T.C. Memo. 2002-39
UNITED STATES TAX COURT
ANDREW J. AND MARILYN WELCH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16459-99. Filed February 11, 2002.
Douglas M. Edwards, for petitioners.
Rodney J. Bartlett, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Relating to Federal income tax deficiencies
that respondent determined against petitioners, respondent
determined against petitioners additions to tax for 1980, 1982,
and 1983 as follows:
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Additions to Tax
Year Sec. 6653(a) Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6661
1980 $60* –-- -–- —--
1982 --- $1,936 ** $9,682
1983 --- 40 *** -–-
* Based upon a claimed investment tax credit carryback from
1983.
** 50 percent of interest due on $38,726.
*** 50 percent of interest due on $805.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
After concessions, the remaining issue for decision is
whether petitioners are liable for the above additions to tax for
negligence under section 6653(a), (a)(1), and (a)(2), for 1980,
1982, and 1983.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulated facts and attached exhibits are incorporated
herein by this reference.
At the time the petition was filed, petitioners resided in
Las Vegas, Nevada. Hereinafter, references to petitioner in the
singular are to Andrew J. Welch.
During the years in issue, petitioner was a successful
orthopedic surgeon practicing in Las Vegas, Nevada. During 1982
and 1983, petitioner’s medical practice was particularly
successful. Petitioner earned from his orthopedic practice
$649,177 in 1982 and $1,027,000 in 1983.
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In the late summer or early fall of 1982, petitioner’s
medical partner introduced petitioner to Gary Sheets (Sheets), an
aggressive tax shelter promoter from Salt Lake City, Utah, who
had induced a number of physicians practicing in the Las Vegas
area to purchase interests in tax-sheltered limited partnerships.
In late 1982 and in 1983, petitioners purchased interests in
a number of tax-sheltered limited partnerships that were being
promoted by Sheets. On the basis of those investments, on
petitioners’ 1982 and 1983 joint Federal income tax returns
petitioners claimed large paper tax losses that offset
significantly the reported income from petitioner’s medical
practice.
The particular investment that is relevant to the negligence
additions to tax at issue herein is Blythe Jojoba II Research,
Ltd. (Blythe II), a jojoba research and development partnership
promoted by Sheets.
In connection with their decision to invest in Blythe II,
petitioners obtained from Sheets a prospectus describing
Blythe II and containing the typical risk caveats associated with
tax-sheltered limited partnership investments of the early 1980s.
The prospectus alerted petitioners, as of 1982, to the lack of an
established market for jojoba, to the lack of processing
facilities for jojoba, to the high degree of risk associated with
investments in the partnership, and to the fact that investors
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should not invest unless they could “afford the total loss
of their investment”.
The prospectus contained five pages of warnings of material
tax risks associated with investments in Blythe II, and the
prospectus urged investors to consult a tax adviser, as well as
independent counsel.
In spite of the risks identified in the prospectus,
petitioners did not consult, in any diligent way, with an
independent, professional tax or legal adviser. Petitioner spoke
over the telephone with W. Larry Swecker (Swecker), his tax
accountant, with relatives, and with friends. Swecker made
nothing more than a cursory review of the Blythe II prospectus
and the tax law.
Petitioners did not make any meaningful study of the
proposed investment. Petitioners never visited the Blythe II
jojoba farm before making an investment decision, even though
petitioners acknowledged visiting on a number of occasions the
locale in which the farm was located.
In spite of the many risks and warnings, in December of
1982, petitioners invested $40,000 in cash in Blythe II, and
petitioners signed a $95,680 promissory note associated
therewith.
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In 1982 and 1983, petitioners paid a total of only $39,170
and $50,000, respectively, in estimated and withheld Federal
income taxes.
On petitioners’ jointly filed Federal income tax returns for
1982 and 1983, petitioners reported $649,177 and $1,027,000 in
income from petitioner’s medical practice, and petitioners
claimed net losses of $575,171 and $671,937, respectively,
relating to petitioners’ various tax-sheltered partnership
investments, including losses relating to Blythe II of $83,732
and $4,024, respectively, for those years.
