T.C. Memo. 1996-271
UNITED STATES TAX COURT
ROBERT D. SPARROW, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
N. LARAE SPARROW, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 7127-94, 7128-94. Filed June 12, 1996.
Robert D. Sparrow and N. LaRae Sparrow, prosese.
Fred E. Green, Jr., for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Robert D. Sparrow (Mr. Sparrow) and N. LaRae
Sparrow (Mrs. Sparrow) separately petitioned the Court to
redetermine respondent’s determinations with respect to their
1986, 1987, and 1988 Federal income taxes. Respondent made a
separate determination for Mr. Sparrow and a separate
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determination for Mrs. Sparrow, and respondent reflected each of
these determinations in separate notices of deficiency.
Respondent determined the following deficiencies in, and
additions to, petitioners’ taxes:
Robert D. Sparrow, docket No. 7127-94
Additions to Tax
Sec. Sec. Sec.
Year Deficiency 6653(b)(1) 6653(b)(1)(A) 6661
1986 $12,742 --- $9,557 $3,186
1987 71,509 --- 53,632 17,877
1988 49,835 $37,376 --- 12,459
N. LaRae Sparrow, docket No. 7128-94
Additions to Tax
Sec. Sec.
Year Deficiency 6651(a)(1) 6661
1986 $12,742 $3,186 $3,186
1987 71,742 --- 17,877
1988 49,835 12,459 12,459
Respondent also determined that Mr. Sparrow was liable for the
addition to tax under section 6653(b)(1)(B) on the entire
deficiency for 1986 and 1987, and that petitioners were liable
for increased interest under section 6621(c) on the entire
deficiency in each year.
Following a consolidation of the cases, we must decide:
1. Whether petitioners underreported their gross income for
1986, 1987, and 1988, by failing to report proceeds from the
sales of stock. We hold they did.
2. Whether petitioners failed to report $10,000 in
consulting fees received by Mr. Sparrow in 1986, and, if they
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did, whether this amount is subject to self-employment tax.
We hold they did, and it is.
3. Whether petitioners are liable for the additions to tax
for substantial understatements determined by respondent under
section 6661. We hold they are.
4. Whether Mrs. Sparrow is liable for the additions to her
1986 and 1988 taxes for delinquency determined by respondent
under section 6651(a)(1). We hold she is.
5. Whether Mr. Sparrow is liable for the additions to tax
for fraud determined by respondent under section 6653(b). We
hold he is not.
6. Whether petitioners are liable for the increased rate of
interest determined by respondent under section 6621(c) for
substantial underpayments attributable to tax motivated
transactions. We hold they are not.
Unless otherwise stated, section references are to the
Internal Revenue Code in effect for the taxable years in issue.
Rule references are to the Tax Court Rules of Practice and
Procedure. Dollar amounts are rounded to the nearest dollar.
FINDINGS OF FACT1
Petitioners resided in St. George, Utah, when they
petitioned the Court. They filed a 1986 Form 1040, U.S.
1
Some of the facts have been stipulated and are so found.
The stipulations and attached exhibits are incorporated herein by
this reference.
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Individual Income Tax Return, on October 1988, using the status
of “Married filing joint return”. They filed a 1987 Form 1040 on
April 15, 1988, using the status of “Married filing joint
return”. They filed a 1988 Form 1040, on October 17, 1990, using
the status of “Married filing joint return”. They did not
receive an extension of time to file any of these returns.
During 1986, Mr. Sparrow owned at least 1.5 million shares
of NRG Intl., Inc. (NRG), and Mrs. Sparrow owned at least 150,000
shares of NRG.
During 1986, petitioners sold to the husband of Dorothy S.
Hall, 10,000 shares of NRG for $2,000. Mr. Sparrow received a
$2,000 check from Mrs. Hall, dated February 22, 1986, which was
payable to “Bob Sparrow”. Petitioners did not include this
$2,000 in their 1986 gross income.
On July 10, 1986, Mr. Sparrow sold to Norman C. Hall, 10,000
shares of NRG for $500. Petitioners received a $500 check from
Mr. Hall, dated July 10, 1986, which was made payable to “Bob
Sparrow”. The $500 was gain from the sale of stock. Petitioners
did not include this $500 in their 1986 gross income.
