1989 U.S. Tax Ct. LEXIS 55">*104 ">*851 Section 6659Section 6659(a) imposes a graduated addition to tax on an underpayment "attributable to a valuation overstatement." Section 6659(c) provides that "there is a valuation overstatement if the value of any property, or the adjusted basis of any property, claimed on any return is 150 percent or more of the amount determined to be the correct amount of such valuation or adjusted basis (as the case may be)."
We have sustained additions to tax under section 6659 on the ground that the basis claimed on the return exceeded the correct adjusted basis in the property. See, e.g., Zirker v. Commissioner, 87 T.C. 970">87 T.C. 970, 87 T.C. 970">978-979 (1986).
In this case, however, we have not determined adjusted basis. Petitioners' entitlement to deductions for rent and the distributor's fee were disallowed without regard to any claim of basis or determination with respect to fair market value and thus do not support an addition to tax under section 6659. Ferrell v. Commissioner, 90 T.C. 1154">90 T.C. 1154, 90 T.C. 1154">1204 (1988); Soriano v. Commissioner, 90 T.C. 44">90 T.C. 44, 90 T.C. 44">61 (1988); Zirker v. Commissioner, 87 T.C. 970">87 T.C. 980.">*105
Petitioners in this case claimed on their 1982 return an investment tax credit base and a fair market value equal to the price purportedly paid by AEL to IHI, $ 185,000. They were not entitled to include the note from AEL to IHI in calculating the credit base. Secs. 46(c)(8) and 48(d)(6). The fair market value of the property was negligible. Prior to trial of this case, however, petitioners conceded that they were not entitled to the investment tax credit because the agreement was a license and not a lease. Thus they have not disputed the fair market value of the master recording or the correct amount of the investment tax credit base. Petitioners contend that under Todd v. Commissioner, 89 T.C. 912">89 T.C. 912 (1987), affd. 862 F.2d 540">862 F.2d 540 (5th Cir. 1988), section 6659 does not apply because the underpayment of $ 18,500 ">*852 resulting from the erroneous claim of investment tax credit is not attributable to a valuation overstatement.
In 89 T.C. 912">Todd v. Commissioner, supra, we found that an underpayment was not attributable to a valuation overstatement when property was not placed in service during the years in issue. In affirming ">*106 our decision, the Court of Appeals agreed that Congress apparently intended that the calculation of an underpayment attributable to a valuation overstatement be made "'after' taking account of 'any other proper adjustment to tax liability.'" 862 F.2d 540">862 F.2d at 542.
In Todd, respondent argued before us that the result was not equitable because taxpayers who purchased an asset and claimed a valuation overstatement on their tax returns but also did not place the asset in service during the years in issue would avoid the addition to tax under section 6659 whereas taxpayers who merely claimed the valuation overstatement would be subject to the addition to tax. We responded:
We do not agree with respondent that this result is not logical or equitable. The consequence of determining that an asset was not placed in service during the years in issue is to disallow all deductions and investment tax credit relating to that asset. * * * Moreover, if a taxpayer were to concede that an asset was not placed in service and that no deductions or credits are allowable in order to avoid an addition to tax, could that concession reasonably be refused? [Todd v. Commissioner, 89 T.C. 912">89 T.C. 918-919.]
">*107
Petitioners' concession in this case is apparently in response to the rhetorical question thus posed in Todd.
Respondent argues that Todd is distinguishable because here petitioners continued to contest other deductions, thus forcing a trial, and we have not made a determination of an alternative ground for disallowance of the investment tax credit. Respondent contends that petitioners cannot selectively concede a ground for disallowance in order to avoid an addition to tax. We agree with respondent that this case may be distinguished, but there are certainly many cases in which taxpayers concede a single ground for disallowance of an item, thus avoiding the necessity of trial in a case. The question is whether the distinctions in this case make a difference, particularly in view of the Todd opinion of the ">*853 Court of Appeals for the Fifth Circuit, to which our decision in this case is appealable.
