TAX COURT OPINION

Case: 106 LTD., David Palmlund, Tax Matters Partner
Docket Number: 14586-05
Judge: Holmes
Opinion Type: reported
Filed: 01/10/2011
Pages: 24

136 T.C. No. 3 UNITED STATES TAX COURT 106 LTD. , DAVID PALMLUND, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 14586-05. Filed January 10, 2011. Partnership P entered into a Son-of-BOSS This generated more than $1 million in losses which P's partners claimed on their transaction. artificial 2001 returns. determined a penalty under sec . 6662 (h) , gross-valuation.misstatement of P's inside basis in an asset distributed by P. penalty, alleging it has . a reasonable-cause-and-goodfaith defense. P now contests only that R adjusted various partnership items and I . R . C. , f or Held: The Court has jurisdiction over the penalty in this partnership-level proceeding after Petaluma FX Partners v. Commissioner, 135 T.C. relates to an adjustment item, partner's tax return that can be assessed without a partnerlevel affected items proceeding. ,___ (2010), because the penalty to inside basis, a partnership to the that results in a computational adjus,tment Held, further, we agree with the Court of Appeals for the Seventh Circuit in American Boat Co. LLC v. United States, 583 F.3d 47/1 (7th Cir. 2009) , that a partnership can SERVED JAN 10 2011 as ert its own reasonab]e-cause-and-good-faith defense in a pa tnership-level proceeding. Held, further, P cannot reasonably rely in good faith on the tax advice given by a "promoter", defined as an adviser who participates in structuring the transaction or wh from the transaction. is otherwise related to, has an interest in, or profits Wi liam A. Roberts and Kyle R. Coleman, for petitioner. Na cy B. Herbert, Richard Hassebrock, and Jadie T. Woods, for res >ondent. HO MES, Judge: David Palmlund bought into a bad deal to lose money but save on taxes . He has since f iled an amended return änd paid the tax he was trying to avoid. But he contests the pen lty that the Commissi ner asserts against him; he argues that he relied in good faith on professional advisers. I. Palmlund FINDINGS OF FACT David Palmlund started his professional life in upstate New York. n 1964 he graduated dith a dual degree in industrial ! engineering and management aceounting from Syracuse University, then tiook a job in Rochester with Eastman Kodak as a cost engineer. After a year in the corporate world, duty called; he served in thè Army as an ordnance officer stationed at the Aber- deen Proving Grounds, but also spent time in Vietnam with the State Department on matters h "can't talk about 'in Asia." Then -3- he returned to Syracuse, completed his MBA in 1968, and went back to Eastman Kodak. But the draw of a larger city proved irresistible. Palmlund moved to New York to work for American Cyanamid Chemical Company from 1968 to 1972. He started out as an operations analyst-- finding ways to improve the operations of subsidiaries--and moved up to become a budget analyst involved..in major acqui.sitions. His entrepreneurial spirit caught the attention of like-minded young men, and together they forded a home-warranty company, American Home Shield, in 1972. As chief adminis-trative officcer, Palmlund set up American Home Shield's oþerations, developed the company's pricing model, and hired the contractors who would perform the covered home repairs.' American Home Shield grew to be a successful, $800 million-a-year company. Palmlund then maved to Merrill Lynch in 1975. He eventually became vice president and controllei, as well as CEO of several Merrill subsidiaries. At one of these, Merrill Lynch Realty, Palmlund had 10,000 employees under his direction working in New York and London. He then returned to American Home Shield as chief operating officer. In 1980 he to'ok four months off to care for his wife and moved to Dallas to' be closer to her family. Palmlund contacted some of the executive recruiters he met while working for Merrill--he got to know them -well during the time he hired about one manager a week--to see what jobs there !! I- 4- might be for himsin Dallas. Instead, the recruiters recruited him to join their company. Palmlund wasn't interested at first , because he didn' t like the way recruiters operated, but the recruiters replied: "Fine, ccme in and change it." He agreed to give it a try, with the understanding that he could do things his way for a while; if it didn't work out, he would