T.C. Mem o. 2 01 4- 18 2

UNITED STAT ES TAX COURT

VISIONMONITOR SOF TWARE, LLC, TO RGEIR MANTOR,

TAX MATTERS PARTNER, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 76 32 -1 2. Fi le d S ep te m be r 3, 2 01 4.

Ri ch ardE. Sym

ps on an d Der ek

B. Mat ta , forpe ti ti on er. Carl D. Ins ke ep an d C aro l B. M cCl ur e, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION HOLMES, Ju dg e: Torg ei r Man to r an d h is pa rtn er Al anSm ith s ta rte d Vis io nM on it orSo ftwa re, LLC ba ckin20 02 . They co nt rib ut eda go odde al of th ei r sa vi ng s an d l ab or , bu t Vi si on Mo ni to r lo stm on ey for th e fi rs t s ev eral y ears . Ano th er p artne r, a d eep -p oc ke te d c or po rat io n, was wil li ng to co nt rib ut e n earl y a- 2 -

[* 2] m il li on do ll ars to ke ep th e fi rm afl oa t, b utitwant edMan to r an d S m ith t o pl ace t he m se lv es at g reat er ri sk . Man to r an d S m ith re sp on de d b y co nt rib ut in g th ei r own pro m is so ry

no te s t o Vi si on Mo ni to r in bo th 20 07 an d 2 00 8. Vis io nM on it orreco rd edth e n ot es on it s b oo ks as a dd it io na l capi ta l an d a ccru ed in te res t o n t he m --b utne ithe r Man to r no r Sm ith fu nd edth em durin g e ithe r y ear. Man to r an d S m ith a rg ue th atth e n ot es in crea se d the ir b as es in Vis io nM on it or , whi chwou ldletth em cla im gre at er p as st hr ou gh lo ss es fro m th os e y ears on th ei r in di vi du al returns . The Co m m is si on er s ay s tha t Vi si on Mo ni to r’s ba si s i n e ach no te was z ero be cau se th e p artne rs ’ ba se s i n the no te s wer e zer o. The partn ers rep ly tha t the no te s p utth em at s ub st an ti al fin an ci al ris k a ndth at sh ou ldbe en ou gh
. FINDINGS OF FACT Man to r rec ei ve d h is ba ch el or ’s deg ree i n b us in es s i n No rway in19 79 , and
anMBA fro m

th e Uni ve rs ity

of Wis co ns inin19 80 . He to oka job inHou st on worki ng as afin an ci al an al y stfor a co m pa ny call edNors e Servi ces Hou st on , Inc . Nor se was e ve ntua ll y

bo ug htby the Am eri canMet al lu rg ic al Co al Co m pa ny (AMC) , an i nv es tm en t co m pa ny focu se d o n t he en erg y in du stry . Man to r ro se to be co m e p res id en t o f AMC andwork edth ere u nt il 20 00 . As AMC wo un d d own m os t o f it s No rs e in ve st m en ts , Man to r de ci de d t o s ta rt Vi si on Mo ni to r. In 2 00 2, h e- 3 -

[* 3] m ad e anin it ia l capi ta l co nt rib ut io n o f m or e th an$3 00 ,00 0 a ndwith Al an Sm ith a ndAMC fo un de d t he Vis io nM on it orpa rtn ers hi p. 1 Vis io nM on it orbu rn edm on ey for th e n ex t fo ury ears , andAMC re fu se d t o sh ov el inan y

m or e unl es s M an to r an d S m ith p utso m e ad di ti on al “ sk in inth e ga m e.” Thi s was a pr ob le m --M an to r an d S m ith d idn’t h av e th e li qu id ity to co nt rib ut e cas h. So th ey

cal le d t he ir l on gt im e atto rn ey , Ric k S ym ps on , to di sc us s so m e id eas . Sm ith a sk edSym ps on ab ou t the tax im

pl ic at io ns of c on tri bu ti ng pr om is so ry

no te s t o apa rtn ers hi p. Sym ps on di d s om e cu rs ory

res earc h t o m ak e su re tha t the no te s “ wou ldge t h im ba si s,” b uttes ti fie d t ha t h e rel ie d m ai nl y on th e factth atMan to r an d S m ith wer e requi redby the ot he r in ve st or s t o c on tri bu te so m ethi ng m or e to th e co m pa ny. He kn ew th e n ot es were en fo rceabl e, an d tha t th e p artne rs hi p wo ul d p utth em do wn as ass et s o n i ts ba lanc e sh eet . So h e to ld Man to r an d S m ith t ha t the no te s wer e ap pr op ria te cap it al co ntrib ut io ns an d “ wou ld
crea te pa rtn ers hi p b as is .” Bu t h e n ev er i ss ue d awrit te n l eg al op in io n, an d d idn’t
An LLC is a hybri d fo rm of b us in es s en ti ty tha t s hares so m e o f th e 1 ch arac te ris ti cs of apa rtn ers hi p a ndso m e o f th e ch arac te ris ti cs of aco rp or at io n. It ha s “ m em be rs ” rat he r th ansh areh ol de rs , andanLLC with m or e th anon e m em be r is by defau ltcla ss ifi edas apa rtn ers hi p fo r ta x p ur po se s. Sec . 30 1.7 70 1- 3( b) (1 )(i ), Pro ced . & Adm in . Reg s. Be cau se of t hi s, we re fer t o Vi si on Mo ni to r th ro ug ho utas a p artne rs hi p a ndit s m em be rs as p artne rs . (Sect io n re fere nc es are t o t he Int ern al Rev enue Co de an d re gu la ti on s i n e ffec t fo r th e y ears inis su e, an d R ul e ref eren ces are t o t he Tax C ou rt Rul es of P ract ic e an d P ro cedur e.)- 4 -

