DocketNumber: Docket Nos. 17481-88, 18100-89
Citation Numbers: 62 T.C.M. 1567, 1991 Tax Ct. Memo LEXIS 680, 1991 T.C. Memo. 632
Judges: SHIELDS
Filed Date: 12/19/1991
Status: Non-Precedential
Modified Date: 11/21/2020
1991 Tax Ct. Memo LEXIS 680">*680
MEMORANDUM FINDINGS OF FACT AND OPINION
In deficiency notices dated April 18, 1989, and April 11, 1988, respectively, respondent determined deficiencies in and additions to petitioners' Federal income taxes for 1981 and 1984 as follows:
Additions to tax | ||||
Year | Deficiency | Sec. 6653(a)(1) 2 | Sec. 6653(a)(2) | Sec. 6661 |
1981 | $ 1,649 | $ 82.45 | * | -- |
1984 | 10,751 | 537.55 | ** | $ 2,687.75 |
After concessions the issues for decision are: (1) Whether petitioners are entitled under
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by reference.
Petitioners are husband and wife and resided in the State of Louisiana at the time they filed their petition in this case. They timely filed joint income tax returns for 1981, 1984, and 1985.
Petitioners own 100 percent of the stock of Video Park, Inc., (Video Park) a television production company, which was organized by them in 1982 under the laws of the State of Louisiana. 1991 Tax Ct. Memo LEXIS 680">*682 Mr. Seward has been president of Video Park since its formation. During 1984 and 1985, Mrs. Seward was its secretary-treasurer and as such issued checks for the corporation and acted as the liaison between Video Park and its accountants.
During 1984, petitioners also operated as individual proprietors an equipment leasing business in which they purchased on December 18, 1984, certain video equipment for $ 77,561 from Ampex Corporation, a subsidiary of Allied Signal Corporation. Prior to the purchase of the video equipment, petitioners employed Chapman & Company, a certified public accounting firm, to investigate two potential sources of financing (Capital Bank and Trust of Baton Rouge and Signal Capital Corporation, a subsidiary of Allied Signal) and to advise them which of the two lenders would provide the most favorable financing terms. Upon the advice of the accounting firm, petitioners obtained the financing from Signal Capital Corporation, and Mr. Seward executed a promissory note and a security agreement in favor of the lender.
After its purchase petitioners leased the video equipment to Video Park in December of 1984, and on their 1984 return claimed an investment tax1991 Tax Ct. Memo LEXIS 680">*683 credit with respect to the video equipment in the total amount of $ 7,256, which completely offset their 1984 income tax liability and left a balance of unused credit in the amount of $ 1,647. With an Application for Tentative Refund on Form 1045, petitioners carried the balance of the credit back to 1981. In claiming the ITC for 1984, petitioners did not attach to their 1984 return the statement required by
In connection with the video equipment, petitioners claimed a depreciation deduction on Schedule C of their 1984 return in the amount of $ 15,340, and on their 1985 return they claimed deductions in the amounts of $ 15,165 for depreciation and $ 8,038 for interest. In an amended return for 1985 petitioners reported as additional income a bonus from Video Park in the amount of $ 4,500 and claimed additional lease expenses in the same amount. The additional lease expenses in the amount of $ 4,500 claimed on the 1985 return consist of accounting expenses totaling $ 3,327.06, salaries incurred in training operators for Video Park in1991 Tax Ct. Memo LEXIS 680">*684 the amount of $ 1,000, and insurance in the amount of $ 172.94. Both the original and the amended returns for 1985 were prepared by Robert C. Barrett, Jr., of Chapman & Company (later Barrett & Company).
The equipment lease from petitioners to Video Park required a monthly rental of $ 1,825. The term of the lease was for 2 years commencing on December 31, 1984, with a renewal option in the lessee for an additional term of 1 year.
Under the terms of the lease petitioners were required to insure the video equipment. However, the lease also permitted Video Park to insure the equipment if it desired to do so and from March 12, 1984, through March 12, 1985, Video Park paid $ 2,507 to State Farm Insurance Company for insurance on equipment. The record fails to disclose whether any part of this payment was for insurance on the video equipment.
Under the terms of the lease petitioners were required to provide operators for the equipment for 1 year in order to enable Video Park to train its personnel. Mr. Seward trained three individuals to operate the equipment, but these individuals were paid $ 1,000 with checks from the bank account of Video Park.
