DocketNumber： Docket Nos. 12605-79, 1411-81.
Filed Date： 9/3/1986
Status： Non-Precedential
Modified Date： 11/21/2020
From 1974 through 1976, petitioner-husband's primary business was as a Texaco consignee; he was also an officer, an employee, and a shareholder of three corporations -- EASI, CAN DO, and ECO-REZ. These corporations were operated separately from each other and were not related to petitioner-husband's business as a Texaco consignee. In 1974, petitioner-husband guaranteed a note on behalf of EASI and a note on behalf of ECO-REZ. Neither of these corporations paid the notes. Petitioner-husband made payments on account of these guarantees. From 1974 through 1976, petitioner-husband made expenditures on behalf of the three corporations. CAN DO was dissolved in 1976.
In 1976, petitioners did not report any dividend income from Santa Fe Fuels, Inc.
(2) Petitioner-husband's 1976 payments on account of his guarantee of the ECO-REZ note gave rise to business bad debts, deductible in full against gross income for 1976.
(3) Petitioner-husband's expenditures on behalf of EASI, CAN DO, and ECO-REZ were contributions to the capital of the respective corporations.
(4) Petitioners are entitled to a 1976 long-term capital loss deduction for petitioner-husband's contributions to CAN DO's capital.
(5) Petitioners failed to prove (a) that they are entitled to deduct items that respondent had disallowed as personal or unverified, and (b) that they had no dividend income from Santa Fe Fuels, Inc.
(6) Liability determined for additions to tax under
MEMORANDUM FINDINGS OF FACT AND OPINION
CHABOT, Docket No. Year *199 Deficiency Additions to Tax Sec. 6653(a) 12605-79 1974 $9,269.88 $463.49 1975 7,585.83 379.29 1141-81 1976 11,717.97 585.90
These cases have been consolidated for trial, briefs, and opinion.
After concessions by respondent, the issues for decision are as follows:
(1) Whether petitioners are entitled to deduct their claimed Schedule C business expenses for 1974, 1975, and 1976;
(2) Whether petitioners received unreported dividend income in 1976; and
(3) Whether petitioners are liable for an addition to tax under
FINDINGS OF FACT
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petitions were filed in the instant cases, Marcus Conant (hereinafter sometimes referred to as "Conant") and Anne L. Conant, husband and wife, resided in Gainesville, Florida.
During the 1930's, Conant was an employee of the Internal Revenue Service (hereinafter sometimes referred to as "the IRS"). When Conant left the IRS he was chief of an audit section. Conant had been in the United States Army (or Army Reserves) for 27 years; during *200 World War II, he spent 42 months overseas. During the years in issue, Conant was a retired military officer and he received a pension for his service in the United States Army.
In 1945, Conant became involved with dredges. In the late 1960's, Conant started building an 8-inch dredge. He had this dredge throughout the 1970's. Conant maintained a shop in his garage at home; he had lathes, grinders, and welders. In the shop, Conant was developing an improved cutter head for a dredge, and a model of a bomb shelter. Conant applied for a patent on his bomb shelter.
From 1974 through 1976, Conant's primary business was as a Texaco consignee, operating from offices in Gainesville, Florida. As a Texaco consignee, Conant sold Texaco products for commission.
Texaco would assist an individual in establishing a service station by financing 90 percent of the cost of a service station and the land. Conant believed that if he had a piece of land dredged and traded it for a service station site then he could receive a 100-percent mortgage on the property.
From 1974 through 1976, Conant also was an employee, officer, and shareholder of the following three corporations: (1) Environmental Aquatic *201 Services, Inc. (hereinafter sometimes referred to as "EASI"); (2) CAN DO, Inc. (hereinafter sometimes referred to as "CAN DO"); and (3) ECO-REZ, Inc. (hereinafter sometimes referred to as "ECO-REZ"). Each of these corporations was operated separately from the others and was not related to Conant's business as a Texaco consignee.
EASI was incorporated on November 15, 1971. EASI was authorized to issue 100 shares of common stock, par value $5. The original shareholders of EASI were Arthur E. Barrett (hereinafter sometimes referred to as "Barrett"), EASI's president, and Paul B. Drewing (hereinafter sometimes referred to as "Drewing"), EASI's secretary/treasurer; each shareholder had 20 shares of stock. In January 1973, Drewing transferred his EASI stock to First National Bank of Florida as collateral against a $2,000 loan; these 20 shares were later retired. In January 1973, Conant became office manager/director/treasurer of EASI and bought 20 shares of stock. In late 1973, Sherill Alesi (hereinafter sometimes referred to as "Alesi"), became secretary of EASI. Alesi did not own EASI stock.
