UNITED STATES TAX COURT
Agency decision
Ask Donna
What actually matters in this document.
Text
T.C. Memo. 2001-270
UNITED STATES TAX COURT
EUGENE A. BECK, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 12215-99, 12216-99,
12217-99.
Filed October 9, 2001.
Eugene A. Beck, pro se.
Tracey A. Martinez, for respondent.
1
Cases of the following petitioners are consolidated
herewith: Eugene A. Beck, docket No. 12216-99 and Beck's Village
West Liquors, Ltd., docket No. 12217-99.
- 2 CONTENTS
FINDINGS OF FACT
. . . . . . . . . . . . . . . . . . . . . . . 5
I.
Background . . . . . . . . . . . . . . . . . . . . . . . . 6
A. Formation and Titling of Stock in Beck's Liquors . . . 6
B. Purchases of Condominiums . . . . . . . . . . . . . . 7
C. Officers . . . . . . . . . . . . . . . . . . . . . . . 8
D. Operation of the Business . . . . . . . . . . . . . . 8
II.
Audit of Returns . . . . . . . . . . . . . . . . . . . .
14
OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
Issues 1, 2, & 3: Whether Beck's Liquors Is Liable for the Fraud
Penalty Under Section 6663(a) for Each of the Years at
Issue, and Whether Mr. Beck Is Liable for the Fraud
Penalty Under Section 6663(a) for Fraudulently
Understating His Income on His 1991 Federal Income Tax
Return and Under Section 6651(f) for Fraudulently
Failing To File Federal Income Tax Returns for 1992 and
1993. . . . . . . . . . . . . . . . . . . . . . . . 19
I.
Underpayment of Tax . . . . . . . . . . . . . . . . . . . 20
A. Gross Receipts of Beck's Liquors . . . . . . . . . . 21
1. State Bank Deposits . . . . . . . . . . . . . . 21
2. Cash Payments . . . . . . . . . . . . . . . . . 22
a. Cash From Till . . . . . . . . . . . . . . 22
b. Gambling Losses . . . . . . . . . . . . . 22
c. Insurance Payment . . . . . . . . . . . . 23
3. Nonincome Items . . . . . . . . . . . . . . . . 25
B. Disallowed Expenses . . . . . . . . . . . . . . . . 26
1. Payments in Lieu of Wages . . . . . . . . . . . 28
2. Vehicle Expenses and Depreciation . . . . . . . 28
3. Annual Meeting Expenses . . . . . . . . . . . . 29
4. Travel Expenses and Entertainment Expenses . . 30
a. Las Vegas Expenses . . . . . . . . . . . . 30
b. Other Meal and Entertainment Expenses . . 31
c. Cost of Tickets To Various Sporting Events
. . . . . . . . . . . . . . . . . . . . 32
5. Insurance, Condominium Fees, Utilities, and
Property Taxes Paid for Residences of Mr. Beck,
Michael, and/or Michelle . . . . . . . . . . . 33
6. Charges on the Corporate Visa Card for Mr. Beck's
Personal Expenses . . . . . . . . . . . . . . 34
7. Mrs. Beck's Memorials, Funeral, and Medical
Expenses . . . . . . . . . . . . . . . . . . . 34
- 3 C.
II.
Conclusion . . . . . . . . . . . . . . . . . . . . .
35
Intent To Evade Taxes . . . . . . . . . . . . . . . . . 35
A. Badges of Fraud . . . . . . . . . . . . . . . . . . 36
1. Failure To Report Income Over an Extended Period of
Time . . . . . . . . . . . . . . . . . . . . . 37
2. Failure To File a Tax Return . . . . . . . . . . 39
3. Concealment of Bank Accounts From Internal Revenue
Agent, Failure To Furnish the Government With
Access To His Records, and Failure To Cooperate
With Tax Authorities . . . . . . . . . . . . . 39
4. Failure To Keep Adequate Books and Records . . 40
5. Dealing in Cash . . . . . . . . . . . . . . . . 40
6. Taxpayer’s Experience and Knowledge, Especially
Knowledge of Tax Laws . . . . . . . . . . . . 41
7. Taxpayer's Implausible Explanations of Conduct
Given at Trial . . . . . . . . . . . . . . . . 41
8. Participation in Illegal Activities or Concealment
of an Illegal Activity . . . . . . . . . . . . 41
B. Conclusion . . . . . . . . . . . . . . . . . . . . . 42
Issue 4.
Whether Petitioner Mr. Beck Received Constructive
Dividends From Beck's Liquors in 1992 and 1993 in the
Respective Amounts of $151,448 and $117,641 . . . . 43
I.
Ownership of Stock of Beck's Liquors
. . . . . . . . . .
43
II.
Constructive Dividends . . . . . . . . . . . . . . . . .
A. Diverted Corporate Income . . . . . . . . . . . . .
B. Remaining Expenses . . . . . . . . . . . . . . . . .
45
46
48
MEMORANDUM FINDINGS OF FACT AND OPINION
PARR, Judge:
Respondent determined deficiencies and
penalties in petitioners' Federal income taxes for 1991, 1992,
and 1993 as follows:
- 4 Eugene A. Beck
docket Nos. 12215-99, 12216-99
Year
Deficiency
Penalty
Sec. 6663(a)
1991
1992
1993
$28,517.92
41,509.00
30,649.00
$21,388.44
31,131.75
22,986.75
Beck's Village West Liquors, Ltd.
docket No. 12217-99
Year
Deficiency
Penalty
Sec. 6663(a)
1991
1992
1993
$44,274.16
23,047.49
37,064.66
$32,127.00
17,285.62
26,407.50
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.
The issues for decision are as follows:2
1.
Whether Beck's Village West Liquors, Ltd. (Beck's
Liquors or the corporation) is liable for the fraud penalty under
section 6663(a) for each of the years at issue.
2
We hold that it
Respondent determined that Beck's Liquors overstated its
cost of goods sold in the respective amounts of $3,014 and
$11,474 on its 1991 and 1993 Federal corporate income tax returns
and understated its cost of goods sold in the amount of $39,004
on its 1992 Federal corporate income tax return. Petitioners do
not contest those adjustments. Additionally, the notices of
deficiency contain adjustments to Beck's Liquors deductions for
charitable contributions and to Mr. Beck's taxable Social
Security benefits. These are computational adjustments which
will be affected by the outcome of the other issues to be
decided, and we do not separately address them.
- 5 is not, and, therefore, the period for assessing a deficiency has
expired.
2.
Whether Eugene A. Beck (Mr. Beck) is liable for the
fraud penalty under section 6663(a) for fraudulently understating
his income tax on his 1991 Federal income tax return.
We hold
that he is not, and, therefore, the period for assessing a
deficiency has expired.
3.
Whether Mr. Beck is liable for the penalty
under section 6651(f) for fraudulently failing to file Federal
income tax returns for 1992 and 1993.3
4.
We hold that he is not.
Whether Mr. Beck received constructive dividends from
Beck's Liquors in 1992 and 1993 in the respective amounts of
$151,448, and $117,641.4
We hold that he received constructive
dividends in lesser amounts to be computed under Rule 155 in
accordance with the Court's finding and conclusions.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
3
In the notice of deficiency issued to Mr. Beck for 1992 and
1993, respondent determined that Mr. Beck was liable for the
penalty for fraud under sec. 6663(a). In the answer, respondent
conceded that Mr. Beck was not liable under sec. 6663(a), but
alleged that Mr. Beck was liable under sec. 6651(f).
4
In the notice of deficiency issued to Mr. Beck for 1992 and
1993, respondent determined that Mr. Beck failed to report
interest income in the respective amounts of $35 and $26. Mr.
Beck did not challenge that determination in his petition, and it
is not at issue in these cases.
- 6 incorporated herein by this reference.
I.
Background
At the time the petitions in these cases were filed, Mr.
Beck resided in Fargo, North Dakota, and Beck's Liquors had its
principal place of business in Fargo, North Dakota.
At the time
of the trial in this case, Mr. Beck was 73 years old.
A.
Formation and Titling of Stock in Beck's Liquors
In 1977, Mr. Beck and his then wife, Gretchen Beck (Mrs.
Beck), started a liquor store business in Fargo, North Dakota,
known as Village West Liquors.5
store/bar known as Vega Ltd.
Mr. Beck also had another liquor
Because Mr. Beck owned Vega Ltd.,
the Becks treated Mrs. Beck as the owner of Village West Liquors.
