In the

       United States Court of Appeals
                     For the Seventh Circuit

                         ____________________
Nos. 17-2964, 17-2965
EXELON CORPORATION,
                                                      Petitioner-Appellant,

                                      v.

COMMISSIONER OF INTERNAL REVENUE,
                                                     Respondent-Appellee.
                         ____________________

                Appeals from the United States Tax Court
               Nos. 29183-13, 29184-13 — David Laro, Judge.
                         ____________________

        ARGUED MAY 24, 2018 — DECIDED OCTOBER 3, 2018
                   ____________________

   Before MANION AND BARRETT, Circuit Judges, and
GETTLEMAN, District Judge. ∗




   ∗   Of the Northern District of Illinois, sitting by designation.
2                                               Nos. 17-2964, 17-2965

    GETTLEMAN, District Judge. Petitioner-Appellant Exelon
Corporation (“Exelon”) 1 appeals from a decision of the United
States tax court which upheld a determination by the Com-
missioner of Internal Revenue that Exelon is liable for a defi-
ciency of $431,174,592 for the 1999 tax year and $5,534,611 for
the 2001 tax year. The tax court also affirmed the imposition
of $87 million in accuracy-related penalties. We affirm both
decisions.
                                    I.
    In 1999, after deregulation of the energy industry in Illi-
nois, Exelon, an Illinois-based energy company, decided to
sell its fossil-fuel power plants, intending to use the proceeds
to finance improvements to its nuclear plants and infrastruc-
ture. It sold all of its fossil-fuel power plants for $4.8 billion,
over $2 billion more than expected. Using $2.35 billion of the
proceeds to update its nuclear fleet, Exelon was left with ap-
proximately $2.45 billion to invest. It was also left with a sig-
nificant tax bill. It thus began looking for a strategy that could
reduce or defer the tax on the gain.
    Enter PricewaterhouseCoopers (“PwC”), one of Exelon’s
accounting firms. PwC proposed that Exelon could defer the
tax liability on the gains from the sale of its power plants by
executing “like-kind exchanges” under § 1031 of the Tax
Code, which provides: “No gain or loss shall be recognized
on the exchange of property held for productive use ... or for
investment if such property is exchanged solely for property




    1
      As did the parties, we refer to Exelon, its predecessors and subsidi-
aries collectively as “Exelon.”
Nos. 17-2964, 17-2965                                                3

of like-kind which is to be held either for productive use ... or
for investment.” 26 U.S.C. § 1031(a)(1) (1999).
    Exelon identified two of its own fossil-fuel power plants
that were good candidates for like-kind exchanges: the Col-
lins Plant, to be sold for $930 million, $823 million of which
would be taxable gain; and the Powerton Plant, to be sold for
$870 million, $683 million of which would be taxable gain. It
then identified three investment candidates for the ex-
changes: the J.K. Spruce Plant Unit No. 1 (“Spruce”), a coal-
fired plant in Texas that would replace the Collins Plant; and
two coal-fired plants in Georgia–Plant Robert W. Sherer Units
No. One, Two, and Three (“Sherer”) and Plant Hal Wansley
Units No. One and Two (“Wansley”),–which together would
replace the Powerton Plant.
    To carry out its purported like-kind exchanges, Exelon en-
tered into six “sale-and-leaseback” transactions. In each of the
three representative transactions 2 Exelon leased an out-of-
state power plant from a tax-exempt entity for a period longer
than the plant’s estimated useful life. Exelon then immedi-
ately leased the plant back to that entity for a shorter sublease
term and provided to the tax-exempt entity a multimillion-
dollar accommodation fee for engaging in the transaction,
along with a fully-funded purchase option to terminate Ex-
elon’s residual interest at the end of the sublease.
    Exelon asserted that it had acquired a genuine ownership
interest in each of the plants as a result of the transactions,
thus qualifying them as like-kind exchanges under § 1031,

   2
      The parties agreed to try three representative test transactions,
Spruce, Scherer One and Wansley One, in the tax court and to apply the
court’s ruling to the remaining transactions.
4                                         Nos. 17-2964, 17-2965

entitling it to defer tax on the $1,231,927,407 gain it realized
from the sale of its power plants. Exelon also claimed
$93,641,195 in deductions on its 2001 return for depreciation,
interest and transaction costs as lessor of the plants.
    The Commissioner disallowed the benefits claimed by Ex-
elon, characterizing the sale-and-leaseback transactions as a
variant of the traditional sale-in-lease-out (“SILO”) tax shelter
that the tax courts and courts of appeals had almost univer-
sally invalidated as abusive tax shelters that fail to transfer
genuine ownership or leasehold interest in the underlying
property. See, e.g., Wells Fargo & Co. v. United States, 

, 1321-22, 1329-30 (Fed. Cir. 2011). The Commissioner de-
termined income deficiencies of $431,174,592 for tax year 1999
and $5,534,611 for tax year 2001, and imposed a 20% accuracy-
related penalty for each year.
    After a 13-day trial, the tax court, in a comprehensive 175-
page opinion, agreed with the Commissioner, applying the
substance over form doctrine to conclude that the transactions
in question, like SILO transactions, failed to transfer to Exelon
a genuine ownership interest in the out-of-state plants. As a
result, Exelon was not entitled to like-kind exchange treat-
ment or its claimed deductions. The tax court agreed with the
Commissioner that in substance Exelon’s transactions most
closely resemble loans from Exelon to the tax-exempt entities.
Nos. 17-2964, 17-2965                                          5

                               II.
       A.     SILOs
    Each of Exelon’s sale-and-leaseback transactions was
structured as a variant of a SILO tax shelter, which is a trans-
action designed to transfer tax benefits associated with prop-
erty ownership from a tax-exempt entity to the taxpayer, but
which in reality fails to transfer the benefits and burdens of
ownership in the underlying property. See Wells 

