James Tarpey v. United States

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

JAMES TARPEY, No. 22-35208

Plaintiff-Appellant, D.C. No. 2:17-cv-

00094-BMM

v.

UNITED STATES OF AMERICA, OPINION

Defendant-Appellee.

Appeal from the United States District Court

for the District of Montana

Brian M. Morris, District Judge, Presiding

Argued and Submitted April 12, 2023

Seattle, Washington

Filed August 17, 2023

Before: M. Margaret McKeown, Jay S. Bybee, and

Roopali H. Desai, Circuit Judges.

Opinion by Judge McKeown

2 TARPEY V. USA

SUMMARY *

Tax

The panel affirmed the district court’s judgment

imposing over $8 million in penalties against taxpayer for

promoting a tax-avoidance scheme that involved charitable

deductions claimed in connection with the donation of

unwanted timeshares.

Taxpayer formed Project Philanthropy, Inc., d/b/a/

Donate for a Cause (DFC), a nonprofit with tax-exempt

status that facilitated the donation of timeshares by timeshare

owners. Taxpayer also formed Resort Closings, a for-profit

service that handled the real estate closings for timeshares

donated to DFC. Donors paid a donation fee to DFC and

shouldered the timeshare transfer fees. Taxpayer, his sister,

Ron Broyles, and Curt Thor appraised the value of the

unwanted timeshares.

26 U.S.C. § 6700 imposes a penalty on promoters and

others involved in the organization or sale of tax shelters if

they make false statements or exaggerate valuation, in this

case, in the form of timeshare appraisals. The panel upheld

the district court’s determination on summary judgment that

taxpayer was liable for the appraisals of Broyles and Thor

because, as a matter of law, taxpayer knew or had reason to

know Broyles and Thor were disqualified as appraisers

under the Treasury regulations, and taxpayer forfeited his

*

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

TARPEY V. USA 3

argument on appeal that he was unaware the appraisals

would be imputed to DFC.

The panel next affirmed the district court’s

determination on summary judgment that the scope of the

“activity” to be penalized under § 6700(a) encompassed

taxpayer’s entire timeshare donation business and not just

the funds directly coming from the false statement

appraisals.

Finally, the panel upheld the district court’s judgment

following a bench trial imposing over $8 million in

penalties. The panel held that the district court properly

relied on the Internal Revenue Code’s general definition of

gross income, which includes “all income from whatever

source derived,” 26 U.S.C. § 61(a), and properly included

funds deposited into an escrow account managed by Resort

Closings in calculating the penalties, because taxpayer had

some guarantee that he would be allowed to keep the money

in that account.

COUNSEL

Sean T. Morrison (argued), Morrison Law Firm PLLC,

Helena, Montana; Brian K. Gallik, Gallik Bremer & Molloy

PC, Bozeman, Montana; for Plaintiff-Appellant.

Judith A. Hagley (argued) and Jacob E. Christensen,

Attorneys, Tax Division/ Appellate Section; Jesse

Laslovich, United States Attorney; Department of Justice,

Washington, D.C.; for Defendant-Appellee.

4 TARPEY V. USA

OPINION

McKEOWN, Circuit Judge:

Through Donate for a Cause, James Tarpey pitched an

attractive offer to customers looking to get rid of timeshares:

donate your unwanted property to us, we’ll get it appraised,

and you’ll claim a charitable contribution deduction on your

federal tax return. There was just one hitch. The timeshare

donation business was really more of a bogus tax scheme.

The Internal Revenue Service (“IRS”) assessed penalties

under 26 U.S.C. § 6700 for promoting an abusive tax shelter.

The district court concluded that Tarpey was liable for the

entirety of his timeshare donation scheme and, after a bench

trial, ordered a penalty amount of $8.465 million plus

interest.

Tarpey challenges a portion of the liability ruling and the

district court’s computation of his gross income for the

penalty amount. Of broader significance, this case also calls

on us to interpret § 6700 to address the scope of the

“activity” for which a person is liable for making a false

statement in furtherance of the tax-avoidance plan. We

affirm.

I. BACKGROUND

James Tarpey, a lawyer and businessman, formed

Project Philanthropy, Inc. d/b/a/ Donate for a Cause (“DFC”)

around 2006. DFC facilitated the donation of timeshares for

timeshare owners who no longer wanted to pay timeshare

fees or otherwise wanted to dispose of their timeshare

properties. Tarpey promised potential customers that they

could receive generous tax savings from donating their

unwanted timeshares to DFC. Tarpey himself appraised the

TARPEY V. USA 5

value of some of the properties donated to DFC, and other

properties were appraised by his sister, Suzanne Tarpey, and

real property appraisers Ron Broyles and Curt Thor.

Tarpey formed DFC as a nonprofit and obtained tax-

exempt status from the IRS. He touted this arrangement as

“the only way to get rid of an unwanted timeshare and still

make some money.” He served as the sole voting member.

