DocketNumber: Docket No. 24265-12
Citation Numbers: 2017 T.C. Memo. 31, 2017 Tax Ct. Memo LEXIS 28
Judges: PUGH
Filed Date: 2/8/2017
Status: Non-Precedential
Modified Date: 11/20/2020
Decision will be entered under
PUGH,
2003 | $808,253 | $606,190 |
2004 | 763,703 | 572,777 |
2005 | 486,799 | 365,046 |
Petitioners conceded their tax liabilities as determined by respondent for 2003 and 2004. Respondent conceded that petitioners do not have a tax liability for 2005 and are not liable for any penalties under
Some of the facts have been stipulated and are so found. The stipulation of facts and the accompanying exhibits are incorporated herein by this reference. Petitioners resided in Montana at the time their petition was timely filed. Petitioners married in 1987. They separated for the last time in January 20032017 Tax Ct. Memo LEXIS 28">*29 and *33 divorced in 2009. Throughout their marriage, including for the years in issue, they filed joint returns. Mrs. Smaaland has an associate's degree in interior design and worked primarily in that field. Before and during the years in issue D.J. Young assisted petitioners in using a web of entities to conduct business, including Mrs. Smaaland's interior design business; to own real estate in Montana; and to hold assets in various accounts. Because the remaining dispute between the parties turns on Mrs. Smaaland's knowledge of, and/or involvement in, certain transactions giving rise to petitioners' tax deficiencies for the years in issue, we review them in detail.
In 1998 Mr. Young formed Inside Elegance, LLC (Inside Elegance), for Mrs. Smaaland. Mrs. Smaaland was its operating manager and president and held a 5% interest. Cambridge Fund, a Nevada trust created by Mr. Young, held the remaining 95% interest. Inside Elegance began operations in 1999 in Montana in the areas of new home development and interior design.
In 1999 Mr. Young formed and incorporated Allied Administrators, Ltd. (Allied Administrators), in Nevada. Also in 19992017 Tax Ct. Memo LEXIS 28">*30 Mr. Young created Big Sky Land Trust with Allied Administrators as its trustee. Both petitioners had signature authority on Big Sky Land Trust's account at First Interstate Bank in *34 Bozeman, Montana. In 1999 Big Sky Land Trust purchased property in Bozeman, Montana (Wildrose Lane property), that petitioners used as their personal residence. In 2000 Mrs. Smaaland became Allied Administrators' registered agent in Montana. In 2001 Allied Administrators was appointed trustee for Cambridge Fund.
Petitioners held an interest in funds in a T.D. Waterhouse Investor Services, Inc. account (T.D. Waterhouse account) for Rothburg Group, a trust in Nevis, West Indies, and an interest in funds held in a Bank of Nevis account (Bank of Nevis account) for Rothburg Group and Century Trust Co. Ltd. (Century Trust). Reinhold Sommerstedt and Century Trust were cotrustees of Rothburg Group. Petitioners were involved in business activities with Mr. Sommerstedt during the years in issue. Mrs. Smaaland knew about the T.D. Waterhouse account and knew that transfers, including to accounts for which she had signature authority, were used to fund certain property acquisitions as described below. She kept petitioners'2017 Tax Ct. Memo LEXIS 28">*31 checkbook and provided records to petitioners' tax return preparer although Mr. Smaaland handled the relationship with the return preparer.
In December 2002 petitioners sold the Wildrose Lane property for $1,169,000 through Allied Administrators, as trustee for Big Sky Land Trust. Gross proceeds of $1,169,321 were sent from Allied Administrators to the Bank of *35 Nevis account. Petitioners negotiated the sale and signed various documents relating to the listing and negotiations, and they received $20,000 in earnest money for the sale.
