Court Opinion

ID: 9963212
Source: CourtListenerOpinion
Date Created: 2024-04-24 19:01:58.909663+00
Date Added: 2024-06-11T08:24:42.926236
License: Public Domain

United States Tax Court
                                     CORRECTED
                                   T.C. Memo. 2024-3

       WILLIAM E. FRAZIER AND MARY A. FRAZIER, ET AL., 1
                          Petitioners

                                               v.

                COMMISSIONER OF INTERNAL REVENUE,
                            Respondent

                                         —————

Docket Nos.       8427-14,          8548-14,                       Filed January 8, 2024.
                 18494-15,         18521-15,
                 18721-15,         18745-15,
                 18797-15,         18799-15.

                                         —————

Jaye A. Calhoun and Ray C. Mayo, Jr., for petitioners.

Edwin B. Cleverdon, for respondent.

                                        CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION ..................... 9

FINDINGS OF FACT ............................................................................ 15

I.      Petitioners: the Fraziers and their wholly-owned C
        corporation, LHDC ...................................................................... 15

II.     LHDC administered Section 8 housing programs for
        certain public housing agencies in Louisiana. ........................... 16

       1 Cases of the following petitioners are consolidated herewith: Louisiana

Housing Development Corp., Docket Nos. 8548-14, 18721-15, and 18799-15; William
E. Frazier, Docket No. 18494-15; Mary A. Frazier, Docket No. 18521-15; and William
E. Frazier and Mary A. Frazier, Docket Nos. 8427-14, 18745-15, and 18797-15. Cases
with docket numbers 18725-15 and 18726-15, regarding deficiencies for tax years 2013,
were also consolidated with these cases, but were settled before trial.

                                     Served 04/24/24
                                                   2

[*2]
III.    Louisiana Assisted administered Section 8 housing
        programs for certain other public housing agencies in
        Louisiana. .................................................................................... 16

IV.     LHDC agreed to make payments to Gary Lala.......................... 17

V.      Hurricane Katrina affected LHDC operations. .......................... 17

VI.     LHDC began administering Disaster Housing Assistance
        Program payments for Jefferson Parish PHA............................ 17

VII.    In 2006, LHDC and Lala replaced their 2003 contract with
        a new contract. ............................................................................ 17

VIII. Louisiana Assisted began administering DHAP payments
      for Mississippi Gulf Coast; Bobbie sold 50% of her share of
      Louisiana Assisted to LHDC in exchange for LHDC’s
      assistance in doing so. ................................................................. 19

IX.     Business operations of LHDC and Louisiana Assisted
        during the years at issue............................................................. 19

X.      During the years at issue, Louisiana Assisted made cash
        distributions to LHDC and reimbursed LHDC for certain
        expenses. ...................................................................................... 21

        A. During the years at issue, Trombetta’s accounting firm
           prepared income statements for LHDC. ............................... 21

        B. During the years at issue, Louisiana Assisted paid cash
           distributions to LHDC. .......................................................... 23

        C. During the years at issue, Louisiana Assisted made
           reimbursements payments to LHDC. ................................... 24

XI.     In 2012, LHDC sold of its 50% membership interest in
        Louisiana Assisted to Bobbie. ..................................................... 24

XII.    In 2012, the Fraziers sold securities from the Merrill Lynch
        brokerage account. ...................................................................... 25

XIII. In 2012, the Fraziers sold securities from the Franklin
      Growth Fund, receiving $40,867 of proceeds. ............................ 48
                                                   3

[*3]
XIV. In 2012, the Fraziers’ received $1,417 from “Columbia
     Seligman Comm. And Info.”........................................................ 48

XV.      In 2012, the Fraziers received taxable wages, interest,
         dividends, IRA distributions, pension distributions, social
         security benefits, and Schedule E income and had federal
         income tax withholding. .............................................................. 48

XVI. In 2012, the Fraziers paid state and local income taxes and
     real estate taxes. ......................................................................... 48

XVII. Tax reporting: Louisiana Assisted’s Forms 1065, the
      Fraziers’ Forms 1040 and 2012 Form 1099-B, and LHDC’s
      Forms 1120 .................................................................................. 48

         A. Louisiana Assisted ................................................................. 49

                  1. Overview of Louisiana Assisted’s tax reporting:
                     Forms 1065 .................................................................. 49

                  2. Louisiana Assisted’s tax reporting by year ................ 51

                            a. 2009 ................................................................... 51

                            b. 2010 ................................................................... 54

                            c. 2011 ................................................................... 57

                            d. 2012 ................................................................... 59

         B. The Fraziers ........................................................................... 62

                  1. The Fraziers’ tax reporting for 2009........................... 62

                  2. The Fraziers’ tax reporting for 2010........................... 65

                  3. The Fraziers’ tax reporting for 2011........................... 68

                  4. The Fraziers’ 2012 tax year ........................................ 72

         C. LHDC...................................................................................... 72

                  1. LHDC’s tax reporting for 2009 ................................... 72

                  2. LHDC’s tax reporting for 2010 ................................... 76
                                                    4

[*4]               3. LHDC’s tax reporting for 2011 ................................... 79

                   4. LHDC’s tax reporting for 2012 ................................... 83

XVIII. Notices of deficiency .................................................................... 87

         A. The Fraziers ........................................................................... 87

                   1. 2009 tax year ............................................................... 87

                   2. 2010 tax year ............................................................... 90

                   3. 2011 tax year ............................................................... 92

                   4. 2012 tax year ............................................................... 93

         B. LHDC...................................................................................... 97

                   1. 2009 tax year ............................................................... 97

                   2. 2010 tax year ............................................................... 99

                   3. 2011 tax year ............................................................. 100

OPINION .............................................................................................. 102

I.       LHDC was the other member of Louisiana Assisted. .............. 106

         A. Under Louisiana law, the other membership interest in
            Louisiana Assisted was owned by LHDC. .......................... 106

         B. Under federal tax law, the other membership interest
            in Louisiana Assisted was owned by LHDC. ...................... 113

         C. The IRS’s Danielson argument is inapposite because
            petitioners are not attempting to disavow the terms of
            the 2007 oral agreement. ..................................................... 114

II.      The tax consequences to LHDC and the Fraziers of LHDC
         being the other member of Louisiana Assisted ........................ 115

         A. Legal Concepts ..................................................................... 115

                   1. Tax Court jurisdiction ............................................... 115

                   2. Taxation of entities treated as partnerships ............ 116
                                                 5

[*5]   B. Analysis ................................................................................ 117

                1. 2009 tax year ............................................................. 117

                          a. The Fraziers .................................................... 118

                          b. LHDC .............................................................. 118

                2. 2010 tax year ............................................................. 120

                          a. The Fraziers .................................................... 121

                          b. LHDC .............................................................. 121

                3. 2011 tax year ............................................................. 122

                          a. The Fraziers .................................................... 123

                          b. LHDC .............................................................. 124

                4. 2012 tax year ............................................................. 124

                          a. The Fraziers .................................................... 126

                          b. LHDC .............................................................. 126

III.   We do not sustain the IRS’s adjustments to LHDC’s 2010
       and 2011 salary-and-wage deductions and to LHDC’s 2011
       professional-fee deductions. ...................................................... 127

       A. The entire amounts of disallowed salaries and wages
          and professional fees were paid. .......................................... 131

       B. The IRS is not permitted to rely on the new theory
          raised on brief....................................................................... 132

IV.    The Fraziers had $3,856 short-term capital gain and
       $2,283 in long-term capital gain for 2012 from the sales of
       capital assets from the Merrill Lynch brokerage account. ...... 135

       A. The law ................................................................................. 135

       B. Analysis of the Fraziers’ sales of securities from the
          Merrill Lynch brokerage account ........................................ 136

                1. Cost basis ................................................................... 136
                                        6

[*6]            a. The Fraziers had basis of $30,642 in the
                   2,332 shares of Columbia Tax Exempt
                   Fund A that they acquired on June 8,
                   2011, and sold on March 15, 2012.................. 137

                b. The Fraziers had basis of (a) $13.14 in the
                   1 share of Columbia Tax Exempt Fund A
                   that they acquired on January 26, 2012,
                   and sold on March 15, 2012; and (b) $4.06
                   in the 0.309 of a share of Columbia Tax
                   Exempt Fund A that they acquired on
                   January 26, 2012, and sold on March 27,
                   2012. ................................................................ 137

                c. The Fraziers had basis of (a) $19,003 in
                   the 1,829 shares of Blackrock Municipal I
                   that they acquired on June 8, 1994, and
                   sold on March 15, 2012; and (b) $26,214 in
                   the (separately listed on the Form 1099-B)
                   2,523 shares of Blackrock Municipal I that
                   they acquired on June 8, 1994, and sold on
                   March 15, 2012. .............................................. 138

       2. The securities sold from the Merrill Lynch
          brokerage account in 2012 were capital assets. ....... 138

       3. Holding periods for the five sales of securities for
          which the Form 1099-B states the cost basis are
          “N/A” .......................................................................... 139

       4. The Fraziers’ long-term capital gain is computed
          without the $5.62 loss disallowed by the wash-
          sale. ............................................................................ 139

       5. The Fraziers’ short-term and long-term capital
          gains from the sales of securities from the Merrill
          Lynch brokerage account assuming that the total
          proceeds from the sales were $307,261 (the total
          of the amounts stated in the Form 1099-B) ............. 140

       6. The Fraziers’ short-term and long-term capital
          gains from the sales of securities from the Merrill
          Lynch brokerage account after accounting for the
          $665 discrepancy between the total proceeds in
                                                     7

[*7]                   the Form 1099-B and the total proceeds in the
                       stipulation.................................................................. 141

V.      The Fraziers had $40,867 in short-term capital gain from
        the sale of securities from the Franklin Growth Fund. ........... 143

VI.     For 2012, the Fraziers had $1,417 in short-term capital
        gain from “Columbia Seligman Comm. And Info.” .................. 143

VII.    The Fraziers received $24,425 in Schedule E income,
        $1,545 in ordinary dividends, and $4,636 in qualified
        dividends for 2012. .................................................................... 145

VIII. For 2012, the Fraziers are entitled to the standard
      deduction of $14,200. ................................................................. 146

IX.     The Fraziers’ income for 2012 is computed with two
        personal exemptions for a total of $7,600................................. 148

X.      The Fraziers’ liability for section 6662 accuracy-related
        penalties..................................................................................... 148

        A. For 2009, the Fraziers are not liable for the accuracy-
           related penalty under section 6662(a)................................. 150

        B. For 2010, the Fraziers are not liable for the accuracy-
           related penalty under section 6662(a) because the
           understatement is not substantial, a point that will be
           confirmed by Rule 155 computations. ................................. 151

        C. For 2011, the Fraziers are not liable for the accuracy-
           related penalty under section 6662(a) because the
           understatement is not substantial, a point that will be
           confirmed by Rule 155 computations. ................................. 152

XI.     The Fraziers’ liability for section 6651(a)(1) additions to tax
        .................................................................................................... 153

        A. The law ................................................................................. 153

        B. Analysis ................................................................................ 156

                  1. For 2009, the Fraziers are liable for the section
                     6651(a)(1) addition to tax. ......................................... 156
                                                     8

[*8]               2. For 2010, the Fraziers are liable for the section
                      6651(a)(1) addition to tax. ......................................... 157

                   3. For 2011, the Fraziers are liable for the section
                      6651(a)(1) addition to tax. ......................................... 158

                   4. For 2012, the Fraziers are not liable for the
                      section 6651(a)(1) addition to tax. ............................ 159

XII.     The Fraziers’ liability for the section 6651(a)(2) addition to
         tax for 2012 ................................................................................ 160

         A. Petitioners waived the argument that (1) the IRS did
            not prepare a valid substitute for return under section
            6020(b) and (2) the IRS has not produced evidence that
            it prepared such a return. .................................................... 162

         B. For 2012, should the Rule 155 computations show a
            positive amount as the correct amount of tax, the
            Fraziers are liable for the section 6651(a)(2) addition to
            tax. ........................................................................................ 163

XIII. LHDC’s liability for section 6662 accuracy-related
      penalties..................................................................................... 164

         A. For 2009, if Rule 155 computations show a substantial
            understatement, LHDC is liable for the section 6662(a)
            penalty for the entire underpayment. ................................. 166

         B. For 2010, LHDC is not liable for the accuracy-related
            penalty under 6662(a). ......................................................... 168

         C. For 2011, LHDC is not liable for the accuracy-related
            penalty under 6662(a). ......................................................... 169

XIV. LHDC’s liability for section 6651(a)(1) additions to tax .......... 170

         A. For 2009, LHDC is liable for the section 6651(a)(1)
            addition to tax. ..................................................................... 171

         B. For 2010, LHDC is liable for the section 6651(a)(1)
            addition to tax. ..................................................................... 172
                                                   9

      [*9]     MEMORANDUM FINDINGS OF FACT AND OPINION

             MORRISON, Judge: During the 2009, 2010, 2011, and 2012 tax
      years (years at issue), William and Mary Frazier were the sole
      shareholders of Louisiana Housing Development Corporation (LHDC),
      a subchapter C corporation. The Fraziers are a married couple who filed
      joint income tax returns for 2009, 2010, and 2011, but they did not file
      a return for 2012. Respondent, or the IRS, issued notices of deficiency to
      the Fraziers and LHDC (collectively, petitioners) determining income
      tax deficiencies, accuracy-related penalties, and additions to tax. In
      these consolidated cases, the Fraziers and LHDC seek judicial review of
      these determinations:

                                                                             § 6651(a)(1)   § 6651(a)(2)
Docket                                                           § 6662
                 Petitioner(s)          Year      Deficiency                 addition to    addition to
number                                                           penalty
                                                                                 tax            tax

8427-14    William & Mary Frazier       2009      $1,051,988     $210,398       $261,807        $—

8548-14    LHDC                         2009           313,155     62,631        77,7933         —

18745-15   William & Mary Frazier       2010           211,420     42,284         52,855         —

18721-15   LHDC                         2010             9,270     20,299         15,224         —

18797-15   William & Mary Frazier       2011           167,051     33,410         41,763         —

18799-15   LHDC                         2011           177,759     36,152         —              —

18521-15   Mary Frazier                 2012           267,458      —             60,178             29,420

18494-15   William Frazier              2012           268,506      —             60,414             29,536

      The Fraziers and LHDC filed timely Petitions under section 6213(a).
      The Fraziers were residents of Louisiana when they filed their Petitions.
      LHDC’s principal place of business was in Louisiana when it filed its
      petitions. We have jurisdiction to resolve these cases under section
      6213(a). 2

              2 Unless otherwise indicated, references to sections are to the Internal Revenue

      Code of 1986, Title 26 U.S.C., in effect at all relevant times, regulation references are
      to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,
      and Rule references are to the Tax Court Rules of Practice and Procedure.
                                          10

[*10] We use short names for certain persons and entities:

      Short name of
                            Full name                      Description
     person or entity

 William                William Frazier      A petitioner, married to Mary

 Mary                   Mary Frazier         A petitioner, married to William

                        William & Mary       Collective name for William and Mary
 The Fraziers
                        Frazier              Frazier

                        Louisiana Housing    A C corporation owned 75% by Mary
 LHDC                   Development          and 25% by William
                        Corporation

                        Louisiana Assisted   A limited liability company that, from
 Louisiana Assisted     Housing Company,     2007 to 2012, was owned 50% by Bobbie
                        LLC                  Robinson and 50% by LHDC.

 Tracy                  Tracy Robinson       Daughter of William and Mary

                                             Chief operating officer of LHDC and
                                             from 2007 to 2012, the 50% owner of
 Bobbie                 Bobbie Robinson
                                             Louisiana Assisted; Bobbie is not
                                             related to either Tracy or Robert

 Robert                 Robert Robinson      Husband of Tracy, unrelated to Bobbie

                                             The accountant for LHDC and the
 Trombetta              Mark Trombetta
                                             Fraziers

     The parties have resolved some issues through concessions. The
remaining issues are resolved as follows:

1.       It is undisputed that Louisiana Assisted Housing Company, LLC
         (Louisiana Assisted) was treated as a partnership for federal
         income tax purposes from 2009 through 2012 and was not subject
         to TEFRA proceedings for those years. See sec. 6221. The Fraziers
         and LHDC contend that in 2007 Bobbie sold half her 100%
         membership interest in Louisiana Assisted to LHDC and
         repurchased the interest in 2012. The IRS contends that in 2007
         Bobbie sold half her 100% membership interest in Louisiana
         Assisted to William and repurchased the interest in 2012. We
         agree with the Fraziers and LHDC. Therefore, LHDC was the
         owner of the 50% membership interest opposite Bobbie from 2009
         through 2012.
                                 11

[*11]
2.    The tax consequences of LHDC being a 50% member of Louisiana
      Assisted are as follows:

     a.    For 2009, the Fraziers’ income does not include the
           $2,987,744 distributive share of Louisiana Assisted’s
           nonseparately stated income and the $3,156 distributive
           share of Louisiana Assisted’s separately stated interest
           income (because William was not a member of Louisiana
           Assisted). We disallow the $2,987,744 deduction that the
           Fraziers reported to cancel the effect of their reporting the
           $2,987,744 distributive share of nonseparately stated
           income in their income (dummy deduction). LHDC’s
           income includes its $2,987,744 distributive share of
           Louisiana Assisted’s nonseparately stated income and its
           $3,156 distributive share of Louisiana Assisted’s
           separately stated interest income. LHDC’s income does not
           include its $2,165,000 cash distribution from Louisiana
           Assisted that it reported as its income. LHDC’s outside
           basis is increased by $2,990,900 total distributive share of
           income from Louisiana Assisted and decreased by the
           $2,165,000 distribution of cash from Louisiana Assisted.

     b.    For 2010, the Fraziers’ income does not include the
           $643,165 distributive share of Louisiana Assisted’s
           nonseparately stated income and the $3,392 distributive
           share of Louisiana Assisted’s separately stated interest
           income (because William was not a member of Louisiana
           Assisted). We disallow the $643,165 dummy deduction that
           the Fraziers reported to cancel the effect of their reporting
           the $643,165 distributive share of nonseparately stated
           income in their income. LHDC’s income includes its
           $643,165 distributive share of Louisiana Assisted’s
           nonseparately stated income and its $3,392 distributive
           share of Louisiana Assisted’s separately stated interest
           income. LHDC’s income does not include its $765,000 cash
           distribution from Louisiana Assisted that it reported as its
           income. LHDC’s outside basis is increased by the $646,557
           total distributive share of income from Louisiana Assisted
           and decreased by the $765,000 distribution of cash from
           Louisiana Assisted.
                                          12

[*12] c.       For 2011, the Fraziers’ income does not include the $7,586
               distributive share of Louisiana Assisted’s nonseparately
               stated loss and the $1,839 distributive share of Louisiana
               Assisted’s separately stated interest income (because
               William was not a member of Louisiana Assisted). The
               Fraziers’ income does not include the $450,000 cash
               distribution from Louisiana Assisted to LHDC that the
               Fraziers reported as their income. We disallow the
               $450,000 dummy deduction that the Fraziers reported to
               cancel the effect of their reporting the $450,000 cash
               distribution in their income. LHDC’s income includes its
               $7,586 distributive share of Louisiana Assisted’s
               nonseparately stated loss and its $1,839 distributive share
               of Louisiana Assisted’s separately stated interest income.
               LHDC’s income does not include its $450,000 cash
               distribution from Louisiana Assisted that it reported in its
               income. LHDC’s outside basis is decreased by the $5,747
               net distributive share of loss from Louisiana Assisted and
               further decreased by the $450,000 distribution of cash from
               Louisiana Assisted.

       d.      For 2012, William’s income does not include the $932,972
               distributive share of Louisiana Assisted’s income (because
               William was not a member of Louisiana Assisted). William
               is not entitled to a $932,972 deduction the purpose of which
               would be to cancel the effect of including in William’s
               income the $932,972 distributive share. 3

3.     In OPINION Part III, we hold that the IRS erred in disallowing
       $424,935 of the $2,770,775 deduction claimed by LHDC for
       salaries and wages for 2010, in disallowing $358,922 of the
       $2,326,404 deduction claimed by LHDC for salaries and wages for

        3 The Fraziers did not file a tax return for 2012. Trombetta, the Fraziers’ and

LHDC’s accountant, sent the IRS an unfiled Form 1040, U.S. Individual Income Tax
Return, for 2012, which includes a Schedule C and Schedule E. The parties stipulate
that “[t]he Fraziers reported Schedule E income . . . from [Louisiana Assisted] . . .
during . . . 2012 in the amount[] of . . . $932,972.00” and that “[t]he Fraziers claimed
Schedule C deductions related to alleged payments to LHDC for taxable year[] . . . 2012
in the amount[] of . . . $932,972.00 . . . which respondent disallowed for lack of
substantiation and for lack of business purpose.” While the $932,972 dummy deduction
was not disallowed or even addressed in either William’s or Mary’s 2012 notices of
deficiency, we hold that the parties tried the deductibility of this $932,972 dummy
deduction by consent under Rule 41(b)(1).
                                          13

[*13] 2011, and in disallowing $158,993 of the $1,818,542 deduction
      claimed by LHDC for professional fees for 2011.

4.     In OPINION Part IV, we address capital gains from the sale of
       the securities from the Fraziers’ Merrill Lynch brokerage account.
       In 2012, the Fraziers sold a group of securities from their Merrill
       Lynch brokerage account which are the subject of the Form 1099-
       B, Proceeds from Broker and Barter Exchange Transactions,
       provided to the Fraziers and the IRS by Merrill Lynch. 4 The only
       issues in dispute involving the securities sold from the Merrill
       Lynch brokerage account are the amounts of basis of: (1) the 2,332
       shares of Columbia Tax Exempt Fund A that were acquired on
       June 8, 2011, and sold on March 15, 2012; (2) the one share of
       Columbia Tax Exempt Fund A that was acquired on January 26,
       2012, and sold on March 15, 2012; (3) the 0.309 of a share of
       Columbia Tax Exempt Fund A that was acquired on January 26,
       2012, and sold on March 27, 2012; (4) the 1,829 shares of
       Blackrock Municipal I that were acquired on June 8, 1994, and
       sold on March 15, 2012; and (5) the 2,523 shares of Blackrock
       Municipal I that were acquired on June 8, 1994, and sold on
       March 15, 2012. We resolve these issues as follows:

       a.      The Fraziers had a basis of $30,642 in the 2,332 shares of
               Columbia Tax Exempt Fund A that were acquired on June
               8, 2011, and sold on March 15, 2012. We hold that the
               disposition of these securities resulted in short-term
               capital gain.

       b.      The Fraziers had a basis of $13.14 in the one share of
               Columbia Tax Exempt Fund A that was acquired on
               January 26, 2012, and sold on March 15, 2012. We hold
               that the disposition of this share resulted in short-term
               capital gain.

       c.      The Fraziers had a basis of $4.06 in the 0.309 of a share of
               Columbia Tax Exempt Fund A that was acquired on
               January 26, 2012, and sold on March 27, 2012. We hold

         4 We observe that there is a $665 discrepancy between the stipulated amount

of proceeds of $306,596 and the $307,261 of proceeds stated by the Form 1099-B, which
the Fraziers actually received. We hold the parties to their stipulation under Rule
91(e). The $665 discrepancy must be accounted for by reducing proceeds from the 2012
sales of securities from the Merrill Lynch brokerage account that the Fraziers held for
more than one year.
                                    14

[*14]         that the disposition of this fraction of a share resulted in
              short-term capital gain.

        d.    The Fraziers had a basis of $19,003 in the 1,829 shares of
              Blackrock Municipal I that were acquired on June 8, 1994,
              and sold on March 15, 2012. We hold that the disposition
              of these securities resulted in long-term capital gain.

        e.    The Fraziers had a basis of $26,214 in the 2,523 shares of
              Blackrock Municipal I that were acquired on June 8, 1994,
              and sold on March 15, 2012. We hold that the disposition
              of these securities resulted in long-term capital gain.

5.      In OPINION Part V, we address capital gains from the sale of the
        securities from the Fraziers’ Franklin Growth Fund. In 2012, the
        Fraziers sold a group of securities from their Franklin Growth
        Fund. We hold that the Fraziers’ basis in the securities was $0
        and we hold that the disposition of these securities resulted in a
        short-term capital gain of $40,867 to the Fraziers.

6.      In OPINION Part VI, we address capital gains from an amount
        of $1,417 received by the Fraziers from “Columbia Seligman
        Comm. And Info.” In 2012, the Fraziers received an amount of
        $1,417 from “Columbia Seligman Comm. And Info.” We hold that
        the Fraziers’ basis was $0 and that the Fraziers received $1,417
        in a short-term capital gain from “Columbia Seligman Comm.
        And Info.”

7.      In OPINION Part VII, we hold that the Fraziers received $24,425
        in Schedule E income, $1,545 in ordinary dividends, and $4,636
        in qualified dividends in 2012.

8.      In OPINION Part VIII, we hold that the Fraziers are entitled to
        the standard deduction of $14,200 for 2012.

9.      In OPINION Part IX, we hold that the Fraziers’ income for 2012
        is computed with two personal exemptions for a total of $7,600.

10.     In OPINION Part X, we address the Fraziers’ liability for section
        6662 penalties. The Fraziers are not liable for the section 6662(a)
        penalty for 2009 because they do not have an underpayment of
        tax for 2009. The Fraziers are not liable for section 6662(a)
        penalties for 2010 and 2011 because the understatements are not
                                   15

[*15] substantial, a point that will be confirmed by computations under
      Rule 155.

11.   In OPINION Part XI, we address the Fraziers’ liability for section
      6651(a)(1) additions to tax. The Fraziers are liable for section
      6651(a)(1) additions to tax for 2009, 2010, and 2011. The Fraziers
      are not liable for the section 6651(a)(1) addition to tax for 2012.

12.   In OPINION Part XII, we address the Fraziers’ liability for the
      section 6651(a)(2) additions to tax for 2012. The Fraziers are
      liable for the section 6651(a)(2) addition to tax for 2012 should the
      Rule 155 computations show a positive amount as the correct
      amount of tax.

13.   In OPINION Part XIII, we address LHDC’s liability for section
      6662 penalties. LHDC is liable for the section 6662(a) penalty for
      2009 if Rule 155 calculations show the existence of a substantial
      understatement of tax. LHDC is not liable for section 6662(a)
      penalties for 2010 and 2011 because it does not have
      underpayments of tax for 2010 and 2011.

14.   In OPINION Part XIV, we address LHDC’s liability for 6651(a)(1)
      additions to tax. LHDC is liable for section 6651(a)(1) additions to
      tax for 2009 and 2010.

                         FINDINGS OF FACT

      The parties stipulated some facts. Unless otherwise stated, we
agree with the facts to which the parties have stipulated.

I.    Petitioners: the Fraziers and their wholly-owned C corporation,
      LHDC

       William and Mary founded LHDC in 1971. During the tax years
at issue, 2009–2012, Mary held 75% of LHDC’s shares, and William held
25% of its shares. William was the president of LHDC. Mary’s exact role
in the company is not revealed by the record, but was insignificant
compared to her husband’s. LHDC used the cash basis for accounting
during all years at issue. William and Mary were over 65 years old at
the end of 2012.
                                          16

[*16] II.     LHDC administered Section 8 housing programs for certain
              public housing agencies in Louisiana.

      LHDC was engaged in the business of administering the Section
8 housing program for public housing agencies (PHAs) in Louisiana.

      In the early 1970s, the PHA of the City of Shreveport, Louisiana, 5
engaged LHDC to administer the Section 8 housing program on its
behalf. A few years later, during the late 1970s, LHDC received a second
contract to administer Section 8 funds on behalf of the PHA of Jefferson
Parish, Louisiana. 6

III.   Louisiana Assisted administered Section 8 housing programs for
       certain other public housing agencies in Louisiana.

       In 2000, Bobbie formed Louisiana Assisted to administer the
Section 8 housing program for Plaquemines Parish PHA. (Initially,
Plaquemines Parish did not have a PHA, and Bobbie helped the Parish
create one.) Bobbie was LHDC’s chief operating officer and its program
administrator for Jefferson Parish. William knew about Louisiana
Assisted and gave Bobbie his full consent for her to operate it. Louisiana
Assisted expanded its administration of the Section 8 housing program
from Plaquemines Parish to other PHAs that were too small to be
profitable for LHDC. Bobbie was Louisiana Assisted’s sole member until
2007. 7 During all years at issue, Louisiana Assisted used the cash basis
of accounting for federal income tax purposes. During all years at issue,
Louisiana Assisted was a Louisiana limited liability company operating
out of Gretna, Louisiana with a mailing address in Metairie, Louisiana.
Both Gretna and Metairie are in Jefferson Parish Louisiana.

       5 Shreveport is located in Caddo Parish in the northern part of Louisiana.

       6 In Louisiana, parishes are the sub-state governmental units analogous to

counties in other states. Where the city and parish governments are consolidated, the
consolidated city-parish is the sub-state governmental unit corresponding to
consolidated city-county units in other states. Cities 101 – Consolidations, National
League of Cities, https://www.nlc.org/resource/cities-101-consolidations/ (last visited
Sept. 9, 2021).
        7 It is unclear how Louisiana Assisted was treated for federal income tax

purposes when Bobbie was its sole member. Louisiana Assisted was a single-member
LLC. For federal income tax purposes, it would have been treated either as (1) a
disregarded entity (and sole proprietorship of Bobbie) or (2) a corporation. See Treas.
Reg. § 301.7701-3(a), (b)(1)(ii).
                                  17

[*17] IV.   LHDC agreed to make payments to Gary Lala.

       In 2003, LHDC’s contract with the Jefferson Parish PHA was up
for renewal. A former vice chairman of the Jefferson Parish PHA, Gary
Lala (Lala), contacted William. Lala suggested that he would attempt to
secure the contract for himself unless LHDC entered into a business
arrangement with him. Lala’s best friend was the chairman of the board
of the Jefferson Parish PHA, Barry Bordelon. Not wanting LHDC to lose
the Jefferson Parish Section 8 housing program contract, William
agreed that Lala could receive payments from LHDC. Lala and LHDC
drew up a contract in 2003. That contract is not in the record.

V.     Hurricane Katrina affected LHDC operations.

      Hurricane Katrina, which hit the Gulf Coast in August 2005,
destroyed LHDC’s Jefferson Parish office and disrupted LHDC’s
operations. To help LHDC recover, William and Mary’s daughter Tracy
and her husband Robert moved from Austin, Texas to work for LHDC.
Tracy was a lawyer with a solo practice in Austin, Texas. Before that
she had worked as an in-house tax lawyer for Exxon Mobil and BP. After
the post-Katrina move to Louisiana, Tracy began to perform regulatory
compliance work for LHDC. Robert had been working as an information-
technology professional in Austin. After the post-Katrina move to
Louisiana, he began working for LHDC without a specific title. In 2014,
he became its president.

VI.    LHDC began administering Disaster Housing            Assistance
       Program payments for Jefferson Parish PHA.

       Katrina displaced many people living in Jefferson Parish and
other parts of the U.S. Gulf Coast. The Federal Emergency Management
Agency partnered with HUD to develop the Disaster Housing Assistance
Program (DHAP), whose purpose was to provide disaster-relief housing
for victims displaced by Katrina. LHDC received a contract with
Jefferson Parish PHA to administer its DHAP payments.

VII.   In 2006, LHDC and Lala replaced their 2003 contract with a new
       contract.

      The 2003 contract between LHDC and Lala was replaced with a
new contract each time LHDC renewed its contract with the Jefferson
Parish PHA. In 2006, the 2003 LHDC-Lala contract was replaced by a
new contract.
                                          18

[*18] The 2006 contract, which was signed by William Frazier as
LHDC’s “duly authorized President,” provided that Lala would be
employed as the vice president of LHDC. Under the contract, LHDC was
required to pay Lala a base fee of $400,080 per year. In addition to this
base fee, Lala was to be paid a fee calculated by reference to increased
fees received by LHDC for administering Section 8 payments:

      An additional monthly fee of 33% of the net increase in the Base
Administrative Fee received by LHDC above the sum received for the
same month in the previous calendar year. Should the gross unit
administrative fee 8 that LHDC receives from the Authority fall below
the Base Administrative Fee for the same month in the previous
calendar year, 33% of the reduction shall be offset against future or
current payments. 9

       “Base Administrative Fee” was defined as the fee that LHDC
received each month for providing Section 8-related administrative
services to PHAs.

      Furthermore, the contract required LHDC to pay Lala 50% of fees
that LHDC earned from new programs:

       Additional compensation: Fees for any new programs such as
Disaster Voucher Program (DVP) one time placement fees, affordable
housing, homeownership and consulting grants, all shall be paid at a
rate of one-half (50%)

      The contract also provided that Lala was entitled to
reimbursement for business-related meals, entertainment, travel, and
telephone expenses of $4,000 per month.

     Except for exercising his influence with the Jefferson Parish
PHA, Lala seems to have performed little work for LHDC. He did not

        8 The contract does not define “gross unit administrative fee.” There is nothing

else in the record that allows us to discern what the “gross unit administrative fee” is.
We need not make a finding as to what constitutes the “gross unit administrative fee”
because the specific terms of Lala’s compensation under his contract with LHDC has
no bearing on the outcome of the issues under dispute.
        9 The contract does not elaborate on what payments the 33% reductions are

offset against. Like the “gross unit administrative fee,” see supra note 8, we need not
make a finding as to what payments the 33% reductions are being offset against
because the specific terms of Lala’s compensation under his contract with LHDC has
no bearing on the outcome of the issues in dispute.
                                           19

[*19] have an office at the LHDC headquarters. He went into LHDC’s
headquarters infrequently, if ever. Other LHDC workers considered him
a political “leech.”

VIII. Louisiana Assisted began administering DHAP payments for
      Mississippi Gulf Coast; Bobbie sold 50% of her share of Louisiana
      Assisted to LHDC in exchange for LHDC’s assistance in doing so.

       Around 2007, HUD awarded Louisiana Assisted a contract to
administer DHAP payments for portions of the Mississippi Gulf Coast. 10
These payments were apparently handled without the involvement of a
PHA. Bobbie, who was the sole owner of Louisiana Assisted, was
concerned that Louisiana Assisted lacked the necessary personnel, office
space, and information technology, for such an undertaking. Bobbie
orally agreed with William that Louisiana Assisted could use LHDC’s
personnel, office space, and information technology to administer the
DHAP payments to residents of the Mississippi Gulf Coast in exchange
for LHDC receiving a 50% membership interest in Louisiana Assisted.
We refer to this agreement as the 2007 oral agreement.

      William and Bobbie were concerned that Lala would take the view
that he was entitled to a portion of the Louisiana Assisted fees for the
Mississippi Gulf Coast under his 2006 agreement with LHDC.
Therefore, they attempted to conceal that LHDC had received a 50%
membership interest in Louisiana Assisted. As described later, the tax
returns of Louisiana Assisted, the Fraziers, and LHDC, were prepared
in such a way as to hide LHDC’s ownership interest in Louisiana
Assisted and report that William was the owner.

IX.     Business operations of LHDC and Louisiana Assisted during the
        years at issue

      During the years at issue, 2009–2012, LHDC and Louisiana
Assisted were administering the following housing programs:

        10 The Mississippi Gulf Coast refers to the area of the State of Mississippi that

is along the Gulf of Mexico.
                                         20

[*20]                     LHDC                          Louisiana Assisted
 Section 8   City of Shreveport PHA            Plaquemines Parish PHA
             Jefferson Parish PHA              Other PHAs
             Other PHAs
 DHAP        Jefferson Parish PHA              Areas of Mississippi Gulf Coast (no
                                               PHAs involved)

      Pursuant to the 2007 oral agreement, LHDC provided Louisiana
Assisted services (through its workers, both workers treated as
employees and workers treated as independent contractors), office
space, and information systems, to assist Louisiana Assisted in
administering the Mississippi Gulf Coast DHAP program. LHDC also
administered its own contracts.

       LHDC and Louisiana Assisted each had their own workers and
their own payment system for making wage and non-wage payments to
the workers. LHDC paid its workers (and paid non-wage payroll
expenses) through the use of Creative Payroll Solutions, a professional
employer organization.

      Creative Payroll Solutions performed LHDC’s payroll function,
which includes paying those workers that LHDC treated as employees,
and performing payroll services related to payroll compliance, workers’
compensation, health insurance, retirement, 401(k), dental plans, and
company benefit plans. 11 Creative Payroll Solutions also paid
professional fees to workers who were not treated as employees.

      The people who worked for LHDC, and who were treated as
employees by LHDC, were paid by Creative Payroll Solutions, which in
turn received payment from LHDC. The wage for each such worker was
determined by LHDC. LHDC would pay Creative Payroll Solutions
amounts equal to (1) wages for all such workers, (2) payroll expenses
that were not related to wages, and (3) a fee for Creative Payroll

        11 Trombetta ran Creative Payroll Solutions. Trombetta was also the Fraziers’

and LHDC’s long-time accountant. He began working for them in the mid-1980s. He
was a certified public accountant and was licensed with the State of Louisiana to
practice accounting. Trombetta prepared the Fraziers’ Forms 1040, U.S. Individual
Income Tax Return; LHDC’s Forms 1120, U.S. Corporation Income Tax Return; and
LHDC’s annual income statement. Another accounting firm prepared the Forms 1065,
U.S. Return of Partnership Income, for Louisiana Assisted.
                                   21

[*21] Solutions. Every two weeks Creative Payroll Solutions would pay
these workers their wages.

       LHDC paid Creative Payroll Solutions $2,770,775.28 in 2010,
which is the same amount that LHDC reported as a deduction for
salaries and wages on its 2010 tax return. LHDC paid Creative Payroll
Solutions $2,326,406.19 in 2011, which is the same amount that LHDC
reported as a deduction for salaries and wages on its 2011 tax return.
Our reasoning for the findings in this paragraph is discussed infra,
OPINION Part III.B.1.

       Creative Payroll Solutions also wrote checks on behalf of LHDC
to various payees for professional fees. Creative Payroll Solutions had a
facsimile of William’s signature that it used to sign the checks to these
payees.

       LHDC paid professional fees in the amount of $1,818,542 in 2011,
which is the same amount that LHDC reported as a deduction for
professional fees on its 2011 tax return. Our reasoning for this finding
is discussed infra, OPINION Part III.B.2.

X.    During the years at issue, Louisiana Assisted made cash
      distributions to LHDC and reimbursed LHDC for certain
      expenses.

      During the years at issue, Louisiana Assisted made two types of
transfers of funds to LHDC for two reasons. First, Louisiana Assisted
made cash distributions to LHDC, and second, Louisiana Assisted
reimbursed LHDC for certain expenses paid for work performed on
behalf of Louisiana Assisted. LHDC’s income statements and
Trombetta’s testimony help us trace the movements of cash from
Louisiana Assisted to LHDC.

      A.     During the years at issue, Trombetta’s accounting firm
             prepared income statements for LHDC.

       For the years at issue, Trombetta’s accounting firm prepared an
income statement for LHDC. These income statements show LHDC’s
revenue and expenditures for the calendar years of 2009, 2010, 2011,
and 2012. Although they were not filed with the IRS as part of LHDC’s
tax returns, Trombetta used them in preparing LHDC’s tax returns.

       Three line items in LHDC’s income statements represent cash
received from Louisiana Assisted:
                                    22

[*22] (1) “Fees – LA Assisted Housing, LLC,” which is in LHDC’s 2009
      and 2010 income statements, but not in LHDC’s 2011 and 2012
      income statements;

        (2) “Fees Reimbursed LA Assisted Housing,” which is in LHDC’s
        income statements for all four years (2009–2012); and

        (3) “Other Income,” which is only in LHDC’s 2012 income
        statement.

       The following table shows the amounts recorded for these three
categories (i.e., “Fees – LA Assisted Housing, LLC,” “Fees Reimbursed
LA Assisted Housing,” and “Other Income”) along with amounts
recorded for “Total Sales” (for reference) in LHDC’s income statements
for every tax year at issue:

                                   Fees
   Income        Fees – LA
                                Reimbursed
  Statement       Assisted                     Other Income   Total Sales
                                LA Assisted
    Year        Housing, LLC
                                 Housing

 2009              $2,165,000        $17,560       N/A          $9,239,547

 2010                765,000          17,460       N/A           5,528,510

 2011               N/A              477,114       N/A           4,830,470

 2012               N/A              926,434        165,000      4,731,274

      We now address some aspects of LHDC’s income statements that
are not explained by the statements but by other parts of the record.

      First, for 2009 and 2010, Trombetta intended for “Fees – LA
Assisted Housing, LLC” to show cash distributions from Louisiana
Assisted and “Fees Reimbursed LA Assisted Housing” to show
reimbursements for costs that LHDC paid for work performed on behalf
of Louisiana Assisted.

       Second, the 2011 income statement does not have the “Fees – LA
Assisted Housing, LLC.” Instead, Trombetta recorded the total $477,114
of cash that LHDC received from Louisiana Assisted (consisting of the
$450,000 cash distribution and $27,114 of reimbursements) in “Fees
Reimbursed LA Assisted Housing” for 2011. The $450,000 cash
distribution component in “Fees Reimbursed LA Assisted Housing” in
LHDC’s 2011 income statement matches the $450,000 reported in the
                                       23

[*23] “Distributions” box in Louisiana Assisted’s 2011 Schedule K–1
issued to William. 12

       Third, the information in the record is inconsistent as to the total
amount of money that LHDC received from Louisiana Assisted in 2012.
Louisiana Assisted reported a $942,271 distribution on the Schedule
K–1 issued to William. LHDC’s 2012 income statement did not have a
“Fees – LA Assisted Housing, LLC” line item. We might expect that the
“Fees Reimbursed LA Assisted Housing” line item contained the
combined amount of money that LHDC received from Louisiana
Assisted for the cash distribution and reimbursements—since that was
the case in 2011. However, the “Fees Reimbursed LA Assisted Housing”
line item for 2012 shows $926,434, which is less than the $942,271
reported as a distribution on the Schedule K–1.

     We make no finding as to whether $942,271, $926,434, or another
amount was the actual amount of combined cash that LHDC received
from Louisiana Assisted in 2012 for the cash distribution and
reimbursements.

      Lastly, the $165,000 of “Other Income” on LHDC’s 2012 income
statement refers to the proceeds from the sale of the 50% Louisiana
Assisted membership interest pursuant to the 2012 agreement.

       B.     During the years at issue, Louisiana Assisted paid cash
              distributions to LHDC.

       In the early phase of Louisiana Assisted and LHDC’s
collaboration, Bobbie would write checks for cash distributions from
Louisiana Assisted to herself and to LHDC. For the checks she made out
to LHDC, she would mail them directly to Trombetta’s office, a member
of which would then deposit each check into LHDC’s account.

       But recall supra FINDINGS OF FACT Part IV, that, in 2003,
LHDC and Lala had entered into a contract in which LHDC had agreed
to hire Lala as vice-president of LHDC and agreed to compensate him
in part based on certain types of fees earned by LHDC. Lala had already
attempted to collect compensation from LHDC (to which the Fraziers
believed he was not entitled under the terms of the contract) based on
his broad interpretation of the new programs clause. Although, the fees
to which Lala was entitled under the contract arguably did not include

       12 Louisiana Assisted issued Schedules K–1 to Bobbie and William for 2009,

2010, 2011, and 2012. See infra FINDINGS OF FACT Part XVII.A.1.
                                  24

[*24] cash distributions from Louisiana Assisted, the Fraziers were
concerned that if Lala discovered that LHDC was an owner of Louisiana
Assisted, he would attempt to claim a portion of LHDC’s cash
distributions from Louisiana Assisted as part of his compensation.
Therefore, William asked Bobbie to make the distribution checks out to
him, instead of LHDC, in order to conceal the revenue from Lala. Bobbie
made the checks out to William and sent them to Trombetta who
deposited them directly into LHDC’s account.

       The cash distributions continued to be paid to LHDC despite the
checks being written out to William. William never received any cash
distributions from Louisiana Assisted.

      Louisiana Assisted paid cash distributions to LHDC of $2,165,000
in 2009, $765,000 in 2010, $450,000 in 2011, and an undetermined
amount, in 2012.

      C.    During the years at issue, Louisiana Assisted made
            reimbursements payments to LHDC.

      Louisiana Assisted made reimbursement payments to LHDC of
$17,560 in 2009, $17,460 in 2010, $27,114 in 2011, and an indeterminate
amount in 2012.

      Both LHDC and Louisiana Assisted paid expenses for salary and
wages of their respective workers. Workers performing duties for LHDC
were expected to perform the same work for Louisiana Assisted on
DHAP contracts if needed. There were no intercompany payments for
these services other than the understanding that part of the
consideration that LHDC provided in exchange for its 50% interest in
Louisiana Assisted was to allow Louisiana Assisted to use LHDC’s
personnel to administer Louisiana Assisted’s DHAP contracts.

XI.   In 2012, LHDC sold of its 50% membership interest in Louisiana
      Assisted to Bobbie.

      In 2012, LHDC sold its 50% membership interest in Louisiana
Assisted back to Bobbie for $165,000. She sent the check directly to
Trombetta, who deposited the money in LHDC’s account.
                                        25

[*25] XII.     In 2012, the Fraziers sold securities from the Merrill Lynch
               brokerage account.

      During 2012, the Fraziers made 1,030 sales of securities from
their Merrill Lynch brokerage account. Each of these 1,030 sales was
reported on a Form 1099-B, Proceeds from Broker and Barter Exchange
Transactions, that was sent by Merrill Lynch to the Fraziers. We
admitted the Form 1099-B into evidence. The IRS suggests that the
information in the Form 1099-B sent to the Fraziers is different from
the information on the Form 1099-B Merrill Lynch sent to the IRS.
However, the Form 1099-B Merrill Lynch sent to the IRS is not in
evidence. Therefore, we cannot determine if the information on the Form
1099-B sent to the Fraziers is different from the information on the
Form 1099-B sent to the IRS.

