T.C. Memo. 1998-419
UNITED STATES TAX COURT
AMERICAN VALMAR INTERNATIONAL LTD., INC., ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 11776-95, 11777-95, Filed November 19, 1998.
16318-96, 16319-96.
An individual and his wholly owned corporation
each received wire transfers of U.S. dollars from
within the former Soviet bloc of countries. Ps claim
that the wire transfers to the individual were part of
a ruble hoard accumulated before he came to the United
States and the wire transfers to the corporation were
deposits received in the corporation’s business as a
commission agent. R treated all the wire transfers as
gross income to the corporation and treated the amounts
received by the individual as distributions from the
corporation. R also disallowed certain deductions of
the corporation and imposed accuracy-related penalties
and delinquency additions.
Held: Wire transfers to corporation and some of
wire transfers to the individual are gross income to
1
The cases of the following petitioners are consolidated
herewith: Valeri Markovski, docket Nos. 11777-95 and 16319-96;
American Valmar International, Ltd., Inc., docket No. 16318-96.
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corporation; held, further, P had constructive
dividend; held, further, all but one deduction
disallowed; held, further, accuracy-related penalties
sustained; held, further, delinquency addition
sustained.
Ira B. Stechel and Thomas J. Fleming, for petitioners.
Daniel O'Brien and Patrick E. Whelan, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN, Judge: These cases have been consolidated for
trial, briefing, and opinion. By separate notices of deficiency,
respondent had determined deficiencies in, additions to, and
penalties with respect to the Federal income taxes of petitioners
Valeri Markovski (Markovski) and American Valmar International,
Ltd., Inc. (American Valmar) as follows:
Additions to tax
Petitioner Year1 Deficiency Sec. 6651(a)(1) Sec. 6662(a)
Markovski 1991 $248,662 -- $49,732
1992 499,989 -- 99,998
American 1991 814,158 $203,270 162,832
Valmar 1992 1,125,466 280,827 225,093
1993 190,569 46,485 38,114
1
American Valmar's taxable year is a fiscal year ending
June 30. Markovski is an individual taxpayer whose taxable year
ends Dec. 31.
After concessions, the issues for decision with respect to
American Valmar are:
(1) Whether American Valmar had gross income on account of
receipts of $1,426,653, $1,507,440, and $32,335, during 1991,
1992, and 1993, respectively.
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(2) Whether American Valmar had gross income on account of
deposits to bank accounts of its sole shareholder, Markovski.
(3) Whether American Valmar is entitled to additional
deductions for business expenses of $291,293, $104,894, and
$399,828 for 1991, 1992, and 1993, respectively.
(4) Whether American Valmar is subject to accuracy-related
penalties for 1991, 1992, and 1993.
(5) Whether American Valmar is subject to delinquency
additions for 1991, 1992, and 1993.
The issues for decision with respect to Markovski are:
(1) Whether Markovski had gross income on account of
constructive dividends of $670,547, and $1,600,000 received from
American Valmar during 1991 and 1992, respectively.
(2) Whether Markovski is subject to accuracy-related
penalties for 1991 and 1992.
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.
FINDINGS OF FACT
Introduction
Some of the facts have been stipulated and are so found.
The stipulations of fact filed by the parties, with accompanying
exhibits, are incorporated herein by this reference. At the time
the petitions were filed, American Valmar maintained its
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principal office in New York, New York, and Markovski resided in
Fort Lee, New Jersey.
Markovski
Markovski was born in Dniepepetrovsk, U.S.S.R., in 1945. In
1989, he emigrated to the United States, and, in 1995, he became
a U.S. citizen. Prior to emigrating to the United States, he
accumulated a substantial hoard of rubles (the ruble hoard). The
ruble hoard was, in part, attributable to Markovski’s sale of
Soviet government securities and inherited jewelry.
American Valmar
American Valmar, a New York corporation, was organized in
1989. Markovski is the sole shareholder of American Valmar.
During its taxable years here in issue, American Valmar was
engaged as a commission broker, purchasing goods in the United
States for export to customers located in the former Soviet
Union. It had four customers: Video Computer, a Moscow-based
trading company engaged in the sale of electronic goods;
Diapazon, also a Moscow-based trading company; Interrosa, a
Ukraine-based trading company; and Kond Petroleum, a company in
the oil business in Siberia. American Valmar filed Federal
income tax returns for the years in issue. On those returns, it
did not report gross sales and cost of goods sold. The only
income reported by it was commission income of between 5 and
8 percent of the dollar amount of purchases made for customers.
