106 LTD., David Palmlund, Tax Matters Partner v. Commissioner
136 T.C. 67
Tax Ct.2011Background
- Palmlund participated in a Son-of-BOSS transaction via a set of entities (106, 32 LLC, 7612 LLC) that transferred currency/assets to Palmlund, Ltd., generating large artificial losses used on 2001 returns.
- The transaction involved inside-basis adjustments in the partnership’s Canadian dollars distributed to Palmlund, Ltd., creating a substantial overstatement of basis and triggering a 6662(h) gross-valuation penalty.
- Palmlund amended his individual return after an IRS settlement announcement (Announcement 2004-46) but did not amend the related partnership returns; the FPAA subsequently issued penalties against 106 and its partners.
- Garza (the tax adviser/attorney) and Turner & Stone (tax preparer) advised Palmlund and prepared returns; Garza issued an opinion letter that misdescribed the transaction and relied on Palmlund’s (often inaccurate) representations.
- The Tax Court held it has TEFRA-venue jurisdiction over penalties tied to a partnership item’s inside basis, and that the partnership can raise a reasonable-cause-and-good-faith defense at the partnership level; Palmlund cannot rely on promoter-adviser advice as good faith under these circumstances.
- The decision ultimately favors the Commissioner, with the court finding that advisers were promoters and Palmlund lacked good-faith reliance; the penalty is sustained against Palmlund’s partnership for the gross-valuation misstatement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Jurisdiction over penalty in partnership-level proceeding | Palmlund argues Petaluma forecloses partnership-level penalties | Tax Court retains jurisdiction as inside-basis adjustments are partnership items | Court has jurisdiction |
| Whether partnership may raise reasonable-cause defense at partnership level | Defense is available at partner level only | Defense can be raised at partnership level | Yes, partnership may assert the defense |
| Whether reliance on promoters defeats good-faith defense | Promoter reliance supports good faith | Promoters negates good faith reliance | Promoter advisers negate good-faith reliance; defense fails |
| Definition of promoter for purposes of good-faith defense | Promoter status should be limited | Promoter includes advisers who structured or profited from the transaction | Garza and Turner & Stone are promoters; no good-faith reliance |
Key Cases Cited
- Petaluma FX Partners v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010) (holds Tax Court lacks jurisdiction over penalties tied to partner outside-basis; relevant for TEFRA jurisdiction)
- Jade Trading, LLC v. United States, 598 F.3d 1372 (Fed. Cir. 2010) (confirms TEFRA jurisdiction distinctions for inside vs outside basis)
- American Boat Co. LLC v. United States, 583 F.3d 471 (7th Cir. 2009) (partnership-level defense to accuracy-related penalties supported)
- Countryside Ltd. Pship. v. Commissioner, 132 T.C. 347 (2009) (court discusses factors for reliance on professional advice in promoting good faith)
- Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000) (tests three factors for reasonable reliance on advisers)
- United States v. Boyle, 469 U.S. 241 (1985) (ordinary business care and prudence in reliance on counsel)
- Long Term Capital Holdings v. United States, 330 F. Supp. 2d 122 (D. Conn. 2004) (court consideration of opinion letters in penalties)