Wyatt v. Comm'r

T.C. Memo. 2008-253
UNITED STATES TAX COURT
WILLIAM C. WYATT AND LISA M. WYATT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24246-04. Filed November 10, 2008.
Robert J. Stientjes, for petitioners.
Michael W. Bitner, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Respondent determined the following
deficiencies, addition to tax, and penalty with respect to
petitioners’ Federal income taxes:
- 2 -
Addition to Tax and Penalty
Sec. Sec.
Year Deficiency 6651(a)(1) 6662
1998 $3,347 -- --
1999 3,341 -- --
2000 42,166 $6,325 $8,433
2001 165 -- –-
After concessions by petitioners, these issues remain for
decision: (1) Whether petitioners are entitled to a theft loss
deduction for 2001; (2) whether petitioners are liable for the
section 6651(a)(1)1 addition to tax for 2000; and (3) whether
petitioners are liable for the section 6662(a) accuracy-related
penalty for 2000.
FINDINGS OF FACT
The parties have stipulated some facts, which are so found.
When they petitioned the Court, petitioners resided in Maryland.
From 1997 through early 2001, Anderson Ark & Associates
(Anderson Ark) marketed and sold investment programs. Anderson
Ark, with over 1,500 clients, was based in Costa Rica, had
administrative offices in Hoodsport, Washington, and maintained a
presence in four other countries.
In April 2000 petitioners learned about Anderson Ark from a
friend who claimed to have made money from Anderson Ark
investments. After attending a promotional meeting in Hickory,
1
Unless otherwise indicated, all 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. All dollar amounts are rounded to the nearest dollar.
- 3 -
North Carolina, and learning about purported financial planning
opportunities and reputed tax advantages, William C. Wyatt
(petitioner husband) decided to invest with Anderson Ark.
One program sold by Anderson Ark was called the Look Back
Program. This program offered investors the opportunity to
participate in purported joint ventures with Anderson Ark
entities, including Macro Media Advertising, L.L.C. (Macro
Media), which was purportedly engaged in the advertising of
books, electronic media, and audiotapes. One of the publications
that Macro Media proposed to distribute was a book entitled “21st
Century Tax Strategies and Structures”, by Tara LaGrand and Gary
Kuzel. The business ventures were purportedly to be financed in
large part by loans from La Maquina Blanca, S.A., a Costa Rican
entity that Anderson Ark controlled. As it turned out, the loans
were nonexistent.
Another Anderson Ark investment program, the Loan Four
Program, also known as the Factoring Program, was marketed as a
short-term investment that would yield large returns. This
program was later revealed to be a pyramid scheme.
Petitioners allege that between April and August 2000 they
made six payments to Anderson Ark totaling $161,270 for
investments in the Look Back Program and the Loan Four Program.
It was apparently not until December 2000, however, that
petitioner husband effected his investment in the Look Back
- 4 -
Program by forming a partnership called Wilwyatt Joint Venture
(Wilwyatt) with Macro Media. The purported partnership agreement
indicates that petitioner husband received a 95-percent interest
in Wilwyatt in return for a $42,700 payment.2
As part of petitioner husband’s participation in the Look
Back Program, the Loan Four Program, or both, Anderson Ark formed
an entity in Costa Rica called Acuerta.com, S.A., with petitioner
husband as its owner. Acuerta.com, S.A. or some other Anderson
Ark affiliate provided petitioners with one or more VISA debit
cards with which they could withdraw funds at automatic teller
machines in the United States. Between May 2000 and March 2001
petitioners withdrew at least $58,709 from their investments with
Anderson Ark.
On February 26, 2001, the U.S. District Court for the
District of Massachusetts issued arrest warrants with respect to
several principals of Anderson Ark (the Anderson Ark defendants).
On February 28, 2001, U.S. law enforcement officials and Costa
Rican authorities raided Anderson Ark’s offices in Santa Ana,
Costa Rica. On that same day, U.S. law enforcement officials
raided 14 Anderson Ark domestic locations.