leave. His; way was based on per onal contact . He would meet each candidate face to face, never offering anyone, for a position whom he hadn't met in person. This was labor intensive--Palmlund accumul ted over 10 million f i-equent - f lyer mile s - - but his approacl paid of f . He became a partner at his f irm, his f irm became t he world's largest, and he placed more senior executives than an one else at it . All of his placements stayed in their new job at least a year; every other partner .had to redo some. Pa]mlund' s success made his tax reporting complicated, and for .man years he relied on Arthur Andersen. In the early '90s, his f irn hired a f inancial planner who recommended setting up limited partnerships, living grusts, and other entities to help Palmlun meet his financial goals--and who also recommended, as the law er to set it all up, one Joe Garza. Palmlund ended up using Garza off and on over t:he next 20 years not only for the financi 1-planning-entity-creation work, but for all his legal needs . Garza in turn recommended Turner & Stone to Palmlund as a more af ordable alternative to Arthur Andersen for tax prepara- -5- tion. But even at those lower rates, Palmlund was an active and frugal client who carefully reviewed every return--and noticed when one year Turner & Stone nearly doubled its fee to $2,700. He credibly testified that he "moaned and groaned" until it was reduced. II. The Transaction Sometime early in 2001, Garza called Palmlund to briefly pitch an "investment" in foreign currency. Palmlund dismissed the idea because he didn't have much experience in the field.1 But he was no neophyte investor--he ran a real-estate investment partnership, actively picked stocks, and formed a Texas family limited partnership named Palmlund, Ltd., with the stated business of "investments." He also had numerous personal bank and brokerage accounts that he actively managed. Palmlund says that he warmed up to the transaction after receiving a "hot tip" at a cocktail party in mid 2001. But this tip came from his business partner's daughter, who mentioned that "the yen is weak and is going to get weaker." We do not think this is a credible explanation for Palmlund's interest in foreign-currency speculation, and instead find that his interest was really'sparked when Garza resurfaced. His only experience was ordering his staff at Merrill Lynch's London office to hedge against a threatened devaluation of the transaction. He did not personally implement the pound. Garza, however, was not really urging a speculative foray into foreign currency--he was pitching a particular transaction that he explained had significant tax benefits. The deal was a variation of the Son-of -BOSS transaction that has produced so much litigation in recent years.2 He tried to explain its basic - structu e, though on this topic Palmlund credibly testified that the exp anation, with its use of foreign-currency digital-options and the "super sweet spot" allegedly a way to make a large profit f the dollar-to-yen exchange rates worked out just 2 We lay out only the barest of bones, because Palmlund has 1 (20:09) . concedåd the tax and fights only the penalty. Very similar deals See, e.g., Highwood Partners v. have bÃen dissected elsewhele. Commissioner, 133 T.C. For an explanation of Son-ofBOSS deals, see Kligfeld Holdings v. Commissioner, 128 T.C. 192 (2007)) see also, e.g., BLAK Invs. v. Commissioner, 133 T.C. 431 (2009) i 3K Inv. Partners v. 3Commissioner, 133 T.C. 112 (2009) ; Olesen(v. Commissioner, T.C. Memo. 2009-307; Bergmann v. Commishioner, T.C. Memo. 20$9-289; LVI Investors, LLC v. Commisbioner, T.C. Memo. 200:9-254; UTAM, Ltd. v. Commissioner, T.C. Mémo. 2009-253; Tigers Eye Trading, LLC v. Commissioner, T.C. Mèmo. 2009-121; Napoliello v. Commissioner, T.C.. Memo. 2009-104; F0ars v. Commissioner, T.C. Memo. 2009-62. increasing basis in that The liabilities are not completely fixed at Sþn-of-BOSS deals come in different varieties. But they all involvë the transfer of assets along with significant liabilities to a pårtnership, with the goal of partnefship. time of transfer, so the partnership ignores them in computing basis.Í This results in high-basis assets that produce large tax---b t not out-of-pocket--Elosses. usually yield capital because he attached the high basis to Canadian dollars, and on his or ginal return took the position that certain foreigncurrency transactions may produce an ordinary loss. 988 (a) otherwise, all section refe ences are to the Internal Revenue Code iÃ effect for the year 'lat losses, but Palmlund offset ordinary income Son-of-BOSS transactions sec . 