T.C. Mem o. 2 01 6- 13 9

UNITED STAT ES TAX COURT

AMERIC AN METALLU RGICAL COAL CO. AND SUBSIDIARIES , Pet it io ne r v. COM MIS SIONER OF INTERNAL REVENUE , Res po nd en t HEIMDAL INVESTMENT COMPANY, INC., Pet it io ne r v. COM MIS SIONER OF INTERNAL REVENUE , Res po nd en t

Doc ke t No s. 2 11 98 -1 2, 2 55 43 -1 3. Fi le d J ul y 25 , 20 16
.
DerekB. Mat ta , forpe ti ti on ers . Nin a E. Cho wdh ry , Caro l Bi ng ha m McC lu re, an d R

us se ll Sco ttSh ie ld es , fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Ju dg e: In the se co ns ol id at edcas es , res po nd en t d et erm in ed de fic ie nc ie s, p en al ti es , andad di ti on s t o t ax as f ol lo ws:- 2 -

[* 2] Am eri canMet al lu rg ic al Co al Co . andSubs id ia rie s, Do ck etNo. 2 11 98 -1 2

Year Defi ci en cy Pen al ty se c. 66 62 (a) 20 07 $3 ,76 1,3 14 $7 52 ,26 3 Heim da l In ve stm en t Co m pa ny, Inc., Doc ke t No . 25 54 3- 13

Add it io ns to tax Sec. Sec. Sec. Year Defi ci en cy 66 51 (a)( 1) 66 51 (a)( 2) 66 56 19 95 $2 75 ,19 3 $6 1,9 18 .43 $6 8,7 98 .25 $2 7,5 19 .30 19 96 34 4,0 06 77 ,40 1.3 5 86 ,00 1.5 0 34 ,40 0.6 0 19 97 41 5,3 61 93 ,45 6.2 3 10 3,8 40 .25 41 ,53 6.1 0 19 98 30 6,6 64 68 ,99 9.4 0 76 ,66 6.0 0 30 ,66 6.4 0 19 99 66 6,7 21 15 0,0 12 .23 16 6,6 80 .25 66 ,67 2.1 0 20 00 18 0,0 00 40 ,50 0.0 0 45 ,00 0.0 0 18 ,00 0.0 0 20 01 18 0,0 00 40 ,50 0.0 0 45 ,00 0.0 0 18 ,00 0.0 0 20 02 34 0,3 42 76 ,57 6.9 5 85 ,08 5.5 0 34 ,03 4.2 0 20 03 18 0,0 00 40 ,50 0.0 0 45 ,00 0.0 0 18 ,00 0.0 0 20 04 18 0,0 00 40 ,50 0.0 0 45 ,00 0.0 0 18 ,00 0.0 0 20 05 47 8,9 08 11 9,7 27 .00 11 9,7 27 .00 47 ,89 0.8 0 20 06 18 0,0 00 45 ,00 0.0 0 45 ,00 0.0 0 18 ,00 0.0 0 20 07 2,1 68 ,97 9 48 8,0 20 .28 54 2,2 44 .75 21 6,8 97 .90 20 08 50 ,51 5 11 ,36 5.8 8 12 ,62 8.7 5 5,0 51 .50- 3 -

[* 3] 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 (Co de ) in effe ctforth e y ears inis su e, an d a ll Ru le refe ren ces are t o th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. The rem ai ni ng fiv e is su es forde ci si onare: Doc ke t No . 21 19 8- 12 (1 ) whe th er Am eri canMet al lu rg ic al Co al Co . andSubs id ia rie s (No rs e Gro up ) is en ti tl edto de du cta pu rp orte d i nt eres t ex pe ns e o f $7 ,22 9,9 30 forth e 20 07 tax y ear a ndif s o, wh ethe r itis en ti tl edto a ne t o pe rat in g l os s (NOL) de du ct io n fo r th aty ear; an d (2 ) whe th er the Nors e Gro up is li ab le for anaccu racyrel at edpe na lty

un de r se ct io n 6 66 2( a) fo r th e 2 00 7 t ax y ear; Doc ke t No . 25 54 3- 13 (3 ) whe th er Hei m da l In ve st m en t Co m pa ny, Inc. (Hei m da l), i s l iabl e fo r 30 % withh ol di ng tax on th e g ro ss am ou nt s o f di st rib ut io ns itm ad e to a fo rei gnen ti ty fro m 19 95 th ro ug h 2 00 8; (4) whethe r Hei m da l i s l iabl e fo r th e fai lure t o fi le ad di ti on to tax un de r se ct io n 6 65 1( a)(1 ) fo r ta x years 1 99 5- 20 08 ; an d (5 ) whe th er Heim da l i s l iabl e fo r th e fai lu re t o d ep os itad di ti on to tax un de r se ct io n 6 65 6 fo r ta x years 1 99 5- 20 08
.- 4 -

[* 4] FINDINGS OF FACT The st ip ul at io n o f fac ts an d t he acco m pa nyin g e xh ib it s ar e in co rp or at ed he rei n b y th is refe ren ce. At the ti m e th ei r pe ti ti on s wer e fi le d, the Nors e Gro up ’s
an d Hei m da l’s p rin ci pa l p la ces of b us in es s wer e in Texa s. Alt ho ug h t he Nors e Gro up form al ly beg anfil in g re tu rn s o n aco ns ol id at edba si s i n 1 99 5, we u se th e te rm “ th e Nor se Group” to m eanAMC an d i ts subs id ia rie s, p as t an d p res en t. The Nors e Gro up co m

pr is es th e Am eri canMet al lurg ic al Co al Co . (AMC)
an d i ts subs id ia rie s, wh ic h i nc lu de Heim da l. AMC is a do m es ti c co rp or at io n t ha t is in di rect ly who ll y

own edby JanPet te r Ro ed , a Norwe gi ansh ip own er wh o h as a ba ck gr ou ndinsh ip pi ng an d o re tran sp orta ti on . The fo cal po in t o f th es e cas es is a tra ns act io n b etweenHeim da l an d Lau sa nn e Ene rg y , Inc . (Laus an ne ), a Lib eri an
co rp or at io n, tha t t oo k p la ce o ve r th e co ur se of t ax y ears 19 95 th ro ug h 2 00 8, the y ears inis su e. Bri ef Hi st ory

of Lau sann e an d t he Nors e Gro up ’s Bus in es s R el at io ns hi p Lau sa nn e an d t he Nors e Gro up ha ve a bu si ne ss rel at io ns hi p t ha t d at es ba ck to 19 84 . Sin ce 1 98 4, a c urren t No rs e Gro up subs id ia ry , Nors e Servi ces , has pr ov id edm an ag em en t s erv ic es to Laus anne an d a ct edas Lau sann e’s ag en t i n t he Uni te d S tate s. In19 84 , Laus an ne pu rch as eda co m pa ny, H ei m da l In ve stm en t Co
. N.V. (Heim da l NV), th atwas fo rm erl y a m em be r of th e Nor se Group. Atth atti m e- 5 -

[* 5] Heim da l NV was anori gi na l i nv es to r in Cai th ne ss Geot he rm al 19 80 , LTD (CG), a d om es ti c p riv at el y he ldpa rtn ers hi p andin de pe nd en t p owe r pr oduc er ba se d i n s ou th ernCal ifo rn ia . CG dev el op ed , own ed , m an ag ed , andop erat ed ge ot he rm al pro

jects inth atreg io n u nd er p owe r pu rch as e ag reem en ts with So ut he rnCal ifo rn iaEdi so n C o. In19 86 , Laus an ne m ad e a d ire ctin ve stm en t i n CG by con tri bu ti ng $1 ,08 0,0 00 to th e p artne rs hi p i n e xc ha ng e fo r th ree l im it ed pa rtn ers hi p u ni ts . In19 86 , AMC was a ge ne ral pa rtn er i n ado m es ti c p artne rs hi p c al le d Al li ed Mi ne ral s. Th aty ear, i t g ran te d t wo b an ks a se cu rit y in te res t i n t he di st rib ut io ns it
rece iv edfro m

All ie d M in eral s. In19 87 , AMC’s p aren t co m pa ny un de rwen t a
reo rg an iz at io n i n re sp on se to th e te rm in at io n o f th e Uni te d S ta te s- Neth erl an ds Ant il le s t ax tre aty . At th e ti m e AMC’s p res id en t, To rg ei r Man to r, co ns ul te d wi th Ro be rt P faff

, a pa rtn er atKPMG, ab ou t the tax asp ect s o f th e reo rg an iz at io n. Th e pu rp os e o f th e reo rg an iz at io n was to “ en sure the pre se rv at io n o f ne t o pe rat in g l os s (NOLs) c arry forwar ds forpo ss ib le futur e u se .” As a re su ltof t he reo rg an iz at io n, AMC l owe redit s t ax bu rd enan d g en erat edsubs ta nt ia l NOLs, b utitwas s ti ll
subjec t t o the sec ur it y

in te res ts he ldby the ba nk s, i n p art ic ul ar Denno rs ke Ban k (Dn B).- 6 -

[* 6] AMC i nc or

po rat edHeim da l i n 1 98 7 a s a d om es ti c h ol di ng co m pa ny of Lau sann e’s in te res ts . Heim da l’s fi rs t d ire ct orwas Han s R in de rkne ch t (H. Rin de rkne ch t), aSwis s l awy er wh o h adpre vi ou sl y rep res en te d Lau sa nn e in
ne go ti at io ns co nc ern in g i ts 19 84 servi ces ag reem en t wi th Nors e Servi ces . In 19 87 , H. Rin de rkne ch t was als o t he di rect orof Lau sann e. His so n, Dr. Th om as Ri nd erkne ch t (T. Ri nd erkne ch t), was Laus an ne ’s m an ag in g d ire ct orfor th e y ears in is su e. Lead in g Up to th e Tran sa ct io n B etweenHeim da l an d Lau sa nn e In19 91 , di st rib ut io ns fro m CG cau se d Lau sa nn e to tu rna pr of it , andit be cam e li ab le forU.S. in co m e ta x, s pe ci fic al ly the bra nc h p ro fit s t ax , whi chitpa id vi a wit hh ol di ng inth aty ear. Lat er tha t year T. Rin de rkne ch t i ni ti at eddi sc us si on s with M an to r ov er h ow t o m ak e ch an ge s t o Lau sa nn e’s in ve st m en t i n C G bec au se in co m e fro m

th e CG p artne rs hi p h ad“ gr own to be subs ta nt ia l” an d Lau sa nn e
m ig htface “br an chpro fit s t ax at io n p ro bl em s.” T. Ri nd erkne ch t as ke d M an to r to
reac h o utto tax ex pe rts ab ou t re st ru ctur in g Lau sa nn e’s in ve stm en ts to reduc e th e po te nt ia l t ax ex po su re. Man to r co nt act edPfaff an d app ris edhi m

of Lau sann e’s si tu at io n. He al so to ldPfaff th atth e Nor se Group h adanin te res t i n p art ic ip at in g in so m e way .- 7 -