[* 4] rev ie w any com

pa ny do cum en ts be fo re g iv in g h is ora l ad vi ce. Thi s was st il l go oden ou gh forMan to r an d S m ith, an d M an to r an d S mith a gr eedat t he st artof 20 07 to a “ Res ol ut io n o f th e Mana gi ng Mem be rs ” o f Vis io nM on it or . They ag reed to free ze the ir s al ari es , to pro vi de pe rs on al cred itto th e “ Co m pa ny ven do rs * * * to en su re co nt in ue d u ni nt errupt edop erat io ns ,” an d t o “ in de btth em se lv es th ro ug h
no te s p ay ab le to th e Co m pa ny to i m

pr ov e th e Co m

pa ny’ s fi na nc ia l p os it io n.” The
res ol ut io n was th e fo rm al auth or iz at io n fo r th e is su an ce o f th e p ro m is so ry no te s fro m Man to r an d S mith t o Vi si on Mo ni to r. Thi s was als o n otth ei r fi rs t t im e-- Sm ith h adalr eady

m ad e co nt rib ut io ns of p ro m is so ry no te s i n 2 00 4, 2 00 5, an d 20 06 , as h adMan to r in 20 05
. The ir 2 00 7 n ot es were fo r $5 0,0 00 an d $ 95 ,00 0; an d t he ir 2 00 8 n ot es were fo r $2 5,0 00 an d $ 43 ,00 0. Th is was e no ug h fo r AMC- -s at is fie d t ha t M an to r an d Sm ith wer e al l i n, AMC pro vi de d Vi si on Mo ni to r anad di ti on al $9 00 ,00 0 t o s us ta in op erat io ns --an d re cei ve d i n e xc ha ng e $ 45 0,0 00 inequi ty and$4 50 ,00 0 i n co nv ert ib le de bt
. The ex ecu ti on of thi s tran sa ct io n was no t p erfe ct . Sm ith’s n ot es are s ig ne d
an d n ot ari zed , bu t co nt ai n i nc orrectda te s an d i nc orrectva lu es as t o the am ou nt s pa y ab le . His 2 00 7 n ot e fo r $9 5,0 00 st at es a writ te n n om in al am ou ntof “ One Hun dr edTho us an d Do ll ars ” wit h apa ren th et ic al ne xtto itread in g- 5 -

[* 5] “ ($ 10 4,4 51 .07 )” an d t he da te Ju ne 30 , 20 08 . His 2 00 8 n ot e fo r $4 3,0 00 si mil arl y co nt ai ns a no min al am ou ntof “ One Hun dr edTho us an d Do ll ars ” wit h a pa ren th et ic al fig ur e st at in g “ ($ 58 ,71 8.2 7) ” an d t he da te Ju ly 31, 2 00 9. Th e am ou ntof t he pa ren th et ic al fig ur e fo ll owi ng th e n om in al am ou ntof e ach no te se em s t o i nc lu de accrue d b utunpa idin te res t tha t Sm ith o wedonhi s p rev io us ly
co nt rib ut edno te s. An d t he no m in al am ou ntsee m s t o b e a carry ov er fro m a pr io r dr aftof the no te th atsl op py pro of read in g d idn’t ca tc h, b utth e am ou nt s tha t the pa rtn ers no w cla im

as t he face va lu es of t he no te s ar e th e v al ue s ac tu al ly repo rte d in Vis io nM on it or ’s bo ok s, al th ou gh ne ithe r th e n om in al am ou ntno r th e am ou ntin th e p aren th es es m at ch es th e am ou ntth atis id en ti fie d o n t he Vis io nM on it orreturn as Sm ith’s 2 00 7 a nd20 08 co nt rib ut io ns . Man to r’s no te s wer e n ev er n ot ari zed , bu t the da te s o n t he un si gn ed ackno wled gm en t ce rti fic at es are M arch 31 , 20 07 an d Ap ril 30 , 20 08 . The n om in al
va lu e o f th e 2 00 7 n ot e is st at edas “ Fi fty Thou sa ndDol la rs ($5 0,0 00 .00 )” an d t ha t of th e 2 00 8 n ot e is st at edas “ Twent y Fiv e Tho us an d Do ll ars ($2 5,0 00 .00 )” wh ic h is jus t wh atVis io nM on it orrep orte d a s M an to r’s cap it al co nt rib ut io ns . Unl ik e th e in te res t o n S m ith’s n ot es , th e in te res t tha t M an to r pr om is edto pa y is no t i nc lu de d in th e p aren th et ic al fig ur e fo ll owi ng th e n om in al am ou ntof e ach no te .- 6 -

[* 6] All fou r were 7 -y ear b al lo on no te s wi th 6-p erce ntin te res t ra te s. All fou r no te s wer e uns ecu red , andinno ne of the m di d e ithe r Man to r orSm ith a ss um e an y pa rtn ers hi p d eb t. The no te s al so st at e th e p ay ee as “ Vis io nM on it orInv es to rs , LLC,” whi chwas n otactua ll y th e n am e o f th e co m

pa ny. (Thi s was to ha ve be en th e n am e o f a h ol di ng co m pany for Vi si on Mo ni to r So ftwa re, b utev eryone in vo lv edtre at edth e n ot es as f orth e b en efi t o f th e actua ll y ex is ti ng co m

