# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T.C. Memo. 2005-125

UNITED STATES TAX COURT

TIMOTHY DEAN STRONG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
STRONG CONSTRUCTION CO., INC., A MINNESOTA CORPORATION,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 821-01, 2048-01.

Filed May 26, 2005.

Thomas E. Brever, for petitioners.
John C. Schmittdiel, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge:

Respondent determined deficiencies in

petitioners’ Federal income tax, additions to tax, and penalties
as follows:

- 2 Timothy Dean Strong--docket No. 821-01

Year

Deficiency

Penalty
Sec. 6663

In the alternative
Penalty
Addition to Tax
Sec. 6662
Sec. 6651(a)(1)

1990
1991
1992
1993
1994

$9,768
11,185
19,794
31,567
6,613

$7,326.00
8,388.75
14,845.50
23,675.25
4,959.75

$1,953.60
2,237.00
3,958.80
6,313.40
1,322.60

$2,442.00
2,796.25
4,948.50
7,891.75
N/A

Strong Construction Co., Inc.--docket No. 2048-01

Year

Deficiency

Addition to Tax
Sec. 6651(f)

1990
1991
1992
1993
1994

$6,257
6,925
12,871
25,783
5,090

$4,693
5,194
9,653
19,337
3,818

In the alternative
Addition to Tax
Sec. 6651(a)(1)
$1,564
1,731
3,218
6,446
N/A

Unless otherwise noted, all section references are to the
Internal Revenue Code in effect during the taxable years at
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
The issues for decision are:
1.

Whether petitioner Strong Construction Co., Inc. (SCC),

should be recognized as a taxable entity.

We hold SCC is a

taxable corporate entity;
2.

whether SCC had additional income from sales of houses

it constructed during the years 1990-94 (the years at issue) and
from unidentified taxable sources, as established on the basis of
deposits to petitioner Timothy Dean Strong’s (Mr. Strong) joint

- 3 bank account with SCC.

We hold with certain specific exceptions

that SCC did have the additional income determined by respondent;
3.

whether SCC is entitled to expenses for construction

costs and general and administrative expenses related to its
homebuilding business during the years at issue in excess of
those allowed by respondent.

We hold SCC is entitled to deduct

certain expenses as redetermined herein;
4.

whether Mr. Strong had additional income for the years

at issue for constructive dividends from SCC, deposits of SCC’s
funds for his personal use, and the corporation’s payment of his
personal expenses.
5.

We hold he did as redetermined herein;

whether Mr. Strong is liable for the fraud penalty

under section 6663 on his underpayment of tax for each of the
years at issue.
6.

We hold he is;

whether SCC is liable for the addition to tax under

section 6651(f) for fraudulent failure to file timely on its
underpayment of tax for each of the years at issue.

We hold that

SCC is not liable for the section 6651(f) addition to tax; and
7.

alternatively, whether SCC is liable for the addition

to tax under section 6651(a)(1) for failure to file timely tax
returns.

We hold that SCC is liable for the section 6651(a)(1)

addition to tax.

- 4 FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference.

At the time of filing his

petition in this case, Mr. Strong resided in Clear Lake,
Minnesota.

At the time of filing its petition, SCC had its

principal place of business, mailing address, and registered
office in Minnesota.
SCC
SCC was incorporated under Minnesota law in 1986, and as of
December 31, 1994, had not been formally dissolved.

At all times

relevant, Mr. Strong was the 100-percent owner of SCC.
its incorporator, director, and president.

He was

During the years at

issue, SCC had no officers except Mr. Strong and had no
employees.
During the years at issue, SCC was engaged in the
residential construction business and built and sold houses under
the names Strong Construction or Strong Construction Co., Inc.
SCC constructed and sold the following houses (the 22 house
sales):

- 5 1990
Date

Property (Buyer)

7/5
7/5
10/12
12/10
Total

10925 Osage Street
10929 Osage Street
10901 Osage Street
374 Rose Avenue East

Sale Price
$59,900
64,600
64,900
75,400
264,800

1991
Date

Property (Buyer)

1/17
1/30
4/5
6/28
7/26
9/6
Total

12166 Wedgewood Drive
10905 Osage Street
16051 Andrie Street
767 99th Lane, NE
1755 124th Avenue, NW
1737 McKnight

Sale Price
$88,000
64,000
116,960
87,760
84,000
84,000
524,720

1992
Date

Property (Buyer)

Sale Price

2/20
1761 County Road F
$89,000
4/2
3242 129th Lane
85,000
4/13
3854 120th Avenue, NW
78,000
7would be one word
12154 Wedgewood Drive
92,900
7/23
11900 NE Kerry Street
91,000
11/18
818 Meander Street
96,000
Total
531,900
1993
Date

Property (Buyer)

10/27
Total

14671 Helium Street

Sale Price
$85,448
85,448

- 6 1994
Date

Property (Buyer)

Sale Price

8/30
9/27
10/7
10/25
11/22
Total

14685 Iodine Court
4412 Josephine Lane North
5661-146th Circle
4265 Victoria Street
7096 Progress Road

$117,600
103,766
115,000
121,880
73,150
531,396

During the years at issue, Mr. Strong had signatory
authority over bank account No. 893315300 at First Bank, Coon
Rapids, Minnesota (later known as Marquette Bank Coon Rapids).
This account bears his name and that of SCC.

The net proceeds

from the 22 house sales during the years at issue were paid by
checks issued to SCC and deposited in account No. 893315300.

SCC

did not file Federal or State income tax returns for the years
1990-94.

Mr. Strong considered SCC funds deposited into account

No. 893315300 to be available for his personal use.
Mr. Strong’s Income Tax Returns
Mr. Strong filed his 1990, 1991, and 1993 Forms 1040, U.S.
Individual Income Tax Return, on March 23, 1995.

He filed his

1992 Form 1040 on March 2, 1995, and he timely filed his 1994
return.

For each of the years 1990-94, the returns filed by Mr.

Strong reflect negative taxable income.

These tax returns all

included a Schedule C, Profit or Loss From Business (Sole
Proprietorship), which identified his principal business as
“construction”.

These Schedules C reflect the following gross

receipts, expenses, and net profits or losses:

- 7 Item

1990

Gross
receipts
or sales

$20,100

1991

1992

1993

$24,150

$26,210

$47,934

1994

$81,640

Returns &
allowances

---

---

---

2,110

---

Net sales

---

---

---

45,824

---

Cost of
goods sold

---

---

---

29,151

66,204

Gross
profit

---

---

---

16,673

15,436

Total
expenses

19,642

24,818

24,970

30,016

15,436

Net profit
(loss)

458

(668)

1,240

-0(13,343)

The Forms 1040 Mr. Strong filed reflect a $65 tax liability
based on self-employment tax in 1990 and a $175 self-employment
tax liability in 1992.