. All SILOs are structured similarly. First, the tax-
exempt entity leases the asset to the taxpayer under a “head-
lease” for a term that exceeds the useful life of the asset,
thereby qualifying the lease as a “sale” for federal tax pur-
poses. The taxpayer concurrently leases the asset back to the
tax-exempt entity for a term that is less that the asset’s useful
life. That lease, called a “sublease,” is a “net” lease, meaning
that the tax-exempt entity is responsible for all expenses nor-
mally associated with ownership of the asset, and retains le-
gal title. 

contains an option under which
the tax-exempt entity can repurchase the asset at the end of
the sublease term at a set price. This option is “fully funded”
with funds provided by the taxpayer for that purpose at the
outset of the transaction. As a result, the tax-exempt entity has
no risk of losing control of the asset. 

prepays its entire “rent” under the headlease
in one lump sum payment at closing. 

rent
prepayment is funded in part with the taxpayer’s own funds
and in part with a nonrecourse loan, although in some in-
stances (as in the instant case) the taxpayer funds the entire
prepayment with its own funds. Most of the taxpayer’s pre-
paid rent is deposited into restricted accounts that are nomi-
nally held by the tax-exempt entity but are pledged to secure
6                                         Nos. 17-2964, 17-2965

the tax-exempt entity’s rental obligations under the sublease
and to fund its repurchase option at the end of the sublease
term. A small percentage of the headlease rent prepayment,
usually between 4% and 8% of the asset value, is paid to the
tax-exempt entity as its accommodation fee for participating
in the SILO transaction. 

s’ headlease prepayment is invested in high
grade debt with the growth of the account managed to ensure
that the tax-exempt entity has sufficient funds to repurchase
the asset from the taxpayer at the conclusion of the sublease
without adding any funds of its own. The repurchase or “ex-
ercise price” is set at the beginning of the SILO transaction
and can be exercised simply by giving notice. 

unlikely event that the tax-exempt entity chooses
not to exercise its repurchase option, the transaction generally
provides the taxpayer with two options. First, it can elect a
“return option” under which it takes immediate control of the
asset or, more likely, it can exercise what is called the “service
contract option” under which the tax-exempt entity is re-
quired to satisfy several conditions before continuing to use
the asset or arranging for its use by a third party. 

transaction offers three forms of tax benefits to the
taxpayer. First, it can take depreciation deductions on the as-
set for the remainder of its useful life. Next, it can take deduc-
tions for interest payments made from any loan used to fi-
nance the taxpayer’s prepayment of rent under the headlease.
And third, it can deduct certain transaction costs associated
with the SILO. These benefits are partially offset by the tax-
payer’s receipt of income at the end of the sublease if the tax-
exempt entity exercises its repurchase option, but “the
Nos. 17-2964, 17-2965                                           7

deferral of tax payments during the life of the sublease has
substantial economic value to the taxpayer.” 

Test Transactions
    As noted, it was PwC that first pitched the idea of like-
kind exchanges to Exelon. PwC’s strategy was to use the cash
obtained from Exelon’s sale of its fossil fuel power plants to
acquire “tax title” in like-kind replacement properties
through the sale and leaseback transactions, in which the
properties would be leased back to the original owner under
“triple net” leases with an end-of-term “fixed purchase op-
tion.” PwC’s plan was to structure the transactions to ensure
that federal tax ownership of the replacement asset would
pass to Exelon, while operation risks remained with the les-
see. As incentive to enter the transaction, Exelon would pass
a portion of its tax-deferred benefit to the lessee in the form of
an upfront cash benefit.
    PwC estimated that the tax deferral allowed under § 1031
would provide an after-tax yield of 20%. PwC explained to
Exelon that the transactions would be similar to maintaining
a typical debt private placement, and that the fundamental
risks for Exelon would be the credit of the lessee and the fed-
eral tax risk that the IRS would not respect the form of the
transaction. PwC explained that the credit risk would be ad-
dressed through the transactions’ “defeasance strategy,” and
the tax risk would be mitigated by obtaining an appraisal and
other expert opinions to support the conclusion that the fixed
purchase option was not “practically compelled.” Prior to
making its pitch to Exelon, PwC had assisted other clients to
implement SILO transactions, including as part of its “Like-
Kind Exchange Program.”
8                                         Nos. 17-2964, 17-2965

    Once it decided to employ PwC’s strategy, Exelon began
to put its own team together. Although it had internal tax,
treasury and accounting staff, it had no in-house expertise
with like-kind exchanges. It retained PwC as its lead financial
advisor, and Winston & Strawn, LLP (“Winston”) as legal
counsel. It also brought in several other experts to provide ad-
vice on the transactions, including: Arthur Anderson, LLP, for
accounting advice; Sidley Austin, LLP, for regulatory advice;
Vincent & Ekins, LLP, and Holland & Knight, LLP, for advice
about the new States in which it was investing; as well as top
investment and insurance advisors.
    After identifying the two of its own plants to be used as
part of the exchanges and the new plants to be “purchased,”
Exelon engaged the engineering firm Stone & Webster Man-
agement Consultant, Inc. (“Stone & Webster”) to evaluate the
new plants to assure itself that it was investing in high qual-
ity, well-maintained plants. After receiving confirmation of
that from Stone & Webster, the final step was to obtain the
valuations and appraisals that Winston would need to pro-
vide its expert opinion on whether the transactions would
qualify for like-kind exchange tax treatment. Exelon hired
Deloitte & Touche, LLP (“Deloitte”) to provide the needed ap-
praisals as to the useful life of the assets to be purchased, the
value of the assets at the time of the headlease and at the end
of the sublease, as well as the financial implications of the
transactions’ terms and conditions.
              1.     The Spruce Transaction
   On June 2, 2000, Exelon entered into a transaction with
City Public Service (“CPS”) in San Antonio under which Ex-
elon leased the Spruce Plant for 65 years (the headlease) and
simultaneously leased it back to CPS for 32 years (the
Nos. 17-2964, 17-2965                                          9

