14 0 T.C. No . 12

UNITED STAT ES TAX COURT

LAWRENCE F. PEEK AND SARA L. PEEK, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt DARRELL G. FLE CK AND KIMBERLY J. FLECK, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 5 95 1- 11 , 64 81 -1 1. File d M ay 9, 2 01 3.

In20 01 Ps e st ab li sh edtra di ti on al IRAs . Ps fo rm edFP Co rp . an d d ire ct edth ei r ne w IRAs t o u se rol le d- ov er ca sh to pu rch as e 1 00 % of FP Co rp .’ s n ewly iss ue d s to ck . Ps u se d F P Co rp . to acqui re the as se ts of AFS Co rp . Ps p ers on al ly gua ran te edlo an s o f FP Co rp . th at aro se ou t o f th e as se t p ur ch as e. In20 03 an d 2 00 4 P s u nd ert oo k t o ro ll ov er the FP Co rp . st oc k fr om th ei r tr ad it io na l IRAs t o R ot h IRAs, in cl ud in g i n P s’ in co m e th e v al ue of t he st oc k ro ll edov er i n t ho se y ears . In 2 00 6 a fte r th e FP Co rp . st oc k h adsi gn ifi can tl y ap pr eci at ed in va lu e, Ps di rect edth ei r Ro th IRAs to sel l al l o f th e FP s to ck . Ps’ pe rs on al gu aran ti es on th e lo an s o f FP Co rp . per si st edup to th e st oc k sa le in20 06 . R con te nd s t ha t Ps ’ pe rs on al gu aran ti es of t he FP Co rp . lo anwere p ro hi bi te d t ran sa ct io ns , and , as ares ul t, the ga in s re al iz ed in 20 06 an d 2 00 7 fr om

th e 2 00 6 s al es of F P st oc k s ho ul d b e in cl ud ed in Ps’ in co m e.- 2 - Held : Eachof P s’ per so na l g ua ran ti es of t he FP Co rp . lo anwas anin di rectex te ns io n o f cre di t t o t he IRAs , whi ch is a pr oh ib it ed tra ns act io n; an d und er I.R.C . sec . 40 8( e), the acco un ts th athe ldth e FP Co rp . st oc k c eas edto be IRAs
. Held , furth er, the ga in s re al iz edon th e sa le of t he FP Co rp . st oc k are i nc lu de d i n P s’ in co m e. Held , furth er, Ps are l iabl e fo r th e acc ur acy-rela te d p en al ty un de r I.R.C. s ec. 6 66 2.

Sh el do n Har ol d S m it h, fo r pe ti ti on ers . Sh awnP. Nowl an , E. Abig ai l Ra in es , andJo hn Q. W al sh , Jr., fo r res po nd en t.
GUSTAFSON, Ju dg e: Pur su an t t o s ect io n 6 21 2, th e In te rn al Rev enue 1 Serv ic e (“ IRS” ) is su edst atut ory no ti ces of d efi ci en cy

to pe ti ti on ers Lawren ce F. Peekan d S ara L. Pee k o n Dec em be r 9, 2 01 0, an d t o p et it io ne rs Darrel l G. Fl eck
an d Ki m be rly J. Fle ckonDecem

be r 14 , 20 10 , det erm in in g t he fol lo win g de fic ie nc ie s i n i nc om e ta x a ndaccu racy-rela te d p en al ti es un de r se ct io n 6 66 2( a) fo r ta x years 2 00 6 a nd20 07 :
Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 Rev enue Co de (26 U.S.C.), an d a ll Ru le refe ren ces are t o the Tax C ou rt Rul es of Prac ti ce an d P ro cedur e.- 3 - Pen al ty

Tax pa y ers Year Defi ci en cy se c. 66 62 (a) Peek 20 06 $2 23 ,65 0 $4 4,7 30 .00

20 07 1,3 99 27 9.8 0 Flec k 20 06 24 3,2 29 48 ,64 5.8 0

20 07 4,9 48 98 9.6 0 The is su es forde ci si on inth es e co ns ol id at edcas es are: (i) wh ethe r Mr. Fl eck ’s andMr. Pee k’s p ers on al gu aran ti es of alo anto FP Co m pany were pr oh ib it edtra ns act io ns un de r se ct io n 4 97 5( c)(1 )(B) ; an d (i i) wh ethe r th e Fl eck s 2
an d t he Peek s o we acc ur acy-rela te d p en al ti es un de r se ct io n 6 66 2( a).

Bec au se we ho ldth atth e lo angu aran ti es were p ro hi bi te d t ran sa ct io ns , we 2 ne edno t an d d o n otreac h t he ad di ti on al qu es ti on s o f whe th er p ro hi bi te d tra ns act io ns oc cu rred(i) when FP Co m pa ny m ad e p aym en ts of wa ge s t o M r. Fle ck an d M r. Peek(whi ch th e IRS co nt en ds were p ro hi bi te d t ran sa ct io ns un de r se ct io n 49 75 (c)( 1) (D)), o r (i i) wh enFP Co m pany m ad e p aym en ts of r en t t o a n e nt it y own edby Mrs. Fl eckan d M rs . Peek(whi chth e IRS co nt en ds were p ro hi bi te d tra ns act io ns un de r se ct io n 4 97 5( c)(1 )(E)). (We als o n eedno t co ns id er wh ethe r th os e is su es co ns ti tu te “ ne w m atte r”. See no te 3 b el ow.) Fu rth erm or e, be cau se ou r ho ld in g t ha t the lo angu aran ti es were p ro hi bi te d t ran sa ct io ns res ol ve s t he in co m e ta x i ss ue s i n fa vo r of th e IRS an d a ga in stth e p et it io ne rs , we nee d n ot reac h the qu es ti on whet he r Mr. Fl eckan d M r. Peekwou ld , inth e al te rn at iv e, owe ex ci se tax forex ces s co ntrib ut io ns to th ei r su cces so r IRAs un de r se ct io n 4 97 3.- 4 - FINDINGS OF FACT The se cas es were s ub m it te d b y th e p art ie s fu ll y

st ip ul at edun de r Ru le 12 2 fo r de ci si on witho uttri al , an d t he st ip ul at edfact s ar e in co rp or at edhe rei n b y th is 3 refe ren ce. Abb otFir e & Sa fety , Inc
. In20 01 Mr. Fl eckid en ti fie d Ab bo ttFir e & Sa fety , Inc . (“ AFS”), a s an at tra ct iv e b us in es s o pp ortu ni ty. AFS sp eci al iz edinpro vi di ng ala rm s an d fi re pr ot ect io n, h oo d s up pr es si onsyste m s, s pr in kl er s y st em s, b ack flo w in sp ect io ns , fir e ex ti ng ui sh ers , andem erg en cy li gh ts for bu si ne ss es . AFS als o e ng ag edin go ve rn m en t-mand at edco m pl ia nc e te st in g re la te d t o fi re s up pr es si on an d s afety .
The bu rd enof p ro of