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The books and records of American Valmar reflect the receipt
of incoming wire transfers of American currency as credits to an
account denominated “accounts payable-contracts” (contracts
payable). At year’s end, amounts expended by American Valmar for
customer purchases, otherwise disbursed at the request of
customers, or refunded to customers, together with commissions
earned, were debited to contracts payable. Credit balances in
the contracts payable account at the end of American Valmar’s
1991, 1992, and 1993 taxable years were $1,426,653, $2,934,093,
and $2,966,428, respectively. For each of those years, the
following table shows amounts credited to contracts payable,
debits on account of purchases made and commissions charged, and
the yearend excess of such credits over such debits:
1991 1992 1993
Credits to contracts
payable: $2,365,494 $3,406,539 $1,709,983
Less:
Purchases: 894,134 1,793,669 1,553,378
Commissions: 44,707 105,430 124,270
Excess amount: 1,426,653 1,507,440 32,335
At the time American Valmar received funds from customers,
it did not necessarily have instructions as to how those funds
were to be used. Funds received from customers were held in
interest-bearing accounts or used to purchase U.S. Treasury bills
until disbursed. American Valmar retained all interest earned.
The Fort Lee Residence
On May 30, 1991, Markovski purchased a condominium apartment
in Fort Lee, New Jersey (the condominium), for $604,150.
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Previously, Markovski had rented the condominium. During 1991,
American Valmar spent at least $57,137 for improvements to and
home furnishings for the condominium. That $57,137 was debited
to contracts payable. Subsequently, Markovski sold the
condominium and purchased another apartment in the same building.
The improvements to the condominium and some of the furnishings
purchased for it remained in the condominium when it was sold.
American Valmar’s Bank Accounts
During the years in issue, American Valmar maintained the
following bank accounts:
Bank Account Number (Reference)
Chemical 136-004725 Chem. 1
Manufacturers 134-0721145-65 ManH. 1
Hanover
Markovski’s Bank Accounts
During the years in issue, Markovski maintained the
following bank accounts:
Bank Account Number (Reference)
Chemical 136-336213 Chem. 2
Manufacturers 063-0647792-65 ManH. 2
Hanover
Wire Transfers to American Valmar
American Valmar received wire transfers of U.S. dollars as
follows:
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Date Account Amount Originator Identification
8/27/90 ManH. 1 $477,988 Bank of Fgn. Contract June 25,
Econ. Affairs, 1990, Ordering
Moscow Customer, Video-
computer, Moscow
8/27/90 ManH. 1 9,988 Bank of Fgn. Videocomputer,
Econ. Affairs, Ordering Customer
Moscow
12/18/90 ManH. 1 499,988 Lloyds Bank, Air Foyle Ltd.,
London England Luton Airport
12/24/90 ManH. 1 683,468 Bank of Fgn. Re: Videocomputer
Econ. Affairs,
Moscow
12/26/90 Chem. 1 58,860 Bank of Fgn. Firms Invoice,
Econ. Affairs, Invoice for
Moscow Supplied Equip.
1/22/91 Chem. 1 700,000 DBS Bank, According to
Singapore Agreement 12/28/90
1/25/91 ManH. 1 99,982 Energologila, Equipment Contract
Kiev Kiev, 14/20/90 -
Ukranian Prod.
Assoc.
6/06/91 ManH. 1 145,220 -- Ukranian Production
Associates; Contract
14 Dec 90
6/21/91 ManH. 1 140,000 -- Rem Kiev; Equipment
Contract 14-12-90
During April and May 1991, the following wire transfers of
U.S. dollars were made to Markovski's personal bank accounts:
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Date Account Amount Originator Identification
4/22/91 ManH. 2 $315,591 Ykrainian Beneficiary -
Production American Valmar.
Assoc. Equipment Contract
14-12-90
5/24/91 ManH. 2 133,800 Ykrainian For Equip.
Production Contract 14-12-90
Assoc.
