T.C. Mem o. 2 01 3- 23 3

UNITED STAT ES TAX COURT
PHILIP D. LONG a.k.a. PHIL LONG, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 26 55 2- 10
. Fil edOcto be r 21 , 20 13
.
Ph il ip D. Long , pro se. Kim be rly A. Daig le , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION
MORR ISON, Ju dg e: The re sp on de ntis su eda no ti ce o f de fic ie nc y de te rm in in g a$1 ,43 0,7 43 de fic ie nc y inth e p et it io ne r’s fed eral in co m e ta x a nda $2 86 ,14 8.6 0 a ccu racy-rela te d p en al ty und er s ect io n 6 66 2( a) fo r th e 2 00 6 t ax y ear. Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al Rev enue Co de- 2 -

[* 2] as ineffe ctforth e 2 00 6 t ax y ear, an d a ll Ru le refe ren ces are t o t he Tax C ou rt Ru le s o f Prac ti ce an d P ro cedur e. The re sp on de ntis refe rredto as t he IRS. The pe ti ti on er i s re ferr edto as Lo ng . The on ly iss ue s re m ai ni ng to be res ol ve d a re: (1 ) Is Lon g e nt it le d t o ade du ct io n fo r $2 38 ,54 3.7 1 i n l eg al fees in ad di ti on to th e $ 82 9,9 22 inleg al fees de te rm in edto be de du ct ib le in th e n ot ic e o f de fic ie nc y ? (At tria l Lo ng waiv edth e is su e o f th e de du ct ib il ity

of t he $2 38 ,54 3.7 1 i n l eg al fees ; h e is th eref or e n ot
en ti tl edto th atde du ct io n.) (2 ) Of th e $ 5.7 5 m il li onth atLon g re cei ve d fr om Lou is P. Ferri s, J r., is $6 00 ,00 0 e xc lu dabl e fro m Lon g’s i nc om e o n t he th eo ry th atth is
am ou ntwas the sh are o f earn in gs attrib ut ab le to Lon g’s al le ge d jo in t
ve ntur e p artne r, Ste el erv es t, In c.? (W e fi ndth ere was no joi nt
ve ntur e; Lon g m

us t the refo re i nc lu de th e $ 60 0,0 00 inhi s i nc om e.) (3 ) Is th e ch arac te r of

th e $ 5.7 5 m il li on rece iv edby L on g c ap it al or or di nary ? (W e h ol d t ha t the in co m e is ord in ary. ) (4 ) Is Lon g e nt it le d t o c os t o f go od s s ol d o f $2 ,44 0,8 61 , as c la im edon hi s re tu rn , or $ 1,6 55 ,56 2, as de te rm in edinth e n ot ic e o f de fic ie nc y ? (We ho ldth atth e al lo wab le am ou ntis $1 ,65 5,5 62 .)- 3 -

[* 3] (5 ) Is Lon g l iabl e fo r th e acc ur acy-rela te d p en al ty pur su an t t o s ect io n

66 62 (a)? (W e h ol d t ha t h e is li ab le .)

FINDINGS OF FACT The pa rti es st ip ul at edso m e fac ts ; tho se fact s ar e so fou nd . Lon g re si de d i n Fo rt Lau de rd al e, Fl or id a, atth e ti m e th e p et it io n was fil ed
. Lon g was m arri edto Su sa n Lo ng un ti l the ir d iv or ce i n S ep te m be r 20 06
. Lon g was in vo lv edinva rio us en ti ti es th atco nduc te d re al est at e de ve lo pm en t p ro

jects inFlo rid a. The d ev el op m en t p ro jects oft ensp an ne d s ev eral y ears . Lon g o wne d a ndop erat edLas Ol as Tower C o., In c. (h erei na fte r “ LOT”). LOT was in co rp or at edin19 94 as aDelaware co rp or at io n. Lo ng ne ve r fi le d a ny co rp or at e in co m e ta x re tu rn s fo r LOT andtre at edth e en ti ty as a s ol e pr op rie to rs hi p, re po rti ng it s i nc om e an d d educ ti on s o n h is Sch edul e C, “ Pro fitor Los s Fr om

Bu si ne ss ”. Lon g c reat edLOT to d es ig n a ndbu il d alu xu ry hi gh -ri se 1
co nd om in iu m

bu il di ng cal le d the Las Ol as Tower. Th e Las Olas Tower wa s t o b e bu il t o n l an d t o b e p ur ch as edfro m Las Ol as Riv ers id e Hot el (he rei na fte r “ LOR”).

Neit he r Lon g n orth e IRS urg es th atLOT be tr eat edas o th er tha n aso le 1 pr op rie to rs hi p fo r fed eral in co m e ta x p ur po se s.- 4 -

[* 4] The l an d was on Las Ol as Bo ul ev ardinFo rt Lau de rd al e, Fl or id a. In19 94 , LOT beg anne go ti at io ns to pu rch as e th e la ndfro m LOR. In19 95 , LOT bo rro wed$3 00 ,00 0 fr om Ste el erv es t, In c., a co rp or at io n own edby H enry

J. Lan gs en ka m

p II I (h erei na fte r “ Lan gs en ka m p” ). In a dd it io n t o ag reei ng to rep ay

th e p rin ci pa l o n t he lo an , LOT gr an te d S te el erv es t an op ti on to acqui re 1 0% o f anen ti ty to wh ic h LOT pr om is edto tra ns fer o wne rs hi p o f th e bu il di ng to be co ns tru ct edon Las Ol as Bo ul ev ard . The l oa n a gr eem en t p ro vi de d th atif the 10 % op ti onwas e xe rci se d b y Ste el erv es t, an y

di st rib ut io ns Ste el erv es t
rece iv edfro m

th e en ti ty w ou ldreduc e th e lo anpri nc ip al LOT owed . Stee le rv es t
ne ve r ex erci se d the 10 % op ti on . At so m e p oi nt , Ste el erv es t m ad e o th er l oa ns to LOT beyondth e in it ia l $ 30 0,0 00 . By 20 01 , th e b al an ces of a ll of S te el erv es t’s lo an s t o Lo ng am ou nt edto $7 48 ,00 0. Fro m 19 97 th ro ug h 2 00 3, Lo ng own edAlh am br a Partn ers , Inc . (he rei na fte r

“ Alh am br a”). Al ha m

br a was form edto co ns tru cta lu xu ry co nd om in iu m

bu il di ng on Bir chRo adinFo rt Lau de rd al e, Fl or id a. To fac il it at e th e p ro ject, Al ha m

br a en te redin to a joi ntve ntur e, cal le d Al ha m br a Jo in t Ven tu re, wit h S te el erv es t. 2
The pa rti es st ip ul at edth e ex is te nc e o f th e Alh am br a Jo in t Ven tu re. The 2 se co ndis su e fo r de ci si on rel at es to Lon g’s as se rti on th atth ere was a di ffer en t jo in t ve ntur e wit h re sp ectto th e Las Olas Tower, wh ic h wo ul d a ll ow h im to ex cl ud e pa rt o f th e $ 5.7 5 m il li onrece iv edfro m Ferri s.- 5 -

