United States Tax Court

T.C. Memo. 2023-55

ES NPA HOLDING, LLC, JOSEPH NPA INVESTMENT, LLC,

TAX MATTERS PARTNER,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 13471-17. Filed May 3, 2023.

—————

Derek T. Teeter and Jason A. Reschly, for petitioner.

Randall L. Eager, Robert C. Teutsch, and William Benjamin McClendon, 

for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WEILER, Judge: On March 20, 2017, the Internal Revenue

Service (IRS) issued a notice of final partnership administrative 

adjustment (FPAA) for the tax year ending December 31, 2011, to 

Joseph NPA Investment, LLC (JNPA), the tax matters partner for ES 

NPA Holding, LLC (ES NPA). The issues for decision are (1) whether ES 

NPA underreported its income for the 2011 tax year and (2) whether an 

accuracy-related penalty under section 66621 is appropriate. For the 

reasons detailed below we find for petitioner.

1 Unless otherwise indicated, all statutory references are to the Internal 

Revenue Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times, all regulation 

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all 

relevant times, and all Rule references are to the Tax Court Rules of Practice and 

Procedure. All dollar amounts are rounded to the nearest dollar.

Served 05/03/23
2

[*2] FINDINGS OF FACT

Some facts have been stipulated and are so found. The First and 

Supplemental Stipulations of Facts, and the Exhibits submitted 

therewith, are incorporated by this reference.

I. ES NPA and Its Tax Matters Partner

ES NPA was formed on September 12, 2011. ES NPA is treated

as a TEFRA partnership for federal income tax purposes during all 

relevant periods.2 ES NPA’s tax matters partner, and the petitioner in 

this case, is JNPA, which was formed as a Delaware LLC on September 

22, 2011. Both ES NPA and JNPA were Delaware LLCs when the 

Petition was filed. ES NPA’s principal place of business was Kansas 

City, Missouri.

II. ES NPA’s FPAA

ES NPA timely filed its 2011 Form 1065, U.S. Return of 

Partnership Income, on April 15, 2012. On March 20, 2017, respondent 

issued the FPAA to ES NPA’s partners for the 2011 tax year. 

Respondent determined in the FPAA that ES NPA had received, but 

failed to report, other income of $16,106,250 for the 2011 tax year. In 

the FPAA respondent determined that the unreported income was 

attributable to ES NPA’s receipt of a 50% capital interest in Integrated 

Development Solutions, LLC (IDS). In the alternative, according to the 

FPAA, respondent determined that the unreported income was 

attributable to ES NPA’s receipt of a 30% indirect capital interest in 

National Performance Agency, LLC (NPA, LLC).

III. Restructuring of National Processing of America, Inc. (NPA, Inc.)

Before October 14, 2011, Joshus3 Landy owned 100% of the 

outstanding shares or membership units in NPA, Inc., Community 

Credit Services, Inc. (CCS), National Opportunities Unlimited, Inc. 

(NOU), and American Consumer Credit, LLC (ACC). Those entities 

conducted consumer loan businesses. Mr. Landy desired to dispose of a 

2 Before its repeal, TEFRA (the Tax Equity and Fiscal Responsibility Act of 

1982, Pub. L. No. 97-248, §§ 401–407, 96 Stat. 324, 648–71) governed the tax treatment 

and audit procedures for many partnerships, including ES NPA.

3 Joshus Landy is referenced throughout the record with various spellings of 

his first name (e.g., Joshus, Joshua, and Josh). We do not find any indication that these

spellings represent separate individuals.
3

[*3] portion of his consumer loan businesses (NPA, Inc., CCS, NOU, and 

ACC) in 2011. Monu Joseph and Amit Raizada, who would later become 

ES NPA’s principals, became aware of an opportunity to acquire an 

interest in an existing online consumer finance business that was fully 

licensed in Delaware. Messrs. Joseph and Raizada contacted Mr. Landy 

with regard to his desire to dispose of a portion of his consumer loan 

businesses.

