T.C. Mem o. 2 01 3- 27 5

UNITED STAT ES TAX COURT

MIC HAEL D. BROWN AND MARY M. BROWN, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 1 09 7- 07 , 23 60 -0 7, Fil edDecem be r 3, 2 01 3. 64 9- 08 , 72 1- 09 , 31 01 2- 09 , 51 08 -1 1.

Mi ch ael Ch arl es Co he n, J on atha n I. R ei ch , Ju di an ne J. J affe , Rus se ll M. Ozawa, an d Dav idL. Rice , forpe ti ti on ers . Lou is B. Ja ck , Jer i L. Acro m it e, Kev in W . Coy, andSh erri Sp rad le y W il de r, fo r res po nd en t.- 2 -

[* 2] MEMORANDUM FINDINGS OF FACT AND OPINION HOLMES, Ju dg e: On Dece m be r 30 , 20 03 , an i ns ur an ce s al es m anna m ed Mi ch ael Bro wn to okown ers hi p o f a $ 22 m il li on pl an e in Po rtl an d, Ore go n. He 1 fle w fro m th ere t o S eat tl e to Ch ic ag o- -h e sa y s fo r bu si ne ss m eet in gs --an d t he n ba ckto Po rtl an d. Br own says th es e fl ig ht s p utth e p la ne inservi ce i n 2 00 3, an d
en ti tl e h im

to a gi an t b on us -d ep reci at io n a ll owa nc e. Bu t a f ew da y s l at er h e h ad th e p la ne flo wn t o apl an t i n Il li no is wher e itun de rwen t ad di ti on al m od ifi cat io ns th atwere co m

pl et edab ou t a m on th lat er. The Co m m is si on er s ay s t he se ad di ti on al
m od ifi cat io ns m ean th atBro wn d id n’t p la ce the pl an e in servi ce u nt il 20 04
. W e h av e to fig ur e o utwhatex act ly it m ean s t o p uta pl an e “ inservi ce.”

FINDINGS OF FACT I. Bro wn’s In su ran ce Bu si ne ss Fit zg eral d a ss ert edth at“ th e v ery ric h * * * are d iff eren t fr om

y ouan d m e.” F. Sco ttFit zg eral d, “ The Ric h B oy”, in All th e SadYou ng Men1, 5 (19 26 ). Hem in gwa y

rep li edth at“ [t]he ve ry

ric h a re d iff

eren t fr om

y ouan d m e. * * * [T]hey ha ve m or e m on ey .” Erne stHem in gwa y , “ The Sn ows of Ki li m an jaro ”, in The Fif th Co lu m n a ndth e Fi rs t Fo rty-Nin e St or ie s 5 8, 7 8 (1 93 8) . The fac ts of Mary Brown is a pa rty on ly becau se sh e an d h er h us ba ndfil eda joi nt 1 return. Al l re fere nc es to Bro wn ar e to Mi ch ael Bro wn.- 3 -

[* 3] th is cas e sh ow t ha t b ot h s ta te m en ts are tru e: The v ery ric h h av e m uc h m or e m on ey an d t he y canus e itto do th in gs with i ns ur an ce tha t m os t p eo pl e can ’t. Bro wn h as bu il t h is care er o n fi gu rin g o utho w to he lp th e v ery ric h d o t he se th in gs . He fin ds whatFit zg eral d c al le d t he “ co m pe ns at io ns an d re fu ge s o f li fe,” Fi tz ge ral d, s up ra, at5-- orat l eas t o f li fe i ns ur an ce-- fo r th em to us e inth ei r es ta te pl an ni ng . Andhe ’s bee n v ery su cces sf ul --h e d oe sn ’t bo th er s el li ng po li ci es wort h le ss th an$1 0 m il li on , andha s s ol d aha nd fu l i n t he ran ge of $ 30 0 m il li on . On th os e la rg er o ne s, the pre m iu m s av erag e b etween$1 0 a nd$1 5 m il li on pe r y ear. Si nc e Bro wn’s co m

m is si on on a po li cy

oft enequa ls th e fi rs t year’s pre m iu m , he’s
earn edov er $ 10 m il li on on a si ng le po li cy sev eral ti m es --an d o nc e ev enearn ed $1 7 m il li on on a si ng le de al
. As o ne m ig htim ag in e, in di vi du al s wi th th e m ean s t o b uy the se po li ci es are no t co m m on , andBro wn h as to co ns ta nt ly pro sp ectforne w cli en ts . Mos t o f th es e he ge ts th ro ug h re ferr al s, an d m os t o f hi s re ferr al s co m e fro m a ne two rkof C PAs
an d o th er i ns ur an ce ag en ts he ha s n urtu redfory ears . Whe n an a ge ntor acco un ta ntinhi s n etwork i de nt ifi eda Fo rb es 40 0 m em be r pu rs ui ng anin su ran ce pr og ram , th atco nt actwou ldoft encal l Br own --an in su ran ce g en iu s o fte n a he adof th e IRS inhi s u nd ers ta nd in g o f th e Co de ’s in tri caci es , or a t l eas t i ts ap pa ren t- 4 -

[* 4] in tri caci es --t o e xp la in an d s el l the in su ran ce. If Br own clo se d t he de al , he 2
wou ldsh are t he co m

m is si on with t he on e who bro ug hthi m th e le ad
. II. NeedforanAirc raft The ve ry ric h a re al so ve ry

de m an di ng . Early in hi s careerBro wn re al iz ed th atrel y in g o n c omm erci al fli gh ts to m eetpro sp ect iv e cl ie nt s ata m om en t’s wh im
wou ldli m ithi s s uc ces s, s o h e b eg anto ch art er jet s. Th e ab il it y to ge t t o pr os pe ct iv e cl ie nt s qui ck ly on t he ir o wn s ch edul es ga ve hi m a hu ge adva nt ag e ov er h is co m

pe ti to rs . Butev en tu al ly even ch art eri ng ledto m is se d b us in es s op po rtu ni ti es . Bro wn cr ed ib ly test ifi edth atjet o wne rs oft enren eg edon th ei r or al
co m m it m en t t o s up pl y

a pl an e an d, as Bro wn s ai d, “ [i]f th ey de ci de to us e it th em se lv es , y ou ’re justou t o f lu ck .” He reco un te d o ne su ch m is se d o pp ortu ni ty: He ha d s etup a m eet in g wi th th e Koc h b ro th ers inKans as an d a rran ge d fo r a ch art er fro m

Oran ge Co un ty to Wich it a. Butwhen he arri ve d a t the air po rt, t he 3 pl an e d id n’t s ho w up an d t he ch art er co m pa ny tol d h im

th atth e o wne r ha d d eci de d

In 2 00 2, a New Yo rkTim es art ic le cred it edhi m an d ana ti on al ly kno wn 2 es ta te -p lann in g a tt orne y

with i nv en ti ng a sp li t-d ol la r li fe-i ns ur an ce arran ge m en t th aten ab le d B ro wn’s cl ie nt s t o a vo id$9 inest at e ta xe s fo r ev ery $1 of i ns ur an ce th ey bo ug ht . W it hi n am ere t hr ee wee ks aft er the art ic le ’s publ ic at io n, the IRS is su edNot ic e 2 00 2- 59 , 20 02 -2 C.B. 4 81 , whi ch di sa ll owe d t he arra ng em en t’s u se . The Ko ch bro th ers are p artof t he fam il y th atco nt ro l Ko ch Indus tri es , an 3 ex cep ti on al ly larg e p riv at el y own edco m

pany.- 5 -

[* 5] to us e itforhi m se lf. Br own co ul dn ’t fly co m m erci al ly to Wich it a to m ak e th e m eet in g, an d t he Koch s d id n’t re sc he du le . He lat er l earn edth ey en de d up b uyin g a p ol ic y fro m an ot he r ag en t tha t re su lt edinan$8 m il li on co m m is si on . Tha t m is se d o pp ortu ni ty in 2 00 1 p ers ua de d B ro wn t o b uy a pl an e fo r hi m se lf. Th atpl an e was a Hawke r jet m an ag edby a com pa ny call edPri va tAi r-- an d i t h el pe d B ro wn a g oo d d eal in m eet in g t he ne ed s o f hi s ups cal e cl ie nt el e. He
co ul d e ve n o ccas io na ll y

tra ve l t o fo urdi ffer en t s ta te s o n t he same day to m eetwith pr os pe ct iv e cl ie nt s. Owni ng a pl an e al so en ab le d h im to est ab li sha “ cert ai n rap po rt” with the “ ex tre m e h ig h e ndof t he in su ran ce b uyers,” m os t o f who m als o own edth ei r own jets . The Hawk er, h owe ve r, wasn ’t per fect . It was “ on ly abo uta fo ur [-]ho urair

pl an e,” wh ic h m ean t tha t Br own co ul dn ’t fly no ns to p fr om Los Ang el es to New York --the two cit ie s t ha t h e sa idha d t he m os t b il li on ai res --u nl es s he ha d ajet s tre am

be hi ndhi m . W it ho uton e, he ha d t o s to p i n Kan sa s t o re fu el , whi chst ret ch eda fi ve -h ou r jou rn ey in to a se ve n- ho uron e. III. The Sear ch foranUpg rad e Thi s i ne ffi ci en cy

wore on Bro wn, an d h e d eci de d t o upg rad e h is rid e. Rec og ni zi ng th e lo w in te res t ra te s p rev al en t i n 2 00 3 (c om pa redto th e 8 % in te res t he was p ay in g o n the m on ey he bo rro wedto bu y

th e Hawk er), h e b eg anto sh op fo r a l on ge r-rang e ai rcra ft. Hi s s earc h i nt en si fie d i n M ay 20 03 when Co ng res s- 6 -

[* 6] in crea se d b on us de pr eci at io n fr om 30 % to 50 % forcert ai n k in ds of p ro pe rty acqui redan d p la cedinservi ce b etweenMay 6, 20 03 an d Dec em be r 31 , 20 04 . See Jo bs an d Gro wth Tax R el ie f Rec on ci li at io n Actof 2 00 3 (J GTRRA), Pub. L. No. 10 8- 27 , sec . 20 1, 1 17 Sta t. at75 6. Upo n l earn in g o f th at“bi g b en efi t” --an d i n c om bi na ti onwith h is

“ ex cep ti on al ly goo d year”--B ro wn s ta rte d h is hu ntfora be tt er p la ne . Buthe in si st edth atwhat ev er was off eredto hi m

be av ai labl e fo r de li ve ry in20 03 . After
un su cces sf

ul ly try in g t o b uy an ai rp la ne on hi s o wn, Br own cal le d Woo dy McC le nd on . McCl en do n was work in g fo r a co m pa ny nam edPri va te JetServ ic es , In c., bu t Br own ha d kno wn h im si nc e h is da y s atPri va tAi r, th e p la ne -m an ag em en t co m pa ny tha t Br own ha d u se d fo r y ears . McCl en do n d ire ct edBro wn t o a Bo m ba rd ie r Ch al le ng er 6 04 . AndMcC le nd on to ldhi m th atth e Ch al le ng er wo ul d be av ai labl e fo r de li ve ry

by the en d o f 20 03 --an ab so lu te m us t fo r Bro wn wh os e in co m e, an d t hu s wh os e ab il it y to us e v ery la rg e d ep reci at io n a ll owa nc es , cou ld
va ry gre at ly from

y ear t o year. Bro wn qui ck ly too k o ff aft er thi s l ead . He pro m is eda $2 00 ,00 0
co m m is si on to Pri va te JetServ ic es , andMcC le nd on fle w to Cah ok ia , Ill in oi s, t o in sp ectth e jet- -th enown edby a com pa ny call edJet craf

t-- to en su re a Dec em

be r de li ve ry . The jetwas i n C ah ok iaat t he Mi dc oa stAvi at io n F aci li ty, a p la ntwher e- 7 -

[* 7] own ers co ul d h av e th ei r jets co nf ig ur edan d e qu ip pe d t o the ir s pe ci fic at io ns . (J et craf t h ada co nt ractwith M id co as t t o c on fig ur e jets th atJet craf t h adbo ug hton sp ecu la ti on .) Afterco nf

irming th atth e Ch al le ng er wo ul d b e rea dy for a Dec em be r 20 03 de li ve ry , McCl en do n p utBro wn i n t ou ch with J et craf t an d the y be ga n t o b ol t to ge th er a d eal . In ea rly Decem be r 20 03 , Bro wn h im se lf t rav el edto Cah ok iato ch eckMi dc oa st ’s pro gr es s, an d t oo k ates t fl ig htona si m il ar Ch al le ng er jetth at Mi dc oa stha d a lre ady

fin is he d wo rkon . Bro wn l ik edwhathe saw a ndso , on Decem be r 16 , 20 03 , he s ig ne d a
co nt ractto bu y

th e Ch al le ng er fo r $2 2 m il li on . He m ad e su re tha t the co nt ract requi redde li ve ry

inOreg onby D ecember 3 1, 2 00 3; an d i f Je tc raftfai le d t o d o s o, 4 th e co nt ractletBro wn t erm in at e th e d eal an d re cei ve a fu ll refu ndof h is en ti re de po si t. Bro wn m ad e n o s ecre t t o J et craf t an d M id co as t tha t h e n eed edto clo se by th atda te fortax reas on s. IV. Po st co nt ractMo di fic at io ns The $2 2 m il li on Bro wn p ro m is edto pa y was n otth e en ti re p ur ch as e p ric e. Whi le Bro wn was inCah ok ia , Mid co as t s ho wedhi m so m e o th er p la ne s, an d o ne in pa rti cu la r cau gh t h is ey e. It h ada co nf eren ce t ab le , injus t ab ou t the same spo t
Bro wn wan te d t he pl an e d el iv eredto hi m inOreg on be cau se th atst at e, 4 un li ke Cal ifo rn ia , has no sal es tax .- 8 -