During 1986, Mr. Sparrow sold to Stanley L. Evans some
shares of NRG for $11,800. Mr. Sparrow received a $11,800 check
from Mr. Evans, dated July 21, 1986, which was payable to “Bob
Sparrow”. Petitioners did not include this $11,800 in their 1986
gross income.
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During 1986, Mr. Sparrow maintained a stock account at
Anderson Bryant & Co. (Anderson Bryant). Mr. Sparrow received a
$9,998 check from Anderson Bryant, dated August 1, 1986, which
was payable to “Robert D. Sparrow”. Petitioners did not include
this $9,998 in their 1986 gross income.
During 1986, the brokerage firm of Wilson-Davis & Co.
(Wilson-Davis), purchased and sold stock for petitioners. On
August 12, 1986, Wilson-Davis sold 40,000 shares of NRG on behalf
of petitioners for $11,284, and purchased 1,300 shares of
Centurion stock on behalf of Mr. Sparrow for $985. The cost of
the purchase was deducted from the proceeds from the sale, and
Mr. Sparrow received a $10,299 check from Wilson-Davis, dated
August 19, 1986. Petitioners did not include the $11,284 in
their 1986 gross income.
On August 25, 1986, Wilson-Davis sold 40,000 shares of NRG
on behalf of Mr. Sparrow for $7,020. On August 26, 1986,
Mr. Sparrow purchased 1,000 shares of Centurion for $665, which
amount was deducted from the proceeds of the prior day’s sale.
Mr. Sparrow received a $6,354 check from Wilson-Davis dated
August 29, 1986. Petitioners did not include this $7,020 in
their 1986 gross income.
On September 18, 1986, Wilson-Davis sold 10,000 shares of
National Division stock on behalf of Mr. Sparrow for $557.
Mr. Sparrow received a $557 check from Wilson-Davis dated
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September 25, 1986. Petitioners did not include this $557 in
their 1986 gross income.
On October 10, 1986, Wilson-Davis sold 30,000 shares of NRG
on behalf of Mr. Sparrow for $4,205. On October 13, 1986,
Wilson-Davis sold 20,000 shares of NRG on behalf of Mr. Sparrow
for $3,496. Mr. Sparrow received a $7,701 check from
Wilson-Davis dated October 20, 1986. Petitioners did not include
this $7,701 in their 1986 gross income.
On October 21, 1986, Wilson-Davis sold 20,000 shares of NRG
on behalf of Mr. Sparrow for $2,788. Mr. Sparrow received a
$2,788 check from Wilson-Davis dated October 28, 1986.
Petitioners did not include this $2,788 in their 1986 gross
income.
On October 14, 1986, Wilson-Davis sold 30,000 shares of NRG
on behalf of Mr. Sparrow for $4,205. Mr. Sparrow received a
$4,205 check from Wilson-Davis dated October 29, 1986.
Petitioners did not include this $4,205 in their 1986 gross
income.
On November 3, 1986, Wilson-Davis sold 20,000 shares of NRG
on behalf of Mr. Sparrow for $3,496. Mr. Sparrow received a
$3,496 check from Wilson-Davis dated November 11, 1986.
Petitioners did not include this $3,496 in their 1986 gross
income.
On November 6, 1986, Wilson-Davis sold 20,000 shares of NRG
on behalf of Mr. Sparrow for $3,496. Mr. Sparrow received a
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$3,496 check from Wilson-Davis dated November 13, 1986.
Petitioners did not include this $3,496 in their 1986 gross
income.
On November 12, 1986, Wilson-Davis sold 5,000 shares of NRG
on behalf of Mr. Sparrow for $841. Mr. Sparrow received an $841
check from Wilson-Davis dated November 20, 1986. Petitioners did
not include this $841 in their 1986 gross income.
On November 17, 1986, Wilson-Davis sold 20,000 shares of NRG
on behalf of Mr. Sparrow for $4,990. Petitioners did not include
this $4,990 in their 1986 gross income.
On November 21, 1986, Wilson-Davis sold 20,000 shares of NRG
on behalf of Mr. Sparrow for $7,490. Petitioners did not include
this $7,490 in their 1986 gross income.
On November 24, 1986, Mr. Sparrow received a $10,000 check
made payable to him, from H. T. Shepherd. The $10,000 was paid
to Mr. Sparrow for consulting services. Petitioners did not
include this $10,000 in their 1986 gross income.
