Upchurch v. Commissioner
| Decision Date | 26 September 1996 |
| Docket Number | Docket No. 14784-88. |
| Parties | James H. Upchurch v. Commissioner. |
| Court | U.S. Tax Court |
Robert E. Kovacevich, Spokane, Wash, for the petitioner. James W. Clark and Keith Medleau, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in, additions to, and increased interest on Federal income tax for petitioner's 1980, 1981, 1982, and 1983 taxable years as follows:
Additions to Tax
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Year Deficiency Sec. 6653(a) Sec. 6653(a)(1) Sec. 6653(a)(2)
1980 ....................... $4,176 $ 209 -- --
1981 ....................... 5,373 -- $ 269 1
1982 ....................... 5,335 -- 267 1
1983 ....................... 2,573 -- 129 1
Additions to Tax Increased Interest
---------------- ------------------
Year Sec. 6659 Sec. 6661 Sec. 6661(c)
1980 ..................................... $1,253 -- 2
1981 ..................................... 1,612 -- 2
1982 ..................................... 1,601 $1,333,753 2
1983 ..................................... -- -- 2
1 50 percent of the interest due on the deficiency
2 The entire underpayment of income tax is a substantial underpayment attributable to tax-motivated
transactions under sec. 6621(c)
3 For 1982 respondent, in an amendment to answer, determined an addition to tax under section 6661 of
$1,333.75 as an alternative to the addition to tax under section 6659 shown
The issues remaining for our consideration concern whether petitioner is liable for additions to tax under section 6653(a)1 for 1980; under section 6653(a)(1) and (2) for 1981, 1982, and 1983; and for increased interest under section 6621(c) for 1980, 1981, 1982, and 1983. In an amendment to answer, respondent alleged that petitioner was liable for an addition to tax under section 6661 for 1982. That addition to tax remains in controversy. The parties stipulated that the facts and conclusions in the opinion rendered in Schillinger v. Commissioner [Dec. 47,042(M)], T.C. Memo. 1990-640, affd. [93-2 USTC ¶ 50,477] 1 F.3d 954 (9th Cir. 1993), control as to the income tax deficiencies. In the aforementioned case it was decided that the taxpayer's energy device had a fair market value not in excess of $1,000 (the alleged purchase price was $80,000) and that the taxpayer was not entitled to deductions and credits because his object was "solely to gain a significant tax advantage and not to earn an economic profit." Petitioner has conceded the income tax deficiencies in this case, which are based on a disallowance of $9,100 loss from Evergreen Partnership I (Evergreen) and investment tax credit carrybacks and an investment tax credit of $4,176, $5,373, $5,335, $973 for 1980, 1981, 1982, and 1983, respectively. Additionally, respondent conceded that petitioner is not liable for additions to tax under section 6659 for the taxable years 1980, 1981, 1982, or 1983.
Petitioner resided in Veradale, Washington, at the time his petition was filed in this case. After high school, petitioner served 4 years in the U.S. Marine Corps until September of 1955, when he began college. His major was in physical education. Petitioner obtained a degree in 1959 and a master's degree in 1961. From 1961 through the time of trial, petitioner taught mathematics, biology, health, physical education, and was also involved in coaching at the secondary school and college levels.
Petitioner and George Chalich (Mr. Chalich) were friends who had met in high school, played high school football together, and, for a time, were teachers at the same school. After Mr. Chalich retired from teaching, he solicited petitioner's interest in certain tax-sheltered annuities and investment opportunities. Mr. Chalich sold investments for Professional Investors Group, Inc. (Professional), a Washington corporation. Mr. Chalich asked petitioner if he knew of any other teachers who were interested in investing. Ultimately, petitioner and another friend and teacher, Bill Pecha (Mr. Pecha) talked to Mr. Chalich about investing. Mr. Pecha, whose educational background was in chemistry, and petitioner worked together in a college wrestling program.
