T.C. Memo. 1996-532
UNITED STATES TAX COURT
MICHAEL W. REHTORIK, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 9115-91, 24660-91, Filed December 2, 1996.
24661-91.
David M. Garvin, for petitioner Michael W. Rehtorik.
James P. Dawson and Eli J. Dicker, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined deficiencies in
petitioners’ joint Federal income taxes and additions to tax for
1984 and 1985 and deficiencies in petitioner Michael W.
1
Cases of the following petitioners are consolidated
herewith: Michael W. and Barbara B. Rehtorik, docket No. 24660-
91; and Michael W. Rehtorik, docket No. 24661-91.
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Rehtorik’s (petitioner’s) individual Federal income taxes and
additions to tax for 1986 and 1987, as follows:
Michael W. and Barbara B. Rehtorik
Additions To Tax
Sec. Sec. Sec.
Year Deficiency 6653(b)(1) 6653(b)(2) 6661
1984 $131,360 $65,680 * $32,840
1985 165,695 82,848 * 41,424
* 50 percent of interest due on amount of deficiency
attributable to fraud.
Michael W. Rehtorik
Year Deficiency
1986 $3,337
Additions to Tax
Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6653(a)(1)(A) 6653(a)(1)(B)
1987 $125,206 $1,370 $1,346 *
Sec. Sec. Sec.
6653(b)(1)(A) 6653(b)(1)(B) 6661
$73,715 ** $31,302
* 50 percent of interest due on amount of deficiency
attributable to negligence.
** 50 percent of interest due on amount of deficiency
attributable to fraud.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
After settlement, the primary issues for decision in these
consolidated cases are: (1) Whether petitioner is liable for the
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fraud and other additions to tax for 1984, 1985, and 1987; and
(2) whether petitioner is entitled for 1986 to deduct $6,033 in
interest expenses and for 1987 $108,037 in legal expenses. All
issues relating to Barbara B. Rehtorik have been settled.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
In 1983, petitioner, as sole shareholder, incorporated
Government Securities Corp. (GSC) as a Florida corporation.2
Until May 1987, petitioner was president of GSC.
In 1984, petitioner incorporated Government Securities Group
of America (GSC America) as a Florida corporation and as the
parent holding company of GSC. Petitioner was sole shareholder
and president of GSC America.
GSC was engaged as a broker/dealer in the purchase and sale
for and to investors of Government-backed securities, such as
Government National Mortgage Association and Federal National
Mortgage Association mortgage-backed securities, and U.S.
Government zero coupon bonds.
Separately from GSC’s above brokerage activities on behalf
of investors, GSC solicited funds from a limited number of
individual investors to be invested on behalf of GSC by
petitioner and by Oscar F. Gomez (Gomez), vice president and
2
GSC was originally incorporated under the name of the
Federal Government Securities Corp. (FGSC). In 1984, FGSC
changed its name to GSC to comply with Federal law.
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director of GSC. These funds were referred to in the relevant
written materials as “managed accounts”. Funds received from
investors as managed accounts (managed account funds) were to be
invested in various securities to be selected by and at the
discretion of GSC, of petitioner, and of Gomez, and apparently
were not limited to Government-backed securities.
Managed account funds had the characteristics of loans from
the investors to GSC. Receipt of managed account funds was
documented by written agreements that were signed by the
individual investors, and, on behalf of GSC, by petitioner and
Gomez. The written agreements reflected total funds invested, a
fixed term for repayment to individual investors of the funds
invested, and a stated interest rate. Interest was due monthly.
Under each managed account investment agreement, at the end
of a stated fixed term, the term of each managed account
investment would be automatically renewed unless the investor
gave 30 days’ notice of cancellation. Upon cancellation, the
principal amount of the investor’s managed account funds was to
be repaid with any interest due.
Investors expected to be repaid the total principal amount
invested in managed accounts. Repayments of principal on some
occasions were made, and payments of interest on many occasions
were made.
Most of the principal repayments and much of the interest
payments that were due managed account investors, however, were
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not paid by GSC, by petitioner, or by Gomez. As explained below,
the total principal of all managed account funds that was not
repaid by GSC, by petitioner, or by Gomez, was repaid to the
investors pursuant to the Securities Investor Protection Act of
1970 (SIPA), Federal legislation that protects investor funds
when security brokerage companies are liquidated.