[* 7] On No ve m

be r 21 , 19 91 , Pfaff

m ai le d apre li m in ary le tt er t o M an to r pr op os in g tha t Lau sann e co nt rib ut e it s C G partn ers hi p i nt eres t t o t he Nors e Gro up in ex ch an ge for

sh ares an d p os si bl y

de be ntur es . Pfaff b el ie ve d the pro po sa l wo ul d ap pe al to Laus an ne be cau se th e Nor se Group’s NOLs “ wou ldsh el te r th e in co m e in al l l ik el ih oo d” bu t ex pr es se d c on cern th at“ th e se cu rit y ag reem en t wi th th e b an k”
wou ldm ak e h is pro po sa l u nl ik el y to be im pl em en te d. Inth e fal l o f 19 92 , th e p art ie s fu rth er d is cu ss edres tru ctur in g Lau sa nn e’s in ve st m en t i n C G fortax pu rp os es . On Dece m be r 10 , 19 92 , Man to r fax eda pr op os eddi ag ram

of t he Nors e Gro up to T. Rin de rkne ch t. The fax co ve r sh eet advi se d T. Ri nd erkne ch t tha t Dn B was a cred it orof t he Nors e Gro up an d h ad ag reedon ly to h ol d asec ur it y in te res t i n ane wly fo rm edsubs id ia ry co m pa ny,

“Newco ”, whi chwou ldho ldAMC’s co al pro pe rti es . There fo re, Ma nt orbe li ev ed th atDnB wo ul d “ no t b e in a po si ti on to att ackany ass et s o th er tha n wh atis he ldin th is co m pa ny.” Man to r’s di ag ram id en ti fie d tha t AMC wou ldbe th e p aren t
co m pa ny of Hei m da l, Newco , andAMC’s o th er s ub si di ari es . The d ia gr am als o id en ti fie d Lau sa nn e, as th e h ol de r of a se cu rit y

in te res t wi th res pe ctto Heim da l,
an d Newc o, as th e Nor se Group s ub si di ary th at“ [o ]wns co al pro pe rti es an d h as ba nkde bt ”.- 8 -

[* 8] On Dec em

be r 11 , 19 92 , Pfaff

m ai le d alet te r to Man to r an d T. Ri nd erkne ch t
ou tl in in g t he tax im

pa ct s o f a p ro po se d s al e o f Lau sa nn e’s CG p artne rs hi p uni ts to Nor se Serv ic es . In the let te r Pfaf f in di cat edth atLaus an ne wou ldtra ns fer i ts CG pa rtn ers hi p i nt eres t i n e xc ha ng e fo r a n ot e wit h p rin ci pa l due up on m atur it y . He
su gg es te d t ha t the term s o f th e n ot e cal l fo r th e p aym en t o f fi xe d i nt eres t atan
as su m edrat e o f 12 % ov er a t erm (no t t o e xc eedsev eny ears ) an d a dd it io na l in te res t wh ereb y

Laus an ne wou ldsh are i n e xc es s “ cas h fl ow” . He ass um eda
m ax im um pu rch as e p ric e o f $5 m il li on forth e CG p artne rs hi p i nt eres t an d
su gg es te d t ha t Lau sann e p erfe cta se cu rit y in te res t i n t he CG pa rtn ers hi p u ni ts
su chth atinth e ev en t o f a d efau ltby the Nors e Gro up subs id ia ry , Laus an ne wou ld ha ve fir stde edon th e p artne rs hi p i nt eres t. Pfa ff d et erm in edth atth e tr an sa ct io n
wou ldbe ch arac te riz edas a n i ns ta ll m en t s al e fo r ta x p ur po se s an d t ha t Lau sa nn e
wou ldde fer re co gn it io n o f ga in on th e sa le of i ts CG partn ers hi p i nt eres t u nt il Lau sann e rec ov eredth e n ot e’s pr in ci pa l. He s tate d t ha t thi s was th e cas e reg ard le ss of t he factth atsec ti on89 7 wo ul d c la ss ify the CG pa rtn ers hi p i nt eres t as a U.S. real pro pe rty int eres t an d p os si bl y subjec t Lau sa nn e to withh ol di ng tax
un de r th e Fo rei gn Inv es tm en t i n R eal Pro pe rty Tax Act(FIRP TA). Pfaff al so
co nc lu de d t ha t the in te res t p ai d t o Lau sa nn e wou ldbe co ns id ered“po rtf ol io in te res t” , free fr om

withh ol di ng tax es un de r se ct io n 8 71 (h ). He co nc lu de d h is- 9 -

[* 9] let te r by sta ti ng th atinord er fo r th e sa le to pro ceed , sev eral tas ks wou ldha ve to be co m pl et ed , in cl ud in g app lying for anex em pt io n s o t ha t the FIRPTA withh ol di ng tax rul es wou ldno t ap pl y , andth atth e p art ie s s ho ul d “ ev al ua te ve ry
care fu ll y th e eco no m ic va lu e o f th e p artne rs hi p i nt eres t t o n eg ot ia te anarm ’s le ng th sal es pri ce.” On Dec em

be r 17 , 19 92 , Man to r se ntRo eda cas hf lo w ana lysis whi chhe be li ev edsh owe d “ th e ta x b en efi ts ” o f th e tr an sa ct io n. Ma nt or st at edth atth e
an al y si s was a “ qu ic k draft ” th atwas “ ba se d o n s om e in fo rm at io n wh ic h n eed s t o be di sc us se d wi th Laus an ne .” Inth e an al y si s h e co m pa redth e aft er-t ax pro fitto th e Nor se Group “ with re or ga ni zat io n” an d t he aft er-t ax pro fitto Laus an ne

“ witho utreo rg an iz at io n” forth e p eri od19 92 -2 00 0. Th e an al y si s as su m edth at to ta l d is tri bu ti on s fr om

CG wou ldbe $8 ,51 4,8 19 fro m 19 92 -2 00 0 fo r bo th
sc en ari os . He bel ie ve d t ha t h e h ada pr et ty goo d i de a o f wha t the cas hf lo w and in co m e wou ldbe fro m

CG be cau se he ha d a cces s t o a ll of C G’ s d oc um en ta ti on pu rs ua ntto th e se rv ic es ag reem en t b etweenLaus an ne an d No rs e Servi ces . The an al y si s as su m edth atth e Nor se Group wo ul d g iv e a n ot e p ay ab le to Lau sann e worth $5 m il li on “ @ 1 2% i nt eres t o nl y forsev eny ears ” an d a n “ [e]qu it y ki ck er o f 45 -5 0% o f [the ] rem ai ni ng cas h fl ow.” Th e an al y si s p ro jecte d h ow the Nor se Group’s NOLs a ndex pe ct edin te res t ex pe ns es to Laus an ne wou ldoff se t- 10 -

[* 10 ] an ti ci pa te d d is tri bu ti on s fr om CG. In the en d t he an al y si s p ro jecte d ato ta l aft er-t ax pro fitforth e Nor se Group o f $1 ,57 3,8 13 “ with re or ga ni zat io n” an d a to ta l af te r-t ax pro fitforLaus anne of $ 3,3 37 ,80 9 “ witho utreo rg an iz at io n” . In pr ojec ti ng th e aft er-t ax pro fitto th e Nor se Group “ with re or ga ni zat io n” , th e
an al y si s as su m edth atth e Nor se Group wo ul d p ay to Laus an ne 79 % of t he to ta l di st rib ut io ns fro m

CG. The an al y si s d idno t p ro vi de forth e Nor se Group’s rep aym en t o f th e p rin ci pa l o f th e n ot e to Laus an ne . At s om e p oi ntdurin g t hi s t im e, Lau sa nn e an d t he Nors e Gro up ag reedth at th e tr an sa ct io n re ga rd in g t he CG pa rtn ers hi p u ni ts wou ldbe be twee n Lau sa nn e
an d Hei m da l. OnDecem be r 21 , 19 92 , T. Rin de rkne ch t fa xe d alet te r to Man to r
an d P faff reg ard in g t he sal e o f Lau sa nn e’s CG p artne rs hi p i nt eres t t o Hei m da l. In th e le tt er T. Rin de rkne ch t s ta te d t ha t h e h adsp ok enwith J im Bis ho p o f Cai th ne ss Co rp . (CC), the ge ne ral pa rtn er o f CG. Bis ho p was th e p res id en t an d C EO of CC , an d h e as su redT. Rin de rkne ch t tha t CC wou ldco op erat e wit h Lau sa nn e an d t he Nor se Group o n t he tra ns act io n. Bi sh op be li ev edth atinth e fo res eeab le futur e th e li mit edpartn ers of C G, li ke Laus an ne , wou ldbe tax edfordi st rib ut io ns on ly up t o th ei r ne t capi ta l i nv es tm en t an d t ha t the reaf te r al l d is tri bu ti on s t o t he pa rtn ers
wou ldbe tax free . He adv is edT. Rin de rkne ch t t o c on ta ctCC’s t ax advi se r reg ard in g t hi s as se ss m en t an d b efo re s el li ng Laus anne ’s partn ers hi p i nt eres t. T.- 11 -

[* 11 ] Rin de rkne ch t re qu es te d tha t Pf aff co nt actCC’s t ax advi se r to ve rif y whet he r itwas tru e th atLaus anne wou ldno t fa ce ad ve rs e ta x c on se qu en ces if i t re ta in ed th e CG uni ts fora whi le . T. Rin de rkne ch t al so in si st edth atinth e ev en t Lau sa nn e were t o s el l i ts CG pa rtn ers hi p u ni ts to Heim da l, Lau sa nn e ret ai n a n o pt io n t o rep ur ch as e th e uni ts fro m Heim da l. T. Rin de rkne ch t i ns is te d o n an o pt io n p eri od of “ no t l es s tha n 1 5 years” an d t ha t Lau sa nn e sh ou ldbe ab le to rep ur ch as e th e
un it s fo r a p ric e “ co ns is ti ng of t he pu rch as e p ric e p ai d b y Heim da l i nc reas edby a cert ai n m arg in forHeim da l.” On Dec em

be r 22 , 19 92 , Man to r fax eda m em or an du m to Ro edreg ard in g

“Nor se Res tru ctur in g” . The m em or an du m ou tl in edth e b ack gr ou nd , stru ctur e, ta x
co ns id erat io ns , andris k fa ct or s o f two tra ns act io ns . The fi rs t tran sa ct io n was a
co nt in ua ti on of AM C’s 19 87 reo rg an iz at io n a ndin vo lv eda ne w AMC
subs id ia ry ’s own in g o f as se ts th atha d b eenpre vi ou sl y own edby two AMC affi li at es . This ne w subs id ia ry wou ldass um e an d b e res po ns ib le forall of t he ba nkde btass oc ia te d wi th th e as se ts an d wo ul d jo ininAMC’s co ns ol id at edreturn. As a re su ltof the res tru ctur in g, M an to r be li ev edth atAMC wo ul d b e ab le to us e a
co m bi ne d NOL o f ap pr ox im at el y $2 0 m il li on . The s eco ndtra ns act io n i nv ol ve d Heim da l’s p ur ch as e o f Lau sann e’s CG p artne rs hi p u ni ts . Man to r su m m ari zedth e st ru ctur e o f th e se co ndtra ns act io n a s fo ll ows : (1 ) Hei m da l wo ul d p ur ch as e- 12 -