pany, and th ey were co ns is te nt ly recor de d a s as se ts on th atco m pa ny’ s b oo ks .) Str ap pe d fo r cas h, M an to r an d S m ith c ou ldn’t m ak e th e in te res t p aym en ts an d i ns te adha d Vis io nM on it orrep ort u np ai d a ccru edin te res t o n the unpa idpro m is so ry no te s. 2 AMC’s m on ey

di d i ts work , th ou gh , andVis io nM on it orbe cam e p ro fit ab le in 20 12 an d c on ti nu edto gro w in20 13 . Butth is cas e is ab ou t Vi si on Mo ni to r’s lo ss y ears . The Co m

mis si on er au di te d b ot h M an to r’s an d Vi si on Mo ni to r’s returns fo r 20 07 an d 2 00 8, an d t he n h e is su edbo th a no ti ce o f de fic ie nc y to th e Mant or s an d ano ti ce o f fi na l p artne rs hi p a dm in is tra ti ve ad jus tm en t (F PAA) to Man to r as

Noton ly w ere t he no te s a b itoff , bu t s o wer e Vis io nM on it or ’s Sch edul es 2 K-1 . Visi on Mo ni to r rep orte d M an to r’s en di ng sh ares of p ro fit , lo ss , andcap it al in 20 07 as 4 3.7 8%, 4 3.7 8%, an d 3 2.3 59 4%, re sp ect iv el y , bu t h is be gi nn in g s ha res fo r 20 08 as 6 1.6 64 8%, 1 4.4 19 7%, an d 3 1.2 4%. Th e sa m e in co ns is te nc y is pre se nt on Vis io nM on it or ’s 20 08 K-1 t o M an to r, 20 07 K-1 t o S m ith, an d 2 00 7 K-1 to AMC. The re ar e n o t ax co ns eque nc es fro m th es e m is ta ke s.- 7 -

[* 7] tax m at te rs pa rtn er o f Vis io nM on it or . W e co ns ol id at edth e cas es an d t rie d 3 th em inTexa s, wh ere M an to r co nt in ue s t o re si de an d wh ere Vi si on Mo ni to r was or ga ni zedan d h as it s p rin ci pa l o ffi ce. See Tex. Ci v. Pr ac. & Re m . Cod e Ann . sec . 15 .00 2 (West20 02 ). The p art ie s s et tl edall th e is su es inth e Mant or s’ in di vi du al
cas e ex cep t fo r so m e it em s tha t b ot h p art ie s ag reedne ed edto be di sm is se d fo r la ck of juri sd ic ti on , andwe se ve redth atin di vi du al cas e aft er tria l. All th at ’s lef t fo r us to de ci de th enis whet he r Man to r an d S mith g en erat edba se s i n the ir p artne rs hi p in te res ts when th ey

co ntrib ut edth ei r pe rs on al pro mis so ry no te s an d wh ethe r an y pe na lty is ap pl ic ab le
. OPINION I. Ju ris di ct io n Part ne rs hi ps do n’t p ay

in co m e ta x, b utth ey

do fil e in fo rm at io n re turn s, an d pa rtn ers are s up po se d t o u se th e num be rs fro m th os e returns on th ei r own in di vi du al returns . See s ecs . 70 1, 6 03 1, 6 22 2( a). TEFRA ha s a s etof s pe ci al tax
Und er the Tax Equi ty andFis cal Res po ns ib il ity Act o f 19 82 (TEFRA), 3 Pub. L. No. 9 7- 24 8, s ec. 4 02 (a), 9 6 S ta t. at64 8, an y pa rtn ers hi p m

us t d es ig na te on e o f it s p artne rs as t he tax m at te rs pa rtn er (TMP ) to ha nd le it s ad m in is tra ti ve is su es with t he Co m

m is si on er an d m an ag e an y res ul ti ng li ti ga ti on . The p ur po se of au di ts at t he pa rtn ers hi p l ev el , andof r equi rin g p artne rs hi ps to ha ve a TMP, i s t o ha ve a si ng le po in t o f ad

jus tm en t fo r al l p artne rs hi p i te m s atth e p artne rs hi p l ev el
. Kli gf el d Ho ld in gs v. Co m

m is si on er, 1 28 T.C. 19 2, 2 00 (20 07 ); s ee s ec. 62 31 (a)( 7) ; s ec. 3 01 .62 31 (a)( 7) -1 , Pro ced . & Adm in . Reg s.- 8 -

[* 8] an d aud itrul es th atap pl y to all partn ers hi ps (with e xc ep ti on s tha t ar en ’t rel ev an t h ere) . See s ec. 6 23 1( a)(1 ). TEFRA li m it s o ur

juri sd ic ti on at t he pa rtn ers hi p l ev el to pa rtne rs hi

p i te ms o f the pa rtne rs hi

p f or th e p ar tn er

sh ip taxa bl e yea r to wh ic h the no ti ce o

f f in al pa rtne rs hi

p a dmi nistra ti ve a dj us tmen t re la tes , th e p ro pe r al lo cat io n o f su chit em s among th e p artne rs , and th e ap pl ic ab il ity

of a ny pen al ty, ad di ti on to tax , or a dd it io na l am ou nt whi chrel at es to anad

jus tm en t t o apa rtn ers hi p i te m . Sec. 6 22 6( f) (em

ph as is ad de d)
. So whatare p artne rs hi p i te m s? Sect io n 6 23 1( a)(3 ) sa y s tha t [t]he term “pa rtn ers hi p i te m ” m ean s, wi th res pe ct to a p ar tn er

sh ip , an y it em re qu ir ed

to be ta ken in to ac co un t f or th e p ar tn er

sh ip ’s taxa bl e yea r

un de r an y

pro vi si on of s ub ti tl e A to th e ex te nt reg ul at io ns pre sc rib edby the Secr et ary pr ov id e th at , forpu rp os es of th is subt it le , su chit em

is m or e ap pr op ria te ly det erm in edat t he pa rtn ers hi p l ev el th anat t he pa rtn er l ev el . [Em ph as is ad de d.]

