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.
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 of
tax benefits?). It is clear, however, that "this formulation cannot be
used as a `rigid two-step analysis.'" Sacks, 69 F.3d at 988 (quoting
Casebeer, 909 F.2d at 1363). Rather, "it is proper for the court to look
at all elements of the transaction at issue." Casebeer, 909 F.2d at
"[I]t is well established that the determination of an existing profit
motive is made at the partnership level and does not address the
subjective intent of the particular partner in question." Hill v.
Commissioner, 204 F.3d 1214, 1218 (9th Cir. 2000); see also Copeland v.
Commissioner, 2000 WL 765171 (T.C. 2000) (stating "in analyzing the
economic substance and the profit objective of limited partnership
investments, in particular, individual actions of limited partners are
not the focus of the analysis;" holding "[I]n light of the lack of profit
objective and the lack of economic substance associated with the
activities and investments of the . . . limited partnerships, petitioners
are liable for increased interest under section 6621(c)."). "For limited
partnerships the criterion is whether the general partner sought to
make profits for the partnership." Arrowhead Mountain Getaway, Ltd. v.
Commissioner, 1995 WL 35359 (T.C. 1995); see also Wolf v. Commissioner,
4 F.3d 709, 713 (9th Cir. 1993) ("[p]rofit must be the predominant,
primary or principal objective of the general partner"). The mere fact an
investor took into consideration the beneficial tax aspects of an
investment does not establish that the transaction was a sham; instead,
the question is whether the transaction had economic substance. Sacks, 69
F.3d at 991.
Upon finding that the transaction was a sham or fraudulent, the
Commissioner may impose increased interest irrespective of the subjective
intent of the taxpayer. See Hill, 204 F.3d at 1220 (holding imposition of
increased interest was proper when partnership lacked profit motive as
"`tax-motivated transactions' set out in § 6621(c)(3)(A) show a
legislative pattern established by Congress which treats violations of
certain code sections as implicit violations of § 6621(c)" without
requiring "inquiry into the subjective state of mind of the individual
making the claim").
Taxpayers bear the burden of proof when disputing the I.R.S.'
application of the increased interest rate. See Hill, 204 F.3d at 1220.
II. Summary Judgment
Summary judgment is proper when the pleadings, discovery and affidavits
show that there is "no genuine issue as to any material fact and that the
moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56
(c). Material facts are those which may affect the outcome of the case.
See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505,
91 L.Ed.2d 202 (1986). A dispute as to a material fact is genuine if
there is sufficient evidence for a reasonable jury to return a verdict
for the nonmoving party. Id. The moving party for summary judgment bears
the burden of identifying those portions. of the pleadings, discovery and
affidavits that demonstrate the absence of a genuine issue of material
fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91
L.Ed.2d 265 (1986). On an issue for which the opposing party will have
the burden of proof at trial, the moving party need only point out "that
there is an absence of evidence to support the nonmoving party's case."
Once the moving party meets its initial burden, the nonmoving party
must go beyond the pleadings and, by its own affidavits or discovery,
"set forth specific facts showing that there is a genuine issue for
trial." Fed.R.Civ.P. 56(e). Mere allegations or denials do not defeat a
moving party's allegations. Id.; see also Gasaway v. Northwestern Mut.
Life Ins. Co., 26 F.3d 957, 960 (9th Cir. 1994). Nor is it sufficient for
the opposing party simply to raise issues as to the credibility of the
moving party's evidence. See Nat'l Union Fire Ins. Co. v. Argonaut Ins.
Co., 701 F.2d 95, 97 (9th Cir. 1983). If the nonmoving party fails to
show that there is a genuine issue for trial, "the moving party is
entitled to judgment as a matter of law." Celotex Corp., 477 U.S. at
323, 106 S.Ct. 2548.
On a motion for summary judgment, the court does not make credibility
determinations, for "the weighing of evidence, and the drawing of
legitimate inferences from the facts are jury functions, not those of a
judge." Liberty Lobby, 477 U.S. at 249, 106 S.Ct. 2505. Inferences to be
drawn from the facts must be viewed in the light most favorable to the
party opposing the motion. See Masson v. New Yorker Magazine, 501 U.S. 496,
520, 111 S.Ct. 2419, 2435, 115 L.Ed.2d 447 (1991).