Conant's job with EASI was to manage all EASI funds. Barrett was responsible *202 for soliciting work for EASI, checking that the work was done properly, and maintaining EASI's equipment. Initially, Conant maintained all of EASI's records in Gainesville. However, sometime in 1973 or 1974, Conant turned over most of the recordkeeping duties to Alesi, who lived in Georgia. While Conant initially controlled EASI's checking accounts with ComBank/Pine Castle, Pine Castle, Florida, the First National Bank of Gainesville (hereinafter sometimes referred to as "First Bank"), and the Florida National Bank of Gainesville, the actual check-writing duties were for the most part transferred to Alesi in 1973. In 1973, Conant advanced more than $6,000 to EASI.
Federal employment tax Forms 941 were filed for EASI for the years in issue. A corporate tax return Form 1120 was filed for EASI on June 18, 1973, for the calendar year 1972. There is no record of any further corporate tax return filing by EASI. EASI failed to make Federal income tax withholding and Social Security payments to the IRS for the period of September 30, 1973, through March 31, 1975. The IRS considered Conant responsible for the lack of payments, and garnished $4,142.33 of his military retirement pay. *203 On September 5, 1979, Conant filed a refund claim for the $4,142.33.
EASI was apparently dissolved in 1977 and reinstated in 1979 to pursue some lawsuits. Background -- CAN DO
CAN DO was incorporated by Conant in Florida about 1946 in order to operate dredges and earth-moving equipment. CAN DO was owned solely by Conant. At one time, CAN DO performed services for Conant's Texaco distributorship by fixing service stations and repairing pumps. Because of the high-risk nature of the work, Conant used the corporate form to limit his exposure to liability.CAN DO was dissolved in 1976.
ECO-REZ was apparently incorporated in New York in 1974. The incorporators were Harry Trussell (hereinafter sometimes referred to as "Trussell"), Trussell's wife, and Conant. Trussell and Conant each had a 50-percent interests in ECO-REZ. ECO-REZ's officers were Conant (president), Trussell (Treasurer), and Trussell's son, Carrie (secretary). The business was intended to recycle various waste plastic/vinyl materials into reuseable vinyl resins, which in turn could be used as raw materials for producing *204 finished products.
In 1973, Conant and Barrett arranged to purchase a 10-inch dredge from a man named Taylor for about $20,000. When the deal was made, Conant and Barrett each paid Taylor about $2,500. Conant contributed has interest in the dredge to EASI. The dredge was to be used at Lake Wicata, Florida; the dredging job was halted because a State Dredging permit was not obtained. EASI received $15,000 for the work performed.
In 1973, Conant loaned Barrett some money. *205 and then Barrett was to work for AMAX. Barrett told Conant that AMAX was developing a product to neutralize military radar. Conant related this information to the Federal Bureau of Investigation (hereinafter sometimes referred to as "the FBI"). After about 2 years, the FBI informed Conant that the files on the case were destroyed.
The sale of EASI to AMAX never took place; instead EASI sold only the 10-inch dredge to AMAX. Conant did not receive any of the proceeds from this sale to AMAX.
Taylor sued Conant to recover the outstanding debt owed to Taylor on the purchase of the 10-inch dredge. After Conant told Taylor that he had contributed his interest in the dredge to EASI, Taylor amended his suit to include EASI.
In September 1973, Conant leased his 8-inch dredge for use on a dredging job in Smyrna, Georgia. The dredge was moved to the site. Conant never received any money for the use of his dredge; he even had difficulty in having his dredge returned.
