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BURIEN NISSAN, INC., ET AL., BURIEN NISSAN, INC. v. COMMISSIONERNo. 9519-98; No. 12341-98; No. 11536-99; No. 16916-99
United States Tax Court T.C. Memo 2001-116; 2001 Tax Ct. Memo LEXIS 142; 81 T.C.M. 1624;May 14, 2001, Filed2001 Tax Ct. Memo LEXIS 142">*142 Decision will be entered for respondent in docket No. 11536-99.
J. Patrick Quinn, for petitioners.Roy Wulf , for respondent.Ruwe, Robert P.RUWEMEMORANDUM FINDINGS OF FACT AND OPINION
RUWE, JUDGE: Respondent determined deficiencies and accuracy-related penalties for Burien Nissan, Inc. (Burien Nissan), as follows:
Accuracy-related Penalty Docket No. Year Deficiency Sec. 6662(a) 9519-98 1994 $ 9,842 $ 1,792.00 16916-99 1995 37,626 7,525.20 16916-99 1996 20,371 4,074.20 Respondent determined deficiencies and accuracy-related penalties for Donald W. Johnston and Jacque C. Johnston, Deceased (the Johnstons), as follows:
Accuracy-related Penalsy Docket No. Year Deficiency Sec. 6662(a) 12341-98 1994 $ 71,837 $ 14,367 11536-99 1995 116,984 23,397 2001 Tax Ct. Memo LEXIS 142">*144 FINDINGS OF FACT 2001 Tax Ct. Memo LEXIS 142">*145 Burien Nissan's mailing address was in Seattle, Washington, at the time of the filing of its petitions. At the time the Johnstons filed their petitions, their mailing address was in Tumwater, Washington.
Mr. Johnston has over 40 years of experience in the automobile industry, and he has owned interests in six automobile dealerships. Mrs. Johnston died in 1995.
THE 1990 SALE OF BURIEN NISSAN
As of May 24, 1990, Mr. Johnston and Gary McLaughlin owned all the issued and outstanding shares of Burien Nissan. Mr. Johnston owned 96,000 shares or 80 percent of the issued and outstanding shares of Burien Nissan. His basis in those shares as of May 24, 1990, was $ 484,080. Mr. McLaughlin owned 24,000 shares or 20 percent of the issued and outstanding shares of Burien Nissan. Mr. McLaughlin is Mr. Johnston's son-in-law.
On May 25, 1990, Mr. Johnston and Mr. McLaughlin entered into a stock purchase agreement (1990 stock purchase agreement) with Gerald Buchner, Kenneth Stanford, Herbert Whitehead, and Patrick Watson (purchasers). The 1990 stock purchase agreement provided that Mr. Johnston would sell 34,800 shares of Burien Nissan to the purchasers for $ 121,327 2001 Tax Ct. Memo LEXIS 142">*146 would sell his entire 24,000 shares in Burien Nissan for $ 83,673.
OPTION CLOSING
The 1990 stock purchase agreement provided an option for Burien Nissan to purchase Mr. Johnston's remaining 61,200 shares for $ 215,000. 2001 Tax Ct. Memo LEXIS 142">*147 Burien Nissan breached its obligation to pay for the 61,200 shares, and the option closing never occurred. 2001 Tax Ct. Memo LEXIS 142">*148
BREACH OF THE 1990 STOCK PURCHASE AGREEMENT
Burien Nissan breached its obligation under the 1990 stock purchase agreement. In the event of a breach, Mr. Johnston's sole remedy under the 1990 stock purchase agreement was to force a sale of all outstanding Burien Nissan shares to a third party. Mr. Johnston wrote a letter dated October 14, 1993, putting the purchasers and Burien Nissan on notice that they had breached the 1990 stock purchase agreement.
RESTRUCTURED SALE
On December 13, 1993, Burien Nissan, Mr. Johnston, Mr. McLaughlin, and the purchasers entered into an addendum to the 19902001 Tax Ct. Memo LEXIS 142">*149 stock purchase agreement (1993 addendum) and a contract entitled "Supplement to Agreement" (1993 supplement). Under the terms of the 1993 addendum, Burien Nissan was to redeem Mr. Johnston's capital stock for $ 434,677 and pay Mr. McLaughlin $ 65,323.
