T.C. Summary Opinion 2002-32
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T.C. Summary Opinion 2002-32
UNITED STATES TAX COURT
JANET L. WIEST, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
RAYMOND A. WIEST, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 6294-00S, 6302-00S.
Filed April 2, 2002.
Robert S. Schriebman and Patrick E. McGinnis, for
petitioners.
Timothy S. Sinnott, for respondent.
ARMEN, Special Trial Judge: These consolidated cases were
heard pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect at the time that the petitions were
filed.1
1
The decisions to be entered are not reviewable by any
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1983,
(continued...)
- 2 other court, and this opinion should not be cited as authority.
In so-called affected items notices of deficiency,
respondent determined additions to tax to petitioners’ Federal
income tax for the year and in the amounts as shown below:
Sec.
6653(a)(1)
$272
Year
1983
Additions to Tax
Sec.
6653(a)(2)
1
$5,435
Sec.
6661
$1,359
2
1
The notice of deficiency mistakenly equates the
amount of the addition to tax with the amount of the
deficiency in income tax (see infra “J”). Prior to trial,
respondent filed an answer to claim an increased addition
to tax pursuant to sec. 6214(a). The increase, in the
amount of $7,834.69, is purely computational in nature.
2
The first page of the notice of deficiency
mistakenly references sec. 6662(d), which section is the
successor to sec. 6661 and is applicable for returns the
due date for which (determined without regard to
extensions) is after December 31, 1989. See Omnibus
Budget Reconciliation Act of 1989, Pub. L. 101-239, sec.
7721(a), (c)(2), (d), 103 Stat. 2395-2400.
After concessions by the parties,2 the issues for decision
are as follows:
(1) Whether petitioner Raymond Wiest (petitioner) is liable
for additions to tax under section 6653(a)(1) and (2) for
1
(...continued)
the taxable year in issue.
2
Petitioners concede that the notice of deficiency is
valid. Cf. Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987),
revg. 81 T.C. 855 (1983).
Respondent concedes, and petitioner Raymond A. Wiest does
not dispute, that pursuant to sec. 6015, petitioner Janet L.
Wiest is entitled to relief from joint and several liability for
the additions to tax.
- 3 negligence or intentional disregard of rules or regulations.
We
hold that petitioner is liable for such additions.
(2) Whether petitioner is liable for the addition to tax
under section 6661 for substantial understatement of tax
liability.
We hold that petitioner is liable for such addition.
The foregoing two issues relate to the participation of
petitioner as a limited partner in a jojoba partnership known as
San Nicholas Research, Ltd.
Background
Some of the facts have been stipulated, and they are so
found.
The stipulated facts and attached exhibits are
incorporated herein by this reference.
Petitioner resided in Riverside, California, at the time
that his petition was filed with the Court.
A.
Petitioner’s Background and Experience
After graduating from high school in 1955, petitioner
attended San Bernardino Valley Junior College for 1 year and
California State University at Long Beach for an additional year.
While in college, petitioner majored in industrial arts.
He did
not take any business or accounting courses, nor did he take any
courses in either Federal or State taxation.
During 1983, the taxable year in issue, petitioner’s
principal occupation was part owner and operator of a successful
equipment rental company known as Wiest Rentals in Riverside,
- 4 California.
The company, which was family owned, rented
construction equipment, such as dump trucks, skip loaders, and
air compressors, and sold building materials, such as rock, sand,
and cement blocks.
In 1983, petitioner was also a member of the board of
directors of Riverside Thrift & Loan Association, a statechartered financial institution in Riverside, California.
As a
board member, petitioner received director’s fees in the amount
of $6,320.
In 1983, petitioner had fractional interests in commercial
real estate that produced net rental income.
Petitioner also
received fees in the amount of $9,526 for managing one of these
properties.
In 1983, petitioner also had an interest in some orange
groves in southern California.
The orange groves produced
minimal income.3
In 1983, petitioner was financially well off and
sophisticated.
Without regard to partnership and farm losses,
petitioner’s reported income exceeded $200,000 for that year,
including (but not limited to):
(1) Compensation from Wiest
Rentals in the amount of $36,500; interest income in the amount
of $52,991; capital gain (net of the 60 percent deduction under
3
On his Schedule F, Farm Income and Expenses, petitioner
reported a gross profit of $262 and deducted expenses of $7,181,
for a net loss of $6,919.
- 5 section 1202) in the amount of $64,694;4 net rental income in the
amount of $33,073; and other income (consisting principally of
rental management fees and director’s fees) in the amount of
$16,006.
In addition, petitioner had equity interests in: (1) A
partnership known as M&W Construction;5 (2) a partnership known
as Canyon Crest Lots; (3) a partnership known as The Attic; (4) a
partnership known as The Thrift Land Company; (5) a partnership
known as Sovereign Land Company; (6) San Nicholas, Ltd. (see
infra “E” through “K”); (7) two parcels of commercial real
estate; and (8) an S corporation.
Prior to 1983, petitioner had an interest in a family-owned
ranch.
The ranch, which was located in northern California, and
grazed about 250 head of cattle, was operated on a day-to-day
basis by petitioner’s father, who lived in the area.
The ranch
was sold in November 1980.
B.
Petitioner’s Friend and Associate William G. Kellen
William G. Kellen (Mr. Kellen) was petitioner’s friend and
business associate.
Like petitioner, Mr. Kellen was a member of
the board of directors of Riverside Thrift & Loan Association.
4
Petitioner’s capital gain included an installment sale in
March 1983 of 69,971 shares of Riverside Thrift & Loan
Association at a gross profit of $265,844.
5
Petitioner’s share of partnership income from M&W
Construction in 1983 was $6,307. This income is apparently the
basis of petitioner’s testimony that his livelihood in 1983 was
based, in part, on “some contracting”.
- 6 Mr. Kellen was a general partner and tax matters partner of
four limited jojoba partnerships:
Utah Jojoba Research, Ltd.
(Utah Jojoba); Blythe Jojoba I Research, Ltd. (Blythe Jojoba I);
Blythe Jojoba II Research, Ltd. (Blythe Jojoba II); and Desert
Center Jojoba Research, Ltd. (Desert Center Jojoba).
Each of
these partnerships was similar, if not identical, to San Nicholas
Research, Ltd., described infra in “E” through “H”.
Prior to 1982, Mr. Kellen did not have any experience in
growing jojoba, nor did he have any experience in either the
research or development of jojoba.
