CORRECTED T.C. M em o . 2 0 2 1 -1 3 5

UNITED STATES TAX COURT
FAB HOLDINGS, LLC, Pet it i on er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t FRANK BERRITTO AND ESTATE OF DANA BERRITTO, DECEASED,

FRANK BERRITTO, EXECUTOR, Pet it i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 2 1 9 7 1 -1 7 , 2 2 15 2 -1 7
. Fi l edNo vem b er 3 0 , 2 02 1
.

Kev an P. M cLau g h l i n , fo r p et i t i on ers . J effreyL. Hei n k el , Heat her K. M cCl u s k ey , an d M in Yo u ng Ch an , fo r res p o n d en t .

M EM ORANDUM OPINION COPELAND, Ju d g e: Th e cas es b efo re t h e Co u rt are co n s o l i d at edfo r p u rp os es o f b ri efi n g an do p i ni on . Th e cas es were s ub m i tt edt o t h e Co u rtfu l l y Served 01/27/22-2
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[* 2 ] s t ip u l at edp u rs u an t t o Ru l e 1 2 2
. 1 Th e In t ern al Rev en u e Serv ice (IRS) d et erm i n edd efi ci en ci es an dp en al t i es fo r FAB Ho l di n g s , LLC (FAB), as fo l l o ws : Tax y ear en d i ng 3 /3 1 Defi ci en cy Pen al ty sec. 6 6 6 2 (a) 2 01 0 $ 2 3 ,5 7 4 $ 4 ,7 1 5 2 01 1 8 ,4 9 0 1 ,6 9 8 2 01 2 3 4 ,0 9 0 6 ,8 1 8 2 01 3 1 9 ,2 7 6 3 ,8 5 5 Th e IRS d et erm in edd efi ci en ci es an dp en al t i es fo r Fran kBerri t t o an dDan a Berri t t o , Deceas ed , as fo l lo ws :
Year Defi ci en cy Pen al ty s ec. 6 6 62 (a) 2 01 0 $ 6 4,1 0 2 $ 1 2,8 2 0 2 01 1 7 8 ,0 4 4 1 5 ,6 0 1 2 01 2 1 1 3,3 8 9 2 2 ,6 7 8 2 01 3 8 1 ,6 2 0 1 6 ,3 2 4

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o nreferen ces are t o th e In t ern al Rev enu e Co de o f 1 98 6 (Co d e), as am en d edan di n effect atal l rel ev an tt i m es , an d al l Ru l e referen ces are t o t h e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. Al l m o net ary am o un t s are ro un dedt o th e n eares td o ll ar.-3
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[* 3 ] Aft er co n ces si o ns , 2 th e i s s u es fo r d eci si o nare: (1 ) wh et h er t h e s tatu t o ry
n o t i ces o f d efi ci en cy (SNODs ) were t i m el y s en t , 3 (2 ) wh et h er t h ere s h o ul db e a
co rrel at i v e ad

ju st m en t 4 t o the g ro s s i n co m e o f FAB, an d(3 ) wh et h er p et i t i o n er Fran kBerri t to recei v edco n s tru ct i v e d i v id en d s fro m FAB i nt ax y ears 2 0 1 0 , 2 0 1 1 , an d 2 0 1 2 an dp et it i o n ers Fran kBerri t t o an dth e Es t at e o f Dan a Berri t t o recei v ed
co n st ru ct i v e d iv i d en ds fro m FAB i n2 0 13
. Back gro u n d Th es e cas es were s ub m i tt edi n acco rd an ce wi th Ru l e 1 2 2
. Th e s t i p u l at ed fact s are fo u n dacco rd i n g l y . Wh en th e p et it i on s were t i m el y fi l edi nth es e
co n so l i d at edcas es , Fran kBerri t t o res i d edi n New Yo rk , th e Es t at e o f Dan a Berri t t o w as ad m i n i s t eredi n New Yo rk , an dFAB’ s p ri nci p al p l ace o f b u s i n es s
was i n New Yo rk
. 5

2 Res p o n d en tco n ced edthe s ec. 6 6 6 2 (a) p en al t i es . Res p o n d en t al s o co n ced edth atth e as s es s m en tl i m i t at i o n s p eri o d s ex p iredwi th res pect t o th e Es t at e o f Dan a Berri t t o fo r t ax y ears 2 0 1 0 , 2 0 1 1 , an d2 0 12
.

3 Th e Berri t t o s ’ 2 0 1 3 t ax y ear i s ex cl u dedfro m thi s i s s u e. 4 Wh il e p et i t i o ners u s e t h e t erm “ co rrel at i v e ad

ju s t m en t ”, t h ey

are as k i n g fo r co n si s t en cy

an da co rres p on d i n g ad

ju s t m en t, an das d i s cu s sedi n fra n o t e 2 3 , s ec. 4 8 2 d o es n o tap p l y

i n th i s s i tu at i o n . 5 Th es e cas es are t herefo re ap p eal ab l e t o th e U.S. Co u rto f Ap p eal s fo r t h e Seco n dCi rcu i t u nl es s th e p art i es s t i p ul at e o therwi s e. See s ec. 7 4 8 2 (b )(1 ) an d(2 ).-4
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[* 4 ] I. Th e Berri t t o s Th e Berri t t o s were m arri eddu ri n g th e y ears ati s s u e. Ho wev er, M rs . Berri t t o pas s edaway o n M arch 6 , 2 0 1 5 . M r. Berri t t o wo rk edi nth e fi n an ci al i n du s try . In2 0 1 0 M r. Berri t to s t art edwo rk i n g fo r M erri l l Ly nch , Pi erce, Fen n er & Sm i th , In c., an dh e wo rk edth ere fo r t he rem ai n in g y ears ati s s u e. II. M r. Ari as an dth e In t eg rat edTax Pl an In l at e 2 0 09 o r earl y

2 01 0 th e Berri t t o s d eci dedt o h i re A.V. Ari as & Co . t o p rep are an i n t eg rat edt ax pl an (ITP). Th e ITP i ncl u d edth e fo rm at i o no f two
en t i t i es : a C co rp o rat i o n (FAB) an da p art ners h i p (Berri t to En t erp ri s es , LLC (En t erp ri s es )). FAB was o rg an i zedan d En t erp ri s es was fo rm edi nDel aware o n No v em b er 3 0 , 2 0 1 0 . Th e Berri t t o s were t h e s o l e o wn ers o f FAB an dth e s o l e p art n ers o f En t erp ri s es , each o wn in g a 5 0 % i nt eres ti neach en t i ty . Duri n g t h e y ears ati s s u e M r. Berri t t o was th e m an ag i n g m em ber o f En terp ri s es an d t h e p res i den to f FAB. M r. Berri t t o was i nv o l v edi nth e s tru cturi n g o f t h e ITP (fo r ex am p l e b y
em ai l i ng h i s ch o i ce o f en t i ty n am es an dn o t i n g thath e wo u l dco nt ri bu t e s ecu ri t i es
as th e i n i t i al cap i t al fo r En t erp ri s es ); h e was i n v o l v edth ereaft er i nad m i n i s t eri n g th e en t i t i es ’ tran s act i o ns . Duri n g th e y ears ati s s ue M r. Berri t t o wo rk ed-5
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[* 5 ] ap p ro x i m at el y 6 0 0 h o u rs p er y ear fo r FAB wh i l e M rs . Berri t t o wo rk ed ap p ro x i m at el y 4 0 h o u rs p er y ear fo r b o th FAB an dEn t erp ri s es . En t erp ri s es fi l eda Fo rm

1 0 6 5 , U.S. Retu rn o f Part n ers hi p In co m e, as i t s i n i t i al retu rn an dfo r each t ax y ear at i s s u e. 6 Inco n tras tFAB fi leda Fo rm 1 1 2 0 , U.S. Co rp o rat i o n In co m e Tax Retu rn , as i t s i n i t ial retu rn an d fo r each t ax y ear at i s su e. To i t s i n it i al retu rn FAB at t ach eda Fo rm 8 8 3 2 , En t i ty

Cl as s i fi cat i o n El ect i o n , ch o o s i ng t o b e cl as s i fi edas an as s o ci at io nt ax ab l e as a co rp o rat i o n . OnDecem

b er 1 , 2 0 10 , FAB an dEn t erp ri s es en t eredi n t o a “ M an ag em en t Ag reem en t .” M r. Berri t to s i g n edth e ag reem en t o nb eh al f o f b o th en ti t i es as p res i den to f FAB an dm an ag i n g m em b er o f En t erp ri s es . En t erp ri s es ’ i n co m e was l arg el y i nt eres t , d i vi d en ds , an dcap it al g ai ns fro m
s ecu ri t i es i n v es t m en t s co n tri bu t edb y th e Berri t t os . FAB’ s i n co m e was m o s t l y , i f
n o ts o l el y , p aym en t s fro m En t erp ri s es . Per t h ei r “ M an ag em en tAg reem en t ”

6 Th e ch eck -t h e-b o x reg u l at i o ns fo u n d i ns ecs . 3 0 1 .7 7 01 -1 th ro u g h 3 0 1 .7 7 0 1 -3 , Pro ced . & Adm in
. Reg s ., p ro v i de t he ru l es fo r t h e cl as s i fi cat i o no f b u s i n es s en t i t i es fo r Fed eral t ax p u rp o s es . Co m en s o li v . Co m m i s s i on er, T.C. M em o. 2 0 0 9 -2 4 2 , 9 8 T.C.M . (CCH) 3 6 2, 3 6 3 (2 0 0 9), aff’ d, 4 2 2 F. Ap p’ x 4 1 2 (6 th Ci r. 2 0 11 ). Un d er t h e ch eck -th e-b o x reg u l at i o n s , a b u s i nes s en t i ty , s uch as a l i m i ted l i ab i li ty co m

p an y , wi th two o r m o re m em b ers can b e cl as s i fi edas ei th er a p art n ers hi p o r a co rp orat i o n . Id . A n ew d o m es t i c u ni n co rp o rat eden t i ty , o th er th an a s i n g l e-o wn er en t i ty , i s a p art n ers h i p fo r t ax p u rp o s es u n l es s th e en t i ty m ak es an affi rm at i v e el ect i on t o b e an as s o ci at i o nt ax ed as a co rp o rat i o n . Sec. 3 0 1.7 7 0 1 -3 (a) an d(b )(1 )(i ), Pro ced . & Adm i n . Reg s . Becau s e n o el ect i o n was m ad e, En t erp ri s es ’ d efau l tcl as s i fi cat i o nwas p art ners h i p .-6
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[* 6 ] En t erp ri s es p ai dFAB m an ag em en t fees an dd edu ct edth o s e fees each y ear. Th i s creat ed n o np as si v e l o s s es wh i ch fl o wedth ro ug h th e p art ners h i p an d were rep o rt edo n the Berri t to s’ i n d i v i du al retu rn s . FAB co n v ers el y rep o rt edth e fees as i n co m e. III. Yearl y

