T .C . Memo . 2009-12 1

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UNITED STATES TAX'-COUR T

TIGERS EYE TRADING, LLC, SENTINEL ADVISORS, LLC,

TAX MATTERS PARTNER, Petitioner v .

COMMISSIONER OF INTERNAL REVENUE, Responden t

Docket No . 14.510-05 .

Filed May 27, 2009 . :

In a notice of final partnership administrative'

adjustment (FPAA) issued to TET regarding a transaction

of the type the IRS determined in Notice 2000-44, 20002 C .B . 255, is a "listed transaction", R determined

inter alia that TET was not a partnership, had no

business purpose other than tax avoidance, lacked

economic substance, and was an economic sham for

Federal . income tax purposes . In the FPAA R determined

that amounts reported on,the 1999 partnership return

for contributions, distributions, other deductions, and

other losses were reduced to zero, that TET's partners'

outside bases in their partnership interests were zero,

and that accuracy-related penalties determined at the

partnership level should be imposed at the partner,

level .

L and one of the three grantor trusts (PP) L used` .

to engage in the transaction challenge the proposed

adjustments in the FPAA and wish in this partnership.level proceeding to raise L's reasonable cause defenses

-2to accuracy-related penalties applicable to any

deficiency resulting from the FPAA adjustments to

partnership items . L claims that, in reporting losses

from the transaction on his return, he relied on the

advice of professionals, including two attorneys and a

C .. .P .A ., and a written legal opinion of CM to'L and the

three grantor trusts on the tax consequences of the'

transaction .

PP has filed a motion for partial summary judgment

to declare invalid sec . 301 .6221-1T(c) and (d),

Temporary Proced . & Admin . Regs ., 64 Fed . Reg . 3838

(Jan . 26, 1999) (the temporary regulation), on th e

,aground that it would prevent PP and L from raising in

this partnership-level proceeding partner-level

reasonable cause defenses to accuracy-related penalties

applicable to any deficiency of L resulting from the

FPAA adjustments to partnership items .

R has filed a motion in limine to exclude from

evidence PP's expert report prepared by SS that the

legal opinion of CM on the tax consequences of the

transaction was of such quality and character that PP

".an'd L could reasonably, rely on the opinion in .preparing

,their income tax returns . R argues that the report

should be excluded on the alternative grounds that it

relates solely to PP's partner-level defenses and that

it expresses legal conclusions . Alternatively, R

asserts that portions of the report should be excluded

because they constitute advocacy . R is also asserting

that CM was a promoter of TET and the transaction, that

L and his grantor trusts could not reasonably rely ;on

the opinion of a promoter, and that the status of CM as

a promoter should be determined in this partnershiplevel proceeding .

Held : Following New Millennium Trading, LLC v .

Commissioner , 131 T .C . (2008), the temporary

regulation .is valid and potentially applicable in the

case at hand, so that, .should the Court sustain R's

determinations .in .the FPAA that TET or PP's

transactions with TET should be disregarded and tha,t_

all other requirements for application of the accuracyrelated penalties have been . satisfied, PP may no t

assert in this partnership-level proceeding any

partner-level defenses to,application of the penalties ;PP's motion for partial summary judgment will be

denied .

Held , further : We have jurisdiction in this

partnership-level proceeding to decide whether CM was a

promoter .

Held , further : If the Court should decide that CM

is not a promoter of the-transactions at issue, the

reasonableness of L's reliance on the CM opinion, as

well as his reliance on the advice of his personal

attorneys and C .P .A ., would bea partner-level defense

as defined in the temporary regulation that would not

be assertable in this partnership-level proceeding

because it would require the Court to consider factors,

that are personal to L, such as his education and

business experience and the nature and length of his

relationship with the adviser, and would require the

production of evidence unrelated to the underlying

adjustments in the FPAA .

Held , further : PP's expert report consists of

legal discussion and argument ; R's motion in limine

will be granted and the expert's report excluded from

evidence, irrespective of whether CM is determined to

be a promoter .

Felix B . Laughlin and Mark D . Allison , for petitioner,

Sentinel Advisors, LLC, tax matters partner .

David De Coursey Aughtry ,

Hale E . Sheppard , and William E .

Buchanan , for, A . Scott Logan, Trustee, A ~ Scott Logan Grantor's

Retained Interest Annuity Trust I, a partner other than the~ta x

matters partner .

James E . Gray ,

David B . Flassing,

William Bogardus ,

for respondent .

Timothy B . Heavner , and

-4CONTENT S

Background

Discussion

. .

I . TEFRA Procedures and Partnership Items

. 19

Partnership

Items

` .

.20

B . Affected Items

. . . .

C . Penalties and Defenses to Penalties

. . 22

D . Exceptions to Application of TEFRA Procedures . . . 2 6

II . Petitioner's Motion To Invalidate Temporary Regulation

. 29

III . Respondent's Motion in Limine

. 33

A . Reasonable Cause Defense to Accuracy-Relate d

Penalties . . . . . . . . . . . . . . . . .

. . 33

B . Respondent's Position in Motion in Limine .

C . Status as Promoter of Partnership Determined i n

Partnership-Level Proceeding

. -. . . . . . . . . . 38

D . Tax Court's Jurisdiction To Decide Defenses to

Applicability of Penalty That Are Not PartnerLevel Defenses Defined by Temporary Regulation 43

E . Partner-Level Defense : Definition . . . . .

. . 45

1 . Personal to the Partner 46

2 . Depends on Partner's Separate Return 48

3 . Cannot Be Determined at Partnership Level 50

4 . If Curtis Mallet Was a Promoter

. . .

5 . If Curtis Mallet Was Not a Promoter

. . . . 54

6 . Conclusion . . . . . . . . . .

F . Legal Conclusions and Advocacy of Mr . Logan' s

Position in the Smith Report

. . .

. . . . . . 55

Afterword

. 60

MEMORANDUM OPINIO N

BEGHE,

Judge : This proceeding to determine the validity .of

respondent's notice of final partnership administrative

adjustment (FPAA) is before the Court on two interrelated

-5

motions : Motion for partial summary judgment filed under Rule

1211 on behalf of participating partner ; and motion in limine

filed under Rules 50~and 143(f) by respondent .

By the partial summary judgment motion, A . Scott Logan (Mr .

Logan) as Trustee for A . Scott .Logan Grantor Trust I (Logan .Trust.

I or participating partner), a partner other than the tax matter s

.partner, asks us to declare invalid section 301 .6221'-lT(c) a n

(d), Temporary Proced . & Admin . Regs ., 64 Fed . Reg . 3838 (Jan .