[* 12 ] Laus an ne ’s in te res t i n C G fora no te to be ne go ti at edof n o m or e th an$5
m il li on with i nt eres t o nl y forsev eny ears ; (2 ) Lau sa nn e wou ldbe gi ve n a n “ equi ty ki ck er” o f no m or e th an50 % of t he rem ai ni ng an nu al di st rib ut io n fr om CG; an d (3 ) Lau sa nn e wou ldals o b e g iv enanop ti onto purch as e th e in te res t b ackfro m Heim da l i f certa in furth er d ev el op m en t o f th e g eo th erm al pro pe rti es were t o o ccu r. As a re su ltof thi s tran sa ct io n, M an to r be li ev edth atHeim da l wo ul d h av e h ig h de du ct ib le in te res t ex pe ns es whi chwou ldpa rti al ly redu ce i ts tax ab le in co m e in th e Uni te d S tate s. He al so be li ev edth atHeim da l’s re m ai ni ng in co m e wou ldbe reduc edby the us e o f th e NOLs i n AM C. Att ach edto Man to r’s fax was aco py of Pfaf f’s Decem

be r 11 , 19 92 , let te r. The Lett er Ag reem en t an d t he Pro m is so ry Not e On Dec em

be r 31 , 19 92 , th e p art ie s s ig ne d awritte n l et te r ag reem en t whe reb y Heim da l ag reedto pu rch as e Lau sa nn e’s th ree p artne rs hi p u ni ts (refe rred to as “ Uni ts ” in th e ag reem en t) i n C G (refe rredto as “ Part ne rs hi p” ) fo r a p ur ch as e pr ic e o f $5 mil li on , payabl e wit h apro m is so ry no te (refe rredto as “Not e”). The let te r ag reem en t i nc lu de d t he fol lo win g re le va ntterm s: (4 )(f) wi th ou t * * * [Lau sa nn e’s] prio r writ te n c on se nt , (whi ch* * * [Lau sa nn e] m ay

withh ol d i n * * * [it s] so le an d abs ol ut e d is cret io n) * * * [He im da l] will no t (i ) li qu id at e, (i i) m erg e o r co ns ol id at e with an y ot he r en ti ty, (ii i) s el l al l o r subs ta nt ia ll y all of i ts ass et s, (i v) en te r in to or e ng ag e in an y

bu si ne ss ot he r th anown ers hi p o f th e Uni ts , (v)- 13 -

[* 13 ] en te r in to any

gu aran te es or p le dg e an y of * * * [it s] ass et s ot he r th anli ab il it ie s i n t he ord in ary co ur se of b us in es s n otex ceed in g anag gr eg at e o f $1 00 ,00 0 i n a ny y ear a ndli ab il it ie s i n * * * [Lau sa nn e’s] favo r. * * * (7 ) * * * [He im da l] un de rta ke [s ] to cau se th e Partn ers hi p t o d el iv er t o * * * [Lau sa nn e] cop ie s (f orso lo ng as t he Not e rem ai ns ou ts ta nd in g) of all no ti ces an d c orres po nd en ce wh ic h a re s en t t o * * * [Hei m da l] are g en eral ly dis tri bu te d b y th e Partn ers hi p t o i ts li m it edpa rtn ers at th e sa m e ti m e su chm at eri al s ar e se ntor d is tri bu te d. Inth e ev en t the Part ne rs hi p fa il s t o t im el y de li ve r su chm at eri al s t o * * * [Lau sa nn e], * * * [He im da l] will imm ed iate ly sen d * * * [Lau sa nn e] cop ie s th ereo f. In a dd it io n, fo r so lo ng as the Not e rem ai ns ou ts ta nd in g * * * [He im da l] sh al l p ro vi de * * * [Lau sa nn e] with acce ss to all bo ok s an d re co rd s p ert ai ni ng to th e Uni ts . (8 ) Inth e ev en t i t i s p ro po se d t ha t the li m it edpa rtn ers m ak e an y cap it al co nt rib ut io n t o t he Partne rs hi p i n re sp ectof t he ir u ni ts , * * * [Lau sa nn e] and* * * [He im da l] agr ee t o c on si de r in go odfai th whe th er the Cas h F lo w Int eres t p ro vi si on s o f th e Not e sh ou ldbe m od ifi edto refl ectth e eco no m ic effe ctof s uc h c ap it al co nt rib ut io n. Tha t s am e d ay , Heim da l furn is he d Lau sa nn e with a$5 m il li on pro m is so ry
no te th atwas p ay ab le on Decem be r 31 , 20 02 , as c on si de rat io n fo r th e tr an sa ct io n. The pro m is so ry

no te in cl ud edth e fo ll owi ng term s: The pri nc ip al ba la nc e o f th is Not e sh al l b ear i nt eres t atth e rat e o f twel ve pe rcen t (1 2%) pe r an nu m (ba se d o n a36 0 d ay

y ear) . Suc h in te res t s ha ll be pay ab le an nu al ly in arrear s o n Dec em be r 31 , of e ach y ear a ndup on th e m atur it y of t he pri nc ip al he reo f (upo n t he st at ed m atur it y he reo f, pr ep aym en t, ac cel erat io n o r ot he rwis e); pro vi de d ho wev er, tha t upo n P ay or rece iv in g a ny dis tri bu ti on fro m * * * the Part ne rs hi p * * * with re sp ectto th e th ree ( 3) * * * Un it s * * * of li mit edpa rtn ers hi p i nt eres t i n t he Partne rs hi p p ur ch as edas o f th e d at e he reo f by Pay orfro m

Pay ee, Payor s ha ll ap pl y su chdi st rib ut io n t o- 14 -

[* 14 ] pa y (orpre pa y) an y

in te res t ac cru ed(orwhi chsh al l the reaf te r accrue du rin g the th encurren t ca le nd ar y ear) he reu nd er. Inad di ti on to th e 1 2% i nt eres t d es cri be d abo ve , add it io na l i nt eres t (“ Cas h F lo w Int eres t” ) equa l t o fi fty perc en t (5 0%) of t he ex ces s, i f an y , of (i ) di st rib ut io ns pa idby the Partne rs hi p i n a ny calen da r y ear ov er (i i) t he su m

of ( A) si x h un dr edth ou sa nddo ll ars ($6 00 ,00 0) an d (B) the reas on ab le co st s o f co ll ect io n o f su chdi st rib ut io ns , if an y , sh al l b e due an d p ay ab le by Pay or to Pay ee i m

m ed ia te ly upo n re cei pt of an y su chdi st rib ut io n wh ic h re pr es en ts , inwho le or i n p art , any su chex ces s. Any prin ci pa l o r in te res t (i nc lu di ng Cas h F lo w Int eres t) n otpa id whe n due he reu nd er s ha ll be ar ata rat e o f 16 % pe r an nu m . Payor sh al l n otpre pa y

th e p rin ci pa l am ou ntof t hi s No te witho utth e pr io r writ te n c on se ntof P ay ee (wh ic h m ay be withh el d i n P ay ee’s so le an d abs ol ut e d is cret io n)
. Thi s No te is en ti tl edto th e b en efi ts of t he Secu rit y Agre em en t o f ev en da te he rewi th be twee n P ay or , as d eb to r, an d P ay ee, as sec ur edpa rty (th e “ Secu rity

Agre em en t” ) * * * The tra ns fer o f th is Not e (wh ic h a s p ro vi de d i n t he Pay ee’s No te m ay on ly occu r with t he pri orwrit te n c on se ntof P ay or ) is reg is te rab le on th e n ot e reg is try m ai nt ai ne d b y Pay or , up on su rren de r of th is Not e fo r reg is tra ti on of t ran sf

er atth e ad dr es s o f Payor * * * , du ly end or se d by, or acc om

pa ni edby a writt enin stru m en t o f tr an sf er an d dul y ex ecu te d b y

th e h ol de r or

it s at to rn ey , du ly autho riz edinwrit in g, an d th ereupo n ane w no te inth e sa m e p rin ci pa l am ou ntwil l b e is su edby Payor to th e d es ig na te d t ran sf eree . Each of t he fol lo win g e ve nt s s ha ll co ns ti tu te anEven t o f Defau lt he reu nd er:- 15 -

[* 15 ] (a) i f an y

po rti on of t he pri nc ip al , in te res t o r ot he r am ou nt s pa y ab le by Pay orun de r th is Not e is no t p ai d wi th in fiv e (5 ) da y s af te r th e sa m e is du e; (b ) if Pay orvi ol at es or d oe s n otco m pl y with a ny of th e pr ov is io ns of t hi s No te * * * [o r] the Lett er Ag reem en t; * * * (d ) if Pay orsh al l m ak e anass ig nm en t fo r th e b en efi t o f cred it or s; * * * (f) i f th e Partn ers hi p s ha ll sel l al l o r subs tant ia ll y all of i ts pr op ert ie s o r li qu id at e; or (g ) if an y Even t o f Defau lt(as de fin edinth e Sec ur it y Agr eem en t) s ha ll oc cu r. Upo n the oc cu rren ce atan y ti m e o f an y

of t he for eg oi ng Even ts of Defau lt , (i) P ay ee m ay , by writ te n n ot ic e to th e Payor, d ecl are t he ou ts ta nd in g b al an ce o f th e p rin ci pa l an d i nt eres t p ay ab le he reu nd er t o be imm ed ia te ly due an d p ay ab le , up onwhi chde cl arat io n s uc h pr in ci pa l an d i nt eres t s ha ll be imm ed ia te ly due an d p ay ab le * * * Not withs ta nd in g a nyth in g t o t he co nt rary con ta in edinth is Not e o r in an y ot he r in st ru m en ts or d oc um en ts ex ecu te d andde li ve redin co nn ect io n h erewi th , inno ev en t s ha ll th e to ta l o f al l ch arg es pa y ab le un de r th is Not e whi chare o r co ul d b e h el d t o b e in th e n atur e o f in te res t, ex ceedth e m ax im um rat e p erm it te d t o b e ch arg edby ap pl ic ab le law o f th e St at e o f New York. Sh ou ldpay ee re cei ve an y pa ym en t wh ic h i s o r wou ldbe inex ces s o f th atpe rm it te d t o b e ch arg edun de r an y

su chap pl ic ab le law, s uc h p aym en t s ha ll ha ve be en , andsh al l co nc lu si ve ly be d eem edto ha ve be en , m ad e in erro r an d s ha ll au to m at ic al ly the reupo n b e ap pl ie d t o re du ce the unpa id pr in ci pa l am ou ntth enou ts ta nd in g o n t hi s No te . This pro vi si on sh al l co nt ro l i nt erp ret at io n o f an y ot he r co nf

li ct in g p ro vi si on s i n thi s No te an d a ny oth er i ns tru m en ts or d oc um en ts ex ecu te d a ndde li ve redin co nn ect io n h erewi thor the rewi th with re sp ectto th e p aym en t o f in te res t. * * *- 16 -

