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T.C. Memo. 2010-249

UNITED STATES TAX COURT

RONALD B. AND HELEN J. SUNDRUP, ET AL.,1 Petiti.oners y_.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos.

14373-07,

14379-07.

14374-07,

Filed November 16,

2010.

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

Cases of the following petitioners are consolidated herewith:

Sundrup Transfer, Inc., docket No. 14374-07; and Sundrup

Consulting, Inc., docket No. 14379-07.

I SERVED NOV 162010

- 2 -

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 . :

Petitioner

Ronald B. and

Helen J. Sundrup

Petitioner

Sundrup Transfer,

Inc .

Petitioner

Sundrup Consulting,

Inc.

Taxable Year

Deficiency

Accuracy-Related

Penalty Under Sec. 6662(a)

2003

20 04

2005

$19,129

17, 956

14, 999

$3,825.80

3, 591. 20

2, 999.80

Taxable Year

Ended Mar. 31

Deficiency

Accuracy-Related

Penalty Under Sec. 6662(a)

2004

2005

2006

$2, 361

1, 776

843

$472.20

355 .20

168.60

Taxable Year

Ended Mar. 51

Deficiency

Accuracy-Related

Penalty Under Sec. 6662 (a)

2004

2005

20 06

$10 030

7, 875

8 , 250

$2,006

1, 575

1, 650

In amendments to answers filed in the respective cases at

docket Nos. 14373-07 and 14374-07, respondent alleged the following respective increased def iciencies in, and increased accuracyrelated penalties under section 6662 (a) on, the respective taxes

(1) Ronald B. and Helen J. Sundrup and (2) Sundrup Transfer,

Inc . :

All section references are to the Internal Revenue Code

(Code) in effect for the yeÅrs .at issue. All Rule references are

to the Tax Court Rules of P actice and Procedure.

- 3 Petitioner

Ronald B. and

Helen J. Sundrup

Petitioner

Sundrup Transfer,

Inc.

Taxable Year

Increased

Deficiency

Increased Accuracy-Related

Penalty Under Sec. 6662(a)

2003

2004

2005

$24,897

19,000

15,548

$4,979.40

3,800.00

3,109.60

Taxable Year

Ended Mar. 31

Increased

Deficiency

2004

2005

2006

$7,917

6,543

6,218

Increased Accuracy-Related

Penalty Under Sec. 6662(a)

$1,583.40

1,308.60

1,243.60

The issues remaining for decision are:S

(1)

Should certain trans,actions during each of petitioners'

respective taxable years at issue between (a) Sundrup Transfer,

Inc . , and Sundrup Consult ing , Inc . ,

(b) . Sundrup Leas ing , L . L . C . ,

and Sundrup Consulting, Inc., and (c) Ronald B. and Helen J.

Sundrup and Sundrup Consulting, J·nc., be respected for tax

purposes for each of those years?

We hold that they should not.'

3In 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.

*In the light of our holdings with respect to certain respective 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 determinations 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 indicates 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.

(2)

Is petitioner Sundrup Transfer, Inc., entitled for its

taxable year ended March 31,g 2004, to deduct under section 162 (a)

certain medical and dental

(3)

xpenses?

We hold that it is.

Is Sundrup Transfer, Inc., entitled for each of its

táxable years ended March 31, 2004 and 2006, do deduet under

section 162 (a) certain miscellaneous expenses?

We hold that it

is not.

(4)

Is Sundrup Leasinc , 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 properties?"

We hold that it is not.

(5)

Are petitioners (d) Rånald 'B. and Helen J. Sundrup,

(b) Sundrup Transfer, Inc., and (c) Sundrup Consulting, Iric.,

liable for eac

of their re pective taxable years at issue for

accuracy-related penalties under section 666:i (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 releüant times

time petitioners Ronald B.

ince around 1964, including at the

undrup (Mr. Sundrup) and Heleri J.

Sundrup Leasing, L:L.C., was a passthrough entity for tax

purposes for each of its taåable years 2003, 2004, and 2005. As

a result, any deduction that it claimed for each of those years

in'effect flowed through to dits members, petitioners Ronald B.

and Helen J. Sundrup. See infra note 50.

- 5 Sundrup (Ms. Sundrup)' 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.

'We shall sometimes refer to Mr. Sundrup and Ms. Sundrup as

Mr. and Ms. Sundrup or the Sundrups.

- 6 -

On July 2, 1986, Mr.. arid 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-fdmily houses, has approximately 1, 028

square feet of space - on -the main floor and approximately 937

square feet sof 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; åtwo full bathrooms, a utility room,

and the Sundrup enclosed arda.

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 t at is not attached to the original

house .

'We shall refer to the ot that petitioners purchased in

1964, the original house thdt they built on that 'lot, the lot

that they purchased in 1986 and the addition to the oricjinal

house that they built on thåte lot as the Sundrup residence..

- 7 -

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. Sundrupswas 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."

As part of Ms. Sundrup's managing the office opera-

tions of Ron Sundrup Transfer, she answered the tel-ephone,

"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.

- 8 scheduled pickups, monitóre i 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

undrúp, Mr. Sundrup's mother.

Division Street property ha

two houses on it..

The

(Petitioners, and

we shall, refer to those hoËses 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 noti 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 tihe Division Street property.

On a date not disclosed by the record before the years at

issue, Mr. and Ms. Sundrup

emodeled the South House, and Rick

Sundrup, an adult son of Mr

'and Ms. Sundrup, moved intoothat

house with- his family.

the time Rick Sundrup and his family

Fro

moved into the South House until at least the time of trial in

these cases, they did not p y 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

- 9 the Division Street property, including (1) a large maintenance

shop and storage building,

(2) a large storage building,

small storage sheds, and (4) a garage.

(3) two

(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 structures in operating Ron Sundrup Transfer.

Vehicles and Condominiums

In addition¯to the Sundeup 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)."

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

9Although 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.

- 10 -

pickup truck (2000 GMC truck

and (2) a 1997 Cadillac automobile

(1997 Cadillac automobile) .

Transfer

At a time not disclosed by the record before February 16,

20 0 0 , Mr . and Ms . Sundrup re ained 'Frank Pechacek (Mr . Pechacek) ,

an attorney, who, inter alia

advised them regarding the forma-

tion of certain entities (discussed below)..R

On February 16, 2000, Mr. and Ms. Sundrup, with the assistance of Mr. Pechacek, incoOorated Transfer under the laws of

the State of Iowa.

During the years at issue, Mr. Sundrup owned

349 shares,i Ms. Sundrup own(d-350 shares, and Rick Sundrup, .their

son, owned 1 share of Transfer's outstanding stock.

At all

relevant times, including d ring the years at issue, Mr. Sundrup

and Ms. Sundrup were the on]y members of -the board of directors

of Trans f er .

Throughout the years at is sue , Mr . Sundrup -was the

president, Ms. Sundrup was t he vice president, the secretary, and

the treasurer, and Rick Sundrup was the assistant secretary of.

Transfer.

°The record does not e tablish when the Sundrups acquired

the 1996 Chevrolet pickup t uck and the 1997 Cadillac automobile.

"Mr. Pechacek prepared the respective tax returns of petitioners for all of the taxable years at issue and is the lead

attorney representing them in these cases . Before the commencement of the trial in these Šases, petitioners waived any potential conflicts of interest Segarding Mr. Pechacek, who was not

called as a witness at that trial.

- 11 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 activities that Ron Sundrup Transfer had previously handled."

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)."

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 answered 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.

"Around the date on which the Sundrups incorporated Transfer, Mr. Sundrup transferred to Transfer certain assets that he

had used in the business operations of Ron Sundrup Transfer.

"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 residence office space, 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 Transfer.

See supra

note 8.

- 12 -

Sundrup also served as a dri er, for Transfer.

During each of

those years, Mr. Sundrup did work repairing, maintaining, and

washing certain vehicles that Transfer used in its trucking

business.

During each of Transfer's taxable _years ended March

31, 2004 and 2005, Kerry Her enius provided part-time office

support for that business ar d did so in the Sundrup residence

of f ice space .

During Trans f er' s taxable year ended March 31,

2006, Erin Sundrup, Rick Sulidrup' s wife, provided part-time

office support for that bus ness and did so in the Sundrup

residence office space.

Duñing each of its .tax ble years indicated, Transfer paid to

the following individuals t1e following amounts of cash'compensation:

"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 eaäh of those years.

