred i t rat i n g
ex p eri en ce. Fo r o v er 1 0 y ears Dr. Ch am b ers h as b een t each i n g g radu at e an d
u n d erg radu at e co u rs es i n p ort fo l i o m an ag em en t , fi n an ci al m ark et s , an dco rp o rat e fi nan ce. Befo re b eco m i n g a p ro fes s or, Dr. Ch am b ers s pen ttwo d ecad es i n th e cred i trat i n g d i v i s i o n o f St an d ard& Po or’ s an dwas i n vo l v edi n d ev el op i n g cred i t rat i n g cri t eri a an dp ro cedu res . Dr. Ch am b ers co n du ct eda cred i tan al y s i s o f Dy n am o fo r t h e y ears i n i s s u e t o d et erm i n e wh atcred i trat i n g m i g h th av e b een as si g n edt o i t . He rev i ewedth e l o ckup p eri o d s fo r t h e h ed g e fu n dan dd et erm in edth at al l b u t o n e ex p i redo n J an u ary 1 , 2 0 0 6
. He d et erm i n edth atDy n am o ’ s cred i trat i n g wo u l dn ev er h av e- 2 0 -

[* 2 0 ] b een b el o w a “ B”, wh i ch i n d i cat es th ati tco u ldh av e o b t ai n edl o an s o n
s ub s t an t i al l y

s i m i l ar eco n o m i c t erm s as th e ad v an ces fro m Beek m an . 3
. M r. Lu cas M r. Lu cas i s a fi n an ci al an al y stwi th 2 0 y ears o f b u si n es s v al u at io n
ex p eri en ce. He an al y zed th e d eb tcap aci ty o f Ko l t er Co m

m u n i t i es an dKo l t er Cap it al u s i n g th ree m o d el s : a cred i tm et ri c an al y s i s , co m pari n g t h e Ko l ter en t i t i es t o p eer en t it i es ; a KM V-M ert o n an al y s i s , an al y zi n g t h e l i k el i h o o do f d efau l t ; an da
cas h fl o w s tres s t es t , an al y zi n g th e ab i li ty t o refi n an ce. He ch o s e t h os e s p eci fi c
m o del s atth e req u es to f co u n s el t o the Co m m i ss i o n er. On th e b as is o f h i s m o d el s , h e co ncl ud edth atKo l t er Co m m u n i t i es an d Ko l t er Cap i t al co ul d n o th av e b o rro wedth e am o u n t s o f t h e ad v an ces fro m th i rd -p art y l en d ers o n co m

p arab l e t erm s . Du ri n g th e s eco ndweeko f t ri al wh enM r. Lu cas was cal ledt o t es t i fy , h e
s ub m i t t edan “ errat a s h eet ” co n s i s t i n g o f 2 6 p ag es . Inh i s errat a s h eet , h e ad m i t t ed t o u s i n g i n co rrect i n fo rm at i o n i n h i s an al y s i s . He al so ad m i t t ed , as Pro fes s o r Sh ak edi l l u s trat edi n h i s reb u t t al rep o rt , th ath e u n d ers tat ed th e rev en u e fo recas ti n g b y

ap p ro x i m at el y

$ 5 7 5 m il l i o n i n h i s cas h fl o w an al y si s an d o v ers t at ed cap i t al ex p en d itu res .- 2 1 -

[* 2 1 ] M r. Lu cas was fo rcedt o ad ju s th i s m o d el . He fo u n d th ath i s o ri g i n al m o d el
wen t “ h ay

wi re” wh en h e ran i twi th th e co rrect edi n fo rm at i o n an d ad j u s t edh i s fo rm u l as t o co rrect fo r t h e erro n eo u s res u l t s . Wh en M r. Lu cas ran h i s n ew m o d el u si n g m o re accu rat e d at a, h e co n cl u d ed th atKo l t er Co m

m u n i t ies hada 7 5 % ch an ce o f refi n an ci n g aty earen d2 0 0 5 an d th atKo l t er Cap i t al h ada 7 5 % ch an ce o f refi n an ci n g aty earen d2 0 0 6 an d2 0 0 7
. Yeti n h i s rep o rtan dt es ti m o n y , M r. Lu cas d et erm i n edthati n No v em b er 2 0 0 6 Ko l ter Co m

m u n i t ies wo u l dn o th av e b een ab l e t o refi n an ce. Attri al M r. Lu cas ex p l ai n edh o w th e KM V-M ert o n m o d el o p erat edi n d et erm i n i n g th e p ro b ab i l i ty o f d efau l t . Th e KM V-M ert o n m o d el i n creas es th e p ro b ab i l i ty

o f d efau l to v er t i m e. Th e Co u rtqu es t io n ed M r. Lu cas o n th e n atu re o f th i s as su m

p t io n i n h i s rep o rt . Th e Co urtas k edM r. Lu cas wh et h er o v er a 1 0 -y ear p eri o d , wh ere each y ear t h e co m p an y h ada 2 % ch an ce o f d efau l t , th e co m p an y
wo u l dh av e a 2 0 % ch an ce o f d efau l t . M r. Lu cas s ai dth ati t wo ul d . Yetwh en th e Co u rtas ked M r. Lu cas : “ If I were t o fl i p a co in twi ce, d o I h av e a 1 0 0 p ercen t ch an ce o f g et t in g h ead s i n o n e o f t h o s e t wo fl i p s ? ”, M r. Lu cas rep l i ed“No ” an d th en ad d edth at“ I m ay

h av e m is res p o n d edt o th e ad di t iv e n atu re o f t h e p ro b ab i l i t y
o f d efau l t ”. M r. Lu cas ’ o ri g i n al rep o rtwas ri dd l ed wi th erro rs , an dh i s t es t i m o n y i n d i cat eda l acko f fam i li ari ty wi t h p ro b ab i l i t i es , th e v ery s ub jectab o u t wh i ch h e- 2 2 -

[* 2 2 ] t es t i fi ed
. Aft er co rrect io n s fo r erro rs , M r. Lu cas ’ rep o rtl arg el y s up p o rt ed p et i t i o n ers ’ p o si t i on th atDy n am o wo u l d h av e b een ab l e t o b o rro w fro m a t h i rd
p art y l en der. V. As s etTran s fers In ad d i t i o n t o p ro vi d i n g ad v an ces t o Dy n am o , Beek m an tran s ferred p ro p ert y t o Dy n am o . Beek m an tran s ferred th e Do m an i p ro p ert y , th e Gran d e atM iras o l p ro p erty , th e M ai n s treet p ro p ert i es , th e Veran o p ro p ert y , th e J ag o f Pal m Beach p ro p erty , th e Bear’ s Cl ub p ro p ert y , th e Gran d e Saras o t an p ro p ert y , an dth e Heat h ro w Oak s p ro p ert y

du ri n g th e y ears i n i s s ue. Beek m an al s o tran sferred th e Dynam o Fu n d an di t s i n t eres ti n TOUSA/ Ko l t er, LLC. At th e t i m e o f t h e t ran s fers Beek m an an d D y

n am o d i dn o to b t ai n i n d ep en d en tap p rai s al s o f t h e p ro p ert y b ecau s e th e m em

b ers o f t he m an ag em en tt eam b el i ev edth at , as ex p ert s i n p ro p ert y
v al u at i o n an dreal es t at e d ev el o p m en t, th ey h adaccu rat el y p ri cedthe p ro p ert i es . A. Th e Do m an i Pro p ert y Th e Do m an i p ro p ert y

was s ev en acres o f real p ro p erty i n No rth Pal m

Beach , Fl o ri da. In 2 0 0 4 Beek m an p u rch as edth e p ro p ert y fo r $ 2 3,5 0 0 ,0 0 0 th ro u g h a
s ub s i d i ary , Do m an i Dev el o p m en t , LLC. Beekm an s p en tan ad di t i o n al $ 1 ,0 5 6 ,4 1 4 t o d ev el o p th e p ro p ert y .- 2 3 -

[* 2 3 ] In 2 0 0 5 Dy

nam o p u rch as edDo m an i Dev el o p m en t, LLC, fro m Beek m an . As p aym en tfo r t h e Do m an i p ro p ert y Dyn am o i n creas edth e o ut s t an d i n g b al an ce o f i t s d eb tt o Beek m an b y

$ 1 2 ,2 6 1,3 01 . Dy

n am o ’ s p l an i n M arch 2 0 06 was t o d ev el o p th e Do m an i p ro p erty wi t h l u x u ry

co n d o m i n i um

u n i t s, two -s t o ry

m an s i o n s , g u es t s u i t es , an db o atd o ck ag e. Aft er Dyn am o p urch as edth e p ro p ert y , i trecei v ed a l oan fro m

Ban ko f Am eri ca fo r $ 1 7 m il l i o n t h ro u g h Do m an i Dev el o p m en t , LLC. Attri al p et it i on ers cal l edM ich ael Sl ad e t o v al u e t h e Do m an i p ro p erty . M r. Sl ad e i s a s en i or res i d en t i al ap p rai s er wi th o v er 4 0 y ears o f ex p eri en ce. He h o l d s p ro fes s i on al d es i g n at i o ns i n real es t at e v al u at i o n . In v al ui n g th e Do m an i p ro p erty ret ro s p ect i v el y , M r. Sl ad e d et erm i nedth at i t s h i g hes tan db es tu s e was t o b e d ev el o p edi n t o m ul t i fam i l y o r m i x ed -u s e p ro ject s. He u sed th e s al es co m p ari s o n ap p ro ach , i n wh i ch th e p ro p ert y b ei n g
v al u edi s co m

p aredt o s i m i l ar p ro p ert ies s o l d i n th e s am e t i m efram e an d g eo grap hi c area. 7 Onth e b as i s o f t h i s ap p ro ach , h e d et erm i n edth atthe fai r m ark et
v al u e o f t h e Do m an i p ro p ert y was $ 2 3 ,5 00 ,0 0 0
. Th e Co m m is s i o n er d i dn o tcal l a wi tn es s t o v al u e t h e Do m an i p ro p ert y at tri al . Th e Co m

m i s si o n er b el i ev es th atthe v al u e o f t h e Do m an i p ro p ert y i s

7 See Bu t l er v . Co m

m i s s i o n er, T.C. M em o . 2 0 12 -7 2 , 1 0 3 T.C.M . (CCH) 1 3 5 9 , 1 3 6 8 (2 01 2 ).- 2 4 -

[* 2 4 ] $ 2 5 ,8 8 2,8 7 2, wh i ch th e p art i es ag ree was Beek m an ’ s t o tal i n ves t m en ti n t h e Do m an i p ro p ert y . B. Th e Gran d e atM i ras o l Pro p ert y Th e Gran d e atM i ras o l p ro p ert y was ap p ro x i m at el y

4 2 acres o f real p ro p ert y i n Pal m Beach Gard en s , Fl o ri d a. In 2 0 0 1 Beek m an p u rch as edthe Gran d e at M i ras o l pro p ert y

fro m Tay l o r W o o dro w th ro u g h a s ub s i d iary , the Gran d e at M i ras o l , In c. Th e p ro p ert y co ns i s t edo f 4 75 l o w -ri s e res i d en t i al ren t al u n i t s . Th e p u rch as e ag reem en t co n tai n ed a p ro v i s i o n t h atco u l darg u ab l y p ro h i b i t
co n do m i n i um

co nv ers i o n . In 2 0 0 4 Beek m an b eg anag g res s i v el y p u rs u i n g co nv ers i o n o f t h e co m p l ex i n t o co n d o m i n i um s . Beek m an at t em p t ed t o co n v ertth e co m

p l ex qu i ck l y

b ecau s e th e m ark etfo r co n d o m i ni um s was b ri s k. Beek m an s en tth e St at e o f Fl ori d a, Bu reau o f Co n d o m i n iu m s a n o t i ce o f i t s i n t en t t o co n v ert . In Sep tem

b er 2 00 5 Tay l o r W o o dro w an d th e Gran de at M i ras o l , In c.,
en t eredi n t o an ag reem en t th at am en d edth e res tri ct i o n o n co n d o m in i um
co n vers io n . Un d er t he ag reem en tth e Gran d e atM i ras o l , LLC, a Dy n am o en t i t y , co u ldco n v ertth e Gran d e atM i ras o l p ro p ert y t o co n d om i n i u m s o n o r b efo re Decem b er 1 , 2 0 0 6. Up o n co n v ers io n th e Gran de at M i ras o l , LLC, wo u l dp ay- 2 5 -

[* 2 5 ] Tay l o r W o o dro w a b as e co m p en s at i o n o f $ 4 ,8 4 8 ,6 1 8 an db o n u s
co m p en s at i o n wh en th e g ro s s s al e p ro ceed s ex ceed edap p ro x i m at el y $ 1 36 m i l l i o n . Wh i l e s t i ll p u rs u i n g a co n v ers i o n , Beek m an tran s ferred th e Gran d e at M i ras o l pro p ert y

t o th e Gran d e atM i ras ol , LLC, b y m erg i n g t h e Gran d e at M i ras o l , In c., i n to th e Gran d e atM i ras o l , LLC. Beekm an i n creas ed th e
o u t s t an d i n g b al an ce due fro m Dy n am o b y $ 2,6 8 4 ,0 9 4 an dDy

n am o as s u m eda $ 3 8
m i l l io n l iab i li ty o f Beek m an ’ s o n No v em b er 1 7 , 2 0 0 5 . Th e fo l lo wi n g m o n th th e Gran d e atM i ras o l, LLC, s en tl et t ers t o the t en an t s i nfo rm i n g th em o f t h e t ran s i t i o n t o res i den t i al co n d o m i ni u m s . OnJ an u ary 6 , 2 0 0 6 , th e Gran d e atM i ras o l , LLC, recei v edap p ro v al fro m

th e St at e o f Fl o ri d a t o co n v ertt o co nd o m i n i u m s. By th at t i m e, 4 0 % o f t he t en an t s h adm o v ed , b utth e co n d o m in i u m m ark etwas o n th e d ecl i ne. Attri al th e Co m

m i s s io n er cal l ed J ack Fri ed m an t o v al u e t h e Gran d e at M i ras o l pro p ert y . Dr. Fri ed m an recei v edh i s Ph
. D. i n b u s i n es s ad m i n is trat i o n wi t h
a m ajo r i n real es t at e an dl an deco n o m ics . He i s a real es t at e eco n o m i s tan dh o l d s p ro fes s i on al d es i g n at i o ns i n real es t at e v al u at i o n , i n cl u di n g d es i g n at i o n s fo r b ei n g
an ap prai s er wh o h as m eth i g h s t an d ard s an dco n tri b u t edt o the ap p rai s al i ndu s t ry . Dr. Fri ed m an p rep areda ret ro s p ect i v e ap p rai s al o f t he Gran de at M i ras o l p ro p erty t o d et erm i n e i t s fai r m ark etv al u e o n No v em ber 1 7 , 2 0 0 5 . Dr. Fri ed m an- 2 6 -

[* 2 6 ] d et erm in edth ati t s h i g h es tan db es tu s e was t o b e co n v ert edt o
co n do m i n i um s . He d et erm i n edth e fai r m ark etv al u e o f t h e Gran d e atM i ras o l p ro p erty u s i n g the s al es co m

p ari s o n m et h o d . He co m p aredth e Gran d e atM i ras o l p ro p erty t o fo u r ap art m en t co m

p l ex es th atwere acq u i redfo r co n d o m i n iu m
co n vers io n . Dr. Fri ed m an d et erm i n edth atth e fai r m ark etv al u e o f t h e p ro p ert y
was $ 12 1 ,4 0 0 ,0 0 0 . He d i d n o t acco u n tfo r t h e co s tt o co n v erto f $ 4 ,8 4 8 ,6 18
. Attri al p et it i on ers cal l edM r. Sl ad e t o v al u e th e Gran de at M i ras o l p ro p ert y . M r. Sl ad e p rep areda ret ro s p ect i v e ap p rai s al t o d et erm i n e i t s fai r m ark etv al u e o n Decem b er 1 , 2 0 0 5. He d et erm i n edth ati t s h i g hes tan d b es tu s e was t o b e
m ai n t ai n edas a ren tal ap art m en tco m p l ex . M r. Sl ad e co n s i d ered co n d o m i n i u m
co n vers io n b u t d et erm i n edthati twas res tri ct ed . Ho wev er, h e h adn o ts een th e ag reem en tb et ween Beek m an an dth e p rev i o u s l an d o wn er u n d er wh i ch Dy n am o
co u ldco n v ertth e p ro p ert y t o co n d o m i n i u m s i f i t p ai dco m p en s at i on . Duri n g tri al h e ag reedth at i f t h ere was n o res tri ct i o n i n p l ace o n co n d om i n i u m co n v ers i o n s , h e
wo u l dh av e co n si d eredp ro p ert i es th atwere co n v ert edt o co n d o m i n i u m s i n h i s
an al y s i s. On th e b as i s o f a s al es co m p ari s o n ap pro ach an d an i n co m e ap p ro ach , h e d et erm i n edth atth e fai r m ark etv al u e o f t h e Gran d e atM i ras o l p ro pert y was $ 5 6
m i l l io n .- 2 7 -

[* 2 7 ] C. Th e M ai n s treet Pro p ert i es Bet ween No vem

b er 2 0 0 5 an dAp ri l 2 0 0 6 , Res erv e Ho m e Lt d
. , LP (Res erv e Ho m e), t ran s ferred a g ro up o f p ro p ert i es i n Po rtSt . Lu ci e, Fl ori d a, t o M ai ns treet Vi l l ag e II, LLC, M ai ns treet Vi l l ag e III, LLC, an dVeran o Dev el op m en t II, LLC, al l o f wh i ch are Dynam o en t i t i es . As p aym en tfo r t h e M ai n s treet p ro p ert i es Beek m an an d D y

n am o reco rd eda $ 9 ,8 5 0 ,0 00 i n creas e i n th e o u t s t an di n g b al an ce du e t o Beek m an fro m

Dy n am o . 1
. Th e M ai n s treet Co m m erci al Pro p ert y Th e M ai n s treet co m

m erci al p ro p ert y

co n si s t edo f t wo l o t s , C an dA, an da tract , R. Res erv e Ho m e p u rch as edth e M ai n s treet co m m erci al p ro p ert y as
u n d ev el op edl an di n 1 9 98 an d tran s ferred i tt o M ai n s treet Vi l l ag e II o n No v em b er 2 9 , 2 0 0 5
. Attri al th e Co m

m i s s io n er cal l ed BarryDi s k i n t o v al u e t h e M ai n s treet
co m m erci al p ro p ert y . Dr. Di s ki n h as a Ph .D. i n l an deco n o m i cs an dreal es t at e
an d h o l d s p ro fes s i o n al d es i g n at i o n s i n real es t at e v al u at i o n . He h as h el dh i s d es i g n at i o n s fo r o v er 2 0 y ears . Dr. Di s k i n p rep areda ret ro s p ect i v e ap p rai s al o f t h e M ai n s treet co m m erci al p ro p erty t o d et erm i n e i t s fai r m ark etv al u e o n No v em ber 2 9 , 2 0 0 5 . He d et erm i n ed th atl o t C’ s h i g h es tan d b es tu s e was ret ai l , l o tA’ s h i g hes tan d b es tu s e was- 2 8 -

[* 2 8 ] co m

m erci al o ffi ces , an dtract R’ s h ig h es t an db es tu se was a ri g h t -o f-way
. Us i n g t h e s al es co m

p ari s o n m et h o d , Dr. Di s k in d et erm i n ed th atl o t C’ s fai r m ark et
v al u e was $ 3 ,9 0 0 , 0 0 0 , l o t A’ s fai r m ark etv al u e was $ 2 0 3 ,0 0 0 , an dtract R d i dn o t h av e v al ue. Onb ri ef, p et it i o n ers d o n o td i s p u t e t h e Co m m i s s io n er’ s v al u at i o n s . 2
. Th e M ai n s treet Offi ce Bu i l d i ng Th e M ai n s treet Offi ce Bu i l d i n g p ro p ert y co n s i s t s o f 2
. 3 5 acres o f l an dan da .8 5 -acre d rai n ag e eas em en t . Th i s p ro p ert y was d ev el o pedas a s i n g l e-t en an t , o n es t ory o ffi ce b u i l d in g. Res erv e Ho m e t ran s ferred th e M ai n s t eetOffi ce Bu i l d i n g p ro p erty t o M ai n s treet Vi ll ag e III o n Ap ri l 6 , 2 0 0 6
. Attri al p et it i on ers cal l edM r. Sl ad e t o v al u e th e M ai n s treet Offi ce Bu i l d i n g p ro p erty . M r. Sl ad e p rep areda ret ro sp ect i ve ap p rai s al t o d et erm i n e i t s fai r m ark et
v al u e o n Ap ri l 6 , 2 00 6 . He d et erm i n edth atth e M ai n s treet Offi ce Bu i ld i n g p ro p erty ’ s h i g h es tan db es t u s e was as an o ffi ce b u i ld i n g . On th e b as i s o f a s al es
co m p ari s o n ap p ro ach an dan i n co m e ap p ro ach , h e d et erm i n edth atth e fai r m ark et
v al u e o f t h e M ai n s treet Offi ce Bu i l d i n g p ro p erty was $ 8 50 ,0 0 0
. Th e Co m m is s i o n er d i dn o to ffer an ex p ertt o v al u e t h e M ai n st reet Offi ce Bu i ld i n g p ro p ert y .- 2 9 -

[* 2 9 ] 3
. Th e M ai n s treet Vacan t Pro pert y Th e M ai n s treet v acan tp ro p ert y co n s i st s o f 2 .3 9 v acan tacres . Res erv e Ho m e t ran sferred i t t o M ai n st reet Vi l l ag e III o n No v em b er 2 9 , 2 0 0 5. Attri al th e Co m

m i s s io n er cal l ed Dr. Di s k i n t o v al u e t h e M ai n s treet v acan t p ro p erty . Dr. Di s ki n p rep ared a ret ro s p ect iv e ap p rai s al t o d et erm i n e i t s fai r m ark et
v al u e o n No v em

b er 2 9 , 2 0 0 5
. He d et erm i n edth ati t s h ig h es t an db es tu se was as a p arko r p ub l i c faci li ty

o r a d o n at i o n t o th e ci ty . Us i n g th e s al es co m p ari so n
m et h o d, Dr. Di s ki n d et erm in edth atth e fai r m ark etv al u e o f t h e M ai n s treet v acan t p ro p erty was $ 1 2 0,0 0 0
. Pet i t i o ners d i dn o tcal l an ex pert t o v al u e t hi s p ro pert y . 4
. Th e G.O. Team

Pro p erty Th e G.O. Team

p ro p ert y co n si s t s o f a t ot al o f 6 2
. 2 3 acres th at en co m p as s two s ep arat e p ort io ns : an i n du s tri al p o rt i o n an d th e rem ai n i n g p o rt i o n . Th e i n du s tri al p o rt i o n i s fo ur l o t s th att o t al 6 .6 8 acres an d a 3 .4 0 -acre eas em en t. Th e
rem ai n i n g p o rt i on co n si s t s o f 1 3 l o ts o n 2 7 .1 7 acres an da 2 4 .9 8 -acre p ro p ert y th at
co n tai n s a l ak e.- 3 0 -

[* 3 0 ] a. Th e In dus tri al Po rt io n Th e i n du s tri al p o rt i o n co n s i s t s o f fo u r v acan tl ot s o n 6 .6 8 acres an da 3 .4 0
- acre eas em en t . On Ap ri l 6 , 2 0 0 6 , Res erv e Ho m e t ran s ferredth e i n du s tri al p o rt i o n t o M ai n s treet Vi l l ag e III. Attri al th e Co m

m i s s io n er cal l ed Dr. Di s k i n t o v al u e t h e i n du s tri al p o rt i o n . Dr. Di sk i n p rep areda ret ro s p ect i v e ap prai s al t o d et erm i n e i t s fai r m ark etv al u e o n Ap ri l 6 , 2 0 0 6. He d et erm i n ed th atth e i n du st ri al p o rt i o n ’ s h ig h es tan d b es tu s e fo r th e fo u r v acan tl o ts was as s m al l i n du s tri al l o t s an dfo r t he eas em en twas as a drai n ag e an du t i li ty

eas em en t . Dr. Di s k i n v al u ed th e p ro p ert y u s i n g t h e s al es
co m p ari s o n ap p ro ach . He s el ect edfo u r co m parab l e p ro p ert i es i n St . Lu ci e Co u nt y wi th p ri ces b et ween $ 4.9 2 an d$ 1 0 .1 7 p er s qu are fo o t . Dr. Di s k i n d et erm i n edth at th e fai r m ark etv al u e o f t h e i n du s tri al p o rt i o n was $ 5 p er s qu are fo otfo r a t o t al
v al u e o f $ 1 ,4 5 5,0 0 0. Attri al p et it i on ers cal l edM r. Sl ad e t o v al u e th e i n du st ri al p ort i o n . M r. Sl ad e p rep areda ret ro s p ect i v e ap p rai sal t o d et erm i n e i t s fai r m ark etv al u e o n Ap ri l 6 , 2 00 6 . He d et erm i n edthatth e i n du s tri al p o rt io n ’ s h ig h es t an db es tu se was i n du s tri al . M r. Sl ad e v al u edth e l o t s u s i n g th e d i s co u n ts el l ou tan al y s i s . Ind o i n g
s o , h e s el ect ed1 0 co m

parab l e p ro p ert i es i n St . Lu ci e Co u nt y an dM art i n Co u n t y wi th p ri ces b et ween $ 2 an d$ 5 .1 9 p er s qu are fo o t. He ex cl u d edp ro p ert i es wi th- 3 1 -

[* 3 1 ] h i g h er v al ues fro m

h i s co m p ari s o n b ecau s e h e b el iev edth atth o se p ro p ert i es h ad s up eri o r l o cat i o n s . Th e av erag e p er-s qu are-fo o tp ri ce o f t h e rem ai n i n g
co m p arab l e p ro pert ies was $ 3 .8 5 , an dth e m o strecen t s al e was at$ 3 .0 1 p er s qu are fo o t . He co n cl u d edth atthe es t i m at edp ri ce p er s qu are fo o t ran g edfro m $ 2 t o $ 2 .2 5 . He th en d i s co u n t edth e t o t al b y 1 6% t o acco u n tfo r s al es co m m i s s i o n s , g en eral ad m i ni s trat iv e co s t s , d ev el o p er’ s p ro fi t , real es t at e t ax es , an d
m i s cel l an eo u s co s t s, fo r a n etv al u e o f $ 5 3 0 , 0 00 fo r th e fo u r l o t s . He d et erm i n ed th atth e eas em en t h adn o v al u e.

b
. Th e Rem ai n i n g Po rt i o n Th e rem ai n i n g p o rt i o n co n s i s t edo f 1 3 l o t s an da p arcel t o t al i ng 2 4 .9 8 acres . Th e 2 4.9 8 -acre p arcel h ada l ak e i n th e m i d d l e, l eav i n g o n l y 8 .5 acres av ai l ab l e t o b e d ev el op ed . Th e zo n i n g cl as s i fi cat i o n fo r t h e p ro p ert y was i n du s tri al . On Feb ru ary 1 4 , 2 0 0 5 , th e ci ty co un ci l o f Po rtSt . Lu ci e p as s edOrd i n an ce 0 4 -1 0 7 , am en d i n g th e fu tu re l an d u s e m ap o f t h es e p arcel s fro m i n du s tri al t o l o w-d en s i t y
res i den t ial . OnAp ri l 6 , 2 00 6 , Res erv e Ho m e t ran sferred the rem ai n in g p ro p ert y t o Veran o Dev el o p m en tII, LLC. Attri al each p art y

cal ledan ex p ertt o v al u e t h e rem ai n i n g p o rt i o n . Th e Co m m i s s i o n er cal l edDr. Di s ki n . Pet i t i o n ers cal l edM r. Sl ad e.- 3 2 -

[* 3 2 ] Dr. Di s k i n p rep areda ret ro s p ect i v e ap p rai s al o f t h e rem ai n i n g p o rt i o n t o d et erm i n e i t s fai r m ark etv al ue o n Ap ri l 6 , 2 0 0 6 . He d et erm i n edth atth e
rem ai n i n g p o rt i on ’ s h i g hes tan db es tu se wo u l d b e t o co m bi n e t h e l o ts i n t o a l o wd en si ty res i d en t i al p ro p ert y wi th 2 7 1 dwel l i n g u n it s cl u s t eredo n t o the b u i l d ab l e p o rt i on o f t h e p ro p ert y . Dr. Di s k i n v al u edth e p ro p ert y u s i ng th e s al es co m

p ari s o n ap p ro ach
. He
s el ect ed th ree co m

p arab le p ro p ert i es wi th ad ju s t edp ri ces p er acre o f $ 13 2 ,2 6 0 t o $ 1 7 8 ,6 2 5 . Dr. Di s k i n d et erm i n ed th atth e v al u e p er acre was $ 1 4 0,0 0 0 fo r a t o t al fai r m ark etv al u e o f $ 7,9 0 0 ,0 0 0
. M r. Sl ad e cal cu lat edth e fai r m ark etv al u e o f t h e rem ai n i n g p o rt i o n i n two p h as es , v al u i ng th e 1 3 rem ai n i n g l o t s s ep arat el y fro m th e 2 4 .9 8-acre p l o twi th a l ak e. M r. Sl ad e t reat edth e 1 3 s m al l er l o t s ex act l y the s am e as th e i n du s tri al p o rt i on , u s i n g th e d i s co u nt s el l o u t an al y s i s t o d et erm i n e v al u e atth e t i m e o f t h e tran s fer. M r. Sl ad e d et erm i n edth atth e fai r m ark et v al u e o f t h e i n dus tri al p o rt i o n
ran g ed fro m

