Court Opinion

ID: 3008141
Source: CourtListenerOpinion
Date Created: 2015-10-07 17:01:03.688628+00
Date Added: 2024-06-11T11:46:10.634647
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

DJB HOLDING CORPORATION; TAX         No. 12-70574
MATTERS PARTNER; WB PARTNERS,
FKA WB Acquisition Partners,         Tax Ct. No.
           Petitioners-Appellants,    29106-07

                v.

COMMISSIONER OF INTERNAL
REVENUE,
            Respondent-Appellee.

WB ACQUISITION & SUBSIDIARY,         No. 12-70575
             Petitioner-Appellant,
                                     Tax Ct. No.
                v.                    26187-06

COMMISSIONER OF INTERNAL
REVENUE,
            Respondent-Appellee.
2            DJB HOLDING CORP. V. CIR

WB ACQUISITION, INC.,                    No. 12-70576
             Petitioner-Appellant,
                                         Tax Ct. No.
                v.                        5039-08

COMMISSIONER OF INTERNAL
REVENUE,                                    OPINION
            Respondent-Appellee.

            Appeal from a Decision of the
                     Tax Court

               Argued and Submitted
     December 9, 2014—San Francisco, California

                Filed October 7, 2015

     Before: Alex Kozinski, Johnnie B. Rawlinson,
         and Mary H. Murguia, Circuit Judges.

              Opinion by Judge Murguia
                   DJB HOLDING CORP. V. CIR                           3

                           SUMMARY*

                                 Tax

    The panel affirmed three Tax Court decisions involving
federal income tax deficiencies and accuracy-related
penalties.

     Greg Watkins and Daren Barone, owners of asbestos
removal business Watkins Contracting, Inc. (WCI), structured
WCI’s sale and reacquisition via various holding corporations
to limit their personal exposure. WCI and one of the holding
corporations, WB Partners, then formed the NTC Joint
Venture for an environmental remediation project.

    The panel held that the Tax Court did not clearly err in
finding no intent to operate the NTC Joint Venture as a bona
fide partnership, and in taxing profits from the venture as
income only to WCI.

    As part of the sale of WCI assets to Kuranda Capital, LP,
Watkins, Barone, and WCI agreed not to compete with
Kuranda in the environmental remediation business. The
panel held that Watkins’s and Barone’s non-competition
agreement with Kuranda may not be imputed to WB Partners,
and that the Tax Court did not clearly err in not assigning any
portion of the proceeds of the noncompetition agreement to
WB Partners.

  *
    This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
4               DJB HOLDING CORP. V. CIR

    Finally, the panel held that the Tax Court did not commit
reversible error in assessing an accuracy-related penalty,
because taxpayers identified no substantial authority or
reasonable cause for their positions.

                        COUNSEL

Lacey Strachan and Steven Toscher (argued), Hochman,
Salkin, Rettig, Toscher & Perez, P.C., Beverly Hills,
California, for Petitioners-Appellants.

Andrew Weiner (argued) and Teresa Ellen McLaughlin,
Attorneys, and Gilbert Steven Rothenberg, Deputy Assistant
Attorney General, United States Department of Justice,
Washington, D.C.; William J. Wilkins, Chief Counsel,
Internal Revenue Service, Washington D.C., for Respondent-
Appellee.

                         OPINION

MURGUIA, Circuit Judge:

    Daren Barone and Gregory Watkins drew upon their
experience in asbestos removal to establish a successful
environmental remediation company, Watkins Contracting,
Inc (“WCI”). With success came risk—in particular, the
danger that Barone and Watkins would be held personally
liable for the cost of completing any projects that WCI was
unable to finish. To shield themselves from this risk, the two
men restructured WCI so that several corporate entities stood
between them and the company. Barone and Watkins each
formed a holding corporation, and the two corporations
                DJB HOLDING CORP. V. CIR                      5

entered a partnership, Appellant WB Partners. Barone and
Watkins also formed a third holding company, Appellant WB
Acquisition, Inc., and transferred their interest in WCI to this
company. Finally, WB Partners purchased all shares of WB
Acquisition. As a result, WCI was owned by WB
Acquisition, which was owned by WB Partners, which in turn
was owned by Barone’s and Watkins’s holding corporations.
This elaborate corporate structure provided Barone and
Watkins with multiple levels of protection from personal
liability. See Appendix.

    An opportunity arose to do environmental remediation
work for a massive redevelopment project at the San Diego
Naval Training Center (“NTC”). To win the contract,
however, WCI would have to post a large bond against the
possibility that it would be unable to complete the work. To
ensure that WCI could afford the bond, Barone and Watkins
caused WCI and WB Partners to form a joint venture, dubbed
the NTC Joint Venture. Under the terms of the joint venture
agreement, WCI would do the environmental remediation
work, and WB Partners would supply financial guaranties. In
exchange for these services, WCI would receive thirty
percent of the venture’s profits, and WB Partners would
receive seventy percent.

    The joint venture’s structure had significant federal
income tax consequences. WCI would have to pay corporate
income tax on its thirty-percent share of the venture’s profits.
As a general partnership, WB Partners would pay no income
tax on its seventy-percent share; instead, that income would
pass through to WB Partners’ owners, the two holding
corporations. The holding corporations were S corporations,
whose income is treated in the same manner as that of a
general partnership—it passes through to the S corporations’
6               DJB HOLDING CORP. V. CIR

shareholders. And because all shares of Barone’s and
Watkins’s holding corporations were owned by tax-exempt
retirement savings plans, WB Partners’ seventy-percent share
of the NTC Joint Venture’s profits would only be subject to
federal income tax if and when the retirement plans
distributed benefits to their holders.

    While the NTC project was ongoing, WCI sold its assets
to Kuranda Capital, LP (“Kuranda”). The purchase
agreement allocated a portion of the sales price as
consideration for a noncompetition agreement, whereby
Watkins, Barone, and WCI agreed not to compete with
Kuranda in the environmental remediation business. WB
Partners claimed all of the proceeds of the noncompetition
agreement on its tax returns.

    This action began when Appellants WB Partners, WB
Acquisition, and Barone’s holding corporation (collectively,
“Taxpayers”) challenged certain tax deficiencies identified by
the Commissioner of Internal Revenue. In three consolidated
decisions, the Tax Court found that the NTC Joint Venture
was not a valid partnership for tax purposes, and therefore
that all of the joint venture’s profits were taxable income to
WCI. The Tax Court determined that all of the proceeds from
the noncompetition agreement were income to WCI as well.
Because WCI had substantially understated its income, the
Tax Court upheld the Commissioner’s assessment of
accuracy-related penalties. Taxpayers appealed.