- 13 -

Individual

Taxable Year

Ended Mar. 31

Cash Compensation

Rick Sundrup

2004

2005

2006

$44,032.82

43,197.17

53,199.74

Kerry Henkenius

2004

2005

9,520.50

5,123.25

Erin Sundrup

- 2006

3,428.00

Ms. Sundrupl

2004

3,600.00

1The 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

compensatison during that year for certain ùnexplained 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 dogument entitled

"NONDISCRIMINATORY MEDICAL AND DENTAL REIMBURSEMENT PLAN"

fer medical and dental plan).

That document stated in pertinent

part:

Purposes of Plan

(Trans-

The purposessof the Plan are:

(a) To encourage employees to continue their

association with the Company.

- 14 (b)

To attract ad itional employees.

2. Eligibility. All e ployees who have been with the

Company [Transfer] for six (6) months, or since the

Company was incorporatéd, whichever is shorter, pro.vided, however, that seasonal employees, employees

covered by a collective bargaining agreement, or nonresident alien employees shall not be eligible.

3. Benefits. The Comp ny will reimburse all eligible

employees for all reasonable medical and dental expenses up to the sum of $5,000.00 in any fiscal year

(including, but not li ited to the cost of any accia

dent, health or medica2 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 rei bursable to them from any medical, dental, health and/or accident insurance policy

insuring them.

On April 1, 2000, Transfer and Mr. Sundrup executed a

document entitled "AGREEMEN ",

"NONDISCRIMINATORY MEDICAL AND

DENTAL REIMBURSEMENT PLAN"

Sundrup's medical and dental

(Mr.

agreement with Transfer), a d Transfer and Ms. Sundrup executed a

document with the same title (Ms. Sundrup's medical and dental

agreement with Transfer)."

Mr. Sundrup signed Mr. Sundrup's

medical and dental agreemen( with Transfer both in his individual

capacity and as president o

Transfer.

Ms. Sundrup signed Ms.

Sundrup's medical and denta

agreement with Transfer in her

"Although the record e tablishes 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 agreäment between him and Transfer, with

respect to that plan.

15 -

individual capacity, and Mr. Sundrup signed that document as

president of Transfer.

Except as noted -below; Mr. tSundrup's medical and dental

agreement-with Transfer and Ms. tSundrup's¯medical and dental

agreement with Transfer 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, with

Trans f er and Ms . Sundrup in the c as e of Ms . Sundrup ' s

purported medical ánd dental agreement with Transfer]

and the undersigned (hereinafter "Corporation") [Transfer] .

1. The Corporatiòn 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 dentalsexpenses up to

the sum of $5, OOO.00 in any fiscal year (including but

not limitedato 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 m~edical'; dental, health and/or accident insurance policy insuring you and/or members of your immediate family.

During Transfer' s taxable year ended March 31, 2004,

Transfer paid directly, or reimbursed Mr. Sundrup, Ms. Sundrup,

and/or Rick Sundrup,, a total of $12,258.65 for ce'rtain of their

respective medical and dental expenses.

(We shäll refer to the

"Tlie 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.

- 16 -

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 expenses.)"

Leasing

On February 16, 2000, the same.day on which Mr.·and Ms.

Sundrup incorporated Transfdr, they, with-the assistance of Mr.

Pechacek, organized Sundrup Leasing, L.L.C.

(Leasing), as a

limited liability company u der the laws of the State of,Iowa and

adopted an operating agreem nt for it.

The articles of organiza-

tion of Leasing showed 200 dorning Street, ,Arcadia (i.e., the

Sundrup residence), as its

rincipal office.

At all relevant

times, Mr. Sundrup and Ms. Šundrup were the only members, and the

only managers, of Leasing.

Sometime between the förmation of LeÈsing.on February 16,

2000, and March 1, 2000, Mrs Sundrup transferred to Leasing

The parties stipulateå the natire and the amounts of the

various expenses of Mr. Sundrup and/or Ms. Sundrup that Transfer

or Consulting, as the case gay be, paid during each of those

companies' respective taxable years at issue. In certain instances, the description that the parties stipulated regarding a

particular expense did not àorrespond to the nature of the

expense that the parties stipulated. For example, the parties

stipulated that a $319.62 e pense was for "Life insurance" but

the parties also stipulated9that that expense was a medical

expense. The record does not explain the apparent -inconsistencies in the parties' stipul tions. We need not resolve those

apparent inconsistencies inforder to decide the issues presented.

- '17 -

certain of the- assets-that he had been -using in the trucking

business of-Ron Sündrup Transfer, inciuding the "three tractortrailers, four córn hoppere, land a Polar truck tank

ön March 1

2000, Leasing entered into tan agreement with

Transfer under which Neasing agreed sto lease the three tractor-

trailers to -Transfer for use in- Transfer's trucking business:

That agreement provided thataTransfer was to payeLeasing $73,672

each year for the use-of thosè trücks.

Tránsfer 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. Súndfup-transferred the

Division Street property to Leasing by quitclaim deed."

same day

On the

Tr'ansfer entered-into an agreement with Leasing under

which Leasinè agreëd to' lease the Division Street property to

Transfee 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

or ly $20, 000' during each of -its taxable years ended March 31,

2004 and 2005, for the- use of the Division Street property.

T ansfer paid Leasing $24 000 'during its taxable year ended March

31, 2006, for the use sof that property.1

"On Jan. 9, 2001, the quitclaim deed transferring the

Division Stréét property to Leasing was filed with the Office of

the Recorder of Deeds of Carroll County (Carroll County recorder's office).

- 18 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 c apacities, executed a management

agreement (Unit 5 management agreement) with a company called

Thousand Hills Management C$. , Inc . , , ( THMC) .

Under that agree -

ment, THMC agreed to rent tl at unit nightly to third parties and

to make emergency repairs tc that unit when necessary." Although

Mr. and Ms. Sundrup had trar sferred Unit 5 to Leasing by .

quitclaim deed, they ,were d scribed 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 Leasi g.19

On August 25, 2001, Leasing-

executed a management agreet ent with "THMC.

Under that agreement,

THMC agreed to rent that un t nightly to third parties and ,to

make emergency repairs to t at unit when necessary.

Although Mr.

and Ms. Sundrup signed that agreement, they did not indicate

whether they had signed it às managers of Leasing or in their

individual capac ities .

sometime in 2004 befor

minium in Branson, Missouri

1, Unit 4 (Unit 4) .

April 6 Leasing purchased a condodescribed as Tuscany Placer, Building

On April 6, 2004, Leasing executed a manage-

"The,record does not e tablish how the -Sundrups' transfer

of Unit 6 to Leasing was efŠected.

- 19 -

ment agreement (Unit 4 management ragreement) with THMC.2o

Under

that agreement, 'THMC agreed to rent that unit nightly to third

arties landito make- emergency repairs to that unit whenenecessary.

Leasing ,was described in the Unit' 4 management agreement

as "Owner" of Unit 4.

Although Mr: Sundrup signed that sagree-

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 atsissue after the datecon which Leasing.had

purchased Unit- 4, they traveled to Branson, Missouri., in order to

make certain repairs- andtimprovements to Unit 4.

They traveled

to Branson, Missouri, in order to -make certain repairs and

improvements (1) to Unit a and/br-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.

Consulting

On April 24, 2000, Mr. and Ms. Sundrup, with the assistance

of Mr. Pechacek, incorporated Consulting under the laws of the

zoAlthough the Unit 4 management -agreement was véxecuted on

Apr. 6, 2004, it was dated Mar. 18, 2004.

The record does not contain evidence Megarding the trips,

if any, that the Sundrups made, to sBranson, Missouri, after Feb.

20, 2006.

- 20 -

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 Corsulting.

At those times, Mr.1 and Ms.

Sundrup were the only members of the board of directors cof

Consulting (Consulting board) .

During the years :at issue:, Mr .

Sundrup was the president, and Ms . Sundrup was the vice president, the secretary, and th

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, Consult ing and Transfer executed a document

entitled "MANAGEMENT CONSULTING AGREEMENT"

management agreement) ."

(purported Transfer

Sundrup executed that document as

president of Consulting and as president of Transfer.

On January 1, 2003, Ledsing and Consulting executed a

document entitled "MANAGEMENT CONSULTING AGREEMENT"

(purported

"The parties stipulated that the purported Transfer management agreement was executed on Apr. 1, 2000, which was more than

three weeks before Mr. and Ñs. Sundrup incorporated Consulting on

Apr. 24, 2000. That stipulition is clearly contrary to the facts

that we have found are estalŠlished by the record, and we shall

disregard it . See Cal -MainŠ Foods , Inc . V . Commiss ioner , 9 3 T . C .

181,. 195 (1989) . The record establishes, and we have found, that

the purported Transfer mana0ement agreement was not executed

until May 1, 2000.

a 21 -

Leasing management agreement)."