Mr. Strong reported no other tax on the

Forms 1040 for 1990-94.
Mr. Strong’s Initial Contacts and Discussions With A Revenue
Officer
In late 1991, Mr. Strong was contacted by an Internal
Revenue Service (IRS) revenue officer.

The purpose of this

contact was to inquire regarding Mr. Strong’s unpaid income tax
liabilities for 1987 and 1988 and his unfiled income tax returns
for 1989 and 1990.

Mr. Strong refused to provide the revenue

officer with any personal or financial information, but he told
the revenue officer that he expected his tax liabilities for 1989
and 1990 to be at least $50,000.

In a later conversation, Mr.

- 8 Strong informed the revenue officer that the reason he was
delinquent in filing his tax returns was that he could not access
records held by his ex-spouse.

This statement was inaccurate

since his former spouse did not have any of his records.
Return Preparation
Mr. Strong’s tax returns for 1990 and 1993 were signed by D.
R. Newman (Mr. Newman) as the paid tax return preparer on April
10 and 21, 1994, respectively.

His 1991, 1992, and 1994 tax

returns were executed by D. Wade (Ms. Wade) as the paid tax
return preparer.

Ms. Wade dated her signature on the 1991 return

February 21, 1995, and dated the 1994 return February 15, 1995.
Mr. Strong initially had Mr. Newman prepare his tax returns
for 1990-93.

Mr. Newman prepared those returns from information

and documents provided to him by Mr. Strong.

Mr. Newman gave the

completed tax returns along with the provided documents back to
Mr. Strong in April 1994.

Mr. Newman did not discuss the tax

returns with him upon completing and providing them to Mr.
Strong.

Mr. Strong did not provide Mr. Newman with bank

statements, deposit slips, or canceled checks to prepare his tax
returns.
Without the knowledge of Mr. Newman, Mr. Strong altered or
caused to be altered the amounts shown on the 1990 return
prepared by Mr. Newman before he filed the return.

He also

caused the 1991 and 1992 returns originally prepared by Mr.

- 9 Newman to be changed by Ms. Wade.

Mr. Strong instructed Ms. Wade

to change the figures shown on the 1991 and 1992 returns as
originally prepared using handwritten sheets he gave her.

Ms.

Wade changed the figures on the 1991 tax return by covering the
original numbers with correction fluid and writing new numbers
over them because she did not have a 1991 form at the time she
revised the return.
form.

She redid the 1992 return, but on a clean

The changes Mr. Strong instructed Ms. Wade to make to the

1991 and 1992 tax returns, originally prepared by Mr. Newman,
reduced the reported Schedule C profit on each return.

Ms. Wade

also prepared Mr. Strong’s 1994 income tax return from a sheet of
paper provided to her that contained the income and expense
figures she placed on the return.
The Audit of Mr. Strong’s Income Tax Returns
In September 1995, respondent notified Mr. Strong that his
1990 and 1991 Federal income tax returns were under examination,
and in a meeting on November 30, 1995, at his residence, a
revenue agent advised him that his 1992, 1993, and 1994 returns
were also under review.

In response to requests for his bank and

business records, Mr. Strong provided only handwritten summaries
of settlement sheets for five houses sold in 1991 and 1992.
Respondent’s revenue agent obtained information regarding the
construction business by issuing summonses under section 7602 for

- 10 SCC’s bank records and for settlement statements from title
companies for the houses that had been sold by SCC.
After the revenue agent’s preliminary findings were provided
to Mr. Strong, reconstructed financial statements for SCC for the
years 1991, 1992, 1993, and 1994 were presented to the revenue
agent by Mr. Frazier, an accountant who had been engaged by Mr.
Strong.
Respondent used the financial statements provided by Mr.
Frazier as the starting point for determining SCC’s taxable
income for the years at issue.

Respondent determined that SCC

was not entitled to deduct all the expenses shown on the
financial statements prepared by Mr. Frazier.

Respondent also

analyzed deposits in bank account No. 893315300 to determine
SCC’s taxable income in addition to the identified deposits of
sales proceeds of houses.
The following shows the deposits to account No. 893315300
that remain in dispute1:

1

Respondent conceded that a deposit of $6,000 on Dec. 4,
1990, was a loan from Mr. Strong’s father and that a deposit of
$1,000 on June 2, 1992, was a loan from Mr. Strong’s parents.

- 11 Payor
Cash in ticket
Vincent Kurkowski
Cash in ticket
Cash in ticket
Cash in ticket
Cash in ticket
Cash in ticket
Cash in ticket
Cash in ticket
Ken Jeanotte
Unknown
Ken Jeanotte
Ken Jeanotte
Gordon Schnobrich
Gordon Schnobrich
Gordon Schnobrich
Cash in ticket
Wesley Strong
Total other deposits

Payor
Scherer Brothers Lumber
Bradley or Mary Lathrop
Cash in ticket
Cash in ticket
Cash in ticket
Todd Peterson
Cash in ticket
Total other deposits

1990 Date
Deposited

Amount
Deposited

1/2
1/2
1/24
2/6
2/10
2/27
2/13
3/5
3/8
3/13
3/15
5/25
6/5
6/22
7/5
7/17
12/3
12/4

$1,000.00
240.00
2,200.00
3,500.00
4,700.00
9,850.00
7,200.00
9,900.00
4,900.00
9,900.00
4,500.00
9,900.00
9,900.00
312.00
304.80
170.00
1,400.00
6,000.00
85,876.80

1991 Date
Deposited

Amount
Deposited

1/30
4/30
6/14
7/12
12/17
12/17
12/18

$144.45
100.00
4,000.00
9,900.00
5,300.00
2,000.00
6,000.00
27,444.45

- 12 -

Payor
Cash in ticket
Cash in ticket
Cash in ticket
Cash in ticket
Cash in ticket
Cash in ticket
Cash in ticket
Gene or Sharon Strong
Total other deposits
Payor
Cash in ticket
Cash in ticket
Harstad Companies
Harstad Companies
Cash in ticket
3,000
Cash in ticket
No bank info.
Cash in ticket
Cash in ticket
Cash in ticket
Cash in ticket
Cash in ticket
Cash in ticket
4,000
Cash in ticket
Cash in ticket
Cash in ticket
Cash in ticket
No bank info.
No bank info.
Cash in ticket
Cash in ticket
Cashier’s check Rodney Nelson
Total other deposits

1992 Date
Deposited

Amount
Deposited

1/2
1/28
2/5
2/14
2/14
3/17
3/23
6/2

$4,600
6,560
9,000
3,200
3,400
3,000
5,000
1,000
35,760

1993 Date
Deposited

Amount
Deposited

1/19
$3,000
1/29
4,000
2/17
100
2/17
250
3would be one word
3/22
2,000
3/24
5,000
4/2
5,000
4/22
9,900
4/23
9,850
4/28
9,900
5/19
7,000
6would be one word
6/21
7/2
7/15
8/3
8/24
8/24
9/22
10/15

5,000
8,000
11,000
5,000
9,900
9,900
6,000
4,450

10/18

4,000
126,250

- 13 -

Payor
Stephen Roche Homebuilders
North Metro Auto Salvage
Sean Strong for #7
Stephen Roche Homebuilders
No info. available from bank
Keith E. Hagford
Burnet trust acct./
Hagford earnest
Jack W. Thompson
Sean Strong/personal
Criston or Ann Holst/Iodine
Total other deposits

1994 Date
Deposited

Amount
Deposited

3/16
3/16
3/16
3/24
5/13
5/27

$444
75
500
988
5,000
500

6/20
8/10
8/16
10/5

500
8,500
8,500
225
25,232

On March 13, 1990, Mr. Strong deposited $9,900 into account
No. 893315300.