Prior to 1982, Mr. Kellen’s
knowledge concerning jojoba was limited to articles that he had
read in various magazines and a general familiarity with the
existence of an experimental jojoba plantation located at the
University of California at Riverside.
Mr. Kellen did not
consider himself to be an expert in jojoba in 1983.
In 1983, Mr. Kellen was actively engaged in the practice of
law, specializing in the formation of financial institutions such
as banks, savings and loan associations, and thrift and loan
associations.
Mr. Kellen did not have any expertise in
accounting or tax matters, nor did he ever attempt to render
advice on those subjects.
C.
Petitioner’s Friend and Associate E.T. Jacobs
E.T. Jacobs (Mr. Jacobs) was petitioner’s friend and
business associate.
Like petitioner, Mr. Jacobs was a member of
- 7 the board of directors of Riverside Thrift & Loan Association.
From 1957 to 1973, Mr. Jacobs worked for the Internal
Revenue Service (IRS) as a revenue agent and later as an
examination manager.
As a revenue agent, Mr. Jacobs served as a
dairy specialist and later as a cattle feeding specialist.
As a
manager, Mr. Jacobs supervised the examination of agricultural
businesses in Riverside and Imperial Counties in southern
California.
After resigning from the IRS, Mr. Jacobs entered private
practice as an accountant.
In 1983, he maintained his own
practice as a certified public accountant.
In 1982, Mr. Jacobs became interested in the farming of
jojoba in Desert Center, California.
Mr. Jacobs also sold
limited partnership interests in a number of jojoba partnerships.
At no time relevant to this case did Mr. Jacobs have any
experience or expertise in the research or development of jojoba.
D.
Petitioner’s Friend and Associate Eugene C. Pace
Eugene C. Pace (Mr. Pace) was petitioner’s friend and
business associate.
Like petitioner, Mr. Pace was a member of
the board of directors of Riverside Thrift & Loan Association.
Like Mr. Kellen, Mr. Pace was an attorney.
Mr. Pace was president of U.S. Agri, see infra “G”, and a
member of its board of directors.
- 8 Prior to 1983, Mr. Pace did not have any experience in
growing jojoba, nor did he have any experience in either the
research or development of jojoba.
E.
Petitioner’s Investment in San Nicholas, Ltd.
Petitioner was introduced to jojoba by Mr. Pace, who
provided petitioner with a copy of a private placement memorandum
dated October 10, 1983 (see infra “F” and “H”), for San Nicholas
Research, Ltd. (San Nicholas or the partnership).6
Thereafter,
on December 30, 1983, petitioner signed a subscription agreement
and purchased five limited partnership units (a 3.9-percent
interest) in San Nicholas.
The general partner and tax matters partner of San Nicholas
was Alfred M. Clancy.
Petitioner purchased the partnership units pursuant to the
aforementioned private placement memorandum.
Petitioner paid
$2,790 per limited partnership unit, or a total of $13,950, for
his five units in San Nicholas.
Of this amount, $1,140 per unit,
or $5,700 for 5 units, was paid in cash.
The balance, $1,650 per
unit or $8,250 for five units, was payable pursuant to a 10-year
6
Mr. Pace also provided petitioner with a promotional
videotape, which was produced by U.S. Agri, see infra “G”, and
which featured Mr. Pace, that described jojoba as “liquid gold”
and as “the industrial crop of the future”, which would be
cultivated in “some of the most hostile land anywhere”.
- 9 promissory note.7
Prior to investing in San Nicholas, petitioner did not have
any experience or expertise in jojoba, nor did petitioner have
any experience or expertise in the area of research or
development of jojoba.
Petitioner’s decision to invest in San Nicholas was
influenced by the fact that Mr. Pace, his friend and business
associate, was president of U.S. Agri, see infra “G”, and that
Mr. Kellen, another of petitioner’s friends and business
associates, had also invested in San Nicholas.8
Petitioner’s decision to invest was also influenced by
petitioner’s belief that an investment in San Nicholas offered
tax benefits.
Prior to investing in San Nicholas, petitioner did not
consult any attorney.9
7
The note, which was recourse in form, contemplated
payments of interest only for the first 5 years. As matters
actually transpired, late in the 1980s, the limited partners were
given the option of paying a steeply discounted percentage of the
principal in cash. The record does not disclose whether
petitioner elected this option.
8
Mr. Kellen’s investment in San Nicholas also culminated in
a case in this Court. See Kellen v. Commissioner, T.C. Memo.
2002-19; see also Utah Jojoba I Research v. Commissioner, T.C.
Memo. 1998-6, discussed infra in subdivision “J”, regarding Mr.
Kellen’s involvement in another jojoba partnership.
9
Although Mr. Kellen was an attorney, he never rendered any
legal advice to petitioner concerning San Nicholas. Indeed,
petitioner never consulted Mr. Kellen in his capacity as an
(continued...)
- 10 F.
Putative Nature of San Nicholas’ Business
According to the private placement memorandum dated October
10, 1983 (the offering memorandum), San Nicholas was formed in
order “to undertake a comprehensive research and development
program on the plant Simmondsia Chinesis (Jojoba).”
The offering
memorandum described how this program was to be carried out:
The Partnership will enter into a research and
development contract * * * with U.S. Agri Research and
Development Corp. (the “R & D Contractor”), who will
conduct the experiments in various test sites * * * as
well as its laboratory or greenhouse facilities that it
in its sole discretion deems advisable. In addition,
the R & D Contract sets forth that a site in the
vicinity of Desert Center and Blythe, California of
from 30-50 acres will be delineated as the applied
research site upon which all technology and improved
cultivars developed on behalf of the Partnership during
the term of the contract will be placed “in field.”
The Partnership will also have the right but not be
obligated to enter into a License Agreement * * * to
license to U.S. Agri Research and Development Corp. all
technology developed on behalf of the Partnership for a
period of forty (40) years and receive therefrom an
amount equal to 85% of the products produced from the
developed technology.[10]
9
(...continued)
attorney; rather, petitioner merely “chatted” with Mr. Kellen as
a friend and business associate.
In addition, although Mr. Pace was an attorney, petitioner
never consulted him in that capacity. Indeed, any advice that
Mr. Pace may have rendered was offered in his capacity as an
interested party to the San Nicholas promotion, see infra “G”, a
fact of which petitioner was aware.
