T.C. Mem o. 2 01 5- 42

UNITED STAT ES TAX COURT
JASON CHAI, Pe ti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 18 33 0- 09 . Fi le d M arch 11 , 20 15 .
Fran k Ag os ti no , Jer em

y M. Klau sn er, an d Lawre nc e M. Bro dy, for pe ti ti on er. Tim ot hy A. Slo an e an d An dr ew M. Tik ti n, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Ju dg e: Res po nd en t d et erm in eda $6 3,7 51 de fic ie nc y in pe ti ti on er’s Fed eral in co m e ta x a nda $1 2,7 50 .20 accu racy-rela te d p en al ty und er se ct io n 6 66 2( a) fo r 20 03 . In an am en dm en t t o a ns wer res po nd en t as se rte d a n in crea se d d efi ci en cy

an d a n i nc reas edpe na lty of $ 62 7,6 19 an d $ 12 5,5 24 ,-2
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[* 2] res pe ct iv el y . Peti ti on er’s m ot io n t o d is m is s the in crea se d d efi ci en cy an d the in crea se d p en al ty for l ackof ju ris di ct io n was gra nt edon Feb ru ary 13 , 20 15 , by or de r of th e Co urt. The re ar e two is su es forde ci si on : (1 ) whe th er the $2 m il li on pa ym en t p et it io ne r rec ei ve d fr om Delt a Cu rren cy

Trad in g, LLC (Del ta ), in20 03 is no ne m pl oyee co m

pe ns at io n s ub

ject t o s el f-em

pl oym en t t ax ; an d (2 ) whe th er pe ti ti on er i s l iabl e fo r th e acc ur acy-rela te d p en al ty und er s ect io n 6 66 2( a) fo r 20 03 . Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the Int ern al Rev enue Co de in effe ctforth e y ear i n i ss ue , andall Ru le refe ren ces are t o the Tax C ou rt R ul es of Prac ti ce an d P ro cedur e. FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at ed , andth e st ip ul at edfact s ar e in co rp or at edinou r fi nd in gs by thi s re fere nc e. Pet it io ne r res id edinCo nn ect ic ut whe n h e fi le d the pe ti ti on . A. The Parti ci pa nt s Pet it io ne r gr adua te d fr om Harv ardUni ve rs ity

with am as te r’s de gr ee i n arch it ectur e. Pet it io ne r be gan h is care er i n Lo s An ge le s b utm ov edto New York in 19 99 . At al l re le va ntti m es , pet it io ne r co nduc te d asu cces sf ul arch it ectur e bu si ne ss . Whi le att en di ng Harv ardpe ti ti on er m etAndrew Bee r, who lat er m arri ed pe ti ti on er’s co us in . Beer h ol ds a ba ch el orof a rts de gr ee fr om Harv ardCo ll eg e-3
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[* 3] an d am as te r of

bu si ne ss adm in is tra ti on de gr ee fr om Harv ardBu si ne ss Sch oo l. He h as ov er 2 0 years o f ex pe rie nc e in th e in ve st m en t m an ag em en t bu si ne ss . Bee r cre at edan d m ark et edsev eral tax sh el te rs di rect edto weal th y in di vi du al s. Th e ta x s he lt ers were d es ig ne d t o o ffs etpro sp ect iv e cl ie nt s’ lar ge tax li ab il it ie s fo r a p art ic ul ar y ear. To th aten d, Be er fo rm edsev eral en ti ti es to crea te th e ta x s he lt er s tru ctur e. Am on g o th ers , th es e en ti ti es in cl ud edDelt a, Bri co la ge Cap it al , LLC (Bri co la ge ), an d C ou nt erp oi ntCap it al , LLC (Cou nt erp oi nt ). Bee r fo rm edBri co la ge an d Del taas De laware l im it edli ab il ity co m pa ni es on Ju ly 21, 1 99 9, an d M ay

30 , 20 00 , res pe ct iv el y . Cou nt erp oi ntwas fo rm edas a Dela ware l im it edli ab il ity co m pany onMarc h 2 , 20 00 . At al l re le vantti m es , Beer in di rect ly owne d a ll or am ajor ity of t he in te res ts inDelt a, Bri co la ge , and Co un te rp oi nt(co ll ect iv el y , Bri co la ge en ti ti es ). Pet it io ne r ne ve r own edanin te res t in Delt a o r Bri co la ge . The Br ic ol ag e en ti ti es were af fil ia te d b y

co m m on own ers hi p a ndsh aredcli en ts , off ic es , em pl oyees, an d re so ur ces in20 01 an d 2 00 2. The y de ve lo pe d a ndm ark et edBeer ’s tax sh el te rs an d a dv is edth ei r cl ie nt s o n the sa m e.-4
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[* 4] B. The St ru ctur e Bri co la ge advi se d i ts cli en ts on Partne rs hi p Op ti on Po rtf ol io Str at eg y (POPS) tax sh el te rs du rin g 2 00 0 a nd20 01 . Cou nt erp oi ntan d B ric ol ag e advi se d th ei r cl ie nt s o n P ers on al Inv es tm en t Co rp or at io n (P ICO) t ax sh el te rs durin g 2 00 0 an d 2 00 1. Del taals o a dv is edit s cl ie nt s o n b ot h the POPS an d P ICO t ax sh el te rs (co ll ect iv el y , tax sh el te rs ). The tax sh el te rs were d es ig ne d t o e li m in at e Del ta ’s cli en ts ’ ta x l iabi li ti es by ge ne rat in g n on eco no m ic tax lo ss es to off se t the cli en ts ’ ta xabl e in co m e. The t ax sh el te rs sh aredth ree k ey

ch arac te ris ti cs : (1 ) eac h c en te redaro un d the form at io n of a fl owt hr ou gh en ti ty; (2) each in vo lv eda st rad dl e co m pr is in g o ffs et ti ng de riv at iv es in to whi chth e POPS o r PICO e nt ity en te red ; an d (3 ) eac h re qu ire d a tra ns it ory pa rtn er o r sh areh ol de r in th e POPS o r PICO e nt ity to who m th e en ti ty al lo cat edin co m e fro m

th e d eri va ti ve s s o tha t a t ax sh el te r in ve st orco ul d re co gn iz e of fs et ti ng tax lo ss es . To faci li ta te th e tr an sa ct io ns , Delt a p ro vi de d atra ns it ory pa rtn er o r acc omm od at in g p arty . The POPS an d P ICO en ti ti es all oc at edin co m e to th e acc omm od at in g p arty an d a ll oc at edno ne co no m ic lo ss es to Delt a’s cl ie nt s t o of fs etth ei r la rg e ta x l iabi li ti es . Peti ti on er was anacco m m od at in g p arty . For i ts pa rt, Del tarece iv edsi zab le fees foradvi si ng it s cl ie nt s o n the tax sh el te rs an d faci li ta ti ng th e cl ie nt s’ parti ci pa ti on .-5 -

[* 5] The se tra ns act io ns were es pe ci al ly pro fit ab le forBeer as t he m ajor ity

own er of th e Bri co la ge en ti ti es . For i ns tanc e, fo r 20 01 Delt a rep orte d o ve r $8 8 m il li on of in co m e, pr im ari ly from

cli en t fe es . Sim il arl y , for20 02 Delt a rep orte d o ve r $9 3
m il li on of i nc om e, pr im ari ly from cli en t fe es . In20 02 th e Co m

m is si on er re le as edNot ic e 2 00 2- 50 , 20 02 -2 C.B. 9 8, an d Not ic e 2 00 2- 65 , 20 02 -2 C.B. 6 90 , adv is in g t ax pa y ers an d the ir r ep res en ta ti ve s tha t tra ns act io ns li ke POPS an d P ICO were subjec t t o c ha ll en ge by the Co m mis si on er an d h adbe ende si gn at ed“ li st edtra ns act io ns ”. C. Pet it io ne r’s Ro le Afte r pe ti ti on er m ov edto New York , he l iv edinBeer ’s ho m e dur in g the su m m er o f 20 02 . Thatsu m

m er, Bee r ap pr oa ch edpe ti ti on er ab ou t p art ic ip at in g i n a n ew ta x s tra te gy Beer h adde ve lo pe d t o re du ce t ax li ab il it ie s o f po te nt ia l cl ie nt s. Bee r expl ai ne d t o p et it io ne r th athe in te nd edto m ark etth e ta x s he lt ers to en co ur ag e weal th y

