TAX COURT OPINION

Case: Charles D. Helbig
Docket Number: 8011-06
Judge: Wherry
Opinion Type: memo
Filed: 10/29/2008
Pages: 18

CHARLES D . HELBIG, ' Petitioner v . COMMISSIONEi OF INTERNAL REVENUE , Responden t R determined that P is liable for additions to tax pursuant to sec . 653 ( a)(l) and ( 2), I .R .C ., for his 1983, . 1984 , and 1985 to years and pursuant to sec . 6661(a), I .R .C ., for his 183 tax year . Held : P is fable for the additions to tax . Robert L . Goldstein and Amanda F . Vassigh , for petitioner . MEMORANDUM FINDINGS OF FACT'AND OPINIO N WHERRY, Judge : This case is before the Court on a petitio n SERVED OCT 2 9 2008 i 9 - 2 - in which respondent determined that petitioner is liable for the following additions to tax : Year Sec . 6653(a)(1) Sec . 6653(a)(2) Sec . 6661(a ) Additions to Tax 1983 $511 .75 1984 7 .00 1985 40 .30 1 1 $2,558 .7 5 150 percent of the interest due on deficiencies of $10,235, $140, and $806 for the 1983, 1984, and 1985 tax years, respectively . Unless otherwise indicated, section references are to th e Internal Revenue Code, as amended and in effect for the tax years at issue . Rule references are to the Court's Rules of Practic e and Procedure . The issue for decision is whether petitioner i s liable for each of the additions to tax determined by respondent . FINDINGS OF FACT Some of the facts have been stipulated, and the stipulated facts and accompanying exhibits are hereby incorporated b y reference into our findings . At the time he filed his petition , petitioner resided in California . Petitioner earned a bachelor of science degree in business administration from the University of San Francisco in 1942 . Thereafter, he served in the Army until 1946 and then worked for Cosgrove & Company, an insurance broker . Around that time, h e f .1 began investing in the stock market and in real estate . Some of those investments were very profitable . During the tax years at 3 - issue, petitioner was employed by H .S . Crocker Co .,-a.,printing company . He worked i~ their advertising department . -In 1983 Charles 1. Toepfer (Mr . Toepfer), a 'financial planner, advised petitioner to invest in a limited partnership called Contra Costa Jgjoba Research Partners (CCJRP) . Mr . Toepfer was an active promoter of CCJRP and also served as it s general partner . Before his invest ment in CCJRP, petitioner and his adviser s (petitioner ' s friend who was a lawyer , petitioner ' s accountant, and petitioner 's broke) apparently'reviewed or had available to review a one - and-a-ha1~ page "PRIVATE PLACEMENT " letter from Proadvisor Financial & Insurance Services . That ' letter and related documents apprised their readers that an investment i n CCJRP was available only to investors "who anticipate that for the current taxable year they will have gross income equal to $65,000 or taxable income, a portion of which will be subject t o Federal Income tax at 4 marginal rate of 50% ." In a section o f the letter entitled "INVESTMENT OBJECTIVES", the letter indicate d "Tax benefit for 1983 - ,approximately 2320" . In its "HIGHLIGHT S OF INVESTMENT" section, the letter proclaimed that an investment in CCJRP would mean "significant first year tax deductions o f approximately 2320 wit h subsequent year tax deductions . Petitioner and his wife Josefina, who is now deceased , acquired 10 units in CCd7RP for $27, 5 00, or $2,750 per unit . They 4 - paid $11,000 upon closing and signed a promissory note for the remaining $16,500 . 1 In 1983, ,1984, and 1985, CCJRP filed with the Internal Revenue Service and provided to petitioner Schedules K-l, Partner's Share of Income, Credits, Deductions, etc .,,,in which CCJRP allocated to petitioner ordinary losses of $25,000, $490, and $2,582, respectively . Petitioner and his wife claimed on their 1983, 1984, and 1985 joint Forms 1040', U .S . Individual Income Tax Return, ordinary losses relating to their interest in CCJRP of $25,000, $490, and-$2,582, respectively, as deductions in computing their total income . Those tax returns were prepared by Edward R . Sheppie (Mr . Sheppie), a professional tax preparer who petitioner asserts was also a certified public accountant (C .P .A .) . On May 30, 1989, respondent sent petitioner a notice of final partnership administrative adjustment (FPAA) issued to CCJRP for the 1983 tax year .2 On July 13, 1989, a petition i n 'They appear to have paid off the remaining discounted balance of that note--$9,075--on or about Apr . 