sublease). The headlease term exceeded the estimated useful
life of the plant by 13 years. At the end of the sublease CPS
could exercise a unilateral purchase option to terminate Ex-
elon’s residual interest. At closing, Exelon prepaid its entire
rent under the headlease, $725 million, using the proceeds
from the sale of its fossil fuel plants. The $725 million matched
Deloitte’s appraisal of the plant’s fair market value as of the
closing. CPS was required to prepay its entire sublease rent
six months later, in the amount of $557,329,539. At the end of
the sublease term, CPS had the option to “purchase the plant
for $733,849,606.”
    CPS received $87,318,469 as its “accommodation fee” for
entering the transaction. The rest of Exelon’s headlease rent
prepayment was set aside to secure CPS’s rent obligations un-
der the sublease and to fund the purchase option. Thus, at
closing, CPS was required to transfer $539,328,241 of the
headlease proceeds into collateral accounts for the purchase
of government securities that would accrete to cover CPS’s
obligation to prepay the entire sublease rent six months later.
CPS had no control over those accounts, and also had to pay
an irrevocable “undertaking fee” of $88,995,790 to AIG Finan-
cial Products (Jersey) Ltd., in exchange for which AIG became
unconditionally obligated to pay Exelon sums matching both
in timing and amount the sum CPS would owe upon exercis-
ing its purchase option at the end of the sublease. AIG’s pay-
ment obligation was guaranteed by American International
Group, Inc., backed by a letter of credit issued by AIG Finan-
cial Products Corp., and secured by the undertaking fee pro-
ceeds, which were pledged to Exelon as collateral during the
sublease term.
10                                       Nos. 17-2964, 17-2965

    If CPS were to default, resulting in an early termination of
the sublease, Exelon could require CPS to pay as damages a
predetermined “stipulated loss value” designed to recover
Exelon’s full investment plus a premium. Upon receipt of
payment, Exelon would transfer its interest in the plant back
to CPS with any unaccrued rent paid by CPS. CPS’s payment
of the stipulated loss value was secured by the undertaking
fee proceeds, backed by both the AIG guarantee and the letter
of credit. The letter of credit and a separate insurance policy
further guaranteed full reimbursement to Exelon in the un-
likely event that CPS’s payment of the stipulated loss value
was voided under bankruptcy law.
    Under the sublease, CPS had the right to uninterrupted
“use, enjoyment and possession,” of the plant, just as before
the transaction. Because the sublease was a “net lease,” CPS
was responsible for all costs and expenses associated with the
“ownership, use, possession, control, operation, maintenance,
repair, insurance, [and] improvement” of the plant. It also
bore the risk of loss, damage, or condemnation of the plant,
and any risk of eminent domain, just as it had before the trans-
action. Exelon’s rights were limited to inspecting the plant
once a year, and its consent was required for any improve-
ment that “would materially diminish” the plant’s value or
“adversely affect” its operation.
    At the end of the sublease, CPS could exercise its fully-
funded purchase option to terminate Exelon’s residual inter-
est and reacquire the plant. If CPS did not exercise its option,
Exelon would have three choices. First, it could require CPS
to arrange for a “qualified operator” to enter into an operating
agreement with Exelon. Second, it could require CPS to ar-
range for a “qualified bidder” to enter into a service
Nos. 17-2964, 17-2965                                          11

agreement. Finally, Exelon could elect to simply take posses-
sion of the plant and operate it. Failure to provide written no-
tice to CPS of which option Exelon elected would result in an
election of both the operating agreement and service agree-
ment options.
    Under the operating agreement option, CPS was required
to find a suitable operator (not CPS) for the plant. The quali-
fied operator must have its senior-long-term debt rated no
lower than Aa2 by Moody’s and AA by Standard & Poor’s
(“S&P”), have a comparable rating by another rating agency
acceptable to Exelon, or obtain a guarantee of its obligation by
anyone meeting the senior long-term debt standard. Deloitte
included in its appraisal a list of potential qualified operators.
The only one with an acceptable credit rating was General
Electric Corp., meaning any other operator would have to
make guarantee arrangements.
     Under the service agreement option, CPS was required to
arrange for the submission of one or more bids from qualified
bidders to enter into a “power toll processing agreement”
with Exelon in the form attached to the sublease agreement.
CPS was also required to arrange for the bidder to satisfy cer-
tain conditions precedent to entering into the power toll
agreement on or before the expiration date of the sublease. As
in the operating agreement, any qualified bidder must have
its senior-long-term debt rated no lower than Aa2 by Moody’s
and AA by S&P, or have its obligations guaranteed by any
person that had senior unsecured long-term debt obligations
rated no lower than Aa2 by Moody’s or AA by S&P. Exelon
had sole discretion to accept a bidder that could not satisfy
the credit warranty requirement.
12                                        Nos. 17-2964, 17-2965

    The power purchase bids would have to provide Exelon
with net power revenue in the amounts and times set forth in
the sublease. Exelon could reject any bid if it concluded that
the bid would result in the plant being operated inconsist-
ently with the standards, practices, and policies of operators
of similar facilities. If CPS were unable to find a successful
bidder, or if Exelon were to reject all bidders before the sub-
lease expiration dates, CPS would be required to exercise its
purchase option.
    In addition, if CPS did not elect to exercise its purchase
option it would have to meet certain return conditions for the
plant, including minimal operational standards for “Esti-
mated Annual Capacity,” “Net Energy Output” and “Effi-
ciency,” or else pay Exelon damages equal to the “diminution
in fair market value” of the plant.
              2.     The Scherer and Wansley Transactions
    To complete the like-kind exchange for its Powerton plant,
on June 9, 2000, Exelon entered into a series of lease agree-
ments with the Municipal Electric Authority of Georgia
(“MEAG”), the municipal utility that owned the interests in
the Scherer and Wansley plants. The transactions largely mir-
rored the Spruce transaction, although Exelon purchased in-
terests in rather than the entirety of the plants (31.29% of
Scherer and 15.1% of Wansley). Because the two transactions
were identical in structure, we describe only the Scherer
transaction.
   Exelon first leased its interest in the Scherer plant for 61.75
years (longer than the estimated useful life) and simultane-
ously leased it back to MEAG until 2030 (30.25 years), at
which time MEAG can exercise a fully funded unilateral
Nos. 17-2964, 17-2965                                      13