In December 2002 petitioners purchased another property in Bozeman, Montana (Peace Pipe property), for $425,500 through Allied Administrators as trustee of Big Sky Land Trust. They paid earnest money of $10,000 with two checks (one signed by each of them) drawn on Big Sky Land Trust's First Interstate Bank account, and $414,500 came from the Century Trust account at the Bank of Nevis.2 Mr. Young, as president of Allied Administrators, signed the settlement statement and the closing instructions for the purchase, but petitioners were involved in negotiating the purchase price and signing various other documents to effect the purchase. Petitioners (who continued2017 Tax Ct. Memo LEXIS 28">*32 to live together at times after their separation in 2003) then used the Peace Pipe property as their personal residence throughout 2003 and 2004.
Adellyne Enterprises, Inc. (Adellyne Enterprises), was incorporated in Montana in September 2003. Mr. Smaaland was the sole owner of Adellyne Enterprises, and Mrs. Smaaland was its president and chief executive officer (CEO). *36 On November 25, 2003, Rothburg Group wired $1,640,000 from the Century Trust account at the Bank of Nevis to Security Title Co.'s account at First Security Bank in Bozeman, Montana, for Mr. Smaaland's benefit. On or about that same day Adellyne Enterprises used $1,440,000 of these funds to purchase the Budget Rent-A-Car franchise in Bozeman, Montana. During the years in issue Adellyne Enterprises did business as Budget Rent-A-Car in Bozeman, Montana. Mrs. Smaaland was president and CEO of Adellyne Enterprises and a signatory on its bank accounts. She assisted with office work and hiring, and wrote and signed checks for the company. In 2003 and 2004 Adellyne Enterprises reported losses of $1,907,312 and $153,367, respectively, which also were reported on petitioners' joint income tax returns for those years. Mrs. Smaaland2017 Tax Ct. Memo LEXIS 28">*33 began receiving a salary for "helping" with Adellyne Enterprises, after a business manager quit in 2005. A Form W-2, Wage and Tax Statement, attached to the 2004 joint Form 1040, U.S. Individual Income Tax Return, reported that Adellyne Enterprises paid wages to Mrs. Smaaland of $1,278 for the year. (No Form W-2 was attached to the 2003 or 2005 return admitted into evidence.)
Big Sky Design & Development, LLC, was formed in Montana in April 2004 with Mrs. Smaaland as its registered agent. Wildrose Investment Corp. (Wildrose Investment) was incorporated in Montana in April 2004 with Mrs. *37 Smaaland as its registered agent and sole owner, and the signatory on its checking account. In April 2004, Allied Administrators, as trustee for Big Sky Land Trust, conveyed the Peace Pipe property to Mrs. Smaaland by quit claim deed. Mrs. Smaaland did not report her receipt of this property on petitioners' 2004 Form 1040.
In April 2004 Bank of Nevis wired $1,046,664 for Rothburg Group to Heritage Bank in Bozeman, Montana, for Wildrose Investment's and Mrs. Smaaland's benefit. That same month, Mrs. Smaaland purchased another residence in Bozeman, Montana (Chapman Road property), with a $5,000 check drawn2017 Tax Ct. Memo LEXIS 28">*34 on the Big Sky Land Trust account at First Interstate Bank and $720,000 in cash. Originally Big Sky Land Trust was identified on the buy-sell agreement as the buyer of the Chapman Road property, but an addendum changed the agreement to show Mrs. Smaaland as the sole buyer. Petitioners then used this property as their residence. In May 2004 Wildrose Investment used $115,530 from its Heritage Bank account to purchase a condominium in Gallatin County, Montana (Trakker Condo). Mrs. Smaaland signed the associated documents for the purchase. In August 2004 Wildrose Investment paid $2,500 earnest money from its Heritage Bank account to purchase a lot (West Meadow lot). Wildrose*38 Investments eventually completed the purchase of the West Meadow lot for $125,000 in January 2005.
