UNITED STATES TAX COURT

T.C. Memo. 1998-419

UNITED STATES TAX COURT

AMERICAN VALMAR INTERNATIONAL LTD., INC., ET AL.,1 Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos.

11776-95, 11777-95,

16318-96, 16319-96.

Filed November 19, 1998.

An individual and his wholly owned corporation

each received wire transfers of U.S. dollars from

within the former Soviet bloc of countries. Ps claim

that the wire transfers to the individual were part of

a ruble hoard accumulated before he came to the United

States and the wire transfers to the corporation were

deposits received in the corporation’s business as a

commission agent. R treated all the wire transfers as

gross income to the corporation and treated the amounts

received by the individual as distributions from the

corporation. R also disallowed certain deductions of

the corporation and imposed accuracy-related penalties

and delinquency additions.

Held: Wire transfers to corporation and some of

wire transfers to the individual are gross income to

1

The cases of the following petitioners are consolidated

herewith: Valeri Markovski, docket Nos. 11777-95 and 16319-96;

American Valmar International, Ltd., Inc., docket No. 16318-96.

- 2 corporation; held, further, P had constructive

dividend; held, further, all but one deduction

disallowed; held, further, accuracy-related penalties

sustained; held, further, delinquency addition

sustained.

Ira B. Stechel and Thomas J. Fleming, for petitioners.

Daniel O'Brien and Patrick E. Whelan, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, Judge:

These cases have been consolidated for

trial, briefing, and opinion.

By separate notices of deficiency,

respondent had determined deficiencies in, additions to, and

penalties with respect to the Federal income taxes of petitioners

Valeri Markovski (Markovski) and American Valmar International,

Ltd., Inc. (American Valmar) as follows:

Petitioner

Markovski

Year1

1991

1992

Deficiency

$248,662

499,989

American

Valmar

1991

1992

1993

814,158

1,125,466

190,569

Additions to tax

Sec. 6651(a)(1) Sec. 6662(a)

-$49,732

-99,998

$203,270

280,827

46,485

162,832

225,093

38,114

1

American Valmar's taxable year is a fiscal year ending

June 30. Markovski is an individual taxpayer whose taxable year

ends Dec. 31.

After concessions, the issues for decision with respect to

American Valmar are:

(1) Whether American Valmar had gross income on account of

receipts of $1,426,653, $1,507,440, and $32,335, during 1991,

1992, and 1993, respectively.

- 3 (2) Whether American Valmar had gross income on account of

deposits to bank accounts of its sole shareholder, Markovski.

(3) Whether American Valmar is entitled to additional

deductions for business expenses of $291,293, $104,894, and

$399,828 for 1991, 1992, and 1993, respectively.

(4) Whether American Valmar is subject to accuracy-related

penalties for 1991, 1992, and 1993.

(5) Whether American Valmar is subject to delinquency

additions for 1991, 1992, and 1993.

The issues for decision with respect to Markovski are:

(1) Whether Markovski had gross income on account of

constructive dividends of $670,547, and $1,600,000 received from

American Valmar during 1991 and 1992, respectively.

(2) Whether Markovski is subject to accuracy-related

penalties for 1991 and 1992.

Unless otherwise indicated, all section references are to

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

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

Procedure.

FINDINGS OF FACT

Introduction

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

The stipulations of fact filed by the parties, with accompanying

exhibits, are incorporated herein by this reference.

At the time

the petitions were filed, American Valmar maintained its

- 4 principal office in New York, New York, and Markovski resided in

Fort Lee, New Jersey.

Markovski

Markovski was born in Dniepepetrovsk, U.S.S.R., in 1945.

In

1989, he emigrated to the United States, and, in 1995, he became

a U.S. citizen.

Prior to emigrating to the United States, he

accumulated a substantial hoard of rubles (the ruble hoard).

The

ruble hoard was, in part, attributable to Markovski’s sale of

Soviet government securities and inherited jewelry.

American Valmar

American Valmar, a New York corporation, was organized in

1989.

Markovski is the sole shareholder of American Valmar.

During its taxable years here in issue, American Valmar was

engaged as a commission broker, purchasing goods in the United

States for export to customers located in the former Soviet

Union.

It had four customers:

Video Computer, a Moscow-based

trading company engaged in the sale of electronic goods;

Diapazon, also a Moscow-based trading company; Interrosa, a

Ukraine-based trading company; and Kond Petroleum, a company in

the oil business in Siberia.

