T.C. Memo. 1997-306
UNITED STATES TAX COURT
JOHN C. VANDERSCHRAAF AND CORNELIA VANDERSCHRAAF, ET AL.,1
Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 37087-86, 6079-88, Filed July 2, 1997.
8910-88, 21729-88.
Michael J. Christianson, for petitioners.
Elizabeth Girafalco Chirich and Susan K. Greene, for
respondent.
1
Cases of the following petitioners are consolidated
herewith: Estate of Donald R. Lawrenz, Sr., Deceased, Donald R.
Lawrenz, Jr., Executor, and Ella A. Lawrenz, docket No. 6079-88;
John C. Vanderschraaf and Cornelia Vanderschraaf, docket No.
8910-88; and Estate of Donald R. Lawrenz, Sr., Deceased, Donald
R. Lawrenz, Jr., Executor, docket No. 21729-88.
Petitioner Donald R. Lawrenz, Sr., died on Sept. 7, 1996.
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MEMORANDUM OPINION
SWIFT, Judge: Respondent determined deficiencies in
petitioners’ Federal income taxes, additions to tax, and
increased interest, as follows:
Docket Nos. 37087-86 and 8910-88
John C. and Cornelia Vanderschraaf
Increased Interest and Additions to Tax
Sec. Sec. Sec. Sec. Sec. Sec.
Year Deficiency 6621(c) 6653(a) 6653(a)(1) 6653(a)(2) 6659 6661
1980 $ 23,084 * $1,154 -- -- -- --
1981 21,939 * -- $1,097 ** $6,582 --
1982 12,184 * -- 609 ** 3,655 ***
Docket No. 6079-88
Estate of Donald R. Lawrenz, Sr., Deceased, and Ella A. Lawrenz
Increased Interest and Additions to Tax
Sec. Sec. Sec. Sec. Sec.
Year Deficiency 6621(c) 6653(a) 6653(a)(1) 6653(a)(2) 6659
1980 $137,835 * $6,892 -- -- --
1981 200,227 * -- $10,011 ** $60,068
Docket No. 21729-88
Estate of Donald R. Lawrenz, Sr., Deceased
Increased Interest and Addition to Tax
Sec. Sec.
Year Deficiency 6621(c) 6653(a)
1979 $212,325 * $10,616
* 120 percent of interest accruing after Dec. 31, 1984,
on portion of the underpayment attributable to a tax-
motivated transaction.
** 50 percent of interest due on portion of underpayment
attributable to negligence.
*** 25 percent of underpayment due on portion attributable
to substantial understatement of tax.
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Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
After settlement of some issues, the primary issue for
decision is whether the profit objective of certain partnership
investments should be measured at the partnership level or at the
individual partner level.
Background
Many of the facts have been stipulated and are so found.
The entire trial record and the testimony and exhibits admitted
into evidence in our test case opinion in Krause v. Commissioner,
99 T.C. 132, 133-167 (1992), affd. sub nom. Hildebrand v.
Commissioner, 28 F.3d 1024 (10th Cir. 1994), have been stipulated
as part of the trial record herein. Krause involved limited
partnership investments that are closely related to the limited
partnership investments at issue herein.
Background and other general facts as they were found in
Krause that relate directly and indirectly to the partnership
investments involved herein we, by this reference, incorporate as
findings of fact in the instant cases.
Petitioners, John C. and Cornelia Vanderschraaf, resided in
Fountain Valley, California, at the time they filed their
petitions.
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Petitioners, Donald R. and Ella A. Lawrenz, resided in
Corona Del Mar, California, at the time they filed their
petitions.
On their respective Federal income tax returns for the years
in issue, petitioners claimed large losses and interest
deductions relating to investments as limited partners in Boulder
Oil and Gas Associates (Boulder), Technology Oil and Gas
Associates 1979 (Tech-1979), and Winfield Oil and Gas Associates
(Winfield). Respondent disallowed these claimed losses and
interest deductions, and petitioners filed the instant cases
contesting respondent's adjustments.
After a lengthy trial in the Krause test cases, we
analyzed, primarily at the partnership level, the objective of
the particular partnerships involved in Krause. We concluded
that the partnerships did not have the requisite profit objective
to support the losses claimed, and we sustained respondent's
disallowance of the claimed losses relating to the taxpayers’
investments in the partnerships. Also, on the ground that the
underlying debt obligations did not constitute genuine debt, we
sustained respondent's disallowance of the claimed interest
deductions relating thereto, and we imposed an increased interest
rate under section 6621(c).