“ Part ne rs hi p i te m ” is st il l a t erm th at ’s fuz zy

aro un d t he ed ge s, b utth ere’s n o bl urrin es s h ere- -a p artne r’s ba si s i n c on tri bu te d p ro pe rty is d efi ni te ly a part ne rs hi p it em . Nus sd or f v. C omm is si on er, 1 29 T.C. 30 , 42 (20 07 ); s ec. 3 01 .62 31 (a)( 3)
- 1( a)(4 ), Pro ced . & Adm in . Reg s. 4 A “ no np artne rs hi p i te m ” is “ anit em whi chis (or

is tre at edas) no t a 4 pa rtn ers hi p i te m .” Sec. 6 23 1( a)(4 ). Andan“ affe ct edit em ” is a no np artne rs hi p it em th atis affe ct edby the de te rm in at io n o f a p artne rs hi p i te m . See s ec. 62 31 (a)( 5) ; Gi ns bu rg v. Co m m is si on er, 1 27 T.C. 75 , 79 (20 06 ); 6 61 1 Lt d. v
. Co m m is si on er, T.C. Mem o. 2 01 3- 49 , at * 46 , 10 5 T.C.M . (CCH) 1 30 9. Th e Co de (co nt in ue d...)- 9 -

[* 9] Onc e we s po t a p artne rs hi p i te m we ha ve juri sd ic ti onto red et erm in e it reg ard le ss of wh ethe r th e Co m m is si on er ad

jus te d i t i n t he FPAA. See, e.g ., Tige rs Ey e Trad in g, LLC v . Comm is si on er, 1 38 T.C. 67 , 95 (20 12 ). W e al so ha ve juri sd ic ti on to de te rm in e “ th e p ro pe r al lo cat io n o f * * * [the se ] it em s among th e pa rtn ers an d t he ap pl ic ab il ity of a ny pen al ty, ad di ti on to tax , or a dd it io na l am ou nt th atrel at es to anad

jus tm en t t o apa rtn ers hi p i te m .” Id
. II. Co nt rib ut edPro pe rty The va lu e o f wha t a p artne r co nt rib ut es to hi s p artne rs hi p c anbe tri cky whe n h e co nt rib ut es so m ethi ng ot he r th ancas h- -li ke th e n ot es at i ss ue he re. Vis io nM on it orarg ue s tha t the co nt rib ut io n o f th e p ro m is so ry no te s i nc reas ed Man to r’s an d S m ith’s o ut si de ba se s i n a m ou nt s equi va le ntto th ei r fac e v al ue . But a p artne rs hi p’s b as is inpro pe rty con tri bu te d b y a partn er i s the ad

jus te d b as is of th atpro pe rty in t he ha nd s o f th e co nt rib ut in g p artne r atth e ti m e o f th e co nt rib ut io n. Se c. 72 3. Th e Co m mis si on er ar gu es th atth e co m pany’ s b as is inth e no te s i s ze ro be cau se Man to r’s an d S m ith’s b as es inth em were ea chzero .

(...co nt inue d) 4 te ll s u s tha t we ca n re de te rm in e aff ect edit em s (wi th th e ex cep ti on of c ert ai n pe na lt ie s) an d o th er n onpa rtn ers hi p i te m s o nl y at t he in di vi du al lev el an d n otina pa rtn ers hi p- le ve l p ro ceed in g.- 10 -

[* 10 ] W e h av e to ag ree wi th th e Co m m is si on er. W e h av e lo ng he ldth atth e co nt rib ut io n o f a p artne r’s own no te to hi s p artne rs hi p i sn ’t th e equi va le ntof a
co nt rib ut io n o f cas h, an d wi th ou t m or e, itwil l n otin crea se hi s b as is inhi s pa rtn ers hi p i nt eres t. See Dako ta h Hi ll s Off ic es Ltd . P’shi p v . Comm is si on er, T.C. Mem o. 1 99 8- 13 4, 7 5 T.C.M . (CCH) 2 12 2 (n o i nc reas edba si s b ecau se no t ca sh equi va le ntan d n otpro pe rty in wh ic h p artne r ha s b as is ); Ge m in i TwinFundIII v . Co m m is si on er, T.C. Mem o. 1 99 1- 31 5, 6 2 T.C.M (CCH) 1 04 (pa rtn er’s o ut si de ba si s n otin crea se d b y

co nt rib ut io n o f pr om is so ry no te ), aff’d wi th ou t p ub li sh ed op in io n, 8 F.3d26 (9t h C ir. 1 99 3) ; Od env. Co m m is si on er, T.C. Mem o. 1 98 1- 18 4, 41 T.C.M. (CCH) 1 28 5 (p artne r ha s ze ro ba si s i n o wn p ro m is so ry no te ), aff’d witho utpubl is he d o pi ni on , 67 9 F .2d88 5 (4 th Cir . 19 82 ). 5 Vis io nM on it orrel ie s o n Gef env. Co m

m is si on er, 8 7 T.C. 1 47 1 (1 98 6) . In Gefen , a pa rtn er ex ecu te d ali m it edgu aran ty as a co nd it io n o f he r acqui si ti on of a n in te res t i n ali m it edpa rtn ers hi p. Un de r it s t erm s, s he ass um edpe rs on al li ab il ity to
Rev enue Ru li ng 80 -2 35 , 19 80 -2 C.B. 2 29 , su m m ari zes th is co rn er o f 5 pa rtn ers hi p- ta x l aw. It s ta te s tha t the co ntrib ut io n o f a n ot e b y it se lf d oe s n ot in crea se a pa rtn er’s o ut si de ba si s b ecau se he ha s a z ero ba si s i n the no te . His ou ts id e b as is wil l, h owe ve r, in crea se if andwhen he actua ll y m ak es pa ym en ts on th e n ot e. Id .; cf

