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T.C. Memo. 1996-452

UNITED STATES TAX COURT

ROBERT D. GROSSMAN, JR., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos.

20526-90, 14364-91.

Filed October 7, 1996.

P, a tax attorney, effectively controlled the daily

operations of a group of closely held corporations (C). The

corporations were owned by P’s wife (W), W’s mother, and W’s

brother. In 1983 through 1986, P and W took personal

vacation trips, which P caused C to pay for. C’s payments

of the personal expenses of P and W were constructive

dividends to W. P and W omitted to report these

constructive dividends on their 1983 through 1986 joint tax

returns. The notices of deficiency for 1983 through 1988

were sent to P and W more than 3 years after P and W filed

their joint tax returns for 1983, 1984, and 1985. R

contends that many of these omissions for 1983 through 1986

were due to P’s fraud. P denies the omissions, denies

fraud, and contends that, if there are deficiencies, then he

is entitled to innocent spouse treatment for 1986.

Held: The statute of limitations does not bar the

assessment and collection of tax for 1985, but is a bar as

to 1983 and 1984. Sec. 6501(c)(1), I.R.C. 1954.

- 2 2.

Held, further, P is liable for fraud additions to

tax for 1985 and 1986. Sec. 6653(b)(1), I.R.C. 1954; sec.

6653(b)(1)(A), I.R.C. 1986.

Held, further, P is liable for additional

additions to tax for 1985 and 1986 based on the portions of

the deficiencies attributable to P’s fraud; amounts

determined. Sec. 6653(b)(2), I.R.C. 1954; sec.

6653(b)(1)(B), I.R.C. 1986.

Held, further, P is liable for negligence

additions to tax based on the portion of the 1986 deficiency

that is not attributable to fraud; amounts determined. Sec.

6653(a)(1), I.R.C. 1986.

Held, further, amounts of deficiencies

redetermined.

Held, further, P is not entitled to innocent

spouse treatment. Sec. 6013(e), I.R.C. 1986.

Robert D. Grossman, Jr., pro se.

Stephen L. Braga and Eric F. Horvitz, for petitioner.

John C. McDougal, for respondent.

TABLE OF CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION................

FINDINGS OF FACT.......................................

A. Background.....................................

B. Sley Corporations..............................

1. Background..................................

2. Investments.................................

3. Daily Operations: 1980 through March 1986..

4. Daily Operations: After March 1986.........

C. Salaries and Dividends.........................

D. Travel and Entertainment Expenses..............

- 3 1. 1983........................................

2. 1984........................................

3. 1985........................................

4. 1986........................................

E. Financial Statements, Tax Returns, Audits,

Notice of Deficiency.........................

F. Interest Expense for 1987......................

OPINION................................................

I. Statute of Limitations..............................

A. Underpayments of Tax........................... 86

(1) 1983....................................... 91

(2) 1984....................................... 100

(3) 1985....................................... 106

(4) 1986....................................... 117

(5) Conclusions................................ 119

B. Fraudulent Intent.............................. 120

(1) Petitioner’s Knowledge of

Credit Card Charges..................... 122

(2) Petitioner’s Knowledge of Payments......... 123

(3) Petitioner’s Knowledge of Berger’s

Limited Role............................ 124

(4) Petitioner’s Knowledge of the Tax Laws..... 125

(5) Petitioner’s Misleading Explanations....... 128

(6) Other Considerations....................... 133

C. Conclusions.................................... 141

II.

Additions to Tax.................................. 141

A. Fifty-Percent Fraud Addition--1985............. 141

B. Additional Amount for Portion

Attributable to Fraud--1985.................. 142

C. Fraud Additions--1986.......................... 143

D. Negligence Additions--1986..................... 146

III. Amounts of Deficiencies........................... 147

A. Amount of Constructive Dividends............... 147

B. Interest Deduction............................. 148

IV.

Innocent Spouse Relief............................ 152

- 4 MEMORANDUM FINDINGS OF FACT AND OPINION

CHABOT, Judge:

Respondent determined deficiencies in

Federal individual income tax, deficiencies in Federal excise tax

under section 49731 (excess I.R.A. contributions), and additions

to tax under sections 6653(b) (fraud) and 6661 (substantial

understatement of income tax) against petitioner as follows:

Deficiency

Year

Income Tax

Excise Tax

Sec.6653

(b)(1)

1983

1984

1985

1986

1987

1988

$12,740

15,917

14,924

6,400

4,778

2,886

$105

210

315

-315

$6,370

7,959

7,462

----

Additions to Tax

Sec.6653

(b)(2)

(b)(1)(A)

----

---$4,800

221

Sec.6653

(b)(1)(B)

---4

Sec. 6661

--$3,652

----

50 percent of the interest due on $12,635.

50 percent of the interest due on $3,856.

50 percent of the interest due on $14,609.

50 percent of the interest due on $6,400.

50 percent of the interest due on $294.

Respondent determined in the alternative that, if petitioner

is not liable for part or all of the additions to tax for fraud

for 1986, then petitioner is liable for negligence additions to

tax under subparagraphs (A) and (B) of section 6653(a)(1).

Docket No. 20526-90 deals with 1986, a joint tax return

year.

Docket No. 14364-91 deals with 1983, 1984, 1985, and 1987,

Unless indicated otherwise, all section references are

to sections of the Internal Revenue Code of 1954, or the Internal

Revenue Code of 1986, as in effect for the respective years in

issue.

- 5 all joint tax return years, and 1988, a separate tax return year.

The dockets are consolidated for trial, briefing, and opinion.

The joint returns were filed by petitioner and his then-wife,

Betsy Grossman, hereinafter sometimes referred to as Betsy.

After concessions2 and deemed concessions3 by both sides,

Petitioner concedes the 1988 deficiency; he also

concedes the 1987 innocent spouse contention.

Respondent concedes that petitioner’s taxable income should

not be increased by $1,400 for each of the years 1983 through

1986 on account of the value of tax return preparation services

paid on behalf of petitioner and Betsy by corporations in which

Betsy owned stock. Respondent also concedes that petitioner is

not liable for additions to tax for fraud for 1987, nor is

petitioner liable for excise taxes under sec. 4973 for 1983,

1984, 1985, and 1987. On the latter issue, see, e.g., Johnson v.

Commissioner, 74 T.C. 1057, 1062 (1980), affd. 661 F.2d 53 (5th

Cir. 1981).

On opening brief, respondent “concedes the medical

reimbursement adjustment to constructive dividends in 1983, 1984

and 1985 as de minimis.” In the notice of deficiency, respondent

determined the following adjustments for medical reimbursements:

An upward adjustment of $508 for 1983, a downward adjustment of

$411 for 1984, and an upward adjustment of $55 for 1985.

Respondent’s unilateral (i.e., not by stipulation) “concession”

for 1984 would increase petitioner’s deficiency for this year.

Respondent has not asked for an increased deficiency for 1984;

see sec. 6214(a).

In the notice of deficiency, respondent disallowed

Schedule W deductions under sec. 221 (the two-earner deduction)

for 1983, 1984, and 1985. Respondent also determined that

petitioner’s taxable income should be increased by $1,400 for

1987 for the value of tax return preparation services paid on

behalf of petitioner and Betsy. See supra note 2 as to the same

issue for 1983 through 1986. On opening brief, petitioner

listed, but failed to argue these issues. Respondent dealt with

both of these issues on opening brief. Petitioner did not deal

with either of these issues on answering brief.

(continued...)

- 6 the issues for decision are as follows:

(1)

Whether the assessment and collection of

deficiencies and additions to tax for 1983, 1984, and 1985

are barred by the statute of limitations, section 6501(a),

or are allowed under the fraud exception, section

6501(c)(1), to the general period of limitations.

(2)

If assessment and collection are not barred for

1983, 1984, and 1985, then, for each of those years-(a)

whether petitioner is liable for civil fraud

additions to tax under paragraphs (1) and (2) of

section 6653(b) and, as to paragraph (2) of section

6653(b), in what amounts.

(...continued)

We treat petitioner’s failure to argue as, in effect, a

concession by petitioner of these issues. See subpars. (4) and

(5) of Rule 151(e); Sundstrand Corp. v. Commissioner, 96 T.C.

226, 344 (1991); Money v. Commissioner, 89 T.C. 46, 48 (1987).

In the notice of deficiency, respondent disallowed

deductions for contributions to an I.R.A. under sec. 219 for

1983, 1984, and 1985, and determined that petitioner is liable

for an addition to tax for substantial understatement of

liability under sec. 6661 for 1985. Respondent dealt with both

of these issues on opening brief. Petitioner neither listed nor

dealt with either of these issues on opening brief or answering

brief. We conclude that petitioner has conceded these issues.

See subpars. (4) and (5) of Rule 151(e); Sundstrand Corp. v.

Commissioner, supra; Money v. Commissioner, supra.

Unless indicated otherwise, all Rule references are to the

Tax Court Rules of Practice and Procedure.

- 7 (b)

what is the amount of petitioner’s unreported

gross income.

(3)

For 1986-(a)

whether petitioner is liable for civil fraud

additions to tax under subparagraphs (A) and (B) of

section 6653(b)(1) and, as to subparagraph (B) of

section 6653(b)(1), in what amount.

(b)

what is the amount of petitioner’s unreported

gross income.

spouse treatment under section 6013(e).

(4)

For 1987, whether petitioner overstated an

itemized interest deduction by $8,559.

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulations and

the stipulated exhibits are incorporated herein by this

reference.

When the petitions were filed in the instant cases,

petitioner resided in Chevy Chase, Maryland.

Background

Petitioner is a sophisticated taxpayer.

Petitioner is a

practicing attorney; he holds a J.D. degree from the University

of Florida and an LL.M. in Taxation degree from New York

University.

Petitioner was a senior trial attorney in the Trial

- 8 Branch of the Tax Court Litigation Division, Office of Chief

Counsel, Internal Revenue Service, from 1971 through July 1975.

Since July 1975, petitioner has been engaged in private practice,

specializing in Federal tax law, and is currently a member of the

bar of this Court.

Petitioner was a name partner in the law firm

of Grossman & Flask, located in Washington, D.C., during the

years in issue.

Petitioner does not prepare tax returns for

himself or others.

Petitioner and Betsy married in 1967.

They had three

children, two daughters and a son, who were born in the 1970’s-RobBee (1970), Wendi (1973), and Geoffrey (1976).

Petitioner and

Betsy were married during the years in issue; they separated in

September 1986 and divorced in 1991.

Betsy holds a bachelor of science degree from the University

of Colorado and a masters degree in special education and

learning disabilities from the University of Florida.

In 1966,

Betsy worked for the Sley Corporations, described infra.

For

about 2 years, Betsy was employed as a schoolteacher and earned a

yearly salary of about $5,100.

At some point, Betsy was employed

as a substitute teacher and as a gift store clerk for “minimal”

salary.

During the years in issue, petitioner and Betsy had only one

joint checking account.

Through September 1986, this was

petitioner’s only checking account.

Betsy wrote and signed

- 9 almost all the checks drawn on this account.

While petitioner

and Betsy were married, petitioner deposited his earnings into

the joint bank account, and Betsy was responsible for spending

these funds.

Betsy made the decisions regarding petitioner’s and

Betsy’s expenditures.

Betsy is the daughter of Harry Sley, hereinafter sometimes

referred to as Harry, and Beatrice Sley, hereinafter sometimes

referred to as Beatrice.

Harry died on December 11, 1977.

During the years in issue, Beatrice generally divided her time

between Potomac, Maryland, and Miami, Florida.

From about May to

November, Beatrice lived at least part of the time in a home in

Potomac, which she rented from petitioner and Betsy.

From about

November to May, Beatrice lived in a Miami Beach condominium that

she owned.

Beatrice died in 1991.

Betsy’s brother, Benjamin Harry Beryll Sley, hereinafter

sometimes referred to as Ben, lived in Corpus Christi, Texas,

during the years in issue.

Ben is an attorney; he holds a J.D.

degree from Baylor Law School (1974) and an LL.M. in Taxation

degree from Southern Methodist University (1982).4

in his class at Southern Methodist University.

He was first

From 1975 to

1979, Ben served as a judge advocate in the U.S. Marine Corps.

The parties stipulated that Ben received his LL.M. in

Taxation degree from New York University. Our finding, contrary

to the stipulation, is in accord with Ben’s trial testimony and

petitioner’s proposed finding, not objected to by respondent.

- 10 During the years in issue, Ben practiced law in Texas.

He is

also a registered stockbroker and a consolidated life

underwriter.

In 1984, Ben ran for county attorney in Neuces

County, Texas.

Petitioner, Betsy, and Ben grew up in the Miami, Florida,

area.

Petitioner and Betsy went to the same high school.

Petitioner and Ben have known one another since they were

children, and petitioner was best man at Ben’s wedding.

Petitioner’s parents also lived in the Miami area during some

part of the years in issue.

Sley Corporations

Background

Harry formed a number of corporations to conduct parking

lot, garage, and real estate investment businesses in more than

60 locations in Philadelphia, Pennsylvania.

In general, these

corporations, hereinafter sometimes referred to collectively as

the Sley Corporations, owned and operated properties at different

locations.

The Sley Corporations’ businesses and offices originally

were located in Philadelphia; they remained in Philadelphia,

until the fall of 1980, when the offices were moved to

Washington, D.C.

The Sley Corporations include Brine Corp.,

Girard Holding Co., Inc., Markette Corp. (hereinafter sometimes

referred to as Markette), Parkette Corp. (hereinafter sometimes

- 11 referred to as Parkette), Chestnut Parking Corp., Locust Corp.,

Nine Ten Chestnut Corp., Stephen Girard Investment Corp., and

Twelfth and Sansom Corp.

Parkette is the administrative umbrella

for the Sley Corporations.

Some of the Sley Corporations became holding companies when

Harry sold some of the parking lots and garages, and kept the

proceeds of the sales in those corporations.

Harry was the president of each of the Sley Corporations,

and controlled them, until his death in 1977.

At that time, some

of the Sley Corporations were still operating as landlords.

