ES NPA Holding, LLC, Joseph NPA Investment, LLC, Tax Matters Partner ( 2023 )


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  •                      United States Tax Court
    
    T.C. Memo. 2023-55
    ES NPA HOLDING, LLC, JOSEPH NPA INVESTMENT, LLC,
    TAX MATTERS PARTNER,
    Petitioner
    v.
    COMMISSIONER OF INTERNAL REVENUE,
    Respondent
    —————
    Docket No. 13471-17.                                               Filed May 3, 2023.
    —————
    Derek T. Teeter and Jason A. Reschly, for petitioner.
    Randall L. Eager, Robert C. Teutsch, and William Benjamin McClendon,
    for respondent.
    MEMORANDUM FINDINGS OF FACT AND OPINION
    WEILER, Judge: On March 20, 2017, the Internal Revenue
    Service (IRS) issued a notice of final partnership administrative
    adjustment (FPAA) for the tax year ending December 31, 2011, to
    Joseph NPA Investment, LLC (JNPA), the tax matters partner for ES
    NPA Holding, LLC (ES NPA). The issues for decision are (1) whether ES
    NPA underreported its income for the 2011 tax year and (2) whether an
    accuracy-related penalty under section 6662 1 is appropriate. For the
    reasons detailed below we find for petitioner.
    1 Unless otherwise indicated, all statutory references are to the Internal
    Revenue Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times, all regulation
    references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
    relevant times, and all Rule references are to the Tax Court Rules of Practice and
    Procedure. All dollar amounts are rounded to the nearest dollar.
    Served 05/03/23
    2
    [*2]                          FINDINGS OF FACT
    Some facts have been stipulated and are so found. The First and
    Supplemental Stipulations of Facts, and the Exhibits submitted
    therewith, are incorporated by this reference.
    I.      ES NPA and Its Tax Matters Partner
    ES NPA was formed on September 12, 2011. ES NPA is treated
    as a TEFRA partnership for federal income tax purposes during all
    relevant periods. 2 ES NPA’s tax matters partner, and the petitioner in
    this case, is JNPA, which was formed as a Delaware LLC on September
    22, 2011. Both ES NPA and JNPA were Delaware LLCs when the
    Petition was filed. ES NPA’s principal place of business was Kansas
    City, Missouri.
    II.     ES NPA’s FPAA
    ES NPA timely filed its 2011 Form 1065, U.S. Return of
    Partnership Income, on April 15, 2012. On March 20, 2017, respondent
    issued the FPAA to ES NPA’s partners for the 2011 tax year.
    Respondent determined in the FPAA that ES NPA had received, but
    failed to report, other income of $16,106,250 for the 2011 tax year. In
    the FPAA respondent determined that the unreported income was
    attributable to ES NPA’s receipt of a 50% capital interest in Integrated
    Development Solutions, LLC (IDS). In the alternative, according to the
    FPAA, respondent determined that the unreported income was
    attributable to ES NPA’s receipt of a 30% indirect capital interest in
    National Performance Agency, LLC (NPA, LLC).
    III.    Restructuring of National Processing of America, Inc. (NPA, Inc.)
    Before October 14, 2011, Joshus 3 Landy owned 100% of the
    outstanding shares or membership units in NPA, Inc., Community
    Credit Services, Inc. (CCS), National Opportunities Unlimited, Inc.
    (NOU), and American Consumer Credit, LLC (ACC). Those entities
    conducted consumer loan businesses. Mr. Landy desired to dispose of a
    2Before its repeal, TEFRA (the Tax Equity and Fiscal Responsibility Act of
    1982, 
    Pub. L. No. 97-248, §§ 401
    –407, 
    96 Stat. 324
    , 648–71) governed the tax treatment
    and audit procedures for many partnerships, including ES NPA.
    3 Joshus Landy is referenced throughout the record with various spellings of
    his first name (e.g., Joshus, Joshua, and Josh). We do not find any indication that these
    spellings represent separate individuals.
    3
    [*3] portion of his consumer loan businesses (NPA, Inc., CCS, NOU, and
    ACC) in 2011. Monu Joseph and Amit Raizada, who would later become
    ES NPA’s principals, became aware of an opportunity to acquire an
    interest in an existing online consumer finance business that was fully
    licensed in Delaware. Messrs. Joseph and Raizada contacted Mr. Landy
    with regard to his desire to dispose of a portion of his consumer loan
    businesses.
