Heller v. Comm'r

T.C. Memo. 2008-232

UNITED STATES TAX COURT

ROBERT B. AND JANET E. HELLER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13656-06. Filed October 20, 2008.

R determined that Ps are liable for additions to tax
pursuant to sec. 6653(a)(1) and (2), I.R.C., for their 1983,
1984, and 1985 tax years and pursuant to sec. 6661(a),
I.R.C., for their 1983 tax year.

Held: Ps are liable for the additions to tax.

John E. Lahart, for petitioners.

Andrew R. Moore, Catherine Caballero, and Nhi T. Luu for

respondent.
 - 2 -

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: This case is before the Court on a petition

for redetermination of three affected items notices of deficiency

in which respondent determined that petitioners are liable for

the following additions to tax:

Additions to Tax
Year Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6661(a)
1
1983 $550.00 $2,750
1
1984 9.35 ---
1
1985 15.15 ---
1
50 percent of the interest due on deficiencies of
$11,000, $187, and $303 for the 1983, 1984, and 1985
tax years, respectively.

Unless otherwise indicated, section references are to the

Internal Revenue Code, as amended and in effect for the tax years

at issue. The issues for decision are whether petitioners are

liable for each of the additions to tax determined by respondent.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated

facts and accompanying exhibits are hereby incorporated by

reference into our findings. At the time they filed their

petition, petitioners resided in California.

Mr. Heller has a degree in business from UCLA. Following

college and the military, he worked as a stockbroker for Merrill

Lynch. He later worked in sales and marketing in the technology
 - 3 -

sector for various corporations, including Control Data

Corporation, Cisco Systems, Inc., and Oracle Corporation.

Sometime in the early 1980s George Bell (Mr. Bell),

described at trial by Mr. Heller as a “salesperson” and

“chartered financial analyst”,1 advised Mr. Heller to invest in a

limited partnership called Contra Costa Jojoba Research Partners

(CCJRP), which was involved in research about and the growing of

jojoba beans. Before investing in CCJRP, Mr. Heller received a

prospectus relating to CCJRP. According to Mr. Heller, the

prospectus contained caveats as to the risks and tax benefits

associated with an investment in CCJRP. Mr. Heller provided the

prospectus to his certified public accountant (C.P.A.), William

M. Miller (Mr. Miller), who informed Mr. Heller that CCJRP

“looked like a pretty good investment” and that the tax writeoff

associated with an investment in CCJRP was “limited * * *

compared to others.” In addition, Mr. Heller conducted his own

independent research.

On November 30, 1983, petitioners acquired 10 units in CCJRP

for $27,500, or $2,750 per unit. They paid $11,000 upon closing

and signed a promissory note for the remaining $16,500.

In 1983, 1984, and 1985, the tax years at issue, CCJRP filed

with the Internal Revenue Service and provided to petitioners

1
At trial, Mr. Heller also described Mr. Bell as a
salesperson who he believed had received a commission on the
purchase by petitioners of their interest in CCJRP.
 - 4 -

Schedules K-1, Partner’s Share of Income, Credits, Deductions,

etc., in which CCJRP allocated to petitioners ordinary losses of

$25,000, $490, and $2,582, respectively. In turn, on their 1983,

and presumably also their 1984, and 1985 joint Forms 1040, U.S.

Individual Income Tax Return, petitioners claimed ordinary losses

relating to their interest in CCJRP of $25,000, $490, and $2,582,

respectively as deductions in computing their taxable income for

those years. Petitioners’ 1983 joint Federal income tax return

was prepared by Mr. Miller. It appears that Mr. Miller also

prepared their 1984 and 1985 joint returns.

On May 30, 1989, respondent sent petitioners a notice of

final partnership administrative adjustment (FPAA) issued to

CCJRP for the 1983 tax year. FPAAs issued to CCJRP for the 1984

and 1985 tax years were mailed to CCJRP’s Tax Matters Partner,

Paul E. Vallely, on April 12, 1989. On July 13, 1989, a petition

in the name of CCJRP, Charles B. Toepfer, Tax Matters Partner,

was filed with the Court at docket No. 17323-89. On January 28,

1994, to settle the case at docket No. 17323-89, the tax matters

partner and respondent filed a stipulation to accept and be bound

by the result in Utah Jojoba I Research v. Commissioner (Utah

Jojoba I), a test case docketed at No. 7619-90.