For liability purposes, the Becks decided to incorporate the
liquor store business.
On January 14, 1981, the Becks
incorporated Beck's Liquors.
Mrs. Beck transferred the business
of Village West Liquors with a net value of $30,000 to Beck's
Liquors in exchange for 30,000 shares of the common stock of
Beck's Liquors.
The Becks have two children, Michael and Michelle.
Every
year from 1983 to 1987, Mrs. Beck transferred title to 3,000
shares of the stock of Beck's Liquors to each of her children.
By July 1987, Michael and Michelle each held title to 15,000
shares of the common stock of Beck's Liquors.
5
Before Mr. Beck operated the liquor store, he was a farmer.
- 7 In 1988, Michelle and her husband were having marital
difficulties.
In order to avoid a claim by Michelle's husband to
the shares of Beck's Liquors stock titled in Michelle's name,
title to the shares was transferred to Michael for $1.
The
corporate minutes specify that the corporation would issue 30,000
new shares of stock to Michelle after Mr. and Mrs. Beck had died.
Although the stock of Beck's Liquors was originally titled
in Mrs. Beck's name and then transferred to the children, the
Becks did not intend for the children to have any control over
the stock, the corporation, or the business until after their
deaths.
Michael and Michelle were never told that they held
title to any shares of Beck's Liquors stock.
The corporate
minutes specify that Mr. and Mrs. Beck would operate the business
during their lifetime.
B.
Purchases of Condominiums
In 1987 or 1988, Beck's Liquors paid $60,000 in cash for a
condominium.
The condominium was titled in the name of the
corporation, but Mr. and Mrs. Beck lived in the condominium.
1988, Beck's Liquors also purchased a condominium for Michael.
In
Michael paid the condominium fees and utilities, and Beck's
Liquors paid the real estate taxes.
On June 16, 1991, Mr. and Mrs. Beck were in an automobile
accident.
Mrs. Beck was killed instantly.
- 8 C.
Officers
During the years at issue, the following persons were
officers of Beck's Liquors:
1991
President
Vice president
Secretary
Treasurer
Gretchen Beck
Michael Beck
Michelle Beck
Eugene Beck
1992
President and Treasurer
Vice president
Secretary
Eugene Beck
Michael Beck
Michael Beck
1993
President
Vice president
Secretary and Treasurer
D.
Michael Beck
Michelle Beck
Eugene Beck
Operation of the Business
In the 1980s, Mr. Beck worked at the liquor store in the
morning, an employee, Jim Grandbois (Mr. Grandbois) worked in the
afternoon, and Mrs. Beck closed the store.
Mrs. Beck cleaned
houses during the day and worked in the liquor store at night.
From 1990 through the years at issue, Mr. Grandbois worked
full time and managed the store.
In addition to his wages,
Beck's Liquors provided Mr. Grandbois with basic health insurance
through Protective Life.
During the years at issue, employees of Beck's Liquors often
cashed their paychecks at the store and occasionally used cash
from the till to pay for some minor store expenses; most store
- 9 expenses were paid by check.
The paychecks written on the
corporate account were not included with the daily bank deposits.
Paychecks were cashed from the till in the amounts of $14,118 in
1991, $18,002 in 1992, and $2,382 in 1993.
Expenses were paid
from cash taken from the till in the amounts of $138 in 1991,
$3,632 in 1992, and $1,709 in 1993.
Each day, Mr. Grandbois removed all but $100 of the
currency, along with checks, receipts, and other miscellaneous
items from the two cash tills in the store.
He placed everything
he removed from the tills into a deposit bag.
The next morning,
he took the tapes out of the cash register and placed them in the
deposit bags.
Each day, Mr. Beck picked up the deposit bag and took it to
his home, where he would count the money and prepare a deposit
slip.
Because of the store's close proximity to the Canadian
border, some of the cash was in Canadian currency.
a lock box in his home.
cash in the lock box.
Mr. Beck kept
Often, he had in excess of $50,000 in
Mr. Beck used the cash to exchange the
Canadian currency with U.S. currency at the exchange rate.
The
U.S. currency was then included in the deposit.
Mr. Beck traveled to Las Vegas, Nevada, to exchange the
Canadian currency to U.S. currency and to gamble.
went to Las Vegas four or five times.
In 1991, he
In later years the
exchange rate was lower, and Mr. Beck went less often.
Mr. Beck
- 10 usually took $10,000 to $15,000 in Canadian money to exchange on
each trip and stayed in Las Vegas for 3 or 4 days.
The banks in
Fargo charged a fee of 5 to 7 percent above the exchange rate but
the casinos charged at the exchange rate.
Mr. Beck thought that
a better exchange rate given by the casinos exceeded and
justified the cost of the trips.
Beck's Liquors paid for Mr.
Beck's travel to Las Vegas and deducted the expenses on its
Federal income tax returns.
Mr. Beck played blackjack only and
"did very well" during the years at issue.
He won $1,400 in
1991, $8,300 in 1992, and $12,000 in 1993.
He did not report any
gambling winning on his or the corporation's Federal income tax
returns for the years at issue.
He did report $20,000 of
gambling winnings on the corporation's 1994 return.
Beck's Liquors maintained corporate accounts at State Bank
of Fargo, Norwest Bank, and Merrill Lynch.
a personal account at Gate City Bank.
Mrs. Beck maintained
Mr. Beck did not
maintained a personal checking account; he paid for his personal
expenses in cash.
During the years at issue, Mr. Beck kept the books and
records for Beck's Liquors and had the primary responsibility for
operating the store.
Beck's Liquors, however, did not maintain a
formal record keeping system for income and expense items.
Beck kept ledger sheets on the back of a deposit book.
Mr.
The
ledger sheets and cash register tapes were destroyed in July 1993
- 11 when the roof leaked.
Every summer, the Becks spent one or two weeks in a cabin at
a resort on Lake Melissa in Detroit Lakes, Minnesota.
Michelle
and her three children stayed a week, and Michael stayed a couple
days.
The corporate minute book reflects that the annual
stockholders meeting was held at the lake, and Beck's Liquors
paid the expenses incurred by the Becks for the vacation.
Up until the time of Mrs. Beck's death, Beck's Liquors paid
her a wage and officer's compensation.
At the time of her death,
Mrs. Beck had between $50,000 and $60,000, of which $26,000 was
in cash.
Mrs. Beck also had $6,604 in an IRA, the beneficiaries
of which were Michael and Michelle.
Two checks for $3,302
distributed from the IRA and a $1,000 check from her burial
insurance were deposited into Beck's Liquors checking account.
Some friends sent checks totaling approximately $9,500 to Mr.
Beck as memorials for Mrs. Beck.
The checks were deposited into
Beck's Liquors checking account, and Mr. Beck wrote checks to
churches and charitable organizations in memory of Mrs. Beck.
Some of Mrs. Beck's funeral expenses were paid from Beck's
Liquors checking account.
The insurance company paid for the vehicle that was
destroyed in the accident.
Liquors.
The vehicle was owned by Beck's
A check for $6,535 was issued on July 31, 1991, and, on
August 12, 1991, $6,535 was deposited into the corporation's
- 12 Merrill Lynch account.
In addition to the payment for the loss
of the car, the insurance company paid to Mr. Beck death benefits
of $4,934 in 1991, $6,543 in 1992, and $5,328 in 1993.
Beck's Liquors never paid Mr. Beck a salary.
During the
years at issue, Mr. Beck received Social Security benefits but
did not receive a salary or wages from any source.
Mr. Beck
received Social Security payments in 1991, 1992, and 1993 in the
respective amounts of $2,436, $2,836, and $2,923.
Beck's Liquors
paid a share of the expenses related to an office in the
condominium in which Mr. Beck resided and garage storage in two
garages.
Mr. Beck used the corporate VISA credit card to pay for
his personal expenses in addition to corporate expenses.
He
charged meals and travel expenses that were deducted as
entertainment expenses on the corporate returns.
Michael worked as a custodian for Blue Cross/Blue Shield and
Red Lobster.
nights.
He also worked in the liquor store on Friday
He stocked shelves, filled the cooler, dusted shelves,
swept the floors, and occasionally took deposits to the Bank and
picked up freight from the liquor companies.
In 1992, Beck's
Liquors paid $9,400 in cash for a Mercury Topaz for Michael.
drove the Topaz when he ran errands for the store.
