Court Opinion

ID: 9556511
Source: CourtListenerOpinion
Date Created: 2023-08-17 16:01:18.466845+00
Date Added: 2024-06-11T08:03:22.568159
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

JAMES TARPEY,                                No. 22-35208

                Plaintiff-Appellant,        D.C. No. 2:17-cv-
                                              00094-BMM
 v.

UNITED STATES OF AMERICA,                      OPINION

                Defendant-Appellee.

         Appeal from the United States District Court
                 for the District of Montana
          Brian M. Morris, District Judge, Presiding

            Argued and Submitted April 12, 2023
                    Seattle, Washington

                    Filed August 17, 2023

      Before: M. Margaret McKeown, Jay S. Bybee, and
              Roopali H. Desai, Circuit Judges.

                Opinion by Judge McKeown
2                         TARPEY V. USA

                          SUMMARY *

                                Tax

   The panel affirmed the district court’s judgment
imposing over $8 million in penalties against taxpayer for
promoting a tax-avoidance scheme that involved charitable
deductions claimed in connection with the donation of
unwanted timeshares.
    Taxpayer formed Project Philanthropy, Inc., d/b/a/
Donate for a Cause (DFC), a nonprofit with tax-exempt
status that facilitated the donation of timeshares by timeshare
owners. Taxpayer also formed Resort Closings, a for-profit
service that handled the real estate closings for timeshares
donated to DFC. Donors paid a donation fee to DFC and
shouldered the timeshare transfer fees. Taxpayer, his sister,
Ron Broyles, and Curt Thor appraised the value of the
unwanted timeshares.
    26 U.S.C. § 6700 imposes a penalty on promoters and
others involved in the organization or sale of tax shelters if
they make false statements or exaggerate valuation, in this
case, in the form of timeshare appraisals. The panel upheld
the district court’s determination on summary judgment that
taxpayer was liable for the appraisals of Broyles and Thor
because, as a matter of law, taxpayer knew or had reason to
know Broyles and Thor were disqualified as appraisers
under the Treasury regulations, and taxpayer forfeited his

*
 This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                      TARPEY V. USA                      3

argument on appeal that he was unaware the appraisals
would be imputed to DFC.
    The panel next affirmed the district court’s
determination on summary judgment that the scope of the
“activity” to be penalized under § 6700(a) encompassed
taxpayer’s entire timeshare donation business and not just
the funds directly coming from the false statement
appraisals.
    Finally, the panel upheld the district court’s judgment
following a bench trial imposing over $8 million in
penalties. The panel held that the district court properly
relied on the Internal Revenue Code’s general definition of
gross income, which includes “all income from whatever
source derived,” 26 U.S.C. § 61(a), and properly included
funds deposited into an escrow account managed by Resort
Closings in calculating the penalties, because taxpayer had
some guarantee that he would be allowed to keep the money
in that account.

                       COUNSEL

Sean T. Morrison (argued), Morrison Law Firm PLLC,
Helena, Montana; Brian K. Gallik, Gallik Bremer & Molloy
PC, Bozeman, Montana; for Plaintiff-Appellant.
Judith A. Hagley (argued) and Jacob E. Christensen,
Attorneys, Tax Division/ Appellate Section; Jesse
Laslovich, United States Attorney; Department of Justice,
Washington, D.C.; for Defendant-Appellee.
4                       TARPEY V. USA

                         OPINION

McKEOWN, Circuit Judge:

     Through Donate for a Cause, James Tarpey pitched an
attractive offer to customers looking to get rid of timeshares:
donate your unwanted property to us, we’ll get it appraised,
and you’ll claim a charitable contribution deduction on your
federal tax return. There was just one hitch. The timeshare
donation business was really more of a bogus tax scheme.
The Internal Revenue Service (“IRS”) assessed penalties
under 26 U.S.C. § 6700 for promoting an abusive tax shelter.
The district court concluded that Tarpey was liable for the
entirety of his timeshare donation scheme and, after a bench
trial, ordered a penalty amount of $8.465 million plus
interest.
    Tarpey challenges a portion of the liability ruling and the
district court’s computation of his gross income for the
penalty amount. Of broader significance, this case also calls
on us to interpret § 6700 to address the scope of the
“activity” for which a person is liable for making a false
statement in furtherance of the tax-avoidance plan. We
affirm.
I. BACKGROUND
    James Tarpey, a lawyer and businessman, formed
Project Philanthropy, Inc. d/b/a/ Donate for a Cause (“DFC”)
around 2006. DFC facilitated the donation of timeshares for
timeshare owners who no longer wanted to pay timeshare
fees or otherwise wanted to dispose of their timeshare
properties. Tarpey promised potential customers that they
could receive generous tax savings from donating their
unwanted timeshares to DFC. Tarpey himself appraised the
                       TARPEY V. USA                      5