Petitioner and Gomez apparently maintained records relating
to the managed account funds. GSC’s internal accounting office,
however, did not maintain records of the managed account funds,
and GSC’s general sales force apparently did not market or sell
managed account investments and apparently did not know of the
existence of the managed accounts.
The evidence in the record does not reflect the exact amount
of managed account funds that were received from investors. The
following schedule reflects Gomez’ estimate of total managed
account funds that petitioner and Gomez received on behalf of GSC
for the years in issue.
Gomez’ Estimate of
Total Managed Account
Year Funds Received
1984 $500,000 to 600,000
1985 500,000 to 600,000
1987 200,000 to 300,000
Some managed account funds received from investors were
deposited into GSC’s corporate bank accounts for use in
purchasing Government-backed securities that GSC, in turn, would
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resell to investors in the normal course of GSC’s retail
securities business.
Some managed account funds, along with other funds such as
petitioners’ substantial salary income, were deposited into bank
accounts in petitioner’s name, from which accounts funds were
used by petitioner for business expenses and investments relating
to GSC and also for personal purposes.
The following schedule reflects, for the years in issue,
managed account funds that were deposited into GSC’s corporate
bank accounts, our estimate (based on the evidence before us) of
managed account funds that were deposited into bank accounts in
petitioner’s name, and total deposits into bank accounts in
petitioner’s name.
Managed Account Funds Deposited Into Total Deposits
GSC’s Bank Accounts Into Bank Accounts
Year Bank Accounts In Petitioner’s Name In Petitioner’s Name
1984 $271,13O $177,778 $299,965
1985 226,255 158,340 312,039
1987 7,000 200,000 293,212
Total $504,385 $536,118 $905,216
At the end of 1986, petitioner hired a new accounting firm
to perform for 1986 a yearend audit of GSC’s books and records.
This accounting firm determined that GSC’s books and records were
not complete. In 1987, upon verifying through yet another
accounting firm serious errors and omissions in GSC’s books and
records and on advice of GSC’s corporate counsel, petitioner
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notified the U.S. Securities and Exchange Commission (SEC) of
GSC’s accounting problems, and the SEC commenced an investigation
of GSC.
The record does not indicate that the SEC investigation
established anything illegal about GSC’s or petitioner’s use or
management of managed account funds. Gomez, however, was
subsequently prosecuted and pleaded guilty to making certain
false representations in connection with the solicitation of
managed account funds. The SEC investigation did conclude that
GSC's financial situation was not healthy.
On May 12, 1987, either voluntarily or at the insistence of
the Securities Investor Protection Corp. (SIPC), a nonprofit
corporation created by SIPA, GSC entered into a liquidation
proceeding under SIPA in the U.S. Bankruptcy Court for the
Southern District of Florida. In that proceeding, a trustee
(SIPC trustee) was appointed to liquidate GSC. As part of that
liquidation proceeding, managed account investors submitted to
the SIPC trustee claims for repayment of managed account funds.
Also in that proceeding, the SIPC trustee sought damages against
petitioner and Gomez personally on behalf of 28 managed account
investors, seeking to recover the principal amount of outstanding
managed account funds of these 28 investors, plus interest,
costs, and other damages.
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In 1987, petitioner hired and paid an attorney $108,037 in
legal fees to represent him in GSC's liquidation proceeding and
against the claim for damages.
On March 22, 1988, in GSC's liquidation proceeding,
petitioner and Gomez signed consent judgments agreeing to pay
$573,750 and $701,250 in damages, with interest, respectively, to
the SIPC trustee for repayment to managed account investors.
The evidence in this case does not reflect how much, if any,
of the above damages were actually paid by petitioner and Gomez.
As indicated, however, the SIPC trustee did repay the principal
amount of the managed account funds owed to 26 of the managed
account investors.
Use of Managed Account Funds Deposited
into Bank Accounts in Petitioner’s Name
From 1984 through 1987, with funds deposited into bank
accounts in his name, including managed account funds, petitioner
paid certain GSC business expenses. For example, in 1984, GSC
entered into certain investment hedge transactions to offset
risks associated with GSC’s purchase and subsequent holding of
mortgage-backed securities for sale to GSC customers. Petitioner
made all decisions relating to hedge transactions entered into on
behalf of GSC, and petitioner purchased securities with funds
withdrawn from the bank accounts in his name for the above
purpose of hedging GSC’s investment risks.