in di vi du al s t o b eco m e cl ie nt s o f Del taan d i ts affi li at ed co m pa ni es . Bee r al so ex pl ai ne d the tax strat eg y an d the stru ctur e o f th e ta x s he lt ers to pe ti ti on er. Pet it io ne r un de rs to odth atth e cl ie nt s h adlar ge tax li ab il it ie s fo r a gi ve n year. Add it io na ll y , pet it io ne r un de rs to odth atth e st ru ctur e was a se rie s o f tra ns act io ns de si gn edto off se t cl ie nt s’ tax li ab il it ie s an d tha t h is rol e was to serve-6
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[* 6] as apa rtn er wi th th e p ot en ti al cli en ts . Thes e p artne rs hi ps were i nt eg ral to th e ov eral l s tru ctur e. Furth erm or e, pe ti ti on er u nd ers to odhe wou ldserve as aco ndui t an d tha t the po te nt ia l cl ie nt s’ tax li ab il it ie s the n wo ul d b e tr an sf erre d t o h im . Beer to ldpe ti ti on er the tax ob li ga ti on s tran sf erre d t o p et it io ne r wou ldbe eli m in at edby of fs et ti ng act iv it ie s. Pet it io ne r rai se d c on cern s ab ou t the tra ns act io ns an d a sk ed Bee r whe th er POPS an d P ICO were “pu re t ax sh el te rs ”. Beerass ur edpe ti ti on er th es e st ru ctur es ha d b eenve tt edby atto rn ey s an d a cco un tant s. Des pi te hi s co nc ern s, p et it io ne r ag reedto serve as a n a cco m m od at in g p arty fo r th e POPS andPICO tran sa ct io ns inex ch an ge forco m pe ns at io n fr om

th e Bri co la ge en ti ti es . Peti ti on er ag reedto a $1 00 ,00 0 a nn ua l s al ary pl us a si gn in g bo nu s i n e xc ha ng e fo r hi s p art ic ip at io n i n the tra ns act io ns . Beer an d p et it io ne r al so di sc us se d d is cret io na ry bo nu se s p et it io ne r co ul d re cei ve forhi s i nv ol ve m en t in PICO. D. The Eco no m ic s o f Pet it io ne r’s Part ic ip at io n Pet it io ne r was anacco m

m od at in g p arty

forat l eas t 1 31 tax sh el te rs , hav in g rep orte d o ve r $3 .2 b il li on of n on eco no m ic in co m e, al lo cat edto hi m by the tax sh el te rs , onhi s 2 00 0 a nd20 01 in co m e ta x re tu rn s. Th is in co m e was ap pr ox im at el y

equa l t o the am ou nt s o f of fs et ti ng no ne co no m ic tax lo ss es all oc at ed to Delt a’s cl ie nt s. To rel ie ve pe ti ti on er’s co nc ern s ab ou t i nc reas edtax li ab il it ie s,-7 -

[* 7] Beerass ur edpe ti ti on er tha t the re were strat eg ie s the y co ul d u se to off

se t pe ti ti on er’s t ax li ab il it ie s o n the ba si s o f hi s p art ic ip at io n i n the tax sh el te rs . Not ab ly, pe ti ti on er re cei ve d a ndrep orte d o ffs et ti ng lo ss es fro m th e POPS and PICO en ti ti es for20 00 an d 2 00 1 app ro xi m at el y equa l t o a m ou nt s o f in co m e al lo cat edto hi m

fro m th e ta x s he lt ers . E. JJC Trad in g, LLC Pet it io ne r’s pa rti ci pa ti on inth e ta x s he lt ers in vo lv edex ecu ti ng nu m ero us tra ns act io ns to faci li ta te each of t he 13 1 t ax sh el te rs . This in cl ud edsi gn in g bi nd ers of l eg al do cu m en ts (in cl ud in g a rti cl es of i nc or po rat io n, l oa n a gr eem en ts , wire tra ns fers , andred em pt io n re qu es t l et te rs ) fo r th e PIC O andPOPS en ti ti es . In 20 00 pe ti ti on er wen t t o the off ic es of De lt a an d i ts affi li at es “ a lo t” an d “ reg ul arl y ” to si gn do cu m en ts ex ecu ti ng th e ta x s he lt er tran sa ct io ns . This si gn in g res po ns ib il ity

was p ro bl em at ic forpe ti ti on er b ecau se he tra ve le d fr eque nt ly for h is arch it ectur e b us in es s. He was oft enun ab le to be ph y si cal ly pres en t t o s ig n the se do cu m en ts . The refo re, atDelt a’s su gg es ti on , in20 01 pe ti ti on er fo rm edJJ C Trad in g, LLC (JJ C), t o fa ci li ta te an d s im pl ify pet it io ne r’s pa rti ci pa ti oninth e Bri co la ge en ti ti es . Peti ti on er was th e so le own er o f JJ C, an d B ric ol ag e was JJ C’s no nm em be r m an ag er. JJ C rel ie ve d p et it io ne r of hi s s ig na ture b ur de n b ecau se-8
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[* 8] JJ C’s op erat in g a gr eem en t (s ig ne d b y pe ti ti on er) g av e Bri co la ge au th or ity to m ak e d eci si on s an d s ig n d oc um en ts forJJ C in pe ti ti on er’s s te ad . Peti ti on er al so ga ve Bri co la ge po wer o f at to rn ey to m ak e d eci si on s an d s ig n d oc um en ts forJJ C. Pet it io ne r di d n otm ai nt ai n b oo ks an d re co rd s re ga rd in g h is in te res ts inJJ C, th e ta x s he lt er en ti ti es , or the tra ns act io ns . F. Pet it io ne r’s Co m

pe ns at io n Pet it io ne r rec ei ve d s ig ni fic an t co m pe ns at io n fr om

th e Bri co la ge en ti ti es in ex ch an ge forhi s p art ic ip at io n i n the tax sh el te rs . For i ns tanc e, in 20 00 pe ti ti on er rece iv ed$1 .2 m il li on fro m Co un te rp oi ntas asi gn in g b onus , andin20 01 JJ C rece iv ed$1 m il li on fro m Delt a. Co un te rp oi ntan d Del tarep orte d the se pa ym en ts on Fo rm s 1 09 9- MIS C, Mi sc el lane ou s In co m e (Fo rm 10 99 ), as no ne m

pl oyee co m pe ns at io n, an d p et it io ne r rep orte d the m as i nc om e o n F orm s 1 04 0, U.S. In di vi du al Inc om e Tax Return, an d p ai d the res ul ti ng tax . Peti ti on er al so rece iv ed se ve ral othe r pay

m en ts fro m

Bri co la ge an d C ou nt erp oi nt , to ta li ng $1 00 ,00 0 p er y ear f or20 01 an d 2 00 2 a ndrefl ect in g B eer’s ag reem en t wi th pe ti ti on er tha t h e wou ldrece iv e anannu al sal ary of $1 00 ,00 0 i n e xc hang e fo r hi s p art ic ip at io n. Bri co la ge an d C ou nt erp oi ntrep orte d a ll of t he se am ount s as pe ti ti on er’s wag es , an d p et it io ne r pa idth e res ul ti ng tax .-9
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[* 9] G. The 2 00 3 P aym en t Fr om Delt a InApri l 2 00 2 p et it io ne r rec ei ve d a n e m ai l (Ap ril 20 02 em ai l) f ro m Delt a’s ch ie f fi na nc ia l o ffi cer Hel enDel Bo ve , refer en ci ng pe ti ti on er’s rec ei ptof $ 1
m il li on fro m

Delt a in 20 01 . The Ap ril 20 02 em ai l al so no ti fie d p et it io ne r he wou ldrece iv e fu tu re fe es forco ns ul ti ng workhe pe rfo rm edforDelt a. On M arch 3, 2 00 3, p et it io ne r rec ei ve d a$2 m il li onpa ym en t fr om Delt a. Befo re p et it io ne r rec ei ve d the $2 m il li on pa y m en t, h owe ve r, he an d Del Bo ve ha d e xc ha ng edsev eral em ai ls inFeb ru ary 20 03 di sc us si ng th e p ro pe r ta x tre atm en t o f th e $ 2 m il li on paym en t. Del Bo ve no ti fie d p et it io ne r th atDelt a was go in g t o wi re p et it io ne r th e $ 43 6,0 00 rem ai ni ng inJJ C, di ss ol ve th aten ti ty, an d pa y pe ti ti on er an ad di ti on al $2 m il li on . In re sp on se , pet it io ne r as ke d: “ To thi s en d, ca n youfil l m e in onho w th is m on ey sh ou ldbe tre at edas f

ar as m y acco un tantis co nc ern ed ? W il l I b e is su eda 10 99 for th e who le am ount ? ” Del Bo ve res po nd edth atth e $ 2 m il li on paym en t “ wil l b e rep orte d o n a10 99 , so y ou sh ou ldtax -p lan a cco rd in gl y .” Pet it io ne r ag ai n a sk edfor cla rif ic at io n o n wh ethe r bo th th e $ 2 m il li on pa ym en t an d the ba lanc e in th e JJ C acc ou ntwere g oi ng to be rep orte d o n h is Fo rm s 1 09 9 fo r 20 03 . Del Bo ve res po nd edth at“ [t]he am ou nty ou rece iv e fro m