10
Although San Nicholas may not have been obligated to
enter into a license agreement with U.S. Agri Research and
Development Corp., it was a foregone conclusion that it would do
so. Indeed, the research and development (R&D) contract and the
license agreement were executed concurrently. Notably, execution
(continued...)
- 11 Copies of the research and development (R&D) contract and
the license agreement referred to in the preceding paragraph were
attached as exhibits to the offering memorandum.
The R&D
contract identified U.S. Agri Research and Development Corp.
(U.S. Agri) as a party to the contract and the R&D contractor
thereunder.
The license agreement identified U.S. Agri as a
party to the contract and the licensee thereunder.
G.
U.S. Agri
As previously indicated, the offering memorandum identified
U.S. Agri as the R&D contractor under the R&D contract and as the
licensee under the license agreement.
U.S. Agri was also the R&D
contractor and the licensee for Utah Jojoba, Blythe Jojoba I,
Blythe Jojoba II, and Desert Center Jojoba.
As previously indicated, Mr. Pace was the president of U.S.
Agri and a member of its board of directors.
Mr. Kellen also
served as a member of U.S. Agri’s board until he became general
partner of Utah Jojoba, Blythe Jojoba I, Blythe Jojoba II, and
Desert Center Jojoba in late 1982.
Mr. Pace and Mr. Kellen were close personal friends and
business associates for a number of years before the formation of
San Nicholas in late 1983.
10
(...continued)
of the license agreement by San Nicholas served to automatically
terminate the R&D contract pursuant to the terms of the latter
contract. See infra “J”.
- 12 H.
Cautionary Language in the San Nicholas Offering Memorandum
The face of the offering memorandum warned, in block
letters, that “THIS OFFERING INVOLVES A HIGH DEGREE OF RISK”.
The offering memorandum also included the following cautionary
language in block letters:
PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO CONSTRUE
THIS MEMORANDUM OR ANY PRIOR OR SUBSEQUENT
COMMUNICATIONS AS CONSTITUTING LEGAL OR TAX ADVICE.
* * * INVESTORS ARE URGED TO CONSULT THEIR OWN COUNSEL
AS TO ALL MATTERS CONCERNING THIS INVESTMENT.
*
*
*
*
*
*
*
THERE IS NO PUBLIC OR OTHER MARKET FOR THE UNITS, NOR
WILL SUCH MARKET DEVELOP.
*
*
*
*
*
*
*
THE PURCHASE OF SUCH UNITS DESCRIBED IN THIS MEMORANDUM
INVOLVES A HIGH DEGREE OF RISK (SEE “RISK FACTORS”) AND
SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE
TOTAL LOSS OF THEIR INVESTMENT.
*
*
*
*
*
*
*
EACH PURCHASER OF THE UNITS HEREIN SHOULD AND IS
EXPECTED TO CONSULT WITH HIS OWN TAX ADVISOR AS TO THE
TAX ASPECTS.
In addition, the offering memorandum limited the sale of
partnership units to investors with a net worth (exclusive of
home, furnishings, and automobiles) of at least $150,000, or
investors whose net worth was at least $50,000 (exclusive of
home, furnishings, and automobiles) and who anticipated that, for
the taxable year of the investment, they would have gross income
of at least $65,000 or taxable income, a portion of which, but
- 13 for tax-advantaged investments, would be subject to Federal
income tax at a marginal rate of 50 percent.
The offering memorandum included a section entitled “Risk
Factors”, which was the single longest section.
It began with a
general warning:
The purchase of the interests offered hereby
involves various risk factors. Investment in the
Partnership * * * involves an extremely high degree of
risk. Investors should consider carefully the various
risk factors set forth in this and other portions of
this Memorandum. Investment in the Partnership is
suitable only for persons of substantial financial
means who will not require liquidity in the investment.
Investors must be prepared for the possible loss of
their entire investment.
The offering memorandum then proceeded to discuss a number
of specific, and significant, risk factors associated with an
investment in San Nicholas.
memorandum warned:
Among those risks, the offering
(1) Research and development risks were so
great that an investment in San Nicholas should be considered
“highly speculative”; (2) the general partner had no previous
experience in dealing in jojoba; (3) there was no structured
market or distribution system for jojoba; (4) there were no
facilities dedicated to the processing of jojoba; (5) commercial
applications of jojoba are not extensive; (6) the general partner
had not conducted any market analysis or similar studies; (7)
there was no assurance of any increase in marketing or production
facilities or in the demand for jojoba; (8) in the absence of any
such increase, the production of jojoba might be unprofitable,
- 14 regardless of any technology that might be developed by the R&D
contractor; and (9) there was the likelihood of audit by the IRS.
Indeed, the discussion concerning the tax risks associated with
an investment in San Nicholas constituted half of the section on
“Risk Factors”.
The offering memorandum also included projections of
revenue, cashflow, and taxable income or loss.
Investors were
warned, however, that those projections, which had been prepared
for the general partner, had not been audited and that they
should not be relied on to indicate the actual results that might
be attained.
I.
Petitioner’s 1983 Schedule K-1 and Income Tax Return
Petitioner received a Schedule K-1, Partner’s Share of
Income, Credits, Deductions, etc., from San Nicholas for 1983.
The Schedule K-1 reported that petitioner’s distributive share of
partnership loss from San Nicholas was $12,354 for that year.
Petitioner timely filed a Federal income tax return, Form
1040, for 1983.11
Petitioner attached to his return Schedule E,
Supplemental Income Schedule, and claimed thereon a loss from San
Nicholas in the amount of $12,354.
loss against his other income.
11
Petitioner then offset this
See supra “A”.
The return was prepared by Lee R. Jeppson, Jr. (Mr.
Jeppson), a member of an accounting firm in Riverside,
California. In preparing petitioner’s return, Mr. Jeppson relied
on the Schedule K-1 that was provided by petitioner.
- 15 J.
Jojoba Partnership Litigation
San Nicholas was examined by the Internal Revenue Service,
and a notice of final partnership administrative adjustment,
FPAA, was ultimately issued to the partnership.
In December
1991, Alfred M. Clancy (Mr. Clancy), the general partner and tax
matters partner of San Nicholas, commenced a TEFRA partnership
proceeding in this Court.12
Subsequently, in November 1993, Mr.
Clancy and the Commissioner agreed to be bound by the decision to
be entered in Utah Jojoba I Research v. Commissioner, docket No.