The Court issued an opinion in Utah Jojoba I on January 5,

1998, in which it held that the partnership at issue was not

entitled to deduct its losses for research and development
 - 5 -

expenditures. See Utah Jojoba I Research v. Commissioner, T.C.

Memo. 1998-6. On April 11, 2005, the Court entered a decision

against CCJRP upholding as correct the partnership item

adjustments as determined and set forth in the FPAAs for the

1983, 1984, and 1985 tax years. That decision was not appealed.

On June 19, 2006, respondent issued the aforementioned

affected items notice of deficiency with respect to petitioners’

1983 tax year. On June 26, 2006, respondent issued petitioners

the aforementioned affected items notices of deficiency for their

1984 and 1985 tax years. Petitioners then filed a timely

petition with this Court. A trial was held on May 17, 2007, in

San Francisco, California.

OPINION

I. Additions to Tax Under Section 6653(a)(1) and (2)

Section 6653(a)(1) and (2) imposes additions to tax if any

part of any underpayment of tax is due to negligence or disregard

of rules and regulations.2 For the purposes of this statute,

negligence is defined as a “‘lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under

2
Those additions to tax are for (1) an amount equal to 5
percent of the underpayment and (2) an amount equal to 50 percent
of the interest payable under sec. 6601 with respect to the
portion of the underpayment which is attributable to negligence.
Such interest runs for the period beginning on the last date
prescribed by law for payment of such underpayment and ending on
the date of the assessment of the tax. Sec. 6653 (a)(1) and (2).
 - 6 -

the circumstances.’” Neely v. Commissioner, 85 T.C. 934, 947

(1985) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th

Cir. 1967), affg. in part and remanding in part 43 T.C. 168

(1964) and T.C. Memo. 1964-299).

The Court of Appeals for the Ninth Circuit, to which an

appeal lies in this case absent a stipulation to the contrary,

has held that a determination as to negligence for purposes of

sections 6653(a) and 6661(a) in a case involving a deduction for

loss that results from an investment “depends upon both the

legitimacy of the underlying investment, and due care in the

claiming of the deduction.” Sacks v. Commissioner, 82 F.3d 918,

920 (9th Cir. 1996), affg. T.C. Memo. 1994-217.

Petitioners contend that they were not negligent because

they invested in CCJRP only after receiving the independent

opinion of their C.P.A., to whom they had provided the documents

supplied to them by CCJRP. Petitioners further contend that Mr.

Heller, who had investment expertise, did his own thorough

research before investing in CCJRP.

Respondent counters that petitioners failed to act

reasonably because, before investing in CCJRP, they did not seek

independent advice as to the agricultural viability of jojoba

farming in the southwestern United States. Although respondent

concedes that petitioners sought the advice of their C.P.A., Mr.

Miller, respondent asserts that Mr. Miller was provided a
 - 7 -

“limited collection of information” and “reviewed it cursorily

and orally represented to [p]etitioners little more than a

comparison to contemporary oil and gas tax shelter projects.”

Moreover, Mr. Miller “did not have any expertise in either

farming or complex taxation matters” and “was not qualified to

give the requisite advice.” Respondent notes that, despite the

tax risks boldly identified in CCJRP’s prospectus, “Petitioners

negligently failed to have the document reviewed by an

independent tax attorney.”

Concerning petitioners’ deduction of losses stemming from

their investment in CCJRP, respondent points out that petitioners

claimed a $25,000 loss on their 1983 Federal income tax return

after acquiring ten units in CCJRP on November 30, 1983, for

$11,000 in cash and promissory notes for the remaining $16,500.

Respondent argues that “Considering the significance of the loss

claimed, it would have been reasonable and prudent for

petitioners to seek advice from an attorney trained in taxation”

before claiming those losses on their 1983, 1984, and 1985

Federal income tax returns.

