T.C. M em o . 2 0 1 9 -1 4 0

UNITED STATES TAX COURT
PLANO HOLDING LLC, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 9 1 6 9-1 7. Fi l edOct o b er 1 6 , 2 0 1 9
.

Do n al dA. Barn es , fo r p et i t i o n er. Th o m as F. Harri m an , Nas eem J eh an Kh an , an dM i ch el l e E. M arco v e, fo r
res p o n d en t.
M EM ORANDUM OPINION URDA, J ud g e: Th e On t ari o Teach ers ’ Pen s i o n Pl an Bo ard(OTPP) i s o n e o f Can ad a’ s l arg es t i n s t i tu t i o n al i n v es t o rs . In 2 0 1 2 i tcau g h t wh i ff o f a ch an ce t o acq u ire Pl an o M o l d i n g Co . (Pl an o ), an Il li n o is p l as t i cs m an u factu rer. OTPP d i d
s o l at er t h aty ear fo r ap p ro x i m at el y $ 2 4 0 m i l l i o n , wh i ch res u lt ed i n Pl an o ’ s-2
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[* 2 ] b eco m i n g a wh ol ly

o wn eds ub s i d i ary

o f p et i t i o n er Pl an o Ho ld i n g LLC (Ho ld i n g), wh i ch was i n turn co n t ro l l ed b y OTPP. Befo re cl o s i n g (an dco nt i n g en t
o n th e cl o s i n g ’ s s u cces s ) OTPP ag reedt o p ay $ 1.5 m i l l i o n t o Ro bert W . Bai rd& Co ., In c. (Bai rd ), th e co m p an y th atp u tOTPP o n t o Pl an o ’ s s cen t . It was Pl an o , h o wev er, t h aten d edup fo o t in g t h e b i l l. Ho l d i n g an d Pl an o fi leda co n s o l i d at edFed eral i n co m e t ax return fo r 2 0 1 2 , i n wh ich a b us i nes s ex pen s e d edu ct i o n u n d er s ect i o n 1 6 2 1 was cl ai m edfo r Pl an o ’ s p aym en t t o Bai rd . Th e In tern al Rev en ue Serv i ce (IRS) i s s u eda n o ti ce o f d efi ci en cy

d i s al l o wi n g th e d edu ct i o n o n t h e g ro u n dth atBai rd h adn o t p ro v i d ed
an y s erv i ces t o Ho l d i n g o r Pl an o . Th e IRS d et erm i neda d efi ci en cy o f $ 9 0 ,3 8 5
an d an accu racy -rel at edp en al t y o f $ 1 8 ,0 7 7 . W e wi l l s u s t ai n b ot h
. Back gro u n d Th e p art i es h av e s ub m it t ed t h i s cas e fo r d eci s i o n wi t h o u ttri al u n d er Ru l e 1 2 2 . Al l rel ev an tfact s h av e b een s t i p u l at edo r are o t h erwi s e i n cl ud edi n th e
reco rd . See Ru l e 1 2 2 (a). Ho l d i n g , a Del aware l i m i t edl i ab i l i t y co m p an y th at

1 Un l es s o t h erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de o f 1 98 6 (Co d e), as am en d ed , i n effect fo r t he y ear i n i s s u e. Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. Al l m o net ary am ou n t s are ro u n dedt o t h e n eares td o l l ar.-3
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[* 3 ] el ect edt o b e t ax edas a co rp o rat i o n fo r Fed eral t ax p u rp o s es , h adi t s p ri n ci p al p l ace o f b u s i nes s i n Il l i n o i s wh en i t t i m el y fi l ed t h e p et i ti o n . A. Pl an o Draws OTPP’ s In t eres t Pl an o s p eci al i zes i n the m an u fact u re o f p l as t i c s t o rag e eq ui pm en t fo r
o u t d o o r s p o rt s . Fo un d ed i n Il l i n o i s i n 1 9 3 2, i t i n tro du ced t he fi rs tp l as ti c t ack l e b o x t o th e fi s h i n g wo rl d2 0 y ears l at er an ds i n ce t h en h as ex p an d edi t s p ro du ct l i nes t o i n cl u d e arch ery

an dg u n cas es , am

m u n i t i o n b o x es , s h el v i n g , t o ol b o x es , an d co s m et i cs cas es . In Feb ru ary

2 0 0 7 Ti n i cu m

Cap i t al Part n ers (Ti n i cu m ), an i n v es t m en tfi rm , b ecam e Pl an o ’ s m ajo ri t y

s h areh o l d er. Th ree y ears l at er (i n 2 0 1 0 ) Pl an o ret ai n ed Bai rdas i t s fi n an ci al ad v i s o r wi t h an ey e t o a p ot en t i al s al e o f t h e co m p an y . No
s al e t oo kp l ace at th att i m e, h o wev er. In 2 0 1 2 Bai rds u g g es t edPl an o as a p o t en t i al acq u i si t i o n can d i d at e t o OTPP--a Can ad ian co rp orat i o n wi th o u t s h are cap i t al (a n o t -fo r-p ro fi t co rp o rat i o n )
an d a m ajo r i n s t itu t i o n al i n v es t o r. Aft er g au g i n g Ti ni cu m ’ s i n teres ti n s el l i n g Pl an o , Bai rd ’ s m an ag i ng d i rect o r s en tan em ai l o n J u l y 2 , 2 01 2 , t o s etup an i n tro du ct o ry

l u n ch . Al t ho u g h l u n ch p ro vedu nwo rk ab l e, rep res en tat i v es o f OTPP
an d Ti n i cu m

l at er d i s cu s s edth e m at t er b y p h on e. Bai rdd i d n o tp art i ci p at e o n th e cal l an dh adn o fu rt h er i np u ti n t o th e acq ui s i t i o n thatfo l l owed
.-4
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[* 4 ] OnJ u ly

2 6 , 2 0 12 , Pl an o ret ai n edHarri s W i l li am s LLC (Harri s W i l l i am s ) as i n v es t m en tb an k er an dfi n an ci al ad v i s o r fo r “ t h e p o ss i b l e s al e t h ro u g h m erg er,
ex ch an g e, o r s al e o f al l o r s ub s t an t i al l y al l o f t h e as s et s, b us i n es s , o r s t o ck o f * * * [Pl an o ] ”. Pl an o ex p res s l y ag reedth at“ i th as en g ag edex cl u s i v el y * * * [Harri s W i ll i am s ] ” t o acti n th atcap aci t y . Duri ng Sep t em b er an dOct o b er Harri s W i l l i am s
an d OTPP ex ch an g edco rres po n d en ce an di n fo rm at i o n , an dOTPP p erfo rm edi ts du e d i li g en ce. By

the en do f Oct o b er OTPP was “ read y t o p ro ceed o n thi s m at t er wi th o u td el ay ”, s u g g es t i n g t h atth e s al e co u l d b e cl o s edb y earl y Decem

