t c memo united_states tax_court dynamo holdings limited_partnership dynamo gp inc tax_matters_partner petitioner v commissioner of internal revenue respondent beekman vista inc petitioner v commissioner of internal revenue respondent docket nos filed date martin r press edward a marod clinton r losego lu-ann m dominguez alan s lederman and john w terwilleger for petitioners david b flassing lisa m goldberg william g merkle timothy a sloane and g roger markley for respondent memorandum findings_of_fact and opinion buch judge the moog family has been very successful in real_estate development their real_estate business originated in canada when it expanded into the united_states they created u s subsidiaries under the canadian structure over time some family members and beneficial owners of the canadian structure moved to the united_states the canadian structure proved to be very tax inefficient particularly when income was distributed or deemed to be distributed up the canadian ownership chain to cure this inefficiency the family created a u s -based structure and began shifting assets to that new structure the asset transfers took place during and the years in issue in these cases in particular u s subsidiaries within the canadian structure made advances to entities within the u s -based structure to fund dynamo’s operations also entities within the canadian structure sold income-producing assets to entities within the u s -based structure over time the effect was to shift the u s -based income to the u s - based structure 1the years in issue for dynamo holdings limited_partnership are and the years in issue for beekman vista inc are and the commissioner argues that this planning was improper the commissioner makes two principal arguments first the commissioner argues that the advances to the u s -based structure were not bona_fide loans instead the commissioner argues that we should treat the advances as gifts the commissioner argues that this treatment would result in deemed distributions up the canadian ownership chain followed by deemed gifts to the owners of the u s - based structure and deemed contributions to the u s -based structure the commissioner argues that withholding taxes would apply when the deemed distributions made their way across the border in addition the commissioner argues that some of the assets that were sold to the u s -based business were sold below fair_market_value giving rise to gifts that are subject_to this triangular distribution theory we find that the advances were bona_fide loans some of the assets however were transferred at less than fair_market_value findings_of_fact i the moog family the moog family members are successful real_estate developers delia moog is a wealthy canadian who during the years in issue was in her seventies mrs moog’s daughter is christine moog and her nephew is robert julien for over half a century the family successfully developed real_estate in canada and for over years they successfully developed real_estate in the united_states over the years mrs moog engaged in estate_planning she began making gifts of large portions of her estate in the 1990s and she continued to do so after the years in issue she structured many of the gifts as splits giving to her daughter christine and to her nephew mr julien ii beekman during the years in issue beekman vista inc beekman vista was a corporation wholly owned by a canadian entity controlled by mrs moog beekman vista was a holding_company that owned several property development companies in the united_states we use beekman to refer to the group of entities consisting of beekman vista and its u s subsidiaries beekman vista was organized as a delaware corporation in to enter the u s real_estate market beekman vista was a wholly owned subsidiary of a canadian corporation canada square management ltd canada square canada square was a wholly owned subsidiary of kolter property co kolter property co ’s preferred shares were held by ontario inc and kolter 2to avoid confusion we refer to delia moog as mrs moog and her daughter christine moog as christine property co ’s common shares and ownership control were held by ontario ltd ontario inc ’s common_stock was held in a split with delia moog family_trust holding and robert julien family_trust holding mrs moog owned all of its preferred shares ontario ltd was wholly owned by ontario ltd ontario ltd ’s nonvoting common_stock was held in a split with delia moog family_trust holding and robert julien family_trust holding mrs moog held all of its voting control mrs moog’s ownership of the voting_stock of ontario ltd gave her indirect control_over beekman mrs moog mr julien and christine were among the beneficiaries of the trusts christine was one of the beneficiaries of the delia moog family_trust and robert julien was one of the beneficiaries of the robert julien family_trust the beneficiaries of the delia moog family_trust and the robert julien family_trust were mrs moog christine and her descendant and mr julien and his immediate_family mr julien and mrs moog were among the trustees of the robert julien family_trust and the delia moog family_trust beekman’s principal business activity was real_estate management and development beekman vista’s subsidiaries owned and operated office buildings in dallas texas and developed residential real_estate in south florida beekman also held a hedge fund portfolio the dynamo fund that produced investment_income the hedge fund had lockup periods which limit an investor’s ability to redeem the investment all but one lockup period expired on date beekman’s management team has a long track record of profitable real_estate projects the management team operated under the kolter brand name common to beekman and its parent companies mr julien and mrs moog were among the officers and directors of beekman vista although mrs moog was an officer and director mr julien and his team primarily handled the development projects the beekman management team members worked together for decades mr julien had worked in real_estate with kolter since the 1980s and each of the other members of the team had significant real_estate experience before joining kolter the management team had a well-defined project selection process it would not bid on projects until completing due diligence and running financial models that demonstrated that the project would be a worthwhile investment by the early 2000s beekman’s business had changed substantially beekman sold its texas and florida rental properties and the management team decided to focus its efforts on florida real_estate development in mr julien moved to florida and the remaining management team members followed beekman also moved its principal office and management team from canada to florida following his move mr julien discussed with legal consultants how to set up a long-term business structure in the united_states mr julien believed that lending institutions were uncomfortable doing business with foreign companies such as beekman and that a u s -owned structure would provide the lending institutions additional confidence in their projects or business the management team was also concerned with talent retention and believed that a u s company would better attract and retain younger people the management team was also aware of the withholding_tax on cross-border distributions from beekman vista to canada square mrs moog decided to form a u s partnership beekman continued to operate profitably from to beekman vista’s estimated earnings_and_profits for tax years and were dollar_figure dollar_figure and dollar_figure respectively iii dynamo dynamo holdings limited_partnership was formed in early as a delaware limited_partnership we use dynamo holdings to refer to dynamo 3all dollar amounts are rounded to the nearest dollar holdings limited_partnership and dynamo to refer to the group of entities consisting of dynamo holdings and the entities owned by it dynamo holdings was owned by two trusts that were limited partners and a corporation that was a general_partner the christine moog family delaware dynasty_trust held a limited_partnership_interest the robert julien family delaware dynasty_trust held a limited_partnership_interest and dynamo gp held a general_partnership interest the beneficiaries of the u s trusts and the canadian trusts were not identical dynamo gp was owned by ontario ltd one of the canadian corporations indirectly controlled by mrs moog and by robert julien ontario ltd was the common indirect owner of beekman and dynamo dynamo holdings was a holding_company that owned either directly or indirectly several single-member limited_liability companies that were disregarded for tax purposes dynamo holdings directly held dynamo llc which directly held kolter capital llc which directly held kolter communities llc which directly held various property development companies when dynamo holdings was formed mrs moog funded the initial contribution by giving cash to the two trusts that funded dynamo holdings mrs moog gave the trusts dollar_figure million in a split transferring dollar_figure million to the christine moog dynasty_trust christine dynasty_trust and dollar_figure million to the robert julien dynasty_trust julien dynasty_trust mrs moog received the dollar_figure million as a dividend from the canadian entities this dollar_figure million provided dynamo with the means to begin real_estate development in the united_states dynamo’s principal business was real_estate development and sales in florida the management team was the same as the beekman team and it continued to operate under the kolter brand name as it had done before the management team followed a well-defined process to select and bid on profitable projects it also provided management services to beekman the result was that although dynamo was a newly formed structure it had an experienced real_estate development team for efficiency purposes dynamo centralized its operations the management team had centralized operations for beekman and the other canadian companies with the creation of dynamo they implemented the same approach not only were the employees and overhead centralized but the group of entities also centralized their cash management to centralize their cash management one entity would function as the bank and when the operating companies produced cash from operations they would transfer those profits to the bank likewise the bank would advance cash to the operating entities through intercompany advances the operating entities would not submit applications undergo credit checks or execute promissory notes the management team did not believe that formal procedures were necessary because the borrower and lender had the same management team the lender had all the details related to each project and the risks associated with lending to its subsidiary or corporate cousin the intercompany advances were booked to an asset account and to an account labeled as due from to by the lender and the borrower and accrued interest until they were repaid iv advances between beekman and dynamo upon formation and through the years in issue beekman advanced funds to dynamo and dynamo recorded the funds on its ledgers as an account payable to beekman the yearend balances of the advances were approximately dollar_figure million dollar_figure million and dollar_figure million in and respectively some of the funds that beekman transferred to dynamo were funds that beekman had received as loans from canada square the purposes of the advances were to fund operating_expenses and to acquire assets when beekman advanced funds to dynamo specifically through kolter capital and kolter communities as the centralized banks the funds were recorded on the general ledgers in the due from to account interest accrued on that balance and when dynamo made repayments the repayments were recorded on the general ledgers as well beekman and dynamo did not follow many customary lending practices beekman did not demand payments require collateral or security or provide a fixed due_date beekman would not have forced dynamo into bankruptcy to collect the debts the beekman and dynamo management team did not believe that formal lending procedures were necessary the companies shared a single management team that had full knowledge of and access to both companies’ information and the companies had a the long history of advances and repayments over the years given that the management team had control_over both the lenders and the borrowers they believed that formal lending procedures were redundant and unnecessary they also believed that it was unnecessary to demand payments because past repayments were made without demand beekman and dynamo treated the recorded transfers as debt beekman’s management expected that the recorded transfers would be repaid and dynamo’s management expected to repay the recorded transfers dynamo made repayments to reduce the outstanding balance each year and beekman never took any steps to enforce repayment dynamo repaid beekman with proceeds dynamo received from capital contributions it also repaid its debts to beekman by making wire transfers and by paying beekman’s outstanding obligations to third parties finally dynamo also repaid by providing management services rather than collect management fees from beekman only to return them as payment on the debt dynamo provided management services and beekman deducted the cost of those services from dynamo’s outstanding loan balance a the restructuring in dynamo engaged in a series of transactions that restructured the advances to more accurately reflect the advances as part of the transactions beekman and dynamo executed restructuring documents including promissory notes evidencing the prior advances these agreements were executed by date and would not have been created if the restructuring transactions had not occurred in the restructuring documents beekman and dynamo agreed that beekman had previously lent kolter capital dollar_figure million beekman and kolter capital agreed to divide the outstanding balance into three parts with dynamo llc assuming dollar_figure million through a dynamo llc note rj-k newco a newly formed kolter capital subsidiary assuming dollar_figure through an rj-k newco note and kolter capital maintaining the remainder dollar_figure million of the recorded transfers to beekman through the kolter capital note the kolter capital note was a revolving credit facility and the dynamo llc and rj-k newco notes were demand notes each note had required_interest to accrue at the london interbank offering rate for u s dollar deposits plu sec_1 payable on the fifth day following demand beekman and dynamo did not abide by state laws that serve to formalize lending agreements dynamo did not pay any state-level document stamp tax on 4we note that there is an approximately dollar_figure million discrepancy between the amount recorded on the loan documents and the amounts recorded on the general ledgers the total amount included in the promissory notes for the outstanding advances was dollar_figure whereas the total outstanding advances reported on dynamo’s general ledger before the restructuring transaction was dollar_figure 5the face_amount of the rj-k newco note was dollar_figure however rj-k newco recorded only dollar_figure we find that the amount of the assumption was only dollar_figure these notes also as part of the restructuring documents dynamo and beekman executed a security_agreement however the security_agreement was never filed with the florida secretary of state in addition to restructuring the outstanding balance dynamo holdings distributed interests in disregarded entities that held amounts substantially equal to the amounts of the notes dynamo holdings distributed dynamo llc to christine dynasty_trust dynamo llc held the dynamo fund which had assets worth approximately dollar_figure million and dynamo holdings distributed rj-k newco to the julien dynasty_trust which had dollar_figure in assets consisting of dollar_figure million cash and a dollar_figure promissory note b general ledgers the general ledgers of beekman and dynamo reflected the advances dynamo booked all of the intercompany advances on its general ledger in a due to from account these balances changed daily the entries on the general ledger could not be erased or replaced instead incorrect entries had to be reversed by adding additional adjustment entries to the general ledger at trial petitioners called steven moses to explain dynamo’s general ledgers mr moses has over years of experience as a certified_public_accountant and has experience in forensic accounting mr moses spent thousands of hours analyzing the financial records of dynamo and beekman and selected records of canada square each of which maintained separate books he prepared schedules of all the transactions recorded by dynamo and beekman from to through his review of the financial records mr moses determined that during the years in issue the yearend outstanding balances were dollar_figure dollar_figure and dollar_figure for and respectively because entries could not be erased mr moses tracked the entries to