JJ C Trad in g i s n otin co m e an d, the refo re, wil l n otbe rep orte d o n a 10 99 . Thatm on ey

is fro m whaty ouha d o rig in al ly inv es te d i n J JC Trad in g. Th e-1 0-

[* 10 ] 2mm

we pa y y ouwil l b e rep orte d o n a10 99 , as wel l as an y othe r subs eque nt pa ym en ts .” Bee r ha d aut ho riz ed , onbe ha lf o f Del ta , th e $ 2 m il li on pa ym en t t o pe ti ti on er. Bee r vi ewedth e $ 2 m il li on pay m en t as a di sc ret io nary

bo nu s fo r se rv ic es pe ti ti on er h adpro vi de d t o Del ta . Con si st en t wi th pa stpra ct ic e, Delt a rep orte d the $2 m il li on on Fo rm 10 99 for20 03 as n on em pl oyee co m

pe ns at io n. H. Peti ti on er’s Tax Rep orti ng Pet it io ne r di d n otrep ort the $2 m il li on pay m en t fr om

Delt a as tax ab le in co m e, co nt en di ng th atitwas areturn o f cap it al fro m hi s i nv es tm en ts . Howev er, pe ti ti on er was no t a p artne r of Delt a an d d idno t i nv es t an y cap it al inDelt a. Neit he r pe ti ti on er n orJJ C rep orte d re cei vi ng a sh are o f Del ta ’s in co m e o r lo ss . No Sc he du le K-1, Partn er’s Sh are o f In co m e, Cred it s, Deduc ti on s, et c., was pr ep aredby D el taforpe ti ti on er. All of p et it io ne r’s in te res ts inth e o th er t ax sh el te r en ti ti es were ei th er s ol d orred eem edbe fo re h e rec ei ve d the $2 m il li on pa ym en t i n 2 00 3. Inclo si ng ag reem en ts ex ecu te d b etweenpe ti ti on er an d the Int ern al Rev enue Serv ic e (IR S) with re sp ectto POPS an d P ICO, p et it io ne r ag reedth athe ha d d is po se d o f al l h is in te res ts inth e ta x s he lt er en ti ti es by the en d o f 20 01 . Peti ti on er re po rte d the-1 1-

[* 11 ] am ou nt s h e rec ei ve d b efo re 2 00 3 o n F orm s 1 04 0 fo r 20 00 an d 2 00 1. J JC rep orte d a m ou nt s re cei ve d i n c om pl et edsal es of i ts in te res ts in20 01 . Pet it io ne r rep orte d z ero to ta l t ax on hi s i nc om e ta x re tu rnfor 20 03 . St ep he n El ls pe rm an n, a c ert ifi edpubl ic acco un tant , pre pa redpe ti ti on er’s i nc om e ta x re turnfor20 03 . Peti ti on er an d El ls pe rm an n d is cu ss edth e n atur e o f th e $ 2
m il li on paym en t b efo re fi li ng pe ti ti on er’s return fo r 20 03 . Peti ti on er t ol d Ell sp erm an n tha t h e d idno t kno w th e n atur e o f th e $ 2 m il li onpa y m en t. He in di cat edto Ell sp erm an n tha t the $2 m il li on was fr om act iv it ie s m an ag edby Bri co la ge an d tha t El ls pe rm an n s ho ul d c on ta ctBri co la ge to cla rif y it s n atur e. Befo re fi li ng pe ti ti on er’s i nc om e ta x re tu rnfor20 03 , Ells pe rm an n a sk ed Del B ov e’s rep la cem en t, Ba rn ey Tagl ia la te la , abo utm on ey tra ns fers be twee n pe ti ti on er, J JC , Merc at o Gl ob al Opp ortu ni ti es Fund , LP (Merc at o Gl ob al ), an d Bri co la ge . He di d n otaskTagl ia la te laab ou t m on ey tra ns fers to pe ti ti on er fro m Delt a. Ell sp erm an n u nd ers to od , onth e b as is of h is co nv ers at io n wi th Tagl ia la te la , th atev erythi ng pe rta in in g t o the pa rtn ers hi ps was i nc lu de d o n the Merc at o Gl ob al Sch edul e K-1 is su edto pe ti ti on er. Ell sp erm an n b el ie ve d tha t the $2 m il li on pa ym en t was in cl ud edon th e Sch edul e K-1 . He bel ie ve d thi s, ev enth ou gh he di d no t s pe ci fic al ly askTagl ia la te laif the $2 m il li on paym en t was in cl ud edon th e Sch edul e K-1 . Tagl ia la te ladi d n ottel l El ls pe rm an n tha t the $2 m il li on pay m en t-1 2-

[* 12 ] fro m

Delt a was no t i nc om e o r th atitwou ldno t b e rep orte d o n F orm 10 99 fo r 20 03 . Sim il arl y , Tagl ia la te lane ve r to ldpe ti ti on er o r Ell sp erm an n tha t the $2
m il li on wou ldbe rep orte d o n S ch edul e K-1 . The $ 2 m il li on pa ym en t was no t rep orte d a s a wi th dr awal or d is tri bu ti on on an y Sch edul e K-1 or a ny com bi na ti on of Sch edul es K-1 tha t p et it io ne r rec ei ve d fo r 20 03 . Befo re fi li ng hi s i nc om e ta x re tu rnfor20 03 , pet it io ne r di d n ottel l Ell sp erm an n abo uthi s email c orres po nd en ce wi th Del Bo ve reg ard in g the $2
m il li on paym en t an d tha t Del tain te nd editto be in co m e rep orte d o n aFo rm 10 99 fo r 20 03 . He als o d idno t t el l El ls pe rm an n tha t Del Bo ve ha d n ot ifi edpe ti ti on er th athe wou ldrece iv e fu tu re fe es forhi s co ns ul ti ng workwith Del ta . Ells pe rm an n fir stlea rn edof the Delt a Fo rm 10 99 for20 03 in20 08 du rin g the ex am in at io n o f pe ti ti on er’s i nc om e ta x re tu rnfor20 03 . Had El ls pe rm ann kno wn o f th e Fo rm 10 99 for20 03 , he wo ul d h av e d is cu ss edth e ta x treat m en t o f th e $ 2 m il li onwith Tag li al at el a. OPINION The pa rti es ’ fund am en ta l d is pu te is ov er the ch arac te r of th e $ 2 m il li on pa ym en t Del tam ad e to pe ti ti on er i n 2 00 3. Pe ti ti on er co nt en ds th atth e $ 2 m il li on pa ym en t fr om

Delt a is eit he r a return o f cap it al or, a lt ern at iv el y , a gi ft f ro m Beer to pe ti ti on er. Nei th er wo ul d b e subjec t t o s el f-em pl oym en t t ax . Res po nd en t-1 3-

[* 13 ] co nt en ds th e $ 2 m il li on pa ym en t i s n on em pl oyee co m

pe ns at io n s ub

ject t o se lf- em pl oym en t t ax th atsh ou ldha ve be enrep orte d o n p et it io ne r’s return. I. The $ 2 M il li on Dol lar Paym en t A. Burd enof P ro of

an d P ro du ct io n Gen eral ly, th e ta xp ay er b ears th e b ur de n o f pr oo f. Ru le 14 2( a); W el chv. Helv eri ng , 29 0 U.S. 1 11 , 11 5 (1 93 3) . Peti ti on er co nt en ds , ho wev er, tha t p ur su an t to sec ti on s 6 20 1( d) an d 7 49 1( a) re sp on de ntsh ou ldbe ar the burd enof p ro of . If a t ax pa y er as se rts a reas on ab le di sp ut e wit h re sp ectto anit em of i nc om e rep orte d o n a n i nf

orm at io n re tu rnfil edby a thi rdpa rty andm eet s ce rta in othe r requi rem en ts , th e Co m

m is si on er b ears th e b ur de n o f pr oduc in g re as on ab le an d pr ob at iv e ev id en ce, i n a dd it io n t o the in fo rm at io n re tu rn , con cern in g the de fic ie nc y

att rib ut ab le to th atit em . Sec. 6 20 1( d) . Res po nd en t h as pre se nt ed ev id en ce, o th er tha n the in fo rm at io n re tu rnfil edby D el ta , as t o the ch arac te r of th e in co m e inis su e. W e th eref or e are no t re lying on th e ch arac te riz at io n re po rte d i n th atin fo rm at io n re tu rn . The pa rti es st ip ul at edpe ti ti on er’s rec ei ptof t he $2 m il li on pa ym en t an d Delt a’s ch arac te riz at io n o f th atpa ym en t fo r ta x p ur po se s. Thus , pet it io ne r m us t sh ow the no nt ax ab le ch arac te r of th e p aym en t. See Tok ars ki v. Co m mis si on er, 8 7 T.C. 74 , 76 -7 7 (1 98 6) (ho ld in g tha t the tax pa y er h adth e b ur de n o f pr oo f to sh ow-1 4-