From December 1984 through October1991 Tax Ct. Memo LEXIS 680">*685 1985 the accounting firm of Chapman & Company issued seven invoices in the total amount of $ 4,055.99 for services performed for petitioners and Video Park. Five of the invoices totaling $ 2,869 are addressed to Charles P. Seward and two of the invoices in the amount of $ 1,186.99 are addressed to Video Park. Each invoice contains a short description of the services performed by Chapman & Company. One of the invoices addressed to Video Park in the amount of $ 458.06 is for work performed for petitioners in assisting them to determine the most favorable source of financing for the purchase of the video equipment. All seven invoices were paid by checks on the bank account of Video Park.
OPINION
(1)
With regard to the second requirement of
Respondent argues that the 15-percent test of
First, accounting fees such as those involved herein which are incurred in connection with the acquisition of an asset with a useful life of more than 1 year are capital expenditures and are not deductible under
Secondly, under the terms of the lease agreement Video Park, as the lessee, had the right to obtain insurance on the video equipment and from the record as a whole we cannot determine whether the $ 172.94 in premiums relate to a policy owned by petitioners or to a policy owned by Video Park. Therefore, petitioners have failed to carry their burden of proving that the premium payments were their expenses and not those of Video Park. Therefore, the premium payments cannot be used in determining whether the 15-percent test is satisfied.
Finally, we are not satisfied that petitioners have established that they actually paid the accounting fees, salaries, and insurance premiums. In fact, petitioners admit that initially Video Park paid all of these expenses in 1985 but contend that certain entries were made on the books and records of Video Park and reflected on their amended return for 1985 to account for the fact that these payments were made on behalf of petitioners. In addition, petitioners claim that the bonus reported on their amended 1985 return was to account for the income which arose1991 Tax Ct. Memo LEXIS 680">*689 from these payments by Video Park. However, the only evidence in the record on this point is the testimony of petitioners and Timothy Barrett, a certified public accountant employed by Chapman & Company. Such uncorroborated self-serving testimony is not persuasive, however, especially where as here petitioners as the only shareholders of Video Park have failed to explain why they were unable to produce any corporate books or records which tended to establish that the bonus they received in 1985 was to account for the imputed income which they realized upon Video Park's payment of their expenses. In fact, while the filing date of the amended 1985 return does not appear in the record, it obviously occurred after the original return was filed in 1986. It appears, therefore, to be an afterthought to provide support for petitioners' contention that they reimbursed Video Park for these payments. See
(2)
Petitioners assert that they are not liable for the additions to tax determined by respondent for negligence because they relied on the advice 1991 Tax Ct. Memo LEXIS 680">*691 of their tax return preparer, Chapman & Company, a firm of certified public accountants. Good faith reliance on the advice of counsel or a qualified accountant can be, under certain circumstances, a defense to the addition to tax for negligence. See, e.g.,
The record in this case does not reflect what information petitioners gave to their return preparer, what advice they sought from the preparer, and what advice they received. Without such evidence we are unable to evaluate petitioners' alleged reliance on their return preparer. The record does establish that a firm of certified public accountants prepared their returns and advised them with respect to the financing of a purchase of video equipment. However, the record does not reflect what action, if any, the firm took with respect to the books and records of Video Park, petitioners' wholly owned corporation, or the nature and condition of such records. Therefore, petitioners, who are knowledgeable business people who obviously know the importance of records, have failed to carry their burden of proving that the deficiencies due from them were not due to negligence.
(3)
An understatement occurs under
Petitioners advance four arguments in support of their position that the addition under
Second, petitioners contend that respondent abused his discretion under
Third, petitioners argue that there was adequate disclosure under
We conclude therefore that if a Rule 155 computation reveals that after concessions the understatement of petitioners' income tax for 1984 constitutes a substantial understatement under
1. By order dated October 25, 1989, these cases were consolidated for purposes of trial, briefing, and opinion.↩
2. Unless otherwise indicated all section references are to the Internal Revenue Code as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
*. 50 percent of the interest due on $ 1,649
** 50 percent of the interest due on $ 10,751 ↩
3. Since the unused portion of the ITC petitioners claimed in 1984 was carried back to 1981, the resolution of the issue in 1984 will resolve the dispute for 1981.↩
4. Respondent also contends that petitioners are not entitled to the ITC because they failed to attach a statement to their return as required by
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