United States Tax Court

“ We also believe from petitioner's testimony and his manner of betting that he believed he could make a profit from gambling on the dogs. While the race track employees who testified indicated that very few inveterate gamblers win in the long run at the tracks, most gamblers are incorrigible optimists. In order to qualify as a trade or business an activity must be carried on with an objective for profit, but the test is not the reasonableness of the taxpayer's belief that profit will be realized but whether the enterprise is carried on in good faith and for the purpose of making a profit. ”

“ We agree with respondent. To accede to petitioner's claim that it has no connection with International is to ignore reality. While it may be true that they are not formally controlled by the same individuals, International exerts considerable control over petitioner's activities. It sets the tuition for the standard training and requires a minimum number of such trainings. It requires petitioner to conduct regular seminars and to host special events. ”

“ Petitioners contend that a taxpayer's motive is irrelevant in determining whether a transaction should be recognized for tax purposes and that a series of transactions, rather than a single transaction, is of no consequence in determining whether a transaction should be recognized for tax purposes.
Petitioners argue that there is no merit to respondent's claim that the various transactions were shams and argue that there was economic substance to the various transactions involved in this case. ”

“ Commissioner, 769 F.2d at 1380, we conclude that any error attributable to respondent with respect to the mailing of the deficiency notice is rendered harmless by virtue of petitioner's subsequent decision to ignore what was obviously an important piece of correspondence from the Internal Revenue Service. Because we find the deficiency notice in issue to be valid, we will grant respondent's motion to dismiss and deny petitioner's motion to dismiss. ”

“ The purpose of the est training is to transform the ability of individuals to experience living so that the situations they have been trying to change or have been putting up with clear up just in the process of life itself. est is exclusively educational and expressly disclaims any purpose relating to any specific discipline, therapy, philosophy or theology. est makes available to the public a variety of educational programs based upon the training methods developed by Werner Erhard. These programs include training, seminars, courses, lectures, workshops and similar activities. ”

“ Petitioner argues that respondent’s proposed levy action is inappropriate because his correct tax liability for each of 1995, 1996, and 1997 is zero. Petitioner argues that he received neither respondent’s notice of jeopardy assessments nor the notice of deficiency relating to his 1995, 1996, and 1997 Federal income taxes, and petitioner therefore argues that he has not had an opportunity to challenge the existence and amount of the underlying tax deficiencies determined by respondent. ”

“ Generally and not specifically, the est Body of Knowledge is made up in form and substance of the est Standard Training, Graduate Seminars, Guest Seminars, communication and other workshops, and numerous special events, presentations and lectures. The est Body of Knowledge is an educational program involving and consisting of material designed to permit individuals to experience life and living more fully. It is indebted to many thought systems and is a totally new way of looking at reality. ”

“ In the September 16, 1980, memorandum to Werner Erhard, the attorneys also stated:
The existing legal and financial structure of est is and has been consistent with your intention to own est by giving it away; a structure consistent with your desire not be seen to be "in it for the money" while maximizing your ability to expand your contribution to people's well-being and the transformation of the quality of their lives. ”

“ In general, section 4944 (a) (1) imposes an excise tax on each investment which jeopardizes the exempt purposes of a private foundation. Section 4945 (a) (1) imposes an excise tax on each taxable expenditure made by such a foundation. The taxes imposed by subsections (a) (1) are to be paid by the private foundation. When there is tax imposed by a respective subsection (a) (1) , sections 4944 (a) (2) and 4945 (a) (2) may impose excise taxes on the management of the foundation as well. The subsections (a) (1) and (a) (2) taxes are defined as "first tier" excise taxes. ”

“ It is also completely unreasonable to charge petitioner with gambling income of $468,624 with absolutely no cost of producing it. Perhaps, since petitioner had no records, respondent's determination should be considered arbitrary or capricious, but we think accepting respondent's determinations in this instance would be taxing petitioner's failure to keep records rather than his taxable income. We find no reasonable or rational foundation for respondent's not allowing any deductions for amounts bet by petitioner. ”

“ INTEREST ON ALLEGED INDEBTEDNESS FOR WELBEHAGEN LICENSE Petitioner claimed interest expense deductions in the taxable years ended June 30, 1976 and 1977 with respect to the purported indebtedness incurred in acquiring the 10-year license from Welbehagen. Section 163 allows as a deduction all interest paid or incurred on an indebtedness. It is well settled that the indebtedness referred to in section 163 must be genuine, and that economic realities govern over the form in which a transaction is cast. ”

“ Under section 6330 (c) (2) (B) , if a taxpayer received a notice of deficiency for a year in question and does not file a petition for redetermination of the deficiency with the Tax Court, in a collection hearing a taxpayer may not contest the existence or amount of his or her underlying tax liabilities. Nestor v. Commissioner, 118 T.C. 162, 165-166 (2002) . Rather, to contest the underlying tax liabilities in such a situation, the taxpayer would be required to pay the taxes assessed by respondent and to pursue a refund claim and a refund suit in Federal District Court. ”

“ There is nothing in the record to explain the derivation or the nature of the interest in the property by these two entities. It is significant that both of these entities were among the so-called 'system entities' managed by individuals from the office of Margolis. There is no effort to explain why (apart from tax considerations) petitioner, which had just acquired the property with a loan from Barclays Bank of California, [13] would immediately embark on a transaction which did nothing except to engender an onerous (and inflated) monthly rental liability. ”