5/31/91 ManH. 2 50,500 Bank for Fgn. Beneficiary:
Econ. Affairs, American Valmar
Moscow
5/23/91 Chem. 2 113,519 Bank for Fgn. By Order -
Econ. Affairs, Interrosa
Moscow
During American Valmar’s 1992 taxable year, the following
wire transfers of U.S. dollars were made from Budapest Hungary to
American Valmar's accounts:
Date Account Amount Originator
10/30/91 Chem. 1 $1,700,000 Hungarian
Fgn. Trade
Bank
1/17/92 Chem. 1 1,700,000 --
In July 1991 and March 1992 the following wire transfers of
U.S. dollars were made from the former Soviet Union and Budapest,
Hungary, to Markovski's personal bank accounts:
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Date Account Amount Originator Identification
7/1/91 ManH. 2 $52,730 Rem Kiev Beneficiary -
American Valmar.
Equipment Contract
14-12-90
7/12/91 ManH. 2 80,200 Bank of Fgn. Beneficiary -
Econ. American Valmar
Affairs, Equipment Contract
Moscow 14 Dec 1990
3/5/92 Chem. 2 1,600,000 Hungarian Order: ANSA/SZEGED
Fgn. Trade
Bank
Wire Transfer to Mila Panarey
On April 2, 1993, American Valmar wired $24,500 to the
account of Mila Panarey. Ms. Panarey is a housewife who, at the
time of the trial, lived in Philadelphia, Pennsylvania.
Ms. Panarey is the cousin of Ludmila Piker, who was a consultant
for American Valmar from 1990 through at least 1995, and who is
Markovski’s stepdaughter. The $24,500 transmitted to
Ms. Panarey was sent pursuant to an agreement whereby Ms. Panarey
would receive the funds and immediately return them to her
cousin, Ms. Piker. Ms. Panarey did return the funds to her
cousin.
Transfers to Manufacturer’s Hanover Bank Account
During its 1993 taxable year, American Valmar transferred
$337,000 to a Manufacturer’s Hanover bank account in the name of
Anatoly Seregin.
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American Valmar’s Federal Income Tax Returns
Simon Bolonik (Bolonik) became American Valmar’s accountant
in January 1991. Bolonik established the books and records of
American Valmar. Based on his conversations with Markovski, he
determined the accounting and Federal income tax treatment of
American Valmar’s receipts and disbursements. Based on what
Markovski told him, he determined the Federal income tax
treatment of amounts received by wire transfer by Markovski.
Bolonik prepared American Valmar’s and Markovski’s Federal income
tax returns.
Certificates of assessments and payments maintained by the
Internal Revenue Service for American Valmar reflect that the
income tax returns of the corporation for the fiscal years at
issue were filed as follows:
Taxpayer Period Date Filed
American Valmar 6/30/91 2/16/93
American Valmar 6/30/92 7/6/94
American Valmar 6/30/93 12/19/94
The income tax returns filed by American Valmar for the fiscal
years at issue bear date received stamps on their face as
follows:
Taxpayer Period Date Received Stamp
American Valmar 6/30/91 2/16/93
American Valmar 6/30/92 None
American Valmar 6/30/93 12/19/94
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The envelopes in which the income tax returns of American Valmar
for the fiscal years in issue were mailed to the Internal Revenue
Service reflect the below-listed postmark dates:
Taxpayer Period Postmark Date
American Valmar 6/30/91 2/12/93
American Valmar 6/30/92 None
American Valmar 6/30/93 12/15/94
American Valmar’s income tax returns for 1991, 1992, and
1993, were received by the Internal Revenue Service on
February 16, 1993, July 6, 1994, and December 19, 1994,
respectively.
OPINION
I. Introduction
The principal issues in this case involve the proper
characterization of various amounts received from abroad by wire
transfer into bank accounts of petitioner American Valmar
International, Ltd., Inc. (American Valmar) and its principal
shareholder, petitioner Valeri Markovski (Markovski). Respondent
disagrees with petitioners’ claim that the amounts received by
American Valmar did not constitute items of gross income because
of American Valmar’s obligation to expend those amounts on behalf
of its clients. Respondent also disagrees with petitioners’
claim that the amounts received by Markovski did not constitute
items of gross income because those amounts were the proceeds of
a hoard of rubles accumulated before Markovski emigrated to the
United States. Petitioners place substantial reliance on
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Markovski’s testimony, while respondent relies substantially on
circumstantial evidence that respondent claims negates much, if
not all, of Markovski’s testimony. We do not agree completely
with either party. We also decide a deduction issue with respect
to American Valmar and the various additions to tax and
penalties. Petitioners bear the burden of proof. See Rule
142(a).
