The opinion
T.C. Memo. 2010-249
UNITED STATES TAX COURT
RONALD B. AND HELEN J. SUNDRUP, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 14373-07, 14374-07, Filed November 16, 2010.
14379-07.
Frank W. Pechacek, Jr., and Jamie L. Cox, for petitioners.
Stephen A. Haller and James A. Kutten, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined the following defi-
ciencies in, and accuracy-related penalties under section
1
Cases of the following petitioners are consolidated here-
with: Sundrup Transfer, Inc., docket No. 14374-07; and Sundrup
Consulting, Inc., docket No. 14379-07.
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6662(a)2 on, the respective Federal income tax (tax) of
(1) Ronald B. and Helen J. Sundrup, (2) Sundrup Transfer, Inc.,
and (3) Sundrup Consulting, Inc.:
Accuracy-Related
Petitioner Taxable Year Deficiency Penalty Under Sec. 6662(a)
Ronald B. and
Helen J. Sundrup 2003 $19,129 $3,825.80
2004 17,956 3,591.20
2005 14,999 2,999.80
Taxable Year Accuracy-Related
Petitioner Ended Mar. 31 Deficiency Penalty Under Sec. 6662(a)
Sundrup Transfer,
Inc. 2004 $2,361 $472.20
2005 1,776 355.20
2006 843 168.60
Taxable Year Accuracy-Related
Petitioner Ended Mar. 31 Deficiency Penalty Under Sec. 6662(a)
Sundrup Consulting,
Inc. 2004 $10,030 $2,006
2005 7,875 1,575
2006 8,250 1,650
In amendments to answers filed in the respective cases at
docket Nos. 14373-07 and 14374-07, respondent alleged the follow-
ing respective increased deficiencies in, and increased accuracy-
related penalties under section 6662(a) on, the respective taxes
of (1) Ronald B. and Helen J. Sundrup and (2) Sundrup Transfer,
Inc.:
2
All section references are to the Internal Revenue Code
(Code) in effect for the years at issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
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Increased Increased Accuracy-Related
Petitioner Taxable Year Deficiency Penalty Under Sec. 6662(a)
Ronald B. and
Helen J. Sundrup 2003 $24,897 $4,979.40
2004 19,000 3,800.00
2005 15,548 3,109.60
Taxable Year Increased Increased Accuracy-Related
Petitioner Ended Mar. 31 Deficiency Penalty Under Sec. 6662(a)
Sundrup Transfer,
Inc. 2004 $7,917 $1,583.40
2005 6,543 1,308.60
2006 6,218 1,243.60
The issues remaining for decision are:3
(1) Should certain transactions during each of petitioners’
respective taxable years at issue between (a) Sundrup Transfer,
Inc., and Sundrup Consulting, Inc., (b) Sundrup Leasing, L.L.C.,
and Sundrup Consulting, Inc., and (c) Ronald B. and Helen J.
Sundrup and Sundrup Consulting, Inc., be respected for tax
purposes for each of those years? We hold that they should not.4
3
In addition to the issues remaining for decision that are
listed in the text, there are certain other questions relating to
certain determinations in the respective notices of deficiency
that respondent issued to petitioners which are computational in
that their resolution flows from our resolution of certain of the
issues that we address herein.
4
In the light of our holdings with respect to certain re-
spective transactions between (1) Sundrup Transfer, Inc., and
Sundrup Consulting, Inc., (2) Sundrup Leasing, L.L.C., and
Sundrup Consulting, Inc., and (3) Ronald B. and Helen J. Sundrup
and Sundrup Consulting, Inc., we need not address certain deter-
minations that respondent made in the respective notices of
deficiency that respondent issued to Ronald B. and Helen J.
Sundrup and Sundrup Consulting, Inc., because respondent indi-
cates on brief that respondent’s position with respect to those
other determinations is alternative to respondent’s position with
respect to those certain transactions. See infra notes 70 and
75.
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(2) Is petitioner Sundrup Transfer, Inc., entitled for its
taxable year ended March 31, 2004, to deduct under section 162(a)
certain medical and dental expenses? We hold that it is.
(3) Is Sundrup Transfer, Inc., entitled for each of its
taxable years ended March 31, 2004 and 2006, to deduct under
section 162(a) certain miscellaneous expenses? We hold that it
is not.
(4) Is Sundrup Leasing, L.L.C., entitled for each of its
taxable years 2003 through 2005 to deduct under section 162(a)
certain amounts that it paid relating to certain real proper-
ties?5 We hold that it is not.
(5) Are petitioners (a) Ronald B. and Helen J. Sundrup,
(b) Sundrup Transfer, Inc., and (c) Sundrup Consulting, Inc.,
liable for each of their respective taxable years at issue for
accuracy-related penalties under section 6662(a)? We hold that
they are.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found
except as stated herein.
At all relevant times since around 1964, including at the
time petitioners Ronald B. Sundrup (Mr. Sundrup) and Helen J.
5
Sundrup Leasing, L.L.C., was a passthrough entity for tax
purposes for each of its taxable years 2003, 2004, and 2005. As
a result, any deduction that it claimed for each of those years
in effect flowed through to its members, petitioners Ronald B.
and Helen J. Sundrup. See infra note 50.
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Sundrup (Ms. Sundrup)6 filed the petition in the case at docket
No. 14373-07 and throughout the years at issue, Mr. and Ms.
Sundrup resided at 200 Corning Street, Arcadia, Iowa (Arcadia),
which is in Carroll County, Iowa (Carroll County).
At all relevant times, including at the time petitioner
Sundrup Transfer, Inc. (Transfer), filed the petition in the case
at docket No. 14374-07 and throughout the years at issue,
Transfer maintained its principal place of business at 200
Corning Street, Arcadia.
At all relevant times, including at the time petitioner
Sundrup Consulting, Inc. (Consulting), filed the petition in the
case at docket No. 14379-07 and throughout the years at issue,
Consulting listed as its “business address” 200 Corning Street,
Arcadia.
Sundrup Residence
On June 19, 1964, Mr. and Ms. Sundrup purchased a vacant
residential lot at 200 Corning Street, Arcadia, and thereafter
built a single-family one-floor house with a finished basement
and an unfinished attic (original house) on that lot at a cost of
$13,000. They moved into that house and have lived there contin-
uously until at least the time of trial in these cases.
6
We shall sometimes refer to Mr. Sundrup and Ms. Sundrup as
Mr. and Ms. Sundrup or the Sundrups.
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On July 2, 1986, Mr. and Ms. Sundrup purchased a strip of
land adjacent to 200 Corning Street, Arcadia, in order to build
an addition to the original house. In 1988, they built that
addition, which included a two-car garage that is attached to the
original house (Sundrup two-car garage) and a small enclosed area
on the main floor between that garage and the original house that
was approximately 120 square feet (Sundrup enclosed area).7
The Sundrup residence, which is in a residential neighbor-
hood consisting of single-family houses, has approximately 1,028
square feet of space on the main floor and approximately 937
square feet of space in the basement. The main floor of the
Sundrup residence has three bedrooms, a living room, a kitchen
with an eat-in dining area, two full bathrooms, a utility room,
and the Sundrup enclosed area. The basement of the Sundrup
residence has a family room, a utility room, a full bathroom, and
a safe measuring approximately four cubic feet. There is an
unfinished attic in the Sundrup residence where certain business
documents and Christmas ornaments are stored. In addition to the
Sundrup two-car garage that is attached to the original house,
there is a one-car garage that is not attached to the original
house.
7
We shall refer to the lot that petitioners purchased in
1964, the original house that they built on that lot, the lot
that they purchased in 1986, and the addition to the original
house that they built on that lot as the Sundrup residence.
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The Office of the Carroll County Assessor appraised the
Sundrup residence as of January 1, 2008, at $104,800.
Trucking Business
Starting in 1967, Mr. Sundrup, along with his spouse Ms.
Sundrup, began operating a trucking business that, inter alia,
transported agricultural freight such as cattle, feedstock, fuel,
and liquid fertilizers. From 1967 until February 16, 2000, Mr.
Sundrup operated that trucking business as a sole proprietorship
under the name Ron Sundrup Transfer. Mr. and Ms. Sundrup used
certain equipment in operating Ron Sundrup Transfer, including
three Kenworth tractor-trailers (tractor-trailers), four corn
hoppers, a polar truck tank, certain shop tools, certain shop
equipment, and a lawnmower. Although Mr. Sundrup was the princi-
pal driver for Ron Sundrup Transfer, that business also used
certain other drivers.
The Sundrups conducted the office operations of Ron Sundrup
Transfer, which Ms. Sundrup managed, at 200 Corning Street,
Arcadia.8 As part of Ms. Sundrup’s managing the office opera-
tions of Ron Sundrup Transfer, she answered the telephone,
8
After the Sundrups built the addition to the original house
in 1988, they used a portion (Sundrup residence office space) of
the Sundrup enclosed area (i.e., the small enclosed area between
the Sundrup two-car garage and the original house that was
approximately 120 square feet), as well as a desk which was in
the original house and on which were a computer and a facsimile/
copier machine, to conduct the office operations of Ron Sundrup
Transfer.
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scheduled pickups, monitored deliveries, and coordinated jobs
among its drivers.
Division Street
On August 2, 1996, Mr. and Ms. Sundrup purchased a two-acre
parcel of land (Division Street property) at 1000-18 Division
Street, Arcadia, from Rita Sundrup, Mr. Sundrup’s mother. The
Division Street property has two houses on it. (Petitioners, and
we shall, refer to those houses as the North House and the South
House.)
After Rita Sundrup sold the Division Street property to the
Sundrups until at least the time of the trial in these cases, she
continued to live in the North House, where she had lived her
entire life, but she did not pay any rent to the Sundrups for the
use of that house. Nor did Rita Sundrup pay rent to the Sundrups
for the use of a garage on the Division Street property.
On a date not disclosed by the record before the years at
issue, Mr. and Ms. Sundrup remodeled the South House, and Rick
Sundrup, an adult son of Mr. and Ms. Sundrup, moved into that
house with his family. From the time Rick Sundrup and his family
moved into the South House until at least the time of trial in
these cases, they did not pay any rent to the Sundrups for the
use of that house.
At all relevant times, in addition to the North House and
the South House, there were several freestanding structures on
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the Division Street property, including (1) a large maintenance
shop and storage building, (2) a large storage building, (3) two
small storage sheds, and (4) a garage. (We shall refer to the
freestanding structures described in (1) through (3) as the
Division Street maintenance and storage structures.) Mr. and Ms.
Sundrup used the Division Street maintenance and storage struc-
tures in operating Ron Sundrup Transfer.
Vehicles and Condominiums
In addition to the Sundrup residence and the Division Street
property that the Sundrups owned during the times indicated
above, Mr. and Ms. Sundrup owned the following real property in
Branson, Missouri: A condominium described as Thousand Hills,
The Legacy, Building 2, Unit 5 (Unit 5), and a condominium
described as The Grande Legacy, Building E, Unit 6 (Unit 6).9
Mr. and Ms. Sundrup traveled to Branson, Missouri, four
times in 2002 in order to make certain repairs and improvements
to Unit 5 and/or Unit 6.
Mr. and Ms. Sundrup also owned (1) a 1996 Chevrolet pickup
truck that they traded on November 26, 1999, for a new 2000 GMC
9
Although the record does not establish when the Sundrups
acquired Unit 5 and Unit 6, the record does establish that the
Sundrups owned Unit 5 at least as early as Apr. 1, 2001.
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pickup truck (2000 GMC truck) and (2) a 1997 Cadillac automobile
(1997 Cadillac automobile).10
Transfer
At a time not disclosed by the record before February 16,
2000, Mr. and Ms. Sundrup retained Frank Pechacek (Mr. Pechacek),
an attorney, who, inter alia, advised them regarding the forma-
tion of certain entities (discussed below).11
On February 16, 2000, Mr. and Ms. Sundrup, with the assis-
tance of Mr. Pechacek, incorporated Transfer under the laws of
the State of Iowa. During the years at issue, Mr. Sundrup owned
349 shares, Ms. Sundrup owned 350 shares, and Rick Sundrup, their
son, owned 1 share of Transfer’s outstanding stock. At all
relevant times, including during the years at issue, Mr. Sundrup
and Ms. Sundrup were the only members of the board of directors
of Transfer. Throughout the years at issue, Mr. Sundrup was the
president, Ms. Sundrup was the vice president, the secretary, and
the treasurer, and Rick Sundrup was the assistant secretary of
Transfer.
10
The record does not establish when the Sundrups acquired
the 1996 Chevrolet pickup truck and the 1997 Cadillac automobile.
11
Mr. Pechacek prepared the respective tax returns of peti-
tioners for all of the taxable years at issue and is the lead
attorney representing them in these cases. Before the commence-
ment of the trial in these cases, petitioners waived any poten-
tial conflicts of interest regarding Mr. Pechacek, who was not
called as a witness at that trial.
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On the date on which Mr. and Ms. Sundrup incorporated
Transfer, Ron Sundrup Transfer ceased operating, and Transfer
began operating, a trucking business. In operating its trucking
business, Transfer undertook the same types of business activi-
ties that Ron Sundrup Transfer had previously handled.12 As was
true when the Sundrups operated Ron Sundrup Transfer, the
Sundrups conducted the office operations of Transfer, which Ms.
Sundrup managed, at 200 Corning Street, Arcadia (i.e., the
Sundrup residence).13 As was true when Ms. Sundrup managed the
office operations of Ron Sundrup Transfer, as part of Ms.
Sundrup’s managing the office operations of Transfer, she an-
swered the telephone, scheduled pickups, monitored deliveries,
and coordinated jobs among its drivers. During each of its
taxable years ended March 31, 2004 through 2006, Ms. Sundrup
spent approximately 24 hours each week managing the office
operations of Transfer.
During each of its taxable years ended March 31, 2004
through 2006, Rick Sundrup was a full-time driver, and Mr.
12
Around the date on which the Sundrups incorporated Trans-
fer, Mr. Sundrup transferred to Transfer certain assets that he
had used in the business operations of Ron Sundrup Transfer.
13
As was true with respect to the office operations of Ron
Sundrup Transfer during the period 1988 to Feb. 16, 2000, after
the Sundrups incorporated Transfer, they used the Sundrup resi-
dence office space, as well as a desk which was in the original
house and on which were a computer and a facsimile/copier ma-
chine, to conduct the office operations of Transfer. See supra
note 8.
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Sundrup also served as a driver, for Transfer. During each of
those years, Mr. Sundrup did work repairing, maintaining, and
washing certain vehicles that Transfer used in its trucking
business.14 During each of Transfer’s taxable years ended March
31, 2004 and 2005, Kerry Henkenius provided part-time office
support for that business and did so in the Sundrup residence
office space. During Transfer’s taxable year ended March 31,
2006, Erin Sundrup, Rick Sundrup’s wife, provided part-time
office support for that business and did so in the Sundrup
residence office space.
