Anaheim Arena Management, LLC, H&S Investments I, LP, a Partner Other Than the Tax Matters Partner, 16724-19

Background

Anaheim Arena Management, LLC (AAM) managed the Honda Center under a facility management agreement with the City of Anaheim and controlled the facility bank accounts; funds remained City property and repayment of any advances depended on Honda Center revenues per a waterfall payment scheme.
From 2004–2015 AAM made repeated advances to the Honda Center (categorized as Operating Loans, Debt Service Loans, and Capital Expenditure Loans) documented by promissory notes and "Request for Advance" forms; the notes often named "the Honda Center" (a physical asset, not a legal entity) as borrower.
Deloitte reported the advances as debt on financial statements; AAM received limited principal repayments and interest at prime+1%; AAM claimed $51,465,228 as a §166 bad‑debt deduction on its 2015 Form 1065 based on internal analysis and valuation reports concluding worthlessness as of 12/31/2015.
AAM’s accountants (Bolar and Bellew) prepared advice and a draft memo concluding the advances were debt and worthless; AAM’s authorized decisionmaker (Schulman) relied on that advice and claimed the deduction; Bolar signed the 2015 return.
The IRS issued an FPAA disallowing the bad‑debt deduction because the advances were not valid, enforceable obligations to pay a fixed or determinable sum, and asserted a §6662(a) accuracy‑related penalty; AAM’s notice‑partner filed a timely petition to Tax Court.
The Tax Court held the advances were not bona fide debt (so the §166 deduction was disallowed) but sustained AAM’s partnership‑level defense to the §6662 penalty: the IRS satisfied §6751(b)(1) and AAM reasonably and in good faith relied on competent professional advice.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether AAM's advances were "debt" under §166 (bona fide debt test)	The advances were documented by subordinated promissory notes, recorded as debt on financials, and labeled loans — therefore bona fide debt	The notes were not enforceable contracts ("Honda Center" lacked legal personhood), repayment was limited to facility revenues, AAM controlled timing and could waive repayments, and advances functioned as part of managerial obligations	Advances are not debt; bad‑debt deduction disallowed
Whether petition was timely / Court has jurisdiction (tax matters partner rule)	H&S Investments filed as partner other than tax matters partner; uncertainty existed over designation	IRS contended tax matters partner rules apply but notice partner could timely file if tax matters partner did not	Petition timely as a notice partner within the extended period; Court has jurisdiction to readjust partnership items
Whether IRS satisfied §6751(b)(1) (supervisory approval of penalty)	RA Swann initially did not propose a penalty; Senior Counsel Coy later recommended penalty — thus approval issue	IRS produced contemporaneous memoranda and a civil‑penalty approval form signed by RA Swann and his supervisor; Laidlaw guidance governs timing	IRS satisfied §6751(b)(1): penalty approval was timely and properly authorized
Whether §6662 accuracy‑related penalty applies (reasonable cause and good faith)	IRS: Bolar/Bellew did not opine that advances were bona fide debt, so reliance was unreasonable; substantial understatement/negligence argued	AAM: Schulman reasonably relied on competent CPAs who reviewed facts, produced memo and valuation, and AAM provided accurate information	Penalty disallowed: AAM had reasonable cause and acted in good faith relying on advisors; §6662 penalty not imposed

Key Cases Cited

A.R. Lantz Co. v. United States, 424 F.2d 1330 (9th Cir. 1970) (articulates multi‑factor economic test for whether an advance is bona fide debt)
O.H. Kruse Grain & Milling v. Commissioner, 279 F.2d 123 (9th Cir. 1960) (early statement of factors used to distinguish debt from equity/advances)
Hardman v. United States, 827 F.2d 1409 (9th Cir. 1987) (absence of fixed maturity date suggests repayment tied to business fortunes and not debt)
Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43 (2000) (competent professional advice can establish reasonable cause and good faith for penalty defense)
Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022) (timing and scope of supervisory approval required by §6751(b)(1))
United States v. Woods, 571 U.S. 31 (2013) (distinguishes partnership‑level vs partner‑level determinations and confirms Tax Court jurisdictional contours)