[* 5] Alh am

br a Jo in t Ven tu re was res po ns ib le forco ns tru ct in g t he Bir chRo ad
co nd om in iu m

bu il di ng an d s el li ng th e co nd om in iu m un it s t o c us to m ers . Fro m 19 97 to 20 01 , Alh am

br a Jo in t Ven tu re s uf

fere d s ig ni fic an t l os se s. St eel erv es t l en t $ 3,2 03 ,40 9.8 1 t o Al ha m br a Jo in t Ven ture. The lo anwas gu aran te edby L on g a ndSu san Lo ng . In20 01 , Ste el erv es t en te redin to anag reem en t tha t re st ru ctur edit s l eg al an d fin an ci al arrang em en ts with the Lon gs an d t he ir r el at eden ti ti es (i.e ., LOT , Alh am br a, an d Al ha m

br a Jo in t Ven tu re). Th e ag reem en t h adfou r co m po ne nt s: ! St eel erv es t fo rg av e th e $ 74 8,0 00 inlo an s i t h adm ad e to LOT. 3
! St eel erv es t re le as edth e Lon gs fro m th ei r pe rs on al gu aran ti es of t he $3 ,20 3,4 09 .81 lo anSte el erv es t m ad e to Alh am br a Jo in t Ven tu re. ! Alh am

br a, whi chwas o wne d e nt ire ly by Lon g, tran sf

erre d i ts in te res t in Alh am br a Jo in t Ven tu re t o S te el erv es t, thu s l eav in g S te el erv es t as th e so le own er o f Alh am

br a Jo in t Ven tu re. ! Lon g a gr eedto pa y Ste el erv es t ei th er (a ) $6 00 ,00 0 i n t he ev en t h e so ldhi s i nt eres t i n LOT, or (b) 20 % of LOT’s ne t p ro fit s fr om th e

It i s u nc le ar fro m

th e rec or d wh ethe r th e ag reem en t t erm in at ed 3 St eel erv es t’s o pt io n u nd er the 19 95 ag reem en t t o a cqui re 1 0% o f th e en ti ty to b e fo rm edby L OT.- 6 -

[* 6] de ve lo pm en t o f th e p ro pe rty onLas Ol as Bo ul ev ard , if h e d idno t s el l hi s i nt eres t. By th e en d o f 20 01 , th e uni ts inth e co nd om in iu m bu il di ng Alh am

br a Jo in t Ven ture d ev el op edon Bir chRo adwere s ol d. On J un e 2 0, 2 00 2, LOT an d LOR s ig ne d aco nt ract , kn own as “ th e Ri ve rs id e Agr eem en t” , ob li ga ti ng LOR to sel l the pro pe rty onLas Ol as Bo ul ev ard to LOT for $ 8,2 82 ,80 0. Th e cl os in g d at e o f th e co nt ractwas Dec em be r 31 , 20 04
. 4 The co nt ractrequi redLOT to u se th e p ro pe rty for n o o th er p ur po se th anas a
m ul ti un itres id en ti al bu il di ng with a t l eas t 1 20 ,00 0 s qu are f eetof r es id en ti al un it s
an d ahe ig htof a t l eas t 2 25 feet . Whe n t he co nt ractwas e xe cu te d, Lo ng in te nd ed th atLOT w ou ldco ns tru cta co nd om in iu m bu il di ng an d s el l the co nd om in iu m un it s. Eve n b efo re the Decem be r 31 , 20 04 clo si ng da te of t he Riv ers id e Agr eem en t, the co nd om in iu m bu il di ng to be co ns tru ct edon Las Ol as Bo ul ev ard be cam e Lon g’s fu ll -ti m e p ro ject. Lo ng hi redarch it ect s t o p rep are t he pl an s fo r th e bu il di ng . He so ug htto ob ta in a zo ni ng pe rm itfro m th e ci ty. He pr in te d
LOT hadth e o pt io n o f acc el erat in g t he clo si ng da te to a da te no t earli er 4 th anJu ne 4, 2 00 3, p ro vi de d i t g av e LOR ni ne m on th s’ writ te n n ot ic e o f th e n ew cl os in g d at e.- 7 -

[* 7] pro m ot io na l m at eri al s ab ou t the bu il di ng . Opera ti ng ou t o f hi s b us in es s of fic e, Lon g n eg ot ia te d c on tra ct s wi th pu rch as ers of c on do m in iu m un it s. He ob ta in edde po si ts for20 % of t he un it s i n the bu il di ng . Befo re the clo si ng da te of t he Riv ers id e Agr eem en t, the pre si de ntof LOR di ed . His h ei rs di d n otwis h t o g o t hr ou gh with t he Riv ers id e Agr eem en t. The y te rm in at editinFeb ru ary 20 04
. InMarc h 2 00 4, LOT su edLOR inth e 1 7t h J ud ic ia l Ci rcu itCo urt fo r Bro wardCo un ty, Fl or id a, to en fo rce i ts rig ht s und er the Riv ers id e Agr eem en t. The su itag ai ns t LOR i nc lu de d c la im s fo r sp eci fic pe rfo rm an ce o f th e Ri ve rs id e Agr eem en t, d am ag es in ci de ntto a de cree of s pe ci fic pe rfo rm an ce, d ecl arat ory rel ie f, an d t orti ou s i nt erfe ren ce wi th co nt ract . By th e ti m e o f th e la wsu it , Lon g ha d d eci de d tha t i ns te adof c on st ru ct in g t he co nd om in iu m bu il di ng , LOT wou ld
se ll th e la nd , ready

forco ns tru ct io n, t o apu rch as er. Lan gs en kam p fi le d am ot io n to in te rv en e in th e su itinord er t o b e k ep t ap pr is edof i ts st atus . On Nov em be r 21 , 20 05 , th e 1 7t h J ud ic ia l Ci rcu itCo urt fo r Bro wardCo un ty, Fl or id a, fo un d i n fa vo r of LOT on a ll cla im s ex cep t t orti ou s i nt erfe ren ce. The st at e co urt o rd eredsp eci fic pe rfo rm an ce an d re qu ire d LOR t o c lo se th e co nt ractwithi n 3 26 da y s. Inad di ti on , itord eredLOR to pa y

m on et ary da m ag es to LOT, th e am ou ntof wh ic h was to be de te rm in edlat er. The ord er ex pl ai ne d t ha t the purp os e o f th e m on et ary dam ag es- 8 -

[* 8] was t o c om

pe ns at e LOT for the de lay be twee n t he ori gi na l cl os in g d at e (Dece m be r 31 , 20 04 ), an d the earl ie stdate th atLOR wou ldbe co m pe ll edto ful fil l it s o bl ig at io ns un de r th e Ri ve rs id e Agr eem en t (3 26 day s fr om Nov em be r 21 , 20 05 ). LOR, di ss at is fie d wi th th e o ut co m e o f th e su it , app eal edth e d eci si on . Dur in g the ap pe al Lou is P. Ferri s, J r. (h erei na fte r “ Ferr is ”), o ffer edto pu rch as e LOT’ s p os it io n i n the laws ui t ag ai ns t LOR. Mea nwh il e, in Aug us t 2 00 6 Lo ng an d S te el erv es t re ne go ti at edth e fo urth
co m po ne ntof t he ir 2 00 1 a gr eem en t. Lon g a gr eedth atLOT w ou ldpa y Ste el erv es t 50 % of t he pro ceed s o f th e fi rs t $ 1.7 5 m il li on , up to a m ax im um of $ 87 5,0 00 , of
an y m on ey s re cei ve d b y

