Horn v. Comm'r of Internal Revenue
| Decision Date | 10 May 1988 |
| Docket Number | 7242-85.,Dkt. No. 25579-84,36866-84,36405-84 |
| Citation | 90 T.C. 908,90 T.C. No. 60 |
| Parties | KENNETH J. HORN AND VICKIE L. HORN, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In 1979, petitioners purchased units in a gold mine tax shelter and claimed mining development expenses relating thereto on their 1979 Federal income tax returns. Before investing in this gold mine program, petitioners made no independent investigation of its profit potential or the promoters, but relied instead for this purpose on the advice of their tax return preparers and/or financial advisor, none of whom were independent of the gold mine tax shelter promotion. Prior to the time that this case was tried, pursuant to an abusive tax shelter injunction proceeding, these tax returns preparers and the financial advisor were enjoined from promoting further this gold mine tax shelter and from representing that an investor in the shelter would be entitled to deductions, for Federal tax purposes, relating to the tax shelter.
HELD: The gold mine tax shelter was a sham transaction, devoid of any economic substance. HELD FURTHER, petitioners' positions are frivolous and groundless and this proceeding was instituted and maintained primarily for delay; therefore, damages are awarded to the United States pursuant to sec. 6673. HELD FURTHER, the transactions are ‘tax motivated transactions‘ within the meaning of sec. 6621(c). Additions to tax under sections 6653 and 6661 upheld. A. Fuller Glaser, Jr., for the petitioners.
Richard A. Witkowski, for the respondent.
Respondent determined the following deficiencies in petitioners' 1982 Federal income taxes and additions to tax in these consolidated cases:
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¦ ¦ ¦ ¦Additions to tax ¦
+----------+--------+----------+--------------------------------------¦
¦ ¦Docket ¦ ¦Sec.2 ¦Sec. ¦Sec.3 ¦Sec. ¦
+----------+--------+----------+----------+----------+-------+--------¦
¦Petitioner¦No. ¦Deficiency¦6653(a)(1)¦6653(a)(2)¦6621(c)¦6661 ¦
+----------+--------+----------+----------+----------+-------+--------¦
¦Horn ¦25579-84¦$9,611 ¦$481.00 ¦* ¦--- ¦$961.00 ¦
+----------+--------+----------+----------+----------+-------+--------¦
¦Avioli ¦36405-84¦24,625 ¦1,231.00 ¦* ¦--- ¦2,463.00¦
+----------+--------+----------+----------+----------+-------+--------¦
¦Callis ¦36866-84¦12,464 ¦623.20 ¦* ¦--- ¦1,246.40¦
+----------+--------+----------+----------+----------+-------+--------¦
¦Volle ¦7242-85 ¦11,692 ¦584.60 ¦* ¦** ¦1,169.20¦
+---------------------------------------------------------------------+
The issues for decision for all petitioners are whether petitioners are: (1) entitled under sections 616, 162, 212, or any other section of the Internal Revenue Code to the deductions arising from their participation in the ‘Havasu Gold 1982 Tax Advantaged Gold Purchase Program‘ claimed as mining development expenses on the Schedules C filed with their respective 1982 Federal income tax returns; (2) liable for the additions to tax provided under sections 6653(a)(1) and 6653(a)(2); and (3) liable for the addition to tax provided under section 6661. As for petitioners Norman and Ruth Volle, we must also determine whether the Volles are subject to the provisions of section 6621(c).
Some of the facts have been stipulated and are found accordingly. The stipulations of fact and attached exhibits are incorporated herein by this reference.
Petitioners resided in St. Louis, Missouri, at the time they filed their respective petitions with this Court.
Petitioners 4 participated in a gold mine program in 1982 entitled the ‘Havasu Gold 1982 Tax Advantaged Gold Purchase Program‘ (‘Lake Havasu gold mine program‘ or ‘the program‘). The amount of their cash investment and the face value of the note they entered into pertaining to this program, the cubic yards aggregate purchased and bonus yards, if any, received, the date the purchase agreement was executed, and the date the bill of sale was executed, are as follows:
+--------------------------------------------------------+
¦ ¦ ¦Cubic yards¦Date of ¦Date of ¦
+-----------+-------------+-----------+---------+--------¦
¦ ¦Investment ¦aggregate/ ¦purchase ¦bill of ¦
+-----------+-------------+-----------+---------+--------¦
¦Petitioners¦cash/note ¦bonus yards¦agreement¦sale ¦
+-----------+-------------+-----------+---------+--------¦
¦Horn ¦$5,000/20,000¦$4,000/0 ¦12/17/82 ¦1/20/83 ¦
+-----------+-------------+-----------+---------+--------¦
¦Avioli ¦10,000/40,000¦8,000/4,000¦6/23/82 ¦7/16/82 ¦
+-----------+-------------+-----------+---------+--------¦
¦Callis ¦5,000/20,000 ¦4,000/2,000¦11/27/82 ¦12/15/82¦
+-----------+-------------+-----------+---------+--------¦
¦Volle ¦5,000/20,000 ¦4,000/2,000¦6/14/82 ¦6/25/82 ¦
+--------------------------------------------------------+
THE LAKE HAVASU GOLD MINE PROGRAM PROMOTION
The Lake Havasu gold mine program was promoted by Henri Berger (‘Berger ‘) through the Calzone Mining Company, Inc. (‘Calzone‘).