26, 1999.) (sometimes the temporary regulation), implementin g

section 6221 as amended by the Taxpayer Relief Act of 1997 (TR A

1997), Pub . L . 105-34, sec .. 1238(aa), 111 Stat . 1026, because it

would prevent participating partner and Mr . Logan from

interposing partner-level defenses to accuracy-related penaltie s

in this partnership-level proceeding .2 For convenience and

simplicity, we sometimes refer to participating partner as Mr .

Logan .

'Unless otherwise indicated, all Rule references are to the

Tax Court Rules of Practice and Procedure, and all section

references are to the Internal Revenue Code .in effect for 1999,

the year at. issue .

2Participating partner also filed a motion for partial

summary judgment "regarding confirmation of Code and caselaw as

to contingent obligations"', seeking"a ruling that-Helmer v .,

Commissioner , T .C . Memo . 1975-160, requires a holding that "a

contingent obligation such as the Sold Euro Option each of the

Logan . Trusts sold to AIG falls short of a fixed 'liability'cfor`

section 752 and other federal income tax purposes" . By order

dated'Aug . 5, 20 .08, we denied the motion for a variety of

reasons .

-6By the motion in limine respondent asks us to exclude fro m

evidence an expert report and testimony that a legal opinion on

the tax consequences of the transactions at issue was of'such

quality and character that Mr . Logan could reasonably rely on it

in preparing his income tax returns . By respondent's response to

Mr . Logan's motion, . Mr . Logan Is reply to that response, Mr .

Logan'.s,opposition to respondent's .moti .on, respondent's reply to

that opposition, and respondent's supplement to respondent's

motion,, the parties have joined issue on the subjects of the

motions .

Petitioner, Sentinel Advisors, LLC (Sentinel), the tax

matters-partner of Tigers Eye Trading, LLC (Tigers Eye), has no

direct financial interest in the outcome of this case . Thus, Mr .

Logan, as trustee of Logan . Trust I, is wielding the laboring oar

in this proceeding .

In his motion for partial summary judgment Mr . Logan asserts

that in preparing his income tax returns he reasonably relied on

the opinions of personal advisers--attorneys and his accountant-as well,}as an opinion letter and memorandum of the law firm

Curtis, Mallet-Prevost, Colt & Mosle LLP (Curtis Mallet) on the

income tax consequences of the transactions at issue . Mr . Logan

submitted to the Court a notice of expert witness in which he

identified Attorney Stuart A . Smith (Mr . Smith) as a witness wh o

may aid`the Court in evaluating whether the Curtis Mallet opinion

-7opinion was of such quality and character that Mr . Logan and

Logan Trust I could reasonably rely on it in preparing their .

income tax returns .

By the motion in limine respondent asks us to exclude from

evidence Mr . Smith's expert report and testimony on the

alternative grounds that the report : (1) Pertains exclusively to

Mr . Logan's partner-level defenses, an issue not properly before

the Court, pursuant to the'temporary regulation ; (2) consists of

legal conclusions ; and (3) contains advocacy .

Respondent indicated, in respondent's response to Mr .

Logan's motion for partial summary judgment, that respondent is

asserting in this proceeding that Curtis Mallet was a promoter o f

the transactions in issue . Respondent asserts that no

participating partner of,Tigers Eye could reasonably rely on an'

opinion issued by a promoter and that the status of Curtis Mallet

as a promoter of Tigers Eye should be determined in this

partnership-level proceeding .

Following New Millennium Trading, LLC v . Commissioner , 131

T .C . (2008) (upholding the validity and applicability of the

temporary regulation), we will deny Mr . Logan's motion fo r

partial summary judgment . Thus, should we sustain respondent's

determinations in the FPAA that Tigers Eye or the Logan Trusts'

transactions with Tigers Eye should be disregarded and that the

accuracy-related penalties otherwise apply, Mr . Logan's partner-

-8level defenses to those penalties will not be assertable in this

partnership-level proceeding .

We conclude that whether Curtis Mallet was a promoter of the

transactions in issue is to be decided in this partnership-level

proceeding . We also conclude that, if we should determine that

Curtis Mallet was a promoter of the transactions at issue,

reliance on the Curtis Mallet opinion would not be a defense to

the penalties . Moreover, Mr . Logan's reliance on the advice of

his personal advisers is a partner-level defense that is not

assertable in this partnership-level proceeding . See . New

Millennium Trading, LLC v . Commissioner ,

supra . Similarly, if we

should decide that Curtis Mallet was not a promoter, Mr . Logan's

reliance on the Curtis Mallet opinion would be a partner-leve l

defense not assertable in this proceeding .

Since there are unresolved issues whether reliance on and

the reliability of the Curtis Mallet opinion are partner-level

defenses, respondent's motion in limine cannot be granted on that

ground . However, we will grant respondent's motion to exclude

Mr . Smith's expert report and testimony because the report

consists of legal discussion and argument .

.,An,Afterword notes that TRA 1997, as implemented by the

temporary regulation, has created problems of judicial

administration in the case at hand and . similar pending cases that

will~not be resolved by recently proposed regulations .

-9Background

The facts recited in this statement are based on th e

parties' first and second stipulations of fact and accompanying

exhibits and on matters admitted in the pleadings or in the

motion papers or set forth in affidavits submitted by the parties

or in judicially noticed records of the Court . For the purposeof deciding these motions, 'we view the facts in the light most

favorable to the nonmoving party ; the facts recited have not been,

found to be true after a trial .

The case at hand is one of many .Son-of-BOSS cases pending in

this Court .3 It is one of a subset of such . cases of transactions

promoted by Sentinel that used a limited liability compan y

(treated as a partnership for income tax purposes) to enable an

investor (Mr . Logan in the case at hand) to claim losses that

substantially offset millions of dollars of long-term capital

gain realized on the sale of a business interest .

Mr . Logan was a cofounder of Wood Logan Associates, Inc ..

(WLA), a . wholesale marketing and sales organization that

distributed variable annuities . WLA was wholly owned by

Manufacturers Life Wood Logan (MLWL), a holding company . Unti l

early 1999 Mr . Logan owned 53,690 shares of MLWL directly an d

3"BOSS" is an acronym for "Bond and Option Sales Strategy",

which the Commissioner regards as an abusive tax shelter . See

Notice 2000-44, 2000-2 C .B . 255, 256 ; see also Kligfeld Holdings

v . Commissioner , 128 T .C . 192 (2007) .

-10240,000 shares of MLWL through a family limited partnership

(SKL) . Mr . Logan, directly and through three grantor trusts,

Logan, .Trust I .and two other such trusts (collectively the Logan

Trusts), held a more-than-99-percent interest in SKL .

