1 The Code, which is codified at “26 U.S.C.,” may hereinafter be cited as “I.R.C.”

2 Susan Stanford is a party to this proceeding because s he signed the Stanfords’ contested

1990 join t federal income tax return pursuant to I.R.C. § 6013. Unless otherwise indicated,

subsequent references to “Stanford” refer exclusively to Robert A. Stanford.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 97-60531

ROBERT A. STANFORD; SUSAN STANFORD,

Petiti oners-Appellants,

versus

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

Appeal from the United States Tax Court

September 3, 1998

Before DUHÉ, BENAVIDES and STEWART, Circuit Judges.

STEWART, Circuit Judge:

This case, which calls for us to co nst rue certain provisions of section 952(c)(1)(C) of the

Internal Revenue Code (the “Code”), 1 involves a dispute regarding the 1990 income tax liability of

Robert A. Stanford and his wife Susan Stanford. 2 On appeal, the Stanfords challenge a decision of

the Tax Court upholding the Internal Revenue Commissioner’s (“Commissioner”) assessment of (1)2

a tax deficiency against them with respect to their j o int ly-filed 1990 income tax return and (2) an

accuracy-related penalty for their resulting underpayment of tax. S ee Stanford v. Commissioner

, 108

T.C. 344 (1997). For the following reasons, we VACATE the underpayment of tax penalty imposed

against the Stanfords and AFFIRM the Tax Court’s judgment in all other respects.

I.

A. F ACTUAL B ACKGROUND

The underlying facts of this case are, for the most part, undisputed. Between 1985 and 1987,

Stanford, a United States citizen and Houston resident, formed three corporati ons i n the crown

colony of Montserrat in

t he British West Indies, each of which qualified as a “controlled foreign

co rpo ration” within the meaning of section 957(a) of the Code. The first corporation, Guardian

International Bank, Ltd. (“ Guardian Bank”), was incorporated in December 1985 to engage in

offshore banking activiti es. In January 1986, Guardian Bank acquired a banking license from the

Montserrat government authorizing it to engage in business as an offshore investment bank.

The second corporati on, Guardian International Investment Services, Ltd. (“Guardian

Services”), was incorporated in October 1986. Guardian Services’ charter authorized it to engage

in a broad array of business activities, i ncluding real estate development and trademark/patent

acquisition. Pursuant to a 1988 written service agreement with Guardian Bank, Guardian Services

provided marketing and advertising services to Guardian Bank during 1989 and 1990. The

Commissioner concedes that the provision of these services by Guardian Services induced deficits in

Guardian Services’ earnings and profits for both those years.

Finally, Stanford Financial Group, Inc. (“Stanford Financial”) was incorporated in February

1987, with Stanford owning 95 percent of its shares. In relevant part, Stanford Financial’s objective3

was to “ca rry on the business of a [h]olding [c]ompany” and to “take part in the formation,

management, supervision or control of the business operations of any company.” Upon incorporation

of Stanford Financial, all of the shares of stock of both Guardian Bank and Guardian Services were

transferred to Stanford Financial; thus (1) Guardian Bank and Guardian Services became related as

brother-sister corporati ons with (2) Stanford Financial as the common parent. Pursuant to a service

agreement with Guardian Bank, Stanford Financial provided administrative and management services

to Guardian Bank during 1989 and 1990. The Commissioner concedes that the provision of these

services by Stanford Financial induced deficits in Stanford Financial’s earnings and profits for both

those years.

B. S TATUTORY B ACKDROP AND THE S TANFORDS ’ 1990 I NCOME T AX R ETURN

Sect io n 951(a) of the Code requires a United States shareholder of a controlled foreign

corporati on (“CFC”) to include in his gross i nco me his pro rata share of the controlled foreign

corporation’s “subpart F income”

— as d efined in sect ion 952 — whether or not such income is

distributed to him. I.R.C. § 951(a). A CFC is defined as any foreign corporation where more than

50 percent of the corporation’s stock, either by voting power or value, is owned directly, indirectly,

or constructively by United States shareholders. I.R.C. § 957(a). Section 951(b) of the Code defines

a “United States shareholder” as a United S t at es person who owns directly, indirectly, or

constructively 10 percent or more of the voting stock of a foreign corporation. I.R.C. § 951(b). In

t his case, the parties have stipulated that (1) Stanford is a United States shareholder of Guardian

Bank, Guardian Services, and Stanford Financial, and (2) Guardian Ban k, Guardian Services, and

Stanford Financial are CFCs.

Of the three CFCs in this case, only Guardian Bank realized subpa rt F income in 1990.4

Subpart F income is defined in I.R.C. § 952 as including five dif ferent types of i ncom

e, the m ost

pertinent of which, in this case, is “foreign base company income (as determined under section 954).”

I.R.C. § 952(a)(2). Section 954(a) defines foreign base company income as including “foreign

personal holding compa n y income,” I.R.C. § 954(a), which consists of, among other things,

dividends, interest, rents, gains from commodity transactions, and foreign currency gains. I.R.C. §

954(c)(1). The parties in this case have stipulated that Guardian Bank’s 1990 income included

interest, gains on foreign currency exchanges, dividends, and gains on commodity transactions, and

that Guardian Bank’s resulting subpart F income for that year was $2,789,722. Indeed, the Stanfords

reported this figure as Guardian Bank’s subpart F income on their 1990 jo int federal income tax

return.

T he amo unt o f subpart F income of a CFC that is ultimately taxed to a United States

shareholder may be limit

ed by any of three limitations set forth in I.R.C. § 952(c). The only limitation

applicable here is that found in I.R.C. § 952(c)(1)(C), and it is the interpretation of the language of

this provision that is at the heart of the dispute in this case. Section 952(c)(1)(C) reads, in pertinent

part, as follows:

(C) Certain deficits of member of the same chain of corporati ons may be taken into

account.

--

(i) In general. --A controlled foreign c orporation may elect to reduce the

amount of its subpart F income for any taxable year which is attributable to

any qualified activity by the amount of any deficit in earnings and profits of a

qualified chain member for a taxable year ending with (or within) the taxable

year of such controlled foreign corporati on to the extent such d e ficit is

attributable to such activity . * * *

(ii) Qualified chain member.

- -For purposes of this subparagraph, the term

“quali fied chain member” means, with respect to any controlled foreign

corporati on, any othe r co rporation which is created or organized under the

laws of the same foreign country as the controlled foreign corporati on but3 Section 952(c)(1)(C) was added to the Code in 1988, and was made retroactively applicable

to any tax year ending after 1986. See Technical and Miscellaneous Revenue Act of 1988, Pub. L.