$ 2 t o $ 2
. 2 5 p er s qu are fo o t . He al s o d i s co u n t edth e v al u e b y 1 6 % fo r
s al es co m m i s s i o n s , g en eral ad m i n i s trat iv e co s t s , d ev el op er’ s p ro fi t , real es t at e t ax es , an dm i s cel l an eo u s co s t s , fo r a t o t al v al u e o f $ 1,8 9 0 ,0 0 0. At tri al , h e d i d n o t
rem em b er s eei ng th e o rd i n an ce ch an gi n g th e l an dt o res i d en t ial , an dh e d i dn o t- 3 3 -

[* 3 3 ] t ak e i ti n t o acco un ti n h i s v al u at i o n. He b el i ev edth ati f t h e fu ture l an du s e h ad ch an g ed , h e wo u l dn eed t o co n s i d er t h e fu tu re l an du s e i n h i s v al u at i o n . M r. Sl ad e t reat edth e 2 4 .9 8 acres wi th t h e l ak e d i fferen t l y . He ag ai n d et erm i n edth atth e h i gh es t an db es tu s e was i ndu st ri al
. M r. Sl ad e d et erm i n edthe fai r m ark etv al u e o f t h e 2 4 .9 8 acres wi th t h e l ak e wi th th e s al es co m p ari so n ap p ro ach . He s el ect edfi v e co m p arab l e p ro p ert ies wi th p ri ces p er s qu are fo o t
ran g i n g fro m $ 2 .6 6 t o $ 4
. 0 4 an dd et erm i n eda fai r m ark et v al u e o f $ 3 p er s qu are fo o t , fo r a t o t al o f $ 1 ,1 0 0,0 0 0. D. Th e Veran o Pro p erty Th e Veran o p ro p ert y

was 3 ,0 3 0 acres o f real p ro p ert y i n Po rtSt
. Lu ci e, Fl o ri da. Beek m an p u rch as edal l o f t h e Veran o p ro p ert y b y the s u m m er o f 2 0 0 3
. Th e Veran o p ro p ert y

was l arg el y

v acan tl an d . Beek m an h el dth e Veran o p ro p ert y i n d i rect l y th ro ug h i ts o wn ers h ip o f Res erv e Ho m e. As o f Feb ru ary 2 0 0 6 , Beek m an ’ s t o t al co s t fo r t h e Veran o p ro p ert y was ap p ro xi m at el y

$ 4 9 ,4 7 7,2 9 8
. OnFeb ru ary 2 8 , 2 0 0 6, Res erv e Ho m e t ran s ferred th e Veran o p ro p erty t o Veran o Dev el o p m en t , LLC, an da s m al l tract o f t h e Veran o p ro p ert y t o PSL Co m m erci al Ho l d in g s II, LLC, b o th o f wh ich were i n d i rect wh o l l y o wn ed
s ub s i d i ari es o f Dyn am o . Veran o Dev el o p m en t , LLC, p ai d$ 4 9 ,4 7 7 , 2 9 8 fo r th e Veran o p ro p ert y . Dy

n am o p lan n edt o b u il d6 ,3 0 0 res i d en ti al u ni t s o n th e- 3 4 -

[* 3 4 ] p ro p ert y , i n cl u d in g a n i n e-h o le g o l f co u rs e. Sh o rt l y aft er p u rch as i n g th e l an d , Veran o Dev el op m en t , LLC, was ap p ro v edfo r a $ 9 0 m i ll i on l o anfro m Su n tru s t , wi th t h e o p t i on t o i n creas e t h e l o ant o $ 15 0 m i ll i o n , s ecu redb y th e Veran o p ro p ert y . Attri al th e Co m

m i s s io n er cal l ed J ack Fri ed m an t o v al u e t h e Veran o p ro p erty . Dr. Fri edm an p rep areda ret ro s p ect i v e ap p rai s al t o d et erm i n e i ts fai r
m ark etv al u e o n Feb ru ary 2 8 , 2 0 0 6 . Dr. Fri ed m and et erm in edth ati t s h i g h es tan d b es tu s e was t o d ev el o p i ti n t o a m as t er-p l an n edco m m u n i ty . He d et erm i n edth e fai r m ark etv al u e o f t h e Veran o p ro p ert y u s i n g th e s al es co m

p ari s o n m et h o d . He
co m p aredth e Veran o p ro pert y t o th ree p ro p ert i es , ei th er s l at edfo r res i d en t i al d ev el o p m en to r d ev el o p ed , l o cat edi n Po rtSt . Lu ci e an d s ol du nd er t h e s am e
m ark etco n d i ti o n s . On e p ro p ert y

i ncl u d edi n th e co m

p ari s o n, the Cen t ex p ro p ert y , was wi th i n
o n e m i l e o f t h e Veran o p ro p ert y an dwas a l arg e m as ter-p l an n edco m m u n i ty
co n si s t i n g o f 2 ,0 6 7 acres . Th e Cen t ex p ro p ert y s o l d fo r $ 1 1 0 ,0 0 0 ,0 0 0 . Atth e t i m e o f t h e s al e, l i k e t h e Veran o p ro p ert y , th e Cen t ex p ro p ert y h adn o tb een d ev el o p ed
. In d et erm i n in g the fai r m ark etv al u e o f th e Veran o p ro p ert y , Dr. Fri ed m an g av e t h e Cen tex p ro p ert y 5 0 % wei gh tan dd et erm in edth atth e Veran o p ro p erty ’ s v al u e was $ 1 4 0,0 0 0 ,0 0 0
.- 3 5 -

[* 3 5 ] Pet i t i o ners cal l ed M r. Sl ad e t o v al u e t h e Veran o p ro pert y . M r. Sl ad e p rep areda ret ro s p ect i v e ap prai s al t o d et erm i n e i t s fai r m ark etv al u e o n Feb ru ary 2 8 , 2 0 0 6 . He d et erm i n edth atth e Veran o p ro pert y ’ s h ig h es t an d b es tu se was as a fu tu re m i x edu se d ev el o p m en t. M r. Sl ad e al s o u sedth e s al es co m p ari s o n ap p ro ach an d i n cl u d ed th e Cen t ex p ro p ert y ; h o wev er, h e b el i ev edth e v al u e o f t h e Veran o p ro p ert y

s h o ul db e l es s th an th ato f t he Cen t ex p ro p ert y b ecau s e t h e Cen tex p ro p erty

h ads up eri o r ro adacces s . M r. Sl ad e d et erm in edth atth e fai r
m ark etv al u e was $ 1 0 1 ,5 0 0 , 0 0 0
. E. Oth er Tran s fers In J an uary2 0 0 5 Beek m an m ad e a $ 1 7 ,5 0 0 ,0 00 p art n ers h i p co n tri b ut i o n t o TOUSA/ Ko l t er, LLC, an drecei v eda 5 0 % i nt eres t . A p o rt i o n o f t h atco n tri b u t i o n , $ 3 m i l l i o n , was s ub s equ en t l y cred i t edb ackt o Beek m an th ereb y redu ci n g i t s
co n tri b u t i o n t o $ 1 4 ,5 0 0,0 0 0. In 2 0 0 5 TOUSA/ Ko l ter, LLC, p u rch as ed the M o n terra p ro p ert y . Beek m an tran s ferred i t s TOUSA/ Ko l t er, LLC, i nt eres tt o Dynam o i n earl y

2 0 0 5 . Dy

nam o rep o rt ed a $ 1 4 ,5 00 ,0 0 0 i n creas e t o th e
o u t s t an d i n g b al an ce due t o Beek m an . OnDecem

b er 3 1, 2 00 5 , Beek m an h el d t h e Dyn am o Fu n d , wi th a fai r m ark et
v al u e o f $ 2 2 8 ,2 3 4 ,8 0 8 . Duri n g th e fi rs th al f o f 2 0 0 6 Beek m an tran s ferredal l o f th e as s et s i n th e Dy

n am o Fu n dt o Dy

n am o . Bet w een J an u ary

1 an dJ u n e 2 9 , 2 0 06 ,- 3 6 -

[* 3 6 ] Dy n am o p ai da t o t al o f $ 1 9 8 ,0 2 5 ,0 3 7 fo r th e Dy n am o Fu n das s et s . Th e p aym en t s were reco rd edas i ncreas es i n th e o u t st an d in g b al an ce due t o Beek m an . Du ri n g th e y ears i n i ss u e Beek m an al s o s o l dt o Dy n am o th e J ag o f Pal m Beach p ro p ert y , th e Bear’ s Cl ub p ro p ert y , the Gran d e Saras o t an p ro p ert y , an dth e Heat h ro w Oak s p ro p ert y

fo r $ 2 ,4 4 4,2 5 2 , $ 1 ,5 0 0 ,0 0 0 , $ 1 4 , 9 4 1 ,9 1 1 , an d $ 1 2 ,7 6 2 ,1 8 9 , res p ect i v el y . Nei th er p art y o ffered an y

v al u at io n ev i den ce as t o th es e p ro p ert i es attri al
. VI. U.S. Real Pro p ert y Ho l d i n g Co rp o rat i on Attri al p et it i on ers cal l edRi ch ardPres to n t o cal cu lat e Beek m an ’ s p ercen t ag e o f U.S. real p ro p ert y i n t eres t s as a s h are o f i t s t o t al real p ro p erty i n t eres tb o th i n s id e an do ut si d e th e Un i t edSt at es an do th er as s et s wh i ch are u s ed
o r h el dfo r u se i n a t rad e o r b u s i n es s fo r p u rp o s es o f d et erm i n i n g wh eth er Beek m an i s a U.S. real p ro pert y h o l d i n g co rp o rat i on as d efi n ed b y s ect i o n 8 9 7 (c)(2 ). 8 M r. Pres to n h as 4 6 y ears o f ex p eri en ce as a p ub l i c acco u n t an t . M r. Pres t o n an al y zedth e b o o kv al u e o f Beek m an ’ s U.S. real p ro pert y an d th e b o okv al u e o f i ts t o t al real p ro p ert y an d b u si nes s as s et s . He ex cl u d edfro m h i s real p ro p ert y

cal cu l at i o n an y

U.S. real p ro p erty

th atwas h el dp ri m ari l y

fo r s al e i n

8 Al l s ect i o n referen ces are t o th e In tern al Rev en u e Co d e (Co de) i n effect fo r th e y ears i n i s s u e, an dal l Ru le referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an d Pro cedu re, u n l es s o th erwi s e i n d i cat ed
.- 3 7 -

[* 3 7 ] th e o rd i n ary

co u rs e o f b u s i nes s . He d et erm i nedth atfro m J u n e 3 0 , 2 0 0 1 t o 2 0 0 7 , Beek m an ’ s s hare o f U.S. real p ro p ert y as a p ercen t ag e o f i t s t ot al real p ro p erty an db u s i n es s as s et s n ev er ex ceed ed1 1 .6 5 %. Th e Co m m is s i o n er d i dn o tcal l an ex p ert . In s t ead , th e Co m m i s s i o ner cal cu l at edth e fai r m ark etv al u e o f Beek m an ’ s U.S. real p ro p ert y h o l d i n g i nt eres ts
an d th e fai r m ark etv al u e o f Beek m an ’ s b u s i n es s as s et s , i n cl u di n g real es t at e,
u s i n g i n fo rm at i o n p ro v i d edo n Beek m an Vi s t a’ s Fo rm s 1 1 20 , U.S. Co rp o rat i o n In co m e Tax Return . Th e Co m m i s s i on er t oo k the b o o kv al u e rep ort edo n th e retu rn an dad d ed backth e es t i m at edam o u nto f i n co m e Beek m anearn edfro m d i s p o s al o f t h e p ro p ert i es i n l at er y ears . Th e Co m m i ss i o n er d et erm i n edth at Beek m an ’ s p ercen t ag e o f U.S. real p ro p ert y as a s h are o f i t s t o tal real p ro p ert y an d b u s i n es s as s et s n ev er fel l b el ow 7 8 %
. Th e Co m m is s i o n er al s o p rep aredthe cal cu l at i on u s in g th e s am e b o o kv al u es
as M r. Pres t o n ; h owev er, t h e Co m m is s i o n er d i d n o tex cl u d e U.S. real p ro pert y h el dp ri m ari l y

fo r s al e i n th e o rd i n ary

co urs e o f b u s i nes s . Us i n g th e al t ern at i v e b o o kv al u es , the Co m

m i s s i o n er d et erm i n edth atthe s h are o f U.S. real p ro p ert y
n ev er fel l b el o w 4 2 .7 4 %.- 3 8 -

[* 3 8 ] VII. Rep o rt i n g an dEx am i n at i o ns Beek m an Vi s t a an dDy

n am o Ho l d i n g s fi l e d i fferen treturn s an dh av e d i fferen t t ax y ear en d i ng d at es . Fo r each o f t h e y ears i n i s s u e Beek m an Vi s t a fi l ed Fo rm 1 1 2 0 an d h ad a fi s cal t ax y ear en d in g J u n e 3 0 . Beek m an Vi s t a al so fi l ed Fo rm 1 0 4 2 , An n u al W i th ho l d i n g Tax Retu rn fo r U.S. So u rce In co m e o f Fo rei g n Pers o n s, t o rep o rt t ax wi th h el d o n p aym en t s t o fo rei g n p ers o n s . Dy n am o Ho l d i n g s fi led fo r each y ear Fo rm

1 0 65 , U.S. Retu rn o f Part n ers hi p In co m e, an d h ada cal en d ar t ax y ear. Th e m an ag em en tt eam d i d n o tres earch h o w t o reco rdth e tran s fers o r s eekad v ice o n h o w t o rep o rtth e t ran s fers fo r t ax p u rp o s es . A. Beek m an Vi s t a Beek m an Vi s t a fi leda Fo rm 1 1 2 0 fo r each o f i t s t ax y ears en di n g J u n e 3 0 , 2 0 0 6 thro u g h 2 0 0 8 . KPM G LLP, b as edi n Can ad a, p rep aredan d s ig n edthe retu rn s . Each y ear Beek m an Vi s t a fi l edas an accru al m et h o dt ax p ay er. Oni t s 2 0 0 5 Fo rm

1 1 2 0 Beek m anVi s t a rep o rt edcu rren tas s et s o f $ 5 2 1 ,4 5 2 ,5 1 9 du e fro m ad v an ces an dn o i n t eres ti n co m e fro m i t s ad van ces t o affi l i at es . Oni t s 2 0 0 6 Fo rm 1 1 2 0 Beek m an Vi s ta rep o rt edcu rren t as s et s o f $ 5 1 8 ,2 9 3 ,0 4 5 du e fro m ad v an ces an di n t eres ti n co m e o f $ 2 5 ,6 07 ,3 4 0 recei v ed fro m i t s ad v an ces t o affi li at es . Oni ts 2 0 0 7 Fo rm 1 1 20 Beek m anVi s t a rep o rt ed
cu rren tas s et s o f $ 4 4 5 ,1 0 2 ,1 0 7 du e fro m ad v an ces an di n t eres t i nco m e o f- 3 9 -

[* 3 9 ] $ 1 7 ,2 2 0,4 9 2 fro m i t s ad van ces t o affi l i at es . Beek m an Vi s t a d i d n o t fi l e Fo rm 1 0 4 2 fo r 2 0 0 5 o r 2 0 0 6 o r m ak e an y d ep o s i t s wi th res p ectt o wi th h o ld i n g t ax es b efo re 2 00 9
. Du ri n g 2 0 0 7 th ro u g h 2 0 0 9 th e Co m m i s s i o ner ex am i n ed Beek m an Vi s t a’ s Fo rm s 1 1 2 0 fo r th e t ax y ears en d i n g J u n e 3 0 , 2 0 0 4 t h ro u gh 2 0 0 8. Du ri n g th at
ex am i n at i o n th e rev en u e ag en td et erm i n edth atBeek m an Vi s t a o wed wi th h o l d i n g t ax es fo r 2 00 5 an d2 0 0 6 o n tran s fers u nrel at edt o the i s s u es i n t h es e cas es . In 2 0 0 9 the rev en u e ag en tp rep aredFo rm s 1 0 4 2 fo r Beek m an Vi s ta fo r 2 0 0 5 an d 2 0 0 6 . Beek m an Vi s t a s i g nedan dfi l edth e Fo rm 1 04 2 fo r 2 0 0 5 o n Feb ru ary 1 7 , 2 0 0 9 , an dth e Fo rm

1 0 42 fo r 2 0 0 6 o n Sep tem b er 3 0, 2 0 09 . Beek m an p ai dth e
am ou n t s s h o wno n t h o s e ret u rn s . Aft er t h e ret u rn s were fi l ed , th e rev en u e ag en t
co n cl u d ed th at n o p en al ti es wo u l db e p ro p os edb ecau s e t h e Beek m anVi s t a rep res en t at i v es p ro v i d eda s t at em en to f reas o n ab l e cau s e. B. Dyn am o Ho l d in g s Dyn am o Ho l d in g s fi l edFo rm s 1 0 65 fo r 2 00 5 , 2 0 0 6, an d2 00 7 . Ern s t& Yo u n g LLP p rep aredan ds i g n edth e Dyn am o Ho l d i n g s Fo rm s 1 0 6 5. Dy n am o Ho l di n g s rep o rt edthati t was an accru al b as i s t ax p ay er.- 4 0 -

[* 4 0 ] Dyn am o Ho l d in g s fi l edi t s s h ort -y ear 2 00 5 Fo rm 1 0 6 5 rep o rt i n g l i ab i l i t i es
o f $ 2 57 ,9 4 9 ,0 54 fo r i n t erco m p an y ad v an ces an dn o i nt eres tex p en se p ai dt o Beek m an . Dyn am o Ho l d in g s fi l ed2 0 0 6 Fo rm 1 0 6 5 an d rep o rt edad v an ces as a l i ab i l i t y
an d i n teres tex p en s es . Itrep o rt ed y earen d o th er l i ab i l i ti es o f $ 6 3 5 ,3 3 7 ,4 82 fo r i n t erco m p an y ad v an ces , i nt eres tex p en s es n o trep o rt edel s ewh ere o f $ 1 8 ,1 9 2 ,2 6 7 , an d i n ves t m en ti n t eres t ex p en s es o f $ 1 9 , 6 5 6 ,5 3 5
. Ital s o rep o rt edth ati th adn o
n o n reco urs e l i ab i li t i es . Dy n am o Ho l d i n g s i ncl u d eda Sch edu l e 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., fo r Dynam o GP, rep o rt i n g $ 8 7 8 ,1 8 7 ,9 8 6 o f reco u rs e l iab i l i t i es , an dSch edu l es K-1 fo r th e Ch ri st i ne Dyn as t y Tru s tan dJ u l i en Dyn as ty Tru s t rep o rt i n g n o reco u rs e l i ab i l i t i es . Oni t s fi l edFo rm

1 0 65 fo r 2 0 0 7 Dyn am o Ho l d i n g s d i dn otrep o rtad v an ces
as a l i ab i l i ty

b u td i drep o rti n teres tex p en s es . Itrep o rt ed i nt eres t ex p en s es n o t rep o rt edel s ewh ere o f $ 1 7 ,3 0 9 ,2 5 2 an dn o n o n reco u rs e l i ab il i t i es . Dy n am o Ho l di n g s i n cl u d eda Sch edul e K-1 fo r Dynam o GP, rep o rt i n g $ 4 77 ,3 1 3 , 7 4 1 o f
reco u rs e l i ab i l i t i es an dSch edu l es K-1 fo r t h e Ch ri s ti n e Dynas ty Tru s tan dJ u l i en Dynas ty Tru s trep o rt i n g n o reco u rs e l i ab i l i t i es .- 4 1 -

[* 4 1 ] VIII. FPAA an dNo ti ce o f Defi ci en cy In J u n e 2 0 08 th e Co m

m i s s i o n er b eg an an ex am i nat i o n o f Dyn am o Ho l di n g s ’ retu rn s . Aft er t h e ex am i n at i o n s o f Beek m an Vi s ta’ s an dDy n am o Ho l di n g s ’ retu rn s , th e Co m m i s s i o n er i s s u eda n o t i ce o f fi n al p art n ers hi p ad m i n is trat i v e ad

ju st m en t (FPAA) wi th res p ectt o Dyn am o Ho l d i ng s an da n o t i ce
o f d efi ci en cy t o Beek m an Vi s t a. OnDecem

b er 2 8, 2 01 0 , th e Co m

m is si o n er t i m el y i s su ed an FPAA wi th
res p ectt o Dyn am o Ho l d i n g s fo r 2 0 0 5 , 2 0 0 6 , an d 2 0 0 7 . Th e Co m m i s si o n er m ad e
s ev eral ad ju s t m en t s i n th e FPAA, i n cl u d i n g ad ju s t i n g i n t eres tex p en s es b y $ 2 5 ,6 0 7 ,3 4 0 an d$ 1 6 ,9 2 1 ,2 5 6 fo r 2 0 0 6 an d2 0 0 7, res p ect iv el y . Th e Co m m i s s i o n er al s o ad

ju s t edfo rg i ven es s o f i n d eb t ed n es s i n co m e an d d i s tri b u t i o n s t o p art ners . Th e Co m

m i s s i on er d et erm i n eda s ect i o n 6 6 62 (a) accu racy -rel at ed p en al ty fo r each y ear. OnFeb ru ary 1 , 2 0 1 2 , th e Co m m i s s i on er i s s u edBeek m an Vi s t a a t i m el y
n o t i ce o f d efi ci en cy

fo r cal en d ar y ears 2 0 0 5 an d 2 0 0 6 . Th e Co m m is s i o n er d et erm i n edth atBeek m an Vi s t a m ad e U.S. s o u rce d i s tri b ut i o n s t o a Can ad i an
co rp o rat i o n s ub

jectt o wi th ho l d i n g t ax o f $ 56 1 m i ll i o n an d$ 5 0 6 m i l l i o n an dwas l i ab l e fo r a s ect i o n 6 6 5 1 (a)(1 ) ad d i t i o n t o t ax an d a s ect i o n 6 6 5 6 (a) p en al ty fo r each y ear. Th e Co m

m i ss io n er m ad e t h e fo l l o w in g d et erm i n at i o n s :- 4 2 -

Year Defi ci en cy Ad d i t io n t o t ax s ec. 6 65 1 (a)(1 ) Pen al ty

s ec. 6 6 5 6 (a) 2 0 0 5 $ 5 6 ,1 09 ,7 5 7 $ 1 4,0 2 7 ,4 3 9 $ 5 , 6 1 0 ,9 7 6 2 0 0 6 5 0 , 6 2 3 ,6 9 8 1 2,6 5 5 ,9 2 4 5 , 0 6 2 ,3 7 0
IX. Tax Co u rtPro ceed i n gs Dyn am o GP, the t ax m at t ers p art n er o f Dyn am o Ho ld i n g s , an dBeek m an Vi s t a t i m el y

p et i t i o n edth is Co u rtfo r rev i ew o n Feb ru ary 1 , 2 01 1 , an dAp ri l 4 , 2 0 1 2 , res p ect i v el y . At th e t i m e t h e p et i ti o n s were fi l ed , Dy n am o Ho l d in g s ’ an d Beek m an Vi s t a’ s p ri n ci p al p l ace o f b us i nes s was i n Fl ori d a. Th e Co u rt
co n so l i d at edth es e cas es . Bo th p art i es co n du ct edex t en s i v e p ret ri al d i s co v ery . Th e p art i es fi rs t
en g ag edi n i n fo rm al d i s co v ery . Th e Co m m i s s i o n er req ues t edal l d o cu m en t s rel at i n g t o tran s fers o f v al ue b etween Dy n am o an dBeek m an . Two y ears l at er, t h e p art i es i n v o l v edth e Co u rti n thei r p u rs u i to f fo rm al d is co v ery . W e i s s u ed Dynam o Ho l d in g s Lt d
. P’ s h i p v . Co m m i ss i on er, 9 wh i ch al l o wedDy n am o t o
res p o n d t o th e Co m

m i ss i o n er’ s req u es tu s i n g p red ict i ve co d i n g . Th e p art i es ’ d i s co v ery b at t l es co n t i nu ed . Dy

n am o s ub m i t t ed 1 0 req u es t s fo r adm i s si on s an d a
m o ti o n t o co m

p el p ro du ct io n o f d o cu m en t s . Sh o rt l y th ereaft er, t h e Co m

m i s s i o n er [* 42 ]

9 1 4 3 T.C. 1 8 3 (2 0 14 ).- 4 3 -

[* 4 3 ] fi l edtwo m o ti o n s t o co m p el p ro du ct i o n o f d o cu m en t s an ds i x m o ti o n s t o
co m p el th e t ak in g o f d ep o s i t i o n s . 1 0 Si x m o n th s b efo re t ri al th e Co m m i s s i on er fi leda m o t i o n t o am en dh i s
an s wer t o Beek m an Vi s t a’ s p et i t i o n t o i n creas e t h e d efi ci en ci es , ad di t i o n s t o t ax , an d p en al t i es . Th e Co m

m i ss i o n er i n cl u deda l i s t o f 5 2 i n i ti al tran s fers i ncl u d ed i n th e cal cu l at i o n s i n th e n o ti ce o f d efi ci en cy an da rev i s edl is t o f 1 46 tran s fers th at i n creas edth e d efi ci en ci es . Th e Co m m i s s i on er i n creas edth e am o un t s o f t h e tran s fers fro m

th e am o u nt s reco rd edo n th e b o o k s fo r t h e fo l l o wi n g p ro p ert i es : th e Gran d e atM i ras o l p ro p ert y , th e M ai n s treet p ro p ert i es , th e J ag o f Pal m Beach p ro p erty , th e Bear’ s Cl ub p ro p ert y , th e Do m an i p ro p ert y , th e Gran d e Saras o t an p ro p erty , an dth e Heat h ro w Oak s p ro p ert y . Th e Co m m i ss i o n er al s o i n creas edth e
am ou n t s o f t h e t ran s fers fro m th e am o u n t s reco rd edo n th e b o o k s wi th res p ectt o th e TOUSA/ Ko l t er, LLC i n t eres tan dth e Dyn am o Fu n d . W e g ran t edth e m o t i o n . Th e Co m m i ss i o n er’ s am en d ed d et erm i n at i o n s are as fo l l o w s :
Year Defi ci en cy Ad d i t io n t o t ax s ec. 6 65 1 (a)(1 ) Pen al ty

s ec. 6 6 5 6 (a) 2 0 0 5 $ 5 7 ,9 06 ,5 1 4 $ 1 4,4 7 6 ,6 2 8 $5 ,7 9 0 , 6 5 1 2 0 0 6 7 5 , 9 4 4 ,5 1 7 1 8,9 8 6 ,1 2 9 7 ,5 9 4 , 4 5 2

1 0 W e n o te t h at th e Co m

m i s s i o n er d i dn o t fi l e a m o t i o n t o co m p el th e t ak i n g o f a d ep o s i t i o n o f M rs . M o o g .- 4 4 -

[* 4 4 ] Th e p art i es h av e res o l vedo r co n ced edv ari o u s i tem s. OPINION Th e p ri n ci p al i s s u es i n th es e cas es are 1 ) wh et h er t ran sfers fro m Beek m an t o Dynam o were g ift s o r l o an s an d 2 ) wh et h er th ere were t ran s fers o f p ro p ert y fro m Beek m an t o Dynam o atl es s th an fai r m ark et v al u e. To th e ex t en tth e Co m m i s s i o n er p rev ai l s , h is p rev ai l i n g wo u l dg i v e ri se t o co n s tru ct i ve d i s tri b u t i o n s
up th e Beek m an ch ai n o f en t i t i es , an dth os e d i s tri b u t i on s co u l db e s ub j ectt o wi th h o l d i n g t ax es . As t o th e fi rs ti s su e, we m u s tfi rs t d et erm i n e wh et h er t h e ad v an ces were b o n a fi de d eb t . As t o th e s eco n d i s su e, we m u s td et erm i n e wh et h er p ro p erty was tran s ferred atfai r m ark et v al u e. If we fi n d t h atth e t ran s fers were n o t b o n a fi d e d eb t o r t h atp ro p ert y was tran s ferred atl es s th an fai r m ark et v al u e, t h en
we m u s td et erm i n e wh et h er t here were co ns tru ct i v e d i st ri b u t i o n s . If there were, th en we m

u s td et erm i n e wh et h er Beek m an was req ui red t o wi thh o l dt ax es . I. Bu rd en o f Pro o f In g en eral , th e Co m

m i s s i o n er’ s d et erm i n at i o ns i n a n o t ice o f d efi ci en cy an d
an FPAA are p res u m edco rrect , an d t ax p ay ers b ear t h e b u rd eno f p ro v i n g
o th erwi s e. 1 1