[* 16 ] Thi s No te m ay

no t b e wai ve d, ch an ge d, m od ifi ed , term in at edor di sc harg edora ll y , bu t o nl y by agree m en t i n wri ti ng si gn edby the ho ld er h ereo f. Pfaf f’s Mem or an du m

of Ad vi ce t o T. Ri nd erkne ch t On Fe brua ry

11 , 19 93 , Pfaff

m ai le d alet te r to T. Rin de rkne ch t, co pyin g Man to r, th atin cl ud eda m em or an du m of a dv ic e co nc ern in g t he tax co ns eque nc es of th e tr an sa ct io n b etweenHeim da l an d Lau sann e. The m em or an du m ex pl ai ne d th atth e tr an sa ct io n was effe ct edas h adbe enou tl in edinPfaff’s Decem be r 11 , 19 92 , let te r, with the m od ifi cat io n t ha t the sal e was m ad e to Heim da l i ns te adof Nor se Serv ic es , andth atth e p ro m is so ry no te was fo r a t erm

of 1 0 years r athe r th an

“ no m or e th ansev eny ears .” Pfaff ’s m em or an du m

co nc lu de d t ha t the trans fer o f th e CG uni ts fro m

Laus an ne to Heim da l co ul d b e tr eat edas a n i ns ta ll m en t s al e an d th atwithh ol di ng on th e d is po si ti on of aU.S. real pro pe rty int eres t wo ul d t he refo re be requi redwhen Heim da l m ad e a p rin ci pa l p aym en t t o Lau sann e. Pfaff als o ob se rv edth atth e n ot e in cl ud eda pr ov is io n wh ereb y cas hf lo w in te res t o n t he no te
was li m it edto th e m ax im um all owabl e in te res t u nd er New Yo rkSta te law an d
co nc lu de d t ha t thi s p ro vi si on wou ldbe su ffi ci en t t o c la ss ify the se paym en ts as in te res t p aym en ts rathe r th anad di ti on al pri nc ip al pa ym en ts . The m em or an du m

als o i nf orm edT. Rin de rkne ch t an d M an to r th atU.S. in te res t p ai d b y

a U.S. ent it y

to a fo rei gn co rp or at io n i s g en eral ly sub ject t o 3 0%- 17 -

[* 17 ] tax un de r se ct io n 8 81 an d wi th ho ld in g u nd er s ect io n 1 44 2, b utpo rtf ol io in te res t i s ex em

ptfro m U.S. tax un de r se ct io n 8 81 (c). Pfa ff ex pl ai ne d t ha t i n o rd er to m eetth e p ortfo li o i nt eres t ex cep ti on , Heim da l h adto rece iv e a Fo rm W -8 , Cert ifi cat e o f Fo rei gn Sta tu s, fr om Laus an ne be fo re m ak in g p aym en t, at ta chth e
co m pl et edFo rm

W -8 with F orm

10 42 -S, Fo rei gn Pers on ’s U.S. Sou rce I nc om e Subjec t t o Withh ol di ng , to Fo rm 10 42 , Annua l With ho ld in g Tax Return fo r U.S. So ur ce In co m e o f Fo rei gnPers on s, an d fi le Fo rm 10 42 with t he Int ern al Rev enue Serv ic e b y

Marc h 1 5 fo ll owi ng th e cal en da r y ear o f th e p aym en t. The
m em or an du m

st at edth atFo rm

W -8 wou ldbe va li d fo r th ree years b utco ul d b e reque st edan nu al ly or be fo re ea chpa ym en t. The m em or an du m co nc lu de d t ha t the
no te “ ap pe ars to be reg is te red , andwil l m eetth e p ortfo li o i nt eres t ex cep ti on of
se ct io n 8 81 (c) i f th e p ay orrece iv es a st at em en t tha t the be ne fic ia l o wne r of th e ob li ga ti on is no t a Un it edSta te s p ers on .” The m em or an du m was n ota fu ll tax op in io n l et te r subjec t t o p rio r rev ie w with t he KPMG Wash in gt on na ti on al off ic e. Mo di fic at io ns to th e Pro m is so ry Not e On Dec em

be r 31 , 20 02 , Heim da l an d Lau sa nn e ex te nd edth e te rm of t he
no te to Decem

be r 31 , 20 05 (20 02 ex te ns io n) . All o th er t erm s an d c on di ti on s o f th e n ot e, in cl ud in g tho se with re sp ectto fix edin te res t an d c as hf lo w in te res t, were- 18 -

[* 18 ] in co rp or at edinth e 2 00 2 e xt en si on an d re m ai ne d i n fu ll for ce an d e ffec t du rin g t he term

of t he 20 02 ex te ns io n. On Oct ob er 2 8, 2 00 4, Hei m da l an d Lau sa nn e am en de d t he pro m is so ry no te ag reem en t t o s tate th atHeim da l wo ul d a ccru e, rathe r th anpa y up fro nt , th e fi xe d in te res t o f $6 00 ,00 0 fo r eac h o f 20 03 , 20 04 , 20 05 . The am en dm en t o ccu rredaft er Heim da l h adrece iv eddi st rib ut io ns fro m CG in20 03 th atwere l es s tha n t he $6 00 ,00 0 fi xe d i nt eres t p aym en t due to Laus an ne forth aty ear. On Dec em

be r 22 , 20 05 , Heim da l an d Lau sa nn e ex te nd edth e te rm of t he
no te to Decem

be r 31 , 20 06 (20 05 ex te ns io n) . The 2 00 5 e xt en si on pro vi de d t ha t cert ai n o th er t erm s an d c on di ti on s o f th e n ot e, in cl ud in g t he fix edrat e o f in te res t
an d t he rat e o f cas hf

lo w in te res t, wo ul d b e ren eg ot iate d i n g oo d fa it h b utpro vi de d th atsh ou ldth e p art ie s n otag ree o n re vi se d t erm s, the ex is ti ng term s o f th e 2 00 2
ex te ns io n wo ul d re m ai n i n fu ll for ce an d e ffec t. Fi na ll y , onDecem

be r 26 , 20 06 , Heim da l an d Lau sann e ex te nd edth e te rm of th e n ot e to Decem

be r 31 , 20 09 (20 06 ex te ns io n) . As pa rt o f th e 2 00 6 e xt en si on , Heim da l an d Lau sa nn e ag reedto reduc e th e fi xe d i nt eres t ra te po rti on of t he ag reem en t fr om

12 % to 6% an d p ro hi bi t p rep aym en t o f th e p rin ci pa l. Durin g t he pe rio d c ov eredby the 20 06 ex te ns io n, Hei m da l co nt in ue d t o p ay fix edin te res t t o Lau sann e atth e rat e o f 12 % rathe r th anth e reduc edrat e o f 6%.- 19 -

[* 19 ] On J anua ry

29 , 20 08 , Heim da l p rep ai d t he $5 mil li on pri nc ip al am ou ntof th e n ot e to Laus an ne . CG’s In ve st orRel at io ns Rep ort an d Hei m da l’s Pro fitan d Lo ss Sta te m en ts CG’s In ve st orRel at io ns rep ort s ta te s tha t fr om Decem be r 31 , 19 92 , th ro ug h Mar ch31 , 20 09 , Heim da l re cei ve d d is tri bu ti on s o f ap pr ox im at el y $3 5.6 mil li on fro m CG. Heim da l re po rte d o n i ts pro fitan d l os s s ta te m en ts th atitha d re m it te d ap pr ox im at el y

$2 2.7 m il li on to Laus an ne as i nt eres t p aym en ts durin g t hi s p eri od
. In20 07 alo ne Heim da l re cei ve d d is tri bu ti on s fr om CG to ta li ng $1 4,1 70 ,45 2. Fo r th aty ear Hei m da l re po rte d t ha t i t h adrem it te d app ro xi m at el y $7 ,22 9,9 30 to Lau sann e as in te res t p aym en ts . Heim da l’s p ro fitan d l os s s tate m en ts for19 93
- 20 07 sh owe d tha t i t h adrece iv ed“ co ns ul ti ng in co m e” t ot al in g $ 92 3,4 73 .67 in 20 04 -0 7. Pre su m ab ly, Heim da l h adrece iv edth e “ co ns ul ti ng in co m e” i n v io la ti on of th e le tt er ag reem en t b etweenHeim da l an d Lau sa nn e, whi chpro hi bi te d Hei m da l fro m en ga gi ng inan y

bu si ne ss ot he r th anown ers hi p o f th e CG uni ts witho ut Lau sann e’s pr io r writ te n c on se nt . Tax Rep orti ng Fo r 19 93 -2 00 8, Hei m da l d idno t fi le Fo rm s 1 04 2 o r Fo rm s 1 04 2- S. In t he se
sa m e y ears Heim da l d idno t d ep os itor p ay an y withh ol di ng tax ondi st rib ut io ns it
m ad e to Laus an ne . The rec or d s ho ws tha t Lau sa nn e se ntHeim da l o ne co m pl et ed- 20 -

[* 20 ] Fo rm

W -8 da te d Dec em

be r 31 , 19 92 , cert ifyin g t ha t Lau sa nn e was no t a U.S. cit iz enor r es id en t. OPINION I. Bu rd enof P ro of Gen eral ly, th e ta xp ay er h as 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 i nc orrect . Rul e 1 42 (a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). W e res ol ve th es e is su es on th e p rep on de ran ce o f th e ev id en ce i n th e rec or d. Se e Est at e o f Bo ng ardv. Co m m is si on er, 1 24 T.C. 95 , 11 1 (2 00 5)
. II. The Tax Im

pl ic at io ns of t he Tran sa ct io n B etweenHeim da l an d Lau sa nn e Sect io n 8 81 (a)( 1) ge ne ral ly im po se s a t ax of 3 0% o n “ fix edor d et erm in ab le
an nu al or p eri od ic al ” (FDAP) i nc om e rec ei ve d fr om so ur ces withi n t he Uni te d St at es by a fore ig n c or

po rat io n i f th e in co m e is no t ef fect iv el y co nn ect edwith t he
co nduc t o f a Un it edSta te s trad e o r bu si ne ss . This tax m ay be reduc edun de r a bi la te ral in co m e ta x t reat y be twee n t he Uni te d S ta te s an d t he for ei gn co rp or at io n’s
co un try of res id en ce. See sec . 89 4( a)(1 ). Becaus e th e tr an sa ct io n i n t he se cas es in vo lv es Heim da l, a d om es ti c en ti ty, an d Lau sa nn e, anen ti ty inc or po rat edina
co un try tha t d oe s n otha ve a ta x t reat y with t he Uni te d S ta te s, we l oo k t o t he Co de fo r th e ru le s g ov ern in g t he tra ns act io n.- 21 -

[* 21 ] The Co de de fin es FDAP in co m e b ro ad ly andin cl ud es initin co m e fro m in te res t p aym en ts . See Co m mis si on er v . W od eh ou se , 33 7 U.S. 3 69 , 39 3- 39 4 (1 94 9) . The U.S. pa y or s o f su chin co m e are ge ne ral ly requ ire d u nd er s ect io ns 14 41 an d 1 44 2 t o d educ t an d wi th ho ldth eref ro m anam ou ntequa l t o t he tax im po se d b y sec ti on s 8 71 an d 8 81 , andinth e ev en t tha t the y fai l t o d o s o t he y

are li ab le forth os e wit hh ol di ng tax es un de r se ct io n 1 46 1. In19 84 , Con gr es s re pe al edth e 3 0% wi th ho ld in g t ax im po se d b y sec ti on s 87 1 a nd88 1 wi th res pe ctto cert ai n i nt eres t p ai d o n p ortfo li o d eb t, re ferr edto as