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From 1984 through 1987, petitioner also made certain
repayments to investors of principal and payments of interest
with respect to managed account funds, and petitioner used funds
withdrawn from the bank accounts in his name for such repayments
of principal and payments of interest.
Also, in 1987, with funds withdrawn from the bank accounts
in his name, petitioner purchased for and in the name of GSC
$37,725 in gold Krugerrands, which Krugerrands were later sold at
a profit that GSC received.
On February 27, 1987, after having received $100,000 from a
new managed account investor and after depositing such $100,000
into one of the bank accounts in his name, petitioner purchased
with funds withdrawn from the same bank account into which the
$100,000 had been deposited a cashier’s check for $100,000 that
was endorsed over to GSC America. This $100,000 was then
transferred from GSC America to GSC and was apparently used for
GSC’s expenses and investments.
The following schedule reflects and, where necessary,
estimates for each year the amount of GSC’s expenses that were
paid with funds withdrawn from the bank accounts in petitioner’s
name, including funds used to participate in hedge transactions,
funds used to pay principal and interest to managed account
investors, funds used to purchase gold Krugerrands, and the
$100,000 that in February of 1987 petitioner received from a
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managed account investor and then transferred through GSC America
to GSC:
Years in Issue
Purpose 1984 1985 1987
Hedge transactions $114,025 $ 0 $ 0
Payments of principal 58,380 25,334 45,865
and interest on managed
account funds
Purchase of Krugerrands 0 0 37,725
$100,000 transfer 0 0 100,000
Total $172,405 $25,334 $183,590
Tax Returns
The following schedule reflects the date filed, timeliness,
gross income reported, and filing status relating to each of
petitioner’s Federal income tax returns for 1984 through 1987.
Gross Income
Return Date Filed Filed Reported Filing Status
1984 8/15/85 timely $147,000 married filing jointly
1985 6/13/86 untimely $174,900 married filing jointly
1986 2/26/88 untimely $254,573 married filing separately
1987 4/7/89 untimely $83,600 married filing separately
The above gross income reported on the tax returns for each
year consisted primarily of petitioner’s salary income from GSC
and Barbara B. Rehtorik’s salary income from her employment as
manager of a retail clothing store.
Petitioners did not include as income on their 1984 and 1985
joint Federal income tax returns, and petitioner did not include
as income on his 1987 individual Federal income tax return, any
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managed account funds deposited into the bank accounts in
petitioner’s name.
On his 1986 individual Federal income tax return, petitioner
claimed $47,802 as an interest expense deduction relating to a
home mortgage.
On his 1987 individual Federal income tax return, petitioner
claimed $108,037 as an ordinary business expense deduction for
legal fees relating to the claim against him for damages in the
GSC liquidation proceeding.
Petitioner attached to his 1987 Federal income tax return a
disclosure statement reflecting tax advice that petitioner had
received from his tax accountant that the $573,750 in managed
account funds reflected in the consent judgment against
petitioner in GSC’s liquidation proceeding should not be treated
as income to petitioner but as loans that GSC and petitioner
intended to repay to managed account investors.
Respondent’s Audit
On audit, using total deposits made into the bank accounts
in petitioner’s name (including deposits of managed account
funds) of $299,965, $312,039, and $293,212, for 1984, 1985, and
1987, respectively, respondent determined that petitioner
received and was taxable on managed account funds in the
following amounts:
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Year Unreported Income
1984 $287,081
1985 275,446
1987 255,290
At trial and in her briefs, respondent has made revisions to
the above determination of unreported income, as reflected below:
Respondent's Revised
Determination of Petitioner’s
Year Unreported Income
1984 $263,054
1985 192,399
1987 244,449
Total $699,902
For 1984, 1985, and 1987, respondent did not allow as
business expenses or otherwise give petitioner credit against any
of the bank deposits that respondent treated as unreported
taxable income to petitioner, any of the investments by
petitioner in hedge transactions, repayments of principal and
interest to managed account investors, transfers to GSC, or other
amounts that petitioner paid on behalf of GSC.
On February 13, 1991, respondent’s notice of deficiency for
1986 was mailed to petitioner in which notice $6,033 of claimed
interest expenses was disallowed.
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On July 29, 1991, respondent’s notices of deficiency for
1984, 1985, and 1987 were mailed to petitioner; in the notice for
1987 $108,037 of claimed legal expenses was disallowed.
In respondent’s notice of deficiency for 1984 and 1985,
respondent also determined that the underpayments of tax were due
to fraud without which respondent’s assessment of deficiencies
for 1984 and 1985 would be barred by the period of limitations
under section 6501.
