The opinion
T.C. Memo. 2010-175
UNITED STATES TAX COURT
RANDAL W. HOLDNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
WILLIAM F. HOLDNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 10367-08, 10375-08. Filed August 4, 2010.
Randal W. Holdner and William F. Holdner, pro sese.
Kelley A. Blaine, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Petitioners, father and son, have run a
farming operation (Holdner Farms) since 1977. Each petitioner
effectively reported one-half of Holdner Farms’ gross income for
2004, 2005, and 2006 on Schedules F, Profit or Loss From Farming,
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and Schedules D, Capital Gains and Losses, of their respective
Federal income tax returns for those years, but they did not
split the expenses equally or file Federal partnership returns.
Petitioner William F. Holdner (William Holdner) deducted most of
Holdner Farms’ expenses on Schedules F attached to his 2004-2006
returns.
In separate notices of deficiency issued to petitioners,
respondent determined that (1) Holdner Farms was a partnership
(or a joint venture taxed as a partnership) for Federal income
tax purposes in 2004-2006, (2) petitioners were equal partners in
the partnership, and (3) William Holdner was liable for the
section 66621 accuracy-related penalty for 2004-2006. To protect
against a whipsaw situation, respondent allocated 100 percent of
Holdner Farms’ income to each petitioner, disallowed all
expenses,2 and determined the following deficiencies and
penalties:
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code), as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
2
Respondent’s counsel explained at trial that respondent
took these positions to avoid a potential whipsaw situation and
to bring the entire case before the Court. Respondent’s counsel
acknowledged that each petitioner should be allocated only one-
half of Holdner Farms’ gross income and that each petitioner
should be allowed to deduct one-half of Holdner Farms’ expenses.
Respondent does not intend to pursue deficiencies and penalties
in the amounts shown on the notices of deficiency.
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Deficiency Sec. 6662 Penalty
Randal W. William F. Randal W. William F.
Year Holdner Holdner Holdner Holdner
1
2004 $192,731 $264,016 -- $52,803
2005 136,443 215,211 -- 43,042
2006 197,999 296,554 -- 59,311
1
All monetary amounts have been rounded to the nearest
dollar.
Petitioners timely petitioned this Court to review
respondent’s determinations. Respondent moved to consolidate
petitioners’ cases for trial, briefing, and opinion, and we
granted respondent’s motion. The issues for decision are: (1)
Whether petitioners’ Holdner Farms activity was a partnership (or
a joint venture taxed as a partnership) for Federal income tax
purposes during 2004-2006; (2) if so, whether partnership
expenses must be allocated in accordance with partnership income;
i.e., 50 percent to each petitioner; and (3) whether William
Holdner is liable for the section 6662 accuracy-related penalty
for 2004-2006.
FINDINGS OF FACT
Some of the facts have been stipulated. We incorporate the
stipulated facts into our findings by this reference.
Petitioners resided in Oregon when their petitions were filed.
William Holdner, a certified public accountant, is the father of
petitioner Randal W. Holdner (Randal Holdner).
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I. Background: 1968-77
In 1968 or 1969 William Holdner purchased two cows, a bull,
and a horse (collectively, livestock). His daughter and his son,
Randal Holdner, bred the cattle and showed the livestock at 4-H
and Future Farmers of America events, and the children’s
livestock activity expanded each year.
The family kept the livestock at the Home Place, a 3.36-acre
property in Scappoose, Oregon, that was improved by petitioners’
home,3 a barn, and an equipment shed and included a pasture. The
Home Place was titled in William Holdner’s name. The record does
not disclose when William Holdner purchased the Home Place or how
much he paid for the property.
In 1972 William Holdner purchased the Chapman property, a
17-acre parcel in Scappoose, Oregon, consisting of a testing
station and a pasture, for $17,000. William Holdner later
purchased a mobile home for the Chapman property for around
$10,000. In 1974 William Holdner purchased the Dutch Canyon
property, a 100-acre parcel in Scappoose, Oregon, consisting of a
barn, a cattle processing facility, a pollution control system,
and a pasture, for $100,000. The Chapman property and the Dutch
Canyon property were titled in William Holdner’s name. For
3
William Holdner still owns the Home Place property, but
petitioners no longer live there.
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convenience, we shall refer to the Home Place, the Chapman
property, and the Dutch Canyon property collectively as the
separately owned properties.
II. Holdner Farms’ Formation: 1977
In 1977 Randal Holdner graduated from high school. He
showed little interest in college, so his father offered him a
deal-–in lieu of paying for a college education, William Holdner
would invest in a farming business for him. Specifically,
William Holdner proposed that Randal Holdner manage the day-to-
day farming activity on the separately owned properties in
exchange for a share of the profits from cattle sales. Randal
Holdner accepted his father’s offer. Petitioners did not commit
their agreement to writing.
Under their informal oral agreement, each petitioner had
certain duties and responsibilities with respect to the farming
operation known as Holdner Farms. Randal Holdner was responsible
for managing the farm, and his duties included feeding the
cattle, maintaining farm equipment, and tending to sick animals.
William Holdner was primarily responsible for Holdner Farms’
financial affairs, and his duties included arranging cattle
sales, making payments to suppliers, and obtaining financing to
purchase new farm properties. William Holdner also agreed, at
least initially, to contribute money to the farm, though it is
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unclear how much money he actually contributed or whether he
expected to be repaid.4
Petitioners also agreed to certain financial terms. They
agreed that Randal Holdner would be entitled to one-half of
Holdner Farms’ gross proceeds from cattle sales and that Randal
Holdner would have an equity interest in Holdner Farms, though
the precise nature of that interest is unclear. The record does
not contain any credible evidence that petitioners discussed the
allocation of other items of income and expense when the Holdner
Farms activity began, nor is there any credible evidence that
petitioners reached any agreement regarding the allocation of
such items in the early years of Holdner Farms.
When the Holdner Farms activity began, William Holdner did
not transfer an interest in the separately owned properties to
his son, and petitioners took no steps to clarify their
respective interest in the farm equipment or the livestock.
However, petitioners had an understanding that all property used
in the Holdner Farms enterprise, including the separately owned
properties, would be devised to Randal Holdner upon William
4
William Holdner testified at trial regarding his estimate
of the respective contributions to Holdner Farms made by him and
Randal Holdner, but he did not introduce any documentation to
support his estimates. On the record before us we cannot
quantify petitioners’ respective contributions to Holdner Farms
since 1977, and we decline to do so solely on the basis of
William Holdner’s undocumented and self-serving estimates, which
we do not find credible.
