DocketNumber: Docket No. 25246-95
Citation Numbers: 1997 T.C. Memo. 407, 74 T.C.M. 545, 1997 Tax Ct. Memo LEXIS 490
Judges: RUWE
Filed Date: 9/15/1997
Status: Non-Precedential
Modified Date: 4/18/2021
*490 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION *491
RUWE,
Additions to Tax | ||||
Year | Deficiency | Sec. 6653(b)(1) | Sec. 6653(b)(2) | Sec. 6661 |
1983 | $ 142,520 | $ 71,260 | 50 percent of | $ 35,630 |
the interest due | ||||
on $ 142,520 | ||||
1984 | 369,494 | 184,747 | 50 percent of | 92,374 |
the interest due | ||||
on $ 191,310 | ||||
1985 | 543,404 | 271,702 | 50 percent of | 135,086 |
the interest due | ||||
on $ 412,774 |
Additions to Tax | |||
Year | Deficiency | Sec. 6653(a)(1)(A) | Sec. 6653(a)(1)(B) |
1986 | $ 111,494 | $ 5,575 | 50 percent of the |
interest due on | |||
$ 111,494 |
*492 Respondent's determination was based on the following items: Unreported gross income; 1 disallowance of a net operating loss carryover; 2 allowance of a deduction for two-earner married couples; 3 an increase in capital gains; 4 and disallowances of various deductions for business*493 losses and expenses. 5*495 Petitioners concede the adjustments made by respondent for unreported gross income, the allowance of the two-earner deduction, and the increase to capital gains. Petitioners also concede that Mr. Streck is liable for the additions to tax under section 6653(b)(1) 6 and (2) for the taxable years 1983, 1984, and 1985, and agree with respondent that the addition to tax under section 6653(b)(2) is applicable only to the tax attributable to unreported income. Respondent concedes that Mrs. Streck is not liable for the additions to tax under section 6653(b)(1) and (2) for any of the years at issue. *494
The issues remaining for decision are: (1) Whether respondent is bound by an alleged settlement agreement for the years at issue; (2) whether petitioners are entitled to deductions for losses they claimed were sustained by Double D Ranch, Inc., an S corporation; (3) whether Mrs. Streck is entitled to innocent spouse relief pursuant to
*496 FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts is incorporated herein by this reference. At the time the petition was filed, Mr. Streck was incarcerated at FMC Lexington, Lexington, Kentucky, and Mrs. Streck resided in Cincinnati, Ohio. Petitioners were married in 1981 and remained married at the time of trial. Petitioners filed joint returns for the years in issue.
During the early 1980's, Mr. Streck owned and operated P.G.D., Inc. (P.G.D.), a company which provided trucking services. P.G.D. incurred substantial operating losses and, in early 1983, ceased operations.
During the years 1983 through 1985, Mr. Streck served as a consultant to a group of companies known as the Walsh Cos. (Walsh), which were headquartered in New Jersey. These companies provided trucking services. As a consultant for Walsh, Mr. Streck was paid $ 500 per day for his services.
While serving as a consultant, Mr. Streck diverted funds from Walsh. Respondent has determined, and petitioners concede, that Mr. Streck received gross income of $ 384,750 in 1983, $ 382,620 in 1984, and $ 825,548 in 1985 that petitioners failed to report on their joint income*497 tax returns for those years.
On June 23, 1988, Mr. Streck was indicted in the U.S. District Court of New Jersey for violations of
*498 As a result of being liable for much of the debt of P.G.D., Mr. Streck filed a debtor's petition in the U.S. Bankruptcy Court under chapter 7 of title 11 of the United States Code on October 14, 1983. On March 30, 1984, the Bankruptcy Court discharged Mr. Streck from all dischargeable debts.
During 1984, petitioners, acting through Double D Ranch, Inc., constructed a log cabin at an approximate cost of $ 494,000. Petitioners used the log cabin as their residence. During 1984 and 1985, petitioners also purchased two new 1985 Mercedes Benz automobiles, a $ 92,000 boat, and four Honda motorcycles. Also, in 1985, petitioners purchased two condominiums in Florida, one on Marco Island for $ 265,000 and upon its sale, another in Naples for approximately $ 675,000.
During the years in issue, Mrs. Streck was the sole shareholder of American Carriers, Inc. (ACI), and Mr. Streck was ACI's president. Mrs. Streck was a signatory on ACI's bank account, and she signed checks as an officer on behalf of ACI. She also participated in voting on resolutions adopted by ACI's board of directors. Mrs. Streck was also an officer of P.G.D.
