DocketNumber: Docket No. 8690-76
Citation Numbers: 72 T.C. 807, 1979 U.S. Tax Ct. LEXIS 78
Judges: Featherston
Filed Date: 8/8/1979
Status: Precedential
Modified Date: 10/19/2024
1979 U.S. Tax Ct. LEXIS 78">*78
In his income tax return for 1969, petitioner deducted $ 54,500 as interest paid on indebtedness incurred to purchase real property. In 1972, the interest payment was refunded. After the statute of limitations on assessments for 1969 had run, respondent determined that the refund was taxable to petitioner in 1972.
72 T.C. 807">*807 Respondent determined a deficiency of $ 44,405 in petitioners' Federal income tax for 1972. The issue for decision is whether $ 54,500 received in 1972 as a refund of prepaid interest which was claimed and allowed as a deduction in petitioners' 1969 income tax return is taxable in the later year.
72 T.C. 807">*808 FINDINGS OF FACT
Petitioners Allen D. Unvert and Catherine R. Unvert, husband and wife, 1979 U.S. Tax Ct. LEXIS 78">*80 an acquaintance of both men and a law school classmate of Gribben. In mid-December 1969, petitioner telephoned Halverson, then president of U.S. Financial Corp., 1979 U.S. Tax Ct. LEXIS 78">*81 informed of an opportunity to purchase 16 condominium units in a large building owned by U.S. Financial Corp.; these units were identified on a list shown petitioner at the meeting. The representatives of U.S. Financial proposed that petitioner purchase the units on a contract of sale. The amount of the purchase price would be loaned petitioner by U.S. Financial. 72 T.C. 807">*809 Petitioner was informed that by writing a check for prepaid interest on the loan, he would secure an1979 U.S. Tax Ct. LEXIS 78">*82 interest deduction for 1969. Petitioner agreed to these terms. At the meeting, petitioner gave the others a personal check in the amount of $ 54,500 payable to U.S. Mortgage. On the check he indicated that the payment was to serve as prepaid interest on the loan of the purchase price of the condominiums. He was given a receipt for the payment. 1979 U.S. Tax Ct. LEXIS 78">*83 He was reassured by Gribben that the documentation would be forthcoming and by John Leventis (Leventis), petitioner's accountant, that his check was adequate proof of the existence of the contract. To compute depreciation, Leventis telephoned U.S. Financial to confirm the purchase price. On his tax return for 1969, petitioner deducted as prepaid interest $ 54,500 and as depreciation on the units $ 1,239.58.
Having made several telephone calls to representatives of U.S. Financial to request the documents relating to the purchase, petitioner wrote Halverson a letter dated April 23, 1970, in which he expressed his concern at the delay in receiving documents "regarding the contractual relation we entered at the end of 1969." He asked for information and proposed a meeting to resolve possible difficulties. Under cover of a letter dated June 16, 1970, Leaverton forwarded to petitioner copies "of the proposed documentation." By a letter dated December 23, 1970, Gribben suggested that Halverson meet with petitioner about the "substantial amount of documentation remaining to be done."
When preparing his 1970 income tax return, petitioner was still concerned at his failure to receive documentation1979 U.S. Tax Ct. LEXIS 78">*84 and an accounting of the 1969 transaction. By a letter dated March 24, 1971, he asked Halverson for information and indicated he would 72 T.C. 807">*810 be willing to discuss any problems at a meeting. He informed Gribben of this letter by a letter dated the same day. After telephone calls made by petitioner and Leventis yielded no results, the two met with Halverson and Leaverton in mid-1971. At this meeting, petitioner was informed that the condominium units had not been sold and that U.S. Financial had not decided how to arrange the bill of sale.
By a letter dated August 9, 1971, Leaverton informed Gribben that:
My client, Swan Constructors, Inc., hereby agrees to purchase your client Dr. Dale Unvert's position in the above-referenced condominium units on or before December 1, 1971 for the sum of $ 54,000 cash (less any cash theretofore received by Dr. Unvert by reason of such investment), upon the demand of Dr. Unvert.