    Messrs. Landy, Joseph, and Raizada discussed a potential sale for
    several weeks; and on June 25, 2011, one of Mr. Joseph’s businesses,
    Emerald Crest Capital (ECC), sent a letter (term sheet) to Mr. Landy in
    which ECC offered to purchase 70% of Mr. Landy’s consumer loan
    businesses for $20.59 million, which was based on a 2.3× multiple of
    earnings before interest, taxes, depreciation, and amortization
    (EBITDA) for the most recent 12-month period.
    The term sheet specified contingencies such as that a new entity
    would be formed by the principals of ECC, its affiliates, or its investors
    to acquire the 70% interest in Mr. Landy’s consumer loan businesses
    and stated that ECC did not “currently have sufficient information to
    determine the most efficient structure for the [a]cquisition.” The term
    sheet also stated that ECC might bring in various parties as part of its
    purchase group to fund the purchase of an interest in Mr. Landy’s
    businesses. Mr. Landy signed the term sheet on July 5, 2011.
    Thereafter Mr. Landy retained the law firm Bryan Cave LLP to
    represent him with respect to the preparation of the transaction
    documents that would effect the sale of his businesses. Meanwhile, ECC
    provided a 60-page acquisition due diligence memorandum to
    prospective investors to facilitate the purchase of a controlling interest
    in Mr. Landy’s businesses. The memorandum discussed a “contemplated
    transaction” that involved “a purchase of 39.2% of” Mr. Landy’s
    businesses.
    Article 6.2 of the NPA, LLC operating agreement provides that
    “[e]ach Member has made an initial Capital Contribution to the
    Company in such amounts and under such terms as were agreed by the
    Member and approved by the Company as a condition to the issuance of
    Units to the Member. The initial Capital Contribution with respect to
    each Member and Class of Units is set forth in Exhibit B.”
    4
    [*4] NPA, LLC operating agreement § 13.3 provides that, after the
    payment of liabilities, the liquidation proceeds of NPA, LLC are to be
    distributed 30% to class B unit holders, 40% to class A unit holders, and
    30 percent to the Members who hold Class C Units;
    provided however, that, if the sum of all distributions made
    to the Members who hold Class A Units pursuant to [§] 9.2
    and this [§] 13.3(c) is less than the total Capital
    Contributions of such Members, the distributions to the
    Members who hold Class C Units shall be reduced and the
    distribution to the Members who hold Class A Units shall
    be increased, by an amount equal to the lesser of (i) the
    distribution to the Members who hold Class C Units
    pursuant to this [§] 13.3(c)(ii), and (ii) the difference
    between the total Capital Contributions of the Members
    who hold Class A Units and the sum of all distributions
    previously made to the Members who hold Class A Units
    pursuant to [§] 9.2 and the distribution that would be made
    to the Class A Members pursuant to [§] 13.3(c)(iii).
    The sale of Mr. Landy’s businesses was arranged through the
    following transactions, which took place on September 27, October 13,
    and October 14, 2011. On September 27, 2011, NPA, Inc. formed two
    LLCs: IDS and NPA, LLC. IDS had two classes of membership units:
    class B and class C. NPA, LLC had three classes of units: class A, class
    B, and class C. Per Articles 9.2 and 13.3 of the IDS first amended and
    restated limited liability company agreement, the class B and class C
    units in IDS track the class B and class C units in NPA, LLC,
    respectively, in that the owner of IDS class B units was entitled to 100%
    of the payments received by IDS because of its ownership of NPA, LLC
    class B units and the owner of IDS class C units was entitled to 100% of
    the payments received by IDS because of its ownership of NPA, LLC
    class C units.
    On October 13, 2011, NPA, Inc. contributed substantially all of its
    business assets to NPA, LLC in exchange for all three classes of units
    (classes A, B, and C) in NPA, LLC. NPA, Inc. then contributed all three
    classes of units (classes A, B, and C) in NPA, LLC to IDS as a capital
    contribution to IDS. At the end of the day on October 13, 2011, the
    relevant aspects of the entity ownership structure were as follows:
    5
    [*5]
    On October 14, 2011, NPA, LLC entered into revenue-sharing
    agreements with the other consumer loan businesses, CCS, NOU, and
    ACC, respectively. An entity named NPA Investors, LP (NPA Investors),
    purchased all of NPA, LLC’s class A units from IDS in exchange for
    $14,502,436. Also on October 14, 2011, ES NPA exercised a call option
    granted by NPA, Inc., and pursuant thereto acquired all of the IDS
    class C units in exchange for ES NPA’s payment to NPA, Inc. of $100,000
    and services provided or to be provided.
