Thurner v. Commissioner
| Decision Date | 09 October 1990 |
| Docket Number | Docket No. 8407-87. |
| Parties | Scott P. Thurner and Yvonne E. Thurner v. Commissioner. |
| Court | U.S. Tax Court |
Gaar W. Steiner, 100 E. Wisconsin Ave., Milwaukee, Wis., and Cameron D. Sewell, 1717 Main St., Dallas, Tex., for the petitioners. William P. Hardeman and Henry C. Griego, for the respondent.
Memorandum Findings of Fact and Opinion
By notice of deficiency sent to petitioners on December 29, 1986, respondent determined deficiencies, additions to tax, and increased interest as follows:
Sec. 6653(a)1 or
Year Deficiency Sec. 6653(a)(1) Sec. 6621(c)
1980 .............................. $351,855 $17,593 To be determined
1981 .............................. 512,052 25,603 To be determined
For 1981, respondent also determined an addition to tax under section 6653(a)(2) equal to 50 percent of the interest due on $512,052.
Petitioners claimed substantial losses in 1980 and 1981 from gold and platinum spread2 transactions arranged through L.M.E. Investments, Ltd., and L.M.E. Commodities, Ltd. (both referred to here as LME). LME was found to have inspired, designed, and executed certain transactions with United States investors which were factual shams in Forseth v. Commissioner [Dec. 42,265], 85 T.C. 127 (1985), affd. [88-1 USTC ¶ 9331] 845 F.2d 746 (7th Cir. 1988), affd. per curiam sub nom. Enrici v. Commissioner [87-1 USTC ¶ 9251], 813 F.2d 293 (9th Cir. 1987), affd. without opinion sub nom. Bramblett v. Commissioner, 810 F.2d 197 (5th Cir. 1987), affd. without opinion sub nom. Woolridge v. Commissioner, 800 F.2d 266 (11th Cir. 1986). Also Mahoney v. Commissioner [87-1 USTC ¶ 9129], 808 F.2d 1219 (6th Cir. 1987). On their Federal income tax returns, petitioners deducted losses from the claimed cancellation of the gold and platinum spread transactions. Respondent disallowed the deductions. The primary issues for decision are:
1. Whether petitioners may deduct amounts attributable to cancellation of gold and platinum spread transaction contracts in 1980 and 1981. We find that the gold and platinum spreads at issue were factual shams. We also find that they were not entered into primarily for profit. We hold that petitioners may not deduct losses resulting from the claimed cancellation of the loss legs of the gold and platinum forward future contracts.
2. Whether petitioners are at risk for more than $108,000 in losses in 1980. We hold they are not. Laureys v. Commissioner [Dec. 45,446], 92 T.C. 101 (1989) is distinguished.
3. Whether petitioners are liable for additions to tax for negligence under section 6653(a) for 1980 and section 6653(a)(1) and (a)(2) for 1981. We hold that they are.
4. Whether petitioners are liable for increased interest attributable to a tax-motivated transaction under section 6621(c). We hold that they are.
5. Whether petitioners are liable for damages under section 6673. We hold that they are not.
6. We also address the following preliminary issues:
a. Whether price lists from the American Board of Trade (ABT) are admissible. We do not use ABT data in our analysis and so we do not reach this issue.
b. Whether the "leads doctrine" places the burden of proof on respondent. We hold it does not.
c. Whether documents from Forseth v. Commissioner [Dec. 42,265], 85 T.C. 127 (1985), are admissible in this case. We do not use the documents from Forseth v. Commissioner, supra, in our analysis and so we do not reach this issue.
Some of the facts are stipulated and are so found. We note that respondent asserts that the gold and platinum spreads at issue are factual shams. Our use of terms such as loss, gain, position, straddle, option, and transaction, is not necessarily to be construed as a finding that the transactions are not factual shams.
Petitioners are husband and wife who resided in Milwaukee, Wisconsin, when the petition was filed. References to petitioner in the singular are to Scott P. Thurner.
Petitioners are cash basis, calendar year taxpayers.
Petitioner runs a family business in Milwaukee, Wisconsin, and has managed and controlled his own and his family's investments for many years predating 1980. He had been active in high risk investments including oil and gas exploration in the United States and South America and commodities.
