CNT Investors, LLC, Charles C. Carroll, Tax Matters Partner, Petitioner v. Commissioner of Internal Revenue, Respondent, 144 T.C. 161

CONTENTS FINDINGS OF FACT . 164 I. Introducing the Carroll Family . 165 II. Solving the Low Basis Dilemma . 168 III. Selling the Son-of-BOSS Strategy . 171 IV. Achieving the Basis Boost . 173 A. Son-of-BOSS . 174 B. Basis Boost . 176 C. Real Estate Extraction ... 177 V. Reporting the Transactions .. 179 A. CNT’s 1999 Returns . 179 B. CCFH’s 1999 Return . 180 C. Individuals’ 1999 Returns H QO 1 — I VI. Challenging the Transactions H CO T — ! OPTNTON C\ cc 1— I. Preliminary Matters . 182 A. When Appellate Venue Matters . 182 B. Why Appellate Venue Does Not Matter Here . 183 II. Timeliness of the FPAA . 186 A.

Timeliness Under TEFRA . 186 B. Theory of Omission . 188 C. Omission by Bootstrapping . 188 D. Scope of Sham . 191 1. Gregory Revisited . 194 2. Sham Transaction Doctrine . 199 3. Step Transaction Doctrine . 202 4. Blending the Doctrines . 204 5. Conclusion . 208 E. Definition of Omission . 208 1. Mr. Carroll . 210 2. Ms. Cadman . 211 3. Ms. Craig . 212 F. Adequacy of Disclosure . 213 1. Legal Standard . 213 2. Petitioner’s Proof . 215 3. Returns’ Revelations . 215 G. Conclusion . 219 III. Consequences of the Sham Stipulation . 219 IV. Liability for the Accuracy-Related Penalty . 220 A.

Penalties’ Applicability . 221 B. Petitioner’s Defense . 222 1. Sufficient Expertise? . 223 2. Necessary Information? . 227 3. Good-Faith Reliance? . 229 V. Conclusion . 234 Wherry, Judge: This case constitutes a partnership-level proceeding under the unified partnership audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, sec. 402(a), 96 Stat. at 648 (codified as amended at sections 6221-6234).

On August 25, 2008, respondent mailed a notice of final partnership administrative adjustment (FPAA) to CNT Investors, LLC (CNT), for its taxable period ending December 1, 1999. Pursuant to

section 6226, petitioner, Charles C. Carroll, CNT’s tax matters partner (hereinafter referred to as Mr. Carroll or petitioner), timely petitioned this Court on November 12, 2008, for readjustment of CNT’s partnership items determined in the FPAA. After concessions by petitioner, which we discuss below, the issues remaining for decision are: (1) whether the six-year limitations period of

section 6501(e)(1)(

A) applies to CNT’s partners for their 1999 taxable years, such that the FPAA was timely; (2) whether the adjustments in the FPAA should be sustained; and (3) whether a

section 6662 valuation misstatement or accuracy-related penalty applies to any underpayment attributable to the partnership-level determinations made in the FPAA, to the extent sustained herein. FINDINGS OF FACT Petitioner lived in California when he filed CNT’s petition. CNT, the limited liability company to which the FPAA was directed, was, as agreed to by the parties, a sham entity with no business purpose. CNT did, however, file Federal income tax returns annually from 1999 through at least 2010. On its 1999, 2000, and 2001 returns CNT provided a California address and reported ownership of real property.

As of January 22, 2015, online grantor/grantee records of the Ven-tura County, California, Recorder reflected that CNT held legal title to interests in four parcels of real property situated within that county. Those records also reflected that CNT leased some portion of its real property interests to “SCI California Funeral Services, Inc.”, in 2004. The lease agreements) had a 15-year term and included an option to purchase. I. Introducing the Carroll Family After serving in the United States Marine Corps at the time of World War II, Mr. Carroll attended mortuary science college.

He also became a licensed embalmer. Mr. Carroll began operating Charles Carroll Funeral Home (funeral home) in 1954. The funeral home was an archetypal family business. Mr. Carroll and his wife, Garnet, lived for many years and raised their twin daughters, Teri Craig and Nancy Cadman, at various times in homes above, behind, and next door to their mortuaries. Mr. and Mrs. Carroll both worked for the funeral home from 1954 until the business was sold in 2004, and their daughters and Ms. Craig’s two sons also worked for the funeral home during various periods. Although Mr.

Carroll was an astute and successful businessman, he understood only basic tax principles and lacked sophistication in various stock and bond type financial matters. Hence he sought counsel and assistance from professional advisers on legal and accounting issues relating to the funeral home. Attorney J. Roger Myers began working with Mr. Carroll in the late 1970s or early 1980s, when he assisted Mr. Carroll in acquiring two additional mortuaries. Mr.

Myers thereafter became the funeral home’s de facto general counsel, providing general business consultation, maintaining records, and advising on employment and regulatory issues. The Carroll family regularly consulted Mr. Myers on legal issues arising in connection with the funeral home, and Mr. and Mrs. Carroll also engaged Mr. Myers to prepare their estate plan, which included an inter vivos giving program. As of 1999 Mr. Myers had practiced law for almost 30 years, most of them spent in a business-oriented private practice involving some civil litigation.

Although he did not hold himself out as a tax lawyer and typically referred clients to specialists for complicated income tax advice, Mr. Myers had taken basic Federal income and estate tax courses in law school, had previously prepared estate tax returns, and had advised Mr. Carroll on general tax law principles. Certified Public Accountant (C.P.A.) Frank Crowley also began working with Mr. Carroll in the early 1980s, and Mr. Carroll followed him when Mr. Crowley changed accounting firms. Mr.

Crowley provided general bookkeeping and monthly payroll services for the funeral home, and he prepared its financial statements and Federal income tax returns. In the late 1990s Mr. Crowley conferred with Mr. Carroll monthly concerning the funeral home’s financial statements. He interacted more frequently with Ms. Cadman and Ms. Craig, who performed in-house bookkeeping duties for the funeral home. Mr. Carroll relied on Mr. Crowley for routine income tax advice although the funeral home’s operations rarely gave rise to complex tax issues. In addition to his C.P.A. credential, Mr.

Crowley held bachelor’s and master’s degrees in accounting and was a certified financial planner. He had taken classes in individual and corporate income tax and partnership and estate tax during his degree programs. Before meeting Mr. Carroll, Mr. Crowley had worked as a cost accountant at a publicly held company and practiced at multiple private accounting firms. His work entailed advising clients on accounting and income and estate tax issues, and as of 1999, financial matters. By the mid-1990s, the funeral home’s operations had expanded to five mortuaries.

The Carrolls owned the funeral home through a corporation, Charles Carroll Funeral Home, Inc. (CCFH), which also held title directly or indirectly to the mortuary buildings and underlying real property. Mr. Carroll was the funeral home’s original owner and CCFH’s only shareholder until he implemented the giving program through which he transferred annual tranches of shares to his daughters. As of 1999 Mr. Carroll held 94.4512% of CCFH’s outstanding shares, and Ms. Cadman and Ms. Craig each held 2.7744%. CCFH had initially operated as a C corporation but elected S corporation status at some time before 1999. II.

Solving the Low Basis Dilemma Mr. Carroll was 73, going on 74, in early 1999. He and his family had begun to contemplate his retirement and the funeral home’s sale. Mr. Carroll intended to sell the funeral home business but retain ownership of the real property, which would be leased to the buyer(s). SCI, a mortuary company that had recently begun operating in the area, had followed this model for acquisitions of other local mortuaries, and SCI had contacted the Carrolls about purchasing the funeral home. Mr.

Carroll believed that, if a national mortuary chain purchased the funeral home, it would not want to purchase the real property. Retaining and leasing the real estate would also provide the family with a periodic income stream during retirement. Mr. Carroll was financially conservative, and he had no extensive investment experience. Before 1999 he had never invested in United States Treasury notes (T-notes), traded stocks, bonds, or other securities on margin, or participated in a short sale transaction. In 1999 Mr.

Carroll’s interests in the funeral home and five mortuary properties represented almost 100% of his net worth, and his only other holdings consisted of certificates of deposit and cash. To facilitate sale of the business without the real estate, Messrs. Myers and Crowley determined that the two needed to be separated. They initially concluded that the preferred mechanism for achieving this separation would be for CCFH to divest itself of the mortuary properties, leaving it holding only the funeral home’s business operations.

They could not, however, identify a way of transferring the real estate out of CCFH without triggering recognition of substantial built-in gain, caused largely by inflation in real estate prices. As of November 1999, in the aggregate CCFH’s real estate holdings had an adjusted tax basis of $523,377 and a fair market value of $4,020,000. By late 1999 Mr. Crowley considered the real estate’s proposed transfer from CCFH a “dead issue” because, after a few years of analysis and brainstorming with Mr.

