Anderson v. C.I.R.

• Decision Date: 04 August 1995
• Docket Number: No. 94-9007,94-9007
• Citation: 62 F.3d 1266
• Parties: -5967, 95-2 USTC P 50,463 Samuel ANDERSON and Mary Anderson, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1266

62 F.3d 1266

76 A.F.T.R.2d 95-5967, 95-2 USTC P 50,463

Samuel ANDERSON and Mary Anderson, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 94-9007.

United States Court of Appeals Tenth Circuit.

Aug. 4, 1995.

Arnold C. Wegher, Denver, CO, for petitioners-appellants.

Kenneth W. Rosenberg (Loretta C. Argrett, Charles E. Brookhart and Marion E.M. Erickson on the brief), of the U.S. Dept. of Justice, Tax Div., Washington DC, for respondent-appellee.

Before EBEL, Circuit Judge, McWILLIAMS, Senior Circuit Judge, and JENKINS, Senior District Judge. ^*

JENKINS, Senior District Judge.

Taxpayers Samuel and Mary Anderson appeal the Tax Court's decision in Anderson v. Commissioner, 66 T.C.M. (CCH) 1677, 1993 WL 525717 (1993), which found the Andersons liable for additions to tax and increased interest for tax years 1981-84 as a result of Mr. Anderson's investment in a nonexistent container business. We have jurisdiction under I.R.C. Sec. 7482(a)(1) and affirm.

I. FACTS

Mr. Anderson is an attorney. On December 23, 1983, he entered into a container purchase and lease agreement with Gold Depository & Loan Co., Inc. (GD & L). ¹ GD & L purported to sell Mr. Anderson fifty-six marine dry cargo containers for $124,500. Marine dry cargo containers are used to transport dry cargo from one port to another on ocean-going vessels. The agreement called for a down payment of $6,225 (5 percent of the purchase price) with the balance ($118,275) financed at 11 percent interest through a GD & L-related company. The agreement required interest-only payments for five years, with the principal due at the end of the five years. Mr. Anderson was to pay $18,675 a year into a sinking fund, which would reduce the principal at the end of the five years to $24,900. Mr. Anderson was to be personally liable for only $19,920 of this amount. ² The balance of the loan was nonrecourse, secured only by the containers. Mr. Anderson never signed a note or other instrument evidencing the indebtedness, never signed a security agreement and never made any payments toward the indebtedness, even after receiving a demand letter calling the balance due. ³

The purchase agreement authorized GD & L to act as Mr. Anderson's nonexclusive agent for leasing the containers. GD & L was to use its best efforts to lease the containers for a period of thirty-five months, for which it was to receive an annual lease management fee of $1 plus 15 percent of the rent received. ⁴ Lease payments were to go first to satisfy the purchaser's interest payments and then into the sinking fund to repay the principal.

On December 31, 1983, GD & L issued confirmation statements purporting to show the purchase of the containers, the balance due under the agreement, guaranteed minimum annual lease payments and income and expenses for 1983 rental activity.

The GD & L container program was a sham. GD & L never bought or leased any containers for Mr. Anderson, and the statements it issued were false. ⁵ It is undisputed, however, that the Andersons did not know the program was a sham when Mr. Anderson made his investment.

Mr. Anderson had no experience in the marine dry cargo container business or in leasing containers, although he did have over thirty years' experience in the Navy and Naval Reserves and was familiar with cargo ships and dry cargo containers. He had also been involved in all kinds of leasing in his law practice.

Before making the investment, Mr. Anderson did not consult any industry experts, read no industry publications, did no research on the container leasing industry or the market for used cargo containers, did not investigate GD & L or its principals and did not inquire as to the identity of the lessees of the containers he was purportedly purchasing. Mr. Anderson learned of and made the investment through his neighbor and good friend, George Diachok, a registered securities dealer. Mr. Anderson testified that, in making his investment, he relied on his investment adviser (Mr. Diachok) and his accountant (Alvin Leach).