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Holdner’s death,5 in part to assure that Holdner Farms would
remain a viable business upon William Holdner’s death.6
III. Holdner Farms’ Expansion: 1977-2004
William Holdner believed the key to developing a successful
farming operation was to acquire income-producing property under
5
William Holdner explained at trial that he wanted Holdner
Farms to remain intact upon his death in order to increase the
likelihood that the farm would remain a profitable business for
his son.
6
Randal Holdner certainly believed he had an equity interest
in Holdner Farms. When Randal Holdner’s mother claimed that
Holdner Farms was marital property in connection with her divorce
from William Holdner, Randal Holdner filed a lawsuit against his
parents seeking a judicial declaration recognizing and enforcing
his interest in Holdner Farms, including the separately owned
properties. See Holdner v. Holdner, 29 P.3d 1199 (Or. Ct. App.
2001). During the trial Mrs. Holdner testified that she was not
a party to any alleged agreement between petitioners, and the
trial court found her testimony credible. Id. at 1202-1204. The
trial court also found that Mrs. Holdner received no
consideration for the alleged contract between petitioners. Id.
at 1203. On appeal, the Court of Appeals of Oregon affirmed the
trial court’s judgment, concluding that Randal Holdner had failed
to establish the alleged contract by a preponderance of the
evidence. Subsequently, petitioners and Mrs. Holdner entered
into a settlement agreement under which Mrs. Holdner released her
claims to any part of Holdner Farms and any other marital
property in exchange for $400,000, which was paid by Holdner
Farms out of its income from timber sales, and other
consideration.
Neither petitioners nor respondent contend that the judgment
in Holdner v. Holdner, supra, is binding on this Court, and we
are satisfied that the doctrine of collateral estoppel, or issue
preclusion, is not applicable. See Ron Lykins, Inc. v.
Commissioner, 133 T.C. 87, 100-101 (2009). This case involves
later years and different issues, and the facts relating to the
operation of Holdner Farms have changed.
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land sales contracts.7 That way the properties were available to
generate income that could be used to repay the loans. Between
1984 and 1992 petitioners jointly purchased several properties
under land sales contracts.8
In 1984 petitioners purchased the Sattler property, a
178.96-acre property in Scappoose, Oregon, consisting of
timberland and pasture for $175,000.9 Petitioners completed
payments under the contract sometime before 2000, and on
October 9, 2006, they received a warranty deed from the seller’s
estate. Petitioners also jointly leased 90 acres of pasture
adjacent to the Sattler property during the years at issue.
7
A land sales contract is a contract that uses seller
financing to enable a purchaser to acquire property over time by
permitting the purchaser to pay the seller in installments. The
purchaser takes possession of the property immediately but does
not acquire title to the property until the loan is completely
repaid. See Black’s Law Dictionary 371 (9th ed. 2009).
8
Several of the jointly purchased properties are close or
adjacent to one another, and there is some ambiguity in the
record regarding the exact size and location of some of the
properties. For example, the stipulation of facts refers to the
Ernest property and the Johnson Landing Road property as separate
properties, but Randal Holdner referred to the properties at
trial as a single property. Moreover, the stipulation of facts
states that the Ernest property and the Johnson Landing Road
property consisted of 54.24 and 115.32 acres, respectively, but
Randal Johnson testified that the combined property was 204
acres. The details regarding the property or properties do not
affect our resolution of the issues in this case. For
simplicity, we shall treat the Ernest and Johnson Landing Road
properties as a single property.
9
The purchase price was allocated $125,000 to the land and
$50,000 to the timber.
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In 1988 or 1989 petitioners purchased the Ernest property, a
54.24-acre farm in Scappoose, Oregon, for $265,000. The Ernest
property consists of croplands and pasture and includes land that
petitioners lease to a nursery.10 The property is improved by
two houses,11 two barns, and a cattle processing facility.
Petitioners built the two barns using Holdner Farms’ profits.
Around the same time petitioners purchased the Johnson Landing
Road property, a 115.32-acre property that is zoned for farm use.
As mentioned above, see supra note 8, petitioners refer to the
Ernest and Johnson Landing Road properties as a single property.
In 1989 petitioners purchased the Dike Road property, a
33.22-acre farm property in Scappoose, Oregon. In 1992
petitioners purchased an adjacent 7-acre parcel known as the
Hayes property, which includes a house and a pasture. Finally,
between 1997 and 2006, petitioners jointly leased 543 acres of
pastureland in Vancouver, Washington, across the Columbia River
from Oregon.
With the exception of the jointly leased properties,
petitioners purchased all of the above-described properties
jointly under land sales contracts, with title passing only after
the purchase prices were fully paid. Petitioners generated funds
10
During 2004-2006 petitioners received $5,000 per month in
rent from the nursery.
11
Randal Holdner has lived in one of the houses since the
mid-1990s.
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to make payments under the land sales contracts by renting out
the properties or parts thereof. All of the aforementioned land
sales contracts were paid in full before 2004. For convenience
we shall refer to the properties petitioners purchased or leased
jointly as the jointly owned properties.
Petitioners hold title to the jointly owned properties
equally as tenants in common. Although a tenancy in common
typically does not include the right of survivorship,12
petitioners had an understanding that Randal Holdner would
inherit the farm, including the jointly owned properties, upon
his father’s death.13
IV. Holdner Farms’ Operations: 2004-2006
By 2004 Holdner Farms had grown into a profitable cattle
farming operation. Petitioners owned as many as 2,000 head of
cattle at any given time, and they used all of the separately
owned properties and all of the jointly owned properties in the
cattle farming business. Petitioners’ total gross revenue from
cattle sales in 2004-2006 was nearly $1 million. In addition,
12
A tenancy in common is “A tenancy by two or more persons,
in equal or unequal undivided shares, each person having an equal
right to possess the whole property but no right of
survivorship.” Black’s Law Dictionary 1604 (9th ed. 2009).
13
Once again, petitioners never put their agreement in
writing, though William Holdner told his daughter that upon his
death she would not inherit anything from the Holdner Farms
operation. Instead, William Holdner explained to his daughter
that the farm operation would remain intact. Petitioners
apparently never considered what would happen to the properties
in the event Randal Holdner predeceased his father.
