Schouten v. Commissioner
| Decision Date | 08 April 1991 |
| Docket Number | Docket No. 48491-86. |
| Citation | 61 T.C.M. 2357 |
| Parties | Paul R. Schouten and Mary Kay Schouten v. Commissioner. |
| Court | U.S. Tax Court |
George P. Latchford and James B. Rice, for the petitioners. Marjory A. Gerdes and James C. Lanning, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies in, and addition to, petitioners' Federal income tax:
Addition to Tax
Year Deficiency Section 6653(a)
1979 ............... $46,173 $2,309
1980 ............... 32,556 -0-
(All section references are to the Internal Revenue Code, as amended.)
After concessions, the issues for decision are: (1) Whether petitioners are entitled to a deduction under section 616(a) for mine development expenditures of $16,000 allegedly paid to a partnership called Westates Development Company; (2) whether respondent properly used the cash receipts and disbursements method of accounting under section 446 in determining petitioners' distributive share of income from a partnership called Mine-Rite Mining Company; and (3) whether petitioners are entitled to deduct $601 in 1979 and $34,410 in 1980 as their distributive share of losses realized by a partnership called American Mining Trust.
Throughout this opinion, we use the words "investor," "investment," "promissory note," "security agreement," "security interest," "agency agreement," "mineral claim lease," "mining contract," "mine," "ore," "contractor," "development work," "gold," "silver," "copper," and other such terms merely for convenience and simplicity. They are not intended by their use to imply any conclusion as to the character of the transactions at issue for Federal tax purposes, or as to the mineral content of the earth or rock described herein.
The parties have stipulated some of the facts, which are so found. The Stipulation of Facts, First Supplemental Stipulation of Facts, Stipulation of Settled Issues, and attached exhibits are incorporated herein by this reference.
Petitioners filed joint Federal income tax returns for the years 1979 and 1980. At the time they filed their petition in this case, they resided in Palos Heights, Illinois.
In 1979, Mr. Paul R. Schouten, referred to herein as petitioner, was an attorney engaged in the practice of law on a full-time basis in the State of Illinois. During that year, he was approached by Mr. Philip Schouten and Mr. Lawrence Van Someren because, according to petitioner, they "wanted to create their own mining shelter." Mr. Philip Schouten was an accountant and also petitioner's uncle.
Mr. Philip Schouten and Mr. Van Someren had previously invested in so-called "mining programs" which offered investors Federal income tax deductions for mining development expenditures under section 616. One of those investments was a tax shelter called "Gold for Tax Dollars," sponsored by an entity called International Monetary Exchange. That tax shelter is the subject of a number of opinions of this and other courts. See, e.g., Gray v. Commissioner [Dec. 43,927], 88 T.C. 1306 (1987), affd. sub nom. Becker v. Commissioner [89-1 USTC ¶ 9187], 868 F.2d 298 (8th Cir. 1989), affd. without published opinion sub nom. Armstrong v. Commissioner, 869 F.2d 1496 (9th Cir. 1989), affd. sub nom. Adkins v. Commissioner [89-1 USTC ¶ 9335], 875 F.2d 137 (7th Cir. 1989), affd. sub nom. Kennedy v. Commissioner [89-1 USTC ¶ 9358], 876 F.2d 1251 (6th Cir. 1989); Saviano v. Commissioner [Dec. 40,124], 80 T.C. 955 (1983), affd. [85-2 USTC ¶ 9475], 765 F.2d 643 (7th Cir. 1985); Yuter v. Commissioner [Dec. 46,425(M)], T.C. Memo. 1990-108 (on appeal); Hines v. Commissioner [Dec. 45,420(M)], T.C. Memo. 1989-17, affd. without published opinion 893 F.2d 1330 (3d Cir. 1989); Smith v. Commissioner [Dec. 42,925(M)], T.C. Memo. 1986-101; see also Securities and Exchange Commission v. Rogers, 790 F.2d 1450 (9th Cir. 1986); Horn v. Commissioner [Dec. 44,767], 90 T.C. 908 (1988); Howard v. Commissioner [Dec. 45,171(M)], T.C. Memo. 1988-531; United States v. Rogers, 636 F. Supp. 237 (D. Col. 1986); Securities and Exchange Commission v. International Mining Exchange, Inc., 515 F. Supp. 1062 (D. Col. 1981). The other investment was a mining program sponsored by an entity called Argus Resources which followed the same format as the Gold for Tax Dollars program.
