Seykota v. C. I. R., 052891 FEDTAX, 14936-82

Docket Nº:14936-82, 47868-86, 6720-87, 31972-87.
Opinion Judge:DAWSON, JUDGE:
Party Name:EDWARD A. SEYKOTA, ET AL.,[1] Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Stuart Siegel. [2 Robert McDonough and Richard Hindlian for the petitioner in docket No. 14936-82 Theodore L. Craft for the petitioners in docket No. 6720-87. William S. Sabin, Jr., Marsha Keyes, Kathleen E. Whatley, and C. Ted Sanderson for the respondent.
Judge Panel:PANUTHOS, SPECIAL TRIAL JUDGE:
Case Date:May 28, 1991
Court:United States Tax Court
 
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61 T.C.M. (CCH) 2706

EDWARD A. SEYKOTA, ET AL., [1] Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 14936-82, 47868-86, 6720-87, 31972-87.

United States Tax Court

May 28, 1991

During the years in issue, petitioners engaged in " Arbitrage and Carry" transactions in the Futures Trading, Inc. program, and/or in spread transactions in the related Merit T- Bond, T-Bill or stock forward contract programs. In each instance, petitioners intentionally sustained losses in the first year of their investments. Participants in the Arbitrage and Carry program deducted losses relating to the acquisition and holding of gold. They also, with other participants in the Merit programs, intentionally incurred losses by entering into closing transactions with respect to selected positions in their investments. HELD, transactions in the Merit T-Bill, T-Bond and stock forward contract programs were factual shams and losses therefrom are disallowed. HELD FURTHER, even if petitioners' Merit transactions had a factual existence, the transactions lacked economic substance and a business or profit-making purpose. They were therefore shams in substance and losses and deductions derived from those transactions are disallowed on this basis. HELD FURTHER, even though petitioners' transactions in the Arbitrage and Carry program had a factual existence, the transactions lacked economic substance and a business or profit- making purpose. Therefore, they were shams in substance and losses and deductions arising from participation in that program are disallowed. HELD FURTHER, because the transactions in issue were factual or economic shams, petitioner Seykota may not claim entitlement to the provisions available to a " commodities dealer" for purposes of the Deficit Reduction Act of 1984, as amended by the Tax Reform Act of 1986. HELD FURTHER, petitioner Calhoun is allowed a deduction for management fees paid. HELD FURTHER, Seykota is entitled to a deduction for certain interest claimed. HELD FURTHER, additions to tax and increased interest on deficiencies attributable to tax-motivated transactions are sustained.

Stuart Siegel. [2]F. Whitten Peters, Matthew D. Lerner, Marie T. Reilly, and William M. Wiltshire for the petitioners.

Robert McDonough and Richard Hindlian for the petitioner in docket No. 14936-82[3].

Theodore L. Craft for the petitioners in docket No. 6720-87.

William S. Sabin, Jr., Marsha Keyes, Kathleen E. Whatley, and C. Ted Sanderson for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, JUDGE:

This case was assigned to Special Trial Judge Peter J. Panuthos pursuant to the provisions of section 7443A(b) of the Code and Rules 180, 181, and 183. [4] The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

PANUTHOS, SPECIAL TRIAL JUDGE:

By timely notices of deficiencies, respondent determined that petitioners in these consolidated cases were liable for deficiencies and additions to tax as follows:

