T.C. M em o . 2 0 1 7 -2 6

UNITED STATES TAX COURT
BASIC ENGINEERING, INC., Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 7 6 91 -1 3
. Fi l edFeb ru ary 1 , 2 0 1 7
.

L. Do n Kn i g h tan dAaro n P. Ll o y d, fo r p et i t i on er. Bet t in a M . Nad l er, fo r res p o n d en t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION PARIS, J u d g e: Ina n o t ice o f d efi ci en cy d at edAu g u s t2 2 , 2 0 1 3, res p o n d en t d et erm i n edFed eral i n co m e t ax d efi ci en ci es o f $ 8 ,6 7 0 ,9 33 .1 9 an d $ 2 6 6 ,5 6 7.8 2 an d- 2
-

[* 2 ] accu racy -rel at edp en al ti es u n d er s ect io n 6 6 6 2(a) o f $ 1 ,7 3 4 ,1 8 6 .6 4 an d $ 5 3 ,3 1 3 .5 6 fo r p et i t i o ner’ s 2 0 0 9 an d2 0 1 0 t ax ab l e y ears , res p ect i v el y . 1 Th e i s s u es fo r d eci si o n are wh et h er p et i t i o n er i s : (1 ) el i g i bl e t o acco u n tfo r two o f i t s co nt ract s u s in g th e co m p l et edco nt ractm et h o do f acco u nt i n g an d(2 ) l i ab l e fo r accu racy -rel at edp en al t i es . FINDINGS OF FACT So m e o f t h e fact s are s t i p u l at edan dare s o fo u nd . Th e fi rs ts t i p u l at i o n o f fact s an dth e fi rs ts up p lem en t al s ti p u l at i o n o f fact s , an dthe ex h i b i t s at tach ed th eret o , are i n co rp o rat edh erei n b y th i s referen ce. Pet i ti o n er, Bas i c En g in eeri n g , In c., was a Tex as co rp o rat i o n wi th i ts p ri n ci pal p l ace o f b u s in es s i n Tex as wh en i t t i m el y fi l edi t s p et i ti o n . I. Ov erv i ew o f t h e Part i es Pet i t i o ner’ s p ri m ary

b us i n es s i s t h e en g i neeri ng , d es i g n i n g, p ro cu ri n g , refu rb i sh i n g , an dd el i v eri n g o f cru d e o il p ro ces si n g an d refi n i n g s y s t em s t o
cu s t o m ers i n th e p et ro ch em i cal i n du s try wo rl dwi d e. Th o m as Bal k e o wn ed5 1 % o f p et i t i o n er an dJ am es Sm i th o wn ed4 9 %; M r. Bal k e an dM r. Sm i th al s o o wn ed Bas ic Equi p m en t , In c. (Bas i c Equ i p m en t), an o th er Tex as co rp o rat i o n , i n the s am e

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de i n effect fo r t h e y ears ati s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.- 3
-

[* 3 ] res p ect i v e p ercen tag es . M r. Bal k e was th e p res i d en to f b o th co rp o rat io n s du ri n g th e y ears i n i s s u e. M r. Bal k e h as o v er 3 0 y ears o f ex p eri en ce i n wo rk i n g wi th o il refi n eri es an d refi n ery equ i p m en t ; h i s i n tern at i on al o i l refi n ery b u s i n es s
ex p eri en ce fi rs to ccu rredi n 1 9 7 7
. Th i s cas e co n cern s th e acco un t i n g treat m en tfo r t ax p urp o s es o f t w o o f p et i t i o n er’ s co nt ract s th at were o n g o i n g i n 2 0 0 9 an d 2 0 1 0 : (1 ) p et i ti o n er’ s
co n tract wi th Pet ro m ax x En erg y Gro up Gm

b H, l at er kn o wnas Pet ro m ax x En erg y Gro up Gm

bH & Co KG, an dl at er as Tag o re In v es t m en t s S.A. as u n i v ers al
s u cces s o r (co l l ect iv el y

Pet ro m ax x ); an d(2 ) p et i t io n er’ s co n tract wi th Am b er En erg y S.A. (Am

ber). Si n ce i t s i n co rp o rat i o n i n 2 0 0 4 p et i t io n er h as acco u n t edfo r i t s l o n g-t erm co n tract s u s i n g t h e co m p l et edco n tract m et h odo f acco u n t i n g . Res po n d en t ’ s det erm i n at i on s th atp et i t i o ner was i nel i gi b le t o u s e t h e co m p l et ed
co n tract m et h o do f acco u nt i n g fo r t h e Pet ro m ax x an dAm b er co n tract s l edt o th e d efi ci en ci es at i s s u e. II. Th e Pet ro m ax x Co nt ract A. Bas i c Equ i p m en t -Pet ro m ax x Ag reem en t Pet i t i o ner an d Bas i c Equ i p m en tm ai nt ai n edrel at i o n sh i p s wi th s al es p ers o n s
wo rk i n g o u t s i d e t h e Un it edSt at es wh o s earch edfo r p o t en t i al cu s t o m ers o n th ei r b eh al f. In 2 0 0 4 a s al es m an co n t act eda Bas i c Equi p m en trep res en tat i ve t o i n fo rm- 4
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[* 4 ] h i m th atth e i n t ern at i o n al en t i ty Pet ro m ax x was i n t eres t edi n b u i ld i n g a s m al l
o i l refi n ery

i n Bu l g ari a wi th a 1 0 ,0 0 0 t o 1 5 ,0 0 0 b arrel p er d ay (BPD) cru d e o i l t o p p i n g u n i t . M r. Bal k e, act i n g o n b eh al f o f Bas i c Equi p m en t, o fferedt o b u i l d Pet ro m ax x a n ew refi n ery , b u tPet ro m ax x wan teda refi n ery thatwas read il y
av ai l ab l e an d wan t edp et it i on er t o fi n d an ex i s t in g refi n ery , d i s as s em b l e i t, an d refu rb i sh v ari o u s p art s acco rd i n g t o Pet ro m ax x ’ s s peci fi cat i o n s . Th e n ewl y refu rb i sh edp art s wo u l d t h en b e reco n s tru ct edi nt o a n ew refi n ery atPet ro m ax x ’ s p referred i n t ern at io n al l o cat i on . Rep res en t at i v es fo r Bas i c Equ i p m en tan dPet ro m ax x v i s i t edan ex i s t i n g o i l refi n ery i n Ni x o n , Tex as (Ni x o n refi n ery ), th ath adequ i p m en ts i m i l ar t o th e equ ip m en tPet ro m ax x h adi n it i al l y d es cri b ed
. Aft er v i s i t i ng th e refi n ery Bas i c Equ ip m en tm ad e a p ro p os al t o refu rb i s h th e refi n ery ’ s p art s an ds el l them t o Pet ro m ax x , wh i ch wo u l dth en co n st ru ctan o p erat in g refi n ery . Bas i c Equ i pm en t
an d Pet ro m ax x u l t i m at el y reach edan ag reem en to n Decem b er 4 , 2 0 0 5 (Ni x o n equ ip m en tag reem en t). Un d er th e t erm s o f t h e Ni x o n eq u i p m en tag reem en t , Bas i c Equ ip m en t ag reedt o : d es i gn an d m an u fact u re o n e n ew 1 0 ,0 0 0 BPD at m o s p h eri c cru d e u n i t
an d o n e reco n di ti o n ed 1 7 ,0 0 0 BPD cru d e t o p p i n g u n i t ; p ro vi d e Pet ro m ax x wi t h d es i g n s an dfl o w d i ag ram s n eces s ary t o o p erat e an dp erfo rm

m ai n t en an ce o n th e- 5
-

[* 5 ] cru d e u n i t s ; p ro vi d e Pet ro m ax x wi th p l an to p erat i o n m an u al s; an ds up erv i s e th e co m m i s s i o n i n g o f t h e cru d e u n i t s o n ce t h ey were as s em

b l ed
. Inex ch an g e, Pet ro m ax x ag reedt o p ay

Bas i c Equ i p m en t$ 21 .5 m i l l i o n; Pet ro m ax x i n i t ial l y p ai d Bas ic Equi p m en t$ 6 ,4 50 ,0 0 0 as a d ep o si to n Decem b er 2 3 , 2 0 0 5. Earl y i n 2 0 0 6 Pet ro m ax x d et erm i n ed thati t n eed edt o b u i l da l arg er p ro duct i o n cap aci ty

refi n ery th an th e Ni xo n refi n ery

co u ldp ro v id e an dwi th drew th e p rev i o u s ag reem en t
. B. Pet i t i o ner-Pet ro m ax x Sal e an dPu rch as e Ag reem en t 1
. Back g ro u n d Aft er d et erm i n i n g th atth e Ni x o n refi n ery wo ul dn otm eet i t s p ro du ct i o n cap aci ty n eed s , Pet ro m ax x p ro v i d edM r. Bal k e wi th n ew s co pe o f wo rk req u i rem en t s . Inan effo rtt o fi n da refi n ery th atwo u l dm eetPet ro m ax x ’ s p ro duct i o n cap aci ty

req ui rem en t s , M r. Bal ke an d a Pet ro m ax x rep res en t at i v e
v i s i t eda l arg er refi n ery

wi th a 5 0 ,0 0 0 t o 5 5,0 0 0 BPD cap aci ty i n Cal i fo rn i a (Cen co refi n ery ). Aft er ex am i n i n g th e Cen co refi n ery , M r. Bal k e o ffered t o refu rb i sh an d s el l th e refi nery ’ s p art s t o Pet ro m ax x , wh ich wo u ldthen co ns tru ctan
o p erat i n g refi n ery . Ats o m e p o i n tM r. Bal k e m ad e t h e d eci s i o n t o tran s fer t h e- 6
-

[* 6 ] o rd er fro m

Bas i c Equi pm en tt o p et i t i o ner. 2 Bas i c Equi p m en ttran s ferred t o p et i t i o n er Pet ro m ax x ’ s o ri g i n al $ 6 ,4 5 0 ,0 0 0 Ni x o n refi neryd ep o s iti n i ns t al l m en t s
o f $ 3 m i l l i o n o n Feb ru ary 8 , 2 0 0 6 , $ 3 m i l l i o n o n M arch 8 , 2 0 0 6 , an d$ 4 5 0 ,0 0 0 o n M arch 2 8 , 2 0 0 6
. OnM arch 2 2 , 2 0 0 6 , p et it i o n er p u rch as edth e Cen co refi n ery fro m J A S M ark et in g , In c. (J AS), fo r $ 1 8 .9 m i l l i on fo r u s e i n th e Pet ro m ax x p ro j ect
. Pet i t io n er ag reedt o m ak e i ts fi rs tp aym en tt o J AS o n o r b efo re M arch 2 2, 2 0 0 6 , wi th s ub s equen tp aym en t s du e m o n th l y th ro u g h Au g u s t2 2 , 2 0 0 7. 2
. Sal e an dPu rch as e Ag reem en t Befo re ex ecu t i n g a fo rm al ag reem en t , Pet ro m ax x tran s ferredt o p et i t i o n er $ 1 0 ,7 5 0 ,0 0 0 i n ad d i t i o n t o th e $ 6 ,4 50 ,0 0 0 d ep o s i tPet ro m ax x p ai dt o Bas i c Equ ip m en t , wh ich was s ub s equ en t l y tran s ferred t o p et i t i o n er. Th e ad v an cedfu n d s were p ai dt o p et it io n er i n two equ al i n s t al lm en t s o f $ 5 , 3 75 ,0 0 0 o n M ay 2 2 an d Sep tem b er 1 , 2 0 0 6
. OnOct o b er 2 8 , 2 00 6 , p et i t i on er an dPet ro m ax x ex ecu t eda “ Sal e an d Pu rch as e Ag reem en t ” (Pet ro m ax x SPA) wh ereb y Pet ro m ax x ag reedt o p u rch as e cert ai n cru d e o i l p ro ces s i n g u n i t s fro m p et i ti o n er. Th e Pet ro m ax x SPA req u i red

2 Th e ex actd at e o n wh i ch M r. Bal k e m ad e t h e d eci s i o n t o tran s fer t h e o rd er i s n o ti n th e reco rd
.- 7
-

[* 7 ] p et i t i o n er t o refu rb is h th e o i l p ro ces s i n g u n i t s an dt o p ro v i d e Pet ro m ax x wi t h
en g in eeri n g s p eci fi cat i o ns th atPet ro m ax x wo u l du s e t o i n s t al l th e n ewl y refu rb i sh edu n it s an dco n s tru ctan o p erat in g refi n ery . 3 On ce t h e Cen co refi n ery
was b ro k en d o wn an d th e n eces s ary p art s refu rb i s h ed , p et i t i o n er was res p o n s i b le fo r d el i v eri n g th e refu rb is h edu n i t s t o i t s faci l i ty i n Ho u s t o n , Tex as , an d Pet ro m ax x was res po n s ib l e fo r s h i p p i ng th e refu rb i s h edu n i ts fro m th ere t o Bu l gari a. Pet ro m ax x was al s o res p o n s i b l e fo r creat i n g the refi n ery s i t e i n Bu l g ari a
an d erect i n g an di n s t al l i ng th e n ewl y refu rb i s h edu n i t s i n to a refi nery . On ce Pet ro m ax x h aderect edan di n s tal l edth e refu rb is h edu ni t s , p et i t i o n er was req u i red t o s up erv i s e t h e co m

m i ss io n i n g 4 o f t h e n ewl y

erect edu ni t s . Up o n s u cces s fu l

3 Pet i t i on er s ub co n tract edth e en g i neeri ng wo rk t o M M In žen j eri n g LTD. (M o n t m o n t aza), a s ub si d i ary o f M o n t m o n t aža PLC, a Cro at i an co m p an y , v i a an ag reem en tex ecu tedb y

th e p art i es o n J an uary9 , 2 0 0 7 (M o n t m o nt aza ag reem en t ). M o n tm o n t aza was res p o n s i b l e fo r p ro v id i n g th e i nfo rm at i o n th atPet ro m ax x wo u l dn eedt o co n st ru ctthe refi n ery i n Bu l g ari a. To s at is fy

i t s res p o ns i b il i t i es , M o n tm o n t aza was t o p ro du ce as -b u i l td o cu m en t at i o n o f th e ex is t in g Cen co refi n ery i n i t s s t an d i n g co nd i t i o n i n Cal i fo rn ia an d ch eckth e t h en -ex i s t i n g p l an t co n fi g u rat io n ag ai n s tth e fu tu re Bu l g ari a refi n ery s i t e l o cat i o n . Do i ng s o wo u l d al l o w M o n t m o n t aza t o p ro du ce t h e d o cu m en t at i on th atwo u l db e n eces saryfo r Pet ro m ax x t o reco n s tru ctth e refu rb i s h ed Cen co refi neryi n Bu l g ari a.

4 Th e Pet ro m ax x SPA d efi n edco m m i s s i o n i n g as “ a s eto f act i v i t ies th ats h al l b e p erfo rm edb y

BUYER’ s p ers o n n el as Sup erv is edb y BASIC’ s o n s i t e fi el d en g in eer an dwi tn es ses b y Qu al i fi edEn g i n eer at BUYER’ s Lo cat i o n i n o rd er t o d et erm i n e t h atth e Faci l i ty can b e p ro p erl y

an d s afel y

o p erat edi n acco rd an ce wi t h th e Tech ni cal St an d ard s p ro m p t l y aft er m ech an i cal co m

p l et i o n an dp re-co m

m i s - (co n ti n u ed ...)- 8
-

[* 8 ] co m m i s s i o n in g o f t h e refi nery , a qu al i fi eden g i neer wo ul d co n duct p erfo rm an ce t es ts an di s s u e a “ fi n al accep tan ce rep o rtan d cert i fi cat e” up o n
s u cces s fu l t es t i n g . At th atp o i n t , p et i t i o n er wo u l dh av e fu l fi l l edal l o f i ts
o b l i g at i o ns u n d er t he Pet ro m ax x SPA an d Pet ro m ax x wo u l das s um e fu l l
res p o n s i b i l i ty

fo r t h e refi n ery

an di t s o p erat i o n . In co ns i d erat i o n fo r a co m p l et e,
s at i s fact o ry , an dt i m el y

p erfo rm an ce b y

p et i t i o ner o f al l o f i ts o b li g at i o n s u n d er th e Pet ro m ax x SPA, Pet ro m ax x ag reed t o p ay p et i ti o n er $ 9 0 .5 m i l l i o n . 5 Th e Hard tIn v es t m en tGro up , h ead qu art eredi n Vi en n a, Au s tri a, co n tro l l ed th e u n derl y i n g fu nd i n g o f Pet ro m ax x , an dthe p art ies n eg o ti at ed the fo ll o wi n g g o v ern i n g l aw p ro v i s i o n i n s ect i o n 1 9 .3 .1 o f t h e Pet ro m ax x SPA: Th i s Ag reem en ts h al l b e g o v ern edb y , an d co ns tru edi n acco rd an ce wi th , th e l aws o f t h e Rep ub l i c o f Au s tri a i n cl u d i n g t h e UN Co n ven t i on o n Co n tract s fo r th e In t ern at i o nal Sal e o f Go o d s o f 1 9 8 0 (CISG). Th e Part i es ’ ri g h t s an do b l i g at i o n s wi th res p ectt o t i t l e t o an ds ecu ri ty

i n t eres t s i n th e Equ i p m en t s hal l b e g o vern ed b y th e l aw o f t h e ju ri s di ct i o n i n wh i ch s u ch Equ i p m en ti s l o cat ed
.

4 (...co n t in u ed ) s i on i n g o f t h e Faci l i ty ”.

5 Th e t o t al co nt ract p ri ce i n cl u ded th e $ 1 7
. 2 m i ll i on p rev i o u s l y p ai d t o p et i t i o n er--t h e $ 6 , 4 5 0 , 0 0 0 d ep o s i tp ai dt o Bas i c Equi p m en t(an d t ran s ferred t o p et i t i o n er) an d th e t wo p aym en t s o f $ 5 ,3 7 5 ,0 0 0 p ai dd i rect l y t o p et i t i o n er.- 9
-

[* 9 ] 3
. Am en dm en tt o Pet ro m ax x SPA Aft er ex ecu t i n g th e Pet ro m ax x SPA, Pet ro m ax x o n ce ag ai n d et erm i n edth at i t w an t edt o i n creas e t h e cap aci ty o f i t s refi n ery . OnOct o b er 6 , 2 0 0 7 , al m os to n e y ear aft er t h e o ri g i n al co n tract was ex ecu t ed , p et i t i o ner an d Pet ro m ax x ex ecu t ed
an am en d m en tt o t h e Pet ro m ax x SPA wh ereb y p et i t i o n er ag reedt o refu rb i s h ad d it i o n al equ ip m en tthatwo u ldal l o w Pet ro m ax x t o m eeti t s cap aci ty req u i rem en t s . Pet ro m ax x ag reedt o p ay an ad d it i o n al $ 3 1,7 5 0 ,0 0 0 t o p et i ti o n er fo r th e ad d i t i o n al equ i pm en t , b ri ng i n g t h e t o t al co n tract p ri ce t o $ 1 2 2 ,2 5 0 ,0 00 . In Oct o b er o f 2 0 07 , atth e t i m e t h e p art i es ex ecu t edth e am en dm en tt o th e Pet ro m ax x SPA, Pet ro m ax x h ad m ad e p aym en t s t o p et i t i o n er t o t al i n g $ 7 2 .4 m i l l i o n. 6 C. Ti m efram e Fo r p u rp o s es o f acco u n t in g fo r t h e Pet ro m ax x co n tract , p et i t i o ner’ s es t i m at e
o f t h e t i m e t h e co n tract wo u l dt ak e t o co m p l et e i s i m

p o rt an t . Th e Co u rtwi l l l o o k t o the t erm s o f t h e Pet ro m ax x SPA an dwi l l co n si d er t es ti m o n y fro m M r. Bal k e
an d res p on d en t’ s ex pert wi tn es s , J o h n Harri s .