   For the reasons that follow, we affirm the decisions of the
Tax Court.
                DJB HOLDING CORP. V. CIR                   7

                     BACKGROUND

I. History of Watkins Contracting, Inc.

    In the early 1980s, Barone and Watkins worked in the
asbestos removal business in Hawaii. Watkins later returned
home to San Diego, where he went to work for his father’s
asbestos removal company. The company soon expanded
into other areas of environmental remediation. When Barone
joined the company in the early 1990s, he and Watkins
purchased it themselves, renaming it Watkins Contracting,
Inc. (“WCI”).

    Barone was uncomfortable with the degree of personal
liability involved in the environmental remediation business.
In 1997, Barone and Watkins sold WCI’s stock to REXX
Environmental Corp. (“REXX”), another environmental
remediation company, thereby relieving themselves of any
personal liability on future projects. REXX in turn hired
Barone and Watkins to manage WCI. Barone became WCI’s
CEO, and was responsible for “[t]he day-to-day business
affairs, . . . anything from managing employees to handling
financing to business development.” Watkins “oversaw a lot
of the field.”

    REXX soon encountered financial difficulties, and
approached Barone and Watkins to gauge their interest in
repurchasing WCI. Barone and Watkins entered an
agreement to buy WCI’s shares on June 10, 1999. The
purchase closed on September 19, 2000.
8                   DJB HOLDING CORP. V. CIR

II. Birth of WB Partners

    Barone wanted to structure the purchase agreement to
afford “(1) [p]ersonal protection from creditors; (2) layers of
liability protection to operate WCI; (3) the ability to invest
both together [with Watkins] and separately, depending on
the risks involved in each project; (4) . . . qualified retirement
plans; and (5) avoid[ance of] probate.” To accomplish these
goals, Barone and Watkins stacked a number of holding
companies between them and WCI to form a multi-layered
liability shield.

    Barone and Watkins created WB Acquisition, Inc., and
arranged for the company to receive WCI’s shares when the
repurchase from REXX closed. They created two S
corporations1—DJB Holding Corporation (“DJB”) and GSW
Holding Corporation (“GSW”). Barone and Watkins then
entered employment agreements with DJB and GSW,
respectively, and each corporation adopted an employee stock
ownership plan2 (“Plan”). The DJB Plan purchased all shares
of DJB, and the GSW Plan purchased all shares of GSW.
DJB and GSW then formed a general partnership called WB

    1
    An “S corporation” is “a corporation that ha[s] elected to be taxed
under Subchapter S of the [Internal Revenue] Code.” Gitlitz v. Comm’r,
531 U.S. 206, 209 (2001). Like a general partnership, an S corporation
does not pay income tax on its profits, but passes the profits through to its
shareholders. Id.
    2
    An “employee stock ownership plan” is “a type of pension plan that
invests primarily in the stock of the company that employs the plan
participants.” Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2463
(2014). The earnings of such a retirement plan are exempt from income
tax, and participants in the plan pay tax on their benefits only when the
benefits are distributed. 26 U.S.C. §§ 401(a), 402(a), 501(a); McDaniel
v. Chevron Corp., 203 F.3d 1099, 1104 (9th Cir. 2000).
                  DJB HOLDING CORP. V. CIR                           9

Partners, in which each corporation owned a fifty-percent
interest. Finally, WB Partners acquired all shares of WB
Acquisition. All the necessary documents were executed in
September 2000.3

     According to Barone, the Plans were intended to provide
qualified retirement plans, personal protection from creditors,
and avoidance of probate. The holding corporations, DJB
and GSW, permitted Barone and Watkins to pursue separate
endeavors, while WB Partners allowed them to work together
if they wished. Another consequence of the arrangement was
that WB Partners’ income would escape taxation until the
Plans distributed benefits: WB Partners, DJB, and GSW are
all “pass-through” entities, 26 U.S.C. §§ 701, 1363(a),
1366(a)–(c), and valid employee stock ownership plans are
tax exempt, 26 U.S.C. §§ 401(a), 501(a), 4975(e)(7); T.D.
9081, 68 Fed. Reg. 42970, 42970 (July 21, 2003).4

    As part of their employment agreements, Barone and
Watkins agreed to render “construction management,
indemnity, and financing services” exclusively for DJB and
GSW, respectively. “Indemnity and financing services”
include “providing personal guarantees required in order for
clients of [DJB and GSW] to obtain a required performance
bond.” In turn, DJB and GSW agreed on September 20,
2000, to provide these services to WB Partners to the extent

  3
   The Commissioner concedes that “WB Partners, [GSW], and [DJB]
exist for Federal income tax purposes.”
 4
   As a general partnership, WB Partners does not pay income tax on its
profits, but passes its earnings on to its partners, DJB and GSW. See
26 U.S.C. § 701. As noted, DJB and GSW are S corporations that pass
their income on to their shareholders, the Plans, and the Plans are tax
exempt. See supra nn.2, 3.
10              DJB HOLDING CORP. V. CIR

“necessary to manage and conduct the business of the
Partnership.”

    The Tax Court found, and Taxpayers do not dispute, that
Barone and Watkins performed the same roles for WCI after
forming WB Partners as before. Watkins continued to
oversee WCI’s work on a “day-to-day basis.” Barone
continued to handle “business development” and “the
financing.”

    In short, after the restructuring, WCI became a subsidiary
of WB Acquisition, which was owned by WB Partners, which
in turn was owned by the holding corporations DJB and
GSW. Barone and Watkins became employees of their
respective holding corporations rather than WCI, but
continued to provide services to WCI according to the terms
of their employment agreements. And WB Partners’
structure ensured that Barone and Watkins would pay no tax
on any of the partnership’s income until they began to receive
benefits from their respective retirement plans.

III.   The NTC Joint Venture

    In 1999 or 2000, the Corky McMillin Companies
(“McMillin”), the Harper-Nielsen-Dillingham Joint Venture
(“Harper”), and WCI joined forces to bid on a large
redevelopment project at the San Diego Naval Training
Center (“NTC”). The work would include removing various
hazardous materials from nearly two hundred buildings. The
City of San Diego awarded the contract to McMillin, who
hired Harper as construction manager. WCI entered a
subcontractor arrangement with Harper on December 1, 2000,
for a lump-sum amount of $17,001,073. McMillin and
Harper also required WCI to sign an indemnity agreement
                  DJB HOLDING CORP. V. CIR                        11

and post a full performance bond, as neither entity was
willing to do so itself.