is ge ne ral ly on t he tax pa y er, s ee Ru le 14 2( a)(1 ), an d 3 th e subm is si onof acas e as ful ly sti pu la te d u nd er Ru le 12 2 d oe s n otalt er tha t bu rd en , see Bo rch ers v. Co m m is si on er, 9 5 T.C. 8 2, 9 1 (1 99 0) , aff’d, 9 43 F.2d22 (8 th Cir . 19 91 ). Howev er, the bu rd enof p ro of canbe sh ift edwhen th e Co m m is si on er’s p os it io n i m

pl ic at es “ ne w m at te r” tha t was no t i n t he no ti ce o f de fic ie nc y . Peti ti on ers po in t o utth atwher eas th e n ot ic e o f de fic ie nc y de te rm in ed th atth ey ha d e ng ag edin“pr oh ib it edtra ns act io ns ” fo rb id de n i n s ect io n 49 75 (c)( 1) (C) and(F)-- in vo lv in g “ fu rn is hi ng of g oo ds , servi ces ”, et c., an d “ rece ip t o f co ns id erat io n * * * in co nn ect io n wi tha tr an sa ct io n i nv ol vi ng th e in co m e o r as se ts of apl an ”--the Co m m is si on er n ow re li es on sec ti on 49 75 (c)( 1) (B), wh ic h p ro hi bi ts “ in di rect* * * ex te ns io n o f cre di t” . W e n ot e th at th e n ot ic es of d efi ci en cy

m ak e n o m en ti on of t he lo angu aran ti es . To th e ex te nt th atth is is su e wou ldrequi re d iff eren t ev id en ce, i t co ul d c on st itut e “ ne w m at te r”. Howev er, we n eedno t re so lv e th atqu es ti on , see Dagr es v. Co m m is si on er, 1 36 T.C. 26 3, 2 79 (20 11 ), si nc e th e m at eri al fact s ar e n otactua ll y indi sp ut e, an d we can res ol ve th e cas e b y

a m ere p rep on de ran ce o f th e ev id en ce.- 5 -

Mr. Fl eckco nt act edA.J. Hoyal & Co . (“ A.J. Hoyal”) , th e b ro ke rag e fi rm th ro ug h whi chAFS was off

eredfor sal e. Whi le Mr. Fl eckori gi na ll y ho pe d t o p ur ch as e AFS wit h afam il y

m em be r as pa rtn er, tha t re la ti ve was u nabl e to joi n t he ve ntur e. In st ead , Mr. Pee k, an att orne y who ha d p ro vi de d l eg al servi ces to Mr. Fl eckin th e pa st , app ro ach edMr. Fl eckab ou t jo in in g t he ve ntur e. (Mr. an d M rs . Fle ckare n ot rel at edto Mr. an d M rs . Peek .) The IACC A.J. Hoyal i nt ro du cedMr. Fl eckto Ch ris ti anBle es , a cert ifi edpubl ic
acco un ta nt(“ C.P.A.”) ata Co lo rad o S pr in gs acco un ti ng firm . Mr. Fl ecklat er in tro du cedMr. Bl ees to Mr. Pee k. Nei th er Mr . Fle ckno r Mr. Pe ekkn ew Mr. Bl ees pre vi ou sl y . Mr. Fl eckan d M r. Peeken ga ge d M r. Bl ees an d h is firm to
as si stinst ru ctur in g t he purch as e o f AFS’s as se ts an d t o p erfo rm du e d il ig en ce o n th e tr an sa ct io n. Mr. Bl ees pre se nt edto Mr. Fl eckan d M r. Peekin fo rm at io n o n ast rat eg y he id en ti fie d a s t he “ IACC” . On Sep te m be r 6, 2 00 1, M r. Bl ees ga ve to Mr. Fl eckan d Mr. Pe ekdo cu m en ts th atde sc rib edth e IACC p la n. Th is st rat eg y cal le d fo r th e pa rti ci pa ntto est ab li sh a se lf- di rect edin di vi du al ret ire m en t ac co un t (“ IRA”) , tra ns fer fu nd s i nt o t ha t IRA fro m anex is ti ng IRA o r se ct io n 4 01 (k ) pl anacco un t,- 6 -

se t up ane w cor

po rat io n, s el l s ha res inth e n ew co rp or at io n t o the sel f-d ire ct ed IRA, an d u se th e fu nd s fr om th e sa le of s ha res to pu rch as e a b us in es s i nt eres t. Inad di ti on to de sc rib in g t he pl an , th e IACC d oc um en ts in cl ud edan ex te ns iv e d is cu ss io n a ndanop in io n l et te r fro m Mr. Bl ees ab ou t p ro hi bi te d tra ns act io ns un de r se ct io n 4 97 5, wh ic h s ta te th atsu ch tra ns act io ns wou ldbe de tri m en ta l t o t he IACC p la n’s t ax ob jecti ve s. Th e d oc um en ts warn edth at“ th e ta xp ay er co ul d n oten ga ge intra ns act io ns with t he IRA th atth e IRS wou ld de te rm in e to be ‘ pr oh ib it edtra ns act io ns ’”. Als o i nc lu de d i n t he do cu m en ts was a le tt er fro m

th e acc ou nt in g fi rm , whi chin st ru ct ed : An i m po rta ntdi st in ct io n t o a lways reco gn iz e is th atany act io ns y ou ta ke onbe ha lf o f th e co rp or at io n m us t b e ta ke n b y

y ouas a n a ge ntfor th e co rp or at io n andno t b y y oupe rs on al ly. Any bu si ne ss do ne by the co rp or at io n m

us t b e d on e in it s s ta tu s as a co rp or at io n a ndreal iz in g th aty ouare ac ti ng as a n a ge ntof t he co rp or at io n o nl y . The co rp or at io n s ho ul d e xe rci se care to ho ldit se lf o utat a ll ti m es to th e publ ic as aco rp or at io n a ndno t as so m e o th er ty pe of e nt it y , or a s an ex te ns io n o f y oupe rs on al ly.
* * * * * * * Fai lu re t o p ro pe rly m an ag e th e co rp or at io ns [si c] affai rs , or t o co nduc t b us in es s i n a ny m an ne r ot he r th anat a rm s l en gt h c ou ldres ul t in adve rs e eff

ect s t o the co rp or at io n, yourIRA, an d t o youpe rs on al ly. Thi s m ig htin cl ud e, bu t i s n otli m it edto , th e as se ss m en t o f ad di ti on al in co m e ta xe s, p en al ti es an d i nt eres t fr om va rio us tax in g aut ho rit ie s.- 7 -