Messrs. Landy, Joseph, and Raizada discussed a potential sale for 

several weeks; and on June 25, 2011, one of Mr. Joseph’s businesses, 

Emerald Crest Capital (ECC), sent a letter (term sheet) to Mr. Landy in 

which ECC offered to purchase 70% of Mr. Landy’s consumer loan 

businesses for $20.59 million, which was based on a 2.3× multiple of 

earnings before interest, taxes, depreciation, and amortization 

(EBITDA) for the most recent 12-month period.

The term sheet specified contingencies such as that a new entity 

would be formed by the principals of ECC, its affiliates, or its investors 

to acquire the 70% interest in Mr. Landy’s consumer loan businesses 

and stated that ECC did not “currently have sufficient information to 

determine the most efficient structure for the [a]cquisition.” The term 

sheet also stated that ECC might bring in various parties as part of its 

purchase group to fund the purchase of an interest in Mr. Landy’s 

businesses. Mr. Landy signed the term sheet on July 5, 2011.

Thereafter Mr. Landy retained the law firm Bryan Cave LLP to 

represent him with respect to the preparation of the transaction 

documents that would effect the sale of his businesses. Meanwhile, ECC 

provided a 60-page acquisition due diligence memorandum to 

prospective investors to facilitate the purchase of a controlling interest 

in Mr. Landy’s businesses. The memorandum discussed a “contemplated 

transaction” that involved “a purchase of 39.2% of” Mr. Landy’s 

businesses.

Article 6.2 of the NPA, LLC operating agreement provides that 

“[e]ach Member has made an initial Capital Contribution to the 

Company in such amounts and under such terms as were agreed by the 

Member and approved by the Company as a condition to the issuance of 

Units to the Member. The initial Capital Contribution with respect to 

each Member and Class of Units is set forth in Exhibit B.”
4

[*4] NPA, LLC operating agreement § 13.3 provides that, after the 

payment of liabilities, the liquidation proceeds of NPA, LLC are to be 

distributed 30% to class B unit holders, 40% to class A unit holders, and

30 percent to the Members who hold Class C Units; 

provided however, that, if the sum of all distributions made 

to the Members who hold Class A Units pursuant to [§] 9.2

and this [§] 13.3(c) is less than the total Capital 

Contributions of such Members, the distributions to the 

Members who hold Class C Units shall be reduced and the 

distribution to the Members who hold Class A Units shall 

be increased, by an amount equal to the lesser of (i) the 

distribution to the Members who hold Class C Units 

pursuant to this [§] 13.3(c)(ii), and (ii) the difference 

between the total Capital Contributions of the Members 

who hold Class A Units and the sum of all distributions 

previously made to the Members who hold Class A Units 

pursuant to [§] 9.2 and the distribution that would be made 

to the Class A Members pursuant to [§] 13.3(c)(iii).

The sale of Mr. Landy’s businesses was arranged through the 

following transactions, which took place on September 27, October 13, 

and October 14, 2011. On September 27, 2011, NPA, Inc. formed two 

LLCs: IDS and NPA, LLC. IDS had two classes of membership units: 

class B and class C. NPA, LLC had three classes of units: class A, class 

B, and class C. Per Articles 9.2 and 13.3 of the IDS first amended and 

restated limited liability company agreement, the class B and class C 

units in IDS track the class B and class C units in NPA, LLC, 

respectively, in that the owner of IDS class B units was entitled to 100%

of the payments received by IDS because of its ownership of NPA, LLC 

class B units and the owner of IDS class C units was entitled to 100% of 

the payments received by IDS because of its ownership of NPA, LLC 

class C units. 

On October 13, 2011, NPA, Inc. contributed substantially all of its 

business assets to NPA, LLC in exchange for all three classes of units 

(classes A, B, and C) in NPA, LLC. NPA, Inc. then contributed all three 

classes of units (classes A, B, and C) in NPA, LLC to IDS as a capital

contribution to IDS. At the end of the day on October 13, 2011, the 

relevant aspects of the entity ownership structure were as follows:
5 

On October 14, 2011, NPA, LLC entered into revenue-sharing 

agreements with the other consumer loan businesses, CCS, NOU, and 

ACC, respectively. An entity named NPA Investors, LP (NPA Investors), 

purchased all of NPA, LLC’s class A units from IDS in exchange for 

$14,502,436. Also on October 14, 2011, ES NPA exercised a call option 

granted by NPA, Inc., and pursuant thereto acquired all of the IDS 

class C units in exchange for ES NPA’s payment to NPA, Inc. of $100,000 

and services provided or to be provided. 

