T.C. Memo. 2003-224
UNITED STATES TAX COURT
WALTER L. MEDLIN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2615-98. Filed July 29, 2003.
David D. Fussell and Mark L. Horwitz, for petitioner.
James F. Kearney, Benjamin A. de Luna, and Robert W.
Dillard, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CONTENTS
GENERAL FINDINGS OF FACT . . . . . . . . . . . . . . . . . 6
General Legal Principles . . . . . . . . . . . . . . . . . 20
I. Items of Income . . . . . . . . . . . . . . . . . . . 21
A. Rents Received From Island Livings, Inc. in 1988 . 22
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FINDINGS OF FACT . . . . . . . . . . . . . . . . 22
OPINION . . . . . . . . . . . . . . . . . . . . 22
B. Schedule C Gains From Property Sales . . . . . . 23
1. Florida Fruit Belt Subdivision (OS-06) . . . 23
FINDINGS OF FACT . . . . . . . . . . . . . 23
OPINION . . . . . . . . . . . . . . . . . . 24
2. Susan’s Lakefront Estate (OS-03) . . . . . . 28
FINDINGS OF FACT . . . . . . . . . . . . . 28
OPINION . . . . . . . . . . . . . . . . . . 29
3. High Plains Property (OS-35) . . . . . . . . 30
FINDINGS OF FACT . . . . . . . . . . . . . 30
OPINION . . . . . . . . . . . . . . . . . . 31
4. Silver Lake (OS-1.4) . . . . . . . . . . . . 36
FINDINGS OF FACT . . . . . . . . . . . . . 36
OPINION . . . . . . . . . . . . . . . . . . 37
5. East Lake Vista (OS-47) . . . . . . . . . . 38
FINDINGS OF FACT . . . . . . . . . . . . . 38
OPINION . . . . . . . . . . . . . . . . . . 42
6. Grissom Parcels (OS-1.3) . . . . . . . . . . 52
FINDINGS OF FACT . . . . . . . . . . . . . 52
OPINION . . . . . . . . . . . . . . . . . . 53
7. Arrowhead Lakes Subdivision (OR-2),
Angel-Royse Property (OS-39) . . . . . . . 58
FINDINGS OF FACT . . . . . . . . . . . . . 58
OPINION . . . . . . . . . . . . . . . . . . 60
8. Prather Ranch Property (OR-01) . . . . . . . 65
FINDINGS OF FACT . . . . . . . . . . . . . 65
OPINION . . . . . . . . . . . . . . . . . . 68
9. Citrus County Property . . . . . . . . . . . 75
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FINDINGS OF FACT . . . . . . . . . . . . . 75
OPINION . . . . . . . . . . . . . . . . . . 77
C. Miscellaneous Items of Schedule C Income . . . . 81
FINDINGS OF FACT . . . . . . . . . . . . . . . . 81
OPINION . . . . . . . . . . . . . . . . . . . . 82
D. Schedule E Income . . . . . . . . . . . . . . . . 82
FINDINGS OF FACT . . . . . . . . . . . . . . . . 82
OPINION . . . . . . . . . . . . . . . . . . . . 83
E. Unidentified Deposits . . . . . . . . . . . . . . 83
1. Deposit on March 12, 1985, of $59,000 . . . 84
FINDINGS OF FACT . . . . . . . . . . . . . 84
OPINION . . . . . . . . . . . . . . . . . 85
2. Deposit on September 16, 1986, of $84,521.63 88
FINDINGS OF FACT . . . . . . . . . . . . . 88
OPINION . . . . . . . . . . . . . . . . . 89
3. Deposit on April 9, 1987, of $67,740 . . . . 93
FINDINGS OF FACT . . . . . . . . . . . . . 93
OPINION . . . . . . . . . . . . . . . . . 95
4. Deposit on July 8, 1988, of $140,000 . . . . 96
FINDINGS OF FACT . . . . . . . . . . . . . 96
OPINION . . . . . . . . . . . . . . . . . 98
5. Other Deposits . . . . . . . . . . . . . . . 103
FINDINGS OF FACT . . . . . . . . . . . . . 103
OPINION . . . . . . . . . . . . . . . . . 103
F. Deductions Claimed by Petitioner . . . . . . . . 103
1. Schedule C Real Estate Business Deductions . 103
FINDINGS OF FACT . . . . . . . . . . . . . 103
OPINION . . . . . . . . . . . . . . . . . 104
2. Personal Residence Interest . . . . . . . . 105
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FINDINGS OF FACT . . . . . . . . . . . . . 105
OPINION . . . . . . . . . . . . . . . . . . 105
3. Orange Grove, Cattle, and Ferrari
Activities . . . . . . . . . . . . . . . . 106
FINDINGS OF FACT . . . . . . . . . . . . . 106
OPINION . . . . . . . . . . . . . . . . . . 108
G. Self-employment Tax . . . . . . . . . . . . . . . 116
FINDINGS OF FACT . . . . . . . . . . . . . 116
OPINION . . . . . . . . . . . . . . . . . . 116
II. Additions to Tax for Fraud . . . . . . . . . . . . . 118
A. Underpayment of Tax Required To Be Shown
on a Return . . . . . . . . . . . . . . . . . . 121
1. Underpayment for 1985 . . . . . . . . . . . . 122
2. Underpayment for 1986 . . . . . . . . . . . . 128
3. Underpayment for 1987 . . . . . . . . . . . . 131
4. Underpayment for 1988 . . . . . . . . . . . . 132
5. Conclusion . . . . . . . . . . . . . . . . . 135
B. Fraudulent Intent . . . . . . . . . . . . . . . . 135
1. Clear and Convincing Evidence of Fraud . . . 135
2. Portion of Underpayment Not Attributable
to Fraud . . . . . . . . . . . . . . . . 145
C. Section 6653(b)(2) Addition to Tax for 1985 . . . 153
III. Statute of Limitations for Assessment . . . . . . . 155
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . 157
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . 162
Appendix C . . . . . . . . . . . . . . . . . . . . . . . . 164
Appendix D . . . . . . . . . . . . . . . . . . . . . . . . 171
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RUWE, Judge: Respondent determined deficiencies in
petitioner’s Federal income taxes and additions to tax as
follows:
Additions to Tax
Sec. Sec. Sec. Sec.
Year Deficiency 6653(b)(1) 6653(b)(2) 6653(b)(1)(A) 6653(b)(1)(B)
1985 $86,533 $43,736 50% of the --- ---
Interest Due
on $87,471
1986 165,732 --- --- $124,340 50% of the
Interest Due
on $165,787
1987 309,456 --- --- 232,092 50% of the
Interest Due
on $309,456
1988 64,910 51,021 --- --- ---
After concessions,1 the issues for decision are: (1) Whether
petitioner had unreported income from various real estate
transactions, from commissions, interest, rents, and unidentified
deposits for the years in issue; (2) whether petitioner is liable
for additions to tax for fraud under section 6653(b);2 and (3)
whether assessment of the alleged deficiencies is barred by the
statute of limitations. For convenience and clarity, general
findings of fact are discussed first followed by a statement of
general legal principles applicable to this opinion; separate
1
The concessions of petitioner and respondent, as well as
the amounts which remain in dispute, are detailed in app. C.
Petitioner on brief adopts respondent’s statement of the issues
settled by the parties and the accompanying schedules thereto.
2
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.
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findings of fact and opinion are then set forth for each item of
unreported income. Finally, we discuss whether the additions to
tax for fraud apply and whether assessment is barred by the
statute of limitations.
GENERAL FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time of filing the
petition, petitioner resided in Kissimmee, Florida.
Since the 1960s through the present, petitioner has been
engaged in the business of buying and selling real estate, as
well as real estate development. Petitioner used Donna Allen
(Ms. Allen), Michael Johnson,3 and R. Stephen Miles, Jr. (Mr.
Miles), as trustees for the buying and selling of real estate.
Ms. Allen’s and Mr. Johnson’s only duties as trustees were to
hold title to the various properties in trust.
Petitioner met Ms. Allen in 1971, and since 1974, she has
worked for petitioner as a bookkeeper, secretary, and
housekeeper. Petitioner and Ms. Allen had a child together in
1982. The child lived with Ms. Allen from 1982 through 1990.
Petitioner agreed to pay child support of $50,000 per year to Ms.
Allen. Since 1975, petitioner has given real property and two
3
Michael Johnson was petitioner’s cousin.
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Ferrari automobiles to Ms. Allen. Petitioner owed Ms. Allen
money for a number of different things, including child support.
Mr. Miles is an attorney in the State of Florida, and he has
known petitioner since 1959. He has been petitioner’s real
estate attorney since 1975, and he started acting as a trustee
for petitioner at that time. As trustee, Mr. Miles did whatever
petitioner instructed him to do. Mr. Miles held the proceeds
from petitioner’s sales of real estate in his law firm’s trust
account. Alana Goodman was a bookkeeper for Mr. Miles’s law
firm, and she maintained ledger cards which reflected the
identity of properties held in trust, the date that funds were
deposited or disbursed, and the amounts that were deposited and
disbursed from the law firm’s trust account.
On several occasions, petitioner instructed Mr. Miles or Ms.
Goodman to disburse his funds from the law firm’s trust account
for various payments: (1) On December 23, 1985, a house payment
of $51,266.25 was paid to Walter E. and Maxine Melitshka from the
trust account with respect to petitioner’s personal residence;
(2) on May 15, 1987, a house payment of $71,266.25 was paid to
Mr. and Mrs. Melitshka with respect to petitioner’s personal
residence; (3) on May 21, 1987, petitioner’s accountant, John F.
Kelly, was paid $12,187.50; (4) on June 15, 1987, $32,500 was
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paid for the purchase of a 1960 Ferrari;4 (5) on July 2, 1987,
Ms. Allen was paid $31,800; (6) on July 9, 1987, income taxes of
$8,472 were paid to the Internal Revenue Service (IRS); (7) on
July 28, 1987, $12,000 was paid to Mid America Exotic Auto Sales;
(8) on July 30, 1987, income taxes of $1,482 were paid to the
IRS; (9) on September 17, 1987, child support of $10,000 was paid
to Ms. Allen; (10) on October 9, 1987, a house payment of $30,000
was paid to Mr. and Mrs. Melitshka with respect to petitioner’s
personal residence; (11) on November 2, 1988, political
contributions of $2,800 were paid. None of those payments from
the law firm’s trust account were reported as income by
petitioner.
Mr. Kelly prepared petitioner’s Forms 1040, U.S. Individual
Income Tax Returns, for 1983 through 1988.5 Petitioner provided
Mr. Kelly with spreadsheets which reflected deposits into, and
expenditures from, petitioner’s bank accounts for the years 1983
through 1988.6 Those spreadsheets provided the basis for
preparing petitioner’s tax returns for those years: The income
4
The bill of sale and the application for a temporary tag
for the Ferrari were in the name of Mr. Miles’s law firm;
however, petitioner was its actual owner.
5
Mr. Kelly is a certified public accountant who has known
petitioner since 1975. Mr. Kelly and petitioner were members of
the Ferrari Club of America.
6
The spreadsheets were prepared by Ms. Allen at petitioner’s
request. Petitioner provided Ms. Allen guidance in preparing the
spreadsheets.
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reported on the returns reflected deposits into petitioner’s bank
accounts, less any deposits that were classified as loan
proceeds. Any amounts not deposited into petitioner’s bank
accounts were not reported as income. Petitioner did not provide
Mr. Kelly with checks, real estate contracts, real estate closing
statements or any other books or records to prepare his income
tax returns. Petitioner did not inform Mr. Kelly that the
proceeds from his real estate sales were deposited in Mr. Miles’s
law firm’s trust account, and those proceeds were not reflected
on the spreadsheets. Petitioner did not inform Mr. Kelly of any
additional income. Throughout the 1980s and 1990s, petitioner
asked Mr. Kelly questions about the requirements for like-kind
exchanges.
Petitioner requested extensions for the filing of his income
tax returns for 1985, 1986, 1987, and 1988. Petitioner’s Form
2688, Application for Extension of Time to File U.S. Individual
Income Tax Return, for the 1985 tax year states as his need for
an extension: “Client derived substantially all his income from
a bulk land transaction, which was extremely complex. Additional
time is needed to analyze the transaction.” Petitioner did not
provide any information to Mr. Kelly regarding any bulk land sale
transaction. Petitioner requested an extension for tax years
1986, 1987, and 1988, because “Taxpayer has not received all
needed K-1's for 1065 & 1120 tax returns that represent a
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substantial portion of his income. Without these items a
complete and accurate return cannot be prepared.” Petitioner
provided no Schedules K-1 to Mr. Kelly.7
On petitioner’s Form 1040, Schedule C, Profit or (Loss) From
Business or Profession, for 1985, petitioner listed his principal
business or profession as “Real Estate Development”. Petitioner
reported no income from gross receipts or sales, but he did
report $160,363 as “Other income Commissions, Fees & Interest”
and claimed deductions of $152,481. See appendix A. Petitioner
reported a net profit from his real estate development business
of $7,882 on his Form 1040. This was the only amount petitioner
reported as income for 1985. Petitioner reported taxable income
of $5,802 and a tax of $426.
On petitioner’s Form 1040, Schedule C, for 1986, petitioner
listed his principal business or profession as “Real Estate
Development”. He likewise reported no income from gross receipts
or sales, reported $119,772 as “Other income Commissions, Fees &
Interest”, and claimed deductions of $115,634. See appendix A.
Petitioner reported a net profit from his real estate development
business of $4,138 on his Form 1040. This was the only amount
7
Mr. Kelly discussed Schs. K-1 with Mr. Miles and Mr.
Miles’s accountant. However, the accountant informed him that
Schs. K-1 would not be provided and that any information that
would have been on those schedules should be put on petitioner’s
personal income tax returns.
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petitioner reported as income for 1986. Petitioner reported
taxable income of $2,058 and a tax of $0.
On petitioner’s Form 1040, Schedule C, for 1987, petitioner
listed his principal business or profession as “Real Estate
Development”. He reported no income from gross receipts or
sales, reported $138,653 as “Other income * * * Fees, int, &
Sales”, and claimed deductions of $94,434. See appendix A.
Petitioner reported a net profit from his real estate development
business of $44,219 on his Form 1040. This was the only amount
petitioner reported as income for 1987. Petitioner reported
taxable income of $37,879 and a tax of $7,515.
On petitioner’s Form 1040, Schedule C, for 1988, petitioner
listed his principal business or profession as “Developer/Real
Estate”. Petitioner reported $61,921 as income from gross
receipts or sales, reported no “Other income”, and claimed
deductions of $43,713. See appendix A. Petitioner reported a
net profit from his real estate development business of $18,208
on his Form 1040. This was the only amount petitioner reported
as income for 1988.8 Petitioner reported taxable income of
$5,206 and a tax of $784.
In 1985, petitioner purchased a ring, earrings, and two
necklaces for Ms. Allen as a gift. Those items cost $14,540,
8
Petitioner claimed an S corporation loss from Frank’s
Corner, Inc., of $4,702 in 1988.
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which petitioner deducted as commissions paid on Schedule C of
his 1985 tax return. Petitioner deducted the costs of his
subscriptions to Playboy and Penthouse magazines on his 1986 tax
return as Schedule C business expenses.
The trusts that petitioner used did not file tax returns for
any of the tax years at issue. During 1985-88, petitioner never
informed Mr. Miles that petitioner believed that he had no
obligations to report his earnings from the trust transactions,
because they supposedly involved tax free exchanges.
Petitioner used the fictitious names “John Waltin”9 and
“William R. Wright” in some of his real estate transactions
during the tax years at issue. Petitioner signed various real
estate documents as “William R. Wright”. Petitioner signed that
name as a notary public on real estate documents and on articles
of incorporation filed with the State of Florida. Petitioner
used and signed the name “D.W. Davis” to purchase and sell real
estate. He opened a bank account in that name without the
knowledge of Mr. Davis. At one time, petitioner was a notary
public in the State of Florida; however, his license expired.
Petitioner continued to notarize documents after his license
expired.
9
At trial, petitioner claimed that the name John Waltin was
not a fictitious name because “there’s probably a John Waltin
somewhere.”
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Mr. Miles held properties in land trusts, which we refer to
as the Mefford Property (OS-22) and Susan’s Lakefront Estate (OS-
03). Mr. Miles, as trustee, applied for and received an employer
identification number for those land trusts. Respondent
requested tax returns from Mr. Miles for the land trust holding
the Mefford Property for 1985, 1986, and 1987. Respondent also
requested tax returns from Mr. Miles for the land trust holding
Susan’s Lakefront Estate for 1984, 1985, and 1986. Mr. Miles
discussed with petitioner this latter request. Mr. Miles
informed respondent that the trusts were not required to file
returns because each of the beneficiaries had filed a return and
reported his or her share of the income.10
In 1985-88, petitioner was a shareholder and officer in
Frank’s Corner, Inc., which operated a bar and lounge (Island
Living, Inc.), a furniture import business, and Waltin
Investments, Inc. Petitioner was also a shareholder in Medlin
Investment Co., Michigan Avenue Car Wash, Majestic Oaks, and
Cheyenne Social Club. During the tax years at issue, petitioner
owned approximately 25 Ferrari automobiles. Petitioner did not
sell any of those Ferraris during 1985-88.
On December 17, 1985, petitioner sold a piece of property to
Fred Brunson for $5,000. The quitclaim deed that petitioner or
10
Mr. Miles testified that he supposed that he got this
information from petitioner.
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his agent filed with the Osceola County Recorders Office paid
documentary stamp taxes of only $.50, reflecting a reported sales
price of less than $100.
Petitioner maintained the following bank accounts during the
tax years at issue:
Bank Name Account Number Account Name
Freedom Savings and Loan 32-480-9 Walter L. Medlin
(formerly Com Bank) Trust Account 1
Tucker State Bank 1089234 Walter L. Medlin
Tucker State Bank 18066 Walter L. Medlin
Trust Account 1
The accounts titled “Trust Account 1” were actually petitioner’s
personal bank accounts. Petitioner was also the beneficiary of a
Cayman Islands trust account at Washington International Bank and
Trust, Ltd., which he had funded.
On a financial statement dated November 15, 1985, petitioner
represented that he had a net worth of $10,822,260, and he valued
his automobile collection at $2,717,000. On a financial
statement dated June 1, 1988, petitioner represented that he had
a net worth of $7,121,800. On a financial statement dated
September 20, 1989, petitioner represented that he had a net
worth of $8,837,000.11
Thomas Brooks, a certified public accountant, prepared
petitioner’s tax returns for the 1977-1982 tax years. Petitioner
provided spreadsheets of his income and expenses to Mr. Brooks
11
The financial statements dated June 1, 1988, and Sept. 20,
1989, do not include a listing for petitioner’s automobile
collection.
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for the preparation of his tax returns. Mr. Kelly prepared those
spreadsheets using as their basis the deposits and disbursements
into, and from, petitioner’s bank accounts. Petitioner did not
inform Mr. Brooks that the proceeds from his real estate
transactions were deposited into Mr. Miles’s law firm’s trust
account, that those proceeds were not accounted for on the
spreadsheets, that petitioner used trustees in his transactions,
or that petitioner had a Cayman Islands trust account.
Petitioner did not give to Mr. Brooks any books, records, or
closing statements from his real estate transactions. Petitioner
did not file timely his Federal income tax returns for 1977,
1978, 1979, 1980, and 1981. Petitioner did not file his Forms
1040 for those years until June 15, 1983.
Respondent audited petitioner for the 1977-1982 tax years,
and respondent issued a notice of deficiency for those years on
June 13, 1986.12 On September 12, 1986, petitioner filed a
petition with the Tax Court (docket No. 36958-86). In January
1988, petitioner and his representative met with respondent’s
revenue agent for purposes of resolving that case. Petitioner
took an active role in those meetings. Most of the real estate
transactions which were at issue for the 1977-1982 tax years
12
Petitioner’s representative would not allow petitioner to
meet with respondent’s revenue agent assigned to examine his
returns or to extend the period of limitations, unless respondent
gave petitioner immunity from criminal prosecution.
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involved the use of trustees, and petitioner agreed that those
particular transactions were taxable. Petitioner did not inform
the revenue agent that proceeds from his real estate transactions
were deposited into Mr. Miles’s law firm’s trust account, nor did
he inform him of his belief that those proceeds were not subject
to taxation if not disbursed. On April 27, 1988, this Court
entered a decision pursuant to a stipulation of the parties and
found the following deficiencies and additions to tax:
Additions to Tax
Tax Sec. Sec. Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6653(a) 6653(a)(1) 6653(a)(2) 6661
1977 $1,082 $2,240 $54 n/a n/a n/a
1978 22,213 10,661 1,161 n/a n/a n/a
1979 63,533 15,883 3,177 n/a n/a n/a
1981 7,110 1,778 n/a $356 50% interest
on $7,110 n/a
1982 37,921 3,792 n/a 1,896 50% interest
on $37,921 $9,480
Petitioner did not file timely his Forms 1040 for 1983 and
1984. Those tax returns were filed on January 30, 1986, and
March 7, 1986, respectively. Respondent examined those tax
returns. Petitioner told the revenue agent assigned to that
examination that he was not involved in any corporations,
partnerships, or trusts. Petitioner’s income for 1983 and 1984
was determined on the basis of deposits and disbursements from
his bank accounts. The revenue agent explained to petitioner
that simply analyzing deposits into his bank account was not the
proper way to report income and did not reflect the true
financial picture of his real estate transactions. Petitioner
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did not disclose all his installment sale activities to the
revenue agent during this examination. Petitioner also informed
the revenue agent that his Cayman Islands trust account had been
closed in 1983. However, petitioner received five checks
totaling $135,000 from the Cayman Islands trust in 1985. On
October 21, 1988, petitioner agreed to income tax deficiencies of
$10,550 and penalties of $3,584 for those tax years.
Respondent received Forms 1040 for petitioner’s 1985 and
1986 tax years on November 29, 1988. Those forms were not timely
filed.13 Petitioner’s Form 1040 for 1987 was received on October
17, 1988. Petitioner was given an extension until October 16,
1989, to file his 1988 Federal income tax return. Petitioner did
not file his Form 1040 for 1988 until April 26, 1990. For each
of his Forms 1040 for 1985, 1986, 1987, and 1988, petitioner
listed his address as “P.O. Box 383, Lake Lure, NC 28746”.
However, petitioner actually resided in Kissimmee, Florida, at
the time he filed his returns.
Respondent examined petitioner’s 1985, 1986, 1987, and 1988,
tax returns. As part of that examination, respondent’s revenue
agent spent several weeks researching courthouse records in seven
counties in order to identify petitioner’s real estate
13
Petitioner claims to have previously filed timely returns
for 1985 and 1986; however, respondent could not find those
purported returns. Petitioner did not produce copies of any such
returns, and he did not present any evidence or testimony on the
subject of those purported returns.
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transactions for 1985-88. Petitioner never informed the revenue
agent of his belief that funds from his real estate transactions,
which were held in trust, were not subject to taxation.
Respondent reconstructed petitioner’s income and expenses for
1985, 1986, 1987, and 1988.
On September 5, 1990, respondent served a third-party
recordkeeper summons on Mr. Miles, which requested information
pertaining to petitioner’s income tax liabilities for the 1985-88
tax years. At the request of petitioner’s representative, Mr.
Miles did not provide the requested documents to the IRS. On
March 7, 1991, the Government filed a petition in the U.S.
District Court for the Middle District of Florida, Orlando
Division, to enforce the summons issued to Mr. Miles. On March
26, 1991, petitioner filed a motion to intervene in the
enforcement proceeding. On September 17, 1992, the Government
filed a notice to dismiss, and, on September 18, 1992, the court
canceled a show cause hearing and dismissed the summons
enforcement proceeding. On April 18, 1991, respondent served a
summons on petitioner. Petitioner failed to comply with the
summons, and the Government filed a petition to enforce the
summons in the U.S. District Court for the Middle District of
Florida, Orlando Division.
On June 12, 1997, an information was filed in the U.S.
District Court for the Middle District of Florida alleging that
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petitioner violated section 7206(4) in regard to his unpaid
income tax liabilities for 1977-82. On November 13, 1997,
pursuant to petitioner’s plea of guilty, the District Court
entered a judgment convicting petitioner of a violation of
section 7206(4) and sentenced petitioner to imprisonment. The
offense to which petitioner pleaded guilty occurred on August 9,
1990. In the plea agreement, petitioner admitted:
WALTER L. MEDLIN, in an attempt to avoid the
collection of a previously assessed income tax
liability for which levy was authorized under 26 U.S.C.
§ 6331, placed three of his automobiles in a storage
facility, located on Michigan Avenue in Kissimmee,
Florida, in the Middle District of Florida, which
facility leased to an entity called Central Florida
Transportation Museum, Inc.
Specifically, the defendant MEDLIN, after
consenting to a United States Tax Court judgment
against him in the approximate amount of $400,000.00
for liabilities stemming from tax years 1977-1982,
misrepresented the nature and extent of his assets to
an IRS Revenue Officer. Further, after issuance of the
levy, defendant MEDLIN stored the automobiles in the
above-referenced storage facility and, when asked about
the case by and [sic] IRS Revenue Officer, stated that
he no longer owned the vehicles. MEDLIN knew this
statement to be false.
On November 14, 1997, respondent issued a notice of
deficiency to petitioner for 1985, 1986, 1987, and 1988. On
February 11, 1998, petitioner filed his petition.
Petitioner testified on his own behalf at trial. We find
that, generally, his testimony was self-serving, was not
credible, was at times inconsistent, and was at other times
confusing. Petitioner did not satisfactorily answer many of the
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questions that he was asked, and the questions that he did answer
he did not answer with any degree of specificity. With respect
to the real estate transactions, he was evasive and did not
recall specific transactions. Petitioner could not testify
whether his financial statements were accurate.
General Legal Principles
Respondent’s determinations of unreported income for the tax
years at issue are presumed correct, and petitioner bears the
burden of proving those determinations incorrect, arbitrary, or
erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933);
Parks v. Commissioner, 94 T.C. 654, 658-659 (1990). On the other
hand, respondent has the burden of proving by clear and
convincing evidence that some portion of an underpayment of taxes
by petitioner is due to fraud. Sec. 7454(a); Rule 142(b).
Section 6001 requires taxpayers to keep adequate records.
The regulations promulgated under that section provide:
Records. (a) In general. * * * any person subject
to tax under subtitle A of the Code * * * or any person
required to file a return of information with respect
to income, shall keep such permanent books of account
or records, including inventories, as are sufficient to
establish the amount of gross income, deductions,
credits, or other matters required to be shown by such
person in any return of such tax or information. [Sec.
1.6001-1(a), Income Tax Regs.]
In Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158,
1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947), we stated:
The rule is well established that the failure of a
party to introduce evidence within his possession and
- 21 -
which, if true, would be favorable to him, gives rise
to the presumption that if produced it would be
unfavorable. This is especially true where * * * the
party failing to produce the evidence has the burden of
proof or the other party to the proceeding has
established a prima facie case. * * *
Also, the failure to present the testimony of available
witnesses, who purportedly possess knowledge about certain
relevant facts, provides sufficient basis to infer that the
testimony of those witnesses would not have been favorable.
Petzoldt v. Commissioner, 92 T.C. 661, 691 (1989); Pollack v.
Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d 409 (5th
Cir. 1968).
We are not required to accept incredible, implausible, or
biased testimony. Fleischer v. Commissioner, 403 F.2d 403, 406
(2d Cir. 1968), affg. T.C. Memo. 1967-85; Parks v. Commissioner,
supra at 659; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
I. Items of Income Determined by Respondent
Respondent prepared on brief a reconciliation of items which
are “in dispute” and concessions as to the adjustments in the
statutory notice of deficiency. Appendix C of this opinion
reflects the reconciliation schedules that respondent prepared
and which petitioner stipulated in his answering brief. We
discuss below those items of income that the parties represented
were still in dispute. However, we point out that petitioner
does not contest on brief many of those items. Instead, he
- 22 -
states “In addition, any issues not raised in Petitioner’s Brief
are also conceded by Petitioner.”
A. Rents Received From Island Living, Inc. in 1988
FINDINGS OF FACT
In 1985, petitioner through Mr. Miles, as trustee, purchased
property located in Osceola County, Florida, the “Osceola County
Property” (OS-19). On July 22, 1985, petitioner leased that
property to petitioner’s corporation, Island Living, Inc., for
$3,000 per month. Petitioner concedes that he received rents of
$6,000 in 1985, $24,000 in 1986, $24,000 in 1987, and $12,000 in
1988 from Island Living, Inc.
OPINION
Petitioner did not address on brief whether he received the
additional amount of $12,000 that respondent determined as rent
in 1988. We find that petitioner has conceded this matter. We
find that he received $24,000 of rental income in 1988 and that
he is taxable on that amount. See sec. 61(a)(5).
