DocketNumber: Docket Nos. 2581-78, 2582-78, 2616-78.
Citation Numbers: 40 T.C.M. 163, 1980 Tax Ct. Memo LEXIS 466, 1980 T.C. Memo. 119
Filed Date: 4/15/1980
Status: Non-Precedential
Modified Date: 11/20/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
HALL,
*469
Petitioner | Docket No. | Year | Deficiency | § 6651(a)(1) | § 6653(a) |
Raymond and | 2581-78 | 1973 | $16,875.34 | $0 | $ 843.77 |
Jean Beran | |||||
Raymond Beran | 2582-78 | 1975 | 1,814.48 | 453.62 | 90.72 |
Jean Beran | 2616-78 | 1975 | 58,215.90 | 14,553.98 | 2,910.80 |
In his amended answer, Docket No. 2582-78 (Raymond J. Beran), respondent asserts that the deficiency should be increased by $8,569.53 and that the additions to the tax under secutions 6651(a) and 6653(a) should be increased by $2,142.38 and $428.48, respectively.
Due to concessions by the parties, the issues remaining for decision are:
1. Whether petitioners correctly computed the gain on 1973 and 1975 sales of First National Bank of Belfield stock.
2. Whether petitioner, Jean Beran, is taxable on the 1975 sale of Crofton State Bank stock and, if not, whether petitioner, Raymond Beran, is taxable on that sale.
3. Whether petitioners are entitled to an interest deduction in 1973 for amounts paid on behalf of Automated Systems, Inc.
4. Whether petitioners are entitled to file a joint return for 1975.
5. Whether the addition to tax pursuant to
6. Whether the addition to tax pursuant to
FINDINGS OF FACT
Some of the facts have been stipulated by the parties and are found accordingly.
At the time they filed their petitions, Raymond J. and Jean R. Beran ("petitioners"), were residents of Grand Island, Nebraska.
Raymond Beran ("Raymond") is a business consultant. His background includes a business degree and correspondence courses in accounting, several years of employment as an accountant for various companies, employment in the computer service industry (during which time he prepared simple tax returns), and three years as president and owner of a number of banks. Jean Beran ("Jean") is a housewife.
On September 5, 1972, and August 23, 1973, Raymond acquired stock of the First National Bank of Belfield ("Belfield"), located in Belfield, North Dakota. Subsequently, Raymond sold the Belfield shares in two transactions, one occurring in late 1973, the other in 1975. In 1973 and 1975 Raymond realized gain from the sale of the Belfield stock, as follows:
*471
169 2/3 shares | 104 1/3 shares | |
purchased | purchased | |
9/5/72 | 8/23/73 | |
Sale price | $305,400 | $187,800 |
Cost of shares sold | ||
169 2/3 shares | 99,300 | |
104 1/3 shares | 186,166 | |
Gain realized | $206,100 | $ 1,634 |
50% to Raymond 3 | $103,050 | $ 817 |
Sale price | $349,000.00 |
Cost of 172 shares sold | 306,906.00 |
Gain realized | $ 42,094.00 |
50% to Raymond | $ 21,047.00 |
In January 1972 Raymond purchased a controlling interest in the Crofton State Bank ("Crofton") located in Crofton, Nebraska. A single stock certificate for 36,050 shares represented virtually all of Raymond's ownership in the bank. In March 1975 Raymond contracted to sell all of his Crofton stock for $8.50 per share to two individuals. The two sales agreements provided a closing date of July 1, 1975. The agreements further provided that their terms would be binding on the parties, their personal representatives, successors and assigns.
During 1975 the Securities and Exchange Commission ("SEC") conducted an investigation into Raymond's activities as an officer*472 and director of the First National Bank of Belfield. 4 In order to prevent any potential government interference with his interest in Crofton or the pending sale of that interest, Raymond transferred the certificate representing 36,050 shares of Crofton stock to his wife's name. Raymond unilaterally decided to transfer these shares to Jean and he told her of the transfer only after it had been completed. Neither Raymond nor his wife intended the transfer to constitute a sale and Raymond received no consideration in exchange for the transfer. Raymond also expected his wife to comply with the March sales agreements.
On April 3, 1975, Raymond substituted the new certificate issued in Jean's name as collateral for a loan from Toy National Bank which had previously been secured by the certificate in Raymond's name. Between April 3 and July 1, 1975, Jean exercised no ownership rights in the stock. On July 1, 1975, Jean transferred the 36,050 shares pursuant to the March sales agreements. The purchasers of the stock considered Raymond to be the seller*473 of these shares and they followed Raymond's instructions regarding the application of the proceeds. 5 Jean received none of the sales proceeds.