No. 100-647, § 1012(i)(25)(A), 102 Stat. 3342, 3512. Thus, subparagraph (i), which has been

referred to in commentary as the “TAMRA chain deficit rule,” was applicable in 1990, the tax year

of the Stanfords at issue in this case. As discussed i nfra note 9, a considerably broader “chain deficit

rule” was in effect for tax years ending prior to 1987.

4 Of the total claimed deficit, $1,251,891 was generated by Guardian Services and $154,474

was generated by Stanford Financial.

5

o nly if--

(I) all the stock of such other corpora t ion (other than directors’

q ualifying shares) is owned at all times during the taxable year in

w hich the deficit arose (directly or through 1 or more corpo rations

other than the common parent) by such controlled fo reign

corporati on, or

(II) all the st ock of such controlled foreign corporation (other than

directors’ qualify ing shares) is owned at all times during the taxable

year in which

t he deficit arose (directly or through 1 or more

corporati o ns o t her than the common parent) by such other

corporati on.

I.R.C. § 952(c)(1 )(C). 3 Under section 952(c)(1)(C), a CFC may reduce its subpart F income

at tributable to a “qualified activity” by the deficits in earnings and profits of a “qualified chain

member” to the extent the deficit of the chain member is “attributable to” to such qualified activity.

Relying on retained, expert tax advice, th e St anfo rds invoked Guardian Bank’s section

952(c)(1)(C)(i) election and reduced Guardian Bank’s 1990 subpart F income ($2,789,722) by the

total deficits in the 1990 earnings and profits of Guardian Services and Stanford Financial, which total

they determined to be $1,406,365. 4 On audit, however, the Commissioner disallowed this reduction

as violative of section 952(c)(1)(C). Notably, the Commissioner conceded (and does not contest on

appeal) that (1) Guardian Services and Stanford Financial accumulated deficits in earnings and profits

in 1990; (2) these deficits in earnings and profits were generated exclusively through administrative,5 On their 1990 tax return, the Stanfords also reported a net operating loss carryforward from

1989 of $615,890 , which arose, in part, from the Stanfords’ reduction of Guardian Bank’s 1989

subpart F income of $580,483 by the 1989 deficits in earnings and profits of Guardian Services and

Guardian Financial of $385,386. On audit, the Commissioner also disallowed this reduction.

6 The Commissioner also assessed the Stanfords a lat e-filing penalty under I.R.C. § 6651(a)(1),

which the Tax Court later sustained and the Stanfords do not contest on appeal.

6 marketing, or management services provided to Guardian Bank under applicable service agreements;

and (3) the deficits accrued t o a total of $1,406,365. Such concessions notwithstanding, the

Commissioner prohibited the Stanfords from offsetting these deficits against Guardian Bank’s subpart

F income, determining that (1) Guardian Services was not a “qualified chain member” with respect

t o Guardian Bank within the meaning of section 952(c)(1)(C)(ii) (and, thus, Guardian Services’

deficit in earnings and profits was not deductible vis-à-vis Guardian Bank’s subpart F income); and

(2) Stanfor d Financial’s deficit, although accrued by a “qualified chain member” with respect to

Guardian Bank, was not “attributable to [the same] qualified activity” to which Guardian Bank’s

subpart F income was attributable (and, thus, was also not deductible vis-à-vis Guardian Bank’s

subpart F income). 5

The Commissioner determined the resulting deficiency in the Stanfords’ 1990 tax to be

$423,531.36. Additionally, because the Stanfords’ understatement of tax was substantial, t he

Commissioner assessed the Stanfords an accuracy-related penalty of $84,706.27 under I.R.C. §

6662(a). 6 The Stanfords filed a petition challenging these determinations in the United States Tax

Court.

C. T HE T AX C OURT ’ S O PINION

The Tax Court sustained the Commissioner’s determinations. First, the court agreed with the

Commissioner that Guardian Services was not a qua lified chain member with respect to Guardian7 I.R.C. § 952(c)(1)(B)(iii)(VI) defines “qualified activity,” in pertinent part, as “any activity

giving rise to, in the case of a qualified financial institution, foreign personal hol ding company

income.” See I.R.C. § 952(c)(1)(B)(iii) (defining “qualified activity” as also including “any activity

giving rise to [(1)] foreign base company shipping income, [(2)] foreign base company oil related

income, [(3)] foreign base company sales income, [(4)] foreign base company services income, [and

(5)] in the case o f a qualified insurance company, insurance income or foreign personal holding

company income.”). The Commissioner conceded below (and does not contest on appeal) that

Guardian Bank, by actively engaging in the activity of banking and financing during 1989 and 1990,

(1) was a “qualified financial institution” in 19 89 and 1990, s ee I.R.C. § 952(c)(1)(B)(vi), and (2)

generated “foreign personal holding company income” during those years, see discussion supra

. By

definition, that income was subpart F income under the Code. I.R.C. §§ 952(a)(2); 954(a). As such,

we find no error in the Tax Court’s determination that Guardian Bank’s 1989 and 1990 subpart F

income was “attributable to” a “qualified activity” within the meaning of section 952(c)(1)(B)(iii).

7 Bank, and therefore the deficits of Guardian Services could not be used to reduce the subpart F

income of Gua rdian Bank. The court held that section 952(c)(1)(C)(ii), which defines the term

“qualified chain member,” provides that CFCs are qualified chain members “only where the CFCs are

related to each other directly or indirectly through a single, straight-line chain of corporations, as in

a parent-subsidiary relationship, and not where the CFCs are related to each through a common

pa rent , as in a brother-sister relationship.” Because Guardian Services and Guardian Bank were

related to each other as brother-sister corporati ons through their common parent — Stanf ord

F inancial — the court concluded that Guardian Services was not a qualified chain member with

respect to Guardian Bank. Accordingly, the court held that Guardian Services’ deficit in earnings and

profits could not offset Guardian Bank’s subpart F income.

With respect to Stanf

o rd Financial, the court acknowledged that (1) as Guardian Bank’s

parent, Stanford Financial was a qualified chain member with resp ect to Guardi an Bank, and (2)

Guardian Bank’s subpart F income was “attributable to” the “qualified activity” of bankin g and

financing, 7 but concluded that because Stanford Financial’s deficit in earnings and profits arose from

the performance of

administrative and management services, it was (A) not “attributable to” the8

qualified activity to which Guardian Bank’s subpart F income was attributable and therefore (B) not

deductible against that income. In essence, the Tax Court determined that to be deductible against

a related CFC’s subpart F income under section 952(c)(1)(C), a qualified chain member’s deficit in

earnings and profits must be generated through the conducting of a qualified activity, which activity

must also have generated the CFC’s subp art F inco me. Because this “identity of activity”

requirement was no t met in the instant case, the Tax Court held that Guardian Bank’s subpart F

income could not be reduced by the deficit in earnings and profits of Stanford Financial under section

952(c)(1)(C)(i).

