Bruce v. Comm'r, T.C. Memo. 2014-178
| Decision Date | 02 September 2014 |
| Docket Number | Docket No. 29005-10,T.C. Memo. 2014-178 |
| Parties | CHARLES T. BRUCE AND MARY A. BRUCE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
P-H desired to sell Ps' M stock in the ready market. P-H's financial planners promoted to P-H a plan to cash out the value of the stock and pay no Federal tax. P-H, a high-school-educated seafarer with little tax knowledge, consulted his attorney/tax adviser, who in turn advised P-H that the plan was legitimate. Pursuant to the plan, P-H and G entered into two offsetting $5.5 million loans, one of which was labeled a "Swap" and for which P-H claimed a basis of $5.5 million. P-H contributed the Swap to a newly formed unitrust in which he retained a remainder interest and the power to substitute for the unitrust's corpus property of equal value. His two daughters each had a 1% unitrust interest. P-H sold his remainder interest to two other newly formed trusts (Ts), the beneficiary of each of which was one of the daughters, in exchange for promissory notes totaling the portion of the $5.5 million basis that P-H apportioned to the remainder interest (approximately $5.4 million). P-H substituted the M stock for the Swap in the belief that each property was of the same value. Ts acquired the daughters' unitrust interests, the unitrust was terminated, and the M stock was distributed to Ts. Ts transferred the M stock toS, a general partnership that Ts formally owned and P-H controlled. S sold the M stock to a third party for cash, and Ps received the value of their M stock through Ts' payments on the promissory notes from the cash that the third party paid to purchase the M stock. Ps reported on their Federal income tax return that they realized no gain or loss on the sale of the remainder interest because the selling price equaled the basis. Ps did not report that the M stock was sold or that they realized any gain or loss as to that sale.
Held: The applicability of the three-year limitations period under I.R.C. sec. 6501(a) is not properly before the Court in that (1) Ps attempt inappropriately to raise this issue in their opening brief and (2) I.R.C. sec. 7491(a)(1) does not require that the Court hold that the limitations period bars assessment simply because the record establishes that a deficiency notice was issued after the three-year period and does not establish that an exception to the three-year period applies.
Held, further, Ps' gross income includes the full proceeds from the sale of the remainder interest in that P-H's basis in that interest was zero. Alternatively, Ps are considered to have sold the stock directly to the third party for Federal income tax purposes and must recognize their gain on that sale.
Held, further, I.R.C. sec. 162(a) does not allow Ps to deduct the legal and professional expenses related to the plan.
Held, further, Ps are not liable for the 40% accuracy-related penalty that R determined under I.R.C. sec. 6662(h) because P-H reasonably relied on the advice of his attorney.
R. Cody Mayo, Jr., for petitioners.
Marshall R. Jones, for respondent.
WHERRY, Judge: Petitioners petitioned the Court to redetermine respondent's determination of an $819,041 deficiency in their Federal income tax for 2003 and a $327,616.40 accuracy-related penalty under section 6662(h) for a gross valuation misstatement.1 We decide the following issues:
1. whether the applicability of the three-year limitations period under section 6501(a) is properly before the Court. We hold it is not;
2. whether petitioners underreported their income stemming from a plan (plan) involving the sale of their stock in Sea & Sea Marine, Inc. (Marine). We hold they did;
3. whether petitioners may deduct the legal and professional expenses that respondent disallowed. We hold they may not;
4. whether petitioners are liable for the 40% accuracy-related penalty that respondent determined under section 6662(h). We hold they are not.
The parties submitted stipulated facts and exhibits, and we find the stipulated facts accordingly. We incorporate herein the stipulated facts and the facts drawn from the exhibits.
Petitioners are husband and wife, and they have two daughters, Rebekah Ruth Bruce (RRB) and Sarah Jane Bruce (SJB) (collectively, daughters).Petitioners filed a joint Federal income tax return for 2003, and they resided at a Louisiana address when the petition underlying this case was filed.
Charles Bruce is an experienced, successful tugboat captain and fisherman. He has a high school education and regularly consults with and relies upon professionals, friends, and employees to advise and inform him before he makes his business decisions. He relied upon the advice of Attorneys Francis J. Lobrano and David J. Lukinovich to effect the plan (discussed infra pp. 10-11), receiving the latter's advice directly from him or through Mr. Lobrano. Mr. Bruce also relied heavily upon the advice of his longtime friend and loyal employee, Wade A. Rousse.
