Vidal Suriel v. Commissioner

141 T.C. No. 16
UNITED STATES TAX COURT
VIDAL SURIEL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 367-12. Filed December 4, 2013.
P’s wholly owned S corporation, V, claimed deductions for
unpaid obligations, both principal and interest, owed into the Tobacco
Master Settlement Agreement (MSA) fund, which is a qualified
settlement fund under I.R.C. sec. 468B. R disallowed the deductions
on the basis that economic performance did not occur until payment
was actually made into the MSA fund, pursuant to sec. 1.468B-
3(c)(1), Income Tax Regs. Under I.R.C. sec. 1366 R made
adjustments to P’s individual income tax returns and determined
deficiencies in P’s income tax.
Held: V is not entitled to deductions for unpaid MSA
obligations, because economic performance does not occur until the
obligations are actually paid. See sec. 1.468B-3(c)(1), Income Tax
Regs.
Held, further, because the special rules governing qualified
settlement funds do not differentiate between interest and principal,
we afford them equal treatment.
-2-
Held, further, we sustain R’s deficiency determinations.
Edward T. Yevoli, Paul D. Turner, and Joey M. Lampert, for petitioner.
Robert M. Ratchford and Jeffrey B. Fienberg, for respondent.
GOEKE, Judge: Respondent determined deficiencies in petitioner’s Federal
income tax as follows:
Year Deficiency
2004 $33,912,933
2006 5,837,489
Respondent’s determinations of tax deficiencies result from adjustments
made following respondent’s examination of returns of Vibo Corp., d.b.a. General
Tobacco, Inc. (Vibo),1 an S corporation, because pursuant to section 13662 all of
1
General Tobacco, Inc., is another subch. S corporation wholly owned by
petitioner during the years in issue that was incorporated in the State of Florida on
July 6, 2000. Because General Tobacco is the “d.b.a. name” of Vibo, and the
parties use these two names interchangeably, we will refer to them collectively as
Vibo throughout this Opinion to alleviate any confusion.
2
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
-3-
the deductions and losses of Vibo properly passed through to petitioner as the sole
shareholder during each of the tax years in issue.
The issues in dispute concern Vibo’s accrual of unpaid obligations incurred
when it settled with 46 States, the District of Columbia, the Commonwealth of
Puerto Rico, and 4 U.S. territories (collectively, settling States) by entering into
the Tobacco Master Settlement Agreement (MSA). After respondent’s
concession,3 the issues for decision are:
(1) whether Vibo properly deducted its MSA payment obligations under
section 461(h) before those obligations were actually paid into the MSA escrow
account established at Citibank. We hold that it did not;
(2) whether accrued interest owed into a qualified settlement fund is
deductible in the tax year before actual payment is made. We hold that it is not;
and
(3) whether adjustments to income or tax should be made with respect to
petitioner’s 2004 and 2006 Forms 1040, U.S. Individual Income Tax Return, as a
3
Respondent concedes that petitioner reasonably and in good faith relied
upon tax professionals in reporting Vibo’s deductions of $302,221,719 for the
2004 tax year and thus is not liable for any accuracy-related penalty under sec.
6662(a). Respondent did not determine a sec. 6662 penalty for the 2006 tax year.
-4-
result of the adjustments made to Vibo’s 2004-06 Forms 1120S, U.S. Income Tax
Return for an S Corporation. We hold that they should be made.
FINDINGS OF FACT
Some of the facts have been stipulated for trial under Rule 91. The
stipulation of facts and the attached exhibits are incorporated by this reference and
are found accordingly.
I. Background
Respondent mailed a notice of deficiency to petitioner on October 6, 2011.
Petitioner timely filed his petition with this Court on January 4, 2012. At the time
the petition was filed, petitioner was a resident of Miami, Florida. The parties
have stipulated that venue for purposes of an appeal is in the Court of Appeals for
the Eleventh Circuit.
A. Vibo
Vibo, a Florida corporation, began to sell cigarettes in the United States in
1999. During 2000-2006, Vibo was taxed under subchapter S and wholly owned
by petitioner. Vibo was an accrual method taxpayer during the tax years 2004-06.
For each of the tax years in issue, Vibo filed a Form 1120S. During the tax years
at issue, Vibo did not own any cigarette manufacturing or packaging equipment.
-5-
B. Protabaco
Productora Tabacalera De Colombia S.A. (Protabaco), a Colombian
company, is unrelated to petitioner by ownership. During the tax years in issue,
Protabaco was in the business of manufacturing tobacco products. During the tax
years in issue, Protabaco was the fabricator of Vibo’s cigarettes. As part of its
entry into the MSA, Vibo entered into an exclusive manufacturing and distribution
agreement with Protabaco, whereby Vibo appointed Protabaco as its exclusive
manufacturer and Protabaco appointed Vibo its exclusive importer.
II. Tobacco Master Settlement Agreement (MSA)
A. Background
Before the MSA was executed various States either had commenced or were
expected to commence litigation in order to assert claims for monetary, equitable,
and injunctive relief against certain tobacco product manufacturers and other
defendants for damages under State laws. Relief and damages were sought under
State laws such as consumer protection or antitrust in order to further the States’
policies regarding public health, including policies to reduce smoking by youth.
The central purpose of the MSA was to reduce smoking--particularly youth
smoking--in the United States.
-6-
On November 23, 1998, the MSA execution date, four tobacco product
manufacturers (TPMs) entered into the MSA with representatives (the NAAG)4
from the settling States. The four manufacturers were Brown & Williamson
Tobacco Corp., Lorillard Tobacco Co., Phillip Morris, Inc., and R.J. Reynolds
Tobacco Co. The settling States included 46 States, the District of Columbia, the
Commonwealth of Puerto Rico, and 4 U.S. territories.
A TPM as defined in the MSA is an entity that after the MSA execution date
directly (and not exclusively through any affiliate):
(1) manufactures Cigarettes anywhere that such manufacturer intends
to be sold in the States, including cigarettes intended to be sold in the
States through an importer * * *;
(2) is the first purchaser anywhere for resale in the States of cigarettes
manufactured anywhere that the manufacturer does not intend to be
sold in the States; or
(3) becomes a successor of an entity described in subsection (1) or (2)
above.
Amendment No. 24 (amendment 24) to the MSA provides:
In addition, and in consideration for the above, * * * [Vibo] shall be
considered to be a * * * [TPM] and a Participating Manufacturer, and
Protabaco shall not be considered to be a * * * [TPM].
