Opinion ID: 3008141
Heading Depth: 2
Heading Rank: 2

Heading: The Tax Court Properly Assessed Accuracy-

Text: Related Penalties. The Internal Revenue Code imposes a twenty-percent penalty on “[a]ny substantial understatement of income tax.” 26 U.S.C. § 6662(b)(2), (a). Even in the event of a substantial understatement, however, the taxpayer may escape the penalty if one or both of two conditions applies. First, a taxpayer does not owe a penalty where the taxpayer can identify “substantial authority” supporting its treatment of an item of income. 26 U.S.C. § 6662(d)(2)(B)(i). Second, to the extent that the taxpayer had reasonable cause for its position and acted in good faith, the penalty does not apply. 26 U.S.C. § 6664(c)(1). The Tax Court assessed penalties against Taxpayers for substantially understating their income. Taxpayers argue that the Tax Court’s decisions in Maxwell and Stevens Brothers furnish substantial authority for their positions that the NTC Joint Venture was a valid partnership and that the parties to the venture agreed in good faith to share profits. They also contend that they relied reasonably and in good faith on the advice of their accountant in reaching those positions. Finally, they assert that their positions are reasonable in light of the complexity of the law governing the validity of partnerships for tax purposes. For the reasons discussed below, we reject Taxpayers’ arguments and affirm the district court’s imposition of accuracy-related penalties.
Substantial Authority for Taxpayers’ Position. “The substantial authority standard” is somewhat less stringent than the “more likely than not standard.” Treas. 30 DJB HOLDING CORP. V. CIR Reg. § 1.6662-4(d)(2). Substantial authority supports the taxpayer’s position if, taking into account all relevant authorities, “the weight of the authorities supporting” the taxpayer’s position is “substantial” when compared to the weight of authorities that are contrary to the taxpayer’s position. § 1.6662-4(d)(3)(i). The weight that a court should assign to an authority “depends on its relevance and persuasiveness, and the type of document providing the authority.” § 1.6662-4(d)(3)(ii). A Tax Court disposition may be relevant authority, but is “not particularly relevant” if it “is materially distinguishable on its facts.” Id. Taxpayers advance two Tax Court opinions as substantial authority for their position that the share of the profits from the NTC project transferred to WB Partners is properly WB Partners’ income. One is Maxwell, in which the court found that a corporation and its majority shareholder formed a valid partnership when the shareholder agreed to guarantee a necessary bond in exchange for a share of the profits. 29 T.C.M. (CCH) at 1362. The second is Stevens Brothers, in which the court held that a corporation properly declared only half the profits from a project as income where it agreed to pay the other half to another corporation in exchange for a capital loan. 24 T.C. at 955–56. Maxwell and Stevens Brothers do not amount to substantial authority because they are materially distinguishable. In each case, the taxpayer reached a bona fide agreement to share the profits from an endeavor in exchange for a financial guaranty or loan. In this case, the joint venture’s decision to cap WB Partners’ share at a rate apparently plucked from thin air shows that the profit-sharing agreement was not bona fide. The absence of a good-faith profit-sharing agreement distinguishes this case from DJB HOLDING CORP. V. CIR 31 Maxwell and Stevens Brothers, and leaves Taxpayers’ position unsupported by substantial authority. See Treas. Reg. § 1.6662-4(d)(3)(ii).
Their Accountant’s Opinion Because the Accountant Was Not Involved in Designing the NTC Joint Venture’s Structure. Reliance on professional advice may establish reasonable cause and good faith. Treas. Reg. § 1.6664-4(b)(1). The Tax Court requires a taxpayer to prove three elements in order to show that reliance on advice was reasonable: “(1) The adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser’s judgment.” Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43, 99 (2000). Once the Commissioner produces evidence showing that an accuracy-related penalty applies, the burden of proving the existence of reasonable cause and good faith falls on the taxpayer. Higbee v. Comm’r, 116 T.C. 438, 449 (2001); cf. Sparkman, 509 F.3d at 1161 (noting that the taxpayer bears the burden of overturning the Commissioner’s imposition of a negligence penalty under 26 U.S.C. § 6662). Taxpayers argued before the Tax Court that they reasonably relied on the advice of their accountant in deciding how to treat the proceeds from the NTC Joint Venture. The Tax Court noted that the accountant had not participated in any way in structuring the joint venture or any of the entities that comprised it, but merely prepared Taxpayers’ tax returns based on information given him. Accordingly, the court found that Taxpayers had not supplied 32 DJB HOLDING CORP. V. CIR the accountant with “all the necessary and accurate information,” and therefore that their reliance on the accountant’s tax returns was not reasonable. Taxpayers argue that the Tax Court clearly erred in failing to specify what necessary information they neglected to provide to the accountant. They assert that the accountant was “fully aware of the NTC Joint Venture and the allocation of income between WCI and WB Partners.” The Tax Court did not clearly err. “The mere fact that a certified public accountant has prepared a tax return does not mean that he or she has opined on any or all of the items reported therein.” Neonatology Assocs., 115 T.C. at 100. Nothing in the record suggests that the accountant knew Barone’s reasons for erecting the NTC Joint Venture, information the accountant would need in order to opine on its validity for tax purposes. See Treas. Reg. § 1.6664- 4(c)(1)(i) (listing the taxpayer’s purpose for a transaction as information the adviser must consider). More importantly, nothing in the record indicates that Taxpayers even asked the accountant for such an opinion. Instead, the record reveals only that the accountant prepared tax returns for the entities involved in the joint venture based on data supplied to him. Taxpayers have not met their burden of showing reasonable reliance on the accountant’s advice. See Treas. Reg. § 1.6664-4(b)(1); Higbee, 116 T.C. at 449. DJB HOLDING CORP. V. CIR 33
of Income Was Due to a Reasonable Misunderstanding of Tax Law Because the Principles Governing Whether a Partnership Is Valid Are Well Settled. A taxpayer may show reasonable cause and good faith where the law governing its position “w[as] not settled” when the taxpayer asserted it. See Patel v. Comm’r, 138 T.C. 395, 417 (2012) (finding that a taxpayer reasonably claimed a deduction where the law governing the deduction’s availability was in an “uncertain state”). Taxpayers argue that their position that the NTC Joint Venture was a valid partnership is reasonable because the law governing it is complex. They have missed the point of Patel. The law may be complex, but it is not unsettled. The Luna factors have been the law for fifty years. See Luna, 42 T.C. at 1067; see also Bergford v. Comm’r, 12 F.3d 166, 168–69 (9th Cir. 1993) (applying the Luna factors). Taxpayers offer no authority for their suggestion that the complexity of the Luna factors alone should excuse their failure to conduct the NTC Joint Venture as a valid partnership. We conclude that the Tax Court did not err in upholding the Commissioner’s assessment of accuracy-related penalties.