Tax Retu rn s M r. Berri t t o h i redM r. Ari as t o p rep are an dfi l e t h e Berri t t o s’ jo i n t i n d i v i du al retu rn s , En t erp ri ses ’ Fo rm s 1 0 6 5, an d FAB’ s Fo rm s 1 1 2 0 fo r th e y ears ati ss u e. Th e Berri tt o s p ai dM r. Ari as o v er $ 20 ,0 0 0 fo r h i s s erv i ces . M r. Berri t t o
rev i ewedan dap p ro v edth e ret u rn s b efo re s i g n in g th em , an dth e ret u rn s were t i m el y fi l ed . Th ro u g h ou tth e y ears ati s s u e En t erp ri s es wo u l d p ay fees , s u ch as
m an ag em en tfees o r b o n u s es , t o FAB. Ho wev er, b ecau s e FAB h ada M arch 3 1 y earen dan dEn t erp ri ses h ada cal en d ar y earen dth ere were t i m i n g d i fferen ces b et ween wh en En terp ri s es rep o rt edth e ex pen s es an dwh en FAB p i ck edup th e
co rres p o n d i n g i t em s as i n co m e. A. 2 01 0 Retu rn s Fo r 2 0 1 0 En t erp ri s es rep o rt ed$ 1 9 3 ,4 9 7 o f t ax -ex em p t i n t eres ti n co m e an d $ 2 6 4 o f d i vi d en d i n co m e; i td edu ct ed$ 1 4 3,0 7 9 o f m an ag em en tfees 7 an d$ 2 1 ,0 0 0
o f ren tex p en s e. It rep o rt edan o rd i n ary b us i n es s l os s o f $ 1 64 ,0 7 9
.

7 Fo r al l y ears at i s s u e t h e m an ag em en t fees were p ai dt o FAB.-7
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[* 7 ] Fo r t h e y ear en d i n g M arch 3 1 , 2 0 1 1 , FAB rep o rt ed$ 1 6 9,1 4 5 o f i n co m e. M o s to f FAB’ s i n co m e co n s is t edo f m an ag em en tfees fro m En t erp ri ses . 8 FAB d educt edex pen s e t o t al i n g $ 1 2 9 ,1 5 2 , i n cl u d i n g t h e fo l l o wi n g i t em s : $ 3 4 ,3 0 5 o f
s al ari es an dwag es , $ 3 0 , 0 0 0 of o ffi cer co m pen s at i o n, an d$ 12 ,5 0 0 o f l eg al an d p ro fes s i on al fees
. Fo r 2 0 1 0, am o n g o th er i t em s n o ti nd i s p u t e, t h e Berri t t os rep o rt ed$ 1,2 8 4 o f wag e i n co m e fro m

FAB an d d edu ct edth e $ 1 6 4,0 7 9 fl o wthro u g h l o s s fro m En t erp ri s es . B. 2 01 1 Retu rn s Fo r 2 0 1 1 En t erp ri s es rep o rt ed$ 2 ,8 69 o f i n t eres ti n co m e, $ 17 3 , 8 6 3 o f t ax ex em p ti n t eres ti n co m e, $ 1 03 ,5 9 1 o f d i v i d en di n co m e, an d $ 5 9 ,7 9 4 o f n etl o n g t erm cap i t al g ai n . En t erp ri s es d edu ct ed$ 2 1 , 0 0 0 o f ren tex p en s e, $ 3 66 o f i n t eres t
ex p en s e, an da t o tal o f $ 2 09 ,6 47 o f o th er d edu ct io n s . Th e o th er d edu ct i o ns
co n si s t edo f $ 5 ,0 4 9 o f am o rt i zat i o nex p en s e, $ 1 5,6 1 0 o f acco u n ti n g fees , $ 1 0 ,0 0 0 fo r a b u s i n es s p l an , an d $ 1 7 8 ,9 8 8 o f m an ag em en t fees . En t erp ri s es rep ort edan
o rd i n ary b u s i n es s l o s s o f $ 2 3 1 ,0 1 3
.

8 Fo r t h e y ears ati s s u e FAB’ s rep o rt edi n co m e d i ffers fro m En t erp ri s es ’ rep o rt edm an ag em en tfee ex p en s e b ecau s e o f t i m i n g d i fferen ces . As n ot ed s up ra p . 6 , FAB h as a M arch 3 1 y earen dan d En t erp ri s es h as a cal en d ar y earen d
.-8
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[* 8 ] Fo r t h e y ear en d i n g M arch 3 1 , 2 0 1 2 , FAB rep o rt edi n co m e o f $ 1 6 9 ,9 5 5 , m o sto f wh i ch was fro m

En t erp ri s es . FAB d edu ct edex p en s es t ot al in g $ 1 4 2 ,3 6 6 , i n cl u d i n g $ 8 ,4 9 1 o f l eg al an dp ro fes s i o n al fees
. Fo r 2 0 1 1, am o n g o th er i t em s n o ti nd i s p u t e, t h e Berri t t os rep o rt ed$ 31 ,0 21 9
o f wag e i n co m e fro m

FAB an dd edu ct edth e $ 2 3 1 ,0 1 3 fl o wth ro u g h l o s s fro m En t erp ri s es . C. 2 01 2 Retu rn s Fo r 2 0 1 2 En t erp ri s es rep o rt ed$ 7 ,0 34 o f i n t eres ti n co m e, $ 70 ,1 8 4 o f t ax ex em p ti n t eres ti n co m e, $ 2 18 ,2 3 4 o f d i v i d en di n co m e, an d $ 1 4 4 ,2 2 9 o f n etl o n g t erm cap i t al g ai n . En t erp ri s es d edu ct ed$ 2 1 , 0 0 0 o f ren tex p en s e, $ 8 5 o f i n t eres t
ex p en s e, an d$ 2 5 2 ,1 3 1 o f o th er d edu ct i o n s . Th e o ther d edu ct i o n s co n s i s t edo f $ 1 ,3 6 0 o f acco u n t i n g fees , $ 50 4 o f l eg al an dp ro fes si o n al fees , $ 2 5 0 o f o ffi ce
ex p en s e, $ 52 ,6 6 4 o f m an ag em en tfees , an d$ 19 7 ,3 5 3 fo r a p erfo rm an ce b o n u s . 1 0 En t erp ri s es rep o rt edan ord in ary b us i nes s l o s s o f $ 2 7 3,2 1 6 . En t erp ri s es al s o fi l ed a 2 0 1 2 Fo rm

1 0 6 5 X, Am en d edRetu rn o r Ad m i n i s trat i v e Ad ju st m en tReq u es t

9 Th i s am o u n ti n cl u des $ 3 0 ,0 0 0 o f u n co nt es t ed o ffi cer co m p en s at i o nth at , b ecau s e o f FAB’ s h av i n g a M arch 3 1 y earen d, rel at es t o FAB’ s rep ort i n g o nan earl ier fi ledretu rn .

1 0 Li k e t h e m an ag em en tfees , an y p erfo rm an ce b o n u s es were p ai dt o FAB du ri n g th e y ears ati s su e.-9
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[* 9 ] (AAR), o n M ay

2 4 , 2 0 14 . Th atam en d edretu rn d i dn otch an g e an y o f t h e i t em s i n d i s p u te. Fo r t h e y ear en d i n g M arch 3 1 , 2 0 1 3 , FAB rep o rt ed$ 2 5 7,6 8 3 i n i n co m e. M o s to f FAB’ s i n co m e was fro m En t erp ri s es . Of the i n co m e rep o rt ed , $ 1 9 7 ,3 5 4 1 1
was fo r o th er i n co m e, wh i ch was fu rt h er d et ai l edas a p erfo rm an ce b o n u s . FAB d educt edex pen s es t o t al i n g $ 2 7 7 ,8 4 0, i n cl u d i n g th e fo l l o wi n g i t em s : $ 8 ,4 4 0 o f l eg al an dp ro fes si o nal fees , $ 1 1 8 ,8 1 3 o f em p l o y ee b en efi t p lan ex p en s e (fu rt h er d et ai led as $ 3 0 ,9 8 2 o f m ed i cal rei m b u rs em en t s an d $ 8 7 ,8 3 1 o f l o n g -t erm care i n s u ran ce), an d $ 1 4,0 0 0 o f d i rect o r’ s fees
. Fo r 2 0 1 2, am o n g o th er i t em s n o ti nd i s p u t e, t h e Berri t t os rep o rt edth e $ 1 4 ,0 0 0 o f d i rect or’ s fee i n co m e fro m FAB an dd educt edth e $ 2 7 3,2 1 6 fl owt h ro u g h l o s s fro m

En t erp ri s es . D. 2 01 3 Retu rn s Fo r 2 0 1 3 En t erp ri s es rep o rt ed$ 1 2 ,5 3 6 o f o rd i n ary i n co m e fro m

o th er p art n ers hi p s , es tat es , an dtru s t s , $ 3 0 ,6 4 7 o f i n t eres t i nco m e, $ 5 6,6 5 3 o f t ax ex em p ti n t eres ti n co m e, an d$ 32 9 ,8 1 4 o f d i v i d en di n co m e. En t erp ri s es d edu ct ed $ 2 1 ,0 0 0 o f ren tex p en se, $ 2 1 , 6 4 2 fo r t ax es an dl i cen s es , $ 2 0 7 o f d ep reci at i o n , an d

