136 T.C. 67
Tax Ct.2011Background
- Palmlund engaged in a large, loss-making foreign-currency transaction arranged by Garza and Turner & Stone, marketed as providing tax benefits.
- Garza guaranteed the deal and provided a lengthy opinion letter, while Turner & Stone prepared multiple 2001 returns based on that opinion.
- The 106 partnership distributed Canadian dollars to Palmlund, Ltd. in 2001, generating inside-basis issues and a large reported loss on the original return.
- Amendment in 2004 removed the $1 million loss from Palmlund’s personal return; the IRS issued an FPAA disallowing items and penalties.
- Palmlund petitioned Tax Court; after review, the court concluded penalties and partnership-item adjustments were warranted, and promoter status and good-faith reliance were lacking.
- This case follows and distinguishes Petaluma FX Partners and Jade Trading in its treatment of partnership-level penalties and the inside-basis issue.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Tax Court has jurisdiction over penalties at the partnership level | Palmlund argues jurisdiction lies at the partnership level for penalties related to partnership items. | Commissioner contends jurisdiction exists at partnership level for penalties on partnership items. | Tax Court has jurisdiction over penalties on partnership items. |
| Whether the reasonable-cause/good-faith defense can be asserted at the partnership level | 106 may raise a partnership-level defense to the penalty. | Defense should be partner-level (and not available to the partnership). | 106 may assert the reasonable-cause defense at the partnership level. |
| Whether reliance on professional advisers can establish good faith | Palmlund relied on Garza and Turner & Stone for tax treatment. | advisers were promoters and not independent, undermining reliance. | Reliance failed due to promoter status and lack of good faith. |
| Whether advisers Garza and Turner & Stone were promoters of the transaction | Investigation into whether advisers acted independently without conflicts. | Advisers participated in structuring and profited from the deal, making them promoters. | Garza and Turner & Stone were promoters; reliance not in good faith. |
| Whether the inside-basis misstatement supports the gross-valuation misstatement penalty | Inside-basis adjustments flow through to partner returns, justifying penalties. | Treatment depends on partnership-item adjustments and applicable penalties. | Penalty sustained based on inside-basis overvaluation and partnership-item adjustments. |
Key Cases Cited
- Petaluma FX Partners v. Commissioner, 135 S. Ct. (official reporter not provided here) (2010) (jurisdictional questions on partnership-item penalties; outside vs inside basis distinctions)
- Petaluma FX Partners v. Commissioner, 131 T.C. 84 (2008) (initial penalty and basis-related considerations in partnership contexts)
- Jade Trading, LLC v. United States, 598 F.3d 1372 (Fed. Cir. 2010) (fleet of penalties and partnership-item considerations following Petaluma)
- American Boat Co., LLC v. United States, 583 F.3d 471 (7th Cir. 2009) (partnership-level determination of penalties)
- Tigers Eye Trading, LLC v. Commissioner, T.C. Memo. 2009-121 (Tax Court, 2009) (definition of promoter in the tax-shelter context)
- Countryside Ltd. Pship. v. Commissioner, 132 T.C. 347 (2009) (factors for evaluating adviser-promoter status and reliance)
- Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000) (reliance on professional advice factors for penalties)
- Estate of Goldman v. Commissioner, 112 T.C. 317 (1999) (opinion letters and reliance considerations in penalties)