Kersting v. Commissioner
| Decision Date | 17 June 1999 |
| Docket Number | Docket No. 7448-96. |
| Parties | Henry F.K. Kersting v. Commissioner. |
| Court | U.S. Tax Court |
Leonard Thomas Bradt, for the petitioner. Henry E. O'Neill, for the respondent.
Mr. Kersting petitioned the Court on April 16, 1996, to redetermine respondent's determination of deficiencies in petitioner's Federal income tax for 1982 through 1988. Respondent determined petitioner had unreported income in connection with his tax shelter promotion activities. The resulting deficiencies in income tax and additions to tax are as follows:
Additions to Tax
----------------------------------------------
Year Deficiency Sec. 6651(a)(1) Sec. 6653(a)1 Sec. 6654(a)
1982 .................... $ 454,752 $113,688 $22,738 $44,274
1983 .................... 855,081 213,770 42,754 52,325
1984 .................... 960,807 240,202 48,040 60,407
1985 .................... 1,045,458 261,365 52,273 59,909
1986 .................... 787,428 196,857 39,371 38,097
1987 .................... 101,574 25,394 5,079 5,489
1988 .................... 28,064 7,016 1,403 1,794
1 Respondent also determined that the time sensitive addition to tax under section 6653(a)(2) also
applied for 1982 through 1988, and that the time sensitive addition to tax under section 6653(a)(1)(B)
applied to 1986 and 1987
We decide the following issues:
1. Whether the presumption of correctness attaches to respondent's deficiency determination. We hold it does.
2. Whether petitioner's gross income includes receipts from tax shelter promotion activities as determined by respondent in the following amounts:
Year Amount
1982 ............................ $ 916,997
1983 ............................ 1,720,483
1984 ............................ 1,932,671
1985 ............................ 2,101,968
1986 ............................ 1,585,676
1987 ............................ 266,681
1988 ............................ 83,045
We hold it does.
3. Whether section 162 allows petitioner to claim deductions for 1982 through 1988 for expenses incurred by petitioner's alter ego corporations. We hold it does not.
4. Whether petitioner is liable for additions to tax for failure to file under section 6651(a)(1) for 1982 through 1988. We hold he is.
5. Whether petitioner is liable for additions to tax for negligence under section 6653(a)(1) and (2) for 1982 through 1985, section 6653(a)(1)(A) and (B) for 1986 and 1987, and section 6653(a) for 1988. We hold he is.
6. Whether petitioner is liable for additions to his 1982 through 1988 taxes under section 6654(a) for failure to pay estimated taxes. We hold he is.
Unless otherwise stated, section references are to the Internal Revenue Code in effect for the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure. Dollar amounts are rounded to the nearest dollar.
Some of the facts have been stipulated and are so found. The stipulated facts and exhibits submitted therewith are incorporated herein by this reference. Petitioner resided in Honolulu, Hawaii, when he petitioned the Court.
Petitioner was a promoter and manager of investment plans designed to create interest deductions for plan participants.1 Petitioner has not filed a tax return since 1975. In January 1981, special agents of the Internal Revenue Service (IRS), Criminal Investigation Division, executed a warrant to search petitioner's corporate offices. Among the documents seized were lists of participants in the tax shelter programs. Audits of these participants resulted in the filing in this Court of approximately 1,800 petitions. In 1989, 14 dockets involving eight petitioners with similar adjustments were selected as test cases, consolidated for purposes of trial, briefing, and opinion, and set for trial under the name Dixon v. Commissioner. The issue in Dixon was whether the interest deductions generated by the Kersting investment plans were allowable.
While the Dixon taxpayers were awaiting trial, the IRS on May 15, 1987, petitioned the U.S. District Court for the District of Hawaii (District Court) for leave to serve a John Doe summons on petitioner. In its petition, the IRS alleged that petitioner was promoting tax shelters of questionable validity and that it sought the summoned documents in order to identify taxpayers participating in petitioner's investment plans.
The District Court enforced the John Doe summons over the objections of petitioner and third-party intervenors. The District Court's enforcement order was affirmed by the Court of Appeals for the Ninth Circuit, but the appellate court remanded the case to the District Court to determine whether petitioner had already complied with the summons and thus rendered the appeal moot. See United States v. Kersting [90-1 USTC ¶ 50,039], 891 F.2d 1407, 1411-1413 (9th Cir. 1989).
