Bronson v. Commissioner
| Decision Date | 02 March 1992 |
| Docket Number | Docket No. 34645-87. |
| Citation | 63 T.C.M. 2225 |
| Parties | Robert E. Bronson III v. Commissioner. |
| Court | U.S. Tax Court |
Robert E. Bronson III, pro se. William S. Garofalo, Brendan G. King, and James Gehres, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioner's Federal income tax and additions to tax for the calendar years 1979 through 1983 in the following amounts:
Additions to Tax
------------------------------------------------------------------------
Year Deficiency Sec. 6651(a)(1) Sec. 6653(a) Sec. 6653(a)(1) Sec. 6654 Sec. 6661
1979 ................... $83,512 $20,878 $4,176 $ -- $3,493 $ --
1980 ................... 70,573 17,643 3,529 -- 4,497 --
1981 ................... 62,568 15,642 -- 3,128 4,795 --
1982 ................... 47,474 11,868 -- 2,374 4,623 11,869
1983 ................... 12,179 3,045 -- 609 747 3,045
For returns for 1981, 1982, and 1983 respondent determined that the addition to tax equal to 50 percent of the interest due on the portion of the underpayment attributable to negligence pursuant to section 6653(a)(2)1 was applicable. By an amendment to his answer, respondent alleged that petitioner was liable for an addition to tax under section 6659(a) in each of the years in issue for underpayment of tax attributable to a valuation overstatement and an increased rate of interest for each year in issue on underpayments attributable to tax-motivated transactions pursuant to section 6621(c).
Some of the issues raised by the pleadings have been disposed of by agreement of the parties leaving for decision the following: (1) Whether petitioner is entitled to depreciation and miscellaneous deductions and investment tax credit with respect to art masters he purchased from Jackie Fine Arts, Inc.; (2) whether petitioner is entitled to deductions of losses claimed from either or both Resortimeshare Marketing Associates, Ltd., or Resortimeshare Development Associates, Ltd. II, and if so, the amount of losses deductible; (3) whether petitioner is liable for an addition to tax pursuant to section 6659(a) for all years in issue for underpayment of tax attributable to valuation overstatement; (4) whether petitioner is subject to an increased rate of interest for interest accrued after December 31, 1984, on underpayments attributable to tax-motivated transactions pursuant to section 6621(c) for the years in issue; (5) whether petitioner is liable for an addition to tax pursuant to section 6661(a) for substantial understatement of income tax for the years 1982 and 1983; (6) whether petitioner is liable for an addition to tax pursuant to section 6651(a)(1) for failing to timely file a Federal income tax return for any or all of the years here in issue; (7) whether petitioner is liable for an addition to tax pursuant to section 6653(a) for negligence or intentional disregard of rules and regulations for the years 1979 and 1980 and under section 6653(a)(1) and (2) for the years 1981, 1982, and 1983; and (8) whether petitioner is liable for an addition to tax pursuant to section 6654(a) for underpayment of estimated tax for each of the years here in issue.
Some of the facts have been stipulated and are found accordingly.
Petitioner resided in Littleton, Colorado, on the date of the filing of the petition in this case. Petitioner attended the U.S. Military Academy at West Point, New York, in 1962 and the University of Washington in Seattle, Washington, from 1963 through 1966, but did not obtain a degree. He majored in mathematics and philosophy. From 1967 through 1980 petitioner's primary occupation was financial planning.
In 1977 petitioner and his wife obtained an interest in a custom framing shop, Chatfield Frameworks and Gallery (Chatfield Frameworks), which had been started a few months earlier by another couple. Initially the business of Chatfield Frameworks was that of a custom framer, but later art work was sold by the business. From 1979 through 1983, the distributive share of income from Chatfield Frameworks allocable to petitioner and his wife was as follows:
Total
Year income
1979 ......................... $6,690.00
1980 ......................... 9,404.00
1981 ......................... 7,152.00
1982 ......................... 5,788.00
1983 ......................... 8,403.14
Jackie Fine Arts, Inc. (Jackie), is a corporation that sold art masters. Mr. Herman Finesod was president of Jackie. Art Resources and Treasures (ART) in which Mr. Herman Finesod had an interest also sold art masters. Jackie sold approximately 2,500 and ART sold approximately 400 art masters from 1977 through 1981.