On appeal, the Commissioner apparently made equitable arguments similar to those made before us in Todd. The Court of Appeals stated (862 F.2d 540">862 F.2d at 544-545):
Finding no explicit support for his position, the Commissioner argues that">*108 the policies underlying section 6659 mandate imposition of the addition to tax in this instance. He notes that Congress wanted to make tax shelters based on property overvaluations less attractive. To allow the Todds to significantly overvalue the adjusted basis of these food containers on their tax returns without suffering an addition to tax would supposedly frustrate the policies behind section 6659. We point out, of course, that the Todds did not benefit from their tax shelter, since their depreciation deductions and investment tax credits were denied in full. Further, it is probable that Congress was balancing competing policies when it determined how to apply section 6659. First, Congress may not have wanted to burden the Tax Court with deciding difficult valuation issues where a case could be easily decided on other grounds. section 6659 penalty so that it would not be imposed on taxpayers whose overvaluation was irrelevant to the determination of their actual tax liability. section 6659 liability, rather than modifying the formula">*109 to address the Commissioner's concerns. However, we remain convinced that the formula set out above represents Congress' intent for determining whether to impose the section 6659 addition to tax in any given case.
Finally, appellant argues that the Tax Court decision leads to anomalous results. * * * The Commissioner also raises the spectre that under the Tax Court ruling, taxpayers might avoid section 6659 penalties by denying they had a profit motivation in entering the transactions in issue.
* * * *
We note, however, that the results the Commissioner deplores may not be as inequitable as he argues. First, while the Hendricks and Hillendahls had to pay a section 6659 penalty, they were also allowed to retain a portion of their claimed depreciation deductions and investment tax credits. The Todds, on the other hand, while escaping the section 6659 penalty, were denied any of their claimed deductions and credits for the years in question. * * *
Finally, the fear that taxpayers will deny profit motivation to avoid section 6659 penalties, is unimpressive. Significant penalties attach to tax underpayments attributable to fraud, negligence, or tax motivated transactions. To the">*110 extent a taxpayer took the position that he entered a transaction without profit motive, but still claimed tax benefits relating to the transaction, he might well win a Pyrrhic victory, escaping section ">*854 6659 penalties only to subject himself to a much larger seventy-five percent penalty for fraud.
">*111 Following this language, we feel compelled first to apply the formula referred to by the Court of Appeals and in our Todd opinion, to wit:
Under the first step (1), we calculate the amount of tax liability for each year as if all items had been reported properly, i.e., as if petitioners had not claimed any investment tax credit * * * [because the agreement was a license and not a lease] during the years in issue. Next (2), without taking into account any adjustments that are attributable to the valuation overstatement, we calculate the amount of tax liability as if all other items had been reported properly. Finally (3) because there is no difference between the amounts calculated under steps (1) and (2), no part of the underpayment is attributable to the valuation overstatement. [89 T.C. 912">89 T.C. 918.]
Under the formula, section 6659 does not apply to the underpayment attributable to the investment tax credit.
We made a determination of fair market value in this case only because of the disputes over the additions to tax. We cannot conclude that petitioner required a trial that otherwise would have been unnecessary or that petitioner forced ">*855 ">*112 us to decide "difficult valuation issues where a case could be easily decided on other grounds." We can conclude that respondent would have us decide those issues for the purpose of imposing the addition to tax. Moreover, as discussed below, a concession to avoid a 30-percent addition to tax on a portion of the underpayment under section 6659 would appear to be a "Pyrrhic victory" ( Todd v. Commissioner, 862 F.2d at 545) where the alternative is a 25-percent addition to tax on the whole underpayment under section 6661. section 6659 does not apply to any portion of the underpayment in this case.
Section 6661Section 6661 imposes an addition to tax "if there is a ">*113 substantial understatement of income tax for any taxable year." Such amounts assessed after October 21, 1986, are in an amount equal to 25 percent of the amount of any underpayment attributable to such understatement. Pallottini v. Commissioner, 90 T.C. 498">90 T.C. 498 (1988). Section 6661 defines a substantial understatement (for taxpayers other than corporations or personal holding companies) as follows:
SEC. 6661(b). Definition and Special Rule. -- (1) Substantial understatement. --
(A) In general. -- For purposes of this section, there is a substantial understatement of income tax for any taxable year if the amount of the understatement for the taxable year exceeds the greater of --
(i) 10 percent of the tax required to be shown on the return for the taxable year, or
(ii) $ 5,000.