1 1 W e n o te t h at th ere was a ro u n d in g d ifferen ce b et ween FAB an d En t erp ri s es .-1 0
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[* 1 0 ] $ 1 9 8 ,0 25 o f o th er d edu ct i o n s. Th e o ther d edu ct i on s co n s i s t edo f $ 1 9 5 o f
am ort i zat i o n , $ 1 6 , 8 7 5 o f acco u n t i n g fees , $ 6 2 ,4 1 2 o f m an ag em en t fees , an d $ 1 1 8 ,5 4 3 fo r a p erfo rm an ce b o n u s . En t erp ri ses rep o rt eda l o s s o f $ 25 0 , 2 1 5
co m p ri s i n g an o rd i n ary

b us i n es s l o s s o f $ 2 2 8 ,3 3 8 an da n etren t al real es t at e l o s s
o f $ 2 1,8 7 7
. Fo r t h e y ear en d i n g M arch 3 1 , 2 0 1 4 , am o n g o th er i t em s , FAB rep o rt edt o t al i n co m e o f $ 18 1 ,6 5 5
. 1 2 M os to f t h i s i nco m e was fro m En t erp ri s es . FAB d edu ct ed
ex p en s es t o t al in g $ 15 1 ,4 0 7 , i n cl u di n g th e fo l l o wi n g i t em s : $ 1 1,4 3 6 o f l eg al an d p ro fes s i on al fees , $ 4 0 ,0 8 8 o f em p l o y ee b en efi t p l an ex p en s e, $ 1 4,0 0 0 o f d i rect o r’ s fees , an d$ 6 ,3 52 o f t ax es an dl i cen s es . Fo r 2 0 1 3 am o ng o ther i t em s n o ti nd is p u te, t h e Berri t to s rep o rt ed th e $ 1 4 ,0 0 0 o f d i rect or’ s fee i n co m e fro m FAB an dd educt eda $ 2 5 0 ,2 1 5 fl o wth ro u g h l o s s fro m En t erp ri s es . IV. Au th o ri zat i o n s an d Co ns en t s fo r t h e Berri t t o s In M arch 2 01 4 M r. an d M rs . Berri t t o each s i gn eda Fo rm 2 8 4 8, Po wer o f At t o rn ey an d Decl arat i o n o f Rep res en t at i v e, au th o ri zi n g M r. Ari as t o s i g n
co n sen t s t o ex t en dth e as s es s m en tl im i t at io n s p eri o d s o n t h ei r b eh al f fo r th e

1 2 Th i s i s ap p ro x i m at el y

th e $ 6 2 ,4 1 2 m an ag em en tfee an dth e $ 1 1 8 ,5 4 3 p erfo rm an ce b o n u s En t erp ri s es cl ai m edas a d educt i on .-1 1
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[* 1 1 ] 2 0 1 0 -1 7 t ax y ears . OnAp ri l 7 , 2 0 1 4, res p o nd en t recei v ed th e fu ll y ex ecu t ed Fo rm s 2 8 4 8 fo r M r. an dM rs . Berri t to . OnAu g u s t2 , 2 0 1 7 , M r. Berri t t o s ig n eda Fo rm 2 8 4 8 as ex ecu t o r o f M rs . Berri t t o ’ s es t at e, au tho ri zi ng M r. Ari as t o s i g n
co n sen t s t o ex t en dth e as s es s m en tl im i t at io n s p eri o d s o n t h e es t at e’ s b eh al f fo r t h e 2 0 1 0 -1 7 t ax y ears . Al s o o n Au g u s t2 , 2 0 1 7, M r. Berri t t o s i gn eda Fo rm 5 6 , No t i ce Co n cern i n g Fi du ci ary Rel at i o n s h i p , o nwh i ch h e s t at edh e was th e ex ecu t o r o f M rs . Berri t t o ’ s es t at e. OnAu g u s t7 , 2 0 1 7 , res p o n d en trecei v edthe Fo rm 2 8 4 8 fo r M rs . Berri t t o ’ s es t at e an dth e fi du ci ary n o t i ce. M r. Ari as s i g n edfo u r Fo rm s 8 7 2 , Co n s en tt o Ex t en d th e Ti m e t o As s es s Tax , p u rp o rt i n g t o ex t en dthe t i m e fo r t he IRS t o as s es s M r. Berri t t o ’ s t ax fo r 2 0 1 0 , 2 0 1 1 , an d 2 0 1 2 t ax y ears t o Au g u s t 8 , 2 0 1 8
. 1 3

1 3 OnAp ri l 16 , 2 0 1 4 , M r. Ari as s i g n eda Fo rm 8 7 2 o nb eh al f o f M r. an dM rs . Berri t t o . Th i s ex ten d edth e t im e t o as s es s t ax fo r t he 2 0 1 0 return t o Oct o ber 1 5 , 2 0 1 5 . OnM ay

2 8 , 2 0 1 5, aft er M rs . Berri t t o p as s edaway , M r. Ari as s i gn eda s eco n dFo rm 8 7 2 o n b eh al f o f t h e Berri t t o s. Bu tb ecau s e o f t h e i n terv en i n g d eat h , th i s ex t en d edth e t i m e t o as s es s t ax fo r o n l y M r. Berri t to ’ s 2 0 1 0 an d2 0 11 retu rn s t o Oct o b er 3 0 , 2 0 1 6
. OnM arch 1 1 , 2 0 1 6 , M r. Ari as s i g n eda t h i rdFo rm 8 7 2 o n b eh al f o f t h e Berri t t o s . Th is ex t en d edth e t i m e t o as s es s t ax fo r o n ly M r. Berri t t o ’ s 2 0 1 0 , 2 0 1 1 , an d 2 0 1 2 ret u rn s t o Au g u s t4 , 2 0 1 7 . On Decem b er 1 2, 2 0 1 6 , M r. Ari as s i g n eda fo u rt h Fo rm 8 72 o nb eh al f o f t h e Berri t t o s. Th i s ex t en d edth e t i m e t o as s es s t ax fo r o n l y

M r. Berri t t o ’ s 2 0 1 0 , 2 0 11 , 2 01 2 , an d2 0 13 retu rn s t o Au g u s t8 , 2 0 1 8 . As d is cu s s edi n fra n o t e 1 6 th e 2 0 1 3 SNOD was i s s u edwi th i n the as s es s m en tl i m i t at i on s p eri o das t o b o th M r. Berri tt o an dth e Es t at e o f Dan a Berri t t o . Ho wev er, as we n o t eds upra n o t e 2 , res p o n d en tco n ced edth atth e as s es s m en tl i m i t at i on s p eri o d s ex p i redwi th res p ectt o th e Es t at e o f Dan a Berri t t o (co n ti n u ed ...)-1 2
-

[* 1 2 ] V. Au th o ri zat i o n s an d Co n s en ts fo r FAB OnJ u ne 1 2 , 2 01 4 , M r. Berri t t o s ig n ed , as p res i den to f FAB, a Fo rm 2 8 4 8
au th o ri zi n g M r. Ari as t o s i g n co n s en t s t o ex ten dth e as s es s m en tl i m i t at i o n s p eri o d s
o n b eh al f o f FAB fo r t ax y ears en d i n g M arch 3 1 , 2 0 1 0 t h ro u gh 2 0 1 7. Ul t i m at el y , fo u r Fo rm s 8 7 2 were ex ecu t edfo r FAB, wh ich ex t en d edth e t i m e t o as s es s t ax o n FAB’ s Fo rm s 1 1 2 0 t o Au gu s t8 , 2 0 1 8 , fo r t h e t ax y ears en d i n g M arch 3 1 , 2 0 1 1 th ro u g h 2 0 1 4 . Th e fo l l o wi n g t ab l e i l l u s trat es th e fo u r co n s en t s ex ecu t ed o nb eh al f
o f FAB an dthe ex t en s i o n d at es as wel l as th e d at e t h e SNOD was i s s u edt o FAB.

Y ear endi ng Return

f i l i ngdat e 3- yr .

assess. li m i t . pd. exp. dat e Fi r st

consent r ecei v ed 6/ 21/ 14 ext ends t o... Second

consent r ecei v ed 2/ 12/ 15 ext ends t o... T hi r d

consent r ecei v ed 3/ 15/ 16 ext ends t o... Four t h

consent r ecei v ed 11/ 15/ 16 ext ends t o... SNOD

i ssue dat e 3/ 31/ 11 8/ 5/ 11 8/ 5/ 14 10/ 15/ 15 10/ 30/ 16 8/ 4/ 17 8/ 8/ 18 7/ 26/ 17 3/ 31/ 12 8/ 1/ 12 8/ 1/ 15
- - - 10/ 30/ 16 8/ 4/ 17 8/ 8/ 18 7/ 26/ 17 3/ 31/ 13 11/ 8/ 13 11/ 8/ 16
- - - - - - 8/ 4/ 17 8/ 8/ 18 7/ 26/ 17 3/ 31/ 14 1 6/ 15/ 14 6/ 15/ 17
- - - - - - 8/ 4/ 17 8/ 8/ 18 7/ 26/ 17
1 Th e ret u rn was fi l ed b efo re t h e J u n e 1 5 , 2 0 1 4 , du e d at e. Ho wev er, fo r t h e cal cu l at io n o f t h e as s es s m en t l i m i t at i o n s p eri o d , th e as s es sm en tp eri odb eg i n s th e l at er o f th e fi l i ng d at e o r the due d at e. See s ec. 6 5 01 (b )(1 ).