2
The copy of the purported partnership agreement in the
record is signed only by petitioner husband. Petitioners
characterize the $42,700 payment as a “loan fee” for a loan to
finance their initial investment in Wilwyatt. Included in the
record is a copy of an undated promissory note, signed only by
petitioner husband, indicating a $250,000 10-year loan to
Wilwyatt from La Maquina Blanca, S.A., to be funded upon payment
of $42,700 in fees.
- 5 -
Following their indictment on May 3, 2001, in 2002 the
Anderson Ark defendants were convicted in the U.S. District Court
for the Eastern District of California on charges of money
laundering and/or conspiracy to commit money laundering. See
United States v. Anderson, 371 F.3d 606, 610 (9th Cir. 2004).
Also in 2002 the same Anderson Ark defendants and two other
Anderson Ark principals (hereafter collectively referred to as
the Anderson Ark defendants) were indicted in the U.S. District
Court for the Western District of Washington.
In 2004 the Anderson Ark defendants were convicted in the
Washington District Court on charges of conspiracy to defraud the
United States, mail fraud, wire fraud, money laundering, and
aiding and assisting the filing of false tax returns with respect
to their participation in Anderson Ark, as well as 19 counts of
wire and mail fraud for defrauding Anderson Ark clients of over
$7 million in fees for the nonexistent loans associated with the
Look Back Program. In addition, one of the principals, Keith
Anderson, was convicted of defrauding Anderson Ark clients of $21
million with respect to their investments in the Loan Four
Program.
Petitioners’ 2000 Federal income tax return was due, after
an extension, on August 15, 2001. Petitioners did not file their
2000 return until October 18, 2001. The return was prepared by
Tara LaGrand (LaGrand), a certified public accountant who was
- 6 -
affiliated with Anderson Ark and coauthored the aforementioned
21st Century Tax Strategies and Structures. LaGrand also
prepared petitioners’ 2001 Federal income tax return, which she
signed on May 10, 2002. LaGrand was later incarcerated for her
involvement in Anderson Ark.
On their 2000 return petitioners claimed a $275,730 loss
from Wilwyatt and resulting net operating loss carrybacks to 1998
and 1999 and a carryforward to 2001. Petitioners claimed no
theft loss from their Anderson Ark investments with respect to
any of these years. In the notice of deficiency, respondent
disallowed the purported Wilwyatt loss, carrybacks, and
carryforwards, primarily on the grounds that petitioners had
failed to establish that they had basis in Wilwyatt.
The petition assigns error to this determination. In an
amendment to their petition, petitioners claim a $140,000 theft
loss deduction for 2001 with respect to their Anderson Ark
investments.3
OPINION
Petitioners concede that respondent properly disallowed the
$275,730 passthrough loss from Wilwyatt and the related
carrybacks and carryforwards. The primary issue for decision is
3
On brief petitioners claim that they are entitled to theft
loss deductions totaling $102,561. We deem petitioners to have
conceded that they are entitled to no greater theft loss
deduction.
- 7 -
whether petitioners are entitled to a theft loss deduction, as
claimed in their amendment to petition.
I. Evidentiary Issue
Before trial the parties stipulated certain facts and
exhibits, including petitioners’ Exhibits 17-P and 22-P. Exhibit
17-P is a U.S. Department of Justice press release dated December
27, 2004. This press release discusses the convictions of six
individuals associated with Anderson Ark. In the stipulation of
facts, petitioners reserved objections to this exhibit on the
ground that “it constitutes hearsay, except for select portions
of which petitioner asserts are admissible as an exception to the
hearsay rules.”4 At trial petitioners’ counsel did not seek to
withdraw this exhibit but requested that only certain sentences
and sentence fragments should come into evidence as admissions of
a party opponent and that everything else should be stricken from
the record.