[* 14 ] no nt ax ab le na tu re o f pa ym en t wh ere the tax pa y er i nd is pu tabl y rece iv edth e in co m e inis su e); Pri ce v . Comm is si on er, T.C. Mem o. 2 00 4- 10 3. If a t ax pa y er p ro du ces cred ib le ev id en ce t o s up po rt h er o r hi s p os it io n, co m pl ie s wi th subs tant ia ti on requi rem en ts , andco op erat es with the Co m m is si on er with re ga rdto all reas on ab le reque st s fo r in fo rm at io n, the n the bu rd enof p ro of sh ift s t o the Co m

m is si on er. Sec . 74 91 (a); see Hig be e v . Commis si on er, 1 16 T.C. 43 8, 4 40 -4 41 (20 01 ). A pro lo ng eddi sc us si on of b ur de n o f pr oo f is un ne ces sa ry be cau se we de ci de th is cas e o n the pre po nd eran ce o f th e ev id en ce. See Knu ds en v. Co m m is si on er, 1 31 T.C. 18 5, 1 89 (20 08 ) (“ Ina cas e whe re the st an da rdof pr oo f is pre po nd eran ce o f th e ev id en ce an d the pre po nd eran ce o f th e ev id en ce fav or s o ne pa rty, we m ay de ci de th e cas e o n the weig htof t he ev id en ce an d n oton anall oc at io n o f th e b ur de n o f pr oo f.”); see als o Es ta te of J or ge ns env. Co m m is si on er, T.C. Mem o. 2 00 9- 66 , aff’d, 4 31 Fed . App x. 5 44 (9t h C ir. 2 01 1) . B. Ch arac te r of

th e Paym en t Gro ss in co m e g en eral ly inc lu de s al l i nc om e fro m what ev er s ou rce d eri ve d, in cl ud in g c om

pe ns at io n fo r se rv ic es inth e fo rm of f ees , comm is si on s, o r fri ng e be ne fit s. Sec . 61 (a)( 1) . The ch arac te r of a pa ym en t fo r ta x p ur

po se s i s d et erm in ed by the in te ntof t he pa rti es , parti cu larly the in te ntof t he pa y or , as d is cl os edby the su rro un di ng fact s an d c irc um st an ces . See Sm ith v . Comm is si on er, T.C. Mem o.-1 5-

[* 15 ] 19 95 -4 10 ; Kec k v . Comm is si on er, T.C. Mem o. 1 99 3- 53 8; W at so n v . Co m m is si on er, T.C. Mem o. 1 96 0- 25 5. A rec ei ptof c ap it al or areturn o f cap it al do es no t co ns ti tu te tax ab le in co m e. See Do y le v. Mi tc he ll Bro s. Co ., 24 7 U.S. 17 9, 1 85 (19 18 ); Ve en st ra & DeHa anCo al Co . v. Co m m is si on er, 1 1 T.C. 9 64 , 96 6 (1 94 8) ; M on ic o v . Commis si on er, T.C. Mem o. 1 99 8- 10 . Sim il arl y , recei ptof a gi ft i s n ottax ab le in co m e. See Es ta te of M ay can n v . Commis si on er, 2 9 T.C. 8 1, 85 (19 57 ); M cDerm ot t v . Commis si on er, T.C. Mem o. 2 00 3- 26 9. The tri al tes ti m on y

supp orts th e co nc lu si on th atth e $ 2 m il li on pay m en t was co m pe ns at io n s ub

ject t o s el f-em

pl oym en t t ax . Alth ou ghpe ti ti on er at te m pt s t o m in im iz e h is rol e in th e ta x s he lt ers an d d es cri be s h is act iv it ie s as in ve st m en ts , th e reco rdrefl ect s tha t h e p ro vi de d s erv ic es to Delt a to faci li ta te th e ta x s he lt er tra ns act io ns . Beer t es ti fie d tha t p et it io ne r’s ro le inth e ta x s he lt ers was acri ti cal co m po ne ntof t he trans act io ns an d the tax sh el te rs co ul d n othave fun ct io ne d a s pl an ne d wi th ou t p et it io ne r’s pa rti ci pa ti on . Delt a co ul d n otha ve all oc at ed no ne co no m ic lo ss es to it s cl ie nt s wi th ou t p et it io ne r’s act in g a s the acco m m od at in g pa rty. T he all oc at io n o f $3 .2 b il li on of n on eco no mic in co m e to pe ti ti on er en ab le d Delt a’s cl ie nt s t o re ap th e b en efi ts of a n a lm os t equa l am ountof n on eco no m ic lo ss es to off

se t the ir t ax ab le in co m e. Pet it io ne r’s ro le was far fro m no m in al .-1 6-

[* 16 ] Pet it io ne r arg ue s tha t b ecau se he de le ga te d d eci si on m ak in g aut ho rit y to Bri co la ge , he d idno t p erfo rm an y m ean in gf

ul servi ces forDelt a (o r an y of t he ot he r Bri co la ge en ti ti es ). Pet it io ne r’s in co m e can no t es cap e ta xa ti on m erel y be cau se he de le ga te d c ert ai n dut ie s t o B ric ol ag e an d B eer. Th e ri sky na ture an d larg e rec ei pt s o f th e ta x s he lt ers pro vi de am pl e jus ti fic at io n fo r th e h ig h co m pe ns at io n re la ti ve to th e lo w am ou ntof p ers on al effo rt i nv ol ve d. Pet it io ne r al so pro vi de d s erv ic es ina m or e ap paren t m anne r. Pet it io ne r’s pr im ary res po ns ib il ity

was t o s ig n b in de rs of f

orm at io n a ndorg an iz at io na l do cu m en ts forth e PIC O andPOPS en ti ti es . He tes ti fie d tha t the re was oft ena flu rry of a ct iv ity

requi rin g h im

to go to th e Bri co la ge en ti ti es ’ of fic es “ a lo t” an d

“ reg ul arl y ” to si gn lar ge vo lu m es of l eg al do cu m en ts to ex ecu te th e ta x s he lt er tra ns act io ns . This was abu rd enforpe ti ti on er b ecau se he tra ve le d fr eque nt ly for hi s ar ch it ectur e b us in es s. To all ev ia te th e b ur de n, Del tasu gg es te d tha t h e fo rm JJ C an d s ig n ado cu m en t g ran ti ng a po wer o f at to rn ey to Bri co la ge . Pet it io ne r arg ue s tha t the $2 m il li on pa ym en t co ul d n othave be en co m pe ns at io n fo r se rv ic es be cau se aft er J JC was fo rm edhe was c om pl et el y rem ov edfro m

th atpro ces s. Co nt rary to p et it io ne r’s as se rti on s, s ig ni ng th e fo rm at io n a ndorg an iz at io na l d oc um en ts was n ota m en ia l t as k b utanin te gr al co m po ne ntof c reat in g the tax sh el te r en ti ti es . Whe th er p et it io ne r subjec ti ve ly-1 7-

[* 17 ] un de rs to odan d app reci at edth e n atur e o f hi s ac ti on s d oe s n oteli m in at e th e si gn ifi can ce o f th e se rv ic es he pro vi de d t o Del taan d the othe r ta x s he lt ers by si gn in g the form at io n a ndorg an iz at io na l d oc um en ts . Peti ti on er’s s ub se qu en t de le ga ti onof h is si gn atur e au th or ity do es no t ab so lv e h im

fro m li ab il ity fortax on th e co m pe ns at io n h e rec ei ve d. The rem ai nd er o f th e rec or d a ls o re fle ct s tha t the $2 m il li on pa ym en t was co m pe ns at io n. Be er ag reedto pa y pe ti ti on er a $ 10 0,0 00 an nu al sal ary pl us a si gn in g b on us inex ch an ge forpe ti ti on er’s i nv ol ve m en t. Bee r an d p et it io ne r al so di sc us se d p os si bl e d is cret io na ry bo nu se s. Pet it io ne r rec ei ve d s ev eral pa ym en ts co ns is te ntwith h is ag reem en t wi th Beer . Pet it io ne r rec ei ve d s ig ni fic an t p aym en ts fro m th e Bri co la ge en ti ti es ch arac te riz edan d re po rte d a s n on em pl oyee in co m e. In20 00 pe ti ti on er re cei ve d a $1 .2 m il li on si gn in g b onus fro m Co un te rp oi nt . Cou nt erp oi ntrep orte d i t as no ne m pl oyee in co m e o n i ts Fo rm 10 99 for20 00 , andpe ti ti on er p ai d i nc om e ta x on th e fu ll am ou nt . Sim il arl y , in20 01 pe ti ti on er re cei ve d a$1 m il li on pa ym en t fro m Delt a th ro ug h J JC . Peti ti on er t es ti fie d tha t h e v ie weditas a no th er b on us . Delt a rep orte d the $1 m il li on pa ym en t as no ne m pl oyee in co m e o n F orm

