Court Opinion

ID: 4337314
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:17:32.104858+00
Date Added: 2024-06-11T14:47:48.534296
License: Public Domain

T.C. Memo. 2008-253

                     UNITED STATES TAX COURT

       WILLIAM C. WYATT AND LISA M. WYATT, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 24246-04.              Filed November 10, 2008.

     Robert J. Stientjes, for petitioners.

     Michael W. Bitner, for respondent.

             MEMORANDUM FINDINGS OF FACT AND OPINION

     THORNTON, Judge:   Respondent determined the following

deficiencies, addition to tax, and penalty with respect to

petitioners’ Federal income taxes:
                                  - 2 -

                                    Addition to Tax and Penalty
                                        Sec.            Sec.
     Year         Deficiency         6651(a)(1)         6662

     1998           $3,347                  --          --
     1999            3,341                  --          --
     2000           42,166                $6,325      $8,433
     2001              165                  --          –-

     After concessions by petitioners, these issues remain for

decision:     (1) Whether petitioners are entitled to a theft loss

deduction for 2001; (2) whether petitioners are liable for the

section 6651(a)(1)1 addition to tax for 2000; and (3) whether

petitioners are liable for the section 6662(a) accuracy-related

penalty for 2000.

                             FINDINGS OF FACT

         The parties have stipulated some facts, which are so found.

When they petitioned the Court, petitioners resided in Maryland.

     From 1997 through early 2001, Anderson Ark & Associates

(Anderson Ark) marketed and sold investment programs.     Anderson

Ark, with over 1,500 clients, was based in Costa Rica, had

administrative offices in Hoodsport, Washington, and maintained a

presence in four other countries.

     In April 2000 petitioners learned about Anderson Ark from a

friend who claimed to have made money from Anderson Ark

investments.     After attending a promotional meeting in Hickory,

     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. All dollar amounts are rounded to the nearest dollar.
                               - 3 -

North Carolina, and learning about purported financial planning

opportunities and reputed tax advantages, William C. Wyatt

(petitioner husband) decided to invest with Anderson Ark.

     One program sold by Anderson Ark was called the Look Back

Program.   This program offered investors the opportunity to

participate in purported joint ventures with Anderson Ark

entities, including Macro Media Advertising, L.L.C. (Macro

Media), which was purportedly engaged in the advertising of

books, electronic media, and audiotapes.   One of the publications

that Macro Media proposed to distribute was a book entitled “21st

Century Tax Strategies and Structures”, by Tara LaGrand and Gary

Kuzel.   The business ventures were purportedly to be financed in

large part by loans from La Maquina Blanca, S.A., a Costa Rican

entity that Anderson Ark controlled.   As it turned out, the loans

were nonexistent.

     Another Anderson Ark investment program, the Loan Four

Program, also known as the Factoring Program, was marketed as a

short-term investment that would yield large returns.   This

program was later revealed to be a pyramid scheme.

     Petitioners allege that between April and August 2000 they

made six payments to Anderson Ark totaling $161,270 for

investments in the Look Back Program and the Loan Four Program.

It was apparently not until December 2000, however, that

petitioner husband effected his investment in the Look Back
                                 - 4 -

Program by forming a partnership called Wilwyatt Joint Venture

(Wilwyatt) with Macro Media.     The purported partnership agreement

indicates that petitioner husband received a 95-percent interest

in Wilwyatt in return for a $42,700 payment.2

         As part of petitioner husband’s participation in the Look

Back Program, the Loan Four Program, or both, Anderson Ark formed

an entity in Costa Rica called Acuerta.com, S.A., with petitioner

husband as its owner.     Acuerta.com, S.A. or some other Anderson

Ark affiliate provided petitioners with one or more VISA debit

cards with which they could withdraw funds at automatic teller

machines in the United States.     Between May 2000 and March 2001

petitioners withdrew at least $58,709 from their investments with

Anderson Ark.

     On February 26, 2001, the U.S. District Court for the

District of Massachusetts issued arrest warrants with respect to

several principals of Anderson Ark (the Anderson Ark defendants).