American Valmar filed Federal

income tax returns for the years in issue.

On those returns, it

did not report gross sales and cost of goods sold.

The only

income reported by it was commission income of between 5 and

8 percent of the dollar amount of purchases made for customers.

- 5 The books and records of American Valmar reflect the receipt

of incoming wire transfers of American currency as credits to an

account denominated “accounts payable-contracts” (contracts

payable).

At year’s end, amounts expended by American Valmar for

customer purchases, otherwise disbursed at the request of

customers, or refunded to customers, together with commissions

earned, were debited to contracts payable.

Credit balances in

the contracts payable account at the end of American Valmar’s

1991, 1992, and 1993 taxable years were $1,426,653, $2,934,093,

and $2,966,428, respectively.

For each of those years, the

following table shows amounts credited to contracts payable,

debits on account of purchases made and commissions charged, and

the yearend excess of such credits over such debits:

1991

Credits to contracts

payable:

$2,365,494

Less:

Purchases:

894,134

Commissions:

44,707

Excess amount:

1,426,653

1992

1993

$3,406,539

$1,709,983

1,793,669

105,430

1,507,440

1,553,378

124,270

32,335

At the time American Valmar received funds from customers,

it did not necessarily have instructions as to how those funds

were to be used.

Funds received from customers were held in

interest-bearing accounts or used to purchase U.S. Treasury bills

until disbursed.

American Valmar retained all interest earned.

The Fort Lee Residence

On May 30, 1991, Markovski purchased a condominium apartment

in Fort Lee, New Jersey (the condominium), for $604,150.

- 6 Previously, Markovski had rented the condominium.

During 1991,

American Valmar spent at least $57,137 for improvements to and

home furnishings for the condominium.

to contracts payable.

That $57,137 was debited

Subsequently, Markovski sold the

condominium and purchased another apartment in the same building.

The improvements to the condominium and some of the furnishings

purchased for it remained in the condominium when it was sold.

American Valmar’s Bank Accounts

During the years in issue, American Valmar maintained the

following bank accounts:

Bank

Account Number

(Reference)

Chemical

136-004725

Chem. 1

Manufacturers

Hanover

134-0721145-65

ManH. 1

Markovski’s Bank Accounts

During the years in issue, Markovski maintained the

following bank accounts:

Bank

Account Number

(Reference)

Chemical

136-336213

Chem. 2

Manufacturers

Hanover

063-0647792-65

ManH. 2

Wire Transfers to American Valmar

American Valmar received wire transfers of U.S. dollars as

follows:

- 7 -

Date

Account

Amount

Originator

Identification

8/27/90

ManH. 1

$477,988

Bank of Fgn.

Econ. Affairs,

Moscow

Contract June 25,

1990, Ordering

Customer, Videocomputer, Moscow

8/27/90

ManH. 1

9,988

Bank of Fgn.

Econ. Affairs,

Moscow

Videocomputer,

Ordering Customer

12/18/90

ManH. 1

499,988

Lloyds Bank,

London England

Air Foyle Ltd.,

Luton Airport

12/24/90

ManH. 1

683,468

Bank of Fgn.

Econ. Affairs,

Moscow

Re: Videocomputer

12/26/90

Chem. 1

58,860

Bank of Fgn.

Econ. Affairs,

Moscow

Firms Invoice,

Invoice for

Supplied Equip.

1/22/91

Chem. 1

700,000

DBS Bank,

Singapore

According to

Agreement 12/28/90

1/25/91

ManH. 1

99,982

Energologila,

Kiev

Equipment Contract

Kiev, 14/20/90 Ukranian Prod.

Assoc.

6/06/91

ManH. 1

145,220

--

Ukranian Production

Associates; Contract

14 Dec 90

6/21/91

ManH. 1

140,000

--

Rem Kiev; Equipment

Contract 14-12-90

During April and May 1991, the following wire transfers of

U.S. dollars were made to Markovski's personal bank accounts:

- 8 Date

Account

Amount

Originator

Identification

4/22/91

ManH. 2

$315,591

Ykrainian

Production

Assoc.

Beneficiary American Valmar.

Equipment Contract

14-12-90

5/24/91

ManH. 2

133,800

Ykrainian

Production

Assoc.

For Equip.

Contract 14-12-90

5/31/91

ManH. 2

50,500

Bank for Fgn.