In 1970 Raymond wanted to increase an existing loan he had from the American Savings Company ("American"), located in Omaha, Nebraska. Because of Nebraska's usury laws, the bank was unwilling to advance additional funds to Raymond. The bank, however, suggested that a shell corporation could be used to avoid the undesirable aspect of the usury laws. The usury law in question did not apply to corporations. At this time Raymond owned Automated Systems, Inc. ("Automated"), a computer service corporation whose assets had been sold by Raymond in 1967.
On July 8, 1970, American offered to lend Automated $22,000, provided that Raymond guaranteed the loan. 6 The proceeds of the loan were made payable to Automated and Automated in turn lent the money to Raymond. Raymond and Jean pledged their personal property as security for the loan. 7 Both the bank records and the bank correspondence relating*474 to the loan referred to Automated as the borrower. On at least two occasions American and Automated modified the terms of the original loan. On both of these occasions Raymond approved those changes in his capacity as president of Automated. In connection with the loan to Automated, life and disability insurance was maintained on Raymond, with American named as the primary creditor beneficiary and Automated as the secondary beneficiary.
*475 Raymond personally paid the principal and interest on the Automated loan. Raymond deducted the $2,523.55 interest payments on his and his wife's 1973 joint return.
In 1975 petitioners failed to file a joint or separate return within the time prescribed by section 6072(a), as extended. Pursuant to section 6020(b), the Internal Revenue Service prepared separate substitute returns for Raymond Beran and Jean Beran. Separate notices of deficiency for 1975 were issued to Raymond and Jean on December 13, 1977.These notices computed each of their income tax liabilities using the married-filing-separate tables. Subsequent to the mailing of the notices of deficiency for 1975, petitioners mailed the Internal Revenue Service a joint return prepared by a certified public accountant which was received by the Service on February 15, 1978. Raymond and Jean filed separate petitions with respect to 1975 on March 13, 1978.
The SEC conducted an investigation into the affairs of a partnership entitled Beran, Kaminski and Associates, of which Raymond was a partner. In 1975 the partnership records were held by various parties involved in the SEC*476 investigation. 8 Petitioners claim they are entitled to partnership losses for 1975 but did not include any such losses on the joint return for 1975 filed in February 1978. By October 15, 1976, petitioners possessed all the information contained in the 1975 joint return. 9
In his statutory notice for 1973, respondent determined that petitioners had incorrectly computed gain on the sale of the Belfield stock in that they did not use the first-in, first-out ("FIFO") method in allocating their basis. Respondent also disallowed the $2,523.55 interest deduction relating to the Automated loan.
Respondent's statutory notices for 1975 are based on the substitute returns authorized by section 6020. With respect to Raymond Beran's substitute return, respondent determined that the gain on the sale of the Belfield stock should be computed using the FIFO method of basis allocation. With respect to Jean Beran's substitute return, respondent determined*477 that she had unreported short-term capital gain of $105,987 resulting from the sale of the Crofton stock. In his amended answer, respondent alternatively determined an increase in Raymond's 1975 deficiency resulting from the unreported sale of the Crofton stock.
In addition to the above deficiencies, respondent determined that additions to the tax for failure to file returns are applicable to 1975, and that additions to the tax for negligence or intentional disregard of rules and regulations are applicable in each of the three dockets.
OPINION
The first issue is the correct computation of the gain on the sale of First National Bank of Belfield ("Belfield") stock by petitioner, Raymond Beran ("Raymond") in 1973 and 1975. Raymond contends that he can adequately identify which shares of Belfield stock were sold in 1973 and 1975 and, accordingly, the actual basis of the identified shares should be used in computing his gain on those sales. Respondent, on the other hand, argues that the record contains no evidence identifying which shares were sold in 1973 and in 1975, and therefore Raymond must use the first-in, first-out ("FIFO") method in allocating*478 his basis.
*480 At trial, the parties indicated to the Court that grounds for settlement had been reached on this issue. Both parties agreed that they could use the stock certificates to trace which shares were actually sold in 1973 and which were sold in 1975. At the parties' request, the Court agreed to leave the record open for purposes of filing a supplemental stipulation which would indicate the result of tracing the stock certificates. The parties offered no evidence at trial on this issue because of the apparent settlement.
After the trial, the parties met several times to work out a stipulation but, unfortunately, these attempts failed to produce any agreement. On June 8, 1979, the parties conferred with the trial judge whereupon it was agreed that the gain on the Belfield stock would be computed on the basis of the record as submitted. The parties were invited to submit computations based on the record. Neither party requested the Court to reopen the record on this issue.Because petitioner presented no admissible evidence to meet his burden of proof, 11 we sustain respondent's determination.
*481 Raymond misreads
The second issue is whether petitioner, Jean Beran ("Jean") is taxable on the 1975 sale of Crofton State Bank ("Crofton") stock. Respondent contends that the sale of 36,050 shares of Crofton stock should be attributed to Jean because in April 1975 her husband transferred these shares to her without restriction. In other words, respondent wants to tax the legal titleholder of the shares. On the other hand, Jean contends that she was a mere nominee and, consequently, she should not be considered the owner of the Crofton stock for income tax purposes, and we agree.