value of some of the properties donated to DFC, and other
properties were appraised by his sister, Suzanne Tarpey, and
real property appraisers Ron Broyles and Curt Thor.
    Tarpey formed DFC as a nonprofit and obtained tax-
exempt status from the IRS. He touted this arrangement as
“the only way to get rid of an unwanted timeshare and still
make some money.” He served as the sole voting member.
He also formed a for-profit timeshare closing service called
Resort Closings that handled the real estate closings for
timeshares donated to DFC. DFC and Resort Closings
marketed the generous tax savings that a customer could
gain by donating a timeshare. When a customer decided to
donate an unwanted timeshare, DFC would accept the
timeshare, and open a “closing file” with Resort Closings to
handle the property closing and transfer. Donors paid a
donation fee to DFC plus shouldered the timeshare transfer
fees. DFC accepted at least 7,600 timeshare donations
during the period at issue, 2010-2013.
   A. PRIOR INJUNCTION
    In a prior proceeding, the United States alleged that
Tarpey was operating a “bogus tax scheme.” Tarpey v.
United States, No. CV-17-94-B-BMM, 2019 WL 1255098,
at *1 (D. Mont. Mar. 19, 2019). The government alleged
Tarpey was using conflicted appraisers who overstated the
value of the timeshares and that Tarpey “falsely told
customers that they could deduct the full appraised amount
of the timeshare, conducted by DFC, and the associated
processing fees.” Id. Between 2016 and 2017, the district
court entered six orders permanently enjoining Tarpey, his
sister, Broyles, Thor, Resort Closings, and DFC from
continuing to appraise and accept timeshare donations. See,
e.g., United States v. Tarpey, 2:15-cv-00072-SEH, 2016 WL
6                        TARPEY V. USA

6196497 (D. Mont. Sept. 28, 2016) (final judgment of
permanent injunction against James Tarpey). The consent
judgment against Tarpey permanently enjoined him from
preparing property appraisals in connection with federal
taxes, encouraging others to claim charitable contribution
deductions on their taxes, and promoting any plan regarding
charitable contribution deductions claimed on federal tax
returns. Id. at *1.
    B. THE PRESENT ACTION
    The IRS assessed penalties, pursuant to 26 U.S.C.
§ 6700, for Tarpey’s timeshare donation business. Tarpey,
2019 WL 1255098, at *2. Tarpey paid a portion of the
penalties and then filed suit, alleging that he was not liable
for penalties, and alternatively, the IRS’s penalty
calculations were inaccurate. Id. The United States
countersued, moving for summary judgment on Tarpey’s
liability under § 6700, and later for penalties owed. Id. The
district court addressed the issues in this case in three orders,
two on summary judgment and one after a bench trial.
        1. Summary Judgment on Liability Regarding Two
           Appraisers
    The district court held on summary judgment that Tarpey
was liable for penalties under § 6700. Id. at *8. Section
6700 of the Internal Revenue Code imposes a penalty on
promoters and others involved in the organization or sale of
tax shelters if they make false statements or exaggerate
valuation. In this circumstance, to establish liability under
§ 6700(a)(2)(A), the United States had to show that (1)
Tarpey organized or sold, or participated in the organization
or sale of, an entity, plan, or arrangement; (2) Tarpey made,
or caused to be made, false or fraudulent statements
concerning the tax benefits to be derived from the entity,
                        TARPEY V. USA                        7

plan, or arrangement; (3) Tarpey knew or had reason to
know that the statements were false or fraudulent; and (4)
Tarpey’s false or fraudulent statements pertained to a
material matter. Id. at *2 (citing United States v. Est. Pres.
Servs., 202 F.3d 1093, 1098 (9th Cir. 2000)). Tarpey
challenged only the second and third elements. Id.
    The district court first determined that the second
element, false statements, was satisfied. The court stated
that “[t]he appraisals of timeshare to be donated to DFC
represent the alleged false statements at issue.” Id. at *3.
The court noted that “[t]he United States asserts that Tarpey
made false statements by preparing appraisals himself” and
“caused others to make or furnish similar appraisals.” Id.
    Taxpayers must obtain a “qualified appraisal” of
property if a donation of that property results in a claimed
deduction of more than $5,000. Id. (citing 26 U.S.C.
§ 170(f)(11)(C), (E)). A qualified appraisal must be
prepared, signed, and dated by a “qualified appraiser.” 26
C.F.R. § 1.170A-13(c)(3)(i)(B). As applicable here, the
Treasury regulations disqualify as an appraiser (i) the donee
of the property, (ii) persons related to the donee, and (iii)
persons used by the donee whose appraisal practice is not
sufficiently diversified by performing the majority of their
appraisals for persons other than the donee. Id. § 1.170A-
13(c)(5)(iv)(C), (E), (F). The district court held that “Tarpey
constitutes the donee,” Tarpey and DFC are “related,” and
Tarpey, his sister, Broyles, and Thor were all disqualified
pursuant to the last exclusion because they did not perform
a majority of their appraisals for persons other than DFC.
Tarpey, 2019 WL 1255098, at *3, *5. The court concluded
that all four “lacked sufficient independence from DFC to
serve as qualified appraisers under the Treasury
Regulations,” and “[t]he undisputed facts demonstrate,
8                       TARPEY V. USA