Marine is a Louisiana corporation that was organized in 1991. Each petitioner owned one-half of Marine's stock from at least January 1, 2000, when Marine elected S corporation status for Federal income tax purposes, through early September 2003. An election was made to characterize Marine as an S corporation effective January 1, 2000, and petitioners treated Marine as an S corporation from January 1, 2000, through September 5, 2003. As further discussed infra p. 22, petitioners caused the Marine stock to be formally owned by a shareholder thatmade Marine ineligible for status as an S corporation as of September 5, 2003, and Marine thereafter reported that it was taxable as a C corporation.
Marine was a small offshore water transportation/tugboat business. Marine owned a 214-foot offshore oilfield supply vessel named the M/V Sarah Jane Bruce (Sarah Jane). The Sarah Jane was Marine's principal asset (and its sole marine vessel) in 2003. Marine operated the Sarah Jane out of Port Fourchon, Louisiana.
Marine acquired the Sarah Jane on September 3, 2002, in a "like-kind exchange" for a boat of then-equal value which Mr. Bruce (through his business) had acquired for and used in his business since 1993. During 2003 the Sarah Jane could easily have been sold (and was sold in 2003 as discussed infra p. 24) for $5 million. Marine's basis in the Sarah Jane was zero as of January 1, 2003.
Mr. Bruce coowned a second business referred to as "Maritime Logistics". Maritime Logistics' other coowners were Mr. Rousse, Joey Adams, and one or more other individuals whose identity is not relevant to our analysis. Mr. Adams was a boat owner, and he owned (through his company) one or more marine vessels.
Maritime Logistics was a maritime brokerage business; i.e., essentially a business in which one or more boat owners worked together to obtain contractualwork for their boats. Maritime Logistics obtained contract work for Marine and for a company owned by Mr. Adams (and possibly for one or more other companies). Maritime Logistics' manager and primary worker was Mr. Rousse.
Mr. Rousse grew up in Mr. Bruce's neighborhood. Mr. Rousse as a teenager mowed the grass at Mr. Bruce's home, and they had a special business and familylike personal relationship. Their personal relationship originally stemmed from Mr. Bruce's friendship with Mr. Rousse's father, which developed from the father's and Mr. Bruce's attending school together and from their working together. With Mr. Bruce's encouragement, Mr. Rousse later received a college degree in business administration and then went to work for Mr. Bruce full time. Mr. Rousse worked for Mr. Bruce for approximately 20 years, and Mr. Rousse spearheaded the growth of Mr. Bruce's businesses during that time.
Mr. Bruce always encouraged Mr. Rousse to further his education, and Mr. Rousse earned an M.B.A. from the University of New Orleans while employed by Mr. Bruce. Mr. Rousse ultimately stopped working for Mr. Bruce to pursue a master's degree and a Ph.D in economics from the University of Illinois at Chicago, Illinois. After earning those degrees during or about 2007, Mr. Roussewent to work for the Federal Reserve Bank of Chicago as an economist specializing in policy research and economic outreach.
W&T Offshore, Inc. (W&T), is a publicly traded oil and gas exploration company operating primarily in the Gulf of Mexico. In or about March 2003 W&T and Maritime Logistics were negotiating some long-term contracts which would allow Marine to build one or more supply vessels to service W&T.
On March 19, 2003, Marine borrowed $2,522,223 from American Horizons Bank (AHB). This loan was secured by Marine's deposits with AHB.
On March 20, 2003, Mr. Bruce borrowed $2,303,967 from Marine. Mr. Bruce secured the repayment of this loan with stock that he owned in FBT Bancorp, Inc. (FBT), a Delaware corporation.
Jack Doverspike is a Larose, Louisiana-based insurance agent and financial planner with whom Mr. Bruce had done business (e.g., made investments and purchased life insurance) for several years. In or about 1998 Mr. Doverspikebegan talking to Mr. Bruce about his and his wife's estate plans and a possible "estate freeze" to minimize estate tax, and Mr. Doverspike did some estate work for Mr. Bruce in or about 2001.
Soon after W&T and Maritime Logistics began negotiating the long-term contracts, Mr. Doverspike invited Mr. Bruce to meet with Mr. Doverspike and two financial planners, John Ohle and Scott Deichmann,3 to discuss Mr. Bruce's financial and estate plans further. As of that time Mr. Bruce was planning to retire and to move permanently to Baton Rouge, Louisiana, where one of his daughters and her children lived, and he desired to sell Marine (or the Sarah Jane) as part of...
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