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Holdner Farms had developed two additional sources of income--
rental income from leasing parts of the jointly owned properties
(totaling $283,800 for 2004-2006) and income from logging the
Sattler property (totaling $869,116 for 2004-2006).14
Throughout 2004-2006 Randal Holdner managed Holdner Farms’
day-to-day operations, often working 16-18 hour days, while
William Holdner was primarily responsible for Holdner Farms’
finances and accounting. William Holdner devoted approximately
50 percent of his professional time to Holdner Farms in 2004-
2006, and Randal Holdner devoted all of his worktime to Holdner
Farms. During 2004-2006 petitioners shared equally in Holdner
Farms’ gross income from cattle sales. At some point before 2004
petitioners also agreed to share equally in Holdner Farms’ gross
rental income and gross income from timber sales, and during
2004-2006 they divided these additional sources of income
equally.
Although petitioners never committed their revised agreement
to writing, petitioners took other steps in years preceding 2004
to formalize their business arrangement. First, petitioners
created a separate bank account for Holdner Farms (the Holdner
Farms account), which was in existence throughout 2004-2006.
Each petitioner was an authorized signatory on the Holdner Farms
account and could sign checks and withdraw funds from the
14
Petitioners reported their gain from timber sales on
Schedules D of their Federal income tax returns.
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account. Petitioners deposited all proceeds from cattle sales,
rental activity, and timber sales into the Holdner Farms account,
and they used the Holdner Farms account to pay most farm
expenses. Petitioners also took draws from the account.
Second, petitioners purchased an insurance policy for
Holdner Farms. When the policy required a rewrite in 2003,
petitioners’ insurance broker, Raymond Schumacher, who testified
at trial, recommended that petitioners register Holdner Farms as
a partnership for insurance purposes. Petitioners accepted
Schumacher’s suggestion and purchased a commercial umbrella
insurance policy. The policy’s declarations page describes the
form of business insured as a partnership.
Finally, on January 23, 2003, petitioners registered Holdner
Farms as a partnership with the State of Oregon. Petitioners
renewed the registration on December 14, 2004, and again on
December 26, 2006.
V. Petitioners’ 2004-2006 Federal Income Tax Returns
In addition to his involvement with Holdner Farms, William
Holdner maintained an active accounting practice in 2004-2006
which he conducted as a partnership with several other partners.
On his Federal income tax returns for 2004, 2005, and 2006,
William Holdner reported on Schedules K-1, Partner’s Share of
Income, Deductions, Credits, etc., income from his accounting
partnership of $264,516, $232,156, and $263,423, respectively.
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William Holdner prepared his and his son’s Federal income
tax returns for 2004-2006. For 2004-2006 petitioners reported
Holdner Farms’ income and expenses from cattle sales and rental
activity on Schedules F of their income tax returns, and they
reported Holdner Farms’ income and expenses from timber sales on
Schedules D of the returns. Each petitioner effectively reported
one-half of Holdner Farms’ gross income.15 However, William
Holdner deducted most of Holdner Farms’ expenses in 2004-2006 on
his personal income tax returns for those years. As a result,
William Holdner’s income tax returns for 2004-2006 claimed net
losses from his involvement in Holdner Farms, as illustrated by
the following table:
2004 2005 2006
Randal William Randal William Randal William
Holdner Holdner Holdner Holdner Holdner Holdner
Cattle income $138,966 $138,966 $91,695 $91,695 $250,405 $250,405
1 1
Rental income 47,175 47,175 53,875 53,875 40,850 40,850
Timber sales 237,966 237,966 196,592 196,592 -– --
Total income 424,107 424,107 342,162 342,162 291,255 291,255
Total expenses 158,797 477,991 167,320 431,219 261,473 551,032
Net gain (loss) 265,310 (53,884) 174,842 (89,057) 29,782 (259,777)
1
Both petitioners testified that they divided income from cattle sales,
rental income, and timber sales generated by Holdner Farms equally during the
years at issue, and their testimony is generally consistent with their tax
returns. However, William Holdner, who prepared the tax returns, would
sometimes report 100 percent of certain income (such as rental income in 2005
and 2006) and then claim an offsetting deduction for the 50-percent share owed
15
In some instances, William Holdner reported 100 percent of
Holdner Farms’ gross income from a particular item on his returns
and then deducted Randal Holdner’s 50-percent share as an
expense. On his 2004 Schedule F, for example, William Holdner
reported $277,932 in sales of livestock and deducted $138,966 as
cost or other basis. Similarly, on his 2004 return William
Holdner reported $94,350 of rental income related to the Holdner
Farms activity, and he deducted $47,175 as a rent or lease
expense attributable to land.
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to Randal Holdner. Regardless of how the income was actually reported on the
relevant returns, however, the net effect of petitioners’ reporting positions
is that all income from Holdner Farms was divided equally between them during
the years at issue. The above table reflects each petitioner’s net share of
the gross income generated by cattle sales, rentals, and timber sales.
In a few instances petitioners shared expenses in the same
way they shared gains; i.e., 50-50. In most instances, however,
William Holdner allocated Holdner Farms’ expenses between himself
and his son as he saw fit. Indeed, the allocation of Holdner
Farms’ expenses between petitioners did not bear any apparent
relationship to petitioners’ respective ownership interests in,
or their respective levels of involvement with, Holdner Farms.
In fact, the allocation of expenses made by William Holdner had
no apparent rational basis16 and appeared completely arbitrary,
as illustrated by the following table showing William Holdner’s
allocation of depreciation, interest, and animal feed expenses
during the years at issue:
16
William Holdner appeared to assert at trial that his
allocation of expenses was related to his and Randal Holdner’s
respective investments in Holdner Farms and to their agreements
regarding specific Holdner Farms expenses, although the testimony
in question was often unclear and confused. William Holdner’s
assertions are not substantiated in the record, and we reject
them as self-serving and not credible.
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Depreciation Expense
Randal Holdner William Holdner
Year Amount Percentage Amount Percentage
1
2004 $88,566 89 $11,357 11
2005 12,907 21 49,710 79
2006 133,576 53 119,584 47
Interest Expense
Randal Holdner William Holdner
Year Amount Percentage Amount Percentage
2004 $1,900 8 $23,005 92
2005 28,276 49 29,180 51
2006 20,134 50 20,134 50
Animal Feed Purchased
Randal Holdner William Holdner
Year Amount Percentage Amount Percentage
2004 -0- -0- $224,932 100
2005 -0- -0- 118,338 100
2006 $54,144 29 134,433 71
1
All monetary amounts have been rounded to the nearest
dollar, and all percentages have been rounded to the nearest
whole number.
Following an examination of petitioners’ returns for
2004-2006, respondent determined that Holdner Farms was a
partnership for Federal income tax purposes and that petitioners
were equal partners who must allocate partnership income and
expenses accordingly. Respondent also determined that William
Holdner was liable for the accuracy-related penalty under section
6662 for each of the years at issue. Petitioners timely filed
petitions challenging respondent’s determinations.