LOT as a res ul t o f LOT’ s l aws ui t ag ai ns t LOR o r th e de ve lo pm en t o f th e co nd om in iu m bu il di ng on Las Ol as Bo ul ev ard . In a s ep arat e ag reem en t, St eel erv es t l en t Su sa n Lo ng $2 00 ,00 0. Th e lo anwas s ecu redby a
m ortg ag e o n re al pro pe rty owne d b y Lon g a ndSu sa n Lo ng . The $ 20 0,0 00 lo an ag reem en t i s n otinth e rec or d. Fro m th e te st im on y , itap pe ars to us th at St eel erv es t an d Lo ng ag reedth atLon g’s re pa ym en t o f th e $ 20 0,0 00 lo anwou ld reduc e th e am ou ntLon g o wedun de r th e Aug us t 2 00 6 a gr eem en t. Thu s, i f Lon g were t o re pa y

th e $ 20 0,0 00 lo an , th e m ax im um am ou nthe wou ldowe u nd er the Aug us t 2 00 6 a gr eem en t wo ul d b e $ 67 5,0 00 , no t $ 87 5,0 00
.- 9 -

[* 9] On Se pt em

be r 13 , 20 06 , LOT as si gn edit s p os it io n i n i ts laws ui t ag ai ns t LOR, andall rig ht s ar is in g u nd er the Riv ers id e Agr eem en t, t o F erri s fo r a pu rch as e p ric e o f $5 .75 m il li on . In thi s ag reem en t (h erei na fte r th e “ Ferr is -LOT 5
as si gn m en t ag reem en t” ), Ferr is an d LOT “ ackno wled ge th at$6 50 ,00 0 o f th e pu rch as e p ric e [i .e., $6 50 ,00 0 o f th e $ 5.7 5 m il li on ] is all oc at edto ward s rei m bu rs em en t o f at to rn ey s’ fees in cu rredby Sell er [i .e., by LOT] .” Earli er the
sa m e d ay , th e Lon gs , who were the n i n d iv or ce p ro ceed in gs , ent eredin to an ag reem en t t o re so lv e th ei r res pe ct iv e cl ai m s t o e ach ot he r’s as se ts . This ag reem en t (h erei na fte r th e “ m ari ta l s et tl em en t ag reem en t” ) was co nt in ge nton th e ex ecu ti on of th e Ferris -LOT ass ig nm en t ag reem en t. Pu rs ua ntto th e m ari ta l s et tl em en t ag reem en t, Su san Lo ng rel eas edan y in te res t i n LOT th atsh e h adacqui redbe cau se of he r m arri ag e to Lon g. Inex ch an ge , Lon g a gr eedto pa y Su sa n Lo ng $2 m il li on fro m th e $ 5.7 5 m il li on pa y

m en t fr om

Ferri s. Lo ng als o a gr eedto m ak e an ad di ti on al $1 ,96 3,8 28 inpa ym en ts to va rio us th irdpa rti es , in cl ud in g $ 80 0,0 00 to 6 St eel erv es t.

The pa rti es to th e Ferris -LOT ass ig nm en t ag reem en t wer e LOT andFerri s, 5 al th ou gh Lon g s ig ne d i n b ot h h is in di vi du al cap aci ty andas p res id en t o f LOT. Lon g a gr eedto pay

cert ai n c red it or s an d h av e th em rel eas e Su sa n Lo ng 6 fro m an y cla im s.- 10 -

[* 10 ] At the ti m e th atLOT sol d i ts laws ui t t o F erri s, Lo ng was the so le own er o f LOT. Afte r th e sa le Ferri s dro pp edth e ap pe al ; an d t he 17 th Ju di ci al Cir cu itCo urt of Bro wardCo un ty, Fl or id a, en te redanord er (1 ) va cat in g i ts earl ie r jud gm en t an d (2 ) di sm is si ng th e lawsu itwith p reju di ce. As ag reedinth e Ferris -LOT ass ig nm en t ag reem en t, Fe rri s p ai d Lo ng $5 .75
m il li on for

LOT’ s p os it io n i n the laws ui t an d i ts rig ht s i n the Riv ers id e co nt ract . As re qu ire d b y

th e m ari ta l s et tl em en t ag reem en t, Lo ng pa idSu sa n Lo ng $2 m il li on
an d v ari ou s thi rdpa rti es $1 ,96 3,8 28 . Thes e p aym en ts in cl ud edan$8 00 ,00 0 pa ym en t t o S te el erv es t. Inco ns id erat io n o f th e $ 80 0,0 00 pa ym en t, St eel erv es t
ex ecu te d a n a gr eem en t re le as in g t he Lon gs an d LOT fro m an y cla im s, i nc lu di ng
an y cla im s b as edon th e Aug us t 2 00 6 a gr eem en t an d t he $2 00 ,00 0 l oa n. Lon g fi le d aFo rm

10 40 , “ U.S. Ind iv idua l In co m e Tax Return” , for20 06
. He at ta ch eda Sch edul e C t o re po rt t he in co m e an d e xp en se s o f LOT. T he Sch edul e C s ta te d tha t Lo ng ’s tra de or b us in es s was “ real est at e d ev el op er”. On th e Sch edul e C, Lon g re po rte d $ 1,8 96 ,82 4 o f th e $ 5.7 5 m il li on pa ym en t as
or di na ry in co m e; he di d n otrep ort the rem ai ni ng $3 ,85 3,1 76 . On th e Sch edul e C, Lon g re po rte d c os t o f go od s s ol d o f $2 ,44 0,6 81 . He di d n otcla im a de du ct io n fo r le ga l-a nd -p ro fes si on al -s erv ic es ex pe ns es on hi s re tu rn . He rep orte d t ha t h is tax- 11 -

[* 11 ] li ab il ity

forth e y ear was zero . Lon g d is cu ss edth e o rd in ary ch arac te r of th e $5 .75 m il li on pa ym en t wi th hi s ac co un tant , bu t n o o th er as pe ct s o f th e return. The IRS t im el y

is su eda no ti ce o f de fic ie nc y on Sep te m

be r 2, 2 01 0, de te rm in in g ade fic ie nc y

intax for20 06 of $ 1,4 30 ,74 3. Th e n ot ic e m ad e th e fo ll owi ng no nc om

pu ta ti on al ad

jus tm en ts to th e am ou ntLon g re po rte d a s i nc om e on hi s re tu rn :

Ite m Am ou ntrep orte d

by Long on hi s return Am ountof

ad jus tm en t i n no ti ce o f de fic ie nc y Adju st edam ou ntin

no ti ce o f de fic ie nc y Sch edul e C gro ss rece ip ts $1 ,89 6,8 24 $3 ,85 3,1 76 $5 ,75 0,0 00 Sch edul e C co st of g oo ds so ld 2,4 40 ,68 1 -1 ,65 5,5 62 78 5,1 19 Sch edul e C leg al -an d- pro fes si on al - servi ces deduc ti on -0
- 82 9,9 22 82 9,9 22 Inhi s p et it io n, Lo ng m ad e a b lank etst at em en t d is pu ti ng th e d efi ci en cy an d pe na lty de te rm in edinth e n ot ic e o f de fic ie nc y . In ad di ti on , th e p et it io n c on ta in ed th e fo ll owi ng sp eci fic all eg at io ns :- 12 -

[* 12 ] ! The $5 .75 m il li on pa ym en t fr om Ferri s i s ex cl ud ab le fro m Lon g’s in co m e to th e ex te ntof $ 60 0,0 00 he pa idto Ste el erv es t. 7
! The IRS erredinad jus ti ng th e co stof g oo ds so ldto $1 ,65 5,5 62
. ! Lon g i s en ti tl edto de du ct$2 38 ,54 3.7 1 i n l eg al fees (in ad di ti on to th e $8 29 ,92 2 d et erm in edto be all owabl e as a de du ct io n i n the no ti ce o f de fic ie nc y ). At tria l Lo ng ass ert edth atth e ch arac te r of an y in co m e fro m

th e $ 5.7 5
m il li on paym en t was cap it al , no t o rd in ary. At tr ia l Lo ng waiv edhi s cl ai m th athe is en ti tl edto de du ct io n o f $2 38 ,54 3.7 1 fo r le ga l fe es . 8 OPINION The tax pa y er g en eral ly bears th e b ur de n o f pr ov in g t ha t the de te rm in at io ns in th e n ot ic e o f de fic ie nc y are erro ne ou s. Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). Pur su an t t o s ect io n 7 49 1( a), the bu rd enof p ro of m ay be sh ift edto th e IRS . Howev er, Lon g h as no t es tabl is he d t ha t h e h as m etth e