As explained below, although reasonable reliance on

professional advice may serve as a defense to the additions to

tax for negligence, see United States v. Boyle, 469 U.S. 241, 251

(1985), petitioners have not demonstrated that they acted with

due care with respect to their investment in CCJRP and the
 - 8 -

resulting tax deductions claimed in 1983, 1984, and 1985 for

losses relating to that investment.

CCJRP’s underlying activity lacked legitimacy, as we decided

in Utah Jojoba I. See Utah Jojoba I Research v. Commissioner,

supra (“[W]e hold that Utah I was not actively involved in a

trade or business and also lacked a realistic prospect of

entering a trade or business.”); see also Welch v. Commissioner,

T.C. Memo. 2002-39. Because CCJRP and the jojoba partnership at

issue in Utah Jojoba I are essentially identical, we need not

rehash in detail the license agreement and the research and

development (R & D) agreement entered into between CCJRP and U.S.

Agri Research & Development Corp (the same entity with which the

partnership at issue in Utah Jojoba I entered into a license

agreement and an R & D agreement). Suffice it to say that “the R

& D agreement was designed and entered into solely to provide a

mechanism to disguise the capital contributions of the limited

partners as currently deductible expenditures and thus reduce the

cost of their participation in the farming venture.” Utah Jojoba

I Research v. Commissioner, supra. As the Court has stated in a

number of other cases involving nearly identical jojoba

partnerships:

First, the principal flaw in the structure of
Blythe II was evident from the face of the very
documents included in the offering. A reading of the
R & D agreement and licensing agreement, both of which
were included as part of the offering, plainly shows
that the licensing agreement canceled or rendered
 - 9 -

ineffective the R & D agreement because of the
concurrent execution of the two documents. Thus, the
partnership was never engaged, either directly or
indirectly, in the conduct of any research or
experimentation. Rather, the partnership was merely a
passive investor seeking royalty returns pursuant to
the licensing agreement. Any experienced attorney
capable of reading and understanding the subject
documents should have understood the legal
ramifications of the licensing agreement canceling out
the R & D agreement. However, petitioners never
consulted an attorney in connection with this
investment, nor does it appear that they carefully
scrutinized the offering themselves.

Christensen v. Commissioner, T.C. Memo. 2001-185; see Finazzo v.

Commissioner, T.C. Memo. 2002-56; Serfustini v. Commissioner,

T.C. Memo. 2001-183; Carmena v. Commissioner, T.C. Memo. 2001-

177; Nilsen v. Commissioner, T.C. Memo. 2001-163.

Although we do not doubt that petitioners sought some

professional advice and that Mr. Heller conducted some of his own

research before investing in CCJRP, this case resembles other

jojoba cases in which the Court has sustained the imposition of

an addition to tax under section 6653(a)(1) and (2). See, e.g.,

Christensen v. Commissioner, supra; Serfustini v. Commissioner,

supra; Nilsen v. Commissioner, supra.

For example, Christensen v. Commissioner, supra, involved

taxpayers who had obtained the advice of their C.P.A. before

investing in a jojoba partnership. In sustaining the imposition

of an addition to tax under section 6653(a)(1) and (2), the Court

noted, among other things, that the C.P.A. “did not provide
 - 10 -

petitioners with a written opinion about the investment.” Id.

Moreover, the Court observed that the record lacked evidence

demonstrating that the C.P.A. “conducted any independent

investigation to determine whether the specific research and

development proposed to be conducted by or on behalf of the

partnership would have qualified for deductions under section

174.” Id.

As was the case in Christensen, petitioners’ C.P.A.,

Mr. Miller, did not testify at trial.3 Nor did he provide

petitioners with a written opinion concerning their investment in

CCJRP. As a consequence, the specific nature of his advice to

petitioners is unclear. At trial, Mr. Heller provided a vague

description regarding the advice offered by Mr. Miller.

According to Mr. Heller, Mr. Miller

said, well, from his professional opinion, it
looked like a pretty good investment, it looked like
the economics were there, the demand for the product
was there, and I remember him saying to the effect, as
a limited writeoff in this program compared to others
so it looked like a very conservative program to go
into. And he would recommend that I go into that
program itself.