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OPINION
I. Evidentiary Matters
Respondent reserved objections to Exhibits 26-P through 33-
P, which relate to respondent’s examination of petitioners’
2004-2006 Federal income tax returns, on various grounds.
Respondent objects to Exhibits 26-P through 31-P on the ground
that they attempt to go behind the notice of deficiency.
Respondent also objects to Exhibits 26-P, 27-P, 29-P, and 31-P
through 33-P on the ground that they contain hearsay. Finally,
respondent objects to Exhibit 32-P, an introductory letter from
William Holdner to respondent’s district counsel, on the ground
that it is irrelevant.
A trial of a deficiency case in the Tax Court is a
proceeding de novo. Our decision in a deficiency case is based
on the record that is developed at trial, not on any previous
record developed at the administrative level. Greenberg’s
Express, Inc. v. Commissioner, 62 T.C. 324, 328 (1974).
Ordinarily, we do not go behind the notice of deficiency. Id.
We have, however, recognized two limited exceptions to the
general rule that we will not look behind the notice of
deficiency. One is where there is substantial evidence of
unconstitutional conduct by the Commissioner, and the other is in
so-called naked assessment cases where the Commissioner
introduces no evidence but rests on the presumption of
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correctness and the taxpayer challenges the notice of deficiency
on the grounds that it is arbitrary. Graham v. Commissioner, 82
T.C. 299, 308-309 (1984), affd. 770 F.2d 381 (3d Cir. 1985); see
also United States v. Janis, 428 U.S. 433, 441 (1976).
Neither exception is applicable in these cases. Petitioners
have not alleged that respondent engaged in unconstitutional
conduct with respect to the determinations, and respondent does
not rely solely on the presumption of correctness. Petitioners
have not convinced us that the exhibits in question are relevant
or otherwise admissible, and we hold that they are not.
Respondent’s objections to Exhibits 26-P through 31-P are
sustained.
With respect to respondent’s objections to Exhibits 32-P and
33-P on grounds of relevance and hearsay, we note that
proceedings in the Tax Court are conducted in accordance with the
Federal Rules of Evidence. See sec. 7453; Rule 143(a). Rule 402
of the Federal Rules of Evidence provides that all relevant
evidence is admissible unless otherwise provided, and all
evidence that is not relevant is not admissible. Relevant
evidence is any evidence that has any tendency to make any fact
of consequence to the determination of the action more or less
probable than it would be without the evidence. Fed. R. Evid.
401. However, even relevant evidence may be excluded if its
probative value is substantially outweighed by, inter alia,
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“considerations of undue delay, waste of time, or needless
presentation of cumulative evidence.” Id. 403.
Rule 801(c) of the Federal Rules of Evidence defines hearsay
as any statement, other than one made by the declarant while
testifying at trial, offered in evidence to prove the truth of
the matter asserted. Hearsay is not admissible, except as
provided by the Federal Rules of Evidence, by other rules
prescribed by the Supreme Court pursuant to statutory authority,
or by Act of Congress. Id. 802.
We agree with respondent that Exhibit 32-P, an introductory
letter from William Holdner to respondent’s district counsel, and
Exhibit 33-P, a memorandum from William Holdner to the Appeals
Office, are irrelevant. Moreover, Exhibit 33-P is an advocate’s
document containing arguments and citations made by William
Holdner during the consideration of his case by the Appeals
Office. To the extent Exhibit 33-P references financial
information regarding Holdner Farms, most if not all of that
information is already in evidence through other sources.
Consequently, we sustain respondent’s objections to Exhibits 32-P
and 33-P.
II. Burden of Proof
As a general rule, the Commissioner’s determinations in a
notice of deficiency are presumed correct, and the taxpayer has
the burden of proving that the determinations are incorrect.
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Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In
certain circumstances, if the taxpayer introduces credible
evidence with respect to any factual issue relevant to
ascertaining the taxpayer’s liability for tax, section 7491(a)
shifts the burden to the Commissioner but only if the taxpayer
establishes that he has complied with the requirements of section
7491(a)(2). See Weaver v. Commissioner, 121 T.C. 273, 275
(2003); Baker v. Commissioner, 118 T.C. 452, 461 (2002), affd.
338 F.3d 789 (7th Cir. 2003).
Petitioners have neither alleged that section 7491 applies
nor established that they complied with the requirements of
section 7491(a)(2) to substantiate items, to maintain required
records, and to fully cooperate with respondent’s reasonable
requests. Nevertheless, petitioners argue that respondent’s
determinations are not entitled to the presumption of
correctness. Although petitioners’ argument is not entirely
clear, petitioners appear to object to the fact that respondent
has taken inconsistent positions by allocating 100 percent of the
income from petitioners’ Holdner Farms activity to both
petitioners and disallowing all deductions even though respondent
concedes that petitioners’ Holdner Farms’ expenses were
substantiated. Petitioners’ argument is without merit.
It is well established that the Commissioner may take
inconsistent positions in order to protect the public fisc and
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ensure against a potential whipsaw effect.17 Fayeghi v.
Commissioner, 211 F.3d 504, 508 n.3 (9th Cir. 2000), affg. T.C.
Memo. 1998-297; Centel Commcns. Co. v. Commissioner, 92 T.C. 612,
626 n.7 (1989) (citing Gerardo v. Commissioner, 552 F.2d 549,
555-556 (3d Cir. 1977), affg. in part and revg. in part T.C.
Memo. 1975-341, and Estate of Goodall v. Commissioner, 391 F.2d
775, 782-783 (8th Cir. 1968), vacating T.C. Memo. 1965-154),
affd. 920 F.2d 1335 (7th Cir. 1990); Doggett v. Commissioner, 66
T.C. 101, 103 (1976). In Estate of Goodall v. Commissioner,
supra at 783, the Court of Appeals for the Eighth Circuit
explained the rationale behind allowing the Commissioner to take
inconsistent positions, stating:
Inconsistency in determinations, when they are not made
in bad faith, does not equate with an absence of the
statutorily required determination, as the taxpayers
suggest. Each taxpayer, even though there are several
related ones, by the determination and notice made for
him, knows the position the Commissioner is taking with
respect to his tax situation. So long as the ultimate
resolution of the issues is consistent for all, we see
no legal wrong.
The same reasoning applies to this case. To prevent a
potential whipsaw, respondent has taken inconsistent positions by
allocating 100 percent of Holdner Farms’ income to each
petitioner and disallowing all expenses. Respondent acted in
17
“A whipsaw occurs when different taxpayers treat the same
transaction involving the same items inconsistently, thus
creating the possibility that income could go untaxed, or two
unrelated parties could deduct the same expenses on their
separate returns.” Maggie Mgmt. Co. v. Commissioner, 108 T.C.