    The “Whereas” clause of the call option agreement states that ES
    NPA agreed to provide the following services to NPA, Inc. in exchange
    for the option to pay $100,000 to NPA, Inc. to acquire all of the class C
    units in IDS (which reflected an indirect interest in the class C units of
    NPA, LLC): “strategic advice for the purpose of enhancing the
    performance of [NPA Inc.’s] business and to assemble an investor group
    that would purchase 40 [sic] percent of [NPA Inc.’s] business for
    approximately $21 million.” The call option agreement also provides
    that ES NPA is hereby given “an option . . . to purchase all of the Class C
    Units . . . from [IDS]” and is dated October 14, 2011.
    6
    [*6] At the end of the day on October 14, 2011, the relevant aspects of
    the entity ownership structure were as follows:
    At the end of the day on October 14, 2011, (i) the class A units
    held by NPA Investors had a capital contribution of $20,985,509, (ii) the
    class B units held by IDS had a capital contribution of $8,993,790, and
    (iii) the class C units held by IDS had a capital contribution of zero.
    7
    [*7]                                OPINION
    I.     Summary of the Parties’ Arguments
    A.      Petitioner
    ES NPA contends that its indirect receipt of the class C units in
    NPA, LLC (through ES NPA’s receipt of the class C units in IDS) was a
    profits interest, as defined in Revenue Procedure 93-27, 1993-
    2 C.B. 343
    ,
    and related caselaw, that was excludable from income for the tax year
    ending December 31, 2011. ES NPA acquired the class C units in IDS
    and thereby, indirectly, the class C units in NPA, LLC pursuant to a call
    option agreement exercised on October 14, 2011. The initial capital
    account specified in the NPA, LLC operating agreement as of October
    14, 2011, was as follows:
    Unit        Number of         Capital          Percentage
    Type 4        Units         Contribution       of Capital
    Class A             400             $20,985,509         70%
    Class B             300               8,993,790         30
    Class C             300                —                —
    Total            —               $29,979,299       100%
    B.      Respondent
    Respondent’s primary argument is that Revenue Procedure 93-27
    is inapplicable because ES NPA did not provide services to IDS.
    Respondent’s first alternative argument is that the safe harbor in
    Revenue Procedure in 93-27 is inapplicable because ES NPA received a
    taxable capital interest in IDS. Further, respondent argues that the fair
    market value of ES NPA’s class C units in IDS was $12,169,000 as of
    October 14, 2011.
    4 The class A units were held by NPA Investors; the class B and class C units
    were held by IDS.
    8
    [*8] II.    Legal Principles
    A.    Jurisdiction
    Section 6226 provides for judicial review of FPAAs. In general,
    section 6226(f) gives this Court jurisdiction to determine all partnership
    items of the partnership for the partnership’s taxable year to which the
    FPAA relates. However, this Court’s jurisdiction does not extend to
    determining the partnership items of lower tier partnerships. See Sente
    Inv. Club P’ship of Utah v. Commissioner, 
    95 T.C. 243
    , 247–48 (1990).
    That means that we may determine only the partnership items of the
    partnership to which the FPAA relates. 
    Id.
     If the partnership items of a
    lower tier partnership are included in the FPAA of the partnership
    before us, we are without jurisdiction to determine those lower tier
    partnership items. See Rawls Trading, L.P. v. Commissioner, 
    138 T.C. 271
    , 288–89 (2012); Sente Inv. Club P’ship of Utah, 95 T.C. at 247–48.
    B.    Burden of Proof
    Generally, the Commissioner’s determinations in an FPAA are
    presumed correct, and the party challenging the FPAA bears the burden
    of proving that those determinations are erroneous. See Rule 142(a)(1);
    Crescent Holdings, LLC v. Commissioner, 
    141 T.C. 477
    , 485 (2013);
    Republic Plaza Props. P’ship v. Commissioner, 
    107 T.C. 94
    , 104 (1996).