Myers and other attorneys, he had identified no way for the Carrolls to accomplish the transfer without incurring significant tax liability. Nevertheless, while sale of CCFH’s stock (after divestiture of the real estate) appeared a nonstarter, sale of its business assets remained a possibility. In that case, however, CCFH could lose its S election and become subject to dual-level income taxation within three years after the asset sale because of the passive income limitation of

section 1362(d)(3). Either way, retention of the real estate would have income tax implications. In 1999 Mr. Myers encountered a potential solution. Over lunch with a longtime acquaintance, local financial adviser Ross Hoffman, Mr. Myers described Mr. Carroll’s problem in general terms, explaining that he had a client who needed to transfer appreciated assets out of a corporation for estate planning purposes. Mr. Hoffman advised Mr. Myers that he knew of a strategy that might work. Earlier in the year Mr.

Hoffman had attended a Las Vegas conference sponsored by Fortress Financial, a New York-based tax planning firm. Erwin Mayer, an attorney with the law firm Jenkens & Gilchrist, gave a seminar at the conference on a strategy he called a “basis boost” that could allegedly increase the tax basis of low-basis assets. The basis boost strategy Mr. Mayer presented was, in substance, a Son-of-BOSS transaction. Mr. Hoffman was not a tax professional and did not hold himself out as one.

In 1999 he was a certified financial planner and regularly advised clients on liquidity, life insurance, asset allocation, and investment planning, with a focus on estate planning. He offered clients “industry designed” tax-advantaged products, such as limited partnerships, municipal bonds, and annuities. Mr. Hoffman attended the Las Vegas conference to learn about strategies and ideas that he could sell to clients or to their attorneys or C.P.A.’s. Before attending the conference, Mr. Hoffman was unfamiliar with Mr.

Mayer and with Jenkens & Gilchrist and had never traded stocks or conducted any T-note or short sale transactions for clients. Mr. Hoffman never fully understood the Son-of-BOSS transaction that Mr. Mayer pitched at the conference, but he nevertheless described it to Mr. Myers at the luncheon as a possible solution for Mr. Myers’ client. Mr. Myers wanted to understand the Son-of-BOSS transaction better before presenting it to Mr. Carroll, so Messrs. Hoffman and Myers met again, this time for a conference call with Mr. Mayer.

Bill Fairfield, another Ventura, California, attorney who had clients situated similarly to the Carrolls, also participated in the call. After speaking with Mr. Mayer, Mr. Myers understood that the proposed transaction would involve a short sale and would conclude with the real estate’s being transferred out of CCFH with a new basis. At Mr. Myers’ request, Mr. Mayer sent him a memorandum prepared by Jenkens & Gilchrist describing and analyzing the transaction. Mr. Myers reviewed the memorandum and consulted some of the legal authorities cited therein, albeit not in extreme detail.

Thereafter, on two occasions Messrs. Myers and Hoffman met with the Carrolls and Mr. Crowley at Mr. Myers’ office to discuss the proposed transaction. Using visual aids, Mr. Hoffman described in broad strokes how Mr. Carroll could, through a short sale of securities, create basis in a new entity, and he mentioned that Ted Turner had engaged in a similar transaction and, in a subsequent case concerning it, prevailed. Ms. Cadman found the Ted Turner story persuasive, reasoning that, if someone who could afford the very best legal and tax advice had engaged in this kind of transaction, it must be effective.

After the second meeting with Mr. Hoffman, the Carrolls decided to proceed with the Son-of-BOSS transaction. III. Selling the Son-of-BOSS Strategy Mr. Hoffman pitched the Son-of-BOSS transaction to the Carrolls, but the Carrolls never became his clients or paid him any compensation. He never provided any tax advice to Mr. Carroll, gave a written opinion as to the transaction, or expressly represented that the transaction would achieve Mr. Carroll’s desired result. He did, however, answer Mr. Carroll’s and his advisers’ questions, parroting what he had heard from Mr. Mayer and consulting with Mr.

Mayer when he needed more information. Messrs. Myers and Crowley and Ms. Cadman all perceived, after meeting with him, that Mr. Hoffman supported and recommended the transaction. Once Mr. Carroll decided to go forward with the transaction, Mr. Hoffman assisted ministerially with finalizing paperwork. He expected to receive a “finder’s fee” in the form of a percentage of Fortress Financial’s fee if Mr. Carroll proceeded with the transaction. After the various presentations, meetings, and phone calls, Mr.

Myers believed that he had a good grasp of how the Son-of-BOSS transaction would work and of the legal theories behind it. He had met with fellow Ventura attorney Bill Fair-field and had researched Jenkens & Gilchrist in Martindale Hubbell and on the Internet, learning that the firm had offices throughout the United States, including in Chicago, where Mr. Mayer worked. He had spoken by telephone with Mr. Mayer about the transaction. He had reviewed Mr. Mayer’s memorandum and the supporting legal authorities. And he had been present for Mr. Hoffman’s presentation. Mr.

Myers believed the transaction was feasible and that the Carrolls should seriously consider it. He advised Mr. Carroll that the transaction looked like a viable way to resolve CCFH’s low basis dilemma. Mr. Myers’ opinion did not change as the transaction proceeded. During the implementation phase, he spoke by telephone with Mr. Mayer on multiple occasions. Mr. Myers did not know all of the details of the transaction.

He did not know, for instance, how much money was actually at risk in the Son-of-BOSS component of the transaction, had no financial information about the short sale, and was unaware that the short sale would almost certainly generate no profit. He did not know how much Jenkens & Gilchrist would charge Mr. Carroll to implement the transaction. On the basis of what he did know, however, Mr. Myers formed the opinion that the transaction was legitimate and proper, and he shared this opinion with Mr. Carroll. Mr. Myers was working only for Mr. Carroll, billed Mr.

Carroll monthly for work on the transaction at his regular hourly rate, and received no other compensation or incentive for recommending it. Like Mr. Myers, Mr. Crowley did not know how much money was actually at risk in the Son-of-BOSS transaction, had no financial information about the short sale, and was unaware that the short sale would almost certainly generate no profit. Also like Mr. Myers, Mr. Crowley was working only for Mr. Carroll and received no unusual compensation for his counsel to the Carroll family. However, his advice was more ambivalent than Mr. Myers’: Mr.

Crowley did not conceal his lack of complete understanding of the transaction, and rather than affirmatively endorse it, he told Mr. Carroll that he would “go along with” it. He was willing to do so because the transaction had been developed by what he thought was a knowledgeable national law firm that was sufficiently confident to promise, in writing, that it would defend the transaction if it were challenged. As a C.P.A. in a small, two-partner firm, Mr. Crowley felt intimidated by the Jenkens & Gilchrist brand and essentially “acquiesced”. Notwithstanding Mr. Crowley’s uncertainty, Ms.

Cadman testified that the family believed he and their other advisers recommended proceeding with the Son-of-BOSS transaction. According to Ms. Cadman, had Mr. Crowley advised against it, the Carrolls would not have moved forward. IV. Achieving the Basis Boost Once the “go” decision had been made, Mr. Mayer formed four limited liability companies (LLCs):

(1) CNT, which elected to be treated as a partnership for income tax purposes,

(2) Teloma Investments, LLC (Teloma), of which Mr. Carroll was the sole member,

(3) Santa Paula Investments, LLC (Santa Paula), of which Ms. Craig was the sole member, and

(4) S. Mountain Investments, LLC (S. Mountain), of which Ms. Cadman was the sole member. Each of the LLCs was formed under Delaware law. Each was a sham entity with no business purpose. Pursuant to directions from and with the active control of Mr. Mayer and his colleagues at Jenkens & Gilchrist, the following sequence of transactions occurred. A. Son-of-BOSS On November 18, 1999, the five real properties were transferred by deed to CNT. The book value of the transferred real estate was credited to CCFH’s capital account. See supra note 4.

At that time, the five properties’ aggregate adjusted tax basis, and hence CCFH’s initial outside basis in CNT, was $523,377. On November 24, 1999, Mr. Carroll, Ms. Craig, and Ms. Cadman, via their respective LLCs, engaged in short sales of T-notes. Once the proceeds had settled, on November 26, 1999, the Carrolls transferred a total of $2,877,343 in cash proceeds from the short sales, together with the related obligations and a nominal amount of cash, apparently $10,800, to CNT. These transfers were sham transactions having no business purpose.

