2001 Tax Ct. Memo LEXIS 23">*23 Decision will be entered for respondent.
MEMORANDUM OPINION
DINAN, SPECIAL TRIAL JUDGE: Respondent determined that petitioner was liable for the following additions to tax for taxable year 1982: $ 452.25 under
The issues for decision are: (1) Whether petitioners are liable for additions to tax for negligence under
2001 Tax Ct. Memo LEXIS 23">*24 Some of the facts have been stipulated and are so found. The stipulations of fact and the attached exhibits are incorporated herein by this reference. Petitioners resided in Norman, Oklahoma, on the date the petition was filed in this case.
Mr. Harvey currently teaches international business and conducts research at the University of Oklahoma. He has received a bachelor's degree in business administration (marketing), a master's degree in business administration, a second master's degree in marketing research, and a doctorate in marketing and international sociology. However, he has no tax background, and his accounting background is limited to two accounting classes. His teaching and writing encompass neither accounting nor tax. Petitioner wife (Ms. Harvey) has received a bachelor's degree in secondary education.
Beginning in 1967, Mr. Harvey was involved in the formation and operation of a business that reconditioned and then sold trucks. He ran the business for a period of 2-
During 1982, the year in issue, Mr. Harvey was a professor of international marketing at Southern Methodist University, he was the sole proprietor of a consulting business which generated $ 86,766 in gross2001 Tax Ct. Memo LEXIS 23">*25 receipts and a $ 71,091 profit, and he was the sole proprietor of a trucking business (separate from the business discussed above) which generated $ 83,157 in gross receipts and a $ 19,610 loss.
Mr. Harvey's introduction to jojoba occurred about 1970 through 1972 through discussions he had with two neighbors. These neighbors happened to be doctoral students of archaeology and anthropology who were conducting research related to the history of jojoba. Mr. Harvey was reacquainted with jojoba in 1982 by Marlin Peterson. Mr. Peterson, a certified public accountant, is petitioners' accountant and has prepared their tax returns since around 1974. When Mr. Harvey and Mr. Peterson first discussed jojoba in November 1982, Mr. Peterson was in the planning stages of the jojoba investment. Mr. Harvey discussed the investment with Mr. Peterson when Mr. Harvey met with him and another of his clients at a lunch which was both social and for the purpose of discussing tax matters. After meeting with Mr. Peterson, Mr. Harvey met with Rick Avery, president of Anderson-Clayton Food Company. Mr. Avery had access to research which had been conducted relating to potential uses of jojoba in the food industry. 2001 Tax Ct. Memo LEXIS 23">*26 Mr. Harvey learned from this meeting that the insufficient supply of jojoba was at least in part prohibiting its use in food products. Mr. Harvey then discussed jojoba with a health food store owner, who provided him with materials relating to jojoba's properties and uses.
Mr. Harvey also obtained, and carefully reviewed, a copy of the private placement memorandum distributed by the promoters of Yuma Mesa. According to this document, the partnership was organized "to engage in research and development and, thereafter, participate in the marketing of the products of the jojoba plant." Interests in the partnership were offered for $ 12,245 each, payable by cash of $ 3,571 and a 4-year promissory note of $ 8,674 bearing 10 percent annual interest.
Yuma Mesa was organized as a limited partnership, with two co-general partners. The general partners, G. Dennis Sullivan and William Woodburn, were lawyers; the private placement memorandum listed no experience of either outside the legal field. Yuma Mesa was to enter into a "Research and Development Agreement" with Hilltop Plantations, Inc. (Hilltop), which would in turn enter into a farming subcontract with its wholly owned subsidiary, Mesa2001 Tax Ct. Memo LEXIS 23">*27 Plantations, Inc. (Mesa). Hilltop was then to enter into an "Experimental Agricultural Lease" with Hilltop Ventures, a general partnership with identical ownership as Hilltop. This lease was to be assigned to Mesa upon completion of the research and development. Finally, Hilltop was to enter into a "Research and Development Management Agreement" with Agricultural Investments, Inc., which was to be the "manager" of the project.
Hilltop (as well as Mesa and Hilltop Ventures) was controlled by four individuals. These individuals were Raymond H. Meinke (president, director, and shareholder), Keith A. Damer (vice president, secretary, director, and shareholder), Mr. Peterson (vice president, treasurer, director, and shareholder), and Cecil R. Almand (shareholder). The three officer/directors of Hilltop were all listed as certified public accountants with expertise in the tax field. The private placement memorandum listed no experience of any of the officer/directors or shareholders which is relevant to the farming of jojoba.
The private placement memorandum contained language specifically alerting investors to the planned deduction of the "research and development" costs, as well as other2001 Tax Ct. Memo LEXIS 23">*28 tax risks involved in making an investment in the partnership. The document also contained an opinion letter stating that the research and development agreement contained therein met the requirements of section 174. Potential investors were required to provide information concerning any previous experience in tax shelter investments, and the subscription agreement required investors to initial a statement that the investor had been advised to consult with an attorney concerning the tax consequences of the investment.
