Adkins v. C.I.R.

• Decision Date: 18 May 1989
• Docket Number: No. 88-1466,88-1466
• Citation: 875 F.2d 137
• Parties: -1412, 89-1 USTC P 9335 Larry R. ADKINS and Sondra Adkins, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 137

875 F.2d 137

63 A.F.T.R.2d 89-1412, 89-1 USTC P 9335

Larry R. ADKINS and Sondra Adkins, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 88-1466.

United States Court of Appeals Seventh Circuit.

Submitted Feb. 24, 1989.

Decided May 18, 1989.

Gary R. Allen, Chief, William S. Rose, Jr., Gilbert S. Rothenberg, Mary Frances Clark, Asst. Attys. Gen., Appellate Section, Tax Div., Dept. of Justice, Washington, D.C., for appellants.

William R. Klein, Sarasota, Fla., for appellee.

Before CUDAHY and EASTERBROOK, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.

FAIRCHILD, Senior Circuit Judge.

The Adkins seek review of a Tax Court decision determining a deficiency in income tax for 1979. The court disallowed $20,000 in deductions and determined that $16,000 additional income should have been reported. The decision is reported as Gray v. Commissioner, 88 T.C. 1306 (1987).

The deductions and unreported income stemmed from a tax shelter program colorfully dubbed "Gold for Tax Dollars" by its promoters. The details of the plan (which was also offered in slightly varied form for 1978 and 1980), as described in promotional materials, are explained at length in this Court's decision in Saviano v. Commissioner, 765 F.2d 643 (7th Cir.1985).

The "Gold for Tax Dollars" plan proposed to take advantage of deductions from taxable income available for "all expenditures paid or incurred during the taxable year for the development of a mine ... if paid or incurred after the existence of ores or minerals in commercially marketable quantities has been disclosed." 26 U.S.C. Sec. 616(a). Hoping to convince ordinary investors to become miners, the plan advertised (for 1979) a 4:1 ratio of income deduction to cash investment: the "miner" who put up $5,000 could deduct $20,000 from taxable income that year.

This is how International Monetary Exchange (IME), the promoter of the program, proposed in 1979 to transform taxpayers into gold miners: The investor would deposit with IME one-fourth of the desired deduction. The investor obtained at no cost, through IME, a mineral lease from Compagnie Miniere Paul Isnard, S.A. (CMPI SA). CMPI SA held a gold mining concession from the government of French Guiana. The lease covered a specific quantity of gold-bearing gravel located at a particular zone on the CMPI SA concession, and each lease supposedly was to be developed as a distinct "claim." The "miner," again through IME, would sell to a third party a "gold option" for an amount equal to the other three-fourths of the desired deduction. This "gold option" gave the buyer of the option the right to buy gold at a fixed price from the particular claim, but only after the gold was extracted. The miner was under no obligation to extract any gold. The proceeds of the "gold option" sale, plus the original money deposited with IME, were supposedly paid by IME on behalf of the investor to General Miniere, S.A., a mining contractor which agreed to develop the claim. The investor would claim as a deduction the total amount of the cash investment and the option sale proceeds as mine development expenses under Sec. 616(a). The investors would not report the option proceeds as income in 1979 because as IME informed them, no income was reportable until the option expires or is exercised. In Saviano, the Tax Court concluded that the right sold was "not a binding, legal option." 80 T.C. 955, 971 (1983), aff'd 765 F.2d 643 (7th Cir.1985). This court, noting that Saviano did not attempt to argue that this was a true option, rejected Saviano 's alternative theories why the proceeds were not income when received. 765 F.2d at 652-54.

For some unexplained reason, see Saviano v. Commissioner, 80 T.C. 955, 967 n. 16 (1983), the Adkins received a 5:1 deduction-to-investment ratio: they invested $4,000 cash, obtained $16,000 in option proceeds which were also purportedly spent on their behalf, and claimed a mining development expense deduction of $20,000. They did not report the proceeds of the option sale as income received in 1979. The Adkins report on a cash basis.