After Harry’s death, Beatrice and Lorraine Hicks, hereinafter

sometimes referred to as Hicks, Harry’s secretary for 50 years,

oversaw the investments of the Sley Corporations and continued to

sell some of the lots that some of the Sley Corporations held.

Hicks resigned from the Sley Corporations in the fall of 1980.

Betsy was a corporate officer of each of the Sley

Corporations during the years in issue; she first became an

officer of some of these corporations in the 1960’s.

After

Harry’s death, all of the stock in the Sley Corporations has been

owned, either directly or beneficially (through inter vivos and

testamentary trusts) by Beatrice, Betsy, and Ben.

Harry intended

that all the Sley Corporations stock was to be owned exclusively

by Beatrice, Betsy, and Ben; he intended that in-laws, such as

- 12 petitioner, would not have an ownership interest in the Sley

Corporations.

Investments

In 1978, after Harry died, Ben started to become interested

in learning about investments and began going to seminars and

reading financial publications.

In 1979, Ben began taking an

active role in the investment decisions of the Sley Corporations.

Ben devised investment strategies for the Sley Corporations.

September 20, 1979, Ben bought 1,750 Krugerrands at a cost of

about $700,000 for the Sley Corporations.

On October 3, 1979,

Ben sold the 1,750 Krugerrands at a profit of about $40,000 for

the Sley Corporations.

On October 4, 1979, Ben bought 38

diamonds at a cost of $2,369,190 for the Sley Corporations.

October 9, 1979, Ben bought another 1,750 Krugerrands at a cost

of about $700,000 for the Sley Corporations.

At some later date,

Ben and petitioner traveled to New York to receive the diamonds.

Each of them wore a money belt that contained more than $1

million worth of diamonds, which they carried to Washington,

D.C., and then put into the Sley Corporations’ safe deposit box

in a Washington, D.C., bank.

Ben received a Gemological

Institute of America (hereinafter sometimes referred to as GIA)

certificate for each diamond.

A GIA certificate is a written

description of a diamond’s physical characteristics.

At various

other dates, Ben bought (in 1979 and 1980) and sold (in 1980)

- 13 Krugerrands for the Sley Corporations.

The sales produced a 1980

profit of $75,150 for the Sley Corporations.

In 1981, there was a very rapid drop in the prices of both

diamonds and gold.

In 1980, Ben was employed as a stockbroker; he engaged in

transactions on behalf of the Sley Corporations that year.

1981, Ben went back to law school full-time.

From 1981 through

1986, Ben did not perform any investment services for the Sley

Corporations other than generally keeping abreast of financial

markets for the Sley Corporations and for his own investment

purposes, and reviewing monthly account statements from the banks

at which the Sley Corporations had cash management accounts.

1987, Ben made some investments for Markette’s pension and

profit-sharing plan.

On January 20, 1984, Girard Holding Co., Inc., sold land and

parking lot improvements for $640,000; it reported a $511,658

gain on this sale.

1985.

Twelfth and Sansom Corp. was liquidated in

The liquidation included about $1 million worth of assets.

Apart from the disposition of Krugerrands when Twelfth and

Sansom Corp. was going through its liquidation, none of the Sley

Corporations bought or disposed of any Krugerrands or diamonds

between the end of 1980 and the end of 1986.

See infra table 1.

In fact, the Sley Corporations still owned those same Kruggerands

and diamonds during the trial of the instant cases.

- 14 Table 1 shows the investment portfolios of the Sley

Corporations for 1980 through 1986.

historical costs of these assets.

The values shown are the

Apart from the limited buying

and selling of certificates of deposit and moving money from one

bank or account to another done by petitioner, see infra, the

1984 Girard Holding Co., Inc., land and parking lot sale, and the

1985 Twelfth and Sansom Corp. liquidation, the assets held by the

Sley Corporations did not change during the years in issue.

The

cash management accounts shown in table 1 were accounts held at

the trust department of a bank; the trust department

automatically fully invested the accounts’ income and principal

on a daily basis.

Table 1

Asset

1980

Cash management acct

$1,556,190

Diamonds

518,001

Krugerrands

96,180

Affiliate

100

Marketable securities

48,750

Certificates of deposit

-Totals

Asset

Cash management acct

Diamonds

Krugerrands

Affiliate

Ready assets

Marketable securities

Repurchase agreement

Certificates of deposit

Totals

Asset

$2,219,221

1980

Asset

Brine Corporation

1982

1983

1984

1985

1986

$1,533,220

518,001

96,180

100

48,750

$1,957,913

518,001

96,180

100

48,750

$1,984,248

518,001

96,180

100

48,750

$937,270

518,001

96,180

100

48,750

1,030,822

$817,270

518,001

96,180

100

48,750

1,088,863

$1,627,989

518,001

96,180

100

48,750

$2,196,251

$2,620,944

$2,647,279 $2,631,123

$2,569,164

$2,291,020

Girard Holding Co., Inc.

1981

1982

1983

1984

1985

1986

$752,260

101,269

96,180

1,725

-188,703

---

$745,700

101,269

96,180

1,725

917

188,703

5,000

$762,823

101,269

96,180

1,725

1,032

188,703

5,337

$815,823

101,269

96,180

1,625

1,123

188,703

5,796

$963,819

101,269

96,180

1,625

1,241

188,703

6,350

395,980

$855,717

101,269

96,180

1,625

1,342

188,703

6,805

429,934

$1,245,356

101,269

96,180

200

1,428

173,603

7,185

1,140,137

1,139,494

1,157,069

1,210,519

1,755,167

1,681,575

1,625,221

1980

1981

Cash management acct

$2,838,000

Diamonds

1,477,377

Krugerrands

96,180

Affiliate

100

Repurchase agreements

19,000

Certificates of deposit

-Totals

1981

4,430,657

1980

Markette Corporation

1982

1983

1984

1985

1986

$2,790,680

1,477,377

96,180

100

---

$2,755,258

1,477,377

96,180

100

---

$2,710,130

1,477,377

96,180

100

---

$839,386

1,477,377

96,180

100

-1,681,386

$766,980

1,477,377

96,180

100

-1,570,098

$2,195,735

1,477,377

96,180

100

4,364,377

4,328,915

4,283,787

4,094,429

3,910,735

3,769,392

1984

1985

1986

Chestnut Parking Corporation

1981

1982

1983

- 16 Cash management acct

Diamonds

Krugerrands

Affiliate

Totals

$50,700

269,745

96,180

100

$45,000

269,745

96,180

100

$45,032

269,745

96,180

100

$45,032

269,745

96,180

100

$45,032

269,745

96,180

100

$28,032

269,745

96,180

100

$27,032

269,745

96,180

100

416,725

411,025

411,057

394,057

393,057

Con’t. Table 1

Locust Corporation

1981

1982

Assets

1980

Cash management acct

Diamonds

Krugerrands

Affiliate

$32,260

252,842

96,180

100

$22,970

252,842

96,180

100

381,382

372,092

Asset

1980

Nine Ten Chestnut Corporation

1981

1982

1983

Cash management

Krugerrands

Affiliate

Ready assets

Repurchase agreement

$11,000

13,740

100

$497,980

13,740

100

16,567

15,000

$416,126

13,740

100

18,666

16,012

$24,840

543,387

464,644

Totals

Asset

Cash management acct

Diamonds

Krugerrands

Affiliate

Totals

Asset

Cash management acct

Krugerrands

Affiliate

Ready assets

Repurchase agreement

1980

1983

1984

1985

1986

$22,974

252,842

96,180

100

$22,974

252,842

96,180

100

$22,974

252,842

96,180

100

$20,974

252,842

96,180

100

$19,774

252,842

96,180

100

372,096

370,096

368,896

1984

1985

1986

$416,127

13,740

100

20,298

17,388

$412,327

13,740

100

22,435

19,050

$312,327

13,740

100

24,248

20,415

$297,327

13,740

100

25,817

21,562

467,653

467,652

370,830

358,546

1984

1985

1986

Stephen Girard Investment Corporation

1981

1982

1983

$113,700

100,125

96,180

100

$99,900

100,125

96,180

100

$99,708

100,125

96,180

100

$99,708

100,125

96,180

100

$99,708

100,125

96,180

100

$99,708

100,125

96,180

100

$99,708

100,125

96,180

100

310,105

296,305

296,113

1980

Twelfth and Sansom Corporation

1981

1982

1983

1984

1985

1986

$286,870

96,180

100

---

$288,390

96,180

100

821

15,000

$969,655

96,180

100

925

16,012

$845,655

96,180

100

1,005

17,388

$845,655

96,180

100

1,111

19,050

--100

---

--100

---

- 18 Marketable securities

84,500

Totals

467,650

484,991

1,167,372

1,044,828

1,046,596

84,600

-100

- 19 Daily Operations:

1980 Through March 1986

In the fall of 1980, after Hicks resigned, the business

offices of the Sley Corporations were moved from Philadelphia to

Washington, D.C., into space sublet from and adjacent to Grossman

& Flask’s office.

Later, when the Grossman & Flask office was

moved, the Sley Corporations’ office was simultaneously moved, so

that the Sley Corporations’ office remained in sublet office

space of Grossman & Flask throughout the years in issue.

When

the Sley Corporations’ offices moved to Washington, D.C.,

petitioner took control of the daily operations of the Sley

Corporations.

Betsy did not give petitioner directions as to how

to run the daily operation of the Sley Corporations.

Tanja Baybrook, hereinafter sometimes referred to as

Baybrook, was the bookkeeper for the Sley Corporations from

September 1980 to March 1986.

She has a B.S. degree in

accounting from Northeastern University.

Petitioner interviewed

and hired Baybrook for this bookkeeping position.

Petitioner

explained to Baybrook her duties with the Sley Corporations, and

told her that she was to report to him in connection with that

work.

Petitioner supervised Baybrook in carrying out her duties

for the Sley Corporations.

During Baybrook’s interview,

petitioner told her that he was administering the Sley

Corporations.

Baybrook saw Betsy and Ben in the Sley

Corporations’ office on a few occasions, but not on a regular

basis; she saw Beatrice there only once.

Baybrook never received

- 20 instructions as to how to perform her duties from Beatrice,

Betsy, or Ben.

Baybrook’s salary started at about $15,000 per

year and increased a little over time.

In early 1981, Baybrook also began doing the bookkeeping for

Grossman & Flask.

Baybrook spent about 75 percent of her time

doing the bookkeeping for Grossman & Flask.

Baybrook was paid by

Parkette; she was not paid by Grossman & Flask.

Petitioner

explained to Betsy that, because he was not being paid directly

for his administrative work on behalf of the Sley Corporations,

Parkette’s payment of Baybrook’s entire salary was, in effect, an

indirect way of the Sley Corporations paying for his

administrative work.

Pursuant to her duties for the Sley Corporations, Baybrook

did bank reconciliations, disbursed payroll checks, and prepared

general ledger and payroll quarterly tax returns; she also

prepared checks for paying bills, and prepared summary financial

statements and monthly financial statements.

Baybrook created,

among other documents, computerized books of accounts and bank

statements for the investment accounts of Brine Corp., Girard

Holding Co., Inc., and Markette.

Baybrook did this work after

discussing it with petitioner, and chose the computer and program

after petitioner approved the purchases.

Baybrook did not

prepare any minutes for the Sley Corporations.

Baybrook

occasionally prepared corporate correspondence, which generally

was signed by petitioner.

- 21 Baybrook opened the Sley Corporations’ mail.

For those

bills that came into the office that were readily identifiable,

Baybrook prepared checks as payment; for those bills that she had

questions about, she asked petitioner.

Petitioner told Baybrook

which of the Sley Corporations would pay a particular bill;

Baybrook used her own judgment to categorize the expenses on the

Sley Corporations’ books.

Baybrook prepared the checks as

payment for bills that came in on a particular day, attached the

bills to the checks, then took the bills and checks to petitioner

so that he could review the bills and sign the checks.

Petitioner closely reviewed the checks that Baybrook prepared

against each underlying bill.

Petitioner usually signed the Sley Corporations checks

prepared by Baybrook.

Betsy occasionally signed Sley

Corporations checks.

Baybrook generally prepared about 12 Sley

Corporations checks per month as payments for dividends, rent,

telephone, payroll, and travel, although there was heavier

activity in some months.

Petitioner signed more than 98 percent

of the Sley Corporations checks that were written from January 1,

1983, thought March 31, 1986.

The invoices that came into the Sley Corporations’ offices

from American Express discussed infra (under Travel and

Entertainment Expenses), were processed a bit differently.

These

invoices were addressed primarily to petitioner at his home.

Petitioner usually brought these invoices to Baybrook and told

- 22 her which of the Sley Corporations would pay for the charges on a

particular invoice.

If Baybrook had a question as to which of

the Sley Corporations would pay for a particular charge, then

Baybrook asked petitioner.

Baybrook prepared the check, attached

the invoice to the check, and returned the invoice with the

attached check to petitioner for his final review.

Petitioner

closely reviewed the checks that Baybrook prepared against each

invoice; he also reviewed each transaction on each invoice.

Baybrook categorized these charges as “TRAVEL/TRANSPORTATION”

expenses on Markette’s books and records.

Petitioner never told

Baybrook that a travel expense was personal, as opposed to

business, and thus was not to be paid by the Sley Corporations.

At one time, when Baybrook was going to Orlando, Florida, for

personal purposes, petitioner asked Baybrook to check on the

health of two people who were receiving checks from Harry’s

estate.

Petitioner arranged for Baybrook to be paid $200 by the

Sley Corporations, which was payment for her time and the

expenses she incurred while doing work for Harry’s estate5 while

in Florida, not the cost of her entire trip to Florida.

Baybrook prepared Sley Corporations’ payroll checks to be

paid to Beatrice, Betsy, and Ben.

Petitioner told Baybrook the

Petitioner’s proposed finding 318 states that this work

was for Markette. Respondent did not object to this proposed

finding. Nevertheless, Baybrook’s detailed testimony, on which

petitioner’s proposed finding was based, makes it clear that the

work was done for Harry’s estate, and we have so found.