10 99 for 20 01 , andpe ti ti on er p ai d i nc om e ta x o n the ful l am ount . Add it io na ll y , in20 01 an d 2 00 2 p et it io ne r rec ei ve d a$1 00 ,00 0 s al ary pa idby Brico la ge an d-1 8-

[* 18 ] Co un te rp oi ntan d c on si st en t wi th pe ti ti on er’s ag reem en t wi th Beer . Bri co la ge an d C ou nt erp oi ntrep orte d the se am ou nt s as wage s, an d p et it io ne r pa id th e res ul ti ng tax . There is ne ithe r di sc ern ab le reas on no r pe rs ua si ve jus ti fic at io n fo r tr eat in g the 20 03 paym en t d iff eren tl y . Mo reo ve r, Del B ov e in fo rm edpe ti ti on er tha t the $2 m il li on pa ym en t i n is su e wou ldbe rep orte d o n the Fo rm 10 99 for20 03 . In Ap ril 20 02 Del Bo ve an d pe ti ti on er ex ch an ge d s ev eral em ai ls reg ard in g the $2 mil li onpa y m en t an d h ow Delt a in te nd edto ch arac te riz e it . After r es po nd in g t o p et it io ne r’s m ul ti pl e reque st s fo r cl ari fic at io n, Del Bo ve un equi vo cal ly not ifi edhi m th atDelt a in te nd ed to rep ort the $2 m il li on paym en t o n the Fo rm 10 99 for20 03 . After h is em ai l ex ch an ge with Del Bo ve , pet it io ne r st il l que st io ne d Del Bo ve ’s cal cu la ti on s an d di d n otbe li ev e th atall or p artof t he $2 mil li on pa ym en t was tax ab le in co m e. Pet it io ne r’s te st im on y

is im pl au si bl e an d u np ers ua si ve . He hadrece iv ed co m pe ns at io n i n p rio r y ears pu rs ua ntto hi s ag reem en t wi th Beer , andhe ha d no ti ce tha t the pa y

m en t was to be tre at edas c om pe ns at io n b y

th e p ay or , Delt a. At tria l an d i n h is po st tri al supp le m en ta l b rie f pe ti ti on er o bjec te d t o the us e of th e Del Bo ve em ai ls as h ears ay . They are a dm is si bl e, ho wev er, fo r pu rp os es ot he r th anpro vi ng th atDel Bo ve was c orrectinhe r ch arac te riz at io n o f th e pa ym en t, i .e., forpu rp os es othe r th anth e trut h o f he r st at em en ts . The em ai ls are-1 9-

[* 19 ] admis si bl e to sh ow tha t p et it io ne r was on no ti ce tha t the $2 m il li on pa ym en t wou ldbe tre at edas t ax ab le in co m e. See B ie ga s v . Qui ckway Carr ie rs , Inc ., 57 3 F.3 d 3 65 , 37 9 (6 th Cir . 20 09 ) (h ol di ng st at em en t ad m is si bl e fo r no nh ears ay pu rp os e to pro ve pl ai nt iff was o n n ot ic e o f immin en t d an ge r, ig no redwarn in g, an d act edne gl ig en tl y ). The Del Bo ve em ai ls are al so adm is si bl e und er the st at e o f
m in d e xc ep ti on to th e h ears ay rul e to sh ow h ow Del tain te nd edto rep ort an d ch arac te riz e th e $ 2 m il li on pa ym en t. See Fed . R. Evi d. 8 03 (3 ); Es ta te of P ru it t v . Co m m is si on er, T.C. Mem o. 2 00 0- 28 7 (h ol di ng tes ti m on y reg ard in g d eced en t’s st at edin te ntto in cl ud e a p owe r to m ak e g ift s i n p owe rs of a tt orne y adm is si bl e un de r ru le 80 3( 3) of t he Fed eral Ru le s o f Evi de nc e); PanAm . Accep tanc e Co rp . v. Co m m is si on er, T.C. Mem o. 1 98 9- 44 0 (h ol di ng ch eckwith n ot at io n “ rep ay de bt ” adm is si bl e und er ru le 80 3( 3) of t he Fed eral Ru le s o f Evi de nc e as ev id en ce o f in te ntto rep ay

lo an ). Pet it io ne r ad di ti on al ly argu es th atres po nd en t p rev en te d m at eri al ev id en ce fro m be in g i nt ro du cedby notpro vi di ng Del Bo ve with l im it edimm un ity . Pet it io ne r al so arg ue s tha t re sp on de nt ’s fai lu re t o d o s o s ho ul d c reat e anadve rs e in fere nc e th atDel Bo ve ’s tes ti m on y wou ldno t h av e supp orte d re sp on de nt ’s po si ti on . Con trary

to pe ti ti on er’s as se rti on s, o nl y th e Dep art m en t o f Ju st ic e can gr an t i m m un ity . See 1 8 U.S.C. s ec. 6 00 3 (2 01 2) . Mor eo ve r, ev enif re sp on de nt-2 0-

[* 20 ] co ul d h av e g ran te d i m m un ity to Del Bo ve an d c ho se no t t o, a n eg at iv e in fere nc e can no t b e drawnfro m th atpro se cu to ria l d eci si on . See Un it edSta te s v . Myerso n, 1 8 F .3d15 3, 1 58 (2dCir . 19 94 ) (ci ti ng Uni te d S ta te s v . St. Mi ch ael ’s Cred itUni on , 88 0 F .2d57 9, 5 98 (1s t Ci r. 19 89 ), an d re lying on th atco urt’s de te rm in at io ns th at“ th e g ov ern m en t’s fa il ur e to imm un iz e a wit ne ss , witho ut m or e, do es no t g iv e ri se to a m is si ng witne ss in st ru ct io n” an d tha t n o “ ne ga ti ve in fere nc e m ay

be dra wn fr om

th atpro se cu to ria l d eci si on ”); Uni te d S ta te s v . Fo rb es , 20 07 W L 14 19 52 , at * 7 (D. Co nn . Jan . 17 , 20 07 ). Delt a’s tr eatm en t o f th e $ 2 m il li onpa y m en t as no ne m

pl oyee in co m e was co ns is te ntwith Del taan d C ou nt erp oi nt ’s tre atm en t o f th e 2 00 1 a nd20 02 “bo nu s” pa ym en ts . Delt a rep orte d b ot h p rio r paym en ts as n on em pl oyee co m

pe ns at io n, an d pe ti ti on er re po rte d the m

as s el f-em

pl oym en t i nc om e an d p ai d t ax on th em . Pet it io ne r ha s p ro vi de d n o p ers ua si ve jus ti fic at io n fo r di st in gu is hi ng th e 2 00 3 $2 m il li on pa ym en t fr om

th e 2 00 1 o r 20 02 “bo nu s” pa ym en ts . The ev id en ce es tabl is he s tha t the in te ntof t he pa rti es an d s pe ci fic al ly the in te ntof t he pa y or Delt a was to tre atth e $ 2 m il li on pa ym en t as no ne m pl oyee in co m e subjec t t o t ax . The refo re, the ch arac te r of th e $ 2 m il li on pay

m en t i s n on em

pl oyee in co m e subjec t to sel f-em

pl oym en t t ax .-2 1-

[* 21 ] Pet it io ne r ad di ti on al ly argu es th athe is no t s ub ject t o s el f-em

pl oym en t t ax on th e $ 2 m il li on pa ym en t b ecau se he was n oten ga ge d i n atra de or b us in es s as a ta x s he lt er ac co m

m od at in g p arty . The t erm “ tra de or b us in es s” ha s the same m ean in g u nd er s ect io n 1 40 2( a) as un de r se ct io n 1 62 . Sec. 1 40 2( c); see Bo t v . Co m m is si on er, 1 18 T.C. 13 8, 1 46 (20 02 ), aff’d, 3 53 F.3d59 5 (8 th Cir . 20 03 ). In Co m m is si on er v . Groe tz in ge r, 48 0 U.S. 2 3, 3 5 (1 98 7) , th e Supr em e Co urt de te rm in edth atto be en ga ge d i n atra de or b us in es s u nd er s ect io n 1 62 (an d, i n thi s cas e, se ct io n 1 40 2( a)), the tax pa y er m us t b e in vo lv edinanact iv ity with c on ti nu ity an d re gu larit y

an d wi th th e p rimary

pu rp os e o f rec ei vi ng in co m e o r pr of it . The reco rdde m on st rat es th atpe ti ti on er’s act iv it ie s wer e co nt in uo us an d reg ul ar. Pet it io ne r te st ifi edth athe wentto Bri co la ge ’s off ic es “ a lo t” an d

