FI L ED U.S. COURT OF APPEAL S EL EVENTHCI RCUI T AUGUST 11, 2010 J OHN L EY CL ERK [DO NOT PUBLISH] IN THE U

NITED STATE S COURT OF APPEALS FOR THE ELE VENTH CIRCUIT

__ __ __ __ __ __ __ __ __ __ __ __ No. 1 0- 10 44 7 Non -Arg um en t Ca le nd ar

__ __ __ __ __ __ __ __ __ __ __ __ Agen cy No. 8 81 8- 08
DONALD W . WALLIS, KATHRYN W . WALLIS, ll ll ll ll ll ll ll ll ll ll l Pet it io ne rs , ve rs us COMM ISSI ONER OF THE INTERNAL REVENU E SERVICE, ll ll ll ll ll ll ll ll ll ll l Res po nd en t.

__ __ __ __ __ __ __ __ __ __ __ __ Pet it io n fo r Rev ie w of aDeci si on fro m th e Uni te d S ta te s Tax Co urt

__ __ __ __ __ __ __ __ __ __ __ __ (Au gu st11 , 20 10 ) Befo re CARNES, HULL andMARCUS , Cir cu itJu dg es . PER CURI AM:Don al d W. W al li s an d h is wife Kath ryn W. W al li s ap pe al pro se t he Tax

Co urt’s o rd er fi nd in g an i nc om e ta x d efi ci en cy of $ 27 ,30 5 fo r 20 05 an d a n accu racy-rela te d p en al ty of $5 ,46 1, p ur su an t t o 2 6 U.S.C. § 66 62 . After r ev ie w, we affi rm . 1 I. BACKG ROUND Fro m 19 91 un ti l 2 00 3, Do na ldW al li s, a t ax lawyer, was an equi ty part ne r at th e la w firm

of Ho ll an d & Kni gh t (“ H&K”). The tax de fic ie nc y rel at es to th e W al li se s’ fai lu re t o re po rt $ 80 ,00 0 i n “ Sch edul e C” p aym en ts H&K m ad e to Don al d Wall is in 20 05 . The i ss ue is whet he r th es e Sch edul e C p aym en ts were ta xabl e as ord in ary in co m e o r as lo ng -te rm cap it al ga in s. Inacco rd an ce wi th two pa rtn ers hi p a gr eem en ts W al li s en te redwith H& K, whe n h e wit hd rew, h e wou ldrece iv e th e v al ue of h is partn ers hi p i nt eres t i n t he firm . The p art ne rs hi p a gr eem en t s ta te d t ha t an equi ty part ne r’s in te res t was th e va lu e o f hi s capi ta l ac co un t an d t he va lu e o f hi s “ Sch edul e C u ni ts .” Und er Sc he du le C of

th e p art ne rs hi p a gr eem en t, H&K awar de d e ach equi ty pa rtn er fi fty Sche du le C un it s p er y ear, v al ue d a t $ 30 0 p er u ni t o r $1 5,0 00 pe r We reviewthe Tax Court’s leg al conc lusions de novo and its factua l findings unde r the 1 clea rly err oneous standar d, even when, as he re, those f actua l findings a

re ba sed on a f

ully stipulated rec ord. F la. Hosp. Trust F und v. Comm’r, 71 F.3d 808, 810 (11th Cir. 1996). A findingof fa ct is clea