1. 988 -3 (a) , Income Tax Regs . (Unless we say issue.) ' ' the See sec. -7- right--was not entirely comprehensible. But Garza's tutorials never really got Palmlund interested in the theory of how to make foreign-currency options trading profitable. What got him interested--and we specifically find this based on the trial testimony--was the alluring tax benefit-.- Palmlund ran Garza's suggestion by his accountants at Turner & Stone. The accountants gave him the green light, telling him they themselves had used the same transaction. And Garza personally guaranteed the deal, promising to cover any taxes, penalties, or litigation costs if the transaction blew up. This was good enough for Palmlund.. He directed Garza to handle all the paperwork and told his secretary to forward any correspondence about the deal directly to Garza. Here are the mechanics: • • • • In November 2001, Palmlund formed three entities: 32, LLC ("32-LLC"); 7612, LLC ("7612 LLC"); and 106, Ltd. ("106"). The owners of 106 were David Palmlund (99 percent) and 32 LLC (1 percent). Palmlund's Texas family limited partnership, Palmlund, Ltd., involved in this case. Its partners were David Palmlund (49.5 percent), Suzanne Palmlund (49.5 percent) and the David Channing Palmlund Trust percent). is also (1 Also in November 2001, 7612 LLC bought offsetting long and short termination date for both options was December 12, 2001, whën they would expire out-of-the-money. foreign-currency options. The On November 26, 2001, 7612 LLC transferred both long and short options to 106. On December 5, 2001, 7612 LLC bought Can$6,207.82 for US$4,000. • • . On December 24, 2001, 7612 LLC transferred the Canadian currency to 106 as: a capital * contribution. , - On December 26, 2001, 106 tried to assign all of its Canadian currency to Palmlund, Ltd. , but ac tually dis tribute d only Can$2, 172 . 74 . Can$4,035.08 remained with 106 until it sold the currency in October 2002. Palmlund testified that he earned $10, 000 in two weeks. Deutsche Bank paid out $40, 000 on the options and charged a $30, 000 net premium If these had been the only expenses involved, the deal would have been prof itable . But Palmlund doesn' t include Garza' s fees in his profit calculation. Those fees shrink the $10, 000 "profit" to a loss of somewhere between $32,000 and $85,000.4 III. Reþorting the Transactiön || Palmlund used Turner & Stone to prepare his 2001 return. A critical part of that preparation was the opinion letter Garza wrote; hich Palmlund forwarded to them. The opinion letter contains a four-page introduâtion tailored to the deal, but the remaining 85 pages consist mostly of generic boilerplate on tax- 3 The premiums on the long and short option positions were $3, 000 000 and $2, 970, 000, respectively. 4 l'he exact amount of Gažza'' s fee is unclear from the It was either $72,000 or $95,000, and the $30,000 net record. premiuYn may or may not have been included in the fee. the lowest possible Garza fee- $72, 000 with the net premium includEd----Palmlund would have lost $32, 000 on the deal option payout the spectrum--$95,000 not would ave lost $85, 000 ($40, 000 option payout net pr mium and the $95, 000 Garza fee) . less $72, 000 for Garza' s fee) . At including the net premium--Palmlund less the $30, 000 .Assuming ($40, 000 the other end of -9- law-doctrines--running the gamut from partnership-basis rules, treatment of foreign-currency contracts, the step-transaction doctrine, economic substance; disguised-sale, provisions, and partnership anti-abuse regulations. In the letter, Garza concluded that.the tax treatment he:proposed would "more likely than not" withstand IRS scrutiny." To reach this conclusion, Garza had to clear a few hurdles. In the introductory pages, he states that Palmlund represented that he • • "independently reviewed the economics underlying the investment," "believed there was reasonable opportunity to earn a reasonable pre-tax profit * * in excess of all associated fees and costs," and * • ^ received "[t]he foreign currency and financial instruments * * distributions." * as Partnership liquidating (Emphasis added.) Here's the first stueble--wer find that Palmlund'did no such things. But even if he had, Garza still didn't get it right--he s One factor to consider in determining whether the good- * tax law." * as to the treatment of the Sec. 1.6664-4(c) (1), In analyzing corporate tax shelters, citing the faith-reliance defense applies is the existence of an "opinion of a professional tax advisor * taxpayer * * under Federal Inco.me Tax Regs. "more likely than not" standard--defined as "a greater than 50- percent upheld if challenged by the Internal Revenue Service"--is a necessary, but not sufficient, condition in such opinions. 