therefore, that Tarpey made or furnished false statements
regarding timeshare appraisals” and caused others to make
or furnish such statements. Id. at *6.
    The district court further determined that the government
established the third element for liability—that Tarpey knew
or had reason to know that the statements were false or
fraudulent. Id. at *7. The court rejected Tarpey’s reliance
on advice of counsel argument, as the advice was general
and unrelated to his appraisal practice. Id. at *6. As the
court explained, the record did not establish that any
professional “ever advised Tarpey that he met all of the
criteria to serve as a qualified appraiser” under the Treasury
regulations. Id. The court found that Tarpey knew or had
reason to know that he made false statements “regarding
qualified appraisal practice,” in part because “Tarpey signed
a ‘Declaration of Appraiser’ for each appraisal that he
pe[r]formed” and “promised in this declaration that he knew
the Treasury regulation exclusions.” Id. at *7.
    Based on these determinations, the district court
concluded that Tarpey was liable for penalties under § 6700.
Id. at *8.
       2. Summary Judgment on Scope of Penalties
    Section 6700(a) provides two methods for computing
penalties, depending on whether a “gross valuation
overstatement” or a false statement is involved. The parties
agree that the computation method for conduct that involves
false statements applies. Under this method, the penalty
equals “50 percent of the gross income derived (or to be
derived) from such activity.” 26 U.S.C. § 6700(a)(2)(B). At
summary judgment, the parties disputed the breadth of
“activity” under the statute. Tarpey sought to limit the
“activity” to appraisals he performed for DFC, limiting his
                       TARPEY V. USA                       9

penalty to income derived from those appraisals. Tarpey v.
United States, No. CV-17-94-BMM, 2019 WL 5820727, at
*2 (D. Mont. Nov. 7, 2019). He contended that “each
‘activity’ must be proved separately and that the United
States has proven appraisals as the only activity undertaken
by Tarpey.” Id. The United States argued that “the activity”
encompassed the entire timeshare donation scheme, and
DFC served as Tarpey’s alter ego for the purposes of
calculating a penalty. Id.
    The district court turned to the text of § 6700(a) and
determined that “[t]he ‘activity’ giving rise to the penalty
against Tarpey encompasses the entire arrangement
facilitated and organized by Tarpey to solicit timeshare
donations, appraise the timeshares, and direct profits to his
other organizations.” Id. It went on to conclude that DFC’s
income should be imputed to Tarpey under the corporate-
veil-piercing doctrine because DFC functioned as Tarpey’s
alter ego. Id. at *4–6.
       3. Bench Trial on Amount of Penalties
    The case proceeded to a bench trial, with both parties
submitting expert reports and testimony. The government’s
expert, Brian Dubinsky, “determined that Tarpey earned
$22,323,437 in gross income from the activity between 2010
and 2013.” Tarpey v. United States, No. CV-17-94-BU-
BMM, 2021 WL 5955699, at *3 (D. Mont. Dec. 16, 2019).
Dubinsky took the aggregate transactional data from the five
entities over which Tarpey exercised control, identified the
DFC-related transactions, included only income originating
from donors or buyers, and removed internal transfers
between the Tarpey entities. Id. at *3–4. Dubinsky’s
calculation would result in a penalty of $11,161,718.50,
though the United States requested that the court order
10                      TARPEY V. USA

Tarpey to pay the original penalty assessed of $8,465,000
plus interest. Id. at *4. The district court agreed with
Dubinsky’s calculation and ruled for the government. Id. at
*7.
II. ANALYSIS
    Tarpey raises three issues on appeal. He challenges the
district court’s liability ruling as to two of the appraisers,
Broyles and Thor; he contends that the court’s “cumulative
definition of ‘activity’” contravenes the text of § 6700(a);
and he urges that the court applied the wrong definition of
“gross income.”
     A. LIABILITY FOR OTHER APPRAISERS
   The district court correctly determined that, as a matter
of law, Broyles and Thor were disqualified as appraisers,
and Tarpey forfeited his argument that he was unaware the
appraisals would be imputed to DFC.
    Broyles and Thor were disqualified because they
appraised timeshares primarily, if not exclusively, for DFC.
Nearly 100% (97.5%) of Broyles’s income was from
appraisals for DFC and DFC constituted 57% of Thor’s
appraisal business. Tarpey, 2019 WL 1255098, at *5. As
relevant here, the Treasury regulations disqualify any
“appraiser who is regularly used by” the donor—or is
“regularly used” as an appraiser by a “party to the transaction
in which the donor acquired the property being appraised”
or the “donee of the property”—“and who does not perform
a majority of his or her appraisals made during his or her
taxable year for other persons.” 26 C.F.R. § 1.170A-
13(c)(5)(iv)(F), (B), (C).
   The question on appeal is what “regularly used” means.
Tarpey insists that the appraisals were not “used by” DFC
                        TARPEY V. USA                      11