The “Whereas” clause of the call option agreement states that ES 

NPA agreed to provide the following services to NPA, Inc. in exchange 

for the option to pay $100,000 to NPA, Inc. to acquire all of the class C 

units in IDS (which reflected an indirect interest in the class C units of 

NPA, LLC): “strategic advice for the purpose of enhancing the 

performance of [NPA Inc.’s] business and to assemble an investor group 

that would purchase 40 [sic] percent of [NPA Inc.’s] business for 

approximately $21 million.” The call option agreement also provides 

that ES NPA is hereby given “an option . . . to purchase all of the Class C 

Units . . . from [IDS]” and is dated October 14, 2011.

[*5]
6

[*6] At the end of the day on October 14, 2011, the relevant aspects of 

the entity ownership structure were as follows:

At the end of the day on October 14, 2011, (i) the class A units 

held by NPA Investors had a capital contribution of $20,985,509, (ii) the 

class B units held by IDS had a capital contribution of $8,993,790, and 

(iii) the class C units held by IDS had a capital contribution of zero.
7

[*7] OPINION

I. Summary of the Parties’ Arguments

A. Petitioner

ES NPA contends that its indirect receipt of the class C units in 

NPA, LLC (through ES NPA’s receipt of the class C units in IDS) was a 

profits interest, as defined in Revenue Procedure 93-27, 1993-2 C.B. 343,

and related caselaw, that was excludable from income for the tax year 

ending December 31, 2011. ES NPA acquired the class C units in IDS 

and thereby, indirectly, the class C units in NPA, LLC pursuant to a call 

option agreement exercised on October 14, 2011. The initial capital 

account specified in the NPA, LLC operating agreement as of October 

14, 2011, was as follows:

Unit 

Type4

Number of 

Units

Capital 

Contribution

Percentage 

of Capital

Class A 400 $20,985,509 70%

Class B 300 8,993,790 30

Class C 300 — —

 Total — $29,979,299 100%

B. Respondent

Respondent’s primary argument is that Revenue Procedure 93-27 

is inapplicable because ES NPA did not provide services to IDS. 

Respondent’s first alternative argument is that the safe harbor in 

Revenue Procedure in 93-27 is inapplicable because ES NPA received a 

taxable capital interest in IDS. Further, respondent argues that the fair 

market value of ES NPA’s class C units in IDS was $12,169,000 as of 

October 14, 2011.

4 The class A units were held by NPA Investors; the class B and class C units 

were held by IDS.
8

[*8] II. Legal Principles

A. Jurisdiction

Section 6226 provides for judicial review of FPAAs. In general, 

section 6226(f) gives this Court jurisdiction to determine all partnership 

items of the partnership for the partnership’s taxable year to which the 

FPAA relates. However, this Court’s jurisdiction does not extend to 

determining the partnership items of lower tier partnerships. See Sente 

Inv. Club P’ship of Utah v. Commissioner, 95 T.C. 243, 247–48 (1990). 

That means that we may determine only the partnership items of the 

partnership to which the FPAA relates. Id. If the partnership items of a 

lower tier partnership are included in the FPAA of the partnership 

before us, we are without jurisdiction to determine those lower tier 

partnership items. See Rawls Trading, L.P. v. Commissioner, 138 T.C. 

271, 288–89 (2012); Sente Inv. Club P’ship of Utah, 95 T.C. at 247–48.

B. Burden of Proof

Generally, the Commissioner’s determinations in an FPAA are 

presumed correct, and the party challenging the FPAA bears the burden 

of proving that those determinations are erroneous. See Rule 142(a)(1); 

Crescent Holdings, LLC v. Commissioner, 141 T.C. 477, 485 (2013); 

Republic Plaza Props. P’ship v. Commissioner, 107 T.C. 94, 104 (1996).

Petitioner argues the burden of proof has shifted to respondent 

under section 7491 since it has produced credible evidence 

demonstrating its position. Our conclusions, however, are based on a 

preponderance of the evidence, and therefore the allocation of the 

burden of proof is not material. See Kimberlin v. Commissioner, 128 T.C. 