4
The National Association of Attorneys General (NAAG) is an association
of U. S. attorneys general whose tobacco project’s mission is to support the States
in enforcing, defending, and administering the MSA.
-7-
A participating manufacturer as defined in the MSA is a TPM that is or becomes a
signatory to the MSA, provided that: (1) in the case of a TPM that is not an
original participating manufacturer (OPM) (i.e., in Vibo’s case), that TPM is
bound by the MSA in all settling States in which the MSA binds OPMs, and (2) in
the case of a TPM that signs the MSA after the MSA execution date (i.e., also in
Vibo’s case), that TPM, within a reasonable time after signing the MSA, makes
any payments that it would have been obligated to make in the intervening period
had it been a signatory as of the MSA execution date.
Under the MSA, the settling States released a participating manufacturer
from all past and future tobacco-related claims that the States might have against
that company, when the participating manufacturer became a signatory to the
MSA. The MSA specifies two types of participating manufacturers: an OPM and
a subsequent participating manufacturer (SPM). The OPMs consisted of the four
TPMs, discussed supra, that signed the MSA on the MSA execution date. An
SPM is a TPM (other than an OPM) that: (1) is a participating manufacturer, and
(2) is a signatory to the MSA, regardless of when that TPM became a signatory to
the MSA.
In consideration for the released claims, the participating manufacturers
were required to make MSA payments to the settling States in order to promote
-8-
educational programs tailored to preventing smoking and to compensating the
States for healthcare costs incurred from the effects of smoking and tobacco use.
Both the released claims and the MSA payments will be discussed in turn.
B. Released Claims
Section XVIII(d) of the MSA provides: “All payments to be made by the
Participating Manufacturers pursuant to this Agreement are in settlement of all of
the settling States’ antitrust, consumer protection, common law negligence,
statutory, common law and equitable claims for monetary, restitutionary, equitable
and injunctive relief alleged by the settling States with respect to the year of
payment or earlier years”.
C. MSA Payments
Section IX(a) of the MSA, titled “Payments”, provides that all payments
made pursuant to the MSA (except those not at issue in this case) shall be made
into escrow pursuant to the escrow agreement. The second and third sentences of
section 6 of the escrow agreement provide:
The escrow established pursuant to this Escrow Agreement is
intended to be treated as a Qualified Settlement Fund for Federal tax
purposes pursuant to Treas. Reg. § 1.468B-1. The Escrow Agent
shall comply with all applicable tax filing, payment and reporting
requirements, including, without limitation, those imposed under
Treas. Reg. § 1.468B * * *.
-9-
The OPMs and SPMs are required under the MSA to make their payments to the
settling States into an escrow fund. The parties stipulate that the MSA escrow
fund is a qualified settlement fund under section 1.468B-1, Income Tax Regs. The
escrow fund was established with Citibank, N.A., which served as the escrow
agent.
III. Pre-MSA
Tobacco manufacturers that do not join the MSA are known as
nonparticipating manufacturers (NPMs). The MSA directed each settling State to
enact legislation that would require an NPM to make deposits into an escrow
account to satisfy any judgments that a particular State might bring against the
NPM in that particular State. These statutes required an NPM to make annual
deposits into State escrow accounts for each State where the NPM sold its tobacco
products. The escrow payment amounts were based on each company’s sales in
the respective State.
The exclusive manufacturing and distribution agreement states in its
recitals:
WHEREAS, manufacturers of cigarettes sold in the United States are
obligated under the laws of various U.S. states to either (i) join the
* * * [MSA] or (ii) to establish and contribute funds to designated
escrow accounts, which funds are intended to be made available for
the settlement of tobacco-related litigation that may be brought
- 10 -
against such cigarette manufacturers by authorities in those U.S.
states;
Because Protabaco manufactured cigarettes that were sold in the United States, it
had an obligation to either join the MSA or contribute to the NPM escrow
accounts, of which it chose the latter. Protabaco’s name was on the NPM escrow
accounts, but Vibo made the account contributions. Once Protabaco chose the
NPM route, there was no obligation to later join the MSA.
The NPM escrow statutes, as originally enacted by the settling States,
contained an unintended loophole that gave NPMs an unfair competitive
advantage over TPMs participating in the MSA. To close this statutory loophole,
in late 2003 the NAAG adopted a resolution supporting allocable share legislation,
which made the passage of such corrective legislation its number one legislative
effort in 2004. On March 30, 2004, Vibo submitted to the NAAG its application
to join the MSA.
In a Federal antitrust action, Vibo sued the settling States, the OPMs, and
other SPMs in the matter of Vibo Corp. v. Conway, 669 F.3d 675 (6th Cir. 2012).
In its complaint, Vibo alleged that the MSA violated its constitutional rights and
imposed an unreasonable restraint on trade in violation of antitrust laws and that it
- 11 -
was fraudulently induced by the settling States to join the MSA. Vibo’s claims
were dismissed and judgment was entered in favor of the defendants.
Vibo further alleged that the settling States’ amendment of their escrow
statutes made it increasingly difficult for Vibo to continue in business under the
obligation of making NPM contributions. Vibo also stated that it came to
understand that the only effective means to reach the vast majority of the national
cigarette market was to join the MSA because most retail chains wanted the
liability release afforded by the MSA to participating manufacturers and refused to
carry Vibo products without it. That complaint was verified by J. Ronald Denman,
Vibo’s vice president and general counsel.
The exclusive manufacturing and distribution agreement petitioner signed
states: “[Vibo] has agreed to make a considerable long term investment wherein it
has obligated itself to make payments to the States * * * in order that it may
become a signatory to the MSA, with the expectation of gaining a considerable
increase in market share for the [Vibo] Cigarettes”.
IV. Entering Into the MSA
Before Vibo entered into the MSA, it fulfilled all of the NPM escrow statute
deposit requirements. On August 19, 2004, effective as of July 1, 2004, petitioner
- 12 -
executed the MSA on behalf of Vibo. The first paragraph of the MSA execution
statement, which petitioner signed under oath, states:
[the] undersigned authorized representative hereby executes the * * *
[MSA], as amended (hereafter “Agreement”) on behalf of * * *
[Vibo] thereby becoming * * * [an SPM]. * * * [Vibo] and its
authorized representatives agree to be bound by such Agreement and
to fulfill all the obligations of a Participating Manufacturer under the
Agreement, including, but not limited to, making all payments that it
would have been obligated to make had it been a signatory as of the
MSA execution date.