In a letter to petitioner dated September 1, 1971, the controller of U.S. Financial, Gary L. Fitzgerald, enclosed a promissory note, a contract of sale and purchase, and a management agreement, which were designed to document the December 31, 1969, transaction. He1979 U.S. Tax Ct. LEXIS 78">*85 requested that petitioner execute the documents and return them. He indicated that he would then return "the completely executed documents" to petitioner. In the letter, he refers to a letter written by Leaverton to Gribben, apparently that of August 9, 1971, which he terms a "letter of indemnification."
By a letter dated September 20, 1971, Gribben forwarded to Leaverton a promissory note in the amount of $ 50,000 and an executed copy of the management agreement, both of which were signed by petitioner. As he indicates in the letter, the promissory note is dated December 31, 1969; Gribben states that "it is clear that this Promissory Note evidenced part of the original purchase price." He mentions that he has asked petitioner to sign the contract of sale and purchase agreement, which petitioner "unfortunately neglected to sign." He further refers to Leaverton's statement in the August 9, 1971, letter that Swan Constructors, Inc., would purchase petitioner's interest in the condominiums.
In August or September 1971, petitioner and his accountant met with U.S. Financial's in-house accountant. When informed by the accountant that "the deal [would] be consummated" only if petitioner1979 U.S. Tax Ct. LEXIS 78">*86 invested an additional $ 55,000, petitioner refused. At this point, petitioner asked Gribben to represent him in 72 T.C. 807">*811 obtaining a refund of the original investment from U.S. Financial.
Petitioner believed until at least April 15, 1972, that he owned the condominiums. He also believed that during 1970 and 1971 some of the condominiums were leased under the management agreement and that some were sold and others substituted by U.S. Financial. On his 1970 and 1971 income tax returns, he deducted losses connected with the investment.
On or about May 1, 1972, following a series of contacts by Gribben in person, over the telephone, and by letter, which included a threat of legal action, petitioner received a personal check from Walters in the amount of petitioner's December 31, 1969, check. Petitioner informed Leventis of his receipt of the money.
On August 14, 1972, Revenue Agent Gerald Lenning (Lenning) contacted petitioner concerning an audit of petitioner's 1970 and 1971 income tax returns. On October 11, 1972, Lenning met with Leventis with regard to the audit. At the meeting, Lenning gave Leventis a documented request for additional information about several items on the1979 U.S. Tax Ct. LEXIS 78">*87 return, including petitioner's deductions related to U.S. Financial. Despite repeated requests for information, neither petitioner, Leventis, nor Gribben supplied any information to Lenning about the U.S. Financial transaction. Leventis supplied Lenning with information on other items.
On or about June 7, 1973, Lenning first obtained information on the U.S. Financial transaction from the San Diego Office of the Internal Revenue Service. On July 11, 1973, Lenning informed Leventis of his position that petitioner's purchase of the units was never completed. Leventis disagreed with Lenning. Petitioner's representatives did not comply with requests for more information on the transaction submitted by Lenning on July 23, 1973, July 30, 1973, September 28, 1973, and December 21, 1973. 1979 U.S. Tax Ct. LEXIS 78">*88 72 T.C. 807">*812 OPINION
Because petitioner received a "tax benefit" from the deduction of the $ 54,500 as interest on his 1969 return, he is, in respondent's view, required to include that amount in his income for 1972, the year in which the deducted amount was refunded to him. Petitioner implicitly concedes that he would be required to include the refund in his 1972 income if the deducted amount in fact represented interest relating to a valid contract to purchase condominium units.
1979 U.S. Tax Ct. LEXIS 78">*89 We hold for respondent.
Although each taxable period is separate and independent, there are situations in which the proper treatment of an item in one year cannot be resolved without reference to events in a prior year. See, e.g.,
The instant case is a classic one. Petitioner deducted his 1969 payment to U.S. Financial Corp. as interest, thereby realizing a tax benefit. In 1972, the amount previously deducted was refunded to him. Under the tax benefit rule, the return to him of money which had been the subject of the income tax deduction in the prior year 1979 U.S. Tax Ct. LEXIS 78">*91 requires that the money be treated as income in the year of recovery.