Finally, the Tax Court sustained the Commissioner’s determination that the Stanfords were

liable for the accuracy-related penalty imposed by I.R.C. § 6662(a) for a substantial understatement

of tax. In so holding, the court determined that because no portion of the Stanfords’ understatement

was attributable to the tax treatment of an item that was suppor t ed by “substantial authority,” the

Stanfords were not entitled to a reduction of the penalty under I.R.C. § 6662(d)(2)(B). Notably, the

court did not directly address whether the Stanfords were entitled to a reduction of the penalty under

I.R.C. § 6664(c)(1), which section prohibits accuracy-related penal t ies for any portion of an

underpayment with respect to which the taxpayer had reasonable cause and acted in good faith. The

Stanfords timely appeal the Tax Court’s determinations.

II.

A. S TANDARD OF R EVIEW

The focus of this case is on the interpretation and application of section 952(c)(1)(C) of the

Co de. The Tax Court’s determinations of law — for example, interpretations of the statuto ry9

language — are reviewed de novo, while its factual findings are reviewed for clear erro r. G.M.

Trading Corp. v. Commissioner

, 121 F.3d 977, 980 (5th Cir. 1997) (citing Bolding v. Commissioner

,

117 F.3d 270, 273 (5th Cir. 1997)). “A finding is ‘clearly erroneous’ when although there is evidence

to support it, the reviewing court on the entire evidence is left with the definite and firm conviction

that a m istake has been com m

itted.” I d. (citation omitted). In this case, the facts are essentially

undisputed. In such a situation, the question of whether a taxpayer has “substantial authority” for any

tax t reat ment t hat results in an underpayment of tax, precluding a penalty for substantial

understatement of tax, is a legal question reviewed de novo. W estbrook v. Commissioner

, 68 F.3d

868, 874, 881-82 (5th Cir. 1995); Little v. Commissioner , 106 F.3d 1445, 1449 (9th Cir. 1997).

B. D ISCUSSION

The Stanfords make three arguments on appeal — that (1) Guardian Services is a qualified

chain member with respect to Guardian Bank and thus its deficits in earnings and profits may validly

reduce Guardian Bank’s subpart F income under section 952(c)(1)(C); (2) Stanford Financial’s

deficits in earnings and profits are “attributable to” the same qualified activit y t o which Guardian

Bank’s subpart F income is attributable and thus are also deductible against that income under section

952(c)(1)(C); and (3) a substantial understatement of tax penalty is unwarranted in this case, either

because (a) substantial authority e xist s for their tax treatment of the deficits at issue or (b) any

resulting underpayment was due to a reasonable cause and was premised on good faith behavior on

their part. We examine each of the Stanfords’ arguments in turn.

1. Qualified Chain Member

The Stanfords contend that section 952(c)(1)(C)’s statutory language

, its legislative history,

and a current treasury regulation example support their view that Guardian Services is a “qualified8 We use the term “deficit corporation” to refer to any foreign corporation that has a deficit

in earnings and profits that is potentially deductible against a CFC’s subpart F income under section

952(c)(1)(C)(i), or, where applicable, under prior I.R.C. § 952(d) (1962), see infra note 9 (discussing

prior section 952(d)).

10 chain member” of Guardian Bank’s and that Guardian Services’ deficits in earnings and profits are

deductible against Guardian Bank’s subpart F income. We disagree. A s always, we commence our

analysis b y examining the plain language of the relevant statute, G .M. Trading Corp.

, 121 F.3d at

981, which in this case is section 952(c)(1)(C). In the absence of any ambiguity, our examination is

confined to the words of the statute, which are assumed to carry their ordinary meaning. Id.

Section 952(c)(1)(C)(ii) defines the term “qualified chain member.” It provides that a deficit

corporation (here, Guardian Services) 8 is a qualified chain member vis-à-vis a CFC with offsettable

subpart F income (here, Guardian Bank) if (1) the deficit corporati on is organized under the laws of

the same foreign country as the CFC, and (2) either one of th e two condi ti ons set forth i n

subparagraphs (I) and (II) of section 952(c)(1)(C)(ii) is satisfied. I.R.C. § 952(c)(1)(C)(ii). In this

case, both Guardian Bank and Guardian Services were organized under the laws of Montserrat. As

such, resolution of the “qualified chain member” issue depends so lely o n whether either of the

conditions set forth in subparagraphs (I) and (II) was satisfied.

Under subparagraphs (I) and (II), a deficit corporati on is a qualified chain member vis-à-vis

a CFC with offsettable s ubpart F inco me only if the CFC “owns” all the stock of the deficit

corporati on, or if the deficit corporati on “owns” all the stock of the CFC. I.R.C. § 952(c)(1)(C)(ii).

Specifically, subparagraphs (I) and (II) provide that the deficit corporati on is a qu alified chain

member o f the CFC only if (1) all of the deficit corporation’s stock is owned by the CFC eit her

“directly or through 1 or more c orporations other than the common parent,” I.R.C. §9 As such, the focus of section 952(c)(1)(C) is on the stock ownership interests of the CFC and

the deficit corporati on at issue. By contrast, the old “chain deficit rule”

— which was codified in

prior section 952(d) and repealed in 1986

— focused on the stock ownership interests of the ultimate

taxpayer, the United States shareholder. See I.R.C. § 952(d) (1962), repealed by Tax Reform Act

of 1986, Pub. L. No. 99-514, § 1221(f), 100 Stat. 2085, 2554. Under former section 952(d), a CFC

with subpart F income and a deficit corporati on were part of the same qualified chain of corporati ons

if either corporati on was owned directly by “a United States shareholder,” and the other was thereby

derivatively owned ( i.e.

, indirectly) by such shareholder in the manner specified by treasury regulation

section 1.952-1(d)(2)(ii)(b). S ee Treas. Reg. § 1.952-1(d)(1); Treas. Reg. § 1.952-1(d)(2)(ii) (“A

chain of foreign corporati ons shall, with respect to a United States share holder , include (a) [a]ny

foreign corporati on in which such shareholder owns [directly ] (within the meaning of secti on

958(a)(1)(A)) stock but, only to the extent of the stock so owned and (b) [a]ll foreign corporati ons

in which such shareholder owns [indirectly] (within the meaning of section 958(a)(2)) stock, but only

to the extent of the stock so owned by reason of his ownership of the stock referred to in (a) of this

subdivision.”) (emphasis added).