    Petitioner argues the burden of proof has shifted to respondent
    under section 7491 since it has produced credible evidence
    demonstrating its position. Our conclusions, however, are based on a
    preponderance of the evidence, and therefore the allocation of the
    burden of proof is not material. See Kimberlin v. Commissioner, 
    128 T.C. 163
    , 171 n.4 (2007).
    C.    Receipt of a Partnership Interest in Exchange for Services
    Section 721(a) provides that “[n]o gain or loss shall be recognized
    to a . . . partner[] in the case of a contribution of property to the
    partnership in exchange for an interest in the partnership.” However,
    where a person receives a partnership interest in exchange for a
    contribution of services, nonrecognition is not always guaranteed. See
    
    Treas. Reg. § 1.721-1
    (b)(1). Under that regulation the “receipt of a
    partnership capital interest in exchange for services is taxable to the
    service provider.” Crescent Holdings, LLC, 
    141 T.C. at 488
    ; see I.R.C.
    § 83(a) (generally dictating the recipient’s tax treatment of property
    received in connection with services performed); 
    Treas. Reg. § 1.61-2
    (d)
    9
    [*9] (stating property received as compensation must be included in
    income). Under longstanding principles services are not “property” for
    purposes of section 721; therefore, the receipt of a partnership capital
    interest in exchange for services does not receive section 721 treatment.
    Treasury Regulation § 1.721-1(b)(1) states in part:
    To the extent that any of the partners gives up any part of
    his right to be repaid his contributions (as distinguished
    from a share in partnership profits) in favor of another
    partner as compensation for services (or in satisfaction of
    an obligation), section 721 does not apply. The value of an
    interest in such partnership capital so transferred to a
    partner as compensation for services constitutes income to
    the partner under section 61.
    The foregoing parenthetical reference to a profits interest in the
    above regulation has been read as intending to exempt the receipt of a
    profits interest for services from taxation. See Charles H. Egerton, Rev.
    Proc. 93-27 Provides Limited Relief on Receipt of Profits Interest for
    Services, 79 J. Tax’n 132, 132 (1993). This view was also acknowledged
    by this Court. See Hale v. Commissioner, 
    T.C. Memo. 1965-274
    , 
    1965 WL 1045
    , n.3.
    We previously held that the receipt of a profits interest in a
    partnership in exchange for the performance of services was a taxable
    event. Diamond v. Commissioner, 
    56 T.C. 530
     (1971), aff’d, 
    492 F.2d 286
    (7th Cir. 1974). Then in Campbell v. Commissioner, T.C. Memo. 1990-
    162, aff’d in part, rev’d in part, 
    943 F.2d 815
     (8th Cir. 1991), we again
    determined the receipt to be a taxable event regardless of whether the
    transferee partner would receive anything upon a theoretical
    liquidation. The U.S. Court of Appeals for the Eighth Circuit, however,
    reversed our decision in Campbell, finding that the receipt of a profits
    interest was not taxable since the value received was speculative.
    Campbell v. Commissioner, 
    943 F.2d 815
    . 5
    Ultimately the IRS addressed the issue when it promulgated
    Revenue Procedure 93-27, publishing guidance on the treatment of the
    receipt of a profits interest for services provided to or for the benefit of
    5 Absent stipulation to the contrary this case is appealable to the Eighth
    Circuit, and we thus follow its precedent. See Golsen v. Commissioner, 
    54 T.C. 742
    ,
    756–57 (1970), aff’d, 
    445 F.2d 985
     (10th Cir. 1971); see also I.R.C. § 7482(b)(1)(E).
    10
    [*10] the partnership. 6 Id. § 1, 1993-2 C.B. at 343. In this revenue
    procedure the IRS cites Treasury Regulation § 1.721-1(b)(1) and
    acknowledges that the receipt of a capital interest for services is taxable
    as compensation, Rev. Proc. 93-27, § 3, 1993-2 C.B. at 343, while on the
    other hand, it will not treat the receipt of a profits interest as a taxable
    event, id. § 4.01, 1993-2 C.B. at 344. 7
    III.    Analysis
    A.      Definition of a Profits Interest
    Revenue Procedure 93-27 8 defines a profits interest as a
    partnership interest “other than a capital interest,” id. § 2.02, 1993-2
    C.B. at 343, and a capital interest is, in turn, an interest that would
    “give the holder a share of the proceeds if the partnership’s assets were
    sold at fair market value and then the proceeds were distributed in a
    complete liquidation of the partnership,” id. § 2.01. This theoretical
    liquidation is to occur “at the time of receipt of the partnership interest,”
    id., which the parties referred to throughout the case as “immediately”
    after the transaction. Under Revenue Procedure 93-27 such a profits
    interest is not treated as income upon its acquisition if a person receives
    it “for the provision of services to or for the benefit of a partnership in a
    partner capacity or in anticipation of being a partner.” Id. § 4.01. 9
    6   The IRS addressed the receipt of a partnership interest in exchange for
    services in a proposed ruling attached to a General Counsel Memorandum (GCM).
