T.C. Memo. 2013-179
UNITED STATES TAX COURT
CHAD B. HESSING AND KELLI B. HESSING, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23949-10. Filed August 5, 2013.
Jeremy D. Deus and Barbara Zanzig Lock, for petitioners.
Kelly Andrew Blaine, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: Respondent, in a notice of deficiency mailed July 28,
2010, determined a $35,223 deficiency in petitioners’ 2003 income tax. The
issues remaining for our consideration are: (1) whether petitioners must recognize
$296,775 in income from the sale of three parcels of realty during 2003; (2)
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[*2] whether petitioners are entitled to business expense deductions in excess of
those respondent allowed in the notice of deficiency; and (3) whether the period of
assessment of tax for petitioners’ 2003 tax year expired or remains open under
section 6501(e).1
FINDINGS OF FACT
Petitioners resided in Boise, Idaho, at the time their petition was filed. Chad
Hessing (petitioner) was 22 years old during 2003, and he intended to pursue a
career in the construction business. Petitioner was generally familiar with his
father’s construction businesses. For two years before 2003 and after the
completion of less than one year of college, petitioner went on a religious mission.
He had agreed with his father that upon his return he would work for and learn
about his father’s construction businesses. Their understanding was that petitioner
would learn about the construction business by working as an employee and would
receive a monthly salary of $2,500.
Petitioner’s father’s businesses had fully extended credit, and petitioners
had a good credit rating.2 The father asked petitioners to use their good credit
1
Section references are to the Internal Revenue Code in effect for the year in
issue.
2
Petitioners had few assets, but their credit card history was good.
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[*3] rating and act as purchasers of three parcels of realty so that he could develop
more properties in his construction businesses. At all times during 2003
petitioner’s father ran the construction businesses and petitioner was an employee.
Petitioner did not receive and/or retain any proceeds from the transactions related
to his father’s construction businesses. Any checks that were drawn to petitioner,
as payee, in connection with the real property and the construction businesses
were turned over to his father. Petitioners acted as a conduit for petitioner’s
father’s businesses concerning the three 2003 real property transactions. During
2003 petitioner received the $2,500 per month salary as he and his father had
agreed.
The first parcel (lot 55) was to be used to construct a home for Kip and Amy
Fife. Lot 55 was purchased in petitioners’ names on March 21, 2003, and the
closing with the Fifes took place on November 21, 2003. The Fifes paid
$176,194, and after the payoff of the mortgage loan on the property and expenses
of sale, the net amount shown as due petitioners was $12,827.03. Petitioners did
not receive any portion of the $12,827.03.
The second parcel (lot 60) was purchased in petitioners’ names and then on
the same day, May 7, 2003, sold or transferred to one of petitioner’s father’s
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[*4] business entities. As part of the lot 60 transaction checks were drawn to
petitioner in various amounts which petitioner, in turn, gave to his father.
The purchase and sale of lot 8, the third parcel, was similar to the lot 55 and
60 transactions, and the sale of lot 8 closed at the end of December 2003.
Petitioners’ names appear in the transaction documents, but petitioners did not
retain any of the checks or funds that the documentation reflected as attributable to
them.
Attached to petitioners’ 2003 joint Federal income tax return was a
Schedule C, Profit or Loss From Business, reflecting $104,300 in gross receipts
and a net profit or taxable amount of $1,558. Petitioner’s father prepared the 2003
return for petitioners to account for the Form 1098, Mortgage Interest Statement,
and Form 1099-MISC, Miscellaneous Income, that were issued in petitioners’
names in connection with the three real estate transactions for which petitioners
acted as agents or conduits for petitioner’s father. Petitioner had no background in
business, accounting, or taxation and was unfamiliar with the source or financial
consequences of the figures his father reported on the 2003 return. Petitioner
trusted his father to present the circumstances properly to the Government.
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[*5] OPINION
The seminal question in this case is whether petitioners underreported gross
income, and if they did, whether the amount of underreported gross income was
sufficient to meet the threshold requirement of section 6501(e), providing for a
six-year period within which respondent may assess a tax deficiency for
petitioners’ 2003 tax year. If we decide that petitioners were not required to report
additional gross income, then the remaining questions become moot because of
respondent’s inability to assess additional tax for 2003. If we decide that
petitioners were required to report 25% or more of additional gross income, we
must then decide whether they are entitled to deductions in excess of those
respondent allowed in the notice of deficiency.
Burden of Proof
Petitioners raised the question of burden of proof for the first time in their
opening brief. They contend that under section 7491(a) respondent bears the
burden of proof for going forward with the evidence. Respondent argues that
petitioners’ attempt to raise the burden of proof is untimely.
At trial the Court asked the parties: “Is there any question in this case about
who has the burden of proof and who has the burden of proceeding with the
evidence?” Counsel for petitioners replied “No, your Honor”, and he proceeded to
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[*6] call his first witness. The entire trial was conducted under the premise that
petitioners had the burden of proof. Under these circumstances, it would be
prejudicial and unjust to allow petitioners to raise, in a posttrial brief, questions
concerning the burden of proof. Accordingly, we hold petitioners to their trial
admission that they had the burden of proof and deny their attempt to raise the
question of burden on brief. See DiLeo v. Commissioner, 96 T.C. 858, 891-892
(1991), aff’d, 959 F.2d 16 (2d Cir. 1992).