B. Schedule C Gains From Property Sales
1. Florida Fruit Belt Subdivision (OS-06)
FINDINGS OF FACT
On April 11, 1985, petitioner through Mr. Miles, as trustee,
sold three lots from the “Florida Fruit Belt Subdivision” located
in Osceola County, Florida, to Burl and Louise Mynhier for
$69,000. Mr. and Mrs. Mynhier paid cash of $33,000 and issued to
- 23 -
petitioner, through Ms. Allen, a promissory note and mortgage for
$36,000. Petitioner’s basis in the three lots was $9,316, and he
incurred selling costs of $412.
On May 20, 1985, petitioner through Ms. Allen, as trustee,
assigned the mortgage that the Mynhiers issued to his father,
Charles Medlin, for $36,000. Petitioner instructed the mortgagor
to send the mortgage payments directly to Charles Medlin. An
assignment of mortgage dated May 20, 1985, and signed by Ms.
Allen, was filed with the County of Osceola, Florida; it
provides:
That I, Donna L. Allen part[y] of the first part, in
consideration of the sum of Thirty-Six Thousand and
no/100 dollars, and other valuable considerations,
received from or on behalf of Charles B. Medlin party
of the second part, at or before the ensealing and
delivery of those presents, the receipt whereof is
hereby acknowledged, do hereby grant, bargain, sell,
assign, transfer and set over unto the said part[y] of
the second part a certain mortgage bearing date the
12th day of April A.D. 1985 made by Burl R. Mynhier and
Louise Mynhier, his wife in favor of Donna L. Allen and
recorded in Official Records Book 772; page 782, public
records of Osceola County, Florida, upon the following
described piece or parcel of land, situate and being in
said County and State, to wit:
[Description of OS-06]
* * * * * * *
Together with the note or obligation described in said
mortgage, and the moneys due and to become due thereon,
with interest from the 20th day of May 1985.
To Have and to Hold the same unto the said party
of the second part his heirs, legal representatives,
successors and assigns forever.
- 24 -
Petitioner did not report any income from the sale to the
Mynhiers on his Form 1040 for 1985.
OPINION
An installment sale is a disposition of property where at
least one payment is to be received after the close of the
taxable year in which the disposition occurs. Sec. 453(b).
Income from an installment sale shall be taken into account under
the installment method. Sec. 453(a). Under the installment
method, the income recognized for any taxable year from a
disposition is that proportion of the payments received in that
year which the gross profit bears to the total contract price.
Sec. 453(c). Respondent determined that petitioner recognized
$28,347 as income from the installment sale to the Mynhiers in
1985.14 Petitioner did not address this issue on brief, and he
conceded any arguments he might have made, but did not. We hold
that petitioner recognized $28,347 as income from the installment
sale in 1985.
Under section 453B(a), gain or loss shall be recognized on
the sale or exchange of an installment obligation to the extent
of the difference between the basis of the obligation and the
amount realized. The basis of an installment obligation shall be
14
Respondent computed the installment gain in 1985 as
follows: Gross profit ($59,272) = sales price ($69,000) minus
selling expenses ($412) minus basis ($9,316); gross profit
percentage (0.859014) = gross profit ($59,272)/contract price
($69,000); income from installment sale ($28,347) = payments in
1985 ($33,000) x gross profit percentage (0.859014).
- 25 -
the excess of the face value of the obligation over an amount
equal to the income which would be returnable were the obligation
satisfied in full. Sec. 453B(b). Any gain or loss recognized
shall be considered as resulting from the sale or exchange of the
property in respect of which the installment obligation was
received. Sec. 453B(a) (flush language).
Respondent determined that the assignment by petitioner to
Charles Medlin was a sale of an installment obligation under
section 453B(a) and that petitioner recognized a gain of $30,925
in 1985.15 Petitioner argues that the assignment of the mortgage
to his father was not a sale but that it was pledged as
collateral for a loan.
At trial, petitioner testified as follows:
Q All right. Would you explain what transpired in
relation to this mortgage and how you dealt with the
mortgage in relation to your father?
A From the sale of the property, there was down
payment for cash. And then the mortgage, we took out
the mortgage. And the guy would make payments; I
believe they were annual payments, or maybe monthly;
I’m not sure. Anyway, he was going to make payments,
but I needed some money.
And my father, again, he was mainly a go-put-his-
money-in-the-bank; he wasn’t interested in real estate
deals or anything, and I was probably sitting around
moaning to him about the interest I was paying to other
people like Mr. Margolis and things like that; he
expressed an interest in--why didn’t I give him some of
15
Respondent computed the gain from the purported sale of
the installment obligation as follows: Gain from sale of
installment obligation ($30,925) = face value of the obligation
sold ($36,000) x gross profit percentage (0.859014).
- 26 -
that? And I was reluctant. He lived in Jacksonville
and didn’t know anything about my business or anything
else, so--but, anyway, this was something he could
relate to. It was a mortgage on a piece of property
and there were payments coming in and I went to him and
borrowed--I’d borrowed from him before, just smaller
amounts of money--some money from him against the
mortgage, and signed a note to him as collateral, and
proceeded to continue to collect the payments. Again,
trying to make him feel warm and fuzzy, instructed the
mortgagor to send the mortgage payments directly to my
dad. We stayed on top of it and if they were a day
late, he called, and we had to go round up the guy and
get it to him.
Basically, it was a loan from my dad and as I got
in my payments from the other guy, they were forwarded
either directly to him or I got the payments in and
forwarded them directly to my dad. Unlike where you
sell a mortgage without recourse and it’s gone, it’s
the other person’s mortgage and you get the money and
go home, I had to live with this. And, if he had quit
paying, my father didn’t want a piece of property in
Osceola County, at his age, his health, you know, I was
going to have to pay the mortgage.
Q You were going--
A Right. I was going to have to pay the loan in
lieu of the mortgage payments?
Q So your position in relation to the handling of
that mortgage is that you did not sell the mortgage to
your father?
A Correct. As collateral, though, it was assigned
to him. And that’s customary practice. I’ve borrowed
against mortgages, mortgage payments, from like Finance
America, Chrysler Financial Corporation, and stuff and
generally what you do is assign them a mortgage,
usually you assign them the mortgage and a portion of
the note. Say you only borrowed the next five
payments, say, you would assign them a portion of the
note.
Petitioner’s testimony is self-serving, is less than credible,
and it is not supported by the testimony of other witnesses or
- 27 -
evidence of record. Indeed, on brief, petitioner states that
“Mr. Medlin’s testimony clouded by the passage of so many years
was not precise.” We cannot accept petitioner’s unsubstantiated
testimony.16
If we were to accept petitioner’s unsubstantiated testimony
at face value that an installment obligation was pledged as
collateral for loan proceeds, section 453B would be largely
ineffective. Where as here, no documentary proof has been
introduced to show that petitioner remained personally liable for
any failure of the mortgagor’s payment, we cannot accept that the
assignment was a pledge of collateral.
Certainly, the form of the assignment was a sale. The
assignment of mortgage filed with Osceola County states that Ms.
Allen assigned the mortgage to Charles Medlin “in consideration
of the sum of” $36,000. Moreover, petitioner’s instructions to
the mortgagor were that direct payments were to be made to his
father following the assignment. Further, although petitioner
testified to his continued involvement in the collection of the
mortgage, he could not testify definitively as to whether he or
Charles Medlin received the mortgage payments. Nevertheless,
petitioner claims that the assignment of the mortgage occurred
16
Petitioner testified that he signed a promissory note to
his father as collateral; however, he did not produce any such
note for the record. Petitioner relies solely on his testimony
and cites the fact that records and witnesses have been lost or
are unavailable.
- 28 -
without an assignment of the promissory note and that this
indicates the mortgage was assigned to Charles Medlin as
collateral for a loan.17 However, the assignment of the mortgage
states that the mortgage “Together with the note or obligation
described in said mortgage, and the moneys due and to become due
thereon” were transferred. We hold that petitioner recognized
gain of $30,925 from the sale of an installment obligation in
1985.
2. Susan’s Lakefront Estate (OS-03)
FINDINGS OF FACT
In 1970, Medlin Investment Co. purchased certain real
property in Osceola County, Florida, for $59,005. This property
was subdivided as “Susan’s Lakefront Estate” and consisted of 30
lots (Lot 1, Lot 2, * * *, Lot 30) and one tract (Tract A).
On July 2, 1985, petitioner through Ms. Allen, as trustee,
sold Lot 1 for $22,000. Petitioner did not report any income
from this sale on his 1985 Form 1040. On June 12, 1986,
petitioner through Ms. Allen, as trustee, sold Tract A, for
$23,000. Petitioner did not report any income from this sale on
his 1986 Form 1040. On May 25, 1988, petitioner through Mr.
17
We note that a mortgage generally secures payment of the
underlying installment obligation and that an assignment of the
mortgage without an assignment of the note creates no right in
the assignee with respect to the note. See Vance v. Fields, 172
So. 2d 613, 614 (Fla. Dist. Ct. App. 1965).
- 29 -
Miles, as trustee, sold Lots 6 through 30, for $540,000.18 The
purchasers paid $89,077 in 1988 and issued a purchase money
mortgage for the remainder. We are unable to locate this payment
on petitioner’s spreadsheets for 1988, and it does not appear
that he reported any amount of this payment as income on his
return for 1988.
OPINION
In computing petitioner’s gains from the sales in 1985,
1986, and 1988, respondent apportioned the cost basis of the
entire property equally among Lots 1 through 30 and Tract A, and
assigned a basis of $1,903 to each lot and tract.19 Respondent
determined that petitioner realized a gain of $20,097 from the
sale in 1985,20 a gain of $21,097 from the sale to Mr. Dugger in
1986,21 and installment gains of $77,298 from the sales in 1988.22
On brief, petitioner does not address the disputed gains
18
Petitioner incurred selling expenses of $23,831 for this
sale.
19
Cost basis for each lot and tract ($1,903) = cost of the
entire property ($59,005)/the number of lots and the tract (31).
20
Gain realized ($20,097) = amount realized ($22,000) -
adjusted basis ($1,903).
21
Gain realized ($21,097) = amount realized ($23,000) -
adjusted basis ($1,903).
22
Gross Profit ($468,594) = sales price ($540,000) - selling
expenses ($23,831) - total of the adjusted bases in lots 6-30
($47,575); gross profit percentage (0.867767) = gross profit
($468,594)/ contract price ($540,000); installment gain from sale
in 1988 ($77,298) = payments received in 1988 ($89,077) x gross
profit percentage (0.867767).
- 30 -
from the sales of the lots and the tract. We find that
petitioner received the amounts determined by respondent as
income for the years in issue and they are taxable as gains
derived from dealings in property. See sec. 61(a)(3).
3. High Plains Property (OS-35)
FINDINGS OF FACT
On June 29, 1977, petitioner, as trustee, through Mr. Miles,
as trustee, purchased real property in Osceola County, Florida,
which we refer to as the “High Plains Property” (OS-35), from
William F. Mitchell, for $448,000. The High Plains Property was
a large piece of property (a couple hundred acres) which was
divided into 5-acre tracts.
On May 30, 1985, petitioner through Ms. Allen, as trustee,
sold a lot (Lot 23) in the High Plains Property to Clarence L.
Bass for $27,000. A gain of $19,699 was realized from the sale
of this lot in 1985. Petitioner did not report any income from
the sale on his Form 1040 for any tax year.
Wayne Schoolfield and petitioner each originally owned a 50-
percent interest in the High Plains Property. Indeed, a
declaration of trust dated April 11, 1977, provides:
MADE this 11th day of April 1977 by and between D.
L. Allen, hereinafter referred to as Allen and C. Wayne
Schoolfield and W. L. Medlin, Trustee as Beneficiaries.
NOW, THEREFORE, Allen, in consideration of $1.00
and other valuable considerations, hereby declares that
she as Trustee holds in trust (for the beneficiaries
herein named) that certain Offer to Purchase Contract
- 31 -
on property in Osceola County, Florida, presently owned
by William F. Mitchell, Trustee.
WHEREAS, the beneficiaries of this Trust and their
interest are as follows: C. Wayne Schoolfield - 50%
and W. L. Medlin, Trustee - 50%.
WHEREAS, Allen further declares she as Trustee
will own, possess and administer the same only in
keeping with the interest of the beneficiaries thereto
and they shall have sole discretion and authority to
sell, assign, transfer, and convey or otherwise dispose
of the aforesaid Offer to Purchase Contract and that
she will execute any and all necessary forms to
consummate a sale upon receiving notice from the
beneficiares [sic]. Allen shall account to and pay
over to the beneficiarie [sic] herein the proceeds
derived from their stated interest in that Receipt for
Deposit and Offer to Purchase contract dated April 7,
1977 and attached hereto.
AND WHEREAS: Allen shall not sell, convey or
exchange the property conveyed to her as Trustee with
herself as an individual without written consent of the
beneficiaries of this Trust Agreement and she shall
keep an accurate set of records regarding the above
property and render periodic accounting therefore to
the beneficiaries.
Mr. Schoolfield and petitioner’s joint ownership of the High
Plains Property terminated at some point in time.
OPINION
Respondent determined that petitioner was the sole owner of
Lot 23 and that he realized the entire $19,699 gain from the sale
of Lot 23 in 1985. Petitioner contends that he was a half-owner
of the lot with Mr. Schoolfield when the property was sold and
that he received only half of the gain that respondent
determined.
- 32 -
At trial, petitioner testified that he was in a partnership
with Mr. Schoolfield with respect to the High Plains Property;
however, he could not testify definitively that he and Mr.
Schoolfield were still 50-50 owners at the time of the sale:
Q What was your ownership interest in * * * [the
High Plains Lot]?
A I was in a partnership. This is one of the pieces
I mentioned earlier that Wayne Schoolfield and I had
purchased from Mr. Green and Mr. Mitchell and developed
it, broke it up into these 5-acre tracts, and sold
them.
Q What percentage interest did you have when OS-35
was sold?
A I’m sorry. I don’t--Wayne and I, when we did this
development, were 50-50 and, I believe, that at this
time, we were still 50-50 owners in the property.
* * * * * * *
Q Did that partnership ultimately end?
A Yes, sir.
Q Do you recall whether it ended before or after the
sale of the lots in OS-35?
A I think we ultimately sold all the property out,
and, then, basically, took our money and went home.
Mr. Schoolfield testified that he was involved in a joint
venture with petitioner with respect to the High Plains Property.
However, when Mr. Schoolfield was shown a copy of the warranty
deed from Ms. Allen to Mr. Bass, he could not recall having ever
owned any interest in Lot 23, and he did not recall having ever
- 33 -
received any sale proceeds from Ms. Allen for this property.23
Mr. Schoolfield further testified that the joint ownership of the
High Plains Property may have terminated sometime prior to the
sale of Lot 23 to Mr. Bass, perhaps as early as the 1970s:
Q Did you ever have any ownership interest in
property known as High Plains?
A I had some--I ended up with some 5-acre tracts out
of that. Started off to joint venture, but ended up
with some 5-acre tracts out of it, yes.
Q You say it was a joint venture with who?
A Mr. Medlin.
Q With Mr. Medlin?
And when did that joint venture break up?
A I’m not sure I can give you a date there, it’s so
long. It’s in--back in the 70’s.
Q It broke up sometime in the 70’s?
A I think it occurred probably then, but you got to
remember, this stuff is going back so far. My hair was
black and I didn’t have a bald spot in the back of my
head.
23
And with respect to the declaration of trust, Mr.
Schoolfield testified:
Q What property did this Declaration of Trust
pertain to?
A There’s nothing attached to it. I--it could have
been this property or another piece, but--
Q Okay. Did this Declaration of Trust pertain
specifically to this Lot 23?
A I--I don’t know. That’s--I don’t think so, but I
don’t know. It’s been too long for me. I don’t recall
ever owning this piece.
- 34 -
You know, it’s a long time. But I think it was in
the early stages, but I can’t, you know, I--my memory
is not that good.
Q Did it occur before the date of this warranty
deed, which is May of 1985?
A I certainly thought it would have.
Ms. Allen testified that petitioner and Mr. Schoolfield were
partners with respect to the High Plains Property and that they
had split up at some point in time. She could not testify as to
when specifically they split up.
The evidence of record shows that at one point, Mr.
Schoolfield and petitioner held joint interests in the High
Plains Property, which may or may not have included Lot 23.
Neither petitioner’s, Mr. Schoolfield’s, nor Ms. Allen’s
testimony establishes that Mr. Schoolfield still possessed his
joint interest at the time of the sale of Lot 23 in 1985, or, for
that matter, whether he ever possessed any interest in Lot 23.
The testimony suggests that it was just as likely, if not more
probable, that Mr. Schoolfield and petitioner split up the
various tracts amongst themselves before 1985, that petitioner
was left as the sole owner of Lot 23, and that petitioner
proceeded to sell that lot in 1985 and collect the sales proceeds
therefrom.24
24
On recross-examination by petitioner’s counsel, Mr.
Schoolfield testified:
Q Ultimately at some point in time, these various 5-
(continued...)
- 35 -
Petitioner relies on Mr. Schoolfield’s testimony that he
could not say for certain that he did not have a 50-percent
interest in Lot 23 at the time of its sale to Mr. Bass and that
he could not say for certain when the “ultimate division” of the
respective interests in the High Plains Property had occurred.
24
(...continued)
acre tracts, of which you and Walter were 50 percent
beneficial owner interest in, were sold and then also
you and he ultimately divided up what was left; is that
right?
A I don’t know that that’s correct. What was left,
we--somewhere in there I said, “Here, look, let me have
X tracts and this is--and you take the rest of it. You
take it all.”
Q And as you sit here today, you’re not sure when
that happened, what the date of that was.
A That’s correct. I don’t know that I can give you
a date. I don’t think I could.
Q So, am I correct in your testimony that if that
date happened, if you split up, and the document, the
deed on page 1 is one of the 5-acre tracts that Walter
got, then you would not have had any interest in it if
it went to Walter after you and he split up.
A Yeah.
Q And if it happened before the split-up, then you
would have had an interest in it.
A I think that probably is correct.
Q And as you sit here today, because of the number
of years that have gone by, in fact you don’t have your
tax returns anymore, you can’t specifically tell us for
sure when that happened in relation to this sale; is
that right?
A Not sitting here today, I can’t.
- 36 -
We reemphasize that respondent’s determination of a deficiency is
presumed correct, and it is petitioner who bears the burden of
proving that determination incorrect. Since petitioner bears the
burden of proof, he must also bear the onus of failed
recollection and the lack of documentary evidence. Further,
petitioner has created the situation in which he now finds
himself by failing to document properly his various real estate
transactions, in failing to maintain and keep adequate records,
and by unnecessarily complicating those transactions. We hold
that petitioner is responsible for 100 percent of the gain
realized on the sale of Lot 23 in 1985.
4. Silver Lake (OS-01.4)
FINDINGS OF FACT
On September 30, 1975, petitioner, as trustee, purchased
property in Osceola County, Florida, which we refer to as “Silver
Lake” (OS-01.4). In November 1978, petitioner, as trustee, sold
Silver Lake to L.R. Donnell, Jr., as trustee, for $70,000. On
February 5, 1979, Mr. Donnell, as trustee, conveyed Silver Lake
to Mr. Miles, as trustee, for no consideration.
On October 31, 1980, Mr. Miles, as trustee, sold Silver Lake
to Don Prewitt, as trustee, for $220,600. Mr. Prewitt issued a
purchase money mortgage for $180,000 to Mr. Miles and paid the
balance. Mr. Miles, as trustee, received the following principal
and interest payments in 1985, 1986, and 1987:
- 37 -
Year Principal Interest
1985 $18,000 $13,545
1986 36,000 11,610
1987 72,000 10,976
Petitioner owned a 50-percent interest in Silver Lake at the time
of its sale in 1980, and his basis was $70,000.
OPINION
Respondent argues that petitioner realized installment gains
of $6,144, $12,288, and $24,577 in 1985, 1986, and 1987,
respectively, for the principal amounts paid to Mr. Miles.25
Petitioner, on brief, does not address the matter. We find that
petitioner realized installment gains of $6,144, $12,288, and
$24,577 in 1985, 1986, and 1987, respectively. Sec. 453(a).
Respondent originally determined that petitioner realized
interest income for the full amount of the interest payments made
to Mr. Miles. Respondent now concedes that petitioner realized
only 50 percent of the original amounts determined. Petitioner
does not address on brief his liability for half of the interest
income. We hold that petitioner realized interest income of
$6,773, $5,805, and $5,488 in 1985, 1986, and 1987, respectively.
25
Respondent computed petitioner’s gross profit percentage
as follows: Gross profit ($150,600) = sales price ($220,600)
minus basis ($70,000); gross profit percentage (0.682684) = gross
profit ($150,600)/contract price ($220,600). Respondent then
applied the gross profit percentage to each of the principal
payments in 1985, 1986, and 1987, respectively, and divided the
result in half to account for petitioner’s 50-percent interest.
- 38 -
5. East Lake Vista (OS-47)
FINDINGS OF FACT
On May 1, 1984, Mr. Miles, as trustee, purchased real
property consisting of approximately 156.65 acres in Osceola
County, Florida, which we refer to as “East Lake Vista” (OS-47),
from Reba Smith, for $500,000. Part of the purchase price,
$125,000, was paid in cash, and Mr. Miles issued a purchase money
mortgage of $375,000 for the remainder.26
In May 1986, Mr. Miles sold approximately 31 acres of East
Lake Vista to Nicholas Pope, for $205,000. On December 16, 1986,
Mr. Miles sold an additional 31.50 acres of East Lake Vista to
Mr. Pope for $215,181. Petitioner did not report any income from
those transactions on a Form 1040 for any tax year.
On December 16, 1986, at the same time as the second sale,
petitioner and Dr. George Gant entered into a “Continuing and
Unconditional Guaranty of Performance and Payment” in favor of
Mr. Pope. That document shows petitioner and Dr. Gant as
“Guarantors”, Mr. Miles, trustee, as “Seller”, and Mr. Pope as
“Buyer”:
WHEREAS, R. Stephen Miles, Jr., Trustee, as
Seller, and Nicholas A. Pope, as Trustee under that
certain unrecorded Trust Agreement dated December 16,
26
The mortgage provides for interest of 10 percent, per
annum, and requires “Three equal annual payments of $150,793.05
including principal and interest commencing one year from the
date hereof and continuing each year thereafter until the entire
balance plus interest is paid in full.” A satisfaction of
mortgage was issued by Reba Smith and was filed on Dec. 18, 1986.
- 39 -
1986, and/or Assigns, as Buyer, entered into that
certain Contract and Sale and Purchase dated May 2,
1986 (the “Contract”) with respect to the purchase of
approximately 31.50 acres, more or less, located in
Osceola County, Florida (the “Property”); and
WHEREAS, the terms of the Contract provide for
Seller’s obligation to complete construction of a road
to be known as “Dan Smith Road” adjacent to the
Property at Seller’s expense within one (1) year after
the date of closing, and further provide for Buyer’s
right to complete said construction and be reimbursed
by Seller in the event of Seller’s failure to complete
said construction in accordance with the Contract; and
WHEREAS, the Contract further calls for the
personal guaranty of Seller’s performance of said road
construction and payment for said road construction by
the undersigned;
NOW THEREFORE, as an inducement to the Buyer to
purchase the Property, and for good and valuable
consideration not herein recited but the receipt and
sufficiency of which is hereby acknowledged, the
undersigned, jointly and severally, give to Buyer, and
its successors and assigns, their continuing and
unconditional guaranty of performance and payment by
the Seller of the following described obligation, to
the same extent as if Guarantors were the named parties
identified as the Seller under the Contract:
* * * * * * *
The Guarantors hereunder also agree to pay all
costs (including attorneys’ fees whether incurred in
connection with collection, trail [sic], appeal or
otherwise) of collection against the Guarantors under
this Guaranty. The liability of Guarantors hereunder
is binding upon Guarantors and Guarantors’ successors
and assigns.
Petitioner and Dr. Gant signed the guaranty.
In August 1988, Mr. Miles, as trustee, sold approximately 10
acres of East Lake Vista for $80,000. Petitioner, for Mr. Miles,
- 40 -
signed the sales contract. Petitioner did not report any income
from this sale on his Form 1040 for 1988.
The record contains two personal financial statements for
petitioner. The first is dated November 15, 1985, and lists as
an asset, East Lake Vista;27 a “160 acre parcel located on East
Lake North of Narcoossee being subdivied [sic] into 5 ac. tracts
and is encumbered by 2 mortgages totaling $386,000.00”. The
listing states: “I own 1/2 interest”, and values that interest
at $560,000, subject to liabilities of $193,000. The second
financial statement is dated June 1, 1988, and lists as an asset,
East Lake Vista; a “100 acre parcel located on East Lake North of
Narcoossee being subdivided into 5 ac. tracts”. That property is
listed under “Miscellaneous Lots & Acreage (Unencumbered)” and is
valued at $400,000.
Mr. Miles’s law firm maintained certain ledger cards,
numbers 70006 through 70008, which are entitled “Walter
Medlin/Reba Smith”, “Medlin Re: Smith, Reba”, and “Medlin,
Walter from Reba L. Smith”, respectively. Those ledger cards
contain the following relevant entries:
27
Petitioner testified that East Lake Vista is also known as
the “Narcoossee property” and the “Dan Smith Road property”. The
parties also agree that the property was sometimes called the
“Reba Smith property”.
- 41 -
Ledger Card Trust Funds
Number/Line Date Name Memo Received Disbursed
70008/1 5-1-84 Reba Louise Smith Medlin ---- $95,551.82
70008/2 5-1-84 H.R. Thornton Medlin ---- 1,250.00
70008/3 5-1-84 Allen’s Osceola
Realty, Inc. Medlin ---- 25,000.00
70008/4 5-1-84 Clerk of Circuit
Court Medlin ---- 3,588.95
70008/5 5-2-84 Transferred from
Medlin/Gant $62,873.61 ----
70008/6 5-2-84 George Gant Medlin/
Smith R. 62,867.16 ----
70008/9 5-14-85 Moved from
Medlin/Tai ---- 61,646.52 ----
70008/10 ---- Moved from
Medlin/Tai ---- 1,950.00 ----
70008/11 ---- Johnston’s Eng. Medlin/Smith ---- 1,950.00
70008/12 5-14-85 Moved from
Medlin/Tai ---- 61,646.52 ----
70008/13 5-14-85 Reba Smith Medlin/Smith ---- 123,293.04
70008/16 5-2-86 Webb Medlin/Smith 189,922.60 ----
70008/21 5-2-86 Lowndes,
Drosdick et al Medlin/Smith 20,000.00 ----
70007/4 5-2-86 H.R. Thornton,
Jr., Trustee Medlin ---- 150,793.05
70007/9 5-14-86 Transfer to
Medlin/Gant card ---- ---- 14,740.92
70007/11 5-14-86 Walter L. Medlin Medlin/Smith ---- 3,768.93
70007/12 5-19-86 Freedom Financial
Center Medlin ---- 6,602.74
70007/13 5-19-86 Walter L. Medlin
Trustee ---- ---- 1,897.26
70007/15 12-16-86 Wire-Transfer Medlin/Smith 218,268.00 ----
70007/16 12-16-86 Reba Louise Smith Medlin/Smith ---- 145,722.80
70006/5 12-24-86 Transfered to
Medlin/Gant ---- ---- 55,094.55
70006/6 8-8-88 Walter T.
Rose, Jr Medlin/Smith 40,000.00 ----
70006/7 8-8-88 Beverly L. Rose ‘’ 39,000.00 ----
70006/8 8-8-88 ERA-Horacio
Toledo, Inc. ‘’ 1,000.00 ----
70006/14 8-8-88 Moved to Medlin
Mefford ---- ---- 528.52
70006/15 8-8-88 Moved to Medlin/
Gant 1/2 proceeds ---- ---- 35,083.53
70006/16 8-8-88 Moved to Medlin/
Gant 1/2 proceeds ---- ---- 35,083.52
70006/22 ?-27-89 Moved to Medlin/
General ---- ---- 100.00
70006/22 10-4-89 Moved to Medlin/
General ---- ---- 128.64
For each of the various sales transactions in 1986 and 1988, the
parties executed a closing statement. The amounts listed in
- 42 -
those statements as deposits in escrow and as amounts due from
the buyer to the seller match amounts listed as deposits in the
ledger cards above, ledger card No. 70008 (lines 16 and 21), No.
70007 (line 15), and No. 70006 (lines 6-8).
Dr. Gant and petitioner each owned a 50-percent interest in
the “Mefford Property” (OS-22), which was sold on October 7,
1988, for $250,000. A gain of $110,328 was realized from this
sale. Respondent originally determined that petitioner was
responsible for the entire gain realized from this sale, but he
now concedes that petitioner is responsible for only half of that
amount ($55,164).
