UNITED STATES TAX COURT

ALS

T.C. Memo. 2017-26

UNITED STATES TAX COURT

BASIC ENGINEERING, INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 27691-13.

Filed February 1, 2017.

L. Don Knight and Aaron P. Lloyd, for petitioner.

Bettina M. Nadler, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARIS, Judge: In a notice of deficiency dated August 22, 2013, respondent

determined Federal income tax deficiencies of $8,670,933.19 and $266,567.82 and

SERVED Feb 01 2017

-2[*2] accuracy-related penalties under section 6662(a) of $1,734,186.64 and

$53,313.56 for petitioner's 2009 and 2010 taxable years, respectively.¹

The issues for decision are whether petitioner is: (1) eligible to account for

two of its contracts using the completed contract method of accounting and (2)

liable for accuracy-related penalties.

FINDINGS OF FACT

Some of the facts are stipulated and are so found. The first stipulation of

facts and the first supplemental stipulation of facts, and the exhibits attached

thereto, are incorporated herein by this reference. Petitioner, Basic Engineering,

Inc., was a Texas corporation with its principal place of business in Texas when it

timely filed its petition.

I.

Overview of the Parties

Petitioner's primary business is the engineering, designing, procuring,

refurbishing, and delivering of crude oil processing and refining systems to

customers in the petrochemical industry worldwide. Thomas Balke owned 51% of

petitioner and James Smith owned 49%; Mr. Balke and Mr. Smith also owned

Basic Equipment, Inc. (Basic Equipment), another Texas corporation, in the same

¹Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for the years at issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

-3[*3] respective percentages. Mr. Balke was the president of both corporations

during the years in issue. Mr. Balke has over 30 years of experience in working

with oil refineries and refinery equipment; his international oil refinery business

experience first occurred in 1977.

This case concerns the accounting treatment for tax purposes of two of

petitioner's contracts that were ongoing in 2009 and 2010: (1) petitioner's

contract with Petromaxx Energy Group GmbH, later known as Petromaxx Energy

Group GmbH & Co KG, and later as Tagore Investments S.A. as universal

successor (collectively Petromaxx); and (2) petitioner's contract with Amber

Energy S.A. (Amber). Since its incorporation in 2004 petitioner has accounted for

its long-term contracts using the completed contract method of accounting.

Respondent's determinations that petitioner was ineligible to use the completed

contract method of accounting for the Petromaxx and Amber contracts led to the

deficiencies at issue.

II.

The Petromaxx Contract

A.

Basic Equipment-Petromaxx Agreement

Petitioner and Basic Equipment maintained relationships with salespersons

working outside the United States who searched for potential customers on their

behalf. In 2004 a salesman contacted a Basic Equipment representative to inform

-4[*4] him that the international entity Petromaxx was interested in building a small

oil refinery in Bulgaria with a 10,000 to 15,000 barrel per day (BPD) crude oil

topping unit. Mr. Balke, acting on behalf of Basic Equipment, offered to build

Petromaxx a new refinery, but Petromaxx wanted a refinery that was readily

available and wanted petitioner to find an existing refinery, disassemble it, and

refurbish various parts according to Petromaxx's specifications. The newly

refurbished parts would then be reconstructed into a new refinery at Petromaxx's

preferred international location.

Representatives for Basic Equipment and Petromaxx visited an existing oil

refinery in Nixon, Texas (Nixon refinery), that had equipment similar to the

equipment Petromaxx had initially described. After visiting the refinery Basic

Equipment made a proposal to refurbish the refinery's parts and sell them to

Petromaxx, which would then construct an operating refinery. Basic Equipment

and Petromaxx ultimately reached an agreement on December 4, 2005 (Nixon

equipment agreement).

Under the terms of the Nixon equipment agreement, Basic Equipment

agreed to: design and manufacture one new 10,000 BPD atmospheric crude unit

and one reconditioned 17,000 BPD crude topping unit; provide Petromaxx with

designs and flow diagrams necessary to operate and perform maintenance on the

-5[*5] crude units; provide Petromaxx with plant operation manuals; and supervise

the commissioning of the crude units once they were assembled. In exchange,

Petromaxx agreed to pay Basic Equipment $21.5 million; Petromaxx initially paid

Basic Equipment $6,450,000 as a deposit on December 23, 2005.

Early in 2006 Petromaxx determined that it needed to build a larger

production capacity refinery than the Nixon refinery could provide and withdrew

the previous agreement.

B.

Petitioner-Petromaxx Sale and Purchase Agreement

1.

Background

After determining that the Nixon refinery would not meet its production

capacity needs, Petromaxx provided Mr. Balke with new scope of work

requirements. In an effort to find a refinery that would meet Petromaxx's

production capacity requirements, Mr. Balke and a Petromaxx representative

visited a larger refinery with a 50,000 to 55,000 BPD capacity in California

(Cenco refinery). After examining the Cenco refinery, Mr. Balke offered to

refurbish and sell the refinery's parts to Petromaxx, which would then construct an

operating refinery. At some point Mr. Balke made the decision to transfer the

-6[*6] order from Basic Equipment to petitioner.2 Basic Equipment transferred to

petitioner Petromaxx's original $6,450,000 Nixon refinery deposit in installments

of $3 million on February 8, 2006, $3 million on March 8, 2006, and $450,000 on

March 28, 2006.

On March 22, 2006, petitioner purchased the Cenco refinery from JAS

Marketing, Inc. (JAS), for $18.9 million for use in the Petromaxx project.

Petitioner agreed to make its first payment to JAS on or before March 22, 2006,

with subsequent payments due monthly through August 22, 2007.

2.

Sale and Purchase Agreement

Before executing a formal agreement, Petromaxx transferred to petitioner

$10,750,000 in addition to the $6,450,000 deposit Petromaxx paid to Basic

Equipment, which was subsequently transferred to petitioner. The advanced funds

were paid to petitioner in two equal installments of $5,375,000 on May 22 and

September 1, 2006.

On October 28, 2006, petitioner and Petromaxx executed a "Sale and

Purchase Agreement" (Petromaxx SPA) whereby Petromaxx agreed to purchase

certain crude oil processing units from petitioner. The Petromaxx SPA required

2The exact date on which Mr. Balke made the decision to transfer the order

is not in the record.

-7[*7] petitioner to refurbish the oil processing units and to provide Petromaxx with

engineering specifications that Petromaxx would use to install the newly

refurbished units and construct an operating refinery.3 Once the Cenco refinery

was broken down and the necessary parts refurbished, petitioner was responsible

for delivering the refurbished units to its facility in Houston, Texas, and

Petromaxx was responsible for shipping the refurbished units from there to

Bulgaria. Petromaxx was also responsible for creating the refinery site in Bulgaria

and erecting and installing the newly refurbished units into a refinery. Once

Petromaxx had erected and installed the refurbished units, petitioner was required

to supervise the commissioning4 of the newly erected units. Upon successful

3Petitioner subcontracted the engineering work to MM In 576enjering

LTD.

(Montmontaza), a subsidiary of Montmonta 576a

PLC, a Croatian company, via an

agreement executed by the parties on January 9, 2007 (Montmontaza agreement).

Montmontaza was responsible for providing the information that Petromaxx

would need to construct the refinery in Bulgaria. To satisfy its responsibilities,

Montmontaza was to produce as-built documentation of the existing Cenco

refinery in its standing condition in Califomia and check the then-existing plant

configuration against the future Bulgaria refinery site location. Doing so would

allow Montmontaza to produce the documentation that would be necessary for

Petromaxx to reconstruct the refurbished Cenco refinery in Bulgaria.

4The Petromaxx SPA defined commissioning as "a set of activities that shall

be performed by BUYER's personnel as Supervised by BASIC's on site field

engineer and witnesses by Qualified Engineer at BUYER's Location in order to

determine that the Facility can be properly and safely operated in accordance with

the Technical Standards promptly after mechanical completion and pre-commis(continued...)

-8[*8] commissioning of the refinery, a qualified engineer would conduct

performance tests and issue a "final acceptance report and certificate" upon

successful testing. At that point, petitioner would have fulfilled all of its

obligations under the Petromaxx SPA and Petromaxx would assume full

responsibility for the refinery and its operation. In consideration for a complete,

satisfactory, and timely performance by petitioner of all of its obligations under

the Petromaxx SPA, Petromaxx agreed to pay petitioner $90.5 million.5

The Hardt Investment Group, headquartered in Vienna, Austria, controlled

the underlying funding of Petromaxx, and the parties negotiated the following

governing law provision in section 19.3.1 of the Petromaxx SPA:

This Agreement shall be governed by, and construed in accordance

with, the laws of the Republic of Austria including the UN

Convention on Contracts for the International Sale of Goods of 1980

(CISG). The Parties' rights and obligations with respect to title to

and security interests in the Equipment shall be governed by the law

of the jurisdiction in which such Equipment is located.

4(...continued)

sioning of the Facility".

5The total contract price included the $17.2 million previously paid to

petitioner--the $6,450,000 deposit paid to Basic Equipment (and transferred to

petitioner) and the two payments of $5,375,000 paid directly to petitioner.

-9[*9]

3.