We did not, however, in the Krause test case opinion sustain
respondent's determinations under sections 6653(a)(1) and (2),
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6659, and 6661 of additions to tax for negligence, for valuation
overstatements, and for substantial understatements of tax.
As indicated, our findings and holdings in Krause v.
Commissioner, supra, were affirmed by the U.S. Court of Appeals
for the Tenth Circuit.
The license agreements entered into by Boulder, Tech-1979,
and Winfield with Elektra are not materially different from the
license agreements entered into by the partnerships involved in
the Krause test cases.
Facts found and conclusions reached in Krause with regard
specifically to lack of profit objective of the partnerships
involved in Krause are incorporated herein by reference and apply
to Boulder, Tech-1979, and Winfield.
Similar to our findings in Krause v. Commissioner, supra at
169, with regard to the partnerships involved therein, the stated
consideration agreed to by Boulder, Tech-1979, and Winfield for
the license of enhanced oil recovery (EOR) technology and for the
lease of tar sands properties was excessive, bore no relation to
the value of that which was acquired, did not conform to industry
norms, and precluded any realistic opportunity for profit.
In the oil and gas industry, a portfolio of technology is
not ordinarily licensed when it is not known whether the
technology will even work on the property on which the technology
is to be implemented. EOR technology is known to be site
specific. For this reason, the acquisition of a portfolio of EOR
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technology for use on particular properties typically does not
occur in the oil industry.
In the late 1970's and early 1980's, when the license
agreements involved in these cases were entered into, the
established license fee in the oil industry for the right to use
EOR technology was a 2-3 percent running royalty based on
incremental increased oil production, or on the income actually
realized therefrom, that was attributable to the particular EOR
technology being licensed. The fixed fees to be paid by Boulder,
Tech-1979, and Winfield for the EOR technology licenses were not
competitive in the oil industry and were contrary to industry
norms.
It was not necessary for Boulder, Tech-1979, and Winfield to
license these technologies. Of the technologies licensed --
Carmel VaporTherm (Carmel), TEC, ElektraFlo, and SME Oil Drive --
only the TEC and Carmel processes were developed to any
significant extent, and the TEC and Carmel processes could have
been licensed by the partnerships directly from the inventors
thereof for running royalties based solely on income realized
therefrom. Thus, it was not necessary for Boulder, Tech-1979,
and Winfield to license the Carmel and TEC processes from Elektra
and pay up-front fees for them.
In the oil exploration and production industry, it is
ordinary to lease tar sands properties based on projections of
reserves, not oil in place.
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The multimillion dollar license fees and lease royalties
that Boulder, Tech-1979, and Winfield agreed to pay were
excessive, did not reflect arm's-length debt obligations, and are
not to be recognized as legitimate obligations of the
partnerships. The license fees and lease royalties to which
Boulder, Tech-1979, and Winfield agreed, and the related debt
obligations, do not constitute legitimate, genuine debt
obligations and are to be disregarded.
On partnership information returns of Boulder, Tech-1979,
and Winfield, petitioners were identified as partners, and on
petitioners' respective individual Federal income tax returns for
the years in issue, they reported their distributive share of the
substantial claimed losses and credits relating to Boulder, Tech-
1979, and Winfield. By claiming these flowthrough partnership
losses, petitioners repeatedly represented to respondent the
existence of these partnerships and petitioners' status as
partners of the partnerships.
It was the general partners and the promoters of Boulder,
Tech-1979, and Winfield, not the limited partners, who controlled
the transactions and activities of the partnerships. Actions and
intent of the general partners with regard to Boulder, Tech-1979,
and Winfield, including the profit objective of the partnerships
or lack thereof, are attributable to petitioners. See Utah Code
Ann. secs. 48-1-9, -11 to -15, -17, -18; 48-2a-403 (1994).
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Discussion
It is well established that the issue under section 183 as
to whether partnerships are engaged in activity with a profit
objective is determined at the partnership level. Pasternak v.
Commissioner, 990 F.2d 893, 900 (6th Cir. 1993), affg. Donahue v.
Commissioner, T.C. Memo. 1991-181; Simon v. Commissioner, 830
F.2d 499, 507 (3d Cir. 1987), affg. T.C. Memo. 1986-156; Krause
v. Commissioner, 99 T.C. 132 (1992) (and cases cited therein);
Drobny v. Commissioner, 86 T.C. 1326, 1341 (1986) (motion to
vacate denied at T.C. Memo. 1995-209, affd. 113 F.3d 670 (7th
Cir. 1997)); Brannen v. Commissioner, 78 T.C. 471, 505 (1982),
affd. 722 F.2d 695 (llth Cir. 1984); Hager v. Commissioner, 76
T.C. 759, 782 n.11 (1981).