In early 1999 Mr . Logan sold all the MLWL .shares he owned,

directly and indirectly, to a-large . Canadian life insurance

company for $94 per share, resulting in proceeds of $22,560,000

to SKL and direct proceeds of $5,046,860 to Mr . Logan . The

shares of MLWL had an average basis in the hands of SKL~and Mr .

Logan of approximately $1 per share . Mr . Logan reported total

long-term capital gain of $27,438, 5 37 on his and the Logan

Trusts' sales of the MLWL shares .

During the taxable year ended December 31, 1999, Tigers Eye

was a limited liability company organized under Delaware law,

formed not earlier than September 21, 1999 . Sentinel was the ta x

matters partner of Tigers Eye . Banque Safra, a nominee partner

for Brazilian investors, obtained a 7 .5-percent capital :-.and

profits interest, in Tigers Eye for a cash contribution of

$58,000, and New Vista, an entity owned by Sentinel and its legal

adviser, obtained a 0 .5-percent profits interest in Tigers Eye

for a cash contribution of $3,000 .

On October 1, 1999, each of the three Logan Trusts bought

from and sold to American International Group (AIG)'a pair of

substantially similar options on the euro--an option to .,bu y

At , 1:

-11E184,537,700

from AIG (the purchased option) and an option to

sell €184,537,700, to AIG (the sold option) . The terms of the

purchased options were identical to the terms of the sold options

with respect to the number of euro, the exercise and expiration

date (October 3, 2000), and counterparty (AIG) . The exercise

prices and premiums of the purchased and sold options differed

slightly as shown-below :

Exercise Pric e

Gros s

Premium

per Euro

Euro

Exercise Pric e

Sold

$9,405,027

$1 .092

E184,537,700

$201,515,168 .4 0

Purchased

9,500,030

1 .091

184,537,700

201,330,630 .7 0

Option

95,003

Net

184,537 .7 0

The $95,003 difference in the, premiums payable on each pair of

options amounted to 1 percent of the higher premium on the

purchased option . The difference in . the exercise prices of the

purchased and sold options . amounted to one-tenth of .1 cent pe r

euro ;

the $184,537 .70 gross difference in the exercise prices o f

the purchased and sold, opt-ions amounted-to

.0009155,

or less than

one-tenth of l .percent of the higher exercise prices of the sold

options .

Because AIG was the counterparty on both options, each of

the Logan Trusts did not actually pay $9,500,030 of its own funds

to AIG for the purchased option, nor did it receive $9,405,027

from AIG for the sold option . Instead the Logan Trusts andAIG

netted their respective payment obligations with respect to'the

-12option premiums, and each Logan Trust paid the net $95,003 to AIG .

with respect to each pair of purchased and sold options : . '

,_ ! On or about October 9, 1999,,

in exchange for a partnership, .

interest in Tigers Eye, each of-the Logan Trusts contributed its

purchased option and assigned its obligations under the sol d

option ., ;to Tigers .Eye, along with $40,600 cash (a tota l

$121,800 for the three trusts) . Tigers Eye recorded that each

trust contributed $133,743 to capital (total $401,229) .

On December 15, 1999, about 65 days after the Logan Trusts

had contributed and assigned their interests and obligations in

the options to Tigers Eye, Tigers Eye distributed to the Logan

Trusts 'in liquidation of their partnership interests euro5 and

10,419 shares of Xerox Corp ., having a combined value o f

$229,992 .42 . In computing the net amounts the Logan Trusts . were

entitled to and did receive in liquidation of their interests in

Tigers Eye, the obligations of Tigers Eye to deliver euro if AIG

should exercise the sold options were netted and offset against

the rights of Tigers Eye to demand and receive euro if it should

exercise the purchased options . SKL received the 10,419 share s

.'This statement disregards other payments by .or on behalf of

Mr . Logan to AIG and others to enable the Logan Trusts to

participate in the transactions .at issue .

'Although the first stipulation of facts that has been

lodged does not specify the exact number of euro distributed to

the Logan Trusts, it appears that the dollar value of the

distributed euro and their proceeds of sale realized onbehalf of

Mr . Logan before yearend 1999 amounted to less than $14,000 .

-13of Xerox Corp . from the Logan Trusts and sold those shares on

December 31, 1999, for $227,447 .36 .

The Batts Group LTD (The Batts Group), another partner

Tigers Eye unrelated to Mr . Logan, entered into and carried out

transactions in a pair of euro options with AIG and Tigers Eye

that were similar to the transactions of the Logan Trusts .

Curtis Mallet issued a 16-page opinion letter (the first

letter) and 122-page legal memorandum, both dated March 31, 2000,

to Mr Logan individually and as trustee of the Logan Trusts .

Curtis Mallet issued a separate 10-page opinion letter, also

dated March 31, 2000, on the subject of penalties, to Mr . Logan

and the Trusts .

By fax,'dated April 7, 2000, and letter, dated

November 6, 2000, Curtis . Mallet revised and supplemented the

first letter and the legal memorandum . In Mr . Logan's opposition

to respondent's motion in limine, Mr . Logan's counsel asserts

that Curtis Mallet provided the same analysis in two opinion

letters and a 122-page memorandum to all Tigers Eye partners "wh o

reported basis/`partnership item' and who face the 40 percen t

penalty" .

Mr . Logan and the Logan Trusts claimed an aggregate basis in

the Xerox Corp . shares of more than $27 million . This resulted

in a claimed aggregate loss on the sale of the shares of more

than $26 million, which Mr . Logan reported on his 1999 Federa l

income tax return as short-term capital losses, offsetting the

-14bulk of the long-term capital gains he reported on his same-year

direct and indirect sales of MLWL stock .

Respoadent timely sent Tigers Eye the FPAA in issue,

comprising (1) Letter 1830, Notice,of Final Partnership`

Administrative Adjustment, (2),Form 870-PT, Agreement for

Partnership Items and Partnership Level Determinations as to

Penalties, Additions to, Tax, and Additional Amounts, including a

Schedule of Adjustments, and (3) an exhibit A setting forth

respondent's various determinations . The schedule of adjustments

adjusted to zero the following five items :

A . Capital contributions (Sched . M-2, line 2)

.B . Distributions of property other'tha n

money (Sched . M-2, line 6b)

Outside

partnership

D . Other deductions (Sched .

basis

line

.$698,595

$365,446

$24,500,059

11)

(11,314)

Other income (loss) (Sched . K, line 7) (242,186)

Unlike items A, B, D, and E, each of which is identified a s

the adjustment of a line item on the Tigers Eye 1999 Form 1065,

U .S . Partnership Return of Income, the item C amount (Outside

partnership basis) does not appear on the partnership return, no r

can we trace it .to any entry on the Schedules K-1, Partner's

Share of Income, Credits, Deductions, etc ., to the partners, and

it does not tie into or relate to any item on the partnership

-15return of which we have been apprised .6 Items A and B are the

sums of the net amounts of property initially contributed and

later received as liquidating distributions by The Batts Group

and the Logan Trusts . It appears that the option premiums on the

purchased (long) options were netted against the option premiums

on the sold (short) options in arriving at the .gross amounts

shown on-the 1999 partnership return as having been contributed

by and distributed to The Batts Group and the Logan Trusts .