under § 1.170A-13. Instead, he claims the appraisals were
“used by” the individual donors seeking charitable
deductions because it is the donor—the timeshare owner—
that “is required to attach an appraisal to their income tax
return.” Therefore, in his view, the appraisal is used only by
“the person claiming the charitable deduction,” rather than
any donee that is accepting the contribution. He is mistaken.
    Tarpey’s “use” argument focuses on the first half of the
exclusion in subsection F (“Exclusion F”), mistaking a form
of use for the exclusive use in contravention of the text.
Exclusion F does not limit use to use by the donor, and
Tarpey’s proposed meaning of “use” would read out
subsections B and C of the regulation. See 26 C.F.R.
§ 1.170A-13(c)(5)(iv). Rather, the exclusion refers to three
different persons: the donor, a party to the transaction, and
the donee. Id. § 1.170A-13(c)(5)(iv)(F).
    The record also belies Tarpey’s creative position that
DFC merely recommended, rather than used, appraisers.
Tarpey, through DFC’s timeshare donation program,
profited off the appraisals. In his response to the
government’s statement of undisputed facts, Tarpey did not
dispute that he “earned $149 when an appraiser other than
himself prepared an appraisal of a timeshare to be donated
to DFC, and caused that money to be paid to [Vacation
Property Appraisers, Inc.],” another one of Tarpey’s entities.
VPA “received a total of $641,737 for appraisals of
timeshares to be donated to DFC,” and Tarpey reported most
of that amount on his individual income tax returns.
    DFC also used the appraisals as a selling point, touting
an appraisal “by an independent licensed appraiser” as an
included benefit of the timeshare donation program.
Consistent with this approach, an employee testified that she
12                      TARPEY V. USA

didn’t remember “any donors specifically questioning” an
option of a different appraiser: “we said we would order it
for them and they liked that.” Broyles was “their appraiser,”
and Broyles thanked DFC employees in an email for “all of
your help in referring Clients to us.” Thor confirmed this
arrangement. On this record, the district court correctly
concluded that DFC “used” Broyles’s and Thor’s appraisals.
     The district court also correctly determined at summary
judgment that Tarpey knew or had reason to know Broyles
and Thor were disqualified. Tarpey now contends that a trial
is needed on this issue. Tarpey’s sole argument in the district
court in relation to the knowledge element of liability was that
he relied on the advice of counsel. Tarpey, 2019 WL
1255098, at *6. The government produced forms that Tarpey
signed with every appraisal that he prepared which include a
declaration by the appraisers that they were not in one of the
six categories of excluded individuals. Id. at *7. Tarpey
never claimed he could not have foreseen that the IRS would
consider DFC’s involvement with the appraisers as “use,” and
he argued below that Resort Closings was really the client, so
“it is irrelevant if James or any other appraiser performed all
of his or her services for Resort Closings.” Because Tarpey
expressly stated that the number of appraisals would not have
mattered and failed in the district court to include the current
challenges to knowledge, Tarpey has forfeited his chance to
advance this claim on appeal. “Although no bright line rule
exists to determine whether a matter has been properly raised
below, an issue will generally be deemed waived on appeal if
the argument was not raised sufficiently for the trial court to
rule on it.” In re Mercury Interactive Corp. Sec. Litig., 618
F.3d 988, 992 (9th Cir. 2010) (citation omitted) (cleaned up).
                         TARPEY V. USA                       13

   B. “ACTIVITY” UNDER § 6700(a)
    Tarpey and the government next battle over the
definition of “activity” under 26 U.S.C. § 6700(a). The
district court concluded that the entire timeshare donation
business was part of a tax-avoidance scheme, and the plain
language of the provision allows the entire scheme to fall
within the scope of “activity.” The government endorses this
position. Urging us to focus on the “separate activity”
language in the second sentence of § 6700(a) instead, Tarpey
insists that the penalty cannot go beyond the appraisal portion
of his business, which he claims was the only activity linked
to making a false statement.
     In construing § 6700, we turn to the text, guided by
Congress’s intervention in shaping the current statute.
Congress adopted § 6700 as part of the Tax Equity and Fiscal
Responsibility Act of 1982. See Est. Pres. Servs., 202 F.3d at
1098. To understand the import of the amendments over time,
it is helpful to separate the sentences of the text and annotate
the current form of the statute. The sentences are broken out
below; underlined language shows text added or changed in
1989, and italicized language shows text added in 2004.
Section 6700(a) states:

   (a) Imposition of penalty
   [First Sentence] Any person who--
       (1)
             (A) organizes (or assists in the organization of)--
                (i) a partnership or other entity,
                (ii) any investment plan or arrangement, or
                (iii) any other plan or arrangement, or
14                   TARPEY V. USA