In resolving this issue, courts focus on actions of the
partners who manage affairs of the partnerships and upon whom
other partners rely to make partnership decisions. Drobny v.
Commissioner, 86 T.C. at 1341 (citing Brannen v. Commissioner, 78
T.C. at 504-505); Fox v. Commissioner, 80 T.C. 972, 1007-1008
(1983), affd. without published opinion 742 F.2d 1441 (2d Cir.
1984), affd. sub nom. Barnard v. Commissioner, 731 F.2d 230 (4th
Cir. 1984), affd. without published opinions sub nom. Hook v.
Commissioner, Kratsa v. Commissioner, Leffel v. Commissioner,
Rosenblatt v. Commissioner, Zemel v. Commissioner, 734 F.2d 5, 6-
7, 9 (3d Cir. 1984). Under any other approach, different results
would accrue to partners in the same partnerships even though the
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partners themselves may have had no control over activity of the
partnerships. See Independent Elec. Supply, Inc. v.
Commissioner, 781 F.2d 724, 729 (9th Cir. 1986), affg. Lahr v.
Commissioner, T.C. Memo. 1984-472; Resnik v. Commissioner, 66
T.C. 74, 81 (1976), affd. per curiam 555 F.2d 634 (7th Cir.
1977). For these reasons, in analyzing the profit objective of,
in particular, limited partnerships, individual actions of
limited partners are not the focus of the analysis.
The U.S. Court of Appeals for the Ninth Circuit has
repeatedly accepted the proposition that a partnership level
determination of profit objective is proper. See, e.g., Balboa
Energy Fund 1981 v. Commissioner, 85 F.3d 634 (9th Cir. 1996),
affg. in part and revg. in part without published opinion
Osterhout v. Commissioner, T.C. Memo. 1993-251; Wolf v.
Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), affg. T.C. Memo.
1991-212; Vorsheck v. Commissioner, 933 F.2d 757, 758 (9th Cir.
1991); Polakof v. Commissioner, 820 F.2d 321, 323 (9th Cir.
1987), affg. T.C. Memo. 1985-197; Independent Elec. Supply, Inc.
v. Commissioner, supra at 729.
Analyzing under section 183 the profit objective element at
the partnership level is consistent with and follows the general
rule of Federal partnership taxation that the treatment of
partnership income, loss, deduction, or credit be determined at
the partnership level. Sec. 702(b); Podell v. Commissioner, 55
T.C. 429, 433 (1970) (citing Estate of Freeland v. Commissioner,
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393 F.2d 573 (9th Cir. 1968), affg. T.C. Memo. 1966-283); sec.
1.702-1(b), Income Tax Regs.
Section 761(a) defines a partnership for Federal income tax
purposes essentially as a group, joint venture, or other
unincorporated organization through which any business, financial
operation, or venture is carried on. See also sec. 7701(a)(2)
and sec. 1.761-1(a), Income Tax Regs., under which the term
"partnership" is defined more broadly than the common law meaning
of partnership.
Petitioners argue that our holding in Krause v.
Commissioner, supra, disallowing under section 183 claimed
partnership losses for lack of profit objective (and any holding
herein to the same effect with regard to Boulder, Tech-1979, and
Winfield) effectively constitutes a holding that the purported
partnerships did not constitute legal partnerships. Petitioners
argue therefrom that in the instant cases Boulder, Tech-1979, and
Winfield must be regarded by the Court as something other than
legal partnership entities and that a partnership entity level
analysis of profit objective should not be applied. Petitioners
argue further that the Court has no option in these cases but to
apply section 183 at the individual partner level with regard to
each and every partner in Boulder, Tech-1979, and Winfield.
Citing section 761(a) and section 301.7701-3(a), Proced. &
Admin. Regs., petitioners argue further that partnerships lacking
in profit objective are to be regarded as not engaged in any
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trade or business and that in such situations the partners'
investments should be regarded as the mere coownership of
property. We disagree.