As the MSA was originally drafted, only a TPM could enter the MSA as a
participating manufacturer. The MSA was later amended by amendment 24 to
allow the exclusive importer of cigarettes manufactured by another person outside
the United States to enter the MSA. Vibo’s application to join the MSA was
submitted on that basis. By signing and executing amendment 24, petitioner
agreed and acknowledged that Vibo was liable to make the MSA payments on its
cigarettes regardless of the identity of their manufacturer.
If an NPM joined the MSA, it would become an SPM and be subject to the
MSA obligations of an SPM and a participating manufacturer. If an NPM joined
the MSA more than 90 days after its execution, as Vibo did, it was required to: (1)
make payments to the States that it would have been obligated to make had it
joined the MSA in November 1998 (prior obligation); and (2) make annual
- 13 -
payments going forward based on the company’s national market share (current
obligation). Once a party becomes a signatory to the MSA, it no longer has an
NPM escrow statute deposit obligation under a settling State’s NPM escrow
statute.
According to the General Tobacco adherence agreement, Vibo was required
to make prior obligation payments based on the amount of Federal excise taxes
that it had paid for cigarettes from January 1, 2000, through June 30, 2004. Vibo
was required to make these payments in 12 annual instalments from 2005 through
2016. After application of all of the NPM escrow account amounts and other
credits, the net unpaid prior obligations totaled $242,314,534 as of June 30, 2004.
Vibo was required to make current obligation payments for all obligations
arising from its market share of cigarettes it sold for the period July 1 through
December 31, 2004 and for all post-2004 sales. Vibo’s current obligations were
payable on April 15 of the year following the year in which Federal excise taxes
were collected on its cigarettes.5 Vibo’s 2004 current obligation amount due on
April 15, 2005, totaled $65,854,272. The General Tobacco adherence agreement
5
The General Tobacco adherence agreement required Vibo to make
quarterly payments into escrow towards its current obligations based upon a fixed
amount per cigarette. These quarterly payments were held by SunTrust Bank in
Miami, which would then transfer those funds to the Citibank escrow account on
the following April 15.
- 14 -
spells out that Vibo is the only party with MSA payment obligations. Nothing in
the MSA documents places this payment obligation on Protabaco. Protabaco was
not a signatory to this agreement, the MSA execution statement, or amendment 24.
Vibo had a strong economic incentive to make its prior and current
obligation payments into the MSA escrow account. If Vibo failed to make those
payments, Vibo’s cigarette brands would end up delisted and retailers would not
stock their shelves with those brands.
V. Vibo’s Deductions
A. Cost of Goods Sold Deductions
On its 2004 Form 1120S, Vibo deducted $295,549,083 of its MSA payment
obligations (both prior and current obligations) as part of its cost of goods sold.
None of this amount was actually paid into the MSA escrow account in 2004.
On its 2006 Form 1120S, Vibo deducted $108,487,225 of its MSA current
obligation as part of its cost of goods sold. In 2006 Vibo paid $97,637,716 of its
MSA current obligation.
B. Interest Deduction
On its 2004 Form 1120S, Vibo deducted $4,661,190 as interest. This
represented interest accrued on, and made part of, Vibo’s prior obligation, for July
1 through December 31, 2004. The interest amount was calculated by and
- 15 -
confirmed in the letter drafted by Pricewaterhouse Coopers (PwC), the internal
auditor under the terms of the MSA. No part of the $4,661,190 was paid in 2004,
but this amount was paid on September 1, 2005.
The PwC letter did not calculate or confirm an interest amount attributable
to the prior obligation owed for the period January 1, 2000, through June 30, 2004.
C. Other Deduction
On its 2004 Form 1120S, Vibo deducted $2,011,446 under “Other
Deductions”, and it was specifically labeled “MSA Obligation--Paid.” No part of
that $2,011,446 was paid in 2004.
OPINION
I. Burden of Proof
Generally, taxpayers bear the burden of proving, by a preponderance of the
evidence, that the determinations of the Commissioner in a notice of deficiency are
incorrect. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Deductions are a matter of legislative grace, and a taxpayer bears the burden of
proving entitlement to any claimed deductions. Rule 142(a)(1); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). Petitioner has not argued that respondent
bears the burden of proof with respect to the issues discussed below.
- 16 -
II. The Danielson Rule
A. Danielson Applies
When a taxpayer casts a transaction in a certain form, the Commissioner
may bind the taxpayer to that form for tax purposes. See Commissioner v.
Danielson, 378 F.2d 771 (3d Cir. 1967), vacating and remanding 44 T.C. 549
(1965). The Danielson rule is a parol evidence rule applicable in Federal tax
controversies. Id. at 779. Under the Danielson rule, as adopted by the Court of
Appeals for the Third Circuit:
[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 the agreement would be admissible to
alter that construction or to show its unenforceability because of
mistake, undue influence, fraud, duress, etc.
Id. at 775.
The Court of Appeals for the Eleventh Circuit, to which an appeal in the
instant case would lie, see sec. 7482(b)(1)(A), has accepted the Danielson rule, see
Plante v. Commissioner, 168 F.3d 1279, 1280-1281 (11th Cir. 1999), aff’g T.C.
Memo. 1997-386; Bradley v. United States, 730 F.2d 718, 720 (11th Cir. 1984).
Accordingly, if the Danielson rule applies, we will follow it. Golsen v.
Commissioner, 54 T.C. 742, 756-757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971).
- 17 -
Petitioner’s pretrial memorandum challenged the application of Danielson.
On brief, however, he agreed that the Danielson rule applies to the MSA
documents.
B. MSA Documents
Although the parties agree that Danielson applies to the “MSA documents”,
they appear to disagree over which documents that term covers.6 The only
disagreement appears to be whether the MSA execution statement should be
included. Because petitioner had to sign the MSA execution statement to join the
MSA, we find the execution statement to be an integral piece of the “MSA
documents”. Accordingly, we will use the term “MSA documents” to refer
collectively to the following documents: the MSA, amendment 24, the MSA
execution statement, the exclusive manufacturing and distribution agreement, and
the General Tobacco adherence agreement.