rly err oneous if it is not supported by substantial evidence and a r eview of the re cord a s a whole le aves us with “the definite a nd firm conviction that a mistake has bee n committed.” Cree l v. Comm ’r, 419 F .3d 1135, 1139 (11th Cir. 2005) (quotation marks omitted). 2y ear. Th e v al ue of the se un it s g en eral ly w as pa y ab le in qu art erl y in st al lm en ts aft er a p art ne r di ed , bec am e d is ab le d, was ex pe ll edor turne d 6 8 years o ld . H&K di d
no t s etasi de fun ds co rrel at in g t o t he se Sch edul e C u ni ts . On M arch 19 , 20 03 , W al li s wi th dr ew fro m H&K. At th e ti m e, W al li s’s cap it al acco un t b al an ce was $9 8,1 61 .75 an d h is Sch edul e C uni ts were v al ue d a t $2 40 ,00 0. Be gi nn in g i n 2 00 3, Wall is rece iv edqu art erl y pa ym en ts of $ 28 ,18 0.1 5, $8 ,18 0.1 5 o f whi ch was re tu rnof h is cap it al acco un t an d $ 20 ,00 0 o f whi ch was pa ym en t fo r hi s Sc he du le C un it s. In 20 05 , H&K m ad e fo urpa ym en ts , to ta li ng $8 0,0 00 , forW al li s’s Sc he du le C un it s. H&K i ss ue d t o Wall is , andfil edwith t he IRS, a F orm

10 99 -MI SC re fle ct in g t he Sch edul e C p aym en ts as “ no ne m pl oyee co m pe ns at io n” an d d educ te d t he se am ou nt s fr om it s o wn i nc om e o n i ts pa rtn ers hi p re tu rn . The Wall is es di d n otrep ort t he se Sch edul e C p aym en ts as in co m e o n t he ir 2 00 5 t ax return. Bas edon th e p art ie s’ st ip ul at edfact s an d the do cu m en ta ry ev id en ce, the Tax Co urt fo un d t ha t t he $8 0,0 00 in Sch edul e C p aym en ts were re ti rem en t p aym en ts pa idto W al li s as a wit hdrawi ng pa rtn er as part o f th e li qu id at io n o f hi s p artne rs hi p in te res t. As s uc h, t he Tax C ou rt c on cl ud edth atth e Sch edul e C p aym en ts were

“ gu aran te edpa ym en ts ” u nd er 2 6 U.S.C. § 73 6( a)(2 ) to be tax edas o rd in ary in co m e p ur su an t t o 2 6 U.S.C. § 70 7( c).
3II . DISCUSSI ON

A. Gua ra ntee d Pay m ents v. Pa rtne rs hi p Dis tri buti on s On ap pe al , th e Walli se s ar gu e th atth e Tax Co urt wro ng ly chara ct eri zedth e $8 0,0 00 in Sch edul e C p aym en ts as “ gu aran te edpa ym en ts ” an d t ha t t he y are pr op erl y ch arac te riz edas “ pa rtn ers hi p d is tri bu ti on s” un de r 26 U.S.C. §§ 73 1 a nd 73 6( b) (1 ), whi ch are t ax edas l on g- te rm cap it al ga in s p ur su an t t o 2 6 U.S.C. § 1 22 2( 3)
. Und er § 73 6 o f th e ta x c od e, pa ym en ts m ad e “ in li qu id at io n o f th e in te res t of a ret iri ng pa rtn er” are ch arac te riz edth ree d iff eren t ways. See 2 6 U.S.C. § 7 36 (a) & (b) . Gener al ly, a p aym en t m ad e in ex ch an ge forth e in te res t o f a ret iri ng pa rtn er ar e co ns id ered : (1 ) a “ di st rib ut iv e sh are” if i t was “ de te rm in edwith reg ardto th e in co m e o f th e p art ne rs hi p” ; o r (2 ) a “ gu aran te edpaym en t” un de r § 7 07 (c) i f itwas “ de te rm in edwitho utreg ardto th e in co m e o f th e p art ne rs hi p” ; o r (3 ) a “ di st rib ut io n b y

th e p art ne rs hi p a ndno t as a di st rib ut iv e sh are o r gu aran te ed pa ym en t,” i f itwas “ m ad e in ex ch an ge forth e in te res t o f su ch pa rtn er i n pa rtn ers hi p p ro pe rty.” Id. § 73 6( a)(1 )-(2 ), (b )(1 ). 2

I f the pa rtnership is a pe rsonal ser vices pa rtnership a

nd the re tiring pa

rtner is a g ener al 2 partne r, then amounts paid for “unr ealized re ceiva bles” a nd “g ood will” are not considere d pay ments made in exchang e for an intere st in partnership prope rty . I d. § 736(b)( 2).