During 1987, Mr. Sparrow sold securities to individuals, and
he engaged Wilson-Davis to purchase and sell securities on his
behalf. On August 24, 1987, Wilson-Davis sold 12,000 shares of
NRG on behalf of Mr. Sparrow for $1,994. Mr. Sparrow received a
$1,994 check from Wilson-Davis dated August 31, 1987.
Petitioners did not include this $1,994 in their 1987 gross
income.
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On October 1, 1987, Wilson-Davis sold 50,000 shares of NRG
on behalf of Mr. Sparrow for $6,490. Mr. Sparrow received a
$6,490 check from Wilson-Davis dated October 8, 1987.
Petitioners did not include this $6,490 in their 1987 gross
income.
On October 7, 1987, Wilson-Davis sold 50,000 shares of NRG
on behalf of Mr. Sparrow for $5,990. Mr. Sparrow received a
$5,990 check from Wilson-Davis dated October 19, 1987.
Petitioners did not include this $5,990 in their 1987 gross
income.
On November 16, 1987, Wilson-Davis sold 4,500 shares of NRG
on behalf of Mr. Sparrow for $181. Mr. Sparrow received a $181
check from Wilson-Davis dated November 23, 1987. Petitioners did
not include this $181 in their 1987 gross income.
On December 16, 1987, Wilson-Davis sold 10,000 shares of
Noble Corp., Inc. (Noble), on behalf of Mr. Sparrow for $370.
On December 16, 1987, Wilson-Davis sold another 9,000 shares of
Noble on behalf of Mr. Sparrow for $350. Mr. Sparrow received a
$720 check from Wilson-Davis dated December 24, 1987.
Petitioners did not include this $720 in their 1987 gross income.
On December 23, 1987, Wilson-Davis sold 10,000 shares of
Noble on behalf of Mr. Sparrow for $790. Petitioners did not
include this $790 in their 1987 gross income.
On June 15, 1987, Mr. Sparrow entered into a written
agreement with Greg Slazis (Mr. Slaziz) to “trade $230,346.00
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worth of appraised gems for 767,820 shares of NRG International
Stock at .30/share.” Pursuant to this agreement, Mr. Sparrow and
Mr. Slaziz exchanged 767,820 shares of NRG for gems valued by
Mr. Slazis at $230,346. Petitioners did not include this
$230,346 in their 1987 gross income.
During 1987, Mr. Sparrow transferred to Leroy J. Isaac, Jr.
2,500 shares of Noble.
During 1987, Michael Allred (Mr. Allred) sold NRG on behalf
of petitioners. Mr. Sparrow received a $1,750 check from
Mr. Allred, dated March 17, 1987, and payable to Mr. Sparrow.
Mr. Sparrow received a $200 check from Mr. Allred, dated
March 27, 1987, and payable to Mr. Sparrow. Mr. Sparrow received
a $2,500 check from Mr. Allred, dated April 6, 1987, and payable
to Mr. Sparrow. Mr. Sparrow received a $1,500 check from
Mr. Allred, dated April 22, 1987, and payable to Mr. Sparrow.
Petitioners did not include the $5,950 of aggregate proceeds from
Mr. Allred in their 1987 gross income.
Petitioners maintained control over Noble’s bank account
during 1987. During 1987, Mr. Sparrow sold to Gordon LaMont
shares of Noble for $900. Mr. Sparrow received a $900 check for
this sale.
Petitioners engaged the brokerage firm of Piper, Jaffray
& Hopwood, Inc. (Piper, Jaffray) to sell stock on their behalf
during 1987. On January 6, 1987, Piper, Jaffray sold 1,300
shares of Centurion Mines Corp. on behalf of petitioners for
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$366. Petitioners received a $366 check from Piper, Jaffray,
dated January 7, 1987.
Petitioners also engaged the brokerage firm of Wilson-Davis
to purchase and sell stock on their behalf during 1987.
On September 2, 1987, Wilson-Davis sold 9,000 shares of NRG on
behalf of Mrs. Sparrow for $1,484. Petitioners received a $1,484
check from Wilson-Davis dated September 8, 1987. The $1,484
check was petitioners' proceeds and gain from the sale of NRG,
and it should have been included in determining their 1987 gross
income. Petitioners failed to include this $1,484 in their 1987
gross income.