[* 8] whe re Br own ’s pl an e h adtwo ba rcal ou ng ers . Bro wn was in sp ire d- -h e “ di dn ’t
wan t ju stco m fo rt” fro m

th e jet, h e “ wan te d t o u se itforbu si ne ss .” The
co nf eren ce t ab le was n ow a n eces si ty. McC le nd on tri edto di ss ua de Bro wn. He ad vi se d h im th atad di ng a co nf eren ce t ab le was n ota go odid ea, an d n otjus t b ecau se of i ts co stan d wei gh t. As M cCl en do n p utit , “ itwas abi g jo b,” requi rin g am ajor rewo rkof t he air

pl an e, in cl ud in g re bu il di ng th e fl oo r an d i ns ta ll in g asep arat e subh y dr au li c syst em . But 5 be cau se McC le nd on sai d t ha t Br own to ldhi m th athe “ ne ed editfor

hi s m is si on ,” Bro wn i ns is te d t ha t h is pl an e h av e a co nf eren ce t ab le
. Bro wn al so want edan othe r ch an ge to th e in te rio r. He freque nt ly use d Po werPo in t t o m ak e p res en ta ti on s t o p ot en ti al cli en ts or f el lo w in su ran ce ag en ts . Add in g aco nf

eren ce t ab le wou ldals o i nc reas e th e p la ne ’s sea ti ng 5 cap aci ty, an d m or e se at s m ean t tha t fe de ral reg ul at io ns wou ldrequi re the in st al la ti onof adi gi ta l fl ig ht -d at a rec or de r. The C omm is si on er fo cu se s o n t he fact th atth e fl ig ht -d at a rec or de r in st al la ti on was n eces sa ry on ly becau se Bro wn wan te d to us e th e ai rcra ft i n ach art er b us in es s i n a dd it io n t o h is in su ran ce b us in es s. An d be cau se th is m od ifi cat io n was no t m ad e u nt il 20 04 , th e Co m m is si on er ar gu es th at Bro wn co ul d n othave pl acedth e Ch al le ng er i n s erv ic e in 20 03 . Bro wn ar gu es th at --ev enth ou gh he di d s ig n ach art er ag reem en t fo r th e Ch al le ng er b eg in ni ng Ja nu ary 1, 2 00 4- -h e h adn’t d eci de d i n 2 00 3 wh ethe r to ch art er i t. Bro wn al so cred ib ly test ifi edth atch art eri ng is us edon ly “ to de fray som e o f th e co st , bu t i t’s no t a b us in es s tha t wi ll m ak e en ou ghm on ey to pa y forth e ai rp la ne .” W e m ak e n o fin di ng as t o wh ethe r Bro wn i nt en de d t o h av e a ch art er b us in es s i n 2 00 3, an d th eref or e we n eedno t-- an d wi ll no t-- de ci de whet he r th e la ck of adi gi ta l fl ig ht reco rd er i n 2 00 3 p rev en te d B ro wn fr om pl aci ng th e Ch al le ng er i n s erv ic e th at y ear.- 9 -

[* 9] Thi s was im

po rta ntto th e eff

ect iv en es s o f hi s s al es pi tc h, s o h e wan te d Mi dc oa stto rep la ce the st an da rd17 -in chdi sp lay scr een s wi th 20 -in ch scr een s. The se see m in gl y

m in orto uc he s ab ou t ad di ng th e co nf eren ce t ab le an d upg rad in g di sp la y scr een s wer e im

po rta ntto Bro wn’s b us in es s, an d we f in d h is tes ti m on y cred ib le whenhe st at edth at“ [h e] ne ed ed th os e two th in gs do ne ” fo r hi s b us in es s. Mi dc oa sthe si ta te d t o c om pl y with t he se de m an ds be fo re d el iv eri ng th e pl an e. Acco rd in g t o B ro wn, the se m od ifi cat io ns were “ to o s pe ci fic ” an d M id co as t di dn ’t “ li ke to m ak e supe r sp eci fic ad jus tm en ts un ti l you’ve alr eady bo ug htth e ai rp la ne .” W e fi nd , ho wev er, tha t the re was a reas on Bro wn di dn ’t wantth e ch an ge s m ad e unt il aft er h e to okown ers hi p o f th e p la ne : Mi dc oa stest im at edth at th es e m od ifi cat io ns --al on g wi th a few o th er re qu es te d c us to m iz at io ns --wo ul d t ak e atlea stsi x wee ks . Andth atwou ldpre ve ntBro wn fr om tak in g d el iv ery in 20 03
. So Bro wn an d M id co as t ag reedon analt ern at iv e. On Dec em be r 23 , 20 03
-- on e weekaft er Br own si gn edth e co nt ractto bu y th e p lane --M id co as t s en t h im a rev is edform , cal le d a n Ai rcra ft WorkAut ho riz at io n, t o re co nf ig ur e th e Ch al le ng er to in cl ud e, am on g o th er thi ng s, the co nf eren ce t ab le an d t he lar ge r di sp la y scr een s. The pro po sa l quo te d apri ce fo r th os e m od ifi cat io ns --al on g wi tha few o th ers --o f- 10 -

[* 10 ] m or e th an$5 00 ,00 0. The fo ll owi ng day Bro wn ag reedto Mi dc oa st ’s 6 pr op os al an d p ai d a n i m

m ed ia te 10 % no nr efu nd ab le de po si t. Whe n M id co as t 7
rece iv editfiv e d ay s l at er o n Dec em be r 29 , 20 03 (th e d el ay

all eg ed ly due to a fax
m ach in e err or ), McC le nd on co nf irmed with aMi dc oa strep res en ta ti ve th at --af te r Bro wn t oo k d el iv ery of

th e ai rp la ne be fo re the en d o f th e y ear- -th e p la ne wou ld return t o M id co as t o n J anua ry 5 o r 6 t o s ta rt the work
. V. Deli ve ry Bro wn an d h is fam il y

pl an ne d ava cat io n a t the en d o f th e y ear, b uthe di dn ’t getm

uc h re stdu rin g t ho se las t fe w days o f 20 03 . Alth ou ghth e p art ie s h ad fir stpl an ne d t o t ran sf

er the Ch al le ng er o n Dec em be r 23 , 20 03 , del ay s s ta rte d t o cree p i n, an d t he y

res ch edul edde li ve ry

forDecem

be r 29 inPo rtl an d. Br own ha d hi s p ers on al pi lo t, Ri ckDug ga n, fl y hi m inhi s o ldpl an e fro m

Cab o S anLuca s, Sp eci fic al ly, Mi dc oa stest im at edth e in st al la ti on of t he co nf eren ce t ab le 6 wou ldco st$2 20 ,00 0 a ndth e d is pl ay scr een up gr ad e $ 20 ,00 0. (Th e o th er h ig hdo ll ar i te m

inth atpro po sa l was th e in st al la ti on of alas er i ne rti al -ref eren ce s y st em es ti m at edto co st$2 25 ,00 0.) Th e p ro po sa l d id n’t ev enin cl ud e th e in st al la ti on of a di gi ta l fl ig htreco rd er, wh ic h e nd edup co st in g yet an ot he r $2 00 ,00 0. The p ap erwo rksh ows th atBro wn s ig ne d t hi s au th or iz at io n o n b eh al f of 7 Zul u Equi pm en t, LLC. Bro wn fo rm edth is co m pa ny for the so le purp os e o f bu y in g a ndown in g t he Ch al le ng er. Bec au se Zul u i s a s in gl e-m em be r LLC th at di dn ’t ele ctto be tre at edas aco rp or at io n, we d is reg arditas an e nt ity sep arat e fro m Bro wn fo r ta x p ur

po se s. See sec . 30 1.7 70 1- 2( c), Pro ced . & Adm in . Reg s. (J etown ers ap paren tl y

pa rkown ers hi p o f th ei r pl an es inLLCs t o l im itth ei r li ab il it y if s om ethi ng go es terrib ly wro ng .)- 11 -

[* 11 ] Mex ic o- -wh ere B ro wn h adbe enat h is va cat io n h om e wit h h is fam il y --t o Ch in o, Ca li fo rn ia(th e o ldpl an e’s ho m e b as e). The n B ro wn l earn edth atth ere were p ro bl em s wi th th e lo anhe ’d arran ge d t o fi na nc e th e d eal . This m ean t m or e de la y . On t he m orni ng of De cem be r 30 , Bro wn an d Du gg anfin al ly flew to Po rtl an d s o B ro wn co ul d t ak e d el iv ery of th e Ch al le ng er. Bro wn i ns pe ct edth e pl an e, an d p ro no un cedit“pe rfec t fo r so m e b uyers.” He e xp la in edth at“ [i]t was
co m pl et e in ev ery way

ex cep t fo r two bu si ne ss requi rem en ts th at[he ] ne ed ed .” W e fi ndth is tes ti m on y

cred ib le . Bro wn re it erat edth atsi nc e h e “ wan te d t o u se [th e p la ne ] fo r bu si ne ss ,” he “ ne ed edth os e two th in gs do ne .” Bu t, b ecau se of t he de al he ha d c utto ha ve th atworkdo ne inJan ua ry 20 04 , Bro wn s ig ne d t he clo si ng do cu m en ts an d a ccep te d d el iv ery of th e Ch al le ng er. Bro wn u nd ers to odth attak in g d el iv ery was n’t en ou gh to cap tu re the bo nu s de pr eci at io n h e was hu nt in g. So hi s ev en tfu l d ay ha d o nl y jus t b eg un . In wh atth e Co m m is si on er ca ll s “ ta x fl ig ht s,” B ro wn p ro ceed edto tak e se ve ral tri ps inth e Ch al le ng er. Afte r fu el in g t he pl an e aro un d n oo n, a pi lo t ce rti fie d t o fl y th e 8

See i nf ra n ot e 1 2 fo r di sc us si on reg ard in g t he ti m e d is crep an cy be twee n 8 th e Po rtl an d fu el rece ip t Br own pro vi de d a t tria l an d the fli gh t l og s.- 12 -

[* 12 ] Ch al le ng er fl ew Bro wn an d Du gg an --al on g wi th Bro wn’s av ia ti on 9 at to rn ey , MarkSch ne id er --fro m Po rtl an d t o S eat tl e, la nd in g ju stbe fo re 1 p.m . 1 0 Bro wn t es ti fie d tha t h e fl ew th ere t o h av e a b us in es s l un ch with M ic ha el Mas tro , a real -es ta te de ve lo pe r to who m he ha d s ol d alar ge in su ran ce p ol ic y earl ie r in th e y ear, an d aco up le th atMas tro want edto in tro du ce t o h im as p ot en ti al cli en ts . 1 1 Bro wn s ai d t ha t h e m etth em at ares taur an t n am edCarm in e’s fo r m ay be anho ur an d- a-h al f ortwo . He add edth atit“ tu rn edou t l ik e m os t o f th e m eet in gs , th ey do n’t b uy.” In ad di ti on to hi s t es ti m on y , Bro wn i nt ro du ceda le tt er d at ed Decem be r 31 , 20 03 th atMas tro wrot e an d s ig ne d. Th atlet te r rea d: Dear M ik e: I jus t wan te d t o t ha nky oufortak in g t he ti m e to fly up h ere t o S eat tl e an d m eetwith m e y es te rd ay . As y oukn ow, i t was cri ti cal th atwe Sin ce Du gg anha dn ’t recei ve d t rai ni ng sp eci fic to th e Ch al le ng er-- an d t hu s 9 was no t “ type rat ed ” fo r th atair craf t-- he was n oty etab le to fly it h im se lf. At tria l Br own de ni edth atSch ne id er was on bo ard . Bro wn h ad , ho wev er, 1 0 pr ev io us ly tol d t he Co m

m is si on er i n re sp on se to anin fo rm al di sc ov ery reque st th atSch ne id er was on th atfli gh t “ to rev ie w anddi sc us s t he pu rch as e d oc um en ts si gn edinPo rtl an d a ndrel at edleg al m at te rs ass oc ia te d wi th m an ag in g a nd op erat in g t he air craf

t.” Br own di dn ’t cal l Sc hn ei de r to tes ti fy an d d id n’t sa ti sf act or il y ex pl ai n h is earl ie r st at em en t, wh ic h we n ow fi ndm or e b el ie vabl e. Bro wn t es ti fie d h e co ul dn ’t rem em be r th e co up le ’s nam e. Andne it he r 1 1 Mas tro no r th e unn am edco up le tes ti fie d a t tria l. (M as tro ’s abs en ce was eas y to ex pl ai n s in ce, ac co rd in g t o t he pa rti es , he was a fu gi ti ve fro m m on ey -laun de rin g an d fr au d c ha rg es at t he ti m e o f tr ia l.)- 13 -

[* 13 ] m eetbe fo re y eare ndto rev ie w th e in su ran ce p ol ic ie s t ha t you so ldm e ear li er thi s year an d d is cu ss futur e o pp ortu ni ti es . Bec au se of you r ex tra or di na ry kn owl ed ge of i ns ur an ce an d re la te d m at te rs , I was h ap py to i nt ro du ce you t o abu si ne ss ass oc ia te of m in e an d h is wife . I enjo y edwatc hi ng th ei r ey es li gh t up a s you d is cu ss ed ho w y ouco ul d h el p t he m tak e ad va nt ag e o f va rio us est at e p la nn in g al te rn at iv es . I tru sty ouwil l b e ab le to tu rnth is in tro du ct io n i nt o a win -win si tu at io n fo r bo thpa rti es . Aga in , th an ks forall y ouha ve do ne for m e an d my

fam il y inth e p as t an d I l oo k fo rwardto work in g wi th y ouinth e fu tu re Bes t re ga rd s, /s / M ic ha el Mas tro Mi ch ael Mas tro Noton ly do o urey es no t l ig htup , bu t we s en se so m ethi ng do es n’t s m el l qu it e ri gh t wi th th e who le Seat tl e v is it . Firs t, Br own ’s tes ti m on y di dn ’t jibe with th e fl ig htlo gs he subm it te d a t au di t. Alt ho ug h B ro wn s ai d h is lu nc h m eet in g la st edbe twee n 9 0 m in ut es an d t wo h ou rs , th e fl ig htlo gs sh ow t ha t the Ch al le ng er was onth e g ro un d i n S eat tl e fo r on ly 66 m inut es . W ith re sp ectto th e ti m efra m e, we fi ndth e fl ig ht s l og s s ub m it te d a t au di t m or e cre di bl e th anBro wn’s t es ti m on y . 1 2 Bro wn i nt ro du cedne w reco rd s- -a s umm ary fli gh t l og an d t hr ee g as ol in e 1 2 rece ip ts --attri al th athe ha dn ’t pre vi ou sl y gi ve n t o t he Co m

m is si on er. The se reco rd s, h owe ve r, no t o nl y co nt rad ic t the ori gi na l fl ig htlo g tha t h e h adpre vi ou sl y tu rn edov er t o the Co m

m is si on er b utals o a ren ’t con si st en t wi th each ot he r. For ex am pl e, th e n ew su m

m ary fli gh t l og (li ke th e o ne he pro vi de d a t au di t) s ho ws the Ch al le ng er t ak in g o ff at11 :5 0 a .m . lo cal ti m e inPo rtl an d, b uton e o f th e n ew-- (co nt in ue d...)- 14 -

