Wimpie v. Commissioner
| Decision Date | 31 January 1994 |
| Docket Number | Docket No. 14222-92.,Docket No. 19510-91.,Docket No. 19057-91. |
| Citation | 67 T.C.M. 2091 |
| Parties | Mortimer Wimpie, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
Eli Robins, for the petitioners. Wendy S. Sands and Victoria J. Kanrek, for the respondent.
Memorandum Findings of Fact and Opinion
Mortimer Wimpie, individually in docket No. 19057-91, and jointly with Katrina Wimpie in docket Nos. 19510-91 and 14222-92, petitioned this Court for a redetermination of respondent's determinations reflected in her notices of deficiency. Hereinafter, the term "petitioners" refers to Mortimer Wimpie with respect to docket No. 19057-91, and to Mortimer Wimpie and Katrina Wimpie with respect to docket Nos. 19510-91 and 14222-92.
Respondent determined deficiencies in and additions to petitioners' Federal income tax as follows:
Mortimer Wimpie
Addition to Tax
Year Deficiency Sec. 6661
1984 ............... $63,464 $15,866
1985 ............... 95,454 23,864
Mortimer Wimpie and Katrina Wimpie
Addition to Tax
Year Deficiency Sec. 6661
1986 ............... $55,020 $13,755
1987 ............... 29,938 7,485
1988 ............... 24,319 6,080
Respondent also determined that the underpayment of Federal income tax for all taxable years in issue was substantial and attributable to tax-motivated transactions within the meaning of section 6621(c).2 Accordingly, Respondent determined that the annual rate of interest payable on the entire underpayment for those years was 120 percent of the adjusted rate established under section 6621(b).
After concessions,3 the issues for decision are:
(1) Whether petitioners' claimed deductions related to a computer leasing activity are limited by section 465. We hold they are.
(2) Whether Katrina Wimpie (Mrs. Wimpie) was an "innocent spouse" with respect to petitioners' 1986 through 1988 Federal income tax returns. We hold she was not.
(3) Whether petitioners are liable for increased interest under section 6621(c). We hold they are.
(4) Whether petitioners are liable for additions to tax under section 6661.4 We hold they are not.
Some of the facts have been stipulated and are so found. The stipulations and exhibits attached thereto are incorporated herein by this reference. Petitioners resided in New York State at the time they filed their petition.
Mortimer Wimpie (Mr. Wimpie) filed his 1984 and 1985 Federal income tax returns under the filing status "Single". Petitioners married in September 1986 and filed their 1986 through 1988 returns under the filing status "Married filing joint return". Petitioners are still married.
For each year in issue, petitioners claimed losses on Schedule C of their tax return, Profit or (Loss) From Business or Profession, for certain equipment leasing activity;5 respondent disallowed the following amounts of these losses:
Year Amounts
1984 ......................... $139,2516
1985 ......................... 190,9077
1986 ......................... 102,191
1987 ......................... 86,098
1988 ......................... 59,759
The series of transactions generating these losses is described below.
Storage Technology Leasing Corporation (STLC), a vendor of computer equipment, owned certain computer equipment that it had leased to lessees (the initial users) in 1983 and 1984. In August 1984, STLC obtained a loan from The Savers Leasing Corporation (Savers Leasing), giving Savers Leasing two nonrecourse promissory notes secured solely by the computer equipment.8
On December 31, 1984, the following occurred:
(1) STLC sold the leased equipment to Trans Cap Associates I Limited Partnership (Transcap), a partnership formed on that date.9 Transcap paid for the equipment with a downpayment and nonrecourse promissory notes.10 Transcap assigned to STLC, as security, the user leases and all rental payments and other sums to be paid by the initial users. These rental payments and other sums to be paid by the initial users were sufficient to service fully both the principal and interest due on the nonrecourse notes that Transcap gave to STLC.
(2) Transcap sold its interest in the equipment to Hawthorne Capital Corporation (HCC) in return for a nonrecourse or limited recourse promissory note.11
(3) HCC leased the equipment, subject to all liens and leases, back to Transcap.12 Transcap assigned to HCC, in order to secure Transcap's performance as lessee, all of Transcap's rights under the leases on the equipment. Transcap also agreed to indemnify HCC and hold HCC harmless from all costs and expenses HCC might incur with respect to leasing the equipment.
