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T.C. Memo. 2002-124

UNITED STATES TAX COURT

JUNE CORDES, ET AL.,1 Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 20254-94, 9294-95,

3284-96, 3305-96,

4182-96, 19178-97,

19256-97, 19277-97,

19278-97, 19279-97.

Filed May 22, 2002.

Michael C. Mayhall and O. Christopher Meyers,

for petitioners.

Gary L. Bloom, for respondent.

For purposes of trial, briefing, and opinion, the cases of

the following petitioners are consolidated herewith: Cordes

Finance Corp., docket Nos. 9294-95 and 3284-96; June J. Cordes,

docket No. 3305-96; Edmund J. & June J. Cordes, docket No. 418296; Edmund J. Cordes, docket No. 19178-97; John J. Cordes, docket

No. 19256-97; Jean Ann Richard, docket No. 19277-97; Eddy Ben

Cordes, docket No. 19278-97; and June Cordes, docket No. 1927997.

- 2 MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge:

In these consolidated cases, respondent

determined deficiencies in petitioners’ Federal income tax and

additions to tax and/or penalties as follow:

Docket Nos. 9294-95 and 3284-96

Petitioner Cordes Finance Corp.:

Year

1991

1992

1993

Deficiency

$606,863

686,695

743,902

Penalties

sec. 6662(a)2

sec. 6663

$121,373

$9,773

131,784

20,832

145,200

13,428

Docket Nos. 20254-94 and 3305-96

Petitioner June Cordes:3

Year

1989

1990

1991

Deficiency

$135,298

134,608

368,551

Additions to tax

sec. 6651(a)(1) sec. 6654

$33,825

$232

33,652

8,863

92,138

21,201

Docket No. 4182-96

Petitioners Edmund J. & June J. Cordes:

Year

1992

1993

Deficiency

$17,281

98,957

Penalties

sec. 6662(a)

$3,456

19,791

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable years in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure. Monetary amounts have been rounded to

the nearest dollar amount as appropriate.

June Cordes (docket No. 20254-94) and June J. Cordes

(docket Nos. 3305-96 and 4182-96) refer to the same person.

Hereinafter, June Cordes and June J. Cordes shall be referred to

as Mrs. Cordes or petitioner, as appropriate.

- 3 Collectively, the above five cases are referred to as the income

tax cases.

In these consolidated cases, respondent also determined

deficiencies in petitioners’ Federal gift tax and additions to

tax as follow:

Docket No. 19178-97

Petitioner Edmund J. Cordes:

Year

1983

1991

1992

1993

Deficiency

$73,100

349,503

18,450

13,500

Additions to tax

sec. 6651(a)(1)

$18,275

-04,613

3,375

Docket No. 19256-97

Petitioner John J. Cordes:

Year

1994

Deficiency

$154,230

Addition to tax

sec. 6651(a)(1)

$38,558

Docket No. 19277-97

Petitioner Jean Ann Richard:4

Year

1987

1988

Deficiency

$16,650

130,500

Additions to tax

sec. 6651(a)(1)

$4,163

32,625

The parties and exhibits refer to this petitioner as Jean

Ann Cordes and as Jean Ann Richard. Jean Ann Cordes married

Joseph P. Richard prior to the issuance of the notices of

deficiency. Throughout this opinion, we shall refer to her as

Jean Ann Richard or petitioner for the sake of clarity. Neither

her name nor marital status has any bearing on our holdings

herein.

- 4 Docket No. 19278-97

Petitioner Eddy Ben Cordes:

Year

1983

1989

Deficiency

$190,450

101,600

Additions to tax

sec. 6651(a)(1)

$47,613

25,400

Docket No. 19279-97

Petitioner June Cordes:

Year

1991

1993

1994

Deficiency

$286,654

28,767

1,749,930

Additions to Tax

sec. 6651(a)(1)

-0$7,192

437,483

Collectively, the above five cases are referred to as the gift

tax cases.

After concessions,5 the issues for decision are:

(1)

As to the income tax cases, whether respondent abused

his discretion in determining that the interest charged for 1992

and 1993 on loans between Edmund J. Cordes (Mr. Cordes) and

Cordes Finance Corp. (CFC) was unreasonable and excessive and in

recharacterizing the amounts transferred to reflect an arm’slength rate of interest under section 482;

Many issues in these consolidated cases have been settled

or conceded by the parties, or are deemed conceded by this Court.

Other issues raised by the parties are computational in nature.

In the interest of space, these conceded, deemed conceded,

computational, and settled issues, and their respective

dispositions, are set forth in Appendix B, Summary of Conceded,

Deemed Conceded, Computational, and Settled Issues. We

incorporate those dispositions into our opinion by this

reference.

- 5 (2)

as to the income tax cases, whether Mrs. Cordes, in

1989 through 1991, and Edmund J. and June J. Cordes (the

Cordeses), in 1992 and 1993, received constructive dividends from

CFC, resulting in additional taxable income to Mrs. Cordes for

1989 through 1991 and to the Cordeses for 1992 and 1993;

(3)

as to the income tax case in which CFC is the

petitioner, whether CFC is liable for a civil fraud penalty on an

underpayment of its income tax, pursuant to section 6663, for

1991; and

(4)

as to the gift tax cases, whether petitioners therein

made completed gifts of stock in family-owned and closely held

corporations for Federal gift tax purposes.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts, the supplemental stipulation of facts,

and two stipulations of agreed adjustments are incorporated in

our findings by this reference.

Background

Petitioners

The Cordeses were married and resided in Lawton, Oklahoma,

at the time they filed their individual and joint petitions.

Petitioner John J. Cordes (John Cordes) was a resident of Austin,

Texas, at the time his petition was filed.

Petitioner Jean Ann

Richard was a resident of Lawton, Oklahoma, at the time her

- 6 petition was filed.

Petitioner Eddy Ben Cordes was a resident of

Lawton, Oklahoma, at the time his petition was filed.

Each of

the individual petitioners was a cash basis, calendar-year

taxpayer.

The Cordeses are the parents of petitioners John

Cordes, Jean Ann Richard, and Eddy Ben Cordes.

We shall

hereinafter refer to the above-named petitioners collectively as

the Cordes family.

CFC was incorporated in Oklahoma on January 24, 1964.

CFC’s principal place of business was in Lawton, Oklahoma, at the

time its petitions were filed.

The Cordes Corporations

During the taxable years at issue, members of the Cordes

family held legal title to all the shares of stock in the

following closely held corporations:6

CFC,7 Eddie Cordes, Inc.,

Edmund Cordes, Inc., and John Cordes, Inc. (collectively, the

Cordes corporations).

The primary business activity of each of

It appears from the record that members of the Cordes

family have held legal title to all, or nearly all, of the shares

of stock in CFC, Eddie Cordes, Inc., Edmund Cordes, Inc., and

John Cordes, Inc. (collectively, the Cordes corporations), since

their respective incorporations.

In 1971, CFC issued 500 shares of stock, 105 of which were

issued to Eddy Ben Cordes. The record does not indicate who

became the recordholder of the other 395 shares. The record does

indicate that, in 1988, Ellen Cordes, Mr. Cordes’s daughter-inlaw, held legal title to 100 shares which she transferred to Jean

Ann Richard later that year. The testimony and exhibits confirm

that members of the Cordes family held legal title to all

outstanding stock in the Cordes corporations during the taxable

years at issue.

- 7 the Cordes corporations was either selling, or financing

customers’ purchases of, motor vehicles.

Eddie Cordes, Inc., was incorporated in Oklahoma on January

2, 1963, as an authorized dealership for Jeep-Eagle and

eventually Dodge vehicles.

Edmund Cordes, Inc. (known as Cordes

Dodge, Inc., until February 16, 1989), was incorporated in

Oklahoma on January 2, 1967, as an authorized dealership for

Dodge vehicles.

John Cordes, Inc., was incorporated in Oklahoma

on June 13, 1983, as an authorized dealership for Chevrolet,

Oldsmobile, Pontiac, and General Motors vehicles.

collectively refer to Edmund Cordes, Inc., John Cordes, Inc., and

Eddie Cordes, Inc., as the Cordes family dealerships.

CFC

operated mainly to finance new and used vehicles purchased by

customers from the Cordes family dealerships.

Each of the Cordes family dealerships was governed by a

franchise agreement with the vehicle manufacturer whose cars it

sold.

Each franchise agreement identified an individual as the

franchise holder and bound that individual to specific

restrictions.

The two common restrictions relevant herein

required the franchise holder (1) to maintain direct ownership of

a certain minimum percentage of stock of that Cordes family

dealership and (2) to maintain active operational control of the

respective Cordes family dealership.

The franchise holder had to

- 8 be both the principal owner and the principal operator of the

Cordes family dealership involved.8

For most of the relevant periods, Mr. Cordes was the

franchise holder for each Cordes family dealership.

At times,

John Cordes, Jean Ann Richard, and Eddy Ben Cordes were the

franchise holders or principal owners, at least nominally

(sometimes in conflict with the relevant franchise agreement), of

John Cordes, Inc., Edmund Cordes, Inc., and Eddie Cordes, Inc.,

respectively.

From time to time, legal title to the stock in the

Cordes family dealerships would change hands among members of the

Cordes family.

Each member of the Cordes family played a role in the Cordes

corporations, but no one played a more substantial role than Mr.

Cordes.

Mr. Cordes served as president of each of the Cordes

corporations and controlled every aspect of the day-to-day

operations.

No one questioned Mr. Cordes’s dominance or

attempted to exercise any control over any corporate decision,

regardless of his or her ostensible stock ownership in that

corporation.

None of the Cordes corporations held shareholder

meetings; instead, Mr. Cordes directed his corporate attorney to

draft meeting minutes, which he brought home for Mrs. Cordes and

The record does not contain any such franchise agreements,

but we accept petitioners’ testimony as to the existence of the

agreements and the requirements therein regarding a principal

owner and principal operator.