        (B) participates (directly or indirectly) in the sale
        of any interest in an entity or plan or arrangement
        referred to in subparagraph (A), and
     (2) makes or furnishes or causes another person to
     make or furnish (in connection with such
     organization or sale)--
        (A) a statement with respect to the allowability of
        any deduction or credit, the excludability of any
        income, or the securing of any other tax benefit
        by reason of holding an interest in the entity or
        participating in the plan or arrangement which
        the person knows or has reason to know is false
        or fraudulent as to any material matter, or
        (B) a gross valuation overstatement as to any
        material matter,
     shall pay, with respect to each activity described in
     paragraph (1), a penalty equal to $1,000 or, if the
     person establishes that it is lesser, 100 percent of the
     gross income derived (or to be derived) by such
     person from such activity.
     [Second Sentence] For purposes of the preceding
     sentence, activities described in paragraph (1)(A)
     with respect to each entity or arrangement shall be
     treated as a separate activity and participation in each
     sale described in paragraph (1)(B) shall be so treated.
     [Third Sentence] Notwithstanding the first
     sentence, if an activity with respect to which a
     penalty imposed under this subsection involves a
     statement described in paragraph (2)(A), the amount
     of the penalty shall be equal to 50 percent of the
     gross income derived (or to be derived) from such
                           TARPEY V. USA                             15

        activity by the person on which the penalty is
        imposed.

    Congress had amended the statute four times, though only
two changes—in 1989 and 2004—are discussed here. 1 The
original language included only the first sentence, less some
words added or substituted in 1989. See Tax Equity and
Fiscal Responsibility Act of 1982, Pub. L. No. 97-248,
§ 320(a), 96 Stat. 324, 611 (1982). In 1989, Congress added
the second sentence—“For purposes of the preceding
sentence . . .”—to resolve a circuit split over the meaning of
“activity.” See Omnibus Budget Reconciliation Act of 1989,
Pub. L. No. 101-239, § 7734(a)(3), 103 Stat. 2106, 2403
(1989). Before the 1989 amendment, some courts had held
that each sale was a separate activity subject to a minimum
penalty of $1,000, while other courts held that multiple sales
of a single tax shelter constituted one activity. See, e.g., Bond
v. United States, 872 F.2d 898, 900–01 (9th Cir. 1989)
(adopting the latter approach). The 1989 amendment codified
the former interpretation. “Congress ended the confusion
over ‘activity’ by amending section 6700 and clarifying that
‘activity’ refers to an individual sale; and in so doing,
Congress returned the penalty to its divisible state.”
Humphrey v. United States, 854 F. Supp. 2d 1301, 1306
(N.D. Ga. 2011).
   In 2004, Congress added the third sentence—the method
applicable to false statements and the relevant method here.
See American Jobs Creation Act of 2004, Pub. L. No. 108-

1
 Other amendments in 1984 and 2018 are minor substitutions that do not
affect the outcome of this case. See Deficit Reduction Act of 1984, Pub.
L. No. 98-369, § 143(a), 98 Stat. 494, 682 (1984); Consolidated
Appropriations Act of 2018, Pub. L. No. 115-141, § 401(a)(314), 132
Stat. 348, 1199 (2018).
16                            TARPEY V. USA

357, § 818(a), 118 Stat. 1418, 1584 (2004). The rationale
was that “the present-law $1,000 penalty for tax shelter
promoters is insufficient to deter tax shelter activities.” H.R.
Rep. No. 108-548, pt. 1, at 274 (2004).
    On appeal, both Tarpey and the government argue that
§ 6700 is divisible. The few courts that have considered the
issue agree, although the question of divisibility does not
drive the result here. The caselaw and legislative history
focus heavily on the second sentence of the 1989 amended
version—a situation that is not present in the case before us.
The focus of the 1989 amended version is whether the
“activity” involving gross valuation overstatements cleared
the $1,000 per activity penalty threshold or whether the court
should use gross income. Congress clarified that each sale
was its own activity, avoiding a situation where a promoter
makes 100 sales and walks away with a $1,000 total penalty.
See, e.g., Humphrey, 854 F. Supp. 2d at 1307. 2 In the case
before us, we instead focus on the 2004 amended version

2
  Other trial courts reached the same conclusion. See, e.g., Schulz v.
United States, No. 1:15-cv-01299 (BKS/CFH), 2018 WL 3405240, at *5
(N.D.N.Y. July 12, 2018) (“Here, the particular activities at issue, as
defined by the Government, are 225 distributions of the Blue Folder.”),
aff’d, 831 F. App’x 48 (2d Cir. 2020); Diversified Grp., Inc. v. United
States, 123 Fed. Cl. 442, 454 (2015) (“The [1989] amended statute
expressly provides that the penalty imposed for selling or promoting an
abusive tax shelter, based upon the activities within the tax shelter, is
divisible, outlining that ‘each entity or arrangement shall be treated as a
separate activity, and participation in each sale . . . shall be so treated.’”
(alteration in original)), aff’d, 841 F.3d 975 (Fed. Cir. 2016); Pfaff v.
United States, No. 14-CV-03349-PAB-NYW, 2016 WL 915738, at *3
(D. Colo. Mar. 10, 2016) (“[Section] 6700 contains additional language
that explains the basis on which § 6700 penalties are divisible: ‘activities
described in paragraph (1)(A) with respect to each entity or arrangement
shall be treated as a separate activity and participation in each sale
described in paragraph 1(B) shall be so treated.’”).
                        TARPEY V. USA                       17