(4) HCC sold the equipment, subject to all prior liens and leases, to a group of joint venturers consisting of Mr. Wimpie, William J. Aramony (Aramony), Jon E.M. Jacoby (Jacoby) and Richard Runco (collectively, the investor group).13 A document entitled Secured Note states that the investor group promises to pay HCC $2,520,435.50;14 the interest rate on this amount is 14 percent. The Secured Note is expressly nonrecourse as to obligations other than principal payments. Payments totaling $33,750.28 plus interest were required from the investor group on each of January 15, 1985, and February 15, 1985.15 Except for these payments, the principal amount of the Secured Note was due January 1, 1991. Under the Secured Note, the payments made by Transcap under the Master Lease as "Fixed Rent", as well as certain other payments, are treated as "mandatory prepayments".16 Under the Secured Note, all prepayments are applied first to accrued and unpaid interest and then to principal.
(5) A "Letter of Direction" directs Transcap to pay directly to HCC lease rental amounts that would be due to the investor group. The Letter of Direction further provides that all such payments shall constitute payments by the investor group to HCC.
Mrs. Wimpie completed intermediate school in England and achieved both ordinary and advanced academic levels. She received a bachelor's degree in economics and social statistics from Manchester University in England. Mrs. Wimpie received a master's degree in psychology from New York University in 1987 or 1988 and is currently completing a doctoral degree in clinical psychology at New York University.
After graduating from Manchester University, Mrs. Wimpie worked as an administrator in a factory for approximately 1 year. Later, she worked as a design documentation engineer at Marconi Space and Defense, a weapons systems manufacturer located outside London. Mrs. Wimpie then worked at PARC, a computer leasing company, from approximately July 1980 to May 1982.
From June 1982 through January 1984, Mrs. Wimpie worked as a contracts administrator for Equilease, an equipment leasing company, first in Equilease's London office, and then in its Zurich office. Equilease's activity included buying leased equipment, selling that equipment, and leasing it back. Mrs. Wimpie assembled all documents necessary for each leasing contract.
In February 1983, Mrs. Wimpie met Mr. Wimpie, who was a senior vice-president of Equilease. In January 1984, Mrs. Wimpie moved to New York and commenced residing with Mr. Wimpie. She obtained a work permit, and from June 1984 through June 1985 she worked as a contracts administrator at First Rock Financial (First Rock) in New York. First Rock sold tax shelters. Mrs. Wimpie's work there included systems design, data processing, and review of documents. Richard Runco was one of Mrs. Wimpie's bosses at First Rock. At First Rock, Mrs. Wimpie met Jacoby and Donald G. Butler (Butler). Butler was executive vice-president of Transcapital Computer Corporation.
Prior to her marriage to Mr. Wimpie, Mrs. Wimpie did not possess significant financial assets. During the years in issue, petitioners traveled extensively; their travel destinations included Puerto Rico, Santo Domingo, La Costa, Niagara Falls, and Great Britain. During each year in issue, petitioners owned a BMW. Mr. Wimpie paid the $10,000 annual tuition for Mrs. Wimpie's studies at New York University.
Mr. Wimpie did not prevent Mrs. Wimpie from reading their tax returns before signing them, and never instructed her not to read them. Petitioners reported total income of $164,845 on their 1986 Federal income tax return, and wrote 1986 checks of at least $168,231. Petitioners reported total income of $305,072 on their 1987 Federal income tax return, and wrote 1987 checks of at least $462,261. Petitioners reported total income of $50,041 on their 1988 Federal income tax return, and wrote 1988 checks of at least $330,689.
OpinionSection 465 was enacted to limit abuses in tax shelters arising from the use of various limited risk financing techniques; it was intended to prevent taxpayers from deducting losses that exceed amounts "at risk" in the transaction. S. Rept. 94-938, 1976-3 C.B. (Vol. 3) at 85. The Senate Report criticizes nonrecourse financing "and other risk limiting devices" because if such devices produce tax losses in excess of amounts at risk, they substantially alter the economic substance of a transaction. Id. Thus, following the enactment of section 465, an individual taxpayer engaged in an activity to which section 465 applies may only deduct losses from the activity to the extent that the taxpayer is "at risk" with respect to the activity at the close of the taxable year. Sec. 465(a).
An individual taxpayer generally is "at risk" with respect to amounts including "the amount of money and the adjusted basis of other property contributed by the taxpayer to the activity", sec. 465(b)(1), and with respect to amounts borrowed for use...
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