Non e o f th e IACC d oc um en ts in di cat e th atMr. Fl eckor M r. Peekin fo rm edth ei r acco un ta ntth atth ey

m ig htgu aran te e lo an s fo r th e n ew co rp or at io n a s p artof t he ir pl an ne d a cqui si ti onof AFS ’s ass et s; an d t he do cu m en ts in cl ud edno advi ce t o t he effe ctth atanex te ns io n o f cre di t o r pe rs on al gu aran ty betweenpe ti ti on ers an d t he
ne w cor po rat io n wo ul d n otbe co ns id eredpro hi bi te d t ran sa ct io n fo r pu rp os es of
se ct io n 4 97 5. Mr. Pe ekco m

pl et edan d s ub m it te d a n “ IACC Ap pl ic at io n” an d, i n re sp on se , rece iv edth e “ IACC Pl anforFP Co m pa ny”, a do cu m en t tha t o ut li ne d apl anfor th e p ur ch as e o f AFS’s as se ts . Mr. Fl eckan d M r. Peeksubs eque nt ly im pl em en te d th is pl anan d c om

pe ns at edMr. Bl ees an d h is firm forst ru ctur in g t he pu rch as e an d pe rfo rm in g due di li ge nc e. Bo th Mr. Fl eckan d M r. Peekwere awar e o f th e co m pe ns at io n. Im pl em en ti ng IACC wi th FP Co m pa ny Mr. Fl eckan d M r. Peekeachest ab li sh edat Vi st a Ban k a cco un ts in te nd edto be sel f-d ire ct edIRAs , ov er wh ic h t he y each ret ai ne d a ll di sc ret io na ry au th or it y an d c on tro l co nc ern in g i nv es tm en ts . Mr. Fl eckrol le d o ve r fu nd s o n Au gu st17 , 20 01 , in to hi s IRA (th e “ Fl eckVis taIRA”), fr om anex is ti ng acco un t m ai nt ai ne d fo r hi s b en efi t atth e All ie d Do m es q 4 01 (k ) Ret ire m en t Pl an . Mr. Peekrol le d o ve r fu nd s o n Au gu st30 , 20 01 , in to hi s IRA (th e “ PeekVis taIRA”), fr om anex is ti ng- 8 -

acco un t m ai nt ai ne d fo r hi s b en efi t atCh arl es Sch wab . Neithe r Mr. Fl eckno r Mr. Peekco nt rib ut edto th e o th er’s IRA. On Au gu st27 , 20 01 , th e art ic le s o f in co rp or at io n fo r FP Co m pa ny, Inc. (“ FP Co m

pa ny”) were fi le d wi th th e Co lo rad o S ecre ta ry of S ta te . At fo rm at io n, Mr. Fl eckan d M r. Peekin te nd edth atFP Co m pa ny woul d p ur ch as e th e as se ts of AFS an d e ng ag e in th e ret ai l s al e o f fi re s up pr es si on syste m s. On Se pt em

be r 11 , 20 01 , each IRA p ur ch as ed5,0 00 sh ares of n ewly iss ue d st oc k i n F P Co m

pa ny for $ 30 9,0 00 an d t he reb y acqui reda 50 % in te res t i n F P Co m pa ny. The PeekVis taIRA m ad e it s p ur ch as e atMr. Pee k’s d ire ct io n, an d t he Fl eckVis taIRA m ad e it s p ur ch as e atMr. Fl eck ’s di rect io n. In so do in g, M r. Peek
an d M r. Fle ckbo th in te nd edth atFP Co m pany woul d p ur ch as e th e as se ts of AFS
. At the ti m e o f pu rch as e, bo thMr. Pee k a ndMr. Fl eckals o i nt en de d t o s erv e as co rp or at e o ffi cers an d d ire ct or s o f FP Co m pany. Ina tr an sa ct io n c lo se d i n m id -Sep te m be r 20 01 (bu t wi thanag reedeffe ct iv e da te of Au gu st28 , 20 01 ), FP Co m pa ny acqu ire d m os t o f AFS’s as se ts fora pr ic e of $1 ,10 0,0 00 , con si st in g o f: (a ) $8 50 ,00 0 i n c as h (d eri ve d fr om (i) a $4 50 ,00 0 ba nklo anto FP Co m

pa ny from

a cred itun io n a nd(ii ) $4 00 ,00 0 o f th e p ro ceed s o f th e sa le of F P Co m

pa ny’ s s to ckto th e IRAs ); ( b) a $5 0,0 00 pro m is so ry no te fro m FP Co m pa ny to A.J . Hoy al (th e b ro ke r); an d (c ) a $ 20 0,0 00 pro m is so ry no te fro m- 9 -

FP Co m pa ny to the sel le rs , sec ur edby pers on al gu aran ti es fro m Mr. Fl eckan d M r. Peek
. As p artof M r. Fle ck ’s andMr. Pee k’s p ers on al gu aran ti es , a de edof t ru ston th ei r pe rs on al res id en ces was re co rd edinEl Pas o C ou nt y , Col or ad o, o n S ep te m be r 17 , 20 01 . Mr. Fl eckan d M r. Peekwere g ran to rs , andLesl ie an d C aro l Hei nr ic h, th e sh areh ol de rs of t he co rp or at io n s el li ng AFS’s as se ts , were the gra nt ees of t he de edof tru st . The g ua ran ti es rem ai ne d i n e ffec t unt il th e sa le an d m erg er o f FP Co m pa ny in 2 00 6. Ope rat io n o f FP Co m

pa ny d.b.a . Abb ot t On Se pt em

be r 25 , 20 01 , FP Co m

pa ny file d aSta te m en t o f Ch an ge of Reg is te redOffic er o r Reg is te redAgen t wi th th e Co lo rad o S ecre ta ry of S ta te , whi chna m edMr. Pee k a s t he ne w reg is te redag en t o f FP Co m pany. Als o o n Sep te m be r 25 , FP Co m

pany file d t wo Ce rti fic at es of As su m edor Tra de Nam e, in di cat in g tha t i t wo ul d h erea fte r do bu si ne ss as “ Abb ot t Fi re & Sa fety , Inc .” an d

“ Abb ot t Fi re Ex ti ng ui sh er Co m pa ny, Inc.” Fro m 20 01 un ti l the 20 06 sal e, Mr. Fl eckan d M r. Peekwere the on ly pe rs on s t o s erv e as co rp or at e o ffi cers an d d ire ct or s o f FP Co m pany.- 10 -