19, 1990 . By 1990, CCJRP was no longer communicating with its investors and petitioner became concerned that the investment was in serious trouble . He wrote to other investors and to CCJRP's general partner but apparently failed to investigate fully the Federal tax issues that had arisen regarding the investment . ., 2This development together with the payments due on the note spurred petitioner to considerable correspondence with .CCJRP, other investors, and the promoters and general partner . That correspondence, particularly a May 24, 1990, letter reflects tha t . .) (continued . 5 - the name of CCJRP ; Ch rles B .-Toepfer, Tax Matters Partner, was filed with the Court .~t docket No . 17323-89 . On January 28 , 1994, the parties filed a stipulation to be bound by the result in Utah Jojoba I Research v . Commissioner (Utah-Jojoba I), a cas docketed at No . 7 .619-90 . The Court issued an opinion in Utah Jojoba -I on January 5, 1998, in which it held that the partnership at issue was not entitled to deduct its losses for research and- development expenditures . See Utah Jojoba I Research v . Commissioner ,°T .C . I Memo . 1998 -6 . On Apri 1 11, 2005, the Court entered a decisio n against CCJRP upholdin ;g as correct the partnership =item" adjustments as determined and set forth in the FPAA',for CCJRP' s 1983, 1984, and 1985 tax years . That decision was not appealed . On March 13, 200 6 respondent issued the aforementione d notices of deficiency . Petitioner then filed a timely petitio n with this Court . A trial was held on May 21, 2007, in Sa n Francisco, California . I . Respondent's Requests for Admission s OPINION On February 26, 2 0 07, respondent served on petitioner' s counsel, Robert L . Gold stein, requests for admissions . Respondent filed that document with the Court on the followin g 2 ( . . . continued ) petitioner had tentativ ~ly reached the conclusion that a profit from his investment in CCJRP was very unlikely . - 6 - day, February 27, 2007 . Respondent at page 6 . requested the following admission and others like it : "21 .. Petitioner did no t exercise due care when he claimed losses stemming from,hi s involvement . with CONTRA COSTA JOJOBA-RESEARCH PARTNERS on his 1983-1985 federal income tax returns . " For unknown reasons, neither petitioner nor his attorney ever 'responded to the requests . Therefore, pursuant to Rule 90(c), each matter set forth in the requests was automatically deemed admitted 30 days after the date of service of the requests .3 See Morrison v . Commissioner , 81 T .C . 644, : 647 (1983) . The effect of petitioner's admissions is that the matters admitted are "conclusively established unless the Court on motion permits withdrawal or modification of the [admissions] .",. Rule 90 (f) . Petitioner has not filed a motion under Rule 90(f) seeking withdrawal or modification of the admissions . In any, event, even if he requested this relief and we granted his request, the outcome of this case would be the same . In other words, th e 3Effective Mar . 1, 2008, Rule 90(b) was amended to provide that a request for admissions "shall advise the party to whom the request is directed of the consequences of failing to respond as provided by paragraph (c) ." The explanation for the amendment states that "Current Rule 90(b) can be a trap for the unwary . Taxpayers, especially pro se taxpayers, are more likely to respond to requests for admissions if they know the severe consequences of failure to respond ." The amended version of Rule 90(b) does not apply to respondent's request for admissions, which was filed more than a year before the amendment took effect . .outcome of this case Aleed not and does not . rest upon the deeme d admissions . As explained below, the evidence in this case compels the same result . II . Additions to Tax Under Section 6653(a)(1) and (2) ' Section 6653 (a) (11) . and (2) imposes additions to tax if an y part of any underpayment of tax is due to negligence or disregard of rules and regulations .4 For the purposes of this statute, negligence is defined as a "'lack of due care or failure to do what a reasonable and rdinarily prudent person would do under the circumstances .' Leely v . Commissioner , 85 T .C .. 