Amendment to Petromaxx SPA

After executing the Petromaxx SPA, Petromaxx once again determined that

it wanted to increase the capacity of its refinery. On October 6, 2007, almost one

year after the original contract was executed, petitioner and Petromaxx executed

an amendment to the Petromaxx SPA whereby petitioner agreed to refurbish

additional equipment that would allow Petromaxx to meet its capacity

requirements. Petromaxx agreed to pay an additional $31,750,000 to petitioner for

the additional equipment, bringing the total contract price to $122,250,000. In

October of2007, at the time the parties executed the amendment to the Petromaxx

SPA, Petromaxx had made payments to petitioner totaling $72.4 million.6

C.

Timeframe

For purposes of accounting for the Petromaxx contract, petitioner's estimate

of the time the contract would take to complete is important. The Court will look

to the terms of the Petromaxx SPA and will consider testimony from Mr. Balke

and respondent's expert witness, John Harris.

6The parties executed subsequent amendments to the Petromaxx SPA

through August 13, 2008, but the subsequent amendments did not adjust the total

contract price.

- 10 [*10]

1.

Petromaxx SPA

With respect to the Petromaxx project's expected timeframe, section 3.2.2.

of the Petromaxx SPA provided:

Agreed Project Schedule. BASIC shall commence * * * [its work] in

accordance with the project schedule and management plan set forth

in Exhibit 3.2.2 (the "Preliminary Project Schedule"). Within one (1)

month after signing this Agreement, BASIC shall submit, for

BUYER's review and approval, an updated and more detailed

schedule (as approved by Qualified Engineer and by BUYER, the

"Agreed Project Schedule") amending the Preliminary Project

Schedule which sets forth the timing of completing the [Cenco

refinery] Units and of all other major elements of * * * [petitioner's

obligations] as well as the interrelationship of such elements. Dates

included in the Agreed Project Schedule shall be the best estimates

available at the time of submission of the Agreed Project Schedule

but shall not be guaranteed dates of delivery or achievement of listed

milestones or objectives, except that Delivery of the last [Cenco

refinery] Unit is guaranteed to occur no later than twelve (12) months

after the signing of this Agreement.

Exhibit 3.2.2 to the Petromaxx SPA--the "Preliminary Project Schedule"--stated:

"[to be provided by BASIC]"; the rest of the page was blank. Petitioner did not

introduce into evidence a document purporting to be the preliminary project

schedule that it was to provide or an amended project schedule.

Although the Petromaxx SPA did not contain a project schedule, it required

petitioner to "use its best efforts" to deliver the last refurbished unit to its facility

in Houston, Texas, by April 30, 2007; however, if petitioner failed to deliver the

- 11 [*11] last unit by April 30, 2007, the Petromaxx SPA did not provide for penalties.

If petitioner failed to deliver the last unit on or before September 12, 2007,

petitioner would default under the terms of the Petromaxx SPA.7 These delivery

dates are the only performance dates specified in the Petromaxx SPA.8

7Specifically, section 3.2.1 of the Petromaxx SPA provided:

BASIC shall use its best efforts to Deliver the [Cenco refinery] Units

listed as Phase One and as Phase Two in the Equipment Ledger

within five (5) months after signing of this Agreement. BASIC shall

use its best efforts to Deliver all other Units on or prior to the date

corresponding to such Unit set forth in the Project Schedule, and in

any event on or prior to April 30, 2007. The failure of BASIC to

deliver such Units on the foregoing dates shall not constitute a default

under this Agreement unless BASIC fails to use its best efforts.

Notwithstanding the foregoing, it shall be a default under this

Agreement if BASIC fails to Deliver the last Unit on or prior to

September 12, 2007 ("Final Delivery Date").

Section 8.4 of the Petromaxx SPA provided that petitioner "shall diligently pursue

the performance of * * * [its work] and will achieve Delivery of all Equipment on

or prior to September 12, 2007".

Sections 3.2.1 and 8.4 of the Petromaxx SPA conflict with section 3.2.2

with respect to the delivery of the units, as sections 3.2.1 and 8.4 state that

delivery of the last unit will occur on or before September 12, 2007, while section

3.2.2 states that delivery of the last unit will occur no later than 12 months after

the signing of the SPA on October 28, 2006. This inconsistency does not affect

the Court's determination with respect to the two-year rule discussed infin.

"The Montmontaza agreement also appears to coincide with the delivery

timeline specified in the Petromaxx SPA, as Montmontaza anticipated having all

drawings and documents completed by the middle of September 2007.

- 12 [*12] Importantly, the Petromaxx SPA did not include terms requiring Petromaxx

to ship the refurbished units from Houston, Texas, to Bulgaria by a specific date,

begin or finish creating the refinery site by a specific date, or begin or finish

installing and erecting the newly refurbished units into a refinery by a specific

date. Petitioner did not offer into evidence any documentation reflecting dates by

which petitioner or Petromaxx expected Petromaxx to begin or finish its

obligations.

Section 9.4.1 of the Petromaxx SPA provided: "Immediately after

notification that the erection and installation of the * * * [refinery site] has been

properly performed and completed, BASIC shall Supervise * * * [Petromaxx's]

personnel in Commissioning of the Facility." After successful commissioning, a

qualified engineer would conduct performance tests which "must in any case be

completed within sixty (60) days, or such other period as may be agreed in writing

by the Parties, from the date on which Commissioning has commenced." Once the

qualified engineer was satisfied that the performance tests showed that the newly

installed and erected refinery met certain standards, he would issue a report. At

that point, petitioner would have fulfilled all of its obligations under the

Petromaxx SPA. The Petromaxx SPA did not contain an overall project

completion date.

- 13 [*13] With respect to the terms of payment, the Petromaxx SPA indicates that the

parties anticipated the final payment to become due on the earlier of: (1) 10

months after the "Final Delivery Date", which was September 12, 2007, or (2) the

"Final Acceptance Date", which was the date that the qualified engineer issued a

completion report.

Because the Petromaxx SPA did not specify dates by which Petromaxx

would ship the refurbished units, finish creating the refinery site, or finish

installing and erecting the newly refurbished units into a refinery, it is unclear

exactly when the parties expected the Petromaxx SPA to be completed.

2.

Mr. Balke's Testimony

Mr. Balke testified that 3-D laser scanning technology was introduced to his

industry in the early to mid-2000s. This technology allowed existing refineries to

be scanned before their deconstruction and produced blueprints and models of the

assembled refineries timelier than the traditional method of measurement and

modeling. These blueprints and models could then be shipped elsewhere to assist

in the preparation of the new site for construction. According to Mr. Balke

petitioner was an early adopter of this technology, and he intended petitioner to

use it in completion of the Petromaxx SPA.

- 14 [*14] In theory, by using the increased efficiency of the 3-D scanning, multiple

stages of the refurbishing and reconstruction processes could proceed in tandem.

Mr. Balke used the phrase "parallel processing" to describe this system of

operation. The logistics of this theory operated in the following manner: Each

stage of the dismantling project would be scanned and modeled, and the model

would be sent to the purchaser; then, simultaneously, petitioner would begin

dismantling and refurbishing the scanned sections of the refinery while the

purchaser used the models to prepare the new site for the refinery's specific

reconstruction requirements. Despite the theory's temporal benefits, Mr. Balke

testified that he was aware of only two other companies in petitioner's industry

currently using a parallel processing system.

3.

Respondent's Expert Witness Testimony

Respondent called John R. Harris, PE, to testify as an expert witness on the

process of creating, constructing, and operating refineries. The Court recognized

Mr. Harris as such an expert and received into evidence his expert witness report,

in which he stated his opinion regarding a reasonable estimate of time it would

take to complete the Petromaxx refinery project.

Mr. Harris opined that a three-year timeframe to complete the Petromaxx

project was "optimistic but possible." To arrive at his conclusion, Mr. Harris

- 15 [*15] noted that the only performance date specified in the Petromaxx SPA was

September 12, 2007, the date by which petitioner was required to deliver the

equipment. Because the Petromaxx SPA did not specify dates by which the

remaining components of the Petromaxx refinery project would begin and finish,

Mr. Harris was required to make assumptions and estimate how long the

remaining components would take, which he summarized as follows:

One must make an estimate of the reasonable time required to ship the

equipment, acquire the balance of the equipment, supplies and

services necessary to complete a refinery. Foreign shipping to an

inland port in the developing world is difficult to estimate. Six

months seems like an optimistic period to have everything in place in

Bulgaria, assuming no delays in long lead-time equipment, no local

shortages of necessary supplies or scarcity of skilled labor.

Following Owner acquisition of the equipment, and presuming

finished engineering proceeds timely, final erection of the refinery

could hardly be expected in less than one year. If commissioning

proceeds promptly and few problems are found, this task should take

6 weeks, followed by another month for a performance run on the

refinery.

Mr. Harris did not take petitioner's parallel processing system into

consideration in reaching his conclusions with respect to the Petromaxx SPA's

timeframe. Instead, Mr. Harris' conclusion was based on traditional industry

practices, and Mr. Balke agreed with Mr. Harris' conclusion to the extent he had

relied on traditional industry practices. Mr. Balke disagreed with Mr. Harris'

overall conclusion that the Petromaxx project would take at least three years to

- 16 [*16] complete because Mr. Harris did not consider how much time 3-D laser

imaging or petitioner's parallel processing system would save.

D.

Project Outcome

Ultimately, the Petromaxx refinery project was not completed. At some

point during the course of the project, Petromaxx lost its financing and was unable

to pay petitioner. At the time of trial, the dismantled units from the Cenco refinery

were still in petitioner's construction yard in Texas.

III.

The Amber Contract

A.

