T.C. M em o . 2 0 1 7 -6 2

UNITED STATES TAX COURT

VINCENT J . CASTIGLIOLA AND M ARIE CASTIGLIOLA, ET AL., 1 Pet i ti o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 1 2 7 3 3 -1 4 , 1 2 73 4 -1 4 , Fi l edAp ri l 1 2 , 2 0 1 7
. 1 29 3 9 -1 4
.

Ro b ertM ich ael Gal l o way , fo r p et i ti o n ers . Reb ecca Dan ce Harri s an dJ as o n D. Las et er, fo r res p o n d en t .

1 Cas es o f t h e fo l l owi ng p et i t i o n ers are co n s o l i d at edh erewi t h : J o h n Ban ah an an dDeb o rah Ban ah an , d o ck etNo
. 1 2 7 3 4 -1 4 ; an dHarry B. M u l l en an d M ari e A. M u l l en , d ock etNo . 1 2 9 3 9 -1 4
.- 2
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[* 2 ] M EM ORANDUM FINDINGS OF FACT AND OPINION PARIS, J u d g e: Res p on d en td et erm i n ed d efi ci en ci es i n p et i t io n ers ’ Fed eral i n co m e t ax an d s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al t i es , as fo l l o ws : 2

Pet i ti o n ers 2 0 0 8 2 0 0 9 2 0 1 0 Vi n cen tJ . an dM ari e Cas t i g l i o l a Defi ci en cy $ 8 , 2 7 8 .0 0 $ 5 , 5 6 6 .0 0 $ 4 , 0 1 3 .0 0 Sec. 6 6 6 2 (a) p en al t y 1 ,6 5 5.6 0 1 ,1 1 3.2 0 8 0 2 .6 0 J o h n an dDeb o rah Ban ah an Defi ci en cy 9 ,1 9 6.0 0 8 ,4 7 7.0 0 6 ,4 1 8 .0 0 Sec. 6 6 6 2 (a) p en al t y 1 ,8 3 9.2 0 1 ,6 9 5.4 0 1 ,2 8 3 .6 0 Harry B. an dM ari e A. M u l l en Defi ci en cy 4 ,1 6 8.0 0 3 ,6 9 2.0 0 3 ,1 2 6 .0 0 Sec. 6 6 6 2 (a) p en al t y 8 3 3 .6 0 7 3 8 .4 0 6 2 5 .2 0 Th e i s s u es fo r d eci si o n are wh et h er: (1 ) M r. Cas t ig l i o l a, M r. Ban ah an , an d M r. M u l l en , as m em

b er-m an ag ers o f a l im i t edl i ab il i ty co m p an y , are each en t i t l ed t o b en efi tfro m

the s el f-em

p l o ym en ti n co m e ex cl u s i o n fo r l i m i t ed p art n ers u n d er
s ect i on 1 4 0 2 (a)(1 3 ) fo r a p o rt i o n o f t h ei r p art n ers h i p d i s t ri b ut i o ns ; (2 ) M r. Cas ti g l i ol a, M r. Ban ah an , an d M r. M u ll en h adad d i t io n al i n co m e i n 2 0 1 0 i n th e fo rm o f u n d is t ri b ut edfu n d s h el di n a t ru s tacco u n t; an d(3 ) p et i ti o n ers are

2 Al l s ect i o n referen ces are t o th e In tern al Rev en u e Co d e i n effect fo r t h e y ears ati s s u e, an dal l Ru l e referen ces are t o t h e Tax Co u rtRu l es o f Pract i ce an d Pro cedure, u n les s o t h erwi s e i n d i cat ed
.- 3
-

[* 3 ] l i ab l e fo r accu racy -rel at edp en al t i es u n d er s ect i o n 6 6 6 2 (a) fo r 2 00 8 , 2 0 0 9 , an d 2 0 1 0
. FINDINGS OF FACT Pet i t i o ners t i m el y

fi l edjo i n tFo rm s 1 0 4 0, U.S. In d i v i du al In co m e Tax Ret u rn , fo r 2 00 8 , 2 0 0 9, an d2 01 0 , an dth ey res id edi n M i s s i s si pp i wh enth e p et i t i o n s were t i m el y

fi led
. M r. Cas t i g li o l a, M r. Ban ah an , an dM r. M u ll en are, an d were at al l rel ev an t t i m es , at t o rn ey s l i cen s edt o p ract i ce l aw i n t h e St at e o f M i s s i ss i p p i
. Ori g i n al l y , t h ey p ract i cedl aw t h ro u g h a g en eral p art n ers h i p , b u to n J u l y 1 2 , 2 00 1 , th ey
reo rg an i zedth ei r l aw fi rm as a p ro fes s i o n al l im i t edl iab i l i ty co m p an y --Bry an , Nel s o n , Sch ro ed er, Cas t i g l io la & Ban ah an , PLLC (PLLC). 3 In2 00 5 the PLLC’ s
o ffi ce an d m an y

o f i t s reco rd s were d es t ro y ed i n Hu rri can e Kat ri n a, b u tthe
m em b ers reco vered an d co nt i n u edth ei r p ract i ce.