- 23 amount for which each payroll check should be written and later

told her when the amounts of the payroll checks changed.

infra Salaries and Dividends.

for the changes.

See

Baybrook was not told the reasons

When petitioner gave these instructions to

Baybrook, he did not indicate to her that he was passing on

instructions from the Sley Corporations’ officers.

Baybrook also

prepared the Sley Corporations payroll tax returns; petitioner

signed them.

Petitioner signed Sley Corporations tax returns as

an “officer”; the “title” he used was “attorney”.

Baybrook prepared summary financial statements of

petitioner’s income based on the books she kept for the Sley

Corporations and for Grossman & Flask; Baybrook did not intend

that these summaries be all-inclusive, but she tried and intended

to include everything that occurred “inside the office”--that is,

the income from Grossman & Flask and from the Sley Corporations.

Baybrook was not asked by petitioner to prepare the summary

financial statements; Baybrook prepared them as a courtesy to

Harvey J. Berger, hereinafter sometimes referred to as Berger,

the accountant who, from 1980 on, prepared the Sley Corporations’

tax returns and petitioner’s and Betsy’s joint tax returns.

Baybrook gave the summary financial statements to petitioner so

that he could make sure that all items of income and deductions

were included.

Baybrook was never asked to prepare a schedule of

constructive dividends.

- 24 During 1983 through March 1986, when Baybrook left the Sley

Corporations, Baybrook did not have any communication with either

Beatrice, Betsy, or Ben about the Sley Corporations.

During

these years, Baybrook did not send to Beatrice, Betsy, or Ben

copies of bills, the financial statements she prepared, or any

other correspondence that came into the office.

Baybrook did not

see any correspondence that was signed or received by Beatrice,

Betsy, or Ben on behalf of the Sley Corporations, except for (1)

occasional checks signed by Betsy or (2) promissory notes signed

by Sley Corporations officers.

During this period, Baybrook was

in the Sley Corporations offices virtually every day, except when

she was on vacation.

Betsy did not direct either petitioner or Baybrook as to

which, if any, of the Sley Corporations should pay for the

expenses appearing on the American Express invoices.

Petitioner

checked with Betsy as to whether Betsy charged particular items

or incurred particular expenses, but he did not ask Betsy whether

particular expenses should be paid by the Sley Corporations.

Neither Betsy nor Ben gave petitioner instructions to pass along

to Baybrook as to the amount of salary Beatrice, Betsy, and Ben

were to receive, nor did they give instructions as to which of

the Sley Corporations were to pay the salaries.

In addition to supervising Baybrook and running the daily

operations of the Sley Corporations, petitioner transferred money

among the Sley Corporations’ bank accounts and bought

- 25 certificates of deposit for the Sley Corporations.

For example,

in July 1984, petitioner told Baybrook to telephone the Mellon

Bank, where Markette had an investment account, and have $1

million transferred from the Mellon Bank to the National

Permanent Bank of Washington to buy certificates of deposit.

October 1984, petitioner told Baybrook to telephone the Mellon

Bank and have that bank transfer $75,000 to Markette’s checking

account.

On February 3, 1986, petitioner moved the amounts shown in

table 2 from the National Permanent Bank of Washington and

deposited these funds into accounts he had opened in the names of

the Sley Corporations at the National Bank of Washington.

Table 2

Corporation

Amount Transferred

Markette

Brine Corp.

Girard Holding Co.

$1,663,963.84

1,171,718.68

433,638.66

On February 4, 1986, petitioner transferred by wire

$432,638.66 from Girard Holding Co., Inc.’s account at the

National Bank of Washington to the Mellon Bank.

On February 4 or

5, 1986, $1,170,718.68 was transferred by wire to Brine Corp.’s

account at Mellon Bank and $1,654,754.92 was transferred by wire

to Markette’s account at Mellon Bank.

Generally, Ben was not

involved in decisions to invest money in particular certificates

of deposit or to move money from one bank or account to another;

- 26 however, petitioner did speak to Ben before he moved funds out of

the National Permanent Bank of Washington in February 1986.

In January 1981, petitioner became the named fiduciary for

the Markette Corporation Comprehensive Health Plan, which was

created at that time.

Petitioner was the administrator and one

of the trustees of the Parkette Corporation Profit Sharing Plan

and also of the Parkette Corporation Pension Plan.

Both of these

plans were established “as of” December 31, 1980, and both plans

covered employees of all the Sley Corporations.

In 1984,

petitioner handled the sale of real estate that belonged to one

of the Sley Corporations.

From 1980 to about March 1986, Betsy did not take an active

interest in the Sley Corporations, nor did she have a working

knowledge of the Sley Corporations’ operations.

During the years

in issue until March 1986, Betsy entrusted the entire operations

of the Sley Corporations to petitioner so that she could stay at

home to take care of her children; Betsy also was very involved

in civic activities.

During the years in issue until 1986, Betsy

and petitioner had, in Betsy’s words, an “old-fashioned

relationship” where she took care of the children and the

household, and petitioner took care of business matters, those

being his law practice and the daily operations of the Sley

Corporations.

However, see our findings as to petitioner’s and

Betsy’s joint checking account, under Background, supra.

- 27 Before 1986, Betsy had a general understanding of what

assets the Sley Corporations held, participated in general family

discussions about the Sley Corporations, and “just read up on

different things and the Wall Street Journal.”

From 1980 through

about March 1986, Betsy did not go into the Sley Corporations’

office, review the monthly financial statements, or sign Sley

Corporations’ correspondence on a regular basis.

From 1979

through early 1986, Betsy merely signed whatever petitioner asked

her to sign.

Before 1986, Betsy did not have any involvement in

the preparation, review, or filing of the Sley Corporations’ tax

returns.

Ben lived in Texas during the years in issue and did not

take responsibility for, nor have any involvement in, the daily

operations of the Sley Corporations.

Ben received copies of the

Sley Corporations’ tax returns, but he did not have any

involvement in the preparation and filing of those tax returns.

In 1984, Ben was involved in decision-making that led to the

liquidation of Twelfth and Sansom Corp.

Also in 1984, Ben

proposed consideration of liquidating all the Sley Corporations.

Petitioner and Ben received a letter from Berger stating the pros

and cons of liquidation; Twelfth and Sansom Corp. was the only

one of the Sley Corporations that was liquidated.

In September of 1984, 1985, and 1986, Beatrice, Betsy, and

Ben met as the Markette board of directors, to authorize the

redemption of stock held by trusts of which Betsy and Ben were

- 28 the beneficiaries.

From 1983 to 1986, these three meetings were

the only meetings held of the Sley Corporations’ directors.

The

minutes prepared for these three meetings were the only minutes

prepared for the Sley Corporations for about 1982 through 1989.

During the period 1980 through 1986, petitioner and his law

firm performed legal services for the Sley Corporations.

When

such services were performed, Grossman & Flask billed the client

for fees.

Daily Operations:

After March 1986

Matters between petitioner and Betsy were deteriorating.

Petitioner and Betsy separated permanently in September 1986.

When Baybrook left the Sley Corporations in March 1986,

Betsy began to become more involved with the operation of the

Sley Corporations.

Betsy began signing checks and tax returns;

she interviewed and hired a bookkeeper in July 1986, Bridgette

Coupeon, and a replacement for Bridgette Coupeon in September

1986, Evelyn Wilson, hereinafter sometimes referred to as Wilson.

Maggie-Jo Brown, hereinafter sometimes referred to as Brown,

is an accountant who originally was employed by the accounting

firm of Grant Thornton under Berger’s supervision.

The first

week after Brown started at Grant Thornton, in February 1985,

Berger assigned her to prepare the 1984 tax returns and

compilation financial statements for the Sley Corporations.

(For a description of the compilation financial statements, see

Financial Statements, etc., infra.)

After Baybrook left the Sley

- 29 Corporations, Brown began going into the Sley Corporations’

office on a weekly basis, at night or on the weekend, to do work

for the Sley Corporations that Baybrook had left undone; at this

point, Brown was still employed by Grant Thornton.

Brown did the

bookkeeping, made sure that checks were written and payroll tax

returns were filed, and answered correspondence.

Brown first met Betsy and Ben in April 1986.

Thereafter,

Brown dealt with both petitioner and Betsy regarding the Sley

Corporations.

Over the course of 1986, however, petitioner told

Brown to start directing questions regarding the Sley

Corporations to Betsy.

After Wilson was hired as the Sley

Corporations’ bookkeeper in September 1986, Brown no longer went

into the Sley Corporations’ office on a weekly basis and mainly

dealt with Wilson over the telephone about questions concerning

the Sley Corporations when preparing the compilation financial

statements and the tax returns.

Although petitioner’s status in

the Sley Corporations’ operations diminished after March 1986, he

continued to play a role throughout 1986.

In January 1987, Betsy, petitioner, and Brown met with a

bond investor; the purpose of the meeting was to have Betsy begin

to think about the investment portfolios of the Sley

Corporations, which had not changed since 1980.

See supra table

In April 1987, Brown ended her employment with Grant

Thornton.

In May 1987, petitioner and Betsy hired Brown to work

for the Sley Corporations as the comptroller; this position

- 30 combined the bookkeeping and the tax preparation duties.

As a

practical matter, Betsy ran the Sley Corporations by the time

Brown was hired, and Betsy supervised Brown.

Salaries and Dividends

Beatrice started receiving a salary from the Sley

Corporations in 1978, when she and Hicks took over the operations

of the Sley Corporations.

Beatrice also received dividends from

the Sley Corporations.

Before 1980, Betsy and Ben received dividends, but not

salaries, from the Sley Corporations.

salary of $25,000.

In 1980, Betsy received a

From 1981 through 1987, Betsy and Ben each

received salaries of at least $100,000.

received a salary of $124,583.

In 1986, each of them

Betsy and Ben were not doing

anything more for the Sley Corporations in 1981 and later years

than they were doing before 1981.

Neither Betsy nor Ben set the salaries for themselves or for

their mother.

Betsy does not know why she received her salary

from Markette,6 nor does she know why she received the amounts of

salaries she received.

Likewise, Ben does not know why he

received his salary from Brine Corp.,7 nor does he know why he

Betsy received her salary exclusively from Markette,

except for 1983, when she also received $1,562 from Girard

Holding Co., Inc.

Ben received his salary exclusively from Brine Corp.,

except for 1983, when he also received $1,563 from Girard Holding

Co., Inc.

(continued...)

- 31 received the amounts of salaries he received.

Beatrice, Betsy,

and Ben received salaries from only one or two of the Sley

Corporations, so that, as to any one shareholder or one

corporation, the salaries were grossly disproportionate to the

shareholdings.

However, the aggregate salaries of each of them

were closely proportionate to their respective aggregate

ownerships of the Sley Corporations.

Betsy and Ben learned the amounts of their Sley Corporations

salaries from petitioner; they did not direct petitioner on this

matter.

Petitioner set Betsy’s and Ben’s Sley Corporations

salaries, at least up to early 1986.

Table 3 shows the amounts that Markette withheld as Social

Security taxes, hereinafter sometimes referred to as F.I.C.A.

taxes, from the amounts Markette paid as salary to Betsy.

Table 3

Year

Amount

1983

1984

1985

1986

1987

1988

$2,391.91

2,532.59

2,791.78

3,003.00

3,131.70

3,379.50

At the end of each year, Berger came into the Sley

Corporations’ office to calculate the amounts of the dividends

(...continued)

- 32 each of the Sley Corporations had to pay out in order to avoid

the personal holding company tax.

Table 4 shows the amounts of Sley Corporations dividends

paid to Betsy and reported on Schedules B of petitioner’s and

Betsy’s joint tax returns.

Table 4

Year

Amount

1983

1984

1985

1986

$36,384

37,609

13,481

18,153

Petitioner’s proposed finding 59, not objected to by

respondent, shows this total as $37,573. Our finding is the sum

of the component dividend amounts, which are correctly

transcribed from petitioner’s and Betsy’s 1984 joint tax return.

The $36 difference between our finding and the total on

petitioner’s proposed finding does not affect our analysis.

Travel and Entertainment Expenses8

On brief, in proposed finding 165, respondent asks us

to find that “During the years 1893[sic] through 1986, Markette

paid and deducted the following travel expenses”. The proposed

finding then sets forth the amounts shown on Markette’s tax

returns for those years. In compliance with Rule 151(e)(3),

respondent shows exhibits Q, R, and S, retained copies of

Markette’s tax returns, as the sources in the record supporting

the proposed finding as to what Markette deducted as travel

expenses for 1983, 1984, and 1985. As respondent properly alerts

us on brief, “Exs. Q, R, and S were admitted into evidence for

the limited, non-hearsay, purpose of establishing the

compensation and dividends reported by the corporation.”

Respondent’s counsel limited his offer of those exhibits at trial

to the compensation and dividend information shown on those tax

returns. We overruled petitioner’s objections to that limited

offer. The trial adjourned for the weekend, resumed the

following Monday, and continued for an additional 496 pages of

transcript.

Later that same day, respondent’s counsel properly asked to

expand the limited admission. Respondent’s counsel explained as

(continued...)

- 33 During the years in issue, Markette had several American

Express credit card accounts on which credit cards were issued in

petitioner’s name and in Betsy’s name.

Petitioner and Betsy

(...continued)

follows:

I had stipulated that the nonhearsay purpose for which

I was offering those returns was to prove, I believe I said,

salary and dividends. I would like to modify that to cover

all compensation and dividends.

The Revenue agent, in preparing her summary, included

other things in compensation besides salary, to include

particularly contributions to pension and profit sharing

plans. Those also would be nonhearsay purposes. We don’t

care if they are true or not; we just want to show what was

reported to the IRS.

The Court accepted the expansion. The expansion clearly did not

relate to deductions of travel expenses.

