106 LTD., David Palmlund, Tax Matters Partner v. Commissioner

106 LTD., DAVID PALMLUND, TAX MATTERS PARTNER,
PETITIONER v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT
Docket No. 14586–05. Filed January 10, 2011.
Partnership P entered into a Son-of-BOSS transaction. This
generated more than $1 million in artificial losses which P’s
partners claimed on their 2001 returns. R adjusted various
partnership items and determined a penalty under sec.
6662(h), I.R.C., for a gross-valuation misstatement of P’s
inside basis in an asset distributed by P. P now contests only
that penalty, alleging it has a reasonable-cause-and-good-faith
defense. Held: The Court has jurisdiction over the penalty in
this partnership-level proceeding after Petaluma FX Partners
v. Commissioner, 135 T.C. 581 (2010), because the penalty
relates to an adjustment to inside basis, a partnership item,
that results in a computational adjustment to the partner’s
tax return that can be assessed without a partner-level
affected items proceeding. Held, further, we agree with the
Court of Appeals for the Seventh Circuit in American Boat Co.
LLC v. United States, 583 F.3d 471 (7th Cir. 2009), that a
partnership can assert its own reasonable-cause-and-good-
faith defense in a partnership-level proceeding. Held, further,
P cannot reasonably rely in good faith on the tax advice given
by a ‘‘promoter’’, defined as an adviser who participates in
structuring the transaction or who is otherwise related to, has
an interest in, or profits from the transaction.
William A. Roberts and Kyle R. Coleman, for petitioner.
Nancy B. Herbert, Richard Hassebrock, and Jadie T.
Woods, for respondent.
HOLMES, Judge: David Palmlund bought into a bad deal to
lose money but save on taxes. He has since filed an amended
return and paid the tax he was trying to avoid. But he con-
tests the penalty that the Commissioner asserts against him;
he argues that he relied in good faith on professional
advisers.
67
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68 136 UNITED STATES TAX COURT REPORTS (67)
FINDINGS OF FACT
I. Palmlund
David Palmlund started his professional life in upstate
New York. In 1964 he graduated with a dual degree in
industrial engineering and management accounting from
Syracuse University, then took a job in Rochester with East-
man Kodak as a cost engineer. After a year in the corporate
world, duty called; he served in the Army as an ordnance
officer stationed at the Aberdeen Proving Grounds, but also
spent time in Vietnam with the State Department on mat-
ters he ‘‘can’t talk about in Asia.’’ Then he returned to Syra-
cuse, completed his M.B.A. in 1968, and went back to East-
man Kodak.
But the draw of a larger city proved irresistible. Palmlund
moved to New York to work for American Cyanamid Chem-
ical Company from 1968 to 1972. He started out as an oper-
ations analyst—finding ways to improve the operations of
subsidiaries—and moved up to become a budget analyst
involved in major acquisitions. His entrepreneurial spirit
caught the attention of like-minded young men, and together
they formed a home-warranty company, American Home
Shield, in 1972. As chief administrative officer, Palmlund set
up American Home Shield’s operations, developed the com-
pany’s pricing model, and hired the contractors who would
perform the covered home repairs. American Home Shield
grew to be a successful, $800 million-a-year company.
Palmlund then moved to Merrill Lynch in 1975. He eventu-
ally became vice president and controller, as well as CEO of
several Merrill subsidiaries. At one of these, Merrill Lynch
Realty, Palmlund had 10,000 employees under his direction
working in New York and London. He then returned to
American Home Shield as chief operating officer. In 1980 he
took four months off to care for his wife and moved to Dallas
to be closer to her family.
Palmlund contacted some of the executive recruiters he
met while working for Merrill—he got to know them well
during the time he hired about one manager a week—to see
what jobs there might be for him in Dallas. Instead, the
recruiters recruited him to join their company. Palmlund
wasn’t interested at first because he didn’t like the way
recruiters operated, but the recruiters replied: ‘‘Fine, come in
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(67) 106 LTD. v. COMMISSIONER 69
and change it.’’ He agreed to give it a try, with the under-
standing that he could do things his way for a while; if it
didn’t work out, he would leave.
His way was based on personal contact. He would meet
each candidate face to face, never offering anyone for a posi-
tion whom he hadn’t met in person. This was labor inten-
sive—Palmlund accumulated over 10 million frequent-flyer
miles—but his approach paid off. He became a partner at his
firm, his firm became the world’s largest, and he placed more
senior executives than anyone else at it. All of his place-
ments stayed in their new jobs at least a year; every other
partner had to redo some.