For 1987, respondent also determined that the underpayment
was due to fraud or, in the alternative, negligence.
Further, for 1987, respondent determined additions to tax
for substantial understatement and failure to timely file.
OPINION
Fraud for 1984, 1985, and 1987
Respondent bears the burden of proving fraud by clear and
convincing evidence. Sec. 7454(a); Rule 142(b); Korecky v.
Commissioner, 781 F.2d 1566, 1568 (11th Cir. 1986), affg. T.C.
Memo. 1985-63; Clayton v. Commissioner, 102 T.C. 632, 646 (1994).
To establish fraud, respondent must prove for each year:
(1) That a taxpayer’s Federal income tax return, as filed,
reflected an underpayment of tax, and (2) that some part of the
underpayment was due to fraudulent intent. Sec. 7454(a); Rule
142(b); Clayton v. Commissioner, supra at 646; Recklitis v.
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Commissioner, 91 T.C. 874, 909 (1988); Stone v. Commissioner, 56
T.C. 213, 220 (1971).
Funds received by a taxpayer through misappropriation or
embezzlement constitute taxable income to the taxpayer. James v.
United States, 366 U.S. 213, 219 (1961).
Funds received as loans, however, are not properly treated
as taxable income. James v. United States, supra at 219. If
there exists between a taxpayer who receives funds and the
provider of funds a good-faith expectation that the funds are to
be repaid and an obligation to do so, the funds in the hands of
the taxpayer will be treated as nontaxable loan proceeds. See
Collins v. Commissioner, 3 F.3d 625, 631 (2d Cir. 1993), affg.
T.C. Memo. 1992-478. Funds received by a taxpayer as an agent or
conduit of a corporation are not treated as taxable income. See
Lashells’ Estate v. Commissioner, 208 F.2d 430, 435 (6th Cir.
1953), affg. in part, revg. in part and remanding a Memorandum
Opinion of this Court; Ishijima v. Commissioner, T.C. Memo. 1994-
353.
With regard to fraudulent intent, respondent must prove that
petitioner intended to evade taxes by conduct intended to
conceal, mislead, or otherwise prevent the collection of taxes.
Clayton v. Commissioner, supra at 647; Parks v. Commissioner, 94
T.C. 654, 661 (1990); Hebrank v. Commissioner, 81 T.C. 640, 642
(1983). Fraud may be proven by circumstantial evidence because
direct evidence of fraud is generally not available. Clayton v.
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Commissioner, supra at 647; Rowlee v. Commissioner, 80 T.C. 1111,
1123 (1983).
As indicated, respondent argues that all managed account
funds deposited into bank accounts in petitioner’s name during
the years in issue should be treated as unreported taxable income
to petitioner. Respondent argues that by depositing managed
account funds into bank accounts in his name, petitioner
misappropriated managed account funds from either the managed
account investors, from GSC, or from both.
Petitioner argues that managed account funds deposited into
bank accounts in his name constituted loans from managed account
investors to GSC, that petitioner did not misappropriate any
managed account funds either directly or through GSC, and that
petitioner used managed account funds deposited into bank
accounts in his name as an agent for GSC, and to pay expenses and
to make purchases of securities on behalf of GSC.
The evidence before us establishes that, from the standpoint
of managed account investors and GSC, managed account funds
transferred by investors to GSC, to petitioner, and to Gomez,
were regarded as funds loaned from the investors to GSC. Managed
account investors signed written agreements with GSC that
provided for repayment of principal and interest, and managed
account investors did expect to be repaid all managed account
funds and interest thereon. The fact that some officers and
employees of GSC did not know of the managed account funds does
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not eliminate GSC’s obligation, as agreed to by petitioner and by
Gomez, as senior officers of GSC, with regard thereto.
Petitioner deposited managed account funds into GSC’s bank
accounts and into bank accounts in his name. Those funds,
including those deposited into bank accounts in petitioner’s name
were in large part used for the benefit of GSC. Managed account
funds deposited into bank accounts in petitioner’s name were used
by petitioner to pay principal and interest owed to managed
account investors, to pay various business expenses of GSC, and
to purchase securities for GSC that represented hedge
transactions.