In 1974, Conant guaranteed a note on behalf of EASI to First Bank. *206 EASI. During 1974, benzene was in limited supply in the United States. Conant contacted his son, a Texaco sales manager in Ireland, about the availability of the chemical. Based on his son's advice, in May 1974, Conant went to Ireland and made arrangements to purchase some benzene. On his return from Ireland, Conant was informed by *207 Texaco that benzene was too dangerous to ship; instead Texaco suggested that a styrene monomer be substituted. The arrangement was that Conant would supply Allied Polymer with the chemical through his Texaco consignee business; Conant would receive a commission on the sales to Allied Polymer. Conant estimated that he would receive a minimum of $10,000 in commission from the sale of the chemicals to Allied Polymer. There was also some discussion that ECO-REZ and Allied Polymer would form a joint operation to produce the product. While Conant was in Ireland in 1974, Allied Polymer issued about $70,000 in bad checks, drawn on the Citizens Bank of Swainesborough (hereinafter sometimes referred to as "the Citizens Bank"). When Conant returned, he became involved with Allied Polymer's financial problems. Later that year, Conant arranged that ECO-REZ would borrow $72,000 from the Citizens Bank, with the note guaranteed by Conant, Trussell, and another individual. Conant guaranteed the note because he believed that Allied Polymer was worth saving. Conant and Trussell also arranged that Allied Polymer's accounts receivable were to be assigned to them, and then factored to provide additional *208 funds for the corporation. It was intended that ECO-REZ would assist Allied Polymer directly with its financial difficulties. However, instead of ECO-REZ receiving the $72,000, the money was placed directly into Allied Polymer's bank account, which was used to pay the checks Allied Polymer had previously issued. Conant also became Allied Polymer's treasurer. After several weeks, he resigned when he learned that Allied Polymer's past failure to pay withheld Social Security taxes to the IRS in a timely manner placed the treasurer personally at risk. By a letter dated July 25, 1974, Allied Polymer ordered from Conant, 40,000 gallons of liquid styrene monomer to be delivered each month for the rest of the year. After receiving the letter, Conant contacted Allied Polymer to confirm the order; at this time Allied Polymer informed Conant that it was intending to purchase the chemical for resale purposes. Conant became upset and he refused to supply Allied Polymer with the chemical. The $72,000 note to the Citizens Bank was not repaid. The Citizens Bank sued Conant, as one of the guarantors on the note. *209 received from Texaco. In 1976, the Citizens Bank received $3,987.40. *210 owned by Tech Rand, located in Gainesville and St. Petersburg, Florida. The contract was never carried out and Conant handled the disassembling and the shipping of the compost plant located in Gainesville. Conant did not receive any money for his services. On February 5, 1975, Conant loaned $15,000 to Eugene F. Vickery (hereinafter sometimes referred to as "Vickery") to do a dredging job in Stuart, Florida. Vickery also leased some equipment from Conant and CAN DO for this job. The dredge used on the job was leased from someone other than Conant and CAN DO. Vickery never repaid any money to Conant. Conant did not sue Vickery. In 1976, Barrett was using a 6-inch dredge, owned by EASI, on the Chattahoochee River. Someone cut the dredge loose and it floated down the river. Conant loaned some money to Barrett to enable Barrett to retrieve the dredge. *211 going concerns, and to protect Conant's capital investments in the corporations. The corporations did not require Conant to make the expenditures. The corporations did not pay any amounts to Conant on account of these expenditures. Conant never sued for reimbursement of the expenditures made on behalf of the three corporations. No loan documentation was ever prepared evidencing the expenditures to be loans from Conant to the respective corporations. Conant never received any income from EASI, CAN DO, or ECO-REZ. On their tax returns for 1974, 1975, and 1976, petitioners reported Schedule C net losses of $8,469.65, $10,524.27, and $13,112.65, respectively. For 1974, respondent made adjustments to the Schedule C as listed in table 1, resulting in a net profit of $29,576.42. Table 1 Per Return Adjustments Gross receipts Less Returns And Allowances $96,249.40 Cost of goods sold: Cost of labor 21,671.00 ($ 912.84) Materials & supplies - shop expense 3,283.06 (1,687.13) Other costs - bulk plant & station expense 15,047.44 322.06 Total cost of goods sold $40,001.50 ($ 2,277.91) Gross profit $56,247.90 $2,277.91 Deductions: Depreciation 6,481.68 $ (1,780.00) Taxes 9,802.67 (4,078.16) Rent 2,531.62 (2,434.56) Utilities 3,418.20 (2,052.77) Insurance 4,511.75 (1,513.84) Legal & professional fees 5,581.65 (5,581.65) Truck expense 14,987.60 (6,038.54) Travel & entertainment 4,617.64 (3,838.38) Interest expense 2,237.74 (1,126.22) Equipment rental 5,577.47 (5,550.96) Office expense 2,180.34 (859.99) Advertising and promotion 1,486.49 (750.23) Freight 337.30 (162.86) Postage 965.40 Total deductions $64,717.55 ($35,768.16) Net profit or (loss) ($8,469.65) $38,046.07
