Gray v. Comm'r of Internal Revenue, Docket Nos. 15156-82
| Citation | 88 T.C. No. 73,88 T.C. 1306 |
| Decision Date | 19 May 1987 |
| Docket Number | 31411-83,31787-83.,18923-82,4223-83,6463-83,18518-83,Docket Nos. 15156-82,17018-83,1192-83 |
| Parties | MARION C. AND RUTH W. GRAY, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Petitioners invested in a tax shelter entitled ‘Gold for Tax Dollars,‘ pursuant to which they deducted at least four times the amount of their cash investment as mining development expenditures under section 616(a), I.R.C. 1954. HELD, petitioners held no property interests as to which such mining development expenditures could be made. HELD FURTHER, the IME Gold for Tax Dollars promotion and its concomitant transactions, taken as a whole, was a fraudulent factual sham. Julien v. Commissioner, 82 T.C. 492 (1984). HELD FURTHER, additions to tax for negligence under section 6653(a), I.R.C. 1954, and for late filing or return under section 6651(a), I.R.C. 1954, imposed as to certain petitioners. HELD FURTHER, interest imposed on substantial underpayments attributable to tax motivated transactions. Section 6621(c)(3)(A)(v), I.R.C. 1986. William Randolph Klein, for the petitioners.
James F. Kidd and Robert R. Rubin, for the respondent.
Respondent determined the following deficiencies in, and additions to petitioners' Federal income taxes:
+-------------------------------------------------------+
¦ ¦ ¦ ¦Additions to tax ¦
+----------+----+----------+----------------------------¦
¦Docket No.¦Year¦Deficiency¦Sec. 6651(a)2 ¦Sec. 6653(a)¦
+----------+----+----------+---------------+------------¦
¦15156-82 ¦1978¦$24,402.66¦--- ¦--- ¦
+----------+----+----------+---------------+------------¦
¦ ¦1979¦53,949.48 ¦--- ¦--- ¦
+----------+----+----------+---------------+------------¦
¦18923-82 ¦1978¦4,972.00 ¦--- ¦--- ¦
+----------+----+----------+---------------+------------¦
¦ ¦1979¦11,936.00 ¦--- ¦--- ¦
+----------+----+----------+---------------+------------¦
¦1192-83 ¦1979¦13,676.00 ¦--- ¦--- ¦
+----------+----+----------+---------------+------------¦
¦4223-83 ¦1979¦18,114.00 ¦--- ¦--- ¦
+----------+----+----------+---------------+------------¦
¦6463-83 ¦1979¦$11,247.00¦--- ¦3 $562.35 ¦
+----------+----+----------+---------------+------------¦
¦ ¦1980¦25,794.00 ¦--- ¦--- ¦
+----------+----+----------+---------------+------------¦
¦17018-83 ¦1979¦14,311.00 ¦$2,582 ¦896.00 ¦
+----------+----+----------+---------------+------------¦
¦18518-83 ¦1979¦15,025.00 ¦--- ¦751.25 ¦
+----------+----+----------+---------------+------------¦
¦31411-83 ¦1979¦166,524.00¦--- ¦--- ¦
+----------+----+----------+---------------+------------¦
¦31787-83 ¦1979¦13,294.00 ¦--- ¦665.00 ¦
+----------+----+----------+---------------+------------¦
¦ ¦1980¦12,419.00 ¦ ¦621.00 ¦
+-------------------------------------------------------+
The issues for decision are whether (1) petitioners properly deducted various amounts as development expenses under section 616(a); (2) some of the petitioners acted negligently with regard to these deductions; (3) the addition to tax for untimely filing a tax return is due from petitioners in docket number 17018-83; and (4) interest on substantial underpayments attributable to tax motivated transactions is due from petitioners under section 6621(c).
At the time their petitions were filed, the States of residence of the respective petitioners were as follows:
+----------------------------------------------------------+
¦ ¦ ¦States of ¦
+------------------------------------+----------+----------¦
¦Name ¦Docket No.¦residence ¦
+------------------------------------+----------+----------¦
¦Marion C. and Ruth W. Gray ¦15156-82 ¦Ohio ¦
+------------------------------------+----------+----------¦
¦Joseph D. and Wanda Auberger ¦18923-82 ¦Ohio ¦
+------------------------------------+----------+----------¦
¦David L. Kennedy ¦1192-83 ¦Ohio ¦
+------------------------------------+----------+----------¦
¦Larry R. and Sondra K. Adkins ¦4223-83 ¦Indiana ¦
+------------------------------------+----------+----------¦
¦Edward M. Becker and Alice M. Becker¦6463-83 ¦Minnesota ¦
+------------------------------------+----------+----------¦
¦John S. Crosby and Carol J. Crosby ¦17018-83 ¦California¦
+------------------------------------+----------+----------¦
¦Manual and Mariana Encinas ¦18518-83 ¦California¦
+------------------------------------+----------+----------¦
¦Wilfred and Vera Clegg ¦31411-83 ¦California¦
+------------------------------------+----------+----------¦
¦John Armstrong and Kathryn Armstrong¦31787-83 ¦California¦
+----------------------------------------------------------+
Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.