163, 171 n.4 (2007).

C. Receipt of a Partnership Interest in Exchange for Services

Section 721(a) provides that “[n]o gain or loss shall be recognized 

to a . . . partner[] in the case of a contribution of property to the 

partnership in exchange for an interest in the partnership.” However,

where a person receives a partnership interest in exchange for a 

contribution of services, nonrecognition is not always guaranteed. See

Treas. Reg. § 1.721-1(b)(1). Under that regulation the “receipt of a 

partnership capital interest in exchange for services is taxable to the 

service provider.” Crescent Holdings, LLC, 141 T.C. at 488; see I.R.C. 

§ 83(a) (generally dictating the recipient’s tax treatment of property 

received in connection with services performed); Treas. Reg. § 1.61-2(d) 
9 

[*9] (stating property received as compensation must be included in 

income). Under longstanding principles services are not “property” for 

purposes of section 721; therefore, the receipt of a partnership capital 

interest in exchange for services does not receive section 721 treatment.

 Treasury Regulation § 1.721-1(b)(1) states in part:

To the extent that any of the partners gives up any part of 

his right to be repaid his contributions (as distinguished 

from a share in partnership profits) in favor of another 

partner as compensation for services (or in satisfaction of 

an obligation), section 721 does not apply. The value of an 

interest in such partnership capital so transferred to a 

partner as compensation for services constitutes income to 

the partner under section 61. 

 The foregoing parenthetical reference to a profits interest in the 

above regulation has been read as intending to exempt the receipt of a 

profits interest for services from taxation. See Charles H. Egerton, Rev. 

Proc. 93-27 Provides Limited Relief on Receipt of Profits Interest for 

Services, 79 J. Tax’n 132, 132 (1993). This view was also acknowledged 

by this Court. See Hale v. Commissioner, T.C. Memo. 1965-274, 1965 WL 

1045, n.3.

We previously held that the receipt of a profits interest in a 

partnership in exchange for the performance of services was a taxable 

event. Diamond v. Commissioner, 56 T.C. 530 (1971), aff’d, 492 F.2d 286 

(7th Cir. 1974). Then in Campbell v. Commissioner, T.C. Memo. 1990-

162, aff’d in part, rev’d in part, 943 F.2d 815 (8th Cir. 1991), we again 

determined the receipt to be a taxable event regardless of whether the 

transferee partner would receive anything upon a theoretical 

liquidation. The U.S. Court of Appeals for the Eighth Circuit, however,

reversed our decision in Campbell, finding that the receipt of a profits 

interest was not taxable since the value received was speculative. 

Campbell v. Commissioner, 943 F.2d 815.5

Ultimately the IRS addressed the issue when it promulgated

Revenue Procedure 93-27, publishing guidance on the treatment of the 

receipt of a profits interest for services provided to or for the benefit of 

5 Absent stipulation to the contrary this case is appealable to the Eighth

Circuit, and we thus follow its precedent. See Golsen v. Commissioner, 54 T.C. 742, 

756–57 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971); see also I.R.C. § 7482(b)(1)(E). 
10

[*10] the partnership.6 Id. § 1, 1993-2 C.B. at 343. In this revenue 

procedure the IRS cites Treasury Regulation § 1.721-1(b)(1) and 

acknowledges that the receipt of a capital interest for services is taxable 

as compensation, Rev. Proc. 93-27, § 3, 1993-2 C.B. at 343, while on the 

other hand, it will not treat the receipt of a profits interest as a taxable 

event, id. § 4.01, 1993-2 C.B. at 344.7

III. Analysis

A. Definition of a Profits Interest

Revenue Procedure 93-278 defines a profits interest as a 

partnership interest “other than a capital interest,” id. § 2.02, 1993-2 

C.B. at 343, and a capital interest is, in turn, an interest that would 

“give the holder a share of the proceeds if the partnership’s assets were 

sold at fair market value and then the proceeds were distributed in a 

complete liquidation of the partnership,” id. § 2.01. This theoretical 

liquidation is to occur “at the time of receipt of the partnership interest,” 

id., which the parties referred to throughout the case as “immediately” 

after the transaction. Under Revenue Procedure 93-27 such a profits 

interest is not treated as income upon its acquisition if a person receives

it “for the provision of services to or for the benefit of a partnership in a 

partner capacity or in anticipation of being a partner.” Id. § 4.01.9

6 The IRS addressed the receipt of a partnership interest in exchange for 

services in a proposed ruling attached to a General Counsel Memorandum (GCM). 