II. Wire Transfers to American Valmar
During each of its taxable years in issue, American Valmar
received substantial deposits into its bank accounts by wire
transfers from abroad (the American Valmar deposits). The
American Valmar deposits were received principally from countries
in the former Soviet bloc. American Valmar argues that it was a
commission broker and the American Valmar deposits did not
constitute gross income because of its obligation to disburse
those deposits as directed by its clients. Respondent agrees
both that American Valmar was a commission broker and that
refundable deposits do not constitute items of gross income.
Respondent is unpersuaded, however, that American Valmar had any
bona fide obligation to its clients. Respondent argues that
American Valmar’s books and records did not adequately establish
its liabilities to individual clients, and American Valmar
treated some of the funds it received as if they were its own.
Respondent adjusted American Valmar’s income by treating the
American Valmar deposits as gross receipts from sales.
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Respondent increased American Valmar’s gross income for the years
in issue by the excess of the American Valmar deposits received
during a year over purchases made and commissions earned during
such year: $1,426,653, $1,507,440, and $32,335, for 1991, 1992,
and 1993, respectively (the excess amounts).
We have found that American Valmar had four customers during
the years in issue: Video Computer, Diapazon, Interrosa, and
Kond Petroleum (the customers). Petitioners claim that the
customers were the source of the American Valmar deposits and
that, until expended on behalf of one of the customers or earned
as a commission by American Valmar, the American Valmar deposits
belonged to the customers. Petitioners rely principally on the
testimony of Markovski that American Valmar had liabilities to
the customers for the unexpended balance of the American Valmar
deposits. Although petitioners did produce some correspondence
with three of the customers, petitioners produced no written
agreements with any of them. In its financial records, American
Valmar did credit the American Valmar deposits to contracts
payable. Video Computer is identified on some of the wire
transfers, but none of the other customers are. No
representative of any of the customers testified.
Petitioners explain their lack of documentary substantiation
by explaining that it was the normal business practice for
business entities located in the former Soviet Union to deposit
funds with foreign businesses without documentary evidence.
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Based on the testimony of petitioners' expert, Yakov M.
Balakhovsky, an attorney experienced with Russian and Soviet law,
petitioners claim the following:
Russian businesses, as a matter of custom and
practice, during the taxable years in issue
herein, would deposit funds abroad due to their
inability to open foreign bank accounts, as well
as the absence of a private banking system in the
U.S.S.R. and rampant economic, political and
social turmoil in the U.S.S.R.
[L]ittle formal documentation or other legal niceties
would accompany such deposits * * * because of the
embryonic nature of the Soviet commercial law, the
absence of skilled lawyers, and the inability to
enforce contractual obligations through government
legal channels, due to endemic corruption and the
systemic hostility of the Soviet state towards
entrepreneurial activity.
Respondent did not challenge petitioners' expert's testimony, and
we accept his opinions and find accordingly.
Respondent made a common response to many of petitioners’
proposed findings of fact with respect to the existence of the
customers and American Valmar’s obligations to them: “Objection
to the proposed finding of fact in that it is based upon the
uncorroborated, self-serving testimony of Valeri Markovski.” It
is undoubtedly true that many of petitioners’ proposed findings
of fact are uncorroborated and self-serving. That, however, does
not necessarily mean that they are false. Respondent also
adverts to the paucity of American Valmar’s records and certain
seeming inconsistencies in those records as grounds for rejecting
all of American Valmar’s allegations. We have examined the
records and are unconvinced that either their minimal extent or
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seeming inconsistencies prove that the customers did not exist or
that American Valmar had no obligation to them. Indeed, we find
respondent’s wholesale rejection of petitioners’ proof, even as
to the existence of the customers, inconsistent with respondent’s
requiring American Valmar to include in gross income for each
year only the excess of the American Valmar deposits received
over purchases made and commissions earned during such year.
Petitioners rely principally on Markovski’s testimony, which
is uncorroborated, they say, because of business conditions in
the former Soviet Union. We give petitioners the benefit of the
doubt with respect to business conditions in the former Soviet
Union. Nevertheless, in some respects we found Mr. Markovski
credible and in some we did not. American Valmar spent at least
$57,137 for home furnishings delivered to a condominium apartment
(the condominium) that Markovski owned and in which he lived.