Dr. Gant and petitioner also each owned a 50-percent
interest in a piece of property which we refer to as the “Tai
Property”. The Tai Property was sold in 1984 for $457,900, and
petitioner concedes that he is liable for 50 percent of the
installment gain ($50,863) from payments received in 1985. See
appendix C.
OPINION
It is well established that income must be taxed to him who
earns it, United States v. Basye, 410 U.S. 441, 449 (1973), and
that income includes gains derived from dealings in property.
Sec. 61(a)(3). Respondent determined that petitioner owned a 50-
percent interest in the portions of East Lake Vista sold in 1986
and 1988 and that he was responsible for 50 percent of the gain
- 43 -
realized from those transactions.28 Petitioner contends that Dr.
Gant owned 100 percent of East Lake Vista at the time of the
sales in 1986 and 1988. Petitioner argues that he and Dr. Gant
originally agreed to be 50-50 partners with respect to East Lake
Vista, but that Dr. Gant contributed the entire purchase price
and thus acquired a 100-percent ownership interest in the
property.
At trial, petitioner testified that, initially, he was to
receive a 50-percent interest in East Lake Vista, but because Dr.
Gant “put up all the money and wanted all the interest in the
property”, Dr. Gant “essentially owned all of it”. However,
petitioner’s testimony was not definitive and was indeed
speculative. It was also self-serving, and we do not agree that
he owned no interest in East Lake Vista at the time of the 1986
and 1988 sales. The documentary evidence of record shows that
28
Respondent allocated basis of $3,191.83 to each acre in
East Lake Vista: Basis per acre ($3,191.83) = purchase price
($500,000)/acres purchased (156.65). Respondent determined
$41,775 as petitioner’s gain from the May 1986 sale: Gain
realized ($83,550) = sales price ($205,000) - selling costs
($22,503) - basis ($98,947 = 31 acres x $3,191.83); petitioner’s
gain ($41,775) = gain realized ($83,550) x petitioner’s ownership
interest (50 percent). Respondent determined $50,726 as
petitioner’s gain on the Dec. 16, 1986, sale: Gain realized
($101,452) = sales price ($215,181) - selling costs ($13,187) -
basis ($100,542 = 31.5 acres x $3,191.83); petitioner’s gain
($50,726) = gain realized ($101,452) x petitioner’s ownership
interest (50 percent). Respondent determined $19,522 as
petitioner’s gain on the 1988 sale: Gain realized ($39,045) =
sales price ($80,000) - selling costs ($9,005) - basis ($31,950 =
10.01 acres x $3,191.83); petitioner’s gain ($19,522) = gain
realized ($39,045) x petitioner’s ownership interest (50
percent).
- 44 -
petitioner held an ownership interest in East Lake Vista at the
time of the sales in 1986 and 1988.
First, petitioner’s financial statements dated November 15,
1985, and June 1, 1988, show that he owned at least a 50-percent
interest in East Lake Vista at some point before the sales that
occurred in 1986 and 1988. Petitioner contends that the November
15, 1985, financial statement is not inconsistent with his
testimony and Dr. Gant’s testimony that he was to originally own
a 50-percent interest in East Lake Vista, which subsequently
changed to no interest. Petitioner has not presented any
evidence to establish when his and Dr. Gant’s original
understanding supposedly changed; however, if it did change, we
assume the change would have occurred either before or shortly
after May 1, 1984, when Dr. Gant purportedly “put up all the
money”, the $125,000 cash portion of the purchase price.29 The
financial statement is dated November 15, 1985, a full year and a
half after the purchase of East Lake Vista. Petitioner offers no
explanation why he continued to represent himself as owning a 50-
percent interest in November 1985, if, in fact, he owned no
interest after Dr. Gant put up all the cash in May 1984.
Petitioner also contends that the June 1, 1988, financial
statement cannot be relied upon since it incorrectly shows that
29
Dr. Gant testified that he could not recall when the
parties original understanding changed, but he suggested that it
might have been in 1984.
- 45 -
he owned 100 percent of East Lake Vista and that the property
consisted of 100 acres when, in fact, it consisted of 84 acres.
We do not agree that these purported inaccuracies cause the June
1, 1988, financial statement to lose its persuasive value. The
financial statement was prepared by or for petitioner, and
petitioner does not explain why those inaccuracies were reflected
on his financial statement, and why they invariably suggest that
he held no interest in East Lake Vista in 1988. At the very
least, the June 1, 1988, financial statement shows that
petitioner perceived himself to own at least some interest in
East Lake Vista in 1988 and that he intended other persons who
might rely on the financial statement to recognize that
ownership.
The road construction guaranty also indicates that
petitioner had an ownership interest in East Lake Vista.
Petitioner, Mr. Miles, and Dr. Gant executed the guaranty on
December 16, 1986, the same date as the sale of the 31.50 acres
of East Lake Vista to Mr. Pope. And, it specifically refers to a
contract for the sale of 31.50 acres that Mr. Miles and Mr. Pope
entered into on May 2, 1986. Petitioner argues that this
guaranty originated in petitioner’s “working relationship” with
Dr. Gant and did not arise from any ownership interest in the
property. However, petitioner did not present any evidence or
testimony to suggest that he was compensated for his real estate
- 46 -
services. Also, we cannot accept that he was performing those
services for free. Petitioner does not suggest that amounts he
received following the sales in 1986 and 1988 were, in fact,
compensation, and, indeed, petitioner claims those amounts were
loans. It is more plausible that petitioner’s performance of
services and his guarantee for the road construction arose from
his ownership interest in East Lake Vista.
Under petitioner’s argument, we must assume that any
services that petitioner performed were for the benefit of Dr.
Gant, the purported 100-percent owner of East Lake Vista. But,
Dr. Gant did not testify that petitioner performed services for
his benefit and that he compensated petitioner. Dr. Gant’s
testimony, as a whole, indicates that petitioner performed the
real estate services for a 50-percent interest in East Lake
Vista. Dr. Gant testified that he and petitioner started out 50-
50, with Dr. Gant putting up all the money30 and petitioner doing
all the work. However, according to an “agreement” with Mr.
Miles, ownership of the property was “posted as 100 percent on my
part since I put up the money”. Dr. Gant also testified:
Q Did you pay anything for the additional 50 percent
interest from Mr. Medlin?
30
Dr. Gant testified that he gave petitioner $125,000 in
1984 for the purchase of East Lake Vista. This amount represents
the initial cash portion of the purchase price for the property.
Dr. Gant testified: “I didn’t pay any more. We paid it out of
operations at the time.”
- 47 -
A As I tried to explain to you earlier, the 50
percent was a 50/50 ownership in property and a 50
percent in participation. I tried to explain that to
you, and I thought you understood it.
Q I must not have, sir. I apologize.
A He did not put any money up. He didn’t put a dime
up to the best of my knowledge. I put the money up.
Q But now, he purchased the property. Correct?
A No.
Q In terms of the expertise--he selected the
property? Excuse me.
A He selected the property.
Q He selected the property?
A I paid for the property.
Q Okay. And so he just gifted his interest to you?
I mean, I understood the deal was 50/50 initially.
A He didn’t have any interest. His interest was in
the developing part of it.
* * * * * * *
Q * * * On the Narcoossee property, if Mr. Medlin
had a financial statement that showed that he was a 50
percent interest or owned half of the Narcoossee
property, would you say that that was correct.
A Sure. That was our understanding--I tried to
explain that--when we first started.
But to protect my interest it was necessary for me
to assume the 100 percent, as I had put the money in,
100 percent of the property.
Q I understand, sir.
A And all of the money he has taken out of it, the
original investment has never been paid back. I know
- 48 -
you haven’t asked this question, but it’s important for
you to know.
Dr. Gant’s testimony, as a whole, shows considerable confusion
regarding petitioner’s interest in East Lake Vista. However, his
testimony indicates that he assumed 100-percent legal ownership
of East Lake Vista to protect his initial $125,000 contribution;
however, petitioner continued to possess an interest in the
property because of his contribution of services. Dr. Gant did
not testify that the supposed agreement with Mr. Miles deprived
petitioner of a participation in any profits realized from the
property.
Petitioner’s execution of the sales contract for the August
1988 sale also indicates that he had more than just a working
relationship with Dr. Gant with respect to East Lake Vista. It
shows that he had the legal capacity to sell the property. This
denotes ownership. In addition, the ledger cards maintained by
Mr. Miles’s law firm are essentially a record of the transactions
associated with East Lake Vista. Those ledger cards show the
initial disbursement of approximately $125,000 to Reba Smith, the
annual payments on the mortgage issued to Ms. Smith, and the
amounts received from the sales in 1986 and 1988. The ledger
cards each list petitioner’s name with respect to transactions
which occurred from 1984 to 1989. The ledger cards contradict a
significant portion of Dr. Gant’s testimony and are certainly
inconsistent with petitioner’s contention that he owned no
- 49 -
interest in East Lake Vista. Although Dr. Gant testified that he
did not put up any additional cash after his initial $125,000,
the ledger cards show that $62,867.16 was received from “George
Gant” on May 2, 1984. Further, Dr. Gant testified that he was
the only cash person in the deal; however, the ledger cards show
that $62,873.61 was received on May 2, 1984, from the Medlin/Gant
ledger card.31 Also, the ledger cards show that matching
deposits of $61,646.52 were received on May 14, 1985, from the
Medlin/Tai card. Since petitioner and Dr. Gant each owned a 50-
percent interest in the Tai Property, we assume that petitioner
contributed at least $61,646.52 with respect to East Lake Vista.
The ledger cards also show disbursements to petitioner’s
general ledger card. Moreover, the pattern of duplicate
disbursements shortly after the 1986 and 1988 sales to ledger
cards in which petitioner and Dr. Gant presumably held equal
interests certainly supports respondent’s position that
petitioner and Dr. Gant each owned a 50-percent interest in East
Lake Vista. Petitioner, on the other hand, argues that his and
Dr. Gant’s testimony shows that any amounts he received from the
1986 and 1988 sales were received as loans from Dr. Gant. We
disagree.
31
According to petitioner, the Medlin/Gant ledger card
represents “an account in which both Medlin and Gant have an
interest.”
- 50 -
Dr. Gant testified that he did not have any records showing
loans to petitioner, that he did not receive a note from
petitioner, and that all records were maintained by Mr. Miles.
Petitioner did not submit any records to substantiate his and Dr.
Gant’s testimony that loans were made, and none of the records
from Mr. Miles’s law firm, including the ledger cards, show any
loans or their amounts.
At trial, petitioner and Dr. Gant testified that proceeds
from the sales of East Lake Vista were deposited into Mr. Miles’s
law firm’s trust account and that petitioner would then “borrow”
those proceeds for his own purposes. However, it is not at all
clear from Dr. Gant’s testimony what he considers to be a
“loan”.32 It appears to us that Dr. Gant understood that upon
the receipt of any sale proceeds from East Lake Vista, and after
debt service on the note to Reba Smith, that he was to be repaid
his initial $125,000, but that petitioner instead borrowed those
proceeds, and that Dr. Gant has never been paid back his
$125,000. However, those facts do not establish a loan, and, in
any event, they are not inconsistent with petitioner owning a 50-
percent interest in East Lake Vista. There is no evidence in
this case that petitioner had an obligation to repay the amounts
32
The “hallmarks” of a loan are: (1) Consensual recognition
between the borrower and the lender of the existence of the loan,
i.e., the obligation to repay; and (2) bona fide intent on the
part of the borrower to repay the funds advanced. Inv. Research
Associates, Ltd. v. Commissioner, T.C. Memo. 1999-407.
- 51 -
“borrowed”, and there is no evidence that those amounts were
treated as a bona fide obligation or that Dr. Gant attempted to
collect the amounts supposedly borrowed. At best, Dr. Gant’s
testimony indicates that petitioner made draws from Mr. Miles’s
trust account on the sale proceeds received from East Lake Vista
and that those draws caused Dr. Gant to fail to realize the full
extent of what he initially invested. However, those facts do
not establish a loan or otherwise permit petitioner to escape
taxation on his share of the gains from East Lake Vista.
Petitioner also points to respondent’s concession that
petitioner owned only a 50-percent interest in the Mefford
Property, and he argues that this concession supports the
credibility of petitioner’s and Dr. Gant’s testimony with respect
to East Lake Vista. We disagree. The record contains numerous
concessions by both petitioner and respondent, and we are not
inclined to speculate as to the basis for those concessions. In
any event, respondent notes that he conceded one-half of the
deficiency with respect to the Mefford Property, because there
was contemporaneous documentary evidence to support Dr. Gant’s
testimony. Respondent contends, and we agree, that Dr. Gant’s
testimony lacks such support with respect to East Lake Vista.
Further, respondent’s position after concession with respect to
the Mefford Property would now appear consistent with the
position he has taken with respect to East Lake Vista, that
- 52 -
petitioner and Dr. Gant each owned a 50-percent interest. It is
also consistent with their respective interests in another piece
of property, the Tai Property.
We hold that petitioner owned a 50-percent interest in East
Lake Vista, and we sustain respondent’s determination that
petitioner realized 50 percent of the gains from the sales in
1986 and 1988.
6. Grissom Parcels (OS 1.3)
FINDINGS OF FACT
On April 15, 1985, petitioner purchased three parcels
(parcels 1, 2, 3) of real property in Osceola County, Florida,
which we refer to as the “Grissom Parcels”, for $47,000. Parcel
1 is fronted by U.S. Highway 192, and it borders another road,
Rivers Road, on one side. Parcels 2 and 3 do not border U.S.
Highway 192, are separated from parcel 1 by Rivers Road and
several smaller tracts of property, and border a road referred to
as “County Road”. The relative sizes of the parcels are similar,
although the dimensions differ.
On November 5, 1985, petitioner transferred the parcels to
Ms. Allen, as trustee, for no consideration. Petitioner was the
sole beneficiary of the parcels conveyed to Ms. Allen. On
October 22, 1986, petitioner, through Ms. Allen, sold parcel 1
for $40,000.
- 53 -
For 1987, Osceola County assessed the values of the Grissom
Parcels as follows:
Parcel Number Assessed Value
Parcel 1 $12,500
Parcel 2 14,955
Parcel 3 11,228
Total Assessed Value 38,683
OPINION
The parties agree that $40,000 was realized on the sale of
parcel 1 in 1986, and that petitioner is responsible for any gain
from that sale. The issue that remains for decision is
petitioner’s basis in parcel 1. The adjusted basis for
determining gain from the sale of property, whenever acquired,
shall be the basis determined under section 1012 and adjusted as
provided in section 1016. Sec. 1011(a). Under section 1012, the
basis of property shall be the cost of such property. Under
section 1016(a)(1), the basis of property shall be adjusted for
expenditures, receipts, losses, or other items, properly
chargeable to capital account.
When a part of a larger property is sold, the cost or other
basis of the entire property shall be equitably apportioned among
the several parts, and the gain realized or loss sustained on the
part of the entire property sold is the difference between the
selling price and the cost or other basis allocated to that part.
Fasken v. Commissioner, 71 T.C. 650, 655 (1979); sec. 1.61-6(a),
Income Tax Regs. An equitable apportionment of cost basis may
- 54 -
reflect the relative fair market values of the portions of the
larger property at the time of their purchase. Sec. 1.61-6(a),
Example (2), Income Tax Regs. Our determination of the
allocation of basis is a question of fact. Sleiman v.
Commissioner, 187 F.3d 1352, 1360 (11th Cir. 1999), affg. T.C.
Memo. 1997-530.
Respondent relies upon the assessed values of the Grissom
Parcels in 1987 to determine the relative values of those parcels
when they were purchased in 1985. Respondent allocated the
purchase price of $47,000 in 1985 to the parcels as follows:
Percentage
Parcel Assessed of Total Basis
Number Value Assessed Value Allocated1
Parcel 1 $12,500 32% $15,040
Parcel 2 14,955 39 18,330
Parcel 3 11,228 29 13,630
Totals 38,683 100 47,000
1
The basis allocated equals the purchase price multiplied by the
percentage of the total assessed value of the parcels.
After accounting for selling expenses of $4,458, respondent
determined that petitioner realized a gain of $20,502.33
Petitioner contends that the methodology used by respondent to
allocate cost basis to the Grissom Parcels is arbitrary.
Petitioner argues that the cost basis should have been allocated
according to the relative fair market values of the parcels in
33
Gain ($20,502) = sales price ($40,000) - selling expenses
($4,458) - basis ($15,040).
- 55 -
1985 and that several factors show that parcel 1 was the most
valuable of the three parcels when they were purchased.
Generally, “We do not consider that the amount for which the
property was assessed for purposes of local taxation is
necessarily a reliable criterion to be used in estimating its
fair market value.”34 Frazee v. Commissioner, 98 T.C. 554, 563
(1992). However, in appropriate circumstances tax-assessed
values can be useful as a guideline or as corroboration of other
evidence of fair market value. Kellahan v. Commissioner, T.C.
Memo. 1999-210. And, in the case that we are concerned with the
relative values of several parts of a larger piece of property,
local tax assessments may be relied upon to provide the correct
value of a particular parcel of real estate. 2554-58 Creston
Corp. v. Commissioner, 40 T.C. 932, 940 n.5 (1963).35 We are not
willing to conclude as a matter of law that because respondent’s
determination is based on local tax assessments, it is arbitrary.
And, indeed, respondent’s determination appears reasonable and
consistent with the relative sizes of the three parcels. See
34
This is especially true when there is nothing in the
record indicating that the tax-assessed value was intended to
represent fair market value. Kellahan v. Commissioner, T.C.
Memo. 1999-210; Estate of Dowlin v. Commissioner, T.C. Memo.
1994-183; see also sec. 20.2031-1(b), Estate Tax Regs.
35
In 2554-58 Creston Corp. v. Commissioner, 40 T.C. 932, 940
n.5 (1963), we stated: “Although valuations for real estate
taxes may often be too low to be relied upon as furnishing the
correct value of a particular parcel of real estate as a whole,
we have no reason to reject the use of such valuations in
determining the relative value of land and buildings.”
- 56 -
Clayton v. Commissioner, T.C. Memo. 1956-21, affd. 245 F.2d 138
(6th Cir. 1957).
“When, as in this case, the Commissioner has determined an
allocation of basis, a taxpayer bringing a deficiency proceeding
bears the burden of proving by a preponderance of the evidence
that the Commissioner’s determination is erroneous.” Sleiman v.
Commissioner, supra at 1359; see also Byram v. Commissioner, 555
F.2d 1234, 1236 (5th Cir. 1977), affg. T.C. Memo. 1975-135.
Petitioner argues that parcel 1 is fronted by U.S. Highway 192,
the main road through Osceola County to Walt Disney World,
whereas parcels 2 and 3 are on a dirt road, and that parcel 1 was
zoned commercial, whereas parcels 2 and 3 were zoned residential.
He also testified that parcels 2 and 3, at the time of their
purchase, were “in a real undesirable neighborhood. As you get
down here, a lot of drug users and stuff. There’s sort of a
shack here.” Petitioner claims, on the sole basis of his
testimony, that one-half of the original $47,000 purchase price,
- 57 -
$23,500,36 should be allocated to the parcel sold in 1986 and
that he is responsible for $12,042 of gain.37
Petitioner is not a disinterested witness. Further, his
opinion regarding the value of the Grissom Parcels is based on
his own subjective viewpoint about the desirability of those
individual parcels. Petitioner presents no objective analysis to
support his valuation of parcel 1 to be “at least half of the
entire purchase”. Petitioner presented no records that were
prepared at the time of the purchase or sale that reflected the
allocation in his testimony, and he completely failed to report
the sale on his income tax return. We cannot accept petitioner’s
testimony to establish the relative values of the Grissom
Parcels, and he has failed to overcome the presumption of
correctness that attaches to respondent’s determination. We hold
that petitioner’s basis in parcel 1 was $15,040 and that his gain
from its sale in 1986 was $20,502.
36
Petitioner testified:
Q And what value do you place as to the basis when
you bought it--of the total purchase price, what value
do you attribute to the value of parcel 1?
A I had figured that it was worth at least half of
the entire purchase, which would mean that it was
equivalent to the other two parcels put together.
37
Gain realized ($12,042) = amount realized ($40,000) -
selling expenses ($4,458) - basis ($23,500).
- 58 -
7. Arrowhead Lakes Subdivision (OR-2), Angel-Royse
Property (OS-39)
FINDINGS OF FACT
In 1974, Roger McLaughlin, as trustee, purchased Lots 26,
27, and 28 in the Arrowhead Lakes Subdivision (OR-2), which was
located in Orange County, Florida. In 1977, Mr. McLaughlin
conveyed those lots to Ms. Allen, as trustee, for no
consideration. In 1979, Ms. Allen conveyed those same lots to
Mr. Miles, as trustee, for no consideration. Petitioner owned
Lots 26, 27, and 28 in the Arrowhead Lakes Subdivision;
petitioner was the 100-percent beneficiary of the lots held in
trust by Mr. Miles.
In 1983, Mr. Miles, as trustee, purchased 40 acres of a
certain real property in Osceola County, Florida. On January 31,
1983, Mr. Miles, as trustee, issued a mortgage deed (purchase
money note and first mortgage) of $70,200 with respect to this
purchase. On February 24, 1983, Mr. Miles, as trustee, issued to
Mr. McLaughlin a mortgage deed (purchase money note and second
mortgage) of $30,500, which related to the 40-acre purchase. On
March 25, 1983, petitioner entered into a contract to purchase an
additional 34 acres for $102,000. Mr. Miles, as trustee, issued
a mortgage deed of $73,000 for part of the purchase price. The
34 acres were conveyed to Mr. Miles, as trustee, on October 26,
1983. Petitioner and Mr. McLaughlin were equal beneficiaries in
- 59 -
the 74 acres held in trust; we refer to the property held in
trust as the “Angel-Royse Property” (OS-39).
Petitioner’s financial statement dated November 15, 1985,
lists as an asset, “Angel-Royce Development”;38 a “74 Acre parcel
located on North side of Boggy Creek Road west of the Turnpike
and valued at $8,000 per acre. There are several mortgages
covering the various parcels totaling $212,000 payable over 15
years I own 50%”. The statement values petitioner’s interest in
the property at $300,000, subject to liabilities of $106,000.
In 1986, petitioner exchanged his ownership interest in Lots
26, 27, and 28 of the Arrowhead Lakes Subdivision for Mr.
McLaughlin’s ownership interest in the Angel-Royse Property. In
exchange for the subdivision lots, Mr. McLaughlin forgave the
$30,500 of outstanding principal that petitioner owed to him from
the February 24, 1983, mortgage deed. Mr. McLaughlin also
assumed the liability for real estate taxes on Lots 26, 27, and
28, which totaled $1,251 at the time of the exchange. Petitioner
assumed Mr. McLaughlin’s share of the liabilities associated with
the Angel-Royse Property. Those liabilities totaled $66,202 and
$71,042, respectively, at the time of the exchange. Petitioner’s
basis in Lots 26, 27, and 28 was $40,300. On November 23, 1986,
Mr. McLaughlin transferred his interest in the 74 acres of the
38
Petitioner referred to the Angel-Royse Property as the
“Angel-Royce [sic] Development”, the “Angel and Royce [sic]
Property” and the “pit piece”. Mr. McLaughlin also referred to
the Angel-Royse Property as the “Boggy Creek Road” property.
- 60 -
Angel-Royse Property to Michael D. Johnson, as trustee.
Petitioner was the 100-percent beneficiary of the Angel-Royse
Property held in trust. Petitioner did not report any income
from the exchange on a Form 1040 for the tax years at issue.
On June 9, 1987, a final judgment was entered by the Circuit
Court of the Ninth Judicial Circuit of Osceola County, Florida,
in the case of South Fla. Water Mgmt. Dist. v. Walter Medlin,
Steven Miles, Tr., and Robert Adkins, Case No. 85-943. The
judgment was entered into pursuant to a stipulation for consent
decree, which requires petitioner and Mr. Adkins to restore the
Angel-Royse Property and to plant cypress trees. The consent
decree enjoins petitioner and Mr. Adkins from further excavation
or dumping activities on the property.
The record contains no partnership tax returns or Schedules
K-1, Partner’s Share of Income, Credits, Deductions, etc., and
there is no evidence that any such returns or schedules were
filed or distributed.
OPINION
Respondent determined that the value of the 74 acres of the
Angel-Royse Property was $312,600, the value which was assessed
by Osceola County for the two parcels of acreage.39 Respondent
determined that Mr. McLaughlin’s interest had a fair market value
39
Osceola County assessed a value of $180,000 for the 40
acres acquired in early 1983 and assessed a value of $132,600 for
the 34 acres acquired on Oct. 26, 1983.
- 61 -
of $156,30040 and that petitioner realized a gain of $60,709 from
the exchange in 1986.41
Petitioner contends that he and Mr. McLaughlin were partners
in a partnership with respect to the properties, that the Angel-
Royse Property was distributed to him from the partnership, and
that this distribution did not result in the recognition of any
gain under section 731(a)(1).42 Respondent argues that section
731(a)(1) does not apply because: (1) There was no distribution
from a partnership to a partner; petitioner simply exchanged his
100-percent interest in the Arrowhead Lakes Subdivision lots for
Mr. McLaughlin’s 50-percent interest in the Angel-Royse Property;
and (2) no partnership existed.
In order for petitioner’s partnership argument to work, that
supposed partnership would have had to own both the Angel-Royse
40
Value of Mr. McLaughlin’s interest in the Angel-Royse
Property ($156,300) = fair market value of the Angel-Royse
Property ($312,600) x Mr. McLaughlin’s interest (50 percent).
41
Amount realized ($101,009) = value of Mr. McLaughlin’s
interest in the Angel-Royse Property ($156,300) + discharge by
Mr. McLaughlin of petitioner’s debt ($15,250) + assumption by Mr.
McLaughlin of real estate taxes ($1,251) - petitioner’s
assumption of Mr. McLaughlin’s share of the liabilities
associated with the Angel-Royse Property ($68,622) - property
taxes ($3,170). Gain on exchange ($60,709) = amount realized
($101,009) - basis ($40,300).
42
Sec. 731(a)(1) provides that in the case of a distribution
by a partnership to a partner “gain shall not be recognized to
such partner, except to the extent that any money distributed
exceeds the adjusted basis of such partner’s interest in the
partnership immediately before the distribution”.
- 62 -
Property and the Arrowhead Lakes Subdivision lots.43 However,
the form of ownership of the Arrowhead Lakes Subdivision lots was
clearly a trust and not a partnership. Moreover, petitioner
stipulated that he was the 100-percent beneficiary of the
Arrowhead lots held in trust by Mr. Miles, and he does not
dispute, and in fact incorporates, respondent’s requested finding
of fact that “Petitioner owned Lots 26, 27 and 28 in OR-2 (a.k.a.
Arrowhead Lakes Subdivision), which were held in trust by R.
Stephen Miles, Jr., Trustee.” Petitioner is bound by the form of
ownership expressed in the stipulation and demonstrated by the
record, and he cannot now argue that the Arrowhead lots were in
fact held by a partnership. We agree with respondent’s
characterization that petitioner exchanged his 100-percent
interest in the Arrowhead Lakes Subdivision lots for Mr.
McLaughlin’s 50-percent interest in the Angel-Royse Property and
that there was no distribution of those properties from any
partnership.44 We also agree that petitioner and Mr. McLaughlin
43
Mr. McLaughlin and petitioner testified that their
supposed partnership owned the Arrowhead Lakes Subdivision lots.
They testified that they were equal partners with respect to both
the Arrowhead Lakes Subdivision lots and the Angel-Royse
Property. Petitioner contends that the partnership was
terminated with the properties’ being distributed equally. He
claims that the properties exchanged were of equal value after
accounting for the environmental liabilities associated with the
Angel-Royse Property.
44
This finding is supported by a letter from Mr. Miles to
Mr. McLaughlin’s attorney; he states:
(continued...)
- 63 -
were not engaged in a partnership with respect to the Angel-Royse
Property.
A partnership is an organization for the production of
income to which each partner contributes one or both of the
ingredients of income, capital, or services. Commissioner v.
Culbertson, 337 U.S. 733, 740 (1949). In determining whether
there is a partnership, we consider the following factors:
The agreement of the parties and their conduct in
executing its terms; the contributions, if any, which
each party has made to the venture; the parties'
control over income and capital and the right of each
to make withdrawals; whether each party was a principal
and coproprietor, sharing a mutual proprietary interest
in the net profits and having an obligation to share
losses, or whether one party was the agent or employee
of the other, receiving for his services contingent
compensation in the form of a percentage of income;
whether business was conducted in the joint names of
the parties; whether the parties filed Federal
partnership returns or otherwise represented to
respondent or to persons with whom they dealt that they
were joint venturers; whether separate books of account
were maintained for the venture; and whether the
parties exercised mutual control over and assumed
mutual responsibilities for the enterprise. [Luna v.
Commissioner, 42 T.C. 1067, 1077-1078 (1964).]