. sec . 1.7 04 -1 (b )(2 )(i v) (d )(2 ), In co m e Tax Reg s. (p ro vi di ng th ata pa rtn er’s cap it al acco un t i s n otin crea se d wi th res pe ctto a no te writ te n b y th at pa rtn er u nt il th ere i s ei th er a t ax ab le di sp os it io n o f th e n ot e b y th e p artne rs hi p, o r th e p artne r m ak es pri nc ip al pa y m en ts on th e n ot e).- 11 -

[* 11 ] th e p artne rs hi p’s ex is ti ng cred it orforhe r pr o r at a sh are o f th e p artne rs hi p’s
reco ur se in de bt edne ss to th atcred it or . She als o a gr eedth atth e p artne rs hi p c ou ld cal l o n h er t o c on tri bu te to th e p artne rs hi p an a m ou ntequa l t o t he pa rtn ers hi p’s
ou ts ta nd in g d eb t. We hel d t ha t s he was e nt it le d t o i nc reas e h er b as is inth e li m it ed pa rtn ers hi p b y

th e sp eci fic am ou ntof t he pa rtn ers hi p’s re co ur se de btth atsh e pe rs on al ly ass um edun de r th e te rm s o f th is gu aran ty. Id. a t 1 50 1. We po in te d t o se ct io n 1 .75 2- 1( e) o f th e reg ul at io ns , whi chpro vi de s tha t a p artne r’s sh are o f pa rtn ers hi p l iabi li ti es is de te rm in edinacco rd an ce wi th he r rat io forsh ari ng lo ss es un de r th e p artne rs hi p a gr eem en t; or i f no ne of t he pa rtn ers ha s an y pe rs on al li ab il ity with re sp ectto a pa rtn ers hi p l iabi li ty, by all oc at in g t he sh are o f li ab il it ie s un de r se ct io n 7 52 (c) i n a cco rd an ce wi th pa rtn er’s rat io forsh ari ng pro fit s. Id . at 14 99 -1 50 0 (c it in g s ec. 1 .75 2- 1( e), In co m e Tax Reg s.). Vis io nM on it or ’s rel ia nc e o n t hi s ca se is m is pl aced . In Gefe n, u nl ik e Dak ot ah , Gem in i Twin FundIII, an d Od en , a li m it edpartn er d ire ct ly ass um ed pa rtn ers hi p re co ur se in de bt edne ss an d a ls o b ecame ob li ge d t o m ak e ad di ti on al cap it al co nt rib ut io ns . See Gefe n, 8 7 T.C. at15 01 n.2 3. Vi si on Mo ni to r arg ue s tha t th e n ot es inth is cas e, li ke th e as su m pt io n o f de btinGefen , were n eces sary to pe rs ua de a th irdparty to k ic k i n m or e fu nd in g t o acas h- st rap pe d p artne rs hi p. Bu t un li ke th e p artne r in Gefen , nei th er Ma nt or no r Sm ith wer e g ua ran te ei ng a- 12 -

[* 12 ] pr eex is ti ng pa rtn ers hi p d eb t t o ath irdpa rty. Andth ey di d n otdi rect ly
as su m e an y

of Vi si on Mo ni to r’s ou ts id e li ab il it ie s- -th es e n ot es are the ir l iabi li ty to Vis io nM on it or , no t an ass um pt io n o r gu aran ty of Vis io nM on it or ’s deb t t o ath ird pa rty. Mant ordi d s ig n ares ol ut io n i n 2 00 7 t ha t i nc lu de d apro mis e “ to pro vi de * * * p ers on al cred itto th e co m pa ny ven do rs * * * t o e ns ur e co nt in ue d
un in te rrupt edop erat io ns ”--b utth ere’s n o e vi de nc e th ateit he r he or S m ith e ve r actua ll y pro vi de d t ha t cr ed it . Andth ere’s al so no ev id en ce tha t M an to r orSmith were p ers on al ly obl ig edun de r th e Vis io nM on it orpartn ers hi p a gr eem en t t o co nt rib ut e a fi xe d a m ou ntfora sp eci fic , pre ex is ti ng pa rtn ers hi p l iabi li ty. Thi s m ean s the se cas es are m or e li ke Dako tah, Gem in i Twin FundIII, an d Ode n. As inGem in i Twin FundIII, the pa rtn ers he re co nt rib ut edth ei r pe rs on al pr om is so ry

no te s t o t he pa rtn ers hi p. Here , as the re, the partn ers each ha ve no ad jus te d b as is inth e n ot es , andun ti l the y are p ai d, the no te s ar e o nl y a co nt ractua l ob li ga ti on to th ei r pa rtn ers hi p. Ma nt orm ad e a p aym en t u nd er h is no te s o nl y in 20 10 , andth e rec or d h as no ev id en ce tha t Sm ith e ve r di d. We th eref or e fi ndth at Man to r’s an d S m ith’s b as es inth ei r pr om is so ry no te s dur in g t he 20 07 an d 2 00 8- 13 -