That amount was charged to contracts payable, and Markovski
testified that the expenditure was made at the direction of
Diapazon to outfit a bedroom as living space and office for
Diapazon employees visiting the United States. After supposedly
outfitting the condominium for Diapazon, Markovski sold the
condominium, with many of the improvements left behind.
Petitioners have not explained what happened to Diapazon’s
interest in the condominium. We did not find Markovski’s
testimony, or the testimony of his wife, Lina, credible with
respect to the condominium transaction. Also, we did not find
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credible Markovski’s testimony with respect to the wire transfer
to Mila Panarey of $24,500. That sum was received pursuant to an
agreement that Ms. Panarey would turn the sum over to Ludmila
Piker, her cousin. Ludmila Piker had been a consultant to
American Valmar and was Markovski’s stepdaughter. Markovski
testified that he knew nothing of that transaction other than
that he had been instructed by a customer, Interrosa, to wire the
money to Ms. Panarey. He also testified that the $24,500 never
came back to American Valmar.
Since we found Markovski’s testimony to be unconvincing with
respect to both the apartment transaction and the Mila Panarey
wire transfer, we think it a fair assumption that Markovski (or
American Valmar) benefited from both transactions. In the
apartment transaction, it was his living quarters that were
improved; with respect to the Mila Panarey wire transfer, it was
Markovski’s step-daughter who ended up with the money. In both
cases, the expenditures were charged to the contracts payable
account. We find that Markovski benefited from both
transactions; we therefore question his assertion that the
American Valmar deposits, accounted for by the contracts payable
account, were held under an obligation to use them solely for the
benefit of the customers. Petitioners have failed to convince us
of that fact and, on that basis, we sustain respondent’s
adjustment with respect to the American Valmar deposits.
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III. American Valmar Additional Deductions
As stated, respondent increased American Valmar’s gross
income for the years in issue by the excess of the American
Valmar deposits received during a year over purchases made and
commissions earned during such year. Respondent disallowed
certain of American Valmar’s claims of purchases made on behalf
of customers as follows: $338,793, $104,894, and $449,828 for
1991, 1992, and 1993, respectively. Respondent has conceded
$47,500 of the purchases disallowed for 1991 and $50,000 of the
purchases disallowed for 1993, leaving at issue $291,293,
$104,894, and $399,828 for 1991, 1992, and 1993, respectively.
Although petitioners claim on brief that additional amounts of
purchases were conceded by respondent, they have failed to prove
any additional concessions. Apparently believing that all other
disallowed purchases have been conceded, petitioners address only
$361,500 of the remaining 1993 disallowance of $399,828.
Petitioners first claim that $337,000 of funds attributable
to Interrosa was disbursed during American Valmar’s 1993 taxable
year to a Manufacturer’s Hanover bank account in the name of
Anatoli Seregin, an officer of Interrosa. The parties have
stipulated transfers in that amount during that year to that bank
in that name (the transfer). In evidence is correspondence
purporting to be from Interrosa and authorizing American Valmar
to open an account in the name of Anatoli Seregin. Respondent
offers nothing to rebut petitioners’ proposed finding that the
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transfer was a disbursement of Interrosa’s funds other than the
claim that the proposed finding “is based on the self-serving
testimony of Valeri Markovski.” Although we have doubts about
some aspects of Markovski’s testimony, there was nothing
suspicious about his testimony concerning the transfer. American
Valmar has carried its burden of proving that the transfer was a
disbursement to Interrosa, and we so find. In his notice of
deficiency for 1993, respondent states that he is disallowing
some of the purchases claimed on the grounds that such amounts
were not for ordinary and necessary business expenses or were not
paid for the purposes designated. We assume that the transfer is
covered by the purposes-designated-language in respondent's
notice, and, since we have found that the transfer was for the
purposes designated, we do not sustain the deficiency to the
extent it is attributable to the transfer.
Petitioners' second claim relates to the $24,500 wire
transfer to Mila Panarey, which they claim was a disbursement at
the direction of Interrosa. We found Markovski’s testimony
unconvincing with respect to that transaction and conclude that
petitioners have failed to carry their burden of proving that the
Mila Panarey transfer was a disbursement at the direction of
Interrosa.