The Tax Court correctly noted that, for all tax years endin g pri or to 1987, secti on 952(d)

permitted the use of deficits in earnings and profits of deficit corporati ons in a chain to reduce the

subpart F income of a CFC in a chain regardless of the manner by which the deficit corporati ons and

the CFC were related to each other ( i.e., regardless of whether the relevant deficit corporati on and

the CFC had a parent/subsidiary or a brother/sister relationship), as long as each such corporati on was

directly or indirectly held by the U.S. shareholder (in t he manner specified by regulation section

1.952-1(d)(2)(ii)). Such a chain constituted a single chain so long as the relationships between the

relevant corporati ons did not extend back through the United States shareholder to another separate

and distinct chain. The government concedes that if prior section 952(d) was applicable to the instant

case, Guardian Services would indeed be a “qualified chain member” with respect to Guardian Bank.

10 It should be emphasized that the stock attribution rules of I.R.C. § 318

— which provide

guidance in applying numerous provisions of the Code for which constructive ownership of stock is

relevant — are immaterial here, as they have not been made applicable to section 952(c)(1)(C)(ii).

See I.R.C. § 958(b) (expressly limit ing the applicability of section 318's stock attribution rules to the

following provisions of subpart F: I.R.C. § 951(b), I.R.C. § 954(d)(3), I.R.C. § 956(c)(2), and I.RC.

11 952(c)(1)(C)(ii)(I); or (2) all of the stock of the CFC is o wned by the deficit corporation either

“directly or throu gh 1 or more corporations other than the common parent,” I.R.C. §

952(c)(1)(C)(ii)(II). 9

In this case, neither Guardian Bank nor Guardian Services owned the other’s stock directly.

Hence, the relevant question becomes whether Guardian Bank or Guardian Services owned indirectly

all of the other’s stock in a way that satisfies the requirements of section 952(c)(1)(C)(ii). 10 In other§ 957).

11 C ontrary to the Stanfords’ suggestion, section 952(c)(1)(C)’s limitation against i ndirect

o wnership “through the common parent” cannot simply be read as a restriction against indirect

ownership “through the common United States shareholder.” As discussed, the limitation imposes

a restriction

against o t herwise qualifying indirect ownership ( i .e.

, ownership “through 1 or more

corporations”) of a deficit corporati on by a CFC (or vice versa) if such ownership flows “through the

common parent.” The St anfo rds’ reading of the limitation — which assumes that the phrase “the

common parent” is synonymous with the phrase “the common United States shareholder”

— results

in a restrict io n against such ownership only if it runs through the “common United States

shareholder.” This reading would simply reimpose the limitation against indirect ownership that was

part of the old chain deficit rule

— i.e.

, being able to trace a relationship back to a common United

States shareholder is not enough to make a deficit corporation and a CFC with offsettable subpart

F income part of the same chain.

We find it more plausible to interpret the indirect ownership limitation in sect io n

952(c)(1)(C)(ii) as a restriction against indirect ownership through the common parent corporati on

, which corporati on may or may not be a United States share holder. The phrase “other than the

12 words, the issue of whether Guardian Services is a qualified chain member with respect to Guardian

Bank turns on whether Guardian Bank or Guardian Services owned 100 percent of the other’s stock

“through 1 or more corporati ons other than the common parent.” I.R.C. § 952(c)(1)(C)(ii). Of

course, in this case, such qual ifying o wnership could flow only through Stanford Financial, which

directly owned all of the stock of both Guardian Bank and Guardian Services.

We agree with the Tax Court’s final conclusion

— that Guardian Services is not a qualified

c hain member with respect to Guardian Bank and thus its deficit in earnings and profits cannot be

used to reduce Guardian Bank ’s subpart F income. Under the plain language of section

952(c)(1)(C)(ii), a deficit corporati on is a qualified chain member vis-à-vis a CFC with of fsettable

subpart F income only if one completely own s the other “directly” (not applicable in this case) or

“through one or more corpor ations o t her than the common parent

. ” I.R.C. § 952(c)(1)(C)(ii)

(emphasis add ed). As such, any qualifying i ndirect relationship between a CFC and a deficit

corporati on cannot flow through “the common parent [corporati on].” 11 In t his case, involving acommon parent ” clearly modifies the word “corporations” in the phrase which precedes it

— namely,

“through 1 or more corporati ons ”

— and thus the word “parent” is simply a shorthand reference for

“parent corporati on.” S ee I.R.C. § 952(c)(1)(C)(ii) (“through 1 or more corporati ons other than the

common parent ”) (emphasis added). We accordingly hold that a CFC’s indirect ownership of a

deficit corporati on (or vice versa) exclusively through a common parent corporati on cannot confer

“qualified chain member”-status on the deficit corporation.

12 We expr ess no o pinion on whether the Tax Court erred in determining that an indirect

relationship with a CFC that triggers “qualified chain member”-status for a deficit corporati on under

section 952(c)(1)(C)(ii) must be of the “single, straight-line” variety. Even if section 952(c)(1)(C)(ii)

co nt emplates that a non-straight-line indirect relationship may suffice, the plain language of t he

statute makes clear that such a relationship may not flow through “the common parent [corporati on],”

thus eliminating Guardian Services’ bid to be a qualified chain member of Guardian Bank’s.

13 Noting correctly (1) that prior section 952(d) was repealed in 1986 because of, inter alia

, congressional concern that deficits in earnings and profits of members within a chain of corporati ons

were being used to reduce subpart F income of CFCs within the chain even though the deficits arose

from “a nonsubpart F income category” or “[bore] little or no relation to the income [they offset],”

see H.R. Conf. Rep. No. 99-841, at 621-26 (1986), reprinted in 1986 U.S.C.C.A.N. 4075; and (2)

t hat t he legislative history of section 952(c)(1)(C) (a) fails to mention the term “qualified chain

member” and (b) refers approvingly to def icit corporations and CFCs within “a single chain of

corporations” ( i.e.