Petitioners' specific arguments herein were rejected in
Madison Gas & Elec. Co. v. Commissioner, 72 T.C. 521, 561-563
(1979), affd. 633 F.2d 512 (7th Cir. 1980). In Madison Gas &
Elec. Co., it was concluded that under section 761(a) a
partnership may exist even without a profit objective. Section
761(a) merely requires an “unincorporated organization, through
or by means of which any business, financial operation, or
venture is carried on." Madison Gas & Elec. Co. v. Commissioner,
633 F.2d at 514; see also Pasternak v. Commissioner, 990 F.2d at
900 (tax shelter cotenancies treated as partnerships under
sections 761(a) and 7701(a)(2)); Brannen v. Commissioner, supra
at 512 n.16 (tax shelter partnership not engaged in business for
profit under section 183 treated as partnership under section
761(a)).
In National Commodity & Barter Association v. United States,
843 F. Supp. 655, 659, 661 (D. Colo. 1993), affd. without
published opinion 42 F.3d 1406 (10th Cir. 1994), an entity that
was organized largely to resist taxes was treated as a
partnership under section 761.
Petitioners cite certain court opinions out of context. In
Commissioner v. Culbertson, 337 U.S. 733, 740 (1949), the Supreme
Court stated that a partnership constitutes an organization for
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production of income to which each partner contributes one or
both of the ingredients of income, which are capital or service.
References to partnership income in Commissioner v.
Culbertson, supra, as well as in Commissioner v. Tower, 327 U.S.
280 (1946), and Form Builders, Inc. v. Commissioner, T.C. Memo.
1990-75, involve the issue of whether a taxpayer is to be treated
as having invested in a partnership, as distinguished from an
investment in some other type of taxable entity, an issue
different from the issue of whether the underlying activity of
the partnership was entered into for profit.
In cases such as Krause v. Commissioner, 99 T.C. 132 (1992),
and the instant cases, the focus of the analysis is on whether
the underlying activity entered into by the partnerships was
supported by economic substance and profit objective. See, e.g.,
Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d 724, 726
(9th Cir. 1986), affg. Lahr v. Commissioner, T.C. Memo. 1984-472
(citing Hirsch v. Commissioner, 315 F.2d 731, 736 (9th Cir.
1963), affg. T.C. Memo. 1961-256); Krause v. Commissioner, supra
at 168 (citing Nickeson v. Commissioner, 962 F.2d 973 (10th Cir.
1992), affg. Brock v. Commissioner, T.C. Memo. 1989-641). In
that context and in regard to that particular issue, a court
decision that a partnership activity does not constitute a trade
or business, has no economic substance, or lacks a profit
objective, does not constitute, and is not equivalent to, a
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holding that the investors intended to create an entity other
than a partnership.
For example, our focus in Krause was not on whether the
parties intended to form partnerships. Our focus was on the
underlying activity and transactions entered into by the
partnerships after the investors entered into and invested in the
partnerships.
As previously noted, finding that the underlying
transactions entered into by the partnerships did not constitute
arm’s-length transactions, that the license fees agreed to were
not negotiated at arm's length and were excessive, and that the
assets acquired were overvalued, we held that the transactions
entered into by the partnerships, upon which the losses in
dispute were based, were not entered into with a profit
objective, that the underlying transactions did not constitute
legitimate for-profit business transactions, and that purported
debt obligations associated therewith did not constitute genuine
debt obligations and were to be disregarded.2 Krause v.
Commissioner, 99 T.C. at 140-141, 145, 171, 175-176.
The essence and focus of the inquiry as to whether an
arrangement constitutes a partnership is whether the parties
thereto intended to create a partnership. See, e.g.,
2
It is noted that the Court made these findings in Krause v.
Commissioner, 99 T.C. 132 (1992), affd. sub nom. Hildebrand v.
Commissioner, 28 F.3d 1024 (10th Cir. 1994), with respect to a
sister partnership, Technology-1980.
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Commissioner v. Culbertson, 337 U.S. at 742; S & M Plumbinq Co.
v. Commissioner, 55 T.C. 702, 707 (1971). Certain factors are
indicative of such an intent.
In Allison v. Commissioner, T.C. Memo. 1976-248, we noted
four basic attributes of a joint venture or partnership: (1) A
contract that a joint venture be formed; (2) the contribution of
money, property, and/or services; (3) an agreement for joint
proprietorship and control; and (4) an agreement to share
profits. Id.; see also S & M Plumbing Co. v. Commissioner, supra
at 707. Boulder, Tech-1979, and Winfield have all four of these
attributes.
In Johnson v. United States, 632 F. Supp. 172, 174 (W.D.