The transferred proceeds and cash, totaling $2,877,343, were credited to Mr. Carroll, Ms. Cadman, and Ms. Craig’s capital accounts and established their respective initial outside bases in CNT as $2,716,609, $80,367, and $80,367. See supra note 13. On the premise that the transferred obligations were not liabilities for purposes of determining the purported partners’ capital contributions, their capital accounts and outside bases were not reduced to reflect the partnership’s assumption of these partner obligations.

CNT immediately used the transferred proceeds and cash to purchase T-notes having a principal amount slightly greater than the amount the Carrolls had sold short. It did so under an agreement with Deutsche Bank whereby Deut-sche Bank agreed to repurchase the T-notes (repo). Through this offsetting repo transaction, CNT reduced to near zero its risk of incurring a loss on the short sale. On November 29, 1999, CNT closed the repo transaction and used the proceeds to satisfy the obligations that had been transferred to it, repurchasing the same number of T-notes that Mr. Carroll, Ms. Craig, and Ms.

Cadman had previously sold short and closing the short sale positions. This transaction, which generated a nominal $2,268 loss to CNT, had an estimated less than 1% probability of generating a gain or loss greater than the additional $10,800 margin that Deutsche Bank had required the Carrolls to post in connection with the transaction. The transaction did, however, leave CNT allegedly holding only the real estate with an adjusted tax basis, or inside basis, of $523,377. By comparison, its partners’ aggregate adjusted basis in their partnership interests, or outside basis, was $3,400,718. B.

Basis Boost On December 1, 1999, Mr. Carroll, Ms. Cadman, and Ms. Craig, who were CCFH’s only shareholders, purported to transfer their respective partnership interests in CNT to CCFH. As a result of these transfers, CCFH became CNT’s sole owner. The transfers triggered the termination of CNT as a partnership. For tax purposes, the following events were deemed to occur: CNT liquidated, transferring all of its assets to its partners in proportion to their interests, and the three individual partners then contributed the assets received in the liquidation to CCFH, leaving CCFH holding all of the real estate.

Each of CNT’s partners took a tax basis in the assets received in the deemed liquidation equal to that partner’s outside basis. With that step, the real estate’s aggregate adjusted tax basis rose from $523,377 to $3,396,716, ostensibly without any taxable event’s having occurred. Upon the deemed contribution of CNT’s assets to CCFH, the real estate’s newly boosted basis transferred to CCFH, and the Carrolls’ aggregate basis in their CCFH stock increased by the same amount. Inside and outside bases were once again allegedly aligned. All that remained to be done was to transfer the real estate out of CCFH. C.

Real Estate Extraction On December 31, 1999, CCFH distributed percentage interests in CNT (totaling 100%) to its three shareholders in proportion to their respective interests in CCFH. The deemed liquidation and contribution occurring on December 1 resulted in ownership of the real estate’s shifting, for tax purposes, from CNT to the Carrolls, and then from them to CCFH. But title to the real estate did not change; CNT continued to hold title to the property.

For tax purposes, the distribution of CNT interests on December 31 resulted in (1) a deemed distribution of the real estate to CCFH’s shareholders, followed by (2) their deemed contribution of the real estate to a new partnership, New CNT. Upon the deemed distribution of the real estate, CCFH recognized gain equal to the difference between its aggregate adjusted tax basis in the real estate, $3,396,716, and the real estate’s then-current fair market value, $4,020,000 — that is, $623,284. Because CCFH was an S corporation, that $623,284 gain passed through and was taxable to CCFH’s shareholders.

The passthrough gain increased each shareholder’s outside basis in CCFH, possibly giving each a sufficient basis to absorb the distribution without further gain recognition. The shareholders’ aggregate basis in the distributed real estate, and the amount of the distribution, was its fair market value, $4,020,000. That fair market value basis transferred to New CNT upon the deemed contribution. The deemed contribution also revived CNT as a partnership in the form of New CNT. This series of transactions divested CCFH of its real estate holdings and concluded with Mr. Carroll, Ms. Cadman, and Ms.

Craig owning the five mortuary properties through New CNT, purportedly generating only $623,284 of taxable, long-term capital gain in the process. Absent the basis boost to the real estate from the Son-of-BOSS transaction, the amount would have been $3,496,623. Jenkens & Gilchrist charged $116,000 for its services in arranging, executing, and assisting with reporting of the series of transactions. The firm also delivered to Mr. Carroll, Ms. Cadman, and Ms. Craig similar opinion letters describing the transactions and attesting to their probable tax consequences. V. Reporting the Transactions Mr.

Crowley prepared all relevant Federal income tax returns for the transactions. When asked to prepare returns for tax year 1999, Mr. Crowley sought further explanation about the transactions from Mr. Mayer. Jenkens & Gilchrist later reviewed Mr. Crowley’s first drafts of CCFH and CNT’s 1999 tax returns at his request and recommended some changes. A. CNT’s 1999 Returns Because of its mid-year termination and subsequent revival, CNT filed two Forms 1065, U.S.

Partnership Return of Income, for tax year 1999: one for the taxable period September 15 through December 1, 1999 (December 1 return), and one for a one-day taxable period, December 31, 1999 (December 31 return). On the December 1 return, CNT reported interest expense of $1,734 and, on

Schedule D, Capital Gains and Losses, a $2,268 short-term capital loss incurred on November 29, 1999, on a short sale of T-notes. On the appended Schedules K-l CNT reported capital interests, capital contributions, distributive shares of short-term capital loss and interest expense, distributions, and yearend capital accounts as follows: On the December 31 return, New CNT reported no income, deductions, gains, or losses. On the appended Schedules K-l, New CNT reported capital interests, capital contributions, distributions, and yearend capital accounts as follows: B.

CCFH’s 1999 Return CCFH filed a single Federal income tax return for 1999 on Form 1120S, U.S. Income Tax Return for an S Corporation. On the appended Schedules K-l, Shareholder’s Share of Income, Credits, Deductions, Etc., CCFH identified its shareholders and their ownership percentages as: Charles Carroll, 94.4512%; Nancy Cadman, 2.7744%; and Teri Craig, 2.7744%. CCFH’s shareholders and their ownership percentages remained unchanged from the beginning of the tax year. On a Treasury “Reg. Sec. 1.351 — 3(

b) Statement” (351 statement) appended to its return, CCFH reported receiving, as a contribution to capital, an 84.6% interest in CNT having a basis in the transferor’s hands of $2,873,955 as of December 1, 1999. Jenkens & Gilchrist provided the 351 statement to Mr. Crowley for attachment to CCFH’s 1999 return, and Mr. Mayer told him that it was a “necessary disclosure”. With regard to CCFH’s distribution to shareholders of CNT interests, Mr. Mayer explained that disclosure was unnecessary because there had been a “simultaneous transaction”. On the basis of this guidance, Mr. Crowley did not report the transaction as a deemed asset sale on

Schedule D, Capital Gains and Losses and Built-In Gains, which he believed would ordinarily be required. Mr. Crowley did not understand Mr. Mayer’s explanation but nonetheless followed his instructions. CCFH did not report any short- or long-term capital gain or loss for 1999 and did not file

Schedule D that year. It reported total nondividend distributions to shareholders during the year of $245,470. C. Individuals’ 1999 Returns On their respective 1999 Forms 1040, U.S. Individual Income Tax Return, Mr. and Mrs. Carroll, Ms. Cadman and her husband (Cadmans), and Ms. Craig and her husband (Craigs), each couple filing jointly, reported only passthrough ordinary income from CCFH. None of them reported any passthrough capital gain from CCFH, and none of them reported any otherwise taxable distribution from CCFH. Mr. and Mrs. Carroll filed their 1999 return on October 15, 2000.

The Cadmans and the Craigs filed their 1999 returns on October 18, 2000. Respondent received from Mr. and Mrs. Carroll and the Cadmans on September 5, 2006, and from the Craigs on September 8, 2006, signed Forms 872-1, Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership, extending the period for assessment as to their 1999 tax years to October 15, 2007. On June 28, 2007, respondent received from each couple a second signed Form 872-1 extending the limitations period to December 31, 2008. VI.

Challenging the Transactions On August 5, 2008, respondent mailed an FPAA with respect to CNT’s December 1 return. In the FPAA, respondent adjusted to zero CNT’s reported losses, deductions, distributions, capital contributions, and outside basis for the applicable tax period.