     The 1,030 sales reported on the Form 1099-B sent by Merrill
Lynch to the Fraziers involved the following eight securities:

                                                 Abbreviation Used in Form
 Full Name                           CUSIP
                                                 1099-B
 Columbia Tax Exempt Fund A          19765L850   Col. Tax Ex. Fd. A
 Nuveen      Louisiana   Municipal               Nuveen LA Muni A
                                     67065P881
 Bond A
 Blackrock National Municipal I      09253C876   Blackrock Nat I
 Orange County FL A Sales            684515PY9   Orange Cty FL A
 New York N Y Subser                 64966JD78   NY Subser
 Michigan Municipal BD Auth.                     MI Muni Auth Rev
                                     59455TZN5
 Rev.
 Nuveen        Quality     Income                Nuveen Qlty Muni
                                     670977107
 Municipal
 BlackRock MuniHoldings Fund II      09253P109   Blackrock MH II

      Replicated below is the information found in the Form 1099-B
sent by Merrill Lynch to the Fraziers:
                                                       26

[*26]                                                                                   Wash sale    Gain or
                       Date of     Date of sale                            Cost basis
Security                                          Quantity     Amount                      loss       loss
                     acquisition   or exchange
                                                                                        disallowed
Col. Tax Ex. Fd. A    1/31/2012      3/15/2012        17.000     $235.46      $238.16         0.00     −$2.70
Col. Tax Ex. Fd. A    2/29/2012      3/15/2012         1.000       13.85        13.99         0.00      −0.14
Col. Tax Ex. Fd. A    2/29/2012      3/15/2012        15.000      207.76       209.85         0.00      −2.09
Col. Tax Ex. Fd. A    2/29/2012      3/27/2012         0.132        1.83         1.85         0.00      −0.02
Col. Tax Ex. Fd. A    4/30/2012      5/22/2012         0.488        6.89         6.77         0.00       0.12
Col. Tax Ex. Fd. A    5/31/2012      6/26/2012         0.001        0.01         0.01         0.00       0.00
Col. Tax Ex. Fd. A    3/30/2012      7/23/2012         6.000       85.62        83.28         0.00       2.34
Col. Tax Ex. Fd. A    7/31/2012      8/21/2012         0.004        0.06         0.05         0.00       0.01
Nuveen LA Muni A      1/31/2012      3/15/2012         1.000       11.21        11.13         0.00       0.08
Nuveen LA Muni A      1/31/2012      3/15/2012        13.000      145.74       147.03         0.00      −1.29
Nuveen LA Muni A      2/29/2012      3/15/2012         1.000       11.21        11.32         0.00      −0.11
Nuveen LA Muni A      2/29/2012      3/15/2012        13.000      145.75       147.16         0.00      −1.41
Nuveen LA Muni A      2/29/2012      3/27/2012         0.040        0.45         0.45         0.00       0.00
Nuveen LA Muni A      4/30/2012      5/22/2012         0.913       10.39        10.23         0.00       0.16
Nuveen LA Muni A       6/1/2012      6/26/2012         0.002        0.02         0.02         0.00       0.00
Nuveen LA Muni A      3/30/2012      7/23/2012         5.000       57.55        56.05         0.00       1.50
Nuveen LA Muni A      7/31/2012      8/21/2012         0.003        0.03         0.03         0.00       0.00
Blackrock Nat I       1/31/2012      3/15/2012        18.000      193.33       194.94         0.00      −1.61
Blackrock Nat I       2/29/2012      3/15/2012         1.000       10.74        10.67         0.00       0.07
Blackrock Nat I       2/29/2012      3/15/2012        17.000       182.6       183.94         0.00      −1.34
Blackrock Nat I       2/29/2012      3/23/2012         0.365        3.91         3.95         0.00      −0.04
Blackrock Nat I       4/30/2012      5/18/2012         0.550        6.02          5.9         0.00       0.12
Blackrock Nat I       5/31/2012      6/22/2012         0.001        0.01         0.01         0.00       0.00
Blackrock Nat I       3/30/2012      7/23/2012         6.000       66.54        64.44         0.00       2.10
Blackrock Nat I       7/31/2012      8/17/2012        0.0030        0.03         0.03         0.00       0.00
Orange Cty FL A        4/5/2012     12/11/2012    10,000.000   12,248.80    11,361.59         0.00     887.21
NY Subser             4/11/2012      12/7/2012    10,000.000   12,700.00    12,137.27         0.00     562.73
MI Muni Auth Rev      3/21/2012      4/13/2012    10,000.000   11,886.10    11,437.06         0.00     449.04
Col. Tax Ex. Fd. A    3/31/2011      3/15/2012        17.000      235.45       214.84         0.00      20.61
Col. Tax Ex. Fd. A    4/29/2011      3/15/2012        16.000      221.60       205.41         0.00      16.19
Col. Tax Ex. Fd. A    4/29/2011      3/15/2012         1.000       13.84        12.65         0.00       1.19
Col. Tax Ex. Fd. A    5/31/2011      3/15/2012         1.000       13.85        13.00         0.00       0.85
Col. Tax Ex. Fd. A    5/31/2011      3/15/2012        19.000      263.15       248.02         0.00      15.13
Col. Tax Ex. Fd. A    6/30/2011      3/15/2012        16.000      221.60       209.92         0.00      11.68
Col. Tax Ex. Fd. A    6/30/2011      3/15/2012         1.000       13.85        13.08         0.00       0.77
Col. Tax Ex. Fd. A    7/29/2011      3/15/2012        18.000      249.30       237.95         0.00      11.35
Col. Tax Ex. Fd. A    7/29/2011      3/15/2012         1.000       13.85        13.17         0.00       0.68
Col. Tax Ex. Fd. A    8/31/2011      3/15/2012        17.000      235.45       226.77         0.00       8.68
Col. Tax Ex. Fd. A    9/30/2011      3/15/2012        17.000      235.45       229.50         0.00       5.95
Col. Tax Ex. Fd. A   10/31/2011      3/15/2012        17.000      235.45       227.62         0.00       7.83
Col. Tax Ex. Fd. A   10/31/2011      3/15/2012         1.000       13.85        13.42         0.00       0.43
Col. Tax Ex. Fd. A   11/30/2011      3/15/2012        16.000      221.60       214.88         0.00       6.72
Col. Tax Ex. Fd. A   11/30/2011      3/15/2012         1.000       13.85        13.41         0.00       0.44
Col. Tax Ex. Fd. A   12/30/2011      3/15/2012        16.000      221.60       218.39         0.00       3.21
Nuveen LA Muni A      3/31/2011      3/15/2012        14.000      156.95       142.37         0.00      14.58
Nuveen LA Muni A      3/31/2011      3/15/2012         1.000       11.21        10.21         0.00       1.00
Nuveen LA Muni A      4/29/2011      3/15/2012        14.000      156.95       144.75         0.00      12.20
                                                      27

[*27]                                                                                  Wash sale    Gain or
                       Date of     Date of sale                           Cost basis
Security                                          Quantity    Amount                      loss       loss
                     acquisition   or exchange
                                                                                       disallowed
Nuveen LA Muni A      4/29/2011      3/15/2012        1.000       11.21        10.24         0.00       0.97
Nuveen LA Muni A      5/31/2011      3/15/2012       14.000      156.95       147.70         0.00       9.25
Nuveen LA Muni A      6/30/2011      3/15/2012       14.000      156.95       148.68         0.00       8.27
Nuveen LA Muni A      6/30/2011      3/15/2012        1.000       11.21        10.48         0.00       0.73
Nuveen LA Muni A      7/29/2011      3/15/2012       14.000      156.95       149.93         0.00       7.02
Nuveen LA Muni A      8/31/2011      3/15/2012       14.000      156.95       151.33         0.00       5.62
Nuveen LA Muni A      9/30/2011      3/15/2012       14.000      156.95       153.16         0.00       3.79
Nuveen LA Muni A     10/31/2011      3/15/2012       14.000      156.95       152.17         0.00       4.78
Nuveen LA Muni A     10/31/2011      3/15/2012        1.000       11.21        10.75         0.00       0.46
Nuveen LA Muni A     11/30/2011      3/15/2012       14.000      156.95       152.74         0.00       4.21
Nuveen LA Muni A     12/30/2011      3/15/2012       14.000      156.95       155.12         0.00       1.83
Blackrock Nat I       3/31/2011      3/15/2012       21.000      225.55       204.11         0.00      21.44
Blackrock Nat I       4/29/2011      3/15/2012       20.000      214.81       197.40         0.00      17.41
Blackrock Nat I       4/29/2011      3/15/2012        1.000       10.74         9.79         0.00       0.95
Blackrock Nat I       5/31/2011      3/15/2012       20.000      214.81       200.60         0.00      14.21
Blackrock Nat I       5/31/2011      3/15/2012        1.000       10.74         9.92         0.00       0.82
Blackrock Nat I       6/30/2011      3/15/2012       20.000      214.81       200.99         0.00      13.82
Blackrock Nat I       7/29/2011      3/15/2012       20.000      214.81       202.19         0.00      12.62
Blackrock Nat I       7/29/2011      3/15/2012        1.000       10.74        10.05         0.00       0.69
Blackrock Nat I       8/31/2011      3/15/2012       19.000      204.07       194.56         0.00       9.51
Blackrock Nat I       9/30/2011      3/15/2012       18.000      193.32       187.38         0.00       5.94
Blackrock Nat I       9/30/2011      3/15/2012        1.000       10.74        10.35         0.00       0.39
Blackrock Nat I      10/31/2011      3/15/2012       18.000      193.33       186.12         0.00       7.21
Blackrock Nat I      11/30/2011      3/15/2012       18.000      193.33       185.75         0.00       7.58
Blackrock Nat I      11/30/2011      3/15/2012        1.000       10.74        10.34         0.00       0.40
Blackrock Nat I      12/30/2011      3/15/2012       18.000      193.33       188.81         0.00       4.52
Blackrock Nat I      12/30/2011      3/15/2012        1.000       10.74        10.36         0.00       0.38
Col. Tax Ex. Fd. A     5/4/1991      4/26/2012        8.000      112.08       115.62         0.00      −3.54
Nuveen LA Muni A      9/18/1993      4/26/2012        4.000       45.16        45.00         0.00       0.16
Nuveen LA Muni A     10/20/1993      4/26/2012        2.000       22.58        22.64         0.00      −0.06
Blackrock Nat I       8/10/1999      4/26/2012        5.000       54.25        54.35         0.00      −0.10
Nuveen Qlty Muni      6/26/1991      3/15/2012    1,000.000   14,586.74    15,000.00         0.00   −413.26
Blackrock MH II       2/24/1998      3/15/2012    1,400.000   22,123.80    21,000.00         0.00   1,123.80
Col. Tax Ex. Fd. A    3/19/1991      3/15/2012       10.000      138.49       136.96         0.00       1.53
Col. Tax Ex. Fd. A    4/19/1991      3/15/2012        8.000      110.79       115.37         4.58       0.00
Col. Tax Ex. Fd. A    4/19/1991      3/15/2012        4.000       55.40        57.68         0.00      −2.28
Col. Tax Ex. Fd. A    5/23/1991      3/15/2012       13.000      180.04       187.07         0.00      −7.03
Col. Tax Ex. Fd. A    6/19/1991      3/15/2012       11.000      152.34       150.28         0.00       2.06
Col. Tax Ex. Fd. A    7/19/1991      3/15/2012       12.000      166.20       172.70         0.00      −6.50
Col. Tax Ex. Fd. A    8/20/1991      3/15/2012       12.000      166.19       174.54         0.00      −8.35
Col. Tax Ex. Fd. A    9/20/1991      3/15/2012       12.000      166.20       168.14         0.00      −1.94
Col. Tax Ex. Fd. A   10/22/1991      3/15/2012       11.000      152.35       162.54         0.00     −10.19
Col. Tax Ex. Fd. A   11/25/1991      3/15/2012       12.000      166.19       176.71         0.00     −10.52
Col. Tax Ex. Fd. A   12/24/1991      3/15/2012       12.000      166.19       168.49         0.00      −2.30
Col. Tax Ex. Fd. A    1/21/1992      3/15/2012       12.000      166.20       177.78         0.00     −11.58
Col. Tax Ex. Fd. A    2/20/1992      3/15/2012       12.000      166.19       168.05         0.00      −1.86
Col. Tax Ex. Fd. A    3/19/1992      3/15/2012       11.000      152.34       160.56         0.00      −8.22
                                                      28

[*28]                                                                                 Wash sale    Gain or
                       Date of     Date of sale                          Cost basis
Security                                          Quantity    Amount                     loss       loss
                     acquisition   or exchange
                                                                                      disallowed
Col. Tax Ex. Fd. A    4/21/1992      3/15/2012       13.000     180.05       190.40         0.00     −10.35
Col. Tax Ex. Fd. A    5/20/1992      3/15/2012       12.000     166.19       169.08         0.00      −2.89
Col. Tax Ex. Fd. A    6/19/1992      3/15/2012       12.000     166.20       178.32         0.00     −12.12
Col. Tax Ex. Fd. A    7/22/1992      3/15/2012       12.000     166.19       182.52         0.00     −16.33
Col. Tax Ex. Fd. A    8/19/1992      3/15/2012       11.000     152.35       167.69         0.00     −15.34
Col. Tax Ex. Fd. A    9/22/1992      3/15/2012       13.000     180.04       196.44         0.00     −16.40
Col. Tax Ex. Fd. A   10/20/1992      3/15/2012       12.000     166.20       179.50         0.00     −13.30
Col. Tax Ex. Fd. A   11/20/1992      3/15/2012       43.000     595.55       624.96         0.00     −29.41
Col. Tax Ex. Fd. A   12/22/1992      3/15/2012       11.000     152.35       163.93         0.00     −11.58
Col. Tax Ex. Fd. A    1/22/1993      3/15/2012       12.000     166.20       179.28         0.00     −13.08
Col. Tax Ex. Fd. A    2/23/1993      3/15/2012       13.000     180.04       197.00         0.00     −16.96
Col. Tax Ex. Fd. A    3/22/1993      3/15/2012       10.000     138.50       146.04         0.00      −7.54
Col. Tax Ex. Fd. A    4/22/1993      3/15/2012       12.000     166.19       184.46         0.00     −18.27
Col. Tax Ex. Fd. A    5/20/1993      3/15/2012       12.000     166.20       176.12         0.00      −9.92
Col. Tax Ex. Fd. A    6/23/1993      3/15/2012       12.000     166.20       185.02         0.00     −18.82
Col. Tax Ex. Fd. A    7/21/1993      3/15/2012       11.000     152.35       171.85         0.00     −19.50
Col. Tax Ex. Fd. A    8/20/1993      3/15/2012       12.000     166.20       179.58         0.00     −13.38
Col. Tax Ex. Fd. A    9/22/1993      3/15/2012       12.000     166.20       189.41         0.00     −23.21
Col. Tax Ex. Fd. A   10/20/1993      3/15/2012       10.000     138.50       152.21         0.00     −13.71
Col. Tax Ex. Fd. A   11/22/1993      3/15/2012       38.000     526.30       576.90         0.00     −50.60
Col. Tax Ex. Fd. A   12/22/1993      3/15/2012       12.000     166.20       186.40         0.00     −20.20
Col. Tax Ex. Fd. A    1/21/1994      3/15/2012       12.000     166.20       178.92         0.00     −12.72
Col. Tax Ex. Fd. A    2/25/1994      3/15/2012       12.000     166.20       185.56         0.00     −19.36
Col. Tax Ex. Fd. A    3/22/1994      3/15/2012       11.000     152.35       157.82         0.00      −5.47
Col. Tax Ex. Fd. A    4/21/1994      3/15/2012       13.000     180.05       189.10         0.00      −9.05
Col. Tax Ex. Fd. A    5/19/1994      3/15/2012       13.000     180.05       189.08         0.00      −9.03
Col. Tax Ex. Fd. A    6/21/1994      3/15/2012       14.000     193.90       204.23         0.00     −10.33
Col. Tax Ex. Fd. A    7/19/1994      3/15/2012       11.000     152.34       160.36         0.00      −8.02
Col. Tax Ex. Fd. A    8/23/1994      3/15/2012       13.000     180.05       189.40         0.00      −9.35
Col. Tax Ex. Fd. A    9/21/1994      3/15/2012       13.000     180.05       186.25         0.00      −6.20
Col. Tax Ex. Fd. A   10/19/1994      3/15/2012       13.000     180.05       184.91         0.00      −4.86
Col. Tax Ex. Fd. A   11/18/1994      3/15/2012       55.000     761.75       702.70         0.00      59.05
Col. Tax Ex. Fd. A   11/21/1994      3/15/2012       15.000     207.75       195.37         0.00      12.38
Col. Tax Ex. Fd. A   12/20/1994      3/15/2012       14.000     193.90       188.98         0.00       4.92
Col. Tax Ex. Fd. A    1/19/1995      3/15/2012       13.000     180.05       179.27         0.00       0.78
Col. Tax Ex. Fd. A    2/23/1995      3/15/2012       15.000     207.75       210.87         0.00      −3.12
Col. Tax Ex. Fd. A    3/21/1995      3/15/2012       11.000     152.35       158.18         0.00      −5.83
Col. Tax Ex. Fd. A    4/19/1995      3/15/2012       13.000     180.05       187.64         0.00      −7.59
Col. Tax Ex. Fd. A    5/19/1995      3/15/2012       13.000     180.05       189.53         0.00      −9.48
Col. Tax Ex. Fd. A    6/21/1995      3/15/2012       14.000     193.90       202.23         0.00      −8.33
Col. Tax Ex. Fd. A    7/20/1995      3/15/2012       12.000     166.20       174.98         0.00      −8.78
Col. Tax Ex. Fd. A    8/21/1995      3/15/2012       14.000     193.90       198.98         0.00      −5.08
Col. Tax Ex. Fd. A    9/19/1995      3/15/2012       13.000     180.05       191.15         0.00     −11.10
Col. Tax Ex. Fd. A   10/23/1995      3/15/2012       13.000     180.05       191.92         0.00     −11.87
Col. Tax Ex. Fd. A   11/21/1995      3/15/2012       14.000     193.90       205.48         0.00     −11.58
Col. Tax Ex. Fd. A   11/21/1995      3/15/2012       24.000     332.40       346.57         0.00     −14.17
Col. Tax Ex. Fd. A   12/19/1995      3/15/2012       12.000     166.20       178.84         0.00     −12.64
                                                      29

[*29]                                                                                 Wash sale    Gain or
                       Date of     Date of sale                          Cost basis
Security                                          Quantity    Amount                     loss       loss
                     acquisition   or exchange
                                                                                      disallowed
Col. Tax Ex. Fd. A    1/19/1996      3/15/2012       13.000     180.05       194.16         0.00     −14.11
Col. Tax Ex. Fd. A    2/21/1996      3/15/2012       14.000     193.90       210.73         0.00     −16.83
Col. Tax Ex. Fd. A    3/19/1996      3/15/2012       12.000     166.20       174.11         0.00      −7.91
Col. Tax Ex. Fd. A    4/19/1996      3/15/2012       14.000     193.90       202.23         0.00      −8.33
Col. Tax Ex. Fd. A    5/21/1996      3/15/2012       15.000     207.75       216.85         0.00      −9.10
Col. Tax Ex. Fd. A    6/19/1996      3/15/2012       13.000     180.05       185.73         0.00      −5.68
Col. Tax Ex. Fd. A    7/19/1996      3/15/2012       13.000     180.05       187.18         0.00      −7.13
Col. Tax Ex. Fd. A    8/20/1996      3/15/2012       14.000     193.90       204.73         0.00     −10.83
Col. Tax Ex. Fd. A    9/19/1996      3/15/2012       14.000     193.90       203.47         0.00      −9.57
Col. Tax Ex. Fd. A   10/21/1996      3/15/2012       14.000     193.90       204.23         0.00     −10.33
Col. Tax Ex. Fd. A   11/19/1996      3/15/2012       43.000     595.55       615.97         0.00     −20.42
Col. Tax Ex. Fd. A   11/19/1996      3/15/2012       14.000     193.90       203.23         0.00      −9.33
Col. Tax Ex. Fd. A   12/27/1996      3/15/2012       14.000     193.90       201.98         0.00      −8.08
Col. Tax Ex. Fd. A    1/21/1997      3/15/2012       15.000     207.75       215.21         0.00      −7.46
Col. Tax Ex. Fd. A    2/21/1997      3/15/2012       14.000     193.90       204.77         0.00     −10.87
Col. Tax Ex. Fd. A    3/21/1997      3/15/2012       13.000     180.05       188.07         0.00      −8.02
Col. Tax Ex. Fd. A    4/21/1997      3/15/2012       15.000     207.75       213.87         0.00      −6.12
Col. Tax Ex. Fd. A    5/21/1997      3/15/2012       14.000     193.90       202.65         0.00      −8.75
Col. Tax Ex. Fd. A    6/19/1997      3/15/2012       14.000     193.90       205.48         0.00     −11.58
Col. Tax Ex. Fd. A    7/21/1997      3/15/2012       14.000     193.90       207.48         0.00     −13.58
Col. Tax Ex. Fd. A    8/19/1997      3/15/2012       15.000     207.75       220.10         0.00     −12.35
Col. Tax Ex. Fd. A    9/19/1997      3/15/2012       14.000     193.90       207.23         0.00     −13.33
Col. Tax Ex. Fd. A   10/21/1997      3/15/2012       15.000     207.75       219.74         0.00     −11.99
Col. Tax Ex. Fd. A   11/19/1997      3/15/2012        4.000      55.39        56.70         0.00      −1.31
Col. Tax Ex. Fd. A   11/19/1997      3/15/2012       14.000     193.90       206.73         0.00     −12.83
Col. Tax Ex. Fd. A   11/19/1997      3/15/2012        2.000      27.69        28.71         0.00      −1.02
Col. Tax Ex. Fd. A   12/19/1997      3/15/2012       14.000     193.90       208.48         0.00     −14.58
Col. Tax Ex. Fd. A    1/21/1998      3/15/2012       15.000     207.75       225.89         0.00     −18.14
Col. Tax Ex. Fd. A    2/20/1998      3/15/2012       14.000     193.90       210.59         0.00     −16.69
Col. Tax Ex. Fd. A    3/19/1998      3/15/2012       13.000     180.05       194.39         0.00     −14.34
Col. Tax Ex. Fd. A    4/21/1998      3/15/2012       16.000     221.60       237.56         0.00     −15.96
Col. Tax Ex. Fd. A    5/19/1998      3/15/2012       13.000     180.05       193.46         0.00     −13.41
Col. Tax Ex. Fd. A    6/22/1998      3/15/2012       15.000     207.75       223.51         0.00     −15.76
Col. Tax Ex. Fd. A    7/21/1998      3/15/2012       15.000     207.75       222.95         0.00     −15.20
Col. Tax Ex. Fd. A    8/19/1998      3/15/2012       13.000     180.05       194.85         0.00     −14.80
Col. Tax Ex. Fd. A    9/21/1998      3/15/2012       15.000     207.75       225.84         0.00     −18.09
Col. Tax Ex. Fd. A   10/27/1998      3/15/2012       15.000     207.75       226.99         0.00     −19.24
Col. Tax Ex. Fd. A   11/19/1998      3/15/2012       49.000     678.65       716.97         0.00     −38.32
Col. Tax Ex. Fd. A   11/20/1998      3/15/2012       14.000     193.90       208.23         0.00     −14.33
Col. Tax Ex. Fd. A   12/21/1998      3/15/2012       14.000     193.90       209.23         0.00     −15.33
Col. Tax Ex. Fd. A    1/20/1999      3/15/2012       15.000     207.75       222.68         0.00     −14.93
Col. Tax Ex. Fd. A    2/22/1999      3/15/2012       15.000     207.75       222.87         0.00     −15.12
Col. Tax Ex. Fd. A    3/19/1999      3/15/2012       13.000     180.05       192.99         0.00     −12.94
Col. Tax Ex. Fd. A    4/20/1999      3/15/2012       15.000     207.75       221.61         0.00     −13.86
Col. Tax Ex. Fd. A    5/19/1999      3/15/2012       15.000     207.75       219.50         0.00     −11.75
Col. Tax Ex. Fd. A    6/21/1999      3/15/2012       15.000     207.75       215.74         0.00      −7.99
Col. Tax Ex. Fd. A    7/20/1999      3/15/2012       16.000     221.60       229.69         0.00      −8.09
                                                      30

[*30]                                                                                 Wash sale    Gain or
                       Date of     Date of sale                          Cost basis
Security                                          Quantity    Amount                     loss       loss
                     acquisition   or exchange
                                                                                      disallowed
Col. Tax Ex. Fd. A    8/19/1999      3/15/2012       16.000     221.60       223.19         0.00      −1.59
Col. Tax Ex. Fd. A    9/21/1999      3/15/2012       17.000     235.45       236.07         0.00      −0.62
Col. Tax Ex. Fd. A   10/19/1999      3/15/2012       15.000     207.75       205.06         0.00       2.69
Col. Tax Ex. Fd. A   11/19/1999      3/15/2012       24.000     332.40       324.11         0.00       8.29
Col. Tax Ex. Fd. A   11/19/1999      3/15/2012       17.000     235.45       231.99         0.00       3.46
Col. Tax Ex. Fd. A   12/21/1999      3/15/2012       17.000     235.45       227.64         0.00       7.81
Col. Tax Ex. Fd. A    1/20/2000      3/15/2012       17.000     235.45       226.13         0.00       9.32
Col. Tax Ex. Fd. A    2/22/2000      3/15/2012       17.000     235.45       226.13         0.00       9.32
Col. Tax Ex. Fd. A    3/21/2000      3/15/2012       17.000     235.45       229.89         0.00       5.56
Col. Tax Ex. Fd. A    4/19/2000      3/15/2012       16.000     221.60       218.72         0.00       2.88
Col. Tax Ex. Fd. A    5/18/2000      3/15/2012       18.000     249.30       238.43         0.00      10.87
Col. Tax Ex. Fd. A    6/19/2000      3/15/2012       18.000     249.30       245.24         0.00       4.06
Col. Tax Ex. Fd. A    7/18/2000      3/15/2012       16.000     221.60       220.82         0.00       0.78
Col. Tax Ex. Fd. A    8/18/2000      3/15/2012       17.000     235.45       236.32         0.00      −0.87
Col. Tax Ex. Fd. A    9/18/2000      3/15/2012       16.000     221.60       223.00         0.00      −1.40
Col. Tax Ex. Fd. A   10/18/2000      3/15/2012       17.000     235.45       235.51         0.00      −0.06
Col. Tax Ex. Fd. A   11/17/2000      3/15/2012       11.000     152.35       147.48         0.00       4.87
Col. Tax Ex. Fd. A   11/20/2000      3/15/2012       19.000     263.15       262.15         0.00       1.00
Col. Tax Ex. Fd. A   12/18/2000      3/15/2012       15.000     207.75       213.87         0.00      −6.12
Col. Tax Ex. Fd. A    1/18/2001      3/15/2012       17.000     235.45       244.72         0.00      −9.27
Col. Tax Ex. Fd. A    2/20/2001      3/15/2012       18.000     249.30       256.70         0.00      −7.40
Col. Tax Ex. Fd. A    3/19/2001      3/15/2012       14.000     193.90       202.98         0.00      −9.08
Col. Tax Ex. Fd. A    4/18/2001      3/15/2012       16.000     221.60       227.24         0.00      −5.64
Col. Tax Ex. Fd. A    5/18/2001      3/15/2012       17.000     235.45       241.20         0.00      −5.75
Col. Tax Ex. Fd. A    6/18/2001      3/15/2012       17.000     235.45       243.21         0.00      −7.76
Col. Tax Ex. Fd. A    7/18/2001      3/15/2012       16.000     221.60       229.80         0.00      −8.20
Col. Tax Ex. Fd. A    8/20/2001      3/15/2012       17.000     235.45       246.74         0.00     −11.29
Col. Tax Ex. Fd. A    9/18/2001      3/15/2012       14.000     193.90       205.23         0.00     −11.33
Col. Tax Ex. Fd. A   10/18/2001      3/15/2012       16.000     221.60       232.35         0.00     −10.75
Col. Tax Ex. Fd. A   11/19/2001      3/15/2012       16.000     221.60       231.84         0.00     −10.24
Col. Tax Ex. Fd. A   11/21/2001      3/15/2012        2.000      27.69        28.31         0.00      −0.62
Col. Tax Ex. Fd. A   12/18/2001      3/15/2012       16.000     221.60       225.54         0.00      −3.94
Col. Tax Ex. Fd. A    1/18/2002      3/15/2012       17.000     235.45       245.04         0.00      −9.59
Col. Tax Ex. Fd. A    2/19/2002      3/15/2012       18.000     249.30       258.62         0.00      −9.32
Col. Tax Ex. Fd. A    3/18/2002      3/15/2012       15.000     207.75       213.31         0.00      −5.56
Col. Tax Ex. Fd. A    4/18/2002      3/15/2012       17.000     235.45       242.91         0.00      −7.46
Col. Tax Ex. Fd. A    5/20/2002      3/15/2012       17.000     235.45       242.09         0.00      −6.64
Col. Tax Ex. Fd. A    6/18/2002      3/15/2012       16.000     221.60       231.34         0.00      −9.74
Col. Tax Ex. Fd. A    7/18/2002      3/15/2012       16.000     221.60       232.64         0.00     −11.04
Col. Tax Ex. Fd. A    8/19/2002      3/15/2012       17.000     235.45       248.29         0.00     −12.84
Col. Tax Ex. Fd. A    9/18/2002      3/15/2012       15.000     207.75       222.54         0.00     −14.79
Col. Tax Ex. Fd. A   10/18/2002      3/15/2012       17.000     235.45       247.91         0.00     −12.46
Col. Tax Ex. Fd. A   11/15/2002      3/15/2012       12.000     166.20       178.21         0.00     −12.01
Col. Tax Ex. Fd. A   11/15/2002      3/15/2012        5.000      69.24        70.88         0.00      −1.64
Col. Tax Ex. Fd. A   11/18/2002      3/15/2012       17.000     235.45       247.46         0.00     −12.01
Col. Tax Ex. Fd. A   12/18/2002      3/15/2012       17.000     235.45       247.49         0.00     −12.04
Col. Tax Ex. Fd. A    1/21/2003      3/15/2012       19.000     263.15       276.09         0.00     −12.94
                                                      31

[*31]                                                                                 Wash sale    Gain or
                       Date of     Date of sale                          Cost basis
Security                                          Quantity    Amount                     loss       loss
                     acquisition   or exchange
                                                                                      disallowed
Col. Tax Ex. Fd. A    2/18/2003      3/15/2012       15.000     207.75       220.28         0.00     −12.53
Col. Tax Ex. Fd. A    3/18/2003      3/15/2012       15.000     207.75       221.61         0.00     −13.86
Col. Tax Ex. Fd. A    4/21/2003      3/15/2012       18.000     249.30       263.71         0.00     −14.41
Col. Tax Ex. Fd. A    5/19/2003      3/15/2012       15.000     207.75       224.28         0.00     −16.53
Col. Tax Ex. Fd. A    6/18/2003      3/15/2012       16.000     221.60       239.22         0.00     −17.62
Col. Tax Ex. Fd. A    7/18/2003      3/15/2012       16.000     221.60       235.39         0.00     −13.79
Col. Tax Ex. Fd. A    8/18/2003      3/15/2012       15.000     221.60       230.37         0.00      −8.77
Col. Tax Ex. Fd. A    9/18/2003      3/15/2012       17.000     235.45       248.06         0.00     −12.61
Col. Tax Ex. Fd. A   10/20/2003      3/15/2012       18.000     249.30       260.27         0.00     −10.97
Col. Tax Ex. Fd. A   11/14/2003      3/15/2012       11.000     152.35       155.12         0.00      −2.77
Col. Tax Ex. Fd. A   11/18/2003      3/15/2012       16.000     221.60       234.20         0.00     −12.60
Col. Tax Ex. Fd. A   12/18/2003      3/15/2012       16.000     221.60       234.35         0.00     −12.75
Col. Tax Ex. Fd. A    1/20/2004      3/15/2012       19.000     263.15       279.31         0.00     −16.16
Col. Tax Ex. Fd. A    2/18/2004      3/15/2012       15.000     207.75       221.61         0.00     −13.86
Col. Tax Ex. Fd. A    3/18/2004      3/15/2012       14.000     193.90       208.73         0.00     −14.83
Col. Tax Ex. Fd. A    4/19/2004      3/15/2012       16.000     221.60       231.79         0.00     −10.19
Col. Tax Ex. Fd. A    5/18/2004      3/15/2012       15.000     207.75       214.40         0.00      −6.65
Col. Tax Ex. Fd. A    6/18/2004      3/15/2012       17.000     235.45       242.55         0.00      −7.10
Col. Tax Ex. Fd. A    7/19/2004      3/15/2012       16.000     221.60       231.22         0.00      −9.62
Col. Tax Ex. Fd. A    8/18/2004      3/15/2012       17.000     235.45       246.97         0.00     −11.52
Col. Tax Ex. Fd. A    9/20/2004      3/15/2012       18.000     249.30       261.54         0.00     −12.24
Col. Tax Ex. Fd. A   10/18/2004      3/15/2012       17.000     235.45       247.74         0.00     −12.29
Col. Tax Ex. Fd. A   11/18/2004      3/15/2012       13.000     180.05       189.75         0.00      −9.70
Col. Tax Ex. Fd. A   11/18/2004      3/15/2012       17.000     235.45       246.08         0.00     −10.63
Col. Tax Ex. Fd. A   12/20/2004      3/15/2012       18.000     249.30       260.57         0.00     −11.27
Col. Tax Ex. Fd. A    1/18/2005      3/15/2012       17.000     235.45       246.87         0.00     −11.42
Col. Tax Ex. Fd. A    2/18/2005      3/15/2012       17.000     235.45       247.21         0.00     −11.76
Col. Tax Ex. Fd. A    3/18/2005      3/15/2012       16.000     221.60       231.55         0.00      −9.95
Col. Tax Ex. Fd. A    4/18/2005      3/15/2012       17.000     235.45       245.39         0.00      −9.94
Col. Tax Ex. Fd. A    5/18/2005      3/15/2012       17.000     235.45       245.97         0.00     −10.52
Col. Tax Ex. Fd. A    6/20/2005      3/15/2012       19.000     263.15       273.47         0.00     −10.32
Col. Tax Ex. Fd. A    7/18/2005      3/15/2012       16.000     221.60       231.50         0.00      −9.90
Col. Tax Ex. Fd. A    8/18/2005      3/15/2012       18.000     249.30       259.24         0.00      −9.94
Col. Tax Ex. Fd. A    9/19/2005      3/15/2012       19.000     263.15       270.79         0.00      −7.64
Col. Tax Ex. Fd. A   10/18/2005      3/15/2012       17.000     235.45       241.80         0.00      −6.35
Col. Tax Ex. Fd. A   11/17/2005      3/15/2012       12.000     166.20       164.20         0.00       2.00
Col. Tax Ex. Fd. A   11/17/2005      3/15/2012       18.000     249.30       254.16         0.00      −4.86
Col. Tax Ex. Fd. A   12/16/2005      3/15/2012       18.000     249.30       254.47         0.00      −5.17
Col. Tax Ex. Fd. A   12/19/2005      3/15/2012        1.000      13.85        13.71         0.00       0.14
Col. Tax Ex. Fd. A    1/17/2006      3/15/2012       18.000     249.30       255.11         0.00      −5.81
Col. Tax Ex. Fd. A    2/17/2006      3/15/2012       20.000     277.00       282.09         0.00      −5.09
Col. Tax Ex. Fd. A    2/21/2006      3/15/2012        1.000      13.85        13.91         0.00      −0.06
Col. Tax Ex. Fd. A    3/17/2006      3/15/2012       16.000     221.60       226.96         0.00      −5.36
Col. Tax Ex. Fd. A    4/17/2006      3/15/2012       19.000     263.15       266.88         0.00      −3.73
Col. Tax Ex. Fd. A    5/17/2006      3/15/2012       18.000     249.30       252.88         0.00      −3.58
Col. Tax Ex. Fd. A    5/18/2006      3/15/2012        1.000      13.84        13.87         0.00      −0.03
Col. Tax Ex. Fd. A    6/16/2006      3/15/2012       19.000     263.15       266.19         0.00      −3.04
                                                      32

[*32]                                                                                 Wash sale    Gain or
                       Date of     Date of sale                          Cost basis
Security                                          Quantity    Amount                     loss       loss
                     acquisition   or exchange
                                                                                      disallowed
Col. Tax Ex. Fd. A    7/17/2006      3/15/2012       18.000     249.30       252.43         0.00      −3.13
Col. Tax Ex. Fd. A    7/18/2006      3/15/2012        1.000      13.84        13.80         0.00       0.04
Col. Tax Ex. Fd. A    8/17/2006      3/15/2012       19.000     263.15       267.10         0.00      −3.95
Col. Tax Ex. Fd. A    9/15/2006      3/15/2012       19.000     263.15       267.43         0.00      −4.28
Col. Tax Ex. Fd. A   10/17/2006      3/15/2012       19.000     263.15       267.10         0.00      −3.95
Col. Tax Ex. Fd. A   10/18/2006      3/15/2012        1.000      13.84        13.95         0.00      −0.11
Col. Tax Ex. Fd. A   11/17/2006      3/15/2012       12.000     166.20       163.49         0.00       2.71
Col. Tax Ex. Fd. A   11/17/2006      3/15/2012       20.000     277.00       279.98         0.00      −2.98
Col. Tax Ex. Fd. A   11/20/2006      3/15/2012        1.000      13.84        13.61         0.00       0.23
Col. Tax Ex. Fd. A   12/15/2006      3/15/2012       16.000     221.60       225.25         0.00      −3.65
Col. Tax Ex. Fd. A   12/18/2006      3/15/2012        1.000      13.85        13.76         0.00       0.09
Col. Tax Ex. Fd. A    1/17/2007      3/15/2012       18.000     249.30       251.68         0.00      −2.38
Col. Tax Ex. Fd. A    2/16/2007      3/15/2012       20.000     277.00       279.16         0.00      −2.16
Col. Tax Ex. Fd. A    2/20/2007      3/15/2012        1.000      13.85        13.76         0.00       0.09
Col. Tax Ex. Fd. A    3/16/2007      3/15/2012       16.000     221.60       224.68         0.00      −3.08
Col. Tax Ex. Fd. A    4/17/2007      3/15/2012       13.000     180.05       183.95         0.00      −3.90
Col. Tax Ex. Fd. A    5/17/2007      3/15/2012       14.000     193.90       197.25         0.00      −3.35
Col. Tax Ex. Fd. A    6/15/2007      3/15/2012       14.000     193.90       195.73         0.00      −1.83
Col. Tax Ex. Fd. A    7/17/2007      3/15/2012       14.000     193.90       195.99         0.00      −2.09
Col. Tax Ex. Fd. A    8/17/2007      3/15/2012       14.000     193.90       194.98         0.00      −1.08
Col. Tax Ex. Fd. A    9/17/2007      3/15/2012       13.000     180.05       183.01         0.00      −2.96
Col. Tax Ex. Fd. A   10/17/2007      3/15/2012       14.000     193.90       196.16         0.00      −2.26
Col. Tax Ex. Fd. A   11/16/2007      3/15/2012       17.000     235.45       235.25         0.00       0.20
Col. Tax Ex. Fd. A   11/16/2007      3/15/2012       14.000     193.90       194.98         0.00      −1.08
Col. Tax Ex. Fd. A   12/17/2007      3/15/2012       12.000     166.20       168.51         0.00      −2.31
Col. Tax Ex. Fd. A   12/18/2007      3/15/2012        1.000      13.85        13.57         0.00       0.28
Col. Tax Ex. Fd. A    1/17/2008      3/15/2012       19.000     263.15       265.08         0.00      −1.93
Col. Tax Ex. Fd. A    2/15/2008      3/15/2012       19.000     263.15       261.50         0.00       1.65
Col. Tax Ex. Fd. A    3/17/2008      3/15/2012       17.000     235.45       231.68         0.00       3.77
Col. Tax Ex. Fd. A    4/17/2008      3/15/2012       18.000     249.30       246.51         0.00       2.79
Col. Tax Ex. Fd. A    4/18/2008      3/15/2012        1.000      13.85        13.61         0.00       0.24
Col. Tax Ex. Fd. A    5/16/2008      3/15/2012       18.000     249.30       247.15         0.00       2.15
Col. Tax Ex. Fd. A    5/19/2008      3/15/2012        1.000      13.85        13.31         0.00       0.54
Col. Tax Ex. Fd. A    6/17/2008      3/15/2012       18.000     249.30       243.96         0.00       5.34
Col. Tax Ex. Fd. A    7/17/2008      3/15/2012       16.000     221.60       218.35         0.00       3.25
Col. Tax Ex. Fd. A    8/15/2008      3/15/2012       15.000     207.75       205.04         0.00       2.71
Col. Tax Ex. Fd. A    8/18/2008      3/15/2012        1.000      13.85        13.58         0.00       0.27
Col. Tax Ex. Fd. A    9/17/2008      3/15/2012       17.000     235.45       228.54         0.00       6.91
Col. Tax Ex. Fd. A   10/17/2008      3/15/2012       22.000     304.70       270.14         0.00      34.56
Col. Tax Ex. Fd. A   10/20/2008      3/15/2012        1.000      13.85        12.08         0.00       1.77
Col. Tax Ex. Fd. A   11/17/2008      3/15/2012       81.000   1,121.85     1,025.69         0.00      96.16
Col. Tax Ex. Fd. A   11/17/2008      3/15/2012       18.000     249.30       230.04         0.00      19.26
Col. Tax Ex. Fd. A   12/17/2008      3/15/2012       19.000     263.15       231.00         0.00      32.15
Col. Tax Ex. Fd. A    1/16/2009      3/15/2012       19.000     263.15       248.41         0.00      14.74
Col. Tax Ex. Fd. A    2/17/2009      3/15/2012       16.000     221.60       210.15         0.00      11.45
Col. Tax Ex. Fd. A    2/18/2009      3/15/2012        1.000      13.85        12.91         0.00       0.94
Col. Tax Ex. Fd. A    3/17/2009      3/15/2012       15.000     207.75       193.31         0.00      14.44
                                                      33

[*33]                                                                                  Wash sale    Gain or
                       Date of     Date of sale                           Cost basis
Security                                          Quantity    Amount                      loss       loss
                     acquisition   or exchange
                                                                                       disallowed
Col. Tax Ex. Fd. A    3/18/2009      3/15/2012        1.000       13.84        12.80         0.00       1.04
Col. Tax Ex. Fd. A    4/17/2009      3/15/2012       10.000      138.50       126.84         0.00      11.66
Col. Tax Ex. Fd. A    5/15/2009      3/15/2012        9.000      124.65       116.71         0.00       7.94
Col. Tax Ex. Fd. A    5/18/2009      3/15/2012        1.000       13.85        13.02         0.00       0.83
Col. Tax Ex. Fd. A    6/24/2009      3/15/2012       13.000      180.05       173.48         0.00       6.57
Col. Tax Ex. Fd. A     7/8/2009      3/15/2012        8.000      110.80       102.85         0.00       7.95
Col. Tax Ex. Fd. A     7/9/2009      3/15/2012        6.000       83.10        77.18         0.00       5.92
Col. Tax Ex. Fd. A    7/24/2009      3/15/2012        6.000       83.10        79.40         0.00       3.70
Col. Tax Ex. Fd. A    8/24/2009      3/15/2012       14.000      193.90       186.94         0.00       6.96
Col. Tax Ex. Fd. A    8/25/2009      3/15/2012        1.000       13.84        13.26         0.00       0.58
Col. Tax Ex. Fd. A    9/24/2009      3/15/2012       14.000      193.90       193.90         0.00       0.00
Col. Tax Ex. Fd. A   10/26/2009      3/15/2012       15.000      207.75       203.79         0.00       3.96
Col. Tax Ex. Fd. A   11/24/2009      3/15/2012       14.000      193.90       189.15         0.00       4.75
Col. Tax Ex. Fd. A   12/17/2009      3/15/2012       16.000      221.60       212.55         0.00       9.05
Col. Tax Ex. Fd. A   12/18/2009      3/15/2012       95.000    1,315.75     1,262.01         0.00      53.74
Col. Tax Ex. Fd. A   12/18/2009      3/15/2012        1.000       13.85        13.34         0.00       0.51
Col. Tax Ex. Fd. A    1/20/2010      3/15/2012       18.000      249.30       239.40         0.00       9.90
Col. Tax Ex. Fd. A    2/19/2010      3/15/2012       14.000      193.90       186.22         0.00       7.68
Col. Tax Ex. Fd. A    2/22/2010      3/15/2012        1.000       13.84        13.30         0.00       0.54
Col. Tax Ex. Fd. A    3/22/2010      3/15/2012       16.000      221.60       213.89         0.00       7.71
Col. Tax Ex. Fd. A    4/21/2010      3/15/2012       16.000      221.60       214.17         0.00       7.43
Col. Tax Ex. Fd. A    5/20/2010      3/15/2012       15.000      207.75       201.58         0.00       6.17
Col. Tax Ex. Fd. A    5/21/2010      3/15/2012        1.000       13.85        13.41         0.00       0.44
Col. Tax Ex. Fd. A    6/21/2010      3/15/2012       17.000      235.45       226.73         0.00       8.72
Col. Tax Ex. Fd. A    7/22/2010      3/15/2012       16.000      221.60       215.57         0.00       6.03
Col. Tax Ex. Fd. A    8/23/2010      3/15/2012       16.000      221.60       219.40         0.00       2.20
Col. Tax Ex. Fd. A    8/23/2010      3/15/2012        1.000       13.85        13.42         0.00       0.43
Col. Tax Ex. Fd. A    9/22/2010      3/15/2012       15.000      207.75       206.45         0.00       1.30
Col. Tax Ex. Fd. A   10/22/2010      3/15/2012       15.000      207.75       206.21         0.00       1.54
Col. Tax Ex. Fd. A   10/22/2010      3/15/2012        1.000       13.84        13.68         0.00       0.16
Col. Tax Ex. Fd. A   11/22/2010      3/15/2012       16.000      221.60       210.90         0.00      10.70
Col. Tax Ex. Fd. A   11/22/2010      3/15/2012        1.000       13.85        13.53         0.00       0.32
Col. Tax Ex. Fd. A   12/16/2010      3/15/2012       38.000      526.30       482.19         0.00      44.11
Col. Tax Ex. Fd. A   12/16/2010      3/15/2012       13.000      180.05       164.89         0.00      15.16
Col. Tax Ex. Fd. A    1/31/2011      3/15/2012       26.000      360.10       326.66         0.00      33.44
Col. Tax Ex. Fd. A    2/28/2011      3/15/2012       16.000      221.60       203.94         0.00      17.66
Nuveen LA Muni A      11/6/1992      3/15/2012      932.000   10,447.72    10,014.53         0.00     433.19
Nuveen LA Muni A      12/2/1992      3/15/2012        3.000       33.62        31.56         0.00       2.06
Nuveen LA Muni A     12/23/1992      3/15/2012        4.000       44.83        42.04         0.00       2.79
Nuveen LA Muni A       1/6/1993      3/15/2012        5.000       56.05        52.70         0.00       3.35
Nuveen LA Muni A       2/3/1993      3/15/2012        5.000       56.04        53.15         0.00       2.89
Nuveen LA Muni A       3/3/1993      3/15/2012        4.000       44.83        44.16         0.00       0.67
Nuveen LA Muni A       4/5/1993      3/15/2012        5.000       56.05        54.20         0.00       1.85
Nuveen LA Muni A       5/5/1993      3/15/2012        5.000       56.04        54.55         0.00       1.49
Nuveen LA Muni A       6/3/1993      3/15/2012        4.000       44.84        43.72         0.00       1.12
Nuveen LA Muni A       7/6/1993      3/15/2012        5.000       56.04        55.45         0.00       0.59
Nuveen LA Muni A       8/4/1993      3/15/2012        5.000       56.05        55.15         0.00       0.90
                                                    34

[*34]                                                                               Wash sale    Gain or
                     Date of     Date of sale                          Cost basis
Security                                        Quantity    Amount                     loss       loss
                   acquisition   or exchange
                                                                                    disallowed
Nuveen LA Muni A     9/3/1993      3/15/2012        4.000      44.83        45.00         0.17       0.00
Nuveen LA Muni A    10/5/1993      3/15/2012        2.000      22.42        22.64         0.22       0.00
Nuveen LA Muni A    10/5/1993      3/15/2012        3.000      33.63        33.96         0.00      −0.33
Nuveen LA Muni A    11/4/1993      3/15/2012        4.000      44.83        45.24         0.00      −0.41
Nuveen LA Muni A    12/3/1993      3/15/2012        5.000      56.05        55.55         0.00       0.50
Nuveen LA Muni A   12/16/1993      3/15/2012        3.000      33.62        33.69         0.00      −0.07
Nuveen LA Muni A     1/5/1994      3/15/2012        5.000      56.05        56.15         0.00      −0.10
Nuveen LA Muni A     2/3/1994      3/15/2012        5.000      56.05        56.60         0.00      −0.55
Nuveen LA Muni A     3/2/1994      3/15/2012        4.000      44.84        43.92         0.00       0.92
Nuveen LA Muni A     4/8/1994      3/15/2012        5.000      56.05        52.15         0.00       3.90
Nuveen LA Muni A    5/10/1994      3/15/2012        5.000      56.05        52.05         0.00       4.00
Nuveen LA Muni A     6/2/1994      3/15/2012        5.000      56.05        52.40         0.00       3.65
Nuveen LA Muni A     7/6/1994      3/15/2012        5.000      56.04        51.85         0.00       4.19
Nuveen LA Muni A     8/3/1994      3/15/2012        5.000      56.05        52.75         0.00       3.30
Nuveen LA Muni A     9/2/1994      3/15/2012        5.000      56.05        52.60         0.00       3.45
Nuveen LA Muni A    10/4/1994      3/15/2012        5.000      56.05        51.30         0.00       4.75
Nuveen LA Muni A    11/2/1994      3/15/2012        5.000      56.05        49.95         0.00       6.10
Nuveen LA Muni A    12/6/1994      3/15/2012        5.000      56.04        48.65         0.00       7.39
Nuveen LA Muni A     1/4/1995      3/15/2012        6.000      67.26        59.70         0.00       7.56
Nuveen LA Muni A     2/2/1995      3/15/2012        5.000      56.05        51.15         0.00       4.90
Nuveen LA Muni A     3/2/1995      3/15/2012        5.000      56.05        52.50         0.00       3.55
Nuveen LA Muni A     4/5/1995      3/15/2012        5.000      56.04        52.65         0.00       3.39
Nuveen LA Muni A     5/2/1995      3/15/2012        5.000      56.04        52.40         0.00       3.64
Nuveen LA Muni A     6/5/1995      3/15/2012        5.000      56.05        54.00         0.00       2.05
Nuveen LA Muni A     7/6/1995      3/15/2012        5.000      56.04        53.05         0.00       2.99
Nuveen LA Muni A     8/2/1995      3/15/2012        5.000      56.04        53.20         0.00       2.84
Nuveen LA Muni A     9/5/1995      3/15/2012        5.000      56.05        53.65         0.00       2.40
Nuveen LA Muni A    10/4/1995      3/15/2012        5.000      56.05        53.70         0.00       2.35
Nuveen LA Muni A    11/2/1995      3/15/2012        6.000      67.26        65.22         0.00       2.04
Nuveen LA Muni A    12/5/1995      3/15/2012        5.000      56.05        55.45         0.00       0.60
Nuveen LA Muni A     1/4/1996      3/15/2012        5.000      56.05        55.90         0.00       0.15
Nuveen LA Muni A     2/2/1996      3/15/2012        5.000      56.05        55.75         0.00       0.30
Nuveen LA Muni A     3/4/1996      3/15/2012        5.000      56.05        55.15         0.00       0.90
Nuveen LA Muni A     4/2/1996      3/15/2012        5.000      56.05        53.95         0.00       2.10
Nuveen LA Muni A     5/2/1996      3/15/2012        5.000      56.05        53.45         0.00       2.60
Nuveen LA Muni A     6/7/1996      3/15/2012        5.000      56.04        53.55         0.00       2.49
Nuveen LA Muni A     7/3/1996      3/15/2012        6.000      67.26        64.56         0.00       2.70
Nuveen LA Muni A     8/2/1996      3/15/2012        5.000      56.05        54.10         0.00       1.95
Nuveen LA Muni A     9/5/1996      3/15/2012        5.000      56.05        53.95         0.00       2.10
Nuveen LA Muni A    9/12/1996      3/15/2012      622.000   6,972.64     7,014.79         0.00     −42.15
Nuveen LA Muni A    10/2/1996      3/15/2012        7.000      78.47        76.58         0.00       1.89
Nuveen LA Muni A    10/7/1996      3/15/2012        8.000      89.68        92.00         0.00      −2.32
Nuveen LA Muni A    11/4/1996      3/15/2012        8.000      89.68        92.00         0.00      −2.32
Nuveen LA Muni A    11/5/1996      3/15/2012        8.000      89.68        88.16         0.00       1.52
Nuveen LA Muni A    12/2/1996      3/15/2012        8.000      89.68        93.44         0.00      −3.76
Nuveen LA Muni A    12/3/1996      3/15/2012        8.000      89.68        89.60         0.00       0.08
Nuveen LA Muni A     1/6/1997      3/15/2012        8.000      89.68        92.16         0.00      −2.48
                                                    35

[*35]                                                                               Wash sale    Gain or
                     Date of     Date of sale                          Cost basis
Security                                        Quantity    Amount                     loss       loss
                   acquisition   or exchange
                                                                                    disallowed
Nuveen LA Muni A     1/7/1997      3/15/2012        8.000      89.68        88.80         0.00       0.88
Nuveen LA Muni A     2/3/1997      3/15/2012        8.000      89.68        92.56         0.00      −2.88
Nuveen LA Muni A     2/6/1997      3/15/2012        9.000     100.89        99.45         0.00       1.44
Nuveen LA Muni A     3/3/1997      3/15/2012        8.000      89.68        92.80         0.00      −3.12
Nuveen LA Muni A     3/5/1997      3/15/2012        8.000      89.68        88.88         0.00       0.80
Nuveen LA Muni A     4/3/1997      3/15/2012        8.000      89.68        87.44         0.00       2.24
Nuveen LA Muni A     4/7/1997      3/15/2012        8.000      89.68        91.20         0.00      −1.52
Nuveen LA Muni A     5/2/1997      3/15/2012        9.000     100.89        99.00         0.00       1.89
Nuveen LA Muni A     5/5/1997      3/15/2012        8.000      89.68        92.00         0.00      −2.32
Nuveen LA Muni A     6/2/1997      3/15/2012        8.000      89.68        92.72         0.00      −3.04
Nuveen LA Muni A     6/5/1997      3/15/2012        8.000      89.68        88.80         0.00       0.88
Nuveen LA Muni A     7/7/1997      3/15/2012        8.000      89.68        94.24         0.00      −4.56
Nuveen LA Muni A     7/7/1997      3/15/2012        9.000     100.89       100.62         0.00       0.27
Nuveen LA Muni A     8/4/1997      3/15/2012        8.000      89.68        95.12         0.00      −5.44
Nuveen LA Muni A     8/5/1997      3/15/2012        8.000      89.68        91.28         0.00      −1.60
Nuveen LA Muni A     9/2/1997      3/15/2012        8.000      89.68        94.16         0.00      −4.48
Nuveen LA Muni A     9/4/1997      3/15/2012        9.000     100.89       101.52         0.00      −0.63
Nuveen LA Muni A    10/3/1997      3/15/2012        8.000      89.68        91.04         0.00      −1.36
Nuveen LA Muni A    10/6/1997      3/15/2012        8.000      89.68        95.36         0.00      −5.68
Nuveen LA Muni A    11/3/1997      3/15/2012        8.000      89.68        94.88         0.00      −5.20
Nuveen LA Muni A    11/4/1997      3/15/2012        9.000     100.89       102.24         0.00      −1.35
Nuveen LA Muni A    12/1/1997      3/15/2012        8.000      89.68        95.52         0.00      −5.84
Nuveen LA Muni A    12/2/1997      3/15/2012        8.000      89.68        91.52         0.00      −1.84
Nuveen LA Muni A     1/2/1998      3/15/2012        3.000      33.63        34.56         0.00      −0.93
Nuveen LA Muni A     1/2/1998      3/15/2012       13.000     145.73       149.76         0.00      −4.03
Nuveen LA Muni A     1/5/1998      3/15/2012        8.000      89.68        96.72         0.00      −7.04
Nuveen LA Muni A     2/2/1998      3/15/2012        8.000      89.68        96.72         0.00      −7.04
Nuveen LA Muni A     2/3/1998      3/15/2012        9.000     100.89       104.22         0.00      −3.33
Nuveen LA Muni A     3/2/1998      3/15/2012        8.000      89.68        96.08         0.00      −6.40
Nuveen LA Muni A     3/3/1998      3/15/2012        8.000      89.68        92.08         0.00      −2.40
Nuveen LA Muni A     4/3/1998      3/15/2012        9.000     100.89       103.59         0.00      −2.70
Nuveen LA Muni A     4/6/1998      3/15/2012        8.000      89.68        96.72         0.00      −7.04
Nuveen LA Muni A     5/4/1998      3/15/2012        8.000      89.68        95.44         0.00      −5.76
Nuveen LA Muni A     5/5/1998      3/15/2012        9.000     100.89       102.69         0.00      −1.80
Nuveen LA Muni A     6/1/1998      3/15/2012        8.000      89.68        96.56         0.00      −6.88
Nuveen LA Muni A     6/3/1998      3/15/2012        9.000     100.89       104.04         0.00      −3.15
Nuveen LA Muni A     7/6/1998      3/15/2012        8.000      89.68        96.48         0.00      −6.80
Nuveen LA Muni A     7/6/1998      3/15/2012        9.000     100.89       103.77         0.00      −2.88
Nuveen LA Muni A     8/3/1998      3/15/2012        8.000      89.68        96.24         0.00      −6.56
Nuveen LA Muni A     8/7/1998      3/15/2012        9.000     100.89       103.68         0.00      −2.79
Nuveen LA Muni A     9/4/1998      3/15/2012        9.000     100.89       104.85         0.00      −3.96
Nuveen LA Muni A     9/8/1998      3/15/2012        8.000      89.68        97.20         0.00      −7.52
Nuveen LA Muni A    10/5/1998      3/15/2012        8.000      89.68        99.12         0.00      −9.44
Nuveen LA Muni A    10/5/1998      3/15/2012        9.000     100.89       106.11         0.00      −5.22
Nuveen LA Muni A    11/2/1998      3/15/2012        8.000      89.68        97.12         0.00      −7.44
Nuveen LA Muni A    11/4/1998      3/15/2012        9.000     100.89       104.67         0.00      −3.78
Nuveen LA Muni A    12/3/1998      3/15/2012        9.000     100.89       104.94         0.00      −4.05
                                                    36