1 3 (...co n t i nu ed ) fo r t ax y ears 2 0 10 , 2 0 1 1 , an d2 0 1 2
.-1 3
-

[* 1 3 ] M r. Berri t t o p ers o n al l y s i g n edth e fi rs tFo rm

8 7 2 as p res i d en t o f FAB. M r. Ari as s i g n edth e l as t th ree Fo rm s 8 7 2 as FAB’ s rep res en t at i v e. VI. St atu t o ry

No t i ces o f Defi ci en cy OnJ u ly 2 6 , 2 0 17 , th e IRS m ai l edth e SNODs fo r t h e Berri t t o s ’ i n d i v i du al retu rn s fo r t ax y ears 2 0 1 0 th ro u g h 2 0 1 3 an dFAB’ s retu rn s fo r t ax y ears en d i n g M arch 3 1 , 2 0 1 1 thro u g h 2 0 14 . Th e ad ju s t m en t s i nth e SNODs co n s i st edo f t h ree
m ai n cat eg o ri es : (1 ) ad

j u s t m en t s t o En t erp ri s es ’ an dFAB’ s ex p en s e d edu ct i o n s ; (2 ) co n s tru ct i v e d i v i d en d s t o th e Berri t t o s fro m FAB; an d(3 ) p en al t i es . A. Th e Berri t t o s’ SNOD Of th e ad ju s t m en t s m ad e t o fl o wth ro u g h i t em s fro m En t erp ri s es , th e SNOD i s su edt o th e Berri t t o s d i s al l owedth e d edu ct i o ns fo r m an ag em en tfees an d p erfo rm an ce b o n u s es p ai dt o FAB. Th o s e ad ju st m en t s res u l t edi np as s th ro u g h ad ju s t m en t s t o th e Berri t t o s ’ i n d i v i du al retu rn s . In th e “ Ex p l an at i o n o f It em s ” rel at edt o “ Sch E-In c/ Lo s s -Part n ers h ip Berri t t o E n t erp ri s es ” t h e ex am i n i n g ag en ts t at edi nerro r 1 4 th at“ [w] e ad ju st edy o u r retu rn i n acco rd an ce wi th the ex am i n at i o n res u lt s o f t he S co rp o rat i o nretu rn

1 4 W e as k ed th e Berri tt o s an dres p o n d en tt o cl ari fy th e u se o f t h e t erm S co rp o rat i o n t o d es cri b e En t erp ri s es , an db o th p art ies ag reed i twas i n erro r.-1 4
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[* 1 4 ] (Fo rm

1 1 2 0 S) o f wh i ch y o uare a s h areh ol d er.” En t erp ri s es was t ax edas a p art n ers hi p , n o t an S co rp o rat i o n . En t erp ri ses fi l ed Fo rm s 1 0 65 , n o tFo rm s 1 1 2 0 S. In th e “ Ex p l an at i o n o f It em s ” fo r “ Ord i n ary Di v i d en d s FAB Ho l d i n g LLC” th e ex am i n i n g ag en t s tat edth at“ [w] e h av e d i s al l o wedth e p ers o n al ex p en ses o f y o u r s h areh o l d er(s ) p ai db y th e S Co rp o rat i o nan dth es e ex p en s es were cl as s i fi ed
as [a] co n s tru ct i v e d i v i d en dt o t h e s h areh o l d er(s ).” FAB was an d s t i l l i s a C
co rp o rat i o n an d fi l edFo rm s 1 12 0 ; i twas n ev er an S co rp o rat i o n. Th e co n s tru ct i v e d i v i d en d ad

ju s tm en t s t o th e Berri t t o s ’ return s were $ 4 4 , 5 0 0 , $ 8 ,4 91 , $ 1 1 8 ,4 2 1 , an d $ 3 7 ,7 8 8 fo r t h e 2 0 1 0 , 2 0 1 1, 2 0 1 2 , an d2 0 1 3 t ax y ears , res p ect i v el y . B. FAB’ s SNOD Th e SNOD i s s u edt o FAB d et erm i n edth atcert ai nex pen s e d edu ct io n s were i n fact co n st ru ct iv e d iv i d en d s fo r t he b en efi to f i t s s h areh o l ders . As a res u l t , th e
ex p en s e d educt i o ns were red u cedb y am ou n ts equ al t o th e co n s tru ct i v e d iv i d en d s . Th es e ad j u s t m en ts t o th e ex p en s e d edu ct io n s are m o re fu ll y s etfo rt h b el o w:-1 5
-

Expense adj ust m ent s T ax y ear endi ng 3/ 31/ 2011 T ax y ear

endi ng 3/ 31/ 2012 T ax y ear

endi ng 3/ 31/ 2013 T ax y ear

endi ng 3/ 31/ 2014 Sal ar i es and wag es $32,000

- - - - - - - - - Leg al and pr of

essi onal ser v i ces 12,500 $8,491 $8,440 $3,430 Em pl oy ee benef

i tpr og r am s - - - - - - 95,981 17,256 Di rect or ’ s f

ees - - - - - - 14,000 14,000 T axes and l i censes - - - - - - - - - 3,102 T ot al 44,500 8,491 118,421 37,788 FAB’ s SNOD d i dn o tm ak e an y ad ju s t m en t s t o FAB’ s i n co m e fo r t h e rel ev an t t ax y ears o r t o th e rem ai n i n g ex p en s e d edu ct i o n s fo r each y ear. Th e Berri t t o s an dFAB t im el y p et it i o n ed th e Co u rt . Di s cu s s i o n 1 5 I. St atu t e o f Li m it at i o n s Pet i t i o ners co n t en dth atth e as s es s m en t l i m i t at i o n s p eri od s ex p i redb efo re th e SNODs were s en t t o them
. 1 6 M ore s peci fi cal l y , p et i t i o n ers arg u e t h atM r. [* 1 5 ]

1 5 Wh i le t h e SNODs , th e p et i t i o ns i n th es e cas es , an dm u ch o f res p o nd en t ’ s b ri efi n g referred t o En terp ri s es as an S co rp o rat i o n , th e reco rdcl earl y refl ect s th at En t erp ri s es was a p art n ers h i p atal l t i m es .

1 6 Pet i t i o ners m ak e t h is arg u m en t as t o al l y ears ex cep tfo r t h e Berri t t o s ’ 2 0 1 3 t ax y ear. Th e SNOD fo r 2 0 1 3 was s en tb efo re t he ex p i rat i on o f t h e t h reey ear l i m i t at i o n s p eri o dan dn o ex t en s i o n was req ui red . In ad d i t i o n as n o t ed s up ra n o t e 2 res p o n d en t co n ced edth e as s es s m en t l i m i t at i o n s p eri o d s ex p i redas t o th e Es t at e o f Dan a Berri tt o fo r t ax y ears 2 0 1 0, 2 0 11 , an d2 0 1 2
.-1 6
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[* 1 6 ] Ari as was o p erat i n g wi th s u ch an i n h eren t co n fl i cto f i n t eres tth atth e Fo rm s 8 7 2 h e s i g n edwere n o tv al i d , an dth erefo re, t h e ex ten s i o n s o f th e l i m i tat i on s p eri od s ex p i redb efo re t h e SNODs ’ b ei n g i s s u ed
. Ord i n ari l y , th e Co m

m is s i o n er m

u s tas s es s a t ax wi th i nth ree y ears aft er a retu rn i s fi led . See s ec. 6 5 0 1 (a). Th i s p eri o dfo r as s es sm en tm ay b e ex t en d edi f th e Co m m i s s i o n er an dth e t ax p ay er h av e co n s en tedi nwri ti n g t o an ex t en s i o n , p ro v id edth atth ei r ag reem en t i s ex ecu t edb efo re t h e ex p i rat i o no f t h e o th erwi s e ap p li cab l e l i m i t at io n s p eri o d
. 1 7 Sec. 6 5 0 1 (c)(4 )(A). A. Bu rd en o f Pro o f Th e ex p i rat i o n o f t h e as s es s m en t l i m i t at i o ns p eri o di s an affi rm at i v e d efen s e, an dth e p art y

rai si n g i tm

us t s peci fi cal l y

p leadi tan dcarryth e b u rd en o f p ro v in g i t s ap p l i cab i li ty . Ru l es 3 9, 1 4 2 (a); M eco m v . Co m m i s s i on er, 1 0 1 T.C. 3 7 4 , 3 8 2 (1 9 9 3), aff’ dwi th ou tp ub l i s h edo p in i o n , 4 0 F.3 d3 8 5 (5 th Ci r. 1 9 9 4 ); Heck m an v . Co m

m is s i o n er, T.C. M em o . 2 0 1 4 -1 3 1 , at* 1 0 -* 1 1, aff’ d , 7 8 8 F.3 d 8 4 5 (8 th Ci r. 2 0 15 ). To es tab l i s h th i s d efen s e, t ax p ay ers m us tm ak e a p ri m a faci e
cas e es t ab l i s h i n g th e d at e o f t h e fi l i n g o f t h ei r return , th e ex p i rat i o no f t h e
as s es s m en tl i m i t at i on s p eri o d , an drecei p to r m ai l i n g o f t h e SNOD aft er t h e

1 7 Th e ag reem en tm ay

al so b e s i g n edb y

a t ax p ay er’ s au th o ri zed rep res en t at i v e. See Ly o n v . Co m m i s s i o n er, T.C. M em o . 1 9 9 4-3 5 1
.-1 7
-

[* 1 7 ] ru n n i n g o f the p eri o d . Co l em anv . Co m m i s si o n er, 9 4 T.C. 8 2, 8 9 (1 99 0 ); Ro b i ns o n v . Co m

m i s s i o n er, 5 7 T.C. 7 3 5, 7 3 7 (1 9 7 2). Wh ere t ax p ay ers h av e
es t ab l i s h eda p ri m a faci e cas e t h atth e Co m m i s s io n er m ai l edthe SNOD t o th em b ey o n d the t h ree-y ear p eri o d , th e b u rd en g o i n g fo rwardi s o nth e Co m m i s s i o n er t o p ro v e th atan ex cep t i on t o th e p eri o do f l im i t at i o ns ap p l i es . J ord an v . Co m m i s s i o n er, 1 3 4 T.C. 1 , 6 (2 0 1 0 ), s up p l em en t edb y T.C. M em o . 2 0 1 1 -2 4 3 . Fo r
ex am p l e, i f t h e Co m

m i s s i on er can s h o w a faci al l y v al i dex t en si on , th en th e b u rd en
s h i ft s b ackt o the t ax p ay ers t o s h o w th atth e co n sen twas i n effect i ve t o ex t en dth e l i m i tat i on s p eri od
. Ad l er v . Co m m i ss i on er, 8 5 T.C. 5 3 5 , 5 4 1 (1 9 8 5 ); s ee al s o
s ec. 6 5 01 (c)(4 ). Pet i t i o ners es t ab l i s h eda p ri m a faci e cas e fo r th e Berri t t o s ’ 2 0 1 0 , 2 0 1 1 , an d 2 0 1 2 t ax ab l e y ears an dfo r FAB’ s t ax y ears en d i n g M arch 3 1 , 2 0 1 1 th ro u g h 2 0 1 4, b ecau s e th e SNODs at i s s u e are d at edJ u l y 2 6 , 2 0 1 7, m o re t h anth ree y ears aft er th e ret urn s fo r t h o s e y ears were fi l ed
. 1 8 See Ad ler v
. Co m m i s s i o n er, 8 5 T.C. at5 4 0 -5 4 1 . Acco rd i n g ly , the b u rd en o f g o i n g fo rwardwi th res p ectt o th os e t ax y ears s h i ft s t o res p on d en t. Ins at is fact i o no f h i s b urd en res p o n d en ts h o wedth e l i m i tat i on s p eri od s were ex t en dedfo r M r. Berri t t o an d FAB b y p res en t i ng m

u l t i p l e

1 8 As d i s cu s s eds up ra n ot e 1 6 , th e SNOD as t o th e Berri t t o s ’ 2 01 3 t ax y ear was s en t b efo re t h e ex p irat io n o f t h e as s es s m en tl i m i tat i o n s p eri o d.-1 8
-