On February 28, 2001, U.S. law enforcement officials and Costa

Rican authorities raided Anderson Ark’s offices in Santa Ana,

Costa Rica.     On that same day, U.S. law enforcement officials

raided 14 Anderson Ark domestic locations.

     2
       The copy of the purported partnership agreement in the
record is signed only by petitioner husband. Petitioners
characterize the $42,700 payment as a “loan fee” for a loan to
finance their initial investment in Wilwyatt. Included in the
record is a copy of an undated promissory note, signed only by
petitioner husband, indicating a $250,000 10-year loan to
Wilwyatt from La Maquina Blanca, S.A., to be funded upon payment
of $42,700 in fees.
                               - 5 -

     Following their indictment on May 3, 2001, in 2002 the

Anderson Ark defendants were convicted in the U.S. District Court

for the Eastern District of California on charges of money

laundering and/or conspiracy to commit money laundering.   See

United States v. Anderson, 371 F.3d 606, 610 (9th Cir. 2004).

Also in 2002 the same Anderson Ark defendants and two other

Anderson Ark principals (hereafter collectively referred to as

the Anderson Ark defendants) were indicted in the U.S. District

Court for the Western District of Washington.

     In 2004 the Anderson Ark defendants were convicted in the

Washington District Court on charges of conspiracy to defraud the

United States, mail fraud, wire fraud, money laundering, and

aiding and assisting the filing of false tax returns with respect

to their participation in Anderson Ark, as well as 19 counts of

wire and mail fraud for defrauding Anderson Ark clients of over

$7 million in fees for the nonexistent loans associated with the

Look Back Program.   In addition, one of the principals, Keith

Anderson, was convicted of defrauding Anderson Ark clients of $21

million with respect to their investments in the Loan Four

Program.

     Petitioners’ 2000 Federal income tax return was due, after

an extension, on August 15, 2001.   Petitioners did not file their

2000 return until October 18, 2001.    The return was prepared by

Tara LaGrand (LaGrand), a certified public accountant who was
                                 - 6 -

affiliated with Anderson Ark and coauthored the aforementioned

21st Century Tax Strategies and Structures.      LaGrand also

prepared petitioners’ 2001 Federal income tax return, which she

signed on May 10, 2002.   LaGrand was later incarcerated for her

involvement in Anderson Ark.

     On their 2000 return petitioners claimed a $275,730 loss

from Wilwyatt and resulting net operating loss carrybacks to 1998

and 1999 and a carryforward to 2001.      Petitioners claimed no

theft loss from their Anderson Ark investments with respect to

any of these years.   In the notice of deficiency, respondent

disallowed the purported Wilwyatt loss, carrybacks, and

carryforwards, primarily on the grounds that petitioners had

failed to establish that they had basis in Wilwyatt.

     The petition assigns error to this determination.      In an

amendment to their petition, petitioners claim a $140,000 theft

loss deduction for 2001 with respect to their Anderson Ark

investments.3

                                OPINION

     Petitioners concede that respondent properly disallowed the

$275,730 passthrough loss from Wilwyatt and the related

carrybacks and carryforwards.     The primary issue for decision is

     3
       On brief petitioners claim that they are entitled to theft
loss deductions totaling $102,561. We deem petitioners to have
conceded that they are entitled to no greater theft loss
deduction.
                                   - 7 -

whether petitioners are entitled to a theft loss deduction, as

claimed in their amendment to petition.

I.     Evidentiary Issue

       Before trial the parties stipulated certain facts and

exhibits, including petitioners’ Exhibits 17-P and 22-P.       Exhibit

17-P is a U.S. Department of Justice press release dated December

27, 2004.       This press release discusses the convictions of six

individuals associated with Anderson Ark.       In the stipulation of

facts, petitioners reserved objections to this exhibit on the

ground that “it constitutes hearsay, except for select portions

of which petitioner asserts are admissible as an exception to the

hearsay rules.”4      At trial petitioners’ counsel did not seek to

withdraw this exhibit but requested that only certain sentences

and sentence fragments should come into evidence as admissions of

a party opponent and that everything else should be stricken from

the record.

