UNITED STATES TAX COURT

T.C. Memo. 2001-294

UNITED STATES TAX COURT

TESCO DRIVEAWAY CO., INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10966-97.

Filed November 6, 2001.

Charles E. Hammond, for petitioner.

Dennis R. Onnen, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

BEGHE, Judge:

Respondent determined the following

deficiencies, late-filing additions, and penalties with respect

to petitioner’s Federal income taxes:

- 2 -

TYE July 31

Deficiency

Additions to Tax

Sec. 6651(a)(1)

1992

1993

1994

$5,143

14,124

43,837

$1,029

3,531

10,959

Accuracy-related

Penalty

Sec. 6662(a)

$1,029

2,825

8,767

After concessions by the parties, only one substantive item

remains in issue.

The parties dispute whether petitioner can

deduct $100,000 in compensation paid to petitioner’s sole

shareholder and his sons after the close of petitioner’s fiscal

year ended July 31, 1994.

We hold that petitioner is not

entitled to the deduction for that year.

Petitioner also challenges the late-filing additions to tax

and the accuracy-related penalties determined by respondent.

We

sustain respondent’s determinations.

FINDINGS OF FACT

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

The stipulation of facts and related exhibits are incorporated by

this reference.

Petitioner’s principal place of business was Kansas City,

Missouri, when it filed the petition in this case.

Petitioner is

in the business of transporting trucks from manufacturers or

dealers to other dealers or end-users.

Doyce Gentry was the sole

shareholder, officer, and director of petitioner, and had sole

check-writing authority over petitioner’s bank accounts.

At all

relevant times, petitioner was an accrual method taxpayer using a

- 3 July 31 fiscal year, and Doyce Gentry and his sons were cash

method taxpayers using the calendar year.

Petitioner had sufficient funds in its bank accounts prior

to the end of its 1994 fiscal year to pay $100,000 in

compensation to Doyce Gentry and his sons.

Petitioner did not

pay compensation to Doyce Gentry or his sons until after the end

of that fiscal year.

Indeed, except for the $100,000 in

compensation at issue here, petitioner had not awarded and had

not paid any compensation to Doyce Gentry or his sons from the

time of its formation in 1991 until after the end of petitioner’s

1994 fiscal year.

Petitioner’s bylaws provided that its officers and employees

shall receive salaries and other compensation “as shall be

determined by resolution of the Board of Directors * * * or by

employment contracts entered into by the Board of Directors.”

The Board of Directors did not adopt any formal resolution

awarding or setting the amount of the compensation prior to the

end of petitioner’s 1994 fiscal year.

Nor was there any prior

written agreement between petitioner and the Gentrys, such as an

employment contract, setting the amount of compensation that

would be awarded to them.

Petitioner took no formal action prior to the end of its

1994 fiscal year to segregate physically or set apart the

$100,000 in compensation for Doyce Gentry and his sons.

Nor did

- 4 petitioner make any entry in its books of account to reflect the

award of $100,000 in compensation prior to the end of the fiscal

year.

Petitioner made no specific allocation of the $100,000 in

compensation between Doyce Gentry and each of his two sons until

after the end of the fiscal year.

Petitioner filed an Employer’s Quarterly Federal Tax Return,

Form 941, for the fourth calendar quarter of 1994, showing

$152,625 in compensation as subject to withholding for that

quarter.

This amount included the $100,000 in compensation paid

to Doyce Gentry and his sons after the end of petitioner’s fiscal

year.

The entire period covered by the Form 941, the fourth

quarter of 1994, occurred after the end of petitioner’s fiscal

year.

Petitioner did not file a Form 941 including the $100,000

in compensation for any prior quarter ending or beginning prior

to July 31, 1994.

Petitioner’s Federal income tax returns were

due and filed on the following dates:

TYE July 31

1992

1993

1994

Date Return Due

Date Return Filed

Oct. 15, 1992

Oct. 15, 1993

Oct. 17, 1994

Feb. 9, 1993

June 13, 1994

Mar. 1, 1995

Petitioner obtained no extensions of time for filing any of

these returns.