6 Th e p art i es ex ecu t eds ub s equ en tam en d m en t s t o th e Pet ro m ax x SPA th ro u g h Au g u st1 3 , 2 0 0 8 , b u t th e s ubs equ en tam en d m en t s d i d n o t ad j u s tth e t o t al co n tract p ri ce.- 1 0 -

[* 1 0 ] 1
. Pet ro m ax x SPA W i th res p ect t o th e Pet ro m ax x p ro ject ’ s ex p ect edt i m efram e, s ect i o n 3 .2 .2
. o f t h e Pet ro m ax x SPA p ro v i d ed : Ag reedPro

jectSch edu l e. BASIC s h al l co m m en ce * * * [i t s wo rk ] i n acco rd an ce wi th the p ro

jects ch edul e an dm an ag em en tp l an s etfo rt h i n Ex h i b i t3 .2 .2 (t he “ Prel i m i naryPro jectSch edu l e”). W i th i n o n e (1 ) m o n th aft er s i g n i ng th i s Ag reem en t , BASIC s h al l s ub m i t , fo r BUYER’ s rev i ew an dap p ro v al , an up d at edan dm ore d et ai led s ch edu l e (as ap p ro v edb y Qu al i fi edEn g in eer an d b y BUYER, th e “ Ag reedPro

jectSch edu l e”) am en d i ng th e Prel i m i n ary Pro j ect Sch edu l e wh ich s et s fo rt h th e t i m i n g o f co m p l et in g th e [Cen co refi n ery ] Un i t s an do f al l o th er m ajo r el em en ts o f * * * [p et i t i o n er’ s o b l i gat i o n s ] as wel l as th e i n t errel at i o n s h i p o f s u ch el em en t s . Dat es i n cl u d edi n the Ag reedPro jectSch edu l e s h al l b e t h e b es tes t i m at es av ai lab le atthe t i m e o f s ub m i s s i o n o f t h e Ag reedPro ject Sch edu le b u ts h al l n o tb e g u aran t eed d at es o f d el iv ery o r ach i ev em en to f l is t ed m i l es t o n es o r o b

ject i ves , ex cep tth atDel iv ery o f t h e l as t[Cen co refi n ery ] Un i ti s g u aran t eedt o o ccu r n o l at er t h an twel v e (1 2 ) m o n th s aft er t he s i g n i n g o f t h i s Ag reem en t
. Ex h ib i t3 .2 .2 t o th e Pet ro m ax x SPA--t h e “ Prel i m i n ary Pro jectSch edul e”--s t at ed :

“ [t o b e p ro v i d edb y

BASIC] ”; th e res to f t h e p ag e was b l an k . Pet i ti o ner d i dn o t i n tro du ce i n t o ev i d en ce a d o cu m en tp u rp o rt i n g t o b e t h e p rel i m i naryp ro ject
s ch edu l e t h ati twas t o p ro v id e o r an am en d edp ro jects ch edul e. Al th ou g h the Pet ro m ax x SPA d i d n o tco n tai n a p ro jects ch edul e, i treq u i red p et i t i o n er t o “ us e i t s b es teffo rt s ” t o d el i v er t h e l as trefu rb is h edu ni tt o i t s faci l i t y i n Ho us t o n , Tex as , b y Ap ri l 3 0 , 2 0 0 7 ; h o wev er, i f p et i ti o n er fai l edt o d el iv er t h e- 1 1 -

[* 1 1 ] l as tu n i tb y

Ap ri l 3 0 , 2 0 0 7 , th e Pet ro m ax x SPA d idn o tp ro v i d e fo r p en al t ies
. If p et it i o n er fai l edt o d el i v er t h e l as tu n i to n o r b efo re Sep t em b er 1 2 , 2 0 07 , p et i t i o n er wo u ldd efau ltu n der t h e t erm s o f t he Pet ro m ax x SPA. 7 Th es e d el i v ery d at es are t h e o n ly

p erfo rm an ce d at es s p eci fi edi n th e Pet ro m ax x SPA. 8

7 Sp eci fi cal l y , s ect i o n 3 .2 .1 o f t h e Pet ro m ax x SPA p ro v i d ed : BASIC s h al l u s e i t s b es t effo rt s t o Del i ver t h e [Cen co refi n ery ] Un i t s l i st edas Ph as e On e an d as Ph as e Two i n th e Equ i pm en tLed g er wi th in fi v e (5 ) m o n th s aft er s i g n i n g o f t hi s Ag reem en t . BASIC s h al l u s e i t s b es teffo rt s t o Del i v er al l o th er Un i t s o n o r p ri or t o th e d at e co rres p o n d i n g t o s u ch Un i ts etfo rt h i n th e Pro jectSch edu l e, an d i n an y ev en to n o r p ri o r t o Ap ri l 3 0 , 2 0 0 7. Th e fai l u re o f BASIC t o d el i v er s u ch Un it s o n the fo reg o i n g d at es s h al l n o tco n s t i tu t e a d efau l t u n d er t h i s Ag reem en t u n l es s BASIC fai l s t o u s e i t s b es t effo rt s . No twi th s t an d i n g th e fo reg o i n g , i ts h al l b e a d efau l tu n d er t h i s Ag reem en t i f BASIC fai l s t o Del i ver t h e l as tUn i t o n o r p ri o r t o Sep t em b er 1 2 , 2 0 0 7 (“ Fi n al Del i v ery Dat e”). Sect i o n 8 .4 o f t h e Pet ro m ax x SPA p ro v id edth atp et i t i o ner “ s h al l d i li g en t l y p u rs u e th e p erfo rm an ce o f * * * [i t s wo rk ] an dwi l l ach i ev e Del i v ery o f al l Equ i pm en to n o r p ri o r t o Sep t em

b er 1 2 , 2 0 0 7 ”. Sect io n s 3 .2 .1 an d8 .4 o f th e Pet ro m ax x SPA co n fl ictwi th s ect i o n 3 .2 .2 wi th res p ect t o th e d el i v ery o f t h e u n i t s , as s ect io n s 3 .2 .1 an d8 .4 s t at e t h at d el i v ery o f t h e l as t u n i t w il l o ccu r o n o r b efo re Sep t em b er 1 2 , 2 00 7 , wh i l e s ect i o n 3 .2
. 2 s t at es th at d el i v ery

o f t he l as tu n i twi l l o ccu r n o l at er t h an 1 2 m o n th s aft er th e s i g n i n g o f t h e SPA o n Oct ob er 2 8 , 2 0 0 6 . Th i s i n co n s is t en cy d o es n o taffect th e Co u rt ’ s d et erm i n at i o n wi th res p ect t o the t wo -y ear ru l e d i s cu s sedi n fra.

8 Th e M o n t m o n t aza ag reem en tal s o ap p ears t o co i n ci d e wi th th e d el i v ery t i m el i n e s p eci fi edi n th e Pet ro m ax x SPA, as M o n t m o n t aza an t i ci p at edh av i n g al l drawi n gs an d d o cu m en t s co m p l et edb y the m i dd l e o f Sep tem b er 2 0 0 7
.- 1 2 -

[* 1 2 ] Im p o rt an t ly , th e Pet ro m ax x SPA d idn o t i n cl u d e t erm s req u i ri n g Pet ro m ax x t o s h i p th e refu rb is h edu n it s fro m Ho us t on , Tex as , t o Bu l g ari a b y a s p eci fi c d at e, b eg in o r fi ni s h creat i n g th e refi n ery s it e b y a s p eci fi c d at e, o r b eg i n o r fi ni s h i n s t al l i n g an derect in g the n ewl y refu rb i s h edu n i ts i n t o a refi n ery b y a s p eci fi c d at e. Pet i t i o n er d i dn o to ffer i n t o ev i d en ce an y d ocu m en t at io n refl ect i n g d at es b y wh i ch p et i t i on er o r Pet ro m ax x ex p ect edPet ro m ax x t o b eg i n o r fi n i s h i t s
o b l i g at i o ns . Sect io n 9 .4 .1 o f t h e Pet ro m ax x SPA p ro v i d ed : “ Im m ed iat el y aft er
n o t i fi cat i o n th atth e erect i o n an di ns t al l at i on o f t h e * * * [refi nerys i t e] h as b een p ro p erl y p erfo rm edan d co m

p l et ed , BASIC s hal l Sup erv i se * * * [Pet ro m ax x ’ s ] p ers o n n el i n Co m

m i s s i o ni n g o f t h e Faci li ty .” Aft er s u cces s fu l co m m is s i o n i n g , a qu al i fi eden gi n eer wo u l dco n du ctp erfo rm an ce t es t s wh i ch “ m u s ti n an y cas e b e
co m p l et edwi th i n s i x ty

(6 0 ) d ay s , o r s u ch o th er p eri o das m ay b e ag reed i n wri t i n g b y th e Part i es , fro m

th e d at e o n wh i ch Co m

m i s s io n i n g h as co m

m en ced .” On ce t h e qu al i fi eden gi n eer was s at i sfi edth atthe p erfo rm an ce t es t s s h o w edth atthe n ewl y i n s t al l edan derect edrefi n ery m etcert ai n s tan d ard s , h e wo u l di s su e a rep o rt . At th atp o i n t , p et i t i o ner wo u l dh av e fu l fi l l ed al l o f i t s o b li g at i o n s u n d er t h e Pet ro m ax x SPA. Th e Pet ro m ax x SPA d i dn o tco n t ai n an o v eral l p ro ject
co m p l et i o n d at e.- 1 3 -

[* 1 3 ] W i th res p ectt o t h e t erm s o f p aym en t , the Pet ro m ax x SPA i nd i cat es th atth e p art i es an t i ci p at edth e fi n al p aym en tt o b eco m e du e o n th e earl i er o f: (1 ) 1 0
m o nt h s aft er t h e “ Fi n al Del i v ery Dat e”, wh i ch was Sep t em b er 1 2 , 2 0 07 , o r (2 ) t he

“ Fi nal Accep t an ce Dat e”, wh i ch was th e d at e t h at the q u al i fi eden gi n eer i s su ed a
co m p l et i o n rep o rt
. Becau s e t he Pet ro m ax x SPA d i dn o t s peci fy d at es b y wh i ch Pet ro m ax x
wo u l ds h i p th e refu rb i s h edu ni t s , fi n i s h creat i n g th e refi nerys i t e, o r fi n i s h i n s t al l i n g an derect in g the n ewl y refu rb i s h edu n i ts i n t o a refi n ery , i t i s u n cl ear
ex act l y wh en the p art i es ex p ect edth e Pet ro m ax x SPA t o b e co m p l et ed
. 2
. M r. Bal ke’ s Tes t i m o n y M r. Bal ke t es t i fi ed th at 3-D l as er s can n i n g t ech n o l o g y was i n tro du cedt o h i s i n du s try i n th e earl y

t o m i d -2 0 0 0 s . Th i s t ech n o l o g y al l o wedex i s t i n g refi n eri es t o b e s can n edb efo re t h ei r d eco ns tru ct i o n an d p ro du cedb l uep ri n t s an dm o d el s o f t h e
as s em b l edrefi n eri es t i m el i er t h an th e t rad i t i o nal m et h o do f m eas u rem en tan d
m o del in g . Th es e b l u ep ri n t s an dm o d el s co ul dth enb e s h i p p edel s ewh ere t o as s i st i n the p rep arat i o n o f t h e n ew s i t e fo r co ns tru ct i o n. Acco rd i n g t o M r. Bal k e p et i t i o n er was an earl y ad o pt er o f t h i s t ech n o l o g y , an dh e i n ten d ed p et i t io n er t o
u s e i ti n co m

p l et i o n o f t he Pet ro m ax x SPA.- 1 4 -

[* 1 4 ] In th eo ry , b y

u s i n g th e i ncreas edeffi ci en cy o f th e 3 -D s can n i n g, m u l t i p l e
s t ag es o f t h e refu rb i s hi n g an dreco n s tru ct i o n p ro ces s es co u l d p ro ceed i n t an d em . M r. Bal k e u s edth e p h ras e “p aral lel p ro ces s i n g ” t o d es cri b e t h i s s y s tem o f
o p erat i o n . Th e l o g is t i cs o f t h i s th eo ry o perat edi n th e fo l l o wi ng m an n er: Each
s t ag e o f t h e d i s m an t l i n g p ro jectwo u l db e s can n edan dm o d el ed , an d t h e m o d el
wo u l db e s en tt o t h e p u rch as er; th en , s im u l t an eo u sl y , p et it i on er wo u l db eg i n d i s m an tl i n g an drefu rb i s h in g the s can n eds ect i o n s o f t he refi n ery wh i l e t h e p u rch as er u s edth e m o d el s t o p rep are t he n ew s i t e fo r t h e refi n ery ’ s s peci fi c
reco n s tru ct i o n req u i rem en t s. Des p it e t h e t h eo ry ’ s t em p o ral b en efi ts , M r. Bal k e t es t i fi edth ath e was aware o f o n l y two o th er co m

p an i es i n p et i t i o ner’ s i ndu s try
cu rren t l y u s i n g a p aral lel p ro ces s i n g s y s t em . 3
. Res p o nd en t ’ s Ex p ertW i tn es s Tes t i m o n y Res p o n d en tcal l edJ o h n R. Harri s, PE, t o t es t i fy as an ex p ertwi tn es s o n th e p ro ces s o f creat i n g , co n s tru ct i n g , an do p erat i n g refi n eri es . Th e Co u rtreco g n i zed M r. Harri s as s u ch an ex p ertan drecei v ed i nt o ev i den ce h i s ex p ert wi tn es s rep o rt , i n wh ich h e s t at edh is o pi n i o n reg ard i n g a reas o n ab l e es t i m at e o f t i m e i two u l d t ak e t o co m

p l et e t h e Pet ro m ax x refi n ery p ro ject
. M r. Harri s o pi n edth ata t h ree-y ear t i m efram e t o co m pl et e th e Pet ro m ax x p ro ject was “ o p ti m is t i c b u tp o s s i b l e.” To arri ve at h i s co n cl u s i o n, M r. Harri s- 1 5 -

[* 1 5 ] n o t edthatthe o n l y

p erfo rm an ce d at e s p eci fi edi n th e Pet ro m ax x SPA was Sep tem b er 1 2 , 2 0 0 7, the d at e b y

wh i ch p et i t io n er was req u i redt o d el i v er t h e equ ip m en t . Becau s e t h e Pet ro m ax x SPA d id n o t s p eci fy d at es b y wh i ch th e
rem ai n i n g co m

p o n en t s o f t h e Pet ro m ax x refi n ery p ro jectwo u l db eg i n an dfi n i s h , M r. Harri s was req ui red t o m ak e as su m p t i o n s an des t i m at e h o wl o n g the
rem ai n i n g co m

p o n en t s wo u l dt ak e, wh i ch h e s u m m ari zedas fo l l o ws : On e m u s t m ak e an es t im at e o f th e reas o n ab l e t i m e req ui red t o s h i p the equ i pm en t , acqu i re t h e b al an ce o f t h e eq u i p m en t , s up p l i es an d s erv ices n eces saryt o co m p l et e a refi n ery . Fo rei g n s h i pp i n g t o an i n l an dp ort i n th e d ev el o p i ng wo rl d i s d i ffi cu l t t o es ti m at e. Si x m o n th s s eem s l i k e an o p t i m i s t i c p eri o dt o h av e ev eryth i n g i n p l ace i n Bu l g ari a, as s u m i n g n o d el ay s i n l o n g l ead -t i m e eq u i p m en t , n o l o cal s h o rt ag es o f n eces s ary

s up p l i es o r s carci ty

o f s k i l l ed l ab o r. Fo l l owi n g Own er acq u i s i t i o n o f t he eq u ip m en t , an d p res um i n g fi ni s h eden g i n eeri n g p ro ceed s t i m el y , fi n al erect i o n o f t h e refi n ery co u l d h ard l y

b e ex p ect edi n l es s th an o n e y ear. If co m m i s s i on i n g p ro ceed s p ro m

p t l y an d few p ro b l em s are fo u n d , th i s t as ks h o u l dt ak e 6 week s , fo l l owedb y

an o t h er m on th fo r a p erfo rm an ce ru n o n th e refi n ery . M r. Harri s d idn o t t ak e p et i t io n er’ s p aral l el p ro ces s i n g s y s t em i n t o
co n si d erat io n i n reach in g h is co n cl u s i o n s wi th res p ectt o th e Pet ro m ax x SPA’ s t i m efram e. In s t ead , M r. Harri s ’ co n cl u s i o n was b as edo n t rad i t io n al i n du s try p ract i ces , an dM r. Bal ke ag reedwi th M r. Harri s ’ co n cl u s i o n t o t h e ex t en t h e h ad rel i edo n trad i t i o n al i n dus try p ract i ces . M r. Bal k e d i s ag reedwi th M r. Harri s ’
o v eral l co n cl u s i o n th atth e Pet ro m ax x p ro jectwo u ldt ak e atl eas tth ree y ears t o- 1 6 -

[* 1 6 ] co m

pl et e b ecau s e M r. Harri s d i dn otco n s id er h o w m u ch t im e 3 -D l as er i m ag i n g o r p et i t i o n er’ s p aral l el p ro ces s i n g s y s t em wo u l ds av e. D. Pro jectOu t co m e Ul t i m at el y , th e Pet ro m ax x refi n ery p ro jectwas n o tco m

p l et ed . Ats o m e p o i n tdu ri n g th e co u rs e o f the p ro ject , Pet ro m ax x l o sti t s fi n an ci ng an d was u n ab l e t o p ay p et i t i o n er. Atth e t i m e o f t ri al , th e d i s m an t ledu n i ts fro m th e Cen co refi n ery
were s t i l l i n p et i t i o n er’ s co n s tru ct i o n y ardi n Tex as . III. Th e Am

b er Co n tract A. Back g ro u n d Wh i l e p et i t i o n er was wo rk i n g o n th e Pet ro m ax x refi n ery p ro ject , a rep res en t at i v e fro m th e Hard t In v es t m en tGro up co n t act ed M r. Bal k e t o i n fo rm h i m th atAm b er was i n t eres t edi n p u rch as i n g a 1 0 0 ,0 0 0 BPD refi n ery an d
as s em b l i n g i ti n Pak i s t an . M r. Bal k e i n fo rm edth e rep res en t at i v e th ath e was
aware o f a 1 0 0 ,0 0 0 BPD refi n ery i n Tu rk ey (At a o refi n ery ) t h at wo u l dm eet Am b er’ s p ro duct i o n cap aci ty req u irem en ts . To p l am

M ü h en d ¥ s l ¥ kv e Taah h ü t Ý th al at Ý h racat L ¥ m ¥ t ed a ¥ rk et ¥ (To p lam ), a co m p an y i n co rp o rat edi n Tu rk ey , co n tract ed t o s up p l y

the At a o refi n ery

u n i t s . 9

9 To p l am o b t ai n ed t i t l e t o th e t h en -ex i st i ng At a o refi n ery u ni t s o n Ap ri l 2 1 , 2 0 0 8 . BP, Sh el l , an dM arm ara Pet ro l o wn ed th e refi nerys i t e an dh av e s i n ce (co n ti n u ed ...)- 1 7 -

[* 1 7 ] B. Pet i t i o ner-Am b er Sal e an dPu rch as e Ag reem en t OnJ u ly 1 7 , 2 0 08 , p et i t i on er an dAm b er ex ecu t eda “ Sal e an d Pu rch as e Ag reem en t ” (Am

b er SPA). Th e Am

b er SPA req u i redp et it i o n er t o i den ti fy an d
n eg ot i at e p u rch as e o rd ers wi th th i rd -p art y v en d o rs t o p ro cu re o i l p ro ces s in g u n i t s fo r u s e i n th e Am

ber p ro ject , refu rb i s h th os e u n i t s , an dd el i v er t h e n ewl y refu rb i sh edu n it s t o a d es i g n at edl ocat i o n. To s at i s fy th o s e o b l i g at i o n s , p et i t i o n er p u rch as edth e At a o refi n ery u n it s fro m

To pl am fo r $ 18 m i l l i o n v i a a “ Sup pl y Ag reem en t ” ex ecu t edo n Ju l y 2 4 , 2 0 0 8 (To p l am

s up p l y ag reem en t ). Un d er t h e t erm s o f t h e To p l am

s up p ly ag reem en t , To p l am

ag reedt o d is m an t l e t h e At a o refi n ery an dd el i v er t h e d i s m an t l edu ni t s t o a s p eci fi edl o cat i o n i n Tu rk ey i n a
co n di t i o n th at wo u l dal l o w them t o b e refu rb i s h edo n s i t e. Pet it i on er t h en
s ub co n tract edwi th t h i rdp art i es t o p erfo rm th e refu rb i s h i n g wo rkth atwas
s p eci fi edi n the Am

b er SPA; the refu rb i s h i n g wo rkwo u l do ccu r wh il e t h e At a o
u n i t s were atth e At a o refi n ery s i t e i n Tu rk ey . 1 0 Up o n co m pl et i o n o f t h e wo rki n

9 (...co n t in u ed ) co n vert edth e l o cat i o n t o an o i l p ro du ct s t erm i n al an d s to rag e faci l i ty .

