T.C. Memo. 2018-2
UNITED STATES TAX COURT
JOAN FARR f.k.a. JOAN HEFFINGTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2746-15. Filed January 9, 2018.
Joan Farr f.k.a. Joan Heffington, pro se.
Patrick A. Greenleaf, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined the following deficiencies in
petitioner’s Federal excise taxes under section 4958(a)(1) and (b)1 for the years
indicated:
1
All section references are to the Internal Revenue Code (Code) in effect for
2010, 2011, and 2012, the years at issue. All Rule references are to the Tax Court
Rules of Practice and Procedure.
-2-
[*2] Year Sec. 4958(a)(1) Sec. 4958(b)
2010 $1,740.94 $13,927.52
2011 6,808.13 54,465.06
2012 1,324.76 10,598.10
FINDINGS OF FACT
Virtually all of the facts have been deemed established pursuant to Rule
91(f)(3).
Petitioner resided in Kansas at the time she filed the petition.
At all relevant times, including during 2010, 2011, and 2012, petitioner was
the chief executive officer and a member of the board of directors of the Associa-
tion for Honest Attorneys (AHA). Any work that petitioner did for AHA during
2010, 2011, and 2012 was done at her residence.
Petitioner had organized AHA in 2003 as a nonprofit corporation under the
laws of the State of Kansas. During that year, petitioner also prepared and filed on
behalf of AHA an application with the Internal Revenue Service (IRS) for a
determination that it qualified as an organization described in section 501(c)(3)
that was exempt from Federal income tax (tax). The IRS granted that application
and made that determination.
-3-
[*3] For each of the years 2010, 2011, and 2012, AHA filed with the IRS Form
990-N (e-Postcard), in which it reported that (1) it continued to operate as a tax-
exempt organization described in section 501(c)(3); (2) petitioner was its principal
officer; and (3) its annual gross receipts were less than $50,000.
AHA did not file for any of the years 2010, 2011, and 2012 Form 990-PF,
Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust
Treated as Private Foundation (Form 990-PF), which must be filed annually by
every private foundation or section 4947(a)(1) trust that is treated as a private
foundation, regardless of its revenues or assets.2 Nor did AHA file for any of the
years 2010, 2011, and 2012 Form 4720, Return of Certain Excise Taxes Under
Chapters 41 and 42 of the Internal Revenue Code (Form 4720), which must be
filed by every private foundation or section 4947(a)(1) trust that is treated as a
private foundation in the event certain excise taxes under chapters 41 and 42 of the
Code are incurred.
AHA filed a petition in the Court for a declaratory judgment under section
7428 with respect to a notice of determination that respondent had issued to it on
February 3, 2015, thereby commencing the case at docket No. 14562-15X. In that
2
We have taken judicial notice of certain facts regarding certain IRS forms
and/or certain IRS instructions with respect to certain IRS forms.
-4-
[*4] notice, respondent determined to revoke, effective January 1, 2010, AHA’s
exemption from tax under section 501(a) because respondent had determined that
AHA “ha[d] not operated in accordance with the provisions of section 501(c)(3)”.3
During 2010, 2011, and 2012, AHA maintained a checking account at Verus
Bank in Derby, Kansas (AHA checking account). During those years, petitioner
had exclusive signature authority for that checking account.
During 2010, 2011, and 2012, petitioner used the AHA checking account to
make certain purchases from certain third parties and certain cash withdrawals
totaling $6,963.76, $27,232.53, and $5,299.05, respectively.4 Specifically,
petitioner used the AHA checking account in 2010, 2011, and 2012 to make
certain purchases from certain department stores and grocery stores, such as
Dillard’s, Walmart, Kwik Shop, Kohl’s, Walgreens, and Dillons. In addition,
petitioner used the AHA checking account in 2010, 2011, and 2012 to make
automobile-related purchases, such as QuikTrip, A&A Auto Salvage, Derby Quick
3
We have taken judicial notice of certain facts relating to the notice of
determination issued to AHA on which the declaratory judgment proceeding that
AHA commenced in the case at docket No. 14562-15X is based.
4
Attached as an appendix are tables that set forth all of the purchases from
third parties that petitioner made with checks drawn on, and all of the cash
withdrawals that she made from, the AHA checking account totaling $6,963.76,
$27,232.53, and $5,299.05 during 2010, 2011, and 2012, respectively.
