152 F. 3d 450 - Stanford v. Commissioner of Internal Revenue

This case, which calls for us to construe certain provisions of section 952(c)(1)(C) of the Internal Revenue Code (the "Code"),1 involves a dispute regarding the 1990 income tax liability of Robert A. Stanford and his wife Susan Stanford.2 On appeal, the Stanfords challenge a decision of the Tax Court upholding the Internal Revenue Commissioner's ("Commissioner") assessment of (1) a tax deficiency against them with respect to their jointly-filed 1990 income tax return and (2) an accuracy-related penalty for their resulting underpayment of tax. See Stanford v. Commissioner, 108 T.C. 344, 1997 WL 210796 (1997). For the following reasons, we VACATE the underpayment of tax penalty imposed against the Stanfords and AFFIRM the Tax Court's judgment in all other respects.

The underlying facts of this case are, for the most part, undisputed. Between 1985 and 1987, Stanford, a United States citizen and Houston resident, formed three corporations in the crown colony of Montserrat in the British West Indies, each of which qualified as a "controlled foreign corporation" within the meaning of section 957(a) of the Code. The first corporation, Guardian International Bank, Ltd. ("Guardian Bank"), was incorporated in December 1985 to engage in offshore banking activities. In January 1986, Guardian Bank acquired a banking license from the Montserrat government authorizing it to engage in business as an offshore investment bank.

The second corporation, Guardian International Investment Services, Ltd. ("Guardian Services"), was incorporated in October 1986. Guardian Services' charter authorized it to engage in a broad array of business activities, including real estate development and trademark/patent acquisition. Pursuant to a 1988 written service agreement with Guardian Bank, Guardian Services provided marketing and advertising services to Guardian Bank during 1989 and 1990. The Commissioner concedes that the provision of these services by Guardian Services induced deficits in Guardian Services' earnings and profits for both those years.

Finally, Stanford Financial Group, Inc. ("Stanford Financial") was incorporated in February 1987, with Stanford owning 95 percent of its shares. In relevant part, Stanford Financial's objective was to "carry on the business of a [h]olding [c]ompany" and to "take part in the formation, management, supervision or control of the business operations of any company." Upon incorporation of Stanford Financial, all of the shares of stock of both Guardian Bank and Guardian Services were transferred to Stanford Financial; thus (1) Guardian Bank and Guardian Services became related as brother-sister corporations with (2) Stanford Financial as the common parent. Pursuant to a service agreement with Guardian Bank, Stanford Financial provided administrative and management services to Guardian Bank during 1989 and 1990. The Commissioner concedes that the provision of these services by Stanford Financial induced deficits in Stanford Financial's earnings and profits for both those years.

B. STATUTORY BACKDROP AND THE STANFORDS' 1990 INCOME TAX RETURN

Section 951(a) of the Code requires a United States shareholder of a controlled foreign corporation ("CFC") to include in his gross income his pro rata share of the controlled foreign corporation's "subpart F income"--as defined in section 952--whether or not such income is distributed to him. I.R.C. § 951(a). A CFC is defined as any foreign corporation where more than 50 percent of the corporation's stock, either by voting power or value, is owned directly, indirectly, or constructively by United States shareholders. I.R.C. § 957(a). Section 951(b) of the Code defines a "United States shareholder" as a United States person who owns directly, indirectly, or constructively 10 percent or more of the voting stock of a foreign corporation. I.R.C. § 951(b). In this case, the parties have stipulated that (1) Stanford is a United States shareholder of Guardian Bank, Guardian Services, and Stanford Financial, and (2) Guardian Bank, Guardian Services, and Stanford Financial are CFCs.

Of the three CFCs in this case, only Guardian Bank realized subpart F income in 1990. Subpart F income is defined in I.R.C. § 952 as including five different types of income, the most pertinent of which, in this case, is "foreign base company income (as determined under section 954)." I.R.C. § 952(a)(2). Section 954(a) defines foreign base company income as including "foreign personal holding company income," I.R.C. § 954(a), which consists of, among other things, dividends, interest, rents, gains from commodity transactions, and foreign currency gains. I.R.C. § 954(c)(1). The parties in this case have stipulated that Guardian Bank's 1990 income included interest, gains on foreign currency exchanges, dividends, and gains on commodity transactions, and that Guardian Bank's resulting subpart F income for that year was $2,789,722. Indeed, the Stanfords reported this figure as Guardian Bank's subpart F income on their 1990 joint federal income tax return.