“po rtf ol io in te res t” . For t he m os t p art , andas r el ev an t h ere, p ortfo li o i nt eres t refe rs to in te res t p aym en ts m ad e to a fo rei gn co rp or at io n (o wni ng les s than 1 0% o f th e p ay oren ti ty) purs ua ntto de btob li ga ti on s tha t ar e ei th er i n re gi st eredform with th e ap pr op ria te cert ifi cat io n o r so ldex cl us iv el y to no n- U.S. per so ns with p ro pe r pr ecau ti on s t ak enth atsu chde btob li ga ti on s wi ll no t b e h el d b y U.S. per so ns . See
se cs . 88 1( c), 1 63 (f)(2 )(B)
. The rem ai ni ng is su es inth es e two cas es tu rnon whet he r th e tr an sa ct io n be twee n Hei m da l an d Lau sa nn e g en erat edbo nafid e p ortfo li o i nt eres t p aym en ts fo r ta x p ur

po se s fr om

th e fo rm er t o t he lat te r. If th e d is bu rs em en ts were b on a fi de fo r ta x p ur

po se s, the Nors e Gro up wou ldbe ab le to de du ctth e p aym en ts on it s 20 07 co ns ol id at edtax return. As a res ul t n o p en al ty w ou ldbe im po se d o n t he- 22 -

[* 22 ] Nors e Gro up forin cl ud in g t hi s l arg e d educ ti on on it s 2 00 7 re tu rn . Furth erm or e, Heim da l wo ul d n otha ve to withh ol d t ax on be ha lf o f Lau sa nn e fo r th e y ears inis su e--p ro vi de d c ert ai n fo rm al it ie s wer e m et --an d n o a dd it io ns to tax
wou ldbe im

po se d fo r it s fa il ur e to do so . Befo re we d eci de whet he r Hei m da l’s p aym en ts to Laus an ne m eetth e rep orti ng requi rem en ts foritto cla im th e p ortfo li o i nt eres t ex em pt io n fr om withh ol di ng , we m

us t fi rs t d eci de whet he r Hei m da l’s p aym en ts were g enui ne in te res t p aym en ts . A. Bo naFid e Deb t The qu es ti on of wh ethe r Hei m da l’s p aym en ts to Laus anne were b on a fi de in te res t p aym en ts is a factua l que st io n t o b e d eci de d o n t he ba si s o f al l o f th e rel ev an t fa ct s an d c irc um st an ces . See Hab er v . Comm is si on er, 5 2 T.C. 2 55 , 26 6 (1 96 9) , aff’d, 4 22 F.2d19 8 (5 th Cir . 19 70 ); R os ch un i v . Comm is si on er, 2 9 T.C. 11 93 , 12 01 -1 20 2 (1 95 8) , aff’d, 2 71 F.2d26 7 (5 thCir . 19 59 ). Fora pr om is so ry
no te to co ns ti tu te bo nafid e in de bt edne ss , th ere m us t b e anun co nd it io na l l eg al ly
en fo rceabl e o bl ig at io n t o p ay th e m on ey . Hornv. Co m m is si on er, 9 0 T.C. 9 08 , 93 8 (1 98 8) . The “ si m

pl e expe di en t o f dr awin g up p ap ers ” is no t co nt ro ll in g fo r ta x p ur po se s wh en“ th e o bjec ti ve eco no m ic real ti es are t o t he co nt rary.” Frank Ly on Co . v. Un it edSta te s, 4 35 U.S. 56 1, 5 73 (19 78 ).- 23 -

[* 23 ] The U.S. Cou rt o f App eal s fo r th e Fi fth Cir cu itha s i de nt ifi edno ne xc lu si ve fact or s t o b e co ns id eredindi st in gu is hi ng bo nafid e in de bt edne ss fro m anequi ty in ve st m en t o r othe r return o n c ap it al . See Est at e o f Mi xo n v . Uni te d S ta te s, 4 64 F.2 d 3 94 , 40 2 (5 th Cir . 19 72 ). Some of th es e fac to rs are as fol lo ws: (1) th e n am es gi ve n t o t he cert ifi cat e ev id en ci ng th e in de bt edne ss ; (2 ) th e p res en ce o r ab se nc e o f a fi xe d m atur it y

da te ; (3 ) th e so ur ce o f th e fund s u se d t o p ay in te res t an d re pa y

th e cred it or ; (4 ) th e ri gh t t o e nf or ce the pa y

m en t o f pr in ci pa l an d i nt eres t; (5) th e
ex te ntof acred it or ’s parti ci pa ti on inm an ag em en t; (6) th e st atus of the advanc e in rel at io n t o o th er co rp or at e cre di to rs ; (7 ) th e in te ntof t he pa rti es ; (8 ) th in ne ss of cap it al stru ctur e in rel at io n t o the de bt ; (9 ) id en ti ty of in te res t b etweencred it oran d st oc kh ol de r; ( 10 ) th e d eb to r’s ab il it y to ob ta in lo an s fr om

ou ts id e le nd in g in st itut io ns ; (1 1) th e ex te ntto whi chth e adva nc e was us edto acqui re capi ta l
as se ts ; an d (1 2) th e fai lure o f th e d eb to r to pa y on th e due da te or t o s eeka po stpo ne m en t. See id .; Inre In di anLake Est at es , Inc ., 44 8 F .2d57 4, 5 78 -5 79 (5t h Ci r. 19 71 ); P K Ventur es , Inc . v. Co m mis si on er, T.C. Mem o. 2 00 6- 36 , aff’d i n pa rt, re v’d i n p artonot he r gr ou nd s, an d re m an de d s ub no m . Ros e v . Co m m is si on er, 3 11 F. App ’x 19 6 (1 1t h C ir. 2 00 8)
. The id en ti fie d fa ct or s ar e n otequa ll y si gn ifi can t, an d n o s in gl e fac to r is de te rm in at iv e in each cas e o r rel ev an t i n e ve ry cas e. See J on es v. Un it edSta te s,- 24 -

[* 24 ] 65 9 F .2d61 8, 6 22 (5t h C ir. 1 98 1) ; Ca lu m etIndus ., Inc . v. Co m m is si on er, 9 5 T.C. 25 7, 2 85 (19 90 ). The re al is su e fo r ta x p ur po se s h as lo ng be enhe ldto be th e
ex te ntto whi chth e tr an sa ct io n c om pl ie s wi th arm ’s len gt h s ta nd ard s an d n orm al bu si ne ss pra ct ic e. Est at e o f Mi xo n, 4 64 F.2dat 4 03 . The v ari ou s fa ct or s ar e o nl y ai ds inan swe rin g t he ul ti m at e que st io n o f whe th er the re was “ a g enui ne in te nt io n to crea te a de bt , with areas on ab le ex pe ct at io n o f rep aym en t, an d d idth atin te nt io n
co m po rt wi th th e eco no m ic real it y of c reat in g ade bt or -cre di to r rel at io ns hi p? ’” Lit to n B us . Sy s., In c. v. Co m m is si on er, 6 1 T.C. 3 67 , 37 7 (1 97 3) ; s ee al so Cal um et In du s., In c. v. Co m

m is si on er, 9 5 T.C. at28 5- 28 6; Dix ie Dair ie s C or p. v . Co m m is si on er, 7 4 T.C. 4 76 , 49 4 (1 98 0) . The fo rm of the trans act io n andth e labe ls th e p art ie s p la ce o n t he tra ns act io n m ay no t h av e as m

uc h s ig ni fic an ce wh en th e p art ie s ca n m ol d the trans act io n a t the ir wi ll . Calu m etIndus ., Inc . v. Co m m is si on er, 9 5 T.C. at28 6. Th e In te rn al Rev enue Serv ic e rec en tl y rel eas ed pr op os edreg ul at io ns inanatt em ptto bri ng cla rity

an d c on si st en cy

to th e an al y si s of di st in gu is hi ng be twee n i nd eb te dn es s an d e qu it y in ve st m en ts . See No ti ce o f Pro po se d R

ul em ak in g, 8 1 F ed . Reg . 20 91 2 (Ap r. 8, 2 01 6) . Becau se th e tra ns act io n a t i ss ue inth es e cas es to okpl ace m or e th an20 y ears ag o, we m en ti on th es e reg ul at io ns forpo st eri ty’ s s ak e o nl y .- 25 -

[* 25 ] App lying th e ab ov e fac to rs we fin d t ha t the adva nc e o f th e p ur ch as e p ric e o f th e th ree C G partn ers hi p u ni ts fro m Laus an ne to Heim da l was no t a b on a fi de lo an bu t an equi ty inv es tm en t. The Nors e Gro up an d Lau sa nn e worke d t og ethe r to
crea te a tr an sa ct io n t ha t re du cedth ei r res pe ct iv e ta x l iabi li ti es , rathe r th ancrea te a st ric t d eb to r-cr ed it orrel at io ns hi p, an d t hi s was th ei r so le ob jecti ve . The Nors e Gro up m ay

ha ve est ab li sh edth e ex is te nc e o f a fo rm al de bt in st ru m en t wi th a fi xe d m atur it y da te at t he ou ts et , bu t i t d idno t es tabl is h t ha t an y of th e n ot e’s te rm s wer e p ro pe rly neg ot ia te d. Th e te rm s o f th e p ro m is so ry no te were l arg el y

ba se d o n P faff

’s Decem be r 11 , 19 92 , let te r, whi chpro po se d a$5
m il li on do ll ar n ot e th atpro vi de d fo r 12 % fix edin te res t an d a dd it io na l ca sh flo w in te res t. Pfa ff rec omm en de d t ha t Hei m da l an d Lau sann e o bt ai n ava lu at io n o f th e CG pa rtn ers hi p u ni ts be fo re the ir s al e so th atth ey co ul d s ho w th atth ey

were de al in g a t arm ’s len gt h, b utth ey di d n otob ta in on e. Furth erm or e, Pfaf f st at edat tri al th athe di d n otkn ow h ow the 12 % fix edin te res t ra te was d ev is ed . An as se t’s
sa le pri ce m ay

be co ns id eredto be at a rm ’s len gt h wh ere e ach pa rty in t he tra ns act io n c an“ di st in gu is h h is eco no m ic in te res t fr om th atof t he ot he r pa rty and , whe re the y

co nf li ct , always ch oo se th atto hi s i nd iv idua l b en efi t.” Se e Cre m e Mfg . Co. v . Uni te d S ta te s, 4 92 F.2d51 5, 5 20 (5t h C ir. 1 97 4) . Here, th atsi m pl y di d n otoc cu r. Nothi ng inth e rec or d s ug ge st s tha t the se term s wer e n eg ot ia te d.- 26 -