I.R.S. G.C.M. 36,346 (July 23, 1975). In the GCM, the IRS acknowledged a conflict 

between our holding in Diamond and Treasury Regulation § 1.721-1(b). In the GCM, 

the IRS declined to follow our holding in Diamond “to the extent that it holds that the 

receipt by a partner of an interest in future partnership profits as compensation for 

services results in taxable income.” The GCM also recognized that because “the receipt 

of a ‘profits[’] interest is not taxable, the proposed revenue ruling is limited to interests 

that give the holder no rights to existing partnership assets upon the liquidation of his 

interest.”

7 Followed by clarification in Revenue Procedure 2001-43, 2001-2 C.B. 191, 

intended to ensure that the receipt of a profits interest will achieve the recipient’s goal 

of not having an immediate recognition of tax upon his or her joining of the 

partnership, the IRS seems to view the receipt of a profits interest as a type of deferred 

compensation arrangement.

8 Revenue Procedure 93-27 is amplified by Revenue Procedure 2001-43, which 

acknowledges the time and valuation rules of section 83.

9 In Revenue Procedure 2001-43, § 2, 2001-2 C.B. at 191, the IRS further 

clarified Revenue Procedure 93-27 by providing that the determination of whether the 

interest granted is a profits interest is tested at the time of grant.
11

B. Whether the Class C Units in NPA, LLC That ES NPA 

Received Constituted a Profits Interest

To answer the foregoing question, we will need to analyze the 

arguments and questions raised by the parties at trial and on brief. As 

summarized above, the parties dispute whether Revenue 

Procedure 93-27 is applicable, and if we find it to be applicable, whether 

ES NPA has satisfied its underlying requirements. We will address both 

disputes. 

1. Is Revenue Procedure 93-27 Applicable? 

As a threshold matter, it is uncontroverted that ES NPA provided 

services to NPA, Inc. in exchange for the class C units in IDS. It is also 

undisputed that ES NPA’s interests in the class C units in IDS are 

identical in all respects to the interests in class C units in NPA, LLC. 

Respondent contends Revenue Procedure 93-27 has no application since 

it applies only when “a partnership profits interest for services provided 

to or for the benefit of the partnership,” id. § 1, and in this case ES NPA 

received an interest in IDS in exchange for services it provided to NPA, 

Inc.—not NPA, LLC.10 We disagree with respondent and find his 

reading of this revenue procedure and views of the transaction at issue

to be unreasonably narrow. 

While respondent has accurately stated the introductory purpose 

set out in Revenue Procedure 93-27, §1,11 the revenue procedure later 

states and further explains that “if a person receives a profits interest 

for the provision of services to or for the benefit of a partnership in a 

partner capacity or in anticipation of being a partner, the [IRS] will not 

treat the receipt of such an interest as a taxable event for the partner or 

10 Proposed Treasury regulations under section 83 reject the concept that the 

receipt of a partnership interest in connection with services is not a realization event. 

In conjunction with the issuance of these proposed regulations, the IRS issued I.R.S. 

Notice 2005-43, 2005-1 C.B. 1221, which explains that Revenue Procedures 93-27 and

2001-43 will become obsolete upon the finalization of these proposed regulations, but 

that until then taxpayers are permitted to rely upon Revenue Procedure 93-27.

11 Revenue Procedure 93-27 does not apply: (1) if the profits interest relates to 

a substantially certain and predictable stream of income from partnership assets, such 

as income from high-quality debt securities or a high-quality net lease; (2) if within 

two years of receipt, the partner disposes of the profits interest; or (3) if the profits 

interest is a limited partnership interest in a “publicly traded partnership” within the 

meaning of section 7704(b). See Rev. Proc. 93-27, § 4.02, 1993-2 C.B. at 344. 

Respondent does not assert that ES NPA triggered any of these three elements. 

Therefore, we will not consider this issue and deem it to be waived.