The deposit was cashier’s check No. 6724 in the

amount of $9,900 issued by First National Bank Anoka-Brooklyn
Park-Champlin (First Bank), which identifies the purchaser as Ken
Jeanotte (Mr. Jeanotte).

On May 25, 1990, Mr. Strong deposited

$9,600 in account No. 893315300, after taking $300 cash back.
The deposit was cashier’s check No. 6726 in the amount of $9,900
issued by First Bank, which also identifies the purchaser as Mr.
Jeanotte.

On June 5, 1990, Mr. Strong deposited $9,500 into

account No. 893315300, after taking $400 cash back.

The deposit

was cashier’s check No. 6725 in the amount of $9,900 issued by
First Bank, which also identifies the purchaser as Mr. Jeanotte.
Mr. Jeanotte did not purchase cashier’s check No. 6724, 6725, or
6726 deposited to account No. 893315300 and did not pay Mr.
Strong the $29,700 those checks represent.

Mr. Strong used Mr.

Jeanotte’s name without his knowledge or permission.

- 14 On July 19, 1994, Mr. Strong obtained two cashier’s checks
issued by Norwest Bank each in the amount of $8,500.

The first

made payable to Mr. Strong shows the payor was his brother, Sean
Strong and was deposited to account No. 893315300 on August 16,
1994.

The second was made payable to Mr. Strong, and Jack

Thompson, the payor, is unidentified.

It was deposited into

account No. 893315300 on August 10, 1994.
Before 1990, Mr. Strong was aware of the title 31
requirements that currency transactions in excess of $10,000 be
reported to the Government.
SCC’s Activity
During the years at issue, SCC entered into vacant land
purchase agreements and acquired real property in its name.

Mr.

Strong signed the purchase agreements as president of SCC.

As

part of the sales process, SCC entered into new construction
purchase agreements with buyers.

SCC also applied for building

permits, which Mr. Strong signed as president of SCC.

In

addition, SCC entered into a builder’s security agreement and
applied for a home buyer’s warranty on some of the 22 house
sales.

SCC was identified as the seller of the property on the

settlement statements or closing statements prepared for the real
estate property closings for the 22 house sales.
executed those statements as president of SCC.

Mr. Strong
For the purpose

of passing title to real property, Mr. Strong executed, as

- 15 president of SCC, affidavits regarding the good standing of SCC.
SCC issued deeds for the 22 houses.
deeds as president of SCC.

Mr. Strong executed those

Finally, during the years at issue

and thereafter, SCC filed various notices with the Minnesota
secretary of state.
Mr. Strong’s Bankruptcy Filing
In March 1990, Mr. Strong, doing business as Strong
Construction, filed for relief under chapter 7 of the Bankruptcy
Code.

In his bankruptcy petition, which Mr. Strong signed under

penalties of perjury, he made the following representations:
a.

That his current monthly gross income was zero and

that his current monthly expenses were $1,319.

He also

stated that “debtor had been living off proceeds from
sale of personal property, which proceeds are now
exhausted”;
b.

that he had been engaged in the construction

business under the name “Strong Construction” and that
all books of account and records were kept and
maintained by him, that they were available, and that
none had been destroyed;
c.

that he had received no income other than from the

operation of his business in the 2 years preceding the
filing of the bankruptcy petition;

- 16 d.

that he was not holding property for another

person and that no other person was holding property
for him;
e.

that the only real property in which he had an

interest was his residence at 7090 107th Avenue, Clear
Lake, Minnesota, and that the value of his interest
therein was $30,000;
f.

that he had no cash on hand, and the market value

of any interest he had in stock or interests in
incorporated or unincorporated companies was zero.

He

reported only $3,500 in personal property on his
bankruptcy petition; and
g.

he reported liabilities of $199,581.38.

Mr. Strong attended a meeting of creditors under 11 U.S.C.
section 341 on June 15, 1990.

The trustee reported that after

diligent inquiry, she had located no property belonging to the
bankruptcy estate.
15, 1990.

A discharge was granted Mr. Strong on August

Robert Munns (Mr. Munns) represented Mr. Strong as his

attorney in his 1990 bankruptcy filing.

Mr. Munns prepared the

bankruptcy petition and accompanying schedules using information
Mr. Strong provided to him.

Mr. Munns reviewed Mr. Strong’s

bankruptcy petition with him before filing it.

Mr. Strong did

not inform Mr. Munns that he had a large accumulation of cash on
hand.

Mr. Munns did not advise Mr. Strong that he did not have

- 17 to report cash on hand, or corporation stock, which he held when
he filed for bankruptcy in 1990.
Other Circumstances Related to Cash Available
Mr. Strong entered the Navy on December 5, 1974, and was
discharged on June 9, 1976.

The highest rank he attained was E-

1, which paid a monthly salary of $361.20 in 1976.

After

discharge from the Navy, he attended vocational school and was
trained as a machinist.

He then worked as a machinist for a

couple of years and later moved into the home construction
business.
Mr. Strong was married to Anna Lisa Strong (Mrs. Strong)
from 1978 to 1989; the couple separated in 1986.
from Mrs. Strong in August 1989.
Mrs. Strong in 1987.

He was divorced

That proceeding was brought by

Mr. Strong did not disclose in that

proceeding his interest in any real estate (except for 7090 107th
Avenue, Clear Lake, Minnesota) or his interest in any cash on
hand.

Petitioner paid child support to his ex-wife during the

years 1991-94.
Between 1978 and 1989, Mr. Strong and his then wife acquired
and relinquished title to various real estate parcels.

In 1983

and 1984, Mr. Strong and his then wife lost at least three
properties in foreclosure actions.

Mr. Strong filed his 1981-85

- 18 income tax returns jointly with his then wife; they reported the
following adjusted gross income and taxable income on those
returns:
Year

Adjusted Gross Income

Taxable Income

1981

$35,266

$24,184

1982

32,636

15,314

1983

20,917

2,765

1984

21,371

-0-

1985

3,170

-0-

Mr. Strong’s Prior Year Returns
Mr. Strong filed his 1986 Federal income tax return in March
1990 with the following details:

(1) His filing status on that

return was married filing separate; (2) he claimed exemptions for
his three children; (3) he reported adjusted gross income of
$31,952; (4) he claimed itemized deductions of $6,826; and (5) he
reported taxable income of $17,526.