ULTIMATE FINDING OF FACT

Doyce Gentry and his sons did not constructively receive

the $100,000 of compensation prior to the end of petitioner’s

- 5 fiscal year ended July 31, 1994.

OPINION

Issue 1. Deduction for Compensation Not Paid by Petitioner

During Its Fiscal Year

Section 2671 requires the matching of deductions and income

between related taxpayers.

It provides that the payor may not

deduct an obligation owing to a related payee until the related

payee would be required to recognize the income by reason of his

method of accounting.

Sec. 267(a)(2).

Doyce Gentry is petitioner’s sole shareholder.

Mr. Gentry

is therefore related to petitioner under section 267(a)(2)(B).

See sec. 267(b)(2).

In addition, Doyce Gentry’s stock ownership

is attributed to his sons because they are his lineal

descendants.

See sec. 267(b)(1), (c)(2), (c)(4).

Doyce

Gentry’s sons therefore are also related to petitioner for

purposes of section 267(a)(2)(B).

Respondent denied petitioner’s deduction of $100,000 in

accrued compensation under section 267(a)(2) because petitioner

is an accrual method taxpayer, Doyce Gentry and his sons are

cash method taxpayers, and the compensation was not actually

paid by petitioner to the Gentrys by the close of petitioner’s

fiscal year on July 31, 1994.

1

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years at issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

- 6 Petitioner argues that its deduction should be allowed

because Doyce Gentry and his sons constructively received the

compensation by the end of petitioner’s fiscal year on July 31,

1994, and were therefore required under section 451 to include

that income when it was constructively received.

Petitioner

admits that it has the burden of proof to show that Doyce Gentry

and his sons constructively received the compensation by July

31, 1994.

Section 1.451-2, Income Tax Regs., defines constructive

receipt as follows:

Income although not actually reduced to a taxpayer’s

possession is constructively received by him in the

taxable year during which it is credited to his

account, set apart for him, or otherwise made

available so that he may draw upon it at any time, or

so that he could have drawn upon it during the taxable

year if notice of intention to withdraw had been

given. However, income is not constructively received

if the taxpayer’s control of its receipt is subject to

substantial limitations or restrictions. * * *

Petitioner argues that since Doyce Gentry was petitioner’s

sole officer, director, and owner, and had sole check-writing

authority over petitioner’s accounts, he had the unfettered

ability to withdraw the compensation at any time, and thus

should be treated as if he constructively received the

compensation by the end of petitioner’s fiscal year.

Respondent notes that Doyce Gentry may have had the

unfettered ability to withdraw funds from petitioner’s bank

accounts, but he did not have the right to receive the

- 7 compensation from petitioner until petitioner followed proper

corporate formalities in awarding that compensation.

Respondent

cites petitioner’s bylaws which provide:

Officers and other employees of the corporation shall

receive such salaries or other compensation as shall

be determined by resolution of the Board of Directors,

adopted in advance or after the rendering of the

services, or by employment contracts entered into by

the Board of Directors. * * *

The parties have stipulated that petitioner made no corporate

resolution authorizing or allocating the compensation prior to

the end of petitioner’s fiscal year.

Nor did petitioner

introduce any documentary evidence to suggest that petitioner

took any action whatsoever to authorize or determine the amount

of the compensation prior to the end of its fiscal year.

Petitioner relies entirely on oral testimony to support its

claim that the compensation was authorized prior to the end of

petitioner’s fiscal year.

But Doyce Gentry’s testimony was

unclear and contradictory.

He initially testified on redirect

examination that he could not recall ever informing his

accountant how much compensation to accrue:

Q.

A.

Q.

A.

Did you ever advise Mr. Livengood how much he

should accrue or how much should be accrued with

regard to your compensation?

I can’t recall that I ever did.

Well, how did he know how much that he was

supposed to put on the books with regard to the

accrual?

Well, he and I-–I could tell by the bank

statements and information that he was giving me

there that there was excess money there that

needed-–that doesn’t necessarily need to be kept

- 8 in the corporation.