, the term used to describe a qualified chain of corporati ons under the pre-1987

chain deficit rule), see S. Rep. No. 100-445 (1988), reprinted in 1988 U.S.C.C.A.N. 4515, 4786, the

Stanfords argue that the legislative history of section 952(c)(1)(C) reflects no dissatisfaction with the

expansive pre-1987 rule for det ermining which deficit corporations qualify as chain members for

purposes of offsetting a CFC’s subpart F income. As alluded to above, however, where — as here

— a plain reading o f t he statute unambiguously precludes a taxpayer’s interpretation thereof, no

13 simple tripartite structure, Guardian Services would be deemed to be an indirect owner of Guardian

Bank only through their common parent corporati on, Stanford Financial. Likewise, Guardian Bank

would be deemed to be an indirect owner of Guardian Services only through the same common

parent corporati on. Acco rdingly, read in the light of ordinary understanding, the “other than the

common parent” language of section 952(c)(1)(C) prevents Guardian Services from being a qualified

ch ain member with respect to Guardian Bank. 1 2 Because a plain reading of the statute precludes

reaching a contrary result in this case, w e need no t co nduct an analysis of the statute’s legislative

history. See Nalle v. Commissioner

, 997 F.2d 1134, 1140 (5th Cir. 1993). 13 The Tax Court correctlyamount of favorable legislative history can rescue the taxpayer’s interpretation. Nalle , 997 F.2d at

1140. The Stanfords’ argument premised on legislative history must fall short for this reason.

14 The Stanfords’ reliance on treasury regulation section 1.952-1(d)(3), example 1(c), is also

misplaced. Example 1(c) was quite obviously intended as an application of the old chain deficit rule

contained in section 952(d), and thus its acknowledgm e nt that a sister corporati on of a CFC may

qualify as a chain member with respect to such CFC is not instructive for purposes of this case. See

Treas. Reg. § 1.952-1(d)(3), Example 1(c). Indeed, the paragraph of the regulations that the example

attem pts to illustrate advises the reader to “[s]ee section 952(d).” S ee Treas. Reg. § 1.952-1(d)(1).

While we are unsure why the example was not withdrawn after Congress’ repeal of section 952(d),

we are constrained from sustaining the Stanfords’ reliance on it because

— as established above

—

it is “plainly inconsistent with the [currently applicable] revenue statute[],” section 952(c)(1)(C). S ee

Brown v. United States

, 890 F.2d 1329, 1336 (5th Cir. 1989) (quoting Bingler v. Johnson

, 394 U.S.

741, 749-50, 89 S.Ct. 1439, 1444-45, 22 L.Ed.2d 695 (1969)).

14 held that the Stanfords could not reduce Guardian Bank’s subpart F income by the deficits in earnings

and profits of Guardian Services. 14

2. Attributable to Such Qualified Activity

We next consider whether the Tax Court erred, as the Stanfords claim, when it refused to

allow them to reduce Guardian Bank’s subpart F income by the de ficit s in earnings and profits of

Stanford Financial, Guardian Bank’s parent corporati on. As discussed above, section 952(c)(1)(C)(i)

provides that a CFC’s subpart F income attributable to a qualified activity may be reduced by the

deficits in earnings and profits of a qualified chain member to the extent the deficit of the chai n

member is “ attributable t o such activity

. ” I.R.C. § 952(c)(1)(C)(i) (emphasis added). The parties

agree that (1) Stanford Financial, by directly owning all of the stock of Guardian Bank in 1989 and

1990, was a qualified chain member with respect to Guardian Bank, I.R.C. § 952(c)(1)(C)(ii)(II); (2)

Stanford Financial generated deficits in earnings and profits during 1989 and 1990, which deficits

arose from the conferral of administrative and management support services to Guardian Bank; and

(3) Guardian Bank’s subpart F income in 1989 ($580,483) and 1990 ($2,789,722), which consisted15 For “qualified financial institutions” such as Guardian Bank, a “qualified activity” is one that

“giv[es] rise to

. . . foreign personal holding company income.” I.R.C. § 952(c)(1)(B)(iii)(VI). Here,

the parties agree that Guardian Bank’s “qualified activity,” through which it generate d foreign

personal holding company income, was banking. See supra note 7.

15 exclusively of foreign personal holding company income earned through the active conduct o f a

banking business, was “attributable t o [a] qualified activity,” I.R.C. §§§ 952(c)(1)(C)(i);

952(c)(1)( B)(iii)(VI); 952(c)(1)(B)(vi); s ee supra note 7. 15 Hence, the sole issue on appeal is

whether the deficits of Stanford Financial were “attributable to such activity,” i.e. banking, so that

they could be deducted against Guardian Bank’s subpart F income on the Stanfords’ 1990 tax return.

Our first task, then, is to interpret the phrase “attributable to such activity,” and in doing so,

we must attempt to g ive t he co mponent words their ordinary, common meaning. G .M. Trading

Corp. , 121 F.3d at 981. While “[t]he term ‘attributable to’ has no particular technical significance

under the tax laws [—] [ind eed,] nowhere in the Internal Revenue Code is such term defined,”

Lawinger v. Commissioner

, 103 T.C. 428, 435 (1994) (punctuation omitted)

—it has occasionally

been interpreted in case law in both tax and nontax contexts:

Under the definition of collapsible corporati on under section 117(m)

of the 1954 Code, the Supreme Court interpreted “attributable to,” in

the phrase “gain attributable to such property ,” as “merely confin[ing]

consideration to t hat gain caused or generated by the property in

question.” Braunstein v. Commissioner

, 374 U.S. 65, 70 (1963). In

interpreting the statutory language of section 165(i) of the 1954 Code

that governs the abilit

y of taxpayers to claim

refunds or credits for

property expropriated by the government of Cuba, the District Court

of Mississippi held that the normal meaning of one thing to be

attributed to another is that one thing is caused or brought about by

that other thing. O gden v. United States

, 432 F.Supp. 214, 216 (S.D.

Miss. 1975), (citing Webster’s Third New International Dictionary),

aff’d , 555 F.2d 134 (5th Cir. 1977). These interpretations are based

on the conclusion that “attribute” or “attributable” connote s causation.

See National Association of Greeting Card Publishers v. United States

Pos t al Service, et al. , 462 U.S. 810, 823 (1983); W atson v.16 Employment Sec. Commn. of North Carolina , 432 S.E.2d 399, 401

(N.C. App. 1993). For example, section 6663(a) provides: “If any

part of any underpayment *** is due to fraud, there shall be added to

the t ax an amount equal to 75 percent of the portion of the

underpayment which is attributable to fraud.” . . . Similarly, t he

accuracy-related p enalty provision provides that the penalty applies

“to the porti on of a ny underpayment which is attributable to”

negligence, substantial understatement of tax, etc. Sec. 6662(b).

Lawinger

, 103 T.C. at 435. Based on this analysis, the L awinger court found that “the plain meaning

of [the phrase] ‘attributable to’ is

. . . due to, caused by, or generated by.” I d . On appeal , the

Stanfords provide no reason why a different meaning should apply to this phrase in the context of this

case.

The St anfords argue that because the administrative and managerial services provided by

Stanford Financial to Guardian Bank were “driven solely by,” “directed solely to,” and “in all respects

indispensable to” Guardi an Bank’s qualified activity of banking, the deficits thereby generated by

Stanford Financial were “attributable to such activity.” Because t he plain meaning of the phrase

“attributable to” does not embrace the interpretations given to it by the Stanfords, we cannot agree

with their assessment. While there is no question that the deficit -inducing activities of Stanford

Financial were (1) substantially related to Guardian Bank’s qualified banking activity and indeed (2)

helped give rise to Guardian Bank’s subpart F income attributable to that activity which the Stanfords

now hope to offset, section 952(c)(1)(C)(i) requires more

— i.e.