“ reg ul arl y ” to ex ecu te lar ge vo lu m es of l eg al do cum en ts co ns is ti ng of f orm at io n an d o rg an iz at io n d oc um en ts forth e ta x s he lt er en ti ti es . This factrem ai ne d e ve n aft er p et it io ne r fo rm edJJ C in 20 01 . By form in g J JC , m ak in g B ric ol ag e JJ C’s no nm em be r m an ag er, an d g iv in g B ric ol ag e p owe r of att orne y ov er J JC , pe ti ti on er’s act iv it ie s re m ai ne d c on ti nu ou s an d re gu lar. Bri co la ge ’s act io ns with res pe ctto JJ C are im

pu te d t o p et it io ne r as hi s ag en t. Pet it io ne r es tabl is he d the le ga l m ach in ery fo r othe rs to acton hi s b eh al f an d c an no t n ow u se th atde le ga ti on of au th or ity as ash ie ld . The rec or d a ls o d em on st rat es pe ti ti on er’s p ro fitm ot iv e.-2 2-

[* 22 ] Pet it io ne r was pa idforhi s s erv ic es th ro ug h l arg e lu m p- su m pa ym en ts th at were re po rte d b y

th e p ay or s as no ne m

pl oyee co m

pe ns at io n o n F orm s 1 09 9, an d pe ti ti on er re po rte d the paym en ts as s el f-em pl oym en t i nc om e. Insh ort, the reco rd de m on st rat es th atpe ti ti on er ac co m m od at edtax sh el te rs with s uf fic ie ntco nt in ui ty, reg ul ari ty, an d apro fitm ot iv e su chth athe was e ng ag edina tr ad e o r bu si ne ss as a ta x s he lt er ac co m

m od at in g p arty . Nex t, p et it io ne r as se rts th atth e $ 2 m il li on pa ym en t was a return o f cap it al . Asi de fro m

hi s b lank etass ert io ns , th e ev id en ce es tabl is he s tha t p et it io ne r was no t a p artne r in Delt a an d d idno t i nv es t capi ta l i n Del ta . The p art ie s s ti pu late d tha t pe ti ti on er re cei ve d the $2 m il li on pa ym en t fr om Delt a an d Del ta ’s cha ract eri zat io n of th atpaym en t. Si m

pl y st at ed , th e p aym en t co ul d n otha ve be ena return o f cap it al be cau se pe ti ti on er d idno t h av e an y cap it al in ve st edinDelt a. The ev id en ce es tabl is he s tha t p et it io ne r di d n otha ve a cap it al in ve st m en t i n an y tax sh el te r en ti ty after 2 00 1. Inclo si ng ag reem en ts with the IRS, p et it io ne r ag reedth atbo th he an d J JC so ldor r ed eem edall of the ir r es pe ct iv e in te res ts inth e ta x s he lt er en ti ti es by the en d o f 20 01 . He reco rd edam ou nt s re cei ve d i n s al es or red em pt io ns of h is in te res ts inth e ta x s he lt er en ti ti es on hi s i nc om e ta x re turn s fo r 20 00 an d 2 00 1. Si m il arl y , JJ C rec or de d am ou nt s re cei ve d i n s al es or r ed em pt io ns of it s i nt eres ts inth e ta x s he lt er en ti ti es on it s i nc om e ta x re tu rnfor20 01 .-2 3-

[* 23 ] Nev erthe le ss , pet it io ne r as se rts th athe ha d i nv es tm en t capi ta l i n the tax sh el te r en ti ti es when he rece iv edth e $ 2 m il li on pa ym en t. Pet it io ne r arg ue s tha t h e un de rs to odth e in it ia l $ 1.2 m il li on pa ym en t fr om “ Bri co la ge ” wou ldbe a si gn in g bo nu s i n 2 00 0 t o b e u se d a s h is in ve st m en t capi ta l i n the tax sh el te r en ti ti es . Si m il arl y , pet it io ne r arg ue s tha t the $1 mil li on de po si t i nt o J JC was “ os te ns ib ly” us edto in ve stinth e Bri co la ge en ti ti es . Pet it io ne r di d n otkn ow wh ic h, o r ho w m an y , of the Bri co la ge en ti ti es ’ pa rtn ers hi ps he ha d i nv es te d i n. He d idno t k eep tra ckof the partn ers hi ps , hi s in ve st m en ts inth e p artne rs hi ps , or the tra ns act io ns th ey en ga ge d i n. He co nc ed es th atitis im

po ss ib le to tra ce h is in ve st m en ts inth e Bri co la ge en ti ti es be cau se th e ta x s he lt ers ’ st ru ctur es were t oo co m pl ex an d v as t t o unwi nd . Fin al ly, he no te s th attra ci ng hi s i nv es tm en ts is im po ss ib le be cau se he ha s re pe at ed ly beende ni ed acce ss to ne ces sa ry

fin an ci al reco rd s. Pet it io ne r’s arg um en t ap pe ars to be th atth e ci rcu m st an ti al ev id en ce o f hi s in ve st m en t i n the Bri co la ge en ti ti es de m on st rat es th atth e $ 2 m il li on pa ym en t was a return o f cap it al . W e d is ag ree. Th e p rep on de ran ce o f th e ev id en ce es tabl is he s th atth e $ 2 m il li on paym en t was no t a r eturn o f cap it al fro m Delt a. Pet it io ne r al te rn at iv el y

arg ue s tha t i f th e $ 2 m il li on paym en t i s n ota return of cap it al , th enitwas agi ft f ro m Beer . Peti ti on er n ot es th at“ [w]hil e th e Co urt-2 4-

[* 24 ] m ay

th in k the su gg es ti on th atth e p aym en t was part g iftso m ewh at far- fet ch ed , th is cas e m

us t b e d eci de d o n the ev id en ce p res en te d.” W e ag ree wi th pe ti ti on er’s ch arac te riz at io n o f hi s s ug ge st io n a ndth e n eces si ty of de ci di ng th e cas e o n the ev id en ce, b utwe rejecthi s co nc lu si on . A gif t re su lt s fr om

a de ta ch ed an d d is in te res te d g en ero si ty m ot iv at edby affect io n, re sp ect , adm ira ti on , cha rit y , or th e li ke . Comm is si on er v . Dub ers te in , 36 3 U.S. 2 78 , 28 5 (1 96 0) . The rec or d i s de vo idof a ny evi de nc e su gg es ti ng th atth e p aym en t re su lt edfro m de ta ch edan d di si nt eres te d g en ero si ty. Rathe r, th e ev id en ce es tabl is he s tha t the pa y or , Delt a, in te nd edth e p aym en t as co m pe ns at io n. No tabl y , Beer t es ti fie d tha t h e v ie wedth e $2 m il li on pa ym en t as a di sc ret io na ry bo nu s fo r se rv ic es pe ti ti on er p ro vi de d t o Delt a. The e vi de nc e co m pe ls th e co nc lu si on th atth e $ 2 m il li on pa ym en t i n qu es ti on was re cei ve d fo r se rv ic es an d was ne ithe r a g iftno r a return o f cap it al co nt rib ut io ns th atne ithe r pe ti ti on er n or Beerco ul d i de nt ify. II. Accu racy-Rel at edPen al ty Fi na ll y , we con si de r whe th er p et it io ne r is li ab le forth e acc ur acy-rela te d pe na lty . See s ec. 6 66 2( a). Res po nd en t h as th e b ur de n o f pr oduc ti on an d m us t pr es en t s uf

fic ie ntev id en ce tha t i t i s ap pr op ria te to im po se th e p en al ty. See s ec. 74 91 (c); Hig be e v . Comm is si on er, 1 16 T.C. at 4 46 -4 47 . Once r es po nd en t s at is fie s hi s b ur de n o f pr oduc ti on , pet it io ne r m us t p res en t ev id en ce s uf

fic ie ntto pe rs ua de-2 5-

[* 25 ] th e Co urt tha t re sp on de nt ’s det erm in at io ns are i nc orrect . See Hig be e v . Co m m is si on er, 1 16 T.C. at 4 47 . A. Sect io n 6 75 1( b) Pet it io ne r rai se s fo r th e fi rs t t im e in hi s p os ttria l b rie f anarg um en t tha t res po nd en t fa il edto carry hi s b ur de n o f pr oduc ti on by notin tro du ci ng ev id en ce o f hi s co m pl ianc e wit h s ect io n 6 75 1( b) (1 ). Pet it io ne r th eo riz es th atforres po nd en t t o m eethi s b ur de n o f pr oduc ti on , res po nd en t m us t i nt ro du ce ev id en ce tha t the in di vi du al m ak in g the pe na lty de te rm in at io n h adhi s o r he r imm ed ia te supe rv is or ap pr ov e th e acc ur acy-rela te d p en al ty in wri ti ng . A party m ay no t ra is e anis su e fo r th e fi rs t t im e o n b rie f if

th e Co urt’s co ns id erat io n o f th e is su e wou ldsu rp ris e an d pr ejud ic e th e o pp os in g p arty . See Sm al le y v. Co m m is si on er, 1 16 T.C. 45 0, 4 56 (2 00 1) ; Se li gm anv. Co m m is si on er, 8 4 T.C. 1 91 , 19 8- 19 9 (1 98 5) , aff’d, 7 96 F.2d 11 6 (5 thCir . 19 86 ). In d eci di ng whet he r th e o pp os in g p arty wil l s uf fer p reju di ce, we co ns id er the de gr ee t o wh ic h the op po si ng pa rty is s ur pr is edby the ne w is su e an d the op po si ng pa rty’ s n eedfor ad di ti on al ev id en ce t o re sp on d t o the ne w is su e. See P ag el , Inc . v. Co m

m is si on er, 9 1 T.C. 2 00 , 21 2 (1 98 8) , aff’d, 9 05 F.2d11 90 (8 th Cir . 19 90 ). In a dd it io n, a p arty m ay no t re ly upo n ane w th eo ry un le ss th e op po si ng pa rty has be enpro vi de d wi th fai r warn in g o f th e in te nt io n t o b as e an arg um en t upo n tha t the ory . See i d. at21 1- 21 2. “ Fai r warn in g” m ean s tha t a-2 6-