After a break, Mr. Gentry testified that he discussed the

matter with petitioner’s accountant, but his testimony was at

best vague as to whether the precise amounts and allocations

were determined at that time:

Q.

A.

Q.

A.

Did you ever advise Mr. Livengood as to how much

compensation should be approved?

Well, that was when I tried to make the statement

early on that when I made that conscious decision

that there was funds there to be disbursed,

that’s when I told the accountant, you know,

whatever is necessary to do with this money here

let’s do it.

Do you recall when that occurred, at least with

regard to the 1994 Tesco return?

Well, I’m sure that it occurred before the 31st

of July. It didn’t-–it wasn’t a spur of the

moment thing.

The accountant testified that Mr. Gentry told him to accrue

$100,000 for compensation for Doyce Gentry and his sons

“probably before or thereabouts” the end of the fiscal year.

The accountant did not testify that he received any direction as

to the division of the $100,000 between Doyce Gentry and his two

sons prior to the end of the fiscal year.

Moreover, the accountant reported the compensation for

employment tax purposes on Form 941 for the fourth quarter of

1994-–which commenced after the end of petitioner’s fiscal year.

Virtually the same constructive receipt language that applies to

income taxes also applies to employment taxes.

See Cohen v.

United States, 63 F. Supp. 2d 1131, 1135 (C.D. Cal. 1999) (“FICA

- 9 taxes to attach upon the actual (or constructive) receipt of

wages”); Mazur v. Commissioner, 986 F. Supp. 752 (W.D.N.Y. 1997)

(upholding regulation).

Compare sec. 1.451-2, Income Tax Regs.,

with sec. 31.3121(a)-2(b), Employment Tax Regs.

Petitioner’s

treatment of the Gentrys’ compensation as not constructively

received during its 1994 fiscal year for employment tax purposes

is inconsistent with its claim of constructive receipt for

income tax purposes.

We agree with respondent that petitioner has failed to meet

its burden of proving that Doyce Gentry or his sons

constructively received the compensation prior to the end of

petitioner’s fiscal year.

In order to constructively receive

funds, the recipient must have both the power and the right to

withdraw the funds from the taxpayer’s account.

Jerome Castree

Interiors, Inc. v. Commissioner, 64 T.C. 564 (1975), affd.

without published opinion 539 F.2d 714 (7th Cir. 1976).

Even if

we were to view Mr. Gentry’s and petitioner’s accountant’s

testimony in a light most favorable to petitioner, petitioner

did not comply with the terms of its own bylaws for awarding

compensation by the end of the fiscal year.

legal entity separate from Mr. Gentry.

proper corporate procedures.

Petitioner is a

It must act through

We cannot overlook the lack of

corporate formalities simply because Mr. Gentry had broad power

to control the corporation.

Otherwise, as respondent brought

- 10 out during cross-examination,2 Mr. Gentry would be able to make

undetected retroactive corporate allocations after the end of

the petitioner’s fiscal year.

Case law under former section 2673 fully supports

respondent’s determination.

In both Jerome Castree Interiors,

Inc. v. Commissioner, supra, and Lacy Contracting Co. v.

Commissioner, 56 T.C. 464 (1971), the Court disallowed the

claimed accruals, holding that the corporation must determine,

2

3

Q. Isn’t it possible that you could

have told Dal Livengood some time after

July 31, ‘94, that I believe I should

have a salary based on the current fiscal

conditions of the company for 1994 of

$88,100. Is it possible -A. No, no. * * * Not after the 31st of July I

couldn’t have done that

Q. And why is that? * * *

A. Well, it’s not legal, is it?

Former sec. 267, which was repealed in 1984, disallowed a

deduction for obligations payable to a related taxpayer if the

obligation was not paid within 2-1/2 months after the end of the

taxpayer’s fiscal year, and if the amounts would not be

includable by the related recipient under its method of

accounting for the taxable year during which the taxpayer’s

deduction accrued. “Because an accrued expense is deductible by a

taxpayer under the accrual method of accounting only in the

taxable year in which it accrues, a deduction disallowed under

sec. 267(a) was permanently lost. It could not be deducted at

some subsequent time when payment was made.” Staff of the Joint

Comm. on Taxation, General Explanation of the Revenue Provisions

of the Deficit Reduction Act of 1984 at 541 (J. Comm. Print

1984). The disallowance rule of former sec. 267 was replaced in

the Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 174, 98

Stat 704, with the current rule deferring the deduction until

recognized by the related recipient. A more restrictive view of

constructive receipt may be appropriate under the current

statutory scheme, which only defers the deduction until the year

of payment rather than disallowing it entirely.

