Dixon v. Commissioner

• Decision Date: 11 December 1991
• Docket Number: Docket No. 30979-85,Docket No. 40159-84.,Docket No. 29643-86.,Docket No. 9382-83.,Docket No. 4201-84.,Docket No. 19321-83.,Docket No. 22783-85.,Docket No. 17640-83.,Docket No. 30965-85.,Docket No. 30010-85.,Docket No. 15135-84.,Docket No. 15907-84.,Docket No. 31236-84.,Docket No. 16900-83.
• Parties: Jerry R. and Patricia A. Dixon, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner.
• Court: U.S. Tax Court

62 T.C.M. 1440

T.C. Memo. 1991-614

Jerry R. and Patricia A. Dixon, et al.¹ v. Commissioner.

Docket No. 9382-83.

Docket No. 16900-83.

Docket No. 17640-83.

Docket No. 19321-83.

Docket No. 4201-84.

Docket No. 15135-84.

Docket No. 15907-84.

Docket No. 31236-84.

Docket No. 40159-84.

Docket No. 22783-85.

Docket No. 30010-85.

Docket No. 30965-85.

Docket No. 30979-85

Docket No. 29643-86.

United States Tax Court.

Filed December 11, 1991.

Joe Alfred Izen, Jr., for the petitioners in Docket Nos. 9382-83, 17640-83, 4201-84, 15907-84, 40159-84, 22783-85, 30010-85, 30979-85, and 29643-86.² Luis C. DeCastro and Philip J. Hoskins, for the petitioners in Docket Nos. 19321-83, 31236-84, and 30965-85. John R. Cravens, pro se in Docket Nos. 16900-83, 15135-84. Kenneth W. McWade, Jeffrey A. Hatfield, and Thomas A. Dombrowski, for the respondent.

                                                            TABLE OF CONTENTS
                Issues ........................................................................................   1444
                Findings of Fact ..............................................................................   1444
                      I. Promoter Background ..................................................................   1444
                     II. Kersting Corporations ................................................................   1445
                         A. Generally .........................................................................   1445
                         B. Holding Companies and Subsidiaries ................................................   1445
                            1. Charter Financial Corporation ..................................................   1445
                            2. Investors Financial Corporation ................................................   1446
                         C. Acceptance Corporations ...........................................................   1447
                         D. Leasing Corporations ..............................................................   1448
                         E. Other Kersting Corporations .......................................................   1449
                         F. Books and Records; Tax Return Preparation .........................................   1450
                

                         G. Collection Litigation .............................................................   1451
                    III. Kersting Investment Programs .........................................................   1452
                         A. Generally .........................................................................   1452
                         B. Stock Purchase Plan ...............................................................   1454
                         C. Stock Subscription Plan ...........................................................   1455
                         D. Leasing Corporation Plan ..........................................................   1458
                         E. CAT-FIT Plan ......................................................................   1460
                         F. Flow of Funds .....................................................................   1462
                            1. Generally ......................................................................   1462
                            2. Stock Purchase Plan ............................................................   1462
                            3. Stock Subscription Plan ........................................................   1463
                            4. Leasing Corporation Plan .......................................................   1463
                            5. CAT-FIT Plan ...................................................................   1464
                         G. Termination of Stock Programs .....................................................   1465
                         H. Collection Activities .............................................................   1466
                         I. Notices of Deficiency .............................................................   1467
                     IV. Petitioners ..........................................................................   1467
                         A. Jerry R. and Patricia A. Dixon ....................................................   1467
                         B. John R. and E. Maria Cravens ......................................................   1470
                         C. Ralph J. Rina .....................................................................   1470
                         D. John R. and Maydee L. Thompson ....................................................   1472
                         E. Hoyt W. and Barbara D. Young ......................................................   1473
                         F. Robert L. and Carolyn S. DuFresne .................................................   1475
                         G. Terry D. and Gloria K. Owens ......................................................   1477
                         H. Richard and Fidella Hongsermeier ..................................................   1480
                Opinion .......................................................................................   1481
                     Issue 1: Validity of Deficiency Notices ..................................................   1482
                     Issue 2: Section 163(a) Interest Deductions ..............................................   1483
                         A. Stock Programs ....................................................................   1483
                            1. Generally ......................................................................   1483
                            2. Sham Analysis ..................................................................   1485
                            3. Subscription Agreements ........................................................   1494
                            4. Primary Loans ..................................................................   1499
                            5. Leverage Loans .................................................................   1502
                            6. Other Waltz Issues .............................................................   1503
                            7. Collection Litigation ..........................................................   1505
                            8. Summary ........................................................................   1506
                         B. CAT-FIT ...........................................................................   1506
                     Issue 3: Income from Corporate Distributions .............................................   1509
                     Issue 4: Owens Subchapter S Corporations, Mortgage Funding, and Investment Expenses ......   1510
                     Issue 5: Section 163(d) Investment Interest Limitation ...................................   1512
                     Issue 6: Section 6653(a) Negligence ......................................................   1512
                     Issue 7: Section 6651(a)(1) Failure to File ..............................................   1513
                     Issue 8: Section 6661(a) Substantial Understatement ......................................   1513
                     Issue 9: Section 6621(c) Increased Interest Rate .........................................   1514
                