3 Un d er M i s si s s i pp i l aw, a p ro fes s i on al l i m i t edl i ab i l i t y co m p an y i s a t y p e o f l i m i ted l i ab i li t y co m

p an y th atm ay b e fo rm edo n l y

fo r t h e p u rp o se o f ren d eri n g cert ai n p ro fes s i o n al s erv i ces , i n cl ud i n g l eg al s erv i ces . M i s s . Co d e An n . s ec. 7 9
- 2 9 -9 02 (f) an d(g ) (2 0 0 9 ). Al l th e m em b ers m u s t b e au t ho ri zedb y l aw t o ren d er t h e s erv i ces th at t h e p ro fes s i o n al l i m i t edl i ab i l i t y co m p an y o ffers . Id . s ec. 7 9 -2 9
- 9 0 9 (1 ). Fo rm at i o n o f a p ro fes s i o n al l i m i t edl i ab i l i ty co m p an y req u ires an ad d it i o n al p ro v i s i o n i n th e cert i fi cat e o f fo rm at i o n el ect i n g p ro fes s i o n al l i m i t ed l i ab i l i t y co m

p an y s t atus . Id . s ec. 7 9 -2 9 -9 0 3.- 4
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[* 4 ] Th ro u g h o u tth e y ears ati s s u e M r. Cas t i g li ol a, M r. Ban ah an , an dM r. M u l l en
were en gag edi n th e p ract i ce o f l aw s o lel y th ro u gh th e PLLC. Th ey were m em

b ers
o f t h e PLLC du ri n g th e y ears ati s su e, an d t h e PLLC i s , an dh as al way s b een , m em b er-m an ag ed . Th e PLLC h as n ev er h ada wri t t en o perat i n g ag reem en t . Th e PLLC t i m el y

fi l edFo rm s 1 06 5 , U.S. Return o f Part n ers hi p In co m e, fo r 2 0 0 8 , 2 0 0 9 , an d2 0 1 0
. 4 Fo r t h e y ears ati s su e, t h e m em b ers ’ co m pen s at i o n ag reem en treq u i red g u aran teedp aym en t s t o each m em b er; th e g u aran t eedp aym en t s were
co m m en s u rat e wi t h l o cal l eg al s al ari es as d et erm i nedb y a s u rv ey o f l eg al s al ari es i n the area. 5 An y

n etp ro fi t s o f th e PLLC i n ex ces s o f am o u n ts p ai d o u tas

4 A Fo rm 4 6 0 5 -A, Ex am i n at i o n Ch an g es - Part n ers h i ps , Fi du ci ari es , S Co rp o rat i o n s , an dIn t eres tCh arg e Do m es ti c In t ern at i o n al Sal es Co rp o rat i o n s (Un ag reedan dEx cep t edAg reed ), was i s s u edo n M arch 1 3 , 2 0 1 2 , t o th e PLLC fo r t h e y ears ati s s u e. Pet i t i o n ers ’ n o t i ces o f d efi ci en cy res u l tedfro m t h e p art n ers h i p ad ju s t m en t s . 5 Th e m em

b ers recei v edth e fo l l o wi n g g u aran t eedp aym en t s fo r each o f t h e y ears ati s s u e:

M em ber 2 0 0 8 2 0 0 9 2 0 1 0 J . Ban ah an $ 1 50 ,0 0 0 $ 1 50 ,0 0 0 $ 1 50 ,0 0 0 V. Cas t i g l i ol a 1 5 0 ,0 0 0 1 5 0 ,0 0 0 1 5 0 ,0 0 0 H. M u l l en 1 2 5 ,0 0 0 1 2 5 ,0 0 0 1 2 5 ,0 0 0- 5
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[* 5 ] g u aran t eedp aym en t s were d i s t ri b u tedam on g t he m em b ers i n acco rd an ce wi t h t h e m em b ers ’ ag reem en t . Pet i t i o ners an dthe PLLC s h aredth e s am e cert i fi ed p ub l ic acco u n t an t (CPA). 6 Th e CPA was an acco u n t an tfo r m an y y ears an ds erv edi n s ev eral p o s i t i on s i n th e Nat i on al As s o ci at i o n o f St at e Bo ard s o f Acco u nt an cy , i n cl u d i n g a t h ree-y ear t erm

o n th e b o ardo f d i rect o rs . He al so s erv edei g hty ears wi t h th e Al ab am a St at e Bar o f Acco u n t an cy . Aro u n dth e t i m e t h e PLLC was fo rm edi n 2 0 0 1 , th e m em

b ers m etwi t h t h e CPA t o d i s cu s s th e n ew PLLC en ti t y . Th e CPA h ad p rep aredFed eral i nco m e t ax retu rn s fo r p et i t i on ers (an dfo r t h e g en eral p art n ers hi p th atp reced ed t h e PLLC) fo r m an y y ears an d was fam i l i ar wi t h t h e h i s t o ry o f th ei r l aw fi rm

as a res u l t . Th e m em

b ers ex p l ai n edth ei r s itu at i o n t o th e CPA an d as k edfo r ad v i ce o n h o w t o rep o rtp aym en t s fro m th e PLLC t o th e
m em b ers . Onth e b as is o f the CPA’ s ad v i ce, th ey rep o rt edal l g u aran t eed p aym en t s fro m

th e PLLC t o th e m em

bers as s el f-em

p l o ym en t i n co m e s ub

jectt o
s el f-em p l o ym en t t ax , b u t t h ey

d i dn o t rem i ts el f-em

p l o ym en tt ax o n th e ex ces s o f t h ei r d is t ri b u t i v e s h ares o ver t h e g u aran t eedp aym en t s t h ey recei v ed
. Atal l rel ev an tt im es th e PLLC m ai n tai n eda M is s is s i p p i Bar Fo u n d at i o n In t eres t o n Lawy er’ s Tru s tAcco u ntata l o cal b an k(t ru s tacco u nt ). Fo r th e y ears

6 Pet i t i on ers ’ CPA p as s edaway b efo re t ri al
.- 6
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[* 6 ] ati ss u e, as p arto f t h e l eg al p ract i ce, t he PLLC h an dl eds ubro g at io n p aym en t s fo r St at e Farm