6
Respondent’s pretrial memorandum states: “The MSA Settlement
Documents include: the MSA, Amendment No. 24 to the MSA, the General
Tobacco Adherence Agreement, the Exclusive Manufacturing and Distribution
Agreement, and the MSA Execution Statement.” However, petitioner’s brief
states: “Petitioner concedes and agrees only that the Court apply Danielson and
give effect to the clear and unambiguous terms of the ‘MSA Documents’ as
defined herein.” Petitioner then defines the MSA documents to include: the
MSA, amendment 24, the exclusive manufacturing and distribution agreement,
and the General Tobacco adherence agreement. The only difference between the
two parties is with regard to the MSA execution statement.
- 18 -
C. Arguments
Respondent contends Vibo voluntarily entered into the settlement with the
settling States and should be bound by the MSA documents. Consequently,
respondent argues, the regulations prohibit Vibo from deducting the MSA
payment obligations until it actually makes the payments.
Petitioner contends that Protabaco was the manufacturer participating in the
MSA, because all the documents refer to Vibo as the importer and distributor (not
the manufacturer) and to Protabaco as the manufacturer. Consequently, petitioner
argues, Vibo was simply assuming Protabaco’s MSA payment obligations as a
cost of purchasing cigarettes and the Code allows Vibo to deduct the MSA
payment obligations as an ordinary and necessary business expense or cost of
goods sold.
Before we can decide the tax consequences resulting under the MSA
documents, we must discern the operative effect of the documents under
Danielson. We begin by determining Vibo’s status under the MSA vis-a-vis its
relationship to Protabaco.
- 19 -
III. TPM, SPM, and Participating Manufacturer
A. Tobacco Product Manufacturer
The MSA defines a “tobacco product manufacturer” (TPM) as an entity that
after the MSA execution date directly (and not exclusively through any affiliate):
(1) manufactures Cigarettes anywhere that such manufacturer intends
to be sold in the States, including cigarettes intended to be sold in the
States through an importer * * *;
(2) is the first purchaser anywhere for resale in the States of cigarettes
manufactured anywhere that the manufacturer does not intend to be
sold in the States; or
(3) becomes a successor of an entity described in subsection (1) or (2)
above.
Amendment No. 24 to the MSA provides:
In addition, and in consideration for the above, * * * [Vibo] shall be
considered to be a * * * [TPM] and a Participating Manufacturer, and
Protabaco shall not be considered to be a * * * [TPM].
Petitioner contends that Vibo was not a TPM under the original draft of the MSA,
and only TPMs were allowed to enter the MSA. The parties agree Vibo was not
an actual manufacturer or fabricator of any cigarettes during the relevant periods.
However, amendment 24 classifies Vibo as a TPM and explicitly allows the
exclusive importer of foreign cigarettes to enter the MSA.
- 20 -
On brief petitioner quoted portions of section (A)(1) and (2) of amendment
24 to support his argument that Vibo is not a TPM. That section states, in part,
that Vibo agrees and acknowledges (1) that it is the sole importer and distributor
in the United States of all cigarettes manufactured by Protabaco, and (2) that
Protabaco is the sole manufacturer of any cigarettes owned or licensed by Vibo or
Protabaco. However, petitioner failed to include the portions of that section that
cuts against his argument. Both parts end with the phrase, “subject to the terms of
this Amendment.” This phrase is important, because as quoted above, the
amendment provides in section (B) that “[Vibo] shall be considered to be a * * *
[TPM] and a Participating Manufacturer, and Protabaco shall not be considered to
be a * * * [TPM]”.
Petitioner also points to section (D) of amendment 24 to support his
argument that Vibo is not a TPM. Section (D) states: “If * * * [Vibo] creates or
acquires its own manufacturing facility, it shall assume all responsibilities as the
* * * [TPM] of such Cigarettes under the MSA.” Petitioner interprets this
statement to mean that Vibo will be considered a TPM only if it creates or acquires
its own manufacturing facilities. We disagree. We interpret the statement to mean
that if Vibo creates or acquires its own manufacturing facility, Vibo will be
considered the TPM of the cigarettes manufactured at the new facility. The
- 21 -
statement is not relevant to Vibo’s TPM status with respect to the cigarettes
Protabaco manufactured.
Finally, petitioner also relies on provisions in the exclusive manufacturing
and distribution agreement to show that Vibo was not a manufacturer. First,
petitioner points to the recitals, which describe Vibo as an “importer and
distributor”.7 Second, he cites a portion of the agreement in which Vibo appoints
Protabaco as its exclusive manufacturer, and Protabaco appoints Vibo as its
exclusive importer. However, as we noted above, under amendment 24 an
exclusive importer (Vibo) of cigarettes fabricated by another party (Protabaco)
outside the United States could apply to participate in the MSA. Vibo’s
application to join the MSA was in fact submitted on that basis. Accordingly, we
are not persuaded that Vibo was incapable of being a TPM under the MSA merely
7
The three recitals as quoted on brief are as follows:
“WHEREAS, Protabaco has engaged in the business of manufacturing
tobacco products ”. (Emphasis added.)
“WHEREAS, * * * [Vibo] is a[n] * * * importer and distributer of
cigarettes.” (Emphasis added.)
“WHEREAS, Protabaco presently manufactures * * * [Vibo’s] cigarettes
* * * and * * * [Vibo] * * * purchases such cigarettes for distribution in the
United States.” (Emphasis added.)
- 22 -
because it did not actually manufacture cigarettes. We find that Vibo was a TPM
under the MSA as it contractually agreed, and as the MSA permits by amendment.
B. Legal Fiction
Petitioner contends that Vibo’s position as a TPM is illusory, because
amendment 24 deems Vibo a TPM merely to allow Vibo to assume Protabaco’s
MSA payment obligation. If amendment 24 had not deemed Vibo a TPM, then
Vibo could not have joined the MSA. Petitioner argues that Vibo’s TPM status is
a legal fiction and that Vibo has actually agreed to make the MSA payments for
Protabaco as part of Vibo’s purchase price for cigarettes.
We reject petitioner’s contention for two reasons. First, Protabaco did not
sign any of the MSA documents except for the exclusive manufacturing and
distribution agreement, which merely appointed Protabaco as Vibo’s exclusive
manufacturer. Second, as discussed infra, Vibo obligated itself under the MSA for
its own liabilities; Protabaco had no MSA liability for Vibo to assume.