Palmlund’s success made his tax reporting complicated,
and for many years he relied on Arthur Andersen. In the
early ‘90s, his firm hired a financial planner who rec-
ommended setting up limited partnerships, living trusts, and
other entities to help Palmlund meet his financial goals—and
who also recommended, as the lawyer to set it all up, one Joe
Garza. Palmlund ended up using Garza off and on over the
next 20 years not only for the financial-planning-entity-cre-
ation work, but for all his legal needs. Garza in turn rec-
ommended Turner & Stone to Palmlund as a more affordable
alternative to Arthur Andersen for tax preparation. But even
at those lower rates, Palmlund was an active and frugal
client who carefully reviewed every return—and noticed
when one year Turner & Stone nearly doubled its fee to
$2,700. He credibly testified that he ‘‘moaned and groaned’’
until it was reduced.
II. The Transaction
Sometime early in 2001, Garza called Palmlund to briefly
pitch an ‘‘investment’’ in foreign currency. Palmlund dis-
missed the idea because he didn’t have much experience in
the field. 1 But he was no neophyte investor—he ran a real-
estate investment partnership, actively picked stocks, and
formed a Texas family limited partnership named Palmlund,
Ltd., with the stated business of ‘‘investments.’’ He also had
numerous personal bank and brokerage accounts that he
actively managed.
1 His only experience was ordering his staff at Merrill Lynch’s London office to hedge against
a threatened devaluation of the pound. He did not personally implement the transaction.
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70 136 UNITED STATES TAX COURT REPORTS (67)
Palmlund says that he warmed up to the transaction after
receiving a ‘‘hot tip’’ at a cocktail party in mid-2001. But this
tip came from his business partner’s daughter, who men-
tioned that ‘‘the yen is weak and is going to get weaker.’’ We
do not think this is a credible explanation for Palmlund’s
interest in foreign-currency speculation, and instead find
that his interest was really sparked when Garza resurfaced.
Garza, however, was not really urging a speculative foray
into foreign currency—he was pitching a particular trans-
action that he explained had significant tax benefits. The
deal was a variation of the Son-of-BOSS transaction that has
produced so much litigation in recent years. 2 He tried to
explain its basic structure, though on this topic Palmlund
credibly testified that the explanation, with its use of foreign-
currency digital options and the ‘‘super sweet spot’’—alleg-
edly a way to make a large profit if the dollar-to-yen
exchange rates worked out just right—was not entirely com-
prehensible. But Garza’s tutorials never really got Palmlund
interested in the theory of how to make foreign-currency
options trading profitable. What got him interested—and we
specifically find this based on the trial testimony—was the
alluring tax benefit. Palmlund ran Garza’s suggestion by his
accountants at Turner & Stone. The accountants gave him
the green light, telling him they themselves had used the
same transaction. And Garza personally guaranteed the deal,
promising to cover any taxes, penalties, or litigation costs if
the transaction blew up.
2 We lay out only the barest of bones, because Palmlund has conceded the tax and fights only
the penalty. Very similar deals have been dissected elsewhere. See, e.g., Highwood Partners v.
Commissioner, 133 T.C. 1 (2009). For an explanation of Son-of-BOSS deals, see Kligfeld Hold-
ings v. Commissioner, 128 T.C. 192 (2007); see also, e.g., BLAK Invs. v. Commissioner, 133 T.C.
431 (2009); 3K Inv. Partners v. Commissioner, 133 T.C. 112 (2009); Olesen v. Commissioner, T.C.
Memo. 2009–307; Bergmann v. Commissioner, T.C. Memo. 2009–289; LVI Investors, LLC v.
Commissioner, T.C. Memo. 2009–254; UTAM, Ltd. v. Commissioner, T.C. Memo. 2009–253; Ti-
gers Eye Trading, LLC v. Commissioner, T.C. Memo. 2009–121; Napoliello v. Commissioner, T.C.
Memo. 2009–104; Fears v. Commissioner, T.C. Memo. 2009–62.
Son-of-BOSS deals come in different varieties. But they all involve the transfer of assets along
with significant liabilities to a partnership, with the goal of increasing basis in that partnership.