- 11 through proper corporate procedures, the specific amount of

compensation to be paid to each recipient.

The authorization of

an unallocated pool of compensation to be divided among the

recipients is not sufficient for constructive receipt, even as

in Jerome Castree Interiors, Inc., where the allocation had been

made orally at the board meeting but was not reflected in the

formal resolution, and even as in Lacy Contracting, Inc., where

the controlling shareholder had the ultimate power to make the

allocation unilaterally.

As stated by the Court in Jerome

Castree Interiors, Inc.:

It is clear that in the case of any corporation,

constructive receipt is not applicable unless some

record is made of the amount due the shareholder.

* * *

* * * a shareholder is not taxable merely because

he has the authority to influence the actions of the

corporation and the authority to withdraw funds; funds

are not constructively received until the corporation

takes the necessary action to set them apart for him.

* * * [Jerome Castree Interiors, Inc. v. Commissioner,

supra at 570; emphasis added; citations omitted.]

Similarly, in Kaw Dehydrating Co. v. Commissioner, 74 T.C.

370 (1980), the Court held that the controlling shareholder was

not in constructive receipt of oral bonuses where the corporate

resolutions stated only that the bonuses had been “discussed”,

but not that they had been approved.

“In the instant case, as

we have noted, there was no resolution nor any subsequent,

timely corporate record to support the proposition that a

binding resolution had been intended.”

Id. at 377.

- 12 Petitioner has failed to establish that it followed proper

formalities entitling Doyce Gentry or his sons to withdraw any

compensation prior to the end of petitioner’s fiscal year.

Like

the taxpayers in Jerome Castree Interiors, Inc. v. Commissioner,

supra, and Lacy Contracting Co. v. Commissioner, supra,

petitioner had not formally allocated the compensation between

Mr. Gentry and his sons by the end of petitioner’s fiscal year.

Moreover, petitioner’s case is much weaker than were the

taxpayers’ cases in Jerome Castree Interiors, Inc. and Lacy

Contracing Co.

Not only did petitioner fail formally to

allocate the compensation between Mr. Gentry and his sons by the

end of petitioner’s fiscal year, petitioner did not even

authorize the total unallocated amount of compensation through

proper corporate procedures by the end of its fiscal year.

Petitioner attempts to distinguish Jerome Castree

Interiors, Inc. because the bonuses there had to be allocated

between five shareholders, while in the case at hand the

compensation only had to be allocated between one shareholder

and two employees.

This distinction makes no difference.

To

actuate constructive receipt, a specific amount must be

“credited to his account, set apart for him, or otherwise made

available so that he may draw upon it at any time”.

2(a), Income Tax Regs.

Sec. 1.451-

It does not matter what ownership or

corporate positions are held by the potential recipients of the

- 13 unallocated compensation pool.

Petitioner next argues that there was no record in Jerome

Castree Interiors, Inc. of the bonus determination by the end of

the calendar year.

Similarly here, petitioner made no record

whatsoever of the bonus determination by the end of its fiscal

year.

Petitioner argues that the shareholders in Jerome Castree

Interiors, Inc. did not include the income in the same calendar

year as the corporation’s proposed deduction.

Here, petitioner

chose to use a fiscal year ending July 31, 1994.

Petitioner

cannot be treated as a calendar year taxpayer for the purpose of

determining when the deduction is allowed and a fiscal year

taxpayer for all other purposes.

Finally, petitioner argues that the corporate resolution in

Jerome Castree Interiors, Inc. authorizing the pool of

compensation specifically conditioned payment on the

corporation’s ability to make payment.