The amount subject to the addition to tax may be reduced in accordance with the following:
SEC. 6661(b). Definition and Special Rule. -- * * * *
(2) Understatement. --
* * * *
">*856 (B) Reduction for understatement due to position of taxpayer or disclosed item. -- The amount of the understatement under subparagraph (A) shall be reduced by that portion of">*114 the understatement which is attributable to --
(i) the tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment, or
(ii) any item with respect to which the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return.
(C) Special rules in cases involving tax shelters. --
(i) In general. -- In the case of any item attributable to a tax shelter --
(I) subparagraph (B)(ii) shall not apply, and
(II) subparagraph (B)(i) shall not apply unless (in addition to meeting the requirements of such subparagraph) the taxpayer reasonably believed that the tax treatment of such item by the taxpayer was more likely than not the proper treatment.
(ii) Tax Shelter. -- For purposes of clause (i), the term "tax shelter" means --
(I) a partnership or other entity,
(II) any investment plan or arrangement, or
(III) any other plan or arrangement,
if the principal purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of Federal income tax.
(3) Coordination with penalty imposed by section 6659. -- For purposes of determining the amount of the addition to tax">*115 assessed under subsection (a), there shall not be taken into account that portion of the substantial understatement on which a penalty is imposed under section 6659 (relating to addition to tax in the case of valuation overstatements).
(c) Authority to Waive. -- The Secretary may waive all or any part of the addition to tax provided by this section on a showing by the taxpayer that there was reasonable cause for the understatement (or part thereof) and that the taxpayer acted in good faith.
Petitioners argue that the arrangement was not a tax shelter and that respondent abused his discretion in refusing to waive the addition to tax. These arguments require little discussion. It is apparent from review of the promotional materials provided by AEL that the AEL master recording lease program was a tax shelter, having as its principal purpose the avoidance or evasion of Federal income tax. Our discussion of the absence of countervailing profit objective or economic substance reinforces this categorization. Thus the amount subject to the addition to tax may be reduced under section 6661(b)(1)(C) only if the taxpayer reasonably believed that the tax treatment of such ">*857 item">*116 by the taxpayer was more likely than not the proper treatment. Even the tax opinion of Blum did not suggest that the tax treatment claimed by AEL investors was more likely than not the proper treatment. The tax opinion was replete with cautions, as was Rhemann's advice to petitioner.
As is apparent from our comments about the lack of credibility to petitioner's claim of profit objective, we do not believe that this petitioner was acting in good faith. The objective facts indicating lack of economic substance and the warnings set forth in the promotional materials negate reasonable cause for the underpayment. See Horn v. Commissioner, 90 T.C. 908">90 T.C. 908, 90 T.C. 908">943-944 (1988). Petitioners are liable for the addition to tax under section 6661 for 1982. (The underpayment in issue for 1983 is not substantial within the meaning of section 6661.)
Section 6621(c)Section 6621(c) provides for interest at the rate of 120 percent of the normal rate (under section 6601) on underpayments with respect to any substantial underpayment attributable to tax-motivated transactions. The term "tax-motivated transaction" includes any sham or fraudulent transaction. Sec. 6621(c)(3)(A)(v). ">*117 A transaction, such as petitioner's transaction with AEL, that lacks economic substance or business purpose is a sham transaction under section 6621(c)(3)(A)(v). Patin v. Commissioner, 88 T.C. 1086">88 T.C. 1086, 88 T.C. 1086">1128-1129 (1987), affd. sub nom. without published opinion Hatheway v. Commissioner, 856 F.2d 186">856 F.2d 186 (4th Cir. 1988), affd. sub nom. without published opinion Skeen v. Commissioner, 864 F.2d 93">864 F.2d 93 (9th Cir. 1989), affd. without published opinion Patin v. Commissioner, 865 F.2d 1264">865 F.2d 1264 (5th Cir. 1989), affd. sub nom. Gomberg v. Commissioner, 868 F.2d 865">868 F.2d 865 (6th Cir. 1989).