934, .947 (1985) (quoting Marcello v . Commissioner , 380 F .2d 499, 506 (5th Cir . 1967), affg_ . in part and remanding in part 43 T .C . 16 8 i (1964) and T .C . Memo . 964-299) . The Court of Appeals for the Ninth Circuit, to which a n appeal would ordinarily lie-in this case , has held that a determination as to negligence for purposes of sections 6653~(a) and 6661(a) in a case involving a deduction for loss that result s from an investment "depends upon both the legitimacy of th e underlying investment, and due care in the claiming of th e 4Those additions tb tax are for : (1) An amount equal .to 5 percent of the underpayment and (2) an amount equal to 50 percent of the interest payable under sec . 6601 with respect to the portion of the underpayment which is attributable to negligence . That interest on which the penalty is computed is the interest for the period beginning on the last date prescribed by law for payment of the underpayment (without consideration of any extension) and ending o the date of the assessment of the tax . .Sec . 6653 (a) (1) and (2) . - 8 - deduction ." Sacks v . Commissioner , 82 .F .3d 918, 920 (9th Cir . 1996) affg . T .,C . Memo . 1994-217 . .Petitioner contends that he was not negligent because, before investing in CCJRP, he sought the advice of severa l professionals including (1) Mr . Toepfer, (2) Mr . Sheppie, (3) petitioner's broker at Dean Witter, and (4) an attorney .' He argues that he invested in CCJRP intending primarily to make a profit, not for tax benefits . As for the reasonableness of claiming the deductions, he asserts reliance on Mr . Sheppie . Respondent challenges each of petitioner's reasonable-reliance arguments . Although reasonable reliance on professional advice may serve as a defense to the additions to tax for-negligence, see United States v . Boyle , 469 U .S . 241, 251 (1985), petitioner has not demonstrated that he acted with due care with respect to his investment . in ;CCJRP and subsequent deductions claimed in 1983, 1984, and 1985, for losses relating to that investment . Our determination as to negligence is a highly factual inquiry, and petitioner has failed to provide sufficient evidence+to persuade us otherwise . See Bass v . Commissioner , T .C . Memo . 2007-36 1 ("[T]he determination of negligence is highly factual .") . 'At trial, petitioner described the attorney, whose name was Rex,. as "A very good friend of mine" . CCJRP's underlying activity lacked legitimacy from it s inception, as, we decided in Utah Jojoba I . See Utah Jojoba I Research v . Commissioner , T .C . Memo . 1998-6 ("[W]e hold-that Uta , olved in a trade or business and als o spect of entering a trade: or business .") ; see also Welch v . Commissioner , T .C . Memo . 2002-39 . Because CCJRP and the jojoba partnership at issue in Utah Jojoba I are essentially identical, we need not rehash in detail the . license agreement and the R &D agreement entered into between CCJRP and U .S . Agri Research & Development Corp (the same entity with whom the partnership at issue in Utah Jojoba I entered into a license agreement and a research and development (R & D) agreement) . Suffice it to say that "the R .& D agreement was designed and entered into solely to provide a mechanism to disguise the . capital contributions of the limited partners as currently deductible expenditure8 and thus reduce the cost of their participation in the farming venture ." Utah Jojoba I Research v . . Commissioner ., supra . s we have observed in a number of other cases involving nearlylidentical jojoba partnerships : - First, the pkincipal flaw in the structure of Blythe II was evident from the face of the very documents include in the offering . A reading of th e R & D agreement a d licensing agreement, both of which were included as fart of the offering, plainly shows that the licensinj agreement canceled or rendered ineffective the R- j& D agreement because of the concurrent execution of the two documents . Thus, the partnership was n~ver engaged, either directly or indirectly, in the conduct of any research or - 10 - experimentation . Rather, the partnership was merely a passive investor seeking royalty returns pursuant to the licensing agreement . Any experienced attorney, capable of reading and understanding the subject documents should have understood the legal ramifications of the licensing agreement canceling out the R & D agreement . However, petitioners never i ;: consulted an attorney in connection with thi s l!investmenty, nor does-it appear that they carefully scrutinized the offering themselves . Christensen v . Commissioner , T .C . Memo . 