Whether Petitioners Underreported Gross Income for 2003
We consider this issue first because it may be determinative of the outcome
of this case. Normally the Commissioner has three years within which to assess
tax. Sec. 6501(a). Under section 6501(e), however, the Commissioner has six
years within which to assess tax where a “taxpayer omits from gross income an
amount properly includible therein which is in excess of 25 percent of the amount
of gross income stated in the return”. See sec. 6501(e)(1)(A). But for section
6501(e), respondent would not be able to assess an income tax deficiency in this
case because the normal three-year period had expired at the time that the notice of
deficiency was mailed. Accordingly, we must decide whether petitioners had an
omission of gross income and whether it was in excess of 25% of the amount
reported.
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[*7] Petitioners argue that they were acting as an agent or conduit for petitioner’s
father and that the assignment of income doctrine requires that the principal report
the income, citing Brittingham v. Commissioner, 57 T.C. 91 (1971). Respondent
does not question or disagree with the legal foundation for petitioners’ argument.
Instead, respondent argues that the record in this case does not support their
argument that they were agents for petitioner’s father. Respondent argues that
petitioner was in the construction business and that his income was understated.
The deeds and conveyancing documents concerning the three real estate
transactions bear petitioners’ names, and various underlying documents, including
checks, also bear petitioners’ names. On the other hand petitioner’s and his
father’s testimony contradict the form of these transactions. Taken at face, the
testimony presents a young man who acceded to his father’s request to lend his
credit reputation to facilitate the acquisition of real estate to be used in his father’s
construction businesses.3 Ultimately, we find petitioner’s and his father’s
testimony to be credible and, on that basis, hold that petitioners did not have
unreported gross income. See Diaz v. Commissioner, 58 T.C. 560, 564 (1972).
3
There were multiple business entities, and we have not detailed their
interrelationship because it is of no consequence to the basic question of whether
petitioners acted as agents or conduits for petitioner’s father.
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[*8] The primary case precedent petitioners rely upon is a 1971 case decided by
this Court in similar circumstances. See Brittingham v. Commissioner, 57 T.C.
91. That case involved a husband and wife who excluded from their gross income
a deposit into the husband’s bank account. The deposit represented the proceeds
of the sale of Mexican bonds the husband’s mother owned. At the husband’s
instruction his bank purchased U.S. bonds with the funds, and his name was
shown on the purchase order. The husband immediately instructed the bank to
change the name on the order to his mother’s name. The Commissioner
determined a deficiency in the taxpayers’ Federal income tax for the amount of the
deposit. This Court held that the deposit was made into the husband’s account in
his capacity as an agent for his mother and was not income to him.
Like the husband’s name in Brittingham, petitioners’ names appear on
transactional documents, but they were in no other respect “owners” of the
properties and/or entitled to the benefits or subject to the burdens of the properties.
See also Diamond v. Commissioner, 56 T.C. 530, 541 (1971), aff’d, 492 F.2d 286
(7th Cir. 1974). We find it somewhat problematic that petitioners had a Schedule
C reflecting income from a construction business. Petitioners, however, do not
ask the Court to ignore the Form 1098 and 1099-MISC income that petitioner’s
father caused them to report on their Schedule C. Petitioners argue that the
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[*9] income that was not reported in Form 1098 or 1099-MISC should not be
attributed to them.4 Respondent argues that petitioners were in the construction
business and that all gross income connected with the three parcels of realty
should be attributed to them.
Respondent is in the unique position of arguing that petitioner’s father was
not the true recipient, even though it appears that he was the operator of the
businesses. Normally, in a situation like this where the individuals named in the
documentation do not appear to be the true parties in interest, the Commissioner
has contended that the assignment of income doctrine would apply to attribute the
income to the party in interest. Respondent is not in a position in this case to do
so, because the three-year period for assessment has expired. So it appears that
respondent’s only recourse here is to attempt to attribute the unaccounted-for
income to petitioners.
Respondent asks the Court to apply special scrutiny to petitioner’s and his
father’s testimony because of their familial relationship. We have carefully
scrutinized the testimony and other evidence in the record in this case, and they do
not support respondent’s argument. Petitioner and his father credibly testified to
4
We note that a taxpayer is not limited to arguing the position taken on his
tax return, although it is a factor to be considered. Casey v. Commissioner, 38
T.C. 357, 384 (1962).
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[*10] the contrary. Although on its face petitioners’ Schedule C supports
respondent’s position, the remainder of the record overwhelmingly does not.
Petitioners are in no way principals or the operators of the various construction
business entities. Other than the Form 1098 and 1099-MISC income that was
reported on petitioners’ 2003 return, there is little or no nexus to petitioner’s
father’s business entities that would provide this Court with a foundation to hold
that petitioners had unreported income.
Wherefore, we hold that petitioners did not have unreported gross income
and that the period for assessment of tax for petitioners’ 2003 tax year has expired.
It is accordingly unnecessary to consider other issues raised by the parties.
To reflect the foregoing,
Decision will be entered for
petitioners.