430, 446 (1997).
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good faith, respondent’s determinations clearly informed each
petitioner of respondent’s position with respect to each
petitioner’s tax situation, and respondent seeks a consistent
resolution for both petitioners; i.e., respondent concedes that
only one-half of Holdner Farms’ income should be allocated to
each petitioner and that each petitioner should be allowed to
deduct one-half of Holdner Farms’ expenses. We therefore reject
petitioners’ argument, and we conclude that petitioners have the
burden of proof with respect to disputed factual issues in this
case.
III. Petitioners’ Holdner Farms Activity Was a Partnership (or a
Joint Venture Taxed as a Partnership) for Federal Income Tax
Purposes
The existence of a partnership for Federal income tax
purposes is a question of Federal law and does not depend on
whether an enterprise is recognized as a partnership under local
law. Commissioner v. Culbertson, 337 U.S. 733, 741 (1949);
Commissioner v. Tower, 327 U.S. 280, 287-288 (1946); see also
Bergford v. Commissioner, 12 F.3d 166, 169 (9th Cir. 1993), affg.
Alhouse v. Commissioner, T.C. Memo. 1991-652; Frazell v.
Commissioner, 88 T.C. 1405, 1412 (1987). Section 7701(a)(2)
defines a partnership as “a syndicate, group, pool, joint
venture, or other unincorporated organization, through or by
means of which any business, financial operation, or venture is
carried on, and which is not * * * a trust or estate or a
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corporation”. See also sec. 761(a) (defining a “partnership” the
same way).18 A partnership is created for Federal income tax
purposes when persons join together their property, labor, or
skill for the purpose of carrying on a trade, profession, or
business and there is a community of interest in the profits and
losses. Commissioner v. Tower, supra at 286. In Commissioner v.
Culbertson, supra at 742, the Supreme Court identified the task
that a court must undertake in deciding whether a partnership
exists for Federal tax purposes:
The question is not whether the services or capital
contributed by a partner are of sufficient importance
to meet some objective standard * * * but whether,
considering all the facts--the agreement, the conduct
of the parties in execution of its provisions, their
statements, the testimony of disinterested persons, the
relationship of the parties, their respective abilities
and capital contributions, the actual control of income
and the purposes for which it is used, and any other
facts throwing light on their true intent--the parties
in good faith and acting with a business purpose
intended to join together in the present conduct of the
enterprise. * * *
See also Luna v. Commissioner, 42 T.C. 1067, 1077-1078 (1964).
Generally, each partner in a partnership contributes
property or services, or both. Commissioner v. Culbertson, supra
at 741.19 In addition, a valid partnership is generally formed
18
The definition of a partnership for Federal income tax
purposes is basically the same as the definition of a partnership
for commercial law purposes but more detailed. 1 Willis &
Postlewaite, Partnership Taxation, par. 1.03[1], at 1-31 (6th ed.
2009).
19
Where one partner contributes property and the other
(continued...)
- 23 -
with a business purpose--to conduct an enterprise for profit.
Madison Gas & Elec. Co. v. Commissioner, 633 F.2d 512, 514-517
(7th Cir. 1980), affg. 72 T.C. 521 (1979); Frazell v.
Commissioner, supra at 1412; see also Cusick v. Commissioner,
T.C. Memo. 1998-286; Estate of Winkler v. Commissioner, T.C.
Memo. 1997-4. Mere coownership of property does not create a
partnership for Federal income tax purposes, but coowners of
property may become partners if they carry on a business activity
for profit. Cusick v. Commissioner, supra; see also Estate of
Winkler v. Commissioner, supra.
We conclude that petitioners’ Holdner Farms activity was a
partnership for Federal income tax purposes in 2004-2006 for
several reasons. First, both petitioners contributed capital and
labor to Holdner Farms. William Holdner contributed the
separately owned properties in 1977, as well as his 50-percent
share of the jointly owned properties as each was acquired, for
use in a farming operation with his son. Although the record
does not disclose whether Randal Holdner contributed any property
19
(...continued)
contributes services, a partnership is formed, but additional tax
complications may arise. See 1 McKee, et al., Federal Taxation
of Partnerships and Partners, par. 5.01, at 5-2 (4th ed. 2007).
For example, receipt of a partnership interest solely in exchange
for past services or anticipated future services does not qualify
for nonrecognition under sec. 721. Id. par. 5.02. Thus, the
value of a partnership interest received solely in exchange for
services may constitute gross income to the partner on receipt.
Id. Respondent does not raise any such issue with respect to
either petitioner for the years at issue.
- 24 -
to Holdner Farms in 1977, he contributed his 50-percent share of
the jointly owned properties to Holdner Farms as the properties
were acquired. Moreover, both petitioners contributed labor to
and performed services for Holdner Farms. Randal Holdner has
spent the past three decades managing the farming enterprise full
time, while William Holdner has spent considerable time managing
Holdner Farms’ business affairs part time.
Second, Holdner Farms has conducted a business activity for
profit since 1977 when it was formed. From 1977 to the years at
issue, Holdner Farms’ farming operation grew steadily in scope
and size and during 2004-2006 was active and profitable.
Petitioners correctly note that mere coownership of property or a
joint undertaking to share expenses alone is not sufficient to
satisfy the business activity requirement. However, petitioners’
Holdner Farms enterprise clearly was more than a mere coownership
of property or a means to share expenses.
Third, petitioners shared Holdner Farms’ gross income from
cattle sales, timber sales, and rental income equally. Randal
Holdner testified that he did not regard his share of the income
as salary or wages, and William Holdner apparently agreed, as he
did not prepare a Form W-2, Wage and Tax Statement, or a Form
1099-MISC, Miscellaneous Income, for his son for any of the years
at issue. The record overwhelmingly demonstrates that Holdner
- 25 -
Farms was a business activity for profit that was jointly
conducted by petitioners.20
An examination of the factors enumerated in Luna confirms
our conclusion. In Luna v. Commissioner, supra at 1077-1078, we
identified eight factors that are relevant to determining whether
an enterprise is a partnership for Federal income tax purposes:
[1] The agreement of the parties and their conduct in
executing its terms; [2] the contributions, if any,
which each party has made to the venture; [3] the
parties’ control over income and capital and the right
of each to make withdrawals; [4] whether each party was
a principal and coproprietor, sharing a mutual * * *
obligation to share losses * * *; [5] whether business
was conducted in the joint names of the parties; [6]
whether the parties filed Federal partnership returns
or otherwise represented to respondent or to persons
with whom they dealt that they were joint venturers;
[7] whether separate books of account were maintained
for the venture; and [8] whether the parties exercised
mutual control over and assumed mutual responsibilities
for the enterprise.