Memorandum Findings of Fact and Opinion

GOFFE, Judge:

The Commissioner determined deficiencies in and additions to petitioners' Federal income taxes, as follows:

                Jerry R. and Patricia A. Dixon
                                                              Additions to Tax, Secs.3
                Year                             Deficiency    6653(a)    6653(a)(1)
                1977 ........................    $ 9,885.00   $  494.00      --
                1978 ........................     17,375.00      868.75      --
                1979 ........................     18,087.00      904.35      --
                1980 ........................     29,448.00    1,649.70      --
                1981 ........................     28,061.00       --       $1,759.90*
                * The Commissioner did not determine an addition to tax under sec
                6653(a)(2) for 1981
                

                John R. and E. Maria Cravens
                Year                                 Deficiency   Sec. 6653(a) Addition to Tax
                1979 .............................   $ 4,508.00             $  225.40
                1980 .............................    19,251.70                962.59
                Ralph J. Rina
                Year                                 Deficiency   Sec. 6653(a) Addition to Tax
                1979 .............................   $16,236.38             $  811.81
                1980 .............................    39,015.00              1,950.75
                John R. and Maydee L. Thompson
                                                                         Additions to Tax, Secs
                Year                                 Deficiency    6653(a)    6653(a)(1)   6651(a)(1)
                1979 .............................   $18,161.00   $  908.00       --            --
                1980 .............................    24,838.00       --          --            --
                1981 .............................    36,294.52       --      $1,958.28*   $ 4,934.32
                * Plus, under sec. 6653(a)(2), 50 percent of the interest due on the deficiency
                

The Commissioner also determined an increased interest rate for 1981 under section 6621(c), formerly section 6621(d).

                Hoyt W. and Barbara D. Young
                                                                        Additions to Tax, Secs
                Year                                 Deficiency    6653(a)    6653(a)(1)   6661(a)(1)
                1979 .............................   $15,658.00   $  783.00       --            --
                1980 .............................    23,582.00    1,179.00       --            --
                1981 .............................    23,819.00       --      $1,191.00*        --
                1982 .............................    13,773.59       --         688.68*   $ 1,377.36
                1983 .............................     2,163.42       --         108.17*        --
                * Plus, under sec. 6653(a)(2), 50 percent of the interest due on the deficiency.
                

The Commissioner also determined an increased interest rate for 1982 and 1983 under section 6621(c).

                Robert L. and Carolyn S. DuFresne
                                                                        Additions to Tax, Secs.
                Year                                 Deficiency    6653(a)    6653(a)(1)   6661(a)(1)
                1980 .............................   $25,877.00   $1,293.85       --           --
                1981 .............................    21,790.00      --       $1,089.50*       --
                1982 .............................    16,684.70      --          834.24*   $1,668.47
                1983 .............................    15,851.64      --          792.58*    1,585.16
                *

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