He
During the
years at issue, Beck's Liquors did not pay Michael cash for the
work he did in the store.
In lieu of wages, Beck's Liquors paid
the real estate taxes on the condominium in which Michael
- 13 resided, the insurance on the Topaz, and the premium on Michael's
life insurance policy.
During the years at issue, Michelle received public
assistance and resided in Minnesota.
After Mrs. Beck died,
Michelle frequently drove with her three young children to Fargo
to help Mr. Beck.
At the time, Michelle owned an old Ford
Mustang that did not have air conditioning, and Mr. Beck drove a
Buick Century, titled in the name of the corporation.
In order
to make Michelle's drive to Fargo more comfortable, Mr. Beck
traded the Buick for the Mustang.
retained title to the Buick.
Beck's Liquors, however,
Mr. Beck drove the Mustang during
the summer of 1991 and then traded the Mustang for a new
Oldsmobile.
Liquors.
The Oldsmobile was titled in the name of Beck's
For the occasional work Michelle performed for the
store, Beck's Liquors paid for the insurance on the Buick she
drove.
In August 1992, Michelle purchased a house in Cottage Grove,
Minnesota, for $80,000.
The $1,000 downpayment was paid by a
check drawn on Beck's Liquors checking account.
The balance of
the purchase price was paid with cash from a loan secured by
certificates of deposit (CDs) owned by Beck's Liquors.
Mr. Beck
paid the balance of the loan with cash payments of $35,000 in
1992 and $44,000 in 1993.
- 14 In 1991, Beck's Liquors paid off a $5,000 loan with cash.
In 1992, Mr. Beck purchased a diamond ring for $10,655 in cash.6
Mr. Beck prepared and filed corporate income tax returns for
Beck's Liquors for tax years 1991, 1992, and 1993.
Mr. Beck
prepared and filed his individual income tax return, Form 1040,
for tax year 1991.
He did not file individual income tax
returns, Forms 1040, for tax years 1992 and 1993.
II.
Audit of Returns
In 1993, the Internal Revenue Service (IRS) reviewed the
records of businesses in the Fargo area to ensure that the
businesses had properly reported cash transaction of $10,000 or
more.
A review of the records of a car dealership revealed that
Beck's Liquors purchased a car for approximately $9,000 in cash.
On the basis of that cash transaction, the IRS conducted an audit
of Beck's Liquors returns for 1991 and 1992.
Later, the agent
included the return for 1993.
The IRS agent interviewed Mr. Beck.
with the agent.
Mr. Beck cooperated
He gave the agent his checks, invoices, and cash
register receipts, which were his only records.
He did not make
misleading statements to, or give misleading documents to,
respondent's agents.
Because Beck's Liquors had no formal books, the IRS agent
6
Mr. Beck remarried in 1994 and gave the ring to his present
wife.
- 15 reconstructed the corporation's income using canceled checks,
bank statements, invoices, and cash register receipts.
The agent
identified all of the accounts of Beck's Liquors and the Becks.
The agent analyzed the deposits made to the accounts and excluded
all deposits that the agent believed were nontaxable, including
transfers between accounts.
The agent also obtained other
documents, such as statements from casinos and forms reporting
cash transactions.
Statements from two casinos showed gambling
losses of $20,600 in 1991 and $15,700 in 1992.
The agent
concluded that Beck's Liquors had income in 1991, 1992, and 1993
from Mr. Beck's use of the corporation's cash that was not
deposited into any corporate account.
He also concluded that Mr.
Beck had income from the use of corporate funds to make the cash
purchases and to pay funeral and memorial expenses of Mrs. Beck
and personal living expenses of Mr. Beck and his children.
The agent referred the case to the Criminal Investigation
Division.
The case was assigned to a special agent and finally
to the Department of Justice.
to prosecute Mr. Beck.
The Department of Justice declined
In 1997, the case was returned to the
original IRS agent for civil closing.
The agent met with Mr. Beck two or three times.
The first
time Mr. Beck saw the proposed adjustments was during one of
these meetings.
to Appeals.
The agent prepared a report and the matter went
On April 9, 1999, respondent mailed to Beck's
- 16 Liquors and to Mr. Beck notices of deficiency for the taxable
years 1991, 1992, and 1993.
Using the bank deposits and cash expenditures method,
respondent determined that Beck's Liquors underpaid its tax by
$44,274.16 in 1991, $23,047.49 in 1992, and $37,064.66 in 1993.
Respondent asserts that Beck's Liquors underreported its
income by the following amounts:
Unreported gross receipts
Cost of goods sold
Disallowed expenses
Total unreported income
1991
74,453
3,014
46,060
123,527
1992
115,133
(39,004)
26,476
102,605
1993
84,782
11,474
30,204
126,460
Respondent's adjustments to the gross receipts of Beck's
Liquors were computed as follows:
State Bank deposits
Cash payments
Nonincome items
Total gross receipts
Reported on return
Unreported gross receipts
1991
1,574,706
85,164
(404,324)
1,255,546
1,181,093
74,453
1992
1,475,700
101,305
(335,616)
1,241,389
1,126,256
115,133
1993
1,554,350
75,487
(391,143)
1,238,694
1,153,912
84,782
The cash payments were identified as follows:
Cash payments
Cash expenses--till
Wage--till
Gambling losses
Insurance proceeds
State Bank CD
Norwest Bank
Gate City S&L
Loan payments
1991
138
14,118
20,600
6,535
27,500
2,273
9,000
5,000
1992
3,632
18,002
15,700
––2,316
–35,000
1993
1,709
2,382
–––4,026
–44,000
- 17 Purchase of ring
Purchase of car
Merrill Lynch
Deposit subsequent year
Total cash payments
––––85,164
10,655
9,400
6,600
–101,305
–––23,370
75,487
The nonincome items did not include $6,604 from Mrs. Beck's
IRA, a $1,000 check from her burial insurance, and gifts totaling
approximately $9,500 from friends given to Mr. Beck in memorial
to Mrs. Beck that were deposited into the corporation's accounts.
Respondent made adjustments to the deductions for expenses
as follows:
- 18 -
Wages
Repairs
Bad debts
Rents
Taxes
Interest
Depreciation
Payroll tax
Advertising
Cleaning
Entertmnt. 80%
Utilities
Security
Bus. expense
License
Supplies
Insurance
Legal
Job service
Dues & subs.
Auto. exp.
Bank charges
Workmen's comp.
Ann. mtg. exp.
State withng.
ND income tax
Total
Return
26,658
5,322
1,250
47,015
3,594
1,079
5,390
10,344
10,647
3,279
2,600
10,733
540
2,091
2,730
9,284
6,197
497
105
972
4,409
1,550
193
1,254
-0-157,733
1991
Exam
16,220
2,605
-045,136
1,361
-01,340
7,538
9,016
1,198
18
9,635
540
267
1,400
8,578
740
497
84
-01,200
2,293
193
-0-01,814
111,673
Adjust.
10,438
2,717
1,250
1,879
2,233
1,079
4,050
2,806
1,631
2,081
2,582
1,098
-01,824
1,330
706
5,457
-021
972
3,209
(743)
-01,254
-0(1,814)
46,060
Return
31,394
2,893
2,017
46,966
3,031
567
6,890
8,953
9,327
-02,948
10,657
540
2,140
1,850
8,614
3,657
-0256
1,102
3,913
3,330
325
1,084
349
2,710
155,513
1992
Exam
32,649
690
-045,946
1,190
-01,340
8,935
6,432
145
230
9,259
540
1,075
700
9,173
740
-0256
75
1,200
5,427
325
-0-02,710
129,037
Adjust.
(1,255)
2,203
2,017
1,020
1,841
567
5,550
18
2,895
(145)
2,718
1,398
-01,065
1,150
(559)
2,917
-0-01,027
2,713
(2,097)
-01,084
349
-026,476
Return
33,567
1,110
2,274
46,119
5,701
748
7,466
11,199
9,582
-02,367
11,588
540
2,204
-05,944
3,105
200
258
1,044
4,234
3,596
529
910
396
933
155,614
1993
Exam
33,078
371
-044,864
20
-01,186
10,292
6,120
295
-010,008
540
404
2,130
6,451
745
200
258
810
1,200
5,909
529
-0-0-0125,410
Adjust.