7619-90, a TEFRA partnership proceeding involving Utah Jojoba
that had previously been commenced by Mr. Kellen in his capacity
as tax matters partner of that partnership.
In Utah Jojoba I Research v. Commissioner, T.C. Memo. 19986, the Court made detailed findings of fact related to the jojoba
limited partnerships,13 Mr. Kellen, U.S. Agri, and Mr. Pace.
The
Court described the R&D contract between the partnerships and
U.S. Agri as “mere window dressing” and held that the
partnerships did not, directly or indirectly, engage in research
12
The TEFRA partnership proceeding was assigned docket No.
29994-91. TEFRA stands for the Tax Equity and Fiscal
Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324. See
secs. 6221-6232; N.C.F. Energy Partners v. Commissioner, 89 T.C.
741, 744 (1987); Maxwell v. Commissioner, 87 T.C. 783, 789
(1986).
13
At least 18 docketed cases were bound by stipulation to
the outcome of Utah Jojoba I Research v. Commissioner, docket No.
7619-90.
- 16 or experimentation and that the partnerships lacked a realistic
prospect of entering into a trade or business.
In upholding the
Commissioner’s disallowance of research and experimental
expenditures, the Court concluded that the agreements between the
partnerships and the R&D contractor (U.S. Agri) had been designed
and entered into solely to provide a mechanism to disguise the
capital contributions of limited partners as currently deductible
expenditures.14
The Court stated that the activities of the
partnerships were “another example of efforts by promoters and
investors in the early 1980s to reduce the cost of commencing and
engaging in the farming of jojoba by claiming, inaccurately, that
capital expenditures in jojoba plantations might be treated as
research or experimental expenditures for purposes of claiming
deductions under section 174.”
Id.
In November 1998, Mr. Clancy, acting in his capacity as tax
matters partner of San Nicholas, consented to entry of decision
against the partnership.
Subsequently, in December 1998, the
Court entered decision against San Nicholas pursuant to the
Commissioner’s Motion for Entry of Decision under Rule 248(a).15
Thereafter, the Commissioner assessed a deficiency in
14
In other words, in order to decrease the limited
partners’ cost of investing in the jojoba partnerships, large upfront deductions were manufactured from expenditures that were
actually capital contributions.
15
All Rule references are to the Tax Court Rules of
Practice and Procedure.
- 17 petitioner’s income tax for 1983 in the amount of $5,435 and
mailed a so-called affected items notice of deficiency to
petitioner determining additions to tax for negligence and
substantial understatement of tax liability.
See sec. 6230(a);
N.C.F. Energy Partners v. Commissioner, 89 T.C. 741, 744 (1987);
Maxwell v. Commissioner, 87 T.C. 783, 792 n.9 (1986).
It is
those additions to tax that are in issue in the present cases.
K.
Epilogue:
Demise of the Jojoba Partnerships
The jojoba partnerships proved to be financial failures.
In
October 1991, some 30 to 40 jojoba partnerships under contract
with U.S. Agri were consolidated into one large limited
partnership, Jojoba Plantation Ltd.
Sometime thereafter, Jojoba
Plantation Ltd. filed a petition in bankruptcy under chapter 7 of
the Bankruptcy Act.
See Utah Jojoba I Research v. Commissioner,
supra.
At trial, petitioner’s witness, Mr. Kellen, testified that
the jojoba partnerships failed because of the Internal Revenue
Service.16
At a previous trial, Mr. Kellen testified that “the
collapse, basically, of the tax incentive for doing jojoba”
contributed to the partnerships’ failure.
16
See id.
Petitioner’s other witness, Kathleen M. Jacobs, suggested
a different reason: That no commercially viable method of
harvesting jojoba was ever developed, or, as Ms. Jacobs
testified, that “it was impossible to harvest.”
- 18 Discussion
We have decided many jojoba cases involving additions to tax
for negligence and substantial understatement of tax liability.17
We have found the taxpayers liable for additions to tax for
negligence in all of those cases; likewise, we have found the
taxpayers liable for the addition to tax for substantial
understatement of tax liability in all of those cases that have
presented that issue.
I.
Section 6653(a)(1) and (2) Negligence
The first issue for decision is whether petitioner is liable
for additions to tax under section 6653(a)(1) and (2) with
respect to the underpayment of tax attributable to petitioner’s
investment in San Nicholas.
Petitioner has the burden of proof
to show that he is not liable for these additions to tax.18
See
17
See, e.g., Finazzo v. Commissioner, T.C. Memo. 2002-56;
Welch v. Commissioner, T.C. Memo. 2002-39; Kellen v.
Commissioner, T.C. Memo. 2002-19; Lopez v. Commissioner, T.C.
Memo. 2001-278; Christensen v. Commissioner, T.C. Memo. 2001-185;
Serfustini v. Commissioner, T.C. Memo. 2001-183; Carmena v.
Commissioner, T.C. Memo. 2001-177; Nilsen v. Commissioner, T.C.
Memo. 2001-163; Ruggiero v. Commissioner, T.C. Memo. 2001-162;
Robnett v. Commissioner, T.C. Memo. 2001-17; Harvey v.
Commissioner, T.C. Memo. 2001-16; Hunt v. Commissioner, T.C.
Memo. 2001-15; Fawson v. Commissioner, T.C. Memo. 2000-195; Downs
v. Commissioner, T.C. Memo. 2000-155; Glassley v. Commissioner,
T.C. Memo. 1996-206; Stankevich v. Commissioner, T.C. Memo.
1992-458.
18
It must be acknowledged that respondent bears the burden
of proof to show that petitioner is liable for the increase in
the addition to tax under sec. 6653(a)(2). See supra, p. 2,
table, note 1; Rule 142(a). However, in the present case, the
(continued...)
- 19 Addington v. Commissioner, 205 F.3d 54, 58 (2d Cir. 2000), affg.
Sann v. Commissioner, T.C. Memo. 1997-259; Bixby v. Commissioner,
58 T.C. 757, 791-792 (1972); Anderson v. Commissioner, T.C. Memo.
1993-607, affd. 62 F.3d 1266 (10th Cir. 1995).
See generally
Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992); Welch v. Helvering, 290 U.S. 111, 115 (1933).19
Section 6653(a)(1) imposes an addition to tax in an amount
equal to 5 percent of the underpayment of tax if any part of the
underpayment is due to negligence or intentional disregard of
rules or regulations.