The liabilities are not completely fixed at the time of transfer, so the partnership ignores them
in computing basis. This results in high-basis assets that produce large tax—but not out-of-pock-
et—losses. Son-of-BOSS transactions usually yield capital losses, but Palmlund offset ordinary
income because he attached the high basis to Canadian dollars, and on his original return took
the position that certain foreign-currency transactions may produce an ordinary loss. See sec.
988(a); sec. 1.988–3(a), Income Tax Regs. (Unless we say otherwise, all section references are
to the Internal Revenue Code in effect for the year at issue.)
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(67) 106 LTD. v. COMMISSIONER 71
This was good enough for Palmlund. He directed Garza to
handle all the paperwork and told his secretary to forward
any correspondence about the deal directly to Garza. Here
are the mechanics:
• In November 2001, Palmlund formed three entities: 32,
LLC (32 LLC); 7612, LLC (7612 LLC); and 106, Ltd. (106). The
owners of 106 were David Palmlund (99 percent) and 32 LLC
(1 percent). Palmlund’s Texas family limited partnership,
Palmlund, Ltd., is also involved in this case. Its partners
were David Palmlund (49.5 percent), Suzanne Palmlund
(49.5 percent) and the David Channing Palmlund Trust (1
percent).
• Also in November 2001, 7612 LLC bought offsetting long
and short foreign-currency options. The termination date for
both options was December 12, 2001, when they would expire
out-of-the-money.
• On November 26, 2001, 7612 LLC transferred both long
and short options to 106.
• On December 5, 2001, 7612 LLC bought Can$6,207.82 for
US$4,000.
• On December 24, 2001, 7612 LLC transferred the
Canadian currency to 106 as a capital contribution.
• On December 26, 2001, 106 tried to assign all of its
Canadian currency to Palmlund, Ltd., but actually distrib-
uted only Can$2,172.74. Can$4,035.08 remained with 106
until it sold the currency in October 2002.
Palmlund testified that he earned $10,000 in two weeks.
Deutsche Bank paid out $40,000 on the options and charged
a $30,000 net premium. 3 If these had been the only expenses
involved, the deal would have been profitable. But Palmlund
doesn’t include Garza’s fees in his profit calculation. Those
fees shrink the $10,000 ‘‘profit’’ to a loss of somewhere
between $32,000 and $85,000. 4
3 The premiums on the long and short option positions were $3 million and $2,970,000, respec-
tively.
4 The exact amount of Garza’s fee is unclear from the record. It was either $72,000 or $95,000,
and the $30,000 net premium may or may not have been included in the fee. Assuming the low-
est possible Garza fee—$72,000 with the net premium included—Palmlund would have lost
$32,000 on the deal ($40,000 option payout less $72,000 for Garza’s fee). At the other end of
the spectrum—$95,000 not including the net premium—Palmlund would have lost $85,000
($40,000 option payout less the $30,000 net premium and the $95,000 Garza fee).
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72 136 UNITED STATES TAX COURT REPORTS (67)
III. Reporting the Transaction
Palmlund used Turner & Stone to prepare his 2001 return.
A critical part of that preparation was the opinion letter
Garza wrote, which Palmlund forwarded to them. The
opinion letter contains a 4-page introduction tailored to the
deal, but the remaining 85 pages consist mostly of generic
boilerplate on tax-law doctrines—running the gamut from
partnership-basis rules, treatment of foreign-currency con-
tracts, the step-transaction doctrine, economic substance, dis-
guised-sale provisions, and partnership anti-abuse regula-
tions. In the letter, Garza concluded that the tax treatment
he proposed would ‘‘more likely than not’’ withstand IRS scru-
tiny. 5 To reach this conclusion, Garza had to clear a few hur-
dles. In the introductory pages, he states that Palmlund rep-
resented that he
• ‘‘independently reviewed the economics underlying the
investment,’’
• ‘‘believed there was reasonable opportunity to earn a
reasonable pre-tax profit * * * in excess of all associated fees
and costs,’’ and
• received ‘‘[t]he foreign currency and financial instruments
* * * as Partnership liquidating distributions.’’ (Emphasis
added.)
Here’s the first stumble—we find that Palmlund did no such
things. But even if he had, Garza still didn’t get it right—
he failed to customize the opinion letter to fit the facts of the
transaction. Here are a few of the mistakes:
• The foreign currency was distributed to Palmlund in liq-
uidation of his partnership interest.
