Klieger v. Commissioner
| Decision Date | 30 December 1992 |
| Docket Number | Docket No. 24138-90.,Docket No. 10334-91.,Docket No. 15343-90.,Docket No. 15000-90.,Docket No. 15341-90.,Docket No. 10388-91.,Docket No. 14096-90.,Docket No. 14477-90. |
| Citation | 64 T.C.M. 1624 |
| Parties | Kim S. Klieger and Sandra J. Klieger, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
Mark E. Gammons, 22255 Center Ridge Rd., Rocky River, Ohio, for the petitioners. Dawn M. Krause, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in and additions to petitioners' Federal income tax as follows:
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.
The issues in these consolidated cases arise out of petitioners' interest in one or more of the tax shelter programs known as Gifts Advertising (Gifts), Bingo Leasing (Bingo), and Pairware Research and Development (Pairware) (collectively the Programs). With the exception of some concessions by respondent and the question of the deductibility of petitioners' out-of-pocket losses, petitioners have stipulated respondent's adjustments in their Federal income tax liabilities for the years at issue.
In addition to deficiencies in Federal income tax, respondent also determined that petitioners were liable for various additions to tax and increased interest. Respondent has conceded the additions to tax under section 6659(a) for valuation overstatements; hence, petitioners Klieger and Griffith are not liable for those additions. After these concessions and stipulations, the issues that remain for decision are:
(1) Whether petitioners are liable for additions to tax under section 6653(a) for negligence or intentional disregard of rules and regulations;
(2) whether petitioners are liable for additions to tax under section 6661(a) for substantial understatement of income tax; and
(3) whether petitioners are liable for increased interest under section 6621(c).
For the reasons discussed below, we hold that petitioners are liable for additions to tax under sections 6653(a) and 6661(a) and increased interest under section 6621(c).
The facts that have been stipulated are so found, and we incorporate them by this reference.
During the taxable years 1986 and 1987, petitioners made payments to acquire interests in one or more of the Programs (Gifts, Bingo, and Pairware). The Programs were promoted by Thomas A. Graham (Graham) of Graham & Associates,2 a self-styled investment counselor, tax expert, and financial adviser. Graham, in conjunction with his associate, Joe Tribble, who was also an employee of the Lincoln Electric Co., solicited petitioners to participate in the Programs.
Graham and Tribble told petitioners that they would make long-term profits and would obtain short-term tax benefits by participating in the Programs. Graham and Tribble represented that the tax benefits of the Programs would allow participants to defer paying tax until they were making profits on their investments. Graham and Tribble advised petitioners to reduce the amounts withheld from their wages and salaries by increasing the number of exemptions claimed on their withholding certificates (Forms W-4) and to use the extra take-home pay to make the initial payments needed to acquire an interest in the Programs. Petitioners signed notes, on which they made few if any payments, for the balances due under the Programs.
Graham & Associates, through its tax return preparation division, Management Accounting Tax & Service, prepared petitioners' Federal income tax returns for the years in issue. These returns were prepared at no additional charge and petitioners understood that tax return preparation was one of the services for which they were paying Graham. In addition, petitioners were led to believe that Graham & Associates, through its attorney John N. Moore, would represent them at no additional charge if audited by the IRS in connection with the Programs. Petitioners Thornton, Ryall, Griffith, and Cullin were originally represented by Mr. Moore when they filed their petitions, but he withdrew shortly thereafter. The only other assistance petitioners received from Graham and Associates, after the audit had begun, was a letter from Graham to all Gifts participants stating the purported legal authority for the advertising deductions reported on their returns. Graham & Associates did not provide petitioners with any other help in dealing with the IRS audits of their returns.
During the years in issue, petitioners acquired interests in the following Programs promoted by Graham & Associates:
Programs
------------------------
Petitioner Year Gifts Bingo Pairware
Klieger 1986 ......................... Yes No Yes
Thornton 1986 ......................... Yes No No
Ryall 1986 ......................... Yes Yes No
1987 ......................... Yes No No
Griffith 1986 ......................... Yes No Yes
Cullin 1986 ......................... Yes No No
Omerza 1986 ......................... Yes No No
Brown 19831 ........................ N/A N/A N/A
1986 ......................... No No Yes
1987 ......................... Yes No No
1 1983 was a carryback year
The Programs purported to operate as set forth below:
1. Gifts Advertising
Graham & Associates established an advertising agency called Marketing Complex, Inc. (MCI), that developed a cooperative advertising campaign known as Gifts Advertising. Graham & Associates told petitioners that Gifts was a revolutionary advertising campaign designed to allow merchants in shopping malls to pool their advertising resources. Graham & Associates told petitioners that the merchants would place ads on bingo gamecards that would be distributed to shoppers after they registered with a Gifts representative at the mall. The cards had pull tabs with 25...
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