He also formed a for-profit timeshare closing service called

Resort Closings that handled the real estate closings for

timeshares donated to DFC. DFC and Resort Closings

marketed the generous tax savings that a customer could

gain by donating a timeshare. When a customer decided to

donate an unwanted timeshare, DFC would accept the

timeshare, and open a “closing file” with Resort Closings to

handle the property closing and transfer. Donors paid a

donation fee to DFC plus shouldered the timeshare transfer

fees. DFC accepted at least 7,600 timeshare donations

during the period at issue, 2010-2013.

A. PRIOR INJUNCTION

In a prior proceeding, the United States alleged that

Tarpey was operating a “bogus tax scheme.” Tarpey v.

United States, No. CV-17-94-B-BMM, 2019 WL 1255098,

at *1 (D. Mont. Mar. 19, 2019). The government alleged

Tarpey was using conflicted appraisers who overstated the

value of the timeshares and that Tarpey “falsely told

customers that they could deduct the full appraised amount

of the timeshare, conducted by DFC, and the associated

processing fees.” Id. Between 2016 and 2017, the district

court entered six orders permanently enjoining Tarpey, his

sister, Broyles, Thor, Resort Closings, and DFC from

continuing to appraise and accept timeshare donations. See,

e.g., United States v. Tarpey, 2:15-cv-00072-SEH, 2016 WL

6 TARPEY V. USA

6196497 (D. Mont. Sept. 28, 2016) (final judgment of

permanent injunction against James Tarpey). The consent

judgment against Tarpey permanently enjoined him from

preparing property appraisals in connection with federal

taxes, encouraging others to claim charitable contribution

deductions on their taxes, and promoting any plan regarding

charitable contribution deductions claimed on federal tax

returns. Id. at *1.

B. THE PRESENT ACTION

The IRS assessed penalties, pursuant to 26 U.S.C.

§ 6700, for Tarpey’s timeshare donation business. Tarpey,

2019 WL 1255098, at *2. Tarpey paid a portion of the

penalties and then filed suit, alleging that he was not liable

for penalties, and alternatively, the IRS’s penalty

calculations were inaccurate. Id. The United States

countersued, moving for summary judgment on Tarpey’s

liability under § 6700, and later for penalties owed. Id. The

district court addressed the issues in this case in three orders,

two on summary judgment and one after a bench trial.

1. Summary Judgment on Liability Regarding Two

Appraisers

The district court held on summary judgment that Tarpey

was liable for penalties under § 6700. Id. at *8. Section

6700 of the Internal Revenue Code imposes a penalty on

promoters and others involved in the organization or sale of

tax shelters if they make false statements or exaggerate

valuation. In this circumstance, to establish liability under

§ 6700(a)(2)(A), the United States had to show that (1)

Tarpey organized or sold, or participated in the organization

or sale of, an entity, plan, or arrangement; (2) Tarpey made,

or caused to be made, false or fraudulent statements

concerning the tax benefits to be derived from the entity,

TARPEY V. USA 7

plan, or arrangement; (3) Tarpey knew or had reason to

know that the statements were false or fraudulent; and (4)

Tarpey’s false or fraudulent statements pertained to a

material matter. Id. at *2 (citing United States v. Est. Pres.

Servs., 202 F.3d 1093, 1098 (9th Cir. 2000)). Tarpey

challenged only the second and third elements. Id.

The district court first determined that the second

element, false statements, was satisfied. The court stated

that “[t]he appraisals of timeshare to be donated to DFC

represent the alleged false statements at issue.” Id. at *3.

The court noted that “[t]he United States asserts that Tarpey

made false statements by preparing appraisals himself” and

“caused others to make or furnish similar appraisals.” Id.

Taxpayers must obtain a “qualified appraisal” of

property if a donation of that property results in a claimed

deduction of more than $5,000. Id. (citing 26 U.S.C.

§ 170(f)(11)(C), (E)). A qualified appraisal must be

prepared, signed, and dated by a “qualified appraiser.” 26

C.F.R. § 1.170A-13(c)(3)(i)(B). As applicable here, the

Treasury regulations disqualify as an appraiser (i) the donee

of the property, (ii) persons related to the donee, and (iii)

persons used by the donee whose appraisal practice is not

sufficiently diversified by performing the majority of their

appraisals for persons other than the donee. Id. § 1.170A-

13(c)(5)(iv)(C), (E), (F). The district court held that “Tarpey

constitutes the donee,” Tarpey and DFC are “related,” and

Tarpey, his sister, Broyles, and Thor were all disqualified

pursuant to the last exclusion because they did not perform

a majority of their appraisals for persons other than DFC.