• No it wasn’t; it was a nonliquidating distribution in 2001.
• Unrelated partners confirmed the partnership’s legit-
imacy.
• All the partners were related—and Palmlund controlled
them.
5 One factor to consider in determining whether the good-faith-reliance defense applies is the
existence of an ‘‘opinion of a professional tax advisor * * * as to the treatment of the taxpayer
* * * under Federal tax law.’’ Sec. 1.6664–4(c)(1), Income Tax Regs. In analyzing corporate tax
shelters, citing the ‘‘more likely than not’’ standard—defined as ‘‘a greater than 50-percent likeli-
hood that the tax treatment of the item will be upheld if challenged by the Internal Revenue
Service’’—is a necessary, but not sufficient, condition in such opinions. Sec. 1.6664–4(e)(2)(i)(B),
(3), Income Tax Regs. Since 106 isn’t a corporation, the ‘‘more likely than not’’ conclusion might
not strictly be necessary, but Garza still cited the standard in his opinion letter.
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(67) 106 LTD. v. COMMISSIONER 73
• Palmlund doesn’t know if he will be called upon to satisfy
his obligations under the sold digital option.
• The options had already been terminated by the time the
opinion was drafted.
Relying on the opinion letter, Turner & Stone prepared
returns for 106, 32 LLC, Palmlund, Ltd., and Palmlund in
2002. They charged $8,000 for return preparation; Palmlund
didn’t complain. He didn’t review the returns or ask any
questions, claiming that he ‘‘wouldn’t even know what to
ask’’ about the returns. The result was happy for a time—a
noneconomic loss of about $1 million flowed through to his
personal return.
Palmlund did get concerned when the IRS sent him a copy
of Announcement 2004–46, 2004–1 C.B. 964, in May 2004.
The announcement outlined terms of settlement for Son-of-
BOSS transactions. Palmlund met with Garza and his
accountants to figure out what he should do, and what he
decided to do was amend his personal return. (No one ever
amended 106’s return.) Turner & Stone finished the
amended return in August 2004, and Palmlund signed it in
September. This return removed the $1 million loss attrib-
uted to the disallowed transaction, and Palmlund paid the
taxes and interest he conceded were due.
The IRS issued an FPAA to 106 that adjusted various part-
nership items (including contributions and distributions) to
zero and asserted penalties. Palmlund, as 106’s tax matters
partner, timely petitioned the Tax Court. In the course of
preparing for trial, the Commissioner subpoenaed Charles
Denson, Palmlund’s private banker. Denson was curious
about the subpoena and set up a lunch with Palmlund. He
asked about the case, and Palmlund explained that he got
into a tax strategy ‘‘and the intent was to lose money.’’
Before trial began, we issued two orders. In the first, we
granted the Commissioner partial summary judgment on the
issue of whether the 2001 asset distribution from 106 was
nonliquidating. As a result, the adjusted basis for 106’s dis-
tribution to Palmlund, Ltd., in 2001 is limited to the partner-
ship’s adjusted basis (i.e., inside basis) 6 in the Canadian cur-
rency. See sec. 732(a); 7050, Ltd. v. Commissioner, T.C.
Memo. 2008–112. In our second order, we granted the
6 Inside basis is a partnership’s basis in property that it owns.
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74 136 UNITED STATES TAX COURT REPORTS (67)
Commissioner’s motion for partial summary judgment on the
issue of whether there was a gross-valuation misstatement in
excess of 400 percent on the 106 return. This second order
required little more than a bit of math, because 106’s assets
were Canadian dollars bought for US$4,000. The partnership
distributed some of those Canadian dollars in 2001, so 106’s
basis—the inside basis—in those distributed dollars was
$1,400. The return claimed a $2.974 million basis in the dis-
tribution, which is significantly more than 400 percent of
$1,400, and was reduced by the FPAA to zero. 7
Because Palmlund conceded the taxes related to the under-
lying transaction, the only remaining question is whether the
partnership has a section 6664(c) reasonable cause/good faith
defense—based upon reliance on Garza and Turner &
Stone—to the 40 percent gross-valuation-misstatement pen-
alty the Commissioner asserts under section 6662(h). This
penalty relates to inside basis—106’s overvaluation of its
basis in the Canadian dollars it distributed to Palmlund Ltd.