Under the terms of paragraph 1.6 in the 1993 supplement, Mr. Johnston was prohibited from competing with Burien Nissan from January 15, 1994 through January 15, 1999, in a geographical area defined as "a line south of Boeing Field running east and west, west east and south King County lines". Burien Nissan was required to pay Mr. Johnston a fee totaling $ 352,503 for complying with the noncompetition agreement. Payment2001 Tax Ct. Memo LEXIS 142">*150 of the fee was to be made as follows:
60 monthly payments of $ 5,117: $ 307,020
Lump sum payment: 45,503
________
Total payments: 352,523
Mr. Whitehead called Mr. Johnston to say that there had been a $ 20 error in the computation of amount due under paragraph 1.6 of the 1993 supplement and that Burien Nissan would pay him $ 20 less in one of the checks. 2001 Tax Ct. Memo LEXIS 142">*151 Under the terms of the 1994 stock redemption agreement, Burien Nissan agreed to redeem Mr. Johnston's 61,200 shares for the sum of $ 434,677.
On January 12, 1994, Burien Nissan paid $ 434,677 to "Don Johnston Johnston Family Partnership." Mr. Johnston surrendered his remaining 61,200 shares to Burien Nissan on January 12, 1994. The Johnstons never reported receiving $ 434,677, as provided in the 1994 stock redemption agreement.
The 1994 stock redemption agreement also provided that Mr. Johnston agreed to:
sign over and cancel the outstanding promissory note payable by
Burien Nissan, Inc. in the sum of * * * ($ 479,947) * * *[
The 1994 stock redemption agreement also provided that the parties shall sign an "Agreement Termination2001 Tax Ct. Memo LEXIS 142">*152 Purchase and Sale Agreement" (termination agreement). 2001 Tax Ct. Memo LEXIS 142">*153 for $ 45,483 to Mr. Johnston. 2001 Tax Ct. Memo LEXIS 142">*154 May 25, 1990, as follows:
Sales price: $ 121,327
Cost/basis: 237,199
_________
Net long-term capital loss: (115,872)
On April 15, 1994, the Johnstons filed a second Form 1040X (second amended 1990 return) to reflect changes in the treatment of the Burien Nissan sale. 2001 Tax Ct. Memo LEXIS 142">*155
Total sales price: Less adjusted basis: 484,080 Net long-term capital loss: (164,254 n17 The basis amount reported by the Johnstons on their second amended 1990 return was their basis in all of their Burien Nissan stock.
The Johnstons applied a portion of the 1990 long-term capital loss against 1990 income and carried forward the remainder, applying it against income earned in 1991, 1992, and 1993. The Johnstons absorbed the entire remaining capital loss carryforward on their 1993 income tax return. They did not have any capital loss to carry forward to 1994.