We think petitioner's reading of
In those cases, the taxpayer did not switch the position taken in the year for which the deduction was allowed. The taxpayer in
In contrast, petitioner claimed the $ 54,500 deduction on his 1969 return and thus declared that he had paid that amount as interest in 1969. The representation1979 U.S. Tax Ct. LEXIS 78">*93 was accepted by the Internal Revenue Service as true, and the 1969 deduction was not disallowed. But now petitioner has shifted his position. He maintains that the payment was not interest, in effect claiming that the declaration in his 1969 return was untrue. Since the Internal Revenue Service did not notice his mistake before the statute of limitations expired, petitioner argues that no adjustment can be made with respect to the erroneously claimed interest deduction either for 1969, the year of the deduction, or for 1972, the year in which he received the refund. 1979 U.S. Tax Ct. LEXIS 78">*94 items.
This court has several times held that when a transaction and its tax consequences are thus projected into other tax years there is a duty of consistency as to its treatment, and one should be held to the consequences of the initial treatment,
1979 U.S. Tax Ct. LEXIS 78">*95 This doctrine applies "even though all the technical elements of estoppel are not present."
(1) the taxpayer has made a representation or reported an item for tax purposes in one year,
(2) the Commissioner has acquiesced in or relied on that fact for that year, and
(3) the taxpayer desires to change the representation, previously made, in a later year after the statute of limitations on assessments bars adjustments for the initial tax year.
See also
In a number of other contexts, courts have refused taxpayers benefits from treating items in a manner inconsistent with that of barred years. E.g.,
Petitioner acknowledges this line of cases but argues that they apply only to those he deems "bad guys"; he maintains that his behavior has been innocent. We are not persuaded by this argument. 1979 U.S. Tax Ct. LEXIS 78">*99 ran.
1979 U.S. Tax Ct. LEXIS 78">*100 Other cases are inapposite in that they involve a change of position not by the taxpayer but by the Commissioner.
Even assuming the duty of consistency or quasi-estoppel does not apply to the innocent, we are not persuaded by petitioner's protestations of what he terms his "pure heart." He claims his belief that the 1969 transaction constituted a valid contract lasted until after April 15, 1979 U.S. Tax Ct. LEXIS 78">*101 1973, when the statute of limitations for 1969 expired. He was shaken in this belief, he asserts, only in August 1973, when he read Lenning's report which stated that the sale of the condominiums was never completed. Upon receiving the May 1972 check for $ 54,500, petitioner, according to his varying accounts, either did not think of the tax consequences, or believed that the check represented part of the sale price to Swan Constructors, Inc., and that it would therefore be reported on his 1972 return, or continued to believe that he still owned the condominiums. He explains his failure to report the amount on his 1972 income tax return as due to his realization, after the statute of limitations for his 1969 return had run but before he filed his 1972 return on October 15, 1973, that he had not in fact owned the condominiums.
We find petitioner's statements inconsistent, both internally and with his contemporaneous actions. We find it incredible that upon merely reading Lenning's report, petitioner would abandon his long-held belief that the 1969 transaction constituted a valid contract. As one of the parties involved, he had knowledge of facts which Lenning lacked. Moreover, 1979 U.S. Tax Ct. LEXIS 78">*102 at the time petitioner now claims he realized there had been no contract, Leventis was disputing this finding with Lenning. Petitioner failed to include the $ 54,500 amount on his 1972 return, an action consistent only with the very position advanced by Lenning which petitioner and his representatives were then disputing.
As to his view of the May 1972 check, we are unable to determine among his spate of accounts what petitioner did in 72 T.C. 807">*818 fact think. We note, however, that the view that the refund was a sale, one which petitioner concededly did not advance on his 1972 return, appears unreasonable. At one point, he states that he viewed the check as carrying out the August 1971 offer to buy his position in the condominiums. Yet the offer was made months earlier and there is nothing to indicate that the May 1972 transaction was intended to carry out that offer. Moreover, his instructions to Gribben "to get * * * [the] money back" are inconsistent with a theory of sale.