which adds a 50% gross income calculation for an activity
involving false statements. The 1989 amendment and the
“second sentence” are not at issue.
     Relying upon this precedent related to the 1989
amendment, the parties tie themselves into knots justifying
their differing outcomes. The government contends for the
first time that there was a false statement attached to every
transaction, and Tarpey insists that “activity” is effectively
synonymous with “false statement.” A close reading of the
statute reveals that the solution is far simpler. The focus
should be on the third sentence of the statute because the case
involves false statements, not an overstatement of valuation.
    Section 6700 defines activity broadly to include any
“plan” or “arrangement.” See 26 U.S.C. § 6700(a)(1)(A)(iii).
Tarpey does not challenge the element that he organized the
timeshare donation plan, which easily qualifies as a plan or
arrangement. Tarpey, 2019 WL 5820727, at *3. The statute
then lays out two computation methods. There is the first
computation method, set out in the first sentence, amended
by Congress to resolve a circuit split:

       [A person found liable] shall pay, with
       respect to each activity described in
       paragraph (1), a penalty equal to $1,000 or, if
       the person establishes that it is lesser, 100
       percent of the gross income derived (or to be
       derived) by such person from such activity.

§ 6700(a)(2)(B). The plain language of the statute makes
clear that the “separate activity” requirement in the second
18                      TARPEY V. USA

sentence modifies the computation method in the first
sentence:
       For purposes of the preceding sentence,
       activities described in paragraph (1)(A) with
       respect to each entity or arrangement shall be
       treated as a separate activity and
       participation in each sale described in
       paragraph (1)(B) shall be so treated.

Id. (emphasis added). The cases cited earlier rest on this
penalty computation.
   Then there is another method in the third sentence, the
computation of penalties for false statements, an amendment
added in 2004:

       Notwithstanding the first sentence, if an
       activity with respect to which a penalty
       imposed under this subsection involves a
       statement described in paragraph (2)(A), the
       amount of the penalty shall be equal to 50
       percent of the gross income derived (or to be
       derived) from such activity by the person on
       which the penalty is imposed.

Id. (emphasis added). The plain language of the statute
states that the third sentence applies “notwithstanding the
first sentence,” so the statute contemplates that the penalties
for false and fraudulent statements will be treated
differently. Under the applicable computation method, we
consider that “the amount of the penalty shall be equal to 50
percent of the gross income derived (or to be derived) from
such activity by the person on which the penalty is imposed.”
Id.
                        TARPEY V. USA                       19

    How then do we understand the scope of activity? We
look to the earlier portion of the statute to determine what
“each activity described in paragraph (1)” entails. Id.
Paragraph (1) includes the broad “organization” of “any
other plan or arrangement.” § 6700(a)(1)(A); see Hargrove
& Costanzo v. United States, No. CV-F-06-046 LJO DLB,
2008 WL 4133928, at *6 (E.D. Cal. Sept. 4, 2008) (“The two
activities which are ‘described in paragraph (1)’ are the
activity of ‘organizes’ and the activity of ‘participates.’”).
The activity here is not limited to the making of false
statements in furtherance of a scheme, but rather the
organization and sale of the tax scheme writ large. The
statute mandates that Tarpey’s gross income be calculated
from his organizational and sale conduct, rather than solely
from the false statements he made about the activity alone.
The Tax Court already appears to adopt this approach. See
Davison v. Comm’r, 119 T.C.M. (CCH) 1373, 2020 WL
2498420, at *23 (2020) (“[T]he penalty is appropriately
calculated as 50% of the gross income petitioner derived
from selling, or participating in selling, the Tool Program.”);
Lemay v. Comm’r, 119 T.C.M. (CCH) 1389, 2020 WL
2498427, at *24 (2020), aff’d, 128 A.F.T.R.2d 2021-5745
(10th Cir. 2021) (same); see also Seaview Trading, LLC v.
Comm’r, 62 F.4th 1131, 1135 (9th Cir. 2023) (en banc)
(“Although Tax Court decisions do not bind us, we have
consistently recognized that court’s unique expertise in tax
matters, and here we find its decisions persuasive.” (citation
omitted)). It would go against the text and common sense to
limit liability only to the false statements when Congress’s
goal was to punish abusive tax shelters. The district court’s
decision is consistent with this analysis and we too adopt this
approach.
20                      TARPEY V. USA