The Johnstons filed their 1994 Federal income tax return on or about April 15, 1995. On Schedule D of their 1994 income tax return, the Johnstons reported selling Burien Nissan stock as follows:
Total sales price $ 43,818 Less adjusted basis: Net long-term capital loss: (203,063) The Johnstons had no basis in the shares of Burien Nissan2001 Tax Ct. Memo LEXIS 142">*156 they sold in 1994. The Johnstons already had applied their entire $ 484,080 basis in their Burien Nissan shares against the proceeds that they reported on their second amended 1990 return. Burien Nissan Amended Income Tax Returns
On March 4, 1998, Burien Nissan mailed Amended U.S. Corporate Income Tax Returns (Forms 1120X) for taxable years 1989, 1990, 1991, 1992, 1993, 1994, 1995, and 1996 to the Ogden Service Center. The Form 1120X for 1994 reflected a $ 74,468 increase in Burien Nissan's reported loss for the year. The increased loss was due to the following reported adjustments:
Johnston
Accrue Family
Additional Partnership
Ransopher Interest Sec. 267
Year Interest Adjustment Adjustment
____ __________ ___________ __________
1989 -- $ 1,731 --
1990 -- (65) --
1991 -- 2001 Tax Ct. Memo LEXIS 142">*157 9,045 $ (1,438)
1992 -- 4,457 (2,497)
1993 -- 5,917 29,736
1994 $ 10,000 -- 11,483
_______ ______ ______
Total 10,000 21,085 37,284
[Table continued]
Reverse Total
Employment Tax Year
Employment Award Prior Adjustment
Award Amortization Expense/
Year Adjustment Expenses (income)
____ __________ ____________ __________
1989 -- -- $ 1,731
1990 -- -- 2001 Tax Ct. Memo LEXIS 142">*158 (65)
1991 -- -- 7,607
1992 -- -- 1,960
1993 -- -- 35,653
1994 $ 9,783 $ (3,684) 27,582
______ ________ ______
Total 9,783 (3,684) 74,468
SALE OF AURORA MITSUBISHI ASSETS
Mr. Johnston owned 75 percent of the outstanding stock of Don Johnston, Inc. Mr. McLaughlin and Richard Huntoon owned 5 percent and 20 percent, respectively, of the outstanding stock of Don Johnston, Inc.Don Johnston, Inc., owned and operated a car dealership doing business as "Aurora Mitsubishi" from 1989 until the sale of the dealership.
On October 28, 1994, Matthew B. West, Inc., and Don Johnston, Inc., entered into an agreement entitled "Agreement for Sale of Assets" (aurora asset sale agreement). Mr. Johnston signed the aurora asset sale agreement as president of Don Johnston, Inc.
The aurora asset sale agreement provided, in part:
2001 Tax Ct. Memo LEXIS 142">*159 Donald Johnston, agrees to not compete with Purchaser in the new
car automobile business with regard to Mitsubishi Company
franchise from a location within King County, Washington, for a
period of five (5) years, * * * As consideration for the
noncompetition and consulting agreement, Purchaser agrees to pay
Donald W. Johnston Two Hundred Ninety Thousand Dollars
($ 290,000.00), payable on closing.
On January 5, 1995, Matthew B. West, Inc., paid Don Johnston, Inc., $ 396,181. This amount included the $ 290,000 allocated to the noncompetition agreement with Mr. Johnston. Mr. Johnston executed a bill of sale in his individual capacity,
A "Recap2001 Tax Ct. Memo LEXIS 142">*160 of Bill of Sale" (recap) provided the following allocation to the purchase:
New vehicle inventory $ 6,183)
Parts inventory 174,673
Oil & grease inventory 1,308
Furniture & fixtures 50,000
Business taxes 2,838
Work-in-process and sublet
inventories 754
Prepaid expenses 6,250
Expense of physical inventory 176
Goodwill 10,000
Covenant noncompetition
agreement 290,000
Miscellaneous obligations (201,349)
68,468
________
2001 Tax Ct. Memo LEXIS 142">*161 On January 12, 1995, Don Johnston, Inc., paid Mr. Johnston $ 200,000 and paid Wilson Ford $ 250,000.
SECTION 197 The first issue is whether Burien Nissan must amortize noncompetition agreement2001 Tax Ct. Memo LEXIS 142">*162 payments to Mr. Johnston over 15 years pursuant to
section 197 . Burien Nissan argues that the noncompetition agreement was entered into in 1990; therefore, it is not asection 197 intangible. We disagree.An "amortizable
section 197 intangible" must be amortized ratably over a 15-year period beginning with the month in which such intangible was acquired.Sec. 197(a) . An "amortizablesection 197 intangible" is anysection 197 intangible acquired by a taxpayer after August 10, 1993,Sec. 197(c)(1) . A covenant not to compete entered into in connection with an acquisition of an interest in a trade or business is asection 197 intangible. Seesec. 197(d)(1)(E) .Execution of the 1990 noncompetition agreement was contingent upon the prior occurrence of particular events. The 1990 noncompetition agreement would be executed if Burien2001 Tax Ct. Memo LEXIS 142">*163 Nissan purchased Mr. Johnston's remaining 61,200 shares for $ 215,000 in monthly installments over a 30-month period beginning in June of 1990, and Mr. Johnston transferred the shares to Burien Nissan at the option closing. In this case, the most important event that fixed the parties' obligation to enter into the covenant did not occur. Burien Nissan breached its obligation to make the required payments. Thus, under the terms of the 1990 stock purchase agreement, Mr. Johnston was not obligated to transfer his remaining 61,200 shares at an option closing. 2001 Tax Ct. Memo LEXIS 142">*164 until after the agreement was signed on December 13, 1993, which prohibited Mr. Johnston from operating an automobile dealership in a defined area starting on January 15, 1994.