purchase option. Exelon prepaid at closing its entire rent un-
der the headlease, $201,986,755, using proceeds from the sale
of its fossil fuel plants. As in the Spruce transaction, MEAG
was required to prepay its entire rent under the sublease six
months later, on December 7, 2000, in the amount of
$157,414,216. The sublease specified a fixed purchase option
price of $179,284,424. Should MEAG default, Exelon could re-
quire it to pay as damages a predetermined “stipulated loss
value” designed to recover Exelon’s full investment, plus a
premium. Upon that payment, Exelon would transfer its in-
terest in the plant back to MEAG along with any unaccrued
rent paid by MEAG.
    As in the Spruce transaction, at closing MEAG was re-
quired to set aside most of the headlease prepaid rent to se-
cure its rent obligations and purchase option under the sub-
lease. To effect that requirement, MEAG transferred
$152,228,894 of the headlease proceeds to a collateral account
for the purchase of government securities that would accrete
to cover MEAG’s rent obligations due six months later.
MEAG was also required to invest $47,576,143 of the head-
lease proceeds as collateral for its payment of the purchase
option price at the end of the sublease. A percentage of this
amount represented MEAG’s accommodation fee, which
MEAG pledged until 2014 to lower the costs of certain credit
enhancements that Exelon required to guarantee MEAG’s
sublease obligations.
   To supply that guarantee, MEAG entered back-to-back
credit swaps with Ambac Credit Products, LLC, under which
Ambac agreed to pay Exelon the difference if MEAG failed to
pay the full amount of the stipulated loss value or the pur-
chase option price when required. In return, Exelon would
14                                       Nos. 17-2964, 17-2965

convey its interests in Scherer to Ambac. Ambac further
agreed to fully reimburse Exelon if any payment by MEAG
was voided under bankruptcy law. In the second swap,
MEAG agreed to pay Ambac the identical amounts for which
Ambac was obligated under the first swap, in return for
which Ambac would convey the interest in Scherer back to
MEAG. MEAG’s obligations under the second swap were se-
cured by its pledge to Ambac of the collateral accounts hold-
ing the headlease proceeds.
    As before the transaction, MEAG retained the right to un-
interrupted “use, operation, and possession” of the Scherer
plant. And, because the sublease was a “net lease” MEAG also
remained solely responsible for all costs and expenses associ-
ated with the “ownership, use, possession, control, operation,
maintenance, repair, insurance, [and] improvement of the
plant,” and bore the risk of any loss, damage, or condemna-
tion of the plant. Exelon was not responsible for any costs re-
lated to the plant and, as in the Spruce transaction, had rights
limited to inspection once a year. In addition, its consent was
required for certain assignments by MEAG of its rights under
the sublease.
    At the end of the sublease, MEAG could exercise its fully
funded option to purchase back the interest in the plant. As in
the Spruce transaction, if MEAG did not exercise its option,
Exelon could impose an operating agreement and a service
agreement requiring MEAG to find a “qualified operator” for
the plant, and a “qualified bidder” to purchase the power gen-
erated by the plant for a predetermined price over the next
8.69 years. Again, as in the Spruce transaction, if MEAG did
not exercise its purchase option, it had to meet certain “re-
turn” conditions for the plant, including minimum
Nos. 17-2964, 17-2965                                        15

operational standards for “Estimated Annual Capacity,” “Net
Energy Output,” and “Efficiency,” or it had to pay Exelon
damages equal to the “diminution in fair market sales value”
of the plant caused by MEAG’s failure to meet those condi-
tions.
                               III.
    The tax court held a 13-day trial, hearing testimony from
16 fact witnesses and 10 expert witnesses. Applying the sub-
stance-over-form doctrine, the court held that Exelon failed to
acquire a genuine ownership interest in the plants and, there-
fore, was not entitled to like-kind-exchange treatment under
§ 1031, or to its claimed tax deductions for 2001.
    To reach this conclusion, the court first analyzed the par-
ties’ rights and obligations during the sublease term for each
transaction. In doing so, it concluded that Exelon “did not face
any significant risks indicative of genuine ownership” during
that period. In particular, the court found that the transac-
tions’ “circular flow of money” precluded Exelon from hav-
ing any real investment in the plants, despite using its own
funds (as opposed to borrowed funds in a traditional SILO) to
finance the headlease payments. In addition, the court found
that each sublease allocated all costs and risks associated with
the plants to the sublessees, and that each transaction’s defea-
sance structure left Exelon able to “fully recover its invest-
ment” in the unlikely event of either a lessee bankruptcy or
an early termination of the sublease.
    Next, the court reviewed the parties’ options at the end of
the sublease terms and found that there was a “reasonable
likelihood” that the lessees would each exercise its purchase
option, meaning Exelon’s profit was fixed at the onset of each
transaction, and thus Exelon did not acquire any benefits or
16                                        Nos. 17-2964, 17-2965