OPINION
I. Jurisdiction
In January 2010, the D.C. Circuit 8 decided Petaluma FX
Partners v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010),
affg. in part, revg. in part, vacating in part and remanding
on penalty issues 131 T.C. 84 (2008). 9 It held that the Tax
Court lacks jurisdiction in partnership-level proceedings to
determine a partner’s basis in the partnership or whether
penalties related to that basis apply. Id. at 655–56. 10 After
the D.C. Circuit issued its opinion, we asked the parties in
this case to brief the question of whether we have jurisdic-
tion, and both tell us that we do.
At first glance, Petaluma seems strikingly similar to 106.
Like the tax shelter in Petaluma, the transaction has the for-
eign-currency-option flavor of a Son-of-BOSS deal. Accuracy-
7 The
parties did not dispute this calculation and holding.
8 106
was a Tax Equity and Fiscal Responsibility Act of 1982 partnership without a principal
place of business when it filed its petition, because it no longer existed. Any appeal therefore
may go to the D.C. Circuit. See sec. 7482(b)(1).
9 In March 2010, the Federal Circuit followed Petaluma in Jade Trading, LLC v. United
States, 598 F.3d 1372, 1379–80 (Fed. Cir. 2010), making essentially the same holding on almost
identical facts.
10 We recently reanalyzed the problem in response to the D.C. Circuit’s mandate in Petaluma.
See Petaluma FX Partners v. Commissioner, 135 T.C. 581 (2010).
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(67) 106 LTD. v. COMMISSIONER 75
related penalties are at stake in both cases. But there’s a key
distinction—Petaluma held that the Tax Court had no juris-
diction over penalties springing from an adjustment to a
partner’s outside basis, 11 but the parties here agree that out-
side basis is not an issue. In the FPAA that provoked this
case, the Commissioner determined that ‘‘the accuracy-
related penalty under section 6662(a) of the Internal Rev-
enue Code applies to all underpayments of tax attributable
to adjustments of partnership items of 106.’’ (Emphasis
added.) And the specific item at issue in this case is 106’s
own basis in the Canadian dollars that it distributed to its
partners. This kind of basis is ‘‘inside’’ basis, not the ‘‘out-
side’’ basis that was at issue in Petaluma. And this is the
kind of basis that the regulation defines as a partnership
item. See sec. 301.6231(a)(3)–1(c)(3)(iii), Proced. & Admin.
Regs. This is a key distinction—Petaluma didn’t address our
jurisdiction over penalties based on adjustments to inside
basis.
We also agree with the parties and hold that partner-level
proceedings are not necessary to determine the gross-valu-
ation-misstatement penalty in this case: The parties have
stipulated that the adjustment to inside basis at the partner-
ship level here allows a numerical adjustment at the partner
level and agree that this ‘‘is a flow through item to the
Palmlunds’ individual return.’’ Stip. par. 27. Because it is
possible to derive through such an adjustment alone the
reduction in the claimed loss on the sale of the Canadian dol-
lars that 106 distributed, and the consequent increase in the
reportable gain and resulting deficiency—all without any
need for an affected-item deficiency notice, see Petaluma, 135
T.C. at 584—we conclude that we do have jurisdiction over
the penalty in this partnership-level case after Petaluma. 12
Partnership items specifically include ‘‘the adjusted basis to
the partnership of distributed property.’’ Sec. 301.6231(a)(3)–
1(c)(3)(iii), Proced. & Admin. Regs. Under section 6226(f), we
11 Outside
basis is an individual partner’s basis in his interest in the partnership itself.
12 ‘‘As
it is not clear from the opinion, the record, or the arguments before this court that the
penalties asserted by the Commissioner and ordered by the Tax Court could have been com-
puted without partner-level proceedings to determine the affected-items questions concerning
outside bases, we are unable to uphold the court’s determination of the penalty issues. While
it may be that some penalties could have been assessed without partner-level computations, we
cannot affirm a decision that has not yet been made.’’ Petaluma FX Partners v. Commissioner,
591 F.3d 649, 655–56 (D.C. Cir. 2010), affg. in part, revg. in part, vacating in part and remand-
ing on penalty issues 131 T.C. 84 (2008).