The amount of subpart F income of a CFC that is ultimately taxed to a United States shareholder may be limited by any of three limitations set forth in I.R.C. § 952(c). The only limitation applicable here is that found in I.R.C. § 952(c)(1)(C), and it is the interpretation of the language of this provision that is at the heart of the dispute in this case. Section 952(c)(1)(C) reads, in pertinent part, as follows:

(C) Certain deficits of member of the same chain of corporations may be taken into account.--

(i) In general.--A controlled foreign corporation may elect to reduce the amount of its subpart F income for any taxable year which is attributable to any qualified activity by the amount of any deficit in earnings and profits of a qualified chain member for a taxable year ending with (or within) the taxable year of such controlled foreign corporation to the extent such deficit is attributable to such activity. * * *

(ii) Qualified chain member.--For purposes of this subparagraph, the term "qualified chain member" means, with respect to any controlled foreign corporation, any other corporation which is created or organized under the laws of the same foreign country as the controlled foreign corporation but only if--

(I) all the stock of such other corporation (other than directors' qualifying shares) is owned at all times during the taxable year in which the deficit arose (directly or through 1 or more corporations other than the common parent) by such controlled foreign corporation, or

(II) all the stock of such controlled foreign corporation (other than directors' qualifying shares) is owned at all times during the taxable year in which the deficit arose (directly or through 1 or more corporations other than the common parent) by such other corporation.

I.R.C. § 952(c)(1)(C).3 Under section 952(c)(1)(C), a CFC may reduce its subpart F income attributable to a "qualified activity" by the deficits in earnings and profits of a "qualified chain member" to the extent the deficit of the chain member is "attributable to" to such qualified activity.

Relying on retained, expert tax advice, the Stanfords invoked Guardian Bank's section 952(c)(1)(C)(i) election and reduced Guardian Bank's 1990 subpart F income ($2,789,722) by the total deficits in the 1990 earnings and profits of Guardian Services and Stanford Financial, which total they determined to be $1,406,365.4 On audit, however, the Commissioner disallowed this reduction as violative of section 952(c)(1)(C). Notably, the Commissioner conceded (and does not contest on appeal) that (1) Guardian Services and Stanford Financial accumulated deficits in earnings and profits in 1990; (2) these deficits in earnings and profits were generated exclusively through administrative, marketing, or management services provided to Guardian Bank under applicable service agreements; and (3) the deficits accrued to a total of $1,406,365. Such concessions notwithstanding, the Commissioner prohibited the Stanfords from offsetting these deficits against Guardian Bank's subpart F income, determining that (1) Guardian Services was not a "qualified chain member" with respect to Guardian Bank within the meaning of section 952(c)(1)(C)(ii) (and, thus, Guardian Services' deficit in earnings and profits was not deductible vis-a-vis Guardian Bank's subpart F income); and (2) Stanford Financial's deficit, although accrued by a "qualified chain member" with respect to Guardian Bank, was not "attributable to [the same] qualified activity" to which Guardian Bank's subpart F income was attributable (and, thus, was also not deductible vis-a-vis Guardian Bank's subpart F income).5

The Commissioner determined the resulting deficiency in the Stanfords' 1990 tax to be $423,531.36. Additionally, because the Stanfords' understatement of tax was substantial, the Commissioner assessed the Stanfords an accuracy-related penalty of $84,706.27 under I.R.C. § 6662(a).6 The Stanfords filed a petition challenging these determinations in the United States Tax Court.

The Tax Court sustained the Commissioner's determinations. First, the court agreed with the Commissioner that Guardian Services was not a qualified chain member with respect to Guardian Bank, and therefore the deficits of Guardian Services could not be used to reduce the subpart F income of Guardian Bank. The court held that section 952(c)(1)(C)(ii), which defines the term "qualified chain member," provides that CFCs are qualified chain members "only where the CFCs are related to each other directly or indirectly through a single, straight-line chain of corporations, as in a parent-subsidiary relationship, and not where the CFCs are related to each through a common parent, as in a brother-sister relationship." Because Guardian Services and Guardian Bank were related to each other as brother-sister corporations through their common parent--Stanford Financial--the court concluded that Guardian Services was not a qualified chain member with respect to Guardian Bank. Accordingly, the court held that Guardian Services' deficit in earnings and profits could not offset Guardian Bank's subpart F income.