C. Subsequent Participating Manufacturer and Participating
Manufacturer
Respondent contends that Vibo not only became a TPM by entering the
MSA, but it also became an SPM and a participating manufacturer as defined by
- 23 -
the MSA’s terms. We agree. The first paragraph of the MSA execution statement
provides:
The undersigned authorized representative hereby executes the * * *
[MSA], as amended (hereafter “Agreement”) on behalf of * * * [Vibo] * * *
thereby becoming a Subsequent Participating Manufacturer. * * * [Vibo]
* * * and its authorized representatives agree to be bound by such
Agreement and to fulfill all the obligations of a Participating Manufacturer
under the Agreement, including, but not limited to, making all payments
that it would have been obligated to make had it been a signatory as of the
MSA execution date. [Emphasis added.]
Petitioner, as president of Vibo, signed this statement under oath. Also,
amendment 24 specifically states: “[Vibo] shall be considered to be a * * *
Participating Manufacturer”.
The MSA defines a participating manufacturer as a TPM that is or becomes
a signatory to the MSA, provided that: (1) in the case of a TPM that is not an
OPM (e.g., in Vibo’s case), that TPM is bound by the MSA in all settling States in
which the MSA binds OPMs, and (2) in the case of a TPM that signs the MSA
after the MSA execution date (e.g., also in Vibo’s case), that TPM, within a
reasonable time after signing the MSA, makes any payments that it would have
been obligated to make in the intervening period had it been a signatory as of the
MSA execution date.
- 24 -
By signing the MSA execution statement, Vibo agreed “to be bound by
* * * [the MSA] and fulfill all the obligations of a participating manufacturer
under the Agreement”. The MSA binds Vibo in each settling State in which it
binds the OPMs. Therefore, Vibo satisfies the first requirement.
Vibo signed the MSA after the MSA execution date of November 23, 1998,
and made its first prior obligation installment payment in 2005 in accordance with
the General Tobacco adherence agreement. Therefore, Vibo also satisfies the
second requirement.
The MSA generally defines an SPM as a TPM that: (1) is a participating
manufacturer, and (2) is a signatory to the MSA. As we noted above, Vibo has
satisfied both of these requirements as well.
The General Tobacco adherence agreement and the exclusive manufacturing
and distribution agreement further demonstrate that Vibo obligated itself under the
MSA as an SPM. Although we do not accord “whereas clause” recitals the weight
of operative terms in an agreement, they can aid interpretation of that agreement.
See e.g., Grynberg v. FERC, 71 F.3d 413, 416 (D.C. Cir. 1995) (“[I]t is standard
contract law that a Whereas clause, while sometimes useful as an aid to
interpretation ‘cannot create any right beyond those arising from the operative
- 25 -
terms of the document.’” (quoting Abraham Zion Corp. v. Lebow, 761 F.2d 93,
103 (2d Cir. 1985))).
In relevant part, the General Tobacco adherence agreement states:
“WHEREAS, * * * [Vibo] wishes to become * * * [an SPM] under the * * *
[MSA] * * * and filed its application therefor”. Also in relevant part, the
exclusive manufacturing and distribution agreement states: “WHEREAS, * * *
[Vibo] has agreed to make a considerable long term investment wherein it has
obligated itself * * * as * * * [an SPM], in order that it may become a signatory to
the MSA”.
Accordingly, we find that Vibo contractually obligated itself as an SPM and
participating manufacturer and had the rights and obligations commensurate with
that designation.
Having determined Vibo’s status as a TPM, an SPM, and a participating
manufacturer under the MSA documents, we next address petitioner’s assumption
of liability argument.
IV. Assumption of Liability
A. Arguments
Petitioner contends that Vibo entered into the MSA at Protabaco’s request
to make the MSA payments on behalf of Protabaco as part of Vibo’s purchase
- 26 -
price for cigarettes. Respondent argues that Protabaco had no liability under the
MSA, so Vibo could not assume its liability.
B. Whether Protabaco Has MSA Liability To Assume
1. Pre-MSA Arrangement
Petitioner argues that Protabaco was liable for the MSA payments, because
State laws required Protabaco to either join the MSA or contribute to the NPM
escrow accounts. Protabaco’s name was on the NPM escrow accounts, but Vibo
made the account contributions. Petitioner argues this as evidence of an ongoing
assumption of liability arrangement.
We agree that Protabaco had an obligation to either join the MSA or
contribute to the NPM escrow accounts, of which it chose the latter. We also
agree that Vibo made the contributions to the NPM escrow accounts. However,
that does not mean Protabaco continued to be the liable party after Vibo entered
into the MSA. Once Protabaco chose the NPM route, it had no obligation to later
join the MSA. As we will discuss, we are not convinced that Protabaco forced
Vibo to join the MSA. We find that Vibo entered into the MSA voluntarily.
While it may have been possible for Protabaco to settle with the settling
States and then pass on the MSA costs to Vibo in the form of increased prices, that
did not happen. Petitioner must be taxed in accordance with the transaction he and
- 27 -
Vibo consummated, not a transaction he might have consummated but did not.
See Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 148-
149 (1974) (“[W]hile a taxpayer is free to organize his affairs as he chooses,
nevertheless, once having done so, he must accept the tax consequences of his
choice, whether contemplated or not, and may not enjoy the benefit of some other
route he might have chosen to follow but did not.” (Citation omitted.)).
Moreover, nothing in the MSA documents creates any Protabaco liability
that Vibo could assume. As discussed supra, the MSA documents clearly show
that Vibo obligated itself to make the MSA payments. By signing and executing
amendment 24, petitioner agreed that Vibo alone was liable for the MSA payments
on its cigarettes regardless of the identity of the manufacturer.8 Therefore, we find
that Protabaco had no liability under the MSA for Vibo to assume.
Petitioner cites the General Tobacco adherence agreement as further
evidence that Vibo assumed Protabaco’s liability. Under that agreement, Vibo
8
See amend. 24, sec. A(3):
[Vibo] shall be responsible for all payments under the MSA for all
Cigarettes manufactured by Protabaco * * *, as well as all Cigarettes
sold under any Brand Name that is, or has been, or will be, owned or
licensed by * * * [Vibo] * * * regardless of the identity of the
manufacturer, including Cigarettes sold prior to the date of this
Amendment.
- 28 -
received credit against its MSA payment obligations for a portion of the NPM
escrow payments it made on behalf of Protabaco. Petitioner argues that this
simply bridges the gap to continue the prior arrangement under which Vibo paid
Protabaco’s obligations.