- 9 their children, as appropriate, to sign.

Similar sequences of

events occurred for each other document Mr. Cordes required Mrs.

Cordes and their children to sign.

Mr. Cordes prepared (or

directed the preparation of), retained, and maintained all

corporate minutes, records, stock certificates, and other

corporate documents.

Mr. Cordes decided who would hold legal title to each of the

shares of stock in each of the Cordes corporations.

He believed

he had the power to revoke those holdings if the shareholder did

not follow his directions, or for any other reason, by virtue of

his original capitalization of the Cordes corporations.

The

other members of the Cordes family acknowledged Mr. Cordes’s

complete control and, in many cases, did not know how many shares

were titled in their names, if any, or whether they were officers

in any of the Cordes corporations.

All external dealings were also controlled and executed by

Mr. Cordes.

Banks dealt solely with Mr. Cordes and held him

liable on all corporate debts, although they occasionally

required other members of the Cordes family to sign certain

documents as a formality.

Likewise, the Cordes corporations’

accounting firm dealt only with Mr. Cordes.

Mr. Cordes had sole

control over the occurrence, timing, amount, and recipient of

corporate payments for noncorporate reasons, and he occasionally

- 10 made below-market loans to and from the corporations to suit his

own purposes.

Mrs. Cordes and Jean Ann Richard each served as officers or

directors of each of the Cordes corporations but did not

participate in any of the Cordes corporations’ day-to-day

operations or business decisions.

Neither of them had any

knowledge of any financial transactions, stock-related or

otherwise.

Jean Ann Richard treated the Cordes corporations as

belonging exclusively to Mr. Cordes, no matter the amount of

shares that may have been titled in her name.

John Cordes served as an officer of CFC, but his only

operational involvement with the Cordes corporations was the

occasional execution of vehicle repossessions in Texas.

otherwise was unaware of any corporate transaction.

Eddy Ben

Cordes served as an officer of CFC and as the full-time sales

manager of Eddie Cordes, Inc.

He had no decision-making ability,

but he placed orders for acquisitions of new cars.

The Cordes family occasionally discussed the Cordes

corporations’ business and financial matters in informal

settings, including at the Cordeses’ kitchen table.

II.

The Income Tax Cases

In the income tax cases, respondent contends that CFC

transferred funds to the Cordeses, or the Cordeses diverted funds

from CFC, or funds were otherwise appropriated from CFC for the

- 11 Cordeses’ benefit.

Below, we set forth additional findings of

fact specific to these purported transactions and their tax

consequences.

Loan Interest Allocation

Mr. Cordes lent $200,000 to CFC on August 20, 1991 (the

first $200,000 loan), and again on September 18, 1991 (the second

$200,000 loan) (collectively, the two $200,000 loans).

CFC

repaid in full each of the two $200,000 loans by December 31,

1992.

On December 31, 1992, CFC paid Mr. Cordes $80,000, by

check, as interest on the two $200,000 loans.

The following day,

January 1, 1993, Mr. Cordes lent $80,000 to CFC (the $80,000

loan).9

CFC repaid in full the $80,000 loan by March 27, 1993.

On December 31, 1993, CFC paid Mr. Cordes $20,000 as interest on

the $80,000 loan.

The record does not contain any evidence of

indebtedness reciting the terms of the two $200,000 loans or the

$80,000 loan.

CFC and the Cordeses treated the transfers from CFC to Mr.

Cordes of $80,000 and of $20,000 consistently as between

themselves; CFC reported them as deductible interest expenses on

its 1992 and 1993 Forms 1120, U.S. Corporation Income Tax Return,

respectively, and the Cordeses reported them as interest income

Mr. Cordes made this loan of $80,000 to CFC by endorsing

the $80,000 check he had received as interest on the two $200,000

loans the day before and returning it to CFC.

- 12 on their 1992 and 1993 Forms 1040, U.S. Individual Income Tax

Return, respectively.

Withdrawal of Corporate Funds for Distribution to

Friends and Family

During each of the taxable years 1989 through 1993, CFC

maintained an account in its corporate records that operated as a

shareholder loan account for the Cordeses (account No. 312).

Account No. 312 tracked amounts transferred between CFC and the

Cordeses.

Mr. Cordes withdrew funds from CFC during each of the

taxable years at issue; the withdrawn funds were charged to

account No. 312 and were distributed as follows:

- 13 Payee

1989

John Cordes

$108,000

Mrs. Cordes1

120,000

Jean Ann Richard

24,000

Ellen Cordes2

12,000

Jean Patton

18,000

Mr. Cordes

10,700

Ray Lee

18,000

Margie Lange

5,000

Cordes bank accts.

-0John Cordes, Inc.

-0Total

315,700

1990

$54,000

120,000

24,000

15,500

18,000

47,159

12,000

-0-0-0290,659

1991

$84,000

135,711

4,000

1,500

323,200

-0-050,600

300,000

900,511

1992

$20,000

150,000

-0-0-0-0-0-0-0-0170,000

1993

$30,000

220,000

-0-0-0-0-0-0-0-0250,000

Mrs. Cordes conceded that the funds distributed to her

constitute income from constructive dividends as determined by

respondent. See Appendix B, Summary of Conceded, Deemed

Conceded, Computational, and Settled Issues. Because Mrs.

Cordes’s concession is inconsistent with the substance of her

argument and in light of our holding regarding the beneficial

ownership of the Cordes corporations, we relieve her of her

concession and conclude only that these are constructive

dividends to Mr. Cordes in 1992 and 1993.

Ellen Cordes is Mr. Cordes’s daughter-in-law; Jean Patton

is Mr. Cordes’s sister; Ray Lee and Margie Lange are Mr. Cordes’s

friends. Also, the Cordes bank accounts are personal accounts

jointly held by Mr. and Mrs. Cordes. During 1991, Mr. Cordes and

John Cordes were the sole holders of legal title in John Cordes,

Inc. See Appendix A, Schedule of Stock Transfers, for details of

their proportionate holdings.

Corporate Payments of Personal Expenses

In 1989, 1990, and 1991, Mr. Cordes caused CFC to pay

certain of the Cordes family’s personal expenses, as follows:

- 14 Expenditure

Medical insurance premiums1

Medical expenses

Life insurance premiums

American Express charges2

Martin’s Restaurant3

1989

$6,184

-0530

148,760

3,849

1990

$6,910

3,121

540

168,854

5,639

1991

-0-0-0$36,986

1,111

Eddie Cordes, Inc., paid the medical insurance premiums in

1989 and 1990. CFC fully reimbursed Eddie Cordes, Inc., in 1992

for those expenses with funds charged to account No. 312. The

parties tried by consent, and we consider, whether those expenses

constitute constructive dividends in 1989 and 1990 as if CFC

originally incurred those expenses. See Cordes v. Commissioner,

T.C. Memo. 1994-377.

Respondent determined Mrs. Cordes was responsible for tax on

$3,955 and $4,459, respectively. The parties, however, have

stipulated that the medical insurance premiums were $6,184 and

$6,910 in 1989 and 1990, respectively.

Respondent determined Mrs. Cordes was responsible for tax

on $148,757 for 1989, and $169,465 for 1990. The parties,

however, have stipulated that CFC paid $148,760 and $168,854 of

the Cordeses’ American Express charges in 1989 and 1990,

respectively. We treat the parties’ stipulation as to 1990 as a

concession on respondent’s part, to the extent of $611.

Respondent determined Mrs. Cordes was responsible for tax

on $3,682 for 1989. The parties have stipulated, however, that

CFC paid $3,849 of the Cordeses’ Martin’s Restaurant charges in

1989.

Diversion of Corporate Income

Mr. Cordes also diverted from CFC, for his and Mrs. Cordes’s

personal use, $57,732, $69,251, and $26,240 in 1991, 1992, and

1993, respectively.

These amounts represented collections on

debts CFC had previously reported as bad debts.10

Purchases of Corporate Notes at Bargain Prices

In 1986, Jaime D. Patton (the Cordeses’ niece) and Robert A.

The Cordeses do not dispute respondent’s determinations

regarding 1992 and 1993. We therefore treat the Cordeses as

conceding those specific determinations. See Appendix B, Summary

of Conceded, Deemed Conceded, Computational, and Settled Issues.

- 15 Bower (Jaime D. Patton’s then-fiancé) (collectively, the Bowers)

executed a 30-year note payable to CFC (the Bower Note).

The

Bower Note, secured by the Bowers’ personal residence, had a face

value of $80,000 and bore an 11.62-percent market rate of

interest.

The total amount of interest due under the Bower Note

was $208,000.

In 1987, Joseph P. Richard,11 Jean Ann Richard’s husband,

executed a 15-year note payable to CFC (the Richard Note).

The

Richard Note, secured by real estate jointly owned by the

Richards, had a face value of $555,000 and bore a 10.1-percent

market rate of interest.

The total amount of interest due under

the Richard Note was $525,000.

Both the Bowers and the Richards made payments on their

notes.12

On March 25, 1991, the Bowers still owed $243,200 in

principal and interest, and the Richards still owed $813,000 in

principal and interest.

On March 25, 1991, Mr. Cordes purchased

from CFC the Bower Note for $35,200 and the Richard Note for

$288,000.

At issue is whether, and to what extent, Mrs. Cordes has

taxable income from constructive dividends stemming from Mr.

The petitioners stipulated that whether Jean Ann Richard

executed the Richard Note is at issue. In light of our holding,

infra, we need not decide that issue.

Although the parties stipulated that the payments were

timely, many of the payments were, in fact, made late.

- 16 Cordes’s purchases of the Bower Note and the Richard Note for

amounts less than their fair market values.

III.