1.6664-4(e) (2) (i) (B), corporation, strictly be necessary, but Garza still cited the standard in his opinion letter. the "more likely than not" conclusion might not Income Tax Regs. Since 106 isn't a Sec. likelihood that the tax treatment of the item will be * (3), ! 10- failed to customize the opinion letter to fitsthe facts of the transaction. Here are a few of the mistakes: • • • The foreign currency was distributed to Palmlund in liquidation of is partnership interest . , • No it wasn't; it was a nonliquidating distribution in 2001. , - , Unrelated partners4confirmed the partnership's legitimacy. • the partners were related--and Palmlund All controlled thèm. Palmlund doesn' t know if he will be called upon to satisfy his obligations under the sold digital option. • The options had already been terminated by the time the opinion was draf ted. Relying on the .opinion letter, Turner & Stone prepared re- , turns for 106, 32 LLC, Palmlund, Ltd.,= and Palmiund in 2002. They cl arged $8,000 for return preparation; ,Palmlund didn't com- plain. He didn' t .review the; returns or, ask . any questions, claim- ing that he "wouldn' t even know what to ask" about the returns . The result was happy for a time--a noneconomic loss of about $1 million flowed through to his personal return. Palmlund did get concerned when the IRS sent him a copy of Announcement 2004-46, 2004-1 C.B. 964, in May 2004. The an- nouncement outlined terms of settlement for Son-of-BOSS transac- tions. Palmlund met with Ga za and his accountants to figure out what he should do; and what he decided to do was amend his per- sonal eturn. (No one ever mended 106' s return. ) Turner & !! li -11- Stone finished the amended return in August 2004, and Palmlund signed it in September. This return removed the $1 million loss attributed to the disallowed transaction, and Palmlund paid the taxes and interest he conceded were due. The IRS issued an FPAA to 106 that adjusted various partner- ship items (including contributions and distributions) to zero and asserted penalties. Palmlund, as 106's tax matters partner, timely petitioned the Tax Court. In the course of preparing for trial, the Commissioner subpoenaed Charles Denson, Palmlund's private banker. Denson was curious about. the subpoena and set up a lunch with Palmlund. He asked about the case, and Palmlund explained that he got into a tax strategy "and:the intent was to lose money." Before trial began, we issued two orders. In the first, we granted the Commissioner partial summary judgment on the issue of whether the 2001 asset distribution from 106 -was nonliquidating. As a result, the adjusted basis for 106's distribution to Palmlund, Ltd., in 2001 is limited to the partnership's adjusted basis (i.e., inside basis)6 in the Canadian currency. See sec. 732(a); 7050, Ltd. v. Commissioner, T.C. Memo. 2008-112. In our second order, we granted the Commissioner's motion for partial summary judgment on the issue of whether there was a gross- ' Inside -basis is a partnership's basis in property that it owns. -12- valuatibn misstatement in excess of 400 percent on the 106 return This second order required little more than a bit of math, because 106' s assets were Canadian dollars bought for I! US$4, 000 . The partnership distributed some of those Canadian dollars in 2001, so 106's basis--the inside basis--in those distribåted dollars was $1, 400 . The return claimed a $2 . 