Econ. Affairs,

Moscow

Beneficiary:

American Valmar

5/23/91

Chem. 2

113,519

Bank for Fgn.

Econ. Affairs,

Moscow

By Order Interrosa

During American Valmar’s 1992 taxable year, the following

wire transfers of U.S. dollars were made from Budapest Hungary to

American Valmar's accounts:

Date

Account

Amount

Originator

10/30/91

Chem. 1

$1,700,000

Hungarian

Fgn. Trade

Bank

1/17/92

Chem. 1

1,700,000

--

In July 1991 and March 1992 the following wire transfers of

U.S. dollars were made from the former Soviet Union and Budapest,

Hungary, to Markovski's personal bank accounts:

- 9 Date

Account

Amount

Originator

Identification

7/1/91

ManH. 2

$52,730

Rem Kiev

Beneficiary American Valmar.

Equipment Contract

14-12-90

7/12/91

ManH. 2

80,200

Bank of Fgn.

Econ.

Affairs,

Moscow

Beneficiary American Valmar

Equipment Contract

14 Dec 1990

3/5/92

Chem. 2

1,600,000

Hungarian

Fgn. Trade

Bank

Order: ANSA/SZEGED

Wire Transfer to Mila Panarey

On April 2, 1993, American Valmar wired $24,500 to the

account of Mila Panarey.

Ms. Panarey is a housewife who, at the

time of the trial, lived in Philadelphia, Pennsylvania.

Ms. Panarey is the cousin of Ludmila Piker, who was a consultant

for American Valmar from 1990 through at least 1995, and who is

Markovski’s stepdaughter.

The $24,500 transmitted to

Ms. Panarey was sent pursuant to an agreement whereby Ms. Panarey

would receive the funds and immediately return them to her

cousin, Ms. Piker.

Ms. Panarey did return the funds to her

cousin.

Transfers to Manufacturer’s Hanover Bank Account

During its 1993 taxable year, American Valmar transferred

$337,000 to a Manufacturer’s Hanover bank account in the name of

Anatoly Seregin.

- 10 American Valmar’s Federal Income Tax Returns

Simon Bolonik (Bolonik) became American Valmar’s accountant

in January 1991.

Bolonik established the books and records of

American Valmar.

Based on his conversations with Markovski, he

determined the accounting and Federal income tax treatment of

American Valmar’s receipts and disbursements.

Based on what

Markovski told him, he determined the Federal income tax

treatment of amounts received by wire transfer by Markovski.

Bolonik prepared American Valmar’s and Markovski’s Federal income

tax returns.

Certificates of assessments and payments maintained by the

Internal Revenue Service for American Valmar reflect that the

income tax returns of the corporation for the fiscal years at

issue were filed as follows:

Taxpayer

Period

Date Filed

American Valmar

American Valmar

American Valmar

6/30/91

6/30/92

6/30/93

2/16/93

7/6/94

12/19/94

The income tax returns filed by American Valmar for the fiscal

years at issue bear date received stamps on their face as

follows:

Taxpayer

Period

Date Received Stamp

American Valmar

American Valmar

American Valmar

6/30/91

6/30/92

6/30/93

2/16/93

None

12/19/94

- 11 The envelopes in which the income tax returns of American Valmar

for the fiscal years in issue were mailed to the Internal Revenue

Service reflect the below-listed postmark dates:

Taxpayer

Period

Postmark Date

American Valmar

American Valmar

American Valmar

6/30/91

6/30/92

6/30/93

2/12/93

None

12/15/94

American Valmar’s income tax returns for 1991, 1992, and

1993, were received by the Internal Revenue Service on

February 16, 1993, July 6, 1994, and December 19, 1994,

respectively.

OPINION

I.

Introduction

The principal issues in this case involve the proper

characterization of various amounts received from abroad by wire

transfer into bank accounts of petitioner American Valmar

International, Ltd., Inc. (American Valmar) and its principal

shareholder, petitioner Valeri Markovski (Markovski).

Respondent

disagrees with petitioners’ claim that the amounts received by

American Valmar did not constitute items of gross income because

of American Valmar’s obligation to expend those amounts on behalf

of its clients.

Respondent also disagrees with petitioners’

claim that the amounts received by Markovski did not constitute

items of gross income because those amounts were the proceeds of

a hoard of rubles accumulated before Markovski emigrated to the

United States.