Section 6653(a)(2) imposes another
addition to tax in an amount equal to 50 percent of the interest
due on the portion of the underpayment attributable to negligence
or intentional disregard of rules or regulations.
Negligence is defined as the failure to exercise the due
care that a reasonable and ordinarily prudent person would
exercise under like circumstances.
See Anderson v. Commissioner,
62 F.3d 1266, 1271 (10th Cir. 1995), affg. T.C. Memo. 1993-607;
18
(...continued)
increase is purely computational in nature, and respondent has
convincingly demonstrated the proper amount of the addition to
tax. Accordingly, our analysis proceeds on the basis that
petitioner bears the burden of proof regarding his liability for
this addition to tax. In any event, we would resolve this issue
for respondent based on a preponderance of the evidence.
19
Cf. sec. 7491(c), effective for court proceedings
arising in connection with examinations commencing after July 22,
1998. In the present case, the examination of petitioner’s
income tax return for 1983 commenced well before July 22, 1998.
- 20 Neely v. Commissioner, 85 T.C. 934, 947 (1985).
The focus of
inquiry is the reasonableness of the taxpayer’s actions in light
of the taxpayer’s experience and the nature of the investment.
See Henry Schwartz Corp. v. Commissioner, 60 T.C. 728, 740
(1973); see also Sacks v. Commissioner, 82 F.3d 918, 920 (9th
Cir. 1996) (whether a taxpayer is negligent in claiming a tax
deduction “depends upon both the legitimacy of the underlying
investment, and the due care in the claiming of the deduction”),
affg. T.C. Memo. 1994-217; Turner v. Commissioner, T.C. Memo.
1995-363.
In this regard, the determination of negligence is
highly factual.
Under some circumstances, a taxpayer may avoid liability for
negligence if reasonable reliance on a competent professional
adviser is shown.
See United States v. Boyle, 469 U.S. 241, 250-
251 (1985); Freytag v. Commissioner, 89 T.C. 849, 888 (1987),
affd. 904 F.2d 1011 (5th Cir. 1990), affd. on another issue 501
U.S. 868 (1991).
However, reliance on professional advice,
standing alone, is not an absolute defense to negligence, but
rather a factor to be considered.
supra.
See Freytag v. Commissioner,
For reliance on professional advice to excuse a taxpayer
from negligence, the taxpayer must show that the professional had
the requisite expertise, as well as knowledge of the pertinent
facts, to provide informed advice on the subject matter.
See
David v. Commissioner, 43 F.3d 788, 789-790 (2d Cir. 1995), affg.
- 21 T.C. Memo. 1993-621; Goldman v. Commissioner, 39 F.3d 402, 407
(2d Cir. 1994), affg. T.C. Memo. 1993-480; Freytag v.
Commissioner, supra.
The facts pertinent to the present case relating to the
structure, formation, and operation of San Nicholas are as found
above and as discussed in Utah Jojoba I Research v. Commissioner,
T.C. Memo. 1998-6.
The offering memorandum identified U.S. Agri
as the contractor under the R&D contract.
In addition, a license
agreement between San Nicholas and U.S. Agri granted U.S. Agri
the exclusive right to use all technology developed for the
partnership for 40 years in exchange for a royalty of 85 percent
of the products produced from such technology.
The R&D contract
and the license agreement were executed concurrently.
According to its terms, the R&D contract expired upon the
partnership’s execution of the license agreement.
Because the
two contracts were executed concurrently, amounts paid by the
partnership to U.S. Agri were not paid pursuant to a valid R&D
contract but rather were passive investments in a farming venture
under which the investors’ return, if any, was to be in the form
of royalties pursuant to the license agreement.
Thus, as the
Court held in Utah Jojoba I Research v. Commissioner, supra, the
partnership was never engaged in research or experimentation,
either directly or indirectly.
Moreover, the Court found that
U.S. Agri’s attempt to farm jojoba commercially did not
- 22 constitute R&D, thereby concluding that the R&D contract was
designed and entered into solely to decrease the limited
partners’ cost of investing in an jojoba partnership through
large, upfront deductions for expenditures that were actually
capital contributions.
The Court further concluded that the
partnership was not involved in a trade or business and had no
realistic prospect of entering into a trade or business with
respect to any technology that was to be developed by U.S. Agri.
Id.
Notwithstanding the foregoing, petitioner contends that his
investment in San Nicholas was motivated solely by the potential
to earn a profit.
Petitioner also contends that, taking into
account the nature of his investment and the amount he invested,
he exercised the due care that a reasonable and ordinarily
prudent person would have exercised under like circumstances.
Finally, petitioner contends that reliance on Mr. Kellen, Mr.
Pace, Mr. Jacobs, and a professor at the University of California
should absolve him of liability for negligence in this case.
For
the following reasons, we disagree with petitioner’s contentions.
First, the principal flaw in the structure of San Nicholas
was evident from an examination of the R&D contract and the
license agreement.
offering memorandum.
Both of these documents were a part of the
A reading of the R&D contract and the
license agreement demonstrates that the license agreement
- 23 canceled, or rendered ineffective, the R&D contract because of
the concurrent execution of the two documents.
Accordingly, San
Nicholas was never engaged in, either directly or indirectly, any
research or experimentation.
Rather, San Nicholas was merely a
passive investor seeking royalty returns pursuant to the license
agreement.
See Finazzo v. Commissioner T.C. Memo. 2002-56;
Kellen v. Commissioner, T.C. Memo. 2002-19; Lopez v.
Commissioner, T.C. Memo. 2001-278; Christensen v. Commissioner,
T.C. Memo. 2001-185; Serfustini v. Commissioner, T.C. Memo. 2001183; Carmena v. Commissioner, T.C. Memo. 2001-177; Nilsen v.
Commissioner, T.C. Memo. 2001-163; Fawson v. Commissioner, T.C.
Memo. 2000-195.
Any experienced attorney capable of reading and
understanding the subject documents should have understood the
legal ramifications of the licensing agreement canceling the R&D
agreement.
Petitioner failed to consult an attorney and,
further, failed to carefully scrutinize the offering himself.
Second, we are unable to accept uncritically petitioner’s
contention that he invested in San Nicholas solely to earn a
profit.20
20
Rather, at the time that he signed the subscription
It is the duty of the Court to listen to testimony,
observe the demeanor of witnesses, weigh the evidence, and
determine what to believe. The Court is not required to accept
testimony at face value, and the Court may discount a party’s
self-interested testimony and place reliance on other evidence
that is believed to be more reliable. See Christensen v.