With respect to Stanford Financial, the court acknowledged that (1) as Guardian Bank's parent, Stanford Financial was a qualified chain member with respect to Guardian Bank, and (2) Guardian Bank's subpart F income was "attributable to" the "qualified activity" of banking and financing,7 but concluded that because Stanford Financial's deficit in earnings and profits arose from the performance of administrative and management services, it was (A) not "attributable to" the qualified activity to which Guardian Bank's subpart F income was attributable and therefore (B) not deductible against that income. In essence, the Tax Court determined that to be deductible against a related CFC's subpart F income under section 952(c)(1)(C), a qualified chain member's deficit in earnings and profits must be generated through the conducting of a qualified activity, which activity must also have generated the CFC's subpart F income. Because this "identity of activity" requirement was not met in the instant case, the Tax Court held that Guardian Bank's subpart F income could not be reduced by the deficit in earnings and profits of Stanford Financial under section 952(c)(1)(C)(i).

Finally, the Tax Court sustained the Commissioner's determination that the Stanfords were liable for the accuracy-related penalty imposed by I.R.C. § 6662(a) for a substantial understatement of tax. In so holding, the court determined that because no portion of the Stanfords' understatement was attributable to the tax treatment of an item that was supported by "substantial authority," the Stanfords were not entitled to a reduction of the penalty under I.R.C. § 6662(d)(2)(B). Notably, the court did not directly address whether the Stanfords were entitled to a reduction of the penalty under I.R.C. § 6664(c)(1), which section prohibits accuracy-related penalties for any portion of an underpayment with respect to which the taxpayer had reasonable cause and acted in good faith. The Stanfords timely appeal the Tax Court's determinations.

The focus of this case is on the interpretation and application of section 952(c)(1)(C) of the Code. The Tax Court's determinations of law--for example, interpretations of the statutory language--are reviewed de novo, while its factual findings are reviewed for clear error. G.M. Trading Corp. v. Commissioner, 121 F.3d 977, 980 (5th Cir.1997) (citing Bolding v. Commissioner, 117 F.3d 270, 273 (5th Cir.1997)). "A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Id. (citation omitted). In this case, the facts are essentially undisputed. In such a situation, the question of whether a taxpayer has "substantial authority" for any tax treatment that results in an underpayment of tax, precluding a penalty for substantial understatement of tax, is a legal question reviewed de novo. Westbrook v. Commissioner, 68 F.3d 868, 874, 881-82 (5th Cir.1995); Little v. Commissioner, 106 F.3d 1445, 1449 (9th Cir.1997).

The Stanfords make three arguments on appeal--that (1) Guardian Services is a qualified chain member with respect to Guardian Bank and thus its deficits in earnings and profits may validly reduce Guardian Bank's subpart F income under section 952(c)(1)(C); (2) Stanford Financial's deficits in earnings and profits are "attributable to" the same qualified activity to which Guardian Bank's subpart F income is attributable and thus are also deductible against that income under section 952(c)(1)(C); and (3) a substantial understatement of tax penalty is unwarranted in this case, either because (a) substantial authority exists for their tax treatment of the deficits at issue or (b) any resulting underpayment was due to a reasonable cause and was premised on good faith behavior on their part. We examine each of the Stanfords' arguments in turn.

The Stanfords contend that section 952(c)(1)(C)'s statutory language, its legislative history, and a current treasury regulation example support their view that Guardian Services is a "qualified chain member" of Guardian Bank's and that Guardian Services' deficits in earnings and profits are deductible against Guardian Bank's subpart F income. We disagree. As always, we commence our analysis by examining the plain language of the relevant statute, G.M. Trading Corp., 121 F.3d at 981, which in this case is section 952(c)(1)(C). In the absence of any ambiguity, our examination is confined to the words of the statute, which are assumed to carry their ordinary meaning. Id.

Section 952(c)(1)(C)(ii) defines the term "qualified chain member." It provides that a deficit corporation (here, Guardian Services)8 is a qualified chain member vis-a-vis a CFC with offsettable subpart F income (here, Guardian Bank) if (1) the deficit corporation is organized under the laws of the same foreign country as the CFC, and (2) either one of the two conditions set forth in subparagraphs (I) and (II) of section 952(c)(1)(C)(ii) is satisfied. I.R.C. § 952(c)(1)(C)(ii). In this case, both Guardian Bank and Guardian Services were organized under the laws of Montserrat. As such, resolution of the "qualified chain member" issue depends solely on whether either of the conditions set forth in subparagraphs (I) and (II) was satisfied.