1 0 Al th o u g h the To p l am

s up p l y ag reem en t al l o wedfo r t h e refu rb i s h i n g wo rk t o t ak e p l ace at th e At a o s i t e, t he u n it s were u l t i m at el y m o v edt o No rt h ern Cy p ru s an d refu rb i s hedth ere.- 1 8 -

[* 1 8 ] Tu rk ey , Am

b er was res p o n s i b l e fo r t ran s p o rt i n g th e n ewl y refu rb i sh edu n i t s t o a s i t e i n Pak i s t an . 1 1 Th e Am b er SPA req u iredp et i t i o ner t o o b t ai n a fl u i dcat al yt i c crack er u n i t (FCCU) 1 2 fo r u s e i n th e Am b er p ro ject
. Pet i t i o n er ag reedt o acq ui re, d is m an t l e,
an d tran s p o rtth e FCCU t o i t s Ho u st o n, Tex as , faci l i ty fo r refu rb i s hi n g wo rk
. Pet i t io n er p u rch as ed an FCCU fro m a t h i rdp art y i n W i ch i t a, Kan s as , fo r u s e i n th e Am b er p ro j ect
. Th e Am b er SPA al s o req u i redp et i t io n er t o p ro vi d e Am b er wi th en gi n eeri n g
s p eci fi cat i on s an ddrawi n g s th atAm b er wo u l d u s e t o i n s t al l th e n ewl y refu rb i s h ed
u n i t s an dco n s tru ctan o p erat in g refi n ery . Am ber was res p o n s ib le fo r creat i n g an d p rep ari n g th e refi n ery

s i t e an derect i n g an di n st al l i n g th e n ewl y refu rb i s h edu n i t s i f i tel ect edt o d o s o . 1 3 If Am b er ch o s e t o erect an d i n s t al l th e refu rb i s hedu n i t s , p et i t i o n er was req u iredt o s uperv i s e t h e co m m i s s i o n i n g o f t h e n ewl y

erect ed

1 1 Th e l o cat i o n atwh i ch Am b er was t o co n s tru cta refi n ery was s ub jectt o ch an ge atAm

b er’ s s o l e d i s cret i o n . Th e av ai l ab l e d o cu m en taryev i d en ce d oes n o t refl ecta fi n al l o cat io n d et erm i nat i o n .

1 2 Fl u i dcat al yt i c crack i n g , a ty p e o f s eco n d ary

u ni t o p erat i o n , i s p ri m ari l y u s ed in p ro du ci n g ad d i t io nal g as o l i n e i n t h e refi n i n g p ro ces s .

1 3 Un d er t h e t erm s o f t h e Am b er SPA, Am

b er was n o t req u iredt o i n s t al l an d erect a refi n ery . If Am

b er el ect edn o tt o i n s tal l , erect , an dco m m i s s i o n t h e refi n ery , th e t o t al co n tract p ri ce was t o b e redu cedb y o nl y $ 7 5 ,0 0 0 o u t o f th e t o t al co n tract p ri ce o f $ 1 0 0 m i l l io n.- 1 9 -

[* 1 9 ] refi n ery . Up on s u cces s fu l co m m i s s i o n i n g o f t h e refi n ery , a qu al i fi ed
en g in eer wo ul d co n du ctp erfo rm an ce t es t s an d i s s u e a “ fi n al accep t an ce rep o rtan d cert ifi cat e” up on s u cces s fu l t es t i n g . Atth at p o i n t, p et it i on er’ s o b li g at i o n s u n d er th e Am b er SPA wo u l den dan dAm b er wo u l das s u m e fu l l res p o n s i b i l i ty fo r t h e refi n ery an di t s o p erat i o n . Inco n si d erat i o n fo r a co m p l et e, s at is fact o ry , an dt i m el y p erfo rm an ce b y

p et i t i o n er o f al l o f i t s o b l i g at io n s u n d er t h e Am b er SPA, Am

b er ag reedt o p ay

p et i t i on er $ 1 00 m i l l i o n . Th e Am b er SPA co n tai n edth e fo l l o w i ng g o v ern in g l aw p ro v i s i o n : Th i s Ag reem en ts h al l b e g o v ern edb y , an d co ns tru edi n acco rd an ce wi th , th e l aws o f t h e St at e o f Tex as , i n cl u d i ng Art i cl e 2 o f t he Un i fo rm Co m m erci al Co d e, ex cep tt o th e ex t en tth atthe Part i es ’ ri gh ts an do b li g at i o n s wi th res p ectt o t it l e t o an ds ecu ri ty i n t eres t s i n th e Equi p m en tm ay

b e g o v ern edb y th e l aw o f t h e ju ri s d i ct i o n i n wh i ch s u ch Equ i p m en ti s l o cat ed
. C. Ti m efram e Fo r p u rp o s es o f acco u n t in g fo r t h e Am b er co n tract , p et i t i o ner’ s es ti m at e o f th e t i m e t h e co n tract wo ul dt ak e t o co m p let e i s i m

p ort an t . Th e Co u rtwi l l l o o kt o th e t erm s o f t h e Am

b er SPA an dwi l l co n s i d er t es t i m on y fro m M r. Bal k e an d
res p o n d en t’ s ex p ertwi tn es s , J o h n Harri s.- 2 0 -

[* 2 0 ] 1
. Am

b er SPA W i th res p ect t o th e Am

b er SPA’ s t i m efram e, s ect io n 3
. 2 .1 o f t h e Am b er SPA p ro v i d ed : BASIC s h al l co m

m en ce * * * [i t s wo rk ] i n acco rd an ce wi th th e Pro jectSch edu l e an ds h al l u s e i t s b es teffo rt s t o en s u re th at* * * [i t s wo rki s] p erfo rm ed i n acco rd an ce wi th the Pro jectSch edu l e. Dat es i n cl u d edi n the Pro

jectSch edu l e are t he b es tes t i m at es av ai l ab l e o n th e d at e o f t h i s Ag reem en tb u tare n o tg u aran t eedd at es o f d el i v ery o r ach i ev em en to f l i st edm i l es t o n es o r o b ject i v es , ex cep tth at Del i v ery o f al l i t em s co m

p ri s i n g th e * * * [co m

p l et e p ack ag e o f cru d e o i l p ro ces s i n g an drefi n i n g eq u ip m en t ] i s g uaran t eedt o o ccu r n o l at er th an the Del i v ery Dead li n e [No v em b er 1 5 , 2 01 0 ] . M o d i fi cat i o n s t o th e Pro jectSch edul e s h al l o n l y b e m ad e wi th t h e p ri o r wri tt en ap p ro v al o f * * * [Am

ber]
. A p ro ject s ch edu l e was n o tat t ach edt o t h e Am b er SPA, an dp et i t i on er d i d
n o to ffer i n t o ev i d en ce a p ro jects ch edu l e o r an y

o th er d o cu m en t at i o n thatwo u l d refl ectd at es b y

wh i ch th e p art i es ex p ect edth e v ari o us co m p o n en t s o f t he p ro

ject t o b e co m p l et ed
. Al th ou g h the Am

b er SPA d i d n o tco nt ai n a p ro jects ch edu l e, t he ag reem en t req u i redp et it i on er t o d el i v er th e l as tu n it“ n o l at er t h an ” No v em b er 1 5 , 2 0 10
. Pet i t io n er was en ti t ledt o b o n u s p aym en ts i f t h e d el i v ery d at e fo r t h e u n i ts
o ccu rredb efo re No v em

b er 1 5 , 2 0 1 0 , an ds ub

ject t o p en al t i es i f t h e d el i v ery d at e
o ccu rredaft er No v em

ber 1 5 , 2 0 1 0
.- 2 1 -

[* 2 1 ] Im p o rt an t l y , ju s tl i k e t h e Pet ro m ax x SPA t he Am b er SPA d i dn o ti n cl u d e t erm s req u i ri n g Am

b er t o s h ip th e refu rb i s h edu n i t s b y a s p eci fi c d at e, b eg i n o r fi ni s h creat i ng the refi n ery s i t e b y a s p eci fi c d at e, o r b eg i n o r fi n i s h i n s t al l i n g an d erect i n g t h e n ewl y

refu rb is h edu n i t s i n t o a refi n ery b y a s p eci fi c d at e. Pet it i o n er d i dn o t i n tro du ce i n t o ev i d en ce an y d o cu m en t at io n refl ect i n g d at es b y wh en p et i t i o n er o r Am

b er ex p ect edAm

ber t o b eg i n o r fi n is h i t s o b li g at i o n s . If Am b er el ect edt o erect th e refi n ery , p et i t i o ner was req u i redt o p ro v i d e at l eas t on e fi el d en g i n eer t o s up erv i s e t h e co m m is s i o n i n g p ro ces s . Aft er s u cces s fu l
co m m i s s io n in g, a qu al ifi eden gi n eer wo ul d co n ductp erfo rm an ce t es ts wh i ch

“ m u s ti n an y cas e b e co m

p l et edwi th i n s i x ty

(6 0 ) d ay s , o r s u ch o th er p eri o das m ay b e ag reedi n wri t i n g b y

th e Part i es , fro m

the d at e o n wh i ch Co m

m i s s i o ni n g h as
co m m en ced .” On ce t h e qu al i fi eden g i neer was s at i s fi edth atth e p erfo rm an ce t es t s
s h o wedth at th e n ewl y

i ns t al l edan derect edrefi n ery m etcert ai n s t an d ard s , h e was t o i ss u e a rep o rt . At th atp o i n t , p et i t i o n er’ s o b l ig at i o n s u n d er t h e Am b er SPA
wo u l den dan dAm

ber wo u l das s u m e fu ll res p o n s i bi l it y fo r th e refi n ery an di t s
o p erat i o n . Th e Am

b er SPA d i dn o ts p eci fy

an o v eral l p ro

jectco m p l et i o n d at e. W i th res p ect t o th e t erm s o f p aym en t , th e Am ber SPA i n d i cat edth atth e p art i es an t i ci p at edth e fi n al p aym en t ’ s b eco m i n g du e o n th e earl i er o f: (1 ) 1 0
m o nt h s aft er t h e “ Del i v ery Dat e”, wh i ch was th e d at e o n wh i ch p et it i on er- 2 2 -

[* 2 2 ] d el i v eredth e refu rb i s hedu n i t s t o i t s faci l i ty i n Ho u s t o n , Tex as , o r (2 ) t h e

“ Fi nal Accep t an ce Dat e”, wh i ch was th e d at e o n wh ich th e qu al ifi eden g i n eer i s su eda co m

p let i o n rep o rt
. 1 4 Becau s e t he Am

b er SPA, l i k e t he Pet ro m ax x SPA, d id n o t s p eci fy d at es b y wh en Am b er was req u i redt o s h i p th e refu rb i s hedu n i t s , fi n i sh creat in g an d p rep ari n g th e refi n ery

s i t e, o r fi n i s h i n s t al li n g an d erect i n g th e n ewl y refu rb i s h ed
u n i t s i nt o a refi n ery , i ti s u n cl ear ex act l y wh en the p art i es ex p ect edth e Am b er SPA t o b e co m

p l et ed
. 2
. M r. Bal ke’ s Tes t i m o n y M r. Bal ke t es t i fi ed th at th e Am b er refi n ery

p ro jectwas s im

pl er fro m a l o g i s t ics p ers p ect i v e t h an th e Pet ro m ax x refi neryp ro ject an dwas l i k el y

t o b e fi ni s h edfas t er t han Pet ro m ax x , s t art i n g fro m each res p ect i v e co n tract ’ s s t artd at e. In ad d it i o n h e p o i n t edt o th e Am b er SPA, wh i ch refers t o th e p o s s i b i l i ty th at p et i t i o n er wo u ldu s e 3 -D l as er s can n i n g an dm o d el i n g . As wi th th e Pet ro m ax x SPA, M r. Bal k e’ s i n ten twas fo r p et it i o n er t o u s e p aral l el p ro ces s i ng i n fu l fi l l i n g th e co n tract o bl ig at i o n s o f th e Am b er SPA.

1 4 Al th o u g h the Am

b er SPA p ro v i d ed fo r d el i v ery o f al l u n i t s t o Ho u s t o n , Tex as , th e p art i es s t i p u l at edth atp et i t i o n er an dAm b er n ev er i nt en d edfo r t h e At a o refi n ery u n i t s t o b e s h i p p edfro m Tu rk ey t o Ho u s t o n . See i n fra n o t e 1 5
.- 2 3 -

[* 2 3 ] 3
. Res p o nd en t ’ s Ex p ertW i tn es s Tes t i m o n y M r. Harri s o pi n edth ata 4 -1 ' 2 -y ear t i m efram e t o co m pl et e t h e Am

b er refi n ery co n tract was “ o p t i m i s t i c b u t p os s i b l e.” In arri v i ng ath i s co n cl u s i o n , M r. Harri s n o t ed th at th e “ Am ber p l an ti s d o ub le t h e s i ze o f t h e * * * [Pet ro m ax x ] p l an t , i n v o l v i n g m ore wo rkan dt i m e.” M r. Harri s al so n o t edth atth e o nl y p erfo rm an ce d at e s p eci fi edi n t h e Am b er SPA was wi th res p ectt o p et it io n er’ s d el i v ery o b l i g at i o ns ; p et i ti o n er was req u i redt o d el iv er t h e eq u i p m en tb y No v em b er 1 5 , 2 0 1 0 , ro ug hl y

2 8 m o nt h s aft er th e d at e o n wh i ch th e Am b er SPA
was ex ecu t ed . Becau s e t h e Am b er refi n ery p ro

jectd i d n ots p eci fy

d at es b y wh i ch th e rem ai n i n g co m

po n en ts o f the Am

b er SPA wo u l db eg i n an d fi ni s h , M r. Harri s
was req u ired t o m ak e as s u m p t i o n s an des t i m at e th e t i m e i two u ldt ak e t o co m p l et e th e rem ai n i n g t as k s , wh ich h e s u m m ari zedas fo l l ows : On e m u s t m ak e an es t im at e o f th e reas o n ab l e t i m e req ui red t o s h i p the equ i pm en t , acqu i re t h e b al an ce o f t h e eq u i p m en t , s up p l i es , an d s erv ices n eces saryt o * * * co m p l et e t he Am

b er refi n ery i n Pak i s t an . Fo rei g n s h i pp i n g i n th e d ev el o p i n g wo rl d i s d i ffi cu l tt o es t i m at e. Sev en m o n th s s eem s l i k e an o p ti m i st i c p eri o dt o h av e ev eryth i n g i n p l ace i n Pak i s t an , as s u m i n g n o d el ay s i n l on g l ead -t im e equ i p m en t , n o l o cal s ho rt ag es o f n eces s ary s up p li es o r s carci ty

o f s k i l l edl ab o r. Fo l l owi n g Own er acq u i s i t i o n o f t he eq u ip m en t , an d p res um i n g fi ni s h eden g i n eeri n g p ro ceed s t i m el y , fi n al erect i o n o f t h e refi n ery co u l d h ard l y

b e ex p ect edi n l es s th an 1 8 m o n th s . If co m m i s s i o n in g p ro ceed s p ro m

p t l y , an d few p ro bl em s are fo u nd , th i s t as ks h o ul dt ak e- 2 4 -

[* 2 4 ] two m o n th s , fo l lo wi n g b y an o th er tw o m o n th s fo r a p erfo rm an ce ru n o n th e refi n ery . [ 1 5 ] As wi th th e Pet ro m ax x SPA, M r. Harri s ’ o v eral l co ncl u s io n wi th res p ectt o th e Am b er SPA’ s t i m efram e d i dn o tt ak e p et it i o n er’ s p aral l el p ro ces s i n g s y s t em i n t o co n s i d erat i o n . D. Pro jectOu t co m e Onth e s am e d ay

th atp et i t i o ner an dAm

b er ex ecu t edthe Am

b er SPA t h ey al s o ex ecu t eda “ Si d e Let t er” t o th e Am ber SPA wh ereu nd er t h e p art i es ag reed th atth e du e d at e fo r cert ai n i ns t al l m en tp aym en t s wo u l d b e ex t en dedb ecau s e Am b er h adn o t y eto b t ai n eds u ffi ci en tfi n an ci n g t o effect p aym en tfo r th e i n s t al l m en t s . Aft er ap p ro x i m at el y 1 8 m o n th s , o n J an u ary

1 8 , 2 0 1 0 , th e p art i es ag reedt o can cel th e Am

b er SPA an d rel eas e t h em s el v es fro m al l res po n si b i l i t i es
an d l i ab i l i t i es u nd er t h e SPA’ s t erm s . At th e t im e o f t ri al , th e FCCU was s t i l l i n

1 5 M r. Harri s ’ o pi n i o n was fo rm ed , i n p art , o n th e b as i s o f m o v i ng th e At a o refi n ery fro m Tu rk ey an dthe FCCU fro m W i ch i t a t o p et i t i o ner’ s faci l i ty i n Ho u s t o n fo r cl ean i n g an d i n s p ect i o n an d th en s h i p p i n g t h o se refu rb i s h edp art s t o Pak is t an . Wh i l e t h e FCCU u n itwas t o b e t ran s p o rt edfro m W i ch i t a t o Ho u s t o n , an d th enfro m Ho u s t o n t o Pak i s t an , th e p art i es s t i p u l at edthatp et i t i o n er an d Am b er n ev er i n ten d edfo r t he d i s m an tl edAt a o refi n ery t o b e s h i pp ed fro m