The reported tax liability

of $2,105 was not paid until August 1991.

He filed his 1987

Federal income tax return in March 1990 with the following
details:

(1) His filing status on that return was married filing

separate; (2) he claimed exemptions for his three children; (3)
he reported adjusted gross income of $11,976; (4) he claimed
itemized deductions of $5,875; and (5) he reported taxable income
of zero.

The reported self-employment tax liability of $1,116

was not paid until April 1992.

Mr. Strong filed his 1988

Federal income tax return in March 1990 with the following

- 19 details:

(1) His filing status on that return was married filing

separate; (2) he claimed exemptions for his three children; (3)
he reported adjusted gross income of $8,867; (4) he claimed
itemized deductions of $4,127; and (5) taxable income of zero.
The reported self-employment tax liability of $1,153 was not paid
until April 1992.

Mr. Strong did not file a Federal income tax

return for 1989.
Respondent’s Income Determinations
Respondent determined in the notice of deficiency that SCC
was a taxable corporate entity and determined SCC’s net taxable
income in the years 1990-94.

These determinations are disputed

as to the status of SCC as a taxpayer, the gross income, and the
allowable expenses.

Respondent also determined in a separate

notice of deficiency that Mr. Strong received constructive
dividend income in the full amount of SCC’s net income.

Both SCC

and Mr. Strong timely filed petitions with this Court.
OPINION
I.

Is SCC A Taxable Entity?
SCC and Mr. Strong argue that SCC should be ignored for tax

purposes and was not a separate taxable entity apart from Mr.
Strong.

A corporation is a separate taxable entity if it was

formed for a business purpose and engaged in business activity.
See Moline Props., Inc. v. Commissioner, 319 U.S. 436, 439
(1943); Strong v. Commissioner, 66 T.C. 12, 23-24 (1976), affd.

- 20 553 F.2d 94 (2d Cir. 1977).
corporation.

SCC was a valid Minnesota

More critical to this question, SCC was engaged in

the construction business and houses were sold in its name during
the years in question.

SCC was jointly listed with Mr. Strong on

account No. 893315300 where the receipts in dispute were
deposited.
payee.

Checks for house sales were issued with SCC as the

Mr. Strong chose to operate the construction business

through a corporation, not a sole proprietorship.

Under these

facts, SCC must be recognized as a distinct taxable entity.
II.

SCC’s Unreported Income and Expenses
The extent of SCC’s taxable income is a separate issue.

There are two distinct questions in this regard.

First, should

the unreported deposits be treated as income, and second, should
SCC be allowed deductions against its income in addition to those
allowed by respondent?
A.

Construction Income

The parties stipulated that the construction business earned
gross income of $264,800 in 1990, $524,720 in 1991, $531,900 in
1992, $85,448 in 1993, and $531,396 in 1994 from the construction
and sale of houses.

This business was conducted in SCC’s name,

and the deposits of proceeds from these home sales should be
included in SCC’s gross income.

- 21 B.

Unidentified Deposits

The question whether the unidentified deposits to the First
Bank account are income to SCC merits further discussion.

The

record reflects deposits were made to account No. 893315300 in
addition to the amounts traced to specific home sales.
Respondent conceded that two of these deposits were loans from
Mr. Strong’s parents but asserts that the rest of these deposits
were income to SCC and Mr. Strong.
Many of the deposits in dispute were of currency or were
completely unidentified.

Other deposits were by check

purportedly from various individuals or entities.

Respondent

asserts that Mr. Strong used nominee names to hide his own
identity on some of the deposited cashier’s checks, such as the
three checks from Mr. Jeanotte in 1990 and two checks from his
brother, Sean Strong, in 1994.
Because of Mr. Strong’s inadequate records, respondent
reasons under the bank deposits method of proof that these
deposits are construction receipts absent evidence of any
nontaxable source of the deposits.

Respondent cites DiLeo v.

Commissioner, 96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir.
1992); Clayton v. Commissioner, 102 T.C. 632 (1994); Tokarski v.
Commissioner, 87 T.C. 74 (1986); and Nicholas v. Commissioner, 70
T.C. 1057 (1978).

We agree with respondent that unless

petitioners have shown that the funds came from nontaxable

- 22 sources, they are taxable to SCC.

Dodge v. Commissioner, 981

F.2d 350, 353 (8th Cir. 1992), affg. in part, revg. in part and
remanding in part 96 T.C. 172 (1991).

Petitioners argue that the

deposits in question were from cash that Mr. Strong accumulated
over the years.
SCC clearly had a taxable source of income as it was in the
construction business during the years at issue.

The amounts

were deposited to bank account No. 893315300, as were the
proceeds from the 22 house sales.

Mr. Strong did not point to

any source for the deposits other than his previously accumulated
funds.
Mr. Strong alleges he began to accumulate cash through
gambling winnings during his service in the U.S. Navy in the mid1970s.

He claims to have maintained a substantial cash hoard

throughout his marriage from 1978 to 1989 and during his filing
under chapter 7 of the Bankruptcy Code in 1990.

Mr. Strong’s

assertions are not credible for several reasons.

First, Mr.

Strong was unable to explain specifically how the cash was
obtained, where it was maintained, its amount after 1978, and how
it was used.

He stated that he was basically guessing when asked

to specify what amounts he had on hand at any particular point.
On cross-examination regarding the nature of his cash hoard, Mr.
Strong refused to be specific and continually changed his story.
For example, he stated that he did not add to his cash

- 23 accumulation for 6 years, from 1982 through 1988.

Later, upon

being questioned by the Court, Mr. Strong stated that he did add
to his cash accumulation during that period.

Still later, Mr.

Strong decided that his cash accumulation would have been in one
of three bank accounts.

We construe against him Mr. Strong’s

failure to provide adequate details regarding his cash hoard.
“We are not required to accept implausible, uncorroborated, and
incoherent contentions as to the existence of a cash hoard.”
Daniels v. Commissioner, T.C. Memo. 1992-692.
Second, even though Mr. Strong was married during the period
he held his cash hoard, his ex-wife was unaware that it existed.
His ex-wife testified that the couple did not have an excess of
cash during the 8 years they were living together.

Further, Mr.

Strong did not disclose the existence of the cash hoard upon
their divorce, even though he stated under penalties of perjury
in that proceeding that he had disclosed all assets.
Third, Mr. Strong’s liabilities are inconsistent with his
claimed cash hoard.

For instance, Mr. Strong and his then wife

lost at least three properties through foreclosure from December
1986 through February 1988.

Such a forfeiture is inconsistent

with the existence of a cash hoard.
States, 348 U.S. 121, 133 (1954).