burdens of ownership. The court rejected Exelon’s reliance on
the properties’ residual values to establish genuine owner-
ship. In particular, the court, agreeing with the government’s
expert, found that Deloitte’s appraisals of the future fair mar-
ket value of the plants at the end of the sublease terms were
too low. As a result, it rejected Exelon’s argument that the
sublessees were not “economically compelled” to exercise the
purchase option.
    The court also found that Winston had interfered with the
“integrity and independence” of the appraisal process by
“providing Deloitte with the wording of the conclusions it ex-
pected to see in the final appraisal reports.” Finally, the court
found that Deloitte had failed to consider the costs to the sub-
lessees of not exercising their purchase options. In this regard,
after analyzing the subleases’ return-condition requirements,
the court found that the parties all “understood and reasona-
bly expected” that the sublessees would exercise their pur-
chase options, because meeting the return conditions would
be “extremely burdensome,” “if not impossible.”
    The court then sustained the imposition of accuracy re-
lated penalties for both 1999 and 2001 based on negligence or
disregard of rules and regulations, rejecting Exelon’s “reason-
able cause” defense based on its reliance on Winston’s tax ad-
vice. The court concluded that Exelon could not have relied
on Winston’s tax opinions “in good faith because [Exelon],
with its expertise and sophistication, knew or should have
known that the conclusions in the tax opinions were incon-
sistent with the terms of the deal.”
    On appeal Exelon argues that the tax court: (1) used the
wrong legal standard to determine whether the purchase op-
tions were so likely to be exercised as to render both the
Nos. 17-2964, 17-2965                                           17

options and Exelon’s ownership illusory; (2) wrongly dis-
missed Exelon’s reliance on its advisors’ opinions based on
communications between Winston and Deloitte that Exelon
asserts were not improper, let alone so improper that Exelon
should have known that they undermined Deloitte’s apprais-
als; and (3) misunderstood the subleases’ return conditions in
concluding that compliance with those conditions would be
unduly costly. We review the tax court’s legal conclusions de
novo and its findings of fact for clear error. Freda v. Comm’r,

, 573 (7th Cir. 2011).
                               IV.
    Taxpayers, of course, have the right to decrease the
amount of what otherwise would be owed in taxes, or even
avoid them altogether, by any lawful means. See BB&T Corp.
v. United States, 

, 471 (4th Cir. 2008). “Anyone may
so arrange his affairs that his taxes shall be as low as possible;
he is not bound to choose that pattern which will best pay the
Treasury... .” Helvering v. Gregory, 

, 810 (2d Cir.
1934) (L. Hand, J.), aff’d, 

(1935).
    Taxpayers cannot, however, claim tax benefits not con-
ferred by Congress by setting up sham transactions that lack
any legitimate business purpose or by affixing labels that do
not accurately reflect the transactions’ true nature. BB&T

. As a result, judicial anti-abuse doctrines
have developed to “prevent taxpayers from subverting the
legislative purpose of the tax code.” Coltec Indus., Inc. v. United
States, 

, 1353 (Fed. Cir. 2006). One such doctrine,
the substance-over-form doctrine applied by the tax court,
“provides that the tax consequences of a transaction are de-
termined based on the underlying substance of the transac-
tion rather than its legal form.” Wells 

.
18                                         Nos. 17-2964, 17-2965

In applying this doctrine, the Supreme Court has “looked to
the objective economic realities of a transaction rather than
the particular form the parties employed,” and “has never re-
garded the simple expedient of drawing up papers as control-
ling for tax purposes when the objective economic realities are
to the contrary.” Frank Lyon Co. v. United States, 

,
573 (1978) (internal quotations omitted).
    Section 1031 of the Internal Revenue Code, 26 U.S.C.
§ 1031(a)(1) (1999), provides a narrow exception to the general
rule that taxpayers are required to recognize all gains from
the sale or exchange of property in the year of realization:
       No gain or loss shall be recognized on the ex-
       change of property held for productive use in a
       trade or business or for investment if such prop-
       erty is exchanged solely for property of like
       kind which is to be held either for productive
       use in a trade or business or for investment.
    This section “was designed to avoid the imposition of a tax
on those who do not ‘cash in’ on their investments in trade or
business property.” Starker v. United States, 

,
1352 (9th Cir. 1979). The underlying assumption of this excep-
tion “is that the new property is substantially a continuation
of the old investment still unliquidated ... .” 26 C.F.R. § 1.1002-
1(c). To constitute an exchange, the transaction “must be a re-
ciprocal transfer of property, as distinguished from a transfer
of property for a money consideration only.” 26 C.F.R. §
11002-1(d).
   In the instant case, the tax court concluded that there was
no “exchange” of like-kind property in any of the transactions
because Exelon never acquired genuine ownership (or
Nos. 17-2964, 17-2965                                           19

ownership interests) in any of the replacement plants. Exelon
first objects that the tax court equated the transactions to typ-
ical SILO transactions such as those in Wells Fargo, which in-
volved “sham” transactions that were driven exclusively by
the taxpayer’s effort to claim special tax benefits associated
with leasing the property back to a tax-exempt entity. In con-
trast, Exelon argues that its transactions were “driven by busi-
ness considerations and tax advantages deriving principally
from the like-kind exchange provisions of the code.”
    This argument is more properly directed to the “economic
substance doctrine,” which the tax court did not apply. We
note, however, that each transaction that Exelon entered was
in fact with a tax-exempt entity, and Exelon attempted to
claim those special tax deductions that were at the heart of the
SILO cases.
    In any event, the tax court’s reliance on the SILO/LILO
cases such as Consolidated Edison Co. of New York, Inc. v. United
States, 

(Fed. Cir. 2013), John Hancock Life Insur-
ance Co. (U.S.A.) v. Commissioner, 

(2013), and Wells
Fargo, was for their methodology and analysis as to whether
the taxpayer had acquired the benefits and burdens of own-
ership which, even assuming Exelon’s legitimate purpose to
avail itself of the tax benefits that Congress conferred in
§ 1031, is the key issue in this case. To be entitled to the § 1031
exception, Exelon had to acquire a genuine ownership interest
in the replacement plants. Ownership for tax purposes is not
determined by legal title. “[T]o qualify as an `owner’ for tax
purposes, the taxpayer must bear the benefits and burdens of
property ownership.” Wells 