An art master consists of a metal, mylar, or etching plate from which prints can be made. If the prints are modeled after some other work, such as an oil painting, the painting or other work from which the plate is modeled is not included as part of the art master. Jackie sold the copyright and other marketing and production rights for the image as part of the art master sale. These rights entitled the purchaser to use the image for posters or other ancillary products, such as greeting cards, tapestries, and napkins. Jackie would also arrange for the printing of a limited edition as part of the art master package, but charged an additional fee for this service. Alternatively, investors who purchased the art masters could arrange for or contract out the printing. The limited edition prints were signed by the artist by hand.
In 1977 and 1978 Jackie sold its art masters for cash, promissory notes secured by letters of credit, and long-term nonrecourse notes. In 1979 Jackie amended its contracts to provide for recourse liability on some or all of the principal of the long-term notes. Some contracts contained an inventory turnback provision which allowed investors to turn back inventory or ancillary products produced by them in payment of their recourse liabilities.
In 1978 petitioner began selling Jackie art masters for Financial Strategies Company (Financial). Petitioner and Financial would invite tax professionals to a presentation by Jackie as an aid in selling the art masters. Each of the tax professionals would receive a Jackie information memorandum and an illustration of tax consequences for himself and for his clients, the art investors. Both the information memorandum and illustration of tax consequences focus on tax benefits and highlight the fact that the Jackie program could be expected to produce writeoffs averaging $4 tax "write-off" dollars to $1 invested in the year of acquisition. Petitioner and Financial would follow up on the result of the presentation and solicitation to accountants and attorneys and schedule a meeting to make a further presentation of the package or to present the package to the accountants' or attorneys' clients.
The commissions paid to petitioner and Financial by Jackie were based solely on the cash (including short-term notes) required by the investor contracts they sold. The amount of commissions was unaffected by the overall purchase price or amount of long-term notes (whether recourse or nonrecourse). Petitioner sold three or four Jackie art masters in 1978 to investors, and by 1981 had sold 30 to 35. As a salesman of the Jackie art, petitioner would receive a discount on the initial cash payment for his purchase of any art master. However, the deferred amount of the note would be increased by the exact amount of the discount received on the cash payment for the purchase, resulting in the same overall purchase price for the art master.
In 1978, petitioner and Mr. Edward Koplin as equal partners began Artvest, Ltd. (Artvest). Artvest brought five artists to Jackie so that Jackie could negotiate purchases of plates from them for use in the Jackie art master program. Each of the five artists sold art masters to Jackie. One of the five was Mr. Roy Purcell. In return for bringing the artist to Jackie, Artvest received artist proofs of limited edition prints for the art master from the artists. The proofs could not be sold until the limited edition was sold out. Petitioner also received a discount on the cash payment for any purchase of an art master from one of the five artists. However, the deferred note on such a purchase was increased by the amount of the cash discount, so that the overall price would remain the same.
On December 30, 1978, petitioner purchased the art master "Dead Giveaway" by Mr. William Schwedler from Jackie. Mr. Schwedler is an abstract artist to some extent known in New York and San Francisco, but with a minimal following in the Midwest. Mr. Schwedler died in 1985.
The initial version of the contract was signed by petitioner both as purchaser and as sales representative of Jackie. The total purchase price of the art master was $280,000, composed of $279,000 for the art master and $1,000 for the copyright. The contract also included a charge of $3,000 for the production of limited edition prints from the art master. The $280,000 total purchase price and $3,000 production cost was to be paid with a $5,500 short-term note due on June 1, 1979, a $2,500 short-term note due December 31, 1979, and a $275,000 long-term note, with interest due on the unpaid principal at the rate of 6 percent per annum, due January 15, 1989. The long-term note contains a blank space where an amount for which petitioner would be personally liable could have been inserted.
A slightly revised contract for the purchase of Dead Giveaway also dated December 30, 1978, was later executed by p...
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