Background

While petitioner was working on the Petromaxx refinery project, a

representative from the Hardt Investment Group contacted Mr. Balke to inform

him that Amber was interested in purchasing a 100,000 BPD refinery and

assembling it in Pakistan. Mr. Balke informed the representative that he was

aware of a 100,000 BPD refinery in Turkey (Atas refinery) that would meet

Amber's production capacity requirements. Toplam Mühendislik ve Taahhüt

Ithalat Ihracat Limited Sirketi (Toplam), a company incorporated in Turkey,

contracted to supply the Atas refinery units.°

9Toplam obtained title to the then-existing Atas refinery units on April 21,

2008. BP, Shell, and Marmara Petrol owned the refinery site and have since

(continued...)

- 17 [*17] B.

Petitioner-Amber Sale and Purchase Agreement

On July 17, 2008, petitioner and Amber executed a "Sale and Purchase

Agreement" (Amber SPA). The Amber SPA required petitioner to identify and

negotiate purchase orders with third-party vendors to procure oil processing units

for use in the Amber project, refurbish those units, and deliver the newly

refurbished units to a designated location. To satisfy those obligations, petitioner

purchased the Atas refinery units from Toplam for $18 million via a "Supply

Agreement" executed on July 24, 2008 (Toplam supply agreement). Under the

terms of the Toplam supply agreement, Toplam agreed to dismantle the Atas

refinery and deliver the dismantled units to a specified location in Turkey in a

condition that would allow them to be refurbished on site. Petitioner then

subcontracted with third parties to perform the refurbishing work that was

specified in the Amber SPA; the refurbishing work would occur while the Atas

units were at the Atas refinery site in Turkey.¹° Upon completion of the work in

9(...continued)

converted the location to an oil products terminal and storage facility.

¹°Although the Toplam supply agreement allowed for the refurbishing work

to take place at the Atas site, the units were ultimately moved to Northern Cyprus

and refurbished there.

- 18 [*18] Turkey, Amber was responsible for transporting the newly refurbished units

to a site in Pakistan."

The Amber SPA required petitioner to obtain a fluid catalytic cracker unit

(FCCU)¹² for use in the Amber project. Petitioner agreed to acquire, dismantle,

and transport the FCCU to its Houston, Texas, facility for refurbishing work.

Petitioner purchased an FCCU from a third party in Wichita, Kansas, for use in the

Amber project.

The Amber SPA also required petitioner to provide Amber with engineering

specifications and drawings that Amber would use to install the newly refurbished

units and construct an operating refinery. Amber was responsible for creating and

preparing the refinery site and erecting and installing the newly refurbished units

if it elected to do so.¹³ If Amber chose to erect and install the refurbished units,

petitioner was required to supervise the commissioning of the newly erected

"The location at which Amber was to construct a refinery was subject to

change at Amber's sole discretion. The available documentary evidence does not

reflect a final location determination.

¹²Fluid catalytic cracking, a type of secondary unit operation, is primarily

used in producing additional gasoline in the refining process.

¹³Under the terms of the Amber SPA, Amber was not required to install and

erect a refinery. If Amber elected not to install, erect, and commission the

refinery, the total contract price was to be reduced by only $75,000 out of the total

contract price of $100 million.

- 19 [*19] refinery. Upon successful commissioning of the refinery, a qualified

engineer would conduct performance tests and issue a "final acceptance report and

certificate" upon successful testing. At that point, petitioner's obligations under

the Amber SPA would end and Amber would assume full responsibility for the

refinery and its operation. In consideration for a complete, satisfactory, and timely

performance by petitioner of all of its obligations under the Amber SPA, Amber

agreed to pay petitioner $100 million.

The Amber SPA contained the following governing law provision:

This Agreement shall be governed by, and construed in accordance

with, the laws of the State of Texas, including Article 2 of the

Uniform Commercial Code, except to the extent that the Parties'

rights and obligations with respect to title to and security interests in

the Equipment may be governed by the law of the jurisdiction in

which such Equipment is located.

C.

Timeframe

For purposes of accounting for the Amber contract, petitioner's estimate of

the time the contract would take to complete is important. The Court will look to

the terms of the Amber SPA and will consider testimony from Mr. Balke and

respondent's expert witness, John Harris.

- 20 [*20]

1.

Amber SPA

With respect to the Amber SPA's timeframe, section 3.2.1 of the Amber

SPA provided:

BASIC shall commence * * * [its work] in accordance with the

Project Schedule and shall use its best efforts to ensure that * * * [its

work is] performed in accordance with the Project Schedule. Dates

included in the Project Schedule are the best estimates available on

the date of this Agreement but are not guaranteed dates of delivery or

achievement of listed milestones or objectives, except that Delivery

of all items comprising the * * * [complete package of crude oil

processing and refining equipment] is guaranteed to occur no later

than the Delivery Deadline [November 15, 2010]. Modifications to

the Project Schedule shall only be made with the prior written

approval of * * * [Amber].

A project schedule was not attached to the Amber SPA, and petitioner did

not offer into evidence a project schedule or any other documentation that would

reflect dates by which the parties expected the various components of the project

to be completed.

Although the Amber SPA did not contain a project schedule, the agreement

required petitioner to deliver the last unit "no later than" November 15, 2010.

Petitioner was entitled to bonus payments if the delivery date for the units

occurred before November 15, 2010, and subject to penalties if the delivery date

occurred after November 15, 2010.

- 21 [*21] Importantly, just like the Petromaxx SPA the Amber SPA did not include

terms requiring Amber to ship the refurbished units by a specific date, begin or

finish creating the refinery site by a specific date, or begin or finish installing and

erecting the newly refurbished units into a refinery by a specific date. Petitioner

did not introduce into evidence any documentation reflecting dates by when

petitioner or Amber expected Amber to begin or finish its obligations.

If Amber elected to erect the refinery, petitioner was required to provide at

least one field engineer to supervise the commissioning process. After successful

commissioning, a qualified engineer would conduct performance tests which

"must in any case be completed within sixty (60) days, or such other period as may

be agreed in writing by the Parties, from the date on which Commissioning has

commenced." Once the qualified engineer was satisfied that the performance tests

showed that the newly installed and erected refinery met certain standards, he was

to issue a report. At that point, petitioner's obligations under the Amber SPA

would end and Amber would assume full responsibility for the refinery and its

operation. The Amber SPA did not specify an overall project completion date.

With respect to the terms of payment, the Amber SPA indicated that the

parties anticipated the final payment's becoming due on the earlier of: (1) 10

months after the "Delivery Date", which was the date on which petitioner

- 22 [*22] delivered the refurbished units to its facility in Houston, Texas, or (2) the

"Final Acceptance Date", which was the date on which the qualified engineer

issued a completion report.¹4

Because the Amber SPA, like the Petromaxx SPA, did not specify dates by

when Amber was required to ship the refurbished units, finish creating and

preparing the refinery site, or finish installing and erecting the newly refurbished

units into a refinery, it is unclear exactly when the parties expected the Amber

SPA to be completed.

2.

Mr. Balke's Testimony

Mr. Balke testified that the Amber refinery project was simpler from a

logistics perspective than the Petromaxx refinery project and was likely to be

finished faster than Petromaxx, starting from each respective contract's start date.

In addition he pointed to the Amber SPA, which refers to the possibility that

petitioner would use 3-D laser scanning and modeling. As with the Petromaxx

SPA, Mr. Balke's intent was for petitioner to use parallel processing in fulfilling

the contract obligations of the Amber SPA.

¹4Although the Amber SPA provided for delivery of all units to Houston,

Texas, the parties stipulated that petitioner and Amber never intended for the Ata

refinery units to be shipped from Turkey to Houston. See infira note 15.

- 23 [*23]

3.

Respondent's Expert Witness Testimony

Mr. Harris opined that a 4-1/2-year timeframe to complete the Amber

refinery contract was "optimistic but possible." In arriving at his conclusion, Mr.

Harris noted that the "Amber plant is double the size of the * * * [Petromaxx]

plant, involving more work and time." Mr. Harris also noted that the only

performance date specified in the Amber SPA was with respect to petitioner's

delivery obligations; petitioner was required to deliver the equipment by

November 15, 2010, roughly 28 months after the date on which the Amber SPA

was executed. Because the Amber refinery project did not specify dates by which

the remaining components of the Amber SPA would begin and finish, Mr. Harris

was required to make assumptions and estimate the time it would take to complete

the remaining tasks, which he summarized as follows:

One must make an estimate of the reasonable time required to ship the

equipment, acquire the balance of the equipment, supplies, and

services necessary to * * * complete the Amber refinery in Pakistan.

Foreign shipping in the developing world is difficult to estimate.

Seven months seems like an optimistic period to have everything in

place in Pakistan, assuming no delays in long lead-time equipment,

no local shortages of necessary supplies or scarcity of skilled labor.

Following Owner acquisition of the equipment, and presuming

finished engineering proceeds timely, final erection of the refinery

could hardly be expected in less than 18 months. If commissioning

proceeds promptly, and few problems are found, this task should take

- 24 [*24] two months, following by another two months for a performance run

on the refinery.us)

As with the Petromaxx SPA, Mr. Harris' overall conclusion with respect to

the Amber SPA's timeframe did not take petitioner's parallel processing system

into consideration.

D.