Petitioner was Chairman of the Board of Trans Delta, a successful venture oil company. In 1980 he and his family realized about a $20,000,000 profit from the sale of Trans Delta. On his 1980 return, he reported $4,793,361 of capital gains income from the sale, and, after the 60 percent exclusion for long-term capital gains, he included $1,941,738 in income.
In 1981 petitioner formed T Investment Group, in which he owned about a 20-percent interest at that time. He was the group's managing partner. It was formed to pool family investment resources.
Petitioner has invested in commodities since 1972. By 1980 petitioner had invested extensively in many commodities, such as silver, gold, platinum, and other strategic and precious metals. He studied investment advice and market data from various brokers, publications, and seminars.
He studied commodities prices and trends by monitoring and charting various commodities daily. Charting was initially done manually and later by computer. He had employees to record, monitor, and chart commodities prices daily. Petitioner made his own investment decisions. Others had input but not discretion to act without his approval.
Petitioner employed an accounting and administrative manager, John E. Mackowski. Mr. Mackowski was responsible for financial relationships with brokers, including transfers of more than $20,000,000 during each of the years at issue. Mr. Mackowski was also responsible for dealing with different brokerage houses over the years, including LME. Before 1980, petitioner invested in commodity straddles through the United States brokerage firm of E.F. Hutton.
Petitioner was at least generally familiar with the tax consequences of his investments during the years at issue. He knew about short and long-term gains and the advantages of taking a loss this year and deferring gain from this year to the next.
Petitioner knew that there was a special tax reason for holding an investment six months and one day before selling. He also was aware that a commodity transaction he conducted in May 1981, was done two days before the effective date of a commodities tax reform enacted that year.
Generally, petitioner held commodity straddle positions for no longer than nine months. An examination of petitioner's trades during the years at issue shows no canceling of loss legs of straddles except for the gold and platinum transactions at issue.
In 1981, petitioners had pensions and annuities income of $1,538,133 and interest income of $622,796. In apparent anticipation of their tax liability for the year, petitioners prepaid $225,417 in estimated tax for taxable year 1981.
Petitioner dealt in commodities in silver and other metals through brokers in the United States, as well as LME and J. Sinclair & Company of London.
Petitioner gave several reasons for going to London, including, the 24 hour trading there, the more international outlook of London brokers than of brokers in the United States, and his belief that trading was "too regulated in America."
The transactions at issue here were conducted by petitioner with LME in 1980 and 1981. LME was found to have inspired, designed and executed certain transactions which were factual shams in Forseth v. Commissioner [Dec. 42,265], 85 T.C. 127 (1985).
LME was a broker in the London market. LME did not take contracts for its own account as a dealer. Instead, it laid off contracts as a broker in the unregulated principal to principal market.
Petitioner was introduced to LME by C.L. (Bud) Caveness, a nonpracticing lawyer, friend, and business associate of petitioner for over 15 years. Mr. Caveness had been an LME client since 1974 and had invested in gold, silver, spreads, and straddles over the years. Petitioner did not talk to anyone in the United States about LME other than Mr. Caveness.
Petitioner and Mr. Caveness went to London in October 1980 to interview the principal people from LME and other London brokerage firms, including the London branch of a United States firm. He met with them extensively to discuss the entire range of commodities markets, investment opportunities, and strategies in connection with strategic and precious metals, futures contracts, forward contracts, spreads and straddles. LME recommended, in addition to the purchase of various strategic metals and silver contracts, which were petitioner's primary initial interest, that petitioner consider investing in a gold/platinum spread.
LME representatives told petitioner that LME had American clients, but none were ever named. We note that all taxpayers in Forseth, except Mr. Bramblett (Forseth v. Commissioner, supra at 133), were introduced to LME through a United States company called InterAct. In contrast, other than in connection with this case, petitioner had not heard of InterAct or any taxpayer in Forseth v. Commissioner, supra.
When petitioner checked on LME at the London branch of his bank, First Wisconsin Bank, he found that the bank did not have a file on LME. He did not try to determine if LME was listed in any publication as a reputable and substantial broker in the commodities market.
James Gourlay was the owner and chairman of L.M.E. Investments, Ltd. and L.M.E. Commodities Ltd. James Gourlay was the manager for Competex who developed the commodities transactions for 265 taxpayers in Glass v. Commissioner [Dec. 43,495], 87 T.C. 1087, 1108 (1986), affd. sub nom. Herrington v. Commissioner [88-2 USTC ¶ 9507], 854 F.2d. 755 (5th Cir. 1988), ...
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