Under section 6621(c)(3)(B):
(B) Regulatory authority. -- The Secretary may by regulations specify other types of transactions which will be treated as tax motivated for purposes of this subsection and may by regulations provide that specified transactions being treated as tax motivated will no longer be so treated. In prescribing regulations under the preceding sentence, the Secretary shall take into account -- ">*858 (i) the ratio of tax benefits to cash invested, ">*118
(ii) the methods of promoting the use of this type of transaction, and
(iii) other relevant considerations.
Under the authority delegated to him to designate by regulation other types of tax-motivated transactions, the Commissioner has promulgated temporary regulations, section 301.6621-2T, Q-4, Temporary Proced. & Admin. Regs., 49 Fed. Reg. 50392 (Dec. 28, 1984), including deductions disallowed for any period under section 183 (relating to an activity not engaged in for profit) among transactions deemed to be tax motivated. Under either of the above subparts of section 6621(c)(3), therefore, interest under section 6621(c) would be due on the portion of petitioners' underpayment attributable to the disallowed deductions, if that portion were substantial, i.e., exceeded $ 1,000. Sec. 6621(c)(2).
Section 6621(c)(3)(A)(i) categorizes "any valuation overstatement (within the meaning of section 6659(c))" as a tax-motivated transaction. In Todd, we discussed the relationship between section 6659(c) and section 6621(c) and the manner of calculating the amount of an underpayment that was "attributable to" a valuation overstatement. 89 T.C. 912">89 T.C. 917-918.">*119 As discussed above, in affirming our decision, the Court of Appeals for the Fifth Circuit adopted the formula, noting that it "instructs us to determine section 6659 liability 'after' taking account of 'any other proper adjustment to tax liability.'" 862 F.2d 540">862 F.2d at 544. Application of that formula here compels the conclusion that the underpayment attributable to the conceded investment tax credit is not attributable to one of the tax-motivated transactions specified in section 6621(c). In this case the Commissioner's regulations specifically lead to the same result. Sec. 301.6621-2T, A-5, Temporary Proced. & Admin. Regs., 49 Fed. Reg. 59394 (Dec. 28, 1984). We recognize that the investment tax credit would have fallen with the contested deductions on alternative grounds (sham transaction, lack of profit objective). We believe, however, that the intended deterrent effect of sections 6659 and 6621(c) has been advanced by petitioner's concession, and reaching out further to penalize petitioners would be "too draconian." ">*859 See Todd v. Commissioner, 862 F.2d at 545 n. 15, quoted above.
">*120 Taxpayers should be cautioned, however, that a different situation exists where a valuation overstatement or other category of tax-motivated transaction is an integral part of or is inseparable from the ground found for disallowance of an item. Irom v. Commissioner, 866 F.2d 545">866 F.2d 545 (2d Cir. 1989), revg. T.C. Memo. 1988-211; Soriano v. Commissioner, 90 T.C. 44">90 T.C. 60; Barr v. Commissioner, T.C. Memo. 1989-69; compare Zirker v. Commissioner, 87 T.C. 970">87 T.C. 980. In Irom, we granted cross-motions for summary judgment. We sustained respondent's determination that certain deductions were not allowable in accordance with requirements for advanced minimum royalty payments under section 1.612-3(b)(3), Income Tax Regs., because the alleged payment was by nonrecourse notes. We also granted petitioner's cross-motion for summary judgment as to additional interest under section 6621(c), concluding that the ground sustained for disallowance was not one of the categories of tax-motivated transactions there specified. The Court of Appeals for the Second">*121 Circuit reversed this holding and remanded the case for decision as to whether additional interest was warranted. The Court of Appeals distinguished Todd as follows:
In Todd, the Tax Court had found that a deficiency was not "attributable to" the taxpayer's overvaluation of his investment in refrigerated food containers because the containers were not placed in service during the relevant tax year. Thus, there was no permissible deduction that could have been overvalued. The disallowance of the deduction was independent of and wholly separable from the alleged overvaluation.