    I.R.S. G.C.M. 36,346 (July 23, 1975). In the GCM, the IRS acknowledged a conflict
    between our holding in Diamond and Treasury Regulation § 1.721-1(b). In the GCM,
    the IRS declined to follow our holding in Diamond “to the extent that it holds that the
    receipt by a partner of an interest in future partnership profits as compensation for
    services results in taxable income.” The GCM also recognized that because “the receipt
    of a ‘profits[’] interest is not taxable, the proposed revenue ruling is limited to interests
    that give the holder no rights to existing partnership assets upon the liquidation of his
    interest.”
    7 Followed by clarification in Revenue Procedure 2001-43, 2001-
    2 C.B. 191
    ,
    intended to ensure that the receipt of a profits interest will achieve the recipient’s goal
    of not having an immediate recognition of tax upon his or her joining of the
    partnership, the IRS seems to view the receipt of a profits interest as a type of deferred
    compensation arrangement.
    Revenue Procedure 93-27 is amplified by Revenue Procedure 2001-43, which
    8
    acknowledges the time and valuation rules of section 83.
    9 In Revenue Procedure 2001-43, § 2, 2001-2 C.B. at 191, the IRS further
    clarified Revenue Procedure 93-27 by providing that the determination of whether the
    interest granted is a profits interest is tested at the time of grant.
    11
    [*11] B.        Whether the Class C Units in NPA, LLC That ES NPA
    Received Constituted a Profits Interest
    To answer the foregoing question, we will need to analyze the
    arguments and questions raised by the parties at trial and on brief. As
    summarized above, the parties dispute whether Revenue
    Procedure 93-27 is applicable, and if we find it to be applicable, whether
    ES NPA has satisfied its underlying requirements. We will address both
    disputes.
    1.      Is Revenue Procedure 93-27 Applicable?
    As a threshold matter, it is uncontroverted that ES NPA provided
    services to NPA, Inc. in exchange for the class C units in IDS. It is also
    undisputed that ES NPA’s interests in the class C units in IDS are
    identical in all respects to the interests in class C units in NPA, LLC.
    Respondent contends Revenue Procedure 93-27 has no application since
    it applies only when “a partnership profits interest for services provided
    to or for the benefit of the partnership,” id. § 1, and in this case ES NPA
    received an interest in IDS in exchange for services it provided to NPA,
    Inc.—not NPA, LLC. 10 We disagree with respondent and find his
    reading of this revenue procedure and views of the transaction at issue
    to be unreasonably narrow.
    While respondent has accurately stated the introductory purpose
    set out in Revenue Procedure 93-27, §1, 11 the revenue procedure later
    states and further explains that “if a person receives a profits interest
    for the provision of services to or for the benefit of a partnership in a
    partner capacity or in anticipation of being a partner, the [IRS] will not
    treat the receipt of such an interest as a taxable event for the partner or
    10 Proposed Treasury regulations under section 83 reject the concept that the
    receipt of a partnership interest in connection with services is not a realization event.
    In conjunction with the issuance of these proposed regulations, the IRS issued I.R.S.
    Notice 2005-43, 2005-
    1 C.B. 1221
    , which explains that Revenue Procedures 93-27 and
    2001-43 will become obsolete upon the finalization of these proposed regulations, but
    that until then taxpayers are permitted to rely upon Revenue Procedure 93-27.
    11 Revenue Procedure 93-27 does not apply: (1) if the profits interest relates to
    a substantially certain and predictable stream of income from partnership assets, such
    as income from high-quality debt securities or a high-quality net lease; (2) if within
    two years of receipt, the partner disposes of the profits interest; or (3) if the profits
    interest is a limited partnership interest in a “publicly traded partnership” within the
    meaning of section 7704(b). See Rev. Proc. 93-27, § 4.02, 1993-2 C.B. at 344.