M u tu al Au t o m o b i l e In s uran ce Co . (St at e Farm ). Th e PLLC
n eg ot i at edp aym en tp l an s wi t h u n i n s u redi nd i v i du al s i n v o l v ed i n au t o m o bi l e acci den t s wi th St at e Farm p o l i cyh o l d ers . Wh en th es e u n i n s uredi n d i vi du al s m ad e p aym en t s t o t h e PLLC, i td ep o s i t edth e p aym en t s i n to th e t ru stacco u n t . Ap p ro x i m at el y

twi ce p er y ear t h e PLLC d i s b u rs eds ub ro g at i o n p aym en t s fro m i t s t ru s tacco u n tt o St at e Farm
. Wh en i td i s b u rs eda s ub ro g at i o n p aym en tt o St at e Farm , th e PLLC al s o tran s ferred the co m p en s at i o n du e t o t h e PLLC fro m i t s tru s t
acco u n t to i t s o p erat i n g acco un t . Atth e en do f 2 0 1 0 t h e t ru s tacco u nth el d $ 1 5 ,1 6 7 o f u n di s t ri b ut edfu n d s; th e m em bers d o n o tkn o w t o wh o m th i s am o u n t b el o n g s . OPINION Th e Co m m is s i o n er’ s d et erm i n at i o n s 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 edco rrect , an dth e t ax p ay er b ears th e b urd en o f p ro v i n g t h o se d et erm i n at i o n s erro n eo u s b y a p rep on d eran ce o f t he ev i d en ce. Ru l e 1 4 2 (a); W el ch
v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3 ). Yetwh ere t h e s t an dardo f p ro o f i s p rep o n d eran ce o f t h e ev i den ce (as i t i s fo r al l i s s u es i n th i s cas e), t he Co urtm ay d eci d e t h e cas e o n th e wei g h to f t h e ev i den ce an dn o to n an al l o cat i o n o f t h e- 7
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[* 7 ] b u rd en o f p ro of. Kn u ds en v . Co m m i s s io n er, 1 3 1 T.C. 1 85 , 1 8 9 (2 0 0 8 ); Es t at e
o f Bo ng ardv . Co m

m i s s i o n er, 1 2 4 T.C. 9 5 , 1 1 1 (2 0 0 5 ). I. Sel f-Em

p l o ym en tTax Sect io n 1 4 0 1 (a) i m

p o s es a t ax o n th e s el f-em p l o ym en t i nco m e o f ev ery i n d i v i du al fo r a t ax ab l e y ear (s el f-em pl o ym en tt ax ). Sel f-em

p l o y m en t i n co m e i s d efi n edas “ th e n etearn in g s fro m s el f-em pl oym en td eri v edb y

an i n d i v i du al * * * du ri n g an y

t ax ab l e y ear” ex cl u d i n g (1 ) t he p o rt i o n i n ex ces s o f th e So ci al Secu ri t y wag e b as e l i m it at i o n fo r t h e y ear 7 as wel l as (2 ) al l earn in g s fro m s el f-em p lo ym en t i f t h e t o tal am o u n to f the i n d iv i du al ’ s n etearn i n gs fro m s el f-em p l o y m en tfo r t h e t ax ab l e y ear i s l es s th an $ 40 0 . Sec. 1 4 0 2 (b ). Sect io n 1 4 0 2 (a) d efi n es n etearn i n g s fro m s el f-em p l o ym en tas t h e g ro s s i n co m e d eri v edb y an i n d iv i du al fro m

an y trad e o r b u s in es s carri edo n b y

s u ch i n d i v i du al , l es s th e d edu ct i o ns al l o wedb y thi s s ub t i t l e wh i ch are at t ri b ut ab l e t o s u ch t rad e o r b u s i n es s, p lu s h is d i s t ri b u t i ve s h are (wh et h er o r n o td is t ri b u t ed ) o f i nco m e o r l o ss d es cri b ed i n s ect i o n 7 0 2 (a)(8 ) fro m an y trad e o r b u s i nes s carri edo n b y a p art n ers h ip o f wh i ch h e i s a m em b er * * *
. Sect i o n 1 4 0 2(a)(1 3 ) p ro v id es th e fo ll o wi n g ex cl u s i on fro m s el f-em p lo y m en t i n co m e:

7 Th e So ci al Secu ri t y wag e b as e l i m i t at i o n was $ 1 02 ,0 0 0 fo r 2 0 08 , an d $ 1 0 6 ,8 0 0 fo r 2 0 0 9 an d2 0 1 0.- 8
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[* 8 ] [T] h ere s h al l b e ex cl u d edth e d i s t ri b u t iv e s h are o f an y i t em o f i n co m e o r l o s s o f a l i m i t edp art n er, as s u ch , o t h er t h ang u aran t eedp aym en t s d es cri b ed i n s ect i o n 7 0 7 (c) t o thatp art n er fo r s erv i ces actu al l y ren d eredt o o r o n b eh al f o f t he p art n ers h i p t o th e ex t en t t h at t h o s e p aym en t s are es tab l i s h edt o b e i n th e n atu re o f rem u n erat i o n fo r t h os e s erv ices * * *
. Pet i t io n ers co n t en dth atth i s ex cl u s i o n ap p l i es t o t h e am o u n t s o f th e m em b ers ’ d i s t ri b u t i v e s h ares i n ex ces s o f t h ei r g u aran t eedp aym en t s . Res p o n d en targ u es th at t h e m em b ers were n o tl i m i tedp art n ers fo r t h e p u rp os es o f s ect io n 1 4 0 2 (a)(1 3 ), an d t h at , th erefo re, t h e ex cl u s i o n d o es n o tap p ly
. Sect io n 1 4 0 2 (a)(1 3 ) was o ri g i n al l y en act edi n 1 97 7 (as s ect i o n 1 4 0 2 (a)(1 2 )), b efo re l i m i t edl i ab i l it y co m p an i es were wi d el y