4The Tax C ou rt f ou ndth e Sch edul e C p aym en ts were “ gu aran te ed ” pa ym en ts . If th e p aym en t i s ch arac te riz edas a“ gu aran te edpaym en t,” t he n 2 6 U.S.C. § 7 07 (c) p ro vi de s t ha t i t i s t ax edas o rd in ary in co m e to th e p art ne r, pu rs ua ntto 26 U.S.C. § 6 1( a), an d t he pa rtn ers hi p m ay de du ctth e p aym en t as a tra de or b us in es s ex pe ns e, pu rs ua ntto 26 U.S.C. § 1 62 (a). 2 6 U.S.C. § § 7 07 (c) & 73 6( a)(2 ); s ee al so Treas . Reg . § 1 .70 7- 1( c) (n ot in g t ha t g ua ran te edpa ym en ts are or di na ry in co m e to th e p art ne r). 3 Howev er, the W al li se s cl ai m th atth e p aym en ts were p art ne rs hi p di st rib ut io ns . If a pa ym en t i s ch arac te riz edas apartn ers hi p d is tri bu ti on , itis tre at edli ke a di st rib ut io n i n c om pl et e li qu id at io n u nd er 2 6 U.S.C. § § 7 31 , 73 2 a nd 75 1. Trea s. Re g. § 1.7 36 -1 (a)( 2) . As su ch , th e p art ne r rec og ni zes a ta xabl e g ai n on ly to t he ex te ntth atth e am ou ntrece iv edex ceed s h is ad jus te d b as is in th e pa rtn ers hi p p ro pe rty. 26 U.S.C. § 73 1( a)(1 ). Becaus e an y ga inreco gn iz edun de r § 7 31 is tre at edli ke a ga in forth e sa le or e xc ha ng e o f a p artne rs hi p i nt eres t, i t i s
Section 707 g overns the tax conseque nces of transac tions between a

partne r and his 3 partne rship when the pa

rtner is not ac ting in his ca pacity as a pa rtner. 26 U .S.C. § 707(a). Unde r § 707(c) , if pay

ments to a partne r for

service s or the use of

capital a re ma de without reg ard to the partne rship’s income, those pa y ments “shall be c onsidered a s made to one who is not a member of the pa rtnership” for pur

poses of 26 U.S.C. § 61(a) , g overningthe re cognition of income, and 27 U.S.C. § 162(a), g overningdeductions for trade or business expenses. I d. § 707(c) . Given that the tax code under

cer tain circ umstances tre ats transa ctions betwee n a par tner a nd the partne rship as betwe en a non- partne r and the partne rship, we r ejec t the Wallis es ar gument that Subchapter

K provides the only

rules g overningthe income tax treatment of suc h transac tions.

5co ns id ereda ga in fro m th e sa le or e xc ha ng e o f a cap it al ass et . Id. § § 7 31 (a), 7 41
. The refo re, i f th e p art ne r ho ld s h is pa rtn ers hi p i nt eres t fo r m or e th anon e y ear, h is ga in wil l b e ta xe d a s a l on g- te rm cap it al ga in . 26 U.S.C. § 1 22 2( 3) . Und er the se ci rcu m st an ces , th e rem ai ni ng pa rtn ers are n otpe rm it te d ade du ct io n. Trea s. Re g. § 1 .73 6- 1( a)(2 ). B. Sche dul e C Pay m ents Here, t he re was am

pl e ev id en ce i n t he pa rtn ers hi p a gr eem en ts an d s ti pu la te d fact s t o s up po rt t he Tax C ou rt’s fi nd in g tha t Do na ldW al li s’s Sc he du le C pa ym en ts were g ua ran te edpa ym en ts . Und er the H&K pa rtn ers hi p a gr eem en ts , 4 Sch edul e C uni ts were awar de d e ach y ear i n fi xe d a m ou nt s ($ 15 ,00 0 p er y ear) an d ul ti m at el y

