McPike v. Commissioner
This text of 1996 T.C. Memo. 46 (McPike v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
*53 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS of FACT and OPINION
DAWSON,
OPINION OF THE SPECIAL TRIAL JUDGE
NAMEROFF,
| Additions to Tax and Increased Interest | ||||||
| Sec. | Sec. | Sec. | Sec. | Sec. | ||
| Year | Deficiency | 6653(a)(1) | 6653(a)(2) | 6651(a)(1) | 6661(a) | 6621(c) |
| 1980 | $ 8,689 | 1 $ 434.45 | -- | -- | -- | 2 |
| 1981 | 11,311 | 565.55 | 3 | -- | -- | |
| 1983 | 9,258 | 462.90 | -- | $ 2,314.50 | ||
| 1984 | 14,139 | 960.80 | $ 3,534.75 | 3,534.75 | ||
*54 Initially, in the notice of deficiency, respondent determined adjustments to petitioners' income by disallowing their claims to losses with respect to the Winthrop Trust and their claims to distributive shares of partnership losses of the Kathmar Company in which petitioners are the two general partners, each having a 50-percent interest. In a Stipulation of Settlement filed with the Court on January 9, 1995, the parties settled all issues pertaining to the Winthrop Trust. Specifically, the parties agreed that petitioners are allowed ordinary losses of $ 8,506 for 1983 and $ 6,441 for 1984 attributable to the Winthrop Trust. With respect to the additions to tax and increased interest the parties agreed as follows:
* * * * 4. No amount of the deficiencies in income taxes resulting from disallowed deductions and credits attributable to Winthrop Trust due from petitioners for the 1983 and 1984 taxable years are attributable to tax-motivated transactions for the purpose of computing the addition to tax payable pursuant to 5. The addition to tax for negligence pursuant to 6. The addition to tax for delinquency pursuant to
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*53 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS of FACT and OPINION
DAWSON,
OPINION OF THE SPECIAL TRIAL JUDGE
NAMEROFF,
| Additions to Tax and Increased Interest | ||||||
| Sec. | Sec. | Sec. | Sec. | Sec. | ||
| Year | Deficiency | 6653(a)(1) | 6653(a)(2) | 6651(a)(1) | 6661(a) | 6621(c) |
| 1980 | $ 8,689 | 1 $ 434.45 | -- | -- | -- | 2 |
| 1981 | 11,311 | 565.55 | 3 | -- | -- | |
| 1983 | 9,258 | 462.90 | -- | $ 2,314.50 | ||
| 1984 | 14,139 | 960.80 | $ 3,534.75 | 3,534.75 | ||
*54 Initially, in the notice of deficiency, respondent determined adjustments to petitioners' income by disallowing their claims to losses with respect to the Winthrop Trust and their claims to distributive shares of partnership losses of the Kathmar Company in which petitioners are the two general partners, each having a 50-percent interest. In a Stipulation of Settlement filed with the Court on January 9, 1995, the parties settled all issues pertaining to the Winthrop Trust. Specifically, the parties agreed that petitioners are allowed ordinary losses of $ 8,506 for 1983 and $ 6,441 for 1984 attributable to the Winthrop Trust. With respect to the additions to tax and increased interest the parties agreed as follows:
* * * * 4. No amount of the deficiencies in income taxes resulting from disallowed deductions and credits attributable to Winthrop Trust due from petitioners for the 1983 and 1984 taxable years are attributable to tax-motivated transactions for the purpose of computing the addition to tax payable pursuant to 5. The addition to tax for negligence pursuant to 6. The addition to tax for delinquency pursuant to 7. The addition to tax for substantial understatement of income tax pursuant to
In the Stipulation of Facts filed with the Court on February 3, 1995, petitioners conceded that all losses, expenses, and investment tax credits derived from the Kathmar Company as partners thereof on their Federal income tax returns for 1983 and 1984 are not allowable. Thus, the issues remaining for decision, pertaining
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. Petitioners resided in San Bernardino, California, when their petition was filed in this case.
