Gould v. Comm'r

• Decision Date: 26 November 2012
• Docket Number: Docket No. 11606-10L,Docket No. 4592-08,139 T.C. No. 17,Docket No. 5887-07L
• Parties: THEODORE B. GOULD AND ESTATE OF HELEN C. GOULD, DECEASED, THEODORE B. GOULD, EXECUTOR,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

THEODORE B. GOULD AND ESTATE OF HELEN C. GOULD, DECEASED THEODORE B. GOULD, EXECUTOR,¹ Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

139 T.C. No. 17

Docket No. 5887-07L

Docket No. 4592-08

Docket No. 11606-10L

UNITED STATES TAX COURT

Filed November 26, 2012

In 1984, P-H and several entities in which he owned interests filed voluntary petitions in ch. 11 bankruptcy. The bankruptcy court established a liquidating trust to which all assets of the bankruptcy estates were transferred. The liquidating trustee remitted payments to the Internal Revenue Service (IRS) in satisfaction of the income tax liabilities of the debtors, including P-H's bankruptcy estate, for tax years before those at issue herein. On Ps' individual joint 1995, amended 1995, and 1996-2002 Federal income tax returns, Ps reportednet operating loss (NOL) deductions and estimated tax payments belonging to the liquidating trust and one of the debtor entities, arguing with respect to the trust that they are so entitled because P-H is the grantor of the liquidating trust pursuant to I.R.C. secs. 671-677. On each of their 1995-2002 tax returns, Ps also claimed capital loss deductions. In addition, they reported, on their joint 1995, amended 1995, and each of their 1996-2003 and 2005-07 tax returns, a self-employment tax liability but did not remit payment.

R determined deficiencies in Ps' 1995-2002 income tax and imposed fraud penalties under I.R.C. sec. 6663(a). The three-year period of limitations on assessment under I.R.C. sec. 6501(a) had expired for 1995-2001 before R issued the notice of deficiency. R alleges that the notice was timely issued as to those years because Ps filed false or fraudulent returns. See I.R.C. sec. 6501(c). For 2002, for which the period of limitations on assessment remained open, R alleges that P-H is liable for the I.R.C. sec. 6663(a) civil fraud penalty, or alternatively, that Ps are liable for the I.R.C. sec. 6662(a) accuracy-related penalty.

R determined to proceed by levy to collect Ps' 1995, 1999-2003, and 2005-07 self-employment tax liabilities and filed a notice of Federal tax lien with respect to those liabilities for 2000-2003 and 2005-07. Ps filed petitions for review of the determination pursuant to I.R.C. sec. 6330.

1. Held: For all audit years, P-H is not the grantor of the liquidating trust; the trust was not created and funded gratuitously on P-H's behalf; he did not acquire an interest in the trust from his bankruptcy estate upon its termination; nor is he the owner because trust income was used to discharge his indebtedness.

2. Held, further, for 1995-2002, Ps are not entitled to NOL deductions attributable to either P-H's bankruptcy estate or the liquidating trust.

3. Held, further, for 1995-2002, for failure to substantiate, Ps are not entitled to capital loss deductions.

4. Held, further, Ps' 1995-2002 returns were not fraudulent.

5. Held, further, because those returns were not fraudulent, R's determinations and adjustments regarding 1995-2001 are barred.

6. Held, further, because the liquidating trust is not a grantor trust with respect to P-H, Ps are not entitled to credit or refund of claimed overpayments of tax on income attributable to property held by the trust.

7. Held, further, this Court lacks jurisdiction to determine whether R properly abated assessments of income tax against the liquidating trust for tax years 1997 and 1998.

8. Held, further, Ps are liable for the I.R.C. sec. 6662(a) accuracy-related penalty for 2002.

9. Held, further, Ps' claims to credits against their 1995, 1999-2003, and 2005-07 self-employment tax liabilities are time barred.

10. Held, further, R did not abuse his discretion in denying Ps a face-to-face collection due process hearing for 2000-2003 and 2005-07.

Samuel Charles Ullman and W. Patrick Hancock, for petitioners in docket Nos. 5887-07L and 4592-08.

Theodore B. Gould, pro se and for the Estate of Helen C. Gould in docket No. 11606-10L.

William John Gregg and Erin R. Hines, for respondent in docket Nos. 5887-07L and 4592-08.

William John Gregg, for respondent in docket No. 11606-10L.