pa idto th e wit hd rawi ng pa rtn er wi th ou t re ga rdto th e p art ne rs hi p’s in co m e o r th e p artne r’s pa rti cu la r equi ty share. H&K co ns id eredth e Sch edul e C pa ym en ts to be ad di ti on al tax ab le co m pe ns at io n, as refl ect edinth e 2 00 5 F orm 10 99 -MI SC H&K i ss ue d t o Wall is an d fi le d wi th th e IRS
. In a dd it io n, H&K 5
The Wallises’ ar gument that the Tax Court failed to addre ss whether Schedule C 4 pay ments were“pay

ments made in liquidation of the intere st of a re tiring pa rtner” is without merit. Be cause the Tax Court determined that the Sche dule C pay ments were guara

nteed pay ments, it necessa

rily conclude d that those pay ments were pay

ments made in liquidation of the interest of a

retiringpartne r. See 26 U .S.C. § 736(a)(2) (def ining guara

nteed pa y ments as a subset of pay

ments made in liquidation of the intere st of a re tiring or dece ased pa

rtner)
. Although the Wallis es sug g est the par ole evidenc e rule prec luded the Tax Court from 5 consideringH& K’s subjec tive beliefs, they provide no a

rgument or citations to authority on this point. Theref

ore, w e do not addr ess it. See Gre enbria r, Ltd. v. Cit y

of Alaba ster, 881 F .2d 1570, 1573 n.6 (11th Cir. 1989) (de clining to c onsider issue identified in brie f, but not elaborated upon 6de du ct edth e am ou ntof the Sch edul e C p aym en ts (bu t n otth e am ou nt s p ai d fo r

W al li s’s capi ta l ac co un t) f ro m it s o wn i nc om e. See M il le r v. C omm ’r, 37 6 F .2d 25 5, 2 56 -5 7 (5 th Cir . 19 67 ) (n ot in g t ha t a p art ne rs hi p’s d educ ti on of p aym en ts as ex pe ns es was e vi de nc e th atpa ym en ts sh ou ldbe ch arac te riz edas g ua ran te ed pa ym en ts ). 6 Inad di ti on , th e Tax Co urt d idno t err in co nc lu di ng th at , whi le Sch edul e C pa ym en ts were m ad e in ex ch an ge forW al li s’s i nt eres t i n t he pa rtn ers hi p g en eral ly, th ey were n otm ad e in ex ch an ge forhi s i nt eres t i n “ pa rtn ers hi p p ro pe rty,” and , th us , were n ota pa rtn ers hi p d is tri bu ti on . Not ab ly, th e p art ie s’ st ip ul at io n re ferr ed 7 to th e Sch edul e C u ni ts as a“be ne fitor e nt it le m en t.” Th atbe ne fitco ul d b e fo rfei te d i f a p art ne r vo lu nt ari ly leftth e p art ne rs hi p. Be cau se th ey co ul d b e fo rfei te d, H&K d idno t co ns id er Sc he du le C un it s t o b e in co m e to th e p art ne rs in th e y ear t he y

were awar de d. Fu rth erm or e, H&K di d n otsetasi de fun ds
co rres po nd in g t o fu tu re Sc he du le C pa ym en ts . Fin al ly, as th e Tax Co urt p oi nt ed

in argument on the merits); F ed. R. App. P. 28(a) (9)( A). Dec isions of the former

Fifth Circuit on or be fore September 30, 1981 a re binding 6 prec edent in the Ele venth Circuit. Bonne r v. City of Prichar d, 661 F.2d 1206, 1209 ( 11th Cir. 1981) (e n banc)
. Be cause the Tax Court determined that the pa y ments werenot in ex chang e for 7 partne rship proper

ty , it did not need to addre ss the subsidiary question of whethe r the pa y ments wer e made in consideration for unre alized rec eivables or g oodwill. 7ou t, the pa ym en ts ap pe aredto be de si gn edas abe ne fitsi m il ar t o aret ire m en t