489
739
2,274
1,255
5,681
748
6,280
907
3,462
(295)
2,367
1,580
-01,800
(2,130)
(507)
2,360
-0-0234
3,034
(2,313)
-0910
396
933
30,204
- 19 Respondent determined that the following payments by Beck's
Liquors were constructive dividends to Mr. Beck:
Condo association fees
Insurance-condos, vehicles
Diverted corporate income
Credit card--personal expenses
Auto expense/repairs
Miscellaneous
Advertising/personal ticket use
Condo utilities
Other personal expenses
Property taxes
Annual meeting expenses
Total
1991
1,276
3,687
74,453
14,095
10,152
-0200
1,098
15,237
1,780
1,461
123,439
1992
1,014
1,866
115,133
14,993
7,294
378
200
1,398
5,239
1,750
2,183
151,448
1993
980
1,830
84,782
16,193
4,679
254
200
1,580
2,221
3,296
1,626
117,641
As a result of respondent's determination that Mr. Beck
received constructive dividends from Beck's Liquors in each of
the years at issue, respondent determined that Mr. Beck underpaid
his taxes in 1991, 1992, and 1993, respectively, in the amounts
of $28,517.92, $41,509.00, and $30,649.00.
OPINION
Issues 1, 2, & 3: Whether Beck's Liquors Is Liable for the Fraud
Penalty Under Section 6663(a) for Each of the Years at Issue, and
Whether Mr. Beck Is Liable for the Fraud Penalty Under Section
6663(a) for Fraudulently Understating His Income on His 1991
Federal Income Tax Return and Under Section 6651(f) for
Fraudulently Failing To File Federal Income Tax Returns for 1992
and 1993.
Respondent asserts that Beck's Liquors is liable for the
fraud penalty under section 6663(a) for each of the years at
issue, and that Mr. Beck is liable for the fraud penalty under
section 6663(a) for fraudulently understating his income on his
- 20 1991 Federal income tax return and under section 6651(f) for
fraudulently failing to file Federal income tax returns for 1992
and 1993.
Respondent has the burden of proving fraud by clear and
convincing evidence.
Sec. 7454(a); Rule 142(b); Parks v.
Commissioner, 94 T.C. 654, 660 (1990).
Respondent must prove by
clear and convincing evidence (1) that petitioners underpaid
their taxes in each year and (2) that petitioners intended to
evade taxes by conduct intended to conceal, mislead, or otherwise
prevent tax collection.
I.
Parks v. Commissioner, supra at 660-661.
Underpayment of Tax
First, respondent must prove by clear and convincing
evidence the existence of an underpayment of tax for each of the
years at issue.
For fraud purposes, respondent may not rely upon
petitioners' failure to carry the burden of proof as to the
underlying deficiency. Id.; Petzoldt v. Commissioner, 92 T.C.
661, 700 (1989); Estate of Beck v. Commissioner, 56 T.C. 297, 363
(1971).
Respondent asserts that, using the bank deposits and cash
expenditures method, Beck's Liquors underpaid its tax by
$44,274.16 in 1991, $23,047.49 in 1992, and $37,064.66 in 1993.
Respondent asserts that Mr. Beck received constructive dividends
from Beck's Liquors in each of the years at issue, and, as a
result, Mr. Beck underpaid his taxes in 1991, 1992, and 1993,
- 21 respectively, in the amounts of $28,517.92, $41,509.00, and
$30,649.00.
If a taxpayer does not maintain adequate books and records,
the Commissioner may reconstruct the taxpayer's income by any
reasonable method which clearly reflects income.
Sec. 446(b);
Holland v. United States, 348 U.S. 121, 130-132 (1954); Caulfield
v. Commissioner, 33 F.3d 991, 992-993 (8th Cir. 1994), affg. T.C.
Memo. 1993-423.
The bank deposits and cash expenditures method
is a rational way to reconstruct income.
See Caulfield v.
Commissioner, supra at 993; Parks v. Commissioner, supra at 658;
Estate of Mason v. Commissioner, 64 T.C. 651, 656 (1975), affd.
566 F.2d 2 (6th Cir. 1977).
Respondent asserts that Beck's Liquors underreported its
income by $123,527 for 1991, $102,605 for 1992, and $126,460 for
1993.
A.
Gross Receipts of Beck's Liquors
Respondent determined unreported gross receipts of Beck's
Liquors totaling $74,453 for 1991, $115,133 for 1992, and $84,782
for 1993.
1.
State Bank Deposits
Petitioners do not dispute the amounts of the State Bank
deposits.
Bank deposits are prima facie evidence of income.
Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason
v. Commissioner, supra at 656-657.
- 22 2.
Cash Payments
Respondent included in the gross receipts of Beck's Liquors
items identified as cash payments totaling $85,164 in 1991,
$101,305 in 1992, and $75,487 in 1993.
Petitioners dispute that
these items were gross receipts of Beck's Liquors.
a.
Cash From Till
Employees of Beck's Liquors often cashed their paychecks at
the store and occasionally used cash from the till to pay for
some minor store expenses; most store expenses were paid by
check.
The paychecks written on the corporate account were not
included with the daily bank deposits.
Because Mr. Beck used the
deposits to calculate gross receipts, the cash used to cash the
checks and pay the expenses was omitted from the computation of
gross receipts.
Paychecks were cashed from the till in the
amounts of $14,118 in 1991, $18,002 in 1992, and $2,382 in 1993.
Expenses were paid from cash taken from the till in the amounts
of $138 in 1991, $3,632 in 1992, and $1,709 in 1993.
Beck's
Liquors underreported its gross receipts in those amounts in the
years at issue.
b.
Gambling Losses
On the basis of reports from two casinos, respondent asserts
that Mr. Beck used corporate cash to pay for gambling losses in
1991 and 1992.
Records from the Mirage casino indicate that Mr.
Beck lost $1,000 in 1991.
Records from the Riviera casino show
- 23 that Mr. Beck lost $19,600 in 1991 and $15,700 in 1992, and won
$3,200 in 1993.
Mr. Beck, however, did not have gambling losses
during the years at issue.
Rather, he had gambling winnings of
$1,400 in 1991, $8,300 in 1992, and $12,000 in 1993.
Mr. Beck
did not report the gambling winnings on his individual returns or
the corporation's returns for the years at issue.
Because he
gambled with the corporation's Canadian currency, Mr. Beck
thought that the winnings were taxable to Beck's Liquors.
Therefore, in an attempt to "correct" the omission, he reported
$20,000 of gambling winnings on the corporation's 1994 return.
The winnings, however, are not the income of Beck's Liquors.
Even though Mr. Beck used corporate funds for gambling, the
winnings are Mr. Beck's income and represent his unreported
income in the years at issue.
In computing the income of Beck's
Liquors, however, we find that the cash expenditures should not
include gambling losses.
Furthermore, the cash winnings
represent a source of cash, and the cash expenditures should be
reduced by $1,400 in 1991, $8,300 in 1992, and $12,000 in 1993.
c.
Insurance Payment
The insurance payment was for the vehicle that was destroyed
in the accident in which Mrs. Beck was killed.
owned by Beck's Liquors.
The vehicle was
Respondent included insurance proceeds
of $6,604 in the gross receipts of Beck's Liquors because,
respondent asserts, there was no business use and Mr. Beck cashed
- 24 the check and received the money.
Contrary to respondent's
assertion, however, the record shows that the insurance company
issued a check for $6,535 on July 30, 1991 and $6,535 was
deposited into the corporation's Merrill Lynch account on August
12, 1991.
Mr. Beck did not receive the money.
The insurance
payment was for a casualty loss that occurred in the year of the
payment.
Respondent has not established that there was a gain on
the receipt of the insurance payment (i.e., that the basis in the
vehicle was less than the amount of the payment).
We find that
the payment is income neither to the corporation nor to Mr. Beck.
d.
Remaining Cash Payments
Mr. Beck contends that the following cash payments were not
income because they were made with cash Mrs. Beck had accumulated
before her death:
Purchase of ring
Purchase of car
Loan payments
State Bank CD
Norwest Bank
Gate City S&L
Total
1991
––$5,000
27,500
–9,000
41,500
1992
$10,655
9,400
35,000
–––55,055
1993
––$44,000
–4,026
–48,026
At the time of her death, Mrs. Beck had between $50,000 and
$60,000, of which only $26,000 was in cash.
The cash
expenditures for 1991 should be reduced to reflect the $26,000
available to Mr. Beck.
- 25 In addition to Mrs. Beck's cash, Mr. Beck received Social
Security payments in 1991, 1992, and 1993 in the respective
amounts of $2,436, $2,836, and $2,923.