If respondent’s counsel overlooked the travel expenses

matter before the instant cases were submitted and later

concluded that it was important to secure a further expansion,

then respondent’s counsel should have either (1) secured

petitioner’s agreement or (2) moved before opening briefs were

due to reopen the record to expand the limited admission. We do

not believe it is appropriate to allow petitioner to write and

file his opening brief on the assumption that these exhibits were

offered and received only for a specified limited purpose and,

afterward, learn that these exhibits are being used for another

purpose. True, petitioner has (and used) the opportunity to

respond on answering brief. However, if the Court were to accede

to respondent’s request in this situation, then petitioner would

have been deprived of the opportunity to use the expanded

admission in crafting his own proposed findings.

There may be extraordinary circumstances under which such a

delay in presenting the matter may be excusable. We do not

decide that hypothetical; in the instant cases, we do not reach

the question of what we would have ruled if respondent had

presented the matter seasonably. We shall expand the limited

admission. Exhibits Q, R, and S were admitted at trial for

limited purposes and, as so limited, do not support respondent’s

proposed finding.

- 34 charged travel and entertainment expenses on these credit cards,

as detailed infra.

Since the 1960’s, Betsy has held credit cards issued in the

name of one or another of the Sley Corporations.

originally gave these credit cards to Betsy.

Harry

Betsy had used the

credit cards, both before and during the years in issue, without

regard to whether the charges made had a business purpose.

Betsy

understood that, as a result, Markette would be paying for the

amounts she charged, and that she and petitioner would not be

paying for these amounts.

Petitioner used his Markette American

Express credit card only once after 1986.

When Betsy took a trip without petitioner, she informed him

of the trip.

1983

Table 5 lists certain checks written on the Markette account

in 1983.

The table shows the date the check was written, check

number, payee, and amount.

petitioner.

All of these checks were signed by

Respondent determined that petitioner and Betsy

failed to report $18,611.70 of constructive dividends received

from Markette in 1983, the sum of the checks listed in table 5,

$15,299.88, plus the amount of a $3,311.82 debit memorandum

resulting from a transfer of funds to Media Communications, Inc.9

Respondent’s travel and entertainment expense

determinations in the notices of deficiency are based on amounts

of certain Markette checks. It is apparent to us that, in

general, our redetermination should be based on evaluations of

the specific trips or the occasions of the specific entertainment

(continued...)

- 35 Table 5

Date

1983

Check

Number

Payee

Amount

Jan. 05

Feb. 03

Mar. 28

Apr. 18

May

111

May

June 29

Aug. 04

Sept. 19

Sept. 29

Nov. 113

1824

1844

1856

1862

1870

1873

1884

1896

115417

1903

1912

American Express

Eastern Airlines

American Express

$42.80

3,588.87

1,038.08

1,302.00

795.59

964.41

2,210.00

3,366.19

1,001.60

496.00

494.34

15,299.88

Debit Memorandum4

June 02

Total

Media Communications

3,311.82

18,611.70

Markette’s cash disbursements journal shows the date as May 9,

but the check itself is dated May 11.

Markette’s cash disbursements journal shows the check No. as

115416800, but the check itself is numbered 115417; it appears to

be a counter check.

(...continued)

items. The trips often cut across the American Express vouchers

and the Markette checks. It is often difficult to determine

which voucher items are to be matched with a specific trip or

entertainment item, or with a specific Markette check. These

difficulties are heightened in those instances in which American

Express allowed credits for amounts previously paid, but the

record herein does not clearly describe the specific charge that

is being reversed in whole or in part by the specific credit. As

a result, notwithstanding the extensive record and long briefs,

there are many items as to which we have been unable to make

meaningful findings. The sums of these items appear infra in

tables 6, 8, 10, and 12, in the columns headed "Unknown".

- 36 3

Markette’s cash disbursements journal shows the date as Nov.

10, but the check itself is dated Nov. 11.

Markette’s cash disbursements journal shows this item as check

No. 1877, the date as June 1, and the payee as National Seminar,

Inc. The bank’s debit memorandum itself shows the information

set forth in the table.

During the years in issue, petitioner, Betsy, and the

children usually flew to Miami to see Beatrice in December and in

the spring, and stayed for about one week.

No notes or records

were kept of any Miami Sley Corporations’ business discussions.

Baybrook was never asked to make copies of the Sley Corporations’

financial statements to take to Miami, nor was Baybrook asked to

make travel arrangements.

Check No. 1862--Miami.

In February 1983, five Eastern

Airlines tickets, costing $1,302, were bought for petitioner,

Betsy, and the children to fly to Miami to visit Beatrice.

The

primary purpose of this trip was personal--a family vacation.

These tickets were paid for by Markette check No. 1862.

Check No. 1896--Lake Tahoe.

The American Express July

invoice includes petitioner’s charges totaling $1,351.50 for five

United Airlines tickets for petitioner, Betsy, and their children

to fly round-trip from Washington, D.C., to Reno, Nevada.

The

primary purpose of this trip was personal--a family vacation to

Lake Tahoe to visit relatives in the area (petitioner’s father

rented a condominium in Lake Tahoe) and to go skiing.

charges were paid for by Markette check No. 1896.

usually went to Lake Tahoe in August.

These

The family

However, petitioner did

- 37 not go on this trip, and the $318 charge for his ticket was

refunded by a credit on the American Express August invoice.

Thus, the $318 that was later refunded is not properly part of

the cost of this Lake Tahoe trip.

Check No. 1896, Debit Memo--Hawaii.

The American Express

July invoice includes charges totaling $2,014.69 for

miscellaneous hotel and airline expenses on a trip to Hawaii by

petitioner, Betsy, and the children.

Petitioner charged all of

these expenses on his Markette American Express credit card.

The

primary purposes of this trip were (1) for petitioner to appear

as a panelist on a video conference to be broadcast from Hawaii

by satellite, (2) to meet Howard Ruff (hereinafter sometimes

referred to as Ruff) in person, and (3) to take a family

vacation.

These charges were paid for by Markette check No.

1896.

Petitioner was invited to be a panelist by a radio talk show

host, H.I. “Sonny” Bloch, hereinafter sometimes referred to as

Bloch.

Bloch’s brother, a Washington, D.C., attorney, was a

client of petitioner.

Bloch also became a client of petitioner.

Ruff, a well-known financial adviser, described by petitioner as

“the greatest guru”, was the other panelist.

On the video

conference, Ruff spoke about financial aspects of investing, and

petitioner spoke about tax aspects of investing.

The video

conference was a segment of “Investor’s Action Line”, a

nationally syndicated television program for investors and

- 38 financial specialists.

The video conference took place in Hawaii

to accommodate Ruff’s schedule.

believed in Ruff’s views.

Ben was an admirer of Ruff and

At Ben’s suggestion, petitioner and

Betsy went to a seminar that Ruff was conducting on Maui apart

from his appearance on the video conference, and “went through

the seminar to see what was going on”.

Petitioner, Betsy, and the children checked into a hotel on

Maui on June 7, 1983.

The video conference was conducted on June

8, 1983, in Honolulu, on Oahu, and lasted about 2 hours.

Honolulu is about 100 miles from Maui by air.

Petitioner, Betsy,

and the children checked into another hotel on Maui on June 13,

1983.

Their stay in Hawaii lasted altogether 10 days or more.

The $2,014.69 of charges related to the Hawaii trip includes

two items for $39.95 each.

The charge on one of the $39.95 items

was refunded by a credit on the American Express August invoice,

and so is not properly part of the cost of the Hawaii trip.

On June 2, 1983, $3,311.82 was transferred, via debit

memorandum, from Markette to Media Communications, Inc.

Markette’s cash disbursements journal shows a June 1, 1983, check

(No. 1877) in the amount of $3,311.82 to National Seminar, Inc.,

the company that produced the video satellite broadcast on which

petitioner appeared.

The record does not include a copy of the

June 1, 1983, check, nor does it enable us to determine whether

the check to National Seminar, Inc., and the June 2, 1983, debit

memorandum to Media Communications, Inc., are essentially the

- 39 same transaction.

Likewise, the record does not enable us to

determine the purpose of either the check or the debit

memorandum.

There was no, or practically no, Sley Corporations business

purpose for the Hawaii trip, and the predominant purposes of the

Hawaii trip were personal and Grossman & Flask business.

Check Nos. 115417 and 1896--1984 Olympics.

On August 12,

1983, Betsy bought $1,359.55 of tickets to the 1984 Olympics in

Los Angeles, and charged this on her Markette American Express

credit card.

The tickets were used by petitioner, Betsy, and

their children to attend the 1984 Olympics.

trip was personal.

The purpose of this

Betsy told petitioner that she would

reimburse Markette for the cost of the Olympics tickets, but she

did not reimburse Markette.

Against the bill for the 1984 Olympics tickets, American

Express allowed credits on account of the $318 Lake Tahoe trip

ticket refund (Check No. 1896--Lake Tahoe, supra) and the $39.95

Hawaii trip ticket refund.

supra.

Check No. 1896, Debit Memo--Hawaii,

As a result, the American Express August invoice netted

to $1,001.60, which Markette paid by check No. 115417.

Check Nos. 1903, 1912--New York City.

On September 29,

1983, Markette issued check No. 1903, in the amount of $496, to

American Express, to pay for round-trip airline tickets to New

York City.

On November 11, 1983, Markette issued check No. 1912,

in the amount of $494.34, to American Express, to pay for hotel,

- 40 telephone, and meal expenses in New York City.

All the charges

were on Betsy’s Markette American Express credit card, but

petitioner signed the credit slips for the hotel, etc., expenses.

The expenses were incurred for a trip by petitioner, Betsy, and

the children to New York City on September 9, 1983, and back on

September 11, 1983.

The purpose of this trip was for petitioner

and Betsy to go to the “diamond district” in New York City to

talk with diamond brokers about selling the Sley Corporations’

diamonds.

Petitioner and Betsy took GIA certificates on their

visits to the diamond district, but did not take the actual

diamonds.

Petitioner and Betsy did not keep notes or records of

their discussions with the diamond brokers, nor did they get

written quotations on the value of their diamonds.

The children were ages 13, 10, and 7 at the time of this New

York trip.

Petitioner and Betsy took the children to New York

City because it was more convenient to take the children with

them than to get a babysitter for the children in Maryland.

Petitioner’s and Betsy’s airline tickets cost a total of

$220; the children’s tickets a total of cost $276.

Petitioner,

Betsy, and the children took two rooms at the Grand Hyatt New

York; the cost (including taxes) of each room for the two nights

was $183.70.

Telephone call charges total $7.18.

Charges for

meals total $119.76.

This New York City trip was taken for Sley Corporations

business purposes and was not a personal or family vacation or

- 41 sightseeing trip.

However, there were no Sley Corporations

business purposes for the children’s presence on this trip; their

presence was for Betsy’s personal purposes.

Of the $990.34 of

expenses paid by Markette ($496 airline plus $494.34 hotel,

etc.), $520 (the children’s airline tickets, one of the hotel

rooms, and about half the meals) is attributable to the children

and the remaining $470.34 is attributable to petitioner and

Betsy.

Summary.

The record does not provide an adequate basis for findings

as to the purposes of the other expenditures listed supra on

table 5.

Table 6 shows our allocations with respect to respondent’s

determinations listed supra on table 5.

Table 6

Purpose

Date

1983

Check

Number

Jan. 05

Feb. 03

Mar. 28

Apr. 18

May 11

May 24

June 29

Aug. 04

1824

1844

1856

1862

1870

1873

1884

1896

Sept.19

Sept.29

Nov. 11

June 02

Payee

American Express

Eastern Airlines

American Express

(July invoice)

115417 American Express

(Aug. invoice)

1903

American Express

(Sept. invoice)

1912

American Express

(Oct. invoice)

Debit memorandum

Total for 1983

Check

Amount

Personal or

Grossman & Flask

Sley Corporations

Business

Unknown

Credit Generated

(Allowed)

$42.80

3,588.87

1,038.08

1,302.00

795.59

964.41

2,210.00

3,366.19

---$1,302.00

---3,008.24

---------

$42.80

3,588.87

1,038.08

-795.59

964.41

2,210.00

-------$318.00

1,001.60

1,359.55

39.95

496.00

276.00

220.00

(318.00)

494.34

244.00

250.34

(39.95)

3,311.82

18,611.70

6,189.79

470.34

11,951.57

- 431984

Table 7 lists certain checks written on the Markette account

in 1984.

The table shows the date the check was written, check

number, payee, and amount.

All of these checks, except for check

Nos. 1951, 1975, and 1995, were signed by petitioner.

Check No.

1951 was unsigned (but was processed and paid, anyway), check No.

1975 was signed by Betsy, and check No. 1995 does not appear in

the record.

Respondent determined that petitioner and Betsy

omitted to report $14,894.26 of constructive dividends received

from Markette in 1984, the sum of the checks listed in table 7.

In the notice of deficiency, this figure was adjusted downward by

$1,214 for the amount of check No. 1995 and by $138 for a travel

and entertainment reimbursement.

See supra note 9.

Table 7

Date

Check

Number

Payee

Amount

Jan. 09

Feb. 21

Mar. 12

Mar. 13

Apr. 17

May 25

July 20

Aug. 02

Aug. 31

Sept.19

Oct. 08

1929

1946

1951

1952

1966

1975

1987

1993

1995

2003

2008

American Express

Eastern Airlines

American Express

United Airlines

American Express

Sean Henry

American Express

$2,526.53

1,616.50

800.00

1,840.28

930.75

694.20

2,057.00

1,399.00

1,214.00

240.00

1,576.00

14,894.26

1,352.00

Less adjustments

Total

13,542.26

In the notice of deficiency, respondent made a mathematical

error and stated this figure as $13,452.26. Respondent, however,

- 44used the arithmetically correct figure, $13,542.26, in

calculating the total constructive dividend amount and thus used

the arithmetically correct total in determining the 1984

deficiency.

Check No. 2008--Orlando.

As payment for the American

Express September invoice, Markette issued check No. 2008,10 for

$1,576, to American Express on October 8, 1984.

By this check,

Markette paid for five Eastern Airlines tickets appearing on the

August invoice and a Pan American World Airways ticket appearing

on the September invoice.