In February 2005 Mrs. Smaaland sold the Peace Pipe property for $599,900. The sale was not reported on petitioners' 2005 Form 1040. In 2005 Adellyne Enterprises sold the Budget Rent-A-Car franchise back to Budget Rent-A-Car for $1,280,000. In November 2005 Wildrose Investment sold the Trakker Condo, receiving proceeds of $305,879. In 2009 Mrs. Smaaland was awarded the Chapman Road property and the West Meadow lot as part2017 Tax Ct. Memo LEXIS 28">*35 of petitioners' divorce settlement.
On their 2003 Form 1040 on September 22, 2004, each petitioner listed his or her occupation as self-employed, but only Mr. Smaaland reported self-employment income. Petitioners failed to report the following taxable amounts on their 2003 Form 1040: (1) ordinary dividends from the T.D. Waterhouse account of $19,747; (2) taxable interest from the T.D. Waterhouse account of $1,519; and (3) gross receipts consisting of (a) $626,219 wired from the Bank of Nevis account to the T.D. Waterhouse account in January 2003, (b) $1,640,000 wired from the Bank of Nevis account to Security Title Co. in November 2003, and (c) $1,671,000 wired from the T.D. Waterhouse account to the Bank of Nevis account *39 in November 2003.3 These adjustments resulted in a liability of $687,960 in income tax and $128,594 in self-employment tax, for a total deficiency of $808,253 (after reduction for the $8,301 shown on petitioners' return) for 2003.
Petitioners filed their 2004 Form 1040 on March 26, 2005. On the return Mrs. Smaaland reported that she received wages from Wildrose Investment of $40,590 and had a net loss of $9,898 from Four Cat Ranch (a horse2017 Tax Ct. Memo LEXIS 28">*36 boarding operation she owned). Petitioners failed to report the following taxable amounts on their 2004 Form 1040: (1) ordinary dividends from the T.D. Waterhouse account of $3,084; (2) taxable interest from the T.D. Waterhouse account of $56; and (3) gross receipts consisting of (a) $20,000 wired from the Bank of Nevis account to Big Sky Land Trust's account, (b) $1,046,664 wired from the Bank of Nevis account to Wildrose Investment, and (c) $1,084,200 wired from the T.D. Waterhouse account to the Bank of Nevis account. These adjustments resulted in a liability of $690,440 in income tax and $80,838 in self-employment tax, for a total deficiency of $763,703 (after reduction for the $7,575 shown on petitioners' return) for 2004. *40 The only issue remaining for decision is whether Mrs. Smaaland is entitled to relief under
Generally, married taxpayers may elect to file a joint Federal income tax return.
This Court has jurisdiction to review respondent's denial of Mrs. Smaaland's request for equitable relief under
(A) a joint return has been made for a taxable year; (B) on such return there is an understatement of tax attributable to erroneous items of 1 individual filing the joint return; (C) the other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement; (D) taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in2017 Tax Ct. Memo LEXIS 28">*38 tax for such taxable year attributable to such understatement; and (E) the other individual elects (in such form as the Secretary may prescribe) the benefits of this subsection not later than the date which is 2 years after the date the Secretary has begun collection activities with respect to the individual making the election * * *
The requirements of
*42
Mrs. Smaaland held interests in the accounts involved in the transactions that gave rise to petitioners' understatements for the years in issue. At the time she signed the 2003 and 2004 returns, she knew, or had reason to know, of the dividend and interest income from the T.D. Waterhouse account and of the transfers among the accounts to fund property and business acquisitions.
Mrs. Smaaland participated in transactions involving transfers between Big Sky Land Trust and the Bank of Nevis account. She had signature authority on Big Sky Land Trust's bank account as the registered agent of its trustee, Allied *43 Administrators. She bought and sold several properties using money from the T.D. Waterhouse account and the Bank of Nevis account and used these properties as her personal residence. She later acquired sole ownership of certain of these properties.
