Vest v. Commissioner

Case: 17-60026 Document: 00514017085 Page: 1 Date Filed: 06/02/2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
No. 17-60026
Fifth Circuit
FILED
Summary Calendar June 2, 2017
Lyle W. Cayce
HERB VEST, Clerk
Petitioner - Appellant
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent - Appellee
Appeal from the Decision of the
United States Tax Court
TC No. 15351-13
TC No. 15352-13
TC No. 15353-13
Before KING, DENNIS, and COSTA, Circuit Judges.
PER CURIAM:*
Herb Vest appeals a final decision of the United States Tax Court finding
first, that he impermissibly deducted expenses made during an investigation
that did not have a profit motive, and second, that he improperly used the
installment method of accounting to report income from a sale of assets made
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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with a principal purpose of tax avoidance. Finding no clear error by the Tax
Court, we AFFIRM.
I. FACTUAL AND PROCEDURAL BACKGROUND
Following an audit, the Internal Revenue Service (IRS) determined
deficiencies totaling approximately $4 million in the income taxes that
Petitioner–Appellant Herb Vest owed for the years 2008 through 2010. Two
alleged errors in Vest’s income calculations are at issue. The first error relates
to deductions that Vest claimed for business expenses stemming from a years-
long investigation into the cause of his father’s 1946 death. 1 According to the
IRS, these expenses were not deductible because they were spent in
furtherance of an investigation that did not have a profit motive. The second
error concerns Vest’s use of the installment method of accounting to report
gross profits of approximately $3.2 million from the sale of computer
equipment and intangible property by one partnership controlled by Vest to
two other such partnerships. This sale occurred in January 2008 but payment
was not due until January 2018, a fact the purchasing partnerships used to
claim depreciation deductions on the assets before making a single payment
on the property and the selling partnership used to defer the gain from the sale
of the property for a decade. The IRS determined that the installment method
was not available to Vest because he failed to establish that a principal purpose
of the transaction was not tax avoidance. Through these two alleged errors,
Vest avoided substantial alternative minimum taxable income from 2008
1 Vest undertook this investigation after receiving an anonymous letter in 2003
asserting that his father—whose death had previously been classified as a suicide—had been
murdered. According to Vest, he viewed the letter as a business opportunity that, if
publicized, could result in book and movie adaptations and also generate revenue for Vest’s
other businesses. Over the years, Vest expended significant sums on investigating his
father’s death, including hiring private investigators and hiring a writer to draft a
manuscript. Vest conducted all of these investigative activities through partnerships that he
controlled.
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through 2010, resulting in total income tax deficiencies of approximately $4
million.
Vest petitioned the Tax Court for redetermination of the deficiencies. A
trial was held on October 21, 2015, at which Vest was the only witness. On
October 6, 2016, the Tax Court issued a decision in which it found in the
Commissioner’s favor on both alleged errors. Vest, proceeding pro se, timely
appeals.
II. BUSINESS EXPENSE DEDUCTIONS
Vest first challenges the Tax Court’s determination that expenses
incurred in the investigation of his father’s death could not be deducted as
business expenses because this investigation lacked the requisite profit motive.
We review the Tax’s Court’s factual finding on profit motive for clear error.
Westbrook v. Comm’r, 68 F.3d 868, 876 (5th Cir. 1995) (per curiam). We will
find clear error only when we are “left with the definite and firm conviction
that a mistake has been made.” Ogden v. Comm’r, 244 F.3d 970, 971 (5th Cir.
2001) (per curiam). The IRS’s deficiency determination is presumptively
correct and the petitioner bears the burden of proving it wrong. Westbrook, 68
F.3d at 876.
A taxpayer is permitted to deduct expenses incurred in carrying on a
business or in connection with the production or collection of income. 26 U.S.C.
§§ 162, 212. However, to be deductible, such expenses must be incurred with
the “primary” objective of generating a profit. Westbrook, 68 F.3d at 876.
Section 183 of the Internal Revenue Code (IRC) governs the deductions a
taxpayer may take for expenses incurred in an activity “not engaged in for
profit.” 26 U.S.C. § 183. It provides that, as a general rule, no deductions for
losses from such an activity are permissible. Id. § 183(a). It provides limited
exceptions to this general rule, none of which is alleged to be applicable here.
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Id. § 183(b). IRS regulations provide that the profit-motive determination is
an objective one made using a non-exhaustive list of nine factors:
(1) the extent to which the taxpayer carries out the activity in a
businesslike manner; (2) the expertise of the taxpayer or his
advisors; (3) the time and effort expended by the taxpayer in
carrying on the activity; (4) the expectation that assets used in the
activity may appreciate in value; (5) the success of the taxpayer in
other similar or dissimilar activities; (6) the taxpayer’s history of
income or losses attributable to the activity; (7) the amount of
occasional profits, if any, which are earned; (8) the taxpayer’s
financial status; and (9) any elements of personal pleasure or
recreation in the activity.
Westbrook, 68 F.3d at 876 (citing Treas. Reg. § 1.183-2(b)(1)–(9)). This court
likewise relies on those factors. Id.