Here, there was no

corporate resolution authorizing the payment.

Certainly a

corporate resolution authorizing payment conditioned on the

corporation’s ability to make payment (when the corporation in

fact was able to do so) is better than no resolution at all.

The factual distinctions identified by petitioner are either

irrelevant or show that the taxpayers in Jerome Castree

Interiors, Inc. had a stronger case for constructive receipt

than petitioner has here.

- 14 Petitioner also tries to distinguish Kaw Dehydrating Co. v.

Commissioner, supra, on five grounds.

First, petitioner argues

that there were four shareholder bonuses at issue in Kaw

Dehydrating Co. and only one shareholder payment here.

It does

not matter how many of the employees who were entitled to share

in the bonuses were also shareholders.

What matters is whether

the corporation, following proper corporate formalities, has

timely determined the specific amount payable to each person who

is alleged to have constructively received the funds.

Second, petitioner argues that in Kaw Dehydrating Co. “the

monies were never timely credited to a personal account nor

physically set aside so that they could be withdrawn at any time

by the individual shareholders after the determination.”

Petitioner similarly failed to segregate the money for Mr.

Gentry and his sons, either physically or by an appropriate

accounting entry, prior to the end of petitioner’s fiscal year.

Third, petitioner argues that in Kaw Dehydrating Co. “the

bonuses were paid well over a year after they were allegedly

distributed to the individual shareholders.”4

In determining

whether the constructive receipt doctrine applies, the actual

timing of the payment is not decisive.

4

The funds are treated as

Petitioner misstates the facts in Kaw Dehydrating Co. v.

Commissioner, 74 T.C. 370 (1980). The bonuses were awarded on

Oct. 3, 1973, and were paid on July 15, 1974--9 months after the

award and 6.5 months after the end of the corporation’s tax year.

- 15 “paid” when constructively received.

Fourth, petitioner argues that the Kaw Dehydrating Co.

bonuses were adjusted after the close of the fiscal year.

We do

not know whether the payment allocation here was likewise

adjusted after the end of petitioner’s fiscal year because there

is no evidence to show what was determined prior to the end of

petitioner’s fiscal year.

Petitioner offered no evidence to

show that the allocation among the Gentrys had been made prior

to the end of petitioner’s fiscal year.

It is sufficient here

that the potential for a post-fiscal-year adjustment exists

because petitioner took no formal action to set the specific

allocation prior to the end of its fiscal year.

Finally, petitioner argues that in Kaw Dehydrating Co., the

“stockholders reported their respective bonuses on their

personal income tax returns in the year following the year in

which they were awarded.”

issues.

This statement raises three potential

First, should the constructive receipt doctrine apply

differently depending on the length of time between the alleged

constructive receipt and the actual receipt?

Second, how should

the recipient’s treatment of the item on the recipient’s tax

return affect the payor’s right to a deduction?

Finally, does

the rule operate differently depending on whether the payor has

a fiscal or a calendar tax year?

Petitioner suggests that the constructive receipt doctrine

- 16 should apply differently depending on whether actual receipt

occurs during the same or the following calendar year.

disagree with petitioner’s suggestion.

We

The constructive receipt

doctrine necessarily looks to the facts at the time of alleged

constructive receipt.

Events occurring later, such as the

timing of the actual payment, should not affect the functioning

of the doctrine.

Similarly, the statutory language does not focus on the

date that the recipient reported the income, but rather on the

date that the income should have been reported.

The statute

refers to the income’s being “includible” not “included” in the

gross income of the recipient.

Sec. 267(a)(2)(A).

Under a

literal reading of the statute, an error in accounting for the

item by the recipient, another taxpayer, would not improve

petitioner’s position.

However, the Court in Jerome Castree Interiors v.

Commissioner, supra, did suggest that the recipient’s failure to

include the funds in income at the time of alleged constructive

receipt is a factor to be considered in denying constructive

receipt, because it shows that the recipient did not believe

that constructive payment had been made.

Id. at 571.