The corporation paid most
of Mr. Beck's living expenses, meals, condominium fees,
utilities, car expenses, and entertainment and travel expenses.
Mr. Beck did not deposit his Social Security checks into any bank
account.
He kept the money in cash.
Respondent has not
established that the cash was not available for the cash
payments.
We have also found that Mr. Beck's gambling winnings should
be included in the cash available.
3.
Nonincome Items
Mr. Beck asserts that the amount of nonincome items should
be increased to reflect $6,604 from Mrs. Beck's IRA, a $1,000
check from her burial insurance, gifts from friends totaling
approximately $9,500 given to Mr. Beck in memorial to Mrs. Beck,
and death benefits paid to Mr. Beck.
Mrs. Beck had $6,604 in an IRA, the beneficiaries of which
were Michael and Michelle.
Two checks for $3,302 distributed
from the IRA and a $1,000 check from her burial insurance were
deposited into Beck's Liquors checking account.
The nonincome
items should be increased to reflect those nontaxable deposits.
Friends sent checks totaling approximately $9,500 to Mr.
Beck as memorials for Mrs. Beck.
The checks were deposited into
- 26 Beck's Liquors checking account.
The nonincome items should be
increased to reflect those nontaxable deposits.
The insurance company paid to Mr. Beck death benefits of
$4,934 in 1991, $6,543 in 1992, and $5,328 in 1993.
The
insurance payments were deposited into the State Bank account.
The payments are not income to Beck's Liquors, and the nonincome
amount should be increased by those amounts.
B.
Disallowed Expenses
Respondent disallowed certain of Beck's Liquors' business
expense deductions reported on the corporation's returns for
1991, 1992, and 1993 in the respective amounts of $46,060,
$26,476, and $30,204.
Petitioner was unable to substantiate some of the expenses.
Some of the expenses were personal living expenses that are not
deductible pursuant to section 262.
The primary items in dispute
are (1) payments in lieu of wages, (2) vehicle expenses and
depreciation, (3) annual meeting expenses, (4) travel and
entertainment expenses, (5) insurance, condominium fees,
utilities, and property taxes paid for residences of Mr. Beck,
Michael, and/or Michelle, (6) charges on the corporate VISA card
for Mr. Beck's personal expenses, (7) Mrs. Beck's funeral and
medical expenses, and (8) payments made to churches and
charitable organizations in memory of Mrs. Beck.
- 27 Section 162 generally allows a deduction for ordinary and
necessary business expenses.
In general, an expense is ordinary
under section 162 if it is considered "normal, usual, or
customary" in the context of the particular business out of which
it arose.
Deputy v. du Pont, 308 U.S. 488, 495 (1940).
Ordinarily, an expense is necessary if it is appropriate and
helpful to the taxpayer's trade or business.
Commissioner v.
Tellier, 383 U.S. 687, 689 (1966); Carbine v. Commissioner, 83
T.C. 356, 363 (1984), affd. 777 F.2d 662 (11th Cir. 1985).
Even
if an expense is ordinary and necessary, it is deductible under
section 162 only to the extent it is reasonable in amount.
See,
e.g., United States v. Haskel Engg. & Supply Co., 380 F.2d 786,
788-789 (9th Cir. 1967).
In deciding whether an expense is ordinary and necessary
within the meaning of section 162, courts generally focus on the
existence of a reasonably proximate relationship between the
expense and the taxpayer's business and the primary motive or
purpose for incurring the expense.
See, e.g., Greenspon v.
Commissioner, 229 F.2d 947, 954-955 (8th Cir. 1956), affg. on
this issue 23 T.C. 138 (1954); Henry v. Commissioner, 36 T.C.
879, 884 (1961); Larrabee v. Commissioner, 33 T.C. 838, 841-843
(1960).
In general, where an expenditure is primarily for
profit-motivated purposes, and personal benefit is distinctly
secondary and incidental, it may be deducted under section 162.
- 28 Intl. Artists, Ltd. v. Commissioner, 55 T.C. 94, 104 (1970);
Sanitary Farms Dairy, Inc. v. Commissioner, 25 T.C. 463, 467-468
(1955); Rodgers Dairy Co. v. Commissioner, 14 T.C. 66, 73 (1950).
Conversely, if an expenditure is primarily motivated by personal
considerations, no deduction for it will be allowed.
Henry v.
Commissioner, supra; Larrabee v. Commissioner, supra.
1.
Payments in Lieu of Wages
In lieu of wages, Beck's Liquors paid the real estate taxes
on the condominium in which Michael resided, the insurance on the
Topaz, and the premium on Michael's life insurance policy.
For
the occasional work Michelle performed for the store, Beck's
Liquors paid for the insurance on the Buick she drove.
Those
payments are for services rendered and are deductible by the
corporation.
2.
Vehicle Expenses and Depreciation
Section 167 generally allows a depreciation deduction with
respect to property used in a trade or business or held for the
production of income.
In determining whether such a deduction is
permitted, courts ordinarily have focused on whether the
acquisition and/or maintenance of property was primarily
associated with profit-motivated purposes.
Intl. Artists, Ltd.
v. Commissioner, supra.
On the 1991, 1992, and 1993 corporate returns, Beck's
Liquors claimed vehicle expenses for three vehicles:
The pickup
- 29 truck, the car driven by Mr. Beck, and the car driven by Michael.
Respondent allowed a vehicle expense deduction for 100 percent of
the use of the pickup truck, plus $100 per month for other
expense relating to vehicle use.
A taxpayer's costs of commuting to and from his place of
business are nondeductible, personal expenses.
Fausner v.
Commissioner, 413 U.S. 838 (1973); Commissioner v. Flowers, 326
U.S. 465 (1946); Feistman v. Commissioner, 63 T.C. 129, 134
(1974); secs. 1.162-2(e), 1.262-1(b)(5), Income Tax Regs.
Mr. Beck and Michael used the corporate-owned automobiles to
commute to work and for personal purposes.
Petitioners did not
keep logs for any business use of the vehicles, and the record
does not show that Beck's Liquors is entitled to a deduction
greater than the amount allowed by respondent.
Beck's Liquors
may not deduct amounts in excess of those allowed by respondent.
3.
Annual Meeting Expenses
Every summer, the Becks spent 1 or 2 weeks in a cabin at a
resort on Lake Melissa in Detroit Lakes, Minnesota.
Michelle and
her three children stayed a week, and Michael stayed a couple
days.
The corporate minute book reflects that the annual
stockholders meeting was held at the lake, and Beck's Liquors
paid the expenses incurred by the Becks for the vacation.
Although an informal annual stockholders meeting may have
been held during the week at the cabin, the trip was, in fact, a
- 30 vacation, primarily for the recreation and pleasure of the
family.
The expenses are not deductible.
4.
Travel Expenses and Entertainment Expenses
a.
Las Vegas Expenses
Beck's Liquors deducted travel expenses Mr. Beck incurred
traveling to Las Vegas, and expenses incurred for the yearly trip
to the cabin.
Under section 162(a)(2), a taxpayer is allowed to
deduct ordinary and necessary travel expenses paid while away
from home in the pursuit of business.
Commissioner v. Flowers,
supra at 470; Walliser v. Commissioner, 72 T.C. 433, 437 (1979).
Where a taxpayer travels to a destination for both business and
personal activities, travel expenses to and from the destination
are deductible only if the trip is related primarily to the
taxpayer's business.
If the purpose of the trip is primarily
personal, the travel expenses to and from the destination are not
deductible even though the taxpayer engages in some business
activities at the destination.
Duncan v. Commissioner, 30 T.C.
386, 390-391 (1958); sec. 1.162-2(b)(1), Income Tax Regs.
Whether a trip is related primarily to the taxpayer's business or
is primarily personal is a question of fact.
Commissioner v.
Flowers, supra; sec. 1.162-2(b)(1), Income Tax Regs.
A casual
connection to one's business does not make the cost of the trip a
business expense.
280 (1966).
Ballantine v. Commissioner, 46 T.C. 272, 279-
- 31 Mr. Beck justified payment by Beck's Liquors of expenses for
traveling to Las Vegas by the savings in the exchange rate.
The
Fargo banks charged 17 percent whereas the casinos charged 10
percent.
If he exchanged $10,000 in Fargo, the banks charged
$1,700.
If he exchanged the same amount in Las Vegas, the
casinos charged only $1,000.