Seven of the eight Luna factors support our conclusion that
Holdner Farms was a partnership for Federal income tax purposes,
and one factor neither supports nor weighs against it. First,
petitioners agreed to split Holdner Farms’ gross income from
cattle sales, timber sales, and leasing activity, and they
20
With respect to Holdner Farms’ expenses, the record does
not establish that petitioners agreed to or even discussed any
specific division or allocation of Holdner Farms’ expenses. The
record does support a conclusion that William Holdner arbitrarily
and unilaterally allocated farm expenses between himself and his
son primarily to shelter William Holdner’s other income, most
particularly his substantial income from his accounting practice.
That allocation was made on an annual basis without any apparent
input from Randal Holdner.
- 26 -
faithfully executed this agreement. Second, both petitioners
contributed capital and services to Holdner Farms. Third,
petitioners had equal access to and control over the Holdner
Farms account, and each petitioner had unlimited power to make
withdrawals. Fourth, petitioners shared a mutual proprietary
interest in Holdner Farms’ profits, while petitioners’
proprietary interest in Holdner Farms’ losses, if any, is simply
unclear. Fifth, the name “Holdner Farms”, while ambiguous,
suggested an enterprise that was not limited to one particular
member of the Holdner family. Sixth, although petitioners did
not file a Form 1065, U.S. Return of Partnership Income, on
behalf of Holdner Farms, they represented to their insurer and to
the State of Oregon that Holdner Farms was a partnership.
Seventh, petitioners maintained a separate bank account for
Holdner Farms, and William Holdner kept meticulous records for
the enterprise. Finally, petitioners exercised mutual control
over and responsibility for Holdner
Farms. Although petitioners had different responsibilities, each
played a crucial role in the enterprise, and each regarded
himself as an owner. In summary, our examination of the Luna
factors confirms our conclusion that Holdner Farms was a
partnership for Federal income tax purposes.
Although petitioners’ arguments are not entirely clear,
petitioners appear to argue that their Holdner Farms’ enterprise
- 27 -
was a joint venture between two individual proprietorships; i.e.,
between William Holdner’s individual proprietorship and Randal
Holdner’s individual proprietorship. Petitioners call our
attention to Bialock v. Commissioner, 35 T.C. 649 (1961), in
which we held that a purported partnership between a taxpayer and
his two minor children was not a valid partnership for Federal
income tax purposes. Petitioners’ argument is unavailing for
several reasons.
First, the facts do not support petitioners’ argument.
There is no evidence, for example, that petitioners maintained
separate bank accounts for their purportedly separate individual
proprietorships, nor is there evidence that petitioners computed
their gain and loss separately (other than for Federal income tax
purposes). On the contrary, for the reasons discussed above, the
record strongly indicates that petitioners regarded Holdner Farms
as a single entity in which they each had an interest.
Second, the case cited in support of petitioners’ argument
is factually and legally distinguishable. In Bialock, the
taxpayer planned to create a partnership among himself and two
trusts established for the benefit of his two minor children,
ages 9 and 15. Bialock v. Commissioner, supra at 650. The
taxpayer planned to donate $2,500 to each trust in 1952 or 1953;
the children were not expected to contribute any additional
capital or any services to the partnership. Id. at 658.
- 28 -
However, the trusts were never created, and the taxpayer’s minor
children never contributed any capital or services to the
enterprise. Id. at 656, 658. We therefore held that no
partnership was formed because the parties did not in good faith
and acting with a business purpose intend to join together in the
present conduct of an enterprise. Id. at 659. By contrast, both
petitioners made bona fide contributions of capital and labor to
Holdner Farms, and both petitioners intended in good faith and
with a business purpose to join together in the conduct of an
enterprise.
Finally, even if we were to accept petitioners’ argument
that Holdner Farms was a joint venture of two individual
proprietorships, we would still conclude that Holdner Farms was a
partnership for Federal income tax purposes. A joint venture
“has been defined as a ‘special combination of two or more
persons, where in some specific venture a profit is jointly
sought without any actual partnership or corporate designation,’
and also as ‘an association of persons to carry out a single
business enterprise for profit.’” Beck Chem. Equip. Corp. v.
Commissioner, 27 T.C. 840, 848-849 (1957) (citing 48 C.J.S. Joint
Adventures, secs. 1 and 2, Estate of Koen v. Commissioner, 14
T.C. 1406 (1950), and Osborn v. Commissioner, 22 B.T.A. 935, 945
(1931)). The existence of a joint venture “is a question of fact
to be determined by reference to the same principles that govern
- 29 -
the question of whether persons have formed a partnership * * *
for tax purposes.” Luna v. Commissioner, 42 T.C. at 1077.
“[T]here are four basic attributes which are indicative of a
joint venture: (1) A contract, express or implied, that a joint
venture be formed; (2) the contribution of money, property and/or
services by the venturers; (3) an agreement for joint
proprietorship and control; and (4) an agreement to share
profits.” S. & M. Plumbing Co. v. Commissioner, 55 T.C. 702, 707
(1971). A joint venture may create a separate entity for Federal
income tax purposes if the participants carry on a trade,
business, financial operation, or venture and divide the profits
therefrom. Sec. 301.7701-1(a)(2), Proced. & Admin. Regs.; see
also Allum v. Commissioner, T.C. Memo. 2005-177, affd. 231 Fed.
Appx. 550 (9th Cir. 2007).
Even if Holdner Farms were a joint venture rather than a
partnership, the joint venture would create a separate entity for
Federal income tax purposes because petitioners carried on a
farming business. Sec. 301.7701-1(a)(2), Proced. & Admin. Regs.
As a domestic separate entity with at least two members, Holdner
Farms would be treated as a partnership for Federal income tax
purposes unless petitioners elected for the enterprise to be
taxed as a corporation. Sec. 301.7701-3(b)(1)(i), Proced. &
Admin. Regs. Petitioners did not file an election with respect
to Holdner Farms. Thus, even if petitioners are correct that
- 30 -
Holdner farms was a joint venture, the activity would still be
treated as a partnership for Federal income tax purposes.
IV. Petitioners Were Equal Partners in Holdner Farms in 2004-
2006 and Must Allocate Expenses Equally
Partnerships are not subject to tax as such. Sec. 701.