(citing
Frank 

–73).
20                                        Nos. 17-2964, 17-2965

    Because the subleases were “net leases,” they allocated all
of the costs and risks associated with the plants to the subles-
sees. That, along with each transaction’s defeasance structure
and the circular flow of money, leads to the inescapable con-
clusion that Exelon did not face any significant risk indicative
of genuine ownership during the terms of the subleases, as
the tax court found. Exelon’s argument that it faced “real
risks” of having to return any unaccrued rent in the event of
a sublessee bankruptcy is unconvincing. Prior to entering the
transactions Exelon was assured and satisfied that CPS could
not declare bankruptcy until and unless the City of San Anto-
nio declared bankruptcy, and MEAG was prevented by Geor-
gia law from declaring bankruptcy.
    Unable to seriously dispute this conclusion, Exelon fo-
cuses more on what could happen at the end of the sublease
terms, arguing that it faced the “very real risk” that the sub-
lessees might not exercise the purchase options, leaving Ex-
elon as owner of the plants. It is here that the tax court erred,
according to Exelon, by applying the wrong legal standard.
The tax court, relying on its opinion in John Hancock, which
adopted the standard set forth in Wells Fargo, applied a “rea-
sonable likelihood” test, concluding that each sublessee was
reasonably likely to exercise the purchase option. Exelon ar-
gues that the court should have asked whether the lessees
would be “economically compelled” to exercise the options.
This, according to Exelon was the “extant law” at the time of
the transaction.
It is unclear to us from where this “extant” law comes, for
none of the cases cited by Exelon actually hold that this is the
proper standard. Certainly, our opinion in M&W Gear Co. v.
Commissioner, 

(7th Cir. 1971), the case on which
Nos. 17-2964, 17-2965                                       21

it primarily relies, does not adopt this standard. In M&W Gear
Co., the taxpayer sought to buy farm land on which to test its
new farm implements. It negotiated to purchase Blairsville
Farm for $335,250 plus some farm equipment for $37,000. In-
stead of a purchase agreement, the parties entered into a lease
with an option to purchase. Under the agreement, the tax-
payer paid annual rent of $50,660 and had an option to pur-
chase at the termination of the lease for $173,707.40. The tax-
payer deducted its annual rental payments, but the Commis-
sioner and the tax court disallowed the deductions, conclud-
ing that they “did not constitute rental payments but partial
payments on the purchase price of the land.” This court af-
firmed that holding because the evidence supported the tax
court’s finding that the taxpayer intended to acquire an equity
interest in the farm. In particular, we noted that the option
price was considerably less than the fair market value of the
farm. We did note that the taxpayer was under no legal obli-
gation to exercise the option and stated, 

      In addition, we are impressed with what ap-
      pears to be the [taxpayer’s] economic obligation
      to buy the Blairsville Farm. Not only did the
      [taxpayer] purchase $37,000 worth of farm ma-
      chinery upon the execution of the lease, but it
      paid ... over $100,000 in 1963 and 1964 for ditch-
      ing and draining of the farm property. Numer-
      ous other expenditures were made for ‘lease-
      hold improvements’ that included water tanks,
      sheds, culverts, floodgates, and water lifts. The
      latter are not recoverable expenditures to a les-
      see, and, in our opinion, are inconsistent with a
      claim by the [taxpayer] that prior to the exercise
22                                          Nos. 17-2964, 17-2965

       of the option to purchase it had not intended to
       acquire an equity in the farm.
    Our use of the phrase “economic obligation” referred
more to the position in which the taxpayer had placed itself
than to any term of the lease agreement. It certainly did not in
any way adopt an “economic compulsion” standard to be ap-
plied to determine the likelihood of a lessee exercising a pur-
chase option.
    The best that can be said for Exelon’s position is that some
courts have found, based on the particular facts of the case,
that it was “highly likely” and “nearly certain” that the pur-
chase option would be exercised. See AWG Leasing Trust v.
United States, 

, 985 (N.D. Ohio 2008). But
making that factual finding, and even affirming such a find-
ing, is a far cry from adopting a standard. For example, Wells
Fargo applied a reasonable likelihood standard even in affirm-
ing the district court’s finding that the purchase options were
“virtually certain” to be exercised. Indeed, every circuit court
that has considered the issue has adopted some form of rea-
sonable likelihood standard. See Wells 

–
26 (Fed. Cir. 2011); Altria Group, Inc. v. United States, 

, 287 (2d Cir. 2011) (rejecting a “certain or virtually certain”
to be exercised test in favor of a likelihood test); Consol. 

–77 (Fed. Cir. 2013) (applying a reasonable ex-
pectation standard). We agree with these courts and hold that
a “reasonable expectation or likelihood” standard rather than
an economic compulsion or certainty standard governs the
characterization of a tax transaction under the substance-
over-form doctrine.
   Exelon next argues that the tax court clearly erred in its
application of the reasonably likely standard. It first takes
Nos. 17-2964, 17-2965                                         23

issue with the court’s rejection of Deloitte’s conclusions that
for each sublease the price to exercise the purchase option
would be considerably higher than the fair market value of
the property at the end of the leases. For example, according
to Deloitte’s appraisal, the fair market value of the Spruce
Plant at the end of the sublease was expected to be approxi-
mately $626 million, while the purchase option price was set
at $733,849,606. Exelon argues that no reasonable person
would overpay over $100 million for an asset it could easily
replace.
    We find two fallacies with Exelon’s position. First, the tax
court rejected Deloitte’s methodology in determining the fair
market value at the end of the sublease, agreeing with the
government’s expert, Dr. Skinner, that there were several
flaws in Deloitte’s appraisal, including using a 9% state cor-
porate income tax rate when Texas does not impose a state
corporate income tax, and using too high of a discount rate.
After correcting for those flaws, Dr. Skinner computed fair
market values substantially higher than the fixed purchase
option prices, and concluded that it would be “nearly certain”
that the lessees would exercise their respective options. The
tax court was well within its bounds as finder of fact to accept
Dr. Skinner’s testimony and conclusions over those of
Deloitte’s. Certainly, it committed no clear error in doing so.
    The tax court also rejected Deloitte’s appraisals because it
found that Winston had interfered with the integrity and in-
dependence of the appraisal process by providing Deloitte
with the wording of the conclusions it expected to see in the
final appraisal reports. As did the tax court, we reject Exelon’s
argument that Winston was merely providing the existing
guidance and tests on the issue of what is considered to be a
24                                        Nos. 17-2964, 17-2965