[*11]
12

[*12] the partnership.” See id. at § 4.01. We find Revenue Procedure

93-27 § 4, entitled “Application,” to set the intended parameters of the 

revenue procedure’s application.

On brief, respondent implies that Revenue Procedure 93-27 is a 

“safe harbor” with limited application. We do not view Revenue 

Procedure 93-27 in such a restricted manner, but rather view it as

administrative guidance on the treatment of the receipt of a partnership

profits interest for services. See William S. McKee et al., Federal 

Taxation of Partnerships and Partners ¶ 5.02[2] (2022) (referring to 

Revenue Procedure 93-27 as a “broad, taxpayer-friendly safe harbor” 

subject only to tightly defined exceptions).

Considering the text of Revenue Procedure 93-27 § 4, the evidence 

supports a finding that ES NPA directly (or through its principals), 

before and after formation, provided services to or for the benefit of the 

partnership in a partner capacity or in anticipation of being a partner. 

It is undisputed that the material assets of this partnership are held in 

NPA, LLC, and the activities ES NPA performed were to and for the 

benefit of the future partnership. It is of no material consequence that 

ES NPA’s interest in NPA, LLC is held indirectly through IDS, which is 

a mere conduit since the liquidation rights in the class C units in both 

IDS and NPA, LLC are identical. This partnership came about only 

through ES NPA and NPA, Inc.’s joint ownership of IDS and their 

ownership interest in NPA, LLC. Other relevant elements here 

evidencing that the application of Revenue Procedure 93-27 is proper 

are the presence of entrepreneurial risk and the receipt of a profits 

interest in the capacity as a partner. Thus, it is entirely reasonable to

conclude that ES NPA’s receipt of the class C units meets the intended 

parameters of Revenue Procedure 93-27 § 4.

2. Has ES NPA Satisfied the Requirements of Revenue

Procedure 93-27?

Since we conclude ES NPA’s receipt of the class C units qualifies 

under Revenue Procedure 93-27, the question now becomes whether ES 

NPA has satisfied the underlying requirements of the revenue 

procedure; namely, whether the received class C units are a profits 

interest. To answer this question Revenue Procedure 93-27 § 2 directs 

us to determine whether ES NPA would receive a distribution upon a 

hypothetical liquidation at the time of receipt.
13

[*13] On October 14, 2011, the class A units held by NPA Investors had 

a capital account of $20,985,509, the class B units held by IDS had a 

capital account of $8,993,790, and the class C units held by IDS had a 

capital account of zero. NPA, LLC operating agreement § 13.3 provides 

that after the payment of liabilities, the NPA, LLC liquidation proceeds 

are to be distributed 30% to class B unit holders and 40% to class A unit 

holders, with the remaining 30% to the members who hold class C units,

provided, however, that the sum of all distributions made to the 

members who hold class A units had first been satisfied. In other words, 

the class A and B unit holders have a preferred return on their capital, 

and the class C units would receive anything in a hypothetical 

liquidation only after all capital accounts were first satisfied in full. The

parties, and their respective experts, agree, under the terms of the 

operating agreement, that if the fair market value of NPA, LLC was 

$29,979,299 as reflected in NPA, LLC’s capital account, then there 

would be no distribution to the class C unit holders upon a hypothetical 

liquidation.12

To answer the question regarding hypothetical liquidation of the 

partnership, we must decide the largely subjective question of fair 

market value. Fair market value is defined as the price at which the 

property would change hands between a willing buyer and a willing 

seller, neither being under any compulsion to buy or to sell and both 

having reasonable knowledge of relevant facts. United States v. 

Cartwright, 411 U.S. 546, 550–51 (1973); see also Treas. Reg. § 20.2031-

1(b); Rev. Rul. 59-60, § 2.2, 1959-1 CB 237, 237.