During each of its taxable years indicated, Transfer paid to
the following individuals the following amounts of cash compensa-
tion:
14
Our findings that during each of Transfer’s taxable years
at issue Mr. Sundrup served as a driver for Transfer and did
certain work on certain vehicles that it used in its business are
not intended to suggest or imply that Mr. Sundrup did no other
work for Transfer during each of those years.
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Taxable Year
Individual Ended Mar. 31 Cash Compensation
Rick Sundrup 2004 $44,032.82
2005 43,197.17
2006 53,199.74
Kerry Henkenius 2004 9,520.50
2005 5,123.25
Erin Sundrup 2006 3,428.00
Ms. Sundrup1 2004 3,600.00
1
The record does not establish the precise nature of the
work that Ms. Sundrup did for Transfer during its taxable year
ended Mar. 31, 2004, for which Transfer paid her $3,600 of cash
compensation. Our finding that Ms. Sundrup received that cash
compensation during that year for certain unexplained work is not
intended to suggest or imply that Ms. Sundrup did no other work
for Transfer during each of its taxable years at issue.
Except for the $3,600 of cash compensation that Transfer
paid to Ms. Sundrup during its taxable year ended March 31, 2004,
Transfer paid no cash compensation to Mr. Sundrup or to Ms.
Sundrup during any of its taxable years ended March 31, 2004
through 2006.
Certain Payments Made by Transfer
for Medical and Dental Expenses
On April 1, 2000, Transfer executed a document entitled
“NONDISCRIMINATORY MEDICAL AND DENTAL REIMBURSEMENT PLAN” (Trans-
fer medical and dental plan). That document stated in pertinent
part:
1. Purposes of Plan The purposes of the Plan are:
(a) To encourage employees to continue their
association with the Company.
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(b) To attract additional employees.
* * * * * * *
2. Eligibility. All employees who have been with the
Company [Transfer] for six (6) months, or since the
Company was incorporated, whichever is shorter, pro-
vided, however, that seasonal employees, employees
covered by a collective bargaining agreement, or non-
resident alien employees shall not be eligible.
3. Benefits. The Company will reimburse all eligible
employees for all reasonable medical and dental ex-
penses up to the sum of $5,000.00 in any fiscal year
(including, but not limited to the cost of any acci-
dent, health or medical or dental insurance policy)
which the eligible employee and/or members of his
immediate family may incur, except such expenses as may
be covered and are reimbursable to them from any medi-
cal, dental, health and/or accident insurance policy
insuring them.
On April 1, 2000, Transfer and Mr. Sundrup executed a
document entitled “AGREEMENT”, “NONDISCRIMINATORY MEDICAL AND
DENTAL REIMBURSEMENT PLAN” (Mr. Sundrup’s medical and dental
agreement with Transfer), and Transfer and Ms. Sundrup executed a
document with the same title (Ms. Sundrup’s medical and dental
agreement with Transfer).15 Mr. Sundrup signed Mr. Sundrup’s
medical and dental agreement with Transfer both in his individual
capacity and as president of Transfer. Ms. Sundrup signed Ms.
Sundrup’s medical and dental agreement with Transfer in her
15
Although the record establishes that Rick Sundrup, the
Sundrups’ son, was entitled to benefits under the Transfer
medical and dental plan, the record does not contain any document
that purports to be an agreement between him and Transfer with
respect to that plan.
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individual capacity, and Mr. Sundrup signed that document as
president of Transfer.
Except as noted below, Mr. Sundrup’s medical and dental
agreement with Transfer and Ms. Sundrup’s medical and dental
agreement with Transfer contained essentially the same provi-
sions. They stated in pertinent part:
This will serve to confirm the understanding and
agreement between you [Mr. Sundrup in the case of Mr.
Sundrup’s purported medical and dental agreement with
Transfer and Ms. Sundrup in the case of Ms. Sundrup’s
purported medical and dental agreement with Transfer]
and the undersigned (hereinafter “Corporation”) [Trans-
fer].
1. The Corporation has adopted a Nondiscrimina-
tory Medical and Dental Reimbursement Plan. Pursuant
to such Plan and for so long as you are employed by the
Corporation, the Corporation agrees to reimburse you
for all reasonable medical and dental expenses up to
the sum of $5,000.00 in any fiscal year (including but
not limited to the cost of any accident, health, medi-
cal or dental insurance policy) which you and/or mem-
bers of your immediate family may incur, except such
expenses which are covered and are reimbursable to you
from any medical, dental, health and/or accident insur-
ance policy insuring you and/or members of your immedi-
ate family.
During Transfer’s taxable year ended March 31, 2004,16
Transfer paid directly, or reimbursed Mr. Sundrup, Ms. Sundrup,
and/or Rick Sundrup, a total of $12,258.65 for certain of their
respective medical and dental expenses. (We shall refer to the
16
The record does not establish that Transfer paid any
medical or dental expenses of Mr. Sundrup, Ms. Sundrup, or Rick
Sundrup during each of its taxable years ended Mar. 31, 2005 and
2006.
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portion of the medical and dental expenses that Transfer paid
directly, or reimbursed Mr. Sundrup and/or Ms. Sundrup, for
certain of their respective medical and dental expenses as
Transfer’s payments of the Sundrups’ medical and dental ex-
penses.)17
Leasing
On February 16, 2000, the same day on which Mr. and Ms.
Sundrup incorporated Transfer, they, with the assistance of Mr.
Pechacek, organized Sundrup Leasing, L.L.C. (Leasing), as a
limited liability company under the laws of the State of Iowa and
adopted an operating agreement for it. The articles of organiza-
tion of Leasing showed 200 Corning Street, Arcadia (i.e., the
Sundrup residence), as its principal office. At all relevant
times, Mr. Sundrup and Ms. Sundrup were the only members, and the
only managers, of Leasing.
Sometime between the formation of Leasing on February 16,
2000, and March 1, 2000, Mr. Sundrup transferred to Leasing
17
The parties stipulated the nature and the amounts of the
various expenses of Mr. Sundrup and/or Ms. Sundrup that Transfer
or Consulting, as the case may be, paid during each of those
companies’ respective taxable years at issue. In certain in-
stances, the description that the parties stipulated regarding a
particular expense did not correspond to the nature of the
expense that the parties stipulated. For example, the parties
stipulated that a $319.62 expense was for “Life insurance” but
the parties also stipulated that that expense was a medical
expense. The record does not explain the apparent inconsisten-
cies in the parties’ stipulations. We need not resolve those
apparent inconsistencies in order to decide the issues presented.
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certain of the assets that he had been using in the trucking
business of Ron Sundrup Transfer, including the three tractor-
trailers, four corn hoppers, and a Polar truck tank.
On March 1, 2000, Leasing entered into an agreement with
Transfer under which Leasing agreed to lease the three tractor-
trailers to Transfer for use in Transfer’s trucking business.
That agreement provided that Transfer was to pay Leasing $73,672
each year for the use of those trucks. Transfer paid Leasing
only $24,000 during each of its taxable years ended March 31,
2004 through 2006, for the use of the three tractor-trailers.
On April 1, 2000, Mr. and Ms. Sundrup transferred the
Division Street property to Leasing by quitclaim deed.18 On the
same day, Transfer entered into an agreement with Leasing under
which Leasing agreed to lease the Division Street property to
Transfer for use in Transfer’s trucking business. That agreement
provided that Transfer was to pay Leasing $24,000 each year for
the use of the Division Street property. Transfer paid Leasing
only $20,000 during each of its taxable years ended March 31,
2004 and 2005, for the use of the Division Street property.
Transfer paid Leasing $24,000 during its taxable year ended March
31, 2006, for the use of that property.
18
On Jan. 9, 2001, the quitclaim deed transferring the
Division Street property to Leasing was filed with the Office of
the Recorder of Deeds of Carroll County (Carroll County re-
corder’s office).
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On April 1, 2001, Mr. and Ms. Sundrup transferred Unit 5 to
Leasing by quitclaim deed. On the next day, Mr. and Ms. Sundrup,
acting in their individual capacities, executed a management
agreement (Unit 5 management agreement) with a company called
Thousand Hills Management Co., Inc., (THMC). Under that agree-
ment, THMC agreed to rent that unit nightly to third parties and
to make emergency repairs to that unit when necessary. Although
Mr. and Ms. Sundrup had transferred Unit 5 to Leasing by
quitclaim deed, they were described in the Unit 5 management
agreement as “Owner” of Unit 5, and Mr. and Ms. Sundrup signed
that document as “Owner” of that unit.
On a date not disclosed by the record, Mr. and Ms. Sundrup
transferred Unit 6 to Leasing.19 On August 25, 2001, Leasing
executed a management agreement with THMC. Under that agreement,
THMC agreed to rent that unit nightly to third parties and to
make emergency repairs to that unit when necessary. Although Mr.
and Ms. Sundrup signed that agreement, they did not indicate
whether they had signed it as managers of Leasing or in their
individual capacities.
Sometime in 2004 before April 6 Leasing purchased a condo-
minium in Branson, Missouri, described as Tuscany Place, Building
1, Unit 4 (Unit 4). On April 6, 2004, Leasing executed a manage-
19
The record does not establish how the Sundrups’ transfer
of Unit 6 to Leasing was effected.
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ment agreement (Unit 4 management agreement) with THMC.20 Under
that agreement, THMC agreed to rent that unit nightly to third
parties and to make emergency repairs to that unit when neces-
sary. Leasing was described in the Unit 4 management agreement
as “Owner” of Unit 4. Although Mr. Sundrup signed that agree-
ment, he did not indicate whether he had signed it as a manager
of Leasing or in his individual capacity.
As was true at least in 2002, during the years at issue the
Sundrups traveled to Branson, Missouri, in order to make certain
repairs and improvements to Unit 5 and/or Unit 6. In addition,
during the years at issue after the date on which Leasing had
purchased Unit 4, they traveled to Branson, Missouri, in order to
make certain repairs and improvements to Unit 4. They traveled
to Branson, Missouri, in order to make certain repairs and
improvements (1) to Unit 5 and/or Unit 6 four times in 2003 and
(2) to Unit 4, Unit 5, and/or Unit 6 five times in 2004, four
times in 2005, and at least one time in 2006.21
Consulting
On April 24, 2000, Mr. and Ms. Sundrup, with the assistance
of Mr. Pechacek, incorporated Consulting under the laws of the
20
Although the Unit 4 management agreement was executed on
Apr. 6, 2004, it was dated Mar. 18, 2004.
21
The record does not contain evidence regarding the trips,
if any, that the Sundrups made to Branson, Missouri, after Feb.
20, 2006.
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State of Iowa. At all relevant times, including during the years
at issue, Mr. Sundrup and Ms. Sundrup each owned 50 percent of
the outstanding stock of Consulting. At those times, Mr. and Ms.
Sundrup were the only members of the board of directors of
Consulting (Consulting board). During the years at issue, Mr.
Sundrup was the president, and Ms. Sundrup was the vice presi-
dent, the secretary, and the treasurer, of Consulting. At all
relevant times, Consulting did not pay Mr. and Ms. Sundrup any
cash dividends.
The Purported Management Agreements
On May 1, 2000, Consulting and Transfer executed a document
entitled “MANAGEMENT CONSULTING AGREEMENT” (purported Transfer
management agreement).22 Mr. Sundrup executed that document as
president of Consulting and as president of Transfer.
On January 1, 2003, Leasing and Consulting executed a
document entitled “MANAGEMENT CONSULTING AGREEMENT” (purported
22
The parties stipulated that the purported Transfer manage-
ment agreement was executed on Apr. 1, 2000, which was more than
three weeks before Mr. and Ms. Sundrup incorporated Consulting on
Apr. 24, 2000. That stipulation is clearly contrary to the facts
that we have found are established by the record, and we shall
disregard it. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C.
181, 195 (1989). The record establishes, and we have found, that
the purported Transfer management agreement was not executed
until May 1, 2000.
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Leasing management agreement).23 Mr. Sundrup executed that
document as a manager of Leasing and as president of Consulting.
Except as noted below, the purported Transfer management
agreement and the purported Leasing management agreement con-
tained essentially the same provisions.24 They stated in perti-
nent part:
1. Management Services. Corporation [in the case
of Transfer and LLC in the case of Leasing] hereby
contracts with Consulting * * * to perform management
and consulting services in accordance with the terms
and conditions set forth in this Agreement.
Consulting * * * will consult with the officers
and employees of Corporation [in the case of Transfer
and LLC in the case of Leasing] concerning matters
related to the management and operation of Corporation
[in the case of Transfer and LLC in the case of Leas-
ing], its financial policies, and generally any matter
arising out of the business affairs of Corporation [in
the case of Transfer and LLC in the case of Leasing].
The management services shall include, but not be
limited to, advice and services regarding marketing,
accounting, technical and computer support, and person-
nel matters. The management services regarding person-
nel matters shall include advice regarding employment
control, supervision, hiring and discharge of employees
and independent contractors hired by Corporation [in
the case of Transfer and LLC in the case of Leasing].
23
The parties stipulated that the purported Leasing manage-
ment agreement was executed on Apr. 1, 2000. That stipulation is
clearly contrary to the facts that we have found are established
by the record, and we shall disregard it. See Cal-Maine Foods,
Inc. v. Commissioner, supra at 195. The record establishes, and
we have found, that the purported Leasing management agreement
was not executed until Jan. 1, 2003.
24
Except for the purported Transfer management agreement
with Transfer and the purported Leasing management agreement with
Leasing, Consulting did not enter into any other purported
management agreements.
- 22 -
Consulting * * * may provide advice with respect
to employee benefits and enter into negotiations re-
garding same on behalf of Corporation [in the case of
Transfer and LLC in the case of Leasing]. Consulting
* * * will also provide advice with respect to the
purchase and/or lease of equipment and supplies relat-
ing to Corporation’s [in the case of Transfer and LLC’s
in the case of Leasing] business.
* * * * * * *
3. Payment to Consulting Company. Corporation
[in the case of Transfer and LLC in the case of Leas-
ing] shall pay Consulting * * * the sum of $3,000.00
[in the case of Transfer and $2,500.00 in the case of
Leasing] per month on or before the first day of each
month. Corporation [in the case of Transfer and LLC in
the case of Leasing] shall not be required to pay any
other fee or benefit to Consulting * * * for services
rendered. Consulting * * * may submit reasonable out-
of-pocket expenses from time to time to Corporation [in
the case of Transfer and LLC in the case of Leasing]
which will be reimbursed only upon Corporation [in the
case of Transfer and LLC in the case of Leasing] ap-
proval.