[* 26 ] pa rty’ s ab il ity

to pre pa re i ts cas e was no t p reju di cedby the othe r pa rty’ s fai lu re t o g iv e n ot ic e, in th e n ot ic e o f de fic ie nc y or i n the pl ead in gs , of the in te nt io n t o re ly on apa rti cu lar th eo ry . Id. Pet it io ne r’s ne w arg um en t i s u nt im el y . W e d o n otrul e o n the is su e o f whe th er the sec ti on 67 51 (b ) requi rem en t i s p artof r es po nd en t’s b ur de n o f pr oduc ti on an d e xp res s n o o pi ni on as t o the m eri ts of p et it io ne r’s arg um en t. Pet it io ne r di d n otall eg e in th e p et it io n, i n h is pre tri al m em or an du m , or a t tria l tha t res po nd en t fa il edto co m

pl y with s ect io n 6 75 1( b) . By be late dl y rai si ng th is arg um en t i n h is po st tri al op en in g b rie f, pe ti ti on er wo ul d p reju di ce re sp on de ntby de nyin g h im

anop po rtu ni ty to i nt ro du ce ev id en ce o f th e IRS ’s com pl ianc e wit h se ct io n 6 75 1( b) . This cas e was tri edbe fo re an d s ub m it te d t o ajud ge who is no lo ng er av ai labl e to de ci de it . The p art ie s wer e g iv enanop po rtu ni ty for a fu rth er tri al bu t d idno t re qu es t o ne . There is no jus ti fic at io n fo r reo pe ni ng th e rec or d a t th is lat e st ag e, an d we wi ll no t ad dr es s the sec ti on 67 51 (b ) arg um en t. B. Subs tant ia l Un de rs ta te m en t o f In co m e Tax A tax pa y er i s l iabl e fo r anaccu racy-rela te d p en al ty as to an y po rti on of a n un de rp aym en t at tri bu tabl e to , am on g o th er thi ng s, a s ub st an ti al un de rs ta te m en t o f in co m e ta x o r ne gl ig en ce. Sec . 66 62 (a) an d (b )(1 ) an d (2 ). Ther e is a subs tant ia l un de rs ta te m en t o f in co m e ta x i f th e am ou ntof t he un de rs ta te m en t ex ceed s the-2 7-

[* 27 ] gre at er o f 10 % of the tax requi redto be sh own on th e return o r $5 ,00 0. Se c. 66 62 (d )(1 )(A); sec . 1.6 66 2- 4( a), In co m e Tax Reg s. Be cau se we de te rm in e th at th ere i s a s ub st an ti al un de rs ta te m en t o f in co m e ta x, we n eedno t ad dr es s ne gl ig en ce. Pet it io ne r rep orte d z ero to ta l t ax for20 03 , andwe are s us ta in in g the de te rm in at io n i n the no ti ce o f de fic ie nc y th athe owes $6 3,7 51 . Thu s, p et it io ne r un de rs ta te d the tax onhi s re tu rnby $63 ,75 1. Acco rd in gl y , res po nd en t h as m ethi s bu rd enof p ro du ci ng ev id en ce tha t p et it io ne r’s un de rp aym en t was att rib ut ab le to a subs tant ia l u nd ers ta te m en t o f in co m e ta x a ndth eref or e p et it io ne r is li ab le for th e accu racy-rela te d p en al ty abs en t a s ho win g o f rea so nabl e cau se or s om e o th er de fen se . C. Reas on ab le Cau se an d Go odFai th Onc e th e Co m

m is si on er h as m etth e b ur de n o f pr oduc ti on , th e ta xp ay er m us t co m e fo rwardwith p ers ua si ve ev id en ce tha t the pe na lty is in ap pr op ria te be cau se , for

ex am pl e, he or s he act edwith re as on ab le cau se an d i n g oo d fa ith. Sec. 6 66 4( c)(1 ); Hi gb ee v . Comm is si on er, 1 16 T.C. at 4 48 -4 49 . The d eci si on as to whet he r a t ax pay 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 a cas 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 . See se c. 1.6 66 4- 4( b) (1 ), In co m e Tax Reg s. Gen eral ly, th e m os t i m po rta ntfact oris th e-2 8-

[* 28 ] ex te ntof t he tax pa y er’s eff ort t o a ss es s h er o r hi s p ro pe r ta x l iabi li ty. Id.; se e Hal by v. Co m

m is si on er, T.C. Mem o. 2 00 9- 20 4. Whi le rel ianc e o n the advi ce o f a p ro fes si on al tax advi se r do es no t ne ces sa ril y

de m on st rat e rea so nabl e cau se an d g oo d fa ith, i t m ay when“un de r al l th e ci rcu m st an ces , su chrel ianc e was reas on ab le an d the tax pa y er ac te d i n g oo d fai th .” Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Th e requi rem en ts forreas on ab le cau se are n otsat is fie d i f th e ta xp ay er fai ls to di sc lo se a factth athe kn ows , or reas on ab ly sho ul d kno w, to be rel ev an t t o the pro pe r ta x treatm en t o f anit em . Sec. 1 .66 64 -4 (c)( 1) (i) , Inc om e Tax Reg s.; see Diaz v. Co m m is si on er, T.C. Mem o. 20 12 -2 80 . Add it io na ll y , a tax pa y er’s educ at io n, s op hi st ic at io n, an d b us in es s ex pe rie nc e are rel ev an t i n d et erm in in g wh ethe r th e ta xp ay er’s rel ianc e o n the tax advi ce was reas on ab le an d m ad e in go odfai th . Sec. 1 .66 64 -4 (c)( 1) , Inc om e Tax Reg s. Pet it io ne r se ek s t o d efen d a ga in stth e acc ur acy-relate d p en al ty by ass ert in g th athe rel ie d o n El ls pe rm an n, h is tax pro fes si on al , to pre pa re the tax return a ndto as su re h im

th atth e $ 2 m il li on pa ym en t was no t t ax ab le in co m e. Howev er, Ell sp erm an n’s ad vi ce was on ly as go odas t he in fo rm at io n tha t p et it io ne r pr ov id ed to hi m . Peti ti on er d idno t p ro vi de Ell sp erm an n wi th ne ces sa ry an d a ccu rat e in fo rm at io n.-2 9-

[* 29 ] Inth e Apr il 20 02 em ai l Del Bo ve di sc us se d p et it io ne r’s rece ip t o f th e $1 m il li on pa ym en t fr om

Delt a in20 01 an d n ot ifi edpe ti ti on er tha t h e wou ld rece iv e fu tu re fe es forco ns ul ti ng workth athe ha d p erfo rm edforDelt a. In Feb ru ary 20 03 Del Bo ve em ai le d p et it io ne r an d n ot ifi edhi m th athe wou ldbe rece iv in g the ba lanc e o f fu nd s fr om hi s J JC acco un t an d the $2 m il li on pa ym en t fro m Delt a. Pet it io ne r an d Del Bo ve ex ch an ge d s ev eral fol lo wup em ai ls di sc us si ng th e p ro pe r ta x treat m en t o f th e $ 2 m il li on pa ym en t. Del Bo ve res po nd edth atth e $ 2 m il li on “ wil l b e rep orte d o n a10 99 , so y oush ou ldtax -p lan acco rd in gl y .” Pet it io ne r as ke d fo r ad di ti on al cla rif ic at io n o n wh ethe r bo th am ount s wo ul d b e in cl ud edon Fo rm 10 99 for20 03 . Del Bo ve res po nd ed un equi vo cal ly tha t “ [t]he am ou nty ourece iv e fro m JJ C Trad in g i s n otin co m e, an d th eref or e, wil l n otbe rep orte d o n a10 99 . Thatm on ey is fro m whaty ouha d or ig in al ly inv es te d i n J JC Trad in g. Th e 2 m m we pa y y ouwil l b e rep orte d o n a 10 99 , as wel l as an y

othe r subs eque ntpa ym en ts .” Pet it io ne r as se rts th at , aft er thi s em ai l ex ch an ge , he que st io ne d Del Bo ve ’s con cl us io n andex ch an ge d s ev eral em ai ls with B ric ol ag e’s ge ne ral co un se l re ga rd in g h ow m uc h was du e to hi m

an d ho w itwou ldbe tre at edfor tax pu rp os es . Pet it io ne r’s te st im on y

onth es e p oi nt s i s n otpe rs ua si ve . Del Bo ve un equi vo cal ly exp la in edto pe ti ti on er, aft er s ev eral cla rif ic at io ns , th atth e-3 0-