Petitioners argue that the agreements executed in December 1993 and January 1994 merely amended and supplemented the 1990 stock purchase agreement. We disagree. The termination agreement executed on January 12, 1994, explicitly stated that the parties agreed that the 1990 stock purchase agreement was terminated, including but not limited to the noncompetition agreement and the purchase of Mr. Johnston's remaining 61,200 shares of stock. Moreover, the terms contained in the noncompetition agreement ratified on December 13, 1993, were different from the terms contained in the 1990 covenant. Each agreement defined different geographic zones, different time periods, and different payment amounts over different payment schedules. Thus, the later agreement did not add terms that were lacking in the previous agreement; it was a completely different agreement.
We find that the noncompetition agreement was entered into after August 10, 1993. Therefore, we hold that Burien Nissan must amortize the payments made to Mr. 2001 Tax Ct. Memo LEXIS 142">*165 Johnston for the noncompetition agreement over 15 years pursuant to
section 197 .II. OPERATING LOSS CARRYFORWARD Burien Nissan argues that its operating loss carryforward for 1994 should be adjusted because it is entitled to additional interest deductions beyond those claimed on its original Federal income tax returns.
2001 Tax Ct. Memo LEXIS 142">*166
Deductions are a matter of legislative grace, and the burden of showing the right to deductions is on the taxpayer. See
Rule 142(a) ;INDOPCO, Inc. v. Commissioner, 503 U.S. 79">503 U.S. 79 , 503 U.S. 79">84, 117 L. Ed. 2d 226">117 L. Ed. 2d 226, 112 S. Ct. 1039">112 S. Ct. 1039 (1992). The fact that a taxpayer reports a deduction on his income tax return is not sufficient to substantiate the deduction claimed on it. SeeWilkinson v. Commissioner, 71 T.C. 633">71 T.C. 633 , 71 T.C. 633">639 (1979);Roberts v. Commissioner, 62 T.C. 834">62 T.C. 834 , 62 T.C. 834">837 (1974). A tax return is merely a statement of the taxpayer's claim; it is not presumed to be correct. See id.The effect of the proffered income tax returns here is a conclusion, given without any circumstances to gauge its accuracy. No evidence was introduced to substantiate the accuracy of the deductions taken on the amended returns. A taxpayer is required to maintain records to substantiate deductions claimed on the tax return. See
sec. 6001 . Basically, Burien Nissan is relying on its own uncorroborated tax returns to substantiate claimed interest deductions in excess of interest deductions previously claimed. Burien Nissan has failed to carry its burden of proving that it is entitled to the additional interest deductions claimed2001 Tax Ct. Memo LEXIS 142">*167 in its 1994 Federal amended income tax return.Burien Nissan also argued that it was entitled to a net loss carryforward into 1995 based largely on the same reasons asserted for additional deductions for 1994. Burien Nissan has failed to meet its burden for additional deductions in 1995.
III. LUMP-SUM PAYMENT The Johnstons argue that Burien Nissan's $ 45,483 payment to Mr. Johnston on February 1, 1994, was made to him in his capacity as a partner in the Johnston Family Partnership. According to the Johnstons, the check was an interest payment on a note due to the Johnston Family Partnership; not a payment under the 1993 noncompetition agreement. Therefore, according to the Johnstons, the payment should not be included in Mr. Johnston's taxable income. We disagree.