[* 1 8 ] faci al l y

v al i dFo rm s 8 72
. Res p o n d en th as co nced edth at th e Fo rm s 8 7 2 were i n v al i d as t o the Es t at e o f Dan a Berri t to . 1 9 As t o M r. Berri t t o an dFAB, each Fo rm 8 7 2 was s ig n edb y

ei th er M r. Ari as o r M r. Berri t t o b efo re th e ex p i rat i o no f th e l i m i t at i o ns p eri o d s , ex t en di n g th e p eri o d s t o Au g u s t8 , 2 0 1 8 . Th e SNODs were d at edJ u l y

2 6 , 2 0 17 . Th erefo re, res p on d en tm eth i s b u rd en t o s h o w th atth e SNODs fo r th e Berri t t o s ’ 2 01 0 , 2 0 1 1, an d2 0 1 2 t ax y ears an d fo r FAB’ s t ax y ears
en d in g M arch 3 1, 2 0 1 1 th ro u g h 2 0 1 4 , were m ai l edwi th i nth e as s es s m en t l i m i tat i on s p eri od s as ex t en dedfo r M r. Berri t to an dFAB. 2 0 Th e b u rd eno f g oi n g fo rwardn o w s h i ft s t o p et i t i o ners t o p ro v e th atth e Fo rm s 8 7 2 were i n v al i d.

1 9 “ T h e Co d e t reat s m arri edt ax p ay ers wh o fi l e jo i nt l y as o n e t ax ab l e un i t ; h o wev er, i td o es n o tco n v erttwo s p o u s es i n t o o n e s i n g l e t ax p ay er.” Vi ch i ch v . Co m m i s s i o n er, 1 4 6 T.C. 1 8 6 , 1 9 3 (2 0 1 6). Sp o u ses fi l i n g a jo i n t retu rn are s ep arat e t ax p ay ers , an d each s p o u s e h as an ab s o lu t e ri g htt o ex t en do r n o t ex t en d th e t i m e wi thi n wh ich t o as s es s t ax . Do lan v . Co m m i ss i on er, 4 4 T.C. 4 20 , 4 2 7
- 4 2 8 (1 96 5 ). A wai ver t o ex t en dth e t i m e wi th i n wh i ch t o as s es s t ax i s v al i do n l y as t o th e s p o u s e wh o s i g ns th e wai v er. Tal l al v . Co m m i s s i o ner, 7 7 T.C. 1 29 1 , 1 2 9 5 (1 9 8 1 ). M rs . Berri t t o p as s edaway o nM arch 6 , 2 0 1 5 . Th erefo re, aft er t h at d at e M r. Ari as co u l d n o l o n g er s i g nfo r h er, an dth e Fo rm s 8 7 2 s i g n edth ereaft er are n o tv al idas to M rs . Berri tt o o r h er es t at e.

2 0 As n o t edab o ve, p et i t i on ers co n ced ed th atth e SNOD fo r t h e 2 0 1 3 t ax y ear fo r b o th M r. Berri t t o an dth e Es t at e o f Dan a Berri t t o was s en t b efo re t h e ex p i rat i o n o f t h e l i m i t at i o n s p eri od s uch thatn o ex t en s i o n was req u i red
.-1 9
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[* 1 9 ] B. Val i di ty

o f Fo rm s 8 7 2 Pet i t i o ners as s ertth atth e Fo rm s 8 7 2 are i n v al i d an dth erefo re d i dn o tex t en d th e as s es s m en tl i m i t at i o ns p eri o d s b ecau se M r. Ari as h adan i n h eren t co nfl i cto f i n t eres t . Acco rd i n g t o p et i ti o n ers , M r. Ari as was a p ro m o t er b ecau s e h e ad v i s ed th em t o i m p l em en t th e s tru cture at i s su e an drecei vedp aym en t fo r h i s ad vi ce. Co n s equ en t l y , p et i t i o n ers co n t en d M r. Ari as ’ s t atu s as a p ro m o t er i nv al i d at es h i s
au th o ri ty t o acto n th ei r b eh al f. W e fi n dthi s arg u m en tu np ers u as i v e. Pet i t i o ners l ab el M r. Ari as a p ro m o t er; h o wev er, t h e l i n e o f cas es p et i t i o n ers rel i edo n , i n wh i ch th e t ax p ay ers arg u ed th ey reas o nab l y

rel i edo nth ei r t ax ad v is er t o av o idp en al t i es , are t ak en o u to f co n t ex t. Pet i t i o n ers rel y o n1 0 6 Lt d . v . Co m m i s s i o n er, 1 3 6 T.C. 6 7 (2 0 1 1 ), aff’ d , 6 8 4 F.3 d8 4 (D.C. Ci r. 2 0 1 2 ), t o s up p o rt th ei r arg um en tth atM r. Ari as was a p ro m o ter. In 1 0 6 Lt d . th e t ax p ay er’ s ad v i s ers
co o rd i n at edth e en t i re t ran s act io n an d“p ro fi t edfro m s el l i n g t h e t ran s act i o nt o
n u m ero u s cl i en t s.” Id . at8 0 -8 1 . Th e Co urti n1 0 6 Lt d . d es cri b ed a p ro m o t er as

“ an ad v i s er wh o p art i ci p at ed i n s tru ctu ri n g th e t ran sact i o no r i s o th erwi s e rel at ed t o , h as an i nt eres t i n , o r p ro fi ts fro m the t ran s act i on .” Id . at 7 9 (qu o t i n g Ti g ers Ey e Trad i n g , LLC v . Co m m i ss i o n er, T.C. M em o . 2 00 9 -1 2 1 , 2 0 0 9 W L 1 4 7 5 1 5 9 , at* 1 9 ). Pet i t i o n ers arg u e t h atM r. Ari as fal ls wi th i n th atd efi n i t io nb ecau s e h e-2 0
-

[* 2 0 ] was i n v o l v ed wi th the t ran s act i o n, an dth erefo re h e h ada co n fl i cto f i n t eres t . W e are n o tco n v i n ced
. In 1 0 6 Lt d . v . Co m

m i s si o n er, 1 3 6 T.C. at 8 0 , th e Co urtal s o cau t i o n edth at

“ [o ] n e m i g h tn eedt o b e carefu l i n ap p l y i n g th e d efi n i ti o n t o s o m e k i n ds o f tran s act io n s --a t ax l awy er as kedb y a b u s in es s m an fo r adv ice o n h o w t o s el l th e fam i l y b u s in es s th ro u g h a t ax -fav o reds t o ckred em pt i o nm ig h tb e s ai dt o h av e

‘ part i ci pat edi n st ru ctu ri n g t h e t ran s act i o n .’ ” Th e m ere fact th at an ad v i ser i s b ei n g p ai dt o h el p wi th a t ran s act i o nd o es n o ttran s fo rm th e ad v i s er i n t o a p ro m o t er. Rat h er, wh en the “ tran s act i o ni n vo l v edi s th e s am e t ax s h el t er o ffered t o nu m ero u s p art i es , th e [Ti g ers Ey e Trad in g , LLC] d efi n i t i o ni s wo rk ab l e.” Id
. Here, M r. Berri tt o h iredM r. Ari as t o s tru ctu re th e ITP t o h el p h i m an dM rs . Berri t t o sav e o n th ei r t ax es . M r. Ari as d i d n o tb en efi tfro m o r h av e an i n t eres ti n th e t ran s act i o n o u t s i d e o f fees g en erat ed fro m t i m e s p en t s et t i n g up the t ran s act i o n
an d p ro v i d i n g acco u n t in g an d t ax p rep arat i o ns erv i ces . Fu rt h erm o re, wh i le M r. Ari as ad v i s edM r. Berri tt o o n t h e ITP, M r. Berri t t o al s o p art i ci p at edi n p l an n i n g th e s tru ctu re. 2 1 Pet i t i o n ers h av e o ffered n o ev i d en ce t o s ho w th at M r. Ari as was
o fferi n g m

u l t i p l e cl i en t s t h e s am e t ax p l an . Si m il ar t o th e “ t ax l awy er” ex am p l e i n

2 1 Fo r ex am

pl e, al th o ug h M r. Ari as wan t edM r. Berri t t o t o u s e “ M an ag em en t ” i n the C co rp o rat i on ’ s n am e, M r. Berri t t o d eci d edt o cal l th e C co rp o rat i o n FAB Ho l d i ng s , LLC.-2 1
-

[* 2 1 ] 1 0 6 Lt d ., as an y

i n d iv i du al wo u l dg o t o an ad v i s er fo r h el p i ns et t i n g up a tran s act io n , M r. Berri t t o wen tt o M r. Ari as fo r g en eral t ax p l an n i n g ad v i ce. M r. Ari as h el p edthe Berri t t o s wi th t h ei r ITP b u t was n o ta p ro m o t er wi th an i n h eren t
co n fl i cto f i n teres t . Pet i t i o ners cas t a wi d er n etarg u i n g thatb ecau s e M r. Ari as was p ai d t o s et
up th e t ran sact i o n h e h adan i n h eren tco n fl i cto f i n teres t . Pet i ti o n ers i n co rrect l y draw an al y s i s fro m Tran s p ac Dri l l in g Ven tu re 1 98 2 -1 2 v . Co m m i ss i o ner, 1 4 7 F.3 d 2 2 1 (2 d Ci r. 1 99 8 ), rev ’ g an drem an d i n g T.C. M em o . 1 9 94 -2 6 . Pet it i o n ers ’ cas es are a far cry fro m