    Respondent does not assert that ES NPA triggered any of these three elements.
    Therefore, we will not consider this issue and deem it to be waived.
    12
    [*12] the partnership.” See id. at § 4.01. We find Revenue Procedure
    93-27 § 4, entitled “Application,” to set the intended parameters of the
    revenue procedure’s application.
    On brief, respondent implies that Revenue Procedure 93-27 is a
    “safe harbor” with limited application. We do not view Revenue
    Procedure 93-27 in such a restricted manner, but rather view it as
    administrative guidance on the treatment of the receipt of a partnership
    profits interest for services. See William S. McKee et al., Federal
    Taxation of Partnerships and Partners ¶ 5.02[2] (2022) (referring to
    Revenue Procedure 93-27 as a “broad, taxpayer-friendly safe harbor”
    subject only to tightly defined exceptions).
    Considering the text of Revenue Procedure 93-27 § 4, the evidence
    supports a finding that ES NPA directly (or through its principals),
    before and after formation, provided services to or for the benefit of the
    partnership in a partner capacity or in anticipation of being a partner.
    It is undisputed that the material assets of this partnership are held in
    NPA, LLC, and the activities ES NPA performed were to and for the
    benefit of the future partnership. It is of no material consequence that
    ES NPA’s interest in NPA, LLC is held indirectly through IDS, which is
    a mere conduit since the liquidation rights in the class C units in both
    IDS and NPA, LLC are identical. This partnership came about only
    through ES NPA and NPA, Inc.’s joint ownership of IDS and their
    ownership interest in NPA, LLC. Other relevant elements here
    evidencing that the application of Revenue Procedure 93-27 is proper
    are the presence of entrepreneurial risk and the receipt of a profits
    interest in the capacity as a partner. Thus, it is entirely reasonable to
    conclude that ES NPA’s receipt of the class C units meets the intended
    parameters of Revenue Procedure 93-27 § 4.
    2.     Has ES NPA Satisfied the Requirements of Revenue
    Procedure 93-27?
    Since we conclude ES NPA’s receipt of the class C units qualifies
    under Revenue Procedure 93-27, the question now becomes whether ES
    NPA has satisfied the underlying requirements of the revenue
    procedure; namely, whether the received class C units are a profits
    interest. To answer this question Revenue Procedure 93-27 § 2 directs
    us to determine whether ES NPA would receive a distribution upon a
    hypothetical liquidation at the time of receipt.
    13
    [*13] On October 14, 2011, the class A units held by NPA Investors had
    a capital account of $20,985,509, the class B units held by IDS had a
    capital account of $8,993,790, and the class C units held by IDS had a
    capital account of zero. NPA, LLC operating agreement § 13.3 provides
    that after the payment of liabilities, the NPA, LLC liquidation proceeds
    are to be distributed 30% to class B unit holders and 40% to class A unit
    holders, with the remaining 30% to the members who hold class C units,
    provided, however, that the sum of all distributions made to the
    members who hold class A units had first been satisfied. In other words,
    the class A and B unit holders have a preferred return on their capital,
    and the class C units would receive anything in a hypothetical
    liquidation only after all capital accounts were first satisfied in full. The
    parties, and their respective experts, agree, under the terms of the
    operating agreement, that if the fair market value of NPA, LLC was
    $29,979,299 as reflected in NPA, LLC’s capital account, then there
    would be no distribution to the class C unit holders upon a hypothetical
    liquidation. 12
    To answer the question regarding hypothetical liquidation of the
    partnership, we must decide the largely subjective question of fair
    market value. Fair market value is defined as the price at which the
    property would change hands between a willing buyer and a willing
    seller, neither being under any compulsion to buy or to sell and both
    having reasonable knowledge of relevant facts. United States v.
    Cartwright, 
    411 U.S. 546
    , 550–51 (1973); see also 
    Treas. Reg. § 20.2031
    -
    1(b); Rev. Rul. 59-60, § 2.2, 1959-1 CB 237, 237.
