DocketNumber： Docket Nos. 7700-76; 8342-76
Citation Numbers： 57 T.C.M. 1489, 1989 Tax Ct. Memo LEXIS 473, 1989 T.C. Memo. 473
Filed Date： 8/31/1989
Status： Non-Precedential
Modified Date： 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
DRENNEN, Ed J. Hagen and Martha Jo Hagen (docket No. 7700-76) Additions to Tax, I.R.C. 1954 Years Income Tax Section 6653(a) Section 6653(b) 1964 $ 26,831.86 -0- $ 13,415.93 1965 51,907.66 -0- 25,953.83 1966 20,890.43 -0- 10,445.21 1968 37,081.98 $ 1,854.10 -0- 1969 88,261.30 4,413.07 -0- 1970 7,187.60 359.38 -0- 1971 5,531.34 276.57 -0-
The issues for decision are: 2. Whether petitioners understated income from interest, dividends and fees on their 1964, *485 1965 and 1966 returns by $ 11,513.32, $ 8,019.27, and $ 18,118.74, respectively. 3. Whether petitioners understated income from life insurance commissions on their 1965 and 1966 returns by $ 1,906.75 and $ 192.53, respectively. 4. Whether petitioners understated income realized from the partnership of Hagen, Ltd. on their 1964 and 1965 returns by $ 4,969.81 and $ 64,269.46, respectively. 5. Whether petitioners realized income of $ 13,422.35 during 1966 from payments made by Hagen Holding Corporation on their note to Hagen, Ltd. 6. Whether petitioners realized income of $ 5,007.88 and $ 5,879.85 from unidentified sources during 1965 and 1966, respectively. 7. Whether petitioners received income of $ 945.00 during 1965 from The Schallmo Foundation, Inc. 8. Whether petitioners realized unreported income of $ 2,284.00 during 1966 from life insurance premiums paid by Acker Industries, Inc. on a policy insuring Ed J. Hagen. 9. Whether petitioners overstated cost of goods sold on their 1964 and 1966 returns and understated cost of goods sold on their 1965 return in the amounts determined by respondent. 10. Whether petitioners overstated allowable depreciation expenses*486 on their 1964, 1965 and 1966 returns by $ 1,557.53, $ 1,609.77, and $ 2,008.54, respectively. 11. Whether petitioners overstated allowable automobile expenses on their 1964, 1965 and 1966 returns by $ 1,696.72, $ 707.90, and $ 284.28, respectively. 12. Whether petitioners understated commission expenses on their 1964, 1965 and 1966 returns by $ 1,443.24, $ 4,005.35, and $ 5,535.54, respectively. 13. Whether petitioners overstated business expenses other than depreciation, automobile, commission and cost of goods sold expenses on their 1964, 1965 and 1966 returns by $ 4,845.05, $ 3,407.58, and $ 14,419.42, respectively. 14. Whether respondent correctly determined that the net operating loss carryover of $ 6,999.25 claimed on petitioners' 1964 return is not allowable. 15. Whether petitioners are entitled to itemized medical expense deductions for the 1964, 1965 and 1966 taxable years. 16. Whether petitioners overstated their 1964 charitable contributions by $ 45.75 and understated their 1965 and 1966 contributions by $ 55.00 and $ 497.00, respectively. 17. Whether petitioners understated itemized tax expenses on their 1964, 1965 and 1966 returns. 18. Whether petitioners*487 overstated itemized interest expenses on their 1965 return by $ 214.76. 19. Whether respondent correctly determined that the $ 1,000.00 capital loss claimed on petitioners' 1964 return is not allowable. 20. Whether petitioners understated income from life insurance commissions on their 1968 return by $ 461.95 and overstated income from insurance commissions on their 1970 return by $ 413.32. 21. Whether petitioners realized income from unidentified sources in the amounts of $ 44,403.41, $ 20,578.29, and $ 6,678.41 for 1968, 1969 and 1970, respectively. 22. Whether petitioners realized income of $ 1,142.00, $ 1,530.00 and $ 1,552.00 in 1968, 1969 and 1970 from premium payments made by Acker Industries, Inc. on a policy insuring Ed J. Hagen's life. 23. Whether petitioners received distributions taxed as dividends as the result of expenditures made by Hagen Investments, Inc. for their personal benefit, and in what amounts. 24. Whether petitioners received distributions taxed as dividends during 1968, 1969, 1970 and 1971 as the result of expenditures made by Capitol Car Care, Inc. for their personal benefit, and in what amounts. 25. Whether petitioners understated interest*488 income on their 1969 and 1970 returns by $ 52.88 and $ 807.61, respectively. 26. Whether petitioners realized additional income of $ 94,500.00 in 1969 relating to the acquisition of equity in Alliance Corporation. 27. Whether respondent correctly determined that petitioners are entitled to deductions of $ 229.72 for office-at-home expenses for each of the taxable years 1968, 1969, 1970 and 1971. 28. Whether petitioners overstated itemized interest expenses on their 1968 return by $ 1,164.40 and understated interest expenses for 1969, 1970 and 1971 by $ 2,378.20, $ 1,285.74, and $ 2,269.45, respectively. 29. Whether petitioners are entitled to itemized medical expense deductions for the 1968 through 1971 taxable years. 30. Whether petitioners are entitled to capital losses in 1968 with respect to stock warrants of Great Northern Gas Utilities, Ltd. and Western Copper Mills, Ltd. 31. Whether petitioners' underpayments of income tax for 1964, 1965 and 1966 were due to fraud within the meaning of 32. Whether petitioners' underpayments of income tax for 1968, 1969, 1970 and 1971 were due to negligence or intentional disregard of rules and regulations*489 within the meaning of In his notice of deficiency issued to Hagen Investments, Inc. on June 30, 1976 respondent determined deficiencies in its corporate income tax and additions to the tax for the taxable fiscal years ended September 30, 1967 through September 30, 1970 as follows: Additions to Tax, I.R.C. 1954 Income Tax Section 6653(a) 1967 $ 276.21 -0- 1968 155,653.08 $ 7,937.85 1969 147,280.66 7,364.03 1970 1,944.39 97.22
The issues for decision are:
1. Whether the corporation understated gross profits from stock sales on its Federal corporate income tax returns for the*490 taxable years ended September 30, 1968, September 30, 1969 and September 30, 1970 by $ 191,768.95, $ 27,366.21 and $ 58,010.36, respectively. *491 year with respect to contributions made to the Hagen Employees Profit-Sharing and Retirement Trust (HEPRET).
8. Whether the corporation overstated auto and travel expenses by $ 727.82, $ 16,015.76, and $ 3,924.56 on its corporate returns for the 1968, 1969 and 1970 fiscal years, respectively.
9. Whether the corporation overstated dues and subscription expenses by $ 994.89, $ 667.95, $ 1,546.95, and $ 144.40 on its corporate returns for the 1968, 1969, 1970 and 1971 fiscal years, respectively.
10. Whether the corporation overstated interest expenses by $ 3,469.75, $ 2,968.43, $ 2,168.04, and $ 2,269.45 on its corporate returns for the 1968, 1969, 1970 and 1971 fiscal years, respectively.
11. Whether the corporation overstated insurance expenses by $ 2,034.47 and $ 856.00 on its corporate returns for the 1968 and 1971 fiscal years, respectively.
12. Whether the corporation overstated office supply expenses by $ 537.96 and $ 1,175.76 on its corporate returns for the 1969 and 1970 fiscal years, respectively.
13. Whether the corporation overstated repair and maintenance expenses by $ 6,600.99, $ 4,151.96, $ 739.16 and $ 277.27 on its corporate returns for the 1968, 1969, *492 1970 and 1971 fiscal years, respectively.
14. Whether the corporation overstated expenses for taxes by $ 700.76, $ 755.14, $ 710.00 and $ 714.58 on its corporate returns for the 1968, 1969, 1970 and 1971 fiscal years, respectively.
15. Whether the corporation overstated travel and entertainment expenses on its corporate returns for the 1968 and 1971 fiscal years by $ 1,830.08 and $ 3,570.79, respectively.
16. Whether the corporation overstated utility expenses by $ 1,572.83, $ 1,500.60, $ 1,293.01, and $ 997.74, on its corporate returns for the 1968, 1969, 1970 and 1971 fiscal years, respectively.
17. Whether the corporation overstated audit and legal expenses on its corporate return for the 1971 fiscal year by $ 15,180.73.
18. Whether the corporation is entitled to a deduction for the 1969 fiscal year for a $ 107.00 expense incurred for William C. "Bill" Hagen, son of petitioners.
19. Whether the corporation is entitled to a $ 59.97 deduction for miscellaneous expenses on its corporate return for the 1971 fiscal year.
20. Whether the corporation overstated depreciation expenses by $ 1,037.47, $ 1,540.88, $ 735.17, and $ 555.55 on its corporate returns for the*493 1968, 1969, 1970 and 1971 fiscal years, respectively.
21. Whether the corporation is entitled to net operating loss carryback deductions for the 1967 and 1968 fiscal years.
22. Whether the corporation understated income from the sale of property in the 1970 fiscal year by $ 8,868.64.
23. Whether the corporation is entitled to investment tax credits for the 1968 and 1969 fiscal years.
24. Whether the corporation's underpayments of income tax for the 1968, 1969 and 1970 fiscal years were due to negligence or intentional disregard of rules and regulations within the meaning of
FINDINGS OF FACT
Some of the facts and exhibits have been stipulated. The stipulation and exhibits are incorporated herein by reference.
Petitioner graduated from the Frankfurt School of Economics, Frankfurt, West Germany with a Master of Economics Degree. Thereafter, he obtained a Master of Business Administration Degree from Stanford University. *494 under the Securities and Exchange Act of 1934. He operated as a sole proprietor under the name of Hagen Investments during the taxable years 1964 through 1966 and until approximately April 1, 1967, at which time Hagen Investments, Inc. succeeded Ed J. Hagen as the registered broker-dealer. *495 from time to time. These were not traded in the ordinary course of business. Inventories, principally of stocks, were a material income-producing factor of Hagen Investments and Hagen Investments, Inc.
Petitioners were involved in other business enterprises which are relevant to these cases. The first is Hagen Holding Corporation, formed in 1963 to purchase and own controlling interests in other corporations. Petitioner was Hagen Holding Corporation's president from its formation on November 20, 1963 until March 31, 1969. *496 Bertha Schallmo ("Mrs. Schallmo") was a friend of petitioners and a customer of Hagen Investments and Hagen Investments, Inc. Mrs. Schallmo was an elderly woman of considerable means who relied on petitioners for investment advice and personal counsel during the years at issue. We mention her at this point because of her involvement in various aspects of these consolidated cases. Mrs. Schallmo was a stockholder in Hagen Holding Corporation in the early years of its existence, and, as a trustee of The Schallmo Foundation, Inc., was a limited partner in Hagen, Ltd.
Hagen Investments and its corporate successor were censored and fined by the National Association of Securities Dealers a number of times between 1964 and 1970 for violating various provisions of its Rules of Fair Practice.
Petitioners resided at 5000 N.W. 31st Street, Oklahoma City, Oklahoma on the date they filed their petition. They timely filed joint Federal income tax returns for the taxable years 1964 through 1966 with the Internal Revenue Service. Respondent determined numerous adjustments in his notice of deficiency for these taxable years and they are as follows:
| Type of | |||
| 1964 | 1965 | 1966 | |
| Gross Receipts from | |||
| $ 16,692.00 | $ 68,739.80 | $ (205,729.09) | |
| Interest, Dividends | |||
| and Fees | 11,591.88 | 8,019.27 | 18,118.74 |
| Life Insurance | |||
| Commissions | 1,906.75 | 192.53 | |
| Income from Hagen, Ltd. | 5,545.81 | 64,269.46 | 13,422.35 |
| Unidentified Income | 5,007.88 | 5,879.85 | |
| Income from Schallmo | |||
| Foundation, Inc. | 945.00 | ||
| Additional Compensation | 2,284.00 | ||
| Cost of Goods Sold | 18,120.16 | (41,570.77) | 231,780.21 |
| Depreciation | 1,557.53 | 1,609.77 | 2,008.54 |
| Automobile Expenses | 1,696.72 | 780.90 | 284.28 |
| Commission Expenses | (1,443.24) | (4,005.35) | (5,535.54) |
| Other Business Expenses | 4,845.05 | 3,407.58 | 14,419.42 |
| Net Operating Loss | 6,999.25 | ||
| Medical Expenses | 139.42 | 92.00 | 888.22 |
| Contributions | 45.75 | (55.00) | (497.00) |
| Tax Expenses | (165.00) | (1,232.28) | (623.59) |
| Interest Expenses | 214.76 | ||
| Capital Loss | 1,000.00 | ||
| $ 66,625.33 | $ 108,129.77 | $ 76,892.92 |
Respondent considered the books and records of both petitioners and Hagen Investments incomplete and unreliable sources for determining the correct amounts of income and expense for these taxable years. He therefore determined petitioners' taxable income for 1964, 1965 and 1966 primarily by the bank deposits method. Using this method, he categorized deposits to and withdrawals from petitioners' numerous accounts, both business and non-business accounts. *499 Investments for transactions at both the wholesale and retail levels. Respondent also used other types of evidence to establish items of income and expense, making his overall method a hybrid bank deposits and specific items method.
The books and records of petitioners and Hagen Investments were not complete and in fact contained false entries. Therefore, they are not reliable sources of data to correctly*500 determine taxable income for 1964, 1965 and 1966. Accordingly, respondent's use of the bank deposits method was an appropriate method for arriving at taxable income for these years.
Facts relevant to the above types of adjustments are set forth in the following paragraphs.
A.
1.
Petitioners reported the following business receipts on their 1964, 1965 and 1966 returns:
| Year | Amount |
| 1964 | $ 156,703.90 |
| 1965 | $ 910,593.00 |
| 1966 | $ 3,441,725.51. |
The gross receipts of Hagen Investments reported on Schedule C of petitioners' returns were taken from the books of account of the business. *501 In 1964, gross receipts using the bank deposits method were from stock sales, commissions from sales of Atkinson Enterprises, Inc. stock and also mutual funds, stock dividends, unidentified income and income received from The Schallmo Foundation, Inc. *502 Petitioners understated gross receipts received by Hagen Investments for 1964 and 1965 and reportable on Schedule C of their returns. However, they overstated gross receipts on their 1966 return. Gross receipts of Hagen Investments for these years, gross receipts per petitioners' returns and the amounts by which gross receipts were either understated or overstated are: 1964 1965 1966 $ 3,235,996.41 Gross Receipts per Return 156,703.90 910,593.00 3,441,725.50 Understatement [Overstatement] $ [205,729.09]
*503 We use 1964 gross receipts per return of $ 156,703.90 in our computation even though the business incorrectly utilized the cash method to arrive at that figure. In doing so we merely find that petitioners reported 1964 business receipts of $ 156,703.90. However, determined gross receipts are based on sales accruing in each of the 3 years. Use of the cash method in 1964 was improper because inventories were necessary. Interest, Dividends and Fees
Petitioners reported the following amounts of interest, dividends and fees on their 1964 return:
| Source | Amount |
| Commission Fees - Occidental Life | $ 7,221.37 |
| Rental Fees | 400.00 |
| Stock Dividends | 859.73 |
| Income from Services Rendered | 5,900.00 |
| Interest | -0- |
| Total | $ 14,381.10 |
No interest or dividend income was reported for the taxable years 1965 and 1966. *504 Petitioner understated interest, dividends and fees for each of these 3 years. Correct interest, dividends and fees, the amounts reported and petitioners' understatements are: 1964 1965 1966 Interest, Dividends and Fees $ 25,894.42 $ 8,019.27 $ 18,118.74 Interest, Dividends and Fees per Return 14,381.10 -0- -0- Understatement $ 8,019.27 $ 18,118.74
3.