Gross income includes compensation for services. See
sec. 61(a)(1) . We have found that "Amounts paid by a purchaser to a seller for a covenant not to compete are ordinary income to the seller since they are tantamount to payments for services."Schmitz v. Commissioner, 51 T.C. 306">51 T.C. 306 , 51 T.C. 306">313 (1968), affd. sub. nom.Throndson v. Commissioner, 457 F.2d 1022">457 F.2d 1022 (9th Cir. 1972).The promissory note from2001 Tax Ct. Memo LEXIS 142">*168 Burien Nissan to the Johnston Family Partnership was canceled on January 12, 1994, and the $ 45,483 check payable to Mr. Johnston was written on February 1, 1994. Burien Nissan did not deduct the $ 45,483 payment as interest on its original 1994 Federal income return; instead, it capitalized the payment and amortized the cost over 15 years. 2001 Tax Ct. Memo LEXIS 142">*169 that the $ 45,483 payment to Mr. Johnston on February 1, 1994, was in satisfaction of the lump-sum payment due under the 1993 supplement agreement, executed on December 13, 1993, prohibiting Mr. Johnston from competing with Burien Nissan.
We find that the $ 45,483 lump-sum payment to Mr. Johnston was paid pursuant to the noncompetition agreement. We hold that Mr. Johnston must include the payment in his 1994 taxable income.
IV. NONCOMPETITION AGREEMENT: MATTHEW B. WEST, INC. Mr. Johnston argues that he should not have to recognize $ 290,000 allocated to the covenant not to compete with Matthew B. West, Inc. The Johnstons do not dispute that the aurora asset sale agreement included Mr. Johnston's covenant not to compete or that the $ 396,936 payment from Matthew B. West on January 5, 1995, included the $ 290,000 allocated to Mr. Johnston's covenant not to compete. 2001 Tax Ct. Memo LEXIS 142">*170 then reallocate or recast the payment to Mr. Johnston individually as a return of capital rather than compensation.
2001 Tax Ct. Memo LEXIS 142">*171
Regardless of who received the income attributable to the covenant not to compete, the true earner of that income is liable for the tax on it and cannot escape that tax by assigning the income to another taxpayer. See
Lucas v. Earl, 281 U.S. 111">281 U.S. 111 , 74 L. Ed. 731">74 L. Ed. 731, 50 S. Ct. 241">50 S. Ct. 241 (1930). In the instant case, Mr. Johnston in his individual capacity, not Don Johnston, Inc., agreed to refrain from competing in the new car automobile business. Consequently, Mr. Johnston in his individual capacity must recognize the income attributable to that promise. SeeChiappetti v. Commissioner, T.C. Memo 1996-183 .The parties stipulated that the $ 396,181 payment by Matthew B. West, Inc., included $ 290,000 allocated to the noncompetition agreement with Mr. Johnston. The presidents of both Don Johnston, Inc., and Matthew B. West, Inc., signed a letter on the same day that the payment was made indicating that the purchase had been completed satisfactorily between both parties. Mr. Johnston initialed a "Recap of Bill of Sale" reflecting the allocation of $ 290,000 to the "Covenant NonCompetition Agreement". Accordingly, we find that Mr. Johnston may not challenge the tax consequences of the agreement, which2001 Tax Ct. Memo LEXIS 142">*172 he voluntarily and knowingly made. We hold that Mr. Johnston must include the $ 290,000 in his 1995 income.