Mr. Sundrup executed that

document as a manager of Leasing and as presidentsof Consulting.

Except as noted below, the purported Transfer management

agreement and'the purported Leasing management agreement.contained essentially the same provisions.

They stated in perti-

nent part:

1. Mánagement Services .

Corporation [in the case

of"Transfer and LLC in the case ofeLeasing]. hereby,

contracts with Consulting * * * to perform management

and consulting serviceå.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 a

related 'to the management and operation of Corporation

[in the case of Transfer and LLC in the case of Leasing]

its financi'äl 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]e

The management services shall include, but not be

limited to, advice and services- regarding marketing,

accounting technicals and computer msupport, and person- nel- matters. The management services regarding personnel, matters shall include advice regarding employment

contfoi, šupervision, 'hiring and discharge of employees

and independent contractors- hired by Corporation [in

the case of Transfer and LLC in the case of Leasing].

The parties stipulated that ,the purported Leasing management agreement was dxecuted n Apr. 1, 2000i

That stipulation is

clearly contrary to the, facts that we have found are established

by the record, and we shäll 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.

"Except for the purported Transfer management agreement

with Transfer and the purported Leasing mánagement agreement with

Leasing, Consulting did not enter into any other purported

management agreements.

- 22 -

Consulting * * * may provide advice with respect

to employee benefits arid enter into negotiations regarding same on behalf of Corporation [in the case of

Transfer and LLC in thd case of Leasing] . Consulting

* * * will also provid advice with respect to the

purchase and/or.lease of equipment and supplies relating to Corporation' s [fn the case of Transfer and LLC' s

in the case of Leasing] business. -

3. Payment to Cor sulting Company. . Corporation

[in,the case of TransfÈr and LLC,in the -case of. Leasing) shall pay Consultfng * * * the sum of $3/000.00

Ein the case of TransfŠr and $2,500.00 in the case of

Leasing] per month on år before the first day of each

month. Corporation [ir the case of Transfer and LLC in

the case of Leasing] sl all not be required to pay any

other fee or benefit to Consulting * * * for services

rendered.

Consulting

* * may submit reasonable outof-pocket expenses frod time to time to Corporation [in

the case of Transfer ar d LLC in the case of Leasing],

which will be reimbursed only upont Corporation [in the

case of Transfer and LLC in the case of Leasing] approval.

4 . Duties of Consulting Company .

Consult ing

* * * shall furnish cor sulting and management services

and render advice to Cdrporation [in the case of Transfer and LLC in the caså of Leasing] at all times reasonably requested by Cc(rporation [in the case of Transfer and LLC in the case of Leasing] , - subject, however,

to the following conditiions:

Consulting * * * shall not b'e required

to devote fu]l time and attention to

providing se vices to corporation [in

the case of ransfer and LLC in the case

of Leasing] . The services and hours

Consulting * * * is to work on any given

day will be ithin Consulting [' s] * * *

control; pro ided, however, that Consulting * *

shall be adequately

staffed to effectively service the Corporation' s [in the case of Transfer and

- 23 -

LLC' s in the case of Leasing] needs at

all times.

Consulting * * * may of fer 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 * * *.

Consulting * * * provid s its services

to the general public and this Agreement

is non-exclusive.

8 . Amendments . No amendment , modi f icat ion; 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 séction 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 e cept Mr. Pechacek.2s

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

2sThe 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,

TYE Mar. - 31,

2004 through 2006:

2004

Date

Apr. 2, 2003

Apr. 16, 2003

May 7, 2003

May 21, 20 0 3

June 4 , 2003

June 19, 2003

July 2, 2003

July 23, 2003

Aug. 8, 2003

Aug. 20, 2003

Sept. 3, 2003

Sept. 24, 2003

Oct. 8, 2003

Oct. 29, 2003

Nov. 5, 2003

Nov. 19, 2003

Dec. 3, 2003

Dec. 10, 2003

Dec. 23, 2003

Jan. 7, 2004 9

Jan. 21, 2004

Feb.

Mar.

4, 2004 e

13, 2004

26, 2004

31, 2004

Total

Amount

$1,750

1,750

1, 750

1,750

1, 750

1,750

1, 750

1,750

1, 750

1,750 1,750

1,750

1, 750

1,750

1, 750

1,750

3,500

1,750

45, 500

e 25 TYE Mar.

2005

Date

Apr. 21, 2004

May 4, 2004

Amount

$1, 750

1,750

May 19, 20 04

June 9, 2004

June 30, 2004

July 13, 2004

July 28, 2004

Aug: 10, 2004

Aug. 25, 2004

Sept. 5, 2004

Sept . 22, 20 04

Ott: 13, 2004

Nov. 3, 2004

Novî 23, 2004

Dec . 7, 20 04

Dec. 29, 2004

Jan. 11, 2005

Jan: 26, - 2005

Feb. 10, 2005

Feb. 23, 2005

Mar . 9, 20 0 5

Mar. 23, 2005

Total

1, 750

1,750

1, 750

1,750

1, 750

1,750

1, 750

1,750

1, 750

1 750

1,750

1, 150

1,750

1/750

1, 750

1,750

38, 500

- 26 TYE Mar.

31,

2006

Date

Apr. 6, 2005

Apr. 20, 2005

May 11, 2005

May 25, 2005

June 8 , 20 05

June 22, 2005

July 5 , 20 0 5

July 20, 2005

Aug. 10, 2005

Aug. 23, 2005

Aug . 31, 20 0 6

Sept . 21, 2005

Oct. 5, 2005

Oct. 19, 2005

Nov. 3, 2005

Nov. 23, 2005

Dec. 13, 2005

Dec. 21, 2005

Jan. 10, 2006

Jan. 26, 2006

Feb. 9, 2006 g

Feb . 21, 20 0 6

Mar. 8, 2006

Mar. 21, 2006

Total

Amount

$1,750

1,750

1, 750

1,'7/50

1, 750

1,750

1, 750

1,750

1, 750

1,750

1, 750

1,750

1, 750

42, 00 0

(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 nionth on or before the first day of

the month, as stated in theipurported Leasing management agreement .

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

Mar. 10,

Apr. 12,

Total

Amount

2004

, .

Taxable Year 2005

Date

Mar. 8, 2005

Apr. 5, 2005

May 3, 2005

May 17, 2005

Oct. 14, 2005

Nov. 3, 2005

Dec. 1, 2005

Total

$18,000

12, 000

30 , OOO

Amount

$1,000

1,000

4,000

1,000

1, 000

1,000

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," and one month before the

purported.Transfer management agreement was executed on May 1,

2000, Consulting'and Mr. Sundrup executed a document entitled

"Although the parties stipulated that the date on which the

Sundrups executed their respective purported employment agreements 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

nd Ms. Sundrup executed a document

entitled. "EMPLOYMENT AGREEMENT"

ment agreement) .??

(Ms'. Sundrup' s purported employ-

Mr . . Sund up signed Mr . Sundrup' s purported

employment agreement both as "employee" and as-president of

Consulting, and Ms . Sundrup s igned 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 purporte d employment agreement

contained essentially the såme provisions.

They stated in

pertinent part:

An AgŸeement made between Ronald B. Sundrup [in

the case of Mr. Sundru)$' s purported employment agreement and Ms . Sundrup in the case of Ms . Sundrup' s

purported employment aÿreement] of Arcadia, Iowa,

herein referred to as Employee and Sundrup Consulting,

Inc . , whose principal ýlace of business is located at

200 Corning St., Arcadia, Iowa [Sundrup residence) ,

herein referred to as Employer.

SECTION 1.

EMPLOYMENT

Employer hereby e$ploys, engages, and hires -Em-

ployee as an operationil supervisor and monitor of a

portion of Employer's usiness, and Employee hereby

27Except for Mr. Sundru '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 Employer.

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 business premises of the Employer, the Employee shall be

required to live in the housing furnished by the Employer 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 terminating

, 2001, subject, however, to

prior termination as herein provided. At the expiration date of

, 2001, this Agreement

shall be considered renewed for regular periods of one

year provided neither party submits a notice of termination.

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 required by the Employer, the following are a list of

certain specific duties and responsibilities Employee

shall have ein 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 responsibilities are to be performed at the location as

directed by the Employer above.

- 30 -

(1)

To constantly be present in the area of responsibility to deter and guard against vandalism and th ft of equipment, tools, buildings and other property of the Employer.