4. Duties of Consulting Company. Consulting
* * * shall furnish consulting and management services
and render advice to Corporation [in the case of Trans-
fer and LLC in the case of Leasing] at all times rea-
sonably requested by Corporation [in the case of Trans-
fer and LLC in the case of Leasing], subject, however,
to the following conditions:
* * * * * * *
b. Consulting * * * shall not be required
to devote full time and attention to
providing services to Corporation [in
the case of Transfer and LLC in the case
of Leasing]. The services and hours
Consulting * * * is to work on any given
day will be within Consulting[’s] * * *
control; provided, however, that Con-
sulting * * * shall be adequately
staffed to effectively service the Cor-
poration’s [in the case of Transfer and
- 23 -
LLC’s in the case of Leasing] needs at
all times.
c. Consulting * * * may offer its services
to anyone, in addition to Corporation
[in the case of Transfer and LLC in the
case of Leasing], for so long as the
terms and conditions of this Agreement
are adhered to by Consulting * * *.
* * * * * * *
f. Consulting * * * provides its services
to the general public and this Agreement
is non-exclusive.
* * * * * * *
8. Amendments. No amendment, modification, or
termination of, or addition to, this Agreement shall be
valid unless and until executed in writing by the
parties to this Agreement.
In drafting the purported Transfer management agreement and
the purported Leasing management agreement, including in arriving
at the $3,000 amount stated in section 3 (quoted above) of the
purported Transfer management agreement and the $2,500 amount
stated in section 3 (quoted above) of the purported Leasing
management agreement, Mr. Sundrup did not consult an accountant,
a business adviser, or any other person except Mr. Pechacek.25
During none of Transfer’s taxable years at issue did Trans-
fer pay Consulting $3,000 each month on or before the first day
of the month, as stated in the purported Transfer management
agreement. Instead, on the dates indicated, Transfer paid to
25
The record does not establish what Mr. Pechacek told Mr.
Sundrup when he consulted him.
- 24 -
Consulting the following amounts during each of Transfer’s
taxable years ended (TYE) March 31, 2004 through 2006:
TYE Mar. 31, 2004
Date Amount
Apr. 2, 2003 $1,750
Apr. 16, 2003 1,750
May 7, 2003 1,750
May 21, 2003 1,750
June 4, 2003 1,750
June 19, 2003 1,750
July 2, 2003 1,750
July 23, 2003 1,750
Aug. 8, 2003 1,750
Aug. 20, 2003 1,750
Sept. 3, 2003 1,750
Sept. 24, 2003 1,750
Oct. 8, 2003 1,750
Oct. 29, 2003 1,750
Nov. 5, 2003 1,750
Nov. 19, 2003 1,750
Dec. 3, 2003 1,750
Dec. 10, 2003 1,750
Dec. 23, 2003 1,750
Jan. 7, 2004 1,750
Jan. 21, 2004 1,750
Feb. 4, 2004 1,750
Feb. 13, 2004 3,500
Feb. 26, 2004 1,750
Mar. 31, 2004 1,750
Total 45,500
- 25 -
TYE Mar. 31, 2005
Date Amount
Apr. 21, 2004 $1,750
May 4, 2004 1,750
May 19, 2004 1,750
June 9, 2004 1,750
June 30, 2004 1,750
July 13, 2004 1,750
July 28, 2004 1,750
Aug. 10, 2004 1,750
Aug. 25, 2004 1,750
Sept. 5, 2004 1,750
Sept. 22, 2004 1,750
Oct. 13, 2004 1,750
Nov. 3, 2004 1,750
Nov. 23, 2004 1,750
Dec. 7, 2004 1,750
Dec. 29, 2004 1,750
Jan. 11, 2005 1,750
Jan. 26, 2005 1,750
Feb. 10, 2005 1,750
Feb. 23, 2005 1,750
Mar. 9, 2005 1,750
Mar. 23, 2005 1,750
Total 38,500
- 26 -
TYE Mar. 31, 2006
Date Amount
Apr. 6, 2005 $1,750
Apr. 20, 2005 1,750
May 11, 2005 1,750
May 25, 2005 1,750
June 8, 2005 1,750
June 22, 2005 1,750
July 5, 2005 1,750
July 20, 2005 1,750
Aug. 10, 2005 1,750
Aug. 23, 2005 1,750
Aug. 31, 2005 1,750
Sept. 21, 2005 1,750
Oct. 5, 2005 1,750
Oct. 19, 2005 1,750
Nov. 3, 2005 1,750
Nov. 23, 2005 1,750
Dec. 13, 2005 1,750
Dec. 21, 2005 1,750
Jan. 10, 2006 1,750
Jan. 26, 2006 1,750
Feb. 9, 2006 1,750
Feb. 21, 2006 1,750
Mar. 8, 2006 1,750
Mar. 21, 2006 1,750
Total 42,000
(We shall refer to any, some, or all of the above-listed payments
as Transfer’s payments to Consulting.)
During none of Leasing’s taxable years at issue did Leasing
pay Consulting $2,500 each month on or before the first day of
the month, as stated in the purported Leasing management agree-
ment. Instead of making any payments to Consulting during
Leasing’s taxable year 2003, Leasing gave Consulting a promissory
- 27 -
note dated December 30, 2003, in the principal amount of $30,000
(Leasing’s promissory note dated December 30, 2003). On the
dates indicated, Leasing paid to Consulting the following amounts
during each of Leasing’s taxable years 2004 and 2005:
Taxable Year 2004
Date Amount
Mar. 10, 2004 $18,000
Apr. 12, 2004 12,000
Total 30,000
Taxable Year 2005
Date Amount
Mar. 8, 2005 $1,000
Apr. 5, 2005 1,000
May 3, 2005 1,000
May 17, 2005 4,000
Oct. 14, 2005 1,000
Nov. 3, 2005 1,000
Dec. 1, 2005 1,000
Total 10,000
(We shall refer to any, some, or all of the above-listed payments
as Leasing’s payments to Consulting.)
The Purported Employment Agreements
On April 1, 2000, more than three weeks before Consulting
was incorporated on April 24, 2000,26 and one month before the
purported Transfer management agreement was executed on May 1,
2000, Consulting and Mr. Sundrup executed a document entitled
26
Although the parties stipulated that the date on which the
Sundrups executed their respective purported employment agree-
ments with Consulting was Apr. 1, 2000, the record does not
explain how they could have executed those purported agreements
on a date before Consulting was incorporated.
- 28 -
“EMPLOYMENT AGREEMENT” (Mr. Sundrup’s purported employment
agreement), and Consulting and Ms. Sundrup executed a document
entitled “EMPLOYMENT AGREEMENT” (Ms. Sundrup’s purported employ-
ment agreement).27 Mr. Sundrup signed Mr. Sundrup’s purported
employment agreement both as “employee” and as president of
Consulting, and Ms. Sundrup signed Ms. Sundrup’s purported
employment agreement as “employee”, and Mr. Sundrup signed that
document as president of Consulting.
Except as noted below, Mr. Sundrup’s purported employment
agreement and Ms. Sundrup’s purported employment agreement
contained essentially the same provisions. They stated in
pertinent part:
An Agreement made between Ronald B. Sundrup [in
the case of Mr. Sundrup’s purported employment agree-
ment and Ms. Sundrup in the case of Ms. Sundrup’s
purported employment agreement] of Arcadia, Iowa,
herein referred to as Employee and Sundrup Consulting,
Inc., whose principal place of business is located at
200 Corning St., Arcadia, Iowa [Sundrup residence],
herein referred to as Employer.
* * * * * * *
SECTION 1.
EMPLOYMENT
Employer hereby employs, engages, and hires Em-
ployee as an operational supervisor and monitor of a
portion of Employer’s business, and Employee hereby
27
Except for Mr. Sundrup’s purported employment agreement
and Ms. Sundrup’s purported employment agreement, at no time was
there a purported employment agreement between Consulting and any
other individual.
- 29 -
accepts and agrees to such hiring, engagement and
employment, subject to the general supervision and
pursuant to the orders, advice and direction of Em-
ployer.
Because of certain necessities required for the
proper performance of the duties which the Employee
must perform for the Employer under this Agreement and
because of the benefits and conveniences accruing to
the Employer by having the Employee residing on busi-
ness premises of the Employer, the Employee shall be
required to live in the housing furnished by the Em-
ployer on the business premises [Sundrup residence] of
the Employer. * * *
* * * * * * *
SECTION 3.
TERM OF EMPLOYMENT
The term of this Agreement shall be a period of
one year, commencing _______________, 2000, and termi-
nating ________________, 2001, subject, however, to
prior termination as herein provided. At the expira-
tion date of _______________, 2001, this Agreement
shall be considered renewed for regular periods of one
year provided neither party submits a notice of termi-
nation.
* * * * * * *
SECTION 6.
SPECIFIC DESCRIPTION OF CERTAIN DUTIES
While at all times, the Employee will be subject
to such additional duties and services as may be re-
quired by the Employer, the following are a list of
certain specific duties and responsibilities Employee
shall have in performing services for the Employer.
The Employee in performing these services shall be on
call twenty-four hours a day except for reasonable
vacations as the Employer may allow. Duties and re-
sponsibilities are to be performed at the location as
directed by the Employer above.
- 30 -
(1) To constantly be present in the area of re-
sponsibility to deter and guard against van-
dalism and theft of equipment, tools, build-
ings and other property of the Employer.
(2) To maintain watch over the property of the
Employer so as to discover and report any
damage to any of the Employer’s property from
wind, fire, freezing, or other catastrophes
and to take any other action if possible to
minimize said losses.
(3) To be present on the premises so as to imme-
diately detect and report any interruption of
electrical service to the facilities of the
Employer so as to minimize the possibility of
any losses.
(4) To monitor the performance and activities of
other Employees of the Employer working on the
premises and report to the Employer concerning
their activities.
(5) To provide assistance to other Employees of
the Employer in case of a breakdown or emer-
gency while operating on the property of the
Employer.
(6) To be present to alert other designated Employees
of shipments of materials being received by Em-
ployer.
At no time during the taxable years at issue did (1) Mr.
Sundrup and Consulting determine the respective dates on which
Mr. Sundrup’s purported employment agreement commenced and
terminated as contemplated under section 3 of that agreement and
(2) Ms. Sundrup and Consulting determine the respective dates on
which Ms. Sundrup’s purported employment agreement commenced and
terminated as contemplated under section 3 of that agreement.
- 31 -
Mr. Sundrup’s purported employment agreement and Ms.
Sundrup’s purported employment agreement contained a section
entitled “COMPENSATION OF EMPLOYEE”. That section in each of
those agreements stated:
SECTION 4.
COMPENSATION OF EMPLOYEE
Employer [Consulting] shall pay Employee [Mr.
Sundrup in the case of Mr. Sundrup’s purported employ-
ment agreement and Ms. Sundrup in the case of Ms.
Sundrup’s purported employment agreement] and Employee
shall accept from Employer, in full payment for Em-
ployee’s services hereunder, minimum compensation at
the rate of _______________ Dollars ($__________) per
___________, payable _______________. Notwithstanding
any language to the contrary, Employer, in its sole
discretion, may pay Employee additional compensation
from time to time.
At no time during the taxable years at issue did (1) Mr.
Sundrup and Consulting determine a rate of compensation to be
paid to Mr. Sundrup as contemplated under section 4 of Mr.
Sundrup’s purported employment agreement and (2) Ms. Sundrup and
Consulting determine a rate of compensation to be paid to Ms.
Sundrup as contemplated under section 4 of Ms. Sundrup’s pur-
ported employment agreement. At all relevant times, Consulting
did not pay any wages or salary to Mr. Sundrup or Ms. Sundrup.
At no time before the trial in these cases did Consulting file
(1) Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax
Return, and (2) Form 941, Employer’s Quarterly Federal Tax
Return. Nor did Consulting issue at any time before that trial
- 32 -
(1) Form W-2, Wage and Tax Statement, or (2) Form 1099-MISC,
Miscellaneous Income.
Consulting’s Board of Directors
On May 1, 2000, Consulting held a meeting (May 1, 2000 board
meeting) of the Consulting board (i.e., Mr. Sundrup and Ms.
Sundrup). The minutes of that meeting stated, inter alia, that
the Consulting board (1) elected for a one-year term Mr. Sundrup
as president of Consulting and Ms. Sundrup as vice president,
secretary, and treasurer of Consulting, (2) adopted the bylaws of
Consulting,28 (3) designated Carroll County State Bank as
Consulting’s depository institution, (4) required that Consult-
ing’s officers and directors use their best efforts to operate
Consulting in such a manner that the stock of Consulting would
qualify as stock under section 1244, (5) accepted Mr. Sundrup’s
offer to purchase stock of Consulting and resolved to issue to
him a certificate representing the number of shares that he pur-
chased, (6) made an election under section 248 with respect to
Consulting’s organizational expenses, (7) authorized Mr. Sundrup
to pay any expenses resulting from the organization of Consult-
ing, and (8) adopted a “Nondiscriminatory Medical and Dental
Reimbursement Plan”.
28
At no time before the trial in these cases were Consult-
ing’s bylaws amended.
- 33 -
The minutes of the May 1, 2000 board meeting did not reflect
that the Consulting board discussed at that meeting (1) the pur-
ported Transfer management agreement that Consulting and Transfer
had executed on the date of that meeting and (2) (a) Mr.
Sundrup’s purported employment agreement and (b) Ms. Sundrup’s
purported employment agreement that Consulting and Mr. Sundrup or
Ms. Sundrup, as the case may be, executed on April 1, 2000.29
Nor did those minutes reflect that the Consulting board discussed
at that meeting the nature or the extent of the services (1) that
the purported Transfer management agreement stated Consulting was
to provide to Transfer and (2) (a) that Mr. Sundrup’s purported
employment agreement stated Mr. Sundrup was to provide to Con-
sulting and (b) that Ms. Sundrup’s purported employment agreement
stated Ms. Sundrup was to provide to Consulting.
On March 20, 2001, Consulting held a joint meeting (March
20, 2001 joint meeting) of the stockholders of Consulting (i.e.,
Mr. Sundrup and Ms. Sundrup) and the Consulting board (i.e., Mr.
Sundrup and Ms. Sundrup). The minutes of that meeting stated,
inter alia, (1) that the stockholders of Consulting elected for a
one-year term Mr. Sundrup and Ms. Sundrup as members of the
29
Mr. Sundrup’s purported employment agreement and Ms. Sun-
drup’s purported employment agreement were executed on Apr. 1,
2000, more than three weeks before Consulting was incorporated.
The minutes of the May 1, 2000 board meeting do not reflect that
Consulting ratified those purported employment agreements at that
meeting.