1 1 Ru l e 1 4 2(a); W el ch v . Hel v eri ng , 2 9 0 U.S. 1 1 1 , 1 15 (1 9 3 3 ).- 4 5 -

[* 4 5 ] Th e Co m

m is s i o n er b ears th e b u rd en o f p ro o f, h o wev er, o n an y n ew m at t er, i n creas es i n d efi ci en cy , o r affi rm at i v e d efen ses p l ead ed i n h i s an s w er. 1 2 Th e Co m m i s s i o n er fi l edan am en d m en tt o an s wer as s ert i n g i n creas ed d efi ci en ci es as wel l as p en al t i es an d ad d i ti o n s t o t ax ag ai n s tBeek m an . Th e Co m m i s s i o n er h as th e b u rd en o n th es e i n creas es . 1 3 Th e Co m m is s i o n er co n t en d s , h o wev er, t h ath e b ears th e b urd en o n l y o n th e
am ou n t s o f t h e d efi ci en ci es i n creas edo v er wh at was i n cl u d edi n t h e FPAA an dthe
n o t i ce o f d efi ci en cy . He arg ues th at , aft er h i s co n ces s i o n s fo r 2 0 0 5 , Beek m an ’ s t o t al d efi ci en cy fo r t h aty ear i s l es s th an th e am o u n td et erm in edi n the n o t i ce o f d efi ci en cy

s o th at h e d o es n o tb ear an y b u rd en wi th res p ect t o 2 0 0 5. W e d i s ag ree. A n ew t h eo ry

o r reas o n th ati s p res en t edt o s u s t ai n a d efi ci en cy i s treat edas
a n ew m at t er wh en i ti n creas es th e am o un to f t h e d efi ci en cy o r req u i res th e p res en t at i o n o f d i fferen tev i d en ce. 1 4 Th e i s su es rai s edi n th e am en d m en tt o an s wer req u i re t he p res en t at i o n o f d i fferen tev i d en ce. Th e Co m m i s s i o n er i s s u eda n o t i ce
o f d efi ci en cy th at d et erm i n edth atBeek m anm ad e d i s tri b u t i o n s t o a Can ad i an

1 2 Ru l e 1 4 2(a); Sh ea v . Co m m is s i o n er, 1 12 T.C. 1 8 3, 1 9 0 -1 9 1 n .1 0 (1 9 9 9 ).
1 3 Ru l e 1 4 2(a); Sh ea v . Co m m is s i o n er, 1 12 T.C. at 1 9 1
. 1 4 See Sh ea v . Co m

m is s i o n er, 1 1 2 T.C. at1 9 1 -1 9 2 ; W ayn e Bo l t & Nu tCo ., v . Co m m i s s i o n er, 9 3 T.C. 5 0 0, 5 0 7 -5 0 8 (1 9 89 ).- 4 6 -

[* 4 6 ] co rp o rat io n an dwas l i ab l e fo r wi th h o l d i n g t ax es o n th o s e d is tri b u t i o n s . Beek m an b ears th e b u rd en o f p ro v i n g th atth e Co m m i s s i o n er’ s d et erm i nat i o n s i n th e n o ti ce o f d efi ci en cy

were i n co rrect . 1 5 Ho wev er, th e Co m m i s s i o n er t h enfi l ed
an am en d m en tt o an s wer i n wh i ch h e i ncreas edth e am o u n t s o f th e d is tri b u t i o n s t o th e Can ad i an co rp o rat i o n b y i n creas i n g th e v al u es o f t h e p ro p ert i es tran s ferred fro m Beek m an t o Dyn am o . Th i s req u i res th e p res en t at i o n o f d i fferen tev i d en ce, i n cl u d i n g rep o rt s o f v al uat i o n ex p ert s . Acco rd i n g l y , we fi n d th atth e Co m m i s s i o n er b ears th e b u rd en o f p ro o f o n th e i n creas ed v al u es o f p ro p ert y th at
were as s ert edi n th e am en d m en tt o an s wer. In th e am en d m en tt o an s wer t h e Co m m is s i o n er al s o i ncreas edthe ad d i t i o n s t o t ax u n d er s ect i on 6 6 5 1 (a)(1 ) an dthe p en al t i es u n d er s ect i o n 6 6 5 6 (a). Th e Co m m i s s i o n er b ears th e b u rd en o f p ro o f o n an y i n creas e i n th e am o un t s o f p en al t i es o v er wh atwas o ri g in al l y d et erm i n ed i n th e n o t ice o f d efi ci en cy . 1 6 Fo r p en al t i es u n d er s ect i o n 6 6 5 6 (a) t h e b u rd en o f p ro o f i n cl u d es wri t t en s up erv i s o ry ap p ro v al as req u i redb y

s ect i o n 6 7 5 1 (b ). 1 7

1 5 See Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. at1 1 5
. 1 6 Rad er v . Co m

m i s s i on er, 1 4 3 T.C. 3 7 6 , 3 8 9 (2 0 1 4 ), aff’ di n p art , 6 1 6 F. Ap p ’ x 3 9 1 (1 0 th Ci r. 2 0 1 5 ).

1 7 Graev v . Co m

m i s si o ner, 1 4 9 T.C. _

_ , _ _ (s li p o p . at1 4 ) (Dec. 2 0 , 2 0 1 7 ),

(co n ti n u ed ...)- 4 7 -

[* 4 7 ] In l i m i teds i tu at io n s th e b u rd en m ay s h i ftt o th e Co m

m i s s i o ner u nd er
s ect i on 7 4 9 1 (a). Pet i t io n ers d o n o targ u e t h at the b u rd en s h o u l d s hi ft , an dwe fi n d th atth e fact s d o n o ts u g ges t th ati ts h o ul d
. Acco rd in gl y , th e b u rd en d o es n o ts h i ft
u n d er s ect i o n 7 4 9 1 (a) o n t h e rem ai n i n g i t em s . II. Deb tv s . Gi ft Th e Co m m is s i o n er arg u es th atth e ad v an ces were n o t l oan s fro m Beek m an t o Dy n am o b u twere g i ft s fro m M rs . M o o g t o the Dyn am o tru s t s i n a 6 0/ 4 0 s p l i t . Th e ques t i o n o f wh et h er a t ax p ay er h as en t eredi n t o a b o n a fi d e cred i t o r-d eb t o r rel at i o n s h i p p erv ad es Fed eral t ax l i t i g at io n. 1 8 Th e p art i es m us th av e act u al l y i n t en d edt o es t ab l i s h a d eb t o r-cred i t o r rel at i o n s h ip fo r a t ran s act i o n t o b e a b o n a fi de l oan . 1 9 To fi n da b on a fi d e cred i t o r-d eb t o r rel at i o n s h i p , we m us td et erm i n e th atat th e t i m e t h e ad v an ces were m ad e t h ere was “ an u n co n di t i o n al o b l i g at i o n o n

1 7 (...co n t i nu ed ) s up p lem en t i n g 1 4 7 T.C. 4 6 0 (2 0 1 6 ).

1 8 See, e.g ., El l i n ger v . Un i t edSt at es , 4 7 0 F.3 d1 3 2 5 ,1 3 3 3 -1 3 34 (1 1 th Ci r. 2 0 0 6 ); Cal l o way

v . Co m m i s s i o n er, 1 35 T.C. 2 6 , 3 6 -3 7 (2 0 1 0 ), aff’ d , 6 9 1 F.3 d 1 3 1 5 (1 1 th Ci r. 2 0 1 2 ).

1 9 Cal l o way

v . Co m m i s si o n er, 1 3 5 T.C. at3 7 ; s ee al s o El l i n ger, 4 7 0 F.3 d . at 1 3 3 3
.- 4 8 -

[* 4 8 ] th e p art of t h e t ran s feree t o rep ay th e m o ney , an d an u n co n d i t i o n al i n t en t i on
o n th e p art o f t h e tran sfero r t o s ecu re rep aym en t .” 2 0 W e ap pl y s p eci al s cru t i n y

t o i n trafam i ly

tran s fers an dtran s act i o ns b et ween
en t i t i es i n th e s am e co rp o rat e fam i ly o r wi th s h aredo wn ers hi p . 2 1 Tran sfers b et ween fam i l y

m em b ers are p res u m edt o b e g i ft s . 2 2 Th i s p res u m p t i o n can b e reb u t t edb y

“ an affi rm at iv e s h o wi ng th at there ex i st eda real ex p ect at i o n o f rep aym en tan di nt en tt o en fo rce t h e co l l ect i o n o f t h e i n deb t ed nes s .” 2 3 When
an al y zi ng tran s fers b etween rel at edp art i es , i ti s u s efu l t o co m p are t h e t ran s act i o n s ati ss u e t o arm ’ s -l en g th t ran s act i o n s an d n o rm al b u s i n es s p ract i ces . 2 4 Ho wev er,

2 0 Haag v . Co m

m i s s io n er, 8 8 T.C. 6 0 4 , 6 16 (1 9 8 7 ), aff’ dwi tho u tp ub l i s h ed o p i n i o n , 8 5 5 F.2 d8 5 5 (8 th Ci r. 1 9 8 8 ).

2 1 Kean v . Co m

m i s s io n er, 9 1 T.C. 5 7 5 (1 9 8 8 ); M al o ne & Hy d e, In c. v . Co m m i s s i o n er, 4 9 T.C. 5 75 , 5 7 8 (1 9 6 8 ); Vi n ik o o r v . Co m m i s s i o ner, T.C. M em o . 1 9 9 8 -1 5 2 , 7 5 T.C.M . (CCH) 2 1 8 5 (1 9 9 8 ).

2 2 Perryv . Co m

m i s s io n er, 9 2 T.C. 4 7 0 , 4 8 1 (1 98 9 ), aff’ d wi th o u tp ub l i s h ed o p i n i o n , 9 1 2 F.2 d1 4 6 6 (5 th Ci r. 1 9 9 0 ); Barr v
. Co m m i s s i o ner, T.C. M em o . 1 9 9 9
- 4 0 , 7 7 T.C.M . (CCH) 1 3 7 0 , 1 3 7 2 (1 9 9 9 ); Vi n i k oo r v . Co m m i ss i o ner, 7 5 T.C.M
. (CCH) at 2 1 8 7
.

2 3 Vi n i k o o r v . Co m

m i s s i on er, 7 5 T.C.M
. at2 1 87
. 2 4 Es t at e o f M i x o n v . Un i t edSt at es , 4 6 4 F.2 d3 94 , 4 03 (5 th Ci r. 1 9 7 2 ); Di x i e Dai ri es Co rp . v . Co m

m i ss i o n er, 7 4 T.C. 4 7 6 , 4 9 4 (1 9 8 0 ).- 4 9 -

[* 4 9 ] we m

u s t al so b e m i n d fu l o f t h e b u s in es s real i ti es o f rel at edp art ies
. 2 5 Fo r
ex am p l e, we h av e h el dth ats ecu ri ty an do th er cred i t o r p ro tect i o ns are l es s i m p o rt an ti n a rel at ed -p art y

co nt ex t . 2 6 Th e Co u rto f Ap p eal s fo r t h e El ev en th Ci rcu i t, t o wh i ch th es e co ns o l i d at ed
cas es co u l db e ap peal ed , h as d ev el o p eda 1 3 -p artt es tt o d et erm i n e wh et h er an ad v an ce i s d eb to r eq u it y . 2 7 Whi l e t hi s i s s i m i l ar t o o u r b o n a fi d e d eb t an al y s i s , th ere are s o m e i nco n s i s t en ci es . Th e Co u rto f Ap p eal s ’ 1 3 -fact o r d eb t -v ers u s equ it y t es tas k s th e Co u rtt o l o o kt o th e t ot al i ty o f al l th e fact s an dci rcu m s t an ces
an d s peci fi cal l y

d irect s th e Co u rtt o co n s i der t h e fo ll o wi n g : (1 ) th e n am es g i v en t o cert i fi cat es ev i d en ci n g th e i n d eb t ed n es s; (2 ) th e p res en ce o r ab s en ce o f a fi x ed m atu ri ty d at e; (3 ) th e s ou rce o f p aym en ts ; (4 ) th e ri g h tt o en fo rce p aym en t o f p ri n ci p al an d i n t eres t ; (5 ) p art i ci pat i o n i n m an ag em en t fl o w i n g as a res u l t ; (6 ) th e s tatu s o f t h e co n tri b u t i on i n rel at i o n t o reg u l ar co rp orat e cred it o rs ; (7 ) th e i n ten to f t h e p art i es ; (8 ) “ thi n ” o r ad equat e cap i t al i zat i o n ;

2 5 Li t t o n Bu s . Sy s ., In c. v . Co m m i s s i o n er, 6 1 T.C. 3 6 7 , 3 7 7 -3 7 8 (1 9 7 3 ); NA Gen
. P’ s h i p & Subs . v . Co m m is s i o n er, T.C. M em o. 2 0 1 2 -1 7 2 , 1 0 3 T.C.M . (CCH) 1 9 1 6 , 1 9 2 0 (2 01 2 ); s ee al s o M al o n e & Hy d e, In c. v . Co m m is s i o n er, 4 9 T.C. at 5 7 8
. 2 6 NA Gen . P’ s hi p & Sub s . v . Co m m i s s i o ner, 1 0 3 T.C.M
. (CCH) at 1 9 2 0
- 1 9 2 1
. 2 7 El l i n g er, 4 7 0 F.3 dat 1 3 3 3 -1 3 3 4
.- 5 0 -

[* 5 0 ] (9 ) i d en t i ty o f i n t eres tb et ween cred i t o r an ds t o ckh o l d er; (1 0 ) s o u rce o f i n t eres tp aym en t s ; (1 1 ) th e ab il i ty

o f t h e co rp o rat i o n t o o b t ai n l o an s fro m o u t s i d e l en di n g i n s ti tu t i o n s ; (1 2 ) th e ex ten tt o wh i ch th e ad v an ce was u s edt o acq u ire cap i t al as s et s ; an d (1 3 ) th e fai l u re o f t he d eb t o r t o rep ay o n th e du e d at e o r t o s eeka p os tp o nem en t . [ 2 8 ] Bu t th is i s n o ta d eb t -v ers u s -eq u i ty cas e. Th e Co m m i s si o n er arg u es th atth e tran s fers were g i ft s , n o t equ i ty . As a res u l t , o u r i n qu i ry i s n o tfo cu s edo n wei g h i n g d eb t v ers u s equ it y , b u trat h er o n co n s i d eri n g wh et h er t h ere i s a b o n a fi d e d eb t . Wh i l e t h e d eb t -v ers u s -eq u it y t es tad o p t edb y

th e Co u rto f Ap p eal s o ffers s o m e g u i d an ce, i ti s n o td i rect l y o n p o i n t . In J o n es v . Co m

m i s s i o n er, we u s ed a l o n g -s t an di n g n i n e-fact o r fact s an d ci rcu m s t an ces t es tt o d et erm i n e wh et h er t wo p art i es en t ered i n t o a v al i d d eb t o rcred i t o r rel at i o n s h i p . 2 9 W e ev al u at edal l th e p ert i n en t fact s an d ci rcu m s tan ces o f th e cas e, i n cl u di n g wh eth er: (1 ) Th ere was a p ro m i ss o ry n o t e o r o th er ev i d en ce o f i nd eb ted n es s , (2 ) i n t eres twas ch arg ed , (3 ) t h ere was s ecu ri ty o r co l l at eral , (4 ) t h ere was a fi xedm atu ri ty

d at e, (5 ) a d em an dfo r rep aym en twas m ad e, (6 ) an y actu al rep aym en twas m ad e, (7 ) t h e t ran s feree h adth e ab i l i ty t o rep ay , (8 ) an y

reco rd s m ai n t ai n edb y

th e t ran sfero r an d/o r t h e

2 8 El l i n g er, 4 7 0 F.3 dat 1 3 3 3 -1 3 3 4
. 2 9 J o n es v . Co m

m i ss i o n er, T.C. M em o . 1 9 9 7-4 0 0 , 7 4 T.C.M . (CCH) 4 7 3 , 4 8 2 (1 99 7 ), aff’ d wi th o ut p ub l is h edo p in i o n, 1 7 7 F.3 d9 8 3 (1 1 th Ci r. 1 9 9 9 ).- 5 1 -

tran s feree refl ect ed th e t ran s act i o n as a l o an , an d(9 ) t he m an n er i n wh i ch th e t ran s act i o n was rep o rt ed fo r Fed eral t ax i s co n s i s t en twi th a l o an . * * * Ou r o pi n i o n i n J o n es was affi rm edwi tho u ta p ub l i sh edo p i n i on . Becau s e t h e Co u rto f Ap p eal s h as ad o pt edo n l y a d eb t-v ers u s -eq u i ty

t es trat h er t h an a b o n a fi d e d eb t t es tl i k e t he o n e em

p lo y edi n J o nes , an db ecau se t he Co u rto f Ap p eal s affi rm edo ur h ol d i n g i n J o n es an dh as n ot ad o p t eda co n trav en in g ru l i n g , we
co n ti n u e t o rel y

o n o u r n i n e-fact o r an al y s i s . 3 0 In ap p l y i n g th is m

u lt i fact o r t es twe d o n otm erel y co u n tth e fact o rs , an dn o t al l fact o rs are eq u al ; i n s t ead , we an al y ze t h e p ert i nen tfact s t o d et erm i ne wh et h er a b o n a fi d e d eb to r-cred i t o r rel at io n s h i p was es t ab l i s h ed
. 3 1 Th es e fact o rs fal l ro u g h l y i n t o two cat eg o ri es : fo rm al i n d i ci a o f d eb tan d eco n o m i c i n d i ci a o f d eb t . Pet i t i o ners al l eg e t h atDy n am o an dBeek m an h ad th e i nt en tt o rep ay an db e rep ai das d em o n s trat edb y th ei r s ubject i ve d ecl arat i o n s o f th ei r i n t en t. Co n v ers el y , th e Co m m i s s i o n er arg ues th atwe s h o u l ddraw an ad v ers e i n feren ce fro m M rs . M o o g’ s fai l u re t o t es t ify

attri al an di n fer t hatDy

nam o an d Beek m an d i dn o t i n t en dt o rep ay

an d b e rep ai d . W e d i s ag ree wi th b o th p art i es . [* 5 1 ]

3 0 Go l s en v . Co m

m i s s i o n er, 5 4 T.C. 7 42 (1 9 7 0 ), aff’ d , 4 4 5 F.2 d9 8 5 (1 0 t h Ci r. 1 9 71 ).

3 1 See El l i n g er, 4 7 0 F.3 dat1 3 3 4 ; Di x i e Dai ri es Co rp . v . Co m m i s s i on er, 7 4 T.C. at4 9 3 -4 9 4
.- 5 2 -

[* 5 2 ] W e ap pl y

a s p eci al s cru t i n y

t o tran s act i on s b et w een co m p an i es wi th s h ared
o wn ers hi p an di nt rafam il y tran s fers , an dwe p res um e t h attran s fers b etw een fam i l y
m em b ers are g i ft s . 3 2 Here, t ran s fers b et ween Beek m anan dDy n am o were t ran s fers b et ween co m

p an ies wi th b o th s h aredo wn ers hi p an di nt rafam i l y tran s fers
. Beek m an an d D y

n am o h ad s hared o wn ers h ip an dco n tro l . Bo th Dy n am o
an d Beek m an w ere o wn edi n p artb y tru s t s fo r wh i ch Ch ri s ti n e, M r. J u l i en an d th ei r fam i l i es were b en efi ci ari es . Tran sfers b et ween th e two s tru ctu res were tran s fers b et w een co m

p an i es wi th s h aredo wn ers h i p . Tran s fers b et ween Beek m an an dDy n am o were u l t i m at el y

i n trafam i l y tran s fers . When Beek m an m ad e t ran s fers t o Dy n am o , v al u e was b ei ng tran s ferred fro m o n e fam i l y

o f co m p an ies , th e m ajo ri ty

o f wh i ch were h el db y

tru s t s fo r wh i ch Del i a M o o g i s a b en efi ci ary , Del i a M oo g Fam i l y Tru s t an d Del i a M o o g Fam i l y Tru s t# 2 , t o an o th er fam i l y o f co m p an i es , th e m ajo ri ty

o f wh i ch were h el db y tru s t s fo r wh i ch h er d au g h t er an dn ep hew an dth ei r fam i l i es were b en efi ci ari es . Wh i l e Ch ri s t in e an dM r. J u l i en were al s o b en efi ci ari es o f s o m e o f th e tru s t s wh i ch
o wn edBeek m an , th e t ran s fers fro m Beek m an t o Dy

n am o redu cedDel i a M o o g ’ s

3 2 Perryv . Co m

m i s s io n er, 9 2 T.C. at4 81 ; Kean v . Co m m i s s io n er, 9 1 T.C. at 5 9 5 ; Vi n i k o o r v . Co m

m i s s i on er, 7 5 T.C.M . (CCH) at 2 1 8 7
.- 5 3 -

[* 5 3 ] b en efi ci al i n t eres ti n th e u n d erl y in g p ro p ert i es i n fav o r o f h er d au g ht er, h er
n ep hew, an dth ei r fam i l i es . Gi v en th e n atu re o f t h es e t ran sfers , we treat th em wi th s p eci al s cru ti n y

an d d et erm i n e wh eth er t h e ad v an ces are g ift s o r l o an s fo r Fed eral t ax p u rp o s es o n th e b as i s o f t h e t o tal i ty

o f t h e ci rcu m s t an ces . 3 3 On th atb as i s we fi n dth atth e ad v an ces were l o an s . A. Fo rm al In d i ci a o f Deb t Dyn am o an d Beek m an s at i s fi eds o m e b u tn o tal l o f t h e fo rm al i n d i ci a o f d eb t. W e ag ree wi th the Co m m i s si o n er t hatatthe t i m e t h e ad v an ces were m ad e th ere was n o co n t em

p o ran eo u s p ro m i s s o ry

n o t e i d en t i fy in g al l th e t erm s o f t h e ag reem en t , there was n o co ll at eral s etas i d e t o en s u re rep aym en t , there was n o i n v o i ce o r d em an d m ad e b y Beek m an , an d t h ere was n o fi x edm atu ri ty d at e o r i n t en tt o fo rce Dyn am o i n t o b an krup t cy i f req ui redt o en s ure rep aym en t . Ho wev er, th ere are m an y m ean i n g fu l i nd i ci a o f d eb t . Dy n am o an d Beek m an
m ai n t ai n edreco rd s th at refl ect edad v an ces as d eb ti n th ei r g en eral l ed g ers , an d th ey ex ecu t edp ro m i s s o ry n o t es .

3 3 See Es t at e o f M i x o n , 4 6 4 F.2 d at4 02
.- 5 4 -

[* 5 4 ] 1
. Gen eral Led g ers W e fi n dth atDy

n am o ’ s an dBeek m an ’ s g en eral l ed g ers co n s i s t en t l y refl ect edth e ad v an ces as d eb t . Th ey h ad a wel l -es t ab l i s h edp ract ice o f reco rd i n g
an d rep ay i n g ad v an ces . Th e ad v an ces t o Dy n am o an di t s s ub s id i ari es were b o o k edas am o u n ts du e t o Beek m an . Li kewi s e, ad v an ces fro m Beek m an were
reco rd edas am o u nt s du e fro m Dy n am o . Al th ou g h Dy

n am o m ad e o ccas i o n al
erro rs i n rep o rt i n g , th o se i n co rrect en tri es co u l dn o tb e eras ed an dwere req u i redt o b e co rrect ed th ro u g h rev ers i n g en tri es . Th es e co rrect io n s were refl ect edi n th e
reco rd s an dg i v e cred i b i li ty t o t h ei r rep o rt i n g . M o reo v er, M r. M os es , th e o n l y fo ren s i c ex p erti n th es e cas es , d et ai ledeach
en try an dcal cu l at edth e am o u n t s o f ad v an ces an d rep aym en ts . W e m ay accep to r rejectex p ertt es t i m o ny

wh en i n o u r b es tju d g m en t , o n th e b as i s o f t he reco rd , i ti s ap p ro p ri at e t o d o s o . 3 4 Onth e b as i s o f t h e reco rd , i t i s ap p ro p ri at e t o accep tM r. M o s es ’ t es t i m o n y

b ecau s e we fi n dh i s p ro ces s o f d et erm i n i n g the am o u nto f ad v an ces an d rep aym en t s cred ib l e. In h i s p o s tt ri al b ri ef t h e Co m m i s s i o ner ch al len g es M r. M o s es ’ rep o rtan d p o s i t s thatBeek m an s im

p ly o ffs etl ed ger en tri es rat h er t h an h av e Dynam o p ay i t s

3 4 Fed . R. Ev i d. 7 0 2 ; Park er v . Co m m i s si o n er, 8 6 T.C. 5 47 , 5 61 (1 9 8 6 ); s ee al s o Sh errer v . Co m

m i ss i o n er, T.C. M em o . 1 9 9 9 -1 2 2 , 7 7 T.C.M
. (CCH) 1 79 5 , 1 8 0 0 -1 8 0 1 (1 9 9 9 ), aff’ d , 5 F. Ap p ’ x 7 1 9 (9 th Ci r. 2 0 0 1 ).- 5 5 -

[* 5 5 ] d eb t s . W e fi nd , h o wev er, t h atDy nam o rep ai di t s d eb t s t o Beek m an i n p art b y p ro v i d i n g m an ag em en t s erv i ces t o Beek m an . Beek m an p ai d fo r t h o s e
m an ag em en ts erv ices b y

redu ci n g th e am o u n t s du e fro m Dy n am o . Th o s e redu ct i o n s h ad th e eco n om i c effect o f p aym en ts an ds h ou l d b e res p ect ed
. Th e Co m m is s i o n er arg u es fo r t h e fi rs t t i m e o n b ri ef th at we s h o u l d i m p o s e
an ad vers e i n feren ce b ecau s e p et i t i o n ers d i dn o tp ro du ce al l o f Beek m an ’ s an d Dynam o ’ s p art n ers ’ reco rd s. W e m ay draw an ad v ers e i n feren ce wh en a p arty al l eg es a fact b u tfai l s t o i nt ro du ce ev i den ce wi th i n h i s p o s s es s i o n wh i ch , i f t ru e,
wo u l db e fav o rab l e t o h i m . 3 5 Ho wev er, we wi l l n o ts p ecu l at e o n wh ats u ch d o cu m en t s wo u lds h o w wh en th e p art y req u es t i n g th e i n feren ce co u l dh av e u s ed d i s co v ery t o ol s b u td idn o t . 3 6 Th e Co m m is si o n er n ev er req u es tedth e d o cu m en t s fro m Dy n am o ’ s p art n ers . Acco rd i n g ly , we wi l l n o t draw an ad v ers e i n feren ce. M o reo v er, we wi l l n otdraw an ad v ers e i n feren ce ag ai n s tDy n am o an d Beek m an fo r n o tp ro duci n g a p o rt i o n o f Beek m an ’ s g en eral l ed g ers . M r. M o s es t es t i fi edth ath e rev i ewedth e g en eral l ed g ers fo r Beek m ant o co n fi rm h i s fi n d i n gs

3 5 Cal l ah an v . Sch u l t z, 7 8 3 F.2 d1 5 4 3 , 1 5 45 (1 1 th Ci r. 1 9 86 ); W i ch i t a Term in al El ev at o r Co . v . Co m m i s s i o n er, 6 T.C. 1 1 58 , 1 16 5 (1 94 6 ), aff’ d , 1 6 2 F.2 d 5 1 3 (1 0t h Ci r. 1 94 7 ).

3 6 St ev en so n v . Co m

m is s io n er, T.C. M em o . 1 9 8 6 -2 0 7 , 5 1 T.C.M (CCH) 1 0 5 0 , 1 0 6 0 n .1 3 (1 9 8 6 ).- 5 6 -

[* 5 6 ] an d t h ath e h adco n fi rm eds p eci fi c t ran sact i o n s wi th Beek m an ’ s g en eral l ed g er. On th e b as i s o f Dynam o ’ s an d Beek m an ’ s b oo k s an dreco rd s , h e d et erm i n edth atad v an ces were rep ai d . M o reo v er, duri n g d i s co v ery th e Co m m i s s i o n er fo un dth ath e d i dn o th av e Beek m an ’ s g en eral l ed g ers . He d i dn o t fi le a m o t i o n t o co m

p el fo r Beek m an ’ s g en eral l ed g ers th en ; h e can n ot req u es tan ad v ers e i n feren ce n o w. 3 7

2
. Dem an dNo t e W e fi n dth atBeek m an an dDy n am o ex ecu t eda p ro m i s so ry n ot e as p arto f th e res tru ctu ri ng tran s act i on s . Th i s n o t e was ex ecu t edn o l at er t h an Feb ru ary 2 0 0 8 . Th e n o te h adth e cu s t o m ary l o an t erm s , i n cl u d i n g t h e am o u n to f t h e l o an , i n t eres trat e accru al , an dd em an dt erm s . Al th o u g h the p ro m i s s o ry n o t es were n o t
ex ecu t edco n t em

p o ran eo u s l y wi th al l o f t h e ad v an ces , we h av e p rev io u s l y fo u n d th ataft er-t h e-fact co ns o l i dat i o n o f ad v an ces an dex ecu t i o n o f p ro m i s s o ry n o t es
can i n d i cat e t h atthe ad v an ces were d eb t . 3 8

3 7 See Eri k s en v . Co m

m i ss i o n er, T.C. M em o . 2 0 1 2 -1 9 4, 1 0 4 T.C.M
. (CCH) 4 6 , 5 3 n .1 3 (2 0 12 ) (d en y i n g an ad v ers e i n feren ce wh en th e requ es ti n g p art y fai l ed t o i ncl ud e t ri al s ubp o en as an dd i dn o ts p eci fy th e s co p e o f t h e d o cu m en t s req u es t ed ).