See Holland v. United
Mr. Strong also borrowed

$10,000 in 1991 to purchase equipment and allegedly borrowed
$6,000 from his father in December 1990.

Mr. Strong specifically

- 24 testified that he borrowed from his father in 1990 because he
“was short on cash”.

Borrowing money and incurring interest

charges are inconsistent with sitting on a large amount of
Thomas v. Commissioner, 223 F.2d 83, 88 (6th

unproductive cash.

Cir. 1955), revg. a Memorandum Opinion of this Court; Daniels v.
Commissioner, supra.
Fourth, Mr. Strong’s prior years’ tax returns are
inconsistent with his claim that the cash hoard came from
previously taxed income.

From 1981 through 1989, he reported

taxable income of $59,789, an average of $6,643 per year.2

The

largest taxable income he reported was $24,184 in 1981, and in
1984, 1985, 1987, 1988 and 1989, he reported zero taxable income.
This was at the same time he was supporting three children.

Mr.

Strong’s reported income from 1981 to 1989 is not sufficient to
live on, much less accumulate a large cash hoard.

See Holland v.

United States, supra.
Finally, Mr. Strong filed for chapter 7 bankruptcy
protection in March 1990.

In his bankruptcy case, he represented

that the sum total of his assets equaled $33,500, including his
homestead valued at $30,000.

He alleged he had no cash on hand

and no interest in any corporation.

These representations

plainly contradict his current assertion that his cash deposits
during the years at issue were from cash on hand at the beginning

2

SCC reported no taxable income during this same period.

- 25 of 1990.

Mr. Strong testified that he made these representations

on the advice of his bankruptcy counsel.

Mr. Strong’s bankruptcy

counsel, Mr. Munns, plainly denied that charge in his testimony.
Mr. Munns unequivocally stated that he did not inform Mr. Strong
that cash on hand or the value of a corporation did not have to
be reported in bankruptcy.

Mr. Munns also stated that Mr. Strong

failed to inform him that he had a significant amount of cash on
hand.
In conclusion, we reject Mr. Strong’s cash hoard explanation
for the unidentified deposits.

Respondent also asserts judicial

estoppel as a result of the representations in the bankruptcy
filing.

Because we reject Mr. Strong’s claims of a cash hoard,

it is unnecessary for us to reach this argument.
The burden is on SCC to establish that the deposits in
dispute were not income.

“Once the deposits were shown to be in

the nature of income and to exceed what the taxpayers had
reported as income, it became the taxpayers’ responsibility to
persuade the trier of fact the deposits were nontaxable.”
v. Commissioner, 981 F.2d at 354.

Dodge

In addition to Mr. Strong’s

claim of a cash hoard, SCC argues that two of the deposits were
not taxable to SCC.

The first is a deposit of $8,500 on August

10, 1994, which Mr. Strong claims was payment for the sale of a
motorcycle.

In that instance, we accept the corroborating

testimony of Mr. Strong’s then girlfriend and hold that the

- 26 $8,500 was not income to SCC.

The second is a deposit of $8,500

on August 16, 1994, which Mr. Strong claims was payment for the
sale of his truck to his brother.
carried its burden.

In this instance, SCC has not

Mr. Strong provided testimony from his

brother that the $8,500 deposit was payment for a pickup truck.
However, this testimony is inconsistent with the records of the
Minnesota Department of Motor Vehicles regarding the ownership of
the truck in question, and we find this testimony unconvincing.
SCC does not provide any explanation for the remaining deposits,
and we conclude that these deposits are income to SCC.
C.

Allowable Expenses of SCC

Section 162(a) allows a taxpayer deductions for ordinary and
necessary business expenses incurred during the taxable year in
carrying on a trade or business.

Deductions, however, are a

matter of legislative grace, and the taxpayer bears the burden of
proving entitlement to any deduction claimed.
v. Commissioner, 503 U.S. 79, 84 (1992).

See INDOPCO, Inc.

Generally, a taxpayer

must establish that deductions taken pursuant to section 162 are
ordinary and necessary business expenses and must maintain
records sufficient to substantiate the amounts of the deductions
claimed.

Sec. 1.6001-1(a), Income Tax Regs.

With respect to certain business expenses specified in
section 274(d), more stringent substantiation requirements apply.
Section 274(d) disallows deductions for travel expenses, gifts,

- 27 meals, and entertainment, as well as for listed property defined
by section 280F(d)(4), unless the taxpayer substantiates by
adequate records or by sufficient evidence corroborating the
taxpayer’s own statement:

(1) The amount of the expense; (2) the

time and place of the expense; (3) the business purpose of the
expense; and (4) the business relationship to the taxpayer of the
persons involved in the expense.
SCC argues that many of the expenses paid by Mr. Strong out
of account No. 893315300 were deductible business expenses of
SCC.

For 1990, SCC’s financial statement provided to the revenue

agent during respondent’s audit of SCC did not include an
accountant’s compilation of expenses paid from account No.
893315300; instead, it estimated SCC’s costs using industry
standards and information available from closing statements.

For

1991-94, respondent allowed SCC expenses based upon financial
statements including accountant’s compilations of expenses for
those years.

Respondent allowed SCC expenses for 1990 on the

basis of the information in the financial statement, adjusted by
SCC’s average actual gross profits percentage taken from the
1991-94 accountant’s compilations.
Mr. Strong testified that he paid some of his personal
expenses, including child support, medical fees, clothing
purchases, restaurant charges, magazine subscriptions, and

- 28 groceries, for 1991-94 by issuing checks from account No.
893315300.
There are seven general categories of additional disputed
expenses that were paid out of account No. 893315300 which we
will discuss:

(1) Advertising or promotional expenses; (2)

professional fees; (3) travel expenses; (4) automobile and truck
expenses; (5) office supplies and general supplies; (6) utility
expenses; and (7) miscellaneous expenses.
1.

Advertising or Promotional Expenses

Expenses for the promotion or sponsorship of activities not
directly related to a taxpayer’s business are deductible if the
taxpayer can establish a proximate relationship between the
activity and the taxpayer’s business such that the sponsorship
was reasonably calculated to advertise the business.

Gill v.

Commissioner, T.C. Memo. 1994-92, affd. without published opinion
76 F.3d 378 (6th Cir. 1996).
SCC advertised its business primarily either through word of
mouth or by athletic sponsorships.

As part of the athletic

sponsorships, SCC paid for the uniforms, logo design, hats, tshirts, sweat pants, coats, bags, and pants for all players on
its sponsored teams.

In addition, SCC made monetary donations

for high school wrestling organizations and would provide
equipment and league/tournament fees for its sponsored athletic
teams.

- 29 SCC claimed that the expenses for advertising were
deductible as ordinary and necessary business expenses.
Respondent determined that SCC was not entitled to deduct these
expenses as shown on the financial statements and the
accountants’ compilations provided by SCC and adjusted these
expenses in determining SCC’s tax liabilities for the years at
issue.

