Dastgir v. Commissioner

T.C. Memo. 1996-169

UNITED STATES TAX COURT

G. DASTGIR AND MARY A. QURESHI, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18099-93. Filed April 3, 1996.

Warren Neal Nemiroff, for petitioners.

Stephen M. Friedberg, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

JACOBS, Judge: Respondent determined a $7,517 deficiency in

petitioners’ 1984 Federal income tax, a $2,255 addition to tax for

valuation overstatement pursuant to section 6659, and additional

interest pursuant to section 6621(c).1 As an alternative to the

1

Pursuant to the Tax Reform Act of 1986, Pub. L. 99-514,

(continued...)

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section 6659 addition to tax, respondent determined a $1,879

addition to tax for substantial understatement of tax pursuant to

section 6661.

Following concessions by petitioners,2 the issues for decision

are: (1) Whether a closing agreement entered into by the parties on

August 7, 1989, precludes petitioners from entitlement to a claimed

depreciation deduction, investment tax credit, and loss from a

program marketed by or on behalf of FoodSource, Inc. (hereinafter,

this program is referred to as the FoodSource program) for 1984;

and if not, (2) whether petitioners are entitled to the

depreciation deduction, investment tax credit, and loss for 1984.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The

stipulation of facts and the attached exhibits are incorporated

herein by this reference. The record before us is incomplete;

nonetheless, we have attempted, as best we can, to ascertain the

facts necessary to resolve the issues before us.3

1

(...continued)

sec. 1511(c)(1), 100 Stat. 2744, former sec. 6621(d) was

redesignated as sec. 6621(c).

Except as otherwise indicated, all section references

are to the Internal Revenue Code for the year under

consideration.

2

Petitioners acknowledge that in the event we sustain

respondent’s deficiency determination, they are liable for both

the sec. 6659 addition to tax and additional interest pursuant to

sec. 6621(c).

3

For a better understanding of the FoodSource program,

(continued...)

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Background

Petitioners G. Dastgir and Mary A. Qureshi, husband and wife,

resided in Richmond, Virginia, at the time they filed their

petition. Petitioners timely filed a joint Federal income tax

return for 1984.

G. Dastgir Qureshi (petitioner) is a physician. He received

his education and training in internal medicine and hematology

oncology at the Medical College of Virginia and Columbia

University. In 1974, he joined the faculty of the Medical College

of Virginia. At all relevant times, petitioner was an assistant

professor at the Medical College of Virginia.

In 1982, petitioners’ income was approximately $35,000.

During the year under consideration, 1984, petitioner received

wages of $77,916.

FoodSource

FoodSource, Inc. (FoodSource)4 is a California company that,

during the period 1980-82, sold interests in controlled atmosphere

refrigerated containers to various investors. The Budd Company of

3

(...continued)

see Noonan v. Commissioner, T.C. Memo. 1986-449, affd. without

published opinion sub nom. Hillendahl v. Commissioner, 976 F.2d

737 (9th Cir. 1992), and Brand v. Commissioner, T.C. Memo. 1988-

194.

4

Beginning in May 1982, containers were sold by

FoodSource Sales, Inc., a corporation wholly owned by David A.

Dixon, who owned or controlled a majority of FoodSource’s stock.

For simplicity, both FoodSource and FoodSource Sales, Inc. are

referred to herein as FoodSource.

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Pennsylvania (Budd Co.) manufactured the containers. The

refrigerated containers controlled the atmosphere for post-harvest

preservation and transportation of perishable agricultural

commodities. In 1982, FoodSource sold a container for $260,000.

Petitioner was introduced to the FoodSource program through

Skip Stewart, who received a commission for each container sold.

Among other things, Mr. Stewart informed petitioner of the

potential tax advantages petitioner could expect to receive from an

investment in the FoodSource program.

FoodSource supplied petitioner with information about its

containers and program. Petitioner engaged a Richmond, Virginia,

law firm to review the FoodSource documentation.

Petitioner did not investigate the reasonableness of the

container’s purchase price, the practicality of owning a fractional

interest in a container, or the viability of the FoodSource

program.