*212 Respondent determined that petitioners are entitled to treat the following as 1974 short-term capital losses: (1) $7,871.58 paid by Conant to First Bank on account of Conant's guarantee on a note from EASI; Respondent determined that petitioners are entitled to treat the following as 1975 short-term capital losses: (1) $10,337.43 paid by Conant to First Bank on account of Conant's guarantee on a note from EASI; and (2) $12,364 paid by Conant on behalf of EASI ($2,749.07) and ECO-REZ ($9,614.93), and included in the "Adjustments" column of table 2, For 1976, respondent made adjustments to the Schedule C as listed in table 3, resulting in a net profit of $26,690.61. For 1976, respondent did *215 not determine that any of the disallowed Schedule C business expenses are deductible as shortterm capital losses. Petitioners did not report any capital gains or losses on their 1974 and 1975 tax returns. On their 1976 tax return, petitioners reported net short-term capital gains of $398.79 *216 to keep adequate records, and this negligence resulted in at least part of their underpayments for 1974, 1975, and 1976. During the years in issue, Conant was in the trades or businesses of being a Texaco consignee, and of being an officer and employee of EASI, CAN DO, and ECO-REZ. During the years in issue, Conant was not involved in any joint venture or co-venture with any corporation. Apart from Conant's payments on account of his guarantees, Conant's expenditures on behalf of EASI, CAN DO, and ECO-REZ were not loans to the corporations. Apart from Conant's payment on account of his guarantee of the ECO-REZ note, Conant's expenditures on behalf of EASI, CAN DO, and ECO-REZ were not related to Conant's trades or businesses or his income-producing activities. Conant's attempt to provide Allied Polymer with benzene and styrene monomer was an activity of Conant's business as a Texaco consignee. Conant's guarantee of ECO-REZ's note to the Citizens Bank was part of this activity. The debt from ECO-REZ to Conant that arose when the Citizens Bank levied on some of Conant's Texaco commission checks was a debt created in connection with Conant's trade or business as a Texaco consignee. OPINION *217 Respondent maintains that for 1974 and 1975, the disallowed Schedule C business expenses (apart from those disallowed as personal or unverified) -- should be deductible only as non-business bad debts under Petitioners maintain that the expenses disallowed by respondent for the years in issue should be deductible under section 162, section 212, We agree in general with respondent's conclusion that petitioners are entitled to a short-term capital loss deductible against *218 gross income to the extent of $1,000 for 1974 and 1975. As a preliminary matter, it is important to determine what trades or businesses Conant carried on We have found, that from 1974 through 1976, Conant was in the trades or businesses of being a Taxaco consignee, and of being *219 an officer and employee of EASI, CAN DO, and ECO-REZ. Petitioners contend that Conant was also in the trades or businesses of being an independent dredge operator, and dredge lessor, a compost plant disassembler, an inventor, and "a coventurer in these capacities with the corporations". We disagree. Viewing the record as a whole, we are convinced that during the years in issue, Conant did not carry on any of these other trades or businesses as petitioners contend. Although we reach this conclusion on the basis of the entire record, there are several factors which deserve brief discussion. We now consider the appropriate treatment of the claimed Schedule C business expenses in light of our conclusions that during the years in issue, Conant was in the trades or business of being a Texaco consignee, and a corporate officer and employee. In disallowing a portion of the claimed Schedule C business expenses for 1974 and 1975, respondent has, in essence, divided these expenses into three categories: (1) those expenses paid on account of Conant's guarantee on a note, which respondent determined are nonbusiness bad debts entitled to short-term capital *223 loss treatment; (2) those made on behalf of the three corporations, which respondent originally determined were also nonbusiness bad debts, entitled to short-term capital loss treatment; A. Conant's Guarantee on a Note In order to prevail, petitioners must show a proximate relationship between the debt and Conant's trades or businesses as a Texaco consignee or corporate officer and employee. For petitioners to treat the amounts paid to First Bank as business bad debts, petitioners must show that Conant's dominant motivation in guaranteeing the note for EASI was proximately *226 related to (1) his business as a Texaco consignee or (2) his status as an officer and employee of EASI, rather than as an investor in EASI. The fact that a loan or payment is made in furtherance of an employer's trade or business does not mean that it is proximately related to that of the officer-employee. On the record in the instant cases, petitioners have failed to prove that Conant's dominant motive in guaranteeing the note to First *227 Bank was the protection or enhancement of his trade or business as an officer-employee of EASI, as distinct from the enhancement of his investment interest as shareholder in EASI. Generes and On answering brief, petitioners attempt to distinguish For the first time, on brief, petitioners