Marvin McPike (petitioner) is a retired fire fighter. He was employed for 28 years as a fireman in San Bernardino*57 and 4 years in Colton. He has a high school education. Since graduating from high school, petitioner received no further formal education, except for a few courses in fire science. Petitioner has no previous investment experience other than investing in his personal residence.
Kathryn McPike (Mrs. McPike) completed the ninth grade in school. During the years before the Court she was employed as office manager and general clerk for the United Food and Commercial Workers Union. Her responsibilities included typing, filing, answering telephones, and general office work. She is now retired. Mrs. McPike has no previous investment experience other than her personal residence.
Prior to 1982, petitioners either prepared their own tax returns or hired someone to prepare them. They did not have a regular return preparer. In 1982, petitioners saw an advertisement in a local newspaper for tax return preparation by Daniel Lukensow (Lukensow). According to the advertisement, Lukensow's background consisted of 7 years as an internal revenue agent and 8 years of private practice in the areas of tax law, tax return preparation, and tax audits. Petitioners contacted Lukensow, made an appointment, *58 and hired him to be their tax return preparer. They never investigated Lukensow's background.
Lukensow advised petitioners that they could save a considerable amount of money through investment in tax shelters. He promoted and sold two different tax shelters, one involving a computer rental program and the other involving a marine dry cargo container program. Petitioner discussed these programs with Lukensow, but Mrs. McPike was not involved. She relied on petitioner to make the decisions regarding investments. Petitioner believed that the proposed investments would reduce their Federal income tax liability, allow them to provide better financial assistance to their blind son, and generate a pension after their retirement.
In 1983, petitioners invested in the container leasing program promoted by Lukensow and offered by GD&L. Lukensow provided petitioner with promotional materials for the container leasing program. These materials included a question and answer memorandum regarding the program, a favorable letter from an attorney, and a prospectus of the container leasing program. Petitioner reviewed and relied on these documents. Although petitioner did not completely understand*59 the documents, his basic understanding of these materials was that an investment in the program would substantially reduce his Federal income tax liability.
Petitioner relied on the following passages from the question and answer memorandum: Q. Aren't container leasing tax shelters an industry-wide scam? A. Yes, we too have heard of such schemes. The only answer to that is that we have been and are now honorable and legitimate and plan to be around for a long time. It is not the form of the investment that is important - it is the expertise that goes into making it successful. All scams will mimic legitimate projects and are actually trading on the good name of the ones that have achieved success. * * * A. * * * Our chief counsel, Alex Laurins, is an attorney, formerly with the IRS and with years of experience in the tax field. Our staff of attorneys has reviewed this program at every step and is now exercising the same meticulous preparatory work on our forthcoming mining tax shelter. * * *Q. How do we know that your firm can, and will, do what you say?
In addition to this excerpt, petitioner relied on the favorable letter from an attorney, Alois E. Lemke. This*60 letter stated that investors in the container leasing program would be able to qualify for tax credits and depreciation write-offs. Petitioners did not contact another attorney, accountant, or any other individual to verify this information.
Lukensow set up a partnership called Kathmar Company in which petitioners each held a 50-percent interest. Through Kathmar, petitioners invested in GD&L's container leasing program. Petitioners did not understand the nature or purpose of the partnership, and Lukensow did not explain its function or operation due to its alleged complexity.
On August 16, 1983, petitioners purchased 20 units 3 of containers for $ 200,000. 4 The terms of the purchase required a downpayment of $ 9,900, and GD&L purportedly arranged the financing for the remaining $ 190,100, for which petitioner signed promissory notes. As part of the agreement, petitioners agreed to appoint GD&L as their non-exclusive agent for the purposes of leasing the containers. GD&L agreed to act as the leasing agent for petitioners for 35 months and to use its best efforts to lease the containers. Pursuant to this agreement, GD&L was to receive an annual lease management fee of $ 1 plus *61 15 percent of the revenues generated by leasing petitioners' containers. Petitioner does not recall making any payments on the promissory notes nor for any management fees.