Exhibit 22-P is a grand jury indictment (case No. 02-CR-
00423) in the U.S. District Court for the Western District of
Washington against specified individuals associated with Anderson
Ark. It contains paragraphs 1 through 469. In the stipulation
of facts, petitioner reserved a hearsay objection to paragraphs
28 through 376 on the grounds that those paragraphs, and only
4
In the stipulations, respondent also reserved an objection
to Exhibit 17-P on the grounds of hearsay but withdrew the
objection at trial.
- 8 -
those paragraphs, did not constitute admissions of a party
opponent.
The Court overruled petitioners’ objections to Exhibits 17-P
and 22-P. On brief petitioners renew their objections to these
exhibits. The exhibit numbers indicate that these stipulated
exhibits were offered by petitioners. See Rule 91(b).
Petitioners have offered no explanation as to why they have
chosen to offer as their own exhibits documents in a form they
find objectionable. Cf. Ohler v. United States, 529 U.S. 753,
755 (2000) (“Generally, a party introducing evidence cannot
complain on appeal that the evidence was erroneously admitted.”).
In any event, the Court has not relied upon, for their truth, the
portions of the exhibits to which petitioners object.
II. Burden of Proof
In general, deductions are a matter of legislative grace.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Taxpayers
are required to maintain records sufficient to enable the
Commissioner to determine their correct tax liability. Sec.
6001; Higbee v. Commissioner, 116 T.C. 438 (2001); sec.
1.6001-1(a), Income Tax Regs. The records must substantiate both
the amount and purpose of the claimed deductions. Higbee v.
Commissioner, supra at 440. Petitioners have the burden of
proving they are entitled to the claimed deduction. See Rule
142(a); Welch v. Helvering, 290 U.S. 111 (1933).
- 9 -
Petitioners argue that pursuant to section 7491(a) the
burden of proof should shift to respondent. Section 7491(a)(1)
provides that if “in any court proceeding, a taxpayer introduces
credible evidence with respect to any factual issue relevant to
ascertaining the liability of the taxpayer * * * the Secretary
shall have the burden of proof with respect to such issue.” This
burden-shifting provision is inapplicable unless the taxpayer
has, among other things, complied with all requirements under the
Code to substantiate any item and unless “the taxpayer has
maintained all records required under this title and has
cooperated with reasonable requests by the Secretary for
witnesses, information, documents, meetings, and interviews”.
Sec. 7491(a)(2)(A) and (B). The taxpayer has the burden of
establishing that all the requirements of section 7491(a)(2) have
been met. Higbee v. Commissioner, supra at 441.
Petitioners did not cooperate with respondent’s reasonable
requests for witnesses, information, documents, meetings, and
interviews as required by section 7491(a). Because of
petitioners’ failure to cooperate in pretrial proceedings, the
Court granted respondent’s Rule 71(c) motion to compel responses
to respondent’s interrogatories and his Rule 91(f) motion to
compel stipulation. Moreover, petitioners have failed to produce
credible evidence in that, as discussed with more particularity
infra, they have failed to produce evidence of such quality that,
- 10 -
after critical analysis, we would find it sufficient upon which
to base a decision on the issue if no contrary evidence were
submitted. See Higbee v. Commissioner, supra at 442 (quoting H.
Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-
995).
Finally, petitioners were required to keep records
sufficient to establish whether they are liable for tax. See
sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Petitioners have
produced only fragmentary records as evidence of their
investments in Anderson Ark-related programs. Petitioners have
not alleged or shown that they have maintained all records
required under section 6001 and the regulations thereunder.
Petitioners have not shown that section 7491(a) applies to shift
the burden of proof to respondent, and the burden of proof
remains on petitioners.
III. Theft Loss Deduction
Section 165 generally allows a deduction for uncompensated
losses resulting from theft for the year in which the taxpayer
discovers the loss. Sec. 165(a), (c), (e).