           Exhibit 22-P is a grand jury indictment (case No. 02-CR-

00423) in the U.S. District Court for the Western District of

Washington against specified individuals associated with Anderson

Ark.       It contains paragraphs 1 through 469.   In the stipulation

of facts, petitioner reserved a hearsay objection to paragraphs

28 through 376 on the grounds that those paragraphs, and only

       4
       In the stipulations, respondent also reserved an objection
to Exhibit 17-P on the grounds of hearsay but withdrew the
objection at trial.
                                 - 8 -

those paragraphs, did not constitute admissions of a party

opponent.

      The Court overruled petitioners’ objections to Exhibits 17-P

and 22-P.   On brief petitioners renew their objections to these

exhibits.   The exhibit numbers indicate that these stipulated

exhibits were offered by petitioners.    See Rule 91(b).

Petitioners have offered no explanation as to why they have

chosen to offer as their own exhibits documents in a form they

find objectionable.     Cf. Ohler v. United States, 529 U.S. 753,

755 (2000) (“Generally, a party introducing evidence cannot

complain on appeal that the evidence was erroneously admitted.”).

In any event, the Court has not relied upon, for their truth, the

portions of the exhibits to which petitioners object.

II.   Burden of Proof

      In general, deductions are a matter of legislative grace.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).     Taxpayers

are required to maintain records sufficient to enable the

Commissioner to determine their correct tax liability.     Sec.

6001; Higbee v. Commissioner, 116 T.C. 438 (2001); sec.

1.6001-1(a), Income Tax Regs.     The records must substantiate both

the amount and purpose of the claimed deductions.     Higbee v.

Commissioner, supra at 440.     Petitioners have the burden of

proving they are entitled to the claimed deduction.    See Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933).
                               - 9 -

     Petitioners argue that pursuant to section 7491(a) the

burden of proof should shift to respondent.    Section 7491(a)(1)

provides that if “in any court proceeding, a taxpayer introduces

credible evidence with respect to any factual issue relevant to

ascertaining the liability of the taxpayer * * * the Secretary

shall have the burden of proof with respect to such issue.”    This

burden-shifting provision is inapplicable unless the taxpayer

has, among other things, complied with all requirements under the

Code to substantiate any item and unless “the taxpayer has

maintained all records required under this title and has

cooperated with reasonable requests by the Secretary for

witnesses, information, documents, meetings, and interviews”.

Sec. 7491(a)(2)(A) and (B).   The taxpayer has the burden of

establishing that all the requirements of section 7491(a)(2) have

been met.   Higbee v. Commissioner, supra at 441.

     Petitioners did not cooperate with respondent’s reasonable

requests for witnesses, information, documents, meetings, and

interviews as required by section 7491(a).    Because of

petitioners’ failure to cooperate in pretrial proceedings, the

Court granted respondent’s Rule 71(c) motion to compel responses

to respondent’s interrogatories and his Rule 91(f) motion to

compel stipulation.   Moreover, petitioners have failed to produce

credible evidence in that, as discussed with more particularity

infra, they have failed to produce evidence of such quality that,
                               - 10 -

after critical analysis, we would find it sufficient upon which

to base a decision on the issue if no contrary evidence were

submitted.    See Higbee v. Commissioner, supra at 442 (quoting H.

Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-

995).

       Finally, petitioners were required to keep records

sufficient to establish whether they are liable for tax.    See

sec. 6001; sec. 1.6001-1(a), Income Tax Regs.    Petitioners have

produced only fragmentary records as evidence of their

investments in Anderson Ark-related programs.    Petitioners have

not alleged or shown that they have maintained all records

required under section 6001 and the regulations thereunder.

Petitioners have not shown that section 7491(a) applies to shift

the burden of proof to respondent, and the burden of proof

remains on petitioners.

III.    Theft Loss Deduction

        Section 165 generally allows a deduction for uncompensated

losses resulting from theft for the year in which the taxpayer

discovers the loss.    Sec. 165(a), (c), (e).

