-
JOSEPH B. DURRETT, JR. AND CAROLYN C. DURRETT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Durrett v. CommissionerDocket No. 21771-84
United States Tax Court T.C. Memo 1994-179; 1994 Tax Ct. Memo LEXIS 179; 67 T.C.M. (CCH) 2735;April 21, 1994, Filed*179 An appropriate order will be issued denying petitioners' motion for leave to amend petition and decision will be entered under Rule 155.
The notice of deficiency in this case involving the taxable years 1979, 1980, and 1981 was mailed to Ps on April 3, 1984. The deficiencies resulted primarily from the disallowances of losses claimed with regard to straddle transactions with First Western Government Securities, Inc. This Court sustained the disallowance of similar losses in
Freytag v. Commissioner , 89 T.C. 849">89 T.C. 849904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990), affd. on other grounds501 U.S. . Ps do not dispute the deficiencies and concede that the transactions involved here are indistinguishable from those inFreytag . Ps, however, contest the additions to tax for negligence and the increased interest undersec. 6621(c), I.R.C. Ps filed their petition in this case on June 29, 1984. Ps filed their 1983 Federal income tax return in October 1984. That return showed a "tentative regular investment tax credit" that was not used in the computation of the tax liability*180 for that year. The credit is derived from the activities of a partnership subject to
secs. 6221 through 6233, I.R.C. , (the partnership provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 324). R did not commence an administrative proceeding with respect to the partnership and did not examine Ps' 1983 return. This case was calendered for trial on April 29, 1993. On April 21, 1993, Ps moved to amend their petition to raise for the first time an investment tax credit carryback from 1983 to 1980. Ps contend that the credit is an "affected item" that cannot be challenged in these proceedings.Held :1. This Court has jurisdiction under
sec. 6214(b), I.R.C. , to consider whether there is an investment tax credit to be carried back to the 1980 year.Hill v. Commissioner , 95 T.C. 437 (1990)Mennuto v. Commissioner , 56 T.C. 910">56 T.C. 9102. Ps' motion to amend is untimely and will be denied.
3. R's determinations concerning increased interest under
sec. 6621(c) and negligence undersec. 6653(a), I.R.C. , are sustained.For petitioners: Thomas*181 E. Redding,Paul J. Coselli , David C. Holland,Alan L. Tinsley , andCharles B. Koerth .For respondent:Paul J. Krug .DAWSON, POWELDAWSONMEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON,
Judge : This case was assigned to Special Trial Judge Carleton D. Powell pursuant to section 7443A(b)(4) and Rules 180, 181, and 183. POWELL,Special Trial Judge : By notice of deficiency dated April 3, 1984, respondent determined deficiencies in petitioners' Federal income taxes and additions to tax as follows:The partnership gains and losses arise from alleged straddle transactions of forward contracts for government-backed financial securities with First Western Government Securities, *185 Inc. (First Western).
The First Western losses were the subject of this Court's opinion in
Freytag v. Commissioner , 89 T.C. 849">89 T.C. 849904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990), affd. on other grounds501 U.S. . After a lengthy trial, this Court found, based on that record, inter alia, that "The transactions between First Western and its customers were illusory and fictitious and not bona fide transactions."Freytag v. Commissioner , 89 T.C. at 875Id. at 876section 6621(c) was due on the underpayments.Id. at 886-887In concluding that the transactions were not bona fide, this Court examined various aspects of the First Western program, including the risk of profit and loss, the hedging operation, the margins*186 required and fees charged, the pricing of the forward contracts that were involved, and the manner in which the transactions were closed. In all of these areas we found that the First Western operations were deficient and not conducted as they should have been if bona fide financial transactions were being conducted. With respect to the losses, this Court noted:
Petitioners' portfolios were constructed so as to achieve their desired tax losses. In this regard, the most important required data supplied by petitioners were their requested tax losses. Indeed, the program could not be implemented without the tax information. Thus, in analyzing the program for a profit standpoint, from the first, the tax tail wagged an economic dog. * * * [
Id. at 878Id. at 882In the case currently before the Court, petitioner *187 that the transactions with First Western were conducted in the same way as the transactions discussed in
Freytag , i.e., the same pricing algorithms were used, the transactions were closed in the same way, etc. He does not contest the disallowance of the losses claimed. He does, however, contest the increased interest undersection 6621(c) and the additions to tax for negligence undersection 6653(a) .Petitioner has a degree in chemical engineering. In 1976 he started his own business, Chemical Exchange (Chemical). Chemical's (and petitioner's) primary business was buying and selling fuel oil. Petitioner was president of Chemical and information concerning the profitability of the corporation was available to him at all times. By 1979, the business had become very successful. Petitioner's compensations from Chemical were $ 333,562.50, *188 $ 516,987, and $ 605,658, respectively for the taxable years 1979, 1980, and 1981. Petitioner's withheld taxes for each year were $ 16,168, $ 16,546, and $ 26,953, respectively.