974 million basis in ,the distribution, which is significantly more than 40 percent of $1, 400, and was reduced by the FPAA to zero.7 Be ause Palmlund conceded the taxes related to the underly- ing trapsaction, the only remaining question is whether the 'part- nership has a section 6664 (c) reasonable cause/good faith de- fense--based upon reliance ori Garza and Turner & Stone--to the 40% gro s-valuation-misstatement penalty the Commissioner asserts under section 6662 (h) . This penalty relates to inside basis-- 106' s o ervaluation of its bàsis in the Canadian dollars it distribùted to Palmlund Ltd. OPINION, I. Jurisdiction In January 2010, the D.C. Circuit" decided Petalumat FX Partner v Commissioner, 591 F.3d_ 649 (D.C. Cir. 2010) , affg. in The parties did not dispute this calculation and holding. * 106 was a Tax Equity and Fiscal Responsibility Act of 1982 partnership without a principal place of business when it filed its pe ition, because it no longer existed. may go to the D.C. Circuit. : See sec. 7482(b) (1) . - Any appeal therefore I! -13- part, revg. in.part, vacating in part and remanding on penalty issues 131 T.C. 84 (2008).9 It held that the Tax Court lacks jurisdiction in partnership-level proceedings to determine a partner's basis in the partnership or whether penalties related to that basis apply. Id. at 655-56." After the D.C. Circuit issued its opinion, we asked the parties in this case to brief the question of whether we have jurisdiction, and both tell us that we do. At first glance, Petaluma seems strikingly similar to 106. Like the tax shelter in Petaluma, the transaction has the for- eign-currency-option flavor of a Son-of-BOSS deal. Accuracy- related penalties are at stake in both cases. But there's a key distinction--Petaluma held that the Tax Court had no jùrisdiction over penalties springing from an adjustment to a partner's out- side basis," but the parties here agree that outside basis is not an issue. In the FPAA that provoked this case, the Commissioner determined that "the accuracy-related penalty under section 6662(a) of the Internal Revenue Code applies to all underpayments * In March 2010, the Federal Circuit followed Petaluma in Jade Trading, LLC v. United States, 598 F.3d 1372, 1379-80 (Fed. Cir. 2010), making essentially the same. holding on almost identical facts. " We -recently reanalyzed the problem in response to the D.C. Circuit's mandate in Petaluma. Commissioner, 135 T.C. (2010). See Petaluma FX Partners v. " Outside basis is an individual partner's basis in his interest in the partnership itself. li -14- of tax attributable to adjustments of partnership items of 106."A || (Emphas s added.) And the specific item at issue in this case is 106' s own basis in the Canadian dollars that, it distributed to itse partners. This kind öf basis is "inside" basis; not the "outside" basis that was at i issue in Petaluma. And this isrthe kind of basis that the regulation defines as a partnership item. See sec 301.6231(a) (3) -1(c) (3) (iii) , Proced. & Admin. Regs . This is a key distinction--Petaluma didn't address our jurisdiction over penalties based on adjustments to inside basis. We also agree with the parties and hold that .partner-Iével ¯ proceed ngs are not necessary to determine the gross-valuation- misstat ment penalty in this case: The parties have stipulated - that th adjustment to insid basis at the; partnerships level here allows a numerical adjustmen sat || the partner level and agree that this "is a flow through item to the Palmlunds' individual re-- * * li turn . " li ( Stip . ¶ '27 . Because it , is pos s ible 'tó 'derive - through a such an adjustment alone the reductiön in the claimed -loss on the såle of the Canadian dollars that 106 distributed, and the conse- quent increase in the reportable gain and resulting deficiency-- all without any need for an affected-item deficiency notice, see Petaluma, 135 T.C. (2010)*--we conclude that~we do have juris- dictio over the penalty in this partnership-level case after -15- Petaluma." Partnership items specifically include "the adjusted basis to the partnership of distributed property." Sec. 301.6231(a) (3)-1(c) (3) (iii), Proced. & Admin. Regs. Under section 6226(f), we have jurisdiction in a TEFRA proceeding to "determine all partnership items * * * and the applicability of any penalty,. addition to tax, or additional amount which relates to an adjustment to a partnership item." Since the overvalued distribution was a partnership item, the outside basis of individual partners is of no consequence. The only issue in dispute is whether 106 had a section 6664 reasonable-cause=and'- good-faith defense for the gross-valuation misstatement. That leads to the next question: Is the reasonable cause/good faith defense available at the partnership level? Most courts that have addressed the issue think so. See, e.g., Am. Boat Co., LLC v. United