The Gift Tax Cases

In the gift tax cases, respondent determined that members of

the Cordes family transferred shares among themselves without

properly reporting those transfers or paying gift tax thereon.

Below, we set forth the findings of fact specifically relevant to

the gift tax cases.

The details of the stock transfers can be

found in Appendix A, Schedule of Stock Transfers.13

CFC Stock Transfers

CFC initially issued 500 shares of stock in January 1964-250 shares to Mr. Cordes, 249 shares to Mrs. Cordes, and 1 share

to B.B. Journeycake (Mrs. Cordes’s father).

On January 4, 1965,

B.B. Journeycake transferred 1 share to the Eddy Ben Cordes

Trust.

On January 8, 1965, Mrs. Cordes transferred 28 shares to

Eddy Ben Cordes.

On December 29, 1965, Mr. Cordes transferred 50

shares, Mrs. Cordes transferred 50 shares, and the Eddy Ben

Cordes Trust transferred 1 share, to Eddy Ben Cordes.

December 16, 1966, Mr. Cordes transferred 100 shares to Eddy Ben

Cordes.

On January 8, 1971, CFC issued 500 additional shares of

The record does not contain complete information regarding

all of the stock transfers which took place before and during the

taxable years at issue. As the stock transfers pertain to the

issues in the gift tax cases, however, the record contains

information sufficient for us to decide the issues presented by

these cases.

- 17 its stock, 105 shares of which were issued to Eddy Ben Cordes.14

On March 14, 1983, Eddy Ben Cordes transferred 334 shares to Mrs.

Cordes.

On January 14, 1994, Mrs. Cordes transferred 334 shares

back to Eddy Ben Cordes.

On CFC’s Schedule E, Compensation of Officers, to its 1992

and 1993 Forms 1120, CFC reported that Mrs. Cordes owned 33.4

percent and Jean Ann Richard owned 33.3 percent of its stock at

the end of 1992 and 1993.15

During his examination of CFC’s

taxable years 1988 through 1993, respondent determined that Mrs.

Cordes owned approximately one-third of CFC’s stock.

On Schedule

E to its 1994 Form 1120, CFC reported that Eddy Ben Cordes owned

33.4 percent, John Cordes owned 33.3 percent, and Jean Ann

Richard owned 33.3 percent of its stock at the end of 1994.

Eddie Cordes, Inc., Stock Transfers

Eddie Cordes, Inc., initially issued 1,000 shares of stock

in January 1963--500 shares to Mr. Cordes, 400 shares to Mrs.

Cordes, and 100 shares to B.B. Journeycake.

In January 1971,

B.B. Journeycake transferred 100 shares to Mr. Cordes.

Also in

January 1971, Mrs. Cordes transferred 400 shares to Jean Ann

Richard.

On March 29, 1983, Mr. Cordes transferred 600 shares to

See supra note 7.

CFC’s 1992 and 1993 Forms 1120 do not reveal who held

legal title to the remaining 33.3 percent of CFC stock during

those taxable years. We note, however, that Mr. Cordes did not

hold legal title to any shares of CFC during those taxable years.

- 18 Jean Ann Richard.

On January 7, 1987, Jean Ann Richard

transferred 600 shares back to Mr. Cordes.16

On July 25, 1988,

Jean Ann Richard transferred the 400 shares remaining in her name

to Eddy Ben Cordes.

On August 8, 1991, Mr. Cordes transferred

600 shares to Eddy Ben Cordes.

Edmund Cordes, Inc., Stock Transfers

Edmund Cordes, Inc., initially issued 1,000 shares of stock

in January 1967--600 shares to Mr. Cordes, 200 shares to Mrs.

Cordes, and 200 shares to a John Parkinson.

On February 15,

1967, Mrs. Cordes transferred 1 share to John Parkinson.

January 8, 1971, John Parkinson transferred 201 shares and Mrs.

Cordes transferred 199 shares to Eddy Ben Cordes.

On October 26,

1979, Mr. Cordes transferred 500 shares to Eddy Ben Cordes.

Mr.

Cordes effected this transfer so that Eddy Ben Cordes would be in

compliance with the franchise agreement Eddy Ben Cordes had made

with Chrysler Corp.

Chrysler Corp. terminated that franchise

agreement in 1988 and entered into a new franchise agreement with

Mr. Cordes.

That franchise agreement required Mr. Cordes to be

the principal owner and principal operator of Edmund Cordes, Inc.

Nevertheless, on July 25, 1988, Eddy Ben Cordes transferred 900

Mr. Cordes testified that the franchise agreement with

Jeep-Eagle/Dodge required Mr. Cordes to maintain ownership of at

least 60 percent of Eddie Cordes, Inc.’s stock. Presumably, this

transfer was made so as to comply with that franchise agreement.

However, Mr. Cordes’s testimony is irreconcilable with his

transfer in 1991 to Eddy Ben Cordes of 600 shares of stock in

Eddie Cordes, Inc.

- 19 shares to Jean Ann Richard, and Ellen Cordes transferred 100

shares17 to Jean Ann Richard.

On January 26, 1989, Jean Ann

Richard transferred 1,000 shares to Mr. Cordes.

On August 20,

1991, Mr. Cordes transferred 1,000 shares back to Jean Ann

Richard.

John Cordes, Inc., Stock Transfers

John Cordes, Inc., initially issued 500 shares of stock in

May 1983--300 shares to Mr. Cordes, 100 shares to Mrs. Cordes,

and 100 shares to Jean Ann Richard.

On January 7, 1987, Mrs.

Cordes and Jean Ann Richard each transferred 100 shares to John

Cordes.

On August 8, 1991, Mr. Cordes transferred 300 shares to

John Cordes.18

Mr. Cordes effected these transfers of John

Cordes, Inc., stock to John Cordes because he intended John

Cordes to hold legal title to the stock and operate John Cordes,

Inc.

Sometime thereafter, the franchisor, General Motors,

informed Mr. Cordes that he was in violation of their franchise

agreement requiring that Mr. Cordes be the principal owner and

principal operator of John Cordes, Inc.

In response, on March

16, 1994, John Cordes transferred 500 shares back to Mr. Cordes.

See supra note 7.

Mr. Cordes reported a gift to John Cordes of 200 shares of

stock in John Cordes, Inc., in 1991.

- 20 E.

The Gift Tax Returns and Notices of Deficiency

None of the stock transfers at issue in the gift tax cases

were made for any consideration.19

Mr. Cordes timely filed Form 709, United States Gift (and

Generation-Skipping Transfer) Tax Return (gift tax return), for

1991 but never filed a gift tax return for 1983, 1992, or 1993.

In his 1991 gift tax return, Mr. Cordes elected to split gifts

with Mrs. Cordes, and Mr. Cordes reported making two gifts--200

shares of stock in John Cordes, Inc.,20 and $100,000 cash--both

to John Cordes.

Respondent determined, as set forth in his

notice of deficiency, that, pursuant to section 2503(a), Mr.

Cordes made taxable gifts in 1983, 1991, 1992, and 1993 of stock

and/or cash equivalents.

The following transfers are still at

issue:

In their petitions in docket No. 19256-97 and docket No.

19277-97, John Cordes and Jean Ann Richard contend they received

items in exchange for their shares equal in value to those shares

transferred. Neither John Cordes nor Jean Ann Richard discussed

these contentions at trial or on brief, and the record contains

no evidence to support these contentions. We therefore disregard

the statements made in those petitions and find the transfers

were made for no consideration.

As detailed above, in 1991, Mr. Cordes transferred 300

shares of stock in John Cordes, Inc., to John Cordes. The

parties have stipulated that it is the transfer of 300 shares

that is disputed herein.

- 21 Taxable Year

Date of Transfer

Details of Transfer

1983

Mar. 29, 1983

600 shares of Eddie

Cordes, Inc., to Jean Ann

Richard

1991

Aug. 8, 1991

600 shares of Eddie

Cordes, Inc., to Eddy Ben

Cordes

1991

Aug. 8, 1991

300 shares of John

Cordes, Inc., to John

Cordes

John Cordes never filed a gift tax return for 1994.

Respondent determined, as set forth in his notice of deficiency,

that, pursuant to section 2503(a), John Cordes made a taxable

gift in 1994 to Mr. Cordes of 500 shares of stock in John Cordes,

Inc.21

Jean Ann Richard never filed a gift tax return for 1987 or

1988.

Respondent determined, as set forth in his notice of

deficiency, that, pursuant to section 2503(a), Jean Ann Richard

made the following taxable gifts:

Respondent subsequently took the position in Cordes v.

Commissioner, T.C. Memo. 2002-125, that John Cordes instead sold

these 500 shares to Mr. Cordes for $800,000, and respondent

acknowledged this change in position from that taken in the case

before us. In light of our finding herein regarding the

beneficial ownership of John Cordes, Inc., we decline to address

respondent’s change of position.

- 22 Taxable Year

Date of Transfer

Details of Transfer

1987

Jan. 7, 1987

100 shares of John

Cordes, Inc., to John

Cordes

1987

Jan. 7, 1987

600 shares of Eddie

Cordes, Inc., to Mr.

Cordes

1988

July 25, 1988

400 shares of Eddie

Cordes, Inc., to Eddy Ben

Cordes

Eddy Ben Cordes never filed a gift tax return for 1983.

Respondent determined, as set forth in his notice of deficiency,

that, pursuant to section 2503(a), Eddy Ben Cordes made a taxable

gift in 1983 to Mrs. Cordes of 334 shares of stock in CFC.

Mrs. Cordes timely filed her 1991 gift tax return but never

filed a gift tax return for 1987, 1993, or 1994.

In her 1991

gift tax return, Mrs. Cordes elected to split gifts with Mr.

Cordes, and she reported making a gift to Jean Ann Richard of

1,000 shares of stock in Edmund Cordes, Inc.