Therefore, every time he went to
Las Vegas, he saved $700 to $1,050 on the exchange, which amounts
exceeded his travel expenses.
Although Mr. Beck was able to get a better exchange rate for
the Canadian currency, we are convinced that the trips to Las
Vegas were primarily to allow Mr. Beck to gamble.
The expenses
are personal and not deductible.
b.
Other Meal and Entertainment Expenses
Beck's Liquors claimed the cost of meals as entertainment
deductions for 1991, 1992, and 1993, most of which respondent
disallowed.
Respondent disallowed all deductions for meal
expenses.
Entertainment expenses are not deductible from gross income
unless, as a threshold matter, they are ordinary and necessary
expenditures directly connected with or pertaining to the
taxpayer's trade or business.
Sec. 1.162-1(a), Income Tax Regs.
The expenses must be "directly related" to the business.
274(a); sec. 1.274-2(c)(3), Income Tax Regs.
For an
Sec.
entertainment expense to be directly related to the active
- 32 conduct of a business, the taxpayer must have had more than a
generalized expectation of deriving income or a specific business
benefit at some indefinite future time from those entertained.
Walliser v. Commissioner, supra at 441.
Even if such expenses
are business related within the meaning of section 162, however,
they must be substantiated pursuant to section 274(d) and the
regulations thereunder.
Sec. 1.274-1, Income Tax Regs.
Beck's Liquors did not comply with the detailed
substantiation requirements of section 274 and the regulations
thereunder.
Beck's Liquors deducted meal expenses because some
topic related to the liquor store was always discussed.
Mr. Beck
testified that, during the meals, he was entertaining clients or
discussing business with an employee or supplier.
A taxpayer's
general testimony that business was always discussed during the
entertainment is not sufficient to establish a business purpose.
The fact that there was a general discussion of the liquor store
does not establish a business purpose directly related to the
business of Beck's Liquors.
Rutz v. Commissioner, 66 T.C. 879,
884 (1976); Leon v. Commissioner, T.C. Memo. 1978-367.
c.
Cost of Tickets To Various Sporting Events
Beck's Liquors purchased tickets to various sporting events
for promotional purposes and deducted the cost as an
entertainment expense.
Respondent allowed all but $200 of the
cost of the tickets as a deductible expense.
Respondent did not
- 33 allow a deduction for $200 attributable to tickets used by Mr.
Beck.
The tickets used by Mr. Beck were personal expenses not
deductible by the corporation.
5. Insurance, Condominium Fees, Utilities, and
Property Taxes Paid for Residences of Mr. Beck, Michael, and/or
Michelle
Generally, a taxpayer may not deduct expenses with respect
to a dwelling unit that the taxpayer uses as a residence during a
taxable year.
Sec. 280A(a).
This general rule does not apply,
however, where the taxpayer uses a portion of the residence
regularly and exclusively as the taxpayer's principal place of
business.
Sec. 280A(c)(1)(A).
Mr. Beck asserts that, because
his residence address is the address used by Beck's Liquors for
purposes of State licensing and registration, that his residence
is the principal place of business of Beck's Liquors.
In Commissioner v. Soliman, 506 U.S. 168, 174 (1993), the
Supreme Court held that when a taxpayer carries on business in
more than one location the principal place of a taxpayer's
business is the most important or significant place of business.
This turns on two conditions: (1) The relative importance of the
activities performed at each business location, and (2) the time
spent at each place.
Id.
The most important activity of Beck's
Liquors is the sale of liquor.
not in petitioner's condominium.
The sale take place in the store,
- 34 Mr. Beck also asserts that he should be allowed to deduct
expenses related to garages, because store supplies are stored in
the garages.
An exception in section 280A(c)(1)(C) provides
that if an office is a "separate structure" not attached to the
dwelling unit and is used in connection with the taxpayer's trade
or business, a home office deduction may be justified.
However,
the statute requires that the separate structure be used
exclusively for business purposes in order to qualify for the
deduction.
Mr. Beck does not assert that the garages are used
exclusively for business purposes.
The expenses related to Mr.
Beck's condominium and the garages are personal expenses of Mr.
Beck and may not be deducted by the corporation.
6. Charges on the Corporate Visa Card for Mr. Beck's
Personal Expenses
Mr. Beck used the corporate VISA credit card to pay for his
personal expenses in addition to corporate expenses.
Mr. Beck
claims that he did not deduct his personal expenses on the
corporation's return.
income to him.
Mr. Beck did not report the payments as
The expenses are not deductible by the
corporation and are taxable dividends to Mr. Beck.
7.
Mrs. Beck's Memorials, Funeral, and Medical
Expenses
Mr. Beck wrote checks from the corporate account to churches
and charitable organizations in memory of Mrs. Beck.
Some of
Mrs. Beck's funeral expenses were paid from Beck's Liquors
- 35 checking account.
These items represent nondeductible personal
expenses.
C.
Conclusion
We conclude that respondent has shown that Beck's Liquors
and Mr. Beck underpaid taxes in all the years at issue.
II.
Intent To Evade Taxes
The Commissioner must prove by clear and convincing evidence
that the taxpayer intended to evade taxes by conduct intended to
conceal, mislead, or otherwise prevent tax collection.
Stoltzfus
v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968); Parks v.
Commissioner, 94 T.C. at 661; Rowlee v. Commissioner, 80 T.C.
1111, 1123 (1983).
A corporation is liable for fraud if the corporate officer
has the fraudulent intent to evade the corporation's taxes.
DiLeo v. Commissioner, 96 T.C. 858, 875 (1991), affd. 959 F.2d 16
(2d Cir. 1992); Federbush v. Commissioner, 34 T.C. 740, 749
(1960), affd. 325 F.2d 1 (2d Cir. 1963); Mazzocchi Bus Co. v.
Commissioner, T.C. Memo. 1993-43, affd. 14 F.3d 923 (3d Cir.
1994).
The fraudulent intent of Beck's Liquors may be
established by the acts of its president, Mr. Beck, who
completely dominated its activity.
Fraud means "actual, intentional wrongdoing", Mitchell v.
Commissioner, 118 F.2d 308, 310 (5th Cir. 1941), revg. 40 B.T.A.
424 (1939), or the intentional commission of an act or acts for
- 36 the specific purpose of evading a tax believed to be owing, Webb
v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968), affg. T.C.
Memo. 1966-81.
A taxpayer's negligence, even gross negligence,
is not enough to prove a willful attempt to evade tax, Kellett v.
Commissioner, 5 T.C. 608, 618 (1945), and understatement of
income is not sufficient to establish fraud, Estate of Upshaw v.
Commissioner, 416 F.2d 737, 741 (7th Cir. 1969), affg. Upshaw v.
Commissioner, T.C. Memo. 1968-123.
However, if a taxpayer
consistently underreports income and other circumstances show an
intent to conceal the income, an inference of fraud may be
justified.
A.
Holland v. United States, 348 U.S. at 137.
Badges of Fraud
The courts have developed a number of objective indicators
or "badges" of fraud.
Recklitis v. Commissioner, 91 T.C. 874,
910 (1988).
Fraud may be inferred from "any conduct, the likely effect
of which would be to mislead or to conceal."
States, 317 U.S. 492, 499 (1943).
Spies v. United
The courts have relied on
numerous indicia of fraud including the following: (1) a
taxpayer’s failure to report income over an extended period of
time; (2) a taxpayer’s failure to file a tax return; (3) a
taxpayer’s concealment of bank accounts from internal revenue
agents, failure to furnish the Government with access to his
records, and failure to cooperate with tax authorities; (4) a
- 37 taxpayer’s failure to keep adequate books and records; (5)
dealing in cash; (6) a taxpayer’s experience and knowledge,
especially knowledge of tax laws; (7) a taxpayer's implausible
explanations of conduct given at trial; and (8) participation in
illegal activities or concealment of an illegal activity.
Solomon v. Commissioner, 732 F.2d 1459, 1461-1462 (6th Cir.
1984), affg. per curiam T.C. Memo. 1982-603; Bahoric v.
Commissioner, 363 F.2d 151, 153-154 (9th Cir. 1966); Niedringhaus
v. Commissioner, 99 T.C. 202, 211 (1992); McCullough v.
Commissioner, T.C. Memo. 1993-70.
These indicia are not direct
evidence of fraud, and we consider them in the context of the
surrounding circumstances.