    Respondent contends that in the opinion of his retained expert
    witness the fair market value of NPA, LLC as of the transaction date
    was $52,463,722. Respondent disputes the testimony of petitioner’s
    expert and further avers that Mr. Landy lacked knowledge of the value
    of his business, performed minimal due diligence, and did not
    understand the terms of the transaction. Essentially, respondent
    disputes that the transaction was an arm’s-length transaction and
    12 This $29 million figure would be the book value of NPA, LLC at its formation.
    See 
    Treas. Reg. § 1.704-3
    (a)(3). Respondent essentially disputes the book value
    assigned to the partnership assets and partners’ capital accounts and contends that
    the market value of the newly formed partnership is substantially greater, upon a
    hypothetical liquidation the class C units would be worth in excess of $12 million, and
    therefore the receipt of these units was in fact a capital interest in NPA, LLC (rather
    than a future profits interest as petitioner contends).
    14
    [*14] contends that it should not be relied upon to determine the fair
    market value of NPA, LLC.
    Petitioner contends that the actual terms of the sale, namely the
    acquisition of the class A units by NPA Investors for $20,985,509, is the
    best evidence of the overall fair market value of $29,979,299. Petitioner
    further avers—on the basis of the testimony of Messrs. Landy and
    Joseph—that the sale was a bona fide arm’s-length transaction
    reflecting the sale of a 70% interest in NPA, LLC. In the alternative,
    petitioner argues, on the basis of its expert witness testimony, that the
    fair market value of $29,979,299 is supported by a market analysis
    approach using a direct capitalization of earnings. Finally, petitioner,
    on the basis of its expert rebuttal report, disputes respondent’s expert
    witness valuation since it erroneously assumes Mr. Landy sold 40% of
    his interest in NPA, LLC for approximately $21 million.
    The parties agree that the best evidence of fair market value is
    actual arm’s-length sales involving that property. Indeed, this Court has
    repeatedly affirmed that actual arm’s-length sales occurring sufficiently
    close to the valuation date are the best evidence of value, and typically
    dispositive, over other valuation methods. See, e.g., Rubber Rsch., Inc. v.
    Commissioner, 
    422 F.2d 1402
    , 1405–06 (8th Cir. 1970), aff’g 
    T.C. Memo. 1969-24
    ; Estate of Fitts v. Commissioner, 
    237 F.2d 729
    , 731 (8th Cir.
    1956), aff’g 
    T.C. Memo. 1955-269
    ; Wortmann v. Commissioner, 
    T.C. Memo. 2005-227
    , 
    2005 WL 2387487
    , at *5 (collecting cases and noting
    that “evidence of what property sold for within a reasonable time before
    the valuation date generally is competent, substantial, and persuasive
    evidence of its fair market value” and that “[a]ctual sales between a
    willing buyer and a willing seller are generally more reliable than
    estimates and approximations and indicate what a hypothetical buyer
    and seller may agree on”). Here, there was an actual sale of the subject
    property—that is, Mr. Landy’s internet-based consumer lending
    businesses—immediately before the hypothetical liquidation of NPA,
    LLC. That sale of a 70% interest implies an overall fair market value of
    $29,979,299.
    In deciding valuation issues courts often receive into evidence and
    consider the opinions of expert witnesses. Helvering v. Nat’l Grocery Co.,
    
    304 U.S. 282
    , 295 (1938). Where experts offer competing estimates of
    fair market value, we determine how to weigh those estimates by, inter
    alia, examining the factors they considered in reaching their
    conclusions. See Casey v. Commissioner, 
    38 T.C. 357
    , 381 (1962).
    Contrary to the Commissioner’s current position that a “formal”
    15
    [*15] appraisal is required, this Court and others have frequently
    adopted the proposition that an actual sale is more persuasive evidence
    of fair market value than an appraisal, so the proposition that an
    appraisal is necessary to validate a sale clearly cannot be correct. See,
    e.g., Gaggero v. Commissioner, 
    T.C. Memo. 2012-331
    , at *34 (giving
    “considerably more weight” to the “actual sales price” than an
    appraisal), aff’d, 
    795 F. App’x 1005
     (9th Cir. 2020); Hollis v.
    Commissioner, B.T.A.M. (P-H) P 37,133 (1937) (“The best evidence of
    value is a sale made between willing parties under no compulsion, and
    where, in valuing property at a given date, we must choose between
    opinion evidence based on appraisals and an actual sale or sales between
    willing parties, the established rule is that the selling price is the better
    evidence of value.”).