6653(a)(1) 6653(a)(2)
Docket No. Names Year Deficiency[5] Additions Additions
14936-82 Edward A. 1978 $1,738,620 - -
Seykota 1979 $3,063,567
1980 $5,396,898
47686-86 Robert B. 1978 $ 41,930 $ 2,097* -
and Jane 1979 $ 89,150 $ 4,458* -
Henry 1980 $ 22,385 $ 1,119* -
1981 $ 3,264 $ 163 50% of
interest due
on $3,264
6720-87 Bruce L. & 1980 $1,189,694 $59,485* -
Jacqueline 1982 $ 855 $ 43 50% of
R. Calhoun interest due
on $855
31972-87 Martin S. 1980 $ 119,073 $ 6,355* -
& Lauri E. 1981 $ 249,603 $13,495 50% of in-
Tepper[6] terest due
on $249,803
1982 $ 65,398 $ 4,118 50% of
interest due
on $65,398
* For 1980 and prior years, the addition is under sec. 6653(a). Respondent claimed additional adjustments in an Amendment to his Answer in docket No. 6720-87, which we granted leave to file on July 31, 1989. Therein, respondent seeks to disallow the Calhouns' deduction of certain fees paid for investment advice. If we sustain respondent's disallowance of those fees, the Calhouns' deficiency for 1980, as set forth above, increases. In his amendment to answer, respondent also proposed to disallow a short-term capital loss for 1982 in the amount of $298,134. If respondent sustains his burden on this item, the deficiency for 1982 will not be affected. By motion filed on January 12, 1990, respondent moved to amend his answer in docket No. 14936-82 to assert an addition to tax for negligence under section 6653(a). We denied respondent's motion to amend on February 22, 1990. During the years at issue, petitioners all invested in the " Arbitrage and Carry" (" A/C" ) program of Futures Trading Inc. (" FTI" ), and/or in the related spread transactions offered by the Merit T-Bond, T-Bill or stock forward contract programs. These cases have been selected by counsel for the parties and consolidated to provide a test case for the investors in those programs. After concessions, the issues presented are: (1) Whether transactions on the Merit T-Bill option, T-Bond option, and stock forward contract markets were factual shams; (2) Whether the FTI A/C program and Merit T-Bill option, T-Bond option, and stock forward contract transactions lacked economic substance; (3) Whether petitioners had a primarily for profit motive for their participation in the FTI A/C and Merit T-Bill option, T-Bond option, and stock forward contract markets; (4) Whether Edward Seykota qualifies for the per se presumption of section 108(b) as a " commodities dealer" with regard to losses in transactions between June 11, 1980, and June 23, 1981; (5) Whether certain petitioners in the FTI A/C program and Merit T-Bill option, T-Bond option, and stock forward contract markets are entitled to deductions for interest, management fees, or related expenses; (6) Whether any part of the underpayment of tax due from certain petitioners is due to negligence; and (7) Whether petitioners are liable for the 120 percent interest rate for tax-motivated transactions pursuant to section 6621(c), formerly section 6621(d); (8) Whether Martin S. Tepper and Lauri E. Tepper are liable for the additions to tax under section 6651(a)(1) for the years 1980 through 1982. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by reference. At the time the respective petitions in these cases were filed, petitioner Edward A. Seykota (" Seykota" ) resided in Las Vegas, Nevada; petitioners Robert B. Henry (" Henry" ) and Jane Henry were married and resided in Kentfield, California; petitioners Bruce R. Calhoun (" Calhoun" ) and Jacqueline Calhoun were married and resided in Peterborough, New Hampshire; and petitioners Martin S. Tepper (" Tepper" ) and Lauri E. Tepper were married and resided in Woodland Hills, California. Our use in this opinion of terms such as loss, gain, position, spread, straddle, option, market, trade, and transaction, is not necessarily to be construed as a finding that the transactions at issue are, or are not, valid for Federal income tax purposes. Rather, the use of such terms is only for convenience. 1. THE FTI/MERIT PROGRAM Futures Trading, Inc. (" FTI" ) was incorporated in the State of California on November 18, 1971. FTI's original president and sole shareholder was Leon Richartz (" Richartz" ). Merit Securities, Inc. (" Merit" ) was incorporated in Delaware on August 16, 1979. Leema Enterprises, Inc. (" Leema" ) was incorporated in the State of Delaware on August 23, 1979. Thereafter, Leema operated as a holding company for a group of corporations controlled by Richartz, which included FTI and Merit. Richartz was the sole shareholder of Leema until April 1980, when he sold 15 percent of his stock to Maria Rivera (" Rivera" ). Rivera sold her stock back to Leema in December 1986. At all relevant times, Richartz was the controlling shareholder and chief executive officer of Leema, and the chief executive officer of both Merit and FTI. The principal offices of Merit and FTI are located in Tiburon, California. Merit and FTI shared the same offices with Leema and its other subsidiaries. Merit and FTI also shared the same computer system, the same employees, and the same back office systems. Hal Koegler (" Koegler" ) was the vice-president of FTI and president of Merit. Randy Hecht (" Hecht" ) was the controller for FTI and the vice- president and chief financial officer of Merit. Rivera was the chief financial officer and secretary of FTI. FTI was a financial planning organization. Among its principal programs was the Arbitrage and Carry (" A/C" ) program. Merit was a corporation that operated a market for options in Government securities, and, later, stock forward contracts. A significant feature of FTI's A/C program involved trading in the Merit markets. Richartz was the principal figure in the A/C program. He created the program, promoted it and, directly or through his subordinates, made all trading decisions for all participants. Richartz was also responsible for creating the Merit markets in T-Bill options, T-Bond options, and stock forward contracts. Koegler was responsible for bringing about trades on the Merit markets for the participants, including trades that generated desired tax effects. Hecht monitored the FTI/Merit trading objectives and,...

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