On September 21, 1987, Wilson-Davis sold 30,000 shares of
NRG on behalf of Mrs. Sparrow for $5,267. Petitioners received a
$5,267 check from Wilson-Davis dated September 28, 1987. The
$5,267 check was petitioners' proceeds and gain from the sale of
NRG, and it should have been included in their 1987 gross income.
Petitioners failed to include this $5,267 in their 1987 gross
income.
On November 16, 1987, Wilson-Davis sold 22,800 shares of NRG
on behalf of Mrs. Sparrow for $959. Petitioners received a $959
check from Wilson-Davis dated November 23, 1987. The $959 check
was petitioners' proceeds and gain from the sale of NRG, and it
should have been included in their 1987 gross income.
Petitioners failed to include this $959 in their 1987 gross
income.
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On November 23, 1987, Wilson-Davis sold 50,000 shares of NRG
on behalf of Mrs. Sparrow for $1,843. Petitioners received a
$1,843 check from Wilson-Davis dated December 1, 1987. The
$1,843 check was petitioners' proceeds and gain from the sale of
NRG, and it should have been included in their 1987 gross income.
Petitioners failed to include this $1,843 in their 1987 gross
income.
During taxable year 1988, Mr. Sparrow continued to sell
stocks and securities. On May 26, 1988, Mr. Sparrow entered into
a second written agreement with Mr. Slaziz to “exchange appraised
gemstones for [500,000 shares of Noble worth $125,000 and 660,823
shares of NRG worth $33,041].” Pursuant to this second
agreement, Mr. Sparrow and Mr. Slaziz exchanged the 1,160,823
shares of the above mentioned stock for gems valued at $158,154
by Mr. Slazis’ appraisal.
During 1988, Mr. Sparrow maintained a stock account at
Securities Settlement Corp. (Securities). On December 19, 1988,
Securities sold 403 shares of General Electric Company on behalf
of Mr. Sparrow for $18,257.
OPINION
Except with respect to respondent's allegation of fraud, the
burden of proof is on petitioners to prove that respondent's
determinations set forth in the notices of deficiency are wrong.
Rule 142(a) and (b); Welch v. Helvering, 290 U.S. 111, 115
(1933). Respondent must prove by clear and convincing evidence
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that Mr. Sparrow is liable for the additions to tax for fraud.
Sec. 7454(a); Rule 142(b). With these basic principles in mind,
we turn to the issues for decision.
1. Proceeds from Sales of Stock
Gross income includes all income from whatever source
derived, including gains derived from dealings in property.
Sec. 61(a)(3). Respondent determined that petitioners failed to
report capital gains of $31,467, $268,968, and $177,181 for 1986,
1987, and 1988, respectively.2 Petitioners did not present any
persuasive evidence at trial to disprove this determination.
In addition, petitioners did not squarely address this issue in
their brief. The thrust of petitioners’ position on brief is
that they have enough net operating losses (NOLs) to offset any
tax that is payable on their unreported income.3 We are
unconvinced that this is true. Petitioners must prove their
right to deduct an NOL in any of the subject years. United
States v. Olympic Radio & Television, Inc., 349 U.S. 232, 235
(1955). Petitioners must also prove the amount (if any) of an
NOL. Jones v. Commissioner, 25 T.C. 1100, 1104 (1956), revd.
2
For 1986, respondent determined that petitioners realized
$84,804 of long-term capital gains in 1986, rather than the
$10,127 that they reported on their 1986 Form 1040.
3
Section 172 allows a taxpayer to deduct an NOL for a
taxable year. The amount of the NOL deduction equals the sum of
the NOL carryovers plus NOL carrybacks to that year. Sec.
172(a). Absent an election to the contrary, an NOL for any
taxable year must first be carried back 3 years and then forward
15 years. Sec. 172(b)(1)(A), (2), and (3).
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and remanded on other grounds 259 F.2d 300 (5th Cir. 1958);
Vaughan v. Commissioner, 15 B.T.A. 596 (1929). Petitioners have
failed to meet either of these burdens. We sustain respondent’s
determination on this issue.
2. Service Income/Self-Employment Tax
Respondent determined that petitioners failed to report
$10,000 of personal service income for 1986. Respondent also
determined that this amount was subject to self-employment tax.
A self-employment tax is imposed on income in excess of $400
derived by an individual from a trade or business. Secs. 1401,
1402(b) and (c).