    Barone worried that assuming personal liability on a $17
million bond could bankrupt him and WCI. In order to
isolate the proceeds of the NTC project from WCI’s other
work, Barone conceived the NTC Joint Venture.

       A. The Joint Venture’s Structure

    WCI and WB Partners executed the NTC Joint Venture
Agreement on September 20, 2000, a week after WB Partners
was formed and just over a month before WCI won the
subcontract from Harper. Under the agreement, WCI would
perform the actual remediation work and WB Partners would
supply indemnity and financial guaranty services. The
agreement further provided that WB Partners would receive
seventy percent of the profits, and WCI would receive thirty
percent.

    The tax consequences of this arrangement bear
mentioning. Because the joint venture agreement entitled
WCI only to thirty percent of the profits, WCI would have to
pay income tax only on that portion.5 The remaining seventy
percent of the profits would pass to WB Partners, whose
income, as mentioned above, was not subject to taxation
unless and until the Plans distributed benefits. In short, if the
NTC Joint Venture were valid for tax purposes, only thirty
percent of its income would be subject to tax now.

   5
     A joint venture is considered a “partnership” for tax purposes.
26 U.S.C. § 761(a). Accordingly, the NTC Joint Venture would pay no
tax on its income, but pass that income on to its members, WCI and WB
Partners. See 26 U.S.C. § 701.
12              DJB HOLDING CORP. V. CIR

    The agreement also provided that the joint venture would
reimburse WCI for costs incurred in the remediation work,
plus five percent. The agreement obligated the joint venture
to keep books and records and to file income tax returns. It
contemplated that Harper would award the subcontract to
WCI, not to the joint venture, and make payments directly to
WCI.

     B. The Joint Venture’s Conduct

    On September 20, 2000, the same day the NTC Joint
Venture was created, WCI, WB Partners, Barone’s and
Watkins’s holding corporations, and the NTC Joint Venture
executed a general indemnity agreement with the American
International Group of Companies (“AIG”). The same
entities entered a second indemnity agreement with
Greenwich Insurance Company on January 2, 2002. Pursuant
to the agreements, the NTC Joint Venture and all the entities
that constituted it agreed to indemnify AIG and Greenwich
against any costs incurred in executing a bond.

     The Insurance Company of the State of Pennsylvania
issued a performance bond on October 18, 2000, and replaced
it soon after with a superseding bond. The bond named WCI
as principal, the insurance company as surety, and both
McMillin and Harper as obligees. The face amount was
$17,001,073, the value of WCI’s lump-sum subcontract with
Harper.

    The NTC Joint Venture obtained an employer
identification number and its own bank account. The joint
venture also tracked its own financing and prepared its own
progress reports.      As the joint venture agreement
contemplated, WCI received payment from Harper directly.
                  DJB HOLDING CORP. V. CIR                        13

Notwithstanding the terms of the agreement, the joint
venture’s accountant opted not to file a tax return for the
venture. Instead, the accountant believed that separately
reporting WCI’s and WB Partners’ income from the NTC
project was sufficient.

    As of September 30, 2002, WCI had billed Harper for
$14,100,332, and incurred costs (plus five percent) of
$5,822,738. This yielded a profit of $8,277,599, of which
WB Partners was entitled to a seventy-percent share, or
$5,794,319. In reality, a WCI invoice reflects that WCI paid
WB Partners only $4,172,000, and kept for itself the
remaining $1,622,319. As a result, WB Partners received
only 50.4% of the profits, not 70%. Barone testified that the
extra $1.6 million was a “bonus” to WCI in recognition of “a
job well done.”

IV.     Sale of WCI’s Assets to Kuranda Capital

    WCI entered an asset purchase agreement with Kuranda
Capital, LP (“Kuranda”),6 on April 18, 2003. The parties
agreed upon a purchase price for WCI’s assets of $4,923,091
in cash and a $500,000 promissory note. As part of the
transaction, Watkins, Barone, and WCI agreed not to compete
with Kuranda in the environmental remediation business.
The asset purchase agreement allocated $3.4 million of the
purchase price to the noncompetition agreement. Taxpayers’
accountant reported all of the noncompetition agreement’s
proceeds, including interest from the note, on WB Partners’
tax returns.

  6
     Kuranda later changed its name to Watkins Contracting, L.P., and
finished the environmental remediation portion of the NTC project as
WCI’s subcontractor.
14              DJB HOLDING CORP. V. CIR

V. Tax Court

    The Commissioner notified WB Acquisition and WB
Partners of tax deficiencies for the years 2002 through 2005.
Taxpayers filed petitions for adjustment. The Tax Court held
that (1) the NTC Joint Venture was not a valid partnership for
tax purposes, (2) only WCI was bound by the noncompetition
agreement, and the $3.4 million allocated to the agreement
was income only to WCI, and (3) accuracy-related penalties
applied.

                     JURISDICTION

   This Court has jurisdiction over Taxpayers’ timely appeal
under 26 U.S.C. § 7482.

                STANDARD OF REVIEW

    This Court reviews the Tax Court’s conclusions of law de
novo and its findings of fact for clear error. Custom Chrome,
Inc. v. Comm’r, 217 F.3d 1117, 1121 (9th Cir. 2000).
Whether a valid partnership existed for tax purposes turns on
whether the parties intended in good faith to act as partners.
Comm’r v. Culbertson, 337 U.S. 733, 741–42 (1949).
Whether there was such an intent is a question of fact.
Comm’r v. Tower, 327 U.S. 280, 287 (1946). To which party
to attribute an item of income is a mixed question of law and
fact, reviewed de novo “unless the question is primarily
factual.” Sparkman v. Comm’r, 509 F.3d 1149, 1157 (9th
Cir. 2007).

   Where the Tax Court imposed an accuracy-related
penalty, we review de novo whether substantial authority
supported the taxpayer’s position. Little v. Comm’r, 106 F.3d
                DJB HOLDING CORP. V. CIR                     15

1445, 1449 (9th Cir. 1997). Whether the taxpayer acted with
reasonable cause and in good faith is a finding of fact
reviewed for clear error. See Hansen v. Comm’r, 471 F.3d
1021, 1029–30 (9th Cir. 2006) (holding that the Tax Court
did not clearly err in finding a lack of reasonable cause and
good faith).