As indicated, for 1984, 1985, and 1987, petitioner deposited
$177,778, $158,340, and $200,000, respectively, in managed
account funds into bank accounts in his name. The evidence
establishes that for 1984, 1985, and 1987 petitioner withdrew at
least $172,405, $25,334, and $183,590, respectively, from the
same bank accounts and used these funds for GSC’s benefit.
With regard to the balance of managed account funds that
petitioner deposited into bank accounts in his name, which the
evidence does not establish that petitioner used for GSC’s
benefit, respondent has not established by clear and convincing
evidence that petitioner was not holding these funds as loans and
as an agent for GSC, nor has respondent established by clear and
convincing evidence that petitioner misappropriated these funds
for his personal use.
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As indicated, the record does not establish that petitioner
used any managed accounts funds that were deposited into the bank
accounts in his name for personal purposes. There is no evidence
that such funds were used by petitioner to take vacations,
purchase extravagant items, or entertain himself or others. We
note that petitioners reported on their tax returns significant
salary income for the years in issue, and the evidence
establishes that much of this salary income was deposited into
the bank accounts in petitioner’s name and that the amount of
petitioners’ salary deposits appears to have been sufficient to
support petitioners’ lifestyle.
Based on the evidence before us, and for purposes of our
decision as to petitioner’s liability for the fraud additions to
tax, on which respondent has the burden of proof by clear and
convincing evidence, we conclude that respondent has not
established that petitioner was not an agent for GSC in his
receipt of managed account funds, nor that petitioner embezzled
or misappropriated for his personal use any managed account funds
during 1984, 1985, and 1987. Accordingly, for purposes of the
fraud additions to tax, we conclude that managed account funds
deposited into the bank accounts in petitioner’s name should not
be treated as taxable income to petitioner.
For 1984, 1985, and 1987, because respondent has not
established by clear and convincing evidence that petitioner
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underreported his income, one of the required elements of the
fraud addition to tax is not present.
In particular for 1984 and 1985, because respondent has
failed to prove fraud, the assessment of any tax deficiency and
additions to tax for those years is barred by the statute of
limitations.3 Sec. 6501(a), (c)(1).
Unreported Income for 1987
For 1987, in spite of our conclusion that fraud has not been
established, respondent’s assessment of a tax deficiency would
not be barred by the 3-year period of limitation under section
6501(a), and we must decide whether petitioner should be charged
with $200,000 in unreported income relating to the managed
account funds deposited into the bank accounts in his name.4 On
this issue for this year, petitioner has the burden of proof by a
preponderance of the evidence. Rule 142(a).
3
We note that respondent has not raised the 6-year period of
limitations under sec. 6501(e)(1)(A) for 1984 and 1985. Because
respondent failed to raise the 6-year period of limitations in
pleading, amended pleading, or briefs, we shall not consider its
application. See Estate of Rosenberg v. Commissioner, 86 T.C.
980, 984 n.1 (1986), affd. without published opinion per curiam
812 F.2d 1401 (4th Cir. 1987); Markwardt v. Commissioner, 64 T.C.
989, 997-998 (1975).
4
Respondent determined that $244,449 in managed account
funds was deposited into bank accounts in petitioner’s name. On
the evidence, we have found that the correct amount of managed
account funds deposited into bank accounts in petitioner’s name
was $200,000.
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As indicated, funds received by a taxpayer through
misappropriation or embezzlement are to be treated as taxable
income. James v. United States, 366 U.S. 213, 219 (1961). Funds
received as loans, however, are not to be treated as taxable
income. See Collins v. Commissioner, 3 F.3d at 631.
Respondent determined that for 1987, the total managed
account funds deposited into the bank accounts in petitioner’s
name should be treated as income to petitioner, not as loan funds
invested by managed account investors that had to be repaid, nor
as loans from GSC to petitioner. Respondent argues that
petitioner misappropriated the managed account funds deposited
into the bank accounts in his name from either GSC or from
managed account investors.
Petitioner argues that all managed account funds, including
those deposited into the bank accounts in his name, constituted
loans and were not misappropriated by him from GSC or from
managed account investors. Petitioner argues that these funds
were used and were intended to be used by him to pay expenses and
to make purchases of securities for and on behalf of GSC and to
make repayments of principal and interest to managed account
investors.