Several weeks after meeting with Mr. Peterson, Mr. Harvey decided to invest in the partnership. Mr. Harvey made his investment because he felt he had insider knowledge concerning jojoba and because he thought demand for the product was sufficient to meet a larger supply. Petitioner did not research the possible yield per acre of a jojoba plantation, did not analyze production costs, did not independently investigate the available markets or means of transporting the jojoba to purchasers, and did not make any financial projections regarding the product.
Petitioner purchased two interests in Yuma Mesa. On December 30, 1982, he executed a subscription agreement, a promissory2001 Tax Ct. Memo LEXIS 23">*29 note in the amount of $ 17,348, and a partnership agreement. Petitioner subsequently was issued a Schedule K-1 by the partnership which reflected a $ 23,174 ordinary loss for taxable year 1982.
On their joint Federal income tax return for 1982, petitioners reported the following amounts of income and losses:
Wages (University) $ 43,978
Interest 984
Business (Consulting) 71,091
Business (Trucking) (19,610)
Royalties 2,878
Yuma Mesa partnership (23,174)
S corporation (79)
_______
Total income 76,068
In the years following his investment in 1982, petitioner received and reviewed financial statements and progress reports. The reports were semiannual or quarterly, and discussed the progress or problems at the sites. At one point, petitioner traveled to the plantation in Yuma, where he spent approximately 1
The private2001 Tax Ct. Memo LEXIS 23">*30 placement memorandum provided projections of estimated cash expenditures and tax savings associated with investments in the partnership. These projections, adjusted to two interests, together with petitioner's actual cash expenditures, are as follow:
Cash Expenditures Tax Savings
Year Projected Actual Projected
____ _________ ______ _________
1982 $ 9,782 $ 8,439 $ 11,998
1983 5,280 5,186 764
1984 5,280 5,186 572
1985 5,280 5,186 360
1986 2,640 3,888 152
28,262 27,885 13,846
Petitioners' claimed loss from Yuma Mesa for taxable year 1982 was disallowed in the computational adjustment which was made pursuant to the partnership level proceedings, resulting in a $ 9,045 deficiency. Respondent issued petitioners a statutory notice of deficiency determining2001 Tax Ct. Memo LEXIS 23">*31 additions to tax under
The first issue for decision is whether petitioners are liable for additions to tax for negligence under
Negligence is defined as "lack of due care or failure to do what a reasonable and prudent person would do under similar circumstances."
Petitioners argue that reliance on an adviser who is a promoter may be reasonable under precedents from the Court of Appeals for the Tenth Circuit, to which appeal lies in this case. The2001 Tax Ct. Memo LEXIS 23">*33 first case petitioners cite is
The second case petitioners cite is the unpublished opinion of
2001 Tax Ct. Memo LEXIS 23">*35 In the case at hand, unlike Anderson and Gilmore & Wilson Constr. Co., Mr. Peterson was involved in Yuma Mesa from the planning stages through its operation. He was a promoter of the partnership and was an officer and director of the corporation which entered into the research and development agreement with it. Mr. Peterson falls far outside the role of an adviser who simply received commissions from independent entities upon the sale of an investment. Rather, he was integrally involved in the partnership, and consequently petitioners' reliance on any advice from him was not reasonable.
We are convinced that petitioner intended to make an actual investment in Yuma Mesa and not merely derive a tax benefit therefrom. Petitioner, for example, performed some investigation into the potential of jojoba prior to investment, monitored the investment after it was made, and made payments to the partnership in an amount greater than the tax benefits expected to be derived. We nevertheless find that petitioner was negligent within the meaning of
Because we hold that petitioner was negligent and that petitioners' reliance upon Mr. Peterson was not reasonable, we2001 Tax Ct. Memo LEXIS 23">*37 uphold respondent's determination that petitioners are liable for the
The second issue for decision is whether petitioners are liable for the addition to tax under
Petitioners do not argue that they had substantial authority for claiming the loss, nor do they argue that there was adequate disclosure on the return. We find that the record does not establish the presence of either. The only argument petitioners make is that they acted with reasonable cause and in good faith in claiming2001 Tax Ct. Memo LEXIS 23">*39 the loss.
Because petitioners have not established either that they had substantial authority for their treatment of the partnership loss or that they adequately disclosed the relevant facts of that treatment, we uphold respondent's determination on this issue.
To reflect the foregoing,
Decision will be entered for respondent.
1. The underlying deficiency in this case is based upon a computational adjustment made by respondent in accordance with partnership level adjustments. Those adjustments were upheld by this Court in
2. The advice petitioner received from Mr. Peterson was apparently only in the context of Mr. Peterson's preparation of petitioners' tax return. Mr. Harvey testified that he never discussed the tax implications of the investment with Mr. Peterson.↩
3. Gilmore & Wilson Constr. Co. is an unpublished opinion of the Court of Appeals for the Tenth Circuit. Although unpublished decisions generally are not binding precedent in the Tenth Circuit and citation thereto is disfavored, that court allows citation to such a decision where "(1) it has persuasive value with respect to a material issue that has not been addressed in a published opinion; and (2) it would assist the court in its disposition."
4. Respondent argues in his brief that "petitioners' claimed loss for 1982 was clearly a tax shelter item," despite the fact that the notice of deficiency stated that the underpayment "is attributable to non-tax shelter items." As a result of our findings we need not decide whether the tax shelter provisions are applicable in this case.↩