King's Court Mobile Home Park, Inc.
v. Commissioner, 98 T.C. 511, 516 (1992); Comparato v.
Commissioner, T.C. Memo. 1993-52.
1.
Failure To Report Income Over an Extended Period of
Time
Mr. Beck underreported the income of Beck's Liquors in each
of the years at issue.
The greatest portion of the omitted
income is attributable to the inclusion of cash purchases and
disallowance of deductions for payment of personal expenses of
Mr. Beck and his children.
Mr. Beck also failed to report as
income the amount of his personal expenses that were paid out of
the corporation's funds.
Fraud, however, may not be inferred
from a mere understatement of income, Holland v. United States,
348 U.S. at 139, or from a deficiency in tax due to an honest
- 38 mistake or poor judgment, Iley v. Commissioner, 19 T.C. 631
(1952).
Although these omissions are substantial enough to
indicate fraudulent intent, the omissions alone are not so
substantial as to unequivocally indicate fraudulent intent, and
we consider them in the context of the entire record.
Candela v.
United States, 635 F.2d 1272, 1274 (1980); Recklitis v.
Commissioner, supra at 909; Wheadon v. Commissioner, T.C. Memo.
1992-633; cf. Kramer v. Commissioner, 389 F.2d 236 (7th Cir.
1968), affg. T.C. Memo. 1966-234.
Mr. Beck believed that payment by the corporation of an
expense tied to the corporation was proper.
For example, the
corporation paid for the expenses incurred at the cabin and
deducted them as expenses related to the annual stockholders'
meeting.
The corporation owned the condominiums where Mr. Beck
and Michael resided.
The corporation paid expenses related to
the condominiums and deducted the expenses on its return.
Similarly, expenses for the vehicles used by Mr. Beck and Michael
were deducted.
The corporation paid for many of Mr. Beck's meals.
Mr. Beck
believed that the payment and deduction was proper because he
discussed the activities of the liquor store or was entertaining
customers or suppliers of the store.
The corporation paid for Mr. Beck's travel expenses to Las
Vegas.
The corporation's savings at the better exchange rate in
- 39 Las Vegas exceeded the costs of Mr. Beck's travel expenses.
Therefore, he reasoned that it was proper for the corporation to
pay for the expenses and deduct the expenses on its returns.
Although Mr. Beck was wrong about the propriety of paying
those expenses with corporate funds and deducting the expenses on
the corporate return, we do not think that the error was a result
of fraudulent intent to evade tax.
Furthermore, Beck's Liquors underreported its cost of goods
sold by $39,004 on its 1992 return.
A taxpayer intending to
fraudulently evade tax would not understate the cost of goods
sold, particularly by such a substantial amount.
2. Failure To File a Tax Return
In the instant cases, Mr. Beck's failure to file returns for
1992 and 1993 is consistent with his belief that his gross income
was less than the minimum amount that required the filing of a
return.
Mr. Beck's failure to file does not, therefore, convince
us that such failure was due to fraud.
Dajos v. Commissioner,
T.C. Memo. 1986-330.
3. Concealment of Bank Accounts From Internal Revenue
Agent, Failure To Furnish the Government With Access To His
Records, and Failure To Cooperate With Tax Authorities
There is no evidence of concealment or attempts to mislead
respondent’s agents.
Mr. Beck was cooperative and forthright
throughout respondent’s investigation.
There is no evidence of
any falsification or alteration of books and records.
Mr. Beck
- 40 did not conceal his assets or the assets of Beck's Liquors.
Mr.
Beck did not use secret accounts or fictitious nominees to hide
his sources of income.
Mr. Beck turned over to respondent all
records that he was aware of at the relevant times and thought
were pertinent to the tax returns.
4.
Failure To Keep Adequate Books and Records
Mr. Beck's failure to keep adequate books and records
resulted in large part from his failure to seek professional
bookkeeping and tax advice, his lack of bookkeeping training, and
the unusual and tragic circumstances surrounding Mrs. Beck's
death.
Mrs. Beck was killed in a car accident in July 1991.
As
Mr. Beck explains:
The years 1991-93 were years of trama [sic]. My
wife and I were in an auto accident in which we struck
a moose on the interstate. The top of our car was
taken off. My wife was driving and was decapated
[sic]. Unless someone has seen your wife and best
friend of 38 years bleed to death and die in front of
your eyes, I don't think that you could be thinking
about keeping a great set of books. She had done the
bookkeeping up to that time. * * *
On the entire record, petitioners' books and records are not
inadequate as a result of fraud.
5.
Dealing in Cash
Although Mr. Beck may have conducted many transactions in
cash, there is no indication that he tried to hide or conceal any
of these activities.
His property purchases and banking
activities were appropriately documented.
There is no evidence
- 41 that Mr. Beck attempted to structure cash purchases to avoid the
requirements for reporting cash transactions.
6. Taxpayer’s Experience and Knowledge, Especially
Knowledge of Tax Laws
In determining the presence or absence of fraud, we "must
consider the native equipment and the training and experience of
the party charged."
Iley v. Commissioner, 19 T.C. at 635.
Mr.
Beck did not consult an accountant or any other professional for
advice in preparing the returns of Beck's Liquors or his
individual returns.
He has no special training or education.
7. Taxpayer's Implausible Explanations of Conduct
Given at Trial
Mr. Beck's testimony was plausible and, we believe,
generally truthful.
At the trial of this case, he answered
questions directly and candidly and did not appear to be evasive
or deceptive.
individual.
He impressed us as a sincere, although mistaken,
We may discount testimony which we find to be
unworthy of belief, but we may not arbitrarily disregard
testimony that is credible and uncontradicted, Conti v.
Commissioner, 39 F.3d 658, 664 (6th Cir. 1994), affg. and
remanding 99 T.C. 370 (1992), and T.C. Memo. 1992-616.
8. Participation in Illegal Activities or Concealment
of an Illegal Activity
Respondent does not allege that Mr. Beck participated in any
illegal activities or that he tried to conceal an illegal
activity.
- 42 B.
Conclusion
The existence of fraud is a question of fact to be resolved
by consideration of the entire record.
Parks v. Commissioner, 94
T.C. at 660; Gajewski v. Commissioner, 67 T.C. 181, 199 (1976),
affd. without published opinion 578 F.2d 1383 (8th Cir. 1978).
We do not impute or presume fraud, and we do not find fraud on
the basis of circumstances that do no more than create a
suspicion of fraud.
(1976).
Green v. Commissioner, 66 T.C. 538, 550
Although respondent is not required to establish fraud
beyond a reasonable doubt, the "clear and convincing" standard
requires that he establish fraud by more than a preponderance of
the evidence.
Kellett v. Commissioner, 5 T.C. at 616.
Although Mr. Beck's omissions of income were substantial,
alone they do not provide clear and convincing evidence that he
intended to evade tax.
The other indicia of fraud that we have
considered are inconclusive or show a lack of fraudulent intent.
Mr. Beck's explanations for his failures to report all income
were neither implausible nor inconsistent, and the circumstances
surrounding the omissions are as consistent with innocent mistake
as with willful evasion.
What has been proved is a negligent or, at most, a willful
disregard of rules or regulations.
After examining the record,
we conclude that Mr. Beck lacked the specific intent to evade tax
that is required to find fraud.
- 43 In the absence of fraud, the period for assessing a
deficiency in tax had expired prior to the issuance of the
notices of deficiencies to Beck's Liquors for all years at issue
and to Mr. Beck for 1991.
Sec. 6501(c)(2).
Issue 4. Whether Petitioner Mr. Beck Received Constructive
Dividends From Beck's Liquors in 1992 and 1993 in the Respective
Amounts of $151,448 and $117,641
Because Mr. Beck did not file returns for 1992 and 1993, the
period for assessing a deficiency did not expire prior to the
issuance of the notice of deficiency.
Sec. 6501(c)(3).
Respondent asserts that Mr. Beck is the true owner of the stock
of Beck's Liquors and that he received constructive dividends
from the corporation in 1992 and 1993.
I.
Ownership of Stock of Beck's Liquors
Beneficial ownership rather than bare legal title is
critical in determining who is a shareholder.
Hook v.
Commissioner, 58 T.C. 267, 273 (1972); Hoffman v. Commissioner,
47 T.C. 218, 233 (1966), affd. per curiam 391 F.2d 930 (5th Cir.
1968).
A nominee theory involves the determination of the true
beneficial ownership of property.
