## Facts

- Donald W. Wallis, a tax lawyer and longtime partner at Holland & Knight (H&K), accrued “Schedule C units” under the firm’s partnership agreement, receiving 50 units annually valued at $15,000.
- The Schedule C units were payable in fixed amounts upon specified departure events and were determined without regard to H&K’s income or Wallis’s equity share.
- Wallis withdrew from H&K in March 2003 and received $80,000 in 2005 attributable to the Schedule C units.
- H&K issued a Form 1099-MISC reporting the 2005 amounts as nonemployee compensation and deducted the payments in computing its own 2005 taxable income.
- The Wallises’ 2005 joint return reported the $80,000 as long-term capital gain rather than ordinary income, and they did not disclose any inconsistent reporting position to the IRS.
- The IRS determined a deficiency, characterizing the $80,000 as guaranteed payments taxable as ordinary income, and imposed an accuracy-related penalty under I.R.C. § 6662.
- The Tax Court, based on stipulated facts and documentary evidence, sustained the deficiency and the § 6662 penalty.
- The Wallises appealed to the Eleventh Circuit.

## Issues

1. Whether the 2005 Schedule C payments to a withdrawing partner were guaranteed payments taxable as ordinary income under I.R.C. § 707(c) rather than capital gain from a payment in exchange for a partnership interest.
2. Whether the Wallises were liable for the I.R.C. § 6662 accuracy-related penalty or qualified for the I.R.C. § 6664(c) reasonable-cause and good-faith exception.

## Decision

- The Eleventh Circuit affirmed the Tax Court’s decision in a per curiam, unpublished disposition.
- The court upheld the classification of the $80,000 as guaranteed payments taxable as ordinary income.
- The court upheld the § 6662 accuracy-related penalty, finding the Wallises did not establish reasonable cause and good faith under § 6664(c).
- The court found no clear error in the Tax Court’s factual findings and no legal error in its application of the governing tax rules.

## Legal Principles

- Under I.R.C. § 707(c), payments to a partner that are determined without regard to partnership income are treated as guaranteed payments and are generally taxable to the recipient as ordinary income.
- Fixed, income-independent amounts payable upon retirement or withdrawal may be treated as guaranteed payments even when described as part of the liquidation of the partner’s interest.
- A taxpayer bears the burden to show entitlement to the § 6664(c) reasonable-cause and good-faith exception to a § 6662 accuracy-related penalty.
- A court may consider the taxpayer’s sophistication and the lack of disclosure of an inconsistent reporting position when evaluating reasonable cause and good faith.

## Conclusion

The Eleventh Circuit held that H&K’s fixed Schedule C retirement payments to Wallis, determined without regard to partnership income, were guaranteed payments taxable as ordinary income, not capital gain, and it affirmed the accuracy-related penalty because the Wallises failed to show reasonable cause and good faith for their contrary reporting position.


Wallis v. Commissioner, 391 F. App’x 826 (11th Cir. 2010)