Applying this list of factors, the Tax Court found that none of them
“weigh[ed] meaningfully in [Vest’s] favor” and accordingly concluded that
Vest’s investigation of his father’s death was not undertaken with the primary
motive of generating a profit. This finding is amply supported by the record
and thus is not clear error. Among other evidence, the Tax Court cited the
following in support of its profit-motive finding: Vest’s investigation had been
ongoing since 2003 yet had never generated an annual profit; Vest’s
investigation lacked a business plan or a budget; Vest had no expertise in the
area of media and publishing; Vest continued his activities even after an
investigator informed him in 2006 that further investigation into the theory
that his father was murdered “would not prove fruitful”; 2 and Vest had strong
personal motives for uncovering the cause of his father’s death. Given the
substantial evidence weighing against finding a profit motive, we cannot say
that the Tax Court’s finding was clearly wrong.
2 Vest challenges the Tax Court’s characterization of the investigator’s report, but the
court’s characterization is consistent with the parties’ joint stipulation of facts, which was
agreed to before trial.
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Vest’s arguments to the contrary are unavailing. According to Vest,
under the “unified business theory” his investigation expenses were profit
motivated because they were undertaken to further one of his other businesses,
a dating website called Truebeginnings, LLC. Yet, even affording his briefing
the liberal interpretation we afford pro se litigants, Grant v. Cuellar, 59 F.3d
523, 524 (5th Cir. 1995) (per curiam), Vest has abandoned this argument and
we do not consider it, Fed. R. App. P. 28(a)(8); Cavallini v. State Farm Mut.
Auto Ins. Co., 44 F.3d 256, 260 n.9 (5th Cir. 1995). Vest fails to cite any legal
authority in support of this argument, nor does he support this factual
assertion with any citation to the record. Accordingly, Vest has only offered us
his bare assertions that his investigation was profit motivated, which are
insufficient under the objective test of § 183 for demonstrating a profit motive.
Westbrook, 68 F.3d at 875–76; Treas. Reg. § 1.183-2.
III. INSTALLMENT METHOD
Vest also takes issue with the Tax Court’s determination that his use of
the installment method to account for sales from Truebeginnings to two other
partnerships controlled by Vest was impermissible because the sales had a
principal purpose of tax avoidance. Whether a principal purpose of an
installment sale was tax avoidance is a factual finding that we review for clear
error. See Mingo v. Comm’r, 773 F.3d 629, 633 (5th Cir. 2014); see also
Tecumsah Corrugated Box Co. v. Comm’r, 932 F.2d 526, 539 (6th Cir. 1991).
The IRC generally requires that a gain or loss be included in a taxpayer’s
income for the year it is received or incurred. 26 U.S.C. § 451(a). There is an
exception to this general rule for income from an installment sale—that is, a
sale in which at least one payment is made in a year subsequent to the one in
which the sale occurs. Id. § 453. Under this exception, known as the
installment method, proceeds from an installment sale may be included in the
seller’s taxable income for the year in which the payment is received, rather
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than the year in which the sale is made. Id. § 453(a)–(c). However, the
installment method of accounting is not available for “an installment sale of
depreciable property between related persons” unless “it is established to the
satisfaction of the Secretary [of the Treasury] that the disposition did not have
as one of its principal purposes the avoidance of Federal income tax.” Id.
§ 453(g)(1)–(2).
Here, the Tax Court concluded that the sales of computer equipment and
intangible assets from Truebeginnings to two of Vest’s other partnerships did
not qualify for the installment method. The Tax Court first found that these
partnerships were “related persons” within the meaning of 26 U.S.C. § 453. It
then concluded that these sales had a principal purpose of tax avoidance, as
evidenced by “the significant and undeserved tax benefits that [Vest and the
buying partnerships] received” by using the installment method, namely,
deferring nearly all of the $3.2 million in gain from the sale of equipment for
10 years while securing substantial depreciation or amortization deductions
based on the stepped-up bases in the equipment over the same period.
These findings were not clearly erroneous. On appeal, Vest does not
dispute that the partnerships were related persons, but rather only challenges
the Tax Court’s finding on the purpose of the sales. Vest urges that the
computer equipment sale “was done for business purposes” because other
Truebeginnings unitholders no longer wished to invest in the equipment so
there was a need to dispense with it. But this argument is inapposite. Even if
the sale was motivated by a business purpose, this fact would not necessarily
mean that the sale did not also have a principal purpose of tax avoidance.
Merely arguing that the sale had a business purpose is not inconsistent with
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it also having tax avoidance as one of its principal purposes. Accordingly, Vest
has failed to demonstrate clear error on the Tax Court’s part. 3
As for the intangible asset sale, Vest asserts that this could not have
been motivated by tax avoidance because, due to his net operating loss for the
years at issue, his use of the installment method did not affect his tax burden.
Yet, as the Tax Court ably explained, Vest’s use of the installment method did
allow him to avoid substantial alternative minimum taxable income, thereby
significantly reducing his tax liability for 2008 through 2010. Vest’s argument
thus fails to show that tax avoidance was not a principal purpose of the
intangible asset sale. The Tax Court’s conclusion that this sale had a principal
purpose of tax avoidance was not in clear error.
IV. CONCLUSION
For the foregoing reasons, the judgment of the Tax Court is AFFIRMED.
3Vest also references “the Matching Principle” in this argument but offers no citation
or explanation of what role this principle plays in the installment method determination.
Accordingly, this argument is abandoned. In any event, the matching principle would not
help Vest: it would seem to require Truebeginnings to recognize in each year at least an
equivalent amount of gain from the sale of the equipment as Vest’s other partnerships
recognized in depreciation or amortization from the equipment, which Truebeginnings did
not do.
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