[* 26 ] Altho ug h t he no te ha d a10 -y ear fi xe d m atur ity da te at t he ou ts etof t he tra ns act io n, tha t m atur ity ha d t o b e p os tp on edfor7 years b ecau se Heim da l d idno t ha ve su ffi ci en t ca sh flo w st em m in g fr om

th e CG d is tri bu ti on s t o re pay th e n ot e o n ti m e. The re pa ym en t o f th e d eb t was stric tl y co nt in ge ntup on th e su cces s o f th e CG pa rtn ers hi p u ni ts to ge ne rat e in co m e, su gg es ti ng equi ty clas si fic at io n. Se e Sl ap pe y Driv e In du s. Pa rkv. Un it edSta te s, 5 61 F.2d57 2, 5 82 -5 83 (5t h C ir. 19 77 ). As a c on di ti on to th e tr an sf er o f th e th ree C G partn ers hi p u ni ts to Heim da l, Lau sann e o bt ai ne d the rig htto ap pr ov e o f Hei m da l’s b us in es s ac ti vi ti es an d d eb ts
an d p recl ud edHeim da l fr om en ga gi ng inan y

ot he r bu si ne ss act iv it ie s an d in cu rri ng an y

ot he r de bt . Whe n a n e nt it y adva nc es fun ds forth e ri gh t t o pa rti ci pa te inth e m an ag em en t o f th e d eb to r’s bu si ne ss , th e adva nc e m ay no t b e in te nd edas b on a fi de de btan d i ns te adm ay be in te nd edas a n e qu it y

in ve st m en t. See Am . Offsh or e, In c. v. Co m m is si on er, 9 7 T.C. 5 79 , 60 3 (1 99 1) . Und er the
res tri ct iv e te rm s o f th e le tt er ag reem en t, Lau sa nn e eff ect iv el y m an ag edHeim da l. The Nors e Gro up pl aces gre atweig hton it s p ro fes se d i nt en t t o e nt er i nt o a de bt or -cre di to r rel at io ns hi p wi th Laus an ne an d i ts refl ect io n o f th e d eb t as su chin it s an d Lau sa nn e’s bo ok s, re co rd s, an d t ax returns . The i nt en t o f th e p art ie s weig hs he av il y

inde te rm in in g the de btve rs us equi ty que st io n, b utsubjec ti ve- 27 -

[* 27 ] in te ntdo es no t s uf

fic e to alt er the rel at io ns hi p o r du ti es crea te d b y an ot he rwis e o bjec ti ve ly ind ic at edin te nt . In re Lane , 74 2 F .2d13 11 , 13 16 (11 th Cir
. 19 84 ). Co nc lu so ry

an d s el f-s erv in g s ta te m en ts by tax pa y ers th atth ey in te nd edto
crea te de bt s h av e b eenacco rd edli tt le weig htby the co urts . The Co urt o f App eal s fo r th e Fi fth Cir cu itha s s ta te d: “ Pri m ary rel ia nc e upo n s ub jecti ve in di cat io ns of in te ntis si m

pl y no t an effe ct iv e way

of r es ol vi ng * * * [t he de btve rs us equi ty] pr ob le m . In a l an d o f hardeco no m ic fact s, we cann otroo t i m po rta ntde ci si on s i n pa rti es ’ pi ou s d ecl arat io ns of i nt en t.” Tex . Farm Bureauv. Un it edSta te s, 7 25 F.2 d 3 07 , 31 4 (5 th Cir . 19 84 ). Thu s, we m

us t l oo k n otsi m

pl y at t he pro no un cem en ts of the parti es bu t al so atth e ci rcum st an ces su rro un di ng th e tr an sa ct io n t o re ve al th ei r in te nt . Ty le r v. Tom li ns on , 41 4 F .2d84 4, 8 50 (5t h C ir. 1 96 9) . The ci rcu m st an ces surro un di ng Lau sann e’s tr an sf

er o f it s thr ee CG p artne rs hi p u ni ts to Heim da l re ve al th atth ey di d n otin te ndto en te r in to a de bt or -cre di to r rel at io ns hi p. Inlat e 1 99 1, i t b ecame app aren t tha t Lau sa nn e m ig htbe li ab le forth e br an chpro fit s t ax as i ts own ers hi p o f th e CG uni ts was b eco m in g p ro fit ab le
aro un d t ha t t im e. Rathe r th antry to ad dr es s thi s i ss ue us in g i ts ownbu si ne ss
ex ig en ci es , itwork edinco nju nc ti on with t he Nors e Gro up to fin d am utua ll y
co m pa ti bl e way

to lo wer b ot h c om

pa ni es ’ ta x b ur de ns . In l at e 1 99 1 a nd- 28 -

[* 28 ] th ro ug ho ut19 92 , Man to r an d T. Ri nd erkne ch t re gu la rly corr es po nd edwith
on e an ot he r reg ard in g t he tra ns act io n. Mea nwh il e, th e Nor se Group re ach edou t t o i ts owntax advi se r, Pfaf f, reg ard in g t he tra ns act io n. Ma nt orwou ldaskforPfaff’s adv ic e reg ard in g c ert ai n
as pe ct s o f th e d eal , andhe wou ldpa ss alo ng Pfaff’s adv ic e to T. Rin de rkne ch t. Man to r’s co rres po nd en ce wi th Pfaff was n otne ces sa ril y

as c on cern edwith t he Nor se Group’s s ol e b us in es s o r ta x c on se qu en ces reg ard in g t he de al as i t was with th e Nor se Group’s an d Lau sann e’s ta x c on se qu en ces to ge th er. At s om e p oi nt Pfaf f st art edto co m

m un ic at e d ire ct ly w it h T. Ri nd erkne ch t re gard in g t he sal ie nt te rm s o f th e d eal . Thes e d is cu ss io ns su gg es t tha t the Nors e Gro up ’s and Lau sann e’s de al in gs were n otat a rm ’s len gt h. Se e Cre m e Mfg . Co., 4 92 F.2dat 52 0 (n ot in g t ha t a t ran sa ct io n i s n otat a rm ’s len gt h i f eac h p arty is no t i n a po si ti onto di st in gu is h i ts owneco no m ic in te res ts fro m th e o th er’s). The pa rti es co nt in ue d t o a ctinco nc ertwith o ne an ot he r to de vi se a se ll erfin an cedpu rch as e o f th e CG p artne rs hi p uni ts th atwas m utua ll y be ne fic ia l t o t he Nor se Group a ndLaus anne . In the m on th s l ead in g up t o t he tra ns act io n, M an to r
crea te d acas hf

lo w ana lysis forth e Nor se Group t ha t an al yzedth e co nt em pl at ed tra ns act io n. Inth is an al y si s M an to r co ns id eredth e ta x ra m ifi cat io ns to bo th th e Nor se Group a ndLaus anne . He was ab le to co ns id er Lau sann e’s ta x i m pl ic at io ns- 29 -

[* 29 ] be cau se he ha d i ts fin an ci al da tafro m a pr ev io us ag reem en t. His co nc ern
ov er the tax asp ect s fo r Lau sa nn e im pl ie s tha t the Nors e Gro up was n otpri m ari ly
co nc ern edwith i ts ownbu si ne ss in te res ts bu t, i ns te ad , with c reat in g am utua ll y be ne fic ia l arran ge m en t wi th Laus an ne . Thu s, the Nors e Gro up an d Lau sann e’s ab il it y to m ol d t he tra ns act io n t o t he ir c ol le ct iv e wil l d im in is he s an y si gn ifi can ce th atth e tr an sa ct io n’s fo rm an d l ab el s m ay

ha ve he ldas d et erm in an ts of b on a fi de de bt . See Ca lu m etIndus ., Inc . v. Co m m is si on er, 9 5 T.C. at28 6. The Nors e Gro up adm it s tha t the so ur ce o f th e rep aym en t o f it s d eb t t o Lau sann e was th e CG p artne rs hi p d is tri bu ti on s i t p ur ch as edfro m Laus an ne . Heim da l h adno ass et s atth e ti m e iten te redin to th e tr an sa ct io n t o p ur ch as e th e CG pa rtn ers hi p u ni ts , anditrequi redanadva nc e o f th e en ti re p ur ch as e p ric e fro m Lau sann e. Thi s fa ctstro ng ly sug ge st s tha t Lau sa nn e’s adva nc e to Heim da l was equi ty rath er tha n d eb t. See Uni te d S ta te s v . Hend ers on , 37 5 F .2d36 , 40 (5t h C ir. 19 67 ). Mo reo ve r, Heim da l’s an d Lau sa nn e’s co nduc t wh il e th e n ot e was
en fo rceabl e in di cat es th atth ey di d n otco ns id er the no te to be ge nu in e in de bt edne ss . Heim da l v io late d t he term s o f th e le tt er ag reem en t b y fai li ng to pa y in te res t t im el y

in20 03 an d 2 00 4. Ra th er tha n t reatth e n ot e as de fau lt edon , ho wev er, Lau sa nn e al lo wedHeim da l t o a ccru e in te res t an d c on ti nu e h ol di ng th e- 30 -

[* 30 ] CG un it s fo r se ve ral y ears aft er the ori gi na l m atur it y da te . Furt he rm or e, th e 20 06 ex te ns io n re du cedth e fi xe d i nt eres t ra te fro m 12 % to 6%, y etin20 07 , Heim da l p ai d Lau sa nn e fi xe d i nt eres t atth e h ig he r 12 % rat e. Whe re a d eb to r do es
no t m ak e requi redpa ym en ts or acred it ordo es no t en fo rce i ts rig htto rece iv e pa ym en ts , an a dv an ce ap pe ars m or e li ke equi ty tha n d eb t. Am ba ss ad or Apa rtments , Inc . v. Co m

m is si on er, 5 0 T.C. 2 36 , 24 6 (1 96 8) , aff’d, 4 06 F.2d28 8 (2 d C ir. 1 96 9)
. Inth e en d t he Nors e Gro up an d Lau sa nn e d ev is eda tr an sa ct io n wh ereb y Lau sann e wou ldsel l the CG pa rtn ers hi p uni ts inex ch an ge fora pr om is so ry no te fro m Heim da l tha t g en erat edin te res t p aym en ts to Laus anne . The t erm s o f th e ag reem en t p rev en te d Hei m da l fr om en ga gi ng inan y

bu si ne ss ot he r th anho ld in g th e CG uni ts an d p ro vi de d Lau sa nn e wit h a cces s t o Hei m da l’s b oo ks an d re co rd s pe rta in in g t o t he CG un it s. Be cau se so m e p orti on of t he in te res t p aym en ts was
co nt in ge nton th e p erfo rm an ce o f CG, Lau sa nn e wou ldst il l g en erat e in co m e fro m CG witho utha vi ng to pa y th e b ran chpro fit s t ax . They an ti ci pa te d t ha t a p orti on of th e in te res t co ul d b e cl as si fie d a s p ortfo li o i nt eres t (p ro vi de d t he leg al fo rm al it ie s wer e m et ). Ther efo re, Hei m da l co ul d c la im in te res t d educ ti on s o n t he in te res t p aym en ts an d o ffs etth e in co m e g en erat edby its ne w own ers hi p o f th e CG
un it s wi th th e NOLs o f th e Nor se Group. Insubs tanc e th e eco no m ic s o f th e- 31 -

[* 31 ] tra ns act io n re m ai ne d t he same--Laus an ne ge ne rat edin co m e fro m th e CG
un it s an d h adsubs ta nt ia l co nt ro l o ve r th e uni ts th em se lv es . The ex pe ct edex tra be ne fitwas tha t b ot h Lau sann e an d t he Nors e Gro up rece iv edlar ge tax adva nt ag es fo r ha vi ng th e tr an sa ct io n s tru ctur edinth is way . InFran k Lyon C o., 4 35 U.S. at 5 83 -5 84 , th e Supr em e Co urt s ta te d t ha t “ a ge nu in e m

ul ti pl e-p arty

tra ns act io n wi th eco no m ic subs tanc e * * * co m pe ll edor
en co ur ag edby bus in es s o r reg ul at ory real it ie s, * * * im

bu edwith t ax -in de pe nd en t
co ns id erat io ns , and* * * n otsh ap edso le ly by tax -av oi da nc e fea tu res ” sh ou ldbe
res pe ct edfortax pu rp os es . Man y cas es de m on strat e th e d iff eren ce b etween
arra ng in g aco nt em

pl at edbu si ne ss tra ns act io n i n atax -ad va nt ag edm an ne r, whi ch is leg it im at e, an d e nt eri ng in to a pr earr an ge d t ran sa ct io n d es ig ne d s ol el y to us e pr es erv edNOLs an d c reat e a t ax be ne fit , whi chis no t. See , e.g., St ob ie Cree k In vs ., LLC v. Uni te d S ta te s, 6 08 F.3d13 66 , 13 75 (Fed . Cir . 20 10 ); C ol te c In du s., In c. v. Un it edSta te s, 4 54 F.3d13 40 , 13 57 (Fed . Cir . 20 06 ); Vu lc anMat eri al s C o. v. Un it edSta te s, 4 46 F.2d69 0, 6 99 -7 00 (5th C ir. 1 97 1) . W e b el ie ve Man to r an d T. Rin de rkne ch t, wi th th e ap pr ov al of R oe d, cr eat edth is tra ns act io n s ol el y to ge ne rat e a t ax be ne fit . The No rs e Gro up an d Lau sa nn e d es ig ne d a ndim pl em en te d th is elabo rat e syst em

to crea te th e ap pe aran ce tha t Hei m da l was pa y in g i nt eres t, whi le insubs ta nc e itwas n ot . There fo re, the paym en ts were n otde du ct ib le by the- 32 -