Petitioners claim to have made the following payments to
Anderson Ark for investment purposes:
- 11 -
Date Amount
4/19/00 $120
4/19/00 5,150
7/25/00 100,000
8/01/00 40,000
8/01/00 11,000
8/30/00 5,000
Total 161,270
Petitioners concede that they withdrew $58,709 from Anderson
Ark between May 2000 and March 2001. They claim that the amount
of the purported theft consists of their $161,270 of alleged
total investments less their $58,709 of withdrawals, or $102,561.
Respondent contends that petitioners’ total investments in
Anderson Ark were less than the $58,709 of their withdrawals,
which respondent suggests were likely to have included earnings
on their investments. We need not resolve that issue, for even
if we were to assume for purposes of argument that petitioners’
investments in Anderson Ark equaled at least the $58,709 that
they withdrew, petitioners have failed to substantiate any
additional amount of investment and consequently have failed to
show that they suffered a loss.
In particular, other than petitioner husband’s vague and
self-serving testimony there is no evidence in the record of
the $11,000 and $5,000 investments that allegedly were made on
August 1 and 30, 2000, respectively. This Court is not bound to
accept a taxpayer’s self-serving, unverified, and undocumented
testimony. Shea v. Commissioner, 112 T.C. 183, 189 (1999);
- 12 -
see also Ganas v. Commissioner, T.C. Memo. 1990-143, affd.
without published opinion 943 F.2d 1317 (11th Cir. 1991).
Similarly, petitioners have failed to substantiate the
$100,000 investment that they claim to have made on July 25,
2000. Attempting to substantiate this investment, petitioners
rely primarily on a photocopy of a facsimile document captioned
“WIRE DISBURSEMENT INQUIRY”, which shows a $100,000 early
distribution from petitioner husband’s IRA to “Key Services
Corporation” in Albany, New York, for the benefit of petitioner
husband. The parties have stipulated that these funds were
deposited into an account held by Denarius Financial Group at
KeyBank. Petitioner husband testified that this was “the
wire transfer, one of the wire transfers, that I used to move
my money to Anderson’s Ark”. Petitioner husband also testified,
however, that he did not know how the funds went from Denarius
Financial Group to Anderson Ark in Costa Rica. The record does
not establish, and petitioners have not explained, the
relationship, if any, between Denarius Financial Group and
Anderson Ark. Petitioners have not shown by competent evidence
that the $100,000 was ever invested in Anderson Ark.
Because petitioners have failed to substantiate $116,000 of
their alleged $161,270 investment in Anderson Ark, we need not
consider the evidence supporting the remaining $45,270 of alleged
investment, inasmuch as this amount is less than the $58,709 that
- 13 -
petitioners admit having withdrawn from Anderson Ark. Moreover,
because of the fragmentary nature of petitioners’ records, we
have no great confidence that the amount that petitioners
withdrew was not greater than they have admitted. Because
petitioners have failed to show that they invested more with
Anderson Ark than they withdrew, they have failed to establish
the existence or amount of any loss. Nor have they presented
sufficient evidence to establish a rational basis for estimating
any such loss. See Cohan v. Commissioner, 39 F.2d 540, 543-544
(2d Cir. 1930); Hossbach v. Commissioner, T.C. Memo. 1981-291.
Moreover, the record does not support a finding that, if a
theft loss did occur, petitioners sustained it in 2001. A theft
loss is treated as sustained during the taxable year in which
the taxpayer discovers the loss. Sec. 165(e). The regulations
provide that “if in the year of discovery there exists a claim
for reimbursement with respect to which there is a reasonable
prospect of recovery”, then “no portion of the loss with respect
to which reimbursement may be received is sustained, for
purposes of section 165, until the taxable year in which it can
be ascertained with reasonable certainty whether or not such
reimbursement will be received.” Sec. 1.165-1(d)(3), Income Tax
Regs.