assert "that should the court fail to find these various expenses deductible to the Petitioner under §§ 162, 212 *229 or 166 of the Code, that the Court should find that such necessary and ordinary expenses (as stipulated by the Respondent) are A basic problem with this position is that we have already concluded that none of Conant's trades or businesses generated the guarantee, the payments, or the debt that became worthless. A second difficulty with petitioners' position, as applied to their losses on account of Conant's guarantee of the EASI note, is that deductibility of bad debts is governed by Finally, we note that, in his opening statement at trial, respondent's counsel set forth his understanding that both sides concurred that section 165 was not applicable to the instant case.Petitioners' counsel did not dispute the correctness of this statement at that point, nor at any point until he raised this *230 "inapplicable" issue on brief. We hold for respondent on this issue. At trial, respondent asserted that the portion of the claimed Schedule C business expenses for 1974 and 1975 that he determined were expenditures made on behalf of EASI, CAN DO, or ECO-REZ and deductible as nonbusiness bad debts, should instead be treated as contributions to capital of the respective corporation "and when the corporation goes defunct, which are not at [sic] the years at issue, except in the case of CAN DO then they would be available for non-business bad debts and short-term capital losses." We agree with respondent's current position that (contrary to respondent's original determination) Conant's expenditures are not loans to the corporations giving rise to short-term capital losses under First, we consider whether Conant's expenditures were loans or capital contributions to EASI, CAN DO, and ECO-REZ. This is an issue which has often been before the courts. In In resolving similar questions of debt versus equity, courts have identified and considered various factors. See, e.g., The identified factors are not equally significant ( [21] See In the instant cases, there is not a written document which would create in Conant an unconditional right to demand payment. There are no papers or other formal indicia evidencing the arrangement between Conant and either EASI, CAN DO, or ECO-REZ. Thus there are no provisions for interest, no enforceable obligation on any of the corporations to repay Conant for the amount of his expenditures, no maturinty date, no provision for prepayment by the corporations, and no provision for superiority of lien of the respective corporations' assets. It is clear that Conant and the corporations failed to follow any formality with regard to the expenditures. There was no corporate action authorizing the "borrowing", Conant did not take any security as a result of the expenditures, and there was no provision made for a sinking fund or corporate reserve to effect repayment. No repayment of the alleged debts was ever made. No interest was ever paid. No law suits were filed to attempt to recover any portion of the alleged debts and the record contains no evidence that a formal demand for repayment was ever made. In short, Conant failed to act like a creditor. *235 Instead, by tolerating nonpayment of principal, Conant evidenced an attitude of placing his shareholder interests ahead of his creditor interests in order to advance the needs of the corporations. Thus, since Conant treated these expenditures the way equity investments are normally treated, we will consider these expenditures to be equity, and not loans. Next we consider whether the expenses are currently deductible under section 162 or 212, or whether they are to be treated as capital contributions. We have already found, The business of a corporation, however, is not that of its officers, employees, or stockholders. Though the individual stockholder-executive, in his own mind, may identify his interest and business with those of the corporation, they legally are distinct, and, ordinarily, if he voluntarily pays or guarantees the corporation's obligations, his expense may not be deducted on his personal return. * * * Conant in his capacity as officer and employee in EASI, CAN DO, and ECO-REZ was not required to pay the expenditures on behalf of the corporations. Conant voluntarily made the expenditures and the expenditures are not deductible by petitioners. Conant's attempt to sell chemicals to Allied Polymer was an activity directly related to his business as a Texaco*237 consignee. The expenses of this activity are deductible under section 162. Petitioners have the burden of proving that their deductions are greater than the amount determined by respondent. In Petitioners maintain that the expenditures made on behalf of EASI and ECO-REZ should be deductible because they were made under duress and pursuant to his duty as a retired United States Army officer. Petitioners assert that Conant's "involvement with the corporations EASI and EcoRez [sic] was in an attempt by him to maintain contact with * * * various individuals and corporations so that he might secure information *238 vital to his country's safety." An individual's concerns about the safety of this Nation are commendable. However, we fail to see how such concerns would convert the expenditures in issue into deductions. We conclude that petitioners are not entitled to