SCC’s canceled checks supported many of these promotional

expenses.

In addition, members of SCC’s sponsored teams

testified credibly to substantiate the expenses.

Accordingly, we

conclude the amounts of the following advertising or promotional
expenses for the years 1991, 1992, 1993, and 1994 were ordinary
and necessary expenses of SCC:
1991
Date

Expense

Amount

1/2
1/2
2/2
2/4
2/27
2/27
3/23
4/9
4/10
4/19
5/7
5/8
5/15
5/17
5/17
6/5
6/13
6/19
8/13
9/12

Letterman Sports
Letterman Sports
A & B
Gladiators
Letterman Sports
SRO Softball
USA Wrestling
SRO Softball
SRO Softball
Letterman Sports
Dave’s Sports
Letterman Sports
Athlete’s Foot
USA Wrestling
USA Wrestling
Letterman Sports
Letterman Sports
Letterman Sports
Letterman Sports
SRO Softball

$50.00
644.80
42.38
74.00
186.00
320.00
30.00
615.00
320.00
297.75
73.62
50.00
37.09
10.00
20.00
95.40
271.75
50.00
48.00
225.00

- 30 1991
Date
12/11
12/11
12/14
12/19
12/23
12/23
12/23
Total

Expense

Amount

Herman’s Sports
Dave’s Sports
Broomball League
Herman’s Sports
Dave’s Sports
Dave’s Sports
Herman’s Sports

$89.35
47.94
60.00
285.39
100.00
169.26
63.88
4,276.61

1992
Date

Expense

Amount

1/9
Herman’s Sports
$32.37
1/14
Dave’s Sports
385.00
1/31
State Broomball
185.00
2/3
Butch Salzinger
800.00
2/29
Radisson (Broomball)
132.69
3would be one word
Radisson (Broomball)
104.81
3/14
D. Stecker (Softball)
3,900.00
4/10
Butch Salzinger (Hats)
185.40
4/13
Herman’s Sports
51.99
5/19
Letterman Sports
429.75
6/10
Letterman Sports
78.00
6/10
Wal-Mart (Balls)
12.32
6/17
Letterman Sports
102.00
6/17
Mardi’s Embroidery
480.25
9/27
Slow Pitch MN
112.00
12/10
Dave’s Sports
287.64
12/11
St. Francis Wrestling
250.00
12/20
4 Seasons Broomball
60.00
Total
7,589.22
1993
Date
1/23
1/24
2/06
3/05
3/11
4/15

Expense
Herman’s Sports
Mardi’s Embroidery
Marc Washburn
Mardi’s Embroidery
MN Sports Federation
City of Coon Rapids

Amount
$149.97
180.00
80.00
294.00
63.00
846.00

- 31 1993
Date

Expense

4/16
4/21
4/22
6/5
6/7
8/10
12/03
Total

MN Liquor Liability
City of Coon Rapids
Janet Cullen
MN Recreation Assn.
A & B Sporting Goods
City of Coon Rapids
Sports Connection

Amount
$200.00
60.00
1,000.00
125.00
21.29
100.00
75.00
3,194.26

1994
Date

Expense

3/7
11/16
4/21
Total
2.

Amount

Elk River Wrestling
A & B Sporting Goods
C.R. Athletic Assn.

$105.00
118.42
300.00
523.42

Professional Fees

Mr. Strong claimed accounting and legal expenses of $3,410
and $4,790 for 1993 and 1994, respectively.

Of these amounts,

respondent allowed $575 and $790 for 1993 and 1994, respectively,
as miscellaneous itemized deductions for tax preparation fees
paid to Mr. Newman.

The remaining $2,835 for 1993 and $4,000 for

1994 are in dispute.

Mr. Strong testified that the $2,835 was

paid to Michael Scott, an attorney, for title clarification in
connection with one of SCC’s business properties.

In addition,

Mr. Strong testified that the $4,000 was paid to Craig Cascorono,
an attorney, also with respect to title issues concerning SCC’s
business properties.

Mr. Strong testified that SCC often had to

retain attorneys in order to make sure its properties had valid

- 32 titles from the city council before building on them.

Respondent

argues that legal expenses relating to title issues are not
deductible as ordinary and necessary business expenses but should
be added to the basis of each property to which they relate.
We agree with respondent.

The cost of defending or

perfecting title to property constitutes a capital expenditure
and no deduction shall be allowed for it.

Estate of Franco v.

Commissioner, T.C. Memo. 1980-340; Cowden v. Commissioner, T.C.
Memo. 1965-278, affd. per curiam 365 F.2d 832 (1st Cir. 1966);
sec. 1.263(a)-2(c), Income Tax Regs.

The only evidence presented

by Mr. Strong and SCC shows that these legal fees were for
defending or perfecting title.

In his testimony, Mr. Strong did

not relate these expenses to specific properties sold during the
years at issue.

Therefore, the legal fees of $2,835 and $4,000

paid in 1993 and 1994, respectively, are not currently deductible
to SCC.
3. Charitable Contributions
SCC claimed deductions for charitable contributions of
$73.14 for 1991, $220 and $80 for 1992, and $80 for 1993.

Of

these amounts, respondent allowed only the $80 charitable
contribution for 1992.

Respondent contends that SCC failed to

provide the required documentation to substantiate the remaining
charitable deductions.

- 33 Under section 1.170A-13(a)(1), Income Tax Regs., a taxpayer
is required to maintain for each charitable contribution a
canceled check, a receipt from the donee organization, or other
reliable written records of the contribution.

Because Mr. Strong

presented copies of canceled checks for the $73.14 in 1991 and
$80 in 1993, we conclude that SCC is allowed these charitable
contributions.

However, because Mr. Strong failed to

substantiate the $220 contribution, we conclude that SCC is
precluded from deducting the $220 for the year 1992 as a
charitable contribution.
4.

Travel Expenses

SCC claimed travel expenses for the years 1991-94 of
$1,914.59, $397.79, $148.62, and $1,045.67, respectively.
Respondent disallowed these travel expenses.
In order to substantiate a deduction by means of adequate
records, a taxpayer must maintain a diary, log, statement of
expenses, trip sheet, or similar record, and documentary evidence
which, in combination, are sufficient to establish each element
of each expense or use.

Sec. 1.274-5T(c)(2)(i), Temporary Income

Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

Accordingly, no

deduction for expenses under section 274(d) may be allowed on the
basis of any approximation or the unsupported testimony of the
taxpayer.

See, e.g., Sanford v. Commissioner, 50 T.C. 823, 827-

828 (1968), affd. 412 F.2d 201 (2d Cir. 1969).

- 34 Here, although Mr. Strong testified to some of the travel
expenses and provided copies of some canceled checks, SCC did not
provide adequate substantiation to meet the strict requirements
of section 274(d).