be ne fit
. Co nt rary to t he W al li s’s as se rti on , th ere i s s uf fic ie ntev id en ce t o s up po rt t he Tax Co urt’s fi nd in g t ha t t he Sch edul e C p aym en ts , rathe r th anbe in g a m ou nt s p ai d fo r W al li s’s i nt eres t i n fi rm pro pe rty, were ess en ti al ly a reti rem en t b en efi t. The H&K pa rtn ers hi p a gr eem en ts pro vi de d t ha t (1 ) el ig ib il it y forSch edul e C p aym en ts was , at l eas t i n p art , ti edto a partn er turni ng 68 y ears ol d; (2) Sch edul e C ob li ga ti on s co ul d b e fu nd edth ro ug h aqu al ifi edde fin edbe ne fitpl anth atwou ld pa y bo th Sch edul e C an d m on th ly reti rem en t b en efi ts ; (3 ) if a de fin edbe ne fitpl an was est ab li sh ed , fun ds pre vi ou sl y setasi de to pa y

m on th ly reti rem en t b en efi ts un de r a d is co nt in ue d re ti rem en t p la n c ou ldbe co nt rib ut edto th e d efi ne d b en efi t pl an ; an d (4 ) th e sa m e m on th ly paym en t l im it s wer e p la cedon bo th ret ire m en t be ne fit s an d S ch edul e C p aym en ts . The W al li se s co un te r th atth ere was “ su ffi ci en t ev id en ce t o s up po rt the
co nc lu si on ” th atth e “ actua l o bjec t” of t he tra ns act io ns was Wall is ’s in te res t i n pa rtn ers hi p p ro pe rty. H owe ve r, th e Walli se s d o n otpo in t t o a ny part ic ul ar ev id en ce i n t he reco rdli nk in g the pa y m en ts to W al li s’s i nt eres t i n a ny pro pe rty he ldby H &K. In a ny even t, ev enass um in g t he W al li se s wer e co rrec t, thi s d oe s no t s ho w th atth e Tax Co urt’s co nt rary con cl us io n was cle arl y erro ne ou s. See
8And ers onv. Be ss em er Ci ty, 47 0 U.S. 5 64 , 57 4, 1 05 S. Ct. 1 50 4, 1 51 1 (1 98 5)

(ex pl ai ni ng th ata fact fin de r’s ch oi ce b etween two pe rm is si bl e v ie ws ca nn otbe cl earl y erro ne ou s)
. 8 C. Accur ac y- Rela ted Pen al ty The W al li se s ch al le ng e th e Tax Co urt’s i m po si ti on of an a ccu racy-rela te d pe na lty pu rs uantto 26 U.S.C. § 6 66 2( a). Sec ti on 66 62 im po se s a t wen ty perce nt pe na lty onth e am ou ntof a ny un de rp aym en t t ha t i s t he res ul t o f, in te r al ia , (1)

“ [n ]egl ig en ce o r di sr eg ardof rul es or r eg ul at io ns ” o r (2 ) “ [a]ny subs ta nt ia l
un de rs ta te m en t o f in co m e ta x.” 26 U.S.C. § 6 66 2( b) (1 )-(2 ). Howev er, n o p en al ty is im po se d o n a ny po rti on of a n u nd erp aym en t fo r whi chth e ta xp ay er h as

“ reas on ab le cau se ” an d “ act edingo odfai th .” 26 U.S.C. § 6 66 4( c)(1 ). Rea so nabl e cau se an d g oo d fa it h m ay be in di cat edwher e th e ta xp ay er h as “ an ho ne stm is un de rs tand in g o f fac t o r la w th atis reas on ab le in li gh t o f al l o f th e fac ts
an d c irc um st an ces , in cl ud in g t he ex pe rie nc e, kn owl ed ge , andeduc at io n o f th e ta xp ay er.” Trea s. Re g. § 1.6 66 4- 4( b) (1 ). Whe re the un de rp aym en t re la te s t o a n it em refl ect edon th e return o f a p as s- th ro ug h e nt it y , su ch as apa rtn ers hi p, t he

