Finazzo v. Commissioner

Citation83 T.C.M. 1297
Decision Date27 February 2002
Docket NumberDocket No. 5727-00.
PartiesAnthony N. and Marie M. Finazzo v. Commissioner.
CourtUnited States Tax Court

In a so-called affected items notice of deficiency, respondent determined additions to tax to petitioners' Federal income tax for the year and in the amounts as shown below:

                Additions to Tax
                                                                            Sec.1 Sec.        Sec
                Year                                                      6653(a)(1)     6653(a)(2) 36661
                1983 ..................................................     $618         2$12,355     $3,089
                1 Throughout this opinion and unless otherwise indicated, all section references are to the Internal Revenue Code in effect for
                the taxable year in issue
                2 The first page of the notice of deficiency mistakenly equates the amount of this addition to tax with the amount of the
                deficiency in income tax (see infra, subdivision "I" of the Findings of Fact). Prior to trial, respondent amended his answer to
                claim an increased addition to tax pursuant to sec. 6214(a). The increase, in the amount of $17,877, is purely computational
                in nature
                3 The first page of the notice of deficiency mistakenly references sec. 6662(d), which section is the successor to sec. 6661 and
                is applicable for returns the due date for which (determined without regard to extensions) is after December 31, 1989. See
                Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721(a), (c)(2), (d), 103 Stat. 2395-2400

After a concession by petitioners,1 the issues for decision are as follows:

(1) Whether petitioners are liable for additions to tax under section 6653(a)(1) and (2) for negligence or intentional disregard of rules or regulations. We hold that petitioners are liable for such additions.

(2) Whether petitioners are liable for the addition to tax under section 6661 for substantial understatement of tax liability. We hold that petitioners are liable for such addition.

The foregoing two issues relate to the participation of Anthony N. Finazzo (petitioner) as a limited partner in a jojoba partnership known as San Nicholas Research, Ltd.


Some of the facts have been stipulated, and they are so found. The stipulated facts and attached exhibits are incorporated herein by this reference.

Petitioners resided in Fontana, California, at the time that their petition was filed with the Court.

A. Petitioners' Background and Experience

Petitioner graduated in 1953 from Chaffey Junior College in Ontario, California, with an associate of arts degree. He then attended the University of California at Los Angeles for 1 year where he took basic courses in business administration, including accounting, economics, and investing. Petitioner never took courses in either Federal or State taxation, nor did he ever take courses related to either farming or agriculture.

Petitioner is a successful businessman. Prior to 1983, petitioner served for 11 years as chairman of the board of directors of Fontana First National Bank; he also served as branch manager for several other financial institutions. In 1983, the taxable year in issue, petitioner was the general manager and 25-percent owner of Midway Honda-GMC Inc., a highly profitable automobile and truck dealership. In July 1983, petitioner sold his ownership interest in the dealership and later became executive vice president of Monitor Dynamics, a corporation specializing in electronic security systems for both civilian and military use.

During the year in issue, petitioner Marie M. Finazzo was employed by the Fontana Unified School District as secretary for the budget commission.

In 1983, petitioner was financially well off and sophisticated. For that year, he received compensation from Midway Honda-GMC, Inc. in the amount of $170,085, gain from the sale of stock in the dealership in the amount of $245,160, and interest in the amount of $8,445. In addition, petitioner had equity interests in: (1) A partnership known as Fontana Bancorp Development; (2) a partnership known as Carousel Video; (3) San Nicholas Research, Ltd. (see infra "C" through "F"); and (4) an S corporation known as Classic Touch, Inc., that manufactured convertible tops for automobiles in Palm Springs, California.

B. Petitioner's Friend and Associate William G. Kellen

William G. Kellen (Mr. Kellen) was petitioner's close personal friend and business associate.

Mr. Kellen was a general partner and tax matters partner of four limited jojoba partnerships: Utah Jojoba Research, Ltd. (Utah Jojoba); Blythe Jojoba I Research, Ltd. (Blythe Jojoba I); Blythe Jojoba II Research, Ltd. (Blythe Jojoba II); and Desert Center Jojoba Research, Ltd. (Desert Center Jojoba). Each of these partnerships was similar, if not identical, to San Nicholas Research, Ltd., described infra in "C" through "F".