(2)

To maintain

tch over the property of the

Employer so s to discover and report any damage to an 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 present3 on the premises so as to immediately detect and report any interruption of

electrical s/rvice to the facilities of the

Employer so és to minimize the possibility of

any losses. 2

(4)

To monitor t e per ormance and activities of

other Employ es of the Employer working on the

premises and report to the Employer concerning

their actividies.

(5)

To provide a sistance to other Employees of

the Employer in case of a breakdown or emergency while Šperating on the property of the

Employers.

(6)

To be presen( to alert other designated Employees

of shipments of materials being received by Employer.

At no time during the Saxable years at issue did (1) Mr.

Sundrup and Consulting dete mine the respective dates on which

Mr. Sundrup's purported emp oyment agreement commenced and

terminated as contemplated únder section 3 of that agreement and

(2) Ms. Sundrup and Consult ng determine the respective dates on

which Ms. Sundrup's purport d employment agreement commenced and

terminated as contemplated

nder 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 bur. Sundrup's purported employment agreement and Ms. Sundrup ,in the case of Ms.

Sundrup's purported employment agreement] and Employee

shall accept from Employer,.in full payment for Employee'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 purported 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 b ard (i.e., Mr. Sundrup and Ms.

Sundrup) .

The minutes of t

t 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,23 (3) designated Carroll County State Bank as

Consulting' s depository inst itution,

ing's officers and director

(4) required that Consult-

use their best efforts tosoperate

Consulting in such a manner that sthe stock of Consulting would

qualify as stock under sect on 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 purchasèd,

(6) made an electior under section 248 with respect to

Consulting's organizational expenses,

(7/) authorized Mr. Sundrup

to pay any expenses resulti g from the organization of Consulting, and (8) adopted a "Nonc iscriminatory Medical and Dental

Re imbursement Plan" .

2eAt no time before the trial in these cases werë Consulting'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 purported 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 Consulting 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).

inter alia,

The minutes of that meeting stated,

(1) that the stockholders of Consulting elected for a

one-year term Mr. Sundrup and Ms. Sundrup as members of the

"Mr. Sundrup's purported employment agreement and Ms. Sundrup'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 rätified those purported employment agreements at that

meeting.

Consulting board.and. (2) thÄt the Consulting -board elected for a

one-year term Mr. Sundrup aÉ president of Consulting and Ms.

Sundrup as vice president, eecretary, and treasurer of Consulting.

Those minutes did not state that the Consulting board

discussed at the March 20,

001 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 min0tes of that meeting state that the

Consulting board discussed Åt that meeting the nature or ,the

extent of the services (1) dhat the purported Transfer management

agreement stated Consulting was to piovide 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 dagreement stated Ms . Sundrup was to

provide to Consulting.

On March 1, 2002, Cons lting held a joint meeting (March 1,

2002 joint meeting) of the

tockholders of Consulting (i.e., Mr.

Sundrup and Ms . Sundrup ) and the Consult ing board ( i . e . , Mr .

Sundrup and Ms . Sundrup) .

inter alia,

he minutes of that meeting stated,

(1) that the st ckholders of Consulting electied for a

one-year term Mr. Sundrup and Ms. Sundrup as members of the

Consulting board and (2) thàt the Consulting board elected for a

one-year term Mr. Sundrup an president of Consulting and Ms.

- 35 -

Sundrup as vice president, secretary, and treasurer of Consulting. - 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.e 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- Consulting.

Those minutes did not state that the Consulting board

discussed at,the March -1, 2003 joint meeting (1) the purported

- 36 -

Leasing management agreemen

that Consulting had executed on

January 1, 2003, two months before the March 1, 2003 joint

meeting,

(3)

(2) the purported -Transfer management agreement, and

(a) Mr. Sundrup's purported employment agreement and (b) Ms.

Sundrup's purported employmènt agreement.

.Nor did the minutes of

that meeting state that the Consulting board discussed at that

meeting the nature or the e tent of the services (1) that the

purported Leasing.managemen

provide to Leasing,

agreement stated-Consulting,was to

(2) thad the purported Transfer management

agreement stated Consulting was to provide to Transfer, and

(3)

(a) that Mr. Sündrup's

urported employment agreemènt stated

Mr. Sundrup was to provide

o Consulting and (b) that Ms;

Sundrup's purported employm nt agreement stated Ms. Sundrup was

to provide to Consulting.

On March 2, 2004, Consùlting held a joint meeting (March 2,

2004 joint meeting) of the åtockholders of Consulting (i.e., Mr.

Sundrup and Ms. Sundrup) and the Consulting board" (i.e.

Sundrup and Ms. Sundrup).

inter alia,

Mr.

The minutes of that meeting stated,

(1) that the st ckholders of Consulting elected-for a

one-year term Mr. Sundrup aÅd Ms. Sundrup as members of the .

Consulting board and (2) thÃt the Consulting board-elected for a

one-year term Mr. Sundrup a

president of Consulting

Ms., Sundrup

as vice president, secretary, and treasurer of Consulting, and

Rick Sundrup as assistant á cretary of Consulting.

«Those minùtes

- 37 -

did not state that the Consulting board discussed at the March 2,

2004 joint meeting (1) the purported Leasing management agree-

ment,

(3)

(2) the purported Transfer management agreement, and

(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."

Nor

did those minutes state that the Consulting board discussed at

"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.

, -

the March 2, 2004 joint meet ing that as of the date of that

meeting Transfer had failed to .pay to Consulting durings Consulting's taxable year that sta ted on April-1, 2003, the $3,000

monthly amount that section 3 of the purported.Transfer management agreement stated Trans er was .to pay to Consulting on or

before the first, day of eacli month."

On March 7, 2005, Consulting held a joint meeting (March 7/,

2005 joint meeting) of the

tockholders of Consulting (i.e., Mr.

Sundrup and Ms . Sundrup ) and the Consult ing board ( i a e . , Mr .

Sundrup and Ms . Sundrup ) .

inter alia,

The minut es . of that mee t ing s t at ed,

(1) that the stockholders of Consulting elected for a

one-year term Mr. Sundrup afid-Ms.»Sundrup as members of the

Consulting board and (2) th t the Consulting board elected for a

one-year term Mr. Sundrup aš president of Consulting, Ms. Sundrup

as vice president, secretary, - and treasurer of Consulting, and

Rick Sundrup as assistant s cretary of .Consulting.

Those minutes

did not state that the Cons lting board discussed at the March 7,

2005 "joint meeting (1) the

ment,

(3)

urported Leasing management agree-

(2) the purported Transfer management agreement, and

(a)" Mr. Sundrup's purpo ted employment agreement and (b) Ms.

Sundrup' s purported employmånt agreement .

* Nor «did the minutes

of that meeting state that t he Consulting board discussed at that

We have found above the respective amounts and the respective dates on which Transfei made Transfer's payments to Consulting.

39 -

meéting the nature or the exteht of the services -(1) that the

purported Leasing management agreement -stated Consulting was to

provide to Leasing,a (2) that the purported Transfer management

agreement stated Consulting was-to provide toaTransfer

(3)

anda

(a) that Mr. Sundrup's purported employment agreement stated

Mr . Sundrup was to provide to Consulting and (b) that Ms .

Sündrup''s purported employment agreementi 'stated Ms . Sundrup was

to provide to Consulting.

The minutes ofdhe March 7-, 2005- joint

meeting" did- not -state that the Consulting board discussed at that

meeting that as of the date "of--that meeting Leasiný· had failed to

pay to Consulting at any time since-the Ma~rch 2; 2004 joint

meeting, the $2,500 monthly amount that section 3 of the 'pur-

þorted Leasing management agreem'ent 'stated Leasing was to pay to

Consulting on soi- before the first day÷of each mohth."

aNor did

thoseeminutes stâte that'the-Consultirig board~discussed at the

March 7, 2005 joint meeting that as of^the- daté of that meeting

Transfer had failed to pay to Consulting at rany time since the

March 2, 2004 joint meeting the $3, 000 monthly amount that

section 3 of the purported Transfer management agreement stated

We have found above the respective aînounts and the respective dates on which Leasing made Leasing's payments to Consulting.

- 40 -

Transfer was to pay to Consu ting on or before the first day. of

each month.

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) an

the Consulting.board (i.e., Mr.

Sundrup and Ms . Sundrup) .

The minutes of that meeting stated,

inter alia,

(1) that the stc ckholders of Consulting elected for a

one-year term Mr. Sundrup ard 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, secretar , and treasurer of Consulating, and Rick Sundrup as assistant secretary of Consulting .

Those minutes

did not state that the Cons lting board discussed at the July 6;

2006 joint meeting (1) the

ment,

(3)

urported. Leasing management agree,

(2) the purported Trar(sfer management agreement, and

(a) Mr . Sundrup' s purpo ted employment- agreement and (b) Ms .