Respondent

determined, as set forth in his notice of deficiency, that Mrs.

Cordes made taxable gifts of stock and/or cash equivalents in

1987, 1991, 1993, and 1994.22

The following transfers are still

at issue:

Regarding 1987, respondent determined only that Mrs.

Cordes made taxable gifts; respondent did not determine any

deficiency in Mrs. Cordes’s tax for 1987.

- 23 Taxable Year

Date of Transfer

Details of Transfer

1987

Jan. 7, 1987

100 shares of John

Cordes, Inc., to John

Cordes

1991

Aug. 20, 1991

1,000 shares of Edmund

Cordes, Inc., to Jean Ann

Richard

1994

Jan. 14, 1994

334 shares of CFC to Eddy

Ben Cordes

OPINION

Income Tax Cases

The five sets of transactions at issue in the income tax

cases are similar in nature in that respondent determined they

each give rise to constructive dividends to the shareholdertaxpayer(s).

The first transactions, involving the excessive

interest paid by CFC to Mr. Cordes, however, are of a slightly

different nature in that our decision involves a reallocation of

income and deduction under section 482.

For that reason, we

initially and separately consider the section 482 reallocation,

and we then decide whether the five sets of transactions result

in constructive dividends to petitioners.

Loan Interest Allocation

Respondent determined that CFC transferred to Mr. Cordes

amounts in excess of those that can reasonably be characterized

as interest on the two $200,000 loans and the $80,000 loan

(collectively, the three loans).

Respondent reallocated CFC’s

and the Cordeses’ income and deductions pursuant to his authority

- 24 under section 482; respondent accordingly disallowed what he

determined were excessive interest deductions claimed by CFC-$52,870 in 1992 and $19,105 in 1993--and determined that like

amounts were properly allocated to the Cordeses as income from

constructive dividends, rather than from interest.23

See sec.

1.482-1A(b)(1), Income Tax Regs.

On brief, respondent conceded that CFC may deduct as

interest expense--and the Cordeses may report as income from

interest, rather than from constructive dividends--amounts equal

to those calculated pursuant to section 1.482-2(a)(2)(iii),

Income Tax Regs.; i.e., the safe-haven interest rate.24

Respondent maintained that the amounts of the transfers in excess

of those computed in accordance with section 1.482-2(a)(2)(iii),

Income Tax Regs., are nondeductible interest expenses with regard

to CFC and income from constructive dividends with regard to the

Cordeses.

In his notice of deficiency, respondent failed to reduce

the Cordeses’ interest income by the amounts he reallocated to

income from constructive dividends. In his reply brief,

respondent conceded that the Cordeses may reduce interest income

reported on their returns to the extent we hold the transfers are

income to the Cordeses from constructive dividends.

The parties have not computed the safe-haven interest

rates applicable under sec. 1.482-2(a)(2)(iii), Income Tax Regs.

Our holding is not to be construed in any way as allowing

respondent to reallocate, with respect to these items, more than

$52,870 in 1992 or $19,105 in 1993.

- 25 CFC and the Cordeses (collectively, with respect to this

issue, petitioners) contend that, under section 482,25 18 percent

is an arm’s-length rate of interest for loans such as the three

loans before us26 and that income and deductions from interest

are properly allocable in a manner consistent with an 18-percent

rate of interest.27

Neither CFC nor the Cordeses (collectively, with respect

to this issue, petitioners) dispute the applicability of sec.

482; they only dispute the way in which respondent applies sec.

482.

Throughout these proceedings, petitioners have treated the

three loans as made on identical terms with identical interest

rates.

Petitioners also argued on brief that CFC’s and the

Cordeses’ consistent reporting of the interest at issue, as

between themselves, justified the amounts of interest expense and

income claimed. In light of our holding, and because petitioners

offered no authority for their supposition, we decline to

consider that argument.

Furthermore, petitioners appear to contend for the first

time in their reply brief that respondent would abuse his

discretion under sec. 482 to reallocate income and deductions in

a manner inconsistent with an interest rate of 18 percent.

Ordinarily, we do not consider issues raised for the first time

in a party’s reply brief. Cordes v. Commissioner, T.C. Memo.

1994-377, and cases cited therein. We note, in passing, that the

Commissioner is afforded broad discretion under sec. 482, and his

reallocations will be upheld absent a taxpayer’s showing that

they are arbitrary, capricious, or unreasonable. Dolese v.

Commissioner, 811 F.2d 543, 546 (10th Cir. 1987), affg. 82 T.C.

830 (1984); Ach v. Commissioner, 42 T.C. 114, 125-126 (1964),

affd. 358 F.2d 342 (6th Cir. 1966). Moreover, petitioners’

income and deductions from interest were not reported using an

18-percent rate.

- 26 Section 48228 gives the Commissioner authority to reallocate

income and deductions among certain related taxpayers.

Respondent’s determination under section 482 is presumptively

correct, and the burden of disproving that determination lies

with petitioners.

Dolese v. Commissioner, 811 F.2d 543, 546

(10th Cir. 1987), affg. 82 T.C. 830 (1984).

The purpose of section 482 is to place a controlled taxpayer

on a tax parity with an uncontrolled and unrelated taxpayer by

determining the true taxable income of the controlled taxpayer

using the standard of an uncontrolled taxpayer dealing at arm’s

length with another uncontrolled taxpayer.

Ciba-Geigy Corp. v.

Commissioner, 85 T.C. 172, 221 (1985); Huber Homes, Inc. v.

Commissioner, 55 T.C. 598, 605 (1971); sec. 1.482-1(a)(1) and

(b)(1), Income Tax Regs.

An interest rate satisfies the arm’s-

length standard under section 482 if it is a rate that was

actually charged, or would have been charged, at the time the

indebtedness arose, in independent transactions with or between

SEC. 482. ALLOCATION OF INCOME AND DEDUCTIONS AMONG

TAXPAYERS.

In any case of two or more organizations * * *

owned or controlled directly or indirectly by the same

interests, the Secretary may * * * allocate gross

income, deductions, credits, or allowances between or

among such organizations * * * if he determines that

such * * * allocation is necessary in order * * *

clearly to reflect the income of any of such

organizations * * *

- 27 unrelated parties under similar circumstances, considering all

the relevant factors.

Sec. 1.482-2(a)(2)(i), Income Tax Regs.

Petitioners have not introduced evidence of actual rates

charged in transactions with or between unrelated taxpayers, nor

have they offered any but the barest evidence relevant to

deciding what a chargeable interest rate would be in an

independent transaction involving unrelated parties under similar

circumstances.

Petitioners provided us only with the original

principal amounts of the loans and have indicated that the loans

were unsecured.

Petitioners introduced no evidence regarding

other relevant factors, including the duration of the loans,

CFC’s credit standing, and the prevailing interest rates at CFC’s

or the Cordeses’ situs for comparable loans between unrelated

parties.

Id.

Because petitioners have failed to establish that

respondent’s determinations are incorrect, let alone that 18

percent is an arm’s-length rate of interest on the three loans

under section 1.482-2(a)(2)(i), Income Tax Regs., we must hold

for respondent.

In holding for respondent, we note that respondent’s

concession to reallocate petitioners’ interest income and

deductions in accordance with the safe-haven interest rate found

in section 1.482-2(a)(2)(iii)(B), Income Tax Regs., satisfies the

arm’s-length standard of section 482, and we accept it.

The

calculation of the appropriate adjustments to CFC’s interest

- 28 expenses and the Cordeses’ income from interest and from

constructive dividends, however, must await the Rule 155

computation.

Constructive Dividends

Respondent determined that Mrs. Cordes, in 1989 through

1991, individually, and the Cordeses, in 1992 and 1993, jointly,

had taxable income from constructive dividends made by CFC to

Mrs. Cordes, as one of CFC’s shareholders.

See sec. 61(a)(7).

Those constructive dividends, as respondent determined, consisted

in part of the portion of payments made by CFC to Mr. Cordes on

the three loans in excess of the amount that represents an arm’slength rate of interest29 (calculated in accordance with our

holding, supra) and consisted in part of (1) withdrawals of

corporate funds for distribution to friends and family, (2)

corporate payments of personal expenses, (3) diversion to the

Cordeses of corporate income, and (4) Mr. Cordes’s bargain

purchase of corporate notes.30

Petitioners contend that the transfers do not constitute

constructive dividends to Mrs. Cordes (1) because Mrs. Cordes did

We discuss this transaction in the context of constructive

dividends in connection with our discussion of diversion of

corporate income because the applicable law is similar.

Respondent also determined certain other items constituted

income from constructive dividends from CFC to the Cordeses in

the taxable years before us, but either Mr. or Mrs. Cordes or

respondent has conceded those items. See Appendix B, Summary of

Conceded, Deemed Conceded, Computational, and Settled Issues.

- 29 not control CFC, control or participate in the transfers at

issue, or in some cases know of the transfers at issue, and (2)

because the transfers did not cause an accession to her wealth.

The law in this area is well settled.

Section 301(a) and

(c)(1) requires the inclusion in a shareholder’s gross income of

amounts received as dividends.

Secs. 61(a)(7), 301(c)(1),

316(a); Hillsboro Natl. Bank v. Commissioner, 460 U.S. 370, 392

(1983); see Ireland v. United States, 621 F.2d 731, 735 (5th Cir.

1980); see also Old Colony Trust Co. v. Commissioner, 279 U.S.

716, 729-731 (1929).

Section 316(a) defines a dividend as “any

distribution of property made by a corporation to its

shareholders--(1) out of its earnings and profits accumulated

after February 28, 1913, or (2) out of its earnings and profits

of the taxable year”.31

It is not necessary that the corporation

intend a dividend, or that the distribution be termed a dividend

or be recorded as such.

Dolese v. United States, 605 F.2d 1146,

1152 (10th Cir. 1979).