As stated previously, petitioner also sold life insurance. Petitioners reported income from life insurance commissions in 1965 and 1966 in the following amounts:
| 1965 | 1966 | |
| Occidental Life | $ 5,540.00 | $ 4,756.87 |
| Standard Life | 1,805.00 | 3,557.45 |
| Totals | $ 7,345.00 | $ 8,314.32 |
Commissions on life insurance sales were paid*505 to petitioner by the various insurance carriers he represented after the sales were consummated and after the total premium payments were first remitted to the carriers.
Life insurance commissions received and reported by petitioners in 1965 and the amounts by which they were understated are:
| Commissions-1965 | ||
| Occidental Life | $ 7,285.35 | |
| Standard Life | 1,966.40 | |
| $ 9,251.75 | ||
| Commissions | ||
| per 1965 Return | 7,345.00 | |
| $ 1,906.75 |
Life insurance commissions received and reported by petitioners in 1966 and the amounts by which they were understated are:
| Commissions-1966 | ||
| Occidental Life | $ 4,949.40 | |
| Standard Life | 3,557.45 | |
| $ 8,506.85 | ||
| Commissions | ||
| per 1966 Return | 8,314.32 | |
| Understatement | $ 192.53 |
4.
On June 5, 1964 petitioners and Mrs. Schallmo formed Hagen, Ltd., a limited partnership, under the laws of the State of Oklahoma. Petitioner was its general partner and the only partner authorized by the terms of the Limited Partnership*506 Agreement ("the Agreement") to transact the business of the partnership. Mrs. Schallmo was described in the Agreement as participating in the partnership as a "trustee." *507 profits would be distributed and net losses borne on the basis of the ratio of the partners' capital accounts at the end of the last accounting period prior to the reduction of the capital account to zero.
The proposed initial contributions to capital of Hagen, Ltd. are set forth on Exhibit A to the Agreement, as follows:
| Other | |||
| Cash | Total | ||
| Ed J. Hagen | $ 2,000 | $ 48,000 | $ 50,000 |
| Bertha Schallmo | 2,000 | 48,000 | 50,000 |
| Martha Jo Hagen | 1,000 | 24,000 | 25,000 |
| Total | $ 5,000 | $ 120,000 | $ 125,000 |
The initial cash*508 contributions were made by the three partners. However, no deeds or other instruments of conveyance are included in the record to establish conclusively that any "other property" was ever conveyed, and Hagen Investments in fact continued throughout the life of the partnership to depreciate items of office furniture and equipment that Mrs. Hagen was to have contributed as her "other property." The partners also contributed additional cash to the partnership after their initial investments were made. The capital accounts of Hagen, Ltd. during its existence are summarized as follows:
| Hagen, Ltd. | |||
| Capital Accounts | |||
| June 5, 1964 to September 1, 1965 | |||
| Ed J. | Martha Jo | Bertha | |
| Hagen | Hagen | Schallmo | |
| Initial Contributions | $ 2,000.00 | $ 1,000.00 | $ 2,000.00 |
| 1964 Investments | 146,000.00 | ||
| 92,000.00 | |||
| 81,107.78 | |||
| Total 1964 Contributions | 148,000.00 | 1,000.00 | 175,107.78 |
| 1964 Withdrawals | (93,000.00) | ||
| (20,000.00) | (10,000.00) | ||
| (102,000.00) | |||
| (94,000.00) | |||
| (40.00) | (21.50) | ||
| Balance before Income | |||
| Allocation | (67,040.00) | (9,000.00) | 81,086.28 |
| 1964 Allocation of | |||
| Income | 3,313.20 | 1,656.61 | 3,313.20 |
| Capital Accounts | |||
| 12/31/64 | (63,726.80) | (7,343.29) | 84,399.48 |
| 1965 Contributions | 4,000.00 | 2,000.00 | |
| 424.94 | 212.94 | ||
| 66,144.00 | |||
| 1,800.00 | |||
| 39,000.00 | |||
| Total 1965 Contributions | 6,842.14 | (5,130.35) | 125,199.48 |
| 1965 Withdrawals | (3,056.80) | ||
| (4,000.00) | |||
| (13,334.23) | (6,616.12) | ||
| (19,999.34) | (10,000.66) | ||
| (9,500.00) | |||
| (44,000.00) | |||
| (4,550.00) | |||
| Balance before Income | |||
| Allocation | (43,048.23) | 76,649.48 | |
| 1965 Allocation of | |||
| Income | -0- | -0- | 416.63 |
| $ (43,048.23) | $ (21,797.13) | $ 77,066.11 | |
| Source of | |
| Investment/ | |
| Recipient of | |
| Initial Contributions | |
| 1964 Investments | Ed J. Hagen |
| Schallmo Foundation, Inc. | |
| Bertha Schallmo | |
| Total 1964 Contributions | |
| 1964 Withdrawals | Ed J. Hagen |
| Ed J. or Martha Jo Hagen | |
| Hagen Investments | |
| Schallmo Foundation, Inc. | |
| Mummer's Theatre (tickets) | |
| Balance before Income | |
| Allocation | |
| 1964 Allocation of | |
| Income | |
| Capital Accounts | |
| 12/31/64 | |
| 1965 Contributions | Ed J. and/or Martha Jo Hagen |
| Ed J. or Martha Jo Hagen | |
| Ed J. Hagen | |
| Bertha Schallmo | |
| Schallmo Foundation, Inc. | |
| Total 1965 Contributions | |
| 1965 Withdrawals | Ed J. Hagen |
| Ed J. Hagen | |
| Ed J. and/or Martha Jo Hagen | |
| Ed J. and Martha Jo Hagen | |
| Hagen Investments | |
| Schallmo Foundation, Inc. | |
| Bertha Schallmo | |
| Balance before Income | |
| Allocation | |
| 1965 Allocation of | |
| Income |
*510 a.
As shown in the preceding schedule, all the partners withdrew cash from the partnership in 1964. The capital accounts of petitioner and Mrs. Hagen fell below zero in that year due to withdrawals in excess of contributions. Hagen, Ltd. had gross income of $ 10,177.91 and expenses of $ 1,894.90 in 1964. Its items of income were rental payments and farm income; expenses cannot be categorized as to type. Based on their capital accounts as of the end of 1964, respondent determined that petitioners realized $ 4,969.81 in partnership income, or 60 percent of the partnership's 1964 taxable income of $ 8,283.01. Respondent allocated 60 percent of the taxable income to petitioners because their combined initial investment of $ 3,000.00, was 60 percent of the total initial cash investment. 1965
By the close of the*511 1965 partnership year petitioner and Mrs. Hagen still had negative capital accounts. The partnership had taxable income of $ 416.63 in 1965 (the year of dissolution), and respondent allocated the entire amount to Mrs. Schallmo. Her personal assets were, as of August 11, 1965, under the management and control of a trustee, A. Francis Porta. *512 Hagen, Ltd. was dissolved by agreement among the partners on September 1, 1965. *513 was reported in 1965.
c.
On December 24, 1964, Hagen Holding Corporation, by Ed J. Hagen, president, and Martha Jo Hagen, secretary, executed a note payable to Hagen, Ltd. for $ 12,500.00. *514 5.
Petitioners received income in 1965 and 1966 from unidentifiable sources and income that could not be categorized as set forth hereinbefore. The amounts received are:
| Year | Amount |
| 1965 | $ 5,007.88 |
| 1966 | $ 5,879.85 |
Most of the items of unidentified income were deposits of currency to petitioners' various bank accounts. *515 6.
The Schallmo Foundation, Inc. ("The Foundation"), referred to earlier in conjunction with Hagen, Ltd., was an organization founded by Mrs. Schallmo for charitable pursuits. She contributed substantial sums of money to it in the early 1960's for the purpose of constructing a nursing home in Okeene, Oklahoma. When Schallmo Manor opened its doors in 1965, Mrs. Schallmo, petitioner and Mrs. Hagen were members of its board of directors.
The Foundation purchased a piano from Mrs. Hagen on January 13, 1965. Mrs. Hagen was then treasurer of the organization in addition to being a director, and she wrote herself a check for $ 945.00 in payment for the piano on that date. Mrs. Hagen's basis in the piano is not known. Petitioners failed to report the $ 945.00 received by Mrs. Hagen on their 1965 return.
By the time Mr. Porta was appointed trustee of the Bertha Schallmo Trust on August 11, 1965, the nursing home was being operated by The Foundation at a substantial financial loss, which had, in turn, become a serious and continuing drain on Mrs. Schallmo's personal resources. The board of directors therefore decided at the recommendation*516 of Mr. Porta to transfer Schallmo Manor to the Town of Okeene. The consideration for the transfer was assumption by the Town of Okeene of a $ 150,000.00 liability of The Foundation relating to the construction of the facility, and the release of The Foundation on the underlying obligation.
7.
As early as December, 1964, petitioner had assumed control of Acker Industries, Inc., ("Acker") an Oklahoma corporation involved in the manufacture of metal products. Petitioner was chairman of the board and treasurer of Acker after its reorganization in 1964 as a Hagen Holding Corporation subsidiary. He was also president of Hagen Holding Corporation until March 31, 1969.
On November 9, 1965, Acker paid a semi-annual premium of $ 1,142.00 for the purchase of a preferred whole life insurance policy insuring the life of petitioner. The policy, Standard Life and Accident Insurance Company ("Standard Life") policy No. OL-92440, was sold by petitioner, and Mrs. Hagen was the original owner. The date of issue on the policy was October 21, 1965 and the amount of insurance purchased was $ 100,000.00.
Mrs. Hagen assigned the Standard*517 Life policy to Acker on the date of purchase. She continued as primary beneficiary. Acker paid additional semi-annual premiums to Standard Life on policy No. OL-92440 during 1966. In all, Acker made premium payments totalling $ 2,284.00 in 1966. The premiums paid by the corporation during 1966 were additional compensation to petitioner. Facts Relating to Expense Adjustments
1.
Petitioners reported the following amounts of cost of goods sold for Hagen Investments on Schedule C of their 1964, 1965 and 1966 returns:
| Year | 1964 | $ 129,669.26 |
| 1965 | $ 890,464.00 | |
| 1966 | $ 3,400,862.26 |
*518 Respondent determined that these amounts were incorrect. He therefore reconstructed cost of goods sold for 1964 through 1966, based again on the bank deposits method. His overall system was to (a) adopt Hagen Investments' closing inventory figures for the 1963, 1964 and 1965 business years as the correct opening inventory figures for 1964, 1965 and 1966, respectively; (b) add to opening inventory the cost of inventory purchases in 1964, 1965 and 1966, derived from respondent's check classifications, to arrive at goods available for sale; and (c) subtract from goods available for sale Hagen Investments' own closing inventory figures for 1964, 1965 and 1966. *519 In the interest of greater clarity, we treat separately each of the 3 years to which cost of goods sold adjustments have been made.
a.
Hagen Investments' cost of goods sold for 1964 was:
*533 Hagen Investments did not trade in Hagen Holding Corporation stock. Similarly, sales and purchases of Hagen Holding Corporation shares were not entered in Hagen Investments' general journal. However, petitioner used Hagen Investments' confirmation slips and receipts when selling Hagen Holding Corporation stock he owned individually, and buyers made their checks for the purchase of these shares payable to the order of Hagen Investments. *534 deposited into FNB 0-350-079. Petitioner's only records of his personal sales and purchases of Hagen Holding Corporation stock were the corporation's stockholder cards.
Ownership of the shares sold and therefore petitioner's basis and amount realized were issues extensively argued at trial. Petitioner testified that 18,669 Class A and 902 Class B shares were purchased by Charles D. Dudley ("Mr. Dudley") in 1965 pursuant to a subscription agreement with Hagen Holding Corporation. He also testified that Mr. Dudley subscribed to and purchased an additional 6,000 Class A shares and 300 Class B shares in a separate transaction in 1965, and that all the Class A and Class B shares obtained in the transactions were sold by Mr. Dudley in that year. Hagen Holding Corporation's stock transfer records show that Mr. Dudley purchased and sold the shares in 1965. *535 rather than Mr. Dudley purchased the 18,669 Class A shares and the 902 Class B shares from Hagen Holding Corporation in 1965. *536 Further findings with respect to this matter are necessary. When petitioner sold the Class A and Class B shares obtained in the above-described transactions to various purchasers in 1965, the number of shares reissued exceeded the number of shares petitioner had acquired. The excess shares issued were obtained by petitioner directly from Hagen Holding Corporation, which he controlled, at no cost. The following shows the number of excess shares issued: Shares Purchased Shares Reissued Excess Shares in 1965 Issued February 24, 1965 18,669(A) 19,765(A) 1,096(A) 902(B) 902(B) -- October 7, 1965 6,000(A) 10,145(A) 4,145(A) December 28, 1965 300(B) 560(B) 260(B) Totals 29,910(A) 1,462(B) 5,241(A) 260(B)
As a result, petitioner's amount realized in 1965, $ 46,536.00, includes the amount realized upon the sale of 5,241 Class A and 260 Class B zero basis shares.
Petitioner purchased 1,000 shares of National Foundation Life Insurance*537 Company ("National Foundation Life") for his investment account in 1965. He sold the shares to Buddy Brixey in the same year for $ 4,250.00. Petitioner's basis in the National Foundation Life stock was $ 4,000.00. The $ 250.00 gain on the sale was not reported.
Bookkeeping irregularities surrounded this stock sale. Petitioner's original mail deposit slip for the check received in the transaction described the deposit of $ 4,250.00 as a check from "Buddy Brixey." On the duplicate mail deposit slip for the transaction "Buddy Brixey" is crossed out and "Ed J. Hagen, Add'l Investment" is substituted. It is from the duplicate mail deposit slip that the transaction was recorded in Hagen Investments' general journal. The journal entry describes the transaction as one in which $ 4,250.00 was received as "Add'l Inv.", i.e., an addition to capital of Hagen Investments rather than the result of a stock sale. In this manner $ 4,250.00 in receipts from 1965 stock sales bypassed any income accounts. The journal entry for the sale falsely represents the nature of the Brixey transaction.