[* 14 ] W e al so gi ve zero cred en ce t o t he let te r. Bro wn ac kn owl ed ge d tha t the le tt er was ne it he r co nt em po ran eo us no r ev enpre pa redby Mast ro . He adm it te d h is CFO/ CPA, Gary Fi tz ge ral d, draft edth e le tt er s om et im e m uc h l at er an d h adMas tro si gnit . Alth ou gh at o ne po in t Br own sai d h e th ou gh t h e h adto ldFit zg eral d t o writ e th e le tt er “ se ve ral m on th s” aft er y ear e nd , we fin d m or e cre di bl e h is lat er te st im on y th aton e o f Fi tz ge ral d’s jo bs is to writ e le tt ers on be ha lf o f Bro wn’s bu si ne ss ass oc ia te s “ to ge t the subs ta nt ia ti on for de du ct io ns wh en th e IRS req ue st s th em .” (Em

ph as is ad de d.) We th eref or e fi ndth atFit zg eral d d idn’t wri te th is let te r un ti l atlea st20 06 when th e IRS be ga n aud it in g B ro wn’s re tu rnforth e 2 00 3 t ax y ear. We do no t t ak e itser io us ly as pr oo f of an yth in g b uta reas onto qu es ti on Bro wn’s cr ed ib il it y . Andth atlea ve s u s wi th on ly Brown ’s un co rro bo rat edtes ti m on y ab ou t h is lu nc h i n S eat tl e. Bro wn d id n’t p ro du ce a l un ch bi ll , andne it he r Mas tro no r th e (...co nt in ue d) 1 2 si gn ed --fu el rece ip ts in tro du cedat t ria l s ho ws the Ch al le ng er b ei ng fue le d i n Po rtl an d a lm os t a h al f ho urlat er. The ne w--u ns ig ne d- -Sea tt le fue l re cei ptals o in di cat es th atBro wn s pe ntalm os t fo urho ur s i n S eat tl e--abo utdo ub le th e ti m e th at Bro wn h im se lf s ai d h e was th ere. If B ro wn h adbe eninSeat tl e fo r th atlo ng , th e Ch al le ng er co ul dn ’t hav e la nd edat i ts ne xtde st in at io n (C hi cag o) be fo re 1 0 p .m . lo cal ti m e--wh ic h i s o ve r anho urlat er tha n t he Ch ic ag o fu el -s erv ic e rec ei pt pr ov id edat t ria l i nd ic at es . W e th eref or e d on ’t gi ve an y

weig htto th e u ns ig ne d Seat tl e fu el rece ip t o r to th e n ew su m m ary fli gh t l og to th e ex te ntth atitco nf li ct s with wh atBro wn o rig in al ly pro vi de d.- 15 -

[* 15 ] un kn own co up le tes ti fie d o n h is be ha lf. We als o fi ndno te worth y th at Sch ne id er-- who was o n b oardth e Ch al le ng er fro m Po rtl an d t o S eat tl e (b utno t o n an y of t he ot he r fl ig ht s d is cu ss edbe lo w)--wo rk edat alaw fi rm jus t o ut si de of Seat tl e. W e th eref

or e fi nditm or e li ke ly tha n n otth atth ere was no bu si ne ss lu nc h in Seat tl e. Bro wn, h owe ve r, was n otfin is he d. So m et im e b etween1 an d 2 p.m . lo cal ti m e, Dug ga n andBro wn fl ew th e Ch al le ng er t o C hi cag o, l an di ng ab ou t thr ee-a nd
a-h al f ho ur s l at er atMi dwa y air po rt. Br own fle w th ere f orth e so le pu rp os e o f
m eet in g afel lo w in su ran ce ag en t n am edMarc Pas qu al e. The re i s n o d oubtth atBro wn was Pas qu al e’s m en to r. In the lat e ‘90 s Pas qu al e--the n o nl y

inhi s m id twen ti es --was a di si ll us io ne d C PA work in g fo r a gi an t ac co un ti ng firm . In 1 99 8 h is fathe r, al so a CPA, s ug ge st edto hi m th athe
m eetBro wn. Pas qu al e g ru dg in gl y co m pl ie d, b utBro wn qui ck ly w on hi m ov er-- an d a t a b reak fas t m eet in g i n New Yo rk , Bro wn co nv in cedhi m to lea ve publ ic
acco un ti ng an d b eg insel li ng in su ran ce. Fro m “ da y on e” Br ownhe lp edest ab li shPas qu al e’s in su ran ce ca reer . Altho ug h P as qu al e ackno wled ge d t ha t i t “ was ki ndof a n o ddarra ng em en t” be cau se Bro wn was inso ut he rnCal ifo rn iawhi le he was i n C hi cag o, Pa squa le fo ll owe d B ro wn ar ou ndth e co un try to app ren ti ce wi th hi m forne arl y

two y ears .- 16 -

[* 16 ] The two oft ensh aredin su ran ce co m m is si on s, an d P as qu al e cre di bl y tes ti fie d th athe m ad e o ve r a m il li on do ll ars on th e p ol ic ie s t ha t h e worke d o n wi th Bro wn be twee n 2 00 0 a nd20 03 . Duri ng th atti m e th ey sp ok e se ve ral ti m es a week
. So aft er Br owngo t o ff the pl an e in Ch ic ag o, h e m etwith P as qu al e atan ai rp ort p iz za re st auran t. Altho ug h B ro wn atti m es su gg es te d o th erwi se , we fin d-
- as Pas qu al e te st ifi ed --tha t Br own hi m se lf s etth is m eet in g up. Th e who le vi si t la st edab ou t an ho ur --Br own ga ve Pas qu al e a t ou r of th e p la ne for

ab ou t 1 0
m in ut es an d t he n h ada qu ic k d in ne r fo r th e o th er 5 0 o r so m in ut es . Wha t ex act ly didth ey

di sc us s? Bro wn i nt ro du cedan ot he r le tt er, v ery si m il ar t o t he on e supp os ed ly from Mas tro . This let te r was si gn edby Pasqua le , da te d Dec em

be r 31 , 20 03 , andlo ok s l ik e it ’s on Pas qu al e’s co m pa ny let te rh ead . It read s: Dear M ik e:

Tha nk s fo r co m in g thr ou gh form e whe n I t ol d youho w vi ta l i t was fo r us to m eetbe fo re the bo ok s ar e cl os edon 20 03
. As we d is cu ss edy es te rd ay inCh ic ag o, due to m

y effo rts , we were ab le to sh are i ns ur an ce co m m is si on s o n wel l o ve r a m il li on do ll ars of po li ci es in20 03 . The l is t we re vi ewed , of p ro sp ect iv e cl ie nt s i n t he gre at er Ch ic ag o a rea, s ho ul d g en erat e ev engre at er co m m is si on s i n 2 00 4. Ourrel at io ns hi p h as alwa y s b een m utua ll y reward in g i n t he pa st , and ba se d o n yest erd ay ’s m eet in g, l oo ks li ke itwil l co nt in ue so well in to th e fu tu re.- 17 -

[* 17 ] Thank s ag ai n. Si nc erel y , OAK VEN TURE ADVISORS, LLC /s / M arc A. Pas qu al e Mar c A. Pas qu al e Thi s i s ju stno t b el ie vabl e. Bro wn ad m it te d t ha t Fi tz ge ral d h adwrit te n t he le tt er athi s d ire ct io n- -li ke th e Ma st ro let te r--andsen t i t t o P as qu al e to si gn . (Pas qu al e co nf

irmed he si gn eda le tt er tha t h adbe enwrit te n fo r hi m .) Pas qu al e

“ co ul dn ’t recal l” ex act ly whe n h e rec ei ve d i t, s ay in g h e th ou gh t i t was at s om e po in t i n 2 00 4 b utals o tha t i t was po ss ib le th atitwas g iv ento hi m as l at e as 20 06
. Inli gh t o f th attes ti m on y , andBro wn’s t es ti m on y th aton e o f Fi tz ge ral d’s jo bs was to ge t d oc um en ta ti on forth es e ev en ts on ly “whe n t he IRS re qu es ts [it ], ” we fin d- -as we di d wi th th e Ma st ro let te r--t ha t Fi tz ge ral d d id n’t s en d t hi s l et te r to Pas qu al e unt il aft er the IRS b eg anau di ti ng Bro wn’s re tu rnin20 06
. Now t o t he let te r’s co nt en ts . As ev enPas qu al e ad m it te d, thi s l et te r was “ a li tt le bi t o ve r th e to p.” Pas qu al e sa idhe co ul dn ’t st an d b y th e le tt er’s s ta te m en t th athe ne ed edto m eetwith B ro wn b efo re y ear e nd . Butwe do be li ev e Pas qu al e’s te st im on y th at“ any ti m e sp en t wi th [Bro wn] face t o fa ce was va lu ab le ” to hi m . So , alt ho ug h P as qu al e adm it te d t ha t h e n ei th er wro te no r rev ie wedth e le tt er, we- 18 -

[* 18 ] fin d t ha t i t was im

po rta ntforhi m

inso m e g en eral way

to tal k t o B ro wn i n pe rs on ab ou t b us in es s. Wha t d idth ey

di sc us s? Bro wn s ai d t ha t the y tal ke d abo uttwo m

utua l cl ie nt s wi th who m

th ey were h av in g s om e d iff

ic ul ty. Pas qu al e co ul dn ’t rem em be r an y of t ho se de ta il s, an d we d on ’t cred itBro wn’s t es ti m on y . Thatsai d, Pa squa le cred ib ly test ifi edth atof t he hu nd red s o f co nv ers at io ns he ha d wi th Bro wn o ve r th e y ears , “ [t]he re was no t o ne th atdi dn ’t in vo lv e b us in es s i n s om e way .” Thei r who le bu si ne ss is sel li ng po li ci es , Pas qu al e ex pl ai ne d, an d a ll th ey di d was “ ta lk ab ou t wh o [t he y ’re] go in g t o s ee, wh o’s [t he ir] pr os pe ct s, wh at ’s wort h fo ll owi ng up with, wh at ’s no t wo rth fol lo win g up wi th , [an d] ho w to co or di na te sch edul es .” W e b el ie ve Pas qu al e whe n h e sa idth at“ th ere’s n o d oubt ” th ey tal ke d b us in es s th atni gh t. The Ch al le ng er re m ai ne d g ro un de d a t M id way forab ou t an ho ur

an d aha lf be fo re Br own an d Du gg anbo ard editat abo ut9 p .m . Chi cag o t im e to return t o Po rtl an d. Th ey

returne d t he re a l it tl e b efo re m id ni gh t l oc al ti m e, an d a ll sai d, Bro wn l og ge d n earl y

4,0 00 m il es du rin g h is fli gh ts th atda y . The fo ll owi ng m orni ng --New Year ’s Eve-- Bro wn an d Du gg ango t b ackin to Bro wn’s o ldpl an e an d re tu rn edto Cab o S anLuca s wh ere B ro wn re joi ne d h is fam il y

on va cat io n.- 19 -

[* 19 ] The Ch al le ng er, h owe ve r, st ay edinPo rtl an d. Itne ed edto return t o Mi dc oa stso --i n M cCl en do n’s wo rd s- - itco ul d b e “ fin is h[ ed ] up .” On J anua ry 3, 20 04 , McCl en do n fl ew itfro m Po rtl an d t o Ari zo na(whe re h e li ve d) . The n ex t da y , he t oo k i t t o C ab o S anLuca s t o re tri ev e Bro wn an d h is fam il y , dro pp in g t he m of f in Cal ifo rn ia . A dif

fere ntpi lo t the n fl ew th e p la ne ba ckto Mi dc oa stin Cah ok iato co m

pl et e th e m od ifi cat io ns . W ork b eg anon Jan ua ry 5 an d l as te d ab ou t thr ee wee ks
. Aftera few ad di ti on al da y s o f worki ng th ro ug h an i ss ue 1 3 rel at edto ob ta in in g re pl acement i ns ur an ce, the co m pl et edCh al le ng er was fin al ly read y to return t o B ro wn o n J anua ry 30
. VI. The Aud it The Bro wns cla im edalm os t $ 11 .2 m il li on of b on us de pr eci at io n o n t he Ch al le ng er as anex pe ns e fo r hi s i ns ur an ce b us in es s o n B ro wn’s 2 00 3 S ch edul e C, Pro fitor Lo ss fro m

Bu si ne ss . Thatde du ct io n, h owe ve r, was f ar fro m th e o nl y it em on th e Bro wns ’ returns ov er a n um be r of y ears th atst art edth e Co m m is si on er’s rad ar b eep in g l ou dl y . Betwe en20 06 an d 2 01 0, the Co m m is si on er i ss ue d s ix no ti ces of d efi ci en cy to th e Bro wns --o ne foreach y ear be twee n 2 00 1 a nd20 06 --d et erm in in g t ha t the y ha d und erp ai d t he ir t ax by ove r Altho ug h M id co as t i ni ti al ly esti m at edinlat e Dece m be r th atth e 1 3 m od ifi cat io n wo ul d t ak e si x wee ks , th atest im at e was reduc edto fou r week s af te r Bro wn s ub se qu en tl y

de ci de d n otto ha ve so m e woo dwo rk do ne .- 20 -

[* 20 ] $3 0 m il li on , no t i nc lu di ng pe na lt ie s u nd er s ect io ns 66 62 an d 6 66 3 o f ap pr ox im at el y

$1 0 m il li on . The Br own s t im el y fil eda pe ti ti on foreach of t he se 1 4 y ears an d we c on so li da te d t he cas es . Abo uttwo week s b efo re a s ch edul edtwo -weektri al inLos Ang el es (th e Bro wns were Ca li fo rn iares id en ts when th ey fil edth ei r pe ti ti on s) , th e p art ie s s ti ll ha dn ’t res ol ve d m an y

of t he is su es . Accor di ng to th e Co m m is si on er’s 7 6- pa ge pr etria l m em o, Br ownha d fa il edto subs tant ia te a li ta ny of h is ex pe ns es on Sch edul e C, cl ai m edfrau du le ntco ns ul ti ng -fee de du ct io ns , us edno m in ees to co nc eal own ers hi p andco nt ro l o f en ti ti es fro m th e IRS , andcrea te d m an y fal se do cu m en ts inanatt em

ptto supp ort i ll eg it im at e d educ ti on s. In th e weeklea di ng up to tri al , ho wev er, the pa rti es set tl edev ery is su e ex cep t Br own ’s ent it le m en t t o bo nu s d ep reci at io n. We th us tri edth e cas e o n t he si ng le is su e o f whe th er Br own was en ti tl edto de du ctov er $ 11 m il li on inbo nu s d ep reci at io n o n t he Ch al le ng er fo r 20 03 . (The p art ie s l at er fi le d ast ip ul at io n o f se tt le d i ss ue s t ha t ad jus te d t he Bro wns ’ in co m e upwa rd s o f ov er $ 50 m il li on , app ro xi m at el y $1 0 m il li on of wh ic h
was “ subjec t t o a n a dd it io n t o t ax ” fo r frau d u nd er s ect io n 6 66 3, re su lt in g i n t ax es an d p en al ti es of o ve r $2 0 m il li on .) All sec ti on refe ren ces are t o t he Int ern al Rev enue Co de ineffe ctat a ll 1 4 rel ev an t t im es , un le ss ot he rwis e in di cat ed . All R ul e ref eren ces are t o t he Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e.- 21 -