deductions under section 162 for any greater amounts than respondent has already allowed. Section 212 As we pointed out in [B]efore petitioner is entitled to the benefits of section 212, he must overcome two hurdles: Petitioner must show that the expenses claimed are indeed his and not those of a separate and distinct taxpayer ( Conant's expenditures on behalf of EASI, CAN DO, and ECO-REZ, were just that -- expenditures on behalf of another. Petitioners are no more entitled to deduct such expenditures under section 212 than they are under section 162. Respondent concedes that Conant's expenditures on behalf of EASI, CAN DO, and ECO-REZ may be treated as contributions to the capital of the respective corporations. We so hold. Deductions are allowable under section 162 for the taxpayer's ordinary and necessary expenses in carrying on a trade or business. However, because of section 262, Under section 6001 *241 and At trial, Conant admitted that some of the claimed expenses for the years in dispute, were personal items. Furthermore, Conant's testimony as to some of the other items is confusing. Petitioners presented no documentation at trial to substantiate their claimed deductions. Conant's uncorroborated and sel-serving testimony is insufficient to overcome respondent's presumption of correctness on this issue. Petitioners assert for the first time, on opening brief, justification for some of the disallowed deductions for salary, rent, and station expenses in 1974. Mere statements on brief do not constitute evidence. Petitioners had the burden of proving respondent's determinations to be in error and they have failed completely to do so. We hold for respondent on this issue. We summarize our holdings with respect to the Schedule C business expenses for 1974 and 1975 as follows: (1) petitioners are entitled to *242 nonbusiness bad debt deductions for 1974 and 1975 in the amounts of Conant's payments in the respective years on account of his guarantee of EASI's note, (2) petitioners must capitalize Conant's other expenditures on behalf of EASI, CAN DO, and ECO-REZ, and (3) petitioners have failed to show that they are entitled to deduct or capitalize any of the Schedule C items that respondent disallowed as personal or unverified. Respondent maintains that the amounts claimed on petitioners' 1976 tax return "as returns and allowances of $3,987.40 are not deductible in the tax year 1976 because it has not been established that these are [petitioners'] expenses." Respondent further contends that $35,815.89 of the deductions "shown as business expenses * * * [on the Schedule C are nondeductible] because it has not been established that * * * [they were] for ordinary and necessary business expenses or [were] expended for the purposes designated." Petitioners maintain that the $3,987.40 garnished from Conant's commission checks from Texaco is deductible under We agree in part with each side. Petitioners have the burden of proving respondent's determinations to be in error. To receive a deduction, the business bad debt must, however, be shown to be totally worthless in the year for which it is claimed. ( We hold that (1) petitioners are entitled to a business bad debt deduction of $3,987.40, (2) petitioners must capitalize Conant's other expenditures on behalf of EASI, CAN DO, and ECO-REZ, III. Dividend Income -- 1976 Respondent maintains that during 1976, petitioners received dividend income from petitioners' wholly-owned business, Santa Fe Fuels, Inc., in the amount of $1,690.93. Respondent asserts that Santa Fe Fuels, Inc., paid various personal expenses for petitioners. Petitioners made no reference to respondent's adjustment for dividend income on petition, at *246 trial, or on opening brief. We need not decide whether petitioners' silence constitutes a concession because the matter is resolvable on burden of proof grounds. Respondent's determination as to matters of fact in the notice of deficiency "has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong." On answering brief, petitioners assert that while respondent's notice of deficiency is granted presumptive status, it "is not competent evidence of the truth of the matters asserted within itself." Petitioners state that "[r]respondent has brought forth no evidence to support his contention of a constructive dividend, thus the omission of such evidence, shown by Petitioner's [sic] advancing of Respondent's agent's workpapers, establishes * * * that Petitioner [sic] should prevail on this issue." Petitioners' view of the situation is clearly erroneous. Petitioners apparently have failed to comprehend the fact that they have the burden of proof on this issue. Petitioners have failed to carry their burden *247 of proof. We hold for respondent on this issue. Respondent contends that petitioners are liable for an addition to tax under An addition to tax under As we explained, When Conant left the IRS, he was chief of an audit section; albeit in the 1930's, we have no doubt that in his position he realized the importance of maintaining books of account or records. Petitioners' failure to keep the records necessary to substantiate some of their claimed deductions for 1974, 1975, and 1976 -- a failure which petitioners have not adequately explained -- indicates that petitioners were negligent. Not only have petitioners failed to prove error by respondent in