In light of petitioner's repeated earlier references to his belief in the existence of a contract and the lack of evidence that the 1969 payment was a deposit, we think petitioner was attempting to retrieve1979 U.S. Tax Ct. LEXIS 78">*103 not a deposit but rather an amount paid for which petitioner had belatedly discovered that a contract might not exist. If petitioner believed no contract existed in May 1972, he was under the duty prescribed by
To reflect the foregoing,
1. Petitioners were married in 1972.↩
2. Petitioners have asked us to take judicial notice under
3. Apparently, related companies were to be involved in aspects of the transaction -- Swan Constructors, Inc., in the sale, and U.S. Mortgage in the loan. We will for the most part refer to U.S. Financial rather than to the other companies.↩
4. The parties have stipulated that petitioner was given a receipt. At trial, without objection, petitioner testified that he was given no receipt and that he believed the canceled check would serve as one.↩
5. By September 1973, Leventis was no longer serving as petitioner's accountant. Later contacts were with petitioner's attorney, Donn Kemble, and new accountant, Pete Helsley.↩
6. Apparently, as late as 1975, petitioner contended that the transaction was a valid purchase. It is stipulated that a notice of deficiency was issued on Mar. 18, 1975, to petitioner, denying claimed losses for 1970 and 1971 in connection with this transaction, and that a Tax Court case was instituted. Subsequent to the filing of the answer in that case, petitioner conceded that respondent had correctly denied those deductions.↩
7. While the tax benefit rule had its genesis in court decisions, it is now implicitly codified in
8.
9. Although the record is not entirely clear on this point, the refund could be interpreted as constituting a rescission of a valid contract. If so, the initial deduction was not erroneous and the tax benefit rule would clearly apply.↩
10. On Jan. 2, 1979, respondent filed a motion for leave to file amended answer to conform the pleadings to the proof, under
11. In contrast, for the more stringent requirements of "pure" estoppel to apply (
"(1) there must be false representation or wrongful misleading silence. (2) The error must originate in a statement of fact and not in an opinion or a statement of law. (3) The person claiming the benefits of estoppel most be ignorant of the true facts, and (4) be adversely affected by the acts or statements of the person against whom an estoppel is claimed."
Accord,
12. In
"are clearly inapposite where the taxpayer,
Dobson v. Commissioner , 64 S. Ct. 495 ( 1944 )
Commissioner of Internal Revenue v. Liberty Bank & Trust Co. , 59 F.2d 320 ( 1932 )
Putnam Nat. Bank v. Commissioner of Internal Revenue , 50 F.2d 158 ( 1931 )
Ross v. Commissioner of Internal Revenue , 169 F.2d 483 ( 1948 )
Continental Oil Co. v. Jones , 177 F.2d 508 ( 1949 )
Robinson v. Commissioner of Internal Revenue , 181 F.2d 17 ( 1950 )
West Seattle National Bank of Seattle v. Commissioner of ... , 288 F.2d 47 ( 1961 )
adolph-b-canelo-iii-and-sally-m-canelo-v-commissioner-of-internal , 447 F.2d 484 ( 1971 )
Mayfair Minerals, Inc. v. Commissioner of Internal Revenue , 456 F.2d 622 ( 1972 )
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Twitchco, Inc. v. United States , 348 F. Supp. 330 ( 1972 )
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Security Flour Mills Co. v. Commissioner , 64 S. Ct. 596 ( 1944 )
Dixie Pine Products Co. v. Commissioner , 64 S. Ct. 364 ( 1944 )
William A. Beltzer and Sharon Beltzer, and v. United States ... , 495 F.2d 211 ( 1974 )
Union Trust Co. v. Commissioner of Internal Revenue , 111 F.2d 60 ( 1940 )
Alamo Nat. Bank v. Commissioner of Internal Revenue , 95 F.2d 622 ( 1938 )
United States v. S. F. Scott & Sons, Inc. , 69 F.2d 728 ( 1934 )
The Crosley Corporation v. United States , 229 F.2d 376 ( 1956 )