- 34 -
Consulting board and (2) that the Consulting board elected for a
one-year term Mr. Sundrup as president of Consulting and Ms.
Sundrup as vice president, secretary, and treasurer of Consult-
ing. Those minutes did not state that the Consulting board
discussed at the March 20, 2001 joint meeting (1) the purported
Transfer management agreement and (2) (a) Mr. Sundrup’s purported
employment agreement and (b) Ms. Sundrup’s purported employment
agreement. Nor did the minutes of that meeting state that the
Consulting board discussed at that meeting the nature or the
extent of the services (1) that the purported Transfer management
agreement stated Consulting was to provide to Transfer and
(2) (a) that Mr. Sundrup’s purported employment agreement stated
Mr. Sundrup was to provide to Consulting and (b) that Ms. Sun-
drup’s purported employment agreement stated Ms. Sundrup was to
provide to Consulting.
On March 1, 2002, Consulting held a joint meeting (March 1,
2002 joint meeting) of the stockholders of Consulting (i.e., Mr.
Sundrup and Ms. Sundrup) and the Consulting board (i.e., Mr.
Sundrup and Ms. Sundrup). The minutes of that meeting stated,
inter alia, (1) that the stockholders of Consulting elected for a
one-year term Mr. Sundrup and Ms. Sundrup as members of the
Consulting board and (2) that the Consulting board elected for a
one-year term Mr. Sundrup as president of Consulting and Ms.
- 35 -
Sundrup as vice president, secretary, and treasurer of Consult-
ing. Those minutes did not state that the Consulting board
discussed at the March 1, 2002 joint meeting (1) the purported
Transfer management agreement and (2) (a) Mr. Sundrup’s purported
employment agreement and (b) Ms. Sundrup’s purported employment
agreement. Nor did the minutes of that meeting state that the
Consulting board discussed at that meeting the nature or the
extent of the services (1) that the purported Transfer management
agreement stated Consulting was to provide to Transfer and
(2) (a) that Mr. Sundrup’s purported employment agreement stated
Mr. Sundrup was to provide to Consulting and (b) that Ms.
Sundrup’s purported employment agreement stated Ms. Sundrup was
to provide to Consulting.
On March 1, 2003, Consulting held a joint meeting (March 1,
2003 joint meeting) of the stockholders of Consulting (i.e., Mr.
Sundrup and Ms. Sundrup) and the Consulting board (i.e., Mr.
Sundrup and Ms. Sundrup). The minutes of that meeting stated,
inter alia, (1) that the stockholders of Consulting elected for a
one-year term Mr. Sundrup and Ms. Sundrup as members of the
Consulting board and (2) that the Consulting board elected for a
one-year term Mr. Sundrup as president of Consulting and Ms.
Sundrup as vice president, secretary, and treasurer of Consult-
ing. Those minutes did not state that the Consulting board
discussed at the March 1, 2003 joint meeting (1) the purported
- 36 -
Leasing management agreement that Consulting had executed on
January 1, 2003, two months before the March 1, 2003 joint
meeting, (2) the purported Transfer management agreement, and
(3) (a) Mr. Sundrup’s purported employment agreement and (b) Ms.
Sundrup’s purported employment agreement. Nor did the minutes of
that meeting state that the Consulting board discussed at that
meeting the nature or the extent of the services (1) that the
purported Leasing management agreement stated Consulting was to
provide to Leasing, (2) that the purported Transfer management
agreement stated Consulting was to provide to Transfer, and
(3) (a) that Mr. Sundrup’s purported employment agreement stated
Mr. Sundrup was to provide to Consulting and (b) that Ms.
Sundrup’s purported employment agreement stated Ms. Sundrup was
to provide to Consulting.
On March 2, 2004, Consulting held a joint meeting (March 2,
2004 joint meeting) of the stockholders of Consulting (i.e., Mr.
Sundrup and Ms. Sundrup) and the Consulting board (i.e., Mr.
Sundrup and Ms. Sundrup). The minutes of that meeting stated,
inter alia, (1) that the stockholders of Consulting elected for a
one-year term Mr. Sundrup and Ms. Sundrup as members of the
Consulting board and (2) that the Consulting board elected for a
one-year term Mr. Sundrup as president of Consulting, Ms. Sundrup
as vice president, secretary, and treasurer of Consulting, and
Rick Sundrup as assistant secretary of Consulting. Those minutes
- 37 -
did not state that the Consulting board discussed at the March 2,
2004 joint meeting (1) the purported Leasing management agree-
ment, (2) the purported Transfer management agreement, and
(3) (a) Mr. Sundrup’s purported employment agreement and (b) Ms.
Sundrup’s purported employment agreement. Nor did the minutes of
that meeting state that the Consulting board discussed at that
meeting the nature or the extent of the services (1) that the
purported Leasing management agreement stated Consulting was to
provide to Leasing, (2) that the purported Transfer management
agreement stated Consulting was to provide to Transfer, and
(3) (a) that Mr. Sundrup’s purported employment agreement stated
Mr. Sundrup was to provide to Consulting and (b) that Ms.
Sundrup’s purported employment agreement stated Ms. Sundrup was
to provide to Consulting. The minutes of the March 2, 2004 joint
meeting did not state that the Consulting board discussed at that
meeting that as of the date of that meeting Leasing had failed to
pay to Consulting during Consulting’s taxable year that started
on April 1, 2003, the $2,500 monthly amount that section 3 of the
purported Leasing management agreement stated Leasing was to pay
to Consulting on or before the first day of each month.30 Nor
did those minutes state that the Consulting board discussed at
30
As of the March 2, 2004 joint meeting, Leasing had not
paid anything to Consulting during Consulting’s taxable year that
began on Apr. 1, 2003. We have found above that Leasing provided
to Consulting Leasing’s promissory note dated December 30, 2003.
- 38 -
the March 2, 2004 joint meeting that as of the date of that
meeting Transfer had failed to pay to Consulting during Consult-
ing’s taxable year that started on April 1, 2003, the $3,000
monthly amount that section 3 of the purported Transfer manage-
ment agreement stated Transfer was to pay to Consulting on or
before the first day of each month.31
On March 7, 2005, Consulting held a joint meeting (March 7,
2005 joint meeting) of the stockholders of Consulting (i.e., Mr.
Sundrup and Ms. Sundrup) and the Consulting board (i.e., Mr.
Sundrup and Ms. Sundrup). The minutes of that meeting stated,
inter alia, (1) that the stockholders of Consulting elected for a
one-year term Mr. Sundrup and Ms. Sundrup as members of the
Consulting board and (2) that the Consulting board elected for a
one-year term Mr. Sundrup as president of Consulting, Ms. Sundrup
as vice president, secretary, and treasurer of Consulting, and
Rick Sundrup as assistant secretary of Consulting. Those minutes
did not state that the Consulting board discussed at the March 7,
2005 joint meeting (1) the purported Leasing management agree-
ment, (2) the purported Transfer management agreement, and
(3) (a) Mr. Sundrup’s purported employment agreement and (b) Ms.
Sundrup’s purported employment agreement. Nor did the minutes
of that meeting state that the Consulting board discussed at that
31
We have found above the respective amounts and the respec-
tive dates on which Transfer made Transfer’s payments to Consult-
ing.
- 39 -
meeting the nature or the extent of the services (1) that the
purported Leasing management agreement stated Consulting was to
provide to Leasing, (2) that the purported Transfer management
agreement stated Consulting was to provide to Transfer, and
(3) (a) that Mr. Sundrup’s purported employment agreement stated
Mr. Sundrup was to provide to Consulting and (b) that Ms.
Sundrup’s purported employment agreement stated Ms. Sundrup was
to provide to Consulting. The minutes of the March 7, 2005 joint
meeting did not state that the Consulting board discussed at that
meeting that as of the date of that meeting Leasing had failed to
pay to Consulting at any time since the March 2, 2004 joint
meeting, the $2,500 monthly amount that section 3 of the pur-
ported Leasing management agreement stated Leasing was to pay to
Consulting on or before the first day of each month.32 Nor did
those minutes state that the Consulting board discussed at the
March 7, 2005 joint meeting that as of the date of that meeting
Transfer had failed to pay to Consulting at any time since the
March 2, 2004 joint meeting the $3,000 monthly amount that
section 3 of the purported Transfer management agreement stated
32
We have found above the respective amounts and the respec-
tive dates on which Leasing made Leasing’s payments to Consult-
ing.
- 40 -
Transfer was to pay to Consulting on or before the first day of
each month.33
On July 6, 2006, Consulting held a joint meeting (July 6,
2006 joint meeting) of the stockholders of Consulting (i.e., Mr.
Sundrup and Ms. Sundrup) and the Consulting board (i.e., Mr.
Sundrup and Ms. Sundrup). The minutes of that meeting stated,
inter alia, (1) that the stockholders of Consulting elected for a
one-year term Mr. Sundrup and Ms. Sundrup as members of the
Consulting board and (2) that the Consulting board elected for a
one-year term Mr. Sundrup as president of Consulting, Ms. Sundrup
as vice president, secretary, and treasurer of Consulting, and
Rick Sundrup as assistant secretary of Consulting. Those minutes
did not state that the Consulting board discussed at the July 6,
2006 joint meeting (1) the purported Leasing management agree-
ment, (2) the purported Transfer management agreement, and
(3) (a) Mr. Sundrup’s purported employment agreement and (b) Ms.
Sundrup’s purported employment agreement. Nor did the minutes of
that meeting state that the Consulting board discussed at that
meeting the nature or the extent of the services (1) that the
purported Leasing management agreement stated Consulting was to
provide to Leasing, (2) that the purported Transfer management
agreement stated Consulting was to provide to Transfer, and
33
We have found above the respective amounts and the respec-
tive dates on which Transfer made Transfer’s payments to Consult-
ing.
- 41 -
(3) (a) that Mr. Sundrup’s purported employment agreement stated
Mr. Sundrup was to provide to Consulting and (b) that Ms.
Sundrup’s purported employment agreement stated Ms. Sundrup was
to provide to Consulting. The minutes of the July 6, 2006 joint
meeting did not state that the Consulting board discussed at that
meeting that as of the date of that meeting Leasing had failed to
pay to Consulting at any time since the March 7, 2005 joint
meeting the $2,500 monthly amount that section 3 of the purported
Leasing management agreement stated Leasing was to pay to Con-
sulting on or before the first day of each month.34 Nor did
those minutes state that the Consulting board discussed at the
July 6, 2006 joint meeting that as of the date of that meeting
Transfer had failed to pay to Consulting at any time since the
March 7, 2005 joint meeting the $3,000 monthly amount that
section 3 of the purported Transfer management agreement stated
Transfer was to pay to Consulting on or before the first day of
each month.35
On January 15, 2007, Consulting held a joint meeting (Janu-
ary 15, 2007 joint meeting) of the stockholders of Consulting
(i.e., Mr. Sundrup and Ms. Sundrup) and the Consulting board
34
We have found above the respective amounts and the respec-
tive dates on which Leasing made Leasing’s payments to Consult-
ing.
35
We have found above the respective amounts and the respec-
tive dates on which Transfer made Transfer’s payments to Consult-
ing.
- 42 -
(i.e., Mr. Sundrup and Ms. Sundrup). The minutes of that meeting
stated, inter alia, (1) that the stockholders of Consulting
elected for a one-year term Mr. Sundrup and Ms. Sundrup as
members of the Consulting board and (2) that Consulting’s board
elected for a one-year term Mr. Sundrup as president of Consult-
ing, Ms. Sundrup as vice president, secretary, and treasurer of
Consulting, and Rick Sundrup as assistant secretary of Consult-
ing. Those minutes did not state that the Consulting board
discussed at the January 15, 2007 joint meeting (1) the purported
Leasing management agreement, (2) the purported Transfer manage-
ment agreement, and (3) (a) Mr. Sundrup’s purported employment
agreement and (b) Ms. Sundrup’s purported employment agreement.
Nor did the minutes of that meeting state that the Consulting
board discussed at that meeting the nature or the extent of the
services (1) that the purported Leasing management agreement
stated Consulting was to provide to Leasing, (2) that the pur-
ported Transfer management agreement stated Consulting was to
provide to Transfer, and (3) (a) that Mr. Sundrup’s purported
employment agreement stated Mr. Sundrup was to provide to Con-
sulting and (b) that Ms. Sundrup’s purported employment agreement
stated Ms. Sundrup was to provide to Consulting.
- 43 -
Certain Payments Made by Consulting
During the years at issue, Consulting paid directly, or
reimbursed Mr. Sundrup and/or Ms. Sundrup, for various ex-
penses.36
Certain Payments Made by Consulting for
Expenses Relating to the Sundrup Residence
On May 1, 2000, one week after incorporating Consulting on
April 24, 2000, Consulting and the Sundrups executed a document
entitled “REAL ESTATE CONTRACT-INSTALLMENTS” (real estate in-
stallment document), which was filed with the Carroll County
recorder’s office. That document stated in pertinent part:
IT IS AGREED this 1st day of May, 2000, by and
between Ronald B. Sundrup and Helen J. Sundrup, husband
and wife of the County of Carroll, State of Iowa,
Sellers; and Sundrup Consulting, Inc. of the County of
Carroll, State of Iowa, Buyers;
That the Sellers, as in this contract provided,
agree to sell to the Buyers, and the Buyers in consid-
eration of the premises, hereby agree with the Sellers
to purchase the following described real estate situ-
ated in the County of Carroll, State of Iowa,[37] to-
wit:
All of Lot Twelve (12) and the East Ten Feet (E 10’) of
Lot Eleven (11), Block Twenty Four (24), Original Plat,
Arcadia, Carroll County, Iowa
and
36
Although Consulting not only paid directly, but also
reimbursed Mr. Sundrup and/or Ms. Sundrup, for their various
expenses, for convenience we shall state that Consulting paid
those expenses.
37
The real estate described in the real estate installment
document is the Sundrup residence.
- 44 -
The East 15 feet of the West 40 feet of Lot 11, Block
24, Town of Arcadia, Carroll County, Iowa
* * * upon the terms and conditions following:
1. TOTAL PURCHASE PRICE. The Buyers agree to pay
for said property the total of $190,000.00 due and
payable * * * as follows:
* * * * * * *
Buyer shall pay the sum of $19,562.93 per year, com-
mencing with the first payment due on May 1, 2001 and
the sum of $19,562.93 on May 1 of each and every year
thereafter until all principal and interest is paid in
full. Interest shall accrue at the rate of 6% per
annum. * * *
* * * * * * *
14. DEED AND ABSTRACT BILL OF SALE. If all said
sums of money and interest are paid to Sellers during
the life of this contract, and all other agreements for
performance by Buyers have been complied with, Sellers
will execute and deliver to Buyers a_________ Warranty
Deed conveying said premises in fee simple pursuant to
and in conformity with this contract and Sellers will
at this time deliver to Buyers an abstract showing
merchantable title in conformity with this contract.