In Saviano, the matter was decided on cross-motions for summary judgment on specified issues, and it was assumed for that purpose that the transactions were consummated in the manner set out in the promotional and related documents. 80 T.C. at 956. In fact, Saviano did not deal with 1979 deductions, but, as to that year, decided only that the purported option was not a true option and the proceeds did not qualify for tax deferral. ¹

In the case presently before us, however, there was a trial, and the Tax Court found in substance, among other things:

The mineral claim leases were totally fictitious. Twenty-five hundred (2500) or more plots in French Guiana were supposed to have been leased to IME's 1979 and 1980 tax shelter investors, but only 100 to 200 plots were ever even laid out on paper. The leases were issued sequentially without reference to any geographical location. Each reflected a number of cubic feet of auriferous gravel, but had no relationship to any actual gravel in an identifiable location. One plot, assigned to a Dr. Yuter, had been worked, but with that exception, it was not possible to locate any specific plot by referring to the claim number assigned to any investor by IME.

As stated by the Tax Court:

The bogus nature of the "lease" and development of these individual plots is emphasized by expert testimony at the trial that small plots, such as those purportedly sold by IME-Rogers, could not realistically be developed and mined, separate and apart from exploitation of the entire tract from which the plots were represented to be carved. But it was absolutely essential to the rationale of the tax scheme that the separate plots not be recharacterized as undivided interests since that would have raised the spectre of partnership treatment under the at-risk rules of sections 465 and 704(d), a fact carefully noted in tax opinion letters distributed with the promotion material.

88 T.C. at 1324-25.

The investors were given a copy of a cancelled check to represent the alleged option sale proceeds. The Tax Court found that "the check merely represented the transfer of funds from one [ ] shell company to another." Id. at 1324. The court referred to the claimed development expenses as "fictitious." The implication from all the findings is clear that the Tax Court found that no money was paid in 1979 on behalf of an investor for development of a particular mining plot.

Noting that transactions entered into primarily for tax benefits are not profit motivated, the Tax Court found that "the real profit that petitioners were looking toward was a large decrease in their tax liability from tax deductions as a result of small cash payments." Id. at 1326.

As its "Ultimate Finding of Fact," the Tax Court said, "The IME Gold for Tax Dollars promotion was a fraudulent factual sham."

The court disallowed the Adkins' entire deduction, and treated the $16,000 as 1979 income. ² It calculated total tax deficiency of $18,114, and because the court concluded that the transactions were motivated primarily for tax benefits, imposed interest on the underpayments at 120% the normal rate pursuant to 26 U.S.C. Sec. 6621(c) (1984). ³ Id. at 1328-29.

It is impossible to read the Appellants' brief as a challenge to the Tax Court's findings of fact or legal analysis. ⁴ Although in its Summary of the Argument, the brief claims the "Court erred in contradicting itself as to whether appellants had entered the transactions for profit" and that the "Court erred in disallowing petitioners' deductions for 1979," one searches the brief in vain for a coherent, or indeed, for any explanation of these assertions. While the Commissioner's brief (surely out of an abundance of caution) defends at length the merits of the decision to disallow the tax deductions and treat the option proceeds as 1979 income, we will only address the few arguments actually raised by the appellants' brief.

Those issues, as best we can discern, arise from (1) the Tax Court's refusal to be bound by certain factual findings made in an action in California involving the "Gold for Tax Dollars" plan; (2) alleged prejudice on the part of the trial judge; (3) the court's refusal to admit certain testimony; and (4) an alleged procedural irregularity.

I. COLLATERAL ESTOPPEL

Before trial, citing the findings of fact in Securities Exchange Commission v. Rogers, No. CV 80-4841NRP (C.D.Cal.1985), aff'd 790 F.2d 1450 (9th Cir.1986), counsel for the Adkins moved "for res judicata, and for the operation of collateral estopp[e]l to the holding and everything involved therein."

Rogers was an action brought by the S.E.C. against Gerald L. Rogers, IME, and eighteen others, alleging that they violated the securities laws in connection with the "Gold for Tax Dollars" promotion.

Violation of the anti-fraud provisions was alleged, along with the sale of unregistered securities and the like. The trial occurred in 1982. IME defaulted, and on September 14, 1982, the district court enjoined IME from violating section 10(b) and ordered it to account to investors. 790 F.2d at 1461 (Judge Noonan, dissenting). In 1985, the district court made numerous findings, generally unfavorable to the S.E.C. Judgment was entered in favor of Rogers, at least, and the S.E.C. appealed. A divided panel of the Ninth Circuit affirmed, although it is not clear what happened to the injunction against IME. It seems fair to say that the findings principally treated in the majority opinion were those determining that Rogers' participation in the program was much more limited than claimed by the S.E.C.

The concluding paragraph of the opinion was:

The district court's findings that Rogers did not participate in the sale of unregistered securities are not clearly erroneous. Because Rogers did not participate in the sale of securities, he had no duty to disclose...