Subs eque nttra ns act io ns in vo lv in g t he Fle ckan d P eekIRAs In20 02 Mr. Fl eckan d M r. Peek ’s acco un ta nt s i nf orm edth em

th atVis ta Ban k was term in at in g i ts servi ces as c us to di anof t he Fle ckVis taIRA an d t he PeekVis taIRA. Co ns eque nt ly, th ey tra ns ferr edth e Fl eckVis taIRA an d t he Peek Vis taIRA to Fir stTrus t Co . of On ag a (t o b eco m e th e “ Fl eckOnag a IRA” a ndth e

“ PeekOnag a IRA”) . Each m anin te nd edth e n ew acc ou ntto be sel f-d ire ct ed . In each ne w IRA th e so le ass etwas t he sh ares of F P Co m pa ny prev io us ly hel d i n t he Vis taIRAs
. In20 03 Mr. Fl eckco nv ert edha lf o f th e Fl eckOnag a IRA t o aRo th IRA at th e sa m e b an k (t he “ Fl eckRo th IRA”); an d M r. Peekco nv ert edha lf o f th e Pee k Ona gaIRA to a Ro th IRA (the “ PeekRo th IRA”). In20 04 each tra ns ferr edth e rem ai ni ng ha lf o f hi s On ag a IRA i nt o h is Ro thIRA, so th atth erea fte r eac h Ro th IRA o wne d 5 0% o f th e st oc k o f FP Co m pa ny. Mr. Fl eckan d M r. Peekeach rep orte d t he fai r m ark etva lu es of the co nv ert edpo rti on s o f th ei r acc ou nt s as ta xabl e in co m e fo r 20 03 an d 2 00 4.- 11 -

20 06 sal e an d m erg er o f FP Co m pa ny In20 06 th e Ro th IRAs so ldFP Co m pa ny to Xp ectFir stAidCo . Each R ot h IRA rec ei ve d p aym en ts on th e fo ll owi ng da te s an d i n the fol lo win g a m ou nt s fo r it s 50 % in te res t i n F P Co m

pany: Date Paym en t 3/ 14 /2 00 6 $1 ,38 5,9 20 4/ 5/ 20 06 11 4,7 13 9/ 14 /2 00 6 63 ,93 2 11 /9 /2 00 6 9,1 56 4/ 30 /2 00 7 94 ,47 1 Tota l 1,6 68 ,19 2 Fo ll owi ng th es e p aym en ts , nei th er the Fle ckRo th IRA n or th e Pee k R ot h IRA
own edan y

in te res t i n F P Co m

pany, andne it he r Mr. Fl eckno r Mr. Pe ekha d a ny in vo lv em en t wi th FP Co m pa ny or Xp ectFir stAidCo
. Adm in is tra ti ve act io ns Bo th th e Fl eck s an d t he Peek s t im el y fil edFed eral in co m e ta x re tu rn s o n Fo rm s 1 04 0, “ U.S. Ind iv idua l In co m e Tax Return” , forth e y ears 20 06 an d 2 00 7. The IRS ex am in edth os e returns , adju st edpe ti ti on ers ’ in co m e to in cl ud e cap it al ga in fro m th e sa le of F P Co m

pa ny sto ck , an d i n the alt ern at iv e im po se d e xc is e ta x 4

As a re su ltof t he in crea se d i nc om e, th e IRS als o m ad e co m pu ta ti on al 4 ad jus tm en ts to ex em

pt io n a m ou nt s, s tu de ntin te res t d educ ti on s (f or th e Fl eck s on ly), itemizedde du ct io ns , andsel f-em pl oym en t t ax .- 12 -

fo r ex ces s co nt rib ut io ns to Mr. Fl eck ’s andMr. Pee k’s Ro th IRAs du rin g 2 00 6. The IRS i ss ue d s ta tu to ry

no ti ces of d efi ci en cy

to th e Pee ks on Decem

be r 9, 2 01 0,
an d t o t he Fle ck s o n Dec em be r 14 , 20 10
. The Peek s t im el y

m ai le d t he ir p et it io n t o t hi s C ou rt o n M arch 8, 2 01 1; an d th e Fl eck s t im el y

m ai le d t he ir p et it io n t o t hi s C ou rt o n M arch 14 , 20 11 . At th e ti m e th ey fil edth ei r pe ti ti on s, b ot h t he Fle ck s an d the Peek s re si de d i n C ol or ad o. OPINION I. IRAs an d p ro hi bi te d tran sa ct io ns A tax pa y er wh o i nv es ts hi s m on ey inth e h op e o f m ak in g aga in ov er a pe rio d o f y ears --wh ethe r to fun d h is ret ire m en t o r fo r an y othe r pu rp os e--n orm al ly
m us t p ay tax on th atga inas h e rea li zes it . Sec. 1 00 1( a), (c) . His p aym en t o f th e ta x fr om ti m e to ti m e d im in is he s t he si ze o f hi s i nv es tm en t an d the reb y , to so m e ex te nt , di m in is he s h is futur e g ai ns . Howev er, a t ax pa y er m ay crea te an

“ in di vi du al ret ire m en t ac co un t” , whi ch is ex em ptfro m tax un de r se ct io n 4 08 (e)( 1)
an d i n wh ic h h is in ve st m en t ca n t he refo re i nc reas e u nt il hi s re ti rem en t wi th ou t be in g d im in is he d b y

in co m e ta x l iabi li ty. As l on g a s t he acco un t qua li fie s as an IRA, th e ta xp ay er-i nv es to r is no t l iabl e fo r in co m e ta x o n t he ga in s, s o t ha t the
un di m in is he d i nv es tm en t ac co un t ca n e arnm ax im um returns un ti l the ti m e co m es fo r pa y ou t, wh enth e ta xp ay er wi ll fin al ly owe in co m e ta x o n t ho se gre at er g ai ns .- 13 -