determine whether they had been reversed or corrected he concluded that the outstanding balances were entirely repaid by he also found that in and as well as the years following the restructuring transaction interest was charged accrued to the loan balance and paid as part of the satisfaction of the loans for mr moses determined that the total outstanding balance due was dollar_figure resulting from dollar_figure of advances that increased the balance due to beekman and dollar_figure in repayment or reductions that decreased the balance due to beekman dynamo recorded all of these transactions but one on date these amounts were reflected through transfers between beekman and dynamo of those were repayments or adjustments that decreased the balance owed to beekman dynamo did not accrue any interest on the outstanding balance in for mr moses determined that the total outstanding balance due was dollar_figure resulting from dollar_figure in transfers that increased the balance due to beekman and dollar_figure in transfers that decreased the balance due to beekman these amounts were reflected through transfers between beekman and dynamo of those were repayments or adjustments that decreased the balance owed to beekman one of the transactions that increased the total amount due was interest of dollar_figure for mr moses determined that the total outstanding balance due was dollar_figure resulting from dollar_figure of transfers that increased the balance due to beekman and dollar_figure of transfers that decreased the balance due to beekman these amounts were reflected through big_number transfers between beekman and dynamo big_number of those were repayments or adjustments that decreased the balance owed to beekman one of the transactions that increased the total amount due was interest of dollar_figure 6although the description says interest amount_paid mr moses testified that the interest amount accrued to the loan balance and was paid as part of the satisfaction of the loans mr moses determined that the advances were entirely repaid including interest in the commissioner did not offer any expert who contradicted mr moses c commercial lending practices at trial the commissioner called filmore enger to explain whether a commercial lender would have entered into loans like those between dynamo and beekman mr enger has over years of experience in the commercial lending and banking industry a commercial lender is typically a commercial bank but a commercial lender can also be a nonregulated financial company mr enger explained that the basic elements required for a commercial loan are a stated principal_amount and interest rate documentation that requires principal and interest to be repaid and a credit agreement that specifies the terms and conditions of such repayment he believed that no reasonable commercial lender would have given dynamo loans like those from beekman on date and date without credit guaranties or collateral credit analyses loan documents stated_interest payments or fixed maturity dates d capital adequacy at trial petitioners called israel shaked and william chambers to testify to dynamo’s ability to repay the advances the commissioner called christopher lucas as an expert to explain whether kolter communities and kolter capital could have obtained the advances from third-party lenders professor shaked professor shaked is a professor of finance and economics with almost years of experience teaching doctoral graduate and undergraduate courses on finance and economics he has extensive valuation and financial consulting experience and has written multiple books on these topics he conducted financial analyses of dynamo for the years in issue to analyze the creditworthiness from the viewpoint of a third-party lender he conducted forward-looking economic analyses based on economic trends and dynamo’s financial statements to examine dynamo’s short-term and long-term ability to repay the degree to which the fair_market_value of dynamo’s assets exceeded the value of its debts and dynamo’s capital adequacy on the basis of his review professor shaked determined that dynamo’s financial position would have been viewed favorably by a third-party lender he concluded that dynamo had the ability to repay its debts in both the short term and the long term he also calculated that dynamo’s assets exceeded the value of its debt including the advances from beekman by at least dollar_figure million and as much as dollar_figure million finally he determined that dynamo was adequately capitalized on the basis of net debt which requires subtracting cash and marketable_securities from debt of the business_enterprise he explained that portfolios could be easily liquidated he concluded that dynamo’s liquid_assets exceeded its debt throughout the years at issue dr chambers dr chambers is a professor of finance with over years of credit rating experience for over years dr chambers has been teaching graduate and undergraduate courses in portfolio management financial markets and corporate finance before becoming a professor dr chambers spent two decades in the credit rating division of standard poor’s and was involved in developing credit rating criteria and procedures dr chambers conducted a credit analysis of dynamo for the years in issue to determine what credit rating might have been assigned to it he reviewed the lockup periods for the hedge fund and determined that all but one expired on date he determined that dynamo’s credit rating would never have been below a b which indicates that it could have obtained loans on substantially_similar economic terms as the advances from beekman mr lucas mr lucas is a financial analyst with years of business valuation experience he analyzed the debt capacity of kolter communities and kolter capital using three models a credit metric analysis comparing the kolter entities to peer entities a kmv-merton analysis analyzing the likelihood of default and a cashflow stress test analyzing the ability to refinance he chose those specific models at the request of counsel to the commissioner on the basis of his models he concluded that kolter communities and kolter capital could not have borrowed the amounts of the advances from third-party lenders on comparable terms during the second week of trial when mr lucas was called to testify he submitted an errata sheet consisting of pages in his errata sheet he admitted to using incorrect information in his analysis he also admitted as professor shaked illustrated in his rebuttal report that he understated the revenue forecasting by approximately dollar_figure million in his cashflow analysis and overstated capital expenditures mr lucas was forced to adjust his model he found that his original model went haywire when he ran it with the corrected information and adjusted his formulas to correct for the erroneous results when mr lucas ran his new model using more accurate data he concluded that kolter communities had a chance of refinancing at yearend and that kolter capital had a chance of refinancing at yearend and yet in his report and testimony mr lucas determined that in date kolter communities would not have been able to refinance at trial mr lucas explained how the kmv-merton model operated in determining the probability of default the kmv-merton model increases the probability of default over time the court questioned mr lucas on the nature of this assumption in his report the court asked mr lucas whether over a 10-year period where each year the company had a chance of default the company would have a chance of default mr lucas said that it would yet when the court asked mr lucas if i were to flip a coin twice do i have a percent chance of getting heads in one of those two flips mr lucas replied no and then added that i may have misresponded to the additive nature of the probability of default mr lucas’ original report was riddled with errors and his testimony indicated a lack of familiarity with probabilities the very subject about which he testified after corrections for errors mr lucas’ report largely supported petitioners’ position that dynamo would have been able to borrow from a third- party lender v asset transfers in addition to providing advances to dynamo beekman transferred property to dynamo beekman transferred the domani property the grande at mirasol property the mainstreet properties the verano property the jag of palm beach property the bear’s club property the grande sarasotan property and the heathrow oaks property during the years in issue beekman also transferred the dynamo fund and its interest in tousa kolter llc at the time of the transfers beekman and dynamo did not obtain independent appraisals of the property because the members of the management team believed that as experts in property valuation and real_estate development they had accurately priced the properties a the domani property the domani property was seven acres of real_property in north palm beach florida in beekman purchased the property for dollar_figure through a subsidiary domani development llc beekman spent an additional dollar_figure to develop the property in dynamo purchased domani development llc from beekman as payment for the domani property dynamo increased the outstanding balance of its debt to beekman by dollar_figure dynamo’s plan in date was to develop the domani property with luxury condominium units two-story mansions guest suites and boat dockage after dynamo purchased the property it received a loan from bank of america for dollar_figure million through domani development llc at trial petitioners called michael slade to value the domani property mr slade is a senior residential appraiser with over years of experience he holds professional designations in real_estate_valuation in valuing the domani property retrospectively mr slade determined that its highest_and_best_use was to be developed into multifamily or mixed-use projects he used the sales comparison approach in which the property being valued is compared to similar properties sold in the same timeframe and geographic area on the basis of this approach he determined that the fair_market_value of the domani property was dollar_figure the commissioner did not call a witness to value the domani property at trial the commissioner believes that the value of the domani property is 7see butler v commissioner tcmemo_2012_72 103_tcm_1359 dollar_figure which the parties agree was beekman’s total investment in the domani property b the grande at mirasol property the grande at mirasol property was approximately acres of real_property in palm beach gardens florida in beekman purchased the grande at mirasol property from taylor woodrow through a subsidiary the grande at mirasol inc the property consisted of low-rise residential rental units the purchase agreement contained a provision that could arguably prohibit condominium conversion in beekman began aggressively pursuing conversion of the complex into condominiums beekman attempted to convert the complex quickly because the market for condominiums was brisk beekman sent the state of florida bureau of condominiums a notice of its intent to convert in date taylor woodrow and the grande at mirasol inc entered into an agreement that amended the restriction on condominium conversion under the agreement the grande at mirasol llc a dynamo entity could convert the grande at mirasol property to condominiums on or before date upon conversion the grande at mirasol llc would pay taylor woodrow a base compensation of dollar_figure and bonus compensation when the gross sale proceeds exceeded approximately dollar_figure million while still pursuing a conversion beekman transferred the grande at mirasol property to the grande at mirasol llc by merging the grande at mirasol inc into the grande at mirasol llc beekman increased the outstanding balance due from dynamo by dollar_figure and dynamo assumed a dollar_figure million liability of beekman’s on date the following month the grande at mirasol llc sent letters to the tenants informing them of the transition to residential condominiums on date the grande at mirasol llc received approval from the state of florida to convert to condominiums by that time of the tenants had moved but the condominium market was on the decline at trial the commissioner called jack friedman to value the grande at mirasol property dr friedman received his ph d in business administration with a major in real_estate and land economics he is a real_estate economist and holds professional designations in real_estate_valuation including designations for being an appraiser who has met high standards and contributed to the appraisal industry dr friedman prepared a retrospective appraisal of the grande at mirasol property to determine its fair_market_value on date dr friedman determined that its highest_and_best_use was to be converted to condominiums he determined the fair_market_value of the grande at mirasol property using the sales comparison method he compared the grande at mirasol property to four apartment complexes that were acquired for condominium conversion dr friedman determined that the fair_market_value of the property was dollar_figure he did not account for the cost to convert of dollar_figure at trial petitioners called mr slade to value the grande at mirasol property mr slade prepared a retrospective appraisal to determine its fair_market_value on date he determined that its highest_and_best_use was to be maintained as a rental apartment complex mr slade considered condominium conversion but determined that it was restricted however he had not seen the agreement between beekman and the previous land owner under which dynamo could convert the property to condominiums if it paid compensation during trial he agreed that if there was no restriction in place on condominium conversions he would have considered properties that were converted to condominiums in his analysis on the basis of a sales comparison approach and an income approach he determined that the fair_market_value of the grande at mirasol property was dollar_figure million c the mainstreet properties between date and date reserve home ltd lp reserve home transferred a group of properties in port st lucie florida to mainstreet village ii llc mainstreet village iii llc and verano development ii llc all of which are dynamo entities as payment for the mainstreet properties beekman and dynamo recorded a dollar_figure increase in the outstanding balance due to beekman from dynamo the mainstreet commercial property the mainstreet commercial property consisted of two lots c and a and a tract r reserve home purchased the mainstreet commercial property as undeveloped land in and transferred it to mainstreet village ii on date at trial the commissioner called barry diskin to value the mainstreet commercial property dr diskin has a ph d in land economics and real_estate and holds professional designations in real_estate_valuation he has held his designations for over years dr diskin prepared a retrospective appraisal of the mainstreet commercial property to determine its fair_market_value on date he determined that lot c’s highest_and_best_use was retail lot a’s highest_and_best_use was commercial offices and tract r’s highest_and_best_use was a right-of-way using the sales comparison method dr diskin determined that lot c’s fair_market_value was dollar_figure lot a’s fair_market_value was dollar_figure and tract r did not have value on brief petitioners do not dispute the commissioner’s valuations the mainstreet office building the mainstreet office building property consists of dollar_figure acres of land and a 85-acre drainage easement this property was developed as a single-tenant one- story office building reserve home transferred the mainsteet office building property to mainstreet village iii on date at trial petitioners called mr slade to value the mainstreet office building property mr slade prepared a retrospective appraisal to determine its fair_market_value on date he determined that the mainstreet office building property’s highest_and_best_use was as an office building on the basis of a sales comparison approach and an income approach he determined that the fair_market_value of the mainstreet office building property was dollar_figure the commissioner did not offer an expert to value the mainstreet office building property the mainstreet vacant property the mainstreet vacant property consists of dollar_figure vacant acres reserve home transferred it to mainstreet village iii on date at trial the commissioner called dr diskin to value the mainstreet vacant property dr diskin prepared a retrospective appraisal to determine its fair_market_value on date he determined that its highest_and_best_use was as a park or public facility or a donation to the city using the sales comparison method dr diskin determined that the fair_market_value of the mainstreet vacant property was dollar_figure petitioners did not call an expert to value this property the g o team property the g o team property consists of a total of dollar_figure acres that encompass two separate portions an industrial portion and the remaining portion the industrial