, a causal relationship between such

activity (banking) and Stanford Financial’s deficits — before those deficits may offset that income;

in short, the deficits must have been “caused by” or “generated through” the conducting of the same

qualified activity which generated the subpart F income sought to be offset. While this requirement

may seem an overly strict one, it is one mandated by a plain reading of the phrase “to the extent such

deficit is attributable to such activity ” in section 952(c)(1)(C)(i). (emphasis added). Because Stanford16 Once again, the Stanfords’ reliance on the legislative histo ry of secti on 952(c)(1)(C) i s

m ooted by an unambiguous application of the relevant st atutory language. The Stanfords argued

below that because the legislative history of se ct io n 952(c)(1)(C) speaks expressly of curtailing

taxpayer reduction of subpart F income of CFCs by deficits in earnings and profits of chain members

that “[bear] little or no relationship to [that] income,” S. Rep. No. 100-445 (1988), reprinted in 1988

U.S.C.C.A.N. 4515, 4786, section 952(c)(1)(C)(i) clearly contemplates that Stan fo rd Financial’s

deficits

— which indisputably bore “a substantial relationship” to Guardian Bank’s banking activity

and the income generated therefrom — may be deducted against Guardian Bank’s subpart F income.

Unfortunately for the Stanfords, not only does the plain language of section 952(c)(1)(C)(i) nullify

their argument, see discussion supra

, but an example in the legislative history provides further proof

that such a deficit offset is available only if the deficit is generated through the conducting of the same

qualified activity that generates the income sought to be offset. See id. (“For example, assume that

a U.S. corporation owns all the stock of a banking corporation organized in a foreign country, and

that the latter owns all the stock of a second banking corporati on organized in the same country. The

parent foreign bank

. . . has subpart F income of $50. T he subsidiary foreign bank has a loss of $100

attributable to activities that, when profitable, generate foreign personal holding company income,

and has a deficit in earnings and profits of $60

. U nder [new section 952(c)(1)(C)], the parent foreign

co rpo rat io n may elect to reduce its subpart F income to zero reflecting the subsidiary’s deficit. ” )

(emphasis added). As such, were we to even consider the legislative history of section 952(c)(1)(C),

we could not find it to be unequivocally in favor of the Stanfords’ position.

17 Financial’s deficits in earnings and profits were not “due to,” “caused by,” or “generated by” (1)

Guardian Bank’s qualified banking activity or (2) any similar qualified banking activity conducted by

Stanford Financial, those deficits were not “attributable to [the qualified] activity” to which Guardian

Bank’s subpart F income was attributable. Read in t he light of ordinary understanding, section

952(c)(1)(C)(i) thus precludes the Stanfords’ abilit y to offset Guardian Bank’s subpart F income by

the earnings and profits deficits of St anford Financial. The Tax Court’s decision to this effect is

accordingly affirmed. 16

3. Accuracy-Related Penalty

The final issue we address is whether the Tax Court erred in sustaining the Commissioner’s

determination that the Stanfords are liable for an accuracy-related penalty of $84,706.21 under I.R.C.

§ 6662. Section 6662 imposes a penalty equal to 20 percent of any “substantial understatement of17 Added to the Code in 1989, section 6664 is applicable to all tax returns due after December

31, 1989 (determined without regard to extensions). S ee Revenue Reconciliation Act of 1989, Pub.

L. No. 101-239, § 7721(d), 103 Stat. 2106, 2400. The Stanfords’ 1990 income tax return was due

in 1991. Consequent ly, assuming the Stanfords invoked section 6664 below, the reasonable

cause/good faith defense in subsection (c)(1) is pertinent to resolving whether the understatement

penalty at issue

— stemming from the Stanfords’ 1990 return

— is warranted. Prior to the enactment

of section 6664, the reasonable cause/good faith defense was contained in I.R.C. § 6661(c), which

read as follows:

(c) Authority to waive.

-- The Secretary may waive all or any part of

the addition to tax provided by this section[, i.e., the accuracy-related

penal t y,] o n a showing by the taxpayer that there was reasonable

cause for th e understatement (or part thereof) and that the taxpayer

acted in good faith.

I.R.C. § 6661(c) (repealed in 1989) . As such, prior to the applicability of section 6664, the

Commissioner had discretion whether to waive the substantial understatement penalty on account of

a taxpayer’s (a) reasonable cause for the understatement and (b) good faith actions, and our review

of the Commissioner’s decision was for abuse of that discretion only. See Heasley v. Commissioner

, 902 F.2d 380, 384-85 (5th Cir. 1990).

18 i ncome tax.” S ee I.R.C. §§ 6662(a); 6662(b). It is undisputed that the Stanfords’ income t ax

deficiency that we affirmed i n Sections II.B.1 and II.B.2 of this opinion was a “substantial

understatement” of tax as defined by I.R.C. § 6662(d)(1)(A). Nonetheless, the statute provides that

the amount of an understatement against which the penalty is imposed shall be reduced by the porti on

of the understatement that is attributabl e t o (1) tax treatment that was supported by “substantial

authority,” or (2) tax treatment for which (a) there is a “reasonable basis” and (b) the relevant facts

were “adequately disclosed in the return or in a stat ement attached to the return.” I.R.C. §

6662(d)(2)(B). Furthermore, I.R.C. § 6664(c)(1) provides that “[no] penalty shall be imposed . . .

with respect to any portion of an underpayment if it is shown that there was a reasonable cause for

such port ion and . . . the taxpay er acted in good faith with respect to such portion.” I.R.C. §

6664(c)(1). 17 Finding a lack of substantial authority to support the Stanfords’ reduction of Guardian19

Bank’s 1989 and 1990 subpart F income by the deficits in earnings and profits of Guardian Services

and S t anford Financial, the Tax Court refused to set aside the accuracy-related penalty imposed

against them by the Commissi o ner. On appeal, the Stanfords request a reversal of this penalty,

contending either that (1) their tax treatment of the deficits was supported by substantial authority,

or (2) any substantial understatement of t ax resulting from this treatment was due to a reasonable

cause and supported by good faith behavior on their part.

We need not resolve the Stanfords’ “substantial authority” argument because we accept their

alternative one

— that the underp a yment of tax resulting from their treatment of the deficits of

Guardian Services and Stanford Financial was due to a reasonable cause and supported by good faith

act io ns. We accordingly vacate the accuracy-related penalty imposed against them. S ee I.R.C. §

6664(c)(1). According to the applicable regulations, “the extent of the taxpayer’s effort to assess [his]

proper tax liabilit y” is “[g]enerally[] the most important factor” in determining reasonable cause and

good faith. Treas. Reg. § 1.6664-4(b); s ee Str eber v. Commissioner , 138 F.3d 216, 223 (5th Cir.