N.C. 1986), the following factors were particularly relevant to a
conclusion that a partnership existed: (1) Whether a partnership
agreement existed; (2) whether the investors represented to
others that they were partners; (3) whether the investors had a
proprietary interest in partnership profits and losses;
(4) whether the investors had a right to control partnership
income and capital; and (5) whether the investors contributed
capital and services. See also United States v. Levasseur, 45
AFTR 2d 80-1507 at 1511, 80-1 USTC par. 9349 at 83,880 (D. Vt.
1980) (citing Estate of Kahn v. Commissioner, 499 F.2d 1186, 1189
(2d Cir. 1974), affg. Grober v. Commissioner, T.C. Memo. 1972-
240).
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Boulder, Tech-1979, and Winfield did not constitute mere
passive coowners of property. The partnerships entered into
transactions, formed joint ventures, operated gas wells, and
engaged in various other activities. They carried on a financial
operation or venture. They are to be treated as partnerships under
section 76l(a) even though underlying activity of the partnerships
lacked a profit objective under section 183.
Boulder, Tech-1979, and Winfield each had the formal indicia
of partnership status and conducted themselves generally as
partnerships. They are to be treated as partnerships. The issue
under section 183 as to the profit objective of the partnership
activity is to be analyzed at the partnership level. Our
conclusion in Krause v. Commissioner, supra, and herein that
activity and transactions of the partnerships were not entered into
with a profit objective does not affect the status of Boulder,
Tech-1979, and Winfield as partnerships for Federal income tax
purposes.
Our findings herein as to the lack of profit objective of the
underlying activity of Boulder, Tech-1979, and Winfield are based
in part on petitioners' failure to meet their burden of proof as to
the existence of a profit objective with respect to the underlying
activity of Boulder, Tech-1979, and Winfield, on the fact that the
entire record and evidence of Krause was stipulated to as evidence
in the instant cases, and on the doctrine of stare decisis.
Stare decisis may apply even though -- because the parties in
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the present case are not the same parties as were involved in the
prior case -- res judicata would not apply. Simmons v. Union News
Co., 341 F.2d 531, 533 (6th Cir. 1965); Leishman v. Radio Condenser
Co., 167 F.2d 890 (9th Cir. 1948).
We have applied stare decisis when faced with repetitive
litigation involving the Federal income tax consequences of
investments in related tax shelter partnerships. See Pearlman v.
Commissioner, T.C. Memo. 1995-182; Kott v. Commissioner, T.C. Memo.
1995-181; Eisenberg v. Commissioner, T.C. Memo. 1995-180; Decker v.
Commissioner, T.C. Memo. 1995-38; Brown v. Commissioner, T.C. Memo.
1994-43; Kozlowski v. Commissioner, T.C. Memo. 1993-430, affd.
without published opinion 70 F.3d 1279 (9th Cir. 1995); Walsh v.
Commissioner, T.C. Memo. 1993-421, revd. in part on another issue
without published opinion 72 F.3d 136 (9th Cir. 1995).
With regard to Tech-1979 and Winfield, on the one hand, and
Technology-1980 (one of the partnerships involved in Krause v.
Commissioner, supra), on the other, petitioners allege that a
material difference exists based on a variation between the license
agreements of Tech-1979 and Winfield and the license agreements of
Technology-1980. Petitioners did not present any credible evidence
to establish how the alleged difference is material.
Respondent's expert witness testified that although Tech-
1979's and Winfield's license agreements had a somewhat different
structure from Technology-1980's, they were not materially
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different. Petitioners have not alleged any differences between
the license agreements of Boulder and Technology-1980.
We agree with respondent's expert that there were no material
differences between the various license agreements of Boulder,
Tech-1979, and Winfield and the license agreements of Technology-
1980.
Petitioners have failed to show that the applicable findings
of fact made in Krause with regard to the lack of profit objective,
the license agreements, and the nongenuine nature of the purported
debt obligations should not be applied in these cases. We conclude
that the activity and transactions of Boulder, Tech-1979, and
Winfield lacked profit objective, as did the transactions of
Technology-1980 and the other partnerships that were involved in
Krause.
In light of our resolution of the profit objective issue, it
is not necessary to address certain other substantive issues raised
by the parties.
Additions to Tax and Increased Interest
In our opinion in Krause v. Commissioner, 99 T.C. at 177-180,
we discussed at some length our reasons for not sustaining
respondent's determination of the same additions to tax that
respondent has determined with regard to petitioners herein. We
believe that that discussion, as set forth in Krause and as
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repeated below, is relevant to the additions to tax and increased
interest at issue herein.