b er. B. OTPP Acqui res Pl an o No v em b er 2 0 12 s aw OTPP an dPl an o s etth e t ab l e fo r t h e acq u i s it io n . Act i n g th ro u g h a wh ol l y

o wn eds ub s i d i ary , OTPP o rg an i zedHo l d in g an d Pl an o Acqui s i ti o n , LLC, as Del aware l i m i t edl i ab i l i t y co m p an i es . OnNo v em

b er 2 0 , 2 0 1 2 , th es e two en t i t i es en t eredi n t o a m erg er ag reem en t wi t h Pl an o an d New Pl an o M ol d i n g , LLC--a v eh i cl e fo r co n v ert i n g Pl an o t o a Del aware l im it ed l i ab i l i ty co m

p an y --t o b ri n g Pl an o i n t o th e OTPP fo l das a wh ol l y o wn ed
s ub s i d i ary

o f Ho l d i n g . Th e d eal , as o u t l i n edi n t h e m erg er ag reem en t, cl o s edo n Decem b er 2 1 , 2 0 12
. Th e ag reem en ts etth e p urch as e p ri ce at$ 2 40 m i l l i o n, s ub ject t o cert ai n ad ju s t m en t s . As rel ev an th ere, t h e p art ies ag reed t o an ad ju s t m en tfo r “ Es t i m at ed-5
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[* 5 ] Tran s act i o n Ex p en ses ,” d efi n edas al l u np ai dfees o r ex p en s es i n cu rredb y Pl an o o r i t s s ub s i d i ari es (o r fo r wh i ch th ey were l i ab l e) i n co n n ect i o n wi t h th e p l an n ed m erg er. Th e d efi n i t i o n o f t ran s act i o n ex p en s es i ncl u d edfees an d
ex p en s es p ay ab l e t o fi n an ci al ad v i s o rs . Wh en th e d eal cl o s edo n Decem b er 2 1 , 2 0 1 2 , Pl an o m ad e t wo d i fferen t p aym en t s t o p u rp o rt edfi n an ci al ad v i s o rs . Pl an o fi rs tp ai dHarri s W i ll i am s a fee o f
ro u g hl y $ 2 .8 9 m i l l i o n fo r i t s s erv i ces i n co nn ect i o n wi th th e m erg er. Pl an o al s o p ai d$ 1.5 m i l l i o n t o Bai rd , p urs u an t t o a No vem ber 2 8 , 2 0 1 2 , ag reem en t b etween Bai rdan d OTPP. Wh i l e t h e fee p ai dt o Harri s W i l l i am s was treat edas a tran s act io n ex pen s e t h atredu cedth e p urch as e p ri ce o f Pl an o, t he Bai rdfee was
n o t . Th e No v em

b er ag reem en ts t emm edfro m OTPP’ s d et erm i n at io n th at“ Bai rd
s h o u ldb e co m

p en s at edfo r s u g g es t i n g * * * [Pl an o ] as a p ot en t i al acq u i s it io n
can d id at e an dat t em

p t i n g t o arran g e an i n t ro du ct o ry m eet in g b etween rep res en t at i v es o f OTPP Bo ardan d* * * [Pl an o ] .” OTPP ag reedt o p ay Bai rd $ 1 .5 m i l l i o n (up o n t he s ucces s fu l acq ui s i t i on o f Pl an o ) fo r Bai rd ’ s s erv ices as i t s

“ ex cl u s i v e fi n an ci al ad v i s o r * * * i n co n n ect io n wi t h t h e Acqu i s it i o n .” Th e ag reem en tp ro v id edth atBai rd ’ s s erv i ces were ren d ered“ s o l el y fo r th e b en efi tan d
u s e o f OTPP’ s m an ag em en tan dd i rect o rs i n co n s id eri n g th e t ran s act i o n (s ) t o-6
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[* 6 ] wh i ch th ey

rel at e.” Th e ag reem en tfu rt her s tat edth at“ OTPP an dBai rdag ree
an d ack n o wl ed g e t h at* * * thi s l et t er i s s o l el y fo r t he b en efi to f t h e p art i es t o th i s l et t er.” Itl i k ewi s e s p eci fi edthatth e p art i es ’ o b l i g at i o n s u nd er t h e ag reem en t
co u ldn o tb e as s i g n edb y

OTPP wi t ho u tBai rd ’ s p ri o r wri t t en co n s en t . To s u m up , Bai rd ’ s s ol e act i v i t i es reg ard i n g th e acq u is i ti o n co ns i s t edo f (1 ) s u g g es t i n g Pl an o as an acq u i s i t i o n t arg ett o OTPP, (2 ) g au g i n g Ti n i cu m ’ s i n t eres t , an d(3 ) at t em

p t in g t o s etup l u n ch b et ween OTPP an dTi n i cu m rep res en t at i v es . Atn o t im e d i d Bai rdp ro v i de an y fi n an ci al ad vi s o ry

s erv i ces (o r
o th er s erv i ces ) t o OTPP wi t h res p ectt o th e acqu i s i t i o n . C. 2 0 1 2 Retu rn an dNo t i ce o f Defi ci en cy Ho l d i n g , Pl an o , an d cert ai n o t h er affi l i at edco rp orat i o n s fi l eda co n s o l i d at ed Fed eral i nco m e t ax return fo r t h e 2 0 1 2 t ax ab l e y ear i n wh i ch 7 0 % o f th e Bai rdfee ($ 1 .0 5 m i l l i o n ) p ai d b y

Pl an o was d edu ct ed(wi t h t h e b al an ce cap it al ized ) p u rs u an t t o an el ect i o n u n d er Rev . Pro c. 2 0 1 1-2 9 , 2 0 1 1 -1 8 I.R.B. 7 4 6. Th e IRS th ereaft er i s s u edHo l d i n g a n ot i ce o f d efi ci en cy fo r 2 0 1 2 i n wh ich i td i s al l owed th e cl ai m edd edu ct i o n o f t h e Bai rdfee. Th e IRS as sert edth at Pl an o d idn o t
es t ab l i s h “ t h at y o u i n cu rred , o r i f i n cu rred , p ai dth is am ou n t du ri n g t h e t ax ab l e y ear fo r o rd i n ary

an dn eces s ary

b u s i n es s p u rp o s es an d/ o r t h atan y am ou n tqu al i fi es
as a b u si n es s ex p en s e u n d er t h e p ro v i s i on s o f t h e In t ern al Rev en u e Co d e.” Th e-7
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[* 7 ] IRS d et erm i n eda d efi ci en cy o f $ 9 0 ,3 8 5 an dan accu racy -rel at edp en al t y
u n d er s ect i o n 6 6 6 2 (a) o f $ 1 8 ,0 7 7
. Ho l d i n g s ub s equ en t l y

s o u g h tred et erm i n at i on i n t h i s Co u rt . Di s cu ss i o n Th e IRS’ d et erm i n at i o ns i n a n o t i ce o f d efi ci en cy are g en eral l y