[* 13 ] ta x years we re ze ro an d, ac co rd in gl y , th atVis io nM on it or ’s bas is inth e co nt rib ut edno te s was als o z ero . 6 III. Pen al ti es All th atis lef

t i s the pe na lt ie s tha t the Co m mis si on er ar gu es are ap pl ic ab le atth e p artne rs hi p l ev el . See s ec. 6 22 1. As th e Supr em e Co urt re cen tl y no te d i n Uni te d S tate s v . W oo ds , 57 1 U.S. _

__ , __ _, 1 34 S. Ct. 5 57 , 56 3- 64 (20 13 ),

“ [p ]roh ib it in g c ou rts inpartn ers hi p- le ve l p ro ceed in gs fro m co ns id eri ng th e ap pl ic ab il ity

of p en al ti es th atrequi re p artne r-l ev el in qu iri es wou ldbe in co ns is te nt with t he na tu re o f th e ‘app li cab il ity ’ de te rm in at io n t ha t TEFRA re qu ire s.”

“ App li cab le ” h ere m ean s wh ethe r th e p en al ti es “ ‘relat e[ ] to a n a dju stm en t t o a pa rtn ers hi p i te m .”” Id . at _

__ , 13 4 S . Ct. at56 3 (quo ti ng sec . 62 26 (f)); Pet al um a FX Part ne rs , LLC v. Co m m is si on er, 5 91 F.3d64 9, 6 55 (D.C. Cir . 20 10 ) (quo ti ng se c. 62 26 (f)), a ff’g i n p art , rev ’g inpa rt, andrem an di ng 13 1 T.C. 8 4 (2 00 8)
. Vis io nM on it orarg ue s tha t the no te s s ho ul d b e in cl ud edinou ts id e b as is 6 be cau se Man to r an d S m ith wer e “ atris k” un de r se ct io n 4 65 . It arg ue s tha t the subs ta nc e o f th e tr an sa ct io n m ad e Mant oran d S m ith u lt im at el y res po ns ib le fora fix edan d d efi ni te ob li ga ti on , th atno th in g i n t he Co de or c as el aw m ak es an y ex pl ic itpre cl us io n o f pa rtn ers hi p d eb ts m ad e to th e p artne rs th em se lv es , andth at th e p ro m is so ry

no te s co ns ti tu te d “ ge nu in e in de bt edne ss .” The C omm is si on er ret orts th atth e “ atris k” li m it at io n i sn ’t a partn ers hi p- le ve l d et erm in at io n, an d i sn ’t so m ethi ng we cande te rm in e h ere. It ’s als o a n i ss ue th atwe do n’t h av e to de ci de be cau se th e rel ev an t que st io n i sn ’t whethe r th e n ot es were a d eb t o wedby the pa rtn ers to Vis io nM on it orbu t wh ethe r th e p artne rs ha d b as is inth e n ot es . See Ham br os e Leas in g 1 98 4- 5 Lt d. P’sh ip v. Co m m is si on er, 9 9 T.C. 2 98 (19 92 ).- 14 -

[* 14 ] “ TEFRA gi ve s co urts inpartn ers hi p- le ve l p ro ceed in gs juri sd ic ti onto de te rm in e th e ap pl ic ab il ity of a ny pen al ty tha t co ul d re su ltfro m anad jus tm en t t o a pa rtn ers hi p i te m , eve n i f im po si ng th e p en al ty w ou ldals o re qu ire de te rm in in g affe ct edor n on -p artne rs hi p i te m s s uc h a s o ut si de ba si s.” Woo ds , 57 1 U.S. at__ _, 13 4 S . Ct. at56 4. Th eref or e, th e actua l as se ss m en t o f a p en al ty relat in g t o a n ad jus tm en t o f a p artne rs hi p i te m is do ne at t he pa rtn er l ev el bu t i s b as edon pa rtn ers hi p- le ve l d et erm in at io ns . Sec. 3 01 .62 21 -1 (c), Pr oc ed . & Adm in . Reg s. Part ne rs hi p- pe na lty

law g et s ev enm or e co m

pl ic at edwhen on e lo ok s at de fen se s b ecau se juri sd ic ti on ov er the m canex is t atbo th th e p artne rs hi p a nd pa rtn er l ev el s. Th e p artne rs hi p i ts el f m ay ha ve a de fen se to a pe na lty th atwou ld sh ie ldall it s p artne rs ; o ne pa rtn er m ay ha ve a de fen se to th e p en al ty tha t’s al l h is
own . Our Co urt h as juri sd ic ti onto rul e o n a ny partne rs hi p- le ve l d efen se , bu t- 15 -

[* 15 ] pa rtn ers ha ve to tak e th ei r pa rtn er-l ev el de fen se s t o arefu ndforum . Fears 7 v. Co m m is si on er, 1 29 T.C. 8, 1 0 (2 00 7)
. W ith t hi s b ack gr ou ndou t o f th e way , we no w tu rnto th e ap pl ic ab il ity of a ny pe na lty an d t he m eri ts of a ny partne rs hi p- le ve l d efen se s. Th e Co m m is si on er arg ue s tha t the 20 -p erce ntsec ti on 66 62 accu racy-rela te d p en al ti es are ap pl ic ab le to Vis io nM on it or ’s po si ti on th atth e co nt rib ut edno te s h ada no nz ero ba si s. He cl ai m s thi s was ne gl ig en t, an in te nt io na l d is reg ardof the rul es or r eg ul at io ns , and
cau se d t he subs tant ia l-u nd ers ta te m en t p en al ty to b e ap pl ic ab le to th e Mant or s. See s ec. 6 66 2( a), (b )(1 )-(2 ). W e h av e li tt le do ub t tha t the se gro un ds m ak e th e se ct io n 6 66 2 a ccuracyrel at edpe na lty