Sundrup' s purported employment agreement . i Nor did the minutes of

that meeting state that the Consulting board discussed at that

meeting the nature or the e tent of the services a(1) that the.

purported Leasing managemend agreement stated Consulting was to

provide to -Leasing,

(2) that

the purported Transfer management

agreement stated Consulting was to provide to Transfer, and

We have found above t e respective amounts and the respective dates on which Transfe made Transfer's payments to Consulting.

- 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 Constilting 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 (January 15, 2007 joint meeting) of the stockholders of Consulting

( i . e , , Mr . Sundrup and Ms . Sundrup) and the Consulting board

34We have found above the respective amounts and the respective dates on which Leasing made Leasing' s payments to Consulting.

"We have found above the respective amounts and the respective dates on which Transfer made Transfer's payments to Consulting.

- 42 ( i . e . , Mr . Sundrup and Ms . S ndrup ) .

stated, inter alia,

The minut es of that mee t ing

(1) that the stockholders of Consulting

elected for a one-year term Mr. Sundrup and Ms. Sundrup as

members of the Consult-ing boård and (2) that Consulting' s board

elected for a one-year term vir. Sundrup as president of Consults

ing, Ms. Sundrup as vice president, secretary, and treasurer oft

Consulting, and Rick Sundrup as assistant secretary of Consulte ing.

Those minutes did not state that the Consulting board

discussed at the January 15, 2007 joint meeting (1) the purported

Leasing management agreement

ment agreement, and (3)

(2) the purported Transfer manage-

(a) Mr. Sundrup's purported employment"

agreement and (b) Ms . Sundrup' s purport ed employment agreement .

Nor did the minutes of that meeting state that the Consulting

board discussed at that meet ing the nature or the extent of the

services (1) that the purpo ted Leasing management agreement

stated Consulting was to pr vide to Leasing,

(2) that the pur-

ported Transfer management

greement 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 . Sur drup' s purported employment agreement

stated Ms. Sundrup was to p ovide 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 expenses."

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 consideration of the premises, hereby agree with the Sellers

to purchase the following described real estate situated in the County of Carroll, State of Iowa,"" towit:

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

"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.

"The real estate described in the real estate installment

document is the Sundrup residence.

3 - 44 -

The East 15 feet of thel West 40 feet of Lot 11, Block

24, Town of Arcadia, Ca roll County, Iowa

* * * upon the terms and conditions following:

TOTAL PURCHASE PRICE.

The Buyers agree to pay

for said property the total of $190,000.00 due and

payable * * * as follous:

Buyer shall pay the - su of $19 , 562 . 9 3 per year , commencing with the first payment due on May 1, 2001 and

- the sum of $19,562.93 oh May 1 of each and every year

thereafter until all p incipal and interest is paid in

full.

Interest shall accrue at the rate of 6% per

annum. * * *

14.

DEED AND ABST ACT BILL OF SALE.

If all said

sums of money and intedest are paid to Sellers during

the life of this contr$ct, and all other agreements, for

performance by Buyers 1 ave been complied with, Sellers

will execute and deliver to Buyers a

Warranty

Deed conveying said pr mises in fee simple pursuant to

and in conformity with this contract and Sellers will

at this time deliver t Buyers an abstract showing .

merchantable title in onformity with-this contract.

The record does not establi h why the blank appeared in paragraph

14 of the real estate installment document or that that blank was

completed.

At no time before the drial in these cases did petitioners

execute a deed in favor of donsulting with respect to the Sundrup

residence.

Petitioners condinued to reside in the Sundrup

residence after Consulting

installment document.

nd they executed the real estate

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":

Date

Consulting's

Purported

Interest Payments

Consulting's

Purported

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 interest 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

that Consulting- paid during

ts taxable years. ended March 31,

2004., 2005, and 2006," (2) :despective repairs and maintenance of

$1,607.09," $2,326.58, and $4;671.28 that Consulting paid during

its taxable years ended March 31,

2004,

2005, and 2006,4°

(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, " and (4) respective homeowner' s and umbrella insurance of $1,097, $1,096, and $1,785 that Consultinge

paid during its taxable yea s ended March 31, 2004, 2005, and

2006.42

(We shall refer to

ny, some, or all of the above-stated

"We shall refer to any 0 some, or all of the abovie-stated

payments for real property t axes that Consulting made as Consult

ing's payments of the Sundrup residence real property taxes.

"The parties made variÙus mathematical errors in stipulating the respective total amdunts of certain types of expenses

that Consulting paid during consulting's taxable years endedi Mar.

31, 2004 through 2006. Tho e erroneous stipulations are clearly

contrary to the facts that e have s found are established by the

record in these cases. We have found the correct respective

total amounts of expenses tËat Consulting paid during Consulting's taxable years ended Mår. 31, 2004 through 2006, which are

established by the record. See Cal-Maine Foods, Inc. v. Commissioner,

93 T.C. at 195.

4°We shall refer to any some, or all of the above-stated

payments for repairs and ma ntenance that Consulting made as

Consulting' s payments of the Sundrup residence repairs and

maint enance .

5 "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 .

42We shall refer to any some, or all of the above-stated *

payments for homeowner's and umbrella insurance that Consulting

( cont inued . . . )

- 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."

ended March 31,

2004,

2005,

and 2006,

During its taxable years

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

"(...continued) made as Consulting's payments of the Sundrup residence insurance.

"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 Consulting reimbursed her.

- 48 -

1.-

Purposes -of Plan

T e purposes of the Plan are:

(a) To encourage þmployees to continue their

association with the Company [Consulting] .

(b)

To attract additional employees.

Eligibility. All employees who have been with the

Company for six .(6) mor ths, or since the Company was

incorporated, whicheveZ is shorter, provided, however,

that seasonal employeesi, employees covered by a collective bargaining agreeme*nt, or non-resident alien employees shall not be eligible.

3. Benefits. The Com any will reimburse all eligible

emp]oyees for all reasonable medical and dental expenses up to the sum o $5,000.00 in any. fiscal year

(including, but not lin ited to the cost of any accident, health or medical or dental insurance policy)

which the eligible employee and/or members of his

immediate family may irícur, except such expenses as may,

be covered and are reinfbursable to them from any medical, dental, health and/or accident insurance policy

insuring them.

On May 1, 2000, Consult(ing and Mr. Sundrup executed a document entitled "AGREEMENT",

REIMBURSEMENT PLAN"

'NONDISCRIMINATORY MEDICAL AND DENTAL

(Mr . Su drup' s purported medical and dental

agreement) ,. and Consulting

nd Ms . Sundrup executed a document

with the same title (Ms . Sundrup' s purported medical and dental

agreement) .

Mr. Sundrup siýned Mr. Sundrup's purported medical

and dental agreement both iS his individual capacity and as

president of Consulting.

Ms. Sundrup signed Ms. Sundrup's

purported medical and denta

agreement in her individual capac-

ity, and Mr. Sundrup signed that document as president of Consulting.

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 Nondiscriminatory 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 insurance policy insuring you and/or members of your immediate 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:

for certain health insurance plans,

(1) Premiums

(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-st ted medical and dental expenses of

the Sundrups that Consulting paid as Consulting's payments cof the

Sundrups' medical and dental expenses.)

On June 24, 2004, Consu ting made payments totaling

$2,029,.88 on behalf of Mr. a d Ms. Sundrup to a company known as

American Federal Assurance f r expenses relating to nursing home

care (Consulting' s payments

f 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, 20 0 0 , almc s t two months be f ore Mr . and Ms .

Sundrup incorporated Consult ing, Mr. and Ms. Sundrup transferred

the 1997 Cadillac automobil(and the 2000 GMC truck to it.45

On September 1, 2000, Consulting traded the 1997 Cadillac

automobile for a 2000 Cadil]ac automobile (2000 Cadillac.automobile) .

During Consulting' s taxable years ended March 31, 2004

through 2006, Ms. Sundrup,

ho drove the 2000 Cadillac automobile

during those years, used that vehicle to buy food for her family

and for other personal purposes.

440n June 24, 2004, Consulting paid $330.75 to the Iowa

Motor Truck Association 'for "Annual dues" (Consulting' s payment

to the Iowa Motor Truck Assóciation for annual dues).

4sAlthough the parties tipulated that the date on which the

Sundrups transferred the tw$ vehicles in question to Consulting

was Mar. 31, 2000, the reco$d does not explain how they could

have made those transfers tå Consulting" on a date before Consulting 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. Sundfup 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 suppl~ies .