CONTENTS

FINDINGS OF FACT .............................................. 9

OPINION ...................................................... 22

I. Deficiency Proceeding Regarding Petitioners' 1995-2002 Tax Liabilities ................................................. 22

A. Period of Limitations .................................... 22

1. Introduction ...................................... 22

2. Underpayment of Tax .............................. 24

a. NOL Carryovers ............................. 24

(1) The MCLT Is Not a Grantor Trust ........... 25

(a) Collateral Estoppel ................. 27

(b) Grantor Trust Rules ................. 29

(2) Petitioners Are Not Entitled to NOL Carryovers of Petitioner's Bankruptcy Estate Upon Its Termination............................ 39

b. Capital Loss Deductions ....................... 45

c. Conclusion ................................. 48

3. Fraudulent Intent .................................. 48

a. Understatement of Income ...................... 50

b. Inadequate Maintenance of Records .............. 50

c. Failure To Cooperate With Tax Authorities ......... 52

d. Intent To Mislead ............................ 53

e. Filing False Documents ........................ 54

f. Implausible or Inconsistent Explanations of

Behavior ................................... 56

g. Conclusion ................................. 58

B. Deficiencies in Tax ..................................... 60

1. Introduction ...................................... 60

2. Disallowed Deductions ............................. 60

3. Credit or Refund of Overpayment of Tax ................ 61

4. Abatement of Assessments .......................... 63

C. Imposition of the Accuracy-Related Penalty .................. 65

1. Introduction ...................................... 65

2. Substantial Understatement of Income Tax .............. 66

3. Section 6664(c) Reasonable Cause Defense ............. 70

4. Conclusion ...................................... 75

II. Collection Proceeding Regarding Petitioners' 1995, 1999-2003 and 2005-07 Tax Liabilities .............................................. 76

III. Conclusion ................................................ 83

Appendix ....................................................... 84

HALPERN, Judge:

By a notice of deficiency, respondent determined deficiencies in, and penalties with respect to, Theodore B. Gould and Helen C. Gould's (petitioners'²) Federal income tax as follows:³

+----------------------------------+
                ¦      ¦            ¦Penalty       ¦
                ¦Year  ¦Deficiency  ¦              ¦
                ¦      ¦            ¦sec. 6663(a  )¦
                +------+------------+--------------¦
                ¦1995  ¦$41,218     ¦$30,914       ¦
                +------+------------+--------------¦
                ¦1996  ¦8,934       ¦6,701         ¦
                +------+------------+--------------¦
                ¦1997  ¦4,293       ¦3,220         ¦
                +------+------------+--------------¦
                ¦1998  ¦5,246       ¦3,935         ¦
                +------+------------+--------------¦
                ¦1999  ¦19,155      ¦14,366        ¦
                +------+------------+--------------¦
                ¦2000  ¦113,064     ¦84,798        ¦
                +------+------------+--------------¦
                ¦2001  ¦23,679      ¦17,759        ¦
                +------+------------+--------------¦
                ¦2002  ¦27,732      ¦20,799        ¦
                +----------------------------------+
                

On brief, respondent concedes an adjustment made in the notice of deficiency to petitioners' 1995 taxable income for an unreported $12,750 State income tax refund. His concession reduces the deficiency and penalty amounts for that year to $36,628 and $27,471, respectively.

By two Notices of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, respondent's Appeals Office (Appeals) sustained a proposed levy to collect petitioners' assessed but unpaid self-employment taxes, penalties, and interest for 1995, 1996, and 1999. We subsequently dismissed the levy action as to 1996 as moot.⁴ By a third Notice of Determination ConcerningCollection Action(s) Under Section 6320 and/or 6330, Appeals sustained (1) the filing of a notice of Federal tax lien relating to petitioners' assessed but unpaid self-employment taxes for 2000, 2001, 2002, 2003, 2005, 2006, and 2007 and (2) a proposed levy to collect petitioners' assessed but unpaid self-employment taxes, penalties, and interest for those years.

After respondent's concession that Mrs. Gould is not liable for the section 6663(a) civil fraud penalty, the issues for decision are: (1) whether the periods of limitations for assessing and collecting the proposed deficiencies and penalties remain open as to taxable years 1995-2001,⁵ and if so, whether (2) petitioners are entitled to a net operating loss (NOL) deduction for each of those years, (3) petitioners are entitled to a capital loss deduction for each of those years, (4) petitioners are entitled to a credit or a refund of an alleged overpayment for each ofthose years, (5) respondent properly abated certain tax assessments,⁶ and (6) Mr. Gould is liable for the civil fraud penalty pursuant to section 6663(a) for each of those years. Because we decide for petitioners with respect to issue (1), respondent is time barred from raising issues (2) through (6) as to 1995-2001, and we must decide those issues in petitioners' favor.

Respondent has also raised issues (2) through (6) as to taxable year 2002, for which, because of petitioners' consent to extend the period of limitations, respondent may still assess and collect tax. We must, therefore, decide issues (2) through (6) for that year. If we determine that Mr. Gould is not liable for the section 6663(a) penalty for that year, we must determine whether petitioners are liable for the section 6662(a) accuracy-related penalty.⁷

Finally, we decide whether (1) to sustain the filing of the notice of Federal tax lien relating to petitioners' assessed 2000-2003 and 2005-07 self-employment taxes,(2) respondent may proceed by levy to collect petitioners' 1995, 1999-2003, and 2005-07...