The FPAA cites myriad bases for these adjustments, including that CNT was not, as a factual matter, a partnership, lacked economic substance, and was formed or availed of solely for tax avoidance purposes; and that both the Son-of-BOSS transaction and the individual partners’ subsequent contribution of their interests to CCFH were sham transactions undertaken solely for tax avoidance purposes. Respondent also determined an accuracy-related penalty under

section 6662 of 20% or 40% of any underpayment attributable to a gross or substantial valuation misstatement, negligence or disregard of rules and regulations, and/or a substantial understatement of income tax. CNT, through its tax matters partner, Mr. Carroll, timely petitioned this Court on November 12, 2008, for readjustment of partnership items under

section 6226, challenging each of respondent’s adjustments and all alleged bases for the determined penalty. OPINION I. Preliminary Matters We have listed above only three issues for decision in this case, but the parties have, between them, raised several others. Before proceeding to the issues we will decide, we explain why we do not decide two others: (1) whether the venue for appeal in this case is in the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit) or the U.S. Court of Appeals for the District of Columbia Circuit (D.C.

Circuit); and (2) whether this Court has jurisdiction over the accuracy-related penalty determined in the FPAA. We need not answer the second question because the U.S. Supreme Court has already done so — in the affirmative — in United States v. Woods, 571 U.S. _ , _, 134 S. Ct. 557, 564 (2013). We need not resolve the first question because, after Woods, the answer will not affect our analysis of the substantive issues in this case. A. When Appellate Venue Matters

Section 7482(

b) governs the venue for appeal from a decision of this Court. Where our decision readjusts partnership items pursuant to a petition under

section 6226, the appellate venue is the U.S. Court of Appeals for the circuit in which the partnership’s principal place of business is located. Sec. 7482(b)(1)(E). If, however, the subject partnership has no principal place of business when the petition is filed, the appellate venue will be the D.C. Circuit. Sec. 7482(b)(1) (flush language); see also AHG Invs., LLC v. Commissioner, 140 T.C. 73, 82 (2013) (where it was not established whether a partnership had a principal place of business at the time the petition was filed, concluding that the case would be appealable in the D.C. Circuit).

Respondent contends that CNT had no principal place of business when the petition was filed, and that the D.C. Circuit is the proper venue for appeal. Petitioner, however, insists that the venue for appeal in this case is the Ninth Circuit. As a trial court, we do not ordinarily opine on the venue for appeal of our decisions. See Peat Oil & Gas Assocs. v. Commissioner, T.C. Memo. 1993-130, 65 T.C.M. (CCH) 2259, 2264 (1993). However, this Court “follow[s] a Court of Appeals decision which is squarely in point where appeal from our decision lies to that Court of Appeals and to that court alone.” Golsen v.

Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). Where the proper venue for appeal determines how we should apply the law, “[w]e believe it appropriate * * * to consider the issue of venue”. Brewin v. Commissioner, 72 T.C. 1055, 1059 (1979), rev’d and remanded on other grounds, 639 F.2d 805 (D.C. Cir. 1981). B. Why Appellate Venue Does Not Matter Here In their briefs, the parties invoke the Golsen rule with respect to two related issues. First, the substantial and gross valuation misstatement penalties apply with respect to any understatement of tax “attributable to” the misstatement.

Sec. 6662(b)(3), (h). If the venue for appeal is the Ninth Circuit, petitioner contends we would be bound to follow that court’s decisions in Keller v. Commissioner, 556 F.3d 1056 (9th Cir. 2009), aff’g in part, rev’g in part T.C. Memo. 2006-131, and Gainer v. Commissioner, 893 F.2d 225 (9th Cir. 1990), aff’g T.C. Memo. 1988-416, interpreting the phrase “attributable to”. In Gainer v.

Commissioner, 893 F.2d at 226, the taxpayer purchased an interest in a shipping container at an inflated value, paying most of the purchase price with a promissory note, then claimed an investment tax credit and deducted depreciation on the basis of the inflated value. The Commissioner disallowed the deduction because the container was not placed in service in the tax year at issue, 1981, and also determined a valuation misstatement penalty. Id. Affirming this Court, the Ninth Circuit held that the taxpayer’s understatement of income tax was not “attributable to” his overstatement of the container’s value.

Id. at 228. Rather, the understatement was attributable to the container’s not having been placed in service, a fact that precluded the taxpayer from deducting any depreciation. See id. In Keller v. Commissioner, 556 F.3d at 1060-1061, the Ninth Circuit extended Gainer’s reasoning to disallow a gross valuation misstatement penalty where the taxpayer engaged in a sham transaction and then claimed deductions for and reported basis in assets that he never actually acquired.

On petitioner’s reading, these precedents compel us to disallow any valuation misstatement penalty here because any understatement of tax results from CNT’s sham status, not from a valuation misstatement. In making this argument, petitioner did not have the benefit of the Supreme Court’s subsequently released decision in Woods. Specifically citing Keller, the Supreme Court rejected the premise on which the Ninth Circuit’s rule rests — that is, that a transaction’s lack of economic substance and an overstatement of basis are necessarily independent possible causes for an understatement of tax.

Woods, 571 U.S. at _, 134 S. Ct. at 567. Where “partners underpa[y] their taxes because they overstate^ their outside basis * * * because the partnership[ ] * * * [is a] sham[]”, the Court had “no difficulty concluding that” any resulting underpayment was attributable to the misstatement of outside basis. Id. at_, 134 S. Ct. at 568. Woods governs the valuation misstatement penalty’s applicability here, regardless of the appellate venue. Second, under

section 6221 we may consider the applicability of a penalty only to the extent that it “relates to an adjustment to a partnership item”. If the venue for appeal is the D.C. Circuit, petitioner contends we would be bound to follow that court’s decision in Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010), aff’g in part, rev’g in part, vacating and remanding in

part 131 T.C. 84 (2008). There, the D.C. Circuit strongly hinted that, where the Commissioner determines that a penalty applies to an understatement of income tax, and that understatement is attributable to an adjustment of outside basis, this Court lacks jurisdiction over the penalty in a partnership-level proceeding because outside basis is an affected item “to be resolved at the partner level”. See id. at 655-656. This Court has twice before examined the scope and import of the D.C. Circuit’s holding. See Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67, 136-138 (2012); Petaluma FX Partners, LLC v.

Commissioner, 135 T.C. 581, 586-587 (2010). We need not revisit the question here because, in the interim, the Supreme Court has had the final word. In Woods, 571 U.S. at _, 134 S.

Ct. at 564, where the allegedly misstated item was outside basis in a sham partnership, the Supreme Court concluded that a trial court in a partnership-level proceeding has jurisdiction to determine whether the partnership’s lack of economic substance can “justify imposing a valuation-misstatement penalty on the partners.” Regardless of the appellate venue, Woods confirms that we have jurisdiction to consider the valuation misstatement penalty. We need not invoke the Golsen rule for either reason raised by the parties.

We will apply the same legal principles to the issues in this case whether the venue for appeal is the D.C. Circuit or the Ninth Circuit. For us to undertake to resolve the correct appellate venue, inasmuch as it would not affect the disposition of this case, “would, at best, amount to rendering an advisory opinion. This we decline to do.” See Greene-Thapedi v. Commissioner, 126 T.C. 1, 13 (2006). II. Timeliness of the FPAA The parties have stipulated that CNT and the Son-of-BOSS transaction were shams. One might view this stipulation as a concession by petitioner of the entire case. It is not.

Petitioner offers a defense to the penalties determined in the FPAA, and more importantly, vigorously contests the FPAA’s validity in the first instance, claiming that its issuance was untimely. A. Timeliness Under. TEFRA In the context of an FPAA issued under TEFRA procedures, timeliness for statute of limitations purposes is derivative: The Internal Revenue Code prescribes no period during which TEFRA partnership-level proceedings, which begin with the mailing of the * * * [FPAA], must be commenced.

However, if partnership-level proceedings are commenced after the time for assessing tax against the partners has expired, the proceedings will be of no avail because the expiration of the period for assessing tax against the partners, if properly raised, will bar any assessments attributable to partnership items. Generally, in order to be a party to a partnership action, a partner must have an interest in the outcome. If the statute of limitations applicable to a partner bars the assessment of tax attributable to the partnership items in issue, that partner would generally not have an interest in the outcome.

See sec. 6226(

c) and (d). However, * * * a partner may participate in such action for the purpose of asserting that the period of limitations for assessing any tax attributable to partnership items has expired and that we have jurisdiction to decide whether that assertion is correct. * * * [Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533, 534-535 (2000); fn. refs, omitted.]

Section 6229(

a) prescribes a three-year limitations period, commencing on the later of the date on which the partnership return is filed or the last day for filing such return without regard to extensions, for the assessment of tax attributable to any partnership item or affected item. However, we have held that “[sjection 6229 provides a[n] [alternative] minimum period of time for the assessment of any tax attributable to partnership items (or affected items)” that can extend, but not reduce, the limitations period otherwise prescribed by

section 6501. Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. at 540-543. Respondent issued the FPAA with respect to CNT’s December 1 return, which covered the taxable period September 15 through December 1, 1999. That taxable period ended within the partners’ common 1999 taxable year, so we must ascertain whether the period for assessment for the 1999 tax year had expired as to any or all of CNT’s partners when respondent issued the FPAA on August 25, 2008.