Tran sp ac, wh ere t h e U.S. Co u rto f Ap p eal s fo r th e Seco n d Ci rcu i tfo u n dth atth ere was a co n fl i cto f i n teres t th at p rev en t edth e t ax m at t ers p art n ers fro m

act i ng as rep res en t at i v es fo r t he p art ners o f t h e p art n ers hi p wh en th e t ax m at t ers p art n ers u n i l at eral l y s i g n edth e ex ten s i o n s o f t h e l i m i tat i o n s p eri o d
. Id . at2 2 7 . Inth atcas e t h e IRS was u n ab l e t o g etth e co n s en t s fro m th e l i m i t ed p art n ers s o i t tu rn edt o the t ax m at t ers p art n ers , wh o p u rp o rt ed l y act edo nb eh al f o f th e l i m i t edp art n ers . Id . at2 2 4 . Ev en m o re eg reg i o u s , th o se t ax m at ters p art n ers
were u n d er a cri m i n al i n v es t i g at i o n an dth erefo re h ad a s i g n i fi can tco n fl i cto f i n t eres tb ecau s e o f t h ei r wi l l in g n es s t o o b l i g e t h e IRS’ req u es ts fo r t h ei r o wn b en efi t , i g n o ri n g th ei r fi du ci ary du ty t o th e l i m i t edp art n ers . Id . at2 2 7 -2 28
. Pet i t io n ers arg ue t h atM r. Ari as ’ ro l e was l i k e t h ato f t h e t ax m at t ers p art n ers i n-2 2
-

[* 2 2 ] Tran s p ac: Becau s e t h e IRS k n ew t h atM r. Ari as p lay eda ro l e i n
es t ab l i s h in g p et i t i o n ers ’ ITP, th e IRS was o nn o t i ce th at h e h ada co n fl i ct . Th i s arg u m en ti s b ey o n d t h e p al e. Pet i t i o ners m ak e s ev eral u n ju s t i fi ed an dex t en si ve l eap s t o co m p are t h es e
cas es wi th Tran s p ac. Un d er p et i t i o n ers ’ p ro p o s edco nfl i cto f i n teres ts t an d ard , t ax p ay ers wh o p ai da t ax p rep arer o r an at t o rn ey as th ei r rep res en t at i v e co u l dn o t h av e th e p rep arer o r at t o rn ey rep res en tthem

b efo re t h e IRS (o r i n a ju di ci al p ro ceed in g ) ari si n g o u to f t h e t ran sact i o n fo r wh i ch th e p rep arer o r at to rn ey was p ai d . Ho wev er, t ax p ay ers o ft en s el ectth e fi rm o r p ers o nwh o p l an n edth e tran s act io n t o b e t hei r rep res en t at iv e b efo re t h e IRS i na s ub s equ en t i n qu i ry . Pet i t io n ers s o u g h tM r. Ari as ’ ex p ert is e fo r t ax p l an n i n g an d p rep arat i o n . M r. Ari as p ro v i d edt ax p l an ni n g s erv i ces t o th e Berri tt os b u tal s o p rep aredy earl y retu rn s fo r t h em , FAB, an dEn t erp ri s es . Pet i t io n ers p ai dM r. Ari as aro u n d $ 2 0 ,0 0 0 fo r t h es e s erv i ces . Un l i k e Tran s p ac, t h es e cas es rev eal n o ev i d en ce t h at M r. Ari as was u n d er cri m i n al i n v es t ig at i o nwi th a p ro p en s i ty t o co o p erat e wi th th e IRS. Th e acto f ch arg in g fo r s erv i ces i s n ota cri m i n al act i v it y . No th i n g i nth e
reco rdi n d i cat es th atM r. Ari as ’ ex t en d i n g th e as s es s m en tl i m i t at i o n s p eri o d s i n v o l v ed an i nh eren tco n fl i cto f i n t eres t . Fu rt herm o re, u n l i k e t h e l i m i t edp art n ers i n Tran s p ac, wh i l e M r. Ari as s i g n edal l o f t he Fo rm s 8 7 2 fo r t h e Berri t t o s’-2 3
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[* 2 3 ] i n d i v i du al retu rn s an d m o s to f FAB’ s Fo rm s 8 7 2 , M r. Berri t t o p ers o n al l y
s i gn edth e fi rs tFo rm

8 7 2 fo r FAB. Co n s equ en t ly , Tran s p ac i s n o t an an al o g o u s
cas e. Si m i l arl y , p et i ti o n ers arg u e t h atCi rcu l ar 2 3 0 , wh i ch g o v ern s p ract i ce b efo re th e IRS, i d en t i fi es M r. Ari as ’ co n du ctas a co n fl icto f i n t eres t . See 3 1 C.F.R. s ec. 1 0 .0 (a) (2 0 2 1 ). Ci rcu lar 2 3 0 n o t es th atth ere i s co n fl i cto f i nt eres t wh en “ [t ] h ere i s
a s i g n i fi can tri s kth atthe rep res en t at i on o f o n e o r m o re cl i en t s wi l l b e m at eri al l y l i m i ted b y

* * * a p ers o n al i n t eres to f t h e p ract i t io n er.” Id . s ec. 1 0 .2 9 (a)(2 ). Pet i t io n ers arg ue t h atth e IRS s h o u l dh av e kn o wnth atth ere was an i n h eren t
co n fl i cto f i n teres ti n M r. Ari as ’ s i g n i n g th e ex t en s i o n s b ecau s e h e al s o s ig n edth e t ax return s as a p ai d prep arer. As s t at ed ab o v e, th e s u g g es ti o n th atb ecau s e an i n d i v i du al i s p ai d o r p arto f a t ran s act i o n’ s p l an ni n g th ati nd i v i du al wo u l d
au t o m at i cal l y

b e u nab l e t o rep res en ta t ax pay er i s n o tp ract i cal . Su ch a s tan d ard
wo u l di n v al id at e t h e rep res en t at i o no f t ax p ay ers b y nu m ero u s at t o rn ey s , acco u n t an t s , an dp o wer o f at t o rn ey h o ld ers b ecau s e t h o se i nd i v i du al s o ft en p erfo rm t ax p l an n in g an dt ax p rep arat i o n an d s ub s equen t l y rep res en t thei r cl i en ts b efo re t h e IRS. Th ere wi l l al way s b e an u n d erl y i n g m o n et ary tu g b et ween cl i en t s
an d th ei r p ai drep res en t at i v es . Ci rcu lar 2 30 i s a m ech an is m t o al l ow s an ct i o n s fo r
v i o l at i n g th e reg u l at i o n s g o v ern i n g p ract i ce b efo re t h e IRS; i ti s n ota m ech an i s m-2 4
-

[* 2 4 ] t o d et erm i n e wh et h er a p o wer o f at t o rn ey i s v al idan dco n fers au tho ri ty t o
s i gn Fo rm s 8 7 2. 3 1 C.F.R. s ec. 1 0.0 (a). Acco rd i n g l y , p et i ti o n ers ’ p o s it i on h as n o
m eri t . Co n s equ en t ly , we fi n dth atp et i t i o n ers d i dn o tp ro v e th ere was an i n h eren t
co n fl i cto f i n teres t . In co n cl u s i o n , we h o l dthatth e as ses s m en tl i m i t at i on s p eri o d s were p ro p erl y
ex t en d edas t o M r. Berri t to fo r t ax y ears 2 0 10 th ro u g h 2 0 1 2 an dfo r FAB fo r t h e t ax y ears en di n g M arch 3 1 , 2 0 1 1 th ro u g h 2 0 14 . Acco rd i n gl y , we co ncl u d e t h at th e SNODs ati s su e i n th es e cas es were t i m el y s en tt o p et i t i o n ers . II. Co rrel at i v e Ad

ju s t m en t Gen eral ly SNODs are p res u m edco rrect , an d t ax p ay ers g en eral l y b ear t h e b u rd eno f p ro vi ng th ei r d et erm i n at i o n s erro n eo u s . See 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 15 (1 9 33 ). Th e Berri t t o s’ SNOD d i sal l owedth e d educt i o n s fo r m an ag em en tfees an d p erfo rm an ce b o n u s es cl ai m edb y En t erp ri s es fo r p aym en t s t o FAB, wh i ch i ntu rn d ecreas edth e l o s s es fl o w i n g t h ro u g h t o th e Berri t t os ’ return s . 2 2 Pet i t i o n ers d o n o t

2 2 Th e Berri t t o s ’ SNOD al s o d i s al l owedo ther d edu ct i o n s cl ai m edb y En t erp ri s es th ataffect edth e l o s s th atfl o wedth ro u g h t o the Berri t t o s ’ retu rn s , i n cl u d i n g d edu ct i o n s s u ch as ren t , i n t eres t, am o rt i zat i o n , l eg al an d acco u n t i n g fee ex p en s es ; b u tp et i t io ners di dn otas kfo r a co rrel at i v e ad j u s tm en tfo r t h o s e i t em s an d o therwi s e co n ced edth o s e ad ju s t m en t s . Th e Berri t t o s ’ SNOD al s o i n creas ed th e Berri tt o s ’ i n co m e b y

as s ert i n g co n s tru ct i v e d i v i d en d s fro m FAB. Th o s e (co n ti n u ed ...)-2 5
-

[* 2 5 ] d i s p u t e t h es e ad

ju s t m en t s b u trat h er as s ertthatth ey req ui re a co rrel at i v e ad ju s t m en t s t o FAB’ s i n co m e t h atwas n o tt ak en i n t o acco u nti nth e p ro po s ed ad ju s t m en t s o u t l i n ed i n FAB’ s SNOD. Pet i t i o n ers arg u e t h atres p o n den ti s req u i redt o redu ce FAB’ s i nco m e i nam o un t s co rres p o n d i n g t o t h e am o u n t s o f En t erp ri s es ’ d i s al lo wedd edu ct i o n s fo r m an ag em en tfees an dp erfo rm an ce b o n u s es . Th ey

co n t en dth atwi th o u ts u ch ad j u s t m en t s t o FAB’ s i n co m e t h ey
wo u l db e “ d o ubl e t ax ed ,” wh i ch th ey b el iev e i s u n fai r. Fo r th e reas o n s d i s cu s s ed b el o w, res p o n den ti s n otreq u i redt o m ak e co rrel at i v e ad ju s t m en t s 2 3 t o FAB’ s i n co m e. Pet i t i o ners i n v i t e t h e Co u rtt o m o d i fy FAB’ s i n co m e b y

an al o g i zi ng th ei r
cas es t o Al o n dra In dus ., Lt d . v . Co m m i s s i o ner, T.C. M em o . 1 9 96 -3 2 , 1 9 9 6 W L 3 1 2 5 0 , at* 1 9 -* 2 0 , wh ere co rrel at iv e ad ju s tm en t s were m ad e t o a p artn ers h i p ’ s i n co m e wh en th ree rel at ed co rp o rat i o n s m ad e p aym en t s fo r m an ag em en ts erv i ces t o the p art n ers h ip th ey

o wn ed . Inthatcas e ad

ju s t m en ts were m ad e b ecau s e th e
co rp o rat i o ns ’ d educt i o n s fo r t h o s e s erv i ces were d i s al l o wed an d t h e p art n ers h i p