Under subparagraphs (I) and (II), a deficit corporation is a qualified chain member vis-a-vis a CFC with offsettable subpart F income only if the CFC "owns" all the stock of the deficit corporation, or if the deficit corporation "owns" all the stock of the CFC. I.R.C. § 952(c)(1)(C)(ii). Specifically, subparagraphs (I) and (II) provide that the deficit corporation is a qualified chain member of the CFC only if (1) all of the deficit corporation's stock is owned by the CFC either "directly or through 1 or more corporations other than the common parent," I.R.C. § 952(c)(1)(C)(ii)(I); or (2) all of the stock of the CFC is owned by the deficit corporation either "directly or through 1 or more corporations other than the common parent," I.R.C. § 952(c)(1)(C)(ii)(II).9

In this case, neither Guardian Bank nor Guardian Services owned the other's stock directly. Hence, the relevant question becomes whether Guardian Bank or Guardian Services owned indirectly all of the other's stock in a way that satisfies the requirements of section 952(c)(1)(C)(ii).10 In other words, the issue of whether Guardian Services is a qualified chain member with respect to Guardian Bank turns on whether Guardian Bank or Guardian Services owned 100 percent of the other's stock "through 1 or more corporations other than the common parent." I.R.C. § 952(c)(1)(C)(ii). Of course, in this case, such qualifying ownership could flow only through Stanford Financial, which directly owned all of the stock of both Guardian Bank and Guardian Services.

We agree with the Tax Court's final conclusion--that Guardian Services is not a qualified chain member with respect to Guardian Bank and thus its deficit in earnings and profits cannot be used to reduce Guardian Bank's subpart F income. Under the plain language of section 952(c)(1)(C)(ii), a deficit corporation is a qualified chain member vis-a-vis a CFC with offsettable subpart F income only if one completely owns the other "directly" (not applicable in this case) or "through one or more corporations other than the common parent. " I.R.C. § 952(c)(1)(C)(ii) (emphasis added). As such, any qualifying indirect relationship between a CFC and a deficit corporation cannot flow through "the common parent [corporation]."11 In this case, involving a simple tripartite structure, Guardian Services would be deemed to be an indirect owner of Guardian Bank only through their common parent corporation, Stanford Financial. Likewise, Guardian Bank would be deemed to be an indirect owner of Guardian Services only through the same common parent corporation. Accordingly, read in the light of ordinary understanding, the "other than the common parent" language of section 952(c)(1)(C) prevents Guardian Services from being a qualified chain member with respect to Guardian Bank.12 Because a plain reading of the statute precludes reaching a contrary result in this case, we need not conduct an analysis of the statute's legislative history. See Nalle v. Commissioner, 997 F.2d 1134, 1140 (5th Cir.1993).13 The Tax Court correctly held that the Stanfords could not reduce Guardian Bank's subpart F income by the deficits in earnings and profits of Guardian Services.14

We next consider whether the Tax Court erred, as the Stanfords claim, when it refused to allow them to reduce Guardian Bank's subpart F income by the deficits in earnings and profits of Stanford Financial, Guardian Bank's parent corporation. As discussed above, section 952(c)(1)(C)(i) provides that a CFC's subpart F income attributable to a qualified activity may be reduced by the deficits in earnings and profits of a qualified chain member to the extent the deficit of the chain member is "attributable to such activity. " I.R.C. § 952(c)(1)(C)(i) (emphasis added). The parties agree that (1) Stanford Financial, by directly owning all of the stock of Guardian Bank in 1989 and 1990, was a qualified chain member with respect to Guardian Bank, I.R.C. § 952(c)(1)(C)(ii)(II); (2) Stanford Financial generated deficits in earnings and profits during 1989 and 1990, which deficits arose from the conferral of administrative and management support services to Guardian Bank; and (3) Guardian Bank's subpart F income in 1989 ($580,483) and 1990 ($2,789,722), which consisted exclusively of foreign personal holding company income earned through the active conduct of a banking business, was "attributable to [a] qualified activity," I.R.C. sss 952(c)(1)(C)(i); 952(c)(1)(B)(iii)(VI); 952(c)(1)(B)(vi); see supra note 7.15 Hence, the sole issue on appeal is whether the deficits of Stanford Financial were "attributable to such activity," i.e. banking, so that they could be deducted against Guardian Bank's subpart F income on the Stanfords' 1990 tax return.