The issue of who is the owner of property for income tax purposes is a question of fact which must be determined upon an examination of all the facts and circumstances.See
In the alternative, respondent contends that the sale of the Crofton stock is attributable to Raymond and that the resulting gain should be included on his 1975 tax return. Because respondent raised this issue for the first time in his amended answer, he bears the burden of proof.
*485
The third issue is whether petitioners are entitled to an interest deduction in 1973 for amounts paid on a loan obtained by Automated Systems, Inc. ("Automated"). Raymond contends that Automated is a mere nominee and should be disregarded for tax purposes. Respondent asserts that Automated should be recognized as a separate taxable entity.
As a general rule, a corporate entity will not be ignored except in unusual circumstances.
The doctrine of corporate entity fills a useful purpose*486 in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity. [Footnotes omitted.]
This Court has previously held that the avoidance of restrictions under state law constitutes a valid business purpose under the
Moreover, the facts support the legal conclusion that Automated was a separate, recognizable entity. The correspondence relating to the loan was addressed to Automated, all the bank's documents refer to Automated as the borrower, the documents pertaining to the loan were signed by Raymond in his capacity as president of Automated, and the proceeds of the loan were payable to Automated.
However, analysis does not stop there. In this case Automated did not need the money for its own use. It was a mere shell with no business activity. In fact Raymond, and not Automated, needed the money and would have borrowed it directly if he could have. Instead he had Automated borrow the money and lend it to him. Automated acted as a conduit, and to the extent we honor the reality of its loan from American Savings Company ("American") we must likewise give tax effect to the fact that Automated immediately reloaned the money on the same terms to Raymond. Respondent does not contend that this reloan should be treated as other*488 than a loan for tax purposes and we conclude that it should be so treated. Hence when Raymond directly paid American, in legal effect by discharging Automated's principal and interest liability to American, Raymond thereby satisfied and discharged his own corresponding liabilities to Automated. The reloan was apparently at the same interest rate which Automated paid American because Automated had no other source of funds with which to pay American. Whether petitioner is viewed as paying interest to Automated or directly to American, as Automated's agent, he is still entitled to the same interest deduction.
The fourth issue is whether petitioners are entitled to file a joint return for 1975.
Respondent prepared separate substitute returns pursuant to section 6020(b) for petitioners' 1975 tax year. Notices of deficiency were mailed on December 13, 1977, with respect to both of these substitute returns. On February 15, 1978, petitioners filed a joint return for 1975.
This same issue was recently before the Court in
* * * At first blush, it may appear strange that the statute would cut off a taxpayer's switching privilege at the 90-day letter stage if he goes the Tax Court route but only at the litigation*490 stage if he pays the tax and seeks a refund. However, the words of the statute clearly so provide. Had Congress intended to allow a Tax Court petitioner to switch until he files his petition, language to such effect would have been simpler to write than the provisions of
The final issues for decision relate to the applicability of various additions to the tax.
*492
The question presented is whether Raymond's failure to file a return in 1975 was due to reasonable cause. 16 Raymond contends that his failure to file a return for 1975 stems from an investigation by the SEC into the affairs of a partnership, Beran & Kaminski, Associates, in which he was a partner. Believing the partnership incurred considerable losses in 1975, Raymond wanted to incorporate his allocable share of those losses into his 1975 return. However, he was allegedly unable to obtain any partnership information because the partnership records were held by various parties involved in the SEC investigation. These parties included not*493 only the SEC itself, but also an attorny who acted as a receiver for the partnership's assets and the partnership's accountant. According to Raymond, the partnership records were still unavailable in February 1978 when he submitted his 1975 joint return.
On the basis of the record presented, we conclude that Raymond's failure to file was not due to reasonable cause. Initially, Raymond presented no evidence as to how he knew that the partnership's 1975 losses were substantial. We have no way of ascertaining whether such losses were actually incurred or te magnitude of those losses; nor do we have any basis for saying that Raymond's belief that he was entitled to large partnership losses was well-founded. Raymond did not show that he had a working knowledge of the partnership's books and records, nor did he obtain an opinion regarding the partnership's 1975 operations from the partnership's counsel or accountant.
Second, although Raymond stated that his attempts to secure partnership information were unsuccessful, he did not indicate why the information*494 was unavailable. We do not know the extent of Raymond's efforts to secure the information or the nature of the responses to his inquiries. All we know is that Raymond allegedly telephoned the SEC, the attorney acting as the partnership's receiver, and the partnership's accountant, to request the information. Without knowing the details of those alleged conversations, we cannot say that petitioner exercised ordinary business care and prudence in attempting to file a timely return. See
Finally, we have no way of determining if Raymond's continued failure to file after the extension period of October 15, 1976, was due to the SEC investigation. Raymond offered no evidence as to the length of the SEC investigation or whether the records were inaccessible during the entire course of the investigation. Clearly, it is unreasonable to assume that records which are inaccessible for one year will remain inaccessible thereafter. Yet, Raymond provided us with no information regarding the continuity of his efforts to secure the necessary information.