An official of Argus Resources, Mr. Robert Hughes, consulted with Mr. Philip Schouten and Mr. Van Someren about the organization of the tax shelter which was ultimately formed in this case. He introduced them to another individual, Mr. Robert Morris, who was the chief executive officer of a corporation called Bullion Monarch Company. Mr. Morris also consulted with petitioner, Mr. Philip Schouten, and Mr. Van Someren about the organization of a mining tax shelter and introduced them to a retired mining engineer, Mr. R. O. Camozzi. At that time Mr. Camozzi was approximately 70 years old and was no longer physically able to visit mine sites. He was the principal officer of a Mexican corporation, Camco Industrias, S.A. C.V., and a Nevada corporation, Jarbridge Gold and Silver Mining Company. In November or December of 1982, he became ill and died after undergoing open heart surgery.
During 1979, petitioner organized the three partnerships which are central to the issues in this case, Westates Development Company (Westates), Mine-Rite Mining Company (Mine-Rite), and American Mining Trust. Westates had three partners, petitioner and two associates from his law office, Mr. James Wolfenson and Mr. Patrick Cleary. During 1979 and 1980, each of them had a one-third interest in Westates' capital, profits, and losses. Mine-Rite was organized in December of 1979. During 1979 and 1980, its partners and their respective interests in the partnership's capital, profits, and losses were as follows:
Partnership
Partner Interest
Paul R. and Mary Kay Schouten .......... 25 percent
Philip J. and Dorothy L. Schouten ...... 25 percent
Lawrence and Alma Van Someren .......... 50 percent
The last of the three partnerships, American Mining Trust, had three partners, petitioner, Mr. Van Someren, and Mr. Philip Schouten, and during 1979 and 1980, each of them had a one-third interest in its capital, profits, and losses.
Petitioner had no training or experience in mining. In structuring the "mining shelter" at issue in this case, he took the operative legal documents which formed the basis of certain of the programs sponsored by International Monetary Exchange and Argus Resources and revised them to reflect differences in the names of the entities, the type and location of minerals to be mined, and the like. As structured by petitioner, the mining shelter in this case is similar to the 1978 version of the Gold For Tax Dollars shelter described in Gray v. Commissioner, supra, and Saviano v. Commissioner, supra.
The mining program in this case offered investors a tax deduction under section 616(a) for mine development expenses in an amount equal to four times their cash outlay. Under the program, a typical investor paid Westates one-fourth of the amount of the deduction he desired for 1979 and executed a promissory note to Westates for the other three-fourths.
Westates, purportedly acting as agent for the investor, arranged "to fund" the investor's promissory note by borrowing an amount equal to the face value of the note from American National Bank of Chicago, a bank at which Mr. Van Someren conducted business. By prearrangement, the proceeds of that loan, together with the cash paid by the investor, were transferred to an account at the same bank maintained by Mine-Rite. Ostensibly, the purpose of this transfer of funds to Mine-Rite's account was to pay Mine-Rite for mine development work. Nevertheless, the monies transferred were used to purchase certificates of deposit which were immediately pledged as collateral for Westates' loan and, when they matured, the proceeds were used to pay Westates' loan from the bank. As a result, Mine-Rite ended up with the cash paid to Westates by the investor.
The record in this case does not satisfactorily explain why Mine-Rite paid Westates' loan. There is also no evidence that any investor became liable to American National Bank by reason of Westates' "funding" of his promissory note at the bank. Finally, there is no evidence that any investor ever paid his promissory note to Westates nor is there evidence that Westates, Mine-Rite, the bank, or any other entity ever sought to enforce a promissory note signed by any of the investors. All of the notes were forgiven at the end of 1982 or at the beginning of 1983.
The promotion in this case involves four mines, two in Mexico and two in Nevada. The two Mexican mines were located in the State of Durango, Mexico. Petitioner testified that one of them, San Andreas, was principally a silver mine. He said that the other, San Jeronimo, was principally a gold mine. Both mines had been abandoned for approximately 30 to 40 years. One of the two mines in Nevada, called Adelaide, was located in Golonda, Nevada, and was said to contain copper/silver ore. The other Nevada mine was called Jarbridge. The record does not describe its location or its purported mineral content.
Mine-Rite did not itself engage in any development work. Rather, it entered into "joint venture" agreements with corporations owned or controlled by Mr. Camozzi and Mr. Morris, purportedly for the purpose of having them do the development work. Three such joint venture agreements were entered into covering the four mine sites. One joint venture, variously referred to as Camco Industrias or Camco Industries, covered the two Mexican mines and was composed of Camco Industrias, S.A. C.V., Bullion Monarch Company, and Mine-Rite. A second joint venture, variously referred to as Jarbridge Mining Co. or Jarbridge...
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