[*36]                                                                               Wash sale    Gain or
                     Date of     Date of sale                          Cost basis
Security                                        Quantity    Amount                     loss       loss
                   acquisition   or exchange
                                                                                    disallowed
Nuveen LA Muni A    12/7/1998      3/15/2012        8.000      89.68        97.20         0.00      −7.52
Nuveen LA Muni A    12/8/1998      3/15/2012        7.000      78.47        81.48         0.00      −3.01
Nuveen LA Muni A   12/23/1998      3/15/2012       10.000     112.10       115.70         0.00      −3.60
Nuveen LA Muni A     1/4/1999      3/15/2012        8.000      89.68        96.80         0.00      −7.12
Nuveen LA Muni A     2/1/1999      3/15/2012        8.000      89.68        97.12         0.00      −7.44
Nuveen LA Muni A     2/3/1999      3/15/2012        9.000     100.89       104.67         0.00      −3.78
Nuveen LA Muni A     3/1/1999      3/15/2012        8.000      89.68        96.00         0.00      −6.32
Nuveen LA Muni A     3/2/1999      3/15/2012        9.000     100.89       103.50         0.00      −2.61
Nuveen LA Muni A     4/5/1999      3/15/2012        8.000      89.68        96.00         0.00      −6.32
Nuveen LA Muni A     4/5/1999      3/15/2012       10.000     112.10       115.00         0.00      −2.90
Nuveen LA Muni A     5/3/1999      3/15/2012        8.000      89.68        95.92         0.00      −6.24
Nuveen LA Muni A     5/4/1999      3/15/2012        9.000     100.89       103.41         0.00      −2.52
Nuveen LA Muni A     6/1/1999      3/15/2012        8.000      89.68        94.64         0.00      −4.96
Nuveen LA Muni A     6/2/1999      3/15/2012        9.000     100.89       101.97         0.00      −1.08
Nuveen LA Muni A     7/2/1999      3/15/2012       10.000     112.10       111.30         0.00       0.80
Nuveen LA Muni A     7/6/1999      3/15/2012        8.000      89.68        92.96         0.00      −3.28
Nuveen LA Muni A     8/2/1999      3/15/2012        8.000      89.68        92.56         0.00      −2.88
Nuveen LA Muni A     8/3/1999      3/15/2012       10.000     112.10       110.80         0.00       1.30
Nuveen LA Muni A     9/2/1999      3/15/2012       10.000     112.10       108.40         0.00       3.70
Nuveen LA Muni A     9/7/1999      3/15/2012        8.000      89.68        90.32         0.00      −0.64
Nuveen LA Muni A    10/4/1999      3/15/2012        8.000      89.68        89.28         0.00       0.40
Nuveen LA Muni A    10/4/1999      3/15/2012       10.000     112.10       106.90         0.00       5.20
Nuveen LA Muni A    11/1/1999      3/15/2012        9.000     100.89        98.19         0.00       2.70
Nuveen LA Muni A    11/2/1999      3/15/2012       11.000     123.31       114.95         0.00       8.36
Nuveen LA Muni A    12/2/1999      3/15/2012       11.000     123.31       115.61         0.00       7.70
Nuveen LA Muni A    12/6/1999      3/15/2012        9.000     100.89        98.73         0.00       2.16
Nuveen LA Muni A   12/21/1999      3/15/2012       11.000     123.31       113.74         0.00       9.57
Nuveen LA Muni A     1/3/2000      3/15/2012        9.000     100.89        96.75         0.00       4.14
Nuveen LA Muni A     2/2/2000      3/15/2012       12.000     134.52       122.04         0.00      12.48
Nuveen LA Muni A     2/7/2000      3/15/2012        9.000     100.89        96.12         0.00       4.77
Nuveen LA Muni A     3/2/2000      3/15/2012       11.000     123.31       113.52         0.00       9.79
Nuveen LA Muni A     3/6/2000      3/15/2012        9.000     100.89        97.20         0.00       3.69
Nuveen LA Muni A     4/3/2000      3/15/2012        9.000     100.89        98.91         0.00       1.98
Nuveen LA Muni A     4/4/2000      3/15/2012       11.000     123.31       115.83         0.00       7.48
Nuveen LA Muni A     5/1/2000      3/15/2012        9.000     100.89        97.74         0.00       3.15
Nuveen LA Muni A     5/2/2000      3/15/2012       11.000     123.31       114.40         0.00       8.91
Nuveen LA Muni A     6/2/2000      3/15/2012       11.000     123.31       113.30         0.00      10.01
Nuveen LA Muni A     6/5/2000      3/15/2012        9.000     100.89        97.20         0.00       3.69
Nuveen LA Muni A     7/3/2000      3/15/2012        9.000     100.89        98.73         0.00       2.16
Nuveen LA Muni A     7/5/2000      3/15/2012       11.000     123.31       115.61         0.00       7.70
Nuveen LA Muni A     8/2/2000      3/15/2012       11.000     123.31       117.04         0.00       6.27
Nuveen LA Muni A     8/7/2000      3/15/2012        8.000      89.68        89.28         0.00       0.40
Nuveen LA Muni A     9/5/2000      3/15/2012        8.000      89.68        90.24         0.00      −0.56
Nuveen LA Muni A     9/5/2000      3/15/2012       12.000     134.52       129.60         0.00       4.92
Nuveen LA Muni A    10/2/2000      3/15/2012        8.000      89.68        89.20         0.00       0.48
Nuveen LA Muni A    10/3/2000      3/15/2012       11.000     123.31       117.48         0.00       5.83
Nuveen LA Muni A    11/2/2000      3/15/2012       11.000     123.31       118.14         0.00       5.17
                                                    37

[*37]                                                                               Wash sale    Gain or
                     Date of     Date of sale                          Cost basis
Security                                        Quantity    Amount                     loss       loss
                   acquisition   or exchange
                                                                                    disallowed
Nuveen LA Muni A    11/6/2000      3/15/2012        8.000      89.68        89.60         0.00       0.08
Nuveen LA Muni A    12/4/2000      3/15/2012        8.000      89.68        90.16         0.00      −0.48
Nuveen LA Muni A    12/4/2000      3/15/2012       11.000     123.31       118.80         0.00       4.51
Nuveen LA Muni A   12/27/2000      3/15/2012       11.000     123.31       121.66         0.00       1.65
Nuveen LA Muni A     1/2/2001      3/15/2012        8.000      89.68        92.88         0.00      −3.20
Nuveen LA Muni A     2/2/2001      3/15/2012       12.000     134.52       133.68         0.00       0.84
Nuveen LA Muni A     2/5/2001      3/15/2012        8.000      89.68        93.20         0.00      −3.52
Nuveen LA Muni A     3/2/2001      3/15/2012       11.000     123.31       122.43         0.00       0.88
Nuveen LA Muni A     3/5/2001      3/15/2012        8.000      89.68        93.04         0.00      −3.36
Nuveen LA Muni A     4/2/2001      3/15/2012        8.000      89.68        93.20         0.00      −3.52
Nuveen LA Muni A     4/3/2001      3/15/2012       11.000     123.31       122.76         0.00       0.55
Nuveen LA Muni A     5/2/2001      3/15/2012       11.000     123.31       120.78         0.00       2.53
Nuveen LA Muni A     5/7/2001      3/15/2012        8.000      89.68        92.16         0.00      −2.48
Nuveen LA Muni A     6/4/2001      3/15/2012        8.000      89.68        92.64         0.00      −2.96
Nuveen LA Muni A     6/4/2001      3/15/2012       12.000     134.52       132.96         0.00       1.56
Nuveen LA Muni A     7/2/2001      3/15/2012        8.000      89.68        92.80         0.00      −3.12
Nuveen LA Muni A     7/3/2001      3/15/2012       11.000     123.31       122.21         0.00       1.10
Nuveen LA Muni A     8/2/2001      3/15/2012       11.000     123.31       123.86         0.00      −0.55
Nuveen LA Muni A     8/6/2001      3/15/2012        8.000      89.68        94.08         0.00      −4.40
Nuveen LA Muni A     9/4/2001      3/15/2012        8.000      89.68        95.04         0.00      −5.36
Nuveen LA Muni A     9/5/2001      3/15/2012       12.000     134.52       136.56         0.00      −2.04
Nuveen LA Muni A    10/1/2001      3/15/2012        8.000      89.68        94.40         0.00      −4.72
Nuveen LA Muni A    10/2/2001      3/15/2012       11.000     123.31       124.30         0.00      −0.99
Nuveen LA Muni A    11/2/2001      3/15/2012       11.000     123.31       125.73         0.00      −2.42
Nuveen LA Muni A    11/5/2001      3/15/2012        8.000      89.68        95.36         0.00      −5.68
Nuveen LA Muni A    12/3/2001      3/15/2012        8.000      89.68        93.76         0.00      −4.08
Nuveen LA Muni A    12/4/2001      3/15/2012       12.000     134.52       134.76         0.00      −0.24
Nuveen LA Muni A   12/27/2001      3/15/2012       12.000     134.52       132.36         0.00       2.16
Nuveen LA Muni A     1/7/2002      3/15/2012        8.000      89.68        92.56         0.00      −2.88
Nuveen LA Muni A     2/4/2002      3/15/2012        8.000      89.68        93.76         0.00      −4.08
Nuveen LA Muni A     2/4/2002      3/15/2012       12.000     134.52       134.52         0.00       0.00
Nuveen LA Muni A     3/4/2002      3/15/2012        8.000      89.68        93.92         0.00      −4.24
Nuveen LA Muni A     3/4/2002      3/15/2012       12.000     134.52       135.24         0.00      −0.72
Nuveen LA Muni A     4/1/2002      3/15/2012        8.000      89.68        91.84         0.00      −2.16
Nuveen LA Muni A     4/2/2002      3/15/2012       12.000     134.52       132.00         0.00       2.52
Nuveen LA Muni A     5/2/2002      3/15/2012       12.000     134.52       133.56         0.00       0.96
Nuveen LA Muni A     5/6/2002      3/15/2012        8.000      89.68        93.12         0.00      −3.44
Nuveen LA Muni A     6/3/2002      3/15/2012        8.000      89.68        93.20         0.00      −3.52
Nuveen LA Muni A     6/4/2002      3/15/2012       12.000     134.52       133.92         0.00       0.60
Nuveen LA Muni A     7/1/2002      3/15/2012        8.000      89.68        93.44         0.00      −3.76
Nuveen LA Muni A     7/2/2002      3/15/2012       13.000     145.73       145.47         0.00       0.26
Nuveen LA Muni A     8/2/2002      3/15/2012       12.000     134.52       136.08         0.00      −1.56
Nuveen LA Muni A     8/5/2002      3/15/2012        8.000      89.68        95.04         0.00      −5.36
Nuveen LA Muni A     9/3/2002      3/15/2012        8.000      89.68        95.68         0.00      −6.00
Nuveen LA Muni A     9/4/2002      3/15/2012       12.000     134.52       137.52         0.00      −3.00
Nuveen LA Muni A    10/2/2002      3/15/2012       12.000     134.52       139.80         0.00      −5.28
Nuveen LA Muni A    10/7/2002      3/15/2012        8.000      89.68        97.36         0.00      −7.68
                                                    38

[*38]                                                                               Wash sale    Gain or
                     Date of     Date of sale                          Cost basis
Security                                        Quantity    Amount                     loss       loss
                   acquisition   or exchange
                                                                                    disallowed
Nuveen LA Muni A    11/4/2002      3/15/2012        8.000      89.68        94.40         0.00      −4.72
Nuveen LA Muni A    11/4/2002      3/15/2012       13.000     145.73       147.29         0.00      −1.56
Nuveen LA Muni A    12/2/2002      3/15/2012        8.000      89.68        93.76         0.00      −4.08
Nuveen LA Muni A    12/3/2002      3/15/2012       12.000     134.52       134.76         0.00      −0.24
Nuveen LA Muni A   12/30/2002      3/15/2012       12.000     134.52       137.16         0.00      −2.64
Nuveen LA Muni A     1/6/2003      3/15/2012        8.000      89.68        95.12         0.00      −5.44
Nuveen LA Muni A     2/3/2003      3/15/2012        8.000      89.68        94.72         0.00      −5.04
Nuveen LA Muni A     2/4/2003      3/15/2012       12.000     134.52       136.08         0.00      −1.56
Nuveen LA Muni A     3/3/2003      3/15/2012        8.000      89.68        96.24         0.00      −6.56
Nuveen LA Muni A     3/4/2003      3/15/2012       12.000     134.52       138.24         0.00      −3.72
Nuveen LA Muni A     4/2/2003      3/15/2012       13.000     145.73       148.46         0.00      −2.73
Nuveen LA Muni A     4/7/2003      3/15/2012        8.000      89.68        94.72         0.00      −5.04
Nuveen LA Muni A     5/2/2003      3/15/2012       12.000     134.52       138.48         0.00      −3.96
Nuveen LA Muni A     5/5/2003      3/15/2012        8.000      89.68        96.32         0.00      −6.64
Nuveen LA Muni A     6/2/2003      3/15/2012        8.000      89.68        97.92         0.00      −8.24
Nuveen LA Muni A     6/3/2003      3/15/2012       12.000     134.52       140.76         0.00      −6.24
Nuveen LA Muni A     7/2/2003      3/15/2012       12.000     134.52       139.44         0.00      −4.92
Nuveen LA Muni A     7/7/2003      3/15/2012        8.000      89.68        96.72         0.00      −7.04
Nuveen LA Muni A     8/4/2003      3/15/2012        8.000      89.68        92.64         0.00      −2.96
Nuveen LA Muni A     8/4/2003      3/15/2012       12.000     134.52       132.96         0.00       1.56
Nuveen LA Muni A     9/2/2003      3/15/2012        8.000      89.68        92.56         0.00      −2.88
Nuveen LA Muni A     9/3/2003      3/15/2012       13.000     145.73       144.04         0.00       1.69
Nuveen LA Muni A    10/2/2003      3/15/2012       12.000     134.52       136.92         0.00      −2.40
Nuveen LA Muni A    10/6/2003      3/15/2012        8.000      89.68        94.40         0.00      −4.72
Nuveen LA Muni A    11/3/2003      3/15/2012        8.000      89.68        94.48         0.00      −4.80
Nuveen LA Muni A    11/4/2003      3/15/2012       13.000     145.73       147.03         0.00      −1.30
Nuveen LA Muni A    12/1/2003      3/15/2012        8.000      89.68        94.96         0.00      −5.28
Nuveen LA Muni A    12/2/2003      3/15/2012       12.000     134.52       136.44         0.00      −1.92
Nuveen LA Muni A   12/30/2003      3/15/2012       13.000     145.73       149.24         0.00      −3.51
Nuveen LA Muni A     1/5/2004      3/15/2012        8.000      89.68        95.52         0.00      −5.84
Nuveen LA Muni A     2/2/2004      3/15/2012        8.000      89.68        96.00         0.00      −6.32
Nuveen LA Muni A     2/3/2004      3/15/2012       12.000     134.52       138.00         0.00      −3.48
Nuveen LA Muni A     3/1/2004      3/15/2012        8.000      89.68        97.28         0.00      −7.60
Nuveen LA Muni A     3/2/2004      3/15/2012       13.000     145.73       151.45         0.00      −5.72
Nuveen LA Muni A     4/2/2004      3/15/2012       12.000     134.52       138.36         0.00      −3.84
Nuveen LA Muni A     4/5/2004      3/15/2012        8.000      89.68        94.88         0.00      −5.20
Nuveen LA Muni A     5/3/2004      3/15/2012        8.000      89.68        93.52         0.00      −3.84
Nuveen LA Muni A     5/4/2004      3/15/2012       14.000     156.94       156.80         0.00       0.14
Nuveen LA Muni A     6/1/2004      3/15/2012        8.000      89.68        92.56         0.00      −2.88
Nuveen LA Muni A     6/2/2004      3/15/2012       13.000     145.73       144.04         0.00       1.69
Nuveen LA Muni A     7/2/2004      3/15/2012       13.000     145.73       144.69         0.00       1.04
Nuveen LA Muni A     7/6/2004      3/15/2012        8.000      89.68        93.68         0.00      −4.00
Nuveen LA Muni A     8/2/2004      3/15/2012        8.000      89.68        93.92         0.00      −4.24
Nuveen LA Muni A     8/3/2004      3/15/2012       14.000     156.94       157.50         0.00      −0.56
Nuveen LA Muni A     9/2/2004      3/15/2012       13.000     145.73       148.33         0.00      −2.60
Nuveen LA Muni A     9/7/2004      3/15/2012        8.000      89.68        94.96         0.00      −5.28
Nuveen LA Muni A    10/4/2004      3/15/2012        8.000      89.68        94.88         0.00      −5.20
                                                    39

[*39]                                                                               Wash sale    Gain or
                     Date of     Date of sale                          Cost basis
Security                                        Quantity    Amount                     loss       loss
                   acquisition   or exchange
                                                                                    disallowed
Nuveen LA Muni A    10/4/2004      3/15/2012       13.000     145.73       147.81         0.00      −2.08
Nuveen LA Muni A    11/1/2004      3/15/2012        8.000      89.68        95.52         0.00      −5.84
Nuveen LA Muni A    11/2/2004      3/15/2012       13.000     145.73       148.72         0.00      −2.99
Nuveen LA Muni A    12/2/2004      3/15/2012       14.000     156.94       158.34         0.00      −1.40
Nuveen LA Muni A    12/6/2004      3/15/2012        8.000      89.68        95.04         0.00      −5.36
Nuveen LA Muni A   12/28/2004      3/15/2012       14.000     156.94       159.32         0.00      −2.38
Nuveen LA Muni A     1/3/2005      3/15/2012        8.000      89.68        95.44         0.00      −5.76
Nuveen LA Muni A     2/2/2005      3/15/2012       13.000     145.73       149.76         0.00      −4.03
Nuveen LA Muni A     2/7/2005      3/15/2012        8.000      89.68        96.88         0.00      −7.20
Nuveen LA Muni A     3/2/2005      3/15/2012       13.000     145.73       148.46         0.00      −2.73
Nuveen LA Muni A     3/7/2005      3/15/2012        8.000      89.68        95.68         0.00      −6.00
Nuveen LA Muni A     4/4/2005      3/15/2012        8.000      89.68        94.56         0.00      −4.88
Nuveen LA Muni A     4/4/2005      3/15/2012       13.000     145.73       147.03         0.00      −1.30
Nuveen LA Muni A     5/2/2005      3/15/2012        8.000      89.68        95.68         0.00      −6.00
Nuveen LA Muni A     5/3/2005      3/15/2012       13.000     145.73       148.98         0.00      −3.25
Nuveen LA Muni A     6/2/2005      3/15/2012       12.000     134.52       138.60         0.00      −4.08
Nuveen LA Muni A     6/6/2005      3/15/2012        8.000      89.68        96.56         0.00      −6.88
Nuveen LA Muni A     7/5/2005      3/15/2012        8.000      89.68        96.00         0.00      −6.32
Nuveen LA Muni A     7/5/2005      3/15/2012       13.000     145.73       149.89         0.00      −4.16
Nuveen LA Muni A     8/1/2005      3/15/2012        8.000      89.68        95.44         0.00      −5.76
Nuveen LA Muni A     8/2/2005      3/15/2012       13.000     145.73       148.59         0.00      −2.86
Nuveen LA Muni A     9/2/2005      3/15/2012       13.000     145.73       149.63         0.00      −3.90
Nuveen LA Muni A     9/6/2005      3/15/2012        9.000     100.89       107.64         0.00      −6.75
Nuveen LA Muni A    10/3/2005      3/15/2012        8.000      89.68        93.84         0.00      −4.16
Nuveen LA Muni A    10/4/2005      3/15/2012       13.000     145.73       146.12         0.00      −0.39
Nuveen LA Muni A    11/1/2005      3/15/2012       13.000     145.73       144.95         0.00       0.78
Nuveen LA Muni A    11/1/2005      3/15/2012        8.000      89.68        92.88         0.00      −3.20
Nuveen LA Muni A    12/1/2005      3/15/2012       13.000     145.73       144.95         0.00       0.78
Nuveen LA Muni A    12/2/2005      3/15/2012        1.000      11.21        11.08         0.00       0.13
Nuveen LA Muni A    12/5/2005      3/15/2012        8.000      89.68        92.48         0.00      −2.80
Nuveen LA Muni A    12/5/2005      3/15/2012       19.000     212.99       210.33         0.00       2.66
Nuveen LA Muni A    12/6/2005      3/15/2012        1.000      11.21        11.09         0.00       0.12
Nuveen LA Muni A   12/27/2005      3/15/2012       13.000     145.73       144.95         0.00       0.78
Nuveen LA Muni A   12/28/2005      3/15/2012        1.000      11.21        11.15         0.00       0.06
Nuveen LA Muni A     1/3/2006      3/15/2012        8.000      89.68        93.28         0.00      −3.60
Nuveen LA Muni A     2/1/2006      3/15/2012       13.000     145.73       144.82         0.00       0.91
Nuveen LA Muni A     2/2/2006      3/15/2012        1.000      11.21        11.15         0.00       0.06
Nuveen LA Muni A     2/6/2006      3/15/2012        8.000      89.68        93.28         0.00      −3.60
Nuveen LA Muni A     3/1/2006      3/15/2012       13.000     145.73       145.60         0.00       0.13
Nuveen LA Muni A     3/6/2006      3/15/2012        8.000      89.68        93.04         0.00      −3.36
Nuveen LA Muni A     4/3/2006      3/15/2012        8.000      89.68        92.64         0.00      −2.96
Nuveen LA Muni A     4/3/2006      3/15/2012       14.000     156.94       155.26         0.00       1.68
Nuveen LA Muni A     4/4/2006      3/15/2012        1.000      11.21        11.10         0.00       0.11
Nuveen LA Muni A     5/1/2006      3/15/2012        8.000      89.68        92.00         0.00      −2.32
Nuveen LA Muni A     5/1/2006      3/15/2012       14.000     156.94       154.28         0.00       2.66
Nuveen LA Muni A     6/1/2006      3/15/2012       14.000     156.94       154.70         0.00       2.24
Nuveen LA Muni A     6/5/2006      3/15/2012        8.000      89.68        92.64         0.00      −2.96
                                                    40

[*40]                                                                               Wash sale    Gain or
                     Date of     Date of sale                          Cost basis
Security                                        Quantity    Amount                     loss       loss
                   acquisition   or exchange
                                                                                    disallowed
Nuveen LA Muni A     7/3/2006      3/15/2012        8.000      89.68        91.76         0.00      −2.08
Nuveen LA Muni A     7/3/2006      3/15/2012       14.000     156.94       153.86         0.00       3.08
Nuveen LA Muni A     7/5/2006      3/15/2012        1.000      11.21        10.97         0.00       0.24
Nuveen LA Muni A     8/1/2006      3/15/2012       14.000     156.94       155.12         0.00       1.82
Nuveen LA Muni A     8/7/2006      3/15/2012        8.000      89.68        92.88         0.00      −3.20
Nuveen LA Muni A     9/1/2006      3/15/2012       14.000     156.94       156.94         0.00       0.00
Nuveen LA Muni A     9/5/2006      3/15/2012        8.000      89.68        93.52         0.00      −3.84
Nuveen LA Muni A    10/2/2006      3/15/2012        8.000      89.68        94.08         0.00      −4.40
Nuveen LA Muni A    10/2/2006      3/15/2012       14.000     156.94       157.78         0.00      −0.84
Nuveen LA Muni A    10/3/2006      3/15/2012        1.000      11.21        11.27         0.00      −0.06
Nuveen LA Muni A    11/1/2006      3/15/2012       14.000     156.94       158.76         0.00      −1.82
Nuveen LA Muni A    11/6/2006      3/15/2012        8.000      89.68        94.24         0.00      −4.56
Nuveen LA Muni A    12/1/2006      3/15/2012       14.000     156.94       160.16         0.00      −3.22
Nuveen LA Muni A    12/4/2006      3/15/2012        8.000      89.68        95.28         0.00      −5.60
Nuveen LA Muni A    12/5/2006      3/15/2012        8.000      89.68        91.20         0.00      −1.52
Nuveen LA Muni A    12/6/2006      3/15/2012        1.000      11.21        11.40         0.00      −0.19
Nuveen LA Muni A   12/27/2006      3/15/2012       14.000     156.94       158.20         0.00      −1.26
Nuveen LA Muni A     1/3/2007      3/15/2012        8.000      89.68        94.40         0.00      −4.72
Nuveen LA Muni A     2/1/2007      3/15/2012       14.000     156.94       157.22         0.00      −0.28
Nuveen LA Muni A     2/2/2007      3/15/2012        1.000      11.21        11.24         0.00      −0.03
Nuveen LA Muni A     2/5/2007      3/15/2012        8.000      89.68        93.92         0.00      −4.24
Nuveen LA Muni A     3/1/2007      3/15/2012       14.000     156.94       158.76         0.00      −1.82
Nuveen LA Muni A     3/5/2007      3/15/2012        8.000      89.68        94.88         0.00      −5.20
Nuveen LA Muni A     4/2/2007      3/15/2012        8.000      89.68        94.00         0.00      −4.32
Nuveen LA Muni A     4/2/2007      3/15/2012       10.000     112.10       112.60         0.00      −0.50
Nuveen LA Muni A     4/3/2007      3/15/2012        1.000      11.21        11.25         0.00      −0.04
Nuveen LA Muni A     5/1/2007      3/15/2012       10.000     112.10       112.80         0.00      −0.70
Nuveen LA Muni A     5/7/2007      3/15/2012        8.000      89.68        94.24         0.00      −4.56
Nuveen LA Muni A     6/1/2007      3/15/2012       10.000     112.10       111.80         0.00       0.30
Nuveen LA Muni A     6/4/2007      3/15/2012        8.000      89.68        93.36         0.00      −3.68
Nuveen LA Muni A     6/4/2007      3/15/2012        1.000      11.21        11.18         0.00       0.03
Nuveen LA Muni A     7/2/2007      3/15/2012        8.000      89.68        92.80         0.00      −3.12
Nuveen LA Muni A     7/2/2007      3/15/2012       10.000     112.10       111.10         0.00       1.00
Nuveen LA Muni A     8/1/2007      3/15/2012       10.000     112.10       111.20         0.00       0.90
Nuveen LA Muni A     8/2/2007      3/15/2012        1.000      11.21        11.11         0.00       0.10
Nuveen LA Muni A     8/6/2007      3/15/2012        8.000      89.68        92.64         0.00      −2.96
Nuveen LA Muni A     9/4/2007      3/15/2012        8.000      89.68        92.24         0.00      −2.56
Nuveen LA Muni A     9/4/2007      3/15/2012       10.000     112.10       110.50         0.00       1.60
Nuveen LA Muni A     9/5/2007      3/15/2012        1.000      11.21        11.11         0.00       0.10
Nuveen LA Muni A    10/1/2007      3/15/2012        8.000      89.68        93.44         0.00      −3.76
Nuveen LA Muni A    10/1/2007      3/15/2012       10.000     112.10       111.90         0.00       0.20
Nuveen LA Muni A    10/2/2007      3/15/2012        1.000      11.21        11.20         0.00       0.01
Nuveen LA Muni A    11/1/2007      3/15/2012       10.000     112.10       112.00         0.00       0.10
Nuveen LA Muni A    11/2/2007      3/15/2012        1.000      11.21        11.21         0.00       0.00
Nuveen LA Muni A    11/5/2007      3/15/2012        8.000      89.68        93.44         0.00      −3.76
Nuveen LA Muni A    12/3/2007      3/15/2012        8.000      89.68        93.60         0.00      −3.92
Nuveen LA Muni A    12/3/2007      3/15/2012       10.000     112.10       112.10         0.00       0.00
                                                    41

[*41]                                                                               Wash sale    Gain or
                     Date of     Date of sale                          Cost basis
Security                                        Quantity    Amount                     loss       loss
                   acquisition   or exchange
                                                                                    disallowed
Nuveen LA Muni A    12/6/2007      3/15/2012       13.000     145.73       145.34         0.00       0.39
Nuveen LA Muni A    12/7/2007      3/15/2012        1.000      11.21        11.12         0.00       0.09
Nuveen LA Muni A    12/7/2007      3/15/2012        1.000      11.21        11.12         0.00       0.09
Nuveen LA Muni A   12/28/2007      3/15/2012       11.000     123.31       121.77         0.00       1.54
Nuveen LA Muni A     1/7/2008      3/15/2012        8.000      89.68        93.68         0.00      −4.00
Nuveen LA Muni A     2/1/2008      3/15/2012       15.000     168.15       166.95         0.00       1.20
Nuveen LA Muni A     2/4/2008      3/15/2012        8.000      89.68        92.80         0.00      −3.12
Nuveen LA Muni A     3/3/2008      3/15/2012        9.000     100.89        98.73         0.00       2.16
Nuveen LA Muni A     3/3/2008      3/15/2012       16.000     179.36       167.20         0.00      12.16
Nuveen LA Muni A     3/4/2008      3/15/2012        1.000      11.21        10.63         0.00       0.58
Nuveen LA Muni A     4/1/2008      3/15/2012       16.000     179.36       171.36         0.00       8.00
Nuveen LA Muni A     4/7/2008      3/15/2012        8.000      89.68        89.76         0.00      −0.08
Nuveen LA Muni A     5/1/2008      3/15/2012       16.000     179.36       172.80         0.00       6.56
Nuveen LA Muni A     5/5/2008      3/15/2012        8.000      89.68        90.16         0.00      −0.48
Nuveen LA Muni A     6/2/2008      3/15/2012        8.000      89.68        90.56         0.00      −0.88
Nuveen LA Muni A     6/2/2008      3/15/2012       16.000     179.36       173.28         0.00       6.08
Nuveen LA Muni A     7/1/2008      3/15/2012       16.000     179.36       170.72         0.00       8.64
Nuveen LA Muni A     7/7/2008      3/15/2012        8.000      89.68        89.68         0.00       0.00
Nuveen LA Muni A     8/1/2008      3/15/2012       16.000     179.36       169.60         0.00       9.76
Nuveen LA Muni A     8/4/2008      3/15/2012        9.000     100.89        99.72         0.00       1.17
Nuveen LA Muni A     8/4/2008      3/15/2012        1.000      11.21        10.61         0.00       0.60
Nuveen LA Muni A     9/2/2008      3/15/2012        8.000      89.68        89.20         0.00       0.48
Nuveen LA Muni A     9/2/2008      3/15/2012       17.000     190.57       181.56         0.00       9.01
Nuveen LA Muni A    10/1/2008      3/15/2012       18.000     201.78       182.16         0.00      19.62
Nuveen LA Muni A    10/6/2008      3/15/2012        9.000     100.89        95.13         0.00       5.76
Nuveen LA Muni A    11/3/2008      3/15/2012        9.000     100.89        90.90         0.00       9.99
Nuveen LA Muni A    11/3/2008      3/15/2012       19.000     212.99       183.73         0.00      29.26
Nuveen LA Muni A    12/1/2008      3/15/2012       10.000     112.10        99.40         0.00      12.70
Nuveen LA Muni A    12/1/2008      3/15/2012       19.000     212.99       181.07         0.00      31.92
Nuveen LA Muni A    12/2/2008      3/15/2012        1.000      11.21         9.48         0.00       1.73
Nuveen LA Muni A    12/5/2008      3/15/2012       14.000     156.94       131.46         0.00      25.48
Nuveen LA Muni A   12/26/2008      3/15/2012       20.000     224.20       182.80         0.00      41.40
Nuveen LA Muni A   12/29/2008      3/15/2012        1.000      11.21         9.16         0.00       2.05
Nuveen LA Muni A     1/5/2009      3/15/2012       10.000     112.10        96.30         0.00      15.80
Nuveen LA Muni A     2/2/2009      3/15/2012        9.000     100.89        90.90         0.00       9.99
Nuveen LA Muni A     2/2/2009      3/15/2012       19.000     212.99       183.54         0.00      29.45
Nuveen LA Muni A     3/2/2009      3/15/2012       10.000     112.10        99.60         0.00      12.50
Nuveen LA Muni A     3/2/2009      3/15/2012       19.000     212.99       181.26         0.00      31.73
Nuveen LA Muni A     3/3/2009      3/15/2012        1.000      11.21         9.52         0.00       1.69
Nuveen LA Muni A     4/1/2009      3/15/2012       19.000     212.99       180.88         0.00      32.11
Nuveen LA Muni A     4/2/2009      3/15/2012        1.000      11.21         9.53         0.00       1.68
Nuveen LA Muni A     4/6/2009      3/15/2012       10.000     112.10        99.30         0.00      12.80
Nuveen LA Muni A     5/1/2009      3/15/2012       14.000     156.94       136.08         0.00      20.86
Nuveen LA Muni A     5/4/2009      3/15/2012        9.000     100.89        91.80         0.00       9.09
Nuveen LA Muni A     6/1/2009      3/15/2012        9.000     100.89        93.33         0.00       7.56
Nuveen LA Muni A     6/1/2009      3/15/2012       13.000     145.73       129.48         0.00      16.25
Nuveen LA Muni A     6/2/2009      3/15/2012        1.000      11.21         9.93         0.00       1.28
                                                    42

[*42]                                                                               Wash sale    Gain or
                     Date of     Date of sale                          Cost basis
Security                                        Quantity    Amount                     loss       loss
                   acquisition   or exchange
                                                                                    disallowed
Nuveen LA Muni A     7/1/2009      3/15/2012       14.000     156.94       138.46         0.00      18.48
Nuveen LA Muni A     7/6/2009      3/15/2012        9.000     100.89        92.97         0.00       7.92
Nuveen LA Muni A     8/3/2009      3/15/2012        9.000     100.89        93.78         0.00       7.11
Nuveen LA Muni A     8/3/2009      3/15/2012       13.000     145.73       129.74         0.00      15.99
Nuveen LA Muni A     8/4/2009      3/15/2012        1.000      11.21         9.98         0.00       1.23
Nuveen LA Muni A     9/1/2009      3/15/2012       13.000     145.73       131.95         0.00      13.78
Nuveen LA Muni A     9/2/2009      3/15/2012        1.000      11.21        10.20         0.00       1.01
Nuveen LA Muni A     9/8/2009      3/15/2012        9.000     100.89        96.03         0.00       4.86
Nuveen LA Muni A    10/1/2009      3/15/2012       13.000     145.73       137.02         0.00       8.71
Nuveen LA Muni A    10/5/2009      3/15/2012        9.000     100.89        99.00         0.00       1.89
Nuveen LA Muni A    11/2/2009      3/15/2012        9.000     100.89        97.11         0.00       3.78
Nuveen LA Muni A    11/2/2009      3/15/2012       13.000     145.73       134.68         0.00      11.05
Nuveen LA Muni A    11/3/2009      3/15/2012        1.000      11.21        10.36         0.00       0.85
Nuveen LA Muni A    12/1/2009      3/15/2012       13.000     145.73       134.68         0.00      11.05
Nuveen LA Muni A    12/2/2009      3/15/2012        1.000      11.21        10.40         0.00       0.81
Nuveen LA Muni A    12/7/2009      3/15/2012        9.000     100.89        97.56         0.00       3.33
Nuveen LA Muni A   12/28/2009      3/15/2012       13.000     145.73       135.07         0.00      10.66
Nuveen LA Muni A     1/4/2010      3/15/2012        9.000     100.89        97.38         0.00       3.51
Nuveen LA Muni A     2/1/2010      3/15/2012        9.000     100.89        97.65         0.00       3.24
Nuveen LA Muni A     2/1/2010      3/15/2012       13.000     145.73       135.33         0.00      10.40
Nuveen LA Muni A     2/2/2010      3/15/2012        1.000      11.21        10.43         0.00       0.78
Nuveen LA Muni A     3/1/2010      3/15/2012        9.000     100.89        97.92         0.00       2.97
Nuveen LA Muni A     3/1/2010      3/15/2012       13.000     145.73       135.72         0.00      10.01
Nuveen LA Muni A     3/2/2010      3/15/2012        1.000      11.21        10.44         0.00       0.77
Nuveen LA Muni A     4/1/2010      3/15/2012       13.000     145.73       135.72         0.00      10.01
Nuveen LA Muni A     4/5/2010      3/15/2012        9.000     100.89        97.92         0.00       2.97
Nuveen LA Muni A     4/5/2010      3/15/2012        1.000      11.21        10.44         0.00       0.77
Nuveen LA Muni A    4/30/2010      3/15/2012       13.000     145.73       136.89         0.00       8.84
Nuveen LA Muni A     5/3/2010      3/15/2012        9.000     100.89        98.73         0.00       2.16
Nuveen LA Muni A     5/3/2010      3/15/2012        1.000      11.21        10.53         0.00       0.68
Nuveen LA Muni A    5/28/2010      3/15/2012       13.000     145.73       137.54         0.00       8.19
Nuveen LA Muni A     6/1/2010      3/15/2012        1.000      11.21        10.58         0.00       0.63
Nuveen LA Muni A     6/7/2010      3/15/2012        9.000     100.89        99.09         0.00       1.80
Nuveen LA Muni A    6/30/2010      3/15/2012       13.000     145.73       137.01         0.00       8.72
Nuveen LA Muni A     7/6/2010      3/15/2012        9.000     100.89        98.91         0.00       1.98
Nuveen LA Muni A    7/30/2010      3/15/2012       13.000     145.73       138.32         0.00       7.41
Nuveen LA Muni A    7/30/2010      3/15/2012        1.000      11.21        10.54         0.00       0.67
Nuveen LA Muni A     8/2/2010      3/15/2012        9.000     100.89        99.72         0.00       1.17
Nuveen LA Muni A    8/31/2010      3/15/2012       13.000     145.73       140.79         0.00       4.94
Nuveen LA Muni A    8/31/2010      3/15/2012        1.000      11.21        10.68         0.00       0.53
Nuveen LA Muni A     9/7/2010      3/15/2012        8.000      89.68        90.08         0.00      −0.40
Nuveen LA Muni A    9/30/2010      3/15/2012       13.000     145.73       140.66         0.00       5.07
Nuveen LA Muni A    9/30/2010      3/15/2012        1.000      11.21        10.82         0.00       0.39
Nuveen LA Muni A    10/4/2010      3/15/2012        8.000      89.68        90.08         0.00      −0.40
Nuveen LA Muni A   10/29/2010      3/15/2012       13.000     145.73       139.87         0.00       5.86
Nuveen LA Muni A    11/1/2010      3/15/2012        8.000      89.68        89.68         0.00       0.00
Nuveen LA Muni A   11/30/2010      3/15/2012       14.000     156.94       147.13         0.00       9.81
                                                    43

[*43]                                                                               Wash sale    Gain or
                     Date of     Date of sale                          Cost basis
Security                                        Quantity    Amount                     loss       loss
                   acquisition   or exchange
                                                                                    disallowed
Nuveen LA Muni A   11/30/2010      3/15/2012        1.000      11.21        10.77         0.00       0.44
Nuveen LA Muni A    12/6/2010      3/15/2012        9.000     100.89        98.37         0.00       2.52
Nuveen LA Muni A   12/31/2010      3/15/2012       14.000     156.94       143.36         0.00      13.58
Nuveen LA Muni A     1/3/2011      3/15/2012        9.000     100.89        96.03         0.00       4.86
Nuveen LA Muni A    1/31/2011      3/15/2012       14.000     156.94       141.40         0.00      15.54
Nuveen LA Muni A    1/31/2011      3/15/2012        1.000      11.21        10.30         0.00       0.91
Nuveen LA Muni A    2/28/2011      3/15/2012       14.000     156.95       143.21         0.00      13.74
Nuveen LA Muni A    2/28/2011      3/15/2012        1.000      11.21        10.11         0.00       1.10
Blackrock Nat I     7/26/1999      3/15/2012        5.000      53.70        54.35         0.65       0.00
Blackrock Nat I     7/26/1999      3/15/2012       16.000     171.83       173.93         0.00      −2.10
Blackrock Nat I     8/25/1999      3/15/2012       11.000     118.13       119.21         0.00      −1.08
Blackrock Nat I     9/27/1999      3/15/2012       20.000     214.80       202.67         0.00      12.13
Blackrock Nat I    10/15/1999      3/15/2012        3.000      32.21        32.94         0.00      −0.73
Blackrock Nat I    10/25/1999      3/15/2012        8.000      85.92        81.60         0.00       4.32
Blackrock Nat I    11/26/1999      3/15/2012        5.000      53.70        49.96         0.00       3.74
Blackrock Nat I    12/27/1999      3/15/2012        5.000      53.70        48.95         0.00       4.75
Blackrock Nat I     1/25/2000      3/15/2012        5.000      53.70        48.36         0.00       5.34
Blackrock Nat I     2/25/2000      3/15/2012       20.000     214.80       195.95         0.00      18.85
Blackrock Nat I     3/27/2000      3/15/2012        3.000      32.22        33.24         0.00      −1.02
Blackrock Nat I     4/17/2000      3/15/2012        2.000      21.48        16.59         0.00       4.89
Blackrock Nat I     4/25/2000      3/15/2012        3.000      32.22        33.07         0.00      −0.85
Blackrock Nat I     5/25/2000      3/15/2012        3.000      32.21        32.39         0.00      −0.18
Blackrock Nat I     6/15/2000      3/15/2012        2.000      21.47        16.51         0.00       4.96
Blackrock Nat I     6/26/2000      3/15/2012        3.000      32.22        33.17         0.00      −0.95
Blackrock Nat I     7/25/2000      3/15/2012        3.000      32.22        33.53         0.00      −1.31
Blackrock Nat I     8/15/2000      3/15/2012        2.000      21.48        16.88         0.00       4.60
Blackrock Nat I     8/25/2000      3/15/2012       75.000     805.50       782.45         0.00      23.05
Blackrock Nat I     9/15/2000      3/15/2012        2.000      21.48        16.92         0.00       4.56
Blackrock Nat I     9/25/2000      3/15/2012       15.000     161.10       151.81         0.00       9.29
Blackrock Nat I    10/25/2000      3/15/2012       11.000     118.14       118.30         0.00      −0.16
Blackrock Nat I    11/15/2000      3/15/2012        2.000      21.48        16.80         0.00       4.68
Blackrock Nat I    11/27/2000      3/15/2012        3.000      32.22        33.68         0.00      −1.46
Blackrock Nat I    12/15/2000      3/15/2012        2.000      21.47        17.20         0.00       4.27
Blackrock Nat I    12/26/2000      3/15/2012        5.000      53.70        51.89         0.00       1.81
Blackrock Nat I     1/25/2001      3/15/2012        3.000      32.21        34.49         0.00      −2.28
Blackrock Nat I     2/15/2001      3/15/2012        2.000      21.48        17.26         0.00       4.22
Blackrock Nat I     2/26/2001      3/15/2012        3.000      32.21        34.51         0.00      −2.30
Blackrock Nat I     3/15/2001      3/15/2012        2.000      21.48        17.32         0.00       4.16
Blackrock Nat I     3/26/2001      3/15/2012        3.000      32.22        34.71         0.00      −2.49
Blackrock Nat I     4/25/2001      3/15/2012        3.000      32.22        33.79         0.00      −1.57
Blackrock Nat I     5/15/2001      3/15/2012        2.000      21.47        16.93         0.00       4.54
Blackrock Nat I     5/25/2001      3/15/2012        3.000      32.22        34.02         0.00      −1.80
Blackrock Nat I     6/15/2001      3/15/2012        2.000      21.48        17.11         0.00       4.37
Blackrock Nat I     6/25/2001      3/15/2012        5.000      53.70        51.42         0.00       2.28
Blackrock Nat I     7/25/2001      3/15/2012        5.000      53.70        51.78         0.00       1.92
Blackrock Nat I     8/27/2001      3/15/2012       44.000     472.56       472.77         0.00      −0.21
Blackrock Nat I     9/17/2001      3/15/2012        3.000      32.22        35.04         0.00      −2.82
                                                   44

[*44]                                                                              Wash sale    Gain or
                    Date of     Date of sale                          Cost basis
Security                                       Quantity    Amount                     loss       loss
                  acquisition   or exchange
                                                                                   disallowed
Blackrock Nat I    9/25/2001      3/15/2012        3.000      32.22        34.64         0.00      −2.42
Blackrock Nat I   10/25/2001      3/15/2012        2.000      21.48        17.39         0.00       4.09
Blackrock Nat I   11/15/2001      3/15/2012        3.000      32.22        34.78         0.00      −2.56
Blackrock Nat I   11/26/2001      3/15/2012        2.000      21.48        17.22         0.00       4.26
Blackrock Nat I   12/17/2001      3/15/2012        3.000      32.22        33.58         0.00      −1.36
Blackrock Nat I   12/26/2001      3/15/2012        7.000      75.18        67.68         0.00       7.50
Blackrock Nat I    1/25/2002      3/15/2012        2.000      21.48        17.12         0.00       4.36
Blackrock Nat I    2/15/2002      3/15/2012        3.000      32.22        34.22         0.00      −2.00
Blackrock Nat I    2/25/2002      3/15/2012        2.000      21.48        17.19         0.00       4.29
Blackrock Nat I    3/15/2002      3/15/2012        3.000      32.22        33.86         0.00      −1.64
Blackrock Nat I    3/25/2002      3/15/2012        2.000      21.48        16.85         0.00       4.63
Blackrock Nat I    4/15/2002      3/15/2012        3.000      32.22        33.94         0.00      −1.72
Blackrock Nat I    4/25/2002      3/15/2012        2.000      21.48        17.03         0.00       4.45
Blackrock Nat I    5/15/2002      3/15/2012        3.000      32.22        33.86         0.00      −1.64
Blackrock Nat I    5/28/2002      3/15/2012        2.000      21.47        17.01         0.00       4.46
Blackrock Nat I    6/17/2002      3/15/2012        3.000      32.22        34.18         0.00      −1.96
Blackrock Nat I    6/25/2002      3/15/2012        2.000      21.48        17.09         0.00       4.39
Blackrock Nat I    7/15/2002      3/15/2012        3.000      32.22        34.40         0.00      −2.18
Blackrock Nat I    7/25/2002      3/15/2012       34.000     365.16       362.25         0.00       2.91
Blackrock Nat I    8/15/2002      3/15/2012        2.000      21.48        17.23         0.00       4.25
Blackrock Nat I    8/26/2002      3/15/2012        3.000      32.22        34.40         0.00      −2.18
Blackrock Nat I    9/16/2002      3/15/2012        3.000      32.22        34.68         0.00      −2.46
Blackrock Nat I    9/25/2002      3/15/2012        2.000      21.48        17.47         0.00       4.01
Blackrock Nat I   10/15/2002      3/15/2012        2.000      21.47        17.28         0.00       4.19
Blackrock Nat I   10/25/2002      3/15/2012        5.000      53.70        50.66         0.00       3.04
Blackrock Nat I   11/15/2002      3/15/2012        3.000      32.22        34.12         0.00      −1.90
Blackrock Nat I   11/25/2002      3/15/2012        2.000      21.48        17.01         0.00       4.47
Blackrock Nat I   12/16/2002      3/15/2012        3.000      32.22        34.14         0.00      −1.92
Blackrock Nat I   12/26/2002      3/15/2012        3.000      32.22        34.30         0.00      −2.08
Blackrock Nat I    1/15/2003      3/15/2012        2.000      21.48        17.05         0.00       4.43
Blackrock Nat I    1/27/2003      3/15/2012       67.000     719.58       701.51         0.00      18.07
Blackrock Nat I    2/18/2003      3/15/2012        3.000      32.22        34.18         0.00      −1.96
Blackrock Nat I    2/25/2003      3/15/2012        2.000      21.48        17.20         0.00       4.28
Blackrock Nat I    3/17/2003      3/15/2012        3.000      32.22        34.50         0.00      −2.28
Blackrock Nat I    3/25/2003      3/15/2012        2.000      21.48        17.06         0.00       4.42
Blackrock Nat I    4/15/2003      3/15/2012        3.000      32.22        34.18         0.00      −1.96
Blackrock Nat I    4/25/2003      3/15/2012        2.000      21.48        17.27         0.00       4.21
Blackrock Nat I    5/15/2003      3/15/2012        3.000      32.22        35.08         0.00      −2.86
Blackrock Nat I    5/27/2003      3/15/2012       11.000     118.14       123.54         0.00      −5.40
Blackrock Nat I    6/16/2003      3/15/2012        5.000      53.70        53.28         0.00       0.42
Blackrock Nat I    6/25/2003      3/15/2012       15.000     161.10       157.76         0.00       3.34
Blackrock Nat I    7/15/2003      3/15/2012        2.000      21.48        17.23         0.00       4.25
Blackrock Nat I    7/25/2003      3/15/2012       25.000     268.50       256.20         0.00      12.30
Blackrock Nat I    8/15/2003      3/15/2012        3.000      32.22        33.56         0.00      −1.34
Blackrock Nat I    8/25/2003      3/15/2012        2.000      21.47        16.81         0.00       4.66
Blackrock Nat I    9/15/2003      3/15/2012        3.000      32.22        34.02         0.00      −1.80
Blackrock Nat I    9/25/2003      3/15/2012        2.000      21.48        17.12         0.00       4.36
                                                   45

[*45]                                                                              Wash sale    Gain or
                    Date of     Date of sale                          Cost basis
Security                                       Quantity    Amount                     loss       loss
                  acquisition   or exchange
                                                                                   disallowed
Blackrock Nat I   10/15/2003      3/15/2012        2.000      21.48        16.95         0.00       4.53
Blackrock Nat I   10/27/2003      3/15/2012        2.000      21.48        17.12         0.00       4.36
Blackrock Nat I   11/17/2003      3/15/2012        3.000      32.22        34.50         0.00      −2.28
Blackrock Nat I   11/25/2003      3/15/2012        2.000      21.48        17.28         0.00       4.20
Blackrock Nat I   12/15/2003      3/15/2012        3.000      32.22        34.52         0.00      −2.30
Blackrock Nat I   12/26/2003      3/15/2012        2.000      21.48        17.37         0.00       4.11
Blackrock Nat I    1/15/2004      3/15/2012        3.000      32.22        34.94         0.00      −2.72
Blackrock Nat I    1/26/2004      3/15/2012       11.000     118.14       121.66         0.00      −3.52
Blackrock Nat I    2/17/2004      3/15/2012        2.000      21.48        17.47         0.00       4.01
Blackrock Nat I    2/25/2004      3/15/2012        2.000      21.48        17.50         0.00       3.98
Blackrock Nat I    3/15/2004      3/15/2012        3.000      32.22        35.10         0.00      −2.88
Blackrock Nat I    3/24/2004      3/15/2012        2.000      21.48        17.45         0.00       4.03
Blackrock Nat I    3/25/2004      3/15/2012        2.000      21.48        17.41         0.00       4.07
Blackrock Nat I    4/26/2004      3/15/2012       40.000     429.60       415.60         0.00      14.00
Blackrock Nat I    5/21/2004      3/15/2012       23.000     247.02       235.29         0.00      11.73
Blackrock Nat I    5/25/2004      3/15/2012       13.000     139.62       133.10         0.00       6.52
Blackrock Nat I    5/28/2004      3/15/2012        1.000      10.73        10.26         0.00       0.47
Blackrock Nat I    6/22/2004      3/15/2012       23.000     247.02       235.75         0.00      11.27
Blackrock Nat I    6/25/2004      3/15/2012       17.000     182.58       174.59         0.00       7.99
Blackrock Nat I    7/22/2004      3/15/2012       22.000     236.28       228.14         0.00       8.14
Blackrock Nat I    7/26/2004      3/15/2012       19.000     204.06       197.02         0.00       7.04
Blackrock Nat I    8/20/2004      3/15/2012       23.000     247.02       240.81         0.00       6.21
Blackrock Nat I    8/25/2004      3/15/2012        2.000      21.48        20.91         0.00       0.57
Blackrock Nat I    9/21/2004      3/15/2012       22.000     236.28       231.66         0.00       4.62
Blackrock Nat I    9/27/2004      3/15/2012        1.000      10.74        10.56         0.00       0.18
Blackrock Nat I   10/21/2004      3/15/2012       23.000     247.02       242.88         0.00       4.14
Blackrock Nat I   10/25/2004      3/15/2012       97.000   1,041.78     1,025.29         0.00      16.49
Blackrock Nat I   11/19/2004      3/15/2012       23.000     247.02       241.50         0.00       5.52
Blackrock Nat I   12/21/2004      3/15/2012       22.000     236.28       231.88         0.00       4.40
Blackrock Nat I   12/27/2004      3/15/2012        1.000      10.74        10.52         0.00       0.22
Blackrock Nat I    1/21/2005      3/15/2012       25.000     268.50       264.75         0.00       3.75
Blackrock Nat I    1/25/2005      3/15/2012       10.000     107.40       105.80         0.00       1.60
Blackrock Nat I    2/18/2005      3/15/2012       22.000     236.28       232.98         0.00       3.30
Blackrock Nat I    3/22/2005      3/15/2012       21.000     225.54       220.29         0.00       5.25
Blackrock Nat I    4/21/2005      3/15/2012       22.000     236.28       231.88         0.00       4.40
Blackrock Nat I    5/20/2005      3/15/2012       23.000     247.02       244.03         0.00       2.99
Blackrock Nat I    6/22/2005      3/15/2012       21.000     225.54       223.65         0.00       1.89
Blackrock Nat I    7/22/2005      3/15/2012       24.000     257.76       254.64         0.00       3.12
Blackrock Nat I    8/24/2005      3/15/2012       23.000     247.02       244.26         0.00       2.76
Blackrock Nat I    9/23/2005      3/15/2012       23.000     247.02       243.34         0.00       3.68
Blackrock Nat I   10/25/2005      3/15/2012       23.000     247.02       241.04         0.00       5.98
Blackrock Nat I   11/23/2005      3/15/2012       22.000     236.28       229.90         0.00       6.38
Blackrock Nat I   12/23/2005      3/15/2012       24.000     257.76       252.00         0.00       5.76
Blackrock Nat I    1/20/2006      3/15/2012       20.000     214.80       210.80         0.00       4.00
Blackrock Nat I    2/17/2006      3/15/2012       22.000     236.28       231.66         0.00       4.62
Blackrock Nat I    3/23/2006      3/15/2012       24.000     257.76       252.24         0.00       5.52
Blackrock Nat I    4/21/2006      3/15/2012       23.000     247.02       239.89         0.00       7.13
                                                   46