u s edo r g en eral l y t reat ed as p art ners h i p s fo r Fed eral t ax p u rp os es . 8 So ci al Secu ri t y Am en d m en t s o f 1 9 7 7 , Pub . L. No
. 9 5 -2 1 6, s ec. 3 1 3 (b ), 9 1 St at . at1 5 3 6 ; Ren k em ey er, Cam p b el l , & W eav er, LLP v . Co m

m i s s i o n er (Ren k em ey er), 1 3 6 T.C. 1 3 7 , 1 4 8 (2 0 1 1 ). As the Co u rtn o t ed i n Ren k em ey er, n o s t atut o ry o r reg u lat o ry au th o ri t y d efi nes “ l i m i t ed p art n er” fo r t h e p u rp os es o f s ect i o n 1 4 0 2 (a)(1 3 ). See i d
. at1 4 8 -1 49 . Becau s e t h e t erm i s n o td efi n ed , th e Co u rtap p l i es accep tedp ri n ci p l es o f s t atu t ory co n s t ru ct i o n

8 Th e fi rs ts t atu t e au t h o ri zi n g l i m i t edl i ab i l i t y co m p an i es (LLCs ) was ad o pt ed i n Wy o m i n g i n 1 9 7 7, b u tth e Fed eral t ax treat m en t o f LLCs rem ai n ed rel at i v el y u n cl ear u n t i l 1 9 8 8 , wh en Rev . Ru l. 8 8-7 6 , 1 9 8 8-2 C.B. 3 6 0 , cl ari fi ed t h atp ro p erl y o rg an i zedLLCs wo u l d b e treat edas p art ners h i p s. 1 Ri b s t ei n & Keat i n g e, Li m i t edLi ab i l i t y Co m p an i es , s ec. 1 : 2 (Decem

ber 2 01 6 up dat e). To d ay al l St at es h av e LLC s t atut es an dth e LLC fo rm i s wi d el y u sed . Id
.- 9
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[* 9 ] t o as cert ai n co n g res s i o n al i n t en t . Iti s a wel l -es t ab l i s h edru l e o f co n s t ru ct i o n t h ati f a s t atu t e d o es n o t d efi n e a t erm , th e t erm i s t o b e g iv en i t s o rd i nary m ean i n g atthe t im e o f en act m en t . Gat es v . Co m m i ss i o ner, 1 35 T.C. 1 , 6 (2 0 1 0 ); s ee Perri n
v . Un i t edSt at es , 4 4 4 U.S. 3 7 , 4 2 (1 9 7 9 ). Ren k em ey er i n d i cat edth atthe m ean i n g o f “ l i m i tedp art n er” i s n o t
n eces s ari l y

co n fi n eds o l el y t o th e l i m i t edp art n ers h i p co n t ex t. See 1 3 6 T.C. at 1 4 6 -1 5 0 ; cf. Garn et tv . Co m m i s s i o n er, 1 3 2 T.C. 3 6 8, 3 7 7 -3 7 8 (2 00 9 ) (fi n d i n g th at
u n d er s ect i o n 4 6 9 (h )(2 ) “ l i m i t edp art n er” i s n o t n eces sari l y co n fi n edt o th e l i m i t ed p art n ers hi p co n t ex t ). Th erefo re, fo l l o wi n g th e ap p ro ach t ak en i n Ren k em ey er, o u r fi rs ti n qu i ry

i s wh et h er t h e p ers o n cl ai m in g th e s ect i o n 1 4 0 2 (a)(1 3 ) ex em p t i o n h el da p os i t i o n i n an en t it y treat edas a p art n ers h i p fo r Fed eral t ax p u rp o ses th ati s fu n ct i o n al l y

equ i v al en tt o thato f a l i m i t edp art n er i n a l i m i t edp art n ers h i p . M r. Cas ti g l i ol a, M r. Ban ah an , an d M r. M u ll en were al l m em bers o f a m em

b erm an ag edPLLC. Co n s equ en tl y , th e i s s u e i s wh et h er a m em ber o f s u ch a PLLC i s fu n ct i o n al l y

equ i v al en tt o a l i m i t edp art ner i n a l i m i t edp artn ers h ip
. A l i m i tedp artners h i p h as two cl as s es o f p artn ers , g en eral an d l i m i t ed . E.g ., Garn et tv . Co m

m i s s i on er, 1 3 2 T.C. at3 75 . Gen eral p art ners ty p i cal l y h av e
m an ag em en tp o wer an d u n li m it edp ers o nal l i ab i l i t y . 1 Bro m b erg & Ri b s t ei n , Part ners h i p , s ec. 1 .0 1 (B)(3 ) (2 01 5 -3 Sup p .). Onth e o t her h an d , l i m i t edp artn ers- 1 0 -

[* 1 0 ] t y p i cal ly l ackm an ag em en t p o wer b u ten jo y i m m u n i t y fro m

l i ab i l i t y fo r d eb ts o f t h e p art n ers hi p . Id
. M o re s p eci fi cal ly , the ex actm ean i n g o f “ l i m i tedp art n er” m ay v ary s l i g h tl y fro m St at e t o St at e. Th e Un i fo rm Law Co m

