In re Hopkins
| Decision Date | 24 July 1991 |
| Docket Number | Adv. No. 390-3592.,Bankruptcy No. 389-37580 RCM-7 |
| Citation | 131 BR 308 |
| Parties | In re Robert H. HOPKINS, Jr., Debtor. Robert H. HOPKINS, Jr., Plaintiff, v. UNITED STATES of America (INTERNAL REVENUE SERVICE), Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
Louise P. Hytken, Dept. of Justice, Tax Div., Dallas, Tex., for IRS.
Robert L. Yeager, III, Dallas, Tex., for debtor.
AMENDED MEMORANDUM OPINION
This matter came before the Court on cross motions for summary judgment filed on behalf of Robert H. Hopkins, Jr. ("Plaintiff") and United States of America (Internal Revenue Service) ("IRS" or "Defendant"). On August 22, 1990, Plaintiff filed a complaint to determine the dischargeability of certain income tax penalties and interest asserted in a June 4, 1990, IRS statutory notice of deficiency (the "Notice of Deficiency"). The questions posed in the complaint are whether income tax penalties and interest are dischargeable where the underlying income tax deficiency, for which they were assessed, has been eliminated by the carry-back of net operating losses from subsequent tax years. Believing that no issue of material fact remains, both Plaintiff and Defendant waived argument and submitted the matter on briefs and stipulated facts. After review of the pleadings, briefs, and case law, the Court enters the following as its Findings of Fact and Conclusions of Law pursuant to Bankruptcy Rules 7052 and 7056.
Plaintiff and his wife, Joanne S. Hopkins ("Mrs. Hopkins"),1 filed voluntary petitions under Chapter 7 of the Bankruptcy Code on November 27 and December 1, 1989, respectively. Plaintiff and Mrs. Hopkins were cash basis taxpayers who filed their U.S. Individual Income Tax Returns on a calendar year basis. They timely filed their Form 1040 for the taxable year 1982 on October 15, 1983, pursuant to timely executed and approved applications for extensions of time within which to file.2
Plaintiff's Form 1040 for taxable year 1982, as filed, reflected gross income of $403,488.01, which was derived by adding to wages, interest income and dividends the net income reported on Schedule E, attached to Plaintiff's Form 1040. The Schedule E attached to Plaintiff's Form 1040 for taxable year 1982 reflected losses attributable to two partnerships, both of which Defendant contends are abusive tax shelters, as follows:
Nusearch Development $ 495,525.66
Mopac Development $ 541,690.12
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NET LOSS $1,037,215.78
Also on the Schedule E attached to the Form 1040 for taxable year 1982, Plaintiff reported income from National Mortgage Corporation of America ("National"), a small business corporation, in the amount of $1,398,737.30. These losses attributable to Nusearch Development and Mopac Development in the total amount of $1,037,215.78 were offset against the $1,398,737.30 income received from National, for a net taxable income to be reported on Schedule E of $342,610.84. After taking into account other adjustments, deductions, and credits not in controversy herein, Plaintiff reported for taxable year 1982 taxable income in the amount of $246,384.53.
Plaintiff and Mrs. Hopkins timely filed their Form 1040 for the taxable year 1983 on April 15, 1984.3 Plaintiff's Form 1040 for taxable year 1983, as filed, reflected a negative gross income of , which derived by adding to wages, interest income and dividends the net loss reported on Schedule E, attached to Plaintiff's Form 1040. The Schedule E attached to Plaintiff's Form 1040 for taxable year 1983 reflected losses attributable to the same two partnerships, as follows:
Nusearch Development $25,976.03
Mopac Development $22,574.55
__________
NET LOSS $48,550.58
The Schedule E attached to Plaintiff's Form 1040 for taxable year 1983 also reflected losses attributable to National in the amount of $1,304,213.48. The total losses reported on the Schedule E attached to Plaintiff's Form 1040 for taxable year 1983 totaled $1,359,409.59. After taking into account other adjustments, deductions and credits not in controversy herein, Plaintiff reported for taxable year 1983 negative taxable income of .
As a result of the negative taxable income and losses in the amount of reported on Plaintiff's Form 1040 for taxable year 1983, Plaintiff filed, on October 18, 1985, the Form 1040X, Amended U.S. Individual Income Tax Return. By filing Form 1040X, Plaintiff carried back $1,087,574 as a loss allegedly incurred in 1983, which amount exceeded the loss reported on Plaintiff's Form 1040 for taxable year 1983, to taxable year 1982, for a refund from Defendant in the amount of $104,228. On December 2, 1985, Defendant issued to Plaintiff a refund in tax for the taxable year 1982, based on Plaintiff's Form 1040X, in the amount of $104,228.
