# UNITED STATES TAX COURT > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A702a27cd05031e2d ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text 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. 1. 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. 3. 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. 4. 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. 5. Held, further, amounts of deficiencies redetermined. 6. 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................ 4 FINDINGS OF FACT....................................... 7 A. Background..................................... 7 B. Sley Corporations.............................. 10 1. Background.................................. 2. Investments................................. 3. Daily Operations: 1980 through March 1986.. 4. Daily Operations: After March 1986......... 11 12 19 28 C. Salaries and Dividends......................... 30 D. Travel and Entertainment Expenses.............. 32 - 3 1. 1983........................................ 2. 1984........................................ 3. 1985........................................ 4. 1986........................................ 34 43 47 55 E. Financial Statements, Tax Returns, Audits, Notice of Deficiency......................... 67 F. Interest Expense for 1987...................... 78 OPINION................................................ 80 I. Statute of Limitations.............................. 80 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 ---- 1 2 3 4 5 Additions to Tax Sec.6653 Sec.6653 (b)(2) (b)(1)(A) 1 2 3 ---- ---$4,800 221 -- Sec.6653 (b)(1)(B) ---4 5 -- 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. 1 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, 2 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). 3 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. 3 (...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. (c) whether petitioner qualifies for innocent 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. 4 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. On 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. On 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. In 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. In 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 96,180 100 416,725 411,025 411,057 411,057 411,057 394,057 393,057 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 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 96,180 100 372,096 372,096 372,096 370,096 368,896 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 96,180 100 310,105 296,305 296,113 296,113 296,113 296,113 296,113 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 84,500 84,500 84,500 84,500 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. 5 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. In 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. 1. 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 6 Betsy received her salary exclusively from Markette, except for 1983, when she also received $1,562 from Girard Holding Co., Inc. 7 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 7 (...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 1 37,609 13,481 18,153 1 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 8 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 8 (...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 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 24 June 29 Aug. 04 Sept. 19 Sept. 29 Nov. 113 1824 1844 1856 1862 1870 1873 1884 1896 2 115417 1903 1912 American Express American Express American Express Eastern Airlines American Express American Express American Express American Express American Express American Express 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 1 Markette’s cash disbursements journal shows the date as May 9, but the check itself is dated May 11. 2 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. 9 (...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. 4 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 American Express American Express Eastern Airlines American Express American Express American Express 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 or (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 -- -- 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 American Express American Express American Express United Airlines American Express 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 1 1 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. 10 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 American Express American Express 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 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 American Express American Express American Express American Express American Express American Express American Express American Express 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. 11 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. 12 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 American Express (Apr. invoice) American Express 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 -- -- 457.00 3,530.01 3,530.01 -- -- 45.00 -- 45.00 -- 278.00 -- -- 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. In 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 American Express American Express American Express American Express American Express American Express VISA Amount 1 $5,076.65 1 1,447.00 958.18 1 1,656.33 86.42 39.00 1 1,017.50 2,166.61 12,447.69 13 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 1 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 14 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. 15 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. 16 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- 17 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 or (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. 18 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 19 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. 20 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 2 Taxable income 354,112 $284,227 $309,497 Income tax liability 160,344 125,402 138,142 2 1 These amounts are as shown in the notice of deficiency, and do not take into account respondent’s later concessions. See supra note 2. 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 1 Tax Return 1987 Audit Adjusted gross income $272,480 2 2 Taxable income 191,733 $173,700 $176,460 $205,679 Income tax liability 76,110 67,094 68,474 83,398 1 1988 Audit Notice of Deficiency 2 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. 2 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 I. 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. 21 If 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. 22 SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION. * * * * * * * (c) Exceptions.-(1) False return.--In the case of a false or 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. 23 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 24 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. 25 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 2 Total Travel and 18,611.70 13,452.26 23,014.34 11,659.62 entertainment adjustments --notice of deficiency 1 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. 2 See infra text following note 29 f [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A702a27cd05031e2d. Public record. Not legal advice.