Tu rk ey t o Ho us t o n ev en tho u g h d el i veryt o Ho u s t o n was s p eci fi edi n th e Am b er SPA. Th e s ti p u l at io n was ex ecu t edb y th e p art i es aft er t h e fi l in g d at e o f t h e ex p ert rep o rt
.- 2 5 -

[* 2 5 ] p et i t i o n er’ s co n s tru ct i o n y ardi n Tex as , an dthe At a o refi n ery u ni t s were s t i l l i n No rth ernCy

p ru s . IV. Pet i t i o ner’ s Fed eral In co m e Tax Retu rn s Fro m 2 00 5 t o 2 0 1 0 p et i ti o n er acco un t edfo r th e Pet ro m ax x an d Am ber
co n tract s u s in g th e co m

p l et edco n tract m et h o d o f acco u n t i ng ; each retu rn was p rep aredan ds i g n edb y

th e s am e cert i fi edp ub l i c acco u n t an t(CPA). A t ax p ay er
u s i n g th e co m

p l et edco n tract m et h o do f acco un t in g reco g n i zes al l i n co m e an d
ex p en s es as s o ci at edwi th a co n tract o n l y i n th e co n tract ’ s co m

pl et i o n y ear. See
s ec. 1 .4 6 0-4 (d ), In co m e Tax Reg s . Pet i t i o n er’ s p o s i t i o n i s t h atn ei th er co n tract
was co m p l et ed . Becau s e p et i t i o n er acco u n t edfo r t he co n tract s u s in g th e
co m p l et edco n tract m et h o d o f acco u n t i n g , i td i dn otrep o rt i nco m e o r ex p en s es
as s o ci at ed wi th ei th er co n tract du ri n g th e y ears ati ss ue o r earl i er b ecau s e t h e
co n tract s were n o t co m

pl et ed . Pet i t io n er’ s s ch edu l e o f al l o f i t s co n tract s fo r 2 0 0 7 -2 0 1 0 was p ro vi d edt o res p o n d en t . Th is i n fo rm at i o n was n o trep o rt edo n i ts i n co m e t ax retu rn s . Th e s ch edu l es refl ect edp et it i on er’ s an n u al co n tract rev en u e,
es t i m at edt o t al co nt ract p ri ces , an n u al co nt ract ex p en s es , an des t i m at edt o t al
co n tract ex p en s es fo r t h e Pet ro m ax x an dAm b er p ro ject s as fo l l o w s :- 2 6 -

[* 26 ] Pet ro m ax x p ro

ject

Year A n n u al

rev en u e Es t i m at ed t o t al

co n tract p ri ce An n u al

ex pen s es Es t i m at edt o t al

co n tract ex pen s es Befo re 2 0 0 7 $ 2 0,3 9 5,9 1 7 $ 1 2 2 ,2 5 0 , 0 0 0 $ 1 6,3 1 6 ,7 3 8 $ 9 7,8 0 0 ,0 0 0 20 0 7 4 9 ,7 0 8 ,3 6 1 1 2 2 ,2 5 0 , 0 0 0 3 9,7 6 6 ,6 8 7 9 7 ,8 00 ,0 0 0 20 0 8 3 1 ,9 7 8 ,6 2 3 1 2 2 ,2 5 0 , 0 0 0 2 5,5 8 2 ,8 1 9 9 7 ,8 00 ,0 0 0 20 0 9 8 6 6,6 3 1 1 2 2 ,2 5 0 , 0 0 0 7 0 9 ,2 95 9 7 ,8 00 ,0 0 0 20 1 0 1 9 2,7 0 7 1 2 2 ,2 5 0 , 0 0 0 1 5 4 ,1 74 9 7 ,8 00 ,0 0 0 To t al $ 1 0 3,1 4 2,2 3 9 $ 8 2,5 2 9 ,7 1 3
Am b er p ro ject

Year A n n u al

rev en u e Es t i m at ed t o t al

co n tract p ri ce An n u al

ex pen s es Es t i m at edt o t al

co n tract ex pen s es Befo re 2 00 7
-- -- -- -- 20 0 7
-- -- -- -- 20 0 8 $ 3 3 ,2 5 2 ,6 3 4 $ 1 0 1 ,0 0 0 , 0 0 0 $ 2 6,6 6 7 ,9 5 4 $ 8 1,0 0 0 ,0 0 0 20 0 9 1 ,4 1 8 ,7 7 5 1 0 1 ,0 0 0 , 0 0 0 1 ,1 3 7 ,8 3 5 8 1 ,0 00 ,0 0 0 20 1 0 3 1 ,5 8 5 1 0 1 ,0 0 0 , 0 0 0 2 5 ,3 25 8 1 ,0 00 ,0 0 0 To t al $ 3 4 ,7 0 2 ,9 9 4 $ 2 7,8 3 1 ,1 1 4 Res p o n d en td et erm i n edth at p et i t i o n er was i n el i g i bl e t o u s e t h e co m p l et ed
co n tract m et h o do f acco u nt i n g fo r t h e Pet ro m ax x an dAm b er SPAs . Th e n o t i ce o f d efi ci en cy

refl ect edal t ern at i v e acco u n ti n g p os i t i o n s fo r p et i ti o n er’ s p ro ject s .- 2 7 -

[* 2 7 ] Un d er ei th er p o s i t io n , res p o n d en td et erm i n edthatp et i t i on er was n o t el i g i b l e t o rep o rti n co m e u n d er t h e co m p l et edco n tract m et h o d o f acco u n ti ng . Res p o n d en t d et erm i n edth atth e Pet ro m ax x SPA s h o u l dh av e b een rep o rt edas a m anu fact u ri n g
co n tract an d thatp et it i o n er s h o u l dh av e acco u nt edfo r t h e Pet ro m ax x SPA u s i n g th e accru al m et ho d o f acco u n t in g . 1 6 As h i s al t ern at i v e p o si t io n , res p o nd en t d et erm i n edth atp et i t i o n er m us tacco u n tfo r b o th co n tract s u s i n g th e p ercen t ag e o f
co m p l et i o n m et h od b ecau s e p et i t i o n er co u ldn o t h av e es t i m at edth ei r co m p l et i o n wi th i n th e t wo -y ear p eri o d b eg i n n i n g o n th e res p ect i v e co n tract co m m en cem en t d at es . See s ec. 4 6 0 (e). As d i s cu s s edi n fra, th e d et erm i n at i o n o f wh et her ei th er co nt ract i s a
m an u fact u ri n g co n tract o r a co ns tru ct i o n co n tract i s i rrel ev an tb ecau s e t h e s ect i o n 4 6 0 d efau l tp ro v i s i o n ap p l ies . Thu s , th e fo l lo wi n g fact s an dcal cu l at io n s are d eri v edfro m res p on d en t’ s al t ern at i v e p o s i t i o n , i .e., th atp et i t i o ner was req u i redt o
acco u n t fo r b o th co n tract s u s i n g th e p ercen t ag e o f co m p l et i o n m et h o d
. 1 7

1 6 Al th o u g h res p o n d en t ’ s p ret ri al m em o ran dum as s ert s th atb o th the Pet ro m ax x an dAm

ber co n tract s are m anu fact u ri ng co n tract s, th e n o t i ce o f d efi ci en cy

d et erm i n es th ato n l y

th e Pet ro m ax x co n tract i s a m an u fact u ri n g co n tract
. Res p o n den td i dn otam en dh i s an s wer t o as s ert o th erwi s e.

1 7 Becau s e t h e d efi ci en cy

an dp en al ty

am o u n t s refl ect edo n t h e face o f t h e n o t i ce o f d efi ci en cy

are b as edo n res p o n den t ’ s p ri m ary p o s i t i o n , th e ad

ju st m en t s d i s cu s s edi n fra wi l l n o tm at ch th e d efi ci en cy an dp en al ty

am ou n t s refl ect edo n t h e

(co n ti n u ed ...)- 2 8 -

[* 2 8 ] Th e p ercen t ag e o f co m p l et i o n m et h odo f acco u n t i n g req u i res t ax p ay ers t o
reco g n ize i n co m e an dex p en ses th ro u g h o ut the du rat i o n o f a co n tract o n t h e b as i s
o f t h e p ercen t ag e o f t h e co n tract th ati s actu al l y co m p l et ed . Acco rd in g l y , res p o n d en t’ s al tern at iv e p os i ti on ad ju st edp et i t i o ner’ s g ro s s recei p t s an dco s to f g o o d s s o l dfi g u res fo r t h e Pet ro m ax x an d Am b er SPAs o n th e b as i s o f t he p ercen t ag e t hat th e co n tract s were co m p l et edi n 2 0 0 9 an d 2 0 1 0
. To d et erm i n e t h e p ercen t ag es o f t h e Pet ro m ax x an dAm b er SPAs th atwere
co m p l et ed , res po n d en tu s edth e s ch edu l e o f co n tract s p et i t i o n er h adp ro v id ed ; i n
acco rd an ce wi th s ect io n 4 6 0(b ), res po n d en tad d edth e an n ual ex p en s es p et i t i o n er h ad actu al l y

i n cu rredan dthen d i vi d ed tho s e t o tal s b y th e es t i m at edt o t al co n tract
co s t s . Fo r 2 0 0 9 res p on d en t d et erm i n ed th atp et i t i on er h ad co m pl et ed ap p ro x i m at el y 8 4 .2 3 % o f t h e Pet ro m ax x SPA 1 8 an dap pro x i m at el y 3 4 .3 3 % o f t h e Am b er SPA, 1 9 an dfo r 2 0 10 res p o n d en td et erm i n edth at p et i t io n er h adco m p l et ed

1 7 (...co n t i nu ed ) face o f t h e n o t i ce o f d efi ci en cy .

1 8 Pet i t i o ner h ad i n cu rred$ 8 2 ,3 75 ,5 3 9 o f act u al ex p en s es b et ween 2 0 0 5 an d 2 0 0 9 . Pet i t i o n er es ti m at ed th e t o t al co n tract co s t s t o am o u ntt o $ 9 7 .8 m i l l i o n . Actu al ex p en s es o f $ 8 2 ,3 7 5 ,5 3 9 d i v i d edb y an es t i m at edt o t al co n tract co s to f $ 9 7 .8 m i l l i o n equ al s 8 4.2 3 %
.

1 9 Pet i t i o ner h ad i n cu rred$ 2 7 ,8 05 ,7 8 9 o f act u al ex p en s es b et ween 2 0 0 5 an d 2 0 0 9 . Pet i t i o n er es ti m at ed th e t o t al co n tract co s t s t o am o u ntt o $ 8 1 m i l l i o n . (co n ti n u ed ...)- 2 9 -

[* 2 9 ] ap pro x i m at el y

8 4
. 3 9 % o f t h e Pet ro m ax x co nt ract an dap p ro xi m at el y 3 4 .3 6 %
o f t h e Am

b er co n tract
. Res p o n d en tth en m

u l t i p l i edth e p ercen t ag e each co n tract was co m p l et edb y th e es t im at edt o t al co n tract p ri ce t o arri v e atth e am o u n t s p et i t i o n er s h o u l dh av e
reco g n izedas i n co m e h ad i tacco u n t ed fo r t h e co n tract s u s in g th e p ercen t ag e o f
co m p l et i o n m et h od o f acco u n t i n g . Fo r 2 0 0 9 res p o n den tad ju s t ed p et i t io n er’ s g ro s s recei p ts b y

$ 13 7 ,6 4 4,4 7 5. 2 0 Becau s e p et i t i o n er d i dn ot rep o rtan y i n co m e o r
ex p en s es fro m

th e Pet ro m ax x o r Am

ber co n tract fro m

2 0 05 t o 2 00 9 , th e 2 0 0 9 ad ju s t m en tacco un t s fo r al l i n co m e t h atp et i t i o n er s h o u ldh av e reco g ni zedb et ween

1 9 (...co n t i nu ed ) Actu al ex p en s es o f $ 2 7 ,8 0 5 ,7 8 9 d i v i d edb y an es t i m at edt o t al co n tract co s to f $ 8 1 m i l l io n equ al s 3 4 .3 3 %.

2 0 Fo r t h e Pet ro m ax x SPA, res p o n d en t m u l t ip l i edth e $ 1 2 2 ,2 5 0 ,0 0 0 es t i m at ed t o t al co n tract p ri ce b y an 8 4 .2 3% co m p l et i o n p ercen t ag e t o arri v e ata $ 1 0 2 ,9 7 1 ,1 7 5 g ro s s recei p t s ad ju s t m en tfo r i nco m e fro m th e Pet ro m ax x SPA fro m 2 0 0 5 t o 2 0 0 9 . Fo r th e Am b er SPA, res p o n d en tm

u lt i pl i edth e $ 10 1 m i ll i o n es t i m at edt o t al co nt ract p ri ce b y a 3 4 .3 3 % co m

p l et i on p ercen t ag e t o arri v e ata $ 3 4 ,6 7 3 ,3 0 0 g ro s s recei p t s ad j u s t m en t
. Int o t al , th es e ad ju s t m en ts am ou n tt o $ 1 3 7 ,6 4 4 ,4 7 5
.- 3 0 -

[* 3 0 ] 2 0 0 5 an d2 00 9 u n d er t h e p ercen t ag e o f co m p l et i o n m et ho do f acco u n t i n g . 2 1 Fo r 2 01 0 res p o n d en tad

j u s t edp et it i on er’ s g ro s s recei p t s b y $ 22 5 , 9 0 0
. 2 2 Res p o n d en tal l o wed co rres p o n d i n g ad ju st m en t s fo r co sto f g o o d s s o l dan d
m ad e an ad

ju s tm en tfo r a s ect i o n 4 8 1 (b ) l i m i tat i on cred i tfo r 2 0 0 9 t o fu rt h er redu ce p et i t i o n er’ s t ax l i ab il i ty . Th e ad ju s t m en t s i n th e n o t i ce o f d efi ci en cy g i v e ri se t o th e d efi ci en ci es an dp en al t i es cu rren tl y ati ss u e. Pet i t i o n er ch al l en g es th e d efi ci en ci es an dp en al t i es , arg u i n g t h ati t was en ti t ledt o acco u n t fo r t h e Pet ro m ax x an dAm

ber SPAs u s i n g th e co m

p l et edco n tract m et h odo f acco u n t i n g . As o f t h e d at e o f t h e n o ti ce o f d efi ci en cy , Au g u s t2 2, 2 0 1 3 , p et i t i o n er h adn ei th er

2 1 Fo l l o wi n g a ch an g e o f acco u n t i n g m eth o d , th e Co m m i s s i o n er m ay

m ak e an y n eces s ary ad

ju s t m en t s t o p rev en tt ax ab l e i n co m e fro m b ei n g dupl i cat edo r o m it t edas a res ul to f t he ch an g e u n d er s ec. 4 8 1 (a). Fo r p u rp os es o f s ec. 4 8 1 (a) ad ju s t m en t s , o n ce t h ere h as b een a ch an g e i n the m et ho do f acco un t in g , n o s t atu t e o f l i m i t at i o n s ap p l i es t o th e Co m m i s s io n er’ s au tho ri ty

t o co rrect erro rs o n o l dt ax retu rn s . See M i n g o v . Co m m i s s i o ner, 7 7 3 F.3 d6 2 9 , 6 3 6 (5 th Ci r. 2 0 1 4 ), aff’ g T.C. M em o . 2 01 3 -1 4 9
.

2 2 Fo r t h e Pet ro m ax x SPA, res p o n d en t m u l t ip l i edth e $ 1 2 2 ,2 5 0 ,0 0 0 es t i m at ed t o t al co n tract p ri ce b y an 8 4 .3 9% co m p l et i o n p ercen t ag e t o arri v e at$ 1 0 3 , 1 6 6 ,7 7 5
. Aft er s ub tract i n g th e g ro s s recei p t s ad ju st m en tfo r 2 00 9 o f $ 1 0 2 ,9 7 1 ,1 75 res p o n d en t arri v edata t o t al ad ju s t m en tfo r t h e Pet ro m ax x SPA o f $ 19 5 ,6 0 0 fo r 2 0 1 0 . Fo r t h e Am

b er SPA, res p o n d en t m

u l t i pl i ed th e $ 1 0 1 m i ll i on es t i m at edt o t al co n tract p ri ce b y

a 3 4.3 6 % co m

p l et i o n p ercen t ag e t o arri ve at $ 3 4 ,7 0 3 , 6 0 0. Aft er s ub tract in g th e g ro s s recei p t s ad ju s t m en t fo r 2 00 9 o f $ 3 4 ,6 7 3 ,3 0 0 res po n d en t arri v edata t o t al ad

ju s tm en tfo r t h e Am

b er SPA o f $ 3 0,3 0 0 fo r 2 0 1 0. Th es e ad ju s t m en t s t o t al $ 2 2 5 ,9 0 0
.- 3 1 -

[* 3 1 ] rep o rt ed an y

o f t h e Pet ro m ax x o r Am

b er co n tract i n co m e n o r cl ai m ed d educt i o n s fo r an y

o f t h e co n tract ex p en s es .