portion is four lots that total dollar_figure acres and a 40-acre easement the remaining portion consists of lots on dollar_figure acres and a 98-acre property that contains a lake a the industrial portion the industrial portion consists of four vacant lots on dollar_figure acres and a acre easement on date reserve home transferred the industrial portion to mainstreet village iii at trial the commissioner called dr diskin to value the industrial portion dr diskin prepared a retrospective appraisal to determine its fair_market_value on date he determined that the industrial portion’s highest_and_best_use for the four vacant lots was as small industrial lots and for the easement was as a drainage and utility easement dr diskin valued the property using the sales comparison approach he selected four comparable properties in st lucie county with prices between dollar_figure and dollar_figure per square foot dr diskin determined that the fair_market_value of the industrial portion was dollar_figure per square foot for a total value of dollar_figure at trial petitioners called mr slade to value the industrial portion mr slade prepared a retrospective appraisal to determine its fair_market_value on date he determined that the industrial portion’s highest_and_best_use was industrial mr slade valued the lots using the discount sellout analysis in doing so he selected comparable properties in st lucie county and martin county with prices between dollar_figure and dollar_figure per square foot he excluded properties with higher values from his comparison because he believed that those properties had superior locations the average per-square-foot price of the remaining comparable properties was dollar_figure and the most recent sale was at dollar_figure per square foot he concluded that the estimated price per square foot ranged from dollar_figure to dollar_figure he then discounted the total by to account for sales commissions general administrative costs developer’s profit real_estate_taxes and miscellaneous costs for a net value of dollar_figure for the four lots he determined that the easement had no value b the remaining portion the remaining portion consisted of lots and a parcel totaling dollar_figure acres the 98-acre parcel had a lake in the middle leaving only acres available to be developed the zoning classification for the property was industrial on date the city council of port st lucie passed ordinance amending the future land use map of these parcels from industrial to low-density residential on date reserve home transferred the remaining property to verano development ii llc at trial each party called an expert to value the remaining portion the commissioner called dr diskin petitioners called mr slade dr diskin prepared a retrospective appraisal of the remaining portion to determine its fair_market_value on date he determined that the remaining portion’s highest_and_best_use would be to combine the lots into a low- density residential property with dwelling units clustered on to the buildable portion of the property dr diskin valued the property using the sales comparison approach he selected three comparable properties with adjusted prices per acre of dollar_figure to dollar_figure dr diskin determined that the value per acre was dollar_figure for a total fair_market_value of dollar_figure mr slade calculated the fair_market_value of the remaining portion in two phases valuing the remaining lots separately from the 98-acre plot with a lake mr slade treated the smaller lots exactly the same as the industrial portion using the discount sellout analysis to determine value at the time of the transfer mr slade determined that the fair_market_value of the industrial portion ranged from dollar_figure to dollar_figure per square foot he also discounted the value by for sales commissions general administrative costs developer’s profit real_estate_taxes and miscellaneous costs for a total value of dollar_figure at trial he did not remember seeing the ordinance changing the land to residential and he did not take it into account in his valuation he believed that if the future land use had changed he would need to consider the future land use in his valuation mr slade treated the dollar_figure acres with the lake differently he again determined that the highest_and_best_use was industrial mr slade determined the fair_market_value of the dollar_figure acres with the lake with the sales comparison approach he selected five comparable properties with prices per square foot ranging from dollar_figure to dollar_figure and determined a fair_market_value of dollar_figure per square foot for a total of dollar_figure d the verano property the verano property was big_number acres of real_property in port st lucie florida beekman purchased all of the verano property by the summer of the verano property was largely vacant land beekman held the verano property indirectly through its ownership of reserve home as of date beekman’s total cost for the verano property was approximately dollar_figure on date reserve home transferred the verano property to verano development llc and a small tract of the verano property to psl commercial holdings ii llc both of which were indirect wholly owned subsidiaries of dynamo verano development llc paid dollar_figure for the verano property dynamo planned to build big_number residential units on the property including a nine-hole golf course shortly after purchasing the land verano development llc was approved for a dollar_figure million loan from suntrust with the option to increase the loan to dollar_figure million secured_by the verano property at trial the commissioner called jack friedman to value the verano property dr friedman prepared a retrospective appraisal to determine its fair_market_value on date dr friedman determined that its highest_and_best_use was to develop it into a master-planned community he determined the fair_market_value of the verano property using the sales comparison method he compared the verano property to three properties either slated for residential development or developed located in port st lucie and sold under the same market conditions one property included in the comparison the centex property was within one mile of the verano property and was a large master-planned community consisting of big_number acres the centex property sold for dollar_figure at the time of the sale like the verano property the centex property had not been developed in determining the fair_market_value of the verano property dr friedman gave the centex property weight and determined that the verano property’s value was dollar_figure petitioners called mr slade to value the verano property mr slade prepared a retrospective appraisal to determine its fair_market_value on date he determined that the verano property’s highest_and_best_use was as a future mixed use development mr slade also used the sales comparison approach and included the centex property however he believed the value of the verano property should be less than that of the centex property because the centex property had superior road access mr slade determined that the fair_market_value was dollar_figure e other transfers in date beekman made a dollar_figure partnership contribution to tousa kolter llc and received a interest a portion of that contribution dollar_figure million was subsequently credited back to beekman thereby reducing its contribution to dollar_figure in tousa kolter llc purchased the monterra property beekman transferred its tousa kolter llc interest to dynamo in early dynamo reported a dollar_figure increase to the outstanding balance due to beekman on date beekman held the dynamo fund with a fair_market_value of dollar_figure during the first half of beekman transferred all of the assets in the dynamo fund to dynamo between january and date dynamo paid a total of dollar_figure for the dynamo fund assets the payments were recorded as increases in the outstanding balance due to beekman during the years in issue beekman also sold to dynamo the jag of palm beach property the bear’s club property the grande sarasotan property and the heathrow oaks property for dollar_figure dollar_figure dollar_figure and dollar_figure respectively neither party offered any valuation evidence as to these properties at trial vi u s real_property holding corporation at trial petitioners called richard preston to calculate beekman’s percentage of u s real_property interests as a share of its total real_property interest both inside and outside the united_states and other assets which are used or held for use in a trade_or_business for purposes of determining whether beekman is a u s real_property holding corporation as defined by sec_897 mr preston ha sec_46 years of experience as a public accountant mr preston analyzed the book_value of beekman’s u s real_property and the book_value of its total real_property and business_assets he excluded from his real_property calculation any u s real_property that was held primarily for sale in 8all section references are to the internal_revenue_code code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated the ordinary course of business he determined that from date to beekman’s share of u s real_property as a percentage of its total real_property and business_assets never exceeded the commissioner did not call an expert instead the commissioner calculated the fair_market_value of beekman’s u s real_property holding interests and the fair_market_value of beekman’s business_assets including real_estate using information provided on beekman vista’s forms u s_corporation income_tax return the commissioner took the book_value reported on the return and added back the estimated amount of income beekman earned from disposal of the properties in later years the commissioner determined that beekman’s percentage of u s real_property as a share of its total real_property and business_assets never fell below the commissioner also prepared the calculation using the same book values as mr preston however the commissioner did not exclude u s real_property held primarily for sale in the ordinary course of business using the alternative book values the commissioner determined that the share of u s real_property never fell below vii reporting and examinations beekman vista and dynamo holdings file different returns and have different tax_year ending dates for each of the years in issue beekman vista filed form_1120 and had a fiscal tax_year ending june beekman vista also filed form_1042 annual withholding_tax return for u s source income of foreign persons to report tax withheld on payments to foreign persons dynamo holdings filed for each year form_1065 u s return of partnership income and had a calendar tax_year the management team did not research how to record the transfers or seek advice on how to report the transfers for tax purposes a beekman vista beekman vista filed a form_1120 for each of its tax years ending date through kpmg llp based in canada prepared and signed the returns each year beekman vista filed as an accrual_method taxpayer on its form_1120 beekman vista reported current_assets of dollar_figure due from advances and no interest_income from its advances to affiliates on its form_1120 beekman vista reported current_assets of dollar_figure due from advances and interest_income of dollar_figure received from its advances to affiliates on its form_1120 beekman vista reported current_assets of dollar_figure due from advances and interest_income of dollar_figure from its advances to affiliates beekman vista did not file form_1042 for or or make any deposits with respect to withholding taxes before during through the commissioner examined beekman vista’s forms for the tax years ending date through during that examination the revenue_agent determined that beekman vista owed withholding taxes for and on transfers unrelated to the issues in these cases in the revenue_agent prepared form sec_1042 for beekman vista for and beekman vista signed and filed the form_1042 for on date and the form_1042 for on date beekman paid the amounts shown on those returns after the returns were filed the revenue_agent concluded that no penalties would be proposed because the beekman vista representatives provided a statement of reasonable_cause b dynamo holdings dynamo holdings filed forms for and ernst young llp prepared and signed the dynamo holdings forms dynamo holdings reported that it was an accrual basis taxpayer dynamo holdings filed its short-year form_1065 reporting liabilities of dollar_figure for intercompany advances and no interest_expense paid to beekman dynamo holdings filed form_1065 and reported advances as a liability and interest_expenses it reported yearend other liabilities of dollar_figure for intercompany advances interest_expenses not reported elsewhere of dollar_figure and investment_interest expenses of dollar_figure it also reported that it had no nonrecourse liabilities dynamo holdings included a schedule_k-1 partner’s share of income deductions credits etc for dynamo gp reporting dollar_figure of recourse_liabilities and schedules k-1 for the christine dynasty_trust and julien dynasty_trust reporting no recourse_liabilities on its filed form_1065 for dynamo holdings did not report advances as a liability but did report interest_expenses it reported interest_expenses not reported elsewhere of dollar_figure and no nonrecourse liabilities dynamo holdings included a schedule_k-1 for dynamo gp reporting dollar_figure of recourse_liabilities and schedules k-1 for the christine dynasty_trust and julien dynasty_trust reporting no recourse_liabilities viii fpaa and notice_of_deficiency in date the commissioner began an examination of dynamo holdings’ returns after the examinations of beekman vista’s and dynamo holdings’ returns the commissioner issued a notice of final_partnership_administrative_adjustment fpaa with respect to dynamo holdings and a notice_of_deficiency to beekman vista on date the commissioner timely issued an fpaa with respect to dynamo holdings for and the commissioner made several adjustments in the fpaa including adjusting interest_expenses by dollar_figure and dollar_figure for and respectively the commissioner also adjusted forgiveness of indebtedness income and distributions to partners the commissioner determined a sec_6662 accuracy-related_penalty for each year on date the commissioner issued beekman vista a timely notice_of_deficiency for calendar years and the commissioner determined that beekman vista made u s source distributions to a canadian corporation subject_to_withholding tax of dollar_figure million and dollar_figure million and was liable for a sec_6651 addition_to_tax and a sec_6656 penalty for each year the commissioner made the following determinations year deficiency dollar_figure big_number addition_to_tax sec_6651 dollar_figure big_number penalty sec_6656 dollar_figure big_number ix tax_court proceedings dynamo gp the tax_matters_partner of dynamo holdings and beekman vista timely petitioned this court for review on date and date respectively at the time the petitions were filed dynamo holdings’ and beekman vista’s principal_place_of_business was in florida the court consolidated these cases both parties conducted extensive pretrial discovery the parties first engaged in informal_discovery the commissioner requested all documents relating to transfers of value between dynamo and beekman two years later the parties involved the court in their pursuit of formal discovery we issued dynamo holdings ltd p’ship v commissioner which allowed dynamo to respond to the commissioner’s request using predictive coding the parties’ discovery battles continued dynamo submitted requests for admissions and a motion to compel production of documents shortly thereafter the commissioner t c filed two motions to compel production of documents and six motions to compel the taking of depositionsdollar_figure six months before trial the commissioner filed a motion to amend his answer to beekman vista’s petition to increase the deficiencies additions to tax and penalties the commissioner included a list of initial transfers included in the calculations in the notice_of_deficiency and a revised list of transfers that increased the deficiencies the commissioner increased the amounts of the transfers from the amounts recorded on the books for the following properties the grande at mirasol property the mainstreet properties the jag of palm beach property the bear’s club property the domani property the grande sarasotan property and the heathrow oaks property the commissioner also increased the amounts of the transfers from the amounts recorded on the books with respect to the tousa kolter llc interest and the dynamo fund we granted the motion the commissioner’s amended determinations are as follows year deficiency dollar_figure big_number addition_to_tax sec_6651 dollar_figure big_number penalty sec_6656 dollar_figure big_number 10we note that the commissioner did not file a motion to compel the taking of a deposition of mrs moog the parties have resolved or conceded various items opinion the principal issues in these cases are