In order for there to exist a partnership, the parties must
conduct some business activity. Madison Gas & Elec. Co. v.
44
(...continued)
I trust you will recall that Walter and Roger discussed
with you and I a settlement of the existing dispute
over the Royse-Angell property by an even exchange of
Walter’s interest in the Arrowhead Lakes property for
Roger’s interest in the Royse-Angell property. Walter
apparently feels that he can salvage the Angell-Royse
property and has directed me to proceed with the
proposed settlement. * * *
- 64 -
Commissioner, 633 F.2d 512, 514-517 (7th Cir. 1980), affg. 72
T.C. 521 (1979); Frazell v. Commissioner, 88 T.C. 1405, 1412
(1987); Cusick v. Commissioner, T.C. Memo. 1998-286. And, mere
coownership of property as tenants in common or otherwise does
not result in a partnership. See Bergford v. Commissioner, 12
F.3d 166, 169 (9th Cir. 1993), affg. Alhouse v. Commissioner,
T.C. Memo. 1991-652; Cusick v. Commissioner, supra. Petitioner
testified that when he initially invested in the acreage in the
Angel-Royse Property, it was “landlocked” and “it wasn’t
developable property.” He also testified that Mr. McLaughlin
held an adjoining tract of land that could provide access to the
property and that Mr. McLaughlin’s ownership of this tract
prompted their entering into a “partnership”. However, neither
petitioner nor Mr. McLaughlin testified as to any development
activity or plans for development on the Angel-Royse Property.
Neither testified regarding whether they had any expectation of a
profit from their activities and as to what kind of business
activity their partnership was to engage in; i.e., subdivision,
development, real estate sales, etc. There is substantial
evidence of record that the property was not the subject of any
business activity, and, indeed, the record indicates that
petitioner and Mr. McLaughlin were allowing the property to
waste.45 There is no evidence of any partnership returns’ having
45
Petitioner testified that Mr. McLaughlin “let a guy come
(continued...)
- 65 -
been filed or any Schedules’ K-1 having been issued to petitioner
or Mr. McLaughlin. Petitioner has submitted no evidence of any
partnership records, any partnership agreement, and he has not
provided any discussion regarding the operations of this supposed
partnership. The record shows that petitioner’s and Mr.
McLaughlin’s relationship with respect to the Angel-Royse
Property never rose above mere coownership. Petitioner has not
established that he and Mr. McLaughlin formed a partnership with
respect to the Angel-Royse Property, and we sustain respondent’s
determination that petitioner realized gain on the exchange of
properties.
8. Prather Ranch Property (OR-01)
FINDINGS OF FACT
In 1978, petitioner and Wayne Schoolfield sought to acquire
certain property owned by the Bank of Palm Beach and Trust Co.,
located in Orange County, Florida, which we refer to as the
“Prather Ranch Property”. Petitioner secured a contract with the
bank for the purchase of the property, and he then located other
45
(...continued)
in and cut all the trees on the property and start digging out
the dirt”, and that these operations resulted in considerable
environmental problems. The record also contains a letter from
Mr. Miles, in which he complains to petitioner and Mr. McLaughlin
that they had not paid their installments on the 1986 mortgages
associated with the property and that the mortgagees were
threatening foreclosure.
- 66 -
purchasers to facilitate its acquisition.46 On October 17, 1978,
the bank sold the Prather Ranch Property to Investors Realty of
Osceola, Inc., Agri-Land Corp., William L. Gibson, as trustee,47
Mr. Prewitt, as trustee, William R. Wright (i.e., petitioner), as
trustee,48 and Marlborough Investors, Inc. At the time of its
purchase, the Prather Ranch Property consisted of 1500-1600 acres
and was generally flat pasture with a creek running through the
property; the property was zoned agricultural.
In 1981, Mr. Gibson sold a portion of the property that he
held in trust to third parties. On June 7, 1985, Mr. Gibson
transferred the remaining property, which we refer to as “parcel
1”, to Mr. Miles, as trustee, for no consideration. Petitioner
was the beneficiary of a 100-percent interest in parcel 1.
In March 1983, Mr. Schoolfield, Max Hagen, and petitioner
entered into an agreement to trade and to purchase certain
parcels of the Prather Ranch Property.49 Pursuant to this
46
Mr. Schoolfield was interested in the front piece of the
property, and petitioner was interested in the back piece.
47
Petitioner was the beneficiary of the property interest
held in trust by Mr. Gibson.
48
Petitioner and Agri-Land Corp. were originally the
beneficiaries of 50-percent interests, respectively, in the
property held in trust by “Mr. Wright” (parcel 3). Agri-Land’s
interest in this parcel subsequently terminated.
49
According to petitioner, he ended up with a piece of the
Prather Ranch Property in its southeast corner; Mr. Schoolfield
owned a piece in front of petitioner’s, which had “good access”;
and Mr. Hagen owned a 400-acre piece south of Mr. Schoolfield’s.
(continued...)
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agreement, on April 22, 1982, Agri-Land conveyed its portion
(parcel 2) of the Prather Ranch Property to its shareholder, Mr.
Schoolfield, as trustee. On May 10, 1983, Mr. Schoolfield sold
parcel 2 to Mr. Hagen, as trustee, and Mr. Hagen, in turn, sold
it to Mr. Miles, as trustee, for $356,400. Petitioner was the
sole beneficiary of parcel 2. On May 10, 1983, Mr. Wright, as
trustee, conveyed parcel 3 to Mr. Miles, as trustee.
On September 5, 1986, Mr. Miles, as trustee, entered into a
contract with Maury L. Carter to sell parcels 1, 2, and 3 for
$1,731,000. Mr. Carter never saw an advertisement concerning the
sale of this property, and Mr. Carter initiated the sale
discussions with Mr. Miles. Pursuant to this contract, Mr.
49
(...continued)
Petitioner testified that Mr. Schoolfield was interested in
purchasing Mr. Hagen’s piece, and according to petitioner:
And as part of an accommodation for him to buy the
Hagen piece, I was going to buy his piece that was next
to my portion of this 1,500 acres. So that would leave
me with Wayne’s piece and my piece, but to accomplish
that--I didn’t have the cash to give Wayne for it--so
we went, both jointly, went and sat down and worked out
a deal with Mr. Hagen.
And the end result of the deal was that Mr. Hagen
would, out of his 400 acres, would trade 240 acres, I
believe it was, with Wayne. So he and Wayne did a
trade of 240 acres. That meant that Hagen owned the
240 acres next to my piece and, at the same time, then
Wayne purchased the remaining portion of the 400 acres
from Mr. Hagen that was down in Osceola County. The
240 acres that Mr. Hagen now owns, up in Orange County,
next to my piece, I purchased from him. I added to my
holding by purchasing the property from Mr. Hagen, that
he’d acquired from Wayne.
- 68 -
Miles, as trustee, sold parcel 1 for $120,000 on October 13,
1986. On May 13, 1987, Mr. Miles, as trustee, sold parcels 2 and
3 for $1,611,000.50 Petitioner realized a gain of $72,039 from
the sale of parcel 1 in 1986, and a gain of $823,079 from the
sale of parcels 2 and 3 in 1987. Petitioner did not report those
gains on his Forms 1040 for 1986 and 1987.
At the time of the sales of petitioner’s interests in the
Prather Ranch Property, the property was raw land with no
improvements or site development.
OPINION
The only issue with respect to the Prather Ranch Property is
whether petitioner realized capital gains on the sales of the
parcels in 1986 and 1987, or ordinary income. Respondent
determined that petitioner realized ordinary income.
In order for taxpayers to obtain preferential long-term
capital gains tax rates, the gain must arise from “the sale or
exchange of a capital asset”. Sec. 1222(3). The term “capital
asset” means “property held by the taxpayer (whether or not
connected with his trade or business)”, but does not include
“property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business”. Sec. 1221(1).
50
At the time of the sale, petitioner was the beneficiary of
a 90.689-percent interest in parcels 2 and 3, which interest was
held in trust by Mr. Miles.
- 69 -
In determining whether the gains that petitioner realized
from the sales of the three parcels of the Prather Ranch Property
were capital gains, we must ask three questions: (1) Was
petitioner engaged in a trade or business, and, if so, what
business?; (2) was petitioner holding the property primarily for
sale in that business?; (3) were the sales contemplated by
petitioner “ordinary” in the course of that business? Sanders v.
United States, 740 F.2d 886, 888-889 (11th Cir. 1984); Suburban
Realty Co. v. United States, 615 F.2d 171, 178 (5th Cir. 1980).51
The question whether property is held primarily for sale to
customers in the ordinary course of one’s business is “purely
factual”, Pritchett v. Commissioner, 63 T.C. 149, 162 (1974), and
51
The following factors are considered in answering those
questions:
(1) the nature and purpose of the acquisition of the
property and the duration of the ownership; (2) the
extent and nature of the taxpayer’s efforts to sell the
property; (3) the number, extent, continuity and
substantiality of the sales; (4) the extent of
subdividing, developing, and advertising to increase
sales; (5) the use of a business office for the sale of
the property; (6) the character and degree of
supervision or control exercised by the taxpayer over
any representative selling the property; and (7) the
time and effort the taxpayer habitually devoted to the
sales. [Sanders v. United States, 740 F.2d 886, 889
(11th Cir. 1984); United States v. Winthrop, 417 F.2d
905, 910 (5th Cir. 1969).]
The frequency and substantiality of sales is the most important
factor of those listed. Suburban Realty Co. v. United States,
615 F.2d 171, 176 (5th Cir. 1980); Biedenharn Realty Co. v.
United States, 526 F.2d 409, 416 (5th Cir. 1976); Hancock v.
Commissioner, T.C. Memo. 1999-336.
- 70 -
petitioner bears the burden of showing that the property was held
as a capital asset, Guardian Indus. Corp. & Subs. v.
Commissioner, 97 T.C. 308, 316 (1991), affd. without published
opinion 21 F.3d 427 (6th Cir. 1994). See also Pritchett v.
Commissioner, supra at 164 (“Petitioner has the burden of proving
that when he dealt with the parcels of land here involved he was
wearing the hat of an investor rather than that of a dealer.”).
Respondent argues that petitioner was in the business of
buying and selling real estate at the time of the sales, that
“petitioner agrees that he is not entitled to capital gain
treatment for any of the numerous properties which he sold [in
that business] during the years at issue”, and that he has failed
to meet his burden of demonstrating that he held the parcels as
an investor, rather than a dealer. Petitioner, on the other
hand, contends that he acquired the parcels with the intention of
holding them as long-term investments, that he did not develop
the parcels, did not advertise them for sale, did not attempt to
change the zoning of the property, and that it was Mr. Carter,
not petitioner, who initiated the discussions regarding the sales
of the parcels.
Petitioner stipulated that “Since the mid 1970s through the
present, the petitioner has been in the business of buying and
selling real estate and real estate development.” Nevertheless,
petitioner contends that his ordinary course of business is “the
- 71 -
purchase, platting, subdividing, rezoning, and improvement of
property”, and since petitioner merely purchased and sold the
parcels of the Prather Ranch Property, he cannot be said to have
sold the property in the ordinary course of his trade or
business. After examining the record, the stipulation provides
the proper characterization of petitioner’s business activity.
Petitioner was involved in real estate sales without development,
as well as real estate sales that involved varying degrees of
development. Indeed, there are several examples of record
wherein petitioner did not engage in development prior to sale
and did not make an immediate sale following purchase, and those
properties were sold as part of his real estate business. We
cannot find that the purchase and the sale of the Prather Ranch
Property were outside petitioner’s ordinary course of business.
However, we must decide whether the Prather Ranch Property was
held primarily for sale in that business.
The U.S. Supreme Court has defined “primarily” as used in
section 1221(1) to mean “principally” or “of first importance”.
Malat v. Riddell, 383 U.S. 569, 572 (1966). “It is, of course,
well established that even though petitioner is a dealer in land,
he still has the right to acquire land and hold it for investment
purposes.” Pritchett v. Commissioner, supra at 163; see also
Maddux Constr. Co. v. Commissioner, 54 T.C. 1278, 1286 (1970).
The taxpayer’s primary holding purpose must be determined by
- 72 -
reference to his purpose “at some point before he decided to make
the sale in dispute.” Suburban Realty Co. v. United States,
supra at 182; cf. Guardian Indus. Corp. & Subs., supra at 316.
At trial, petitioner testified that he viewed the Prather
Ranch Property as a “long-term situation from a retirement
standpoint”. Keeping in mind that it is petitioner’s burden to
show his entitlement to capital gains treatment, we are not
convinced that petitioner acquired the Prather Ranch Property as
a long-term investment.52 His purchase of this property was
similar in many respects to his acquisition of other properties
in his real estate business. Petitioner did not offer any
evidence showing that this property, when acquired, was
exceptional. The record reflects that like petitioner’s
acquisitions of other properties in the ordinary course of his
52
Petitioner also testified:
Q When you say--was that something--did you intend
to deal with that property as you deal with most of
your other properties?
A You’re meaning develop it and immediately sell it
and stuff like that?
Q Right.
A No.
We cannot accept petitioner’s testimony in and of itself that he
did not intend to resell the property on its acquisition.
Further, for reasons previously stated, we must reject
petitioner’s suggestion that his business was confined to the
development and immediate sale of properties. The record
suggests several properties were acquired, held for a
considerable length of time, and then sold without development.
- 73 -
real estate business, he intended to resell the acquired property
as soon as the circumstances permitted.53 We find, on the
record, and in the absence of proof to the contrary, that
petitioner acquired the property as part of his real estate
business. However, we must decide whether petitioner’s
motivation in holding the property for some time after its
acquisition changed to an investment purpose.
At trial, petitioner testified that he became interested in
putting cows on the Prather Ranch Property, that his “ultimate
plan” was to move cattle to that property for grazing, and that
he had a cattle guard54 installed. Petitioner’s testimony was
subjective and self-serving, and we cannot accept as true his
testimony that he “got in the cow business, because of this piece
of property”. Further, petitioner never moved any cattle to the
Prather Ranch Property,55 and, indeed, he testified that he had
53
We also note that the 1982-1983 series of trades and
purchases orchestrated by petitioner and Mr. Schoolfield are
highly indicative of a business acquisition. Through that series
of maneuvers, petitioner was able to acquire a parcel of property
with “good access” and we suspect a property with a higher
probability of resale under favorable circumstances.
54
A cattle guard is “a device consisting of a shallow ditch
across which ties or rails are laid far enough apart to prevent
livestock from crossing that is often used instead of a gate at a
fence opening”. Webster’s Third New International Dictionary 354
(1986). Petitioner testified that the cattle guard he installed
was a “huge concrete thing”, which cost $1,600 and weighed about
5,000 pounds.
55
Petitioner testified that as he was preparing to move
cattle to the Prather Ranch Property, Mr. Carter “came along and
(continued...)
- 74 -
moved the cattle to another piece of property, which according to
his testimony, was only 2 miles from his house.56 Other than the
cattle guard, petitioner presented no evidence of any preparation
of the property for cattle grazing or that the property was even
suitable for grazing. We cannot agree that petitioner’s
testimony alone establishes a change in his holding purpose to
investment. We hold that petitioner has not established his
entitlement to capital gains treatment.
55
(...continued)
made me an offer I couldn’t refuse.”
56
Petitioner testified in relevant part:
Well, what I had done was I had, in the course of
doing this, I had investigated with him -- I'd known
Mike [Partin] for years -- getting into the cow
business, with just the piece I had. And then I get
tied up with acquiring this other Hagen piece.
Meanwhile, I had already started buying cows from
Mike and we had a piece of property nearby that I moved
the cows to and put them on. Well, they, you know,
same thing, you start buying too many cows and they
start having babies and you're trying to keep them all
as best you can and so I ended up kind of with too
many.
But just about the time I was getting ready to --
I felt like I had enough cows -- to move up to this
piece of property, which was probably ten miles from my
house, where the other piece was probably two miles
from my house, that to get enough cows to put up there
on this piece of property, Mr. Maury Carter came along
and made me an offer I couldn't refuse. And by then I
was probably up to my eyeballs in something else and
was over my head in the cow business -- had more cows
that I could handle.
- 75 -
9. Citrus County Property
FINDINGS OF FACT
On September 7, 1977, petitioner through Ms. Allen, as
trustee, purchased real property in Citrus County, Florida, which
we refer to as the “Citrus County Property”, for $1,837.54. On
August 10, 1981, petitioner through Ms. Allen, as trustee,
transferred the Citrus County Property to Mr. Miles, as trustee.
Petitioner was the sole beneficiary of this property.
On July 2, 1982, Combank, the predecessors in interest of
Freedom Savings & Loan Association of Tampa, Inc. (Freedom), lent
$120,000 to Cramer, Hoffman & Haber, P.A. On July 2, 1982,
petitioner guaranteed the $120,000 promissory note and pledged
the Citrus County Property (sometimes referred to as property) as
collateral. In 1983, Freedom filed a mortgage foreclosure action
in the Circuit Court of Citrus County, Florida, Case No. 83-917-
CA (the foreclosure case) to foreclose its mortgage interest in
the property. On March 26, 1984, the parties in the foreclosure
case, including petitioner as guarantor, filed a Joint Motion and
Stipulation for Rendition of Final Judgment wherein they asked
the court to render a final judgment of foreclosure regarding the
property pursuant to certain conditions. Those conditions
included Freedom’s forbearance of its right to foreclose in
consideration for petitioner’s unconditional promise to perform
the terms of his guaranty and to make payments on the amounts due
- 76 -
Freedom. Petitioner also agreed that if those payments were not
made as scheduled, then Freedom could proceed with the
foreclosure. On October 11, 1985, Freedom filed a motion for
final judgment of foreclosure against the property averring that
the required payments had not been made in accordance with the
parties’ March 26, 1984, stipulation.57 On October 25, 1985,
pursuant to the stipulation, the court entered a Final Judgment
of Foreclosure. Pursuant to the judgment, the property was sold
and title was conveyed to the purchaser, Freedom, on November 25,
1985.
In 1983, Freedom filed a separate action in the Circuit
Court for Orange County, Florida, Case No. 83-12119 (the judgment
case), for judgment against petitioner and two other guarantors
of the loan to Cramer, Hoffman & Haber, P.A. On September 16,
1986, Freedom filed a Motion for Final Judgment against
petitioner seeking money judgment for the unpaid balance of the
note that he guaranteed. In a pleading that petitioner filed on
October 8, 1986, petitioner represented that the only issue in
the judgment case that remained was the value of the property
that had been sold pursuant to the prior foreclosure action in
Citrus County. On December 22, 1986, the Circuit Court for
Orange County rendered final judgment finding that petitioner
57
The Court’s final judgment recited that the outstanding
debt to Freedom consisted of $96,872.18 principal, together with
interest of $3,553.20 and attorney’s fees of $4,000.
- 77 -
should be given credit for the fair market value of the Citrus
County Property and found that the fair market value was $87,000.
The Circuit Court’s final judgment then determined that
petitioner owed a remaining $20,834 on his guaranty obligation.
On December 31, 1986, petitioner asked for rehearing claiming
that at the time of the foreclosure sale in 1985, the Citrus
County Property had a fair market value far in excess of $87,000.
Petitioner alleged that the Citrus County appraiser’s records
indicated a fair market value of $133,000 and that petitioner’s
testimony was that the property value was, at an “absolute
minimum”, at least $114,000. Based on petitioner’s averments,
the Circuit Court for Orange County granted a rehearing as to the
fair market value of the Citrus County Property. There is no
evidence that a rehearing ever occurred. The parties eventually
reached a settlement, and on October 28, 1987, Freedom filed a
Satisfaction of Judgment stating that the $20,834 had been fully
satisfied. Thus, petitioner’s remaining personal liability on
his guaranty was resolved approximately 2 years after the
foreclosure sale had become final.
Petitioner’s basis in the property at the time of the
foreclosure sale was $1,844.
OPINION
Respondent has raised as a new matter in his amendment to
answer an allegation that petitioner realized a gain of $112,156
- 78 -
from the foreclosure sale in 1985.58 Respondent agrees that he
bears the burden of proof on this issue under Rule 142(a).
The transfer of property in a foreclosure sale represents a
sale or exchange for tax purposes. Helvering v. Hammel, 311 U.S.
504 (1941); 2925 Briarpark, Ltd. v. Commissioner, 163 F.3d 313,
318 (5th Cir. 1999), affg. T.C. Memo. 1997-298; Cox v.
Commissioner, 68 F.3d 128, 133 (5th Cir. 1995), affg. T.C. Memo.
1994-189; Yarbro v. Commissioner, 737 F.2d 479, 485 (5th Cir.
1984), affg. T.C. Memo. 1982-675; Aizawa v. Commissioner, 99 T.C.
197, 198 (1992), affd. without published opinion 29 F.3d 630 (9th
Cir. 1994). Under section 1001(a), the amount of gain realized
from a sale or exchange is the excess of the amount realized over
the taxpayer’s adjusted basis in the property. In the case of
recourse debt, the amount realized from the transfer of property
in a foreclosure sale is the fair market value of the property on
the date of the sale. Frazier v. Commissioner, 111 T.C. 243, 245
(1998); Marcaccio v. Commissioner, T.C. Memo. 1995-174. The
amount realized from a sale or other disposition of property
includes the amount of liabilities from which the transferor is
discharged as a result of the sale or other disposition. 2925
Briarpark, Ltd. v. Commissioner, supra at 317; sec. 1.1001-
2(a)(1), Income Tax Regs. Any unpaid portion of the recourse
58
Respondent originally determined that petitioner realized
cancellation of indebtedness income. Respondent now concedes
this determination.
- 79 -
debt in excess of the fair market value of the property is not
used to calculate the amount realized from a sale under section
1001(b). See 2925 Briarpark, Ltd. v. Commissioner, supra at 318
n.2; Marcaccio v. Commissioner, supra.
Respondent contends that petitioner realized at least
$114,000 in the 1985 foreclosure sale of the Citrus County
Property. He relies upon petitioner’s position in the deficiency
judgment proceedings that the fair market value of that property
was at least $114,000 at the time of the foreclosure sale. We
cannot agree that respondent has established that the fair market
value of the Citrus County Property was at least $114,000 on the
date of the foreclosure sale. The Orange County Circuit Court
found that the Citrus County Property had a fair market value of
$87,000 at the time of the foreclosure sale. The court gave
petitioner credit for $87,000 and then entered a deficiency
judgment of $20,834 against petitioner, which represented
petitioner’s remaining personal liability as guarantor. Although
final judgment was stayed for the introduction of additional
evidence as to fair market value, no such evidence appears to
have been submitted, and, in any event, the parties settled the
matter and Freedom filed a Satisfaction of Judgment stating that
the $20,834 deficiency judgment had been satisfied. We find that
the fair market value on the date of the foreclosure sale was
$87,000, the amount determined by the Circuit Court.
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We must also reject petitioner’s argument that he is not
required to recognize gain from the foreclosure sale, because he
was not the borrower of the original loan proceeds and received
no benefit therefrom. Petitioner argues:
The law is clear that to realize gain based upon market
value of property transferred, the transfer must be in
consideration of the discharge or reduction of
indebtedness. This gain is not realized when the
indebtedness is based upon a guaranty and the taxpayer
received none of the loan proceeds.
Petitioner cites Landreth v. Commissioner, 50 T.C. 803 (1968);
Payne v. Commissioner, T.C. Memo. 1998-227, revd. on other
grounds 224 F.2d 415 (5th Cir. 2000); and Whitmer v.
Commissioner, T.C. Memo. 1996-83, in support of his position. We
find those cases distinguishable in that they dealt with
discharge of indebtedness income of a guarantor, not gain
realized from the sale of the guarantor’s property at a
foreclosure sale.
In Frazier v. Commissioner, supra at 248, we achieved parity
between the tax results to a party owning property sold in a
foreclosure sale and the tax results to the willing seller who
sells the property in an arm’s-length transaction to a willing
buyer, “neither being under compulsion to buy or sell and both
having reasonable knowledge of relevant facts.”59 Applying that
59
A foreclosure, like a voluntary sale, is a disposition
within the scope of the gain or loss provisions of sec. 1001.
See Helvering v. Hammel, 311 U.S. 504 (1941); 2925 Briarpark,
Ltd. v. Commissioner, 163 F.3d 313, 318 (5th Cir. 1999), affg.
(continued...)
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approach in this case, if petitioner sold the Citrus County
Property to a willing buyer for its fair market value of $87,000,
and then transferred the sale proceeds in partial satisfaction of
his personal liability as guarantor, he would have realized
$85,156 ($87,000 amount realized minus $1,844 basis). On the
facts presented, we hold that petitioner realized $85,156 on the
foreclosure sale to Freedom.
C. Miscellaneous Items of Schedule C Income
FINDINGS OF FACT
On February 6, 1985, petitioner deposited $37,500 into his
bank account with Freedom Savings & Loan Association. The record
contains a check of $37,500 from Orange Valley Real Estate
Exchange, Inc., to the order of Metro Realty Association. The
spreadsheets that petitioner used to complete his tax returns
list this amount under “Sales & Comm”. Petitioner reported this
amount as a part of his gross profit from his real estate
business on Schedule C of his 1985 return.
Petitioner received net commission income of $598 from
National Land Commissions in 1986.
On July 1, 1985, petitioner deposited checks from Crazy
Commandos of $250 for rent from June 15 to 30, 1985, and $500 for
rent from July 1 to 31, 1985. Petitioner also deposited $500 of
rent from Crazy Commandos into his Freedom account on September
59
(...continued)
T.C. Memo. 1997-298; Rev. Rul. 90-16, 1990-1 C.B. at 13.
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3, 1985. Petitioner received rents of $1,250 from Crazy
Commandos in 1985.
Petitioner received $400 in 1985 from the sale of 100 wax
myrtle trees.
OPINION
Gross income means all income from whatever source derived,
including compensation for services, commissions, gross income
derived from business, gains derived from dealings in property,
rents, etc. Sec. 61(a). Petitioner does not contest
respondent’s determinations in the notice of deficiency, his
requested findings of fact, or his arguments on brief with
respect to the amounts that petitioner received. Petitioner has
abandoned any arguments he may have made with respect to those
amounts. We hold that petitioner is taxable for the various
amounts described above as determined by respondent.
D. Schedule E Income
FINDINGS OF FACT
Petitioner owned stock in Frank’s Corner, Inc., an S
corporation. Frank’s Corner filed a Schedule K-1 (Form 1120S),
Shareholder’s Share of Income, Credits, Deductions, etc.,
relating to petitioner for 1987. The Schedule K-1 reported
ordinary income of $4,492 and a section 179 deduction of $604.
Petitioner did not report any income from Frank’s Corner on his
1987 return. Respondent determined that petitioner realized
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income of $3,888 ($4,492 - $604) in 1987, which should have been
reported on Schedule E, Supplemental Income and Loss (from rental
real estate, royalties, partnerships, S corporations, estates,
trusts, REMICs, etc.). On his 1988 return, petitioner reported a
loss of $4,702 from Frank’s Corner, which matches the loss
reported on the Schedule K-1 for that year.
OPINION
A shareholder in an S corporation must take into account, in
determining his tax, the shareholder’s pro rata share of the S
corporation’s “nonseparately computed income or loss”. Sec.
1366(a)(1)(B). Nonseparately computed income or loss means gross
income minus the deductions allowed to the corporation. Sec.
1366(a)(2). In other words, the taxpayer is responsible for his
distributive share of income realized by an S corporation in
which he is a shareholder. See Ishler v. Commissioner, T.C.
Memo. 2002-79.
Petitioner presents no challenge to respondent’s
determination, and he has therefore abandoned any arguments he
might have presented. We hold that petitioner realized Schedule
E income as determined by respondent and that petitioner should
have reported that amount on his 1987 return.
E. Unidentified Deposits
Bank deposits are prima facie evidence of income. DiLeo v.
Commissioner, 96 T.C. 858, 868 (1991), affd. 959 F.2d 16 (2d Cir.
- 84 -
1992). “Where the petitioner has failed to maintain adequate
records as to the amount and source of his income, and the
Commissioner has determined that the deposits are income, the
petitioner has the burden of showing that the determination is
incorrect”, Estate of Mason v. Commissioner, 64 T.C. 651, 657
(1975), affd. 566 F.2d 2 (6th Cir. 1977), and he must prove by a
preponderance of the evidence that the deposits came from a
nontaxable source, Rule 142(a); Kudo v. Commissioner, T.C. Memo.
1998-404, affd. 11 Fed. Appx. 864 (2001). All money deposited
into a taxpayer’s bank account is presumed to represent taxable
income, Price v. United States, 335 F.2d 671, 677 (5th Cir.
1964). Except where he bears the burden of proof, e.g., fraud,
the Commissioner need not prove a likely source of the unreported
income. Clayton v. Commissioner, 102 T.C. 632, 645 (1994);
Tokarski v. Commissioner, 87 T.C. at 77. Also, he is not
required to prove that all deposits made by the taxpayer are
income. Estate of Mason v. Commissioner, supra at 657; Gemma v.