“ ap pl ic ab le ”. Co ns id er the subs ta nt ia l-u nd ers ta te m en t p en al ty. See s ec. 6 66 2( b) (2 ), (d ). Ther e is a subs ta nt ia l u nd ers ta te m en t o f ta x i f th e am ou nt
W el l, m ay

be . If th e Co m

m is si on er as se ss es a ta x, an d t he n trie s t o c ol le ct 7 an y unpa idpo rti on of i t b y

fil in g n ot ic es of l ie ns ag ai ns t, o r le vyin g o n, a ta xp ay er’s p ro pe rty, the Co de gra nt s t ax pa y ers a co ll ect io n due pro ces s h eari ng . See s ecs . 63 20 , 63 30 . Andwe have juri sd ic ti on to rev ie w th e Co m m is si on er’s de te rm in at io ns aft er the se he ari ng s. An d o urrev ie w of the Co m m is si on er's de te rm in at io ns m ig htwell be de no vo in as m uc h a s a p artne r as se ss eda pa rtn ers hi p- le ve l p en al ty m ay ne ve r rece iv e a n ot ic e o f de fic ie nc y or o th erwi se ha ve a pr eas se ss m en t o pp ortu ni ty to d is pu te hi s u nd erl y in g t ax li ab il ity . See Gruns te d v . Comm is si on er, 1 36 T.C. 45 5, 4 58 n.4 (20 11 ); P rin ce v . Co m m is si on er, 1 33 T.C. 27 0, 2 74 (20 09 ); Li ndbe rg v. Co m m is si on er, T.C. Mem o. 20 10 -6 7, 2 01 0 WL 13 30 34 3, at*6 . Butwe’ll jus t n ot e th is wrin kl e fo r no w and iro n i t o utif i t ev er co m es to us .- 16 -

[* 16 ] of t he un de rs ta te m en t “ ex ceed s the gre at er o f * * * 1 0 p erce ntof the tax requi redto be sh own on th e return,” or $ 5,0 00 . Sec. 6 66 2( d) . Butth e de te rm in at io n o f anun de rp aym en t ca nn othapp enat t he pa rtn ers hi p l ev el be cau se pa rtn ers hi ps do n’t p ay

tax es , partn ers do . W e can , ho wev er, s ti ll de te rm in e th e ap pl ic ab il it yof t he un de rs tate m en t (o r ne gl ig en ce, o r in te nt io na l-d is reg ard ) pe na lty , at the pa rtn ers hi p l ev el . As Ju dg e Marv el pre sc ie nt ly obs erv ed , “ rel at ed ” jus t m ean s a “ lo gi cal an d c au sa l re la ti on sh ip .” Pet al um a FX Partn ers , LLC v. Co m m is si on er, 1 35 T.C. 58 1, 6 02 -0 3 (2 01 0) (Marve l, J . di ss en ti ng ); Ti ge rs Ey e Trad in g, LLC, 1 38 T.C. at 1 71 (Marve l, J ., st il l d is se nt in g) ; s ee al so W oo ds , 57 1 U.S. at _

__ , 13 4 S . Ct. at56 4- 65 (Marve l, J ., vi nd ic at ed ). App li cab il ity

of p en al ti es th atrel at e to th e ad jus tm en t o f a p artne rs hi p i te m m us t b e li ti ga te d i n t he pa rtn ers hi p- le ve l p ro ceed in g. We kn ow tha t a p artne r’s ba si s i n c on tri bu te d p ro pe rty, lik e th e n ot es inth is cas e, is de fin it el y a partn ers hi p it em , see Nus sd or f, 12 9 T.C. at42 , so th e acc ur acy-rela te d p en al ty for an
un de rs ta te m en t o f ta x re la tes t o anad jus tm en t t o t he rep orte d b as is
. Vis io nM on it orm is rep orte d t he no te s as in crea se s i n t he cap it al acco un ts of S m ith
an d M an to r. Thu s, we fi ndth atth e subs ta nt ia l-u nd ers ta te m en t p en al ty is ap pl ic ab le he re. The Co m m is si on er can’t s ta ckaccu racy-rela te d p en al ti es , sec . 1.6 66 2- 2( c), In co m e Tax Reg s., s o we c anqu ic kl y tu rnto th e que st io n o f- 17 -

[* 17 ] Vis io nM on it or ’s def en se witho utco ns id eri ng whet he r Vis io nM on it or ’s return p os it io n was als o n eg li ge ntor s ho wedin te nt io na l d is reg ardof the rul es or reg ul at io ns . Vis io nM on it or ’s on ly defen se is th atitrel ie d o n p ro fes si on al advi ce. Sec
. 66 64 (c). Th e reg ul at io n t el ls us th atVis io nM on it or ’s rel ia nc e m us t al so ha ve be en , un de r al l the cir cu m st an ces , reas on ab le an d i n g oo d fa ith. Se e se c. 1.6 66 4- 4( b) (1 ), In co m e Tax Reg s. Th e cas el aw li st s thr ee fa ct or s. Neo na to lo gy Ass oc s., P.A. v. C omm is si on er, 1 15 T.C. 43 , 99 (20 00 ), aff’d, 2 99 F.3d22 1 (3 d Ci r. 20 02 ).

• W as th e advi se r 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 ia nc e?

• Didth e ta xp ay er p ro vi de ne ces sa ry an d a ccu rat e in fo rm at io n t o t he advi se r?