Following service of the John Doe summons, the IRS determined that petitioner was engaged in promoting abusive tax shelters from 1982 through 1988. Based on his determination that the 33 corporations involved in the investment plans were alter egos of petitioner, the Commissioner attributed income from the corporations to petitioner as follows: $916,997, $1,720,483, $1,932,671, $2,101,968, $1,585,676, $266,681, and $83,045 for the years 1982 through 1988, respectively. The Commissioner also assessed penalties in excess of $3.8 million against petitioner pursuant to sections 6700 and 6701. Petitioner paid $22,398, a portion of the sections 6700 and 6701 penalties, and brought suit in the District Court for refund of the amounts paid (Kersting I, Civ. No. 90-00304 HMF). The United States filed a counterclaim in the amount of $2,329,700 to reduce the section 6701 penalties to judgment, and it brought a separate action to reduce the section 6700 penalties to judgment (Kersting II, Civ. No. 92-00593 HMF). The 33 corporations involved in the investment plans brought a wrongful levy action pursuant to section 7426 seeking various remedies (Pacific Paradise, Civ. No. 91-00747 HMF). The three cases were consolidated and are hereinafter referred to as Kersting (Consolidated Cases).
The Dixon taxpayers tried their cases before this Court in January 1989. In Dixon v. Commissioner [Dec. 47,801(M)], T.C. Memo. 1991-614, the Court sustained virtually all of the Commissioner's determinations in each of the test cases. However, the Court's decisions in Dixon were vacated and remanded sub nom. DuFresne v. Commissioner [94-1 USTC ¶ 50,286], 26 F.3d 105 (9th Cir. 1994), with directions to conduct an evidentiary hearing to consider the effect of the Commissioner's admission, subsequent to the trial and entry of decisions, that there had been secret settlements with two of the Dixon test case taxpayers. Following an extensive evidentiary hearing and in a lengthy opinion, the Tax Court reinstated the decisions in Dixon determining deficiencies in the income of the taxpayers. See Dixon v. Commissioner [Dec. 53,314(M)], T.C. Memo. 1999-101.
Kersting (Consolidated Cases) was tried in the District Court before Judge Harold M. Fong in a nonjury trial commencing May 10, 1994, and concluding June 17, 1994. During the course of the trial, the District Court considered and denied a number of motions filed by petitioner. See Kersting v. United States [95-1 USTC ¶ 50,077], 865 F. Supp. 669 (D. Haw. 1994). On September 2, 1994, the District Court entered findings of facts and conclusions of law. Adopting the Commissioner's gross income calculations, the District Court found, among other things, that petitioner was liable for penalties under section 6700 for 1982 through 1988 in the aggregate amount of $1,373,700.2 In calculating the amounts of the penalties, the District Court found that the 33 corporations were alter egos of petitioner and that the gross income of the corporations was therefore attributable to petitioner. Specifically, the District Court found that:
The government has demonstrated that Kersting derived as gross income through his corporations $3,478,036.25 from his abusive programs from September 4, 1982, through July 18, 1984, and $5,129,483.70 thereafter. Applying the appropriate percentages * * * Kersting therefore is liable in the amount of $1,373,700.41 pursuant to section 6700.
Though he has the burden of proof in this area, Kersting presented no credible evidence of what he considered was the gross income derived or to be derived from his programs. In fact, Kersting's own testimony strongly suggested that he generated much more income from his programs than was included by the IRS in its calculations and that the Section 6700 penalty is substantially understated.
Judgment for the Government was entered on September 30, 1994, and an appeal by Mr. Kersting (and others) of the judgment is pending before the Court of Appeals for the Ninth Circuit.
On September 14, 1995, respondent issued a notice of deficiency to petitioner that determined deficiencies and additions to tax based on gross income attributable to petitioner through the 33 corporations.
Petitioner moves to shift the burden of proof to respondent. The parties agree respondent based his determination of unreported income on the District Court's findings in Kersting (Consolidated Cases). Petitioner contends respondent's sole reliance on those findings makes the determination arbitrary and erroneous so as to shift the burden of proof to respondent.3 We disagree.
Respondent's determination is generally presumed correct, and the taxpayer has the burden of proof. See Rule 142(a); Welch v. Helvering [3...
To continue reading
Request your trial