m i s s io n draft edthe Un ifo rm Li m i t ed Part ners h i p Act i n 1 9 1 6 (ULPA (1 9 1 6 )), an d t h e Rev i s edUn ifo rm Li m i t ed Part ners h i p Act i n 1 9 7 6 (RULPA (1 9 76 )). Am en d m en t s were ad d ed t o RULPA (1 9 7 6) i n 1 9 8 5 (RULPA (1 9 8 5 )). Vers i o n s o f t h es e u n i fo rm act s h av e b een ad o pt ed i n m o stSt at es , s o m et i m es wi t h m o d i fi cat i o n s . Sect io n 7 o f ULPA (1 9 1 6 ) s t at es : “ A l i m i t edp art n er s h al l n o tb eco m e l i ab l e
as a g en eral p art n er u n l es s, i n ad d i t io n t o the ex erci se o f h is ri g ht s an d p o w ers as a l i m i ted p artn er, h e t ak es p art i n th e co n tro l o f t h e b u s i n es s .” ULPA (1 91 6 ) al l o wed li m i t edp artn ers a n arro w s eto f ri g ht s b utd i d n o ts p eci fi cal l y d efi n e wh i ch act i v i ti es a l i m i t ed p art n er co u l dp erfo rm wi th ou t l o s i n g l i m i tedp art n er
s t atu s. See i d . s ec. 1 0 (al l o wi n g l i m i t edp art n ers t he ri g h t s t o i n sp ectb o ok s , d em an dan acco u n t i n g o f p artn ers h i p affai rs , an drecei ve a s h are o f t h e p ro fi t s an d retu rn o f cap i t al , an dal s o al l o wi n g l i m i t edp artn ers th e s am e ri g h tas g en eral p art n ers t o req u es td is s o l u t i o n an dwi n d in g up o f th e p artn ers h i p). Sect io n 3 0 3 (a) o f RULPA (1 9 7 6 ) p ro v i d es --i n t erm s al m o s t i den t i cal t o t h o s e o f ULPA (1 9 1 6 )--t h ata “ l i m i tedp art n er” wo u l d l o s e l i m i t edl i ab i l i t y- 1 1 -

[* 1 1 ] p ro t ect i o n i f “ i n ad d i t i on t o th e ex erci s e o f h i s ri g h t s an dp o wers as a l i m it ed p art n er, h e t ak es p arti n th e co nt ro l o f th e b us i n es s .” W i t h reg ardt o th e m ean i n g
o f “ l i m it ed p art n er”, t h e es sen ti al d i fferen ce b etw een ULPA (1 9 1 6) an dRULPA (1 9 7 6) i s thatRULPA (1 9 7 6 ) en u m erat es cert ai n act i v i t ies th at a l i m i t edp art n er
m ay p erfo rm wi t h o u t t ak in g p arti n co n t ro l o f t h e b u s in es s ; fo r ex am p l e, s ect i o n 3 0 3 (b )(5 )(i ) an d(i i ) o f RULPA (1 9 7 6 ) ex pl i ci t l y p erm it s l im it ed p art ners t o v o t e
o n th e d is s o l u t i o n o f t h e p art ners h ip o r t h e s al e o f s ub s t an t ial l y al l o f t h e p art n ers hi p ’ s as s et s . In 1 9 8 7 M i s s i s s ip p i ad o p t edRULPA (1 9 8 5 ) wi t h s o m e m o d i fi cat io n s . See 1 9 8 7 M i s s . Laws , ch . 4 8 8 , s ec. 3 0 3 (effect i v e fro m J an . 1 , 1 9 8 8 ); M i s s . Co d e An n . s ec. 7 9 -1 4 -3 0 3 (2 00 9 ). In t erm s al m os ti den ti cal t o th o s e o f ULPA (1 9 1 6 ) an d RULPA (1 97 6 ), th e v ers i o n o f t h e l i m i t edp art n ers h i p actth atM i s s i s s ip p i ad o p t ed i n 1 9 8 7--an dwh i ch was effect iv e t h ro u g h o utthe y ears ati ss u e--p ro v i d edth ata

“ l i m i t edp art n er” wo u ld l o se l i m i t edl i ab il i t y p ro tect i o n i f “ in ad d i ti o n t o th e
ex erci s e o f h i s ri g h t s an dp owers as a l i m i t edp art n er, h e p art ici p at es i n t h e co n tro l
o f t h e b u s i n es s .” M i ss . Co d e An n . s ec. 7 9 -1 4 -3 0 3. Li k e RULPA (1 9 7 6 ), M i s s is s i p p i ’ s v ers i o n p ro vi des s afe h arb o rs fo r v ari o u s act i v i ti es a l i m i t edp art n er
m ay p erfo rm wi t h o u t l o s i n g l i m i t edl i ab il i t y p ro tect i o n. Id
.- 1 2 -

[* 1 2 ] Co m

m o n t o each o f t h e d efi n i t i o n s o f “ l i m i t edp art n er” d i s cu s s edab o v e are t h e p ri m ary

ch aract eri s t i cs o f l i m i t edl iab i l it y an d l acko f co n t ro l o f th e b us i n es s . In th i s cas e, t h e res p ect i ve i n teres ts i n th e PLLC h el db y M r. Cas t i g l i ol a, M r. Ban ah an , an dM r. M u ll en m ad e each a m em b er o f t h e PLLC, wh ich was m em b erm an ag ed
. 9 Th erefo re m an ag em en tp o wer o ver t h e b u s i n es s o f t h e PLLC was
v es t edi n each o f t h em

th ro u g h th e i n t eres teach h el d . See i d . s ec. 7 9 -2 9 -3 0 2 (effect i ve aft er J u ly

1 , 1 9 94 ). Th e PLLC h adn o wri tt en o p erat i n g ag reem en t , n or i s t here an y

ev i d en ce t o s h o w th atan y m em b er’ s m an ag em en tp o w er was l i m i t ed i n an y way . Fu rt h erm o re, al l m em bers p art i ci p at edi n co n t ro l o f t h e PLLC: Fo r
ex am p l e, t h ey al l p art i ci p at edi n co l lect i v el y m ak i n g d eci s i o ns reg ard i n g th ei r d i s t ri b u t i v e s h ares , b orro wi n g m o n ey , h i ri n g , fi ri n g, an drat e o f p ay fo r em p l o y ees . Th ey each s up erv is edas s oci at e at t o rn ey s an ds i g n edch eck s fo r th e PLLC. Onth e b as i s o f t h e fo reg o i n g fact s , the res p ect i v e i n t eres t s h el db y M r. Cas t i g l i o l a, M r. Ban ah an , an dM r. M u ll en co u l dn o th av e b een l i m i t edp artn ers h i p i n t eres t s u n d er
an y o f t h e l i m it edp art n ers h i p act s . Th erefo re, t h ey were n o tl i m i t edp art n ers
u n d er s ect i o n 1 4 0 2 (a)(1 3 ).