Our first task, then, is to interpret the phrase "attributable to such activity," and in doing so, we must attempt to give the component words their ordinary, common meaning. G.M. Trading Corp., 121 F.3d at 981. While "[t]he term 'attributable to' has no particular technical significance under the tax laws [--] [indeed,] nowhere in the Internal Revenue Code is such term defined," Lawinger v. Commissioner, 103 T.C. 428, 435, 1994 WL 471849 (1994) (punctuation omitted)--it has occasionally been interpreted in case law in both tax and nontax contexts:

Under the definition of collapsible corporation under section 117(m) of the 1954 Code, the Supreme Court interpreted "attributable to," in the phrase "gain attributable to such property," as "merely confin[ing] consideration to that gain caused or generated by the property in question." Braunstein v. Commissioner, 374 U.S. 65, 70, 83 S.Ct. 1663, 10 L.Ed.2d 757 (1963). In interpreting the statutory language of section 165(i) of the 1954 Code that governs the ability of taxpayers to claim refunds or credits for property expropriated by the government of Cuba, the District Court of Mississippi held that the normal meaning of one thing to be attributed to another is that one thing is caused or brought about by that other thing. Ogden v. United States, 432 F.Supp. 214, 216 (S.D.Miss.1975), (citing Webster's Third New International Dictionary), aff'd, 555 F.2d 134 (5th Cir.1977). These interpretations are based on the conclusion that "attribute" or "attributable" connotes causation. See National Association of Greeting Card Publishers v. United States Postal Service, et al., 462 U.S. 810, 823, 103 S.Ct. 2717, 77 L.Ed.2d 195 (1983); Watson v. Employment Sec. Commn. of North Carolina, 111 N.C.App. 410, 432 S.E.2d 399, 401 (1993). For example, section 6663(a) provides: "If any part of any underpayment * * * is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud." ... Similarly, the accuracy-related penalty provision provides that the penalty applies "to the portion of any underpayment which is attributable to" negligence, substantial understatement of tax, etc. Sec. 6662(b).

Lawinger, 103 T.C. at 435. Based on this analysis, the Lawinger court found that "the plain meaning of [the phrase] 'attributable to' is ... due to, caused by, or generated by." Id. On appeal, the Stanfords provide no reason why a different meaning should apply to this phrase in the context of this case.

The Stanfords argue that because the administrative and managerial services provided by Stanford Financial to Guardian Bank were "driven solely by," "directed solely to," and "in all respects indispensable to" Guardian Bank's qualified activity of banking, the deficits thereby generated by Stanford Financial were "attributable to such activity." Because the plain meaning of the phrase "attributable to" does not embrace the interpretations given to it by the Stanfords, we cannot agree with their assessment. While there is no question that the deficit-inducing activities of Stanford Financial were (1) substantially related to Guardian Bank's qualified banking activity and indeed (2) helped give rise to Guardian Bank's subpart F income attributable to that activity which the Stanfords now hope to offset, section 952(c)(1)(C)(i) requires more--i.e., a causal relationship between such activity (banking) and Stanford Financial's deficits--before those deficits may offset that income; in short, the deficits must have been "caused by" or "generated through" the conducting of the same qualified activity which generated the subpart F income sought to be offset. While this requirement may seem an overly strict one, it is one mandated by a plain reading of the phrase "to the extent such deficit is attributable to such activity " in section 952(c)(1)(C)(i). (emphasis added). Because Stanford Financial's deficits in earnings and profits were not "due to," "caused by," or "generated by" (1) Guardian Bank's qualified banking activity or (2) any similar qualified banking activity conducted by Stanford Financial, those deficits were not "attributable to [the qualified] activity" to which Guardian Bank's subpart F income was attributable. Read in the light of ordinary understanding, section 952(c)(1)(C)(i) thus precludes the Stanfords' ability to offset Guardian Bank's subpart F income by the earnings and profits deficits of Stanford Financial. The Tax Court's decision to this effect is accordingly affirmed.163. Accuracy-Related Penalty