Und er s ect io n 4 08 , th e b en efi t o f th e tr ad it io na l IRA is th us de ferr al of i nc om e ta x li ab il it y onret ire m en t i nv es tm en t g ai ns . Mr. Fl eckan d M r. Peekth eref or e u se d 5 IRAs to m ak e th ei r in ve stm en ts in FP Co m pa ny, w ith t he in te nt io n o f de ferr in g un ti l re ti rem en t the ir i nc om e ta x l iabi li ty on t he ga in th ey ho pe d fo r (an d d id
ex pe rie nc e) fro m

th atin ve st m en t. Howev er, IRAs are s ub

ject t o s pe ci al rul es , in cl ud in g t he pro vi si on in
se ct io n 4 08 (e)( 2) (A) th atanacco un t ce as es to qu al ify as an IRA if “ th e in di vi du al 6 fo r who se be ne fitan y

in di vi du al ret ire m en t ac co un t i s es tabl is he d * * * en ga ge s i n an y tra ns act io n p ro hi bi te d b y sec ti on49 75 ”. The IR S co nt en ds th at , un de r th at pr ov is io n, the Fle ckVis taIRA, th e Pee k Vi st a IRA, an d the ir s uc ces so r IRAs
ceas edto qu al ify as IRAs as o f th e fi rs t d ay of 2 00 1 t hr ou gh 20 06 be cau se Mr. Fl eckan d M r. Peekm ad e lo angu aran ti es th atwere “pr oh ib it edtra ns act io ns ”
To the ex te ntMr. Fl eckan d M r. Peekatt em pt edto us e Ro thIRAs un de r 5 se ct io n 4 08 A, th ei r de si redtax be ne fitwas s li gh tl y di ffer en t. A ta xp ay er i nv es ti ng th ro ug h aRo th IRA d oe s n otex cl ud e qua li fy in g c on tri bu ti on s t o t he Ro thIRA fro m in co m e, bu t o nc e in th e Ro th IRA, in ve stm en ts gro w tax free an d qua li fy in g di st rib ut io ns fro m

th e Ro th IRA are no t s ub ject t o t ax . See s ec. 4 08 A. Becau se th e IRAs ceas edto qu al ify befo re the att em pt edRo th co nv ers io n, the Ro th IRA ru le s o f se ct io n 4 08 A hav e n o app li cat io n i n t he se cas es . Sect io n 4 08 (e)( 2) (A) p ro vi de s: “ If, dur in g a ny tax ab le y ear o f th e 6 in di vi du al forwho se be ne fitan y in di vi du al ret ire m en t ac co un t i s es tabl is he d, tha t in di vi du al or h is be ne fic ia ry en ga ge s i n a ny tran sa ct io n p ro hi bi te d b y sec ti on 49 75 with re sp ectto su chacco un t, s uc h a cco un t ce as es to be anin di vi du al ret ire m en t acco un t as of t he fir stda y of s uc h t ax ab le y ear.”- 14 -

un de r se ct io n 4 97 5( c)(1 )(B)
. The IR S th eref or e co nc lu de s t ha t the IRAs ’ as se ts 7 are, u nd er s ect io n 4 08 (e)( 2) (B), de em edto ha ve be endi st rib ut edto Mr. Fl eckan d 8 Mr. Pe ek , who bo th th eref or e o we in co m e ta x o n t he ga in on sal e in 20 06 an d 20 07 . The p et it io ne rs di sp ut e th e IRS ’s con te nt io n t ha t an y pro hi bi te d tra ns act io ns oc cu rred , andin st eadco nt en d t ha t the IRAs rem ai ne d qua li fie d a s su ch an d t he refo re re m ai ne d e xe m ptfro m tax un de r se ct io n 4 08 (e)( 1)
. II. Loa n g ua ran ti es as p ro hi bi te d t ran sa ct io ns The IRS ar gu es th atMr. Fl eck ’s andMr. Pee k’s p ers on al gu aran ti es of t he $2 00 ,00 0 p ro m is so ry

no te fro m

FP Co m pa ny to t he sel le rs of AFS in20 01 as p art of FP Co m pa ny’ s p ur ch as e o f AFS’s as se ts were p ro hi bi te d tran sa ct io ns . Sect io n 49 75 (c)( 1) (B) p ro hi bi ts “ an y di rector i nd ire ct* * * l en di ng of m on ey or o th er ex te ns io n o f cre di t b etweena [ret ire m en t] pl anan d adi squa li fie d p ers on ”. (Em ph as is ad de d.) Th e p et it io ne rs co un te r th atMr. Fl eck ’s andMr. Pee k’s
Sect io n 4 97 5( c)(1 ) enum erat es cat eg or ie s o f pr oh ib it edtra ns act io ns , 7 in cl ud in g “ an y

di rector i nd ire ct -- * * * (B) l en di ng of m on ey or o th er ex te ns io n o f cred itbe twee n apl anan d adi squa li fie d p ers on ”. Sect io n 4 08 (e)( 2) (B) p ro vi de s: “ Inan y cas e in whi ch any

acco un t ce as es to 8 be anin di vi du al ret ire m en t ac co un t b y reas onof s ub pa rag rap h (A) as o f th e fi rs t da y of a ny tax ab le y ear, p arag rap h (1 ) of subs ect io n (d ) ap pl ie s [i .e., “ an y am ou nt pa idor d is tri bu te d * * * sh al l b e in cl ud edingro ss in co m e b y th e p ay ee o r di st rib ut ee”] as if the re were a di st rib ut io n o n s uc h fi rs t d ay inanam ou ntequa l t o th e fai r m ark etva lu e (o n s uc h fi rs t d ay ) of all ass et s i n t he acco un t (o n s uc h fi rs t da y ).”- 15 -

pe rs on al gu aran ti es were n otpro hi bi te d t ran sa ct io ns be cau se th ey di d n otin vo lv e

“ th e p la n” (i.e ., inth is cas e, th e IRAs ), whe reas th e ex te ns io n o f cre di t p ro hi bi te d
un de r se ct io n 4 97 5( c)(1 )(B) is “be twee n apl anan d adi squa li fie d p ers on ”. 9 (Em ph as is ad de d.) Th ey

ackno wled ge th ata lo angu aran ty can fa ll withi n t he pr oh ib it io n, b ecau se , th ou gh itis no t a d ire ctex te ns io n o f cre di t (i .e., a lo an ), itis
anin di rectex te ns io n o f cre di t. See Janpo l v . Comm is si on er, 1 01 T.C. 51 8, 5 27 (1 99 3) (“ An i nd iv idua l wh o g uaran te es rep aym en t o f a l oa n e xt en de d b y a th ird pa rty to ade bt oris , alt ho ug h i nd ire ct ly, ex te nd in g c red itto th e d eb to r”). Bu t pe ti ti on ers arg ue th atth e p ro hi bi ti on ap pl ie s o nl y to anex te ns io n o f cre di t tha t, whe th er d ire ct(li ke a lo an ) orin di rect(li ke a lo angu aran ty), is “ be twee n apl an an d adi squa li fie d p ers on ”. The l oa n g ua ran ti es at i ss ue were b etweendi squa li fie d pe rs on s (M r. Fle ckan d M r. Peek ) an d a n e nt it y ot he r th anth e p la ns --i .e., FP Co m pa ny, an en ti ty owne d b y th e IRAs , rathe r th anth e IRAs th em se lv es .