p res u m ed
co rrect , an dth e t ax p ay er b ears th e b u rd en o f p ro v i n g t h o se d et erm i nat i on s wro n g . Ru l e 1 4 2 (a); W el ch v . Hel veri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 93 3 ). Th e t ax p ay er al s o h as th e b u rd en o f p ro v in g i ts en t i t l em en tt o d edu ct i o ns al l o wedb y t h e Co d e. INDOPCO, In c. v . Co m

m i s s i o ner, 5 0 3 U.S. 7 9 , 8 4 (1 99 2 ). Th e p art i es ’ d eci s i o n t o s ub m i t thi s cas e fu l l y s ti p u l at edd o es n otch an g e t h es e b u rd en s . Ru l e 1 22 (b ); Ok ers o n v . Co m

m i s s i o n er, 1 2 3 T.C. 2 5 8 , 2 6 3 (2 0 0 4 ); Bo rch ers v . Co m m is s i o n er, 9 5 T.C. 8 2 , 9 1 (1 9 9 0 ), aff’ d , 9 4 3 F.2 d2 2 (8 th Ci r. 1 99 1 ). I. Treat m en to f t he Bai rdFee A. Go v ern in g Fram ewo rk Ho l d i n g arg ues th atthe IRS erred i n d i s al lo wi n g th e d educt i o n cl ai m edfo r Pl an o ’ s p aym en to f $ 1 .5 m i l l i o n t o Bai rd . Wh et h er an ex p en d i tu re co ns t i tu t es an

“ o rd i n ary an dn eces s ary ” b u s i n es s ex p en s e wi t h i n th e m ean i n g o f s ect i o n 1 6 2 g en eral l y p res en t s a qu es ti o n o f fact
. See Co m m is s i o n er v . Hei n i ng er, 3 2 0 U.S.-8
-

[* 8 ] 4 6 7 , 4 7 5 (1 9 4 3); Pac. M g m t . Grp . v . Co m

m i ss i o n er, T.C. M em o . 2 0 1 8 -1 3 1 , at* 3 3
. Sect io n 1 6 2 (a) p ro v i d es a d edu ct i on fo r o rd i n ary an dn eces saryb u s i n es s
ex p en s es p ai d o r i n cu rreddu ri n g the t ax ab l e y ear i n carry in g o n a t rad e o r b u s i n es s . Anex p en se i s “ o rd i n ary ” i f i ti s cu s t o m ary o r u s u al wi t hi n a p art i cu l ar trad e, b u s i nes s , o r i n du s t ry o r rel at es t o a co m

m o n o r freq u en t o ccu rren ce i n th e ty p e o f b u s i n es s i nv o l v ed . See Dep ut y v . du Po n t , 3 0 8 U.S. 4 8 8, 4 9 5 (1 9 4 0 ); Co o p er v . Co m

m is s i o n er, 1 4 3 T.C. 1 9 4 , 2 1 3 (2 0 1 4), aff’ d, 8 7 7 F.3 d1 08 6 (9 t h Ci r. 2 0 1 7 ). Anex p en s e i s “ n eces s ary ” i f i ti s ap p ro p ri at e an dh el p fu l t o th e d ev el o p m en to f t h e t ax p ay er’ s b u s i n es s. See Co m m i s s i o ner v . Tel l i er, 3 8 3 U.S. 6 8 7 , 6 8 9 (1 9 6 6); Co m

m i ss io n er v . Hei n i n g er, 3 2 0 U.S. at4 7 1 . To b e d edu ct i b l e,
o rd i n ary an dn eces s ary

ex p en ses m

u s tb e “ d irect l y

co n nect edwi t h o r p ert ai n i n g t o th e t ax p ay er’ s trad e o r b u s i n es s ”. Sec. 1
. 1 62 -1 (a), In co m e Tax Reg s .; s ee al s o Co o p er v . Co m

m is s i o n er, 1 4 3 T.C. at2 1 3
. A t ax p ay er g en eral l y

m ay n o t d edu ct t h e p aym en to f an o t h er p ers o n ’ s
ex p en s es . See Dep u ty

v . du Po n t , 3 0 8 U.S. at4 9 4 -4 9 5 ; W el ch v . Hel v eri n g , 2 9 0 U.S. at1 1 4 ; Di et ri ckv . Co m m i s s i o n er, 8 8 1 F.2 d3 3 6 , 3 3 8 (6 t h Ci r. 1 9 8 9 ), aff’ g T.C. M em o . 1 98 8 -1 8 0 , 5 5 T.C.M . (CCH) 7 06 (1 9 8 8 ); Lo h rk e v . Co m m is s i o n er, 4 8 T.C. 6 7 9 , 6 8 4 (1 9 6 7 ). W e h av e reco g n izeda n arro w ex cep ti o n t o th i s ru l e wh ere-9
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[* 9 ] (1 ) t h e t ax p ay er’ s p ri m ary m o t i v e fo r p ay i n g the o t h er’ s o b l i g at i o n i s t o p ro t ecto r p ro m o t e th e t ax p ay er’ s o wn b us i n es s an d(2 ) t h e ex p en d i tu re i s an
o rd i n ary an dn eces s ary

ex p en se o f t h e t ax p ay er’ s b us i n es s . Lo h rk e v . Co m m i s s i o n er, 4 8 T.C. at 6 8 8 ; s ee al s o Co o p er v . Co m m i s s i o n er, 1 4 3 T.C. at2 1 4 ; Sch eu rer v . Co m

m i s si o n er, T.C. M em o . 2 0 1 7-3 6 , at* 1 6
. B. An al y s i s Th e p art i es h av e s t ip ul at edth atOTPP en t eredi n to an ag reem en tt o p ay Bai rd$ 1 .5 m i l l i on , wh ich m ean s th at a d edu ct i o n i s s o u g h tfo r a p aym en tPl an o
m ad e o n b eh al f o f an o t h er. 2 W e t h u s l oo k t o Lo h rk e. Nei t her p art y , h o wev er, refers t o Lo h rk e o r m ak es an y effo rt t o fram e t h e i n s t an tcas e i n l i g hto f t hatwel l -es t ab l i s h edan al y s is . Al t h ou g h th e p art i es d o n o t i n v o k e t h e Lo h rk e t es tas s uch , th ei r arg um en ts n o n et h el es s i m p l i cat e b o t h o f i t s p ro n gs , as th ey

d i sp u t e (1 ) wh et h er Pl an o b en efi t edfro m th e p aym en to f t h e Bai rd fee an d(2 ) wh et her t h e p aym en to f th e fee was an o rd i n ary an dn eces s ary ex p en se
o f Pl an o ’ s b u s i n es s . As we wi l l d i s cu s s , Pl an o fai l s o n b o t h co u n t s .