Hagen Investments purchased 14,148 shares of United Income Life stock for petitioner's investment account*538 in 1965 for $ 3,537.00, or $ .25 per share. Of the total number, petitioner sold 7,800 shares for $ 3,800.13 to various purchasers in the same year. His basis in the shares sold was $ 1,950.00 and his gain on the sales totalled $ 1,850.13. None of the sales were entered in either the general journal or petitioner's investment account records, and no gain was reported. Of the 6,348 shares not sold, 6,000 were traded by petitioner for 6,000 shares of Hagen Holding Corporation's Class A stock. *539 the gains were not reported on the 1965 return.
3.
The specific transactions for 1966 are:
| Source and | Correct | Amount | Amount Not |
| Type of Income | Amount | Reported | Reported |
| Confederate Steel | |||
| Corporation/Oklahoma | |||
| Steel Corporation - | |||
| Interest | $ 4,534.71 | $ 279.71 | $ 4,255.00 |
| Acker Industries, Inc. - | |||
| Interest | 4,925.00 | 95.00 | 4,830.00 |
| Hagen Holding Corporation - | |||
| Interest | 2,544.18 | -0- | 2,544.18 |
| Dale Wrobbel - | |||
| Interest | 81.00 | -0- | 81.00 |
| Liberty National Bank | |||
| #584-667-6 - Interest | 204.75 | -0- | 204.75 |
| First National Bank | |||
| 153.23 | -0- | 153.23 | |
| Local Federal Savings & | |||
| Loan Assn. #51293 - | |||
| 234.50 | -0- | 234.50 | |
| Acker Industries, Inc., | |||
| Payments to Standard Life | |||
| and Accident Insurance | |||
| Co. - Premiums | 2,284.00 | -0- | 2,284.00 |
| Hagen Holding Corporation - | |||
| Dividends | 1,617.06 | -0- | 1,617.06 |
| $ 16,578.43 | $ 374.71 | $ 16,203.16 |
*540 As to the first item, the note which gave rise to the $ 4,255.00 in unreported interest income was given by Confederate Steel Corporation to Oklahoma Steel Corporation on June 30, 1965. The face amount of the note was $ 24,992.43. Oklahoma Steel Corporation assigned the note to Hagen Investments on November 11, 1965, at which time the balance owed was $ 20,492.43. Confederate Steel Corporation retired the note in 1966 by making payments of principal and interest to Hagen Investments. Of the $ 4,534.71 in interest income, only $ 279.71 was reported on petitioners' 1966 return. *541 Hagen Investments' general journal, and only $ 95.00 of the $ 4,925.00 in interest was reported on petitioners' 1966 return. *542 Petitioners failed to report savings account interest in 1966. The savings accounts for which no interest was reported and the amounts not reported are shown above. Premium payments made by Acker in 1966 for the benefit of petitioners are explained in detail in Part II.A.7.,
Finally, petitioners received dividends of $ 1,617.06 from Hagen Holding Corporation which they did not report. Mrs. Hagen signed petitioners' dividend check for $ 1,617.06, dated January 15, 1966, as treasurer of Hagen Holding Corporation. Payment of the dividend was recorded in the corporation's 1966 general journal, but this item of income also failed to make its way onto the 1966 return.
4.
The general journals of Hagen Investments for 1964 and 1965 contain entries recording checks written to various customers as shown below. The journal entries record that Hagen Investments purchased stock in each of these transactions. However, the checks were not written to the customers whose names were entered in the journals. Rather, they were written either to petitioner or Hagen Holding Corporation. *543 The transactions are:
| Payee Per | Amount of | Date of | Payee per |
| Journal Entry | Check | Check | |
| Hugh B. Warren | $ 1,021.50 | 9/10/64 | Ed J. Hagen |
| Paul J. Ottis | $ 3,654.00 | 9/17/64 | Ed J. Hagen |
| Mary Jean Wise | $ 5,413.66 | 12/28/64 | Hagen Holding |
| Corporation | |||
| Richard M. Taliaferro | $ 13,200.00 | 12/22/65 | Ed J. Hagen |
| Richard S. Roberts | $ 1,075.00 | 12/27/65 | Ed J. Hagen |
Petitioner's business records failed to correctly record the nature of the above transactions.
As to the last two transactions, petitioner Payee per Amount of Date of Payee per Journal Entry Check Check Ed J. Hagen $ 1,900.00 9/23/64 Max E. Sanders Ed J. Hagen $ 2,272.50 8/30/64 Dorothy Tyler Ed J. Hagen $ 87.50 9/2/64 Richard Taliaferro Ed J. Hagen $ 11,371.50 5/14/66 Mary Jean Wise
Petitioner's business records failed to correctly record the above transactions as well. *545 We have found petitioners' personal and business records for 1964 through 1966 to be woefully inadequate and confusing. They are false as to numerous transactions and incomplete because many transactions were not recorded at all. On the basis of these discrepancies we find that petitioners failed to keep satisfactory books and records during these years.
5.
On September 17, 1971 a criminal indictment was filed in the United States District Court for the Western District of Oklahoma in which the Grand Jury charged as follows:
That on or about the 15th day of April, 1965, in the Western District of Oklahoma, Ed J. Hagen a resident of Oklahoma City, Oklahoma, who during the calendar year 1964 was married, did wilfully and knowingly attempt to evade and defeat a large part of the income tax due and owing by him and his wife to the United States of America for the calendar year 1964, by filing and causing to be filed with the District Director of Internal Revenue for the Internal Revenue District of Oklahoma City, at Oklahoma City, Oklahoma, a false and fraudulent joint income tax return on behalf of himself and his said wife, wherein it was*546 stated that their adjusted gross income for said calendar year was the sum of $ 3,750.24 and that the amount of tax due and owing thereon was zero, whereas, as he then and there well knew, their joint adjusted gross income for the said calendar year was the sum of $ 22,082.94 and their joint taxable income was the sum of $ 16,886.67, upon which said taxable income there was owing to the United States of America an income tax of $ 3,220.04, in violation of
That on or about the 15th day of April, 1966, in the Western District of Oklahoma, Ed J. Hagen a resident of Oklahoma City, Oklahoma, who during the calendar year 1965 was married, did wilfully and knowingly attempt to evade and defeat a large part of the income tax due and owing by him and his wife to the United States of America for the calendar year 1965, by filing and causing to be filed with the District Director of Internal Revenue for the Internal Revenue District of Oklahoma City, at Oklahoma City, Oklahoma, a false and fraudulent joint income tax return on behalf of himself and his said wife, wherein*547 it was stated that their taxable income for said calendar year was the sum of $ 3,329.00 and that the amount of tax due and owing thereon was the sum of $ 505.93, whereas, as he then and there well knew, their joint taxable income for the said calendar year was the sum of $ 39,482.09, upon which said taxable income there was owing to the United States of America an income tax of $ 8,738.96, in violation of
*549 Income Adjustments 1964 1965 1966 Gross Receipts $ 16,666.00 $ 68,739.40 $ (205,729.09) Interest, Dividends and Fees 11,513.32 8,019.27 18,118.74 Life Insurance Commissions 1,906.75 192.53 Income from Hagen, Ltd. 4,969.81 64,269.46 13,422.35 Unidentified Income 5,007.88 5,879.85 Income from The Schallmo Foundation 945.00 Additional Compensation 2,284.00 Expense Adjustments Cost of Goods Sold 18,078.76 (41,570.77) 221,378.61 Depreciation 1,557.53 1,609.77 2,008.54 Auto Expenses 1,696.72 707.90 284.28 Commission Expenses 1,443.24 4,005.35 5,535.54 Other Business Expenses 4,845.05 3,407.58 14,419.42 * * * Contributions 45.75 (55.00) (497.00) Tax Expenses * * * Interest Expenses 215.55 Capital Loss 1,000.00 Increase to Income $ 61,816.18 $ 117,208.14 $ 77,297.77
Petitioners' 1964, 1965 and 1966 returns reported the following amounts: 1964 1965 1966 Adjusted Gross Income $ 3,750.24 $ 9,318.00 ($ 11,713.01) Taxable Income -0- 3,329.00 (19,891.02) Income Tax Liability -0- 505.93 -0-
Petitioners timely filed joint returns for the taxable years 1968 through 1971 with the Internal Revenue Service. Respondent determined numerous adjustments in the notice of deficiency for these years and they are:
Based on the preceding schedules, we find that petitioners with intent to evade and defeat tax substantially underreported taxable income for 1964 through 1966. Also with intent to evade and defeat tax, petitioners did not report their correct income tax liability for 1964, 1965 and 1966. Part of the underpayment of tax required to be shown on petitioners' returns for 1964, 1965 and 1966 is due to fraud. *550 III. Type of Adjustment 1968 1969 1970 1971 Life Insurance $ 461.95 $ (413.32) Commissions Unidentified Income 44,403.41 $ 20,578.29 6,678.41 Additional Compensation 1,142.00 1,530.00 1,552.00 Income from 30,427.14 37,125.11 21,448.27 $ 28,221.49 Interest Income 52.88 807.61 Income from Equity 94,500.00 Acquired Office-at-Home (229.72) (229.72) (229.72) (229.72) Expenses Interest Expenses 1,164.40 (2,378.20) (1,285.74) (2,269.45) Medical and Dental 716.00 1,151.00 1,023.24 213.02 Expenses Capital Losses 537.00 $ 78,622.18 $ 152,329.36 $ 29,580.75 $ 25,935.34
*551 Respondent employed third party records and indirect methods to make the above determinations. He was required to do so because petitioners' records were not complete when received for use in the audit process. When respondent requested to see petitioners' records he was informed that all business records had been lost and that only a few personal records still existed. Miscellaneous records were later turned over in an incomplete, piecemeal fashion.
Facts relating to the various adjustments are in the following paragraphs.
A.
1.
Petitioners reported the following commissions from the sale of life insurance on their 1968 and 1970 returns:
| Source | 1968 | 1970 |
| Occidental Life | $ 5,090.00 | |
| Standard Life | 3,658.00 | |
| Unidentified Sources | $ 4,729.82 | |
| $ 8,748.00 | $ 4,729.82 |
Petitioners understated life insurance commission income in 1968 and overstated it in 1970, as follows: 1968 1970 Commissions Received $ 9,209.95 $ 4,316.50 Commissions per Return 8,748.00 4,729.82 Understatement (Overstatement) $ (413.32)
2.
Petitioners received income in 1968, 1969 and 1970 from sources that have not been identified by either party. Income falling into this category took the form of deposits to three accounts controlled by petitioners. Bank Account Amount 1968 $ 37,000.00 7,125.00 FNB X-XXX-079 278.41 Total 1968 Unidentified Deposits $ 44,403.41 Less: Unidentified Income per Return -0- Understatement $ 44,403.41 1969 Liberty XXX-667-6 $ 12,000.00 State Capitol XXX-XX1-9 8,050.00 FNB X-XX0-079 5,959.29 Total 1969 Unidentified Deposits $ 26,009.29 Less: Unidentified Income per Return 5,431.00 Understatement $ 20,578.29 1970 Liberty XXX-XXX-6 $ 1,000.00 State Capitol XXX-XX1-9 5,678.41 Total 1970 Unidentified Deposits $ 6,678.41 Less: Unidentified Income per Return -0- Understatement $ 6,678.41
3.
Acker continued to pay premiums on Standard Life policy No. OL-92440 in 1968, 1969 and 1970. 1968 $ 1,142.00 1969 $ 1,530.00 1970 $ 1,552.00
These amounts were not reported on petitioners' 1968, 1969 and 1970 returns.
4.
In conjunction with his examination*554 of petitioners' returns for 1967 through 1971, respondent examined the corporate returns of Hagen Investments, Inc. and Capitol Car Care, Inc. *555 Corporate expenditures for dues and subscriptions, travel and entertainment, office supplies, and the like also appear to have been personal in nature, particularly when the various payees are considered. Since neither the corporation nor the petitioners have carried their respective burdens of proof with respect to the purpose for which these expenditures were made, we treat them as distributions also.
Distributions made for petitioners' benefit in these years were:
| Source and Type | ||||
| of Distribution | 1968 | 1969 | 1970 | 1971 |
| Hagen Investments, Inc. | ||||
| Interest Income | $ 573.75 | |||
| Auto Expenses | 727.82 | $ 6,158.96 | $ 530.59 | |
| Dues and Subscriptions | 234.40 | 362.45 | 1,509.45 | $ 144.40 |
| House Payments | 3,408.00 | 3,408.00 | 3,408.00 | 3,408.00 |
| Insurance Premiums | 5,583.47 | 4,951.74 | 4,060.75 | 4,471.00 |
| Office Supplies | 3,460.03 | 537.96 | 1,175.76 | |
| Repairs and Maintenance | 5,984.75 | 2,681.70 | 649.15 | 145.06 |
| Travel and Entertainment | 2,232.57 | 10,168.80 | 1,059.22 | 3,326.67 |
| Utilities | 1,572.83 | 1,820.84 | 1,217.57 | 752.94 |
| Training Program | ||||
| (Bill Hagen) | -0- | |||
| Miscellaneous Expenses | 26.49 | 33.48 | ||
| Legal Fees | 15,180.73 | |||
| Capitol Car Care, Inc. | ||||
| Auto Expenses | 193.00 | 902.69 | 996.97 | 300.00 |
| Insurance Premiums | 619.75 | -0- | 918.45 | -0- |
| Taxes | 338.05 | |||
| Dividend Exclusion | (200.00) | (200.00) | ||
| Totals | $ 24,590.37 | $ 30,993.14 | $ 15,690.45 | $ 27,562.28 |
*556 Our additional findings relating to these distributions are set forth in Appendices E, F, G and H. Facts relating to corresponding corporate expenditures are also set forth in these appendices and in our findings for docket No. 8342-76,
Petitioners presented no evidence relating to the corporation's current or accumulated earnings and profits for these 4 years. None of the distributions were reported on petitioners' 1968, 1969, 1970 and 1971 returns.
5.
Petitioners received interest income from bank accounts in 1969 and 1970 that was not reported on any returns. Liberty 584-667-6 $ 1,857.52 FNB 7-350-369 866.36 $ 2,723.88 Less: Amount Reported 2,671.00 Unreported Interest $ 52.88
For 1970 unreported interest income was:
| Liberty 584-667-6 | $ 603.88 |
| FNB 7-350-369 | 203.73 |
| $ 807.61 | |
| Less: Amount Reported | -0- |
| Unreported Interest | $ 807.61 |
*557 6.
Respondent determined that petitioners received income of $ 94,500.00 in 1969 when petitioner acquired "additional equity" in Alliance Corporation, an investment company. The record is extremely confusing with respect to this adjustment, and we have winnowed the facts from pages of complicated testimony and dozens of exhibits.