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76 136 UNITED STATES TAX COURT REPORTS (67)
have jurisdiction in a TEFRA proceeding to ‘‘determine all
partnership items * * * and the applicability of any penalty,
addition to tax, or additional amount which relates to an
adjustment to a partnership item.’’ Since the overvalued dis-
tribution was a partnership item, the outside basis of indi-
vidual partners is of no consequence. The only issue in dis-
pute is whether 106 had a section 6664 reasonable-cause-
and-good-faith defense for the gross-valuation misstatement.
That leads to the next question: Is the reasonable cause/
good faith defense available at the partnership level? Most
courts that have addressed the issue think so. See, e.g., Am.
Boat Co., LLC v. United States, 583 F.3d 471, 480 (7th Cir.
2009) (court has jurisdiction in partnership-level proceeding
to consider partnership defense to accuracy-related penalty);
Fears v. Commissioner, 129 T.C. 8, 10 (2007) (penalties
relating to partnership-item adjustments generally deter-
mined at partnership level); Santa Monica Pictures, LLC v.
Commissioner, T.C. Memo. 2005–104 (reasonable-cause
defense a partnership-level determination).
On the other hand, the Court of Federal Claims recently
held that the reasonable-cause defense to the gross-valuation
misstatement penalty is exclusively a partner-level defense.
Clearmeadow Invs., LLC v. United States, 87 Fed. Cl. 509,
520–21 (2009). That court interpreted section 301.6221–1(d),
Proced. & Admin. Regs., to prohibit the reasonable-cause
defense at the partnership level. Clearmeadow, 87 Fed. Cl. at
520. The Seventh Circuit disagreed:
To the extent that the court’s holding in Clearmeadow wholly forecloses
a partnership from raising an entity-level reasonable cause defense, we
disagree. The court’s primary premise is correct: a partner may not raise
a partner-level defense during a partnership-level proceeding. But we see
nothing that would prevent a partnership from raising its own reasonable
cause defense * * *
The Clearmeadow court relied on Treasury Regulation § 301.6221–1(d),
which defines a partner-level defense * * *. Although the regulation cites
§ 6664(c)(1) as an example of a partner-level defense, it does not foreclose
a similar defense on behalf of the partnership; it only states that ‘‘whether
the partner has met the criteria of * * * section 6664(c)(1)’’ is a partner-
level defense. Treas. Reg. § 301.6221–1(d). The Fifth Circuit concluded that
this language did not rule out a partnership-level reasonable cause
defense, see Klamath, 568 F.3d at 548, and we agree.
[Am. Boat Co., 583 F.3d at 480.]
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(67) 106 LTD. v. COMMISSIONER 77
We find the Seventh Circuit’s analysis more persuasive than
Clearmeadow’s, and hold that 106 may assert the reasonable-
cause defense at the partnership level. 13
II. Section 6662 Penalty and Defense
The gross-valuation-misstatement penalty can be rebutted
by a showing of reasonable cause and good faith, sec. 6664(c),
and a taxpayer will often argue (as Palmlund does) that he
had reasonable cause and showed good faith by relying on
professional advice. The regulation somewhat unhelpfully
states that reliance on professional advice is ‘‘reasonable
cause and good faith if, under all the circumstances, such
reliance was reasonable and the taxpayer acted in good
faith.’’ Sec. 1.6664–4(b)(1), Income Tax Regs. The caselaw
more helpfully points to three factors to test whether a tax-
payer properly relied on professional advice. Neonatology
Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd.
299 F.3d 221 (3d Cir. 2002).
• First, was the adviser a competent professional who had
sufficient expertise to justify reliance?
• Second, did the taxpayer provide necessary and accurate
information to the adviser?
• Third, did the taxpayer actually rely in good faith on the
adviser’s judgment?
A. Expertise of Professional Advisers
Both Garza and Turner & Stone were licensed and would
have appeared competent to a layman at the time they pre-
pared the return. They would have appeared competent espe-
cially to Palmlund, since Garza had been his personal
attorney for 20 years, and Turner & Stone had prepared his
returns for about 18 years, all without incident. The Commis-
sioner doesn’t dispute their expertise in his brief, and so we
have no trouble finding these advisers to have at least an
adequate level of expertise.
13 The parties have stipulated that only the gross-valuation misstatement penalty for 106 is
at issue, so we do not decide whether other penalties (e.g., negligence) require analyzing adjust-
ments to outside basis or other partner-level facts.