Petitioner was introduced into First Western's world by Allen Daniels (Daniels). Daniels is an attorney with apparently a general business practice. He is not an expert in financial markets or in tax advantaged investments; he had, however, advised petitioner with respect to a truck leasing venture that was successful. Through Daniels, petitioner was introduced to Kenneth McCoin (McCoin) who was with Mosher, McCoin & Sims, Inc., a firm that provides investment advice. McCoin told petitioner and Daniels that he had reviewed the First Western operations and that they appeared to be a bona fide business. Although McCoin explained the First Western program to petitioner and Daniels, neither understood how the program worked. Petitioner testified that
I don't think I had ever been acquainted with a straddle before, but he [McCoin] said that [is] what we would do -- what I understood to do -- and contrary to what everybody has been talking about, I had never heard of a formula.
I thought we were buying*189 some sort of a bond, and then we were buying bonds on the other side; buying Freddie Macs and selling Fannie Maes or vice versa. There was some difference in the interest [rates] between those two, and we could make some money on that. Frankly, I didn't understand.
McCoin was a so-called "finder" for First Western; he was paid by First Western for putting clients into the First Western program. He had approximately 100 clients in the First Western program and the firm was paid over $ 600,000 by First Western. Petitioner and Daniels were aware that McCoin was paid by First Western. McCoin also was an investor in the programs and claimed deductions from purported losses.
Freytag v. Commissioner , 89 T.C. at 873-875The corporation [Mosher, McCoin & Sims, Inc.] prepared various presentations of the First Western program for its customers in which it was pointed out that, even if the customer lost his entire margin, he would make a profit from tax savings. The following statement was made by the corporation: "Cash *190 deposit 17% of writeoff should expect to lose all of cash deposit any profit left at end of transaction is 'gravy'" * * *. Mosher, McCoin & Sims had reviewed a pamphlet prepared apparently in 1978 by First Western * * * that provided, inter alia:
One time margin equal to 10% of the tax writeoff * * *.
* * *
No other cash or margin deposits are required.
* * *
If customer is correct in his interest rate direction, he will receive a check from First Western in the amount of up to 60% of his initial margin * * *. Note that the tax writeoff could be as high as 25 to 1. [
Id. at 875Daniels also suggested that petitioner get advice on the tax ramifications of the First Western transactions from Jerry Chambers (Chambers), a C.P.A. Chambers was not asked to give advice as to the bona fides of the transactions. Chambers reviewed the offering memorandum from First Western; as to the bona fides of the operations of First Western, however, he relied on McCoin and to some extent on Daniels. Chambers knew that there was no public market for these transactions. While he had some experience in straddle transactions involving transactions on*191 the Chicago Board of Trade, Chambers had no experience with financial transactions of the type that were involved in the First Western programs. Chambers was also aware that McCoin was being paid by First Western. Chambers warned petitioner that there was a possibility that the deductions would be disallowed by respondent and that the disallowance "might" be sustained by the Tax Court.
Petitioner's involvement in First Western was, as mentioned, through two partnerships. One of the partners was Leslie Jecko (Jecko) who also worked for Chemical as the "financial officer". Jecko was present when petitioner and Daniels met with McCoin and he knew that McCoin was paid by First Western. Jecko handled the transactions with First Western and prepared the partnership returns. Jecko understood that the loss leg of the straddle would be cancelled in the first year. He could not recall whether he requested a specific tax loss.