Petitioners place substantial reliance on

- 12 Markovski’s testimony, while respondent relies substantially on

circumstantial evidence that respondent claims negates much, if

not all, of Markovski’s testimony.

with either party.

We do not agree completely

We also decide a deduction issue with respect

to American Valmar and the various additions to tax and

penalties.

Petitioners bear the burden of proof.

See Rule

142(a).

II.

Wire Transfers to American Valmar

During each of its taxable years in issue, American Valmar

received substantial deposits into its bank accounts by wire

transfers from abroad (the American Valmar deposits).

The

American Valmar deposits were received principally from countries

in the former Soviet bloc.

American Valmar argues that it was a

commission broker and the American Valmar deposits did not

constitute gross income because of its obligation to disburse

those deposits as directed by its clients.

Respondent agrees

both that American Valmar was a commission broker and that

refundable deposits do not constitute items of gross income.

Respondent is unpersuaded, however, that American Valmar had any

bona fide obligation to its clients.

Respondent argues that

American Valmar’s books and records did not adequately establish

its liabilities to individual clients, and American Valmar

treated some of the funds it received as if they were its own.

Respondent adjusted American Valmar’s income by treating the

American Valmar deposits as gross receipts from sales.

- 13 Respondent increased American Valmar’s gross income for the years

in issue by the excess of the American Valmar deposits received

during a year over purchases made and commissions earned during

such year:

$1,426,653, $1,507,440, and $32,335, for 1991, 1992,

and 1993, respectively (the excess amounts).

We have found that American Valmar had four customers during

the years in issue:

Video Computer, Diapazon, Interrosa, and

Kond Petroleum (the customers).

Petitioners claim that the

customers were the source of the American Valmar deposits and

that, until expended on behalf of one of the customers or earned

as a commission by American Valmar, the American Valmar deposits

belonged to the customers.

Petitioners rely principally on the

testimony of Markovski that American Valmar had liabilities to

the customers for the unexpended balance of the American Valmar

deposits.

Although petitioners did produce some correspondence

with three of the customers, petitioners produced no written

agreements with any of them.

In its financial records, American

Valmar did credit the American Valmar deposits to contracts

payable.

Video Computer is identified on some of the wire

transfers, but none of the other customers are.

No

representative of any of the customers testified.

Petitioners explain their lack of documentary substantiation

by explaining that it was the normal business practice for

business entities located in the former Soviet Union to deposit

funds with foreign businesses without documentary evidence.

- 14 Based on the testimony of petitioners' expert, Yakov M.

Balakhovsky, an attorney experienced with Russian and Soviet law,

petitioners claim the following:

Russian businesses, as a matter of custom and

practice, during the taxable years in issue

herein, would deposit funds abroad due to their

inability to open foreign bank accounts, as well

as the absence of a private banking system in the

U.S.S.R. and rampant economic, political and

social turmoil in the U.S.S.R.

[L]ittle formal documentation or other legal niceties

would accompany such deposits * * * because of the

embryonic nature of the Soviet commercial law, the

absence of skilled lawyers, and the inability to

enforce contractual obligations through government

legal channels, due to endemic corruption and the

systemic hostility of the Soviet state towards

entrepreneurial activity.

Respondent did not challenge petitioners' expert's testimony, and

we accept his opinions and find accordingly.

Respondent made a common response to many of petitioners’

proposed findings of fact with respect to the existence of the

customers and American Valmar’s obligations to them:

“Objection

to the proposed finding of fact in that it is based upon the

uncorroborated, self-serving testimony of Valeri Markovski.”

It

is undoubtedly true that many of petitioners’ proposed findings

of fact are uncorroborated and self-serving.

not necessarily mean that they are false.

That, however, does

Respondent also

adverts to the paucity of American Valmar’s records and certain

seeming inconsistencies in those records as grounds for rejecting

all of American Valmar’s allegations.

We have examined the

records and are unconvinced that either their minimal extent or

- 15 seeming inconsistencies prove that the customers did not exist or

that American Valmar had no obligation to them.

Indeed, we find

respondent’s wholesale rejection of petitioners’ proof, even as

to the existence of the customers, inconsistent with respondent’s

requiring American Valmar to include in gross income for each

year only the excess of the American Valmar deposits received

over purchases made and commissions earned during such year.

Petitioners rely principally on Markovski’s testimony, which

is uncorroborated, they say, because of business conditions in

the former Soviet Union.

We give petitioners the benefit of the

doubt with respect to business conditions in the former Soviet

Union.