Sect io n 4 97 5( e)(2 )(A) d efi ne s “ di squa li fie d p ers on ” as a “ fiduc ia ry ,” whi ch 9 is it se lf d efi ne d i n s ect io n 4 97 5( e)(3 ) as “ an y pe rs onwho * * * ex erci se s an y di sc ret io na ry

au th or it y or d is cret io na ry

co nt ro l re sp ect in g m an ag em en t o f su ch pl anor e xe rci se s an y

au th or it y or c on tro l re sp ect in g m an ag em en t o r di sp os it io n o f it s as se ts ”. See Swa ns on v. Co m m is si on er, 1 06 T.C. 76 , 88 n.1 3 (1 99 6) . The pa rti es st ip ul at edth atMr. Fl eckan d M r. Peekeach ret ai ne d a ll auth or it y an d co nt ro l o ve r hi s Vi st a IRA an d i ts su cces so r IRAs , andth ateach us edth is di sc ret io n t o d ire ctth ei r IRAs to in ve stinFP Co m pa ny. Thu s, M r. Fle ck

an d M r. Peekwere “ di squa li fie d p ers on [s ]” as to th ei r IRAs forpu rp os es of t hi s s ect io n.- 16 -

Thi s re ad in g o f th e st atut e, ho wev er, wo ul d ro b i t o f it s i nt en de d b read th
. Sect io n 4 97 5( c)(1 )(B) pro hi bi ts “ an y di rector i nd ire ct* * * ex te ns io n o f cre di t be twee n apl anan d adi squa li fie d p ers on ”. (Em ph as is ad de d.) Th e Supr em e Co urt h as ob se rv edth atwhenCo ng res s u se d t he ph ras e “ an y di rector i nd ire ct ” in
se ct io n 4 97 5( c)(1 ), itth ereb y em pl oyed “br oa d l an gu ag e” an d s ho wedanob vi ou s in te nt io n t o “ pr oh ib it [] som ethi ng m or e” tha n wo ul d b e rea ch edwitho utit
. Co m m is si on er v . Key st on e Co ns ol . Indus ., Inc ., 50 8 U.S. 1 52 , 15 9- 16 0 (1 99 3)
. As the Co m

m is si on er p oi nt s o ut , if the st atut e p ro hi bi te d o nl y a lo anor l oan gu aran ty betweena di squa li fie d p ers on an d the IRA it se lf, t he n t he pro hi bi ti on co ul d b e eas il y

an d abu si ve ly avo id edsi m pl y by hav in g the IRA cre at e a s he ll
subs id ia ry

to who m th e d is qu al ifi edpe rs on co ul d t he n m ak e a l oa n. Th at , ho wev er, i s an ob vi ou s ev as io n tha t Co ng res s i nt en de d t o p rev en t b y us in g the
wor d “ in di rect ”. The l an gu ag e o f se ct io n 4 97 5( c)(1 )(B) , when gi ve n i ts ob vi ou s an d i nt en de d m ean in g, p ro hi bi te d M r. Fle ckan d M r. Peekfro m m ak in g l oa ns or lo angu aran ti es eit he r di rect ly to the ir I RAs or i nd ire ct ly to the ir I RAs by w ay of th e en ti ty owne d b y

th e IRAs
. III. Tax co ns eque nc es of t he gu aran ti es on th e sa le of s to ck The IRS’s two n ot ic es of d efi ci en cy is su edto pe ti ti on ers for20 06 an d 2 00 7
are s im il ar, an d t he on e is su edto th e Fl eck s as se rte d:- 17 -

The pro hi bi te d t ran sa ct io n t rig ge reda li qu id at io n o f th e IRAs inth e [s ic ] 20 01 . Fol lo win g t ha t l iqui da ti on , th e st oc k o f FP Co m pa ny Inc. is tre at edas o wne d b y

th e [s ic ] Fl eckan d a no th er i nd iv idua l [i .e., Mr. Pe ek ] pe rs on al ly. Co ns eque nt ly, Fl eckan d the ot he r in di vi du al are t ax edpe rs on al ly on a ny gai n o n t he sal e o f su ch st oc k. Pet it io ne rs see m

to arg ue th atth e IRS ’s no ti ces of d efi ci en cy is su edfor20 06 an d 20 07 are s om eh ow t oo lat e (b ecau se th e lo angu aran ti es were m ad e in 20 01 ), an d th atinth e ab se nc e o f anearl ie r no ti ce o f de fic ie nc y th e IRAs rem ai ne d e xe m pt . Pet it io ne rs su gg es t tha t i f th e IRAs di d n otlo se th ei r ex em pt io n u nt il 20 06 , th en pe ti ti on ers wou ldhave real iz edord in ary in co m e in th aty ear, ra th er tha n t he cap it al ga in de te rm in edinth e n ot ic es ; an d t he y arg ue th atsi nc e th e n ot ic es di d n ot
m ak e th atpa rti cu lar ad

jus tm en t, the no ti ces are s om eh ow i na de qu at e to supp ort an
as se ss m en t o f ta x b as edon cap it al ga in s. Th is arg um en t ei th er m is co ns tru es th e ta x c on se qu en ces to anin di vi du al who en ga ge s i n p ro hi bi te d tran sa ct io ns with
res pe ctto anIRA o r pe rh ap s ex ag ge rat es th e im po rta nc e o f th e wor di ng of the
no ti ces . The n ot ic es de te rm in edde fic ie nc ie s fo r 20 06 an d 2 00 7 o n t he ba si s o f a pr oh ib it edtra ns act io n t ha t t oo k p la ce i n 2 00 1. We no w red et erm in e th os e 2 00 6
an d 2 00 7 d efi ci en ci es an d d eci de (1) whet he r th e acc ou nt s tha t h el d t he FP Co m pa ny sto ckwere IRAs i n 2 00 6 wh enth e st oc k was so ld(we h ol d t he y were no t), (2 ) whe n t he y

ceas edto be IRAs an d t he refo re ex em ptfro m in co m e ta x (we ho ldin20 01 ), an d (3 ) th e ta x c on se qu en ces of t he ir n on -ex em pt io n (we ho ldMr.- 18 -