Commissioner, 46 T.C. 821, 833 (1966).
1. Deposit on March 12, 1985, of $59,000
FINDINGS OF FACT
On March 4, 1985, a $70,000 check from Washington
International Bank & Trust Ltd. (Washington International), was
deposited into petitioner’s Freedom bank account (account No.
0110324809). Respondent did not determine that this deposit
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represented unreported income. On March 11, 1985, a check (No.
601) for $63,212.50 was drawn on petitioner’s Freedom account.
This check was payable to the order of “Freedom Financial Center”
and was endorsed by Ms. Allen. The account balance was reduced
from $64,775.80 to $1,563.30 as a result of this check.
On March 11, 1985, petitioner purchased a cashier’s check
for $59,000 from Freedom. Petitioner was listed as both the
remitter and the payee. On March 12, 1985, petitioner deposited
the proceeds of this check into his Tucker State Bank account.
Respondent determined that the $59,000 deposit was taxable as
income to petitioner for 1985.
OPINION
Petitioner contends that the March 12, 1985, deposit of
$59,000 was traceable to the $70,000 check from Washington
International and that respondent did not determine that the
proceeds of this check represented unreported income. Petitioner
argues that after the $70,000 check was deposited to his Freedom
account, Ms. Allen made a withdrawal of $63,212.50 in the form of
check No. 601 and used the proceeds to purchase the $59,000
cashier’s check payable to Mr. Medlin and deposited in his Tucker
bank account.
Petitioner did not question Ms. Allen at trial regarding her
endorsement on check No. 601 and whether she used that check to
purchase the $59,000 cashier’s check from Freedom. Petitioner
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could not establish at trial, and has not established on brief,
the appropriate link between the $59,000 deposit, the purchase of
the $59,000 cashier’s check, the $63,212.50 check signed by Ms.
Allen, and the $70,000 check from Washington International.
Petitioner has not explained why the cashier’s check and the
Tucker account deposit are for $59,000, while the check signed by
Ms. Allen is for $63,212.50, and where the $4,212.50 excess ended
up. His explanation at trial was for the most part confusing.
Petitioner claims that since check No. 601 caused a decrease
of $63,212.50 in his Freedom account and that since check No. 601
is payable to the order of “Freedom Financial Center”, the
proceeds of that check must have been used to purchase the
$59,000 cashier’s check from Freedom. Petitioner assumes too
much. He assumes that he and Ms. Allen did not have other
accounts with Freedom, that he and Ms. Allen did not engage in
other transactions with Freedom, and, most importantly, that
“Freedom Savings and Loan Association” is the same entity as
“Freedom Financial Center”.60 Petitioner assumes, but fails to
establish, those matters. In any event, petitioner’s claim fails
again to account for the $4,212.50 difference between the amount
of the cashier’s check and the amount of check No. 601.
60
At trial, petitioner cross-examined Revenue Agent Sherri
Blackton, but he failed to establish through that witness that
Freedom Savings & Loan Association was the same entity as Freedom
Financial Center. Indeed, Ms. Blackton testified that they might
be separate entities.
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Even if we were to assume that the deposit of $59,000 is
traceable to the $70,000 received from Washington International,
petitioner has not established that this is a nontaxable source
of income. Petitioner relies on the fact that respondent failed
to determine in the notice of deficiency that this amount
represented unreported income. However, this alone does not
establish an income source to be nontaxable. Respondent may have
had a wide range of valid reasons for not targeting this
particular item for an increased deficiency, including lack of
information and records. Those reasons do not indicate that the
source is a nontaxable one, especially given the particular
circumstances of this case where moneys are being moved around
through a variety of entities, individuals, transactions, and
trust accounts.
Petitioner claims that the $70,000 check from Washington
International was a loan, because “The evidence as to Washington
International was that it loaned money secured by real estate
(TR-412, 453).” At trial, John Kelly testified with respect to
petitioner’s Washington International account, i.e., the Cayman
Island account, that “it was basically a loan account. He would
pledge property as collateral, and they would advance him funds
against his property. And subsequently he would repay the loan
either from other funds or through sales of the property.” Mr.
Kelly also testified that “Mr. Medlin would transfer title to
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pieces of property--or a security interest in pieces of property
--not title--to the Cayman bank. The Cayman bank would then
advance him funds using the property as a security. Mr. Medlin
would then repay the loan in time.”
At best, John Kelly’s testimony provides a possible
explanation for what the $70,000 check represented. Petitioner
has offered no additional evidence or testimony to establish his
claim that the check was a loan. Importantly, he does not argue,
nor has he shown, that title to, or a security interest in,
property was ever transferred to Washington International for
what he purports to be $70,000 in loan proceeds. Mr. Kelly’s
testimony that Washington International and Mr. Medlin were
generally involved in loan transactions does not establish that
this amount was a loan. Indeed, his testimony was inconsistent
with petitioner’s testimony at trial that he used the Washington
International trust account as a vehicle for deferring income
from real estate sales. Petitioner has not established a link
between the unreported deposit and a nontaxable source of income.
We sustain respondent’s determination that the $59,000 deposit is
taxable as income to petitioner.
2. Deposit on September 16, 1986, of $84,521.63
FINDINGS OF FACT
On September 16, 1986, $84,521.63 was deposited into Mr.
Miles’s trust account. Ledger card No. 70042 for that trust
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account is entitled “Walter Medlin” and “Re $ Partin”.61 Lines 3
through 6 of that ledger card contain the following notations:
Date Name Memo Received Disbursed
9-16-86 Michael Bast Medlin/Partin $84,521.63 --
9-16-86 Natl. Land & Inv. Inc Medlin/Partin 1,000.00 --
9-18-86 Transferred to Partin
Sybil card -- -- $84,521.63
9-18-86 Transferred to Partin
Sybil card –- -- 1,000.00
Respondent determined that the deposit of $84,521.63 was taxable
as income to petitioner for 1986.
OPINION
Petitioner contends that he did not receive the benefit of
the deposit of $84,521.63 on September 16, 1986, that the amount
deposited related to a transaction between Michael Bast and Sybil
Partin that did not involve petitioner, that the entry on the
ledger card was a mistake, and that this mistake was corrected 2
days later with a transfer to the correct ledger card.
At trial, petitioner testified that he did not receive any
of the proceeds of the $84,521.63 deposit and that he had no
interest in the sale of property from Ms. Partin to Mr. Bast.
Petitioner testified that the entry on the Medlin/Partin ledger
card must have been a mistake:
And because of my relationship with Mike and
having a real estate license and being interested in
real estate as well as his cattle business, I kind of
61
This ledger card relates to ledger card No. 70043, which
has its title line partially cut off. The title line does show
“Partin”, “P.O. Box 521 Kissimmee, FL”, and lists the “Adverse
Party” as “Partin Property”.
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got first shot at buying a couple pieces of property.
And one of them was a Breckenridge piece that is
subject to this. I forget what the other piece was.
But because of my relationship with Mike, a couple
people had come to me. One of them was Mr.
Schoolfield. I believe he bought the parcel that Doc
Partin had gotten. I wasn’t interested in it.
And so Mike Bast had come to me and asked me if I
was trying to buy Sybil’s piece and/or if I could help
him buy it. And, basically, I, you know, told him I
wasn’t interested in it. I couldn’t--I had all I could
afford at the time. And, so I took him to Mike Partin
--they really knew each other--but I basically took him
to Mike Partin and said, Mike and Mike, why don’t you
all get together on Sybil’s behalf because Mike, Mr.
Mike Partin who was here, and his wife had been
handling his aunt’s, who is Sybil, handling all her
affairs and helping handle her cattle because she was a
widow. And I think she was the only sister in the
group, I believe, so she didn’t have any help. Anyway,
I kind of put the deal together for them, put the two
of them together, and recommended that Mike take Aunt
Sybil over to Steve Miles and have him do the closing
and so forth.
And, I think, because of my PR position in the
middle, dealmaker or whatever, it got put on one of my
cards by Alana, I think. Then, it appears, that a
couple days later, Mr. Miles--and again I’m guessing by
looking at this--had said, Wait a minute. This is not
Medlin’s deal. Start a card that says Sybil Partin and
transfer everything to Sybil Partin’s card. I’m
surmising this. I haven’t discussed this with Mr.
Miles. I’ve heard his testimony and Alana’s testimony
as to kind of how these things happen.
Mr. Miles referenced various checks accompanying ledger card No.
70042 and concluded that the references to “Partin” on that card
must refer to “Edward L. Partin”, known as “Geech Partin”, and
“Constance Partin”. Mr. Miles testified that the property
referred to in ledger card No. 70042 “was known or later
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developed as Anorada Subdivision”. Mr. Miles then testified
about the entries at issue:
Q Well, if you look at again 70042, you see this
Michael Bast payment of $84,521.
A Yes.
Q And then, the same amount, $84,521.63, was
transferred to, according to the notation there,
Partin, Sybil card. Do you see that?
A That’s correct.
Q And Partin, Sybil card is a card that you
apparently maintained for a Partin, Ms. Sybil Partin?
A Yes.
Q Was she also a client of yours that you performed
trustee activities for?
A I don’t know that we ever held anything in trust
for Sybil Partin. We just represented her in
connection with the transaction with Mr. Bast, I
believe.
Q Okay, So would it be fair to say that, from
looking at this, while Mr. Bast sent a check and it
originally got placed onto this card that relates to
Mr. Medlin, that the same amount of funds was then, two
days later, transferred over to the benefit of Sybil
Partin?
A Yes. And it looks like it was just a mistake in
putting it on this card to start with, because to my
knowledge Mr. Bast did not have anything to do with the
property that Mr. Medlin acquired from Geech and Connie
Partin. Mr. Bast bought property from Sybil Partin.
And there’s a lot of Partins in Osceola County.
And when this check came in, it probably just said
Partin on it, and Alana put it on here. I don’t know.
Did you all ask her about it when she was here?
Q No, I didn’t.
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A Oh. Okay. She could probably tell you better
than I could.
Q But that kind of a mistake would have been
corrected through the transfer that we see on there?
A That’s correct.
Q And that’s your memory of it now?
A I don’t have any memory of it. Just looking at
that and knowing the cast of characters, I think that’s
what happened.
Mike Partin, who was personally involved with the Sybil
Partin/Michael Bast transaction, also testified that petitioner
had no ownership interest in the property sold to Mr. Bast, that
Sybil Partin was the owner of the property, and that Mr. Bast was
the purchaser.
Although petitioner did not question Ms. Goodman regarding
the deposit entry and the purported correction, Ms. Goodman was
questioned generally about the ledger system she maintained. She
testified that the ledger system did not involve actual physical
transfers but was “simply a bookkeeping trace”. Ms. Goodman
testified that when a transfer was made to another ledger card,
“I would write, Moved, on the card that it came from, and I would
write either Received or Transferred from the card that it came
from.”
On the basis of the testimony offered at trial, we are
satisfied that petitioner did not have an ownership or other
interest in the property sold by Sybil Partin to Michael Bast and
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that the payment from Michael Bast was mistakenly entered on the
Medlin/Geech Partin ledger card, ledger card No. 70042. Although
petitioner’s testimony was, as a general matter, self-serving and
less than credible at trial, his testimony regarding his
involvement in the Sybil Partin/Michael Bast property transaction
was detailed and supported by the testimony of Mr. Miles and
Mike Partin. Given that petitioner lacked any discernible
interest in that transaction, petitioner’s contention that the
entry on ledger card No. 70042 was a mistake is supported by the
record. The ledger card shows a deposit of $84,521.63 followed 2
days later by a transfer in that same amount to the Sybil Partin
ledger card. Mr. Miles confirmed that these entries were
consistent with the procedures he and his bookkeeper followed
with respect to a mistaken entry. Ms. Goodman’s general
testimony establishes that the initial deposit of $84,521.63 was
indeed transferred to the Sybil Partin card given the notation
“Transferred to Partin Sybil card”. We hold that the $84,521.63
deposit is not income to petitioner.
3. Deposit on April 9, 1987, of $67,740
FINDINGS OF FACT
On April 9, 1987, petitioner deposited $67,740 into his
Tucker bank account No. 00018066.62 A memorandum dated October
62
The record contains a Tucker State Bank signature card,
which contains account information for account No. 00018066.
That record contains the signatures of petitioner and Ms. Allen,
(continued...)
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19, 1993, from Revenue Agent Sherri Blackton to Special Agent
Linda Ford states with respect to the source of this deposit:
At 12:35 p.m. today, Mr. Larry Blackwater of
Community First Bank of Winter Garden returned my call.
I explained that I had a question regarding a deposit
made to Mr. Medlin’s account number 18066 on April 9,
1987 in the amount of $67,740. The deposited item we
received in response to the summons previously issued
to the bank indicated the money was transferred from
another account. (#1089234) I explained that I needed
to identify the originating account owner. * * *
* * * * * * *
At 1:08 p.m. Mr. Blackwelder called to report that
the originating account belonged to Mr. Medlin and that
he thought we were provided with copies of the
statements, etc. to that account. He stated his
research indicated that a $90,000 check from Orlando
Land and Investment, less a $22,260 cashier’s check,
was deposited to account number 1089234. The $67,740
was then immediately transferred to account number
18066.
A “Transfer of Funds” statement by Tucker State Bank states: “On
the date indicated above [4/9/87], we made the following transfer
of funds between your accounts, according to your instructions
received by phone * * *. We have charged your account for this
transfer From 1089234 to 00018066.” The statement is to “Walter
L. Medlin” and shows an amount of “$67,740.00”.
Orlando Land & Investment Co. issued a check dated April 3,
1987, for $90,000, which is payable to the order of petitioner
and which contains the notation “FOR Loan”. A deposit ticket for
62
(...continued)
shows the type of account as a trust with a “separate agreement”,
and states an initial deposit of $67,740 having been made on
“4/8/87”.
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Mr. Medlin’s Tucker bank account No. 1089234 dated April 8, 1987,
shows the deposit of a check for $90,000 from “Orl. Land &
Investment”, “LESS CASHIERS CHECK in the amount of $22,260.00”;
this resulted in a net deposit of $67,740 to account No. 1089234.
On April 6, 1987, petitioner executed a promissory note for
the benefit of Don Henry and Sylvia Cohn, which provided:
90,000.00 4/6/1987
Ninty (90) days after date, the undersigned, for value
received jointly and severally promise to pay to the
order of Don Henry and/[illegible entry] Sylvia Cohn at
Orlando Fla. Ninty Thousand ($90,000) + Twenty
Thousand ($20,000) dollars with interest from date at
the rate of ----% per annum until fully paid. Interest
payable ----. This note shall bear interest from
maturity at the rate of ----% per annum until fully
paid.
The promissory note is signed by petitioner. Don Henry was the
president of Orlando Land & Investment Co.
Respondent determined that the deposit of $67,740 was
taxable as income to petitioner for 1987.
OPINION
Petitioner contends that the deposit of $67,740 on April 9,
1987, represents a portion of the loan proceeds received from Don
Henry of the Orlando Land & Investment Co.
Respondent agrees that “The source for the deposit was a
check for $90,000 from Orlando Land & Investment”. Accordingly,
the April 9, 1987, deposit is not unidentified as respondent
originally determined. Nevertheless, respondent argues that this
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check was not a loan from Don Henry and Sylvia Cohn. He argues
that the promissory note that petitioner relies upon shows Don
Henry and Sylvia Cohn as the obligees, not Orlando Land &
Investment Co., and that the check from that entity was not a
check from those obligees.
Since respondent has conceded the source of the formerly
unidentified deposit, we are concerned only with whether that was
a nontaxable source. We note that respondent did not determine
an increased deficiency based on the $90,000 check, although his
failure to do so is not conclusive, see supra. At trial,
petitioner testified that the deposit was attributable to
proceeds lent to him by Don Henry. Respondent concedes that Don
Henry was the president of Orlando Land & Investment Co., and we
have found that as fact. Although this fact alone does not
establish a connection between the check of $90,000 and the
promissory note of $90,000, we believe the evidence as a whole
shows a sufficient connection beyond mere coincidence. We hold
that the deposit of $67,740 is not taxable as income to
petitioner.
4. Deposit on July 8, 1988, of $140,000
FINDINGS OF FACT
On July 8, 1988, $140,000 was deposited into Mr. Miles’s law
firm’s trust account for petitioner. Ledger card No. 70269 for
that trust account is entitled “Walter Medlin”, “Prather Ranch
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Property”, and “see also Maury Carter”. Line 21 of the ledger
card contains the following information:
Date Name Memo Received
7-8-88 Walter Medlin Medlin/Prather $140,000
Line 22 of this same ledger card contains the following entry:
Date Name Memo Disbursed
7-12-88 moved to Medlin/Partin -- $97,893.78
7-13-88 moved to Medlin/Malfa (24,529.00 + 342.72) 24,871.72
7-13-88 moved to Medlin/general 17,234.50
Ledger card No. 70042, entitled “Walter Medlin” and “Re $
Partin”, contains the following entries on lines 10, 11, and 12,
which were related to the transfer to the ledger card noted in
line 13 below:
Line Date Name Memo Received Disbursed
10 7-12-88 Edward L. and
Constance A. Partin Medlin/Partin -- $89,615.96
11 7-12-88 Mike Partin Medlin/Partin -- 5,094.04
12 7-12-88 W.G. Boyd Medlin/Partin -- 3,183.78
13 7-12-88 Rec from Medlin/Prather -- $97,893.78 --
The record contains a Dean, Witter, Reynolds, Inc. (Dean
Witter), check (No. 69566) dated July 7, 1988, for $140,000,
which is payable to the order of the “Stephen Miles Trust
Account”. The stub to that check is signed as “RECD BY Richard
Margolis”. A deposit statement for the “Miles & Cumbie P.A.
Trust Account”, dated July 8, 1988, lists check “1-23” for
$140,000. This deposit statement was filled out by Alana
Goodman. Ms. Goodman was Mr. Miles’s bookkeeper, and she made
the entries into the ledger cards. Ms. Goodman matched the
- 98 -
number “1-23” listed on the deposit statement to the bank tracing
number “1-23” on the Dean Witter check.
Respondent determined that the deposit of $140,000 was
taxable as income to petitioner for 1988.
OPINION
Petitioner argues that the deposit on July 8, 1988, of
$140,000, was traceable to a loan from Richard Margolis, that the
loan proceeds were needed to make a mortgage payment on the
Partin property, and that “The loan was secured by being
structured as a sale and option to buy back from Margolis rather
than a mortgage to Margolis.” Respondent agrees that $97,893.78
was transferred from the Medlin/Prather Ranch ledger card to the
Medlin/Partin ledger card and that checks were written for the
Medlin/Partin property on that same date; however, respondent
disagrees that the deposit for $140,000 and the subsequent
transfers establish that a loan was made. We agree with
respondent.
We find that petitioner has established that the source of
the $140,000 deposit was the Dean Witter check of $140,000. That
check was dated July 7, 1988, the day before the unidentified
deposit to the Medlin/Prather Ranch Property card. Ms. Goodman
testified that she always used the bank tracing number for checks
when making deposits. As such, she was able to match the bank
tracing number on the Dean Witter check to the bank tracing
- 99 -
number of a check listed on a deposit statement for the Miles &
Cumbie P.A. Trust Account. The deposit statement is dated July
8, 1988, the check is in the amount of $140,000, and the deposit
slip was filled out by Ms. Goodman. Petitioner has shown that
the issuance of the $140,000 Dean Witter check on July 7, 1988,
the deposit of $140,000 to Mr. Miles’s law firm’s trust account
on July 8, 1988, and the deposit entry of $140,000 on the
Medlin/Prather Ranch Property ledger card were more than mere
coincidences and that the source of the deposit entry was the
Dean Witter check. Nevertheless, petitioner has not shown that
the Dean Witter check was a loan; i.e., that the check was a
nontaxable source of income. See Polidori v. Commissioner, T.C.
Memo. 1996-514.
At trial, petitioner testified that he needed to make a
mortgage payment on what petitioner refers to as the Partin
property, that he called Richard Margolis up and told him he
needed some money, and that Mr. Margolis lent him the $140,000 at
issue. Petitioner testified that Mr. Margolis’s representative
recommended:
rather than do a mortgage, have me deed them the
property, or deed or convey them the beneficial
interest in the property, if I only held the beneficial
interest, and then give me an option to buy it back at
this continually accelerating price, which was
reflective of the interest rate. And that’s what
happened here.
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Petitioner claims that this recommendation was followed and that
the property he put up as collateral was the Partin property.
Petitioner also testified that he used some of the proceeds from
the Margolis “loan” to make his mortgage payment, and he also
described the various ledger entries:
Q Okay. And did you use some of the proceeds of the
$140,000 loan, after you had conveyed the property to
Mr. Margolis, to make a payment on that very property,
on the mortgage already existing on that very property?
A Yes, sir.
Q And is that reflected in 70042 ledger card of 93-
R?
A Yes, sir, but you sort of have to go back to
70501. And you can see where a portion on the next
line from the entry of the $140,000--you can see on
line 22, it says, 7/12/88, moved to Medlin/Partin,
$97,893.78.
And then you go to the--as Mrs. Goodman explained,
that was her way of getting the money out of, in this
case off the Prather Ranch card onto the Partin card.
So, I guess kind of an attempt to, all this gets very
confusing and we probably should have, somebody should
have done better--I didn’t keep these cards. They may
have been in worse shape. But just trying to keep
track of this stuff. But in this case, she moved it.
The $140,000 probably should have been put on the
Partin card to begin with. And it had nothing to do
with the Prather Ranch. But she put it there and we’ve
seen it before, and we’ll probably see it again, where
she put stuff on the wrong card. But it’s not the end
of the world. It’s correctable. She makes an entry
and says, I’m moving this over to the Partin card. It
was moved to the Partin card on line 13, same date
7/12/88, and it says, Received from Medlin/Prather
97,893.78.
Q And did you then use that to make a payment out?
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A Yes, sir.
Q Does that show there?
A Yes, sir. Those are reflected in the columns
above, 10, 11, and 12.
Q So then the source of this $140,000 unknown
deposit on ledger card 70501, on 93-R, is the loan from
Mr. Margolis?
A Yes, sir.
Unlike petitioner’s testimony with respect to the deposit of
$84,521.63 on September 16, 1986, petitioner’s testimony with
respect to this deposit cannot be substantiated with the
testimony of other witnesses or with evidence of record.
Petitioner did not call Richard Margolis to testify, and he did
not submit any evidence or documentation to show that the
$140,000 Dean Witter check was a loan from Mr. Margolis.63
Accordingly, we find petitioner’s testimony to be self-serving
and of no assistance to him.
Petitioner expends considerable effort to establish that on
July 12, 1988, $97,893.78 was transferred from the Medlin/Prather
Ranch Property ledger card (no. 70501) to the Medlin/Partin
ledger card (no. 70042), and that on that same date, $97,893.78
was disbursed to Edward L. and Constance Partin, Mike Partin, and
63
Petitioner cites the testimony of Revenue Agent Sherri
Blackton that petitioner would at times borrow funds which were
secured by giving a deed to the property with an option to buy
the property back. However, this does not establish that
petitioner engaged in this type of transaction with Richard
Margolis on this particular occasion.
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W.G. Boyd from the Medlin/Partin ledger card. However, this has
little relevance in determining whether the $140,000 Dean Witter
check was a nontaxable source of income; i.e., a loan. Moreover,
the considerable difference between the amount of the Dean Witter
check, $140,000, and the total amount of the disbursements,
$97,893.78, contradicts petitioner’s testimony that the purpose
of the loan was to make a mortgage payment.64
Also, we are not inclined to accept petitioner’s testimony
that the entries on the Medlin/Prather Ranch Property ledger card
were mistaken entries by Ms. Goodman that were subsequently
corrected. Unlike the deposit in 1986, which we held was
attributable to a mistaken entry, the entry on the ledger card at
issue here was not simply corrected with a transfer in an
equivalent amount to another card. Instead, there were three
offsetting entries: (1) A transfer to the Medlin/Partin ledger
card on July 12, 1988, of $97,893.78; (2) a transfer to the
Medlin/Malfa card on July 13, 1988, of $24,871.72; and (3) a
transfer to the Medlin/general ledger card on July 13, 1988, of
$17,234.50. We cannot conclude that the deposit entry on the
Medlin/Prather Ranch Property was necessarily a mistake and that
the $140,000 should have been transferred to the Medlin/Partin
64
And, indeed, it could indicate that the transaction was in
fact a sale of the property. Proceeds from a sale of property
would not be a nontaxable source of income.
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ledger card. We sustain respondent’s determination that the
$140,000 deposit represents taxable income to petitioner.
5. Other Deposits
FINDINGS OF FACT
On May 6, 1986, petitioner deposited $300 into his Freedom
account. On August 1, 1986, a deposit of $9,038.47 was made to
Mr. Miles’s law firm’s trust account. On October 10, 1986, $300
was deposited into Mr. Miles’s law firm’s trust account for
petitioner. Respondent determined that those deposits were
taxable as income to petitioner.
OPINION
Petitioner does not discuss on brief the deposit of $300 on
May 6, 1986. We find that he received that item as income.
In respondent’s reply brief, he concedes that the deposit of
$9,038.47 on August 1, 1986, to Mr. Miles’s law firm’s trust
account was not income to petitioner.
Petitioner does not discuss on brief the deposit of $300 on
October 10, 1986. We find that he received that item as income.
F. Deductions Claimed by Petitioner
1. Schedule C Real Estate Business Deductions
FINDINGS OF FACT
Petitioner claimed deductions on the Schedules C for his
real estate business on his returns for 1985 through 1988. Those
deductions were claimed on the basis of the spreadsheets that
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petitioner prepared for the deposits and disbursements from his
personal bank accounts. Petitioner’s spreadsheets classified the
various disbursements as expenditures for automobiles, dues and
subscriptions, office, telephone, utilities, interest,
maintenance and repair, travel and entertainment, licenses and
taxes, commissions paid, insurance, and miscellaneous. Those
disbursements were then claimed on the Schedules C as deductions
from the gross income he reported for his real estate business.
Respondent reconstructed petitioner’s expenses from buying and
selling real estate for 1985 through 1988. See appendix A. In
reconstructing petitioner’s expenses, respondent disallowed many
of the deductions petitioner claimed for a failure to
substantiate or a failure to show an ordinary and necessary
business expense for purposes of section 162. Respondent allowed
deductions for petitioner’s real estate business in much larger
amounts than petitioner originally claimed on his returns.65
OPINION
Petitioner did not present any evidence that respondent
erred in reconstructing his Schedules C real estate expenses.
Petitioner does not present any arguments on brief relating to
his Schedules C real estate expenses or respondent’s
65
Of course, it is likely that many of these expenses were
related to properties that petitioner sold but failed to report.
We point out that the largest items of additional expense
deductions are interest and taxes which appear to be linked to
properties which petitioner sold as part of his real estate
business.
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reconstruction of those expenses. Petitioner’s only argument
relates to certain deductions he claims for alleged expenses from
his orange grove, cattle, and Ferrari automobile collection
activities. We hold that petitioner has conceded any arguments
relating to respondent’s reconstruction of the allowable expenses
for his real estate business.
2. Personal Residence Interest
FINDINGS OF FACT
On August 31, 1981, petitioner purchased his personal
residence in Osceola County, Kissimmee, Florida, from Walter E.
and Maxine J. Melitshka.66 Petitioner borrowed certain amounts
from the Melitshkas for the purchase of this residence. The
amount of the loan, the interest rate, the repayment terms for
the loan, and the actual amount of interest petitioner paid
during tax years 1985, 1986, 1987, and 1988 were not established
on the record.
OPINION
Respondent determined that petitioner was entitled to
deductions for mortgage interest paid on his personal residence
of $24,957, $0, $41,759, and $16,249 for 1985, 1986, 1987, and
1988, respectively. Petitioner does not challenge those
determinations on brief, and, accordingly, he has conceded the
66
The residence was originally titled in the name of Mr.
Miles, as trustee; however, on Aug. 10, 1990, Mr. Miles conveyed
title to the residence to petitioner.
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matter. We sustain respondent’s determination of the allowable
mortgage interest expenses.
3. Orange Grove, Cattle, and Ferrari Activities
FINDINGS OF FACT
Petitioner had an orange grove of approximately 800 trees
near his personal residence, which covered approximately 17 to 18
acres. When petitioner moved to his personal residence in or
about 1981, the orange grove was old with at least a portion of
it having been planted in the 1920s. Petitioner was not in the
growing business, and he allowed the orange grove to deteriorate.
After a bad freeze in 1985, petitioner let the orange grove
go for a year without spraying it (without putting any herbicide
or fertilizer on the trees). Petitioner replaced a considerable
number of old trees and dead trees with 690 new trees. The
orange grove had an irrigation system which needed repairs, and
the orange grove required fertilizer and herbicide treatment.