Commissioner, 786 F.2d 1382, 1383-1384 (9th Cir. 1986), affg. in
part and remanding in part T.C. Memo. 1984-197; Niedringhaus v.
(continued...)
- 24 agreement, petitioner believed that his investment in San
Nicholas offered tax benefits, and his decision to invest was
influenced, in part, by that belief.
Third, we do not think that petitioner, a successful
businessman and, in petitioner’s counsel’s words, “a man who knew
about investments”, exercised due care at the time that he signed
the subscription agreement.
In this regard we are again unable
to accept uncritically petitioner’s contention that he reasonably
relied on the offering memorandum.
The short answer to this
contention is that petitioner either did not read the offering
memorandum in its entirety or chose to ignore portions thereof.
See Goldman v. Commissioner, 39 F.3d 402, 407-408 (2d Cir. 1994),
(holding that the taxpayer’s reliance on offering materials was
not reasonable), affg. T.C. Memo. 1993-480; see also Pasternak v.
Commissioner, 990 F.2d 893, 903 (6th Cir. 1993), affg. Donahue v.
Commissioner, T.C. Memo. 1991-181, holding that claims that are
probably “too good to be true” should be investigated by a
reasonably prudent person.21
20
(...continued)
Commissioner, 99 T.C. 202, 212 (1992); Duralia v. Commissioner,
T.C. Memo. 1994-269; see also Tokarski v. Commissioner, 87 T.C.
74, 77 (1986).
21
The record includes a promotional videotape, produced by
U.S. Agri and featuring its president Mr. Pace, that described
jojoba as “liquid gold” and as “the industrial crop of the
future”, which would be cultivated in “some of the most hostile
land anywhere”. This videotape was provided to petitioner by Mr.
(continued...)
- 25 The offering memorandum was replete with caveats and
warnings regarding the business and tax risks associated with an
investment in San Nicholas.
The cover page cautioned that “THIS
OFFERING INVOLVES A HIGH DEGREE OF RISK” and warned prospective
investors “NOT TO CONSTRUE THIS MEMORANDUM OR ANY PRIOR OR
SUBSEQUENT COMMUNICATIONS AS CONSTITUTING LEGAL OR TAX ADVICE.”
Potential inventors were urged “TO CONSULT THEIR OWN COUNSEL AS
TO ALL MATTERS CONCERNING THIS INVESTMENT” and were advised “TO
CONSULT WITH [THEIR] OWN TAX ADVISOR AS TO THE TAX ASPECTS.”
The
single longest section of the offering memorandum was devoted to
“risk factors” and warned of numerous risks, specifically
including tax risks, the lack of a structured market and
distribution system for jojoba, and the highly speculative nature
of the investment.
Petitioner ignored these warnings, reasoning
that “I felt that what I had done to investigate the thing * * *
was a reasonable amount of checking for what I invested
* * * ”.
On brief, petitioner painstakingly dissects portions of the
offering memorandum in an attempt to show that he carefully
perused what he calls a “business plan”.
Petitioner’s piecemeal
approach to the offering memorandum ignores the existence of the
strong cautionary language.
A careful review of the offering
memorandum, especially the portion discussing the tax risks,
21
(...continued)
Pace. See supra note 6.
- 26 would have caused a prudent investor to question the propriety of
the tax benefits.
We would certainly expect no less from an
individual described by his counsel as “an astute businessman”.
Petitioner contends that his experience with farming and his
reading about jojoba gave him confidence in the viability of his
investment in San Nicholas.
Petitioner essentially compared and
equated the production costs of jojoba found in the articles he
read with his own knowledge of citrus groves, and concluded that
the jojoba industry would be profitable.
Yet, had petitioner
delved deeper into the nature of his investment, he would have
inquired into both the operational aspects of the partnership and
the nature of the research that U.S. Agri was to conduct under
the terms of the R&D contract.22
See Fawson v. Commissioner,
T.C. Memo. 2000-195.
Petitioner contends that he visited jojoba plantations
before he invested in San Nicholas and that such visits
demonstrate due care in making the investment.
Yet the record
suggests that petitioner’s visits to the plantations were, at
best, incidental to other business that he had in the Desert
22
We find it curious that petitioner would choose to
emphasize his experience in farming when the record clearly
demonstrates that he did not have any experience in either the
farming of jojoba or the research or development of jojoba. In
addition, petitioner’s professed experience in farming was
essentially limited to some orange groves, which produced a gross
profit of $262 in 1983, and a family-owned ranch in northern
California that was operated, before it was sold in 1980, by his
father.
- 27 Center area.23
In any event, petitioner’s principal interest in
the plantations appears to have been to determine how the jojoba
plants were developing.
There is no persuasive evidence in the
record to demonstrate that petitioner visited the plantations in
order to determine whether research or development was being
conducted.
If petitioner had visited the plantations for that
purpose, he would have quickly discovered that U.S. Agri was
engaged in nothing more than a farming activity.
See Kellen v.
Commissioner, T.C. Memo. 2002-19; Fawson v. Commissioner, supra.
Petitioner should have realized that in the absence of any
research and development, there could be no deduction for
research and experimental expenditures under section 174.
Fourth, petitioner contends that reliance on Mr. Kellen, Mr.
Pace, Mr. Jacobs, and a professor at the University of California
should absolve him of liability for negligence in this case.
We
disagree that any such reliance was reasonable; rather, the
record demonstrates that petitioner failed to obtain competent,
independent, professional advice before investing in San
Nicholas.
23
Petitioner testified on direct examination as follows:
we pulled some gas tanks out of our rental yard, and I
sold them to [Mr.] Jacobs and took them down to the
Desert Center because he was going to use them. Well,
he was going to use one for water and one to store
diesel in. So, I was down there then and a couple of
other times.
- 28 Petitioner contends that he reasonably relied on advice from
Mr. Kellen.
Yet petitioner never consulted Mr. Kellen as an
attorney but rather as a friend and business associate; moreover,
petitioner characterized his dialogue with Mr. Kellen as
“chat”.24
Regardless, petitioner argues that Mr. Kellen was
qualified as an expert in jojoba.
To the contrary, Mr. Kellen
did not consider himself to be an expert in jojoba in 1983, an
admission borne out by the record.