The record does not include any receipts,

vouchers, itineraries, diaries, logs, or calendars made in
connection with the alleged travel expenses, nor any other
evidence sufficient to corroborate Mr. Strong’s testimony.
Accordingly, we sustain respondent’s determinations with respect
to these travel expenses for the years 1991 through 1994.
5.

Miscellaneous Expenses
a.

Office Supplies and General Supplies Expenses

SCC contests respondent’s disallowance of the deductions
claimed for office supplies and general supplies incurred for
1991, 1992, 1993, and 1994 of $797.96, $611.16, $396.12, and
$1,102.14, respectively.

Of these amounts, respondent allowed

$326 for 1991, $495.52 for 1992, $386.66 for 1993, and $518.01
for 1994.
However, SCC contends that it is entitled to additional
office and general supplies expenses that were not allowed by
respondent.

SCC offered as proof only copies of canceled checks.

The canceled checks do not show in any detail the items purchased
or the business purpose for the items, as required to
substantiate the claimed deductions.

See sec. 1.162-17, Income

- 35 Tax Regs.

Therefore, we cannot allow SCC deductions for these

expenses.
b.

Automobile and Truck Expenses

SCC claims deductions for automobile and truck expenses for
1991, 1992, 1993, and 1994 of $686.56, $572.66, $27, and
$1,239.93, respectively.

Respondent allowed SCC automobile and

truck expenses for only the years 1992 and 1994 of $469.35 and
$320.91, respectively.

Respondent disallowed the remaining

automobile and truck expenses because of failure to substantiate
that the amounts were expended for business use.

SCC did not

offer any evidence at trial or present any argument on brief
regarding these amounts.

Accordingly, respondent’s determination

on these remaining items is sustained.
c.

Utility and Telephone Expenses

SCC claimed utility expenses for the years 1991-94 of
$3,704.50, $3,314.11, $1,669.92, and $4,692.60, respectively.
Respondent concedes that SCC may deduct $3,609.20, $2,873.73,
$912.20, and $3,118.61, respectively for 1991-94.

SCC has failed

to present any evidence to substantiate entitlement to the
remaining disallowed deductions.

Accordingly, respondent’s

determination on these items is sustained.
In addition, SCC claimed telephone expenses for the 1992 tax
year of $665.53.
$355.77.

Respondent concedes that SCC may deduct

SCC failed to present any evidence at trial or present

- 36 any argument on brief regarding the additional amount.
Accordingly, respondent’s determination on the remaining claimed
deduction is sustained.
d.

Miscellaneous Expenses

As to SCC’s other deductions (i.e., entertainment,
insurance, and rent), Mr. Strong was not able to proffer any
documentation to substantiate that the purpose of these expenses
was for business.

Mr. Strong attributes the lack of

substantiation to two fires that resulted in the loss of his
receipts, but his general attitude regarding Federal income taxes
and his lack of credibility leave us with no reason to believe
receipts were ever maintained.
Even if we were persuaded that some portion of these
expenses was for business purposes, Mr. Strong has not offered
any evidence that would support his allocation of expenses or
otherwise allow the Court to reach an alternate determination
under Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).
Thus, with regard to these additional expenses for which there
are no adequate receipts, SCC’s claim fails for lack of
substantiation.
III.

Constructive Dividends to Mr. Strong
Respondent argues that the unreported business income of

SCC, measured by the deposits into account No. 893315300, is
taxable to Mr. Strong as constructive dividend income because Mr.

- 37 Strong freely used the money for personal expenses.

Petitioners

do not address respondent’s argument.
If a controlling shareholder diverts corporate income to his
own use, the diverted funds are generally treated as constructive
dividends for tax purposes.
883.

DiLeo v. Commissioner, 96 T.C. at

A dividend is any distribution of property made by a

corporation to its shareholders out of its earnings and profits.
Sec. 316(a).

Where a corporation makes a distribution to a

shareholder that serves no legitimate corporate purpose and
results in an economic benefit to the shareholder, the payment is
a constructive dividend to the benefited shareholder.
Commissioner v. Riss, 374 F.2d 161, 167 (8th Cir. 1967), affg. in
part, revg. in part and vacating in part T.C. Memo. 1964-190; see
also Meridian Wood Prods., Inc. v. United States, 725 F.2d 1183,
1191 (9th Cir. 1984).

However, the fact that certain payments

are not deductible by a corporation as business expenses does not
automatically make them taxable to the shareholder.

Dolese v.

United States, 605 F.2d 1146, 1152 (10th Cir. 1979); Falsetti v.
Commissioner, 85 T.C. 332, 356-357 (1985); Ashby v. Commissioner,
50 T.C. 409, 418 (1968).

To the extent the payments do not

represent some direct benefit to the shareholder, they are not
taxable to him.

See Ashby v. Commissioner, supra.

Some of the income deposited into account No. 893315300 was
used by Mr. Strong for SCC’s legitimate business expenses.

- 38 Respondent allowed some of these expenses in the notice of
deficiency, and we have identified additional promotional
expenses in section II.C.1., above.

In addition, although SCC

may not deduct certain capital legal fees, see supra section
II.C.2., we are convinced that those items were of no personal
benefit to Mr. Strong.

These items, which are not constructive

dividends to Mr. Strong, are $2,835 in 1993 (check No. 6834) and
$4,000 in 1994 (check No. 7763).
Either the remaining income items disallowed as deductions
to SCC were used by Mr. Strong for personal benefit or he has
failed to show that they were not so used.

He made no

distinction between SCC’s funds and his own, by his own
admission.

He paid child support, medical bills, clothing,

groceries, travel, and other personal expenses directly out of
account No. 893315300.

In addition to failing to properly

substantiate his travel expenses, he has not shown that the
travel expenses were not personal.

He has failed to establish

that the remaining nondeductible corporate expenditures had any
legitimate corporate purpose and were not for his benefit.
In summary, the deposits into account No. 893315300
determined to be taxable to SCC are taxable to Mr. Strong as
constructive dividends, less the amounts of (1) the expenses
allowed by respondent, (2) the promotional expenses we have held

- 39 in section II.C.1. and 3. above are deductible by SCC, and (3)
the items we have determined have no benefit to Mr. Strong in
this section. IV.
A.

Penalties and Additions to Tax

Fraud Penalty Under Section 6663--Mr. Strong

Respondent determined that Mr. Strong is liable for the
fraud penalty under section 6663 for each of the years 1990,
1991, 1992, 1993, and 1994.

Respondent must show by clear and

convincing evidence that Mr. Strong fraudulently intended to
underpay his taxes in each year in issue in order to prove that
he is liable for the fraud penalty under section 6663.

See sec.

7454(a); Rule 142(b); Rowlee v. Commissioner, 80 T.C. 1111, 1113
(1983).

For Federal tax purposes, fraud entails intentional

wrongdoing with the purpose of evading a tax believed to be
owing.