In 1982, petitioner purchased a one-half interest5 in

FoodSource container No. 506622. The price for petitioner’s one-

half interest was $130,000. Petitioner paid $26,000 in cash and

gave a nonrecourse note for the balance. Subsequently, he exchanged

a recourse note for the nonrecourse note.

Although petitioner expected the FoodSource container to

generate rental income sufficient to pay for the cost of the

5

The remaining 50-percent interest was purchased by

petitioners’ neighbor, Tom Ream.

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container as well as yield a profit, he understood that if the

monthly earnings from the container rental were insufficient to

meet monthly expenses, he would be required to pay the difference.

Petitioner never saw or possessed the container.

Petitioner received periodic statements from FoodSource with

respect to his interest in the container that purported to show

rental revenues generated and expenses incurred. He eventually

discovered that the revenue information contained in these

statements was false.

Petitioner made three payments in 1984 to FoodSource totalling

$2,655.95 for 1984. The purpose of these payments is unknown.

In 1990, petitioner was notified that the Budd Co. had

possession of his container,6 and that the Budd Co. was planning

to sell it. The Budd Co. offered to sell the container to

petitioner and Mr. Tom Ream (the other 50-percent interest holder)

for $22,000. Neither petitioner nor Mr. Ream chose to accept this

offer. Eventually, the container was sold at auction.

FoodSource filed for bankruptcy in 1984. In 1990, petitioner

paid $25,000 on his recourse note to FoodSource’s trustee in

bankruptcy.

Closing Agreement

On their tax returns for 1979, 1980, 1982, and 1983,

petitioners claimed credits, deductions, and losses with respect to

6

The record is devoid of any evidence as to why the Budd

Co. possessed the container at that time.

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petitioner’s investment and participation in the FoodSource

program.7 Respondent determined that the FoodSource program was an

abusive tax shelter.

Petitioner was one of a large number of persons nationwide who

had invested in the FoodSource program and claimed credits,

deductions, and losses with respect thereto, which respondent

disallowed. In order to resolve common issues, “test case

petitioners” were selected among the persons whose credits,

deductions, and losses had been disallowed by respondent and who

had petitioned this Court for a redetermination of that

disallowance. We rendered an opinion in the consolidated test

cases entitled Noonan v. Commissioner, T.C. Memo. 1986-449, affd.

without published opinion sub nom. Hillendahl v. Commissioner, 976

F.2d 737 (9th Cir. 1992).

Subsequent to our decisions in Noonan and the conclusion of

the appeal thereof, on August 7, 1989, petitioners and respondent

entered into a closing agreement (Form 906) regarding the credits,

deductions, and losses petitioners claimed on their 1979, 1980,

1982, and 1983 tax returns with respect to petitioner’s investment

and participation in the FoodSource program. In pertinent part,

the closing agreement states:

7

Petitioners claimed refunds for carrybacks to their

1979 through 1981 tax years, based upon the depreciation

deductions, interest expense, and investment tax credit as a

result of petitioner’s purchase of the container.

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WHEREAS, a dispute has arisen between the parties as to

the amount of the taxpayers’ income, gains, losses,

credits, and deductions related to investments and

transactions with FoodSource, Inc.; and

WHEREAS, the parties wish to determine with finality the

taxpayers’ income, gains, losses [,] credits, and

deductions for the taxable years [ending] December 31,

1979, December 31, 1980, December 31, 1982 and December

31, 1983 with respect to investments and transactions

with FoodSource, Inc.

NOW IT IS HEREBY DETERMINED and AGREED for Federal Income

Tax purposes that:

(1) No item of income, gain, loss, credit,

and deduction from the taxpayers’ transactions

and investments with respect to FoodSource,

Inc. is recognized with regard to container

#506622, which was considered to be placed in

service December 5, 1983.

(2) No depreciable basis shall be allowed for

the container.

(3) No investment tax credit shall be allowed

for the container.

(4) Any interest paid on the note financing

the purchased container from FoodSource, Inc.

would not be allowed as a deduction in any

year.

(5) No maintenance, insurance, or other

operating expenses would be allowed to the

extent cash payments were paid for them,

unless a portion of the container income

reported was used to offset the expense.