Project Outcome

On the same day that petitioner and Amber executed the Amber SPA they

also executed a "Side Letter" to the Amber SPA whereunder the parties agreed

that the due date for certain installment payments would be extended because

Amber had not yet obtained sufficient financing to effect payment for the

installments. After approximately 18 months, on January 18, 2010, the parties

agreed to cancel the Amber SPA and release themselves from all responsibilities

and liabilities under the SPA's terms. At the time of trial, the FCCU was still in

"Mr. Harris' opinion was formed, in part, on the basis of moving the Atas

refinery from Turkey and the FCCU from Wichita to petitioner's facility in

Houston for cleaning and inspection and then shipping those refurbished parts to

Pakistan. While the FCCU unit was to be transported from Wichita to Houston,

and then from Houston to Pakistan, the parties stipulated that petitioner and

Amber never intended for the dismantled Atas refinery to be shipped from Turkey

to Houston even though delivery to Houston was specified in the Amber SPA.

The stipulation was executed by the parties after the filing date of the expert

report.

- 25 [*25] petitioner's construction yard in Texas, and the Atas refinery units were still

in Northern Cyprus.

IV.

Petitioner's Federal Income Tax Returns

From 2005 to 2010 petitioner accounted for the Petromaxx and Amber

contracts using the completed contract method of accounting; each return was

prepared and signed by the same certified public accountant (CPA). A taxpayer

using the completed contract method of accounting recognizes all income and

expenses associated with a contract only in the contract's completion year. See

sec. 1.460-4(d), Income Tax Regs. Petitioner's position is that neither contract

was completed. Because petitioner accounted for the contracts using the

completed contract method of accounting, it did not report income or expenses

associated with either contract during the years at issue or earlier because the

contracts were not completed. Petitioner's schedule of all of its contracts for

2007-2010 was provided to respondent. This information was not reported on its

income tax returns. The schedules reflected petitioner's annual contract revenue,

estimated total contract prices, annual contract expenses, and estimated total

contract expenses for the Petromaxx and Amber projects as follows:

- 26 [*26]

Petromaxx project

Yeg

Annual

revenue

Estimated total

contract price

Annual

expenses

Estimated total

contract

expenses

Before 2007

$20,395,917

$122,250,000

$16,316,738

$97,800,000

2007

49,708,361

122,250,000

39,766,687

97,800,000

2008

31,978,623

122,250,000

25,582,819

97,800,000

2009

866,631

122,250,000

709,295

97,800,000

2010

192,707

122,250,000

154,174

97,800,000

Total

$103,142,239

$82,529,713

Amber project

Y_ejg

Annual

revenue

Estimated total

contract price

Annual

expenses

Estimated total

contract

expenses

Before 2007

--

--

--

--

2007

--

--

--

--

2008

$33,252,634

$101,000,000

$26,667,954

$81,000,000

2009

1,418,775

101,000,000

1,137,835

81,000,000

2010

31,585

101,000,000

25,325

81,000,000

Total

$34,702,994

$27,831,114

Respondent determined that petitioner was ineligible to use the completed

contract method of accounting for the Petromaxx and Amber SPAs. The notice of

deficiency reflected alternative accounting positions for petitioner's projects.

- 27 [*27] Under either position, respondent determined that petitioner was not eligible

to report income under the completed contract method of accounting. Respondent

determined that the Petromaxx SPA should have been reported as a manufacturing

contract and that petitioner should have accounted for the Petromaxx SPA using

the accrual method of accounting.¹6 As his alternative position, respondent

determined that petitioner must account for both contracts using the percentage of

completion method because petitioner could not have estimated their completion

within the two-year period beginning on the respective contract commencement

dates. See sec. 460(e).

As discussed infra, the determination of whether either contract is a

manufacturing contract or a construction contract is irrelevant because the section

460 default provision applies. Thus, the following facts and calculations are

derived from respondent's alternative position, i.e., that petitioner was required to

account for both contracts using the percentage of completion method.¹7

¹6Although respondent's pretrial memorandum asserts that both the

Petromaxx and Amber contracts are manufacturing contracts, the notice of

deficiency determines that only the Petromaxx contract is a manufacturing

contract. Respondent did not amend his answer to assert otherwise.

¹7Because the deficiency and penalty amounts reflected on the face of the

notice of deficiency are based on respondent's primary position, the adjustments

discussed inka will not match the deficiency and penalty amounts reflected on the

(continued...)

- 28 [*28] The percentage of completion method of accounting requires taxpayers to

recognize income and expenses throughout the duration of a contract on the basis

of the percentage of the contract that is actually completed. Accordingly,

respondent's alternative position adjusted petitioner's gross receipts and cost of

goods sold figures for the Petromaxx and Amber SPAs on the basis of the

percentage that the contracts were completed in 2009 and 2010.

To determine the percentages of the Petromaxx and Amber SPAs that were

completed, respondent used the schedule of contracts petitioner had provided; in

accordance with section 460(b), respondent added the annual expenses petitioner

had actually incurred and then divided those totals by the estimated total contract

costs. For 2009 respondent determined that petitioner had completed

approximately 84.23% of the Petromaxx SPA¹8 and approximately 34.33% of the

Amber SPA,¹9 and for 2010 respondent determined that petitioner had completed

"(...continued)

face of the notice of deficiency.

¹8Petitioner had incurred $82,375,539 of actual expenses between 2005 and

2009. Petitioner estimated the total contract costs to amount to $97.8 million.

Actual expenses of $82,375,539 divided by an estimated total contract cost of

$97.8 million equals 84.23%.

¹°Petitioner had incurred $27,805,789 of actual expenses between 2005 and

2009. Petitioner estimated the total contract costs to amount to $81 million.

(continued...)

- 29 [*29] approximately 84.39% of the Petromaxx contract and approximately 34.36%

of the Amber contract.

Respondent then multiplied the percentage each contract was completed by

the estimated total contract price to arrive at the amounts petitioner should have

recognized as income had it accounted for the contracts using the percentage of

completion method of accounting. For 2009 respondent adjusted petitioner's

gross receipts by $137,644,475.2° Because petitioner did not report any income or

expenses from the Petromaxx or Amber contract from 2005 to 2009, the 2009

adjustment accounts for all income that petitioner should have recognized between

"(...continued)

Actual expenses of $27,805,789 divided by an estimated total contract cost of $81

million equals 34.33%.

2°For the Petromaxx SPA, respondent multiplied the $122,250,000 estimated

total contract price by an 84.23% completion percentage to arrive at a

$102,971,175 gross receipts adjustment for income from the Petromaxx SPA from

2005 to 2009. For the Amber SPA, respondent multiplied the $101 million

estimated total contract price by a 34.33% completion percentage to arrive at a

$34,673,300 gross receipts adjustment. In total, these adjustments amount to

$137,644,475.

- 30 [*30] 2005 and 2009 under the percentage of completion method of accounting.2¹

For 2010 respondent adjusted petitioner's gross receipts by $225,900.22

Respondent allowed corresponding adjustments for cost of goods sold and

made an adjustment for a section 481(b) limitation credit for 2009 to further

reduce petitioner's tax liability. The adjustments in the notice of deficiency give

rise to the deficiencies and penalties currently at issue. Petitioner challenges the

deficiencies and penalties, arguing that it was entitled to account for the

Petromaxx and Amber SPAs using the completed contract method of accounting.

As of the date of the notice of deficiency, August 22, 2013, petitioner had neither

2¹Following a change of accounting method, the Commissioner may make

any necessary adjustments to prevent taxable income from being duplicated or

omitted as a result of the change under sec. 481(a). For purposes of sec. 481(a)

adjustments, once there has been a change in the method of accounting, no statute

of limitations applies to the Commissioner's authority to correct errors on old tax

returns. See Mingo v. Commissioner, 773 F.3d 629, 636 (5th Cir. 2014), af[g

T.C. Memo. 2013-149.

22For the Petromaxx SPA, respondent multiplied the $122,250,000 estimated

total contract price by an 84.39% completion percentage to arrive at $103,166,775.

After subtracting the gross receipts adjustment for 2009 of $102,971,175

respondent arrived at a total adjustment for the Petromaxx SPA of $195,600 for

2010. For the Amber SPA, respondent multiplied the $101 million estimated total

contract price by a 34.36% completion percentage to arrive at $34,703,600. After

subtracting the gross receipts adjustment for 2009 of $34,673,300 respondent

arrived at a total adjustment for the Amber SPA of $30,300 for 2010. These

adjustments total $225,900.

- 31 [*31] reported any of the Petromaxx or Amber contract income nor claimed

deductions for any of the contract expenses.

OPINION

I.

Burden of Proof

Generally, the Commissioner's determinations set forth in a notice of

deficiency are presumed correct, and the taxpayer bears the burden of showing the

determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). If a taxpayer's method of accounting does not clearly reflect income,

section 446(b) allows the Commissioner to change the taxpayer's method of

accounting to one that does clearly reflect income. The Commissioner is granted

broad discretion in determining whether an accounting method clearly reflects

income, and that determination is entitled to more than the usual presumption of

correctness. See Commissioner v. Hansen, 360 U.S. 446, 467 (1959); The Howard

Hughes Co., LLC v. Commissioner, 142 T.C. 355, 376, afCd, 805 F.3d 175 (5th

Cir. 2015); Shea Homes, Inc. v. Commissioner, 142 T.C. 60, 84 (2014), aE, 834

F.3d 1061 (9th Cir. 2016). The question of whether a particular accounting

method clearly reflects income is a question of fact to be determined on a case-bycase basis. See The Howard Hughes Co., LLC v. Commissioner, 142 T.C. at 376;

- 32 [*32] Shea Homes, Inc. v. Commissioner, 142 T.C. at 85; Ansley-Sheppard-

Burgess Co. v. Commissioner, 104 T.C. 367, 371 (1995).