OPINION I. Bu rd en o f Pro o f Gen eral ly , th e Co m

m i s s i o n er’ s d et erm i n at i o n s s etfo rt h i n a n ot i ce o f d efi ci en cy

are p res u m edco rrect , an dth e t ax p ay er b ears th e b u rd en o f s h o wi n g th e d et erm i n at i o n s are i n erro r. Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). If a t ax p ay er’ s m eth o do f acco u n t i n g d o es n o tcl earl y refl ect i nco m e,
s ect i on 4 4 6 (b ) al l o ws th e Co m m i s s io n er t o ch an g e t h e t ax p ay er’ s m et h o do f
acco u n t in g t o o n e t h atd o es cl earl y refl ecti n co m e. Th e Co m m i s si o n er i s g ran t ed b ro add i s cret i o n i n d et erm i ni n g wh et h er an acco u n ti n g m et h o d cl earl y refl ect s i n co m e, an dth atd et erm i n at i o n i s en t i t ledt o m o re t h an th e u s u al p res u m p t i o n o f
co rrect nes s . See Co m

m i s si o ner v . Han s en , 3 6 0 U.S. 4 4 6 , 4 6 7 (1 9 5 9 ); Th e Ho ward Hu g h es Co ., LLC v . Co m m i s s i o n er, 1 4 2 T.C. 3 5 5 , 3 7 6 , aff’ d , 8 0 5 F.3 d1 7 5 (5 th Ci r. 2 0 15 ); Sh ea Ho m es , In c. v . Co m m is s io n er, 1 4 2 T.C. 6 0 , 8 4 (2 01 4 ), aff’ d , 8 34 F.3 d1 0 6 1 (9 th Ci r. 2 0 16 ). Th e qu es t i o n o f wh eth er a p art i cu l ar acco u n ti n g
m et h o d cl earl y

refl ect s i n co m e i s a qu es ti o n o f fact t o b e d et erm i ned o n a cas e-b y cas e b as i s . See Th e Ho wardHu g h es Co ., LLC v
. Co m m i s s i o ner, 1 4 2 T.C. at3 7 6;- 3 2 -

[* 3 2 ] Sh ea Ho m es , In c. v . Co m m i s s i o n er, 1 4 2 T.C. at8 5 ; An s l ey -Sh ep p ard

Bu rg es s Co . v . Co m

m i s si o ner, 1 0 4 T.C. 3 6 7 , 3 7 1 (1 9 9 5 ). To p rev ai l, the t ax p ay er m u s t es t ab l is h thatth e Co m m i s s i o n er ab u s edh i s d i s cret i o n i n ch an g in g the m et h o do f acco u nt i n g. M i n go v . Co m m i s s i o n er, 7 7 3 F.3 d6 2 9 , 6 3 5 (5 th Ci r. 2 0 1 4 ), aff’ g T.C. M em o . 2 01 3 -1 49 ; Th e Ho wardHu g h es Co ., LLC v . Co m

m i s s i o n er, 1 4 2 T.C. at3 7 6 ; Sh ea Ho m es , In c. v . Co m m i s si o n er, 1 4 2 T.C. at8 5. Th e t ax p ay er b ears a h eav y b urd en o f p ro o f, an dth e Co m m i s s i on er’ s d et erm i nat i o n i s n o tt o b e s etas i d e u n les s s h own t o b e p l ai n l y arb i trary . M i n g o v . Co m

m i s s i o n er, 7 73 F.3 d at6 3 5 ; An sl ey -Sh ep p ard -Bu rg es s Co . v . Co m m i s s i o n er, 1 0 4 T.C. at3 7 0-3 7 1 (ci t i n g Th o r Po wer To o l Co . v . Co m m i s s i on er, 4 3 9 U.S. 5 2 2 , 5 3 2 -5 3 3 (1 97 9 )). Bu t th e Co m m i s s i on er m ay n otch an g e a t ax p ay er’ s m et ho do f acco u n t i n g fro m an i n co rrectm et h o dt o an o th er i n co rrect
m et h o d; n o r m ay

th e Co m m i s s i o n er ch an g e a t ax p ay er’ s m et h o do f acco un t i n g wh ere a t ax p ay er’ s m et h o do f acco u nt i n g i s cl earl y an accep t ab l e m et h o d an d cl earl y refl ect s i n co m e. Th e Ho wardHu g h es Co ., LLC v . Co m m is si o n er, 1 4 2 T.C. at3 7 6 ; Sh ea Ho m es , In c. v . Co m m i s s i o n er, 1 4 2 T.C. at8 5
. II. Lo n g -Term

Co n tract s Sect io n 4 6 0 g o v ern s h o w t ax p ay ers rep o rt i n co m e fro m l o ng -t erm

co n tract s . Sect i o n 4 6 0 (f)(1 ) d efi n es a l o n g -t erm co n tract as “ an y co n tract fo r t h e- 3 3 -

[* 3 3 ] m anufact u re, b u i l d i ng , i n s t al l at i o n , o r co n s tru ct i o n o f p ro p ert y i f s u ch
co n tract i s n o tco m

pl et ed wi th i n th e t ax ab l e y ear i n wh i ch s u ch co n tract i s en t ered i n t o .” Th e Am

b er an dPet ro m ax x SPAs were b o th fo r t h e “ m an u factu re, b u i l d i n g , i n s t al l at i on , o r co ns tru ct i o n o f p ro pert y ”, an dn ei th er co n tract was co m pl et ed wi th i n th e t ax ab le y ear i n wh ich i t was en tered i nt o . Thu s , th e co nt ract s are l o n gt erm co n tract s u n der s ect i o n 4 6 0
. A. Percen t ag e o f Co m p l et i o n M et h od Gen eral ly , t ax p ay ers wh o recei ve i n co m e fro m l o n g -t erm

co n tract s m

u s t
acco u n t fo r t h ati n co m e u s i ng th e p ercen t ag e o f co m pl et i o n m et h odo f acco u n t i n g . Sec. 4 6 0(a). Th is m et h o des s en t i al l y req ui res a t ax p ay er t o reco g ni ze i n co m e an d
ex p en s es th ro u g h ou tthe du rat i o n o f a co n tract . See s ec. 4 6 0 (b ); s ee al so Th e Ho wardHu g hes Co ., LLC v . Co m m i s s i o n er, 1 4 2 T.C. at3 82 ; Sh ea Ho m es , In c. v . Co m m i s s i o n er, 1 4 2 T.C. at8 5
. As arg u ed h ere, h o wev er, t wo ex cep t i o n s t o th i s
ru l e m ay ap p l y : s ect i o n 4 6 0(f)(2 ) ex cl u d es cert ai n m an ufact uri n g co nt ract s an d
s ect i on 4 6 0 (e)(1 )(B) ex cl u d es cert ai n co n st ru ct io n co nt ract s . As d i s cu s s edi n fra, th e Co u rtn eedn o td et erm i n e wh et h er t h e Pet ro m ax x an dAm b er SPAs are fo r
m an u fact u ri n g o r co n s tru ct i o n b ecau s e n ei ther ex cep t i o n ap p li es ; s ect i o n 4 6 0 req u i res p et i t i o n er t o u s e t h e p ercen t ag e o f co m p let i o n m et h o do f acco u n t i n g fo r b o th co n tract s .- 3 4 -

[* 3 4 ] B. Ex cep t i on fo r Cert ai n M an u fact u ri ng Co n tract s Res p o n d en t ’ s p ri m ary

p o s i t i o n i s th atth e Pet ro m ax x SPA i s a
m an u fact u ri n g co n tract an dthati t fai l s t o m eetth e s ect i o n 4 6 0 (f)(2 ) req u i rem en t s t o b e t reat edas a l o n g-t erm co n tract . Acco rd i ng l y , res po n d en t as sert s , p et i t i o n er i s req u i redt o u se t h e accru al m eth o do f acco u n t i n g . Pet i t i o ner d i s ag rees , arg u i n g th ats ect i o n 4 6 0 (f)(2 ) i s i n ap p l i cab l e b ecau s e t h e co n tract s are co ns tru ct i o n
co n tract s--n o tm an u fact u ri n g co n tract s . M an u fact u ri n g co n tract s are g en eral l y n o ttreat edas l o n g -t erm

co nt ract s , m ean i n g th e l o n g -t erm

co n tract acco u n t i n g ru l es o f s ect i o n 4 6 0 wo u l dn o tap p l y . See s ec. 4 6 0 (f)(2 ). Ho wev er, i f a co n tract i n v o l v es the m anu fact u re o f (A) an y
u n i qu e i t em

o f a t y pe n o tn o rm al l y

i n cl u d edi n th e fi n is hed g o o d s i n v en t o ry o f t h e t ax p ay er o r (B) an y

i t em wh i ch n o rm al l y req u i res m o re t h an 1 2 cal en d ar m o n th s t o
co m p l et e, t h en th e co n tract i s treat edas a l o n g-t erm co n tract an di s s ub

jectt o
s ect i on 4 6 0 . See s ec. 4 6 0 (f)(2 )(A) an d(B). Ati s s ue are t wo co n tract s --each fo r t h e d i sas s em b l y , tran s p o rt at i o n , refu rb i sh i n g , as sem

b ly , an dcert i fi cat i o n o f a n ew o i l refi n ery . Pet i t i o n er i n tro du ceds u ffi ci en t ev i d en ce, co rro b o rat edb y th e t es t i m o n y

o f M r. Bal k e,
s h o wi n g th atth e p ro ces ses i n v o l v edn o rm al l y req u ire m ore t han 1 2 cal en d ar
m o nt h s t o co m

p l et e. Res p o n d en t ’ s ex p ert , M r. Harri s, ag reed , s t at i ng th atth e- 3 5 -

[* 3 5 ] as s em

b l y p ro ces s al o n e “ co u l dh ard l y b e ex p ect edi n l es s than o n e y ear.” As s um i n g wi th o u tfi n d i n g th at th es e co n tract s are fo r t h e m an u factu re o f t w o o i l refi n eri es , each wo ul dfal l u n d er t h e s ect i o n 4 6 0 (f)(2 )(B) req u irem en tth ati tb e treat ed as a l o n g -t erm

co n tract u n d er s ect i o n 4 6 0 an dth us g en eral l y acco u n t edfo r
u s i n g th e p ercen t ag e o f co m p l et i o n m et h o d o f acco un t i n g . Th e Co m m is s i o n er m ay

n o tch an g e a t ax p ay er’ s m et h o d o f acco u n ti n g fro m
an i n co rrect m eth o dt o an o th er i n co rrect m et h o d . Th e Ho wardHu g h es Co ., LLC
v . Co m m i s s i o n er, 1 4 2 T.C. at3 7 6 ; Sh ea Ho m es , In c. v . Co m m i s si o n er, 1 4 2 T.C. at 8 5 . Becau s e t h e ev i d en ce cl earl y es t ab l is h es th atev en i f t h e Pet ro m ax x SPA were
a m anu fact u ri n g co n tract , the l en g th o f t h e co nt ract wo ul d ren d er s ect i o n 4 6 0 (f)(2 ) p ro p erl y ap p l i cab l e an d wo u l dg en eral l y req u i re p et i t i o n er t o u s e t h e p ercen t ag e o f
co m p l et i o n m et h od o f acco u n t i n g , th e Co u rtfi nd s res p o n den t ’ s m an u fact u ri n g p o s i t i on fo r t h e Pet ro m ax x SPA i n co rrect
. C. Ex cep t i on fo r Cert ai n Co n st ru ct io n Co n tract s In s o m e i n s tan ces t ax p ay ers m ay acco u n tfo r i n co m e fro m cert ai n
co n st ru ct i o n co n tract s u n der a m et ho do f acco u n t in g o th er t h an th e p ercen t ag e o f
co m p l et i o n m et h od , s u ch as th e co m p l et edco nt ract m et h o d . See s ec. 4 60 (e); Th e Ho wardHu g hes Co ., LLC v . Co m m i s s i o n er, 1 4 2 T.C. at3 82 . Sect i on 4 6 0 (e)(1 )(B) p ro v i d es an ex cep t i o n t o th e p ercen t ag e o f co m p l et i o n m et ho do f- 3 6 -

[* 3 6 ] acco u n t i ng fo r cert ai n l o n g -t erm co n tract s th at m eetth e fo l l o wi ng req u i rem en t s : (1 ) t h e co n tract i s a co n s tru ct i o n co n tract ; (2 ) t h e t ax p ay er
es t i m at es , atth e t im e t h e co n tract i s en t eredi n t o , th ati twi l l b e co m p l et edwi th i n th e t wo -y ear p eri o db eg i n n i n g o n th e co n tract co m m en cem en t d at e (t h e t wo -y ear
ru l e); an d (3 ) t h e t ax p ay er’ s av erag e an nu al g ro s s recei p t s fo r t h e th ree t ax ab l e y ears p reced i n g th e t ax ab le y ear i n wh i ch th e co n tract i s en t eredi n t o d o n o t
ex ceed $ 10 m i ll i o n . A t ax p ay er wh o s at i s fi es al l th ree req u i rem en t s i s el i g i b l e t o
acco u n t fo r s u ch a co n tractu s i ng th e co m p l et edco n tract m etho d o f acco u n t i n g ; fai l u re t o m eet an y

o n e o f t h e th ree req u irem en ts wi ll ren d er t h e ex cep t i on i n ap p l i cab l e. 2 3 Pet i t i o ner acco u n t ed fo r t h e Pet ro m ax x an d Am b er SPAs u si n g th e
co m p l et edco n tract m et h o d
. Res p o n d en td et erm i n edth atp et i t i o n er was i n el i g i b l e t o u s e t h e co m

p let edco n tract m et h o d
. Th e p art i es d i s ag ree o v er wh et h er (1 ) t h e
co n tract s were “ co n s tru ct i o n co n tract s ” u n d er s ect i o n 4 6 0 an d (2 ) t he t wo -y ear
ru l e was s at i s fi ed . As s u m i n g wi th o u tfi n d i n g t h atthes e co n tract s are co ns tru ct i o n
co n tract s, an db eari n g i n m i n dth e wel l -s et t l edp ri n ci pl e t h ats t atu t es g ran t i n g t ax
ex em p t i o n s o r d eferm en t s m

u s t b e s tri ct l y

co n st ru ed , s ee Th e Ho wardHu gh es

2 3 Sec. 4 6 0(e)(1 )(A) p ro v i d es an ad di t i o n al ex cep t i o n t o t h e p ercen t ag e o f co m p l et i o n m et h od o f acco u n t i n g fo r h o m e co n s tru ct i o n co n tract s . Pet i t io n er d o es n o tco nt en dthati t qu al i fi es fo r t h i s ex cep t i o n .- 3 7 -

[* 3 7 ] Co ., LLC v . Co m

m is s i o n er, 8 0 5 F.3 dat1 8 1, the Co u rtfi n d s th atp et i t i o n er d i dn o t s at i s fy

th e t w o -y ear ru l e wi th res p ectt o ei th er co n tract . Pet i t i o ner, th erefo re, was n o tel i g i b l e t o acco un tfo r t h e Pet ro m ax x o r Am b er SPA u si n g th e
co m p l et edco n tract m et h o d o f acco u n t i n g . III. Two -Year Ru l e A. Leg al Fram ewo rk To b e el i g i bl e fo r t h e co n s tru ct i o n co n tract ex cep t i o n t o th e p ercen t ag e o f
co m p l et i o n m et h od , th e t ax pay er m u s tes t i m at e, atth e t i m e t h e co n tract i s en t ered i n t o , th ati twi l l b e co m

p l et edwi th i n th e t wo -y ear p eri odb eg i n n i ng o n th e co n t ract
co m m en cem en td at e. See s ec. 4 6 0 (e)(1 )(B)(i ). Th e s t atu t e req u i res th e Co u rtt o fi rs td et erm i n e t h e co n tract co m m en cem en td at es o f t h e Pet ro m ax x an dAm b er SPAs an dth en d et erm in e wh et h er p et it i on er co u l dh av e reas o n ab l y es t i m at ed --at th e t i m e t h e res p ect iv e co n tract s were en t eredi n t o --t h atth e p ro ject s wo u l db e
co m p l et e wi thi n tw o y ears fro m th ei r res pect i v e co m

m en cem en t d at es . Sec. 4 6 0 (e)(1 )(B); s ee al s o s ec. 1
. 4 6 0 -1 (f)(4 ), In co m e Tax Reg s .

1
. Co n tract Co m

m en cem en t Dat e Fo r p u rp o s es o f s ect i on 4 6 0 , th e t erm “ co n tract co m

m en cem en td at e” m ean s th e fi rs td at e o n wh i ch an y co s t s (o th er t h an b id d i ng ex p en s es o r ex pen s es i n cu rredi n co n n ect io n wi th n eg o t i at i n g th e co n tract ) al l o cab l e t o the co n tract are- 3 8 -

[* 3 8 ] i n cu rred
. 2 4 Sec. 4 60 (g ); s ec. 1 .4 6 0 -1 (b )(7 ), In co m e Tax Reg s. A co s ti s

“ i n cu rred ” fo r t h e t ax ab l e y ear i n wh i ch al l th e ev en ts h av e o ccu rredth ates t ab li s h th e fact o f t h e co s t , the am ou nto f t h e co s tcan b e d et erm in edwi th reas o n ab l e
accu racy , an d eco n om i c p erfo rm an ce h as o ccu rredwi th res pect t o the co s t . Sec. 1 .4 60 -1 (b )(8 ), In co m e Tax Reg s . (“ In cu rredh as the m ean in g g i v en i n § 1 .4 6 1
- 1 (a)(2 ) (co n cern i n g th e t ax ab l e y ear a l i ab i l it y i s i n cu rredu nd er t h e accru al
m et h o d o f acco u n ti n g ), reg ard les s o f a t ax pay er’ s o v eral l m et h o do f acco u n t i n g .”).

2
. Two -Year Es t i m at e W i th res p ect t o es t im at i n g th e l en gt h o f a co n tract u n d er s ect i o n 4 6 0,
s ect i on 1 .4 6 0 -1 (f)(4 )(i ), In co m e Tax Reg s., p ro vi d es : A t ax p ay er m

u s t u s e a reas o n ab l e es t im at e o f th e t i m e req ui redt o co m p let e a co n tract wh enn eces s ary t o cl as s ify

the co n tract (e.g ., t o d et erm i ne wh eth er * * * th e t wo -y ear co m p l et i o n ru l e fo r ex em

p t co n s tru ct io n co n tract s * * * i s s at i s fi ed* * * ). To b e co ns i d ered reas o n ab l e, anes t i m at e o f t he t i m e req ui redt o co m p l et e t h e co n tract m u s ti n cl u d e an t i ci pat edt i m e fo r d el ay , rewo rk , ch an g e o rd ers , t ech no l o g y

o r d es i g n p ro b l em s , o r o th er p ro bl em s thatreas on ab l y can b e an t ici p at ed co n s i d eri n g th e n atu re o f t h e co n tract an d p ri o r ex p eri en ce. A co n tract t erm th ats p eci fi es an ex p ect edco m p let i o n o r d el i v ery d at e m ay b e co n s i d eredev id en ce t h atth e t ax pay er

2 4 Th e co n tract co m

m en cem en t d at e i s n o tn eces s ari l y th e s am e d at e as th e d at e t h atth e co nt ract i s en t eredi n t o . Th e reg u l at i o n s p ro v i d e s ep arat e d efi n i t i o ns fo r t h e t w o t im es . Secs . 1 .4 6 0 -1 (b )(7 ) (d efi n i n g co n tract co m m en cem en td at e), (c)(2 ) (d efi n in g t he d at e t h at th e co n tract i s en t eredi n t o ), In co m e Tax Reg s . An d p ara. (c)(2 ) co n t em

p lat es s i tu at i o n s wh ere a t ax p ay er at t em p t s t o ch an g e h i s Fed eral t ax co n s equ en ces th ro u g h creat i v e s ch edu li n g o f t h es e d at es .- 3 9 -

[* 3 9 ] reas o n ab l y

ex p ect s t o co m

p l et e o r d el i ver t h e s ub

jectm at t er o f t h e co n tracto n o r ab o u tth e d at e s p eci fi ed , es peci al l y i f t h e co n tract p ro v i d es b o n a fi de p en al t i es fo r fai l i n g t o m eetth e s p eci fi edd at e. If a t ax p ay er cl as s i fi es a co n t ract b as ed o n a reas on ab le es t i m at e o f co m p let i o n t i m e, t h e co n tract wi l l n o tb e recl as s ifi edb as edo n t h e actu al (o r an o th er reas o n ab l e es t i m at e o f) co m p l et i o n t i m e. A t ax p ay er’ s es t i m at e o f co m p l et i o n t im e wi l l n o t b e co n s id ered u n reas o n ab l e i f a co n tract i s n o tco m p l et edwi th i n th e es t i m at edt i m e p ri m ari l y b ecau s e o f u n fo res eeab l e fact o rs n o twi th i n th e t ax p ay er’ s co n tro l, s u ch as th i rd -p art y l i t i g at i on , ex trem e weat her co n d it io n s , s tri k es , o r d el ay s i n s ecu ri n g p erm i ts o r l i cen ses . Sect io n 1 .4 6 0 -1 (f)(4 )(i ), In co m e Tax Reg s . , p ro v i d es th at th e t ax p ay er’ s
es t i m at e o f t h e t i m e req u i redt o co m p let e a co n tract m

u s tb e “ reas o nab l e”. Wh ere,
as h ere, t he p art i es d i s ag ree as t o wh et h er t h e t wo -y ear ru l e fo r ex em p t
co n st ru ct i o n co n tract s h as b een s at i sfi ed , th e Co u rtwi l l co n s id er al l o f t h e fact s
an d ci rcu m s t an ces o f a p art icu l ar cas e t o d et erm in e wh et h er th e t ax p ay er’ s
es t i m at e was reas on ab l e. Fu rth er, t h e Co u rtm u stl o o kb ackt o th e t i m e t h e
co n tract was en t eredi nt o t o d eci d e wh et h er t h e es t i m at e was reas on ab le. See s ec. 4 6 0 (e)(1 )(B)(i ). Oft en , a wri t t en co n tracto b ject i v el y m an i fes t s t h e t ax p ay er’ s ex p ect at i o n s at th e t i m e t h e t ax p ay er en t ers i n t o th e co n tract . Ho wev er, th e reg u l at i o ns d o n o t req u i re t he Co u rtt o m ak e i t s d et erm i n at i o n wi th res p ect t o th e t wo -y ear ru l e o n th e b as i s o f t h e co nt ract al on e, an dth e d at es s p eci fi ed i n t h e co n tractare n ot d i s p o s i t i ve. See s ec. 1 .4 6 0 -1 (f)(4 )(i ), In co m e Tax Reg s . (“ Aco n tract t erm th at- 4 0 -