The Wallises contend that the Tax Court erre d by decliningto addre ss whether the 8 Commi ssioner had the burden of production as to the de ficienc y , pursuant to 26 U.S.C. § 6201(d), a

nd the burde n of proof

, pursuant to 26 U.S.C. § 7491(a) . Any err or in this reg ard was ha rmless g iven that the Commissi oner a ctually satisfied both burdens ba sed on the stipulated fac ts and the par

tnership agree ments. 9pa rtn ers hi p’s t reat m en t o f th atit em is a rel ev an t co ns id erat io n wh ende te rm in in g whe th er the tax pa y er ac te d wi th reas on ab le cau se an d i n g oo d fa it h. Trea s. Re g. § 1 .66 64 -4 (e). Th e Co m

m is si on er h as th e b ur de n o f pr oduc ti on with re sp ectto a ta xp ay er’s l iabi li ty for a p en al ty. 26 U.S.C. § 7 49 1( c). 9 The W al li se s d o n otch al le ng e th e fi nd in g t ha t t he ir u nd erp aym en t was th e res ul t o f ne gl ig en ce an d d is reg ardof t he tax co de or r eg ul at io ns an d was a subs ta nt ia l u nd ers ta te m en t. In st ead , th ey arg ue th atth ey

ha d “ reas on ab le cau se ”
an d “ act edin go odfai th ” p ur su an t t o § 66 64 (c)( 1) . W e rev ie w forcle ar erro r th e Tax Co urt's factua l fi nd in g wh ethe r anad di ti on al tax is du e as a pe na lt y . Patt ers on v. Co m m ’r, 74 0 F .2d92 7, 9 30 (11 th Cir . 19 84 ). Sect io n 6 22 2 p ro vi de s a m ean s fo r a p art ne r to in fo rm th e IRS when hi s own tre at m en t o f a p artne rs hi p i te m “ is (orm ay

be ) in co ns is te ntwith t he tre at m en t of th e it em on th e p artne rs hi p re tu rn .” 26 U.S.C. § 6 22 2( b) (1 ). Giv enth atDon al d W al li s h as 35 y ears of e xp eri en ce as a ta x l awy er, the Tax C ou rt r eas on ab ly cou ld
co nc lu de th atW al li s s ho ul d h av e b een aware t he re were in co ns is te nc ie s b etween (1 ) hi s n otrep orti ng th e Sch edul e C p aym en ts at a ll to th e IRS an d (2 ) th e in co m e Fo rm 10 99 he rece iv edfro m

H&K. See Trea s. Re g. 1 .66 64 -4 (b )(1 ). The Wallises' contention that the Tax Court failed to impose the burde n of produc tion 9 upon the Commiss ioner a s to the penalty is without m erit. The T ax C ourt stated in its opinion that the Commiss ioner ha d the burde n of produc tion and then conc luded that the Commissi oner had met that burde n. 10The W al li se s ar gu e th atth ey ha d n o o bl ig at io n t o re po rt u nd er § 62 22 be cau se th ei r in co ns is te nc y was wi thH&K’s Form

10 99 -MI SC, n otwith H& K’ s 20 05 return. No ne th el es s, § 62 22 requi res pa rtn ers to rep ort ev enpo ss ib le in co ns is te nc ie s t o t he IRS i f th ey wis h t o treatpa rtn ers hi p i te m s d iff eren tl y on th ei r own return fr om

th e p art ne rs hi p’s re tu rn . And , W al li s’s re cei ptof t he Fo rm 10 99 -MI SC s ho ul d h av e al ert edhi m th atth e Sch edul e C p aym en ts wou ldbe refl ect edas d educ ti on s o n H& K’ s p art ne rs hi p re tu rn . Rath er tha n a le rti ng th e IRS to W al li s’s (n ow- ab an do ne d) th eo ry th atth e p aym en ts di d n otrep res en t t ax ab le in co m e, th e Walli se s m ad e n o m en ti on of t he Sch edul e C p aym en ts when th ey fil edth ei r return. Un de r th e ci rcu m st an ces , th e Tax Co urt d idno t cl earl y err i n fin di ng th atth e Walli se s d idno t h av e rea so nabl e cau se forth e u nd erp aym en t o r actin go odfai thwith re sp ectto it
. AFFIRMED.

11