Whether a reasonable prospect of recovery exists with
respect to loss reimbursement claim is a question of fact to
- 14 -
be determined upon an examination of all facts and circumstances.
Sec. 1.165-1(d)(2)(i), Income Tax Regs. “A reasonable prospect
of recovery exists when the taxpayer has bona fide claims for
recoupment from third parties or otherwise, and when there is a
substantial possibility that such claims will be decided in his
favor.” Ramsay Scarlett & Co. v. Commissioner, 61 T.C. 795,
811 (1974), affd. 521 F.2d 786 (4th Cir. 1975). The loss
deduction need not be postponed, however, if the potential for
success of a claim is remote or nebulous. Id. The determination
as to whether there is a reasonable prospect of recovery is
based primarily on objective factors; the taxpayer’s subjective
belief may also be considered, but it is not the sole or
controlling criterion. Id.; see Jeppsen v. Commissioner, 128
F.3d 1410, 1418 (10th Cir. 1997), affg. T.C. Memo. 1995-342.
Petitioners have failed to establish that they had no
reasonable prospect of recovery at the end of 2001. Petitioner
husband testified that in weekly telephone calls with Anderson
Ark representatives before May 1, 2001, he was told that
Anderson Ark would be “vindicated because everything they did
was legal.” He testified that he later participated in several
conference calls with other investors and attorneys in Costa Rica
who were trying to form a group of former Anderson Ark investors
to fund a lawsuit. He testified that he declined to retain an
attorney because “I’d thrown enough money down there and I didn’t
- 15 -
think that it would be profitable to go any further with it” and
“because nobody really knew where the money was”.
Other than this uncorroborated testimony, there is no
evidence that petitioners had no reasonable prospect for
recovery in 2001 of amounts allegedly invested with Anderson
Ark and not already withdrawn. Other than allegedly
participating in some conference calls, petitioners apparently
made no efforts to recover the sizeable amounts they now claim
to have been stolen. Tellingly, petitioners retained LaGrand,
their Anderson Ark-affiliated “planner” who coauthored the book
that was implicated in petitioners’ alleged fleecing by Anderson
Ark, to prepare not only their 2000 return (claiming significant
pass-through losses from Wilwyatt) but also their 2001 Federal
income tax return, which was prepared in May 2002; i.e. the year
after petitioners allegedly discovered the theft. It seems to us
implausible that in 2001 petitioners would have simply abandoned
any efforts to recover over $100,000 in funds allegedly stolen by
Anderson Ark and yet would have continued as late as May 2002 to
rely upon LaGrand to prepare their tax returns.5
5
On reply brief petitioners attempt to minimize the
significance of their continued involvement with Tara LaGrand,
stating: “LaGrand was not responsible for the theft of the
money. Petitioners do not blame LaGrand for the theft of the
money and simply chose to continue using her Certified Public
Accounting services after the discovery of the theft by the
principals of Anderson’s Ark.” Inconsistently, in their pretrial
memorandum petitioners state that after LaGrand prepared their
2000 return they “learned that the accountant was in league with
(continued...)
- 16 -
In the first half of 2001 several Anderson Ark defendants
had been arrested and indicted. Petitioner husband was
apparently aware of these legal difficulties. Whether he chose
to believe, as he had been told, that Anderson Ark ultimately
would be vindicated, or whether he was indifferent to Anderson
Ark’s legal problems because he had already withdrawn all or most
of the funds he had invested with Anderson Ark, or whether he
made a calculated decision to continue relying on LaGrand’s
services in hopes of realizing the bogus tax losses from his
Anderson Ark investments, the result is the same: Petitioners
have failed to establish that it was reasonably certain at the
end of 2001 that they would not recover their alleged Anderson
Ark losses.
IV. Addition to Tax and Penalty
Section 6651(a)(1) imposes an addition to tax for failure to
file a Federal income tax return by its due date, determined with
regard to any extension of time for filing previously granted.