V. ACCURACY-RELATED PENALTY Respondent determined that both Burien Nissan and the Johnstons were liable for an accuracy-related penalty under
section 6662(a) .Section 6662(a) imposes a penalty in an amount equal to 20 percent of the portion of the underpayment of tax attributable to a taxpayer's negligence or disregard of rules or regulations, or any substantial underpayment of income tax. Seesec. 6662(a) ,(b)(1) and(2) .Section 6662(c) provides that the term "negligence" includes any failure to make a reasonable attempt to comply with the provisions of this title, and the term "disregard" includes any careless, reckless, or intentional disregard of rules or regulations. The Commissioner's determination that a taxpayer was negligent is presumptively correct, and the burden is on the taxpayer to show lack of negligence. SeeHall v. Commissioner, 729 F.2d 632">729 F.2d 632 , 729 F.2d 632">635 (9th Cir. 1984), affg.T.C. Memo 1982-337 . We sustain respondent's determination of the accuracy-related penalty undersection 6662(a) and(b)(1) for the following reasons: Burien Nissan2001 Tax Ct. Memo LEXIS 142">*173 and the Johnstons provided no direct evidence regarding the negligence penalty to rebut the presumption of correctness, and the evidence that is in the record tends to indicate a disregard of the rules and regulations. SeeRethorst v. Commissioner, T.C. Memo 1972-222 , affd.509 F.2d 623">509 F.2d 623 (9th Cir. 1974).No accuracy-related penalty shall be imposed with respect to any portion of an underpayment if it is shown that there was reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion. See
sec. 6664(c)(1) . Burien Nissan and the Johnstons claim that a reasonable person would have taken a similar position in their income tax returns. We have already rejected Burien Nissan's explanations for deducting monthly payments to Mr. Johnston for complying with the noncompetition agreement, and Burien Nissan has conceded that it cannot deduct the cost of redeeming stock it purchased from Mr. Johnston.With regard to the Johnstons, no legal authority was provided to justify the omission of $ 45,483 in income in 1994 and $ 290,000 from income in 1995. We rejected the Johnstons' arguments as to why they failed to report these2001 Tax Ct. Memo LEXIS 142">*174 items, and the Johnstons conceded that they were not entitled to a capital loss for their 1994 sale of Burien Nissan stock.
Burien Nissan and the Johnstons also argue that the accuracy-related penalties should be waived because there was a reasonable basis for their income tax positions since they relied on the advice of a tax adviser. Reliance on professional advice does not necessarily demonstrate reasonable cause and good faith. See
sec. 1.6664-4(b)(1), Income Tax Regs. In order for a taxpayer's reliance on advice to be reasonable so as to negate asection 6662(a) accuracy-related penalty, this Court requires that the taxpayer prove by a preponderance of the evidence that the adviser was a competent professional who had sufficient expertise to justify reliance; the taxpayer gave the adviser the necessary and accurate information; and the taxpayer actually relied in good faith on the adviser's judgement. SeeNeonatology Associates v. Commissioner, 115 T.C. 43">115 T.C. 43 (2000).We are not convinced that petitioners reasonably relied on their return preparer in reporting the items in issue. The record does not contain evidence of what specific information2001 Tax Ct. Memo LEXIS 142">*175 Burien Nissan and the Johnstons gave their return preparer. Indeed, we have found that petitioners mischaracterized the key transactions in this proceeding, and there is every reason to believe that they made the same representations to their return preparer.
Accordingly, we find that petitioners have failed to prove that any portion of their underpayments was due to reasonable cause or that substantial authority existed for Burien Nissan's and the Johnstons' various tax positions. We hold that Burien Nissan and the Johnstons are liable for the accuracy-related penalties under
section 6662(a) and(b)(1) for the years in issue. Respondent also determined that Burien Nissan and the Johnstons are liable for the accuracy- related penalty for substantially underpaying their income tax liability for the years in issue undersection 6662(a) and(b)(2) . To the extent that a computation under Rule 155 indicates that a substantial underpayment of tax within the meaning ofsection 6662 exists, then we sustain respondent's determination. Of course, the 20-percent penalty undersection 6662 applies only once for each taxable year. Seesec. 1.6662-2(c), Income Tax Regs. 2001 Tax Ct. Memo LEXIS 142">*176 To reflect the foregoing and the parties' concessions,
Decisions will be entered pursuant to Rule 155 in docket Nos. 9519-98, 12341-98, and 16916-99.
Decision will be entered for respondent in docket No. 11536-99.