(6) Overvaluation and negligence penalties

are determined to be NONE and NONE for the

year 1979, NONE and NONE for the year 1980,

NONE and NONE for the year 1982, and $2,154.30

and NONE for the year 1983, respectively.

(7) Any future receipt by the taxpayers of

damages or monies from FoodSource or its

related entities and agents shall be included

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as ordinary income of the taxpayers in the

taxable year of receipt.

(8) Any future cash payments on notes

financing the purchase of the container, which

are either required by a court of law or by a

settlement based on pending litigation with

respect to the debt, will be allowed as an

operating expense in the year paid. [Item (4)

would then be superseded.]

Petitioners’ 1984 Federal Income Tax Return

On Schedule C attached to petitioners’ 1984 Federal income tax

return, petitioners claimed a $27,300 depreciation deduction and

reported a $27,300 net loss with respect to petitioner’s investment

in the FoodSource program. Also, on Form 3468, Computation of

Investment Credit, attached to their 1984 return, petitioners

claimed a $218 investment tax credit with respect to petitioner’s

investment in the FoodSource program. Respondent disallowed the

claimed depreciation deduction, investment tax credit, and loss.

OPINION

Issue 1. Validity of the Closing Agreement for 1984

Initially, we must determine whether the closing agreement

entered into by petitioners and respondent in August 1989 precludes

petitioners from claiming the disputed deduction, credit, and loss

for 1984. Petitioners contend that the closing agreement is

applicable only to those years enumerated therein (namely, 1979,

1980, 1982, and 1983), and hence has no applicability to 1984.

Respondent, on the other hand, contends that the closing agreement

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is applicable to all matters concerning petitioner’s investment and

participation in the FoodSource program.

Section 7121(a) authorizes the Secretary of the Treasury or

his delegate to enter into written closing agreements with respect

to the tax liability of any person for any taxable period. Such

closing agreements are binding on the parties as to the matters

agreed upon and may not be annulled, modified, set aside, or

disregarded in any suit or proceeding unless there is a showing of

fraud, malfeasance, or misrepresentation of a material fact.8 Sec.

7121(b); Rink v. Commissioner, 100 T.C. 319, 324 (1993), affd. 47

F.3d 168 (6th Cir. 1995); Zaentz v. Commissioner, 90 T.C. 753, 760

(1988). A Form 906 is a final and conclusive agreement that is

binding only as to matters agreed upon for the taxable period

stated in the agreement. Estate of Magarian v. Commissioner, 97

T.C. 1 (1991); Zaentz v. Commissioner, supra at 761-762; sec.

301.7121-1(d)(1), Proced. & Admin. Regs. Closing agreements are

interpreted using ordinary contract law principles, which generally

require that we look within the “four corners” of the agreement.

Rink v. Commissioner, supra at 325.

The 1989 closing agreement is not a model of clarity. The

first introductory clause therein supports respondent’s position

that the closing agreement relates to a transaction (namely,

8

Neither party contends that fraud, malfeasance, or

misrepresentation of a material fact exist in this case.

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petitioner’s investment in FoodSource), not specific years. Also,

the body of the closing agreement, specifically paragraphs (4),

(5), (7), and (8), supports respondent’s transaction position.

However, the second introductory clause clearly supports

petitioner’s position; it refers to specific taxable years, namely

1979, 1980, 1982, and 1983.

Respondent’s agents drafted the closing agreement. It is a

well-established principle of contract law that where an agreement

contains an ambiguity, the ambiguity is resolved against the

drafter of the agreement. See Moore v. Chesapeake & O. Ry. Co.,

649 F.2d 1004, 1012 (4th Cir. 1981); see also O’Neil v. Retirement

Plan For Salaried Employees of RKO General, Inc., 37 F.3d 55, 61

(2d Cir. 1994); Milk ‘N’ More, Inc. v. Beavert, 963 F.2d 1342, 1344

(10th Cir. 1992); United States v. Coleman, 895 F.2d 501, 505 (8th

Cir. 1990); Thanet Corp. v. United States, 219 Ct. Cl. 75, 591 F.2d

629, 633 (Ct. Cl. 1979). This rules applies to the Internal

Revenue Service as drafter of a stipulated agreement. Clapp v.

Commissioner, 875 F.2d 1396, 1399 (9th Cir. 1989).