For the years before us, section 6653(a)(1) provides additions
to tax equal to 5 percent of the underpayments if any part of the
underpayments are due to negligence or intentional disregard of
rules or regulations. Section 6653(a)(2) provides an addition to
tax of 50 percent of the interest on the portion of the
underpayment attributable to negligence. Negligence under section
6653(a)(1) and (2) constitutes the failure to exercise due care or
the failure to do what a reasonable or ordinarily prudent person
would do under the circumstances. Zmuda v. Commissioner, 731 F.2d
1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982); Neely v.
Commissioner, 85 T.C. 934, 947 (1985).
With regard to our analysis of the additions to tax, it is
important to note that one of respondent's own expert witnesses
acknowledges that investors may have been significantly and
reasonably influenced by the energy price hysteria that existed in
the late 1970's and early 1980's to invest in EOR technology. A
number of industry and governmental reports and publications
encouraged investors to invest in EOR technology. Various
governmental incentives, funding, and subsidies were directed at
development of EOR technology. In the early 1980's, a large amount
of money was spent on the development of technology for the
recovery of oil from shale and synthetic fuels in spite of the fact
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that such technology was not technically viable at the time and
that minimal oil was produced therefrom.
In evaluating the imposition of the additions to tax in the
instant cases, and in light of the above facts (encouraging
investments in and the development of tertiary oil recovery methods
such as EOR technology), we are somewhat understanding of the
individual investments that were made in the Boulder, Tech-1979,
and Winfield partnerships. In the context of the hysteria relating
to the energy crisis, the oil price increases of the late 1970's,
the industry and governmental interest in EOR technology, the heavy
and sophisticated promotion of these investments, and the evidence
in these cases (and in spite of our findings and conclusions
sustaining respondent's substantive tax adjustments), we conclude
that petitioners are not liable for the additions to tax under
section 6653(a)(1) and (2).
For 1981 and 1982, respondent in these cases, on brief, has
conceded the section 6659 additions to tax.
For 1982, respondent asserts that petitioners, John and
Cornelia Vanderschraaf, are liable for an addition to tax for
substantial understatement of tax under section 6661, equal to 25
percent of the respective underpayment of tax attributable to such
understatement of tax. In order for an understatement of tax to be
considered substantial, the amount of the understatement must
exceed the greater of 10 percent of the tax required to be shown on
the Federal income tax return or $5,000. Sec. 6661(b)(1)(A).
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Respondent contends that the addition to tax under section 6661
should be imposed because there was no substantial authority
supporting the claimed treatment of the disallowed items.
Petitioners argue that they should be held not liable for the
section 6661 addition to tax and that respondent should have waived
the section 6661 addition to tax.
Respondent also argues that petitioners never formally
requested respondent to waive the section 6661 addition to tax, and
respondent argues that the Court therefore is without jurisdiction
to review respondent's refusal to waive this addition to tax.
On the record in these cases, we conclude that the section
6661 addition to tax has always been before the Court and in
dispute between the parties. Respondent has been aware for years
of petitioners’ request for an abatement thereof.
In the related test case of Krause v. Commissioner, 99 T.C. at
179 (on general grounds that are also applicable to petitioners
herein), we expressly addressed and rejected respondent's
imposition of the section 6661 addition to tax. Based on the
record in these cases, we conclude that respondent's refusal to
waive the section 6661 addition to tax constitutes an abuse of
discretion. Mailman v. Commissioner, 91 T.C. 1079 (1988); see also
Vorsheck v. Commissioner, 933 F.2d 757 (9th Cir. 1991).
As we explained in Krause v. Commissioner, 99 T.C. at 180,
imposition of increased interest under section 6621(c), and its
predecessor section 6621(d), is more automatic. Section 6621(c)
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provided an increased rate of interest for substantial
underpayments attributable to tax-motivated transactions.
Substantial underpayments are defined as underpayments in excess of
$1,000. By regulation, among the types of transactions that are
considered to be tax-motivated transactions within the meaning of
section 6621(c) are those with respect to which the related tax
deductions are disallowed under section 183 for lack of profit
objective. Rybak v. Commissioner, 91 T.C. 524, 568 (1988); sec.
301.6621-2T, A-4(1), Temporary Proced. & Admin. Regs., 49 Fed. Reg.
50392 (Dec. 28, 1984). In light of our findings as to the lack of
profit objective, petitioners are liable for increased interest
under section 6621(c).
For the reasons stated, respondent's imposition of the
additions to tax is not sustained in these cases, but respondent's
imposition of increased interest under section 6621(c) is
sustained.
Decisions will be entered
under Rule 155.