Here, the

only documentary evidence submitted to the Court, petitioner’s

Form 941, shows that the parties treated the compensation as

earned in the fourth quarter of 1994--a period commencing after

- 17 the end of petitioner’s fiscal year.

Unsubstantiated testimony

that the Gentrys reported the income on their 1994 calendar year

returns, even if true, does not show that they treated the funds

as constructively received at or prior to the end of

petitioner’s fiscal year on July 31, 1994. After all, payments

actually received by the Gentrys in the 5 months following the

end of petitioner’s fiscal year would still be within their

calendar year.

Petitioner has failed to show either that the

Gentrys should have included the funds in gross income by the

end of petitioner’s fiscal year, or that the funds were in fact

so included.

Finally, petitioner’s comment implies that the constructive

receipt doctrine should apply differently where the payor

operates on a fiscal year.

Petitioner’s notion seems to be that

since petitioner’s fiscal tax year ended in the middle of the

Gentrys’ calendar tax years, funds received or taken into income

by the end of the calendar year should be treated as

constructively received during the same “year,” and so the

deduction should be allowed.

There are other matching provisions in the Internal Revenue

Code that do not require matching precision.

See, e.g., sec.

83(h) (deduction allowed for taxable year in which ends the

taxable year in which item included in gross income of person

who performed services); sec. 404(a)(6) (payment deemed made on

- 18 last day of preceding tax year if paid by due date of payor’s

tax return, including extensions); former sec. 267(a)(2)

(repealed 1984) (payments made within 2-1/2 months after end of

the payor’s taxable year relate to that year).

However, section

267(a)(2) requires a precise matching of the date of the

deduction and the date that the amount is includable in the

gross income of the recipient:

any deduction allowable under this chapter in respect

of such amount shall be allowable as of the day as of

which such amount is includible in the gross income of

the person to whom the payment is made (or, if later,

as of the day on which it would be so allowable but

for this paragraph). * * * [Sec. 267(a)(2) (flush

language); emphasis added.]

This language does not permit a payment made after the end of

the fiscal year but during the calendar year to relate back.

Petitioner chose to use a fiscal year.

“Under present law * * *

[current section 267], an accrual payor is effectively placed on

the cash basis for all payments to related cash basis payees,

and the payor’s deduction therefore is pushed over to the next

year if payment is made the stroke after midnight of the last

day of the accrual year.”

Bittker & Lokken, Federal Taxation of

Income, Estates & Gifts, par. 78.2.1, at 78-11 (2d ed. 2001).

Petitioner cannot deduct payments made after the end of its

fiscal year merely because they were made prior to the end of

the calendar year.

Petitioner’s efforts to distinguish Kaw

Dehydrating Co. v. Commissioner, 74 T.C. 370 (1980), on factual

- 19 grounds are unavailing.

The cases cited by petitioner in support of its position

that the funds were constructively received prior to end of its

fiscal year are not on point.

Petitioner cites White v.

Commissioner, 61 T.C. 763 (1974), and Haack v. Commissioner,

T.C. Memo. 1981-13, for the proposition that Doyce Gentry’s

unfettered power should be enough to establish constructive

receipt.

In both cases, the specific amount of the constructive

recipient’s compensation had been determined in advance through

proper corporate action.

In White, the corporation had

determined the amount of the shareholder’s bonus in advance

through a proper corporate resolution and had given him the

power to withdraw the funds whenever he wished.

Commissioner, supra at 764.

White v.

Similarly, in Haack v.

Commissioner, supra, the bonuses had been awarded to the

controlling shareholder through proper corporate resolutions

prior to the end of the corporation’s fiscal year.

This Court

in White and Haack did not address the issue here--whether the

employee would have been in constructive receipt of the

compensation if the corporation had not determined and awarded

the compensation in advance through proper corporate procedures.

Petitioner also cites Fetzer Refrigerator Co. v. United

States, 437 F.2d 577 (6th Cir. 1971), O.H. Kruse Grain & Milling

v. Commissioner, T.C. Memo. 1959-110, affd. 279 F.2d 123 (9th

- 20 Cir. 1960), and Miller-Dunn v. Commissioner, a Memorandum

Opinion of this Court dated Feb. 28, 1946, for the proposition

that no formal corporate resolution is required for constructive

receipt.