this matter, but the record supports the conclusion that petitioners were negligent. In responding to petitioners' assertions, we note that we have insufficient facts from the 1973 audit to agree with petitioners. Petitioners, having the burden of proof, should have introduced evidence as to the specific expenses claimed on their 1973 return and the corresponding adjustments. We have no indication whether the same types of expenses (whether or not in similar amounts) were claimed on this return. The fact that it was determined that petitioners owed only $184 in additional taxes does not carry the burden for petitioners. On the contrary, it indicates that petitioners' *250 1973 tax return did not properly represent their activities for 1973. We hold for respondent on this issue. Table 2 Per Return Adjustments Gross receipts Less Returns And Allowances $91,964.64 Cost of goods sold: Cost of labor 23,389.50 Materials & supplies - truck expense 11,714.22 ($1,956.04) Other costs - bulk expense 2,433.55 (872.87) Total cost of goods sold $37,537.27 Gross profit $54,427.37 $ 2,828.91 Deductions: Depreciation 9,065.68 (3,157.00) Taxes 10,401.27 (4,588.79) Rent 3,111.23 (538.70) Repair (shop expense) 2,846.66 (848.58) Insurance 5,431.55 (1,035.55) Legal and professional fees 8,988.62 (7,617.62) Utilities 4,474.78 (1,818.00) Interest 2,308.25 (111.31) Station expense 3,565.33 (1,183.09) Travel and entertainment 4,484.20 (3,755.96) Office expense 2,691.80 (1,357.66) Advertising and promotions 2,314.75 (1,014.74) Postage and freight 1,133.77 (146.12) Equipment rental 4,133.75 (3,021.45) Total deductions $64,951.74 ($30,194.57) Net profit or (loss) ($10,524.37) 33,023.48 Table 3 Per Return Adjustments Gross receipts $47,124.96 Less: Returns and allowances 3,987.40 $ (3,987.40) Total income $43,137.56 Deductions: Depreciation 3,765.00 (538.00) Taxes 807.56 (237.45) Rental 2,865.25 (2,865.25) Repair 965.96 (965.96) Salaries 8,399.00 -0- Insurance 1,439.51 (564.16) Legal and Professional fees 4,450.95 (4,431.10) Utilities 3,058.10 (1,720.80) Interest 1,107.21 177.76 Bad debts 750.00 (750.00) Freight 2,038.31 (1,424.08) Station Expense 1,799.27 (1,200.31) Bulk plant 1,692.25 (565.71) Travel and entertainment 9,290.90 (9,164.90) Truck expense 3,345.13 (1,659.13) Office 734.64 (705.63) Promotional 453.46 (378.46) Postage 633.00 (168.00) Equipment rent 8,654.71 (8,654.71) Total deductions $56,250.21 ($35,815.89) Net profit or (loss) ($13,112.65) $39,803.29
On the other hand, where, as a condition of his employment, an employee incurs unreimbursed expenses on behalf of his employer, the employee may deduct those expenses which are ordinary and necessary to his business as an employee, to the extent they are not subject to reimbursement.
1. Unless indicated otherwise, all section and chapter references are to sections and chapters of the Internal Revenue Code of 1954 as in effect for the years in issue. ↩
2. Of these amounts, self-employment taxes under chapter 2 are $1,042.80 for 1974, $1,113.90 for 1975, and $1,208.70 for 1976; the remaining amounts are chapter 1 income taxes.
3. The record does not provide an explanation as to the nature of the lawsuits.↩
4. The record fails to indicate how much money was involved.↩
5. The record fails to indicate the amount of the note guaranteed by Conant. ↩
6. It does not appear that any such amounts were paid in 1976.↩
7. The record fails to indicate if the Citizens Bank also sued the other two guarantors. ↩
8. Petitioners chose to deduct this item on their 1976 tax return as "returns and allowances", but inked in the explanation "garnishment". See table 3,
9. The record does not indicate whether Barrett repaid any money to Conant.↩
10. Apparently, respondent now contends that only $7,738.72 was so paid, and that the remaining $132.86 is a personal payment to "AMEX", which we assume is the entity we refer to as "AMAX". ↩
11. Because of the manner in which respondent's determinations are presented in the notice of deficiency, we are unable to ascertain which of the Schedule C adjustments were determined to be currently recognizable short-term capital losses and which were determined to fall into other categories (e.g., personal expenditures or contributions to capital of one or another of the corporations).↩
12. On the notice of deficiency, respondent erroneously failed to include this adjustment in parentheses, indicating that this adjustment is to be added to petitioners' total cost of goods sold on the Schedule C. However, this error by respondent does not affect his determination that the revised amount of petitioners' total cost of goods sold is $34,708.36.↩
13. In the notice of deficiency, respondent determined that Conant's net profit was $26,690.64; this is the correct algebraic sum of (1) the loss petitioners reported on their tax return, and (2) the adjustments in the notice of deficiency. However, the parties' written stipulation states that, in the notice of deficiency respondent determined that Marcus' net profit was $26,640.64. It is not clear whether (a) the written stipulation contains a typographic error that persists in a subsequent oral stipulation, or (b) the written stipulation corrects an error in the notice of deficiency, or (c) the oral stipulation corrects an error in the written stipulation. The parties are to resolve this matter in the computation under Rule 155.