While Mrs. Smaaland claimed to have no knowledge of the transfer of $1,640,000 from the Bank of Nevis account to fund Adellyne Enterprises'2017 Tax Ct. Memo LEXIS 28">*40 purchase of the Budget Rent-A-Car franchise, at the time of the transfer she was president and CEO of Adellyne Enterprises. She assisted with office work and hiring, and wrote and signed checks for the company. Given Mrs. Smaaland's involvement with Adellyne Enterprises and her ownership interest in the account that funded the franchise acquisition, her professed lack of knowledge as to the funds used to acquire the franchise by the time she signed the 2003 Form 1040 is not credible.
In deciding whether a taxpayer has carried her burden of proof, witness credibility is an important consideration.
We did not find Mrs. Smaaland to be a credible witness, and she offered no corroborating testimony or other evidence to support her own self-serving testimony that her involvement was low level and ministerial. Even if we accept her testimony that she did not know the specific source of funds and her2017 Tax Ct. Memo LEXIS 28">*41 involvement was minimal, she certainly knew that Adellyne Enterprises had acquired the Budget Rent-A-Car franchise with funds from somewhere. As noted above, she owned an interest in the account from which funds were transferred to make the purchase, and she was involved in other transactions funded by transfers from these accounts.
On these facts, therefore, we find that Mrs. Smaaland knew of the omitted income for 2003 and 2004, resulting in the understatements of tax for those years, before she signed the tax returns for those years. Because we conclude that Mrs. Smaaland cannot satisfy the requirements of
*45 We note that the record is unclear as to whether Mrs. Smaaland contests only the liability arising from the $1,640,000 transfer to acquire the Budget Rent A-Car franchise or all of the tax liability other than that associated with the $1,046,664 transfer to Wildrose Investment. We need not parse the record on this issue as we find ample evidence to support our conclusion that she2017 Tax Ct. Memo LEXIS 28">*42 knew of the other income giving rise to the understatement as well.
To be eligible for
Relief2017 Tax Ct. Memo LEXIS 28">*43 under
We find that Mrs. Smaaland had actual knowledge2017 Tax Ct. Memo LEXIS 28">*44 when she signed the 2003 joint tax return of the receipt of funds to buy the Budget Rent-A-Car franchise. An account held for the benefit of both petitioners funded the acquisition of the franchise; Mrs. Smaaland served as an officer of Adellyne Enterprises, which acquired and operated the franchise, and performed office work and signed checks. She admitted or stipulated involvement in other property acquisitions funded by transfers from the various accounts and admitted to general knowledge of the accounts. She offered no evidence that she lacked access to account statements or other information, including statements from the various accounts. She offered no testimony or other evidence to corroborate her self-serving testimony as to her minimal involvement and lack of knowledge. As *48 noted above, we did not find her testimony credible, and do not find it sufficient to overcome the other evidence that supports our finding that she had actual knowledge of the receipt of funds to acquire the franchise, the dividend and interest income earned on the accounts in which she held an interest in 2003 and 2004, and the other disputed fund transfers in those years, as described above.
If relief is not available to a requesting spouse under
The2017 Tax Ct. Memo LEXIS 28">*46 revenue procedure lists seven threshold conditions, all of which a spouse must meet to qualify for relief under
Mrs. Smaaland urges us to attribute to Mr. Smaaland all but the tax liability arising from the $1,046,664 transfer to Wildrose Investment, citing in support
To reflect the foregoing,
1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended and in effect at all relevant times. Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.↩
2. The record does not identify the source of the remaining $1,000.↩
3. The stipulation of facts does not explain whether or how any of these amounts were offset in the calculation of petitioners' liability.↩
Kathryn Cheshire v. Commissioner of Internal Revenue , 282 F.3d 326 ( 2002 )
Emilia R. Pietromonaco v. Commissioner Internal Revenue ... , 3 F.3d 1342 ( 1993 )
Pullins v. Comm'r , 136 T.C. 432 ( 2011 )
Porter v. Comm'r , 132 T.C. 203 ( 2009 )
Tokarski v. Commissioner , 87 T.C. 74 ( 1986 )