The government argues that this is an easy case. All parties agree that
& L scheme was nothing more than a fraud. In fact, its deviser was
convicted of crimes arising out of this scheme and sentenced to a prison
term. See United States v. Laurins, 857 F.2d 529, 534 (9th Cir. 1988).
The government contends that as the GD & L investment arrangement was a
sham, and section 6621(c)(3)(A)(v) permits the I.R.S. to impose an
interest penalty when a sham is found, the I.R.S. acted within its
discretion in imposing the interest penalty regardless of the taxpayers'
Plaintiffs counter that the investments at issue were not shams or
fraudulent transactions within the meaning of section 6621(c), and thus
the government improperly applied the higher interest rate to
plaintiffs. Plaintiffs admit that the GD & L transaction was a fraud, but
not that it met the definition of a "sham or fraudulent transaction" as
defined in the statute. Rather, plaintiffs claim that they were the
victims of a massive fraud and should not be penalized for someone else's
There is an inherent equitable appeal to plaintiffs' argument. Yet,
equity alone cannot dictate this court's decision. The court must look to
the language of the statute as interpreted by the Ninth Circuit to
determine whether the I.R.S. properly imposed increased interest under
section 6621(c)(3)(A)(v). Upon so doing, the court concludes that it
cannot grant the government's motion for summary judgment.
The government conflates the two inquiries facing the court. The fact
that GD & L bilked investors does not necessarily mean that the
investment was a sham or fraudulent transaction for the purposes of the
Internal Revenue Code. In making a sham determination for tax code
purposes, the court must examine the subjective intent of the general
partner. The court then imputes that intent to the partnership as a whole
and to the limited partners as individuals. If after this inquiry the
court finds there was no economic purpose to the transaction other than
to acquire tax benefits, the I.R.S. may impose increased interest without
further investigation as to any individual partner's motives. See Hill,
204 F.3d at 1217; see also Thomas v. United States, 166 F.3d 825, 833,
834 (6th Cir. 1999) (recognizing that Sixth Circuit precedent "focused on
the taxpayers' motive as part of the analysis in deciding whether the
transactions were shams," but that "by its plain language I.R.C. §
6621(c) imposes no inquiry into the taxpayer's investment motive when
the transaction is found to be a sham"); Anderson v. Commissioner,
62 F.3d 1266, 1274 (10th Cir. 1995) (holding investor in GD & L program
who stipulated that the program was a "sham could not challenge increased
interest penalty as once a sham is found, the taxpayer's motivation is
irrelevant"); Chakales v. Commissioner, 79 F.3d 726, 728 (8th Cir. 1996)
(stating "Commissioner has authority to assess [increased interest]
penalty simply upon a finding that a transaction was a sham;" however, as
Chakales had not demonstrated profit motive, court refused to reach issue
of whether increased interest could appropriately be applied to "an
innocent victim of a fraudulent scheme who entered it in good faith for
profit"); Keeler v. Commissioner, 243 F.3d 1212, 1221 (10th Cir. 2001)
("[I]n light of our holding that the transactions at issue lacked
economic substance and were not engaged in for profit, the Commissioner
properly subjected taxpayer to an increased interest rate under former
I.R.C. § 6621(c) (repealed 1989) on the ground that his
underpayments were attributable to tax-motivated transactions.");
Thompson v. United States, 223 F.3d 1206, 1212 (10th Cir. 2000) (imposing
"strict liability on innocent, non-negligent investors who invest in a
partnership that is later determined to be a sham" despite sympathy for
taxpayers' plight as "section 6621(c) simply leaves no room for
consideration of the individual taxpayer's motivation when the taxpayer
concedes the transaction was a sham"); Karr v. Commissioner, 924 F.2d 1018,
1026 (11th Cir. 1991) (holding because petitioner's activity "lacked
economic substance, the Tax Court correctly determined that the Karrs'
tax liability is subject to the imposition of additional interest
pursuant to section 6621(c)").