As stated before, Alliance Corporation was the successor corporation to Hagen Holding Corporation. Petitioner was a major shareholder. He was also a member of its board of directors and president of the corporation from its founding until his resignation on march 31, 1969. During this time he was in control of the records of the corporation and continued to be in control of them after he resigned.
When Hagen Holding Corporation was organized in 1963, two classes of common stock were authorized, Class A and Class B. The Class A shares were nonvoting shares. The Class B shares were designated in Article V of the Articles of Incorporation as voting shares "in the election of directors and in all other matters, except as may be otherwise provided by statute." As early as November 20, 1964, a corporate policy*558 was in place whereby Hagen Holding Corporation stock was to be issued in "units," each unit containing 20 shares of Class A nonvoting stock and one share of Class B voting stock. This policy never became part of the corporation's bylaws but it was adhered to in numerous transactions involving the sale of stock. The 20 to 1 ratio was perceived to be an established corporate policy by most shareholders and was followed with respect to transactions occurring through 1966.
Neither the Articles of Incorporation of Hagen Holding Corporation nor its bylaws stated that the Class A stock carried a liquidation preference or any other type of preference. That class was simply described as "Class A nonvoting common." However, on February 3, 1966, amendments to the Articles of Incorporation were filed with the Oklahoma Secretary of State's Office adding the following language to Article V of the Articles of Incorporation: "Each share of outstanding common stock, either Class A or Class B, shall share equally in all dividends and any other distributions, in liquidation or otherwise, made in respect of the common stock of the corporation." The amendment was voted on at the January 26, 1966 Special*559 Meeting of Shareholders and passed unanimously.
The directors of the corporation voted in favor of splitting the Class B voting shares a number of times between November, 1963 and September, 1969. In conjunction with these stock splits the Articles of Incorporation were amended to increase the number of authorized shares and to reduce the par value of each share. The stock splits were always proposed by and passed by the directors and then approved by the shareholders at the recommendation of petitioner.
By August, 1969, petitioners had acquired the following Class B voting shares by stock splits or purchase:
| Date of | Class B Shares | Method of Acquisition | |
| Issue | (Par Value/Price) | ||
| 11/25/63 | 1,000 | Cash Purchase | (1.00) |
| 6/15/64 | 5,000 | Cash Purchase | (1.00) |
| 10/10/64 | 6,000 | 2:1 Split | (.50) |
| 12/16/64 | 18,000 | Cash Purchase | (.50) |
| 12/22/65 | 23,000 | Cash Purchase | (.50) |
| 1/26/66 | 53,000 | 2:1 Split | (.25) |
| 11/15/66 | 14,000 | Cash Purchase | (.25) |
| 1/27/67 | 30,000 | 5:4 Split | (.20) |
| 8/4/69 | 150,000 | 2:1 Split | (.10) |
| 300,000 | |||
*560 For reasons not made apparent in the record, the Class A shares did not increase at the 20 to 1 ratio of Class A to Class B shares when the Class B shares split. Petitioners acquired Class B shares directly from the corporation from time to time. Petitioners' separate purchases of Class B shares occurred on December 22, 1965 and November 15, 1966, for 23,000 and 14,000 Class B shares, respectively. *561 was acquired by Hagen Holding Corporation in early 1967. (Hagen Holding Corporation changed its name to "Alliance Corporation" on September 12, 1966 and it is hereinafter known as "Alliance".) Wesbanco in turn acquired 1,000,000 shares of FRI from Thurston National Insurance Company in 1968. The acquisition made FRI a second-tier subsidiary of Alliance. Petitioner negotiated the FRI transaction, which was to have placed Wesbanco in control of the majority of FRI's capital stock. However, in consummating the transaction, petitioner diverted 400,000 shares of FRI stock to Capitol Car Care, Inc. and 200,000 shares to The Schallmo Foundation, Inc. Petitioner did so, in his own words, as Wesbanco's "nominee" and as collateral for all "past, present and future loans." *562 In mid-1969, FRI became the subject of an investigation by the Oklahoma Securities Commission. On July 7, 1968 FRI filed an "Application for Registration by Notification" with the Oklahoma Securities Commission to register 2,000,000 shares of its common stock, par value $ .05 per share. On July 11, 1969 the Oklahoma Securities Commission notified FRI that it intended to revoke the registration. In issuing its notice the Oklahoma Securities Commission alleged that FRI's March 31, 1969 consolidated balance sheet had seriously overvalued its assets and that, in particular, stocks owned by FRI which were stated as having a fair market value of $ 1,203,220.33 actually had little if any fair market value. The notice also alleged that a sale of FRI stock could operate as a fraud upon any purchaser of its stock relying on the financial information in FRI's consolidated balance sheet. *563 While the matter was still pending, petitioner caused the 600,000 shares of FRI to be reregistered to Wesbanco. Contemporaneously, the board of directors of Alliance voted to distribute 500,000 shares of FRI as a dividend to the shareholders of Alliance, Wesbanco's parent. The vote was taken at the August 4, 1969 directors meeting. These actions followed lengthy negotiations with the Oklahoma Securities Commission and were taken in an effort to settle the controversy over the registration of FRI's stock. One of the principal purposes of the dividend, which the Oklahoma Securities Commission had insisted upon, was to place the ownership of the 1,000,000 shares of FRI stock in the hands of more than one stockholder. In fact, the FRI stock was never reregistered.
The two-for-one split of August 4, 1969, the last of the four stock splits, was devised by petitioner. He suggested to the board of directors that a two-for-one split of the Class B voting shares would facilitate distribution of the 500,000 FRI shares to Alliance's shareholders. Prior to the stock split 770,000 shares of Alliance stock were outstanding:
| 540,000 | Class A Shares |
| 230,000 | Class B Shares |
| 770,000 | Total Shares Outstanding |
*564 Thus, a two-for-one split of the Class B shares would increase Alliance's outstanding shares to an even 1,000,000, or 540,000 Class A shares and 460,000 (i.e., 230,000 X 2) Class B shares. One FRI share could then be distributed for every two shares of Alliance issued and outstanding.
The resolution to split the shares passed after a heated discussion over the problems associated with the FRI purchase and stock registration. Petitioner was the target of much criticism on these issues. During the August 4th meeting he was asked to produce Alliance's stock records but he stated they were not available. He nevertheless assured the board that the stock split would not significantly reduce any stockholder's equity interest and that every stockholder would be treated approximately equally. The measure passed unanimously. *565 which also passed unanimously, was as follows:
THEREFORE BE IT RESOLVED: That the officers of the corporation call a special stockholders meeting for the purpose of presenting a recommendation to split the Common Stock Class B of Alliance Corporation by issuing one additional share for each one share presently held and to reduce the par value of all of Class B stock from [$ .]20 per share to [$ .]10 per share, and after said stock split and as a part of the same plan of re-organization to reclassify all of the outstanding shares of Alliance Corporation, irregardless of whether Class A or Class B, as voting common stock, so that after said re-organization there will then be outstanding one million shares of Common Stock-Full Voting having a par value of $ 1.00 each.
A special meeting of stockholders was convened on August 20, 1969. The meeting was called to vote on the two-for-one split and the recapitalization. Petitioner was not present at the meeting. However, Alliance's president, Vincent V. Messer, assured the shareholders that all would benefit equally from the recapitalization. When a question arose as to the number of outstanding Class B shares, Mr. Messer advised*566 the shareholders that the stock records were in petitioner's possession and not available for examination.
The shareholders unanimously passed the resolutions relating to the split of the Class B shares and the recapitalization. After the split 1,000,000 shares were outstanding:
| 540,000 | Class A Shares |
| 460,000 | Class B Shares (230,000 X 2) |
| 1,000,000 | Total Shares |
Total stockholders' equity as of December 31, 1969 was $ 899,494.17. Alliance Corporation et al vs. Ed J. Hagen, et al (Cause No. CIV-70-536) alleged that petitioner had defrauded and deceived Alliance's stockholders and creditors by employing manipulative*567 and deceptive practices in contravention of Rule 10(b)(5) of the United States Securities and Exchange Commission Rules. Specifically, the plaintiffs alleged that petitioner, the defendant therein, had altered dividend and liquidation rights to the detriment of Alliance's Class A shareholders as the result of stock purchases and stock splits between 1963 and 1969.
The District Court suit was settled in 1973 with petitioner returning 146,500 shares of Alliance's stock to the corporation. In return, the plaintiffs paid approximately $ 43,000 in cash to petitioner. Additionally, all other shares of Alliance's common stock owned by petitioners were to be placed in a voting trust for 5 years. Before the suit was initiated, however, the same plaintiffs brought an earlier suit in the District Court to recover the books and records of Alliance remaining in petitioner's possession after he ceased to be president and a board member of Alliance. The records obtained in the earlier suit provided the basis for the second suit, Cause No. CIV-70-536.
B.
1.
Respondent allowed office-at-home expenses of $ 229.72 for*568 1968 through 1971 for the business use of the 5000 N.W. 31st Street property. When we consider the corporation's expenditures relating to the property (which are treated as distributions,
2.
Petitioners claimed itemized interest expenses for the taxable years 1968 through 1971 in the amounts of $ 3,600.00, $ 883.00, $ 1,031.68 and $ 1,019.48, respectively. They overstated their interest expenses for 1968 and understated them for 1969, 1970 and 1971. The understatements were in part the result of respondent's treatment of house payments made by the corporation. He treated 4 years of house payments as corporate distributions. That portion of each house payment which was interest was deductible by petitioners under
Interest expenses claimed and allowable, and the resulting adjustments are: *569
| 1968 | 1969 | 1970 | 1971 | |
| Interest Expense | ||||
| Claimed | $ 3,600.00 | $ 883.00 | $ 1,031.68 | $ 1,019.48 |
| Allowable Interest | ||||
| Expense | 2,435.60 | 3,261.20 | 2,317.42 | 3,288.93 |
| Overstatement | $ 1,164.40 | |||
| (Understatement) | ($ 2,378.20) | ($ 1,285.74) | ($ 2,269.45) |
3.
Petitioners claimed itemized medical expense deductions on their 1968, 1969, 1970 and 1971 returns in the amounts of $ 716.00, $ 1,151.00, $ 1,023.24 and $ 213.02, respectively. Petitioners' medical expenses for these taxable years were:
| 1968 | 1969 | 1970 | 1971 | |
| Medicine and | ||||
| Drugs | $ 495.00 | $ 456.00 | $ 273.78 | $ 114.71 |
| Other Medical | ||||
| Expenses | $ 833.00 | $ 1,064.00 | $ 938.65 | $ 231.50 |
Whether these itemized expenses qualify as deductions depends upon petitioners' adjusted gross income as redetermined.
C.
Petitioners reported a $ 537.00 long term capital loss on Schedule C of their 1968 return relating to stock warrants that petitioner did not exercise. The warrants were for 100 shares of Great Northern Gas Utilities, Ltd. and 200 shares of Western Copper*570 Mills, Ltd. The Great Northern Gas Utilities, Ltd. warrant was exercisable from October 1, 1957 to September 14, 1965 and the Western Copper Mills, Ltd. warrant was exercisable from August 15, 1962 to August 15, 1967. The failure to exercise the warrants did not generate capital losses in 1968.
D.
During 1968 through 1971 petitioners did not keep satisfactory books and records and as a result failed to report substantial amounts of income relating to life insurance commissions, unidentified bank deposits, premiums paid on a life insurance policy by Acker, and corporate distributions relating to Hagen Investments, Inc. If the transactions were properly recorded in any books of account, the books are not part of the record.
Respondent determined that petitioners' underpayments of tax for 1968 through 1971 were due to negligence or intentional disregard of rules and regulations within the meaning of
Petitioner Hagen Investments, Inc. (hereinafter "the corporation") timely filed Federal corporate income tax returns for the taxable fiscal years ended September 30, 1967 through September 30, 1971. Type of Adjustment 1968 1969 1970 1971 Gross Profits $ 191,768.95 $ 27,366.21 $ 58,010.36 (6,535.62) (31,671.39) (3,644.92) Interest Income (543.75) Management Fees 750.00 Miscellaneous Income 60,000.00 268,104.00 Profit Sharing Trust 43,275.00 (43,275.00) Auto and Travel Expenses 727.82 16,015.76 3,924.56 Dues and Subscriptions 994.89 667.95 1,546.95 $ 144.40 Interest Expenses 3,469.75 2,968.43 2,168.04 2,269.45 Insurance Expenses 2,187.47 1,204.61 1,933.84 856.00 Office Supply Expenses 976.48 537.96 1,175.76 Repairs and Maintenance 6,600.99 4,151.96 739.16 277.27 Tax Expenses 700.76 755.14 710.00 714.58 Travel and Entertainment 1,830.08 3,570.79 Utility Expenses 1,572.83 1,500.60 1,293.01 997.74 Audit and Legal Expenses 15,180.73 Training Program Expenses 107.00 Miscellaneous Expenses 59.97 Depreciation 1,037.47 1,540.88 735.17 555.55 Net Operating Loss (6,016.27) Gain on Sale of Assets 8,868.64 $ 302,796.85 $ 293,249.11 $ 34,185.57 $ 24,626.48
Respondent also disallowed investment tax credits for the 1968 and 1969 fiscal years, and disallowed the net operating loss which the corporation had tentatively carried back from 1969 to 1967.
Again, respondent was required to use third party records and indirect methods in his determinations because the records of the corporation were not made available to him.
A.
1.
On its corporate income tax returns (Forms 1120) filed with the Internal Revenue Service for its fiscal years ended September 30, 1968, September 30, 1969 and September 30, 1970, the corporation reported gross receipts from the sale of securities, cost of goods sold and gross profits as follows:
| FYE 9/30/68 | FYE 9/30/69 | FYE 9/30/70 | |
| Gross Receipts - | |||
| Sale of Securities | $ 14,743,165.41 | $ 11,046,930.75 | $ 1,744,376.45 |
| Cost of Goods Sold | 14,253,590.57 | 10,698,097.49 | 1,686,369.19 |
| Gross Profits | $ 489,574.84 | $ 348,833.26 | $ 58,007.26 |
*573 The corporation failed to provide respondent with adequate books and records relating to its gross receipts and cost of goods sold. In such posture, respondent was unable to determine the corporation's gross business income by subtracting cost of goods sold from gross receipts. *574 were paid 50 percent of the gross profit on their stock sales and 50 percent of total mutual fund commissions generated by them. The amounts paid to these traders and salespersons during 1968, 1969 and 1970 -- their "sales commissions" -- are shown on Appendices I through K, attached hereto. Also shown on these Appendices are the applicable percentages and multipliers, and the resulting gross profits generated by each of them.
a.