Lon g p ai d S te el erv es t a t ot al of $ 80 0,0 00 , whi chin cl ud edth e $ 20 0,0 00 7 m ortg ag e lo anrep aym en t fo r Su sa n Lo ng . Lon g a ss ert edth aton ly $60 0,0 00 of h is pa ym en t t o S te el erv es t s ho ul d b e ex cl ud edfro m in co m e. At the en d o f tr ia l the IRS m ov edto am en d i ts an swe r to ass ertth atLon g 8 earn ed$7 5,0 00 incan cel la ti on -o f-i nd eb te dn es s i nc om e. W e d en ie d t hi s m ot io n i n a se pa rat e o rd er.- 13 -

[* 13 ] co nd it io ns forsu cha sh ift . See s ec. 7 49 1( a)(1 ) an d (2 ); R ol fs v. Co m m is si on er, 1 35 T.C. 47 1, 4 83 (20 10 ), aff’d, 6 68 F.3d88 8 (7 th Cir . 20 12 ). Co ns eque nt ly, he st il l b ears th e b ur de n o f pr oo f. 1. Deduc ti on s fo r le ga l fe es Inhi s p et it io n, Lo ng so ug hta de du ct io n fo r $2 38 ,54 3.7 1 i n l eg al fees , in ad di ti on to th e $ 82 9,9 22 inleg al fees de te rm in edto be all owabl e as a de du ct io n i n th e n ot ic e o f de fic ie nc y . At tri al , Lon g c on ced edth e is su e o f th e d educ ti bi li ty of th e $ 23 8,5 43 .71 inleg al fees by stat in g: “ I’ve ag reedto gi ve up on th e ad di ti on al le ga l fe es .” On b rie f, Lon g a tt em pt edto rev iv e h is cla im

th athe was e nt it le d t o th e $ 23 8,5 43 .71 de du ct io n. A con ces si on m ad e o n the reco rdby a tax pa y er dur in g t ria l i s the equi va le nt of a st ip ul at io n. Ch ur chof S ci en to lo gy v. Co m m is si on er, 8 3 T.C. 3 81 , 52 4 (1 98 4) (“ [A] con ces si oninop enco urt * * * [is ] th e equi va le ntof ast ip ul at io n.” ), aff’d, 82 3 F .2d13 10 (9th C ir. 1 98 7) . A taxpa y er i s b ou ndby his or h er s ti pu la ti on s. Dor ch es te r In du s., In c. v. Co m m is si on er, 1 08 T.C. 32 0, 3 30 (19 97 ), aff’d wi th ou t publ is he d o pi ni on , 20 8 F .3d20 5 (3 d C ir. 2 00 0) . Thu s, Lo ng ’s con ces si on is bi nd in g. Eve n i f Lon g h adno t co nc ed edth e is su e, hi s cl ai m fora de du ct io n fo r $2 38 ,54 3.7 1 i n l eg al fees wou ldha ve fai le d fo r la ckof p ro of . Taxp ay ers are- 14 -

[* 14 ] requi redto m ai nt ai n re co rd s s uf fic ie ntto est ab li sh th e am ou nt s o f al lo wab le de du ct io ns an d t o e nabl e th e IRS to de te rm in e th e co rrec t t ax li ab il ity . Sec. 6 00 1; Sh ea v . Comm is si on er, 1 12 T.C. 18 3, 1 86 (19 99 ). It i s a g en eral rul e, es tabl is he d in Co ha n v . Comm is si on er, 3 9 F .2d54 0, 5 43 -5 44 (2dCir . 19 30 ), th atif the tri al
reco rdpro vi de s s uf

fic ie ntev id en ce tha t the tax pa y er h as in cu rreda de du ct ib le
ex pe ns e, bu t the tax pa y er i s u nabl e to ful ly sub st an ti at e th e p reci se am ountof t he de du ct io n, the Co urt m ay est im at e th e am ou ntof the de du ct ib le ex pe ns e an d a ll ow a d educ ti on to th atex te nt . In m ak in g s uc h e st im at es , th e Co urt m ay be ar h eav il y ag ai ns t the tax pa y er, wh o c au se d t he in ex act itud e. Id . at 5 44 . For t he Co urt t o es ti m at e th e am ou ntof a n e xp en se , th ere m us t b e so m e b as is on whi chanest im at e
m ay be m ad e. W il li am s v . Uni te d S ta te s, 2 45 F.2d55 9, 5 60 (5t h C ir. 1 95 7) ; Van ic ekv. Co m

m is si on er, 8 5 T.C. 7 31 , 74 2- 74 3 (1 98 5) . Becau se th e IRS ha s al read y de te rm in edth atLon g i s en ti tl edto a de du ct io n fo r $8 29 ,92 2 i n l eg al fees , Lon g’s as se rti on th athe is en ti tl edto anad di ti on al $2 38 ,54 3.7 1 i n l eg al fees is tant am ou ntto a cl ai m

th athe is en ti tl edto a de du ct io n o f le ga l fe es of $1 ,06 8,4 65 .71 (th e su m

of $ 82 9,9 22 an d $ 23 8,5 43 .71 ). Ther e is so m e ev id en ce i n th e rec or d tha t $ 65 0,0 00 inleg al ex pe ns es was i nc urredinrel at io n t o LOT’s lawsu itag ai ns t LOR. Lon g a ls o m ov edth e adm is si on of alet te r fro m hi s l aw fi rm refe rri ng to $2 38 ,54 3 i n fe es . Howev er, the let te r was no t a b us in es s re co rdan d- 15 -

[* 15 ] was ex cl ud edfro m

ev id en ce. Lon g t es ti fie d abo utth e $ 23 8,5 43 , bu t the te st im on y was t oo va gu e an d i nc on si st en t t o e st ab li sh a ba si s fo r es ti m at in g wh at he sp en t o n l eg al fees . See Will ia m s, 2 45 F.2dat 5 60 ; Van ic ekv. Co m m is si on er, 85 T.C. at 7 42 -7 43 . W e h ol d tha t n o d educ ti onforleg al ex pe ns es is av ai labl e to Lon g b ey on d the $8 29 ,92 2 d et erm in edinth e n ot ic e o f de fic ie nc y . 2. The ex cl ud ab il ity

fro m in co m e o f $6 00 ,00 0 o f th e $ 5.7 5 m il li on Lon g rece iv edfro m

Ste el erv es t In20 06 , Lon g a gr eedth atLOT w ou ldpa y Ste el erv es t 5 0% o f th e p ro ceed s of th e fi rs t $ 1.7 5 m il li on , up to a m ax im um of $ 87 5,0 00 , of any m on ey s LOT
rece iv edas ares ul t o f LOT’ s l aws ui t ag ai ns t LOR o r th e d ev el op m en t o f th e co nd om in iu m

bu il di ng on Las Ol as Bo ul ev ard . Later i n 2 00 6, Lo ng rece iv ed $5 .75 m il li on fro m