-5-
[*5] Lube, K-15 Auto Salvage, and Meineke. Petitioner also used the AHA
checking account in 2010, 2011, and 2012 to make certain home-related and real-
estate-related purchases from certain stores, such as Slumberland, Westar Energy,
Lowes, T&S Tree Service, Gene’s Stump Grinding Service, Dutch’s, Echostar
Dish, Allstate, Roberts Overdoors Inc., Lusco Brick & Stone, MY Construction,
and Star Lumber & Supply. In addition, petitioner used the AHA checking
account in 2010 and 2011 to make certain payments with respect to a USAA credit
card. Petitioner also used the AHA checking account in 2011 to make a $189.50
payment to an animal clinic and a $7,750 payment to St. John’s Military School
for tuition for her son, and another $100 payment to that school. In addition,
petitioner used the AHA checking account in 2011 to pay $2,200 for the exhuma-
tion and DNA testing of her father’s remains.
Although petitioner used the AHA checking account during 2010, 2011, and
2012 to make certain purchases from certain third parties and certain cash with-
drawals totaling $6,963.76, $27,232.53, and $5,299.05, respectively, she did not
report any income from AHA in the individual tax return that she filed for each of
those years.
AHA did not pay petitioner a salary during any of the years 2010 through
2012. Nor did AHA issue to petitioner Form W-2, Wage and Tax Statement, or
-6-
[*6] any type of Form 1099 for any of those years. In addition, AHA did not file
any Forms 941, Employer’s Quarterly Federal Tax Return (Forms 941), or any
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (Form
940), for any of the years 2010, 2011, and 2012 or for any periods within any of
those years. During the period 2003 through 2012, AHA did not execute any
promissory notes payable to petitioner and did not make any payments of interest
to her.
Respondent issued to petitioner a notice of deficiency (notice) for her
taxable years 2010, 2011, and 2012. In that notice, respondent determined, inter
alia, that during those taxable years petitioner, a so-called disqualified person, had
engaged in certain excess benefit transactions with AHA under section 4958
totaling $6,963.76, $27,232.53, and $5,299.05, respectively.
OPINION
We must decide whether to sustain respondent’s determinations in the
notice. Petitioner has the burden of establishing that those determinations are
erroneous.5 See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
5
Sec. 7491(a) is inapplicable because it does not apply to taxes imposed by
subtitle D of the Code, such as the taxes under sec. 4958 that are at issue here.
-7-
[*7] Before deciding whether to sustain respondent’s determinations in the
notice, we summarize the statutory framework within which we must make that
decision. Section 4958(a)(1) imposes on each “excess benefit transaction” a so-
called first-tier “tax equal to 25 percent of the excess benefit.” The first-tier tax is
required to be paid by any disqualified person, as defined in section 4958(f)(1),
with respect to that excess benefit transaction. See sec. 4958(a)(1).
Section 4958(c)(1)(A) defines the term “excess benefit transaction” to mean
generally “any transaction in which an economic benefit is provided by an applica-
ble tax-exempt organization directly or indirectly to or for the use of any disquali-
fied person if the value of the economic benefit provided exceeds the value of the
consideration (including the performance of services) received for providing such
benefit.” The term “excess benefit” means the excess referred to in section
4958(c)(1)(A).
As pertinent here, section 4958(f)(1)(A) defines the term “disqualified
person” to mean with respect to any transaction, inter alia, “any person who was,
at any time during the 5-year period ending on the date of such transaction, in a
position to exercise substantial influence over the affairs of the organization”.
Section 4958(e) defines the term “applicable tax-exempt organization” in
pertinent part to mean--
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[*8] (1) any organization which (without regard to any excess
benefit) would be described in paragraph (3) * * * of section 501(c)
and exempt from tax under section 501(a), and
(2) any organization which was described in * * * [section
4958(e)(1)] at any time during the 5-year period ending on the date of
the transaction.[6]
Section 4958(b) imposes a so-called second-tier “tax equal to 200 percent of
the excess benefit involved.” The second-tier tax will be imposed “[i]n any case in
which an initial [first-tier] tax is imposed by * * * [section 4958] (a)(1) on an
excess benefit transaction and the excess benefit involved in such transaction is
not corrected within the taxable period”. The second-tier tax imposed by section
4958(b) is required to be paid by any disqualified person, as defined in section
4958(f)(1), with respect to that excess benefit transaction.
Section 4958(f)(6) defines the terms “correction” and “correct” for purposes
of the second-tier tax imposed by section 4958(b) to mean,
with respect to any excess benefit transaction, undoing the excess
benefit to the extent possible, and taking any additional measures
necessary to place the organization in a financial position not worse
than that in which it would be if the disqualified person were dealing
under the highest fiduciary standards * * *
6
The term “applicable tax-exempt organization”does not include a private
foundation, as defined in sec. 509(a).