Mr. Heller’s vague testimony concerning Mr. Miller’s advice

is insufficient to support petitioners’ reasonable-reliance

argument. This is a highly factual inquiry, and the dearth of

3
The Christensens’ C.P.A. was deceased. It is unknown why
Mr. Miller did not testify at trial.
 - 11 -

evidence in the record leads us to conclude that petitioners’

arguments are unpersuasive. See Bass v. Commissioner, T.C. Memo.

2007-361 (“[T]he determination of negligence is highly

factual.”).4

The fact that Mr. Heller conducted his own research before

investing in CCJRP does not alter our opinion. At trial, he

testified that he invested in CCJRP because he learned of

jojoba’s many uses and because he believed that there was great

demand for jojoba. However, he was also aware that there was

some tax benefit associated with his investment. This is no

different than the aforementioned cases in which the Court found

that the taxpayers “acted on their enthusiasm for the potential

uses of jojoba and acted with knowledge of the tax benefits of

making the investment.” Nilsen v. Commissioner, supra.

Nor does the fact that Mr. Miller prepared petitioners’

1983, 1984, and 1985 joint Federal income tax returns shield them

from liability for the section 6653(a)(1) and (2) additions to

tax. Aside from Mr. Heller’s self-serving testimony, there is no

evidence in the record as to the specific nature of Mr. Miller’s

4
A guiding principle is that similarly situated taxpayers
should be treated similarly. See Hassebrock v. Commissioner,
T.C. Memo. 1983-255 n.3 (“Although we are required to decide this
case on its own facts, we must also see that similarly situated
taxpayers are treated the same way.”). Petitioners’ reasonable-
reliance defense does not differ materially from those of the
taxpayers found to be unavailing in the aforementioned cases.
See supra pp. 9-10.
 - 12 -

advice. Owing to a lack of evidence offered by petitioners, the

Court is not convinced that a fully informed competent tax

professional ever advised them regarding the propriety of their

claimed 1983, 1984, and 1985 CCJRP-related deductions of $25,000,

$490, and $2,582, respectively. That is particularly troublesome

in this case considering that petitioners invested $11,000 in

CCJRP in 1983 and that same year claimed a $25,000 deduction for

a loss relating to that investment.5 Under the circumstances,

petitioners acted with a lack of due care in claiming as

deductions on their 1983, 1984, and 1985 joint Federal income tax

returns ordinary losses of $25,000, $490, and $2,582,

respectively, relating to their interest in CCJRP. Consequently,

petitioners are liable for the section 6653(a)(1) and (2)

additions to tax.6

5
Although petitioners also signed a promissory note for
$16,500, there is no evidence in the record as to whether they
ever made payments on that note.
6
We note that this case is distinguishable from Kantor v.
Commissioner, 998 F.2d 1514 (9th Cir. 1993), affg. in part and
revg. in part T.C. Memo. 1990-380, in which the Court of Appeals
for the Ninth Circuit reversed this Court’s affirmance of the
imposition of a sec. 6653(a) addition to tax on the basis that
the experience and involvement of the general partner and the
lack of warning signs could reasonably have led investors to
believe that they were entitled to deductions in light of the
undeveloped state of the law regarding sec. 174. The Court of
Appeals explained that the Supreme Court's decision in Snow v.
Commissioner, 416 U.S. 500 (1974), left unclear the extent to
which research must be “in connection with” a trade or business
for purposes of qualifying for an immediate deduction under sec.
174. See, e.g., Nilsen v. Commissioner, T.C. Memo. 2001-163.
(continued...)
 - 13 -