Nevertheless, in some respects we found Mr. Markovski

credible and in some we did not.

American Valmar spent at least

$57,137 for home furnishings delivered to a condominium apartment

(the condominium) that Markovski owned and in which he lived.

That amount was charged to contracts payable, and Markovski

testified that the expenditure was made at the direction of

Diapazon to outfit a bedroom as living space and office for

Diapazon employees visiting the United States.

After supposedly

outfitting the condominium for Diapazon, Markovski sold the

condominium, with many of the improvements left behind.

Petitioners have not explained what happened to Diapazon’s

interest in the condominium.

We did not find Markovski’s

testimony, or the testimony of his wife, Lina, credible with

respect to the condominium transaction.

Also, we did not find

- 16 credible Markovski’s testimony with respect to the wire transfer

to Mila Panarey of $24,500.

That sum was received pursuant to an

agreement that Ms. Panarey would turn the sum over to Ludmila

Piker, her cousin.

Ludmila Piker had been a consultant to

American Valmar and was Markovski’s stepdaughter.

Markovski

testified that he knew nothing of that transaction other than

that he had been instructed by a customer, Interrosa, to wire the

money to Ms. Panarey.

He also testified that the $24,500 never

came back to American Valmar.

Since we found Markovski’s testimony to be unconvincing with

respect to both the apartment transaction and the Mila Panarey

wire transfer, we think it a fair assumption that Markovski (or

American Valmar) benefited from both transactions.

In the

apartment transaction, it was his living quarters that were

improved; with respect to the Mila Panarey wire transfer, it was

Markovski’s step-daughter who ended up with the money.

In both

cases, the expenditures were charged to the contracts payable

account.

We find that Markovski benefited from both

transactions; we therefore question his assertion that the

American Valmar deposits, accounted for by the contracts payable

account, were held under an obligation to use them solely for the

benefit of the customers.

Petitioners have failed to convince us

of that fact and, on that basis, we sustain respondent’s

adjustment with respect to the American Valmar deposits.

- 17 III.

American Valmar Additional Deductions

As stated, respondent increased American Valmar’s gross

income for the years in issue by the excess of the American

Valmar deposits received during a year over purchases made and

commissions earned during such year.

Respondent disallowed

certain of American Valmar’s claims of purchases made on behalf

of customers as follows:

$338,793, $104,894, and $449,828 for

1991, 1992, and 1993, respectively.

Respondent has conceded

$47,500 of the purchases disallowed for 1991 and $50,000 of the

purchases disallowed for 1993, leaving at issue $291,293,

$104,894, and $399,828 for 1991, 1992, and 1993, respectively.

Although petitioners claim on brief that additional amounts of

purchases were conceded by respondent, they have failed to prove

any additional concessions.

Apparently believing that all other

disallowed purchases have been conceded, petitioners address only

$361,500 of the remaining 1993 disallowance of $399,828.

Petitioners first claim that $337,000 of funds attributable

to Interrosa was disbursed during American Valmar’s 1993 taxable

year to a Manufacturer’s Hanover bank account in the name of

Anatoli Seregin, an officer of Interrosa.

The parties have

stipulated transfers in that amount during that year to that bank

in that name (the transfer).

In evidence is correspondence

purporting to be from Interrosa and authorizing American Valmar

to open an account in the name of Anatoli Seregin.

Respondent

offers nothing to rebut petitioners’ proposed finding that the

- 18 transfer was a disbursement of Interrosa’s funds other than the

claim that the proposed finding “is based on the self-serving

testimony of Valeri Markovski.”

Although we have doubts about

some aspects of Markovski’s testimony, there was nothing

suspicious about his testimony concerning the transfer.

American

Valmar has carried its burden of proving that the transfer was a

disbursement to Interrosa, and we so find.

In his notice of

deficiency for 1993, respondent states that he is disallowing

some of the purchases claimed on the grounds that such amounts

were not for ordinary and necessary business expenses or were not

paid for the purposes designated.

We assume that the transfer is

covered by the purposes-designated-language in respondent's

notice, and, since we have found that the transfer was for the

purposes designated, we do not sustain the deficiency to the

extent it is attributable to the transfer.

Petitioners' second claim relates to the $24,500 wire

transfer to Mila Panarey, which they claim was a disbursement at

the direction of Interrosa.