Fl eckan d M r. Peekare l iabl e fo r ta x o n t he cap it al ga in s re al iz edin20 06 an d 20 07 fro m

th e sa le of t he FP Co m

pa ny sto ck ). The lo angu aran ti es were n ota on ce-and -d on e tr an sa ct io n wi th effe ct s o nl y in 20 01 bu t i ns te adrem ai ne d i n p la ce an d c on st itut eda co nt in ui ng pro hi bi te d tra ns act io n, thu s p rev en ti ng Mr. Fl eck ’s andMr. Pec k’s ac co un ts th athe ldth e FP Co m pa ny sto ckfro m

be in g IRAs i n s ub se qu en t years. On J anuary 1, 2 00 6, i t 1 0
rem ai ne d t ru e th atMr. Fl eckan d M r. Peekgu aran te edth e lo anto FP Co m pa ny; if FP Co m pa ny defaul te d, the y

wou ldpa y . By

it s n atur e, th e lo angu aran ty tha t ea ch
m anm ad e p uthi m

an d h is acco un t i n a n i nd ire ctlen di ng rel at io ns hi p t ha t wo ul d pe rs is t u nt il th e lo anwas p ai d o ff. Co ns eque nt ly, un de r se ct io n 4 08 (e)( 2) (A), eac h o rig in al acco un t h ol di ng th e FP Co m pa ny sto ckceas edto qu al ify as an IRA in 20 01 . In 2 00 3 and20 04 when Mr. Fl eckan d M r. Peekest ab li sh edRo th IRAs , th os e acc ou nt s ce as edto be Ro th IRAs when th ey

fun de d t he acco un ts with F P Co m pa ny sto ck , bec au se th e pr oh ib it edtra ns act io ns co nt in ue d a s t o t ho se acco un ts . See s ec. 4 08 A(a) (“ Exc ep t
as pro vi de d i n thi s s ect io n, a R ot h IRA sh al l b e tr eat edforpu rp os es of t hi s t it le in Si nc e th e g ua ran ti es (i.e ., th e p ro hi bi te d t ran sa ct io ns ) co nt in ue d t hr ou gh 1 0 th e ti m e o f th e sa le of F P Co m pany sto ckin20 06 , we do no t ad dr es s wh at , if an y , requi rem en ts th ere a re t o s ub se qu en tl y refo rm or r es us ci ta te anIRA th at , pu rs ua nt to th e p ro vi si on s i n s ect io n 4 08 (e)( 1) , has “ ceas edto be anin di vi du al ret ire m en t acco un t”
.- 19 -

th e sa m e m an ne r as anin di vi du al ret ire m en t p la n” ). Forth e sa m e rea so ns , th e acco un ts ho ld in g t he FP Co m pa ny sto ckwhen th e st oc k was so ldin20 06 were n ot Ro th IRAs , andth e g ai ns fro m th e sa le real iz edin20 06 an d 2 00 7 wer e n otex em pt fro m tax . The t ax li ab il it y

fro m th e g ai n i s p ro pe rly attrib ut ab le to Mr. Fl eckan d Mr. Pe ekas t he crea to rs an d b en efi ci ari es of t he acco un ts th atso ldth e FP Co m pa ny sto ck . See s ecs . 67 1, 4 08 (a), (e )(2 )(A)(i ). Pet it io ne rs ha ve no t ch al le ng edth e IRS ’s cal cu la ti on of g ai n o n t he sal e o r as se rte d t ha t the y were en ti tl edto a hi gh er b as is inth e st oc k t ha n wh atth e IRS all owe d. Th ey were th eref or e li ab le for

tax on th e g ai ns real iz edinth e sa le tra ns act io n a s d et erm in ed in th e n ot ic es of d efi ci en cy . 1 1

Inth e al te rn at iv e, th e IRS ag ue s t ha t M r. Fle ck an d M r. Peekowe e xc is e 1 1 ta x o n t he ex ces s co ntrib ut io ns to th ei r su cces so r IRAs un de r se ct io n 4 97 3( a). Whi le sec ti on 49 73 (a) i m po se s an ex ci se tax equa l t o 6 % of t he ex ces s co nt rib ut io n m ad e to a tr ad it io na l/ Ro th IRA, th is tax is im po se d o nl y

foreach subs eque nty ear i n wh ic h t he ex ces s co ntrib ut io n re m ai ns inth e IRA. Und er o ur ho ld in g h ere t ha t wh enth e IRAs en ga ge d i n p ro hi bi te d t ran sa ct io ns , th ey ceas edto be IRAs an d t he va lu e o f th e IRAs ’ as se ts co ns ti tu te d d eem eddi st rib ut io ns to Mr. Pe ekan d M r. Fle ckpe rs on al ly, an y ex ces si ve co nt rib ut io n t o ane w IRA was se lf- co rrec te d a ndno ex ci se tax wou ldbe du e. W e th eref or e d o n otad dr es s fu rth er thi s al te rn at iv e th eo ry .- 20 -

IV. Accu racy-rela te d p en al ti es A. Subs ta nt ia l u nd ers ta te m en ts The IRS d et erm in edth atth e Fl eck s an d t he Peek s ar e li ab le fora 20 %
accu racy-rela te d p en al ty becau se th ei r un de rp aym en ts were “ subs ta nt ia l
un de rs ta te m en t[s ] of

in co m e ta x” un de r se ct io n 6 66 2( b) (2 ). 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 s ub st an ti al if i t ex ceed s t he gre at er o f $5 ,00 0 o r 10 % of t he tax requi redto be sh own on th e return. Se c. 66 62 (d )(1 )(A). Pu rs ua nt to sec ti on 74 91 (c), the Co m m is si on er b ears th e b ur de n o f pr oduc in g s uf fic ie nt
ev id en ce s ho win g t ha t the im po si ti on of t he pe na lt y

is ap pr op ria te ina gi ve n c as e. Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). He ha s m etth is bu rd enof sh owi ng subs ta nt ia l u nd ers ta te m en ts of i nc om e ta x fo r 20 06 , si nc e th e ad jus tm en ts fo r 20 06 inth e n ot ic es of d efi ci en cy res ul t i n d efi ci en ci es th atex ceedth e requi si te
am ou nt s. Th e sa m e can no t b e sa idforth e 2 00 7 d efi ci en ci es ; co ns eque nt ly, th e Co m m is si on er al so m ai nt ai ns th atbo th th e 2 00 6 a nd20 07 un de rp aym en ts inth es e cas es were at tri bu tabl e to “ ne gl ig en ce o r di sr eg ardof rul es or r eg ul at io ns ”. Sec. 66 62 (b )(1 ). B. Neg li ge nc e o r di sr eg ard Fo r pu rp os es of s ect io n 6 66 2, “ th e te rm ‘ ne gl ig en ce’ in cl ud es an y fai lu re t o
m ak e a rea so nabl e at te m

ptto co m pl y with t he pro vi si on s o f th is ti tl e [i .e. 26- 21 -

U.S.C.]”. Sec. 6 66 2( c). Neg li ge nc e is de fin edas alac k o f du e car e o r fai lu re t o do whata reas on ab le an d o rd in ari ly pru de ntpe rs onwou lddo un de r th e ci rcu m st an ces . Neely v. Co m m is si on er, 8 5 T.C. 9 34 (19 85 ). The t erm “ di sr eg ard ” in cl ud es an y

care le ss , reck le ss , or i nt en ti on al di sr eg ardof t he rul es or r eg ul at io ns . Sec. 6 66 2( c). The un de rp aym en ts inth es e cas es res ul t fr om pe ti ti on ers ’ fai lu res to rep ort cap it al ga in in co m e th atth ey real iz edfro m