Persons carrying on business as partners are liable for tax only
in their separate and individual capacities. Id. To determine
income tax liability, each partner shall take into account his
distributive share of partnership income, gain, loss, deduction,
and credit. Sec. 702(a). A partner’s distributive share of
income, gain, loss, deduction, and credit is determined by the
partnership agreement. Sec. 704(a). If the partnership
agreement does not state how a partner’s distributive share of
income, gain, loss, deduction, or credit is to be determined, or
if the allocation provided in the partnership agreement does not
have substantial economic effect, the partner’s distributive
share shall be determined according to the partner’s interest in
the partnership. Sec. 704(b).
A partner’s interest in a partnership refers to the manner
“in which the partners have agreed to share the economic benefit
or burden * * * corresponding to the income, gain, loss,
deduction, or credit (or item thereof) that is allocated.” Sec.
1.704-1(b)(3)(i), Income Tax Regs. A partner’s interest in a
partnership is determined by taking into account all the facts
and circumstances. Sec. 704(b); Vecchio v. Commissioner, 103
- 31 -
T.C. 170, 193 (1994); sec. 1.704-1(b)(3)(i), Income Tax Regs.
Partners are presumed to have equal per capita interests in the
partnership. Sec. 1.704-1(b)(3)(i), Income Tax Regs.21 However,
the presumption may be rebutted by the taxpayer or the
Commissioner by establishing that the partners’ interests in the
partnership were other than equal. Id.
In determining the partners’ interests in the partnership,
the following factors are relevant: (1) The partners’ relative
contributions to the partnership, (2) the partners’ respective
interests in partnership profits and losses, (3) the partners’
relative interests in cashflow and other nonliquidating
distributions, and (4) the partners’ rights to capital upon
liquidation. Sec. 1.704-1(b)(3)(ii), Income Tax Regs.; see also
Estate of Ballantyne v. Commissioner, T.C. Memo. 2002-160, affd.
341 F.3d 802 (8th Cir. 2003). An examination of these factors
supports respondent’s argument that petitioners have presented
insufficient evidence to rebut the presumption of equal
partnership interests and that, therefore, petitioners must
allocate both income and expenses equally.
21
Sec. 1.704-1(b)(3)(i), Income Tax Regs., was amended in
2008. T.D. 9398, 2008-1 C.B. 1143. The regulation as amended no
longer contains the presumption that all partners’ interests in a
partnership are equal, on a per capita basis. See id., 2008-1
C.B. at 1146-1147. Sec. 1.704-1(b)(3)(i) as amended by T.D.
9398, supra, applies to partnership taxable years beginning on or
after May 19, 2008. Id., 2008-1 C.B. at 1147. Accordingly, the
amended regulation does not apply to this case. We apply the
version of sec. 1.704-1(b)(3)(i), Income Tax Regs., in effect for
the years at issue.
- 32 -
A. Petitioners’ Contributions to Holdner Farms
The first factor requires an examination of petitioners’
relative contributions to Holdner Farms. At trial William
Holdner estimated that he had contributed approximately $2.5
million to Holdner Farms since its formation and that Randal
Holdner had contributed approximately $800,000, but he did not
introduce any documentation to support his estimates. Relying
solely on his self-serving estimates, he argued that he should be
treated as owning a 75-percent interest in Holdner Farms.
Neither petitioner quantified his contribution of labor to
Holdner Farms.
William Holdner’s estimate of his and Randal Holdner’s
capital contributions to Holdner Farms since 1977 is unsupported
by any documentation in the record or by corroborating testimony.
Petitioners did not maintain capital accounts for Holdner Farms,
nor did they offer evidence concerning the relative values of the
separately owned properties or the jointly owned properties at
the time they were contributed to Holdner Farms. Moreover,
William Holdner’s estimate fails to account for his son’s
contribution of services to Holdner Farms. The record strongly
suggests that Randal Holdner regarded his decades of work for
Holdner Farms as “sweat equity”, and he worked 16-18 hour days on
the farm in part because he believed he had an equity interest in
it.
- 33 -
Perhaps the most telling problem with petitioners’ argument
is that it is inconsistent with their own tax accounting.
Petitioners contend that William Holdner, as a 75-percent
partner, was entitled to 75 percent of Holdner Farms’ losses, but
William Holdner’s actual share of Holdner Farms’ total expenses,
as reported on petitioners’ 2004-2006 Federal income tax returns,
ranged from 67.8 percent to 75.1 percent, and his share of
Holdner Farms’ gross income was only 50 percent. A closer look
at petitioners’ treatment of particular items only makes matters
more confusing: For example, William Holdner deducted 11.4
percent of Holdner Farms’ depreciation and section 179 expenses
in 2004, 79.4 percent in 2005, and 47.2 percent in 2006.
Petitioners have presented no credible evidence of any special
allocations that would adequately explain these variations.
We simply cannot estimate petitioners’ relative
contributions to Holdner Farms solely on the basis of evidence
that is inconsistent, unsubstantiated, and self-serving. Thus,
we conclude that petitioners have failed to rebut the presumption
of equal partnership interests with respect to this factor.
B. Petitioners’ Respective Interests in Holdner Farms’
Profits and Losses
The second factor requires us to examine petitioners’
relative interests in Holdner Farms’ economic profits and losses.
Petitioners had equal interests in Holdner Farms’ gross income in
2004-2006 and previous years, but petitioners’ relative interests
- 34 -
in Holdner Farms’ expenses is less clear. For tax purposes, the
allocation of Holdner Farms’ expenses between petitioners that
William Holdner made each year was heavily weighted in his favor.
However, the record suggests that William Holdner did not bear
the economic burden of the disproportionate allocation of farm
expenses. The record reveals that all farm expenses during 2004-
2006 were paid from farm revenue, which as we know was divided
equally between petitioners. Consequently, we believe that the
economic reality of petitioners’ arrangement is that petitioners
bore the economic burden of farm expenses equally despite the
disproportionate allocation of expenses reflected on the tax
returns William Holdner prepared for 2004-2006. We therefore
conclude that petitioners have failed to rebut the presumption of
equal partnership interests with respect to this factor.
C. Petitioners’ Relative Interests in Cashflow and Other
Nonliquidating Distributions
The third factor we consider is petitioners’ relative
interests in cashflow and other nonliquidating distributions.