We found Markovski’s testimony

unconvincing with respect to that transaction and conclude that

petitioners have failed to carry their burden of proving that the

Mila Panarey transfer was a disbursement at the direction of

Interrosa.

In addition to the two claims with respect to 1993,

petitioners also claim credit for the $57,137 spent with respect

- 19 to the condominium.

Petitioners have failed to prove that such

amount was disbursed at the direction of Diapazon.

Except with respect to the transfer, respondent’s

determination of a deficiency is sustained to the extent it

relates to respondent’s disallowances of purchases.

IV.

Constructive Dividends

During 1991 and 1992, Markovski received seven deposits into

his bank accounts by wire transfer from abroad (the Markovski

deposits).

Six of those deposits were made in 1991 and totaled

$746,340.

The seventh deposit was made in 1992 in the amount of

$1,600,000.

Respondent treated the Markovski deposits as if they

had been received by (and belonged to) American Valmar and had

then been distributed to Markovski with respect to his stock.

Respondent made positive adjustments to American Valmar’s income

on the basis that the Markovski deposits were items of gross

income to American Valmar.2

Respondent made positive adjustments

in Markovski’s income on the basis that the Markovski deposits

constituted constructive dividends from American Valmar.3

2

In his notices of deficiency to American Valmar, respondent

labels the adjustments to American Valmar’s income “Receipts From

Shareholder Account”. The adjustments are $613,410 and

$1,600,000 for American Valmar’s taxable years ending June 30,

1991, and 1992. Inexplicably, respondent has omitted making an

adjustment to American Valmar’s 1992 income for the Markovski

deposits in the amounts of $52,730 and $80,200 received by

Markovski on July 1 and 12, 1991, respectively.

3

The adjustment for 1991 totaled $803,477, which is $57,137

greater than the Markovski deposits received during 1991.

(continued...)

- 20 Petitioners assigned error to respondent’s adjustments, claiming

that the Markovski deposits constituted the tax free receipt of a

substantial hoard of rubles (the ruble hoard) accumulated before

Markovski emigrated to the United States.

Petitioners rely principally on Markovski’s testimony and

the testimony of Larisa Saltevskiya (Saltevskiya), a close

personal friend, to establish the existence and size of the ruble

hoard.

Petitioners also direct us to a copy of a letter from

R.B. Gevorkian, an executive of Diapazon, dated September 17,

1991 (the Gevorkian letter).

The Gevorkian letter states

Diapazon received $1,172,560 from Markovski in November 1990 and

transferred a portion of it to the Chem. 2 account in various

amounts, which include all of the Markovski deposits made in

1991.

Respondent relies principally on similarities with respect

to the source and identifying information between the Markovski

deposits and the American Valmar deposits.

Respondent

disbelieves Markovski’s and Saltevskiya’s testimony concerning

the ruble hoard, pointing out certain inconsistences in the

testimony of each.

Again, we must weigh petitioners’ less than perfect

testimonial evidence against respondent’s circumstantial

evidence.

3

We have found that Markovski accumulated the ruble

(...continued)

Apparently, the $57,137 represents the amount American Valmar

spent for home furnishings delivered to Markovski’s condominium

apartment.

- 21 hoard before he emigrated from Russia.

No purpose would be

served in going into the details of his testimony.

We have

considered the inconsistencies pointed out by respondent.

Nevertheless, respondent has no effective rebuttal to much of

Markovski’s narrative of his activities and family history in

Russia.

We believe that Markovski did accumulate some

substantial amount of wealth before he emigrated to the United

States.

Whether the Markovski deposits comprised all or part of

the ruble hoard is another question.

Petitioners offered no good

explanation for the similarities between the Markovski deposits

and the American Valmar deposits.

A similar notation--for

equipment contract 14-12-90--accompanies four of the 1991

Markovski deposits, those of April 22, May 24, July 1, and

July 12, 1991, in the amounts of $315,591, $133,800, $52,730, and

$80,200, respectively, and three of the American Valmar deposits,

those of January 25, June 6, and June 21, 1991.

The May 23,

1991, Markovski deposit, in the amount of $113,519, carries the

notation:

“By order of: SV Interrousa [sic].”

The May 31,

1991, Markovski deposit, in the amount of $50,500, carries the

notation:

“Beneficiary: American Valmar, Intl Co.”

We believe

that the similarities in notation between the April 22, May 24,

July 1, and July 12, 1991, Markovski deposits and certain of the

American Valmar deposits and the notations on the May 23 and

May 31, 1991, Markovski deposits are evidence that those deposits

related to the business of American Valmar.

