DJB Holding Corp. v. Commissioner, 803 F.3d 1014

Barone and Watkins formed WB Acquisition and two S corporations (DJB and GSW) with employee stock ownership plans; WB Partners—a general partnership owned 50/50 by DJB and GSW—acquired WB Acquisition, placing WCI under a multi-layered liability shield.
WB Partners generated income via a 70% share in the NTC Joint Venture, which funded WCI’s bond and indemnity obligations for the San Diego Naval Training Center project.
WCI and WB Partners executed indemnity agreements with AIG and Greenwich; the NTC Joint Venture posted a $17,001,073 bond secured by WCI and supported by guaranties from WB Partners and related entities.
WCI later sold WCI’s assets to Kuranda (Kuranda Capital, LP) for cash and a promissory note, allocating $3.4 million of the price to a noncompetition agreement.
Tax deficiencies were assessed for 2002–2005; Tax Court held the NTC Joint Venture was not a valid partnership, and proceeds from the noncompetition agreement were income to WCI; penalties were sustained; the Tax Court decisions were affirmed by the Ninth Circuit.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the NTC Joint Venture was a valid partnership for tax purposes.	WB Partners contends it held a bona fide partnership share.	Tax Court found Luna factors bar a true partnership; WB Partners contributed no value.	Not a valid partnership; income taxed to WCI.
Whether WB Partners earned a share of NTC profits under a bona fide agreement.	WB Partners claims 70% share under joint venture terms.	Agreement lacked good faith and actual profit-sharing; WCI reduced share unilaterally.	No bona fide profit-sharing; WB Partners earned no profits.
Whether proceeds of the noncompetition agreement were income to WB Partners or WCI.	Proceeds should go to WB Partners as consideration for guaranties.	Proceedings bound WCI and Barone/Watkins personally; WB Partners had no future services to claim.	Income to WCI; WB Partners entitled to none.
Whether accuracy-related penalties were properly assessed.	Posits substantial authority and reasonable reliance on accountant.	No substantial authority; reliance on accountant ineffective; law not unsettled.	Penalties affirmed.
Whether Barone/Watkins’ noncompetition agreement could bind WB Partners for tax purposes.	WB Partners entitled to share in noncompetition proceeds.	Barone/Watkins’ future services could not be imputed to WB Partners; WB Partners had no claim.	WB Partners not entitled to any share.

Luna v. Comm’r, 42 T.C. 1067 (Tax Court 1964) (factors for determining partnership intent (Luna factors))
Culbertson v. Commissioner, 337 U.S. 733 (U.S. 1949) (test for partnership existence depends on intent to join together)
Stevens Bros. & Miller-Hutchinson Co., Inc. v. Comm’r, 24 T.C. 953 (Tax Court 1955) (income-sharing arrangements may be taxable to the contributing party)
Maxwell v. Commissioner, 29 T.C.M. (CCH) 1356 (Tax Court 1970) (finding partnership where owner guaranty aided bond; distinguishable)
Beals’ Estate v. Comm’r, 82 F.2d 270 (2d Cir. 1936) (noncompetition proceeds often income to parties who promised not to compete)
Cox v. Helvering, 71 F.2d 987 (D.C.Cir. 1934) (income to shareholder for noncompete promises)
Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43 (Tax Court 2000) (reasonableness of reliance on adviser requires three elements)