See sec. 706(a) (partner must include partnership items in income in the partner’s tax year within or with which the partnership’s tax year ends). It is undisputed that the alternative three-year limitations periods in sections 6501(

a) and 6229(

a) had both lapsed with respect to all partners’ 1999 tax years when respondent issued the FPAA. Instead, respondent hangs his hat on

section 6501(e)(1)(A), which extends the limitations period to six years where a taxpayer “omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return”. In that case, the time for assessment would have expired on October 15, 2006, as to Mr. and Mrs. Carroll, and three days later as to the Cadmans and the Craigs. Before their respective expiration dates under

section 6501(e)(1)(A), but after their respective expiration dates under sections 6501(

a) and 6229(a), Mr. and Mrs. Carroll, the Cadmans, and the Craigs all agreed to extend the periods for assessment for their 1999 tax years, including with respect to tax items attributable to CNT, to October 15, 2007. See sec. 6501(c)(4). Before that date, each couple agreed to further extend the limitations period to December 31, 2008. Respondent issued the FPAA before that later date. The FPAA’s timeliness therefore turns on whether

section 6501(e)(1)(

A) applies. B. Theory of Omission The statute of limitations is an affirmative defense to be pleaded and ultimately proven by petitioner; but because respondent asserts that the six-year statute of limitations in

section 6501(e)(1)(

A) applies, respondent bears the burden of going forward with the evidence regarding the alleged omission of income. See Hoffman v. Commissioner, 119 T.C. 140, 146-147 (2002). If respondent satisfies that burden, then petitioner must introduce evidence of his own to rebut respondent’s showing. See id. at 146. Relying on stipulated facts and the tax returns in the record, respondent offers the following: Pursuant to the parties’ stipulations, CNT, Teloma, Santa Paula, and S. Mountain are all disregarded as shams, and the transfer of short sale proceeds and related obligations to CNT is also disregarded as a sham.

Therefore, CCFH in fact distributed its interest in the highly appreciated assets of CNT (the five mortuary properties) to its shareholders, the Carrolls. Under

section 311(b), if a corporation distributes appreciated property to a shareholder, the corporation must recognize gain as if it had sold the property for fair market value. Where the corporation is an S corporation, that gain passes through and is taxable to the corporation’s shareholders pursuant to

section 1366(a)(1). Yet neither CCFH nor its shareholders reported any of this gain. Hence, an item of gross income was omitted from CCFH’s 1999 Form 1120S and from its three shareholders’ 1999 Forms 1040. By respondent’s computations, because this omission amounted to more than 25% of gross income for each partner,

section 6501(e)(1)(

A) applies. We conclude that respondent has met his burden of going forward with evidence as to the longer, six-year period of limitations. We turn now to petitioner’s response. Petitioner offers four alternative reasons

section 6501(e)(1)(

A) will not avail respondent here. We examine each of these arguments in turn. C. Omission by Bootstrapping First, petitioner charges respondent with attempting to “bootstrap” an alleged omission by a different taxpayer, using a transaction occurring outside the tax period covered by the return that is the subject of the FPAA (the December 1 return), to hold open the period of limitations with respect to items reported on that return. Petitioner contends this approach stretches our caselaw too far.

We view petitioner’s “bootstrapping” critique as aimed at two mismatches: between CNT and the taxpayers from whose returns the income item was allegedly omitted, and between the tax period covered by the December 1 return and the tax period in which the event giving rise to the income item occurred. Neither of these incongruities is unprecedented. In Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. at 536, the taxpayer corporation had purportedly transferred property to a partnership in exchange for an interest therein.

The Commissioner, discerning a sale disguised as a capital contribution, issued an FPAA adjusting items relating to the purported contribution. Id. Before this Court, the Commissioner claimed that while no income had been omitted from the partnership’s return, if the FPAA adjustments were sustained, the taxpayer corporation would have failed to report a substantial gain on its own return. Id. at 538. Because of this omission by a partner, the six-year limitations period of

section 6501(e)(1)(

A) would apply with respect to that partner. See id. We agreed with the Commissioner’s analysis. See id. at 551. Petitioner contends that respondent stretches Rhone-Poulenc beyond its moorings by relying on an omission by a third-party entity. But as we have elucidated above, if the FPAA’s adjustments are sustained, then it will necessarily follow that Mr. Carroll, Ms. Cadman, and Ms. Craig will each have omitted income from his or her own return — that is, passthrough

section 311(

b) gain, includible under

section 1366(a)(1). It is this omission, not CCFH’s omission of the

section 311(

b) gain from its 1999 Form 1120S, that would trigger

section 6501(e)(1)(

A) as to the Carrolls. Granted, the omitted item does not flow through to the individual partners directly from CNT but instead from another source, CCFH. Yet in Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. at 536, likewise, the omitted item did not flow through to the taxpayer corporation from the partnership but instead arose under

section 1001. And here, as in Rhone-Poulenc, there will have been an omission only if the adjustments in the FPAA are sustained. Id. at 551. Given these essential similarities, we think that Rhone-Poulenc squarely applies to the facts before us. Petitioner further cites as unprecedented respondent’s reliance on an omission arising from a transaction that occurred outside the partnership tax period covered by the subject return. Yet in Kligfeld Holdings v. Commissioner, 128 T.C. 192 (2007), we addressed a highly similar situation.

There, in 1999, an individual taxpayer engaged in a Son-of-BOSS tax shelter transaction and contributed the proceeds and related obligations to a partnership along with highly appreciated Inktomi stock. Id. at 194 — 195. The partnership sold most of the stock in 1999 but distributed the proceeds and the remaining stock to its partners — the taxpayer and his wholly owned S corporation — in 2000. Id. at 197. In 2004 the Commissioner issued to the partnership an FPAA based upon its 1999 Form 1065. Id. at 198. The partnership’s tax matters partner petitioned this Court and raised a statute of limitations defense.

Id. at 199. The Commissioner asserted that the FPAA was timely because the limitations period with respect to the individual taxpayer’s 2000 tax year had not expired when the FPAA was mailed, and the adjustments in the FPAA would, if sustained, affect items reported on that taxpayer’s 2000 tax return, namely, the distributed proceeds from the stock sale. See id. at 199. Scrutinizing TEFRA, we discerned that “Congress anticipated that the taxable year in which an assessment is made would not always be the same as the taxable year in which the adjustments are made.” Id. at 205.

Specifically rejecting the tax matters partner’s timing mismatch arguments, we held that the FPAA was timely when issued because the limitations period had not yet run as to the taxable year in which an assessment triggered by the FPAA’s adjustments would be made. Id. at 202, 206-207. Kligfeld Holdings more than justifies respondent’s position here. There, no overlap existed between the taxable period covered by the FPAA and the taxable period for which, if its adjustments were sustained, an assessment would be made.

Here, given that the alleged omission arose from a transaction occurring on December 31, 1999, any assessment as to CNT’s partners would be made for their 1999 tax year. CNT’s December 1 return covers a period entirely within that same tax year. Moreover, contrary to petitioner’s assertion, there was a third-party entity in play in Kligfeld Holdings. As here, the only other partner in the purported partnership created by the individual taxpayer in Kligfeld Holdings v.

Commissioner, 128 T.C. at 194-195, was his wholly owned S corporation, to which (as occurred here) he contributed a sufficiently large interest in the partnership to trigger a technical termination under

section 708(b)(1). And while in Kligfeld Holdings the FPAA’s adjustments would have flowed through directly to the individual taxpayer’s return, sustaining those adjustments would also have resulted in additional pass-through income to the taxpayer under

section 1366(a)(1). See id. at 199 (explaining Commissioner’s position that S corporation should have reported capital gain on the partnership’s distribution of cash proceeds from the stock sale). Between them, Rhone-Poulenc and Kligfeld Holdings provide ample support for respondent’s theory and decisively answer petitioner’s “boot-strapping” argument. We therefore proceed to petitioner’s second argument. D. Scope of Sham Petitioner insists that — pursuant to the parties’ stipulation and on the basis of the entire record — every step in the series of transactions the Carrolls undertook should be disregarded.

Petitioner contends that transfer of the real estate was part of an integrated series sham of transactions, that the entire series should be disregarded, and that CCFH should be treated as the real properties’ continuous tax owner. Accordingly, petitioner concludes, the transaction generating the allegedly omitted income never occurred, so no income could have been omitted. Respondent, naturally, demurs.