Calzone originally was incorporated in the State of California, on October 20, 1981. The officers and directors of the California corporation were Berger, Guy Chastenet (‘Chastenet‘), and Audrey Lee Berger. Sometime subsequent to October 20, 1981, and apparently before November 18, 1981, this company was dissolved. On November 18, 1981, Calzone was reincorporated in the State of Nevada. The board of directors consisted of Berger, Chastenet, and Albert Sheppard. According to the Articles of Incorporation for the State of Nevada, the business to be conducted by Calzone was developing mine claims.
Petitioners subpoened Berger to testify at the trial. According to Berger, he received a pre-med (dental) degree from a college in France. Subsequently, he graduated from Tufts University in Boston, Massachusetts, in 1957 or 1958, with a degree in dentistry. Following his graduation, Berger entered into the cosmetic business with his wife. He was engaged in that business for approximately 6 to 8 years. Following that, Berger was involved in marketing and sales of real estate for a number of years. In 1977, he left this work and began to sell computer portrait T-shirts and computer portrait equipment. Berger had a store in California for about three years selling both of these items.
In 1978, Berger and a business associate by the name of Honsucker acquired some mining claims on property in Utah owned by the Bureau of Land Management (‘BLM‘) and leased to Honsucker. They hoped to mine oil shale on these claims. These mining claims subsequently were abandoned because Berger and Honsucker could not raise the money needed to mine the property.
Berger was introduced to Chastenet in 1979 by Robert MacDonald (‘MacDonald ‘). MacDonald owned an engineering company in New York. 5 He recommended Chastenet to Berger when Berger mentioned that he was looking for an engineer to look at a piece of property in Utah. This property was the Utah mining claims owned by Berger and Honsucker. Chastenet, however, advised Berger that it would be too costly to mine this property.
Berger first heard of the Lake Havasu region in the summer of 1981 from Allen Russell (‘Russell‘). 6 Russell referred Berger to John Pasak (‘Pasak ‘). Pasak had mined in the Lake Havasu region for a number of years. Claims purportedly owned by Pasak were the claims that Berger promoted as the Lake Havasu gold mine program. Berger was told by Russell to contact a Mr. Needles. (‘Needles‘) 7
In September 1981, Berger met with Pasak, Needles, a Mr. O'Brien (‘O'Brien‘), Rick Carling (‘Carling‘), and David McLlellan, (‘McLlellan‘) in Las Vegas, Nevada. 8 McLlellan, an attorney, was hired by Berger in early 1981. At the meeting in September 1981, O'Brien allegedly gave Berger an essay report, a BLM report, history of the area, and various backup materials regarding the mine. Berger then purportedly gave these documents to McLlellan for McLlellan's review. A few weeks later Berger visited the mine site.
Berger testified that he asked Chastenet to come to the Lake Havasu area in October or November, 1981 to find out if Chastenet would like to work for them. Around this time, Chastenet also was elected to a position on the board of directors of Calzone and made a vice president of the company. Later, purportedly after conferring with MacDonald, Chastenet allegedly informed Berger that it was against company policy for Chastenet become involved personally and that Calzone instead should retain MacDonald Gateway Engineering (Canada) Ltd. (‘MacDonald Gateway‘). Chastenet was the executive vice president of MacDonald Gateway. Chastenet purportedly then resigned as director and vice president of Calzone.
Calzone allegedly retained MacDonald Gateway to do all the engineering and mining for the Lake Havasu gold mine for a fixed fee plus all costs. Calzone allegedly requested that Chastenet or MacDonald Gateway do a feasibility study regarding the Lake Havasu gold mine. Chastenet purportedly drilled a number of test holes on the property for this purpose. Chastenet did not testify at the trial nor did Michael Lipstate, the individual hired as chief engineer for Calzone after Chastenet left the program.
Calzone originally advertised the sale of units at the Lake Havasu gold mine through a booklet dated October 23, 1981, entitled ‘1981 Rick-Mine Arizona.‘ The title ‘Calzone Mining Company, Inc. Gold For Your Tax Advantage‘ (the ‘1981 program‘) also was used for the 1981 program. The booklet indicated that Rick-Mine Development Corp. (‘Rick-Mine‘) owned certain mineral leases on land owned in fee by the United States and located in Mohave...
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