Tarpey, 2019 WL 1255098, at *3, *5. The court concluded

that all four “lacked sufficient independence from DFC to

serve as qualified appraisers under the Treasury

Regulations,” and “[t]he undisputed facts demonstrate,

8 TARPEY V. USA

therefore, that Tarpey made or furnished false statements

regarding timeshare appraisals” and caused others to make

or furnish such statements. Id. at *6.

The district court further determined that the government

established the third element for liability—that Tarpey knew

or had reason to know that the statements were false or

fraudulent. Id. at *7. The court rejected Tarpey’s reliance

on advice of counsel argument, as the advice was general

and unrelated to his appraisal practice. Id. at *6. As the

court explained, the record did not establish that any

professional “ever advised Tarpey that he met all of the

criteria to serve as a qualified appraiser” under the Treasury

regulations. Id. The court found that Tarpey knew or had

reason to know that he made false statements “regarding

qualified appraisal practice,” in part because “Tarpey signed

a ‘Declaration of Appraiser’ for each appraisal that he

pe[r]formed” and “promised in this declaration that he knew

the Treasury regulation exclusions.” Id. at *7.

Based on these determinations, the district court

concluded that Tarpey was liable for penalties under § 6700.

Id. at *8.

2. Summary Judgment on Scope of Penalties

Section 6700(a) provides two methods for computing

penalties, depending on whether a “gross valuation

overstatement” or a false statement is involved. The parties

agree that the computation method for conduct that involves

false statements applies. Under this method, the penalty

equals “50 percent of the gross income derived (or to be

derived) from such activity.” 26 U.S.C. § 6700(a)(2)(B). At

summary judgment, the parties disputed the breadth of

“activity” under the statute. Tarpey sought to limit the

“activity” to appraisals he performed for DFC, limiting his

TARPEY V. USA 9

penalty to income derived from those appraisals. Tarpey v.

United States, No. CV-17-94-BMM, 2019 WL 5820727, at

*2 (D. Mont. Nov. 7, 2019). He contended that “each

‘activity’ must be proved separately and that the United

States has proven appraisals as the only activity undertaken

by Tarpey.” Id. The United States argued that “the activity”

encompassed the entire timeshare donation scheme, and

DFC served as Tarpey’s alter ego for the purposes of

calculating a penalty. Id.

The district court turned to the text of § 6700(a) and

determined that “[t]he ‘activity’ giving rise to the penalty

against Tarpey encompasses the entire arrangement

facilitated and organized by Tarpey to solicit timeshare

donations, appraise the timeshares, and direct profits to his

other organizations.” Id. It went on to conclude that DFC’s

income should be imputed to Tarpey under the corporate-

veil-piercing doctrine because DFC functioned as Tarpey’s

alter ego. Id. at *4–6.

3. Bench Trial on Amount of Penalties

The case proceeded to a bench trial, with both parties

submitting expert reports and testimony. The government’s

expert, Brian Dubinsky, “determined that Tarpey earned

$22,323,437 in gross income from the activity between 2010

and 2013.” Tarpey v. United States, No. CV-17-94-BU-

BMM, 2021 WL 5955699, at *3 (D. Mont. Dec. 16, 2019).

Dubinsky took the aggregate transactional data from the five

entities over which Tarpey exercised control, identified the

DFC-related transactions, included only income originating

from donors or buyers, and removed internal transfers

between the Tarpey entities. Id. at *3–4. Dubinsky’s

calculation would result in a penalty of $11,161,718.50,

though the United States requested that the court order

10 TARPEY V. USA

Tarpey to pay the original penalty assessed of $8,465,000

plus interest. Id. at *4. The district court agreed with

Dubinsky’s calculation and ruled for the government. Id. at

*7.

II. ANALYSIS

Tarpey raises three issues on appeal. He challenges the

district court’s liability ruling as to two of the appraisers,

Broyles and Thor; he contends that the court’s “cumulative

definition of ‘activity’” contravenes the text of § 6700(a);

and he urges that the court applied the wrong definition of

“gross income.”

A. LIABILITY FOR OTHER APPRAISERS

The district court correctly determined that, as a matter

of law, Broyles and Thor were disqualified as appraisers,

and Tarpey forfeited his argument that he was unaware the

appraisals would be imputed to DFC.

Broyles and Thor were disqualified because they

appraised timeshares primarily, if not exclusively, for DFC.

Nearly 100% (97.5%) of Broyles’s income was from

appraisals for DFC and DFC constituted 57% of Thor’s

appraisal business. Tarpey, 2019 WL 1255098, at *5. As

relevant here, the Treasury regulations disqualify any

“appraiser who is regularly used by” the donor—or is

“regularly used” as an appraiser by a “party to the transaction

in which the donor acquired the property being appraised”

or the “donee of the property”—“and who does not perform

a majority of his or her appraisals made during his or her

taxable year for other persons.” 26 C.F.R. § 1.170A-

13(c)(5)(iv)(F), (B), (C).

The question on appeal is what “regularly used” means.