On August 1, 1993, in connection with an ongoing audit by respondent, *499 petitioners submitted an Offer in Compromise (Form 656) to respondent's Appeals Officer Frank Sower with respect to their individual Federal income tax liabilities for the years 1983 through 1992 and their liability for withholding taxes attributable to Jamie Enterprises, Inc. (JEI), a corporation owned by Mrs. Streck. This offer was in the amount of $ 2,000. 9
On February 10, 1994, the original offer in compromise, dated August 1, 1993, was withdrawn by petitioners, and two revised offers were executed and submitted on Forms 656. The first Form 656 related to petitioners' individual income tax liabilities for 1983 through 1992. Petitioners offered to settle these liabilities for $ 19,000. The second Form 656 was submitted by Mr. Streck on behalf of JEI to compromise*500 its employment taxes for 1991 and 1992 for $ 1,000.
OPINION
Petitioners' primary position is that they have previously entered into a binding settlement agreement with respondent regarding the years in issue. They allege that the agreement was entered into when respondent's Appeals Officer accepted their offer in compromise prior to the issuance of the notice of deficiency. It is not clear which of the two Forms 656 relating to their individual income taxes petitioners rely on.
The settlement of disputed tax liabilities is governed by
Petitioners submitted a Form 656 to Mr. Sower on August 1, 1993. In the Form 656, petitioners offered $ 2,000 to settle their income tax liabilities for the years in issue plus certain withholding tax liabilities. Petitioners withdrew the original Form 656 on February 10, 1994, and submitted two separate offers on Forms 656 in place of the first. Each Form 656 referred to above contains a statement whereby the taxpayer-proponent agrees to waive and suspend the statutory period of limitations for assessment and collection. The Forms 656 also contain a signature line for an authorized Internal Revenue Service official to acknowledge that "I accept the waiver of statutory period of limitations for the Internal Revenue Service." Mr. Sower's signature appears under this preprinted statement on each form. By signing the Forms 656, Mr. Sower accepted petitioners' waiver of the statutory period of limitations. By signing the Forms 656 in this manner, Mr. Sower did not accept petitioners' offers.
Form 656 makes it clear that Mr. Sower's signature was not an acceptance of petitioners' offer in compromise. *502 Clause (8) of Form 656 states: The taxpayer-proponents agree to the waiver and suspension of any statutory periods of limitations for assessment and collection of the tax liability described in paragraph (1) while the offer is pending, during the time any amount offered remains unpaid and for one (1) year after the satisfaction of the terms of the offer. The offer shall be deemed pending from the date an authorized official of the Internal Revenue Service accepts taxpayer-proponents' waiver of the statutory periods of limitation and shall remain pending until an authorized official of the Internal Revenue Service formally, in writing, accepts, rejects or withdraws the offer. * * *
*503 Petitioners next argue their offer was accepted orally by Mr. Sower. While it is not clear which offer petitioners refer to, they have failed to prove that Mr. Sower said or did anything that would constitute acceptance of any offer they made.
Both parties offered testimony regarding the alleged oral agreement. Mr. Streck testified that Mr. Sower orally represented that he would accept petitioners' signed offer in compromise. Petitioners' accountant, Mr. Mancini, who was present during meetings between Mr. Streck and Mr. Sower, did not recall any oral acceptance by Mr. Sower. Mr. Sower testified that he never told Mr. Streck that he would accept an offer in compromise relating to the years in issue. Mr. Sower testified that he "did not have the authority to accept or reject offers in compromises." 11 We believe Mr. Sower's testimony. It is consistent with the plain language on the Form 656. The testimony of petitioners' accountant is consistent with Mr. Sower's. Mr. Streck, on the other hand, has a long history of dishonest, criminal behavior and lacks credibility. We find that Mr. Sower never made, or purported to make, an oral acceptance of any offer to compromise petitioners' *504 tax liabilities for the years in issue and that no settlement agreement with respect to the tax years 1983 through 1986 ever existed. 12
*505 Petitioners next argue that respondent improperly disallowed losses that they claimed from Double D Ranch, Inc., an S corporation. Petitioners deducted $ 277,582, $ 330,385, and $ 274,483 as their share of the purported losses of Double D Ranch, Inc., in 1984, 1985, and 1986, respectively. Respondent disallowed $ 200,331, $ 255,302, and $ 229,232 of those loss deductions in 1984, 1985, and 1986, respectively. These losses were disallowed because it had not been established to respondent's satisfaction that deductions taken by Double D Ranch, Inc., were ordinary and necessary business expenses or expenses incurred in an activity engaged in for the production of income. 13
*506 Respondent's determinations are presumed correct, and petitioners bear the burden of proving otherwise.
