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ADKERSON v. U.S.

June 13, 2001

LEONARD A. ADKERSON, ET AL., PLAINTIFFS,
v.
UNITED STATES OF AMERICA, DEFENDANT. MERRILYN BARKER, ET AL., PLAINTIFFS, V. UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Patel, Chief Judge.

MEMORANDUM AND ORDER

In 1995, plaintiffs Leonard Adkerson, Merrilyn Barker and others (collectively "plaintiffs"), brought these actions against defendant United States of America ("government") alleging that the government collected tax penalties from plaintiffs under 26 U.S.C. § 6621 (c) without proper authority.*fn1 Now before the court is the government's motion for summary judgment. Having considered the parties arguments and submissions, and for the reasons set forth below, the court enters the following memorandum and order.

BACKGROUND

Gold Depository and Loan Company, Inc. ("GD & L") devised and operated a tax shelter called the Dry Cargo Marine Container Purchase Program ("GD & L program") under which a typical investor might buy $100,000 worth of marine cargo containers with just $4,000 down.*fn2 GD & L arranged for financing of the unpaid balance. GD & L advised investors that they could then take an investment tax credit of 10% or $10,000, as well as a depreciation deduction of $15,000, on their tax return for the year of investment.

As described in the court's memorandum and order of July 22, 1996 denying the government's motion to dismiss for failure to state a claim, plaintiffs were limited partners in either Sunshine Transportation Systems ("Sunshine"), Stanley Transport Services ("Stanley"), STS Trucking Service ("STS"), Shamrock Transport Service ("Shamrock"), H.V. Enterprises ("H.V."), or in a combination of these partnerships. Sunshine, Stanley, STS, and Shamrock (collectively "the trucking partnerships") were formed in 1982. H.V. was formed in 1983. Plaintiffs invested in the trucking partnerships and H.V. predominantly for economic profit rather than for tax savings.

Under the control of general partner Harold Coffin ("Coffin"), the trucking partnerships invested approximately half their funds in the GD & L program, with the understanding that GD & L would facilitate the trucking partnerships' purchase and lease of dry cargo marine containers. The trucking partnerships invested the remaining portion of their funds in heavy trucks and trailers, a venture related to plaintiffs' goal of purchasing and leasing cargo containers. H.V. invested approximately half its funds in GD & L and half in a company that manufactured and sold tape recorders.

In their 1982 tax returns, plaintiffs who had invested in the trucking partnerships claimed tax credit and losses pursuant to information received from the trucking partnerships regarding investments in the GD & L program. Some of the plaintiffs carried back investment tax credits to 1979, 1980 and 1981. In their 1983 tax returns, those plaintiffs who invested in H.V. claimed tax credits and deductions pursuant to information received from H.V. regarding investments in the GD & L program. Some of these plaintiffs carries back investment tax credits to 1980, 1981 and 1982.

In 1984, pursuant to 26 U.S.C. § 6221, 6223, the Commissioner of the Internal Revenue Service ("I.R.S.") began an audit of the trucking partnerships. The next year, under the same authority, the I.R.S. began an audit of H.V. After discovering that the entire GD & L program was a fraud, namely because GD & L never purchased any cargo containers, the I.R.S. disallowed all the tax credits and many of the losses claimed by plaintiffs in connection with GD & L. The I.R.S. also assessed penalties pursuant to former Internal Revenue Code ("I.R.C.") section 6621(c), codified at 26 U.S.C. § 6621 (c).*fn3 In making the penalty assessments, the I.R.S. calculated interest on the disallowed credits and losses at the increased rate reserved for tax-motivated investments. Plaintiffs paid the penalties in full but thereafter filed claims with the I.R.S. for a refund of the payments. The I.R.S. denied those claims.

Plaintiffs admit that no dry cargo containers ever existed, but claim that they were victims of GD & L's fraud, not knowing participants. Plaintiffs contend that on Coffin's advice they invested in the trucking partnerships and H.V. in good faith, and only subsequently learned that the containers did not exist. As evidence of their good faith and profit motive, plaintiffs who invested in the trucking partnerships maintain that these partnerships actually purchased trucks and semi-trailers and operated a trucking business. These plaintiffs claim that this part of the trucking partnerships' business operated at a profit for approximately two years.

In November 1995, plaintiffs filed these actions pursuant to 26 U.S.C. § 7422, which permits certain actions "for the recovery . . . of any penalty claimed to have been collected without authority." 26 U.S.C. § 7422 (a). Plaintiffs claim that the government had no authority to assess the tax penalties because plaintiffs did not invest in the trucking partnerships or H.V. to achieve tax savings.

LEGAL STANDARD

I. Increased Interest

The I.R.C. provides that if a "tax imposed by [the Code] is not paid on or before the last date prescribed for payment, interest on such amount at the underpayment rate established under section 6621 shall be paid for the period from such last date to the date paid." 26 U.S.C. § 6601 (a). 26 U.S.C. § 6621 (c) imposes an increased rate of interest for "any substantial underpayment attributable to tax motivated transactions." 26 U.S.C. § 6621 (c)(1) (imposing interest rate of "120 percent of the underpayment rate established under this subsection"). The statute defines "substantial underpayment attributable to tax motivated transactions" as "any underpayment of taxes for any taxable year which is attributable to 1 or more tax motivated transactions if the amount of the underpayment for such year so attributable exceeds $1,000." 26 U.S.C. § 6621 (c)(2). Tax motivated transactions include "any sham or fraudulent transaction." 26 U.S.C. § 6621 (c)(3)(A)(v).

"A transaction is a sham if it has no purpose or economic effect other than the creation of a tax deduction." Bail Bonds by Marvin Nelson v. Commissioner, 820 F.2d 1543, 1548 (9th Cir. 1987); see also Sochin v. Commissioner, 843 F.2d 351, 354 (9th Cir. 1988) (to find that a transaction was a sham, court must determine "whether the transaction had any practical economic effects other than the creation of income tax losses"). In this inquiry, courts "typically focus on the subjective aspect of whether the taxpayer intended to do anything other than acquire tax deductions, and the objective aspect of whether the transaction had any economic substance other than creation of tax benefits." Sacks v. Com1missioner, 69 F.3d 982, 987 (9th Cir. 1995); see also Casebeer v. Commissioner, 909 F.2d 1360, 1363 (9th Cir. 1990) (quoting Bail Bonds, 820 F.2d at 1549) (in determining whether transaction is a sham court asks: 1) has the taxpayer shown that it had a business purpose for engaging in the transaction other than tax avoidance? 2) has the taxpayer shown that the transaction had economic substance beyond the creation ...


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