To prevail, the taxpayer must establish that the Commissioner abused his

discretion in changing the method of accounting. Mingo v. Commissioner, 773

F.3d 629, 635 (5th Cir. 2014), af0g T.C. Memo. 2013-149; The Howard Hughes

Co., LLC v. Commissioner, 142 T.C. at 376; Shea Homes, Inc. v. Commissioner,

142 T.C. at 85. The taxpayer bears a heavy burden of proof, and the Commissioner's determination is not to be set aside unless shown to be plainly arbitrary.

Mingo v. Commissioner, 773 F.3d at 635; Ansley-Sheppard-Burgess Co. v.

Commissioner, 104 T.C. at 370-371 (citing Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 532-533 (1979)). But the Commissioner may not change a

taxpayer's method of accounting from an incorrect method to another incorrect

method; nor may the Commissioner change a taxpayer's method of accounting

where a taxpayer's method of accounting is clearly an acceptable method and

clearly reflects income. The Howard Hughes Co., LLC v. Commissioner, 142

T.C. at 376; Shea Homes, Inc. v. Commissioner, 142 T.C. at 85.

II.

Long-Term Contracts

Section 460 governs how taxpayers report income from long-term contracts.

Section 460(f)(1) defines a long-term contract as "any contract for the

- 33 [*33] manufacture, building, installation, or construction of property if such

contract is not completed within the taxable year in which such contract is entered

into." The Amber and Petromaxx SPAs were both for the "manufacture, building,

installation, or construction of property", and neither contract was completed

within the taxable year in which it was entered into. Thus, the contracts are longterm contracts under section 460.

A.

Percentage of Completion Method

Generally, taxpayers who receive income from long-term contracts must

account for that income using the percentage of completion method of accounting.

Sec. 460(a). This method essentially requires a taxpayer to recognize income and

expenses throughout the duration of a contract. See sec. 460(b); see also B

Howard Hughes Co., LLC v. Commissioner, 142 T.C. at 382; Shea Homes, Inc. v.

Commissioner, 142 T.C. at 85. As argued here, however, two exceptions to this

rule may apply: section 460(f)(2) excludes certain manufacturing contracts and

section 460(e)(1)(B) excludes certain construction contracts. As discussed infira,

the Court need not determine whether the Petromaxx and Amber SPAs are for

manufacturing or construction because neither exception applies; section 460

requires petitioner to use the percentage of completion method of accounting for

both contracts.

- 34 [*34] B.

Exception for Certain Manufacturing Contracts

Respondent's primary position is that the Petromaxx SPA is a

manufacturing contract and that it fails to meet the section 460(f)(2) requirements

to be treated as a long-term contract. Accordingly, respondent asserts, petitioner is

required to use the accrual method of accounting. Petitioner disagrees, arguing

that section 460(f)(2) is inapplicable because the contracts are construction

contracts--not manufacturing contracts.

Manufacturing contracts are generally not treated as long-term contracts,

meaning the long-term contract accounting rules of section 460 would not apply.

S_e_e sec. 460(f)(2). However, if a contract involves the manufacture of (A) any

unique item of a type not normally included in the finished goods inventory of the

taxpayer or (B) any item which normally requires more than 12 calendar months to

complete, then the contract is treated as a long-term contract and is subject to

section 460. See sec. 460(f)(2)(A) and (B).

At issue are two contracts--each for the disassembly, transportation,

refurbishing, assembly, and certification of a new oil refinery. Petitioner

introduced sufficient evidence, corroborated by the testimony of Mr. Balke,

showing that the processes involved normally require more than 12 calendar

months to complete. Respondent's expert, Mr. Harris, agreed, stating that the

- 35 [*35] assembly process alone "could hardly be expected in less than one year."

Assuming without finding that these contracts are for the manufacture of two oil

refineries, each would fall under the section 460(f)(2)(B) requirement that it be

treated as a long-term contract under section 460 and thus generally accounted for

using the percentage of completion method of accounting.

The Commissioner may not change a taxpayer's method of accounting from

an incorrect method to another incorrect method. The Howard Hughes Co., LLC

v. Commissioner, 142 T.C. at 376; Shea Homes, Inc. v. Commissioner, 142 T.C. at

85. Because the evidence clearly establishes that even if the Petromaxx SPA w_ge

a manufacturing contract, the length of the contract would render section 460(f)(2)

properly applicable and would generally require petitioner to use the percentage of

completion method of accounting, the Court finds respondent's manufacturing

position for the Petromaxx SPA incorrect.

C.

Exception for Certain Construction Contracts

In some instances taxpayers may account for income from certain

construction contracts under a method of accounting other than the percentage of

completion method, such as the completed contract method. See sec. 460(e); T_h_e

Howard Hughes Co., LLC v. Commissioner, 142 T.C. at 382. Section

460(e)(1)(B) provides an exception to the percentage of completion method of

- 36 [*36] accounting for certain long-term contracts that meet the following

requirements: (1) the contract is a construction contract; (2) the taxpayer

estimates, at the time the contract is entered into, that it will be completed within

the two-year period beginning on the contract commencement date (the two-year

rule); and (3) the taxpayer's average annual gross receipts for the three taxable

years preceding the taxable year in which the contract is entered into do not

exceed $10 million. A taxpayer who satisfies all three requirements is eligible to

account for such a contract using the completed contract method of accounting;

failure to meet any one of the three requirements will render the exception

inapplicable.23

Petitioner accounted for the Petromaxx and Amber SPAs using the

completed contract method. Respondent determined that petitioner was ineligible

to use the completed contract method. The parties disagree over whether (1) the

contracts were "construction contracts" under section 460 and (2) the two-year

rule was satisfied. Assuming without finding that these contracts are construction

contracts, and bearing in mind the well-settled principle that statutes granting tax

exemptions or deferments must be strictly construed, see The Howard Hughes

23Sec. 460(e)(1)(A) provides an additional exception to the percentage of

completion method of accounting for home construction contracts. Petitioner does

not contend that it qualifies for this exception.

- 37 [*37] Co., LLC v. Commissioner, 805 F.3d at 181, the Court finds that petitioner

did not satisfy the two-year rule with respect to either contract. Petitioner,

therefore, was not eligible to account for the Petromaxx or Amber SPA using the

completed contract method of accounting.

III.

Two-Year Rule

A.

Legal Framework

To be eligible for the construction contract exception to the percentage of

completion method, the taxpayer must estimate, at the time the contract is entered

into, that it will be completed within the two-year period beginning on the contract

commencement date. M sec. 460(e)(1)(B)(i). The statute requires the Court to

first determine the contract commencement dates of the Petromaxx and Amber

SPAs and then determine whether petitioner could have reasonably estimated--at

the time the respective contracts were entered into--that the projects would be

complete within two years from their respective commencement dates. Sec.

460(e)(1)(B); see also sec. 1.460-1(f)(4), Income Tax Regs.

1.

Contract Commencement Date

For purposes of section 460, the term "contract commencement date" means

the first date on which any costs (other than bidding expenses or expenses

incurred in connection with negotiating the contract) allocable to the contract are

- 38 [*38] incurred.24 Sec. 460(g); sec. 1.460-1(b)(7), Income Tax Regs. A cost is

"incurred" for the taxable year in which all the events have occurred that establish

the fact of the cost, the amount of the cost can be determined with reasonable

accuracy, and economic performance has occurred with respect to the cost. Sec.

1.460-1(b)(8), Income Tax Regs. ("Incurred has the meaning given in § 1.4611(a)(2) (concerning the taxable year a liability is incurred under the accrual

method of accounting), regardless of a taxpayer's overall method of accounting.").

2.

Two-Year Estimate

With respect to estimating the length of a contract under section 460,

section 1.460-1(f)(4)(i), Income Tax Regs., provides:

A taxpayer must use a reasonable estimate of the time required to

complete a contract when necessary to classify the contract (e.g., to

determine whether * * * the two-year completion rule for exempt

construction contracts * * * is satisfied * * *). To be considered

reasonable, an estimate of the time required to complete the contract

must include anticipated time for delay, rework, change orders,

technology or design problems, or other problems that reasonably can

be anticipated considering the nature of the contract and prior

experience. A contract term that specifies an expected completion or

delivery date may be considered evidence that the taxpayer

24The contract commencement date is not necessarily the same date as the

date that the contract is entered into. The regulations provide separate definitions

for the two times. Sees. 1.460-1(b)(7) (defining contract commencement date),

(c)(2) (defining the date that the contract is entered into), Income Tax Regs. And

para. (c)(2) contemplates situations where a taxpayer attempts to change his

Federal tax consequences through creative scheduling of these dates.

- 39 [*39] reasonably expects to complete or deliver the subject matter of the

contract on or about the date specified, especially if the contract

provides bona fide penalties for failing to meet the specified date. If

a taxpayer classifies a contract based on a reasonable estimate of

completion time, the contract will not be reclassified based on the

actual (or another reasonable estimate of) completion time. A

taxpayer's estimate of completion time will not be considered

unreasonable if a contract is not completed within the estimated time

primarily because of unforeseeable factors not within the taxpayer's

control, such as third-party litigation, extreme weather conditions,

strikes, or delays in securing permits or licenses.