Petitioners received income and expense statements related to their container leasing investment. Because petitioners did not understand the documents, they took them to Lukensow for use in the preparation of their tax returns.
On the Schedule E attached to their 1983 Federal income tax return, petitioners reported ordinary losses of $ 33,758*62 from Kathmar. On Form 3468 petitioners computed an ITC in the amount of $ 20,000. Petitioners carried this $ 20,000 credit back to taxable years 1980 and 1981 for refunds in the amounts of $ 8,698 and $ 11,311, respectively.
Based on Lukensow's advice, petitioners filed Form 4868, Application for Automatic Extension of Time, on April 12, 1985, for an automatic extension until August 15, 1985, to file their 1984 Federal income tax return. Petitioners gave Lukensow all their tax papers, and he prepared the Form 4868. On that form, petitioners estimated their 1984 Federal income tax liability to be $ 5,077, of which $ 4,551 had been withheld by Mrs. McPike's employer and a life insurance company. Petitioners filed Form 4868 and enclosed a check in the amount of $ 526. Thereafter, they sent by certified mail their 1984 Federal income tax return to the Internal Revenue Service Center in Fresno, California. The envelope containing petitioners' 1984 tax return was postmarked August 13, 1985. The tax return was stamped "received" by the Internal Revenue Service on August 19, 1985.
On the Schedule E attached to their 1984 Federal income tax return, petitioners reported ordinary losses of*63 $ 23,484 related to the container leasing investment. In the notice of deficiency respondent disallowed all losses claimed by petitioners regarding Kathmar for 1983 and 1984, as well as all claimed ITC.
Petitioners are currently part of a pending class action lawsuit against the promoters of GD&L. The primary claim of the lawsuit is that the promotion was fraudulent and a sham.
OPINION
Petitioners contend that they reasonably relied on Lukensow and the promotional materials when they invested in and claimed deductions and credits attributable to the GD&L container leasing program. Therefore, they assert that they are not liable for the additions to tax and increased interest related thereto. To the contrary, respondent contends that petitioners are liable for the additions to tax pursuant to
In order to prevail on the negligence issue, petitioners must prove that their actions in connection with the GD&L container investment were reasonable in light of their experience and the nature of the investment. See
Based on this record, we conclude that petitioners' reliance on the alleged expertise of Lukensow and the promotional materials was not reasonable or prudent.
It is clear that petitioners were sheltering income improperly with large deductions and small cash investments. For example, in 1983 they used GD&L losses of $ 33,758 to offset gross income of $ 53,422, and in 1984 they used GD&L losses of $ 23,484 to offset gross income of $ 75,664. The substantial losses that GD&L generated for 2 consecutive years should have concerned even unsophisticated*67 investors. Although petitioners may not have fully understood their GD&L investment and may not have known all the "gremlins" that were present in the investment, it would seem that they should have inquired. See
We have considered
We cannot reach similar conclusions in the instant case. Although petitioners have educational backgrounds similar to the taxpayers in
Accordingly, we sustain respondent's determination with respect to the additions to tax for negligence insofar as it pertains to the GD&L container*69 leasing investment. 7
Generally, individuals who compute their taxes on a calendar year basis must file their Federal income tax return by the 15th day of April following the close of the taxable year. Sec. 6072(a). Nevertheless, individual taxpayers*70 may obtain an automatic 4-month extension of time to file their return. must show the full amount
Respondent concedes that petitioners' 1984 Federal income tax return was timely postmarked and therefore timely filed if the extension request was valid. Sec. 7502(a). However, it is respondent's position that because petitioners failed to properly estimate their tax liability, their extension request was invalid, and *71 the extension received was void ab initio. The Commissioner may properly void automatic extensions of filing deadlines previously obtained where the taxpayer's Form 4868 is invalid because of a failure to estimate properly tax liability.