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78 136 UNITED STATES TAX COURT REPORTS (67)
B. Provision of Necessary and Accurate Information
We also find that Palmlund provided both Garza and
Turner & Stone with all the relevant financial data needed
to assess the correct level of income tax. See sec. 1.6664–
4(c)(1)(i), Income Tax Regs. The Commissioner doesn’t dis-
pute this either.
C. Actual Reliance in Good Faith
It’s the third point—the issue of Palmlund’s actual good-
faith reliance on Garza’s, and Turner & Stone’s, professional
advice—that’s in dispute. There are at least three factors to
consider:
• Palmlund’s business sophistication and experience,
• the sloppy opinion letter, and
• whether Garza and Turner & Stone were promoters.
Palmlund’s business sophistication and experience tend to
make it harder to believe he didn’t know the transaction was
improper. Even though he wasn’t a tax expert and was
accustomed to relying on professional advisers for tax
preparation, it seems doubtful that he acted in good faith in
light of his ‘‘experience, knowledge, and education.’’ See sec.
1.6664–4(b)(1), Income Tax Regs.
The mistake-ridden opinion letter is problematic as well.
The opinion didn’t accurately describe the transaction in this
case, and the actual transaction was different from the
generic transaction described in the opinion in some key
respects. We don’t, however, always take a close look at
opinion letters when penalties are at issue. See, e.g., Estate
of Goldman v. Commissioner, 112 T.C. 317, 324 (1999)
(opinion letter mentioned, but not scrutinized), affd. without
published opinion sub nom. Schutter v. Commissioner, 242
F.3d 390 (10th Cir. 2000). And the Supreme Court has
touched on this issue as well:
To require the taxpayer to challenge the attorney, to seek a ‘‘second
opinion,’’ or to try to monitor counsel on the provisions of the Code himself
would nullify the very purpose of seeking the advice of a presumed expert
in the first place. * * * ‘‘Ordinary business care and prudence’’ do not
demand such actions. [United States v. Boyle, 469 U.S. 241, 251 (1985).]
On the other hand, at least one district court found that an
opinion letter wasn’t good enough only after taking a hard
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(67) 106 LTD. v. COMMISSIONER 79
look at it. Long Term Capital Holdings v. United States, 330
F. Supp. 2d 122, 205–12 (D. Conn. 2004) (opinion letter
wasn’t based on all pertinent facts and circumstances and
therefore didn’t protect against penalties), affd. 150 Fed.
Appx. 40 (2d Cir. 2005).
One doesn’t need to look very hard to find problems with
Garza’s opinion. Section 1.6664–4(c)(1)(ii), Income Tax Regs.,
warns taxpayers against relying on advice that itself
unreasonably relies ‘‘on the representations, statements,
findings, or agreements of the taxpayer.’’ Garza’s opinion
letter, as we described in our findings of fact, is filled with
what appear to be (but which were not in fact) Palmlund’s
representations. And many of these ‘‘representations’’ just
weren’t true. Garza shouldn’t have relied on them, and it’s
hard to believe that someone as sophisticated as Palmlund
wouldn’t at least suspect something was amiss.
And Palmlund also can’t rely on Garza or Turner & Stone
if they were promoters of the transaction. The caselaw is
clear on this point—promoters take the good-faith out of
good-faith reliance. See, e.g., Neonatology Associates, 115
T.C. at 98. But what exactly makes a tax adviser a promoter
has been less than clear. A frequently cited promoter-reliance
case explains that ‘‘advice must generally be from a com-
petent and independent advisor unburdened with a conflict of
interest and not from promoters of the investment.’’
Mortensen v. Commissioner, 440 F.3d 375, 387 (6th Cir.
2006), affg. T.C. Memo. 2004–279. But this merely tells us
what a promoter is not, not what a promoter is.
Tigers Eye Trading, LLC v. Commissioner, T.C. Memo.