A taxpayer claiming a deduction under
The next issue is whether Mrs. Streck qualifies as an innocent spouse pursuant to
In order for Mrs. Streck to qualify for innocent spouse status, she must prove that: (1) Petitioners filed a joint tax return; (2) on that joint tax return, there was a substantial understatement of tax attributable to grossly erroneous items of the other spouse; (3) in signing the joint tax return, she did not know, nor have reason*509 to know of the substantial understatement; and (4) taking into account all the facts and circumstances, it is inequitable to hold her liable for any deficiency attributable to the substantial understatement.
*510 Under
Mrs. Streck participated in the business affairs and bookkeeping of petitioners' businesses. During the years in issue, Mrs. Streck was the sole shareholder of ACI. Mrs. Streck was a signatory on ACI's bank account, and she signed checks as an officer on behalf of ACI. She also participated in voting on resolutions adopted by the board of directors of ACI. Mrs. Streck was an officer of P.G.D., a corporation wholly owned by Mr. Streck. Mrs. Streck testified that she wrote and signed checks for all of petitioners' businesses including ACI. She also testified she made deposits to corporate bank accounts and paid invoices from corporate accounts. We find that Mrs. Streck substantially participated in petitioners' combined business affairs.
Mrs. Streck provided absolutely no evidence or argument that Mr. Streck refused to disclose information or was not forthright with her*512 regarding their financial affairs.
Family expenditures during the years in issue appear to be lavish within the meaning of
*513 These expenditures appear inconsistent with the amounts petitioners reported on their tax returns and would have alerted Mrs. Streck to the fact that there were understatements of income on petitioners' returns. 16 We find that Mrs. Streck knew or should have known that there were understatements of tax on the returns in issue.
Mrs. Streck has also failed to show that it would be inequitable to hold her jointly and severally liable for the disputed taxes. An important factor in determining whether it is inequitable to hold a spouse liable is whether that spouse significantly benefited, either directly or indirectly, from the understatement of taxes.
Mrs. Streck failed to provide any specific evidence that her lifestyle and asset acquisitions were normal support. There is no evidence of petitioners' lifestyle prior to 1983. Petitioners purchased numerous luxury items during the years in issue, including new Mercedes Benz automobiles, an expensive boat, and various residences. Petitioners' 1986 financial statement indicates that their joint net worth increased since Mr. Streck's bankruptcy. 17 The financial statement indicates that petitioners owned valuable furs and jewelry. We find that Mrs. Streck failed to show she did not significantly benefit from *515 the understatement of taxes.
The next issue concerns petitioners' liability for additions to tax under sections 6653(a) and 6661. Respondent determined that petitioners are liable for additions to tax for negligence or intentional disregard of rules or regulations under section 6653(a)(1)(A) and (B) for the taxable year 1986. As in effect during 1986, section 6653(a)(1)(A) imposed an addition to tax equal to 5 percent of the underpayment of tax where any part of the underpayment was due to negligence or disregard of rules or regulations. Section 6653(a)(1)(B) imposed an addition to tax in an amount equal to 50 percent of the interest payable under section 6601 with respect to the portion of the underpayment which was attributable to negligence.
Respondent also determined that petitioners are liable for the addition to tax for substantial understatement of income tax pursuant to section*516 6661 with respect to their 1983, 1984, and 1985 income tax returns. As in effect during 1983, 1984, and 1985, section 6661(a) imposed an addition to tax equal to 10 percent of the amount of any underpayment attributable to a substantial understatement of income tax. An understatement is defined in section 6661(b)(2)(A) as the excess of the amount of tax required to be shown on the return over the amount of tax imposed which is shown on the return. There is a substantial understatement under section 6661(b)(1)(A) if the amount of the understatement for the taxable year exceeds the greater of 10 percent of the tax required to be shown on the return or $ 5,000. All of petitioners' tax returns for the years in issue have understatements of tax in excess of the threshold.
Petitioners bear the burden of proving that the additions to tax do not apply.