The final issue we address is whether the Tax Court erred in sustaining the Commissioner's determination that the Stanfords are liable for an accuracy-related penalty of $84,706.21 under I.R.C. § 6662. Section 6662 imposes a penalty equal to 20 percent of any "substantial understatement of income tax." See I.R.C. §§ 6662(a); 6662(b). It is undisputed that the Stanfords' income tax deficiency that we affirmed in Sections II.B.1 and II.B.2 of this opinion was a "substantial understatement" of tax as defined by I.R.C. § 6662(d)(1)(A). Nonetheless, the statute provides that the amount of an understatement against which the penalty is imposed shall be reduced by the portion of the understatement that is attributable to (1) tax treatment that was supported by "substantial authority," or (2) tax treatment for which (a) there is a "reasonable basis" and (b) the relevant facts were "adequately disclosed in the return or in a statement attached to the return." I.R.C. § 6662(d)(2)(B). Furthermore, I.R.C. § 6664(c)(1) provides that "[no] penalty shall be imposed ... with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and ... the taxpayer acted in good faith with respect to such portion." I.R.C. § 6664(c)(1).17 Finding a lack of substantial authority to support the Stanfords' reduction of Guardian Bank's 1989 and 1990 subpart F income by the deficits in earnings and profits of Guardian Services and Stanford Financial, the Tax Court refused to set aside the accuracy-related penalty imposed against them by the Commissioner. On appeal, the Stanfords request a reversal of this penalty, contending either that (1) their tax treatment of the deficits was supported by substantial authority, or (2) any substantial understatement of tax resulting from this treatment was due to a reasonable cause and supported by good faith behavior on their part.

We need not resolve the Stanfords' "substantial authority" argument because we accept their alternative one--that the underpayment of tax resulting from their treatment of the deficits of Guardian Services and Stanford Financial was due to a reasonable cause and supported by good faith actions. We accordingly vacate the accuracy-related penalty imposed against them. See I.R.C. § 6664(c)(1). According to the applicable regulations, "the extent of the taxpayer's effort to assess [his] proper tax liability" is "[g]enerally[ ] the most important factor" in determining reasonable cause and good faith. Treas. Reg. § 1.6664-4(b); see Streber v. Commissioner, 138 F.3d 216, 223 (5th Cir.1998) (citing Heasley, 902 F.2d at 385). Additional "[c]ircumstances that may indicate reasonable cause and good faith include [ (1) ] an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstances, including the experience, knowledge, and education of the taxpayer," Treas. Reg. § 1.6664-4(b), and (2) reliance on the advice of a professional tax advisor "if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith," id.; Reser v. Commissioner, 112 F.3d 1258, 1271 (5th Cir.1997).

Here, the Commissioner acknowledges that the Stanfords relied on the advice of attorney Kenneth Allen, an expert in international banking law, in setting up their Montserrat offshore banking enterprise. Nothing in the record indicates that the heeded advice, which called for the utilization of a tripartite corporate structure consisting of Guardian Bank, Guardian Services, and Stanford Financial, had as a purpose the facilitation of tax avoidance. More importantly, the Commissioner does not dispute that the Stanfords' 1990 tax return reporting the income and deficits from this enterprise was prepared by Harry Failing ("Failing"), an experienced CPA who (1) served as the Stanfords' principal tax advisor and regular tax-return preparer, and who (2) prior to starting his own extensive tax compliance practice, worked for Price Waterhouse in an office where he alone comprised "the international tax department." At trial, Failing testified that before preparing the Stanfords' return he (1) reviewed the business and tax records of Guardian Bank, Guardian Services, and Stanford Financial; (2) studied the language of section 952(c)(1)(C), the section's legislative history, and what he considered to be the applicable regulations; and (3) concluded that the Stanfords could deduct under section 952 the deficits in earnings and profits of Guardian Services and Stanford Financial against Guardian Bank's subpart F income on their 1990 tax return. On appeal, the Commissioner does not allege that the Stanfords failed to advise Failing of any facts material to the determination of their 1990 tax liability or limited the scope of his research in any way. See Treas. Reg. § 1.6664-4(c)(1).

