NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel.
Wesley H. HILLENDAHL, Marilyn G. Hillendahl, Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
No. 91-70405.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted July 8, 1992.
Decided Sept. 21, 1992.
Before FARRIS, WIGGINS and FERNANDEZ, Circuit Judges.
MEMORANDUM*
OVERVIEW
Appellants, Wesley and Marilyn Hillendahl, appeal the tax court's decision imposing penalties under Internal Revenue Code section 6659 and 6621 for underpayment of taxes. The tax court found the Hillendahls liable for additional taxes under I.R.C. section 6659 because they underpaid their income taxes as a result of valuation overstatements.1 Further, the tax court held the appellants liable for an increased rate of interest which is applicable under I.R.C. section 6621(c)2 to tax-motivated transactions. This court has jurisdiction over the timely appeal pursuant to I.R.C. section 7482, and we affirm.
Imposition of § 6659 Penalties
Although section 6659 was repealed at the end of 1989, it was in effect at the time the Hillendahls underpaid their taxes and therefore applies in this case. This section provides for a penalty in the event of an underpayment of taxes attributable to a valuation overstatement. A value overstatement occurs whenever "the value of any property, or the adjusted basis of any property, claimed on any return" is overstated by 150 percent or more. § 6659(c). The penalty is determined by calculating the percentage of the overstatement and then referring to the chart in the statute for the matching penalty. In this case, the overstatement was more than 250 percent, making the applicable penalty thirty percent.
Whether the penalty was properly imposed is a question of law reviewed de novo. Gainer v. Commissioner,
The Hillendahls do not contest the factual findings of the tax court. Nor do they challenge the computation of their undervaluation and the amount of the penalty. Instead, they claim that it was unfair for the tax court to assess the penalty when other taxpayers who invested in the same shelter escaped the penalties merely because their containers were never placed in service. The Hillendahls find this situation particularly inequitable; while the investors who escaped this penalty were found to have no profit motive in investing, the Hillendahls were found to have at least some profit motivation. This court has already addressed this issue in rejecting an appeal by the Commissioner. In Gainer, the Commissioner appealed the tax court's refusal to impose the penalty on taxpayers situated similarly to the Hillendahls, but whose containers had not been placed in service. The Commissioner anticipated the Hillendahl's claim in this case and argued that the tax court's decision would produce an inequity among taxpayers. The Gainer court was not persuaded:
The Commissioner suggests that some taxpayers will be liable for the section 6659 penalty if their containers were placed in service, while others like Gainer will not be liable for any penalties, even though their deductions and credits allegedly suffer from greater infirmities.... [E]ven if this were so, we cannot obviate the intent of Congress, once it has been determined, merely to avoid an inequitable result.
Gainer,
Next, appellants argue that the Commissioner should have waived the overvaluation penalty pursuant to section 6659(e). Under that section, "[t]he Secretary may waive all or any part of the addition to the tax provided by this section on a showing by the taxpayer that there was a reasonable basis for the valuation or adjusted basis claimed on the return and that such claim was made in good faith." This waiver rests in the discretion of the Secretary (or his delegate, the Commissioner), and thus is reviewed for an abuse of discretion. Heasley v. Commissioner,
Appellants have not shown that the Commissioner abused his discretion. Appellants believe they satisfied the waiver requirement because of the tax court's conclusion that they did have some profit motive. However, to be found to have a profit motive, one only need prove an actual and honest objective (a subjective test) to make a profit; one does not need to prove a reasonable expectation (an objective test) of realizing a profit. Beck v. Commissioner,
Imposition of § 6621(c) Penalties
Again appellants do not challenge the factual findings made by the tax court, but rather the application of the penalty to them. Determining whether the penalty properly applies is a question of statutory interpretation. The tax court's finding is therefore subject to a de novo review. Gainer,
Section 6621 provides for an increased rate of interest for substantial underpayments of tax which are attributable to tax motivated transactions. A tax motivated transaction includes any valuation overstatement as defined in section 6659. See § 6621(c)(3)(A)(i). Therefore, when section 6659 applies, so does section 6621(c).
In this case, the tax court found the Hillendahls made a valuation overstatement and were liable for the section 6621(c) increased rate of interest. The Hillendahls claim that a tax motivated interest penalty is not applicable to them because they were found to have a profit motive. To support this argument, they claim that section 6621(c) has never been imposed "upon a transaction where economic substance exists, and where the taxpayers have been proven to have a profit motive." Appellants are incorrect. The court in Cranfill v. Commissioner, 56 T.C.M. (CCH) 392, 394 (1988), rejected the argument that it was inconsistent to treat a transaction that was motivated by profit as a tax motivated transaction. The court said that a tax motivated transaction is defined in section 6621 and a finding that the taxpayers' transaction fits that definition ends the inquiry.3
Appellants cite Heasley v. Commissioner,
The Heasley court did find the taxpayers to have a profit motive and refused to impose section 6621(c) penalties for lack of a profit motive. The Hillendahls fail to note, however, that the lack of profit motive was an alternate ground for imposing 6621 penalties argued by the Commissioner in the event the section 6659 penalty was disallowed (as it was). It was unrelated to the section 6659 penalty issue. As the Heasley court noted, "the IRS may specify other types [besides those such as section 6659 which are specifically listed in section 6621(c) ] of transactions as 'tax-motivated." Heasley,
In the Hillendahl's case, their deductions and credits were not totally disallowed, and they were properly subjected to the penalties under section 6659. An overvaluation under section 6659 is a tax-motivated transaction under section 6621(c) and the increased interest rate was properly applied.
AFFIRMED.
Notes
This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3
The tax court found that the Hillendahls grossly overstated the value of the tax shelters in which they invested. They paid for a large portion of those shelters with non-recourse notes
This section has been substantially amended since the genesis of this case. The version referred to in this case is the version that was valid until the December 31, 1989 amendment
This case is by no means unique. See also Ronnen v. Commissioner,