2 Ho l d i ng m ak es a h al f-h eart edarg um en tth atOTPP “ as s i g n ed ” i ts o b l i g at i o ns u n d er t he Bai rdag reem en t t o Pl an o . Th e reco rdb el i es th i s co n t en t i o n . Th e Bai rdfee ag reem en tp ro vi d es th ati t co u l dn o tb e as s i g n edb y OTPP wi t h o u t Bai rd ’ s p ri o r wri t ten co n s en t . Ho l d i n g fai ls t o i nt ro duce an y s u ch wri t t en co n s en t o r o th er s upp o rtfo r i t s as s i g n m en tth eo ry .-1 0
-

[* 1 0 ] 1
. Pl an o Di dNo tPay Bai rdPri m ari l y

To Ben efi tIt s Bu s i nes s . Gen eral ly , th e fi rs t Lo h rk e p ro n g req u ires th ata t ax p ay er p ay “ t h e o th er p ers o n ’ s ex p en s e p ri m ari l y t o ben efi ti t s b u s i n es s , wi th th e recei p t b y th e o t h er p ers o n o f an y

b en efi tfro m

th e p aym en tb ei n g m erel y i nci d en t al
. ” HIE Ho ld i n g s, In c. v . Co m

m is s io n er, T.C. M em o . 2 0 0 9 -1 3 0 , 9 7 T.C.M
. (CCH) 1 6 7 2, 1 7 4 0 (2 0 0 9), aff’ d , 5 2 1 F. Ap p ’ x 6 0 2 (9 th Ci r. 2 0 1 3 ). To es tab l is h th ati tact ed p ri m ari l y t o b en efi ti t s o wn b u s i n es s , th e t ax p ay er m u s t“ d em o n s t rat e a d i rect
n ex us b et ween th e p u rp o s e o f th e p aym en tan dth e t ax p ay er’ s b u s in es s o r i n co m ep ro duci n g act i v i t ies .” Bo n e v . Co m m i s s i o n er, T.C. M em o . 2 0 0 1 -4 3, 8 1 T.C.M
. (CCH) 1 1 9 9 , 1 2 0 2 (2 0 0 1 ), aff’ d , 3 2 4 F.3 d1 2 8 9 (1 1 t h Ci r. 2 0 03 ). On e co m m o n way fo r a t ax p ay er t o s at i s fy

thi s req u i rem en ti s t o s h o w th ati t s b u s i n es s wo u l d h av e faced“ di rectan d p ro x i m at e” ad v ers e co n s equ en ces h adi tn otm ad e t h e p aym en t o n b eh al f o f th e o th er p ers on . 3 Ho o dv . Co m m i s s i o n er, 1 1 5 T.C. 1 7 2 ,

3 Prev i o u s cas es i n th i s area h av e co n s i d eredwh et h er t he t ax p ay er faced a “ cl ear p ro x i m at e d an g er” an dm ad e a p aym en t“ t o p ro t ectan ex i s t i n g b u si n es s fro m h arm ”. Bo n e v . Co m

m i s si o n er, T.C. M em o . 2 0 0 1-4 3 , 8 1 T.C.M
. (CCH) 1 1 9 9 , 1 2 0 2 (2 0 0 1 ) (qu o t i n g Yo u ng & Rub i cam , In c. v . Un i tedSt at es , 4 1 0 F.2 d1 2 3 3 , 1 2 4 3 (Ct . Cl
. 1 9 6 9 )), aff’ d , 3 2 4 F.3 d 1 2 8 9 (1 1 t h Ci r. 2 00 3 ); J RJ Ex p res s In c. v . Co m

m i s s i o n er, T.C. M em o . 1 9 9 8 -2 0 0 , 7 5 T.C.M . (CCH) 2 3 9 7 , 2 3 9 9 (1 9 9 8 ). Ho ld in g d oes n o targ u e t hatPl an o ’ s b u s i nes s faced s u ch a d an g er were i tn o t t o co v er OTPP’ s d eb t t o Bai rd . Cf. Go u l dv . Co m m i s s i o n er, 6 4 T.C. 1 32 , 1 3 5 (1 9 75 ); J RJ Ex p res s In c. v . Co m m i s s i o n er, 7 5 T.C.M . (CCH) at2 3 9 9-2 4 0 0
.-1 1
-

[* 1 1 ] 1 8 1 (2 0 0 0 ); s ee al s o Squ are D Co . v . Co m m i ss i o n er, 1 2 1 T.C. 1 6 8 , 2 0 0 (2 0 0 3); HIE Ho l d i n g s , In c. v . Co m m i s s i o n er, 9 7 T.C.M . (CCH) at 1 7 4 0 ; W . Co vi n a M ot ors , In c. v . Co m m i s s i o n er, T.C. M em o. 2 0 0 8 -2 37 , 9 6 T.C.M
. (CCH) 2 6 3 , 2 6 6 (2 0 0 8 ), s up p l em en t edb y T.C. M em o. 2 0 09 -2 9 1 . “ Wh ere, as h ere, th e p ay o r an dth e b en efi ci ary o f t h e p aym en t are a co rp o rat i on an da co n t ro l l i n g
s h areh o ld er, t he co rp o rat i o n’ s p aym en to f t h e s h areh o l d er’ s ex p en s e i s cl o s el y
s cru t in i zed , an dthe s h o wi n g o f t h e p ri m ary b en efi tt o th e co rp orat io n m u stb e
s tro n g .” HIE Ho l di n g s , In c. v . Co m m i s s i o n er, 9 7 T.C.M . (CCH) at 1 7 4 0 ; s ee al s o Ho o dv . Co m

m i s s i o n er, 1 1 5 T.C. at1 8 1
. Onb ri ef Ho l d i n g p o i n t s t o Bai rd ’ s m at ch m ak i n g ro l e an ds u g g es t s t hat Pl an o m ad e t h e Bai rdp aym en t t o faci li t at e i t s acq u i si t i o n b y OTPP, as wo ul d --an d d i d --al l o w Pl an o t o ex p an d . Ho l d i n g , h owev er, fai l s t o es t ab l i sh a d i rect l i n k b et ween th e o st en s i b l e b u s i n es s p u rp o s e (Pl an o ’ s acq u i s i t i o n b y a d eep -p ock et ed i n v es t o r) an d t h e Bai rdp aym en t . Ho l d i n g d o es n otco n t en dth atth e m erg er was i n
an y way co n t i n g en t o n Pl an o ’ s p i ck i n g up OTPP’ s t ab t o Bai rd . To th e co n t rary th e reco rdes t ab li s h es th atPl an o an dOTPP (act i n g th ro u g h i t s s ub s i d i ari es ) h ad al read y ag reedt o t h e m erg er m o re t h an a weekb efo re OTPP co n t ract edt o p ay Bai rd . No r d o es Ho l d in g d em on s t rat e an y d i rect an dp ro x im at e ad v ers e
co n seq u en ces t o Pl an o ’ s b u s i n es s o f m an u factu ri n g p l as t i c g o o d s h adi tn o t-1 2
-