[*46]                                                                              Wash sale    Gain or
                    Date of     Date of sale                          Cost basis
Security                                       Quantity    Amount                     loss       loss
                  acquisition   or exchange
                                                                                   disallowed
Blackrock Nat I    5/23/2006      3/15/2012       23.000     247.02       239.66         0.00       7.36
Blackrock Nat I    6/22/2006      3/15/2012       22.000     236.28       227.92         0.00       8.36
Blackrock Nat I    7/21/2006      3/15/2012       24.000     257.76       249.84         0.00       7.92
Blackrock Nat I    8/22/2006      3/15/2012       23.000     247.02       241.96         0.00       5.06
Blackrock Nat I    9/21/2006      3/15/2012       22.000     236.28       232.54         0.00       3.74
Blackrock Nat I   10/31/2006      3/15/2012       30.000     322.20       317.70         0.00       4.50
Blackrock Nat I   11/30/2006      3/15/2012       22.000     236.28       234.08         0.00       2.20
Blackrock Nat I   12/29/2006      3/15/2012       23.000     247.02       243.11         0.00       3.91
Blackrock Nat I     1/3/2007      3/15/2012        1.000      10.74        10.58         0.00       0.16
Blackrock Nat I    1/31/2007      3/15/2012       23.000     247.02       242.19         0.00       4.83
Blackrock Nat I     2/1/2007      3/15/2012        1.000      10.74        10.53         0.00       0.21
Blackrock Nat I    2/28/2007      3/15/2012       21.000     225.54       222.60         0.00       2.94
Blackrock Nat I    3/30/2007      3/15/2012       16.000     171.84       168.80         0.00       3.04
Blackrock Nat I    4/30/2007      3/15/2012       16.000     171.84       168.64         0.00       3.20
Blackrock Nat I     5/1/2007      3/15/2012        1.000      10.74        10.54         0.00       0.20
Blackrock Nat I    5/31/2007      3/15/2012       16.000     171.84       167.52         0.00       4.32
Blackrock Nat I    6/29/2007      3/15/2012       16.000     171.84       166.24         0.00       5.60
Blackrock Nat I     7/2/2007      3/15/2012        1.000      10.74        10.39         0.00       0.35
Blackrock Nat I    7/31/2007      3/15/2012       16.000     171.84       166.24         0.00       5.60
Blackrock Nat I     8/1/2007      3/15/2012        1.000      10.74        10.38         0.00       0.36
Blackrock Nat I    8/31/2007      3/15/2012       17.000     182.58       174.59         0.00       7.99
Blackrock Nat I    9/28/2007      3/15/2012       16.000     171.84       165.60         0.00       6.24
Blackrock Nat I    10/1/2007      3/15/2012        1.000      10.74        10.35         0.00       0.39
Blackrock Nat I   10/31/2007      3/15/2012       17.000     182.58       175.78         0.00       6.80
Blackrock Nat I   11/30/2007      3/15/2012       16.000     171.84       164.96         0.00       6.88
Blackrock Nat I   12/31/2007      3/15/2012       17.000     182.58       174.25         0.00       8.33
Blackrock Nat I     1/2/2008      3/15/2012        1.000      10.74        10.27         0.00       0.47
Blackrock Nat I    1/31/2008      3/15/2012       24.000     257.76       246.72         0.00      11.04
Blackrock Nat I    2/29/2008      3/15/2012       23.000     247.02       226.09         0.00      20.93
Blackrock Nat I     3/3/2008      3/15/2012        1.000      10.74         9.89         0.00       0.85
Blackrock Nat I    3/31/2008      3/15/2012       25.000     268.50       250.00         0.00      18.50
Blackrock Nat I     4/1/2008      3/15/2012        1.000      10.74         9.98         0.00       0.76
Blackrock Nat I    4/30/2008      3/15/2012       23.000     247.02       231.38         0.00      15.64
Blackrock Nat I     5/1/2008      3/15/2012        1.000      10.74        10.06         0.00       0.68
Blackrock Nat I    5/30/2008      3/15/2012       24.000     257.76       241.92         0.00      15.84
Blackrock Nat I    6/30/2008      3/15/2012       23.000     247.02       228.85         0.00      18.17
Blackrock Nat I    7/31/2008      3/15/2012       23.000     247.02       227.93         0.00      19.09
Blackrock Nat I     8/1/2008      3/15/2012        1.000      10.74         9.91         0.00       0.83
Blackrock Nat I    8/29/2008      3/15/2012       25.000     268.50       248.75         0.00      19.75
Blackrock Nat I    9/30/2008      3/15/2012       27.000     289.98       255.96         0.00      34.02
Blackrock Nat I    10/1/2008      3/15/2012        1.000      10.74         9.47         0.00       1.27
Blackrock Nat I   10/31/2008      3/15/2012       30.000     322.20       273.90         0.00      48.30
Blackrock Nat I   11/28/2008      3/15/2012       28.000     300.72       252.84         0.00      47.88
Blackrock Nat I   12/31/2008      3/15/2012       29.000     311.46       258.68         0.00      52.78
Blackrock Nat I    1/30/2009      3/15/2012       27.000     289.98       250.29         0.00      39.69
Blackrock Nat I     2/2/2009      3/15/2012        1.000      10.74         9.30         0.00       1.44
Blackrock Nat I    2/27/2009      3/15/2012       24.000     257.76       225.36         0.00      32.40
                                                      47

[*47]                                                                                 Wash sale    Gain or
                       Date of     Date of sale                          Cost basis
Security                                          Quantity   Amount                      loss       loss
                     acquisition   or exchange
                                                                                      disallowed
Blackrock Nat I       3/31/2009      3/15/2012      26.000      279.24       242.84         0.00     36.40
Blackrock Nat I        4/1/2009      3/15/2012       1.000       10.74         9.35         0.00      1.39
Blackrock Nat I       4/30/2009      3/15/2012      19.000      204.06       181.07         0.00     22.99
Blackrock Nat I       5/29/2009      3/15/2012      19.000      204.06       183.92         0.00     20.14
Blackrock Nat I        6/1/2009      3/15/2012       1.000       10.74         9.64         0.00      1.10
Blackrock Nat I       6/30/2009      3/15/2012      18.000      193.32       172.98         0.00     20.34
Blackrock Nat I        7/1/2009      3/15/2012       1.000       10.74         9.61         0.00      1.13
Blackrock Nat I       7/31/2009      3/15/2012      19.000      204.06       183.73         0.00     20.33
Blackrock Nat I       8/31/2009      3/15/2012      18.000      193.32       176.94         0.00     16.38
Blackrock Nat I        9/1/2009      3/15/2012       1.000       10.74         9.85         0.00      0.89
Blackrock Nat I       9/30/2009      3/15/2012      17.000      182.58       173.74         0.00      8.84
Blackrock Nat I      10/30/2009      3/15/2012      18.000      193.32       180.00         0.00     13.32
Blackrock Nat I       11/2/2009      3/15/2012       1.000       10.74        10.00         0.00      0.74
Blackrock Nat I      11/30/2009      3/15/2012      18.000      193.32       179.28         0.00     14.04
Blackrock Nat I       12/1/2009      3/15/2012       1.000       10.74         9.98         0.00      0.76
Blackrock Nat I      12/31/2009      3/15/2012      19.000      204.06       190.38         0.00     13.68
Blackrock Nat I       1/29/2010      3/15/2012      19.000      204.06       190.76         0.00     13.30
Blackrock Nat I       2/26/2010      3/15/2012      17.000      182.58       171.36         0.00     11.22
Blackrock Nat I        3/1/2010      3/15/2012       1.000       10.74        10.08         0.00      0.66
Blackrock Nat I       3/31/2010      3/15/2012      19.000      204.06       191.90         0.00     12.16
Blackrock Nat I       4/30/2010      3/15/2012      19.000      204.06       193.80         0.00     10.26
Blackrock Nat I        5/3/2010      3/15/2012       1.000       10.74        10.20         0.00      0.54
Blackrock Nat I       5/28/2010      3/15/2012      19.000      204.06       194.37         0.00      9.69
Blackrock Nat I       6/30/2010      3/15/2012      19.000      204.06       193.60         0.00     10.46
Blackrock Nat I       6/30/2010      3/15/2012       1.000       10.74        10.17         0.00      0.57
Blackrock Nat I       7/30/2010      3/15/2012      19.000      204.06       194.75         0.00      9.31
Blackrock Nat I       8/31/2010      3/15/2012      18.000      193.32       188.46         0.00      4.86
Blackrock Nat I       9/30/2010      3/15/2012      17.000      182.58       177.81         0.00      4.77
Blackrock Nat I       9/30/2010      3/15/2012       1.000       10.74        10.37         0.00      0.37
Blackrock Nat I      10/29/2010      3/15/2012      17.000      182.58       176.63         0.00      5.95
Blackrock Nat I      10/29/2010      3/15/2012       1.000       10.74        10.44         0.00      0.30
Blackrock Nat I      11/30/2010      3/15/2012      18.000      193.32       181.44         0.00     11.88
Blackrock Nat I      11/30/2010      3/15/2012       1.000       10.74        10.27         0.00      0.47
Blackrock Nat I      12/31/2010      3/15/2012      20.000      214.80       197.19         0.00     17.61
Blackrock Nat I      12/31/2010      3/15/2012       1.000       10.74         9.93         0.00      0.81
Blackrock Nat I       1/31/2011      3/15/2012      21.000      225.55       203.27         0.00     22.28
Blackrock Nat I       2/28/2011      3/15/2012      21.000      225.55       205.79         0.00     19.76
Blackrock Nat I       2/28/2011      3/15/2012       1.000       10.74         9.75         0.00      0.99
Col. Tax Ex. Fd. A     6/8/2011      3/15/2012    2332.000   32,298.46      N/A             0.00    N/A
Col. Tax Ex. Fd. A    1/26/2012      3/15/2012       1.000       13.85      N/A             0.00    N/A
Col. Tax Ex. Fd. A    1/26/2012      3/27/2012       0.309        4.26      N/A             0.00    N/A
Blackrock              6/8/1994      3/15/2012    1829.000   19,643.46      N/A             0.00    N/A
Blackrock              6/8/1994      3/15/2012    2523.000   27,097.01      N/A             0.00    N/A
                                   48

[*48] There are five sales for which the abbreviation “N/A” appears in
the column for cost basis. The parties disagree as to the true cost basis
for these five sales.

XIII. In 2012, the Fraziers sold securities from the Franklin Growth
      Fund, receiving $40,867 of proceeds.

      During 2012, the Fraziers had proceeds from the sale of securities
from the Franklin Growth Fund in the amount of $40,867.

XIV. In 2012, the Fraziers’ received $1,417 from “Columbia Seligman
     Comm. And Info.”

      During 2012, the Fraziers received an amount of $1,417 from
“Columbia Seligman Comm. And Info.” The parties stipulated that “the
Fraziers had no basis in this asset.”

XV.   In 2012, the Fraziers received taxable wages, interest, dividends,
      IRA distributions, pension distributions, social security benefits,
      and Schedule E income and had federal income tax withholding.

       The parties stipulated that during 2012, the Fraziers received
taxable wages of $1,175,640; taxable interest of $10,308; taxable
ordinary dividends of $1,545; qualified dividends of $4,636; taxable
income related to rental real estate, royalties, partnerships, S
corporations, trusts, etc., of $957,397; taxable IRA distributions of
$4,990; pension distributions of $13,079 (of which $11,741 is taxable);
and taxable social security benefits of $43,150. The parties also
stipulated that the Fraziers had federal income tax withholding of
$370,278.

XVI. In 2012, the Fraziers paid state and local income taxes and real
     estate taxes.

      In 2012, the Fraziers paid state and local income taxes of $91,453
and real estate taxes of $11,571.

XVII. Tax reporting: Louisiana Assisted’s Forms 1065, the Fraziers’
      Forms 1040 and 2012 Form 1099-B, and LHDC’s Forms 1120

      The Fraziers filed joined Forms 1040, U.S. Individual Income Tax
Return[s], for 2009, 2010, and 2011. LHDC filed Forms 1120, U.S.
Corporation Income Tax Return[s], for 2009, 2010, 2011, and 2012.
                                    49

[*49] Louisiana Assisted filed Forms 1065, U.S. Return[s] of
Partnership Income, for 2009, 2010, 2011 and 2012. The notices of
deficiency do not make any adjustments that are corrections to the
Forms 1065 filed by Louisiana Assisted. However, we discuss Louisiana
Assisted’s Forms 1065 for these years because Louisiana Assisted’s tax
reporting affects the tax reporting of its members: Bobbie and LHDC.

      To avoid confusion, we define two terms at the outset.

        “Distributive share”: A partnership itself is not subject to income
tax. § 701. The income or loss of a partnership is computed as an initial
step in calculating the partners’ tax liabilities. § 703(a). Each partner’s
income takes into account the partner’s distributive share of the
partnership’s income or loss. § 702(a). All partners take into account
their distributive shares of income regardless of whether income is
actually distributed. Treas. Reg. § 1.702-1(a). Thus, “distributive share
does not mean distributed share. A partner has income irrespective of
whether or not any amount is distributed to the partner. The Code could
have (and perhaps should have) said allocable share.” Richard M.
Lipton, Paul Carman, Charles Fassler, & Walter D. Schwidetzsky,
Partnership Taxation 94 (LexisNexis ed. 2012). In this Opinion, we will
use the term “distributive share” to refer to a partner’s taxable share of
partnership income or loss pursuant to section 702(a).

       “Distribution” or “cash distribution”: A partnership may
distribute property to a partner. A partner generally does not recognize
income on the distribution of property from the partnership except that
the partner recognizes a gain to “the extent that any money distributed
exceeds the adjusted basis of such partner’s interest in the partnership
immediately before the distribution.” § 731(a)(1). In this Opinion, we
will use the term “distribution” or “cash distribution” to refer to property
or money actually distributed to a partner by a partnership.

      A.      Louisiana Assisted

              1.    Overview of Louisiana Assisted’s tax reporting:
                    Forms 1065

      Each of Louisiana Assisted’s Forms 1065 contained the following
attachments that the IRS argues are relevant to the identity of the
member of the LLC other than Bobbie:

      •    a Schedule B, Other Information;
                                          50

[*50] •    a Schedule B-1, Information on Partners Owning 50% or More
           of the Partnership;

       •   a Schedule K, Partners’ Distributive Share Items;

       •   a Schedule K–1 issued to Bobbie and a Schedule K–1 issued to
           William; and

       •   a document titled “Federal Statements.”

       Certain lines in the Schedule B ask for information about the
partners. Line 2 of the Schedule B asks: “At any time during the tax
year, was any partner in the partnership a . . . nominee or similar
person?” (Emphasis added). Line 3a asks: “At the end of the tax year:
Did any foreign or domestic corporation . . . own directly or indirectly an
interest of 50% or more in the profit, loss, or capital of the partnership?”
On all of the Forms 1065, both questions were answered in the negative.

       The Schedule B also asks, in line 3b, whether “any individual . . .
own[s] directly or indirectly, an interest of 50% or more in the profit, loss,
or capital of the partnership?” Line 3b instructs: “If yes, attach Schedule
B-1, Information on Partners Owning 50% or More of the Partnership.”
The line 3b question was answered in the affirmative, and there were
Schedules B-1 attached to each of the four years’ Forms 1065. Each of the
Schedules B-1 reported William and Bobbie as the partners who each
owned 50% or more of the interest in Louisiana Assisted.

       The Louisiana Assisted Schedules K–1 for 2009, 2010, 2011, and
2012 were issued to Bobbie and William. On each of the Schedules K–1,
Bobbie is reported to be a general partner, and William is reported to be
a limited partner. Both Bobbie and William are reported to be
“individual” partners, as opposed to, for example, corporate partners.
For all four years, Bobbie and William were reported to be partners to
shared profits and losses 50-50, and to be partners whose capital
accounts were on the tax basis method. 13

        13 For the relevant tax years, and until 2020, a partnership (or entity treated

as a partnership for tax purposes) was permitted to calculate a partner’s capital
account using a variety of methods: “tax basis,” “Section 704(b),” “GAAP” (Generally
Accepted Accounting Principles), or “any other method.” IRS Notice 2019-66, 2019-52
I.R.B. 1509; see 2009 IRS Instructions for Form 1065 at 25; 2010 IRS Instructions for
Form 1065 at 25; 2011 IRS Instructions for Form 1065 at 24; 2012 IRS Instructions for
Form 1065 at 26; see also Thomas J. Dickerson & Christopher J. Koyle, The Elusive
                                            51

[*51] The “Federal Statements” document contains a number of
subsidiary statements that provide additional detail on certain items
reported in the Form 1065, including line 7, “Other income” and line 20,
“Other deductions.”

      We now discuss Louisiana Assisted’s tax reporting on a year-by-
year basis for each of the tax years at issue.

                2.       Louisiana Assisted’s tax reporting by year

                         a.      2009

      The following table shows the relevant amounts reported on
Louisiana Assisted’s 2009 Form 1065. 14

Treatment of Partnership Syndication Costs, 97 J. Tax’n 277, 2002 WL 31692866 2.
Under the tax basis method, a partner’s capital account is credited with the net tax
basis (gross tax basis less related liabilities) of assets he contributes to the partnership,
while under the GAAP and Section 704(b) methods capital accounts are credited with
the net fair market value of contributed property (gross value less any related
liabilities). Dickerson, supra, at 2.
        14 Line items without any reported amounts have been omitted.
                                          52

[*52]                    Item and line                      Amount

                                         Income

 Gross profit (line 3)                                         $7,345,149

 Other income (line 7)                                               199

 Total income (line 8, sum of lines 3 through 7)                7,345,348

                                     Deductions

 Salaries and wages (line 9)                                     −116,957

 Repairs and maintenance (line 11)                                 −1,000

 Rent (line 13)                                                   −62,050

 Taxes and licenses paid (line 14)                                 −9,957

 Employee benefit programs (line 19)                               −4,446

 Other deductions (line 20)                                    −1,175,450

 Total deductions (line 21, sum of lines 9 through 20)         −1,369,860

     Ordinary business income (loss) (line 22, line 8
                                                                5,975,488
      minus line 21)

      Line 22 of the 2009 Form 1065, labeled “Ordinary business
income (loss),” shows the total of nonseparately stated income (loss). See
§ 702(a)(8); see also 2009 IRS Instructions for Form 1065 at 14.

       “SEE STATEMENT 1” is typed next to the $199 of “Other income”
on line 7. However, Statement 1 attached to the 2009 Form 1065 does
not provide further detail of what the $199 of “Other income” in line 7
is.

       “SEE STATEMENT 2” is typed next to the $1,175,450 of “Other
deductions” on line 20. Statement 2 attached to the 2009 Form 1065
provides detail of the “Other deductions” amount. Some of these detailed
categories are “legal and professional” expenses of $81,171, “outside
services” expenses of $993,753, and “payroll processing” expenses of
$1,211.
                                            53

[*53] The following table shows the amounts reported on the 2009
Schedule K, Form 1065: (1) total nonseparately stated income
(“Ordinary business income (loss)” on the Schedule K), § 702(a)(8), and
(2) relevant separately stated items pursuant to sections 702(a) and
703(a).

                            Item and line                     Amount

 “Ordinary business income (loss)” (line 1) (nonseparately      $5,975,488
 stated income, see § 702(a)(8))

 Interest income (line 5)                                              6,311

 Contributions (line 13a)                                              5,000

 Net earnings (loss) from self-employment (line 14a)             2,240,744

 Nondeductible expenses (line 18c)                                       75

 Distributions of cash and marketable securities (line 19a)      4,300,000

 Investment income (line 20a)                                          6,311

       For 2009, Louisiana Assisted issued both Bobbie and William
Schedules K–1, both of which are in the record. The following table
shows amounts as they were reported on the 2009 Schedule K–1, Form
1065 that Louisiana Assisted issued to William: the beginning balance
of William’s capital account along with changes to his capital account,
his distributive share of partnership items, and his cash distribution.
                                           54

[*54]                      Item and line                      Amount

Beginning capital account balance                                $582,194

Current-year increase (decrease) in capital account balance      2,988,362

Withdrawals and distributions                                   −2,165,000

Ending capital account balance                                   1,405,556

“Ordinary business income (loss)” (line 1) (nonseparately        2,987,744
stated income, see § 702(a)(8))

Interest income (line 5)                                               3,156

Deduction for cash contribution (line 13)                          −2,500

Non-deductible expenses (line 18)                                       −38

Investment income (line 20)                                            3,156

Cash distribution (line 19)                                      2,165,000

                      b.         2010

      The following table shows the relevant amounts reported on
Louisiana Assisted’s 2010 Form 1065.
                                          55

[*55]                    Item and line                      Amount

                                         Income

 Gross profit (line 3)                                         $1,892,848

 Total gross income (line 8, sum of lines 3 through 7)          1,892,848

                                     Deductions

 Salaries and wages (line 9)                                      −78,817

 Rent (line 13)                                                   −30,650

 Taxes and licenses paid (line 14)                                 −7,697

 Employee benefit programs (line 19)                               −1,913

 Other deductions (line 20)                                      −487,441

 Total deductions (line 21, sum of lines 8 through 20)          −606,518

     “Ordinary business stated income (loss)” (line 22,
                                                                1,286,330
      line 8 minus line 21)

      Line 22 of the 2010 Form 1065, labeled “Ordinary business
income (loss),” shows the total of nonseparately stated income (loss). See
§ 702(a)(8); see also 2010 IRS Instructions for Form 1065 at 14.

       “SEE STATEMENT 1” is typed next to the $487,441 of “Other
deductions” on line 20. Statement 1 attached to the 2010 Form 1065
provides detail of the “Other deductions” amount reported in line 20.
Some of these detailed categories are “legal and professional” expenses
of $15,735, “outside services” expenses of $402,940, and “payroll
processing” expenses of $1,656.

      The following table shows the amounts reported on the 2010
Schedule K, Form 1065: (1) total nonseparately stated income
(“Ordinary business income (loss)” on the Schedule K), section 702(a)(8),
and (2) relevant separately stated items pursuant to sections 702(a) and
703(a).
                                            56

[*56]                       Item and line                      Amount

 “Ordinary business income (loss)” (line 1) (nonseparately       $1,286,330
 stated income, see § 702(a)(8))

 Interest income (line 5)                                               6,783

 Contributions (line 13a)                                               8,000

 Net earnings (loss) from self-employment (line 14a)               643,165

 Nondeductible expenses (line 18c)                                       326

 Distributions of cash and marketable securities (line 19a)       1,789,686

 Investment income (line 20a)                                           6,783

       For 2010, Louisiana Assisted issued both Bobbie and William
Schedules K–1, both of which are in the record. The following table
shows amounts as they were reported on the 2010 Schedule K–1, Form
1065 that Louisiana Assisted issued to William: the beginning balance
of William’s capital account along with changes to his capital account,
his distributive share of partnership items, and his cash distribution.

                            Item and line                      Amount

 Beginning capital account balance                               $1,405,556

 Current-year increase (decrease) in capital account balance       642,394

 Withdrawals and distributions                                    −765,000

 Ending capital account balance                                   1,282,950

 “Ordinary business income (loss)” (line 1) (nonseparately         643,165
 stated income, see § 702(a)(8))

 Interest income (line 5)                                               3,392

 Deduction for cash contribution (line 13)                              4,000

 Non-deductible expenses (line 18)                                       163

 Investment income (line 20)                                            3,392

 Cash distribution (line 19)                                       765,000
                                            57

[*57]                     c.     2011

      The following table shows the relevant amounts reported on
Louisiana Assisted’s 2011 Form 1065.

                           Item and line                    Amount

                                           Income

 Gross profit (line 3)                                           $392,681

 Total gross income (line 8, sum of lines 3 through 7)           392,681

                                        Deductions

 Salaries and wages (line 9)                                      −66,000

 Rent (line 13)                                                   −19,800

 Taxes and licenses paid (line 14)                                 −6,052

 Depreciation (line 16)                                            -1,319

 Retirement plans, etc. (line 18)                                  -1,920

 Other deductions (line 20)                                      −312,762

 Total deductions (line 21, sum of lines 8 through 20)          −407,853

     “Ordinary business income (loss)” (line 22, line 8
                                                                 −15,172
      minus line 21)

      Line 22 of the 2011 Form 1065, labeled “Ordinary business
income (loss),” shows the total of nonseparately stated income (loss). See
§ 702(a)(8); see also 2011 IRS Instructions for Form 1065 at 14.

       “SEE STATEMENT 1” is typed next to the $312,762 of “Other
deductions” on line 20. Statement 1 attached to the 2011 Form 1065
provides detail of the “Other deductions” amount reported in line 20.
Two of these deductions are $7,780 for “legal and professional” expenses
and $254,450 for “outside services” expenses.

      The following table shows the amounts reported on the 2011
Schedule K, Form 1065: (1) total nonseparately stated income
(“Ordinary business income (loss)” on the Schedule K) section 702(a)(8),
                                            58

[*58] and (2) relevant separately stated items pursuant to sections
702(a) and 703(a).

                            Item and line                     Amount

 “Ordinary business income (loss)” (line 1) (nonseparately       −$15,172
 stated income, see § 702(a)(8))

 Interest income (line 5)                                              3,677

 Contributions (line 13a)                                              7,040

 Net earnings (loss) from self-employment (line 14a)               −7,586

 Post-1986 depreciation adjustment (line 17a)                           331

 Nondeductible expenses (line 18c)                                      933

 Distributions of cash and marketable securities (line 19a)       904,489

 Investment income (line 20a)                                          3,677

       For 2011, Louisiana Assisted issued both Bobbie and William
Schedules K–1, both of which are in the record. The following table
shows amounts as they were reported on the 2011 Schedule K–1, Form
1065 that Louisiana Assisted issued to William: the beginning balance
of William’s capital account along with changes to his capital account,
his distributive share of partnership items, and his cash distribution.
                                           59

[*59]                      Item and line                      Amount

Beginning capital account balance                               $1,282,950

Current-year increase (decrease) in capital account balance        −9,734

Withdrawals and distributions                                    −450,000

Ending capital account balance                                    823,216

“Ordinary business income (loss)” (line 1) (nonseparately          −7,586
stated income, see § 702(a)(8))

Interest income (line 5)                                               1,839

Deduction for cash contribution (line 13)                          −3,520

Alternative minimum tax (AMT) items (line 17)                          −165

Non-deductible expenses (line 18)                                      −467

Investment income (line 20)                                            1,839

Cash distribution (line 19)                                      −450,000

                      d.         2012

      The following table shows the relevant amounts reported on
Louisiana Assisted’s 2012 Form 1065.
                                            60

[*60]                      Item and line                    Amount

                                           Income

 Gross profit (line 3)                                         $1,978,044

 Total gross income (line 8, sum of lines 3 through 7)          1,978,044

                                      Deductions

 Salaries and wages (line 9)                                      −20,569

 Rent (line 13)                                                    −4,200

 Taxes and licenses paid (line 14)                                 −6,297

 Depreciation (line 16c)                                             −942

 Other deductions (line 20)                                       −80,093

 Total deductions (line 21, sum of lines 8 through 20)          −112,101

     “Ordinary business income (loss)” (line 22, line 8
                                                                1,865,943
      minus line 21)

      Line 22 of the 2012 Form 1065, labeled “Ordinary business
income (loss),” shows the total of nonseparately stated income (loss). See
§ 702(a)(8); see also 2012 IRS Instructions for Form 1065 at 15.

       “SEE STATEMENT 1” is typed next to the $80,093 of “Other
deductions” on line 20. Statement 1 attached to the 2012 Form 1065
provides detail of the “Other deductions” amount reported in line 20.
Two of these deductions are $5,422 for “legal and professional” expenses
and $64,060 for “outside services” expenses.

      The following table shows the amounts reported on the 2012
Schedule K, Form 1065: (1) total nonseparately stated income
(“Ordinary business income (loss)” on the Schedule K), section 702(a)(8),
and (2) relevant separately stated items pursuant to sections 702(a) and
703(a).
                                           61

[*61]                      Item and line                      Amount

“Ordinary business income (loss)” (line 1) (nonseparately       $1,865,943
stated income, see § 702(a)(8))

Net earnings (loss) from self-employment (line 14a)                 932,971

Post-1986 depreciation adjustment (line 17a)                            207

Nondeductible expenses (line 18c)                                       109

Distributions of cash and marketable securities (line 19a)       3,213,666

       For 2012, Louisiana Assisted issued both Bobbie and William
Schedules K–1, both of which are in the record. The following table
shows amounts as they were reported on the 2012 Schedule K–1, Form
1065 that Louisiana Assisted issued to William: the beginning balance
of William’s capital account along with any changes to his capital
account, his distributive share of partnership items, and his cash
distribution.

                           Item and line                      Amount

Beginning capital account balance                                    $9,354

Current-year increase (decrease) in capital account balance         932,917

Withdrawals and distributions                                    −942,271

Ending capital account balance                                            0

“Ordinary business income (loss)” (line 1) (nonseparately           932,972
stated income, see § 702(a)(8))

Interest income (line 5)                                        —

Deduction for cash contribution (line 13)                       —

Post-1986 depreciation adjustments (line 17)                           −104

Non-deductible expenses (line 18)                                      −55

Investment income (line 20)                                     —

Cash distribution (line 19)                                      −942,271
                                         62

[*62] On the Schedule K–1 that Louisiana Assisted issued to William
for 2012, his beginning capital account balance was $9,354. On the
Schedule K–1 that Louisiana Assisted issued to William for the year
before, for 2011, his ending capital account balance was $823,216. For
every other year (2009, 2010, and 2011), the prior year’s ending capital
account balance was the following year’s beginning capital account
balance.

       B.      The Fraziers

               1.      The Fraziers’ tax reporting for 2009

       Before trial, the parties entered into a stipulation of facts. The
stipulation of facts made only the following statement about the
Fraziers’ tax return for 2009: “The Fraziers’ 2009 federal tax return was
due October 15, 2010; it was filed March 18, 2013.” The stipulation of
facts did not attach a copy of the Fraziers’ return for 2009.

      At trial, no party offered into evidence a copy of that filed return.
However, petitioners’ counsel offered Exhibit 4-P, a copy of an unsigned
Form 1040 for 2009. The IRS did not object to the admission of Exhibit
4-P, and it was admitted. The briefs of petitioners and the IRS rely on
Exhibit 4-P to prove what the Fraziers reported on their 2009 tax return.

      Although Exhibit 4-P is not signed by either of the Fraziers, no
party disputes that the filed return was signed by the Fraziers.

       Exhibit 4-P contains no date next to where the Fraziers were to
sign the Form 1040. No party takes a position as to whether the Fraziers
placed a date next to their signature on the filed return.

      Although Exhibit 4-P is not signed by Trombetta as the
preparer, 15 no party disputes that the filed return was signed by
Trombetta as the preparer.

      Exhibit 4-P has a date of August 8, 2013, for the preparer’s
signature. This date is peculiar because the parties stipulated that the
date on which the Fraziers filed their 2009 return was March 18, 2013.
We would expect this date to be earlier than the date on which the
Fraziers filed their returns because normally a preparer would sign and
date the return and next send it to the taxpayer who would then sign

        15 The line asking for the preparer’s firm name is filled out with Trombetta’s

firm’s name, “Trombetta & Trombetta, C.P.A.”
                                   63

[*63] and date it before sending it to the IRS. No party takes a position
as to what date appeared on the filed return next to the preparer’s
signature.

       However, the “total tax” amount reported in Exhibit 4-P is
$411,762 and the 2009 notice of deficiency states that the “Total Tax
Shown on Return or as Previously Adjusted” is $411,762. The “total tax”
on a Form 1040 is a figure computed from numerous inputs including a
taxpayer’s income, deductions, and exemptions. That the total tax
amount on Exhibit 4-P is the same as the tax shown amount from the
notice of deficiency suggests that Exhibit 4-P uses the same amounts as
the Fraziers’ filed tax return that the IRS used as a basis for its 2009
notice of deficiency. No party disputes that the amounts on Exhibit 4-P
are the same as the filed return.

      Thus, we conclude that the Exhibit 4-P is identical to the return
that was filed except that (1) the Fraziers signed the filed return
(Exhibit 4-P was unsigned), (2) Trombetta signed the filed return
(Exhibit 4-P was unsigned), (3) we make no finding as to the date, if any,
the Fraziers wrote on the filed return next to their signature (Exhibit 4-
P contains no date), (4) we make no finding as to the date, if any, that
appears on the filed return next to Trombetta’s signature as preparer
(Exhibit 4-P has a date of August 8, 2013).

      These conclusions are consistent with the proposition that
Trombetta prepared the Form 1040, kept a copy of the Form 1040 (which
is Exhibit 4-P), signed the original Form 1040 as preparer, and sent the
original Form 1040 to the Fraziers. No party gives a different
explanation of Exhibit 4-P.

      Thus, our description of the filed 2009 Form 1040 is based on the
information in Exhibit 4-P, Trombetta’s unsigned file copy of the return
he sent to the Fraziers.

      The Fraziers’ 2009 return contains a number of attached
schedules. Three schedules are important for our purposes:

      •   Schedule B, Interest and Ordinary Dividends, which includes
          an attachment showing interest income (Statement 1-
          Schedule B, Line 1-Interest Income);

      •   Schedule C, Profit or Loss from Business (Sole Proprietorship);
          and
                                           64

[*64] •    Schedule E, Supplemental Income and Loss (From Rental
           Real Estate, Royalties, Partnerships, S Corporations, Estates,
           Trusts, REMICs, etc.).

The table below shows relevant excerpts from the Fraziers’ 2009 Form
1040 and its schedules.

                    Item, schedule, and line                        Amount

 Taxable interest, Sched. B, ln. 1                                      $22,778

 Distributive share of Louisiana Assisted’s separately stated
                                                                             3,156
  interest income, Sched. B, Stmt. 1

 Car and truck expenses, Sched. C, ln. 9                                 −7,992

 Depreciation and § 179 expense deduction, Sched. C, ln. 13              −4,545

 Payment to LHDC, Sched. C, lns. 27, 48                               −2,987,744

 Net Schedule C profit or (loss), Sched. C, ln. 31                    −3,000,281

 Total rental real estate and royalty income or (loss), Sched. E,
                                                                         22,078
  ln. 26

 Distributive share of Louisiana Assisted’s nonseparately
                                                                       2,987,744
  stated income, Sched. E, ln. 28(j)

 Total Schedule E income or (loss), Sched. E, ln. 41                   3,009,822

       The “total tax” in line 60 of the Form 1040 was $411,762.

      We now address some aspects of the record that relate to the
Fraziers’ 2009 Form 1040.

      First, the $2,987,744 of distributive share of Louisiana Assisted’s
nonseparately stated income that the Fraziers reported on their
Schedule E matches the amount of the distributive share of
nonseparately stated income reported on the 2009 Schedule K–1 that
Louisiana Assisted issued to William. See supra FINDINGS OF FACT
Part XVII.A.2.a. As discussed supra FINDINGS OF FACT Part X.B,
sometime before the years at issue, William asked Bobbie to make
checks from Louisiana Assisted for distributions owed to LHDC in
William’s name in order to conceal these payments from Lala. As part of
this subterfuge, William reported LHDC’s distributive share of
                                    65

[*65] Louisiana Assisted’s income for 2009 on the Fraziers’ joint 2009
tax return.

       Second, to offset the inclusion of LHDC’s distributive share of
Louisiana Assisted’s nonseparately stated income, the Fraziers claimed
a $2,987,744 deduction on William’s Schedule C. In other words, this
deduction is essentially a dummy entry to offset the erroneous inclusion
of LHDC’s distributive share of Louisiana Assisted’s income on the
Fraziers’ joint tax return. The $2,987,744 deduction for the putative
payment to LHDC that the Fraziers reported on William’s Schedule C
is the same amount as the distributive share of Louisiana Assisted’s
nonseparately stated income reported on the Fraziers’ Schedule E and
is also the same amount as the distributive share of nonseparately
stated income reported on the 2009 Schedule K–1 that Louisiana
Assisted issued to William. The Fraziers did not report any income on
the 2009 Schedule C.

       Third, the Fraziers attached to their 2009 Form 1040 a statement
called “Statement 1 - Schedule B, Line 1 - Interest Income,” which
itemizes the $22,778 of interest income that they reported on their
Schedule B. Statement 1 states that the $22,778 is composed in part of
$3,156 for the line item “Louisiana Assisted housing Co., LLC.” This
amount matches the $3,156 of distributive share of separately stated
interest income reported on the 2009 Schedule K–1 that Louisiana
Assisted issued to William.

      The Fraziers’ 2009 federal income tax return was due October 15,
2010, but was not filed until March 18, 2013.

             2.     The Fraziers’ tax reporting for 2010

       The stipulation of facts made only the following statement about
the Fraziers’ tax return for 2010: “The Fraziers’ 2010 federal income tax
return was due October 15, 2011; it was filed May 19, 2014.” The
stipulation of facts did not attach a copy of the Fraziers’ return for 2010.
      At trial, no party offered into evidence a copy of the filed return.
However, petitioners’ counsel offered Exhibit 8-P, a copy of an unsigned
Form 1040 for 2010. The IRS did not object to the admission of Exhibit
8-P, and it was admitted. The briefs of petitioners and the IRS rely on
Exhibit 8-P to prove what the Fraziers reported on their 2010 tax return.

       Exhibit 8-P has the stamp “Preparor Copy,” on the first page in
large, bold letters.
                                          66

[*66] Although Exhibit 8-P is not signed by either of the Fraziers, no
party disputes that the filed return was signed by the Fraziers.

      Exhibit 8-P contains no date next to where the Fraziers were to
sign the Form 1040. No party takes the position as to whether the
Fraziers placed a date next to their signature on the filed return.

      Although Exhibit 8-P is not signed by Trombetta as the
preparer, 16 no party disputes that the filed return was signed by
Trombetta as the preparer.

      The date of the preparer’s signature is May 15, 2014. No party
disputes that the filed return also contained this date for the preparer’s
signature.

       We conclude that Exhibit 8-P is identical to the return that was
filed except that (1) the filed return was not stamped “Preparor Copy,”
(2) the Fraziers signed the filed return (Exhibit 8-P was unsigned),
(3) Trombetta signed the filed return (Exhibit 8-P was unsigned), and
(4) we make no finding as to the date, if any, the Fraziers wrote on the
filed return next to their signature (Exhibit 8-P contains no date).

       The conclusions are consistent with the explanation that
Trombetta prepared the original Form 1040, kept a copy of the Form
1040 that was stamped “Preparor Copy” (which is Exhibit 8-P), signed
the original Form 1040, and sent the original Form 1040 to the Fraziers.
No party gives a different explanation of Exhibit 8-P.

      Thus, our description of the filed 2010 Form 1040 is based on the
information in Exhibit 8-P, Trombetta’s unsigned file copy of the return
he sent to the Fraziers.

      The Fraziers’ 2010 Form 1040 contains a number of attached
schedules. Three schedules are important for our purposes:

       •   Schedule B, Interest and Ordinary Dividends;

          16 Unlike the Form 1040 for 2009, the Form 1040 for 2010 has a space for both

the preparer’s name and the preparer’s firm name. The line asking for preparer’s name
is filled out with “Mark M. Trombetta.” The line asking for the preparer’s firm’s name
is filled out with Trombetta’s firm’s name, “Trombetta & Trombetta, C.P.A.”
                                           67

[*67] •     Schedule C, Profit or Loss from Business (Sole Proprietorship);
            and

       •    Schedule E, Supplemental Income and Loss (From Rental
            Real Estate, Royalties, Partnerships, S Corporations, Estates,
            Trusts, REMICs, etc.).

The table below shows relevant excerpts from the Fraziers’ 2010 Form
1040 and its schedules.

                    Item, schedule, and line                        Amount

 Taxable interest, Sched. B, ln. 1                                      $30,799

 Gross profit, Sched. C, ln. 7                                           17,200

 Car and truck expenses, Sched. C, ln. 9                                −16,650

 Depreciation and § 179 expense deduction, Sched. C, ln. 13             −11,060

 Office expense, Sched. C, ln. 18                                        −6,177

 Travel, Sched. C, ln. 24a                                               −3,045

 Payment to LHDC, Sched. C, lns. 27, 48                                −643,165

 Net Schedule C profit or (loss), Sched. C., ln. 31                    −662,897

 Total rental real estate and royalty income or (loss), Sched. E,
                                                                             1,007
  ln. 26

 Distributive share of Louisiana Assisted’s nonseparately
                                                                        643,165
  stated income, Sched. E, ln. 28(j)

 Nonpassive loss from Lagniappe Film Fund LLC, Sched. E,
                                                                             −343
  ln. 28(h)

 Total Schedule E income or (loss), Sched. E., ln. 41                   643,829

       The “total tax” in line 60 of Form 1040 was $274,745.

      We now address some aspects of the record that relate to the
Fraziers’ 2010 Form 1040.

      First, the $643,185 of distributive share of Louisiana Assisted’s
nonseparately stated income that the Fraziers reported on their
Schedule E matches the amount of the distributive share of
                                    68

[*68] nonseparately stated income reported on the 2010 Schedule K–1
that Louisiana Assisted issued to William. See supra FINDINGS OF
FACT Part XVII.A.2.b. As with 2009, William reported LHDC’s
distributive share of Louisiana Assisted’s income for 2010 on the
Fraziers’ joint 2010 tax return to conceal revenue from Lala.

        Second, the $643,165 deduction for the putative payment to
LHDC that the Fraziers reported on William’s Schedule C is the same
amount as the distributive share of Louisiana Assisted’s nonseparately
stated income reported on the Fraziers’ Schedule E and is also the same
amount as the distributive share of nonseparately stated income
reported on the 2010 Schedule K–1 that Louisiana Assisted issued to
William. As with 2009, this deduction is essentially a dummy entry to
offset the erroneous inclusion of LHDC’s distributive share of Louisiana
Assisted’s income on the Fraziers’ joint tax return.

      The Fraziers’ 2010 federal income tax return was due October 15,
2011, but was not filed until May 19, 2014.

             3.     The Fraziers’ tax reporting for 2011

       The stipulation of facts made only the following statement about
the Fraziers’ tax return for 2011: “The Fraziers’ 2011 federal income tax
return was due October 15, 2012; it was filed October 28, 2014.” The
stipulation of facts did not attach a copy of the Fraziers’ return for 2011.

       At trial, no party offered into evidence a copy of the filed return.
However, petitioners’ counsel offered Exhibit 12-P. The IRS did not
object to the admission of Exhibit 12-P, and it was admitted. The briefs
of petitioners and the IRS rely on Exhibit 12-P to prove what the
Fraziers reported on their 2011 tax return.

       Exhibit 12-P has the stamp “Preparor Copy,” on the first page in
large, bold letters.

      Although Exhibit 12-P is not signed by either of the Fraziers, no
party disputes that the filed return was signed by the Fraziers.

       Exhibit 12-P contains no date next to where the Fraziers were to
sign the Form 1040. No party takes a position as to whether the Fraziers
placed a date next to their signature on the filed return.
                                         69

[*69] Although Exhibit 12-P is not signed by Trombetta as the
preparer, 17 no party disputes that the filed return was signed by
Trombetta as the preparer.

      The date of the preparer’s signature is October 20, 2014. No party
disputes that the filed return also contained this date for the preparer’s
signature.

       We conclude that Exhibit 12-P is identical to the return that was
filed except that (1) the filed return was not stamped “Preparor Copy,”
(2) the Fraziers signed the filed return (Exhibit 12-P was unsigned),
(3) Trombetta signed the filed return (Exhibit 12-P was unsigned), and
(4) we make no finding as to the date, if any, the Fraziers wrote on the
filed return next to their signature (Exhibit 12-P contains no date).

       The conclusions are consistent with the explanation that
Trombetta prepared the original Form 1040, kept a copy of the Form
1040 that was stamped “Preparor Copy” (which is Exhibit 12-P), signed
the original Form 1040, and sent the original Form 1040 to the Fraziers.
No party gives a different explanation of Exhibit 12-P.

      Thus, our description of the filed 2011 Form 1040 is based on the
information in Exhibit 12-P, Trombetta’s unsigned file copy of the return
he sent to the Fraziers.

      The Fraziers’ 2011 Form 1040 contains a number of attached
schedules. Three schedules are important for our purposes:

       •   Schedule B, Interest and Ordinary Dividends, which includes
           an attachment showing interest income (Statement 1-
           Schedule B, Line 1-Interest Income);

       •   Schedule C, Profit or Loss from Business (Sole Proprietorship);
           and

       •   Schedule E, Supplemental Income and Loss (From Rental
           Real Estate, Royalties, Partnerships, S Corporations, Estates,
           Trusts, REMICs, etc.).

        17 The line asking for preparer’s name is filled out with “Mark M. Trombetta.”

The line asking for the preparer’s firm’s name is filled out with “Mark M. Trombetta,
C.P.A.”
                                           70

[*70] The table below shows certain amounts reported on the Fraziers’
2011 Form 1040 and its schedules.

                    Item, schedule, and line                        Amount

 Taxable interest, Sched. B, ln. 1                                      $12,641

 Distributive share of Louisiana Assisted’s separately stated
                                                                             1,839
  interest income, Sched. B, Stmt. 1

 Gross income, Sched. C, ln. 7                                          450,000

 Depreciation and § 179 expense deduction, Sched. C, ln. 13              −4,900

 Legal and professional expenses, Sched. C, ln. 17                       −7,650

 Supplies, Sched. C, ln. 22                                              −1,920

 Travel, Sched. C, ln. 24a                                               −3,297

 Payment to LHDC, Sched. C, lns. 27a, 48                               −450,000

 Net Schedule C profit or (loss), ln. 31                                −17,749

 Total rental real estate and royalty income or (loss), Sched. E,
                                                                         25,498
  ln. 26

 Distributive share of Louisiana Assisted’s nonseparately
                                                                         −7,586
  stated loss, Sched. E, ln. 28(h)

 Total Schedule E income or (loss), Sched. E., ln. 41                    17,912

       The “total tax” in line 60 of the Form 1040 was $167,481.

      We now address some aspects of the record that relate to the
Fraziers’ 2011 Form 1040.

       First, the $7,586 distributive share of Louisiana Assisted’s
nonseparately stated loss that the Fraziers reported on their Schedule
E matches the amount of the distributive share of nonseparately stated
loss reported on the 2011 Schedule K–1 that Louisiana Assisted issued
to William. See supra FINDINGS OF FACT Part XVII.A.2.c. William
reported LHDC’s distributive share of Louisiana Assisted’s loss for 2011
on the Fraziers’ joint 2011 tax return, to conceal LHDC’s connection
with Louisiana Assisted from Lala.
                                        71

[*71] Second, unlike in previous years for which the Fraziers did not
report any income on William’s Schedules C related to Louisiana
Assisted, they improperly reported $450,000 of gross income on
William’s 2011 Schedule C for a cash distribution from Louisiana
Assisted. This reporting was improper for two reasons. First because, as
we hold infra OPINION Part I.B, William was not the other member of
Louisiana Assisted alongside Bobbie. Second, cash distributions would
not have been includible in William’s income even if he were the other
member of Louisiana Assisted, unless the amount would have exceeded
his basis in the LLC. See § 731(a)(1). Nothing in the record allows us to
determine the outside basis of the other member of Louisiana Assisted
alongside Bobbie, but none of the parties asserts that this $450,000 cash
distribution exceeded the other member’s outside basis. See infra
OPINION Part II.B.3.b. This $450,000 of income matches the
distribution reported on the 2011 Schedule K–1 that Louisiana Assisted
issued to William.

      William’s reporting of $450,000 of income along with an offsetting
$450,000 deduction were also part of William’s attempt to conceal from
Lala the fact that Louisiana Assisted paid cash distributions to LHDC. 18

       Third, the $450,000 deduction for the payment to LHDC that the
Fraziers reported on William’s Schedule C is equal to the amount of
gross income reported on William’s Schedule C and withdrawals and
distributions reported on the 2011 Schedule K–1 that Louisiana
Assisted issued to William. As with prior years, this deduction is
essentially a dummy entry to offset the erroneous inclusion of a cash
distribution from Louisiana Assisted on the Fraziers’ joint 2011 tax
return.

      Fourth, the Fraziers attached to their 2011 Form 1040 a
statement called “Statement 1 – Schedule B, Line 1 – Interest Income,”
which itemizes the $12,641 taxable interest that they reported on their
Schedule B. Statement 1 contains an amount of $1,839 for the line item
“Louisiana Assisted Housing Co., LLC.” This amount matches the
$1,839 of the distributive share of separately stated interest income

        18 It is unclear why a distribution payment from Louisiana Assisted to LHDC

was included on the Fraziers’ return. As we discuss infra OPINION Part II.A.2,
distribution payments from LLCs are not includable in their members’ income unless
the amount exceeds the members’ basis in the LLC, which the parties do not argue was
the case in 2011.
                                          72

[*72] reported on the 2011 Schedule K–1 that Louisiana Assisted issued
to William.

      The Fraziers’ 2011 federal income tax return was due October 15,
2012, but was not filed until October 28, 2014.

                4.      The Fraziers’ 2012 tax year

        The Fraziers did not file a 2012 tax return.

        C.      LHDC

                1.      LHDC’s tax reporting for 2009

       The stipulation of facts made only the following statement about
LHDC’s tax return for 2009: “LHDC’s 2009 federal income tax return
was due September 15, 2010; it was filed February 28, 2011.” The
stipulation of facts did not attach a copy of LHDC’s return for 2009.

       At trial, no party offered into evidence a copy of the filed return.
However, petitioners’ counsel offered Exhibit 2-P. The IRS did not object
to the admission of Exhibit 2-P, and it was admitted. The IRS’s brief
relies on Exhibit 2-P to prove what LHDC reported on its 2009 tax
return. Petitioners relied on Exhibit 2-P during trial to prove what
LHDC reported on its 2009 tax return.

       Exhibit 2-P has the stamp “Preparor Copy,” on the first page in
large, bold letters.

      Although Exhibit 2-P is not signed by an officer of LHDC, no party
disputes that the filed return was signed by an officer of LHDC.

       Exhibit 2-P contains no date next to where an officer of LHDC
was to sign the Form 1120. No party takes a position as to whether an
officer of LHDC placed a date next to the officer’s signature on the filed
return.

      Although Exhibit 2-P is not signed by Trombetta as the
preparer, 19 no party disputes that the filed return was signed by
Trombetta as the preparer.

        19 The line asking for the preparer’s firm’s name is filled out with Trombetta’s

firm’s name, “Trombetta & Trombetta, C.P.A.”
                                            73

[*73] The date of the preparer’s signature is February 22, 2011. No
party disputes that the filed return also contained this date for the
preparer’s signature.

       We conclude that Exhibit 2-P is identical to the return that was
filed except that (1) the filed return was not stamped “Preparor Copy,”
(2) an officer of LHDC signed the filed return (Exhibit 2-P was
unsigned), (3) Trombetta signed the filed return (Exhibit 2-P was
unsigned), and (4) we make no finding as to the date, if any, an officer
of LHDC wrote on the filed return next to the officer’s signature (Exhibit
2-P contains no date).

       The conclusions are consistent with the explanation that
Trombetta prepared the original Form 1120, kept a copy of the Form
1120 that was stamped “Preparor Copy” (which is Exhibit 2-P), signed
the original Form 1120, and sent the original Form 1120 to LHDC. No
party gives a different explanation of Exhibit 2-P.

      Thus, our description of the filed 2009 Form 1120 is based on the
information in Exhibit 2-P, Trombetta’s unsigned file copy of the return
he sent to LHDC.

      LHDC’s 2009 Form 1120 contains a number of attached
schedules, only one of which, the Schedule K, Other Information, is
important for our purposes. 20 Line 5b of the Schedule K attached to
LHDC’s 2009 return asks, “At the end of the tax year, did the
corporation . . . [o]wn directly an interest of 20% or more, or own directly
or indirectly, an interest of 50% or more in any foreign or domestic
partnership (including an entity treated as a partnership . . .)?” LHDC
answered the question in the negative—that it did not own an interest

        20 Line 4a of the Schedule K, Other Information, attached to LHDC’s 2009

return, asks, “[a]t the end of the tax year . . . [d]id any individual or estate own directly
20% or more, or own, directly or indirectly, 50% or more of the total voting power of all
classes of the corporation’s stock entitled to vote?” The answer was “no.” This reporting
implies that Mary’s ownership of LHDC was less than 20% and that William’s
ownership of LHDC was less than 20%. This is at odds with Tracy’s testimony that
Mary owned 75% of LHDC while William owned the remaining 25%. Further,
petitioners proposed a finding of fact that “LHDC was owned 75% by Mrs. Frazier and
25% by Mr. Frazier” to which the IRS did not object. Based on Tracy’s testimony and
petitioners’ proposed finding of fact to which the IRS did not object, we find that Mary
owned 75% of LHDC and William owned 25%, which is contrary to the response to
Line 4a of LHDC’s 2009 Schedule K.
                                            74

[*74] of at least 20% in a domestic partnership or an entity treated as a
partnership.

      The table below shows relevant excerpts from LHDC’s 2009
return.

                       Item, schedule, and line                Amount

 Gross profit (line 3)                                           $9,237,153

 Interest income (line 5)                                                985

 “Other income” (line 10)                                               2,425

 Total income (line 11, add lines 3 through 10)                   9,240,563

 Salaries and wages paid (less employment credits) (line 13)     −3,424,424

 Repairs and maintenance (line 14)                                   −4,023

 Rents (line 16)                                                  −148,331

 Taxes and licenses paid (line 17)                                 −58,863

 Interest payments (line 18)                                         −5,167

 Charitable contributions (line 19)                                  −7,007

 Depreciation from Form 4562 not reported on Schedule A or
                                                                     −2,113
  elsewhere (line 20)

 Advertising expenses (line 22)                                      −4,401

 “Other deductions” (line 26)                                    −5,232,086

 Total deductions (line 27, add lines 12 through 26)             −8,886,415

 Net operating loss deduction (line 29a)                          −181,248

 Taxable income (line 30)                                           172,900

 Total tax (line 31)                                                 50,681

 2008 overpayment credit applied to 2009 tax liability (line
                                                                   −47,761
  32a)

 Estimated tax penalty (line 33)                                          29

 Amount owed (line 34)                                                  2,949
                                          75

[*75] The “total tax” in line 31 of the Form 1120 was $50,681.