In exhibit A, respondent determined that :

1 . Neither Tigers Eye nor its purported partners

established its existence as a partnership as a matter of fact ;

2 . even if Tigers Eye existed as a partnership, it had no

business purpose other than tax avoidance, lacked economic

substance, and constitutes an economic sham for Federal income

tax purposes, so that the partnership and the transactions are

disregarded in full and any purported losses resulting from'the

transactions are not allowable as deductions and are not allowed

for Federal income tax purposes ;

3 . under section 1 .701-2, Income-Tax Regs ., Tigers Eye was

formed and availed of in connection with a transaction or

transactions in taxable year 1999, a principal purpose of whic h

6In a supplement to respondent's response to Mr . Logan's

motion, respondent asserts : "All partnership items that feed

into the Tigers Eye participants' outside bases in Tigers Eye ar e

properly raised by this line item

-16was to .reduce the present value of its partners' aggregate

Federal tax liability in a manner that is inconsistent with the

intentk'of subchapter K of the Internal Revenue Code ;

4 . the purported partners of Tigers Eye did not enter into

the option positions and Tigers Eye did not purchase the foreign

currency or stock with a profit motive for purposes of sectio n

165(c) (2) ;

5 ., even if the foreign currency options are treated .a s

having been contributed to Tigers Eye, the amount treated as

contributed by the partners under section 722 with respect to the

purchased options is reduced by the amounts received by the

contributing partners from the contemporaneous sales ofthe sold

options to the same counterparty, thus reducing the basis of the

contributed options in the hands of both Tigers Eye and the

contributing partners, so that any corresponding claimed, increases

in the outside bases in : Tigers Eye resulting . from the

contributions of the sold options are disallowed ;

6 . the adjusted bases of the purchased options .and other

property'purportedly contributed by the partners to Tigers Eye

have not been established under section 723 so that-the partners

of Tigers Eye have not established adjusted bases in thei r

respective partnership interests in an amount greater than zero ;

7 . in the case of a sale, exchange, or liquidation o f

Tigers Eye partners' partnership interests, neither the purported

-17partnership nor its purported partners have established . that the

bases of the partners '

partnership interests were greater than

zero for the purpose of determining gain or loss to such partners

from the sale ,

exchange ,

or liquidation of the partnership

interest ;

8 . accuracy - related penalties are determined at th e

partnership level and will ; be imposed at the partner level .

Sentinel, the tax matters partner, filed a petition durin g

the time it was entitled to do so as a notice partner . See

Barbados #6 Ltd . v . Commissioner , 85 T .C . 900, 903-905 (1985) .

Sentinel's petition assigned error to all of respondent's

determinations set forth in the FPAA . Respondent's answer

categorically denied all the assignments of error ; by amendmen t

to answer respondent advanced two additional theories, under

section 465(b)(4) and section 1 .988-2(f), Income Tax Regs .

The Court granted Mr . Logan, as trustee of Logan Trust I,

leave to file a notice to'participate in this proceeding . Banque

Safra, as well as Sentinel, has no stake in the outcome of this

proceeding . . The Batts Group settled its case with the Internal

Revenue Service (IRS) arising from the FPAA in'the case at hand

and also has no stake in the outcome .

Mr . Logan asserts that in reporting losses from th e

transactions at issue on his return, he relied on the advice o f

professionals, including two attorneys and a certified public

-18accountant, as well as the Curtis Mallet opinion . He wishes to

raise his reliance on that advice as adefense to the application

of accuracy-related penalties if we should sustain respondent's

determinations in the FPAA that either Tigers Eye or the Logan

Trusts' transactions with Tigers Eye should be disregarded so

that the accuracy-related penalties would otherwise apply .

Mr . Logan submitted to the Court and served on Sentinel and

respondent, .a notice of expert witness in which he identified Mr .

Smith as a witness who may aid the Court in evaluating whether

the Curtis Mallet opinion "i .s of the quality and character upon

which the Logan Trust could reasonably rely in preparing its-tax

returns" . A copy of "Petitioner's Expert Report of Stuart A .

Smith",(the Smith report) was attached to Mr . Logan's notice .

Mr . Logan would have the Smith report entered into evidence to

support his claim that his reliance on the Curtis Mallet opinion

was-reasonable .

On May 20, 2008, the first stipulation of facts, with

exhibits, was lodged with the Court . Included among those

exhibits were Exhibits 125-J, 126-J, 127-J, 128-J, and 130-J,

comprising copies of the Curtis Mallet opinion, as revised and

supplemented, and the 122-page .legal memorandum .

On September 26, 2008, the second stipulation of facts, with

exhibits, was lodged with the Court . Included among those

exhibits are copies of communications among representatives of

-19Sentinel and BDO Seidman and attorneys at Curtis Mallet that

would indicate that Curtis Mallet played a role in the

preparation of the forms of documents used to implement the,

transactions at issue . Mr . Logan asserts that he did not receiv e

a copy of any such communications included among such exhibits

before this litigation commenced .

Neither the first stipulation of facts nor the second

stipulation of facts nor any .document yet lodged or filed in thi s

proceeding refers to or includes a copy of any retainer agreemen t

between Mr . Logan and Curtis Mallet or to any Curtis Mallet..

opinion to The Batts Group nor to whether, when, and in what

circumstances Tigers Eye disposed of its interests an d

obligations in the paired options contributed and assigned to .

Tigers Eye by the Logan Trusts .

{

Discussio n

I .

TEFRA Procedures and Partnership Item s

The unified partnership audit and litigation procedures set

forth in sections 6221 through 6234 were originally enacted by

the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA ),'

Pub . L . 97-248, sec . 402(a), 96 Stat . 648 . TEFRA provisions

divide disputes arising from "partnership items"' from thos e

7Sec . 6231(a)(3) defines "partnership item" as :

with respect to a partnership, any item required to be!

taken into account for the partnership's taxable yea r

(continued . . .)

-20arising from "nonpartnership items" .'

Maxwell v . Commissioner ,

87 T .C . 783, 787 (1986) (citing section 6231(a)(3) and (4)) . If

the tax treatment of a partnership item is at issue, the statute

requires the matter to be resolved at the partnership level .

Sec . 6221 ;

Maxwell v . Commissioner ,

supra at 787-788 .

