Hayes v. C.I.R., 100694 FEDTAX, 30609-81

Docket Nº:30609-81, 22632-82, 26776-82,
Opinion Judge:DAWSON, Judge: DINAN, Special Trial Judge:
Party Name:John E. HAYES, Jr. and Cheryl S. Hayes, et al.,[1] Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Philip H. Weener, Atlanta, GA, for petitioners. Eric B. Jorgensen, Roswell, GA, for respondent.
Case Date:October 06, 1994
Court:United States Tax Court
 
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68 T.C.M. (CCH) 862

John E. HAYES, Jr. and Cheryl S. Hayes, et al.,[1] Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 30609-81, 22632-82, 26776-82,

United States Tax Court.

October 6, 1994

Philip H. Weener, Atlanta, GA, for petitioners.

Eric B. Jorgensen, Roswell, GA, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge:

These consolidated cases were assigned to Special Trial Judge Daniel J. Dinan pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183.[2] The Court agrees with and adopts his opinion which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

DINAN, Special Trial Judge:

In these consolidated cases respondent determined deficiencies in petitioners' Federal income taxes and additions to tax as follows:

Docket No. 30609-81
Addition to Tax
Year Deficiency Sec. 6653(b)
1976 $1,082,175 $541,087
1977 8,422 4,211
Docket No. 22632-82
Addition to Tax
Year Deficiency Sec. 6651(a)(1)
1978 $5,264.16 $789.62
Docket No. 26776-82
Addition to Tax
Year Deficiency Sec. 6653(b)
1978 $1,203,070 $601,535
Docket No. 39901-85
Addition to Tax
Year Deficiency Sec. 6653(b)
1979 $998,620 $449,310
1980 704,225 352,113
Docket No. 44701-85
Additions to Tax
Year Deficiency Sec. 6653(a) Sec. 6653(a)(1) Sec. 6653(a)(2)
1979 $114,703 $5,735 __ __
1980 113,581 5,679 __ __
1981 87,422 - $4,371 1

FN1 50% of the interest due on the underpayments due to negligence.