Thus, dividends may be either formally

declared or they may be “constructive”.

Ireland v. United

States, supra at 735.

Petitioners have failed to meet their burden of proving

that there were not sufficient accumulated or current earnings

and profits to support the deficiencies determined in

respondent’s notices of deficiency. Rule 142(a). But see

Appendix B, Summary of Conceded, Deemed Conceded, Computational,

and Settled Issues.

- 30 A constructive dividend is paid when a corporation confers

an economic benefit on a shareholder without expectation of

repayment.

Wortham Mach. Co. v. United States, 521 F.2d 160, 164

(10th Cir. 1975).

Petitioners do not dispute that the payments

in question were made without expectation of repayment; they

focus instead on whether CFC conferred an economic benefit on

Mrs. Cordes as a shareholder of CFC.

Because only shareholders

may receive constructive dividends for Federal income tax

purposes and because we do not believe Mrs. Cordes was a

shareholder of CFC for Federal income tax purposes, we conclude

she did not receive constructive dividends from CFC during the

years at issue.

Mrs. Cordes held legal title to at least 33.4 percent of the

outstanding shares of stock in CFC throughout the taxable years

at issue.

The Cordeses’ children held legal title to the balance

of the shares.

See Appendix A, Schedule of Stock Transfers, and

notes therein.

Regardless of Mrs. Cordes’s percentage of record

ownership, however, “record ownership of stock, standing alone,

is not determinative of who is required to include any dividends

attributable to such stock in gross income.

ownership is the controlling factor.”

Rather, beneficial

Cordes v. Commissioner,

T.C. Memo. 1994-377 (citing Walker v. Commissioner, 544 F.2d 419

(9th Cir. 1976), revg. T.C. Memo. 1972-223; Ragghianti v.

Commissioner, 71 T.C. 346, 349 (1978), affd. without published

- 31 opinion 652 F.2d 65 (9th Cir. 1981); Cepeda v. Commissioner, T.C.

Memo. 1994-62).

“‘Beneficial ownership is marked by command over

property or enjoyment of its economic benefits.’”

Cordes v.

Commissioner, T.C. Memo. 1994-377 (quoting Cepeda v.

Commissioner, supra).

A taxpayer’s total control over a

corporation and use of corporate funds for personal reasons can

result in constructive dividends, even though the taxpayer did

not hold legal title to the corporation’s stock at the time of

the advances.

Yelencsics v. Commissioner, 74 T.C. 1513, 1532-

1533 (1980); Cordes v. Commissioner, T.C. Memo. 1994-377.

In Cordes v. Commissioner, T.C. Memo. 1994-377, we held Mr.

Cordes received constructive dividends even if he did not hold

legal title to any shares, because we found he exercised full

control over CFC in the taxable year at issue, 1988.32

In 1988,

the taxable year immediately preceding those before us here, Mr.

Cordes caused CFC to make distributions to him, to friends and

family, and to his personal creditors.

amount, and uses of those funds.

He controlled the timing,

Because Mr. Cordes had total

control over CFC and used the corporate funds for personal

reasons, we concluded that “whether or not petitioner [Mr.

Cordes] was a stockholder of record, petitioner had beneficial

We note in passing that in Cordes v. Commissioner, T.C.

Memo. 1994-377, we stated, based on the evidence therein: “[Mr.

Cordes’s] complete control over Cordes Finance Corp. continued

until at least 1992”.

- 32 ownership of all of the stock of Cordes Finance Corp. in 1988.”

By virtue of his beneficial ownership, we held he received

constructive dividends in 1988 and was required to include those

dividends in his gross income.

Mr. Cordes’s relationship to CFC did not change from 1988 to

1989, or during any of the other taxable years before us; in the

taxable years 1989 through 1993, Mr. Cordes remained in complete

control of CFC and remained the beneficial owner of the shares of

stock therein.

In deciding beneficial ownership, we examine the

facts and circumstances concerning one’s control over the

property and continued enjoyment of economic benefits.

Yelencsics v. Commissioner, supra at 1532; Cepeda v.

Commissioner, supra; see also Weiner v. Commissioner, T.C. Memo.

1984-163 (citing Schoenberg v. Commissioner, 302 F.2d 416 (8th

Cir. 1962), affg. T.C. Memo. 1961-235; Snyder v. Commissioner, 66

T.C. 785 (1976)).

Mr. Cordes’s actions with respect to CFC exceeded the level

of control normally conferred upon corporate officers.

He made

every corporate decision without conferring with the shareholders

of record.

Any purported shareholder meeting was an invention of

his design; he made all shareholder decisions and instructed the

legal titleholders merely where to sign the corporate minutes,

loan arrangements, stock certificates, and so forth.

titleholders complied with his every instruction.

The legal

- 33 His actions were that of an owner and sole shareholder.

viewed the Cordes corporations as his own and used them to make

generous loans and gifts to family and friends, and to satisfy

personal obligations and desires.

He made loans to third parties

of CFC funds and then unilaterally forgave those loans.

Mr.

Cordes controlled the timing, amount, and use of the

distributions and transactions.

The legal titleholders viewed CFC as Mr. Cordes did.

They

paid no attention to their purported stockholdings and never

attempted to exercise any of the rights that “ownership” may have

theoretically provided.

They did not attempt to attend

shareholder meetings, transfer or vote their shares, or otherwise

involve themselves in CFC, unless Mr. Cordes instructed them to

do so.

His control was unmitigated.

Taken together, the facts and circumstances reveal that Mr.

Cordes was CFC’s sole beneficial owner during the taxable years

at issue; Mrs. Cordes’s status as a shareholder was in name only.

Because beneficial ownership is the controlling factor in

deciding who is required to include dividends in gross income, we

hold that Mrs. Cordes did not receive constructive dividends from

CFC for the 1989, 1990, and 1991 taxable years, the years in

which she filed separately.

With respect to those taxable years,

we conclude only that Mrs. Cordes was not a beneficial owner or

shareholder of CFC for Federal income tax purposes.

We decline

- 34 to consider whether Mr. Cordes received constructive dividends as

a shareholder for those taxable years, as he is not a party to

those years herein.

The Cordeses filed jointly for 1992 and 1993, and, in docket

No. 4182-96, respondent determined they were jointly liable for

tax on the receipt of constructive dividends for those taxable

years.

In that docket, we must consider whether CFC conferred an

economic benefit on petitioner-shareholder, Mr. Cordes, as

beneficial owner.

See Dolese v. United States, 605 F.2d at 1152

(citing Palo Alto Town & Country Vill., Inc. v. Commissioner, 565

F.2d 1388 (9th Cir. 1977), affg. T.C. Memo. 1973-223).

In order

for a company-provided benefit to be treated as income to the

shareholder, the item “must primarily benefit taxpayer’s personal

interests as opposed to the business interests of the

corporation.”

Ireland v. United States, 621 F.2d at 735; accord

Dolese v. United States, supra at 1152.

Petitioners bear the burden of proving that the amounts at

issue were not expended for personal benefit or in discharge of

personal obligations.

Rule 142(a); Welch v. Helvering, 290 U.S.

111 (1933); Challenge Manufacturing Co. v. Commissioner, 37 T.C.

650, 663 (1962); Arnold v. Commissioner, T.C. Memo. 1994-97.

Our

standard, in reviewing these many expenditures, is whether the

expenditures primarily benefited CFC or Mr. Cordes.

Frazier v.

- 35 Commissioner, T.C. Memo. 1994-358, affd. 90 F.3d 437 (10th Cir.

1996).

Withdrawal of Corporate Funds for Distribution to

Friends and Family

In 1992 and 1993, Mr. Cordes directed the withdrawal of

corporate funds from CFC and the payment of those funds to John

Cordes and Mrs. Cordes.

It is well-settled that corporate

payments to children of its shareholders can constitute

constructive dividends to the shareholders when the payments are

made to satisfy personal parental objectives as opposed to the

bona fide business purposes of the corporation.

Engg. Sales,

Inc. v. United States, 510 F.2d 565, 569-570 (5th Cir. 1975);

58th St. Plaza Theatre, Inc. v. Commissioner, 195 F.2d 724, 725

(2d Cir. 1952), affg. 16 T.C. 469 (1951); Frazier v.

Commissioner, supra.

Likewise, payments to family members can constitute

constructive dividends to the shareholders when the payments fail

to benefit the corporation.

Cordes v. Commissioner, T.C. Memo.

1994-377 (in situation nearly identical to that before us, this

Court held corporate transfers to friends, wife, and children of

shareholder to be constructive dividend to shareholder, namely

Mr. Cordes, when shareholder failed to show corporate benefit or

expectation of repayment); Proctor v. Commissioner, T.C. Memo.

1981-436 (payments to shareholder’s mother, in excess of

compensation reasonable for services provided, constituted

- 36 constructive dividend income to shareholder).

Petitioners have

introduced no evidence that these transfers benefited CFC and do

not contend that the transfers were made for any reason other

than personal reasons.

Therefore, because petitioners failed to

show Mr. Cordes received no personal benefit or satisfaction from

these transfers, we hold Mr. Cordes received constructive

dividends in 1992 and 1993 with respect to these items in the

amounts determined by respondent.

Diversion of Corporate Income33 and Loan Interest

Allocation

In 1992 and 1993, Mr. Cordes diverted CFC income--amounts

collected on debts CFC had previously reported as bad debts--to

the Cordeses’ benefit.

Income diverted from a corporation for a

shareholder’s benefit may be a constructive dividend to that

shareholder.

Truesdell v. Commissioner, 89 T.C. 1280, 1295

(1987); Fed. Auto Body Works, Inc. v. Commissioner, T.C. Memo.

1990-303.

Petitioners have not introduced any evidence that CFC

recognized any benefit from these transfers.