      We now address some aspects of the record that relate to LHDC’s
2009 Form 1120. We connect the discussion of LHDC’s 2009 Form 1120
to LHDC’s 2009 income statement because Trombetta used the income
statement to prepare LHDC’s tax returns and relied on the income
statement in his testimony.

      First, as Trombetta credibly testified, the total income amount of
$9,240,563 on LHDC’s 2009 Form 1120, (line 11) included the
$2,165,000 cash distribution that LHDC received from Louisiana
Assisted. This $2,165,000 amount matches the amount of distribution
recorded on LHDC’s 2009 income statement under “Fees – LA Assisted
Housing LLC.”

       Second, as Trombetta credibly testified, he used the “Total
Sales” 21 amount of $9,239,547, recorded on LHDC’s income statement
as total income for LHDC’s 2009 Form 1120. The discrepancy of $1,016
between the $9,239,547 “Total Sales” in LHDC’s income statement and
the $9,240,563 total income in LHDC’s 2009 Form 1120 is largely
attributable to the fact that the $985 of interest earned is included in
the computation of the $9,240,563 of total income on the Form 1120 but
not in the computation of the $9,239,547 of “Total Sales” amount on the
income statement. The record does not reveal any additional
information about the source of the $985 of interest income reported in
line 5.

       Third, LHDC’s 2009 Form 1120 has a notation to “See stmt 1” in
line 10, “Other income.” Similar notations to “See stmt 2” and “See stmt
3” are made for line 19, charitable contributions and in line 26, “Other
deductions.” These are presumably statements that provide further
detail as to the underlying items comprising “Other income,” charitable
contributions, and “Other deductions.” None of these three statements
are included with LHDC’s 2009 Form 1120.

        21 The term “Total Sales” is a misnomer because it implies that the $9,239,547

recorded on LHDC’s income statement does not contain a cash distribution from
Louisiana Assisted. A cash distribution is not a “sale.” However, the income statement
shows that the $2,165,000 cash distribution from Louisiana Assisted is included in this
“Total Sales” amount of $9,239,547, (included under “Fees – LA Assisted Housing,
LLC” which was one of the amounts added into “Total Sales”) making the “Total Sales”
label counter-intuitive.
                                          76

[*76] LHDC’s 2009 federal income tax return was due September 15,
2010, but was not filed until February 28, 2011.

               2.      LHDC’s tax reporting for 2010

       The stipulation of facts made only the following statement about
LHDC’s tax return for 2010: “LHDC’s 2010 federal income tax return
was due September 15, 2011; it was filed November 16, 2011.” The
stipulation of facts did not attach a copy of LHDC’s return for 2010.

       At trial, no party offered into evidence a copy of the filed return.
However, petitioners’ counsel offered Exhibit 6-P. The IRS did not object
to the admission of Exhibit 6-P, and it was admitted. The briefs of
petitioners and the IRS rely on Exhibit 6-P to prove what LHDC
reported on its 2010 tax return.

       Exhibit 6-P has the stamp “Preparor Copy,” on the first page in
large, bold letters.

      Although Exhibit 6-P is not signed by an officer of LHDC, no party
disputes that the filed return was signed by an officer of LHDC.

       Exhibit 6-P contains no date next to where an officer of LHDC
was to sign the Form 1120. No party takes a position as to whether an
officer of LHDC placed a date next to the officer’s signature on the filed
return.

      Although Exhibit 6-P is not signed by Trombetta as the
preparer, 22 no party disputes that the filed return was signed by
Trombetta as the preparer.

      The date of the preparer’s signature is November 16, 2011. No
party disputes that the filed return also contained this date for the
preparer’s signature.

       We conclude that Exhibit 6-P is identical to the return that was
filed except that (1) the filed return was not stamped “Preparor Copy,”
(2) an officer of LHDC signed the filed return (Exhibit 6-P was
unsigned), (3) Trombetta signed the filed return (Exhibit 6-P was

          22 Unlike the Form 1120 for 2009, the Form 1120 for 2010 has a space for both

the preparer’s name and the preparer’s firm name. The line asking for preparer’s name
is filled out with “Mark M. Trombetta.” The line asking for the preparer’s firm’s name
is filled out with Trombetta’s firm’s name, “Trombetta & Trombetta, C.P.A.”
                                          77

[*77] unsigned), and (4) we make no finding as to the date, if any, an
officer of LHDC wrote on the filed return next to the officer’s signature
(Exhibit 6-P contains no date).

       The conclusions are consistent with the explanation that
Trombetta prepared the original Form 1120, kept a copy of the Form
1120 that was stamped “Preparor Copy” (which is Exhibit 6-P), signed
the original Form 1120, and sent the original Form 1120 to LHDC. No
party gives a different explanation of Exhibit 6-P.

      Thus, our description of the filed 2010 Form 1120 is based on the
information in Exhibit 6-P, Trombetta’s unsigned file copy of the return
he sent to LHDC.

      LHDC’s 2010 Form 1120 contains a number of attached schedules
only one of which, the Schedule K, Other Information, is important for
our purposes. 23 The 2010 Schedule K reported in line 5b that LHDC did
not own an interest of at least 20% in a domestic partnership or an entity
treated as a partnership at the end of tax year 2010.

        The table below shows relevant excerpts from LHDC’s 2010 Form
1120.

         23 As for 2009, the Schedule K, Other Information, attached to LHDC’s 2010

Form 1120 reported that at the end of the tax year no individual or estate owned
directly 20% or more, or directly or indirectly, 50% or more of the total voting power of
all classes of LHDC’s stock entitled to vote in 2010 (LHDC’s response to the question
in Line 4a).
                                           78

[*78]                 Item, schedule, and line                Amount

Gross profit (line 3)                                           $5,534,810

Interest income (line 5)                                               1,860

Total income (line 11, add lines 3 through 10)                   5,536,670

Salaries and wages paid (less employment credits) (line 13)     −2,770,775

Repairs and maintenance (line 14)                                   −5,411

Rents (line 16)                                                  −150,605

Taxes and licenses (line 17)                                        −8,078

Interest payments (line 18)                                         −3,066

Depreciation from Form 4562 not claimed on Schedule A or            −1,269
 elsewhere (line 20)

Advertising expenses (line 22)                                      −1,837

Employee benefit programs (line 24)                                 −6,300

“Other deductions” (line 26)                                    −2,711,901

Total deductions (line 27, add lines 12 through 26)             −5,659,242

Taxable income (line 30)                                         −122,572

Total tax (line 31)                                                       0

        The “total tax” in line 31 of the Form 1120 was $0.

      We now address some aspects of the record that relate to LHDC’s
2010 Form 1120. We connect the discussion of LHDC’s 2010 Form 1120
to LHDC’s 2010 income statement because Trombetta used the income
statement to prepare LHDC’s tax returns and relied on the income
statement in his testimony.

       First, as Trombetta credibly testified, the $765,000 cash
distribution that LHDC received from Louisiana Assisted was included
in the total income amount of $5,536,670 on LHDC’s 2010 Form 1120
(line 11). This $765,000 amount matched the amount of distribution
recorded on LHDC’s 2010 income statement under “Fees – LA Assisted
Housing, LLC.”
                                      79

[*79] Second, as Trombetta credibly testified, he used the “Total
Sales” 24 amount of $5,528,510, recorded on LHDC’s income statement
as total income for LHDC’s 2009 Form 1120. The discrepancy of $8,160
between the $5,528,510 “Total Sales” in LHDC’s income statement and
the $5,536,670 total income in LHDC’s 2010 Form 1120 is partially
attributable to the fact that the $1,860 of interest earned is included in
the computation of the $5,536,670 of total income on the Form 1120 but
not in the computation of the $5,528,510 of “Total Sales” amount on the
income statement. Nothing in the record explains why there is a
remaining discrepancy of $6,300. The record does not reveal any
additional information about the source of the $1,860 of interest income
reported in line 5.

      Lastly, LHDC’s 2010 Form 1120 has a notation to “See stmt 1” in
line 26, “Other deductions.” This is presumably a statement that
provides further detail as to the underlying items comprising “Other
deductions.” There is no statement 1 included with LHDC’s 2010 Form
1120.

        LHDC’s 2010 Form 1120 was due September 15, 2011, but was
not filed until November 16, 2011.

              3.     LHDC’s tax reporting for 2011

       The stipulation of facts made no mention of LHDC’s tax return
for 2011, nor did it attach a copy of LHDC’s return for 2011.

       At trial, no party offered into evidence a copy of the filed return.
However, petitioners’ counsel offered Exhibit 10-P. The IRS did not
object to the admission of Exhibit 10-P, and it was admitted. The briefs
of petitioners and the IRS rely on Exhibit 10-P to prove what LHDC
reported on its 2011 tax return.

       Exhibit 10-P has the stamp “Preparor Copy,” on the first page in
large, bold letters.

      Although Exhibit 10-P is not signed by an officer of LHDC, no
party disputes that the filed return was signed by an officer of LHDC.

        24 The term “Total Sales” is a misnomer. See supra FINDINGS OF FACT Part

XVII.C.1 note 21. The “Total Sales” amount of $5,528,510 includes $765,000 of
distribution from Louisiana Assisted. The $765,000 was included under “Fees – LA
Assisted Housing, LLC” which was one of the amounts added into “Total Sales.”
                                          80

[*80] Exhibit 10-P contains no date next to where an officer of LHDC
was to sign the Form 1120. No party takes a position as to whether an
officer of LHDC placed a date next to the officer’s signature on the filed
return.

      Although Exhibit 10-P is not signed by Trombetta as the
preparer, 25 no party disputes that the filed return was signed by
Trombetta as the preparer.

      The date of the preparer’s signature is September 16, 2012. No
party disputes that the filed return also contained this date for the
preparer’s signature.

        We conclude that Exhibit 10-P is identical to the return that was
filed except that (1) the filed return was not stamped “Preparor Copy,”
(2) an officer of LHDC signed the filed return (Exhibit 10-P was
unsigned), (3) Trombetta signed the filed return (Exhibit 10-P was
unsigned), and (4) we make no finding as to the date, if any, an officer
of LHDC wrote on the filed return next to the officer’s signature (Exhibit
10-P contains no date).

       The conclusions are consistent with the explanation that
Trombetta prepared the original Form 1120, kept a copy of the Form
1120 that was stamped “Preparor Copy” (which is Exhibit 10-P), signed
the original Form 1120, and sent the original Form 1120 to LHDC. No
party gives a different explanation of Exhibit 10-P.

      Thus, our description of the filed 2011 Form 1120 is based on the
information in Exhibit 10-P, Trombetta’s unsigned file copy of the return
he sent to LHDC.

      LHDC’s 2011 Form 1120 contains a number of attached
schedules, only one of which, the Schedule K, Other information, is
important for our purposes. 26 The 2011 Schedule K reported in line 5b
that LHDC did not own an interest of at least 20% in a domestic

       25 The line asking for preparer’s name is filled out with “Mark M. Trombetta.”

The line asking for the preparer’s firm’s name is filled out with Trombetta’s firm’s
name, “Trombetta & Trombetta, C.P.A.”
       26 Just as for 2009 and 2010, the Schedule K, Other Information, attached to

LHDC’s 2011 Form 1120 reported that at the end of the tax year no individual or estate
owned directly 20% or more, or, directly or indirectly, 50% or more of the total voting
power of all classes of LHDC’s stock entitled to vote in 2011 (LHDC’s response to the
question in Line 4a).
                                            81

[*81] partnership or an entity treated as a partnership at the end of tax
year 2011.

      The table below shows relevant amounts reported on LHDC’s
2011 Form 1120.

                       Item, schedule, and line                Amount

 Gross profit (line 3)                                            $4,830,469

 Interest income (line 5)                                                296

 Total income (line 11, add lines 3 through 10)                   4,830,765

 Salaries and wages paid (less employment credits) (line 13)      −2,326,407

 Repairs and maintenance (line 14)                                  −40,796

 Rents (line 16)                                                   −156,432

 Taxes and licenses (line 17)                                       −42,772

 Interest payments (line 18)                                         −2,750

 Depreciation from Form 4562 not claimed on Schedule A or               −761
  elsewhere (line 20)

 Advertising expenses (line 22)                                      −3,531

 “Other deductions” (line 26)                                     −2,239,036

 Total deductions (line 27, add lines 12 through 26)             −4,812,485

 Taxable income (line 30)                                           −18,280

 Total tax (line 31)                                                    2,742

 Estimated tax penalty (line 33)                                          54

 Amount owed (line 34)                                                  2,796

        The “total tax” in line 31 of the Form 1120 was $2,742.

      We now address some aspects of the record that relate to LHDC’s
2011 Form 1120. We connect the discussion of LHDC’s 2011 Form 1120
to LHDC’s 2011 income statement because Trombetta used the income
                                          82

[*82] statement to prepare LHDC’s tax returns and relied on the income
statement in his testimony.

       First, as Trombetta credibly testified, the total income amount of
$4,830,765 on LHDC’s 2011 Form 1120, (line 11) included $477,114
received from Louisiana Assisted. As he testified, the $477,114 was
comprised of a $450,000 cash distribution that LHDC received from
Louisiana Assisted plus additional amounts that LHDC received from
Louisiana Assisted for specific reimbursement items. This $477,114
amount matches the amount of recorded on LHDC’s 2011 income
statement under “Fees Reimbursed LA Assisted Housing.”

       Second, the $4,830,469 of gross profit (line 3) reported on LHDC’s
2011 Form 1120 matches the $4,830,469 of “Total Sales” 27 from LHDC’s
2011 income statement. In the 2011 Form 1120, Trombetta added
interest of $296 (line 5) to the $4,830,469 of gross profit (line 3) for the
total income of $4,830,765 (line 11). The record does not reveal any
additional information about the source of the $296 of interest income
reported in line 5.

       Lastly, LHDC’s 2011 Form 1120 has a notation to “See stmt 1” in
line 26, “Other deductions.” This is presumably a statement that
provides further detail as to the individual items comprising “Other
deductions” of $2,239,036. There is no statement 1 included with
LHDC’s 2011 Form 1120. The parties stipulated that LHDC claimed a
$1,818,542 deduction for professional fees, of which the deductibility of
$158,993 is at dispute in this case. The “Other deductions” line item of
$2,239,036 is the only deduction amount on LHDC’s 2011 Form 1120
that is large enough to contain the $1,818,542 of professional fees. All
other expense items other than salaries and wages are well below
$1,000,000. Therefore, the $1,818,542 deduction for professional fees
that the parties stipulated was claimed on LHDC’s 2011 Form 1120 is
contained in the $2,239,036 of “Other deductions.”

      LHDC’s 2011 Form 1120 is dated September 16, 2012. The parties
have not made any stipulations as to when LHDC filed its 2011 tax
return, nor does LHDC’s 2011 notice of deficiency state when LHDC

        27 The term “Total Sales” is a misnomer. See supra FINDINGS OF FACT Part

XVII.C.1 note 21. The “Total Sales” amount of $4,830,469 includes the $450,000
distribution from Louisiana Assisted which is not a sale, as well as $27,114 for specific
reimbursement items, which the record does not indicate are sales. The $477,114
amount ($450,000 + $27,114) was included under “Fees Reimbursed LA Assisted
Housing” which was one of the amounts added into “Total Sales.”
                                         83

[*83] filed the tax return upon which the 2011 notice of deficiency was
based.

               4.      LHDC’s tax reporting for 2012

      Although the IRS did not issue a notice of deficiency for LHDC’s
2012 tax year, and we therefore have no jurisdiction over LHDC’s tax
year, we discuss LHDC’s 2012 tax return because the IRS argues that
the tax return helps prove that William was the other member of
Louisiana Assisted.

       The stipulation of facts made no mention of LHDC’s tax return
for 2012, nor did it attach a copy of LHDC’s return for 2012.

       At trial, no party offered into evidence a copy of the filed return.
However, petitioners’ counsel offered Exhibit 14-P. The IRS did not
object to the admission of Exhibit 14-P, and it was admitted. The briefs
of petitioners and the IRS rely on Exhibit 14-P to prove what LHDC
reported on its 2012 tax return.

       Exhibit 14-P has the stamp “Preparor Copy,” on the first page in
large, bold letters.

      Although Exhibit 14-P is not signed by an officer of LHDC, no
party disputes that the filed return was signed by an officer of LHDC.

       Exhibit 14-P contains no date next to where an officer of LHDC
was to sign the Form 1120. No party takes a position as to whether an
officer of LHDC placed a date next to the officer’s signature on the filed
return.

      Although Exhibit 14-P is not signed by Trombetta as the
preparer, 28 no party disputes that the filed return was signed by
Trombetta as the preparer.

      The date of the preparer’s signature is September 12, 2013. No
party disputes that the filed return also contained this date for the
preparer’s signature.

        28 The line asking for preparer’s name is filled out with “Mark M. Trombetta.”

The line asking for the preparer’s firm’s name is filled out with “Mark M. Trombetta,
C.P.A.”
                                          84

[*84] We conclude that Exhibit 14-P is identical to the return that was
filed except that (1) the filed return was not stamped “Preparor Copy,”
(2) an officer of LHDC signed the filed return (Exhibit 14-P was
unsigned), (3) Trombetta signed the filed return (Exhibit 14-P was
unsigned), and (4) we make no finding as to the date, if any, an officer
of LHDC wrote on the filed return next to the officer’s signature (Exhibit
14-P contains no date).

       The conclusions are consistent with the explanation that
Trombetta prepared the original Form 1120, kept a copy of the Form
1120 that was stamped “Preparor Copy” (which is Exhibit 14-P), signed
the original Form 1120, and sent the original Form 1120 to LHDC. No
party gives a different explanation of Exhibit 14-P.

      Thus, our description of the filed 2012 Form 1120 is based on the
information in Exhibit 14-P, Trombetta’s file copy of the return he sent
to LHDC.

      Thus, our description of the return LHDC filed is based on the
information in LHDC’s 2012 Form 1120, marked as Exhibit 14-P,
Trombetta’s file copy of the unsigned return.

      LHDC’s 2012 tax return contains a number of attached schedules,
only one of which, the Schedule K, Other Information, is important for
our purposes. 29 The 2012 Schedule K reported in line 5b that LHDC did
not own an interest of at least 20% in a domestic partnership or an entity
treated as a partnership at the end of tax year 2012.

     The 2012 tax return reported $1,155,000 in deductions for
“compensation of officers” in line 12 of the tax return.

      The table below shows relevant amounts reported on LHDC’s
2012 tax return.

         29 Just as for 2009, 2010, and 2011, the Schedule K, Other Information,

attached to LHDC’s 2012 Form 1120 reported that at the end of the tax year no
individual or estate owned directly 20% or more, or, directly or indirectly, 50% or more
of the total voting power of all classes of LHDC’s stock entitled to vote in 2012 (LHDC’s
response to the question in Line 4a.
                                            85

[*85]                  Item, schedule, and line                Amount

 Gross profit (line 3)                                           $4,566,274

 Gross rents (line 6)                                                   2,855

 Capital gain (line 8)                                              165,000

 Total income (line 11, add lines 3 through 10)                   4,734,129

 Compensation of officers (line 12)                              −1,155,000

 Salaries and wages paid (less employment credits) (line 13)     −1,872,306

 Repairs and maintenance (line 14)                                   −1,162

 Rents (line 16)                                                  −143,760

 Taxes and licenses (line 17)                                        30,394

 Interest payments (line 18)                                         −2,365

 Depreciation from Form 4562 not claimed on Schedule A or            −1,142
  elsewhere (line 20)

 Advertising expenses (line 22)                                      −1,857

 Other deductions (line 26)                                      −1,835,795

 Total deductions (line 27, add lines 12 through 26)             −4,982,993

 Taxable income (line 30)                                         −248,864

 Total tax (line 310                                                       0

        The “total tax” in line 31 of the Form 1120 was $0.

      We now address some aspects of the record that relate to LHDC’s
2012 tax return. We connect the discussion of LHDC’s 2012 Form 1120
to LHDC’s 2012 income statement because Trombetta used the income
statement to prepare LHDC’s tax returns and relied on the income
statement in his testimony.

      First, as Trombetta credibly testified, the $4,734,129 of total
income in line 11 included a cash distribution from Louisiana Assisted.
Nothing in the record allows us to accurately determine the amount of
                                   86

[*86] this distribution. As discussed supra FINDINGS OF FACT Part
X.A, we make no finding as to the amount of this distribution.

       Second the $4,734,129 from LHDC’s 2012 Form 1120 (line 11) is
$2,855 more than the $4,731,274 “Total Sales” in LHDC’s income
statement. The $2,855 difference is due to the fact that the $2,855 of
interest earned is included in the computation of the $4,734,129 of total
income on the tax return but not in the computation of the $4,731,274
of “Total Sales” amount on the income statement. The record does not
reveal any additional information about the source of the $2,855 of
interest income reported in line 5.

       Third, the parties stipulated that “On its 2012, [sic] LHDC
reported $165,000.00 in capital gain with respect to the sale or
disposition of [Louisiana Assisted]. Respondent contends this capital
gain should have been reported by the Fraziers.” The $165,000 amount
is recorded as “Capital gain net income” on Line 8 of LHDC’s 2012 tax
return. Line 8 contains a parenthetical stating “attach Schedule D
(Form 1120).” Since a Form 1120 Schedule D, Capital Gains and Losses,
provides additional information about a corporate taxpayer’s capital
gain, we would reasonably expect LHDC’s 2012 Schedule D to provide
additional detail on the $165,000 capital gain. However, the record does
not contain a Schedule D for LHDC’s 2012 tax year. We do not know
whether the Schedule D (1) was filed with LHDC’s 2012 tax return but
was not included with Exhibit 14-P, (2) was never filed with LHDC’s
2012 return in the first place, or (3) ever existed at all.

      Fourth, line 12, for compensation to officers, directs the taxpayer
to “attach Form 1125-E.” Although the 2012 tax return reported
$1,155,000 in deductions for “compensation of officers” on line 12 of the
tax return, there is no Form 1125-E in the record. We do not know
whether the Form 1125-E was filed with LHDC’s 2012 tax return but
was not included with Exhibit 14-P; was never filed with LHDC’s 2012
return in the first place; or ever existed at all.

       Lastly, LHDC’s 2012 return has a notation to “See stmt 1” in line
26, “Other deductions.” This is presumably a reference to a statement
that provides further detail of the underlying items comprising “Other
deductions,” but there is no statement 1 included with LHDC’s 2012 tax
return. We do not know whether statement 1 (1) was filed with LHDC’s
2012 tax return but was not included with Exhibit 14-P, (2) was never
filed with LHDC’s 2012 return in the first place, or (3) ever existed at
all.
                                         87

[*87] XVIII. Notices of deficiency

       The IRS issued a notice of deficiency to the Fraziers for tax years
2009, 2010, and 2011. The IRS issued separate notices of deficiency to
William and Mary for tax year 2012. The IRS issued a notice of
deficiency to LHDC for each of three tax years: 2009, 2010, and 2011.

       For each of these years, the parties made concessions regarding
some of the adjustments made by the notices of deficiency. We now
describe the adjustments made by the notices of deficiency and any
related concessions.

      A.      The Fraziers

              1.      2009 tax year

       William and Mary were issued a notice of deficiency for 2009. The
notice was dated January 15, 2014. The following table details each non-
computational adjustment in the notice of deficiency, the amount of the
adjustment, and any concessions made by the parties with respect to
each adjustment after the issuance of the notice of deficiency.

                                                Amount of      Concessions by the
                Adjustment
                                                adjustment          parties

Disallowance of dummy Schedule C
deduction that offsets the reported inclusion
                                                $2,987,744           None
of LHDC’s distributive share of Louisiana
Assisted’s nonseparately stated income

                                                             The Fraziers conceded
                                                             that the amount is
Unreported income from state income tax
                                                      991    includible in income
refund
                                                             and had not been
                                                             reported.

     The 2009 notice of deficiency determined that there was an
underpayment of $1,051,988 as follows:

 Total corrected tax liability (Form 4549-A,                          $1,463,750
 Income Tax Examination Changes, line 11)
 “Total Tax Shown on Return or as Previously                            −411,762
 Adjusted” (Form 4549-A, line 12)
 Underpayment                                                          1,051,988
                                          88

[*88] The $411,762 “Total Tax Shown on Return or as Previously
Adjusted” in the 2009 notice of deficiency matches the $411,762 in line
60 of the Fraziers’ 2009 Form 1040, total tax.

       Recall supra FINDINGS OF FACT Part XVII.B.1 that the
Fraziers reported LHDC’s $2,987,744 distributive share of Louisiana
Assisted’s nonseparately stated income on their 2009 Form 1040, which
they offset with a dummy deduction of $2,987,744 on William’s Schedule
C. The notice of deficiency disallowed the offsetting $2,987,744 dummy
deduction but did not reduce the Fraziers’ (or LHDC’s) income by
$2,987,744. The parties subsequently agreed that “if the Fraziers may
deduct the full $2,987,744.00 in 2009 related to the payments 30 to
LHDC, then LHDC has additional gross income in the amount of
$822,744.00, 31 but if the Fraziers may not deduct the $2,987,744.00,
LHDC will have a reduction in gross income in the amount of
$2,165,000.00. 32” We hold infra OPINION Part II.B.1.a that the
Fraziers’ $2,987,744 dummy deduction is disallowed, that LHDC must
include the $2,987,744 distributive share of Louisiana Assisted’s
nonseparately stated income and the $3,156 distributive share of
Louisiana Assisted’s separately stated interest income, and that

       30 The word “payments” is a misnomer to the extent that it implies that funds

were actually transferred. Nothing in the record indicates that the $2,987,744 amount
was actually transferred from Louisiana Assisted. The $2,987,744 amount represents
the distributive share of Louisiana Assisted’s 2009 nonseparately stated income for the
member other than Bobbie. A distributive share is a tax law concept that determines
the amount of partnership income taxable to the individual partner; it does not
represent a transfer of funds. See § 702(a); Treas. Reg. § 1.702-1(a).
       31  For 2009, LHDC included an amount of $2,165,000 in its income
representing a distribution from Louisiana Assisted. However, a partner generally
does not recognize income on the distribution of property from the partnership—except
that the partner recognizes a gain to “the extent that any money distributed exceeds
the adjusted basis of such partner’s interest in the partnership immediately before the
distribution.” § 731(a)(1). The stipulation anticipates that if the Court holds that
LHDC was the other member of Louisiana Assisted then LHDC’s income would be
increased by $2,987,744 (to include the amount representing the distributive share of
Louisiana Assisted’s nonseparately stated income) but reduced by $2,165,000
(representing a distribution from Louisiana Assisted). Hence, LHDC would have
“additional gross income in the amount of $822,744.00” ($2,987,744 − $2,165,000).
        32 The stipulation also anticipates the potential inverse holding: that William

was the other member of LHDC. In that case, according to the stipulation, the Fraziers
would not be permitted to deduct the $2,987,744 distributive share of Louisiana
Assisted’s nonseparately stated income, and LHDC’s income would still be reduced by
$2,165,000 (representing a distribution from Louisiana Assisted).
                                          89

[*89] LHDC’s income does not include the $2,165,000 of cash
distributions. 33

       The notice of deficiency determined that the Fraziers are liable
for a section 6662 accuracy-related penalty of $210,398 for “one or more
of the following: (1) Negligence or disregard of rules or regulations;
(2) Substantial understatement of income tax; (3) Substantial valuation
misstatement (overstatement).” The IRS has since conceded that the
underpayment was not due to negligence or disregard of rules or
regulations, nor substantial valuation misstatement, leaving only the
issue of whether the underpayment was due to substantial
understatement.

       The notice of deficiency determined a section 6651(a)(1) addition
to tax of $261,807 for the Fraziers’ failure to timely file their 2009
return. According to the notice of deficiency, the Fraziers’ 2009 tax
return was due on October 15, 2010, suggesting that the Fraziers filed
a six-month extension. The notice of deficiency stated that the Fraziers

       33   The parties do not appear to urge that the Court take the stipulation
literally. First, the stipulation does not account for the $3,156 distributive share of
Louisiana Assisted’s separately stated interest income, which the parties were aware
was at issue. (The Fraziers reported the $3,156 on their 2009 return, and the IRS
argues that the Fraziers’ reporting of this $3,156 interest income shows that William
was the other member of Louisiana Assisted.) Second, the IRS argues on brief for a
different means of adjusting the Fraziers’ income in 2009 and other years:
       [R]espondent’s disallowance of the Fraziers’ claimed Schedule C
       expenses should be upheld. However, if the Court holds that LHDC,
       rather than Mr. Frazier, was the true owner of the 50-percent interest
       in LAHC [Louisiana Assisted] during the years at issue, then
       adjustments to the Fraziers’ returns for the years at issue will need to
       be made. First, the income and deductions reported by the Fraziers on
       Schedule E from LAHC [Louisiana Assisted] will need to be reversed,
       as well as the Schedule C income and deductions claimed by Mr.
       Frazier, and the income must be added to LHDC’s gross income as
       appropriate.
Thus, if LHDC is held to be the other member of Louisiana Assisted, the IRS argues
not that the Fraziers may deduct the distributive share of Louisiana Assisted’s
nonseparately stated—as stated in the stipulation—but that the income on the
Fraziers’ Schedule E and deductions on William’s Schedule C should be reversed.
        Instead, we understand the stipulation to be a recognition by the parties that
either William or LHDC was the other member of Louisiana Assisted and that either
William or LHDC (but not both) will have the tax consequences of being the other
member of Louisiana Assisted.
                                         90

[*90] filed their return on March 18, 2013, which is the same date that
the parties have stipulated the return was filed.

       We find that March 18, 2013, is the filing date although this date
is before the date next to the preparer’s signature in the 2009 Form 1040
(Exhibit 4-P), which shows a date of August 8, 2013. We found supra
FINDINGS OF FACT Part XVII.B.1 that Exhibit 4-P was the copy of the
form that Trombetta kept when he signed the original copy of the return
and sent it the to the Fraziers for them to sign and file with the IRS. We
also found that Exhibit 4-P is identical to the return that was filed (with
the exception of the taxpayers’ signatures and date and Trombetta’s
signature). None of the parties argue that August 18, 2013, was the
filing date or that that Exhibit 4-P is not the same in amounts as the
return that was filed.

              2.     2010 tax year

       The Fraziers were issued a notice of deficiency for 2010. The
notice was dated April 21, 2015. The following table details each non-
computational adjustment in the notice of deficiency, the amount of the
adjustment, and any concessions made by the parties with respect to
each adjustment:

                                              Amount of      Concessions by the
                Adjustment
                                              adjustment          parties

 Disallowance of dummy Schedule C
 deduction that offsets the reported
 inclusion of LHDC’s distributive share of     $643,165            None
 Louisiana Assisted’s nonseparately stated
 income

                                                           The Fraziers conceded
 Disallowance of partnership loss from                     that the IRS correctly
                                                    343
 Lagniappe Film Fund LLC                                   disallowed this
                                                           partnership loss.

     The 2010 notice of deficiency determined that there was an
underpayment of $211,420 as follows:

 Total corrected tax liability (Form 4549-A, line 11)                 $486,165
 “Total Tax Shown on Return or as Previously                          − 274,745
 Adjusted” (Form 4549-A, line 12)
 Underpayment                                                           211,420
                                          91

[*91] The $274,745 “Total Tax Shown on Return or as Previously
Adjusted” in the 2010 notice of deficiency matches the $274,745 in line
60 of the Fraziers’ 2010 Form 1040, total tax.

       Recall supra FINDINGS OF FACT Part XVII.B.2 that the
Fraziers reported LHDC’s $643,165 distributive share of Louisiana
Assisted’s nonseparately stated income on their 2010 Form 1040, which
they offset with a dummy deduction of $643,165 on William’s Schedule
C. The notice of deficiency disallowed the offsetting $643,165 dummy
deduction but did not reduce the Fraziers’ (or LHDC’s) income by
$643,165. The parties subsequently agreed that “if the Fraziers may not
deduct the $643,165.00 payment 34 to LHDC, LHDC will have a
reduction in gross income in that amount.” 35 We hold infra OPINION
Part II.B.2.a that the Fraziers’ $643,165 dummy deduction is
disallowed, that LHDC must include the $643,165 distributive share of
Louisiana Assisted’s nonseparately stated income and $3,392
distributive share of Louisiana Assisted’s separately stated interest
income, and that LHDC’s income does not include the $765,000 of cash
distribution that it received from Louisiana Assisted. 36

       34 The word “payment” is a misnomer to the extent that it implies that funds

were actually transferred. Nothing in the record indicates that the $643,165 amount
was actually transferred from Louisiana Assisted. The $643,165 amount represents
the distributive share of Louisiana Assisted’s 2010 nonseparately stated income for the
member other than Bobbie. A distributive share is a tax law concept that determines
the amount of partnership income taxable to the individual partner; it does not
represent a transfer of funds. See § 702(a); Treas. Reg. § 1.702-1(a).
       35 Unlike for 2009, see supra notes 31 and 32, and for a reason unknown to

Court, the parties only considered the result if the Court held that William was the
other member. In that case, according to the stipulation, the Fraziers would not be
permitted to deduct the $643,165 distributive share of Louisiana Assisted’s
nonseparately stated income, and LHDC’s income would be reduced by $643,165. For
2010, as for 2009, LHDC included an amount in its income representing a distribution
from Louisiana Assisted ($765,000 for 2010). It seems that the parties’ stipulation is
intended to say that if William were held to be the other member, the Fraziers’ income
should include the $643,165 distributive share of Louisiana Assisted’s nonseparately
stated income, and LHDC’s income should be reduced by that amount because it would
not be the other member.
         36 The parties do not appear to urge that the Court take the stipulation

literally. See supra FINDINGS OF FACT Part XVIII.A.1 note 32. Instead, we
understand the stipulation to be a recognition by the parties that either William or
LHDC was the other member of Louisiana Assisted and that either William or LHDC
(but not both) will have the tax consequences of being the other member of Louisiana
Assisted.
                                      92

[*92] The notice of deficiency determined that the Fraziers are liable
for a section 6662 accuracy-related penalty of $42,284 for “one or more
of the following: (1) Negligence or disregard of rules or regulations;
(2) Substantial understatement of income tax; (3) Substantial valuation
misstatement (overstatement); (4) Transaction lacking economic
substance.” The IRS has since conceded that the underpayment was not
due to negligence or disregard of rules or regulations, substantial
valuation misstatement, or transaction lacking economic substance,
leaving only the issue of whether the underpayment was due to
substantial understatement.

        The notice of deficiency determined a section 6651(a)(1) addition
to tax of $52,855 for the Fraziers’ failure to timely file their 2010 return.
According to the notice of deficiency, the Fraziers’ 2010 tax return was
due on October 15, 2011, suggesting that the Fraziers filed a six-month
extension. The notice of deficiency determined that the Fraziers filed
their return on May 19, 2014, which is the same date that the parties
have stipulated the return was filed. We find that May 19, 2014, is the
filing date.

              3.     2011 tax year

       The Fraziers were issued a notice of deficiency for 2011. The
notice was dated April 22, 2015. The following table details the single
non-computational adjustment in the notice of deficiency and the
amount of the adjustment.

                                           Amount of     Concessions by the
                Adjustment
                                           adjustment         parties

 Disallowance of dummy Schedule C
 deduction that offsets the inclusion of
                                            $450,000           None
 LHDC’s cash distribution from Louisiana
 Assisted

     The 2011 notice of deficiency determined that there was an
underpayment of $167,051 as follows:

 Total corrected tax liability (Form 4549-A, line 11)             $334,532
 “Total Tax Shown on Return or as Previously                      − 167,481
 Adjusted” (Form 4549-A, line 12)
 Underpayment                                                      167,051
                                     93

[*93] The $167,481 “Total Tax Shown on Return or as Previously
Adjusted” in the 2011 notice of deficiency matches the $167,481 in line
60 of the Fraziers’ 2011 Form 1040, total tax.

      Unlike in 2009 and 2010, the parties did not make a stipulation
regarding the result of the allowance or disallowance of the dummy
deduction.

       The notice of deficiency determined that the Fraziers are liable
for a section 6662 accuracy-related penalty of $33,410 for “one or more
of the following: (1) Negligence or disregard of rules or regulations;
(2) Substantial understatement of income tax; (3) Substantial valuation
misstatement (overstatement); (4) Transaction lacking economic
substance.” The IRS has since conceded that the underpayment was not
due to negligence or disregard of rules or regulations, substantial
valuation misstatement, or transaction lacking economic substance,
leaving only the issue of whether the underpayment was due to
substantial understatement.

        The notice of deficiency determined a section 6651(a)(1) addition
to tax of $41,763 for the Fraziers’ failure to timely file their 2011 return.
According to the notice of deficiency, the Fraziers’ 2011 tax return was
due on October 15, 2012, suggesting that the Fraziers filed a six-month
extension. The notice of deficiency states that the Fraziers filed their
return on October 28, 2014, which is the same date that the parties have
stipulated the return was filed. We find that October 28, 2014, is the
filing date.

             4.     2012 tax year

       As explained before, the Fraziers did not file federal income tax
returns for the tax year 2012. William and Mary were issued separate
notices of deficiency for 2012. Both notices were dated April 21, 2015.

       Mary’s notice of deficiency determined that she received $442 in
ordinary dividends, $4,862 in IRA distributions, $980 in taxable
interest, $20,640 in salaries and wages, $19,547 in Social Security
income, $2,315 in qualified dividends, and $1,417 short-term capital
gain income from “Columbia Seligman Comm. and Info.” Mary’s notice
of deficiency determined that she had federal income tax withholding of
$183,727 and that she was entitled to the standard deduction of $5,950
for a married person filing a separate return, and a personal exemption
of $3,800. Finally, Mary’s notice of deficiency determined she was liable
for $29,420 in section 6651(a)(2) addition to tax, and $60,178 in section
                                          94

[*94] 6651(a)(1) addition to tax. In calculating the additions to tax under
section 6651(a)(1) and (a)(2) the notice of deficiency took the position
that the IRS created a substitute for return with a tax shown amount of
$451,185 and a filing date of February 12, 2015 (the same date the notice
of deficiency was prepared). This means that the additions to tax under
section 6651(a)(1) and (a)(2) were both calculated with a multiplier of
$267,458 ($451,185 total corrected tax liability minus $183,727
allowable payments on or prior to due date of return).

       William’s notice of deficiency determined that he received
$932,972 in Schedule E partnership flow-through income from
Louisiana Assisted, $908 in Schedule E royalties, $922 in ordinary
dividends, $11,869 in IRA distributions, $9,327 in taxable interest,
$1,155,000 in salaries and wages, $23,604 in Social Security income,
$2,315 in qualified dividends, $40,867 in short-term capital gain income
from the Franklin Growth Fund, 37 $306,596 in short-term capital gain
income from the Merrill Lynch brokerage account, 38 and $165,000 in
short-term capital gain income from Bobbie Robinson. William’s notice
of deficiency determined that he had federal income tax withholding of
$186,551 and that he was entitled to the standard deduction of $5,950
for a married person filing a separate return, and a personal exemption
of $3,800. Finally, William’s notice of deficiency determined he was
liable for $29,536 in section 6651(a)(2) addition to tax, and $60,414 in
section 6651(a)(1) addition to tax. In calculating the additions to tax
under section 6651(a)(1) and (a)(2) the notice of deficiency took the
position that the IRS created a substitute for return with a tax shown
amount of $455,057 and a filing date of February 12, 2015 (the same
date the notice of deficiency was prepared). This means that the
additions to tax under section 6651(a)(1) and (a)(2) were both calculated
with a multiplier of $268,506 ($455,057 total corrected tax liability
minus $186,551 allowable payments on or prior to due date of return).

       The parties executed stipulations regarding William and Mary’s
filing status for 2012. The parties stipulated that “[t]he Fraziers may
claim married filing jointly with respect to the 2012 taxable year; the
parties recognize, and agree, that the resulting joint and several tax

       37 Although the notice of deficiency referred to the “Franklin Growth Fund

Class A,” it is apparent in context that the notice of deficiency was referring to the
Franklin Growth Fund referred to in our findings of fact.
        38 Although the notice of deficiency referred to “Merrill Lynch Pierce Fenner &

Smith,” it is apparent in context that the notice of deficiency was referring to the
Merrill Lynch brokerage account referred to in our findings of fact.
                                   95

[*95] liability may exceed the individual deficiencies proposed in the
individual notices of deficiency.” We interpret this stipulation to mean
that the William and Mary’s tax liability for 2012 is computed on a
married-filing-jointly status.

       The parties stipulated that during 2012, the Fraziers received
taxable wages of $1,175,640. This amount is the sum of the amounts of
wages and salaries determined by the notice of deficiency to have been
earned by Mary ($20,640) and William ($1,155,000). Thus, the
stipulation represents the agreement by the parties that these two
adjustments are correct in total.

      The parties stipulated that during 2012, the Fraziers received
taxable interest of $10,308. This amount is the sum of the amounts of
taxable interest determined by the notice of deficiency to have been
earned by Mary ($980) and William ($9,327). (There is a $1 difference
probably due to rounding.) Thus, the stipulation represents the
agreement by the parties that these two adjustments are correct in total.

       The parties stipulated that during 2012, the Fraziers received
$4,990.00 of “taxable IRA distributions” and $11,741.00 of “taxable . . .
pension distributions.” The sum of these two numbers is $16,731. This
is also the sum of the amounts determined by the notice of deficiency to
be the IRA distributions earned by Mary ($4,862) and the IRA
distributions earned by William ($11,869). Because of the similarity of
the descriptions in the stipulation and in the notice of deficiency, and
because of the identity of the two sums, we conclude that the stipulation
represents the agreement by the parties that these two adjustments are
correct in total.

       The parties stipulated that during 2012, the Fraziers received
taxable social security benefits of $43,150. This amount is the sum of the
amounts of taxable social security income determined by the notice of
deficiency to have been earned by Mary ($19,547) and William ($23,604).
(There is a $1 difference probably due to rounding.) Thus, the stipulation
represents the agreement by the parties that these two adjustments are
correct in total.

       The parties stipulated that during 2012, the Fraziers received
taxable ordinary dividends of $1,545. This amount is greater than the
$1,364 total amount of ordinary dividends determined by the notices of
deficiency to have been earned by Mary ($442) and William ($922).
                                    96

[*96] The parties stipulated that during 2012, the Fraziers received
qualified dividends of $4,636. This amount is $6 greater than the $4,630
total amount of qualified dividends determined by the notice of
deficiency to have been earned by William ($2,315) and Mary ($2,315).

       The parties stipulated that during 2012, the Fraziers received
$957,397.00 of taxable income related to rental real estate, royalties,
partnerships, S corporations, trusts, etc. The comparable amount
determined to have been earned by the Fraziers in the notice of
deficiency was $933,880, which is the sum of (1) $932,972 determined to
have been earned by William in partnership flow-through income from
Louisiana Assisted and (2) $908 determined to have been earned by
William in royalties.

     See infra OPINION Part VII for our holdings on these types of
income.

       The parties stipulated that during 2012, the Fraziers had
“proceeds from the sale or disposition” of securities in the Franklin
Growth Fund in the amount of $40,867, and that the amount of the basis
of these securities remains at issue. By contrast, the notice of deficiency
had determined that the $40,867 was the short-term “gain” from the sale
of these same securities. This determination would have been consistent
with a determination that the proceeds from the sale or disposition of
the securities was $40,867 and the basis in these securities was $0. See
infra OPINION Part V for our holdings related to the securities sold
from the Franklin Growth Fund.

       The parties stipulated that “the Fraziers had proceeds from the
sale or disposition of Columbia Seligman Comm. And Info capital assets
in the amount of $1,417.00” and that “the Fraziers had no basis in this
asset.” See infra OPINION Part VI for our holdings related to the $1,417
amount from “Columbia Seligman Comm. And Info.”

       The parties stipulated that the Fraziers had proceeds from the
sale or disposition of securities in the Merrill Lynch brokerage account
in the amount of $306,596 and the amount of the basis remains at issue.
William’s notice of deficiency determined that the sales of securities
from the Merrill Lynch brokerage account resulted in $306,596 of short-
term capital “gain,” which would be consistent with the determination
that there was $306,596 of proceeds from the sale or disposition of these
securities and that the basis of these securities was $0. However, the
$306,596 amount in the notice of deficiency and stipulation does not
                                       97

[*97] match the $307,261 of proceeds stated in the Form 1099-B, which
the Fraziers actually received. In the notice of deficiency, the IRS did
not show how it arrived at the $306,596 number, nor did it attempt to
reconcile the $306,596 with the $307,261 amount stated in the Form
1099-B or even reference the Form 1099-B at all. See infra OPINION
Part IV for our holdings related to the securities sold from the Merrill
Lynch brokerage account.

      The parties also stipulated that Fraziers had federal income tax
withholding of $370,278. This is the sum of the amounts determined by
the notices of deficiency to have been withheld from the income of Mary
($183,727) and William ($186,551).

     The stipulations did not address how many exemptions should be
computed in determining the Fraziers’ income tax liability. See infra
OPINION Part IX for our holdings on the Fraziers’ exemptions for 2012.

       B.     LHDC

              1.       2009 tax year

      LHDC was issued a notice of deficiency for 2009. The notice was
dated January 14, 2014. The following table details each non-
computational adjustment in the notice of deficiency, the amount of the
adjustment, and any concessions made by the parties with respect to
each adjustment after the issuance of the notice of deficiency.

                              Amount of
        Adjustment                                Concessions by the parties
                              adjustment

 Disallowance of deduction                  The IRS conceded that the amount is
                               $886,148
 for professional fees                      deductible.

                                            LHDC conceded that the amount is
 Unreported interest income
                                   3,316    includible in income and had not been
 from BanCorp South
                                            reported.

 Unreported dividend                        LHDC conceded that the amount is
 income from Intel                  144     includible in income and had not been
 Corporation                                reported.

 Unreported rental income                   The IRS conceded that the amount is
                                   3,588
 from Jefferson Parish                      not includible in income.
                                         98

[*98] The 2009 notice of deficiency determined that there was an
underpayment of $313,155 as follows:

 Total corrected tax liability (Form 4549-A, line 11)                    $320,737
 “Total Tax Shown on Return or as Previously                               − 7,582
 Adjusted” (Form 4549-A, line 12)
 Underpayment                                                             313,155

The $7,582 “Total Tax Shown on Return or as Previously Adjusted” in
the 2009 notice of deficiency is computed by subtracting the $43,099 of
refund per Form 1139, “Corporation Application for Tentative Refund”
from the $50,681 tax per original return. 39 The $50,681 tax per original
return matches the $50,681 in line 31, total tax, of LHDC’s 2009 Form
1120.

       The notice of deficiency determined that LHDC is liable for a
section 6662 accuracy-related penalty of $62,631 for “one or more of the
following: (1) Negligence or disregard of rules or regulations;
(2) Substantial understatement of income tax; (3) Substantial valuation
misstatement (overstatement).” The IRS has since conceded that the
underpayment was not due to negligence or disregard of rules or
regulations, or substantial valuation misstatement, leaving only the
issue of whether the underpayment was due to substantial
understatement.

       The notice of deficiency also determined a section 6651(a)(1)
addition to tax of $77,933 for LHDC’s failure to timely file its 2009
return. According to the notice of deficiency, LHDC’s 2009 tax return

       39   In calculating a deficiency under section 6211, an underpayment under
section 6664, and an understatement under 6662, refunds received are treated as
rebates to the extent that they were made on the ground that the tax imposed was less
than the excess of the sum of the amount shown as the tax by the taxpayer on his
return, plus amounts not so shown previously assessed (or collected without
assessment) over rebates previously made. See § 6664(a)(2); Pesch v. Commissioner, 78
T.C. 100, 110–13 (1982); see also Galloway v. Commissioner, 149 T.C. 407, 414, 418–
19 (2017); Baldwin v. Commissioner, 97 T.C. 704, 709–10 (1991). Treasury Regulation
§ 1.6664-2 provides a formula for calculating an underpayment: underpayment = W −
(X + Y − Z) in which W = the amount of income tax imposed; X = the amount shown as
the tax by the taxpayer on his return; Y = amounts not so shown previously assessed
(or collected without assessment); and Z = the amount of rebates made. Thus, the IRS
calculated the underpayment as $320,737 − ($50,681 + 0 − $43,099) = $313,155. While
the record does not reveal whether LHDC received the $43,099 refund, petitioners do
not argue that LHDC did not receive it, nor do they contest that the IRS subtracted
the refund from the tax per original return.
                                       99

[*99] was due on September 15, 2010. The notice of deficiency states
that LHDC filed its return on February 28, 2011, which is the same date
the parties have stipulated the return was filed. We find that February
28, 2011, is the filing date.

              2.       2010 tax year

       LHDC was issued a notice of deficiency for 2010. The notice was
dated April 22, 2015. The following table details each non-computational
adjustment in the notice of deficiency, the amount of the adjustment,
and any concessions by the parties with respect to each adjustment after
the issuance of the notice of deficiency.

                             Amount of
        Adjustment                                Concessions by the parties
                             adjustment

 Disallowance of deduction
                               $424,935                     None
 for salaries and wages

 Unreported interest                        LHDC conceded that the amount is
 income from BanCorp                935     includible in income and had not been
 South                                      reported.

 Unreported dividend                        LHDC conceded that the amount is
 income from Intel                  167     includible in income and had not been
 Corporation                                reported.

 Unreported “[o]ther
 income” from Louisiana                     The IRS conceded that the amount is
                                  2,156
 Workers Compensation                       not includible in income.
 Corporation

     The 2010 notice of deficiency determined that there was an
underpayment of $9,270 as follows:

Total corrected tax liability (Form 4549-A, line 11)                      $9,270
“Total Tax Shown on Return or as Previously                                   −0
Adjusted” (Form 4549-A, line 12)
Underpayment                                                                   9,270

The $0 “Total Tax Shown on Return or as Previously Adjusted” in the
2010 notice of deficiency matches the $0 in line 31, total tax, of LHDC’s
2010 Form 1120.
                                   100

[*100] The $424,935 of deductions for salaries and wages that the IRS
disallowed was out of a total deduction for salaries and wages taken of
$2,770,775.

       The notice of deficiency determined that LHDC is liable for a
section 6662 accuracy-related penalty of $20,299 for “one or more of the
following: (1) Negligence or disregard of rules or regulations;
(2) Substantial understatement of income tax; (3) Substantial valuation
misstatement (overstatement); (4) Transaction lacking economic
substance.” The IRS has since conceded that the underpayment was not
due to negligence or disregard of rules or regulations, substantial
valuation misstatement, or transaction lacking economic substance,
leaving only the issue of whether the underpayment was due to
substantial understatement.

       The notice of deficiency also determined a section 6651(a)(1)
addition to tax of $15,224 for LHDC’s failure to timely file its 2010
return. According to the notice of deficiency, LHDC’s 2010 tax return
was due on September 15, 2011. The notice of deficiency determined that
LHDC filed its return on November 16, 2011, which is the same date the
parties have stipulated the return was filed. We find that November 16,
2011, is the filing date.

             3.    2011 tax year

      LHDC was issued a notice of deficiency for 2011. The notice was
dated April 22, 2015. The following table details each non-computational
adjustment in the notice of deficiency, the amount of the adjustment,
and any concessions made by the parties with respect to each
adjustment after the issuance of the notice of deficiency.
                                        101

[*101]                        Amount of
         Adjustment                                Concessions by the parties
                              adjustment

Disallowance of deduction
                                 $358,922                    None
for salaries and wages

Disallowance of deduction
                                  158,993                    None
for professional fees

Unreported interest                         LHDC conceded this amount was
income from BanCorp                 1,195   includible in income but had not been
South                                       reported.

Unreported dividend                         LHDC conceded this amount was
income from Intel                     214   includible in income but had not been
Corporation                                 reported.

Unreported “[o]ther
income” from Louisiana                      The IRS conceded that the amount is
                                    2,262
Workers Compensation                        not includible in income.
Corporation

     The 2011 notice of deficiency determined that there was an
underpayment of $177,759 as follows.

 Total corrected tax liability (Form 4549-A, line 11)                    $177,759
 “Total Tax Shown on Return or as Previously                                   −0
 Adjusted” (Form 4549-A, line 12)
 Underpayment                                                             177,759

The $0 “Total Tax Shown on Return or as Previously Adjusted” in the
2011 notice of deficiency is computed by subtracting the $2,742 of refund
per Form 1139 from the $2,742 tax per original return. 40 The $2,742 tax
per original return matches the $2,742 in line 31, total tax, of LHDC’s
2011 Form 1120.