     Under the clear error standard, the Tax Court’s fact
findings are upheld if its “account of the evidence is plausible
in light of the record viewed in its entirety.” Wolf v. Comm’r,
4 F.3d 709, 712–13 (9th Cir. 1993) (quoting Serv. Emps. Int’l
Union, AFL-CIO, CLC v. Fair Political Practices Comm’n,
955 F.2d 1312, 1317 n.7 (9th Cir. 1992), implied overruling
recognized on other grounds by Mont. Right to Life Ass’n v.
Eddleman, 343 F.3d 1085, 1091 n.2 (9th Cir. 2003)).

                       DISCUSSION

I. Income from the NTC Project Attributed to WB
   Partners Was in Fact Income to WCI.

    Taxpayers raise two arguments in the alternative. First,
they argue that the Tax Court clearly erred in finding that the
NTC Joint Venture was not a valid partnership for tax
purposes. Second, they argue that, even if the joint venture
was not a valid partnership, WCI and WB Partners reached a
bona fide agreement to compensate WB Partners for
providing financial guaranties. We conclude that the Tax
Court properly taxed WCI on all income from the NTC
project.
16              DJB HOLDING CORP. V. CIR

     A. The NTC Joint Venture Was Not a Valid
        Partnership for Tax Purposes.

    For tax purposes, a “partnership” is “a syndicate, group,
pool, joint venture, or other unincorporated organization” that
carries on “any business, financial operation, or venture” and
that is not “a corporation or a trust or estate.” 26 U.S.C.
§§ 761(a), 7701(a)(2). To determine whether a purported
joint venture is a valid partnership, courts ascertain whether
“the parties in good faith and acting with a business purpose
intended to join together in the present conduct of the
enterprise.” Culbertson, 337 U.S. at 742. The Tax Court
distilled from Culbertson eight factors to consider in
measuring the parties’ intent:

       [(1)] [t]he agreement of the parties and their
       conduct in executing its terms; [(2)] the
       contributions, if any, which each party has
       made to the venture; [(3)] the parties’ control
       over income and capital and the right of each
       to make withdrawals; [(4)] whether each party
       was a principal and coproprietor, sharing a
       mutual proprietary interest in the net profits
       and having an obligation to share losses, or
       whether one party was the agent or employee
       of the other, receiving for his services
       contingent compensation in the form of a
       percentage of income; [(5)] whether business
       was conducted in the joint names of the
       parties; [(6)] whether the parties filed Federal
       partnership returns or otherwise represented to
       respondent or to persons with whom they
       dealt that they were joint venturers; [(7)]
       whether separate books of account were
                DJB HOLDING CORP. V. CIR                   17

       maintained for the venture; and [(8)] whether
       the parties exercised mutual control over and
       assumed mutual responsibilities for the
       enterprise.

Luna v. Comm’r, 42 T.C. 1067, 1077–78 (1964).

    Here, the Tax Court concluded that the Luna factors
weighed against the conclusion that the NTC Joint Venture
was a valid partnership. Regarding the first factor, the court
noted that the parties violated the terms of the joint venture
agreement both by imposing a 50.4% profit cap on WB
Partners and by failing to file a tax return. These deviations
from the agreement suggested to the Tax Court that WCI and
WB Partners did not intend in good faith to act as partners.
Second, the court found that WB Partners contributed nothing
of value to the joint venture because the performance bond
was issued based not on WB Partners’ financial guaranties,
but on the collective net worth of WCI, WB Partners, Barone,
Watkins, DJB, and GSW as related entities. The marginal
value of WB Partners’ guaranty suggested that WB Partners
did not make a meaningful contribution to the joint venture.
Third, the venture’s imposition of a profit cap on WB
Partners demonstrated that WB Partners exercised no control
over income and capital, further suggesting that WB Partners
did not act as a bona fide partner.

    Fourth, the profit cap and the joint venture agreement’s
provision guaranteeing reimbursement of WCI’s costs
showed that WCI and WB Partners did not intend to share
profits and losses as bona fide partners would. Concerning
the eighth factor, the court found that WB Partners’
concession of a large portion of the profits to which it was
entitled showed that the parties did not exercise mutual
18                  DJB HOLDING CORP. V. CIR

control over the enterprise. The court found the remaining
factors neutral in light of the joint venture’s efforts to conduct
itself as a valid partnership, such as opening a separate bank
account and keeping its own records.7

    On appeal, Taxpayers take issue only with the Tax
Court’s finding regarding the second Luna factor—that WB
Partners contributed nothing of value to the NTC Joint
Venture. They do not dispute the Tax Court’s application of
the Luna factors in any other respect, except to assert that the
court’s assessment of WB Partners’ contribution to the
venture “infected” its analysis of the other factors.

    Before the Tax Court, Taxpayers argued that WB
Partners’ financial guaranty was an essential contribution to
the NTC Joint Venture because WCI could not have won the
NTC project without it. The Tax Court disagreed. It
specifically noted that WCI won the NTC bond based on “the
combined net worth and financial guaranties of each of WCI,
WB Partners, Barone, Watkins, DJB, and GSW,” not based
on WB Partners’ guaranty alone. Moreover, the court
reasoned that WB Partners would have supplied a guaranty
even if the joint venture had never existed, by virtue of being
the parent entity of WCI. Finally, the court noted that only

  7
   The Tax Court found the fifth factor “mixed” because the NTC Joint
Venture obtained and used its own employer identification number as a
legitimate entity would, but WCI dealt with Harper, the construction
contractor, entirely in its own name. The sixth factor was neutral because,
while the joint venture did not file its own tax return, it dealt with various
banks as an entity separate from WCI and WB Partners. Finally, the Tax
Court found the seventh factor neutral because the joint venture
maintained its own bank account, income statements, and progress reports,
but did so using WCI employees and did not keep “other books of account
that may normally be expected in the operation of a business.”
                DJB HOLDING CORP. V. CIR                    19

WB Partners received compensation for its financial
guaranty, while Barone, Watkins, DJB, and GSW each
guaranteed the bond without receiving a share of the NTC
project’s profits. If WB Partners’ guaranty warranted
compensation to the tune of seventy percent of the profits, the
Tax Court reasoned, then surely the other entities’ guaranties
also called for some share of the proceeds.