Those payments totaled $821. 05, . $288 . 11,

and $476 . 93 during Consultina' s taxable s years ended March 31;

2004, 2005, and 2006, respectively., (We shall refer to-any, some,

or all of the above-stated office expenses thatt Consulting paid

as Consult ing' s payments of pf f ice expenses . )

Summary of Certain Amounts That «Consulting

Received, Paid, or Clained as Depreciation

The following chart summarizes certain amounts that Consult-

ing received, paid, or clained as depreciation (discussed

belon) :"

"The amount listed belòw 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

63,500.00

51,500.00

51,000.00

$19,562.93

$19,-562.93

1,096.00

1,116.00

1,126.00

1,607.09

2,326.58

4,671.28

Sundrup residence utilities

2,939.71

2,852.21

2,668.77

Consulting's payments of the

Sundrup residence insurance

Consulting's payments of the

1,097.00

1,096.00

1,785.00

4,869.81

4,149.66

5,590.75

4,830.79

8,838.76

11,455.26

2,029.88

330.75

2,871.73

1,776.75

1,622.08

821.05

288.11

476.93

39,696.11

44,367.63

48,959.00

$27,374.00

$15,226.00

$12,326.00

67,070.11

59,593.63

61,285.00

Total amounts received by

Consulting

Amounts Paid

Consulting's purported interest

and principal payments

Consulting's payments of the

Sundrup residence real property

taxes

Consulting's payments of the

Sundrup residence repairs and

maintenance

Consulting's payments of the

Sundrups' food

Consulting's payments of the

Sundrups' medical and dental

expenses

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

Consulting's payments of office

expenses

Total amounts Consulting

paid

Amounts Claimed as Depreciation

Depreciation claimed

Total Amounts Consulting Paid

and Claimed as Depreciation

- 54 -

(We shall refer collectively to Consulting' s purported interestand principal payments, Cons lting' s payments of the Sundrup

residence expenses, Consulti g' s payments of the Sundrups' foo'd,

Consulting' s payments of the Sundrups' medical and dental expenses, Consulting' s payment 3 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,

md Consulting's payments of .office

expenses as Consulting' s pa

ents of the Sundrups' expenses . )

Tax lieturns

The Sundrups' Tax Returns

For their taxable year 1999 and an undisclosed number of

years before that taxable y ar, the Sundrups used an accountant4

(Sundrup accountant) , who w s with the accounting firm Olsen

Muhlbauer, to prepare their tax returns .

Sometime duking their

taxable year 2000, the Sund ups informed the Sundrtip accountant

that they intended to incorporate Ron Sundrup Transfer.

Sometime after the Sundrups used the Sundrup accountant to

prepare their tax return fo

their taxable year 1999, they

stopped using him to preparé their tax returns.

The Sundrup

accountant did not prepare

ny tax returns for (1) the Sundrups

for their taxable years 200

through 2005,

(2) Transfer for its

taxable years ended March 3 , 2001 through 2006,

(3) Consulting

47The record does not i lentify the accountant who prepared

petitioners' tax returns fo certain years before 2000 .

- 55 for its taxable years ended March 31, 2001 through 2006, and

(4) Leasing for its- taxable years 20'00-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. Pechacek" 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 $10,391.06"

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),

"See supra note 11.

"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.5°

that loss "from rental real

In calculating

state activities", Leasing claimed

(1)" ~a deduction of $30,000 f r Leasing's promissory note to

Consulting dated December 30

2003 and (2) a deduction for cer,

tain expenses (e.g., real pr perty taxes, insurance, repairs, and

depreciation) with respect t

the North House and the South House

(deduction for expenses rela ing to the North House and the South

House) .5

Leasing provided to each of the Sundrups Schedule K-1,

Partner's Share of Income, Óredits, Deductions, etc.

(Schedule K-

1) , for Leasing' s taxable y ar 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 cl imed in calculating "total income"

soAt all relevant times Leasing used the cash method of

accounting for tax purposes

At no time before t-he trial in

these cases did Leasing fil

(1) Form 8832, Entity Classification

Election, in which it elect d to be taxed as a corporation or

(2) Form 8893, Election of artnership Level Tax Treatment, or

any other election statement under sec. 6231(a) (1) (B) (ii) , in

which it elected partnershiy-level tax treatment. - As a result,

at all relevant times, including during the years at issue,

Leasing was treated as a paÅsthrough entity for tax purposes.

siThe record does not ešstablish the amount, if any, that .

Leasing paid for expenses rŠlating to the North House and the

South House during its taxaßle year 2003.

57 -

that they reported in the Sundrups' 2003 return was equal to the

totalsof 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 Sundrùps' 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' Distributive 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.

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.

"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

n which Leasing showed each.of,their

shares of the 2004 Leasing S hedule K claimed loss of $11 258 .

The 2004 -Schedule E Leasing blaimed loss of $11, 258 that the

Sundrups claimed in calculat ng "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.

n calculating that total income, Mr.

and Ms. Sundrup claimed (1) $13,687 of "Taxable interest", which

included Consulting's purpo ted interest payments of $9,257.42

that the Sundrups -received

uring their taxable year 2005, and

(2) a loss attributable' to Ieasing of $1,830 (Sundrups' 2005

Schedule E Leasing claimed loss) from «Schedule E that petitioners

included with- the Sundrups' 2005 return.

The Sundrups's 2005 Sch dule E Leasings claimed loss of $1,,830

was the amount of the loss

rom "rental real estate" activities

that Leasing claimed in Sch dule K, Partners' Distributive Share

Items (2005 Leasing Schedul

K claimed loss) , that Leasing -in-

cluded with Form 1065 which it -filed for its taxable year 2005

and which Mr. Pechacek sign d as return preparer.

In calculating

that loss from "rental real estate" activities, Leasing claimed

(1) a deduction of $10,000

or 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.

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."

In Transfer's TYE 3/31/04 return, Transfer claimed "Taxable

income" of negative $4,487, or a loss of $4,487.

In calculating

"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.

"At all relevant times Transfer used the cash method of

accounting for tax purposes.

- 60 -

that loss, Transfer claimed i.n Transfer's TYE 3/31/04 return

(1) a deduction of $45,32655 for Transfer's payments to Consulting

that Transfer made during Tra.nsfer's taxable year -ended March 31,

2004,

(2) a deduction of $13 322 for "Employee benefit programs"

which included:Transfer's p yments of the Sundrups' medical and

dental expenses made during that taxable year, and (3) a deduce

tion of $485 for "MISCELLANI OUS" expenses - (miscellaneous ex- penses) .5

In Transfer' s TYE 3/31 05 return, Transfer claimed zero

"Taxable income".

In calcu]ating that taxable income, Transfer

claimed in Transfer's TŸE 3 31/05 return a deduction of $39,602

for Transfer's payments to

onsulting-that Transfer made during

Transfer' s taxable year endèd March 31, 2005.

In Transfer' s TYE 3/31 06 return, Transfér claimed "Taxable

income" of negatiire $4,h48, or a loss of $4,248.

In calculating

tha't loss, Transfer claimed in Transfer' s 'Ì'YE 3/31/06 return

(1) a deduction of $43,639 Eor Transfer's payments- to Consulting

ssWe have found above that Transfer' s payments

o Consulting

that Transfer made during T ansfer's taxable year ended Mar. 31,

2004, totaled $45 500.

s'The record does not establish that Transfer paid $485 of

miscellaneous expenses duri g 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."

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 (Consulting'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 incame".

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, 2004.5"

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

"The record does not establish that Transfer paid $696 of

miscellaneous expenses during Transfer's taxable year ended Mar.

31,

2006.

58Consulting 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 p yments 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

31", 2004,

(5) Consulting's p yments of office expenses, of $821

that Consulting made during

2004,

(6)

uring -its, taxable year ended March

ts taxable -year ended March .31,

$10,391 of "INTERE T ON REK", which was the amount of

Consulting' s purported inte est 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 Consult ing made during its taxable year

ended March 31,,2004,

(8) Cånsulting's payments of the Sundrup

residence repairs and maint nance of $1, 815 that Consulting made

during its taxable year end d March 31, 2004,

(9) Consulting' s

payments of the Sundrupares dence utilities of $2, 940 that Consulting- made during its tax ble year- ended March 31, - 2004, and

ssConsulting included F rm 4562, Depreciation and Amortization (Form 4562) , with Cons lting' s TYE -3/31/04 return.