The Markette American Express invoice with a closing date of

October 17, 1984, shows charges for five Eastern Airlines

tickets, costing $780, and no other charged items.

The October

invoice also shows the $1,576 payment made with check No. 2008

and a $860 credit on account of the return or cancellation of

five Eastern Airlines tickets that had appeared on the August

invoice.

The October invoice charges were on Betsy’s card.

The

October invoice had a credit balance of $80, the net of the $780

charges and the $860 credit.

The five Eastern Airlines tickets on the October invoice

were bought for petitioner, Betsy, and the children to fly from

Washington, D.C., to Orlando, Florida, on September 27, 1984, and

back on September 30, 1984.

The purpose of this trip was

The notice of deficiency shows this as check No. 2007.

However, it is clear from the context that 2008 is intended.

- 45personal--a family vacation to meet Ben and to take the children

to Walt Disney World.

No payment was made on the October invoice.

The five

Eastern Airlines tickets to Orlando on the October invoice were

“paid for” with the $860 credit issued on account of the refund

of the five Eastern Airlines tickets appearing on the August

invoice.

Markette had paid for the five Eastern Airlines tickets

on the August invoice, later refunded, with check No. 2008.

Thus, in effect, Markette used check No. 2008 to pay $780 for the

five Eastern Airlines tickets to Orlando on the October invoice.

Check No. 1995.

As payment for the August invoice, Markette

issued check No. 1995, for $1,214, to American Express on August

31, 1984.

Check No. 1995 was voided on September 10, 1984.

Summary.

The record does not provide an adequate basis for findings

as to the purposes of the other expenditures listed on table 7,

supra.

Table 8 shows our allocations with respect to respondent’s

determinations listed on table 7, supra.

Table 8

Date

1984

Check

Number

Jan. 09

Feb. 21

Mar. 12

Mar. 13

Apr. 17

May 25

July 20

Aug. 02

1929

1946

1951

1952

1966

1975

1987

1993

Aug. 31

1995

Sept. 19

Oct. 08

2003

2008

Payee

American Express

Eastern Airlines

American Express

United Airlines

American Express

(July invoice)

American Express

(Aug. invoice)

Sean Henry

American Express

(Sept. invoice)

American Express

(Oct. invoice)

Purpose

Sley Corporations

Business or

Voided

Unknown

Check

Amount

Personal or

Grossman &

Flask

$2,526.53

1,616.50

800.00

1,840.28

930.75

694.20

2,057.00

1,399.00

---------

1,214.00

240.00

1,576.00

---

240.00

796.00

$780.00

Less adjustments

(1,352.00)

Total for 1984

13,542.26

--------$1,214.00

(1,214.00)

780.00

$2,526.53

1,616.50

800.00

1,840.28

930.75

694.20

2,057.00

1,399.00

(138.00)

12,762.26

- 47 1985

Table 9 lists certain checks written on the Markette account

in 1985.

The table shows the date the check was written, check

number, payee, and amount.

Betsy signed the checks numbered

2036, 2050, 2078, and 2092.

All of the other checks were signed

by petitioner.

Respondent determined that petitioner and Betsy

omitted to report $23,014.34 of constructive dividends received

from Markette in 1985, the sum of the checks listed in table 9.

See supra note 9.

Table 9

Date

Check

Number

Payee

Amount

Jan. 06

Feb. 04

Feb. 26

Apr. 03

May 15

May 24

June 06

July 10

Aug. 02

Aug. 27

Oct. 28

Nov. 25

Dec. 03

2036

2043

2050

2051

2068

2078

2080

2084

2092

2098

2100

2108

2118

2123

American Express

Eastern Airlines

American Express

Eastern Airlines

American Express

$1,802.00

1,192.00

2,002.25

974.00

2,636.42

3,514.96

208.00

3,494.66

292.18

2,587.86

457.00

3,530.01

45.00

278.00

Total

23,014.34

Check No. 2036--Miami--Betsy.

The American Express December

1984 invoice includes a $198 charge for an Eastern Airlines

ticket for Betsy to fly round-trip to Miami.

ticket in November 1984.

Betsy bought the

She left Washington, D.C., on November

- 48 15, 1984, and returned on November 21, 1984.

of the trip was personal--to see Beatrice.

The primary purpose

This charge was paid

for by Markette check No. 2036.

Check No. 2036--Miami--Children.

The American Express

December 1984 invoice includes charges totaling $397 for three

Eastern Airlines one-way tickets for the children from New York

City to Miami.

Betsy bought the tickets on December 3, 1984.

The children left New York on December 26, 1984.11

Petitioner,

Betsy, and the children had gone to New York City for Christmas.

It was intended that all five of them would go to Miami to meet

with Beatrice--a personal family vacation purpose.

However,

petitioner had some business to do in Washington, D.C., before

the end of the year, so he and Betsy returned to Washington,

D.C., from New York City, while the children went directly from

New York City to Miami.

A few days later, petitioner and Betsy

went on to Miami to meet Beatrice.

These charges for the

children’s three tickets were paid for by Markette check No.

2036.

Petitioner’s proposed finding of fact 507 indicates

that this trip was on Dec. 26, 1987, and on answering brief

respondent does not dispute the date. Even if we were to regard

the parties’ agreement on this point as a supplemental

stipulation, we would disregard the stipulation because it is

contrary to the persuasive evidence in the record that the trip

was on Dec. 26, 1984. Jasionowski v. Commissioner, 66 T.C. 312,

318 (1976).

- 49 Check Nos. 2084 and 2092--Acapulco.

In April 1985,

petitioner, Betsy, and the children went to Acapulco, Mexico.

Petitioner and Betsy charged the following items, totaling

$3,682.21, for this trip on Markette credit cards:

$2,988.46

(Acapulco Princess)--petitioner signing the charge slip made on

his card, $426.21 (Viajes Mexicanos de Acapulco) and $187.55

(Aeronaves de Mexico)--Betsy signing the charge slip made on her

card, and $79.99 (Andersons)--petitioner signing the charge slip

made on Betsy’s card.

The purpose of this trip was personal--a

family spring vacation, and not to conduct Sley Corporations

business.

The first, second, and fourth items, totaling

$3,494.66, appear on the American Express May invoice, and were

paid for by Marquette check No. 2084.

The third item, $187.55,

appears on the American Express June invoice, and was paid for by

Marquette check No. 2092.

Check Nos. 2092 and 2098--Stamford.

The American Express

June invoice includes a $59.6312 charge at LePavillon, in

Stamford, Connecticut.

Petitioner charged this item on his

American Express credit card on June 8, 1985.

Petitioner and

Betsy went to Stamford from New York to attend a bar mitzvah--a

personal purpose--and not on Sley Corporations’ business.

This

charge was paid for by Markette check No. 2092.

The charge slip shows $59.93, but the American Express

invoice shows only $59.63, so Markette paid only $59.63.

- 50 The American Express July invoice includes charges totaling

$290 for two adult ($65 ea.) and four children’s ($40 ea.) oneway Eastern Airline tickets between Washington, D.C., and New

York City, for travel on June 8, 1985.

The tickets, which do not

indicate the direction of the flight, were charged on Betsy’s

American Express credit card.

These transportation expenses were

incurred in connection with the same trip on which petitioner and

Betsy went to Stamford for a bar mitzvah.

These charges were

paid for by Markette check No. 2098.

Check No. 2092--American Express Fee.

The American Express

June invoice includes a charge of $45 for the annual membership

fee for petitioner’s American Express credit card.

This business

expense was paid for by Markette check No. 2092.

Check No. 2098--Corpus Christi.

The American Express July

invoice includes charges totaling $1,137.50 for four American

Airlines tickets for Betsy and the children to fly round-trip

from Washington, D.C., to Corpus Christi, Texas.

The charges

were made on Betsy’s American Express credit card on June 24,

1985.

This trip was for personal purposes, for Betsy to visit

with her mother and brother, and for the children to visit with

their grandmother and uncle.

Petitioner did not go on this trip.

The record does not enable us to determine how long Betsy and the

children stayed in Corpus Christi.

by Markette check No. 2098.

These charges were paid for

- 51 Check No. 2098--San Diego.

The American Express July

invoice includes a $450 charge for an American Airlines ticket

for Betsy to fly round-trip from Washington, D.C., to San Diego,

California.

The purpose of this trip was personal, and not for

Sley Corporations’ business.

The charge was made on Betsy’s

American Express credit card on July 7, 1985, and was paid for by

Markette check No. 2098.

Check Nos. 2098 and 2108--Canada.

On July 15, 1985, five

USAir tickets were bought for petitioner and Betsy to fly from

Washington, D.C., to Buffalo, New York, and the children to fly

from Washington, D.C., to Buffalo, and from Buffalo to Natchez,

Mississippi, in August 1985.

In August 1985, petitioner, Betsy,

and the children rented an automobile in Buffalo, and incurred

expenses at hotels in Montreal, Toronto, and Ottawa.

Canada lasted about 10 days.

The trip in

The purpose of this trip was

personal--to take a 10-day family vacation trip to Canada, and

not for Sley Corporations business.

The record does not provide

a basis for findings as to why (or even whether) the children

went to Natchez.

The airline tickets, which total $710.36, were

charged on Betsy’s Markette American Express credit card, and

were paid for by Markette check No. 2098.

The automobile rental

and hotel expenses, which total $2,900.01, were charged on

petitioner’s Markette American Express credit card, and were paid

for by Markette check No. 2108.

- 52 Check No. 2100--Los Angeles.

The American Express August

invoice includes a $457 charge for a one-way American Airlines

ticket from Los Angeles to Washington, D.C.

Petitioner bought

this ticket on or about July 28, 1985, and charged it on his

American Express credit card.

This charge was paid for on August

27, 1985, by Markette check No. 2100.

Check No. 2108--Lake Tahoe.

The American Express September

invoice includes charges totaling $630 for Continental Airlines

ticket, between Reno, Nevada, and Washington, D.C.

On August 6,

1985, Betsy bought a ticket for herself to fly round-trip from

Washington, D.C.

The next day Betsy bought a one-way ticket for

petitioner from Reno to Washington, D.C.

Betsy flew to Reno on

August 7, 1985; Betsy and petitioner flew back 4 days later.

The

primary purpose of this trip was personal--a vacation to visit

petitioner’s relatives’ condominium in the Lake Tahoe area.

The

charges were paid for by Markette check No. 2108.

Check No. 2118--American Express Fee.

The American Express

November invoice includes a charge of $45 as the annual

membership fee for Betsy’s American Express credit card.

This

business expense was paid for by Markette check No. 2118.

Summary.

The record does not provide an adequate basis for findings

as to the purposes of the other expenditures listed on table 9,

supra.

- 53 Table 10 shows our allocations with respect to respondent’s

determinations listed supra on table 9.

Table 10

Date

1985

Check

Number

Jan. 06

2036

Feb. 04

Feb. 26

2043

2050

Feb. 26

Apr. 03

May 15

2051

2068

2078

May 24

June 06

2080

2084

July 10

2092

Aug. 02

2098

Aug. 27

2100

Oct. 28

2108

Nov. 25

2118

Dec. 03

2123

Total for 1985

Payee

American Express

(Dec. invoice)

Eastern Airlines

American Express

(Feb. invoice)

Eastern Airlines

American Express

(Apr. invoice)

American Express

(May invoice)

American Express

(June invoice)

American Express

(July invoice)

American Express

(Aug. invoice)

American Express

(Sept. invoice)

American Express

(Nov. invoice)

American Express

Check

Amount

Purpose

Personal or

Grossman & Flask

$1,802.00

$595.00

$1,207.00

1,192.00

2,002.25

---

1,192.00

2,002.25

974.00

2,636.42

3,514.96

----

974.00

2,636.42

3,514.96

208.00

3,494.66

-3,494.66

---

208.00

292.18

247.18

45.00

2,587.86

2,297.86

290.00

457.00

3,530.01

45.00

278.00

10,164.71

90.00

12,759.63

23,014.34

Sley Corporations

Business

Unknown

- 55 1986

Table 11 lists certain checks written on the Markette

account in 1986.

The table shows the date the check was written,

check number, payee, and amount.

were signed by petitioner.

Betsy.

Check Nos. 2137, 2148, and 2203

The remaining checks were signed by

Respondent determined that petitioner and Betsy failed to

report $12,447.69 of constructive dividends received from

Markette in 1986, the sum of the checks listed in table 11.

the notice of deficiency, this figure was adjusted downward by

$788.07 for net constructive dividends of $11,659.62.13

See

supra note 9.

Table 11

Date

Check

Number

Payee

Jan. 23

Mar. 13

Mar. 31

May 10

Sept.30

Oct. 31

Dec. 05

Dec. 31

2137

2148

2203

2162

2200

2213

2220

2227

American Express

VISA

Amount

$5,076.65

1,447.00

958.18

1,656.33

86.42

39.00

1,017.50

2,166.61

12,447.69

The only explanation that respondent gives in the

notice of deficiency for this $788.07 negative adjustment is the

cryptic “Less JE[JB?] 284 11/30/86”. We have not found any

explanation in the record for this negative adjustment. Under

the circumstances, we shall subtract the $788.07 from whatever

amount we otherwise find to be the total 1986 constructive

dividends to Betsy on account of Markette payments of Betsy’s, or

her household’s, personal expenses. This subtraction is to be

applied in calculating income omissions resulting from fraud, as

well as total income omissions.

- 56 Less adjustment

Total

(788.07)

11,659.62

The total amounts for check Nos. 2137, 2162, and 2220 are

$6,750.65, $4,713.94, and $1,615.50, respectively. The check

amounts listed in table 11 are the net amounts respondent

determined were constructed dividends.

Check Nos. 2137, 2148, and 2203--Miami.

Petitioner or his

family traveled to Miami in late November 1985, in January 1986,

and in February 1986.

Of the net $5,424.86 expenses for these

three trips charged on Markette American Express credit cards,

$4,265.28 was paid for by Markette check No. 2137,14 $438 was

paid for by Markette check No. 2148,15 and $721.58 was paid for

by Markette check No. 2203.