[* 21 ] OPINION The di sp ut e h ere i s o ve r ti m in g. Th e Co m m is si on er co nc ed es th atBro wn co ul d p ro pe rly clai m

bo nu s d ep reci at io n o n t he Ch al le ng er fo r 20 04 . The Co m m is si on er, h owe ve r, as se rts th ere a re two i nd ep en de ntba rri ers th atpre ve nt Bro wn fr om

cla im in g t he de du ct io n fo r 20 03 . Firs t, h e co nt en ds th atth e Ch al le ng er was no t p la cedinservi ce i n 2 00 3. Bu t ev enif i t was , th e Co m m is si on er ar gu es th atBro wn s ti ll lo se s b ecau se he di dn ’t subs ta nt ia te qu al ifi edbu si ne ss us e fo r th aty ear. We beg in with afew p as se s o ve r th e lu sh an d ta ng le d l an ds cap e o f bo nu s d ep reci at io n. I. Bo nu s Dep reci at io n W e st artwith d ep reci at io n: Sin ce t ax po li cy de si res ge ne ral ly to m at ch in co m e with t he ex pe ns es of p ro du ci ng th atin co m e, se e INDOPCO, In c. v. Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ), th e Co de all ows a de du ct io n fo r th e ex haus ti on an d wea r an d t ear o f pr op erty us edina tr ad e o r bu si ne ss , sec . 16 7( a). Thi s al lo ws t ax es to m or e cl os el y refl ecteco no m ic pro fit . To de te rm in e th e an nu al
wear- an d- te ar, the Co de ge ne ral ly requ ire s t ax pa y ers to us e th e m od ifi ed
acce le rat edco streco ve ry syste m (MACR S) s etup insec ti on 16 8. Ena ct edas p artof t he Econ om ic Reco ve ry Tax Actof 1 98 1, Pub. L. No. 9 7- 34 , sec . 20 1( a), 9 5 S ta t. At20 3- -an d s ub st an ti al ly am en de d b y th e Tax Refo rm

Act- 22 -

[* 22 ] of 19 86 , Pub . L. No. 99 -5 14 , sec s. 2 01 , 20 3, 1 00 Sta t. at21 21 , 21 43 (whi ch
us he redinth e MACR S reg im e)-- se ct io n 1 68 ha s b een ti nk eredwith b y Co ng res s so oft enov er the y ears th atitha s b eco m e, ev enby the st an da rd s o f th e Co de , un us ua ll y co m pl ex . The m any

layers o f am en dm en ts to th e se ct io n h av e b een of
m an y di ffer en t s hape s an d s iz es , bu t the y st il l o fte n s ho w so m e se m bl an ce o f
co nn ect io n t o t he sec ti on ’s ori gi na l p ur po se --ec on om ic st im

ul at io n. Andth is was t ru e imm ed ia te ly after S ep te m be r 11 , 20 01 . Con cern ed ab ou t the effe ct s t he terro ris t at ta ck s m ig htha ve on th e eco no m y , Con gr es s en act edsec ti on 16 8( k) . Thatsubs ect io n g ran te d a“ sp eci al all owa nc e” fo r certa in pr op erty acqui redaft er Se pt em

be r 10 , 20 01 an d b efo re J anua ry 1, 2 00 5. Se e Jo b Crea ti on an d Work er As si st an ce Actof 2 00 2, Pub. L. No. 1 07 -1 47 , sec . 10 1, 1 16 St at . at 2 2. Inth e cas e o f “ qu al ifi edpro pe rty,” th e d ep reci at io n d educ ti on un de r se ct io n 1 67 (a) “ fo r th e ta xabl e y ear i n wh ic h t he pro pe rty is pl ac ed in ser vi ce sh al l in cl ud e anall owa nc e equa l t o 3 0 p erce ntof t he ad jus te d b as is of t he qu al ifi ed pr op erty ” in ad di ti on to de pr eci at io n o th erwi se all owabl e u nd er MAC RS. Sec
. 16 8( k) (1 )(A) (e m

ph as is ad de d) . This sp eci al all owa nc e b ecame kn own co ll oqui al ly as bo nu s d ep reci at io n. Less th antwo y ears lat er, Co ng res s upp edth e b on us . See J GTRRA
se c.2 01 . Und er n ew pa rag rap h (4 ) of subs ect io n (k ), Co ng res s i nc reas edbo nu s- 23 -

[* 23 ] de pr eci at io n fo r “ qu al ifi edpro pe rty” acqui redan d “ pl acedinservi ce” a fte r May 5, 20 03 an d b efo re J anua ry 1, 2 00 5 fr om

30 % to 50 %. Sec. 16 8( k) (4 )(B)
. Fo r Bro wn t o p ro pe rly clai m bo nu s d ep reci at io n fo r 20 03 , th e Ch al le ng er m us t th us ha ve be enbo th qu al if ie d p ro pe rt y an d qua li fie d p ro pe rty tha t was acqui red
an d pl ac ed

in ser vi ce th aty ear. II. Qua li fie d P ro pe rty Wha t i s “ qu al ifi edpro pe rty? ” As re le va nthe re, the Co de de fin es “ qu al ifi ed pr op erty ” as pro pe rty with “ a rec ov ery pe rio d o f 20 y ears or l es s.” Se c. 16 8( k) (2 )(A)(i )(I). No nc omm erci al air pl an es ha ve a reco ve ry

pe rio d o f fi ve y ears , se e Rev . Pro c. 87 -5 6, 1 98 7- 2 C .B. 67 4, s o t he Ch al le ng er fl ie s p as t tha t t es t wi th
no pro bl em . The re ar e, ho wev er, ex cep ti on s t ha t can b rin g o th erwi se “ qu al ifi ed pr op erty ” to gro un d. Se e se c. 16 8( k) (2 )(C) . One o f th os e is if the pro pe rty is
subjec t t o the alt ern at iv e d ep reci at io n s y st em un de r se ct io n 1 68 (g ). Sec. 1 5 16 8( k) (2 )(C) (i) . Andto de te rm in e whe th er s ect io n 1 68 (g ) ap pl ie s t o p ro pe rty, we
m us t fi rs t ap pl y

sec ti on 28 0F (b )--asec ti onth atrel at es to “ li st edpro pe rty” with li m it edbu si ne ss us e. See s ec. 1 68 (k )(2 )(C) (i) (II).
Sect io n 1 68 (g ) requi res th e u se of a n a lt ern at iv e (an d l es s favo rab le ) 1 5 de pr eci at io n s y st em

forfiv e sp eci fie d c at eg or ie s o f pr op erty .- 24 -

[* 24 ] Sect io n 2 80 F(b ) se nd s u s d own an ot he r ru nwa y . Und er s ect io n 28 0F (b )(1 ), a ta xp ay er m us t u se th e al te rn at iv e d ep reci at io n s y st em un de r se ct io n 16 8( g) if “ li st edpro pe rty” is no t “pr ed om in an tl y us edina qu al ifi edbu si ne ss us e” fo r a certa in tax ab le y ear. “ Lis te d p ro pe rty” in cl ud es pro pe rty tha t’s u se d a s a m ean s o f tr an sp orta ti on , su ch as t he Ch al le ng er. See sec . 28 0F (d )(4 )(A)(i i). Th e te rm “pr ed om in an tl y

us edina qu al ifi edbu si ne ss us e” m ean s tha t the li st ed pr op erty ’s “bu si ne ss us e p erce nt ag e” m us t ex ceed50 %. Sec. 2 80 F(b )(3 ). And

“bu si ne ss us e p erce nt ag e” m ean s t he pe rcen ta ge of u se whi ch is a “ qu al ifi ed bu si ne ss us e.” Sec . 28 0F (d )(6 )(A). Andge ne ral ly, “ qu al ifi edbu si ne ss us e” i s

“ an yus e in a tr ad e o r bu si ne ss of the tax pa y er.” Sec. 2 80 F(d )(6 )(B) (em ph as is 1 6 ad de d) . Thu s, i f Bro wn p ro ve d t ha t h e “ us ed ” th e Ch al le ng er i n a ny way inhi s bu si ne ss in20 03 m or e th an50 % of the ti m e h e fl ew it(i.e ., if the m ajor it y of h is fli gh t m il es on Decem

be r 30 were u se d a ny way inhi s b us in es s) , th enth e al te rn at iv e d ep reci at io n s y st em un de r se ct io n 1 68 (g ) wou ld n’t ap pl y , andth e
An ex cep ti on is th at“ qu al ifi edbu si ne ss us e” d oe sn ’t in cl ud e le as in g 1 6 pr op erty to a 5- pe rcen t o wne r orrel at edpe rs on . Sec. 2 80 F(d )(6 )(C) (i) (I). Altho ug h Zu luEqu ip m en t l eas edth e Ch al le ng er t o B ro wn i n 2 00 3, i t’s di sr eg ard edas asep arat e en ti ty for t ax purp os es be cau se it ’s an LLC wh ol ly own edby Brown . See s up ra n ot e 7 . Thu s, the lea se is als o d is reg ard edfortax pu rp os es . See s ec. 3 01 .77 01 -2 (a), Pr oc ed . & Adm in . Reg s (“ [I]f th e en ti ty is di sr eg ard ed , it s ac ti vi ti es are treat edinth e sa m e m an ne r as a so le pro pr ie to rs hi p, br an ch , or d iv is io n o f it s o wne r”).- 25 -

[* 25 ] Ch al le ng er wo ul d b e co ns id ered“ qu al ifi edpro pe rty” forbo nu s- de pr eci at io n pu rp os es . 1 7 III. Pl acedinServ ic e Tha t’s a h ardqu es ti on to an swe r, an d we t hi nkitm ak es sen se to ke ep iton st an db y --an d m ov e to th e que st io n o f whe th er Br own pl acedhi s n ew pl an e in
se rv ic e wit hi n t he m ean in g o f th e reg ul at io ns . Rem em be r th atsec ti on 16 8( k) says th atforqu al ifi edpro pe rty, “ th e de pr eci at io n d educ ti on pro vi de d b y sec ti on16 7( a) fo r th e ta xabl e y ear i n wh ic h
su ch pro pe rty is pl ac ed

in ser vi ce sh al l” be eli gi bl e fo r 50 % bo nu s d ep reci at io n. Sec. 1 68 (k )(4 )(A) (e m

ph as is ad de d) . The reg ul at io n s ay s t ha t “ [p ]rop erty is fir st pl acedinservi ce wh enfir stpl acedina co nd it io n o r st at e o f rea di ne ss an d
av ai labi li ty for a sp eci

fi ca ll y a ss igne d f

un ct io n .” Sec. 1 .16 7( a)-1 1( e)(1 )(1 ), In co m e Tax Reg s. (e m

ph as is ad de d) . So the qu es ti onco m es do wn t o wh ethe r in

W e n ot e ag ai n t he st an da rdis “ an y us e in a tr ad e o r bu si ne ss ,” se c. 1 7 28 0F (d )(6 )(B) , whi ch is n’t the same as th e “ or di na ry an d n eces sa ry ” st an da rd ge ne ral ly requ ire d o f bu si ne ss de du ct io ns un de r se ct io n 1 62 . W e h av e al so he ld th at“ [n ]owhe re i n t he lan gu ag e o f se ct io n 1 68 is th ere asu gg es ti on th at av ai labi li ty of th e d ep reci at io n d educ ti onis de pe nd en t o n t he sat is fact io n o f th e requi rem en ts of s ect io n 1 62 . There si m pl y is no requi rem en t tha t the us e o f th e de pr eci ab le pro pe rty be ‘ord in ary’ or ‘ne ces sa ry .’ The o nl y requi rem en t i s t ha t i t be us edinth e ta xp ay er’s trad e o r bu si ne ss .” Noyce v. Co m m is si on er, 9 7 T.C. 67 0, 6 89 -9 0 (1 99 1)
.- 26 -

[* 26 ] 20 03 th e Ch al le ng er was “ in a co nd it io n o r st at e o f rea di ne ss an d
av ai labi li ty” for t he “ sp eci fic al ly ass ig ne d fu nc ti on ” fo r whi ch Bro wn p ur ch as ed it
. The Co m

m is si on er ar gu es th atth e Ch al le ng er’s s pe ci fic al ly ass ig ne d fu nc ti on was t o s erv e as anair craf t co nf ig ur edinth e m an ne r Bro wn d eem ed
ne ces sa ry forhi s i ns ur an ce b us in es s. An d t ha t co nf ig ur at io n i nc lu de d a
co nf eren ce t ab le an d e nh an ceddi sp la y scr een s. Th e Co m

m is si on er s ay s t ha t s in ce th os e two m od ifi cat io ns weren ’t m ad e u nt il Jan uary 20 04 th e Ch al le ng er was n’t read y forit s s pe ci fic al ly ass ig ne d fu nc ti on un ti l the n. Bro wn d is ag rees . Andwith n ei th er Co de no r reg ul at io n t o g ui de us , we m us t n av ig at e u si ng on ly casel aw. The ea rli es t ca se th e Co m m is si on er re li es on is Noe ll v. Co m

m is si on er, 6 6 T.C. 7 18 (19 76 ). The t ax pa y er i n No el l b ui ltanair po rt ru nwa y be twee n l at e 1 96 5 a ndlat e 1 96 8, wh ic h re qu ire d h im to gra de th e land , supp ly a rockba se , lay down asp ha ltpa ve m en t, an d p la ntso d. Id . at 7 21 . After he lai d d own th e ro ckba se in19 67 --b utbe fo re h e co m pl et edth e p ro

ject- -p il ot s di d o ccas io na ll y

us e th e ru nwa y

to lan d a ndtak e o ff. The rou gh ne ss of t he in co m pl et e su rfac e h owe ve r, m ad e itun sa ti sf act ory forpe rm an en t u se , and
av ai labl e o nl y

ingo odweathe r. Id. Th e ta xp ay er wan te d a n i nv es tm en t cr ed itfor- 27 -

[* 27 ] th e ru nwa y

ag ai ns t h is 19 68 tax bi ll
. The Co m m is si on er ar gu ed , ho wev er, 1 8 th atsi nc e ai rp la ne s b eg anto us e th e ru nwa y in19 67 , th e ta xp ay er h adpl aceditin
se rv ic e--a ndth us ha d t o t ak e th e cre di t-- th aty ear. Id . at 7 28
. W e reject edth e Co m

m is si on er’s p os it io n. We sai d t ha t the “ ru nwa y was no t i n aco nd it io n o r st at e o f rea di ne ss ” in 19 67 be cau se th e ro cksu rfac e was

“ cl earl y on ly a sta ge inth e co ns tru ct io n o f th e fac il it y ” an d i t “ was qu it e un sa ti sf act ory an d p il ot s ri sk edda m ag in g t he ir a irc raftby lan di ng on it .” W e al so sa idth at“ th e ro ck

su rfac e co ul d n otbe us edon a pe rm an en t b as is , si nc e th e la nd in g a rea e as il y

co ul d b e ru in edby the weathe r.” W e th eref or e h el d t ha t s in ce th e fac il it y

wasn ’t ava il ab le forful l s erv ic e u nt il th e runwa y was p av edin19 68 , th e ta xp ay er h adn’t p la cedth e la nd in g fa ci li ty in s erv ic e in19 67 . Id. at72 9. The Co m m is si on er m ak es a si m il ar ar gu m en t h ere. He s ay s t he
co nf ig ur at io n o f th e Ch al le ng er i n 2 00 3 was “ cl earl y on ly a sta ge inth e co ns tru ct io n” of t he ass etan d t ha t the de li ve ry of t he Ch al le ng er i n P ortl an d o n Decem be r 30 was “ no th in g m or e th ananin te rrupt io n i n t he co m pl et io n o f th e
The re gu la ti on de fin in g “ pl acedinservi ce” f orpu rp os es of t he in ve st m en t 1 8 ta x c red itis id en ti cal to th e “pl acedinservi ce” d efi ni ti on inth e d ep reci at io n reg ul at io ns . Com

pa re s ec. 1 .46 -3 (d )(1 )(i i), In co m e Tax Reg s., wit h s ec. 1 .16 7( a)- 11 (e)( 1) (i) , Inc om e Tax Reg s.; see ge ne ral ly Shir le y v. Co m m is si on er, T.C. Mem o. 2 00 4- 18 8 (p ro pe r to us e reg ul at io ns of r ep eal edsec ti on if n ew se ct io n ne arl y id en ti cal ).- 28 -