9 Th ere i s n o ev i d en ce t o s u g g es tth atan y m em b er h el da d i fferen tty

p e o f i n t eres ti n th e PLLC o r h el dm o re t h an o n e t y p e o f i n teres ti n th e PLLC.- 1 3 -

[* 1 3 ] M o reo v er, a l i m i t edp art n ers hi p m u s th av e atl eas to n e g en eral p art n er. See, e.g ., M i s s . Co d e An n . s ec. 7 9 -1 4 -8 0 1 (2 00 9 ) (“ A l i m i t edp art n ers h i p i s d i s s o l v ed
an d i t s affai rs m

us t b e wo un dup up on th e fi rs to f t he fo l l o wi n g t o o ccu r: * * * (4 ) Anev en to f wi t h drawal o f a g en eral p art n er u n l es s atthe t im e t h ere i s atl eas to n e
o t h er g en eral p art n er[.] ”). Th i s i s l o g i cal , b ecau s e l i m i t edp art n ers , as d i s cu s s ed ab o ve, can no tp art ici pat e i n co nt ro l o f t h e b u s i n es s an dm ai n t ai n t h ei r l i m i t ed l i ab i l i t y . Becau se t h ere m u s tb e at l eas t o n e p art n er wh o i s i n co n t ro l o f t h e b u s i n es s , th ere m

u s tb e at l eas to n e g en eral p art n er. Th e m em b ers t es ti fi edth atal l
m em b ers p art i ci p at edequ al l y

i n al l d eci s i o n s an dh ads ub s t an t i al ly i d en t i cal rel at i o n s h i p s wi t h the PLLC. Th ere was n o PLLC o p erat i ng ag reem en to r o t h er
ev i d en ce t o s u g ges t o t h erwi s e. Bu ts i n ce b y n eces s i t y at l eas t o n e o f t h e m em

b ers
m u sth av e o ccup i eda ro le an al o g ou s t o t h ato f a g en eral p artn er i n a l im i t ed p art n ers hi p , an d b ecau s e al l o f t h e m em b ers h adth e s am e ri g h t s an d
res p o n s i b i l i t ies , t h ey

m u s tal l h av e h adp o s i t i o n s an al o g o u s t o t h o se o f g en eral p art n ers i n a l i m it edp art n ers h ip . Th is co n cl u s i o n i s affi rm edb y th e h i s t o ry

o f t h e PLLC: Befo re t h e m em

b ers o rg an i zed t h e PLLC, t h ey o p erat edas a g en eral p art n ers hi p ; an dth ere i s n o ev id en ce t h ato rg an i zi n g as a PLLC was acco m p an i ed b y an y ch an g e i n th e way

th ey m an ag edth e b u s in es s .- 1 4 -

[* 1 4 ] Acco rd i n g ly , M r. Cas ti g l i o l a, M r. Ban ah an , an dM r. M u l l en m ay n ot
ex cl u d e an y

p arto f t hei r d i s t ri bu t i v e s h ares fro m s el f-em p lo ym en ti n co m e u n d er
s ect i on 1 4 0 2 (a)(1 3 ). II. Un rep o rt edIn co m e Res p o n d en targ u es th at$ 1 5 , 1 6 7 o f u n d is t ri bu t ed fu nd s rem ai n i n g i n th e PLLC’ s tru s t acco u n tatth e en do f 2 0 1 0 i s i n co m e t o th e m em b ers fo r 2 0 1 0 an d
s h o u ldh av e b een rep o rt edo n p et i t i o n ers ’ jo i n ti n co m e t ax retu rn s . M r. Ban ah an t es t i fi edcred i b l y th atth e fu n d s i n th e t ru s tacco u n twere n o t PLLC fu n d s an dco ul dn o tb e wi t h drawn as fees b y th e m em b ers . He was n o ts u re t o wh ich cl i en t s the fu n d s b el o n g edb u twas cert ai n th ati t wo u l db e a v io l at i o n o f p ro fes s i on al et hi cs t o wi t h draw t h e m o n ey as fees (t h e co ns equ en ces o f wh i ch
m i g h th av e i n cl u d ed d i s barm en t ). He was n o t s u re h o w th e d is crep an cy aro s e b u t
s t at edth ati tm ay

h av e b een at tri b u t ab l e t o l os i n g th e PLLC’ s o ffi ce i n Hu rri can e Kat ri n a. He al s o s t at edth atats o m e p o i n tthe m on ey m i g h tb e d ep o s i t edi n t o M i s s is s i p p i ’ s fu n dfo r u ncl ai m edm o n ey s . M r. Ban ah an ’ s t es t im on y was
co rro b o rat ed b y t h e cred i b l e t es t i m o n y o f M r. Cas t i gl i o l a. Th e m em b ers t es t i fi ed cred i b l y

th atthe fu n d s res p on d en ti d en t i fi ed d o n o t b el o n g t o th e m em

b ers . Ru l e 1 .1 5 o f t h e M i s s i ss i pp i Ru l es o f Pro fes s i o n al Co n du ctreq ui res t h ata l awy er k eep cl ien tfu n d s --an dfu n d s th e o wn ers hi p o f- 1 5 -