Section 1.460-1(f)(4)(i), Income Tax Regs., provides that the taxpayer's

estimate of the time required to complete a contract must be "reasonable". Where,

as here, the parties disagree as to whether the two-year rule for exempt

construction contracts has been satisfied, the Court will consider all of the facts

and circumstances of a particular case to determine whether the taxpayer's

estimate was reasonable. Further, the Court must look back to the time the

contract was entered into to decide whether the estimate was reasonable. See sec.

460(e)(1)(B)(i).

Often, a written contract objectively manifests the taxpayer's expectations at

the time the taxpayer enters into the contract. However, the regulations do not

require the Court to make its determination with respect to the two-year rule on the

basis of the contract alone, and the dates specified in the contract are not

dispositive. See sec. 1.460-1(f)(4)(i), Income Tax Regs. ("A contract term that

- 40 [*40] specifies an expected completion or delivery date m_ay be considered

evidence that the taxpayer reasonably expects to complete or deliver the subject

matter of the contract on or about the date specified[.]" (Emphasis added.)). The

facts and circumstances of this case require the Court to make a decision with

respect to the two-year rule on the basis of the contracts and the supporting

documentation in the record, Mr. Balke's testimony, and Mr. Harris' expert

testimony because they are the only evidence available for the Court to consider

for both the Petromaxx and Amber SPAs.

B.

Petromaxx SPA

1.

Contract Commencement Date

Although petitioner and Petromaxx formally executed the Petromaxx SPA

on October 28, 2006, the first date on which petitioner incurred costs allocable to

the Petromaxx SPA (other than bidding expenses or expenses incurred in

connection with negotiating the contract) was March 22, 2006, when petitioner

purchased the Cenco refinery for use in the Petromaxx SPA. Thus, for purposes of

section 460, the contract commencement date of the Petromaxx SPA was March

22, 2006. See sec. 460(g); sec. 1.460-1(b)(7) and (8), Income Tax Regs.

- 41 [*41]

2.

Two-Year Estimate

a.

Parties' Arguments

The parties disagree as to whether petitioner reasonably estimated that the

Petromaxx SPA could have been completed within two years from the contract

commencement date of March 22, 2006. Respondent relies on the terms of the

Petromaxx SPA and Mr. Harris' expert testimony that three years is an optimistic

estimate of the time required to complete a project similar to the Petromaxx

refinery project. Petitioner contends that its 3-D laser scanning and parallel

processing system allowed it to reasonably estimate that the Petromaxx SPA

would be completed within two years. Further, petitioner argues that Mr. Harris

did not consider petitioner's parallel processing system when determining how

long it would take the parties to complete the Petromaxx refinery project and that

he was altogether unfamiliar with parallel processing.

b.

Terms of the Petromaxx SPA

The two-year rule requires the Court to look at petitioner's expectations at

the time it entered into the contract. See sec. 460(e)(1)(B). While dates specified

in a contract are not dispositive, the Court will first look to the terms of the

Petromaxx SPA to help determine petitioner's expectations at the time it entered

into the SPA, October 28, 2006.

- 42 [*42] Section 1.460-1(f)(4)(i), Income Tax Regs., provides that a contract term

that specifies an expected completion or delivery date may be considered evidence

that the taxpayer reasonably expects to complete or deliver on or about that date,

especially if the contract provides bona fide penalties for failing to meet the

specified date. The only provision in the Petromaxx SPA that references a specific

date is with respect to petitioner's delivery obligations. Petitioner was to "use its

best efforts" to deliver the last unit by April 30, 2007, but failure to do so would

not result in penalties; rather, petitioner would only default under the Petromaxx

SPA if it failed to deliver the last unit by September 12, 2007. The Petromaxx

SPA references a project schedule. However, the project schedule attached to the

Petromaxx SPA stated only "[to be provided by BASIC]"; the remainder of the

page was blank, and petitioner did not introduce into evidence any documents that

purport to be a project schedule.

Petitioner's contractual obligations were not complete upon delivery of the

last refurbished unit. The parts then had to be shipped from Texas to Bulgaria and

assembled according to petitioner's detailed modeling, and the newly assembled

refinery had to be commissioned under petitioner's supervision and a final

acceptance report and certificate obtained upon successful testing. Only then

would petitioner's contractual obligations be fulfilled. And the Petromaxx

- 43 [*43] SPA did not specify dates by when these remaining obligations were to be

complete.

Respondent introduced an expert witness report into evidence. In that

report Mr. Harris estimated how long the remaining components of the Petromaxx

refinery project would take, i.e., how long it would take to ship the delivered units

from Texas to Bulgaria; how long it would take to assemble the refinery once

Petromaxx was in possession of all of the equipment; and how long it would take

to commission and performance test the newly assembled refinery. Mr. Balke

agreed with Mr. Harris' conclusions to the extent they were based on traditional

industry practices.

Once petitioner delivered the final unit, Petromaxx had to ship the units to

Bulgaria; Mr. Harris opined that six months was an optimistic estimate of only the

time required to ship the units to Bulgaria, which did not include the time required

to assemble the new refinery. Once Petromaxx acquired all of the equipment, it

had to assemble the refinery; Mr. Harris estimated that the assembly process alone

"could hardly be expected in less than one year." Once Petromaxx assembled the

refinery, petitioner was required to supervise the commissioning process; Mr.

Harris estimated that the commissioning process would take six weeks. After the

commissioning process was complete, a qualified engineer was to conduct

- 44 [*44] performance tests and issue a final report upon successful testing; Mr. Harris

estimated that performance testing would take approximately one month. At that

point petitioner would have finally completed all of its obligations under the

Petromaxx SPA.

Even if the Court concludes that April 30, 2007 (the best efforts date)--and

not September 12, 2007 (the default date)--is the relevant delivery date despite the

Petromaxx SPA's not calling for penalties if petitioner did not deliver the units by

then, the Petromaxx project still could not have been completed within two years

from March 22, 2006, the contract commencement date. The time between the

contract commencement date and the best efforts date was 13 months; once the

units were delivered, it would take 6 months to ship them from Texas to Bulgaria.

Upon receipt of all of the units, it would take Petromaxx 12 months to assemble

the refinery; and once the refinery was assembled, it would take approximately 21/2 months to commission and conduct performance tests. In total, a project

similar to the Petromaxx refinery project would take over 33 months to complete

using traditional industry practices.

The Petromaxx SPA indicates that petitioner and Petromaxx anticipated the

final payment's becoming due on the earlier of: (1) 10 months after the "Final

Delivery Date", which the Petromaxx SPA defined as September 12, 2007, or (2)

- 45 [*45] the "Final Acceptance Date", which was defined as the date on which the

qualified engineer issued a completion certificate.25 Assuming traditional industry

practices, this provision puts the completion date more than two years after the

contract commencement date. The Petromaxx SPA does not require the qualified

engineer to issue a completion certificate by a certain date, and 10 months after the

September 12, 2007, "Final Delivery Date" is July 12, 2008, which is more than

two years after the March 22, 2006, contract commencement date.

Under section 1.460-1(f)(4)(i), Income Tax Regs., dates specified in the

Petromaxx SPA are not dispositive in determining whether petitioner, at the time it

entered into the Petromaxx SPA, could have reasonably expected to complete the

Petromaxx project within two years from its commencement date. Accordingly,

the Court will next consider Mr. Balke's testimony.

c.

Mr. Balke's Testimony

Petitioner acknowledges the lack of specificity in the Petromaxx SPA and

the lack of formal documentation such as a project schedule but argues that the

"parties intended for Petromaxx to begin building the * * * [refinery]

25Although this provision of the Petromaxx SPA refers to terms of payment

and not performance, i.e., refurbishing, shipping, constructing the refinery,

commissioning, or performance testing, the Court will address this terms of

payment provision for the sake of completeness.

- 46 [*46] infrastructure while Petitioner was refurbishing the refinery" even though

the Petromaxx SPA is silent on the matter.26

The Petromaxx SPA is governed by Austrian law, including the United

Nations Convention on Contracts for the International Sale of Goods (CISG), Apr.

11, 1980, 1489 U.N.T.S. 59.27 The CISG embodies a liberal approach to contract

26Specifically, petitioner's reply brief states:

As is apparent from the contracts themselves and the testimony

at trial, Petitioner operates in a flexible and informal manner; the lack

of formal documentation of a project schedule does not prove that the

parties did not have an understanding that the * * * [refinery site]

should be completed while the refinery is being refurbished, simultaneously instead of subsequently. Petitioner offered testimony as a

fact witness, under oath, which is the best available evidence of its

customary business practices. Mr. Balke has established his criteria

as an experienced professional in his line of work. His testimony is

supported by the efforts taken by Petitioner to provide specifications

to Petromaxx using laser imaging at considerable cost to Petitioner.

Procuring those images immediately and providing such images at an

unusually early stage in the construction process corroborates the

testimony that the parties intended for Petromaxx to begin building

the * * * [refinery] infrastructure while Petitioner was refurbishing

the refinery.

27 CISG art. 1(1) "applies to contracts of sale of goods between parties

whose places of business are in different States: (a) when the States are

Contracting States; or (b) when the rules of private international law lead to the

application of the law of a Contracting State." For purposes of the CISG, a party's

place of business is the one having "the closest relationship to the contract and its

performance, having regard to the circumstances known to or contemplated by the

parties at any time before or at the conclusion of the contract." R art. 10(a).

(continued...)

- 47 [*47] interpretation. Under the CISG a contract of sale may be proven by any

means, including witnesses; it need not be evidenced by writing and is not subject

to any other requirement as to form. R art. 11. Article 8 of the CISG provides:

(1) For the purposes of this Convention statements made by and

other conduct of a party are to be interpreted according to his intent

where the other party knew or could not have been unaware what the

intent was.