We hold Mr. Cordes

received constructive dividends with respect to these items in

the amounts determined by respondent.

Likewise, with regard to the excess interest paid in 1992

and 1993 by CFC to Mr. Cordes, discussed supra, petitioners

See supra note 10. Petitioners did not present arguments

regarding the diversion of corporate income in 1992 and 1993. We

nevertheless choose to address it briefly here.

- 37 offered no evidence showing that either a benefit accrued to CFC

or a benefit did not accrue personally.

We therefore hold that

Mr. Cordes received constructive dividends with respect to the

amounts CFC paid to him as interest on the three loans, to the

extent the amounts of those payments exceed the amounts allocated

as interest income in accordance with our holding supra.

sustain respondent’s determination with regard to this issue.

Fraud Penalty Against CFC

Respondent determined CFC was liable for a civil fraud

penalty in the amount of $9,773 for 1991, pursuant to section

6663.

Respondent based his determination on CFC’s understatement

of income attributable to $35,349 from late fees received.

CFC

filed an amended return for 1991 reflecting CFC’s receipt of this

income.

The parties stipulated that this issue of whether CFC is

liable for the civil fraud penalty for 1991 would be resolved on

the same basis as that in the final decision in Cordes Fin. Corp.

v. Commissioner, T.C. Memo. 1997-162, affd. without published

opinion 162 F.3d 1172 (10th Cir. 1998).

In Cordes Fin. Corp., we

sustained respondent’s determination of fraud for the 1990

taxable year because Mr. Cordes, as CFC’s president, schemed to

divert and disguise the diverted income.

CFC appealed our

decision to the Court of Appeals for the Tenth Circuit.

However,

as the Court of Appeals stated in note 1 to its unpublished

opinion, CFC did not dispute our holding as to the fraud penalty

- 38 in its appeal.

In accordance with the parties’ stipulation, we

hold CFC is liable for the civil fraud penalty for 1991.

II.

Gift Tax Cases

Respondent determined that the disputed stock transfers are

taxable gifts pursuant to section 2503(a).

Petitioners in these

gift tax cases contend that (1) the stock in CFC was not actually

transferred by and between Eddy Ben Cordes and Mrs. Cordes

because Eddy Ben Cordes and Mrs. Cordes did not knowingly and

voluntarily transfer CFC stock between themselves, and (2) all of

the transfers of stock at issue herein were incomplete gifts

because Mr. Cordes reserved and retained a power to revoke, or to

otherwise alter, any and all of the gifts of stock in the Cordes

corporations.

Therefore, petitioners argue, none of the disputed

transfers constitute completed gifts for Federal gift tax

purposes.

Section 2501(a)(1) imposes a tax on the “transfer of

property by gift”.

This gift tax applies “whether the transfer

is in trust or otherwise, whether the gift is direct or indirect,

and whether the property is real or personal, tangible or

intangible”.

Sec. 2511(a); sec. 25.2511-1(a), Gift Tax Regs.

The terms “transfer * * * by gift” and “indirect” are designed to

encompass all transfers whereby, and to the extent that, property

or a property right is gratuitously passed to or conferred upon

another, regardless of the means or the device employed in its

- 39 accomplishment.

H. Rept. 708, 72d Cong., 1st Sess. (1932), 1939-

1 C.B. (Part 2) 457, 476; S. Rept. 665, 72d Cong., 1st Sess.

(1932), 1939-1 C.B. (Part 2) 496, 524; sec. 25.2511-1(c)(1), Gift

Tax Regs; see also Dickman v. Commissioner, 465 U.S. 330, 334 n.4

(1984) (describing the scope of the gift tax to be analogous in

breadth to the definition of gross income contained in section

61); Commissioner v. Wemyss, 324 U.S. 303, 306 (1945) (“Congress

intended to use the term ‘gifts’ in its broadest and most

comprehensive sense * * * [in order] to hit all the protean

arrangements which the wit of man can devise”).

Nevertheless, gift tax is not applicable to certain types of

transfers.

“It is applicable only to a transfer of a beneficial

interest in property.

It is not applicable to a transfer of bare

legal title to a trustee.”

Sec. 25.2511-1(g)(1), Gift Tax Regs.

We conclude below, based on all the facts and circumstances, that

Mr. Cordes had complete control over all the Cordes corporations

and that the disputed transfers herein were only of bare legal

title and are therefore not subject to the gift tax.

Transfers of CFC Stock By and Between Eddy Ben Cordes

and Mrs. Cordes

Respondent contends the purported transfers of shares of

stock in CFC by and between Eddy Ben Cordes and Mrs. Cordes are

completed gifts of stock and subject to the gift tax.

Eddy Ben

Cordes and Mrs. Cordes contend that because neither of them knew

of the transfers or voluntarily made those transfers, the

- 40 transfers did not occur for Federal gift tax purposes.

We have

considered Eddy Ben Cordes’s and Mrs. Cordes’s levels of

involvement in these and other corporate activities, and we agree

that these transfers are not subject to the gift tax, not because

the transfers of legal title to the stock did not occur on the

books of the corporation, but because the transfers were not of a

beneficial interest.

In Cordes v. Commissioner, T.C. Memo. 1994-377, we found Mr.

Cordes to be the beneficial owner of CFC in 1988.

We concluded

earlier in this opinion that Mr. Cordes was the beneficial owner

of CFC in 1989 through 1993.

The facts before us indicate that

Mr. Cordes’s control has existed unimpaired from CFC’s

incorporation in 1964 through the date of the trial.

On all of

the intervening dates, Mr. Cordes was the beneficial owner of all

of CFC’s stock.

Eddy Ben Cordes did not have any beneficial interest in CFC

in 1983 when he transferred mere legal title to Mrs. Cordes, nor

did he later obtain a beneficial interest in CFC and transfer

that to Mrs. Cordes.

Because Eddy Ben Cordes never transferred a

beneficial interest in CFC to Mrs. Cordes, the transfer is not

subject to the gift tax.

Likewise, Mrs. Cordes never acquired a beneficial interest

in CFC and therefore never transferred such an interest.

Mrs.

Cordes held only legal title to some of CFC’s stock from 1983

- 41 through 1994.

She transferred that legal title to Eddy Ben

Cordes in 1994, but at no time did she transfer a beneficial

interest in CFC.

The transfer, therefore, is not subject to the

gift tax.

We conclude that because Mr. Cordes owned all beneficial

interest in CFC during the years at issue, the transfers of CFC

stock by and between Eddy Ben Cordes and Mrs. Cordes were merely

of legal title and, as a result, were not subject to the gift

tax.

Transfers of Stock in the Cordes Family Dealerships

The other disputed transfers were of shares of stock in the

Cordes family dealerships by and between members of the Cordes

family.

Respondent determined the transfers were completed gifts

subject to the gift tax.

Petitioners argued that Mr. Cordes

retained a power to revoke those transfers, thereby rendering the

gifts incomplete and not subject to the gift tax.

Petitioners do not expressly argue that Mr. Cordes was the

beneficial owner of all the stock in the Cordes family

dealerships.

However, their argument that Mr. Cordes exercised

complete and unencumbered control over the Cordes corporations

and retained the power to revoke all stock transfers implicitly

recognizes that Mr. Cordes was the beneficial owner of the Cordes

- 42 family dealerships.34

In fact, in related cases, respondent has

argued that Mr. Cordes was the beneficial owner, and we have so

held.

Cordes v. Commissioner, T.C. Memo. 1994-377.

The evidence in this case resoundingly demonstrates that Mr.

Cordes’s control over the Cordes family dealerships remained

unimpaired and was so complete that he could do anything he

wanted with the Cordes family dealerships regardless of which

family member held legal title to the shares of stock.

While the

record in this case contains several examples of Mr. Cordes’s

taking inconsistent positions with the Internal Revenue Service

and with others regarding the ownership of the Cordes family

dealerships, we simply cannot ignore the overwhelming weight of

the evidence establishing that no member of the Cordes family

other than Mr. Cordes held any beneficial ownership interest in

the Cordes family dealerships.

The family members knew it,

corporate employees knew it, and, despite respondent’s position

in these consolidated cases, respondent knew it (having taken

such a position in related cases).

In related cases, respondent has argued that Mr. Cordes

was the beneficial owner, and we have so held. Cordes v.

Commissioner, T.C. Memo. 1994-377 and T.C. Memo. 2002-125. This

may explain petitioners’ failure to argue directly that Mr.

Cordes beneficially owned all of the stock in the Cordes

corporations. We note, however, that it is difficult, if not

impossible, to reconcile respondent’s position in this case that

the transfers of stock were completed gifts with respondent’s

position in the related cases that Mr. Cordes was the beneficial

owner of the Cordes corporations.

- 43 Mr. Cordes’s absolute control over all aspects of the Cordes

family dealerships--stock, financial, and operational--was such

that we must conclude he was the beneficial owner of all of the

Cordes family dealerships.

Because Mr. Cordes owned all beneficial interest in the

Cordes family dealerships during the taxable years at issue, all

of the disputed transfers were solely of legal title.

Because

such transfers of legal title are not subject to the gift tax, we

must hold for petitioners with respect to the gift tax cases

involving stock in the Cordes family dealerships.

III.

Conclusion

We have carefully considered all remaining arguments made by

the parties for contrary holdings and, to the extent not

discussed, find them to be irrelevant or without merit.

To reflect the foregoing,

Decisions will be entered

under Rule 155.

- 44 APPENDIX A

Schedule of Stock Transfers1

Cordes Finance Corp.2

1/24/64

1/4/65

1/8/65

12/29/65

12/16/66

1/8/71

3/14/83

1/14/94

Mr.

Cordes

250

Mrs.

Cordes

249

250

249

(28)

221

(50)

171

250

(50)

200

(100)

100

171

+334

505

(334)

171

B.B.