       The $358,922 of deductions for salaries and wages that the IRS
disallowed was out of a total deduction for salaries and wages taken of

       40 In years in which a corporation applies for a refund per Form 1139, Tax per

Original Return, appears in the “Other Information” section of the Form 4549-A and
matches “Total tax”—line 31 of the Form 1120. The “refund per Form 1139” is
subtracted from “Tax per Original Return” to arrive at “Total Tax Shown on Return or
as Previously Adjusted”—line 12 of the Form 4549-A. We discuss the reason for this
subtraction as it relates to the calculation of deficiencies, underpayments, and
understatements supra FINDINGS OF FACT Part XVIII.B.1 note 39.
                                   102

[*102] $2,326,407. The $158,993 of professional fees that the IRS
disallowed was out of a total deduction for professional fees taken of
$1,818,542.

       The notice of deficiency determined that LHDC is liable for a
section 6662 accuracy-related penalty of $36,152 for “one or more of the
following: (1) Negligence or disregard of rules or regulations;
(2) Substantial understatement of income tax; (3) Substantial valuation
misstatement (overstatement); (4) Transaction lacking economic
substance.” The IRS has since conceded that the underpayment was not
due to negligence or disregard of rules or regulations, substantial
valuation misstatement, or transaction lacking economic substance,
leaving only the issue of whether the underpayment was due to
substantial understatement.

                                OPINION

        As a general rule, the taxpayer has the burden of proof, which
includes both the burden of production and persuasion. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933); Cozzi v. Commissioner, 88
T.C. 435, 443 n.8 (1987). The burden of persuasion is satisfied by the
preponderance of the evidence. Estate of Gilford v. Commissioner, 88
T.C. 38, 51 (1987). In an exception to the general rule that the taxpayer
bears the burden of proof, section 7491(a) provides that the burden of
proof shifts to the IRS with respect to an issue related to income tax
liability if the following conditions are met: (1) the taxpayer introduced
credible evidence with respect to that factual issue relevant to
ascertaining the taxpayer’s tax liability, (2) the taxpayer complied with
all applicable substantiation requirements for that factual issue, (3) the
taxpayer maintained all required records for that factual issue, and
(4) the taxpayer cooperated with reasonable requests for information
from the IRS regarding that factual issue. § 7491(a)(1), (a)(2)(A), (B),
and (C). If the taxpayer is a corporation, then section 7491(a)(2)(C)
imposes a fifth requirement: the corporation’s net worth may “not exceed
$7,000,000 at the time the . . . [petition] was filed.” 28 U.S.C.
§ 2412(d)(2)(B) (cross-referenced by § 7430(c)(4)(A)(ii)). The taxpayer
bears the burden of proving that these requirements for shifting the
burden of proof have been met. See Rolfs v. Commissioner, 135 T.C. 471,
483 (2010), aff’d, 668 F.3d 888 (7th Cir. 2012). Petitioners argue that the
burden of proof should be shifted to the IRS on only one issue, the 2010
and 2011 salary-and-wage and professional-fees deductions. However,
petitioners have failed to demonstrate that they cooperated with
reasonable requests for information from IRS with respect to that issue.
                                   103

[*103] Therefore, we conclude that petitioners have not met the
requirements of section 7491(a) for shifting the burden of proof on this
issue. Petitioners have the burden of proof on all issues related to their
income tax liability.

      In our findings of fact, we set forth a chart replicating the
information found on the Form 1099-B sent by Merrill Lynch to the
Fraziers. Some aspects of the chart above merit additional explanation.
The “Amount” column in the chart refers to the proceeds from the sale.
The Form 1099-B has a column labeled “Transaction Description.” Each
transaction reported by the Form 1099-B is described as a “Sale.” The
“Transaction Description” column in the Form 1099-B is omitted from
the chart. The Form 1099-B reports mathematical totals that are
omitted from the chart. The parties agree that the information on the
Form 1099-B in the record is correct. The only exception to this
agreement is that the parties stipulated that the proceeds received by
the Fraziers from the 1,030 sales was $306,596, whereas the proceeds
from the same sales reported on the Form 1099-B sum to $307,261. We
adjust for this $665 discrepancy infra OPINION Part IV.B.6.

       The Form 1099-B that Merrill Lynch sent the Fraziers reported
1,030 sales of securities made by the Fraziers during 2012. The Form
1099-B reported the cost basis for each of the 1,030 sales except for 5
sales. For these five sales, Form 1099-B reported that the cost basis was
“N/A.” The cost basis for the shares from these sales were reported as
“N/A” because the shares were transferred into the Fraziers’ Merrill
Lynch brokerage account at an unknown time prior to the end of 2012.

       Shortly before trial Trombetta prepared a spreadsheet estimating
the cost basis for the five sales for which the Form 1099-B reported that
the relevant cost basis were “N/A.” We admitted the spreadsheet.
Although his estimates are memorialized in the spreadsheet, they are
also explained in his testimony. We do not rely on the spreadsheet
separate from his testimony.

       The five sales for which the Form 1099-B does not show basis are:
(1) the 2,332 shares of Columbia Tax Exempt Fund A that were acquired
on June 8, 2011, and sold on March 15, 2012, for which Trombetta
estimated the basis to be $30,642; (2) the one share of Columbia Tax
Exempt Fund A that was acquired on January 26, 2012, and sold on
March 15, 2012, for which Trombetta estimated the basis to be $13.14;
(3) the 0.309 of a share of Columbia Tax Exempt Fund A that was
acquired on January 26, 2012, and sold on March 27, 2012, for which
                                   104

[*104] Trombetta estimated the basis to be $4.06; (4) the 1,829 shares
of Blackrock Municipal I that were acquired on June 8, 1994, and sold
on March 15, 2012, for which Trombetta estimated the basis to be
$19,003; and (5) the 2,523 shares of Blackrock Municipal I that were
acquired on June 8, 1994, and sold on March 15, 2012, for which
Trombetta estimated the basis to be $19,003. Trombetta’s method of
calculating the cost basis of these shares as well as our holdings on these
basis are discussed infra OPINION Part IV.B.1.

        Besides preparing the spreadsheet, Trombetta prepared a Form
1040 for the Fraziers’ 2012 tax year. The Fraziers submitted the Form
1040 to the IRS three days before trial. The Form 1040 is not signed or
dated by either of the Fraziers. The Form 1040 included Schedules C, D,
and E. Although we admitted the Form 1040 as evidence, no party
contends that the Form 1040 should be considered a filed return.
However, the Fraziers’ brief relies on the Form 1040 to explain its
litigating position for certain issues.

       The Schedule C included with the unfiled Form 1040 states an
amount of $932,972 on line 48, “Total other expenses.” This amount is
further described by the Schedule C as the amount “paid to Louisiana
Housing Development Corp.” The stipulation states that this $932,972
on the Schedule C is a “claim” by the Fraziers of a “deduction related to”
an “alleged payment[] to LHDC” that the IRS “disallowed for lack of
substantiation and for lack of business purpose.” We understand the
stipulation to mean that petitioners’ litigating position is that the
Fraziers are entitled to the $932,972 deduction and that the IRS
disagrees.

        For same unfiled Form 1040, the Schedule D, line 7, “Net short-
term capital gain or (loss)” states an amount of $3,857, which is
attributable to the sales of securities in the Merrill Lynch account for
securities sold one year or less from their acquisition date. The amount
itself is computed from the information (i.e., amount realized and cost
basis) in the Merrill Lynch Form 1099-B for securities sold one year or
less from their acquisition date. For three such sales, the Form 1099-B
did not show a cost basis; the cost basis for these three sales was
computed from Trombetta’s basis estimates memorialized in his
spreadsheet.

       For the same unfiled Form 1040, the Schedule D, line 13, “Capital
gain distributions,” states an amount of $1,417, which is the amount
that the Fraziers received from “Columbia Seligman Comm. And Info,”
                                        105

[*105] and for which the Fraziers concede they have no basis. Placing
the $1,417 amount on line 13 signifies the Fraziers’ claim that the
$1,417 amount received from the “Columbia Seligman Comm. And Info”
should be considered a capital gain dividend and should therefore be
treated as long-term capital gain. See infra OPINION Part VI for our
holdings on this amount.

       For the same unfiled Form 1040, the Schedule D, line 15, “Net
long-term capital gain or (loss)” states an amount of $4,364. This $4,364
amount is the sum of (a) $1,417 (the amount received from “Columbia
Seligman Comm. And Info”) and (b) $2,947. The $2,947 amount is
attributable to the sales of securities in the Merrill Lynch account for
securities sold more than one year after their acquisition date. The
$2,947 amount itself is computed from the information (i.e., amount
realized, cost basis, and amount of loss disallowed under the wash-sale
rule) in the Merrill Lynch Form 1099-B for securities sold more than one
year after their acquisition date. For two such sales, the Form 1099-B
did not show a cost basis; the cost basis for these two sales was computed
from Trombetta’s basis estimates memorialized in his spreadsheet. The
$2,947 amount reflected the disallowance of $6 of loss because of the
wash-sale rule. This was consistent with the Form 1099-B’s treatment
of the $6 loss (rounded to the nearest dollar). See infra OPINION Part
IV.B.4 for our holdings on the wash sale loss disallowance.

       Consistent with the Form 1099-B, the Schedule D for the unfiled
Form 1040 for 2012 assumed that the total sales proceeds of securities
sold from the Merrill Lynch account in 2012 was $307,262, 41 which is
$666 more than the $306,596 that the parties stipulated that the
Fraziers received from the sales of securities from the Merrill Lynch
brokerage account in 2012. As explained later, we interpret petitioners’
brief to take the position that, contrary to the Schedule D, total sales
proceeds of securities sold from the Merrill Lynch account in 2012 was
$306,596. See infra OPINION Part IV.B.6.

      Although the parties stipulated that the Fraziers had proceeds of
$40,867 from the sale or disposition of capital assets from the Franklin
Growth Fund, the Schedule D included with the unfiled Form 1040 for

        41 The Fraziers received total proceeds of $307,261, as is stated on the Form

1099-B, whereas adding the proceeds in the Schedule D results in a sum of $307,262.
The Schedule D uses rounded numbers, but the Form 1099-B uses dollars and cents.
Thus, the one-dollar difference is the result of rounding to the nearest dollar.
                                          106

[*106] 2012 does not account for the Franklin Growth Fund securities
at all. See infra OPINION Part V for our holdings on these securities.

       The Fraziers attached a Schedule E to the unfiled Form 1040 for
2012. In the Schedule E, the Fraziers state an amount of $932,972 in
line 28(j), “Nonpassive income from Schedule K–1,” with a description
“Louisiana Assisted Housing Co., LLC.” This amount corresponds to the
$932,972 of nonseparately stated income reported on the 2012 Schedule
K–1 issued to William from Louisiana Assisted.

       In the unfiled Form 1040 for 2012, the Fraziers compute their
taxable income with itemized deductions in the amount of $103,024 for
(1) state and local income taxes of $91,453 plus (2) real estate taxes of
$11,571. See infra OPINION Part VIII for our holdings on these
deductions.

I.      LHDC was the other member of Louisiana Assisted.

       During tax years 2009 through 2012, Louisiana Assisted was a
multi-member LLC owned by Bobbie and a second member, the identity
of whom is a central point of dispute in this case. Petitioners contend
that the other member of Louisiana Assisted was LHDC. The IRS
contends that the other member of Louisiana Assisted was William.
Identifying the other member of Louisiana Assisted determines which
taxpayer (LHDC or William) has the tax consequences of owning a
membership interest in Louisiana Assisted from 2009 through 2012.

        A.      Under Louisiana law, the other membership interest in
                Louisiana Assisted was owned by LHDC.

      Louisiana Assisted was a Louisiana LLC for the years at issue.
We consider here whether it was William or LHDC who, under the law
of Louisiana, owned the membership interest of Louisiana Assisted that
was not owned by Bobbie. We conclude that it was William.

       A “member” of an LLC “means a person 42 with a membership
interest in an LLC with the rights and obligations specified under this
Chapter.” La. Stat. Ann. § 12:1301(13) (2007). The term “this Chapter”
means Chapter 22 of the Louisiana Statutes, which is known as the
“Limited Liability Company Law.” See La. Stat. Ann. §§ 12:1301,

        42 Person “means a natural person, corporation, partnership, limited

partnership, domestic or foreign limited liability company, joint venture, trust, estate,
or association.” La. Stat. Ann. § 12:1301(18) (2007).
                                        107

[*107] 12:1369 (2007). Chapter 22 defines a “membership interest” in
an LLC as “a member’s rights in a limited liability company, collectively,
including” (1) the “share of the profits and losses of the limited liability
company,” 43 (2) the “right to receive distributions of the limited liability
company’s assets,” 44 (3) any “right to vote,” 45 or (4) any right to
“participate in management.” 46 La. Stat. Ann. § 12:1301(14) (2007).

       Under Louisiana law, a membership interest in an LLC is an
“incorporeal movable.” La. Stat. Ann. § 12:1329 (2007). “The ownership
of a movable, ‘including an incorporeal movable,’ is voluntarily
transferred by a contract between the owner and the transferee that
purports to transfer the ownership of the movable.” La. Civ. Code Ann.
art. 518 (2007). Thus, to determine if the owner of an LLC membership
interest transferred the membership interest to a transferee, the
contract between the owner and the transferee is controlling. To
establish, under Louisiana law, the existence of an oral contract
involving goods or services with price or value in excess of $500, the oral
contract must be proved by (1) at least one witness and (2) “other
corroborating circumstances.” La. Civ. Code Ann. art. 1846 (2007). A
witness for these purposes may be a party to the oral contract. See
Foshee v. Hand-Enis Realty Co., 237 So. 2d 437, 439 (La. App. 3 Cir.
1970).

       43 Section 1323 of the Limited Liability Company Law provides:

       The profits and losses of a limited liability company shall be allocated
       among the members and among classes of members in the manner
       provided in a written operating agreement. To the extent the operating
       agreement does not so provide in writing, profits and losses shall be
       allocated equally among the members.
La. Stat. Ann. § 12:1323 (2007).
        44 Section 1324 of the Limited Liability Company Law addresses a member’s

right to receive interim distributions, and section 1325 addresses a member’s right to
receive distributions upon a member’s withdrawal. See La. Stat. Ann. §§ 12:1324, 1325
(2007).
       45 Section 1318 of the Limited Liability Company Law provides default rules

for member voting. See La. Stat. Ann. § 12:1318 (2007). These default rules have no
bearing on the facts of this case.
        46 Section 1311 of the Limited Liability Company Law provides a default rule

for member management, see La. Stat. Ann. § 12:1311 (2007), while section 1312
provides that the articles of organization can require that the LLC be managed by “one
or more managers who may, but need not, be members.” La. Stat. Ann. § 12:1312
(2007). These rules on management have no bearing on the facts of this case.
                                   108

[*108] That a person contributes capital to an LLC may be evidence
that the person is a member of the LLC. Egle v. Egle, 2006-1550, p. 10
(La. App. 3 Cir. 6/27/07), 963 So. 2d 454, 460, writ denied, 2007-1596
(La. 10/26/07), 966 So. 2d 579; Moise v. Moise, 06-876, p. 4 (La. App. 5
Cir. 3/13/07), 956 So. 2d 9, 11. Under the Limited Liability Company
Law, a member’s contribution to capital may take a variety of forms:
“The contribution of a member to a limited liability company may take
the form of cash, property, services rendered, or a promissory note or
other binding obligation to contribute cash or property or to perform
services.” La. Rev. Stat. Ann. § 12:1321 (2007). In Egle, a Louisiana
court determined that two individuals were members of an LLC
because—although they did not pay cash for their capital contribution
per the original agreement—they provided valid consideration through
a credit transaction. 2006-1550 at 10, 963 So. 2d at 460-463. In Moise, a
Louisiana court found that an individual was the sole member of an LLC
by virtue of his capital contribution of land in partial consideration of
the 100% interest in the LLC. 06-876 at 4, 956 So. 2d at 11.

       Louisiana courts have considered tax reporting, among other
factors, in determining who is a member of an LLC. Destiny Servs.,
L.L.C., 2010-1895 at 5 (finding that plaintiffs were members of the LLC
and considering, among other factors, that tax returns characterized
plaintiffs as members and that plaintiffs were issued Forms K–1).
However, tax reporting is not dispositive. See Labby v. Labby Mem’l
Enterprises, LLC, No. 2:18-CV-01388, 2020 WL 5742539, at *1–*2 (W.D.
La. Sept. 24, 2020) (finding an individual was not a member of an LLC
although the LLC issued him a Form K–1); Moise, 06-876 at 3–4, 956
So. 2d at 10–11 (determining that wife was not a member of the LLC
although the LLC’s tax return stated husband and wife were 50%
members).

      In 2007, pursuant to an oral contract, Bobbie sold 50% of
Louisiana Assisted to either LHDC (according to petitioners) or William
(according to the IRS) in exchange for the use of LHDC’s resources. In
2012, also pursuant to an oral contract, Bobbie repurchased the 50% of
Louisiana Assisted sold in 2007 for $165,000. The record does not
contain any documentation related to this payment (such as a copy of
the check that Bobbie wrote or any bank statements showing receipt of
the $165,000).

      Bobbie was a “witness” to the 2007 oral contract. See La. Civ. Code
Ann. art. 1846 (2007). She testified that the 2007 oral contract called for
her to transfer a 50% membership interest in Louisiana Assisted to
                                         109

[*109] LHDC. We find Bobbie’s testimony credible because she was in
the best position to know the terms of the 2007 oral contract (and the
2012 oral contract). 47 Additionally, her testimony was corroborated by
Tracy.

       Tracy’s testimony serves as “other corroborating circumstances”
to the 2007 oral contract. See La. Civ. Code Ann. art. 1846 (2007). In
2005, after Hurricane Katrina, Tracy quit her job in Austin, moved to
Louisiana, and began working for LHDC. Tracy testified that she had
extensive involvement in LHDC at the time when the 2007 oral contract
was made, and that she knew about of the oral contract. Tracy testified
that LHDC became the other member of Louisiana Assisted through the
contract. We find Tracy’s testimony credible because, by virtue of her
extensive involvement in LHDC, she was in a position to know of the
2007 oral contract.

       Another “corroborating circumstance[]” that indicates that LHDC
acquired the second membership interest in Louisiana Assisted under
the 2007 oral contract is that LHDC, not William, shared in the profits
and losses of Louisiana Assisted and had a right to receive distributions
of Louisiana Assisted’s assets. See La. Stat. Ann. § 12:1301(13) and (14)
(2007). The parties agree that Louisiana Assisted initially wrote checks
for distributions to LHDC. The fact that the checks for distributions
were initially written to LHDC suggests that LHDC had the right to
receive distributions from Louisiana Assisted, at least immediately after
acquiring the interest in 2007. From 2009 through 2012 checks for the
distributions were written to William, which, the IRS argues, shows that
William had the right to such distributions. However, Bobbie began
writing checks to William only because William “was concerned about
his problem he was having with Mr. Lala.” Although Bobbie wrote the
checks to William, she sent the checks to Trombetta and expected that
Trombetta would ensure that LHDC received the funds. Trombetta
credibly 48 testified that William never received these checks and that
these checks were deposited directly in LHDC’s account instead:

       47 Although William, acting as LHDC’s agent in the 2007 oral contract (and the

2012 oral contract), was a witness to the contracts, William could not testify at trial
because he had Alzheimer’s disease.
       48 We believe Trombetta’s testimony is credible because, as LHDC’s

accountant, he would have personally received the checks and deposited them in
LHDC’s account. Further, Bobbie’s testimony corroborated Trombetta’s testimony
when she testified that she sent the checks directly to Trombetta.
                                       110

[*110] Question: Now, when Bobbie made out the check, did she
      send that check directly to you?

       Trombetta Answer: Directly to me.

       Question: And then what would you do with the check?

       Trombetta Answer: One of my staff would deposit that into
       the Louisiana Housing’s [LHDC’s] operating account. 49

       Question: You did not deposit to Elmo’s 50 [William’s]
       account?

       Trombetta Answer: No.

       Question: Only to the LHDC account?

       Trombetta Answer: It only went into LHDC’s account.

The placement of William’s name on these checks was a formality of title
that did not impart actual ownership over the distributions. See Corliss
v. Bowers, 281 U.S. 376, 378 (1930).

       Another “corroborating circumstance[]” indicating that LHDC
received the other membership interest was that LHDC made a capital
contribution to Louisiana Assisted by giving Louisiana Assisted the use
of LHDC’s work force, office space, and information systems. See La.
Stat. Ann. § 12:1321 (2007); see also Egle, 2006-1550 at 10, 963 So. 2d at
460; Moise, 06-876 at 4, 956 So. 2d at 11. Bobbie agreed to exchange a
50% membership interest in Louisiana Assisted for Louisiana Assisted’s
right to use LHDC’s workers, office space, and information systems to
administer the DHAP payments to residents of the Mississippi Gulf
Coast—LHDC’s capital contribution. See La. Stat. Ann. § 12:1321
(2007); see also Egle, 2006-1550 at 10, 963 So. 2d at 460; Moise, 06-876
at 4, 956 So. 2d at 11. LHDC paid the salaries and wages of its workers
through Creative Payroll Services. Robert, who worked for LHDC,
developed the information technology infrastructure that was adapted
for Louisiana Assisted’s use. LHDC’s office space, which was leased by

       49 Trombetta had “a facsimile of Mr. Frazier’s signature” which he used to

endorse checks from LHDC to various professionals. Trombetta must have used this
facsimile of William’s signature to endorse these checks from Louisiana Assisted as
well.
       50 Elmo is William’s middle name.
                                          111

[*111] LHDC, was set aside for use by Louisiana Assisted. The
infrastructure and work force belonged to LHDC, not William. Although
William is a shareholder in LHDC, LHDC is a separate entity. See
Moline Props., Inc. v. Commissioner, 319 U.S. 436, 438-439 (1943).

      The tax reporting of Louisiana Assisted, LHDC, and the Fraziers
is not determinative of who acquired the membership interest in
Louisiana Assisted. Below is a summary of the tax reporting 51 of
Louisiana Assisted, the Fraziers, and LHDC for tax years 2009–2012.

                                       2009          2010         2011         2012
 (1) Distribution from Louisiana     $2,165,000     $765,000     $450,000     $942,271
 Assisted to LHDC
 (2) NonBobbie distributive           2,987,744      643,165       −7,586      932,972
 share of Louisiana Assisted’s
 nonseparately stated income
 (3) NonBobbie distributive               3,156        3,392        1,839        —
 share of Louisiana Assisted’s
 separately stated interest
 income
 (4) William’s reported income        2,987,744      643,165       −7,586      932,972
 inclusion of Louisiana
 Assisted’s nonseparately stated
 income
 (5) William’s reported income            3,156       —             1,839        —
 inclusion of Louisiana
 Assisted’s separately stated
 interest income
 (6) William’s Schedule C                —            —           450,000        —
 income inclusion from
 distribution from Louisiana
 Assisted
 (7) William’s dummy deduction        2,987,744      643,165      450,000      932,972
 (8) LHDC’s reported income           2,165,000      765,000    477,114 52   unknown
 inclusion from distribution                                                     53
 from Louisiana Assisted

        51 For 2012, the Fraziers did not file a tax return. Rows four through seven, for

2012, are based on the Fraziers unfiled, unsigned 2012 Form 1040 and attachments,
which are relevant only because they contain the Fraziers’ litigating position for issues
also argued on brief.
        52 This amount includes the $450,000 distribution from Louisiana Assisted to

LHDC plus specific reimbursement items.
      53 Total income (line 11) includes a distribution from Louisiana Assisted to

LHDC, but does not indicate the amount.
                                  112

[*112] The first, second, and third rows reflect what was reported on
the Forms K–1 that Louisiana Assisted issued to William. We use the
term “NonBobbie” to refer to the amounts reported ostensibly for
William as the member of Louisiana Assisted other than Bobbie. The
fourth row reflects what was reported on the Fraziers’ Schedule E (filed
in 2009–2011, but unfiled in 2012). The fifth row reflects what was
reported on the Fraziers’ Schedule B and attachments. The sixth and
seventh rows reflect what was reported on the Fraziers’ Schedule C
(filed in 2009–2011, but unfiled in 2012). The eighth row reflects what
was reported on LHDC’s Forms 1120.

      Louisiana Assisted’s, the Fraziers’, and LHDC’s tax reporting
suggests to the IRS that William was the other 50% member of
Louisiana Assisted opposite Bobbie.

      First, Louisiana Assisted issued Schedules K–1 to Bobbie and
William (not to LHDC) for tax years 2009 through 2012.

       Second, for tax years 2009 to 2012, LHDC did not report a
distributive share of Louisiana Assisted’s nonseparately stated income,
but the Fraziers reported a distributive share of Louisiana Assisted’s
nonseparately stated income on their Schedules E for tax years 2009
through 2011. (Recall the Fraziers did not file a tax return for 2012.)

       Third, for tax years 2009 to 2012, LHDC did not report a
distributive share of Louisiana Assisted’s separately stated interest
income, but the Fraziers reported a distributive share of Louisiana
Assisted’s separately stated interest income for 2009 and 2011.

      Fourth, Louisiana Assisted’s Schedules B and B-1 stated that
there was no corporation that owned Louisiana Assisted and that its
only members were Bobbie and William.

       Lastly, LHDC reported in line 5b of its Schedule K, Form 1120,
that it did not own an interest of at least 20% in a domestic entity
treated as a partnership for tax years 2009 through 2012, suggesting it
did not own 50% of Louisiana Assisted from 2009 through 2012.

      On the other hand, one portion of LHDC’s 2012 return implies
that LHDC was the other member. LHDC recorded $165,000 in capital
gain on its 2012 tax return. The parties stipulated: “On its 2012, [sic]
LHDC reported $165,000.00 in capital gain with respect to the sale or
disposition of [Louisiana Assisted]. Respondent contends this capital
gain should have been reported by the Fraziers.” This reporting suggests
                                      113

[*113] that LHDC, not William, sold its membership interest in
Louisiana Assisted back to Bobbie in 2012.

       More importantly, facts and circumstances indicate that the tax
reporting was part of a paper trail designed to deceive Lala. Trombetta
passed income from Louisiana Assisted through the Fraziers’ tax return
by reporting the distributive share of nonseparately stated income from
Louisiana Assisted on the Fraziers’ Schedule E and claiming a
corresponding deduction on William’s Schedule C. 54 We found supra
FINDINGS OF FACT Part VIII that this was part of a subterfuge to
conceal payments from Lala.

      Furthermore, although the tax returns of Louisiana Assisted, the
Fraziers, and LHDC stated that William and not LHDC was the other
member of Louisiana Assisted, tax reporting is not determinative of
whether a person owns a membership interest in an LLC under
Louisiana law. See Labby, 2020 WL 5742539, at *1–2; Moise, 06-876
at 3–4, 956 So. 2d at 10–11.

      We hold that under Louisiana law LHDC acquired the other 50%
membership interest in Louisiana Assisted through the 2007 oral
contract with Bobbie.

       B.     Under federal tax law, the other membership interest in
              Louisiana Assisted was owned by LHDC.

       Determining that LHDC became the other member of Louisiana
Assisted in 2007 under Louisiana law does not, without further analysis,
resolve the question of whether LHDC became the other member of
Louisiana Assisted in 2007 under federal tax law. True, the principle
expressed in Keith v. Commissioner, 115 T.C. 605, 611 (2000) (citing
United States v. National Bank of Commerce, 472 U.S. 713, 722 (1985)),
suggests that the result under Louisiana law controls the result under
federal tax law. In Keith, id., we stated: “In determining whether passage
either of title or of benefits and burdens has occurred, we look to State
law. It is State law that creates, and governs the nature of, interests in
property, with Federal law then controlling the manner in which such

       54 For 2011, unlike for 2009 and 2010, the Fraziers improperly reported

$450,000 of gross income on William’s Schedule C for a cash distribution from
Louisiana Assisted. They reported a corresponding $450,000 deduction on William’s
Schedule C. This was also part of William’s attempt to conceal from Lala cash
payments from Louisiana Assisted to LHDC. See supra FINDINGS OF FACT Part
VIII.
                                   114

[*114] interests are taxed.” But the principle expressed in Estate of
Skaggs v. Commissioner, 75 T.C. 191, 198 (1980), suggests that state law
is not relevant. In Estate of Skaggs, id., we stated: “[T]he Internal
Revenue Code, not State law, determines who is a partner and what is a
partnership for Federal tax purposes.” In this case, we need not reconcile
these two principles. Respondent does not rely on the principle in Estate
of Skaggs in support of his theory that William was the other member of
Louisiana Assisted opposite Bobbie. Nor does respondent point to any
particular provision of the Internal Revenue Code that suggests that
conclusion. By contrast, in Estate of Skaggs, the Court relied on section
708, dealing with termination of a partnership, for its holding that the
partnership in that case did not terminate by the death of one of its two
partners. Our reading of respondent’s brief is that respondent is of the
view that the identity of the non-Bobbie partner is revealed by tax
reporting. That is, in respondent’s view, William is the other member of
Louisiana Assisted because his returns reported income from Louisiana
Assisted and because he was named by Louisiana Assisted’s Forms K–1
as the other member. But tax reporting is not dispositive of tax
treatment. It is only a piece of evidence to weigh. Here we do not find the
tax reporting to be persuasive evidence that William was the other
member of Louisiana Assisted for three reasons: (1) the tax reporting was
mixed on that point (LHDC reported the gain from the 2012 sale of the
membership interest, William did not), (2) the tax reporting of William
as the other member was intended only to deceive Lala, and (3) William
did not exercise rights of ownership over the membership interest in that
he did not receive distributions from Louisiana Assisted except as a
conduit for LHDC. In conclusion, the way the membership interest was
reported on the tax returns does not convince us that William was the
other member of LHDC. We conclude that LHDC was the other member
under federal tax law for the purpose of this case.

      C.     The IRS’s Danielson argument is inapposite because
             petitioners are not attempting to disavow the terms of the
             2007 oral agreement.

      The IRS also argues that Commissioner v. Danielson, 378 F.2d
771, 775 (3d Cir. 1967), compels the conclusion that William was the
other member of Louisiana Assisted. In Danielson, the Third Circuit
held:

      [A] party can challenge the tax consequences of his
      agreement as construed by the Commissioner only by
      adducing proof which in an action between the parties to
                                   115

[*115] the agreement would be admissible to alter that
       construction or to show its unenforceability because of
       mistake, undue influence, fraud, duress, etc.

Danielson, 378 F.2d at 775. Although Danielson was an opinion of the
Third Circuit, the Fifth Circuit has applied the Danielson rule in several
cases. Smith v. Commissioner, 65 F.3d 37, 40 n.13 (5th Cir. 1995), aff’g
T.C. Memo. 1994-149; Insilco Corp. v. United States, 53 F.3d 95, 99 (5th
Cir. 1995); Spector v. Commissioner, 641 F.2d 376, 386 (5th Cir. 1981),
rev’g 71 T.C. 1017 (1979).

       The IRS argues that LHDC and the Fraziers are bound under the
Danielson rule to the tax consequences of William being the other
member of Louisiana Assisted because (according to the IRS) the 2007
oral agreement was for William to acquire 50% of Louisiana Assisted
from Bobbie. We reject the argument. As we held supra OPINION Part
I.A, the 2007 oral agreement was for Bobbie to transfer a 50%
membership interest in Louisiana Assisted to LHDC (not William).
Thus, by arguing that LHDC (not William) was the other member of
Louisiana Assisted from 2007 to 2012, petitioners are not disavowing
their contract.

      The Danielson rule does not disturb our conclusion that LHDC
acquired the other 50% membership interest in Louisiana Assisted
through the 2007 oral agreement with Bobbie.

II.   The tax consequences to LHDC and the Fraziers of LHDC being
      the other member of Louisiana Assisted

       Having determined that LHDC was the other member of
Louisiana Assisted, we now discuss the tax consequences to petitioners
resulting from LHDC’s ownership of 50% of Louisiana Assisted.

      A.     Legal Concepts

             1.     Tax Court jurisdiction

       The Tax Court is a court of limited jurisdiction, and the Court
may exercise jurisdiction only to the extent authorized by Congress.
§ 7442; Naftel v. Commissioner, 85 T.C. 527, 529 (1985). The Tax Court
has jurisdiction to redetermine a taxpayer’s deficiency for a particular
year only if the notice of deficiency issued to the taxpayer determined a
deficiency for the year and the petition seeks a redetermination for that
year. Rule 13(a), (c); §§ 6212, 6213. Under section 6214(a), the Tax Court
                                   116

[*116] has jurisdiction to determine a deficiency greater than that
determined by the notice of deficiency provided that the IRS has made
a claim for the increased deficiency. Further:

      Rule 41(b)(1) . . . provides that when an issue not raised in
      the pleadings is tried with the express or implied consent
      of the parties, that issue is treated in all respects as if it
      had been raised in the pleadings. Thus, where respondent
      raises an issue that could result in an increased deficiency
      without formally amending his pleading and that issue is
      tried with petitioner’s express or implied consent, the
      requirement in section 6214(a) that respondent make a
      claim for the increased deficiency is satisfied. See Woods v.
      Commissioner, 91 T.C. 88, 93 (1988).

Smaldino v. Commissioner, T.C. Memo. 2021-127, at *16.

             2.     Taxation of entities treated as partnerships

      Federal tax law treats an LLC with multiple members as a
partnership unless the LLC elects to be treated as a corporation for
federal tax purposes. See Treas. Reg. § 301.7701-3(a) and (b)(1)(i).

       A partnership itself is not subject to income tax. § 701. The
income or loss of a partnership is computed as an initial step in
calculating the partners’ tax liabilities. § 703(a). Each partner’s income
takes into account the partner’s distributive share of the partnership’s
income or loss. § 702(a). “Section 702(a)(1) through (a)(7) requires that
specific items of partnership gain, loss, deduction, and credit be
segregated by the partnership and separately stated on the returns of
the individual partners.” Garcia, 96 T.C. at 794. Items of partnership
gain, loss, deduction, and credit not specified in section 702(a)(1)
through (7) are referred to as nonseparately stated items. Id.

       All partners take into account their distributive shares of income
regardless of whether income is actually distributed. Treas. Reg.
§ 1.702-1(a). A partner generally does not recognize income on the
distribution of property from the partnership except that the partner
recognizes a gain to “the extent that any money distributed exceeds the
adjusted basis of such partner’s interest in the partnership immediately
before the distribution.” § 731(a)(1). For convenience, we refer to the
partner’s adjusted basis in its partnership interest as the partner’s
outside basis. See Kligfield Holdings v. Commissioner, 128 T.C. 192, 196
(2007).
                                    117

[*117] A partner’s outside basis is determined in the following manner:
there is an initial outside basis when the partnership interest is
acquired, and then there are annual adjustments to outside basis. The
initial outside basis depends on how the partnership interest was
acquired. If the partnership interest was acquired by a contribution to
the partnership, the partner’s initial outside basis equals the amount of
cash contributed plus the partner’s basis in any other contributed
property. § 722. If the partnership interest was acquired “other than by
contribution,” for example, through a purchase transaction, the
partner’s initial outside basis is determined by the basis rules in sections
1011 through 1016. § 742. For example, if a taxpayer bought a
partnership interest for $10,000, the taxpayer’s initial basis in the
partnership would be $10,000. That is because section 1012 provides
that the basis of property is equal to the cost of the property. The annual
adjustments to a partner’s outside basis consist of increases and
decreases for various amounts. A partner’s outside basis is increased by
the partner’s distributive share of partnership taxable income, as well
as by other amounts. § 705(a)(1). A partner’s outside basis is decreased
(but not below zero) by distributions received from the partnership, by
the partner’s distributive share of partnership losses and expenditures,
and by other amounts. §§ 705(a)(2), 733; see also Treas. Reg. § 1.705-
1(a)(3).

      B.     Analysis

             1.     2009 tax year

        For 2009, Louisiana Assisted reported on Schedule K–1 that
William was one of its members, William’s distributive share of its
nonseparately stated income was $2,987,744, and his distributive share
of its separately stated interest income was $3,156. Louisiana Assisted
also reported on Schedule K–1 that it made a cash distribution of
$2,165,000 to William (even though the cash distribution was in fact
made directly to LHDC). The Fraziers included the distributive share of
nonseparately stated income of $2,987,744 on the Schedule E of their
joint 2009 tax return. They reported a dummy deduction for the same
amount on William’s individual Schedule C on their 2009 joint tax
return to offset the $2,987,744 income reported on their Schedule E. The
Fraziers also reported the $3,156 of separately stated interest income on
the Schedule B of their 2009 joint tax return. LHDC reported the
$2,165,000 cash distribution it received from Louisiana Assisted as
income on its 2009 corporate tax return. LHDC did not report the
                                   118

[*118] $2,987,744 of nonseparately stated income on its return. Nor did
it report the $3,156 of separately stated interest income.

       The IRS disallowed the $2,987,744 dummy deduction claimed on
William’s individual Schedule C in the notice of deficiency issued to the
Fraziers. The IRS did not make adjustments to either the Fraziers’ or
LHDC’s income for any of the other items described in the previous
paragraph (the $2,987,744 distributive share of nonseparately stated
income, the $3,156 distributive share of separately stated interest
income reported in the Fraziers’ 2009 income, and the $2,165,000 cash
distribution from Louisiana Assisted to LHDC reported in LHDC’s 2009
income).

                    a.    The Fraziers

      We held that during the years at issue, including 2009, LHDC
(not William) was the true 50% member of Louisiana Assisted opposite
Bobbie. Therefore, the $2,987,744 distributive share of Louisiana
Assisted’s nonseparately stated income and $3,156 distributive share of
Louisiana Assisted’s separately stated interest income are not includible
in the Fraziers’ income. The Fraziers are not permitted to take the
$2,987,744 dummy deduction that they took to offset the inclusion of the
$2,987,744 distributive share of Louisiana Assisted’s nonseparately
stated income.

                    b.    LHDC

       Also, as result of our holding that LHDC (not William) was the
true 50% member of Louisiana Assisted opposite Bobbie, the $2,987,744
distributive share of Louisiana Assisted’s nonseparately stated income
and the $3,156 distributive share of Louisiana Assisted’s separately
stated interest income are includible in LHDC’s income. See § 702(a);
Treas. Reg. § 1.702-1(a). The $2,987,744 distributive share of Louisiana
Assisted’s nonseparately stated income and $3,156 distributive share of
Louisiana Assisted’s separately stated interest income increase LHDC’s
outside basis in Louisiana Assisted by $2,990,900 ($2,987,744 plus
$3,156). See § 705(a)(1).

       We hold that LHDC’s income does not include the $2,165,000 of
cash distributions that it received from Louisiana Assisted because
neither petitioners nor the IRS asserts that this cash distribution
exceeded LHDC’s outside basis in Louisiana Assisted immediately
before the distribution. See § 731(a)(1). This cash distribution decreases
                                   119

[*119] LHDC’s outside basis in Louisiana Assisted by $2,165,000.
§§ 705(a)(2), 733.

       Recall that for 2009, LHDC improperly reported the $2,165,000
cash distribution as income but did not report its $2,987,744 distributive
share of Louisiana Assisted’s nonseparately stated income and $3,156
distributive share of Louisiana Assisted’s separately stated interest
income. The IRS did not adjust LHDC’s income in the 2009 notice of
deficiency to include the $2,987,744 distributive share of Louisiana
Assisted’s nonseparately stated income or to include the $3,156
distributive share of Louisiana Assisted’s separately stated interest
income. By holding that LHDC’s income is increased by $825,900 (i.e.,
increased by $2,987,744 plus $3,156 and decreased by $2,165,000), we
are redetermining LHDC’s deficiency to be greater than what the IRS
determined in LHDC’s 2009 notice of deficiency. Therefore, we address
whether we may properly do so under section 6214(a).

       The parties have argued extensively over the issue of whether the
$2,987,744 distributive share of Louisiana Assisted’s nonseparately
stated income is includible in the Fraziers’ or LHDC’s income for 2009.
Accordingly, this issue was tried by consent under Rule 41(b)(1) and is
considered raised by the pleadings. See Smaldino, T.C. Memo. 2021-127,
at *16. As a result, the IRS is considered to have asserted a claim for an
increase in LHDC’s deficiency due to the inclusion in LHDC’s income of
the $2,987,744 distributive share of Louisiana Assisted’s nonseparately
stated income. See id. Therefore, we can redetermine LHDC’s deficiency
to be greater than what the IRS determined in the notice of deficiency
due to LHDC’s inclusion of the $2,987,744 distributive share of
Louisiana Assisted’s nonseparately stated income in LHDC’s taxable
income. See § 6214(a).

       The parties have also tried by consent the issue of whether the
$3,156 distributive share of Louisiana Assisted’s separately stated
interest income is includible in the Fraziers’ or LHDC’s income. In its
Answering Brief, the IRS argues that the fact that the Fraziers reported
the $3,156 of interest income shows that William was the other member
of Louisiana Assisted. This argument suggests that the $3,156 amount
is properly includable in the Fraziers’ income. Petitioners’ response to
this argument, found in their Reply Brief, is that Trombetta erred in
reporting the $3,156 amount on the Fraziers’ return. They invite judicial
“resolution” of this error. This response is tantamount to the position
that the $3,156 amount is includable in the Fraziers’ income.
Accordingly, the issue of whether the $3,156 interest income is
                                        120

[*120] includible in the Fraziers’ or LHDC’s income was tried by consent
under Rule 41(b)(1). See Smaldino, T.C. Memo. 2021-127, at *16.
Therefore, we can redetermine LHDC’s deficiency to be greater than
what the IRS determined in the notice of deficiency due to LHDC’s
inclusion of the $3,156 distributive share of Louisiana Assisted’s
separately stated interest income in LHDC’s taxable income. See
§ 6214(a).

       Therefore, our redetermination of LHDC’s deficiency to be greater
than that determined by the IRS in the notice of deficiency due to the
inclusion of the $2,987,744 distributive share of Louisiana Assisted’s
nonseparately stated income and the $3,156 distributive share of
Louisiana Assisted’s separately stated interest income is permissible
under section 6214(a).

               2.      2010 tax year

       For 2010, Louisiana Assisted reported that William was one of its
members, that William’s distributive share of its nonseparately stated
income was $643,165, and that his distributive share of its separately
stated interest income was $3,392. Louisiana Assisted also reported that
it made a cash distribution of $765,000 to William (even though the cash
distribution was in fact made directly to LHDC). For 2010, the Fraziers’
joint return included the distributive share of nonseparately stated
income of $643,165 on the Schedule E. They reported a dummy
deduction for the same amount on William’s individual Schedule C of
their 2010 joint tax return to offset the $643,165 income reported on
their Schedule E. The Fraziers did not report the $3,392 of separately
stated interest income on the Schedule B of their 2010 joint tax return. 55

        55 The Schedule B attached to the Fraziers’ 2010 Form 1040 has a notation to

“See Statement 1” in reference to a $30,799 amount of interest income. Statement 1 is
presumably a statement that provides detail for this $30,799 of interest income just
like Statement 1 attached to the Fraziers’ 2009 Form 1040 did for the $22,778 of
interest income reported on the 2009 Form 1040. There was no Statement 1 included
with the Fraziers’ 2010 Form 1040. We do not know whether the 2010 Statement 1
(1) was originally attached to the Fraziers’ 2010 Form 1040 but omitted from the trial
record, (2) was never filed with the Fraziers’ 2010 Form 1040 in the first place, or
(3) ever existed at all. The 2010 Schedule K–1 issued to William reports separately
stated interest income of $3,392. Without Statement 1, we do not know if the $30,799
of interest income reported on the Fraziers’ 2010 Schedule B includes the $3,392
reported on the 2010 Schedule K–1 issued to William. The IRS asserts that the
Fraziers’ Schedule B included the $3,392 of separately stated interest income. A
finding that the Fraziers’ Schedule B includes the $3,392 separately stated interest
                                         121

[*121] LHDC reported the $765,000 cash distribution it received from
Louisiana Assisted as income on its 2010 corporate tax return. LHDC
did not report the $643,165 of nonseparately stated income on its return.
Nor did it report the $3,392 of separately stated interest income.

       The IRS disallowed the $643,165 dummy deduction claimed on
William’s individual Schedule C in the notice of deficiency issued to the
Fraziers. The IRS did not make adjustments to either the Fraziers’ or
LHDC’s income for any of the other items described in the previous
paragraph (the $643,165 distributive share of nonseparately stated
income reported in the Fraziers’ 2010 income, the $765,000 cash
distribution from Louisiana Assisted to LHDC reported in LHDC’s 2010
income, and the $3,392 distributive share of separately stated interest
income).

                       a.      The Fraziers

       We held that during the years at issue, including 2010, LHDC
(not William) was the true 50% member of Louisiana Assisted opposite
Bobbie. Therefore, the $643,165 distributive share of Louisiana
Assisted’s nonseparately stated income is not includible in the Fraziers’
income. The Fraziers are not permitted to take the $643,165 dummy
deduction that they took to offset the inclusion of the $643,165
distributive share of Louisiana Assisted’s nonseparately stated income.

                       b.      LHDC

       Also as a result of our holding that LHDC (not William) was the
true 50% member of Louisiana Assisted opposite Bobbie, the $643,165
distributive share of Louisiana Assisted’s nonseparately stated income
and the $3,392 distributive share of Louisiana Assisted’s separately
stated interest income are includible in LHDC’s income. See § 702(a);
Treas. Reg. § 1.702-1(a). The $643,165 distributive share of Louisiana
Assisted’s nonseparately stated income and the $3,392 distributive
share of Louisiana Assisted’s separately stated interest income increase

income would be a determination in favor of the taxpayer because our holding infra
OPINION Part II.B.2.a, would then result in a reduction of the Fraziers’ taxable
income by $3,392. Hence this assertion is a concession by the IRS. Yet the Fraziers
deny that the Schedule B included the $3,392 of separately stated interest income. A
finding that the Fraziers’ Schedule B does not include $3,392 separately stated interest
income would be a determination in favor of the IRS because there would be no such
reduction. Hence this denial is a concession by the Fraziers. Faced with these
competing concessions, we think that the Fraziers are in a better position to say
whether their Schedule B included a report of the $3,392. We conclude it did not.
                                   122

[*122] LHDC’s outside basis in Louisiana Assisted by $646,557
($643,165 plus $3,392). See § 705(a)(1).

       We hold that LHDC’s income does not include the $765,000 of
cash distribution that it received from Louisiana Assisted because
neither LHDC nor the IRS asserts that this cash distribution exceeded
LHDC’s outside basis in Louisiana Assisted immediately before the
distribution. See § 731(a)(1). This cash distribution decreases LHDC’s
outside basis in Louisiana Assisted by $765,000. §§ 705(a)(2), 733.

       Recall that for 2010, LHDC improperly reported the $765,000
cash distribution as income but did not report its $643,165 distributive
share of Louisiana Assisted’s nonseparately stated income and $3,392
distributive share of Louisiana Assisted’s separately stated interest
income. LHDC also had $935 of unreported interest income from
BanCorp South and $167 of unreported dividend income from Intel. As
a result, LHDC overreported income by $117,341 ($765,000 minus
($643,165 + $3,392 + $935 + $167)). Unlike with 2009, the net effect of
our holdings regarding LHDC’s taxable income for 2010 is a decrease in
taxable income. Therefore, these holdings do not contribute to the
redetermination of a deficiency greater than that determined by the IRS
in the notice of deficiency for 2010 under section 6214(a).

             3.    2011 tax year

       For 2011, Louisiana Assisted reported that William was one of its
members, his distributive share of its nonseparately stated loss was
$7,586, and his distributive share of its separately stated interest
income was $1,839. Louisiana Assisted also reported that it made a cash
distribution of $450,000 to William even though the cash distribution
was in fact made directly to LHDC. The Fraziers included the
distributive share of nonseparately stated loss of $7,586 on the Schedule
E of their joint 2011 tax return. The Fraziers reported the $450,000 cash
distribution as income on William’s individual Schedule C of their 2011
joint tax return along with a dummy deduction for the same amount on
the same Schedule C to offset the $450,000 of reported income. The
Fraziers reported the $1,839 of separately stated interest income on the
Schedule B of their 2011 joint tax return. LHDC reported the $450,000
cash distribution it received from Louisiana Assisted as income on its
2011 corporate tax return. LHDC did not report the $7,586
nonseparately stated loss on its return. Nor did it report the $1,839 of
separately stated interest income.
                                  123

[*123] The IRS disallowed the $450,000 dummy deduction claimed on
William’s individual Schedule C in the notice of deficiency issued to the
Fraziers. The IRS did not make adjustments to either the Fraziers’ or
LHDC’s income for any of the other items described in the previous
paragraph (the $450,000 cash distribution from Louisiana Assisted to
LHDC and the $1,839 distributive share of separately stated interest
income reported in the Fraziers’ 2011 income and the $450,000 cash
distribution from Louisiana Assisted to LHDC reported in LHDC’s 2011
income).

                   a.     The Fraziers

      We held that during the years at issue, including 2011, LHDC
(not William) was the true 50% member of Louisiana Assisted opposite
Bobbie. Therefore, the $7,586 distributive share of Louisiana Assisted’s
nonseparately stated loss and the $1,839 distributive share of Louisiana
Assisted’s separately stated interest income are not includible in the
Fraziers’ income. Furthermore, the $450,000 cash distribution that
Louisiana Assisted made to LHDC is not includible in the Fraziers’
income because the cash distribution was in fact made directly to LHDC.
The Fraziers are not permitted to take the $450,000 dummy deduction
that they took to offset the inclusion of the $450,000 cash distribution
that Louisiana Assisted made to LHDC.

       The IRS did not adjust the Fraziers’ income in the 2011 notice of
deficiency to disallow the $7,586 distributive share of Louisiana
Assisted’s nonseparately stated loss. By holding that the Fraziers’
income is increased by $5,747 (the disallowance of the $7,586 loss netted
against the non-inclusion of $1,839 of interest income), we are
redetermining the Fraziers’ deficiency to be greater than what the IRS
determined in the 2011 notice of deficiency. Therefore, we must address
whether we may properly do so under section 6214(a).

       The parties have argued extensively over the issue of whether the
$7,586 distributive share of Louisiana Assisted’s nonseparately stated
loss is includible in the Fraziers’ or LHDC’s income for 2011.
Accordingly, this issue was tried by consent under Rule 41(b)(1). See
Smaldino, T.C. Memo. 2021-127, at *16. As a result, the IRS is
considered to have asserted a claim for an increase in the Fraziers’
deficiency due to the disallowance of the $7,586 distributive share of
Louisiana Assisted’s nonseparately stated loss. See id. Therefore, we can
redetermine the Fraziers’ deficiency to be greater than what the IRS
determined in the notice of deficiency due to the disallowance of the
                                    124

[*124] $7,586 distributive share of Louisiana Assisted’s nonseparately
stated loss. See § 6214(a). Our holding that the Fraziers’ income does not
include the $1,839 separately stated interest income has the effect of
reducing the Fraziers’ deficiency and, therefore, is not an exercise of the
Court’s jurisdiction to determine a deficiency greater than the amount
of the deficiency in the notice of deficiency under § 6214(a).

                    b.     LHDC

       Also as a result of our holding that LHDC (not William) was the
true 50% member of Louisiana Assisted opposite Bobbie, the $7,586
distributive share of Louisiana Assisted’s nonseparately stated loss and
the $1,839 distributive share of Louisiana Assisted’s separately stated
interest income are includible in LHDC’s income. See § 702(a); Treas.
Reg. § 1.702-1(a). The $7,586 distributive share of Louisiana Assisted’s
nonseparately stated loss and the $1,839 distributive share of Louisiana
Assisted’s separately stated interest income decrease LHDC’s outside
basis in Louisiana Assisted by $5,747 (−$7,856 + $1,839). See § 705(a)(1).

       We hold that LHDC’s income does not include the $450,000 cash
distribution that it received from Louisiana Assisted because neither
LHDC nor the IRS asserts that this cash distribution exceeded LHDC’s
outside basis in Louisiana Assisted immediately before the distribution.
See § 731(a)(1). This cash distribution decreases LHDC’s outside basis
in Louisiana Assisted by $450,000. §§ 705(a)(2), 733.

       Recall that for 2011, LHDC improperly reported the $450,000
cash distribution as income but did not report its $7,586 distributive
share of Louisiana Assisted’s nonseparately stated loss and $1,839
distributive share of Louisiana Assisted’s separately stated interest
income. LHDC also had $1,195 of unreported interest income from
BanCorp South and $214 of unreported dividend income from Intel. As
a result, LHDC overreported income by $454,338 ($450,000 plus $7,586
minus ($1,839 + $1,195 + $214)). The net effect of our holdings regarding
LHDC’s taxable income for 2011 is a decrease in taxable income.
Therefore, there is no jurisdictional issue related to a redetermination
of a deficiency greater than that determined by the IRS in the notice of
deficiency for 2011 under section 6214(a).

             4.     2012 tax year

      For 2012, Louisiana Assisted reported that William’s distributive
share of its nonseparately stated income was $932,972. Louisiana
Assisted reported that there was no separately stated interest income
                                  125

[*125] for 2012. (Line 5 “interest income” in the Schedule K is blank, as
is line 5 “interest income” in the Schedules K–1 issued to Bobbie and
William.) Louisiana Assisted also reported that it made a cash
distribution of $942,271 to William, although the record is unclear
whether the actual amount of the distribution was $942,271, $926,434,
or another amount. See supra FINDINGS OF FACT Part X.A.