In addition to the two claims with respect to 1993,
petitioners also claim credit for the $57,137 spent with respect
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to the condominium. Petitioners have failed to prove that such
amount was disbursed at the direction of Diapazon.
Except with respect to the transfer, respondent’s
determination of a deficiency is sustained to the extent it
relates to respondent’s disallowances of purchases.
IV. Constructive Dividends
During 1991 and 1992, Markovski received seven deposits into
his bank accounts by wire transfer from abroad (the Markovski
deposits). Six of those deposits were made in 1991 and totaled
$746,340. The seventh deposit was made in 1992 in the amount of
$1,600,000. Respondent treated the Markovski deposits as if they
had been received by (and belonged to) American Valmar and had
then been distributed to Markovski with respect to his stock.
Respondent made positive adjustments to American Valmar’s income
on the basis that the Markovski deposits were items of gross
income to American Valmar.2 Respondent made positive adjustments
in Markovski’s income on the basis that the Markovski deposits
constituted constructive dividends from American Valmar.3
2
In his notices of deficiency to American Valmar, respondent
labels the adjustments to American Valmar’s income “Receipts From
Shareholder Account”. The adjustments are $613,410 and
$1,600,000 for American Valmar’s taxable years ending June 30,
1991, and 1992. Inexplicably, respondent has omitted making an
adjustment to American Valmar’s 1992 income for the Markovski
deposits in the amounts of $52,730 and $80,200 received by
Markovski on July 1 and 12, 1991, respectively.
3
The adjustment for 1991 totaled $803,477, which is $57,137
greater than the Markovski deposits received during 1991.
(continued...)
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Petitioners assigned error to respondent’s adjustments, claiming
that the Markovski deposits constituted the tax free receipt of a
substantial hoard of rubles (the ruble hoard) accumulated before
Markovski emigrated to the United States.
Petitioners rely principally on Markovski’s testimony and
the testimony of Larisa Saltevskiya (Saltevskiya), a close
personal friend, to establish the existence and size of the ruble
hoard. Petitioners also direct us to a copy of a letter from
R.B. Gevorkian, an executive of Diapazon, dated September 17,
1991 (the Gevorkian letter). The Gevorkian letter states
Diapazon received $1,172,560 from Markovski in November 1990 and
transferred a portion of it to the Chem. 2 account in various
amounts, which include all of the Markovski deposits made in
1991. Respondent relies principally on similarities with respect
to the source and identifying information between the Markovski
deposits and the American Valmar deposits. Respondent
disbelieves Markovski’s and Saltevskiya’s testimony concerning
the ruble hoard, pointing out certain inconsistences in the
testimony of each.
Again, we must weigh petitioners’ less than perfect
testimonial evidence against respondent’s circumstantial
evidence. We have found that Markovski accumulated the ruble
3
(...continued)
Apparently, the $57,137 represents the amount American Valmar
spent for home furnishings delivered to Markovski’s condominium
apartment.
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hoard before he emigrated from Russia. No purpose would be
served in going into the details of his testimony. We have
considered the inconsistencies pointed out by respondent.
Nevertheless, respondent has no effective rebuttal to much of
Markovski’s narrative of his activities and family history in
Russia. We believe that Markovski did accumulate some
substantial amount of wealth before he emigrated to the United
States. Whether the Markovski deposits comprised all or part of
the ruble hoard is another question. Petitioners offered no good
explanation for the similarities between the Markovski deposits
and the American Valmar deposits. A similar notation--for
equipment contract 14-12-90--accompanies four of the 1991
Markovski deposits, those of April 22, May 24, July 1, and
July 12, 1991, in the amounts of $315,591, $133,800, $52,730, and
$80,200, respectively, and three of the American Valmar deposits,
those of January 25, June 6, and June 21, 1991. The May 23,
1991, Markovski deposit, in the amount of $113,519, carries the
notation: “By order of: SV Interrousa [sic].” The May 31,
1991, Markovski deposit, in the amount of $50,500, carries the
notation: “Beneficiary: American Valmar, Intl Co.” We believe
that the similarities in notation between the April 22, May 24,
July 1, and July 12, 1991, Markovski deposits and certain of the
American Valmar deposits and the notations on the May 23 and
May 31, 1991, Markovski deposits are evidence that those deposits
related to the business of American Valmar. We accord that
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evidence more weight than Markovski’s testimony that those
deposits were from his ruble hoard, and so find. We do not find
sufficient similarities between the March 5, 1992, Markovski
deposit of $1,600,000 and any American Valmar transactions to
rebut Markovski’s testimony that that deposit was from his ruble
hoard, and we so find.