In this regard, the record
establishes that Mr. Kellen became involved in the farming of
jojoba only in or about 1982, so his experience was limited, and
there is nothing to indicate that he was knowledgeable about
research and development of jojoba.
See Kellen v. Commissioner,
supra; see also Freytag v. Commissioner, 89 T.C. at 888.
The record also establishes that Mr. Kellen was the general
partner and tax matters partner of four other jojoba
partnerships, including Utah Jojoba.
See supra “B”.
Mr. Kellen
was also the close personal friend and business associate of Mr.
Pace, the president and a director of U.S. Agri, which
24
To the extent that the “chat” was focused on any
particular matter, it appears to have focused on the profit
projections in the offering memorandum. However, the offering
memorandum specifically warned that such projections had been
prepared for the general partner, had not been audited, and
should not be relied on. See supra “H”. In addition, we have
previously found that Mr. Kellen’s “analysis” of San Nicholas was
not based on anything other than the projections set forth in the
offering memorandum. Kellen v. Commissioner, T.C. Memo. 2002-19;
see Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
- 29 corporation was the R&D contractor and licensee of San Nicholas
and other jojoba partnerships.
Indeed, at one time, Mr. Kellen
was also a director of U.S. Agri.
Accordingly, any advice that
Mr. Kellen may have given was essentially that of an insider or
promoter, which advice is inherently suspect.
E.g., Addington v.
Commissioner, 205 F.3d at 59; Pasternak v. Commissioner, 990 F.2d
at 903.
Petitioner also contends that he reasonably relied on advice
from Mr. Pace, the individual who furnished him with the offering
memorandum and promotional videotape.
At the time of trial, Mr.
Pace was deceased; accordingly, we do not know first hand what
knowledge he may have had or what advice he may have given.25
The record does establish that Mr. Pace was the president of U.S.
Agri and a member of its board of directors.
Petitioner, who was
Mr. Pace’s friend and business associate, was aware that Mr. Pace
was an interested party and that Mr. Pace had a conflict of
interest.
Reliance on promotional materials furnished by the promoter
of the partnership or by an interested party does not constitute
due care.
See, e.g., Addington v. Commissioner, 205 F.3d at 59
(“It is unreasonable for taxpayers to rely on the advice of
someone who they should know has a conflict of interest.”).
25
In Utah Jojoba I Research v. Commissioner, T.C. Memo.
1998-6, the Court found that before 1983, Mr. Pace had only
limited knowledge of, and minimal background in, jojoba.
- 30 Thus, whatever advice petitioner may have received from Mr. Pace
fails as a defense to negligence because of Mr. Pace’s lack of
competence to give such advice and the clear presence of a
conflict of interest.
See Goldman v. Commissioner, 39 F.3d at
408; LaVerne v. Commissioner, 94 T.C. 637, 652-653 (1990), affd.
without published opinion 956 F.2d 274 (9th Cir. 1992); Rybak v.
Commissioner, 91 T.C. 524, 565 (1988); Barlow v. Commissioner,
T.C. Memo. 2000-339; see also Weitzman v. Commissioner, T.C.
Memo. 2001-215, wherein we stated that “The fact that * * * [the
putative adviser] introduced the partnership investment to
petitioner should have put petitioner on guard that * * * [the
putative adviser] was engaged in selling rather than acting as an
independent adviser.”
Petitioner also contends that he reasonably relied on advice
from Mr. Jacobs.
At the time of trial, Mr. Jacobs was deceased;
accordingly, we do not know first hand what knowledge he may have
had or what advice he may have given.
The record does establish
that Mr. Jacobs only became interested in the farming of jojoba
in 1982, so his experience was limited, and he did not have any
experience or expertise in the research or development of jojoba.
See Freytag v. Commissioner, 89 T.C. at 888.
The record also
establishes that Mr. Jacobs was involved in the sale of limited
partnership interests in a number of jojoba partnerships.
Accordingly, any advice that he may have given can be analogized
- 31 to that of insider or promoter, which advice is inherently
suspect.
E.g., Addington v. Commissioner, 203 F.3d at 59;
Pasternak v. Commissioner, 99 F.2d at 903.
In Glassley v. Commissioner, T.C. Memo. 1996-206, we found
that the taxpayers:
acted on their fascination with the idea of
participating in a jojoba farming venture and their
satisfaction with tax benefits of expensing their
investments, which were clear to them from the
promoter’s presentation. They passed the offering
circular by their accountants for a “glance” * * *.
The record in the present case suggests that whatever advice may
have been given by Mr. Jacobs was nothing more than a generalized
affirmation to invest in jojoba.
Indeed, at trial, petitioner
testified that Mr. Jacobs “thought * * * the investment was very
good”.
Petitioner also contends that he reasonably relied on advice
from a professor at the University of California at Riverside, a
Dr. Yermanos, an individual whom petitioner regards as an expert
in jojoba.26
Yet petitioner admits that he met this individual
only once and that he showed him no documentation whatsoever.
Indeed, there is nothing in the record to suggest that petitioner
ever discussed the details of San Nicholas with Dr. Yermanos or
that Dr. Yermanos even knew about the existence of the
26
We note that this individual did not testify at trial, so
we know essentially nothing about him. We also note that no
mention is made of a “Dr. Yermanos” in Utah Jojoba I Research v.
Commissioner, T.C. Memo. 1998-6.
- 32 partnership.
Equally significant, the record suggests that
petitioner’s conversation with Dr. Yermanos was, at best,
incidental to other business that petitioner had in the area, as
the following colloquy between petitioner and respondent’s
counsel demonstrates:
Q: This Dr. Yermanos, where was he-–where was he
located?
A: He was with the University of California at
Riverside in the Ag–-I don’t know how familiar you are
with Riverside, but they have a complete research–-oh,
there originally was probably 300 acres in there that
they–-you know, they–-oh, what do I want to say, they
experiment. Well, they put like greenhouses over a
citrus tree and then give it a disease and see what it
does. So, it’s a research area that the University of
California uses and it’s an ag research.
Q:
And you said you spoke with him once?
A:
That’s correct, yeah.
Q:
What did you show him, anything?
A: No. He–-basically, I had a friend of mine who
did these greenhouses. The Luminex Corporation built
these greenhouses, and I was out there seeing him, and
he was out there by where the plants were and stuff,
and so I talked to him, you know, asked him about–-you
know, questions about it.