Petitioner paid $10,000 on June 22, 1987, and $6,371.53 on June
1, 1988, to Irrigation Engineers for certain irrigation work done
on petitioner’s orange grove. Petitioner did not maintain any
books or records for the orange grove, except for his checkbook.
Petitioner has never made a profit from selling oranges.
Petitioner also owned cattle during the tax years at issue.
Petitioner was advised by Michael Partin, a rancher, that the
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cattle business could be profitable.67 Petitioner purchased a
herd of purebred Brahman cattle from Mr. Partin in or about 1982
or 1983. Most of the cattle were midage to older-age cattle, and
a few were 1-2 year-old heifers. Petitioner joined the American
Brahman Beef Association and registered a brand.
In 1989, petitioner returned the cattle back to Mr. Partin.
The market for cattle at this time was not good. When Mr. Partin
took the cattle back in 1989, the cattle were in good condition.
Mr. Partin sold the cattle off over time.
Petitioner owned approximately 25 Ferrari automobiles in
1985 to 1988. He did not sell any of the Ferraris in 1985
through 1988. The Ferraris were damaged by vandals, and
petitioner went to a dealer to get the damages repaired.
Petitioner also had alternators replaced, carburetors cleaned
out, and timing belts changed, etc. Petitioner was a member of
the Ferrari Club of America.
Petitioner did not maintain separate bank accounts for the
orange grove, the cattle, or the Ferraris. Petitioner did not
report any business activities relating to the orange grove, the
cattle, or the Ferraris on any income tax returns for the
relevant tax years. To the extent petitioner did report any
67
Mr. Partin testified that “the Brahman business was really
good. We had good foreign sales, good domestic sales. And I
just told him that I thought it would be a good business for him
to get into. He had some land he could put some cattle on.” He
also testified that “we were selling our yearling bulls for
$1,500 apiece and our heifers for about the same price.”
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expenses with respect to those activities, he reported them on
the Schedules C for his real estate business.
OPINION
Petitioner claims that he is entitled to deductions for 1985
through 1988, which relate to expenses incurred with respect to
his orange grove, his cattle, and his collection of Ferrari
automobiles.68 Respondent argues that petitioner was not engaged
in a trade or business with respect to those activities and that
petitioner has failed to substantiate the expenses he claims.
It is well established that “‘an income tax deduction is a
matter of legislative grace and that the burden of clearly
showing the right to the claimed deduction is on the taxpayer.’”
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) (quoting
Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593
(1943)). It is also the taxpayer’s burden to show that the
particular expense is currently deductible and is not a capital
68
Petitioner claims that he reported the expenses relating
to his orange grove, cattle, and Ferrari activities on his
returns for 1985 through 1988. The civil report that respondent
prepared indicates that petitioner claimed expenses for those
activities. However, we are unable to determine from the
spreadsheets and petitioner’s returns to what extent he claimed
expenses for those activities, since the expenses are
intermingled with expenses for other activities. Further, we are
unable to determine whether any expenses, if identifiable, were
in fact incurred in the activities that petitioner claims. Also,
it appears from petitioner’s supplement to petition that he is
claiming expenses in greater amounts than the expenses claimed on
his returns.
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expenditure which is amortized or depreciated over time. See id.
at 83-84.
Section 162(a) allows as a deduction all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business. Conversely, section 262(a)
disallows any deduction, except as otherwise expressly provided
in the Code, for personal, living, or family expenses. And,
section 263(a) disallows a current deduction for any capital
expenditure; i.e., an amount paid out for new buildings or for
permanent improvements or betterments made to increase the value
of any property or estate. See id. To qualify for a deduction
under section 162(a), an item must: (1) Be paid or incurred
during the taxable year, (2) be for carrying on any trade or
business, (3) be an expense, (4) be a necessary expense, and (5)
be an ordinary expense. Commissioner v. Lincoln Sav. & Loan
Association, 403 U.S. 345, 352 (1971). We are primarily
concerned here with the second requirement; i.e., whether
petitioner incurred the expenses while carrying on a trade or
business.
“[T]o be engaged in a trade or business, the taxpayer must
be involved in the activity with continuity and regularity and
that the taxpayer’s primary purpose for engaging in the activity
must be for income or profit. A sporadic activity, a hobby, or
an amusement diversion does not qualify.” Commissioner v.
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Groetzinger, 480 U.S. 23, 35 (1987). The taxpayer’s expectation
of profit need not be reasonable; however, a good faith
expectation of profit is required. Burger v. Commissioner, 809
F.2d 355, 358 (7th Cir. 1987), affg. T.C. Memo. 1985-523; Golanty
v. Commissioner, 72 T.C. 411, 425-426 (1979), affd. without
published opinion 647 F.2d 170 (9th Cir. 1981). All the facts
and circumstances must be considered, and more weight is given to
objective facts than to the taxpayer’s statement of his intent.
Engdahl v. Commissioner, 72 T.C. 659, 666 (1979).
In determining whether petitioner possessed the requisite
profit motive under section 162(a), we look to the factors set
forth in section 183. Osteen v. Commissioner, 62 F.3d 356, 358
(11th Cir. 1995), affg. in part and revg. in part T.C. Memo.
1993-519. The regulations promulgated under section 183, section
1.183-2(b), Income Tax Regs., set forth a nonexclusive list of
factors, which include: (1) The manner in which the taxpayer
carried on the activity; (2) the expertise of the taxpayer or his
advisers; (3) the time and effort expended by the taxpayer in
carrying on the activity; (4) the expectation that assets used in
the activity may appreciate in value; (5) the success of the
taxpayer in carrying on similar or dissimilar activities; (6) the
taxpayer’s history of income or losses with respect to the
activity; (7) the amount of occasional profits, if any, which are
earned; (8) the financial status of the taxpayer; and (9) the
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presence of elements of personal pleasure or recreation. See
Nichols v. Commissioner, T.C. Memo. 1990-546. None of these
factors alone is necessarily controlling, nor is any mathematical
preponderance of factors determinative. Osteen v. Commissioner,
supra at 358. Petitioner bears the burden of proving the
requisite profit motive. Allen v. Commissioner, 72 T.C. 28, 34
(1979).
During the tax years at issue petitioner did not realize a
profit on the orange grove, and he did not receive any income
attributable to that activity.69 At trial, petitioner did not
know how many crates of oranges he produced from the orange grove
during the years at issue, and he could only testify that it
“seems like ‘87, I sold a few oranges.” Petitioner did not know
how much fruit he had picked. Petitioner also testified:
Q Did you do it hoping you would make money
eventually?
A Oh, yes. And I eventually will. I’ve been hit a
couple of hard times by the freeze. And, particularly,
the time that we have in question, the irrigation
system was a mess and I had to bring in Mrs. Ray’s
husband and they came in and straightened it out.
There was a problem with the pump. I had to replace
the pump just to get it up and going.
But, unfortunately, what happens though, is I kind
of get it up and going and either a freeze came along,
like in ‘85, and just about killing everything. That
set me back for a couple years.
69
A history of unexplained losses over an extended period is
persuasive evidence of the absence of a profit motivation,
especially where the taxpayer has substantial independent sources
of income. Allen v. Commissioner, 72 T.C. 28, 34 (1979).
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On the basis of petitioner’s testimony, we cannot agree that
petitioner incurred his expenses while carrying on a trade or
business. At best, petitioner in 1985-1988 had an aspiration
that one day the orange grove would be capable of producing fruit
and that the fruit could be sold as part of an ongoing trade or
business.70 Indeed, from petitioner’s testimony, it is clear
that his aspirations have not changed at the time of the trial in
this case, some 13 years later.
The fact that an activity has recreational aspects is an
important factor in determining whether petitioner has the
requisite profit motivation. See Nichols v. Commissioner, supra;
sec. 1.183-2(b)(9), Income Tax Regs. Although cattle, unlike
horses, and an orange grove are not activities which one might
think of as providing the type of personal pleasure or
gratification that might supplant a profit motivation, see Allen
v. Commissioner, supra at 36, at trial, petitioner testified:
The grove really went downhill. I bought it and
I’m not in the growing business--I was out there
chasing cows--and gradually I figured out, similar to
the cow situation, you can’t afford to be in the cow
business unless you own the land. And I owned a large
piece of land that I was already buying and talked to
Mike Partin and he said if you can’t make enough out of
the cows to pay for the land--but cows can be a good
investment and I enjoy the animals.
70
Similarly, petitioner testified with respect to his
claimed cattle business that “Basically, I never got up to the
point that I was really producing stock, and so forth, that I
would be selling into it and know myself.”
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Same way with the orange grove. I was setting
there with the orange grove, paying for my house
anyway, and so it was suggested to me, Why are you
letting the grove go to hell. And so then I started
fixing it up which--probably, very little fruit came
off in the beginning because, like I say, I wasn’t
paying any attention to it. I just thought, well, gee,
nobody makes money off groves, but if you already own
the grove and you can buy a tractor and buy a sprayer
and stuff like this--I always bought used equipment,
and you can see in all the repair things, I had to fix
up old tractors and discs and sprayers and stuff--
[Emphasis added.]
Mr. Partin also testified that, prior to petitioner’s purchase of
the cattle; “He loved the cattle. He’d come--he’d be at my place
off and on, and you know, he just loved the cattle. And we
thought, you know, with his love of the cattle, that’s what it
takes to be in the cattle business.” And, certainly, it is
beyond doubt that the Ferrari automobile has an inherent pleasure
quality, and petitioner has not presented any evidence to suggest
otherwise. Elements of personal pleasure do not alone negate a
profit motivation, see Burger v. Commissioner, supra at 360;
McCarthy v. Commissioner, T.C. Memo. 2000-135; however, on the
record before us we find considerable evidence that the
activities were engaged in for hobby and as a personal diversion.
Petitioner did not maintain any books or records for any of
these purported businesses, and his only method of bookkeeping
with respect to the orange grove and cattle business was his
“checkbook”. The lack of a bookkeeping system such that the
taxpayer could not monitor expenses or losses and could not make
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informed business decisions is persuasive evidence that the
business activity was not engaged in for profit. Burger v.
Commissioner, 809 F.2d at 359. Further, with respect to the
cattle and the orange grove, the record and petitioner’s
testimony show that he had a very primitive expertise in those
activities. For example, even though petitioner noted the
importance of the age of cattle as an “economic factor” in their
“economic production”, he could not testify from personal
knowledge regarding the age of the cattle he acquired from Mr.
Partin. This indicates to us a lack of a bona fide profit
motivation.
Petitioner did not provide evidence of the amount of time
that he devoted to the particular activities during the tax years
at issue, or any evidence that he was required to withdraw from
his real estate business to devote more time to any of those
activities. See McCarthy v. Commissioner, supra; sec. 1.183-
2(b)(3), Income Tax Regs. On the record before us, we find that
petitioner was not engaged in a trade or business with respect to
the orange grove, cattle, and Ferrari activities.
Taxpayers must substantiate any expenses which they claim as
deductions. See Hradesky v. Commissioner, 65 T.C. 87, 89-90
(1975), affd. 540 F.2d 821 (5th Cir. 1976); Tarakci v.
Commissioner, T.C. Memo. 2000-358.71 Further, to be an
71
Sec. 274(d) provides for more stringent substantiation
(continued...)
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“ordinary” expense under section 162, the expense must arise from
a transaction that is “of common or frequent occurrence in the
type of business involved.” Deputy v. du Pont, 308 U.S. 488, 495
(1940); Tarakci v. Commissioner, supra.
There is no dispute in this case that petitioner was engaged
in orange grove, cattle, and Ferrari activities. There is also
no dispute, we think, that those activities are such that
expenses arise in their normal course.72 As petitioner states
with respect to his cattle, “he’s got to eat”. However, to
substantiate his expenses for those activities, petitioner has
simply provided a bundle of receipts and a listing of expenses.
Most of those receipts and the listing do not show for what
purpose the expenses were made. Those items do not foreclose
that the expenses incurred were personal expenses unrelated to
the activities that petitioner claims deductions for or that the
71
(...continued)
requirements with respect to “any traveling expense (including
meals and lodging while away from home)”, “for any item with
respect to an activity which is of a type generally considered to
constitute entertainment, amusement, or recreation, or with
respect to a facility used in connection with such an activity”,
and for any expenses relating to passenger automobiles or any
other property used as a means of transportation. See secs.
274(d)(4), 280F(d)(4). We note that several of the expenses that
petitioner claims as a deduction, he categorizes as “Automobiles”
and “Meals & Entertainment”. Also, he claims expenses relating
to his collection of Ferraris.
72
At trial, petitioner testified with respect to his cattle
activity that he incurred expenses for 50-pound mineral blocks,
hay, and health supplies such as injections, insect sprays, “and
stuff”. Petitioner’s testimony regarding those expenses was
general and not specific.
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expenses are such that they are required to be capitalized.
Petitioner has not provided further substantiation of those
items, and he has not provided evidence which would permit us to
conclude that those particular expenses were of frequent and
common occurrence in the petitioner’s purported business
activity. With that being said, petitioner has not met his
burden of substantiation or proved his entitlement to current
deductions under section 162(a). We hold that the claimed
expenses are not allowable as ordinary and necessary business
deductions.
G. Self-employment Tax
FINDINGS OF FACT
Petitioner reported self-employment tax of $930, $509,
$5,387, and $2,371, on his Forms 1040 for 1985, 1986, 1987, and
1988, respectively. Those amounts were computed on the basis of
petitioner’s net profits, which he reported from his real estate
business: Net profits of $7,882, $4,138, $44,219, and $18,208,
for 1985, 1986, 1987, and 1988, respectively.
OPINION
Section 1401 imposes a percentage tax on self-employment
income of every individual. See Baker v. Commissioner, T.C.
Memo. 2001-283. Self-employment income is defined as “the net
earnings from self-employment derived by an individual * * *
during any taxable year”. Sec. 1402(b). The term “net earnings
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from self-employment” is defined as “the gross income derived by
an individual from any trade or business carried on by such
individual, less the deductions * * * which are attributable to
such trade or business”. Sec. 1402(a).
Respondent determined self-employment taxes on the basis of
petitioner’s income from his real estate business. The
applicable percentage for each of the tax years at issue was
applied to the maximum amount of self-employment earnings subject
to self-employment tax: $39,600 in 1985, $42,000 in 1986,
$43,800 in 1987, and $45,000 in 1988. See sec. 1402(b)(1).
Respondent determined petitioner’s self-employment tax liability
to be $4,67373 for 1985, $5,16674 for 1986, $5,38775 for 1987, and
$5,85976 for 1988.
Petitioner was engaged in the trade or business of buying
and selling real estate during the years at issue. He does not
contest on brief that his earnings from that business are subject
to self-employment taxes. Therefore, we sustain respondent’s
73
Self-employment tax ($4,673) = Maximum amount subject to
self-employment tax ($39,600) x Applicable percentage (.118).
74
Self-employment tax ($5,166) = Maximum amount subject to
self-employment tax ($42,000) x Applicable percentage (.123).
75
Self-employment tax ($5,387) = Maximum amount subject to
self-employment tax ($43,800) x Applicable percentage (.123).
76
Self-employment tax ($5,859) = Maximum amount subject to
self-employment tax ($45,000) x Applicable percentage (.1302).
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determination regarding the application of the self-employment
tax to petitioner’s net earnings and the amounts he determined.
II. Additions to Tax for Fraud
Respondent determined additions to tax under section 6653(b)
for petitioner’s 1985, 1986, 1987, and 1988 tax years. Section
6653(b), in effect for the tax years at issue, provided for
additions to tax for underpayments of tax which are attributable
to fraud. Section 6653(b)(1) and (2), in effect for petitioner’s
1985 tax year provided:
SEC. 6653(b). Fraud.--
(1) In general.--If any part of any underpayment
* * * of tax required to be shown on a return is due to
fraud, there shall be added to the tax an amount equal
to 50 percent of the underpayment.
(2) Additional amount for portion attributable to
fraud.--There shall be added to the tax (in addition to
the amount determined under paragraph (1)) an amount
equal to 50 percent of the interest payable under
section 6601--
(A) with respect to the portion of the
underpayment described in paragraph (1) which is
attributable to fraud, and
(B) for the period beginning on the last day
prescribed by law for payment of such underpayment
(determined without regard to any extension) and
ending on the date of the assessment of the tax
(or, if earlier, the date of the payment of the
tax).
Section 6653(b)(1) and (2), in effect for 1986 and 1987,
provided:
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SEC. 6653(b). Fraud.--
(1) In general.--If any part of any underpayment
* * * of tax required to be shown on a return is due to
fraud, there shall be added to the tax an amount equal
to the sum of--
(A) 75 percent of the portion of the
underpayment which is attributable to fraud, and
(B) an amount equal to 50 percent of the
interest payable under section 6601 with respect
to such portion for the period beginning on the
last day prescribed by law for payment of such
underpayment (determined without regard to any
extension) and ending on the date of the
assessment of the tax or, if earlier, the date of
the payment of the tax.
(2) Determination of portion attributable to
fraud.--If the Secretary establishes that any portion
of an underpayment is attributable to fraud, the entire
underpayment shall be treated as attributable to fraud,
except with respect to any portion of the underpayment
which the taxpayer established is not attributable to
fraud.
Section 6653(b)(1) and (2), in effect for 1988, provided:
SEC. 6653(b). Fraud.--
(1) In general.--If any part of any underpayment
* * * of tax required to be shown on a return is due to
fraud, there shall be added to the tax an amount equal
to 75 percent of the portion of the underpayment which
is attributable to fraud.
(2) Determination of portion attributable to
fraud.--If the Secretary establishes that any portion
of an underpayment is attributable to fraud, the entire
underpayment shall be treated as attributable to fraud,
except with respect to any portion of the underpayment
which the taxpayer established is not attributable to
fraud.
Respondent has the burden of proof, sec. 7454(a); Rule 142(b),
and he must show by clear and convincing evidence: (1)
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Petitioner has underpaid his taxes for each year, and (2) at
least some part of the underpayment is due to fraud. DiLeo v.
Commissioner, 96 T.C. at 873; Hebrank v. Commissioner, 81 T.C.
640, 642 (1983).
With respect to the 1985 tax year, the 50-percent addition
to tax for fraud under section 6653(b)(1) is imposed on the total
underpayment, where any portion of the underpayment is
attributable to fraud. See H. Conf. Rept. 99-841 at II-780
(1986), 1986-4 C.B. 1, 780. With respect to the section
6653(b)(2) addition to tax for 1985, it is respondent’s burden to
establish, by clear and convincing evidence, the specific portion
of the underpayment attributable to fraud. Hughes v.
Commissioner, T.C. Memo. 1994-139.
With respect to the 1986, 1987, and 1988 tax years, once
respondent has shown by clear and convincing evidence an
underpayment of tax and that at least some portion of the
underpayment is attributable to fraud, the entire underpayment is
treated as attributable to fraud and subject to the section
6653(b)(1) addition to tax. Sec. 6653(b)(2); Kalo v.
Commissioner, T.C. Memo. 1996-482, affd. without published
opinion 149 F.3d 1183 (6th Cir. 1998). The normal presumption of
correctness then attaches to the Commissioner’s determination,
DiLeo v. Commissioner, supra at 873, and the taxpayer bears the
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burden of showing how much of the underpayment is not due to
fraud. Ishler v. Commissioner, T.C. Memo. 2002-79.77
A. Underpayment of Tax Required To Be Shown on a Return78
Under section 6653(c)(1), in effect for each of the tax
years at issue, an “underpayment” is defined as follows:
SEC. 6653(c). Definition of Underpayment.–For
purposes of this section, the term “underpayment”
means--
(1) Income, estate, gift, and certain excise
taxes.--In the case of a tax to which section 6211
(relating to income, estate, gift, and certain
excise taxes) is applicable, a deficiency as
defined in that section (except that, for this
purpose, the tax shown on a return referred to in
section 6211(a)(1)(A) shall be taken into account
only if such return was filed on or before the
last day prescribed for the filing of such return,
determined with regard to any extension of time
for such filing) * * *
The Commissioner cannot rely upon the taxpayer’s failure to meet
the burden of proof on the issue of the existence of a deficiency
to sustain his burden of proving an underpayment by clear and
convincing evidence. Parks v. Commissioner, 94 T.C. at 660-661;
Otsuki v. Commissioner, 53 T.C. 96, 106 (1969).79 However, the
77
See also Hughes v. Commissioner, T.C. Memo. 1994-139
(describing sec. 6653(b)(2) as a burden-shifting provision).
Sec. 6653(b)(2) was added to the Code by the Tax Reform Act of
1986, Pub. L. 99-514, sec. 1503(b), 100 Stat. 2742, and is
effective for return due dates after Dec. 31, 1986.
78
Our discussions in subs. A and B do not address fraudulent
underpayments under sec. 6653(b)(2) for the 1985 tax year. That
addition is discussed separately in subs. C, infra.
79
See appendix D for the items of income that respondent
(continued...)
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Commissioner need only show that there is “some underpayment” for
each of the tax years at issue. Langworthy v. Commissioner, T.C.
Memo. 1998-218.
Since petitioner’s returns for 1985, 1986, and 1988 were not
filed timely, respondent computed the fraud penalty on the basis
of petitioner’s total tax liability for each year without
reduction for amounts shown on petitioner’s untimely returns.
See sec. 6653(c)(1) (parenthetical). On the record before us, we
hold that respondent has met his burden of proving by clear and
convincing evidence an underpayment for each of the tax years
1985, 1986, 1987, and 1988.
1. Underpayment for 1985
For 1985, petitioner has specifically conceded the following
amounts as income, see appendix C:
Income item Amount
Schedule C miscellaneous income $12,357
Gains from property sales 185,661
Schedule C interest income 40,479
Commission income 30,249
Unidentified deposits 1,700
Total 270,446
In addition, petitioner did not address on brief the following
items of income:
79
(...continued)
relies upon as clear and convincing evidence of an underpayment.
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Income item Amount
Gain from sale of Lot 1 in
Susan’s Lakefront Estate $20,097
Installment gain from sale of 3 lots
in Florida Fruit Belt Subdivision 28,347
Installment gain from Silver Lake sale 6,144
Gain from sale of Wax Myrtle trees 400
Interest income from Silver Lake mortgage 6,773
Commission income 37,500
Rental income 1,250
Total 100,511
Those items are conceded by petitioner’s own statement on brief
that “any issues not raised in Petitioner’s Brief are also
conceded by Petitioner”.80 Respondent has produced affirmative
evidence for each of the items conceded, and he has proven those
items of income by clear and convincing evidence.
Respondent’s determination that petitioner realized $30,925
in 1985 from the sale of an installment obligation to his father
is supported by clear and convincing evidence in the record: (1)
An assignment of mortgage relates that the mortgage along with
the “note or obligation” and “the moneys due and to become due
thereon” were being transferred “in consideration of the sum of”
$36,000 received from Charles Medlin; (2) the form of the
transaction was a sale of an installment note, which is evidenced
by petitioner’s instructions to the mortgagor to make direct
payments to his father.
80
See Brodsky v. Commissioner, T.C. Memo. 2001-240
(taxpayer’s failure to contest certain amounts of undisputed
income determined by respondent establishes underpayment by clear
and convincing evidence).
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Respondent also relies on his determination that petitioner
realized 100 percent of the gain realized on the sale of Lot 23
in the High Plains Property in 1985. The record is clear that,
at one point in time, petitioner and Mr. Schoolfield were 50-50
owners of the High Plains Property. However, it is not clear
from the record whether this 50-50 interest extended to Lot 23,
and, if so, whether petitioner and Mr. Schoolfield split up
before or after the sale in 1985. In our general discussion
relating to the deficiency determination, we have relied on
petitioner’s failure to overcome the presumption of correctness
which attaches to respondent’s determination. See supra. We
decided that petitioner did not establish that Mr. Schoolfield
owned 50 percent of that lot at the time of its sale, and we
decided that petitioner was responsible for 100 percent of the
gain realized. However, with respect to the fraud addition to
tax, we find that respondent has not proven by clear and
convincing evidence that petitioner was responsible for 100
percent of the gain from this sale. Petitioner agrees on brief
that he is responsible for half of the gain from this sale.
There is clear and convincing evidence that the fair market
value of the Citrus County Property at the time of the
foreclosure sale in 1985 was at least $87,000 and that petitioner
realized $85,15681 on the foreclosure sale in 1985.
81
Gain realized ($85,156) = Amount realized ($87,000) -
(continued...)
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Respondent determined that the deposit of a $59,000
cashier’s check into petitioner’s Tucker bank account on March
12, 1985, was income to petitioner. Bank deposits are prima
facie evidence of income. United States v. Price, 335 F.2d at
677; DiLeo v. Commissioner, 96 T.C. at 868. Where respondent
bears the burden of proof, he must show a likely taxable source
for the deposits. Armes v. Commissioner, 448 F.2d 972, 975 (5th
Cir. 1971), affg. in part, revg. in part, and remanding T.C.
Memo. 1969-181. Alternatively, where the taxpayer alleges a
nontaxable source, the Commissioner may satisfy his burden by
disproving the nontaxable source so alleged. United States v.
Massei, 355 U.S. 595 (1958); Parks v. Commissioner, 94 T.C. at
661. Respondent claims that the Tucker bank account is an
account to which petitioner deposited, generally, taxable income
from his business. Also, respondent relies upon petitioner’s
“business of buying and selling real estate and real estate
development” as the likely source of the $59,000 deposit.
The record shows that there were a number of deposits into
petitioner’s Tucker bank account from his real estate business
and that those deposits represented taxable income. Indeed, the
spreadsheets provided to Mr. Kelly, which list deposits to and
expenditures from the Tucker bank account, show items such as
commissions and interest received in petitioner’s real estate
81
(...continued)
Basis ($1,844).
- 126 -
business. Respondent has shown by clear and convincing evidence
the likely source of the $59,000; i.e., petitioner’s real estate
business. Petitioner was regularly engaged in the real estate
business during 1985, and he received a substantial amount of
unreported income during that period from that business.82
Petitioner did not maintain adequate records for his real estate
transactions or development activities, and there is substantial
evidence of an intent to conceal income received in that
business. Given those circumstances, we find that the real
estate business provides a likely source for the $59,000
cashier’s check.
Petitioner argues, on the other hand, that the $59,000
cashier’s check is traceable to a $70,000 check from Washington
International, and that check represents a loan. Petitioner
contends that respondent has not proven this source to be a
taxable source and that, indeed, he was aware of this $70,000
check during the examination, but he did not classify it as
income. First, we note that respondent, having shown a likely
taxable source for the $59,000 deposit, does not bear the burden
of negating nontaxable sources alleged by petitioner. Holland v.
82
Petitioner’s financial statement dated Nov. 15, 1985, also
reveals certain items of income receivable in petitioner’s real
estate business that could provide a likely source of the
deposit. For example, the financial statement shows notes and
mortgages receivable of $329,210, annual income from rentals of
$40,000, and “Projected annual income from Monarch Realty” of
$40,000.
- 127 -
United States, 348 U.S. 121 (1954). Second, we find that
respondent has nevertheless negated the Washington International
check as a nontaxable source of the deposit. Petitioner, in this
case, relies upon Mr. Kelly’s testimony that Washington
International, generally, “loaned money secured by real estate”
and that petitioner’s account was “basically a loan account”.
However, this position is inconsistent with petitioner’s
testimony at trial that the Washington International trust
account was used as a vehicle for deferring income from real
estate sales. We cannot agree, on the basis of the record before
us, that the Washington International trust account was a loan
account or that the $70,000 check represents a loan. There is
evidence that this check did not represent a nontaxable source,
and we do not draw any adverse conclusion from respondent’s
failure to classify it as taxable income in his examination. We
hold that respondent has shown by clear and convincing evidence
that the $59,000 deposit represents income to petitioner.
Respondent has proven by clear and convincing evidence the
following items of income for 1985:
Item Amount
Income conceded or stipulated $270,446
Disputed income conceded on brief 100,511
Gain from sale of installment obligation 30,925
One-half gain from sale of High Plains Property 9,850
Gain from foreclosure of Citrus County Prop. 85,156
Unidentified deposit--Mar. 12, 1985 59,000
Total 555,888
Respondent allowed the following deductions for 1985:
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Type of deduction Amount
Schedule C expenses $225,301
Itemized deductions 22,567
Exemptions 2,080
Total 249,948
Respondent has proven by clear and convincing evidence that
petitioner received taxable income of $305,94083 in 1985.
Respondent has also proven that petitioner is liable for self-
employment taxes of $4,673 for 1985. Respondent has proven an
underpayment for 1985 by clear and convincing evidence.