1. Respondent determined that petitioners had unreported gross income of $ 384,750, $ 382,620, and $ 825,548 in 1983, 1984, and 1985, respectively.↩
2. Respondent disallowed $ 88,236 of petitioners' 1983 net operating loss carryover deduction.↩
3. Respondent allowed a deduction for two-earner married couples of $ 120 for 1983 pursuant to sec. 221.↩
4. Respondent determined an increase in petitioners' capital gains of $ 6,636 for 1983.↩
5. Respondent disallowed deductions claimed by petitioners for the following items: Business expenses in the amount of $ 42,500 for 1984; legal and professional fees in the amount of $ 16,014 for 1984; losses related to petitioners' ownership of Double D Ranch, Inc., an S corporation, in the amounts of $ 200,331, $ 255,302, and $ 229,232 for 1984, 1985, and 1986, respectively; and real estate taxes in the amount of $ 22,994 for 1985. Respondent allowed an increase in expenses related to legal and professional fees in the amount of $ 2,848 in 1985.↩
6. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
7. Petitioners appear to have raised other issues at various times in this case. We need not address these issues since they are either frivolous or were not addressed at trial or on brief by petitioners.↩
8. Subsequent to Mr. Streck's release from prison, and while he remained on probation, petitioners moved to Knoxville, Tennessee. In connection with the refinancing of a house they purchased in Knoxville, Mr. Streck prepared a false document purporting to be a release of a Federal tax lien. On July 3, 1996, in the Criminal/Circuit Court of Knox County Tennessee, Mr. Streck pleaded guilty to a theft in excess of $ 60,000 from his employer in Knoxville. On July 5, 1996, based on violations of the terms and conditions of his probation in connection with the 1988 convictions, Mr. Streck was reincarcerated.↩
9. Petitioners had a case before this Court with respect to their 1987 tax year. On Oct. 19, 1993, pursuant to an agreement by the parties, this Court entered its decision that there was no deficiency and no additions to tax with respect to the 1987 tax year.↩
10. We note that if petitioners believed that Mr. Sower's signature on the first Form 656 constituted an acceptance, it makes no sense that they withdrew the first offer in order to make an offer to pay more.↩
11. Mr. Sower did not have the authority to accept such an offer. See
12. Petitioners also argue that respondent should be estopped from rejecting their offer in compromise. The doctrine of equitable estoppel should be applied against the Government "'with utmost caution and restraint.'"
13. The only deductions that respondent allowed to Double D Ranch, Inc., were those for real estate taxes and interest. The Double D Ranch, Inc., loss amounts that respondent allowed to petitioners were computed as follows:
1984 | 1985 | 1986 | |
Total income reported by | $ 1,500 | $ 0 | $ 18,817 |
Double D Ranch, Inc. | |||
Less: | |||
Total interest paid | (71,644) | (69,590) | (58,228) |
Total real estate taxes paid | (7,107) | (5,493) | (5,840) |
Total loss allowed | ($ 77,251) | ($ 75,083) | ($ 45,251) |
14. Mrs. Streck claims that for purposes of
15. In his October debtor's petition filed in the U.S. Bankruptcy Court, Mr. Streck listed debts of $ 1,999,678 and assets of $ 548,994. A financial statement prepared by petitioners' accountant, a C.P.A., based on information received from petitioners, reflects petitioners' assets and liabilities as of Sept. 30, 1986, as follows:
Assets | |
Cash and cash equivalents | $ 36,600 |
Investments, nonmarketable | 1,408,000 |
equity securities | |
Residence | 770,000 |
Automobile | 54,500 |
Furs, jewelry, household items, | 200,000 |
etc. | |
$ 2,469,100 | |
Liabilities and Net Worth | |
Income taxes, current year | $ 500,000 |
balance | |
Notes payable, financial | 817,800 |
institutions | |
Estimated income taxes, on | 215,000 |
the difference between the | |
estimated current values of | |
assets and the estimated | |
current amounts of liabilities | |
and their tax bases | |
Net worth | 936,300 |
$ 2,469,100 |
16. On their tax returns, petitioners reported taxable income of zero in 1983, $ 66,857 in 1984 (after amendments), $ 31,561 in 1985, and $ 103,836 in 1986.↩
17. There is nothing to indicate Mrs. Streck's separate financial status prior to petitioners' financial statement as of Sept. 30, 1986.↩
William Randolph Klein v. Commissioner of Internal Revenue , 899 F.2d 1149 ( 1990 )
Richard D. Bokum, Ii, Margaret B. Bokum v. Commissioner of ... , 992 F.2d 1132 ( 1993 )
Joyce Purcell v. Commissioner of Internal Revenue , 826 F.2d 470 ( 1987 )
Howard B. Quinn and Charlotte J. Quinn v. Commissioner of ... , 524 F.2d 617 ( 1975 )
Sally A. Shea v. Commissioner of Internal Revenue , 780 F.2d 561 ( 1986 )
Frank J. Hradesky v. Commissioner of Internal Revenue , 540 F.2d 821 ( 1976 )
Pierre Boulez v. Commissioner of Internal Revenue , 810 F.2d 209 ( 1987 )
New Colonial Ice Co. v. Helvering , 54 S. Ct. 788 ( 1934 )
Welch v. Helvering , 54 S. Ct. 8 ( 1933 )
Adams v. Commissioner , 60 T.C. 300 ( 1973 )
Quinn v. Commissioner , 62 T.C. 223 ( 1974 )
Terzian v. Commissioner , 72 T.C. 1164 ( 1979 )
Bokum v. Commissioner , 94 T.C. 126 ( 1990 )