Partnership Item s

In a partnership-level proceeding the Court has jurisdiction

determine "all partnership items of . the partnership for th e

partnership taxable year to which the notice of final partnership

administrative adjustment relates, the proper allocation of such

items among the .partners ., and the applicability of any penalty,

addition to tax, or additional amount which relates to an

adjustment to a partnership item ." Sec . 6226(f) . "While TEFRA

defines a `partnership item' in technical terms, the provision

generally encompasses items `more appropriately determined at the

partnership level than .at the partner level"' .

States , 389 F .3d 152,

Weiner v . United

154 (5th Cir . 2004) .(quoting section

6231(a),(3)) . . The determination of partnership itemsin, ;a

partnership-level proceeding is binding on the partners and ma y

. . .continued)

under any provision of subtitle A to the extent

regulations prescribed by the Secretary provide that,

for purposes of this subtitle, such item is more

appropriately determined at the partnership level than

at the partner level .

8Sec . 6231(a)(4) defines the term "nonpartnership item" as

"an item which is .(or is treated as) not a partnership item ."

-21not be challenged i•n a later partner-level proceeding . Secs .

6230 (c) (4) , 7422 (h )

Affected Item s

The term "affected item " means

"any item to the extent such

item is affected by a partnership item ." Sec . 6231(a)(5) . An! .

affected item is by definition not a partnership item .

Dial USA ;

Inc . v . Commissioner , 95 T .C . 1, 5 (1990) . An affected item,"

rather than being universally applicable to every partner, is

peculiar to a particular partner's tax position .

Commissioner ,

Maxwell :v .

supra at 790 .

Affected items have two essential aspects . The first

involves a partnership issue and the second involves a

nonpartnership issue ; i .e ., the partner's personal items .

Partners must raise any partnership item that "affects" thei r

personal items at the partnership-level proceeding . See, e .g .,

GAF Corp . & Subs . v . Commissioner , 114 T .C . 519, 528 (2000) ;

Dubin v . Commissioner , 99 T .C . 325, 328 (1992) ;

Commissioner ,

supra

792-793 .

Maxwell v .

If a partner does not pursue his

rights in a partnership-level proceeding, he may not later seek a

redetermination of partnership items as .they relate to his

affected item in a later partner-level proceeding . See, e .g .,

GAF Corp . & Subs . v . Commissioner ,

supra at

526-527 .

After the partnership-level proceeding is concluded and the

partnership administrative adjustments have become final, the

-22Commissioner makes a "computational adjustment", a change in the

tax liability of a partner that .properly reflects the treatment

of a partnership item . See sec . 6231(a)(6) . If a computational

adjustment results in a deficiency in a partner's tax stemming

from an affected item that requires a factual determination at

the partner level, the normal deficiency procedures outlined in

sections 6212 and 6213 apply . Sec . 6230(a) ; sec . 301 .6231(a)(6) .

1T(a) . .(2), Temporary Proced . & Admin . Regs ., 64 Fed . Reg .-3840

(Jan . 26, 1999) .9 On the other hand, . if the computational .

adjustment of a partner's tax liability . can be made without

making any additional partner-level determinations, the

Commissioner may . directly assess . the change without issuing a

notice of deficiency . Sec . 6231(a)(6), (c) ;

N .C .F . Energy

Partners v . Commissioner , 89 T .C ., 741, 744 (1987) ; sec .

;

301 .6231(a)(6)-1T(a)(l), Temporary Proced . & Admin . Regs ., 64

Fed . Reg . 3840 (Jan . 26, 1999) . If the partner believes that the

computational adjustment was erroneous,'he may file a claim for

refund,after"payment, sec . 6230(c), .and, upon its denial, sue for

the refund in a District Court or the Court of Federal Claims .

C .

Penalties and Defenses to Penaltie s

Any penalty, addition : to tax, or additional, amount,:

(collectively penalty) related to adjustments stemming from a n

9With the exception of penalties . See infra pt' .

-immediately following .

-23adjustment to partnership items has generally been treated as an

affected item that often requires a factual determination at the

partner level . See N .C .F . Energy Partners v . Commissioner ,

supra

at 744 ; sec . 301 .6231(a)(5)-1T(d), Temporary Proced . & Admin

Regs ., 52 Fed . Reg . 6790 (Mar . . 5, 1987) . Before Congress enacte d

TRA 1997 the Court did not, have jurisdiction in a partnershiplevel proceeding to decide the applicability of partnership-ite m

penalties .10 See N .C . F . . Energy Partners v . Commissioner ,

supra ;

Crystal Beach Dev . of Destin Ltd . ., v . Commissioner , T .C . Memo .

2000-170 . Rather, partnership-item penalties were determined at

the partner level as affected items in a deficiency proceeding

after the related partnership-level proceeding had been

completed .

TRA 1997 section 1238(a) amended section 6221 to provide .,

that "the applicability of any penalty, addition to tax, or

additional amount which relates to an adjustment to a partnershi p

10The Taxpayer Relief Act of 1997 (TRA 1997), Pub . L .

105-34, sec . 1238, 111 Stat . 1026, amended the partnership

procedures regarding penalties by (1) amending sec . 6221 to

require the applicability of any partnership-item penalty to be

determined at the partnership level, (2) amending sec .

6230(a)(2)(A)(i) to exclude partnership-item penalties fromithe

deficiency proceeding, and (3) amending sec . 6230(c)(4) making

conclusive the partnership level determination regarding the

applicability of any partnership-item penalty but allowing the

partner to assert in a refund claim any "partner-level" defenses .

-24item"-be determined at the partnership level ." Although the

applicability of a penalty usually requires consideration of any

defenses to the penalty, section 301 .6221-1T(c) and (d),

Temporary Proced . & Admin . Regs ., 64 Fed . Reg . 3838 (Jan . 26,

1999), prohibits "partner level defenses" to any partnership-item

penalty from being litigated in the partnership-level proceeding

and allows such a penalty attributable to the treatment of

partnership items to be assessed as a computational adjustment

irrespective of whether partner-level determinations are

required . A partner who wishes to assert a partner-level defense

to such a penalty must do so in a separate refund action

following assessment and payment . Sec . 6230(c) ; sec . 301 .62211T(d), Temporary Proced . & Admin . Regs .,

supra .12 Althoug h

"In its report underlying the amendments, the House

Committee on Ways and Means explained that it had proposed the

amendment because :

Many penalties are based upon the conduct of the

taxpayer . With respect to partnerships, the relevant

conduct often occurs at the partnership level . In

addition, applying penalties at the partner level

.through the deficiency procedures following the

conclusion of the unified proceeding at the partnership

level increases the administrative burden on the IRS

and can significantly increase the Tax Court's

inventory . [H . Rept . 105-148, at 594 (1997), 1997-4`

C .B . (Vol . 1) 319, 916 . ]

12The temporary regulation is consistent with the

legislative history . The House committee report explained that

the proposed amendment "provides that the partnership-level

proceeding is to include a determination of the applicability of

penalties at the partnership level . . However, the provisio n

(continued . . .