    On appeal, Taxpayers argue that WB Partners’ financial
guaranty and those of its owners and their employees were in
fact a valuable contribution because WCI could not otherwise
have posted a performance bond. They contend that Tax
Court case law supports this conclusion. In Maxwell v.
Commissioner, 29 T.C.M. (CCH) 1356 (1970), a bridge
construction corporation and its majority owner formed a
joint venture to bid on a lucrative contract. Id. at 1358. The
corporation supplied all the materials and labor, and the
owner provided a personal financial guaranty to enable the
corporation to post a bond. Id. Because the corporation’s net
worth was not alone sufficient to secure the bond, the Tax
Court found that the owner’s guaranty was a valuable
contribution showing intent to form a partnership. Id. at
1362.

    As in Maxwell, Taxpayers argue, WCI could not have
secured the necessary $17 million bond on its own. WB
Partners’ guaranty, along with those of its partner holding
corporations and their employees, made obtaining that bond
possible. Because WB Partners’ financial guaranty, as well
as those of Barone, Watkins, and their holding corporations,
enabled WCI to obtain a performance bond, Taxpayers argue
that the Tax Court clearly erred in finding that WB Partners
contributed nothing valuable to the joint venture.
20              DJB HOLDING CORP. V. CIR

    We conclude that the record supports the Tax Court’s
finding that WB Partners contributed no value to the NTC
Joint Venture. Had the joint venture never existed, WB
Partners would still be obligated to offer Barone’s and
Watkins’s guaranties because both men promised to provide
financial services as necessary to support WB Partners’
business. As WB Partners’ wholly owned subsidiary, WCI
would have been entitled to Barone’s and Watkins’s
guaranties even if WB Partners did not promise to provide
those guaranties to the joint venture.

    In September of 2000, in their employment agreements
with the holding corporations DJB and GSW, Barone and
Watkins promised to provide guaranties to enable the
corporations’ clients to post performance bonds. Later that
month, DJB and GSW amended WB Partners’ general
partnership agreement to offer Barone’s and Watkins’s
services as “necessary to manage and conduct the business of
[WB Partners].” The amendment offered Barone’s and
Watkins’s services not only to WB Partners itself, but also to
any “third parties in connection with” WB Partners’ business.

    WCI’s environmental remediation work for the NTC
redevelopment project was part of WB Partners’ business
because WB Partners wholly owned WB Acquisition, which
in turn wholly owned WCI. Because WCI’s work on the
NTC project was part of WB Partners’ business, the
partnership agreement required Barone and Watkins to
provide any financial guaranties necessary to permit WCI to
obtain the bond it needed to perform the work. Accordingly,
WB Partners was obligated to furnish Barone’s and Watkins’s
guaranties independently of the joint venture agreement. WB
Partners’ commitment to provide guaranties to the NTC Joint
Venture therefore was superfluous.
                DJB HOLDING CORP. V. CIR                   21

    Not only did Barone’s and Watkins’s guaranties
contribute no value to the joint venture independent of what
they were already obligated to provide, but the record also
belies any argument that WB Partners’ own guaranty, or
those of DJB and GSW, held independent value. An
employee of AIG, one of the companies that executed an
indemnity agreement with the NTC Joint Venture, remarked
that the performance bond issued because WCI, Barone, and
Watkins were “financially sound indemnitors.”             The
employee recalled that WCI’s financial condition was “very
good” and that Barone and Watkins both had a “pretty high”
net worth. He did not remember WB Partners’ financial
condition (or that of DJB and GSW) at all. Moreover, at the
time WB Partners provided its guaranty, it had no other assets
outside its equity in the NTC Joint Venture and WB
Acquisition. This evidence supports the Tax Court’s
conclusion that WB Partners’ guaranty contributed no
additional value to the NTC Joint Venture. Only Barone’s
and Watkins’s guaranties enhanced WCI’s ability to secure a
performance bond, and they were obligated to provide the
guaranties purely by virtue of their employment agreements
and the amended partnership agreement. Maxwell is
therefore inapposite, as the majority shareholder in that case
was not obligated to offer his personal guaranty by any
contract outside of the partnership agreement. See 29 T.C.M.
(CCH) at 1358.

    Because Barone and Watkins were contractually obligated
to provide any guaranties necessary to permit WCI to perform
environmental remediation work, WB Partners’ separate
commitment to provide those guaranties to the joint venture
was superfluous. The Tax Court therefore did not clearly err
in concluding that WB Partners contributed nothing of value
to the NTC Joint Venture. Because Taxpayers do not
22              DJB HOLDING CORP. V. CIR

challenge the Tax Court’s analysis of any of the other Luna
factors, it necessarily follows that the Tax Court did not
clearly err in finding that Taxpayers did not intend to operate
the NTC Joint Venture as a bona fide partnership. See Luna,
42 T.C. at 1077–79; Culbertson, 337 U.S. at 742.

     B. WCI and WB Partners Did Not Agree in Good
        Faith To Share Profits.

    Of course, if the NTC Joint Venture was not a valid
partnership for tax purposes, then WB Partners does not have
a partnership interest entitling it to declare as income a share
of the profits from the NTC project. Taxpayers argue in the
alternative that WCI agreed in good faith to assign WB
Partners a share of the profits in exchange for WB Partners’
signing the indemnity agreement.

    Where a taxpayer agreed to pay a portion of the profits
from an enterprise in exchange for financial assistance from
another, that portion of the profits is income to the entity
providing the assistance, not to the taxpayer. See Stevens
Bros. & Miller-Hutchinson Co., Inc. v. Comm’r, 24 T.C. 953,
956–57 (1955). In Stevens Brothers, the taxpayer, a
corporation in the heavy construction business, was unable to
bid on a public works project because it had insufficient
capital to obtain a loan. Id. at 954. Another corporation
agreed to loan the taxpayer the necessary additional capital in
exchange for a one-half share of the profits from the project.
Id. at 955. In accordance with the agreement, the taxpayer
declared only half of the profits as income. Id. at 956. The
Tax Court held that this was proper. Id. The risk of loss to
the second corporation was real, the terms of the agreement
were fair, and the interests of both corporations were
sufficiently “adverse” to permit the conclusion that the
                   DJB HOLDING CORP. V. CIR                            23

contract was “bona fide.” Id. In addition, the corporations
actually shared the profits at the agreed-upon fifty-percent
division, further demonstrating that the agreement was
genuine. Id.

