David G. Collins Pamela Collins Bernie Gates Maureen Gates Anne Hamsley and David Dister v. Commissioner of Internal Revenue

Taxpayers David and Pamela Collins, Bernie and Maureen Gates, Anne Hamsley, and David Dister (taxpayers), appeal the Tax Court’s disallowance of deductions for mining development expenses and imposition of penalties for negligence. We affirm.

BACKGROUND

For centuries, rivers have deposited tiny flakes of gold on the sandy beaches of Cape Yakataga, Alaska. Taxpayers claimed mining development expenses for a venture ostensibly intended to extract these flakes of gold from Cape Yakataga. The issue is whether taxpayers sought gold in the sands of Cape Yakataga or in the provisions of the Internal Revenue Code.

Lords Mine Inc. (Lords) and Cape Yaka-taga, Ltd. (CY), which owned mining claims on Cape Yakataga, joined with Alaska Mining and Processing Co. (AMP), in marketing this mining venture. The venture worked as follows: taxpayers purchased allegedly gold-bearing “mineral aggregate” (beach sand) from claims owned by Lords and CY. At the same time, taxpayers agreed that AMP would develop their sand for production. For AMP’s mining development services, taxpayers paid AMP cash and executed “Full Recourse” promissory notes, whose face value was four times the cash payment to AMP. The…