Tarpey insists that the appraisals were not “used by” DFC

TARPEY V. USA 11

under § 1.170A-13. Instead, he claims the appraisals were

“used by” the individual donors seeking charitable

deductions because it is the donor—the timeshare owner—

that “is required to attach an appraisal to their income tax

return.” Therefore, in his view, the appraisal is used only by

“the person claiming the charitable deduction,” rather than

any donee that is accepting the contribution. He is mistaken.

Tarpey’s “use” argument focuses on the first half of the

exclusion in subsection F (“Exclusion F”), mistaking a form

of use for the exclusive use in contravention of the text.

Exclusion F does not limit use to use by the donor, and

Tarpey’s proposed meaning of “use” would read out

subsections B and C of the regulation. See 26 C.F.R.

§ 1.170A-13(c)(5)(iv). Rather, the exclusion refers to three

different persons: the donor, a party to the transaction, and

the donee. Id. § 1.170A-13(c)(5)(iv)(F).

The record also belies Tarpey’s creative position that

DFC merely recommended, rather than used, appraisers.

Tarpey, through DFC’s timeshare donation program,

profited off the appraisals. In his response to the

government’s statement of undisputed facts, Tarpey did not

dispute that he “earned $149 when an appraiser other than

himself prepared an appraisal of a timeshare to be donated

to DFC, and caused that money to be paid to [Vacation

Property Appraisers, Inc.],” another one of Tarpey’s entities.

VPA “received a total of $641,737 for appraisals of

timeshares to be donated to DFC,” and Tarpey reported most

of that amount on his individual income tax returns.

DFC also used the appraisals as a selling point, touting

an appraisal “by an independent licensed appraiser” as an

included benefit of the timeshare donation program.

Consistent with this approach, an employee testified that she

12 TARPEY V. USA

didn’t remember “any donors specifically questioning” an

option of a different appraiser: “we said we would order it

for them and they liked that.” Broyles was “their appraiser,”

and Broyles thanked DFC employees in an email for “all of

your help in referring Clients to us.” Thor confirmed this

arrangement. On this record, the district court correctly

concluded that DFC “used” Broyles’s and Thor’s appraisals.

The district court also correctly determined at summary

judgment that Tarpey knew or had reason to know Broyles

and Thor were disqualified. Tarpey now contends that a trial

is needed on this issue. Tarpey’s sole argument in the district

court in relation to the knowledge element of liability was that

he relied on the advice of counsel. Tarpey, 2019 WL

1255098, at *6. The government produced forms that Tarpey

signed with every appraisal that he prepared which include a

declaration by the appraisers that they were not in one of the

six categories of excluded individuals. Id. at *7. Tarpey

never claimed he could not have foreseen that the IRS would

consider DFC’s involvement with the appraisers as “use,” and

he argued below that Resort Closings was really the client, so

“it is irrelevant if James or any other appraiser performed all

of his or her services for Resort Closings.” Because Tarpey

expressly stated that the number of appraisals would not have

mattered and failed in the district court to include the current

challenges to knowledge, Tarpey has forfeited his chance to

advance this claim on appeal. “Although no bright line rule

exists to determine whether a matter has been properly raised

below, an issue will generally be deemed waived on appeal if

the argument was not raised sufficiently for the trial court to

rule on it.” In re Mercury Interactive Corp. Sec. Litig., 618

F.3d 988, 992 (9th Cir. 2010) (citation omitted) (cleaned up).

TARPEY V. USA 13

B. “ACTIVITY” UNDER § 6700(a)

Tarpey and the government next battle over the

definition of “activity” under 26 U.S.C. § 6700(a). The

district court concluded that the entire timeshare donation

business was part of a tax-avoidance scheme, and the plain

language of the provision allows the entire scheme to fall

within the scope of “activity.” The government endorses this

position. Urging us to focus on the “separate activity”

language in the second sentence of § 6700(a) instead, Tarpey

insists that the penalty cannot go beyond the appraisal portion

of his business, which he claims was the only activity linked

to making a false statement.

In construing § 6700, we turn to the text, guided by

Congress’s intervention in shaping the current statute.

Congress adopted § 6700 as part of the Tax Equity and Fiscal

Responsibility Act of 1982. See Est. Pres. Servs., 202 F.3d at

1098. To understand the import of the amendments over time,

it is helpful to separate the sentences of the text and annotate

the current form of the statute. The sentences are broken out

below; underlined language shows text added or changed in

1989, and italicized language shows text added in 2004.