       Petitioners claim to have made the following payments to

Anderson Ark for investment purposes:
                               - 11 -

                  Date                    Amount

                 4/19/00                    $120
                 4/19/00                   5,150
                 7/25/00                 100,000
                 8/01/00                  40,000
                 8/01/00                  11,000
                 8/30/00                   5,000
                   Total                 161,270

     Petitioners concede that they withdrew $58,709 from Anderson

Ark between May 2000 and March 2001.    They claim that the amount

of the purported theft consists of their $161,270 of alleged

total investments less their $58,709 of withdrawals, or $102,561.

     Respondent contends that petitioners’ total investments in

Anderson Ark were less than the $58,709 of their withdrawals,

which respondent suggests were likely to have included earnings

on their investments.    We need not resolve that issue, for even

if we were to assume for purposes of argument that petitioners’

investments in Anderson Ark equaled at least the $58,709 that

they withdrew, petitioners have failed to substantiate any

additional amount of investment and consequently have failed to

show that they suffered a loss.

      In particular, other than petitioner husband’s vague and

self-serving testimony there is no evidence in the record of

the $11,000 and $5,000 investments that allegedly were made on

August 1 and 30, 2000, respectively.    This Court is not bound to

accept a taxpayer’s self-serving, unverified, and undocumented

testimony.   Shea v. Commissioner, 112 T.C. 183, 189 (1999);
                               - 12 -

see also Ganas v. Commissioner, T.C. Memo. 1990-143, affd.

without published opinion 943 F.2d 1317 (11th Cir. 1991).

     Similarly, petitioners have failed to substantiate the

$100,000 investment that they claim to have made on July 25,

2000.   Attempting to substantiate this investment, petitioners

rely primarily on a photocopy of a facsimile document captioned

“WIRE DISBURSEMENT INQUIRY”, which shows a $100,000 early

distribution from petitioner husband’s IRA to “Key Services

Corporation” in Albany, New York, for the benefit of petitioner

husband.   The parties have stipulated that these funds were

deposited into an account held by Denarius Financial Group at

KeyBank.   Petitioner husband testified that this was “the

wire transfer, one of the wire transfers, that I used to move

my money to Anderson’s Ark”.   Petitioner husband also testified,

however, that he did not know how the funds went from Denarius

Financial Group to Anderson Ark in Costa Rica.   The record does

not establish, and petitioners have not explained, the

relationship, if any, between Denarius Financial Group and

Anderson Ark.   Petitioners have not shown by competent evidence

that the $100,000 was ever invested in Anderson Ark.

     Because petitioners have failed to substantiate $116,000 of

their alleged $161,270 investment in Anderson Ark, we need not

consider the evidence supporting the remaining $45,270 of alleged

investment, inasmuch as this amount is less than the $58,709 that
                              - 13 -

petitioners admit having withdrawn from Anderson Ark.   Moreover,

because of the fragmentary nature of petitioners’ records, we

have no great confidence that the amount that petitioners

withdrew was not greater than they have admitted.   Because

petitioners have failed to show that they invested more with

Anderson Ark than they withdrew, they have failed to establish

the existence or amount of any loss.   Nor have they presented

sufficient evidence to establish a rational basis for estimating

any such loss.   See Cohan v. Commissioner, 39 F.2d 540, 543-544

(2d Cir. 1930); Hossbach v. Commissioner, T.C. Memo. 1981-291.

     Moreover, the record does not support a finding that, if a

theft loss did occur, petitioners sustained it in 2001.    A theft

loss is treated as sustained during the taxable year in which

the taxpayer discovers the loss.   Sec. 165(e).   The regulations

provide that “if in the year of discovery there exists a claim

for reimbursement with respect to which there is a reasonable

prospect of recovery”, then “no portion of the loss with respect

to which reimbursement may be received is sustained, for

purposes of section 165, until the taxable year in which it can

be ascertained with reasonable certainty whether or not such

reimbursement will be received.”   Sec. 1.165-1(d)(3), Income Tax

Regs.