In his view only the Son-of-BOSS transaction was a sham because it was entered into solely to artificially eliminate the built-in gain in the real estate, while the remaining steps were cognizable for tax purposes. The parties’ arguments implicate three closely related and frequently conflated legal doctrines: the economic substance doctrine, the sham transaction doctrine, and the step transaction doctrine. Although these doctrines’ distinct names might suggest corresponding substantive distinctions, the lines between and among them blur upon examination.

Congress reduced prospective confusion as to the economic substance doctrine’s tenets when it codified that doctrine in March 2010. See Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, sec. 1409, 124 Stat. at 1067-1070 (codified at

section 7701(o)). Yet the flurry of commentary that followed the issuance by the IRS of Notice 2014-58, 2014-44 I.R.B. 746, interpreting the codified provision amply demonstrates the degree of remaining uncertainty as to the scope, contours, and sources of economic substance and the other, noncodified judicial doctrines. See, e.g., Jasper L. Cummings, Jr., “The Sham Transaction Doctrine”, 145 Tax Notes 1239 (2014); Amy S.

Elliott, “Economic Substance Notice’s Sham Treatment Prompts Criticism”, 145 Tax Notes 377 (2014); Susan Simmonds, “Economic Substance Cases Still Reflect a Vague Doctrine”, 146 Tax Notes 32 (2015). If one looks to the caselaw, the economic substance, sham transaction, and substance over form doctrines resemble a Venn diagram. In a statutorily mandated 1999 study the Joint Committee on Taxation attempted to define and distinguish these three doctrines as well as the business purpose and step transaction doctrines. See Staff of J.

Comm, on Taxation, Study of Present-Law Penalty and Interest Provisions as Required by

Section 3801 of the Internal Revenue Service Restructuring Act of 1998 (Including Provisions Relating to Corporate Tax Shelters) (Vol. I), at 186-198 (J. Comm. Print 1999). The study candidly acknowledges that “[t]hese doctrines are not entirely distinguishable, and their application to a given set of facts is often blurred by the courts and the IRS. There is considerable overlap among the doctrines, and typically more than one doctrine is likely to apply to a transaction.” Id. at 186.

The doctrines’ substantive similarities would not, alone, generate uncertainty for taxpayers (or tenure opportunities for tax academics) if courts applying the doctrines did so using consistent terminology. We have not. Despite their lexical imprecision, prior opinions of this Court and other courts form a substantial body of precedent for the application of judicial doctrines to disallow tax results in transactions that, on their face, technically strictly conform to the letter of the Code and the regulations. In identifying the source of those doctrines, courts typically point to Gregory v.

Helvering, 293 U.S. 465 (1935). Gregory has come to stand for so many principles that, in order to define our premises before applying them to the facts of this case, what the Supreme Court actually said and what it was doing in that case bear reexamination. 1. Gregory Revisited Gregory and subsequent Supreme Court opinions relying upon it contain the seeds of each of the doctrines attributed to it. Mrs.

Gregory had conducted a series of transactions that, she asserted, satisfied all requirements for a reorganization under then-applicable law, such that her wholly owned corporation’s transfer to her of highly appreciated stock, ensconced within a transient corporate shell, was nontaxable. See Gregory v. Helvering, 293 U.S. at 467-468. In its opinion the Supreme Court asked “whether what was done, apart from the tax motive, was the thing which the statute intended.” Id. at 469. The Court’s answer to that question implicates two rationales.

First, the Court read the statute to apply only to transfers made in pursuit of a “business or corporate purpose”. See id. Second, the Court emphasized its focus on the substance, rather than the form, of what had transpired, characterizing the transaction as “a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character”. See id. Less than one year later, the Court echoed these two themes in Helvering v. Minn. Tea Co., 296 U.S. 378, 385 (1935), another reorganization case.

The Court distinguished the case before it from Gregory as involving a “bona fide business move” (i.e., business purpose). Id. Further, the Court explained that Gregory had “revealed a sham[,] * * * a mere device intended to obscure the character of the transaction”, but confirmed that Gregory had “disregarded the mask and dealt with realities.” Id. The Court thus used the word “sham” to describe a transaction, the true “character” of which did not align with its form, and thereby tethered the term “sham” to substance over form principles. See id.

Hence, the sham transaction doctrine originated as an extension of Gregory's substance over form principle. We have described that doctrine as having two strands: (1) a factual sham is a transaction that did not, in fact, take place, and (2) a legal or economic sham, also known as a sham in substance, is a transaction that did take place but that had no independent economic significance aside from its tax implications. See Krumhorn v. Commissioner, 103 T.C. 29, 38, 46 (1994). The latter strand can be traced to Gregory.

In a transaction that is a sham in substance, papers may have been signed and money moved around, but in concrete, economic terms, the transaction is a nullity. Afterward, the parties’ beneficial interests remain essentially unchanged. Courts typically apply the substance over form principle to recharacterize a transaction to make its form (on the basis of which it will be taxed) consistent with the economic, nontax substance of what occurred.

When the transaction is an economic sham, such that nothing of substance in fact occurred (or could have occurred as the transaction was structured), we disregard it altogether, just as we would do with a factual sham. Only five years later, in Higgins v. Smith, 308 U.S. 473, 476 (1940), the Court deemed substance over form a “broad and unchallenged principle”. The taxpayer in that case had claimed an ordinary loss deduction in connection with a sale of securities to his wholly owned corporation, which he had created solely to achieve income and estate tax savings. See id. at 474-475.

Because substance over form “furnishe[d] only a general direction”, the Court looked to Gregory’s business purpose theme and extrapolated from it: “[If] the Gregory case is viewed as a precedent for the disregard of a transfer of assets without a business purpose but solely to reduce tax liability, it gives support to the natural conclusion that transactions, which do not vary control or change the flow of economic benefits, are to be dismissed from consideration.” Id. at 476.

Gregory, the Court implied, supports the twin propositions that any property transfer must have a nontax purpose and that transactions without nontax, economic consequences may be disregarded for tax purposes. See id. These propositions now make up the two prongs of the codified economic substance doctrine. Gregory, as interpreted by the Court in its subsequent opinions, spawned the economic substance, sham transaction, business purpose, and substance over form doctrines.

We do not trace these doctrines back to Gregory in order to add to the extensive literature parsing Gregory and related caselaw, or in order to propose a discrete doctrinal taxonomy. We source the judicial doctrines to Gregory to draw attention not to what the Court said, but to what it was doing, in that case and subsequent cases. Gregory, like much of the caselaw using the economic substance, sham transaction, and other judicial doctrines in interpreting and applying tax statutes, represents an effort to reconcile two competing policy goals.

On one hand, having clear, concrete rules embodied in a written Code and regulations that exclusively define a taxpayer’s obligations (1) facilitates smooth operation of our voluntary compliance system, (2) helps to render that system transparent and administrable, and (3) furthers the free market economy by permitting taxpayers to know in advance the tax consequences of their transactions.

On the other side of the scales, the Code’s and the regulations’ fiendish complexity necessarily creates space for attempts to achieve tax results that Congress and the Treasury plainly never contemplated, while nevertheless complying strictly with the letter of the rules, at the expense of the fisc (and other taxpayers). In Gregory, the Court confronted such an extreme result and, on the basis of equitable principles, interpreted and applied the relevant statute so as to subject Mrs. Gregory’s transaction to tax.

Likewise, the various other judicial doctrines applied in tax cases all represent efforts to rein in activity that, while within the technical letter of the rules, deeply offends their spirit. Attempts to parse and define the doctrines merely intellectualize what is, ultimately, an equitable exercise. Those who favor transparency might prefer a strictly circumscribed taxonomy of judicial doctrines, to include exclusive

definitions of the circumstances in which they should be applied. Those who favor administrability, protection of the fisc, and respect for congressional purpose might prefer that courts exercise carte blanche in disallowing results of transactions perceived as abusive. Gregory and its progeny represent an ongoing effort to reconcile these opposing principles and methodologies. Litigants and courts employ specialized terminology to make this effort appear more rigorous, but candidly, underneath, we are simply engaged in the difficult, commonsense task of judging.

We attempt to apply Gregory’s teachings to the transactions at issue. 2. Sham Transaction Doctrine The parties have stipulated numerous exhibits — including real estate deeds, account agreements, trade confirmations, and account statements — demonstrating that the transactions at issue actually occurred, so we consequently focus on the economic sham strand of the sham transaction doctrine. See Krumhorn v. Commissioner, 103 T.C. at 38, 46 (distinguishing factual shams from shams in substance).

