Intertan Inc. v. Commissioner ( 2004 )

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT December 8, 2004
_______________________ Charles R. Fulbruge III
Clerk
No. 04-60225
_______________________
INTERTAN INC,
Petitioner-Appellant,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
Appeal from the United States Tax Court
9599-02
Before GARWOOD, JONES, and PRADO, Circuit Judges.
PER CURIAM:*
InterTan, Inc. (“InterTan”) appeals the tax court’s
assessment of an accuracy-related penalty for substantial
underpayment of tax liability based on InterTan’s 1993 tax return.
We AFFIRM the judgment of the Tax Court.
A determination as to whether a taxpayer acted with
reasonable reliance and in good faith is reviewed for clear error.
Srivastava v. Commissioner, 220 F.3d 353, 367 & n.42 (5th Cir.
2000). Whether substantial authority exists for treating a
transaction in a given manner is a mixed question of law and fact.
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this
opinion should not be published and is not precedent except under the limited
circumstances set forth in 5TH CIR. R. 47.5.4.
Therefore, legal conclusions are subject to de novo review, and
factual determinations are reviewed for clear error. Westbrook v.
Commissioner, 68 F.3d 868 (5th Cir. 1995).
An accuracy-related penalty will not apply when a
taxpayer, acting in good faith, reasonably relies on professional
advice with respect to the tax treatment of a particular
transaction. TREAS. REG. § 1.6664-4(b)(1). This inquiry is fact-
specific and made on a “case-by-case basis.” Id. “The most
important factor is the extent of the taxpayer’s effort to assess
the taxpayer’s proper tax liability.” Id. Any reliance on profes-
sional tax advice also presupposes that the taxpayer gave the
advisor all information material to the tax return and any key
transactions. See Westbrook v. Commissioner, 68 F.3d 868, 881 (5th
Cir. 1995).
The Tax Court’s factfindings on the diligence of InterTan
and the reasonableness of its reliance on PriceWaterhouse are
supported by the record. The absence of any documentation that
PriceWaterhouse was aware of ITC’s financial condition and
testimony by a PriceWaterhouse employee at trial demonstrates that
the accountants were unaware of the arrangement between InterTan
and the Royal Bank. The Tax Court’s findings cannot be clearly
erroneous.
In the alternative, InterTan asserts, contrary to the Tax
Court’s decisions, that it had “substantial authority” that the
transaction was lawful and thus no penalty should have been imposed
2
by the Commissioner. See 26 U.S.C. §§ 6662(d)(1), (2); Treas. Reg.
§§ 1.6662-4(a), (b), (d)(2). InterTan relies on two cases as sub-
stantial authority for its tax treatment of the transaction. In
Soreng v. Commissioner, 158 F.2d 340 (7th Cir. 1946) and Crellin’s
Estate v. Commissioner, 203 F.2d 812 (9th Cir. 1953), courts
treated distributions to shareholders that were held briefly, with
the money being returned to the corporation, as dividends for tax
purposes. In Soreng, however, the agreement was between a third-
party lender and the shareholders themselves; the shareholders were
free to choose their own arrangements, and the overall arrangement
had an independent business purpose. In Crellin’s Estate, a
holding company rescinded a dividend after learning that the tax
advice triggering the dividend payment was incorrect. 203 F.2d at
813. Crellin is readily distinguishable because the company
undeniably declared a dividend and then later revoked it based on
an agreement with its shareholders. The issue whether the payment
constituted a dividend in the first instance was not before the
court. By contrast, in this case, InterTan set up the entire
transaction and directed the conduct of the other players, all
subject to the underlying obligation to the Royal Bank. The cases
are so fundamentally distinguishable as not to amount to
substantial authority.
Because InterTan is unable to prevail on either claim of
error, the judgment of the tax court is AFFIRMED.
3