3 8 Swai n v . Co m

m i s si o n er, T.C. M em o 1 98 1 -7 1 6 , 4 3 T.C.M . (CCH) 1 2 1 , 1 2 9 (1 98 1 ).- 5 7 -

[* 5 7 ] M o reo v er, we are p ers u ad edb y th e fact th at th e n o t es were creat edas a p art
o f t h e res tru ctu ri n g tran sact i o n s wh erei n m u lt i pl e d o cu m en t s i d en t i fy i n g th e ad v an ces as l o an s were creat ed . Th e Co m m i ss i o n er as k s u s t o fo l l o wth e l i n e o f
reas on i n g i n cas es wh ere co u rt s h av e h el dth at a p ro m i ss o ry n o t e creat edaft er t h e
co m m en cem en to f an ex am i n at i o n s h o ul dco u n tag ai n s ta fi n di n g o f d eb t . 3 9 W e fi ndth atan ex am i n at i on d i dn o tcau s e t h e ex ecu t i o n o f t h e n o t es i n th es e cas es . M o reo v er, th e n ot es were creat edb efo re Dy n am o’ s 2 0 07 Fo rm 1 06 5 was du e. W e fi ndth atth e n ot es were creat edas p arto f a g reat er res tru ctu ri n g effo rt . Th e Co m m is s i o n er arg u es th atth e n o tes are u n en fo rceab le an d t h atth e
u n en fo rceab i l i ty

s h o ws th atDy

n am o ’ s an d Beek m an ’ s o b ject i v e i n t en twas n o tt o
en fo rce rep aym en t o r m ak e p aym en t . Th e Co m m i s s i o n er arg u es th atth e n o t es are
u n en fo rceab l e b ecau se Dyn am o an dBeek m anfai l edt o p ay s tam p t ax , an d u n d er Fl o ri da s t atu t es , fai l u re t o p ay s t am p t ax ren d ers th e n o t e u n en fo rceab l e. 4 0 Ho wev er, th e wei g h to f t h e ev i d en ce s ho ws th at th e p art ies ex ecu t edth e n ot es t o

3 9 See W i l l i am s v . Co m

m i s s i o n er, 6 2 7 F.2 d1 03 2 , 1 0 3 5 (1 9 8 0), aff’ g T.C. M em o. 1 9 7 8 -3 0 6 ; Bai rdv . Co m m i s s i on er, 2 5 T.C. 3 8 7 , 3 9 4 -3 9 5 (1 9 5 5 ); Geo rg i o u v . Co m m i s s i o n er, T.C. M em o . 1 9 9 5 -5 4 6 , 7 0 T.C.M . (CCH) 1 3 4 1, 1 3 5 1 (1 9 9 5 ).
4 0 Fl a. St at . s ec. 2 0 1 .0 8 (1 )(b ) (2 0 0 6 ) (“ Th e * * * i n s tru m en t s hal l n o tb e en fo rceab l e i n an y

co u rto f t h i s s t at e as t o an y s u ch ad v an ce u n l es s an du n t i l th e t ax du e th ereo n up o n each ad v an ce t h atm ay h av e b een m ad e t h ereu n d er h as b een p ai d .”).- 5 8 -

[* 5 8 ] m em o ri al i ze t h e res tru ctu ri n g tran s act i o n s , an d i n d o i n g s o , th ey al s o
m em o ri al i zedth ei r l o n g st an d i n g p ract i ce o f ad v an ci n g an drep ay i n g l o an s . Th e d em an dn ot es , as is cu s t o m ary wi th d em an dn o t es , d i dn o th av e a fi x ed
m atu ri ty d at e. Wh i le t h e Co urto f Ap p eal s fo r t h e El ev en th Ci rcu ith as fo u n da l acko f fi x edm atu ri ty

d at e “ h i gh l y

s i gn i fi can t” i n a d eb tv ers u s equi ty an al y s i s , h ere Beek m an an dDy

n am o s i m p l y m em ori al i zed th ei r l o n g s t an d i n g p ract i ce o f ad v an ci ng an d rep ay in g l oan s . 4 1 In cas es wh ere t h at Co u rto f Ap p eal s h as fo u n da l acko f fi x edm atu ri ty

d at e t ro ub l i n g , th e p art i es al so fai l edt o rep ay th e d eb to r p ay i n t eres to n the n ot es an dth e “ cred i t o rs ” fai l ed t o s h o wthatth ey tru l y i n t en d ed t o h av e th e d eb t rep ai d
. 4 2 Here, t h e p art i es i n t en d edt o rep ay th e p ri n ci p al as wel l
as i n t eres to n the l o an s an d i n factd i d s o . Co n s equ en t l y , th e l acko f fi x edm atu ri t y d at es d o es n o tcreat e t h e s am e co n cern . W e h av e p rev i ou s l y

s t at edth atn o t es i n a “ cl o s ekn i tfam il y o f co rp o rat e
co u si n s are n o tas n eces s ary t o i n s u re rep aym en tas m ay b e t h e cas e b et ween
u n rel at eden ti t i es .” 4 3 Dy

n am o an dBeek m an h av e n o t es ev en th o u gh th e l o an s are

4 1 El l i n g er, 4 7 0 F.3 dat 1 3 3 4
. 4 2 See, e.g ., El l i n ger, 4 7 0 F.3 d at 1 33 4 ; St in n et t ’ s Po n t i ac Serv i ce, In c. v . Co m m i s s i o n er, 7 3 0 F.2 d6 3 4 , 6 3 8 (1 1 th Ci r. 1 9 8 4 ), aff’ g T.C. M em o 1 9 8 2 -3 1 4
. 4 3 Li t t o n Bu s . Sy s ., In c. v . Co m m i s s i o n er, 6 1 T.C. at 3 77 -3 7 8 (qu o t i n g Am
. (co n ti n u ed ...)- 5 9 -

[* 5 9 ] b et ween rel at edp art i es . W e fi n dth ato n th e b as i s o f t hes e fact s , th i s fact o r i s ei th er n eu tral o r wei g h s i n fav o r o f d eb t . Ho wev er, rel at ed -p art y

d em an dn o t es are affo rd edl i t t l e wei g h t . 4 4 Thu s , al th o u g h we fi n dth e d em an dn o t es m ay wei g h i n fav o r o f d eb t , we g i v e t h e n o t es l i tt l e wei g h t . W e are n o ttro ubl edb y

an y s h o rt co m i n g s i n Dy

n am o’ s an dBeek m an ’ s fo rm al i nd i ci a o f d eb t . Th ey m u s tb e t ak en i nt o acco u nti n th e co n t ex to f t he b u s i n es s real i t ies o f t h e t ran s act i o n . W e wo ul db e s u rp ri s edi f M r. J u l i en wro t e h i m s el f an i n v oi ce, d em an d edrep aym en t , o r req u i red a cred i tch ecko r au di t ed fi nan ci al s t at em en t s b efo re m ak i n g an ad v an ce. Th e m an ag em en to f t h es e
co m p an i es was th e s am e, an dth ey h adfu l l kn o wl ed g e o f an dacces s t o al l fi nan ci al i n fo rm at i on . M o reo v er, we h av e co ns i s t en t ly h el dth atthes e fo rm al i n d i ci a o f d eb tare l i t t l e m o re t han d ecl arat i o n s o f i n t en twi th o u tacco m pan y i n g
o b ject i ve eco n o m i c i n d i ci a o f d eb t . 4 5

4 3 (...co n t i nu ed ) Pro ces s i n g & Sal es Co . v . Un i t ed St at es , 3 7 1 F.2 d 8 4 2 , 8 5 7 (Ct . Cl . 1 9 6 7 )); s ee al s o Es t at e o f M i x o n , 4 6 4 F.2 dat4 0 3
.

4 4 W i l l iam s v . Co m

m is s i o n er, T.C. M em o . 1 97 8 -3 0 6 , 3 7 T.C.M . (CCH) 1 2 7 0 , 1 2 7 7 -1 2 7 8 (1 9 7 8 ).

4 5 Al t erm an Fo od s , In c. v . Un i t edSt at es , 5 0 5 F.2 d 8 73 , 8 7 9 (5 th Ci r. 1 9 7 4 ); (co n ti n u ed ...)- 6 0 -

[* 6 0 ] B. Eco n o m i c In di ci a o f Deb t In as cert ai n i n g the eco n o m ic real i ti es o f th e tran s act i o n, i t i s h el pfu l t o
m eas u re th e t ran s fer ag ai n s tth e eco n o m i c real i t i es o f t h e m ark etp l ace t o d et erm i n e wh et h er a t h i rdp art y

l en d er wo u l dh av e ex ten d ed th e l oan . 4 6 Dy n am o an d Beek m an s at is fy

al l th e o bject i v e eco n o m ic i nd i ci a o f d eb t. Beek m anch arg edan d Dynam o accru edi n teres to n th e ad v an ces i n 2 0 06 an d2 0 0 7 . Beek m anrep o rt ed
an d p ai dt ax o n th ati nt eres t i n co m e. Dy nam o rep o rt edan dd edu ct edth ati n t eres t
ex p en s e. Dy

n am o rep ai d s om e o f t h e ad van ces b efo re an y ex am i n at i on b eg an . At al l t i m es , Dy

n am o h adthe ab i l i ty

t o rep ay the l o an s . Im

p o rt an t ly , Dy

n am o co u l d h av e recei v edl o an s o n s ubs t an t i al l y s i m i lar t erm s . An dDy

n am o d i d recei v e
s i zab l e l o an s fro m

th i rdp art i es . 1
. In t eres tan dTax Rep ort i n g W e fi n dth atDy

n am o accru edi n teres twi th res p ectt o th e ad v an ces , an d Dynam o Ho l d in g s an dBeek m anVi s t a rep o rt ed th e i nt eres t o n th ei r Fo rm s 1 0 6 5
an d 1 1 2 0 . Tax rep o rt i n g can b e a fo rm al i nd i ci a o f d eb t o r an eco n o m i c i n d i ci a o f

4 5 (...co n t i nu ed ) Fi n Hay Real ty

Co . v . Un i t edSt at es , 3 9 8 F.2 d6 9 4 , 6 9 7 (3 dCi r. 1 9 68 ); Sen s en i g v . Co m m i s s i o n er, T.C. M em o . 2 0 1 7 -1 , at* 2 4 -* 2 6 , aff’ d, _

_ F. Ap p ’ x _

_ , 2 0 1 8 W L 5 0 8 5 6 7 (3 d Ci r. J an . 2 3 , 2 0 1 8 ).

4 6 Sen s en i g v . Co m

m i s s i on er, at* 2 6 -* 2 7.- 6 1 -

[* 6 1 ] d eb t . Where t ax rep o rt i n g h as n o eco n o m i c co n s equen ces , i ti s a p u rel y fo rm al i nd i ci a o f d eb t . Wh ere t ax rep o rt i n g h as eco no m i c co n s equ en ces , as wh ere rep o rt i n g i n t eres ti n co m e g iv es ri s e t o t ax ab l e i n co m e, we co ns i d er i tt o b e an
eco n om i c i n d i ci a o f d eb t . Dyn am o accru edi n teres to n the ad v an ces t o Beek m ano f $ 2 5 ,6 0 7 , 3 4 0 an d $ 1 7 ,2 2 0 ,4 9 3 i n 2 0 0 6 an d2 0 0 7 , res p ect iv el y . Th es e i n teres tex p en s es were i n d i cat edb y o n e b o o ken try atth e en do f each y ear. In t eres taccru ed an dwas ad d edt o th e o u t s t an d i n g b al an ce an d was p ai das th e o u t s t an di n g b al an ce was rep ai d . Al th o u g h th e i n t eres trat e was n o t p ro v i d ed , i ti s cl ear t h at i n t eres twas ap p li ed . M o reo v er, we are n ottro ub l edb y th e l acko f 2 0 0 5 i n t eres taccru al s . Th e ad v an ces were b o o k edat th e en do f 2 0 0 5 , s o i n t eres t wo u l dn o th av e accru edfo r 2 0 0 5
. Beek m an Vi s t a rep o rt edi n t eres ti nco m e an dDy n am o Ho ld in g s rep ort ed i n t eres tex p en se. Beek m an Vi s t a rep o rt ed$ 2 5 ,6 0 7 ,3 40 an d $ 1 7 ,2 2 0 ,4 9 3 o n i t s 2 0 0 6 Fo rm

1 1 20 an d2 0 07 Fo rm

1 1 2 0 , res p ect i v el y . Dy

n am o Ho l d i n g s rep o rt ed i n t eres tex p en ses o f $ 1 8 ,1 9 2 ,2 6 7 an d$ 1 9 , 6 56 ,3 5 3 o n i t s 2 0 0 6 Fo rm 1 0 6 5 an d $ 1 7 ,3 0 9 ,2 5 2 o n i t s 2 0 0 7 Fo rm 1 0 6 5 . Bo th th e fact th atDy n am o accru edan dp ai d i n t eres to n i t s ad v an ces fro m Beek m an an dth e fact th at b o th Beek m an Vi s t a an d- 6 2 -

[* 6 2 ] Dy n am o Ho l di n g s rep o rt edth e i n t eres tp aym en t s fo r t ax p u rp o s es p oi n t t o ward d eb t . 2
. Rep aym en t s W e fi n dth atDy

n am o m ad e rep aym en t s t o reduce t he o u t s t an d i n g b al an ce each y ear wi th o u t reg ardt o an y ex am i n at io n. Rep aym en t s , es p eci al l y rep aym en t s b efo re t h e Co m

m i s si o ner h as b eg u n an ex am i n at i o n , i n d i cat e d eb t . 4 7 Dy n am o rep ai dBeek m an wi th fu n d s fro m cap i t al co nt ri b u ti o n s fro m th e t ru s t s , an dwi th wi re t ran sfers . Dy

n am o al s o redu cedth e o u t st an d i n g b al an ce due b y p ro v id i n g
m an ag em en ts erv ices an d b y m ak i n g p aym en t s o n d eb t s th atBeek m an o wedt o th i rd p art i es . In Dy n am o ’ s fi rs ty ear o f o p erat i o n s , Dy nam o d ecreas edth e o ut s t an d i n g b al an ce b y

$ 1 3 7 ,5 3 1 ,6 2 6 . Ini ts s eco n d y ear o f o p erat io n s , Dy n am o d ecreas edth e
o u t s t an d i n g b al an ce b y

$ 9 8 6,9 4 3 ,5 81 . Al th o ug h the o u ts tan d i n g b al an ce i n creas edi n 2 0 0 6 , Dy

n am o ’ s 2 0 0 6 p aym en t s co m p l et el y rep ai dth e b al an ce fro m 2 0 0 5 . Duri n g th e y ear en d in g Decem b er 3 1 , 2 00 7 , Dy

nam o d ecreas edth e
o u t s t an d i n g b al an ce b y

$ 5 1 3,7 3 4 ,7 67 . Th i s am o u n tl eftth e o u t s t an di n g b al an ce at

4 7 M i el e v . Co m

m i s si o n er, 5 6 T.C. 5 5 6, 5 6 8 n .5 (1 9 7 1 ), aff’ dwi th ou t p ub l i s h edo p i n i o n, 4 7 4 F.2 d1 3 3 8 (3 dCi r. 1 9 7 3 ); Ep ps v . Co m m i s s i o n er, T.C. M em o. 1 9 9 5 -2 9 7 , 7 0 T.C.M . (CCH) 1 , 4 -5 (1 9 9 5 ) (“ Rep aym en t b efo re a t ax au d i t i s , o f co u rs e, m o re p ers u as i ve ev i d en ce o f an i n t en t io n t o creat e a d eb tth an rep aym en taft er s u ch an au d i t h as co m m en ced .”).- 6 3 -

[* 6 3 ] $ 1 7 6 ,1 94 ,0 52 , ap p ro x i m at el y $ 32 5 m i l l i on l es s th an th e o u t s t an d in g b al an ce atthe en do f 2 0 0 6. Th e co n t i n u o u s rep aym en ts th atres u l t edi n s ub s t an t ial n et redu ct i o n s co upl edwi th i n teres tp aym en ts are s i g n i fi can tev i den ce o f d eb t. 4 8 M r. M o s es d et erm i n edth atth e ad v an ces were en t i rel y rep ai d wi th i nt eres ti n 2 0 1 1
. W e fi n dth i s cred i b le.

3
. Ab i l it y

To Rep ay Fi n al l y , we fi n dthatDy

nam o h adth e ab i l i ty

t o rep ay . In ad equ at e cap i t al i zat io n i n d i cat es th atthe t ax p ay er can n o t rep ay th e d eb t . 4 9 Bo th s id es cal l ed
ex p ert s t o t es t i fy

ab o u tDy n am o ’ s ab i l it y

t o rep ay th e ad v an ces i t recei v ed fro m Beek m an . Pet it io n ers cal l edtwo ex p ert s , Pro fes s o r Sh ak edan d Dr. Ch am bers , an d th e Co m

m i s s i o n er cal l edo n e ex p ert , M r. Lu cas .

4 8 See Li t t o n Bu s . Sy s ., In c. v . Co m m i ss i o ner, 6 1 T.C. at3 81
. 4 9 Di x i e Dai ri es Co rp . v . Co m m i s s i o n er, 7 4 T.C. at4 9 6 (ex p l ai n i n g , i n a d eb t-eq u i ty

cas e, t h at“ [o ] f p ri n ci p al i m p o rt an ce are: the ‘ th i n nes s ’ o f t h e cap i t al s tru ctu res i n rel at i o n t o d eb t ; th e ri s ki n v o l v edi n m ak i n g t h e ad v an ces ; an dth e av ai l ab i li ty

o f o ut s id e s o u rces o f fu n d s ”); Ru tt er v . Co m m i ss i o n er, T.C. M em o . 2 0 1 7 -1 7 4 , at* 25 (ex p lai n i n g , i n a d eb t -equi ty cas e, th at“ [a] co m

p an y ’ s cap i t al i zat io n i s rel ev an tt o d et erm i n i n g th e l ev el o f ri s kas s oci at edwi th rep aym en t ”); NA Gen . P’ s h i p & Sub s . v . Co m m i s s io ner, 1 0 3 T.C.M . (CCH) 1 9 1 6
.- 6 4 -

[* 6 4 ] It is wi thi n t h e s ou n dd i s cret i o n o f o ur Co u rtt o ad m i t o r ex cl ud e ex p ert t es t i m o ny . 5 0 “ W e m ay

em b race o r rejectex p ertt es t i m o ny , wh i ch ev er, i n o u r b es t ju d g m en t , i s ap p ro p ri at e.” 5 1 “ Th u s we h av e reject edex p ert t es t i m o n y wh ere t h e wi tn es s ’ o p i ni o n o f v al u e was s o ex ag g erat edth ath i s t es t i m o n y was i n cred i b l e.” 5 2 W e are n o tb ou n db y

the o p i n i o n o f an ex pert wi tn es s wh en th at o p i n i on
co n trad i ct s o u r o wns o u n dju dg m en t . 5 3 W e h av e b ro add i s cret i o n t o ev al u at e “ t h e
o v eral l co g en cy o f each ex pert ’ s an al y si s .” 5 4 M o reo ver, an ex p ertwh o i s m erel y
an ad vo cat e o f a p art y ’ s p o s i t i o n d o es n o tas s i s tth e Co u rtt o u n d ers t an dthe
ev i d en ce o r t o d et erm i n e a fact i n i s s u e. 5 5 W e wi l l s t artwi th M r. Lu cas . Aft er rev i ewi ng M r. Lu cas ’ rep ort , h i s 2 6 p ag es o f errat a, an dh i s t es t i m o n y , we are n otp ers u ad edth ath i s o p i n i o n i s h el p fu l

5 0 Sal em v . Un i tedSt at es Li n es Co ., 3 7 0 U.S. 3 1, 3 5 (1 9 6 2 ); Es t at e o f Cro ss m o re v . Co m

m i s s i on er, T.C. M em o . 1 9 8 8 -4 9 4 , 5 6 T.C.M . (CCH) 4 8 3 , 4 8 6 (1 9 8 8).

5 1 Park er v . Co m

m i s s i o n er, 8 6 T.C. at 5 6 1.
5 2 Park er v . Co m

m i s s i o n er, 8 6 T.C. at 5 6 1.
5 3 Park er v . Co m

m i s s i o n er, 8 6 T.C. at 5 6 1.
5 4 Es t at e o f Dav i s v . Co m

m i s s i o n er, 1 1 0 T.C. 5 3 0 , 5 3 8 (1 99 8 ) (qu o t i n g Samm o n s v . Co m

m i s s i o n er, 8 3 8 F.2 d3 3 0 , 3 3 3 (9 th Ci r. 1 9 8 8 ), aff’ g T.C. M em o . 1 9 8 6 -3 1 8 ).

5 5 Sn ap -Drap e, In c. v . Co m m i s s i o n er, 1 0 5 T.C. 1 6 , 1 9-2 0 (1 9 9 5 ), aff’ d , 9 8 F.3 d1 9 4 (5 th Ci r. 1 9 9 6).- 6 5 -

[* 6 5 ] t o th e Co urti n u n ders t an d i n g th e ev i d en ce o r d et erm i n in g th e fact s i n i s s u e. M r. Lu cas ’ rep o rtwas p lag u edwi th erro rs . He ad m i t t edt o u s i n g i n co rrect i n fo rm at i o n i n co n du ct i n g h i s an al y s i s, s u ch as u n d ers t at in g th e rev en ue fo recas ti n g b y

ap p ro x i m at el y

$ 5 7 5 m il l i o n i n h i s cas h fl o w an al y si s an d
o v ers t at in g cap i t al ex p en di tu res . He ad m i t t edth ath i s m o d el was fl awedan dth at wh en h e t ri edt o acco u n tfo r t h e v o l at i l i ty , i tfai l ed . He al so ad m i t t edth at h e d eferred t o th e Co m

m i s s i o n er wh en ch o o s i n g th e m o d el o n wh i ch t o b as e h i s
an al y s i s. M o reo v er, h i s t es t i m o n y i n d i cat eda l acko f fam i l i ari ty wi th p ro b ab i l i t i es , th e v ery

s ub ject ab o u t wh ich h e t es t ifi ed . Becau s e we fi n dth atM r. Lu cas was n o t cred i b l e an d h i s o p in i o n was n o th el p fu l t o d eci d i n g th es e cas es , we d i s reg ardh i s rep o rt , h is errat a rep o rt , an dh i s t es t i m o n y . If we were t o cred i th i s rep o rtan dt es ti m o n y , aft er acco u n t i n g fo r erro rs , i tl arg el y s up p ort ed p et i t i o n ers ’ cl ai m th atDy n am o wo u l dh av e b een ab l e t o refi n an ce i ts d eb t s . Tu rn i n g t o Pro fes s o r Sh ak edan dDr. Ch am b ers , we fi n dthei r o p i n io n s cred i b l e an d h el pfu l i n d eci d in g th es e cas es . Pro fes s o r Sh ak edd et erm i n edth at Dynam o h adth e ab i l it y

t o rep ay . Bo th Pro fes s o r Sh ak edan d Dr. Ch am b ers d et erm i n edth atDy

nam o ’ s p os i t i o n wo u l d h av e b een v i ewedfav o rab l y b y th i rd p art i es , an dDr. Ch am

b ers d et erm i n edth atDy

n am o wo ul dh av e b een ab l e t o recei v e l oan s o n s i m i l ar t erm s fro m th i rdp art i es .- 6 6 -

[* 6 6 ] Pro fes s o r Sh ak ed d et erm i n edth at Beek m an reas o n ab l y ex p ect edDy

n am o t o rep ay i t s d eb t s as th ey

b ecam e du e. He d et erm i nedth atDy n am o was ab l e t o rep ay b o th i t s s h o rt -t erm

an dl o n g -t erm

d eb t s . Inh i s s h o rt -t erm an al y s i s , Pro fes s o r Sh ak edd et erm i nedthatDy nam o h adth e ab i l i ty t o p ay i n t eres ti n each y ear b ecau s e o f i t s h i gh ly

l i qu i das s etp ro fi l e. In h is l o n g -t erm an al y si s , Pro fes s o r Sh ak edd et erm i nedthatDy nam o h adth e earn i n g cap aci ty t o p ay i n t eres t ex p en s es
an d rep ay p ri n ci p al i n 1 5 y ears . He d et erm i n ed th atDy n am o’ s b reak -ev en rat e, th e l o wes trat e o f retu rn o n as s et s atwh i ch Dyn am o co u lds t i l l m ak e i n t eres t p aym en t s o n i t s d eb t , was 2 .3 %-4 .4 %, wh i ch was s i g n i fi can t l y l o wer t h anth e p ro ject edrat e o f retu rn o f 1 5 % o n as s et s . W e fi n d Pro fes s or Sh ak ed ’ s
as s u m pt i o n s reas o n ab l e, h i s an al y s i s cred i bl e, an d h i s fi n d i n g s p ers u as i v e. Acco rd in g ly , we ad o p th i s o p i n i o n an d fi ndth at Dyn am o h ad th e ab il i ty t o rep ay . Pet i t i o ners ’ ex p ert s al s o l o o k edt o h ow t h i rdp art i es wo u l dv iew Dyn am o ’ s ab i l i ty t o p ay , an dthey

d et erm i n edth atth i rdp art i es wo u ldv i ew Dyn am o ’ s p o s i t i on fav o rab l y . Pro fes s o r Sh ak edd et erm i n edth atDy n am o ’ s equi ty

cu s h i o n
was b etween $ 12 4 m i l li o n an d$ 2 9 2 m i l l i o n . An“ equ i ty cu s hi o n” i s t h e am o u nt b y wh i ch th e b u s i n es s ’ as s et s ex ceed s the b u s in es s ’ d eb t . W e h av e p rev i o u s l y
ex p lai n edth at a l arg e equ it y cu s h i o n i s i m

p o rt an tt o cred i to rs b ecau s e i taffo rd s- 6 7 -

[* 6 7 ] th em

p ro t ect i o n i f t h e b o rro wer en co u n t ers fi n an ci al s tres s . 5 6 He d et erm i n ed th atth is l arg e eq u it y

cu s h io n wo u l dco n st i tu t e accep t ab l e cred i t ri s kan dl en d ers
wo u l dh av e a g reat er d eg ree o f as s u ran ce o f rep aym en t . Pet i t i o ners ’ ex p ert s d et erm i n edthatDy nam o was ad equ at el y

cap i t al izedo n a “ n etd eb t ” b as i s . A co m p an y ’ s cap i t al i zat i o n i s rel ev an tt o d et erm in i n g th e l ev el
o f ri s k as s o ci at edwi th rep aym en t. 5 7 Th ey ex p l ai nedth atwh en co m p an i es h av e h i g h l ev el s o f cas h , i ti s m o re ap p ro p ri at e t o an al y ze d eb t -t o -equi ty rat i o s o n a “ n et d eb t” b as i s . To reach th i s cal cu l at i o n th ey s ubt ract edth e cas h an dm ark et ab l e
s ecu ri t i es fro m

d eb tan dth e b u s i n es s en t erp ri s e v al u e. In o th er wo rd s , th ey
s ub tract ed th e v al u e o f t h e Dy n am o Fu n d , th e h ed g e fu ndp o rt fo l i o, fro m th ei r
ev al u at i on . Pro fes s o r Sh ak edd et erm i n eda d eb t -t o -eq u i ty rat i o ran g i n g fro m .0 5 x t o 1 .7 x fro m

2 0 0 5 t o 2 0 0 7 . Th i s fi g u re was s l i gh t l y h i g h er t h an fo r co m

p arab l e
co m p an i es b u ts t i l l wi th in a reas o n ab l e ran g e. Li k ewi s e, Dr. Ch am bers d et erm i n edth atDy

nam o h adad equ at e cap i t al o n a n et d eb tb as i s . Pet i t i o n ers ’
ex p ert s d et erm i n ed th at Dyn am o wo u l dh av e b een v i ewedfav orab l y b y th i rd -p art y l en d ers . Dr. Ch am

b ers d et erm i n edth ato n th e b as i s o f t h i s cap i t al ad equ acy , Dynam o co u l dh av e o b t ai n edl o an s o n s ub s tan t ial l y s i m i l ar eco n o m ic t erm s .