[* 4 0 ] s p eci fi es an ex pect ed co m p l et i o n o r d el i v ery

d at e m ay b e co n s id ered
ev i d en ce t h atth e t ax p ay er reas o n ab l y ex p ect s t o co m

p l et e o r d el i v er t h e s ub

ject
m at t er o f t h e co n tract o n o r ab o u tth e d at e s p eci fi ed [.] ” (Em ph as i s ad d ed .)). Th e fact s an dci rcu m s t an ces o f t h i s cas e req u i re t h e Co u rt t o m ak e a d eci s i o n wi th
res p ectt o t h e t wo -y ear ru l e o n th e b as i s o f th e co n tract s an dth e s upp o rt in g d o cu m en t at i o n i n th e reco rd , M r. Bal k e’ s t es t i m o n y , an dM r. Harri s ’ ex p ert t es t i m o ny b ecau s e t h ey

are t h e o n l y

ev i d en ce av ai l ab l e fo r th e Co urtt o co n s i d er fo r b o th th e Pet ro m ax x an dAm b er SPAs
. B. Pet ro m ax x SPA 1
. Co n tract Co m

m en cem en t Dat e Al th ou g h p et i t i o n er an dPet ro m ax x fo rm al l y ex ecu t ed th e Pet ro m ax x SPA
o n Oct o b er 2 8 , 2 0 0 6 , th e fi rs td at e o n wh i ch p et i t i o ner i n cu rredco s t s al l o cab l e t o th e Pet ro m ax x SPA (o th er t h an b i d d i n g ex p en s es o r ex p en s es i n cu rredi n
co n nect io n wi th n eg o t iat i n g th e co n tract ) was M arch 2 2 , 2 0 06 , wh en p et i t i o n er p u rch as edth e Cen co refi n ery fo r u s e i n th e Pet ro m ax x SPA. Th u s , fo r p u rp o s es o f
s ect i on 4 6 0 , th e co nt ract co m m en cem en td at e o f t he Pet ro m ax x SPA was M arch 2 2 , 2 0 0 6 . See s ec. 4 60 (g ); s ec. 1 .4 6 0 -1 (b )(7 ) an d (8 ), In co m e Tax Reg s .- 4 1 -

[* 4 1 ] 2
. Two -Year Es t i m at e

a. Part i es ’ Arg u m en t s Th e p art i es d i s ag ree as t o wh et h er p et i t i o n er reas o n ab l y es t i m at edth atth e Pet ro m ax x SPA co u l dh av e b een co m p l et edwi th i n t wo y ears fro m th e co nt ract
co m m en cem en td at e o f M arch 2 2 , 2 0 0 6. Res p o n d en trel i es o n t h e t erm s o f t h e Pet ro m ax x SPA an dM r. Harri s’ ex p ertt es ti m o n y th atth ree y ears i s an o pt i m i s t i c
es t i m at e o f t h e t i m e req u i redt o co m p let e a p ro

jects i m i l ar t o th e Pet ro m ax x refi n ery p ro ject . Pet i t i o n er co n t en d s th ati t s 3 -D l as er s can n i n g an dp aral lel p ro ces s i n g s y s t em

al l o wed i tt o reas o n ab l y

es t i m at e t hatth e Pet ro m ax x SPA
wo u l db e co m

p l et edwi th in two y ears . Fu rt h er, p et i ti o n er arg u es th atM r. Harri s d i dn o t co n s i d er p et i t i o ner’ s p aral l el p ro ces s in g s y s t em wh end et erm in i n g h o w l o n g i two u l dt ak e t he p art i es t o co m p l et e t h e Pet ro m ax x refi n ery p ro jectan dth at h e was al t o g et h er u n fam i li ar wi th p aral l el p ro ces s in g .

b
. Term s o f t h e Pet ro m ax x SPA Th e t wo -y ear ru le req u i res th e Co u rtt o l o o k atp et i t io n er’ s ex p ect at i o n s at th e t i m e i ten tered i n to th e co n tract . See s ec. 4 6 0(e)(1 )(B). Wh il e d at es s peci fi ed i n a co n tract are n o td i s p o s it i v e, t h e Co u rtwi l l fi rs tl o o kt o t h e t erm s o f t he Pet ro m ax x SPA t o h el p d et erm i n e p et i ti o n er’ s ex p ect at i o ns atth e t i m e i ten t ered i n t o th e SPA, Oct o b er 2 8 , 2 0 0 6
.- 4 2 -

[* 4 2 ] Sect i o n 1 .4 6 0-1 (f)(4 )(i ), In co m e Tax Reg s ., p ro v i d es th at a co n tract t erm th ats p eci fi es an ex p ect edco m p l et i o n o r d el i v ery

d at e m ay b e co n s i d eredev i d en ce th atth e t ax p ay er reas o n ab l y ex p ect s t o co m

p l et e o r d el iv er o n o r ab o u tth atd at e,
es p eci al ly i f t h e co n tract p ro v i d es b o n a fi d e p en al t i es fo r fai l in g t o m eetth e
s p eci fi edd at e. Th e o n l y

p ro v i s i o n i n t h e Pet ro m ax x SPA t h atreferen ces a s p eci fi c d at e i s wi th res p ectt o p et i t io n er’ s d el i v ery o b l i g at i o n s . Pet i t i on er was t o “ u s e i t s b es teffo rt s ” t o d el i v er th e l as t u n itb y Ap ri l 3 0 , 2 0 0 7 , b u t fai l u re t o d o s o wo u l d
n o tres u l ti n p en al t i es ; rat h er, p et i t i o n er wo u ld o n ly d efau l tu n d er t h e Pet ro m ax x SPA i f i tfai l edt o d el i ver t h e l as tu n i t b y Sep t em b er 1 2 , 2 0 0 7 . Th e Pet ro m ax x SPA referen ces a p ro

jects ch edu l e. Ho wev er, th e p ro jects ch edu l e at tach edt o th e Pet ro m ax x SPA s t at edo n ly “ [t o b e p ro v i d edb y

BASIC] ”; th e rem ai n d er o f t h e p ag e was b l an k , an d p et i t i o ner d i dn o t i n tro du ce i n to ev i d en ce an y d o cu m en t s th at p u rp ortt o b e a p ro

ject s ch edu l e. Pet i t i o ner’ s co n tract u al o b l i g at i o ns were n o tco m pl et e upo n d el i v ery

o f t he l as trefu rb i s hedu n i t . Th e p art s th en h adt o b e s h i p p edfro m Tex as t o Bu l g ari a an d
as s em b l edacco rd i n g t o p et i t i o ner’ s d et ai l edm o d el i n g , an dth e n ewl y as s em b l ed refi n ery h adt o b e co m

m i s s i o nedu n d er p et i t i o ner’ s s up erv i s i on an da fi n al accep t an ce rep o rtan dcert i fi cat e o b t ai n edup on s u cces s fu l t es t i n g . On l y th en
wo u l dp et i t i o n er’ s co n tract u al o b l i g at io n s b e fu l fi l l ed
. An dth e Pet ro m ax x- 4 3 -

[* 4 3 ] SPA d i d n o ts p eci fy d at es b y wh en th es e rem ai n i n g o b l ig at i o n s were t o b e
co m p l et e. Res p o n d en ti n tro du cedan ex p ertwi tnes s rep o rti n t o ev i den ce. In th at rep o rtM r. Harri s es t im at edh o w l o n g t h e rem ai n i n g co m p o n en t s o f t h e Pet ro m ax x refi n ery p ro jectwo u l dt ak e, i .e., h o w l o n g i t wo u l dt ak e t o s h i p th e d el i v eredu n i t s fro m Tex as t o Bu l g ari a; h o w l o n g i t wo u l d t ak e t o as s em b le t h e refi neryo n ce Pet ro m ax x was i n p o s ses s i o n o f al l o f t h e eq u i p m en t ; an dh ow l o n g i t wo u l dt ak e t o co m m i s s i o n an d p erfo rm an ce t es tth e n ewl y as s em b l ed refi n ery . M r. Bal k e ag reedwi th M r. Harri s ’ co ncl u s i o n s t o the ex t en tth ey were b as edo n t rad i t i o n al i n du s try p ract i ces . On ce p et i ti on er d el iv eredth e fi n al u n i t , Pet ro m ax x h adt o s h i p th e u n i t s t o Bu l gari a; M r. Harri s o p i n edth ats ix m on th s was an o p ti m i s t i c es t i m at e o f o n l y th e t i m e req u i redt o s h i p th e u n i t s t o Bu l g ari a, wh ich d i dn o ti ncl u d e t he t im e req u i red t o as s em b l e t h e n ew refi n ery . On ce Pet ro m ax x acq u iredal l o f t h e eq u i pm en t , i t h ad t o as s em

b le t h e refi nery ; M r. Harri s es t i m at ed th atth e as s em b l y p ro ces s al o n e

“ co u l dh ard l y be ex p ect edi n l es s th an o n e y ear.” On ce Pet ro m ax x as s em b l edth e refi n ery , p et i t i on er was req u i redt o s up erv i s e th e co m m i ss i o n i n g p ro ces s ; M r. Harri s es ti m at edthatthe co m m i s s i o n i n g p ro ces s wo u l dt ak e s i x week s. Aft er t h e
co m m i s s io n in g p ro ces s was co m p l et e, a qu al i fi eden g i n eer was t o co ndu ct- 4 4 -

[* 4 4 ] p erfo rm an ce t es t s an di s su e a fi n al rep o rt up o n s u cces s fu l t es ti n g ; M r. Harri s
es t i m at edth atp erfo rm an ce t es t i n g wo u l d t ak e ap p ro x i m at el y o n e m on th . Atth at p o i n tp et i t i o n er wo ul dh av e fi n al ly co m p l et edal l o f i t s o b l i g at i on s u n d er t h e Pet ro m ax x SPA. Ev en i f th e Co u rtco ncl u d es th atAp ri l 3 0 , 2 0 0 7 (t h e b es teffo rt s d at e)--an d
n o tSep t em

b er 1 2 , 2 0 0 7 (t h e d efau l td at e)--i s t h e rel ev an td el i v ery d at e d es p i t e t h e Pet ro m ax x SPA’ s n o tcal l i n g fo r p en al t i es i f p et it i o n er d i dn otd el i v er t h e u n i t s b y th en , th e Pet ro m ax x p ro

jects t i l l co ul dn o th av e b een co m pl et edwi th in two y ears fro m M arch 2 2 , 2 0 06 , th e co nt ract co m m en cem en t d at e. Th e t i m e b et ween th e
co n tract co m

m en cem en td at e an dth e b es t effo rt s d at e was 1 3 m o n th s ; o n ce t h e
u n i t s were d el iv ered , i t wo u l dt ak e 6 m o n th s t o s h i p th em fro m Tex as t o Bu l g ari a. Up o n recei p t o f al l o f t h e u n i t s , i two u l dt ak e Pet ro m ax x 1 2 m o n ths t o as s em b l e th e refi n ery ; an do n ce t h e refi n ery was as s em

b l ed , i two u l dt ak e ap pro x i m at el y 2
- 1 ' 2 m o n th s t o co m

m i ss io n an dco n du ctp erfo rm an ce t es t s . Int o tal , a p ro ject
s i m i l ar t o th e Pet ro m ax x refi n ery p ro jectwo u l dt ak e o v er 3 3 m o n th s t o co m p l et e
u s i n g trad i t i o n al i n du s try p ract i ces . Th e Pet ro m ax x SPA i n d i cat es th atp et it i o n er an dPet ro m ax x an t i ci p at edth e fi nal paym en t ’ s b eco m i n g du e o n th e earl i er o f: (1 ) 1 0 m o n th s aft er t h e “ Fi n al Del i v ery Dat e”, wh i ch th e Pet ro m ax x SPA d efi n edas Sep t em b er 1 2 , 2 0 0 7, o r (2 )- 4 5 -

[* 4 5 ] th e “ Fi n al Accep t an ce Dat e”, wh i ch was d efi n edas th e d at e o n wh i ch th e qu al i fi eden gi n eer i ss u ed a co m p l et i o n cert i fi cat e. 2 5 As s u m i ng trad i t i o nal i n du s t ry p ract i ces , thi s p ro vi s io n p u ts th e co m p l et i o n d at e m o re th antwo y ears aft er t h e
co n tract co m

m en cem en td at e. Th e Pet ro m ax x SPA d o es n o treq u ire t h e qual i fi ed
en g in eer t o i s s u e a co m

p l et io n cert i fi cat e b y

a cert ai n d at e, an d1 0 m o n th s aft er t h e Sep tem b er 1 2 , 2 0 0 7, “ Fi n al Del i v ery Dat e” i s J ul y

1 2 , 2 00 8 , wh ich i s m o re t h an two y ears aft er t h e M arch 2 2 , 2 0 0 6 , co n tractco m m en cem en t d at e. Un d er s ect i o n 1
. 4 6 0 -1 (f)(4 )(i ), In co m e Tax Reg s ., d at es s p eci fi edi n th e Pet ro m ax x SPA are n o t d i s po s it i v e i n d et erm i n i ng wh et her p et i t io n er, at th e t i m e i t
en t eredi n t o th e Pet ro m ax x SPA, co u l dh av e reas o n ab l y ex p ect edt o co m

p l et e t h e Pet ro m ax x p ro

jectwi th i n t wo y ears fro m i ts co m m en cem en td at e. Acco rd i n g l y , th e Co u rtwi l l n ex tco n s i d er M r. Bal k e’ s t es t i m o n y .

c. M r. Bal k e’ s Tes t i m o n y Pet i t i o ner ack n o wl ed g es th e l acko f s p eci fi ci ty i n th e Pet ro m ax x SPA an d th e l acko f fo rm al d o cu m en t at i o n s u ch as a p ro jects ch edul e b u t arg u es th atth e

“p art i es i n t en d edfo r Pet ro m ax x t o b eg i n b u i l d i ng th e * * * [refi n ery ]

2 5 Al th o u g h thi s p ro vi s io n o f t he Pet ro m ax x SPA refers t o t erm s o f p aym en t an d n o tp erfo rm an ce, i .e., refu rb i s h i n g , s h i p p i n g , co ns tru ct i n g t h e refi n ery , co m m i s s io n in g, o r p erfo rm an ce t es t i ng , th e Co urtwi ll ad dres s th i s t erm s o f p aym en t p ro v i s i on fo r t h e s ak e o f co m p l et en es s .- 4 6 -

[* 4 6 ] i n fras tru ctu re wh il e Pet i t i o n er was refu rb i sh i n g th e refi n ery ” ev en th o u g h th e Pet ro m ax x SPA i s s i l en t o n th e m at ter. 2 6 Th e Pet ro m ax x SPA i s g o v ern edb y Au st ri an l aw, i n cl u d i n g the Un i t ed Nat i o n s Co n v en t i o n o n Co n tract s fo r t h e In t ern at i o n al Sal e o f Go o d s (CISG), Ap r. 1 1 , 1 9 8 0 , 1 4 8 9 U.N.T.S. 5 9
. 2 7 Th e CISG em bo d i es a l i b eral ap p ro ach t o co n tract

2 6 Sp eci fi cal ly , p et i ti o ner’ s rep l y b ri ef s t at es : As i s ap paren tfro m

th e co n tract s th em sel v es an d th e t es t i m on y attri al , Pet i t i o n er o perat es i n a fl ex ib l e an d i n fo rm al m an ner; th e l ack o f fo rm al d ocu m en tat i o n o f a p ro jects ch edu l e d o es n o tp ro ve t h atth e p art i es d i dn oth av e an u n d ers t an d i n g t h atthe * * * [refi n ery s i t e] s h o u l d b e co m

p l et edwh i l e t h e refi n ery

i s b ei n g refu rb i s h ed , s i m u l

t an eo u s l y i n s t eado f s ub seq u en t ly . Pet i ti o n er o ffered t es t i m o n y as a fact wi tn es s , u n der o at h , wh i ch i s th e b es t av ai l ab le ev id en ce o f i t s cu s t om ary

b u s i n es s p ract i ces . M r. Bal k e h as es t ab l i s h edh i s cri t eri a as an ex peri en cedp ro fes s i o n al i n h i s l i n e o f wo rk
. Hi s t es t i m o ny i s s up p o rt ed b y

th e effo rt s t ak enb y

Pet it i o n er t o p ro v i d e s p eci fi cat i o n s t o Pet ro m ax x u s i n g l as er i m ag i n g atco n s i d erab l e co s tt o Pet i t i o ner. Pro cu ri n g tho s e i m ag es i m m ed i at el y an d p ro v i d i n g s u ch i m ag es atan u n u s u al l y earl y s t ag e i n th e co n s tru ct i on p ro ces s co rro bo rat es th e t es t i m o n y th atth e p art i es i n ten d ed fo r Pet ro m ax x t o b eg i n b u il d i n g th e * * * [refi n ery ] i n fras tru ctu re wh i l e Pet i t i o n er was refu rb i s hi n g th e refi n ery . 2 7 CISG art . 1 (1 ) “ ap p l i es t o co n tract s o f s al e o f g o o d s b et ween p art i es wh o s e p l aces o f b u s i nes s are i n d i fferen tSt at es : (a) wh en th e St at es are Co n tract i n g St at es ; o r (b ) wh en th e ru l es o f p ri v at e i n t ern at i o n al l aw l eadt o th e ap p li cat io n o f t h e l aw o f a Co n tract i n g St at e.” Fo r p u rp o s es o f th e CISG, a p art y ’ s p l ace o f b u s i nes s i s th e o n e h av i n g “ th e cl o ses trel at i o n s h i p t o t h e co nt ract an di t s p erfo rm an ce, h av in g reg ardt o th e ci rcu m s t an ces kn o wnt o o r co n t em p l at edb y th e p art i es atan y

t i m e b efo re o r atth e co n cl u s io n o f t h e co n tract
. ” Id . art . 1 0 (a). (co n ti n u ed ...)- 4 7 -

[* 4 7 ] i n t erp ret at i o n . Un d er th e CISG a co n tract o f s al e m ay b e p ro v en b y

an y
m ean s , i n cl u d i n g wi tn es s es ; itn eedn o tb e ev i d en cedb y wri t i n g an di s n o t s ub

ject t o an y o th er req ui rem en tas t o fo rm . Id
. art . 1 1 . Art i cl e 8 o f t h e CISG p ro v i d es : (1 ) Fo r t h e p u rp o s es o f t h i s Co n v en t i o n s t at em en ts m ad e b y an d o th er co n du cto f a p arty are t o b e i n t erp ret edacco rd i n g t o h i s i n t en t wh ere t h e o th er p art y

kn ew o r co u l dn ot h av e b een u n aware wh atth e i n t en twas . (2 ) If t h e p reced i ng p arag rap h i s n o t ap p l i cab l e, s t at em en t s m ad e b y an do th er co n du cto f a p art y are t o b e i n t erp ret edacco rd i n g t o the u n d ers t an di n g th ata reas o n ab l e p ers o n o f th e s am e k i n das th e o th er p art y wo u l dh av e h adi n th e s am e ci rcu m st an ces . (3 ) In d et erm i n i n g th e i n t en to f a p arty o r t h e u n d ers tan d i ng a reas o n ab l e p ers o n wo u l dh av e h ad , du e co n s id erat i o n i s t o b e g iv en t o al l rel ev an t ci rcu m s t an ces o f t h e cas e i n cl ud i n g n eg o t i at i o n s , an y p ract i ces wh i ch th e p art ies h av e es tab l is h ed b et ween th em s el v es , u s ag es an dan y

s ub seq u en tco n du cto f t h e p art ies
. Art i cl e 8 o f the CISG al l o ws b ro ad er s t an dard s o f ev i d en ce o u t s i d e t h e
ex ecu t edd o cu m en t s , i ncl u d i n g s t at em en ts m ad e o r a p art y ’ s co n du ct , t o d et erm i n e th e i n t en to f a p art y . Pet i ti o n er’ s p o s i t i o n i s th atev en th o u g h th e Pet ro m ax x SPA