States 583 F.3d 471, 480 (7th Cir. 2009) (court has jurisdiction in partnérship-level proceeding to consider partnership defense to accuracy-related penalty); Fears v. Commissioner, 129 T.C. 8, 10 (2007) (penalties relating to "As it is not clear from the opinion, the record, or the arguments before this court that the penalties asserted by the Commissioner and ordered by the Tax Court could have been computed without partner-level proceedings to determine the affected items questions concerning outside bases, we are unable to uphold the court's determination of the penalty issues. While it may be that some penalties could have been assessed without partner-level computations, we cannot affirm a decision that has not yet been made." Petaluma, 591 F.3d 649, 655-56 (:D.C. Cir. 2010), affg. and remanding on penalty issues, 131 T.C. 84 (2008). in part, vacating in part in part, revg. -16- partnerdhip-item adjustments enerally determined at partnership, level) ; Santa Monica Pictures LLC v. Commissioner, T.C. Memo 2005-10 (reasonable-cause defense a partnership-level , determi ation) . On the other hand, the C$urt of Federal Claims recently held that th reasonable-cause defense to the gross-valuation misstatèment penalty is excluþively a partner-level defense. Clearmeadow Inys. , LLC v. United States, 87 Fed. Cl. 509, 520-21 (2009) . That court interpreted section 301.6221-1 (d) , Proced. & Admin. Pegs., to prohibit the reasonable-cause defense at the partnership level. Clearmead$w, 87 Fed. Cl. at 520. The Seventh Circuit disagreed To the extent that Ehe court' s holding in C1 armeadow wholly forecioses a partnership from raising an entity-level reasonable cause defense, we diåagree. The court's piimary premise is correct: a paátner may not raise a partner-level defense during a pa$tnership-level proceeding. But we sée nothing that wotÎld prevent a partnership from raising. its own re$sonable cause defense" * * * The Clearmeadow court relied on Treasury * *. Although the regulation cites § foreclose a similar defense on behalf of Regulation § 301.6221-1(d) , which defines a paratner le el defense * 66fí4 (c) (1) as an example of a partner-level defense, do$s not paËtnership; had met pa$tner-level defense. Th Fifth Circuit conclu led that this language did not ruie out a partnership-1pvel reasonable cause defense, seÊ Klamath; 568 F.3d at 548, and we agree. the the partner it only states that § 301.6221-1(d) . the criteria of * * * section 6664 (c) (1) " is a it "whether i'reas. Reg. Am. Boat Co., 583 F.3d at 480 We find the Seventh Circuit's analysi more persuasive than Clearmeadow' s, and hold that 106 may assert the reasonable-cause defense at.the partnership -17- level. II. Section 6662 Penalty and Defense The gross-valuation-misstatement penalty can be rebutted by a showing of reasonable cause and good faith, sec. 6664-(c), and a taxpayer will often argue (as Palmlund does) that he had reason- able cause and showed good faith by relying on professional ad- vice. The regulation somewhat unhelpfully states that reliance on professional advice is "reasonable cause and good faith if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith." Sec. 1.6664-4(b) (1), Income Tax Regs. The caselaw more helpfully points to three factors to test whether a taxpayer properly relied on professional advice. Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir. 2002). • • • First; was the adviser a competent professional who had sufficient expertise to justify reliance? Second, did the taxpayer provide necessary and accurate information to the adviser? Third, did the taxpayer actually rely in good faith on the adviser's judgment? " The parties have stipulated that only the gross-valuation misstatement penalty for 106 is at whether other penalties (e.g., negligence) adjustments t:o outside basis or other partner-level facts. issue, so we do not decide require analyzing A. Expertise of Professional Advisers -18- Both Garza and Turner & Stone were licensed and would have appeared competent to a layman at the time -they prepared the return. They would have appeared competent especially to , Palmlund, since Garza had been his personal attorney for 20 years, and Turner & Stone had prepared his returns for about 18 years, 11 without incident. The Commissioner. doesn't dispute li' their eÊpertise in his brief, and so we have no trouble finding these advisers to have at least an adequate -level