See, e.g., Oxford Capital
Corp. v. United States, 211 F.3d 280, 284 (5th Cir. 2000).
Nominees, guardians, agents, and custodians are not recognized as
taxable entities.
W & W Fertilizer Corp. v. United States, 208
Ct. Cl. 443, 527 F.2d 621, 627 (1975).
- 44 The following factors are generally considered in
determining nominee status: (a) No consideration or inadequate
consideration paid by the nominee; (b) property placed in the
name of the nominee in anticipation of a suit or occurrence of
liabilities while the transferor continues to exercise control
over the property; (c) close relationship between transferor and
the nominee; (d) failure to record conveyance; (e) retention of
possession by the transferor; and (f) continued enjoyment by the
transferor of benefits of the transferred property.
United
States v. Miller Bros. Constr. Co., 505 F.2d 1031 (10th Cir.
1974)); see also Oxford Capital Corp. v. United States, supra.
Mr. Beck testified:
stock.
"My son and my daughter owned the
My son said he didn't own the stock.
course, is a private family affair.
But this, of
When I am gone, the children
are going to own that store without any hassle.
So the stock was
transferred to the children back in the '80s."
Further, he
testified that Michael "will own the business, half of it, when
the time comes."
The record in these cases establishes that, although the
stock was originally titled in Mrs. Beck's name, Mr. and Mrs.
Beck equally owned and controlled the stock in Beck's Liquors.
After Mrs. Beck died, Mr. Beck alone controlled and owned the
stock.
Neither Mr. Beck nor Mrs. Beck intended for Michael and
Michelle to own the stock during the parents' lifetimes.
We find
- 45 that Mr. Beck was the sole shareholder of Beck's Liquors during
the years at issue.
II.
Constructive Dividends
Section 61(a) defines gross income to include "all income
from whatever source derived," including receipt of a dividend.
Sec. 61(a)(7).
A dividend is "any distribution of property made
by a corporation to its shareholders" to the extent of its
earnings and profits.7
Sec. 316(a).
"When a corporation confers
an economic benefit upon a shareholder, in his capacity as such,
without an expectation of reimbursement, that economic benefit
becomes a constructive dividend, taxable to the respective
shareholder."
Loftin & Woodard, Inc. v. United States, 577 F.2d
1206, 1214 (5th Cir. 1978); see also Magnon v. Commissioner, 73
T.C. 980, 993-994 (1980).
Respondent determined that the following payments by Beck's
Liquors were constructive dividends to Mr. Beck:
Diverted corporate income
Condo association fees
Insurance-condos, vehicles
Credit card--personal expenses
Auto expense/repairs
Miscellaneous
Advertising/personal ticket use
7
1992
$115,133
1,014
1,866
14,993
7,294
378
200
1993
$84,782
980
1,830
16,193
4,679
254
200
Neither party argued that Beck's Liquors had insufficient
earnings and profits for the distributions to be treated as
dividends.
- 46 Condo utilities
Other personal expenses
Property taxes
Annual meeting expense
Total
A.
1,398
5,239
1,750
2,183
151,448
1,580
2,221
3,296
1,626
117,641
Diverted Corporate Income
The diverted corporate income is the gross receipts omitted
from the corporate returns for each year determined as follows:
State Bank deposits
Cash payments
Nonincome items
Total gross receipts
Reported on return
Unreported gross receipts
1992
$1,475,700
101,305
(335,616)
1,241,389
1,126,256
115,133
1993
$1,554,350
75,487
(391,143)
1,238,694
1,153,912
84,782
The State Bank deposit amounts were the amounts deposited
into the corporation's State Bank account.
There is no evidence
that those amounts were distributed to Mr. Beck or to either of
his children.
We hold that those amounts are not constructive
dividends to Mr. Beck.
The cash payments include the following:
Cash payments
Cash expenses--till
Wage--till
Gambling losses
Norwest Bank
Loan payments
Purchase of ring
Purchase of car
Merrill Lynch
Deposit subsequent year
Total cash payments
1992
$3,632
18,002
15,700
2,316
35,000
10,655
9,400
6,600
–101,305
1993
$1,709
2,382
–4,026
44,000
–––23,370
75,487
- 47 The amount of cash that was not reported by the corporation
that is attributable to cash taken from the till to cash employee
checks and to pay for expenses was not cash distributed to Mr.
Beck and is not a constructive dividend to him.
Mr. Beck did not have gambling losses during the years at
issue.
Rather, he had gambling winnings of $8,300 in 1992 and
$12,000 in 1993.
as income.
Mr. Beck did not report the gambling winnings
Although the winnings are not constructive dividends,
they are income to Mr. Beck that is to be included in his income
for the years at issue.
We have found that the cash winnings
represent a source of cash, and the cash payments should be
reduced by $8,300 in 1992 and $12,000 in 1993.
The $6,600 was deposited into the corporation's Merrill
Lynch account in 1992; Mr. Beck did not receive the money, and it
is not a constructive dividend to him.
Similarly, the Norwest
account is the corporation's account, and the cash deposited into
that account is not a constructive dividend to Mr. Beck.
The
$23,370 received at the end of 1993 and deposited into the State
Bank account in January 1994 also is not a constructive dividend
to Mr. Beck.
Mr. Beck asserts that the $10,655 paid in 1992 for the ring
was a cash loan to him, that the $9,400 paid in 1992 for the car
was a cash loan to Michael, and that the loan payments of $35,000
in 1992 and $44,000 in 1993 were cash loans to Michelle.
Mr.
- 48 Beck has failed to prove that it is more likely than not that
these items were loans.
There are no loan documents, and there
is no evidence that Mr. Beck, Michael, or Michelle ever intended
to repay the corporation for the payments.
Those amounts are
dividends to Mr. Beck.
B.
Remaining Expenses
Respondent asserts that the remaining items are personal
expenses of Mr. Beck that were paid for by the corporation.
Corporate shareholders who use corporate property for
personal purposes or for whom the corporation pays personal
expenses are charged with additional distributions from the
corporation, taxable to them as constructive dividends to the
extent of the corporation's earnings and profits.
Melvin v.
Commissioner, 88 T.C. 63, 79 (1987), affd. per curiam 894 F.2d
1072 (9th Cir. 1990); Challenge Manufacturing Co. v.
Commissioner, 37 T.C. 650, 663 (1962).
When a corporation has
made such a transfer to a member of the shareholder's family, the
shareholder has enjoyed the use of such property no less than if
it had been distributed to him directly.
Byers v. Commissioner,
199 F.2d 273 (8th Cir. 1952), affg. a Memorandum Opinion of this
Court.
If a corporation provides property for or pays personal
expenses of employees in their capacity as such, the employees
are charged with additional income in the form of constructive
- 49 wages or salary.
Sec. 61(a)(1).
Whether personal use of
corporate property constitutes constructive dividends or
constructive wages is a question of fact.
Loftin & Woodard, Inc.
v. United States, 557 F.2d at 1242; Goldstein v. Commissioner,
298 F.2d 562, 566 (9th Cir. 1962), affg. T.C. Memo. 1960-276.
Whether amounts are paid as compensation turns on the
factual determination of whether the payor intends at the time
that the payment is made to compensate the recipient for services
performed.
See Whitcomb v. Commissioner, 733 F.2d 191, 194 (1st
Cir. 1984), affg. 81 T.C. 505 (1983); Neonatology Associates,
P.A. v. Commissioner, 115 T.C. 43, 92 (2000); King's Ct. Mobile
Home Park, Inc. v. Commissioner, 98 T.C. at 514-515; Paula
Constr. Co. v. Commissioner, 58 T.C. 1055, 1058-1059 (1972),
affd. without published opinion 474 F.2d 1345 (5th Cir. 1973).
In lieu of wages, Beck's Liquors paid the real estate taxes
on the condominium in which Michael resided, the insurance on the
Topaz, and the premium on Michael's life insurance policy.
For
the occasional work Michelle performed for the store, Beck's
Liquors paid for the insurance on the Buick she drove.
payments are not constructive dividends to Mr. Beck.
Those
- 50 With respect to the remaining items, they are personal
expenses of Mr. Beck that were paid for by the corporation; they
are dividends taxable to Mr. Beck in the year of payment.
To reflect the foregoing,
Decisions will be entered
for petitioners in docket Nos.
12215-99 and 12217-99.
Decision will be entered
under Rule 155 in docket No.
12216-99.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.