In contrast, the Tax Court here found that Irom's investment did not meet the requirements for advanced royalty payments because his financing was non-recourse. The finding of a deficiency on the royalty grounds thus appears to have been inseparable from a finding that the taxpayer was not "at risk" in the transaction.
The Fifth Circuit in Todd also relied on legislative materials suggesting that the amount of a deficiency "attributable to" an overvaluation should be calculated only after subtracting deficiencies based on other grounds. 862 F.2d 540">862 F.2d at 541. A similar ">*122 subtraction is warranted here if on remand the Tax Court finds that none, or only part, of Irom's deficiency is attributable to a transaction that was not "at risk." But if, as the Tax Court's opinion in this case suggests, the two grounds for deficiency are inseparable, then no subtraction is warranted. [Irom v. Commissioner, 866 F.2d 545">866 F.2d at 547.]
">*860 Thus the Court of Appeals for the Second Circuit seems to have implicitly agreed with the application of the formula in Todd and in this case. Its distinction, however, should be observed in future cases where grounds for disallowing deductions or investment tax credits are inseparable and at least one such ground is a tax-motivated transaction.
Decision will be entered under Rule 155.
GERBER
Gerber, J., dissenting: The majority opinion in this case and the opinion in Todd v. Commissioner, 89 T.C. 912">89 T.C. 912 (1987), affd. 862 F.2d 540">862 F.2d 540 (5th Cir. 1988), 1989 U.S. Tax Ct. LEXIS 55">*123 Committee Explanation. These interpretations, while perhaps supportable in the abstract, ignore congressional focus upon gross overvaluation as one of the core problems of so-called "abusive tax shelters." Sections 6659 and 6621(c) were enacted to deter the very activity that the majority has circumvented and refused to address in its opinion.
The genesis of this controversy is our opinion in 89 T.C. 912">Todd v. Commissioner, supra. In an earlier Memorandum Opinion, Noonan v. Commissioner, T.C. Memo. 1986-449, we had made specific findings that the taxpayer's refrigerated containers had not been placed in service, resulting">*124 in the disallowance of all deductions and credits with respect to the container activity. In Todd, we concluded that the underpayment resulting from that disallowance could not be "attributable to" a valuation overstatement within the ">*861 meaning of section 6659, notwithstanding the fact that the taxpayers had claimed values on their income tax returns for the containers exceeding 400 percent of fair market value.
This Court and the Court of Appeals for the Fifth Circuit found support for their reasoning in the following sentence in the Joint Committee on Taxation's General Explanation of the Economic Recovery Tax Act of 1981 (Blue Book). "The portion of a tax underpayment that is attributable to a valuation overstatement will be determined after taking into account any other proper adjustments to tax liability." From that sentence, both this Court and the Court of Appeals for the Fifth Circuit incorrectly reasoned that if another ground besides valuation overstatement supports a deficiency, the deficiency cannot be attributable to a valuation overstatement.
"Attributable" means capable of being attributed. Irom v. Commissioner, 866 F.2d 545">866 F.2d 545 (2d Cir. 1989).">*125 In the ordinary meaning of that term, it is logical to conclude that an underpayment (the correct amount of tax less the amount shown on a timely return) may be attributable to more than one ground. The Court of Appeals for the Second Circuit is in agreement with this concept and in conflict with the Court of Appeals for the Fifth Circuit. "Thus, even though the Tax Court found a deficiency on the first ground, it should also have considered whether a deficiency was capable of being attributed to the second ground, which would have entailed additional interest." (Emphasis supplied.) 866 F.2d 545">Irom v. Commissioner, supra at 547. Although the Court of Appeals in 866 F.2d 545">Irom v. Commissioner, supra at 547, attempted to distinguish Todd, the Second Circuit's holding is based upon the opposite interpretation of the term "attributable." The Second Circuit held: "We do not think Congress intended to preclude additional interest for deficiencies that are capable of being attributed to tax-motivated transactions simply because the Commissioner seeks summary judgment for the deficiency on other grounds." 866 F.2d 545">Irom v. Commissioner, supra at 547.">*126 As a practical matter, the majority's rationale in this case would force respondent to pursue the tax-motivated transaction and/or overvaluation approach as the sole ground(s) for the ">*862 tax deficiency, although multiple grounds may exist, in order to successfully employ section 6621(c) or 6659.