Ferri s an d p ai d S te el erv es t $ 60 0,0 00 of t he pro ceed s. Th e $2 00 ,00 0 l oa n t o S us anLon g was als o re pa idto Ste el erv es t. Lon g n ow cl ai m s th athi s Au gu st20 06 ag reem en t wi th Ste el erv es t cr eat eda joi ntve ntur e an d tha t th e $ 60 0,0 00 po rti on of t he $5 .75 m il li onwas St eel erv es t’s t ax ab le sh are o f th e in co m e o f th e joi ntve ntur e. The IR S co nt en ds th atth ere was no joi ntve ntur e 9

Im pl ic it ly, Lon g a rg ue d tha t the $5 .75 m il li on pa ym en t was in co m e o f th e 9 joi ntve ntur e an d tha t $ 5.1 5 m il li on of t he joi ntve ntur e’s in co m e was hi s t ax ab le sh are. Hi s ex pr es s co nt en ti on was tha t $ 60 0,0 00 of t he $5 .75 mil li on pa ym en t i s St eel erv es t’s i nc om e, no t h is
.- 16 -

[* 16 ] be twee n Lo ng an d S te el erv es t. Init s v ie w, th e en ti re $ 5.7 5 m il li on is th e in co m e o f Lon g. A join t v en ture “ ha s b eende fin edas a‘ sp eci al co m bi na ti on of t wo o r m or e pe rs on s, wh ere i n s om e sp eci fic ve ntur e a p ro fitis joi nt ly sou gh t wi th ou t an y actua l p artne rs hi p o r co rp or at e d es ig na ti on ,’ an d a ls o a s ‘an a ss oc ia ti on of p ers on s to carry ou t a s in gl e b us in es s en te rp ris e fo r pr of it .’ ” Bec k C he m . Equ ip . Cor p. v . Co m m is si on er, 2 7 T.C. 8 40 , 84 8- 84 9 (1 95 7) (ci ti ng 48 C.J.S. J oi ntAdv en tu res , se cs . 1 an d 2 , Est at e o f Koe n v . Comm is si on er, 1 4 T.C. 1 40 6 (1 95 0) , andOsb orn v. Co m m is si on er, 2 2 B .T.A. 935 , 94 5 (1 93 1) ). The ex is te nc e o f a joi ntve ntur e “ is a que st io n o f fac t t o b e d et erm in edby referen ce t o t he same pri nc ip le s tha t g ov ern th e que st io n o f whe th er p ers on s h av e fo rm eda pa rtn ers hi p * * * fortax pu rp os es .” Lun a v . Comm is si on er, 4 2 T.C. 1 06 7, 1 07 7 (1 96 4) . The requi redin qu iry for de te rm in in g the ex is te nc e o f a p artne rs hi p fo r fed eral in co m e ta x p ur po se s i s whe th er the pa rti es “real ly andtru ly int en de d t o jo into ge th er fo r th e p ur po se of
carry in g o n b us in es s an d s harin g i n t he pro fit s o r lo ss es or b ot h.” Comm is si on er v. To wer, 3 27 U.S. 28 0, 2 87 (19 46 ). The p art ie s’ in te nt io ns are a m atte r of fact ,

“ to be de te rm in edfro m

tes ti m on y

di sc lo se d b y

th ei r ‘agree m en t, co ns id eredas a who le , andby the ir c on du ctinex ecu ti on of i ts pro vi si on s.’” Id. (quo ti ng Dren ne n v. Lo nd on Ass ur an ce Co ., 11 3 U.S. 5 1, 5 6 (1 88 5) ). The C ou rt i n Lu nav.- 17 -

[* 17 ] Co m

m is si on er, 4 2 T.C. at10 77 -1 07 8, d is ti ll in g t he pri nc ip le s es tabl is he d i n Toweran d C omm is si on er v . Cul be rts on , 33 7 U.S. 7 33 (19 49 ), he ldth atth e fo ll owi ng fact or s ar e rel ev an t i n e va lu at in g wh ethe r pa rti es in te ndto crea te a pa rtn ers hi p fo r fed eral in co m e ta x p ur po se s: [1 ] The ag reem en t o f th e p art ie s an d t he ir c on du ctinex ecu ti ng it s te rm s; [2] th e co nt rib ut io ns , if an y , whi cheach pa rty has m ad e to th e ve ntur e; [3] th e p art ie s’ con tro l o ve r in co m e an d c ap it al an d t he rig ht of each to m ak e wit hd rawal s; [4] whet he r eac h p arty was apri nc ip al an d c op ro pr ie to r, sh ari ng a m utua l p ro pr ie tary

in te res t i n t he ne t pr of it s an d h av in g a n o bl ig at io n t o s ha re l os se s, o r whe th er o ne pa rty was th e ag en t o r em

pl oyee of th e o th er, rec ei vi ng forhi s s erv ic es co nt in ge ntco m

pe ns at io n i n t he form

of ape rcen ta ge of i nc om e; [5] whe th er b us in es s was co nduc te d i n t he joi ntna m es of t he pa rti es ; [6 ] whe th er the pa rti es fil edFed eral pa rtn ers hi p re tu rn s o r ot he rwis e rep res en te d t o re sp on de nt[i.e ., th e IRS ] orto pe rs on s wi thwho m th ey de al t tha t the y

were joi ntve ntur ers ; [7 ] whe th er s ep arat e b oo ks of acco un t wer e m ai nt ai ne d fo r th e v en tu re; an d [8 ] whe th er the pa rti es ex erci se d m

utua l co nt ro l o ve r an d a ss um edm utua l re sp on si bi li ti es for th e en te rp ris e. No s in gl e fac to r is co nc lu si ve of t he ex is te nc e o f a p artne rs hi p. Bu rd e v . Co m m is si on er, 3 52 F.2d99 5, 1 00 2 (2 d C ir. 1 96 5) , aff’g 4 3 T.C. 2 52 (19 64 ); McDo ug al v. Co m

m is si on er, 6 2 T.C. 7 20 , 72 5 (1 97 4) . Exam in in g e ach Lun a fact or , we det erm in e th atLon g a ndSte el erv es t d idno t en ga ge ina joi ntve ntur e reg ard in g LOT:- 18 -

[* 18 ] 1. Th e Aug us t 2 00 6 a gr eem en t p ro vi de d o nl y th atSte el erv es t wo ul d re cei ve a sh are o f Lon g’s p ro fit s fr om LOT. Neit he r th is ag reem en t n orany pri or ag reem en ts pu rp orte d t o c reat e a joi ntve ntur e. 2. St eel erv es t d idco nt rib ut e m on ey . 3. Be si de s i ts pro fitsh are, St eel erv es t h adno rig htto co ntro l LOT’s ass et s orto rece iv e m on ey

fro m LOT. 4. St eel erv es t’s i nt eres t i n LOT’s pr of it s was cap pe d a t $ 87 5,0 00 an d i t h ad
no li ab il ity

forLOT’ s l os se s. 5. Nei th er Lo ng ’s own ers hi p o f LOT no r LOT’ s o pe rat io ns were co nduc te d in Ste el erv es t’s n am e. 6. Lo ng an d S te el erv es t d idno t fi le pa rtn ers hi p re tu rn s o r ot he rwis e rep res en t t o the IRS o r ot he rs th atth ere was a joi ntve ntur e. 7. No ev id en ce s ho ws tha t s ep arat e b oo ks of a cco un t o f an y joi ntve ntur e were m ai nt ai ne d. 8. Lo ng po ss es se d a ll co nt ro l o ve r hi s o wne rs hi p i nt eres t i n LOT an d o ve r LOT’ s o pe rat io ns ; the re was no co nt ro l b y Ste el erv es t. On the ba si s o f th es e fac to rs , we fin d t ha t St eel erv es t was no t i n ajoi nt
ve ntur e wit h Lo ng reg ard in g Lo ng ’s in ve st m en t i n LOT orinLOT’ s o pe rat io ns .- 19 -