th e 2 00 6 s al e o f FP Co m pa ny sto ck ; in st eadpe ti ti on ers co nt en de d tha t IRAs h el d t he FP Co m pa ny sto ckwhenth e st oc k was so ldan d, the refo re, the real iz edga in s wer e n ottax ab le . Howev er, Mr. Fl eckan d M r. Peekwere wel l awa re tha t p ro hi bi te d t ran sa ct io ns li st edin
se ct io n 4 97 5 c ou ldbe fat al to th ei r IRA arr an ge m en ts , bec au se bo th th e IACC in fo rm at io n t he y

rece iv edan d an o pi ni on let te r fro m th ei r acc ou nt an t d is cu ss ed
se ct io n 4 97 5 i n d et ai l. The IACC i nf orm at io n e xp res sl y

st at ed : “ th e ta xp ay er co ul d n oten ga ge intra ns act io ns with t he IRA th atth e IRS wou ldde te rm in e to be ‘pro hi bi te d t ran sa ct io ns ’”. Sect io n 4 97 5( c)(1 )(B) cle arl y pro vi de s t ha t an y

“ in di rect* * * l en di ng of
m on ey or o th er ex te ns io n o f cre di t b etweena pl anan d adi squa li fie d p ers on ” is a pr oh ib it edtra ns act io n. As we ha ve he ld , Mr. Fl eck ’s andMr. Pee k’s p ers on al gu aran ti es to FP Co m

pa ny were “ in di rect* * * ex te ns io n[ s] of c red it ” to th ei r- 22 -

IRAs an d wer e p ro hi bi te d t ran sa ct io ns , see Janpo l v . Comm is si on er, 1 01 T.C. at 52 7, an d n o o ne advi se d t he m othe rwis e. Giv enMr. Fl eck ’s andMr. Pee k’s kn owl ed ge ab ou t the ha zard s o f pr oh ib it edtra ns act io ns an d t he ir p ers on al in vo lv em en t wi th th e FP Co m pa ny tran sa ct io ns (in pa rti cu la r, th ei r pe rs on al gu aran ti es ), we co nc lu de th atpe ti ti on ers were n eg li ge ntwhen th ey fai le d t o re po rt in co m e fro m

th e sa le s o f FP Co m

pa ny sto ckaft er Mr . Fle ckan d M r. Peekha d
en ga ge d i n apro hi bi te d t ran sa ct io n. C. Rea so nabl e cau se an d g oo d fa it h Onc e th e Co m

m is si on er m eet s t hi s b ur de n, the tax pa y er m us t co m e fo rward with p ers ua si ve ev id en ce tha t the Co m m is si on er’s d et erm in at io n i s i nc orrect . Ru le 14 2( a); Hig be e v . Comm is si on er, 1 16 T.C. at 4 47 . Peti ti on ers arg ue th at , ev enif the y

owe t ax on th e g ai n fr om th e sa le of F P Co m

pa ny, the y

act edwith
reas on ab le cau se an d i n g oo d fa it h wh enth ey fai le d t o re po rt t he cap it al ga in s at is su e, be cau se th ey

rel ie d o n a dv ic e p ro vi de d b y Mr. Bl ees , th e C.P.A. See s ec. 66 64 (c) (a ccu racy-rela te d p en al ty is n otdu e with re sp ectto an y po rti on of a n un de rp aym en t i f itis sh ownth atth ere was reas on ab le cau se an d t ax pa y er ac te d i n go odfai th with re sp ectto th atpo rti on ). Howev er, as Mr. Fl eckan d M r. Peek kn ew, Mr. Bl ees was h im se lf n ota di si nt eres te d p ro fes si on al bu t ra th er an act iv e pr om ot er o f th e IACC. A “pr om ot er” i s “ ‘an advi se r who pa rti ci pa te d i n- 23 -

st ru ctur in g t he tra ns act io n o r is ot he rwis e rel at edto , has anin te res t i n, o r pr of it s fro m th e tr an sa ct io n.’” 10 6 Lt d. v . Comm is si on er, 1 36 T.C. 67 , 79 (20 11 ) (quo ti ng Tig ers Ey e Trad in g, LLC v . Comm is si on er, T.C. Mem o. 2 00 9- 12 1) , aff’d, 6 84 F.3d84 (D.C. Cir . 20 12 ). Wha t the y rece iv edfro m

Mr. Bl ees was n ot advi ce s o m

uc h a s a s al es pi tc h. Bec au se of M r. Bl ees ’s rol e as pro m ot er, Mr . Fle ckan d M r. Peekco ul d n ot
reas on ab ly andingo odfai th rel y on th atadvi ce. See 10 6 Lt d. v . Comm is si on er, 13 6 T.C. at79 (“pr om ot ers tak e th e g oo d- fai th ou t o f go od -fai th rel ia nc e”). As th e pa rti es ha ve st ip ul at ed , Mr. Bl ees so ldto Mr. Fl eckan d M r. Peekth e IACC p la n, whi chwas l at er u se d t o s tru ctur e th e p ur ch as e o f AFS’s as se ts . Mr. Bl ees was th us a pr om ot er, an d M r. Fle ck an d M r. Peekco ul d n otreas on ab ly andingo od fai th rel y on hi s ad vi ce t o a do ptth e IACC. Mo reo ve r, th ere i s n o i nd ic at io n t ha t M r. Fle ckan d M r. Peekin fo rm edth ei r acco un ta ntof t he ir i nt en ti on to pe rs on al ly guaran te e FP Co m pa ny loa ns , or t ha t Mr. Bl ees ga ve th em

an y advi ce tha t the ir p ers on al gu aran ti es wou ldno t b e a pr oh ib it edtra ns act io n u nd er s ect io n 4 97 5. Ra th er, the y were warn edno t t o en ga ge inan y

tra ns act io ns th at“ th e IRS wou ldde te rm in e to be a ‘pro hi bi te d tra ns act io n’”.- 24 -

Si nc e Mr. Bl ees ’s adv ic e d idno t ad dr es s t he is su e o f pe rs on al gu aran ti es , we co nc lu de th atpe ti ti on ers di d n otrel y on th ei r acc ou nt an t’s advi ce wi th reg ard to th e p ro hi bi te d t ran sa ct io ns inth es e cas es , anddi d n otha ve reas on ab le cau se or actingo odfai thinfai li ng to rep ort the cap it al ga in s i n t he se cas es . W e th eref

or e su st ai n t he im

po si ti on of t he accu racy-rela te d p en al ty und er se ct io n 6 66 2( a) fo r bo th y ears inis su e in bo th cas es . To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te redun de r Ru le 15 5.