Where, as here, the language of a statute is not expressly defined, legislative purpose can be found in the ordinary meaning of the words used. Richards v. United States, 369 U.S. 1">369 U.S. 1, 369 U.S. 1">9 (1962). The word "attributable" is defined as "capable of being attributed." Webster's Third New International Dictionary (1976). Congress enacted section 6659, along with a number of other penalty provisions (including sections 6621, 6661, and 6673) to deal with the Tax Court's backlog arising from the enormous number of tax shelter cases under audit, 500,000 of which involved property valuation questions of more than routine significance. In discussing these additions to tax, Congress believed it had "given the Tax Court sufficient tools to manage its docket * * *. The Court should * * * assert, without hesitancy in appropriate instances, the penalties that the Congress">*127 has provided." H. Rept. 98-861 (Conf.), 985 (1984), 1984-3 C.B. (Vol. 2) 1, 239. The majority's interpretation frustrates the policy that Congress sought to implement.
Initially, it should be noted that the so-called "Blue Book" commentary, heavily relied upon by the majority, is not considered part of the official legislative history underlying statutory enactment. Moreover, the majority's and the Fifth Circuit's reading of the Joint Committee (Blue Book post-enactment) Explanation is not the most plausible. The Blue Book contains the following sentence: "The portion of a tax underpayment that is attributable to a valuation overstatement will be determined after taking into account any other proper adjustments to tax liability." This sentence does not contemplate and was not intended to include situations where the deficiency related to a single transaction that could be sustained on multiple grounds. Rather, the sentence was intended to define or explain "attributable to" where there are several different portions of a deficiency, some admittedly attributable to a valuation overstatement and others not. The majority's reading of the Blue Book creates">*128 an unwarranted hierarchy where valuation overstatements are subordinated to every other ground for redetermining a deficiency. If anything, considering the ">*863 crux of the abusive shelter problem, we should give priority to grounds that support a valuation overstatement.
Valuation is one of the major devices used in abusive tax shelters. It is the value inherent in an asset that will imbue a transaction with economic substance. Value is the measure of the income producing potential of the asset, crucial to profit objective. In measuring profit objective, and economic substance, we look at the value of the underlying asset. Rose v. Commissioner, 88 T.C. 386">88 T.C. 386 (1987), affd. 868 F.2d 851">868 F.2d 851 (6th Cir. 1989), and cases cited therein. Estate of Franklin v. Commissioner, 544 F.2d 1045">544 F.2d 1045, 544 F.2d 1045">1046 n. 1 (9th Cir. 1976),">*129 affg. 64 T.C. 752">64 T.C. 752 (1975). Other inquiries in these cases, whether the asset will appreciate, whether the taxpayer obtained independent appraisals, the expertise of the taxpayer or his advisors, all relate to the taxpayer's realistic ability or honest attempts to measure value and, subsequently, earn a profit. Query whether petitioners would be before this Court had the value of the asset even approached the amount claimed?
The majority's position is ostensibly designed to obviate thorny and difficult valuation questions. Judicial economy should apply to situations where alternative grounds are available to support the same determination. Where, however, an alternative part of a deficiency determination can only be sustained if a further ground is considered, we must consider that ground because it is not">*130 an alternative. Even if the majority's approach were correct, it would not, in numerous circumstances, obviate the need to address the valuation issue. For example, one factor in determining whether a sale has occurred for tax purposes is the relationship of the purchase price to fair market value. Grodt and McKay Realty, Inc. v. Commissioner, 77 T.C. 1221">77 T.C. 1221 (1981) (whether the taxpayer acquired an equity in the ">*864 property). Additionally, in both Noonan v. Commissioner, supra (predecessor to Todd), and in this case, the valuation problem was addressed, notwithstanding the Court's avowed hesitancy to do so.