      The Fraziers did not file an income tax return for 2012. The IRS
prepared notices of deficiency for William and Mary. The IRS included
the $932,972 distributive share of Louisiana Assisted’s nonseparately
stated income and $165,000 capital gain from the sale of the 50%
membership interest in Louisiana Assisted in William’s income because
the IRS asserts that William was the 50% member of Louisiana
Assisted.

      Petitioners argue that the Fraziers’ income does not include the
$932,972 distributive share of Louisiana Assisted’s nonseparately
stated income and $165,000 capital gain from the sale of the 50%
membership interest in Louisiana Assisted because LHDC and not
William was the 50% member of Louisiana Assisted.

       The Fraziers sent the joint unfiled 2012 Form 1040 to the IRS the
Monday (April 24, 2017) prior to trial, which was admitted into evidence
as Exhibit 16-P. The Fraziers’ 2012 Form 1040 is significant only as the
Fraziers have seemingly adopted it as their litigating position. The
unfiled 2012 Form 1040 reports no net income attributable to an
ownership interest in Louisiana Assisted, although (perhaps to be
consistent with the filed returns) it does so through a dummy deduction
trick. First, Schedule E reports pass-through income of $932,972 from
the Schedule K–1 issued by Louisiana Assisted. Second, the Schedule C
reports a deduction of $932,972 with a description “[l]ess paid to
Louisiana Housing Development Corp.” Although petitioners seemingly
urge us to adopt the tax treatment shown on the unfiled 2012 Form
1040, the Form 1040’s position that a distributive share of Louisiana
Assisted’s income is includable in William’s income is inconsistent with
petitioners’ argument (and our holding) that William was not a member
of Louisiana Assisted.

      LHDC reported a $165,000 capital gain on its 2012 corporate tax
return for gain from the sale of 50% of its membership interest in
Louisiana Assisted.
                                   126

[*126]              a.    The Fraziers

      We held that during the years at issue, including 2012, LHDC
(not William) was the true 50% member of Louisiana Assisted opposite
Bobbie. Therefore, the $932,972 distributive share of Louisiana
Assisted’s nonseparately stated income and the $165,000 gain from the
sale of the 50% membership interest in Louisiana Assisted are not
includible in the Fraziers’ income. And the Fraziers are not permitted to
take the $932,972 dummy deduction to offset the inclusion of the
$932,972 distributive share of Louisiana Assisted’s nonseparately
stated income.

                    b.    LHDC

       Although LHDC reported on its 2012 return that it had $165,000
capital gain from its sale of its membership interest in Louisiana
Assisted, LHDC (and the other petitioners) argue on brief that LHDC
had a capital loss on the sale. However, the IRS did not issue a notice of
deficiency to LHDC for 2012.

       We have jurisdiction over deficiencies for LHDC for 2009, 2010,
and 2011 (because the IRS issued notices of deficiency to LHDC for those
years and LHDC filed the petitions with respect to those years). Rule
13(a). We also have jurisdiction over deficiencies for William and Mary
for 2009–12 (because the IRS issued notices of deficiency to them for
those years and because they filed petitions for those years). Id.
However, we do not have jurisdiction over any deficiency for LHDC for
2012 and therefore do not determine the amount of gain or loss realized
from the 2012 sale. Id.

       Recall that the Schedule K–1 that Louisiana Assisted issued to
William for 2012 states that his beginning capital account balance was
$9,354. Recall furthermore that the Schedule K–1 that Louisiana
Assisted issued to William for the year before, for 2011, stated that his
ending capital account balance was $823,216. For every other year
(2009, 2010, and 2011), the prior year’s ending capital account balance
was the following year’s beginning capital account balance. Nothing in
the record explains why the 2011 ending capital account balance did not
match the 2012 beginning capital account balance—petitioners’ brief
suggests that this was a computational error. Petitioners contend that
the Court should find that $823,216 was the balance of the 2012
beginning capital account (i.e., LHDC’s capital account, because
petitioners contend that LHDC, not William, was the owner of the
                                          127

[*127] membership interest). Petitioners further contend that because
$823,216 was its capital account balance, LHDC had a capital loss on its
sale of its 50% interest in Louisiana Assisted instead of a capital gain of
$165,000 (although petitioners do not put forward an amount they
believe should be the capital loss). Petitioners’ argument appears to
conflate LHDC’s capital account with its outside basis. Ultimately, we
cannot consider petitioners’ capital-loss argument because we have no
jurisdiction over LHDC’s 2012 taxable year. Furthermore, there is no
dispute regarding substantial economic effect. 56 Therefore LHDC’s
capital account in Louisiana Assisted is not relevant for resolution of
this case.

III.    We do not sustain the IRS’s adjustments to LHDC’s 2010 and 2011
        salary-and-wage deductions and to LHDC’s 2011 professional-fee
        deductions.

      Section 162(a) allows a deduction for “the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any
trade or business.” Deductible ordinary and necessary expenses can
include “a reasonable allowance for salaries or other compensation for
personal services actually rendered.” § 162(a)(1). A taxpayer on the
accrual method of accounting deducts expenses as they are accrued.
Treas. Reg. § 1.461-1(a)(2). A taxpayer on the cash method of
accounting—such as LHDC—deducts expenses as they are paid. 57
Treas. Reg. § 1.461-1(a)(1).

      For a taxpayer to be entitled to deductions under section 162(a),
the business for which the expenses are incurred or paid must be the
taxpayer’s business. See du Pont, 308 U.S. at 493–94; United States v.

        56 We need not determine the capital accounts of the members of Louisiana

Assisted during the years at issue. A partner’s distributive share of income, gain, loss,
or credit is determined by the partnership agreement, unless the allocation under the
partnership agreement has no substantial economic effect, in which case the
distributive share is determined in accordance with the partner’s interest in the
partnership. § 704(a), (b)(2). The allocation under the partnership agreement has
substantial economic effect if the capital accounts are maintained in accordance with
the regulations. Treas. Reg. § 1.704-1(b)(2)(iv)(a). If the partnership agreement makes
no provision as to the distributive share, then the distributive share is determined in
accordance with the partner’s interest in the partnership. § 704(b)(2). Here Louisiana
Assisted and its members reported that the distributive shares of the members were
equal. The IRS does not challenge this proportion. Rather it challenges the identity of
the member opposite Bobbie.
      57 LHDC used the cash basis for accounting during all years at issue. See supra

FINDINGS OF FACT Part I.
                                       128

[*128] Cocke, 399 F.2d 433, 447 (5th Cir. 1968); H.W. Nelson Co. v.
United States, 308 F.2d 950, 954 (Ct. Cl. 1962). In other words, a
taxpayer may not deduct expenses it incurs or pays on behalf of another
taxpayer. See du Pont, 308 U.S. at 493–94; Cocke, 399 F.2d at 447; H.W.
Nelson Co, 308 F.2d at 954. Thus, a shareholder of a corporation cannot
deduct expenses the shareholder paid or incurred for the business of the
corporation. du Pont, 308 U.S. at 493–94. Similarly, “a partner may not
deduct partnership expenses on his individual return.” Klein v.
Commissioner, 25 T.C. 1045, 1051 (1956); see also McLaughlan v.
Commissioner, 558 Fed. Appx. 374, 377 (5th Cir. 2014) (“[A] partner may
not deduct the expenses of the partnership on his individual return, even
if the expenses were incurred by the partner in furtherance of
partnership business.”). However, there is an exception to the rule that
a partner may not deduct partnership expenses on his return: When,
under a partnership agreement, a partner is required to pay partnership
expenses out of the partner’s own funds, the partner is entitled to deduct
the amount thereof from the partner’s gross income. Klein, 25 T.C. at
1051–52. To fit into the exception, the expenses paid on behalf of the
partnership cannot be reimbursable by the partnership to the partner
who pays these expenses. Id. at 1052; see also McLauchlan, 558 Fed.
Appx. at 379.

        A taxpayer must substantiate a deduction claimed under section
162(a) by establishing entitlement to such deduction, including that the
amount of the expense to which the deduction relates has been paid or
incurred. §§ 6001, 162(a); Treas. Reg. § 1.6001-1(a); see also Boyd v.
Commissioner, 122 T.C. 305, 319–20 (2004). The taxpayer’s returns
alone do not substantiate its deductions because returns are merely
statements of a taxpayer’s claims. Wilkinson v. Commissioner, 71 T.C.
633, 639 (1979). In general, a taxpayer is required to maintain records
that are sufficient to enable the IRS to determine its correct tax
liability. 58 See § 6001; Treas. Reg. § 1.6001-1(a).

       On its 2010 tax return, LHDC reported a deduction for salaries
and wages of $2,770,775. In the notice of deficiency for 2010, the IRS
disallowed $424,935 of that deduction, thus allowing $2,345,840 of the
deduction claimed. The notice of deficiency made no adjustment to

        58 When a taxpayer is able to demonstrate payment or incurrence of a

deductible expense but cannot substantiate the precise amount, the Court may
estimate the amount of the expense if the taxpayer produces credible evidence
providing a basis for the Court to make such an estimate. Cohan v. Commissioner, 39
F.2d 540, 544 (2d Cir. 1930).
                                  129

[*129] LHDC’s deductions relating to its payment of professional fees
for that year.

        On its 2011 return, LHDC reported a deduction for salaries and
wages of $2,326,407. On its 2011 tax return, LHDC reported “[o]ther
deductions” of $2,239,036, which includes a deduction for professional
fees of $1,818,542. See supra FINDINGS OF FACT Part XVII.C.3. In the
notice of deficiency for 2011, the IRS disallowed $358,922 of the
$2,326,407 deduction for salaries and wages claimed for 2011 (thus
allowing $1,967,485 of the deduction claimed). The IRS also disallowed
$158,993 of the $1,818,542 deduction for professional fees for 2011 (thus
allowing $1,659,549 of the deduction claimed).

       Explaining these adjustments for 2010 and 2011, the notices of
deficiency stated that “it had not been established” that the disallowed
amounts (1) constituted “ordinary and necessary business expenses” or
(2) were “expended for the purpose designated.” The notices of deficiency
did not explain that the amounts were disallowed because they related
to the expenses of Louisiana Assisted. The notices of deficiency did not
explain why the IRS disallowed portions of the salary-and-wage and
professional-fee deductions while allowing the remaining portions of the
deductions claimed.

      In its Answer to LHDC’s petitions, the IRS did not give any
further justification for the disallowances. Nor did it explain why the
claimed deductions were disallowed in part and allowed in part.

      The IRS’s Pretrial Memorandum included the following
discussion of the IRS’s position regarding the disallowed salary-and-
wage and professional-fee deductions:

      Professional fees/compensation deduction: LHDC claimed
      deductions for professional fees for . . . 2011 in the
      amount[] of . . . $158,993.00 . . . and salary expenses for
      2010 and 2011 in the amounts of $424,935.00 and
      $358,922.00, respectively. LHDC has not substantiated
      these claimed deductions.

The $158,933 amount referred to in the excerpt above is the portion of
LHDC’s professional-fee deduction for 2011 that was disallowed in the
notice of deficiency. The $424,935 amount referred to in the excerpt
above is the portion of LHDC’s salary-and-wage deduction for 2010 that
was disallowed in the notice of deficiency. The $358,922 amount referred
to in the excerpt above is the portion of LHDC’s salary-and-wage
                                   130

[*130] deduction for 2011 that was disallowed in the notice of deficiency.
Therefore, the excerpt is an explanation that the disallowed amounts
had not been “substantiated.” The excerpt does not explain specifically
that the amounts were disallowed because they related to the expenses
of Louisiana Assisted.

       Another portion of the IRS’s Pretrial Memorandum gave the
following description of the legal principles justifying the disallowance
of portions of LHDC’s salary-and-wage deductions and professional-fee
deductions:

      Taxpayers generally must maintain sufficient records to
      establish their tax liability. See I.R.C. § 6001; Hradesky v.
      Commissioner, 65 T.C. 87 (1975), aff’d. 540 F.2d 821 (5th
      Cir. 1976). A taxpayer’s self-serving declaration is
      generally not a sufficient substitute for records. Weiss v.
      Commissioner, T.C. Memo. 1999-17.

      ....

      I.R.C. § 162(a) permits a taxpayer to deduct the ordinary
      and necessary expenses paid or incurred in carrying on a
      trade or business.

This excerpt stresses the lack of “records” and it paraphrases section
162(a). It does not specifically suggest that the amounts were disallowed
because they related to the expenses of Louisiana Assisted.

       At trial, as will be discussed infra OPINION Part III.A,
petitioners presented evidence that LHDC paid the same amounts that
it deducted.

       After trial, we ordered the parties to file briefs in the following
sequence: (1) petitioners’ Opening Brief, (2) respondent’s Answering
Brief, and (3) petitioners’ Reply Brief.

       In petitioners’ Opening Brief, they addressed the disallowed
amounts of salary-and-wage deductions—$424,935 and $358,922 for
2010 and 2011 respectively—by claiming that the disallowed amounts
were ordinary and necessary business expenses and that Trombetta’s
testimony shows that these amounts were actually paid by LHDC.
Specifically, petitioners explained that Trombetta’s testimony shows
LHDC paid total payroll expenses of $2,770,775 and $2,326,407 in 2010
and 2011 respectively. Petitioners also argued that the $158,993
                                   131

[*131] disallowed amount of professional fees for 2011 (out of a total
claimed professional-fee deduction of $1,818,542) were ordinary and
necessary business expenses and that Trombetta’s testimony shows that
the $158,993 amount was actually paid. Specifically, petitioners argued
that they substantiated the entire $1,818,542 LHDC deducted because
(1) Trombetta testified that he personally wrote all of the checks totaling
$1,818,542 and (2) the professional-fee ledger admitted into evidence
corroborates Trombetta’s testimony by showing the total amount of
professional fees paid in 2011 was $1,818,542. Thus, in petitioners’ view,
having proved the $1,818,542 total claimed deduction, they proved the
$158,993 subset of the total claimed deduction.

       In its Answering Brief, the IRS responded with two arguments.
First, the IRS argued that petitioners did not establish that the
disallowed amounts ($424,935 of salary-and-wage expenses for 2010,
$358,922 of salary-and-wage expenses for 2011, and $158,993 of
professional-fee expenses for 2011) were “in fact paid.” Second, the IRS
argued that even if paid, the disallowed amounts were not ordinary and
necessary to LHDC’s business because LHDC paid the disallowed
portions for work performed on behalf of Louisiana Assisted. The IRS
relies on Deputy v. du Pont, 308 U.S. 488, 493–95 (1940), and Young &
Rubicam, Inc. v. United States, 410 F.2d 1233 (Ct. Cl. 1969), for
authority that LHDC cannot deduct expenses paid on behalf of
Louisiana Assisted.

       In their Reply Brief, petitioners contend that the IRS’s second
argument described above (i.e., that LHDC cannot deduct expenses paid
on behalf of Louisiana Assisted) was a new argument inappropriately
raised during the briefing stage of proceedings. Petitioners nevertheless
respond to the IRS’s position by arguing that because work performed
on behalf of Louisiana Assisted benefitted LHDC, LHDC is entitled to
deductions reported for compensation paid to Louisiana Assisted’s
workers.

      A.     The entire amounts of disallowed salaries and wages and
             professional fees were paid.

      We address the IRS’s first argument, that LHDC has failed to
show that the amounts deducted for salaries and wages, and for
professional fees, “were in fact paid.”

      For the salary-and-wage deductions, LHDC introduced into
evidence two salary-and-wage ledgers created by Trombetta’s firm,
                                        132

[*132] Creative Payroll Solutions, for 2010 and 2011 respectively. The
salary-and-wage ledgers show the biweekly amounts that LHDC paid
Creative Payroll Solutions for (1) wages for all workers treated as
employees by LHDC, (2) payroll expenses with respect to such workers
other than wages, and (3) a fee for Creative Payroll Solutions. The
salary-and-wage ledgers also show the total annual amounts of these
biweekly payments. The total amount paid in 2010 is shown as
$2,770,775.28. The total amount paid in 2011 is shown as $2,326,406.19.
Trombetta credibly testified that the salary-and-wage ledgers
accurately recorded the amounts paid by LHDC to Creative Payroll
Solutions. We find that the salary-and-wage ledgers in conjunction with
Trombetta’s testimony establish that LHDC actually paid $2,770,775 for
total salary-and-wage expenses in 2010 and $2,326,407 for total salary-
and-wage expenses in 2011. See Higbee v. Commissioner, 116 T.C. 438,
447 (2001).

       For professional-fee deductions, LHDC introduced into evidence
a professional-fee ledger for 2011. As explained supra FINDINGS OF
FACT Part IX, Creative Payroll Solutions wrote checks from LHDC’s
bank account to pay professional fees on behalf of LHDC. The
professional-fee ledger contains a column for the date each payment was
made, the payee to whom the payment was made, and the amount the
payee was paid. The sum of all payments is shown in the ledger as
$1,818,542. Trombetta credibly testified that $1,818,542 was the actual
amount of professional fees that LHDC paid in 2011 and that his office
wrote and mailed all the checks for payments shown in the ledger (which
according to the ledger, totaled $1,818,542). 59 We find that the
professional-fee ledger in conjunction with Trombetta’s testimony
establishes that LHDC actually paid the amount of $1,818,542 for
professional-fee expenditures in 2011. See Higbee, 116 T.C. at 440.

       B.      The IRS is not permitted to rely on the new theory raised on
               brief.

       We now address the IRS’s second argument, i.e., that the
disallowed portions of the salary-and-wage deductions ($424,935 for
2010 and $358,922 for 2011) and professional-fee deductions ($158,993

        59 At trial, LHDC’s counsel asked Trombetta if the total was “$1,818,524”

instead of the $1,818,542 stated by the professional-fee ledger, to which Trombetta
replied “correct.” We believe petitioners’ counsel meant to say “$1,818,542” and that
Trombetta meant to agree to that amount.
                                   133

[*133] for 2011) were not expenses of LHDC’s business because these
were Louisiana Assisted’s expenses.

       A party can rely on a legal theory only if it has provided the
opposing party with fair warning of the theory so that the opposing party
is not surprised and prejudiced in its ability to prepare its case. Smalley
v. Commissioner, 116 T.C. 450, 456 (2001). The opposing party is
considered to be surprised or prejudiced when the lack of notice causes
it not to present evidence at trial to defend against the new theory. See
Chapman Glen Ltd. v. Commissioner, 140 T.C. 294, 349–50 (2013)
(taxpayer was prejudiced because taxpayer had no reason to introduce
evidence directed towards disproving the IRS’s new argument first
raised on brief); Sundstrand v. Commissioner, 96 T.C. 226, 348 (1991)
(taxpayer was prejudiced because taxpayer would have introduced
additional evidence had it known of the new theory); Seligman v.
Commissioner, 84 T.C. 191, 199 (1985) (taxpayers were prejudiced
because taxpayers did not have the opportunity to present evidence on
the new theory); Ware v. Commissioner, 92 T.C. 1267, 1269 (1989)
(taxpayers were not prejudiced because it is unclear what additional
evidence the taxpayers would have presented on account of the new
theory); Pagel, Inc. v. Commissioner, 91 T.C. 200, 212 (1988) (taxpayers
were not prejudiced because the evidence necessary for a legal
determination under the new theory proposed by IRS was already in the
record). A theory can be considered a new theory even if it involves the
same Code section as the theory upon which the case was tried.
Sundstrand Corp., 96 T.C. at 347.

       The first time the IRS made the argument that the disputed
deductions related to Louisiana Assisted was in its Answering Brief filed
after trial. The argument was not made in the notices of deficiency, the
Answer, or the Pretrial Memorandum.

       LHDC did not have fair warning that the IRS intended to rely on
the argument that the disallowed portions of the expenses were paid in
carrying on another taxpayer’s business. See du Pont, 308 U.S. at 493–
94. The principal limitations to section 162(a) usually involve three
issues: (1) whether the expense was “ordinary and necessary,”
(2) whether the expense was paid or incurred for business and not
personal reasons, (3) and whether the expense was a current expense
and not a capital investment. Marvin A. Chirelstein, Federal Income
Taxation 97 (1999). Thus, a taxpayer might expect, from the IRS’s
invocation of section 162(a), arguments related to these three issues, but
                                         134

[*134] not the expense-of-another-taxpayer argument. See Sundstrand
Corp., 96 T.C. at 347–48.

       The lack of fair warning prejudiced LHDC because the IRS’s
failure to identify its expense-of-another-taxpayer argument denied
LHDC the opportunity to present evidence against the argument. See
Seligman, 84 T.C. at 199; see also Chapman Glen Ltd., 140 T.C. at 349–
50. Had LHDC had appropriate notice of the expense-of-another
taxpayer argument, it could have directly challenged its factual
premises. For example, LHDC could have presented evidence showing
that LHDC’s workers did not perform $424,935 and $358,922 worth of
services on behalf of Louisiana Assisted in 2010 and 2011 respectively
(and instead performed the services for LHDC or performed services of
a value less than these amounts for Louisiana Assisted). For example,
LHDC could have presented evidence showing that it did not pay
professional fees worth $158,993 on behalf of Louisiana Assisted in 2011
(and instead paid the fees for LHDC or paid a lesser amount for
Louisiana Assisted). Furthermore, LHDC may have argued that the
expenses paid on behalf of Louisiana Assisted fell under an exception to
the expense-of-another-taxpayer rule, specifically that a partner is
entitled to deduct partnership expenses to the extent that (1) the partner
is required to pay partnership expenses out of the partner’s own funds
and (2) those expenses are not reimbursable. See Klein, 25 T.C. at 1051–
52. In furtherance of this argument, LHDC could have presented
evidence showing that its workers were required under its arrangement
with Louisiana Assisted to provide services to Louisiana Assisted and
that it did not expect reimbursement for these services. 60

        Because LHDC was not given fair warning, and because the lack
of fair warning prejudiced LHDC, we decline to consider the IRS’s theory
that LHDC’s salary-and-wage expenses and professional-fee expenses
are not deductible under the theory that the expenses were actually
expenses of Louisiana Assisted.

        60 As we have found, Louisiana Assisted made reimbursement payments to

LHDC of $17,560 in 2009, $17,460 in 2010, $27,114 in 2011, and an indeterminate
amount in 2012. We cannot discern from the record what these reimbursement
payments were for. Tracy testified that LHDC charged Louisiana Assisted only for
expenses that were discrete and identifiable, such as an unusually large copy job, and
that LHDC was reimbursed for only a fraction of the expenses it actually paid on behalf
of Louisiana Assisted. There is no information in the record that indicates whether
there was any formal reimbursement policy.
                                   135

[*135] We hold that LHDC is permitted to deduct the entire $2,770,775
of salary-and-wage deductions reported on its 2010 return, the entire
$2,326,407 of salary-and-wage deductions reported on its 2011 tax
return, and the entire $1,818,542 of professional-fee deductions reported
on its 2011 tax return.

IV.   The Fraziers had $3,856 short-term capital gain and $2,283 in
      long-term capital gain for 2012 from the sales of capital assets
      from the Merrill Lynch brokerage account.

      A.     The law

       Section 1221 defines a “capital asset” as property held by a
taxpayer, except for eight categories of property specifically excluded
from the definition. See Tempel v. Commissioner, 136 T.C. 341, 345
(2011), aff’d sub nom. Esgar Corp. v. Commissioner, 744 F.3d 648 (10th
Cir. 2014).

       The amounts of gains and losses on the sale or disposition of
property, including capital assets, are generally determined by section
1001(a). Under section 1001(a), the amount of gain from the sale or
disposition of a property is equal to the amount realized on the sale or
disposition of the property minus the adjusted basis (as defined in
section 1011). And the amount of loss from the sale or disposition of
property is equal to the adjusted basis (as defined in section 1011) minus
the amount realized on the sale or disposition of the property. § 1001(a).
The amount realized from the sale or disposition of property is the
amount of money received plus the fair market value of any non-money
property received. § 1001(b).

       Section 1011(a) provides that the adjusted basis for determining
the gain or loss from the sale or disposition of property is the basis as
adjusted under section 1012 or other applicable sections of the Code.
Section 1012(a) provides the general rule that the basis of property is
the cost of the property.

      Taxpayers must substantiate their basis for the purpose of
determining the amount of gain or loss that they must recognize on the
disposition of a capital asset. Cullins v. Commissioner, 24 T.C. 322, 328
(1955). In general, taxpayers must keep adequate records to
substantiate their basis. § 6001; Treas. Reg. § 1.6001-1(a). However,
where a taxpayer lacks adequate records of its basis in an asset, we have
applied the Cohan rule to estimate basis of the asset if the taxpayer has
provided some reasonable evidentiary ground upon which to make such
                                    136

[*136] an estimate. Cohan, 39 F.2d at 544; see also Prosperity Co., Inc.
v. Commissioner, 17 T.C. 171, 186 (1951) (applying the Cohan rule to
estimating cost basis). The Court’s estimate under Cohan will bear
heavily against “the taxpayer whose inexactitude is of his own making.”
Cohan, 39 F.2d at 543–44.

       The sale of a capital asset results in either short-term capital gain
or loss or long-term capital gain or loss, depending on how long the asset
is held—the holding period. § 1222. Capital gain or loss is short-term if
the asset is held for one year or less, § 1222(1) and (2), and long-term if
the asset is held for more than one year, § 1222(3) and (4). The
distinction between short-term and long-term matters because net long-
term capital gains are subject to tax at the preferential rates set forth
in section 1(h).

       Short-term capital gains and losses are netted for either “net
short-term capital gain,” or “net short-term capital loss.” Section 1222(5)
defines “net short-term capital gain” as “the excess of short-term capital
gains for the taxable year over the short-term capital losses for such
year.” Section 1222(6) defines “net short-term capital loss” as “the excess
of short-term capital losses for the taxable year over the short-term
capital gains for such year.”

       Long-term capital gains and losses are netted for either “net long-
term capital gain,” or “net long-term capital loss.” Section 1222(7)
defines “net long-term capital gain” as “the excess of long-term capital
gains for the taxable year over the long-term capital losses for such
year.” Section 1222(7) defines “net long-term capital loss” as “the excess
of long-term capital losses for the taxable year over the long-term capital
gains for such year.”

      B.     Analysis of the Fraziers’ sales of securities from the Merrill
             Lynch brokerage account

      As discussed before, the Fraziers made 1,030 sales of securities
from their Merrill Lynch brokerage account in 2012.

             1.     Cost basis

       The parties agree that the Form 1099-B prepared by Merrill
Lynch accurately shows the cost basis for all 1,030 sales of securities
except for 5 sales for which the Form 1099-B states that the cost basis
is “N/A.” In this section we set forth our findings as to the cost basis for
these 5 sales.
                                  137

[*137]             a.     The Fraziers had basis of $30,642 in the 2,332
                          shares of Columbia Tax Exempt Fund A that
                          they acquired on June 8, 2011, and sold on
                          March 15, 2012.

      On March 15, 2012, the Fraziers sold 2,332 shares of Columbia
Tax Exempt Fund A, which they had acquired on June 8, 2011. The
Fraziers’ basis was estimated by Trombetta to be $30,642.48, which
Trombetta computed by multiplying (a) $13.14, the closing price per
share on June 8, 2011, by (b) 2,332, the number of shares acquired.
Trombetta’s testimony explaining his calculations is persuasive of the
Fraziers’ cost basis in the 2,332 shares of Columbia Tax Exempt Fund A.
Therefore, we hold that the Fraziers’ cost basis in the 2,332 shares of
Columbia Tax Exempt Fund A is $30,642.

                   b.     The Fraziers had basis of (a) $13.14 in the 1
                          share of Columbia Tax Exempt Fund A that
                          they acquired on January 26, 2012, and sold
                          on March 15, 2012; and (b) $4.06 in the 0.309
                          of a share of Columbia Tax Exempt Fund A
                          that they acquired on January 26, 2012, and
                          sold on March 27, 2012.

      On March 15, 2012, the Fraziers sold 1 share of Columbia Tax
Exempt Fund A, which they had acquired on January 26, 2012. On
March 27, 2012, the Fraziers sold 0.309 of a share of Columbia Tax
Exempt Fund A, which they had also acquired on January 26, 2012.
Trombetta’s basis estimate for these 1.309 shares assumed the Fraziers
paid the same price per share for these 1.309 shares as they did for the
other 2,332 shares of Columbia Tax Exempt Fund A even though the
2,332 shares were bought on June 8, 2011, at a closing price of $13.14
per share, whereas the 1.309 shares were bought on January 26, 2012.

       Trombetta’s estimate of the cost basis of the 1.309 shares relied
on a closing price of June 8, 2011, and the record lacks direct evidence
of the closing price on January 26, 2012. Cohan allows us to estimate a
taxpayer’s basis in an asset if the record provides some reasonable
ground upon which we may make the estimate. See 39 F.2d at 544. Here,
petitioners argue that the Fraziers’ acquisition cost was $13.14 per
share, the market price on June 8, 2011. This market price is an
imperfect indicator of the cost of the 1.309 shares, which were acquired
six months later, on January 26, 2012. Nonetheless, it still provides us
with a reasonable ground for estimating the cost of the 1.309 share.
                                    138

[*138] Therefore, we hold that the Fraziers’ basis in the one share of
Columbia Tax Exempt Fund A acquired on January 26, 2012, and sold
on March 15, 2012, is $13.14 ($13.14 × 1) and the basis in the 0.309 of a
share of Columbia Tax Exempt Fund A acquired on January 26, 2012,
and sold on March 27, 2012, is $4.06 ($13.14 × 0.309).

                    c.     The Fraziers had basis of (a) $19,003 in the
                           1,829 shares of Blackrock Municipal I that
                           they acquired on June 8, 1994, and sold on
                           March 15, 2012; and (b) $26,214 in the
                           (separately listed on the Form 1099-B) 2,523
                           shares of Blackrock Municipal I that they
                           acquired on June 8, 1994, and sold on March
                           15, 2012.

       On March 15, 2012, the Fraziers sold 4,352 shares of Blackrock
Municipal I. The Form 1099-B reported this as two different sales (of
1,829 shares and 2,523 shares). All 4,352 shares had been acquired on
the same date, June 8, 1994. Trombetta estimated the Fraziers’ basis in
the total 4,352 shares to be $45,217.28, which he computed by
multiplying (a) $10.39, the closing price per share on June 8, 1994, by
(b) 4,352, the number of shares purchased. Trombetta’s testimony
explaining his estimates is persuasive of the Fraziers’ cost basis of these
shares. Therefore, we hold that the Fraziers’ cost basis in the 1,829
shares was $19,003 (1,829 × $10.39, rounded to nearest dollar), and the
cost basis in the 2,523 shares was $26,214 (2,523 × $10.39, rounded to
nearest dollar).

             2.     The securities sold from the Merrill Lynch brokerage
                    account in 2012 were capital assets.

       In the stipulation, the parties agreed that the securities sold were
capital assets: “During 2012, the Fraziers had proceeds from the sale or
disposition of Merrill Lynch capital assets.” (emphasis added). See
§ 1221 (defining “capital asset” as property held by a taxpayer, except
for eight categories of property specifically excluded from the definition).
This means that the character of the gains and losses from the 1,030
sales is capital rather than ordinary.
                                   139

[*139]       3.     Holding periods for the five sales of securities for
                    which the Form 1099-B states the cost basis are
                    “N/A”

       For the 1,030 sales of securities, the Form 1099-B expressly
classifies the gain or loss from the sale as long-term or short-term,
except that the Form 1099-B does not do so for the 5 securities sales for
which the Form 1099-B states that the cost basis are “N/A.” For these
five sales, the gain or loss can be classified as long-term or short-term
by comparing the acquisition dates and sales dates stated by the Form
1099-B.

      For the 2,332 shares of Columbia Tax Exempt Fund A acquired
on June 8, 2011, and sold on March 15, 2012, the holding period was less
than a year, and the resulting gain is short-term gain. See § 1222(1)
and (2).

       For the one share of Columbia Tax Exempt Fund A acquired on
January 26, 2012, and sold on March 15, 2012, the holding period was
less than one year, and the resulting gain is short-term gain. See
§ 1222(1) and (2).

      For the 0.309 of a share of Columbia Tax Exempt Fund A acquired
on January 26, 2012, and sold on March 27, 2012, the holding period
was less than one year, and the resulting gain is short-term gain. See
§ 1222(1) and (2).

       For the 1,829 shares and the 2,523 shares of Blackrock Municipal
I acquired on June 8, 1994, and sold on March 15, 2012, the holding
period was more than one year, and the resulting gain is long-term gain.
See § 1222(3) and (4).

             4.     The Fraziers’ long-term capital gain is computed
                    without the $5.62 loss disallowed by the wash-sale.

      Under section 1091, no deduction is allowed for a loss sustained
from the sale of securities if, within a period beginning 30 days before
the sale and ending 30 days after the sale the taxpayer has acquired
substantially identical securities. See also Treas. Reg. 1.1091-1(a). This
is known as the “wash-sale” rule.

      The Form 1099-B states $5.62 for “Wash Sale Loss Disallowed.”
The Fraziers’ unfiled 2012 Form 1040, Schedule D, computes the gain
on the sale of the Merrill Lynch securities by excluding the $5.62
                                         140

[*140] (rounded to the nearest dollar) loss reported on the Merrill Lynch
Form 1099-B as a wash-sale-loss disallowance. Thus, the Fraziers do not
take the position that they are entitled to the $5.62 loss. We hold that
the Fraziers’ long-term capital gain does not include the $5.62 loss
disallowed.

               5.      The Fraziers’ short-term and long-term capital gains
                       from the sales of securities from the Merrill Lynch
                       brokerage account assuming that the total proceeds
                       from the sales were $307,261 (the total of the
                       amounts stated in the Form 1099-B)

       Our holdings mean that the Fraziers had basis of $72,857 61 in the
securities sold from the Merrill Lynch brokerage account held for one
year or less. According to the Form 1099-B, the Fraziers received
$307,261 in total proceeds from the 1,030 sales and $76,713 of these
proceeds were from assets that were held for one year or less. Thus, the
Fraziers had $3,856 in short-term capital gain from the sales of these
securities. See §§ 1001, 1222(1). ($3,856 = $76,713 − $72,857). This
computation is made before accounting for the $665 discrepancy
between the $307,261 in total proceeds reported on the Form 1099-B and
the $306,569 amount in the parties’ stipulation.

       Our holdings mean that the Fraziers had basis of $227,606 62 in
securities sold from the Merrill Lynch brokerage account held for more
than one year. According to the Form 1099-B, the Fraziers received
$307,261 in total proceeds from the 1,030 sales and $230,548 of these
proceeds were from assets that were held for more than one year. Thus,
the Fraziers had (accounting for the $5.62 of wash sale loss disallowed)
$2,948 of long-term capital gain from the sales of these securities.
($2,948 = $230,548 − $227,606 + $5.62 (rounded to the nearest dollar).)
See §§ 1001, 1222(3). This computation is made before accounting for the
$665 discrepancy between the $307,261 in total proceeds reported on the
Form 1099-B and the $306,569 amount in the parties’ stipulation.

       61 The Form 1099-B shows that the basis of securities sold in 2012 and held for

one year or less totaled $42,197.56. We added this amount to the basis of the shares of
Columbia Tax Exempt Fund A (for which the Form 1099-B states the cost basis are
“N/A”) estimated by Trombetta ($30,642.48 + $13.14 + $4.06).
        62 The Form 1099-B shows that the basis of securities sold in 2012 and held for

more than one year totaled $182,388.71. We added this amount to the basis of the
shares of Blackrock Municipal I (for which the Form 1099-B states the cost basis are
“N/A”) estimated by Trombetta ($19,003.31 + $26,213.97).
                                            141

[*141]           6.      The Fraziers’ short-term and long-term capital gains
                         from the sales of securities from the Merrill Lynch
                         brokerage account after accounting for the $665
                         discrepancy between the total proceeds in the Form
                         1099-B and the total proceeds in the stipulation

       There is a $665 discrepancy between the $306,596 amount of
proceeds that the parties stipulate that the Fraziers received from the
sales of securities from the Merrill Lynch brokerage account and the
$307,261 63 amount of proceeds that the Fraziers actually received from
these securities.

         Here we trace the history of this discrepancy.

       The Form 1099-B issued by Merrill Lynch stated that the total
proceeds from the 2012 sales of securities from the Merrill Lynch
brokerage account were $307,261. Not only is the $307,261 stated as the
total of these proceeds, but it is arithmetically the total of all the
proceeds reported on the Form 1099-B for all 1,030 sales of securities
reported for 2012.

       The 2012 notice of deficiency issued to William determined that
the gain from the sales of securities in the Merrill Lynch brokerage
account was $306,596. The notice of deficiency did not state how this
amount was computed, i.e., it did not state the amount realized or the
cost basis.

      The Fraziers prepared a Form 1040 shortly before trial that takes
the position that the total proceeds were $307,262.

      The parties stipulated that, “[d]uring 2012, the Fraziers had
proceeds from the sale or disposition of Merrill Lynch capital assets in
the amount of $306,596.”

       Petitioners’ brief, in its proposed findings of fact, states that the
total proceeds were $306,596: “During 2012, Mr. and Mrs. Frazier had
proceeds from the sale or disposition of Merrill Lynch capital assets in
the amount of $306,596.” Although the brief also asserts that the
Schedule D from the unfiled 2012 Form 1040, which reflects total
proceeds of $307,262, “represents the true short-term and long-term
capital gain recognized by the Petitioners,” the brief acknowledges that
“[t]here are minor mathematical errors reflected in the calculation of the

         63 The one-dollar difference is likely the result of rounding to the nearest dollar.
                                   142

[*142] proceeds, basis, and gain/loss calculations” in the unfiled 2012
Form 1040.

       On brief, the IRS agrees that the total proceeds received were
$306,569: “[A]s indicated in the Stipulation of Facts, in 2012 the
Fraziers received proceeds from the sale or disposition of Merrill Lynch
capital assets in the amount of $306,596.”

      The IRS brief acknowledges that the Form 1099-B from Merrill
Lynch “reflects that $307,261.08 was paid.” In a footnote to this sentence
the IRS states, “Respondent cannot account for the difference in
amounts reported to respondent and the amounts reported to Mr.
Frazier.”

       Neither petitioners nor the IRS take a position on how to treat
the $665 discrepancy between the stipulated $306,596 proceeds and the
actual $307,261 of proceeds that the Fraziers received, as reported on
the Form 1099-B. Although we found supra FINDINGS OF FACT Part
XII that the information in the Form 1099-B was accurate and that the
Fraziers in fact received $307,261, we hold parties to their stipulations
under Rule 91(e). Thus, we must determine the effect of the $306,596
stipulation.

       According to the Form 1099-B, the Fraziers received proceeds of
$76,713 from assets sold from the Merrill Lynch brokerage account held
for one year or less and proceeds of $230,548 from assets sold from the
Merrill Lynch brokerage account held for more than one year. The total
of the two amounts—$307,261—is inconsistent with the stipulation.
Reducing proceeds from capital assets held for one year or less, rather
than proceeds from capital assets held for more than one year, would be
favorable to the Fraziers because this would reduce short-term capital
gain, rather than long-term capital gain. See §§ 1001, 1222(1), (3). Long-
term capital gain is taxed less than short-term capital gain. See Verito
v. Commissioner, 43 T.C. 429, 441 (1965).

       Under Rule 142(a), the petitioner bears the burden of proof. As
petitioners, it was incumbent on the Fraziers to show that the proceeds
from assets held for one year or less should be reduced by $665. The
Fraziers failed to explain or account for the $665 in their arguments.
Therefore, we hold that the $230,548 proceeds from assets held for more
than one year—resulting in long-term capital gain—should be reduced
by $665 to $229,883 to account for the fact that the parties stipulated
                                    143

[*143] that the Fraziers received $306,596 of proceeds from the sales of
the Merrill Lynch capital assets.

      As a result, the Fraziers had $3,856 short-term capital gain and
$2,283 in long-term capital gain for 2012 from the sales of capital assets
from the Merrill Lynch brokerage account. See §§ 1001, 1222(1) and (3).

V.    For 2012, the Fraziers had $40,867 in short-term capital gain from
      the sale of securities from the Franklin Growth Fund.

       In 2012, the Fraziers sold securities from the Franklin Growth
Fund for $40,867. The notice of deficiency mailed to William determined
that he had $40,867 of short-term capital gain from the sale of the
securities from the Franklin Growth Fund.

       Under the stipulation, the parties agree that the securities sold
were capital assets: “During 2012, the Fraziers had proceeds from the
sale or disposition of Franklin Growth Fund capital assets in the amount
of $40,867.00.” (Emphasis added.) In their briefs, the Fraziers do not
dispute the determination in the notice of deficiency that the gain from
the Franklin Growth Fund securities was short-term capital gain as
opposed to long-term capital gain. In their briefs, they also concede that
William had no basis in the Franklin Growth Fund securities that were
sold in 2012. That means the amount of the gain from the sales is equal
to $40,867. See § 1001(a).

       We conclude that the notice of deficiency issued to William
correctly determined that he had $40,867 in short-term capital gain
from the sale of securities from the Franklin Growth Fund.

VI.   The Fraziers had $1,417 in short-term capital gain from
      “Columbia Seligman Comm. And Info.”

       A “capital gain dividend” (also called a “capital gain distribution”)
is defined in section 852(b)(3)(C)(i) as “any dividend, or part thereof,
which is reported by [a regulated investment company] as a capital gain
dividend in written statements furnished to its shareholders.” See
Treas. Reg. § 1.852-4(c) (“A capital gain dividend, as defined in section
852(b)(3)(C), is any dividend or part thereof which is designated by a
regulated investment company . . .” (emphasis added)); see also IRS
Publication 550, Investment Income and Expenses (For use in preparing
2012 Returns) at 21. Under section 852(b)(3), a shareholder who earns
a “capital gain dividend” must treat it as a long-term capital gain: “A
capital gain dividend shall be treated by the shareholders as a gain from
                                   144

[*144] the sale or exchange of a capital asset held for more than 1 year.”
We discuss the law on the tax treatment of capital assets supra
OPINION Part IV.A.

       Three days before trial, the Fraziers provided the IRS an
unsigned, unfiled Form 1040 for 2012 which no party contends is a filed
return. In the Schedule D attached to this unfiled Form 1040, the
Fraziers state the $1,417 amount on line 13, “Capital gain
distributions.” This appears to be an assertion by the Fraziers that the
$1,417 amount from “Columbia Seligman Comm. And Info” was a capital
gain dividend which should be treated as long-term capital gain under
section 852(b)(3)(B). See also IRS Publication 550, Investment Income
and Expenses (For use in preparing 2012 Returns) at 21, 25.

       In their Opening Brief, the Fraziers generally put forward the
view that the Schedule D attached to the unfiled Form 1040 was correct.
However, the Fraziers did not specifically argue that the $1,417 amount
from “Columbia Seligman Comm. And Info” was a capital gain dividend.
Not surprisingly, the IRS did not address this in their Answering Brief.
Finally, the Fraziers did not argue for capital gain dividend treatment
of the $1,417 amount in their Reply Brief. Nowhere in the record is there
evidence—such as the written notice required to be sent to shareholders
under Treasury Regulation § 1.852-4(c)(4) designating a dividend as a
capital gain dividend—that the $1,417 amount from “Columbia
Seligman Comm. And Info” was a capital gain dividend.

       We hold that the Fraziers are not entitled to capital gain dividend
treatment under section 852(b)(3)(B) for the $1,417 amount from
“Columbia Seligman Comm. And Info” for two reasons. First, the
Fraziers failed to provide evidence for treating the $1,417 amount from
“Columbia Seligman Comm. And Info” as a capital gain dividend under
section 852(b)(3)(B). For example, the Fraziers could have provided the
written notice required to be sent to shareholders under Treasury
Regulation § 1.852-4(c)(4), which they did not. Second, they waived the
argument that they are entitled to capital gain dividend treatment for
the $1,417 amount by failing to clearly raise the argument on brief. See
Mendes v. Commissioner, 121 T.C. 308, 312–13 (2003) (“If an argument
is not pursued on brief, we may conclude that it has been abandoned.”).

       We hold that the Fraziers had zero basis in the “Columbia
Seligman Comm. And Info” assets and that they had proceeds from the
sale or exchange of these assets of $1,417, resulting in $1,417 in short-
term capital gain. See § 1222(1). Under the stipulation, the parties agree
                                    145

[*145] that the securities sold were capital assets: “During 2012, the
Fraziers had proceeds from the sale or disposition of Columbia Seligman
Comm. And Info capital assets in the amount of $1,417.” (Emphasis
added.) See § 1221 (defining “capital asset” as property held by a
taxpayer, except for eight categories of property specifically excluded
from the definition). Under the stipulation, the parties agree that the
Fraziers had no basis in these assets: “the Fraziers had no basis in this
asset.” We hold parties to their stipulations under Rule 91(e). The IRS
in the notice of deficiency determined that the Fraziers realized short-
term capital gain income from “Columbia Seligman Comm. and Info” in
the amount of $1,417. Under Rule 142(a), the IRS’s determination of a
taxpayer’s liability in a notice of deficiency is presumed correct, and the
taxpayer bears the burden of proving that the determination is
incorrect. Because the Fraziers did not introduce any evidence for a
different treatment of the $1,417 amount, we uphold the IRS’s
determination in the notice of deficiency regarding this amount.

VII.   The Fraziers received $24,425 in Schedule E income, $1,545 in
       ordinary dividends, and $4,636 in qualified dividends for 2012.

       For 2012, for several types of income, the amounts to which the
parties stipulated are greater than the amounts in the notices of
deficiency:

       •   For Schedule E income “related to rental real estate, royalties,
           partnerships, S corporations, trusts, etc.,” the $957,397
           amount that the parties stipulated is greater than the total
           amount of Schedule E income determined in the notices of
           deficiency, $933,880.

       •   For ordinary dividends, the $1,545 amount that the parties
           stipulated is greater than the total amount of ordinary
           dividends determined in the notices of deficiency, $1,364.

       •   For qualified dividends, the $4,636 amount that the parties
           stipulated is $6 greater than the total amount of qualified
           dividends determined in the notices of deficiency, $4,630.

      For these types of income, except as stated below, we hold that
the amounts in the stipulations are the correct amounts that the
Fraziers received. We generally hold parties to their stipulations under
Rule 91(e).
                                   146

[*146] Although this could result in determining a deficiency greater
than that determined in the notices of deficiency, we believe that by
stipulating to amounts greater than the amounts determined in the
notices of deficiency, the parties have tried these issues by consent.
Section 6214(a) provides that the Tax Court has jurisdiction to
redetermine the correct amount of deficiency even if the redetermined
amount is greater than the amount originally determined in the notice
of deficiency, as long as the greater amount was asserted by the IRS
before or during trial. The IRS is considered to have asserted a claim for
a greater deficiency if the parties try the issue by consent under Rule
41(b)(1), even if the IRS does not raise the issue in the notice of
deficiency or in pleadings. Smaldino, T.C. Memo. 2021-127, at *16.

       Although the parties stipulated that the Fraziers had Schedule E
income for 2012 of $957,397, we noted in OPINION Part II.B.4 that this
amount includes the $932,972 distributive share of Louisiana Assisted’s
nonseparately stated income for that year, and we conclude that this
$932,972 amount is not includible in the Fraziers’ income, consistent
with our determination in OPINION Part I that LHDC, and not
William, is a member of Louisiana Assisted. This Court may disregard
a stipulation between parties if the evidence contrary to the stipulation
is substantial or the stipulation is clearly contrary to facts disclosed by
the record. See Loftin & Woodward, Inc. v. United States, 577 F.2d 1206,
1232 (5th Cir. 1978); Jasionowski v. Commissioner, 66 T.C. 312, 317–18
(1976). Accordingly, we conclude that the Fraziers received $24,425 in
Schedule E income for 2012.

VIII. For 2012, the Fraziers are entitled to the standard deduction of
      $14,200.

      Mary’s 2012 notice of deficiency determined that she was entitled
to the standard deduction of $5,950 for a married person filing a
separate return. And William’s 2012 notice of deficiency determined
that he was entitled to the standard deduction of $5,950 for a married
person filing a separate return.

       The stipulation addresses William and Mary’s filing status for
2012. It says they can file jointly. But the stipulation does not say
whether their joint tax liability should be computed with a standard
deduction versus itemized deductions. The standard deduction is the
sum of the basic standard deduction and the additional standard
deduction. § 63(c)(1). The basic standard deduction for a couple filing
jointly is $11,900 for 2012. See §§ 63(c), 1(f)(3); Rev. Proc. 2011-52
                                   147

[*147] § 3.11(1), 2011-45 I.R.B. 701. The additional standard deduction
is the additional amount to which the taxpayer is entitled under section
63(f). § 63(c)(3). Section 63(f)(1) provides for an additional standard
deduction for taxpayers who are at least 65 years of age at the end of the
taxable year. Both William and Mary are entitled to the additional
standard deduction under section 63(f)(1) because each was over 65
years of age at the close of 2012. The additional standard deduction for
2012 was $1,150. Rev. Proc. 2011-52 § 3.11(3), 2011-45 I.R.B. 701. Thus,
an additional standard deduction amount of $1,150 is added for each of
the Fraziers. § 63(f)(1); Rev. Proc. 2011-52 § 3.11(3), 2011-45 I.R.B. 701.
As a result, the Fraziers are entitled to the standard deduction of
$14,200 ($11,900 + $1,150 +$1,150).

       Unless a taxpayer makes an election to itemize deductions for the
taxable year, no itemized deductions are allowed for the taxable year.
§ 63(e)(1). An election to itemize deductions “shall be made on the
taxpayer’s return.” § 63(e)(2). Thus, a taxpayer must file a return in
order to elect to itemize deductions. § 63(e)(1)–(2); see also Salter v.
Commissioner, T.C. Memo. 2022-29, at *4–5; Jenkins v. Commissioner,
T.C. Memo. 2021-54, at * 53.

      During 2012, the Fraziers paid state and local income taxes of
$91,453 and real estate taxes of $11,571. See supra FINDINGS OF
FACT Part XVI. The parties stipulated that the Fraziers paid these
amounts in 2012. These amounts are potentially deductible as itemized
deductions, at least for a taxpayer who properly elects to itemized
deductions.

        But the Fraziers did not file a return for 2012. Three days before
trial, they provided the IRS an unsigned, unfiled Form 1040 for 2012
which no party contends is a filed return. In their unsigned, unfiled
Form 1040, the Fraziers compute their taxable income with itemized
deductions in the amount of $103,024 for (1) state and local income taxes
of $91,453 plus (2) real estate taxes of $11,571. After trial, the parties
filed briefs in the following sequence: (1) petitioners’ Opening Brief,
(2) respondent’s Answering Brief, and (3) petitioners’ Reply Brief. In
their Opening Brief, petitioners did not argue that the Fraziers are
entitled to these deductions (or that they are entitled to itemize their
deductions). Thus, the IRS did not address these deductions in its
Answering Brief. Finally, petitioners did not argue that they are entitled
to these deductions in their Reply Brief.
                                   148

[*148] We hold that the Fraziers are not entitled to itemized deductions
(including deductions for state and local income taxes and real estate
taxes) for two reasons. First, the Fraziers did not file a return for 2012.
Thus, they did not elect to itemize deductions, and they are not
permitted itemized deductions for 2012. See § 63(e)(1) and (2). Second,
they waived the argument that they are entitled to itemized deductions
by failing to raise the issue on brief.

IX.   The Fraziers’ income for 2012 is computed with two personal
      exemptions for a total of $7,600.

       The IRS in Mary’s notice of deficiency determined that she was
entitled to a personal exemption of $3,800. And the IRS in William’s
notice of deficiency determined that he was entitled to a personal
exemption of $3,800. As a couple with married-filing-jointly status,
William and Mary’s taxable income is computed with two personal
exemptions for a total personal-exemption deduction of $7,600. See
§§ 151(d), 1(f)(3); Rev. Proc. 2011-52 § 3.19, 2011-45 I.R.B. 701.

X.    The Fraziers’ liability for section 6662 accuracy-related penalties

       Section 6662(a) imposes a 20% penalty on the portion of an
underpayment of tax to which section 6662 applies. Section 6662(b)(2)
provides that section 6662 applies to the portion of an underpayment of
tax attributable to a substantial understatement of income tax. For
2009, the notice of deficiency determined that the Fraziers were liable
for section 6662 penalties for “one or more of the following:
(1) Negligence or disregard of rules or regulations; (2) Substantial
understatement of income tax; (3) Substantial valuation misstatement
(overstatement).” For 2010 and 2011, the notices of deficiency
determined that the Fraziers were liable for section 6662 penalties for
“one or more of the following: (1) Negligence or disregard of rules or
regulations; (2) Substantial understatement of income tax;
(3) Substantial      valuation      misstatement        (overstatement);
(4) Transaction lacking economic substance.” For 2009, 2010 and 2011,
the IRS has since conceded that the underpayments were not due to
negligence or disregard of rules or regulations, substantial valuation
misstatement, or transaction lacking economic substance, leaving only
the issue of whether the underpayments were due to substantial
understatement.