Section 6700(a) states:

(a) Imposition of penalty

[First Sentence] Any person who--

(1)

(A) organizes (or assists in the organization of)--

(i) a partnership or other entity,

(ii) any investment plan or arrangement, or

(iii) any other plan or arrangement, or

14 TARPEY V. USA

(B) participates (directly or indirectly) in the sale

of any interest in an entity or plan or arrangement

referred to in subparagraph (A), and

(2) makes or furnishes or causes another person to

make or furnish (in connection with such

organization or sale)--

(A) a statement with respect to the allowability of

any deduction or credit, the excludability of any

income, or the securing of any other tax benefit

by reason of holding an interest in the entity or

participating in the plan or arrangement which

the person knows or has reason to know is false

or fraudulent as to any material matter, or

(B) a gross valuation overstatement as to any

material matter,

shall pay, with respect to each activity described in

paragraph (1), a penalty equal to $1,000 or, if the

person establishes that it is lesser, 100 percent of the

gross income derived (or to be derived) by such

person from such activity.

[Second Sentence] For purposes of the preceding

sentence, activities described in paragraph (1)(A)

with respect to each entity or arrangement shall be

treated as a separate activity and participation in each

sale described in paragraph (1)(B) shall be so treated.

[Third Sentence] Notwithstanding the first

sentence, if an activity with respect to which a

penalty imposed under this subsection involves a

statement described in paragraph (2)(A), the amount

of the penalty shall be equal to 50 percent of the

gross income derived (or to be derived) from such

TARPEY V. USA 15

activity by the person on which the penalty is

imposed.

Congress had amended the statute four times, though only

two changes—in 1989 and 2004—are discussed here. 1 The

original language included only the first sentence, less some

words added or substituted in 1989. See Tax Equity and

Fiscal Responsibility Act of 1982, Pub. L. No. 97-248,

§ 320(a), 96 Stat. 324, 611 (1982). In 1989, Congress added

the second sentence—“For purposes of the preceding

sentence . . .”—to resolve a circuit split over the meaning of

“activity.” See Omnibus Budget Reconciliation Act of 1989,

Pub. L. No. 101-239, § 7734(a)(3), 103 Stat. 2106, 2403

(1989). Before the 1989 amendment, some courts had held

that each sale was a separate activity subject to a minimum

penalty of $1,000, while other courts held that multiple sales

of a single tax shelter constituted one activity. See, e.g., Bond

v. United States, 872 F.2d 898, 900–01 (9th Cir. 1989)

(adopting the latter approach). The 1989 amendment codified

the former interpretation. “Congress ended the confusion

over ‘activity’ by amending section 6700 and clarifying that

‘activity’ refers to an individual sale; and in so doing,

Congress returned the penalty to its divisible state.”

Humphrey v. United States, 854 F. Supp. 2d 1301, 1306

(N.D. Ga. 2011).

In 2004, Congress added the third sentence—the method

applicable to false statements and the relevant method here.

See American Jobs Creation Act of 2004, Pub. L. No. 108-

1

Other amendments in 1984 and 2018 are minor substitutions that do not

affect the outcome of this case. See Deficit Reduction Act of 1984, Pub.

L. No. 98-369, § 143(a), 98 Stat. 494, 682 (1984); Consolidated

Appropriations Act of 2018, Pub. L. No. 115-141, § 401(a)(314), 132

Stat. 348, 1199 (2018).

16 TARPEY V. USA

357, § 818(a), 118 Stat. 1418, 1584 (2004). The rationale

was that “the present-law $1,000 penalty for tax shelter

promoters is insufficient to deter tax shelter activities.” H.R.

Rep. No. 108-548, pt. 1, at 274 (2004).

On appeal, both Tarpey and the government argue that

§ 6700 is divisible. The few courts that have considered the

issue agree, although the question of divisibility does not

drive the result here. The caselaw and legislative history

focus heavily on the second sentence of the 1989 amended

version—a situation that is not present in the case before us.

The focus of the 1989 amended version is whether the

“activity” involving gross valuation overstatements cleared

the $1,000 per activity penalty threshold or whether the court

should use gross income. Congress clarified that each sale

was its own activity, avoiding a situation where a promoter

makes 100 sales and walks away with a $1,000 total penalty.

See, e.g., Humphrey, 854 F. Supp. 2d at 1307. 2 In the case

before us, we instead focus on the 2004 amended version

2

Other trial courts reached the same conclusion. See, e.g., Schulz v.

United States, No. 1:15-cv-01299 (BKS/CFH), 2018 WL 3405240, at *5

(N.D.N.Y. July 12, 2018) (“Here, the particular activities at issue, as

defined by the Government, are 225 distributions of the Blue Folder.”),

aff’d, 831 F. App’x 48 (2d Cir. 2020); Diversified Grp., Inc. v. United

States, 123 Fed. Cl. 442, 454 (2015) (“The [1989] amended statute

expressly provides that the penalty imposed for selling or promoting an

abusive tax shelter, based upon the activities within the tax shelter, is

divisible, outlining that ‘each entity or arrangement shall be treated as a

separate activity, and participation in each sale . . . shall be so treated.’”

(alteration in original)), aff’d, 841 F.3d 975 (Fed. Cir. 2016); Pfaff v.