[* 19 ] Thu s, Lo ng m

us t i nc lu de th e en ti re $ 5.7 5 m il li on pay m en t i n h is in co m e. See s ec. 6 1( a). 3. Cap it al -v ers us -o rd in ary ch arac te r of th e $ 5.7 5 m il li on pa ym en t Purs uantto th e Ferris -LOT ass ig nm en t ag reem en t, LOT so ldit s p os it io n i n it s l aws ui t ag ai ns t LOR, an d a ll rig ht s ar is in g u nd er the Riv ers id e Agr eem en t, t o Ferr is . In ex ch an ge itrece iv ed$5 .75 m il li on fro m Ferri s. Init s s ui t, LOT reque st edsp eci fic pe rfo rm an ce o f a s al es co nt ractforth e pr op erty on Las Ol as Bo ul ev ard . The Fl or id a co urt awa rd edsp eci fic pe rfo rm an ce, or de rin g LOR t o s el l the pro pe rty to LOT. In e xc hang e fo r th is rig htof s pe ci fic pe rfo rm an ce, LOT recei ve d $ 5.7 5 m il li on . There fo re, the ch arac te r of th e $ 5.7 5
m il li on inin co m e d ep en ds up on whet he r Lon g i nt en de d t o a cqui re the Las Ol as Bo ul ev ardpro pe rty for i nv es tm en t. The IRS co nt en ds th atLon g i nt en de d t o h av e LOT con st ru cta co nd om in iu m

bu il di ng on th e la ndan d s el l co nd om in iu m un it s. Th e IRS ass ert s th atth e co nd om in iu m

un it s ar e n otcap it al ass et s u nd er s ect io n 1 22 1( a)(1 ), whi ch pr ov id es th at“pr op erty

he ldby the tax pa y er p rimaril y forsal e to cu st om ers inth e or di na ry co ur se of * * * [th e ta xp ay er’s] trad e o r bu si ne ss ” is no t a c ap it al ass et . Lon g arg ue s tha t h e in te nd edto sel l the lan d t o a“ de ve lo pe r”, wh ic h s eem s t o
m eanhe ex pe ct edth e p ur ch as er t o c on st ru ctth e b ui ld in g.- 20 -

[* 20 ] A th res ho ldqu es ti on reg ard in g t he ap pl ic at io n o f se ct io n 1 22 1( a)(1 ) is whe th er the “pr op erty ” Lon g i nt en de d t o s el l i s (1 ) th e la nd , (2) th e la ndpl us th e bu il di ng , or (3 ) th e in di vi du al co nd om in iu m un it s. As di sc us se d, the IRS co nt en ds th atLon g i nt en de d t o s el l the co nd om in iu m un it s. Lo ng co nt en ds th athe in te nd ed to sel l the lan d (r eady

forco ns tru ct io n) . Whi le we ag ree wi th Lon g t ha t h e in te nd edto sel l the lan d (r eady forco ns tru ct io n) , we ho ldth atth e ch arac te r of th e in co m e is ord in ary. Reca ll th at : ! In19 99 LOT beg anne go ti at io ns to buy th e landfro m

LOR.
! InJu ne 20 02 LOR agr eedto sel l the lan d t o LOT with aclo si ng da te of Decem be r 20 04
. ! InFeb ru ary 20 04 LOR termin at edth e Ri ve rs id e Agr eem en t. ! LOT sue d LOR fo r sp eci fic pe rfo rm an ce o f th e Ri ve rs id e Agr eem en t. As o f Ju ne 20 02 , Lon g’s i nt en ti on was tha t LOT wou ldco ns tru ctth e b ui ld in g a nd
se ll th e uni ts . Howev er, b y th e ti m e LOT fil edsu itag ai ns t LOR, Lon g h ad ch an ge d h is min d a ndde ci de d t o h av e LOT sel l the pro pe rty befo re co m pl et io n o f th e b ui ld in g. Itwas Lo ng ’s in te ntat t hi s t im e th atin fo rm s o urvi ew of th e n atur e of th e cl ai m s as se rte d i n the laws ui t. See Ric e v . Comm is si on er, T.C. Mem o. 20 09 -1 42 (lo ok in g t o the tax pa y er’s i nt en t atth e ti m e p ro pe rty was d is po se d o f); Raym on d v . Comm is si on er, T.C. Mem o. 2 00 1- 96 . At th e ti m e h e so ldhi s ri gh ts- 21 -

[* 21 ] un de r th e Ri ve rs id e Agr eem en t an d t o t he laws ui t t o F erri s, Lo ng in te nd ed to sel l the lan d t o a no th er d ev el op er. The refo re, the ap pl ic ab il ity of s ect io n 12 21 (a)( 1) de pe nd s o n wh ethe r Lon g i nt en de d t o s el l the lan d t o c us to m ers inth e or di na ry co ur se of h is bu si ne ss . In co m e fro m

th e sa le of acap it al ass etis cap it al inch arac te r. See s ec. 1 22 1;
se c. 1.1 22 1- 1( a) an d (b ), In co m e Tax Reg s. Un de r se ct io n 1 22 1( a)(1 ), pr op erty is
no t a c ap it al ass etif i t i s “ st oc k i n t rad e o f th e ta xp ay er o r ot he r pr op erty of aki nd whi chwou ldpro pe rly be i nc lu de d i n t he in ve nt ory of t he tax pa y er * * * or pr op erty he ldby the tax pa y er p rimaril y forsal e to cu st om ers inth e o rd in ary co ur se of h is tra de or b us in es s” . The Supr em e Co urt h as de fin ed“pr im ari ly” in th is co nt ex t t o m ean“pr in ci pa ll y ” o r “ of fir stim po rta nc e”. Ma la t v . Rid de ll , 38 3 U.S. 56 9, 5 72 (19 66 ); s ee al so Bie de nh arnReal ty Co. v. Un it edSta te s, 5 26 F.2d 40 9, 4 22 -4 23 (5t h C ir. 1 97 6) . The que st io n o f whe th er p ro pe rty is h el d p rimaril y fo r sa le to cu st om ers inth e o rd in ary co ur se of atax pa y er’s b us in es s re qu ire s a factua l an al y si s. Pri tc he ttv. Co m m is si on er, 6 3 T.C. 1 49 , 16 2 (1 97 4) . Ty pi cal ly, th e fac to rs inm ak in g thi s d et erm in at io n i nc lu de : (1 ) th e ta xp ay er’s p ur po se in acqui rin g the pro pe rty; (2 ) th e p ur po se forwhi chth e p ro pe rty was s ub se qu en tl y he ld ; (3 ) th e ta xp ay er’s ev eryday bu si ne ss an d the rel at io ns hi p o f th e in co m e fro m th e p ro pe rty to t he tax pa y er’s t ot al in co m e; (4) th e fre qu en cy , con ti nu ity , and- 22 -