We accord that

- 22 evidence more weight than Markovski’s testimony that those

deposits were from his ruble hoard, and so find.

We do not find

sufficient similarities between the March 5, 1992, Markovski

deposit of $1,600,000 and any American Valmar transactions to

rebut Markovski’s testimony that that deposit was from his ruble

hoard, and we so find.

We find that the April 22, May 23, May 24, and May 31

Markovski deposits were constructively received by American

Valmar and constitute items of gross income to American Valmar

See, e.g., Truesdell v. Commissioner, 89 T.C. 1280,

for 1991.

1300 (1987) ("diverted amounts taxed to a shareholder as

constructive dividends also remain fully taxable to the

corporation to which attributable").

We see little difference

between those deposits and the ones made on July 1 and 12, 1991.

Nevertheless, since respondent has not determined any deficiency

in American Valmar’s 1992 tax on account of those deposits,4 we

shall ignore them with respect to American Valmar.

We find that

all of the April 22, May 23, May 24, May 31, July 1, and July 12,

1991, Markovski deposits were distributed to Markovski with

respect to his stock.

Since petitioners have failed to prove an

insufficiency in American Valmar’s earnings and profits, the

distributions are dividends includable in Markovski’s 1991 gross

income.

4

See secs. 301, 316.

See supra note 2.

- 23 The $57,137 that American Valmar spent for home furnishings

delivered to the condominium also constitutes a constructive

dividend to Markovski, includable in his gross 1991 income.

V.

Additions to Tax and Penalties

A.

Additions to Tax for Failure To File Return

Respondent determined additions to tax against American

Valmar for each of its years in issue under section 6651(a)(1).

Section 6651(a)(1) provides that, in the case of a failure

to file an income tax return by the due date, there shall be

imposed an addition to tax for such failure of 5 percent of the

amount of tax, reduced by timely payments and credits under

section 6651(b)(1), for each month or portion thereof during

which the failure continues, not exceeding 25 percent in the

aggregate unless such failure is due to reasonable cause and not

due to willful neglect.

Respondent determined that American

Valmar’s income tax return for 1991, due on September 16, 1991,

was 17 months delinquent and that its 1992 and 1993 income tax

returns, due (on account of extensions) on March 15, 1993 and

1994, respectively, were not filed until July 6, 1994, and

December 19, 1994, respectively.

We have found that American

Valmar’s income tax returns for 1991 through 1993 were received

by the Internal Revenue Service on February 16, 1993, July 6,

1994, and December 19, 1994, respectively.

We have done so based

on respondent’s records and the other information set forth in

our findings of fact.

Petitioners’ evidence of timely filing

- 24 consists of the testimony of Simon Bolonik (Bolonik), by whose

office the returns were filed and who testified that the returns

were mailed one week before the due dates.

Bolonik testified:

“Mr. Markovski was one of my oldest clients and I basically

remember where I put -- if I mailed it [the return] or not.

would take special care in mailing them.”

I

We found Bolonik’s

testimony inexact and unconvincing, and we accord it no weight.

Moreover, two of the returns bear postmarks well after the

relevant due date.

The returns in question were not timely

received by the Internal Revenue Service, and petitioners have

failed to satisfy the requirements of section 7502(a) that timely

mailing constitutes timely filing.

We find that the returns in

question were filed on the dates received by the Internal Revenue

Service.

The returns were, thus, not timely, and petitioners

have failed to show reasonable cause and lack of willful neglect.

Respondent’s determinations of additions to tax under section

6651(a) are sustained, adjusted only to take into account the

deficiencies redetermined by us.

B.

Accuracy-Related Penalty

Respondent determined penalties against American Valmar and

Markovski for each of their respective years in issue under

section 6662(a).

Section 6662(a) provides for the imposition of an accuracyrelated penalty equal to 20 percent of any portion of an

underpayment attributable to, among other things, any substantial

- 25 understatement of income tax.

Sec. 6662(a) and (b)(2).5

An

understatement is “substantial” when the understatement for the

taxable year exceeds the greater of (1) 10 percent of the tax

required to be shown or (2) $5,000 ($10,000 in the case of a

corporation).

Sec. 6662(d)(1)(A) and (B).

The understatement is

reduced to the extent that the taxpayer has (1) adequately

disclosed his or her position, or (2) has substantial authority

for the tax treatment of an item.