(2) If the preceding paragraph is not applicable, statements made by

and other conduct of a party are to be interpreted according to the

understanding that a reasonable person of the same kind as the other

party would have had in the same circumstances.

(3) In determining the intent of a party or the understanding a

reasonable person would have had, due consideration is to be given to

all relevant circumstances of the case including negotiations, any

practices which the parties have established between themselves,

usages and any subsequent conduct of the parties.

Article 8 of the CISG allows broader standards of evidence outside the

executed documents, including statements made or a party's conduct, to determine

the intent of a party. Petitioner's position is that even though the Petromaxx SPA

27(...continued)

Under the Petromaxx SPA, Petromaxx's "place of business" for purposes of the

CISG is in Bulgaria, as the refinery was to be assembled there. Petitioner's "place

of business" for purposes of the CISG is in the United States, as petitioner

refurbished the Cenco refinery parts in the United States. Both Bulgaria and the

United States ratified the CISG. Thus, the CISG applies because there is a

contract for the sale of goods between parties whose places of business are in

different contracting States.

- 48 [*48] and related documents are silent with respect to anticipated performance

dates and parallel processing, petitioner's conduct reflected the parties' intent to

implement petitioner's parallel processing system.

Even if the Court looks outside the terms of the Petromaxx SPA and

considers statements and conduct of the parties, petitioner did not introduce any

such evidence to support Mr. Balke's self-serving testimony that would allow the

Court to conclude that the parties in fact agreed to implement a parallel processing

system. Petitioner did not introduce any evidence that Petromaxx "knew or could

not have been unaware what the intent was" with respect to the project's time line.

S_e_e CISG art. 8(1). Further, because petitioner's parallel processing system was

not the traditional way of operating in the industry, Petromaxx would not have

known or had reason to know that it should be performing its contractual

obligations simultaneously with petitioner. See id. Petitioner did not introduce

any evidence to show that Petromaxx made statements to petitioner or acted as if

the parties were conducting operations using a parallel processing system. See id.

art. 8(2) and (3). Mr. Balke further testified that he agreed with most of Mr.

Harris' conclusions because they were based on traditional practices within the

industry. That testimony provides further support to the conclusion that

Petromaxx did not have any reason to be aware of petitioner's expectations with

- 49 [*49] respect to Petromaxx's timing for beginning and completing its contractual

obligations. See CISG art. 8(2) and (3).

Petitioner did not produce any other witnesses, provide the Court with any

documentary evidence that would reflect a meeting of the minds between the

parties to use a parallel processing system, or even explain how much time parallel

processing would save; instead petitioner relied solely on Mr. Balke's unsupported

testimony. Although Mr. Balke has over 30 years of experience in working with

oil refineries and refinery equipment, including international dealings, he did not

provide a single concrete example of a project similar to the Petromaxx SPA

where the parties conducted operations using a parallel processing system and

which was complete within two years from its commencement date.28 Petitioner's

28The increased efficiency vel non of the parallel processing system does not

rescue petitioner's expectations here. Assuming without finding that the best

efforts date is the relevant date, the two-year clock began running on March 22,

2006; the best efforts date was April 30, 2007; the parts needed to be transported

from Texas to Bulgaria, taking six months; and commissioning and testing the

refinery required an additional 2-1/2 months--leaving slightly more than two

months until the end of the two-year period for Petromaxx to assemble the refinery

according to petitioner's detailed models. And respondent's expert found that

through the use of traditional industry techniques, reassembly might be attained in

12 months. As discussed supra, none of these projections account for delay,

rework, or technology or design problems caused by implementing a new 3-D

scanning and modeling process. See sec. 1.460-1(f)(4)(i), Income Tax Regs.

Therefore, even if parallel processing could reduce a one-year construction project

to approximately two months, a reasonable estimate necessarily requires inclusion

(continued...)

- 50 [*50] actions of purchasing the Cenco refinery and beginning the refurbishing

process do not prove the intent or knowledge of Petromaxx to equally perform its

responsibilities. Petitioner simply has not introduced sufficient evidence to show

that its expectations with respect to the Petromaxx refinery project's timeframe

differed from those projected by Mr. Harris according to traditional industry

practices or objectively manifested in the Petromaxx SPA.

d.

Conclusion

The Commissioner is granted broad discretion in determining whether an

accounting method clearly reflects income, and that determination is entitled to

more than the usual presumption of correctness. Commissioner v. Hansen, 360

U.S. at 467; The Howard Hughes Co., LLC v. Commissioner, 142 T.C. at 376;

Shea Homes, Inc. v. Commissioner, 142 T.C. at 84. Petitioner simply has not met

its burden to prove that respondent's determination was clearly arbitrary.

Respondent's position that petitioner did not reasonably estimate that the

Petromaxx refinery project could be completed within two years is supported by

the documentation that is available for the Court to review, primarily the

28(...continued)

of time for such unanticipated issues. Id. Petitioner offered no explanation other

than the unsupported testimony of Mr. Balke that he believed the contract could

have been completed within two years.

- 51 [*51] Petromaxx SPA and its amendments, and by Mr. Harris' expert testimony.

Petitioner attempts to rebut respondent's determination with Mr. Balke's

testimony. However, petitioner did not introduce any other evidence to support

Mr. Balke's testimony, and the Court is not required to accept self-serving

testimony as true. The Court concludes that petitioner did not meet its burden in

proving that, at the time it entered into the Petromaxx SPA, it reasonably believed

the contract would be completed within two years from its commencement date.

Accordingly, petitioner was not eligible to report income from the Petromaxx SPA

using the completed contract method of accounting.

C.

Amber Contract

1.

Contract Commencement Date

Petitioner and Amber executed the Amber SPA on July 17, 2008. The first

date on which petitioner incurred costs allocable to the Amber SPA (other than

bidding expenses or expenses incurred in connection with negotiating the

contract) was July 24, 2008, when petitioner purchased the Atas refinery from

Toplam for use in the Amber SPA. Thus, for purposes of section 460, the contract

commencement date of the Amber SPA was July 24, 2008. See sec. 460(g); sec.

1.460-1(b)(7) and (8), Income Tax Regs.

- 52 [*52]

2.

Two-Year Estimate

a.

Parties' Arguments

As was the case with the Petromaxx SPA, the parties disagree whether

petitioner reasonably estimated that the Amber SPA could have been completed

within two years from the contract commencement date of July 24, 2008.

Respondent argues that the terms of the Amber SPA itself show that petitioner did

not reasonably expect the SPA to be completed within two years. Respondent also

relies on Mr. Harris' expert testimony that 4-1/2 years is an optimistic estimate of

the time required to complete a project similar to the Amber refinery project.

Petitioner again argues that its 3-D laser scanning and parallel processing system

allowed it to reasonably estimate that the Amber SPA would be completed within

two years and that Mr. Harris did not consider petitioner's parallel processing

system when determining how long it would take the parties to complete the

Amber refinery project.

b.

Terms of the Amber SPA

While the dates specified in a contract are not dispositive, the Court will

first look to the terms of the Amber SPA to help determine petitioner's

expectations at the time it entered into the agreement. The Amber SPA is

governed by Texas law, including Article 2 of the Uniform Commercial Code

- 53 [*53] (UCC). Under Texas law, interpreting a written contract is primarily a

matter of "ascertain[ing] the * * * intentions of the parties as expressed in the

instrument." Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). A threshold

issue in contract interpretation is whether the contract is ambiguous. A contract is

ambiguous if the terms used are reasonably susceptible of more than one meaning.

See id.

Where an unambiguous writing has been entered into between parties, the

courts will give effect to the parties' intention as expressed or apparent in the

writing. City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515, 518

(Tex. 1968). In the usual case the instrument alone will be deemed to express the

intention of the parties for it is objective, not subjective, intent that controls. Id.

Generally, the parties to a contract intend every clause to have some effect and in

some measure to evidence their agreement. R All parts of a contract are to be

taken together, and such meaning shall be given to them as will carry out and

effect to the fullest extent the intention of the parties. R at 519.

The terms of the Amber SPA are not ambiguous. While the Amber SPA is

silent with respect to many anticipated performance dates, there is a significant

legal difference between ambiguous contracts and silent contracts. See Thompson

v. CPN Partners, LP, 23 S.W.3d 64, 71 (Tex. App. 2000). The only term in the

- 54 [*54] Amber SPA that references a specific date is with respect to petitioner's

delivery obligations; the Amber SPA clearly states that petitioner was required to

deliver the last unit to a specified site in Turkey29 by November 15, 2010,

approximately 28 months after the July 24, 2008, contract commencement date. If

petitioner failed to deliver by November 15, 2010, petitioner was subject to

penalties; if petitioner delivered the last unit before November 15, 2010, it was

entitled to bonus payments.

Taken together, the delivery date and the potential penalties and bonus

payments indicate that the parties intended November 15, 2010, to be the

approximate date by which petitioner would deliver the last unit. This delivery

date occurred more than two years after the contract commencement date--July 24,

2008--and Amber still had to transport the refurbished parts from Turkey to

Pakistan, construct the refinery, and commission and performance test the newly

assembled refinery before petitioner would have satisfied its contractual

obligations.

29The Amber SPA reserved the right to determine the final location of the

refinery, but at the time of executing the SPA, a location in Pakistan was the

target.