[* 28 ] ai rcra ft.” Whi le th atch arac te riz at io n l ik el y un de rs ta te s h ow m

uc h o f th e ai rcra ft h adbe enco m

pl et edby the en d o f 20 03 , we do ag ree wi th th e Co m m is si on er tha t No el l i s re le va nthe re. Tha t i s s o b ecau se in20 03 th e p la ne , li ke th e runwa y

inNoel l, was “ si m

pl y no t av ai labl e fo r fu ll servi ce” f orit s in te nd edfun ct io n- -s erv in g B ro wn’s ai r tr an sp orta ti on ne ed s i n h is in su ran ce bu si ne ss . See i d. at72 8. An d u nt il anass etis av ai labl e fo r fu ll servi ce, i t h as n’t be enpl acedinservi ce. See id
. Bro wn d is ag rees , andarg ue s tha t h is pl an e was “ fu ll y fun ct io na l fo r ai r tra ns po rta ti on ” an d t ha t, u nl ik e p la ne s l an di ng on th e ru nwa y de sc rib edinNoel l, hi s p la ne ne it he r su ffer edno r th reat en ed“ sa fety ha zard s fr om

it s u se or we athe r li m it at io ns whenpl acedinservi ce i n 2 00 3.” The 2 00 4 m od ifi cat io ns , Bro wn s ay s,

“ m erel y pro vi de d e nh an ci ng featur es th atdi d n otin vo lv e im pr ov em en ts ne ces sa ry to all ow t he Ch al le ng er t o s erv e it s s pe ci fic fun ct io n o f pr ov id in g a ir tra ns po rta ti on inco nn ect io n wi th Bro wn’s i ns ur an ce b us in es s.” W e ag ree wi th Bro wn t ha t the Ch al le ng er “ was ful ly fun ct io na l fo r ai r tra ns po rta ti on .” Bu t tha t’s n otqu it e th e ri gh t que st io n. Th e reg ul at io n t el ls us to de ci de when th e p la ne was re ady an d a va il ab le fora “ sp eci fic al ly ass ig ne d fu nc ti on .” Sec. 1 .16 7( a)-1 1( e)(1 )(1 ), In co m e Tax Reg s.- 29 -

[* 29 ] Wha t ex act ly w as th e sp eci fic al ly ass ig ne d fu nc ti on of B ro wn’s n ew pl an e? Bro wn as se rts inhi s b rie f th atth e 2 00 4 m od ifi cat io ns were m erel y

“ en ha nc in g fe atur es ” whi ch im pl ie s t ha t the sp eci fic al ly ass ig ne d fu nc ti on was si m pl y to fly Brownto an d fr om m eet in gs with h is cli en ts or l ead s. Bu t thi s wo ul d
co nt rad ic t h is tes ti m on y . Accor di ng to th attes ti m on y , hi s i ns ur an ce b us in es s re qu ir ed th atth e ai rp la ne ha ve a co nf eren ce t ab le an d the lar ge r sc reen s s o h e co ul d m ak e h is Po wer Po in t p res en ta ti on s t o c li en ts an d o th er ag en ts --an d tho se pr es en ta ti on s wer e n ota pe rip he ral pa rt o f hi s b us in es s. With ou t tho se two requi rem en ts , th e Ch al le ng er was n’t fu ll y fun ct io na l fo r th e v ery sp eci fic ne ed s o f Bro wn’s i ns ur an ce b us in es s. The Co m m is si on er ci te s t wo o th er ca se s t ha t p oi ntus inth e sa m e d ire ct io n- - Co ns um ers Po wer Co . v. Co m m is si on er, 8 9 T.C. 7 10 (19 87 ), an d Val le y Natu ral Fu el s v . Comm is si on er, T.C. Mem o. 1 99 1- 34 1, 1 99 1 Tax Ct. M em o. LEXIS 3 90 , aff’d wi th ou t p ub li sh edop in io n, 9 90 F.2d12 66 (9t h C ir. 1 99 3) . W e’ll s ta rt wi th Co ns um ers Po wer. The re, an ele ctric ut il it y be ga n c on st ru ct io n o f a h y dr oe le ctric pl an t i n 1 96 9. Id . at 7 16 . Reg ul at or s ap pr ov edth e uti li ty’ s re qu es t t o b eg in op erat in g t he pl an t, s ub

ject t o s uc ces sf

ul co m pl et io n o f pr eo pe rat io na l t es ti ng on a pa rti cu la r un it . Id. at71 7. Th atun it --Un it1-- be ga n p um pi ng wate r an d fo r ab ou t a two -weekpe rio d i n l at e Nov em be r an d e arl y

Decem be r 19 72 ge ne rat edele ctric al- 30 -

[* 30 ] po wer, subs ta nt ia ll y all of wh ic h was so ldto th e ta xp ay er’s cu st om ers . Id. at 71 8- 19 . On Dece m

be r 7, h owe ve r, a d is rupt io n i n t he un it ’s ele ctric al po wer cau se d d am ag e th atledto a te m po rary shu td own forrep ai rs . Id. at71 9. Preo pe rat io na l t es ti ng di dn ’t res um e u nt il earl y in19 73 . Id. The tax pa y er cl ai m eda de pr eci at io n d educ ti on on th e p la ntfor19 72 , bu t the Co m m is si on er d et erm in edth e p la ntwasn ’t pl acedinservi ce tha t year an d t hu s di sa ll owe d t he de du ct io n. Id . W e ag reedwith t he Co m m is si on er, fi nd in g tha t Uni t 1 was n otav ai labl e to pro vi de ele ctric al po wer o n areg ul ar b as is in19 72 an d th atth e am ou ntof e le ctric al po wer g en erat edth aty ear was n’t s uf fic ie ntto es tabl is h t ha t the pl an t was av ai labl e fo r “ fu ll op er at io n on a re

gu la r ba si s.” Id . at 72 5 (e m ph as is ad de d) . W e fo un d i ns te adth atth e p la ntwasn ’t ava il ab le forus e un ti l i t h adco m

pl et edall pre op erat io na l t es ti ng inJan ua ry 19 73 . Onl y

aft er the
un itha d d em on st rat edth at“ itwas av ai la bl e fo r s ervi ce o n a reg ul ar ba sis was the
un itina st at e o f rea di ne ss an d ava il ab il it y forit s s pe ci fic al ly ass ig ne d fu nc ti on .” Id . (em ph as is ad de d)
. The an al og y

to th is cas e is clo se . Ju stas Un it1 ac tu al ly pum pe d wat er an d ge ne rat edele ctric al po wer tha t was so ldto cu st om ers inlat e 1 97 2, s o d idBro wn actua ll y fly in t he Ch al le ng er h al fway acro ss th e co un try in l at e 2 00 3 t o t al k bu si ne ss (wit h a t l eas t o ne of t he pe op le he sai d h e d id ). Bu t the factth ata- 31 -

[* 31 ] ta xp ay er us es anass etinhi s b us in es s s om et im e dur in g t he co ur se of ay ear do es n’t n eces sa ril y

m ean th athe pl ac ed

it in ser vi ce th aty ear. Co ns um ers Po wer te ll s u s i ns te adth atth e as se t n eed s t o b e av ai labl e o n areg ul ar b as is forit s sp eci fic al ly ass ig ne d fu nc ti on . Andli ke th e u ni t i n C on su m ers Po wer tha t su ffer edanin te rrupt io n i n i ts us e aft er i t h adge ne rat edele ctric it y , th e Ch al le ng er, aft er Br own fle w initon e d ay in20 03 , was g ro un de d fo r th ree wee ks at the be gi nn in g o f 20 04 so Mi dc oa stco ul d m ak e th e m od ifi cat io ns th atBro wn re qu ire d fo r hi s n ew pl an e to serve hi m on a reg ul ar b as is forit s s pe ci fic al ly ass ig ne d fu nc ti on --n otjus t m ov in g B ro wn ac ro ss co un try bu t en ab li ng hi m to m ak e h is pi tc he s o n b ig scr een s t o e xe cu ti ve s s it ti ng at aco nf eren ce t ab le an d n otsp rawl ed
ou t i n alo un ge ch ai r. Bro wn wo ul d h av e u s d is ti ng ui sh Co ns um ers Po wer “ onth e si m pl e g ro un ds th atth e Ch al le ng er h adalr eady co m pl et edan d p as se d fl ig httes ti ng , was fli gh two rth y , andli cen se d fo r fl ig htwhen ” Bro wn u se d i t “ fo r th e reg ul ar s erv ic e of airtrans po rta ti on in20 03 .” Thi s m ig htbe a go odarg um en t i f pr eced en t fo cu se d, fo r ex am

pl e, on anass et ’s hav in g c le aredan y reg ul at ory

hu rd le s i t ne ed edto cle ar. Bu t the re ar e a g reatm any de pr eci ab le ass et s wh ic h, u nl ik e po wer p la nt s an d jetair craf t, d on ’t hav e th es e so rts of r eg ul at ory ob st acl es . For th es e as se ts --an d h ere we m ak e th e te sta ge ne ral ly use fu l o ne --as well as a ss et s- 32 -

[* 32 ] li ke po wer p la nt s an d p la ne s, o urcas el aw te ll s u s t o l oo k a t wh ethe r th e as se t i nv ol ve d i s re ady

an d a va il ab le forful l o pe rat io n o n areg ul ar b as is forit s sp eci fi ca ll y a ss igne d f

un ct io n . See i d. at72 4. Br own hi m se lf t es ti fie d t ha t the Ch al le ng er-- as itwas o n Dec em be r 30 , 20 03 --was n’t s uf

fic ie ntto m eethi s s pe ci fic bu si ne ss ne ed s b ecau se th e b ig scr een s an d the co nf eren ce t ab le weren ’t y et in st al le d. W e tu rnne xtto Vall ey

Natu ral Fu el s. Th atcas e aro se fro m a pa rtn ers hi p’s acqui si ti on of a n e th an ol -d is ti ll at io n p la nt . Sin ce the pa rtn ers hi p’s o bjec ti ve was to pro du ce an d s el l an hydro us eth an ol (19 8.2 + p ro of eth y l al co ho l), i t b ou gh t the faci li ty on a n u nd ers ta nd in g tha t the pl an t co ul d p ro du ce atlea st1,5 00 ga ll on s o f 19 9+ pro of

eth an ol pe r da y . Vall ey

Natu ral Fu el s, 1 99 1 Tax Ct. M em o. LEXIS 39 0, at*1 8. Th e p la ntbe ga n o pe rat io ns inDecem be r 19 83 , bu t co ul dn ’t at fi rs t pr oduc e 1 98 .2-p ro of

eth an ol witho uta m ol ecu la r si ev e, an d a ctua l et ha no l pr oduc ti on was l es s than 1 ,50 0 g al lo ns pe r da y . Id. at*5 . The p artne rs hi p d id n’t ha ve th e m ol ecu la r si ev e in st al le d u nt il sp rin g 1 98 4 (andth e p la ntne ed edst il l
m or e equi pm en t i ns ta ll edin19 85 to m ak e itrun pro pe rly.) Id. On i ts 19 83 return, ho wev er, the pa rtn ers hi p c la im eda de pr eci at io n d educ ti on on th e etha no ldi st rib ut io n e qu ip m en t. Id . at * 9. Th e Co m m is si on er ar gu edth atth e p la ntwasn ’t- 33 -

[* 33 ] pl acedinservi ce o r in a st at e o f read in es s t o b e p la cedinservi ce b y th e en d of th aty ear. Id . at * 11
. W e si de d wi th th e Co m

m is si on er. W e u lt im at el y fou ndth atth e “ as si gn ed fu nc ti on of t he faci li ty w as to pro du ce an d s el l 1 98 .2 p ro of eth an ol ,” an d
co nc lu de d t ha t the “ faci li ty w as no t i n aco nd it io n o r st at e o f rea di ne ss an d
av ai labi li ty for i ts ass ig ne d fu nc ti on ” in19 83 . Id. at*1 1- *1 2. We rejecte d t he pa rtn ers hi p’s ar gu m en t tha t i t “ was im pr op er t o a ss um e th atth e ta xp ay er’s bu si ne ss ob

jecti ve m us t au to m at ic al ly equ at e to th e as si gn edfun ct io n o f th e ta xp ay er’s equi pm en t.” Id . at * 18 -* 19 . W e al so reject edit s ar gu m en t tha t Co ns um ers Po wer was di st in gu is habl e b ecau se th e p artne rs hi p i n Val le y Natu ral Fu el s fo rm al ly accep te d t he faci li ty in 1 98 3 wh erea s t he tax pay er i n C on su m ers Po wer d id n’t fo rm al ly accep t the pl an t u nt il a y ear l at er tha n t he on e atis su e. Id
. at*2 3. We po in te d o utth atth is di st in ct io n was li ke ly not“ a fai r ch arac te riz at io n of th e fac ts ,” bu t i n a ny even t tha t al le ge d d iff eren ce was “ no t d is po si ti ve .” Id
. In st ead , th e d is po si ti ve qu es ti on was wh ethe r th e p la nt“ ‘w as av ai labl e fo r se rv ic e on a reg ul ar b as is ’ an d h en ce i n ast at e o f rea di ne ss an d a va il ab il it y forit s sp eci fic al ly ass ig ne d fu nc ti on .” Id . (qu ot in g C on su m ers Po wer, 9 8 T.C. at72 4)
. Whi le we ackno wled ge d t ha t the reg ul at io n d oe sn ’t “requi re tha t p ro pe rty be free of a ll fla ws an d d efec ts as o f th e ti m e th atitis fir stop erat ed ,” we- 34 -