The records of First Western show, inter alia, that the 1979 partnership requested a $ 300,000 ordinary loss in 1979 and a long-term capital gain of that amount in 1981. The 1979 loss from the First Western alleged trading was $ 303,000, and petitioner claimed*192 a deduction of his aliquot share of the loss in the amount of $ 143,235. For the 1980 partnership, an ordinary loss in the amount of $ 525,000 in 1980 and a corresponding long-term capital gain in 1982 were requested. For 1981, a $ 600,000 ordinary loss and a 1983 long-term gain were requested. Petitioner claimed losses in the amounts of $ 391,422 and $ 398,043 arising from the 1980 partnership for the taxable years 1980 and 1981.
OPINION
1. Motion for Leave to Amend Petition Rule 41(a) provides, in part:
Amendments: A party may amend a pleading once as a matter of course at any time before a responsive pleading is served. * * * Otherwise a party may amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires. No amendment shall be allowed after expiration of the time for filing the petition, however, which would involve conferring jurisdiction on the Court over a matter which otherwise would not come within its jurisdiction under the petition as then on file. * * *
In this case, the motion for leave was not filed before the responsive pleading, and respondent has not consented*193 to the motion. The motion is addressed, therefore, to the sound discretion of the court.
Avatar Exploration, Inc. v. Chevron, U.S.A., Inc. , 933 F.2d 314">933 F.2d 314Daves v. Payless Cashways, Inc. , 661 F.2d 1022">661 F.2d 1022Evans Products Co. v. West American Ins. Co. , 736 F.2d 920">736 F.2d 920Russo v. Commissioner , 98 T.C. 28">98 T.C. 28As to the timeliness of the motion, petitioner contends that at the time that the petition was filed he had no reason to know that the carryback credit existed because he filed the petition before the 1983 return was filed. This may be so, but, when he filed the 1983 return in October, 1984, he knew of the 1980 deficiency, and he also had been warned by Chambers that*194 he might not prevail on the First Western issue. By 1987, when our opinion in
Freytag v. Commissioner ,supra While tacitly recognizing these problems, petitioner contends that another trial is not necessary, and respondent would not be prejudiced because everything is in this record to decide the issue. This reasoning is predicated on a perceived relationship between the rules for deficiency litigation (subchapter B of chapter 63) and the rules governing so-called TEFRA partnership litigation contained in subchapter C of chapter 63.
The partnership provisions of subchapter C of chapter 63 were added by section 402(a) of TEFRA, 96 Stat. 648. A "partnership item" is determined at the partnership level.
Sec. 6221 . A *195 "partnership item" is an item "more appropriately determined at the partnership level than at the partner level" to the extent prescribed by the regulations. Sec. 6231(a)(3). Subchapter C also uses the concept of an "affected item", which is defined as "any item to the extent such item is affected by a partnership item." Sec. 6231(a)(5). Although an investment credit is taken into account separately by each partner, sec. 702(a);Southern v. Commissioner , 87 T.C. 49">87 T.C. 49Maxwell v. Commissioner , 87 T.C. 783">87 T.C. 783Petitioner contends that the 1983 investment tax credit arises from investments made by a TEFRA partnership and that the credit is a "partnership item" properly determined at the partnership level. Petitioner reasons that, because respondent has not challenged the partnership return and the period*196 of limitations under section 6229 has expired, the partnership item of that return cannot be challenged in a TEFRA proceeding. Furthermore, because the carryback of the credit is an affected item, this Court has no jurisdiction to consider a challenge to the claim with respect to the 1980 taxable year.
Respondent, relying on
section 6214(b) , disagrees.Section 6214(b) provides:Jurisdiction Over Other Years and Quarters. -- The Tax Court in redetermining a deficiency of income tax for any taxable year * * * shall consider such facts with relation to the taxes for other years * * * as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other year * * * has been overpaid or underpaid.
Section 6214(b) is a subject matter jurisdictional statute. In dealing with items from a later year where no notice of deficiency had been issued for that year, this Court is without jurisdiction to redetermine whether a tax liability for that year has been underpaid or overpaid. Notwithstanding this, under the first part ofsection 6214(b) , in redetermining the tax liability for the*197 year properly before this Court, Congress instructs that this Court "shall consider such facts with relation to the taxes for other years * * * as may be necessary correctly to redetermine the amount of such deficiency".This Court has long held that we have jurisdiction to consider the claim of an investment tax credit carryover or carryback to a year that is before this Court where the credit arises in a year that is not before this Court and would otherwise be barred by the period of limitations.
