T.C. Memo. 1998-95
UNITED STATES TAX COURT
MARGUERITE BARROW AND WILLIAM D. BARROW, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15978-91. Filed March 5, 1998.
William D. Barrow, pro se.
William R. McCants, for respondent.
MEMORANDUM OPINION
COLVIN, Judge: Respondent determined deficiencies in
petitioners' Federal income tax and additions to tax for 1983,
1984, and 1985 as follows:
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William D. and Marguerite Barrow
Additions to tax
Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6653(a)(1) 6661
1983 $126,082 $31,520 $7,224 $31,521
1984 9,194 n/a 460 2,298
William D. Barrow
Additions to tax
Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6653(a)(1) 6661
1985 $18,688 $965 $1,245 $4,672
Respondent also determined that petitioners are liable for
additions to tax of 50 percent of the interest due on the
deficiency under section 6653(a)(2) for each year in issue.
After concessions,1 the sole issue that we must decide is
whether petitioner William D. Barrow is liable for income tax on
$175,000 which he received in 1983 and which he contends is
income of a closely held corporation. We hold that he is.
1
Respondent concedes that petitioner Marguerite Barrow is
an innocent spouse as to all adjustments and penalties determined
against her, except for the $3,023 in interest income received in
1983 from her savings accounts, resulting in a deficiency for her
of $704, plus interest as provided by law. Petitioner concedes
all of the other adjustments (such as failure to report in income
legal fees, interest, and stock received as payment for services;
the disallowance of capital gain on the Holiday Isle transaction;
and additions to tax) in this case except whether he was taxable
in 1983 on $175,000 of the $250,000 from the Holiday Isle
transaction.
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Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
References to petitioner are to William D. Barrow.
Background
The parties submitted this case fully stipulated under Rule
122.
A. Petitioners
Petitioners were married during 1983 and 1984 and were
divorced in 1985. Petitioner lived in Niceville, Florida, and
Mrs. Barrow lived in Crestview, Florida, when they filed the
petition in this case.2
Petitioner was an attorney licensed to practice in Florida
in the years in issue.3 He practiced law through the law
partnership of Barrow & Holley. He also participated in several
real estate transactions during the years in issue in a capacity
other than as an attorney.
In 1990, petitioner was convicted of violating 18 U.S.C.
sections 2 and 1956(a)(3)(B) and (C) (laundering drug money) and
2
Petitioners filed joint income tax returns for 1983 and
1984. Petitioner filed his 1985 individual tax return as an
unmarried person. Respondent issued notices of deficiency to
petitioners for 1983 and 1984 and to petitioner for 1985.
Petitioners filed one petition for 1983, 1984, and 1985.
3
Petitioner was not admitted to practice law in Florida at
the time of trial.
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31 U.S.C. sections 5322(a) and 5324(3) (structuring a transaction
to avoid a cash transaction report).
B. Dogwood Acres, Inc.
Dogwood Acres, Inc. (Dogwood Acres), was a closely held
Florida corporation and a subchapter C corporation. Petitioner
and his brother each owned 49 percent of its stock. Mrs. Barrow
and petitioner's mother and father owned the other 2 percent.
Dogwood Acres owned a family farm in northern Florida.
Dogwood Acres' taxable years ended on March 31. Dogwood Acres
did not file an income tax return or report any income or loss
for its taxable year ending on March 31, 1984.
C. The Holiday Isle Property Transaction
George Dana Harris (Harris) was one of petitioner's clients
during the years in issue. Harris bought, sold, and developed
real estate through fictitious business names including Saudi
Corp. and Fujimo Corp. On September 21, 1983, Harris was
convicted of tax evasion under section 7201 and willful failure
to file under section 7203.
In the 1970's, petitioner owned an interest in a parcel of
real property in northern Florida known as Holiday Isle. He lost
it to Southeast First National Bank of Miami because of a
foreclosure suit in 1979. In 1981, Harris, acting as Saudi
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Corp., bought Holiday Isle in a joint venture with Wallace C.