-25partner-level defenses maybe raised only in a refund action,

defenses to any penalty that are not partner-level defense's must .

be determined in the partnership-level proceeding . See, e .g . ,

Klamath Strategic Inv . Fund, LLC v . United States ,

F .3d .

(5th Cir ., May 15, 2009) (slip op . at 14-16) (considering

reasonable cause and good faith defenses at partnership level by

looking to actions of managing member), affg . in part, vacating

in part, and remanding 472 F . Supp . 2d 885, 902-904 (E .D . Tex .

2007) ;

Whitehouse Hotel Ltd . Pship . v . Commissioner , 131 T .C .

(2008) (reasonable cause exception for qualified appraisal in

section 6664(c)(1) is a partnership-level defense) ;

Pictures, LLC v . Commissioner , T .C .

Santa Monic a

Memo . 2005-104 (looking t

actions of partnership through managing member in considering

partnership ' s reasonable cause and good faith defenses ) ;

Creek Invs ., LLC v .

United States ,

82 Fed .

Stobie

C1 . .636 (2008)

(partnership - level reasonable cause defense to any of the

penalties under section 6664 ( c)) ;

States , 80 Fed .

Cl .

Jade Trading , LLC v .

Unite d

11, 60 (2005) (partnership's reasonable cause

defenses were not raised and, therefore, were not considered by

the court) ;

Long Term Capital Holdings v . United States , 330 F .

Supp . 2d 122, 205-212 (D . Conn . 2004) (considering partnership' s

12 ( .

. .continued)

allows partners to raise any partner-level defenses in a refund

forum ." H . Rept . 105-148, at 594 (1997), 1997-4 C .B . (Vol . 1)

319, 916 .

-26reasonable cause and good faith defenses at partnership level by

looking to actions of general partner), affd . 150 Fed . Appx . 40

(2d Cir ; . 2005) ; see also sec . 301 .6221-1T(c), Temporary Proced . &

Admin .Regs .,

supra

(partnership=level determinations include all

legal and factual determinations underlying the determination of

partnership-level penalties, including partnership-level-defense s

but not partner-level defenses) .

D. .

Exceptions to Application of TEFRA Procedures "

For completeness and to prepare for concluding observations

in the Afterword about problems of judicial administration

created by TRA 1997 and the temporary regulation, we note two

circumstances under section 6231 in which what would have

otherwise been partnership items may be treated as nonpartnership

items . In these circumstances, application of the TEFRA

procedures may be avoided so that the traditional deficiency and

assessment procedures will apply to both deficiencies and

penalties .

Under section 6231(a)(1)(B), there is an exception for small

partnerships (having fewer than .10 partners, each of whom is a

U .S . resident individual, C corporation, or estate of adecedent

partner) . Although Tigers Eye had fewer than 10 partners, it was

purportedly owned by a number of passthrough entities, and so it

did not qualify for the exception and remained subject to TEFRA .

See Primco Mgmt . Co . v . Commissioner , T .C . Memo . 1997-332 ; Rev .

-27Rul . 2004-88, 2004-2 C .B . 165 . Son-of-BOSS partnerships with

fewer than 10 .par .tners, for, the most part, but not invariably,

see New Phoenix Sunrise Corp . & Subs . v . Commissioner , 132 T .C .

(2009), do not qualify for the small partnership exception

because individuals participating in the transaction use

disqualified entities such as grantor trusts and LLCs to hold

their interests and other disqualified persons such as foreign .

individuals or entities are partners . As we observed in New 'Phoenix Sunrise Corp . & Subs . v . Commissioner ,

supra at

n .3

(slip op . at 20) (quoting Wadsworth-v- .- Commissioner , T .C . Memo .

2007-46), "'The small partnership exception permits this Court t o

review in a deficiency suit items that otherwise would be subject

to . partnership-level proceedings'" . .

Under section 6231(c) the Secretary is authorized to

promulgate regulations with respect to special enforcement areas .

Partnership items may be treated as nonpartnership items under

section 6231(c) if by such regulations the Secretary determines ,

and provides that to treat such items as partnership items will

interfere with the effective and efficient enforcement of the

revenue laws . Special enforcement areas mentioned in section

6231(c)(1) include (A) termination and jeopardy assessments, (B)

criminal investigations, (C) indirect methods of proof of income,

(D) foreign partnerships, and (E) "other areas that the Secretary

determines by regulation" . Among such areas that have been

-28designated by regulation, in addition to those specified in

section 6231(c)(1),13 are bankruptcy and . receivership, sec .

301 .62.31(c) .-7, Proced . & Admin . Regs ., and requests for ;prompt

assessment, sec . 301 .6231(c)-8, .Proced . & Admin . Regs .

The following comment appears in 1 . McKee et al ., Federal

Taxation of Partners and Partnerships, par . 10 .02[4], at 10-16

(4th ed . 2007) :

Converting partnership items to nonpartnership

items may have the salutary effect of freeing the

Service and the partnership from the potentially

cumbersome procedures of the partnership audit rules in

. .appropriate cases . * * *

February 12, 2009, the Secretary proposed regulation s

that would determine that treating items related to listed

transactions within the meaning of section 1 .6011-4(b)(2), Income

Tax Regs ., as partnership items "interferes with the effective

and efficient enforcement of the internal revenue laws" . Notice

of proposed rule making, 74 Fed ."Reg . 7206 (Feb . 13, 2009) . In

Notice 2000-44,

supra , 2000-2 C .B . at 256, the IRS had announced

that Son-of-BOSS transactions using the paired-option partnership

contribution/disposition arrangement are "listed transactions" .

However, the proposed regulations would not become effective

until adopted as final regulations, applicable to partner taxable

years ending on or after the date of-publication of the propose d

13No such'designation has been made by regulation with

respect to foreign partnerships .

-29_

regulations in the Federal Register . Sec . 301 .6231(c)-9(c),,

Proposed Proced . .& Admin . Regs ., 74 Fed . Reg . 7208 (Feb . 13, :

2009) . Under the proposed regulations, as under the current

regulations related to designated enforcement areas, the

conversion of partnership items to nonpartnership items would

occur only if the Commissioner sent a written notice to that

effect to a partner before issuing an FPAA . A hearing was set

for June 4, 2009, and comments were requested by May 14 .

II .