lease. Winston’s December 29, 1999, letter to Deloitte con-
tained a detailed list of specific conclusions that Winston
needed in order to issue the necessary tax opinion. Deloitte’s
conclusions mirrored those in Winston’s letter almost word
for word. The evidence certainly supports the tax court’s de-
cision to reject Deloitte’s appraisals.
    As noted, there is a second, more fundamental problem
with Exelon’s position that the set purchase option prices far
exceeded the fair market value of the plants at the end of the
subleases. Even if we were to accept that position, it does not
lead to Exelon’s conclusion that “no reasonable person would
overpay” that much. To be sure, no reasonable entity would
overpay if it was paying with its own money. But here, the
sublessees could exercise the purchase options without pay-
ing a single cent of their own money. Thus, Exelon’s argument
does not reflect the economic reality of the transactions. “Be-
cause the `purchase’ is free to [the sublessees], price cannot be
[an] obstacle.” BB&T 

n.13. And, because
the sublessees do not retain any of the money set aside for the
purchase option if they do not exercise it, they have no eco-
nomic incentive not to do so. Indeed, exercising the options
leaves the sublessees in precisely the same position as if they
had not entered the transactions, except millions of dollars
richer.
    Exelon’s final argument is that the tax court clearly erred
in its understanding of the end-of-lease physical return con-
ditions and thus in its application of the reasonably likely
standard. According to Exelon, joined by the amicus, the
court confused the terms “availability factor” with “capacity
factor.”
Nos. 17-2964, 17-2965                                        25

    A plant’s “availability factor” is the number of hours in a
given period (one year) that the plant could theoretically run.
Thus, availability is the total number of hours in the period
minus the hours that the plant is down for maintenance
(planned or unplanned) or for any other reason. Availability
can be controlled, for the most part, by the plant operator.
    “Capacity factor,” on the other hand, refers to the number
of hours a plant is actually run in the given period (one year).
A plant’s capacity factor is affected by its availability and by
other factors such as demand, over which the plant operator
has much less control.
   Stone and Webster’s engineering reports included histori-
cal performance data for each plant’s “Capacity Factor,”
“Equivalent Availability,” and “Heat Rate,” defined as:
              Capacity Factor–The ratio of the actual net gen-
              eration to the normal claimed capacity operat-
              ing for 8760 hours/year.
              Equivalent Availability (EAF)–The fraction of
              maximum generation that could be provided if
              limited only by outages, overhauls, and derat-
              ings. It is the ratio of available generation to
              maximum generation.
              Heat Rate (Btu/kWh)–The ratio of the heat en-
              ergy input to the net unit electric energy output.
   Deloitte used Stone and Webster’s historical capacity and
availability data to estimate each plant’s residual value. Us-
ing the definitions from the Stone and Webster report,
Deloitte estimated each plant’s Capacity Factor at the end of
the sublease terms as:
26                                        Nos. 17-2964, 17-2965

              Spruce–58.7%
              Scherer–39.9%
              Wansley–39.2%
   Each sublease had a return condition titled “Estimated
Annual Capacity,” that had the same definition as used in the
Stone and Webster report—“an annual ratio of the actual net
generation to the normal claimed capacity operating for 8,760
hours/year.” The sublease return conditions, however, had
much higher capacity factors than the Deloitte estimate of re-
sidual value:
              Spruce–82%
              Scherer–62%
              Wansley–62%
    This led the tax court to conclude that it would be too
costly for the sublessees to get the plants’ capacity factors up
to that specified in the return conditions, leaving it reasonably
likely that they would exercise their purchase options.
    Exelon argues that despite its title, the “Estimated Annual
Capacity” return condition refers to the plants’ availability
factors and should not be compared to the capacity factors es-
timated by Deloitte. Joined by the amicus, Exelon argues that
anyone in the industry would recognize this, and that no one
in the industry would agree to a return condition based on
capacity, which is largely out of the operator’s control.
   We disagree. Exelon has no explanation for the fact that
Deloitte and the subleases used the same definition, except to
suggest that in retrospect the drafter (Exelon) should have
been more precise with its language. Nor can Exelon get
around the fact that the subleases’ definition of Estimated
Nos. 17-2964, 17-2965                                            27

Annual Capacity refers to the annual ratio of the “actual net
generation to the normal claimed capacity ... .” (emphasis
added). The definition refers to actual generation—not the po-
tential generation. It is, as its title suggests, a reference to the
plant’s capacity factor.
     Additionally, each sublease had another return condition
titled “Net Energy Output,” defined as “an annual ratio of the
maximum generation that could have been provided if lim-
ited only by outages, overhauls, and derating (the ratio of
available generation to maximum generation)” of at least 89%
for Spruce and 87.5% for Sherer and Wansley. This return con-
dition quite clearly refers to the plant’s availability factor.
Thus, if Exelon is correct, each sublease would contain two
different irreconcilable return conditions for the availability
factor.
    As to Exelon’s argument that no one in the industry would
agree to a return condition based on capacity factor, we note
that these are not typical leases. Exelon had a strong incentive
to require such a return condition, because it did not want the
plants back. Remember, these transactions were the direct re-
sult of Exelon’s decision to get out of the fossil fuel business.
    Additionally, the sublessees were not worried about the
return conditions because they always intended to exercise
the purchase options. There was never any incentive to not do
so. Had they been even remotely concerned, they would have
done their own independent appraisal to assess both the
value of the plants at the time of the sale and the residual
value at the end of the lease terms. Neither chose to do so.
Indeed, before proceeding, the City of San Antonio filed a
state court action to obtain a declaration of the continued va-
lidity of certain covenants in its outstanding public securities,
28                                        Nos. 17-2964, 17-2965