       An understatement of income tax is the excess of (1) the amount
of the tax required to be shown on the return (i.e., the correct tax) minus
                                    149

[*149] (2) the tax reported minus any rebate. § 6662(d)(2)(A). For
individuals, an understatement of income tax is substantial if it exceeds
the greater of (1) 10% of the correct tax or (2) $5,000. § 6662(d)(1)(A). An
underpayment is the amount by which the tax imposed (i.e., the correct
tax) exceeds the excess of (1) the sum of (a) the tax reported plus
(b) amounts not so reported that were previously assessed (or collected
without assessment) minus (2) any rebates made. § 6664(a); Treas. Reg.
§ 1.6664-2(a) and (b).

       Section 6751(b) provides that the initial determination to impose
certain types of penalties (including accuracy-related penalties under
section 6662(a)) must generally be personally approved in writing by the
immediate supervisor of the person making the determination. See
Graev v. Commissioner, 149 T.C. 485, 493 (2017), supplementing and
overruling in part 147 T.C. 460 (2016).

       The IRS bears the initial burden of production regarding the
applicability of the section 6662(a) penalty to an individual. § 7491(c). If
the IRS meets its burden of production that the section 6662(a) penalty
is applicable, then the individual taxpayer bears the burden to persuade
the Court that the section 6662(a) penalty is inapplicable. Webber v.
Commissioner, 144 T.C. 324, 377 (2015).

      Section 6664(c)(1) provides that the penalty under section 6662(a)
does not apply to any portion of the underpayment to the extent that the
taxpayer had reasonable cause for that portion of the underpayment and
acted in good faith with respect to that portion of the underpayment.
Whether the taxpayer acted with reasonable cause and good faith
depends on all the pertinent facts and circumstances. Treas. Reg.
§ 1.6664-4(b)(1). Generally, the most important factor is the extent of
the taxpayer’s efforts to assess the proper tax liability. Id. If the IRS
meets its burden of production that the 6662(a) penalty applies, then the
taxpayer has the burden to prove that it acted with reasonable cause
and in good faith under section 6664(c)(1). See Stough v. Commissioner,
144 T.C. 306, 321 (2015).

      The parties stipulate that for all petitioners (including the
Fraziers),

      [t]he requirements of I.R.C. § 6751(b)(1) have been
      satisfied with respect to the application of the I.R.C.
      § 6662(a) penalties for all taxable years at issue to the
      extent, and only to the extent, such penalties are
                                     150

[*150] exclusively related to the portion of any underpayment
       which is attributable to any substantial understatement of
       income tax pursuant to I.R.C. § 6662(b)(2) and I.R.C.
       § 6662(d).

Thus, the supervisory-approval requirement of section 6751(b)(1) has
been met for all taxable years at issue with respect to the application of
the section 6662(a) accuracy-related penalty attributable to substantial
understatements of income tax.

       A.     For 2009, the Fraziers are not liable for the accuracy-related
              penalty under section 6662(a).

        There is no underpayment for 2009. An underpayment exists only
if the correct tax exceeds the tax reported. 64 § 6664(a). The tax reported
is $411,762, the amount the Fraziers reported on their 2009 return.

      As explained below, the 2009 return overreported the Fraziers’
income by a total amount of $2,165. The Fraziers overreported income
by incorrectly including the $2,987,744 distributive share of
nonseparately stated income of Louisiana Assisted because LHDC (not
William) was the other member of Louisiana Assisted in 2009. See supra
OPINION Part I.B. The Fraziers also overreported income by incorrectly
including the $3,156 of separately stated interest income of Louisiana
Assisted because LHDC (not William) was the other member of
Louisiana Assisted in 2009.

      The Fraziers underreported income by claiming the $2,987,744
Schedule C dummy deduction, the disallowance of which we sustained.
Additionally, the Fraziers underreported income by failing to report
$991 from a state income tax refund.

       As a result, the Fraziers overreported income by $2,165
($2,987,744 + $3,156 − ($2,987,744 + $991)). Because the return
overreported income, the tax reported on the return exceeded the correct
tax. Thus, there is no underpayment. Because there is no underpayment
of tax for 2009, the Fraziers are not liable for the accuracy-related
penalty under section 6662(a) for 2009.

        64 For 2009, there were no “amounts not so reported that were previously

assessed (or collected without assessment),” § 6664(a)(1)(B), or “rebates made,”
§ 6664(a)(2).
                                     151

[*151] Although petitioners put forth a reasonable cause argument for
the section 6662(a) penalties for the Fraziers for all tax years, we need
not address this argument for the Fraziers for the 2009 tax year because
the underpayment for 2009 is zero.

       B.     For 2010, the Fraziers are not liable for the accuracy-related
              penalty under section 6662(a) because the understatement
              is not substantial, a point that will be confirmed by
              Rule 155 computations.

      There is an underpayment for 2010 only if the correct tax exceeds
the tax reported. 65 § 6664(a). The tax reported is $274,745, the amount
the Fraziers reported on their 2010 return. The correct tax is a result of
our holdings and the parties’ concessions and stipulations. It will be
computationally determined by the Court after the parties submit their
Rule 155 computations.

      As explained below, the 2010 return underreported the Fraziers’
income by a total amount of $343. The Fraziers overreported income by
including the $643,165 distributive share of nonseparately stated
income of Louisiana Assisted. This amount was not includable in the
Fraziers’ income because William was not a member of LHDC. See supra
OPINION Part II.B.2.a.

      The Fraziers underreported income by taking a $643,165
Schedule C dummy deduction, the disallowance of which we sustained.
The Fraziers also underreported income by claiming a $343 disallowed
partnership loss from Lagniappe Film Fund LLC.

      As a result, the Fraziers underreported income by $343 ($643,165
+ $343 − $643,165). Thus, there is an underpayment.

       The Fraziers are liable for a section 6662(a) penalty only if there
is a substantial understatement for that year. An understatement is the
correct tax minus the tax reported (because there are no rebates for
2010). See § 6662(d)(2)(A). An understatement is substantial if the
understatement exceeds the greater of (1) 10% of the correct tax or
(2) $5,000. § 6662(d)(1)(A). The tax reported on the return was $274,745.

        65 For 2010, there were no “amounts not so reported that were previously

assessed (or collected without assessment),” § 6664(a)(1)(B), or “rebates made,”
§ 6664(a)(2).
                                     152

[*152] It does not appear that the understatement is substantial, a
point that will be confirmed by computations under Rule 155.

       C.     For 2011, the Fraziers are not liable for the accuracy-related
              penalty under section 6662(a) because the understatement
              is not substantial, a point that will be confirmed by
              Rule 155 computations.

       There is an underpayment for 2011 only if the correct tax exceeds
the tax reported. 66 § 6664(a). The tax reported is $167,481. The correct
tax depends on our holdings and the parties’ concessions and
stipulations and will be computationally determined by the Court after
the parties submit their Rule 155 computations.

       As explained below, the 2011 return underreported the Fraziers’
income by a total amount of $5,747. The Fraziers overreported income
by including the $450,000 cash distribution from Louisiana Assisted.
This amount was not includable in the Fraziers’ income. See supra
OPINION Part II.B.3.a. The Fraziers also overreported income by
including the $1,839 distributive share of separately stated interest
income of Louisiana Assisted, which was not includable because William
was not a member of Louisiana Assisted. See supra OPINION Part
II.B.3.a.

       The Fraziers underreported income by taking a $450,000
Schedule C dummy deduction, the disallowance of which we sustained.
The Fraziers also underreported income by claiming a $7,586
distributive share of Louisiana Assisted’s nonseparately stated loss. We
disallow this loss because William was not a member of Louisiana
Assisted. See supra OPINION Part II.B.3.a.

      As a result, the Fraziers underreported income by $5,747
($450,000 + $7,586 − ($450,000 + $1,839)). Thus, there is an
underpayment.

       The Fraziers are liable for a section 6662(a) penalty only if there
is a substantial understatement for that year. An understatement is the
correct tax minus the tax reported (because there are no rebates for
2011). See § 6662(d)(2)(A). An understatement is substantial if the
understatement exceeds the greater of (1) 10% of the correct tax or

        66 For 2011 there were no “amounts not so reported that were previously

assessed (or collected without assessment),” § 6664(a)(1)(B), or “rebates made,”
§ 6664(a)(2).
                                       153

[*153] (2) $5,000. § 6662(d)(1)(A). The tax reported on the return was
$167,481. It does not appear that the understatement is substantial, a
point that will be confirmed by computations under Rule 155.

XI.     The Fraziers’ liability for section 6651(a)(1) additions to tax

        A.     The law

       Under section 6012(a)(1)(A)(iv), individuals who are “entitled to
make a joint return” are required to file an income tax return if both
spouses’ gross income combined is greater than the sum of (1) twice the
exemption amount, (2) the basic standard deduction applicable to a joint
return, and (3) “the amount of the additional standard deduction for
each additional standard deduction to which the individual or his spouse
is entitled by reason of section 63(f)(1).” § 6012(a)(1)(B). Section 63(f)(1)
provides for an additional standard deduction for individuals who have
attained the age of 65 by the close of the taxable year.

       For 2009, the exemption amount was $3,650, the basic standard
deduction applicable to a joint return was $11,400, and the additional
standard deduction was $1,100. §§ 1(f)(3), 63(c), (f)(1), 151(d); Rev. Proc.
2008-66 § 3.10(1), 3.10(3), 3.19(1), 2008-45 I.R.B. 1107. Thus, for 2009,
couples entitled to make a joint return who were both over the age of 65
were required to file a return if their combined gross income exceeded
$20,900. See § 6012(a)(1)(A)(iv). 67 For 2009, the Fraziers’ gross income
was $1,362,703, 68 which exceeds the threshold of $20,900. Thus, the
Fraziers were required to file a return for 2009.

      For 2010, the exemption amount was $3,650, the basic standard
deduction applicable to a joint return was $11,400, and the additional
standard deduction was $1,100. §§ 1(f)(3), 63(c), (f)(1), 151(d); Rev. Proc.
2009-50 § 3.11(1), 3.11(3), 3.19, 2009-45 I.R.B. 617. Thus, for 2010,
couples entitled to make a joint return who were both over the age of 65
were required to file a return if their combined gross income exceeded
$20,900. See § 6012(a)(1)(A)(iv). For 2010, the Fraziers’ gross income

        67 Both William and Mary were over age 65 by the close of the taxable year

2009.
       68 For 2009, the Fraziers reported gross income of $1,364,868, which is

decreased by $3,156, see OPINION Part II.B.1.a, and increased by $991.
                                         154

[*154] was $1,001,890, 69 which exceeds the filing threshold of $20,900.
Thus, the Fraziers were required to file a return for 2010.

      For 2011, the exemption amount was $3,700, the basic standard
deduction applicable to a joint return was $11,600, and the additional
standard deduction was $1,150. §§ 1(f)(3), 63(c), (f)(1), 151(d); Rev. Proc.
2011-12 § 2.05(1), 2.05(3), 2.07(1), 2011-2 I.R.B. 297. Thus, for 2011,
couples entitled to make a joint return who were both over the age of 65
were required to file a return if their combined gross income exceeded
$21,300. See § 6012(a)(1)(A)(iv). For 2011, the Fraziers’ gross income
was $645,080, 70 which exceeds the filing threshold of $21,300. Thus, the
Fraziers were required to file a return for 2011.

      For 2012, the exemption amount was $3,800, the basic standard
deduction applicable to a joint return was $11,900, and the additional
standard deduction was $1,150. §§ 1(f)(3), 63(c), (f)(1), 151(d); Rev. Proc.
2011-52 § 3.11(1), 3.11(3), 3.19, 2011-45 I.R.B. 701. Thus, for 2012,
couples entitled to make a joint return who were both over the age of 65
were required to file a return if their combined gross income exceeded
$21,800. See § 6012(a)(1)(A)(iv). For 2012, the Fraziers’ gross income
was $2,257,830, 71 which exceeds the filing threshold of $21,800. Thus,
the Fraziers were required to file a return for 2012.

       Section 6651(a)(1) imposes an addition to tax for the failure to file
a required tax return by its filing deadline (determined by taking into
account any extensions of that deadline). The section 6651(a)(1) addition
to tax is 5% of the correct tax for each month or fraction of a month the

       69 For 2010, the Fraziers reported gross income of $1,001,547, which is
increased by $343.
       70 For 2011, the Fraziers reported gross income of $639,333, which is increased

by $7,586 and decreased by $1,839, see OPINION Part II.B.3.a.
        71 The Fraziers’ gross income for 2012 is calculated by adding the following:

taxable wages of $1,175,640, taxable interest of $10,308, taxable IRA distributions of
$4,990, taxable pension distributions of $11,741, supra FINDINGS OF FACT Part
XVIII.A.4; Schedule E income of $24,425, ordinary dividends of $1,545, qualified
dividends of $4,636, supra OPINION Part VII; short-term capital gain of $3,856 and
long-term capital gain of $2,283 from the sales of capital assets from the Merrill Lynch
brokerage account, supra OPINION Part IV; $40,867 in short-term capital gain from
the sale of securities from the Franklin Growth Fund, supra OPINION Part V; and
$1,417 in short-term capital gain from Columbia Seligman Comm And Info., supra
OPINION Part VI.
                                   155

[*155] failure to file continues, not to exceed 25% in the aggregate.
§ 6651(a)(1), (b)(1); see also Treas. Reg. § 301.6651-1(b).

      The section 6651(a)(1) addition to tax is reduced by the amount of
the section 6651(a)(2) addition to tax, for any month (or fraction of a
month) to which both additions to tax apply. § 6651(c)(1). (The section
6651(a)(2) addition to tax is discussed more fully infra OPINION Part
XII.)

       Section 6651(b)(1) provides that the correct tax is “reduced by the
amount of any part of the tax which is paid on or before the date
prescribed for payment of the tax and by the amount of any
credit against the tax which may be claimed on the return,” including
amounts withheld for federal income tax. See § 31(a).

      A substitute for return prepared by the IRS under section 6020(b)
does not count as a return filed by the taxpayer for purposes of section
6651(a)(1). § 6651(g)(1); Spurlock v. Commissioner, 118 T.C. 155, 159
(2002).

      Section 7491(c) imposes on the IRS the burden of production with
respect to an individual’s liability for the section 6651(a)(1) addition to
tax. The IRS can satisfy its burden of production by producing evidence
that the taxpayer failed to timely file a required federal income tax
return. See Wheeler v. Commissioner, 127 T.C. 200, 207–08 (2006), aff’d,
521 F.3d 1289 (10th Cir. 2008); Higbee, 116 T.C. at 447. Once the IRS
has satisfied its burden of production, the burden of proof is on the
taxpayer to show that the addition to tax is improper. Higbee, 116 T.C.
at 446.

       The burden of proof includes the burden of establishing that the
failure to timely file is due to reasonable cause and not due to willful
neglect. See § 7491(c); Higbee, 116 T.C. at 446. The delay is due to a
“reasonable cause” if “the taxpayer exercised ordinary business care and
prudence and was nevertheless unable to file the return within the
prescribed time.” Treas. Reg. § 301.6651-1(c). “Willful neglect” is
“conscious, intentional failure or reckless indifference.” United States v.
Boyle, 469 U.S. 241, 245 (1985). Whether there was reasonable cause
(and no willful neglect) is a question of fact “answered on the basis of
the circumstances of the individual case.” Grecian Magnesite Mining,
Indus. & Shipping Co. v. Commissioner, 149 T.C. 63, 94 (2017), aff’d,
926 F.3d 819 (D.C. Cir. 2019); accord Boyle, 469 U.S. at 249 n.8.
                                    156

[*156] The failure of an accountant or lawyer to prepare a taxpayer’s
return is not in and of itself reasonable cause for a failure to timely file.
Logan Lumber Co. v. Commissioner, 365 F.2d 846, 854 (5th Cir. 1966);
see also Boyle, 469 U.S. at 251.

      The unavailability of information does not constitute reasonable
cause; a taxpayer is expected to timely file a return based on the best
information available and then, if necessary, file an amended return
when better information emerges. Estate of Vriniotis v. Commissioner,
79 T.C. 298, 311 (1982); Electric & Neon, Inc. v. Commissioner, 56 T.C.
1324, 1343-1345 (1971), aff’d without published opinion, 496 F.2d 876
(5th Cir. 1974).

       A taxpayer’s illness or incapacity can be a reasonable cause for
failing to file timely returns. See Williams v. Commissioner, 16 T.C. 893,
906 (1951). For illness or incapacity to constitute reasonable cause, a
taxpayer must show that he was incapacitated to such a degree that he
was unable to prepare his returns on the dates they were due. See id.

      B.     Analysis

             1.     For 2009, the Fraziers are liable for the section
                    6651(a)(1) addition to tax.

       The Fraziers’ 2009 tax return was due October 15, 2010, because
the Fraziers had filed a six-month extension of the filing deadline. The
Fraziers did not file their 2009 tax return until March 18, 2013.
Therefore, the Fraziers are liable for the section 6651(a)(1) addition to
tax for the 2009 tax year unless they have proven that they had
reasonable cause for their failure to timely file their return and their
failure to file was not due to willful neglect. See § 6651(a)(1); Higbee, 116
T.C. at 446–47.

       Petitioners make two arguments why the Fraziers’ failure to
timely file their 2009 return was due to reasonable cause and not due to
willful neglect. First, they argue that the Fraziers relied on Trombetta
to file their income tax return on time. Because the failure of an
accountant to prepare a taxpayer’s return is not reasonable cause for a
failure to timely file, the Fraziers’ alleged reliance on Trombetta is not
reasonable cause for their failure to timely file their 2009 return. See
Logan Lumber Co., 365 F.2d at 854. Second, they argue that the Fraziers
needed LHDC to file its corporate income tax return before they could
file their personal income tax return. The unavailability of information
is not reasonable cause for the failure to file a return. See Estate of
                                          157

[*157] Vriniotis, 79 T.C. at 311. Therefore, LHDC’s late filing of its 2009
income tax return was not reasonable cause for the Fraziers’ failure to
timely file their 2009 income tax return. See id.; Electric & Neon, 56 T.C.
at 1343–45. In conclusion, we hold that the Fraziers did not have
reasonable cause for failing to timely file their 2009 income tax return. 72

       Accordingly, the Fraziers are liable for the section 6651(a)(1)
addition to tax for failure to timely file their 2009 income tax return.
The section 6651(a)(1) addition to tax is 5% of the correct amount of tax,
plus another 5% of the correct amount of tax for each month or fraction
of a month the failure to file continues, “reduced by the amount of any
part of the tax which is paid on or before the date prescribed for payment
of the tax and by the amount of any credit against the tax which may be
claimed on the return,” and not to exceed 25% in the aggregate.
§ 6651(a)(1), (b)(1). The Fraziers’ correct amount of tax for 2009
resulting from the conclusions in this Opinion will be computed under
Rule 155. This correct amount of tax must be reduced by $416,523, the
amount of tax that the Fraziers paid before the due date of their 2009
return. See § 6651(b)(1).

                2.      For 2010, the Fraziers are liable for the section
                        6651(a)(1) addition to tax.

       The Fraziers’ 2010 tax return was due October 15, 2011, because
the Fraziers had filed a six-month extension of the filing deadline. The
Fraziers did not file their 2010 tax return until May 19, 2014. Therefore,
the Fraziers are liable for the section 6651(a)(1) addition to tax for the
2010 tax year unless they have proven that they had reasonable cause
for their failure to timely file their return and their failure to file was
not due to willful neglect. See § 6651(a)(1); Higbee, 116 T.C. at 446–47.

      Petitioners make two arguments that the failure to timely file the
2010 return was due to reasonable cause and not willful neglect. First,
they argue that the Fraziers relied on Trombetta to file their income tax

        72 Petitioners also argue that the Court ought to grant the Fraziers relief from

their 2009 section 6651(a)(1) addition to tax under the policy allowing an abatement of
penalties for the first time a taxpayer fails to file a return set forth in the Internal
Revenue Manual 20.1.1.3.6.1 (Nov. 25, 2011). The Internal Revenue Manual provides
the IRS’s intra-agency operating procedures. The provisions of the Internal Revenue
Manual do not confer judicially enforceable rights on taxpayers. Valen Mfg. Co. v.
United States, 90 F.3d 1190, 1194 (6th Cir. 1996); United States v. Horne, 714 F.2d
206, 207 (1st Cir. 1983); see also United States v. Caceres, 440 U.S. 741, 750–51 (1979).
Therefore, we cannot grant the Fraziers the relief that they seek.
                                    158

[*158] return. Because the failure of an accountant to prepare a
taxpayer’s return is not reasonable cause for a failure to timely file, the
Fraziers’ alleged reliance on Trombetta is not reasonable cause for their
failure to timely file their 2010 return. See Logan Lumber Co., 365 F.2d
at 854. Second, they argue that the Fraziers needed LHDC to file its
corporate income tax return before they could file their personal income
tax return. The unavailability of information is not reasonable cause for
the failure to file a return. See Estate of Vriniotis, 79 T.C. at 311.
Therefore, LHDC’s late filing of its 2010 income tax return was not
reasonable cause for the Fraziers’ failure to timely file their 2010 income
tax return. See id.; Electric & Neon, 56 T.C. at 1343–45. In conclusion,
we hold that the Fraziers did not have reasonable cause for failing to
timely file their 2010 income tax return.

       Accordingly, the Fraziers are liable for the section 6651(a)(1)
addition to tax for failure to timely file their 2010 income tax return.
The section 6651(a)(1) addition to tax is 5% of the correct amount of tax,
plus another 5% of the correct amount of tax for each month or fraction
of a month the failure to file continues, “reduced by the amount of any
part of the tax which is paid on or before the date prescribed for payment
of the tax and by the amount of any credit against the tax which may be
claimed on the return,” and not to exceed 25% in the aggregate.
§ 6651(a)(1), (b)(1). The Fraziers’ correct amount of tax for 2010
resulting from conclusions in this Opinion will be computed under Rule
155. This correct amount of tax must be reduced by $267,574, the
amount of tax that the Fraziers paid before the due date of their 2010
return. See § 6651(b)(1).

             3.     For 2011, the Fraziers are liable for the section
                    6651(a)(1) addition to tax.

       The Fraziers’ 2011 tax return was due October 15, 2012, because
the Fraziers had filed a six-month extension of the filing deadline. The
Fraziers did not file their 2011 tax return until October 28, 2014.
Therefore, the Fraziers are liable for the section 6651(a)(1) addition to
tax for the 2011 tax year unless they have proven that they had
reasonable cause for their failure to timely file their return and their
failure to file was not due to willful neglect. See § 6651(a)(1); Higbee, 116
T.C. at 446–47.

      Petitioners argue that the Fraziers’ failure to timely file their
2011 return was due to reasonable cause and not willful neglect because
they relied on Trombetta to file their income tax return. Because the
                                    159

[*159] failure of an accountant to prepare a taxpayer’s return is not
reasonable cause for a failure to timely file, the Fraziers’ alleged reliance
on Trombetta is not reasonable cause for their failure to timely file their
2011 return. See Logan Lumber Co., 365 F.2d at 854.

        Therefore, we hold that the Fraziers did not have reasonable
cause for their failing to timely file their 2011 income tax return.
Accordingly, the Fraziers are liable for the section 6651(a)(1) addition to
tax for failure to timely file their 2011 income tax return. The section
6651(a)(1) addition to tax is 5% of the correct amount of tax, plus another
5% of the correct amount of tax for each month or fraction of a month
the failure to file continues, “reduced by the amount of any part of the
tax which is paid on or before the date prescribed for payment of the tax
and by the amount of any credit against the tax which may be claimed
on the return,” and not to exceed 25% in the aggregate. § 6651(a)(1),
(b)(1). The Fraziers’ correct amount of tax for 2011 resulting from
conclusions in this Opinion will be computed under Rule 155. This
correct amount of tax must be reduced by $162,145, the amount of tax
that the Fraziers paid before the due date of their 2010 return. See
§ 6651(b)(1).

             4.     For 2012, the Fraziers are not liable for the section
                    6651(a)(1) addition to tax.

       The Fraziers did not file an income tax return for 2012. Therefore,
the Fraziers are liable for the section 6651(a)(1) addition to tax for the
2012 tax year unless they have proven that they had reasonable cause
for their failure to file their return and their failure to file was not due
to willful neglect. See § 6651(a)(1); Higbee, 116 T.C. at 446–47.

       In 2012 and 2013, William, who was in his mid-70s, suffered from
dementia. The Fraziers contend that William’s dementia prevented him
and Mary from timely filing their 2012 income tax return. Their claim
is supported by credible testimony.

       Therefore, we hold that, because of William’s incapacity from
dementia, the Fraziers had reasonable cause for their failing to file their
2012 income tax returns. Accordingly, the Fraziers are not liable for the
section 6651(a)(1) addition to tax for failure to timely file their 2012
income tax returns.
                                   160

[*160] XII.   The Fraziers’ liability for the section 6651(a)(2) addition to
              tax for 2012

       Section 6651(a)(2) provides that if a taxpayer fails to pay the
amount shown as tax on a return on or before the due date for payment,
and unless the failure is due to reasonable cause and not due to willful
neglect, there is a late-payment addition to tax of 0.5% of the amount
shown as tax on the return, with an additional 0.5% of the amount
shown as tax on the return added for each additional month or fraction
of a month during which the failure to pay continues, not exceeding 25%
in the aggregate. Section 6651(c)(2) provides that if the “amount
required to be shown as tax on a return”—the correct tax—is less than
the amount shown as tax on a return, the correct tax is used in
calculating the addition to tax under section 6651(a)(2) instead of the
amount shown as tax on the return.

       The due date for payment is generally the same as the
unextended due date for filing the return. § 6151(a). For calendar-year
individual taxpayers, the return is due on April 15. § 6072(a); Treas.
Reg. §§ 1.6072-1(a)(1), 1.6081-1(a); see also § 7503 (extending April 15
deadline for holidays and weekends).

       When a taxpayer does not file a return for the tax year at issue,
the IRS can prepare a substitute for return, pursuant to section 6020(b),
which is treated as the return for purposes of section 6651(a)(2).
§ 6651(g)(2). In instances in which the IRS prepared a substitute for
return under section 6020(b), the amount of tax due as shown on the
substitute for return is considered the tax shown on the return for
purposes of section 6651(a)(2). § 6651(g)(2).

       Treasury Regulation § 301.6020-1(b)(2) sets forth the require-
ments that a document must meet to be a substitute for return under
section 6020(b):

      A document (or set of documents) signed by the
      Commissioner or other authorized Internal Revenue
      Officer or employee shall be a return . . . if the document
      (or set of documents) identifies the taxpayer by name and
      taxpayer identification number, contains sufficient
      information from which to compute the taxpayer’s tax
      liability, and purports to be a return.

       Thus, a document or set of documents is a substitute for return
for purposes of section 6020(b) if it (1) is signed by the Commissioner or
                                   161

[*161] other authorized employee, (2) identifies the taxpayer by name
and taxpayer identification number, (3) contains sufficient information
to compute the taxpayer’s tax liability, and (4) purports to be a return.
See id.

      Regarding the signature requirement of Treasury Regulation
§ 301.6020-1(b)(2), the regulation provides:

      A return may be signed by the name or title of an Internal
      Revenue Officer or employee being handwritten, stamped,
      typed, printed or otherwise mechanically affixed to the
      return, so long as that name or title was placed on the
      document to signify that the Internal Revenue Officer or
      employee adopted the document as a return for the
      taxpayer. The document and signature may be in written
      or electronic form.

       Section 6651(b)(2) provides that the amount of tax shown on the
return is, for purposes of computing the addition for any month, reduced
by the amount of any part of the tax paid on or before the beginning of
the month and by the amount of any credit against the tax reported on
the return.

       For individual taxpayers, the IRS has the burden of producing
evidence that the addition to tax under section 6651(a)(2) is appropriate.
§ 7491(c). The IRS can satisfy its burden of production with evidence
that it prepared a valid substitute for return under 6020(b) and that the
taxpayer failed to pay the tax shown on the substitute for return.
Wheeler, 127 T.C. at 210.

       Once the IRS has satisfied its burden of production, the taxpayer
has the burden to prove that the addition to tax is not appropriate.
McLaine v. Commissioner, 138 T.C. 228, 245 (2012), as amended (June
7, 2012) (citing Higbee, 116 T.C.at 447). This burden includes the burden
of proving that the failure to pay was due to reasonable cause and not
due to willful neglect. See § 6651(a)(2). Treasury Regulation § 301.6651-
1(c) provides the standard as to what constitutes reasonable cause for
failing to pay:

      A failure to pay will be considered to be due to reasonable
      cause to the extent that the taxpayer has made a
      satisfactory showing that he exercised ordinary business
      care and prudence in providing for payment of his tax
      liability and was nevertheless either unable to pay the tax
                                   162

[*162] or would suffer an undue hardship . . . if he paid on the due
       date.

The regulation further provides that in evaluating whether this showing
is made “consideration will be given to all the facts and circumstances
of the taxpayer’s financial situation”. Id.

       A.    Petitioners waived the argument that (1) the IRS did not
             prepare a valid substitute for return under section 6020(b)
             and (2) the IRS has not produced evidence that it prepared
             such a return.

        The notices of deficiency included documents that can qualify as
substitutes for returns under 6020(b) if they were signed. The Fraziers
did not file returns for 2012 and the IRS prepared separate notices of
deficiency for William and Mary for 2012. The Forms 4549-A, Income
Tax Examination Changes, and attached Forms 886-A, Explanation of
Items, incorporated in each of the Fraziers’ 2012 notices of deficiency
meet all but one of the requirements of Treasury Regulation § 301.6020-
1(b)(2)—they identify the taxpayer by name and taxpayer identification
number and contain sufficient information to compute the taxpayer’s tax
liability. However, they do not meet the signature requirement. Treas.
Reg. § 301.6020-1(b)(2). On neither of the Forms 4549-A nor the Forms
886-A is a “name or title . . . placed on the document to signify that the
Internal Revenue Officer or employee adopted the document as a return
for the taxpayer.” Id.

      The notices of deficiency determined that valid substitutes for
returns had been prepared on February 12, 2015, which was the same
date the notices of deficiency were prepared, and that the tax shown on
the substitutes for returns was $455,057 for William and $451,185 for
Mary (before accounting for timely payments and credits against tax).

       Petitioners and the IRS stipulated that the IRS filed substitutes
for returns pursuant to section 6020(b) for the Fraziers individually for
2012. Although the stipulation does not specify that the substitutes for
returns consist of documents in the notices of deficiency (the Forms
4549-A and 886-A) or specify the amount of tax shown on the substitutes
for returns, petitioners did not dispute (on brief or otherwise) the
determinations in the notices of deficiency that the substitutes for
returns were prepared on February 12, 2015, and that the tax shown on
the substitutes for returns was $455,057 for William and $451,185 for
Mary.
                                    163

[*163] The IRS can satisfy its burden of production with evidence that
it prepared a valid substitute for return under 6020(b) and that the
taxpayer failed to pay the tax shown on the substitute for return.
Wheeler, 127 T.C. at 210. Because the parties stipulated that the IRS
filed substitutes for returns pursuant to section 6020(b) and because
petitioners did not argue (on brief or otherwise) that the substitutes for
returns referenced in the stipulation did not meet the requirements of
Treasury Regulation § 301.6020-1(b)(2), we hold that petitioners waived
the argument that the IRS did not prepare valid substitutes for returns
under 6020(b) and we treat the Forms 4549-A and 886-A prepared for
William and Mary as their substitutes for returns. Petitioners did not
pay the tax shown on the substitutes for returns, hence the IRS has
satisfied its burden of production. See § 7491(c).

      B.     For 2012, should the Rule 155 computations show a positive
             amount as the correct amount of tax, the Fraziers are liable
             for the section 6651(a)(2) addition to tax.

       The amount of tax shown on the returns under section 6651(a)(2)
(accounting for section 6651(c)(2) and 6651(b)), if any, will be determined
under Rule 155. Should the Rule 155 computations show a positive
amount, the Fraziers are liable for the section 6651(a)(2) addition to tax
for the 2012 tax year unless they have proven that they had reasonable
cause for their failure to pay. See § 6651(a)(2); see also McLaine, 138 T.C.
at 245–46 (taxpayer bears the burden of proving reasonable cause for
section 6651(a)(2) additions to tax).

        As to the Fraziers’ liability for the addition to tax under
6651(a)(2), petitioners make the general statement that “Delinquency
Penalties Should Not Apply” and that “penalties set forth in IRC Section
6651(a)(1) and IRC Section 6651(a)(2) should not be imposed.” However,
all their specific arguments in support of this general statement go to
late filing under 6651(a)(1) not late payment under 6651(a)(2). To prove,
under 6651(a)(2), that the failure to pay was due to reasonable cause
and not due to willful neglect the petitioner must show “that he
exercised ordinary business care and prudence in providing for payment
of his tax liability and was nevertheless either unable to pay the tax or
would suffer an undue hardship . . . .” Treas. Reg. § 301.6651-1(c)
(emphasis added). The Fraziers provide no explanation for their failure
to pay, such as an argument based on their financial situation or that
they would have faced an undue hardship if they paid on the due date.
See id. Therefore, the Fraziers have not argued that that they had
reasonable cause for their failure to pay. See § 6651(a)(2).
                                    164

[*164] XIII. LHDC’s liability for section 6662 accuracy-related penalties

       Section 6662(a) and (b)(2) imposes a 20% penalty on the portion
of an underpayment of tax attributable to a substantial understatement
of income tax. An understatement of income tax is the excess of (1) the
correct tax minus (2) the tax reported minus any rebate. § 6662(d)(2)(A).
For a corporation (other than an S corporation or a personal holding
company)

      there is a substantial understatement of income tax for any
      taxable year if the amount of the understatement for the
      taxable year exceeds the lesser of—
             (i) 10 percent of the tax required to be shown on the
      return for the taxable year (or, if greater, $10,000), or
             (ii) $10,000,000.

§ 6662(d)(1)(B).

      An underpayment is the amount by which the correct tax exceeds
the excess of (1) the sum of (a) the tax reported plus (b) amounts not so
reported that were previously assessed (or collected without
assessment) minus (2) any rebates made. § 6664(a); Treas. Reg.
§ 1.6664-2(a) and (b).

       Section 6751(b) provides that the initial determination to impose
certain types of penalties (including accuracy-related penalties under
section 6662) must generally be personally approved in writing by the
immediate supervisor of the person making the determination. See
Graev, 149 T.C. at 493.

       Unlike for individual taxpayers, the IRS does not have the burden
of production with respect to section 6662(a) accuracy-related penalties
asserted against corporate taxpayers. § 7941(c) (“[T]he Secretary shall
have the burden of production in any court proceeding with respect to
the liability of any individual for any penalty [or] addition to tax . . . .”
(emphasis added)); see also NT, Inc. v. Commissioner, 126 T.C. at 194–
95; Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 231–
32 (2018). A corporate taxpayer has the burden of production, NT, Inc.,
126 T.C. at 194. As with individual taxpayers, a corporate taxpayer has
the burden of persuasion. Cozzi, 88 T.C. at 443 n.8.

      Section 6664(c)(1) provides that the penalty under section 6662(a)
does not apply to any portion of the underpayment to the extent that the
taxpayer had reasonable cause for that portion of the underpayment and
                                  165

[*165] acted in good faith with respect to that portion of the
underpayment. “Reasonable cause requires that the taxpayer have
exercised ordinary business care and prudence as to the disputed item.”
Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000) (citing
Boyle, 469 U.S. 241), aff'd, 299 F.3d 221 (3d Cir. 2002). Good faith
reliance on the advice of an independent, competent professional may
meet this requirement. Treas. Reg. § 1.6664-4(b)(1); see also
Neonatology, 115 T.C. at 98. However, the “advice must be based upon
all pertinent facts and circumstances and the law as it relates to those
facts and circumstances.” Treas. Reg. § 1.6664-4(c)(1)(i). Advice is
defined by Treasury Regulation § 1.6664-4(c)(2):

      Advice is any communication, including the opinion of a
      professional tax advisor, setting forth the analysis or
      conclusion of a person, other than the taxpayer, provided
      to (or for the benefit of) the taxpayer and on which the
      taxpayer relies, directly or indirectly, with respect to the
      imposition of the section 6662 accuracy-related penalty.
      Advice does not have to be in any particular form.

        In Neonatology, we held that for a taxpayer to reasonably rely on
professional advice so as to possibly negate a section 6662(a) penalty,
the taxpayer must prove by a preponderance of the evidence that
“(1) [t]he 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.” 115 T.C. at 99. We also held
that “[t]he 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.” Id. at 100.

      The parties stipulate that for all petitioners (including LHDC),

      [t]he requirements of I.R.C. § 6751(b)(1) have been
      satisfied with respect to the application of the I.R.C.
      § 6662(a) penalties for all taxable years at issue to the
      extent, and only to the extent, such penalties are
      exclusively related to the portion of any underpayment
      which is attributable to any substantial understatement of
      income tax pursuant to I.R.C. § 6662(b)(2) and I.R.C.
      § 6662(d).
                                        166

[*166] Thus, we hold that the supervisory-approval requirements of
section 6751(b)(1) have been met for all taxable years at issue with
respect to the application of the section 6662(a) accuracy-related penalty
attributable to substantial understatements of income tax.

       A.      For 2009, if Rule 155 computations show a substantial
               understatement, LHDC is liable for the section 6662(a)
               penalty for the entire underpayment.

       There is an underpayment only if the correct tax exceeds the tax
reported minus any rebates made. 73 The tax reported is $50,681, the
amount that LHDC reported on its 2009 return. There was a $43,099
rebate in the form of a refund received. 74 See supra FINDINGS OF
FACT Part XVIII.B.1 note 39 and accompanying text. The correct tax is
the result of our holdings and parties’ concessions and stipulations. It
will be computationally determined by the Court after the parties
submit their Rule 155 computations. LHDC overreported income by
including the $2,165,000 cash distribution from Louisiana Assisted. We
hold that this amount is not includable in LHDC’s income because
neither petitioners nor the IRS asserts that this cash distribution
exceeded LHDC’s outside basis in Louisiana Assisted immediately
before the distribution. See § 731(a)(1). See supra OPINION Part
II.B.1.b.

       LHDC underreported income by failing to include the $2,987,744
distributive share of Louisiana Assisted’s nonseparately stated income
and $3,156 distributive share of Louisiana Assisted’s separately stated
interest income. These amounts were includable because LHDC was the
true member of Louisiana Assisted in 2009. See supra OPINION Part
I.B. LHDC also underreported income by failing to report the $3,316 of
interest income from BanCorp South, the $144 of dividend income from
Intel Corporation, and the $3,588 of rental income from Jefferson
Parish.

       73 For 2009, there were no “amounts not so reported that were previously
assessed (or collected without assessment).” § 6664(a)(1)(B).
        74 In calculating an underpayment under section 6664 and an understatement

under 6662, refunds received are treated as rebates to the extent that they were made
on the ground that the tax imposed was less than the excess of the sum of the amount
shown as the tax by the taxpayer on its return, plus amounts not so shown previously
assessed (or collected without assessment) over rebates previously made. See
§ 6664(a)(2); Pesch, 78 T.C. at 110–13; see also Galloway, 149 T.C. at 414, 418–19;
Baldwin, 97 T.C. at 709–10.
                                        167

[*167] As a result, LHDC underreported income by $832,948
($2,987,744 + $3,156 + $3,316 + $144 + $3,588 − $2,165,000). It follows
that the correct tax is greater than the tax reported ($50,681). This
means that the correct tax is also greater than the tax reported ($50,681)
minus rebates ($43,000). 75 Thus, there is an underpayment.

        There is an understatement for 2009 if the correct tax exceeds the
tax reported minus any rebates made. 76 § 6662(d)(2)(A). The tax
reported is $50,681, and there was a $43,099 rebate in the form of a
refund received. 77 Thus, there is an understatement for 2009. An
understatement is “substantial” under section 6662(d)(1)(B) if it
“exceeds the lesser of—(i) 10 percent of the tax required to be shown on
the return for the taxable year (or, if greater, $10,000), or
(ii) $10,000,000.” This will be computationally determined by the Court
after the parties submit their Rule 155 computations.

       If there is a substantial understatement for 2009, LHDC is liable
for the section 6662(a) penalty for the entire underpayment except to
the extent that any portion of the underpayment is due to reasonable
cause and for which LHDC acted in good faith.

      LHDC failed to set forth any reasonable-cause-and-good-faith-
argument regarding its failure to report the $3,316 of interest income
from BanCorp South, the $144 of dividend income from Intel
Corporation, and the $3,588 of rental income from Jefferson Parish.

       LHDC argues that the section 6662(a) penalty should not apply
because it had reasonable cause and acted in good faith by allegedly
relying on professional advice from Trombetta. It asserts that Trombetta
advised it that because it was the true member of Louisiana Assisted it
(1) should not include the $2,987,744 distributive share of nonseparately
stated income of Louisiana Assisted and the $3,156 separately stated
interest income of Louisiana Assisted, and (2) should instead include a

        75 In calculating an underpayment under section 6664 and an understatement

under 6662, refunds received are treated as rebates to the extent that they were made
on the ground that the tax imposed was less than the excess of the sum of the amount
shown as the tax by the taxpayer on its return, plus amounts not so shown previously
assessed (or collected without assessment) over rebates previously made. See
§ 6664(a)(2); Pesch, 78 T.C. at 110–13; see also Galloway, 149 T.C. at 414, 418–19;
Baldwin, 97 T.C. at 709–10.
       76 For 2009, there were no “amounts not so reported that were previously
assessed (or collected without assessment).” § 6664(a)(1)(B).
       77 See supra OPINION Part X.A note 64.
                                     168

[*168] lesser amount, $2,165,000, representing a cash distribution from
Louisiana Assisted. However, the record does not indicate that
Trombetta gave this advice. Trombetta prepared LHDC’s tax returns.
However, “[t]he 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, 115 T.C. at 100.
Petitioners have failed to show that Trombetta gave advice, meaning
“any communication, including the opinion of a professional tax advisor,
setting forth the analysis or conclusion” to not include this income from
Louisiana Assisted. See Treas. Reg. 1.6664-4(c)(2).

        Petitioners bear the burden of proving reasonable cause, which
they have not carried. We hold that LHDC did not have reasonable cause
for failing to include the $2,987,744 distributive share of nonseparately
stated income of Louisiana Assisted and the $3,156 separately stated
interest income of Louisiana Assisted.

      If Rule 155 computations show a substantial understatement for
2009, LHDC is liable for the section 6662(a) penalty for the entire
underpayment for the year.

       B.     For 2010, LHDC is not liable for the accuracy-related
              penalty under section 6662(a).

       There is no underpayment of tax for 2010. An underpayment is
the excess of the correct tax over the tax reported. 78 The tax reported is
$0, the amount that LHDC reported on its 2010 return.

      Although the notice of deficiency disallowed $424,935 of LHDC’s
salary-and-wage deductions, we held supra OPINION Part III that
LHDC is entitled to deduct the $424,935. Thus, LHDC’s 2010 return did
not underreport income in claiming the $424,935 deduction.

      LHDC overreported income by incorrectly including the $765,000
cash distribution from Louisiana Assisted. We hold that this amount is
not includable in LHDC’s income because neither petitioners nor the
IRS asserts that this cash distribution exceeded LHDC’s outside basis
in Louisiana Assisted immediately before the distribution. See
§ 731(a)(1). See supra OPINION Part II.B.2.b.

        78 For 2010, there were no “amounts not so reported that were previously

assessed (or collected without assessment),” § 6664(a)(1)(B), or “rebates made,”
§ 6664(a)(2).
                                        169

[*169] LHDC underreported income by failing to include the $643,165
distributive share of Louisiana Assisted’s nonseparately stated income
and the $3,392 distributive share of Louisiana Assisted’s separately
stated interest income. These amounts were includable in LHDC’s
income because LHDC was the true member of Louisiana Assisted in
2010. See supra OPINION Part II.B.2.b. LHDC also underreported
income by failing to report $935 of interest income from BanCorp South
and $167 of dividend income from Intel. As a result, LHDC overreported
income by $117,341 ($765,000 − ($643,165 + $3,392 + $935 + $167)).
Because the return overreported income, the tax reported on the return
exceeded the correct tax. Thus, there is no underpayment. Because there
is no underpayment of tax for 2010, LHDC is not liable for the accuracy-
related penalty under section 6662(a) for 2010.

       Although petitioners put forth a reasonable cause argument for
all section 6662(a) penalties for LHDC for all tax years, we need not
address this argument for LHDC for 2010 because LHDC is not liable
for the accuracy-related penalty under section 6662(a) for 2010.

       C.      For 2011, LHDC is not liable for the accuracy-related
               penalty under section 6662(a).

      There is no underpayment of tax for 2011. There is an
underpayment only if the correct tax exceeds the tax reported minus any
rebates made. 79 The tax reported is $2,742—the amount that LHDC
reported on its 2011 return. There was a $2,742 rebate in the form of a
refund received. 80 See supra FINDINGS OF FACT Part XVIII.B.1 note
39 and accompanying text.

      Although the notice of deficiency disallowed $358,922 of LHDC’s
salary-and-wage deductions and $158,993 of LHDC’s professional-fee
deductions, we held supra OPINION Part III that LHDC is entitled to
deduct the $358,922 and $158,993. Thus, LHDC’s 2011 return did not

       79 For 2011, there were no “amounts not so reported that were previously

assessed (or collected without assessment).” § 6664(a)(1)(B).
       80 In calculating an underpayment under section 6664 and in calculating an

understatement under 6662, refunds received are treated as rebates to the extent that
they were made on the ground that the tax imposed was less than the excess of the
sum of the amount shown as the tax by the taxpayer on its return, plus amounts not
so shown previously assessed (or collected without assessment) over rebates previously
made. See § 6664(a)(2); Pesch, 78 T.C. at 110–13; see also Galloway, 149 T.C. at 414,
418–19; Baldwin, 97 T.C. at 709–10.
                                       170

[*170] underreport income in claiming the $358,922 and $158,993
deductions.

       LHDC overreported income by incorrectly including the $450,000
cash distribution from Louisiana Assisted. We hold that this amount is
not includable in LHDC’s income because neither petitioners nor the
IRS asserts that this cash distribution exceeded LHDC’s outside basis
in Louisiana Assisted immediately before the distribution. See
§ 731(a)(1). See supra OPINION Part II.B.3.b. LHDC also overreported
income because it did not deduct the $7,586 distributive share of
Louisiana Assisted’s nonseparately stated loss from its 2011 income.
LHDC was entitled to deduct this loss because LHDC was the true
member of Louisiana Assisted in 2011. See supra OPINION Part
II.B.3.b.

       LHDC underreported income by failing to include the $1,839
distributive share of Louisiana Assisted’s separately stated interest
income. This amount was includable in LHDC’s income because LHDC
was the true member of Louisiana Assisted in 2011. See supra OPINION
Part II.B.3.b. LHDC also failed to report $1,195 of interest income from
BanCorp and $214 of dividend income from Intel. As a result, LHDC
overreported income by $454,338 ($450,000 + $7,586 − ($1,839 + $1,195
+ $214)). Therefore, the correct tax is less than the reported tax. It
follows that the correct tax is also less than the reported tax minus the
$2,742 rebate. Thus, there is no underpayment. There is no penalty
under section 6662(a) if there is no underpayment of tax. Because there
is no underpayment of tax for 2011, LHDC is not liable for the accuracy-
related penalty under section 6662(a) for 2011.

       Although petitioners put forth a reasonable cause argument for
all section 6662(a) penalties for LHDC for all tax years, we need not
address this argument for LHDC for 2011 because LHDC is not liable
for the accuracy-related penalty under section 6662(a) for 2011.

XIV. LHDC’s liability for section 6651(a)(1) additions to tax

       Every corporation subject to taxation under subtitle A 81 must file
a federal income tax return. § 6012(a)(2). Section 6651(a)(1) imposes an

        81 Subtitle A, “Income Taxes,” comprises sections 1–1564 of the Internal

Revenue Code. It includes section 11, which imposes a tax on every corporation (with
certain exceptions not relevant here). The tax imposed on LHDC is the section 11
corporate tax, and the tax return that was untimely filed is Form 1120, U.S.
Corporation Income Tax Return.
                                    171

[*171] addition to tax for the failure to file a tax return by its filing
deadline (determined by taking into account any extensions of that
deadline). The section 6651(a)(1) addition to tax is 5% of the correct tax
for each month the failure to file continues, not to exceed 25% in the
aggregate. § 6651(a)(1), (b)(1); see also Treas. Reg. § 301.6651-1(b).
Section 6651(b)(1) provides that the correct tax is “reduced by the
amount of any part of the tax which is paid on or before the date
prescribed for payment of the tax and by the amount of any credit
against the tax which may be claimed on the return,” including amounts
withheld for federal income tax. See § 31(a).

       As with the section 6662(a) accuracy-related penalty, the IRS
does not have the burden of production with respect to section 6651(a)(1)
additions to tax asserted against corporate taxpayers. § 7941(c); see NT,
Inc., 126 T.C. at 194–95.

       A corporate taxpayer has the burden of proof, NT, Inc., 126 T.C.
at 194. The burden of proof includes the burden of establishing that the
failure to timely file is due to reasonable cause and not due to willful
neglect. See § 6651(a)(1). The delay is due to a “reasonable cause” if “the
taxpayer exercised ordinary business care and prudence and was
nevertheless unable to file the return within the prescribed time.” Treas.
Reg. § 301.6651-1(c). “Willful neglect” is “conscious, intentional failure
or reckless indifference.” Boyle, 469 U.S. at 245. Whether there was
reasonable cause (and no willful neglect) is a question of fact “answered
on the basis of the circumstances of the individual case.” Grecian
Magnesite Mining, Indus. & Shipping Co., 149 T.C. at 94; accord Boyle
469 U.S. at 249 n.8.

      The failure of an accountant or lawyer to prepare a taxpayer’s
return is not in and of itself reasonable cause for a failure to timely file.
Logan Lumber Co., 365 F.2d at 854; see also Boyle, 469 U.S. at 251.

      A.     For 2009, LHDC is liable for the section 6651(a)(1) addition
             to tax.

       LHDC’s 2009 income tax return was due on September 15, 2010,
but was not filed until February 28, 2011. Because LHDC filed the
return more than five months after its due date, it is liable for the
maximum 25% section 6651(a)(1) addition to tax for the 2009 tax year
unless it has proven that it had reasonable cause for its failure to timely
file and its failure was not due to willful neglect. See § 6651(a)(1);
Higbee, 116 T.C. at 446–47.
                                         172

[*172] Petitioners argue that LHDC’s failure to timely file its 2010
return was due to reasonable cause and not willful neglect because it
relied on Trombetta to timely file its income tax return. The failure of
an accountant to prepare a taxpayer’s return is not reasonable cause for
a failure to timely file. See Logan Lumber Co., 365 F.2d at 854. LHDC’s
alleged reliance on Trombetta is not reasonable cause for its failure to
timely file its 2009 return. 82

        We find that LHDC did not have reasonable cause for failing to
timely file its 2009 income tax return. Accordingly, we hold that LHDC
is liable for the section 6651(a)(1) addition to tax for failure to timely file
its 2009 income tax return. LHDC’s correct amount of tax for 2009
resulting from the conclusions in this Opinion will be computed under
Rule 155. This correct amount of tax must be reduced by $47,761, the
amount of tax that LHDC paid in 2009 before the due date of its 2009
return. See § 6651(b)(1).

       B.      For 2010, LHDC is liable for the section 6651(a)(1) addition
               to tax.

        LHDC’s 2010 income tax return was due on September 15, 2011,
but was not filed until November 16, 2011. Two months of addition to
tax is calculated because LHDC filed its return two months after its due
date. Treas. Reg. § 301.6651-1(b). Therefore, LHDC is liable for a 10%
section 6651(a)(1) addition to tax for the 2010 tax year unless it has
proven that it had reasonable cause for its failure to timely file and its
failure was not due to willful neglect. See § 6651(a)(1); Higbee, 116 T.C.
at 446–47.

       LHDC argues that it relied on Trombetta to timely file its income
tax return. The failure of an accountant to prepare a taxpayer’s return
is not reasonable cause for a failure to timely file. See Logan Lumber

       82 LHDC also argues that the Court ought to grant it relief from its 2009 section

6651(a)(1) addition to tax under the policy allowing an abatement of penalties for the
first time a taxpayer fails to file a return set forth in the Internal Revenue Manual
20.1.1.3.6.1. (Nov. 25, 2011). The Internal Revenue Manual provides the IRS’s intra-
agency operating procedures. The provisions of the Internal Revenue Manual do not
confer judicially enforceable rights on taxpayers. Valen Mfg. Co., 90 F.3d at 1194;
Horne, 714 F.2d at 207; see also Caceres, 440 U.S. at 750–51. Therefore, we cannot
grant LHDC the relief that it seeks.
                                        173

[*173] Co., 365 F.2d at 854. LHDCs’ alleged reliance on Trombetta is
not reasonable cause for its failure to timely file its 2010 return.

        We hold that LHDC did not have reasonable cause for failing to
timely file its 2010 income tax return. Accordingly, we hold that LHDC
is liable for the section 6651(a)(1) addition to tax for failure to timely file
its 2010 income tax return. LHDC’s correct amount of tax for 2010
resulting from the conclusions in this Opinion will be computed under
Rule 155. 83

       To reflect the foregoing,

       Decisions will be entered under Rule 155.

         83 LHDC did not make any payments prior to the date its return was due or

have any tax withholdings in 2010 with which to reduce its section 6651(a)(1) addition
to tax. See § 6651(b)(1).