The addition equals 5 percent for each month that the return is
late, not to exceed 25 percent. Id. Unless otherwise provided,
the Commissioner has the burden of production with respect to
this addition to tax. Sec. 7491(c).
Petitioners’ 2000 Federal income tax return was due on
August 15, 2001, under an extension of time to file their return.
5
(...continued)
the investment managers who defrauded Petitioners.”
- 17 -
The parties have stipulated that the IRS received petitioners’
2000 tax return on October 18, 2001. Respondent has met his
burden of production pursuant to section 7491(c).
The addition to tax under section 6651(a)(1) shall not apply
if it is shown that the failure to timely file is due to
reasonable cause and not due to willful neglect. Sec.
6651(a)(1). A delay is due to reasonable cause if “the taxpayer
exercised ordinary business care and prudence and was
nevertheless unable to file the return within the prescribed
time”. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
Petitioners bear the burden of proving that their failure to
timely file was due to reasonable cause and not to willful
neglect. See Higbee v. Commissioner, 116 T.C. 447.
Petitioners argue that they failed to file their 2000 return
on time because LaGrand “falsely informed petitioners that she
had filed a second request for extension of time to file their
2000 federal income tax return and that the due date would be
validly extended from August 15, 2001 until October 15, 2001.”
A taxpayer has, however, a personal and nondelegable duty to file
a timely return; reliance on a bookkeeper or accountant does not
provide reasonable cause for an untimely filing. United States
v. Boyle, 469 U.S. 241, 249 (1985); Sparkman v. Commissioner,
T.C. Memo. 2005-136, affd. 509 F.3d 1149 (9th Cir. 2007).
Petitioners have not established reasonable cause for their late
- 18 -
filing. Petitioners are liable for the section 6651(a)(1)
addition to tax.
Pursuant to section 6662(a) and (b)(1) and (2) a taxpayer
may be liable for a penalty of 20 percent on the portion of an
underpayment of tax that is attributable to (1) negligence or
disregard of rules or regulations, or (2) any substantial
understatement of tax. A substantial understatement of tax is
defined as an understatement of tax that exceeds the greater of
10 percent of the tax required to be shown on the tax return or
$5,000. See sec. 6662(d)(1)(A).
On their 2000 income tax return petitioners claimed a
$275,730 loss which they now concede to have been erroneous,
resulting in a $42,166 deficiency. Respondent has met his burden
of production with respect to the accuracy-related penalty.
No penalty shall be imposed under section 6662(a) with
respect to any portion of an underpayment if it is shown that
there was reasonable cause and that the taxpayer acted in good
faith. Sec. 6664(c). Whether a taxpayer acted in good faith
depends upon the facts and circumstances of each case. Sec.
1.6664-4(b)(1), Income Tax Regs. Reliance in good faith on the
advice of a qualified adviser may constitute reasonable cause.
Id. Reliance may be unreasonable if the taxpayer knows or should
have known that the adviser has an inherent conflict of interest.
Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99
- 19 -
(2000), affd. 299 F.3d 221 (3d Cir. 2002); Rogers v.
Commissioner, T.C. Memo. 2005-248.
Petitioners did not obtain independent advice or look beyond
their Anderson Ark-affiliated accountant, LaGrand, in claiming a
$275,730 tax loss from Wilwyatt which they now concede to have
been erroneous and for which they offer no substantive
justification. As far as the record reveals, petitioners took no
steps to verify that LaGrand had sufficient expertise or was
sufficiently independent of Anderson Ark to justify their
reliance. LaGrand did not testify at trial, and the specific
nature of her advice to petitioners is unclear. We conclude that
petitioners did not make a good faith effort to determine their
2000 tax liability, that it was not reasonable for them to rely
on LaGrand, and that they are liable for the section 6662(a)
penalty for substantial understatement of their 2000 tax
liability.
To reflect the foregoing and concessions by petitioners,
Decision will be entered
for respondent.