II. Addition to Tax Under Section 6661(a) for Petitioners’ 1983

Tax Year

Section 6661(a) provides for an addition to tax of 25

percent of the amount of any underpayment attributable to a

substantial understatement.7 There is a “substantial

understatement” of income tax for any tax year where the amount

of the understatement exceeds the greater of (1) 10 percent of

the tax required to be shown on the return for the taxable year

or (2) $5,000. Sec. 6661(b)(1)(A). However, the amount of the

understatement is reduced to the extent attributable to an item

(1) for which there is or was substantial authority for the

taxpayer’s treatment thereof, or (2) with respect to which the

relevant facts were adequately disclosed on the taxpayer’s return

or an attached statement. See sec. 6661(b)(2)(B).8

6
(...continued)
Unlike the partnership in Kantor, CCJRP was neither engaged in a
trade or business nor conducting research and development, either
directly or indirectly. See Utah Jojoba I Research v.
Commissioner, T.C. Memo. 1998-6.
7
In 1983, sec. 6661(a) provided for a 10-percent addition to
tax. The amount of the sec. 6661(a) addition to tax was later
increased to 25 percent for additions to tax assessed after Oct.
21, 1986. Omnibus Budget Reconciliation Act of 1986, Pub. L.
99-509, sec. 8002, 100 Stat. 1951. The retroactive increase of
the amount of the penalty from 10 percent to 25 percent does not
violate petitioners’ constitutional rights to equal protection or
due process. See Licari v. Commissioner, 946 F.2d 690, 692-695
(9th Cir. 1991), affg. T.C. Memo. 1990-4.
8
Where the understatement at issue is attributable to a tax
shelter, adequate disclosure is inconsequential; and, in addition
(continued...)
 - 14 -

In a very short section of their brief, petitioners state

without supporting argument that they are not liable for the

section 6661 addition to tax. Respondent contends that

petitioners’ underpayment of tax for 1983 was the result of a

substantial understatement of tax for that year. Respondent

further contends that petitioners have “provided no authority to

either substantiate their claim nor outweigh the authority

presented.” We agree with respondent that petitioners are liable

for the section 6661(a) addition to tax.

Petitioners do not argue that they had substantial authority

for claiming the loss on their 1983 Federal income tax return,

and they have not demonstrated that they adequately disclosed the

facts relevant to their investment in CCJRP on their 1983 tax

return or on an attached statement.

Rev. Proc. 83-21, 1983-1 C.B. 680, applicable to tax returns

filed in 1983, lists information which is deemed sufficient

disclosure with respect to certain items, none of which is

involved in this case. Notwithstanding the inapplicability of

Rev. Proc. 83-21, supra, a taxpayer may make adequate disclosure

8
(...continued)
to substantial authority, the taxpayer must demonstrate a
reasonable belief that the tax treatment claimed was more likely
than not proper. Sec. 6661(b)(2)(C). Because the result would
be the same in this case whether or not we label CCJRP a tax
shelter, we will analyze petitioners’ entitlement to a reduction
of the sec. 6661(a) addition to tax as though CCJRP were not a
tax shelter.
 - 15 -

if the taxpayer provides sufficient information on the return to

enable the Commissioner to identify the potential controversy

involved. See Schirmer v. Commissioner, 89 T.C. 277, 285-286

(1987). However, “Merely claiming the loss, without further

explanation,” as petitioners did, is insufficient to alert

respondent to the controversial nature of the claimed partnership

loss. Robnett v. Commissioner, T.C. Memo. 2001-17. In addition,

petitioners did not attach any statement to their 1983 return.

As a result, the Court sustains the imposition of a section

6661(a) addition to tax.

III. Anti-Stacking Argument

On brief, citing section 1.6662-1(c), Income Tax Regs.,

petitioners argue that “respondent applied the penalty interest

provision under section 6621(c)(3) and then again under

6653(a)(2) for the same understatement” and that “[T]he anti-

stacking regulations were promulgated to end this result.”9 That

argument lacks merit.

The anti-stacking provision referred to by petitioners

pertains to accuracy-related penalties imposed under section

6662, which is effective only with respect to tax returns due

after December 31, 1989. Omnibus Budget Reconciliation Act of

1989, Pub. L. 101-239, sec. 7721, 103 Stat. 2395. The additions

9
The anti-stacking rule is actually contained in sec.
1.6662-2(c), Income Tax Regs.
 - 16 -

to tax at issue in this case were not imposed pursuant to section

6662 and relate to petitioners’ 1983, 1984, and 1985 joint

Federal income tax returns, which were due to be filed long

before section 6662 took effect. Simply stated, the regulation

cited by petitioners is inapplicable here.

The Court has considered all of petitioners’ contentions,

arguments, requests, and statements. To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

To reflect the foregoing,

Decision will be entered

for respondent.