• Didth e ta xp ay er ac tu al ly rely ingo odfai th on th e advi se r’s jud gm en t? The ke y fig ur e h ere i s R ic k S ym

ps on . Sym

ps on was the lo ng ti m e at to rn ey an d t ax pre pa rer fo r Vis io nM on it oran d t he Man to rs . He kn ew th e in s- an d- ou ts of th e b us in es s an d h adest ab li sh edhi m se lf a s an ex pe rie nc edtax pro fes si on al . He’ s a certi fie d t ax sp eci al is t an d h as m or e th an20 y ears of e xp eri en ce. We tak e n o is su e wit h h is co m

pe te nc e.- 18 -

[* 18 ] Whe th er Vi si on Mo ni to r pr ov id edaccu rat e in fo rm at io n t o S ym ps on is a cl os er que st io n. Th e p ro mis so ry no te s the m se lv es are ri dd le d wi therro rs an d in co ns is te nc ie s. Sm ith’s n ot es ha ve di sc rep an ci es be twee n t he ir n om in al am ou nt s an d p aren th et ic al fig ur es , andth ou gh si gn ed , th os e n ot es aren ’t dat ed . The n ot ary st at em en t at ta ch edto each (da te d J un e 3 0, 2 00 8, an d J ul y 31 , 20 09 ) is well aft er Vis io nM on it or ’s pri ortax y ear h adclo se d, b utth e p artne rs hi p re tu rn s cr ed iteach
no te as acap it al co ntrib ut io n fo r th e p rece di ng tax y ear. Ma nt or ’s no te s h av e th e rig htam ou nt s an d ada te d n ot ary st at em en t-- bu t ar e uns ig ne d. We als o c ou ldno t fig ur e o utwhy no te s d at edtwo m on th s ap art(th e Mant orno te da te d Ap ril 30 , 20 08 , andth e Sm ith n ot e d at edJu ne 30 , 20 08 ) are acco un te d fo r in two di ffer en t y ears . The se pro bl em s m ay pu shNeon at ol og y ’s sec on d p ro ng to po ke at Vis io nM on it or ’s def

en se , bu t we d on ’t th in k t he y pu sh ha rden ou gh to pu nc tu re i t. The tes t t el ls us to lo okat wh ethe r Vis io nM on it orpro vi de d n eces sa ry an d a ccu rat e in fo rm at io n t o S ym

ps on . Becau se a pe na lty

is ap pl ic ab le as ares ul t o f a p os it io n ta ke n o n areturn, we l oo k t o s ee i f Vis io nM on it orpro vi de d wh atin fo rm at io n i t ha d b efo re i t fi le d i ts returns an d n otjus t wh enSym ps onwas g iv in g h is ora l advi ce t o M an to r. W e th in k a ccu racy here m ean s h ol di ng no th in g b ackan d l et ti ng th e p ro fes si on al gi ve hi s o pi ni on on th e n ot es an d a ss oc ia te d re co rd s i n a ll th ei r- 19 -

[* 19 ] co nf

us in g m es si ne ss . Andon th is po in t we fi ndbo th Man to r an d S ym ps on cred ib le insayin g t ha t Sym ps on ha d a cces s t o a ll th e rec or ds he ne ed edwhen he pr ep aredth e returns , as h e h adform an y y ears inth e p as t. We als o b el ie ve Sym ps on ’s tes ti m on y

th atMan to r di sc us se d t he factua l b ack gr ou ndwith h im
. Eve n tho ug h M an to r is far m or e fo rm al ly edu cat edan d n um erat e th anth e ta xp ay er in Co x v . Comm is si on er, T.C. Mem o. 2 00 5- 28 8, 2 00 5 WL 34 46 05 2, at*4 , 90 T.C.M. (CC H) 59 9, we fi ndth athi s o pe nn es s wi th hi s t ax advi se r is si m il ar. Cf. Ma- TranCo rp . v. Co m

m is si on er, 7 0 T.C. 1 58 , 17 3 (1 97 8) ; Oh an a v . Co m m is si on er, T.C. Mem o. 2 01 4- 83 , at * 28 ; Hri st ov v. Co m m is si on er, T.C. Mem o. 2 01 2- 14 7, 2 01 2 WL 18 69 00 1, at*8 -* 10 , 10 3 T.C.M . (CCH) 1 79 2. W e h av e li tt le pro bl em

infin di ng th atVis io nM on it or actua ll y rel ie d o n Sym ps on ’s adv ic e--h is co nc lu si on th atth e n ot es were ad di ti on s t o Vis io nM on it or ’s cap it al (an d t he cap it al acco un ts of S m ith a ndMan to r) was set ou t o n t he co m

pa ny’ s re tu rn s. An d we h av e li tt le tro ub le infin di ng th atth is rel ia nc e was ingo odfai th . In a c as e li ke th is on e--wh ere Vi si on Mo ni to r se cu red Sm ith a ndMan to r’s pr om is es to in crea se th ei r pe rs on al ris k a lo ng si de th ei r pr om is e to ex te ndth ei r pe rs on al cred itto th e fi rm ’s ven do rs --ad vi ce fr om a lo ng ti m e ta x a dv is er tha t thi s i nc reas edSm ith’s an d M an to r’s ba se s wo ul d s eem reas on ab le to Man to r. Even th ou gh we can ’t agr ee tha t the co nt rib ut io n o f th e- 20 -

[* 20 ] no te s i nc reas edth ei r ba se s, we ca nn otfin d M an to r’s (an d t hr ou gh Man to r, Vis io nM on it or ’s) rel ianc e o n S ym ps on ’s read in g o f th e subt le ti es inth e cas el aw in ba d fa ith. Tha t m ak es th is a sp li t re su lt , whi chm ean s tha t Deci si on wil l b e en te red
un de r Ru le 15 5.