Although Mr. Stanford stated at trial that he was "not an unsophisticated taxpayer," it is not reasonable under the above-stated facts to expect that the Stanfords could "monitor [Failing,] [their] independent advisor[,] to make sure [he] [conducted] sufficient research to give knowledgeable advice." Mauerman v. Commissioner, 22 F.3d 1001, 1006 (10th Cir.1994). "It is for exactly this reason that many intelligent investors hire independent, educated experts to advise them," particularly with respect to arcane matters of tax law such as those at issue in this case. Id. (emphasis added); see also Chamberlain v. Commissioner, 66 F.3d 729, 733 (5th Cir.1995) ("To require the taxpayer to challenge the [expert], to seek a 'second opinion,' or to try to monitor [the expert] on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place.") (quoting United States v. Boyle, 469 U.S. 241, 251, 105 S.Ct. 687, 692-93, 83 L.Ed.2d 622 (1985)). Here, Failing satisfied himself that the deficits of Guardian Services and Stanford Financial could offset Guardian Bank's subpart F income under section 952(c)(1)(C), and the Stanfords had reasonable cause, because of his extensive expertise in the field of international taxation, to trust his advice. Although Failing's legal interpretation of section 952(c)(1)(C) turned out ultimately to be incorrect--and indeed gave rise to a substantial understatement of tax on the Stanfords' 1990 joint return--we find that the Stanfords' reliance on that interpretation constitutes "reasonable cause" for purposes of precluding the penalty imposed against them for that understatement. See Boyle, 469 U.S. at 250, 105 S.Ct. at 692 (" '[R]easonable cause' is established when a taxpayer shows that he reasonably relied on the advice of an accountant or attorney that it was unnecessary to file a return, even when such advice turned out to have been mistaken."). Accordingly, the Tax Court's affirmance of the Stanfords' accuracy-related penalty is reversed.18III.

In summary, we hold that (1) because Guardian Services is not a qualified chain member with respect to Guardian Bank, the Tax Court correctly sustained the Commissioner's determination that the Stanfords may not offset Guardian Bank's subpart F income by the deficits in earnings and profits of Guardian Services; (2) because the deficits in earnings and profits of Stanford Financial are not attributable to the same qualified activity to which Guardian Bank's subpart F income is attributable, the Tax Court correctly sustained the Commissioner's determination that the Stanfords may not offset Guardian Bank's subpart F income by the deficits in earnings and profits of Stanford Financial; and (3) because the Stanfords had reasonable cause and acted in good faith with respect to the understatement of tax resulting from the disallowance of the aforementioned offsets, the Tax Court incorrectly sustained the Commissioner's determination that the Stanfords are liable for an accuracy-related penalty under section 6662(a). Accordingly, we VACATE the Stanfords' underpayment of tax penalty and AFFIRM the Tax Court's judgment in all other respects.

BENAVIDES, Circuit Judge, concurring in part and dissenting in part:

I agree with my colleagues that Guardian Services is not a qualified chain member with respect to Guardian Bank and that Guardian Services' deficits therefore cannot be used to offset Guardian Bank's subpart F income for tax purposes. I also agree that the Stanfords had reasonable cause and acted in good faith with respect to the understatement of their 1990 tax liability and consequently should not be assessed as accuracy-related penalty. I concur in the majority's reasoning in reaching those conclusions and write separately only to voice my dissent on the issue of whether the deficits of Stanford Financial were "attributable to" the qualified activity of Guardian Bank within the meaning of 26 U.S.C. § 952(c)(1)(C)(i). I would hold that Stanford Financial's deficits were attributable to the qualified activity of Guardian Bank, and that the Stanfords therefore should be allowed to offset the income of the latter by the losses of the former.

It is undisputed that Stanford Financial is a qualified chain member with respect to Guardian Bank, that Stanford Financial generated deficits of $154,474 during the 1990 tax year as a result of providing administrative and management services to Guardian Bank, and that those services supported a "qualified activity" (banking) within the meaning of 26 U.S.C. § 952(c)(1)(B)(iii). Thus, the only question before us is whether those deficits are attributable to that qualified activity. The majority defines "attributable to" to mean "due to, caused by, or generated by"--a definition I accept. I do not, however, believe it is significant that the Stanfords say Stanford Financial's deficits were "driven solely by" and "directed solely to" Guardian Bank's qualified activity rather than using the words "due to, caused by, or generated by." It seems clear that their point is that administrative and management services are "attributable to" the activity they support and this seems to me, as a matter of the plain meaning of the phrase, to be true. The majority seems to be construing the phrase "attributable to " so strictly as to implicitly require that deficits offset pursuant to § 952(c)(1)(C)(i) be generated by an entity itself engaged in a qualified activity--a view which I believe misreads the provision. Because I believe that the costs of administrative and management services provided in support of a qualified activity are caused by a qualified activity, I would find that the Stanfords should be allowed to use the deficits of Stanford Financial to offset the profits of Guardian Bank for purposes of computing their 1990 tax liability.