thereby allowing CPS to enter into the transaction. In its initial
draft of that petition, San Antonio represented that it intended
to exercise the purchase option. Tellingly, this representation
was removed at Winston’s and PwC’s suggestion.
    The record also reveals that MEAG, too, always intended
to exercise its option. Its own internal documents describing
the transaction indicate: “At the end of the lease term,
MEAGPower exercises its purchase option, the money for
which has been previously set aside at the beginning of the
transaction.”
    In short, the record definitively reveals that all of the par-
ties to these transactions fully intended and expected the sub-
lessees to exercise their purchase options at the end of the sub-
lease terms. As a result, we agree with the tax court’s finding
that Exelon bore none of the burdens or indicia of ownership
such that it was entitled to the benefit of a §1031 like-kind ex-
change.
                               V.
    Section 6662 of the Tax Code imposes a mandatory 20 per-
cent penalty on the portion of any underpayment of tax that
is attributable to “[n]egligence or disregard of rules or regula-
tions.” 26 U.S.C. § 6662(a), (b)(1). For purposes of this section,
the term negligence “includes any failure to make a reasona-
ble attempt to comply with the provisions” of the Code, and
the term disregard “includes any careless, reckless, or inten-
tional disregard.” 26 U.S.C. § 6662(c). Negligence is “strongly
indicated” when the taxpayer fails to make a reasonable in-
quiry into the correctness of an item that appears “too good
to be true.” Treas. Reg. § 1.6662-3(b)(1)(ii).
Nos. 17-2964, 17-2965                                         29

    Not every tax underpayment is subject to § 6662 penalties.
A taxpayer who had “a reasonable cause” for the underpay-
ment and acted in “good faith” with respect to that portion of
the underpayment has a valid defense. 26 U.S.C. § 6664(c)(1).
“Whether a taxpayer had reasonable cause depends on all of
the pertinent facts and circumstances of a particular case, with
the most important factor being the taxpayer’s effort to assess
his proper tax liability.” American Boat Co., LLC v. United
States, 

, 481 (7th Cir. 2009) (citing Treas. Reg. §
1.6664-4(b)(1)).
     One common method of demonstrating reasonable cause
is to show reliance on the advice of a competent and inde-
pendent professional advisor. American 

(citing United States v. Boyle, 

, 251 (1985) (“When
an accountant or attorney advises a taxpayer on a matter of
tax law, such as whether a liability exists, it is reasonable for
the tax-payer to rely on that advice.”)).
    Simply relying on a professional does not necessarily re-
lieve a taxpayer of penalties. “To constitute reasonable cause,
the reliance must have been reasonable in light of the circum-
stances. This is a fact-specific determination with many vari-
ables, but the question turns on the quality and objectivity of
the professional advice obtained.” 

and
citations omitted). To establish the defense the taxpayer, at a
minimum, must show that the advice was “(1) based on all
relevant facts and circumstances, meaning the taxpayer must
not withhold pertinent information[;] and (2) not based on
unreasonable factual or legal assumptions, including those
the taxpayer knows or has reason to know are untrue.” 

’s education, sophistication, business experience,
30                                        Nos. 17-2964, 17-2965

and purpose for entering the questioned transaction are also
relevant factors to be considered. 

instant case, the tax court sustained the Commis-
sioner’s imposition of penalties based on its findings that the
underpayments for those years were attributable to Exelon’s
negligence or disregard of rules or regulations. In doing so,
the court necessarily rejected Exelon’s “reasonable cause” de-
fense of reliance on its professional advisors. In particular, the
court found that Exelon did not rely in good faith on Win-
ston’s tax opinions because Exelon “knew or should have
known” that Winston’s conclusions were flawed in light of
the “obvious inconsistency” of the physical return condition
specified in the contracts and the capacity factors projected by
Deloitte for the plants at the end of the subleases, which made
exercise of the purchase options more likely. The tax court
found that Exelon must have appreciated that it would be
very expensive for the sublessees to sufficiently upgrade the
plants to meet the return capacity requirements. Thus, the
court concluded that Exelon must have understood that Win-
ston’s tax opinions, based on the Deloitte appraisals, were
flawed.
    Exelon’s attack on this finding mimics its argument that
the tax court confused capacity factor with availability factor
and thus compared apples to oranges in its determination that
the sublessees were reasonably likely to exercise their pur-
chase options. We rejected that argument above and we reject
it again here. We agree with the tax court that as a sophisti-
cated plant operator, Exelon knew or should have known
that, given the way these transactions were structured and
given what the tax court found to be tainted appraisals, it was
Nos. 17-2964, 17-2965                                        31

reasonably likely, or even highly likely, that the sublessees
would exercise their options.
     Exelon continues to argue that the Deloitte appraisals
were not tainted by Winston’s input. More importantly, it ar-
gues that even if the appraisals were tainted, Exelon had no
way of knowing that and cannot be penalized for its reliance
on Winston’s opinions. The record is replete, however, with
evidence that Exelon knew full well that Winston was supply-
ing Deloitte with the necessary conclusions. Both Walter
Hahn and Robert Hanley of Exelon were copied on the emails
sent by Winston first to Stone and Webster and then to
Deloitte. Indeed, it was Hahn who concluded that most of the
requested conclusions were items for Deloitte, and sent the
list of Winston’s necessary appraisal conclusions to Deloitte
multiple times.
    Whether reasonable cause exists, and the finding underly-
ing that determination, are questions of fact which we review
for clear error. American 

. We find no such
error and affirm the tax court’s conclusion that penalties are
warranted under § 6662.
   AFFIRMED.