We ask whether any of these transactions had “nontax substance” or affected the parties’ beneficial interests other than by reducing their tax obligations. See Knetsch v. United States, 364 U.S. 361, 366 (1960). The parties have stipulated that CNT, Teloma, Santa Paula, and S. Mountain were sham entities with no business purpose. They have likewise stipulated that the Carrolls’ purported contribution of short sale proceeds and related obligations (along with a nominal amount of cash) to CNT in exchange for partnership interests in CNT was a sham transaction with no business purpose.

They have not, however, stipulated that any of the other transactions at issue, nor the entire series of transactions, constitutes a sham. On the basis of our factual findings and review of the record, we identify six separate actions undertaken here:

(1) CCFH contributed the five mortuary properties to CNT; (2) the Carrolls opened short sale positions; (3) the Carrolls contributed those short sale positions to CNT;

(4) CNT closed the short sale positions; (5) the Carrolls contributed their CNT interests to CCFH; and

(6) CCFH distributed New CNT interests to its shareholders. Following Knetsch, we must determine whether these transactions had “nontax substance” and were thus what they purported to be — that is, not economic shams. Examining each step independently (before determining whether and to what extent the step transaction doctrine should apply), we find that steps (1), (3), and (5) were all sham transactions, principally because CNT was a sham entity. The parties have stipulated, and the record reflects, that CNT lacked any legitimate business purpose.

Rather, it was formed solely as a vehicle for effecting the Son-of-BOSS transaction and artificially “boosting” the real estate’s aggregate adjusted tax basis. Hence, consistent with the parties’ stipulation, it was a sham partnership. See Commissioner v. Culbertson, 337 U.S. 733, 742 (1949) (explaining that, to form a valid partnership under Federal law, “the parties in good faith and acting with a business purpose [must] intend[] to join together in the present conduct of the enterprise”). We therefore disregard its existence. See, e.g., Sparkman v.

Commissioner, 509 F.3d 1149, 1156 n.6 (9th Cir. 2007), aff’g T.C. Memo. 2005-136; Andantech L.L.C. v. Commissioner, 331 F.3d 972, 980 (D.C. Cir. 2003), aff’g and remanding T.C. Memo. 2002-97, 83 T.C.M. (CCH) 1476 (2002); see also Moline Props., Inc. v. Commissioner, 319 U.S. 436, 439 (1943) (explaining, in a tax case, that “the corporate form may be disregarded when it is a sham or unreal”). We likewise disregard as shams the purported contributions of property to, and contributions of interests in, the sham partnership that occurred at steps (1), (3), and (5).

Although deeds were signed and funds moved among accounts, economically, the parties’ positions did not change. CCFH and the Carrolls could not have contributed property in exchange for interests in a nonexistent partnership. They acquired nothing of substance and relinquished nothing of substance. A transaction undertaken with a sham entity is, a fortiori, a sham. We further conclude that steps (2) and (4), together, constituted a sham transaction.

The Carrolls opened the short sale positions, and — disregarding the positions’ purported contribution to the sham partnership, CNT — closed them mere days later pursuant to a prearranged plan. Pursuant to that same plan, during the brief period for which the short sale positions remained open, the short sale proceeds were invested in the same T-notes sold short, in an almost identical amount, thereby reducing to near zero the risk of a loss on the short sale.

Conversely, respondent’s expert concluded, and petitioner does not specifically dispute, that the short sale as structured had virtually no chance of generating a profit. As designed, the short sale could have had no lasting economic consequence and would alter only the individuals’ tax positions, through the creation of basis in a purported partnership. Hence, like the offsetting premium payments and loans in Knetsch, which “did ‘not appreciably affect * * * [the taxpayer’s] beneficial interest except to reduce his tax’”, steps (2) and (4) constitute an economic sham.

See Knetsch, 364 U.S. at 365-366 (quoting Gilbert v. Commissioner, 248 F.2d 399, 411 (2d Cir. 1957) (Learned Hand, J., dissenting)); see also, e.g., Horn v. Commissioner, 968 F.2d 1229, 1236 (D.C. Cir. 1992) (describing an economic sham as a transaction structured “in such a way as to create the tax benefits while completely avoiding economic risk”), rev’g Fox v. Commissioner, T.C. Memo. 1988-570, and rev’g Kazi v. Commissioner, T.C. Memo. 1991-37; Neely v. United States, 775 F.2d 1092, 1094 (9th Cir. 1985) (defining a sham transaction as “one having no economic effect other than to create income tax losses”).

Step (6), however, was different. If, for the reasons explained above, we disregard the preceding steps as shams and look through New CNT to its then partners, at this step CCFH transferred the five mortuary properties to the Carrolls. This transfer materially changed the Carrolls’ and CCFH’s economic positions, entirely aside from tax considerations. CCFH was a passthrough entity for tax purposes, but for other legal purposes it was a legal entity distinct from its owners. The parties have not stipulated, and the record does not reflect, that CCFH was a sham entity.

On the contrary, CCFH was a going concern that had operated a viable business and held the real properties for several years, not an ephemeral shell created solely for this series of transactions. In distributing the real estate to its shareholders, it reduced its balance sheet and lost the right to control and dispose of a valuable asset. Its shareholders, meanwhile, acquired the “bundle of rights” associated with ownership of real property. In particular, the Carrolls acquired the right to lease and receive rental income from the properties, as they had contemplated doing.

All obligations connected with ownership of land likewise passed from CCFH to the Carrolls. Moreover, as petitioner essentially acknowledges, a substantial, nontax purpose motivated the transfer, and attainment of that purpose altered the parties’ economic positions in a meaningful way. The Carroll family wanted to retire from the mortuary business and hoped to sell the funeral home, retaining the real estate as a source of ongoing income.

Their advisers had concluded that the best means of achieving this goal would be to separate the real estate from the operating assets by transferring the real estate out of CCFH. In sharp contrast to the annuity arrangement in Knetsch, this transaction’s participants did realize something of substance beyond a tax deduction: They implemented the business disposition and rental income retirement plan recommended by their advisers. For the foregoing reasons, we conclude that step (6) had nontax substance, and we will not disregard CCFH’s transfer of the real estate as a sham transaction.

Petitioner, however, repeatedly emphasizes that the Carrolls and their advisers refrained from causing CCFH to transfer the real estate until they had identified an ostensible means of accomplishing it without tax consequences. He contends that, but for the Son-of-BOSS transaction, the real estate would never have been transferred at all. This contention essentially invokes the step transaction doctrine. Even if, on its own, step (6) had nontax substance, must we nevertheless disregard it because it was part and parcel of an integrated sham transaction? 3.

Step Transaction Doctrine It is axiomatic that “a transaction’s true substance rather than its nominal form governs its Federal tax treatment.” Superior Trading, LLC v. Commissioner, 137 T.C. 70, 88 (2011), aff’d, 728 F.3d 676 (7th Cir. 2013); see also Commis sioner v. Court Holding Co., 324 U.S. 331, 334 (1945) (“The incidence of taxation depends upon the substance of a transaction.”).

Before recharacterizing a transaction’s form to align with its substance, we conduct “a searching analysis of the facts to see whether the true substance of the transaction is different from its form or whether the form reflects what actually happened.” Harris v. Commissioner, 61 T.C. 770, 783 (1974); see also Gordon v.

Commissioner, 85 T.C. 309, 324 (1985) (“[FJormally separate steps in an integrated and interdependent series that is focused on a particular end result will not be afforded independent significance in situations in which an isolated examination of the steps will not lead to a determination reflecting the actual overall result of the series of steps.”). Three alternative tests of varying degrees of permissiveness exist for determining whether to invoke the step transaction doctrine: the binding commitment test, the end result test, and the interdependence test. Superior Trading, LLC v.

Commissioner, 137 T.C. at 88. “[A] transaction need only satisfy one of the tests to allow for the step transaction doctrine to be invoked.” Id. at 90. Under the binding commitment test, we ask whether, at the time of the first step to occur, there was a binding commitment to undertake the subsequent steps. See Commissioner v. Gordon, 391 U.S. 83, 96 (1968). Courts have seldom used this test, and we have typically applied it only where ‘“a substantial period of time has passed between the steps that are subject to scrutiny.’” Superior Trading, LLC v. Commissioner, 137 T.C. at 89 (quoting Andantech LLC v.

Commissioner, 83 T.C.M. (CCH) at 1504). Because all steps here occurred within little over one month, the binding commitment test is likely inappropriate to these circumstances. See id.; see also Assoc. Wholesale Grocers, Inc. v. United States, 927 F.2d 1517, 1522 n.6 (10th Cir. 1991) (declining to apply binding commitment test where case did not involve series of transactions over multiple years). Under the end result test, we examine “whether the formally separate steps are prearranged components of a composite transaction intended from the outset to arrive at a specific end result.” Superior Trading, LLC v.