* * *
The record does not establish why the blank appeared in paragraph
14 of the real estate installment document or that that blank was
completed.
At no time before the trial in these cases did petitioners
execute a deed in favor of Consulting with respect to the Sundrup
residence. Petitioners continued to reside in the Sundrup
residence after Consulting and they executed the real estate
installment document. At no time before the trial in these cases
was there a sign on the Sundrup residence indicating that Con-
- 45 -
sulting engaged in any activity there. The only visible indica-
tion at the Sundrup residence of the identity of the owner of
that residence was a rock on which appeared the name “Sundrup”.
Consulting did not pay timely the $19,562.93 that the real
estate installment document stated Consulting was to pay to the
Sundrups on May 1 of each of the years at issue. Instead,
Consulting paid to the Sundrups on the dates indicated the
following amounts that it, and they, described as payments of
“interest” and “principal”:
Consulting’s Consulting’s
Purported Purported
Date Interest Payments Principal Payments Total
May 17, 2003 $10,391.06 $9,171.87 $19,562.93
May 20, 2004 9,840.75 9,722.18 19,562.93
May 18, 2005 9,257.42 10,305.51 19,562.93
(We shall refer to any, some, or all of the above-listed
(1) purported interest payments as Consulting’s purported inter-
est payments, (2) purported principal payments as Consulting’s
purported principal payments, and (3) Consulting’s total pur-
ported interest and principal payments as Consulting’s purported
interest and principal payments.)
In addition to Consulting’s purported interest and principal
payments described above, Consulting paid during each of its
taxable years ended March 31, 2004 through 2006, virtually all of
the expenses relating to the Sundrup residence, including
(1) respective real property taxes of $1,096, $1,116, and $1,126
- 46 -
that Consulting paid during its taxable years ended March 31,
2004, 2005, and 2006,38 (2) respective repairs and maintenance of
$1,607.09,39 $2,326.58, and $4,671.28 that Consulting paid during
its taxable years ended March 31, 2004, 2005, and 2006,40
(3) respective utilities of $2,939.71, $2,852.21, and $2,668.77
that Consulting paid during its taxable years ended March 31,
2004, 2005, and 2006,41 and (4) respective homeowner’s and um-
brella insurance of $1,097, $1,096, and $1,785 that Consulting
paid during its taxable years ended March 31, 2004, 2005, and
2006.42 (We shall refer to any, some, or all of the above-stated
38
We shall refer to any, some, or all of the above-stated
payments for real property taxes that Consulting made as Consult-
ing’s payments of the Sundrup residence real property taxes.
39
The parties made various mathematical errors in stipulat-
ing the respective total amounts of certain types of expenses
that Consulting paid during Consulting’s taxable years ended Mar.
31, 2004 through 2006. Those erroneous stipulations are clearly
contrary to the facts that we have found are established by the
record in these cases. We have found the correct respective
total amounts of expenses that Consulting paid during Consult-
ing’s taxable years ended Mar. 31, 2004 through 2006, which are
established by the record. See Cal-Maine Foods, Inc. v. Commis-
sioner, 93 T.C. at 195.
40
We shall refer to any, some, or all of the above-stated
payments for repairs and maintenance that Consulting made as
Consulting’s payments of the Sundrup residence repairs and
maintenance.
41
We shall refer to any, some, or all of the above-stated
payments made for utilities that Consulting made as Consulting’s
payments of the Sundrup residence utilities.
42
We shall refer to any, some, or all of the above-stated
payments for homeowner’s and umbrella insurance that Consulting
(continued...)
- 47 -
amounts that Consulting paid for virtually all of the expenses
relating to the Sundrup residence as Consulting’s payments of the
Sundrup residence expenses.)
Certain Payments Made by Consulting for Food
During each of Consulting’s taxable years ended March 31,
2004 through 2006, Ms. Sundrup purchased food at area grocery
stores, which she used to prepare meals for herself and her
family and for which Consulting paid.43 During its taxable years
ended March 31, 2004, 2005, and 2006, Consulting paid $4,869.81,
$4,149.66, and $5,590.75, respectively, for that food. (We shall
refer to any, some, or all of the above-stated amounts that
Consulting paid for food that Ms. Sundrup purchased to prepare
meals for herself and her family as Consulting’s payments of the
Sundrups’ food.)
Certain Payments Made by Consulting
for Medical and Dental Expenses
On May 1, 2000, Consulting executed a document entitled
“NONDISCRIMINATORY MEDICAL AND DENTAL REIMBURSEMENT PLAN”. That
document stated in pertinent part:
42
(...continued)
made as Consulting’s payments of the Sundrup residence insurance.
43
In some instances, Ms. Sundrup paid for the food that she
purchased using checks drawn on Consulting’s checking account,
Consulting’s credit card, or her personal funds for which Con-
sulting reimbursed her.
- 48 -
1. Purposes of Plan The purposes of the Plan are:
(a) To encourage employees to continue their
association with the Company [Consulting].
(b) To attract additional employees.
* * * * * * *
2. Eligibility. All employees who have been with the
Company for six (6) months, or since the Company was
incorporated, whichever is shorter, provided, however,
that seasonal employees, employees covered by a collec-
tive bargaining agreement, or non-resident alien em-
ployees shall not be eligible.
3. Benefits. The Company will reimburse all eligible
employees for all reasonable medical and dental ex-
penses up to the sum of $5,000.00 in any fiscal year
(including, but not limited to the cost of any acci-
dent, health or medical or dental insurance policy)
which the eligible employee and/or members of his
immediate family may incur, except such expenses as may
be covered and are reimbursable to them from any medi-
cal, dental, health and/or accident insurance policy
insuring them.
On May 1, 2000, Consulting and Mr. Sundrup executed a docu-
ment entitled “AGREEMENT”, “NONDISCRIMINATORY MEDICAL AND DENTAL
REIMBURSEMENT PLAN” (Mr. Sundrup’s purported medical and dental
agreement), and Consulting and Ms. Sundrup executed a document
with the same title (Ms. Sundrup’s purported medical and dental
agreement). Mr. Sundrup signed Mr. Sundrup’s purported medical
and dental agreement both in his individual capacity and as
president of Consulting. Ms. Sundrup signed Ms. Sundrup’s
purported medical and dental agreement in her individual capac-
ity, and Mr. Sundrup signed that document as president of Con-
sulting.
- 49 -
Except as noted below, Mr. Sundrup’s purported medical and
dental agreement and Ms. Sundrup’s purported medical and dental
agreement contained essentially the same provisions. They stated
in pertinent part:
This will serve to confirm the understanding and
agreement between you [Mr. Sundrup in the case of Mr.
Sundrup’s purported medical and dental agreement and
Ms. Sundrup in the case of Ms. Sundrup’s purported
medical and dental agreement] and the undersigned
(hereinafter “Corporation”) [Consulting].
1. The Corporation has adopted a Nondiscrimina-
tory Medical and Dental Reimbursement Plan. Pursuant
to such Plan and for so long as you [Mr. Sundrup in the
case of Mr. Sundrup’s purported medical and dental
agreement and Ms. Sundrup in the case of Ms. Sundrup’s
purported medical and dental agreement] are employed by
the Corporation, the Corporation agrees to reimburse
you for all reasonable medical and dental expenses up
to the sum of $5,000.00 in any fiscal year (including
but not limited to the cost of any accident, health,
medical or dental insurance policy) which you and/or
members of your immediate family may incur, except such
expenses which are covered and are reimbursable to you
from any medical, dental, health and/or accident insur-
ance policy insuring you and/or members of your immedi-
ate family.
During each of Consulting’s taxable years ended March 31,
2004 through 2006, Consulting paid the following medical and
dental expenses of Mr. Sundrup and/or Ms. Sundrup: (1) Premiums
for certain health insurance plans, (2) copayments to certain
health care providers, and (3) miscellaneous medical and dental
expenses. Those payments totaled $4,830.79, $8,838.76, and
$11,455.26 during Consulting’s taxable years ended March 31,
2004, 2005, and 2006, respectively. (We shall refer to any,
- 50 -
some, or all of the above-stated medical and dental expenses of
the Sundrups that Consulting paid as Consulting’s payments of the
Sundrups’ medical and dental expenses.)
On June 24, 2004, Consulting made payments totaling
$2,029.88 on behalf of Mr. and Ms. Sundrup to a company known as
American Federal Assurance for expenses relating to nursing home
care (Consulting’s payments of the Sundrups’ expenses relating to
nursing home care).44
Certain Payments Made by Consulting
for Expenses Relating to Certain
Vehicles Used by the Sundrups
On March 31, 2000, almost two months before Mr. and Ms.
Sundrup incorporated Consulting, Mr. and Ms. Sundrup transferred
the 1997 Cadillac automobile and the 2000 GMC truck to it.45
On September 1, 2000, Consulting traded the 1997 Cadillac
automobile for a 2000 Cadillac automobile (2000 Cadillac automo-
bile). During Consulting’s taxable years ended March 31, 2004
through 2006, Ms. Sundrup, who drove the 2000 Cadillac automobile
during those years, used that vehicle to buy food for her family
and for other personal purposes.
44
On June 24, 2004, Consulting paid $330.75 to the Iowa
Motor Truck Association for “Annual dues” (Consulting’s payment
to the Iowa Motor Truck Association for annual dues).
45
Although the parties stipulated that the date on which the
Sundrups transferred the two vehicles in question to Consulting
was Mar. 31, 2000, the record does not explain how they could
have made those transfers to Consulting on a date before Consult-
ing was incorporated.
- 51 -
On February 14, 2004, Consulting traded the 2000 GMC truck
for a 2004 GMC Envoy (2004 GMC Envoy). During Consulting’s
taxable years ended March 31, 2004 through 2006, Mr. Sundrup, who
drove the 2004 GMC Envoy during those years, used that vehicle,
inter alia, to (1) buy with Ms. Sundrup food for their family,
(2) haul parts for Transfer’s trucking business, (3) buy tools
for use in Transfer’s trucking business, and (4) travel with Ms.
Sundrup to Branson, Missouri, in order to make certain repairs
and improvements to Unit 4, Unit 5, and/or Unit 6.
During each of Consulting’s taxable years ended March 31,
2004 through 2006, Consulting paid expenses relating to the
respective vehicles that the Sundrups used during those years.
Those payments totaled $2,871.73, $1,776.75, and $1,622.08 during
Consulting’s taxable years ended March 31, 2004, 2005, and 2006,
respectively. (We shall refer to any, some, or all of the above-
stated expenses that Consulting paid relating to the respective
vehicles that the Sundrups used during Consulting’s taxable years
ended March 31, 2004 through 2006, as Consulting’s payments of
the Sundrups’ vehicle expenses.)
Certain Payments Made by
Consulting for Office Expenses
During each of Consulting’s taxable years ended March 31,
2004 through 2006, Consulting paid certain expenses consisting
(1) primarily of expenses for subscriptions to periodicals, such
as Popular Science, Reader’s Digest, and Good Housekeeping, and
- 52 -
(2) certain supplies. Those payments totaled $821.05, $288.11,
and $476.93 during Consulting’s taxable years ended March 31,
2004, 2005, and 2006, respectively. (We shall refer to any, some,
or all of the above-stated office expenses that Consulting paid
as Consulting’s payments of office expenses.)
Summary of Certain Amounts That Consulting
Received, Paid, or Claimed as Depreciation
The following chart summarizes certain amounts that Consult-
ing received, paid, or claimed as depreciation (discussed
below):46
46
The amount listed below as “Depreciation claimed” includes
sec. 179 expense.
- 53 -
Taxable Year Ended Mar. 31
Amounts Received 2004 2005 2006
Transfer’s payments to Consulting $45,500.00 $38,500.00 $42,000.00
Leasing’s payments to Consulting 18,000.00 13,000.00 9,000.00
Total amounts received by
Consulting 63,500.00 51,500.00 51,000.00
Amounts Paid
Consulting’s purported interest
and principal payments $19,562.93 $19,562.93 $19,562.93
Consulting’s payments of the
Sundrup residence real property
taxes 1,096.00 1,116.00 1,126.00
Consulting’s payments of the
Sundrup residence repairs and
maintenance 1,607.09 2,326.58 4,671.28
Consulting’s payments of the
Sundrup residence utilities 2,939.71 2,852.21 2,668.77
Consulting’s payments of the
Sundrup residence insurance 1,097.00 1,096.00 1,785.00
Consulting’s payments of the
Sundrups’ food 4,869.81 4,149.66 5,590.75
Consulting’s payments of the
Sundrups’ medical and dental
expenses 4,830.79 8,838.76 11,455.26
Consulting’s payments of the
Sundrups’ expenses relating to
nursing home care -- 2,029.88 --
Consulting’s payment to the Iowa
Motor Truck Association for
annual dues -- 330.75 --
Consulting’s payments of the
Sundrups’ vehicle expenses 2,871.73 1,776.75 1,622.08
Consulting’s payments of office
expenses 821.05 288.11 476.93
Total amounts Consulting
paid 39,696.11 44,367.63 48,959.00
Amounts Claimed as Depreciation
Depreciation claimed $27,374.00 $15,226.00 $12,326.00
Total Amounts Consulting Paid
and Claimed as Depreciation 67,070.11 59,593.63 61,285.00
- 54 -
(We shall refer collectively to Consulting’s purported interest
and principal payments, Consulting’s payments of the Sundrup
residence expenses, Consulting’s payments of the Sundrups’ food,
Consulting’s payments of the Sundrups’ medical and dental ex-
penses, Consulting’s payments of the Sundrups’ expenses relating
to nursing home care, Consulting’s payment to the Iowa Motor
Truck Association for annual dues, Consulting’s payments of the
Sundrups’ vehicle expenses, and Consulting’s payments of office
expenses as Consulting’s payments of the Sundrups’ expenses.)
Tax Returns
The Sundrups’ Tax Returns
For their taxable year 1999 and an undisclosed number of
years before that taxable year, the Sundrups used an accountant47
(Sundrup accountant), who was with the accounting firm Olsen
Muhlbauer, to prepare their tax returns. Sometime during their
taxable year 2000, the Sundrups informed the Sundrup accountant
that they intended to incorporate Ron Sundrup Transfer.
Sometime after the Sundrups used the Sundrup accountant to
prepare their tax return for their taxable year 1999, they
stopped using him to prepare their tax returns. The Sundrup
accountant did not prepare any tax returns for (1) the Sundrups
for their taxable years 2000 through 2005, (2) Transfer for its
taxable years ended March 31, 2001 through 2006, (3) Consulting
47
The record does not identify the accountant who prepared
petitioners’ tax returns for certain years before 2000.