Hill v. Commissioner , 95 T.C. 437 (1990)Mennuto v. Commissioner , 56 T.C. 910">56 T.C. 910Brock v. Commissioner , T.C. Memo 1982-335">T.C. Memo. 1982-335Lone Manor Farms, Inc. v. Commissioner , 61 T.C. 436">61 T.C. 436510 F.2d 970">510 F.2d 970 (3d Cir. 1975) (same with regard to net operating loss carrybacks and carryovers).Hill v. Commissioner ,supra at 441-442section 6214(b) and the case law based thereon. We agree.In
Roberts v. Commissioner , 94 T.C. 853">94 T.C. 853Maxwell that 'Affected items depend on partnership level determinations, [and] cannot be tried as part of the personal tax case, and must await the outcome of a partnership proceeding.'Maxwell v. Commissioner ,supra at 792Id. at 860However, the "outcome of the partnership proceeding" may be acceptance of the partnership return as filed as a result of the fact that there was no partnership proceeding and there can no longer be a partnership proceeding under the normal statute of limitations. We do not read section 6230(a)(2)(A)(i) to mean that a partnership proceeding must be opened and closed in order for there to be a determination with regard to an affected item. We also find no requirement in the statute or regulations that prohibits affected items from being considered in a proceeding involving a personal tax case,
providing subject matter jurisdiction exists . [*200Roberts v. Commissioner ,supra at 860-861In the instant case, respondent does not contend that she can reopen the 1983 taxable year. Nonetheless, in redetermining the correct tax for the 1980 taxable year, respondent insists that, if petitioner is allowed to amend the petition to raise the carryback, then under
section 6214(b) , this Court has jurisdiction to consider whether the carryback is proper.Petitioner does not directly address this argument. Rather, petitioner contends that our opinion in
Harris v. Commissioner , 99 T.C. 121 (1992)16 F.3d 75">16 F.3d 75 (5th Cir. 1994), directs that we must allow the claimed carryback as set forth on the 1983 return. Harris the taxpayer was before this Court in a deficiency proceeding. During the Rule 155 computation petitioner sought to amend the petition and raise net operating loss carrybacks from two classes of TEFRA partnerships. In one class, there was a settlement of the TEFRA partnership items reached between respondent and the partnership. In the other class, settlement of the administrative proceedings was*201 under consideration; no settlement, however, had been reached.With regard to the settled partnership items, we noted when the Commissioner and a partner enter into a settlement those items become nonpartnership items under section 6231(b)(1)(C). Respondent contended, however, that the procedure for taking into account TEFRA partnership carrybacks was governed by the TEFRA procedures and "not by the provisions ordinarily governing the redetermination of deficiencies, such as
section 6214(b) ."Harris v. Commissioner ,supra at 125We, however, do not read the provisions of section 6230(a)(2)(A)(ii) * * * as depriving us of jurisdiction to take account of the settled items pursuant to
section 6214(b) . The purpose of section 6230(a)(2)(A)(ii) is to enable the Commissioner to collect amounts due as a result of settlements without the necessity of issuing a statutory notice of deficiency, and we find no suggestion that such provision was intended to restrict the jurisdiction of this Court in the situation present in the instant case. * * * [Id. at 126Id. at 127In
Harris we commented that such cases asHill andLone Manor Farms, Inc. "did not involve the TEFRA partnership provisions and, consequently, do not resolve the issue before us."Id. at 125Harris , there were pending or settled administrative proceedings, and the rationale ofHill andLone Manor Farms, Inc. did not apply. But it is vastly a different matter to say that in situations where there has been no partnership administrative proceeding, the TEFRA partnership rules prohibit this Court from examining the merits of a claimed carryback or carryover in conjunction with determining the correct tax liability in an individual's case undersection 6214(b) . Indeed, as notedsupra , this Court rejected the contention that the partnership provisions restricted our jurisdiction undersection 6214(b) where the partnership items had been settled. In short, theHarris case, to the extent that it is apposite, supports respondent's position.If we were to allow petitioner to amend his petition to raise the carryback, we then would have to consider all of the attendant questions involving the availability of that credit to be carried back including not only the *204 bona fides of the credit but the correct tax liability for 1983.