Commissioner, 137 T.C. at 89; see also True v. United States, 190 F.3d 1165, 1175 (10th Cir. 1999) (observing that what matters is whether the parties “intended to reach a particular result by structuring a series of transactions in a certain way”). The interdependence test similarly asks whether the various steps are so interdependent that each alone accomplishes no independent business purpose and “would have been fruitless without completion of the later series of steps.” Superior Trading, LLC v. Commissioner, 137 T.C. at 90.

Petitioner readily admits that the series of transactions undertaken by the Carrolls and their wholly owned entities were orchestrated solely to achieve a particular goal, established at the outset, of removing the real estate from CCFH and that each step in the series would not have occurred but for the others. Under either the end result test or the interdependence test, then, the step transaction doctrine plainly applies. We thus collapse the series of transactions into one, disregarding CNT, Teloma, Santa Paula, and S. Mountain as sham entities pursuant to the parties’ stipulation.

Before the series of transactions began, CCFH owned the five mortuary properties. When the dust settled, Mr. Carroll, Ms. Cadman, and Ms. Craig owned the properties. Accordingly, the “stepped” transaction is a transfer of the five properties by CCFH to the three individuals, and for the reasons discussed above, that transaction had nontax substance. It was not, as petitioner would have it, a nonevent. “[I]n cases where a taxpayer seeks to get from point A to point D and does so stopping in between at points B and C”, we apply the step transaction doctrine to ignore the interim stops, Smith v.

Commissioner, 78 T.C. 350, 389 (1982), not to return the taxpayer to point A. The foregoing conclusion is decidedly not the one petitioner seeks. Rather than simply stop there, we must consider a strand of authority he raises on brief that, in effect, blends the sham and step transaction doctrines. 4. Blending the Doctrines Where a sham transaction consists of multiple steps, we have recognized that “there is authority [for the proposition] that a sham transaction may contain elements whose form reflects economic substance and whose normal tax consequences therefore may not be disregarded.” Alessandra v.

Commissioner, T.C. Memo. 1995-238, 69 T.C.M. (CCH) 2768, 2770, 2773 (1995) (requiring inclusion of income generated by T-bills purchased and interest-bearing account opened in connection with a sham transaction), aff’d without published opinion, 111 F.3d 137 (9th Cir. 1997). In most such cases, courts determined that interest paid on bona fide indebtedness could be deducted even when the indebtedness had been incurred in connection with or in anticipation of a sham transaction. See, e.g., Jacobson v.

Commissioner, 915 F.2d 832, 840 (2d Cir. 1990) (concluding that interest and loan commitment fees were deductible), aff’g in part, rev’g in part on other grounds T.C. Memo. 1988-341; Bail Bonds by Marvin Nelson, Inc. v. Commissioner, 820 F.2d 1543, 1549 (9th Cir. 1987) (finding that a loan was a sham, but implying that if it were bona fide, interest would be deductible), aff’g T.C. Memo. 1986-23; Rice’s Toyota World, Inc. v.

Commissioner, 752 F.2d 89, 96 (4th Cir. 1985) (in a sham sale-leaseback transaction financed with notes, holding that taxpayer could deduct interest paid on a recourse note because it represented a genuine obligation), aff’g in part, rev’g in

part 81 T.C. 184 (1983); Rose v. Commissioner, 88 T.C. 386, 423-424 (1987) (allowing deduction of interest payments “attributable to the forbearance of amounts due on genuine indebtedness” in connection with a transaction lacking economic substance), aff’d, 868 F.2d 851 (6th Cir. 1989). On the other hand, we have declined to sever interest payments from a multistep sham transaction where the interest payments were “an integral part of the tax-motivated sham.” Alessandra v. Commissioner, 69 T.C.M. (CCH) at 2772; see, e.g., Sheldon v.

Commissioner, 94 T.C. 738, 762 (1990) (disallowing deductions for interest owed to securities repo counterparties where the repo transactions “lacked tax-independent purpose”); Seykota v. Commissioner, T.C. Memo. 1991-541, 62 T.C.M. (CCH) 1116, 1117, 1119 (1991) (disallowing current-year deductions for interest paid to a commercial lender where the taxpayer borrowed the funds to purchase capital assets that would be sold in the following tax year, thereby both deferring recognition of income and converting ordinary income to capital gain); see also Goldstein v.

Commissioner, 364 F.2d 734, 740 (2d Cir. 1966) (affirming disallowance of interest deductions where debt was incurred solely for its anticipated tax consequences), aff’g 44 T.C. 284 (1965). Petitioner argues that the latter strand of caselaw governs here because CCFH’s transfer of the real estate was “integral” to the sham Son-of-BOSS transaction and would not have occurred but for that transaction. Thus, petitioner asks us to disregard the tax consequences flowing from the transfer and to hold, for tax purposes, that CCFH still owns the real estate.

Petitioner’s characterization of the real estate’s transfer as a mere component of a sham transaction represents a category mistake. Transferring the real estate was the reason for and objective of the series of transactions at issue, not simply one of the transactions. Taxpayers have most commonly used Son-of-BOSS transactions retrospectively, to offset recognized gains from unrelated, completed transactions. See supra note 7.

Here, the Carrolls used the Son-of-BOSS transaction prospectively, to avoid recognizing gains on a planned transaction — to wit, separation of the real estate from the funeral home business. We think this a distinction without a difference. A Son-of-BOSS transaction is a tax shelter undertaken, as its moniker implies, to offset, or “shelter”, income that would otherwise be subject to tax. Neither the sham transaction doctrine nor the step transaction doctrine nor the two combined requires us to disregard the income-producing event along with the shelter transaction designed to offset it. Such an

interpretation would render the doctrines toothless and yield absurd results. None of the cases petitioner cites as supporting his position persuades us otherwise. In Sheldon v. Commissioner, 94 T.C. at 762, where we disallowed interest deductions generated by sham repo transactions, we held that the taxpayers need not recognize the “relatively small amounts of interest income” generated by the transactions; we did not discuss, much less disregard as shams, the transactions that had produced the ordinary income the taxpayers presumably hoped to shelter with the interest deductions.

Accord Arrowhead Mountain Getaway Ltd. v. Commissioner, T.C. Memo. 1995-54, 69 T.C.M. (CCH) 1805 (1995), aff’d without published opinion, 119 F.3d 5 (9th Cir. 1997); Seykota v. Commissioner, T.C. Memo. 1991-541. In United States v. Wexler, 31 F.3d 117, 126 (3d Cir. 1994), a criminal tax fraud case, the Court of Appeals for the Third Circuit found clear error in a jury instruction that would have recognized as valid interest deductions “constituting the tax benefits of the entire [sham] transaction.” The “profits from other transactions” that had been offset by these deductions were not at issue. See id. at 120.

And in Goldstein, where we disallowed deductions of interest paid on loans that were shams, we did not hold that the taxpayer need not recognize the sweepstakes income that her son had engineered the loans to offset. Goldstein v. Commissioner, 44 T.C. at 286-287, 296, 300 (likewise disallowing interest on loans incurred solely to obtain a deduction, without concurrently disregarding sweepstakes income). We would no more disregard the transfer of the real estate here than we would Mrs. Goldstein’s sweepstakes win.

Here, the gain-producing transaction and the shelter transaction occurred pursuant to a plan, and the shelter transaction arguably preceded realization of the gains it was designed to shield. But if we were to disregard the gain-producing transaction along with the shelter transaction, we would encourage taxpayers to hedge against the audit lottery by structuring their tax shelter transactions to precede and intertwine with their income-producing activities.

We will not do so. “[W]hile a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not”. Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974). 5. Conclusion In sum, we hold that the step transaction doctrine applies to the transactions undertaken by the Carrolls; that application of that doctrine collapses the various transactions to a transfer of the real estate from CCFH to the Carrolls; and that this transfer was not simply part and parcel of a larger sham transaction.

We will not disregard the transfer or the gain it generated. E. Definition of Omission Although we will not disregard CCFH’s transfer of the real estate as petitioner urges, he has another arrow in his quiver. He contends that, under the Supreme Court’s decision in United States v. Home Concrete Supply, LLC, 566 U.S. _, 132 S. Ct. 1836 (2012), the allegedly omitted item — gain recognized on CCFH’s distribution of appreciated property to its shareholders — does not constitute an omission within the meaning of

section 6501(e)(1)(

A) because it derives entirely from an overstatement of outside basis. In Home Concrete, 566 U.S. at _, 132 S. Ct. at 1841, the Supreme Court held that its

interpretation in Colony, Inc. v. Commissioner, 357 U.S. 28,

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