Petitioner and Mr. Pecha discussed, with Mr. Chalich, investment in an energy saving device through a promotion of Saxon Energy Investment (Saxon). Petitioner had also discussed other possible investments with Mr. Chalich, including one involving stamps (Philatelic) and another involving electrical pain management (Xylocain). Petitioner was interested in energy related investments because of increases in gasoline prices, the effects of an oil embargo, and because sources of energy were becoming more limited. Petitioner discussed with Mr. Pecha the possibility of investing in Saxon, which was being offered or promoted by Professional and Mr. Chalich. Petitioner, to some extent, relied on Mr. Pecha's background in chemistry in considering whether to become involved in Saxon.
Petitioner attended about six meetings or discussions conducted by Professional prior to investing in Saxon. Professional advised petitioner that he could be at risk without signing a note and that his investment in the energy device held through the Evergreen partnership, would be funded by the refund of prior years' income taxes generated by the carryback of investment tax credits. Petitioner was also advised that his involvement in Evergreen would result in reductions of his current (1983) and future years' tax liabilities. Petitioner also understood that he could retain any tax savings generated through his investment. Petitioner stated that he was interested in the investment for retirement purposes and that his primary motivation was not the tax benefits, but his actions belie that statement.
Petitioner was aware that Evergreen was to lease the energy device, but after investing and claiming the tax benefits, he made no effort to inquire whether the energy device had been leased. Petitioner was aware that, in addition to the initial lease payment of about $12,700, the partnership and/or partners were not obligated to make any payments unless the device was leased to a user. Petitioner believed that his 16.667-percent interest in Evergreen (which held an interest in the energy device) was worth about $64,000 to $76,000. Petitioner's claim for a refund reflects a cost basis of $990,000 for the energy device, so that petitioner's 16.667-percent share of the cost would have been $165,003. Petitioner did not physically examine the energy device or determine whether the value or price was appropriate. Mr. Chalich also acquired a 17.244-percent interest in Evergreen.
At the time of making the investment in Evergreen, petitioner earned about $28,000 from his teaching, and his net worth was less than $100,000. Petitioner had some investment experience by means of involvement in an investment club through which shares of stock had been acquired. Prior to investing, petitioner did not make any specific inquiries concerning the energy device or its use. Petitioner generally discussed heating costs with the school custodian where he worked. Other than people connected with Professional, petitioner did not consult with anyone specifically qualified with respect to the technology underlying the energy device or tax ramifications concerning the investment. Prior to investing in Evergreen, petitioner did not consult with attorneys or accountants in connection with income tax matters, including the preparation of his income tax return.
Petitioner and his former wife (Sally Upchurch) went to Dave Shriver (Mr. Shriver), an accountant, to discuss whether the investment in the energy device transaction packaged by Saxon was a viable investment and whether the tax aspects were proper. Petitioner states that the accountant assured petitioner that it was a proper investment. Mr. Shriver, however, was connected with Mr. Chalich and was a part of the Professional organization, and he was referred to in Professional's advertising or promotional brochure. Professional earned commissions or income on the sale of shelter investments to its clients. In order to invest, petitioner and Sally Upchurch borrowed $14,000 secured by a second mortgage on their residence. The loan, however, was at least $3,000 less than the refunds and/or tax reductions generated by the energy-device transaction.
Petitioner and Sally Upchurch entered into an agreement with Professional on June 8, 1983. For a $1,500 fee, Professional was to assist petitioner in developing a financial plan, which included consultation on ways to increase capital. In addition, Professional was to provide a 1-hour conference with a lawyer and another with an accountant. There is no indication whether the fee was paid or the services performed, other than the consultations with Mr. Shriver, the accountant.
Petitioner and Sally Upchurch acquired a 16.667-percent interest in Evergreen, which, in turn, was to hold an interest in an energy-saving device. Petitioner's understanding of the transaction was that an interest in the energy device would be purchased by the investors, through Evergreen, which would lease the device to a user who would save on energy. He did not expect a profit in the early years of the energy device's operation because the revenue from the expected energy savings would be utilized to make lease payments. He expected to recoup his...
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