2009–121, offers a more workable definition of promoter: ‘‘an
adviser who participated in structuring the transaction or is
otherwise related to, has an interest in, or profits from the
transaction.’’ But there’s a catch: This definition wasn’t relied
on or applied to the facts of that case—it’s dictum. In Tigers
Eye, we held only that we had jurisdiction in a partnership-
level proceeding to determine whether a tax adviser was a
promoter. Since the case was only at the summary-judgment
stage, we left for another day the question of whether the tax
adviser there actually was a promoter. Id. Still, the definition
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80 136 UNITED STATES TAX COURT REPORTS (67)
of ‘‘promoter’’ in that opinion was carefully crafted after con-
sidering relevant precedent. 14
One might need to be careful in applying the definition to
some kinds of transactions—a tax lawyer asked by a
businessman for advice on how to sell the family business
through a tax-favored stock redemption might be said to
have ‘‘participated in structuring the transaction’’—but when
the transaction involved is the same tax shelter offered to
numerous parties, the definition is workable. As we observed
in Countryside Ltd. Pship. v. Commissioner, 132 T.C. 347,
352–55 (2009), a tax adviser is not a ‘‘promoter’’ of a trans-
action when he
• has a long-term and continual relationship with his
client;
• does not give unsolicited advice regarding the tax shelter;
• advises only within his field of expertise (and not because
of his regular involvement in the transaction being scruti-
nized);
• follows his regular course of conduct in rendering his
advice; and
• has no stake in the transaction besides what he bills at
his regular hourly rate.
We therefore adopt the Tigers Eye definition for cases like
this one, and apply it to Garza and Turner & Stone.
We find that both these advisers not only participated in
structuring the transaction, but arranged the entire deal.
Garza set up the LLCs, provided a copy of the opinion letter,
and coordinated the deal from start to finish. And both Garza
and Turner & Stone profited from selling the transaction to
14 Tigers Eye Trading, LLC v. Commissioner, T.C. Memo. 2009–121, drew from the following
cases for its definition of promoter: Goldman v. Commissioner, 39 F.3d 402, 408 (2d Cir. 1994)
(taxpayer could not reasonably rely on professional advice of someone known to be burdened
with an inherent conflict of interest—a sales representative of transaction), affg. T.C. Memo.
1993–480; Pasternak v. Commissioner, 990 F.2d 893, 903 (6th Cir. 1993) (reliance on promoters
or their agents is unreasonable because such persons are not independent of the investment),
affg. Donahue v. Commissioner, T.C. Memo. 1991–181; Illes v. Commissioner, 982 F.2d 163, 166
(6th Cir. 1992) (finding negligence where taxpayer relied on person with financial interest in
the venture), affg. T.C. Memo. 1991–449; see also Hansen v. Commissioner, 471 F.3d 1021, 1031
(9th Cir. 2006) (‘‘a taxpayer cannot negate the negligence penalty through reliance on a trans-
action’s promoters or on other advisors who have a conflict of interest’’), affg. T.C. Memo. 2004–
269; Van Scoten v. Commissioner, 439 F.3d 1243, 1253 (10th Cir. 2006) (‘‘To be reasonable, the
professional adviser cannot be directly affiliated with the promoter; instead, he must be more
independent’’), affg. T.C. Memo. 2004–275; Barlow v. Commissioner, 301 F.3d 714, 723 (6th Cir.
2002) (‘‘courts have found that a taxpayer is negligent if he puts his faith in a scheme that,
on its face, offers improbably high tax advantages, without obtaining an objective, independent
opinion on its validity’’), affg. T.C. Memo. 2000–339.
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(67) 106 LTD. v. COMMISSIONER 81
numerous clients. Garza charged a flat fee for implementing
it and wouldn’t have been compensated at all if Palmlund
decided not to go through with it. He wasn’t being paid to
evaluate the deal or tweak a real business deal to increase
its tax advantages; he was being paid to make it happen.
And Turner & Stone charged $8,000 for preparing
Palmlund’s tax returns—$6,500 more than usual. The extra
fees were not attributable to an extraordinarily complex
return—Palmlund’s returns were always complex due to his
various business interests—but, we find, were the firm’s cut
for helping to make the deal happen. Because Palmlund’s
advisers structured the transaction and profited from its
implementation, they are promoters. Palmlund therefore
could not rely on their advice in good faith.
Even if the promoter issue was not in the picture,
Palmlund would still have failed to establish his good-faith
reliance. Palmlund’s conversation with Denson—his private
banker—also negates a finding of such reliance. It doesn’t
show good faith to enter into a ‘‘tax strategy’’ with the intent
to ‘‘lose money.’’ We find Denson to be credible. And his testi-
mony, combined with the sloppy opinion letter and
Palmlund’s unusual level of ‘‘experience, knowledge, and edu-
cation’’, demonstrates Palmlund’s lack of good-faith reliance.
See sec. 1.6664–4(b)(1), Income Tax Regs.
Decision will be entered for respondent.
f
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