2001-185 ; Serfustini v . Commissioner , T .C . Memo . 2001-183 ; Nilsen v . Commissioner , T .C . Memo ., 200.1-163 ; see also Finazzo v . Commissioner , T .Cy Memo . 2002-,56 ; Carmena v . Commissioner , T .C . Memo . 2001- .177 . , jAlthough petitioner sought some advice and conducted some of his own research before investing in CCJRP, this case resembles other jojoba partnership cases in which this Court has consistently sustained the imposition of an addition to tax under section 6653(a)(1) and (2) . See, e .g ., Christensen v . Commissioner , supra ; Serfustini v .. Commissioner , supra ; Nilsen v . Commissioner , supra . ;For .example, Christensen v . Commissioner , supra , involved taxpayers who had obtained the advice of their C .P .A . . before investing in a jojoba partnership . In sustaining the ; imposition of an addition to tax under section 6653(a)(1) and (2), the Court noted that the ; C .P .A . "did not provide petitioners with a written opinion about the investment ." Id . Moreover, the Court observed that the record lacked evidence demonstrating that the C .P .A . - 11 - "conducted any indepeident investigation to determine whether t h specific research an d on behalf of the part : ership would have qualified for deduction s under section"174 ." id . As was the case in Christensen , petitioner's C .P .A ., Mr . Sheppie, was' dece sed'and'could not- testify at trial . Petitioner's broker at Dean Witter and petitioner's friend wh o 1 was an attorney with ,ohom petitioner discussed investing in CCJR P did not testify eithe . Importantly, none of those individuals provided petitioner with a written opinion concerning his investment in CCJRP . s a result, the nature of their advice to petitioner is unclear . At trial, perhaps due to age and the more than two decades that had . passed since he events at issue had occurred , petitioner could prov i the advice offered by 4iIr . Sheppie, petitioner's broker at Dea n Witter, and petitioner s friend who was an attorney' .6 Further , petitioner testified that neither he nor his advisers ha d reviewed the prospectu R & D agreement, or, license agreemen t 6Petitioner testified that Mr : Sheppie told'him about sec . 174 and that Mr . Shepp e thought-that an investment in CCJRP was a good investment . Bearding the broker at Dean Witter, petitioner testified t1-at that individual "wasn't up on Jojoba" and "From his knowledge it was a -- it appeared to be a good investment ." Petitioner provided no information at . to the nature of his attorney/"friend's advice regarding CCJRP . He testified only that he had spoken to that individual "friend to friend" . - 12 - before he invested in CCJRP .7 To the extent that petitioner relied on the advice of Mr . Toepfer, a promoter with-an obvious personal interest in CCJRP, this reliance constitutes .a failure to exercise due care before investing in CCJRP . See Hansen v . Commissioner , 471 F .3d 1021, 1031 (9th Cir . 2006) ("We hav e previously held that a taxpayer cannot negate the negligence penalty through reliance on a transaction's promoters or on other advisors who have a conflict of interest ."), affg . T .C . Memo . 2004-269 . The one .-and-a-half page promotional private placement letter touting ;, the substantial tax benefits of investing in CCJRP--upon which petitioner and his advisers relied--should hav e served as an ample warning regarding the suspect nature of CCJRP . Indeed, in 1983 petitioner invested $11,000 in CCJRP(cid:127)and that same ; tax year claimed a $25,000 tax deduction--equal to roughl y 'In his reply brief, petitioner asserts that when he invested in CCJRP those documents had not yet been created . He appears to be correct in that regard--at least to some extent . Petitioner invested in CCJRP on Dec . 5, 1983, and the R & D and license agreements were not entered into until Dec . 