Hill v. Commissioner , 95 T.C. 437">95 T.C. 437 (1990)2A. Section 6621(c) Petitioners contend that the increased interest under
section 6621(c) is inapplicable to them, relying onHeasley v. Commissioner , 902 F.2d 380">902 F.2d 380T.C. Memo. 1988-408 .Section 6621(c)(1) provides that, if there is a "substantial underpayment attributable to tax-motivated transactions," the interest payable under section 6601 "shall be 120 percent of the underpayment rate". A substantial underpayment attributable to a tax-motivated transaction means "any underpayment of taxes * * * attributable to 1 or more tax-motivated transactions if the amount of the underpayment for such year * * * exceeds $ 1,000."Sec. 6621(c)(2) . The term "tax motivated transactions" means, inter alia, "any sham or fraudulent transaction."Sec. 6621(c)(3)(v) . From a literal reading of the statute, if a transaction is determined to be a "sham", the increased interest applies.*206 In
Freytag v. Commissioner , 89 T.C. 849">89 T.C. 849904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990), affd. on other grounds501 U.S. , we sustained respondent's determinations thatsection 6621(c) applied to the First Western underpayments based on our finding that the transactions were "shams." Because petitioners concede that their transactions with First Western were identical to those inFreytag , additional interest undersection 6621(c) is applicable here.Howard v. Commissioner , 931 F.2d 578">931 F.2d 578, 582 (9th Cir. 1991)T.C. Memo. 1988-531 .*207
Heasley v. Commissioner ,supra Heasley v. Commissioner , T.C. Memo. 1988-40849 Fed. Reg. 50392 (Dec. 28, 1984), the increased interest undersection 6621(c) was applicable. The Court of Appeals for the Fifth Circuit concluded, however, that the taxpayers had "the requisite profit motive."Heasley v. Commissioner , 902 F.2d at 386Freytag v. Commissioner , 89 T.C. at 882-886section 6621(c) on the ground that the alleged transactions factually were illusory and fictitious, i.e., "shams", a finding affirmed by the Court of Appeals for the Fifth Circuit inFreytag v. Commissioner , 904 F.2d at 1015-1016">904 F.2d at 1015-1016section 6621(c)(3)(v) the transaction must be without economic substance and be entered into without a profit objective, citingHeasley v. Commissioner ,supra .infra , we reject their contention that there was a profit motive, we do not read the Fifth Circuit Court of Appeals' opinion inHeasley , not its opinion inLukens v. Commissioner , 945 F.2d 92">945 F.2d 92Ames v. Commissioner , T.C. Memo. 1990-87Cherin v. Commissioner , 89 T.C. 986">89 T.C. 986section 6621(c)(3)(v) requires. See Statement of the Managers attached to the conference report, H. Conf. Rept. 99-841. II-796 (1986), 1986-3 C.B. (Vol. 4) 796.2B. Negligence Respondent determined that additions to tax under
section 6653(a) are due for negligence. *209Section 6653(a) provides in relevant part that "If any part of any underpayment * * * is due to negligence or intentional disregard of rules and regulations * * * there shall be added to the tax an amount equal to 5 percent of the underpayment." "'Negligence is a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances.'"Freytag v. Commissioner , 89 T.C. at 887Marcello v. Commissioner , 380 F.2d 499">380 F.2d 49943 T.C. 168">43 T.C. 168 (1964)); see alsoZmuda v. Commissioner , 731 F.2d 1417">731 F.2d 141779 T.C. 714">79 T.C. 714 (1982). Petitioners have the burden of establishing that their actions were not negligent.Freytag v. Commissioner , 904 F.2d at 1017">904 F.2d at 1017The negligence question focuses on petitioner Joseph B. Durrett, Jr. He entered into the transactions with First Western. Petitioner contends that the addition to tax under
section 6653(a) is unwarranted because he had a reasonable expectation for profit, and*210 he exercised due care when he entered into the transactions with First Western. The gravamens of his contention are that he relied on expert advice and that his motive for entering into the transactions was not to avoid taxes.With regard to petitioner's reliance on experts, such reliance, standing alone, will not insulate a taxpayer from the addition to tax for negligence. It must be shown that the expert had the expertise and knowledge of the pertinent facts to render such an opinion on the subject matter.