Journeycake

(1)

Eddy Ben

Cordes Trust

Eddy Ben

Cordes

(1)

+28

+101

129

+100

229

+105

334

(334)

+334

334

Transfers of shares from one entity to another are shown in

parentheses. Receipts of shares by an entity from another are

shown with a plus sign.

The incompleteness of the record prevents us from

presenting a complete and accurate chart of stock ownership and

transfers regarding CFC. For instance, the record shows Jean Ann

Richard held legal title to 33.3 percent of the stock in CFC in

1992, 1993 and 1994, but we are not able to decipher the date she

acquired legal title to those shares. We are only able to guess

the extent to which she obtained legal title to those shares from

CFC, see infra note 3, Mr. Cordes, see infra note 4, or Mrs.

Cordes, see infra note 5.

Additionally, John Cordes acquired legal title to 33.3

percent of the stock in CFC sometime in 1994, but we are not able

to decipher the date he acquired legal title to those shares or

from whom he acquired legal title.

On Jan. 8, 1971, CFC issued 500 additional shares of stock.

Eddy Ben Cordes received 105 of those shares. The record does

not indicate who, if anyone, received the other 395 shares at

that time.

The record indicates that Mr. Cordes did not hold legal

title to any stock in CFC in 1992 or 1993.

The record indicates that Mrs. Cordes held legal title to

33.4 percent of the stock in CFC in 1992 and 1993.

- 45 6

The record indicates that Mrs. Cordes did not hold legal

title to any stock in CFC in 1994.

Eddie Cordes, Inc.

1/2/63

1/71

3/29/83

1/7/87

7/25/88

8/8/91

Mr.

Cordes

500

+100

600

(600)

+600

600

Mrs.

Cordes

400

(400)

B.B.

Journeycake

100

(100)

Jean Ann

Richard

Eddy Ben

Cordes

+400

400

+600

1,000

(600)

400

(400)

600

(600)

+400

400

+600

1,000

Edmund Cordes, Inc.

1/4/67

2/15/67

1/8/71

10/26/79

7/25/88

1/26/89

8/20/91

Mr.

Cordes

600

(500)

100

+1,000

1,100

(1,000)

100

Mrs.

Cordes

200

(1)

199

(199)

John

Parkinson

200

201

(201)

Eddy Ben Jean Ann

Cordes Richard

+400

400

+500

900

(900)

+1,000

1,000

(1,000)

+1,000

1,000

The record indicates that on July 25, 1988, Jean Ann

Richard received 900 shares of stock in Edmund Cordes, Inc., from

Eddy Ben Cordes, and 100 shares of stock in Edmund Cordes, Inc.,

from Ellen Cordes, Mr. Cordes’s daughter-in-law. The record does

not indicate how, when, or from whom Ellen Cordes acquired those

100 shares of stock in Edmund Cordes, Inc., nor is it

particularly relevant.

- 46 John Cordes, Inc.

5/1/83

1/7/87

8/8/91

3/16/94

4/1/94

Mr.

Cordes

300

(300)

+500

500

(500)

Mrs.

Cordes

100

(100)

Jean Ann

Richard

100

(100)

John

Cordes

+200

200

+300

500

(500)

+500

500

- 47 APPENDIX B

Summary of Conceded, Deemed Conceded, Computational,

and Settled Issues

The following is a summary of issues and/or adjustments

conceded, deemed conceded, of a computational nature, or settled.

The Income Tax Cases

Docket No. 9294-95, Cordes Finance Corp.:

1991:

Respondent adjusted petitioner’s income for 1991

to reflect additional gross receipts of $355,200.

Petitioner concedes this adjustment.

Respondent adjusted petitioner’s income for 1991

by $37,505, pursuant to sec. 482, to reflect an

improper deduction for interest expense.

Petitioner concedes this adjustment.

Respondent readjusted petitioner’s reported bad

debt deduction for 1991 by $501,267 to reflect

actual realized bad debts for the taxable year.

Respondent concedes this adjustment.

Respondent determined petitioner used an incorrect

method of accounting for 1991 and readjusted

petitioner’s interest income by $859,338 to

reflect interest accrued under the accrual method

of accounting. The parties stipulated that the

final decision in Cordes Fin. Corp. v.

Commissioner, T.C. Memo. 1997-162, affd. without

published opinion 162 F.3d 1172 (10th Cir. 1998),

would decide the proper amount of petitioner’s

interest income for 1991. In accordance with the

parties’ stipulations, respondent concedes this

adjustment.

Petitioner conceded an increase in its interest

income in the amount of $16,600. This concession

does not appear to relate to any specific

adjustment in the notice of deficiency.

Petitioner claimed a net operating loss for 1994

and carried a loss back to 1991. Petitioner

concedes it was not entitled to claim a net

operating loss in 1994 or carry a loss back to

1991.

Respondent determined petitioner was liable for a

penalty for 1991 pursuant to sec. 6662(a) for

substantial understatement of tax. Petitioner

- 48 -

II.

presented no argument regarding the penalty. We

deem petitioner to have conceded the application

of the penalty.

Docket No. 3284-96, Cordes Finance Corporation:

1992:

Respondent adjusted petitioner’s income for 1992

to reflect additional gross receipts of

$1,174,666.

Petitioner concedes this adjustment, to the

extent of $311,928.

Respondent concedes this adjustment, to the

extent of $20,000.

The remaining $842,738 at issue reflects

gross receipts that respondent determined

were income to petitioner for 1992 because

respondent determined petitioner used an

incorrect method of accounting for its 1992

taxable year and readjusted petitioner’s

income to reflect income accrued under the

accrual method of accounting. The parties

stipulated that the final decision in

Cordes Fin. Corp. v. Commissioner, supra,

would decide the proper amount of

petitioner’s gross receipts for 1992. In

accordance with the parties’ stipulations,

respondent concedes this adjustment.

Respondent readjusted petitioner’s reported bad

debt deduction for 1992 by $537,599 to reflect

substantiated bad debts for the taxable year.

Respondent concedes this adjustment.

Respondent disallowed $112,756 of petitioner’s

reported interest expense deduction for 1992 to

reflect substantiated interest expenses for the

taxable year. Petitioner concedes that

adjustment, to the extent of $73,298.

As a mathematical computation, petitioner’s

concession leaves $39,458 of the interest

expense at issue for 1992. The parties

stipulated, however, that $52,870 is

properly at issue.

Respondent concedes that portion of the

$52,870 paid which constitutes a safe-haven

rate of interest calculated, pursuant to

sec. 482 and the regulations thereunder, on

the underlying loans, to the extent that

portion exceeds the amount paid on those

underlying loans already allowed as an

interest expense on the underlying loans

- 49 ($27,130).

Petitioner claimed a net operating loss for 1994

and carried a loss back to 1992. Petitioner

concedes it was not entitled to claim a net

operating loss in 1994 or carry a loss back to

1992.

Respondent recomputed petitioner’s environmental

tax and environmental tax deduction. Petitioner

presented no argument regarding this

recomputation, and we deem petitioner to have

conceded this adjustment.

Respondent determined petitioner was liable for a

civil fraud penalty for 1992 in the amount of

$20,832 pursuant to sec. 6663. Respondent

concedes that determination.

Respondent determined petitioner was liable for a

penalty for 1992 pursuant to sec. 6662(a) for

substantial understatement of tax. Petitioner

presented no argument regarding the penalty. We

deem petitioner to have conceded the application

of the penalty.

1993:

Respondent adjusted petitioner’s income for 1993

to reflect additional gross receipts of

$1,199,590.

Petitioner concedes this adjustment, to the

extent of $326,852.

Respondent concedes this adjustment, to the

extent of $30,000.

The remaining $842,738 at issue reflects

gross receipts that respondent determined

were income to petitioner for 1993 because

respondent determined petitioner used an

incorrect method of accounting for its 1993

taxable year and readjusted petitioner’s

income to reflect income accrued under the

accrual method of accounting. The parties

stipulated that the final decision in

Cordes Fin. Corp. v. Commissioner, supra,

would decide the proper amount of

petitioner’s gross receipts for 1993. In

accordance with the parties’ stipulations,

petitioner’s income will be increased by

$405,181 from gross receipts due to a

change in accounting method.

Respondent readjusted petitioner’s reported bad

debt deduction for 1993 by $650,900 to reflect

- 50 unsubstantiated bad debts for the taxable year.

Respondent concedes this adjustment.

Respondent disallowed $140,873 of petitioner’s

reported interest expense deduction for 1993 to

reflect unsubstantiated interest expenses for the

taxable year. Petitioner concedes that

adjustment, to the extent of $142,214.

As a mathematical computation, petitioner’s

concession is in excess of that which

respondent determined was unsubstantiated.

The parties stipulated, however, that

$19,105 is properly at issue.

Respondent concedes that portion of the

$19,105 paid which constitutes a safe-haven

rate of interest calculated, pursuant to

sec. 482 and the regulations thereunder, on

the underlying loan, to the extent that

portion exceeds the amount paid on that

underlying loan already allowed as an

interest expense on the underlying loan

($895).

Petitioner claimed a net operating loss for 1994

and carried a loss back to 1993. Petitioner

concedes it was not entitled to claim a net

operating loss in 1994 or carry a loss back to

1993.

Respondent recomputed petitioner’s environmental

tax and environmental tax deduction. Petitioner

presented no argument regarding this

recomputation, and we deem petitioner to have

conceded this adjustment.

Respondent determined petitioner was liable for a

civil fraud penalty for 1993 in the amount of

$13,428 pursuant to sec. 6663. Respondent

concedes that determination.

Respondent determined petitioner was liable for a

penalty for 1993 pursuant to sec. 6662(a) for

substantial understatement of tax. Petitioner

presented no argument regarding the penalty. We

deem petitioner to have conceded the application

of the penalty.