whether transfers from beekman to dynamo were gifts or loans and whether there were transfers of property from beekman to dynamo at less than fair_market_value to the extent the commissioner prevails his prevailing would give rise to constructive distributions up the beekman chain of entities and those distributions could be subject_to_withholding taxes as to the first issue we must first determine whether the advances were bona_fide debt as to the second issue we must determine whether property was transferred at fair_market_value if we find that the transfers were not bona_fide debt or that property was transferred at less than fair_market_value then we must determine whether there were constructive distributions if there were then we must determine whether beekman was required to withhold taxes i burden_of_proof in general the commissioner’s determinations in a notice_of_deficiency and an fpaa are presumed correct and taxpayers bear the burden of proving otherwisedollar_figure 11rule a 290_us_111 the commissioner bears the burden_of_proof however on any new_matter increases in deficiency or affirmative defenses pleaded in his answerdollar_figure the commissioner filed an amendment to answer asserting increased deficiencies as well as penalties and additions to tax against beekman the commissioner has the burden on these increasesdollar_figure the commissioner contends however that he bears the burden only on the amounts of the deficiencies increased over what was included in the fpaa and the notice_of_deficiency he argues that after his concessions for beekman’s total deficiency for that year is less than the amount determined in the notice_of_deficiency so that he does not bear any burden with respect to we disagree a new_theory or reason that is presented to sustain a deficiency is treated as a new_matter when it increases the amount of the deficiency or requires the presentation of different evidencedollar_figure the issues raised in the amendment to answer require the presentation of different evidence the commissioner issued a notice_of_deficiency that determined that beekman made distributions to a canadian 12rule a 112_tc_183 ndollar_figure 13rule a shea v commissioner t c pincite 14see shea v commissioner t c pincite 93_tc_500 corporation and was liable for withholding taxes on those distributions beekman bears the burden of proving that the commissioner’s determinations in the notice_of_deficiency were incorrectdollar_figure however the commissioner then filed an amendment to answer in which he increased the amounts of the distributions to the canadian corporation by increasing the values of the properties transferred from beekman to dynamo this requires the presentation of different evidence including reports of valuation experts accordingly we find that the commissioner bears the burden_of_proof on the increased values of property that were asserted in the amendment to answer in the amendment to answer the commissioner also increased the additions to tax under sec_6651 and the penalties under sec_6656 the commissioner bears the burden_of_proof on any increase in the amounts of penalties over what was originally determined in the notice of deficiencydollar_figure for penalties under sec_6656 the burden_of_proof includes written supervisory approval as required by sec_6751dollar_figure 15see rule a welch v helvering u s pincite 16143_tc_376 aff’d in part 616_fedappx_391 10th cir 17graev v commissioner t c __ __ slip op pincite date continued in limited situations the burden may shift to the commissioner under sec_7491 petitioners do not argue that the burden should shift and we find that the facts do not suggest that it should accordingly the burden does not shift under sec_7491 on the remaining items ii debt vs gift the commissioner argues that the advances were not loans from beekman to dynamo but were gifts from mrs moog to the dynamo trusts in a split the question of whether a taxpayer has entered into a bona_fide creditor-debtor relationship pervades federal tax litigationdollar_figure the parties must have actually intended to establish a debtor-creditor relationship for a transaction to be a bona_fide loandollar_figure to find a bona_fide creditor-debtor relationship we must determine that at the time the advances were made there was an unconditional obligation on continued supplementing 147_tc_460 18see eg 470_f3d_1325 11th cir 135_tc_26 aff’d 691_f3d_1315 11th cir 19calloway v commissioner t c pincite see also ellinger f 3d pincite the part of the transferee to repay the money and an unconditional intention on the part of the transferor to secure repayment we apply special scrutiny to intrafamily transfers and transactions between entities in the same corporate family or with shared ownershipdollar_figure transfers between family members are presumed to be giftsdollar_figure this presumption can be rebutted by an affirmative showing that there existed a real expectation of repayment and intent to enforce the collection of the indebtedness when analyzing transfers between related parties it is useful to compare the transactions at issue to arm’s-length transactions and normal business practicesdollar_figure however 2088_tc_604 aff’d without published opinion 855_f2d_855 8th cir 2191_tc_575 49_tc_575 vinikoor v commissioner tcmemo_1998_152 75_tcm_2185 2292_tc_470 aff’d without published opinion 912_f2d_1466 5th cir barr v commissioner tcmemo_1999_40 77_tcm_1370 vinikoor v commissioner t c m cch pincite 23vinikoor v commissioner t c m pincite 24464_f2d_394 5th cir 74_tc_476 we must also be mindful of the business realities of related partiesdollar_figure for example we have held that security and other creditor protections are less important in a related-party contextdollar_figure the court_of_appeals for the eleventh circuit to which these consolidated cases could be appealed has developed a 13-part test to determine whether an advance is debt or equitydollar_figure while this is similar to our bona_fide debt analysis there are some inconsistencies the court of appeals’ 13-factor debt-versus- equity test asks the court to look to the totality of all the facts and circumstances and specifically directs the court to consider the following the names given to certificates evidencing the indebtedness the presence or absence of a fixed maturity_date the source of payments the right to enforce payment of principal and interest participation in management flowing as a result the status of the contribution in relation to regular corporate creditors the intent of the parties thin or adequate capitalization 2561_tc_367 na gen p’ship subs v commissioner tcmemo_2012_172 103_tcm_1916 see also malone hyde inc v commissioner t c pincite 26na gen p’ship subs v commissioner t c m cch pincite- 27ellinger f 3d pincite4 identity of interest between creditor and stockholder source of interest payments the ability of the corporation to obtain loans from outside lending institutions the extent to which the advance was used to acquire capital assets and the failure of the debtor to repay on the due_date or to seek a postponement but this is not a debt-versus-equity case the commissioner argues that the transfers were gifts not equity as a result our inquiry is not focused on weighing debt versus equity but rather on considering whether there is a bona_fide debt while the debt-versus-equity test adopted by the court_of_appeals offers some guidance it is not directly on point in jones v commissioner we used a long-standing nine-factor facts_and_circumstances_test to determine whether two parties entered into a valid debtor- creditor relationshipdollar_figure we evaluated all the pertinent facts and circumstances of the case including whether there was a promissory note or other evidence_of_indebtedness interest was charged there was security or collateral there was a fixed maturity_date a demand for repayment was made any actual repayment was made the transferee had the ability to repay any records maintained by the transferor and or the 28ellinger f 3d pincite4 29jones v commissioner tcmemo_1997_400 74_tcm_473 aff’d without published opinion 177_f3d_983 11th cir transferee reflected the transaction as a loan and the manner in which the transaction was reported for federal tax is consistent with a loan our opinion in jones was affirmed without a published opinion because the court_of_appeals has adopted only a debt-versus-equity test rather than a bona_fide debt test like the one employed in jones and because the court_of_appeals affirmed our holding in jones and has not adopted a contravening ruling we continue to rely on our nine-factor analysisdollar_figure in applying this multifactor test we do not merely count the factors and not all factors are equal instead we analyze the pertinent facts to determine whether a bona_fide debtor-creditor relationship was establisheddollar_figure these factors fall roughly into two categories formal indicia of debt and economic indicia of debt petitioners allege that dynamo and beekman had the intent to repay and be repaid as demonstrated by their subjective declarations of their intent conversely the commissioner argues that we should draw an adverse inference from mrs moog’s failure to testify at trial and infer that dynamo and beekman did not intend to repay and be repaid we disagree with both parties 3054_tc_742 aff’d 445_f2d_985 10th cir 31see ellinger f 3d pincite dixie dairies corp v commissioner t c pincite we apply a special scrutiny to transactions between companies with shared ownership and intrafamily transfers and we presume that transfers between family members are giftsdollar_figure here transfers between beekman and dynamo were transfers between companies with both shared ownership and intrafamily transfers beekman and dynamo had shared ownership and control both dynamo and beekman were owned in part by trusts for which christine mr julien and their families were beneficiaries transfers between the two structures were transfers between companies with shared ownership transfers between beekman and dynamo were ultimately intrafamily transfers when beekman made transfers to dynamo value was being transferred from one family of companies the majority of which were held by trusts for which delia moog is a beneficiary delia moog family_trust and delia moog family_trust to another family of companies the majority of which were held by trusts for which her daughter and nephew and their families were beneficiaries while christine and mr julien were also beneficiaries of some of the trusts which owned beekman the transfers from beekman to dynamo reduced delia moog’ sec_32perry v commissioner t c pincite kean v commissioner t c pincite vinikoor v commissioner t c m cch pincite beneficial_interest in the underlying properties in favor of her daughter her nephew and their families given the nature of these transfers we treat them with special scrutiny and determine whether the advances are gifts or loans for federal tax purposes on the basis of the totality of the circumstancesdollar_figure on that basis we find that the advances were loans a formal indicia of debt dynamo and beekman satisfied some but not all of the formal indicia of debt we agree with the commissioner that at the time the advances were made there was no contemporaneous promissory note identifying all the terms of the agreement there was no collateral set_aside to ensure repayment there was no invoice or demand made by beekman and there was no fixed maturity_date or intent to force dynamo into bankruptcy if required to ensure repayment however there are many meaningful indicia of debt dynamo and beekman maintained records that reflected advances as debt in their general ledgers and they executed promissory notes 33see estate of mixon f 2d pincite general ledgers we find that dynamo’s and beekman’s general ledgers consistently reflected the advances as debt they had a well-established practice of recording and repaying advances the advances to dynamo and its subsidiaries were booked as amounts due to beekman likewise advances from beekman were recorded as amounts due from dynamo although dynamo made occasional errors in reporting those incorrect entries could not be erased and were required to be corrected through reversing entries these corrections were reflected in the records and give credibility to their reporting moreover mr moses the only forensic expert in these cases detailed each entry and calculated the amounts of advances and repayments we may accept or reject expert testimony when in our best judgment on the basis of the record it is appropriate to do sodollar_figure on the basis of the record it is appropriate to accept mr moses’ testimony because we find his process of determining the amount of advances and repayments credible in his posttrial brief the commissioner challenges mr moses’ report and posits that beekman simply offset ledger entries rather than have dynamo pay it sec_34fed r evid 86_tc_547 see also sherrer v commissioner tcmemo_1999_122 77_tcm_1795 aff’d 5_fedappx_719 9th cir debts we find however that dynamo repaid its debts to beekman in part by providing management services to beekman beekman paid for those management services by reducing the amounts due from dynamo those reductions had the economic_effect of payments and should be respected the commissioner argues for the first time on brief that we should impose an adverse inference because petitioners did not produce all of beekman’s and dynamo’s partners’ records we may draw an adverse inference when a party alleges a fact but fails to introduce evidence within his possession which if true would be favorable to himdollar_figure however we will not speculate on what such documents would show when the party requesting the inference could have used discovery tools but did notdollar_figure the commissioner never requested the documents from dynamo’s partners accordingly we will not draw an adverse inference moreover we will not draw an adverse inference against dynamo and beekman for not producing a portion of beekman’s general ledgers mr moses testified that he reviewed the general ledgers for beekman to confirm his finding sec_35783_f2d_1543 11th cir 6_tc_1158 aff’d 162_f2d_513 10th cir 36stevenson v commissioner tcmemo_1986_207 51_tcm_1050 ndollar_figure and that he had confirmed specific transactions with beekman’s general ledger on the basis of dynamo’s and beekman’s books_and_records he determined that advances were repaid moreover during discovery the commissioner found that he did not have beekman’s general ledgers he did not file a motion to compel for beekman’s general ledgers then he cannot request an adverse inference nowdollar_figure demand note we find that beekman and dynamo executed a promissory note as part of the restructuring transactions this note was executed no later than date the note had the customary loan terms including the amount of the loan interest rate accrual and demand terms although the promissory notes were not executed contemporaneously with all of the advances we have previously found that after-the-fact consolidation of advances and execution of promissory notes can indicate that the advances were debtdollar_figure 37see eriksen v commissioner tcmemo_2012_194 104_tcm_46 ndollar_figure denying an adverse inference when the requesting party failed to include trial subpoenas and did not specify the scope of the documents requested 38swain v commissioner t c memo 43_tcm_121 moreover we are persuaded by the fact that the notes were created as a part of the restructuring transactions wherein multiple documents identifying the advances as loans were created the commissioner asks us to follow the line of reasoning in cases where courts have held that a promissory note created after the commencement of an examination should count against a finding of debtdollar_figure we find that an examination did not cause the execution of the notes in these cases moreover the notes were created before dynamo’s form_1065 was due we find that the notes were created as part of a greater restructuring effort the commissioner argues that the notes are unenforceable and that the unenforceability shows that dynamo’s and beekman’s objective intent was not to enforce repayment or make payment the commissioner argues that the notes are unenforceable because dynamo and beekman failed to pay stamp tax and under florida statutes failure to pay stamp tax renders the note unenforceabledollar_figure however the weight of the evidence shows that the parties executed the notes to 39see 627_f2d_1032 aff’g tcmemo_1978_306 25_tc_387 georgiou v commissioner tcmemo_1995_546 70_tcm_1341 40fla stat sec b the instrument shall not be enforceable in any court of this state as to any such advance unless and until the tax due thereon upon each advance that may have been made thereunder has been paid memorialize the restructuring transactions and in doing so they also memorialized their longstanding practice of advancing and repaying loans the demand notes as is customary with demand notes did not have a fixed maturity_date while the court_of_appeals for the eleventh circuit has found a lack of fixed