For 1968, gross profits, less gross profits and mutual fund commissions reported, resulted in a $ 184,928.64 understatement of gross profits:
| Gross Profits (on Sales | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commissions of $ 283,809.57) | Less: Gross Profits per Return | 489,574.84 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | $ 191,464.26 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Less: Mutual Fund Income per | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Return | 6,535.62 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Understatement | *575 b. In 1969, the corporation charged 50 percent of total wire and telephone expenses to the traders. Specifically, the corporation deducted 50 percent of these expenses from gross profits (including mutual fund commissions) before applying the appropriate multipliers to profits generated by each of the traders. Fifty percent of these expenses were $ 41,244.41 in that year. For 1969, gross profits, less gross profits and mutual fund commissions reported, resulted in a $ 4,305.18 overstatement of gross profits:
c. For 1970, gross profits, less gross profits and mutual fund commissions reported, resulted in an understatement of gross receipts in the amount of $ 54,365.44:
*576 2. The corporation reported $ 937.40 in interest income on its 1968 return. Of the total, $ 543.75 reported was not earned by the corporation. It was earned by petitioners on personal accounts established at financial institutions in Oklahoma City. Management Fees The corporation received a total of $ 9,750.00 in management fees in 1968. Of that amount, $ 9,000.00 was paid to the corporation by Capitol Car Care, Inc. We are unable to determine from the record what type of management services the corporation rendered to Capitol Car Care, Inc. The corporation also received a $ 750.00 management fee from Acker in 1968. Acker was at that time a wholly-owned subsidiary of Alliance, which petitioner controlled. Only $ 9,000.00 of the $ 9,750.00 in total management fees was reported on the corporate return. 4. a. The corporation received $ 60,018.98 from unknown sources in 1968. Income of $ 60,000.00 is described in an entry in the corporation's ledger as "miscellaneous income." Only*577 $ 18.98 of the $ 60,018.98 was reported. The corporation therefore understated income from miscellaneous sources by $ 60,000.00 in that year. b. Our findings relating to the corporation's gross profits in 1969 do not take into account income realized by the corporation on its 1969 sales of FRI stock. Petitioner "made the market" for the corporation's sales of FRI stock. That is, petitioner himself set the "bid" and "ask" prices for this stock. FRI's stock records were made available to respondent during his examination and they are part of the record in this case. Because of the availability of these records, it is from them rather than the indirect method that we have redetermined income from the corporation's 1969 sales of FRI stock. *578 Transactions in FRI stock are noted hereinbefore in conjunction with petitioner's acquisition of additional equity in Alliance, also in 1969. Petitioner attempted to gain control of FRI by diverting 600,000 of its shares to Capitol Car Care, Inc. and The Schallmo Foundation, Inc. when Wesbanco, a subsidiary of Alliance, purchased a controlling interest in FRI in 1968. As previously noted, the Oklahoma Securities Commission took up the issue of FRI's stock registration in mid-1969. Its concern was that FRI's consolidated balance sheet overvalued stock that it owned in Alliance, Thurston National Insurance Company, Thurston National Life Insurance Company and Computek Corporation. By August 8, 1969, FRI's earlier registration by notification became ineffective by order of the Oklahoma Securities Commission. As of that date most of the FRI sales which generated income for the corporation in 1969 had been made, although a few transactions occurred after that date. The corporation sold 163,949 shares of FRI stock in 1969 of which it was record owner. The record shows that the number of shares sold may actually have been much higher. The corporation purchased hundreds of shares*579 of FRI stock in 1968 and 1969 that it did not cause to have reissued in the corporate name. Subsequent sales of these shares are not shown on FRI's stock transfer records as having been sold by the corporation. We do not take any sales of FRI stock not reissued to the corporation into account in calculating gain on the corporation's FRI sales. The corporation realized income of $ 263,827.65 from the sale of 163,949 shares in 1969:
d. The corporation reported excess insurance and license expenses on its 1968 through 1971 corporate returns. e. The corporation overstated expenses for office supplies on its 1969 and 1970 corporate returns. |
f.
The corporation overstated deductions for repairs and maintenance expenses on its 1968, 1969, 1970 and 1971 corporate returns. Appendices E through H fully set forth facts relating to this adjustment. Expenses claimed and allowable, and the amounts by which they were overstated are:
| 1968 | 1969 | 1970 | 1971 | ||||||||||||||||||||||||||||||||||||
| Repair and Main- | |||||||||||||||||||||||||||||||||||||||
| tenance Expenses | |||||||||||||||||||||||||||||||||||||||
| Claimed | $ 6,672.54 | $ 4,700.41 | $ 1,116.41 | $ 277.27 | |||||||||||||||||||||||||||||||||||
| Allowable Repair | |||||||||||||||||||||||||||||||||||||||
| and Maintenance | |||||||||||||||||||||||||||||||||||||||
| Expenses | 109.53 | 587.08 | 377.25 | 132.21 | |||||||||||||||||||||||||||||||||||
| Overstatement | $ 739.16 | Tax Expenses Most of the deductions for taxes paid during the corporation's 1968 through 1971 fiscal years were allowable deductions. However, we have disallowed ad valorem taxes paid by the corporation which related to 5000 N.W. 31st Street. *589 The amount disallowed constitutes a portion of the house payments made by the corporation for the benefit of petitioners; the house payments have been treated as distributions. The amounts by which deductions for taxes paid were overstated are:
h. The corporation overstated travel and entertainment expenses for its 1968 and 1971 corporate years. |
*590 i.
All utility expenses deducted on the corporate returns for 1968 through 1971 were disallowed by respondent. Correspondingly, respondent allowed petitioners modest home office expense deductions for 1968 through 1971 after having treated the expenditures disallowed to the corporation as distributions to petitioners. At trial petitioners did not establish what portion of the utilities were attributable to the corporation's business activities at the 5000 N.W. 31st Street property.
The utility expenses reported on the corporation's returns were incorrectly reported, resulting in the following overstatments:
| 1968 | 1969 | 1970 | 1971 | |
| Utility Expenses | ||||
| Claimed | $ 1,572.83 | $ 1,500.60 | $ 1,293.01 | $ 997.74 |
| Allowable Utility | ||||
| Expenses | - 0 - | - 0 - | - 0 - | - 0 - |
| Overstatement | $ 1,572.83 | $ 1,500.60 | $ 1,293.01 | $ 997.74 |
j.
Of the $ 18,337.08 in audit and legal expenses reported by the corporation in 1971, $ 15,180.73 were not ordinary and necessary business expenses. Respondent contended at trial that the $ 15,180.73 constituted legal fees incurred in relation to the criminal action brought*591 against petitioner under
The corporation deducted $ 1,557.00 in 1969 for training program expenses for Bill Hagen (petitioners' son) and others. Respondent disallowed $ 107.00 of the total deduction, thereby allowing $ 1,450.00 of the expense taken on the corporate return. After a review of the record, we find that the $ 107.00 balance was business related as well. Petitioners established at trial that expenditures totalling that amount were for the same general purpose as those allowed. They were to pay for books used in a business training program. Miscellaneous Expenses
The corporation made miscellaneous expenditures of $ 59.97 during 1971 which do not qualify as ordinary and necessary business expenses. The expenditures were primarily for flowers. We are unable to determine why the flowers and other items were purchased. *592 m.
The corporation reported depreciation on its corporate returns for 1968 through 1971 in the following amounts:
| Year | Amount |
| 1968 | $ 2,843.44 |
| 1969 | $ 4,171.64 |
| 1970 | $ 2,442.97 |
| 1971 | $ 1,355.55 |
The corporation's depreciable assets were office furniture and fixtures, and business machines. Many of the assets depreciated by the corporation on its returns were not depreciable assets, such as bar stools and a gazebo. Depreciation claimed and allowable, and the amounts by which it was overstated are:
| 1968 | 1969 | 1970 | 1971 | |
| Depreciation Claimed | $ 2,843.44 | $ 4,171.64 | $ 2,442.97 | $ 1,355.55 |
| Allowable Depreciation | 1,805.97 | 2,630.76 | 1,707.80 | 800.00 |
| Overstatement | $ 1,037.47 | $ 1,540.88 | $ 735.17 | $ 555.55 |
2.
a.
Respondent determined that the net operating loss which the corporation attempted to carry back from the 1969 to the 1967 fiscal year and tentatively allowed was eliminated by his adjustments. We sustain his determination on the basis of our findings relating to the 1969 taxable fiscal year.
b.
The corporation determined that it*593 had no taxable income in its 1970 fiscal year -- that it had in fact sustained total tax losses of $ 25,768.29. On the basis of this figure the corporation concluded that it had a 1970 net operating loss of $ 18,179.31. In late 1970 it applied to respondent for a refund with respect to its 1968 fiscal year resulting from a carryback of the 1970 net operating loss. The application for the tentative carryback was incorrectly filed, and respondent advised the corporation of the problems with the application. The corporation never made the suggested corrections.
On the basis of the adjustments shown in the notice of deficiency, respondent determined that the corporation's 1970 fiscal year generated no net operating losses. Respondent did, however, conclude after audit adjustments that the corporation operated at a loss in 1971, and carried back the entire amount of the loss, $ 6,016.27, to 1968.
Notwithstanding certain modifications made herein with respect to the adjustments per the notice of deficiency, we are able to state that the corporation operated at a loss in 1971. The amount of the loss, to be determined under Rule 155, is a net operating loss.
C.
All the office furniture and office machines owned by the corporation (and depreciated as described hereinbefore) were sold on or about February 1, 1970 when the corporation closed its doors. The gain on the sale of these assets in 1970 was: Amount Realized (Accepted as Filed) $ 12,000.00 Less: Adjusted Basis 4,316.57 Taxable as Ordinary Income $ 7,683.43 Add: Loss per Return 1,185.24 Gain $ 8,868.67
The gain was not reported on the 1970 return.
D. *595
Respondent disallowed investment credits of $ 498.67 for the 1968 fiscal year and $ 529.90 for the 1969 fiscal year after having determined that the property upon which the credits were based were not qualified investments. The $ 529.90 tentative investment credit of 1969 was not applied because the corporation calculated that it owed no tax in that year.
Respondent was unable to determine the nature of the property upon which the investment credits were based, and we are unable to make such a determination from the record.
E.
The corporation failed to maintain adequate, complete and correct books and records during each of its fiscal years 1968 through 1970. As a result it did not record nor report substantial amounts of income received from the following sources: stock sales of Hagen Investments, Inc., management fees, gain on the sale of assets, and gain on the sale of FRI stock. Additionally, it expensed on its books and records items which, in the aggregate, were significant in amount and which did not serve any business purpose. The expenditures were for autos, dues and subscriptions, interest, insurance, *596 office supplies, repairs and maintenance, taxes, travel and entertainment, utilities, audit and legal fees and a deduction claimed for HEPRET.
ULTIMATE FINDINGS OF FACT
Our ultimate findings of fact in these consolidated cases are:
A. Adjustments to Taxable Income:
| Ed J. Hagen and Martha Jo Hagen | |||
| Taxable Years 1964 through 1966 | |||
| Type of Adjustment | 1964 | 1965 | 1966 |
| Gross Receipts | $ 16,666.00 | $ 68,739.40 | $ (205,729.09) |
| Interest, Dividends | |||
| and Fees | 11,513.32 | 8,019.27 | 18,118.74 |
| Life Insurance Commissions | 1,906.75 | 192.53 | |
| Income from Hagen, Ltd. | 4,969.81 | 64,269.46 | 13,422.35 |
| Unidentified Income | 5,007.88 | 5,879.85 | |
| Income from Schallmo | |||
| Foundation, Inc. | 945.00 | ||
| Additional Compensation | 2,284.00 | ||
| Cost of Goods Sold | 18,078.76 | (41,570.77) | 221,378.61 |
| Depreciation | 1,557.53 | 1,609.77 | 2,008.54 |
| Car Expenses | 1,696.72 | 707.90 | 284.28 |
| Commission Expenses | (1,443.24) | (4,005.35) | (5,535.54) |
| Other Business Expenses | 4,845.05 | 3,407.58 | 14,419.42 |
| Net Operating Loss | 6,999.25 | ||
| Medical Expenses | ? | ? | ? |
| Contributions | 45.75 | (55.00) | (497.00) |
| Tax Expenses | ? | ? | ? |
| Interest Expenses | 215.55 | ||
| Capital Loss | 1,000.00 | ||
| Ed J. Hagen and Martha Jo Hagen | ||||
| Taxable Years 1968 through 1971 | ||||
| Type of Adjustment | 1968 | 1969 | 1970 | 1971 |
| Commission Income | $ 461.95 | $ (413.32) | ||
| Unidentified Income | 44,403.41 | $ 20,578.29 | 6,678.41 | |
| Additional Compensation | 1,142.00 | 1,530.00 | 1,552.00 | |
| Income from | ||||
| Distributions | ||||
| Hagen Investments, Inc. | ||||
| Interest Income | 573.75 | |||
| Auto Expenses | 727.82 | 6,158.96 | 530.59 | |
| Dues and Subscriptions | 234.40 | 362.45 | 1,509.45 | $ 144.40 |
| House Payments | 3,408.00 | 3,408.00 | 3,408.00 | 3,408.00 |
| Insurance Premiums | 5,583.47 | 4,951.74 | 4,060.75 | 4,471.00 |
| Office Supplies | 3,460.03 | 537.96 | 1,175.76 | |
| Repairs and | ||||
| Maintenance | 5,984.75 | 2,681.70 | 649.15 | 145.06 |
| Travel and | ||||
| Entertainment | 2,232.57 | 10,168.80 | 1,059.22 | 3,326.67 |
| Utilities | 1,572.83 | 1,820.84 | 1,217.57 | 752.94 |
| Training Program | ||||
| (Bill Hagen) | - 0 - | |||
| Miscellaneous Expenses | 26.49 | 33.48 | ||
| Legal Fees | 15,180.73 | |||
| Capitol Car Care, Inc. | ||||
| Auto Expenses | 193.00 | 902.69 | 996.97 | 300.00 |
| Insurance Premiums | 619.75 | - 0 - | 918.45 | - 0 - |
| Taxes | 338.05 | |||
| Dividend Exclusion | (200.00) | (200.00) | ||
| Interest Income | 52.88 | 807.61 | ||
| Income from Equity | ||||
| Acquired | - 0 - | |||
| Office-at-Home Expenses | (229.72) | (229.72) | (229.72) | (229.72) |
| Interest Expenses | 1,164.40 | (2,378.20) | (1,285.74) | (2,269.45) |
| Medical and Dental | ||||
| Expenses | ? | ? | ? | ? |
| Capital Loss | 537.00 | |||
| Hagen Investments, Inc. | ||||
| Taxable Years 1967 through 1971 | ||||
| Type of Adjustment | 1968 | 1969 | 1970 | 1971 |
| Gross Profit | $ 184,928.64 | $ (4,305.18) | $ 54,365.44 | |
| Interest Income | (543.75) | |||
| Management Fees | 750.00 | |||
| Miscellaneous Income | 60,000.00 | 263,827.65 | ||
| Profit Sharing Trust | 43,275.00 | (43,275.00) | ||
| Auto and Travel | ||||
| Expenses | 727.82 | 15,639.75 | 3,924.56 | |
| Dues and Subscription | ||||
| Expenses | 234.40 | 362.45 | 1,509.45 | $ 144.40 |
| Interest Expenses | 3,469.75 | 2,968.43 | 2,168.04 | 2,269.45 |
| Insurance Expenses | 2,034.47 | 856.00 | ||
| Office Supply | ||||
| Expenses | 537.96 | 1,175.76 | ||
| Repairs and | ||||
| Maintenance Expenses | 6,563.01 | 4,113.33 | 739.16 | 145.06 |
| Tax Expenses | 700.76 | 755.14 | 710.00 | 714.58 |
| Travel and | ||||
| Entertainment | ||||
| Expenses | 1,508.09 | 3,570.99 | ||
| Utility Expenses | 1,572.83 | 1,500.60 | 1,293.01 | 997.74 |
| Audit and Legal | ||||
| Expenses | 15,180.73 | |||
| Training Program | - 0 - | |||
| Miscellaneous | ||||
| Expenses | 59.97 | |||
| Depreciation | 1,037.47 | 1,540.88 | 735.17 | 555.55 |
| Net Operating Loss | ? | |||
| Gain on Sale of | ||||
| Assets | 8,868.64 | |||
B. Hagen Investments, Inc. is not*599 entitled to investment tax credits for any of the taxable years under review.
D. Petitioners underreported taxable income for 1968 through 1971 and did not report their correct income tax liability for those taxable years. Their failure to correctly report and to pay the correct tax liability was due to negligence or intentional disregard of rules and regulations within the meaning of
E. Hagen Investments, Inc. underreported taxable income for 1968 through 1971 and did not report its correct tax liability for those taxable years. This failure to correctly report and to pay the correct tax liability was due to negligence or intentional disregard of rules and regulations within the meaning of
OPINION
At this juncture, it is probably apparent that these cases involve some measure of complexity. That complexity is reflected in the magnitude of the record*600 and is exacerbated by the contentiousness of the parties. Not surprisingly, our task of finding the facts has been laborious and frequently frustrating. We have listened to the testimony of some 70 witnesses, plodded through over 2,300 pages of the trial transcript and scrutinized some 600 exhibits, many embracing innumerable charts and figures. We have done our best to reconcile the conflicting portions of the record. In too many instances, however, we have reluctantly concluded that perfect harmony is not attainable.
