DJB Holding Corp. v. Commissioner, No. 12-70574 (9th Cir. 2015)
Annotate this CaseWCI was owned by WB Acquisition, which was owned by WBPartners, which in turn was owned by Daren Barone’s and Gregory Watkins’s holding corporations. WCI and WB Partners formed a joint venture called the NTC Joint Venture. The joint venture’s structure had significant federal income tax consequences. While the NTC project was ongoing, WCI sold its assets to Kuranda. WB Partners, WB Acquisition, and Barone's holding corporation (collectively, Taxpayers) challenged certain tax deficiencies identified by the Commissioner. In three consolidated decisions, the Tax Court found that the NTC Joint Venture was not a valid partnership for tax purposes, and therefore that all of the joint venture’s profits were taxable income to WCI. The Tax Court determined that all of the proceeds from the noncompetition agreement were income to WCI as well. Because WCI had substantially understated its income, the Tax Court upheld the Commissioner’s assessment of accuracy-related penalties. The court concluded that income from the NTC Project attributed to WB Partners was in fact income to WCL; proceeds from the noncompetition agreement were income to WCI rather than WB Partners; and the Tax Court properly assessed accuracy-related penalties. Accordingly, the court affirmed the judgment.
Court Description: Tax. The panel affirmed three Tax Court decisions involving federal income tax deficiencies and accuracy-related penalties. Greg Watkins and Daren Barone, owners of asbestos removal business Watkins Contracting, Inc. (WCI), structured WCI’s sale and reacquisition via various holding corporations to limit their personal exposure. WCI and one of the holding corporations, WB Partners, then formed the NTC Joint Venture for an environmental remediation project. The panel held that the Tax Court did not clearly err in finding no intent to operate the NTC Joint Venture as a bona fide partnership, and in taxing profits from the venture as income only to WCI. As part of the sale of WCI assets to Kuranda Capital, LP, Watkins, Barone, and WCI agreed not to compete with Kuranda in the environmental remediation business. The panel held that Watkins’s and Barone’s non-competition agreement with Kuranda may not be imputed to WB Partners, and that the Tax Court did not clearly err in not assigning any portion of the proceeds of the noncompetition agreement to WB Partners. 4 DJB HOLDING CORP. V. CIR Finally, the panel held that the Tax Court did not commit reversible error in assessing an accuracy-related penalty, because taxpayers identified no substantial authority or reasonable cause for their positions.
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