Subsequent to the issuance of the tax refund for taxable year 1982, Defendant began an examination of Plaintiff's 1982 and 1983 Forms 1040, primarily due to Plaintiff's involvement in Nusearch Development and Mopac Development, which were determined by Defendant to be abusive tax shelters. In auditing Plaintiff's 1982 Form 1040, Defendant disallowed Plaintiff's claimed losses attributable to Nusearch Development and Mopac Development, in the total amount of $1,037,216. When added to the taxable income as shown on Plaintiff's Form 1040 for the taxable year 1982, Plaintiff's correct taxable income was $1,283,601.
The increase in taxable income for taxable year 1982 resulted in a deficiency in income tax due from Plaintiff for the taxable year 1982, in the amount of $518,610. The examining agent of Defendant determined that, based upon the $518,610 deficiency in income tax due from Plaintiff, the I.R.C. § 6621(c) penalty attributed to tax-motivated transactions, and the I.R.C. § 6661 penalty in the amount of $129,653, attributable to a substantial understatement of the tax, should apply.
During the process of the examination of Plaintiff's 1982 Form 1040, Plaintiff provided Defendant with a copy of his Form 1040 for taxable year 1983. In reviewing the Form 1040 for taxable year 1983, the IRS agent noticed that Plaintiff had claimed losses attributable to Nusearch Development and Mopac Development in the total amount of $48,550.58. The IRS agent disallowed the deductions taken by Plaintiff on the Form 1040 for taxable year 1983, which were attributable to Nusearch Development and Mopac Development, in the total amount of $48,550.58. The disallowance of the Nusearch Development and Mopac Development losses resulted in an adjustment to income in the amount of $48,550.58; however, when added to the large amount of negative taxable income, no positive taxable income or deficiency in tax as to the 1983 taxable year resulted. The effect of the adjustment to income as a result of this disallowance was to reduce the Schedule E loss to be shown on Plaintiff's Form 1040 for the taxable year 1983 to $1,010,768.
The disallowance of the losses also resulted in a reduction in Plaintiff's negative taxable income for the taxable year 1983, from to , and a maximum net operating loss that could be carried back to the 1982 taxable year in the amount of $1,010,768. This $1,010,768 loss, from taxable year 1983, was carried back to taxable year 1982 only, as taxable years 1980 and 1981 were negative taxable income years. Once carried back to the 1982 taxable year, the loss partially absorbed the $518,610 deficiency in income tax due by Plaintiff for the taxable year 1982.
In the process of examining the 1982 and 1983 Forms 1040 and the Form 1040X for 1982, the IRS agent utilized the 1983 loss amount reported by Plaintiff on his 1982 Form 1040X, which amount was erroneously entered as $1,087,574, and upon which figure, Plaintiff received a refund, and subtracted from this amount the revised net operating loss incurred in 1983 in the amount of $1,010,768, for a net adjustment to income of $76,806. This net adjustment to income, when added to the adjustments to income due to the disallowed deduction attributable to the Nusearch Development and Mopac Development tax shelter losses for taxable year 1982 in the amounts of $495,525.66 and $541,690.12, respectively, resulted in a total adjustment to taxable income in the amount of $1,114,020.78. The IRS agent added to the $1,114,020.78 adjustment to taxable income the negative taxable income reported by Plaintiff on his Form 1040X, which amount was , for a positive taxable income of $272,831.78.
The IRS agent utilized the applicable tax schedule to determine the correct amount of tax due on taxable income of $272,831.78, which tax was $104,188, and subtracted from this amount the amount of tax shown by Plaintiff on the Form 1040X, which amount was $2,318, for a deficiency in tax for the taxable year 1982, after utilizing the net operating loss carry back from 1983, in the amount of $101,870. After determining the deficiency in tax for taxable year 1982, the I.R.C. § 6661 substantial understatement penalty and the I.R.C. § 6621(c) tax motivated transaction penalty would be computed based upon the resulting deficiency of $101,870.
Plaintiff and Mrs. Hopkins filed their Form 1040 for the taxable year 1984 on October 18, 1985, which Form 1040 was considered by Defendant to be timely-filed pursuant to timely-executed and approved applications for extension of time within which to file. For taxable year 1984, Plaintiff reported on the Schedule E attached to the Form 1040 a net loss of $7,593,283. When carried back to the 1982 taxable year, only $429,936 of the 1984 net operating loss needed to be utilized to fully eliminate the $101,870 deficiency in income tax for the taxable year 1982, which amount remained after utilization of the net operating loss carry back from the 1983 taxable year. Although the $518,610 deficiency in income tax determined by Defendant to be due by Plaint...
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