Fetzer Refrigerator Co. and O.H. Kruse Grain & Milling

involved contractual rents that had been accrued on the

corporate taxpayer’s books prior to the end of its fiscal year.

In each case the rental amounts were set forth in a lease

agreement and were reflected by entries on the corporation’s

books as of the end of the fiscal year, giving the

shareholder/lessor the right as well as the power of withdrawal.

Fetzer Refrigerator Co. v. United States, supra at 579

(“Although Mr. Fetzer never physically received the amounts due

him, he did possess the power and the right to receive the

payments.” (Emphasis added.)).

We agree with petitioner that the doctrine of constructive

receipt does not require a specific corporate resolution

authorizing the compensation.

ways.

A corporation can act in other

For example, the award of compensation could be set in

advance under a written contract that was itself authorized by

proper corporate procedures.

The compensation could be set

through the formal act of an agent who had a proper delegation

of authority from the corporation.

However, petitioner has

failed to cite any authority for the proposition that the

compensation could be set other than through formal and

- 21 verifiable corporate actions.

The controlling shareholder’s

thought processes or informal oral statements to an outside

accountant, which are not timely acted upon and are not timely

reflected in the corporation’s books and records, do not

constitute verifiable corporate actions.

See Lombard & Co. v.

Commissioner, T.C. Memo. 1979-297 (“in the absence of any

written memoranda, corporate minutes, resolution, or a crediting

upon the corporation's books of the amount of salary, we cannot

say that Franklin's salary was credited or set aside so as to be

constructively received”).

Petitioner’s reliance on Miller-Dunn v. Commissioner,

supra, is also misplaced.

Miller-Dunn was a reasonable

compensation case, not a constructive receipt case.

The Court

held that amounts actually paid by the corporation during the

fiscal year constituted reasonable compensation for prior

services, even though no corporate resolution awarding such

compensation had been enacted.

The Miller-Dunn case does not

consider a timing issue like the one in the case at hand.

The preceding analysis shows that neither Doyce Gentry nor

his sons had the right to receive or take the income prior to

the end of petitioner’s fiscal year.

In addition, unlike Mr.

Gentry, who had sole check-writing authority over petitioner’s

accounts, the sons did not have the power to obtain payment

prior to the close of petitioner’s fiscal year.

We therefore

- 22 sustain respondent’s determination denying petitioner a

deduction for compensation allegedly accrued but unpaid by the

close of petitioner’s fiscal year ended July 31, 1994.

Issue 2.

Late-Filing Additions

Petitioner’s fiscal years at issue in this case ended on

July 31, 1992, 1993, and 1994.

Absent extension, the deadlines

for filing petitioner’s Federal income tax returns were October

15, 1992, October 15, 1993, and October 17, 1994,5 respectively.

See sec. 6072(b) (“returns made on the basis of a fiscal year

shall be filed on or before the 15th day of the third month

following the close of the fiscal year”).

The parties have

stipulated that the returns were delinquently filed on February

9, 1993, June 13, 1994, and March 1, 1995.

Under section 6651(a)(1), there shall be imposed on a

taxpayer who fails timely to file an income tax return an

addition to tax of 5 percent of the tax due for each month or

partial month of the delinquency, not to exceed 25 percent,

“unless it is shown that such failure is due to reasonable cause

and not due to willful neglect”.

Respondent determined a 20-

percent addition to tax for petitioner’s 4-month delay in filing

its 1993 return, and 25-percent additions to tax for the more

than 5-month delays in filing its 1994 and 1995 returns.

5

Oct. 15, 1994, fell on a Saturday. Therefore, petitioner

had until the following Monday to file its return. See sec.

7503.

- 23 Petitioner’s briefs contained no argument with respect to the

additions to tax.