[* 1 2 ] co vered OTPP. Wh i l e Ho l d i n g n o tes th at Pl an o’ s m ark etfo o tp ri n t ex p an d ed aft er t h e acq u i s i ti o n , i td o es n o tes t ab l i s h t h atOTPP wo u l dh av e s cal ed b acki t s p l an s o r fi n an ci al b ack i n g h adPl an o n o tp ai d t h e fee. Al th ou g h we reco g n ize t h e s i g n i fi can tro l e Bai rdp l ay edi n th e earl y d ay s o f th e OTPP-Pl an o co u rt s h i p , th e s erv i ces Bai rdren d ered --wh i ch en d edfi v e m o n t h s b efo re t h e m erg er was co n s u m m at ed --d o n o t s up p l y Pl an o wi t h a b u s i n es s p u rp o s e d i rect l y l in k edt o t he p aym en t . Infact , we d is cern n o b en efi tt o Pl an o fro m th e Bai rdp aym en t , as d i s t i n g u is h edfro m th e m erg er i ts el f. Th e reco rd i n s t ead
co n vi n ces u s t h atth e p ri m ary b en efi tfro m

the Bai rdp aym en t red o u n dedt o OTPP,
an i n s t i tu t i on al i n ves to r wi t h a s t ro n g i n t eres ti n reward i ng an dd ev el o p i n g p ro duct i v e rel at i o n s h i p s wi t h co m p an i es t hatb ri n g at t ract i v e acq u i s i t i o n
can d id at es t o i t s s i g h t . W e t h u s fi n dth atHo l d i ng h as fai l edt o s at i s fy the fi rs tp ro n g o f t h e Lo h rk e
an al y s i s. See Bo n e v . Co m m i s s i o n er, 8 1 T.C.M
. (CCH) at 1 2 0 2
. 2
. Bai rdPaym en tW as No tan Ord i n ary an d Neces s ary

Ex p en s e. Al th ou g h the fai l u re t o s at i sfy th e fi rs t Lo h rk e p ro n g s u ffi ces t o s up p o rtth e d i s al lo wan ce o f t h e cl ai m edd edu ct i o n , s ee Di et ri ck v . Co m m i s s i o n er, 5 5 T.C.M
. (CCH) at 7 1 5 , we wi ll n ev ert h el es s ad dres s th e s eco n d p ro n g : wh ether Pl an o ’ s-1 3
-

[* 1 3 ] p aym en t o f t h e Bai rdfee was an o rd i naryan d n eces s ary ex p en se o f Pl an o ’ s
o wnb u s in es s . Ho l di n g ag ai n fai l s t o co nv i n ce u s . W e fi rs tn o t e t h atn ei t h er p art y s u gg es t s th at Pl an o ’ s p aym en t o f t h e Bai rd fee was a p ro du cto f Bai rd ’ s fai l edat t em p tt o fi n da s u i t o r fo r Pl an o i n 2 0 10 . To th e co n trary , th e p art i es ag ree t h atth e Bai rdp aym en tcam e ab o u tb ecau s e OTPP fel to bl i g at edt o Bai rdfo r i ts l eg wo rk(i n 2 0 12 ) i n i d en t i fy i n g a p o t en t ial acq u is i t io n fo r OTPP. 4 Th e Bai rdp aym en tthu s i s i n th e n ature o f a fi n d er’ s fee t h atOTPP d eci d ed t o b es t o w m o n th s aft er t h e fact . W ere we l o o k i n g atth e b u s i n es s o f an i n s t i tu t i o n al i n v es t o r l i k e OTPP, we v ery wel l m i g h tco n cl u d e t h ata fee o f t h i s
s o rt(i f i t were n o ta cap it al ex p en d i tu re t o acq u i re Pl an o ) wo u l db e an o rd i n ary
an d n eces s ary

ex p en se t h atco u l db e d edu ct ed
. Bu twe are n o t . Pl an o ’ s b u s i n es s i s m an u factu ri n g p l as t ic g o od s , p ri m ari l y s t o rag e i t em s fo r o u t d oo r s p o rt s . Ho l di n g fai l s t o p ers uad e u s th ats u ch a p aym en tqu al ifi es as ei t h er o rd i n ary o r
n eces s ary i n th atl i ne o f b us i n es s . Cf. Cap i t al Vi d eo Co rp . v . Co m m i s s i o n er, 3 1 1 F.3 d4 5 8 , 4 6 5 (1 s t Ci r. 2 0 0 2 ) (ex p l ai n i n g th at t he s eco n d Lo h rk e p ro n g av o i d s

“ th ro wi n g o p en th e fl o o d gat es o f co rp o rat e d edu ct i on ” b y req u iri n g th atth e

4 Ou r h o ld i n g t od ay acco rd i n g l y s h o u ldn o t b e s een t o o p i n e o n wh et h er a p aym en t s t em

m in g fro m

Bai rd ’ s 2 0 1 0 effo rt s o n b eh al f o f Pl an o wo u l d h av e b een an o rd in ary

an dn eces s ary

ex p en s e o f Pl an o’ s b u s i n es s .-1 4
-

[* 1 4 ] ex pen se “ ari s e i n co n n ect i o n wi t h th e b us i n es s act i v it i es ” o f t h e p ay o r), aff’ g T.C. M em o . 2 00 2 -4 0
. Ho l d i n g at t em

p t s t o draw s up p o rtfro m

o u r d eci s i o n s i n W ari n g Pro d s . Co rp . v . Co m

m i ss i o n er, 2 7 T.C. 9 21 (1 9 5 7), an dSqu are D Co . v . Co m m is s i o n er, 1 2 1 T.C. 1 6 8 (2 00 3 ). Nei t h er o f t h es e fact -d ri v en d eci s i o n s s up po rt s t h e
co n cl u s i o n th atth e Bai rdp aym en tcan b e co n s i d ered an o rd i n ary an dn eces s ary b u s i n es s ex p en s e o f Pl an o . Ho l d i n g fi rs tp o i n t s t o o u r d eci s i o n i n W ari n g Pro d s ., wh i ch s t an ds fo r t h e p ro p os i t i on th at a l eg al o b l i g at io n i s n o ta s i ne q u a n o n fo r d edu ct i b i l i t y u n d er
s ect i on 1 6 2 . See al s o O ldTo wnCo rp . v . Co m m i s si o n er, 3 7 T.C. 8 4 5 , 8 5 9 (1 9 6 2 ); Sak ki s v . Co m

m i s s i o n er, T.C. M em o. 2 0 1 0 -2 5 6, 1 0 0 T.C.M . (CCH) 4 5 9 , 4 6 2 (2 0 1 0). Ou r cas e, h o w ev er, d o es n o t tu rn o n th e p res en ce o r ab s en ce o f a l eg al
o b l i g at i o n, b u to n wh et h er t h e Bai rdfee was an o rd i n ary an dn eces s ary b u s i n es s
ex p en s e o f Pl an o. Ho l d i n g n ex ttri es t o b ri n g th i s cas e i n t o l in e wi t h o u r p ri o r d eci si o n i n Squ are D. In th atcas e a co rp o rat e p aren t n eg o t i at eda l o an co m m i t m en tan d ag reedt o p ay

cert ai n fees o n b eh al f o f i t s “ t o -b e-o rg an i zeds ub s i d iary ”, wh i ch
u l t i m at el y

recei v ed t h e l o an p ro ceed s an d b ecam e t h e t ax p ay er ati ss u e. Squ are D Co . v . Co m

m i s s i o n er, 1 2 1 T.C. at1 72 -1 7 4. Th e t ax pay er s ub s equ en t ly t o oko v er-1 5
-

