DuFresne v. C.I.R., s. 92-70346

• Decision Date: 14 June 1994
• Docket Number: 92-70347,Nos. 92-70346,92-70352,92-70355,92-70349 and 92-70662,s. 92-70346
• Citation: 26 F.3d 105
• Parties: -2266, 94-1 USTC P 50,286 Robert L. DUFRESNE; Carolyn S. Dufresne, Petitioners-Appellants, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellee. Jerry DIXON; Patricia Dixon, Petitioners-Appellants, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellee. Richard HONGSERMEIER; Fiorella Hongsermeier, Petitioners-Appellants, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellee. Hoyt W. YOUNG; Barbara D. Young, Petitioners-Appellants, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellee. Terry D. OWENS; Gloria Owens, Petitioners-Appellants, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellee. Ralph RINA, Petitioner-Appellant, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 105

26 F.3d 105

73 A.F.T.R.2d 94-2266, 94-1 USTC P 50,286

Robert L. DUFRESNE; Carolyn S. Dufresne, Petitioners-Appellants, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellee.

Jerry DIXON; Patricia Dixon, Petitioners-Appellants, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellee.

Richard HONGSERMEIER; Fiorella Hongsermeier, Petitioners-Appellants, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellee.

Hoyt W. YOUNG; Barbara D. Young, Petitioners-Appellants, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellee.

Terry D. OWENS; Gloria Owens, Petitioners-Appellants, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellee.

Ralph RINA, Petitioner-Appellant, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellee.

Nos. 92-70346, 92-70355, 92-70352, 92-70347, 92-70349 and 92-70662.

United States Court of Appeals Ninth Circuit.

Argued and Submitted April 11, 1994.

Decided June 14, 1994.

Joe Alfred Izen, Jr., Bellaire, TX, for petitioners-appellants Robert L. DuFresne, et al.

Steven Parks, U.S. Dept. of Justice, Washington, DC, for respondent-appellee C.I.R.

Appeal from the United States Tax Court.

Before GOODWIN, FERGUSON, and TROTT, Circuit Judges.

PER CURIAM:

These cases concern certain investment programs presented and managed by Henry Kersting. Kersting presided in Hawaii over numerous holding corporations, acceptance corporations, automobile leasing corporations, and lending institutions. He created and administered assorted investment programs which he sold primarily to commercial airline pilots. In each plan, a client obtained a primary loan from one Kersting corporation in order to purchase stock or an investment certificate in another Kersting corporation. The taxpayer simultaneously obtained a leverage loan from another Kersting corporation in an amount equal to one year's interest on the primary loan, the proceeds of which were used to pay the interest owed on the primary loan. The corporation in which the client invested made a nontaxable distribution in the amount of the leverage loan. At the end of the year, if the transactions were not repeated, the taxpayer returned the stock or investment certificate to the Kersting corporation in satisfaction of the primary loan. The interest paid by means of these loans was then charged as a deduction on the taxpayer's tax returns.

The Commissioner disallowed the interest deductions claimed by the taxpayers, and issued notices of deficiency detailing deficiencies in their federal tax liabilities for the year in which the interest deductions were claimed and additional assessments for negligence or intentional disregard of rules or regulations. Approximately 1300 cases were filed in the tax court by participants in the Kersting plans seeking a redetermination of tax deficiencies assessed against them. From those cases, a group was chosen by the parties as test cases, and were consolidated in the tax court for purposes of trial and opinion. It was agreed that the decision in the tax cases would be binding in all the cases. The Commissioner and the taxpayers believed that the test cases were fairly representative of all the other cases and were not sham or collusive proceedings. It is now known that was not true.

The tax court found that the interest deductions were not allowable. It found that the Kersting plans were shams and that the primary and leverage loans and obligations under stock option agreements did not create genuine indebtedness.

On March 13, 1992, the tax court entered decisions against the taxpayers determining deficiencies in their tax liability in accordance with its opinion.

On June 9, 1992, the Commissioner filed motions in the test cases, Thompson, Cravens, and Rina to vacate the decision and to conduct an evidentiary hearing. In her motions, the Commissioner stated that, from information then known to the Commissioner's regional counsel, it appeared that...