[* 34 ] ul ti m at el y

sai d “ th e p ro pe rty m

us t b e o pe rat in g i n t he ful fil lm en t o f it s sp eci fic al ly ass ig ne d fu nc ti on .” Id . at * 24 (ci ti ng Noel l, 6 6 T.C. at72 8- 29 ). Bec au se th e fac il ity

wasn ’t cap ab le of p erfo rm in g i ts sp eci fic al ly ass ig ne d fu nc ti on --the pro du ct io n o f 19 8.2 pro of eth an ol --i n 1 98 3, we co nc lu de d t ha t i t was n’t p la cedinservi ce tha t year. Id. at*2 6. Ra th er, “ on ly after a ll of t he []
co m po ne ntass et s wer e in st al le d a ndfun ct io ni ng [in 19 85 ] di d the faci li ty co ns ti tu te a co m

pl et e u ni t tha t was op erat io na l an d s erv edth e p ur po se in te nd ed by” th e p artne rs hi p. Id . at * 26
. W e ag ree wi th th e Co m

m is si on er tha t Br own ’s cas e is si m il ar t o t he se two pr eced en ts . Like th e u ni t i n C on su m ers Po wer tha t was n’t qui te ful ly ready and
av ai labl e fo r reg ul ar s erv ic e in 19 72 forit s s pe ci fic al ly ass ig ne d fu nc ti on , th e Ch al le ng er was n’t fi rs t av ai labl e fo r fu ll op erat io n i n B ro wn’s i ns ur an ce b us in es s on a reg ul ar b as is in20 03 . And , justas t he eth an ol pl an t i n Val le y Natu ral Fu el s ne ed edto ha ve all of i ts co m po ne nt s i n p la ce an d fu nc ti on in g i n t he rig htway to fu lfi ll it s s pe ci fic al ly ass ig ne d fu nc ti on be fo re we co ul d fi ndth atitwas p la cedin
se rv ic e, so to o d idth e Ch al le ng er re qu ire in st al la ti on of a ll of i ts ne ces sa ry pa rts -- in cl ud in g t he co nf

eren ce t ab le an d e nl arg eddi sp lay scr een s- -to ful fil l i ts sp eci fic al ly ass ig ne d fu nc ti on be fo re i t was pl acedinservi ce. Val le y Natu ral Fu el s i s al so he lp fu l i n i ts ob se rv at io n t ha t the re’s n ot hi ng wron g i n e qu at in g a- 35 -

[* 35 ] ta xp ay er’s s ta te d b us in es s o bjec ti ve forso m e fea tu re (e .g., Bro wn’s requi rem en t tha t h is pl an e h av e a co nf eren ce t ab le an d l arg er s cree ns to he lp hi m se ll in su ran ce) wi th anass et ’s “ sp eci fic al ly ass ig ne d fu nc ti on .” Mu ch of t he Co de
an d re gs is writ te n i n t he pa ss iv e v oi ce, an d i t i s s om et im es ha rdto fig ur e o utwho th e act orinan y

pa rti cu la r se nt en ce i s s up po se d t o b e. Notso he re. Cas es li ke Co ns um ers Po wer an d Val le y Natu ral Fu el s t el l u s t o l oo k a t the tax pay er-- he ’s th e on e who ge ts to de te rm in e wha t an ass et ’s “ sp eci fic al ly ass ig ne d fu nc ti on ” is
. Andhe re tha t as se t’s fu nc ti on wasn ’t justto fly Brownaro un d; itwas t o b e co nf ig ur edina pa rti cu la r way to m eethi s v ery pa rti cu la r bu si ne ss ne ed s. Ev en th ou gh anass etli ke th e Ch al le ng er m ay be op erat io na l, i t’s n otpl acedinservi ce un ti l i t i s o pe rat io na l fo r it s i nt en de d u se on a reg ul ar b as is
. The Co m m is si on er d ire ct s u s n ex t t o 8 5 Go rg on io W in d Gen erat in g C o. v . Co m m is si on er, T.C. Mem o. 1 99 4- 54 4, 1 99 4 WL 59 19 09 . Thatcas e st art edwith a pa rtn ers hi p t ha t i nv es te d i n t wo wi nd -tu rb in e g en erat or s. Id . 19 94 W L 59 19 09 at *5 . It ac qu ire d the m , m ou nt eddri ve tra in s o n t owe rs , andev enco nn ect edth em to a g ridby the en d o f 19 85 . Id. Bu t the y were fi tt edon ly w it h h el ic op te r bl ad es si gn ifi can tl y

sh orte r th anth os e cal le d fo r inth e d es ig n s pe ci fic at io ns , andne it he r on e h adbe enequi pp edwith aco nt ro ll er. Id . Andalt ho ug h t he tu rb in es co ul d pr oduc e el ect ric it y

un de r fav or ab le win d c on di ti on s t hr ou gh m anua l o pe rat io n- 36 -

[* 36 ] with t ho se bl ad es , th e la ckof i ns tru m en ta ti on pre ve nt edco nt in uo us gr ou nd -le ve l m on it or in g o f th e win d turbi ne s’ sen so rs inaneffi ci en t m an ne r. Id. (On e o f th e tu rb in es was fi tt edwith a n aut om at ic co nt ro ll er i n 1 98 6, an d the ot he r on e was n’t fi tt edun ti l s om et im e aft er tha t. Id .) The p artne rs hi p t oo k d ep reci at io n de du ct io ns with re sp ectto th e tu rb in es for19 85 , bu t the Co m m is si on er d is al lo wed th em forth aty ear. Id . at * 1, * 6. W e fo un d t ha t the pa rtn ers hi p a cqui redth e g en erat or s “ fo r th e p ur po se of pr oduc in g e le ctric it y

for sal e to a ut il it y .” Id . at * 6. An d we t he n fo un d t ha t

“ [n ]eith er wi ndtu rb in e acqui redby the pa rtn ers hi p was cap ab le of r eg ul ar, on go in g o pe rat io n fo r th e p ro du ct io n o f el ect ric ity du rin g 1 98 5.” Id. We th eref or e fo un d tha t i n 1 98 5 n ei th er o f th e g en erat or s was pl acedina co nd it io n o f read in es s an d ava il ab il it y forit s as si gn edfun ct io n- -th e o ng oi ng pro du ct io n o f el ect ric it y . Id. Alt ho ug h we a ckno wled ge d t ha t o pe rat io n o f th e tu rb in es witho ut th e co nt ro ll ers “ was th eo ret ic al ly pos si bl e,” i t was “un li ke ly” th atth ey co ul d’ve be en“ op erat edon a reg ul ar, o ng oi ng ba si s fo r th e p ro du ct io n o f el ect ric it y witho ut el ect ro ni c co nt ro ll ers .” Id . at * 9. In co nc lu si on , rel y in g o n No el l, Co ns um ers Po wer, an d Val le y

Natu ral Fu el s, we h el d t ha t s in ce n ei th er o f th e g en erat or s

“ [was ] av ai labl e fo r fu ll servi ce” i n 1 98 5, n ei th er was pl acedinservi ce tha t year. Id
.- 37 -

[* 37 ] Thes e cas es tea ch us th atno t ju stan y us e o f anass etwil l s at is fy th e pl aced -in -s erv ic e st an da rd . An as se t m us t i ns te adbe av ai labl e fo r it s i nt en de d u se on a r eg ul ar

, on go in g b as is be fo re we ca n fi ndit“pl acedinservi ce” i n t he tax y ear i n que st io n. Br own arg ue s, h owe ve r, th atinco nt ras t t o t he win d turbi ne s- - who se op erat io n was “ th eo ret ic al ly pos si bl e”-- th e Ch al le ng er’s o pe rat io n o n Decem be r 30 , 20 03 “ was no t a que st io n o f th eo ry , bu t a m at te r of pl ai n fa ct . As
ev id en cedby the rou ndtri p fl ig ht s h al fway acro ss th e co nt in en t i n 2 00 3, the re were n o i m

pa irments to it s fu ll , reg ul ar func ti on al it y as abu si ne ss air craf

t i n 20 03 .” Bu t tha t’s n otwhatth e cas es tel l u s t o l oo k fo r. The p ro bl em with t he Ch al le ng er was th at , alt ho ug h i t wo ul d h av e b een , as B ro wn s ai d, “pe rfec t fo r so m e b uyers,” i t was n’t co m pl et e fo r hi m

witho utth e “ two bu si ne ss requi rem en ts th at[he ] ne ed ed .” Andwitho utth os e two po st -2 00 3 m od ifi cat io ns , th e Ch al le ng er was n’t “ in a st at e o f av ai labi li ty for the sp eci fic in te nd edfun ct io n i n” Bro wn’s in su ran ce b us in es s i n 2 00 3. W e d o a gr ee wi th Bro wn tha t the cas el aw do es no t requi re tha t an ass et actua ll y be us edbe fo re i t’s re ga rd edas “ pl acedinservi ce.” In Sear s Oi l v
. Co m m is si on er, 3 59 F.2d19 1 (2 d C ir. 1 96 6) , aff’g i n p art , rev ’g inpa rt T.C. Mem o. 1 96 5- 39 , a ba rg e was read y forus e in th e ta xp ay er’s b us in es s b y Decem be r- 38 -

[* 38 ] 19 57 , bu t co ul dn ’t actua ll y be us edbe cau se itwas l oc ke d i n i ce i n acan al
un ti l M ay 19 58 . Id. The Seco ndCir cu ithe ldth atbe cau se th e b arg e was “ read y fo r us e” an d “ subjec t t o t he weathe r el em en ts all win te r,” “ [i]t s eem [ed ] on ly pr op er, i n o rd er t o re fle ctth e g radua l d et eri or at io n o f th e co m pl et edass etth atwas ta ki ng pl ace dur in g t hi s p eri od , th atpa rt o f th e co stof the ass etbe all oc at edas a de pr eci at io n d educ ti on to Decem be r 19 57 an d t he rem ai ni ng m on th s o f th e win te r of 19 57 -1 95 8.” Id. at19 8. Whatwe cangl ean fro m th atho ld in g i s t ha t i t’s po ss ib le fora ta xp ay er t o p la ce an ass etinservi ce fo r a certa in tax y ear e ve n witho utus in g i t tha t year. See Co ns um ers Po wer, 8 9 T.C. at72 5 (“ [T]he as se ts in qu es ti on [in Sear s Oi l] were h el d t o h av e b een pl acedinservi ce dur in g the tax ab le y ear b ecau se th ey

were re ady

an d a va il ab le to pe rfo rm th ei r sp eci fic al ly ass ig ne d fu nc ti on s, ev enth ou gh th e ta xp ay ers were p recl ud edfro m us in g t he ass et s dur in g th e ta xabl e y ear due to cir cum st an ces be y on d t he ir c on tro l” ). Co nt rary to wh at Bro wn co nt en ds , ho wev er, Sea rs Oil do es n’ t st an d fo r th e d iff

eren t p ro po si ti on th atas l on g a s an ass etha s b een “us ed ” in a cert ai n year, itha s al so be en“pl aced in servi ce” t ha t year. Bro wn p oi nt s u s i n h is rep ly brie f to on e cas e--He ll in gs v. Co m m is si on er, T.C. Mem o. 1 99 4- 24 , 20 04 W L 17 91 6- -th atdo es supp ort h is po si ti on . In Hell in gs , two tax pa y ers form eda pa rtn ers hi p o n Dec em be r 21 , 19 83 to en ga ge in- 39 -

[* 39 ] sa il bo atch art eri ng , andth ei r pa rtn ers hi p b ou gh t a s ai lb oa t tha t s am e d ay . Id ., 20 04 W L 17 91 6 a t * 3. Itqu ic kl y en te redin to a ch art er ag reem en t fo r th e fi na l te n d ay s o f 19 83 with ath irdpa rty--Bay Y ach t Ag en cy --tha t b ot h s ol d a nd
m an ag edbo at s. (Itals o e nt eredin to a se pa rat e ch art er ag reem en t wi thBay Yach t fo r 19 84 .) Sin ce Ba y

Yach t d idn’t h av e a s im il ar s ai lb oa t i n s to ck , itwant edto ha ve th e sa il bo atav ai labl e as a de m on st rat io n m od el to sh ow p ro sp ect iv e b uyers- - an d t he pa rti es ag reedon a di sc ou nt edfee b ecau se th e b oa t wo ul d n otbe subjec t t o th e n orm al wear an d t ear o f a reg ul ar ch art er. W e fo un d t ha t, b y th e en d o f 19 83 ,

“ th e b oa t was ful ly equ ip pe d a ndch art er-r eady , exc ep t fo r sa il s wh ic h c ou ld be
ea si lybo rr ow ed .” Id . (em ph as is ad de d) . The t ax pa y ers to oka de pr eci at io n de du ct io n i n 1 98 3 fo r th e sa il bo at , bu t the Co m m is si on er d is al lo wedit , bec au se he th ou gh t tha t the bo atwasn ’t pl acedinservi ce u nt il 19 84 . Id. at*1 , *8
. W e si de d wi th th e ta xp ay ers . W e fo un d t ha t the bo at ’s “ sp eci fic al ly
as si gn edfun ct io n * * * was u se as ach art er b oa t,” a ndat t he ti m e th e ta xp ay ers pu rch as edth e b oa t “ itwas c ha rte r-re ady .” Id . at * 8. Al th ou gh we ackno wled ge d th at“ ad di ti on al equi pm en t was ad de d l at er, an d the bo atm ay no t h av e b een as at tra ct iv e to pro sp ect iv e ch art erer s atth atti m e as itwas a fte r th e ad di ti on al equi pm en t was ad de d, the bo atwas s ai labl e, an d re ady to be ch art ered ” in 19 83
. Id . Alth ou gh th e Co m

m is si on er em

ph as iz ed“ th atth e b oa t was no t ac tu al ly in the- 40 -

[* 40 ] wate r whe n [t he tax pa y ers ] pu rch as editan d was no t p la cedinth e wat er un ti l Ap ril 19 84 ,” we fo un d t ho se fact s n ot“ co nt ro ll in g” , no ti ng th atth e b oa t was in th e wat er two m on th s b efo re the tax pa y ers pu rch as edit . Id. We als o fo un d pe rs ua si ve th e fac t tha t the ch art er ag reem en t b etweenth e p artne rs hi p a ndBay Yach t d id n’t re st ric t Ba y

Yach t fr om

pl aci ng th e b oa t i n t he wate r an d s ai li ng it
. Id
. Bro wn co nt en ds th at“ [i]f a s ai lb oa t wi th ou t s ai ls , andap pa ren tl y witho utan arra y of s afet y equi pm en t, i s re ady

forth e as si gn edfun ct io n o f ch art er tra ns po rta ti on ,” th ere’s “ no do ub t tha t the Ch al le ng er was ful ly ready for the
as si gn edfun ct io n o f tr an sp orti ng [hi m ] whe n i t was lac ki ng on ly the co nv en ie nc es of a co nf eren ce t ab le an d l arg er v id eo scr een s.” Tru ly, if He ll in gs were the on ly
cas e o n p oi nt , we’ d h av e to ag ree wi th Bro wn. Bu t wh ere we h av e g ap s i n t he Co de an d re gs th atne edto be weld edor r iv et edto ge th er t o k eep li ke cas es de ci de d a li ke , any on e cas e’s pe rs ua si ve ne ss oft ende pe nd s o n h ow i t treat s ea rli er on es . In Hel li ng s, we d idno t m en ti on , m uc h l es s d is ti ng ui sh , Noel l, Co ns um ers Po wer, o r Val le y