2 7 (...co n t i nu ed ) Un d er t h e Pet ro m ax x SPA, Pet ro m ax x ’ s “p l ace o f b u s i n es s ” fo r p u rp o s es o f t h e CISG i s i n Bu l g ari a, as th e refi n ery was t o b e as sem

bl edth ere. Pet i ti o ner’ s “ p l ace o f b u si n es s ” fo r p urp os es o f t h e CISG i s i n th e Un i t edSt at es , as p et i t i o n er refu rb i sh edth e Cen co refi n ery p art s i n th e Un i t edSt at es . Bo th Bu l g ari a an dth e Un i ted St at es rat i fi edth e CISG. Th u s , the CISG ap p l ies b ecau s e t h ere i s a co n tract fo r t h e s al e o f g o o d s b et ween p art i es wh os e p l aces o f b u s i n es s are i n d i fferen t co n tract i n g St at es .- 4 8 -

[* 4 8 ] an d rel at edd o cu m en t s are s i l en twi th res p ectt o an t i ci p at edp erfo rm an ce d at es an dp aral l el p ro ces s i n g , p et i t i o n er’ s co n du ctrefl ect edth e p art i es ’ i n t en tt o i m p l em en tp et i t i o n er’ s p aral l el p ro ces s i n g s y s t em . Ev en i f th e Co u rtl o o k s o u t s i d e t he t erm s o f t h e Pet ro m ax x SPA an d
co n si d ers s t at em en t s an d co n ducto f t h e p art i es , p et i t io n er d i d n o ti n tro du ce an y
s u ch ev i d en ce t o s up p o rtM r. Bal k e’ s s el f-s erv i n g t es t i m on y th atwo u l dal l o w th e Co u rtt o co n cl u de t h atth e p art i es i n fact ag reedt o i m pl em en ta p aral lel p ro ces s i ng
s y s t em . Pet i t i on er d i dn o ti nt ro du ce an y ev i d en ce th at Pet ro m ax x “ kn ew o r co u l d
n o th av e b een u n aware wh atth e i n t en twas ” wi th res p ectt o th e p ro ject ’ s t i m e l i n e. See CISG art . 8 (1 ). Fu rt h er, b ecau s e p et i t i o n er’ s p aral l el p ro ces s in g s y s t em was
n o tth e t rad i t i o n al way

o f o p erat i ng i n th e i ndu s try , Pet ro m ax x wo u l dn o t h av e kn o wn o r h adreas o n t o kn o w th ati ts h o u l d b e p erfo rm i n g i t s co n tract u al
o b l i g at i o ns s i m

u l tan eo u sl y wi th p et i t i o n er. See i d . Pet i ti o n er d i dn o ti n tro du ce
an y ev i d en ce t o s h o w th atPet ro m ax x m ad e s t at em en ts t o p et i t i o n er o r act edas i f th e p art i es were co n du ct i n g o p erat i o n s u si n g a p aral l el p ro ces s i n g s y s t em . See i d
. art . 8 (2 ) an d (3 ). M r. Bal ke fu rt h er t es t i fi edth ath e ag reedwi th m o sto f M r. Harri s ’ co n cl us i on s b ecau s e t h ey were b as edo n trad i t i o n al p ract i ces wi th i n t h e i n du s try . Th att es t i m o n y p ro v i d es fu rt h er s up p o rtt o t h e co n cl u s i o n th at Pet ro m ax x d i dn o th av e an y reas o n t o b e aware o f p et i t i o ner’ s ex p ect at i o n s wi t h- 4 9 -

[* 4 9 ] res p ectt o Pet ro m ax x’ s t i m i n g fo r b eg i n n i ng an dco m p l et i n g i t s co n tract u al
o b l i g at i o ns . See CISG art . 8 (2 ) an d(3 ). Pet i t i o ner d i dn o tp ro du ce an y o th er wi tn es ses , p ro v i de t he Co urtwi th an y d o cu m en t ary

ev i d en ce t hatwo u l drefl ecta m eet i n g o f t h e m i n d s b etween th e p art i es t o u s e a p aral l el p ro ces s i n g s y s t em , o r ev en ex p l ai n h o w m u ch t i m e p aral l el p ro ces s i n g wo ul ds av e; i n s t eadp et i ti o n er rel i eds o l el y o n M r. Bal k e’ s u n s up p o rt ed t es t i m o ny . Al th o u g h M r. Bal k e h as o v er 3 0 y ears o f ex p eri en ce i n wo rk i n g wi t h
o i l refi n eri es an drefi n ery equ i pm en t , i n cl ud i ng i n t ern at io nal d eal i n gs , h e d i dn o t p ro v id e a s i n gl e co n cret e ex am p l e o f a p ro

ject s im il ar t o th e Pet ro m ax x SPA wh ere t h e p art ies co n du ct ed op erat i o ns u s i n g a p aral l el p ro ces s i n g s y s t em an d wh i ch was co m

pl et e wi th in two y ears fro m i t s co m m en cem en td at e. 2 8 Pet i ti o n er’ s

2 8 Th e i n creas edeffi ci en cy v el n o n o f th e p aral l el p ro ces s i n g s y s t em d o es n o t res cu e p et i t i o n er’ s ex p ect at i o n s h ere. As s u m i n g wi th ou tfi n d i ng th at th e b es t effo rt s d at e i s th e rel ev an td at e, t h e t wo -y ear cl o ckb eg an ru n n in g o n M arch 2 2 , 2 0 0 6 ; th e b es teffo rt s d at e was Ap ri l 3 0 , 2 0 0 7; th e p art s n eed edt o b e t ran s p o rt ed fro m Tex as t o Bu l g ari a, t ak i n g s i x m o n th s; an dco m m i s si on i n g an dt es t in g th e refi n ery req u iredan ad d i t io n al 2 -1 ' 2 m o n th s --l eav i n g s l ig h tl y m o re th an two m o nt h s u n t i l th e en do f th e t wo -y ear p eri o dfo r Pet ro m ax x t o as s em b l e t he refi n ery acco rd i n g t o p et it i o n er’ s d et ai l edm o d el s . An dres p o n d en t ’ s ex pert fo un dth at th ro u g h th e u s e o f trad it i o n al i n du st ry t ech n i qu es , reas s em

b l y m i g h t b e at t ai n edi n 1 2 m o n th s . As d i s cu s s eds up ra, n o n e o f t h es e p ro ject io n s acco un tfo r d el ay , rewo rk , o r t ech n o l o g y o r d es i g n p ro b l em s cau s ed b y i m pl em en t i n g a n ew 3 -D s can n i n g an d m o d el i n g pro ces s. See s ec. 1 .4 6 0 -1 (f)(4 )(i ), In co m e Tax Reg s . Th erefo re, ev en i f p aral lel p ro ces s i n g co u l dreduce a o n e-y ear co n s tru ct i on p ro ject t o ap p ro x i m at el y

two m o n ths , a reas o n ab l e es t i m at e n eces s ari l y req ui res i n cl u s i o n (co n ti n u ed ...)- 5 0 -

[* 5 0 ] act i o n s o f p urch as in g the Cen co refi n ery an db eg i n n i n g the refu rb is h i n g p ro ces s d o n o tp ro v e t he i n ten to r kn o wl ed g e o f Pet ro m ax x t o equ al l y p erfo rm i t s
res p o n s i b i l i t ies
. Pet it i on er s i m p l y h as n oti n tro du ced s uffi ci en tev i den ce t o s h o w th ati t s ex p ect at io n s wi th res p ectt o th e Pet ro m ax x refi n ery p ro ject ’ s t i m efram e d i ffered fro m

th o se p ro ject edb y M r. Harri s acco rd i n g t o trad i t io n al i n du s try p ract i ces o r o b

ject i vel y m an i fes t edi n th e Pet ro m ax x SPA. d
. Co n cl u s i o n Th e Co m m is s i o n er i s g ran t edb ro ad d is cret i o n i n d et erm i n i n g wh eth er an
acco u n t in g m et h o dcl earl y refl ect s i nco m e, an dth atd et erm i n at i o n i s en t i t l edt o
m o re th an th e u su al p res u m p t i o n o f co rrect n es s. Co m m i s s i o ner v . Han s en , 3 6 0 U.S. at4 6 7 ; Th e Ho ward Hu g h es Co ., LLC v . Co m m i s s i o ner, 1 4 2 T.C. at3 7 6 ; Sh ea Ho m es , In c. v . Co m m i s s i o n er, 1 4 2 T.C. at8 4 . Pet i ti o n er s i m p l y h as n o tm et i t s b u rd en t o p ro v e t h atres p o n d en t ’ s d et erm i n at io n was cl earl y arb i trary . Res p o n d en t ’ s p o s it i o n th atp et i t i o n er d i dn o t reas o n ab l y es t i m at e t h atth e Pet ro m ax x refi n ery

p ro jectco u l db e co m

p let edwi th i n t wo y ears i s s up p o rt edb y th e d o cu m en t at i on th ati s av ai l ab l e fo r t he Co u rtt o rev i ew, p ri m ari l y th e

2 8 (...co n t i nu ed ) o f t i m e fo r s u ch u nan t i ci p at ed i s s u es . Id
. Pet i t i o n er o ffered n o ex pl an at i o n o th er th an th e u n s up p ort edt es t i m o n y o f M r. Bal k e t h ath e b el i ev edth e co n tract co u l d h av e b een co m

p l et ed wi th i n two y ears .- 5 1 -

[* 5 1 ] Pet ro m ax x SPA an di t s am en dm en ts , an db y M r. Harri s ’ ex pert t es t i m o n y . Pet i t io n er at t em

pt s t o reb ut res p o n d en t ’ s d et erm i n at i o n wi th M r. Bal k e’ s t es t i m o ny . Ho wev er, p et i t i on er d i d n o ti n tro du ce an y o th er ev i d en ce t o s up p o rt M r. Bal k e’ s t es t i m o n y , an dthe Co u rti s n o treq ui redt o accep ts el f-s erv i n g t es t i m o ny as tru e. Th e Co u rtco n cl u d es thatp et i t i o n er d idn o t m eeti ts b u rd en i n p ro v in g th at , atth e t i m e i ten t eredi n t o th e Pet ro m ax x SPA, i treas o n ab l y b el i ev ed th e co n tract wo u l db e co m p l et edwi th i n two y ears fro m i t s co m m en cem en td at e. Acco rd in g ly , p et i ti o n er was n o tel i g ib l e t o rep o rti n co m e fro m th e Pet ro m ax x SPA
u s i n g th e co m

p l et edco n tract m et h o do f acco un t in g . C. Am

b er Co n tract 1
. Co n tract Co m

m en cem en t Dat e Pet i t i o ner an d Am

b er ex ecu t ed th e Am

b er SPA o n J u ly

1 7 , 2 0 0 8 . Th e fi rs t d at e o n wh i ch p et i ti o ner i n cu rredco s t s al l o cab l e t o the Am b er SPA (o ther t h an b i d d i n g ex p en ses o r ex p en ses i n cu rredi n co nn ect i o n wi th n eg o t i at i n g th e
co n tract ) was J u l y

2 4 , 2 0 0 8 , wh en p et i t i o n er p u rch as ed the At a o refi n ery fro m To p lam fo r u s e i n th e Am

b er SPA. Th u s, fo r p u rp o s es o f s ect i on 4 6 0 , th e co n t ract
co m m en cem en td at e o f t h e Am b er SPA was J ul y

2 4 , 2 00 8 . See s ec. 4 6 0 (g ); s ec. 1 .4 60 -1 (b )(7 ) an d(8 ), In co m e Tax Reg s.- 5 2 -

[* 5 2 ] 2
. Two -Year Es t i m at e

a. Part i es ’ Arg u m en t s As was th e cas e wi th th e Pet ro m ax x SPA, th e p art i es d i s ag ree wh et h er p et i t i o n er reas o n ab l y

es t i m at edth atth e Am

b er SPA co u l dh av e b een co m p l et ed wi th i n two y ears fro m

th e co n tract co m

m en cem en td at e o f J u l y

2 4 , 2 0 0 8
. Res po n d en targ u es th atth e t erm s o f t h e Am b er SPA i t s el f s h o w th atp et i t i o n er d i d
n o treas o n ab l y

ex pect th e SPA t o b e co m p let ed wi th i n two y ears . Res p o n d en tal s o rel i es o n M r. Harri s ’ ex p ertt es t i m o n y th at4 -1 ' 2 y ears i s an o p t i m i st i c es t im at e o f th e t i m e req ui redt o co m

p l et e a p ro

ject s im il ar t o th e Am

b er refi n ery

p ro ject
. Pet i t io n er ag ai n arg u es thati ts 3 -D l as er s can n i n g an dp aral l el p ro ces s i n g s y s t em al l o wed itt o reas o nab l y

es ti m at e t hatth e Am

b er SPA wo u l db e co m

p l et edwi th in two y ears an dth atM r. Harri s d i dn o tco n si der p et i t io n er’ s p aral l el p ro ces s i n g
s y s t em wh en d et erm in in g h ow l o n g i two u l d t ak e t h e p art i es t o co m p l et e t h e Am b er refi n ery

p ro j ect
. b
. Term s o f t h e Am

b er SPA Wh i l e t h e d at es s p eci fi edi n a co n tractare n otd i s po s it i v e, t h e Co u rtwi l l fi rs tl o o kt o th e t erm s o f t h e Am b er SPA t o h el p d et erm i n e p et i t i o n er’ s
ex p ect at i o ns atthe t i m e i ten t eredi n t o th e ag reem en t . Th e Am ber SPA i s g o v ern edb y

Tex as l aw, i n cl u d i n g Art i cl e 2 o f t h e Un i fo rm Co m m erci al Co d e- 5 3 -

[* 5 3 ] (UCC). Un d er Tex as l aw, i nt erp ret i ng a wri t t enco n tract i s p ri m ari l y a
m at t er o f “ as cert ai n [i n g] th e * * * i n t en t i on s o f t h e p art i es as ex pres s edi n th e i n s tru m en t
. ” Co k er v . Co k er, 6 5 0 S.W .2 d3 9 1 , 3 9 3 (Tex . 1 9 83 ). A th res ho l d i s su e i n co n tract i n t erp ret at io n i s wh et h er th e co n tract i s am b i g uo u s . A co n tract i s
am bi g uo u s i f the t erm s u sedare reas o n ab l y s us cep t i b l e o f m o re t h an o n e m ean i n g . See i d
. Wh ere an u n am

bi g u o u s wri t i n g h as b een en t eredi n t o b et ween p art i es , th e
co u rt s wi l l g i v e effect t o t h e p art i es ’ i n t en t i o n as ex p res s edo r ap paren ti n th e wri t in g . Ci ty

o f Pi neh u rs t v . Sp o o n er Ad d i ti o n W at er Co ., 4 3 2 S.W .2 d5 1 5 , 5 1 8 (Tex . 1 96 8 ). In th e u s ual cas e t h e i n s tru m en t al o n e wi ll b e d eem edt o ex pres s th e i n t en t i o n o f t h e p art i es fo r i ti s o b ject i v e, n o t s ub

ject iv e, i n t en tth atco n tro l s . Id
. Gen eral l y , th e p art i es t o a co n tract i n t en d ev ery cl au se t o h av e s o m e effect an di n
s o m e m eas u re t o ev i d en ce th ei r ag reem en t
. Id . Al l p art s o f a co n tract are t o b e t ak en t o g et h er, an ds u ch m ean i n g s h al l b e g iv en t o th em as wi l l carryo u t an d effect t o th e fu l l es tex t en tthe i n t en t i o n o f t he p art i es . Id . at5 1 9
. Th e t erm s o f t he Am

b er SPA are n o t am

b i gu o u s . Wh i l e t h e Am

b er SPA i s
s i len t wi th res p ectt o m an y an t i ci p at edp erfo rm an ce d at es , there i s a s i g n i fi can t l eg al d i fferen ce b et ween am b i g u o u s co n tract s an ds i l en t co n tract s . See Th o m p s o n
v . CPN Part n ers , LP, 2 3 S.W .3 d6 4 , 7 1 (Tex . Ap p . 2 0 0 0 ). Th e o nl y t erm i n th e- 5 4 -

[* 5 4 ] Am b er SPA t h atreferen ces a s p eci fi c d at e i s wi th res pect t o p et i t i o ner’ s d el i v ery o b l i g at i o ns ; th e Am

ber SPA cl earl y

s t at es thatp et i t i on er was req u i redt o d el i v er t h e l as tu n itt o a s p eci fi eds i t e i n Tu rk ey 2 9 b y No v em b er 1 5, 2 0 10 , ap p ro x i m at el y 2 8 m o n th s aft er t h e J u l y 2 4 , 2 00 8 , co n tract co m

m en cem en td at e. If p et i t i o n er fai l edt o d el i v er b y No vem b er 1 5 , 2 0 1 0 , p et i t i o n er was s ubjectt o p en al t i es ; i f p et i t i o ner d el i vered th e l as t u ni tb efo re No v em ber 1 5 , 2 0 10 , i twas
en t i t l edt o b o n u s p aym en t s . Tak en t o g et h er, t h e d el i v ery d at e an dth e p o t en t i al p en al t i es an db o nu s p aym en t s i nd i cat e t h atth e p art ies i n t en d edNo v em ber 1 5 , 2 0 1 0 , t o b e t h e ap p ro x i m at e d at e b y

wh ich p et i t i o n er wo u l d d el i v er th e l as tu n i t. Th i s d el iv ery d at e o ccu rredm o re t h an two y ears aft er t h e co n tract co m m en cem en td at e--J u l y

2 4 , 2 0 0 8 --an d Am

b er s t i l l h adt o tran s p o rtth e refu rb i s h edp art s fro m Tu rk ey t o Pak is t an , co n s tru ct th e refi n ery , an dco m m i s s i o n an dp erfo rm an ce t es tth e n ewl y
as s em b l edrefi n ery

b efo re p et i t i o n er wo u ldh av e s at i s fi edi t s co n tract u al
o b l i g at i o ns .