maturity_date highly significant in a debt versus equity analysis here beekman and dynamo simply memorialized their longstanding practice of advancing and repaying loansdollar_figure in cases where that court_of_appeals has found a lack of fixed maturity_date troubling the parties also failed to repay the debt or pay interest on the notes and the creditors failed to show that they truly intended to have the debt repaiddollar_figure here the parties intended to repay the principal as well as interest on the loans and in fact did so consequently the lack of fixed maturity dates does not create the same concern we have previously stated that notes in a closeknit family of corporate cousins are not as necessary to insure repayment as may be the case between unrelated entities dynamo and beekman have notes even though the loans are 41ellinger f 3d pincite 42see eg ellinger f 3d pincite 730_f2d_634 11th cir aff’g t c memo 43litton bus sys inc v commissioner t c pincite quoting am continued between related parties we find that on the basis of these facts this factor is either neutral or weighs in favor of debt however related-party demand notes are afforded little weightdollar_figure thus although we find the demand notes may weigh in favor of debt we give the notes little weight we are not troubled by any shortcomings in dynamo’s and beekman’s formal indicia of debt they must be taken into account in the context of the business realities of the transaction we would be surprised if mr julien wrote himself an invoice demanded repayment or required a credit check or audited financial statements before making an advance the management of these companies was the same and they had full knowledge of and access to all financial information moreover we have consistently held that these formal indicia of debt are little more than declarations of intent without accompanying objective economic indicia of debtdollar_figure continued processing sales co v united_states 371_f2d_842 ct_cl see also estate of mixon f 2d pincite 44williams v commissioner tcmemo_1978_306 37_tcm_1270 45505_f2d_873 5th cir continued b economic indicia of debt in ascertaining the economic realities of the transaction it is helpful to measure the transfer against the economic realities of the marketplace to determine whether a third party lender would have extended the loandollar_figure dynamo and beekman satisfy all the objective economic indicia of debt beekman charged and dynamo accrued interest on the advances in and beekman reported and paid tax on that interest_income dynamo reported and deducted that interest_expense dynamo repaid some of the advances before any examination began at all times dynamo had the ability to repay the loans importantly dynamo could have received loans on substantially_similar terms and dynamo did receive sizable loans from third parties interest and tax reporting we find that dynamo accrued interest with respect to the advances and dynamo holdings and beekman vista reported the interest on their forms and tax reporting can be a formal indicia of debt or an economic indicia of continued 398_f2d_694 3d cir sensenig v commissioner tcmemo_2017_1 at aff’d __ f app’x __ wl 3d cir date 46sensenig v commissioner at debt where tax reporting has no economic consequences it is a purely formal indicia of debt where tax reporting has economic consequences as where reporting interest_income gives rise to taxable_income we consider it to be an economic indicia of debt dynamo accrued interest on the advances to beekman of dollar_figure and dollar_figure in and respectively these interest_expenses were indicated by one book entry at the end of each year interest accrued and was added to the outstanding balance and was paid as the outstanding balance was repaid although the interest rate was not provided it is clear that interest was applied moreover we are not troubled by the lack of interest accruals the advances were booked at the end of so interest would not have accrued for beekman vista reported interest_income and dynamo holdings reported interest_expense beekman vista reported dollar_figure and dollar_figure on its form_1120 and form_1120 respectively dynamo holdings reported interest_expenses of dollar_figure and dollar_figure on its form_1065 and dollar_figure on its form_1065 both the fact that dynamo accrued and paid interest on its advances from beekman and the fact that both beekman vista and dynamo holdings reported the interest payments for tax purposes point toward debt repayments we find that dynamo made repayments to reduce the outstanding balance each year without regard to any examination repayments especially repayments before the commissioner has begun an examination indicate debtdollar_figure dynamo repaid beekman with funds from capital contributions from the trusts and with wire transfers dynamo also reduced the outstanding balance due by providing management services and by making payments on debts that beekman owed to third parties in dynamo’s first year of operations dynamo decreased the outstanding balance by dollar_figure in its second year of operations dynamo decreased the outstanding balance by dollar_figure although the outstanding balance increased in dynamo’s payments completely repaid the balance from during the year ending date dynamo decreased the outstanding balance by dollar_figure this amount left the outstanding balance pincite56_tc_556 n aff’d without published opinion 474_f2d_1338 3d cir epps v commissioner tcmemo_1995_297 70_tcm_1 repayment before a tax audit is of course more persuasive evidence of an intention to create a debt than repayment after such an audit has commenced dollar_figure approximately dollar_figure million less than the outstanding balance at the end of the continuous repayments that resulted in substantial net reductions coupled with interest payments are significant evidence of debtdollar_figure mr moses determined that the advances were entirely repaid with interest in we find this credible ability to repay finally we find that dynamo had the ability to repay inadequate capitalization indicates that the taxpayer cannot repay the debtdollar_figure both sides called experts to testify about dynamo’s ability to repay the advances it received from beekman petitioners called two experts professor shaked and dr chambers and the commissioner called one expert mr lucas 48see litton bus sys inc v commissioner t c pincite 49dixie dairies corp v commissioner t c pincite explaining in a debt-equity case that o f principal importance are the ‘thinness’ of the capital structures in relation to debt the risk involved in making the advances and the availability of outside sources of funds rutter v commissioner tcmemo_2017_174 at explaining in a debt-equity case that a company’s capitalization is relevant to determining the level of risk associated with repayment na gen p’ship subs v commissioner 103_tcm_1916 it is within the sound discretion of our court to admit or exclude expert testimonydollar_figure we may embrace or reject expert testimony whichever in our best judgment is appropriate thus we have rejected expert testimony where the witness’ opinion of value was so exaggerated that his testimony was incredible we are not bound by the opinion of an expert witness when that opinion contradicts our own sound judgmentdollar_figure we have broad discretion to evaluate the overall cogency of each expert’s analysis moreover an expert who is merely an advocate of a party’s position does not assist the court to understand the evidence or to determine a fact in issuedollar_figure we will start with mr lucas after reviewing mr lucas’ report hi sec_26 pages of errata and his testimony we are not persuaded that his opinion is helpful 50370_us_31 estate of crossmore v commissioner tcmemo_1988_494 56_tcm_483 51parker v commissioner t c pincite 52parker v commissioner t c pincite 53parker v commissioner t c pincite 54110_tc_530 quoting 838_f2d_330 9th cir aff’g t c memo 55105_tc_16 aff’d 98_f3d_194 5th cir to the court in understanding the evidence or determining the facts in issue mr lucas’ report was plagued with errors he admitted to using incorrect information in conducting his analysis such as understating the revenue forecasting by approximately dollar_figure million in his cashflow analysis and overstating capital expenditures he admitted that his model was flawed and that when he tried to account for the volatility it failed he also admitted that he deferred to the commissioner when choosing the model on which to base his analysis moreover his testimony indicated a lack of familiarity with probabilities the very subject about which he testified because we find that mr lucas was not credible and his opinion was not helpful to deciding these cases we disregard his report his errata report and his testimony if we were to credit his report and testimony after accounting for errors it largely supported petitioners’ claim that dynamo would have been able to refinance its debts turning to professor shaked and dr chambers we find their opinions credible and helpful in deciding these cases professor shaked determined that dynamo had the ability to repay both professor shaked and dr chambers determined that dynamo’s position would have been viewed favorably by third parties and dr chambers determined that dynamo would have been able to receive loans on similar terms from third parties professor shaked determined that beekman reasonably expected dynamo to repay its debts as they became due he determined that dynamo was able to repay both its short-term and long-term debts in his short-term analysis professor shaked determined that dynamo had the ability to pay interest in each year because of its highly liquid asset profile in his long-term analysis professor shaked determined that dynamo had the earning capacity to pay interest_expenses and repay principal in years he determined that dynamo’s break-even rate the lowest rate of return on assets at which dynamo could still make interest payments on its debt wa sec_2 -4 which was significantly lower than the projected rate of return of on assets we find professor shaked’s assumptions reasonable his analysis credible and his findings persuasive accordingly we adopt his opinion and find that dynamo had the ability to repay petitioners’ experts also looked to how third parties would view dynamo’s ability to pay and they determined that third parties would view dynamo’s position favorably professor shaked determined that dynamo’s equity cushion was between dollar_figure million and dollar_figure million an equity cushion is the amount by which the business’ assets exceeds the business’ debt we have previously explained that a large equity cushion is important to creditors because it affords them protection if the borrower encounters financial stressdollar_figure he determined that this large equity cushion would constitute acceptable credit risk and lenders would have a greater degree of assurance of repayment petitioners’ experts determined that dynamo was adequately capitalized on a net debt basis a company’s capitalization is relevant to determining the level of risk associated with repaymentdollar_figure they explained that when companies have high levels of cash it is more appropriate to analyze debt-to-equity ratios on a net debt basis to reach this calculation they subtracted the cash and marketable_securities from debt and the business_enterprise value in other words they subtracted the value of the dynamo fund the hedge fund portfolio from their evaluation professor shaked determined a debt-to-equity_ratio ranging from 05x to 7x from to this figure was slightly higher than for comparable companies but still within a reasonable range likewise dr chambers determined that dynamo had adequate capital on a net debt basis petitioners’ experts determined that dynamo would have been viewed favorably by third-party lenders dr chambers determined that on the basis of this capital adequacy dynamo could have obtained loans on substantially_similar economic terms 56rutter v commissioner at 57rutter v commissioner at the commissioner alleges that we should find that dynamo was not adequately capitalized because the dynamo fund held marketable_securities that had lock-up dates however dr chambers credibly testified that he reviewed the lock-up periods for the dynamo fund and determined that all but one expired before date the date beekman transferred the dynamo fund to dynamo professor shaked credibly testified that there was a market for purchasing these hedge funds we find the testimony of both credible and hold that dynamo was adequately capitalized during the years in issue the experts’ findings that dynamo had the ability to repay coupled with the fact that dynamo actually obtained substantial third-party loans such as the dollar_figure million loan on the verano property demonstrate that dynamo would have been able to receive loans on substantially_similar terms c conclusion after analyzing the facts we hold that dynamo and beekman entered into a bona_fide creditor-debtor relationship at the time the advances were made dynamo had an unconditional obligation to repay the loans and beekman had an unconditional intent to be repaid a bona_fide loan precludes a constructive distributiondollar_figure because we found that the advances were bona_fide debt the advances are not constructive distributions likewise dynamo is entitled to deduct the interest_expenses iii property transactions the commissioner alleges beekman made constructive distributions to its shareholders to the extent that property was transferred from beekman to dynamo for less than fair_market_value fair_market_value has been defined as the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts the fair_market_value of property is based on the highest_and_best_use of the property as of its relevant valuation datedollar_figure in determining highest_and_best_use we must examine the suitability of the property’s current use under existing zoning and marketing conditions together 58schnallinger v commissioner tcmemo_1987_9 52_tcm_1311 59411_us_546 quoting sec_20_2031-1 estate_tax regs 92_tc_958 aff’d 921_f2d_280 9th cir 6087_tc_389 see 85_tc_677 with any realistic alternative usesdollar_figure the determination of the fair_market_value of property is a question of fact that must be resolved after consideration of all of the evidence in the recorddollar_figure petitioners allege that we should find that the amounts that dynamo and beekman paid to transfer the properties were the fair market values because they are experts in the property development industry we disagree transfers between family members or entities controlled by family members are subject_to special scrutinydollar_figure accordingly independent experts provide a better analysis of the price at which property would change hands between a willing buyer and a willing seller as is common in valuation cases the parties called experts to show the fair market values of the properties transferred the commissioner called two experts mr friedman and dr diskin petitioners called one expert mr slade 61hilborn v commissioner t c pincite 6264_tc_183 43_tc_663 63perry v commissioner t c pincite estate of lockett v commissioner tcmemo_2012_123 103_tcm_1671 expert opinion sometimes aids the court in determining value other times it does notdollar_figure as with the lending experts we are not bound by the opinions or formulas of valuation experts when those opinions contravene our judgment instead we may reach a determination based on our own examination of the recorddollar_figure we may be selective in the use of any portions of their opinionsdollar_figure the persuasiveness of an expert’s opinion depends largely upon the disclosed facts on which it is baseddollar_figure consequently we take into account expert opinion testimony only to the extent that it aids us in arriving at the fair market values of the properties a the domani property the domani property was seven acres of real_property that dynamo intended to develop into a high-rise tower in beekman sold the property to dynamo by increasing the outstanding balance due from dynamo by dollar_figure only petitioners called an expert to value the property retrospectively petitioners called mr slade mr slade determined that the highest_and_best_use of 64see 92_tc_101 65estate of davis v commissioner t c pincite 66parker v commissioner t c pincite 67estate of davis v commissioner t c pincite the property would be as a multifamily or mixed-use project he valued the property at dollar_figure the commissioner did not call an expert to value the property the commissioner alleges that the fair_market_value of the property was the accumulated cost incurred by beekman or dollar_figure we find that the fair_market_value of the property was dollar_figure although the commissioner alleges that the fair_market_value is the accumulated cost the fair_market_value is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts this definition does not include the seller’s cost mr slade determined that the fair_market_value of the property was dollar_figure his testimony is