In that

form, it claimed (1) totalsclepreciation of $5,165 for the 1997

Cadillac automobile, 2000 CÅdillac automobile,. 2000 GMC truck,

and 2004 GMC Envoy and (2) Nec. 179 expense of $14,500 for the

2004 GMC Envoy. However, w have found that Consulting traded

(1) the 1997 Cadillac autom bile on Sept. 1, 2000, for the 2000

Cadillac automobile and (2) the 2000 GMC truck on Feb. 14, 2004,

for the 2004 GMC Envoy. Co sulting 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 lso 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."

In Consulting's TYE 3/31/05 return, Consulting claimed

"Taxable income" of negative $5,654, or a loss of $5,654.

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,"

(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," (4) Consult-

"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 deductions. That is because Consulting does not contest them.

"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.

"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 automobile, 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 Sundru s' vehicle expenses of .$1, 857 that·

Consulting made during its taxable year wended March, 31, 2005,

(5) Consulting's payments of office expenses of $302 that, Consulting made during its taxable year ended March 31, 2005;

(6) -$9,841 of "INTERESTá ON R K", which was the amount' of Consulting' s purported interest pay nents that it made to the Sundrups

during Consulting's taxable

ear ended March 31, 2005,

(7), Con-

sulting' s payments of the S ndrup residence real property taxes

of $1,116 that Consulting m de during its taxable year,ended

March -31, 2005,

(8) Consultïng' s payments of the Sundrup resi-

dence repairs and maintenan e 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 t-hat Consulting made during its taxable year ended March 31, 2005, .and

(10) Consulting's payments-af the Sundrup residence insurance of

$1,096 that Consulting made during its taxable year ended March

31,

2005.

(. .continued)

Sept. 1, 2000, for the 2000 Cadillac automobile Ånd (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 alsos

claimed $6, 908 of depreciation with re'spect to the Sundrup

residence, including the laNd.

"In calculating the zero "taxable income" that Consulting

claimed in Consulting's TYE 3/31/05 return, Consulting claimed

cei-tain additional deductio s that respondent determined to disallow. We do not discuss t ose additional disallowed deductions.

That is because Consulting loes 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

paymeñts to Consulting and Leasing's payments to Consulting that

Transfer and Leasing made during Consulting's taxable year ended

March 31, 2006."

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," (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," (3) depreciation

of $12,326," (4) Consulting's payments of the Sundrups' vehicle

"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.

"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.

"We have found that Consulting's payments of the Sundrups'

medical and dental expenses that Consulting made during Consulting's taxable year ended Mar. 31, 2006, totaled $11,455.26.

"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 automobile, 2000 GMC truck, and 2004 GMC Envoy. However, we have found

(continued...)

expenses of $3,151 that Cons lting made during its taxable year

ended March 31, 2006,

(5) Consulting's payments of office ex-

penses of $477 that Consulti ig made during its taxable year ended

March 31,

2006;

(6)

$9,257 of ,"INTEREST ON REK", which was the

amount of Consulting' s purpo ted interest payments that it made

to s the Sundrups during Cons lting' s taxable year ended March 31,

2006,

(7) Consulting' s payments of the Sundrup residence real

property taxes of $1,126 th t Consulting made during its taxable

year ended March 31, 2006, . 8) Consulting' s payments of the

Sundrup residence repairs ar d maintenance of $4, 671 that Consulting made during . its taxable year ended March 31, 2006,

(9) Con-

sulting' s, payments of the S ndrup 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, 127'" that C0nsulting made during its taxable year

ended March 31,

20 0 6 .

that Consulting traded (1)

he 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 '['YE 3/31/06 ereturn, Consulting also

claimed $6, 908 of depreciation with respect to the Sundru];>

residence, including the la d.

"We have found that Éonsulting's payments of the Sundrup

residence insurance that weie made during Consulting' s taxable

year ended Mar. 31, 2006, t taled $1,'/85.

In calculating the ze o "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,

years 2003 through 2005,

(2) Leasing's taxable

(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 deficiency (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 Consulting' s purported interest payments that they reported as "Interest

Income" for their taxable years indicated:

allow. We do not discuss those additional disallowed deductions.

That is because Consulting does not contest them.

- 68 -

Taxable Year

Consult ing' s Purported Interest

Payt ents Excluded From Gross Income

2003

2004

2005

$10,391

9,841

9,257

In the Sundrups' notice9

Sundrups are not entitled t

respondent also determined that the

deduct the following amounts of

Schedule E claimed losses:

Schedule E Claimed Loss Disallowed

Sundrups' 2003 Schedule E L asing claimed loss

Sundrups' 2004 Schedule E easing claimed loss

Sundrups' 2005 Schedule E Ueasing claimed loss

In that notice, respondent

Amount

$4,.720

11, 258

1,830

lso determined that the Sundrups. have

the following amounts of Sc edule E "Total income" for their taxable years indicated:

Taxable Year

Schedule E "Total incâme"

2003

2004

2005

$7, 056

6, 743

5, 287

Respondent made the Su drups' Schedule E determinations in

the Sundrups' notice because respondent determined for the taxable years indicated (1) that Leasing is not entitled to the

following amounts of Schedule IC claimed losses and (2) that

Leasing has the following athounts of "Ordinary income (loss) from

trade or business activitie "

- 69 -

Taxable Year

2003

2004

2005

Schedule K

Claimed Loss

Disallowed

$4,720

11,258

"Ordinary income (loss) from

'trade ór business activities"

1,830

$7,056

6,743

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.7°

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

7°Respondent made certain other-determinations in the Sundrups' notice that we do n'ot 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,

espondent also determined that Trans-

fer is liable for accuracy- elated penalties under section

6662 (a), in the respective· at ounts of $472.20, $355.20, and

$168.60 for its taxable yeafs 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 C nsulting a notice with respect to its

taxable years ended March 3 , 2004- through 2006 (Consulting' s

notice) .

In that notice, r spondent determined, inter alia, that

-Consulting is not entitled for the taxable years at issue to the

following deductions?1 that

t claimed for the payments indicated:

71Respondent also deter ined that Consulting is "not entitled

for each of its taxable yeats at issue to certain additional

amounts of the deductions tEat it claimed for each of those

years . We do not address tl ose additional disallowed .amounts .

That is because Consulting aloes not contest them.

- 71 Claimed Deduction

Consulting's payments of the

Sundrups' food

Consulting's payments of the

Sundrups' medical and dental

expenses

Depreciation and

sec.

179 expense

Consulting's payments of the

Sundrups' vehicle expenses

Consulting's payments of office

expenses

Consulting's purported interest

payments

Consulting's payments of the

Sundrup residence real

property taxes

2004

2005

2006

$4,870

$4,072

$5,491

14,831

18,839

11,084

27,374

15,226

12,326

2,872

1,777

11,622

821

288

1477

10,391

19,841

9,257

1,096

1,116

1,126

11,607

12,327

4,671

Consulting's payments of the

Sundrup residence repairs and

maintenance

Consulting's payments of the

Sundrup residence utilities

2,940

2,852

12,669

Consulting's payments of the

Sundrup residence insurance

1,097

1,096

1,127

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 substantial understatement of tax.

- 72 -

Amendments to Answers

The Sundrups

Respondent filed an ame 1dment 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

eficiencies that-

respondent -determined in th

Sundrups' notice for their-taxable

years 2003, 2004, and 2005.

Respondent made those allegations

because respondent alleged in the amendment: to answer that Leasing is not entitled to the

espective deductions thåt it claimed

for its taxable years 2003, 2004, and 2005 for Leasing' s promissory note to Consulting dat d December 30, 2003 and for Leasing's

payments to Consulting .

Re pondent further alleged in that

amendment to answer that th

Sundrups have respective increases

of $1,153.60, $208.80, and $109.80 to the accuracy-related penalties under section 6662 (a) t hat respondent determined in the

Sundrups' notice for their t axable years 2003, 2004, and 2005.

Transfer

Respondent filed an am ndment to answer in Transfer' s case

at docket No. 14374-07.

Re pondent alleged in that amendment to

answer that Transfer has re pective increases of $5,556, $4,767,

and $5,375 in the respectiv

deficiencies that respondent deter-

mined in Transfer's notice

or its taxable years ended March 31,

2004, March 31, 2005, and M rch 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 accuracyrelated penalties under section 6662(a) that respondent determined 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.

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

111,

115

(1933).

See Rule

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 selfserving.

We shall not rely on the respective testimonies of Mr.

Sundrup ' and Ms . Sundrup in thos e re spe c t s .

v. Commissioner,

87 T.C.a74,

See , e . g . , Tokarski

(1986) .