30, 1983 . But that fact is inconsequential on the issue of petitioner's liability for the additions to tax now at issue . The private placement letter relied upon by petitioner and his advisers referred to a,"research and development contract" and an "option to license" . There is no evidence that petitioner or his advisers ever requested those documents . Moreover, the fact that the private placement letter invited its readers to "CONTACT THIS OFFICE FOR PROSPECTUS OR FURTHER INFORMATION" seemingly belies petitioner's contention that a prospectus did not exist . In any event, if there was no prospectus, as petitioner claims, then he entered into this investment and claimed its advertized tax benefits essentially sight unseen, which appears negligent . I - 13 - 227% of his initial investment--for losses relating to tha t investment .' The deduction of such a large loss in proportion t his initial investment claimed so close to when that investment was made should have wised a red flag to petitioner ' regarding the propriety of deductions relating to CCJRP . 9 In the end, petitioner's vague testimony . concerning th e advice that he purportedly received before he invested in CCJRP and claimed the subsequent deductions is insufficient to support his .reasonable -ableargument . See Sacks v . Commissioner ; 82 F .3d at 920 ("The [Sapkses] offered virtually no evidence,o f advice actually givenThat petitioner did not even request vital documents relat ng to CCJRP before making his investment and did not heed obvi us warning signs regarding CCJRP's suspect nature is particularly troubling . The fact that petitione r passed by his adviser a one-and-a-half page advertisement is , insufficient to shield him from the section 6653(a)(1) and (2 ) 'Although petitioner also signed a promissory note for $16,500, the evidence of record is unclear as to whether he paid that note in full . Pitit .ioner appears to have paid CCJRP .only $9,075 in April 1990 . 9The fact that Mrs . Sheppie prepared petitioner's 1983, 1984, and 1985 joint Federal income tax returns is insufficient to shield him from liability for the sec . 6653(a)(1) and (2) additions to tax . Aside from petitioner's vague testimony, they is no evidence in the record as to the specific nature of Mr . Sheppie's .advice . As far as we can tell, Mr . Sheppie merely transferred . the losses from the Schedules K-1 provided by CCJRP onto petitioner's returns . There is no evidence that establishe otherwise . - 14 - additions to tax . See Glassley v . Commissioner , T .C . Memo . 1996- 1 ii 206 (concluding that passing an "offering circular by thei r accountants for a 'glance'" was insufficient to establis h "consultation with an expert") . Petitioner's actionsi I were simpl y unreasonable under the . circumstances of this case, and he is therefore liable for the section 6653(a)(1) and (2) additions to tax . III . Addition to Tax Under Section 6661(a ) Section 6661(a) provides for an addition to tax of 25 percent of the amount of any underpayment attributable to a substantial understatement .'° There is a "substantiali' understatement" of an individual's income tax for any taxabl e year where the amount of . the understatement exceeds the greater of (1) 10 percent of the tax required to be shown on the return for the taxable year or (2) $5,000 . ..Sec . 6661(b)(1)(A) . However, the amount of the understatement is reduced to the extent attributable to an item (1) for which there is .~,or was substantial authority for the taxpayer's treatment thereof, or, (2) with respect to which the relevant facts were adequatel y 10TH 1983 sec . 6661(a) provided for a 10-percent addition to tax . : The amount of the sec . 6661(a) addition to tax was later increased to 25, percent for additions to tax assessed after Oct . 21, 1986 . Omnibus Budget Reconciliation Act of 1986, Pub . L . 99-509, sec . 8002, 100 Stat . 1951 . 15 disclosed on the taxpayer's return or an-attached statement . sec . 6661 (b) (2) (B) 1 1 Petitioner raises no distinct arguments with respect to the section 6661(a) addition to tax . He does not argue that he ha d substantial authorit y income tax return, and has not demonstrated that he adequately disclosed the facts r1levant to his investment in CCJRP on tha t tax return or-on an atached statement . Rev . Proc . 83-21, 1983-1 C .B . 680, applicable to tax return filed in 1983, lists Iinformation that is deemed sufficient disclosure with respect to certain items, none of which i s applicable . in this ca .Notwithstanding the inapplicability o f Rev . Proc . 