Each tax year is a separate matter. See Harrah’s Club v.

United States, 228 Ct. Cl. 650, 661 F.2d 203, 205 (1981). If the

parties had intended 1984 to be included in their closing

agreement, they could have done so. But they did not. Accordingly,

we hold that the closing agreement per se does not preclude

petitioners from entitlement to the claimed depreciation deduction,

investment tax credit, and loss for 1984.

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Issue 2. 1984 Depreciation, Investment Tax Credit, and Loss Arising

From FoodSource Investment

In order to establish petitioners’ entitlement to an

investment tax credit and depreciation deduction for 1984,

petitioners must establish that: (1) The container was placed in

service during the taxable year; (2) petitioner had a profit

objective in acquiring and holding the property; and (3) petitioner

had a particular basis in the property for tax purposes. In order

to establish petitioners’ 1984 FoodSource loss, petitioners must

prove that it was a loss connected with a transaction entered into

for profit.

a. Placed in Service

Depreciation begins, and the investment tax credit is allowed,

in the year in which a taxpayer places the qualifying property in

service. Secs. 38(a), 46(a)(1) and (2), 46(c); secs. 1.46-3(a)(1),

1.167(a)-10(b), 1.167(a)-11(e)(1)(i), Income Tax Regs. Property is

placed in service when it is “placed in a condition or state of

readiness and availability for a specifically assigned function,

whether in a trade or business, in the production of income, in a

tax-exempt activity, or in a personal activity.” Secs. 1.46-

3(d)(1)(ii), 1.167(a)-11(e)(1)(i), Income Tax Regs.

Here, paragraph (1) of the closing agreement states that

petitioner’s container was placed in service on December 5, 1983.

No evidence to the contrary was presented. Accordingly,

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petitioners are not entitled to the claimed investment tax credit

for 1984.

b. Profit Objective

In order to qualify for depreciation and other expense

deductions with respect to the container, petitioners must

demonstrate that the container was used in a trade or business or

was held for the production of income. Secs. 162, 167, 212.

To be entitled to a depreciation deduction, petitioner must

prove that he had “an actual and honest objective of making a

profit.” Dreicer v. Commissioner, 78 T.C. 642, 646 (1982), affd.

without opinion 702 F.2d 1205 (D.C. Cir. 1983). For this purpose,

“profit” means economic profit, independent of tax savings.

Surloff v. Commissioner, 81 T.C. 210, 233 (1983). There is no

requirement that a reasonable expectation of profit exist. Elliott

v. Commissioner, 90 T.C. 960, 970 (1988), affd. without published

opinion 899 F.2d 18 (9th Cir. 1990). The determination of whether

an activity is engaged in for profit is made by reference to

objective standards, taking into account all the facts and

circumstances of each case. Brannen v. Commissioner, 78 T.C. 471,

506 (1982), affd. 722 F.2d 695 (11th Cir. 1984). Greater weight is

given to the objective facts than to the taxpayer’s own statements

of intent. Sec. 1.183-2(b), Income Tax Regs.9 A taxpayer bears

9

Sec. 1.183-2(b), Income Tax Regs., sets forth a

nonexclusive list of factors used in determining whether an

activity is engaged in for profit. The regulation lists nine

(continued...)

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the burden to prove that he engaged in the activity with the

objective of realizing an economic profit within the meaning of

section 183. Surloff v. Commissioner, supra. If a taxpayer engages

in an activity without a profit objective, deductions attributable

to the activity are allowed only to the extent of the income

derived from the activity. Sec. 183; Hager v. Commissioner, 76

T.C. 759, 781 (1981).

Petitioner argues that he had an honest and actual profit

objective in purchasing the container. He also contends that his

investment in the container was a business or an enterprise entered

into for profit. Respondent, on the other hand, argues that

petitioner’s FoodSource investment was only a means of receiving

tax benefits. We agree with respondent.