2. Underpayment for 1986
For 1986, petitioner has specifically conceded the following
amounts as income; see appendix C:
Income item Amount
Schedule C miscellaneous income $27,019
Gains from property sales 154,924
Schedule C interest income 10,614
Schedule C commission income 32,357
Schedule C unidentified deposit 24,186
Total 249,100
In addition, petitioner did not address on brief the following
items of income:
Income item Amount
Gain from sale of Tract A in
Susan’s Lakefront Estate $21,097
Installment gain from Silver Lake sale 12,288
Interest from Silver Lake 5,805
Deposit on May 6, 1986 300
Deposit on Oct. 10, 1986 300
Total 39,790
83
Total income proven of $555,888 less allowable deductions
of $249,948 equals $305,940 in taxable income.
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Petitioner has conceded those items. Respondent has produced
affirmative evidence for each of the items conceded, and he has
proven those items of income by clear and convincing evidence.
Respondent relies upon the gain from the sale of one of the
Grissom Parcels in 1986 as evidence of an underpayment.
Petitioner agrees that he is responsible for $12,042 of gain from
that sale. Respondent has proven that amount by clear and
convincing evidence.
Respondent also relies on the gain from the exchange of
petitioner’s ownership interest in Lots 26, 27, and 28 of the
Arrowhead Lakes Subdivision for Mr. McLaughlin’s ownership
interest in the Angel-Royse Property. In our discussion relating
to whether a deficiency existed with respect to this item, the
record reflected that petitioner was the 100-percent owner of the
lots in the Arrowhead Lakes Subdivision and that he exchanged
those lots for Mr. McLaughlin’s 50-percent interest in the Angel-
Royse Property. There is clear and convincing evidence that
petitioner and Mr. McLaughlin were not involved in a partnership
with respect to both the Arrowhead Lakes Subdivision and the
Angel-Royse Property. We hold that respondent has proven by
clear and convincing evidence that petitioner realized $60,709 of
gain from the exchange of the properties in 1986.
Respondent also relies upon the gain of $92,502 from the
sales of 31 and 31.5 acres of East Lake Vista in 1986. There is
- 130 -
clear and convincing evidence that petitioner owned at least a
50-percent interest in the East Lake Vista properties at the time
of their sales in 1986, including petitioner’s financial
statements, a guaranty that petitioner entered into with the
buyer at the time of the sale of the 31.5 acres, and the ledger
cards that Mr. Miles’s law firm maintained with respect to East
Lake Vista. We hold that respondent has proven by clear and
convincing evidence that petitioner realized half of the gain
from the sales of 31 and 31.5 acres from East Lake Vista in 1986.
Respondent has proven by clear and convincing evidence the
following items of income for 1986:
Item Amount
Income conceded or stipulated $249,100
Disputed income conceded on brief 39,790
Gain from sale of Grissom Parcels 12,042
Gain from exchange of Arrowhead Lakes
Subdivision lots 60,706
Gain from sales in East Lake Vista 92,502
Total 454,140
Respondent allowed the following deductions for 1986:
Type of deduction Amount
Schedule C expenses $298,656
Nonitemized contributions 48
Exemptions 2,160
Total 300,864
Respondent has proven by clear and convincing evidence that
petitioner received taxable income of $153,27684 in 1986.
84
Total income proven of $454,140 less allowable deductions
of $300,864 equals $153,276 in taxable income.
- 131 -
Respondent has also proven that petitioner is liable for self-
employment taxes of $5,166 for 1986. Respondent has proven an
underpayment for 1986 by clear and convincing evidence.
3. Underpayment for 1987
For 1987, petitioner has specifically conceded the following
amounts as income; see appendix C:
Income item Amount
Schedule C miscellaneous income $24,000
Gains from property sales 946,649
Schedule C interest income 9,084
Total 979,733
In addition, petitioner did not address on brief the following
items of income:
Income item Amount
Gain from sale of Silver Lake $24,577
Interest income 5,488
Total 30,065
Petitioner has conceded those items. Respondent has produced
affirmative evidence for each of the items conceded, and he has
proven those items of income by clear and convincing evidence.
Thus, respondent has proven by clear and convincing evidence that
petitioner received income of $1,009,798 ($979,733 + $30,065) in
1987.
Respondent allowed the following deductions for 1987:
Type of deduction Amount
Schedule C expenses $265,076
Itemized deductions 43,561
Exemptions 3,800
Total 312,437
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Respondent has proven by clear and convincing evidence that
petitioner received taxable income of $697,36185 in 1987.
Respondent has proven by clear and convincing evidence that
petitioner is liable for self-employment tax of $5,387.
Petitioner reported taxable income of $37,879, a tax of $7,515 on
that amount, and self-employment tax of $5,387. Respondent has
proven an underpayment for 1987 by clear and convincing evidence.
4. Underpayment for 1988
For 1988, petitioner has specifically conceded the following
amounts as income; see appendix C:
Income item Amount
Schedule C miscellaneous income $12,000
Gains from property sales 167,120
Unidentified deposits 4,400
Total 183,520
In addition, petitioner did not dispute on brief the following
items of income:
Income item Amount
Gain from sale of Lots 6-30 in
Susan’s Lakefront Estate $77,298
Gain from sale of Mefford property 55,164
Rents received from Island Living, Inc. 12,000
Total 144,462
Petitioner has conceded those items. Respondent has produced
affirmative evidence for each of the items conceded, and he has
proven those items of income by clear and convincing evidence.
85
Total income proven of $1,009,798 less allowable
deductions of $312,437 equals $697,361 in taxable income.
- 133 -
Respondent relies on the sale of 10 acres in East Lake Vista
as evidence of an underpayment for 1988. Considering our
discussion above with respect to the sales of acres from East
Lake Vista in 1986, we hold that respondent has proven by clear
and convincing evidence that petitioner owned a 50-percent
interest in East Lake Vista at the time of the sale in 1988 and
that he realized gain of $19,522 in 1988 from the sale of his 50-
percent interest.
Respondent also relies on the $140,000 that was deposited
into Mr. Miles’s law firm’s trust account for petitioner on July
8, 1988. Petitioner established that the $140,000 was traceable
to a $140,000 check from Dean Witter and that the check stub was
signed “RECD BY Richard Margolis”. Respondent has demonstrated
by clear and convincing evidence that petitioner was involved in
the business of buying and selling real estate; he received
substantial amounts of income from numerous property transactions
in this business; those property transactions were carried out
using trustees, including Mr. Miles; proceeds from those
transactions were deposited into Mr. Miles’s law firm’s trust
account; and those proceeds represented income taxable to
petitioner but which he failed to report. By petitioner’s own
account, the $140,000 check from Dean Witter and allegedly from
Mr. Margolis was attributable to a transaction which was in form
a sale of petitioner’s property. We hold that respondent has
- 134 -
established that petitioner’s business of buying and selling real
estate was a likely taxable source of this deposit.
Petitioner alleges that the source of the deposit of
$140,000 was a loan from Mr. Margolis. Petitioner did not call
Mr. Margolis as a witness, and he did not provide any documentary
evidence to support his claim that this amount was a loan.
Petitioner’s claim that this item represents a loan is based
solely on his testimony, which was uncorroborated, inconsistent,
and not credible. Given these circumstances, petitioner’s use of
Mr. Miles’s law firm’s trust account to transact his real estate
deals, the substantial evidence of concealment of petitioner’s
real estate sales and gains therefrom, and the form of the
transaction that petitioner relies upon as a source of nontaxable
income, we are convinced that the $140,000 was not a loan.
Respondent has proven by clear and convincing evidence the
following items of income for 1988:
Item Amount
Income conceded or stipulated $183,520
Disputed income conceded on brief 144,462
Sale of 10 acres from East Lake Vista 19,522
Deposit of $140,000 on July 8, 1988 140,000
Total 487,504
Respondent allowed the following deductions for 1988:
Type of deduction Amount
Schedule C expenses $301,910
Itemized deductions 44,651
Exemptions 3,900
Total 350,461
- 135 -
Respondent has proven by clear and convincing evidence that
petitioner received taxable income of $137,04386 in 1988.
Respondent has also proven that petitioner is liable for self-
employment taxes of $5,859 for 1988. Respondent has proven an
underpayment for 1988 by clear and convincing evidence.
5. Conclusion
Respondent has proven underpayments by clear and convincing
evidence for 1985, 1986, 1987, and 1988.
B. Fraudulent Intent
1. Clear and Convincing Evidence of Fraud
Respondent must show that a portion of the underpayment is
attributable to fraud. Fraud is established where the
Commissioner shows that “the taxpayer intended to evade taxes
that he knew or believed to be owing by conduct intended to
conceal, mislead or otherwise prevent the collection of such
taxes.” Korecky v. Commissioner, 781 F.2d 1566, 1568 (11th Cir.
1986), affg. T.C. Memo. 1985-63; see also Webb v. Commissioner,
394 F.2d 366, 377 (5th Cir. 1968), affg. T.C. Memo. 1966-81;
Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983); Clark v.
Commissioner, T.C. Memo. 2001-205. Suspicion of fraudulent
conduct is not sufficient. King’s Court Mobile Home Park, Inc.
v. Commissioner, 98 T.C. 511, 517 (1992). The issue of
fraudulent intent is a question of fact shown by surveying the
86
Total income proven of $487,504 less allowable deductions
of $350,461 equals $137,043 in taxable income.
- 136 -
taxpayer’s entire course of conduct and drawing reasonable
inferences therefrom. Korecky v. Commissioner, supra at 1568.
Fraud is rarely provable by direct evidence but may be
provable by circumstantial evidence. Brooks v. Commissioner, 82
T.C. 413, 431 (1984), affd. without published opinion 772 F.2d
910 (9th Cir. 1985). Such evidence includes, but is not limited
to the following “badges of fraud”: (1) Understating income, (2)
maintaining inadequate records, (3) failing to file tax returns,
(4) giving implausible or inconsistent explanations of behavior,
(5) concealing income or assets, (6) failing to cooperate with
tax authorities, (7) engaging in illegal activities, (8) an
intent to mislead which may be inferred from a pattern of
conduct, (9) lack of credibility of the taxpayer’s testimony,
(10) filing false documents, and (11) dealing in cash. See
Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986),
affg. T.C. Memo. 1984-601; Recklitis v. Commissioner, 91 T.C.
874, 910 (1988); Kalo v. Commissioner, T.C. Memo. 1996-482. No
single factor is necessarily dispositive, but a combination of
several factors is persuasive circumstantial evidence of fraud.
Petzoldt v. Commissioner, 92 T.C. at 699. We find substantial
evidence of fraud in this case.
The record shows a consistent pattern of understating income
by petitioner. For the years in issue, petitioner received
substantial amounts of income from his real estate business,
- 137 -
which he did not report as income. Petitioner reported income
only to the extent that deposits were made into his personal
checking accounts and which he did not classify as “loans”.
However, the income that petitioner reported was substantially
offset by deductions that petitioner claimed for each
disbursement that he made from his personal bank accounts.87 The
items of income that respondent determined, and which he proved
by clear and convincing evidence, greatly exceed the amounts
which petitioner reported as gross income on his returns for 1985
through 1988. We find that the understatements for the years at
issue were substantial and are evidence of fraud.
Petitioner has previously understated his income in
considerable amounts and with respect to items of income
substantially similar to those items involved herein.88 On April
17, 1988, we entered a stipulated decision for deficiencies of
$1,082 for 1977, $22,213 for 1978, $63,533 for 1979, $7,110 for
1981, and $37,921 for 1982. Petitioner also understated his
income for the 1983 and 1984 tax years, and he eventually agreed
to deficiencies of $10,550 for those years. We find the
87
Petitioner reported gross income from his real estate
business of $160,363 for 1985, $119,772 for 1986, $138,653 for
1987, and $61,921 for 1988. He claimed deductions for expenses
of $152,481 for 1985, $115,634 for 1986, $94,434 for 1987, and
$43,713 for 1988.
88
Evidence of tax evasion for tax years which occur before
and after the filing of the return for the particular tax year at
issue is relevant on the issue of willfulness for that return.
United States v. Dixon, 698 F.2d 445, 447 (11th Cir. 1983).
- 138 -
stipulated decision constitutes substantial evidence of fraud for
the years at issue in the instant case since: (1) The decision
involved similar items as those involved herein; i.e., the use of
nominee accounts to hold real estate sale proceeds; and (2) it
was entered before petitioner’s filing of each of his returns for
the 1985 through 1988 tax years. Further, in the course of the
previous years’ examinations, petitioner was apprised that the
use of trustees to hold real estate sale proceeds did not
insulate him from tax liability, and he agreed that those
transactions were taxable. Petitioner’s consistent
understatement of large amounts of such income over a period of
years is evidence of willful intent to evade tax. Otsuki v.
Commissioner, 53 T.C. at 108.
Petitioner filed Forms 2688 for each of the years at issue
in which he requested an extension of time for filing his
returns. In the Form 2688 for the 1985 tax year, he states as
his need for an extension: “Client derived substantially all his
income from a bulk land transaction, which was extremely complex.
Additional time is needed to analyze the transaction.”
Petitioner did not report income on his Form 1040 for 1985 from
any bulk land transaction, and he accepts on brief that he did
not provide any information to Mr. Kelly regarding any bulk land
sale transaction. We find his statement on the Form 2688, which
essentially admits having received income from a land sale, as
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substantial evidence that petitioner knew he was taxable for such
a transaction before the filing of his return.
In his Forms 2688 for the 1986, 1987, and 1988, tax years,
petitioner requested an extension because “Taxpayer has not
received all needed K-1's for 1065 & 1120 tax returns that
represent a substantial portion of his income. Without these
items a complete and accurate return cannot be prepared.”
However, petitioner never provided any Schedules K-1 to Mr.
Kelly. Moreover, in the examination of his 1983 and 1984 Forms
1040 filed on January 30, 1986, and March 7, 1986, respectively,
petitioner informed the revenue agent that he was not involved in
any corporations, partnerships, or trusts, i.e., entities from
which Schedules K-1 might be issued. We have found as fact that
petitioner was involved in several business entities, and
petitioner accepts that he owned properties held in trust by Mr.
Miles and other trustees under his control. We also note that
petitioner informed the revenue agent examining his 1983 and 1984
returns that his Cayman Islands trust account was closed in 1983.
However, petitioner subsequently received five checks totaling
$135,000 from the Cayman Islands trust in 1985. We find that
this record of inconsistent statements and claims by petitioner
is yet another indication of fraud.89
89
The making of false and inconsistent statements to the
Commissioner’s revenue agents during the course of their
investigation indicates fraudulent intent. Solomon v.
(continued...)
- 140 -
Petitioner did not provide to his return preparer, Mr.
Kelly, any checks or other documents relating to his real estate
transactions, and he did not disclose to Mr. Kelly the existence
or nature of his use of Mr. Miles’s law firm’s trust account.
Petitioner provided to Mr. Kelly only spreadsheets reflecting his
deposits into and expenditures from his bank accounts.90
Concealing evidence from one’s tax return preparer is indicative
of fraud. Ishler v. Commissioner, T.C. Memo. 2002-79.
Petitioner’s reliance on spreadsheets of his bank deposits
and disbursements to compute his income tax liability was surely
misplaced, and there is considerable evidence that he knew this
to be the case. Indeed, he was told during the examination of
his 1983 and 1984 returns, which occurred prior to filing the
returns for the years in issue, that this method of computing
taxable income was not acceptable. The duty of filing accurate
returns cannot be avoided by placing responsibility upon an
agent, especially where the taxpayer has withheld books, records,
and other information regarding sources of income, see Bacon v.
89
(...continued)
Commissioner, 732 F.2d 1459, 1462 (6th Cir. 1984) (“concealment
of bank accounts from Internal Revenue agents is yet another sign
indicating fraud), affg. T.C. Memo. 1982-603; Grosshandler v.
Commissioner, 75 T.C. 1, 20 (1980); Kalo v. Commissioner, T.C.
Memo. 1996-482 (taxpayer’s failure to mention foreign bank
accounts), affd. without published opinion 149 F.3d 1183 (6th
Cir. 1998).
90
This same lack of disclosure was apparent in the
preparation of petitioner’s 1977-1982 spreadsheets and tax
returns involving Mr. Kelly and Mr. Brooks.
- 141 -
Commissioner, T.C. Memo. 2000-257, affd. without published
opinion 275 F.3d 33 (3d Cir. 2001), and where the taxpayer has
taken an active and controlling role in the process of preparing
the tax returns and the information used for their preparation.
During the examination of petitioner’s returns, respondent
served a third-party recordkeeper summons on Mr. Miles and a
summons on petitioner, both of which requested information for
petitioner’s 1985 through 1988 tax years. Petitioner did not
comply with the summons issued to him, and, at petitioner’s
behest, Mr. Miles did not provide any requested information.
Respondent was forced to pursue enforcement in court of those
summonses. Petitioner’s refusal to cooperate with respondent in
determining his correct income tax liability is indicia of fraud.
See Rowlee v. Commissioner, 80 T.C. at 1125.
We also consider petitioner’s testimony at trial to be
evidence of his fraudulent intent for the years at issue. We
find that petitioner’s testimony at trial was evasive and
inconsistent, and we do not find it credible:
Although mere refusal to believe the taxpayer’s
testimony does not discharge the Commissioner’s burden,
the lack of credibility of the taxpayer’s testimony,
the inconsistencies in his testimony and his
evasiveness on the stand are heavily weighted factors
in considering the fraud issue.” [Toussaint v.
Commissioner, 743 F.2d 309, 312 (5th Cir. 1984), affg.
T.C. Memo. 1984-25; citations omitted.]
Petitioner was unable to explain credibly his failure to report
the amounts of income from his real estate sales transactions.
- 142 -
There is considerable evidence of the concealment of assets
and of income for the tax years at issue, and we find that this
concealment is due in large part to an intent to mislead tax
authorities and to evade taxation on income.91 For the years
1981 through 1990, petitioner had his personal residence titled
in the name of Mr. Miles, as trustee.92 Also, in 1987,
petitioner purchased a Ferrari and had the bill of sale and the
application for a temporary tag put in the name of Mr. Miles’s
law firm. Petitioner regularly used Mr. Miles, Ms. Allen, and
other trustees to hold and sell his various properties, and he
then used Mr. Miles’s law firm’s trust account to hold the
proceeds from the sales. The trustees had no functions other
than holding title to the properties, and petitioner was firmly
in control of the proceeds that passed into the law firm’s trust
account. Indeed, as trustee of that account, Mr. Miles did
whatever petitioner instructed him to do, and petitioner
requested on several occasions that Mr. Miles or Ms. Goodman pay
his personal expenses with his trust funds. The use of nominee
accounts; i.e., the use of bank accounts fashioned as trust
91
Petitioner’s concealment of the various real estate
transactions was so prevalent that respondent’s revenue agent was
able to discover those transactions only by a search of various
courthouse records in seven different counties.
92
We also note that on petitioner’s Forms 1040 for 1985-
1988, he lists his address as “P.O. Box 383, Lake Lure, NC
28746”. However, petitioner resided in Osceola County,
Kissimmee, Florida, during the tax years at issue and at the time
of filing his returns.
- 143 -
accounts, to conceal assets is evidence of fraud where petitioner
has unfettered control over those accounts.93 Temple v.
Commissioner, T.C. Memo. 2000-337, affd. 62 Fed. Appx. 605 (6th
Cir. 2003); Friedman v. Commissioner, T.C. Memo. 1968-145, affd.
421 F.2d 658 (6th Cir. 1970).
Petitioner used fictitious names in some of his real estate
dealings for the years in issue. Indeed, petitioner signed
various documents relating to real estate documents in the name
of “William R. Wright”, and he also notarized several documents
in that name. Petitioner also used the name “D.W. Davis” and
opened a bank account in that name. When asked about his use of
fictitious names, petitioner testified with respect to the name
“John Waltin” that it was not fictitious since “there’s probably
a John Waltin somewhere”. We find petitioner’s testimony not
credible, and we find that he used those fictitious names for the
purpose of concealing income and property transactions. See
Milito v. Commissioner, T.C. Memo. 1989-145 (“The use of aliases
93
Petitioner argues that his use of trusts is not evidence
of fraud, since “the practice of owning property through nominees
and trustees was widespread and common.” We might agree that the
use of trusts alone does not establish fraudulent intent;
however, the use of trusts in combination with evidence of the
concealment of assets and sale proceeds provides persuasive
evidence of fraud. Further, it does not follow from the frequent
use of the trust vehicle to hold property in Florida that
petitioner’s use of the trust vehicle was not fraudulent.
Indeed, the use of trusts does not necessarily involve the same
circumstances that exist with respect to petitioner’s use,
notably the failure to report income and the failure to file
appropriate returns.
- 144 -
or fictitious names to conceal income is also evidence of
fraud.”); see also Cooperstein v. Commissioner, T.C. Memo. 1984-
290; Yu v. Commissioner, T.C. Memo. 1973-188; Staff v.
Commissioner, T.C. Memo. 1954-59.
As we have noted throughout this opinion, petitioner has
consistently failed to maintain adequate records of his real
estate and other transactions. In some cases, the only record
petitioner admits to have maintained is his checkbook. Clearly,
a checkbook is an insufficient record for purposes of computing
his gross income, especially where the transactions involved are
complex real estate transactions which include installment sales
and subdividing. Such a gross failure to maintain adequate
records (or to provide such records) is certainly indicative of
fraud. See Clayton v. Commissioner, 102 T.C. at 647.
We hold that there is clear and convincing evidence of
fraudulent intent to evade income taxes by petitioner and that
the circumstances which lead us to that holding were apparent
with respect to at least some part of the underpayments for each
of the tax years in issue. Thus, with respect to the 1985 tax
year, respondent has satisfied his burden, and the addition to
tax under section 6653(b)(1) applies to the entire underpayment;
with respect to the 1986, 1987, and 1988, tax years respondent
has satisfied his initial burden, and the additions to tax for
fraud for those tax years apply to the entire underpayment unless
- 145 -
petitioner can show the specific portion of the underpayment that
is not due to fraud.
2. Portion of Underpayment Not Attributable to Fraud
Petitioner contends, generally, that he understood that, in
dealings in real estate (and exotic cars), receipts from sales or
mortgage payments related to the real estate business “were not
taxable, but were a tax free exception”, but that “Payments taken
for living and personal expenses were taxable.” Petitioner is
correct that the fraud penalty cannot be imposed on the basis of
an “honest mistake” regarding taxability. Indeed, the “due to
fraud” language in section 6653(b) requires a specific intent to
evade a tax owing, and “a good-faith misunderstanding of the tax
laws could negate fraud”. Niedringhaus v. Commissioner, 99 T.C.
202, 217 (1992). However, considering all the facts and
circumstances on the record, we find petitioner’s alleged
misunderstanding of the law on tax free exchanges incredible.94
Petitioner was an experienced real estate developer and
dealer for many years. He was involved in a considerable number
of real estate transactions during the years at issue and in
prior years. Mr. Kelly testified that petitioner appeared
94
It appears that petitioner raised this explanation of his
failure to report income from his real estate transactions for
the first time at trial. The record shows that he did not
present this purported “misunderstanding” of tax free exchanges
to respondent’s revenue agent during the examination of his 1985-
1988 returns, and his petition does not provide any allegation of
a misunderstanding of the tax laws.
- 146 -
knowledgeable on the subject of like-kind exchanges. See sec.
1031; Kalo v. Commissioner, T.C. Memo. 1996-482 (A taxpayer’s
intelligence, education, and tax expertise are also relevant for
purposes of determining fraudulent intent).
At trial, petitioner testified:
Q Now, in relation to mortgage payments--the receipt
of mortgage payments--if those payments went to Mr.
Miles as trustee, you related how they might not--
might or might not have appeared on your tax return.
A Yes, sir.
Q Would you explain to the Court why they might or
might not appear on your tax return if a payment went
to Miles?
A Well, I mean, we were discussing before that as
long as I was leaving in there to either pay--I mean,
some of it went for legal fees or taxes--real estate
taxes, mortgage payments, interest payments, to
purchase another piece of property that--and
occasionally I would go, you know, need money and say,
Write me a check. I would put it in my account, go on
the spreadsheet; it would go on the return.
Q Now, as far as payments that were received from
the sale of a property, if that went to Miles, how
would you consider it? How did you consider it?
A I’m sorry. I thought that was the question you
had just previously asked me.
Q No, I asked you specifically about receipt from
mortgage payments--if there was a mortgage payment that
Miles received.
A Okay. All right, well, I gave you the correct
answer.
Q Now, if it was not a mortgage payment, but
actually a payment at a closing from the sale of
property--
- 147 -
A Oh, like the downpayment at closing.
Q Right.
A Same thing.
Q Did you use Miles--any of the money in Miles’s
trust account at times to attempt to make purchases of
property?
A Oh, yes.
Q And did you think that that caused you to have to
declare that as income when you made the purchase
through Miles?
A No, sir.
Q Why not?
A Again, I had this. I thought, an understanding of
what a tax-free exchange was, and I don’t think in this
game you have to be off very much. But apparently I
was off a little bit on this.
Q Well, what was your understanding in the years at
issue--1985, ‘-6, ‘-7, and ‘8, as to how this tax-free
exchange worked in relation to your tax liability?
A Okay. It’s hard to divorce myself from what I
think today and what I thought today--is that, you
could sell a piece of property, the money goes into
escrow, and you take that money and buy another piece
of property, and if you don’t--again, I refer to it as,
take it out and spend it on wine, women, and song--
Q By that, you mean--
A --that is reinvestment.
Q By that phrase--wine, women, and song--you mean
take it out for yourself, for living.
A Yes, sir.
Q And if you didn’t take it out for living, what was
your opinion at that time?
- 148 -
A That it was like a tax-free--that was the way, and
I’m not far off, but I think I’m off far enough. I
understand now that that was how you do a tax-free
exchange.
Q Now, you considered yourself to be in the business
of buying and selling property. Is that correct?
A Yes, pretty much. Yes, sir.
Q Did you think that because you were in the
business of buying and selling property, that that
impacted your ability to engage in tax-free exchanges?
A That was my business.
Q Did you think that you could be in the business of
buying and selling properties, and still engage in tax-
free exchanges?
A Oh, yes.
Q I mean, as you sit here today, you know there’s a
--
A Yes, now I understand your question, and yes, sir.
Q So back in the years at issue, did you know that
there was this distinction about, even if you do it
correctly, it may--a tax-free exchange may not be
available to a dealer in property?
A Yes, sir. I understand that now.
As we have stated previously in this opinion, we were not
impressed with petitioner’s testimony at trial, generally, and we
were certainly not impressed with his supposed understanding of
tax free exchanges of property. During the examinations of
petitioner’s returns for 1985 through 1988, petitioner did not
discuss with the revenue agent his beliefs regarding tax free
exchanges, and the substantial evidence of concealment of the
- 149 -
trust holdings and the sales proceeds in Mr. Miles’s law firm
trust account indicates that petitioner’s use of nominees was for
a purpose other than tax-free exchanges.
Most importantly, petitioner’s testimony and contentions
regarding his failure to report income deposited in Mr. Miles’s
law firm’s trust account are contradicted by other evidence of
record. Petitioner’s purported understanding was that he was not
required to report income from his sales of real estate so long
as the sale proceeds remained in the trust account and were not
disbursed for personal expenses. Petitioner claims that he
reported consistently with that understanding. Nevertheless,
there were considerable amounts that were disbursed from Mr.
Miles’s law firm’s trust account for personal expenses during the
years in issue that were not reported as income. Petitioner does
not explain this failure to report. We cannot accept that
petitioner had a bona fide misunderstanding of tax free exchanges
and that this purported misunderstanding explains his failure to
report the substantial amounts of income from real estate
transactions.
Petitioner argues that fraud penalties should not apply to
the amounts which he reported as income on his returns for 1986
through 1988.95 Petitioner suggests that to the extent those
95
The addition to tax for fraud under sec. 6653(b)(1)
applies to the entire underpayment for 1985, regardless of
whether petitioner establishes that some portion of that
(continued...)
- 150 -
amounts gave rise to underpayments, the underpayments are not
attributable to fraud. We disagree.
Petitioner’s method of preparing his returns for 1985
through 1988 was erroneous, and petitioner was aware at the time
he signed those returns that the method was erroneous. His
returns for 1985 through 1988 were prepared on the basis of
spreadsheets of the deposits to, and disbursements from, his
personal bank accounts. Petitioner reported income only to the
extent that deposits were made to his personal accounts and,
then, only to the extent that the deposit was not classified as a
“loan”. However, petitioner’s reported income from these
spreadsheets was substantially offset by disbursements from his
personal bank accounts, which he claimed as deductible expenses
on his Schedules C.
Petitioner contends that the fraud penalties should not be
applied to the tax liability which was increased due to the
expenses that respondent disallowed. After reviewing the
spreadsheets that petitioner used to prepare his returns, we are
convinced that many of the expenses that petitioner claimed as
deductions were personal in nature. For example, on Schedule C
of petitioner’s 1985 tax return, he claimed a deduction for
commission expenses of $14,540, which represented the cost of a
ring, earrings, and two necklaces that he purchased for Ms.