     Whether a reasonable prospect of recovery exists with

respect to loss reimbursement claim is a question of fact to
                              - 14 -

be determined upon an examination of all facts and circumstances.

Sec. 1.165-1(d)(2)(i), Income Tax Regs.   “A reasonable prospect

of recovery exists when the taxpayer has bona fide claims for

recoupment from third parties or otherwise, and when there is a

substantial possibility that such claims will be decided in his

favor.”   Ramsay Scarlett & Co. v. Commissioner, 61 T.C. 795,

811 (1974), affd. 521 F.2d 786 (4th Cir. 1975).   The loss

deduction need not be postponed, however, if the potential for

success of a claim is remote or nebulous. Id.   The determination

as to whether there is a reasonable prospect of recovery is

based primarily on objective factors; the taxpayer’s subjective

belief may also be considered, but it is not the sole or

controlling criterion.   Id.; see Jeppsen v. Commissioner, 128
F.3d 1410, 1418 (10th Cir. 1997), affg. T.C. Memo. 1995-342.

     Petitioners have failed to establish that they had no

reasonable prospect of recovery at the end of 2001.    Petitioner

husband testified that in weekly telephone calls with Anderson

Ark representatives before May 1, 2001, he was told that

Anderson Ark would be “vindicated because everything they did

was legal.”   He testified that he later participated in several

conference calls with other investors and attorneys in Costa Rica

who were trying to form a group of former Anderson Ark investors

to fund a lawsuit.   He testified that he declined to retain an

attorney because “I’d thrown enough money down there and I didn’t
                              - 15 -

think that it would be profitable to go any further with it” and

“because nobody really knew where the money was”.

     Other than this uncorroborated testimony, there is no

evidence that petitioners had no reasonable prospect for

recovery in 2001 of amounts allegedly invested with Anderson

Ark and not already withdrawn.   Other than allegedly

participating in some conference calls, petitioners apparently

made no efforts to recover the sizeable amounts they now claim

to have been stolen.   Tellingly, petitioners retained LaGrand,

their Anderson Ark-affiliated “planner” who coauthored the book

that was implicated in petitioners’ alleged fleecing by Anderson

Ark, to prepare not only their 2000 return (claiming significant

pass-through losses from Wilwyatt) but also their 2001 Federal

income tax return, which was prepared in May 2002; i.e. the year

after petitioners allegedly discovered the theft. It seems to us

implausible that in 2001 petitioners would have simply abandoned

any efforts to recover over $100,000 in funds allegedly stolen by

Anderson Ark and yet would have continued as late as May 2002 to

rely upon LaGrand to prepare their tax returns.5

     5
       On reply brief petitioners attempt to minimize the
significance of their continued involvement with Tara LaGrand,
stating: “LaGrand was not responsible for the theft of the
money. Petitioners do not blame LaGrand for the theft of the
money and simply chose to continue using her Certified Public
Accounting services after the discovery of the theft by the
principals of Anderson’s Ark.” Inconsistently, in their pretrial
memorandum petitioners state that after LaGrand prepared their
2000 return they “learned that the accountant was in league with
                                                   (continued...)
                              - 16 -

      In the first half of 2001 several Anderson Ark defendants

had been arrested and indicted.     Petitioner husband was

apparently aware of these legal difficulties.     Whether he chose

to believe, as he had been told, that Anderson Ark ultimately

would be vindicated, or whether he was indifferent to Anderson

Ark’s legal problems because he had already withdrawn all or most

of the funds he had invested with Anderson Ark, or whether he

made a calculated decision to continue relying on LaGrand’s

services in hopes of realizing the bogus tax losses from his

Anderson Ark investments, the result is the same:     Petitioners

have failed to establish that it was reasonably certain at the

end of 2001 that they would not recover their alleged Anderson

Ark losses.

IV.   Addition to Tax and Penalty

      Section 6651(a)(1) imposes an addition to tax for failure to

file a Federal income tax return by its due date, determined with

regard to any extension of time for filing previously granted.