1998) (citing Heasley , 902 F.2d at 385). Additional “[c]ircumstances that may indicate reasonable

cause and good faith include [(1)] an honest misunderstanding of fact or law that is reasonable in light

o f all t he facts and circumstances, including the experience, knowledge, and education of the

taxpayer,” Treas. Reg. § 1.6664-4(b), and (2) reliance on the advice of a professional tax advisor “if,

under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith,” id. ;

Reser v. Commissioner , 112 F.3d 1258, 1271 (5th Cir. 1997).

Here, the Commissi o ner acknowledges that the Stanfords relied on the advice of attorney

Kenneth Allen, an expert in international banking law, in setting up their Montserrat offshore banking

enterprise. Nothing in the record indicates that the heeded advice, which called for the utilization of20

a tripartite corporate structure consisting of Guardian Bank, Guardian Services, and Stan f ord

Financial, had as a purpose the facilitation of tax avoidance. More importantly, the Commissioner

does not dispute th at t he Stanfords’ 1990 tax return reporting the income and deficits from this

enterprise was prepared by Harry Failing (“Failing”), an expe rienced CPA who (1) served as the

Stanfords’ principal tax advisor and regular tax-return preparer, and who (2) prior to starting his own

extensive tax compliance practice, worked for Price Waterhouse in a n o ffice where he alone

comprised “the international tax department.” At trial, Failing testified that before preparing the

Stanfords’ return he (1) reviewed the business and tax records of Guardian Bank, Guardian Services,

and Sta n ford Financial; (2) studied the language of section 952(c)(1)(C), the section’s legislative

history, and what he considered to be the applicable regulations; and (3) concluded that the Stanfords

could deduct under section 952 the deficits in earnings and profits of Guardian Services and Stanford

Financial aga inst Guardian Bank’s subpart F income on their 1990 tax return. On appeal, the

Commissioner does not allege that the Stanfords failed to advise Failing of any facts material to the

determination of their 1990 tax liability or limited the scope of his research in any way. See Treas.

Reg. § 1.6664-4(c)(1).

Although Mr. Stanford stated at trial that he was “not an unsophisticated taxpayer,” it is not

reasonable under the above-stated facts to expect that the Standfords could “monitor [Failing,] [their]

independent advisor[, ] t o make sure [he] [conducted] sufficient research to give knowledgeable

advice.” Mauerman v. Commissioner

, 22 F.3d 1001, 1006 (10th Cir. 1994). “It is for exactly this

reason that many intelligent investors hire independent, educated experts to advise them,” particularly

with respect to arcane matters of tax law such as those at issue in this case. Id. (emphasis added);

see also Chamberlain v. Commissioner , 66 F.3d 729, 733 (5th Cir. 1995) (“To require the taxpayer18 As is evident from our discussion above, we do not accept the Commissioner’s contention

that the Stanfords waived their reasonable-cause-for-underpayment argument by failing to adequately

raise it in the court below. Noting that “to be preserved, an argument must be pressed, and not

merely intimated,” In re Fairchild Aircraft

, 6 F.3d 1119, 1128 (5th Cir. 1993) (citation omitted), the

Commissioner insists that the Stanfords’ “passing references” to the reasonable cause argument in

the Tax Court were insufficient to preserve this argument for review, especially given the fact that

t he Tax Court failed to rule on it. Unfortunately for the Commissioner, he reads the above-cit ed

language i n F airchild out of context. In particular, we highlight the sentences both preceding and

following the language that the Commissioner isolates:

Citing cases that may contain a useful argument [( i.e.

, by implication)]

is simply inadequate to preserve that argume nt for appeal ; to be

preserved, an argument must be pressed, and not mere ly int imated.

In short, the argument must be raised to such a degree that the tri al

court may rule on it.

21 to challenge the [expert], to seek a ‘second opinion,’ or to try to monitor [the expert] on the

provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed

expert in the first place.”) (quoting United States v. Boyle

, 469 U.S. 241, 251, 105 S.Ct. 687, 692-

93, 83 L.Ed.2d 622 (1985)). Here, Failing satisfied himself that the deficits of Guardian Services and

Stanford Financial could offset Guardian Bank’s subpart F income under section 952(c)(1)(C), and

the Stanfords had reasonable cause, b ecause o f his extensive expertise in the field of international

taxation, to trust his advice. Although Failing’s legal interpretation of section 952(c)(1)(C) turned

out ultimately to be incorrect — and indeed gave rise to a substantial understatement of tax on the

Stanfords’ 1990 joint return

— we find that the Stanfords’ reliance on that interpretation constitutes

“reasonable cause” for purposes of precluding the penalty imposed against them for that

understatement. S ee Boyle

, 469 U.S. at 250, 105 S.Ct. at 692 (“‘[R]easonable cause’ is established

when a taxpayer shows that he reasonably relied on the advice of an accountant or attorney that it

was unnecessary to file a return, even when such advice turned out to have been mistaken.”).

Accordingly, the Tax Court’s affirmance of the Stanfords’ accuracy-related penalty is reversed. 18Id. at 1128 (quotations omitted) (emphasis added).

Here, the Stanfords did considerably more than present their reasonable cause argument by

implication through case cites; they “identified [it] by name,” and even “advocated [it].” I d. For

instance, in their original petition to the Tax Court, the Stanfords asserted error i n the

Commissioner’s finding that they “substantially understated income without substantial authority and

without reasonable cause .” (emphasis added). In their trial memorandum, the Stanfords listed five

distinct issues, one of which was “[w]hether [they] substantially understated income without

substantial aut hority and wi thout r easonable cause

, and are liable for the penalty under I.R.C. §

6662(a).” (emphasis added). During opening arguments, (1) the Stanfords’ counsel (a) stated that

“the issues in controversy in this case [include]

. . . whether [the Stanfords] substantially understated

income without substantial authority and without reasonable cause

, a nd (b) averred that “the

accuracy-related pen alt y . . . does not apply here [because] the evidence will show that [the

Stanfords] exercised due care in the development of the position they elected

. . . [on] their return;”

and (2) the C o mmissioner’s counsel, recognizing reasonable cause to be an issue, contended that

“[the Stanfords made] no reasonable attempt to comply with the law.” (emphasis added). As

discussed above, at trial the Stanfords’ counsel elicited testimony (1) from Stanford establishing that

he regularly relied on tax practitioners, particularly Failing, for tax advice and return preparation; and

(2) from Failing establishing his (Failing’s) (a) expertise in tax law and (b) the reasoning he followed

to reach the tax position advanced on the Stanfords’ joint return. Indeed, such evidence could only

be relevant to the reasonable cause issue, as the only other issue in dispute concerning the penalty

—

i.e.