83-21, sup r a, a taxpayer may make adequate disclosure if the taxpayer provides sufficient information on the return to enable the Commissioner to identify the potential controversy involved . See Schirmer v . Commissioner , 89 .T .C . 277, 285-286 (1987) . However, "Merely claiming-the loss, without further explanationas petitioner did in thi scase, was insufficient to alert respondent to thle controversial nature of the partnershi p "Where the understatement at issue is attributable to a tax shelter, adequate disclosure is inconsequential ; and, in addition to substantial authority, the taxpayer must demonstrate a reasonable belief that the tax treatment claimed was more likely than not proper . Sec . 6661(b) .(2)(C) . Because the result would be the same in this ca e whether or not,we label CCJRP a ta x shelter, we will analyze petitioner's entitlement to a reduction of the sec . 6661(a) addition to tax as though CCJRP were not a tax shelter . I 16 - loss claimed on: the tax return . See Robnett v . Commissioner , T .C . Memo . 2001-17 . In addition, petitioner did not attach any statement to his 1983 return . As a result, we sustain the imposition of a section 6661(a) addition to tax .. IV . Capital Los s Section 165(a) generally allows a deduction for losses sustained within' the taxable year . Section 165(c) limits losses that can be deducted by individual taxpayers, permitting deduction only for losses incurred in a trade or business, a profit-making activity (though, not connected with a trade or business), or from a casualty or theft . Petitioner bears the burden of proof, on this issue . -See Rule 142(a) ; INDOPCO, Inc . v . . Commissioner , 503 U .S . 79, 84 (1992) . A loss is,1deductible only for the taxable year in which it . is sustained . Sec . 1 .165-1(d)(1), Income Tax Regs . In order'to be "sus.tained", the loss must be "evidenced by closed' ;1and completed transactions and as fixed by identifiable events occurring in such taxable year ." Id . "I .R .C .,§ 165 losses have been referred to as abandonment losses to reflect that some act is required which evidences an intent to discard or discontinue use permanently ." Gulf Oil Corp . v . Commissioner , 914 F .2d 396, 402 (3d Cir . 1990), affg . 86 T .C . 115 (1986), 87 T .C ."135 (1986), and 89 T .C . 1010 (1987), affg . in part and revg .'in part 86 T .C . 937 (1986) . 4 - 17 - On brief, citing section 165 ( a), petitioner argues that he is entitled to deduct an ."$11,000 capital loss on his 1983 ta x return" as a result o hisinvestment-in .CCJRP . In support of that argument he assets "that the moment he paid his money over to CCJRP, the investment was lost ." In his reply brief, he argues--without providing any support--that if the Court does no t allow-the capital los s deduction in 1983, "he is entitled to th e loss on his 1984 or 19 85 tax return ." He does not acknowledg e section 165(c) in eith6r his brief or reply brief . The evidence of record flies in the face of petitioner' s contention that his investment in CCJRP was worthless in 1983 or , in the alternative, i n 1984 or 1985 . Indeed, as respondent points out, "In 1990 a: d 1991, petitioner was still pursuing his investment in Contra Costa" . In that regard, the evidence of record reflects that petitioner corresponded with CCJRP throughout 1990 and ino 1991 and that he appears to have paid CCJRP $9,075 in April 990 . See supra note 8 . As the Court of Appeals for the Seventh Circuit has observed, "Investors would love to hold onto an asset'in the .hope that it will pay off despite long odds, whit retaining the option of taking a deduction if it does no ." Corra Res ., Ltd . v . Commissioner , 945 F .2d 224, 226 (7th Cir . 1991), affg . T .C . Memo . 1990-133 . Not only did petitioner hold onto his investment in CCJRP beyond 1985, he made payments ~n the promissory note relating to that - 18 - Ti investment as late as in April 1990 . Consequently, he has failed to demonstrate entitlement to an $11,000 deduction in°,1983, 1984, or 19'85 for a capital loss-resulting from his investment in CCJRP . The Court has considered all of petitioner's contentions, arguments, requests, and statements . To the . extent not discussed herein, we conclude that they are meritless, moot, or irrelevant . To reflect the foregoing, Decision will be entere d for respondent . I