    Taxpayers argue that, as in Stevens Brothers, WCI and
WB Partners agreed that WB Partners would receive a
portion of the profits from the NTC project in exchange for
providing necessary financial assistance to WCI—in this
case, a financial guaranty. As in Stevens Brothers, WB
Partners assumed substantial financial risk by agreeing to
indemnify the surety on the performance bond. Also as in
Stevens Brothers, Taxpayers assert, the parties to the joint
venture agreed that WB Partners would receive a percentage
share of the profits in exchange for its guaranty.

    To the contrary, Taxpayers’ conduct shows that WCI and
WB Partners did not reach a bona fide agreement to transfer
a share of the profits to WB Partners in exchange for its
guaranty. According to the joint venture agreement, WB
Partners was to receive seventy percent of the profits for this
service. Instead, as reflected in an invoice, WCI unilaterally
reduced WB Partners’ share to 50.4%. It is questionable that
a company dealing with WCI at arms’ length would give up
a nearly twenty-percent share of the profits—approximately
$1.6 million—so casually. This disregard for the joint
venture agreement’s terms demonstrates that WCI and WB
Partners did not intend in good faith to be bound by that
agreement.8 Accordingly, the Tax Court did not clearly err in

 8
   Taxpayers argue in the alternative that they are entitled to deduct WB
Partners’ share “as an ordinary and necessary bond guaranty expense.” See
A.A. & E.B. Jones Co. v. Comm’r, 19 T.C.M. (CCH) 1561, 1563 (1960)
(permitting the taxpayer to deduct as a business expense a share of profits
24                 DJB HOLDING CORP. V. CIR

finding that WCI and WB Partners did not reach a bona fide
agreement to share profits. Cf. Stevens Bros., 24 T.C. at 956
(noting that the lending corporation received “payment of the
agreed amounts”).

    The record supports the Tax Court’s finding that WB
Partners contributed no value to the NTC Joint Venture, and
therefore that WB Partners and WCI did not act as bona fide
partners. See Luna, 42 T.C. at 1077–79; Culbertson, 337 U.S.
at 742. WCI’s arbitrary reduction of WB Partners’ share of
the proceeds further supports the Tax Court’s finding that the
two entities did not reach a bona fide agreement to share
profits. Cf. Stevens Bros., 24 T.C. at 956. Accordingly, the
Tax Court properly determined that all of the profits from the
NTC Joint Venture were income to WCI.

II. Proceeds from the Noncompetition Agreement Were
    Income to WCI Rather Than WB Partners.

    The “first principle of income taxation” is “that income
must be taxed to him who earns it.” Culbertson, 337 U.S. at
739–40. When a commercial transaction includes a
noncompetition agreement, the portion of the proceeds
allocated to that agreement is income to the persons who
promised not to compete. For example, when an agreement
to sell a corporation’s assets includes promises by its
shareholders that they will not compete with the purchaser,
the shareholders must declare as income the consideration

paid to shareholders who indemnified a bond surety). Because we affirm
the Tax Court’s conclusion that the parties did not intend in good faith to
transfer a share of the profits to WB Partners in exchange for its
guaranties, we must also reject the suggestion that WCI is entitled to
deduct that share as a business expense.
                DJB HOLDING CORP. V. CIR                    25

they receive for their promises. See Beals’ Estate v. Comm’r,
82 F.2d 268, 270 (2d Cir. 1936) (holding that stock
transferred in exchange for a taxpayer’s agreement not to
compete was income to the taxpayer, and not merely
“ancillary” to a larger reorganization plan); Cox v. Helvering,
71 F.2d 987, 988 (D.C. Cir. 1934) (holding that money paid
in exchange for a shareholder’s agreement not to compete
was income to the shareholder). By promising not to
compete with the purchaser’s business, the shareholders
“earn” the consideration that the purchaser offers in exchange
for the promise. See Cox, 71 F.2d at 988 (“If [a person]
refrains from exercising his skill and ability in a particular
line for a definite period, what he receives in compensation
. . . is income.”).

    Of the roughly $5.5 million price at which Kuranda
agreed to purchase WCI’s assets, the Tax Court concluded
that the $3.4 million portion allocated to the noncompetition
agreement was income to WCI, not WB Partners. The
noncompetition clause prohibits Barone, Watkins, and WCI
from engaging in “Competing Services,” which are defined
to include any

       (i) service that has been provided, performed
       or offered by or on behalf of WCI (or any
       predecessor of WCI) at any time on or prior to
       the date of this Noncompetition Agreement
       that involves or relates to asbestos, mold, and
       lead abatement in residential, commercial and
       government properties; (ii) service that is
       substantially the same as, is based upon or
       competes in any material respect with any
       service referred to in clause “(i)” of this
       sentence.
26              DJB HOLDING CORP. V. CIR

(alterations omitted). To summarize, Barone, Watkins, and
WCI agreed not to compete with Kuranda in providing any
service related to “asbestos, mold, and lead abatement.”

    The Tax Court noted that WCI was the only signatory to
the noncompetition agreement ever to perform “asbestos,
mold, and lead abatement” services. Moreover, it was the
only entity bound by the agreement that “had the proper
licenses and permits to perform the necessary construction
and excavation work.” While Barone’s and Watkins’s
services were necessary to WCI’s operations, the court found
that WCI was entitled to those services because both men
were WCI officers. As the only entity capable of competing
with Kuranda in providing environmental remediation
services, the court found, WCI was the only party truly bound
by the agreement. The Tax Court therefore concluded that
WCI earned all of the proceeds. Accordingly, it found that
the interest on Kuranda’s $500,000 promissory note was also
income to WCI, not WB Partners. Because the Tax Court’s
analysis was “primarily factual,” we review its assignment of
the proceeds of the noncompetition agreement to WCI for
clear error. See Sparkman, 509 F.3d at 1155, 1157.