    The activity encompasses the scheme while
simultaneously being made up of the individual timeshare
donation transactions. The government’s expert, Dubinsky,
excluded transactions unrelated to the timeshare donation
program then aggregated the gross income derived from the
7,600 timeshare donation transactions. Tarpey, 2021 WL
5955699, at *3–4. The government does not need to limit
itself to the funds directly coming from the false statement
appraisals, as the 7,600 transactions made up an overarching
scheme that flowed into further gross income for Tarpey and
DFC. Thus, the activity can be made up of an aggregation
of transactions without being limited to only those
transactions that explicitly contained a false statement.
    In the face of the correct application of the term
“activity,” Tarpey now claims this approach makes it more
difficult to establish jurisdiction under 26 U.S.C. § 6703(c).
Not so. A taxpayer may obtain jurisdiction over a refund
suit for a penalty assessed under § 6700 by satisfying the
timing and payment requirements, which require a taxpayer
to pay 15% of the assessed penalty and file a refund claim
within 30 days of the IRS’s notice of the penalty before filing
a refund suit within 30 days of the denial of that claim. See
§ 6703(c)(1)–(2). Tarpey paid 15% of his 2010 penalty, while
his sister paid 15% of her 2014 penalty. The parties stipulated
to these facts as satisfying jurisdiction under § 6703(c), and
the government continues to contend that this payment
secured jurisdiction. In his reply brief, however, Tarpey
claims for the first time that his payment of the 2010 assessed
penalty is inadequate, as it would at most garner jurisdiction
over one tax year.
   We are skeptical of Tarpey’s newly crafted interpretation.
Section 6703(c)(1) provides that upon “notice and demand of
any penalty under section 6700,” the person charged can pay
                        TARPEY V. USA                       21

“an amount which is not less than 15 percent of the amount of
such penalty.” The IRS sent four separate Notice of Penalty
Charge assessments to Tarpey in 2017 for tax years 2010
through 2014. Each Notice of Penalty Charge states “[w]ithin
30 days after the date of this Notice and Demand, pay an
amount which is not less than 15 percent of the penalty and
file a claim for refund.” The IRS deemed Tarpey’s payment
of one penalty demand adequate, and we agree that this is not
an unreasonable reading of the statute.
   C. CALCULATING GROSS INCOME
    Tarpey’s final challenge is that the district court applied
the wrong definition of gross income and erroneously
included money held in escrow. We review for clear error
the district court’s factual findings on the amount of the
penalty and its legal conclusions de novo, and we are not
persuaded by Tarpey’s position. Cooper v. Comm’r, 877
F.3d 1086, 1090 (9th Cir. 2017).
    The district court properly relied on the Internal Revenue
Code’s general definition of gross income, stating that
“[g]ross income includes ‘all income from whatever source
derived.’” Tarpey, 2021 WL 5955699, at *6 (quoting 26
U.S.C. § 61(a)). Tarpey nevertheless points to Dubinsky’s
statement that his penalty calculation total was not
“quote/unquote ‘the gross income’ of Mr. Tarpey in the
normal sense of taxation” as evidence that the district court
departed from the statutory definition in accepting his
calculations. Tarpey’s take on Dubinsky’s testimony is
misleading. He portrays the “normal sense of taxation”
statement as an acknowledgment that the court had departed
from the statutory definition when in fact Dubinsky was
22                      TARPEY V. USA

instead clarifying that his calculation included income
attributable to Tarpey’s alter ego, DFC:

       Q. And just for the record, Mr. Dubinsky, can
       you restate your final opinion on the gross
       income you calculated for Mr. Tarpey under
       26 USC 6700?
       A. Yes. And just so it’s clear, when you say --
       I’m going to term it -- this is the gross income
       that would be attributable to the activity to
       which Mr. Tarpey -- that the Court has
       determined is subject to the penalty. This is
       not quote/unquote “the gross income” of Mr.
       Tarpey in the normal sense of taxation.

Read in context, Dubinsky’s statement explains that the total
penalty exceeds the gross income of Tarpey as an individual.
Based on the district court’s finding that DFC was Tarpey’s
alter ego—a conclusion not challenged on appeal—Dubinsky
included gross income from the entity as well. Tarpey’s
definitional challenge is a red herring.
    Tarpey next argues that the transactions “involved the
acquisition and sale of real property,” and therefore he should
have been eligible to capitalize his expenses related to the
acquisition and sale of property under 26 U.S.C. § 61(a)(3)
and § 263A. This position ignores the district court’s finding
that Tarpey did not operate DFC as a dealer in real property,
and instead he benefited from organizing it as a tax-exempt
501(c)(3) organization. See Tarpey, 2021 WL 5955699, at
* 5–6. The Supreme Court “has observed repeatedly that,
while a taxpayer is free to organize his affairs as he chooses,
nevertheless, once having done so, he must accept the tax
consequences of his choice, whether contemplated or not.”
                        TARPEY V. USA                        23