We find that the April 22, May 23, May 24, and May 31
Markovski deposits were constructively received by American
Valmar and constitute items of gross income to American Valmar
for 1991. See, e.g., Truesdell v. Commissioner, 89 T.C. 1280,
1300 (1987) ("diverted amounts taxed to a shareholder as
constructive dividends also remain fully taxable to the
corporation to which attributable"). We see little difference
between those deposits and the ones made on July 1 and 12, 1991.
Nevertheless, since respondent has not determined any deficiency
in American Valmar’s 1992 tax on account of those deposits,4 we
shall ignore them with respect to American Valmar. We find that
all of the April 22, May 23, May 24, May 31, July 1, and July 12,
1991, Markovski deposits were distributed to Markovski with
respect to his stock. Since petitioners have failed to prove an
insufficiency in American Valmar’s earnings and profits, the
distributions are dividends includable in Markovski’s 1991 gross
income. See secs. 301, 316.
4
See supra note 2.
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The $57,137 that American Valmar spent for home furnishings
delivered to the condominium also constitutes a constructive
dividend to Markovski, includable in his gross 1991 income.
V. Additions to Tax and Penalties
A. Additions to Tax for Failure To File Return
Respondent determined additions to tax against American
Valmar for each of its years in issue under section 6651(a)(1).
Section 6651(a)(1) provides that, in the case of a failure
to file an income tax return by the due date, there shall be
imposed an addition to tax for such failure of 5 percent of the
amount of tax, reduced by timely payments and credits under
section 6651(b)(1), for each month or portion thereof during
which the failure continues, not exceeding 25 percent in the
aggregate unless such failure is due to reasonable cause and not
due to willful neglect. Respondent determined that American
Valmar’s income tax return for 1991, due on September 16, 1991,
was 17 months delinquent and that its 1992 and 1993 income tax
returns, due (on account of extensions) on March 15, 1993 and
1994, respectively, were not filed until July 6, 1994, and
December 19, 1994, respectively. We have found that American
Valmar’s income tax returns for 1991 through 1993 were received
by the Internal Revenue Service on February 16, 1993, July 6,
1994, and December 19, 1994, respectively. We have done so based
on respondent’s records and the other information set forth in
our findings of fact. Petitioners’ evidence of timely filing
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consists of the testimony of Simon Bolonik (Bolonik), by whose
office the returns were filed and who testified that the returns
were mailed one week before the due dates. Bolonik testified:
“Mr. Markovski was one of my oldest clients and I basically
remember where I put -- if I mailed it [the return] or not. I
would take special care in mailing them.” We found Bolonik’s
testimony inexact and unconvincing, and we accord it no weight.
Moreover, two of the returns bear postmarks well after the
relevant due date. The returns in question were not timely
received by the Internal Revenue Service, and petitioners have
failed to satisfy the requirements of section 7502(a) that timely
mailing constitutes timely filing. We find that the returns in
question were filed on the dates received by the Internal Revenue
Service. The returns were, thus, not timely, and petitioners
have failed to show reasonable cause and lack of willful neglect.
Respondent’s determinations of additions to tax under section
6651(a) are sustained, adjusted only to take into account the
deficiencies redetermined by us.
B. Accuracy-Related Penalty
Respondent determined penalties against American Valmar and
Markovski for each of their respective years in issue under
section 6662(a).
Section 6662(a) provides for the imposition of an accuracy-
related penalty equal to 20 percent of any portion of an
underpayment attributable to, among other things, any substantial
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understatement of income tax. Sec. 6662(a) and (b)(2).5 An
understatement is “substantial” when the understatement for the
taxable year exceeds the greater of (1) 10 percent of the tax
required to be shown or (2) $5,000 ($10,000 in the case of a
corporation). Sec. 6662(d)(1)(A) and (B). The understatement is
reduced to the extent that the taxpayer has (1) adequately
disclosed his or her position, or (2) has substantial authority
for the tax treatment of an item. Sec. 6662(d)(2)(B).