A.
1.
Respondent used the bank deposits method to determine that petitioners failed to report the following types of income on their 1964, 1965 and 1966 returns:
Gross Receipts from Hagen Investments 1965
Gross Receipts from Hagen Investments
Interest, Dividends and Fees
Unidentified Income
Income from Hagen, Ltd.
Income from The Schallmo Foundation, Inc.
Gross Receipts from Hagen Investments
Interest, Dividends and Fees
Unidentified Income
Income from Hagen, Ltd.
He used*601 this method to determine income because petitioners failed to keep adequate records relating to both business and personal receipts.
Under
Petitioners argued at trial that respondent should be compelled to rely on their books and records in determining taxable income, and that, in any event, income of a broker/dealer whose recordkeeping activities are governed by the Securities Exchange Act of 1934 cannot be reconstructed using the bank deposits method. We disagree. Because petitioners' personal records and books of account were incomplete and in dozens of instances misleading, respondent properly treated bank deposits to their accounts as income (subject to offsets for expenses*603 and nontaxable receipts). His reconstruction of income was not carried out capriciously or in haste. After a painstaking compilation of deposits made to some 21 accounts during 1964, 1965 and 1966, respondent eliminated all deposits determined to be gifts, transfers between accounts, loan proceeds, cash from the Bertha Schallmo Trust and other receipts deemed nontaxable. Whatever recordkeeping is required of a broker/dealer under the Federal securities laws was not respondent's immediate concern, and it is not ours. Respondent's reconstruction of income was therefore proper under the circumstances before us.
a.
Petitioners urge us to accept the gross receipts figures derived from Hagen Investments' books of account and reported on their returns. We found hereinbefore that these books are incomplete and that they contain false and misleading entries. Respondent is not therefore required to rely on them. Furthermore, petitioners' self-serving testimony and oftentimes baffling exhibits, taken together, do not overcome the presumption of correctness that attaches to respondent's 1964, 1965 and 1966 gross receipts determinations. They are presumptively correct.
*605 b.
Gross income includes interest, dividends and fees.
*606 c.
Hagen, Ltd. was formed in 1964. The net profits and net losses of the partnership were to be shared in the ratio of the partners' capital account balances before adjusting for profits and losses. In the case of negative capital accounts, the Partnership Agreement directed that profits be distributed on the basis of the partners' capital accounts at the end of the last accounting period prior to the reduction of the capital account to zero. We previously found that the capital accounts of petitioner and Mrs. Hagen fell below zero in 1964 due to withdrawals in excess of contributions. 1964
Respondent determined that petitioners realized $ 4,969.81 in partnership income from Hagen, Ltd. in 1964. This amount was 60 percent of the partnership's 1964 net income of $ 8,283.01, determined from respondent's analysis of bank deposits to and disbursals from Liberty 024-079-6. Respondent allocated 60 percent of the net income to petitioners because their combined initial investment of $ 3,000.00 was 60 percent of the total initial cash investment in the partnership.
Petitioners contended that*607 all capital accounts had positive balances as of December 31, 1964. They also argued, based on the positive balances, that 4.23 percent of the partnership's 1964 taxable income rather than 60 percent should be allocated to them. In view of our findings relating to Hagen, Ltd.'s capital accounts, and in particular those findings relating to the numerous withdrawals from the accounts, we are unable to accept petitioners' figure of 4.23 percent. Their percentage is based on capital account records improperly maintained.
Gross income includes a taxpayer's distributive share of partnership gross income.
*608 The Limited Partnership Agreement ("the Agreement") did not provide for the allocation of net profits in the case of negative capital accounts in the first partnership year. Even so, it is clear from the terms of the Agreement that partners with negative capital accounts were to be allocated a portion of any net profits. *609 Hagen, Ltd.'s records are incomplete and confusing. Its computation of the partners' capital accounts as of December 31, 1964 is wrong. On the basis of the record, we are unable to determine precisely why the partnership was formed, the nature of its day-to-day operations, or the reason for petitioners' numerous cash withdrawals. The burden of proof as to the allocation of partnership income lies with petitioners -- properly so since they are in a much better position than respondent to compute distributive shares of income, gain, loss, deduction, or credit. They have produced no credible evidence to persuade us that their distributive share of taxable income in 1964 was only 4.23 percent of the partnership's taxable income. We therefore uphold respondent's determination, subject to his 1964 concession.
ii.
Respondent allocated all the partnership's 1965 taxable income, $ 416.63, to Mrs. Schallmo. When Hagen, Ltd. was dissolved, petitioners' combined capital account balance was $ (64,269.46). *610 amount was ever repaid. Respondent treated the $ (64,269.46) as income in 1965. In his brief, respondent did not state the statutory basis for his determination or characterize the income, but we assume he regarded the $ (64,269.46) as ordinary income.
We previously found that petitioners withdrew cash in excess of their contributions as early as 1964.
iii.
Petitioners received income of $ 13,422.35 from Hagen Holding Corporation in 1966 when petitioner wrote a check to himself in that amount relating to the December 24, 1964 Hagen Holding Corporation note. This payment was income under
Petitioners received income in 1965 and 1966 from sources unable to be identified and income that could not be categorized as to type. Most of the items were bank deposits of currency. Petitioner contended that the unidentified income*614 was from the Bertha Schallmo Trust, and nontaxable. However, respondent's calculations of unidentified 1965 and 1966 income specifically excluded receipts of this type.
We sustain respondent's determinations relating to unidentified income received in 1965 and 1966.
e.
We also sustain respondent's determination that petitioners received income in 1965 from The Schallmo Foundation, Inc. relating to a payment to Mrs. Hagen for the purchase of a piano.
2.
a.
The parties stipulated that petitioners understated life insurance commission income from Occidental Life and Standard Life in 1965 by $ 1,906.75. For 1966, the amount of Occidental Life commissions, $ 4,949.40, was stated in a letter from Bernard R. *616 Bent, a manager of Occidental Life, to Wesley E. Hendren of the Internal Revenue Service and one of respondent's key witnesses. The amount of Standard Life commissions received in 1966, $ 3,557.45, was established from a Form 1099, U.S. Information Return for Calendar Year 1966, sent to petitioners by Standard Life. Petitioner was unable to prove that the 1966 figures were incorrect. The understatement for 1966 was $ 192.53.
Commissions from the sale of life insurance are income under
b.
Premium payments made by Acker in 1966 on Standard Life policy OL-92440 were compensation to petitioner for services rendered. Petitioner was the insured party under the policy and Mrs. Hagen was the primary beneficiary. Petitioner was chairman of the board and president of Acker throughout 1966.
*617 Life insurance premiums paid by an employer on the life of an employee, where the policy proceeds are payable to the beneficiary of the employee, are part of the employee's gross income.
Admittedly, one type of "split-dollar" life insurance is the "employer pay-all" plan wherein the premium, which is prorated for tax purposes, is paid entirely by the employer.
*619 B.
1.
Respondent adjusted expenses reported on petitioners' 1964, 1965 and 1966 returns. Adjustments made to numerous types of expenses were again based on respondent's analysis of bank accounts. Based on the payees involved, respondent identified checks written for salaries and wages, stock and mutual fund purchases, operating expenses and other deductible expenses, and also personal expenses, then gave petitioners credit for the allowable items.
Cost of Goods Sold
Commission Expenses
Other Business Expenses
Medical and Dental Expenses
Contributions
Cost of Goods Sold
Commission Expenses
Other Business Expenses
Medical and Dental Expenses
Contributions
Interest Expenses
Cost of Goods Sold
Commission Expenses
Other Business Expenses
Medical and Dental*620 Expenses
Contributions
The taxpayer has a greater burden with regard to deductions. Because they are a matter of legislative grace, the taxpayer must establish not only error or arbitrary action in the disallowed deduction, but must also sufficiently persuade the finder of fact as to the amount of deduction allowable on each claimed item.
a.
We made the following findings with respect to cost of goods sold for 1964, 1965 and 1966:
| 1964 | $ 18,078.76 Overstatement |
| 1965 | $ 41,570.77 Understatement |
| 1966 | $ 221,367.61 Overstatement |
Respondent's overall system for reconstructing cost of goods sold was to (a) adopt Hagen Investments' closing inventory figures for the 1963, 1964 and 1965 business years*621 as the opening inventory figures for 1964, 1965 and 1966, respectively; (b) add to opening inventory the cost of inventory purchases in 1964, 1965 and 1966, derived from respondent's check classifications, to arrive at goods available for sale; and (c) subtract from goods available for sale Hagen Investments' own closing inventory figures for 1964, 1965 and 1966. He also converted the closing inventory of the trading account in 1965 and 1966 from the lower of cost or market to cost, and he modified the cost of 1964, 1965 and 1966 inventory purchases consistent with the accrual method.
A securities dealer who inventories unsold securities on hand at cost, market, or the lower of cost or market may make his return on the basis of how those accounts are kept.
*623 We do not have a clear picture of how petitioners calculated cost of goods sold in 1964, 1965 and 1966. Certified public accountants generated audit reports showing closing inventories of Hagen Investments for 1963 through 1966. Since petitioner caused the reports to be prepared, it is realistic to conclude that the closing inventory amounts were utilized to calculate cost of goods sold per the returns.
We also sustain respondent's conversion of the 1965 and 1966 closing inventories to cost, and his modification*624 of purchases consistent with the accrual method. In order to clearly reflect income, the taxpayer's accounting practices must be consistent from year to year.
Petitioners attempted to substantiate additional stock costs with an exhibit entitled "Additional Cost of Sales Not Available Nor Visible from Check and Deposit Spread." The exhibit is difficult to follow. It is a self-serving document, handwritten, and prepared for use at trial. The transactions it records have not been substantiated. Furthermore, it appears to represent the cost of shares received only in stock-for-stock trades; since income from those trades would not have been recorded in the check classifications, the stock costs should be omitted.
b.
We previously found that petitioners understated commission*625 expenses for 1964, 1965 and 1966. Our findings were based on respondent's check classifications. On the basis of testimony relating to docket No. 8342-76, we presume that the commissions were paid to retailers and traders, and that the amount paid per transaction was a percentage of the total commission earned by Hagen Investments.
Commissions are deductible under
c.
Expenses thus described are those of Hagen Investments other than cost of goods sold, depreciation expenses, automobile expenses and commission expenses. We found that petitioners overstated these expenses for 1964 through 1966, based on respondent's check classifications. Deductible expenses were for travel and entertainment, telephone and postage, dues and subscriptions and other expenses necessary for the day-to-day operation of Hagen Investments.
Three*626 conditions must be satisfied before a deduction will be allowed for a claimed business expense under
Petitioner's evidence on these adjustments consisted of lists of purported business expenditures. Some of them had previously been allowed by respondent. The balance was not substantiated. In accepting respondent's determinations, we conclude that the allowed expenditures were ordinary and necessary and incurred for the benefit of Hagen Investments.
d.
For 1964 through 1966, medical expense deductions are calculated by reference to a taxpayer's adjusted gross income. Medical expenses are deductible to the extent they exceed 3 percent of adjusted gross*627 income. Medicine and drug expenses are "medical expenses" to the extent that they exceed 1 percent of adjusted gross income.
Respondent determined medical expenses from the returns and also from checks. Petitioners presented no persuasive evidence to establish that these figures are incorrect, and we adopted the determinations in our findings.
e.
Petitioners overstated contributions in 1964 and understated them in 1965 and 1966, based on checks paid to charitable organizations.
f.
Petitioners paid non-business interest in 1965 of $ 2,541.32, based on the check classifications. They claimed an itemized deduction of $ 2,756.87 for interest paid. Their deduction was overstated by $ 215.55.
2.
a.
Petitioners did not describe the assets they depreciated on their returns. After a review*629 of petitioners' books, respondent determined the depreciable assets, the cost of the assets, the date they were acquired, their useful lives, and the allowable depreciation. Petitioners have not sustained their burden of proof with respect to the depreciation adjustments. Their testimony at trial has not enlightened us, as it amounted to little more than a denial of respondent's figures. We therefore uphold respondent's determinations.
b.
Under
Respondent adopted the number of business miles driven, recorded each month in Hagen Investments' general journals, to calculate the automobile expenses. Petitioners used an incorrect formula to calculate the deductions they took on their returns. As a consequence the deductions were overstated. We sustain respondent's adjustments for auto expenses.
c.
Petitioners claimed a $ 6,999.25 net operating loss deduction on their 1964 return. They had sustained a net operating loss of $ 6,999.25 in 1963, according to their 1963 return, and we stated this fact in our findings. They sustained no net operating losses in 1961 and 1962.