    As Taxpayers correctly observe, the Tax Court erred in
finding that only WCI was bound by the noncompetition
agreement. Instead, the agreement also bound Barone and
Watkins personally. Contrary to the Tax Court’s reasoning,
Barone’s and Watkins’s status as WCI officers does not
entitle WCI to their services because Barone and Watkins
were employees of their holding corporations, DJB and GSW,
not of WCI. Further, even if they were employees of WCI,
Barone and Watkins were free to terminate their relationship
with WCI at any time. Because California is an at-will
employment state, WCI was not entitled to Barone and
                DJB HOLDING CORP. V. CIR                  27

Watkins’s services in the future absent a contractual
agreement to that effect. See Cal. Lab. Code § 2922 (“An
employment, having no specified term, may be terminated at
the will of either party on notice to the other.”); Guz v.
Bechtel Nat’l, Inc., 8 P.3d 1089, 1110 (Cal. 2000) (“The mere
existence of an employment relationship affords no
expectation, protectible by law, that employment will
continue . . . unless the parties have actually adopted such
terms.”). The record contains no evidence of such an
agreement. Accordingly, under California law, Barone and
Watkins were free to sever their ties to WCI and perform
environmental remediation services for another company.
The noncompetition agreement therefore bound Barone and
Watkins personally not to compete with Kuranda in the
environmental remediation business.

    Taxpayers go on to argue that the noncompetition
agreement binds Barone and Watkins alone, not WCI, and
that WB Partners, not Barone and Watkins, is entitled to the
proceeds of the agreement. This argument rests on two
fundamental misapprehensions. First, by its plain terms, the
agreement forbids “[e]ach of Seller, Watkins and Barone”
from performing competing services. The agreement goes on
to provide that the $3.4 million amount be “allocated as
partial consideration for Seller’s and the Shareholders’
obligations” not to compete. The asset purchase agreement
defines “Seller” as WCI, and “Shareholders” refers to Barone
and Watkins. The terms of the noncompetition agreement
demonstrate that Barone, Watkins, and WCI each earned a
share of the $3.4 million proceeds.

    Second, the proceeds of the noncompetition agreement
are not income to WB Partners because the partnership, like
WCI, has no future claim to Barone’s and Watkins’s services.
28                 DJB HOLDING CORP. V. CIR

It is true that Barone and Watkins agreed to provide their
services exclusively for their holding corporations, DJB and
GSW. DJB and GSW, in turn, agreed to provide Barone’s
and Watkins’s services to WB Partners. However, Barone’s
and Watkins’s employment agreements with DJB and GSW
provide that either party may terminate employment at any
time with ninety days’ notice to the other. Accordingly,
Barone and Watkins were free to leave DJB and GSW and go
off to perform environmental services for another company.
Because WB Partners had no right to expect Barone and
Watkins to continue to provide their services into the future,
Barone’s and Watkins’s agreement not to compete with
Kuranda may not be imputed to WB Partners. WB Partners
therefore earned no part of the consideration for the
noncompetition agreement.

    WCI, Barone, and Watkins each are individually bound
not to compete with Kuranda, and therefore are each entitled
to a share of the noncompetition agreement. See Beals’
Estate, 82 F.2d at 270; Cox, 71 F.2d at 988. Because WB
Partners has no claim to Barone’s and Watkins’s future
services, WB Partners is entitled to no share at all. See
Culbertson, 337 U.S. at 739–40. Accordingly, the Tax Court
did not clearly err in declining to assign any portion of the
proceeds of the noncompetition agreement to WB Partners.9

 9
   Were the question before us, we may be inclined to hold that the Tax
Court clearly erred in failing to assign any share of the noncompetition
agreement’s proceeds to Barone and Watkins individually. Neither party
has asked that we do so.
                 DJB HOLDING CORP. V. CIR                     29

III.      The Tax Court Properly Assessed Accuracy-
          Related Penalties.

    The Internal Revenue Code imposes a twenty-percent
penalty on “[a]ny substantial understatement of income tax.”
26 U.S.C. § 6662(b)(2), (a). Even in the event of a
substantial understatement, however, the taxpayer may escape
the penalty if one or both of two conditions applies. First, a
taxpayer does not owe a penalty where the taxpayer can
identify “substantial authority” supporting its treatment of an
item of income. 26 U.S.C. § 6662(d)(2)(B)(i). Second, to the
extent that the taxpayer had reasonable cause for its position
and acted in good faith, the penalty does not apply. 26 U.S.C.
§ 6664(c)(1).

    The Tax Court assessed penalties against Taxpayers for
substantially understating their income. Taxpayers argue that
the Tax Court’s decisions in Maxwell and Stevens Brothers
furnish substantial authority for their positions that the NTC
Joint Venture was a valid partnership and that the parties to
the venture agreed in good faith to share profits. They also
contend that they relied reasonably and in good faith on the
advice of their accountant in reaching those positions.
Finally, they assert that their positions are reasonable in light
of the complexity of the law governing the validity of
partnerships for tax purposes. For the reasons discussed
below, we reject Taxpayers’ arguments and affirm the district
court’s imposition of accuracy-related penalties.

       A. Maxwell and Stevens Brothers Do Not Furnish
          Substantial Authority for Taxpayers’ Position.

    “The substantial authority standard” is somewhat less
stringent than the “more likely than not standard.” Treas.
30               DJB HOLDING CORP. V. CIR

Reg. § 1.6662-4(d)(2). Substantial authority supports the
taxpayer’s position if, taking into account all relevant
authorities, “the weight of the authorities supporting” the
taxpayer’s position is “substantial” when compared to the
weight of authorities that are contrary to the taxpayer’s
position. § 1.6662-4(d)(3)(i). The weight that a court should
assign to an authority “depends on its relevance and
persuasiveness, and the type of document providing the
authority.” § 1.6662-4(d)(3)(ii). A Tax Court disposition may
be relevant authority, but is “not particularly relevant” if it “is
materially distinguishable on its facts.” Id.

    Taxpayers advance two Tax Court opinions as substantial
authority for their position that the share of the profits from
the NTC project transferred to WB Partners is properly WB
Partners’ income. One is Maxwell, in which the court found
that a corporation and its majority shareholder formed a valid
partnership when the shareholder agreed to guarantee a
necessary bond in exchange for a share of the profits. 29
T.C.M. (CCH) at 1362. The second is Stevens Brothers, in
which the court held that a corporation properly declared only
half the profits from a project as income where it agreed to
pay the other half to another corporation in exchange for a
capital loan. 24 T.C. at 955–56.