On audit, respondent disallowed the claimed losses relating
to petitioners’ investment in Blythe II. William G. Kellen, the
tax matters partner of Blythe II, initiated a proceeding under
the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L.
97-248, 96 Stat. 324, 648, and signed a stipulation to be bound
by the decision entered in Utah Jojoba I Research v.
Commissioner, T.C. Memo. 1998-6 (Utah I).
As a result of the final resolution of Utah I (wherein
claimed section 174 research and experimental expenses and losses
similar to those claimed by Blythe II were disallowed), the tax
deficiencies relating to petitioners’ investment in Blythe II are
conceded by petitioners.
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OPINION
Under section 6653(a), (a)(1), and (a)(2), an addition to
tax is imposed on the portion of an underpayment of tax
attributable to a taxpayer’s negligence equal to 5 percent of the
underpayment plus 50 percent of the interest due thereon under
section 6601.
Negligence is generally described as the failure to use due
care or to do what a reasonable and ordinarily prudent person
would do under the circumstances. Allen v. Commissioner, 925
F.2d 348, 353 (9th Cir. 1991), affg. 92 T.C. 1 (1989); Laverne v.
Commissioner, 94 T.C. 637, 652 (1990), affd. without published
opinion 956 F.2d 274 (9th Cir. 1992), affd. without published
opinion sub nom. Cowles v. Commissioner, 949 F.2d 401 (10th Cir.
1991).
Good faith reliance on the advice of a tax professional may
indicate that a taxpayer was not negligent. Allen v.
Commissioner, supra at 353-354; Collins v. Commissioner, 857 F.2d
1383, 1386 (9th Cir. 1988), affg. T.C. Memo. 1987-217. Reliance
on the advice of a tax professional may not be reasonable where
the professional had no firsthand knowledge of the proposed
investment and where the professional only made a cursory review
of the proposed investment. Sacks v. Commissioner, 82 F.3d 918,
920 (9th Cir. 1996), affg. T.C. Memo. 1994-217; Collins v.
Commissioner, supra at 1386.
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The Court of Appeals for the Ninth Circuit has stated that
whether a taxpayer is to be treated as negligent under section
6653(a), (a)(1), and (a)(2), may be affected by “the legitimacy
of the underlying investment”. Sacks v. Commissioner, supra at
920.
Respondent’s determination of the negligence addition to tax
is presumptively correct, and the burden is on the taxpayer to
prove that the taxpayer’s underpayment of tax was not due to
negligence. Allen v. Commissioner, supra at 353; Laverne v.
Commissioner, supra at 652.
On the facts of this case, we conclude that petitioners did
not exercise due care and were negligent in making an investment
in Blythe II. Petitioners did not adequately consider the risks
associated with an investment in Blythe II. Petitioners did not
inspect the land which was to be used by the partnership.
Petitioners did not confer with experts in any credible manner
with regard to the investment. The review of the investment by
petitioners’ tax accountant was so superficial as to be
worthless.
Aspects of petitioner’s testimony are suspect. Dates are
missing from documents. Third parties who purportedly advised
petitioner did not testify.
The lack of legitimacy of the underlying activity relating
to the Blythe II partnership is indicated by our opinion in
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Utah I, supra, the test case, and by our opinions in Christensen
v. Commissioner, T.C. Memo. 2001-185, Serfustini v. Commissioner,
T.C. Memo. 2001-183, and Nilsen v. Commissioner, T.C. Memo. 2001-
163, in each of which we upheld negligence additions to tax
relating to investments in Blythe II. No credible evidence in
this case provides any legitimacy to petitioners’ investment in
the Blythe II partnership.
In light of the above, for each year in issue petitioners
are liable for the negligence addition to tax under section
6653(a), (a)(1), and (a)(2).
To reflect the foregoing,
Decision will be entered
for respondent.