- 55 -
for its taxable years ended March 31, 2001 through 2006, and
(4) Leasing for its taxable years 2000 through 2005.
Mr. and Ms. Sundrup jointly filed Form 1040, U.S. Individual
Income Tax Return, for each of their taxable years 2003
(Sundrups’ 2003 return), 2004 (Sundrups’ 2004 return), and 2005
(Sundrups’ 2005 return), which Mr. Pechacek48 signed as return
preparer.
In the Sundrups’ 2003 return, Mr. and Ms. Sundrup reported
“total income” of $61,454. In calculating that total income, Mr.
and Ms. Sundrup claimed (1) $16,737 of “Taxable interest”, which
included Consulting’s purported interest payments of $10,391.0649
that the Sundrups received during their taxable year 2003, and
(2) a loss attributable to Leasing of $4,720 (Sundrups’ 2003
Schedule E Leasing claimed loss) from Schedule E, Supplemental
Income and Loss (Schedule E), that petitioners included with the
Sundrups’ 2003 return.
The Sundrups’ 2003 Schedule E Leasing claimed loss of $4,720
was the amount of the loss “from rental real estate activities”
that Leasing claimed in Schedule K, Partners’ Shares of Income,
Credits, Deductions, etc. (2003 Leasing Schedule K claimed loss),
48
See supra note 11.
49
The Sundrups, as well as Transfer and Consulting, rounded
to the nearest dollar the amounts claimed in the respective tax
returns that they filed for their respective taxable years at
issue.
- 56 -
that Leasing included with Form 1065, U.S. Return of Partnership
Income (Form 1065), which it filed for its taxable year 2003 and
which Mr. Pechacek signed as return preparer.50 In calculating
that loss “from rental real estate activities”, Leasing claimed
(1) a deduction of $30,000 for Leasing’s promissory note to
Consulting dated December 30, 2003 and (2) a deduction for cer-
tain expenses (e.g., real property taxes, insurance, repairs, and
depreciation) with respect to the North House and the South House
(deduction for expenses relating to the North House and the South
House).51
Leasing provided to each of the Sundrups Schedule K-1,
Partner’s Share of Income, Credits, Deductions, etc. (Schedule K-
1), for Leasing’s taxable year 2003 in which Leasing showed each
of their shares of the 2003 Leasing Schedule K claimed loss of
$4,720. The Sundrups’ 2003 Schedule E Leasing claimed loss of
$4,720 that the Sundrups claimed in calculating “total income”
50
At all relevant times, Leasing used the cash method of
accounting for tax purposes. At no time before the trial in
these cases did Leasing file (1) Form 8832, Entity Classification
Election, in which it elected to be taxed as a corporation or
(2) Form 8893, Election of Partnership Level Tax Treatment, or
any other election statement under sec. 6231(a)(1)(B)(ii), in
which it elected partnership-level tax treatment. As a result,
at all relevant times, including during the years at issue,
Leasing was treated as a passthrough entity for tax purposes.
51
The record does not establish the amount, if any, that
Leasing paid for expenses relating to the North House and the
South House during its taxable year 2003.
- 57 -
that they reported in the Sundrups’ 2003 return was equal to the
total of the amounts shown in those two 2003 Schedules K-1.
In the Sundrups’ 2004 return, Mr. and Ms. Sundrup reported
“total income” of $38,044. In calculating that total income, Mr.
and Ms. Sundrup claimed (1) $15,344 of “Taxable interest”, which
included Consulting’s purported interest payments of $9,840.75
that the Sundrups received during their taxable year 2004, and
(2) a loss attributable to Leasing of $11,258 (Sundrups’ 2004
Schedule E Leasing claimed loss) from Schedule E that petitioners
included with the Sundrups’ 2004 return.
The Sundrups’ 2004 Schedule E Leasing claimed loss of
$11,258 was the amount of the loss from “rental real estate”
activities that Leasing claimed in Schedule K, Partners’ Distrib-
utive Share Items (2004 Leasing Schedule K claimed loss), that
Leasing included with Form 1065 which it filed for its taxable
year 2004 and which Mr. Pechacek signed as return preparer. In
calculating that loss from “rental real estate” activities,
Leasing claimed (1) a deduction of $12,000 for Leasing’s payments
to Consulting that were made in Leasing’s taxable year 2004 and
(2) a deduction for expenses relating to the North House and the
South House.52
52
The record does not establish the amount, if any, that
Leasing paid for expenses relating to the North House and the
South House during its taxable year 2004.
- 58 -
Leasing provided to each of the Sundrups Schedule K-1 for
Leasing’s taxable year 2004 in which Leasing showed each of their
shares of the 2004 Leasing Schedule K claimed loss of $11,258.
The 2004 Schedule E Leasing claimed loss of $11,258 that the
Sundrups claimed in calculating “total income” that they reported
in the Sundrups’ 2004 return was equal to the total of the
amounts shown in those two 2004 Schedules K-1.
In the Sundrups’ 2005 return, Mr. and Ms. Sundrup reported
“total income” of $82,605. In calculating that total income, Mr.
and Ms. Sundrup claimed (1) $13,687 of “Taxable interest”, which
included Consulting’s purported interest payments of $9,257.42
that the Sundrups received during their taxable year 2005, and
(2) a loss attributable to Leasing of $1,830 (Sundrups’ 2005
Schedule E Leasing claimed loss) from Schedule E that petitioners
included with the Sundrups’ 2005 return.
The Sundrups’ 2005 Schedule E Leasing claimed loss of $1,830
was the amount of the loss from “rental real estate” activities
that Leasing claimed in Schedule K, Partners’ Distributive Share
Items (2005 Leasing Schedule K claimed loss), that Leasing in-
cluded with Form 1065 which it filed for its taxable year 2005
and which Mr. Pechacek signed as return preparer. In calculating
that loss from “rental real estate” activities, Leasing claimed
(1) a deduction of $10,000 for Leasing’s payments to Consulting
- 59 -
that were made in Leasing’s taxable year 2005 and (2) a deduction
for expenses relating to the North House and the South House.53
Leasing provided to each of the Sundrups Schedule K-1 for
Leasing’s taxable year 2005 in which Leasing showed each of their
shares of the 2005 Leasing Schedule K claimed loss of $1,830.
The Sundrups’ 2005 Schedule E Leasing claimed loss of $1,830 that
the Sundrups claimed in calculating “total income” that they
reported in the Sundrups’ 2005 return was equal to the total of
the amounts shown in those two 2005 Schedules K-1.
Transfer’s Tax Returns
Transfer filed Form 1120, U.S. Corporation Income Tax Return
(Form 1120), for each of its taxable years ended March 31, 2004
(Transfer’s TYE 3/31/04 return), March 31, 2005 (Transfer’s TYE
3/31/05 return), and March 31, 2006 (Transfer’s TYE 3/31/06
return), which Mr. Pechacek signed as return preparer.54
In Transfer’s TYE 3/31/04 return, Transfer claimed “Taxable
income” of negative $4,487, or a loss of $4,487. In calculating
53
The record does not establish the amount, if any, that
Leasing paid for expenses relating to the North House and the
South House during its taxable year 2005.
We shall refer collectively to the respective deductions for
expenses relating to the North House and the South House that
Leasing claimed for its taxable years 2003, 2004, and 2005 as
Leasing’s claimed deductions for expenses relating to the North
House and the South House.
54
At all relevant times Transfer used the cash method of
accounting for tax purposes.
- 60 -
that loss, Transfer claimed in Transfer’s TYE 3/31/04 return
(1) a deduction of $45,32655 for Transfer’s payments to Consulting
that Transfer made during Transfer’s taxable year ended March 31,
2004, (2) a deduction of $13,322 for “Employee benefit programs”,
which included Transfer’s payments of the Sundrups’ medical and
dental expenses made during that taxable year, and (3) a deduc-
tion of $485 for “MISCELLANEOUS” expenses (miscellaneous ex-
penses).56
In Transfer’s TYE 3/31/05 return, Transfer claimed zero
“Taxable income”. In calculating that taxable income, Transfer
claimed in Transfer’s TYE 3/31/05 return a deduction of $39,602
for Transfer’s payments to Consulting that Transfer made during
Transfer’s taxable year ended March 31, 2005.
In Transfer’s TYE 3/31/06 return, Transfer claimed “Taxable
income” of negative $4,248, or a loss of $4,248. In calculating
that loss, Transfer claimed in Transfer’s TYE 3/31/06 return
(1) a deduction of $43,639 for Transfer’s payments to Consulting
55
We have found above that Transfer’s payments to Consulting
that Transfer made during Transfer’s taxable year ended Mar. 31,
2004, totaled $45,500.
56
The record does not establish that Transfer paid $485 of
miscellaneous expenses during Transfer’s taxable year ended Mar.
31, 2004.
- 61 -
that Transfer made during Transfer’s taxable year ended March 31,
2006, and (2) a deduction of $696 for miscellaneous expenses.57
Consulting’s Tax Returns
Consulting filed Form 1120 for each of its taxable years
ended March 31, 2004 (Consulting’s TYE 3/31/04 return), March 31,
2005 (Consulting’s TYE 3/31/05 return), and March 31, 2006 (Con-
sulting’s TYE 3/31/06 return), which Mr. Pechacek signed as
return preparer.
In Consulting’s TYE 3/31/04 return, Consulting claimed zero
“Taxable income”. In calculating that taxable income, Consulting
reported as “Gross receipts or sales” $60,000 of Transfer’s
payments to Consulting and Leasing’s payments to Consulting that
Transfer and Leasing made during Consulting’s taxable year ended
March 31, 2004.58 In calculating the zero taxable income that
Consulting claimed in Consulting’s TYE 3/31/04 return, Consulting
deducted (1) Consulting’s payments of the Sundrups’ food of
$4,870 that Consulting made during its taxable year ended March
57
The record does not establish that Transfer paid $696 of
miscellaneous expenses during Transfer’s taxable year ended Mar.
31, 2006.
58
Consulting claimed in Consulting’s TYE 3/31/04 return, and
the parties stipulated, that the total amount that Consulting
received from Transfer and Leasing during Consulting’s taxable
year ended Mar. 31, 2004, was $60,000. We have found on the
basis of the parties’ stipulations that Transfer and Leasing paid
to Consulting during Consulting’s taxable year ended Mar. 31,
2004, a total of $63,500. The record does not explain that
discrepancy.
- 62 -
31, 2004, (2) Consulting’s payments of the Sundrups’ medical and
dental expenses of $4,830.79 that Consulting made during its
taxable year ended March 31, 2004, (3) depreciation of $27,374,59
(4) Consulting’s payments of the Sundrups’ vehicle expenses of
$2,872 that Consulting made during its taxable year ended March
31, 2004, (5) Consulting’s payments of office expenses of $821
that Consulting made during its taxable year ended March 31,
2004, (6) $10,391 of “INTEREST ON REK”, which was the amount of
Consulting’s purported interest payments that it made to the
Sundrups during Consulting’s taxable year ended March 31, 2004,
(7) Consulting’s payments of the Sundrup residence real property
taxes of $1,096 that Consulting made during its taxable year
ended March 31, 2004, (8) Consulting’s payments of the Sundrup
residence repairs and maintenance of $1,815 that Consulting made
during its taxable year ended March 31, 2004, (9) Consulting’s
payments of the Sundrup residence utilities of $2,940 that Con-
sulting made during its taxable year ended March 31, 2004, and
59
Consulting included Form 4562, Depreciation and Amortiza-
tion (Form 4562), with Consulting’s TYE 3/31/04 return. In that
form, it claimed (1) total depreciation of $5,165 for the 1997
Cadillac automobile, 2000 Cadillac automobile, 2000 GMC truck,
and 2004 GMC Envoy and (2) sec. 179 expense of $14,500 for the
2004 GMC Envoy. However, we have found that Consulting traded
(1) the 1997 Cadillac automobile on Sept. 1, 2000, for the 2000
Cadillac automobile and (2) the 2000 GMC truck on Feb. 14, 2004,
for the 2004 GMC Envoy. Consulting did not report depreciation
recapture with respect to the 2000 GMC truck in Consulting’s TYE
3/31/04 return. In Form 4562 included with Consulting’s TYE
3/31/04 return, Consulting also claimed $6,908 of depreciation
with respect to the Sundrup residence, including the land.
- 63 -
(10) Consulting’s payments of the Sundrup residence insurance of
$1,097 that Consulting made during its taxable year ended March
31, 2004.60
In Consulting’s TYE 3/31/05 return, Consulting claimed
“Taxable income” of negative $5,654, or a loss of $5,654. In
calculating that loss, Consulting reported as “Gross receipts or
sales” $51,500, which was the total of Transfer’s payments to
Consulting and Leasing’s payments to Consulting that Transfer and
Leasing made during Consulting’s taxable year ended March 31,
2005. In calculating the loss of $5,654 that Consulting claimed
in Consulting’s TYE 3/31/05 return, Consulting deducted
(1) Consulting’s payments of the Sundrups’ food of $4,072 that
Consulting made during its taxable year ended March 31, 2005,61
(2) Consulting’s payments of the Sundrups’ medical and dental
expenses of $10,904 that Consulting made during its taxable year
ended March 31, 2005, (3) depreciation of $15,226,62 (4) Consult-
60
In calculating the zero “taxable income” that Consulting
claimed in Consulting’s TYE 3/31/04 return, Consulting claimed
certain additional deductions that respondent determined to
disallow. We do not discuss those additional disallowed deduc-
tions. That is because Consulting does not contest them.
61
We have found that Consulting’s payments of the Sundrups’
food that Consulting made during Consulting’s taxable year ended
Mar. 31, 2005, totaled $4,149.66.
62
Consulting included Form 4562 with Consulting’s TYE
3/31/05 return. In that form, it claimed total depreciation of
$6,502 for the 1997 Cadillac automobile, 2000 Cadillac auto-
mobile, 2000 GMC truck, and 2004 GMC Envoy. However, we have
found that Consulting traded (1) the 1997 Cadillac automobile on
(continued...)
- 64 -
ing’s payments of the Sundrups’ vehicle expenses of $1,857 that
Consulting made during its taxable year ended March 31, 2005,
(5) Consulting’s payments of office expenses of $302 that Con-
sulting made during its taxable year ended March 31, 2005,
(6) $9,841 of “INTEREST ON REK”, which was the amount of Consult-
ing’s purported interest payments that it made to the Sundrups
during Consulting’s taxable year ended March 31, 2005, (7) Con-
sulting’s payments of the Sundrup residence real property taxes
of $1,116 that Consulting made during its taxable year ended
March 31, 2005, (8) Consulting’s payments of the Sundrup resi-
dence repairs and maintenance of $2,342 that Consulting made
during its taxable year ended March 31, 2005, (9) Consulting’s
payments of the Sundrup residence utilities of $2,852 that Con-
sulting made during its taxable year ended March 31, 2005, and
(10) Consulting’s payments of the Sundrup residence insurance of
$1,096 that Consulting made during its taxable year ended March
31, 2005.63
62
(...continued)
Sept. 1, 2000, for the 2000 Cadillac automobile and (2) the 2000
GMC truck on Feb. 14, 2004, for the 2004 GMC Envoy. In Form 4562
included with Consulting’s TYE 3/31/05 return, Consulting also
claimed $6,908 of depreciation with respect to the Sundrup
residence, including the land.