Natu ral Fu el s i n c on cl ud in g t ha t the tax pa y ers pl acedth e b oa t i n se rv ic e in 19 83 . Andth ou gh we di d fi ndth atth e b oa t was “ fu ll y equi pp ed ” ev en witho utha vi ng sai ls , we als o fo un d t ha t tho se sai ls “ co ul d b e eas il y bo rro wed .” Id . Perh ap s t he sai l i n t ha t ca se were l ik e jet fu el inth is on e--e ss en ti al to m ak in g- 41 -

[* 41 ] th e as se t m ov e, bu t s o re ad il y av ai labl e th atit s ab se nc e ata pa rti cu la r ti m e wou ldno t p rev en t the ass et ’s bei ng pl acedinservi ce. Bu t we h av e to adm itth at th at ’d be a stret ch --s o we t hi nkitbe stto co nf in e Hel li ng s t o i ts pe cu li ar fa ct s. Co ns um ers Po wer i s a T.C. Op in io n, s o we m us t fo ll ow i t -- whi ch m ean s tha t we sh ou ldfol lo w it s re as on in g a s el ab or at edan d i ll um in at edby the fact s o f la te r cas es th atdi sc us s i t, an d n ota po ss ib le ou tl ie r th atdo es n’t. Bro wn u nd ers ta nd ab ly downpl ay s t he si gn ifi can ce o f th e 2 00 4
m od ifi cat io ns . Whi le ackno wled gi ng inhi s b rie fs th atth os e m od ifi cat io ns m ad e th e Ch al le ng er “ m or e v al uabl e to hi m ” an d a ll owe d h im to “ m or e co m fo rtabl y co nduc t b us in es s” as apa ss en ge r, he says th ey ha ve “ no th in g t o d o wi th th e Ch al le ng er’s as si gn edfun ct io n o f tr an sp orti ng hi m forhi s b us in es s.” Th e p ro bl em is th atth is po st tri al fram in g ju stdo es n’t s qu are wi th th e tr ia l t es ti m on y , inwhi ch Bro wn t es ti fie d tha t tho se two m od ifi cat io ns were “ ne ed ed ” an d “ requi red ”. W e th eref or e fi ndth atth e Ch al le ng er s im pl y was n otav ai labl e fo r it s i nt en de d u se on a reg ul ar b as is un ti l tho se m od ifi cat io ns were i ns ta ll edin20 04 . Bro wn t hu s d id n’t pl ace t he Ch al le ng er i n s erv ic e in 20 03 an d c an ’t tak e b on us de pr eci at io n o n i t tha t y ear.- 42 -

[* 42 ] IV. Pen al ti es A. Frau d P en al ty Sect io n 6 66 3( a) i m

po se s a p en al ty equ al to 75 % of t he po rti on of t he
un de rp aym en t tha t i s at tri bu tabl e to frau d. Th e Co m m is si on er as se rte d t ha t the frau d p en al ty app li edto so m e o f th e ad jus tm en ts inth e n ot ic es of d efi ci en cy . He ha s t he bu rd enof p ro vi ng frau d a nd , to do so , m us t h av e cl ear a ndco nv in ci ng ev id en ce tha t a t ax pa y er und erp ai d a ndth athi s und erp aym en t was attrib ut ab le to frau d. Se c. 74 54 (a); Ru le 14 2( b) ; Ak la ndv. Co m m is si on er, 7 67 F.2d61 8, 6 21 (9 th Cir . 19 85 ), aff’g T.C. Me m o. 1 98 3- 24 9. Howev er, tha t’s o nl y

th e g en eral rul e. The b ur de n c ansh iftinso m e cas es -- an d i t d oe s s o h ere b ecau se if the Co m m is si on er p ro ve s t ha t an

ypa rt o f th e un de rp aym en t fo r a t ax ab le y ear i s at tri bu tabl e to frau d, the n “ th e en ti re un de rp aym en t s ha ll be tre at edas a ttrib ut ab le to frau d, ex cep t wi th res pe ctto an y po rti onof t he un de rp aym en t wh ic h t he tax pa y er es tabl is he s (b y a pr ep on de ran ce of ev id en ce) i s n otatt rib ut ab le to frau d.” Sec. 6 66 3( b) . In the st ip ul at io n o f
se tt le d i ss ue s, the Bro wns ag reedth atm or e th an$1 .8 m il li on of the ad jus tm en ts
m ad e to th ei r in co m e fo r 20 03 wil l b e subjec t t o t he frau d p en al ty. Thi s p ut s o n- 43 -

[* 43 ] th em

th e b ur de n o f sh owi ng th atth e b onus -d ep reci at io n d educ ti ontak enfor th e Ch al le ng er i n 2 00 3 was no t at tri bu tabl e to frau d. 1 9 Frau d i s t he in te nt io na l wro ng do in g wi th th e sp eci fic pu rp os e o f av oi di ng a ta x b el ie ve d t o b e o wed . See DiLe o v . Comm is si on er, 9 6 T.C. 8 58 , 87 4 (1 99 1) , aff’d, 9 59 F.2d16 (2dCir . 19 92 ). In o th er wo rd s, i t’s the “ wil lfu l at te m ptto ev ad e ta x.” Beav er v . Comm is si on er, 5 5 T.C. 8 5, 9 2 (1 97 0) . Sin ce d ire ctpro of of a ta xp ay er’s fraudul en t i nt en t i s ra rel y av ai labl e, we us ua ll y

lo okto cir cu m st an ti al
ev id en ce t o d et erm in e whe th er i t ex is ts . DiLeo , 96 T.C. at 8 74 . Over the y ears , co urts ha ve de ve lo pe d ano ne xc lu si ve li stof f act or s- -o fte n re ferr edto as b ad ge s o f frau d- -th atde m on st rat e fraudul en t i nt en t. Tho se ba dg es in cl ud e:

• un de rs ta ti ng in co m e;

• m ai nt ai ni ng in ad equa te reco rd s;

• fai li ng to fil e ta x re tu rn s;

• im pl au si bl e o r in co ns is te ntex pl an at io ns of b eh av io r;

• co nc eal in g a ss et s;

• fai li ng to co op erat e wit h t ax au th or it ie s;
In t he cas e o f a joi ntreturn- -as th ere i s h ere- -s ect io n 6 66 3 d oe sn ’t app ly 1 9 with re sp ectto bo th sp ou se s u nl es s s om e p artof t he un de rp aym en t i s due to bo th sp ou se s’ frau d. Se c. 66 63 (c). Ma ry Bro wn s ti pu la te d t o t he ad jus tm en ts m ad e in th e st ip ul at io n o f se tt le d i ss ue s, s o t he bu rd enals o s hi fts with re sp ectto he r.- 44 -

[* 44 ] • fil in g fa ls e d oc um en ts ;

• en ga gi ng inil le ga l ac ti vi ty; an d

• at te m

pt in g t o c on ceal il le ga l ac ti vi ty. See S pi es v. Un it edSta te s, 3 17 U.S. 49 2, 4 99 (19 43 ); B rad fo rdv. Co m m is si on er, 79 6 F .2d30 3, 3 07 (9t h C ir. 1 98 6) , aff’g T.C. Mem o. 1 98 4- 60 1; Nied rin gh au s v . Co m m is si on er, 9 9 T.C. 2 02 , 21 1 (1 99 2) . W e al so co ns id er a t ax pa y er’s l ev el of
so ph is ti cat io n i n t ax m at te rs . See Lau rin s v . Comm is si on er, 8 89 F.2d91 0, 9 13 (9 th Cir . 19 89 ), aff’g T.C. Me m o. 1 98 7- 26 5. The Bro wns po in t t o s ev eral fact s t ha t the y co nt en d s ho ul d n eg at e th e fraud pe na lty with re sp ectto th e b onus -d ep reci at io n d educ ti on . They sa y th atit ’s cle ar th atBro wn b ou gh t the Ch al le ng er i n 2 00 3, d id n’t m is st at e it s co st , fle w initon Decem be r 30 of t ha t year, andus editonth atda y to m eetwith p eo pl e wit h wh om he ha d asi gn ifi can t b us in es s co nn ect io n. The Co m m is si on er wo ul d n ev erthe le ss foc us us on th ree f act or s t ha t h e sa y s supp ort i m

po si ti on of t he frau d p en al ty for an y po rti on of t he un de rp aym en t due to th e b on us -d ep reci at io n d educ ti on :

• th e fal se “ th an k you ” le tt ers ;

• Bro wn’s l ev el of s op hi st ic at io n; an d

• Bro wn’s p at te rnof s ub st an ti al ly ove rs ta ti ng de du ct io ns .- 45 -

[* 45 ] The Co m

m is si on er fi rs t co nt en ds th atth e “ th an k you ” le tt ers --p ur po rte dl y fro m Mas tro an d P as qu al e b utreal ly draft edby one of B ro wn’s em pl oyees years la te r--wer e fal se do cu m en ts . The Co m m is si on er i s co rrec t tha t m ak in g fa ls e do cu m en ts is on e o f th e fac to rs th atin di cat es frau d. Se e, e.g ., Spi es , 31 7 U.S. at 49 9. St il l, wh il e th es e le tt ers weren ’t actua ll y writ te n b y

Mas tro or P as qu al e, we kn ow atlea stPas qu al e d idsi gn th e o ne with h is na m e o n i t. Thu s, wh il e th e co nt en ts of P as qu al e’s le tt er were --as Pas qu al e m il dl y pu t i t-- “ a li tt le bi t o ve r th e to p,” it ’s no t cl ear t ha t the co nt en ts of e it he r le tt er were pa te nt ly fals e. Bu t ev enif t he y

were, we d on ’t fin d t ha t the y be ar o n the frau d ana lysis he re. It ’s well est ab li sh edth atfrau du le ntin te ntm us t ex is t at

th e ti me th e taxp ay er fi les the ret ur n . See Gle is v. Co m m is si on er, 2 4 T.C. 9 41 , 95 2 (1 99 5) , aff’d, 2 45 F.2 d 2 37 (6t h C ir. 1 95 7) ; Ho lm es v. Co m m is si on er, T.C. Mem o. 2 01 2- 25 1, at*3 7. W e fo un d t ha t Br own (vi a Fi tz ge ral d) ge ne rat edth os e le tt ers du rin g t he au di t pr oc es s; th atis , act io ns th atto okpl ace af te r th e fi li ng of t he return. Whil e we ha ve sai d t ha t p os tfi li ng ev en ts ca n in di cat e fraudul en t i nt en t atth e ti m e o f fi li ng , se e Hol m es , at * 37 , we do n’t s ee an y ev id en ce tha t Br own form edth e in te ntto crea te th os e le tt ers wh en he fi le d the 20 03 ret urn . Bro wn t es ti fie d t ha t h is pra ct ic e was to ha ve Fit zg eral d wri te let te rs on be ha lf o f bu si ne ss ass oc ia te s o nl y “ whe n th e IRS reque st s t he m ”--tha t i s, af te r a return h as be enfil ed . On th e u nu su al fact s- 46 -

[* 46 ] of th is cas e, we do fin d t hi s b itof B ro wn’s t es ti m on y cred ib le , anditdo es pe rs ua de us th atth e le tt ers are n otgo odpro of th atBro wn i nt en de d t o e va de tax at th e ti m e h e fi le d h is returns . See i d. at*4 1 (f in di ng th at“ [A]lth ou gh pe ti ti on er fai le d t o c oo pe rat e wit h re sp on de nt ’s age nt s b y in te nt io na ll y

subm it ti ng a fal se do cu m en t, h is fai lu re d oe s n otco m pe l the co nc lu si on th athe ha d afrau du le nt in te ntinfil in g h is 20 00 -0 4 t ax returns ”); id . at * 32 (“ Altho ug h re sp on de ntha s pr of fere d s om e ev id en ce o f frau d, tha t ev id en ce re la te s ex cl us iv el y to pe ti ti on er’s po st fil in g a ct io ns an d d oe s n otco nv in ce u s o f hi s i nt en ti on to ev ad e ta x wh enhe fil edhi s t ax return fo r eac h year in is su e”). The Co m m is si on er al so arg ue s t ha t we s ho ul d fa ct or inBro wn’s l ev el of
so ph is ti cat io n. He wo ul d h av e u s wei gh two ot he r in ci de nt s t ha t h e say s s ho w Bro wn co m

m it te d fr au d- -Bro wn’s s ig na tu re o n afal se let te r to th e Cal ifo rn ia Bo ardof Equa li zat io n t o a vo idCal ifo rn iasal es tax when he bo ug htth e Hawk er an d F it zg eral d’s draft in g o f fal se let te rs forform er em pl oyees t o s ig n t o co rro bo rat e th atpo si ti on . At tri al , ho wev er, we d id n’t ad m itth is ex tri ns ic
ev id en ce t o p ro ve sp eci fic in st an ces of B ro wn’s co nduc t wi th res pe ctto th es e co ll at eral m at te rs , see Fed . R. Evi d. 6 08 (b ), an d thu s we wo n’t l etth e- 47 -