[* 32 ] Nors e Gro up , andth ey were FDAP i nc om e, whi chrequi redHeim da l t o withh ol d i nc om e ta x. B. Rep orti ng Requi rem en ts To Me etth e Po rtf ol io Int eres t Ex em

pt io n Altho ug h we f

in d t ha t the Nors e Gro up di d n otreal ly pay in te res t t o Lau sann e fo r pu rp os es of s ect io n 8 81 (c), an alt ern at iv e g ro un d fo r de ci si onis th at Heim da l d idno t m eetth e rep orti ng requi rem en ts to sat is fy th e p ortfo li o i nt eres t
ex em pt io n. Inord er fo r a d eb to r pa y in g i nt eres t o n re gi st eredde btto a fo rei gn
co rp or at io n t o c la im

th e p ortfo li o i nt eres t ex em pt io n, an d t hu s n otbe subjec t t o withh ol di ng pro cedur es , itge ne ral ly m us t re cei ve a st at em en t tha t the be ne fic ia l
own er o f th e reg is te redob li ga ti on is no t a U.S. p ers on . See s ecs . 87 1( h) (5 ), 88 1( c)(2 )(B) ; s ec. 1 .88 1- 2( a)(6 ), In co m e Tax Reg s. (r eferrin g t o s ect io n 1 .87 1- 14 , In co m e Tax Reg s., fo r ru le s ap pl ic ab le to a fo rei gn co rp or at io n’s re cei ptof i nt eres t
on cert ai n p ortfo li o d eb t i ns tru m en ts ); s ec. 1 .87 1- 14 (c)( 1) (ii ), In co m e Tax Reg s. (ap pl ic ab le to in te res t p aym en ts m ad e aft er Dece m be r 31 , 20 00 ). A deb to r th at do es no t h av e a b en efi ci al own ers hi p s ta te m en t b efo re the in te res t p aym en t m us t rel y on pre su m

pt io n ru le s i n the reg ul at io ns to de te rm in e whe th er t o wi th ho ld
un de r se ct io n 1 44 2. Se e se c. 1.8 71 -1 4( c)(3 )(i ), In co m e Tax Reg s. (app li cab le to in te res t p aym en ts m ad e aft er Dece m be r 31 , 20 00 ); s ec. 1 .14 42 -1 , Inc om e Tax- 33 -

[* 33 ] Reg s. (r eferrin g t o s ect io ns 1.1 44 1- 1 t hr ou gh 1.1 44 1- 9, In co m e Tax Reg s., fo r ru le s co nc ern in g t he withh ol di ng of t ax at t he so ur ce i n t he cas e o f fo rei gn
co rp or at io ns ); s ec. 1 .14 41 -1 (b )(7 )(i ), In co m e Tax Reg s. (app li cab le to in te res t pa ym en ts m ad e aft er Dece m be r 31 , 20 00 ). Fo r in te res t p aym en ts m ad e in tax y ears 19 95 -2 00 0, thi s s ta te m en t m us t b e si gn edby the be ne fic ia l o wne r un de r pe na lty of p erjury

an d p ro vi de th e n am e an d ad dr es s o f th e b en efi ci al own er. Sec . 35 a.9 99 9- 5( b) , Q&A-9 , Tem po rary Inco m e Tax Reg s., 4 9 F ed . Reg . 33 24 2 (Au g. 2 2, 1 98 4) . For i nt eres t p aym en ts m ad e aft er Decem be r 31 , 20 00 , th is st at em en t h as th e ad de d re qu ire m en t tha t i t m us t b e pr ov id edev ery th ree years dur in g t he pe rio d i n wh ic h t he be ne fic ia l o wne r own s th e o bl ig at io n. Se e se cs . 87 1( h) (5 ), 88 1( c)(2 )(B) ; s ec. 1 .87 1- 14 (e)( 4) (ii ), In co m e Tax Reg s. A pro pe rly com

pl et edFo rm

W -8 wil l s at is fy

th e requi rem en ts un de r se ct io n 87 1( h) (5 ). See s ec. 3 5a .99 99 -5 (b ), Q&A-9 , Tem po rary Inco m e Tax Reg s., s up ra;
se cs . 1.8 71 -1 4( c)(2 )(i ), 1.1 44 1- 1( e)(1 )(i i)( 1) , (2) (ii ), In co m e Tax Reg s. Fo r in te res t p aym en ts m ad e in tax y ears 19 95 -2 00 0, the Fo rm W -8 m us t b e rec ei ve d b y th e p ay orinth e cal en da r y ear i n wh ic h t he pa y m en t i s m ad e o r co ll ect edor i n ei th er o f th e p rece di ng two cal en dar y ears . Sec. 3 5a .99 99 -5 (b ), Q&A-9 , Tem po rary Inco m e Tax Reg s., s up ra; sec . 1.6 04 9- 5( b) (2 )(i v) , Inc om e Tax Reg s.- 34 -

[* 34 ] Fo r in te res t p aym en ts m ad e aft er Dece m be r 31 , 20 00 , th e Fo rm

W -8 m us t b e pr ov id edbe fo re the ex pi rat io n o f th e b en efi ci al own er’s p eri odof l im it at io n fo r cl ai min g arefu ndof t ax on su chin te res t. See sec . 1.8 71 -1 4( c)(3 )(i ) an d (i i), In co m e Tax Reg s. Inth es e cas es a Fo rm W -8 ha d t o b e p ro vi de d b efo re the
ex pi rat io n o f Lau sa nn e’s pe rio d o f li m it at io n fo r cl ai m in g arefu ndinord er fo r th e in te res t t o qua li fy

as p ortfo li o i nt eres t. The pa rti es ag ree t ha t the pro m is so ry no te pu rp orte d t o b e a d eb t o bl ig at io n
an d was inreg is te redform . The p art ie s d o n otarg ue th atth e p res um pt io n ru le s i n th e reg ul at io ns pe rm itHeim da l t o a vo idwithh ol di ng ob li ga ti on s u nd er s ect io n 14 42 . There fo re, fo r in te res t p aym en ts on th e n ot e to be cla ss ifi edas p ortfo li o in te res t, Hei m da l m

us t h av e rec ei ve d ast at em en t fr om Laus an ne st at in g t ha t Lau sann e is no t a U.S. p ers on . Heim da l re cei ve d o nl y on e p ro pe r Fo rm

W -8 fro m Lau sann e th atwas i ss ue d i n 1 99 2. Th is st at em en t o f be ne fic ia l o wne rs hi p wo ul d ha ve be eneffe ct iv e o nl y

du rin g t ax ab le y ears 19 92 -9 4. Se e 3 5a .99 99 -5 (b ), Q&A9, Tem po rary Inco m e Tax Reg s., s up ra; sec . 1.6 04 9- 5( b) (2 )(i v) , Inc om e Tax Reg s. Heim da l al so pro vi de d a n u ns ig ne d F orm W -8 ECI, Certi fic at e o f Fo rei gn Pers on ’s Cla im

ThatInc om e Is Effect iv el y Co nn ect edW it h t he Co nduc t o f a Trad e o r Bu si ne ss inth e Uni te d S ta te s. Irr es pe ct iv e o f whe th er the Fo rm W -8 ECI ha s an y im pa cton th es e cas es , th e reg ul at io ns st at e th ata be ne fic ia l o wne rs hi p- 35 -

[* 35 ] form

is va li d o nl y

if i t i s s ig ne d u nd er p en al ty of pe rjury by th e b en efi ci al
own er, i n t he se cas es Laus an ne . There fo re, we can no t re ly on t hi s d oc um en t as a st at em en t o f be ne fic ia l o wne rs hi p. Fi na ll y , Laus an ne ’s per io d o f li m it at io n fo r cl ai m in g arefu ndfor an y of t he y ears inis su e h as ex pi red . See s ec. 6 51 1( a) (p ro vi di ng th atth e p eri odof li mit at io n fo r cl ai m in g arefu ndis ge ne ral ly w it hi n t hr ee years fr om th e ti m e th e return was fil edor t wo years fr om th e ti m e th e ta x was pa id , whi ch ev er p eri od
ex pi res lat er). Th eref

or e, th e ti m e fo r Hei m da l t o re cei ve a pr op er b en efi ci al
own ers hi p s tate m en t h as run ou t. Thu s, fo r th e y ears inis su e, Heim da l d idno t
sa ti sf y th e rep orti ng requi rem en t fo r cl ai m in g t he po rtf ol io in te res t ex em

pt io n. C. Co nc lu si on Inco nc lu si on we ho ldth atHeim da l’s p aym en ts to Laus anne were n otbo na fid e in te res t p aym en ts . There fo re, the Nors e Gro up is no t en ti tl edto de du cta pu rp orte d i nt eres t ex pe ns e o f $7 ,22 9,9 30 for th e 2 00 7 t ax y ear, an d Hei m da l i s li ab le fora 30 % withh ol di ng tax on th e g ro ss am ou ntof d is tri bu ti on s i t m ad e to Lau sann e fo r th e y ears inis su e. III. Pen al ty andAdd it io ns to Tax Res po nd en t d et erm in edth atth e Nor se Group i s l iabl e fo r th e se ct io n 66 62 (a) a ccu racy-rela te d p en al ty on i ts un de rp aym en t fo r th e 2 00 7 t ax y ear.- 36 -