Certain Transactions at Issue

It is respondent' s position that the respective transactions

between -(1)

(a) Transfer an

Consulting and (b) Leasing and ~

Consulting, under which Cons lting purported to provide to -each

of 'those companies certain 'services, and (2) the Sundrups -and

Consulting, under which Con ulting purported to agree to buy the

Sundrup residence, should nct be respected for tax-purposes.22

support of that position, r spondent argues that there was no

nontax business purpose for any of those - transactions and that

each of them was without ecânomic substance and a sham.

Accord-

ing tio respoñdent,

When looking beyond thä four corners of petitioners'

documents, the evidencë 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 lifestýle through Consulting's payment

of their personal living expenses. Those payments from

Transfer and Leasing t Consulting, a corsporation without any purpose beyond tax avoidance, should not be

deductible.

Mr . and Mrs . Sund up 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 ,

22We shall sometimes refer to the respective transactions

betúreen (1) Transfer and Co sulting, (2) Leasing and Consulting,

and (3) the Sundrups and Co sulting as the respective transactions at issue .

- 75 -

$9,257.00, respectively. Respondent disallowed these

amounts, determining that the alleged sale of 200 Corning 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 transactions at issue should be respected for tax purposes.

In sup-

port of that position, petitioners argue:

Sundrup Consulting, Sundrup Transfer, and Sundrup Leasing 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 testimonies 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 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, was the Sundrups' tax-avoidance objective

of having Consulting pay- th

Sundrups' personal.living expenses

with funds which Transfer and Leasing paid to Consulting and for

which Transfer and -Leasing

laimed tax deductions for their

respective taxable years at issue."

On that record, we find that

the respective transactions at issue were not entered into for

nontax business reasons, weie 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. i

part and revd.

in part 752 F.2d 89

(4th Cir. 1985); Van Zandt i.-Commissioner, 40 T.C.

affd. 341 F.2d 440

824

(1963),

(5th Ciri 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 7(3) the Sundrups and

Consulting should not be re pected for tax purposes.

As a re-

sult, we hold that (1) Tran fer is not entitled for each of its

"In order to bolster the chances that they would succeed in

achieving their tax-avoidanåe objective, petitioners, created a

paper trail consisting of the purported Transfer management

agreement, the purported Legsing management agreement, Mr.

Sundrup's purported employmënt agreement, Ms. Sundrup's purported

employment agreement, and the real estate installment document.

Those documents are nothinggmore than self-serving attempts by

petitioners to create a paper trail that they hoped would increase the chances that the½ 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 yëa à;

anda (3) the Sundrups do not have for each of

their taxable years at issue interest income because sof Consulting's purported interest payments to them during each of those

years.9

¯+

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'deduction of $9,2Š3'for Transfer'is payments of the Sundrups' medical

and dental expenses during that year.

In Transfer's notice,

respondentedetermined to disallow that deduction."

Respondent sa'rgues that Transfer is not entitled to the

deduction-claieed for its taxable year ended March 31, 2004, for

Transfer's payménts of Ithe Sundrups' medical and dental expenses

See supra note 50.

"In the light of our holdings with respect to the respectives 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 nondeductible payments that constitute constructive dividends to the

Sundrups.

See supra note-4.

Atitrial, 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 ans employee [of Transfer] and cannot claim benefits under the plan. * * * Mrs. Sundruponever

established that she was an employee of Transfer."

Mr.. Sundrup testified inconsistently that during Transfer's

taxable years at issue he w s not an employee of Transfer and

that he was an employee of

ransfer.

Ms. Sundrup claimed at

trial that she was an emplo ee of Transfer during at least spart

of its taxable year ended M rch 31, 2004.

We are unwilling to

rely on the respective test monies of Mr. Sundrup and Ms. Sundrup

regarding whether they were employees of Transfer during its

taxable gear ended March 31

Respondent acknowledge

2004.

that Mr . Sundrup and Ms . Sundrup

"were in fact performing th

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 ha e made.

We have found that, as was

true when the Sundrups 'oper ted Ron Sundrup Transfer, the

Sundrups conducted the offi e operations of Transfer, which Ms.

Sundrup managed, at the Sundrup residence.

that, as was true when Ms.

We have also found

undrup managed the office operations

of Ron Sundrup Transfer, as part of her managing the office

operations of Transfer she

nswered the telephone, scheduled

pickups, monitored deliveriés, and coordinated jobs among the

drivers.

In addition, we háve found that Mr.- Sundrup served as a

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."

In!Transfer's notice, respondent

determined to disallow $426 and $215 of those respective deductions.

Transfer presented no evidence at trial, and makes no argument 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

"See supra notes 56 and 57.

- 80 -

and that respondent disallo ed.

On the record before us, we - find

that Transfer is not entitled to those deductions.

Leas ing' s Claimed DeductionË Relating

to the North House and the South House

In the respectiVe Form

1065 that it filed for its taxable

years 2003, 2004, 2005, Lea ing claimed deductions for expenses

relating to the North House and the South House of $11, 776,

$18,001, and $7,117, respectively.?"

In the Sundrups' noticer,

respondent determined to disallow those deductions .

The Sundrups present-ed no evidence at trial, and make no

argument on brief, with respect to Leasing's claimed dedlictions

for expenses relating to th

North House and the South House.

the record before us, we fi d that Leasing is not entitled to

thos e deduc t ions . 79

Accuracy-Related Penalties

In the respective notiåes that respondent issued to the

Sundrups, Transfer, and Con ulting, respondent determined that

they are liable for each of their respective taxable years at

issue for accuracy-related

enalties under section 6662(a) be

cause of (1) negligence or

isregard 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 fil d in the Sundrups' case at docket No.

7"See supra notes 51,

79See supra note 50 .

52, and 53.

- 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 tog 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. Commissi¯oner,

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 return.

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

taxable year or $5,000.

- 82 -

Sec. 6662(d) (1) (A) .

As pertinent here,

in the case of a corporatior other than"an S corporation, an

understatement is substanti 1 (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,

se .

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 pénalty 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

deteräin'ation of whether the taxpayer acted with reasonable cause

ahd in good faith depends o

the pertinent facts and circum-

stances, including the taxpayer's efforts to assess such taxpayer's proper tax liability, the knowledge and experience of the

taxpayer, -and the reliance

as an accountant.

n the advice of a professional, such

Sec. 1.6064-4(b) (1), Income Tax Regs.

Relie

ance on the' advice of a pro essional does not necessarily demonstrate reasonable cause and good faith unless, under all the

circumstances, such relianc

acted in good faith.

Id.

was reasonable and the taxpayer

- 83 -

Respondent bears the burden of'production with respect to

the accuracy-related penalties at issue.

See sec. 7491(c).

meet respondent's burden of production, respondent must come

forward with sufficient evidence showing that it is appropriate

to impose the accuracy-related penalty.

sioner, 116 T.C. 438,-446 (2001).

See Higbee v. Commis-

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 shoùld 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 Transfer'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."

We have also

held that Transfer is not entitled for each of its taxable years

"See 'supra note 75.

- 84 -

ended March 31, 2004 and 2006, to deduct claimed miscellaneous

expenses .

In addition, we

ave 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 (stipulat ion of settled issues) , Transfer

conceded certain determinat ons that respondent made ein Transfer's notice, and Consultin

conceded one of the determinations

that respondent made in Con ulting's notice."

In the light of our ho] dings 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 conclud

that respondent has satisfied re-

spondent's burden of produc ion under section 7491(c) /

Petitioners argue that the Sundrups, Transfer,- and Consul-ting are not liable for any òf their respective taxable years at

issue for accuracy-related benalties under section 6662 (a) .

That

is because, according to petitioners, they

• did not substantially ùnderstate income tax and did not

act negligently or diskegard rules or regulations .

Petitioners had reasonâble cause and acted in good

faith. Petitioners haUe shown their transactions were

legitimate business activities and not a scheme to

deduct personal expenses. * * *

"At trial, petitioner

made certain additional concessions.

- 85 -

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 miscellaneous 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."

With respect to the respective

determinations of respondent that Transfer and Consulting conceded 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

"See supra note 50.

- 86 -

the respective items that- r spondent determined are wrong and

that they conceded.83

On the record before un, we find that the Sundrups, Transfer, and Consulting were neeligent 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 underpayme ts for each of their respective

taxable years at issue.

On the record before us, we find that there was not reasonable 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 respectiv

taxable years at issue for accuracy-

related penalties under section 6662 (a) with respect to their ,

respective underpayments ofßtax for each of those years."

We have considered all of the contentions and arguments of

the parties that are not diåcussed herein, and we find them to be

without merit, irrelevant, and/or moot.

83See supra note 81.

"See supra note 75.

- 87 -

To reflect the foregoing and the parties' respective concessions,

Decisions will be entered

under Rule 155.

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