“ They also rely on the notes to establish that the claimed indebtedness was an indebtedness of Talmud.
From their analysis of the evidence, petitioners conclude that they have established a prima facie case for the interest deduction and that it is incumbent on respondent to go forward with evidence to show that the amount is not properly deductible as interest. Petitioners then argue that respondent has not met his burden of going forward with evidence to show that the transaction was not in substance what it purported to be. ”

“ The 1980 amendments, in relevant portion, substituted the term "taxable period" for the term "correction period" in sections 4944 (b) (1) and 4945 (b) (1) . "Taxable period" is now defined in section 4944 (e) (1) as beginning when the jeopardizing investment is made and ending on the earliest of the date of mailing of a notice of deficiency, the date on which the first-level tax is assessed, or the date on which the amount is removed from jeopardy. ”

“ In light of petitioner's knowledge of the dogs he bet on and the race tracks on which they ran, the time he spent each day studying the racing forms and watching the dogs run, the type of races he bet on, and the system he used to be relatively sure of a winner in many of the races he bet on, and his consistency in attending the races and betting on them almost every day the tracks were open, and keeping in mind that he testified he came out ahead on the races in 1979, 1981, and 1982, we believe petitioner won on the races in both of the years 1979 and 1980. ”

“ Membership in petitioner is limited to graduates of the training designated 'Erhard Seminars Training.' In order to retain membership status, an individual must vote in the election of the directors of the corporation at least once in the first 3 years and once in every successive group of three elections. To be eligible for election to the board of directors, an individual must be a resident of Hawaii and a graduate of 'Erhard Seminars Training.' Directors and officers receive no compensation for their services. ”

“ Petitioner contends that the decision to shed est, a.e.c. in 1981 and continue the Erhard operations as Werner Erhard & Associates, a sole proprietorship, was prompted by business realities and that the transactions between WEA and est, a.e.c., as well as the financial obligations purportedly incurred, were thus valid and should be given effect for tax purposes. The business reality, argues petitioners, was to escape the perceived financial damage to the enterprise caused by the continued association of the enterprise with Margolis. ”

“ A credit balance on a system accounting redounded to the benefit of the client in that it was available to him for future use. In order to implement his tax planning techniques Margolis or his employees engaged in so-called 'money movements.' A typical 'money movement' consisted of borrowing money from one system entity and paying it to another. A 'money movement' is described by the following pattern: periodically, after an accumulation of 'transactions requests' submitted by Margolis or his employees was collated, a series of proposed transactions was plotted on a spread sheet. ”

“ Petitioner argues that each section imposes an additional excise tax upon a foundation manager only when that manager refuses a request from a fellow foundation manager to remove part or all of an investment from jeopardy or to correct a taxable expenditure. ”

“ An examination of the circular money flow in each of the four phases, in which the participation and orchestration by Harry Margolis is amply demonstrated by the record, underscores the complete absence of economic substance sufficient to support the depreciation and interest expense deduction here at issue. In phases one and two the various amounts simply circled out of the system through WEA and back into the system except for cash retained by WEA from the flow in the amount of $2,249,323 in phase one and $850,854 in phase two. ”

“ The visits to individuals in India who were in some way versed in aspects of Indian philosophy appear to be incidental in nature. We have carefully considered the record and we are persuaded that the trip to India was primarily personal in nature. Petitioner has failed to establish the requisite nexus between the trip to India and its trade or business. We reach the same conclusion with respect to the around- the-world airplane tickets for Erhard and Ingrasci since the record is virtually silent as to the purpose of such trip. ”

“ In explaining identical language in section 4941 (a) and (b) , concerning the remedies for self-dealing, the Senate Report states:
The second level of tax applies if the self-dealing is not "undone" or (if undoing is not possible) the foundation is not made whole or given the benefit of the bargain within 90 days after the mailing of the deficiency notice with respect to the first level of tax. * * * A second-level tax is also imposed on the foundation manager if he refuses to agree to any part of the correction. ”

“ The circular money movements here involved generally began and ended with system entities, with no change in the economic position of the system viewed as a whole. Quite often, the money movements occurred in a single day. The stream of money flowing through the intermediate entities, supported by mere bookkeeping entries or by the devices of back to back loans, was without economic substance. See Karme v. Commissioner, supra.
It is established that the economic substance of a transaction, rather than its form, must control for Federal tax purposes. ”

“ Petitioner's contention that the wardrobe expenses were undertaken for the business and not for the personal benefit of the employee is unpersuasive. There is no perceptible connection between the continuous expenditures over the years or Erhard's wardrobe and the business in which petitioner was engaged. The wardrobe expenses incurred by petitioner for Erhard consisted of ordinary, conventional items of clothing, i.e., shirts, slacks, jackets, sweaters, and shoes, which were undeniably suitable for general or personal wear. ”

“ When the Trust made a grant to an exempt organization, petitioner always requested a copy of its exemption letter. If the donation was made to an individual or a nonexempt organization, petitioner sent the recipient a copy of a letter prepared by Mr. Margolis explaining expenditure responsibility and that expenditure responsibility reports were required. The Trust never sought approval of its grant-making procedures from the Internal Revenue Service before it made grants to individuals. ”

“ EMPLOYEE recognizes that it is in the mutual interest of himself and EMPLOYER that he remain an active public figure in these areas and, therefore, he agrees that he will not unreasonably refuse to perform any services called for by the terms of such agreement. Should a dispute arise between the parties concerning the reasonableness of any EMPLOYEE refusal to perform any said services, such dispute shall be subject to binding arbitration. ”