See Neely v. Commissioner, 85 T.C. 934, 947 (1985).

order to show fraud, respondent must prove:

In

(1) An underpayment

exists and (2) Mr. Strong intended to evade taxes known to be
owing by conduct intended to conceal, mislead, or otherwise
prevent the collection of taxes.

See Parks v. Commissioner, 94

T.C. 654, 660-661 (1990).
1.

Underpayment

We have found above that SCC received construction income in
each of the years 1990-94 and that Mr. Strong used most of the
construction income for his personal expenses.

Neither SCC nor

Mr. Strong paid Federal income tax on the additional construction

- 40 income.

Therefore, both SCC and Mr. Strong underpaid their taxes

for 1990-94.
2.

Fraudulent Intent

Because direct evidence of fraud is rarely available, fraud
may be proved by circumstantial evidence and reasonable
inferences from the facts.
661, 699 (1989).

Petzoldt v. Commissioner, 92 T.C.

Courts have developed a nonexclusive list of

factors, or “badges of fraud”, that demonstrate fraudulent
intent.

Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).

These badges of fraud include:

(1) Understating income; (2)

maintaining inadequate records; (3) failure to file tax returns;
(4) implausible or inconsistent explanations of behavior; (5)
concealment of income or assets; (6) failing to cooperate with
tax authorities; (7) filing false documents; (8) failure to make
estimated tax payments; (9) dealing in cash; (10) engaging in
illegal activities; (11) attempting to conceal illegal activity;
(12) an intent to mislead which may be inferred from a pattern of
conduct; and (13) lack of credibility of the taxpayer’s
testimony.

Id.; see also Spies v. United States, 317 U.S. 492,

499 (1943); Recklitis v. Commissioner, 91 T.C. 874, 910 (1988).
Although no single factor is necessarily sufficient to establish
fraud, the combination of a number of factors constitutes
persuasive evidence.

Niedringhaus v. Commissioner, supra at 211.

- 41 Mr. Strong consistently understated his income while
spending SCC’s construction income on his personal expenses
during the years in issue.

During these same years, Mr. Strong

reported minimal taxable income, if any, and at most $81,640 in
gross receipts from the construction business.

Mr. Strong’s

personal tax returns also do not take into account any of the
funds he used for personal expenses.
Mr. Strong did not keep adequate records of the expenses he
claims were related to SCC’s business.

His claim of a cash hoard

that he periodically deposited into account No. 893315300 was an
implausible explanation of the unreported construction income.
His purported explanation, if true, is an admission that he
defrauded his creditors and lied to his attorney during his
bankruptcy proceedings by denying the existence of the cash he
claims was hidden under his house.

During an inquiry by

respondent’s revenue agent, Mr. Strong refused to provide the
revenue agent with any personal or financial information and lied
about his access to records.

During the later audit, he provided

detailed financial records only after respondent obtained third
party records by summons.

Mr. Strong knowingly filed false tax

returns for each year at issue.

His patterns of depositing cash

in amounts less than $10,000 and understating the construction
income in each year show that he intended to conceal the income
he appropriated from his construction business.

We did not find

- 42 Mr. Strong’s testimony credible and do not accept his explanation
for the income deposited into his bank account.

He admitted in

his testimony that he considered the money in account No.
893315300 his personal funds.
heavily against Mr. Strong.

The factors indicating fraud weigh
Respondent has shown by clear and

convincing evidence that Mr. Strong fraudulently underpaid his
taxes for 1990, 1991, 1992, 1993, and 1994.

Therefore, he is

liable for the fraud penalty under section 6663 for each year in
issue.
B.

Additions to Tax for Failure To File--SCC

Respondent asserts that SCC is liable for the addition to
tax under section 6651(f) for fraudulent failure to file a
return, or, in the alternative, that SCC is liable for the
addition to tax for failure to file a return under section
6651(a)(1) for each of the years 1990, 1991, 1992, 1993, and
1994.

Corporations subject to taxation must file Federal income

tax returns.

Sec. 6012(a)(2).

If a corporation fails to file a

return, the Commissioner may impose an addition to tax of 5
percent per month of the amount of tax required to be shown on
the return, to a maximum of 25 percent.

Sec. 6651(a)(1).

If the

failure to file is fraudulent, the addition to tax is increased
to 15 percent per month of the tax required to be shown on the
return, to a maximum of 75 percent.

Sec. 6651(f).

We consider

the same factors under section 6651(f) that are considered in

- 43 imposing the fraud penalty under section 6663.

Clayton v.

Commissioner, 102 T.C. 632, 653 (1994).
A corporation can act only through its officers and does not
escape responsibility for acts of its officers performed in that
capacity.

DiLeo v. Commissioner, 96 T.C. at 875.

It follows

that corporate fraud necessarily depends upon the fraudulent
intent of the corporate officers.

Id.

In determining whether

SCC acted with the requisite fraudulent intent, we must consider
the actions of Mr. Strong, SCC’s president and sole shareholder.
The pertinent questions are:

(1) Whether Mr. Strong had

sufficient control of the corporation that his fraudulent acts
should be imputed to the corporation and (2) whether Mr. Strong
was acting on behalf of, and not against the interests of, SCC.
See Ruidoso Racing Association, Inc. v. Commissioner, 476 F.2d
502, 506 (10th Cir. 1973), affg. in part and remanding in part on
another ground T.C. Memo. 1971-194; Botwinik Bros., Inc. v.
Commissioner, 39 T.C. 988, 996 (1963); Federbush v. Commissioner,
34 T.C. 740, 750 (1960), affd. per curiam 325 F.2d 1 (2d Cir.
1963); Moore v. Commissioner, T.C. Memo. 1977-275, affd. 619 F.2d
619 (6th Cir. 1980).
Mr. Strong was the sole shareholder, officer, and director
of SCC and had control over its activities.
for his own use that belonged to SCC.

He diverted proceeds

Given Mr. Strong’s limited

education, lack of tax experience, and existence as SCC’s only

- 44 shareholder, we are not convinced that he fully understood that
SCC’s corporate form required a separate tax return.

In fact,

Mr. Strong formed SCC as a corporation because his attorney
recommended it.

It has not been shown that Mr. Strong had any

expertise in keeping corporate books and records, or that his
attorney or accountants instructed him in filing corporate
returns.

As a result, respondent has not shown by clear and

convincing evidence that Mr. Strong’s fraudulent intent extended
beyond his desire to conceal income with respect to his personal
income tax returns or that SCC’s failure to file tax returns was
fraudulent.
However, it is clear from the record that SCC did not file
Federal income tax returns for 1990-94 without any reasonable
explanation.

Therefore, SCC is liable for the addition to tax

under section 6651(a)(1) for failure to file returns.
To reflect the foregoing and concessions by the parties,

Decisions will be entered
under Rule 155.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A6b14cac467d7137d. Public record. Not legal advice.