95
(...continued)
underpayment is not attributable to fraud.
- 151 -
Allen. On Schedule C of petitioner’s 1986 tax return, he
deducted the costs of his subscriptions to Playboy and Penthouse
magazines.96 Petitioner also claimed as deductible expenses on
his Schedules C: (1) Subscription payments for Sesame Street and
Dr. Seuss books; and (2) travel and entertainment expenses for
credit card payments to Burdines, Neiman Marcus, Jordan Marsh,
Master Card, and Visa; and (3) expenses for gasoline and expenses
related to his 25 Ferrari automobiles. These items are
inherently personal in nature, and petitioner’s claiming those
deductions pursuant to his method of preparing his returns for
1985 through 1988 is evidence of fraud.
Petitioner also points to certain expenses which he claims
are related to his orange grove, cattle, and Ferrari collection
activities. He claims that respondent disallowed all expenses
relating to those activities, which he claimed on his returns.
Petitioner contends that, although it might be appropriate to
disallow expense deductions for those activities when determining
his deficiencies, fraud penalties should not be imposed on the
tax liabilities resulting from their disallowance. However, it
96
Petitioner argues on brief that the Playboy magazine
“could be used by Mr. Medlin as reading material for his real
estate business”, and although he concedes those are not
allowable expenses, he suggests that such deductions are not
indicative of fraud. We disagree. Those items are inherently
personal and are items which we find someone in petitioner’s
position as a real estate businessman would have known were not
deductible. In our view, claiming those deductions on a return
shows a willingness to evade tax.
- 152 -
is unclear to us the extent to which petitioner claimed those
items as expenses on his returns, and, the amounts claimed and
disallowed.97 Petitioner did not prepare separate Schedules C
for the orange grove, cattle, and Ferrari collection activities
for 1985 through 1988. Instead, he claimed those expenses, along
with other expenses including personal expenses, on the Schedules
C relating to his real estate business. We also point out that
petitioner’s method of preparing his returns considered only
whether a disbursement was made from his personal bank accounts
and not whether that disbursement related to a trade or business
or was otherwise a deductible expense.
Given petitioner’s faulty method of preparing his returns,
and the inherently personal nature of many of the expenditures
claimed on his returns, petitioner has not established that the
portion of the underpayment arising from the disallowed expense
deductions is not attributable to fraud. Petitioner has not
shown that any portion of the underpayment for each of the years
1986, 1987, and 1988, is not attributable to fraud, and,
accordingly, the entire underpayment for each of those years is
subject to the addition to tax for fraud.
97
We note that the civil report that respondent prepared
indicates that certain expenses were disallowed with respect to
petitioner’s Ferrari automobile collection and his orange grove
and cattle activities. However, since petitioner lumped the
expenses relating to those activities into expenses relating to
other activities, and reported them as car and truck and repair
and maintenance expenses, we are unable to determine to what
extent those items were claimed as deductions on his returns.
- 153 -
C. Section 6653(b)(2) Addition to Tax for 1985
With respect to the section 6653(b)(2) addition to tax for
1985, it is respondent’s burden to establish, by clear and
convincing evidence, the specific portion of the underpayment
which is attributable to fraud. Hughes v. Commissioner, T.C.
Memo. 1994-139; Franklin v. Commissioner, T.C. Memo. 1993-184.
Pursuant to our discussion above, respondent has proven by
clear and convincing evidence that petitioner received taxable
income of $305,940 and that petitioner is liable for self-
employment tax of $4,763 for 1985. For purposes of section
6653(b)(2), respondent has proven by clear and convincing
evidence an underpayment for 1985, which the parties shall
compute under Rule 155 on the basis of our findings and
conclusions.
Respondent has proven by clear and convincing evidence that
petitioner failed to report substantial gains and other income
from his real estate transactions and that he did so with
fraudulent intent. Petitioner was an experienced real estate
developer and businessman. We are convinced that he knew those
items were taxable as income when received. Indeed, petitioner
was informed during the examination of his 1983 and 1984 returns,
which occurred prior to the time petitioner filed his 1985
through 1988 returns, that the sale proceeds deposited into the
- 154 -
law firm’s trust account were taxable, and petitioner agreed.98
We cannot accept petitioner’s explanation that he misunderstood
that if sales proceeds and other items were “reinvested” and held
in trust accounts, they would not be taxable until withdrawn for
“wine, women, and song”. Respondent has produced evidence
showing that substantial amounts of income were paid from the
trust account per petitioner’s instructions for personal expenses
and that those withdrawals were not reported as income on his tax
returns. Petitioner did not inform respondent’s revenue agent,
who examined his returns for 1985-1988, that he held this belief
regarding tax deferred exchanges, and there is no credible
evidence of record showing that petitioner had this purported
misunderstanding.
Respondent has also proven by clear and convincing evidence
that petitioner’s method of preparing his return for 1985 was
done with a fraudulent intent. On the Schedule C for his real
estate business, petitioner reported income and expenses from
that business on the basis of spreadsheets of the deposits and
disbursements from his personal bank accounts. He reported the
deposits, less amounts he classified as “loans”, as gross income
from his business, and the disbursements, as deductible expenses
on the Schedule C. Many of the disbursements were for inherently
98
Also, the Tax Court’s stipulated decision with respect to
petitioner’s agreed deficiencies for 1977, 1978, 1979, 1981, and
1982, was entered before petitioner’s filing of each of his
returns for the 1985 through 1988 tax years.
- 155 -
personal items, including jewelry for Ms. Allen and expenses for
his 25 Ferrari automobiles.
Unlike most of the unreported items involving gain from real
estate transactions that we find were due to fraud, the 1985
foreclosure sale of the Citrus County Property was not a typical
sale of real estate. Respondent originally determined that
petitioner realized $49,907 as cancellation of indebtedness
income with respect to the Citrus County Property, in 1987.
Respondent first raised the issue of gain from the foreclosure
sale as a new matter in his amendment to answer. Respondent has
not proven that the portion of the underpayment from the 1985
foreclosure sale of the Citrus County Property was attributable
to petitioner’s fraud. The addition to tax under section
6653(b)(2) shall not apply to that portion of the underpayment
attributable to the gain realized from the foreclosure sale in
1985. Respondent has proven to our satisfaction that the
remaining amount of the underpayment for 1985 is attributable to
fraud. We hold that the addition to tax under section 6653(b)(2)
applies to that amount of the underpayment.
III. Statute of Limitations for Assessment
Generally, the amount of any tax must be assessed within 3
years after the return required to be filed by the taxpayer was
filed (whether such return was filed on or after the date
prescribed therefor). Sec. 6501(a). However, in the case of a
- 156 -
false or fraudulent return with the intent to evade tax, the tax
may be assessed at any time. Sec. 6501(c)(1). Respondent bears
the burden of proving the applicability of this exception, and he
must prove the same elements of fraud under section 6501(c)(1) as
he is required to prove with respect to the additions to tax for
fraud. Estate of Johnson v. Commissioner, T.C. Memo. 2001-182.
In this case, respondent has shown by clear and convincing
evidence that an underpayment of tax exists for each of the years
1985, 1986, 1987, and 1988, and he has shown that at least some
part of that underpayment for each of those years is a result of
fraud by petitioner. Therefore, we hold that the open period of
limitations of section 6501(c)(1) applies, and section 6501(a)
does not bar assessment of petitioner’s deficiencies in taxes.
See DiLeo v. Commissioner, 96 T.C. at 880.99
Decision will be
entered under Rule 155.
99
Since we hold that each of the tax years at issue is open
under sec. 6501(c)(1), we do not address respondent’s alternative
argument that the 1988 assessment is not barred under sec.
6501(a), because the period of limitations specified in sec.
6501(e)(1) applies and was extended by sec. 7609(e)(1).
- 157 -
Appendix A
INCOME AND DEDUCTIONS REPORTED BY PETITIONER ON RETURNS
RESPONDENT’S DETERMINATIONS OF INCOME AND DEDUCTIONS IN THE
STATUTORY NOTICE OF DEFICIENCY
1985:
Schedule C Income
Amount Reported Amount Determined Total Adjustment
$160,363 $448,498 $288,135
Deduction Allowed in
Description of Deduction Deduction Claimed Notice of Deficiency
Schedule C
Car and truck expenses $7,712 - 0 -
Commissions 26,840 - 0 -
County recording fee expense --- $640
Depreciation and sec. 179
deduction from Form 4562 2,300 3,575
Development expense --- 437
Dues and publications 3,677 - 0 -
Engineering expense --- 4,060
Insurance 1,277 - 0 -
Legal and professional services 9,282 3,609
Office expense 6,996 316
Other interest 43,291 178,435
Repairs & maintenance 23,157 - 0 -
Taxes 9,073 29,955
Title insurance expense --- 8
Travel and entertainment 15,688 - 0 -
Utilities and telephone 3,188 - 0 -
Total 152,481 221,035
Itemized Deductions
Reported by petitioner ---
Determined by respondent $22,567
Personal Exemptions
Reported by petitioner (2) $2,080
Determined by respondent (2) $2,080
Taxable Income
Reported by petitioner $5,802
Determined by respondent $202,816
- 158 -
Tax
Reported by petitioner $426
Determined by respondent $82,798
Self-employment Tax
Reported by petitioner $930
Determined by respondent $4,673
Earned Income Credit Recapture
Determined by respondent $382
1986:
Schedule C Income
Amount Reported Amount Determined Total Adjustment
$119,772 $659,361 $539,589
Deduction Allowed in
Description of Deduction Deduction Claimed Notice of Deficiency
Car and truck expenses $4,807 - 0 -
Commissions 6,922 - 0 -
County recording fee expense --- $351
Depreciation expense --- 8,579
Dues and publications 1,146 - 0 -
Engineering expense --- 6,380
Insurance 112 - 0 -
Interest:
Mortgage (paid to
financial institutions) --- - 0 -
Other 76,828 208,287
Legal and professional services 11,031 16,870
Office expense 3,935 268
Repairs & maintenance 4,510 - 0 -
Taxes --- 63,588
Title insurance expense --- 159
Travel 3,505 - 0 -
Utilities and telephone 2,838 - 0 -
Total 115,634 304,482
Itemized deductions
Reported by petitioner ---
Determined by respondent $48
Personal Exemptions
Reported by petitioner (2) $2,080
Determined by respondent (2) $2,160
- 159 -
Taxable Income
Reported by petitioner $2,058
Determined by respondent $352,671
Tax
Reported by petitioner - 0 -
Determined by respondent $160,671
Self-employment Tax
Reported by petitioner $509
Determined by respondent $5,166
Political Contribution Credit
Reported by petitioner ---
Determined by respondent $50
Earned Income Credit Recapture
Determined By Respondent $454
1987:
Schedule C Income
Amount Reported Amount Determined Total Adjustment
$138,653 $1,157,509 $1,018,856
Deduction Allowed in
Description of Deduction Deduction Claimed Notice of Deficiency
Appraisal expense --- $630
Car and truck expenses $5,152 - 0 -
Commissions 2,840 3,441
County recording fee expenses --- 9
Depreciation expense --- 8,579
Development expense --- 106
Dues and publications 1,649 75
Engineering expenses --- 2,272
Interest:
Mortgage (paid to
financial institutions) --- - 0 -
Other 619 213,685
Legal and professional expenses --- 8,115
Office expense 13,104 126
Repairs 41,554 - 0 -
Taxes 24,290 20,509
Title insurance expense --- 10,979
Travel 2,325 - 0 -
Utilities and telephone 2,901 - 0 -
Total 94,434 268,526
- 160 -
Itemized Deductions
Reported by petitioner ---
Determined by respondent $41,021
Personal Exemptions
Reported by petitioner (2) $3,800
Determined by respondent (2) $3,800
Taxable Income
Reported by petitioner $37,879
Determined by respondent 845,510
Tax
Reported by petitioner $7,515
Determined by respondent $316,971
Self-employment Tax
Reported by petitioner $5,387
Determined by respondent $5,387
1988:
Schedule C Income
Amount Reported Amount Determined Total Adjustment
$61,921 $576,668 $514,747
Deduction Allowed in
Description of Deduction Amount of Deduction Notice of Deficiency
Advertising expense --- $265
Appraisal expense --- 1,500
Car and truck expenses $986 - 0 -
Commissions 3,750 3,467
County recording fee expenses --- 146
Depreciation expense --- 8,579
Development expense --- 604
Dues and publications 555 - 0 -
Engineering expenses --- 9,500
Interest:
Mortgage (paid to
financial institutions) --- - 0 -
Other 19,272 222,133
Legal and professional services 3,986 5,885
Office expense 823 173
Repairs 10,182 - 0 -
Taxes 510 56,057
Title insurance 0 (1,435)
- 161 -
Travel, meals, ent.
Travel ---
Meals & ent. 1,081
20% of meals & ent. (216)
Meals & ent. minus 20% 865 - 0 -
Utilities and telephone 2,784 - 0 -
Total 43,713 306,874
S Corporation Loss
Reported by petitioner $4,702
Determined by respondent $4,702
Itemized Deductions
Reported by petitioner ---
Determined by respondent $38,661
Personal Exemptions
Reported by petitioner (2) $3,900
Determined by respondent (2) $3,900
Taxable Income
Reported by petitioner $5,206
Determined by respondent $218,131
Tax
Reported by petitioner $784
Determined by respondent $62,169
Self-employment Tax
Reported by petitioner $2,371
Determined by respondent $5,859
Earned Income Credit Recapture
Determined by respondent $37
- 162 -
Appendix B
ADDITIONAL INCOME AND CLAIMED DEDUCTIONS
RAISED IN PETITIONER’S SUPPLEMENT TO PETITION
AND RESPONDENT’S AMENDMENT TO ANSWER
Petitioner’s Supplement to Petition
Petitioner claims that respondent erred in disallowing expenses and in failing
to allow expenses relating to his land development business, orange grove
business, cattle business, and interest expense.
Petitioner claims to have incurred the following expenses as to part-time
labor with grove, cattle, and general property maintenance and repair:
Tax Year Expenses
1985 $787
1987 4,782
1988 3,765
Petitioner claims to have incurred the following expenses as to orange grove
agricultural dues and fees, supplies and equipment along with grove
fertilizer, general maintenance and repairs, and development work:
Tax Year Expenses
1985 $15,628.42
1986 2,716.22
1987 27,409.61
1988 33,136.92
Petitioner claims to have incurred the following expenses as to the purchase
of cattle, feed, supplies and equipment:
Tax Year Expenses
1985 $7,508.94
1986 1,656.61
1987 7,349.77
1988 125.00
Petitioner claims to have incurred the following expenses as to vintage
automobiles:
Tax Year Expenses
1985 $16,125.77
1986 28,938.78
1987 72,951.91
1988 349.17
- 163 -
Respondent’s Amendment to Answer
Citrus County Property: Respondent originally determined that petitioner
realized $49,907 as forgiveness of indebtedness income in 1987. Respondent
alternatively alleges that petitioner realized $112,156 of ordinary income
from the sale of that property in 1985.
Tai Property: Respondent alleges that petitioner realized additional income
of $50,863 from the sale of real property in 1985.
As a result of those allegations, respondent asserts an additional deficiency
of $80,523. Thus, respondent claims a total revised income tax deficiency of
$167,056 for 1985.
Respondent also alleges that those items of income were omitted with
fraudulent intent to evade tax and asserts an increased sec. 6653(b)(1)
addition to tax of $40,402 (revised addition to tax for fraud of $84,188 for
1985), and an increased sec. 6653(b)(2) addition to tax of 50 percent of the
interest due on the revised underpayment of $167,056.
Total adjustments to Schedule C income: $163,019
Taxable income from notice of deficiency: $202,816
Corrected taxable income: $365,835
Tax: $163,321
Self-employment tax: $4,673
Total corrected tax liability: $167,994
Total tax shown on return or as previously adjusted: $1,320
Adjustment to earned income credit: ($382)
Deficiency - increase in tax: $167,056
- 164 -
Appendix C
CONCESSIONS100
SCHEDULE C MISCELLANEOUS INCOME
Taxable Year
1985 1986 1987 1988
Notice of deficiency
Miscellaneous income $12,357 $27,019 $73,907 $24,000
Amounts conceded by petitioner
Commission Income $6,357 $3,019 - 0 - - 0 -
Rent 6,000 24,000 $24,000 $12,000
Total 12,357 27,019 24,000 12,000
Amounts conceded by respondent
Forgiveness of debt - 0 - - 0 - $49,907* $0
Amounts in dispute
Rent - 0 - - 0 - - 0 - $12,000
*Respondent concedes his forgiveness of debt determination for 1987. However,
he raises as new matter that petitioner realized $112,156 of ordinary income
from the sale by foreclosure of the Citrus County Property in 1985. See
appendix B.
100
Respondent prepared on brief a reconciliation of items
which are “in dispute” and concessions as to the adjustments in
the statutory notice of deficiency. Appendix C of this opinion
reflects the reconciliation schedules that respondent prepared
and which petitioner stipulated in his answering brief. However,
there are a number of income items, as we discuss in the opinion,
that the parties represented were still in dispute but which
petitioner does not contest on brief. Instead, he states: “In
addition, any issues not raised in Petitioner’s Brief are also
conceded by Petitioner”.
- 165 -
SCHEDULE C GAINS FROM PROPERTY SALES
Taxable Year
1985 1986 1987 1988
Notice of deficiency
Gains on property sales $247,154 $417,788 $995,801 $375,268
Amendment to answer
Tai Property $50,863 - 0 - - 0 - - 0 -
Amounts conceded by petitioner
OS-13 $4,854 - 0 - - 0 - - 0 -
OS-06 10,270 $13,100 - 0 - $12,950
OS-49 20,000 - 0 - $94,446 - 0 -
OS-1.2 6,878 - 0 - 29,124 - 0 -
OS-61 92,796 - 0 - 0 - 0 -
OR-01 - 0 - 72,039 823,078 - 0 -
OS-29 - 0 - 2,570 - 0 - - 0 -
OS-31 - 0 - 48,432 - 0 - - 0 -
OR-ABC - 0 - 18,783 - 0 - - 0 -
OS-23 - 0 - - 0 - - 0 - 154,170
Total 134,798 154,924 946,648 167,120
Concession relating to
amendment to answer
Tai Property $50,863 - 0 - - 0 - - 0 -
Amounts conceded by respondent
OS-06 $1,000 $1,000 - 0 - $1,000
OS-1.4 6,144 12,289 $24,577 - 0 -
OS-29 - 0 - 42,480 - 0 - - 0 -
OS-22 - 0 - - 0 - - 0 - 55,164
Total 7,144 55,769 24,577 56,164
Amounts in dispute
OS-03 $20,097 $21,097 - 0 - $77,298
OS-06 59,272 - 0 - - 0 - - 0 -
OS-35 19,699 - 0 - - 0 - - 0 -
OS-1.4 6,144 12,289 $24,577 - 0 -
OS-47 - 0 - 41,776 - 0 - - 0 -
OS-47 - 0 - 50,726 - 0 - 19,522
OS-1.3 - 0 - 20,502 - 0 - - 0 -
OS-39 - 0 - 60,706 - 0 - - 0 -
OS-22 - 0 - - 0 - - 0 - 55,164
Total 105,212 207,096 24,577 151,984
*Petitioner on brief concedes that his share of the gain from the sale of the
Mefford Property (OS-22) was $55,164.
- 166 -
SCHEDULE C INTEREST INCOME
Taxable Year
1985 1986 1987 1988
Notice of deficiency
Interest income $54,024 $22,224 $20,061 - 0 -
Amounts conceded by petitioner
Payee
Botos - 0 - - 0 - $400 - 0 -
Horton - 0 - $10,614 - 0 - - 0 -
Tai $27,718 - 0 - - 0 - - 0 -
Commonwealth Int. - 0 - - 0 - 8,305 - 0 -
Muroff 12,761 - 0 - - 0 - - 0 -
Miles - 0 - - 0 - 380 - 0 -
Total 40,479 10,614 9,085 - 0 -
Amounts conceded by respondent
Payee
Bettner, et al. $6,773 $5,805 $5,488 - 0 -
Amounts in dispute
Payee
Bettner, et al. $6,773 $5,805 $5,488 - 0 -
- 167 -
SCHEDULE C COMMISSION INCOME
Notice of deficiency
Commission income-1985 $67,749
Commission income-1986 32,383
Commission income-1987 - 0 -
Commission income-1988 - 0 -
Amounts conceded by petitioner
Commission income-1985
Account (Date of deposit)
Freedom (01/03/85) $500
Freedom (01/18/85) 18,562
Freedom (06/10/85) 500
Freedom (07/22/85) 10,530
Tucker (03/01/85) 157
Total 30,249
Commission income-1986*
Account (Date of deposit)
Freedom (01/08/86) $1,817
Freedom (01/17/86) 1,600
Freedom (04/10/86) 4,680
Freedom (06/20/86) 5,215
Freedom (07/24/86) 1,588
Freedom (08/01/86) 13,558
Freedom (08/25/86) 3,000
Freedom (10/03/86) 600
Freedom (12/12/86) 300
Total 32,358
*The amounts of commission income for 1986 were not part of respondent’s
reconciliation of Schedule C commission income; however, petitioner agrees to
respondent’s requested finding that he received those amounts as income in
1986.
Amounts in dispute
Commission income-1985
Account (Date of deposit)
Freedom (02/06/85) $37,500
Commission income-1986
None - 0 -
*The statutory notice of deficiency determined $32,383 as commission income
for 1986. However, on brief, respondent states $32,358 as the amount of
commission income for 1986. Respondent has apparently conceded the $25
difference between these two figures.
- 168 -
SCHEDULE C RENT FROM CRAZY COMMANDOS
Notice of deficiency
Rent from Crazy Commandos-1985 $1,353
Amounts conceded by respondent
Rent from Crazy Commandos-1985 $103
Amounts in dispute
Rent from Crazy Commandos-1985 $1,250
SCHEDULE C UNIDENTIFIED DEPOSITS
Notice of deficiency
Unidentified deposits-1985 $60,854
Unidentified deposits-1986 159,349
Unidentified deposits-1987 67,740
Unidentified deposits-1988 177,400
Amounts conceded by petitioner
Unidentified deposits-1985
Account (Date of deposit)
Tucker (08/01/85) $1,700
Unidentified deposits-1986
Account (Date of deposit)
Freedom (04/14/86) $6,000
Freedom (09/09/86) 11,186
Freedom (12/16/86) 7,000
Total 24,186
Unidentified deposits-1987
None - 0 -
Unidentified deposits-1988
Account (Date of deposit)
Freedom (03/21/88) $2,200
Tucker (09/07/88) 2,200
Total 4,400
Amounts conceded by respondent
Unidentified deposits
Account (Date of deposit)
Tucker (09/30/85) $154
Unidentified deposits-1986
Account (Date of deposit)
Ledger (08/01/86) $9,038
Ledger (08/15/86) 41,003
Total 50,041
Unidentified deposits-1987
None - 0 -
- 169 -
Unidentified deposits-1988
Account (Date of deposit)
Freedom (03/24/88) $33,000
Amounts in dispute
Unidentified deposits-1985
Account (Date of deposit)
Tucker (03/12/85) $59,000
Unidentified deposits-1986
Account (Date of deposit)
Freedom (05/06/86) $300
Ledger (09/16/86) 84,522
Ledger (10/10/86) 300
Total 85,122
Unidentified deposits-1987
Account (Date of deposit)
Tucker (04/09/87) $67,740
Unidentified deposits-1988
Account (Date of deposit)
Ledger (07/08/88) $140,000
SCHEDULE C NATIONAL LAND COMMISSION INCOME
Notice of deficiency
Natl. Land Commissions-1985 $4,607
Natl. Land Commissions-1986 598
Amounts conceded by respondent
Natl. Land Commissions-1985 $4,607*
*According to respondent’s concession, this is a net amount composed of
commission income received from, and commission expenses paid to, National
Land. Respondent is actually conceding commission income of $8,873; which
eliminates the $4,607 adjustment in the notice of deficiency and results in a
negative adjustment of $4,266 ($4,607 - $8,873).
Amounts in dispute
Natl. Land Commissions-1985 - 0 -
Natl. Land Commissions-1986 $598
- 170 -
SCHEDULE C SALE WAX MYRTLE TREES
Notice of deficiency
Sale Wax Myrtle Trees-1985 $400
Amounts in dispute
Sale Wax Myrtle Trees-1985 $400
SCHEDULE E INCOME*
Notice of deficiency
Schedule E income-1987 $3,888
Amounts in dispute
Schedule E income-1987 $3,888
*This item was not reflected in respondent’s reconciliation schedules.
- 171 -
Appendix D
ITEMS RESPONDENT RELIES UPON AS
CLEAR AND CONVINCING EVIDENCE OF UNDERPAYMENT
1985:
Stipulated Income:
Income Item Amount
Miscellaneous Sch. C income $12,357
Gains from property sales 185,661
Interest income 40,479
Commission income 30,249
Unidentified deposits 1,700
Total stipulated income 270,446
Disputed Income:
Income Item Amount
Gain from sale of Lot 1 in
Susan’s Lakefront Estate $20,097
Installment gain from sale of
3 lots in Florida Fruit Belt Subd. 28,347
Gain from sale of installment note 30,925
Gain from sale of Lot 23, High Plains 19,699
Installment gain from Silver Lake sale 6,144
Gain from foreclosure sale of
Citrus County Property 112,156
Interest income from Silver Lake mortgage 6,773
Commission income 37,500
Rental income 1,250
Unidentified deposit 59,000
Total disputed income 321,891
Total income relied upon by respondent (stipulated income +
disputed income): $592,337
Less reconstructed Schedule C expenses
(after concessions on brief): $225,301
Less itemized deductions: $22,567
Less personal exemptions: $2,080
Taxable income: $342,389
Tax liability (based on head of household filing status):
$151,597
Plus self-employment tax: $4,673
CLAIMED UNDERPAYMENT FOR 1985: $156,270
- 172 -
1986:
Stipulated Income:
Income Item Amount
Miscellaneous Sch. C income $27,019
Gains from property sales 154,924
Interest income 10,614
Commission income 32,357
Unidentified deposits 24,186
Total stipulated income 249,100
Disputed Income:
Income Item Amount
Gain from sale of Tract A in
Susan’s Lakefront Estate $21,097
Gain from sale of parcel in Grissom Parcels 20,502
Installment gain from Silver Lake sale 12,288
Gain from sale of 62.5 acres in East Lake Vista 92,502
Gain from exchange of Arrowhead Lakes Subd.
for Angel-Royse Property 60,706
Interest income from Silver Lake mortgage 5,805
Unidentified deposits 9,638
Total disputed income 222,538
Total income relied upon by respondent (stipulated income +
disputed income): $471,638
Less reconstructed Sch. C expenses
(after concessions on brief): $298,656
Less itemized deductions: - 0 -
Less nonitemized contributions: $48
Less personal exemptions: $2,160
Taxable income: $170,774
Tax liability (based on head of household filing status):
$69,723
Plus self-employment tax: $5,166
CLAIMED UNDERPAYMENT FOR 1986: $74,889
- 173 -
1987:
Stipulated Income:
Income Item Amount
Miscellaneous Sch. C income $24,000
Gains from property sales 946,649
Interest income 9,084
Total stipulated income 979,733
Disputed Income:
Income Item Amount
Installment gain from Silver Lake sale $24,577
Interest income from Silver Lake mortgage 5,488
Total disputed income 30,065
Total income relied upon by respondent (stipulated income +
disputed income): $1,009,798
Less reconstructed Sch. C expenses
(after concessions on brief): $265,076
Less itemized deductions: $43,561
Less personal exemptions: $3,800
Taxable income: $697,361
Tax liability (based on head of household filing status):
$259,934
Plus self-employment tax: $5,387
Less tax per return: $12,902
CLAIMED UNDERPAYMENT FOR 1987: $252,419
- 174 -
1988:
Stipulated Income:
Income Item Amount
Miscellaneous Sch. C income $12,000
Gains from property sales 167,120
Unidentified deposits 4,400
Total stipulated income 183,520
Disputed Income:
Income Item Amount
Gain from sale of Lots 6-30 in
Susan’s Lakefront Estate $77,298
Gain from sale of 10 acres in East Lake Vista 19,522
Gain from sale of Mefford Property 55,164
Rent received from Island Living, Inc. 12,000
Unidentified deposit 140,000
Total disputed income 303,984
Total income relied upon by respondent (stipulated income +
disputed income): $487,504
Less reconstructed Sch. C expenses
(after concessions on brief): $301,910
Less itemized deductions: $44,651
Less personal exemptions: $3,900
Taxable income: $137,043
Tax liability (based on head of household filing status):
$39,035
Plus self-employment tax: $5,859
CLAIMED UNDERPAYMENT FOR 1988: $44,894