Because the predicate facts for the late-filing additions

were stipulated, and petitioner’s attorney repeatedly argued at

the trial that petitioner relied on its accountant in tax filing

matters, we surmise that petitioner challenges the additions on

the grounds that it had “reasonable cause” and not “willful

neglect” for the failure to file on time due to its reliance on

its accountant.

Petitioner bears the burden of proof to show

“reasonable cause” and not “willful neglect” where the additions

to tax were claimed in the notice of deficiency, as they were

here.

Sanderling, Inc. v. Commissioner, 66 T.C. 743, 757

(1976), revd. in part on other grounds 571 F.2d 174 (3d Cir.

1978); sec. 301.6651-1(c)(1), Proced. & Admin Regs.;6 Rule

142(a); see Welch v. Helvering, 290 U.S. 111 (1933).

Petitioner has offered no evidence to meet its burden of

proof.

The Supreme Court made it clear in United States v.

Boyle, 469 U.S. 241, 249-250 (1985), that a taxpayer cannot

6

In 1998, Congress enacted sec. 7491(c), which places the

burden of production on the Commissioner in connection with any

determination of penalties or additions to tax. Sec. 7491(c)

applies only to court proceedings arising in connection with

examinations commenced after July 22, 1998. Internal Revenue

Service Restructuring and Reform Act of 1998, Pub. L. 105-206,

sec. 3001, 112 Stat. 726. The notice of deficiency in this case

was issued on Feb. 26, 1997, which conclusively establishes that

the examination was commenced before July 22, 1998. Because it

is clear that sec. 7491(c) does not apply here, we need not

determine whether respondent has met the burden of production.

- 24 avoid late-filing additions to tax merely by showing that he

relied on an agent to file his tax returns.

Petitioner also failed to introduce any evidence to show

that the delay was caused by its accountant’s neglect, as

opposed to petitioner’s own neglect.

We therefore hold that

petitioner is liable for the late-filing additions to tax under

section 6651(a)(1).

Issue 3.

Accuracy-Related Penalties

Section 6662(a) imposes a 20-percent penalty on the

underpayment of tax attributable to, among other things, the

taxpayer’s “negligence or disregard of rules or regulations.”7

Sec. 6662(b)(1).

Negligence is defined to include the “failure

to make a reasonable attempt to comply” with the tax laws.

Sec.

6662(c).

Section 6664(c)(1) contains a defense to the accuracyrelated penalty provisions.

It provides:

No penalty shall be imposed under this part with

respect to any portion of an underpayment if it is

shown that there was a reasonable cause for such

portion and that the taxpayer acted in good faith with

7

Respondent argued on brief that petitioner should also be

liable for the accuracy-related penalty because of its

“substantial understatement of income tax.” See sec. 6662(b)(2).

However, respondent did not seek the accuracy-related penalties

on the grounds of “substantial understatement” in the notice of

deficiency. We need not consider whether this alternative ground

for supporting the penalty is properly before us, and if so who

would bear the burden of proof, because petitioner has failed to

meet its burden of proof on the negligence ground stated in the

notice of deficiency.

- 25 respect to such portion.

Respondent’s determination in a negligence case is

presumptively correct, and petitioner has the burden of proving

that it was not negligent, or that there was “reasonable cause”

for the error, and that it acted “in good faith”:8

The section 6653(a) additions[9] involve negligence or

intentional disregard of rules and regulations. The

burden of proof as to such additions is upon

petitioners. * * * They have submitted no evidence

whatever in this respect. These additions must

therefore be sustained.

Lair v. Commissioner, 95 T.C. 484, 493 (1990).

Petitioner

introduced no evidence to meet its burden of proof to show

“reasonable cause” for the errors or to show that it acted in

good faith. We therefore sustain respondent's determination that

petitioner is liable for the accuracy-related penalty on the

deficiencies.

To give effect to the foregoing,

Decision will be entered

under Rule 155.

8

See supra note 6.

9

The negligence accuracy-related penalty was formerly an

addition to tax under former sec. 6653(a). The negligence

provisions were revised and moved to sec. 6662 by the Omnibus

Budget Reconciliation Act of 1989, Pub. L. 101-239, sec.

7721(c)(1), 103 Stat. 2399.