[* 36 ] Res po nd en t al so de te rm in edth atHeim da l i s l iabl e fo r ad di ti on s t o t ax un de r
se ct io ns 66 51 (a)( 1) an d (2 ) an d 6 65 6 fo r ta x years 1 99 5- 20 08 . Res po nd en t n ow
co nc ed es th atHeim da l i s n otli ab le forth e se ct io n 6 65 1( a)(2 ) ad di ti on s t o t ax . A. The Nors e Gro up Sect io n 6 66 2( a) an d (b )(2 ) im po se s a 2 0% a ccu racy-rela te d p en al ty on a ny
un de rp aym en t o f Fed eral in co m e ta x wh ic h i s at tri bu tabl e to a subs ta nt ia l
un de rs ta te m en t o f in co m e ta x. Inth e cas e o f a co rp or at io n (o th er tha n a n S
co rp or at io n o r a p ers on al ho ld in g c om pa ny), an u nd ers ta te m en t o f in co m e ta x i s
subs ta nt ia l i f itex ceed s the les se r of 10 % of t he tax requi redto be sh own on th e return (o r, if g reat er, $ 10 ,00 0) or $ 10 m il li on . Sec. 6 66 2( d) (1 )(B) . The No rs e Gro up , as aco rp or at e ta xp ay er, b ears th e b ur de n o f pr ov in g t ha t i t i s n otli ab le for
anaccu racy-rela te d p en al ty pur su an t t o s ect io n 6 66 2( a). See NT, Inc. v
. Co m m is si on er, 1 26 T.C. 19 1, 1 95 (20 06 ). 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 pe na lt y is in ap pr op ria te be cau se , forex am pl e, th e ta xp ay er ac te d wi threas on ab le cau se
an d i n g oo d fa ith. Se c. 66 64 (c)( 1) ; Hi gb ee v . Comm is si on er, 1 16 T.C. at 4 48 -4 49
. The de ci si on as t o wh ethe r a t axpa y er ac te d wi th reas on ab le cau se an d i n g oo d fai th is 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 o f th e p ert in en t fa ct s
an d c irc um st an ces . See s ec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s.- 37 -

[* 37 ] Rel ia nc e o n t he advi ce o f a t ax pro fes si on al m ay , bu t d oe s n otne ces sa ril y , es tabl is h re as on ab le cau se an d g oo d fa it h fo r th e p ur po se of a vo id in g asec ti on 66 62 (a) p en al ty. Uni te d S ta te s v . Boyle, 4 69 U.S. 24 1, 2 51 (19 85 ) (“ Rel ianc e b y a la y pe rs onon a la wy er [o r anacco un ta nt ] is of c ou rs e co m m on ; b utth atrel ia nc e
can no t fu nc ti on as asubs ti tu te for co m pl ia nc e wit h a n unam

bi gu ou s s ta tu te .”). Tha t p et it io ne rs ha d an a cco un ta ntpre pa re the ir r eturns do es no t, i n andof i ts el f, pr ov e th atth ey

act edwith re as on ab le cau se an d i n g oo d fa it h. Se e Neo na to lo gy Ass oc s., P.A. v. C omm is si on er, 1 15 T.C. 43 , 99 -1 00 (20 00 ), aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2)
. Cas el aw se ts forth th e fo ll owi ng th ree r equi rem en ts inord er fo r a t ax pa y er to us e rel ia nc e o n atax pro fes si on al to av oi d l iabi li ty for a s ect io n 6 66 2( a) pe na lty : “ (1 ) The advi se r was a co m pe te ntpro fes si on al who ha d s uf fic ie nt
ex pe rti se to jus ti fy

rel ianc e, (2 ) th e ta xp ay er p ro vi de d n eces sa ry an d a ccu rat e in fo rm at io n t o t he advi se r, an d (3 ) th e ta xp ay er ac tu al ly reli edingo odfai thon th e advi se r’s jud gm en t.” Se e id . at 9 9; see als o C ha rlo tt e’s Offi ce Bo ut ique , Inc . v. Co m m is si on er, 4 25 F.3d12 03 , 12 12 n.8 (9t h C ir. 2 00 5) (qu ot in g wi th ap pr ov al th e ab ov e th ree- pr on g t es t), a ff’g 1 21 T.C. 89 (20 03 ). In a dd it io n, the advi ce m us t
no t b e b as edon un reas on ab le factua l o r le ga l as su m pt io ns (in cl ud in g a ss um

pt io ns
as to futur e ev en ts ) an d m us t n otun reas on ab ly rely on th e rep res en ta ti on s,- 38 -

[* 38 ] st at em en ts , fin di ng s, o r ag reem en ts of the tax pa y er o r an y ot he r pe rs on . Sec. 1.6 66 4- 4( c)(1 )(i i), In co m e Tax Reg s. The Nors e Gro up rep orte d t ax of $ 1,8 17 ,19 2 o n i ts 20 07 return wh il e itwas requi redto sh ow t ax of $ 5,5 78 ,50 6, n ot withs ta nd in g c ert ai n d educ ti on s. Th is
un de rs ta te m en t ex ceed s $ 55 7,8 50 (10 % of t he requi redtax to be sh own onNors e Gro up ’s return) , an a m ou ntwhi chis th e le ss er o f $1 0 m il li on (an d t he gre at er o f $1 0,0 00 ). Ther efo re, the un de rs ta te m en t o f in co m e ta x was subs ta nt ia l. The Nors e Gro up arg ue s tha t i t h adsubs ta nt ia l au th or it y forit s p os it io n t o tre atit s d is bu rs em en ts to Laus an ne as i nt eres t p aym en ts . It al so arg ue s tha t i t act edwith re as on ab le cau se an d i n g oo d fa ith wi th res pe ctto th is po si ti on be cau se itrel ie d o n P faff

’s adv ic e. As ex pl ai ne d abo ve , th e arg um en ts th e Nor se Group o ffer edto sh ow
supp ort fo r it s p os it io n a re n otad equa te ly sup po rte d b y th e cas el aw an d d o n ot sh ow s ub st an ti al au th or it y . See s ec. 1 .66 62 -4 (d )(2 ) an d (3 ), In co m e Tax Reg s. The po si ti on th e Nor se Group t oo k o n i ts 20 07 tax return was a gam bl e atbe stas th e wei gh t o f th e au th or it ie s s up po rti ng it s treat m en t o f th e d is bu rs em en ts to Lau sann e as in te res t p aym en ts was s li m to no ne whi le th e wei gh t o f th e au th or it ie s
supp orti ng co nt rary treat m en t was ab un da nt . See i d.- 39 -

[* 39 ] Furth erm or e, th e Nor se Group’s ar gu m en t tha t i t re li edon th e advi ce o f a
co m pe te nttax pro fes si on al is no t p ers ua si ve . Whi le Pfaff ass is te d i n t he de ve lo pm en t o f th e tr an sa ct io n b etweenHeim da l an d Lau sa nn e, th e Nor se Group fai le d t o fo ll ow h is reco m m en da ti on s o f ob ta in in g ava lu at io n o f th e CG uni ts or fil in g t he requi si te form s t o c la im th e p ortfo li o i nt eres t ex em pt io n. Ad di ti on al ly, Pfaf f’s su gg es ti on s wer e in fo rm al an d n otup to th e stric t s ta nd ard s o f hi s fi rm ’s op in io n l et te rs onwhi chcli en ts co ul d re as on ab ly rely . Heim da l an d Lau sa nn e si m pl y to okPfaff’s reco m

m en da ti on s fo r th e d es ig n o f th e tr an sa ct io n a t fa ce
va lu e wit ho utne go ti at in g t he term s. Whenitcam e ti m e fo r Pfaf f to writ e a
m em or an du m

of a dv ic e reg ard in g t he tra ns act io n, i t was un cl ear wh ethe r Pfaf f’s
m em or an du m

was d ire ct edto ward s the Nors e Gro up , Laus anne , or b ot h. Pfa ff’s
m ul ti pl e co rres po nd en ce wi th bo thth e Nor se Group a ndLaus an ne sh ows th atth e Nor se Group d idno t u se hi s advi ce s o m uc h fo r pr op erl y

ass es si ng th ei r ta x li ab il it y as the y di d fo r en te rin g i nt o atra ns act io n fo r pu re t ax -av oi da nc e p ur po se s. W e co nc lu de th atth e Nor se Group d idno t ac t wi th reas on ab le cau se an d i n g oo d fai th inde du ct in g i ts di sb ur se m en ts to Laus an ne as i nt eres t p aym en ts for20 07
. B. Heim da l Sect io n 6 65 1( a)(1 ) pr ov id es foranad di ti on to tax of 5 % of t he tax requi red to be sh ownon th e return fo r eac h m on th or f ract io n t he reo f fo r whi chth ere i s a- 40 -

[* 40 ] fai lu re t o fi le , no t t o e xc eed25 %. Howev er, the ad di ti on to tax for fai lu re t o fil e is no t i m

po se d i f itis sh own th atth e fai lu re t o fi le di d n otres ul t fr om wil lfu l
ne gl ectan d was du e to reas on ab le cau se . See Bo y le , 46 9 U.S. at24 5. To pro ve
reas on ab le cau se , th e ta xp ay er m us t s ho w th athe ex erci se d o rd in ary bu si ne ss care
an d p ru de nc e b utne ve rth el es s co ul d n otfil e th e return wh enitwas due . See Cro ck er v . Comm is si on er, 9 2 T.C. 8 99 , 91 3 (1 98 9) ; s ec. 3 01 .66 51 -1 (c)( 1) , Pro ced
. & Admin . Reg s. Sect io n 6 65 6 i m

po se s an ad di ti on to tax equa l t o 1 0% o f th e p orti on of a n
un de rp aym en t i n wi th ho ld in g t ax th atis requi redto be de po si te d i f th e fai lure t o de po si t ex te nd s m or e th an15 da y s. A ta xp ay er m ay als o a vo idth e ad di ti on to tax
un de r se ct io n 6 65 6 i f it s fa il ur e to de po si t was du e to reas on ab le cau se an d n ot wil lfu l n eg le ct . Charlo tt e’s Offi ce Bo ut ique , Inc . v. Co m m is si on er, 1 21 T.C. at 10 9. It i s u nd is pu te d t ha t Hei m da l fi le d n o wi th ho ld in g t ax returns (Fo rm s 1 04 2)
an d d ep os it edno withh ol di ng tax es with t he Treas ury . Heim da l ar gu es th atit s fai lu re t o fi le Fo rm s 1 04 2 was du e to reas on ab le cau se be cau se : (1 ) it s v ery ob li ga ti on to fil e th e returns is th e is su e b ei ng li ti ga te d i n the se cas es , and(2) it
reas on ab ly reli edon th e advi ce o f a co m pe te nttax pro fes si on al who in fo rm ed Heim da l tha t i t h adno withh ol di ng ob li ga ti on . This arg um en t fa il s.- 41 -

[* 41 ] The re i s n o e vi de nc e th atHeim da l was to ldth atitne edno t fi le Fo rm s 1 04 2. Infact , th ere i s ev id en ce t o t he co nt rary. Pfaf f sp eci fic al ly tol d Hei m da l tha t i ts di sb ur se m en ts to Laus an ne wou ldbe subjec t t o wi th ho ld in g t ax es if Hei m da l fai le d t o re cei ve a Fo rm

W -8 fro m

Laus anne ev ery th ree years a ndfai le d t o a tt ach each Fo rm

W -8 with F orm

10 42 -S t o F orm

10 42 . Heim da l d idno t fo ll ow thi s im po rta ntadvi ce. The refo re, Hei m da l cann otsh ow tha t i t ac te d wi th reas on ab le
cau se an d i n g oo d fa it h. Acco rd in gl y , we su st ai n re sp on de nt ’s det erm in at io n t ha t Heim da l i s l iabl e fo r ad di ti on s t o t ax an d p en al ti es fortax y ears 19 95 -2 00 8. W e h av e co ns id eredall th e o th er arg um en ts m ad e b y th e p art ie s, an d t o t he
ex te ntno t d is cu ss edab ov e, fi ndth os e arg um en ts to be irr el ev an t, m oo t, o r witho ut
m eri t. To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te red
un de r Ru le 15 5.