In its order of July 22, 1996 denying the government's motion to
dismiss, the court stated that it needed the benefit of a factual record
to determine whether, the transactions were shams. See Adkerson v. United
States, 1996 WL 428348, *3 (N.D.Cal. 1996) (citing Erhard v.
Commissioner, 46 F.3d 1470, 1475 (9th Cir.) (affirming Tax Court's
opinion, rendered after six-week trial, that transactions lacked economic
substance); Sochin v. Commissioner, 843 F.2d 351, 355 (9th Cir.)
(affirming Tax Court's conclusion, supported by twenty-eight pages of
factual findings, that transactions were shams); Collins v.
Commissioner, 857 F.2d 1383, 1385, 1387 (9th Cir. 1988) (relying on Tax
Court's nine pages of factual findings to affirm Tax Court's
determination that taxpayers had no profit motive and that investments
lacked economic substance)). That still holds true.
Although the limited partners may have invested in GD & L with the
intent of realizing a profit, they are bound by the motive of the
partnership. See Vorsheck v. Commissioner, 933 F.2d 757, 758 (9th Cir.
1991). That motive is determined by examining the subjective intent of
general partner Coffin. The parties have presented dueling affidavits,
deposition testimony and documentary evidence as to Coffin's intent. As
the court may not make credibility determinations on a motion for summary
judgment, and a determination of Coffin's subjective intent will in large
part turn on his credibility, the court cannot now grant this motion.
See, e.g., Bunch v. United States, 1995 WL 319204, *8 (D.Nev. 1995)
(denying government's motion for summary judgment as to increased
interest for a sham transaction as taxpayer "may have reasonably
concluded [at the time of his investment] that the Partnership was
primarily motivated for profit, and not merely for tax benefits");
Nicholson v. Commissioner, 1993 WL 128090 (T.C. 1993) (rejecting
government's contentions that transactions were shams after finding
petitioner's testimony credible in demonstrating that "transactions were
intended to have economic significance and not merely to evade
It does not bode well for plaintiffs that every court to consider the
issue of increased interest imposed on GD & L investors has found the GD
& L program to be a sham and consequently imposed increased interest.
See, e.g., McPike v. Commissioner, 1996 WL 55974 (T.C. 1996) ("This Court
has previously held that the container leasing program promoted by GD & L
lacked economic substance and was a factual sham. . . . Petitioners
introduced no evidence that the container leasing program was not a
sham. Accordingly, the increased rate of interest applies to the
underpayment attributable to all deductions and credits taken with
respect to the container program."); Schafer v. Commissioner, 1994 WL
652250 (T.C. 1994) ("We have considered the GD & L container program in
other cases, and have concluded that the containers did not exist, the
purported sales transactions were shams, and the program completely lacked
economic substance." E.g., Marcinek v. Commissioner, T.C. Memo.
1993-631; Anderson v. Commissioner, T.C. Memo. 1993-607; Falligan v.
Commissioner, T.C. Memo. 1993-606; Cleland v. Commissioner, T.C. Memo.
1993-589; Amsler v. Commissioner, T.C. Memo. 1993-289 (the GD &
L program was a factual sham); Shortal v. Commissioner, T.C. Memo.
1992-560 ("the GD & L program was completely lacking in economic
substance and was simply a sham"); Weiler v. Commissioner, T.C. Memo.
1990-562. "Petitioner has not shown that his GD & L transaction is
distinguishable from those in the cases cited above."). Cf. Pelham v.
Commissioner, 1993 WL 364820 (T.C. 1993) (stating transaction has
previously been found to be a sham, but that petitioner was not liable for
addition to tax for negligence). However, each case must be judged on its
specific facts, and therefore, the court will thoroughly explore the
motives behind the various partnerships' investments with GD & L.
Given the conflicting evidence, the court finds that plaintiffs have
demonstrated that there exists a genuine issue as to whether the
transactions had practical economic effects and thus whether the I.R.S.
properly assessed the interest rate applicable to tax motivated
transactions. The action must proceed.
For the foregoing reasons, the court hereby DENIES defendant's motion
for summary judgment.
IT IS SO ORDERED.