This case is an outgrowth of a tax shelter promotion called ‘Gold for Tax Dollars‘ (sometimes herein referred to as GFTD) sponsored by an entity called International Monetary Exchange (IME). Pursuant to a survey conducted by the Internal Revenue Service (IRS), the IRS identified a number of Gold for Tax Dollars investors and the amount of the deductions claimed by them as mining development expenses derived from the IME promotion, as follows:
+-------------------------------+
¦ ¦Number of¦Amount of ¦
+-----+---------+---------------¦
¦Year ¦investors¦deduction ¦
+-----+---------+---------------¦
¦1978 ¦356 ¦$13,012,329 ¦
+-----+---------+---------------¦
¦1979 ¦1,877 ¦70,988,760 ¦
+-----+---------+---------------¦
¦1980 ¦792 ¦34,618,355 ¦
+-----+---------+---------------¦
¦Total¦3,025 ¦4 118,619,444 ¦
+-------------------------------+
Petitioners in this case are among the foregoing 3,025 investors.
Petitioners claimed the following deductions based upon their IME investments:
+----------------------------------------------------------------------+
¦ ¦ ¦ ¦ ¦Nonrecourse ¦ ¦
+----------+---------------------+----+-------+--------------+---------¦
¦ ¦ ¦ ¦ ¦loan (1978) ¦Total ¦
+----------+---------------------+----+-------+--------------+---------¦
¦ ¦ ¦ ¦ ¦or option sale¦deduction¦
+----------+---------------------+----+-------+--------------+---------¦
¦Docket No.¦Petitioners ¦Year¦Cash ¦(1979 or 1980)¦claimed ¦
+----------+---------------------+----+-------+--------------+---------¦
¦15156-82 ¦Marion C. Gray ¦1978¦$10,000¦$40,000 ¦$50,000 ¦
+----------+---------------------+----+-------+--------------+---------¦
¦ ¦and Ruth W. Gray ¦1979¦10,000 ¦40,000 ¦50,000 ¦
+----------+---------------------+----+-------+--------------+---------¦
¦18923-82 ¦Joseph D. Auberger ¦1978¦4,000 ¦16,000 ¦20,000 ¦
+----------+---------------------+----+-------+--------------+---------¦
¦ ¦and Wanda Auberger ¦1979¦4,000 ¦16,000 ¦20,000 ¦
+----------+---------------------+----+-------+--------------+---------¦
¦1192-83 ¦David L. Kennedy ¦1979¦5,000 ¦12,795 ¦17,795 ¦
+----------+---------------------+----+-------+--------------+---------¦
¦4223-83 ¦Larry R. Adkins ¦1979¦4,000 ¦16,000 ¦20,000 ¦
+----------+---------------------+----+-------+--------------+---------¦
¦ ¦and Sondra K. Adkins ¦ ¦ ¦ ¦ ¦
+----------+---------------------+----+-------+--------------+---------¦
¦6463-83 ¦Edward M. Becker ¦1979¦5,000 ¦15,000 ¦20,000 ¦
+----------+---------------------+----+-------+--------------+---------¦
¦ ¦and Alice M. Becker ¦1980¦7,000 ¦28,000 ¦35,000 ¦
+----------+---------------------+----+----------------------+---------¦
¦17018-83 ¦John S. Crosby ¦1979¦(basis for deduction ¦20,000 ¦
+----------+---------------------+----+----------------------+---------¦
¦ ¦and Carol J. Crosby ¦ ¦not stated in record) ¦ ¦
+----------+---------------------+----+----------------------+---------¦
¦18518-83 ¦Manual Encinas ¦1979¦10,000 ¦18,000 ¦28,000 ¦
+----------+---------------------+----+-------+--------------+---------¦
¦ ¦and Mariana Encinas ¦ ¦ ¦ ¦ ¦
+----------+---------------------+----+----------------------+---------¦
¦31411-83 ¦Wilfred Clegg ¦1979¦(basis for deduction ¦155,000 ¦
+----------+---------------------+----+----------------------+---------¦
¦ ¦and Vera Clegg ¦ ¦not stated in record) ¦ ¦
+----------+---------------------+----+----------------------+---------¦
¦31787-83 ¦John Armstrong ¦1979¦5,000 ¦15,000 ¦20,000 ¦
+----------+---------------------+----+-------+--------------+---------¦
¦ ¦and Kathryn Armstrong¦1980¦5,000 ¦15,000 ¦20,000 ¦
+----------------------------------------------------------------------+
NATURE OF PROMOTION
The 1978 IME promotion was tied to a gold mining concession in Panama. The 1979 and 1980 promotions were tied to a gold mining concession in French Guiana.
The theoretical factual basis upon which a 1978 investor would proceed is described in the following excerpts from an opinion letter dated May 15, 1978, to one James Mongello, written by James Victor Kosnett of the law firm of Kallen, Grant, May and Tremblatt of Hollywood, California:
You contemplate working a foreign gold mine claim. Based on assay reports, each cubic...
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