63
In calculating the zero “taxable income” that Consulting
claimed in Consulting’s TYE 3/31/05 return, Consulting claimed
certain additional deductions that respondent determined to dis-
allow. We do not discuss those additional disallowed deductions.
That is because Consulting does not contest them.
- 65 -
In Consulting’s TYE 3/31/06 return, Consulting claimed zero
“Taxable income”. In calculating that taxable income, Consulting
reported as “Gross receipts or sales” $53,000 of Transfer’s
payments to Consulting and Leasing’s payments to Consulting that
Transfer and Leasing made during Consulting’s taxable year ended
March 31, 2006.64 In calculating the zero taxable income that
Consulting claimed in Consulting’s TYE 3/31/06 return, Consulting
deducted (1) Consulting’s payments of the Sundrups’ food expenses
of $5,491 that Consulting made during its taxable year ended
March 31, 2006,65 (2) Consulting’s payments of the Sundrups’
medical and dental expenses of $11,084 that Consulting made
during its taxable year ended March 31, 2006,66 (3) depreciation
of $12,326,67 (4) Consulting’s payments of the Sundrups’ vehicle
64
Consulting claimed in Consulting’s TYE 3/31/06 return, and
the parties stipulated, that the total amount that Consulting
received from Transfer and Leasing during Consulting’s taxable
year ended Mar. 31, 2006, was $53,000. We have found on the
basis of the parties’ stipulations that Transfer and Leasing paid
to Consulting during Consulting’s taxable year ended Mar. 31,
2006, a total of $51,000. The record does not explain that
discrepancy.
65
We have found that Consulting’s payments of the Sundrups’
food that Consulting made during Consulting’s taxable year ended
Mar. 31, 2006, totaled $5,590.75.
66
We have found that Consulting’s payments of the Sundrups’
medical and dental expenses that Consulting made during Consult-
ing’s taxable year ended Mar. 31, 2006, totaled $11,455.26.
67
Consulting included Form 4562 with Consulting’s TYE
3/31/06 return. In that form, it claimed total depreciation of
$4,328 for the 1997 Cadillac automobile, 2000 Cadillac automo-
bile, 2000 GMC truck, and 2004 GMC Envoy. However, we have found
(continued...)
- 66 -
expenses of $3,151 that Consulting made during its taxable year
ended March 31, 2006, (5) Consulting’s payments of office ex-
penses of $477 that Consulting made during its taxable year ended
March 31, 2006, (6) $9,257 of “INTEREST ON REK”, which was the
amount of Consulting’s purported interest payments that it made
to the Sundrups during Consulting’s taxable year ended March 31,
2006, (7) Consulting’s payments of the Sundrup residence real
property taxes of $1,126 that Consulting made during its taxable
year ended March 31, 2006, (8) Consulting’s payments of the
Sundrup residence repairs and maintenance of $4,671 that Consult-
ing made during its taxable year ended March 31, 2006, (9) Con-
sulting’s payments of the Sundrup residence utilities of $2,719
that Consulting made during its taxable year ended March 31,
2006, and (10) Consulting’s payments of the Sundrup residence
insurance of $1,12768 that Consulting made during its taxable year
ended March 31, 2006.69
67
(...continued)
that Consulting traded (1) the 1997 Cadillac automobile on Sept.
1, 2000, for the 2000 Cadillac automobile and (2) the 2000 GMC
truck on Feb. 14, 2004, for the 2004 GMC Envoy. In Form 4562
included with Consulting’s TYE 3/31/06 return, Consulting also
claimed $6,908 of depreciation with respect to the Sundrup
residence, including the land.
68
We have found that Consulting’s payments of the Sundrup
residence insurance that were made during Consulting’s taxable
year ended Mar. 31, 2006, totaled $1,785.
69
In calculating the zero “taxable income” that Consulting
claimed in Consulting’s TYE 3/31/06 return, Consulting claimed
certain additional deductions that respondent determined to dis-
(continued...)
- 67 -
Notices of Deficiency
Respondent conducted respective examinations of (1) the
Sundrups’ taxable years 2003 through 2005, (2) Leasing’s taxable
years 2003 through 2005, (3) Transfer’s taxable years ended March
31, 2004 through 2006, and (4) Consulting’s taxable years ended
March 31, 2004 through 2006. As a result of those examinations,
respondent issued separate notices of deficiency to the Sundrups,
Transfer, and Consulting.
The Sundrups’ Notice
Respondent issued to Mr. and Ms. Sundrup a notice of defi-
ciency (notice) with respect to their taxable years 2003 through
2005 (Sundrups’ notice). In that notice, respondent excluded
from the Sundrups’ gross income the following amounts of Consult-
ing’s purported interest payments that they reported as “Interest
Income” for their taxable years indicated:
69
(...continued)
allow. We do not discuss those additional disallowed deductions.
That is because Consulting does not contest them.
- 68 -
Consulting’s Purported Interest
Taxable Year Payments Excluded From Gross Income
2003 $10,391
2004 9,841
2005 9,257
In the Sundrups’ notice, respondent also determined that the
Sundrups are not entitled to deduct the following amounts of
Schedule E claimed losses:
Schedule E Claimed Loss Disallowed Amount
Sundrups’ 2003 Schedule E Leasing claimed loss $4,720
Sundrups’ 2004 Schedule E Leasing claimed loss 11,258
Sundrups’ 2005 Schedule E Leasing claimed loss 1,830
In that notice, respondent also determined that the Sundrups have
the following amounts of Schedule E “Total income” for their tax-
able years indicated:
Taxable Year Schedule E “Total income”
2003 $7,056
2004 6,743
2005 5,287
Respondent made the Sundrups’ Schedule E determinations in
the Sundrups’ notice because respondent determined for the tax-
able years indicated (1) that Leasing is not entitled to the
following amounts of Schedule K claimed losses and (2) that
Leasing has the following amounts of “Ordinary income (loss) from
trade or business activities”:
- 69 -
Schedule K
Claimed Loss “Ordinary income (loss) from
Taxable Year Disallowed trade or business activities”
2003 $4,720 $7,056
2004 11,258 6,743
2005 1,830 5,287
Respondent made the Leasing Schedule K determinations in the
Sundrups’ notice because respondent determined that Leasing is
not entitled to Leasing’s claimed deductions relating to the
North House and the South House of $11,776, $18,001, and $7,117
for its taxable years 2003, 2004, and 2005, respectively.
In the Sundrups’ notice, respondent also determined that the
Sundrups are liable for accuracy-related penalties under section
6662(a) in the respective amounts of $3,825.80, $3,591.20, and
$2,999.80 for their taxable years 2003, 2004, and 2005 because of
negligence or disregard of rules or regulations or a substantial
understatement of tax.70
Transfer’s Notice
Respondent issued to Transfer a notice with respect to its
taxable years ended March 31, 2004 through 2006 (Transfer’s
notice). In that notice, respondent determined, inter alia, that
Transfer is not entitled to deduct (1) $9,293 of the $13,322 that
Transfer claimed as “Employee benefit programs” in Transfer’s TYE
3/31/04 return, (2) $426 of the $485 of miscellaneous expenses
70
Respondent made certain other determinations in the Sun-
drups’ notice that we do not address because of our holdings with
respect to certain alternative issues that respondent raised.
See supra note 4 and infra note 75.
- 70 -
that Transfer deducted in Transfer’s TYE 3/31/04 return, and
(3) $215 of the $696 of miscellaneous expenses that Transfer
deducted in Transfer’s TYE 3/31/06 return.
In Transfer’s notice, respondent also determined that Trans-
fer is liable for accuracy-related penalties under section
6662(a) in the respective amounts of $472.20, $355.20, and
$168.60 for its taxable years ended March 31, 2004 through 2006
because of negligence or disregard of rules or regulations or a
substantial understatement of tax.
Consulting’s Notice
Respondent issued to Consulting a notice with respect to its
taxable years ended March 31, 2004 through 2006 (Consulting’s
notice). In that notice, respondent determined, inter alia, that
Consulting is not entitled for the taxable years at issue to the
following deductions71 that it claimed for the payments indicated:
71
Respondent also determined that Consulting is not entitled
for each of its taxable years at issue to certain additional
amounts of the deductions that it claimed for each of those
years. We do not address those additional disallowed amounts.
That is because Consulting does not contest them.
- 71 -
Claimed Deduction 2004 2005 2006
Consulting’s payments of the
Sundrups’ food $4,870 $4,072 $5,491
Consulting’s payments of the
Sundrups’ medical and dental
1 1
expenses 4,831 8,839 11,084
Depreciation and
sec. 179 expense 27,374 15,226 12,326
Consulting’s payments of the
1 1
Sundrups’ vehicle expenses 2,872 1,777 1,622
Consulting’s payments of office
1 1
expenses 821 288 477
Consulting’s purported interest
1
payments 10,391 9,841 9,257
Consulting’s payments of the
Sundrup residence real
property taxes 1,096 1,116 1,126
Consulting’s payments of the
Sundrup residence repairs and
1 1
maintenance 1,607 2,327 4,671
Consulting’s payments of the
1
Sundrup residence utilities 2,940 2,852 2,669
Consulting’s payments of the
Sundrup residence insurance 1,097 1,096 1,127
1
For convenience we have rounded to the nearest dollar the
payments that Consulting made for the items indicated during each
of its taxable years at issue.
In Consulting’s notice, respondent also determined that
Consulting is liable for accuracy-related penalties under section
6662(a) in the respective amounts of $2,006, $1,575, and $1,650,
for its taxable years ended March 31, 2004 through 2006 because
of negligence or disregard of rules or regulations or a substan-
tial understatement of tax.
- 72 -
Amendments to Answers
The Sundrups
Respondent filed an amendment to answer in the Sundrups’
case at docket No. 14373-07. Respondent alleged in that amend-
ment to answer that the Sundrups have respective increases of
$5,768, $1,044, and $549 in the respective deficiencies that
respondent determined in the Sundrups’ notice for their taxable
years 2003, 2004, and 2005. Respondent made those allegations
because respondent alleged in the amendment to answer that Leas-
ing is not entitled to the respective deductions that it claimed
for its taxable years 2003, 2004, and 2005 for Leasing’s promis-
sory note to Consulting dated December 30, 2003 and for Leasing’s
payments to Consulting. Respondent further alleged in that
amendment to answer that the Sundrups have respective increases
of $1,153.60, $208.80, and $109.80 to the accuracy-related penal-
ties under section 6662(a) that respondent determined in the
Sundrups’ notice for their taxable years 2003, 2004, and 2005.
Transfer
Respondent filed an amendment to answer in Transfer’s case
at docket No. 14374-07. Respondent alleged in that amendment to
answer that Transfer has respective increases of $5,556, $4,767,
and $5,375 in the respective deficiencies that respondent deter-
mined in Transfer’s notice for its taxable years ended March 31,
2004, March 31, 2005, and March 31, 2006. Respondent made those
- 73 -
allegations because respondent alleged in the amendment to answer
that Transfer is not entitled to the respective deductions that
it claimed for its taxable years ended March 31, 2004, 2005, and
2006, for Transfer’s payments to Consulting. Respondent further
alleged in that amendment to answer that Transfer has respective
increases of $1,111.20, $953.40, and $1,075 to the accuracy-
related penalties under section 6662(a) that respondent deter-
mined in Transfer’s notice for its taxable years ended March 31,
2004, 2005, and 2006.
OPINION
Petitioners bear the burden of proving that the respective
determinations in the Sundrups’ notice, Transfer’s notice, and
Consulting’s notice that remain at issue are erroneous. See Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Respondent
bears the burden of proving any new matters that respondent
alleged in the respective amendments to answers that respondent
filed in the Sundrups’ case at docket No. 14373-07 and Transfer’s
case at docket No. 14374-07. See Rule 142(a).
Before turning to the issues presented, we shall comment on
the respective testimonies of Mr. Sundrup and Ms. Sundrup, who
were the only witnesses at the trial in these cases. We found
those testimonies to be in certain material respects question-
able, implausible, vague, inconsistent, unpersuasive and/or self-
serving. We shall not rely on the respective testimonies of Mr.
- 74 -
Sundrup and Ms. Sundrup in those respects. See, e.g., Tokarski
v. Commissioner, 87 T.C. 74, 77 (1986).
Certain Transactions at Issue
It is respondent’s position that the respective transactions
between (1) (a) Transfer and Consulting and (b) Leasing and
Consulting, under which Consulting purported to provide to each
of those companies certain services, and (2) the Sundrups and
Consulting, under which Consulting purported to agree to buy the
Sundrup residence, should not be respected for tax purposes.72 In
support of that position, respondent argues that there was no
nontax business purpose for any of those transactions and that
each of them was without economic substance and a sham. Accord-
ing to respondent,
When looking beyond the four corners of petitioners’
documents, the evidence demonstrates that Transfer and
Leasing’s payments [to Consulting] of $63,500.00,
$51,500.00, and $51,000.00 in Consulting’s fiscal years
ending March 31, 2004, March 31, 2005, and March 31,
2006, respectively, enabled Ronald and Helen Sundrup to
live a tax-free lifestyle through Consulting’s payment
of their personal living expenses. Those payments from
Transfer and Leasing to Consulting, a corporation with-
out any purpose beyond tax avoidance, should not be
deductible.
* * * * * * *
Mr. and Mrs. Sundrup reported interest income on
their 2003, 2004, and 2005 joint federal income tax
returns in the amounts of $10,391.00, $9,841.00, and
72
We shall sometimes refer to the respective transactions
between (1) Transfer and Consulting, (2) Leasing and Consulting,
and (3) the Sundrups and Consulting as the respective transac-
tions at issue.
- 75 -
$9,257.00, respectively. Respondent disallowed these
amounts, determining that the alleged sale of 200 Corn-
ing St. [the Sundrup residence] was part of a scheme to
deduct Mr. & Mrs. Sundrup’s personal living expenses.
* * *
It is the position of petitioners that the respective trans-
actions at issue should be respected for tax purposes. In sup-
port of that position, petitioners argue:
Sundrup Consulting, Sundrup Transfer, and Sundrup Leas-
ing were created primarily for corporate protection in
the form of premises liability. The companies were not
a scheme to deduct personal expenses of Mr. and Mrs.