[* 1 5 ] th e p aym en to f t h e co s ts (ei t h er d i rect l y o r i n d irect l y ), wh ich i t s ou g h tt o d educt . Id . at1 9 3 . W e h el d u n d er t h o se fact s th at“ wh ere t h e l o an acq u is i ti o n
co s t s were i n cu rredo n b eh al f o f * * * [t h e t ax p ay er] an d t h en p ai db y * * * [t h e t ax p ay er] , i t i s ap p ro p ri at e t o al l o w * * * [t h e t ax p ay er] t o d edu ctth e co s ts i t p ai d .” Id . at2 01
. Ho l d i n g co nt en d s o u r cas e res em b l es Squ are D an dthatPl an o ’ s p aym en t
s h o u ldrecei v e t h e s am e t reat m en t . Sp eci fi cal l y i targ u es th at OTPP en t eredi n t o th e Bai rdag reem en to n Pl an o ’ s b eh al f b ecau s e Pl an o co u l dn o td o s o , i n th e s am e way th atth e co rp o rat e p aren ti n Squ are D fro n t edthe l o an acq u i s i t i o n co st s fo r i t s

“ t o -b e-o rg an i zeds ub s id iary ”. Ho l d in g cl ai m s thatth e fact s an dci rcu m s t an ces o f th i s cas e s h o w Pl an o co u l d n o t en t er a fee ag reem en t wi t h Bai rdd i rect ly b ecau s e
o f (1 ) Pl an o’ s ret en t i o n o f Harri s W i l l i am s as fi n an ci al ad v i s o r an d (2 ) fi n an ci al rep ercu s s i o n s fo r i t s s h areh o l d ers i f t h e Bai rdp aym en t were t reat edas a tran s act io n ex pen s e. Ho l d i n g ’ s arg u m en t ru n s co u n t er t o th e p art i es ’ ex p res s s t i pu l at i o n t h at OTPP “ en t eredi n t o th e l et t er ag reem en t* * * b ecau s e * * * [i t] d et erm i n edth at Bai rds h ou l db e co m

p en s at edfo r s u g g es t i n g * * * [Pl an o] as a p o t en t i al acq u is i t io n can d i dat e an dat t em p t i n g t o arran g e an i n tro du ct o ry m eet i ng b et ween rep res en t at i v es o f OTPP Bo ardan d* * * [Pl an o ] .” Pu tm o re s i m p l y , OTPP act ed-1 6
-

[* 1 6 ] o n i t s o wnb eh al f, n o to n b eh al f o f Pl an o , i n ag reei n g t o th e Bai rdp aym en t , th u s d i s t i n g u i sh i n g t h i s cas e fro m Squ are D, wh ere t h e reci p i en to f t h e b en efi t(t h e l o an p ro ceed s ) was th e t ax p ay er wh o m ad e t h e p aym en t s an dcl ai m ed t h e d educt i o n . 5 No r d o es t h e reco rds u g g es tth atthi s cas e’ s res em b l an ce t o Squ are D i s an y
m o re th an s k i n d eep . Ho l d i n g arg u es th atPl an o wan t edt o , b utco u l dn o t , p ay Bai rdd i rect l y , an ds o i ten l is t edOTPP t o en t er i n t o an ag reem en to n i ts b eh al f
u n d er wh i ch Pl an o u lt i m at el y p ai d . Th i s co n t en ti o n s tri k es u s as farfet ch ed
. Ho l di n g o ffers n o s up p o rtfo r th e i d ea th at Pl an o i t s el f s aw a n eedt o co m p en s at e Bai rdfo r i n t ro du ct io n s p ro v i d eds ev eral m o n t h s b efo re (as o p p os ed t o the p aym en t o f t h e t ran s act i o n ex p en s es i n cu rredi n Squ are D). An d we are n o t p ers u ad edth at Pl an o was u n ab l e t o p ay Bai rdd i rect ly , as was th e cas e fo r t h e t o b e-o rg an i zeds ub si d i ary i n Squ are D. Ho l d i n g fai ls t o s h o w thatth e ag reem en tfo r Harri s W i l l i am s t o s erv e as Pl an o ’ s ex cl us i v e fi n an ci al ad v i s o r wo u l db ar t h e p aym en t o f a fi n d er’ s fee t o Bai rd , wh i ch p ro v i d edn o fi nan ci al ad v is o ry s erv i ces

5 Th o u g h we m ay

d i s reg ards t i p u l at i o n s “ wh ere ju s t i ce req u i res i t i f t h e ev i d en ce co n t raryt o th e s t i p u lat i o n i s s ub s t an t i al o r t h e s t i p u l at io n i s cl earl y co n traryt o fact s d i s cl o s edb y th e reco rd ”, Cal -M ai ne Fo o d s , In c. v . Co m m i s s i o n er, 9 3 T.C. 1 8 1 , 1 9 5 (1 9 8 9 ), Ho ld i n g d o es n o ts u g g es tth atth e s t i p u l at i on s h o u l db e i g n o red , an dwe s ee n o b as i s t o d o s o .-1 7
-

[* 1 7 ] atan y

p o i nt(ag ai n, acco rd i n g t o th e p art i es ’ s t i p u lat i o n ) an dwh o s e ro l e
co n cl u d ed wel l befo re t h e ret en t i o n o f Harri s W il l i am s . W e are l i k ewi s e u n co n v i n cedo f t h e p u rp o rt edn eg at i v e fi n an ci al rep ercu s s i o n s fo r Pl an o ’ s s el l i ng s h areh o l d ers , wh i ch s eem a m at ter o f co n t ract u al
s em an ti cs . Al t h ou g h ex p en d i tu res treat edas “ tran s act i on ex p en s es ” redu ced Pl an o ’ s p u rch as e p ri ce t o t h e d et ri m en t o f i t s s el l i n g s h areh o ld ers , Ho l di n g fai l s t o p ers u ad e u s th at t h e p aym en tt o Bai rdh ere wo u l dfal l i n t o th i s cat eg o ry g i v en th at b o th p art i es ag ree t h atBai rd p ro v i d edn o s erv i ces i n co n nect i o n wi t h the m erg er. Atth e en do f the d ay

th e reco rdi s fu l ly

co n s i s t en twi t h th e co n cl u s i on th atOTPP ag reedt o the Bai rdp aym en t fo r i t s o wnreas o n s an do n i ts o wnb eh al f. Squ are D i s o f n o m o m en t . 6