Respondent contends that in the opinion of his retained expert 

witness the fair market value of NPA, LLC as of the transaction date 

was $52,463,722. Respondent disputes the testimony of petitioner’s

expert and further avers that Mr. Landy lacked knowledge of the value 

of his business, performed minimal due diligence, and did not 

understand the terms of the transaction. Essentially, respondent 

disputes that the transaction was an arm’s-length transaction and 

12 This $29 million figure would be the book value of NPA, LLC at its formation. 

See Treas. Reg. § 1.704-3(a)(3). Respondent essentially disputes the book value 

assigned to the partnership assets and partners’ capital accounts and contends that 

the market value of the newly formed partnership is substantially greater, upon a 

hypothetical liquidation the class C units would be worth in excess of $12 million, and

therefore the receipt of these units was in fact a capital interest in NPA, LLC (rather 

than a future profits interest as petitioner contends).
14

[*14] contends that it should not be relied upon to determine the fair 

market value of NPA, LLC.

Petitioner contends that the actual terms of the sale, namely the 

acquisition of the class A units by NPA Investors for $20,985,509, is the 

best evidence of the overall fair market value of $29,979,299. Petitioner

further avers—on the basis of the testimony of Messrs. Landy and 

Joseph—that the sale was a bona fide arm’s-length transaction 

reflecting the sale of a 70% interest in NPA, LLC. In the alternative, 

petitioner argues, on the basis of its expert witness testimony, that the 

fair market value of $29,979,299 is supported by a market analysis

approach using a direct capitalization of earnings. Finally, petitioner, 

on the basis of its expert rebuttal report, disputes respondent’s expert 

witness valuation since it erroneously assumes Mr. Landy sold 40% of 

his interest in NPA, LLC for approximately $21 million.

The parties agree that the best evidence of fair market value is

actual arm’s-length sales involving that property. Indeed, this Court has 

repeatedly affirmed that actual arm’s-length sales occurring sufficiently 

close to the valuation date are the best evidence of value, and typically 

dispositive, over other valuation methods. See, e.g., Rubber Rsch., Inc. v. 

Commissioner, 422 F.2d 1402, 1405–06 (8th Cir. 1970), aff’g T.C. Memo. 

1969-24; Estate of Fitts v. Commissioner, 237 F.2d 729, 731 (8th Cir. 

1956), aff’g T.C. Memo. 1955-269; Wortmann v. Commissioner, T.C. 

Memo. 2005-227, 2005 WL 2387487, at *5 (collecting cases and noting 

that “evidence of what property sold for within a reasonable time before 

the valuation date generally is competent, substantial, and persuasive 

evidence of its fair market value” and that “[a]ctual sales between a 

willing buyer and a willing seller are generally more reliable than 

estimates and approximations and indicate what a hypothetical buyer 

and seller may agree on”). Here, there was an actual sale of the subject 

property—that is, Mr. Landy’s internet-based consumer lending 

businesses—immediately before the hypothetical liquidation of NPA,

LLC. That sale of a 70% interest implies an overall fair market value of 

$29,979,299.

In deciding valuation issues courts often receive into evidence and 

consider the opinions of expert witnesses. Helvering v. Nat’l Grocery Co., 

304 U.S. 282, 295 (1938). Where experts offer competing estimates of 

fair market value, we determine how to weigh those estimates by, inter 

alia, examining the factors they considered in reaching their 

conclusions. See Casey v. Commissioner, 38 T.C. 357, 381 (1962). 

Contrary to the Commissioner’s current position that a “formal” 
15

[*15] appraisal is required, this Court and others have frequently 

adopted the proposition that an actual sale is more persuasive evidence 

of fair market value than an appraisal, so the proposition that an 

appraisal is necessary to validate a sale clearly cannot be correct. See, 

e.g., Gaggero v. Commissioner, T.C. Memo. 2012-331, at *34 (giving 

“considerably more weight” to the “actual sales price” than an 

appraisal), aff’d, 795 F. App’x 1005 (9th Cir. 2020); Hollis v. 

Commissioner, B.T.A.M. (P-H) P 37,133 (1937) (“The best evidence of 

value is a sale made between willing parties under no compulsion, and 

where, in valuing property at a given date, we must choose between 

opinion evidence based on appraisals and an actual sale or sales between 

willing parties, the established rule is that the selling price is the better 

evidence of value.”).