Mr. Diachok testified that he looked into the container program carefully and had his accountant and attorney review it and check out its structure. Mr. Diachok also spoke with GD & L's principal, looked into his background and checked his references, banks, other business connections and the Better Business Bureau. Mr. Diachok also considered samples of confirmations describing GD & L's purported purchases of containers and checked with three different container manufacturers and sellers to determine if the prices GD & L was purportedly charging for containers were in line with market prices, allowing GD & L to be competitive with other companies in the industry. Mr. Diachok discussed these matters, as well as other investment alternatives, with Mr. Anderson, who concluded from GD & L's pro forma that GD & L looked like a reasonable business investment that could produce a sizable amount of income over a five-year period. Mr. Diachok received a $900 commission from Mr. Anderson's investment and also invested in the program himself.

Mr. Leach, the Andersons' accountant, discussed the offering circular with Mr. Anderson before he invested and told Mr. Anderson that he thought that "the tax aspects of it were flaky or overly aggressive, and he may have problems." Mr. Anderson responded that he thought the economics of the program were good and that he would make money regardless of the tax consequences.

Mr. Anderson also testified that he relied on the prospectus and other promotional materials GD & L furnished. The prospectus describes generally the containers, their use and the types of leases available. It states that GD & L has been in the container leasing business only since 1982. The prospectus says that GD & L will help purchasers lease their containers for a period of thirty-five months but that it has no obligation beyond that time to help the purchaser either lease or sell his containers. GD & L was to try to obtain short-term or "operating" leases. The prospectus indicates that rates for short-term leases vary greatly, depending on market conditions, but that they will not cover the purchaser's investment in the containers; to recover his investment, at the end of the lease period the purchaser will have to obtain renewal leases, find new lessees or sell the containers. GD & L made no representations about the resale value of the containers. According to the prospectus, a purchaser's ultimate cash return would depend in part on the container's ongoing value, which in turn depended on the quality of maintenance by the purchaser and lessee. The prospectus recognizes that the market for leasing containers is highly competitive and that the investment involves "substantial business and tax risks."

The prospectus emphasizes the tax benefits of the investment but adds that GD & L makes no representations about the tax consequences of the purchase and encourages the purchaser to consult with a qualified accountant or tax attorney before purchasing containers. The promotional materials also included a favorable legal opinion and an accountant's opinion from an international accounting firm. Mr. Anderson looked up the attorney who wrote the legal opinion in the Martindale-Hubbell legal directory and called her office to make sure it existed. The Commissioner does not claim that the materials misrepresent the program's tax consequences, assuming the program had not been a sham.

Mr. Anderson testified that he was interested in the program not only for its tax benefits but also for the long-range potential of earning some money to help with his retirement. He "assumed" that GD & L would keep the containers leased even after its thirty-five-month commitment to use its "best efforts" to lease the containers, but he also thought the containers were marketable if GD & L ever stopped leasing them for him. Mr. Anderson further testified that his investigation of GD & L was similar to his investigations of other investments he had made and that he relied heavily on his broker's representations and the broker's reputation and position in the community.

Finally, the Andersons offered expert testimony from a former IRS district director, who testified that some similar leasing programs were legitimate and that Mr. Anderson acted reasonably and consistently with how a prudent investor would act in checking out an investment of this type and magnitude.

On their 1983 tax return, the Andersons claimed a Schedule C business loss from their GD & L investment of $1,416 (due primarily to depreciation of the containers) and an investment tax credit related to the investment of $6,251. For 1984 they claimed a loss of $1,595 and an investment tax credit of $5,447. They also claimed investment tax credits of $1,138 and $2,619 for tax years 1981 and 1982 respectively (carried back from 1983).

In 1988 the Commissioner issued a notice of deficiency to the Andersons for tax years 1981 through 1984, disallowing the losses and investment tax credits. The Andersons do not contest the deficiencies. The Commissioner also assessed additions to tax for negligence, under I.R.C. Sec. 6653(a)(1) and (2), and for substantial understatement, under I.R.C. Sec. 6661, as well as increased interest under I.R.C. Sec. 6621. The Tax Court sustained the IRS's assessment of these penalties and interest, ⁶ and the Andersons appealed. ⁷

II. STANDARD OF REVIEW

We review Tax Court decisions "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." I.R.C. Sec. 7482(a)(1). We review the Tax Court's factual findings under the clearly erroneous standard and review its legal conclusions de novo. Worden v. Commissioner, 2 F.3d 359, 361 (10th Cir.1993). We review mixed questions of law and fact either under the clearly erroneous standard or de novo, depending on whether the mixed...