Petitioner’s argument does not convince us that Vibo assumed Protabaco’s
liability. Under the MSA, if a TPM joined the MSA more than 90 days after the
MSA execution date (as Vibo did), it was required to make payments--known as
the prior obligation--to the States that it would have been obligated to make had it
joined the MSA in November 1998. Because the prior obligation relates to the
same cigarettes for which Vibo made the NPM payments in those earlier years,
and the effect of the payments to both the MSA and NPM escrow accounts was the
same, it makes sense economically that Vibo would receive credit for its NPM
escrow contributions. Nothing about the credit gives rise to the legal effect of an
assumption-of-liability arrangement.
Moreover, the General Tobacco adherence agreement makes clear that Vibo
alone is obligated to make the MSA payments--both prior and current. Nothing in
the agreement suggests that Vibo agreed to undertake those obligations as part of
its purchase of cigarettes from Protabaco. Protabaco was not even a signatory to
that agreement, amendment 24, or the MSA execution statement. On these facts,
- 29 -
we find that Vibo did not assume Protabaco’s MSA payment obligations as part of
its purchase of cigarettes. Rather, Vibo’s liability arose when it contractually
agreed with the settling States to be obligated under the MSA.
2. Quarterly Report Requirement
The exclusive manufacturing and distribution agreement requires Vibo to
provide reports to Protabaco regarding its payment of current MSA obligations
and its ability to make future payments.9 Petitioner argues that this arrangement
indicates an assumption-of-liability arrangement between Vibo and Protabaco.
We disagree, because other plausible explanations for the reporting requirement
exist.
Protabaco has an interest in Vibo’s ability to meet its MSA obligations
regardless of whether Vibo assumed Protabaco’s liability. If Vibo failed to make
the necessary MSA payments, Vibo’s cigarette brands would end up delisted and
retailers would not stock their shelves with those brands. Therefore, Protabaco
had a vested interest in ensuring that Vibo could make its MSA payments, because
9
Under the heading “MSA Obligations”, the agreement states: “[Vibo]
agrees to provide Protabaco with: (i) a quarterly report setting forth in detail the
amount necessary for * * * [Vibo] to have available to make its MSA payments
due each quarter, and (ii) documentation reflecting * * * [Vibo’s] quarterly deposit
requirements pursuant to its MSA Adherence Agreement.”
- 30 -
nonpayment could lead to Vibo’s importing fewer (or no) cigarettes from
Protabaco.
3. Reason for Entering Into the MSA
Petitioner contends that Vibo entered into the MSA on behalf of Protabaco
at Protabaco’s request. However, the evidence indicates that financial
considerations led Vibo to enter into the MSA voluntarily.
The NPM escrow statutes, as originally enacted by the settling States,
contained an unintended loophole that gave NPMs an unfair competitive
advantage over TPMs participating in the MSA. Congress closed the loophole in
2004, and Vibo submitted its application that year.
The exclusive manufacturing and distribution agreement petitioner signed
states: “[Vibo] has agreed to make a considerable long term investment wherein it
has obligated itself to make payments to the States * * * in order that it may
become a signatory to the MSA, with the expectation of gaining a considerable
increase in market share for the * * * [Vibo] Cigarettes”. (Emphasis added.)
In a Federal antitrust action, Vibo filed a verified amended complaint,
arguing that the settling States’ amendment of their escrow statutes made it
increasingly difficult for Vibo to continue in business under the obligation of
- 31 -
making NPM contributions.10 The complaint also stated that Vibo came to
understand that the only effective means to reach the national cigarette market was
to join the MSA because most retail chains wanted the liability release afforded by
the MSA to participating manufacturers and refused to carry Vibo products
without it. Vibo’s vice president and general counsel, Mr. Denman, verified the
complaint.
On cross-examination before this Court, Mr. Denman testified that the
statements in the complaint were accurate but that Vibo ultimately entered into the
MSA “because Protabaco gave * * * [Vibo] no alternative.” This testimony
without more does not outweigh the evidence that Vibo voluntarily entered into
the MSA after carefully considering the financial impact of its decision.
Petitioner did not offer testimony from any Protabaco representatives to
corroborate Mr. Denman’s statements. The failure to call a representative of
Protabaco at trial gives rise to the adverse inference that had such a witness been
produced, his or her testimony would not support petitioner’s contentions. See
Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), aff’d,
162 F.2d 513 (10th Cir. 1947). Vibo had significant business reasons for joining
10
Verified Amended Complaint at 53, Vibo Corp. v. Conway, 594 F. Supp.
2d 758 (W.D. Ky. 2009), aff’d, 669 F.3d 675 (6th Cir. 2012).
- 32 -
the MSA, and Mr. Denman’s self-serving testimony alone does not convince us
that Protabaco forced Vibo to join. See Broz v. Commissioner, 137 T.C. 46, 59
(2011) (“We need not accept the taxpayer’s self-serving testimony when the
taxpayer fails to present corroborative evidence.”); Tokarski v. Commissioner, 87
T.C. 74, 77 (1986).
Accordingly, we reject petitioner’s argument that Vibo entered into the
MSA at Protabaco’s request.
V. Deductions
A. The Law
Section 162(a) allows taxpayers to deduct all ordinary and necessary
business expenses they pay or incur during the taxable year in carrying on any
trade or business. Section 461(a) provides that any deduction “shall be taken for
the taxable year which is the proper taxable year under the method of accounting
used in computing taxable income.” During the years at issue, Vibo was an
accrual method taxpayer. Under the accrual method of accounting, taxpayers
record liabilities as they are incurred. A taxpayer incurs a liability in the taxable
year in which (1) all the events have occurred that establish the fact of the liability,
(2) the amount of the liability can be determined with reasonable accuracy, and (3)
- 33 -
economic performance has occurred with respect to the liability. Sec. 1.461-
1(a)(2), Income Tax Regs.; see sec. 461(h)(1), (4).
Conditions (1) and (2) together compose what is known as the “all events”
test. Sec. 461(h)(4). Section 461(h)(1) modifies the all events test, providing that
“the all events test shall not be treated as met any earlier than when economic
performance with respect to such item occurs.” Therefore, we must first determine
if and when economic performance occurred. If petitioner failed to satisfy the
economic performance requirement, we need not address the all events test.