Sec. 6662(d)(2)(B).

Additionally, no penalty is imposed with respect to any portion

of an understatement as to which the taxpayer acted with

reasonable cause and in good faith.

Sec. 6664(c)(1).

Petitioners do not claim adequate disclosure on their

returns.

They do claim substantial authority.

However, in

making that claim, they refer generally to the portions of their

brief containing their arguments that neither a deposit nor a

taxpayer’s receipt of his own funds is an item of gross income

and the expenditures in question were made by American Valmar as

an agent for its clients.

We have rejected the factual basis of

petitioners’ claim, and, thus, what authority they cite is not

relevant to the facts of this case and cannot constitute

5

Respondent determined an alternative basis for the penalties

imposed by sec. 6662 on account of negligence or disregard of

rules and regulations. See sec. 6662(a) and (b). Respondent

failed to address that alternative basis on brief, so we will

assume that respondent has abandoned that alternative. See

Bernstein v. Commissioner, 22 T.C. 1146, 1152 (1954), affd. 230

F.2d 603 (2d Cir. 1956); Lime Cola Co. v. Commissioner, 22 T.C.

593, 606 (1954); Roberts v. Commissioner, T.C. Memo. 1996-225.

- 26 substantial authority.

See Antonides v. Commissioner, 91 T.C.

686, 702-703 (1988) (cases that are factually distinguishable are

not substantial authority), affd. 893 F.2d 656 (4th Cir. 1990);

see also Estate of Reinke v. Commissioner, 46 F.3d 760, 765 (8th

Cir. 1995), affg. T.C. Memo. 1993-197.

Petitioners also claim that, with respect to any

underpayment, there was reasonable cause and each acted in good

faith.

Petitioners argue that both elements, reasonable cause

and good faith, are established by Markovski’s ignorance of the

law and reliance on his tax adviser, Bolonik.

Section 1.6664-

4(b), Income Tax Regs., states:

The determination of whether a taxpayer acted with

reasonable cause and in good faith is made on a caseby-case basis, taking into account all pertinent facts

and circumstances. The most important factor is the

extent of the taxpayer’s effort to assess the

taxpayer’s proper tax liability. Circumstances that

may indicate reasonable cause and good faith include an

honest misunderstanding of fact or law that is

reasonable in light of the experience, knowledge and

education of the taxpayer. * * * Reliance on * * *

the advice of a professional (such as an appraiser,

attorney or accountant) does not necessarily

demonstrate reasonable cause and good faith. * * *

Reliance on * * * professional advice * * * constitutes

reasonable cause and good faith if, under all the

circumstances, such reliance was reasonable and the

taxpayer acted in good faith. * * *

Bolonik’s testimony clearly establishes that he both determined

the tax treatment of the American Valmar deposits and the

Markovski deposits (and related items) and prepared the

petitioners’ returns.

We can, thus, assume that the petitioners

relied on him in determining their tax liabilities.

Bolonik’s

- 27 testimony is also clear that he determined the tax treatment of

the American Valmar and Markovski deposits based on what

Markovski told him about the nature of those deposits.

With

respect to the American Valmar deposits, Bolonik testified that,

in setting up American Valmar’s books and records, he had

conversations with Markovski about the nature of the

corporation’s business and the books and records reflected those

discussions.

With respect to the Markovski deposits, Mr. Bolonik

testified that he believed that those deposits did not constitute

items of gross income during the years received based on

Markovski’s statements to him that those sums had been earned

before Markovski moved to the United States.

In substantial

part, petitioners have failed to prove their version of the facts

concerning the American Valmar and Markovski deposits.

Bolonik’s

advice, thus, was faulty, and petitioners can rely on it to

establish reasonable cause and good faith only if such reliance

was reasonable and they acted in good faith.

Reasonable cause

and good faith may be established by a showing of an honest

misunderstanding of fact.

Petitioners have failed to convince us

of what actually transpired here.

They have, thus, failed to

convince us that they honestly misunderstood any facts.

We are

not convinced--i.e, petitioners have failed to prove--that there

was reasonable cause for their underpayment and that they acted

in good faith in determining their income tax liabilities with

respect to the American Valmar and Markovski deposits.

We

- 28 sustain respondent’s determinations of penalties under section

6662 subject only to modification with respect to the

deficiencies as redetermined.

Decisions will be entered

under Rule 155.