5 6 Ru t t er v . Co m

m i s s i on er, at* 2 6 -* 2 7
. 5 7 Ru t t er v . Co m

m i s s i on er, at* 2 5 -* 2 7
.- 6 8 -

[* 6 8 ] Th e Co m

m is s i o n er al l eg es th atwe s h ou l d fi n dth atDy n am o was n o t ad equat el y

cap i t al i zedb ecau s e t h e Dyn am o Fu n dh el dm ark et ab l e s ecu ri t i es th at h ad “ l o ck -up ” d at es . Ho wev er, Dr. Ch am b ers cred ib l y

t es t ifi edth at h e rev i ewed th e l o ck -up p eri o d s fo r t h e Dy n am o Fu ndan d d et erm i n edth atal l b u t o n e ex p i red b efo re J an u ary

1 , 2 0 06 , th e d at e Beek m an tran s ferred th e Dy n am o Fu n dt o Dynam o . Pro fes s or Sh ak edcred i b l y t es t i fi edth atth ere was a m ark etfo r p u rch as in g th es e h ed g e fu n d s . W e fi n dthe t es t i m o n y o f b o th cred i b l e an dh o l d th atDy n am o was ad equ at el y

cap i t al i zeddu ri n g th e y ears i n i s s u e. Th e ex p ert s ’ fi nd i n g s t h atDy nam o h ad th e ab i l it y t o rep ay co up l ed wi th th e fact th atDy

n am o actu al ly

o b tai n eds ub st an t i al thi rd -p art y l o an s , s u ch as the $ 9 0
m i l l io n l oan o n t h e Veran o p ro p ert y , d em o n s trat e t h at Dyn am o wo u l dh av e b een ab l e t o recei v e l o an s o n s ub s t an t i al l y s i m i l ar t erm s. C. Co n cl u si o n Aft er an al y zi n g th e fact s , we h o l d t h atDy n am o an d Beek m an en t eredi n t o a b o n a fi d e cred i t o r-d eb t o r rel at io n s h i p . At th e t i m e t h e ad van ces were m ad e, Dynam o h adan u n co n d i t i o n al o b l i g at i o n t o rep ay th e l o an s, an d Beek m an h adan
u n co nd i t io n al i n t en tt o b e rep ai d . A b o n a fi d e l o anp recl ud es a co ns tru ct i v e- 6 9 -

[* 6 9 ] d i s tri b u t io n . 5 8 Becau s e we fo u n dth atth e ad v an ces were b on a fi d e d eb t , th e ad v an ces are n o tco n s tru ct i v e d i s tri b u t i o n s . Li k ewi s e, Dyn am o i s en ti t ledt o d eductth e i n teres tex p en s es . III. Pro p ert y

Tran s act i o n s Th e Co m m is s i o n er al l eg es Beek m an m ad e co n s tru ct i v e d i s tri b u t i o n s t o i t s
s h areh o ld ers t o t h e ex t en tth atp ro p ert y was tran s ferred fro m Beek m an t o Dy n am o fo r l es s t h an fai r m ark etv al u e. Fai r m ark etv al u e h as b een d efi n edas “ th e p ri ce at wh i ch th e p ro p ert y

wo ul dch an g e h an d s b et ween a wi l li n g b u y er an da wi l li n g
s el l er, n ei ther b ei n g u n d er an y co m p u l si o n t o b u y o r t o s el l an db o th h av in g
reas on ab l e kn o wl ed g e o f rel ev an tfact s .” 5 9 Th e fai r m ark etv al u e o f p ro p ert y i s b as edo n th e “ h i g h es tan db es t u s e” o f t he p ro p ert y as o f i ts rel ev an t v al u at i o n d at e. 6 0 Ind et erm i n in g h i g h es tan db es t u s e, we m u stex am i n e t h e s u it ab il i ty o f t h e p ro p erty ’ s cu rren tu s e u n d er ex i s t i n g zo n in g an dm ark et in g co n d i t i o n s , t o g et h er

5 8 Sch n al li n g er v . Co m

m is s i o ner, T.C. M em o . 1 9 8 7 -9 , 5 2 T.C.M . (CCH) 1 3 1 1 , 1 3 1 4 (1 98 7 ).

5 9 Un i t ed St at es v . Cart wri g h t , 4 1 1 U.S. 5 46 , 5 5 1 (1 9 73 ) (qu o ti n g s ec. 2 0 .2 0 3 1 -1 (b ), Es t at e Tax Reg s .); M ari n e v . Co m m is s i o n er, 9 2 T.C. 9 5 8 , 9 8 2 (1 9 8 9), aff’ d , 9 2 1 F.2 d2 8 0 (9 th Ci r. 1 9 9 1).

6 0 St an l ey W o rk s & Sub s . v . Co m

m i s s io n er, 8 7 T.C. 3 8 9, 4 0 0 (1 9 8 6 ); s ee Hi l b o rn v. Co m

m i s s io ner, 8 5 T.C. 6 7 7 , 6 8 9 (1 9 8 5 ).- 7 0 -

[* 7 0 ] wi th an y real i s t i c al t ern at i v e u s es . 6 1 Th e d et erm in at i o n o f t h e fai r m ark et
v al u e o f p ro p ert y

i s a qu es t i o n o f fact th atm u s tb e res o l v edaft er co n si d erat i o n o f al l o f t h e ev i d en ce i n th e reco rd
. 6 2 Pet i t i o ners al l eg e t h atwe s h o u l d fi n d t h atth e am o u n t s th atDy n am o an d Beek m an p ai dt o tran s fer t h e p ro p ert i es were t h e fai r m ark etv al ues b ecau s e t h ey
are ex p ert s i n th e p ro p erty d ev el o p m en t i n du st ry . W e d is ag ree. Tran s fers b et ween fam i l y m em b ers o r en t it i es co n tro l ledb y fam il y m em b ers are s ub

jectt o s p eci al
s cru t in y . 6 3 Acco rd i n g l y , i n dep en d en tex p ert s p ro v i de a b et ter an al y s i s o f t h e p ri ce atwh ich p ro p ert y

wo u ldch an g e h an d s b etw een a wi ll i n g b u y er an da wi l l i n g
s el l er. As i s co m

m o n i n v al u at i o n cas es , th e p art i es cal l edex p ert s t o s h o w th e fai r
m ark etv al u es o f t h e p ro pert i es tran s ferred . Th e Co m m i s s io n er cal ledtwo ex p ert s , M r. Fri edm an an dDr. Di s k i n . Pet i t i o n ers cal ledo n e ex p ert , M r. Sl ad e.

6 1 Hi l b o rn v . Co m

m i s si o ner, 8 5 T.C. at6 8 9
. 6 2 J arre v . Co m

m i s s io ner, 6 4 T.C. 1 8 3 , 1 8 8 (1 97 5 ); Kap lan v . Co m m i s s i o n er, 4 3 T.C. 6 6 3 , 6 6 5 (1 9 6 5 ).

6 3 Perryv . Co m

m i s s io n er, 9 2 T.C. at4 81 ; Es t at e o f Lo ck et tv . Co m m i s s i o n er, T.C. M em o . 2 0 1 2 -1 2 3 , 1 0 3 T.C.M . (CCH) 1 6 7 1 , 1 6 7 6 (2 0 1 2 ).- 7 1 -

[* 7 1 ] Ex p erto p i n i o n s o m et i m es ai d s th e Co u rti n d et erm i n i n g v al u e; o th er t i m es , i t do es n o t . 6 4 As wi th t h e l en d in g ex p ert s , we are n o tb o u n db y th e o pi n i o n s o r fo rm u l as o f v al u at i o n ex p ert s wh en th o se o p in io n s co n trav en e o u r ju d g m en t . In s t ead , we m ay

reach a d et erm i n at io n b as edo n o u r o wnex am i n at i o n o f t h e
reco rd
. 6 5 W e m ay

b e s el ect i ve i n th e u s e o f an y p o rt i o n s o f t h ei r o p i n i o n s . 6 6 Th e p ers u as i v en es s o f an ex pert ’ s o p i n i o n d ep en d s l arg el y up o n t h e d i s cl o s edfact s o n wh i ch i ti s b as ed
. 6 7 Co n seq u en t l y , we t ak e i n to acco u n t ex p erto p i n io n t es t i m o n y
o n l y t o t h e ex t en t th ati tai d s u s i n arri v i n g atth e fai r m ark et v al u es o f t h e p ro p ert i es . A. Th e Do m an i Pro p ert y Th e Do m an i p ro p ert y

was s ev en acres o f real p ro p erty th atDy n am o i n t en d edt o d ev el o p i n t o a h i gh -ri s e t o wer i n 2 0 0 5 . Beek m an s o l dth e p ro pert y t o Dynam o b y

i n creas i ng th e o u t s t an d i ng b al an ce du e fro m Dy n am o b y $ 1 2 ,2 6 1 ,3 0 1
. On l y p et i ti o n ers cal l edan ex p ertt o v al u e t h e p ro p ert y ret ro s p ect iv el y . Pet i t io n ers cal l ed M r. Sl ad e. M r. Sl ad e d et erm i n edth atthe h i g h es tan db es tu s e o f

6 4 See Lau rey s v . Co m

m i s s i o n er, 9 2 T.C. 1 0 1, 1 2 9 (1 9 8 9 ).
6 5 Es t at e o f Dav i s v . Co m

m i s s i o n er, 1 1 0 T.C. at5 3 8
. 6 6 Park er v . Co m

m i s s i o n er, 8 6 T.C. at 5 6 2.
6 7 Es t at e o f Dav i s v . Co m

m i s s i o n er, 1 1 0 T.C. at5 3 8
.- 7 2 -

[* 7 2 ] th e p ro p ert y

wo u l d b e as a m

ul t ifam i l y o r m i x ed -u s e p ro

ject . He v al u edth e p ro p erty at$ 2 3 ,5 0 0 ,0 0 0 . Th e Co m m is s io n er d i d n o tcal l an ex p ertt o v al u e t h e p ro p erty . Th e Co m

m i s s i o n er al l eg es th atth e fai r m ark etv al u e o f th e p ro p ert y was th e accu m

u l at ed co s ti ncu rredb y

Beek m an , o r $ 2 5 ,8 8 2 ,8 7 2
. W e fi n dth atth e fai r m ark et v al u e o f t h e p ro p ert y was $ 23 ,5 0 0 ,0 0 0
. Al th o u g h th e Co m

m i s s i o n er al l eg es th at th e fai r m ark etv al u e i s t he accu m u l at ed
co s t , th e fai r m ark etv al u e i s “ th e p ri ce atwh ich th e p ro p erty wo u l dch an g e h an d s b et ween a wi l l i n g b u y er an da wi l l i ng s el l er, n ei th er b ei n g u n der an y co m pu l s i on t o b u y o r t o s el l an d b o th h av i ng reas o nab l e kn owl ed ge o f rel ev an t fact s .” 6 8 Th i s d efi n i t i o n d o es n o t i n cl ud e th e s el l er’ s co s t . M r. Sl ad e d et erm i nedth atth e fai r
m ark etv al u e o f t h e p ro p ert y was $ 2 3 ,5 00 ,0 0 0
. Hi s t es t i m o n y i s u n reb u tt ed , an d we fi n dn o reas o n t o qu es t i o n h i s cred i b i l i ty . Acco rd i n g l y , we fi n dth e fai r m ark et
v al u e was $ 2 3 ,5 0 0,0 0 0
. Pet i t i o ners arg ue t h atDy n am o as s u m ed$ 1 7 m i ll i on o f d eb tfro m Beek m an . W e d i s ag ree. Th e reco rdes t ab l i s h es th at , aft er Dyn am o p urch as edth e p ro pert y , Dynam o recei veda l o an fro m Ban ko f Am eri ca fo r $ 1 7 m i l l io n ; th e reco rdd o es
n o tes t ab l i s h th atth i s was th e as s u m p t i on o f a Beek m and eb t . Acco rd i n gl y ,

6 8 Cart wri g h t , 4 1 1 U.S. at5 5 1 (qu o t i n g s ec. 2 0 .2 03 1 -1 (b ), Es t at e Tax Reg s .); M ari n e v . Co m

m i ss i o n er, 9 2 T.C. at 9 8 2
.- 7 3 -

[* 7 3 ] Beek m an tran s ferredth e Do m an i p ro pert y t o Dyn am o at $ 1 1 ,2 3 8 , 6 9 9 b el o w fai r m ark etv al u e. Becau s e t h e am o u n to f t h e t ran s fer refl ect edi n the am en d m en t t o an s wer was g reat er t h anth atd et erm i ned i n th e n o t i ce o f d efi ci en cy , th e Co m m i s s i o n er b ears th e b u rd en wi th res p ect t o th e i n creas e. Th e Co m m i ss i o n er h as m eth i s b urd en . B. Th e Gran d e atM i ras o l Pro p ert y Th e Gran d e atM i ras o l p ro p ert y was ap p ro x i m at el y

4 2 acres o f real p ro p ert y th atwas d ev el o p ed i n t o 4 7 5 l o w-ri s e u n it s thato p erat edas an ap art m en tco m p lex
. Beek m an was ag g res s iv el y p u rs u i ng a co n v ers i o n o f t h e co m pl ex i n t o
co n do m i n i um s . OnNo v em b er 1 7 , 2 0 0 5, Beek m an s ol d t h e p ro p ert y t o Dy n am o fo r $ 4 0 ,6 8 4,0 9 4 . As p aym en t fo r t h e p ro p ert y Dyn am o i n creas edth e o ut s t an d i n g b al an ce du e t o Beek m an b y $ 2 ,6 8 4 ,0 9 4 an d as s u m eda $ 3 8 m il li o n l i ab i l i ty . Bo th p art i es ’ ex p ert s v al u edth e p ro p ert y ret ro s pect i v el y . Th e p ri nci p al d i fferen ce b et ween th e p art i es ’ ex p ert s i s wh et h er t h e h i g h es tan db es tu s e o f t h e p ro p erty wo u l db e a co n do m i n i u m co n v ers i o n . Th e Co m

m i s s i o n er’ s ex p ert , Dr. Fri ed m an , d et erm i n edth e h i gh es t an db es tu s e o f t h e p ro p ert y was as a
co n do m i n i um

co nv ers i o n p ro

jectan dd et erm i n edthatth e fai r m ark et v al u e o f t h e Gran d e atM i ras o l p ro p ert y was $ 1 2 1 , 4 0 0 ,0 0 0 . Pet i ti o n ers ’ ex p ert , M r. Sl ad e, d et erm i n edth atth e h i gh es t an db es tu s e o f t h e p ro p ert y was t o m ai n t ai n th e- 7 4 -

[* 7 4 ] p ro p ert y

as an ap art m en tco m

p l ex an d t h atth e fai r m ark etv al u e o f t h e Gran d e atM i ras o l p ro p ert y was $ 5 6 m i l li o n . Acco rd i n gl y , we m u s t d et erm i n e wh et h er t h e h i g h es tan db es t u s e o f t h e p ro p ert y was as a co n d o m i n i u m

co nv ers i o n
o r as an ap art m en tco m

p l ex . W e fi n dth atth e h i g h es tan db es tu s e o f t h e Gran d e atM iras o l p ro p ert y was
as a co n d o m i n i u m

co n v ers i o n . Befo re Beek m an s ol dth e p ro p ert y t o Dy n am o , Beek m an was act i v el y

p urs u i n g a co n d o m i n i um co n vers i o n . Beek m ans en tth e St at e o f Fl o ri d a, Bu reau o f Co nd o m i n i u m s a n o t i ce o f t hei r i nt en tt o co n v ert . In Sep tem b er 2 0 0 5 Beek m an an dth e p rev i o u s l an do wn er en t eredi n t o an ag reem en t b y wh i ch Dy

n am o co u l dco n vert th e p ro p erty t o a co n d om i n i um

i f i tp ai d b as e
co m p en s at i o n o f $ 4 ,8 4 8 ,6 1 8 an db o n u s co m p en s at io n i f t he g ro s s s al e p ro ceed s
ex ceed edap pro xi m at el y

$ 1 3 6 m i l l i o n . Aft er Dynam o p u rch as edth e p ro p ert y , Dynam o co n t i n u ed t o pu rs u e a co n d o m i n i u m co n vers i o n . Dy

n am o s en tl et t ers t o th e t en an t s i n fo rm i n g th em o f t h e co n v ers i o n. Dy

nam o s ub s equ en t l y

recei v ed ap p ro v al fro m

th e Bu reau o f Co n d o m i n i u m s t o co n vert . No thi n g i n th e reco rd
s u g g es t s th atDy

n am o an dBeek m an were p recl u d ed fro m co n v ert i n g th e ap art m en t s . M r. Sl ad e co n s i d eredco n d o m i n i u m co n v ers i o n, b u t erro n eo u s l y d et erm i n ed th ati twas res tri ct ed . He h adn o ts een th e ag reem en tb et ween Beek m an an dth e- 7 5 -

[* 7 5 ] p rev i o u s o wn er al lo wi n g Dy n am o t o co nv ertth e p ro p ert y t o co n d om i n i u m s i f Dyn am o p ai dco m

p en s at i o n . At tri al h e ag reedth ati f t here were n o res tri ct i o n s , h e wo u l dh av e u s edp ro p ert i es th atwere co n v ert edt o co n do m i n i u m s i n h i s
co m p arab l es an al y s i s . Becau s e we fi ndth atth e h i g h es tan db es t u se o f t he Gran d e atM i ras o l p ro p erty was as a co n do m i n i u m

co n v ers i o n , we ad o p tDr. Fri ed m an ’ s v al u at i o n . Ho wev er, Dr. Fri ed m an d i dn o tacco u n tfo r t h e $ 4 ,8 4 8,6 1 8 th atDy n am o wo u l d p ay t o th e p rev i o u s p ro p ert y

o wn er t o co n v ert . Acco rd in g l y , th e fai r m ark etv al u e
o f t h e p ro p ert y

was $ 1 1 6,5 5 1 ,3 8 2 , o r Dr. Fri edm an ’ s v al u e o f $ 1 2 1 ,4 0 0,0 0 0 l es s th e $ 4 , 84 8 ,6 1 8 thatwo u ldh av e b een req u i redt o b e p ai d t o co n vert the p ro p ert y . Beek m an tran s ferred th e Gran d e atM i ras o l p ro p erty t o Dy n am o fo r $ 7 5 ,8 6 7 ,2 8 8 b el o w fai r m ark etv al u e. Becau s e t h e am o u nto f t h e t ran s fer refl ect edi n th e
am en d m en tt o an s wer was g reat er t h an th at d et erm i nedi n th e n ot i ce o f d efi ci en cy , th e Co m m i s s i o n er b ears the b u rd en wi th res p ectt o th e i ncreas e. Th e Co m m i s s i o n er h as m eth i s b u rd en t o th e ex t en t d es cri b edab o v e. C. Th e M ai n s treet Pro p ert i es Th e M ai n s treet p ro p ert i es are a g ro up o f p ro p ert i es th atBeek m an tran s ferred t o Dyn am o fo r $ 9 ,8 5 0 ,0 0 0
.- 7 6 -

[* 7 6 ] 1
. Th e M ai n s treet Co m m erci al Pro p ert y Th e M ai n s treet co m

m erci al p ro p ert y

co n si s t s o f t wo l o t s , A an dC, an da tract , R. Lo tA, l o tC, an dtract R were .9 3 3 acres , 2 1 .0 5 acres , an d1
. 0 04 acres , res p ect i vel y . Th e Co m m is s i o n er cal l edDr. Di sk i n t o v al u e t h e M ai n s treet co m m erci al p ro p erty ret ro s p ect i v el y . He d et erm i n edth e h i g hes tan db es tu s e o f l o tA, l o tC,
an d tract R was as co m

m erci al o ffi ces , ret ai l , an da ri gh to f way , res p ect i v el y . He
co n cl u d ed th at th e fai r m ark etv al u e o f t he M ai n s treet co m m erci al p ro p ert y

was $ 4 ,1 0 3 ,0 0 0 . Onb ri ef, p et i t i o n ers d i dn o t co n t es tth i s v al ue. W e fi ndn o reas o n t o qu es ti o n Dr. Di sk i n’ s cred i b i l i ty o n th i s v al u at i o n . W e fi ndth atth e fai r m ark et
v al u e fo r t h e M ai n s treet co m m erci al p ro pert y

i s $ 4,1 0 3 ,0 0 0. 2
. Th e M ai n s treet Offi ce Bu i l d i ng Th e M ai n s treet Offi ce Bu i l d i n g p ro p ert y , wh i ch co n s i s ts o f 2 .3 5 acres o f l an dth atwas d ev el o p ed as an o ffi ce b u i l d i n g an d a .8 5 -acre d rai n ag e eas em en t , s o l do n Ap ri l 6 , 2 00 6
. Pet i t i o ners cal l ed M r. Sl ad e t o v al u e t h e M ai n s treet Offi ce Bu i l d i ng p ro p erty ret ro s p ect i v el y . M r. Sl ad e d et erm i n edth ati t s h ig h es t an db es tu se was t o
rem ai n an o ffi ce b u i l d in g , an dh e v al u edi tat$ 8 5 0 ,0 00 . Th e Co m m i ss i o n er d i d
n o tcal l an ex p ert .- 7 7 -

[* 7 7 ] W e fi n dth atth e fai r m ark et v al u e o f t h e M ai ns treet Offi ce Bu i l d in g p ro p erty was $ 8 5 0,0 0 0 . M r. Sl ad e’ s t es t im on y i s u n reb u t t ed , an dwe fi n d n o
reas on t o qu es t i on h i s cred i b i l i ty o n th i s v al u at i o n . 3
. Th e M ai n s treet Vacan t Pro pert y Th e M ai n s treet v acan tp ro p ert y co n s i st s o f 2 .3 9 v acan tacres th at Beek m an
s o l dt o Dy

n am o o n No v em

b er 2 9 , 2 0 0 5
. Th e Co m m is s i o n er cal l edDr. Di sk i n t o v al u e t h e M ai n s treet v acan t p ro p erty . Dr. Di s ki n p rep ared a ret ro s p ect iv e ap p rai s al . He d et erm i n edth ati t s h i g h es tan db es tu s e was as a p arko r p ub l i c faci l i ty o r fo r d o n at i o n t o th e ci ty . Us i n g t h e s al es co m

p ari s o n m et h o d , Dr. Di s k in d et erm i n ed th atth e fai r m ark et
v al u e o f t h e M ai n s treet v acan t p ro p ert y was $ 1 2 0,0 0 0 . Pet i t i o n ers d i d n o ts ub m i t reb u t t al ev i d en ce. W e fi n dth atth e fai r m ark et v al u e o f t h e M ai ns treet v acan tp ro p ert y was $ 1 2 0 ,0 0 0 . Dr. Di s k i n ’ s t es t i m o n y was u n reb ut t ed , an dwe fi n d n o reas o n t o qu es ti o n i t s cred i b i l i ty o n th i s v al u at i o n .

4
. Th e G.O. Team

Pro p erty Th e G.O. Team

p ro p ert y co n si s t s o f 1 7 l o t s o n 3 3
. 8 5 acres , a 2 4 .9 8 -acre p arcel o f l an dth ati s en cu m b eredb y a l ak e, an d a 3 .4 0 -acre eas em en t . Th e- 7 8 -

[* 7 8 ] eas em en tan dfo u r o f t he l o t s were i n du s tri al p ro p ert y du ri n g th e y ears i n i s su e. Th e rem ai n i n g p o rt i o n co n s i s t edo f 1 3 l o ts an dth e p arcel th ati n cl u dedth e l ak e.
a. Th e In dus tri al Po rt io n Beek m an tran s ferred th e i n du s tri al p o rt i o n t o Dy n am o o n Ap ri l 6 , 2 0 0 6 . It
co n si s t s o f fo u r v acan tl o t s t o t al i n g 6 .6 8 acres an da 3 .4 0-acre eas em en t . Bo th p art i es ’ ex p ert s v al u edth e i n du s tri al p o rt i o n ret ro s p ect i vel y . Bo th
ex p ert s d et erm i n ed th e h i g h es tan db es tu s e was i n du s tri al
. Th e p ri n ci pal d i fferen ces b et ween th e p art ies ’ ex p ertv al u at i o ns are t h e p ri ce p er s quare fo o tan d th e m et h o du s edt o v al u e t h e p ro p erty . Th e Co m m i s s i o ner’ s ex p ert , Dr. Di s k i n , rel i edo n co m

p arab l e p ro p ert i es , wh i ch h adp ri ces p er s qu are fo o tth atran g edfro m $ 4 .9 2 t o $ 1 0 .1 7
. He d et erm in edthatth e i n du s tri al p o rt i o n ’ s p ri ce p er s qu are fo o t
was $ 5 an dth e t o t al fai r m ark etv al u e was $ 1,4 5 5 ,0 0 0. Si m i l arl y , p et i t i o n ers ’
ex p ert , M r. Sl ad e, rel i ed o n co m p arab l e p ro p ert i es ; h o w ev er, h i s co m p arab l e p ro p ert i es ran g edi n p ri ce fro m $ 2 t o $ 5.1 9 p er s qu are fo ot . He fo u n do ther h i g h er p ri cedp ro p ert i es th ath e ex cl ud edb ecau s e h e d et erm i n edthatth ei r ro ad acces s
was s up eri o r. He d et erm i n edth atth e i n du s tri al p o rt i o n ’ s p ri ce p er s qu are fo o twas b et ween $ 2 an d $ 2
. 2 5 , th e l o wes to f al l the co m p arab l e p ro pert i es . He th en d i s co u n tedth e p ri ce p er s qu are fo o tb y 1 6 % fo r s al es co m

m i s s i o ns , g en eral- 7 9 -

[* 7 9 ] ad m in i s trat i v e co s t s , d ev el o p er’ s p ro fi t , real es t at e t ax es , an dm i s cel l an eo us
ex p en s es , an darri v ed ata fai r m ark etv al ue o f $ 5 30 ,0 0 0
. W e fi n dth atth e fai r m ark et v al u e o f t h e i n dus tri al p o rt i o n was $ 1 , 4 55 ,0 00
. M r. Sl ad e’ s v al u at i on i s u n reas o n ab l y l ow. He ch o s e t h e l o wer en do f t h e
co m p arab l e p ro pert ies an dth en d i s co u n t ed th atv al u e u s in g a d i s co u n t eds al es ap p ro ach . Dr. Di s k i n ’ s v al u at io n was reas o n ab l e. Acco rd i n g l y , we ad o p t h i s
v al u at i o n . b
. Th e Rem ai n i n g Po rt i o n Beek m an s o l d t h e rem ai n i n g p o rt io n t o Dy n am o o n Ap ri l 6 , 2 00 6 . Th e
rem ai n i n g p o rt i on co n si s t edo f 1 3 i n du s tri al l o t s an d a 2 4.9 8-acre p arcel
en cu m b eredb y a l ak e. Th e l ak e l efto n l y 8 .5 acres o f t h e 2 4 .9 8 -acre l o tav ai l ab le t o b e d ev el o p ed
. Bo th p art i es ’ ex p ert s ret ro s p ect i vel y v al u edth e rem ai n i n g p ort i on . Th e p ri n ci p al d i fferen ce b et ween th e ex p ert s ’ v al u es was wh et h er th e h i gh es tan db es t
u s e o f th i s l an d s h o u l db e i n du s tri al , b as edo n cu rren t zo n i n g , o r res i d en t ial , b as ed
o n a fu tu re l an du s e ch an g e. Th e Co m m i s s io n er’ s ex p ert , Dr. Di s k i n , d et erm i n ed th atth e h i g h es tan db es tu s e o f t h e p ro p ert y was res i d en ti al
. He cl us t ered2 7 1 dwel l i n g s o n th e l an d , rel y i n g o n an o rd i n an ce am en d i n g th e fu tu re l an du s e m ap . Us i n g h i s s al es co m

p ari s o n ap p ro ach , h e d et erm i n ed th atth e fai r m ark et v al u e was- 8 0 -

[* 8 0 ] $ 7 ,9 00 , 0 0 0
. Pet it i o n ers ’ ex p ert , M r. Sl ad e, d et erm in edth at th e rem ai n i n g p o rt i on was i n dus tri al an dth atth e t ot al v al ue o f t he rem ai n in g p o rt i o n was $ 2 ,9 9 0 ,0 0 0
. W e ag ree wi th Dr. Di s k in thatth e h i g h es t an db es tu s e was res i d en t i al . In d et erm i n i n g h i g h es tan db es tu s e, we m us tex am i n e th e s ui t ab i l i ty o f t he p ro p ert y ’ s
cu rren tu s e u n d er ex i s t i n g zo n i n g an d m ark etco n d i t i o n s , t o g et h er wi th an y real is t i c al t ern at i v e u s es . 6 9 A p o t en t i al h i g h es tan db es tu s e fo r p ro p ert y can b e
co n si d eredev en th ou g h zo n i n g l aws p ro h i b i tthe p o t en ti al u se o n th e d at e o f t h e
co n tri b u t i o n . 7 0 Ho w ev er, t h e p ro ject edh i gh es tan d b es tu s e can n o tb e rem o t e,
s p ecu l at i v e, o r co njectu ral
. 7 1 Th e fai r m ark etv al u e o f t h e p ro p ert y m u s tb e ad ju s t edfo r an y

res tri ct i o n o n i t s m ark et ab i l i ty . 7 2 Th e ci ty co u n ci l o f Po rtSt
. Lu ci e p as s edOrd in an ce 0 4 -1 0 7 , am en d i n g t h e fu tu re l an du se m ap fro m i n du s t ri al

6 9 Hi l b o rn v . Co m

m i s si o ner, 8 5 T.C. at6 8 9 ; Cro wl ey v . Co m m i ss i o ner, T.C. M em o. 1 9 9 0 -6 3 6 , 6 0 T.C.M . (CCH) 1 4 47 , 1 44 9 (1 99 0 ), aff’ d , 9 6 2 F.2 d1 0 7 7 (1 st Ci r. 1 9 92 ).