    Maxwell and Stevens Brothers do not amount to
substantial authority because they are materially
distinguishable. In each case, the taxpayer reached a bona
fide agreement to share the profits from an endeavor in
exchange for a financial guaranty or loan. In this case, the
joint venture’s decision to cap WB Partners’ share at a rate
apparently plucked from thin air shows that the profit-sharing
agreement was not bona fide. The absence of a good-faith
profit-sharing agreement distinguishes this case from
                DJB HOLDING CORP. V. CIR                    31

Maxwell and Stevens Brothers, and leaves Taxpayers’
position unsupported by substantial authority. See Treas.
Reg. § 1.6662-4(d)(3)(ii).

   B. Taxpayers May Not Claim Reasonable Reliance on
      Their Accountant’s Opinion Because the
      Accountant Was Not Involved in Designing the
      NTC Joint Venture’s Structure.

    Reliance on professional advice may establish reasonable
cause and good faith. Treas. Reg. § 1.6664-4(b)(1). The Tax
Court requires a taxpayer to prove three elements in order to
show that reliance on advice was reasonable: “(1) The adviser
was a competent professional who had sufficient expertise to
justify reliance, (2) the taxpayer provided necessary and
accurate information to the adviser, and (3) the taxpayer
actually relied in good faith on the adviser’s judgment.”
Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43, 99
(2000). Once the Commissioner produces evidence showing
that an accuracy-related penalty applies, the burden of
proving the existence of reasonable cause and good faith falls
on the taxpayer. Higbee v. Comm’r, 116 T.C. 438, 449
(2001); cf. Sparkman, 509 F.3d at 1161 (noting that the
taxpayer bears the burden of overturning the Commissioner’s
imposition of a negligence penalty under 26 U.S.C. § 6662).

    Taxpayers argued before the Tax Court that they
reasonably relied on the advice of their accountant in
deciding how to treat the proceeds from the NTC Joint
Venture. The Tax Court noted that the accountant had not
participated in any way in structuring the joint venture or any
of the entities that comprised it, but merely prepared
Taxpayers’ tax returns based on information given him.
Accordingly, the court found that Taxpayers had not supplied
32              DJB HOLDING CORP. V. CIR

the accountant with “all the necessary and accurate
information,” and therefore that their reliance on the
accountant’s tax returns was not reasonable.

    Taxpayers argue that the Tax Court clearly erred in failing
to specify what necessary information they neglected to
provide to the accountant. They assert that the accountant
was “fully aware of the NTC Joint Venture and the allocation
of income between WCI and WB Partners.”

    The Tax Court did not clearly err. “The mere fact that a
certified public accountant has prepared a tax return does not
mean that he or she has opined on any or all of the items
reported therein.” Neonatology Assocs., 115 T.C. at 100.
Nothing in the record suggests that the accountant knew
Barone’s reasons for erecting the NTC Joint Venture,
information the accountant would need in order to opine on
its validity for tax purposes. See Treas. Reg. § 1.6664-
4(c)(1)(i) (listing the taxpayer’s purpose for a transaction as
information the adviser must consider). More importantly,
nothing in the record indicates that Taxpayers even asked the
accountant for such an opinion. Instead, the record reveals
only that the accountant prepared tax returns for the entities
involved in the joint venture based on data supplied to him.
Taxpayers have not met their burden of showing reasonable
reliance on the accountant’s advice. See Treas. Reg.
§ 1.6664-4(b)(1); Higbee, 116 T.C. at 449.
                DJB HOLDING CORP. V. CIR                    33

   C. Taxpayers Cannot Show That the Understatement
      of Income Was Due to a Reasonable
      Misunderstanding of Tax Law Because the
      Principles Governing Whether a Partnership Is
      Valid Are Well Settled.

    A taxpayer may show reasonable cause and good faith
where the law governing its position “w[as] not settled” when
the taxpayer asserted it. See Patel v. Comm’r, 138 T.C. 395,
417 (2012) (finding that a taxpayer reasonably claimed a
deduction where the law governing the deduction’s
availability was in an “uncertain state”). Taxpayers argue
that their position that the NTC Joint Venture was a valid
partnership is reasonable because the law governing it is
complex. They have missed the point of Patel. The law may
be complex, but it is not unsettled. The Luna factors have
been the law for fifty years. See Luna, 42 T.C. at 1067; see
also Bergford v. Comm’r, 12 F.3d 166, 168–69 (9th Cir.
1993) (applying the Luna factors). Taxpayers offer no
authority for their suggestion that the complexity of the Luna
factors alone should excuse their failure to conduct the NTC
Joint Venture as a valid partnership.

    We conclude that the Tax Court did not err in upholding
the Commissioner’s assessment of accuracy-related penalties.

                      CONCLUSION

    WB Partners offered nothing to the NTC Joint Venture
that it was not already contractually obligated to provide, and
WCI’s arbitrary reduction of WB Partners’ share of the
profits demonstrated that the parties did not intend to adhere
to the terms of the joint venture agreement. The Tax Court
therefore did not clearly err in finding that WCI and WB
34              DJB HOLDING CORP. V. CIR

Partners did not intend to operate the joint venture as a bona
fide partnership, and taxing all profits from the venture as
income to WCI accordingly. See Luna, 42 T.C. at 1077–79;
Culbertson, 337 U.S. at 742.

    Further, though Barone and Watkins and their holding
corporations agreed to supply services to WB Partners,
Barone and Watkins were entitled to terminate their
employment with ninety days’ notice. Because Barone and
Watkins could leave WB Partners and provide services to
another environmental remediation company at any time,
their agreement not to compete with Kuranda may not be
imputed to WB Partners. The Tax Court therefore did not
clearly err in assigning WB Partners no portion of the $3.4
million proceeds of the noncompetition agreement. See
Beals’ Estate, 82 F.2d at 270; Cox, 71 F.2d at 988;
Culbertson, 337 U.S. at 739–40.

    Finally, because Taxpayers have identified no substantial
authority or reasonable cause for their positions, the Tax
Court did not commit reversible error in assessing an
accuracy-related penalty. See 26 U.S.C. §§ 6662(a), (b)(2),
(d)(2)(B)(i), 6664(c)(1).

     The decisions of the Tax Court are AFFIRMED.
                 DJB HOLDING CORP. V. CIR                                           35

                               APPENDIX

         Participant                                        Participant

Barone                 DJB Plan                 GSW Plan                  Watkins

                        100%                      100%

                         DJB                      GSW

                            50%                 50%

                                     WB
                                   Partners

                                     100%
                                                      70%

                                     WB
                                  Acquisition                       NTC
                                                                     JV

                                     100%
                                                      30%

                                     WCI