    In his reply brief respondent argues that the transaction was not
    for fair market value and should be disregarded since Mr. Landy was
    pressured to sell, failed to obtain a formal appraisal, and lacked
    sophistication and education. There is nothing in the record that
    indicates that Mr. Landy was under any duress or compulsion to sell,
    and in fact his trial testimony reflects the contrary. At trial Mr. Landy
    testified how he wanted a “liquidity event” and he understood that he
    would retain 30% of his businesses. He also testified that he was under
    no financial compulsion or other need to sell, as his businesses were in
    fact profitable. The parties to the transaction entered into a letter of
    intent whereby Mr. Landy agreed to effect the sale of 70% of his
    consumer loan businesses for a 2.3× multiple of EBITDA. Mr. Landy was
    represented by legal counsel, and after months of due diligence, the sale
    occurred with investors paying $14,502,436 for “good will” and
    $6,483,073 for the existing book of loans for a total price of
    $20,985,509. 13
    Respondent retained an expert witness to provide a retrospective
    opinion of NPA, LLC’s fair market value. This expert was also retained
    to provide his opinion as to the proceeds ES NPA would receive upon a
    hypothetical liquidation of NPA, LLC. Respondent’s expert performed a
    market approach analysis through examining comparable businesses
    and determined an overall fair market value of $52,463,772. It was
    13 Mr. Landy (through NPA, Inc.) contributed substantially all of his interests
    in his consumer loan businesses to NPA, LLC before the sale; so to say Mr. Landy sold
    70% of his consumer loan businesses, compared to what third-party investors paid to
    acquire class A units in NPA, LLC, is referring to the same transaction.
    16
    [*16] respondent’s expert’s opinion that ES NPA would receive
    $12,269,000 upon a hypothetical liquidation.
    Respondent’s expert, however, was not aware when he prepared
    his original report that Mr. Landy had sold 70% of his consumer loan
    businesses for approximately $21 million. Therefore, respondent’s
    expert performed no analysis with respect to the transaction in his
    original report. On rebuttal, respondent’s expert acknowledged that the
    transaction provides the best indicator of NPA, LLC’s value; however,
    he conducted additional analysis using an income approach to test the
    reasonableness of the transaction. In his rebuttal report respondent’s
    expert opined, using an income approach and a 4.7× multiple of
    EBITDA, that NPA, LLC had an overall fair market value of
    $48,480,500, resulting in ES NPA’s receiving a distribution upon a
    hypothetical liquidation.
    Determining credibility is the province of the Court, and we find
    the testimony of Mr. Landy, a neutral third-party regarding the nature
    of the transaction at issue, to be credible and unbiased. We find nothing
    in the record to dispute a finding that the transaction was arm’s-length
    and bona fide. We decline to adopt respondent’s expert’s opinion of value.
    See Parker v. Commissioner, 
    86 T.C. 547
    , 561 (1986). Rather, we rely
    upon the arm’s-length and bona fide transaction in which Mr. Landy
    sold a 70% interest in his consumer loan businesses for approximately
    $21 million, resulting in an overall fair market value in NPA, LLC of
    $29,979,299.
    Therefore, we determine ES NPA’s class C units are a profits
    interest as defined under Revenue Procedure 93-27 since, applying a fair
    market value of $29,979,299 to NPA, LLC at the time of receipt, ES NPA
    would not receive a share of the proceeds upon a hypothetical liquidation
    of the partnership. 14 Further, on the basis of the conflicting expert
    witness testimony, we determine any fair market value in excess of
    $29,979,299 to be speculative. See Campbell v. Commissioner, 
    943 F.2d at 823
    .
    IV.    The Imposition of the Accuracy-Related Penalty
    Section 6662(a) and (b)(1) imposes a penalty equal to 20% of the
    portion of an underpayment of tax required to be shown on a taxpayer’s
    14 The foregoing facts are distinguishable from those in Crescent Holdings,
    LLC, 
    141 T.C. at 493
    , where, unlike here, we found that upon a hypothetical
    liquidation the taxpayer would have received a share of the proceeds.
    17
    [*17] return that is attributable to negligence or disregard of rules or
    regulations. Since we find Revenue Procedure 93-27 to be applicable, we
    likewise find the asserted accuracy-related penalty under section 6662
    is inappropriate here.
    V.    Conclusion
    In consideration of the foregoing, decision for petitioner is
    appropriate in this case. We have considered all arguments that the
    parties made, and to the extent they are not addressed herein, we
    consider them to be moot, irrelevant, or without merit.
    To reflect the foregoing,
    Decision will be entered for petitioner.