9

(...continued)

factors: (1) The manner in which the taxpayer carried on the

activity; (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 the assets used in the

activity may appreciate in value; (5) the success of the taxpayer

in carrying on other similar or dissimilar activities; (6) the

taxpayer’s history of income or losses with respect to the

activity; (7) the amount of occasional profits, if any, which are

earned; (8) the financial status of the taxpayer; and (9)

elements indicating personal pleasure or recreation. No single

factor, nor the existence of even a majority of the factors, is

controlling. Abramson v. Commissioner, 86 T.C. 360, 371 (1986);

Golanty v. Commissioner, 72 T.C. 411, 425-426 (1979), affd.

without published opinion 647 F.2d 170 (9th Cir. 1981); see also

Hendricks v. Commissioner, 32 F.3d 94, 98 (4th Cir. 1994), affd.

T.C. Memo. 1993-396. In applying these factors, “courts have

universally sought to ascertain the taxpayer’s true intent.”

Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd. without

opinion 702 F.2d 1205 (D.C. Cir. 1983).

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Petitioner contends that he did everything he could “to

guarantee this was [a] legitimate investment.” Although petitioner

did request a law firm to review literature from FoodSource, he did

nothing else. He did not seek any independent verification of the

information FoodSource provided. He did not inquire as to the

actual cost of manufacturing the container, nor did he attempt to

evaluate the container’s fair market value. Based on the record

before us, we are not persuaded that petitioner had an actual and

honest profit objective with respect to his involvement in the

FoodSource program. See Sutton v. Commissioner, 84 T.C. 210, 222-

226 (1985), affd. per curiam 788 F.2d 695 (11th Cir. 1986)

We do not believe that petitioner invested $26,000, in a year

when petitioners’ income was approximately $35,000, for the purpose

of generating an unknown and unsubstantiated amount of future

income. Clearly, of considerable if not primary importance to

petitioner in his participation in the FoodSource program was the

immediate tax advantages he could achieve and the refunds that

could be (and were) claimed on petitioners’ amended returns for

prior years.

Petitioner had no background or experience in the

transportation of produce, nor did he exhibit any desire to become

involved with it. He did not follow up on his investment to

determine whether the container was completed or placed in an

income-producing use. He never had control over the container.

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None of the factors enunciated in section 1.183-2(b), Income

Tax Regs., favors petitioners other than the absence of personal

pleasure or recreation factor. We conclude, and thus hold, that

petitioner’s investment in the FoodSource container was not made

with an actual and honest profit objective. Petitioners therefore

are not entitled to the depreciation deduction for 1984.10

c. Business Loss

Petitioners have the burden of establishing that petitioner

sustained a loss in a transaction entered into for profit in 1984.

Section 165 provides as follows:

SEC. 165. LOSSES.

(a) General Rule.--There shall be allowed as a

deduction any loss sustained during the taxable year and

not compensated for by insurance or otherwise.

* * * * * * *

(c) Limitation On Losses Of Individuals.-- In the

case of an individual, the deduction under subsection (a)

shall be limited to--

* * * * * * *

(2) losses incurred in any transaction

entered into for profit, though not connected

with a trade or business, * * *

Section 1.165-1(b), Income Tax Regs., provides: “To be allowable as

a deduction under section 165(a), a loss must be evidenced by

10

In light of these holdings, we need not determine

petitioner’s adjusted basis for purposes of investment tax credit

and depreciation.

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closed and completed transactions, fixed by identifiable events,

and * * * actually sustained during the taxable year.”

Petitioners argue that they are entitled to a $27,30011 loss

pursuant to section 165 with respect to petitioner’s investment in

the FoodSource program. Respondent contends that petitioner did

not enter into the FoodSource program primarily for profit and

therefore petitioners are not entitled to the loss claimed. See

Fox v. Commissioner, 82 T.C. 1001, 1021 (1984).

The only evidence petitioners presented in this regard was

petitioner’s blanket assertion that he possessed a profit motive

in entering the FoodSource investment. We are not required to, and

do not, accept this blanket self-serving assertion. Petitioner

attempted in 1984 to recoup his lost investment from prior years.

He has failed to show that he entered into the FoodSource program

primarily for profit or that he sustained any business-related loss

in 1984.

We conclude that petitioners are not entitled to a section 165

deduction in 1984 for the $27,300 invested in the FoodSource

program.

To reflect the foregoing,

Decision will be

entered for respondent.

11

Petitioner contends that $27,300 is the amount of his

cash investment in the FoodSource program.