On November 14, 1985, Betsy bought six round-trip Eastern

Airlines tickets to Miami, to leave Washington, D.C., on November

27 and return on December 1.

Three of the tickets cost $399 each

In the notice of deficiency, respondent allowed as Sley

Corporations business expenses $1,674 of the expenses paid for by

Markette check No. 2137. At trial, respondent’s revenue agent

testified that the allowed $1,674 “related to November `85,

January `86 and February `86 airfare to Miami.” Neither side has

offered, and we have been unable to discover, a likely

identification of which are the items of the total $4,265.28

Miami expenses paid by check No. 2137 that respondent determined

to be includable in petitioner’s and Betsy’s income, and which

are the items in the $1,674 not so includable.

For some reason undisclosed by the record, Markette

check No. 2137 was not used to pay the charges shown on one of

the four pages of the American Express Jan. 1986 invoice.

Instead, the two $219 Eastern Airlines charges on that page were

paid together with American Express Feb. 1986 invoice items by

Markette check No. 2148. See infra Check No. 2148--Betsy’s

Western Trip.

- 57 and the other three cost $219 each.

The tickets were for

petitioner, Betsy, the children, and another adult, probably

Beatrice.

All six of these tickets, totaling $1,854, were

charged on Betsy’s Markette American Express credit card.

Eastern Airlines refunded $200, which was credited on the

December statement.

On the same Miami trip, petitioner charged

$179.24 at Pershing Auto Leasing in Miami Beach.

On November 26, 1985, a purchase was made of a Pan American

World Airlines round-trip ticket from Dulles Airport to Miami and

back to Washington, D.C.

The ticket was bought for petitioner

but was charged on Betsy’s Markette American Express credit card;

the price was $1,095.

The record does not indicate which of the

Miami trips this item relates to.

On or about January 6, 1986, petitioner, Betsy, and the

children were in Miami.

Hilton.

They stayed at the Omni International

Petitioner charged the $719.04 hotel bill on his

Markette American Express credit card.

On December 19, 1985, Betsy bought five round-trip Eastern

Airlines tickets to Miami, to leave Washington, D.C., on February

14, 1986, and return on February 17, 1986.

Two of the tickets

cost $399 each and the other three cost $219 each.

were for petitioner, Betsy, and the children.

The tickets

All five of these

tickets, totaling $1,455, were charged on Betsy’s Markette

American Express credit card.

On January 24, 1986, Betsy bought

a round-trip United Airlines ticket for herself from Washington,

- 58 D.C., to Miami, to Tucson, Arizona, then San Diego, California,

to Denver, Colorado, and back to Washington, D.C.

This is

discussed further infra, at Check No. 2148--Betsy’s Western Trip.

It had been intended that Betsy would fly from Denver to

Washington, D.C., where she would join petitioner and the

children on the February 14 trip to Miami.

mother died in Miami at that time.

However, petitioner’s

What had been planned as a

Presidents Day weekend visit to Miami was turned into a funeral

trip to Miami.

Instead of returning to Washington, D.C., Betsy

bought a United Airlines one-way ticket from Denver to Miami for

herself.

Betsy charged the $399 cost of this ticket on her

Markette American Express credit card.

On or about February 15,

1986, petitioner charged the $322.58 Miami Omni International

Hilton hotel bill on Betsy’s Markette American Express credit

card.

The $399 Denver-Miami ticket and the $322.58 Miami Hotel

item appeared on the American Express March invoice.

The $721.58

total of these expenses was paid for by Markette check No. 2203.

The remaining above-described expenses for these Miami trips were

paid for as indicated in the text supra at notes 14 and 15.

However, Betsy did not use her $399 ticket that had been bought

on December 19, 1985--the one that had been replaced by the

Denver-Miami ticket.

Markette received a credit for that ticket

on the American Express April invoice.

Accordingly, that $399 is

not properly an expense of the Miami trips paid for by check Nos.

- 59 2137, 2148, and 2203, but rather is properly attributable to one

of the trips paid for by check No. 2162.

Thus, the net Miami

trip expenses paid for by check No. 2137 are $4,265.28.

The primary purpose of Betsy’s Denver-Miami trip ($399) and

the Miami mid-February hotel stay ($322.58) was personal.

The

primary purpose of $1,674 of the Miami trips’ expenses that

appeared on the American Express December 1985 and January 1986

invoices was Sley Corporations business (see supra note 14).

The $438 paid for by check No. 2148 was not included in the

$1,674 Sley Corporations business expenses.

The primary purpose

of the remaining $2,591.28 of these expenses paid for by check

No. 2137 was personal.

Check No. 2137--Snowmass.

The American Express December

1985 invoice includes charges totaling $1,693.22 for four roundtrip United Airlines tickets to Aspen, Colorado.

The ticket for

Betsy cost $521 and the other three tickets cost $390.74 each.

Betsy bought the tickets on November 19, 1985.

The American

Express January 1986 invoice includes a $326.15 charge for a stay

at the Silvertree Motel at Snowmass Village, Colorado.

The

$2,019.37 total of these Snowmass expense charges were paid for

by Markette check No. 2137.

The purpose of this trip was to take

a Christmas vacation to Snowmass, a ski resort near Aspen,

Colorado.

Although petitioner did not go on this trip, he knew

that Betsy and the children were going to Snowmass.

- 60 Petitioner, Betsy, and the children had gone to Snowmass in

1983.

Betsy may have paid for the 1983 transportation by

charging it on her Markette American Express credit card, but

neither Betsy nor petitioner charged any of the other expenses of

that trip on their Markette American Express credit cards.

Check No. 2137--Shoreham.

The American Express December

1985 invoice includes a $67 charge for petitioner’s and Betsy’s

dinner at the Shoreham Hotel in Washington, D.C.

Petitioner made

this charge on his Markette American Express credit card on

December 7, 1985.

check No. 2137.

This meal expense was paid for by Markette

The primary purpose of this “night out” was

personal.

Check No. 2148--Betsy’s Western Trip.

As we found, supra

(Check Nos. 2137, 2148, and 2203--Miami), on January 24, 1986,

Betsy bought a round-trip United Airlines ticket for herself from

Washington, D.C., to Miami, to Tucson, then San Diego, to Denver,

and back to Washington, D.C.

The Tucson-San Diego leg of the

trip required a separate ticket on Pacific Southwest Airlines.

The former ticket cost $945 and the latter ticket cost $64; both

were charged on Betsy’s Markette American Express credit card.

Both tickets appeared on the American Express January invoice.

The $1,009 total of these western trip expenses was paid for by

Markette check No. 2148.

Betsy.

This was a personal vacation trip for

- 61 Check No. 2203--Miscellaneous.

The American Express March

invoice includes charges of $53.6016 for Lenny’s Restaurant, $173

for Vista International Hotel (Washington, D.C.), and $10 for

delinquency.

Petitioner charged the Lenny’s item on March 3,

1986, and the Vista item on March 6, 1986.

These items, totaling

$236.60, were paid for by Markette check No. 2203.

The record does not provide an adequate basis for findings

as to the purposes of these expenses.

Check No. 2162--Miami, Key West, Daughters.

The American

Express April invoice includes charges totaling $1,016.50 for

four round-trip Eastern Airlines tickets to Miami, to leave

Washington, D.C., on March 27, 1986, and return on April 5, 1986.

One of the tickets cost $362.50, and the other three cost $218

each.

The tickets were for Betsy and the children.

charged the tickets on March 12, 1986.

Betsy

The American Express

April invoice also includes charges totaling $231 for three

round-trip Piedmont Airlines tickets to Key West, Florida, to

leave Miami on April 1, 1986, and return the next day.

ticket cost $77.

The tickets were for Betsy and the daughters.

Betsy charged the tickets on April 1, 1986.

Each

The $1,247.50 total

The charge slip shows a charge of $46.22 and a tip of

$6.78, for a total of $53.00. However, the invoice shows the

amount as $53.60, and the entire invoiced amount was paid.

- 62 of these Miami-Key West expenses was paid for by Markette check

No. 2162.17

The purpose of this trip was for Betsy and the children to

take a personal vacation to Miami during the spring school break.

The side trip to Key West was to see Halley’s Comet.

The son was

sick, and so he stayed in Miami while the others went to Key

West.

Check No. 2162--Miami, Key West, Son.

The American Express

April invoice includes charges totaling $827 for three round-trip

Eastern Airlines tickets to Miami, to leave Washington, D.C., on

April 11, 1986.

The tickets, for petitioner, Betsy, and the son,

cost $289, $319, and $219, respectively.

The American Express

April invoice also includes charges totaling $352 for three one-

As shown supra table 14, respondent determined that a

net of $1,656.33 ($4,713.94 less $3,057.61) of check No. 2162 was

a constructive dividend. The remaining amount, $3,057.61,

represents $897 of travel expenses and $2,160.61 in connection

with a computer; respondent later concluded that the computer was

not paid for by check No. 2162. Respondent has not identified

which travel expenses are included in the $897 that was allowed.

Also, respondent has not asked for an increased deficiency, or

otherwise acted, with regard to the $2,160.61 computer expense

that was allowed.

As we noted in the next-to-last paragraph of supra Check

Nos. 2137, 2148, and 2203--Miami, Markette received a $399 credit

on its American Express April invoice. Markette used this credit

to pay charges appearing on this invoice, and paid the balance by

its check No. 2162. See infra table 12. For purposes of

determining whether Markette paid for an item, and whether that

payment constitutes a constructive dividend, it does not make any

difference whether Markette’s payment was accomplished by

applying the credit or by check No. 2162. For convenience in our

findings we shall refer to all the payments of April invoice

items as being accomplished by check No. 2162.

- 63 way Piedmont Airlines tickets from Miami to Key West for April

11, 1986, and another three tickets from Key West to Miami for

April 13, 1986.

cost $44.

1986.

Each adult ticket cost $66 and each child ticket

Betsy charged all nine of these tickets on April 11,

The American Express April invoice also includes a $790.23

charge for a stay at the Marriott Casa Marina at Key West.

Petitioner charged this item on or about April 11, 1986.

The

$1,969.23 total of these Miami-Key West expenses was paid for by

Markette check No. 2162.

There was a two-fold purpose for the trip: (1) To take the

son to Key West to see Halley’s Comet for his birthday, this to

make up for his inability to see Halley’s Comet with his sisters

because he was sick when his sisters went; and (2) for petitioner

to meet with a Grossman & Flask client.

The American Express April

Check No. 2162--Corpus Christi.

invoice includes charges totaling $983.78 for four American

Airlines tickets to Corpus Christi, Texas.

tickets on March 31, 1986.

Markette check No. 2162.

Betsy charged these

These expenses were paid for by

The purpose of this trip to Corpus

Christi was personal--to visit Ben and to attend a wedding.

Check No. 2162--Philadelphia.

The American Express April

invoice includes a $115.22 charge for a bill from the Franklin

Plaza Hotel, in Philadelphia.

about March 7, 1986.

No. 2162.

Petitioner charged this item on or

This item was paid for by Markette check

The charge from the Franklin Plaza Hilton was incurred

- 64 in connection with a trip petitioner took to Philadelphia to do

Pennsylvania State tax work for one of the Sley Corporations.

Check No. 2162--Miscellaneous Washington, D.C.

Miscel-

laneous hotel, airlines, restaurant, and theater expenses,

totaling $797.21, appear on the American Express April invoice.

These expenses were incurred by petitioner and Betsy in the

Washington area.

These expenses were paid for by check No. 2162.

The record does not provide an adequate basis for findings as to

the purposes of these expenses.

Check No. 2220--Miami.

The American Express November

invoice includes charges totaling $1,570.50 for six round-trip

Eastern Airlines tickets to Miami.

Three of the tickets cost

$299 each, and the other three cost $224.50 each.

The tickets

were for Betsy, the children, probably petitioner, and another

adult.

Betsy charged the tickets on October 10, 1986.

tickets were paid for by Markette check No. 2220.

These

Respondent

conceded that two of the adult tickets ($598) were for business

purposes and reflected this concession in the notice of

deficiency.

The remaining expenses were for personal purposes--a

family vacation.

Check No. 2220--American Express Fee.

The American Express

November invoice includes a charge of $45 as the annual

membership fee for Betsy’s American Express credit card.

business expense was paid for by Markette check No. 2220.

This

- 65 Summary.

The record does not provide an adequate basis for findings

as to the purposes of the other expenditures listed supra on

table 11.

Table 12 shows our allocations with respect to respondent’s

determinations listed supra on table 11.

Table 12

Purpose

Date

1986

Check

Number

Jan. 23

2137

less adjustments

Mar. 13

2148

Mar. 31

2203

May 10

2162

less adjustments

Sept. 30

2200

Oct. 31

2213

Dec. 05

2220

less adjustments

Dec. 31

2227

less adjustment

Total for 1986

Payee

American Express

(Dec. invoice)

American Express

(Jan. invoice)

American Express

(Jan. invoice)

American Express

(Feb. invoice)

American Express

(Mar. invoice)

American Express

(Apr. invoice)

American Express

(Sept. invoice)

American Express

(Oct. invoice)

American Express

(Nov. invoice)

VISA

Check

Amount

Personal or

Grossman & Flask

Sley Corporations

Business

Unknown

Credit Generated

(Allowed)

$6,750.65

$3,593.46

2,758.19

$399.00

(1,674.00)

1,447.00

(1,674.00)

438.00

1,009.00

958.18

721.58

$236.60

4,713.94

4,200.51

$115.22

797.21

(399.00)

(3,057.61)

86.42

(3,057.61)

86.42

39.00

1,615.50

1,570.50

45.00

(598.00)

2,166.61

(598.00)

2,166.61

12,447.69

(788.07)

8,961.63

(788.07)

11,659.62

8,173.56

160.22

3,325.84

39.00

- 67 Financial Statements, Tax Returns, Audits, Notices of Deficiency

Berger is a Certified Public Account and a partner in the

accounting firm of Grant Thornton;18 he also has a J.D. degree

from the University of Maryland School of Law.