United States, No. 14-CV-03349-PAB-NYW, 2016 WL 915738, at *3

(D. Colo. Mar. 10, 2016) (“[Section] 6700 contains additional language

that explains the basis on which § 6700 penalties are divisible: ‘activities

described in paragraph (1)(A) with respect to each entity or arrangement

shall be treated as a separate activity and participation in each sale

described in paragraph 1(B) shall be so treated.’”).

TARPEY V. USA 17

which adds a 50% gross income calculation for an activity

involving false statements. The 1989 amendment and the

“second sentence” are not at issue.

Relying upon this precedent related to the 1989

amendment, the parties tie themselves into knots justifying

their differing outcomes. The government contends for the

first time that there was a false statement attached to every

transaction, and Tarpey insists that “activity” is effectively

synonymous with “false statement.” A close reading of the

statute reveals that the solution is far simpler. The focus

should be on the third sentence of the statute because the case

involves false statements, not an overstatement of valuation.

Section 6700 defines activity broadly to include any

“plan” or “arrangement.” See 26 U.S.C. § 6700(a)(1)(A)(iii).

Tarpey does not challenge the element that he organized the

timeshare donation plan, which easily qualifies as a plan or

arrangement. Tarpey, 2019 WL 5820727, at *3. The statute

then lays out two computation methods. There is the first

computation method, set out in the first sentence, amended

by Congress to resolve a circuit split:

[A person found liable] shall pay, with

respect to each activity described in

paragraph (1), a penalty equal to $1,000 or, if

the person establishes that it is lesser, 100

percent of the gross income derived (or to be

derived) by such person from such activity.

§ 6700(a)(2)(B). The plain language of the statute makes

clear that the “separate activity” requirement in the second

18 TARPEY V. USA

sentence modifies the computation method in the first

sentence:

For purposes of the preceding sentence,

activities described in paragraph (1)(A) with

respect to each entity or arrangement shall be

treated as a separate activity and

participation in each sale described in

paragraph (1)(B) shall be so treated.

Id. (emphasis added). The cases cited earlier rest on this

penalty computation.

Then there is another method in the third sentence, the

computation of penalties for false statements, an amendment

added in 2004:

Notwithstanding the first sentence, if an

activity with respect to which a penalty

imposed under this subsection involves a

statement described in paragraph (2)(A), the

amount of the penalty shall be equal to 50

percent of the gross income derived (or to be

derived) from such activity by the person on

which the penalty is imposed.

Id. (emphasis added). The plain language of the statute

states that the third sentence applies “notwithstanding the

first sentence,” so the statute contemplates that the penalties

for false and fraudulent statements will be treated

differently. Under the applicable computation method, we

consider that “the amount of the penalty shall be equal to 50

percent of the gross income derived (or to be derived) from

such activity by the person on which the penalty is imposed.”

Id.

TARPEY V. USA 19

How then do we understand the scope of activity? We

look to the earlier portion of the statute to determine what

“each activity described in paragraph (1)” entails. Id.

Paragraph (1) includes the broad “organization” of “any

other plan or arrangement.” § 6700(a)(1)(A); see Hargrove

& Costanzo v. United States, No. CV-F-06-046 LJO DLB,

2008 WL 4133928, at *6 (E.D. Cal. Sept. 4, 2008) (“The two

activities which are ‘described in paragraph (1)’ are the

activity of ‘organizes’ and the activity of ‘participates.’”).

The activity here is not limited to the making of false

statements in furtherance of a scheme, but rather the

organization and sale of the tax scheme writ large. The

statute mandates that Tarpey’s gross income be calculated

from his organizational and sale conduct, rather than solely

from the false statements he made about the activity alone.

The Tax Court already appears to adopt this approach. See

Davison v. Comm’r, 119 T.C.M. (CCH) 1373, 2020 WL

2498420, at *23 (2020) (“[T]he penalty is appropriately

calculated as 50% of the gross income petitioner derived

from selling, or participating in selling, the Tool Program.”);

Lemay v. Comm’r, 119 T.C.M. (CCH) 1389, 2020 WL

2498427, at *24 (2020), aff’d, 128 A.F.T.R.2d 2021-5745

(10th Cir. 2021) (same); see also Seaview Trading, LLC v.

Comm’r, 62 F.4th 1131, 1135 (9th Cir. 2023) (en banc)

(“Although Tax Court decisions do not bind us, we have

consistently recognized that court’s unique expertise in tax

matters, and here we find its decisions persuasive.” (citation

omitted)). It would go against the text and common sense to

limit liability only to the false statements when Congress’s

goal was to punish abusive tax shelters. The district court’s

decision is consistent with this analysis and we too adopt this

approach.