Footnotes
1. Cases of the following petitioners are consolidated herewith: Burien Nissan, Inc., docket No. 16916-99; and Donald W. Johnston and Jacque C. Johnston, Deceased, docket Nos. 12341-98 and 11536-99.↩
2. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule reference are to the Tax Court Rules of Practice and Procedure.↩
3. Burien Nissan deducted $ 53,500 that it paid to redeem its own stock on its 1990 and 1991 Federal income tax returns. This deduction increased the amount of Burien Nissan's net operating loss carryforward into 1994. Burien Nissan concedes that it is not entitled to deduct these payments and that the net operating loss carryforward has to be reduced accordingly.
The Johnstons concede that they are not entitled to a capital loss for their 1994 sale of Burien Nissan stock.
Respondent concedes that Burien Nissan is entitled to deduct $ 23,533 in 1994, $ 15,000 in 1995, and $ 11,250 in 1996 in connection with payments to Gerald Buchner. Respondent also concedes the $ 155,842 proposed adjustment in the Johnstons' 1994 interest income.↩
4. Burien Nissan and the Johnstons ignored
Rule 151(e)(3) , which provides, in part:In an answering or reply brief, the party shall set forth any
objections, together with the reasons therefor, to any proposed
findings of any other party, showing the numbers of the
statements to which the objections are directed; in addition,
the party may set forth alternative proposed findings of fact.
Under the circumstances, we have assumed that Burien Nissan and the Johnstons do not object to respondent's proposed findings of fact except to the extent that their statements on brief are clearly inconsistent therewith, in which event we have resolved the inconsistencies based on our understanding of the record as a whole. See
Gleave v. Commissioner, T.C. Memo 1997-276 n.3 ; see alsoEstate of Jung v. Commissioner, 101 T.C. 412">101 T.C. 412 , 101 T.C. 412">413↩ n.2 (1993).5. All amounts throughout this opinion are rounded to the nearest dollar.↩
6. These shares amounted to 51 percent of the outstanding Burien Nissan shares.↩
7. Mr. Johnston received $ 53,500 from Burien Nissan in 1990 and 1991. Mr. Johnston never reported receiving the remaining $ 161,500 ($ 161,500 + $ 53,500 = $ 215,000) from Burien Nissan pursuant to the 1990 stock purchase agreement option.↩
8. Exhibit B of the 1990 stock purchase agreement contained the 1990 noncompetition agreement between Burien Nissan and Mr. Johnston.↩
9. The 1990 noncompetition agreement provided that in the event that Burien Nissan was unable to make a single payment of $ 355,000 to Mr. Johnston, then consideration shall be paid by promissory note. The promissory note required monthly payments of $ 11,833 until the note was paid in full.↩
10. Burien Nissan negotiated a loan for $ 500,000 from Primus Financial Services, Inc. (Primus). The purpose of the Primus loan was to complete the acquisition of Burien Nissan by the purchasers.↩
11. Par. 1.6 of the 1993 supplement required 60 monthly payments of $ 5,117 (60 x $ 5,117 = $ 307,020) plus a lump sum payment of $ 45,503 ($ 307,020 + $ 45,503 = $ 352,523). However, the agreement only required a total payment of $ 352,503.↩
12. We note that par. 2 of the 1994 stock redemption agreement refers to a promissory note in the amount of $ 479,947, while the promissory note is in the stated amount of $ 479,949, a $ 2 difference.↩
13. The 1994 stock redemption agreement also provided that the parties "shall sign and enter into the Donald Johnston noncompetition agreement, which document is incorporated herein by reference." From this, we conclude that the noncompetition agreement was not effective until January 1994, when this agreement was signed and when Mr. Johnston received consideration for entering into the noncompetition agreement.↩
14. The difference between the $ 45,483 check paid on Feb. 1, 1994, and the lump-sum payment of $ 45,503 due Mr. Johnston pursuant to the 1993 supplement is $ 20. As stated earlier, the $ 20 difference is an adjustment to the payments due Mr. Johnston due to a computational error.↩
15. Norm Smith prepared all income tax returns for Burien Nissan, the Johnstons, the Johnston Family Partnership, and Don Johnston, Inc., for all years from 1988 through 1998.↩
16. The Johnstons filed their first Form 1040X amending their 1990 income tax return to reflect changes in the treatment of interest expense on Apr. 15, 1994.↩
17. The Johnstons computed their sales proceeds as follows:
↩ Proceeds reported on original return $ 121,327 Amount due to Johnston Family Partnership which had been paid to Mr. Johnston 145,000 Payments received in 1990 and 1991 53,500 Total 319,827 18. On their 1994 Federal income tax return, the Johnstons computed their original 1990 income tax return of $ 237,199 from their basis iin the 96,000 shares held on May 24, 1990 ($ 484,080). The Johnstons disregarded the second amended 1990 return filed on Apr. 15, 1994. ↩
19. He also signed the bill of sale in his capacity as president.↩
1. We note a $ 754 difference between the $ 396,935 bill of sale
recap and the $ 396,181 amount paid by Matthew B. West, Inc., on Jan.