unrebutted and we find no reason to question his credibility accordingly we find the fair_market_value was dollar_figure petitioners argue that dynamo assumed dollar_figure million of debt from beekman we disagree the record establishes that after dynamo purchased the property dynamo received a loan from bank of america for dollar_figure million the record does not establish that this was the assumption of a beekman debt accordingly 68cartwright u s pincite quoting sec_20_2031-1 estate_tax regs marine v commissioner t c pincite beekman transferred the domani property to dynamo at dollar_figure below fair_market_value because the amount of the transfer reflected in the amendment to answer was greater than that determined in the notice_of_deficiency the commissioner bears the burden with respect to the increase the commissioner has met his burden b the grande at mirasol property the grande at mirasol property was approximately acres of real_property that was developed into low-rise units that operated as an apartment complex beekman was aggressively pursuing a conversion of the complex into condominiums on date beekman sold the property to dynamo for dollar_figure as payment for the property dynamo increased the outstanding balance due to beekman by dollar_figure and assumed a dollar_figure million liability both parties’ experts valued the property retrospectively the principal difference between the parties’ experts is whether the highest_and_best_use of the property would be a condominium conversion the commissioner’s expert dr friedman determined the highest_and_best_use of the property was as a condominium conversion project and determined that the fair_market_value of the grande at mirasol property was dollar_figure petitioners’ expert mr slade determined that the highest_and_best_use of the property was to maintain the property as an apartment complex and that the fair_market_value of the grande at mirasol property was dollar_figure million accordingly we must determine whether the highest_and_best_use of the property was as a condominium conversion or as an apartment complex we find that the highest_and_best_use of the grande at mirasol property was as a condominium conversion before beekman sold the property to dynamo beekman was actively pursuing a condominium conversion beekman sent the state of florida bureau of condominiums a notice of their intent to convert in date beekman and the previous land owner entered into an agreement by which dynamo could convert the property to a condominium if it paid base compensation of dollar_figure and bonus compensation if the gross sale proceeds exceeded approximately dollar_figure million after dynamo purchased the property dynamo continued to pursue a condominium conversion dynamo sent letters to the tenants informing them of the conversion dynamo subsequently received approval from the bureau of condominiums to convert nothing in the record suggests that dynamo and beekman were precluded from converting the apartments mr slade considered condominium conversion but erroneously determined that it was restricted he had not seen the agreement between beekman and the previous owner allowing dynamo to convert the property to condominiums if dynamo paid compensation at trial he agreed that if there were no restrictions he would have used properties that were converted to condominiums in his comparables analysis because we find that the highest_and_best_use of the grande at mirasol property was as a condominium conversion we adopt dr friedman’s valuation however dr friedman did not account for the dollar_figure that dynamo would pay to the previous property owner to convert accordingly the fair_market_value of the property was dollar_figure or dr friedman’s value of dollar_figure less the dollar_figure that would have been required to be paid to convert the property beekman transferred the grande at mirasol property to dynamo for dollar_figure below fair_market_value because the amount of the transfer reflected in the amendment to answer was greater than that determined in the notice_of_deficiency the commissioner bears the burden with respect to the increase the commissioner has met his burden to the extent described above c the mainstreet properties the mainstreet properties are a group of properties that beekman transferred to dynamo for dollar_figure the mainstreet commercial property the mainstreet commercial property consists of two lots a and c and a tract r lot a lot c and tract r were acres dollar_figure acres and acres respectively the commissioner called dr diskin to value the mainstreet commercial property retrospectively he determined the highest_and_best_use of lot a lot c and tract r was as commercial offices retail and a right of way respectively he concluded that the fair_market_value of the mainstreet commercial property was dollar_figure on brief petitioners did not contest this value we find no reason to question dr diskin’s credibility on this valuation we find that the fair_market_value for the mainstreet commercial property is dollar_figure the mainstreet office building the mainstreet office building property which consists of dollar_figure acres of land that was developed as an office building and a 85-acre drainage easement sold on date petitioners called mr slade to value the mainstreet office building property retrospectively mr slade determined that its highest_and_best_use was to remain an office building and he valued it at dollar_figure the commissioner did not call an expert we find that the fair_market_value of the mainstreet office building property was dollar_figure mr slade’s testimony is unrebutted and we find no reason to question his credibility on this valuation the mainstreet vacant property the mainstreet vacant property consists of dollar_figure vacant acres that beekman sold to dynamo on date the commissioner called dr diskin to value the mainstreet vacant property dr diskin prepared a retrospective appraisal he determined that its highest_and_best_use was as a park or public facility or for donation to the city using the sales comparison method dr diskin determined that the fair_market_value of the mainstreet vacant property was dollar_figure petitioners did not submit rebuttal evidence we find that the fair_market_value of the mainstreet vacant property was dollar_figure dr diskin’s testimony was unrebutted and we find no reason to question its credibility on this valuation the g o team property the g o team property consists of lots on dollar_figure acres a 98-acre parcel of land that is encumbered by a lake and a 40-acre easement the easement and four of the lots were industrial property during the years in issue the remaining portion consisted of lots and the parcel that included the lake a the industrial portion beekman transferred the industrial portion to dynamo on date it consists of four vacant lots totaling dollar_figure acres and a 40-acre easement both parties’ experts valued the industrial portion retrospectively both experts determined the highest_and_best_use was industrial the principal differences between the parties’ expert valuations are the price per square foot and the method used to value the property the commissioner’s expert dr diskin relied on comparable properties which had prices per square foot that ranged from dollar_figure to dollar_figure he determined that the industrial portion’s price per square foot was dollar_figure and the total fair_market_value was dollar_figure similarly petitioners’ expert mr slade relied on comparable properties however his comparable properties ranged in price from dollar_figure to dollar_figure per square foot he found other higher priced properties that he excluded because he determined that their road access was superior he determined that the industrial portion’s price per square foot was between dollar_figure and dollar_figure the lowest of all the comparable properties he then discounted the price per square foot by for sales commissions general administrative costs developer’s profit real_estate_taxes and miscellaneous expenses and arrived at a fair_market_value of dollar_figure we find that the fair_market_value of the industrial portion was dollar_figure mr slade’s valuation is unreasonably low he chose the lower end of the comparable properties and then discounted that value using a discounted sales approach dr diskin’s valuation was reasonable accordingly we adopt his valuation b the remaining portion beekman sold the remaining portion to dynamo on date the remaining portion consisted of industrial lots and a 98-acre parcel encumbered by a lake the lake left only acres of the 98-acre lot available to be developed both parties’ experts retrospectively valued the remaining portion the principal difference between the experts’ values was whether the highest_and_best_use of this land should be industrial based on current zoning or residential based on a future land use change the commissioner’s expert dr diskin determined that the highest_and_best_use of the property was residential he clustered dwellings on the land relying on an ordinance amending the future land use map using his sales comparison approach he determined that the fair_market_value was dollar_figure petitioners’ expert mr slade determined that the remaining portion was industrial and that the total value of the remaining portion was dollar_figure we agree with dr diskin that the highest_and_best_use was residential in determining highest_and_best_use we must examine the suitability of the property’s current use under existing zoning and market conditions together with any realistic alternative usesdollar_figure a potential highest_and_best_use for property can be considered even though zoning laws prohibit the potential use on the date of the contributiondollar_figure however the projected highest_and_best_use cannot be remote speculative or conjecturaldollar_figure the fair_market_value of the property must be adjusted for any restriction on its marketabilitydollar_figure the city council of port st lucie passed ordinance amending the future land use map from industrial 69hilborn v commissioner t c pincite crowley v commissioner tcmemo_1990_636 60_tcm_1447 aff’d 962_f2d_1077 1st cir 70292_us_246 crowley v commissioner t c m cch pincite 71olson u s pincite 7233_tc_223 aff’d 283_f2d_945 2d cir see also olson u s pincite to low-density residential real_estate buyers often purchase property because of its anticipated future_benefits which can differ from its present usedollar_figure mr slade did not address or make any adjustments for the change in land use in his valuation accordingly we do not find his report credible on this point dr diskin on the other hand determined that between residential and industrial residential was the highest_and_best_use we find that the highest_and_best_use was residential it was reasonably probable that the land would be developed into residential properties which would increase its value however we find dr diskin’s valuation flawed the lake on the property reduces the area that can be developed and as a result the overall value of the property dr diskin did not adjust the valuation to account for the lake in the middle of the 98-acre parcel accordingly we do not find his approach reasonable while it is reasonable to conclude that density could be increased on the land that could be developed dr diskin did not address the extent to which density could be increased or the effect of increased density on the value of residential property we reduce his valuation by to account for the increased density resulting from the undevelopable portion of the land and find the value to be dollar_figure 7398_tc_554 conclusion on the mainstreet properties in conclusion beekman sold the mainstreet properties to dynamo for dollar_figure the fair market values of the mainstreet commercial office building vacant industrial and remaining properties were dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively and in total dollar_figure accordingly beekman transferred the mainstreet properties to dynamo for dollar_figure less than their total fair_market_value because the amount of the transfer reflected in the amendment to answer was greater than that included in the notice_of_deficiency the commissioner bears the burden with respect to the increase the commissioner has met his burden to the extent described above d the verano property the verano property was big_number acres of real_property planned for development into big_number residential units on date beekman sold the property to dynamo for dollar_figure both parties’ experts valued the verano property retrospectively the principal difference between the valuations is the amount of weight given to the centex property the commissioner’s expert dr friedman determined that the highest_and_best_use of the property was as a master-planned community and that the fair_market_value of the verano property was dollar_figure million petitioners’ expert mr slade determined that the highest_and_best_use of the property was as a mixed-use development with a fair_market_value of dollar_figure million a dollar_figure million discrepancy resulted we find that dr friedman’s approach was reasonable and mr slade’s was not both dr friedman and mr slade found the centex property to be comparable to the verano property petitioners and their expert mr slade argue that the centex property had better road access than the verano property and that the proper valuation should reflect that we disagree on the basis of all the evidence presented including the development plan we conclude that the verano property would have road access similar to that of the centex property accordingly we adopt dr friedman’s valuation we find dr friedman’s approach to be reasonable and find that the fair_market_value of the verano property was dollar_figure million accordingly beekman transferred the verano property to dynamo at dollar_figure below fair_market_value e other transfer sec_1 tousa kolter llc in date beekman made a dollar_figure partnership contribution to tousa kolter llc and received a interest in it beekman’s contribution was subsequently reduced by dollar_figure million in tousa kolter llc purchased the monterra property beekman transferred its tousa kolter llc interest to dynamo in early for dollar_figure by increasing the outstanding balance due from dynamo the commissioner alleges that the fair_market_value of the partnership_interest is either dollar_figure or some higher value based on the value of the property that tousa kolter llc purchased because the valuation of the share of tousa kolter llc was not addressed in the notice_of_deficiency the commissioner bears the burden_of_proof on this issuedollar_figure the commissioner did not present any evidence of the fair_market_value of the property and petitioners explained that the capital_contribution was subsequently reduced by dollar_figure million accordingly we find that the commissioner failed to meet his burden to show that beekman transferred the tousa kolter llc interest to dynamo at less than fair_market_value 74see wayne bolt nut co v commissioner t c pincite the dynamo fund during the first half of beekman transferred the assets in the dynamo fund to dynamo for dollar_figure payment for the dynamo fund was recorded as an increase to the outstanding balance due from dynamo the parties agree that the value of the dynamo fund was dollar_figure on date accordingly beekman transferred the dynamo fund to dynamo for dollar_figure less than fair_market_value other transfers beekman transferred various other properties to dynamo during the years in issue these include the jag of palm beach property the bear’s club property the grande sarasotan property and the heathrow oaks property the commissioner bears the burden_of_proof as to each of these items because none was raised in the notice of deficiencydollar_figure the commissioner has not presented any evidence that these properties were transferred at less than fair_market_value accordingly we find that the amounts reported on the general ledgers were the fair market values of the properties 75see wayne bolt nut co v commissioner t c pincite f conclusion we find that beekman transferred properties to dynamo for less than fair_market_value beekman transferred the domani property the grande at mirasol property the mainstreet properties the verano property and the dynamo fund to dynamo for dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively less than the fair market values accordingly beekman transferred dollar_figure of additional value to dynamo we must determine whether this amount was a constructive distribution iv constructive distribution it is well settled that a transfer of property from one entity to another for less than adequate_consideration may constitute a constructive distribution to an individual who has ownership interests in both entitiesdollar_figure a bargain sale including a bargain sale based on competing property valuations between related parties however does not automatically result in a constructive distributiondollar_figure 76stinnett’s pontiac serv inc v commissioner f 2d