Prior to 1982, Mr. Kellen did not have any experience in growing jojoba, nor did he have any experience in either the research or development of jojoba. Prior to 1982, Mr. Kellen's knowledge concerning jojoba was limited to articles that he had read in various magazines and a general familiarity with the existence of an experimental jojoba plantation located at the University of California at Riverside.

In 1983, Mr. Kellen was actively engaged in the practice of law, specializing in the formation of financial institutions such as banks, savings and loan associations, and thrift and loan associations. Mr. Kellen did not have any expertise in accounting or tax matters, nor did he ever attempt to render advice on those subjects.

C. Petitioner's Investment in San Nicholas Research, Ltd.

Petitioner was introduced to jojoba in the fall of 1983 by Mr. Kellen, who provided petitioner with a copy of a private placement memorandum dated October 10, 1983 (see infra "D" and "F") for San Nicholas Research, Ltd. (San Nicholas or the partnership). Thereafter, on December 29, 1983, petitioner signed a subscription agreement and purchased 10 limited partnership units (a 7.8-percentage interest) in San Nicholas.2

The general partner and tax matters partner of San Nicholas was Alfred M. Clancy, an individual whom petitioner did not know, nor whom he had ever met, at the time that he invested in San Nicholas.

Petitioner purchased the partnership units pursuant to the aforementioned private placement memorandum. Petitioner paid $2,790 per limited partnership unit, or a total of $27,900, for his 10 units in San Nicholas. Of this amount, $1,140 per unit, or $11,400 for 10 units, was paid in cash. The balance, $1,650 per unit or $16,500 for 10 units, was payable pursuant to a 10-year promissory note.3

Prior to investing in San Nicholas, petitioner did not have any expertise in either farming or agriculture in general or jojoba in particular, nor did petitioner have any expertise in the area of research and development.

Prior to investing in San Nicholas, petitioner did not consult any expert in either farming or agriculture or jojoba, nor did petitioner consult any expert in research and development.

Prior to investing in San Nicholas, petitioner did not consult any attorney or accountant.4

Prior to investing in San Nicholas, petitioner did not visit the plantation site, nor did he know where it was located.

Petitioner was influenced to invest in San Nicholas by the fact that Mr. Kellen, his friend and business associate, had done so.5 Indeed, prior to investing, petitioner spoke with no individual other than Mr. Kellen. Petitioner was also influenced to invest by his belief that an investment in San Nicholas offered tax benefits.

D. Putative Nature of San Nicholas' Business

According to the private placement memorandum dated October 10, 1983 (the offering memorandum), San Nicholas was formed in order "to undertake a comprehensive research and development program on the plant Simmondsia Chinesis (Jojoba)." The offering memorandum described how this program was to be carried out:

The Partnership will enter into a research and development contract * * * with U.S. Agri Research and Development Corp. (the "R & D Contractor"), who will conduct the experiments in various test sites * * * as well as its laboratory or greenhouse facilities that it in its sole discretion deems advisable. In addition, the R & D Contract sets forth that a site in the vicinity of Desert Center and Blythe, California of from 30-50 acres will be delineated as the applied research site upon which all technology and improved cultivars developed on behalf of the Partnership during the term of the contract will be placed "in field." The Partnership will also have the right but not be obligated to enter into a License Agreement * * * to license to U.S. Agri Research and Development Corp. all technology developed on behalf of the Partnership for a period of forty (40) years and receive therefrom an amount equal to 85% of the products produced from the developed technology.6

Copies of the research and development (R&D) contract and the license agreement referred to in the preceding paragraph were attached as exhibits to the offering memorandum. The R&D contract identified U.S. Agri Research and Development Corp. (U.S. Agri) as a party to the contract and the R&D contractor thereunder. The license agreement identified U.S. Agri as a party to the contract and the licensee thereunder.

E. U.S. Agri and Eugene Pace

As previously indicated, the offering memorandum identified U.S. Agri as the R&D contractor under the R&D contract and as the licensee under the license agreement. U.S. Agri was also the R&D contractor and the licensee for Utah Jojoba, Blythe Jojoba I, Blythe Jojoba II, and Desert Center Jojoba.


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