The addition equals 5 percent for each month that the return is

late, not to exceed 25 percent. Id.   Unless otherwise provided,

the Commissioner has the burden of production with respect to

this addition to tax.   Sec. 7491(c).

      Petitioners’ 2000 Federal income tax return was due on

August 15, 2001, under an extension of time to file their return.

      5
      (...continued)
the investment managers who defrauded Petitioners.”
                              - 17 -

The parties have stipulated that the IRS received petitioners’

2000 tax return on October 18, 2001.   Respondent has met his

burden of production pursuant to section 7491(c).

     The addition to tax under section 6651(a)(1) shall not apply

if it is shown that the failure to timely file is due to

reasonable cause and not due to willful neglect.    Sec.

6651(a)(1).   A delay is due to reasonable cause if “the taxpayer

exercised ordinary business care and prudence and was

nevertheless unable to file the return within the prescribed

time”.   Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

Petitioners bear the burden of proving that their failure to

timely file was due to reasonable cause and not to willful

neglect.   See Higbee v. Commissioner, 116 T.C. 447.

     Petitioners argue that they failed to file their 2000 return

on time because LaGrand “falsely informed petitioners that she

had filed a second request for extension of time to file their

2000 federal income tax return and that the due date would be

validly extended from August 15, 2001 until October 15, 2001.”

A taxpayer has, however, a personal and nondelegable duty to file

a timely return; reliance on a bookkeeper or accountant does not

provide reasonable cause for an untimely filing.    United States

v. Boyle, 469 U.S. 241, 249 (1985); Sparkman v. Commissioner,

T.C. Memo. 2005-136, affd. 509 F.3d 1149 (9th Cir. 2007).

Petitioners have not established reasonable cause for their late
                                - 18 -

filing.    Petitioners are liable for the section 6651(a)(1)

addition to tax.

      Pursuant to section 6662(a) and (b)(1) and (2) a taxpayer

may be liable for a penalty of 20 percent on the portion of an

underpayment of tax that is attributable to (1) negligence or

disregard of rules or regulations, or (2) any substantial

understatement of tax.     A substantial understatement of tax is

defined as an understatement of tax that exceeds the greater of

10 percent of the tax required to be shown on the tax return or

$5,000.    See sec. 6662(d)(1)(A).

      On their 2000 income tax return petitioners claimed a

$275,730 loss which they now concede to have been erroneous,

resulting in a $42,166 deficiency.       Respondent has met his burden

of production with respect to the accuracy-related penalty.

      No penalty shall be imposed under section 6662(a) with

respect to any portion of an underpayment if it is shown that

there was reasonable cause and that the taxpayer acted in good

faith.    Sec. 6664(c).   Whether a taxpayer acted in good faith

depends upon the facts and circumstances of each case.      Sec.

1.6664-4(b)(1), Income Tax Regs.     Reliance in good faith on the

advice of a qualified adviser may constitute reasonable cause.
Id.   Reliance may be unreasonable if the taxpayer knows or should

have known that the adviser has an inherent conflict of interest.

Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99
                               - 19 -

(2000), affd. 299 F.3d 221 (3d Cir. 2002); Rogers v.

Commissioner, T.C. Memo. 2005-248.

     Petitioners did not obtain independent advice or look beyond

their Anderson Ark-affiliated accountant, LaGrand, in claiming a

$275,730 tax loss from Wilwyatt which they now concede to have

been erroneous and for which they offer no substantive

justification.    As far as the record reveals, petitioners took no

steps to verify that LaGrand had sufficient expertise or was

sufficiently independent of Anderson Ark to justify their

reliance.    LaGrand did not testify at trial, and the specific

nature of her advice to petitioners is unclear.    We conclude that

petitioners did not make a good faith effort to determine their

2000 tax liability, that it was not reasonable for them to rely

on LaGrand, and that they are liable for the section 6662(a)

penalty for substantial understatement of their 2000 tax

liability.

     To reflect the foregoing and concessions by petitioners,

                                          Decision will be entered

                                     for respondent.