Q: Okay. And so you didn’t have an appointment
to meet him or anything.
A:
No.
No, I did not.
In short, there is simply nothing in the record to indicate
that this individual at the University of California provided any
advice to petitioner that would absolve him from liability for
the additions to tax for negligence.
- 33 Finally, petitioner relies heavily on Krause v.
Commissioner, 99 T.C. 132 (1992), affd. sub nom. Hildebrand v.
Commissioner, 28 F.3d 1024 (10th Cir. 1994).
That case, however,
is distinguishable on its facts.
In Krause v. Commissioner, supra, we held for the taxpayers
on the issue of negligence.
We did so in the context of oil
recovery technology based on special or unusual circumstances
related to the energy and oil crisis of the late 1970s and early
1980s:
In evaluating the imposition of the additions to tax
in this case, and in light of the above facts
(encouraging investments in and the development of
tertiary oil recovery methods such as * * * [enhanced
oil recovery] technology), we are somewhat
understanding of the individual investments that were
made in * * * Partnerships. In the context of the
hysteria relating to the energy crisis, the oil price
increases of the late 1970s, the industry and the
governmental interest in * * * [enhanced oil recovery]
technology, the heavy and sophisticated promotion of
these investments * * * we conclude that petitioners
are not liable for the additions to tax and the
additional interest element for negligence under
sections 6653(a), 6653(a)(1) and (2). [Id. at 178.]
None of the circumstances that were determinative in Krause
v. Commissioner, supra, are present in the case at bar.
Petitioner’s reliance on the cited case is misplaced.
In view of the foregoing, we hold that petitioner is liable
for the additions to tax under section 6653(a)(1) and (2) for
negligence.
Respondent’s determination is sustained.
- 34 II.
Section 6661(a) Substantial Understatement of Tax Liability
The second issue for decision is whether petitioner is
liable for an addition to tax under section 6661(a).
That
section, as amended by the Omnibus Budget Reconciliation Act of
1986, Pub. L. 99-509, sec. 8002, 100 Stat. 1951, provides for an
addition to tax of 25 percent of the amount of any underpayment
attributable to a substantial understatement of income tax.
Petitioner bears the burden of proving that he is not liable for
the addition to tax.
Monahan v. Commissioner, 109 T.C. 235, 257
(1997); Mueller v. Commissioner, T.C. Memo. 2001-178.27
A substantial understatement of income tax exists if the
amount of the understatement exceeds the greater of 10 percent of
the tax required to be shown on the return, or $5,000.
6661(b)(1)(A).
Sec.
Generally, the amount of an understatement is
reduced by the portion of the understatement that the taxpayer
shows is attributable to either (1) the tax treatment of any item
for which there was substantial authority or (2) the tax
treatment of any item with respect to which the relevant facts
were adequately disclosed on the return.
See sec. 6661(b)(2)(B).
Substantial authority exists when “the weight of the
authorities supporting the treatment is substantial in relation
to the weight of authorities supporting contrary positions.”
Sec. 1.6661-3(b)(1), Income Tax Regs.
27
See supra note 19.
Adequate disclosure of the
- 35 tax treatment of a particular item may be made either in a
statement attached to the return or on the return itself.
Sec.
1.6661-4(b) and (c), Income Tax Regs.
If an understatement is attributable to a tax shelter item,
then different standards apply.
First, in addition to showing
the existence of substantial authority, a taxpayer must show that
he or she reasonably believed that the tax treatment claimed was
more likely than not the proper treatment.
6661(b)(2)(C)(i)(II).
Sec.
Second, disclosure, whether or not
adequate, will not reduce the amount of the understatement.
Sec.
6661(b)(2)(C)(i)(I).
Petitioner appears to concede that there was a substantial
understatement of tax within the meaning of section 6661(a).28
Petitioner does not contend, however, that there was substantial
authority supporting the deduction of the partnership loss that
he claimed on his return, nor does petitioner contend that there
was adequate disclosure of the facts related to that loss.
Rather, petitioner contends that he should be absolved of
liability for the addition to tax by virtue of section 6661(c).
28
We note that the understatement of tax on which
respondent determined the addition to tax is $5,435. The amount
required to be shown as tax on petitioner’s return is $51,478.
The understatement is therefore “substantial” because it exceeds
the greater of 10 percent of the amount required to be shown on
the return, or $5,000. Sec. 6661(a).
- 36 Section 6661(c) vests the Commissioner with discretion to
waive the addition to tax under section 6661(a) if the taxpayer
shows that he or she acted with reasonable cause and in good
faith.
The Commissioner’s failure to waive the addition to tax
is reviewed by this Court for abuse of discretion.
Martin Ice
Cream Co. v. Commissioner, 110 T.C. 189, 235 (1998).
There is nothing in the record to suggest that petitioner
ever requested that respondent waive the addition to tax under
section 6661(a).
Indeed, petitioner does not even allege that he
requested such a waiver.
For that reason alone, we cannot find
that respondent abused his discretion in failing to waive the
addition to tax.
See McCoy Enters., Inc. v. Commissioner, 58
F.3d 557, 563-564 (10th Cir. 1995), affg. T.C. Memo. 1992-693;
Finazzo v. Commissioner, T.C. Memo. 2002-56; Klieger v.
Commissioner, T.C. Memo. 1992-734; sec. 1.6661-6, Income Tax
Regs.
Even if petitioner had requested a waiver under section
6661(c), the record demonstrates that he failed to act reasonably
and in good faith in deducting the claimed loss from San
Nicholas.
Petitioner’s failure to adequately investigate San
Nicholas or to seek independent, competent advice about the
partnership demonstrates a lack of reasonable cause and good
faith.
See Finazzo v. Commissioner, supra; DePlano v.
Commissioner, T.C. Memo. 1998-303.
- 37 In view of the foregoing, we hold that petitioner is liable
for the addition to tax under section 6661(a) for substantial
understatement of tax liability.
Respondent’s determination is
sustained.
III.
Conclusion
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect our disposition of the disputed issues, as well
as the parties’ concessions, see supra note 2,
Decision will be entered for
petitioner in docket No. 6294-00S.
Decision will be entered for
respondent in docket No. 6302-00S
as to the additions to tax under
sections 6653(a)(1) and 6661 as
determined in the notice of deficiency
and as to the addition to tax under
section 6653(a)(2) as claimed in
respondent's answer.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.