6 Ho l d i ng al s o at t em

p t s t o d raw s up p o rtfro m Pri v . Ltr. Ru l . 2 0 0 9 5 3 0 1 4 , 2 0 0 9 W L 5 1 6 6 5 7 3 (Dec. 3 1 , 2 0 0 9 ). Pri v at e l et t er ru l i n g s h av e n o p reced en t i al v al u e an d m erel y

rep res en tthe Co m

m i s s i o n er’ s p o s i t i o n as t o a p art i cu l ar s eto f fact s. See Bu n n ey

v . Co m m is s i o n er, 1 14 T.C. 2 5 9, 2 6 1 n .2 (2 0 0 0 ); Fi rs tCh i
. Co rp . v . Co m

m i ss i o n er, 9 6 T.C. 4 21 , 4 4 3 (1 9 9 1 ), aff’ d, 1 3 5 F.3 d4 5 7 (7 t h Ci r. 1 9 9 8 ); s ee al so s ec. 6 1 1 0 (k )(3 ). Ev en i f i th ads o m e fo rce, i two u l dn o th el p Ho l di n g . Pri v . Ltr. Ru l. 2 00 9 5 3 0 1 4 ad dres s ed a fact u al s i tu at i o n s i m i l ar t o th ati n Squ are D, co ncl u d i ng th ata co m p an y co ul d d edu cttran s act i o n co s t s arran gedo n i t s b eh al f wh en : “ (i ) t he Co m p an y d em o n s t rat es th atth e s erv i ces were ren d eredt o Co m p an y , an d/ o r o n b eh al f o f Co m p an y ; an d (i i ) t h e fees as so ci at edwi t h s u ch s erv i ces were p ai dfo r b y Co m pan y , an d/ o r rei m

b u rs edb y Co m p an y .” As ex p lai n edab o ve, Ho ld i n g fai ls t o es t ab l i s h th atan y s erv i ces were ren d eredo n Pl an o ’ s b eh al f.-1 8
-

[* 1 8 ] W e acco rd i n g l y fi n dth atHo l d i n g h as fai l edt o s at i s fy th e s eco n dLo h rk e p ro n g as wel l
.

3
. Co n cl u si o n Ho l d i n g h as fai l edt o es t ab l i s h th e ap p l i cab i l i t y o f t h e Lo h rk e ex cep ti o n . W e acco rd in g l y h o l d t h at Pl an o ’ s p aym en to f th e Bai rdfee was n o td edu ct i b l e as
an o rd in ary

an dn eces s ary

b u s i n es s ex p en s e o f Pl an o . Gi v en o u r d et erm i n at i o n , we d o n o tad dres s th e am o u n t o f t h e d edu ct io n u nd er t h e reg u l at i o n s an d rel at ed ad m i n is trat i v e g u id an ce. 7 II. Accu racy -Rel at edPen al t y Ho l d i n g al s o ch al l en g es th e IRS’ d et erm i n at i on o f t h e accu racy -rel at ed p en al ty u n d er s ect i o n 6 6 6 2 (a). Al th o u g h th e Co m m i s si o n er n o rm al l y

b ears th e b u rd eno f p ro du ct i o n wi th res p ectt o a t ax p ay er’ s l i ab il i ty fo r an y p en al t y , s ee s ec. 7 4 9 1 (c); Hi g b ee v . Co m

m i s s io n er, 1 1 6 T.C. 4 3 8 , 4 4 6 (2 0 0 1 ), the b u rd en rem ai n s
o n th e t ax p ay er wh ere t h e Co m m i s s i o n er h as d et erm i n ed a p en al ty ag ai n s ta
co rp o rat i o n, s ee Ex el o n Co rp . v . Co m m is s i o n er, 1 4 7 T.C. 2 3 0, 3 2 9 (2 0 1 6), aff’ d , 9 0 6 F.3 d5 1 3 (7 th Ci r. 2 0 1 8); NT, In c. v . Co m m i ss i o n er, 1 2 6 T.C. 1 9 1, 1 9 5 (2 0 0 6). Ho l di ng fi l ed an el ect i o n t o b e t reat edas an as s o ci at i o n t ax ab le as a

7 As res p on d en t h as n o t arg u edth atPl an o ’ s p aym en t o f t h e Bai rdfee am ou n t edt o a co n s t ru ct i v e d i vi d en dt o OTPP, we fo rg o co n s i d erat i o n o f t h ati s s u e t o o . See Sq u are D Co . v . Co m m i s s i o n er, 1 2 1 T.C. 1 6 8 , 2 00 n .2 7 (2 0 03 ).-1 9
-

[* 1 9 ] co rp o rat io n , s ee s ecs . 3 0 1 .7 7 0 1 -2 an d3 0 1.7 7 0 1 -3 , Pro ced . & Ad m i n . Reg s ., an d we co n cl u de t h ati t bears th e b u rd en h ere. 8 Pu rs uan tt o s ect i o n 6 6 6 2(a), a t ax p ay er m ay b e l i ab le fo r a p en al t y

o f 2 0 %
o n an u n d erp aym en to f t ax at t ri b u t ab l e t o a “ s ub s tan t i al u n d ers t at em en to f i n co m e t ax .” Sec. 6 6 6 2 (b )(2 ). Anu n d ers t at em en ti s “ s ub s t an t i al ” i n th e cas e o f a
co rp o rat i o n (o t h er t han an S co rp o rat i o n ) wh eni tex ceed s th e l es s er o f (i ) 1 0 % o f th e t ax req ui redt o b e s h own o n th e ret u rnfo r th e t ax ab l e y ear (o r, i f g reat er, $ 1 0 ,0 0 0 ) o r (i i ) $ 1 0 m il l i o n . Sec. 6 6 6 2 (d )(1 )(B). Ho l d i ng d o es n o tco n t es tth at th ere was a s ub s t an t i al u n ders t at em en t(wi t h i n the m ean in g o f t h e Co d e) b u t arg u es th atth e p en al t y

s h ou l dn o tap p l y

b ecau s e s ub st an t i al au t h o ri t y s up p o rt ed th e d edu ct i o n . As a g en eral m at t er, an u n d ers t at em en ti s redu cedt o th e ex t en tth atth e t ax p ay er can p ro v e, i nt er al i a, t h ati th ads ub s t an t i al au t h o ri ty fo r i t s t reat m en to f th e co n t es t edi t em . Sec. 6 6 6 2 (d )(2 )(B)(i ); s ee al s o Hi g b ee v . Co m m i s s io n er, 1 1 6