Additionally, no penalty is imposed with respect to any portion
of an understatement as to which the taxpayer acted with
reasonable cause and in good faith. Sec. 6664(c)(1).
Petitioners do not claim adequate disclosure on their
returns. They do claim substantial authority. However, in
making that claim, they refer generally to the portions of their
brief containing their arguments that neither a deposit nor a
taxpayer’s receipt of his own funds is an item of gross income
and the expenditures in question were made by American Valmar as
an agent for its clients. We have rejected the factual basis of
petitioners’ claim, and, thus, what authority they cite is not
relevant to the facts of this case and cannot constitute
5
Respondent determined an alternative basis for the penalties
imposed by sec. 6662 on account of negligence or disregard of
rules and regulations. See sec. 6662(a) and (b). Respondent
failed to address that alternative basis on brief, so we will
assume that respondent has abandoned that alternative. See
Bernstein v. Commissioner, 22 T.C. 1146, 1152 (1954), affd. 230
F.2d 603 (2d Cir. 1956); Lime Cola Co. v. Commissioner, 22 T.C.
593, 606 (1954); Roberts v. Commissioner, T.C. Memo. 1996-225.
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substantial authority. See Antonides v. Commissioner, 91 T.C.
686, 702-703 (1988) (cases that are factually distinguishable are
not substantial authority), affd. 893 F.2d 656 (4th Cir. 1990);
see also Estate of Reinke v. Commissioner, 46 F.3d 760, 765 (8th
Cir. 1995), affg. T.C. Memo. 1993-197.
Petitioners also claim that, with respect to any
underpayment, there was reasonable cause and each acted in good
faith. Petitioners argue that both elements, reasonable cause
and good faith, are established by Markovski’s ignorance of the
law and reliance on his tax adviser, Bolonik. Section 1.6664-
4(b), Income Tax Regs., states:
The determination of whether a taxpayer acted with
reasonable cause and in good faith is made on a case-
by-case basis, taking into account all pertinent facts
and circumstances. The most important factor is the
extent of the taxpayer’s effort to assess the
taxpayer’s proper tax liability. Circumstances that
may indicate reasonable cause and good faith include an
honest misunderstanding of fact or law that is
reasonable in light of the experience, knowledge and
education of the taxpayer. * * * Reliance on * * *
the advice of a professional (such as an appraiser,
attorney or accountant) does not necessarily
demonstrate reasonable cause and good faith. * * *
Reliance on * * * professional advice * * * constitutes
reasonable cause and good faith if, under all the
circumstances, such reliance was reasonable and the
taxpayer acted in good faith. * * *
Bolonik’s testimony clearly establishes that he both determined
the tax treatment of the American Valmar deposits and the
Markovski deposits (and related items) and prepared the
petitioners’ returns. We can, thus, assume that the petitioners
relied on him in determining their tax liabilities. Bolonik’s
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testimony is also clear that he determined the tax treatment of
the American Valmar and Markovski deposits based on what
Markovski told him about the nature of those deposits. With
respect to the American Valmar deposits, Bolonik testified that,
in setting up American Valmar’s books and records, he had
conversations with Markovski about the nature of the
corporation’s business and the books and records reflected those
discussions. With respect to the Markovski deposits, Mr. Bolonik
testified that he believed that those deposits did not constitute
items of gross income during the years received based on
Markovski’s statements to him that those sums had been earned
before Markovski moved to the United States. In substantial
part, petitioners have failed to prove their version of the facts
concerning the American Valmar and Markovski deposits. Bolonik’s
advice, thus, was faulty, and petitioners can rely on it to
establish reasonable cause and good faith only if such reliance
was reasonable and they acted in good faith. Reasonable cause
and good faith may be established by a showing of an honest
misunderstanding of fact. Petitioners have failed to convince us
of what actually transpired here. They have, thus, failed to
convince us that they honestly misunderstood any facts. We are
not convinced--i.e, petitioners have failed to prove--that there
was reasonable cause for their underpayment and that they acted
in good faith in determining their income tax liabilities with
respect to the American Valmar and Markovski deposits. We
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sustain respondent’s determinations of penalties under section
6662 subject only to modification with respect to the
deficiencies as redetermined.
Decisions will be entered
under Rule 155.