2 2 (...co n t i nu ed ) ad ju s t m en t s wi l l b e d i s cu s s eds ep arat el y . See i n fra p p . 2 7-3 2
. 2 3 W e n o te t h at co rrel at i ve ad ju s t m en t s o r al lo cat i on s ty p i cal ly ari s e i nth e co n tex to f s ec. 4 8 2 . Ho wev er, s ec. 4 8 2 was n o t arg u edb y th e p art i es an di s n o tat i s su e i n t h es e cas es .-2 6
-

[* 2 6 ] was treat edas a m ere co n du i t fo r t h e t ran sact i o n . Id . at * 20 . W e fi n d Al o nd ra d i s t i n g u i sh ab le. In th es e cas es we fi n ds i gn i fi can tth atth e p aym en t s were
m ad e fro m

a p artn ers h i p (En t erp ri s es ) t o a s ep arat e C co rp o rat io n(FAB) t h atwas
n o td i rect l y

o wn ed . Th ere was n o d i rect fl o w th ro u gh i m p actas i nAl o nd ra. In ad d it i o n th e reci pi en ten t i ty was d eem eda m ere co n du i ti nAl o n dra. Here t h e reci pi en t en t i ty

i s a C co rp o rat i o nth ath ads i g n i fi can to th er tran s act i o n s th at affect edth i rdp art i es 2 4 s u ch th ati twas n o t a m ere co n dui t fo r t h e i n co m e. 2 5 Th e t ax co n s equ en ces o f o p erat i n g a b u s i n es s thro u g h a C co rp orat i on are d i fferen t fro m

th o se o f a p art ners h i p . Pu rs u an t t o s ect i o n s 7 0 1 an d 7 02 , p art n ers hi p s are fl o w th ro ug h en t i t i es , wh i ch m ean s t hatth ey d o n o tp ay

t ax atth e p art n ers hi p l ev el . See Un i t edSt at es v . Bas y e, 4 1 0 U.S. 4 4 1 , 4 4 8 (1 9 7 3 ). A
co rp o rat i o n, o n th e o th er h an d , i s a s ep arat e t ax ab l e en t i ty fro m i t s s hareh o l d ers . M o l i ne Pro p s . v . Co m

m i s s io ner, 3 1 9 U.S. 4 3 6 , 4 3 9 (1 9 4 3 ). Co n s equen t l y , wh en i t i s o p erat i n g as a C co rp o rat i o n , th e i n co m e i s t ax edfi rs t atth e co rp o rat e l ev el . See
s ec. 6 1
. An d th en , upo n a d i s tri b u t i o nfro m th e co rp o rat i on t o th e s h areh o l d ers ,

2 4 On e s uch tran s act i o n was a fu n d edp ro fi t -s h ari n g p l an th atb en efi tedth e Berri t t o s.

2 5 Res p o nd en tal s o m i s ap p l i es Al o nd ra In du s ., Lt d
. v . Co m m i s s i o n er, T.C. M em o. 1 9 9 6 -3 2 . Res p o n d en t arg u es th atEn t erp ri ses i s an “ S co rp orat i o n ,” an d th atth erefo re Al o n dra s ho u l dn o t ap p l y . En t erp ri s es i s a p art n ers h i p . Reg ard l es s o f res po n d en t ’ s m i s ch aract eri zat i o n , as o u tl i nedab ov e, Al o n dra i s n o tan al o g o u s .-2 7
-

[* 2 7 ] th e s hareh o l d ers al s o h av e t ax co n s equ en ces . See i d . Ins tru ctu ri n g t h ei r b u s i n es s as a s ep arat e t ax ab l e en t i ty , s h areh o l d ers co ns i d er wh et h er “ th ere was
s o m e b en efi ti n d o i ng b us i n es s th ro u g h a co rp o rat i o n . Th ey m u st accep t th e l i ab i l i t i es as wel l as th e b en efi ts .” No b l e v . Co m m i s s i o n er, 3 6 8 F.2 d 4 3 9, 4 4 5 (9 th Ci r. 1 9 66 ), aff’ g T.C. M em o. 1 9 6 5 -8 4 . “ [W ] h i l e a t ax pay er i s free t o o rg an i ze h i s affai rs as h e ch o o s es , n ev ert h el es s , o n ce h av in g d on e s o , h e m u s taccep tth e t ax
co n seq u en ces o f h i s ch o ice, wh et h er co nt em p l at edo r n ot .” Co m

m i s s i o n er v . Nat ’ l Al fal fa Deh y drat i n g & M i l l i ng Co ., 4 1 7 U.S. 1 34 , 1 49 (1 9 74 ). Th e Berri t t o s ch o s e t o m ak e FAB a C co rp o rat i o n an dth em s el ves
s h areh o ld ers o f i t . FAB recei v edp aym en ts fro m En t erp ri s es , wh i ch are t ax ab l e t o FAB. See s ec. 6 1 (a)(1 ). Pet i t i o n ers h av e n o tp ro vi dedan y co g en tl eg al arg u m en t,
o th er t han ci t i n g Al o n dra, t h at wo u l dal l ow s u ch p aym en t s t o b e n on t ax ab l e. Li k ewi se, t h i s Co u rth as n o tfo u n dan y p reced en ti n di cat i ng th at res p on d en ti s req u i redt o o bl i g e t h ei r req u es t . Becau s e FAB h as n o t p ro v en i t s en t i tl em en tt o a redu ct i o n i n i n co m e, res p o nd en ti s n o t req u i redt o redu ce FAB’ s i n co m e. III. Co n st ru ct iv e Di v id en d s Th e Berri t t o s’ SNOD l i kewi s e p ro po s edad ju s t m en t s t o th ei r i n co m e i nth e fo rm o f co n s tru ct iv e d iv i d en d s . Pet i t i o n ers arg u e t h atth ere were n o co n s tru ct i v e d i v i d en d s b ecau s e d o ub l e t ax at i o nwo u l d res u ltan dth atres po n d en td i d n otm eet-2 8
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[* 2 8 ] h i s b u rd en o f p ro o f reg ard i n g co n s tru ct iv e d i v i d en d s. 2 6 Fo r th e reas o n s d i s cu s s edb el o w we d i s ag ree wi th p et i t i o n ers ex cep tt o th e ex ten to f t he
co n st ru ct i v e d iv i d en ds rel at edt o d i rect o r’ s fees . Gen eral l y , a SNOD i s en t i t l edt o a p res u m p ti o n o f co rrect n es s . Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. at1 1 5 (1 9 3 3). In d et erm i n i n g wh et h er t h e Co u rts h ou l ds u s t ai nth e co n s tru ct i v e d i v i d en d d et erm i n at i o n , we l oo kt o th e U.S. Co u rto f Ap p eal s fo r th e Seco n dCi rcu i tt o wh i ch an ap p eal i n th es e cas es wo ul dl i e ab s en ta s ti p u l at i o nt o t h e co n trary . See
s ec. 7 4 82 (b )(1 ) an d(2 ); Go l s en v . Co m m i s s io n er, 5 4 T.C. 7 4 2 , 7 5 7 (1 9 7 0), aff’ d , 4 4 5 F.2 d9 8 5 (1 0t h Ci r. 1 9 71 ). Th atCo u rt o f Ap p eal s h as h el d t h atth e Co m m i s s i o n er b ears th e i ni t i al b u rd en o f p ro of an dth ath e m u s t es t ab l i s h a
reas on ab l e co n n ect i o n b et ween th e t ax p ay er an d t h e i n co m e-p ro du ci n g act i v i ty .

2 6 Th ro u gh o u tth es e cas es res p o n d en th as , att i m es , n o tfu l l y p ai dat t en t i o n t o d et ai ls . Inh i s s eri at i m

an s w eri n g b ri ef, res p o n d en targ u es th atp et i ti o n ers “ h av e wai v ed thi s i ss u e b y

(1 ) n otrai s i n g i ti n t h e p ret ri al m em o , an d(2 ) n oti n cl u d i n g i t (ex cep tp erh ap s as an aft ert h ou g h t) i nth e i s su es p res en tedp o rt i o no f t h ei r o p en in g b ri ef.” Res p o n d en t ap p ears t o h av e fo rg o t t enth e m ul t i p l e t i m es p et i t i o n ers h av e ad dres s edth i s i s s u e. In th e Berri t t o s ’ p et i t i o nthey arg u e t h atFAB d i dn o tp ay o r i n cu r p ers o n al ex p en s es o n th ei r b eh al f t h atwo u l d creat e a co n s tru ct i v e d i v i d en d i n 2 0 1 0, 2 0 1 1 , 2 0 1 2 , o r 2 01 3 . Fu rt h erm o re, wh i l e p et i t i o ners d o n o ts p eci fi cal l y u s e t h e p h ras e “ co n st ru ct iv e d iv i d en d ” i n t h ei r p ret ri al m em o , i nthe v ery fi rs t i s su e p et i t i o n ers as kwh eth er t h ey are “ l i ab l e fo r ad di t i o n al ‘ qu al i fi edd i v i d en d s ’ b y v i rtu e o f * * * [M r. Berri t t o ’ s ] rel at io n s hi p t o FAB Ho l d i ng s , LLC, o r s h o u l d i t em s o n th atretu rn b e ad j u s t ed .” Wh i l e i two u ldh av e b een m o re ap pro p ri at e t o s ep arat e t h e t wo i s s u es , p et it i o n ers d idad dres s th is i s s u e. So , wh i l e res po n d en t d o es no tackn o wl ed g e al l o f t h e i s s u es rai sedb y p et i t i o ners , th ey