Sundrup. * * *
At trial, Mr. Sundrup claimed that the Sundrups incorporated
Consulting after they formed Transfer and Leasing “because I was
concerned of the liability against me in case something would
happen.” At trial, Ms. Sundrup claimed that the Sundrups incor-
porated Consulting after they formed Transfer and Leasing in
order to “have another pocket of liability protection.” As the
trier of fact, we are unwilling to rely on the respective testi-
monies of Mr. Sundrup and Ms. Sundrup as to why they incorporated
Consulting.
Based upon our examination of the entire record before us,
we find that the only intended objective of the respective trans-
actions between (1) (a) Transfer and Consulting and (b) Leasing
and Consulting, under which Consulting purported to provide to
each of those companies certain services, and (2) the Sundrups
and Consulting, under which Consulting purported to agree to buy
- 76 -
the Sundrup residence, was the Sundrups’ tax-avoidance objective
of having Consulting pay the Sundrups’ personal living expenses
with funds which Transfer and Leasing paid to Consulting and for
which Transfer and Leasing claimed tax deductions for their
respective taxable years at issue.73 On that record, we find that
the respective transactions at issue were not entered into for
nontax business reasons, were entered into only for tax-avoidance
reasons, and did not have economic substance. See Frank Lyon Co.
v. United States, 435 U.S. 561 (1978); Gregory v. Helvering, 293
U.S. 465, 467 (1935); Rice’s Toyota World, Inc. v. Commissioner,
81 T.C. 184 (1983), affd. in part and revd. in part 752 F.2d 89
(4th Cir. 1985); Van Zandt v. Commissioner, 40 T.C. 824 (1963),
affd. 341 F.2d 440 (5th Cir. 1965).
Based upon our examination of the entire record before us,
we hold that the respective transactions between (1) Transfer and
Consulting, (2) Leasing and Consulting, and (3) the Sundrups and
Consulting should not be respected for tax purposes. As a re-
sult, we hold that (1) Transfer is not entitled for each of its
73
In order to bolster the chances that they would succeed in
achieving their tax-avoidance objective, petitioners created a
paper trail consisting of the purported Transfer management
agreement, the purported Leasing management agreement, Mr.
Sundrup’s purported employment agreement, Ms. Sundrup’s purported
employment agreement, and the real estate installment document.
Those documents are nothing more than self-serving attempts by
petitioners to create a paper trail that they hoped would in-
crease the chances that they would succeed in achieving the
Sundrups’ tax-avoidance objective. On the record before us, we
find that none of the documents in question has economic reality
beyond tax planning.
- 77 -
taxable years at issue to deduct under section 162(a) Transfer’s
payments to Consulting during each of those years; (2) Leasing is
not entitled for each of its taxable years at issue to deduct
under section 162(a) Leasing’s payments to Consulting during each
of those years;74 and (3) the Sundrups do not have for each of
their taxable years at issue interest income because of Consult-
ing’s purported interest payments to them during each of those
years.75
Transfer’s Claimed Deduction
for Transfer’s Payments of the
Sundrups’ Medical and Dental Expenses
In Transfer’s TYE 3/31/04 return, Transfer claimed a deduc-
tion of $9,293 for Transfer’s payments of the Sundrups’ medical
and dental expenses during that year. In Transfer’s notice,
respondent determined to disallow that deduction.76
Respondent argues that Transfer is not entitled to the
deduction claimed for its taxable year ended March 31, 2004, for
Transfer’s payments of the Sundrups’ medical and dental expenses
74
See supra note 50.
75
In the light of our holdings with respect to the respec-
tive transactions at issue, we need not address respondent’s
alternative position that Consulting’s payments of the Sundrups’
expenses during each of its taxable years at issue are nondeduct-
ible payments that constitute constructive dividends to the
Sundrups. See supra note 4.
76
At trial, respondent’s counsel indicated that respondent
did not disallow in Transfer’s notice the portion of the $13,322
claimed as “Employee benefit programs” in Transfer’s TYE 3/31/04
return that was for medical and dental expenses of Rick Sundrup,
the Sundrups’ son.
- 78 -
because “Ronald Sundrup was not an employee [of Transfer] and
cannot claim benefits under the plan. * * * Mrs. Sundrup never
established that she was an employee of Transfer.”
Mr. Sundrup testified inconsistently that during Transfer’s
taxable years at issue he was not an employee of Transfer and
that he was an employee of Transfer. Ms. Sundrup claimed at
trial that she was an employee of Transfer during at least part
of its taxable year ended March 31, 2004. We are unwilling to
rely on the respective testimonies of Mr. Sundrup and Ms. Sundrup
regarding whether they were employees of Transfer during its
taxable year ended March 31, 2004.
Respondent acknowledges that Mr. Sundrup and Ms. Sundrup
“were in fact performing the daily work of Transfer” throughout
its taxable years at issue, including its taxable year ended
March 31, 2004. Respondent’s contention is consistent with
various findings that we have made. We have found that, as was
true when the Sundrups operated Ron Sundrup Transfer, the
Sundrups conducted the office operations of Transfer, which Ms.
Sundrup managed, at the Sundrup residence. We have also found
that, as was true when Ms. Sundrup managed the office operations
of Ron Sundrup Transfer, as part of her managing the office
operations of Transfer she answered the telephone, scheduled
pickups, monitored deliveries, and coordinated jobs among the
drivers. In addition, we have found that Mr. Sundrup served as a
- 79 -
driver for Transfer during its taxable years at issue. He also
did work during those years repairing, maintaining, and washing
certain vehicles that Transfer used in its trucking business.
Moreover, we have found that the transaction between Transfer and
Consulting, under which Consulting purported to provide certain
services to Transfer, should not be respected for tax purposes.
Based upon our examination of the entire record before us,
we find that Mr. Sundrup and Ms. Sundrup each were employees of
Transfer during its taxable year ended March 31, 2004. On that
record, we further find that Transfer is entitled for its taxable
year ended March 31, 2004, to deduct under section 162(a) Trans-
fer’s payments of the Sundrups’ medical and dental expenses
during that year of $9,293.
Transfer’s Claimed Deductions
for Miscellaneous Expenses
In Transfer’s TYE 3/31/04 return and Transfer’s TYE 3/31/06
return, Transfer claimed respective deductions of $485 and $696
for miscellaneous expenses.77 In Transfer’s notice, respondent
determined to disallow $426 and $215 of those respective deduc-
tions.
Transfer presented no evidence at trial, and makes no argu-
ment on brief, with respect to the respective deductions of $426
and $215 for miscellaneous expenses that Transfer claimed in
Transfer’s TYE 3/31/04 return and Transfer’s TYE 3/31/06 return
77
See supra notes 56 and 57.
- 80 -
and that respondent disallowed. On the record before us, we find
that Transfer is not entitled to those deductions.
Leasing’s Claimed Deductions Relating
to the North House and the South House
In the respective Forms 1065 that it filed for its taxable
years 2003, 2004, 2005, Leasing claimed deductions for expenses
relating to the North House and the South House of $11,776,
$18,001, and $7,117, respectively.78 In the Sundrups’ notice,
respondent determined to disallow those deductions.
The Sundrups presented no evidence at trial, and make no
argument on brief, with respect to Leasing’s claimed deductions
for expenses relating to the North House and the South House. On
the record before us, we find that Leasing is not entitled to
those deductions.79
Accuracy-Related Penalties
In the respective notices that respondent issued to the
Sundrups, Transfer, and Consulting, respondent determined that
they are liable for each of their respective taxable years at
issue for accuracy-related penalties under section 6662(a) be-
cause of (1) negligence or disregard of rules or regulations
under section 6662(b)(1) or (2) a substantial understatement of
tax under section 6662(b)(2). In the respective amendments to
answers that respondent filed in the Sundrups’ case at docket No.
78
See supra notes 51, 52, and 53.
79
See supra note 50.
- 81 -
14373-07 and Transfer’s case at docket No. 14374-07, respondent
alleged that the Sundrups and Transfer are liable for increased
accuracy-related penalties under section 6662(a) for each of
their respective taxable years at issue.
Section 6662(a) imposes an accuracy-related penalty equal to
20 percent of the underpayment of tax attributable to, inter
alia, (1) negligence or disregard of rules or regulations, sec.
6662(b)(1), or (2) a substantial understatement of tax, sec.
6662(b)(2).
The term “negligence” in section 6662(b)(1) includes any
failure to make a reasonable attempt to comply with the Code.
Sec. 6662(c). Negligence has also been defined as a failure to
do what a reasonable person would do under the circumstances.
See Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),
affg. T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C.
686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990). The term
“disregard” includes any careless, reckless, or intentional
disregard. Sec. 6662(c).
For purposes of section 6662(b)(2), an understatement is
equal to the excess of the amount of tax required to be shown in
the tax return over the amount of the tax shown in the tax re-
turn. Sec. 6662(d)(2)(A). In the case of an individual, an
understatement is substantial if it exceeds the greater of 10
percent of the tax required to be shown in the tax return for the
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taxable year or $5,000. Sec. 6662(d)(1)(A). As pertinent here,
in the case of a corporation other than an S corporation, an
understatement is substantial (1) for taxable years that began on
or before October 22, 2004, if it exceeds the greater of 10
percent of the tax required to be shown in the tax return for the
taxable year or $10,000, sec. 6662(d)(1)(B), and (2) for taxable
years that began after October 22, 2004, if it exceeds the lesser
of (a) 10 percent of the tax required to be shown in the tax
return for the taxable year or $10,000 or (b) $10 million, sec.
6662(d)(1)(B).
The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment if it is shown that there
was reasonable cause for, and that the taxpayer acted in good
faith with respect to, such portion. Sec. 6664(c)(1). The
determination of whether the taxpayer acted with reasonable cause
and in good faith depends on the pertinent facts and circum-
stances, including the taxpayer’s efforts to assess such tax-
payer’s proper tax liability, the knowledge and experience of the
taxpayer, and the reliance on the advice of a professional, such
as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs. Reli-
ance on the advice of a professional does not necessarily demon-
strate reasonable cause and good faith unless, under all the
circumstances, such reliance was reasonable and the taxpayer
acted in good faith. Id.
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Respondent bears the burden of production with respect to
the accuracy-related penalties at issue. See sec. 7491(c). To
meet respondent’s burden of production, respondent must come
forward with sufficient evidence showing that it is appropriate
to impose the accuracy-related penalty. See Higbee v. Commis-
sioner, 116 T.C. 438, 446 (2001). With respect to the accuracy-
related penalties that respondent determined in the respective
notices that respondent issued to the Sundrups, Transfer, and
Consulting, respondent “need not introduce evidence regarding
reasonable cause, substantial authority, or similar provisions.
* * * the taxpayer bears the burden of proof with regard to those
issues.” Id.
We have held that the respective transactions between
(1) Transfer and Consulting, (2) Leasing and Consulting, and
(3) the Sundrups and Consulting should not be respected for tax
purposes. As a result, we have further held that Transfer is not
entitled for each of its taxable years at issue to deduct Trans-
fer’s payments to Consulting, that Leasing is not entitled for
each of its taxable years at issue to deduct Leasing’s payments
to Consulting, and that the Sundrups do not have for each of
their taxable years at issue interest income attributable to
Consulting’s purported interest payments to them.80 We have also
held that Transfer is not entitled for each of its taxable years
80
See supra note 75.
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ended March 31, 2004 and 2006, to deduct claimed miscellaneous
expenses. In addition, we have held that Leasing is not entitled
for its taxable years 2003, 2004, and 2005 to Leasing’s claimed
deductions for expenses relating to the North House and the South
House. Moreover, in the stipulation of settled issues filed on
September 15, 2008 (stipulation of settled issues), Transfer
conceded certain determinations that respondent made in Trans-
fer’s notice, and Consulting conceded one of the determinations
that respondent made in Consulting’s notice.81
In the light of our holdings stated above and the respective
concessions of Transfer and Consulting in the stipulation of
settled issues, the Sundrups, Transfer, and Consulting have
respective underpayments of tax for their respective taxable
years at issue. We conclude that respondent has satisfied re-
spondent’s burden of production under section 7491(c).
Petitioners argue that the Sundrups, Transfer, and Consult-
ing are not liable for any of their respective taxable years at
issue for accuracy-related penalties under section 6662(a). That
is because, according to petitioners, they
did not substantially understate income tax and did not
act negligently or disregard rules or regulations.
Petitioners had reasonable cause and acted in good
faith. Petitioners have shown their transactions were
legitimate business activities and not a scheme to
deduct personal expenses. * * *
81
At trial, petitioners made certain additional concessions.
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On the record before us, we reject petitioners’ claim that
they had reasonable cause and acted in good faith in taking the
tax return positions that they did with respect to the issues on
which we have held against them and the respective issues that
Transfer and Consulting conceded in the stipulation of settled
issues. With respect to the respective transactions at issue, we
have held that those transactions should not be respected for tax
purposes and that Transfer and Leasing are not entitled for their
respective taxable years at issue to the respective deductions
that they claimed as a result of those transactions. With re-
spect to Transfer’s claimed respective deductions for miscella-
neous expenses for its taxable years ended March 31, 2004 and
2006, we have held that Transfer is not entitled to those deduc-
tions. With respect to Leasing’s claimed deductions for expenses
relating to the North House and the South House for its taxable
years 2003, 2004, and 2005, we have held that Leasing is not
entitled to those deductions.82 With respect to the respective
determinations of respondent that Transfer and Consulting con-
ceded in the stipulation of settled issues, those companies
presented no evidence, and make no argument, with respect to the
respective tax return positions that they took with respect to
82
See supra note 50.
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the respective items that respondent determined are wrong and
that they conceded.83
On the record before us, we find that the Sundrups, Trans-
fer, and Consulting were negligent and disregarded rules or
regulations, or otherwise did not do what a reasonable person
would do, with respect to the respective items that resulted in
their respective underpayments for each of their respective
taxable years at issue.
On the record before us, we find that there was not reason-
able cause for, and that the Sundrups, Transfer, and Consulting
did not act in good faith with respect to, any portion of the
respective underpayments of tax for each of their respective
taxable years at issue.
Based upon our examination of the entire record before us,
we find that the Sundrups, Transfer, and Consulting are liable
for each of their respective taxable years at issue for accuracy-
related penalties under section 6662(a) with respect to their
respective underpayments of tax for each of those years.84
We have considered all of the contentions and arguments of
the parties that are not discussed herein, and we find them to be
without merit, irrelevant, and/or moot.
83
See supra note 81.
84
See supra note 75.
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To reflect the foregoing and the parties’ respective conces-
sions,
Decisions will be entered
under Rule 155.