Yost (Yost).
In March 1983, petitioner received a check for $50,000 from
Harris. Petitioner deposited it in his personal checking account
on March 29, 1983. On March 30, 1983, petitioner wrote a $43,250
personal check payable to Dogwood Acres. He did not report the
$50,000 as income or deduct the $43,250 payment to Dogwood
Acres.4
In July 1983, Saudi Corp. paid petitioner $25,000 by
endorsing to petitioner a third-party check payable to Saudi
Corp.
In August 1983, Lakeco Corp. issued common stock to
petitioner as consideration for various services which petitioner
provided to the corporation and to Harris, its principal. Lakeco
Corp.'s sole asset was a parcel of real property in northern
Florida. In March 1984, Lakeco Corp. sold that property and paid
petitioner $62,500 of the proceeds to redeem his stock.5
In 1983, Yost sold his interest in Holiday Isle to Harris,
acting as Saudi Corp. In September 1983, Harris, acting as Saudi
Corp., sold Holiday Isle to an unrelated party. When the Holiday
Isle transaction closed, the closing agent paid a $250,000
4
Petitioner concedes that the $50,000 is income to him.
5
Petitioner did not report the $62,500 as income.
Petitioner concedes that the $62,500 is income to him.
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commission to petitioner. None of the Holiday Isle closing
documents show that Dogwood Acres was involved in the
transaction. Neither petitioner nor Harris told Yost that
petitioner or Dogwood Acres was involved in the Holiday Isle
joint venture.
Petitioner deposited the $250,000 in his personal checking
account on September 22, 1983. Also on that day, he wrote checks
from that account for $100,000 to Dogwood Acres, $75,000 to Saudi
Corp. as a loan, and $60,000 to Valparaiso Bank & Trust Co.
Saudi Corp. paid $75,000 to Dogwood Acres in December 1983.
Thus, Dogwood Acres received $100,000 from petitioner and $75,000
from Saudi Corp.
Discussion
A. Contentions of the Parties
Petitioner contends that $175,000 of the $250,000 that he
received as a result of the Holiday Isle transaction is income to
Dogwood Acres and not to him. Petitioner contends that the
$175,000 was Dogwood Acres' share under a joint venture agreement
that it had with petitioner and Saudi Corp.
Respondent contends that the $250,000 is gross income to
petitioner and that petitioner improperly tried to avoid taxation
of the payment by assigning his income to Dogwood Acres.
Respondent contends that petitioner has not shown that a joint
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venture existed between petitioner and Dogwood Acres, Harris or
Saudi Corp. Respondent contends that petitioner has not shown
that Dogwood Acres (and not petitioner) should be taxed on
$175,000 of the $250,000 commission from the Holiday Isle
transaction.
Petitioner bears the burden of proving that respondent's
determinations are incorrect. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). Transactions between related taxpayers
and between a closely held corporation and its shareholders are
subject to close scrutiny. United States v. Ragen, 314 U.S. 513
(1942); Jaques v. Commissioner, 935 F.2d 104, 106 (6th Cir.
1991), affg. T.C. Memo. 1989-673; Tulia Feedlot, Inc. v. United
States, 513 F.2d 800, 805 (5th Cir. 1975); Southeastern Canteen
Co. v. Commissioner, 410 F.2d 615, 619 (6th Cir. 1969), affg. in
part and revg. in part T.C. Memo. 1967-183.
B. Whether $175,000 of the $250,000 Holiday Isle Commission Was
Income to Petitioner
1. Petitioner's Affidavit
The only evidence that petitioner had a joint venture with
Dogwood Acres is an affidavit by petitioner. Petitioner did not
testify. The parties stipulated that the statements in the
affidavit would have been petitioner's testimony if he had
testified at trial. In the affidavit, petitioner stated that the
Holiday Isle transaction was a joint venture among himself,
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Dogwood Acres, and Saudi Corp. He also stated that the
transaction was originally a joint venture between Saudi Corp.
and Dogwood Acres; however, on the advice of his certified public
accountants, with whom he had done business for more than 25
years, that he and Dogwood Acres could become joint venturers
with no adverse tax consequences, he included himself with
Dogwood Acres in the transaction because he needed money for
living expenses. Petitioner's affidavit states that Dogwood
Acres was a joint venturer in the transaction but does not
explain why Dogwood Acres was entitled to the $250,000
commission.