Petitioner

approached Berger to prepare tax returns for the Sley

Corporations for 1980.

Berger continued to prepare or supervise

the preparation of such tax returns for the years through 1986.

Berger also prepared or supervised the preparation of compilation

financial statements and made or supervised the making of

dividend calculations to avoid the personal holding company tax

for the Sley Corporations.

Berger prepared or supervised the

preparation of petitioner’s and Betsy’s joint tax returns for

1980 through 1987, and petitioner’s individual tax returns for

1988 through 1991.

During the years in issue, Berger or those he

supervised came into the Sley Corporations’ offices in February

to prepare the corporate tax returns and the compilation

financial statements, and in November or December to calculate

the dividends needed to avoid the personal holding company tax.

When Berger was first engaged to prepare tax returns

for petitioner and Betsy, and for the Sley Corporations, he was

with the accounting firm of Fox and Co. In 1985, Fox and Co.

merged with Alexander Grant, and was known under the latter name

for about 1 year. Thereafter, Berger’s accounting firm was known

as Grant Thornton.

- 68 Berger prepared the Sley Corporations’ tax returns based on

the books and records of the Sley Corporations, primarily the

general ledger and the trial balances.19

Berger did not

routinely verify the general ledger and the trial balances

against supporting documents before preparing the corporate tax

returns; Berger’s firm was not retained to do any audit work on

behalf of the Sley Corporations.

Baybrook was Berger’s principal

contact at the Sley Corporations and the person who provided

Berger with information; petitioner was the secondary contact

person.

Berger did not have any business discussion with Betsy

about the Sley Corporations until late 1986.

Berger had access

to all of the Sley Corporations’ books and records that he asked

for.

Berger did not give Baybrook instructions about how to

report transactions or how to define expenses for the Sley

Corporations.

Berger was aware that Beatrice, Betsy, and Ben were

receiving six-figure salaries from the Sley Corporations; Berger

did not know how the salary structure was established, who

established the salary structure, or what Beatrice, Betsy, and

A trial balance is a listing of all account balances.

It provides a means of testing whether total debits equal total

credits for all accounts. Generally, trial balances are used to

prepare financial statements. Skousen et al, Financial

Accounting 62, 758 (4th ed. 1991).

- 69 Ben were doing for the Sley Corporations to earn the salaries

that they were paid.

Berger did not set the salary structure,

nor did he participate in the setting of salary levels at any

time.

Berger also did not participate in the decision to

allocate the officers’ salaries among the Sley Corporations or

among the officers themselves.

Berger did not have anything to

do with the decisions to raise and lower the salaries from year

to year.

Berger or those he supervised prepared annual compilation

financial statements for the Sley Corporations for 1980 through

1986.

These compilation financial statements were a form of

financial statement whereby the accounting firm takes the least

responsibility for the figures.

Berger and those he supervised

took the Sley Corporations’ figures and basically put them into

financial statement format.

There was no routine verification of

the Sley Corporations’ figures in the process of preparing

compilation financial statements.

Each compilation financial statement for those years has two

parts, the accountants’ compilation report and the financial

statements.

Each accountants’ compilation report for those years

includes the following paragraphs:

A compilation is limited to presenting in the form of

financial statements information that is the representation

of management. We have not audited or reviewed the

accompanying [December 31, 1980, 1981, etc.] financial

- 70 statements and[,] accordingly, do not express an opinion or

any other form of assurance on them.

Management has elected to omit substantially all of the

disclosures and the statements of changes in financial

position required by generally accepted accounting

principles. If the omitted disclosures and statement[s] of

changes in financial position were included in the financial

statements, they might influence the user’s conclusions

about the company’s [Corporations’] financial position,

results of operations and changes in financial position.

Accordingly, these financial statements are not designed for

those who are not informed about such matters.

Attached to each of these accountants’ compilation reports are

financial statements for each of the Sley Corporations.

The

financial statements for each corporation include a balance sheet

listing that corporation’s assets and liabilities and

stockholders’ equity, and a statement of income and retained

earnings.

Each page of each financial statement refers the

reader to the accountants’ compilation report.

The figures used

in the compilation financial statements came from the books and

records of the Sley Corporations; the compilation financial

statements were prepared at the end of each year, as soon as the

books were closed.

In conjunction with the preparation of the compilation

financial statements for 1981 through 1984, Berger and those he

supervised used a financial statement compilation program, which

is a checklist of steps to be followed in preparing a compilation

financial statement.

The introductory paragraphs on the

financial statement compilation program are as follows:

- 71 Our OBJECTIVE for compilation engagements is to present in

the form of financial statements information that is the

representation of management. No assurances may be given.

INSTRUCTIONS: This form specifies the procedures necessary

to comply with [the accounting firm’s] standards when

engaged to compile financial statements of nonpublic

entities in accordance with Statements on Standards for

Accounting and Review Services (SSARS). Form PF-06 is also

required documentation for compilation engagements.

We are not required by SSARS to make inquiries or perform

procedures to corroborate or review information supplied by

the client. Any information we may have indicating that

client-supplied data is incorrect, incomplete or

unsatisfactory must be addressed by us and resolved

regardless of the source of such data. [Emphasis in

originals.]

Berger prepared or supervised the preparation of

compilations of financial statements as checklists in preparing

the compilation financial statements for 1985 and 1986.

The

introductory language of the compilations of financial statements

states the following as the compilation objectives:

A. To assist the client in presenting its financial data in

financial statement form. B. Determine that professional

standards for compilation engagements have been met and that

any significant matters that came to our attention have been

adequately considered and resolved.

Baybrook and petitioner were the contact personnel for the

Sley Corporations on the financial statement compilation programs

for 1981 through 1984, and on the compilation of financial

statements for 1985.

Betsy and Wilson were the contact personnel

for the Sley Corporations on the compilation of financial

statements for 1986.

- 72 Berger also calculated the amount of dividends to be paid

out by the Sley Corporations at the end of the year so as to

avoid the personal holding company tax.

The amount of the

dividends was dictated by the amount of the taxable income of the

Sley Corporations--if taxable income decreased, then dividends

decreased; if taxable income increased, then dividends increased.

Before 1987, there were no Forms 1099 issued to shareholders

for dividends income in the form of payment of travel expenses.

At some point in the period 1980-1986, Berger discussed the

travel expenses paid by the Sley Corporations, with someone

associated with the Sley Corporations.

Berger was told that the

travel and entertainment expenses were incurred so that the

officers of the Sley Corporations could meet to discuss corporate

business, and that there were no personal expenses included in

those amounts.

Berger had never seen the travel records of the

Sley Corporations before the trial, nor had he heard of specific

trips taken by petitioner, Betsy, and the children.

If Berger

would have heard of trips to the resort destinations, described

under Travel and Entertainment Expenses, supra, then he would

have asked whether the trips were taken for personal or business

purposes.

If a trip was taken for personal purposes, then Berger

would not have deducted the trip expenses on the Sley

Corporations’ tax return, and he probably would have treated the

- 73 Sley Corporations’ payment of those expenses as dividends to the

shareholders.

Petitioner understood that Berger was not engaged to audit

the travel and entertainment expenses of the Sley Corporations.

In calculating income for purposes of preparing petitioner’s

and Betsy’s individual tax returns, Berger and those he

supervised used third-party information such as Forms W-2, 1099,

and K-1 that petitioner gave to Berger, schedules prepared by the

Sley Corporations’ bookkeeper, and information on transactions

that petitioner had with his law firm.

During the years in issue, petitioner and Betsy were cashbasis taxpayers.

Brown worked for Grant Thornton as a tax specialist from

January 1985 to April 1987.

supervision.

Brown worked under Berger’s

Berger assigned her to prepare the 1984 tax returns

and the compilation financial statements for the Sley

Corporations.

Pursuant to her assignment to the Sley

Corporations’ account, Brown was told to prepare trial balances,

corporate tax returns, and compilation financial statements, and

to make adjustments to the compilation financial statements for

accrued income and expenses; she was not told to audit the books

of the Sley Corporations.

Brown used the books and records

prepared by Baybrook to prepare trial balances and then used the

- 74 trial balances to prepare the Sley Corporations’ tax returns.

Brown was not assigned to do, and did not do, any verification of

the truth of the figures on the books and records kept by

Baybrook.

Baybrook was Brown’s primary contact person regarding the

Sley Corporations’ tax returns during the period February 1985

through March 1986; Brown occasionally spoke to petitioner about

the Sley Corporations’ tax returns.

Brown had no discussions

regarding the Sley Corporations’ tax returns with either Betsy or

Ben before April 1986; Brown had never even met either of them.

In April 1987, Brown ended her employment with Grant

Thornton; in May 1987, petitioner and Betsy hired Brown to work

for the Sley Corporations.

Brown prepared the Sley Corporations’

tax returns for 1987 and 1988.

As part of her duties, Brown also

prepared tax returns for trusts of which Betsy or Ben were

beneficiaries.

In 1988 Betsy hired an independent accountant named Olshan,

primarily to help with investments.

Brown began to discuss the

travel expenses and some other matters that she noted on the Sley

Corporations’ tax returns.

As a result of a discussion between

Betsy, Brown, and Olshan, in early 1988 Betsy had the Sley

Corporations issue a Form 1099 for 1987 dividend income received

in the form of payment of travel expenses.

Also, for 1988,

- 75 Betsy’s and Ben’s salaries were reduced to $95,000 and Beatrice’s

salary was reduced to $60,000.

Petitioner and Betsy timely filed joint tax returns for 1983

through 1987.

1988.20

Petitioner timely filed a separate tax return for

On January 30, 1990, petitioner, Betsy, and respondent

extended to June 15, 1990, the period for assessment for 1986.

Respondent audited petitioner’s and Betsy’s 1983 joint tax

return sometime before March 1987, and concluded that petitioner

and Betsy had overstated their income for that year by $69,885;

this overstatement resulted in a $34,942 overstatement of

petitioner’s and Betsy’s 1983 tax liability.

The resulting Form

4549 (Income Tax Examination Changes) for 1983, agreed to on

March 5, 1987, shows that petitioner and Betsy were entitled to a

$69,885 downward adjustment to income for “Sale of Partnership

Interest”.

Petitioner and Betsy reported this item on their 1983

tax return as ordinary income from the sale of “Integrated

Natural Gas Partnership.”

Apparently, petitioner and Betsy

received a credit or refund of the $34,942.

The tax returns for 1983 through 1987 were filed on or

about Apr. 15 of the appropriate years. The tax return for 1988

was filed on July 3, 1989, which was timely because Berger had

timely filed, on petitioner’s and Betsy’s behalf, an application

for a 4-month automatic extension to Aug. 15, 1989.

- 76 Table 13 sets forth petitioner’s and Betsy’s 1983 adjusted

gross income, taxable income, and income tax liability as (1)

shown on their 1983 tax return, (2) adjusted by respondent in

1987, and (3) determined in the notice of deficiency in the

instant cases.

Table 13

Tax Return

1987

Audit--Revenue

Agent’s Report

Notice of

Deficiency1

Adjusted gross income

$407,347

Taxable income

354,112

$284,227

$309,497

Income tax liability

160,344

125,402

138,142

These amounts are as shown in the notice of deficiency, and do

not take into account respondent’s later concessions. See supra

note 2.

Adjusted gross income is not shown on the indicated documents.

Respondent audited petitioner’s and Betsy’s 1985 joint tax

return sometime before February 1987, and concluded that

petitioner and Betsy had overstated their income for that year by

$18,033; this overstatement resulted in a $9,016 overstatement of

petitioner’s and Betsy’s 1985 tax liability.

The resulting Form

4549 (Income Tax Examination Changes) for 1985 shows that

petitioner and Betsy were entitled to a $8,333 increase in

deduction for “Rental Expenses” and a $9,700 increase in

deduction for “Contributions”.

Apparently, petitioner and Betsy

- 77 received a credit or refund of the $9,016.

Respondent audited

petitioner’s and Betsy’s 1985 joint tax return again sometime

before May 1988, and concluded that petitioner and Betsy had

$2,760 of unreported dividend income for that year; this

unreported income resulted in a $1,380 understatement of

petitioner’s and Betsy’s 1985 tax liability.

On May 9, 1988,

respondent mailed to petitioner and Betsy a notice of deficiency

for 1985, based on the $1,380 deficiency; Betsy paid the

deficiency.

Table 14 sets forth petitioner’s and Betsy’s 1985 adjusted

gross income, taxable income, and income tax liability as (1)

shown on their 1985 tax return, (2) adjusted by respondent in

1987, (3) adjusted by respondent in 1988, and (4) determined in

the notice of deficiency in the instant cases.

Table 14

Tax

Return

1987

Audit

Adjusted gross income

$272,480

Taxable income

191,733

$173,700

$176,460

$205,679

Income tax liability

76,110

67,094

68,474

83,398

1988

Audit

Notice of

Deficiency

The notice of deficiency issued in 1988 mistakenly sets forth

the “corrected” taxable income and tax liability by making the

$2,760 (income) and $1,380 (liability) adjustments as adjustments

directly to the amounts set forth on the 1985 tax return as

filed, ignoring the adjustments made in the 1987 audit. The

effects of the 1988 audit are correctly shown in the notice of

deficiency in the instant cases as the basis for purposes of

- 78 calculating the 1985 deficiency that respondent determined in the

instant cases.

Adjusted gross income is not shown on the indicated documents.

In 1989, Brown photocopied some Sley Corporations records.

She turned those records over to respondent’s agent in August

1989, and provided other information to that agent.

On June 14, 1990, respondent mailed to petitioner and Betsy

a notice of deficiency for 1986.

On April 4, 1991, respondent

mailed to petitioner and Betsy a notice of deficiency for 1983,

1984, 1985, and 1987.

Also on April 4, 1991, respondent mailed

to petitioner a notice of deficiency for 1988.

Petitioner filed

petitions in response to these three notices of deficiency,

giving rise to the instant cases.

The notice of deficiency for 1986 was mailed more than 3

years after the 1986 tax return was filed, but within the period

agreed upon in the parties’ timely extension agreement.