A taxpayer is treated as having "properly estimated" his tax liability, within the meaning of
Petitioners argue that the Form 4868 was prepared by Lukensow and that they paid the amount of tax they believed to be due for 1984. It is the taxpayer's obligation to supply his accountant with complete and accurate records from which to make a reasonable estimate of tax liability.
In the previous section of this opinion, we held that petitioners were negligent in claiming deductions and investment tax credits arising out of the GD&L container leasing program and that they did not reasonably rely upon the advice of a competent adviser. It follows that petitioners did not make a bona fide and reasonable estimate of their tax liabilities by relying on that same adviser, who utilized the GD&L deductions and credits in estimating their 1984 Federal tax liability for purposes of obtaining a filing extension. Thus, we conclude*73 that petitioners did not properly estimate their 1984 tax liability, the extension request was not valid, and the 1984 return was not timely filed. Therefore, we hold that petitioners are liable for the 1984 addition to tax for delinquency under
As previously discussed, petitioners' efforts to assess their proper income tax liability consisted of their reliance upon the promotional materials and their discussions with Lukensow. It is clear that they did not make the kind of factual or legal analysis of the GD&L container leasing program that would enable them to formulate any reasonable belief one way or another as to whether the tax treatment they gave to their claimed deductions and ITC was more likely than not the proper treatment. Having concluded that petitioners' reliance on Lukensow and the promotional materials was neither reasonable nor in good faith, it follows that no reduction of the understatement is available and that respondent did not abuse her discretion in declining to waive the addition to tax under
This Court has previously held that the container leasing program promoted by GD&L lacked economic substance and was a factual sham. See
We have considered all arguments made by the petitioners and, to the extent not addressed herein, have found them to be without merit.
In order to reflect our disposition of the disputed issues, as well as the parties' concessions and stipulations,
Footnotes
1. All section references are to the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩
1. The Code section for 1980 is 6653(a).↩
2. Interest on the entire deficiency to be computed at 120 percent of the standard underpayment rate.↩
3. 50 percent of the interest due on the deficiency.↩
2. A detailed discussion of the container industry and program, including GD&L, can be found in
Weiler v. Commissioner , T.C. Memo. 1990-562↩3. According to the Container Purchase and Lease Agreement, each unit represented one 40-foot container "valued at" $ 4,000 and three 20-foot containers "valued at" $ 2,000.↩
4. Most of the documentation contained in the stipulation of facts reflects only the purchase of 10 units, while the 1983 tax return reflects a total cost of $ 200,000. Moreover, the amount of the investment tax credit (ITC) claimed therein, carried back to 1980 and 1981, and at issue herein, is based upon a $ 200,000 alleged cost.↩
5. Prior to the filing of their 1983 return, petitioners had undergone an audit of their 1980 and 1981 income tax returns in connection with an investment in the Universal Life Church and had been assessed substantial deficiencies, interest, and additions to tax in connection therewith.↩
6. There is ample evidence to suggest that petitioners invested in the container leasing program primarily to reduce their Federal tax liability. Petitioner's testimony emphasized his desire to reduce their income tax liability through investments. In addition, his review of the promotional materials focused on the tax benefits which could be obtained by investing in the container program. Although Mrs. McPike suggested that petitioners had a profit motive, we think that petitioners invested in the container program for its tax benefits, and any profit motive was incidental.↩
7. We emphasize again that, in our judgment, respondent has conceded there is no negligence with respect to the claimed losses of the Winthrop Trust, and this should be reflected in the Rule 155 computations.↩
8. This addition to tax applies to the
entire↩ deficiency for 1984, Indeed petitioners have conceded that it applies to the portion of the deficiency in income taxes resulting from the disallowance of deductions and credits attributable to the Winthrop Trust.
Related
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1996 T.C. Memo. 46, 71 T.C.M. 1988, 1996 Tax Ct. Memo LEXIS 53, Counsel Stack Legal Research, https://law.counselstack.com/opinion/mcpike-v-commissioner-tax-1996.