[* 22 ] subs tant ia li ty of sa le s o f pr op erty ; (5 ) th e ex te ntof d ev el op in g a nd im pr ov in g the pro pe rty to i nc reas e th e sa le s re ve nu e; (6) th e ex te ntto whi chth e ta xp ay er u se d a dv ert is in g, p ro m ot io n, o r ot he r act iv it ie s t o i nc reas e sa le s; (7) th e us e o f a b us in es s o ffi ce fo r sa le of p ro pe rty; (8 ) th e ch arac te r an d d eg ree o f
supe rv is io n o r co nt ro l the tax pa y er ex erci se d o ve r an y rep res en ta ti ve sel li ng th e pr op erty ; an d (9 ) th e ti m e an d e ffo rt t he tax pa y er h ab itua ll y de vo te d t o s al es of pr op erty . Bied en ha rnReal ty Co., 52 6 F .2dat 4 15 -4 22 ; Un it edSta te s v . W in th ro p, 4 17 F.2d90 5, 9 10 -9 11 (5t h C ir. 1 96 9) . The fre qu en cy an d
subs tant ia li ty of sa le s i s es pe ci al ly pro ba ti ve . Sub urba n R eal ty Co., 61 5 F .2d17 1, 17 8 (5 thCir . 19 80 ). The p ur po se of t he sec ti on 12 21 (a)( 1) ex cl us io n i s t o

“ di ffer en ti at e b etweenga in de riv edfro m th e ev eryday

op erat io ns of abu si ne ss an d ga in de riv edfro m

ass et s tha t h av e ap pr eci at edinva lu e o ve r a s ub st an ti al pe rio d o f ti m e.” Mc Manus v. Co m mis si on er, 6 5 T.C. 1 97 , 21 2 (1 97 5) (ci ti ng Mal at , 38 3 U.S. at 5 72 ), aff’d, 5 83 F.2d44 3 (9 th Cir . 19 78 ). W e fi rs t ex am in e Lon g’s p ur po se foratt em

pt in g t o a cqui re the pro pe rty on Las Ol as Bo ul ev ard . At th e ti m e o f th e lawsu itLon g i nt en de d t ha t LOT wou ld acqui re the Las Ol as Bo ul ev ardpro pe rty, dev el op a co nd om in iu m bu il di ng (i.e ., de si gn th e b ui ld in g a ndna vi ga te th e zo ni ng -ap pr ov al pro ces s) , andth ensel l the landto a pu rch as er. Thi s i nt en ti on is co ns is te ntwith t he pro po si ti onth atth e Las- 23 -

[* 23 ] Olas Bo ul ev ardpro pe rty, lik e th e uni ts inth e co nd om in iu m bu il di ng on Bi rch Ro ad(whi chLon g h adbo ug htan d s ol d) , wou ldbe he ldby L on g p rimaril y fo r sa le to hi s cu st om ers . See Sykes v. Co m m is si on er, 5 7 T.C. 6 18 , 62 5 (1 97 2) (“Nordo es th e fac t tha t n earl y ha lf o f pe ti ti on er’s s al es in19 67 an d 1 96 8 wer e
m ad e to on e cu st om er p recl ud e h is be in g e ng ag edina bu si ne ss .”); see als o P oi nt er v. Co m m is si on er, 4 8 T.C. 9 06 , 91 7 (1 96 7) (fi nd in g ali mit edcu st om er b as e, su ch
as two cu st om ers , m eet s the requi rem en ts un de r se ct io n 1 22 1) , aff’d, 4 19 F.2d21 3 (9 th Cir . 19 69 ). W e al so co ns id er the tax pa y er’s ev eryday bu si ne ss an d t he rel at io ns hi p o f th e in co m e fro m

th e p ro pe rty to t he tax pa y er’s t ot al in co m e. Lon g’s fu ll -ti m e act iv ity was d ev el op in g the lan d fo r th e co nd om in iu m bu il di ng on Las Ol as Bo ul ev ard . Alth ou gh th is act iv ity was i nt errupt edby the term in at io n o f th e Ri ve rs id e Agr eem en t, wh ic h re qu ire d Lo ng to di ve rt h is en erg ie s t o s up erv is in g LOT’ s l aws ui t ag ai ns t LOR, Lon g p res um ab ly w ou ldha ve so on go ne ba ckto de ve lo pi ng th e co nd om in iu m bu il di ng ha d h e n otstru cka de al with F erri s. W e al so co ns id er the freque nc y , con ti nu ity , andsubs tant ia li ty of Lon g’s
sa le s. We bel ie ve th atLon g i ni ti al ly int en de d t o s el l al l the un it s i n the y et -to -b eco ns tru ct edco nd om in iu m bu il di ng . He recei ve d d ep os it s fo r 20 % of t he un it s. Altho ug h Lo ng ch an ge d h is pl an s an d d eci de d t o s el l the lan d re ady for- 24 -

[* 24 ] co ns tru ct io n o f a b ui ld in g- -an d n otth e b ui ld in g uni ts --thi s d oe s n otalt er o ur vi ew th atLon g h el d the lan d p rimaril y forsal e to cu st om ers inth e o rd in ary co ur se of bu si ne ss . The s al e o f a p arce l o f la nd(rea dy for co ns tru ct io n) wou ldres ul t i n a larg e p ro fitfro m

a si ng le -s al e tr an sa ct io n. Th e p ro fitwou ldha ve be enfro m Lon g’s ef fo rts to de ve lo p the lan d, n otfro m th e m ere p as sa ge of t im e. W e co ns id er the ex te ntto whi chth e ta xp ay er d ev el op edan d i m pr ov edth e pr op erty . Lon g u se d s ub st an ti al effo rts to de ve lo p t he pro pe rty: he hi red arch it ect s, h e o bt ai ne d azo ni ng pe rm it , he p rin te d p ro m ot io na l m at eri al s, h e ne go ti at edco nt ract s wi th res id en ti al cu st om ers , andhe ob ta in edde po si ts . W e co ns id er the ex te ntto whi chth e ta xp ay er u se d a dv ert is in g, p ro m ot io n, orothe r act iv it ie s t o i nc reas e sa le s. Th ro ug h h is sal es effo rts , Lon g re cei ve d de po si ts on 20 % of t he un it s. HadLon g s ol d t he lan d t o asi ng le bu y er, we b el ie ve he wou ldha ve ov ers eenth e sa le
. W e co ns id er wh ethe r a b us in es s o ffi ce was us ed . Lon g u se d abu si ne ss of fic e to sel l the co nd om in iu m un it s. Ho wev er, h e m ay no t h av e u se d abu si ne ss of fic e to effe cta sa le of t he lan d. W e co ns id er the ch arac te r an d d eg ree o f supe rv is io n o r co ntro l Lo ng ex erci se d o ve r an y

rep res en ta ti ve sel li ng th e p ro pe rty. L on g wo ul d h av e b een- 25 -

[* 25 ] pri m ari ly resp on si bl e fo r se ll in g t he lan d (i f he ha d n otso ldth e ri gh ts un de r th e Ri ve rs id e Agr eem en t an d the laws ui t). W e al so co ns id er the ti m e an d e ffo rt t he tax pa y er h ab itua ll y de vo te d t o s al es of pro pe rty. L on g was a pr of es si on al inth e rea l-e st at e in du st ry . His f ul l-t im e bu si ne ss was d ev el op in g a ndsel li ng co nd om in iu m pro pe rti es . On the ba si s o f ou r co ns id erat io n o f th es e fac to rs , we fin d t ha t the pr ep on de ran ce o f ev id en ce d em on st rat es th atLon g i nt en de d t ha t the lan d s ub ject to th e Ri ve rs id e Agr eem en t wo ul d h av e b eenpro pe rty hel d b y Lon g p rimaril y

for
sa le to hi s cu st om ers inth e co ur se of h is bu si ne ss . Thu s, i f Lon g h adno t s ol d LOT’ s ri gh ts un de r th e Ri ve rs id e ag reem en t an d l aws ui t ag ai ns t LOR, h e wou ld ha ve earn edord in ary in co m e th ro ug h LOT aft er the st at e co urt h adord ered sp eci fic pe rfo rm an ce o f th e Ri ve rs id e Agr eem en t. Acco rd in gl y , we ho ldth atth e $5 .75 m il li on pa ym en t i s co rrec tl y tre at edas g iv in g ri se to ord in ary in co m e. 4. Co stof g oo ds so ld The no ti ce o f de fic ie nc y

de te rm in edth atco stof g oo ds so ldsh ou ldbe $1 ,65 5,5 62 rathe r th anth e $ 2,4 40 ,68 1 a m ou ntrep orte d o n Lo ng ’s return. Lo ng ’s pe ti ti on ch al le ng edth is $7 85 ,11 9 re du ct io n. Bu t attri al he pro vi de d n o e vi de nc e to supp ort the di sp ut edco st -o f-g oo ds -s ol d a m ou nt . Con se qu en tl y , we ho ldth at
co stof g oo ds so ldis $1 ,65 5,5 62
.- 26 -