Comm’r v. Nat’l Alfalfa Dehydrating & Milling Co., 417
U.S. 134, 149 (1974). Tarpey “may not enjoy the benefit of
some other route he might have chosen to follow but did
not.” Id. Now is not the time to change horses midstream.
The district court reasonably declined to give Tarpey the
benefit of a different choice after the fact. See Tarpey, 2021
WL 5955699, at *6.
     On appeal, Tarpey expands his argument beyond DFC’s
status to encompass the activity of all his entities. His theory
is that he should be allowed to capitalize his expenses under
§ 61(a)(3) because, “taken collectively,” the “principal
activity” of his entities was the acquisition and sale of
timeshares.
    The few cases that have discussed penalties under § 6700
have not reduced expenses. In Schulz v. United States, the
government argued that “the penalty is based on gross
income, not income less fees or costs or costs of goods sold.”
2019 WL 1385405, at *4. The court agreed, noting that
“[g]ross income means ‘all income from whatever source
derived’” and the penalty was properly calculated “without
regard to fees charged.” Id.; see also In re MDL-731, 989
F.2d 1290, 1304 (2d Cir. 1993) (“Because the Internal
Revenue Code does not provide an exclusion from gross
income for the cost of leased goods, the district court
correctly declined to grant a reduction equal to the cash
downpayments made on the Properties from Townsend’s
and Universal’s gross income.”). We recently affirmed a
decision by the tax court that explained that all taxpayers
“pay tax only on gross income, which is gross receipts minus
the cost of goods sold.” Patients Mut. Assistance Collective
Corp. v. Comm’r, 151 T.C. 176, 204 (2018), aff’d, 995 F.3d
671 (9th Cir. 2021). Cost of goods sold does not offer
Tarpey much help, as it includes only “the costs of acquiring
24                       TARPEY V. USA

inventory, through either purchase or production.” Id. at
205. One of Tarpey’s experts, Thomas Copley, admitted that
there were no acquisition costs with the donated timeshares:

        Q. And so, obviously, because timeshares
        were donated, there were no costs associated
        with DFC’s acquisition of the property. Is
        that fair to say?
        A. In the initial acquisition there were no
        costs incurred.
        Q. That is, DFC didn’t pay a single cent to
        acquire the timeshares; right?
        A. To acquire the timeshares, they did not
        pay. Those were donated, correct.

The district court’s refusal to deduct expenses was not
clearly erroneous.
    Finally, Tarpey argues that the district court erroneously
“concluded that, as a matter of law, the funds deposited into
the escrow account managed by RCI vested in Mr. Tarpey
simply because he owned RCI.” Tarpey asks that any “funds
deposited into escrow” not count towards his gross income.
Tarpey mischaracterizes the district court’s finding. Rather
than deciding that money held in escrow could, as a matter of
law, be included in the calculation of gross income, the district
court more narrowly concluded that the “escrow account”
here was not a true escrow account. Tarpey, 2021 WL
5955699, at *4. It acknowledged that a “taxpayer’s gross
income normally does not include money paid into escrow
because the taxpayer lacks ‘complete dominion’ over the
sum.” Id. (quoting Ware v. Comm’r, 906 F.2d 62, 65 (2d Cir.
1990)). But this principle does not come into play because
                         TARPEY V. USA                        25

“Tarpey did not maintain a true escrow arrangement,” as he
“exercised ‘complete dominion’ over Account 6655, as
evidenced by the comingling of funds from multiple donors
and frequent bulk transfers.” Id. at *4–5. Though Tarpey
insists the district court made a legal error, this fact-specific
finding about the nature of the RCI account is more properly
viewed under the clear error standard. See Est. Pres. Servs.,
202 F.3d at 1099.
    The Supreme Court has explained that “[i]n determining
whether a taxpayer enjoys ‘complete dominion’ over a given
sum . . . [t]he key is whether the taxpayer has some guarantee
that he will be allowed to keep the money.” Comm’r v.
Indianapolis Power & Light Co., 493 U.S. 203, 210 (1990).
A powerful piece of evidence for including the funds as part
of gross income is Tarpey’s inclusions of these funds on his
tax returns—a fact that the district court said “demonstrates
conclusively that the money in Account 96655 remained
within Tarpey’s control.” Tarpey, 2021 WL 5955699, at *5.
Tarpey argues that the court erred because “DFC—not Mr.
Tarpey—amended its returns to show the entire amount
deposited into the escrow account as part of its gross receipts.”
Given that Tarpey has not challenged the alter ego conclusion,
Tarpey and DFC are treated as interchangeable for the
purposes of calculating the penalty. His challenge therefore
misses the evidentiary point.
    Based on a fact-intensive analysis, the district court did
not err in concluding that Tarpey had “some guarantee that
[he] will be allowed to keep the money.” Id. The testimony
supported the district court’s fact-intensive conclusion, and
the district court correctly determined that the fees held in
Resort Closings’ account should not be excluded from the
gross income calculation.
26               TARPEY V. USA

     AFFIRMED.