5, 1995. Mr. Johnston initialed the recap reflecting the allocation
of $ 290,000 to the "Covenant NonCompetition Agreement."↩
20. In 1990, Wilson Ford was an automobile dealership controlled by Mr. Johnston.↩
21. See Omnibus Budget Reconciliation Act of 1993, Pub. L. 103- 66, sec. 13261(g), 107 Stat. 540, for effective date.↩
22. The option closing date was to occur within 3 days of Burien Nissan's full purchase of Mr. Johnston's 61,200 shares.↩
23. Burien Nissan also asserted that it was entitled to deduct $ 9,783 in connection with a $ 20,000 cash payment to Mr. Buchner, as claimed on its 1994 amended Federal income tax return. Burien Nissan's original returns for 1994 through 1996 reflected an amortizable payment of $ 9,783 in connection with the settlement of the law suit with Mr. Buchner. Respondent conceded that the $ 9,783 payment was deductible in 1994 and that the amortization payment should be reversed. In connection with the settlement with Mr. Buchner, Burien Nissan amortized $ 598 in 1994, $ 652 in 1995, and $ 652 in 1996. Burien Nissan incorrectly asserted that it was entitled to an amortization reversal of $ 3,684 in 1994. The correct amount of the employment award reversal is $ 598 in 1994, $ 652 in 1995, and $ 652 in 1996.↩
24. Burien Nissan asserted that it made an error on its 1994 Federal income tax return but that it filed an amended tax return for additional interest. As discussed supra, pp. 18-19, Burien Nissan has not established that it was entitled to additional interest deductions in 1994.↩
25. Although the Johnstons stipulated that Johnston, Inc., received $ 396,181 on Jan. 5, 1995, from Matthew B. West, Inc., they argue on brief that it received $ 396,936 from the sale. We cannot account for the $ 755 difference, which for our purposes, is irrelevant. We note, however, that the same $ 755 difference ($ 754 after accounting for rounding) exists between the bill of resale recap and the amount paid by Matthew B. West, Inc., on Jan. 5, 1995. See supra note 20.↩
26. The Johnstons assert that Don Johnston, Inc., borrowed $ 250,000 from Wilson Motor Co. on Nov. 9, 1992. Mr. Johnston testified that he had "funds in at Wilson Ford" and that it was his personal funds with Wilson Ford that were used to make the loan from Wilson Ford to Don Johnston, Inc. On brief, the Johnstons indicate that Wilson Motor Co. was wholly owned by Donald Johnston. We note, however, that the exhibits referenced by the Johnstons on brief do not support Mr. Johnston's assertion that he had personal money in Wilson Motor Co. and that, in turn, his personal money was used to lend Don Johnston, Inc., $ 250,000.↩
Document Info
Docket Number： No. 9519-98; No. 12341-98; No. 11536-99; No. 16916-99
Judges： "Ruwe, Robert P."
Filed Date： 5/14/2001
Precedential Status： Non-Precedential
Modified Date： 11/20/2020