Freytag v. Commissioner , 849">89 T.C. at 888Rybak v. Commissioner , 91 T.C. 524">91 T.C. 524Petitioner has a background in engineering and petroleum sales. Prior to 1979, he had made no investments in any transactions of this nature. He was told about the First Western program by Daniels. Daniels had no expertise in dealing with straddles in forward contracts that were the heart of the First Western program. Neither petitioner nor Daniels understood how the program*211 worked. Rather, Daniels relied upon McCoin and Chambers, and the latter relied on Daniels and also on McCoin. According to petitioner's version of what happened, there were four blind mice,
Horn v. Commissioner , 90 T.C. 908">90 T.C. 908, 941 (1988)Rybak v. Commissioner ,supra at 565In these circumstances, petitioners did not rely on competent, independent parties; they did no more than inquire of the promoter if the investment was sound. Such reliance is not the type of activity which will overcome the addition to tax for negligence or intentional disregard of the rules and regulations.
*212 See alsoMarine v. Commissioner , 92 T.C. 958">92 T.C. 958921 F.2d 280">921 F.2d 280 (9th Cir. 1991);Patin v. Commissioner , 88 T.C. 1086">88 T.C. 1086865 F.2d 1264">865 F.2d 1264 (5th Cir. 1989), affd. without published opinion sub nom.Hatheway v. Commissioner , 856 F.2d 186">856 F.2d 186Skeen v. Commissioner , 864 F.2d 93">864 F.2d 93Gomberg v. Commissioner , 868 F.2d 865 (6th Cir. 1989)It must be noted that these transactions could hardly be described as being run-of-the-mill, and petitioner admits that he did not understand the transactions. They involved alleged forward contracts to purchase and sell millions of dollars of mortgage-backed securities. See
Freytag v. Commissioner , 849">89 T.C. at 862-863"no reasonable investor would surrender total control of his or her ability to profit or lose unless satisfied that the risk of loss had been greatly diminished or eliminated." [
Freytag v. Commissioner , 904 F.2d at 1016">904 F.2d at 1016Sochin v. Commissioner , 843 F.2d 351">843 F.2d 351Furthermore, the ratio of the tax losses compared with the payments was huge, between 8:1 and 10:1. This latter fact was particularly important because, as the Court of Appeals for the Ninth Circuit recognized in
Zmuda v. Commissioner , 731 F.2d at 1422Freytag v. Commissioner , 89 T.C. at 888Freytag v. Commissioner , 89 T.C. at 889Hanson v. Commissioner , 696 F.2d 1232">696 F.2d 1232T.C. Memo. 1981-675 .Finally, we note that petitioner's alleged profit motive for the First Western transactions is simply cut from whole cloth. The raison d'etre of the program was to convert ordinary income into long-term capital gains and defer the payment of taxes. Jecko understood this. Nonetheless, petitioner steadfastly contends that this was not the reason for his investment and denies that he knew anything about the requests for tax losses that were supplied to First Western. This has a decidedly hollow ring. First, without the losses from First Western, petitioner faced substantial tax liabilities in each of the years arising from his salary because of the underwithholding on his salary." *215 documents that his firm had and produced, that the profit potential of First Western played any significant part of McCoin's discussion with petitioner or petitioner's decision to invest. *216 Petitioner, relying again on
Heasley , suggests that he did all that was necessary because he was an "unsophisticated" investor. It is true that the Court of Appeals for the Fifth Circuit inHeasley found that "moderate-income" and "unsophisticated" investors were not negligent when they failed to do more to investigate an investment in a tax shelter.Heasley v. Commissioner , 902 F.2d at 383-384In this regard, we are continually surprised to discover, after
Heasley , how the definition of an "unsophisticated" and "moderate-income" investor has been expanded to include well educated persons who have established or been engaged in lucrative businesses for many years. Indeed, if petitioner fits within that description, it would appear that at least some of the taxpayers inFreytag were similarly situated. But, inFreytag the additions to tax for negligence were affirmed by the same court that had decidedHeasley just a month before.Heasley does not shield petitioner from additions to tax for negligence. Petitioners have not shown that they used due *217 care, and respondent's determinations with respect to the additions to tax undersection 6653(a) are sustained.An appropriate order will be issued denying petitioners' motion for leave to amend petition and decision will be entered under Rule 155 .Footnotes
1. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
1. 50 percent of the interest due on the underpayment.↩
2. In the notice of deficiency, respondent made other adjustments. By stipulation, the parties have resolved these issues. The other adjustments are mathematical and will be resolved during the Rule 155 computations.↩
1. For 1980, respondent disallowed all losses but did not take the short term capital gain out of the computation of the deficiency for that year. The parties have stipulated that neither the gains nor losses will be recognized.↩
3. The deficiencies and additions to tax focus on the activities of petitioner Joseph B. Durrett, Jr. with First Western, and for convenience he will be referred to as petitioner.↩
4. See also
Phoenix Coal Co. v. Commissioner , 231 F.2d 420 (2d Cir. 1956)T.C. Memo 1955-28">T.C. Memo. 1955-28 ;Calumet Ind., Inc. v. Commissioner , 95 T.C. 257">95 T.C. 257State Farming Co. v. Commissioner , 40 T.C. 774">40 T.C. 774↩5. Although petitioner does not expressly concede the point, he apparently acknowledges that, if the rationale of
Hill v. Commissioner , 95 T.C. 437">95 T.C. 437↩6. Putting aside the investment tax credit issue, respondent would be entitled to question all items on petitioners' 1983 return to determine whether there was an investment tax credit to be carried back.↩
7. Petitioner suggests that the Court applied a different standard when it allowed respondent to file an amended answer raising the increased interest under
sec. 6621(c) . In 1985, this Court issued guidelines for raising the increased interest undersec. 6621(c) in cases that were currently before this Court. SeeCinman v. Commissioner , T.C. Memo. 1991-192Id. This case was calendared for a pretrial hearing on Oct. 5, 1992. On Aug. 31, 1992, respondent filed a Motion for Leave to FileFirst Amendment↩ to Answer and lodged with the Court a proposed amended answer raising the increased interest issue. At that hearing the Court gave notice that the case would be calendared for trial during the week of Apr. 26, 1993, and subsequently the case was calendared for trial commencing Apr. 29, 1993. When we granted respondent's motion for leave on Oct. 5, 1992, there was ample time for petitioners to prepare the issue for trial. The same cannot be said of the motion that is currently before the Court.8. Petitioners also raised but have not pursued the constitutionality of
sec. 6621(c) . We have rejected that argument.Solowiejczyk v. Commissioner , 85 T.C. 552">85 T.C. 552795 F.2d 1005">795 F.2d 1005↩ (2d Cir. 1986).9. Because the increased interest under
sec. 6621(c) was raised for the first time in the amended answer, the burden of proof is on respondent to establish that the provision applies. While petitioners have not conceded that the First Western transactions were "shams", they conceded that the transactions were the same as involved inFreytag v. Commissioner , 89 T.C. 849">89 T.C. 849904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990), affd. on other grounds501 U.S. , and we held that the transactions inFreyteg were shams within the meaning ofsec. 6621(c)(3)(v) . Our findings inFreytag↩ were not based on a failure of proof, but rather affirmative evidence that was in the record. Which party bears the burden of proof is, therefore, not relevant here.10. Petitioner claims that he relied on Daniels, Jecko, and Chambers. Jecko relied on McCoin. Daniels relied on McCoin and Chambers. Chambers claimed that he relied on Daniels to some extent. It is peculiar that Chambers would rely on Daniels' advice when Daniels recommended that they seek Chambers' advice in the first place. We have a circle of the blind leading the blind.↩
11. Petitioner claims that because a large part of his salary was from bonuses based on Chemical's profits, he did not know what, if any, bonuses would be paid. Petitioner was president of Chemical, had access to all financial information, and surely knew at any time where Chemical stood. Despite denials, he clearly knew that Chemical was making substantial profits.↩
12. We recognize that McCoin denied knowledge of his firm's statements concerning the First Western program. We do not believe that is the case.↩
Document Info
Docket Number： Docket No. 21771-84
Judges： DAWSON
Filed Date： 4/21/1994
Precedential Status： Non-Precedential
Modified Date： 11/21/2020