20 TARPEY V. USA

The activity encompasses the scheme while

simultaneously being made up of the individual timeshare

donation transactions. The government’s expert, Dubinsky,

excluded transactions unrelated to the timeshare donation

program then aggregated the gross income derived from the

7,600 timeshare donation transactions. Tarpey, 2021 WL

5955699, at *3–4. The government does not need to limit

itself to the funds directly coming from the false statement

appraisals, as the 7,600 transactions made up an overarching

scheme that flowed into further gross income for Tarpey and

DFC. Thus, the activity can be made up of an aggregation

of transactions without being limited to only those

transactions that explicitly contained a false statement.

In the face of the correct application of the term

“activity,” Tarpey now claims this approach makes it more

difficult to establish jurisdiction under 26 U.S.C. § 6703(c).

Not so. A taxpayer may obtain jurisdiction over a refund

suit for a penalty assessed under § 6700 by satisfying the

timing and payment requirements, which require a taxpayer

to pay 15% of the assessed penalty and file a refund claim

within 30 days of the IRS’s notice of the penalty before filing

a refund suit within 30 days of the denial of that claim. See

§ 6703(c)(1)–(2). Tarpey paid 15% of his 2010 penalty, while

his sister paid 15% of her 2014 penalty. The parties stipulated

to these facts as satisfying jurisdiction under § 6703(c), and

the government continues to contend that this payment

secured jurisdiction. In his reply brief, however, Tarpey

claims for the first time that his payment of the 2010 assessed

penalty is inadequate, as it would at most garner jurisdiction

over one tax year.

We are skeptical of Tarpey’s newly crafted interpretation.

Section 6703(c)(1) provides that upon “notice and demand of

any penalty under section 6700,” the person charged can pay

TARPEY V. USA 21

“an amount which is not less than 15 percent of the amount of

such penalty.” The IRS sent four separate Notice of Penalty

Charge assessments to Tarpey in 2017 for tax years 2010

through 2014. Each Notice of Penalty Charge states “[w]ithin

30 days after the date of this Notice and Demand, pay an

amount which is not less than 15 percent of the penalty and

file a claim for refund.” The IRS deemed Tarpey’s payment

of one penalty demand adequate, and we agree that this is not

an unreasonable reading of the statute.

C. CALCULATING GROSS INCOME

Tarpey’s final challenge is that the district court applied

the wrong definition of gross income and erroneously

included money held in escrow. We review for clear error

the district court’s factual findings on the amount of the

penalty and its legal conclusions de novo, and we are not

persuaded by Tarpey’s position. Cooper v. Comm’r, 877

F.3d 1086, 1090 (9th Cir. 2017).

The district court properly relied on the Internal Revenue

Code’s general definition of gross income, stating that

“[g]ross income includes ‘all income from whatever source

derived.’” Tarpey, 2021 WL 5955699, at *6 (quoting 26

U.S.C. § 61(a)). Tarpey nevertheless points to Dubinsky’s

statement that his penalty calculation total was not

“quote/unquote ‘the gross income’ of Mr. Tarpey in the

normal sense of taxation” as evidence that the district court

departed from the statutory definition in accepting his

calculations. Tarpey’s take on Dubinsky’s testimony is

misleading. He portrays the “normal sense of taxation”

statement as an acknowledgment that the court had departed

from the statutory definition when in fact Dubinsky was

22 TARPEY V. USA

instead clarifying that his calculation included income

attributable to Tarpey’s alter ego, DFC:

Q. And just for the record, Mr. Dubinsky, can

you restate your final opinion on the gross

income you calculated for Mr. Tarpey under

26 USC 6700?

A. Yes. And just so it’s clear, when you say --

I’m going to term it -- this is the gross income

that would be attributable to the activity to

which Mr. Tarpey -- that the Court has

determined is subject to the penalty. This is

not quote/unquote “the gross income” of Mr.

Tarpey in the normal sense of taxation.

Read in context, Dubinsky’s statement explains that the total

penalty exceeds the gross income of Tarpey as an individual.

Based on the district court’s finding that DFC was Tarpey’s

alter ego—a conclusion not challenged on appeal—Dubinsky

included gross income from the entity as well. Tarpey’s

definitional challenge is a red herring.

Tarpey next argues that the transactions “involved the

acquisition and sale of real property,” and therefore he should

have been eligible to capitalize his expenses related to the

acquisition and sale of property under 26 U.S.C. § 61(a)(3)

and § 263A. This position ignores the district court’s finding

that Tarpey did not operate DFC as a dealer in real property,

and instead he benefited from organizing it as a tax-exempt

501(c)(3) organization. See Tarpey, 2021 WL 5955699, at

* 5–6. The Supreme Court “has observed repeatedly that,

while a taxpayer is free to organize his affairs as he chooses,

nevertheless, once having done so, he must accept the tax

consequences of his choice, whether contemplated or not.”