[* 1 5 ] wh i ch i s d i s p u ted --s ep arat e fro m th e l awy er’ s o wnp ro p ert y . Pet i t i o n ers arg u e t h at , b ecau s e t he m em b ers kn o w they

d o n oto wn t h es e fu n d s , th e fu n d s
m u stb e k ep ts ep arat e i n the t ru s tacco u n t . Res po n d en th as o ffered n o ev i d en ce o r arg u m en t s t o s up po rth i s co n ten t i on th atth e m em b ers are en t i t ledt o wi t h draw t h es e fu n d s as fees . Th e Co u rtth erefo re fi n d s t h at t he fu nd s i n th e t ru s tacco u n t d o n o t b el o n g t o th em . Co n s equ en t l y , th e fu n d s rem ai n i n g i n th e PLLC’ s tru s t
acco u n t are n o ti n co m e t o p et i t i o ners fo r 2 01 0
. III. Sect io n 6 6 6 2 (a) Pen al t i es Sect io n 6 6 6 2 (a) an d(b )(1 ) an d(2 ) i m p o s es a p en al t y

o f 2 0 % o f t he p o rt i o n
o f an u nd erp aym en t at t ri b u t ab l e t o an y o n e o f v ari o u s fact o rs , i n cl u d i n g

“ n eg l i g en ce o r d i s reg ardo f ru l es o r reg u lat i on s ” an d“ an y s ub s t an t i al
u n d ers t at em en to f i n co m e t ax ”. Res p o n d en tco n t en d s th at p et i t io n ers are l i ab l e fo r
accu racy -rel at edp en al ti es fo r t h e y ears ati s s u e b ecau se t hey h adu n d erp aym en t s du e t o sub st an t i al u n d ers t at em en t s o f i nco m e t ax o r n eg l i g en ce. Un d er s ect i o n 7 4 9 1 (c) t h e Co m

m i s s i o n er b ears th e b u rd en o f p ro du ct i o n wi t h reg ardt o p en al t i es . Hi g bee v . Co m

m i ss i o n er, 1 1 6 T.C. 4 3 8 , 4 4 6 (2 0 0 1 ). To m eetth atb u rd en t h e Co m m i s s i o n er m

u s tco m e fo rwardwi t h s u ffi ci en t ev i den ce i n d i cat in g th ati ti s ap p ro p ri at e t o i m

p o s e t h e p en al t y . Id
.- 1 6 -

[* 1 6 ] Th ere i s 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 fo r an y t ax ab l e y ear i f t h e am o un to f t h e u n ders t at em en tfo r t h e t ax ab l e y ear ex ceed s th e g reat er o f 1 0 %
o f t h e t ax req u i red to b e s ho wno n th e retu rn fo r t h e t ax ab l e y ear o r $ 5 ,0 00 . Sec. 6 6 6 2 (d )(1 )(A). Pet i t i o n ers d idn o ts ub st an t i al l y u n d ers t at e t h ei r i nco m e t ax fo r
an y y ear at i s s u e. Th e d efi ci en ci es d et erm in edb y res p o n d en twere as fo l l o w s: Pet i t i o ners 2 0 0 8 2 0 0 9 2 0 1 0 Ban ah an $ 9 , 1 9 6 $ 8 , 4 7 7 $ 6 , 4 1 8 Cas t ig li o l a 8 ,2 7 8 5 ,5 6 6 4 ,0 1 3 M u l l en 4 ,1 6 8 3 ,6 9 2 3 ,1 2 6 Res po n d en td et erm i n edth atth e i n co m e t ax req u i redt o b e s h o wno n the Ban ah an s ’
an d t h e Cas t i g l i ol as ’ retu rn s was as fo l l o ws :

Pet i t i o ners 2 0 0 8 2 0 0 9 2 0 1 0 Ban ah an $ 1 57 ,4 6 3 $ 1 50 ,3 6 8 $ 8 5,3 4 0 Cas t ig li o l a 1 5 4 ,1 6 8 1 4 4 ,0 7 4 N/A Th e M u l len s h add efi ci en ci es th atwere l es s t h an $ 5 ,0 0 0 fo r ev ery y ear, an dth e Cas ti g l i ol as ’ d efi ci en cy

was l es s th an $ 5 ,0 0 0 fo r 2 01 0 . Th e d efi ci en ci es
res p o n d en t cal cu l at edfo r t h e Ban ah an s an dth e Cas t i gl i o l as are l es s t h an1 0 % o f t h e res p ect i v e am o u n t s res p o n den td et erm i n edwere req ui red t o b e s h o wn o n th e Ban ah an s ’ an dth e Cas t i g l i o l as ’ t ax retu rn s fo r 2 0 0 8, 2 0 09 , an d2 0 1 0. Th erefo re,- 1 7 -