[* 47 ] Co m

m is si on er u se ithe re t o s up po rt afrau d fi nd in g t hr ou gha ba ck do or arg um en t tha t Br own ’s all eg edba d a ct s s ho w hi s s op hi st ic at io n. 2 0 Last ly, th e Co m

m is si on er ar gu es th at --b y vi rtu e o f th e st ip ul at io n o f se tt le d is su es --Br own ha s en ga ge d i n a“ fo ur -y ear p at te rnof f rau d,” an d t ha t a “ pa tt ernof
subs ta nt ia ll y

ov ers ta ti ng de du ct io ns supp orts a fi nd in g o f frau d.” Gene ral ly a

“pa tt ernof u nd erre po rti ng iny ears no t atis su e d oe s t en d t o s ho w frau d,” Fio re v . Co m m is si on er, T.C. Mem o. 2 01 3- 21 , at * 18 , “pa rti cu la rly whenacco m pa ni edby ot he r ci rcu m st an ces ex hi bi ti ng anin te ntto co nc eal ,” Hol m es , T.C. Mem o. 2 01 2- 25 1, at*3 2. In de ed , th e st ip ul at io n o f se tt le d i ss ue s re fle ct s t en s o f m il li on s o f do ll ars of i nc reas edad

jus tm en ts to in co m e m ad e to th e Bro wns ’ returns be twee n 20 01 an d 2 00 6- -in cl ud in g abo ut$1 0 m il li on res ul ti ng inun de rp aym en ts subjec t t o th e fraudpe na lt y . Thatdo cu m en t d oe s i nd ic at e a p at te rnof s ub st an ti al
un de rrep orti ng of i nc om e. W e’re no t fo cu si ng he re, h owe ve r, on whet he r Bro wn co m m it te d fr au d o n th e returns ge ne ral ly; rathe r we’re lo ok in g a t wh ethe r he ha s s ho wn b y a pr ep on de ran ce o f ev id en ce tha t h e d id n’t co m m itfrau d wi thres pe ctto on e sp eci fic The C omm is si on er al so po in ts ou t tha t ev enth ou ghBro wn- -as an 2 0 ex pe rie nc edbu si ne ss m en --was well aware o f th e n eedforco nt em po ran eo us subs ta nt ia ti on , he f

ai le d t o k eep su ch reco rd s an d i ns te adres orte d t o c reat e fal se , ba ck da te d l et te rs . As we st at edab ov e, th os e le tt ers do n’t h el p s up po rt afin di ng of frau d b ecau se th ey

were cr eat edaft er the fil in g o f th e returns .- 48 -

[* 48 ] de du ct io n. Th e Co m m is si on er co nc ed es th atth e b on us -d ep reci at io n de du ct io n a t i ss ue is a le gi ti m at e b us in es s ex pe ns e (al be itfor20 04 , no t 2 00 3)
. Whi le th atco nc es si on alo ne cert ai nl y do es n’t s hi el d B ro wn fr om frau d, we al so fin d p ers ua si ve th atBro wn ac tu al ly bou gh t the pl an e an d t oo k o wne rs hi p o f itin 20 03 . Andwe als o fi ndno te worth y th atPas qu al e cre di bl y

tes ti fie d t ha t Br own fle w to Ch ic ag o t ha t year to tal k b us in es s wi th hi m . W e d o a ckno wled ge th atth e ab se nc e o f on e o f th os e fac ts wou ldm ak e ita cl os er ca ll . Cf. Hick s v . Comm is si on er, T.C. Mem o. 2 01 1- 18 0, 2 01 1 WL 32 40 84 3, at*3 (fi nd in g fr au d wh entax pa y er i m pr op erl y to okde pr eci at io n de du ct io n i n 1 99 8 o n u nf in is he d a irp la ne th athe fle w on ce tha t year be cau se ne it he r di d t he tax pa y er t ak e d el iv ery of itth aty ear n orwas the re an y ev id en ce th athe us editfor

an y bu si ne ss pu rp os e); Sm ith v . Comm is si on er, T.C. Mem o. 19 92 -3 53 , 19 92 WL 13 74 48 (fi nd in g fr au d wh entax pay ers im pr op erl y to ok de pr eci at io n d educ ti on on ch art er b oa t fo r 19 82 in st eadof 1 98 3 b as edon fin di ng th attax pa y ers ha d n o re as on ab le be li ef tha t b oa t was ev ende li ve redto it s p ort o f fin al de st in at io n- -m

uc h l es s ac tu al ly chart ered --i n 1 98 2) , aff’d wit ho utpubl is he d op in io n, 9 93 F.2d15 39 (4th C ir. 1 99 3) . The fac ts he re-- al th ou gh in su ffi ci en t t o- 49 -

[* 49 ] sa ti sf

y th e p la ced -in -s erv ic e st an da rd --t ak ento ge th er d o s ho w th atBro wn 2 1 actua ll y tri edto m eetth e Co de ’s requi rem en ts for bo nu s d ep reci at io n b y

th e en d o f 20 03 , andwe co nc lu de th athe ha s s ho wn t ha t h e actua ll y be li ev edth athe
co m pl et edall of t he st ep s n eces sa ry to us e th e p lane inhi s b us in es s i n 2 00 3 wh ic h
wou ldall ow h im

to pro pe rly clai m

th e b on us -d ep reci at io n d educ ti on forth aty ear. W e th eref

or e fi ndth atBro wn d id n’t i nt en d t o wi ll fu ll y ev ad e ta x wh enhe cla im ed th e b on us -d ep reci at io n d educ ti on for20 03
. 2 2 B. Accu racy-Rel at edPen al ty Bu t tha t d oe sn ’t nec es sa ril y m ean th atth e Bro wns esc ap e p en al ty free. As
analt ern at iv e to th e fraudpe na lt y , th e Co m m is si on er s eek s a 2 0% a ccu racyrel at edpe na lty

un de r se ct io n 6 66 2( a) o n t he un de rp aym en t o f ta x a tt rib ut ab le to th e d is al lo wan ce o f th e b on us -d ep reci at io n d educ ti on . The Co m m is si on er, wh o
W e ag ai n n ot e th atwe m ak e n o d et erm in at io n h ere wh ethe r Bro wn m et 2 1 hi s b ur de n t o s ub st an ti at e qua li fie d b us in es s u se forth e Ch al le ng er i n 2 00 3. Thi s m ay ha ve anun us ua l ef

fect : Th e d is al lo wan ce o f th e b on us 2 2 de pr eci at io n d educ ti on m ay well be th e o nl y

ad jus tm en t tha t caus es an un de rp aym en t fo r 20 03 . Andth e p art ie s s ti pu la te d n otth ata pa rt o f Bro wn’s un de rp aym en t fo r 20 03 was due to frau d b utrathe r, th ata po rti on of the ad jus tm en t t o i nc om e “ sh al l b e subjec t t o a n a dd it io n t o t ax un de r [s ect io n] 66 63 .” Sect io n 6 66 3( b) do es n’t k ic k i n u nl es s t he Co m m is si on er p ro ve s tha t p artof an un de rp ay men t

is att rib ut ab le to frau d. We will fly ove r, bu t n ot e, th e st ran ge ne ss of sec ti on 66 63 ’s sh ift in g t he bu rd enof p ro of when on e can ’t tel l u nt il th e en d o f a cas e whe th er the re’s actua ll y be enanun de rp aym en t.- 50 -

[* 50 ] be ars th e b ur de n o f pr oduc ti on as t o t he im po si ti on of t hi s p en al ty, se e se c. 74 91 (c), ar gu es foriton two sep arat e g ro un ds : “ ne gl ig en ce” a nd“ subs ta nt ia l
un de rs ta te m en t o f in co m e ta x,” see sec . 66 62 (b ). W e fo cu s o n the lat te r. By de fin it io n, an un de rs ta te m en t o f in co m e ta x i s “ subs ta nt ia l” if i t ex ceed s th e g reat er o f $5 ,00 0 o r “ 10 pe rcen t o f th e ta x re qu ire d t o b e sh own on th e return.” Sec. 6 66 2( d) (1 )(A). Here, Br own rep orte d atax li ab il it y of am ere $ 48 (ari si ng so le ly from

anad di ti on al tax on a ta x- fav or edacco un t) f or20 03 . After we ad d t o in co m e b ot h t he ag reedad jus tm en ts fro m

th e st ip ul at io n o f se tt le d i ss ue s an d t he di sa ll owe d b on us -d ep reca ti on de du ct io n, the un de rs ta te m en t o f th e Bro wns ’ in co m e ta x i s g reat er tha n $ 5,0 00 --i t’s ar ou nd$1 00 ,00 0. Be cau se th e Bro wns rep orte d t ha t the y

owedon ly $48 , th e to ta l t ax requi redto be sh own on th e return is aro un d $ 10 0,0 00 . Thu s, the Co m m is si on er h as m ethi s b ur de n o f pr oduc ti on with re sp ectto th e subs ta nt ia l u nd ers ta te m en t. Si nc e th e Co m

m is si on er h as m etth atbu rd en , to av oi d t he pe na lt y th e Bro wns m

us t co m e fo rwardwith p ers ua si ve ev id en ce tha t the Co m m is si on er’s pe na lty de te rm in at io n i s i nc orrect . See Ru le 14 2( a); Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 -4 7 (2 00 1) . They can m eetth is burd enby sho win g t ha t the pe na lt y is n’t ap pr op ria te be cau se th ei r return p os it io n was ba se d o n “ subs ta nt ia l au th or ity ”- 51 -

[* 51 ] un de r se ct io n 6 66 2( d) (2 ) orreas on ab le cau se un de r se ct io n 6 66 4( c). See Hig be e, 11 6 T.C. at44 6. The Bro wns foc us on subs ta nt ia l au th or it y . If tax pa y ers ha ve sh own “ th ere is or wa s s ub st an ti al au th or it y ” fo r th e ta x t reatm en t o f anit em , th e am ou ntof a n un de rs ta te m en t s ub

ject t o t he pe na lt y

sh al l b e reduc edby the po rti on of t he
un de rs ta te m en t at tri bu tabl e to th atit em . Sec. 6 66 2( d) (2 )(B) . The Br own s co nt en d th atth ey “rel ie d o n t he ex pr es s l an gu ag e o f th e In te rn al Rev enue Co de to supp ort th ei r cl ai m

forbo nu s d ep reci at io n,” an d t ha t “ rel ia nc e was ex pl ic it ” b ecau se Bro wn t ol d a ll of t he ot he r tr an sa ct io n p art ic ip an ts “ th athe ne ed edto us e th e Ch al le ng er i n h is bu si ne ss be fo re the en d o f th e y ear t o c la im bo nu s d ep reci at io n.” Andth atrel ia nc e, th ey

say, “ is cle arl y

rel ia nc e o n ‘subs ta nt ia l au th or it y ,’ whi ch
m ak es th e p en al ty for s ub st an ti al un de rs ta te m en t o f ta x i napp li cab le .” Tha t ch ai n o f rea so ni ng do es n’t p ers ua de us . Firs t, the Bro wns do n’t ci te to th e “ expr es s l an gu ag e” o f th e Co de th ey all eg ed ly reli edon . Ass um in g t he y ’re refe rri ng to th e te rm

“pl acedinservi ce” i n s ect io n 1 68 (k ), we pr ev io us ly not ed th atth e d is cu ss io n i n t he ir o pe ni ng bri ef o f th atterm was l im it edto on e fo ot no te th atdi dn ’t eve n d is cu ss th e reg ul at io n o r an y pe rti ne ntcas el aw in te rp ret in g i t. Seco nd , we’ re n otsu re wh y th e Bro wns be li ev e th ey canm eetth e subs ta nt ia l
au th or it y st an da rdon th e b as is th atBro wn t ol d p eo pl e h e n eed edth e p la ne by y ear- 52 -

[* 52 ] en d t o u se inhi s b us in es s. Un li ke ap pl y in g the frau d s ta nd ard , it s i rrel ev an t wha t Br own subjec ti ve ly bel ie ve d fo r pu rp os es of d et erm in in g s ub st an ti al
au th or it y . See s ec. 1 .66 62 -4 (d )(3 ), Inc om e Tax . Reg s. Ra th er, the “ subs ta nt ia l
au th or it y st an da rdis anob

jecti ve st an da rdin vo lv in g a n a na lysis of t he law an d ap pl ic at io n o f th e la w to th e rel ev an t fa ct s.” Se c. 1.6 66 2- 4( d) (2 ), Inc om e Tax Reg s. An d we wi ll fin d t he ex is te nc e o f subs ta nt ia l au th or it y on ly “ if t he weig ht of th e au th or it ie s” --wh ic h i nc lu de th e Co de , reg ul at io ns , andcas el aw--“ supp orti ng th e tr eatm en t i s s ub st an ti al inrel at io n t o the weig htof aut ho rit ie s s up po rti ng co nt rary treat m en t.” Se c. 1.6 66 2- 4( d) (3 ), In co m e Tax Reg s. No t u nt il th ei r rep ly br ie f di d t he Bro wns ev endi sc us s t he ke y reg ul at io n t ha t re qu ire d t he Ch al le ng er be “ in a co nd it io n o r st at e o f rea di ne ss an d a va il ab il it y for[it s] sp eci fic al ly
as si gn edfun ct io n.” See s ec. 1 .16 7( a)-1 1( e)(1 ), In co m e Tax Reg s. Ev enth enth ey were ab le to cit e o nl y

on e cas e fav or ab le to th ei r po si ti on (Hel li ng s, T.C. Me m o. 19 94 -2 4) , andth atcas e--wh ic h we h av e d et erm in edis m at eri al ly dis ti ng ui sh ab le
on it s fa ct s, s ee s ec. 1 .66 62 -4 (d )(3 )(i i), In co m e Tax Reg s.-- was subs ta nt ia ll y ou twei gh edby oth er ca se s tha t co m pe l u s t o aco nt rary treat m en t. An d b ecau se th e Bro wns di dn ’t eve n a tt em ptto co ns tru e th e te rm

“pl acedinservi ce” i n a m an ne r fav or ab le to th em se lv es , we can no t s ay th atth ey ha ve est ab li sh ed
subs ta nt ia l au th or it y

by pro vi di ng “ a wel l-r eas on edco ns tru ct io n o f th e ap pl ic ab le- 53 -

[* 53 ] st atut ory

pro vi si on .” See i d. Th us , we fin d t ha t the Bro wns ha ve n’t
es tabl is he d t he re i s o r was subs ta nt ia l au th or it y to cla im th e b on us -d ep reci at io n de du ct io n fo r 20 03 . See s ec. 1 .66 62 -4 (d )(3 )(i v) (C), In co m e Tax Reg s. Tax pa y ers canals o e xc ep t the m se lv es fro m th e se ct io n 6 66 2 p en al ty w it h
res pe ctto an y

po rti onof a n u nd erp aym en t i f th ey canest ab li sh th at , un de r al l the fact s an d c irc um st an ces , th ey act edwith re as on ab le cau se an d i n g oo d fa it h. Se c. 66 64 (c)( 1) ; s ec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Th is de te rm in at io n turns on th e p ert in en t fa ct s an d c irc um st an ces . Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s.

“ Ci rcu m st an ces th atm ay in di cat e rea so nabl e cau se an d g oo d fa it h i nc lu de an ho ne stm is un de rs tand in g o f fac t o r la w th atis reas on ab le inli gh t o f al l o f th e fac ts
an d c irc um st an ces , in cl ud in g t he ex pe rie nc e, kn owl ed ge , andeduc at io n o f th e ta xp ay er.” Id . The m os t i m po rta ntfact orge ne ral ly is the tax pa y ers ’ effo rts to as se ss th ei r pr op er t ax li ab il it y . Id. Ho wev er, o th er tha n re lying so le ly on t he ir
subs ta nt ia l-aut ho rit y

arg um en t t o s ho w th ey

als o a ct edwith re as on ab le cau se an d in go odfai th , th e Bro wns do n’t b rin g fo rth an y ev id en ce-- fo r ex am

pl e, rel ia nc e o n th ei r CPA’s ad vi ce o r so m e cre di bl e p ro of th atth ey were awar e o f Hel li ng s an d th e o th er ca se s wh enth ey fil edth ei r returns --s ho win g h ow t he y di d s o.- 54 -

[* 54 ] The Bro wns th eref or e h av e n otm etth ei r bu rd en , andwe su st ai n the Co m m is si on er’s d et erm in at io n t ha t the y are l iabl e fo r anaccu racy-rela te d p en al ty ba se d o n asubs ta nt ia l u nd ers ta te m en t. 2 3

Deci si on s wi ll be en te red
un de r Ru le 15 5.

Our fi nd in g o f a s ect io n 6 66 2 p en al ty bas edon a subs ta nt ia l 2 3 un de rs ta te m en t m ean s t ha t we d on ’t nee d t o a dd res s t he Co m m is si on er’s arg um en t th atth e Bro wns are al so subjec t t o t ha t p en al ty on a cco un t o f ne gl ig en ce.