Docket No. 30613-86
Additions to Tax
Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2)
1982 $8,591 $430
Docket No. 277-86
Addition to Tax
Year Deficiency Sec. 6653(b)
1981 $360,633 $180,317
Docket No. 34875-87
Additions to Tax
Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6661
1983 $11,611 $581 1 $2,903
Docket No. 34923-87
Additions to Tax
Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6661
1983 $137,780.00 $6,889.00 1 $34,445.00
1984 1,299.25 1,299.25 1 6,496.25
FN1 50% of the interest due on the underpayments due to negligence. Concessions have been made by the parties. The only issue remaining for decision is whether respondent improperly and impermissibly discriminated against petitioners John E. Hayes, Jr., and Cheryl S. Hayes by not offering them the same settlement offer that was offered to other investors in two tax shelters in which petitioner John E. Hayes, Jr., participated. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulations of fact and attached exhibits are incorporated herein by this reference. Petitioners John E. Hayes, Jr., and Cheryl S. Hayes resided in, and Hayes and Associates, Inc., had its principal office located in Atlanta, Georgia, when they filed their petitions in these consolidated cases. John E. Hayes, Jr. (petitioner), was graduated from Chattanooga City High School and from September 1959 to December 1964, attended Georgia Tech, where he received a B.S. degree in industrial management. After graduating from Georgia Tech, petitioner was employed by the First National Bank of Atlanta, Georgia, where he worked as an administrative assistant to several trust officers of the bank. As an administrative assistant, he learned the trust operations of the bank. In November 1969, after having been discharged from the U.S. Navy, petitioner was employed in California, with Shearson, Hammill & Co., where he was a stockbroker trainee. He registered as a commodities broker with Shearson, Hammill in 1970. While at Shearson, Hammill petitioner took the commodity examination administered by the Chicago Board of Trade and obtained a passing grade of B+. He was also registered as a representative on the New York Stock Exchange and the American Stock Exchange. Petitioner engaged in commodity trades with the London broker Rudolf Wolff & Co. on his own account in 1975. He also traded on the London silver market in 1976 with the London broker Rothmetal. Petitioner did business under the name Southern California Metals. He left Shearson, Hammill and went to work for Loeb Rhodes. In February 1976, petitioner left Loeb Rhodes and went to work under an employment contract with William Irwin in California in a company known as Irwin Management Co., later called Irwin Trading Co. William Irwin supplied petitioner with various materials to be used to make presentations to potential clients, including a copy of Irwin Trading Company's Federal income tax return for the taxable year ended August 31, 1975, and copies of documents showing transactions done for Irwin Trading Co., in the cash and carry commodities market that generated a tax shelter loss which was claimed on the return. Petitioner also was made a vice president of Irwin Trading Co., during 1976. On or about June 21, 1976, petitioner opened an office in Atlanta to obtain clients to engage in commodities trading with William Irwin's firm. In 1976, Page Boyd and his Atlanta law firm prepared 10 limited partnership agreements and 10 limited partnership subscription agreements for petitioner. The 10 limited partnerships were known as Hayes Associates I through Hayes Associates X. The documents were filed for petitioner with the Clerk of the Superior Court of Fulton County, Georgia. Petitioner marketed the Hayes Associates limited partnerships as a 10-to-1 writeoff for tax purposes. The Hayes Associates limited partnerships reported ordinary losses and capital gains from commodities traded in 1976. Those alleged trades were with Irwin Trading GmbH, a corporation formed by William Irwin and domiciled in Frankfurt, Germany. The Hayes Associates limited partnerships also reported ordinary losses and capital gains from commodities traded in 1977. Those alleged trades were with Les Diablerets Holdings, a brokerage firm established by Fred Thom in Switzerland to trade in commodities. The ordinary losses and capital gains reported by the partnerships were substantially equal in amounts; the tax shelter was used to convert ordinary income into capital gain. In addition to the Hayes Associates limited partnerships, petitioner also marketed a tax shelter that offered a 5-to-1 writeoff for tax purposes. Under this tax shelter, a grantor trust was established in which a client would invest. Petitioner was the trustee of each grantor trust. Each grantor trust then joined a foreign partnership. In 1976, the foreign partnership was Irwin Eurotrade. In 1977 and subsequent years, Fred Thom was the general partner of the various foreign partnerships which the grantor trusts joined. Most of petitioner's clients were in grantor trust tax shelters. In or about 1976, petitioner established his own grantor trust, the John Hayes Trust. That trust then invested with an offshore broker/dealer in gold cash-and-carry commodities transactions known as Intertrade in which Fred Thom was the general partner. Petitioner's trust then became a general partner in Intertrade. In 1976, petitioner also had a grantor trust that was a partner in Irwin Eurotrade. From 1977 through 1981, petitioner invested a total of $200,000 in various grantor trusts and Hayes Associates limited partnerships. After auditing petitioners' Federal income tax returns, respondent determined in the statutory notices of deficiency for the years 1976 through 1983, inter alia, that the deductions, gains, and losses reported by them regarding petitioner's alleged grantor trusts could not be recognized because it had not been shown that they were actually incurred or that they were incurred as claimed. It was further determined that the form of all of the transactions relating to the trusts was a sham. Respondent also determined that the deductions, gains, and losses reported regarding petitioner's alleged commodity trading account and his interest in alleged commodity trading transacted through various Hayes Associates limited partnerships and related entities could not be recognized because it had not been shown that they were actually incurred or that they were incurred as claimed. Respondent further determined that the form of all the transactions relating to the Hayes Associates limited partnerships, including the foreign commodity dealings both individually and through the limited partnerships, was a sham. Respondent offered a settlement to the investors in the commodities tax shelters in which petitioner was the trustee of their grantor trusts and in which he was the managing general partner of one of the Hayes Associates limited partnerships I through X. The settlement provided that the investors would be allowed an ordinary deduction for their net cash-out-of-pocket investment, plus trustee fees, in lieu of all claimed income, gains, and losses from the tax shelters. In addition, respondent offered to concede additions to tax, including the section 6621(c) increased interest rate on deficiencies. The deduction allowance was to be telescoped into the initial year of each investor's participation; that is, if an investor made an investment in more than 1 year, then the total cash out-of-pocket was allowed as a deduction in the first investment year. Respondent did not authorize her agents to make the offer to petitioner but restricted the offer to the other investors. Petitioners John E. Hayes Jr., and Cheryl S. Hayes argue that they are entitled to receive the same settlement offer that was made to...

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