6501(c)(4).

Sec.

The notice of deficiency for 1983, 1984, 1985, and

1987 was mailed more than 3 years after the 1983, 1984, and 1985

tax returns were filed, but within 3 years after the 1987 tax

return was filed.

The notice of deficiency for 1988 was mailed

within 3 years after the 1988 tax return was filed.

Interest Expense for 1987.

At sometime before 1987, Betsy borrowed money from Markette,

a portion of which was to be repaid in 1987.

Betsy wrote check

- 79 No. 121 on her checking account for $13,167.96 as a payment of

interest on the loan and delivered it to Brown sometime between

December 22, 1987, and February 12, 1988.

December 22, 1987.

The check was dated

The check was posted to Markette’s bank

account on February 12, 1988, and to Betsy’s checking account on

February 16, 1988.

numerical order.

Betsy wrote checks in her checking account in

Check No. 120 was recorded on Betsy’s checking

account register on November 30, 1987, and check No. 122 was

recorded on June 25, 1988.

Starting in December 1987, Betsy and Brown began to pack up

the Sley Corporations books and records in boxes because they

were going to move the Sley Corporations office out of the

Grossman & Flask sublet office space.

Betsy arranged to have

professional movers move the Sley Corporations office on January

13, 1988.

On their 1987 joint tax return, petitioner and Betsy listed

a $13,168 personal interest expense to Markette and deducted 65percent of it--$8,559--as an itemized deduction on Schedule A.

Respondent disallowed this deduction.

For each of the years 1983 through 1986, petitioner had an

underpayment of income tax required to be shown on his tax

return; some part of the underpayment for each of the years 1985

and 1986 was due to petitioner’s fraud.

- 80 For 1986, petitioner knew and had reason to know of the

underpayment due to his and Betsy’s failure to report Betsy’s

constructive dividends; it would not be inequitable to hold

petitioner liable for this underpayment.

OPINION

Statute of Limitations

Petitioner has properly raised in his petition the

affirmative defense of the statute of limitations under section

6501(a).

Rule 39.

In general, section 650121 bars assessment of an income tax

deficiency more than 3 years after the later of (1) the date the

tax return was filed, or (2) the due date of the tax return.

Sec. 6501 provides, in pertinent part, as follows:

Sec. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.

(a) General Rule.--Except as otherwise provided in this

section, the amount of any tax imposed by this title [title

26, the Internal Revenue Code] shall be assessed within 3

years after the return was filed (whether or not such return

was filed on or after the date prescribed) * * * and no

proceeding in court without assessment for the collection of

such tax shall be begun after the expiration of such period.

(b) Time Return Deemed Filed.-(1) Early return.--For purposes of this section, a

return of tax imposed by this title, * * * filed before

the last day prescribed by law or by regulations

promulgated pursuant to law for the filing thereof,

shall be considered as filed on such last day.

- 81 the taxpayer proves that the notice of deficiency was mailed more

than 3 years after the later of the filing or the due date, then

respondent has the burden of pleading and proving the existence

of an exception to the general period of limitations.

Stratton

v. Commissioner, 54 T.C. 255, 289 (1970); Farmers Feed Co. v.

Commissioner, 10 B.T.A. 1069, 1075-1076 (1928); see Miami

Purchasing Service Corp. v. Commissioner, 76 T.C. 818, 823

(1981); see also Minahan v. Commissioner, 88 T.C. 492, 506

(1987).

In the instant cases, we found that the tax returns for

1983, 1984, and 1985 were filed more than 3 years before the

notice of deficiency for those years was issued, and that the tax

returns for 1987 and 1988 were filed less than 3 years before the

notices of deficiency for those years were issued.

Although the

tax return for 1986 was filed more than 3 years before the notice

of deficiency for that year was issued, we found that the parties

had timely extended the period for assessment as to 1986, and the

notice of deficiency was mailed within that extended period.

Thus, the statute of limitations is in issue only for 1983, 1984,

and 1985.

Respondent contends that the instant cases fall within the

exception to the general period of limitations set forth in

- 82 section 6501(c)(1),22 which provides that if a false or

fraudulent return is filed with the intent to evade tax, then the

tax may be assessed at any time.23

Petitioner contends that

respondent has failed to prove fraud by clear and convincing

evidence for 1983, 1984, and 1985 and thus, assessment and

collection of tax for 1983, 1984, and 1985 are barred by the

statute of limitations.

We agree with respondent as to 1985, and with petitioner as

to 1983 and 1984.

Respondent has the burden of proving the applicability of

the fraud exception to the general period of limitations.

SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.

fraudulent return with the intent to evade tax, the tax

may be assessed, or a proceeding in court for

collection of such tax may be begun without assessment,

at any time.

Proof that either spouse committed fraud on a joint tax

return extends the limitations period for both spouses on that

tax return, even though only one of the spouses may be liable for

the fraud addition to tax. Hicks Co. v Commissioner, 56 T.C.

982, 1030 (1971), affd. 470 F.2d 87 (1st. Cir. 1972); Stone v.

Commissioner, 56 T.C. 213, 227-228 (1971). In the joint notices

of deficiency, respondent had determined that both Betsy and

petitioner had committed fraud for 1983 through 1987. However,

in the instant cases respondent’s counsel made it plain at trial

that respondent is relying, as to the statute of limitations,

solely on the fraud determined against petitioner, and not on any

contention that Betsy committed fraud.

- 83 Farmers Feed Co. v. Commissioner, 10 B.T.A. at 1075-1076.

This

burden is the same as that which respondent has under section

6653(b).

Asphalt Industries, Inc. v. Commissioner, 384 F.2d 229,

232 (3d Cir. 1967), revg. on other grounds 46 T.C. 622 (1966);

Botwinik Brothers of Mass., Inc. v. Commissioner, 39 T.C. 988,

996 (1963).

To carry this burden for a year, respondent must prove two

elements, as follows:

(1) That petitioner has an underpayment of

tax for that year, and (2) that some part of that underpayment is

due to fraud.

Sec. 7454(a);24 Rule 142(b); e.g., Carter v.

Campbell, 264 F.2d 930, 936 (5th Cir. 1959); Stone v.

Commissioner, 56 T.C. 213, 220 (1971); Otsuki v. Commissioner, 53

T.C. 96, 105, 114 (1969).

Each of these elements must be proven

by clear and convincing evidence.

DiLeo v. Commissioner, 96 T.C.

858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Parks v.

Commissioner, 94 T.C. 654, 663-664 (1990); Hebrank v.

Commissioner, 81 T.C. 640, 642 (1983).

For this purpose, respondent need not prove the precise

amount of the underpayment resulting from fraud, but only that

SEC. 7454. BURDEN OF PROOF IN FRAUD, FOUNDATION

MANAGER, AND

TRANSFEREE CASES.

(a) Fraud.--In any proceeding involving the issue

whether the petitioner has been guilty of fraud with intent

to evade tax, the burden of proof in respect of such issue

shall be upon the Secretary.

- 84 there is some underpayment and that some part of it is

attributable to fraud.

E.g., Lee v. United States, 466 F.2d 11,

16-17 (5th Cir. 1972); Plunkett v. Commissioner, 465 F.2d 299,

303 (7th Cir. 1972), affg. T.C. Memo. 1970-274.

In carrying this

burden, respondent may not rely on petitioner’s failure to meet

his burden of proving error in respondent’s determinations as to

the deficiencies.

E.g., Petzoldt v. Commissioner, 92 T.C. 661,

700 (1989); Habersham-Bey v. Commissioner, 78 T.C. 304, 312

(1982), and cases cited therein.

Where fraud is determined for each of several years,

respondent’s burden applies separately for each of the years.

Drieborg v. Commissioner, 225 F.2d 216, 219-220 (6th Cir. 1955),

affg. in part and revg. in part a Memorandum Opinion of this

Court dated Feb. 24, 1954; Estate of Stein v. Commissioner, 25

T.C. 940, 959-963 (1956), affd. sub nom. Levine v. Commissioner,

250 F.2d 798 (2d Cir. 1958).

does not establish fraud.

A mere understatement of income

However, a pattern of consistent

underreporting of income for a number of years is strong evidence

of fraud.

Estate of Mazzoni v. Commissioner, 451 F.2d 197, 202

(3d Cir. 1971), affg. T.C. Memos. 1970-144 and 1970-37; Adler v.

Commissioner, 422 F.2d 63, 66 (6th Cir. 1970), affg. T.C. Memo.

1968-100; Otsuki v. Commissioner, 53 T.C. at 108.

The issue of fraud poses a factual question that is to be

decided on an examination of all the evidence in the record.

- 85 Plunkett v. Commissioner, 465 F.2d at 303; Mensik v.

Commissioner, 328 F.2d 147, 150 (7th Cir. 1964), affg. 37 T.C.

703 (1962); Stone v. Commissioner, 56 T.C. at 224.

In order to establish fraud, respondent must show that

petitioner intended to evade taxes, which petitioner knew or

believed he owed, by conduct intended to conceal, mislead, or

otherwise prevent the collection of taxes.

E.g., Webb v.

Commissioner, 394 F.2d 366, 377 (5th Cir. 1968), affg. T.C. Memo.

1966-81; Powell v. Granquist, 252 F.2d 56, 60 (9th Cir. 1958);

Danenberg v. Commissioner, 73 T.C. 370, 393 (1979); McGee v.

Commissioner, 61 T.C. 249, 256-257 (1973), affd. 519 F.2d 1121

(5th Cir. 1975).

This intent may be inferred from circumstantial

evidence, Powell v. Granquist, 252 F.2d at 61; Gajewski v.

Commissioner, 67 T.C. 181, 200 (1976), affd. without published

opinion 578 F.2d 1383 (8th Cir. 1978), including the

implausibility of petitioner’s explanations, Bradford v.

Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), and cases there

cited, affg. T.C. Memo. 1984-601; Boyett v. Commissioner, 204

F.2d 205, 208 (5th Cir. 1953), affg. a Memorandum Opinion of this

Court dated Mar. 14, 1951.

We consider first whether petitioner has an underpayment of

tax for any of the statute of limitations years, and then we

consider whether any part of that underpayment is due to fraud.

- 86 A. Underpayments of Tax

In order to determine whether there were any underpayments

of tax, we first determine whether petitioner had unreported

income for 1983 through 1986.25

In the notices of deficiency, respondent determined that

petitioner and Betsy omitted to report, on their 1983 through

1986 joint tax returns, constructive dividends in the form of

personal travel and entertainment expenses paid on behalf of

Betsy by Markette.

Other adjustments are briefly described supra

in notes 2 and 3.

On opening brief, however, respondent states

that respondent relies only on certain of the travel and

entertainment items to carry the fraud burden of proof.

latter items are listed in table 15.

The

Table 15 also shows the

totals of the travel and entertainment constructive dividend

adjustments in the notices of deficiency.

Because a year is

“open” under section 6501(c)(1) only if respondent succeeds in

proving by clear and convincing evidence that there is an

underpayment due to fraud, we focus in this part of the opinion

on only the items listed in table 15.

We have determined, supra, that the statute of

limitations is in issue only for 1983, 1984, and 1985.

Nevertheless, we consider petitioner’s 1986 actions at this point

because any pattern established may have a bearing on our

analysis of other years. E.g., Adler v. Commissioner, 422 F.2d

63, 66 (6th Cir. 1970), affg. T.C. Memo. 1968-100.

- 87 Table 15

Miami, Fla.

1983

1984

1985

1986

$1,302.00

$1,616.50

716.00

----2,057.00

-780.00

-----------

$397.00

2,166.00

---630.00

---3,682.24

349.63

1,137.50

450.00

3,610.37

457.00

-----

$1,854.00

1,777.58

1,570.50

3,216.73

-------983.78

---2,019.37

1,009.00

846.36

45.00

-Miami, Key West, Fla.

-Hawaii

5,326.51

Lake Tahoe, Nev.

1,351.50

L.A. Olympics

1,359.55

New York, N.Y.

990.34

Orlando, Fla.

-Acapulco, Mexico

-Stamford, Conn.

-Corpus Christi, Tex.1

-San Diego, Calif.

-Canada

-Los Angeles, Calif.

-Snowmass, Colo.

-Western Trip

-Miscellaneous Washington

-Annual Fee

Totals--fraud per

10,329.90

5,169.50

12,879.74

13,322.32

respondent’s brief

Total Travel and

18,611.70

13,452.26

23,014.34

11,659.62

entertainment

adjustments

--notice of deficiency

Respondent does not set forth the amounts of the Corpus

Christi, Texas, trips constructive dividends at the same place in

the brief at which the other amounts are listed. The amounts we

show for the Corpus Christi constructive dividends are taken from

Appendix VI to respondent’s opening brief.

See infra text following note 29 for discussion of the effect

of unexplained allowance items in the notices of deficiency.

Section 61(a)(7) includes dividends in gross income.

Section 316(a) provides that a dividend is any property

distributed by a corporation to its shareholders out of post-1913

- 88 accumulated or current earnings and profits.26

Sec. 316(a).

distribution taxable as a dividend under section 301 may be found

even though the corporation has not formally declared a dividend

or even intended to distribute a dividend.

Loftin and Woodard,

Inc. v. United States, 577 F.2d 1206, 1214 (5th Cir. 1978);

Crosby v. United States, 496 F.2d 1384, 1388 (5th Cir. 1974);

Hash v. Commissioner, 273 F.2d 248, 250 (4th Cir. 1959), affg.

T.C. Memo. 1959-96.

Accordingly an expenditure made by a

corporation for the personal benefit of one of its shareholders,

or the personal use of corporate property by a shareholder, may

result in the shareholder’s being treated as having received a

constructive dividend.

Ireland v. United States, 621 F.2d 731,

735 (5th Cir. 1980); Commissioner v. Riss, 374 F.2d 161, 170 (8th

Cir. 1967), affg. on this issue and revg. on another issue T.C.

Memo. 1964-190;

Challenge Manufacturing Co. v. Commissioner, 37

T.C. 650, 663 (1962), and opinions there cited.