2 9 Th e Am b er SPA res erv edth e ri g h t t o d et erm i n e t h e fi n al l o cat i o n o f t h e refi n ery , b u tatth e t i m e o f ex ecu t i n g th e SPA, a l o cat i o n i n Pak i s t an was th e t arg et
.- 5 5 -

[* 5 5 ] Becau s e th e d at es s p eci fi edi n th e Am b er SPA are n o td is p o si t i v e wi th
res p ectt o t h e t wo -y ear ru l e, s ee s ec. 1 .4 6 0 -1 (f)(4 )(i ), In co m e Tax Reg s . , th e Co urt wi l l n ex tco n s i d er M r. Bal k e’ s t es t i m o ny .

c. M r. Bal k e’ s Tes t i m o n y Al th ou g h the t erm s o f t h e Am b er SPA d o n o treferen ce p aral l el p ro ces s i n g
o r s p eci fi c d at es b y

wh i ch th e refi n ery

h adt o b e as s em

b led , co m m i s s i o n ed , an d p erfo rm an ce t es ted , p et i t i on er arg u es th atth e No v em b er 1 5, 2 0 1 0 , d el i v ery

d at e
was an arb i traryd at e s el ect edb y th e p art i es an dth at th e p art ies i n t en d ed t o i m p l em en tp et i t i o n er’ s p aral l el p ro ces s i n g s y s t em , wh i ch wo u l dh av e al l o w edth e Am b er SPA t o b e co m

p l et ed wi th i n “ ab o u t1 8 t o 2 4 m o n th s . ” Pet i t i o ner rel i es o n ly

o n M r. Bal k e’ s u ns upp o rt edt es t i m on y ; p et i t i o ner d i d
n o tp ro du ce an y

o ther wi tn es s es , p ro v i d e t h e Co u rto r res po n d en twi th d o cu m en t ary

ev i d en ce t hatwo u l drefl ectth e p art i es ’ i n t en t t o u s e a p aral l el p ro ces s i n g s y s t em , 3 0 p ro du ce an y ev i d en ce t o s h o w thatth e p art i es ’ co ndu ct refl ect edan i n t en tt o co n du cto p erat i o n s u si n g a p aral l el p ro ces s i n g s y st em , o r
ev en ex p l ai n ex act l y

h ow m u ch t i m e p aral l el p ro ces s i n g wo u lds av e. Ev en i f t h e

3 0 Un l i k e t h e Pet ro m ax x SPA, wh ich d i d n otreferen ce 3 -D l as er s can n i n g an d m o d el i n g , th e Am

ber SPA s p eci fi cal l y

refers t o 3 -D l as er s can n i n g an d m o del in g . Ho wev er, l i k e t h e Pet ro m ax x SPA, th e Am b er SPA d o es n o tm en t i o n p aral l el p ro ces s i n g o r ad dres s th e p u rch as er’ s o b l i g at i on s u nd er s u ch a s y s tem
.- 5 6 -

[* 5 6 ] Co u rtas s u m es th at th e p art i es wo u l db e co m p l et i n g t h ei r t as ks
s i m u l t an eo u s l y , p et i t io n er d i dn o t p ro v e t h atp aral l el p ro ces s i ng wo u l dal l o w th e p art i es t o co m

pl et e t h e co n tract wi th i n two y ears . Al th ou g h M r. Bal k e h as o v er 3 0 y ears o f ex p eri en ce i n wo rk i n g wi th o i l refi n eri es an d refi n ery

equi p m en t , i n cl u d i ng i n tern at i o n al d eal i n g s , h e d i d n o t p ro v id e a s i n gl e co n cret e ex am p l e o f a p ro

ject s im il ar t o th e Am

b er refi n ery p ro ject wh ere t h e p art i es co n du ct edo p erat io n s u s i n g a p aral l el p ro ces s i ng s y s t em
an d co m p l et edi twi th i n t wo y ears fro m i t s co m m en cem en td at e. An d there i s n o i n d i cat i o n t h at M r. Bal k e’ s p ro ject i o n s t oo ki n t o acco un tan y u n an t i ci p at edd el ay s. See i d . Pet i t i o n er s i m

pl y h as n o ti n tro du ceds u ffi ci en tev i d en ce t o s h o w th ati t s
ex p ect at i o ns wi th res p ect t o th e Am b er refi neryp ro

ject ’ s t i m efram e d iffered fro m th o s e o b ject iv el y m an i fes t edi n th e Am

b er SPA. 3 1 d
. Co n cl u s i o n As wi th th e Pet ro m ax x refi n ery p ro ject , p et i t i o ner h as n o tm eti t s b u rd en t o p ro v e th atres po nd en t ’ s d et erm i n at i on reg ard i n g the Am b er refi n ery p ro

jectwas arb i trary . Res p o n d en t ’ s p o s i t i o n th atp et i ti o n er co u l d n o th av e reas o n ab l y
es t i m at edth atth e Am

b er refi n ery

p ro jectwo ul db e co m

p l et edwi th in tw o y ears i s
s up p ort edb y

th e t erm s o f t h e Am

b er SPA; o n i t s face, t h e Am b er SPA cal l edfo r a

3 1 Th e p art i es can cel edth e Am b er SPA o n J an u ary

1 8 , 2 0 1 0
.- 5 7 -

[* 5 7 ] d el i v ery

d at e m o re t h an two y ears aft er t h e Am b er SPA co m

m en cem en t d at e. Ev eni f t h e Co urtco n s i d ers M r. Bal k e’ s s el f-s erv i n g t es t i m o n y , p et i t i o n er d i dn o t p ro v i d e an y

ev i den ce t o s up p o rth is t es t im o n y . Th e Co u rt co ncl u d es th at p et i t i o n er d i dn o tm eeti t s b u rd en i n p ro v i n g that , at th e t i m e i ten t eredi n t o th e Am b er SPA, i t reas on ab l y

ex p ect edth e co n tract t o b e co m p let e wi th i n two y ears fro m i t s co m m en cem en t d at e. Acco rd i n g l y , p et i ti o n er was n o tel i g ib le t o rep o rt i n co m e fro m

th e Am b er p ro jectu s i n g th e co m

p l et edco n tract m et h o do f
acco u n t in g . IV. Sect io n 6 6 6 2 (a) Accu racy -Rel at edPen al t i es Sect io n 6 6 6 2 (a) an d(b )(1 ) an d(2 ) i m p o s es a 2 0 % accu racy -rel at ed p en al t y wi th res p ect “ t o an y

p ort i o n o f an u n d erp aym en to f t ax req ui redt o b e s h o wno n a retu rn ” i f that un d erp aym en ti s du e t o , am o n g o th er t h i n g s , n eg l ig en ce o r a
s ub s t an t i al u n ders t at em en to f i nco m e t ax . Anaccu racy -rel at edp en al ty d o es n o t ap p ly t o an y p o rt i o n o f an u n d erp aym en t o f t ax fo r wh i ch th e t ax p ay er h ad
reas on ab l e cau s e an dact ed i n go o d fai th . See s ec. 6 6 6 4 (c)(1 ). Sect io n 6 6 6 2 (b )(2 ) i m

p os es a 2 0 % p en al ty

o n an y u n d erp aym en t at tri b u t ab l e t o an y

“ s ubs t an t i al u n d ers t at em en to f i n co m e t ax .” An

“ u n d ers t at em en t” g en eral ly i s t h e ex ces s o f th e am o un to f t ax req u i red t o b e s h o wn
o n th e ret u rn o v er t he am ou n to f t ax thati s actu al l y s ho wno n th e ret u rn . Sec.- 5 8 -

[* 5 8 ] 6 6 6 2 (d )(2 )(A). Fo r a C co rp o rat i o n , an u n d ers t at em en ti s “ s ub s tan t ial ” i f i t
ex ceed s t h e l es s er o f 1 0 % o f t he t ax req u i redt o b e s ho wno n the t ax retu rn (o r, i f g reat er, $ 1 0,0 0 0 ) o r $ 1 0 m il l i o n . Sec. 6 66 2 (d )(1 )(B). Un d er s ect i o n 7 4 91 (c), t h e Co m m i s s i o n er b ears th e b u rd en o f p ro du ct i o n wi th reg ardt o p en al t i es fo r i n d i v i du al t ax pay ers , Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 6 (2 0 0 1), b u t
s ect i on 7 4 9 1 (c) d o es n o t ap p ly wh ere, as h ere, t h e t ax p ay er i s a co rp o rat i o n , NT, In c. v . Co m

m is s io n er, 1 2 6 T.C. 1 9 1 , 1 9 4 (2 0 06 ). Pet i t i o ner s ub s t an t i al l y

u n d ers t at edi t s i n co m e t ax fo r b o th 2 0 09 an d2 0 1 0 , rep o rt i n g zero t ax l i ab i l i ty fo r each o f t ho s e y ears . An dth ere i s n o d is ag reem en t th atu n d er ei th er o f res p o nd en t ’ s al t ern at i v e p o s i ti o ns , th e am o un to f t ax req u i red t o b e s h own ex ceed s $ 1 0 ,0 0 0 fo r each y ear. Th erefo re, t h e Co u rtwi l l l o o kn ex tt o wh et h er p et i ti o n er h as s h o wnth ati ti s n o tl i ab l e fo r th e p en al ty b ecau s e o f
reas on ab l e cau s e. Ru l e 1 4 2 (a); s ee Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 7
. Pet i t i o ner arg u es th ati ti s n o tl i ab l e fo r t h e 2 0 % accu racy -rel at edp en al t y b ecau s e, i n v i ew o f t h e co m p l ex i ty o f s ect i o n 4 6 0 an dth e acco m p an y i n g reg u l at i o n s , i t m ad e a g o o d -fai th effo rtt o co m p l y . In g en eral th e accu racy -rel at edp en al ty d o es n o tap pl y

t o an y p o rt i o n o f an
u n d erp aym en t o f t ax i f i t is s h own th atthere was reas o n ab l e cau s e fo r s uch p o rt i o n
an d th atth e t ax p ay er act edi n g o o dfai th. Sec. 6 6 6 4 (c)(1 ). Th e d et erm i n at i o n o f- 5 9 -

[* 5 9 ] wh et h er a t ax p ay er act edwi th reas o n ab l e cau s e an di n g o o dfai th i s m ad e o n
a cas e-b y -cas e b as is , t ak i n g i n t o acco un t al l o f t h e p ert i n en t fact s an d ci rcu m s t an ces . Sec. 1 .6 6 64 -4 (b )(1 ), In co m e Tax Reg s . Gen eral l y , th e m o s t i m p o rt an tfact o r i s t h e ex t en to f t h e t ax pay er’ s effo rt t o as s es s h i s o r h er p ro p er t ax l i ab i l i ty . Id
. Reas o n ab l e cau se req u i res th atth e t ax pay er ex erci s edo rd i naryb u s i n es s
care an dp ru d en ce as t o th e d i s p u t edi t em . Un i t edSt at es v . Bo y l e, 4 6 9 U.S. 2 4 1 , 2 4 6 (1 98 5 ). Itcan b e s h o wnthro u g h reas o n ab l e rel i an ce o n p ro fes s i o n al ad v i ce
o n m at t ers b ey o n d a l ay

p ers o n ’ s u n d ers t an d i n g: Wh en an acco u n t an to r at t o rn ey ad vi ses a t ax p ay er o n a m at ter o f t ax l aw, s u ch as wh et h er a l i ab i l i ty ex i s t s , i ti s reas o n ab le fo r t he t ax p ay er t o rel y o n t h atad v i ce. M o s tt ax pay ers are n o tco m p et en tt o d i s cern erro r i n th e s ub st an t i ve ad v i ce o f anacco u n t an t o r at t o rn ey . To req u ire t h e t ax p ay er t o ch al l en g e t h e at t o rn ey , t o s eeka “ s eco n d o p i n i o n ,” o r t o try

t o m o n i t o r co u n s el o n th e p ro v i s io n s o f t h e Co d e h i m s el f wo u ldn u ll i fy

th e v ery p u rp o s e o f s eek i n g the ad v i ce o f a p res um edex p erti n t h e fi rs tp lace. * * * Id . at2 5 1 ; Graev v . Co m m i s s i on er, 1 4 7 T.C. _

_ , _

_ (s l i p o p . at3 9 -4 0 ) (No v . 3 0 , 2 0 1 6 ); Neo n at ol o g y

As so cs ., P.A. v . Co m

m i s si on er, 1 1 5 T.C. 4 3 , 9 9 (2 0 0 0), aff’ d , 2 9 9 F.3 d2 2 1 (3 d Ci r. 2 0 02 ); Freyt ag v . Co m m i s s io n er, 8 9 T.C. 8 4 9, 8 8 8 (1 9 8 7 ), aff’ do n an o th er i s s u e, 9 0 4 F.2 d1 0 1 1 (5 th Ci r. 1 9 9 0 ), aff’ d , 5 0 1 U.S. 8 6 8 (1 9 9 1 ).- 6 0 -

[* 6 0 ] Pet i ti o n er u s edth e s erv ices o f t h e s am e CPA fro m atl eas t 2 0 0 5 t h ro u g h 2 0 1 0 . Ho wev er, t h e o n l y ev i d en ce o f p et it i o n er’ s rel i an ce up o n p ro fes s i o n al ad v ice ren d eredb y

i t s CPA i s t h e fact th ati t s Fed eral i n co m e t ax retu rn s were fi led
. No th i ng i n t h e reco rdi n di cat es th at p et it io n er ei th er req u es tedo f o r recei v edfro m

i ts CPA ad v i ce reg ard i n g the ap p li cat i o n o f t he l on g -t erm co n tract
ex cep t i o n u n d er s ect i o n 4 6 0 (e) t o th e Pet ro m ax x o r Am ber SPAs . Bas edo n th e ab s en ce o f ev i d en ce i n d icat i n g th atp et i t i o n er ev en ad dres s edth i s i s s u e wi th i t s CPA, t h e Co u rtcan n o tfi n dth ati tex erci sedo rd i n ary b u s i n es s care an dp ru d en ce h ere. Ci rcu m s t an ces th at m ay al s o i n d i cat e reas o n ab le cau s e an d g o o d fai th i n cl u d e an h o n es tm i s u n d ers t an d i n g o f fact o r l aw t h at i s reas o n ab l e i n t h e l i g h to f al l th e fact s an dci rcu m s tan ces , i n cl u d i n g th e ex p eri en ce, kn o wl ed g e, an d edu cat i o n o f t h e t ax p ay er. Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at 4 4 9 ; s ec. 1 .6 66 4 -4 (b )(1 ), In co m e Tax Reg s . As d i s cu s s edatl en g th s up ra, t h e Co u rth as fo u ndu n reas o n ab l e p et i t i o n er’ s al l eg edb el i ef, atth e t im e i ten t eredi n t o th e Pet ro m ax x an d Am b er SPAs , th at ei th er co n tract co u l d b e co m p l et edwi th i n two y ears . Des p i t e h is ex t en s iv e
ex p eri en ce i n wo rk i n g wi th b o th d o m es t i c an di n t ern at i o n al o i l refi n ery p ro ject s , M r. Bal k e d i dn o t p ro v i d e an y co n cret e ex am pl es o f p rev i o u s p ro

j ect s th ath e h ad- 6 1 -

[* 6 1 ] wo rk edo n t o s up p o rth i s cl ai m th ath e t h o u gh tth e Pet ro m ax x an dAm b er SPAs co u l db e co m

p l et ed wi th i n two y ears , an dh e ag reedwi th M r. Harri s ’
es t i m at es wi th res pect t o each p ro ject ’ s durat i o n t o th e ex t en tth ey were b as edo n trad i ti o n al i n du s try

p ract i ces . Al th ou g h the reg u l at i o n s s t at e t h atd at es i den t i fi edi n a co nt ract are n o t d i s p o s i t i ve t o th e Co u rt ’ s an al y s i s , s ec. 1 .4 6 0 -1 (f)(4 )(1 ), In co m e Tax Reg s ., p et i t i o n er co u l dh av e co n tro l l ed --atl eas tt o s om e ex t en t--t h e v ari o u s p erfo rm an ce d at es thatwere s p eci fi edi n th e SPAs . If p et i t i o n er b el i ev edth ati two ul d d el i v er th e l as t refu rb i s hedu ni tb efo re th e d el i v ery d at es s p eci fi ed , i t co u l dh av e p ro v i d ed
s o i n th e SPAs th em s el v es . Pet i t i o n er co u l dh av e req ui redAm b er an dPet ro m ax x t o s h i p th e refu rb is h edu n it s b y a cert ai n d at e, co m

p l et e t he refi n ery

s i t e b y a
s p eci fi c d at e, co m

p let e as s em

b l y b y a s p eci fi c d at e, an d co m

p let e co m m is s i o n i n g
an d p erfo rm an ce t es t in g b y a cert ai n d at e. Ho wev er, n ei th er SPA s p eci fi edth o s e
an t i ci p at edp erfo rm an ce d at es . Th e o n l y p erfo rm an ce d at es s peci fi edi n the Am b er an dPet ro m ax x SPAs were wi th res p ectt o p et i t i o ner’ s d el i v ery o b l i g at i o n s , an d th os e res p ect i v e d at es refl ectan ex p ect at i o n o f co m p l et i n g each co n tract wi th i n a p eri o dex ceed i n g two y ears . Al th ou g h the co nt ract s l ack eds p eci fi c p erfo rm an ce d at es , p et i t i o n er h ad
an o th er o p p ortun i ty

t o co n tro l co m

p l et i o n d at es b y creat i ng a p ro j ects ch edu l e.- 6 2 -

[* 6 2 ] Bo th SPAs referen cedp ro ject s ch edu l es t o b e p ro v i d edb y p et i t i o ner; b u tth e p ro ject s ch edu l es were n o ti n cl u d edi n the SPAs , an dp et it i on er d i d n o tp ro v i d e t h e Co u rto r res p o n d en t wi th an y s ep arat e p ro

jects ch edu l e. A reas o n ab l y p ru den t t ax p ay er wo u l dh av e s o m e d o cu m en t at i o n t o s up po rti t s p o s i t i o n ; o ut s i d e o f M r. Bal k e’ s t es t i m o ny , p et i t i o ner d i dn o t p ro vi d e th e Co u rto r res p o nd en t wi th an y
ev i d en ce t h atwo u l ds up po rti t s d eci s io n t o acco u ntfo r t h e Pet ro m ax x an dAm ber SPAs u s i n g th e co m

p l et edco n tract m et h od
. Fo r t h e afo rem en t i o n edreas o n s , th e Co u rtco n cl ud es th at p et i t io n er d i dn ot actwi th reas o nab l e cau s e an di n g o o dfai th wh en i t acco u n tedfo r t h e Pet ro m ax x
an d Am ber SPAs u s i ng th e co m

p l et edco n tract m et h o do f acco u n ti n g . Acco rd in g ly , th e Co u rtwi l l s u s t ai n res p o nd en t's d et erm i n at i o ns wi th res p ectt o th e
accu racy -rel at edp en al ti es fo r 2 0 0 9 an d 2 0 1 0
. 3 2 Th e Co u rth as co n s i d eredal l o f t h e arg um en t s m ad e b y th e p art i es , an dt o th e ex t en tth ey

are n o tad dres s edh erei n , th ey are co ns i d eredu nn eces s ary , m o o t , i rrel ev an t , o r wi th o u tm eri t
.

3 2 Becau s e t h e Co u rts u st ai n s th e s ec. 6 6 6 2 (a) accu racy -rel at ed p en al ty o n th e g ro u n do f s ub s t an t i al u n ders t at em en t u n d er s ec. 6 6 62 (b )(2 ), th e Co u rtd o es n o t n eed to d eci d e wh et h er t h e p en al ty s h o u l d al s o b e s u s t ai n ed o n th e g ro u n d o f n eg li g en ce u n der s ec. 6 6 6 2 (b )(1 ). Sec. 1 .6 6 6 2 -2 (c), In co m e Tax Reg s .- 6 3 -

[* 6 3 ] To refl ectth e fo reg o i n g an dthe co n ces si o n s o f t h e p art i es , Deci s i o n wi ll b e en t ered
u n der Ru l e 1 5 5
.