TARPEY V. USA 23

Comm’r v. Nat’l Alfalfa Dehydrating & Milling Co., 417

U.S. 134, 149 (1974). Tarpey “may not enjoy the benefit of

some other route he might have chosen to follow but did

not.” Id. Now is not the time to change horses midstream.

The district court reasonably declined to give Tarpey the

benefit of a different choice after the fact. See Tarpey, 2021

WL 5955699, at *6.

On appeal, Tarpey expands his argument beyond DFC’s

status to encompass the activity of all his entities. His theory

is that he should be allowed to capitalize his expenses under

§ 61(a)(3) because, “taken collectively,” the “principal

activity” of his entities was the acquisition and sale of

timeshares.

The few cases that have discussed penalties under § 6700

have not reduced expenses. In Schulz v. United States, the

government argued that “the penalty is based on gross

income, not income less fees or costs or costs of goods sold.”

2019 WL 1385405, at *4. The court agreed, noting that

“[g]ross income means ‘all income from whatever source

derived’” and the penalty was properly calculated “without

regard to fees charged.” Id.; see also In re MDL-731, 989

F.2d 1290, 1304 (2d Cir. 1993) (“Because the Internal

Revenue Code does not provide an exclusion from gross

income for the cost of leased goods, the district court

correctly declined to grant a reduction equal to the cash

downpayments made on the Properties from Townsend’s

and Universal’s gross income.”). We recently affirmed a

decision by the tax court that explained that all taxpayers

“pay tax only on gross income, which is gross receipts minus

the cost of goods sold.” Patients Mut. Assistance Collective

Corp. v. Comm’r, 151 T.C. 176, 204 (2018), aff’d, 995 F.3d

671 (9th Cir. 2021). Cost of goods sold does not offer

Tarpey much help, as it includes only “the costs of acquiring

24 TARPEY V. USA

inventory, through either purchase or production.” Id. at

205. One of Tarpey’s experts, Thomas Copley, admitted that

there were no acquisition costs with the donated timeshares:

Q. And so, obviously, because timeshares

were donated, there were no costs associated

with DFC’s acquisition of the property. Is

that fair to say?

A. In the initial acquisition there were no

costs incurred.

Q. That is, DFC didn’t pay a single cent to

acquire the timeshares; right?

A. To acquire the timeshares, they did not

pay. Those were donated, correct.

The district court’s refusal to deduct expenses was not

clearly erroneous.

Finally, Tarpey argues that the district court erroneously

“concluded that, as a matter of law, the funds deposited into

the escrow account managed by RCI vested in Mr. Tarpey

simply because he owned RCI.” Tarpey asks that any “funds

deposited into escrow” not count towards his gross income.

Tarpey mischaracterizes the district court’s finding. Rather

than deciding that money held in escrow could, as a matter of

law, be included in the calculation of gross income, the district

court more narrowly concluded that the “escrow account”

here was not a true escrow account. Tarpey, 2021 WL

5955699, at *4. It acknowledged that a “taxpayer’s gross

income normally does not include money paid into escrow

because the taxpayer lacks ‘complete dominion’ over the

sum.” Id. (quoting Ware v. Comm’r, 906 F.2d 62, 65 (2d Cir.

1990)). But this principle does not come into play because

TARPEY V. USA 25

“Tarpey did not maintain a true escrow arrangement,” as he

“exercised ‘complete dominion’ over Account 6655, as

evidenced by the comingling of funds from multiple donors

and frequent bulk transfers.” Id. at *4–5. Though Tarpey

insists the district court made a legal error, this fact-specific

finding about the nature of the RCI account is more properly

viewed under the clear error standard. See Est. Pres. Servs.,

202 F.3d at 1099.

The Supreme Court has explained that “[i]n determining

whether a taxpayer enjoys ‘complete dominion’ over a given

sum . . . [t]he key is whether the taxpayer has some guarantee

that he will be allowed to keep the money.” Comm’r v.

Indianapolis Power & Light Co., 493 U.S. 203, 210 (1990).

A powerful piece of evidence for including the funds as part

of gross income is Tarpey’s inclusions of these funds on his

tax returns—a fact that the district court said “demonstrates

conclusively that the money in Account 96655 remained

within Tarpey’s control.” Tarpey, 2021 WL 5955699, at *5.

Tarpey argues that the court erred because “DFC—not Mr.

Tarpey—amended its returns to show the entire amount

deposited into the escrow account as part of its gross receipts.”

Given that Tarpey has not challenged the alter ego conclusion,

Tarpey and DFC are treated as interchangeable for the

purposes of calculating the penalty. His challenge therefore

misses the evidentiary point.

Based on a fact-intensive analysis, the district court did

not err in concluding that Tarpey had “some guarantee that

[he] will be allowed to keep the money.” Id. The testimony

supported the district court’s fact-intensive conclusion, and

the district court correctly determined that the fees held in

Resort Closings’ account should not be excluded from the

gross income calculation.

26 TARPEY V. USA

AFFIRMED.