We are not called upon to calculate a net operating loss in this case. We are simply called upon to determine whether any net operating loss is available to be carried to 1964. As previously found, petitioners had adjusted gross income in excess of $ 10,000.00 in 1960. If carried back to 1960, the $ 6,999.25 net operating loss is totally absorbed. No evidence was presented to the effect that other operating losses were generated which might be carried to 1964. Petitioners did not sustain their burden of proof with respect to this adjustment, so we uphold it.
d.
We previously found the amount of taxes paid per respondent's check classifications, but left undetermined the amount of allowable general sales tax expenses pending the recalculation of adjusted gross income.
*632
(a) General Rule. -- Except as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued:
(1) State and local, and foreign, real property taxes.
(2) State and local personal property taxes.
(3) State and local, and foreign, income, war profits, and excess profits taxes.
(4) State and local general sales taxes.
(5) State and local taxes on the sale of gasoline, diesel fuel, and other motor fuels.
The Commissioner of Internal Revenue has issued optional guideline tables showing the average sales tax paid annually by states which impose general sales taxes, using adjusted gross income and nontaxable receipts. Petitioners' allowable expenses for general sales taxes paid, and thus the amount of petitioners' allowable tax expense, will turn on adjusted gross income as finally determined. The itemized deduction for taxes will be understated for each of the 3 years under review, given our earlier findings.
C.
As previously found, petitioners reported a capital loss carryover of $ 1,099.08 in 1964, and used $ 1,000.00 of that amount to offset 1964*633 income.
D.
We now turn our consideration to whether the additions to tax under
If any part of any underpayment (as defined in subsection (c)) *634 of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. * * *
An intent to conceal or mislead may be inferred from the pattern of conduct.
Respondent has the burden to prove fraud for each year by clear and convincing evidence.
Parts II.A. and B. of our findings,
With respect to his allegations of fraud, respondent asserts that petitioner is estopped to deny the existence of fraud in 1964 and 1965 because of petitioner's criminal conviction under
The collateral estoppel plea notwithstanding, and after a exhaustive consideration of the record, we hold that respondent has independently sustained his burden of proving fraud by clear and convincing evidence with respect to each petitioner for 1964 through 1966. See and compare
Petitioners were shareholders and/or officers in the various entities involved herein -- Hagen Investments, Inc., Hagen Holding Corporation, Hagen, Ltd., Capitol Car Care, Inc. and The Schallmo*639 Foundation, Inc. They were vitally interested in the operations of each entity and they well knew the income they were receiving from them. They received substantial amounts of income from these and other sources which were not entered in their books and records and which never found their way onto the tax returns. Petitioner's misconduct relating to the underreporting of Hagen Holding Corporation and Hagen, Ltd. income was, in our opinion, particularly egregious.
We specifically found hereinabove that petitioners received taxable income from some 18 transactions which they failed to report in 1964, 1965 and 1966 in the respective amounts of $ 4,414.31, $ 33,739.71 and $ 16,203.16.
*641 Petitioners maintained some 21 checking or savings accounts during these years. Only the income deposited into two or three of those accounts was utilized in the preparation of their returns, which were prepared by petitioner. Much business income went into personal accounts and was not entered in Hagen Investments' books and records. That income went unaccounted for. Moreover, many false entries were made in the books and records that were maintained, as shown in Part II.D.4. of our findings,
Petitioners*642 consistently overstated expenses during these 3 years. It is well settled that a fraudulent understatement of income can be accomplished by means of an overstatement of deductions.
In determining the presence of fraud we must consider the native equipment and the training and experience of the party charged.
It is not our purpose to single out each and every instance of fraudulent conduct attributable to petitioners in these years; to do so would unduly lengthen this opinion. *644 or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal. * * * [
In sum, we hold that petitioners received substantial amounts of taxable income in each of the years 1964 through 1966 which were not reported on their joint returns and that there was an underpayment of tax which was due to fraud. Accordingly, we sustain respondent's
A.
Respondent used third party records and indirect methods to make adjustments to income for the taxable years*645 1968 through 1971. He did so because petitioners did not cooperate in turning personal and bank records over to respondent in the audit process. The records respondent later obtained were not complete.
Petitioners offered numerous documents into evidence at trial which respondent had not previously seen. We admonished petitioners for this obvious lack of cooperation in the discovery process but have exercised our discretion in admitting many of them at trial, affording each whatever weight it deserves.
We treat each type of income adjustment in the paragraphs that follow. Previous parts of this opinion are cited if legal issues involved in the adjustments have been discussed hereinbefore.
1.
We previously found that petitioners understated life insurance commission income in 1968 and overstated it in 1970.
Commissions from the sale of life insurance are income under
2.
Amounts deposited to petitioners' bank accounts during 1968, 1969 and 1970 from "unidentified sources" are substantial, and we have painstakingly reviewed the exhibits and testimony relating to respondent's corresponding adjustments. Petitioner attempted to substantiate the sources of the deposits with cancelled checks made payable either to him, to cash, or to the account to which a particular deposit was made. The payors on the checks were Hagen Investments, Inc., Mrs. Schallmo (not the Bertha Schallmo Trust) and Mrs. Hagen. *647 accounts. From this we conclude that petitioners have not carried their burden of proof.
Gross income means all income from whatever source derived.
3.
Acker continued to pay premiums on Standard Life policy No. OL-92440 in 1968, 1969 and 1970 as it had in 1966. We treated Acker's 1966 premium payments as additional compensation to petitioners in Part I.A.2.b. of this opinion,
4.
We must decide whether the expenditures made by Hagen Investments, Inc. and Capitol Car Care, Inc. for the benefit of petitioners in the taxable years 1968 through 1971*648 were constructive dividends.
The nonstatutory test for constructive dividends is two-fold: (1) the expense must be nondeductible to the corporation, and (2) it must primarily be for the economic gain or benefit of the stockholder.
Based on books and records that petitioners had made selectively available, respondent disallowed corporate expenditures of Hagen Investments, Inc. and determined that constructive dividends had been received. At trial and during our subsequent review of the record we examined innumerable invoices and checks offered to substantiate an entire range of purported business expenditures. Mrs. Hagen's trial testimony relating to these expenditures was very difficult to follow, and petitioners inundated the Court with invoices in an extremely disorderly manner. Even so, we believe that some corporate expenditures (more fully*650 discussed in Appendices E, F, G and H and in Part III.B.1. of this opinion,
To the extent that petitioners have not carried their burden of proof with respect to the business nature of the expenditures, and because they primarily benefitted petitioners, they are distributions under
5.
As previously stated, petitioners received interest income from bank accounts in 1969 and 1970. The interest income was not reported on any returns.
6.
We devoted many paragraphs in our findings of fact to this adjustment for three reasons: (1) testimony relating to it was lengthy, confusing and sometimes conflicting; (2) the numerous exhibits involved were highly detailed; and (3) the adjustment is substantial. It concerns a series of transactions that required a tedious and careful unraveling. The composite of transactions reflects profoundly on petitioner's ability to both manage and mismanage business affairs and, we believe, to deceive. Nonetheless, it is our task here to decide whether the August 1969 stock split and recapitalization constituted a taxable event and, if so, what tax flowed therefrom.
In his explanation of adjustments attached to petitioners' statutory notice of deficiency for 1969, respondent determined that petitioners
realized $ 94,500.00*652 income which is includible in gross income under
$ 899,494.17 / 770,000 shares = $ 1.17 value per share before split (value of stockholders equity)
$ 899,494.17 / 1,000,000 = .90 value per share after split
| 300,000 X .90 = | $ 270,000 - value of Hagen's stock after split |
| 150,000 X 1.17 = | 175,500 - value of Hagen's stock before split |
| $ 94,500 - value of equity acquired by Hagen |
On direct examination at trial, Mr. Moates, the revenue agent who made these adjustments, corrected respondent's counsel in the latter's characterization of the stock split as a disproportionate stock dividend not within the purview of the general rule that a stock dividend is not taxable. "[I]t wasn't actually a stock dividend. It's a stock split. And [the adjustment to income is] based upon the realization by Mr. Hagen of the benefit of actual transfer -- economic benefit from the nonvoting shares to the voting shares that he received."
*653 On brief, respondent argued that petitioners realized a $ 94,500 economic benefit as a result of the August 1969 Class B stock split. According to respondent, the proper test for the inclusion in income of stock dividends is whether a shareholder's proportionate interest was altered by the dividend. Respondent concludes that because petitioners' proportionate interest in Alliance materially increased "after the stock distribution generated by the August 1969 stock split," petitioners' taxable income should be increased to the extent of the fair market value of the shares received. Respondent cites as support
Although the record shows that petitioners' equity in Alliance was increased as a result of the August 1969 split*654 and recapitalization, respondent has failed to persuade us that such increase is taxable to petitioners. In asserting his theory of taxation under
A stock split, as distinguished from a stock dividend, is also a nontaxable event effected by a corporation through amending its Articles of Incorporation to divide shares of a particular class of stock into more shares and to reduce each share's par value. A stock split increases the number of shares representing a shareholder's interest in the corporation without changing the shareholder's proportionate share of equity in the corporation. Fletcher Cyc. Corp., sec. 5362.1 (1986). While we recognize that petitioners' equity increased as a result of the August 1969 transactions, we disagree with respondent that we can isolate the Class B split and tax it because, consistent with a traditional nontaxable stock split, the Alliance shareholders approved the Class B stock split and amended the Articles of Incorporation to reflect the increased number of outstanding shares and reduced par value per share.
*656 The split was followed immediately by a recapitalization in which all Class A and B shares were reclassified as full voting common shares with a $ 1.00 par value. This also is a nontaxable event under the Code.
Thus, the August 1969 split and recapitalization in and of themselves do not trigger taxation. Respondent asks us to impose a tax on the result -- petitioners' increased equity position. This we cannot do without authority under the Code or case law. Even if we were to accept respondent's theory of a general accession to wealth under
B.
1.
Petitioners did not claim an office-at-home deduction for business activities carried on at 5000 N.W. 31st Street during 1968, 1969, 1970 and 1971. Instead, a myriad of expenditures purportedly relating to Hagen Investments, Inc.'s business activities at that location were treated by the corporation as ordinary and necessary business expenses. Those either apparently or obviously personal in nature were disallowed.
Petitioners' burden was to either establish that the expenditures were corporate expenditures, or to establish that some portion of the expenditures were ordinary and necessary business expenses.
2.
Respondent determined that petitioners overstated their itemized interest expense deduction for 1968, and that itemized interest expense deductions had been understated in 1969, 1970 and 1971. The understatements were the consequence of mortgage interest paid in those years. Mortgage payments were made by the corporation in*659 1968 through 1971. Respondent treated the payments as constructive dividends, then reallocated the interest expense deductions from the corporation to petitioners.
3.
Our findings relating to medical and dental expenses during 1968, 1969, 1970 and 1971 are in Part III.B.3. of our findings of fact,
C.
Petitioners reported a $ 537.00 long term capital loss on their 1968 return. As our findings state, the failure to exercise the stock warrants that were the basis of the purported loss did not generate capital losses in 1968. We uphold respondent's determination.
D.
Respondent determined that petitioners are liable for*660 additions to tax under
*661 As stated earlier, respondent made slight concessions to certain adjustments and the Court made minor redeterminations to other adjustments. Aside from that, petitioners have wholly failed to introduce any credible or probative evidence to show that any portion of the determined underpayments was not due to negligence or intentional disregard of rules and regulations. In our view, not only have petitioners failed to show error in respondent's determinations; the record shows negligence on the part of petitioners in not keeping proper books and records and in not including in income substantial amounts which they clearly received. Just as unreasonable were petitioner's actions in causing many expenses clearly personal in nature, such as family trips to Puerto Rico and the purchase of bar stools and swimming pool paraphernalia, to be paid by Hagen Investments, Inc. and Capitol Car Care, Inc. See
Adjustments for the corporate years were made on the basis of miscellaneous corporate records.
A.
1.
We previously found that the corporation did not provide respondent with adequate books and records relating to its gross receipts and cost of goods sold. Respondent therefore determined the corporation's gross profits for its fiscal years 1968 through 1970 by (a) ascertaining the amounts paid to each trader and salesperson, (b) determining the percentage of gross profits paid to each on transactions negotiated by them, then (c) applying the appropriate multiplier to arrive at total gross profits, which amounts subsumed cost of goods sold.
The cornerstone of our system of tax collection is self-assessment and payment by the taxpayer. Certain demands are placed on the taxpayer, one of which is to keep*663 such books of account as are sufficient to establish the amount of gross income.
Thus, where a taxpayer keeps no books or records,
This rule has been restated on occasions too numerous to list.
Respondent reconstructed gross profits using various sources and data, including commission figures from audit papers prepared by the corporation's own accountants.
The burden of proof is on the corporation to show that respondent's method does not clearly reflect income.
2.
The corporation earned commissions on the sale of mutual funds in 1968, 1969 and 1970. We have treated mutual fund commissions in conjunction with the corporation's 1968, 1969 and 1970 gross profits. See Part IV.A.1. of our findings and n. 112,
3.
The corporation overstated interest income on its 1968 return; part of the income reported was in fact earned by petitioners on personal bank accounts. We sustain the adjustment and the reallocation of interest income to petitioners. See Appendix E, par. a).
4.
The corporation received a management fee of $ 750.00 from Acker in 1968. Acker was at that time a wholly-owned subsidiary of Alliance.
Fees are included in income under
5.
We previously found that the corporation received unreported miscellaneous income of $ 60,000.00 and $ 263,827.65 in 1968 and 1969, respectively. The source of the 1968 income is unidentified; the source of the 1969 income was sales by the corporation of 163,949 shares of FRI stock at highly inflated prices.
6.
Hagen Investments, Inc. deducted $ 43,275.00 on its 1968 corporate return for contributions made to the Hagen Employees Profit Sharing and Retirement Trust (HEPRET) in that year. It included this amount in income on its 1970 corporate return after HEPRET was determined not to be a qualified trust under
As shown in our findings, the District Director based his adverse determination in major part on the plan's failure to satisfy the nondiscrimination provisions of
*669 The District Director determined that the 1968 forfeitures resulted in reallocations to accounts in whose favor discrimination is prohibited.
*670 Since the corporation's 1968 contributions to HEPRET were not contributions to a qualified trust, deduction of the contributions was subject to
We do not know how the corporation arrived at the amounts to be contributed. Considering the record as a whole, we observe that the profit-sharing plan was assembled carelessly and in haste. The trust instrument was no more than a "form" with blanks to be filled in. Furthermore, we note the apparent lack of attention and diligence paid by the corporation to the District Director's requests for information.
In view of the foregoing, we sustain*671 respondent's disallowance of the 1968 deduction and his reduction of 1970 taxable income by the same amount. Expense Adjustments
1.