- 55 [*55] Because the dates specified in the Amber SPA are not dispositive with

respect to the two-year rule, see sec. 1.460-1(f)(4)(i), Income Tax Regs., the Court

will next consider Mr. Balke's testimony.

c.

Mr. Balke's Testimony

Although the terms of the Amber SPA do not reference parallel processing

or specific dates by which the refinery had to be assembled, commissioned, and

performance tested, petitioner argues that the November 15, 2010, delivery date

was an arbitrary date selected by the parties and that the parties intended to

implement petitioner's parallel processing system, which would have allowed the

Amber SPA to be completed within "about 18 to 24 months."

Petitioner relies only on Mr. Balke's unsupported testimony; petitioner did

not produce any other witnesses, provide the Court or respondent with

documentary evidence that would reflect the parties' intent to use a parallel

processing system,3° produce any evidence to show that the parties' conduct

reflected an intent to conduct operations using a parallel processing system, or

even explain exactly how much time parallel processing would save. Even if the

3°Unlike the Petromaxx SPA, which did not reference 3-D laser scanning

and modeling, the Amber SPA specifically refers to 3-D laser scanning and

modeling. However, like the Petromaxx SPA, the Amber SPA does not mention

parallel processing or address the purchaser's obligations under such a system.

- 56 [*56] Court assumes that the parties would be completing their tasks

simultaneously, petitioner did not prove that parallel processing would allow the

parties to complete the contract within two years.

Although Mr. Balke has over 30 years of experience in working with oil

refineries and refinery equipment, including international dealings, he did not

provide a single concrete example of a project similar to the Amber refinery

project where the parties conducted operations using a parallel processing system

and completed it within two years from its commencement date. And there is no

indication that Mr. Balke's projections took into account any unanticipated delays.

S_e_e id. Petitioner simply has not introduced sufficient evidence to show that its

expectations with respect to the Amber refinery project's timeframe differed from

those objectively manifested in the Amber SPA.3¹

d.

Conclusion

As with the Petromaxx refinery project, petitioner has not met its burden to

prove that respondent's determination regarding the Amber refinery project was

arbitrary. Respondent's position that petitioner could not have reasonably

estimated that the Amber refinery project would be completed within two years is

supported by the terms of the Amber SPA; on its face, the Amber SPA called for a

3¹The parties canceled the Amber SPA on January 18, 2010.

- 57 [*57] delivery date more than two years after the Amber SPA commencement

date. Even if the Court considers Mr. Balke's self-serving testimony, petitioner

did not provide any evidence to support his testimony. The Court concludes that

petitioner did not meet its burden in proving that, at the time it entered into the

Amber SPA, it reasonably expected the contract to be complete within two years

from its commencement date. Accordingly, petitioner was not eligible to report

income from the Amber project using the completed contract method of

accountmg.

IV.

Section 6662(a) Accuracy-Related Penalties

Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty

with respect "to any portion of an underpayment of tax required to be shown on a

return" if that underpayment is due to, among other things, negligence or a

substantial understatement of income tax. An accuracy-related penalty does not

apply to any portion of an underpayment of tax for which the taxpayer had

reasonable cause and acted in good faith. See sec. 6664(c)(1).

Section 6662(b)(2) imposes a 20% penalty on any underpayment

attributable to any "substantial understatement of income tax." An

"understatement" generally is the excess of the amount of tax required to be shown

on the return over the amount of tax that is actually shown on the return. Sec.

- 58 [*58] 6662(d)(2)(A). For a C corporation, an understatement is "substantial" if it

exceeds the lesser of 10% of the tax required to be shown on the tax return (or, if

greater, $10,000) or $10 million. Sec. 6662(d)(1)(B). Under section 7491(c), the

Commissioner bears the burden of production with regard to penalties for

individual taxpayers, Higbee v. Commissioner, 116 T.C. 438, 446 (2001), but

section 7491(c) does not apply where, as here, the taxpayer is a corporation, N_T

Inc. v. Commissioner, 126 T.C. 191, 194 (2006).

Petitioner substantially understated its income tax for both 2009 and 2010,

reporting zero tax liability for each of those years. And there is no disagreement

that under either of respondent's alternative positions, the amount of tax required

to be shown exceeds $10,000 for each year. Therefore, the Court will look next to

whether petitioner has shown that it is not liable for the penalty because of

reasonable cause. Rule 142(a); see Higbee v. Commissioner, 116 T.C. at 447.

Petitioner argues that it is not liable for the 20% accuracy-related penalty

because, in view of the complexity of section 460 and the accompanying

regulations, it made a good-faith effort to comply.

In general the accuracy-related penalty does not apply to any portion of an

underpayment of tax if it is shown that there was reasonable cause for such portion

and that the taxpayer acted in good faith. Sec. 6664(c)(1). The determination of

- 59 [*59] whether a taxpayer acted with reasonable cause and in good faith is made on

a case-by-case basis, taking into account all of the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most

important factor is the extent of the taxpayer's effort to assess his or her proper tax

liability. Id.

Reasonable cause requires that the taxpayer exercised ordinary business

care and prudence as to the disputed item. United States v. Boyle, 469 U.S. 241,

246 (1985). It can be shown through reasonable reliance on professional advice

on matters beyond a layperson's understanding:

When an accountant or attorney advises a taxpayer on a matter of tax

law, such as whether a liability exists, it is reasonable for the taxpayer

to rely on that advice. Most taxpayers are not competent to discern

error in the substantive advice of an accountant or attorney. To

require the taxpayer to challenge the attorney, to seek a "second

opinion," or to try to monitor counsel on the provisions of the Code

himself would nullify the very purpose of seeking the advice of a

presumed expert in the first place. * * *

Il at 251; Graev v. Commissioner, 147 T.C. __, __ (slip op. at 39-40) (Nov. 30,

2016); Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aM,

299 F.3d 221 (3d Cir. 2002); Freytag v. Commissioner, 89 T.C. 849, 888 (1987),

aff'd on another issue, 904 F.2d 1011 (5th Cir. 1990), afCd, 501 U.S. 868 (1991).

- 60 [*60] Petitioner used the services of the same CPA from at least 2005 through

2010. However, the only evidence of petitioner's reliance upon professional

advice rendered by its CPA is the fact that its Federal income tax returns were

filed. Nothing in the record indicates that petitioner either requested of or

received from its CPA advice regarding the application of the long-term contract

exception under section 460(e) to the Petromaxx or Amber SPAs. Based on the

absence of evidence indicating that petitioner even addressed this issue with its

CPA, the Court cannot find that it exercised ordinary business care and prudence

here.

Circumstances that may also indicate reasonable cause and good faith

include an honest misunderstanding of fact or law that is reasonable in the light of

all the facts and circumstances, including the experience, knowledge, and

education of the taxpayer. Higbee v. Commissioner, 116 T.C. at 449; sec.

1.6664-4(b)(1), Income Tax Regs.

As discussed at length supra, the Court has found unreasonable petitioner's

alleged belief, at the time it entered into the Petromaxx and Amber SPAs, that

either contract could be completed within two years. Despite his extensive

experience in working with both domestic and international oil refinery projects,

Mr. Balke did not provide any concrete examples of previous projects that he had

- 61 [*61] worked on to support his claim that he thought the Petromaxx and Amber

SPAs could be completed within two years, and he agreed with Mr. Harris'

estimates with respect to each project's duration to the extent they were based on

traditional industry practices.

Although the regulations state that dates identified in a contract are not

dispositive to the Court's analysis, sec. 1.460-1(f)(4)(1), Income Tax Regs.,

petitioner could have controlled--at least to some extent--the various performance

dates that were specified in the SPAs. If petitioner believed that it would deliver

the last refurbished unit before the delivery dates specified, it could have provided

so in the SPAs themselves. Petitioner could have required Amber and Petromaxx

to ship the refurbished units by a certain date, complete the refinery site by a

specific date, complete assembly by a specific date, and complete commissioning

and performance testing by a certain date. However, neither SPA specified those

anticipated performance dates. The only performance dates specified in the

Amber and Petromaxx SPAs were with respect to petitioner's delivery obligations,

and those respective dates reflect an expectation of completing each contract

within a period exceeding two years.

Although the contracts lacked specific performance dates, petitioner had

another opportunity to control completion dates by creating a project schedule.

- 62 [*62] Both SPAs referenced project schedules to be provided by petitioner; but the

project schedules were not included in the SPAs, and petitioner did not provide the

Court or respondent with any separate project schedule. A reasonably prudent

taxpayer would have some documentation to support its position; outside of Mr.

Balke's testimony, petitioner did not provide the Court or respondent with any

evidence that would support its decision to account for the Petromaxx and Amber

SPAs using the completed contract method.

For the aforementioned reasons, the Court concludes that petitioner did not

act with reasonable cause and in good faith when it accounted for the Petromaxx

and Amber SPAs using the completed contract method of accounting.

Accordingly, the Court will sustain respondent's determinations with respect to the

accuracy-related penalties for 2009 and 2010.32

The Court has considered all of the arguments made by the parties, and to

the extent they are not addressed herein, they are considered unnecessary, moot,

irrelevant, or without merit.

32Because the Court sustains the sec. 6662(a) accuracy-related penalty on

the ground of substantial understatement under sec. 6662(b)(2), the Court does not

need to decide whether the penalty should also be sustained on the ground of

negligence under sec. 6662(b)(1). Sec. 1.6662-2(c), Income Tax Regs.

- 63 [*63] To reflect the foregoing and the concessions of the parties,

Decision will be entered

under Rule 155.