[* 26 ] 5. Accu racy-rela te d p en al ty pur su an t t o s ect io n 6 66 2( a) Sect io n 6 66 2( a) an d (b )(2 ) im po se s an “ accu racy-rela te d p en al ty” of 2 0% o f th e p orti on of t he un de rp aym en t o f ta x a ttrib ut ab le to an y subs tant ia l
un de rs ta te m en t o f in co m e ta x. By defi ni ti on , an u nd ers ta te m en t o f in co m e ta x fo r
anin di vi du al is subs tant ia l i f itex ceed s the gre at er o f $5 ,00 0 o r 10 % of t he tax requi redto be sh own on th e return. Se c. 66 62 (d )(1 ). Und er s ect io n 7 49 1( c), the IRS b ears th e b ur de n o f pr oduc ti on an d m us t p ro du ce s uf

fic ie ntev id en ce tha t the im po si ti on of the pe na lty

is ap pr op ria te inth is cas e. See Hi gb ee v . Comm is si on er, 11 6 T.C. 4 38 , 44 6 (2 00 1) . Once t he IRS m eet s thi s b ur de n, the tax pa y er m us t
co m e fo rwardwith p ers ua si ve ev id en ce tha t the IRS’s d et erm in at io n i s i nc orrect . See Rul e 1 42 (a); Hig be e v . Comm is si on er, 1 16 T.C. at 4 47 . A tax pa y er wh o i s ot he rwis e li ab le forth e acc ur acy-rela te d p en al ty m ay av oi d t he li ab il ity

with
res pe ctto a po rti on of a n u nd erp aym en t i f th e ta xp ay er ca n s ho w, un de r se ct io n 66 64 (c)( 1) , th atth e ta xp ay er h adreas on ab le cau se for th atpo rti onan d th atth e ta xp ay er ac te d i n g oo d fa ith wi th res pe ctto th atpo rti on . Sect io n 1 .66 64
- 4( b) (1 ), In co m e Tax Reg s., p ro vi de s: The de te rm in at io n o f whe th er a t ax pa y er ac te d wi th reas on ab le cau se an d i n g oo d fa ith i s m ad e o n acas e-b y -cas e b as is , tak in g i nt o a cco un t al l p ert in en t fa ct s an d c irc um st an ces . * * * Gen eral ly, th e m os t im po rta ntfact oris th e ex te ntof t he tax pay er’s eff ort t o a ss es s the ta xp ay er’s p ro pe r ta x l iabi li ty. Cir cum st an ces th atm ay in di cat e- 27 -

[* 27 ] reas on ab le cau se an d g oo d fa ith i nc lu de anho ne stmis un de rs tand in g of factor l aw th atis reas on ab le inli gh t o f al l o f th e fac ts an d ci rcu m st an ces , in cl ud in g the ex pe rie nc e, kn owl ed ge , andeduc at io n o f th e ta xp ay er. An i so la te d c om pu ta ti on al or t ran sc rip ti on al erro r ge ne ral ly is n otin co ns is te ntwith re as on ab le cau se an d g oo d fa ith. * * * Re li an ce o n * * * pro fes si on al advi ce * * * co ns ti tu te s reas on ab le cau se an d g oo d fa ith i f, un de r al l the cir cum st an ces , su ch rel ianc e was reas on ab le an d t he tax pa y er ac te d i n g oo d fa ith. * * * 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 ith t hu s de pe nd s o n the pe rti ne ntfact s an d c irc um st an ces , in cl ud in g t he tax pa y er’s eff orts to ass es s the pro pe r ta x l iabi li ty, th e ta xp ay er’s kno wled ge an d e xp eri en ce, an d the
ex te ntto whi chth e ta xp ay er re li edon th e advi ce o f a t ax pro fes si on al
. The re ar e o th er d efen se s t o t he pe na lty : s ect io n 6 66 2( d) (2 )(B) pro vi de s tha t
anun de rs ta te m en t i s re du ced , firs t, wh ere t he re i s s ub st an ti al au th or ity forth e ta xp ay er’s treat m en t o f any it em gi vi ng ris e to th e und ers ta te m en t o r, se co nd , whe re the rel ev an t fa ct s af fect in g t he tre atm en t o f an y it em gi vi ng ris e to th e un de rs ta te m en t ar e ad equa te ly dis cl os edinth e return andth e ta xp ay er h ada reas on ab le ba si s fo r th e tr eatm en t o f th atit em . Lon g u nd ers ta te d h is 20 06 in co m e ta x l iabi li ty by $1 ,43 0,7 43 , an a m ou nt whi chis gre at er tha n 1 0% o f th e am ou ntrequi redto be sh own on hi s re tu rn , $1 43 ,07 4, wh ic h i s g reat er tha n $ 5,0 00 . There fo re, the IRS h as m etit s b ur de n o f pr oduc in g e vi de nc e th atim po si ng th e p en al ty is ap pr op ria te .- 28 -

[* 28 ] The ev id en ce d oe s n otpro vi de gro un ds forth e rea so nabl e-caus e,
subs tant ia l-aut ho rit y , or re as on ab le -b as is de fen se s. Lo ng co ns ul te d wi th hi s t ax return p rep arerab ou t the ch arac te r of th e in co m e (i .e., ord in ary ve rs us cap it al ) fro m th e $ 5.7 5 m il li on pa y

m en t. The two de ci de d t o re po rt t he in co m e as or di na ry , bu t tha t i s n otth e as pe ctof t he return t ha t the IRS ch al le ng ed . W ith
res pe ctto th e ch al le ng edpo rti on s o f hi s re tu rn(th e p orti on s tha t we h ol d re su ltin th e und erp aym en t) the ev id en ce d oe s n otsh ow tha t (1 ) he pro vi de d e no ug h in fo rm at io n t o h is return p rep arer or t ha t (2 ) he rel ie d o n h is return p rep arer ’s jud gm en t. See Neon at ol og y Ass oc s., P.A. v. C omm is si on er, 1 15 T.C. 43 , 99 (2 00 0) , aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2) . Accor di ng ly, we ho ldth atLon g i s li ab le forth e se ct io n 6 66 2( a) p en al ty for 2 00 6 b ecau se he subs tant ia ll y un de rs ta te d h is in co m e ta x. W e h av e co ns id eredall othe r arg um en ts m ad e b y th e p art ie s, an d t o the
ex te ntth atwe ha ve no t d is cu ss edth em , we fin d t he m to be m oo t, i rrel ev an t, o r witho utm eri t. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor
res po nd en t.