It should be noted that the Court of Appeals for the Fifth Circuit implied in affirming Todd that deductions or credits disallowed for lack of profit objective would not create underpayments attributable to valuation overstatements. Todd v. Commissioner, 862 F.2d 540">862 F.2d 540, 862 F.2d 540">545 (5th Cir. 1988). The majority is correct in their holding that, at the least, if valuation is an integral part of or is inseparable from the ground found for disallowance, that the additions to tax (sections">*131 6621(c) and 6659) should apply. Irom v. Commissioner, 866 F.2d 545">866 F.2d 545 (2d Cir. 1989).
The logical path worn by the majority's reasoning will lead us to decide future cases on a basis other than valuation overstatement, where valuation is not the only focus or issue. We are not entitled to avoid ruling on an addition to tax simply because it involves further inquiry. The pervasive nature of the valuation inquiry militates against such an approach, since it could resolve many more issues at once -- profit objective, economic substance, whether a note constitutes genuine indebtedness, and section 48(d) investment tax credit pass-through, etc. As previously indicated, given that value is one of the major focuses of the abusive tax shelter, resolution of that issue makes more sense than deciding a case on the basis of a side or collateral issue(s).
The rationale advanced by the majority will result in anomalous litigation tactics and results that are inconsistent with congressional intent. Taxpayers under the Todd rationale have the incentive to concede based on any amorphous ground other than a valuation overstatement or tax-motivated transaction. ">*132 Similarly, in the charitable contribution context, we are encouraging concessions based on lack of donative intent. The majority's findings in this case reflect an egregious tax-motivated transaction. However, we are precluded from applying the additional interest section under the majority's reasoning, at the very least a violation of the spirit of the law. This is clearly an appropriate instance for application of section 6621(c), in a situation ">*865 intended by Congress. The majority's narrow definition of "attributable" thus leads to absurd results. This decision will result in taxpayers, who had claimed large credits and deductions based upon overvalued assets, arguing that their assets were not placed in service to avoid the congressionally intended additions to tax. Hence, a taxpayer with an asset placed in service will be more harshly treated than a taxpayer who claimed the same tax "benefits" where no asset existed or it was not placed in service.
The majority's attempt at a pragmatic solution will encourage taxpayers with no hope of prevailing to petition and concede the underlying deficiency based on a nontax-motivated issue, thus avoiding the additions. Moreover, ">*133 the practical effect of the majority's opinion will be to shift focus from section 6659 to section 6661. For the number of cases already in the system, this will only generate mountains of paperwork as respondent rushes to amend his answer to alternatively plead section 6661. This may also have the effect of shifting the burden of proof to respondent in the most egregious valuation cases, because section 6661 may not have been included in the notice of deficiency (and afforded the presumption of correctness). As in this case, in lieu of a valuation, we will have to determine whether this is a statutory tax shelter. Sec. 6661(b)(2)(C). This entails determining whether the arrangement was one in which the principal purpose is to avoid or evade Federal income tax. The majority, in this case, determines that the transaction was a tax shelter lacking economic substance and profit objective, presumably by looking at the value, or the lack thereof, of the leased asset. "In view of his training as a loan officer, however, petitioner must have known that a non-negotiable note, payable only from gross receipts for 14 years, at 10-percent interest, did not reflect fair market value." ">*134 Majority opinion at 847. Cf. Goldstein v. Commissioner, 89 T.C. 535">89 T.C. 535 (1987). Therefore, valuation was considered by the majority even though they seem to seek avoidance of such consideration.
Where respondent determines an addition under section 6659, or section 6621(c), we are obliged to consider it, even if we are able to dispose of the underlying deficiency on an "easier" ground. Petitioners are responsible for an accurate ">*866 report of their tax to the Government, including the value of the master tapes. Perhaps they should have considered this before attempting to obtain $ 18,500 in tax benefits for an $ 11,000 investment. Therefore, I do not believe that the application of the sections 6621(c) and 6659 additions in this case would be either "draconian" or in any manner inequitable.
Document Info
Docket Number： Docket No. 2979-86
Judges： Cohen,Nims,Chabot,Korner,Shields,Clapp,Swift,Jacobs,Wright,Williams,Whalen,Colvin,Parr,Ruwe,Gerber
Filed Date： 4/17/1989
Precedential Status： Precedential
Modified Date： 11/14/2024