[* 1 7 ] p et i t i o n ers d i d n o t s ubs t an t i al l y u n d ers t at e t hei r i n co m e t ax fo r an y y ear at i s su e, an dres p o n den th as n o tm eth is b u rd en o f p ro du ct i o n o n thi s i s s u e. Neg l i g en ce i n cl u d es an y

fai l u re t o m ak e a reas on ab l e at t em p t t o co m p l y wi t h th e p ro v i s i on s o f t h e In t ern al Rev enu e Co de, an d“ d i s reg ardo f ru l es o r reg u l at i o n s ” i n cl u d es an y carel es s , reck l es s , o r i n t en t i o nal d i s reg ard . Sec. 6 6 6 2 (c). Neg li g en ce i s d et erm i n edb y t es t i n g a t ax pay er’ s co n du ctag ai n s tth ato f a
reas on ab l e, p ru d en tp ers o n . Zm u d a v . Co m

m i s s i o n er, 7 3 1 F.2 d1 4 1 7 , 1 42 2 (9 t h Ci r. 1 9 84 ), aff’ g 7 9 T.C. 7 1 4 (1 9 82 ). A p en al t y wi l l n otb e i m

p o s edu n der s ect i o n 6 6 6 2 (a) i f t h e t ax p ay er
es t ab l i s h es th ath e act edwi t h reas o n ab l e cau s e an di n g o o dfai t h . Sec. 6 6 64 (c)(1 ). Ci rcu m s t an ces t h at i n d i cat e reas o n ab l e cau s e an dg o o dfai t h i n cl u d e rel i an ce o n t h e ad v i ce o f a t ax p ro fes si o n al . Sec. 1
. 6 6 6 4 -4 (b ), In co m e Tax Reg s .; s ee Hi g b ee
v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 9 . Fo r a t ax p ay er t o rel y reas o n ab l y

up o n ad v ice
s o as t o n eg at e a s ect i on 6 6 6 2(a) accu racy -rel at ed p en al t y d et erm i nedb y th e Co m m i s s i o n er, t h e t ax p ay er m u s tp ro v e b y

a p rep o nd eran ce o f t he ev i d en ce t h at t h e t ax p ay er m eet s each req u i rem en to f t he fo ll o wi n g th ree-p ro n g t es t: (1 ) t h e ad v is er was a co m

p et en tp ro fes s i o n al wh o h ads u ffi ci en tex p ert i s e t o ju st i fy rel i an ce, (2 ) t h e t ax p ay er p ro vi d edn eces s ary an d accu rat e i n fo rm at io n t o the ad v is er, an d (3 ) t h e t ax p ay er act u al l y rel i edi n g o o dfai t h o n t h e ad v i s er’ s- 1 8 -

[* 1 8 ] ju d g m en t . Neo n at o l o g y As s o cs ., P.A. v
. Co m m i s s i o ner, 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). Al l o f t h es e req ui rem en t s are m et . Pet i t io n ers ’ CPA, wh o h ado v er 4 0 y ears
o f ex p eri en ce an dh ad s erv edi n p o s i t i o n s o n St at e an dNat i o n al b o ard s o f
acco u n t an cy , was a co m

p et en tp ro fes s io n al wh o h ads u ffi ci en tex p ert i s e t o ju s t i fy rel i an ce. On the b as i s o f th e en t i re reco rd , th e Co u rti s s at i s fi edth atp et i t i o n ers ’ CPA was g i ven al l th e n eces saryi n fo rm at i o n t o p rep are t h ei r co l l ect i v e t ax retu rn s
an d t h atth e i n fo rm at i o n p ro v i d ed was accu rat e. Fu rt h erm o re, t h e CPA h ad p rep aredth e l aw fi rm ’ s t ax return s fo r m an y y ears an d s o was i n ti m at el y fam i l i ar wi t h th e b u s i nes s. Fi n al ly , th e t es ti m o ny p res en t ed --wh i ch was al l cred i b l e-- cl earl y s h o wedth atp et i t i on ers rel iedi n g o o dfai t h o n t h e ad v i ce t h atth e CPA h ad p ro v id ed . Th erefo re, p et i ti on ers reas on ab l y rel iedo n t h e ad vi ce o f t hei r CPA. Ad d i t i o n al l y , th ere were n o reg u l at i on s o r ad m i n i s t rat i v e o r ju d i ci al g ui d an ce t o
as s i s t t h e m em

b ers atth e t i m e: “ Li m i t ed p art ner” h as n ev er b een d efi n edb y
s t atu te o r reg u l at i o n ; Ren k em ey er was a cas e o f fi rs t i m pres s io n o n th e i s s ue, an d i t w as d eci dedi n 2 0 11 --aft er t h e y ears ati s s u e i n th i s cas e. Al s o , th e m em b ers ad o pt ed a fai rl y

co n s erv at i v e (t h o u g h i n co rrect ) rep o rt in g p os i t i o n : Th ey rem i tt ed
s el f-em p l o ym en t t ax es o n the g u aran t eedp aym en t s th ey recei v ed , th e am o u n t s o f t h e g u aran t eedp aym en t s were cal cu l at edo n th e b as i s o f a s u rv ey o f l eg al s al ari es- 1 9 -

[* 1 9 ] i n th e area, an dth es e g u aran t eedp aym en t am o u n t s were reas o n ab l e o n th e b as i s o f t h e s u rv ey i n fo rm at i o n . Fo r t h es e reas o n s t h e Co urtco n cl u d es th at p et i t i o n ers act edwi t h reas o nab l e cau s e an di n g o o dfai t h
. 1 0 Th erefo re, p et it i o n ers are n o tl i ab l e fo r an y p en al t ies u n d er s ect i o n 6 6 6 2 (a) fo r t h e y ears ati s su e. Th e Co u rth as co n s i d ered al l o f t h e arg u m en t s m ad e b y th e p art i es , an dt o th e ex ten tthey are n otad dres s ed h erei n , th ey are co n s id ered
u n n eces sary , m o o t , i rrel ev an t , o r wi t h o u tm eri t. To refl ectthe fo reg o i n g , Deci s i o n s wi l l b e en t ered
u n der Ru l e 1 5 5
.

1 0 Becau s e o f t h e Co u rt ’ s co n cl u s i o n reg ard i n g th e reas o n ab l e cau s e ex cep t i o n u n d er s ec. 6 66 4 (c), t h e Co u rtd o es n o treach the i s s u e o f wh eth er p et i t i o n ers were n eg l i g en t u n d er s ec. 6 6 6 2 (b )(1 ).