As our findings show, disallowed business expense deductions have fallen into the following categories: (a) auto and travel expenses, (b) dues and subscriptions, (c) interest expenses, (d) insurance expenses, (e) office supply expenses, (f) repair and maintenance expenses, (g) tax expenses, (h) travel and entertainment expenses, (i) utility expenses, (j) audit and legal expenses, (k) training program expenses, (1) miscellaneous expenses, and (m) depreciation. Respondent disallowed virtually all the expenditures for lack of substantiation. He treated them as distributions to petitioners and as constructive dividends. We sustained his determinations relating to constructive dividends, with minor modifications. See Part III.A.4. of our findings of fact,
We do not perceive the need to discuss separately each type of disallowed business expense
2.
a.
A net operating loss shall be a net operating loss carryback to each of the three taxable years preceding the taxable year of the loss.
b.
We incorporate by reference the law relating to net operating losses immediately above. The net operating loss deduction for 1968 (from the 1971 taxable year) is to be determined under*674 Rule 155.
C.
Gross income includes gains derived from dealings in property.
D.
Respondent was unable to determine the nature of the property upon which the 1968 or 1969 investment tax credits were based, and we are unable to make such a determination from the record. We are therefore unable to find that the corporation is entitled to an investment tax credit for either year.
E.
Respondent determined that the corporation is liable for additions to tax for each of the fiscal years 1968, 1969 and 1970.
Petitioner has failed to produce any credible or probative evidence to show that its underpayments were not due to negligence or intentional disregard of rules and regulations. We therefore sustain respondent's determinations on this issue.
| Ed J. and Martha Jo Hagen (docket No. 7700-76) | |||
| Concessions per Respondent's Brief | |||
| Types of | Per Statutory | ||
| Years | Adjustment | Notice | Concession |
| 1964 | Gross Receipts | $ 16,692.00 | $ 26.00 |
| 1964 | Interest, Dividends | ||
| and Fees | 11,591.88 | 78.56 | |
| 1964 | Partnership Income | 5,545.81 | 576.00 |
| 1964 | Cost of Goods Sold | 18,120.16 | 41.40 |
| 1965 | Car Expense | 780.90 | 73.00 |
| 1968 | Dividends | 30,427.14 | 4,738.31 |
| 1969 | Dividends | 37,125.11 | 4,100.22 |
| 1970 | Dividends | 21,448.27 | 3,586.48 |
| 1971 | Dividends | 28,221.49 | 327.00 |
| Hagen Investments, Inc. (docket No. 8342-76) | |||
| Concessions per Respondent's Brief | |||
| Types of | Per Statutory | ||
| FY Ended | Adjustment | Notice | Concession |
| 9/30/68 | Insurance Expense | $ 2,187.47 | $ 153.00 |
| 9/30/69 | Miscellaneous Income | 268,104.00 | 4,273.35 |
*677
We repeat our calculation of 1964 cost of goods sold as a convenience to the reader. Our further findings are in the notes below:
| Opening Inventory | Add: Inventory Purchases |
| and Other Increases | ** 122,910.56 |
| $ 136,796.94 | |
| Less: Miscellaneous Decreases | *** 7,402.59 |
| Goods Available for Sale | $ 129,394.35 |
| Less: Closing Inventory | **** 17,803.85 |
| Cost of Goods Sold | $ 111,590.50 |
*678
We again repeat our calculation of 1965 cost of goods sold. Our further findings are in the notes below:
| Opening Inventory | Add: Inventory Purchases |
| and Other Increases | ** 983,835.87 |
| $ 1,001,639.72 | |
| Less: Miscellaneous Decreases | *** 8,957.10 |
| Goods Available for Sale | $ 992,682.62 |
| Less: Closing Inventory | **** 60,647.85 |
| Cost of Goods Sold | $ 932,034.77 |
*679
We again repeat our calculation of 1966 cost of goods sold. Our further findings are in the notes below.
| Opening Inventory | Add: Inventory Purchases |
| and Other Increases | ** 3,359,866.96 |
| $ 3,420,514.81 | |
| Less: Miscellaneous Decreases | *** 152,491.54 |
| Goods Available for Sale | $ 3,268,023.27 |
| Less: Closing Inventory | **** 88,539.62 |
| Cost of Goods Sold | $ 3,179,483.65 |
*680
Distributions were received by petitioners in 1968 as follows:
| Hagen Investments, Inc.: | |
| a) Interest Income | $ 573.75 |
| b) Auto Expense | 727.82 |
| c) Dues and Subscriptions | 234.40 |
| d) House Payments | 3,408.00 |
| e) Insurance Premiums | 5,583.47 |
| f) Office Supplies | 3,460.03 |
| g) Repairs and Maintenance | 5,984.75 |
| h) Travel and Entertainment | 2,232.57 |
| i) Utilities | 1,572.83 |
| Capitol Car Care, Inc. | |
| j) Auto Expenses | 193.00 |
| k) Insurance Premiums | 619.75 |
| Total | $ 24,590.37 |
Additional facts relating to these distributions are:
a)
b)
c)
Respondent's notice of deficiency stated that these payments totalled $ 994.89, but he modified this to $ 972.89 at trial. Petitioner testified that a $ 738.49 expenditure posted was the cost of a stock subscription for City National Bank stock, and that it was therefore incorrectly posted. We accept petitioner's testimony and have reduced the adjustment accordingly.
d)
Hagen Investments, Inc. operated from this address in 1968 and respondent has allowed petitioners a home office deduction. Respondent's adjustment per his notice of deficiency was $ 4,156.00, not $ 3,408.00. The larger figure includes mortgage payments made by the corporation on property occupied by petitioners as a residence prior to 1968; the modification reflects respondent's determination that the property became investment property after petitioners moved. Respondent has conceded the $ 748.00 difference.
e)
f)
g)
We have determined that expenditures totalling $ 37.98, the first to Hessmer Company for $ 22.68 and the second to Wolfenbarger Electric Company for $ 15.30 were for the benefit of the corporation. Respondent's revised adjustment is therefore reduced by the total of these expenditures. The correct adjustment is $ 5,984.75.
h)
| Date | Payee | Amount |
| 2/19/68 | Chandelle (restaurant) | $ 86.33 |
| 3/19/68 | Chandelle | 13.28 |
| 5/29/68 | Chandelle | 43.15 |
| 7/4/68 | Dub Adams Hickory Kitchen | 99.96 |
| 8/20/68 | Chandelle | 21.60 |
| 9/3/68 | Able Rents | 45.32 |
| 9/3/68 | Dub Adams Hickory Kitchen | 12.35 |
| $ 321.99 |
The resulting amount of the distribution for 1968 is $ 2,232.57.
i)
j)
k)
Distributions were received by petitioners in 1969 as follows:
| Hagen Investments, Inc. | |
| a) Auto Expense | $ 6,158.96 |
| b) Dues and Subscriptions | 362.45 |
| c) House Payments | 3,408.00 |
| d) Insurance Premiums | 4,951.74 |
| e) Office Supplies | 537.96 |
| f) Repairs and Maintenance | 2,681.70 |
| g) Travel and Entertainment | 10,168.80 |
| h) Utilities | 1,820.84 |
| i) Training Program (Bill Hagen) | - 0 - |
| Capitol Car Care, Inc. | |
| j) Auto Expense | 902.69 |
| k) Insurance | - 0 - |
| Total | $ 30,993.14 |
Additional facts relating to these distributions are:
a)
The notice of deficiency stated that such auto expenses totalled $ 5,298.68 in 1969. At trial respondent increased that amount to $ 6,158.96 to reflect a calendar year rather than the corporation's fiscal year. We accept this increase to distributions.
b)
Petitioner presented additional evidence at trial relating to this adjustment. His evidence substantiates certain dues and subscription expenditures made during the corporation's 1969 fiscal year. They are:
| Payee | Amount |
| Oklahoma Securities Commission | $ 115.00 |
| National Assn. of Securities Dealers | 180.00 |
| Value Line Investment Survey | 5.00 |
| Commerce Clearing House | 5.50 |
| Total | $ 305.50 |
*687 As a result, distributions in 1969 for dues and subscription payments are:
| Per Return | $ 6,297.09 |
| Less: National Quotation Bureau | |
| Expense | 5,629.14 |
| Per Notice of Deficiency | $ 667.95 |
| Less: Expenses Substantiated | |
| at Trial | 305.50 |
| Dues and Subscriptions | $ 362.45 |
c)
d)
e)
f)
g)
| Date | Payee | Amount |
| 1/2/69 | Val Gene's | $ 175.90 |
| 5/5/69 | Chandelle (restaurant) | 102.19 |
| 9/5/69 | Chandelle | 97.92 |
| $ 376.01 |
Among the disallowed expenditures we treat as distributions are substantial expenditures for a trip made by the Hagen family to Puerto Rico. Trips to Dallas, New York, Las Vegas and Canada were also made in 1969. No business purpose for these trips was established at trial.
h)
i)
j)
k)
Distributions were received by petitioners in 1970 as follows:
| Hagen Investments, Inc. | |
| a) Auto Expense | $ 530.59 |
| b) Dues and Subscriptions | 1,509.45 |
| c) House Payments | 3,408.00 |
| d) Insurance Premiums | 4,060.75 |
| e) Office Supplies | 1,175.76 |
| f) Repairs and Maintenance | 649.15 |
| g) Travel and Entertainment | 1,059.22 |
| h) Utilities | 1,217.57 |
| i) Miscellaneous Expenses | 26.49 |
| Capitol Car Care, Inc. | |
| j) Auto Expense | 996.97 |
| k) Insurance | 918.45 |
| l) Taxes | 338.05 |
| Dividend Exclusion | (200.00) |
| Total | $ 15,690.45 |
Additional facts relating to these distributions are:
a)
b)
| Per Return | $ 5,452.95 |
| Less: National Quotation Bureau | |
| Expense | 3,906.00 |
| Per Notice of Deficiency | $ 1,546.95 |
| Less: Expenses Substantiated | |
| at Trial | 37.50 |
| $ 1,509.45 |
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
Distributions were received by petitioners in 1971 as follows:
| Hagen Investments, Inc. | |
| a) Dues and Subscriptions | $ 144.40 |
| b) House Payments | 3,408.00 |
| c) Insurance Premiums | 4,471.00 |
| d) Repairs and Maintenance | 145.06 |
| e) Travel and Entertainment | 3,326.67 |
| f) Utilities | 752.94 |
| g) Miscellaneous Expenses | 33.48 |
| h) Legal Fees | 15,180.73 |
| Capitol Car Care, Inc. | |
| i) Auto Expenses | 300.00 |
| j) Insurance Premiums | -0- |
| Dividend Exclusion | (200.00) |
| Total | $ 27,562.28 |
Additional facts relating to these distributions are:
a)
b)
c)
d)
| Thomas A. Edison Industries | $ 22.47 |
| R. K. Black, Inc. | 10.29 |
| Federal Corporation | 40.95 |
| Federal Corporation | 18.50 |
| Comfort Inn | 40.00 |
| $ 132.21 |
Distributions in 1971 for repairs and maintenance are therefore $ 145.06.
e)
f)
g)
h)
i)
j)
*697
| Hagen Investments, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Computation of Gross Profit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Based on Commissions Paid | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended: September 30, 1968 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Type of | Percent of | Gross | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Salesman | Sales | Commissions | Profit/Multiplier | Profit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Willard Buck | Retail | $ 15,731.89 | 50/2.0 | $ 31,463.78 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Jimmy G. Cain | Wholesale | 1,478.05 | 25/4.0 | 5,912.20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Harry Chupack | Retail | 1,597.50 | 50/2.0 | 3,195.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sam Duncan | Retail | 958.35 | 50/2.0 | 1,916.70 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dale Hunter | Retail | 5,214.10 | 50/2.0 | 10.428.20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| William C. Johnson | Retail | 17,445.57 | 50/2.0 | 34,891.14 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marvin F. Oaks | Retail | 30,509.61 | 50/2.0 | 61,019.22 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | Wholesale | 737.86 | 25/4.0 | 2,951.44 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| W. C. Patzack | Retail | 1,898.21 | 50/2.0 | 3,796.42 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| John Porter | Wholesale | 5,744.12 | 25/4.0 | 22,976.48 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| E. H. Reagan | Retail | 198.19 | 50/2.0 | 396.38 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Paul Rice | Retail | 35,389.35 | 50/2.0 | 70,778.70 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Keith Strong | Wholesale | 3,000.00 | 25/4.0 | 12,000.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| E. L. Stucker | Retail | 1,862.50 | 50/2.0 | 3,725.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bob Summers | Wholesale | 25,510.86 | 40/2.5 | 63,777.15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bob Summers | Wholesale | 43,355.29 | 30/3.33 | 144,373.12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tom Summers | Wholesale | 18,967.46 | 40/2.5 | 47,418.65 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tom Summers | Wholesale | 48,053.91 | 30/3.33 | 160,019.52 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Salaries | 26,156.75 | -- | -- | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Totals | $ 283.809.57 | $ 681,039.10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross Profit per Return | 489,574.84 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment | *698
*699
Footnotes
Authorities (33)Ruidoso Racing Association, Inc. v. Commissioner of ... , 476 F.2d 502 ( 1973 ) Cohan v. Commissioner of Internal Revenue , 39 F.2d 540 ( 1930 ) Halle v. Commissioner of Internal Revenue , 175 F.2d 500 ( 1949 ) United States v. Cecil Thompson, Cecil Thompson, Cross-... , 279 F.2d 165 ( 1960 ) Condor Merritt v. Commissioner of Internal Revenue , 301 F.2d 484 ( 1962 ) Nell La Compte Reaves, as of the Will of Jesse Ullman ... , 295 F.2d 336 ( 1961 ) Haldane M. Plunkett v. Commissioner of Internal Revenue , 465 F.2d 299 ( 1972 ) Edward T. And Isabel J. Lysek v. Commissioner of Internal ... , 583 F.2d 1088 ( 1978 ) United States v. Ed J. Hagen , 470 F.2d 110 ( 1972 ) Meridian Wood Products Co., Inc., a Corporation v. United ... , 725 F.2d 1183 ( 1984 ) Bradstreet Co. of Maine v. Commissioner of Internal Revenue , 65 F.2d 943 ( 1933 ) Carmine Bollella and Teresa Bollella, on Review v. ... , 374 F.2d 96 ( 1967 ) anthony-v-thomas-v-commissioner-of-internal-revenue-estate-of-joseph-m , 223 F.2d 83 ( 1955 ) joe-r-anson-and-margie-a-anson-v-commissioner-of-internal-revenue , 328 F.2d 703 ( 1964 ) Earl J. Lollis and Ruth Lollis v. Commissioner of Internal ... , 595 F.2d 1189 ( 1979 ) Hooper v. United States , 216 F.2d 684 ( 1954 ) Robert W. Bradford v. Commissioner of Internal Revenue , 796 F.2d 303 ( 1986 ) Spies v. United States , 63 S. Ct. 364 ( 1943 ) Welch v. Helvering , 54 S. Ct. 8 ( 1933 ) William R. And Lorna E. Hall v. Commissioner of Internal ... , 78 A.L.R. Fed. 355 ( 1984 ) Copyright © 2024 by eLaws. All rights reserved.
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