Unless indicated otherwise, all rule references are to the Tax Court Rules of Practice & Procedure. ↩
14. On the notice of deficiency, respondent erroneously enclosed this adjustment in parentheses, indicating that this adjustment is to be subtracted from petitioners' total income on the schedule C. However, this error by respondent does not affect his determination that the revised amount of petitioners' "Total income" is $47,124.96.↩
15. Three transactions, resulting in gains of $107.46 and $331.25, and a loss of $39.92. ↩
16. Five transactions, resulting in gains of $119.63, $162.05, $80.97, and $411.64, and a loss of $420.59.↩
17. Petitioners do not contend that petitioner Anne L. Conant carried on a trade or business during the years in issue. As a result, we focus exclusively on Conant's activities in our analysis. ↩
18. Section 162(a) provides, in relevant part, as follows:
SEC. 162. TRADE OR BUSINESS EXPENSES.
(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.↩
19. Petitioners cite
20. Respondent now asserts that these expenditures are contributions to the capital of the respective corporations. The effect of respondent's new assertion will be discussed
21.
(a) General Rule. --
(1) Wholly worthless debts. -- There shall be allowed as a deduction any debt which becomes wortheless within the taxable year.
(2) Partially worthless debts. -- When satisfied that a debt is recoverable only in part, the Secretary or his delegate may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.
[The subsequent amendment of this provision by section 1906(b)(13) [sic] (A) of the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520, 1834, does not affect the instant case.] ↩
22.
* * *
(d) Nonbusiness Debts. --
(1) General rule. -- In the case of a taxpayer other than a corporation --
(A) subsections (a) and (c) shall not apply to any nonbusiness debt; and
(B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months.
[The subsequent amendments of this provision by paragraphs (1)(A) and (2) of section 1402(b) of the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1731, 1732, and by subsections (b)(1) and (e) of section 1001 of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 1011-1012, do not affect the instant case.]
23.
* * *
(d) Nonbusiness Debts. --
* * *
(2) Nonbusiness debt defined. -- For purposes of paragraph (1), the term "nonbusiness debt" means a debt other than --
(A) a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or
(B) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.↩
24. Petitioners do not contend they were in a separate trade or business of guaranteeing notes or of making loans.↩
25. Indeed, on brief, petitioners state that "it is not claimed that the loans made by the Petitioner were to protect an employment status".↩
26. In
27.
28. We are unclear as to respondent's rationale in concluding that the contributions to capital would ultimately be deductible as short-term capital losses, since the relevant holding periods appear to be longer than 6 months and a contribution to capital is not a debt which may become worthless. On this point (as on a number of points) the parties' delineations of their positions leave us with significant uncertainties.↩
29. Section 212 provides, in relevant part, as follows:
SEC. 212. EXPENSES FOR PRODUCTION OF INCOME.
In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year --
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income; * * *↩
30. SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES.
Except as otherwise expressly provided in this chapter [i.e., chapter 1], no deduction shall be allowed for personal, living, or family expenses.↩
31. SEC. 6001. NOTICE OR REGULATIONS REQUIRING RECORDS, STATEMENT, AND SPECIAL RETURNS.
Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary or his delegate may from time to time prescribe. Whenever in the judgment of the Secretary or his delegate it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary or his delegate deems sufficient to show whether or not such person is liable for tax under this title. * * *
[The subsequent amendment of this provision by section 1906(b)(13) [sic] (A) of the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520, 1834, does not affect the instant case.]↩
32. Petitioners do not claim a deduction for any part of the $3,987.40 on account of partial worthlessness, under
33. We have found that CAN DO was dissolved in 1976. Petitioners did not claim a deduction on account of this dissolution; respondent has not claimed that Conant had a gain on account of this dissolution. We hold that petitioners realized a 1976 long-term capital loss in the amount of Conant's contributions to CAN DO in 1974, 1975, and 1976.↩
34. SEC 6653. FAILURE TO PAY TAX.
(a) Negligence or Intentional Disregard of Rules and Regulations With Respect to Income or Gift Taxes. -- If any part of any underpayment (as defined in subsection (c)(1)) of any tax imposed by subtitle A or by chapter 12 of subtitle B (relating to income taxes and gift taxes) is due to negligence or intentional disregard of rules and regulations (but without intent to defraud), there shall be added to the tax an amount equal to 5 percent of the underpayment.
[The subsequent amendments of this provision (by sec. 101(f)(8) of the Crude Oil Windfall Profit Tax Act of 1980, Pub. L. 96-223, 94 Stat. 229, 253, by sec. 722(b)(1) of the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172, 342, and by sec. 107(a)(3) of the Technical Corrections Act of 1982, Pub. L. 97-448, 96 Stat. 2365, 2391) do not affect the instant case.]↩
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