of expertise. B. . Provision of Necessary and Accurate Information - We also find that Palmlund provided both Garza and Turner & Stone with all the relevant f(inancial data needed to assess the correct level of income tax. Sec. 1.6664-4(c) (1) (i), IncomerTax Regs. The Commissioner doesn't dispute this either. C. Actual Reliance in Good Faith It s the third point--the issue of . Palmlund' s actual good- faith r liance on Garza' s, and Turner & Stone' s, professional advice that's in dispute. There are at least three factors to conside : • • • Palmlund's business sophistication and experience, the sloppy opinion letter, and whether Garza and Turner & Stone were promoters. Pa mlund' s business sophistication and experience tend to make it harder to believe he didn' t know the transaction "was -19- improper. Even though he wasn't a tax expert and was accustomed to relying on professional advisers for tax preparation, it seems doubtful that he acted in good faith in light of his "experience, knowledge, and-education." Sec. 1.6664-4(b) (1), Income Tax Regs. The mistakerridden opinion letter is problematic as well. The opinion didn't accurately describe the- transaction in this case, and the actual transaction was different from the generic transaction described in the opinion in some key respects. We don't, however, always- take a close look at opinion letters when penalties are at issue. See, e.g., Estate of Goldman v. Commissioner, 112 T.C. 317, 324 (1999) (opinion letter mentioned, but not scrutinized), affdl without published opinion sub nom. Schutter v. Commissioner, 242 F.3d 390 (10th Cir. 2000). And the Supreme Court has touched on this issue as well: To require the taxpayer to.challenge the attorney, to seek a "second opinion," or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place. prudence" do not demand such actions. * "Ordinary business care and * * United States v. Boyle, 469 U.S. 241, 251 (1985). On the other hand, at least one district court found that an opinion letter wasn't good enough only after taking a hard look at it. Long Term Capital Holdings v. United States, 330 F. Supp. 2d 122, 205- 12 (D. Conn. 2004) (opinion letter wasn't based on all pertinent facts and circumstances and therefore didn't protect against penalties), affd. 150 Fed. Appx. 40 (2d Cir. 2005). - 20 - One doesn' t need to look very hard to f ind problems with Garza's opinion. Section 1.6664-4 (c) (1) (ii) , Income Tax Regs., warns t xpayers against relying on advice that itself unreason- ably relies "on the representations, statements, findings, or agreeme ts of the taxpayer." Garza's opinion letter, as we de- scribed in our findings of fact, is filled with what" appear to be (but wh ch were not in fact) Palmlund's representations. And many of these "representations" just weren' t true . Garza shouldn t have relied on them, and it' s hard to believe that someone as sophisticated as almlund wouldn t at least suspect somethi g was amiss. .And Palmlund also can' t rely on Garza or Turner & Stone if Il they weire promoters of the transaction. The caselaw is- clear on l. |- this point--promoters take the good-faith out of goodefaith relianc e . See , e . g . , Neonatology Assoc iates , 115 T . C: at 98 . But what exactly makes a tax adviser a promoter has been less than clear. A frequently cited promoter-reliance case explains that "advice must generally be from a competent and independent i advisor unburdened with a conflict of interest and not from promoters of the investment." Mortensen v. Commissioner, 440 i F.3d 375, 387 (6th Cir. 2006), affg. T.C. Memo. 2004-279. But this merely tells us what a promoter is not, not what a promoter 1s. -21- Tigers Eye Trading, LLC v. Commissioner, T.C. Memór 2009-121 offers a more workable definition of -promoter:- : "an adviser who participated .in structuring the transaction or is-otherwise related to, has an interest ing or profits from: the transaction." But there's a catch: This definitiontwasn't relied on. or applied to the facts of that case--it's dictum. In Tigers Eye, we held only that we had jurisdiction in a partnership-level proceeding to determine whether a taxa adviser nas a promoter.3 Since the case was only at the summary-judgment stäge, we left for another day the question of whether the tax adviser theré actually was a promoter. Id. Still, the definition of "promoter" in that opinion was carefully crafted after considering