During 1987, with funds from the bank accounts in his name,
petitioner paid $83,590 for GSC’s benefit, of which $45,865 was
paid for principal and interest on managed accounts and $37,725
was paid for gold Krugerrands. Also during 1987 and with funds
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from the same bank accounts, petitioner transferred $100,000 to
GSC America and then to GSC, and this $100,000 was apparently
used for GSC’s expenses and investments. With regard to this
total $183,5905 of managed account funds deposited into the bank
accounts in petitioner’s name in 1987, petitioner has met his
burden of proof and has established that such funds were not
misappropriated by him, but were used by him as an agent for GSC.
With regard, however, to $16,410 in managed account funds
deposited in 1987 into the bank accounts in petitioner’s name
that was not used by petitioner to repay managed account
investors, to purchase gold Krugerrands, nor to make a transfer
to GSC, and that was still on deposit in the bank accounts in
petitioner’s name at the end of 1987, petitioner, who has the
burden of proof on this issue, has not adequately established the
nontaxability of such funds. With regard to this $16,410, we
hold for respondent. We are not persuaded that such funds should
be treated as loans to petitioner. We rely primarily on
petitioner’s burden of proof with regard to this $16,410.
$6,033 Claimed Interest Expenses for 1986 and
$108,037 Claimed Legal Expenses for 1987
With regard to the disallowed $6,033 interest expenses
claimed for 1986, petitioner has offered no evidence and has
5
$45,865 plus $37,725 plus $100,000 equals $183,590.
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failed to meet his burden of proof. We sustain respondent's
determination on this issue.
With regard to the disallowed $108,037 legal expenses
claimed for 1987, legal expenses that arise from personal,
nonbusiness matters of a taxpayer do not qualify as business
expense deductions. Commissioner v. Tellier, 383 U.S. 687, 689
(1966); United States v. Gilmore, 372 U.S. 39, 46 (1963); In re
Collins, 26 F.3d 116, 117-118 (11th Cir. 1994).
Petitioner’s $108,037 in legal expenses that were incurred
in 1987 relates to claims instituted against petitioner by the
SIPC trustee and involves petitioner’s activities as president of
GSC and as a fund raiser and purchaser of securities for GSC and
for others.
Respondent argues that the legal expenses should be
disallowed because they relate primarily to petitioner’s alleged
misappropriation of managed account funds. We disagree. See
Commissioner v. Tellier, supra at 688-693. Authority cited by
respondent involves taxpayers subject to criminal charges
unrelated to their business activities. We conclude that the
claimed $108,037 in legal expenses is allowable as a business
expense to petitioner.
Negligence, Substantial Understatement, and
Failure to Timely File Additions to Tax -- 1987
A taxpayer may avoid liability for additions to tax for
negligence under section 6653(a)(1) if a taxpayer reasonably
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relies on a competent professional adviser. United States v.
Boyle, 469 U.S. 241, 250-251 (1985); Freytag v. Commissioner, 89
T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd.
501 U.S. 868 (1991). The reliance must be reasonable, in good
faith, and based upon full disclosure. Freytag v. Commissioner,
supra at 888-889.
Respondent alleges that petitioner was negligent under
section 6653(a)(1) for failing to report income on his Federal
income tax return for 1987 relating to managed account funds.
Petitioner argues that he reasonably relied on his accountant and
tax return preparer, and petitioner emphasizes that he disclosed
-- to the accountant who prepared his 1987 Federal income tax
return and to respondent on his 1987 return -- facts relating to
his receipt of managed account funds.
Petitioner reasonably relied on his accountant’s tax advice
regarding nontaxability of managed account funds, and no evidence
in the record suggests that petitioner acted in bad faith with
regard to his reporting thereof. For 1987, we reject
respondent's determination of the negligence addition to tax
under section 6653(a)(1).
The substantial understatement addition to tax under section
6661(b)(1) does not apply where a taxpayer discloses adequate
facts on the tax return to disclose to respondent the nature of
the item in question. See sec. 1.6661-4(b)(2), Income Tax Regs.
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Petitioner attached a disclosure statement to his 1987 return
disclosing significant facts relating to receipt of managed
account funds and his involvement with the liquidation of GSC.
We reject respondent’s determination of this addition to tax.
A taxpayer is subject to an addition to tax for failure to
timely file a tax return unless the taxpayer establishes that the
failure to timely file was due to reasonable cause and not due to
willful neglect. Sec. 6651(a)(1). Petitioner untimely filed his
1987 Federal income tax return on April 4, 1989, without
extension. Petitioner failed to present evidence showing
reasonable cause. Petitioner is subject to this addition to tax.
To reflect the foregoing,
Decisions will be
entered under Rule 155.