7 0 Ol s o n v . Un it edSt at es , 2 9 2 U.S. 2 4 6 , 2 5 7 (1 9 3 4 ); Cro wl ey v . Co m m i s s i o n er, 6 0 T.C.M . (CCH) at 1 4 4 9
. 7 1 Ol s o n , 2 9 2 U.S. at2 5 7
. 7 2 Co o l ey v . Co m m i s s i on er, 3 3 T.C. 2 2 3 , 2 2 5 (1 9 5 9 ), aff’ d , 2 8 3 F.2 d 9 4 5 (2 d Ci r. 1 9 60 ); s ee al so Ol s o n, 2 9 2 U.S. at2 5 7.- 8 1 -

[* 8 1 ] t o l o w-d en si ty res i d en t i al . Real es t at e b u y ers o ft enp u rch as e p ro p ert y b ecau s e o f i t s an t i ci p at edfu ture b en efi t s , wh i ch can d i ffer fro m i t s p res en tu s e. 7 3 M r. Sl ad e d i dn o tad dres s o r m ak e an y ad ju s t m en t s fo r t h e ch an ge i n l an d
u s e i n h is v al u at i o n . Acco rd i n g l y , we d o n o tfi n dh i s rep o rtcred i bl e o n th is p o i n t . Dr. Di sk i n , o n th e o th er h an d , d et erm i n edth atb etween res i d en t i al an di n du s tri al , res i den t ial was th e h i g h es tan db es tu s e. W e fi n dthatth e h i g h es tan d b es tu s e was
res i den t ial . Itwas reas o n ab l y p ro b ab le t h atth e l an dwo u l db e d ev el o p edi n t o
res i den t ial p ro p ert i es , wh i ch wo u l di n creas e i t s v al u e. Ho wev er, we fi n dDr. Di s k i n ’ s v al u at i o n fl awed
. Th e l ak e o n th e p ro p ert y redu ces th e area t h atcan b e d ev el o p edan das a res u lt th e o v eral l v al u e o f t h e p ro p erty . Dr. Di s ki n d i dn o t ad ju s tth e v al u at io n t o acco un tfo r t h e l ak e i n th e
m i d d l e o f th e 2 4 .9 8 -acre p arcel . Acco rd i n gl y , we d o n o t fi n dh i s ap pro ach
reas on ab l e. Wh il e i t i s reas o n ab l e t o co n cl u d e t h at d en s i ty co u l d b e i n creas edo n th e l an dth atco u l d b e d ev el o p ed , Dr. Di s ki n d idn o t ad dres s th e ex t en t t o wh i ch d en si ty co u l d b e i n creas edo r t h e effect o f i n creas ed d en s i ty o n the v al u e o f
res i den t ial p ro p ert y . W e reduce h i s v al u at i o n b y 2 0 %, t o acco u n t fo r th e i n creas ed d en si ty res u l t i n g fro m

th e u n d ev el o p ab l e p ort i on o f t h e l an d , an dfi ndth e v al u e t o b e $ 6 ,3 2 0 ,0 0 0
.

7 3 Frazee v . Co m

m i s s i o n er, 9 8 T.C. 5 5 4 , 5 7 8 (1 9 9 2 ).- 8 2 -

[* 8 2 ] 5
. Co n cl u si o n o n th e M ai n s treet Pro pert ies In co n cl u s i o n , Beek m an s o l d t h e M ai ns treet p ro p ert i es t o Dyn am o fo r $ 9 ,8 5 0 ,0 0 0 . Th e fai r m ark et v al u es o f t he M ai n s treetco m m erci al , o ffi ce b u i l d i n g , v acan t , i n du s tri al , an d rem ai n i n g p ro p ert i es were $ 4 ,1 0 3,0 0 0 , $ 8 5 0 , 0 0 0 , $ 1 2 0 ,0 0 0 , $ 1 ,4 5 5 ,0 0 0 , an d $ 6 ,3 2 0 ,0 0 0 , res p ect i v el y , an di n t o t al , $ 1 2,8 4 8 ,0 0 0. Acco rd i n g ly , Beek m an tran s ferred th e M ai n s treet p ro p ert i es t o Dy n am o fo r $ 2,9 9 8 ,0 0 0 l es s th an th ei r t o t al fai r m ark etv al u e. Becau s e t h e am ou n to f t he t ran s fer refl ect edi n th e
am en d m en tt o an s wer was g reat er t h an th at i ncl u d edi n th e n o t i ce o f d efi ci en cy , th e Co m m i s s i o n er b ears the b u rd en wi th res p ectt o th e i ncreas e. Th e Co m m i s s i o n er h as m eth i s b u rd en t o th e ex t en t d es cri b edab o v e. D. Th e Veran o Pro p erty Th e Veran o p ro p ert y

was 3 ,0 3 0 acres o f real p ro p ert y p lan n ed fo r d ev el o p m en ti n to 6 ,3 0 0 res i d en t i al u n i t s . OnFeb ru ary 2 8 , 2 0 0 6, Beek m an s o l d th e p ro p ert y

t o Dy n am o fo r $ 4 9,4 77 ,2 9 8
. Bo th p art i es ’ ex p ert s v al u edth e Veran o p ro pert y ret ro s p ect i v el y . Th e p ri n ci p al d i fferen ce b et ween th e v al u at i on s i s th e am o u n t o f wei g h tg i v en t o th e Cen tex p ro p erty . Th e Co m m i s s i o n er’ s ex p ert , Dr. Fri ed m an , d et erm i n ed thatthe h i g h es tan db es tu s e o f t h e p ro p ert y was as a m as t er-p lan n ed co m m u n it y an dth at th e fai r m ark etv al u e o f t h e Veran o p ro p ert y was $ 1 4 0 m i l l i o n . Pet i t i o n ers ’ ex pert ,- 8 3 -

[* 8 3 ] M r. Sl ad e, d et erm in edth atth e h i g h es tan d b es tu s e o f t h e p ro p ert y was as a
m i x ed -u s e d ev el o p m en t wi th a fai r m ark etv al u e o f $ 1 0 1 .5 m i l l io n . A $ 3 8 .5
m i l l io n d i s crep an cy

res u l t ed
. W e fi n dth atDr. Fri ed m an ’ s ap pro ach was reas o n ab l e an d M r. Sl ad e’ s was
n o t . Bo th Dr. Fri edm an an dM r. Sl ad e fo un dthe Cen t ex p ro p ert y t o b e
co m p arab l e t o t h e Veran o p ro p ert y . Pet it i o n ers an d th ei r ex p ert , M r. Sl ad e, arg u e th atth e Cen t ex p ro p erty

h adb et t er ro adacces s th an th e Veran o p ro pert y an dth at th e p ro p er v al u at i o n s h o u l drefl ectth at . W e d is ag ree. On th e b as i s o f al l th e
ev i d en ce p res en t ed , i n cl ud i n g th e d ev el o pm en t p l an , we co n cl u d e t hatth e Veran o p ro p erty wo u l dh av e ro adacces s s i m i lar t o th ato f t h e Cen t ex p ro pert y . Acco rd in g ly

we ad o p tDr. Fri ed m an ’ s v al u at i o n . W e fi n dDr. Fri edm an ’ s ap p ro ach t o b e reas o n ab l e an dfi n dthatth e fai r
m ark etv al u e o f t h e Veran o p ro p ert y was $ 1 4 0 m i l li o n . Acco rd i n g l y , Beek m an tran s ferred the Veran o p ro p ert y t o Dy n am o at$ 9 0,5 2 2 ,7 0 2 b el o w fai r m ark et
v al u e.- 8 4 -

[* 8 4 ] E. Oth er Tran s fers

1
. TOUSA/ Ko l t er, LLC In J an uary2 0 0 5 Beek m an m ad e a $ 1 7 ,5 0 0 ,0 00 p art n ers h i p co n tri b ut i o n t o TOUSA/ Ko l t er, LLC, an drecei v eda 5 0 % i nt eres t i n i t. Beek m an ’ s co n tri b u t i o n
was s ub s equ en t l y

redu cedb y

$ 3 m i l l i on . In2 0 05 TOUSA/ Ko l t er, LLC, p u rch as ed th e M o n terra p ro p ert y . Beek m an tran s ferred i t s TOUSA/ Ko l t er, LLC i n t eres tt o Dynam o i n earl y

2 0 0 5 fo r $ 1 4 ,5 0 0 ,0 0 0 b y i n creas i n g the o u t s tan d i n g b al an ce du e fro m Dy n am o . Th e Co m m is s i o n er al l eg es th atth e fai r m ark etv al u e o f t h e p art n ers h i p i n t eres ti s ei th er $ 17 ,5 00 ,0 00 o r s o m e h i g her v al u e b as edo n th e v al u e o f t h e p ro p erty th at TOUSA/ K o lt er, LLC, p u rch as ed . Becau s e t he v al u at i o n o f t h e 5 0 %
s h are o f TOUSA/ Ko l t er, LLC, was n o tad dres s edi n t h e n o t i ce o f d efi ci en cy , th e Co m m i s s i o n er b ears th e b u rd en o f p ro o f o n th is i s su e. 7 4 Th e Co m m i ss i o n er d i d
n o tp res en tan y

ev i d en ce o f the fai r m ark etv al u e o f t h e p ro p erty , an dp et i t i o n ers
ex p lai n edth at th e cap i t al co n tri b ut i o n was s ub s equ en t l y redu cedb y

$ 3 m i l l i o n . Acco rd in g ly , we fi n d t h atth e Co m m i s s i on er fai ledt o m eeth i s b u rd en t o s h o w th at Beek m an tran s ferred th e TOUSA/ Ko l t er, LLC i nt eres t t o Dy n am o atl es s t h an fai r
m ark etv al u e.

7 4 See W ayn e Bo l t& Nu t Co . v . Co m m i ss i o ner, 9 3 T.C. at5 07
.- 8 5 -

[* 8 5 ] 2
. Th e Dynam o Fu n d Du ri n g th e fi rs th al f o f 2 0 0 6 Beek m an tran s ferred th e as s et s i n th e Dyn am o Fu n dt o Dyn am o fo r $ 19 8 ,0 2 5 ,0 3 7 . Paym en t fo r th e Dy n am o Fu n dwas reco rd ed
as an i n creas e t o th e o ut st an d i n g b al an ce du e fro m Dynam o . Th e p art ies ag ree t h at th e v al u e o f t h e Dy

n am o Fu n d was $ 2 2 8 , 2 3 4 ,8 0 8 o n Decem b er 3 1 , 2 0 0 5. Acco rd in g ly , Beek m an tran s ferred th e Dynam o Fu ndt o Dyn am o fo r $ 3 0 , 2 0 9 ,7 7 1 l es s th anfai r m ark etv al u e.

3
. Oth er Tran s fers Beek m an tran s ferred v ari o u s o th er p ro p ert i es t o Dy n am o du ri n g t h e y ears i n i s su e. Th es e i n cl ud e t h e J ag o f Pal m Beach p ro p ert y , th e Bear’ s Cl ub p ro p ert y , th e Gran de Saras o t an p ro p ert y , an dth e Heat h ro wOak s p ro p ert y . Th e Co m m i s s i o n er b ears th e b u rd en o f p ro o f as t o each o f t hes e i t em s b ecau s e n o n e
was rai s edi n th e n o t i ce o f d efi ci en cy . 7 5 Th e Co m m is s io n er h as n o tp res en t edan y
ev i d en ce t h atth es e p ro p ert ies were t ran sferred at l es s t h anfai r m ark etv al u e. Acco rd in g ly , we fi n d t h atth e am o u n t s rep o rt edo n t h e g en eral l ed g ers were t h e fai r m ark etv al u es o f t h e p ro pert i es .

7 5 See W ayn e Bo l t& Nu t Co . v . Co m m i ss i o ner, 9 3 T.C. at5 07
.- 8 6 -

[* 8 6 ] F. Co n cl u si o n W e fi n dth atBeek m an tran sferred p ro p ert i es t o Dy n am o fo r l es s th an fai r
m ark etv al u e. Beek m an tran s ferred th e Do m an i p ro p ert y , th e Gran d e atM i ras o l p ro p erty , th e M ai n s treet p ro p ert i es , th e Veran o p ro p ert y , an dth e Dyn am o Fu n dt o Dynam o fo r $ 1 1 ,2 3 8 , 6 9 9 , $ 7 5 , 8 6 7 ,2 8 8 , $ 2 ,9 9 8 ,0 0 0 , $ 9 0 , 5 2 2 ,7 0 2 , an d $ 3 0 ,2 0 9 ,7 7 1 , res p ect i v el y , l es s th an th e fai r m ark etv al u es . Acco rd i n g l y , Beek m an tran s ferred $ 2 10 ,8 36 ,4 6 0 o f ad d i t i o n al v al u e t o Dyn am o . W e m u s t d et erm i n e wh eth er t h i s am o u n twas a co n s tru ct i v e d i s tri b u t i o n . IV. Co n st ru ct iv e Di s tri b u t i o n It is wel l s et t l edth ata t ran s fer o f p ro p ert y fro m o n e en t it y

t o an o th er fo r l es s th anad equ at e co n s i d erat i on m ay co n s t i tu t e a co n s tru ct iv e d i s tri bu t i on t o an i n d i v i du al wh o h as o wn ers hi p i n t eres t s i n b o th en t i t i es . 7 6 A b arg ai n s al e, i n cl u d i n g a b arg ai n s al e b as edo n co m p et in g p ro p ert y

v al uat i o n s , b et w een rel at ed p art i es , h o w ev er, d o es n o tau t o m at i cal ly res u l ti n a co n s tru ct i v e d i s tri b u t i o n . 7 7

7 6 St i n n et t ’ s Po n t i ac Serv ., In c. v . Co m m i s s i o n er, 7 3 0 F.2 dat6 4 0; Co x En t ers ., In c., & Sub s . v . Co m m i s s i o n er, T.C. M em o . 2 0 0 9 -1 3 4, 9 7 T.C.M . (CCH) 1 7 6 7 , 1 7 7 4 (2 00 9 ).

7 7 Dav is v . Co m

m i s si o n er, T.C. M em o . 1 9 9 5 -2 8 3 , 6 9 T.C.M . (CCH) 3 0 0 4 , 3 0 0 7 (1 9 9 5 ); s ee al s o J o s ep h Lup o wi tz So n s , In c. v . Co m m i ss i o n er, 4 9 7 F.2 d8 6 2 , 8 6 8 (3 d Ci r. 1 97 4 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o. 1 9 7 2 -2 3 8 ; Co x En t ers ., In c., & Sub s . v . Co m

m i ss io n er, 9 7 T.C.M . (CCH) at 1 7 7 5.- 8 7 -

[* 8 7 ] Co u rt s h av e o u t l i n eda t wo -p ro n g an al y si s t o d et erm i n e wh et h er a t ran s fer
res u l ted i n a co ns tru ct i v e d i s tri b u t i o n . Th e fi rs t p ro n g , th e o b j ect i v e t es t, as k s wh et h er t h e t ran s fer cau s ed“ fu n d s o r o ther p ro p ert y t o l eav e t he co n tro l o f t h e tran s fero r co rp o rat i o n an d* * * [wh et h er] i tal l ow[ed ] th e s t o ckh o ld er t o ex erci s e
co n tro l o v er s u ch fu n d s o r p ro pert y ei th er d i rect ly

o r i n di rect l y

th ro u g h s o m e i n s tru m en t al i ty

o th er t h anth e tran s fero r co rp o rat io n .” 7 8 Th e s eco n dp ro ng , th e
s ub ject i ve t es t , a “ cru ci al i n qu i ry ” i n th e co n st ru ct iv e d i s tri b u t i on d et erm i n at i o n , as k s wh et h er t h e t ran s fer o ccu rredp ri m ari l y fo r t h e co m

m o n s h areh o l d er’ s p ers o n al b en efi trat her t h an fo r a v al i d b u s i n es s p u rp o s e. 7 9 Bo th p ro n gs m u s tb e
s at i s fi edfo r a co u rtt o fi nda co n s tru ct iv e d i s tri b u ti o n . 8 0 A. Ob ject i v e Pro n g Becau s e t he co m

m on s h areh o l d er d oes n o t d i rect l y recei v e fu n d s o r p ro p erty i n a t ran s fer b et ween en t it i es , s uch a t ran s fer i s a d i s tri b u t i o n i f: (1 ) t h e tran s ferred fu n d s l eav e t h e co nt ro l o f t he t ran s ferri n g en ti ty an d (2 ) t h e o wn er

7 8 See St i n net t ’ s Po n t iac Serv ., In c. v . Co m m i ss i o ner, 7 30 F.2 d at 6 4 1 (qu o ti n g Samm o n s v . Co m m i s si o n er, 4 7 2 F.2 d4 49 , 4 5 1 (5 th Ci r. 1 9 7 2 ), aff’ g i n p art , rev ’ g i n p art T.C. M em o . 1 9 7 1 -1 4 5
.

7 9 W i l k o f v
. Co m

m i ss i o n er, T.C. M em o . 1 9 7 8 -4 9 6, 3 7 T.C.M . (CCH) 1 8 5 1- 3 1 , 1 8 5 1 -3 8 (1 9 7 8), aff’ d , 6 3 6 F.2 d1 1 3 9 (6 th Ci r. 1 98 1 ).

8 0 Samm o n s v . Co m

m is s i o n er, 4 7 2 F.2 dat4 5 1 ; Co x En t ers ., In c., & Sub s . v . Co m m i s s i o n er, 9 7 T.C.M . (CCH) at 1 7 7 4
.- 8 8 -

[* 8 8 ] co nt ro l s th e fu nd s , d i rect l y o r i n d i rect l y , th ro u g h s o m e m ean s o th er t h an th e tran s fero r. 8 1 Co ns i deri n g the co n tro l M rs . M oo g ex erci s edo v er Beek m anan d Dynam o th ro u gh 2 02 0 0 7 2 On t ari o , Lt d ., we co n cl ud e t h e fi rs tp ro n g o f t h e t wo p ro n g an al y s is fo r a co n st ru ct iv e d i st ri bu t i o n i s s at i s fi ed . M rs . M o o g h ad th e ab i l i ty t o d iv ertth e v al u e o f t h e p ro p ert y t o h er ch o s enreci p ien t b ecau s e o f h er
co n tro l
. B. Sub

ject iv e Pro n g Th e s ub ject i ve p ro n g as ks th e Co urtt o co ns i d er wh et h er t h e t ran s fer
o ccu rredp ri m ari l y

fo r t he b en efi to f t h e co m m o n s h areh ol d er, rat h er t h an fo r a
v al i db u s i n es s p urp o se. In ap p l y i n g the s ub ject i v e p ro n g “ th e s earch fo r t hi s
u n d erl y i n g p u rp o s e u s u al ly i n v o l v es th e o b

ject i v e cri t eri o n o f act u al p ri m ary
eco n om i c b en efi tt o th e s h areh o l d ers as wel l”. 8 2 Th e Co u rto f Ap p eal s fo r t h e El ev en th Ci rcu i ts t at es th e p o i n tas fo l l ows : “ In d et erm i n i n g wh et h er t h e p ri m ary p u rp os e t es th as b een m et , we m u s td et erm i n e n o to n ly

wh et h er a s ub

ject i v e i n ten t

8 1 Samm o n s v . Co m

m is s i o n er, 4 7 2 F.2 dat4 5 3 ; Dav i s v . Co m m i s si o n er, 6 9 T.C.M . (CCH) at 3 00 7
.

8 2 Co x En t ers ., In c., & Sub s . v . Co m m i s s i o n er, 9 7 T.C.M
. (CCH) at 1 7 7 4 (qu o ti n g Kup er v . Co m

m i s s i o n er, 5 33 F.2 d1 5 2 , 1 6 0 (5 th Ci r. 1 9 7 6 )); s ee al s o St i n n et t ’ s Po n t i ac Serv ., In c. v . Co m m i s s i o n er, 7 3 0 F.2 dat6 4 1
.- 8 9 -

[* 8 9 ] t o p ri m ari l y

b en efi tthe s h areh o l d ers ex i s t s , b u tal so wh et h er an actu al p ri m ary eco n o m i c b en efi t ex i s t s fo r t h e s h areh ol d ers .” 8 3 If t h e p ri m ary

p u rp o se i s a v al i db u s i nes s p u rp o s e, t h en th e p ri m ary p u rp o s e i s n o tfo r t h e s h areh o l d er b en efi t . 8 4 Th e b en efi tt o t h e s h areh o l d er m us tb e

“ d i rect ”, a t erm

b ro ad l y co n s tru ed
. 8 5 Fo r ex am p le, co u rt s h av e fo u n da b en efi tt o th e s h areh o l d er wh enth e p ri m ary p u rp o s e o f t h e t ran s fer i s t o o r fo r t h e b en efi to f
a m em b er o f t h e s h areh o l der’ s fam i l y . 8 6

8 3 St i n n et t ’ s Po n t i ac Serv ., In c. v . Co m m i s s i o n er, 7 3 0 F.2 dat6 4 1.
8 4 St i n n et t ’ s Po n t i ac Serv ., In c. v . Co m m i s s i o n er, 7 3 0 F.2 dat6 4 1; Samm o n s v . Co m m i s s i o n er, 4 7 2 F.2 dat4 5 2 ; Co x En t ers ., In c., & Sub s . v . Co m m i s s i o n er, 9 7 T.C.M . (CCH) at 1 77 4
.

8 5 Gi l b ertv . Co m

m i s s i o n er, 7 4 T.C. 6 0, 6 4 (1 9 8 0 ); W il k o f v
. Co m m i s s i o n er, 3 7 T.C.M (CCH) at 1 8 5 1 -3 8 ; s ee al so Ru sh i n g v . Co m m is s io n er, 5 2 T.C. 8 8 8 , 8 9 4 (1 9 6 9) (“ [W ] h at ev er p ers on al b en efi t , i f an y , Ru s h i n g [t he s o l e s h areh o l d er o f t h e tran s fero r an dtran s feree co rp o rat i o n s ] recei v edwas d eri vat i v e i n n atu re. Si n ce n o d i rect b en efi twas recei v ed , we can n o tp ro p erl y h ol d h e recei v eda co n s tru ct i v e d i v i d en d
. ”), aff’ d , 4 4 1 F.2 d5 9 3 (5 th Ci r. 1 9 7 1 ).

8 6 Green v . Un i tedSt at es , 4 6 0 F.2 d4 1 2, 4 1 9 -4 2 1 (5 th Ci r. 1 97 2 ); By ers v . Co m m i s s i o n er, 1 9 9 F.2 d2 7 3 , 2 7 5 (8 th Ci r. 1 9 5 2 ), aff’ g a M em o ran du m Op i n i o n o f t h i s Co u rt ; Ep s tei n v . Co m m i s s i o n er, 5 3 T.C. 4 5 9 , 4 7 4 -4 7 5 (1 9 6 9) (ex p l ai n i n g th ati ti s fi rm l y

es tab l i s h ed th atwh en a co rp o rat i o n m ak es a t ran s fer o f p ro p ert y fo r n o o r i n s uffi ci en tco n s i d erat i o n “ t o a m em b er o f t he s t o ckho l d er’ s fam i l y , wh et h er i tb e d i rect l y

o r i n t ru s t , th e s t o ckh o l d er h as en jo y edth e u se o f s uch p ro p erty n o l es s th an i f i th adb een d i s tri b u t edt o h i m d i rect l y ”).- 9 0 -

[* 9 0 ] Pet i t i o ners rai se v ari o u s arg u m en t s th atBeek m an h ada b us i n es s p u rp o s e fo r m ak in g th e b arg ai n s al es . Pet i t i o n ers arg u e t h atDy n am o an dBeek m anh ada
s p eci fi c b u s in es s p u rp o s e, n am el y , th atth e t ran s fers en ab l edDy n am o t o rev i t al i ze th e W es t Pal m

Beach n ei g h b orh o o ds u rro u nd i n g Beek m an ’ s p ro ject s an d b o l s t er th e Ko l t er b ran dn am e, wh ich wo ul dfi n an ci al l y b en efi tBeek m an . Inm ak i n g th i s arg u m en t , p et i t i o ners rel y o n Ru s h i n g v . Co m m is si o n er. 8 7 In Ru s h in g , a s o l e s h areh o l d er o f t wo co rp o rat io n s was h el dn o tt o h av e recei v eda co n st ru ct iv e d i s tri b u t i o n wh eno n e co rp orat i o n ad van cedfu n d s t o a
s i st er co rp o rat i o n . 8 8 W e h el dthatan y b en efi t t o the s o l e s h areh o l d er was i n d i rect b ecau s e th e ad v an ci ng co rp o rat i o n , a co rp o rat i o n d ev el o pi n g a s h op p i n g cen t er, h ad a s ig n i fi can ti nt eres t i n th e s u cces s o f th e s is t er co rp o rat i o n , a co rp o rat i o n d ev el o p in g a n earb y res i d en t i al d ev el op m en t . 8 9 W e ex p l ai n edth at the s u cces s o f th e d ev el o p m en t o f h o m e s it es o n th e l an dad jacen t t o t h e s h o p p i ng cen ter wo u l d i n ev i t ab l y

l eadt o i n creas edu s e o f t h e s h o p pi n g cen ter. 9 0 Pet i ti o n ers ’ rel ian ce i s
m i s p l aced . Th ere i s n o reas o n th atBeek m an was req u i redt o tran sfer t he

8 7 Ru s h i n g v . Co m

m i ss i o n er, 5 2 T.C. 8 8 8
. 8 8 Ru s h i n g v . Co m

m i ss i o n er, 5 2 T.C. at8 94
. 8 9 Ru s h i n g v . Co m

m i ss i o n er, 5 2 T.C. at8 94
. 9 0 Ru s h i n g v . Co m

m i ss i o n er, 5 2 T.C. at8 94
.- 9 1 -

[* 9 1 ] p ro p ert i es t o Dy

nam o t o rev i t al ize W es t Pal m Beach . Beek m an , o r o n e o f Beek m an ’ s s ubs i d ai ri es , co u ldh av e u n dert ak en th e p ro j ect . Th i s s am e l o g i c ap p li es t o s tren g th en i n g th e Ko l t er b ran dn am e. Beek m an co u l dh av e ju s t as
eas i l y d ev el o p edth e p ro p ert i es u s i n g the Ko l t er b ran dn am e. Pet i t i o ners arg ue t h atBeek m an ’ s d irect o rs h el dfi du ci ary dut i es t o th e b en efi ci ari es o f t he Can ad i an tru s ts n o t t o d ep l et e t h e v al u e o f Beek m an an d th erefo re Beek m an co ul d n o t h av e u n d erp ri cedth e p ro pert y . Pet it i on ers rel y o n Co x En t ers ., 9 1 wh ere we h el d th atth ere was n o ta co n s tru ct i v e d i s tri b u ti o n . InCo x En t ers ., o n e co rp o rat io n co nt ri bu t edan as s ett o a p art n ers h i p i n ex ch an g e fo r a p art n ers hi p i n t eres tth e v al ue o f wh i ch was l o wer t h an th e v al u e o f t h e co nt ri b u t ed
as s et , effect i v el y

tran s ferri n g v al u e t o th e o th er p artn ers . 9 2 Th e o th er p art n ers were two fam i l y

p art n ers h i p s . 9 3 W e fo u n dth atthe p ri m ary p u rp o s e was n o tt o b en efi t th e o th er p artn ers , i n p artb ecau s e t h e co rp o rat io n ’ s m ajo ri ty s hareh o l d er an d d i rect o rs wo ul d h av e h adt o b reach th ei r fi du ci ary du t i es . 9 4 Th i s wo u l dh av e

9 1 Co x En t ers ., In c. & Sub s . v . Co m m i s s i o n er, 9 7 T.C.M . (CCH) 1 7 6 7
. 9 2 Co x En t ers ., In c. & Sub s . v . Co m m i s s i o n er, 9 7 T.C.M . (CCH) at 1 7 7 0
- 1 7 7 1
. 9 3 Co x En t ers ., In c. & Sub s . v . Co m m i s s i o n er, 9 7 T.C.M . (CCH) at 1 7 6 8
. 9 4 Co x En t ers ., In c. & Sub s . v . Co m m i s s i o n er, 9 7 T.C.M . (CCH) at 1 7 7 6
-- 9 2 -