relevant precedent . " Tigers Eve Trading, LLC v. Commissioner, T.C..Memo. 2009- (taxpayer could not reasonably rely on professional advice ,1993-480; Pasternak v. Commissioner, 990 F.2d 893, 903 (6th (reliance on promoters or their agents is urireasonable 121, dréw 'fiom the following cases for its definition of promoter: Goldman v. Commissioner, 39 F.3d 402, 408 (2d Cir. 1994) of someone knòwn to be burdened ¯with an inherent conflict of interest--a sales representative öf transactiion) , affg. T C. Memo. Cir. 1993) because such persons are not affg. Donahue v. Commissióner, T.C. Memo. 1991-181; Commissioner, 982 F.2d 163, 166 (6th Cir. 1992) negligence where taxpayer relied on person with financial interest Hansen v. Commissioner, 471 F.3d 1021, 1031 (9th Cir. 2006) taxpayer cannot negate the negligence penalty =through reliance on as transaction's promoters or-on other advisors who have a conflict of Commissioner, 439 F.3d 1243, 1253< (10th Cir. 2006), reasonable, affiliated with the promoter; in the venture), affg. T.C. Memo. 1991-449; see also interest") , affg. T.-C. Memo. 2004-269; Van Scoten v. the investment) , Illes v. (finding independent .of ("a the professional adviser cannot be .directly ("To -be instead, he mušt be more 0 (continued. . - . ) -22- One might need to be cažeful in applying the definition to some ki ds of transactions--a tax lawyer asked-by, a businessman for advice on how to sell the family business through a tax- favored stock redemption miglit be said to have "participated in struotu ing the transaction"&but when the transaction involved is the same tax shelter offered to numerous parties, the defini- tion i workable. As we observed in Countryside Ltd. P'ship. v. I: Commisseoner, 132 T.C. 347, 3(52-55 (2009) ; a tax adviser is not a "promot r" of a transaction dhen he e • • • has a long-term and continual relationship with his client; does not give unsolicited advice regarding the tax shelter; advises only within his field of expertise (and not because of his gregular involvement transaction being scrutinized) ; in the follows his regula¾ course of conduct his advice; and i in rendering has no stake in the transaction besides what he ' bills at his regular hourly rate. We therefore adopt the Tigers Eye definition for cases like -this one, and apply it to Garza a d Turner & Stone. . . . continued) indepe dent") , affg. T.C. Memo. 2004-275; Barlow v. Commissioner, 301 F.3d 714, 723 (6th Cir. g2002) ("courts have found that a taxpayer is negligent if he puts his .faith in a "scheme t-hat-, on its face, object ve, Memo. 2000--339. ffers improbably high tax advantages, without obtaining an independent opinion on its validity"), affg. T.C. -23- We find that both.these advisers not only participated in structuring the transact'ion, but arranged the entire deal. Garza set up the LLCs, provided a copy of the opinion letter, and coordinated the deal from start to finish. And both Garza and Turner & Stone profited from selling the transaction to numerous clients. Garza charged a flat fee for implementing it and wouldn't have been compensated at all if Palmlund decided not to go through with it. He wasn't being paid to evaluate the deal or tweak a real business deal to increase its tax advantages; he was being paid to make it happen. And Turner & Stone charged $8,000 for preparing Palmlund's tax returns--$6,500 more than usual. The extra fees were not attributable to an extraordinarily complex return--Palmlund's returns were always complex due to his various business interests--but, we find, were the firm's cut for helping to make the deal happen. Because Palmlund's advisers structured the transaction and profited from its implementation, they are promoters. Palmlund therefore could not rely on their advice in good faith. Even if the promoter issue was not in the picture, Palmlund would still have failed to establish his good-faith reliance. Palmlund's conversation with Denson--his private banker--also negates a finding of such reliance. It doesn't show good faith to enter into a "tax strategy" with the intent to "lose money." We find Denson to be credible. And his testimony, combined with -24- the sloppy opinion letter and Palmlund' s unusual level of "experience, knowledge, and education" , demonstrates Palmlund' s . lack of good- faith .reliance . See sec . 1. 6664-4 (b) (1) , Income Tax Regs. Decision will be entered f or re spondent . H I