- 21 -
allowable deduction, it is further determined that such
interest constitutes interest in investment
indebtedness and deduction of such amounts is limited
under the provisions of I.R.C. 163(d).
Further, and in support of a portion of the
determined deficiency, if you establish that you are
entitled to the above-mentioned interest deduction, it
is determined that you improperly failed to report the
income resulting from the same transaction.
2. It is determined that part of the underpayment of
tax for the taxable year ____ is due to your negligent
of [sic] intentional disregard of the rules and
regulations. Consequently, the 5 percent addition to
the tax is charged for ____ as provided by Section
6653(a) of the Internal Revenue Code.
B. Thompson Notices of Deficiency
John R. Thompson (Mr. Thompson) was a pilot with Continental
Airlines from 1946 until his retirement in October 1982.
Mr. Thompson became aware of Mr. Kersting's programs through a
conversation with another pilot, Michael Provan (Mr. Provan), who
had solicited other pilots to participate in Mr. Kersting's
programs.11 The Thompsons began participating in Mr. Kersting's
programs in 1977.12 In addition to their participation in
11 Mr. Provan, who was at one time the president of one of
the Kersting companies, eventually became an adversary of
Mr. Kersting. See infra p. 66.
12 Although the Thompsons participated in one of
Mr. Kersting's programs during 1977, the Thompsons did not
claim any Kersting-related interest deductions on their 1977
return because their accountant-return preparer refused to
include them on the return.
The record suggests that the Thompsons' 1978 tax return
was prepared by Phil Scheff (an accountant recommended by
Mr. Kersting) and that the Thompsons claimed Kersting program
interest deductions on their return for that year. The Thompsons
experienced audit problems with their 1978 tax return that were
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