8 In Graev v . Co m

m i s s io ner, 1 49 T.C. 4 8 5 , 4 9 3 (2 0 1 7 ), s up pl em en t i n g an d o v erru l i ng i n p art1 4 7 T.C. 4 6 0 (2 0 1 6 ), we h el dthatth e Co m m is si o n er’ s b u rd en o f p ro duct i o n wi th res pect t o p en al t i es i ncl u d es a s h owi n g t h ath e co m p l iedwi t h th e p ro cedural req u i rem en ts o f s ec. 6 7 5 1 (b )(1 ). W e l at er cl ari fi edth atGraev d i dn o t affect o u r p rev i o u s h ol d i n g s o n th e b u rd en s rel at i ng t o p en al t i es as s ert edag ai n s t co rp o rat i o ns . See Dynam o Ho l d i n g s Lt d . P’ sh i p v . Co m m i s s i o n er, 1 50 T.C. 2 2 4 (2 0 1 8). In an y

ev en t , th e reco rdh ere i n cl u d es a p en al t y ap p ro v al fo rm es t ab l i s h in g res p o n d en t ’ s co m p l i an ce wi t h s ec. 6 7 5 1 (b )(1 ).-2 0
-

[* 2 0 ] T.C. at4 4 8 . “ Th e s ubs t an t i al au t h o ri ty s t an d ardi s an o b

ject i ve s t an d ard i n v o l v i n g an an al y s i s o f t he l aw an dap p l i cat i o n o f t he l aw t o rel ev an tfact s .” Sec. 1 .6 66 2 -4 (d )(2 ), In co m e Tax Reg s .

“ Th ere i s s ubs t an ti al au t h o ri t y fo r t h e t ax treat m en t o f an i tem o nl y i f t h e wei g h t o f t he au t h o ri ti es s up p o rt i n g t h e treat m en ti s s ub s t an t i al i n rel at i o n t o th e wei g h t o f au t h o ri t i es s up p o rt i ng co n t rarytreat m en t .” Id . s ub p ara. (3 )(i ). “ Th e wei g h t acco rd edan au th o ri ty d ep en d s o n i t s rel ev an ce an d p ers u as i v en es s , an dth e ty p e o f d o cu m en t p ro v i d i ng th e au t h o ri ty .” Id . s ub di v . (i i ). Co u rtcas es co n s t i tu t e
o n e cat eg o ry

o f au t h o ri t y . Id . s ub d i v. (i i i ). Pri v at e l et ter ru l i n g s co m p ri s e an o t h er. Id .; s ee al s o Keen an v . Co m m i s s i o n er, T.C. M em o . 2 0 1 8 -6 0, at* 14 . Anau t h o ri t y

“ h av i n g s o m e fact s i n co m m o n wi t h the t ax treat m en tati s s ue i s n o tp art i cu l arl y rel ev an t i f t h e au t ho ri t y

i s m at eri al l y

d i s t i n g u i s hab l e o n i t s fact s , o r i s o t h erwi s e i n ap p l i cab l e”. Sec. 1 .6 6 6 2 -4 (d )(3 )(i i ), In co m e Tax Reg s .; s ee al s o An t on i d es v . Co m m i s s i o n er, 9 1 T.C. 6 86 , 7 0 2 -7 0 3 (1 9 8 8 ), aff’ d , 8 9 3 F.2 d 6 5 6 (4 t h Ci r. 1 9 9 0 ); Sam p s o n v . Co m

m i s si o ner, T.C. M em o . 2 0 13 -2 1 2 , at* 1 0. Ho l d i n g as s ert s t h atW ari n g Pro d s ., Squ are D, an dPri v . Ltr. Ru l
. 2 0 0 9 5 3 0 1 4 , 2 0 0 9 W L 5 1 66 5 7 3 (Dec. 3 1 , 2 0 0 9 ), co n s ti tut e s ub st an t i al
au th o ri ty th atn eg at es th e p en al t y

h ere. Bu tas o u t li n edab ov e, t h e fact s i n each o f th es e au th o ri t i es are m at eri al ly d i s t in g u is h ab le fro m

the fact s o f th is cas e.-2 1
-

[* 2 1 ] Al th o u g h th e t ran sact i o n s d i s cu s s edi n th o s e au th o ri t i es b ear s o m e s u rface
s i m i l ari t i es t o t h o s e i n t h i s cas e, Pl an o recei v edn o s erv i ces o r o t her b en efi tfro m i t s p aym en t o f t h e Bai rdfee, an dth e p aym en t was n o tan o rd in ary an dn eces s ary
ex p en s e o f i t s b u s in es s . Ho l di n g h as th u s fai l edt o es t ab l i sh th ati th ads ubs t an t ial
au th o ri ty i n s up p o rto f t h e t reat m en to f t h e Bai rd fee i n th e 2 0 1 2 co n s o l i d at edt ax retu rn . 9 III. Co n cl u si o n In s u m , we h ol dth atPl an o ’ s p aym en to f t h e Bai rdfee was n o td edu ct i b l e as
an o rd in ary

an dn eces s ary

b u s i n es s ex p en s e o f Pl an o . Th e IRS’ d efi ci en cy an d
accu racy -rel at edp en al ty

d et erm i n at i o n s o u t li n edi n th e 2 0 1 2 n o t ice o f d efi ci en cy
are s u s t ai n ed
.

9 Ho l d i ng ’ s b ri ef n o tes t h atPl an o ’ s “ CPA fi rm ” p rep aredth e 2 0 12 t ax retu rn , wh i ch ap p ears t o b e anu n d erco o kedat t em p tt o s at i s fy

th e s ec. 6 6 64 (c) reas o n ab l e cau s e an d g o o d -fai t h ex cep ti o n t o th e d et erm i n ed p en al t y . Cl ai m edrel i an ce o n p ro fes s i on al ad v i ce, h o wev er, “ d o es n o tn eces s ari l y d em o ns t rat e reas o n ab l e cau s e an d g o o dfai t h .” Sec. 1 .6 6 64 -4 (b )(1 ), In co m e Tax Reg s. A t ax p ay er al l eg i n g g o o d -fai th rel i an ce up on th e ad v i ce o f a p ro fes s i o n al m u s t p ro v e t h at(1 ) t he ad v is o r was a co m

p et en tp ro fes s i o n al wi t h s u ffi ci en tex pert i s e t o ju s t i fy the t ax p ay er’ s rel ian ce, (2 ) th e t ax p ay er p ro v i dedn eces s ary an daccu rat e i n fo rm at i o n t o the ad v i s o r, an d(3 ) t h e t ax p ay er act ual l y rel i edi n g o o d fai t h o n th e ad vi s o r’ s ju d g m en t . See Neo n at o l o g y As s o cs ., P.A. v . Co m

m i s s i o n er, 1 1 5 T.C. 4 3 , 9 9 (2 0 0 0), aff’ d , 2 9 9 F.3 d2 2 1 (3 dCi r. 2 0 0 2). Ho l di n g fai l s t o s ho w th at Pl an o ’ s CPA fi rm ren d ered an y

ad v i ce reg ard i n g th e d edu ct i o n ati s s u e an dp l ai n l y d o es n o ts at i s fy

th e req u i rem en t s l ai do u ti n Neo nat o l o g y .-2 2
-

[* 2 2 ] To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredfo r
res p o nd en t .