[* 9 2 ] res u l t ed i n a fi n an ci al d et ri m en tt o th e m i n o ri ty s h areh o l ders wh o d i d n o t
o wnan y i n t eres ti n th e p art n ers h i p s . 9 5 Pet i t i o ners as k th at we fo l l o w th i s l i n e o f reas o n in g b ecau s e t he b en efi ci ari es o f t he Can ad i an tru s ts are n o ti d en t i cal t o th e b en efi ci ari es o f t h e U.S. tru st s . Pet i t i on ers arg u e t h atth e d i rect o rs , o ffi cers , an d co nt ro l l i n g
s h areh o ld ers d idn o tb reach an y du t i es t o t h e Can ad i an tru s t s b y d ep l et i n g v al u e fro m Beek m an . W e d is ag ree. Co x En t ers . i nv o l v eda s i n g l e i n s t an ce o f
u n d erv al u i n g an i n t eres t . Inth es e cas es , we h av e fo un dfi v e b arg ai n s al es
ex ceed in g $ 20 0 m i l l io n. Un l i k e Co x En t ers ., we fi n dth atthe d i rect ors , o ffi cers , an d co n tro l l i n g s h areh ol d er act edfo r t h e b en efi to f th e U.S. tru s t s an dt o th e d et ri m en to f t h e Can ad i an tru s ts . W e ag ree wi th the Co m

m i s s i o n er t hatth e p ri m ary i n ten tan d b en efi twas fo r Dynam o an db y ex ten s i on , th e d yn as ty tru st s . Th e b arg ai n s al e p ro p ert i es wen tt o Dynam o , en h an ci n g i t s v al u e. Th e p ro p ert i es p u tm o re eq u i ty i n Dyn am o an d freed up i t s l i qui das s et s . Th i s al l o wedDy n am o t o d ev el o p i t s Fl o ri d a b u s i n es s
an d i n creas edDy

n am o ’ s b o rro w i n g cap ab i l i ty . Al l o f t hi s d i rect l y b en efi t edth e

9 4 (...co n t i nu ed ) 1 7 7 7
. 9 5 Co x En t ers ., In c. & Sub s . v . Co m m i s s i o n er, 9 7 T.C.M . (CCH) at 1 7 7 7
.- 9 3 -

[* 9 3 ] dyn as ty

tru st s fo r t h e b en efi to f Ch ri s t i n e an d M r. J u l i en an dfu rt h eredM rs . M o o g’ s es t at e p l an ni n g . Acco rd i n g l y , Beek m an m ad e d eem edd i s tri b u ti on s . V. W i th h o ld in g Tax es Hav i n g fo u n dth atco n s tru ct i v e d i s tri b ut i o n s o ccu rred , we m u s td et erm i n e th ei r t ax treat m en tan dBeek m an ’ s wi th h o l d i n g o b l ig at i o n . A. Di s tri b u t i o n s i n Gen eral A d i s tri b ut io n o f p ro pert y m ad e b y a co rp orat io n t o a s h areh ol d er wi th
res p ectt o i t s s t o cki s treat edas p res cri bedb y s ect i o n 3 0 1(c). 9 6 Sect io n 3 01 (c)(1 ) p ro v id es th ata s h areh o l der m u s ti n cl u d e i n g ro s s i nco m e t h e p o rt io n o f th e d i s tri b u t i o n th at i s a d i v i d en d
. 9 7 Sect i o n 3 16 (a) d efi n es a d i v i d en das an y d i s tri b u t i o n o f p ro p ert y

m ad e b y a co rp orat i o n t o i t s s hareh o l d ers (1 ) o u to f i t s
accu m ul at edearn i n gs an dp ro fi t s o r (2 ) o u to f i ts earn in g s an dp ro fi t s fo r t he t ax ab l e y ear. If al l o r p arto f t he d i s tri b u t i o n i s n o ta d i v i d en d , th atam o u nti s a
n o n t ax ab l e ret u rn o f cap i t al t o th e ex t en to f t h e s h areh o ld er’ s ad ju s t edb as i s i n th e

9 6 Sec. 3 0 1(a).
9 7 Sec. 3 1 6(a); W el l e v . Co m m i s s i o n er, 1 4 0 T.C. 4 2 0 , 4 2 2 (2 0 1 3); s ee al s o s ec. 6 1 (a)(7 ).- 9 4 -

[* 9 4 ] s t o ckan d an y

am o u n t i n ex ces s o f t he s h areh ol d er’ s ad ju s tedb as i s i s t ax ab l e cap i t al g ai n . 9 8 Beek m an ’ s es ti m at edearn i n g s an dp ro fi t s were $ 3 4 , 5 0 4 ,9 8 0 an d $ 1 4 1 ,1 1 5 ,2 7 9 o n J u n e 3 0, 2 0 0 5 an d2 00 6 , res p ect i v el y . Acco rd in g l y , Beek m an ’ s
co n st ru ct i v e d is tri b u t i on o f $ 21 0 ,8 3 6 ,4 6 0 ex ceed edi t s earn i n g s an dp ro fi t s. Pet i t io n ers al l eg e t h atth e earn i n g s an dp ro fi ts s h o u l db e i n creas ed b y th e am o u n t
o f t h e u n d erp ri ci n g o n t h e b arg ai n s al e p ro p ert i es u n der s ect i o n 3 1 2 (b )(1 ). Th e Co m m i s s i o n er co n ced es th atBeek m an i s en t i t l edt o an i n creas e i n earn i n gs an d p ro fi ts i n th e am o u n to f t h e d eem edd i s tri b u ti on s . 9 9

9 8 Sec. 3 0 1(c)(2 ) an d (3 ).
9 9 W e ex pect th e p art ies t o res o l v e t h e ex t en t t o wh i ch an y d i st ri b u t i o n m ay o r m ay n oth av e b een m ad e o u to f earn i n gs an d p ro fi ts th ro u g h co m p u tat i o n s u n d er Ru l e 1 5 5
.- 9 5 -

[* 9 5 ] B. W i th h o ld in g Tax es Di s tri b u t i o n s u n d er s ect i o n 3 0 1 (c) are p o t en t i al l y s ub ject t o wi thh o ld i n g t ax es , an dth e p art i es d i sp u te wh et h er Beek m an h ada du ty t o wi th h o ld . In g en eral , s ect i o n 1 44 2 i m

p o s es a wi th h o ld i n g t ax o n d iv i d en d s t o fo rei g n
co rp o rat i o ns , an d s ect i o n 1 4 45 (e)(3 ) i m po s es a wi th h o l d in g t ax o n d is tri b ut i o n s
n o to u t o f earn i n g s an dp ro fi t s wh ere t h e d i st ri b u t i n g co rp o rat i o n i s a U.S. real p ro p erty h o l di ng co rp o rat io n . 1
. W i th h o ld in g Tax es o n Di v i d en d s Sect io n 1 4 4 2 (a) g en eral l y req u i res th e p ay o r o f a U.S. s o u rce d i v i d en dt o a fo rei gn co rp orat i o n t o d edu ctan dwi thh o l dt ax atth e s o urce. Sect i o n 8 8 1 (a) i m p o s es a t ax o f 3 0 % o n v ari o u s k i n d s o f i n co m e i n cl u d in g d iv i den d s recei v ed fro m U.S. s o u rces b y

a fo rei g n co rp o rat i o n t o th e ex t en t th e d i v i d en drecei v edi s
n o teffect i v el y

co nn ect edwi th th e co n du cto f a trad e o r b u s i n es s wi th i n th e Un i ted St at es . 1 0 0 Gen eral l y , a d i vi den di s fro m a U.S. s o u rce wh en th e d i v id en di s fro m a

1 0 0 A “ fo rei gn co rp o rat i o n” i s a co rp o rat i o n thati s n o ta d o m es t i c co rp o rat i o n, an da “ d om es t ic co rp orat i o n” i s a co rp orat i o n creat edo r o rg an i zedi n th e Un i t edSt at es o r u n d er t h e l aw o f t h e Un i t edSt at es o r o f an y St at e. Sec. 7 7 0 1 (a)(4 ) an d(5 ). Can ad a Sq u are i s a fo rei gn co rp o rat io n b ecau s e i t was o rg an i zedu n d er t h e l aws o f Can ad a, an d Beek m an i s d om es t i c co rp o rat i o n b ecau s e i twas o rg an i zedu nd er t h e l aws o f Del aware.- 9 6 -

[* 9 6 ] d o m es t i c co rp o rat io n . 1 0 1 Th e rat e o f t ax i m p os edo n th e d iv i d en di s redu ced t o 5 % b y the U.S.-Can ad a t ax treat y fo r s h areh o l d ers o wn i n g atl eas t1 0 % o f t h e
s o u rce co m

p an y . 1 0 2 Beek m an , a d o m es t i c co rp o rat i o n, m ad e a co ns tru ct i v e d i st ri b u t i o n t o Can ad a Sq u are, a fo rei g n co rp o rat i o n . Beek m an was req u i redt o wi th h o l d a t ax equ al t o 5 % o f t h e p o rt i o n o f t h e d i s tri b u t i o n thatwas a d i v i d en d , th ati s , that p o rt i on th atwas fro m

Beek m an ’ s earn i n g s an dp ro fi t . Beek m an fai ledt o wi th h o l d a t ax equ al t o 5 % o f th e d iv i d en d s d i s tri b u tedt o Can ad a Sq u are i n 2 00 5 an d2 0 0 6
. Acco rd in g ly , we fi n d t h atBeek m an was req u i redt o wi th h o l d5 % o n th e p o rt i o n o f th e d i s tri b u t i o n t h atwas a d i v i d en d
. Pet i t i o ners as k u s t o l i m i to u r fi n d i n g t o d i st ri b u t i o n s fro m Beek m an Vi s ta’ s
earn i n g s an dp ro fi t s. Co n s tru ct i v e d i s tri b ut i o ns o ft en ari se i n s i tu at i o ns wh ere t h e
co rp o rat i o n h as ex ces s earn i n g s an dp ro fi t s an d i s try i n g t o m o v e p ro fi t s o uto f t he

1 0 1 Sec. 8 6 1 (a)(2 ).
1 0 2 Th i rdPro t o co l Am en di n g the Co nv en t io n W i th Res p ectt o Tax es o n In co m e an d Cap i t al , art . 1 0 , Can .-U.S., Sep t . 2 6 , 1 9 8 0 , T.I.A.S. No . 1 1 08 7 , as i n effect fro m

2 0 04 -2 0 0 6
.- 9 7 -

[* 9 7 ] co rp o rat io n . 1 0 3 Ho wev er, we h av e ex p lai n edth atco rp o rat i o n s can m ak e
co n st ru ct i v e d is tri b u t i on s i n ex ces s o f earn i n g s an dp ro fi t . 1 0 4 Pet i t i o ners al s o as kthati f we fi n da co n st ru ct i v e d i s tri b ut i o n , we s h o u l d redu ce t h e am o un t o f t h e d i s tri b u t i o n b y th e am ou n t Beek m an o wes t o Can ad a Squ are as rep aym en to f a l o an . Tax p ay ers are b o u n db y th e fo rm o f t h ei r tran s act io n s an dm ay

n o targ u e th atth e s ub st an ce o f t hei r t ran s act i o n d i ffers fro m th e co n s equ en ces . 1 0 5 Beek m an d i dn o tredu ce t h e am o u n tdu e t o Can ad a Sq u are fo r t h e am o u n t o f t h e co n st ru ct i v e d i s tri bu t i o n . Acco rd i n g l y , Beek m ancan n o t
recas tth e tran sact i o n as a l o an rep aym en t .

2
. W i th h o ld in g Tax es o n No n d i v i d en dDi s tri b u t io n s A d o m es t ic co rp o rat io n th ati s o r h as b een a U.S. real p ro p erty h o ld i n g
co rp o rat i o n at an y

t i m e du ri n g th e fi v e-y ear p eri o den d in g o n th e d at e o f

1 0 3 See, e.g ., W el le v . Co m m i s s i o ner, 1 4 0 T.C. at4 2 6 ; Dav i s v . Co m m i s s i o n er, 6 9 T.C.M . (CCH) 3 0 0 4
. 1 0 4 Le v . Co m

m i s s io n er, T.C. M em o . 2 0 03 -2 1 9, 8 6 T.C.M . (CCH) 1 1 6 , 1 2 1 (2 0 0 3) (“ Un d er s ect i o n 3 0 1 (c), a co n s tru ct i v e d i s tri b u t i o n i s t ax ab le t o th e s h areh o ld er as a d i v i d en d o n ly t o th e ex t en to f t h e co rp o rat i o n ’ s earn i n g s an d p ro fi ts . An y

ex ces s i s a n o n t ax ab l e ret u rn o f cap it al t o th e ex t en to f t he s h areh o ld er’ s b as is i n th e co rp o rat i o n . An y rem ai n i n g am o u n ti s t ax ab l e t o th e s h areh o ld er as cap i tal g ai n .”).

1 0 5 El li n g er, 4 70 F.3 d at1 3 3 3; Es t at e o f Du rk i n v . Co m m i s s io ner, 9 9 T.C. 5 6 1 , 5 7 1 (1 9 9 2).- 9 8 -

[* 9 8 ] d i s tri b u t io n m

u s twi thh o l dt ax es wh en i td i st ri b u t es p ro pert y t o a fo rei g n p ers o n i n a n o n d i vi d en ds ect i o n 3 0 1 d i s tri b u t i o n . 1 0 6 Sub jectt o ex cep t i o n s n o t ap p li cab l e h ere, 1 0 7 s ect i o n 1 4 4 5 (e)(3 ) req u i res p ay o rs t o wi th ho l d“ 1 0 p ercen to f th e am o un treal i zedb y

th e fo rei g n s h areh o l d er.” Th e Co m m is s i o n er arg u es th atBeek m an s ho u l db e req u iredt o wi th h o l d
u n d er s ect i o n 1 4 4 2 o n th e d i v i d en d s o u to f earn in g s an d p ro fi t s an du n d er s ect i o n 1 4 4 5 o n th e d i s tri bu t i o n s i n ex ces s o f earn i n g s an dp ro fi t s. Th is i s co ns i s ten twi t h th e t reat m en t u n d er th e ap p l i cab l e reg u l at i o n s. 1 0 8 Sect i o n 8 9 7 (c)(2 ) d efi nes th e t erm “ U n i t edSt at es real p ro p ert y h o l d i n g co rp orat io n ” as fo l l o ws : Th e t erm “ Un i t edSt at es real p ro p ert y h o l d in g co rp orat i o n ” m ean s an y co rp o rat io n i f (A) th e fai r m ark etv al u e o f i t s Un i t edSt at es real p ro p ert y i n t eres t s equal s o r ex ceed s 5 0 p ercen to f (B) t h e fai r m ark et v al u e o f -- (i ) i t s Un i t ed St at es real p ro p ert y i n teres t s , (i i ) i t s i n t eres t s i n real p ro p ert y

l o cat edo u t s id e t h e Un i t edSt at es , p l u s (i i i ) an y o th er o f i t s as s et s wh ich are u sedo r h el dfo r u s e i n a t rad e o r b us i n es s . Sect i o n 8 9 7 (c)(1 ) d efi n es “ Un i t edSt at es real p ro p erty i n t eres t ” t o m ean (i ) ani n t eres t i n real p ro p ert y * * * l o cat edi n th e Un i t ed St at es o r th e Vi rg i n Is l an ds , an d(i i ) an y i n t eres t(o th er th an an i nt eres t s ol el y as a cred it o r) i n an y

d o m es t ic co rp o rat i o n u n l es s th e t ax p ay er es t ab l i s h es (ats u ch t i m e an di n s u ch m an n er as th e Secret ary b y reg u lat i o n s

1 0 6 Sec. 1 4 4 5(e)(3 ).
1 0 7 Sec. 1 4 4 5(e)(3 ); s ec. 1 .1 4 4 5 -5 (e)(3 )(i ), In co m e Tax Reg s . 1 0 8 Sec. 1 .1 4 4 1 -3 (c)(4 )(i )(B), In co m e Tax Reg s .- 9 9 -

p res cri b es ) t h ats u ch co rp o rat i o n was atn o t i m e a Un i t edSt at es real p ro p ert y h o l di ng co rp o rat i o n du ri n g th e s h ort er o f -- (I) t h e p eri o d aft er J u n e 1 8 , 1 9 8 0 , du ri n g wh i ch th e t ax p ay er h el ds u ch i n t eres t , o r (II) t h e 5 -y ear p eri o den di n g o n th e d at e o f t h e d i s p o s i t i o n o f s uch i n t eres t . Sect io n 1 .8 9 7 -2 (b )(2 ), In co m e Tax Reg s ., p ro v id es an al t ern at iv e t es twh ere th e fai r m ark etv al u e o f t h e co rp o rat i o n ’ s U.S. real p ro pert y i n teres ti s “p res u m ed ” t o b e l es s th an5 0% o f t h e fai r m ark etv al u e o f t h e ag g reg at e o f i t s as s et s “ if o n an ap p li cab l e d et erm i n at i o n dat e t h e t o t al b o o kv al u e o f th e U.S. real p ro pert y i n t eres t s h el db y

th e co rp o rat i o n i s 2 5 p ercen to r l es s o f th e b oo k v al u e o f t h e ag g reg at e o f t h e co rp o rat i o n ’ s as s et s ”. Th e Co m m is s i o n er d et erm i n edth at Beek m an was a U.S. real p ro p ert y h o l d i n g co rp o rat i o n du ri n g the y ears i n i s s ue. Pet it i o n ers rel y o n the al tern at i v e t es tt o s h o w th atBeek m an was n o ta U.S. real p ro p ert y h o l d i n g co rp o rat i o n. Ho wev er, th e al t ern at i ve t es ti s o n l y a “ p res u m

p t i o n ”. 1 0 9 Th e Co m

m i s s i o n er d et erm i n edth atBeek m an was a U.S. real p ro p erty h o l di n g co rp o rat i o n u n d er
s ect i on 8 9 7 (c)(2 ). In d eed , th e reco rdi n d i cat es thatm o s t o f Beek m an ’ s as s et s were U.S. real p ro p erty

i n teres t s . Th e p ri n ci p al d i fferen ce b et w een the Co m m i ss i o n er’ s cal cu l at io n an d t h e cal cu l at i o n p u tfo rth b y Beek m an an dDy

n am o ’ s ex p erti s th e i n cl u s i o n o f p ro pert y

h el dfo r s al e i n th e o rd i n ary co u rs e o f b u s i nes s i n t ot al U.S. [* 9 9 ]

1 0 9 Sec. 1 .8 9 7 -2 (b )(2 ), In co m e Tax Reg s.- 1 0 0 -

[* 1 0 0] real p ro p ert y

h o l d in gs . Beek m an an dDy n am o h av e n o t o ffered an y
co m p el l i n g arg u m en tas t o wh y th e p ro p ert y

s h o u ldb e ex cl u d edfro m the cal cu l at io n an d d i d n o tm eetth ei r b u rd en t o es tab l i s h th atBeek m an was n o ta U.S. real p ro p ert y

h ol d i n g co rp o rat i o n . Beek m an ’ s d i s tri b u ti o n s i n ex ces s o f earn i n g s
an d p ro fi t s are s ub

jectt o 1 0 % wi th h o l d i n g . VI. Dyn am o Det erm i n at i o n s Th e t ax treat m en t o f an y

p art n ers h i p i t em

m u s tb e d et erm i n edatth e p art n ers hi p l ev el
. 1 1 0 Part n ers hi p i t em s i n cl u d e an y i t em req u i redt o b e t ak en i n t o
acco u n t fo r t h e p art n ers h i p ’ s t ax ab l e y ear u n d er s ub t i t l e A t o th e ex t en tth atth e Secret ary h as d et erm i n edb y

reg u l at i o n th at th e i t em

i s m o re ap p ro p ri at el y d et erm i n edatth e p art n ers h i p l ev el
. 1 1 1 Th i s i n cl ud es i t em s o f i n co m e, g ai n, l o s s , d educt i o n , o r cred i t , as wel l as co n tri b u t i o ns an dd i s tri bu t io n s . 1 1 2 Th e FPAA m ad e
s ev eral ad ju s t m en t s ; h o w ev er, t h e p art ies h av e res o l v edm os to f t h em . W e ad dres s th e rem ai n i n g i s s ues .

1 1 0 Sec. 6 2 2 1.
1 1 1 Sec. 6 2 3 1(a)(3 ); s ec. 3 0 1 .6 2 3 1 (a)(3 )-1 (a), Pro ced . & Ad m i n . Reg s . 1 1 2 Sec. 3 0 1
. 6 2 3 1(a)(3 )-1 (a), Pro ced . & Ad m i n . Reg s.- 1 0 1 -

[* 1 0 1] A. Dyn am o GP Th e Co m m is s i o n er arg u es th atDy nam o’ s g en eral p art n er, Dyn am o GP, recei v eda d eem edd is tri b u t i on o f cas h i n a 2 0 0 7 res tru ctu ri n g tran s act i o n i n an
am ou n tequ al t o th e as s um p t i o n o f t h e ad v an ces t o th e Ch ri s t i n e Dyn as ty Tru s t
an d th e Ju l i en Dy

n as ty Tru st . Dy

n am o rep o rt ed al l o f th e ad v an ces b et ween Beek m an an d D y

n am o as reco u rs e d eb t s t o Dy n am o GP i n 2 00 6 an d 2 00 7
. Pet i t io n ers al l eg e t h atth e ad v an ces were n o n reco urs e. W e d i s ag ree. Ord i n ari l y , a t ax p ay er i s b o u n db y th e fo rm o f a t ran s act i o n an d can no t arg u e t h atth e s ub st an ce ju s t i fi es a d i fferen tres u l t . 1 1 3 Pet i t io n ers ’ ex p ert , M r. M o s es , d et erm i n edth atth e ad v an ces were n o n reco u rs e “ fro m a t ax retu rn p rep arer’ s p ers p ect iv e,” b u tM r. M o s es ackno wl ed g edth atthe ret u rn s rep o rt ed
o th erwi s e an dth ath e “ rech aract eri zed ” t h e d eb t as n o n reco u rs e. Pet i t i o ners h av e
o ffered n o o th er ev i d en ce as t o wh y Dyn am o s h o ul db e rel i ev ed o f i t s t ax rep o rt i n g p o s i t i o n . W e fi n dn o b as i s fo r t h e ad v an ces t o b e rech aract eri zedas
n o n reco urs e. Acco rd i n g l y , we fi ndth e ad v an ces were reco urs e l iab i l i t i es t o Dynam o GP.

1 1 3 Sel fe v
. Un i t edSt at es , 7 7 8 F.2 d 7 6 9 , 7 7 3 (1 1 th Ci r. 1 98 5 ); Fram at o m e Co n n ect o rs USA, In c. v . Co m m i s s i o n er, 1 18 T.C. 3 2 , 4 7 (2 0 0 2 ), aff’ d , 1 0 8 F. Ap p ’ x 6 8 3 (2 dCi r. 2 0 04 ); Ho wel l v . Co m m i s s i o n er, T.C. M em o . 2 0 1 2 -3 03 , at * 1 3
.- 1 0 2 -

[* 1 0 2] Sect i on 7 5 2 (b ) p ro v i d es th at“ [a] n y d ecreas e i n a p art n er’ s s h are o f t h e l i ab i l i t i es o f a p art n ers h i p * * * s h al l b e co ns i d ered as a d i s tri b ut i o n o f m o n ey t o th e p art n er b y

th e p art n ers h i p .” 1 1 4 Dy

nam o GP’ s s hare o f th e ad van ces was redu ced by

th e am o u nto f t he as s um p t i on b y th e Ch ri s t i n e Dyn as ty

Tru s t , $ 2 2 0
m i l l io n , an dth e J u l i en Dyn as ty Tru s t , $ 1 4 6 m i l l io n . Acco rd i n gl y , Dy n am o GP i s d eem edt o h av e recei v eda cas h d i s tri b u t io n o f $ 3 6 6 m i l li o n . Pet i t i o ners rai se t h e t ax ab i l i ty o f t h e d i s tri b u t i o n t o Dy nam o GP i n th ei r b ri ef. Ho wev er, i n p artn ers h i p p ro ceed i ng s s u ch as th is o ne, a p art ner’ s t ax o n a d i s tri b u t i o n i s b ey o n d th e s co p e o f t h e p ro ceed i n g s . 1 1 5 B. Ch ri st i n e Dyn as ty

Tru s t an dJ u l ien Dy

nas ty Tru s t Part n ers h ip i t em s i n cl u d e n o to n l y i t em s o f i m

m ed i at e t ax effect , s uch as i t em s o f i n co m e, l o ss , d edu ct i o n , o r cred it , b ut al s o d et erm i n at i o n s as t o i t em s
s u ch as co n tri b u ti o n s an d d i st ri b u t i o n s. 1 1 6 W e tu rn n o w t o v ari o u s p art n ers h i p i t em s o f Dyn am o .

1 1 4 Sec. 1 .7 5 2 -1 (c), In co m e Tax Reg s . 1 1 5 Sec. 6 2 3 0(a)(2 ).
1 1 6 Sec. 3 0 1
. 6 2 3 1(a)(3 )-1 (a)(4 ), Pro ced . & Ad m i n . Reg s .- 1 0 3 -

[* 1 0 3] 1
. Co n tri bu t i o n o f t h e Barg ai n Sal e W e p rev i ou s ly

fo u n d th atBeek m an m ad e a d eem edd i s tri bu t i o n t o M rs . M o o g. 1 1 7 Acco rd i n g ly , M rs . M o o g i s d eem edt o h av e m ad e a g i ftt o the U.S. t ru s ts i n a 6 0 /4 0 s p l i t, wh ere s h e g av e 6 0 % o f t he v al u e t o th e Ch ri s t i n e Dy n as ty Tru s t
an d 4 0 % t o th e J u l i enDy nas ty Tru s t . 1 1 8 Th e d yn as ty

tru s t s are d eem edt o h av e
m ad e a s ect i on 7 2 1 co n tri b u t i on t o Dy n am o . 2
. Res tru ctu ri n g Tran s act i o n
a. Deem edCo nt ri bu t i on Th e Ch ri s t i n e Dyn as ty

Tru s t an dth e J u li en Dy

n as ty Tru s tm ad e
co n tri b u t i o n s i n th e am o u n ts o f t h e d eb tas s u m p ti o n s fro m

th e res tru ctu ri n g tran s act io n . Th e dyn as ty tru s t s as s u m edDy

n am o ’ s l i ab i l i t i es . Sect io n 7 52 (a) p ro v id es th at“ [a] n y

i n creas e i n a p art n er’ s s h are o f t h e l i ab il i ti es o f a p art n ers h i p , o r an y i n creas e i n a p art n er’ s i nd i v i du al l i ab i l i t i es b y reas o n o f th e as s um

p t i o n b y
s u ch part n er o f p art n ers h i p l i ab i l i t i es , s h al l b e co n s i d eredas a co n tri b ut i o n o f
m o ney b y s u ch p art n er t o th e p art n ers h ip .” Th e Ch ri st i n e Dyn as ty Tru s tan dth e J u l i en Dy n as ty Tru s t are d eem edt o h av e co n tri b u t edm o ney t o the p art ners h i p i n th e am o un t s o f t h e d eb t as s u m p t i o n s ; th ati s, th e Ch ri s t i n e Dyn as ty Tru s tan dth e

1 1 7 See St i nn et t ’ s Po n t i ac Serv ., In c. v . Co m m i s s i o n er, 7 3 0 F.2 dat6 41
. 1 1 8 See Ep s t ei n v . Co m

m i s s i o n er, 5 3 T.C. at4 7 4 -4 7 5
.- 1 0 4 -

[* 1 0 4] J u l i en Dy

n as ty Tru stare d eem edt o h av e co n tri b u t ed$ 2 20 m i l l i o n an d $ 1 4 6 m i l li o n , res p ect i v el y .

b
. Di s tri b u t i o n Dyn am o al so d i s tri b u t edas set s t o th e d y n as ty tru st s i n am o u n t s n earl y equal t o thei r d eb tas s u m

p t i on s. Dy

nam o d is tri bu t ed$ 2 2 0 m i l l i o n o f m ark et ab l e
s ecu ri t i es t o th e Ch ri s t i n e Dyn as ty Tru s tan d$ 14 6 ,6 6 6,6 6 7 , wh i ch co ns i s t edo f $ 7 0 m i l l i o n cas h an da $ 7 6 , 6 6 6 ,6 6 6 n o t e, t o th e J u l i en Dy n as ty Tru s t . Sect io n 7 3 1 (b ) p ro vi d es th at“ [n ] o g ai n o r l o s s s h al l b e reco g n i zedt o a p art n ers hi p o n a d i s tri b u t i o n t o a p art n er o f p ro p ert y , i n cl u di n g m o n ey .” Sect i o n 7 3 1 (c)(1 ) p ro v i d es th at , fo r p u rp o s es o f s ect i o n 7 3 1 (a)(1 ), th e t erm “ m o n ey ” i n cl u d es “ m ark et ab l e s ecu ri t i es ”, wh i ch are t o b e t ak en i n t o acco u n t at fai r m ark et
v al u e as o f t he d i s tri b u t i o n d at e. 1 1 9 Sect i o n 7 3 1 (c)(2 )(A) d efi n es th e t erm

“ m ark et ab l e s ecu ri t i es ” t o m ean “ fi n an ci al i n s tru m en t s * * * wh ich are, as o f t h e d at e o f t h e d is tri b u t i on , act i v el y trad ed(wi th i n th e m ean i ng o f s ect i o n 1 0 9 2 (d )(1 )).” Sect i o n 7 3 1 (c)(2 )(B)(i i) an d (C) i n cl u des i n th e m ean i n g o f t h e t erm

“ m ark et ab l e s ecu ri t i es ” “ an y fi n an ci al i n st ru m en twh i ch , p u rs u an tt o i ts t erm s o r
an y o th er arran g em en t , i s read il y co n v ert i b l e i n t o , o r ex ch an g eab l e fo r, m o n ey o r

1 1 9 Co u nt ry s i d e Lt d . P’ sh i p v . Co m m i s s i o n er, T.C. M em o . 2 0 0 8 -3 , 9 5 T.C.M
. (CCH) 1 0 0 6 , 1 0 0 9 (2 0 0 8 ).- 1 0 5 -

[* 1 0 5] m ark et ab l e s ecu ri t i es ,” wh i ch i n cl u d es “ s t o ck s an d o th er eq u i ty i n t eres t s , ev i d en ces o f i n d eb ted n es s , o pt i o n s , fo rward o r fu tu res co n tract s, n ot i o nal p ri n ci p al
co n tract s, an dd eri vat i v es .” Acco rd i n g l y , Dy n am o d i s tri bu t edm ark et ab le
s ecu ri t i es t o th e Ch ri s t i n e Dyn as ty Tru s tan dcas h an dm ark et ab l e s ecu ri t i es t o the J u l i en Dy n as ty Tru s t . C. In t eres tEx p en s es Becau s e we fo un dth atthe ad van ces were b o na fi d e d eb t , Dy nam o can d educti n t eres t o n th atd eb t . 1 2 0 D. Can cel l at io n o f In d eb t ed n es s In co m e Th e FPAA as s ert s as an al t ern at i v e p o si t io n th at , i f am o u n t s tran sferred fro m Beek m an t o Dyn am o were b o n a fi d e d eb t , th enDy n am o m u s treco gn i ze d i s ch arg e o f i nd eb t ed n es s i nco m e atth e en do f 2 0 0 7
. Th e Co m m is s i o n er d i dn o t ad dres s th i s i ss u e attri al o r o n b ri ef, o th er t h an t o n o t e t h at h e d i dn o tad v an ce t h e arg u m en tb ey o n dch al l en g i n g wh et h er p et i t io n ers m etth ei r b u rd en . W e h av e al read y fo u n dth atDy

n am o rep ai d Beek m an b y d i rect rep aym en t, b y s at i s fy i n g Beek m an ’ s o b l i g at io n s t o th i rdp art i es , an db y p ro vi d in g m an ag em en ts erv i ces t o Beek m an . Pet it io n ers m etth ei r b urd en .