In his reply brief respondent argues that the transaction was not

for fair market value and should be disregarded since Mr. Landy was 

pressured to sell, failed to obtain a formal appraisal, and lacked

sophistication and education. There is nothing in the record that 

indicates that Mr. Landy was under any duress or compulsion to sell,

and in fact his trial testimony reflects the contrary. At trial Mr. Landy 

testified how he wanted a “liquidity event” and he understood that he 

would retain 30% of his businesses. He also testified that he was under 

no financial compulsion or other need to sell, as his businesses were in 

fact profitable. The parties to the transaction entered into a letter of 

intent whereby Mr. Landy agreed to effect the sale of 70% of his 

consumer loan businesses for a 2.3× multiple of EBITDA. Mr. Landy was 

represented by legal counsel, and after months of due diligence, the sale 

occurred with investors paying $14,502,436 for “good will” and 

$6,483,073 for the existing book of loans for a total price of 

$20,985,509.13

Respondent retained an expert witness to provide a retrospective 

opinion of NPA, LLC’s fair market value. This expert was also retained 

to provide his opinion as to the proceeds ES NPA would receive upon a 

hypothetical liquidation of NPA, LLC. Respondent’s expert performed a 

market approach analysis through examining comparable businesses

and determined an overall fair market value of $52,463,772. It was 

13 Mr. Landy (through NPA, Inc.) contributed substantially all of his interests 

in his consumer loan businesses to NPA, LLC before the sale; so to say Mr. Landy sold 

70% of his consumer loan businesses, compared to what third-party investors paid to 

acquire class A units in NPA, LLC, is referring to the same transaction.
16

[*16] respondent’s expert’s opinion that ES NPA would receive 

$12,269,000 upon a hypothetical liquidation.

Respondent’s expert, however, was not aware when he prepared 

his original report that Mr. Landy had sold 70% of his consumer loan 

businesses for approximately $21 million. Therefore, respondent’s 

expert performed no analysis with respect to the transaction in his 

original report. On rebuttal, respondent’s expert acknowledged that the 

transaction provides the best indicator of NPA, LLC’s value; however,

he conducted additional analysis using an income approach to test the 

reasonableness of the transaction. In his rebuttal report respondent’s 

expert opined, using an income approach and a 4.7× multiple of 

EBITDA, that NPA, LLC had an overall fair market value of

$48,480,500, resulting in ES NPA’s receiving a distribution upon a 

hypothetical liquidation.

Determining credibility is the province of the Court, and we find 

the testimony of Mr. Landy, a neutral third-party regarding the nature 

of the transaction at issue, to be credible and unbiased. We find nothing 

in the record to dispute a finding that the transaction was arm’s-length 

and bona fide. We decline to adopt respondent’s expert’s opinion of value.

See Parker v. Commissioner, 86 T.C. 547, 561 (1986). Rather, we rely

upon the arm’s-length and bona fide transaction in which Mr. Landy 

sold a 70% interest in his consumer loan businesses for approximately 

$21 million, resulting in an overall fair market value in NPA, LLC of 

$29,979,299.

Therefore, we determine ES NPA’s class C units are a profits 

interest as defined under Revenue Procedure 93-27 since, applying a fair 

market value of $29,979,299 to NPA, LLC at the time of receipt, ES NPA 

would not receive a share of the proceeds upon a hypothetical liquidation

of the partnership.14 Further, on the basis of the conflicting expert 

witness testimony, we determine any fair market value in excess of

$29,979,299 to be speculative. See Campbell v. Commissioner, 943 F.2d 

at 823.

IV. The Imposition of the Accuracy-Related Penalty

Section 6662(a) and (b)(1) imposes a penalty equal to 20% of the 

portion of an underpayment of tax required to be shown on a taxpayer’s 

14 The foregoing facts are distinguishable from those in Crescent Holdings, 

LLC, 141 T.C. at 493, where, unlike here, we found that upon a hypothetical 

liquidation the taxpayer would have received a share of the proceeds.
17

[*17] return that is attributable to negligence or disregard of rules or

regulations. Since we find Revenue Procedure 93-27 to be applicable, we 

likewise find the asserted accuracy-related penalty under section 6662 

is inappropriate here.

V. Conclusion

In consideration of the foregoing, decision for petitioner is 

appropriate in this case. We have considered all arguments that the 

parties made, and to the extent they are not addressed herein, we 

consider them to be moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered for petitioner.