explanation that makes sense to the Court is that no lesser level of comfort would have commanded the $800,000 fixed fee that Chesapeake paid for the opinion. We are also troubled by the number of times the draft opinion uses "it appears." For example, it states: "[i]n focusing on the language of the 752 regs, it appears that such regulation adopts an all or nothing approach." Mr. Miller had no basis for that position other than his interpretation of the regulations. Further, Mr. Miller assumed that the indemnity would be effective and that WISCO would hold assets sufficient to avoid the anti-abuse rule. PWC assumed away the very crux of whether the transaction would qualify as a nontaxable contribution of assets to a partnership. In so doing PWC failed to consider that the indemnity lacked substance. Neither the joint venture agreement nor the indemnity agreement included provisions requiring WISCO to maintain any minimum level of capital or assets. WISCO and Chesapeake could also remove WISCO'S main asset, the intercompany note, from WISCO's books at any time and for any reason. This possibility gutted any substance for the indemnity. We find that Chesapeake's tax position did not warrant a "should" opinion because of the numerous assumptions and dubious legal conclusions in the haphazard draft opinion that has been admitted into the record. Further, we find it inherently unreasonable for Chesapeake to have relied on an analysis based on the specious legal assumptions. B. Chesapeake Lacked Good Faith Moreover, Chesapeake did not act with reasonable cause or in good faith as it relied on Mr. Miller's advice. Chesapeake argues that it had every reason to trust PWC's judgment because of its long-term relationship with the firm. PWC crossed over the line from trusted adviser for prior accounting purposes to advocate for a position with no authority that was based on an opinion with a high price tag-$800,000. Any advice Chesapeake received was tainted by an inherent conflict of interest. We would be hard pressed to identify which of his hats Mr. Miller was wearing in rendering that tax opinion. There were too many. Mr. Miller not only researched and drafted the tax opinion, but he also "audited" WISCO's and the LLC's assets to make the assumptions in the tax opinion. He made legal assumptions separate from the tax assumptions in the opinion. He reviewed State law to make sure the assumptions were valid regarding whether a partnership was formed. In addition, he was intricately involved in drafting the joint venture agreement, the operating agreement and the indemnity agreement. In essence, Mr. Miller issued an opinion on a transaction he helped plan without the normal give-and-take in negotiating terms with an outside party. We are aware of no terms or conditions that GP required before it would close the transaction. We are aware only of the condition that Chesapeake's board would not close unless it received the "should" opinion. Chesapeake acted unreasonably in relying on the advice of PWC given the inherent and obvious conflict of interest. See New Phoenix Sunrise Corp. & Subs. v. Commissioner, 132 T.C. 161, 192–194 (2009) (reliance on opinion by law firm actively involved in developing, structuring and promoting transaction was unreasonable in face of conflict of interest); see also CMA Consol., Inc. v. Commissioner, T.C. Memo. 2005-16 (reliance not reasonable as advice not furnished by disinterested, objective advisers); Stobie Creek Invs., LLC v. United States, 82 Fed. Cl. 636, 714-715 (2008), affd. 608 Fed. 3d 1366 (Fed. Cir. 2010). We also find suspect the exorbitant price tag associated with the sole condition of closing. Chesapeake essentially bought an insurance policy as to the taxability of the transaction. PWC received an $800,000 fixed fee for its tax opinion. PWC did not base its fee on an hourly rate plus expenses. The fee was payable and contingent on the closing of the joint venture transaction. PWC would receive payment only if it issued Chesapeake a "should" opinion on the joint venture transaction. PWC therefore had a large stake in making sure the closing occurred. Considering all the facts and circumstances, PWC's opinion looks more like a quid pro quo arrangement than a true tax advisory opinion. If we were to bless the closeness of the relationship, we would be providing carte blanche to promoters to provide a tax opinion as part and parcel of a promotion. Independence of advisers is sacrosanct to good faith reliance. We find that PWc lacked the independence nec essary for Chesapeake to establish good faith reliance. We further find that Chesapeake did not act with reasonable cause or in good faith in relying on PWC's opinion. We sustain respondent's determination that Chesapeake is liable for the accuracy-related penalty under section 6662(b)(2) for 1999. 