The record establishes that petitioners had equal interests in
Holdner Farms’ cashflow and nonliquidating distributions. During
2004-2006 petitioners were entitled to draws from the Holdner
Farms account. Petitioners each also had an unlimited right to
withdraw funds from the Holdner Farms account at any time. The
only limit on petitioners’ rights to withdraw funds from the
Holdner Farms account was their apparent agreement not to
- 35 -
overdraw it. Petitioners did not offer any evidence that either
of them exercised greater control over cashflow and
nonliquidating distributions than the other. Moreover, there is
no evidence that Holdner Farms ever made a disproportionate
distribution to either partner. Thus, we conclude that
petitioners had an equal interest in Holdner Farms’ cashflow and
nonliquidating distributions.
D. Petitioners’ Rights to Capital Upon Liquidation
Finally, petitioners offered no credible evidence regarding
their rights to liquidating distributions from Holdner Farms.
Although petitioners agreed that the entire Holdner Farms
enterprise would be devised to Randal Holdner upon the death of
William Holdner, petitioners apparently never considered how the
property used in the enterprise would be distributed in the event
that Holdner Farms were liquidated while both partners were still
alive. Randal Holdner testified that he believed he had an
interest in the separately owned properties as early as 1977, and
that belief seems to be supported by the fact that income
generated by timbering on one of the separately owned properties
was divided equally between petitioners. However, like many
parts of the record, the testimony on this point was vague and
uncertain and not sufficient to rebut the presumption of equal
partnership interests.
- 36 -
We conclude on the basis of the entire record that
respondent properly determined that Holdner Farms was a
partnership for Federal income tax purposes and that in the
absence of substantial proof rebutting the presumption of
equality, petitioners had equal interests in partnership income,
expenses, and other partnership items.
V. Section 6662 Accuracy-Related Penalty
Section 6662(a) and (b)(1) authorizes the Commissioner to
impose an accuracy-related penalty equal to 20 percent of the
underpayment attributable to negligence or disregard of rules or
regulations. For purposes of section 6662, negligence is any
failure to make a reasonable attempt to comply with the
provisions of the Internal Revenue Code, and disregard includes
any careless, reckless, or intentional disregard. Sec. 6662(c);
see also Neely v. Commissioner, 85 T.C. 934, 947 (1985)
(negligence is lack of due care or failure to do what a
reasonable and prudent person would do under the circumstances);
sec. 1.6662-3, Income Tax Regs. Negligence also includes any
failure to exercise ordinary and reasonable care in the
preparation of a tax return or any failure to keep adequate books
and records and to properly substantiate items. Sec. 1.6662-
3(b)(1), Income Tax Regs. Negligence is strongly indicated
where, inter alia, “A taxpayer fails to make a reasonable attempt
to ascertain the correctness of a deduction * * * which would
- 37 -
seem to a reasonable and prudent person to be ‘too good to be
true’ under the circumstances”. Sec. 1.6662-3(b)(1)(ii), Income
Tax Regs. A return position that has a reasonable basis is not
attributable to negligence. Sec. 1.6662-3(b)(1), Income Tax
Regs. A reasonable basis standard is a relatively high standard
that is significantly higher than a not frivolous standard. Sec.
1.6662-3(b)(3), Income Tax Regs. The reasonable basis standard
is not satisfied where a return position is merely arguable or
colorable. Id.
Section 6662(a) and (b)(2) authorizes the Commissioner to
impose a 20-percent penalty if there is a substantial
understatement of income tax.22 An understatement of tax is the
excess of the amount of tax required to be shown on the return
for the taxable year over the amount of tax actually shown on the
return. Sec. 6662(d)(2)(A). In the case of an individual, a
substantial understatement is an understatement that exceeds 10
percent of the tax required to be shown on the return for the
taxable year, or $5,000, whichever is greater. Sec.
6662(d)(1)(A). However, the amount of an understatement is
reduced to the extent the taxpayer has “substantial authority”
for the position taken. Sec. 6662(d)(2)(B)(i). Substantial
22
Only one sec. 6662 accuracy-related penalty may be imposed
with respect to any given portion of an underpayment, even if
that portion is attributable to more than one of the types of
conduct listed in sec. 6662(b). New Phoenix Sunrise Corp. &
Subs. v. Commissioner, 132 T.C. 161, 187 (2009); sec.
1.6662-2(c), Income Tax Regs.
- 38 -
authority is an objective standard requiring an analysis of the
law and an application of the law to the relevant facts. Sec.
1.6662-4(d)(2), Income Tax Regs.
The Commissioner bears the initial burden of production with
respect to a taxpayer’s liability for the section 6662 penalty;
i.e., the Commissioner must first produce sufficient evidence to
establish that imposition of the section 6662 penalty is
appropriate. Sec. 7491(c); Kikalos v. Commissioner, 434 F.3d
977, 986 (7th Cir. 2006), affg. T.C. Memo. 2004-82. If the
Commissioner satisfies his initial burden of production, the
burden of producing evidence to refute the Commissioner’s
evidence shifts to the taxpayer. See Higbee v. Commissioner, 116
T.C. 438, 447 (2001).
Respondent has satisfied his burden of production with
respect to negligence by establishing that William Holdner failed
to make a reasonable attempt to comply with the Code.
Specifically, respondent has established that William Holdner
failed to make a reasonable attempt to ascertain the correctness
of his reporting positions with respect to Holdner Farms. As a
practicing accountant with decades of experience, William Holdner
knew that a disproportionate allocation of Holdner Farms’
expenses to him would allow him to shelter hundreds of thousands
of dollars in unrelated income. William Holdner did not
introduce any credible evidence that he acted reasonably in doing
- 39 -
so or that he conducted any research on the proper classification
of Holdner Farms for tax purposes before he decided to prepare
the 2004-2006 returns as he did. Although petitioners assert
that William Holdner is not liable for the section 6662 accuracy-
related penalties, their arguments amount to little more than a
recitation of arguments we have previously rejected, e.g.,
Holdner Farms was, in fact, two individual proprietorships,
petitioners never formed a partnership, etc. Because we conclude
that William Holdner is liable for the 20-percent accuracy-
related penalty for negligence, we need not consider whether he
is also liable for the section 6662 penalty for a substantial
understatement.
VI. Conclusion
We have considered the parties’ other arguments, and to the
extent not discussed herein, we conclude the arguments are
irrelevant, moot, or without merit. In summary, we hold that
Holdner Farms was a partnership for Federal income tax purposes
in 2004-2006. Further, we hold that petitioners were equal
partners in the partnership during the years at issue and that
Holdner Farms’ income, expenses, and other partnership items must
be allocated accordingly. Finally, we hold that petitioner
William Holdner is liable for the section 6662 accuracy-related
penalty for 2004-2006.
- 40 -
To reflect the foregoing,
Decisions will be entered
under Rule 155.