, whether substantial authority existed for the Stanfords’ tax position

— would be resolved, had

we reached it, under an objective standard, see Treas. Reg. § 1.6662-4(d)(2); in other words, the

Stanfords’ reliance on Failing’s expertise would be immaterial to resolving the “substantial authority”

issue. Finally, the parties post-trial pleadings continued to address the reasonable cause issue. The

Stanfords’ post-tri al brief listed the issue as contested, while the Commissioner’s argued that a finding

of reasonable cause was unwarranted due to the Stanfords’ level o f education and investment

experience. In their post-trial reply brief, the Stanfords responded:

[The] Commissioner ignor es t he engagement of a highly qualified

Certified Public Accountant in reviewing case law, the Regulations, the Internal Revenue Code and t he legislative history. These facts and circumstances are

replete in the trial record and adequately cited in the original Brief for Petitioner. The Commissioner

relies solely on the fact that Mr. Stanford and his Certified Public Accountant were highly educated

and so phisticated as evidence of Petitioners’ bad faith and unreasonableness. The Commissio ner

offered no evidence through testimony that the Taxpayers did not act in good faith as provided by

the Internal Revenue Code. The record is replete with Taxpayers’ good faith and r easonable cause

and the relevant facts supporting this view are adequately cited in the original Brief for Petitioner.

(emphasis added). In his appellate brief, the Commissioner acknowledges that questioning Stanford

about his “education and level of business sophistication.

. . went to the issue of reasonable cause.”

Under these circumstances, we find that (1) the Stanfords sufficiently pressed their reasonable

cause argument in the Tax Court — i .e.

, by raising it in their pleadings and introducing relevant

evidence at trial

— and thus did not waive it, see Sealy Power, Ltd. v. Commissioner , 46 F.3d 382,

22398-99 (5th Cir. 1995) (although trial focused on a different issue, issue of non-ded uctibility of

certain expenses not waived by Commissioner where Final Partnership Administrative Adjustment

disallowed expenses; Commissioner raised non-deductibility issue in trial memorandum; partnership

addressed the issue in its o wn trial memorandum; and Commissioner mentioned issue in opening

argument); United States v. Blakeman

, 997 F.2d 1084, 1093-94 (5th Cir. 1992), cert. denied

, 510

U.S. 1042, 114 S.Ct. 687, 126 L.Ed.2d 654 (1994) (although taxpayer did not raise I.R.C. § 7520

issue at trial, issue not waived where taxpayer raised it in proposed findings of fact and conclusions

of law and resolution of issue did not require presentation of evidence); Laney v. Commissioner

, 674

F.2d 342, 350-351 (5th Cir. 1982) (although taxpayers failed to plead recapture argument before the

Tax Court, issue not waived because taxpayers included it in their trial memorandum to the court);

(2) the Tax Court was capable of addressing the Stanfords’ argument when ruling on their claims;

and (3) the Tax Court’s failure to do so does not operate to the Stanfords’ detriment, see Laney

, 674

F.2d at 351 (“Although the Tax Court did not address the issue, its failure should not unfairly penalize

the [taxpayer].”).

23 III.

In summary, we hold that (1) because Guardian Services is not a qualified chain member with

respect to Guardian Bank, the Tax Court correctly sustained the Commissioner’s determination that

the Stanfords may not offset Guardian Bank’s subpart F income by the deficits in earnings and profits

of Guardian Services; (2) because the deficits in earnings and profits of Stanford Financial are not

attributable to the same qualified activity to which Guardian Bank’s subpart F income is attributable,

the Tax Court correctly sustained the Commissioner’s determination that the Stanfords may not offset

Guardian Bank’s subpart F income by the deficits in earnings and profits of Stanford Financial; and

(3) because the Stanfords had reasonable cause and acted in good faith with respect to the

understatement of tax resulting from the disallowance of the aforementioned offsets, the Tax Court

incorrectly sustained the Commissioner’s determination that the Stanfords are liable for an accuracyrelated penalty under section 6662(a). Accordingly, we VACATE the Stanfords’ underpayment of24

tax penalty and AFFIRM the Tax Court’s judgment in all other respects.BENAVIDES, J., concurring in part and dissenting in part:

I agree with my colleag ues t hat Guardian Services is not a qualified chain member with

respect to Guardian Bank and that Guardia n Services’ deficits therefore cannot be used to offset

Guardian Bank’s subpart F income for tax purposes. I also agree that the Stanfords had reasonable

cause and acted in good faith with respect to the understatement of their 1990 tax li abilit y and

consequently should not be assessed an accuracy-related penalty. I concur in the majority’s reasoning

in reaching those conclusions and write separately only to voice my dissent on the issue of whether

the deficits of Stanford Financial were “attributable to” the qualified activity of Guardian Bank within

the meaning of 26 U.S.C. § 952(c)(1)(C)(i). I would hold that Stanford Financial’s deficits were

attributable to the qualified activity of Gua r dian Bank, and that the Stanfords therefore should be

allowed to offset the income of the latter by the losses of the former.

It is undisputed that Stanford Financial is a qualified chain member with respect to Guardian

Bank, that Stanford Financial generated deficits of $154,474 during the 1990 tax year as a result of

providing administrative and management services to Guardian Bank, and that those services

supported a “qualified activity” (banking) within the meaning of 26 U.S.C. § 952(c)(1)(B)(iii). Thus,

the only question before us is whether those deficits are attributable to that qualified activity. The

majority defines “attributable to” to mean “due to, caused by, or generated by”--a definition I accept.

I do not, however, believe it is significant that the Stanfords say Stanford Financial’s deficits were

“driven solely by” and “directed solely to” Guardian Bank’s qualified activity rather than using the

words “due to, caused by, or generated by.” It seems clear that their point is that administrative and

management services are “attributable to” the activity they support and this seems to me, as a matter

of the plain

meaning o f t he phrase, to be true. The majority seems to be construing the phrase26

“attributable to” so strictly as to implicit ly require that deficits offset pursuant to § 952(c)(1)(C)(i)

be generated by an entity itself engaged in a qualified activity--a view which I believe misreads the

provision. Because I believe that the costs of administrative and management services provided in

support of a qualified activity are caused by a qualified activity, I would find that the Stanfords should

be allowed to use the deficits of Stanford Financial to offset the profits of Guardian Bank for

purposes of computing their 1990 tax liability.