1 2 0 See s ec. 1 6 3 (a).- 1 0 6 -

[* 1 0 6] E. Ad d it i on al Ad j u s t m en t s i n th e FPAA Pet i t i o ners h av e s t at edthatth ey an dth e Co m

m i s s i o n er h av e res o l v ed
s ev eral ad ju s t m en t s . To the ex t en tn o tag reedb y th e p art i es o r co n ced edb y a p art y , p et i t i o n ers h av e n o t p res en t edan y ev i d en ce wi th res p ectt o th e rem ai n i n g ad ju s t m en t s . 1 2 1 Acco rd i n gl y , p et i t io n ers h av e n o tm et th ei r b u rd en reg ard i n g th e
rem ai n i n g ad

j u s t m en t s . VII. Ad d it i on s t o Tax an dPen al t i es Th e Co m m is s i o n er d et erm i n eds ect i o n 6 6 5 1 (a)(1 ) ad d i t i o n s t o t ax an d
s ect i on 6 6 5 6 (a) p en al t ies ag ai ns tBeek m an . Th e Co m m i s si on er as s ert eda s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al ty ag ai ns tDy n am o . W e h av e s ep arat el y co n cl u d ed th atth e Co m

m i ss io n er d o es n o tb ear t h e b u rd en o f p ro du ct i o n as t o th e p en al t i es at i s su e i n t h es e p ro ceed i n gs . 1 2 2 He d o es , h o wev er, b ear t h e b u rd en o f p ro of as t o th o s e p en al t i es rai s edi n h i s am en d m en tt o an swer fo r Beek m an . A. Sect io n 6 6 5 1 (a)(1 ) an dSect i o n 6 6 5 6 Sect io n 6 6 5 1 (a)(1 ) i m

p o s es an ad d i t io n t o t ax fo r fai li n g t o t i m el y fi l e a t ax retu rn u n l es s t h e t ax p ay er s h ows th atth e fai l u re i s du e t o reas o n ab l e cau s e an dn o t

1 2 1 See Ru l e 1 4 2 (a); W el ch v . Hel veri n g , 2 9 0 U.S. at 1 1 5
. 1 2 2 Dyn am o Ho l d i ng s Lt d . P’ s h i p v . Co m m i s s io n er, 1 5 0 T.C. _

__ (M ay 7 , 2 0 1 8 ).- 1 0 7 -

[* 1 0 7] du e t o wi l l fu l n eg l ect . Th i s p en al ty ap p l i es t o retu rn s req u i redu n d er
s ect i on 6 0 1 1 , am o n g o th ers . Fo rm s 1 0 4 2 fal l u n d er s ect i o n 6 0 1 1
. 1 2 3 Sect io n 6 6 5 6 (a) i m

p o s es a p en al ty

fo r fai l u re t o d ep o s i tan y am o u n to f t ax wi th a Go v ern m en td ep o s it o ry . Fo r fai l u res t o d ep o s i t fo r m o re t h an 1 5 d ay s , th e p en al ty i s eq u al t o 1 0 % o f t h e u n d erp aym en t . 1 2 4 As i s tru e wi th res p ectt o t h e ad d it i o n t o t ax u n der s ect i o n 6 6 5 1 (a)(1 ), a t ax p ay er m ay av o i da p en al ty

u n d er
s ect i on 6 6 5 6 (a) i f t h e t ax p ay er’ s fai l u re t o m ak e a requ i redd ep o s itwas due t o
reas on ab l e cau s e an dn o twi l lfu l n eg l ect . 1 2 5 Ex cep tas t o th e p o rt i o n o f t he s ect i o n 6 6 5 6 p en al ty rai s ed i n t h e Co m m i s s i o n er’ s am en d m en t t o an s wer, Beek m an i s l i ab l e fo r ad d i t i o n s t o t ax fo r fai l u re t o t im el y

fi l e an dfai l u re t o t i m el y d ep o si t . Beek m an ’ s Fo rm s 1 0 4 2 fo r t h e y ears en d i n g Decem

b er 3 1 , 2 0 0 5 an d2 0 06 , were du e o n M arch 1 5, 2 0 0 6 an d 2 0 0 7 , res p ect i v el y . 1 2 6 Li k ewi s e, Beek m an ’ s p aym en ts o f wi th h o l d i n g t ax fo r t h e y ears en d edDecem

b er 3 1 , 2 0 0 5 an d2 0 0 6 , were du e b y M arch 1 5 , 2 0 0 6 an d2 0 0 7 ,

1 2 3 See s ecs . 1 .6 0 1 1 -1 (c), 1 .1 4 6 1 -1 (b )(1 ), In co m e Tax Reg s . 1 2 4 Sec. 6 6 5 6(b )(1 )(A)(i i i).
1 2 5 Ro g ers v . Co m

m i s si o n er, T.C. M em o. 2 0 1 6 -1 52 , at* 1 1-* 1 2 (ex pl ai n i n g th atb ecau s e s ect io n 6 6 5 1 (a)(1 ) an ds ect i o n 6 6 5 6 (a) are i den t i cal , they m ay b e ad dres s edt o g et h er).

1 2 6 See s ec. 1 .1 4 6 1 -1 (b ), In co m e Tax Reg s .- 1 0 8 -

[* 1 0 8] res p ect iv el y . 1 2 7 Beek m an d i dn o tfi l e Fo rm s 1 04 2 o r p ay d ep o s i t s b efo re 2 0 0 9
. Th e Co m

m is s i o n er b ears th e b u rd en o f p ro o f wi th res pect t o an y i n creas e i n p en al t i es an d ad di t i o n s t o t ax as s ert edi n th e am en d m en tt o an s wer ab o ve t h o s e d et erm i n edi n th e n o t i ce o f d efi ci en cy . 1 2 8 Inth e cas e o f p en al t i es u n d er s ect i o n 6 6 5 6 (a), t h at b u rd en i n cl u d es wri t t en s up erv i s ory ap p ro v al o f p en al t ies u n d er
s ect i on 6 7 5 1 (b )(1 ). Th e Co m m i s s i o n er h as n o to ffered an y ev i d en ce o f
s up erv i s o ry

ap p ro v al fo r t h e i ncreas e i n p en al t ies u n d er s ect i o n 6 6 56 (a) as sert edi n th e am en d m en tt o an swer. Th e Co m m i s si o n er h as n otm eth i s b u rd en . In co n tras t , ad di t i o n s t o t ax u n d er s ect i o n 6 6 51 (a)(1 ) are n o ts ub jectt o
s up erv i s o ry

ap p ro v al u n d er s ect i o n 6 7 5 1 (b )(1 ); co n s equ en t ly , th e l acko f
s up erv i s o ry

ap p ro v al i s n o tfat al fo r t h e am o u n t s o f th e i n creas es i n ad d i t i o n s t o t ax u n der s ect i o n 6 6 5 1 (a)(1 ). 1 2 9 Th e reco rds h o ws th atBeek m and i dn ott i m el y fi le i t s retu rn s fo r 2 00 5 an d2 0 0 6 an dh as n o ts h o wnth atth e fai l u re t o fi l e was du e t o reas o n ab l e cau s e an dn otwi l l fu l n eg l ect . Co n s equ en t l y , i ti s l i ab l e fo r t he ad d it i o n s t o t ax as s ert edi n th e am en d m en tt o an s wer.

1 2 7 Sec. 6 1 5 1(a).
1 2 8 Rad er v . Co m

m i s s io n er, 1 4 3 T.C. at3 8 9
. 1 2 9 Sec. 6 7 5 1(b )(2 )(A).- 1 0 9 -

[* 1 0 9] Pet i t io n ers arg u e t h atth e Co m m i s s i o n er i s p recl u d ed fro m as s ert in g a
s ect i on 6 6 5 1 (a)(1 ) ad d it i o n t o t ax o r a s ect i o n 6 6 5 6 (a) p en al ty b ecau s e t h e rev en u e ag en t i n i t i al l y

fo u n dreas o n ab l e cau s e du ri n g Beek m an ’ s ex am i n at i o n. Pet i t i o n ers rel y o n Es t at e o f Ch aran i a v . Sh u l m an . 1 3 0 InEs t at e o f Ch aran i a, t he Co u rto f Ap p eal s fo r t h e Fi rs t Ci rcu itrev ers edo u r d eci si on an dh el d th atth e ad d i t i o n t o t ax
s h o u ldh av e b een ab at edb ecau s e a p o rt i o n o f t h e p en al ty was ab at eddu ri n g
ex am i n at i o n . 1 3 1 W e d o n o tb el iev e t h atth e h o l d i ng i n Es t at e o f Ch aran ia i s
an al o g o us t o Beek m an ’ s s i tu at i o n . Inth es e cas es , th ere was n o ab at em en t . M o reo v er, we fo l l o w o u r juri s p ru d en ce wh en th e co u rtt o wh i ch an ap peal wo u l d l i e h as n o t ru l edo n the i s s u e. 1 3 2 Pet i t i o ners ’ arg u m en tth atth e Co m m i s s i o n er can n otch an g e h i s m i n dab o u t wh et h er t o d et erm i n e ad d i t i o ns t o t ax o r p en al ti es i n a n ot i ce o f d efi ci en cy h as n o
m eri t . Pet i t i o n ers h av e n ei th er es t ab l i s h ed , n o r at t em p t edt o es t ab l is h , th e
ex i s t en ce o f a cl o si n g ag reem en to r an y o th er b i n d i n g ag reem en tth atwo u l d p recl u d e t h e Co m

m i s s i o n er fro m

s ub s equ en tl y

d et erm i n i n g an ad di ti o n t o t ax o r a

1 3 0 Es t at e o f Ch aran i a v . Sh u l m an , 6 0 8 F.3 d6 7 (1 s t Ci r. 2 0 1 0), aff’ g i n p art , rev ’ g i n p art1 3 3 T.C. 1 2 2 (2 0 09 ).

1 3 1 Es t at e o f Ch aran i a v . Sh u l m an , 6 0 8 F.3 dat7 6 -7 7
. 1 3 2 Lard as v . Co m

m i s si o ner, 9 9 T.C. 4 9 0 , 4 9 3 -4 9 5 (1 9 9 2).- 1 1 0 -

[* 1 1 0] p en al ty . 1 3 3 W e wi l l n o t n o rm al ly l o o kb eh i ndth e n o t i ce o f d efi ci en cy t o
ex am i n e t h e ad m i n i s trat iv e act i o n s , m o ti ves , o r p o l i ci es o f th e Co m m i s s i o n er. 1 3 4 Th u s, we wi l l n o t l o o ki n t o th e rev en u e ag en t ’ s al l eg edi n it i al d eci si on t o n o t i m p o s e an y s ect i o n 6 6 5 1 (a)(1 ) ad d i t i o n t o t ax o r s ect i o n 6 6 56 (a) p en al ty . Acco rd in g ly , we co n cl u d e th at res po n d en td i dn o t ex ceed h i s s t atu t o ry au th o ri t y wh en d et erm i ni ng ad di t i o n s t o t ax u n d er s ect i o n 6 65 1 (a)(1 ) an dp en al t i es u n d er
s ect i on 6 6 5 6 (a). Th e p art i es d i s p ut e wh et h er Dyn am o an dBeek m anh adreas o n ab l e cau s e fo r fai l u re t o t im el y

fi l e an dt im el y

d ep o s i t b ecau s e t h ey

d i dn o tb el i ev e an y d i s tri b u t i o n h ad o ccu rred
. Th e reco rdi s cl ear, h o wev er, th atth ey d i d n o th av e
reas on ab l e cau s e fo r t h ei r fai l ure t o t i m el y fi le o r d ep o s i t . Reas o n ab l e cau s e req u i res th ata t ax p ay er ex erci se o rd i n ary b u s i n es s care an dp ru d en ce. 1 3 5 W e h av e p rev i o u s l y ex p l ai n ed th at “ [a] g o o d -fai th b el i ef t h ato n e i s n o treq u i redt o fi l e a retu rn d o es n o tco n s t i tu te reas o n ab l e cau se u n der s ect i o n 6 6 5 1 (a)(1 ), u n l es s b o l s t eredb y ad v i ce fro m co m p et en tt ax co u n sel wh o h as b een i n fo rm edo f al l the

1 3 3 Es t at e o f W il b an k s v . Co m m i s s i o n er, 9 4 T.C. 3 0 6 , 3 1 5 (1 9 9 0 ).
1 3 4 Green b erg ’ s Ex p res s, In c. v . Co m m i ss i o n er, 6 2 T.C. 3 2 4 , 3 2 7 (1 9 74 ).
1 3 5 Un i t edSt at es v . Bo y l e, 4 6 9 U.S. 2 4 1, 2 4 6 (1 9 8 5); s ec. 3 0 1 .6 6 5 1 -1 (c)(1 ), Pro ced
. & Ad m i n . Reg s .- 1 1 1 -

[* 1 1 1] rel ev an tfact s .” 1 3 6 Th e m an ag em en tt eam d i dn o treq ues tad v i ce o n h o w t o rep o rtth e p ro pert y

tran s fers . W e d o n o tfi n dth atDy n am o an dBeek m an act ed wi th reas o n ab l e cau s e an dn o twi l l fu l n eg lect
. B. Sect io n 6 6 6 2 (a) Th e t ax treat m en t o f an y

p art n ers h i p i t em , i n cl ud i ng th e ap p l i cab i l i ty o f an y p en al ty an dad d i t io n t o t ax th atrel at es t o an ad ju s t m en tt o a “ p art n ers h i p i t em ”, i s d et erm i n edatth e p art n ers h i p l ev el . W e h av e juri s di ct i o n t o d et erm i ne t h e ap p li cab i l i ty

o f anaccu racy -rel at edp en al ty th at rel at es t o an ad

ju s t m en tt o a p art n ers hi p i t em . 1 3 7 Sect io n 6 6 6 2 (a) an d(b )(1 ) an d(2 ) i m p o s es a 2 0 % accu racy -rel at ed p en al t y
o n an y p o rt i o n o f an u n d erp aym en to f t ax th ati s du e t o n eg l i g en ce o r d i s reg ardo f
ru l es o r reg u l at i o n s o r a s ub s t an t i al u n d ers t at em en t o f i n co m e t ax . Th e t erm

“ n eg l i g en ce” i n cl u des an y fai l u re t o m ak e a reas o nab l e at t em p tt o co m p l y wi th the p ro v is i o n s o f t h e Co d e, an dth e t erm “ d i s reg ard ” i n cl u d es an y carel es s, reck l es s , o r i n t en t i o n al d i s reg ard
. 1 3 8 A retu rn p o s i t i o n thath as a reas o n ab l e b as i s i s n o t

1 3 6 Vi n z v . Co m

m i s s i on er, T.C. M em o . 1 9 8 4 -8 4 , 4 7 T.C.M . (CCH) 1 1 2 8 , 1 1 2 9 (1 9 8 4 ).

1 3 7 Sec. 6 2 2 6(f); Un i t edSt at es v . W o o d s , 5 7 1 U.S. 3 1 , 4 1 (2 0 1 3 ).
1 3 8 Sec. 6 6 6 2(c); Hi gb ee v . Co m m i s s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 8 (2 0 0 1 ).- 1 1 2 -

[* 1 1 2] at tri b u t ab l e t o n eg l i g en ce. 1 3 9 Di s reg ardo f ru l es o r reg u l at io ns i s carel es s i f th e t ax p ay er d oes n o tex erci s e reas o n ab l e d i li g en ce t o d et erm i n e t h e co rrect n es s o f a ret u rnp o si t i o n th at i s co n traryt o th e ru l e o r reg ul at i o n . 1 4 0 Anu n d ers t at em en to f i n co m e t ax i s “ s ubs t an ti al ” wh eni t ex ceed s the g reat er o f 1 0 % o f t he t ax req u i red t o b e s h own o n th e ret u rn o r $ 5 ,0 0 0 o r, i n the cas e o f a co rp orat io n o th er t h an an S
co rp o rat i o n, i f t h e am o u n tex ceed s th e l es s er o f 1 0 % o f th e t ax req u iredt o b e
s h o wno n t h e ret u rn (o r, i f g reat er, $ 1 0 ,0 0 0 ) o r $ 1 0 ,0 0 0 ,0 0 0
. 1 4 1 Dyn am o Ho l d in g s was n eg l ig en ti n fai l i ng t o rep o rt the d eem edd i s tri b u t i o n t o Dy n am o GP. W e h av e fo u n dth e ad v an ces were reco u rs e as t o Dy n am o GP an d Dynam o GP recei v eda d eem edd i s tri b u t i o n as a res u l t o f t h e as su m p ti o n o f t h e l i ab i l i t i es b y

th e d ynas ty

tru s t s . Dy

n am o d i d n o trep o rtthe d i s tri b u ti o n o n i t s retu rn . Acco rd i ng l y , Dy

n am o was carel es s wh en i t d i dn o t as cert ai n th e
co rrect nes s o f ex cl u di ng th e d i s tri b u t i o n fro m i ts retu rn . W i th res p ect t o th e rem ai n in g ad ju s t m en ts , Dy

n am o Ho ld in g s fai l edt o i n tro du ce ev i d en ce t h ati th ada reas o n ab l e b as is fo r i t s rep o rt i n g o f t he i t em s th at were ag reedduri n g Dy

n am o’ s ex am i n at io n . Pet i t io n ers al l eg e t h atad ju s t m en t s

1 3 9 Sec. 1 .6 6 6 2 -3 (b )(1 ), In co m e Tax Reg s . 1 4 0 Sec. 1 .6 6 6 2 -3 (b )(2 ), In co m e Tax Reg s . 1 4 1 Sec. 6 6 6 2(d )(1 )(A) an d(B).- 1 1 3 -

[* 1 1 3] res u l t i n g fro m

th e p art i es ’ ag reem en t s were i s ol at edco m p ut at i o n al ad ju s t m en t s . Th ey

al l eg e t h at b ecau s e t h e am o un to f o n e o f t h e ad ju st m en t s was
o n l y 5 % o f t h e o v eral l d efi ci en cy , we s h o u l dfi ndi twas a co m p u t at i o n al erro r. Th e s ize o f t h e ad

ju s tm en tal on e i s n o tev i d en ce o f a reas o n ab l e b as i s . Thu s , th e
n eg li g en ce p en al ty i s s u st ai nedas t o th os e i t em s , as wel l
. Th e s ub s t an ti al u n d ers t at em en tp en al ty m ay b e ap p li cab le i f an
u n d ers t at em en to f t ax th ati s at tri b u t ab l e t o an ad ju s t m en t t o a p art n ers h i p i t em
m eet s th e t h res h o ld
. 1 4 2 Acco rd i n g l y , we p ro v is i on al l y s u s t ai n the Co m

m i ss i o n er’ s
s ect i on 6 6 6 2 (b )(2 ) accu racy -rel at edp en al ty as t o Dy n am o h o l d i n g s o n an y

p o rt i o n
o f an u nd erp aym en t o f t ax th ati s du e t o a s ub s t an t i al u n d ers tat em en t o f i n co m e t ax . Th e accu racy -rel at edp en al ty wi ll n o tap pl y

t o an y p o rt i o n o f an
u n d erp aym en t wh ere t he t ax p ay ers es t ab l i s h thatth ey h adreas on ab l e cau s e an d act edi n g o o dfai th
. 1 4 3

1 4 2 Sec. 6 2 2 1; Vi s i on M o ni t o r So ft ware, LLC v . Co m m i s s i o n er, T.C. M em o . 2 0 1 4 -1 8 2 , at* 16
.

1 4 3 Sec. 6 6 6 4(c)(1 ); Hi g b ee v . Co m m i ss i o ner, 1 16 T.C. at4 4 8 ; Neo n at o l o g y As s ocs ., P.A. v
. Co m

m i ss i o n er, 1 1 5 T.C. 4 3 , 9 8 (2 0 0 0 ), aff’ d, 2 9 9 F.3 d 2 2 1 (3 d Ci r. 2 0 02 ).- 1 1 4 -

[* 1 1 4] Pet i t io n ers al l eg e t h atDy n am o Ho l d i n g s h adreas o nab l e cau s e an d act edi n g o o dfai th . Bu tth e d efen se cen t ers o n M r. J u li en ’ s kn o wl ed ge. In p art i cu l ar, p et i t i o n ers n o t e th atM r. J u li en was “ u n d en i ab l y Can ad ian -b o rn an d rai s ed ” an d

“ wo u l db e ex p ect edt o b e u n fam i l i ar wi th es o t eri c IRS co n s tru ct s ”. Th is d efen s e i s p ers on al t o M r. J u l i en , an da reas on ab l e cau s e d efen s e t h ati s p ers o n al t o a p art n er m ay

n o tb e as s ert edi n a p art n ers h i p -l ev el p ro ceed i n g . 1 4 4 Pet i t i o n ers , a U.S. co rp o rat i o n an d th e t ax m at t ers p art n er o f a U.S. p art n ers h i p , were n o t Can ad i an b o rn an drai s edan dp et i t i o n ers ’ arg u m en td o es n o tes t ab l i s h reas o n ab l e
cau s e atth e en t i ty

l ev el fo r ei th er Dyn am o Ho l d i n g s o r Beek m anVi s t a. VIII. Oth er Arg u m en t s Pet i t i o ners rai se ad d i t i on al arg u m en t s t h at d o n ots u rv iv e s cru t i n y . Pet i t io n ers arg ue t h atDy n am o Ho l d in g s ’ an d Beek m an Vi st a’ s du e p ro ces s ri g h t s
were v i o lat edb ecau s e t h ey were d en i edan ad m i n is trat i v e ap p eal
. Ho wev er, we h av e p rev i o u s ly

h el dth atth e Co m

m i s s i o n er’ s d eci si o n t o n o tp ro v i d e an Ap p eal s Offi ce co n feren ce d o es n o ti n v al i d at e a n o t i ce o f d efi ci en cy o r an FPAA. 1 4 5

1 4 4 RERI Ho l d i n gs I, LLC v . Co m m i s s io n er, 1 4 9 T.C. _

_ , _

_ (s l i p o p . at3 1 ) (J u l y 3 , 2 0 1 7 ); s ec. 3 0 1
. 6 2 2 1 -1 (d ), Pro ced . & Ad m i n. Reg s . 1 4 5 Cup p v . Co m

m is s i o n er, 6 5 T.C. 6 8 , 8 3 (1 9 7 5 ), aff’ dwi tho u tp ub l is h ed o p i n i o n , 5 5 9 F.2 d1 2 0 7 (3 dCi r. 1 9 77 ).- 1 1 5 -

[* 1 1 5] Pet i t io n ers al s o al l eg e t h atth e n ot i ce o f d efi ci en cy an d t h e FPAA are i n v al i du n d er t h e Adm i n i st rat i v e Pro cedu re Actb ecau s e t h e Co m m is si o n er d i dn o t p ro v id e a “ reas o n edex p l an at i o n fo r * * * [h i s ] act i o n s .” Th e Ad m i n i s trat i v e Pro cedure Act d o es n o tap p l y t o th es e n o t i ces . 1 4 6 IX. Co n cl u si o n Beek m an an d D y

n am o en t eredi nt o a b o n a fi d e d eb t o r-cred i t o r rel at i o n s h ip
. Ho wev er, Beek m an tran sferred p ro p ert y t o Dyn am o at l es s t h an fai r m ark etv al u e. Becau s e o f t h atu n d erp ri ci n g , Beek m an m ad e a co n s tru ct i v e d i s tri b ut i o n t o M rs . M o o g. Beek m an was req u i redt o b u t fai l edt o wi th h o l dt ax es . M rs . M o o g i s d eem edt o h av e g i v enth e co ns tru ct i ve d i s tri b u t i o n t o th e d yn as ty tru s t s an d t h e dyn as ty tru s t s are d eem edt o h av e co n tri b u t edth atam o u n tt o Dy n am o. Dy

n am o
en g ag edi n a res tru cturi ng tran s act i o n i n wh ich each p art ner recei v ed a d i s tri b u t i o n . Dy

n am o GP’ s d i s tri b u t i o n o ccu rredb ecau s e t h e d yn as ty tru s ts
as s u m edi t s l i ab i l i ty , an dth e d y n as ty tru s ts ’ co n tri b u ti o n o ccu rredb ecau se t h ey
as s u m edth e l i ab i l i ty . Beek m an Vi s t a i s l i ab l e fo r ad di t i o n s t o t ax fo r fai l u re t o t i m el y fi l e, an d ex cep tas t o th e am o u ntas s ert ed i n the Co m m i ss i o n er’ s
am en d m en tt o an s wer, Beek m anVi s t a i s al s o l iab l e fo r p en al t ies fo r fai lu re t o

1 4 6 Co m m i ss i o n er v . Neal , 5 5 7 F.3 d1 2 6 2 , 1 2 7 5 (1 1 th Ci r. 2 00 9 ), aff’ g T.C. M em o. 2 0 0 5 -2 0 1 ; Po rt er v . Co m m i s s i o n er, 1 3 0 T.C. 1 1 5 , 1 1 7 -1 1 8 (2 0 08 ).- 1 1 6 -

[* 1 1 6] d ep o s i t . Beek m an Vi st a d i dn o t es t ab l is h a d efen s e ag ai n s tth e ad d i t i o n s t o t ax o r p en al t i es . Th e Co m m is s i o n er es t ab l is h ed an accu racy -rel at edp en al ty u n d er
s ect i on 6 6 6 2 (a) fo r n eg l i g en ce wi th res p ectt o th e p ort i on o f each u n d erp aym en t ari s in g fro m

th e d i s tri b u t i o n fro m

Dy n am o Ho l d i n g s , an dDy

nam o Ho l di n g s d i d
n o tes t ab l i s h a d efen se. Deci s i o n s wi l l b e en t ered
u n der Ru l e 1 5 5
.