pincite cox enters inc subs v commissioner tcmemo_2009_134 97_tcm_1767 77davis v commissioner tcmemo_1995_283 69_tcm_3004 see also 497_f2d_862 3d cir aff’g in part rev’g in part tcmemo_1972_238 cox enters inc subs v commissioner t c m cch pincite courts have outlined a two-prong analysis to determine whether a transfer resulted in a constructive distribution the first prong the objective test asks whether the transfer caused funds or other_property to leave the control of the transferor_corporation and whether it allow ed the stockholder to exercise control_over such funds or property either directly or indirectly through some instrumentality other than the transferor_corporation the second prong the subjective test a crucial inquiry in the constructive distribution determination asks whether the transfer occurred primarily for the common shareholder’s personal benefit rather than for a valid business purposedollar_figure both prongs must be satisfied for a court to find a constructive distributiondollar_figure a objective prong because the common shareholder does not directly receive funds or property in a transfer between entities such a transfer is a distribution if the transferred funds leave the control of the transferring entity and the owner 78see stinnett’s pontiac serv inc v commissioner f 2d pincite quoting 472_f2d_449 5th cir aff’g in part rev’g in part tcmemo_1971_145 79wilkof v commissioner tcmemo_1978_496 t c m cch aff’d 636_f2d_1139 6th cir 80sammons v commissioner f 2d pincite cox enters inc subs v commissioner t c m cch pincite controls the funds directly or indirectly through some means other than the transferordollar_figure considering the control mrs moog exercised over beekman and dynamo through ontario ltd we conclude the first prong of the two- prong analysis for a constructive distribution is satisfied mrs moog had the ability to divert the value of the property to her chosen recipient because of her control b subjective prong the subjective prong asks the court to consider whether the transfer occurred primarily for the benefit of the common shareholder rather than for a valid business_purpose in applying the subjective prong the search for this underlying purpose usually involves the objective criterion of actual primary economic benefit to the shareholders as well dollar_figure the court_of_appeals for the eleventh circuit states the point as follows in determining whether the primary purpose test has been met we must determine not only whether a subjective intent 81sammons v commissioner f 2d pincite davis v commissioner t c m cch pincite 82cox enters inc subs v commissioner t c m cch pincite quoting 533_f2d_152 5th cir see also stinnett’s pontiac serv inc v commissioner f 2d pincite to primarily benefit the shareholders exists but also whether an actual primary economic benefit exists for the shareholders if the primary purpose is a valid business_purpose then the primary purpose is not for the shareholder benefitdollar_figure the benefit to the shareholder must be direct a term broadly construeddollar_figure for example courts have found a benefit to the shareholder when the primary purpose of the transfer is to or for the benefit of a member of the shareholder’s familydollar_figure 83stinnett’s pontiac serv inc v commissioner f 2d pincite 84stinnett’s pontiac serv inc v commissioner f 2d pincite sammons v commissioner f 2d pincite cox enters inc subs v commissioner t c m cch pincite 8574_tc_60 wilkof v commissioner t c m cch pincite see also 52_tc_888 w hatever personal benefit if any rushing the sole shareholder of the transferor and transferee corporations received was derivative in nature since no direct benefit was received we cannot properly hold he received a constructive_dividend aff’d 441_f2d_593 5th cir 86460_f2d_412 5th cir 199_f2d_273 8th cir aff’g a memorandum opinion of this court 53_tc_459 explaining that it is firmly established that when a corporation makes a transfer of property for no or insufficient consideration to a member of the stockholder’s family whether it be directly or in trust the stockholder has enjoyed the use of such property no less than if it had been distributed to him directly petitioners raise various arguments that beekman had a business_purpose for making the bargain sales petitioners argue that dynamo and beekman had a specific business_purpose namely that the transfers enabled dynamo to revitalize the west palm beach neighborhood surrounding beekman’s projects and bolster the kolter brand name which would financially benefit beekman in making this argument petitioners rely on rushing v commissionerdollar_figure in rushing a sole shareholder of two corporations was held not to have received a constructive distribution when one corporation advanced funds to a sister corporationdollar_figure we held that any benefit to the sole shareholder was indirect because the advancing corporation a corporation developing a shopping center had a significant interest in the success of the sister corporation a corporation developing a nearby residential developmentdollar_figure we explained that the success of the development of home sites on the land adjacent to the shopping center would inevitably lead to increased use of the shopping centerdollar_figure petitioners’ reliance is misplaced there is no reason that beekman was required to transfer the 8752_tc_888 88rushing v commissioner t c pincite 89rushing v commissioner t c pincite 90rushing v commissioner t c pincite properties to dynamo to revitalize west palm beach beekman or one of beekman’s subsidairies could have undertaken the project this same logic applies to strengthening the kolter brand name beekman could have just as easily developed the properties using the kolter brand name petitioners argue that beekman’s directors held fiduciary duties to the beneficiaries of the canadian trusts not to deplete the value of beekman and therefore beekman could not have underpriced the property petitioners rely on cox enters where we held that there was not a constructive distribution in cox enters one corporation contributed an asset to a partnership in exchange for a partnership_interest the value of which was lower than the value of the contributed asset effectively transferring value to the other partnersdollar_figure the other partners were two family partnershipsdollar_figure we found that the primary purpose was not to benefit the other partners in part because the corporation’s majority shareholder and directors would have had to breach their fiduciary dutiesdollar_figure this would have 91cox enters inc subs v commissioner 97_tcm_1767 92cox enters inc subs v commissioner t c m cch pincite- 93cox enters inc subs v commissioner t c m cch pincite 94cox enters inc subs v commissioner t c m cch pincite- resulted in a financial detriment to the minority shareholders who did not own any interest in the partnershipsdollar_figure petitioners ask that we follow this line of reasoning because the beneficiaries of the canadian trusts are not identical to the beneficiaries of the u s trusts petitioners argue that the directors officers and controlling shareholders did not breach any duties to the canadian trusts by depleting value from beekman we disagree cox enters involved a single instance of undervaluing an interest in these cases we have found five bargain sales exceeding dollar_figure million unlike cox enters we find that the directors officers and controlling shareholder acted for the benefit of the u s trusts and to the detriment of the canadian trusts we agree with the commissioner that the primary intent and benefit was for dynamo and by extension the dynasty trusts the bargain sale properties went to dynamo enhancing its value the properties put more equity in dynamo and freed up its liquid_assets this allowed dynamo to develop its florida business and increased dynamo’s borrowing capability all of this directly benefited the continued 95cox enters inc subs v commissioner t c m cch pincite dynasty trusts for the benefit of christine and mr julien and furthered mrs moog’s estate_planning accordingly beekman made deemed distributions v withholding taxes having found that constructive distributions occurred we must determine their tax treatment and beekman’s withholding obligation a distributions in general a distribution_of_property made by a corporation to a shareholder with respect to its stock is treated as prescribed by sec_301dollar_figure sec_301 provides that a shareholder must include in gross_income the portion of the distribution that is a dividenddollar_figure sec_316 defines a dividend as any distribution_of_property made by a corporation to its shareholders out of its accumulated_earnings_and_profits or out of its earnings_and_profits for the taxable_year if all or part of the distribution is not a dividend that amount is a nontaxable return_of_capital to the extent of the shareholder’s adjusted_basis in the sec_301 sec_316 140_tc_420 see also sec_61 stock and any amount in excess of the shareholder’s adjusted_basis is taxable capital gaindollar_figure beekman’s estimated earnings_and_profits were dollar_figure and dollar_figure on date and respectively accordingly beekman’s constructive distribution of dollar_figure exceeded its earnings_and_profits petitioners allege that the earnings_and_profits should be increased by the amount of the underpricing on the bargain sale properties under sec_312 the commissioner concedes that beekman is entitled to an increase in earnings_and_profits in the amount of the deemed distributionsdollar_figure sec_301 and 99we expect the parties to resolve the extent to which any distribution may or may not have been made out of earnings_and_profits through computations under rule b withholding taxes distributions under sec_301 are potentially subject_to_withholding taxes and the parties dispute whether beekman had a duty to withhold in general sec_1442 imposes a withholding_tax on dividends to foreign_corporations and sec_1445 imposes a withholding_tax on distributions not out of earnings_and_profits where the distributing_corporation is a u s real_property holding corporation withholding taxes on dividends sec_1442 generally requires the payor of a u s source dividend to a foreign_corporation to deduct and withhold tax at the source sec_881 imposes a tax of on various kinds of income including dividends received from u s sources by a foreign_corporation to the extent the dividend received is not effectively connected with the conduct_of_a_trade_or_business within the united_states generally a dividend is from a u s source when the dividend is from a 100a foreign_corporation is a corporation that is not a domestic_corporation and a domestic_corporation is a corporation created or organized in the united_states or under the law of the united_states or of any state sec_7701 and canada square is a foreign_corporation because it was organized under the laws of canada and beekman is domestic_corporation because it was organized under the laws of delaware domestic_corporation the rate_of_tax imposed on the dividend is reduced to by the u s -canada tax_treaty for shareholders owning at least of the source company beekman a domestic_corporation made a constructive distribution to canada square a foreign_corporation beekman was required to withhold a tax equal to of the portion of the distribution that was a dividend that is that portion that was from beekman’s earnings and profit beekman failed to withhold a tax equal to of the dividends distributed to canada square in and accordingly we find that beekman was required to withhold on the portion of the distribution that was a dividend petitioners ask us to limit our finding to distributions from beekman vista’s earnings_and_profits constructive distributions often arise in situations where the corporation has excess earnings_and_profits and is trying to move profits out of the sec_861 102third protocol amending the convention with respect to taxes on income and capital art can -u s date t i a s no as in effect from corporation however we have explained that corporations can make constructive distributions in excess of earnings and profit petitioners also ask that if we find a constructive distribution we should reduce the amount of the distribution by the amount beekman owes to canada square as repayment of a loan taxpayers are bound by the form of their transactions and may not argue that the substance of their transaction differs from the consequences beekman did not reduce the amount due to canada square for the amount of the constructive distribution accordingly beekman cannot recast the transaction as a loan repayment withholding taxes on nondividend distributions a domestic_corporation that is or has been a u s real_property holding corporation at any time during the five-year period ending on the date of 103see eg welle v commissioner t c pincite davis v commissioner 69_tcm_3004 104le v commissioner tcmemo_2003_219 86_tcm_116 under sec_301 a constructive distribution is taxable to the shareholder as a dividend only to the extent of the corporation’s earnings_and_profits any excess is a nontaxable return_of_capital to the extent of the shareholder’s basis in the corporation any remaining amount is taxable to the shareholder as capital_gain 105ellinger f 3d pincite 99_tc_561 distribution must withhold taxes when it distributes property to a foreign_person in a nondividend sec_301 distribution subject_to exceptions not applicable here sec_1445 requires payors to withhold percent of the amount_realized by the foreign shareholder the commissioner argues that beekman should be required to withhold under sec_1442 on the dividends out of earnings_and_profits and under sec_1445 on the distributions in excess of earnings_and_profits this is consistent with the treatment under the applicable regulations sec_897 defines the term united_states_real_property_holding_corporation as follows the term united_states_real_property_holding_corporation means any corporation if a the fair_market_value of its united_states real_property interests equals or exceed sec_50 percent of b the fair_market_value of -- i its united_states real_property interests ii its interests_in_real_property located outside the united_states plus iii any other of its assets which are used or held for use in a trade_or_business sec_897 defines united_states_real_property_interest to mean i an interest_in_real_property located in the united_states or the virgin islands and ii any interest other than an interest solely as a creditor in any domestic_corporation unless the taxpayer establishes at such time and in such manner as the secretary by regulation sec_106sec e sec_1445 sec_1_1445-5 income_tax regs sec_1_1441-3 income_tax regs prescribes that such corporation was at no time a united_states_real_property_holding_corporation during the shorter of -- i the period after date during which the taxpayer held such interest or ii the 5-year period ending on the date of the disposition of such interest sec_1_897-2 income_tax regs provides an alternative test where the fair_market_value of the corporation’s u s real_property interest is presumed to be less than of the fair_market_value of the aggregate of its assets if on an applicable determination_date the total book_value of the u s real_property interests held by the corporation i sec_25 percent or less of the book_value of the aggregate of the corporation’s assets the commissioner determined that beekman was a u s real_property holding corporation during the years in issue petitioners rely on the alternative test to show that beekman was not a u s real_property holding corporation however the alternative test is only a presumption the commissioner determined that beekman was a u s real_property holding corporation under sec_897 indeed the record indicates that most of beekman’s assets were u s real_property interests the principal difference between the commissioner’s calculation and the calculation put forth by beekman and dynamo’s expert is the inclusion of property_held_for_sale in the ordinary course of business in total u s sec_1_897-2 income_tax regs real_property holdings beekman and dynamo have not offered any compelling argument as to why the property should be excluded from the calculation and did not meet their burden to establish that beekman was not a u s real_property holding corporation beekman’s distributions in excess of earnings_and_profits are subject_to withholding vi dynamo determinations the tax treatment of any partnership_item must be determined at the partnership level partnership items include any item required to be taken into account for the partnership’s taxable_year under subtitle a to the extent that the secretary has determined by regulation that the item is more appropriately determined at the partnership level this includes items of income gain loss deduction or credit as well as contributions and distributions the fpaa made several adjustments however the parties have resolved most of them we address the remaining issues sec_6221 sec_6231 sec_301_6231_a_3_-1 proced admin regs sec_301_6231_a_3_-1 proced admin regs a dynamo gp the