III. Docket No. 20254-94, June Cordes:

1989:

Respondent determined petitioner was allowed a

deduction for 1989 for a personal exemption in the

amount of $2,000. Petitioner did not dispute this

determination, and we deem petitioner to have

conceded this adjustment.

- 51 2.

IV.

Respondent determined petitioner was allowed a

deduction for 1989 for the standard deduction, in

the amount of $2,600. Petitioner did not dispute

this determination, and we deem petitioner to have

conceded this adjustment.

1990:

Respondent determined petitioner was allowed a

deduction for 1990 for a personal exemption in the

amount of $2,050. Petitioner did not dispute this

determination, and we deem petitioner to have

conceded this adjustment.

Respondent determined petitioner was allowed a

deduction for 1990 for the standard deduction, in

the amount of $2,725. Petitioner did not dispute

this determination, and we deem petitioner to have

conceded this adjustment.

Docket No. 3305-96, June J. Cordes:

1991:

Respondent adjusted petitioner’s income for 1991

to reflect her receipt of taxable Social Security

benefits in the amount of $2,088. Petitioner

concedes this adjustment.

Respondent determined petitioner received interest

income for 1991 in the amount of $33,000.

Respondent concedes this adjustment.

Respondent determined petitioner was allowed a

deduction for 1991 for the standard deduction, in

the amount of $3,500. Petitioner disputed this

determination in her petition but presented no

further argument. We deem petitioner to have

conceded this adjustment.

Respondent determined petitioner was liable for an

addition to tax for 1991, pursuant to sec.

6651(a)(1), for failure timely to file a tax

return. Petitioner concedes she did not file an

income tax return for 1991 and concedes that, if

the Court concludes petitioner received income for

1991, she is liable for the addition to tax to the

extent of that income.

Respondent determined petitioner was liable for an

addition to tax for 1991, pursuant to sec. 6654,

for failure to make estimated tax payments.

Petitioner presented no argument regarding the

addition to tax and concedes that, if the Court

concludes petitioner received income for 1991, she

is liable for the addition to tax to the extent of

that income.

- 52 V.

Docket No. 4182-96, Edmund J. & June J. Cordes:

1992:

Respondent determined petitioners had income from

constructive dividends in the amount of $56,904

for 1992.

Petitioners presented no argument regarding

CFC’s earnings and profits for 1992. In

his brief, respondent noted that earnings

and profits at the end of 1990, and

therefore 1992, were dependent on the final

decision in Cordes Fin. Corp. v.

Commissioner, T.C. Memo. 1997-162. The

decision in Cordes Fin. Corp. became final

after the briefs were filed herein. We

leave for the Rule 155 computation the

calculation of CFC’s earnings and profits

and its impact on the treatment of the

constructive dividends.

Respondent concedes that, because there

were total credits of $326,930 to account

No. 312 during 1992, petitioner is entitled

to credit that amount against the amount we

conclude petitioner received as

constructive dividends for 1992.

Petitioners failed to address a number of

the items respondent determined were

constructive dividends for 1992. We deem

petitioners to have conceded those

adjustments. Petitioners’ arguments are

such that only adjustments pertaining to

the distribution of CFC’s funds to John

Cordes and to the receipt of excess

interest from CFC remain at issue.

Respondent determined petitioners were liable for

a penalty for 1992, pursuant to sec. 6662(a), for

substantial understatement of tax. Petitioners

presented no argument regarding the penalty and

concede that, if the Court concludes petitioners

received income in 1992, they are liable for the

penalty to the extent of that income.

1993:

Respondent determined petitioners had income from

constructive dividends in the amount of $293,796

for 1993.

Petitioners presented no argument regarding

CFC’s earnings and profits for 1993. In

his brief, respondent noted that earnings

and profits at the end of 1990, and

- 53 -

therefore 1993, were dependent on the final

decision in Cordes Fin. Corp. v.

Commissioner, supra. The decision in

Cordes Fin. Corp. became final after the

briefs were filed herein. We leave for the

Rule 155 computation the calculation of

CFC’s earnings and profits and its impact

on the treatment of the constructive

dividends.

Respondent concedes that because there were

total credits of $80,000 to account No. 312

during 1993, petitioner is entitled to

credit that amount against the amount we

conclude petitioner received as

constructive dividends for 1993.

Petitioners failed to address a number of

the items respondent determined were

constructive dividends for 1993. We deem

petitioners to have conceded those

adjustments. Petitioners’ arguments are

such that only adjustments pertaining to

the distribution of CFC’s funds to John

Cordes and to the receipt of excess

interest from CFC remain at issue.

Respondent adjusted petitioners’ income to reflect

their receipt of taxable Social Security benefits

in the amount of $6,860. Petitioners concede this

adjustment.

Respondent recomputed petitioners’ itemized

deductions and deduction for exemptions.

Petitioners presented no arguments regarding these

recomputations, and we deem petitioner to have

conceded these adjustments.

Respondent determined petitioners were liable for

a penalty for 1993, pursuant to sec. 6662(a), for

substantial understatement of tax. Petitioners

presented no argument regarding the penalty and

concede that, if the Court concludes petitioners

received income in 1993, they are liable for the

penalty to the extent of that income.

The Gift Tax Cases

Docket No. 19178-97, Edmund J. Cordes:

1991:

Respondent determined petitioner made other

taxable gifts as follows:

- 54 a.

Respondent determined petitioner made a

taxable gift of $125,000 to John Cordes in

1991. Petitioner, in his petition, alleged

that the transfer of $125,000 was a loan,

rather than a taxable gift. Petitioner

introduced no evidence of a loan and did

not present any argument regarding this

adjustment in his posttrial briefs. We

deem petitioner to have conceded the

transfer of $125,000 to John Cordes was a

taxable gift.

Respondent determined petitioner made

taxable gifts of $100,000 and $84,000 to

John Cordes, and forgave portions of the

Richard Note and the Bower Note in the

amounts of $300,000 and $77,900,

respectively, such forgiveness constituting

taxable gifts.

(1)

Petitioner conceded in his reply

brief that he made gifts, with

respect to the Richard Note and the

Bower Note, in amounts equal to

$300,000 and $77,900, respectively.

However, respondent concedes that

the correct amounts of the gifts

are $214,941 and $77,550,

respectively. In light of

respondent’s concession, we shall

treat petitioner’s concession as

effective to the extent of $214,941

and $77,550, respectively.

(2)

Petitioner, in his petition,

alleged that the gifts are not

taxable only because the

applications of the unified credit

and annual exclusions, see sec.

2503, reduce his tax liability.

Petitioner has not presented any

argument regarding these

adjustments in his posttrial

briefs. We deem petitioner to have

conceded that the gifts are taxable

gifts, as defined in sec. 2503(a),

subject to the annual exclusion in

sec. 2503(b). We leave for the

Rule 155 computation whether and to

what extent the unified credit and

- 55 the annual exclusions are

applicable.

1992:

Respondent determined petitioner made a taxable

gift of $31,000 to John Cordes in 1992.

Petitioner, in his petition, alleged that the

transfer of $31,000 was a loan, rather than a

taxable gift. Petitioner introduced no evidence

of a loan and did not present any argument

regarding this adjustment in his posttrial briefs.

We deem petitioner to have conceded the transfer

of $31,000 to John Cordes was a taxable gift.

Respondent determined petitioner made a taxable

gift of $20,000 to John Cordes in 1992.

Petitioner has not presented any argument

regarding this adjustment in his petition or

posttrial briefs. We deem petitioner to have

conceded that the transfer is a taxable gift, as

defined in sec. 2503(a).

Respondent determined petitioner was liable for an

addition to tax for 1992, pursuant to sec.

6651(a)(1), for failure to file a gift tax return.

Petitioner concedes he did not file a gift tax

return for 1992 and did not present any argument

regarding the addition to tax. We deem petitioner

to have conceded liability for the addition to

tax.

1993:

Respondent determined petitioner made a taxable

gift of $10,000 to John Cordes in 1993.

Petitioner, in his petition, alleged that the

transfer of $10,000 was a loan, rather than a

taxable gift. Petitioner introduced no evidence

of a loan and did not present any argument

regarding this adjustment in his posttrial briefs.

We deem petitioner to have conceded the transfer

of $10,000 to John Cordes was a taxable gift.

Respondent determined petitioner made a taxable

gift of $30,000 to John Cordes in 1993.

Petitioner has not presented any argument

regarding this adjustment in his petition or

posttrial briefs. We deem petitioner to have

conceded that the transfer is a taxable gift, as

defined in sec. 2503(a).

Respondent determined petitioner was liable for an

addition to tax for 1993, pursuant to sec.

6651(a)(1), for failure to file a gift tax return.

Petitioner concedes he did not file a gift tax

- 56 -

II.

return for 1993 and did not present any argument

regarding the addition to tax. We deem petitioner

to have conceded liability for the addition to

tax.

Docket No. 19279-97, June Cordes:

1993:

Respondent determined petitioner made taxable

gifts to John Cordes in 1993, in the aggregate

amount of $76,900. Petitioner, in her petition,

alleged that the transfers are not taxable gifts

only because the applications of the unified

credit and annual exclusions, see sec. 2503,

reduce her tax liability. Petitioner has not

presented any argument regarding these adjustments

in her posttrial briefs. We deem petitioner to

have conceded that the transfers are taxable

gifts, as defined in sec. 2503(a), subject to the

annual exclusion in 2503(b). We leave for the

Rule 155 computation whether and to what extent

the unified credit and the annual exclusions are

applicable.

Respondent determined petitioner was liable for an

addition to tax for 1993, pursuant to sec.

6651(a)(1), for failure to file a gift tax return.

Petitioner concedes she did not file a gift tax

return for 1993 and did not present any argument

regarding the addition to tax. We deem petitioner

to have conceded liability for the addition to

tax.

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