[* 30 ] $2 m il li onwou ldbe in cl ud edon hi s Fo rm 10 99 for 20 03 an d tha t h e sh ou ld

“ ta x- pl anacco rd in gl y .” Del B ov e’s em ai ls cle arl y ex pl ai ne d h ow Del tain te nd ed to ch arac te riz e th e p aym en t. Del tasubs eque nt ly repo rte d the $2 mil li on pa ym en t as no ne m pl oyee co m

pe ns at io n o n p et it io ne r’s Fo rm 10 99 for20 03 , con si st en t wi th Del B ov e’s em ai ls an d e xp lana ti on . Peti ti on er n ev er i nf orm edEll sp erm an n o f hi s Feb ru ary 20 03 em ai l ex ch an ge with Del Bo ve reg ard in g the tax tre atm en t o f th e $2 m il li on pa ym en t o r th atpe ti ti on er was no ti fie d i t wo ul d b e tr eat edas i nc om e an d i nc lu de d o n F orm

10 99 for20 03 . App aren tl y , pet it io ne r’s arg um en t i s tha t h e h adsat is fie d h im se lf o n the tax tre atm en t o f th e $ 2 m il li on paym en t. We reject p et it io ne r’s ex pl an at io n o f why he di d n ottel l El ls pe rm an n abo uthi s email e xc ha ng es with Del Bo ve . Ins te ad , pe ti ti on er erro ne ou sl y

to ldEll sp erm an n tha t the $2 m il li on pay m en t was part o f th e act iv it ie s B ric ol ag e m an ag edan d tha t, i f Ell sp erm an n h adan y qu es ti on s, h e sh ou ldco nt actBri co la ge reg ard in g the cla ss ifi cat io n a ndna tu re o f th e p aym en t. Ell sp erm an n t es ti fie d tha t h e wou ldha ve fol lo wedup with Del tareg ard in g a po te nt ia l Fo rm

10 99 for 20 03 if h e h adbe enin fo rm edof p et it io ne r’s co rres po nd en ce wi thDel Bo ve . Pet it io ne r m

us t d em on st rat e b y

a pr ep on de ran ce o f th e ev id en ce tha t h e rel ie d i n g oo d fa ith o n h is advi se r’s jud gm en t t o e st ab li sh go odcau se . See-3 1-

[* 31 ] Neo na to lo gy Asso cs ., P.A. v. Co m mis si on er, 1 15 T.C. 43 , 99 (20 00 ), aff’d, 29 9 F .3d22 1 (3 d C ir. 2 00 2) ; s ee al so 10 6 Lt d. v . Commis si on er, 1 36 T.C. 67 , 77 (2 01 1) , aff’d, 6 84 F.3d84 (D.C. Cir . 20 12 ). Pet it io ne r can no t es tabl is h g oo d- fai th rel ianc e b ecau se he withh el d fr om Ell sp erm an n acru ci al an d p ro ba ti ve em ai l ex ch an ge . Peti ti on er’s d eci si on to withh ol d tha t i nf orm at io n fr om

Ell sp erm an n was ne gl ig en t atbe stor i nt en ti on al ly obs tru ct iv e atwors t. Ineit he r ev en t, pe ti ti on er fa il edto in fo rm Ell sp erm an n o f fac ts th athe kn ew, orsh ou ldha ve kn own , were rel ev an t t o the pro pe r ta x treat m en t o f th e $ 2 m il li on pa ym en t. A reas on ab ly pru de ntpe rs on wou ldha ve in fo rm edhi s o r he r ta x p ro fes si on al as t o th e d is pu te d c ha ract eri zat io n o f a p aym en t. Itwas o bjec ti ve ly unr eas on ab le for pe ti ti on er t o fa il to do so . Add it io na ll y , pet it io ne r can no t d em on st rat e g oo d- fai threl ianc e b ecau se he kn ew, orsh ou ldha ve kn own , th atEll sp erm an n’s ad vi ce was ba se d o n i nc om pl et e in fo rm at io n a ndanun reas on ab le ass um pt io n. Th e advi ce o f a p ro fes si on al m us t no t b e b as edon un reas on ab le factua l an d l eg al ass um pt io ns an d m

us t n ot un reas on ab ly rely

on th e rep res en ta ti on s, s ta te m en ts , fin di ng s, o r ag reem en ts of th e ta xp ay er o r any

othe r pe rs on . Sec. 1 .66 64 -4 (c)( 1) (ii ), In co m e Tax Reg s.; see Can al Co rp . v. Co m

m is si on er, 1 35 T.C. 19 9, 2 18 (20 10 ); Du nnv. Co m m is si on er, T.C. Mem o. 2 01 0- 19 8. Th e advi ce m us t n otbe ba se d o n arep res en ta ti on or-3 2-

[* 32 ] ass um

pt io n tha t the tax pa y er kno ws, o r ha s re as on to kn ow, i s u nl ik el y to be tru e. Sec. 1 .66 64 -4 (c)( 1) (ii ), In co m e Tax Reg s. Ell sp erm an n d et erm in edth e $ 2 m il li on pa ym en t co ul d b e o m it te d fr om pe ti ti on er’s t ax return o n the ba si s o f anun reas on ab le an d e rro ne ou s as su m pt io n- - th atth e p aym en t was reco rd edon Sch edul e K-1 as t o apa rtn er’s d is tri bu ti ve sh are. Tha t as su m

pt io n i s erro ne ou s an d u nr eas on ab le forsev eral reas on s. Del Bo ve ’s rep la cem en t, Tag li al at el a, cred ib ly test ifi edth athe ne ve r to ldpe ti ti on er o r Ell sp erm an n tha t the $2 m il li on wou ldbe rep orte d o n S ch edul e K-1 or a ny co m bi na ti on of S ch edul es K-1. Si m il arl y , Tagl ia la te lacred ib ly test ifi edth athe ne ve r to ldEll sp erm an n tha t the $2 m il li on pay m en t was no t i nc om e o r th atit wou ldno t b e rep orte d o n F orm 10 99 for20 03 . The $ 2 m il li on pa ym en t d oe s n ot ap pe ar o n p et it io ne r’s 20 03 Sch edul es K-1. Pe ti ti on er’s fai lu re t o i nf orm Ell sp erm an n abo uthi s email e xc ha ng e wit h Del Bo ve bo ls te redEll sp erm an n’s erro ne ou s as su m

pt io n. Pe ti ti on er kne w, or h adreas onto kn ow, tha t the $2 m il li on wou ldbe rep orte d o n F orm 10 99 for20 03 . There fo re, Ell sp erm an n’s ad vi ce was ba se d o n arep res en ta ti on or a ss um pt io n tha t p et it io ne r kn ew, orha d re as on to kn ow, was un li ke ly to b e true . Fi na ll y , we no te th atpe ti ti on er i s a h ig hl y educ at edbu si ne ss pe rs on . Pet it io ne r rec ei ve d h is un de rg radua te an d m as te r’s de gr ees fro m Harv ard , andhe-3 3-

[* 33 ] own edan d o pe rat eda su cces sf ul arch it ectur e b us in es s. Onth e b as is of pe ti ti on er’s educ at io n, s op hi st ic at io n, kno wled ge , andex pe rie nc e, we fi ndth athe sh ou ldha ve kn own of the im po rta nc e o f in fo rm in g El ls pe rm an n tha t h e kne w, or ha d re as on to kn ow, the $2 m il li on pa ym en t wo ul d b e tr eat edas n on em pl oyee co m pe ns at io n. Insu m , pet it io ne r ha s n otde m on st rat edreas on ab le cau se forhi s fa il ur e to rep ort the $2 mil li on pay

m en t o n h is in co m e ta x re tu rnfor20 03 . Peti ti on er d id no t p ro vi de th e n eces sa ry an d a ccu rat e in fo rm at io n t o El ls pe rm an n a nd , as ares ul t, di d n otrel y

ingo od -fai thonEll sp erm an n’s ju dg m en t. W e h av e co ns id eredall rem ai ni ng arg um en ts th e p art ie s m ad e an d, t o the ex te ntno t ad dr es se d, we co nc lu de th ey are i rrel ev an t, m oo t, o r m eri tl es s. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red fo r res po nd en t.