B. Economic Performance
Section 461(h)(2) determines the timing of economic performance
according to the source of the liability. The parties disagree over the source of the
MSA payment obligation. Petitioner argues that the obligation arose from the
provision of property to Vibo from another person (Protabaco) and therefore
economic performance occurred as Protabaco provided cigarettes to Vibo. See
sec. 461(h)(2)(A)(ii). Respondent argues that Vibo was required to make the
MSA payments to a qualified settlement fund (QSF), and therefore economic
performance does not occur until Vibo actually makes the payments. See sec.
468B(a) (“For purposes of section 461(h), economic performance shall be deemed
- 34 -
to occur as qualified payments are made by the taxpayer to a designated settlement
fund.”); sec. 1.468B-3(c)(1), Income Tax Regs.
1. Property Provided to Vibo
As stated above, we are not convinced that Vibo made the MSA payments
on behalf of Protabaco as a cost of purchasing manufactured cigarettes. Therefore,
we do not apply section 461(h)(2)(A), because it determines the timing of
economic performance only when the liability arises from services or property
provided to the taxpayer.
Petitioner argues that although a QSF received Vibo’s payments, and
despite section 468B(a), we should focus our inquiry on what the payment was for
and not necessarily to whom it was made. In his view, the QSF is nothing more
than a straw man. Petitioner relies on two items to make his argument: (1) Priv.
Ltr. Rul. 9852037 (Dec. 25, 1998), which ignored the fact that a taxpayer was
making payments to a QSF, and (2) IES Indus., Inc. v. United States, 253 F.3d 350
(8th Cir. 2001).
A private letter ruling (PLR) can be relied upon only by the taxpayer to
whom the ruling is addressed; however, “rulings do reveal the interpretation put
upon the statute by the agency charged with the responsibility of administering the
revenue laws.” Hanover Bank v. Commissioner, 369 U.S. 672, 686 (1962). The
- 35 -
Internal Revenue Service limited its ruling in Priv. Ltr. Rul. 9852037 to the
specific facts and circumstances of that case, and the facts in that ruling bear no
resemblance to the facts before this Court. Accordingly, Priv. Ltr. Rul. 9852037
has no value in this proceeding.
Petitioner cites IES Indus. as an example of an accrual basis taxpayer
properly deducting a payment to the Government when accrued and not when paid
because the payment was deemed to be for the provision of services. However,
IES Indus. is distinguishable from this case.
In IES Indus., the payment obligation arose out of the provision of services
to the taxpayer. The U.S. Government provided uranium enrichment services to
the taxpayer. The taxpayer then made payments into a fund for the
decontamination and decommissioning of uranium enrichment plants. The extent
of the taxpayer’s use of the uranium enrichment services determined the amounts
of the payments.
Petitioner equates the payments in IES Indus. with the payments here,
because both arose from the taxpayers’ receipt of services or property. Petitioner
argues that the MSA payment obligations arose out of Protabaco’s provision of
cigarettes to Vibo, and IES’ obligations arose out of the Government’s provision
of uranium enrichment services to IES. Section 461(h)(2)(A) fixes the timing of
- 36 -
economic performance for liabilities arising from the provision of both services
and property. Thus, petitioner argues that we should find IES Indus. instructive on
why economic performance occurred here when Vibo received the cigarettes. We
do not agree.
In IES Indus., the taxpayer’s obligation depended on the amount of uranium
enrichment services the taxpayer received. The U.S. Government provided the
services and assessed payment obligations based on the extent of the services IES
used. Here the MSA calculated a current obligation based on Vibo’s share of the
cigarette market, not the number of cigarettes Vibo received. Similarly, the MSA
calculated a prior obligation based on the Federal excise taxes that Vibo had paid
for cigarettes sold in the U.S. before joining the MSA. Protabaco could have
provided an infinite number of cigarettes to Vibo, but without subsequent sales
Vibo would have owed nothing to the MSA. The facts in IES Indus. also differ
from those here in that IES was not making payments into a QSF.
The Code and the regulations contain specific rules for determining the
timing of economic performance for payments made to QSFs. We discuss the
effect of those rules below.
- 37 -
2. Qualified Settlement Fund
The parties have stipulated that the MSA escrow account is a QSF for
Federal tax purposes. Section 1.468B-3(c), Income Tax Regs., provides that
“economic performance occurs with respect to a liability described in § 1.468B-
1(c)(2) * * * to the extent the transferor makes a transfer to a * * * [QSF] to
resolve or satisfy the liability.” Section 1.468B-1(c)(2), Income Tax Regs.,
describes several types of liabilities for which a QSF can be established, including
those arising out of tort, breach of contract, or violation of law.
3. Tort, Breach of Contract, or Violation of Law
Respondent argues that Vibo’s MSA payment obligation arose out of claims
asserting liability for tort, breach of contract, or violation of law and that section
1.468B-1(c)(2), Income Tax Regs., should accordingly apply. Petitioner
disagrees, because Vibo has not engaged in tortious conduct and has never been
sued for injuries with respect to its tobacco products by the attorney general of any
State that is a party to the MSA. Petitioner’s argument fails, because nothing in
the regulation requires a claim to have been brought against Vibo specifically. It
simply requires that the fund be established for the satisfaction of claims that may
result from an event that has occurred and given rise to a claim asserting liability
arising out of tort or violation of law.
- 38 -
The MSA was made by the settling States’ representatives and the
participating manufacturers “to settle and resolve with finality all Released Claims
against the Participating Manufacturers and related entities as set forth * * *
[therein].” The very first recital of the MSA states that more than 40 States have
commenced litigation asserting various claims for monetary, equitable, and
injunctive relief against certain TPMs and others as defendants. The second
recital explains that those States sought to obtain equitable relief and damages
under State laws, including consumer protection and/or antitrust laws. The final
recital says the settling States and the participating manufacturers wish to avoid
the further expense and burden of continued litigation and have agreed to settle
their respective lawsuits and potential claims. The MSA further states that in
consideration of the payments made by the participating manufacturers and the
release and discharge of all claims by the settling States, the parties enter into and
memorialize the agreement.
Section XVIII(d) of the MSA, titled “Payments in Settlement”, provides as
follows:
All payments to be made by the Participating Manufacturers pursuant
to this Agreement are in settlement of all of the Settling States’
antitrust, consumer protection, common law negligence, statutory,
common law and equitable claims for monetary, restitutionary,
equitable and injunctive relief alleged by the Settling States with
- 39 -
respect to the year of payment or earlier years * * * *. [Emphasis
added.]