*495
With respect to the 1973 penalty, petitioners seek to shed their burden of proof on the grounds that respondent did not specify the acts or omissions on which he based his determination. Petitioners cite
Respondent, contrary to petitioners' argument, is not required to specify the negligent acts in the statutory notice.
To reflect the foregoing,
1. Cases of the following petitioners are consolidated herewith: Raymond J. Beran, docket no. 2582-78 and Jean R. Beran, docket no. 2616-78.↩
1a. Mr. Clare withdrew as counsel of record on November 29, 1979.↩
2. All statutory references are to the Internal Revenue Code of 1954, as in effect during the years in issue.↩
3. Raymond owned only a 50 percent interest in the Belfield stock.↩
4. This investigation eventually led to an indictment and conviction under
5. Some of the proceeds were received directly by Raymond while the remainder were paid to Raymond's creditors.↩
6. The guarantee signed by Raymond read as follows:
The Undersigned, jointly and severally, guarantee to the holder of the within note, the payment, promptly when due, of every installment thereunder, and the payment upon demand, of the entire amount owing thereon upon any default thereunder by the Maker without requiring any proceeding against the Maker. The Undersigned waive notice of acceptance hereof and of any default by Maker. The holder may, without notice to or consent of the Undersigned, enforce any rights thereunder, grant extensions of time of payment, and compromise or adjust any claims against Maker without affecting the liability of the Undersigned. ↩
7. The loan was also secured by a first lien on a 160-acre farm owned by Jean's mother.↩
8. Besides the SEC, the attorney acting as the partnership's receiver and the partnership's accountant also held some of the partnership records. ↩
9. Raymond's final extension of time to file for 1975 expired on October 15, 1976.↩
10.
(c) Sale of stock. (1) In general. If shares of stock in a corporation are sold or transferred by a taxpayer who purchased or acquired lots of stock on different dates or at different prices, and the lot from which the stock was sold or transferred cannot be adequately identified, the stock sold or transferred shall be charged against the earliest of such lots purchased or acquired in order to determine the cost or other basis of such stock and in order to determine the holding period of such stock for purposes of subchapter P, chapter 1 of the Code. If, on the other hand, the lot from which the stock is sold or transferred can be adequately identified, the rule stated in the preceding sentence is not applicable. As to what constitutes "adequate identification", see subparagraphs (2), (3), and (4) of this paragraph.
(2) Identification of stock. An adequate identification is made if it is shown that certificates representing shares of stock from a lot which was purchased or acquired on a certain date or for a certain price were delivered to the taxpayer's transferee. Except as otherwise provided in subparagraphs (3) or (4) of this paragraph, such stock certificates delivered to the transferee constitute the stock sold or transferred by the taxpayer, * * *↩
11. In accordance with the Court's invitation, Raymond submitted his own computation of the gain on the sale of the Belfield stock. This computation reflected the amounts previously reported on his 1973 return. Raymond attached to the computation certain exhibits, the Significance of which he explained in his brief. Neither the attached exhibits nor certain items reflected in the computation have been offered or admitted as evidence. These items are not part of the record in this case and, accordingly, we may not consider them in our determination. See
12. It is significant that the 1975 joint return, submitted by petitioners after the issduance of the notices of deficiency, reported the gain from the sale of the Crofton stock.↩
14. Petitioners correctly concede that the substitute returns filed pursuant to section 6020(b) qualify as separate returns for purposes of
15. We reject petitioners' contention that our interpretation of
16. Because we hold that Jean was not taxable on the sale of the Crofton stock, she was not required to file a return in 1975.↩
17. Because we hold that Jean was not taxable on the sale of the Crofton stock, the 1975 negligence penalty is not applicable to her.↩
Robinson's Dairy, Inc. v. Commissioner of Internal Revenue , 302 F.2d 42 ( 1962 )
Old Dominion Box Company, Incorporated, a Virginia ... , 477 F.2d 340 ( 1973 )
T. M. Britt and Jane Britt v. The United States of America , 431 F.2d 227 ( 1970 )
Carlos and Jacqueline Marcello v. Commissioner of Internal ... , 380 F.2d 499 ( 1967 )
John R. Collins, II v. United States , 514 F.2d 1282 ( 1975 )
Albert Schoenberg v. Commissioner of Internal Revenue , 302 F.2d 416 ( 1962 )
Moline Properties, Inc. v. Commissioner , 63 S. Ct. 1132 ( 1943 )