Petitioner's Motion To Invalidate Temporary Regulation

We now turn to Mr . Logan's motion for partial summary

judgment that section 301 .6221-1T(c) and (d), Temporary Proced . &

Admin . Regs .,

supra,

is invalid because it would prevent him from

interposing his partner-level defenses to accuracy-related

penalties in this partnership-level proceeding .

The issue is important . It not only has implications for

taxpayer rights ; it has practical consequences for judicial

administration generally and the conduct of the trial in the case

at hand, . and also--as we shall see--for resolution of

respondent's motion in limine .

Mr . Logan's counsel represented the taxpayer in Jad e

Trading

.LLC v . United States , 80 Fed . Cl . 11 (2007) on appeal

(Fed . Cir ., Feb . 25, 2008),19 another Son-of-BOSS case o f

"In Evergreen Trading, LLC v . United States , Fed . Cl .

06-123T, involving another Sentinel-promoted Son-of-BOS S

(continued . . .

-30transactions promoted by Sentinel that appears to follow the same

format as New Millennium Trading, LLC v . Commissioner , 131 T .C . _

(2008), and the case at hand . In Jade Trading , there was a 3week trial that was devoted in large part to the introduction of

evidence of the participating partners' alleged due diligence and

good faith reliance .on financial and tax advisers .

In Jade Trading , Judge Williams first held, on the'merits,

that the paired-option transactions lacked economic reality,

notwithstanding her view, under Helmer v . Commissioner , T .C .

Memo . 1975-160, and its offspring, that the obligations to

satisfy the sold call options assigned to and assumed by the

partnership would not be considered liabilities under section

752 .15

Second, Judge Williams determined that the partnership-level

elements for the application of the 40-percent gross valuation

misstatement penalty and other accuracy-related penalties had all

been satisfied because the transaction was an abusive ta x

14( . . .continued)

partnership, Judge .Allegra, in an order dated Sept . 23, 2008, has

stayed all further proceedings pending final resolution on appeal

of Jade Trading, LLC v . United States , 80 Fed . Cl . 11 (2 007) .,

Previously, Judge Allegra had issued Evergreen Trading, LLC v .

United States , 80 Fed . Cl . 122 (2007), a detailed and

comprehensive opinion (21 single-spaced pages and 20-pag .e

appendix), granting in part and denying in part the Government's

motion to compel production of more than 140 documents that

plaintiff had withheld from discovery . See also Nussdorf v .

Commissioner , 129 T .C . 30 (2007) .

15See

supra note 2 .

-31shelter .

In Jade Trading , LLC v .

176 (2008 ),

United States ,

81 Fed . Cl . . 173,

denying Sentinel ' s motion for reconsideration, Judge

Williams stated that the penalties that the Court had determined

clearly related t o

the inflated basis [that] the spread transaction in the

partnership generated on the * * * [partners']

individual returns * * *

* * * it was only the construct of forming the partnership_

and contributing the .spread to the partnership that i

,permitted the tax losses to be realized . Had th e

* * * [partners] simply done the spread transactions on

their own without contributing them to * * * [the

partnership] there would have been no substantial losses .

As the Court recognized : " packaging the investment in the

partnership, vehicle was an absolute necessity for securing

Jade [Trading ], 80 Fed . Cl . at 14 .

the tax benefits . "

[Emphasis supplied . ]

Third, Judge Williams . . upheld the validity of the temporary

.regulation . Notwithstanding that a .substantial part of the, Jade

Trading trial had been devoted to the introduction of evidence to

support the participating partners' defenses to the penalties,

Judge Williams held that the temporary regulation was valid~iand

prevented the Court from considering those defenses . As a

result, if Jade Trading should be affirmed on the pending appeal

to the Court of Appeals for the Federal Circuit, the Commissioner

will be able to assess by 'computational adjustments not only the

deficiencies (only some part of which has already been paid) bu t

also the 40-percent penalties, and the participating partners

will be required to file claims and suits for refund in order to

obtain judicial review of their partner-level defenses/claims for

-32refund of the penalties . To similar effect is

Invs .,'LLC .v . United States , 82 Fed .

Cl .

Stobie Creek

636 (2008) (Court of

Federal :'',Claims held partnership, through its managing partner,

did not act with reasonable cause and good faith in regard to tax

underpayment so as to preclude accuracy-related penalties) on .

appeal (Fed . Cir ., Sept . 29, 2008) . But compare Klamat h

Strategic Inv . Fund , LLC v .

United States ,

F .3d at

(slip op . at 21-23) (Court of Appeals affirmed District Court's

holding that penalties did not apply because managers of

partnership reasonably relied on advice of professionals, but

reversed District Court's ordering a refund because District

Court did not have jurisdiction to grant refund in partnershiplevel proceeding) .

In New Millennium Trading, LLC v . Commissioner ,

supra , thi s

Court, on the participating-partner-tax-matters-partner's motion

for partial summary judgment, has held that the temporary

regulation is valid and applicable to prevent the participating

partner from interposing his partner-level defenses in the

partnership-level proceeding if the Court should sustain th e

Commissioner's FPAA determinations that the partnership or the

participating partner's transactions with the partnership shoul d

be disregarded . We are bound to follow New Millennium Trading ;

we shall therefore deny Mr . Logan's motion for partial summary

judgment .

-33III .

Respondent's Motion in Limine ,

Mr . Logan asserts that he and the Logan Trusts reasonably

relied on the Curtis Mallet.,opinion in taking their return

positions that (1) their obligations under the sold options did

not reduce the bases of their partnership interests in Tigers Eye .

and (2) in the liquidation of their partnership interests they

received high-basis assets whose sales created capital losses

that offset the long-term capital gains Mr . Logan realized

earlier in 1999 on the sales of MLWL shares .

Reasonable Cause Defense to Accuracy-Related Penalties .

Section 6664(c)(1) provides a reasonable cause defense to

application of accuracy-related penalties . Pursuant to section

6664(c)(1), the accuracy-related penalty under section 6662(a)

does not apply to any portion of an underpayment if the taxpaye r

shows that there was reasonable cause for, and that he acted i n

good faith with respect to, such portion . See Higbee v .

Commissioner , 116 T .C . 438,- 448-449 (2001) ; sec . 1 .6664-4(a),

Income Tax Regs . The determination of whether the taxpayer acted

with reasonable cause and in good . faith depends on the pertinent

facts and circumstances . Sec . 1 .6664-4(b)(1), Income TaxRegs .

"Generally, the most important factor is the extent of the

taxpayer's effort to assess the taxpayer's proper tax liability .

Circumstances that may indicate reasonable cause and good faith

-34include * * * the experience, knowledge, and education of . th e

taxpayer."

Id .