were i n d eed rai s ed
.-2 9
-

[* 2 9 ] See, e.g ., Ll o ren te v . Co m m i s s i o n er, 6 4 9 F.2 d1 52 , 1 56 (2 d Ci r. 1 98 1 ) (ci t i n g W ei m ers k i rch v . Co m m i s s i on er, 5 9 6 F.2 d 3 5 8 (9 th Ci r. 1 9 7 9), rev ’ g 6 7 T.C. 6 7 2 (1 9 7 7 )), aff’ g i n p art , rev ’ g i n p art7 4 T.C. 2 6 0 (1 98 0 ). Th e Co m m i s s i o n er m

u s tes tab l i s h s o m e ev i d en t iaryfo u n d at i o nl in k i n g th e t ax p ay er t o th e t ax g en erat i n g act s . Id
. In th es e cas es res p o n d en th as m et h i s b u rd eno f p ro o f. Here t h e
co n st ru ct i v e d iv i d en ds ati ss ue s t emm edfro m th e rech aract eri zat i o no f FAB’ s d educt i o n s fo r s al ary , l eg al an dp ro fes s i o n al fees , m ed ical rei m bu rs em en t s, l o n g t erm care i n s u ran ce, em

p l oy ee b en efi t s p ro g ram s, d i rect or’ s fees , an d t ax es an d l i cen ses as d i v i d en d s . Th es e “ d educt i o n s ” were rech aract eri zedb ecau se FAB p ai d th e Berri tt o s ’ p ers o n al ex p en s es . Th e Berri t t o s were cl earl y i nv o l v edi n th e tran s act io n s as ev i d en ced b y : (1 ) M r. Berri t t o’ s em ai ls an dh i s p o s it i on as p res i den to f FAB; (2 ) M r. an d M rs . Berri t t o ’ s 5 0% o wn ers h i p o f FAB; an d(3 ) t h e
m an n er i n wh i ch i n co m e an dex p en s es were rep o rt edo nth e ret u rn s fo r t h e Berri t t o s an dFAB. Acco rd i ng l y , res p o nd en th as m et h i s b u rd en o f s h owi n g th at th ere i s a reas o n ab l e co n n ect io n b et ween th e Berri t t o s an dth e co n s tru ct i v e d i v i d en d s, as th ere i s ev i d en ce l i n k i n g th e Berri t t o s t o th e t ax g en erat in g act s . As res p o n d en t h as m et h i s i n i t i al b u rd en , th e b u rd en s h i ft s t o p et it i o n ers t o p ro v e th ath i s d et erm i nat i o n s are erro n eo us o r arb i trary . See Hel v eri n g v . Tay l o r,-3 0
-

[* 3 0 ] 2 9 3 U.S. 5 0 7 , 5 1 4 -5 1 5 (1 9 3 5 ); s ee al s o Tex as g u lf, In c., & Subs . v . Co m m i s s i o n er, 1 7 2 F.3 d2 0 9 , 2 1 4 (2 dCi r. 1 9 9 9 ), aff’ g 1 0 7 T.C. 5 1 (1 9 9 6 ). Di v i den d s m ay

b e fo rm al l y

d ecl aredo r co n s tru ct i v e. A co n s tru ct i ve d i v i d en d ari s es “ [w] h ere a co rp o rat i o n co n fers an eco n o m i c b en efi to na
s h areh o ld er wi th o u tth e ex p ect at i o no f rep aym en t , * * * ev en th o u gh n ei th er t h e
co rp o rat i o n n o r th e s h areh o l d er i n t en d eda d i v i d en d .” Ho o d v . Co m m i s s i o n er, 1 1 5 T.C. 1 7 2 , 1 7 9 (2 0 0 0 ) (qu o t i n g M ag n o nv . Co m m i s s i o n er, 7 3 T.C. 9 8 0 , 9 9 3
- 9 9 4 (1 98 0 )); s ee al s o Tru es d el l v . Co m m i s si o n er, 8 9 T.C. 1 28 0 , 1 2 9 5 (1 9 8 7 ). Sect i o n s 3 0 1 an d3 1 6 g o v ern the ch aract eri zat i o no f a co rp o rat e d i s tri b u t i on o f p ro p erty t o a s h areh o l der. If t h e d i s tri b u ti n g co rp orat i o nh as s u ffi ci en t earn i n g s
an d p ro fi t s , th enth e d i s tri b u t i o n i s a d i v i d en dwh i ch i s i n cl u d ed i n t h e
s h areh o ld er’ s g ro ss i n co m e. Secs . 3 0 1 (c)(1 ), 3 16 . If th e d i s tri b ut i o nex ceed s th e
co rp o rat i o n’ s earn i n g s an dp ro fi t s , th e ex ces s i s fi rs ta retu rn o f cap it al an dan y
rem ai n i n g i s t ax edas cap i t al g ai n . Sec. 3 01 (c). Th e t ax p ay er b ears the b u rd en o f p ro v in g th atth e co rp o rat i o n l ack s s u ffi ci en t earn i ng s an d p ro fi t s t o s up p o rt d i v i d en d treat m en t . Tru es d el l v . Co m m i s si o n er, 8 9 T.C. at1 2 9 5 -1 2 9 6 ; s ee al s o Lu czaj & As s o cs . v . Co m m is s i o n er, T.C. M em o . 2 0 1 7 -4 2 , at* 2 2 -* 2 3
. Pet i t i o ners ’ arg u m en treg ard i n g th e treat m en to f t h e d i s tri b u t i on s t em s fro m th ei r as s ert i o n th atFAB i s en t it l edt o a co rrel at i v e ad j u s t m en t . Redu ci n g FAB’ s-3 1
-

[* 3 1 ] i n co m e reduces i t s earn i ng s an dp ro fi t s . If FAB’ s i nco m e i s redu ced , th e Berri t t o s can reco v er s o m e o f t h ei r b as i s i nFAB s t o ck b efo re reco g n izi n g g ai n , th ereb y redu ci n g th ei r i n co m e t ax l i ab i l i t i es . See s ec. 3 0 1 (c)(2 ) an d(3 ). As d i s cu s s eds up ra p p . 2 4 -2 7 , res p o n d en twas n o treq u i red t o m ak e a co rrel at i v e ad ju s t m en t . Th erefo re, FAB’ s i n co m e wi l l rem ai nu n ad ju s t ed , an dacco rd in g l y

i t s
earn i n g s an dp ro fi t s rem ai n th e s am e. In s um p et i t i o n ers h av e n o ts h o wnthatFAB l ack s s u ffi ci en t earn i n gs an dp ro fi t s t o p ay a t ax ab l e d i v i d en d . See s ec. 3 01 . Th e Berri t t o s ch o s e th e co rp o rat e fo rm fo r FAB, an dth erefo re t h ey m u s t ab id e b y

th e
res u l ts o f t h atch o ice. Acco rd in g l y , we s u s t ai nres p o n d en t ’ s d et erm i nat i o n reg ard i n g th e co n s tru ct i v e d i v id en d s wi th the ex cep t i o n o f t he d i rect o r’ s fees as
ex p lai n edb el o w . Wh i l e we ag ree wi th res p o n d en to nthe ch aract eri zat io no f s o m e o f t h e
co n st ru ct i v e d iv i d en ds , p et i t io n ers h av e d em o n st rat edth atn o eco no m i c b en efi t
was co n ferred up o n th e Berri t to s b y FAB’ s d edu ct io no f t h e d i rect o r’ s fees fo r t h e 2 0 1 2 an d2 0 1 3 t ax y ears , res p ect i v el y . On ce a p et i t i o ni s fi l ed wi th thi s Co u rt , o u r juri s d i ct i o n ex t en ds t o the en t i re s ub jectm at t er o f t h e co rrect t ax fo r t h e t ax ab l e y ear. Naft el v . Co m

m i s s i o n er, 8 5 T.C. 5 2 7 , 5 33 (1 98 5 ). Co ns equ en t l y , we wi l l
rev i ew t h e d i rect o r’ s fees
.-3 2
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[* 3 2 ] Th e Berri t t o s i n cl u d ed th e d i rect o r’ s fees i nth ei r i n co m e fo r t ax y ears 2 0 1 2
an d 2 0 1 3 . Wh il e t h e Berri t t o s d i d recei v e aneco n o m i c b en efi t fro m s u ch p aym en t s, th ey

al read y p ai d t ax o nthi s b en efi tb ecau s e i twas i n cl u d ed as i n co m e
o n th ei r i n di v i dual retu rn s . As s u m i n g, arg u en do , th atwe were t o co n cl u de t h atthe d i rect o r’ s fees are a co n s tru ct i v e d i v i d en d , th e Berri t t o s wo u ldb e req u i redt o p ay t ax o n th e s am e i n co m e twi ce: o n ce as d i rect o r’ s fees an do n ce as co n s tru ct i v e d i v i d en d s. Acco rd i n gl y , t o the ex t en tth atth e co n s tru ct i v e d i v i d en d d et erm i n at i o n s fo r 2 01 2 an d 2 0 1 3 rel at e t o th e d i rect o r’ s fees , th e Berri t t o s h av e d em o n s trat edth atres p o n d en t’ s d et erm i n at i on i s erro n eo u s . IV. Co n cl u si o n In co n cl u s i o n , we h o l dthat(1 ) t he as s es s m en tl im i t at i o ns p eri o d s h adn o t
ex p iredb efo re t he SNODs were m ai l edt o M r. Berri t t o fo r t ax y ears 2 0 1 0 th ro u g h 2 0 1 2 an dt o FAB fo r t h e t ax y ears en d i n g M arch 3 1 , 2 0 1 1 th ro u g h 2 0 14 , (2 ) t h e IRS i s n o treq u i redt o m ak e a co rrel at i v e ad ju s t m en t t o FAB’ s i n co m e, an d (3 ) t h e Berri t t o s fai ledt o s h ow th atth ey d i dn o trecei v e co n s tru ct i v e d iv i d en d s , ex cep tt o th e ex t en to f t h e d i rect or’ s fees fo r 2 0 1 2 an d 2 0 1 3 . In reach i n g o u r h o ld i n gs , we h av e co n s i d eredal l arg u m en ts m ad e, an dt o th e ex ten tn o t m en ti o n edab o v e, we
co n cl u d e th ey

are m o o t , i rrel ev an t , o r wi th o u tm eri t.-3 3
-

[* 3 3 ] To refl ectthe fo reg o i n g , Deci s i o n s wi l l b e en t eredu n der Ru l e 1 5 5
.