Under Danielson, we must give great weight to the explicit and
unambiguous terms of the MSA documents in determining the tax consequences
of this arrangement. The explicit and unambiguous terms of the MSA documents
indicate that the fund was established to satisfy claims that may result from an
event that has occurred and given rise to a claim asserting liability arising out of
tort or violation of law. Consequently, under section 1.468B-3(c)(1), Income Tax
Regs., economic performance with respect to the MSA obligation could not occur
until Vibo transferred funds to the QSF.
C. Cost of Goods Sold Deductions
On its 2004 Form 1120S, Vibo deducted $295,549,083 of its MSA payment
obligations--both prior and current--as part of its cost of goods sold. None of this
amount was actually paid into the QSF in 2004, so economic performance did not
occur. Thus petitioner improperly deducted the expenses, and we sustain
respondent’s disallowance of this deduction.
On its 2006 Form 1120S, Vibo deducted $108,487,225 of its MSA current
obligation as part of its cost of goods sold. In 2006 Vibo paid $97,637,716 of its
MSA current obligation. Therefore, only $97,637,716 of its deduction was proper.
- 40 -
D. Interest Deductions
Petitioner argues that Vibo is entitled to deduct all interest that accrued on
the MSA liabilities. Petitioner specifically argues for two interest deductions: (1)
the $4,661,190 claimed on Vibo’s 2004 Form 1120S, and (2) an additional
$6,164,475 deduction for interest that accrued on the prior obligation but was
included in the principal portion of the prior obligation under the General Tobacco
adherence agreement.
Petitioner argues that section 461(h)(2) does not specifically address
interest, so section 461(h)(2)(D), labeled “other items”, controls. Section
461(h)(2)(D) provides that in the case of any other liability not addressed in
section 461(h)(2), economic performance occurs at the time determined under the
regulations. Petitioner then cites section 1.461-4(e), Income Tax Regs., which
states: “In the case of interest, economic performance occurs as the interest cost
economically accrues, in accordance with the principles of relevant provisions in
the Code.”
1. Claimed Interest Deduction
On its 2004 Form 1120S Vibo deducted $4,661,190 as interest accrued on
its unpaid prior obligation for July 1 through December 31, 2004. Respondent
determined that Vibo deducted the expense prematurely and denied the deduction.
- 41 -
The issue here is whether economic performance occurred with respect to
Vibo’s accrued interest on the prior obligation by the time Vibo deducted it on its
2004 return. Petitioner argues that it did and cites section 1.461-4(e), Income Tax
Regs., which provides that economic performance occurs for interest “as the
interest cost economically accrues”. However, section 468B(a) provides that
economic performance occurs for obligations to a QSF when the taxpayer makes
the payments. The expense Vibo deducted here was both interest and an
obligation to a QSF, so we must determine which of the conflicting rules applies.
We hold that section 468B(a) controls the timing of economic performance for all
obligations to a QSF, including interest.
The Congress and the Treasury, acting on Congress’ instruction, have
provided comprehensive rules concerning taxpayers’ payments to settlement
funds. Those rules prevail over more general rules that might otherwise govern
the payments. See Fourco Glass Co. v. Transmirra Prod. Corp., 353 U.S. 222,
228-229 (1957); D. Ginsberg & Sons, Inc. v. Popkin, 285 U.S. 204, 208 (1932)
(“Specific terms prevail over the general in the same or another statute which
otherwise might be controlling.”). Under the specialized rules, economic
performance occurs with respect to payments made to a settlement fund when the
taxpayer makes the payments. The rules do not differentiate between interest and
- 42 -
principal, and we accordingly afford them equal treatment. Vibo did not make the
interest payment on the prior obligation until 2005, and thus, his 2004 deduction
was premature. Accordingly, we sustain respondent’s denial.
2. New Additional Interest Deduction
Petitioner raised a new argument on brief. He argues that Vibo is entitled to
an additional interest deduction of $6,164,475. He claims that figure represents
the amount of accrued interest included in the $239,018,305 prior obligation owed
through June 30, 2004. Petitioner claims that PwC, the internal auditor,
determined the interest amount, but he has failed to produce any evidence to
support this claim. The record contains a letter from PwC, but the letter does not
support petitioner’s contention. The letter includes the $4,661,190 interest
calculation on the current obligation, but it does not mention anything about
accrued interest on the prior obligation.
Petitioner has provided no evidence that the initial prior obligation included
any accrued interest. Because the record is devoid of any such evidence,
petitioner raises this new issue untimely. Accordingly, we follow our well-settled
rule that issues raised for the first time on brief will not be considered when doing
so would prevent the opposing party from presenting evidence that might have
- 43 -
been presented if the issue had been timely raised. DiLeo v. Commissioner, 96
T.C. 858, 891 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992).
E. Other Deduction
On its 2004 Form 1120S Vibo deducted $2,011,446 under “Other
Deductions” for MSA obligations. That $2,011,446 was part of the current
obligation Vibo deducted in 2004 but did not pay. In accordance with our
findings above, the $2,011,446 is not deductible for 2004, because Vibo did not
actually make the payments.
VI. Petitioner’s Individual Income Tax Adjustment
Section 1366(a) provides, generally, that income, losses, deductions, and
credits are passed through pro rata to shareholders on their individual income tax
returns. As a result of the above findings, certain adjustments must be made to
petitioner’s 2004 and 2006 Forms 1040.
Petitioner restricted his arguments to tax consequences at the S corporation
level; he did not argue that the determinations would still be in error in the event
we found economic performance occurred at the time payment was made into the
QSF. Because respondent’s determinations in the notice of deficiency are
- 44 -
presumed correct and petitioner did not prove they were in error, we sustain those
determinations.11
In reaching our holdings herein, we have considered all arguments made,
and, to the extent not mentioned above, we conclude they are moot, irrelevant, or
without merit.
To reflect the foregoing,
Decision will be entered for
respondent as to the deficiency and for
petitioner as to the accuracy-related
penalty under section 6662(a).
11
Because respondent’s determinations have been sustained, pursuant to the
amendment to answer filed with this Court on January 11, 2013, petitioner’s
taxable income for the 2004 tax year also shall be increased by an additional
$2,491,164, resulting in an increase to the deficiency of $871,907 for petitioner’s
2004 taxable year.