commissioner argues that dynamo’s general_partner dynamo gp received a deemed_distribution of cash in a restructuring transaction in an amount equal to the assumption of the advances to the christine dynasty_trust and the julien dynasty_trust dynamo reported all of the advances between beekman and dynamo as recourse debts to dynamo gp in and petitioners allege that the advances were nonrecourse we disagree ordinarily a taxpayer is bound by the form of a transaction and cannot argue that the substance justifies a different result petitioners’ expert mr moses determined that the advances were nonrecourse from a tax_return preparer’s perspective but mr moses acknowledged that the returns reported otherwise and that he recharacterized the debt as nonrecourse petitioners have offered no other evidence as to why dynamo should be relieved of its tax reporting position we find no basis for the advances to be recharacterized as nonrecourse accordingly we find the advances were recourse_liabilities to dynamo gp 113778_f2d_769 11th cir 118_tc_32 aff’d 108_fedappx_683 2d cir howell v commissioner tcmemo_2012_303 at sec_752 provides that a ny decrease in a partner’s share of the liabilities of a partnership shall be considered as a distribution of money to the partner by the partnership dynamo gp’s share of the advances was reduced by the amount of the assumption by the christine dynasty_trust dollar_figure million and the julien dynasty_trust dollar_figure million accordingly dynamo gp is deemed to have received a cash distribution of dollar_figure million petitioners raise the taxability of the distribution to dynamo gp in their brief however in partnership proceedings such as this one a partner’s tax on a distribution is beyond the scope of the proceedings b christine dynasty_trust and julien dynasty_trust partnership items include not only items of immediate tax effect such as items of income loss deduction or credit but also determinations as to items such as contributions and distributions we turn now to various partnership items of dynamo sec_1_752-1 income_tax regs 115sec a sec_301_6231_a_3_-1 proced admin regs contribution of the bargain sale we previously found that beekman made a deemed_distribution to mrs moog accordingly mrs moog is deemed to have made a gift to the u s trusts in a split where she gave of the value to the christine dynasty_trust and to the julien dynasty_trust the dynasty trusts are deemed to have made a sec_721 contribution to dynamo restructuring transaction a deemed contribution the christine dynasty_trust and the julien dynasty_trust made contributions in the amounts of the debt assumptions from the restructuring transaction the dynasty trusts assumed dynamo’s liabilities sec_752 provides that a ny increase in a partner’s share of the liabilities of a partnership or any increase in a partner’s individual liabilities by reason of the assumption by such partner of partnership liabilities shall be considered as a contribution of money by such partner to the partnership the christine dynasty_trust and the julien dynasty_trust are deemed to have contributed money to the partnership in the amounts of the debt assumptions that is the christine dynasty_trust and the 117see stinnett’s pontiac serv inc v commissioner f 2d pincite 118see epstein v commissioner t c pincite julien dynasty_trust are deemed to have contributed dollar_figure million and dollar_figure million respectively b distribution dynamo also distributed assets to the dynasty trusts in amounts nearly equal to their debt assumptions dynamo distributed dollar_figure million of marketable_securities to the christine dynasty_trust and dollar_figure which consisted of dollar_figure million cash and a dollar_figure note to the julien dynasty_trust sec_731 provides that n o gain_or_loss shall be recognized to a partnership on a distribution to a partner of property including money sec_731 provides that for purposes of sec_731 the term money includes marketable_securities which are to be taken into account at fair_market_value as of the distribution date sec_731 defines the term marketable_securities to mean financial instruments which are as of the date of the distribution actively_traded within the meaning of sec_1092 sec_731 and c includes in the meaning of the term marketable_securities any financial_instrument which pursuant to its terms or any other arrangement is readily convertible into or exchangeable for money or 119countryside ltd p’ship v commissioner tcmemo_2008_3 95_tcm_1006 marketable_securities which includes stocks and other equity interests evidences of indebtedness options forward or futures contracts notional_principal_contracts and derivatives accordingly dynamo distributed marketable_securities to the christine dynasty_trust and cash and marketable_securities to the julien dynasty_trust c interest_expenses because we found that the advances were bona_fide debt dynamo can deduct interest on that debt d cancellation_of_indebtedness_income the fpaa asserts as an alternative position that if amounts transferred from beekman to dynamo were bona_fide debt then dynamo must recognize discharge_of_indebtedness income at the end of the commissioner did not address this issue at trial or on brief other than to note that he did not advance the argument beyond challenging whether petitioners met their burden we have already found that dynamo repaid beekman by direct repayment by satisfying beekman’s obligations to third parties and by providing management services to beekman petitioners met their burden 120see sec_163 e additional adjustments in the fpaa petitioners have stated that they and the commissioner have resolved several adjustments to the extent not agreed by the parties or conceded by a party petitioners have not presented any evidence with respect to the remaining adjustments accordingly petitioners have not met their burden regarding the remaining adjustments vii additions to tax and penalties the commissioner determined sec_6651 additions to tax and sec_6656 penalties against beekman the commissioner asserted a sec_6662 accuracy-related_penalty against dynamo we have separately concluded that the commissioner does not bear the burden of production as to the penalties at issue in these proceedings he does however bear the burden_of_proof as to those penalties raised in his amendment to answer for beekman a sec_6651 and sec_6656 sec_6651 imposes an addition_to_tax for failing to timely file a tax_return unless the taxpayer shows that the failure is due to reasonable_cause and not 121see rule a welch v helvering u s pincite 122dynamo holdings ltd p’ship v commissioner t c ___ date due to willful neglect this penalty applies to returns required under sec_6011 among others form sec_1042 fall under sec_6011 sec_6656 imposes a penalty for failure to deposit any amount of tax with a government depository for failures to deposit for more than days the penalty is equal to of the underpayment as is true with respect to the addition_to_tax under sec_6651 a taxpayer may avoid a penalty under sec_6656 if the taxpayer’s failure to make a required_deposit was due to reasonable_cause and not willful neglect except as to the portion of the sec_6656 penalty raised in the commissioner’s amendment to answer beekman is liable for additions to tax for failure to timely file and failure to timely deposit beekman’s form sec_1042 for the years ending date and were due on date and respectively likewise beekman’s payments of withholding_tax for the years ended date and were due by date and 123see sec_1_6011-1 sec_1_1461-1 income_tax regs sec_6656 125rogers v commissioner tcmemo_2016_152 at explaining that because sec_6651 and sec_6656 are identical they may be addressed together 126see sec_1_1461-1 income_tax regs respectively beekman did not file form sec_1042 or pay deposits before the commissioner bears the burden_of_proof with respect to any increase in penalties and additions to tax asserted in the amendment to answer above those determined in the notice_of_deficiency in the case of penalties under sec_6656 that burden includes written supervisory approval of penalties under sec_6751 the commissioner has not offered any evidence of supervisory approval for the increase in penalties under sec_6656 asserted in the amendment to answer the commissioner has not met his burden in contrast additions to tax under sec_6651 are not subject_to supervisory approval under sec_6751 consequently the lack of supervisory approval is not fatal for the amounts of the increases in additions to tax under sec_6651 the record shows that beekman did not timely file its returns for and and has not shown that the failure_to_file was due to reasonable_cause and not willful neglect consequently it is liable for the additions to tax asserted in the amendment to answer sec_6151 128rader v commissioner t c pincite sec_6751 petitioners argue that the commissioner is precluded from asserting a sec_6651 addition_to_tax or a sec_6656 penalty because the revenue_agent initially found reasonable_cause during beekman’s examination petitioners rely on estate of charania v shulman in estate of charania the court_of_appeals for the first circuit reversed our decision and held that the addition_to_tax should have been abated because a portion of the penalty was abated during examination we do not believe that the holding in estate of charania is analogous to beekman’s situation in these cases there was no abatement moreover we follow our jurisprudence when the court to which an appeal would lie has not ruled on the issue petitioners’ argument that the commissioner cannot change his mind about whether to determine additions to tax or penalties in a notice_of_deficiency has no merit petitioners have neither established nor attempted to establish the existence of a closing_agreement or any other binding agreement that would preclude the commissioner from subsequently determining an addition_to_tax or a 130608_f3d_67 1st cir aff’g in part rev’g in part 133_tc_122 131estate of charania v shulman f 3d pincite 13299_tc_490 penalty we will not normally look behind the notice_of_deficiency to examine the administrative actions motives or policies of the commissioner thus we will not look into the revenue agent’s alleged initial decision to not impose any sec_6651 addition_to_tax or sec_6656 penalty accordingly we conclude that respondent did not exceed his statutory authority when determining additions to tax under sec_6651 and penalties under sec_6656 the parties dispute whether dynamo and beekman had reasonable_cause for failure to timely file and timely deposit because they did not believe any distribution had occurred the record is clear however that they did not have reasonable_cause for their failure to timely file or deposit reasonable_cause requires that a taxpayer exercise ordinary business care and prudence we have previously explained that a good-faith belief that one is not required to file a return does not constitute reasonable_cause under sec_6651 unless bolstered by advice from competent tax counsel who has been informed of all the 13394_tc_306 13462_tc_324 135469_us_241 sec_301_6651-1 proced admin regs relevant facts the management team did not request advice on how to report the property transfers we do not find that dynamo and beekman acted with reasonable_cause and not willful neglect b sec_6662 the tax treatment of any partnership_item including the applicability of any penalty and addition_to_tax that relates to an adjustment to a partnership_item is determined at the partnership level we have jurisdiction to determine the applicability of an accuracy-related_penalty that relates to an adjustment to a partnership_item sec_6662 and b and imposes a accuracy-related_penalty on any portion of an underpayment_of_tax that is due to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the code and the term disregard includes any careless reckless or intentional disregard a return position that has a reasonable basis is not 136vinz v commissioner tcmemo_1984_84 47_tcm_1128 sec_6226 united_states v woods 571_us_31 sec_6662 116_tc_438 attributable to negligence disregard of rules or regulations is careless if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule_or_regulation an understatement of income_tax is substantial when it exceeds the greater of of the tax required to be shown on the return or dollar_figure or in the case of a corporation other than an s_corporation if the amount exceeds the lesser_of of the tax required to be shown on the return or if greater dollar_figure or dollar_figure1 dynamo holdings was negligent in failing to report the deemed_distribution to dynamo gp we have found the advances were recourse as to dynamo gp and dynamo gp received a deemed_distribution as a result of the assumption of the liabilities by the dynasty trusts dynamo did not report the distribution on its return accordingly dynamo was careless when it did not ascertain the correctness of excluding the distribution from its return with respect to the remaining adjustments dynamo holdings failed to introduce evidence that it had a reasonable basis for its reporting of the items that were agreed during dynamo’s examination petitioners allege that adjustment sec_139sec b income_tax regs sec_1_6662-3 income_tax regs sec_6662 and b resulting from the parties’ agreements were isolated computational adjustments they allege that because the amount of one of the adjustments was only of the overall deficiency we should find it was a computational error the size of the adjustment alone is not evidence of a reasonable basis thus the negligence_penalty is sustained as to those items as well the substantial_understatement_penalty may be applicable if an understatement_of_tax that is attributable to an adjustment to a partnership_item meets the threshold accordingly we provisionally sustain the commissioner’s sec_6662 accuracy-related_penalty as to dynamo holdings on any portion of an underpayment_of_tax that is due to a substantial_understatement_of_income_tax the accuracy-related_penalty will not apply to any portion of an underpayment where the taxpayers establish that they had reasonable_cause and acted in good_faith sec_6221 visionmonitor software llc v commissioner tcmemo_2014_182 at sec_6664 higbee v commissioner t c pincite 115_tc_43 aff’d 299_f3d_221 3d cir petitioners allege that dynamo holdings had reasonable_cause and acted in good_faith but the defense centers on mr julien’s knowledge in particular petitioners note that mr julien was undeniably canadian-born and raised and would be expected to be unfamiliar with esoteric irs constructs this defense is personal to mr julien and a reasonable_cause defense that is personal to a partner may not be asserted in a partnership-level proceeding petitioners a u s_corporation and the tax_matters_partner of a u s partnership were not canadian born and raised and petitioners’ argument does not establish reasonable_cause at the entity level for either dynamo holdings or beekman vista viii other arguments petitioners raise additional arguments that do not survive scrutiny petitioners argue that dynamo holdings’ and beekman vista’s due process rights were violated because they were denied an administrative appeal however we have previously held that the commissioner’s decision to not provide an appeals_office conference does not invalidate a notice_of_deficiency or an fpaa 144reri holdings i llc v commissioner t c __ __ slip op pincite date sec_301_6221-1 proced admin regs 14565_tc_68 aff’d without published opinion 559_f2d_1207 3d cir petitioners also allege that the notice_of_deficiency and the fpaa are invalid under the administrative_procedure_act because the commissioner did not provide a reasoned explanation for his actions the administrative_procedure_act does not apply to these notices ix conclusion beekman and dynamo entered into a bona_fide debtor-creditor relationship however beekman transferred property to dynamo at less than fair_market_value because of that underpricing beekman made a constructive distribution to mrs moog beekman was required to but failed to withhold taxes mrs moog is deemed to have given the constructive distribution to the dynasty trusts and the dynasty trusts are deemed to have contributed that amount to dynamo dynamo engaged in a restructuring transaction in which each partner received a distribution dynamo gp’s distribution occurred because the dynasty trusts assumed its liability and the dynasty trusts’ contribution occurred because they assumed the liability beekman vista is liable for additions to tax for failure to timely file and except as to the amount asserted in the commissioner’s amendment to answer beekman vista is also liable for penalties for failure to 146557_f3d_1262 11th cir aff’g tcmemo_2005_201 130_tc_115 deposit beekman vista did not establish a defense against the additions to tax or penalties the commissioner established an accuracy-related_penalty under sec_6662 for negligence with respect to the portion of each underpayment arising from the distribution from dynamo holdings and dynamo holdings did not establish a defense decisions will be entered under rule