16 We have considered all remaining arguments the parties made and, to the extent not addressed, we find them to be irrelevant, moot, or meritless. To reflect the foregoing, Decision will be entered for respondent. GEORGE C. HUFF, PETITIONER v. COMMISSIONER Docket No. 12942-09. Filed August 17, 2010. Claiming to be a bona fide resident of the U.S. Virgin Islands at the close of 2002, 2003, and 2004, and claiming he was qualified for the gross income tax exclusion provided by I.R.C. sec. 932(c)(4), P, a U.S. citizen, filed territorial income tax returns with the Virgin Islands Bureau of Internal Revenue. He did not file Federal income tax returns for those years. R determined that P was not a bona fide resident of the Virgin Islands and was not qualified for the gross income tax exclusion as claimed. Therefore, R issued a notice of deficiency determining income tax deficiencies and penalties for 2002, 2003, and 2004. For protective reasons, P filed a petition in this Court but asserts that the deficiency relates to a Virgin Islands tax matter over which this Court lacks jurisdiction. Held: Although this case involves putative Virgin Islands transactions, the notice of deficiency determines deficiencies in Federal income tax. Whether P satisfies all the requirements set forth in I.R.C. sec. 932(c)(4), and thus need not file a Federal tax return or pay Federal income tax for 2002, 2003, and 2004, is a matter which this Court has jurisdiction to decide. Held, further, P's motion to dismiss for lack of jurisdiction will be denied. 16 This holding should not be interpreted as requiring taxpayers to obtain a second tax opinion to qualify for the reasonable reliance exception under sec. 6664(c). Rather, we hold that taxpayers may not reasonably rely on an adviser tainted by an inherent conflict of interest the taxpayer had reason to know of. William M. Sharp, Lawrence R. Kemm, Joseph A. DiRuzzo, III, and Marjorie Rawls Roberts, for petitioner. Daniel N. Price and Ladd Christman Brown, Jr., for respondent. OPINION JACOBS, Judge: This case is before the Court on petitioner's motion to dismiss for lack of jurisdiction. The specific question to be decided is whether this Court has jurisdiction to redetermine Federal income tax deficiencies and penalties of a U.S. citizen who claims (1) to be a bona fide resident of the U.S. Virgin Islands at the close of each of the years at issue (i.e., 2002, 2003, and 2004), and (2) to be exempt from U.S. tax filing and payment requirements as a consequence of his satisfying all the requirements of section 932(c)(4). All section references are to the Internal Revenue Code (Code) in effect for the years at issue unless otherwise indicated. Background Petitioner is a U.S. citizen. He resided in Florida when he filed his petition in this Court on May 28, 2009. Claiming to be a bona fide resident of the U.S. Virgin Islands (Virgin Islands) at the close of 2002, 2003, and 2004, petitioner (1) filed territorial income tax returns with the Virgin Islands Bureau of Internal Revenue (BIR) for 2002, 2003, and 2004, and (2) claimed he was qualified for the section 932(c)(4) gross income exclusion and therefore did not have to file a Federal income tax return or pay Federal income tax for those years. Following an audit of petitioner's 2002, 2003, and 2004 Virgin Islands income tax returns, on February 27, 2009, respondent issued petitioner a notice of deficiency determining the following Federal income tax deficiencies and additions to tax: Attached to the notice of deficiency was a Form 4549-A, Income Tax Discrepancy Adjustments, which set forth the basis for the income tax deficiencies and additions to tax involved herein: It is determined that during the taxable years 2002 through 2004 you were not a bona fide resident of the United States Virgin Islands (USVI). It is also determined that you participated in a tax avoidance scheme which involved improperly claiming to be a resident of the USVI and superficially recasting US-source income as USVI source income in order to inappropriately and invalidly claim a tax credit of 90% under the USVI Economic Development Program. It has also been determined that all transactions between NASCO Corporate Finance Consultants, LLC (NASCO) and American Benefits Institute, Inc. (ABI), Employers International, Inc. (EI), Professional Advisory Group, Inc. (PAG), and George C. Huff, including any entity controlled or owned in whole or in part by George C. Huff, are part of a series of step/sham transactions devoid of economic substance and will not be recognized for US federal income tax purposes. These step/ sham transactions were part of a larger tax avoidance scheme and were entered into solely in an attempt to superficially recharacterize US-source income as USVI-source income in order to inappropriately and invalidly claim a tax credit of 90% under the USVI Economic Development Program. See IRS Notice 2004-45. On May 28, 2009, petitioner filed a petition in this Court. On April 14, 2010, petitioner filed a complaint petition for redetermination of income taxes against the Commissioner of Internal Revenue in the U.S. District Court, District of the Virgin Islands, St. Thomas and St. John Division (District Court), case No. 1:10CV00026. On June 1, 2010, petitioner filed in this Court the motion in question. Discussion I. The Virgin Islands The Virgin Islands are an insular area of the United States; they are a part of neither one of the 50 States nor the District of Columbia. They are generally treated as a foreign country for Federal income tax purposes. See sec. 7701(a)(9). In 1921 Congress made a predecessor of the Code part of the internal law of the Virgin Islands. Act of July 12, 1921, ch. 44, sec. 1, 42 Stat. 123 (codified as amended at 48 U.S.C. sec. 1397 (2006)). |