Petitioner's affidavit is vague and uncorroborated.
Petitioner's affidavit did not identify the Holiday Isle
transaction by name; he referred to it as "the property which was
the subject of the William D. Barrow/Dogwood Acres, Inc, joint
venture with Saudi Corporation". Petitioner's claim that Dogwood
Acres participated in the Holiday Isle transaction is not
credible because neither petitioner nor Harris told Yost about
any involvement by petitioner or Dogwood Acres in the
transaction. We do not give much weight to petitioner's
affidavit because we find it incredible and it is unsupported by
the record, and because petitioner was convicted in 1990 of
violating 18 U.S.C. sections 2 and 1956(a)(3)(B) and (C)
(laundering drug money), and 31 U.S.C. sections 5322(a) and
5324(3) (structuring a money transaction to avoid a cash
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transaction report), both punishable by imprisonment in excess of
1 year. Fed. R. Evid. 609; see Lovell & Hart, Inc. v.
Commissioner, 456 F.2d 145, 148 (6th Cir. 1972), affg. per curiam
T.C. Memo. 1970-335; Tokarski v. Commissioner, 87 T.C. 74, 77
(1986) (we need not rely on uncorroborated testimony).
2. Lack of Corroboration for Petitioner's Claim That
He and Dogwood Acres Had a Joint Venture
The closing agent paid $250,000 to petitioner as a
commission for the Holiday Isle transaction. None of the Holiday
Isle transaction documents refer to Dogwood Acres. Petitioner
offered no documents to corroborate his affidavit or details
about the alleged joint venture. There is no other evidence that
Dogwood Acres was involved in the Holiday Isle transaction. None
of the parties to the Holiday Isle transaction (except
petitioner) thought that Dogwood Acres was involved. Dogwood
Acres did not report any of the $250,000 commission as income.
Petitioner contends that the alleged joint venture between
him and Dogwood Acres was an arm's-length transaction in which he
engaged with the advice of tax professionals. There is no
evidence that petitioner's dealings with Dogwood Acres were at
arm's length. All of the owners of the stock of Dogwood Acres
were members of petitioner's family.
Petitioner contends that Dogwood Acres received $175,000
($100,000 from petitioner and $75,000 from Saudi Corp.) of the
$250,000 as part of the consideration for services that he
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provided to the parties to the Holiday Isle transaction. We are
not convinced because petitioner does not allege nor is there any
evidence that Dogwood Acres provided any services or that
petitioner provided any services as an agent of Dogwood Acres.
3. Conclusion
Gross income includes all income from whatever source
derived unless excluded by law. Sec. 61. Income is taxed to the
individual who earns it; the incidence of taxation cannot be
shifted by an anticipatory arrangement. Lucas v. Earl, 281 U.S.
111, 114-115 (1930). We do not recognize petitioner's transfer
to Dogwood Acres for Federal income tax purposes. Moline
Properties, Inc. v. Commissioner, 319 U.S. 436, 439 (1943);
Kimbrell v. Commissioner, 371 F.2d 897, 901-902 (5th Cir. 1967),
affg. T.C. Memo. 1965-115. We conclude that the $250,000
commission that petitioner received for his services in the
Holiday Isle transaction was taxable to him. Helvering v. Horst,
311 U.S. 112, 119-120 (1940); Lucas v. Earl, supra at 115. We
sustain respondent's determination that the unreported commission
income is attributable to petitioner.
To reflect concessions (e.g., relating to Mrs. Barrow's tax
liability, see supra note 1) and the foregoing,
Decision will be entered
under Rule 155.