Under some circumstances, a taxpayer may avoid liability for

the accuracy-related penalty by showing reasonable reliance on a

competent professional adviser . See United States v . Boyle , 469

U .S . 241, 250-251 (1985) ;

Freytaq v . Commissioner , 89 T .C . 849,

888 (1987), affd . 904 F .2d 1011 (5th Cir . 1990), affd . .501 U .S .

868 (1991) . For reliance on professional advice to excuse a

taxpayer-from negligence, the taxpayer must show that the

professional had the requisite expertise, as well as knowledge of

the pertinent facts, to provide informed advice on the subject

matter .--See David v . Commissioner , 43 F,3d 788, 789-790

1995), affg . T .C . Memo . 1993-621 ;

Freytaq v . Commissioner ,

(2d Cir .

supra

at 888 . The validity of the reliance turns on "the quality and

objectivity of professional advice which they obtained" .

Swayze

v . United States , 785 F .2d 715, 719 (9th Cir . 1986) .

"In order for reliance on professional tax advice to be

reasonable, however, the advice must generally be from a

competent and independent advisor unburdened with a conflict of

interest and-not from promoters of the investment ."

Mortensen v .

Commissioner , 440 F .3d 375, 387 .(6th Cir . 2006), affg . T .C . Memo .

2004-279 . Courts have routinely-held that taxpayers could not

reasonably rely on the advice of promoters or other advisers with

an inherent conflict of interest such as one who financially

-35benefits from the transaction . See, e .g .,

Goldman v .

Commissioner , 39 F .3d 402, 408 (2d Cir . 1994) (taxpayer could not

reasonably rely on professional advice of someone known to be

burdened with an inherent conflict of interest--a sales

representative of transaction), affg . T .C . Memo . 1993-480 ;

Pasternak v . Commissioner , 990 F .2d 893, 903 (6th Cir .

1993)

(reliance on promoters or their agents is unreasonable . because

such persons-are not independent of the investment), affg . T .C .

Memo . 1991-181 ;

Illes v . Commissioner , 982 F .2d 163, 166 (6th

Cir . 1992) (finding negligence where taxpayer relied on person

with financial interest in the venture), affg . T .C . Memo .

1991-449 ; see also Hansen v . Commissioner , 471 F .3d 1021, 1031

(9th Cir . 2006) ("a taxpayer cannot negate the negligence penalty

through reliance on a transaction's promoters or on other

advisors who have a conflict of interest"), affg . T .C . Memo .

2004-269 ;

Van Scoten V . Commissioner , 439 F .3d 1243, 1253 (10th

Cir . 2006) ("To be reasonable, the professional adviser cannot be

directly affiliated with the promoter ; instead, he must be more

independent"), affg . T .C . Memo . 2004-275 ;

Barlow v . Commissioner ,

301 F .3d 714, 723 (6th Cir . .2002) (noting "that courts have foun d

that a taxpayer is negligent if he puts his faith in a schem e

that,'on its face, offers improbably high tax advantages, withou t

obtaining an objective, independent opinion on its validity"),

-36affg . T .C . Memo . 2000-339 . A promoter's self-interest makes such

."advice" inherently unreliable .

B. .

Respondent's Position in Motion in Limin g

Mr . Logan . identified Mr . Smith as a witness whose testimony

and expert ; report might aid the Court in evaluating whether the

Curtis Mallet opinion "is of the quality and character upon which

the Logan Trust could reasonably . rely in preparing its tax

returns" . Respondent filed respondent's motion in limine .to

exclude . the Smith report and filed a supplement to the motion .

Respondent advances two alternative,g .rounds for excluding

the Smith report from evidence in its entirety : (1) The Smith

report relates solely to Mr .,Logan's partner-level defenses that

cannot not be raised in this partnership-level proceeding under

section 301.6221-1T(c) and (d), Temporary Proced . & Admin .- Regs .,

sura ; and .,(2) the Smith report expresses legal conclusions . If

we should reject both alternatives,, respondent asserts that

portions of the Smith report'should be excluded because they

constitute advocacy 1 6

16 .With respect to respondent's argument about advocacy, we

observe that Mr . Smith successfully represented the plaintiffs in

a partner-level'proceeding, Allison v . United States , 80 Fed . Cl .

568 (2008), in establishing their rights to refunds of negligence

penalties assessed against them because of deductions and credits

they claimed from their participation in a plastics recycling

partnership that had been determined in a partnership-level

proceeding to be an abusive tax shelter .

-37Respondent has also taken the position that Curtis Mallet .

was a promoter of the transactions in issue=and that the status

of Curtis Mallet as a promoter of Tigers Eye should be determined

in this partnership-level proceeding .17 Mr . Logan filed an

opposition to respondent's motion in limine, and respondent filed

a reply to the opposition by Mr . Logan to respondent's motion in

limine as supplemented .

There seems to be incongruity between respondent's positio n

that Mr . Logan's alleged reliance on the Curtis Mallet opinion i s

a partner-level defense over which we lack jurisdiction in thi s

partnership-level proceeding and respondent's assertion that in

this same proceeding . we should determine that Curtis Mallet was

one of the promoters of the transactions in .issue on whos e

opinion Mr . Logan was not .entitled to rely . We therefore

consider whether we have jurisdiction in this partnership-level

proceeding to decide whether Curtis Mallet was a promoter because

it relates to the issue of raising defenses to partnership-ite m

penalties in this proceeding .

"Respondent served notice (in n .7 of respondent's response

to Mr . Logan's motion for partial summary judgment to declare the

temporary regulation invalid) that respondent asserts that (1)

Curtis Mallet was one of the promoters of the transactions in,

issue ; (2) as a matter of law, citing sec . 6664(d), a partner,

cannot reasonably rely on the opinion issued by a promoter, and

(3) we should address the status of Curtis Mallet as a promoter

in this partnership-level proceeding .

-38Status as-Promoter of Partnershilp .De.termined-in

Partnership-Level' Proceedin g

.In the FPAA respondent determined, inter alia, that Tigers

Eye should be disregarded for Federal income tax purposes because

it "had no business purpose other than tax avoidance, lacked

economic substance, and constitutes an economic sham for Federal

income tax purposes" . A "partnership item" includes "the legal

and factual determinations that underlie the determination of th e

amount, timing, and characterization of items of income, credit ,

gain, loss, deduction, etc ." Sec . 301 .6231(a)(3)-l(b),'Proced .

& Admin. Regs . Among such determinations are whether partnership

activities have been engaged in with the intent to make a profit

for purposes of section 183 .

Id . 18 The characterization of

partnership as a sham or as lacking economic substance is a lega l

determination .that directly bears on the amount an d

characterization of items of income, credit, gain, loss,

deduction, etc . and falls within the definition of partnershi p

item .

Petaluma FX Partners , LLC v .

(2008 ) ;