Petitioners presented no evidence on these issues, and the
record does not otherwise disprove respondent’s determination on
the issues. We sustain respondent's determination.
3. Substantial Understatements--Section 6661
Section 6661 imposes an addition to tax for substantial
understatements. The amount of the section 6661 addition to tax
for additions assessed after October 21, 1986, equals 25 percent
of the amount attributable to the substantial understatement.
Pallottini v. Commissioner, 90 T.C. 498, 500-503 (1988). An
understatement is substantial if it exceeds the greater of
10 percent of the tax required to be shown on the return or
$5,000. Sec. 6661(b)(1)(A). An understatement is reduced to the
extent it is: (1) Based on substantial authority, or (2)
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adequately disclosed in the return or in a statement attached to
the return. Sec. 6661(b)(2).
Petitioners have failed to meet their burden of proof on
this issue. The record does not disprove respondent’s
determination that the understatements are substantial, and it
does not establish that any of the understatements are reduced
under section 6661(b)(2). We sustain respondent’s determination.
4. Delinquency--Section 6651(a)(1)
Respondent determined an addition to tax under section
6651(a)(1) for Mrs. Sparrow’s 1986 and 1988 taxable years,
asserting that she failed to file timely Federal income tax
returns. In order to avoid this addition to tax, Mrs. Sparrow
must prove that her failure to file was: (1) Due to reasonable
cause and (2) not due to willful neglect. Sec. 6651(a);
Rule 142(a); United States v. Boyle, 469 U.S. 241, 245 (1985);
Catalano v. Commissioner, 81 T.C. 8 (1983). A failure to file
timely is due to reasonable cause if the taxpayer exercised
ordinary business care and prudence, and, nevertheless, was
unable to file the return within the prescribed time. Sec.
301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect means a
conscious, intentional failure or reckless indifference.
United States v. Boyle, supra at 245.
Petitioners filed their 1986 and 1988 Forms 1040 on
October 12, 1988, and October 17, 1990, respectively, and they
did so without the benefit of any extensions to the statutory
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filing period. We conclude that these returns were filed
untimely. Because Mrs. Sparrow has also failed to prove that
either of these untimely filings was due to reasonable cause and
not due to willful neglect, we sustain respondent's
determination.
5. Fraud--Section 6653(b)
Respondent must meet her burden of proving fraud through
affirmative evidence; fraud is never imputed or presumed.
Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Whether fraud
exists in a given situation is a factual determination that must
be made after reviewing the particular facts and circumstances of
the case. DiLeo v. Commissioner, 96 T.C. 858, 874 (1991), affd.
959 F.2d 16 (2d Cir. 1992). Respondent must show clearly that
petitioner intended to evade a tax known or believed to be owing.
Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968).
Based on our review of the record, we are not convinced that
Mr. Sparrow is liable for fraud for any of the years in issue.4
We so hold.
6. Increased Rate of Interest--Section 6621(c)
Section 6621(c) applies if there is a substantial
underpayment attributable to tax-motivated transactions. The
term “tax motivated transaction” connotes a sham or fraudulent
4
We find little to no value in the testimony of the two
witnesses that respondent called at trial to support her
determination.
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transaction. Skeen v. Commissioner, 864 F.2d 93 (9th Cir. 1989);
sec. 6621(c)(3)(A)(v). When section 6621(c) applies, the annual
rate of interest payable on the tax-motivated substantial
underpayment is increased to 120 percent of the underpayment rate
under section 6621(b).
We find that petitioners’ underpayments were not
attributable to tax-motivated transactions. We hold the same.
* * * * * * *
We have considered all arguments made by the parties and, to
the extent not discussed above, find them to be without merit.
To reflect the foregoing,
Decisions will be entered
for respondent for the
deficiencies, the additions to
tax under sec. 6661, and, with
respect to N. LaRae Sparrow,
the additions to tax under
sec. 6651(a)(1), and for
petitioners for the increased
interest under sec. 6621(c),
and, with respect to Robert D.
Sparrow, the additions to tax
under sec. 6653(b).
Sparrow v. Commissioner
Court: United States Tax Court
Date filed: 1996-06-12
Citations: 71 T.C.M. 3170, 1996 Tax Ct. Memo LEXIS 286, 1996 T.C. Memo. 271
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