-9-
[*9] Section 4958(f)(5) defines the term “taxable period” for purposes of the
second-tier tax imposed by section 4958(b) to mean,
with respect to any excess benefit transaction, the period
beginning with the date on which the transaction occurs and ending
on the earliest of--
(A) the date of mailing a notice of deficiency under
section 6212 with respect to the tax imposed by * * * [section
4958] (a)(1), or
(B) the date on which the tax imposed by * * * [section
4958] (a)(1) is assessed.
We turn now to whether to sustain respondent’s determinations in the
notice. In doing so, we must decide (1) whether AHA is an applicable tax-exempt
organization, as defined in section 4958(e); (2) whether petitioner is a disqualified
person with respect to AHA, as defined in section 4958(f)(1)(A); (3) whether
during each of her taxable years 2010, 2011, and 2012 petitioner engaged in
excess benefit transactions with AHA, as defined in section 4958(c)(1)(A),
totaling $6,963.76, $27,232.53, and $5,299.05, respectively; and (4) whether
petitioner corrected the excess benefits involved in those respective excess benefit
transactions within the taxable period, as defined in section 4958(f)(5).
- 10 -
[*10] First-Tier Tax Under Section 4958(a)(1)
Applicable Tax-Exempt Organization
In 2003, petitioner prepared and filed on behalf of AHA an application with
the IRS for a determination that it qualified as an organization described in section
501(c)(3) that was exempt from tax. The IRS granted that application and made
that determination.
For each of the years 2010, 2011, and 2012, AHA filed with the IRS Form
990-N (e-Postcard), in which it reported that (1) it continued to operate as a tax-
exempt organization described in section 501(c)(3); (2) petitioner was its principal
officer; and (3) its annual gross receipts were less than $50,000.
AHA did not file for any of the years 2010, 2011, and 2012 Form 990-PF,
which must be filed annually by every private foundation or section 4947(a)(1)
trust that is treated as a private foundation, regardless of its revenues or assets.
Nor did AHA file for any of those years Form 4720, which must be filed by every
private foundation or section 4947(a)(1) trust that is treated as a private foundation
in the event certain excise taxes under chapters 41 and 42 of the Code are in-
curred.
AHA filed a petition in the Court for a declaratory judgment under section
7428 with respect to a notice of determination that respondent had issued to it on
- 11 -
[*11] February 3, 2015, thereby commencing the case at docket No. 14562-15X.
In that notice, respondent determined to revoke, effective January 1, 2010, AHA’s
exemption from tax under section 501(a) because respondent had determined that
AHA “ha[d] not operated in accordance with the provisions of section 501(c)(3)”.
Petitioner does not dispute respondent’s determinations in the notice that
during each of the years 2010, 2011, and 2012 AHA was an applicable tax-exempt
organization, as defined in section 4958(e).
On the record before us, we find that throughout the period commencing
with its inception in 2003 though December 31, 2009, the IRS treated AHA as an
organization described in section 501(c)(3) that was exempt from tax. On that
record, we further find that during each of the years 2010, 2011, and 2012 AHA
was an applicable tax-exempt organization, as defined in section 4958(e).
Disqualified Person
During 2010, 2011, and 2012, petitioner was the chief executive officer and
a member of the board of directors of AHA. During those years, she had exclusive
signature authority for the AHA checking account at Verus Bank.
Petitioner does not dispute respondent’s determinations in the notice that
during each of the years 2010, 2011, and 2012 she was a disqualified person with
respect to AHA, as defined in section 4958(f)(1)(A).
- 12 -
[*12] On the record before us, we find that during each of the years 2010, 2011,
and 2012, petitioner was in a position to exercise substantial influence over the
affairs of AHA. See sec. 53.4958-3(c)(1) to (3), Foundation Excise Tax Regs.
(persons deemed to have substantial influence over an organization include voting
members of the governing body, presidents, chief executive officers, and treasur-
ers). On that record, we further find that during each of those years petitioner was
a disqualified person with respect to AHA, as defined in section 4958(f)(1)(A).
Excess Benefit Transactions
During 2010, 2011, and 2012, petitioner used the AHA checking account to
make certain purchases from certain third parties and certain cash withdrawals
totaling $6,963.76, $27,232.53, and $5,299.05, respectively.7 Petitioner disputes
respondent’s determinations in the notice that those purchases and those cash
withdrawals are excess benefit transactions, as defined in section 4958(c)(1)(A).
In support of her position, petitioner advances the following three contentions:
(1) each of the payments to third parties for the purchases at issue was for a
business or an exempt purpose of AHA; (2) each of those payments and each of
the cash withdrawals at issue constituted compensation that AHA owed petitioner
for services that she had rendered for AHA during years prior to 2010; and/or
7
See supra note 4.
- 13 -
[*13] (3) each of the payments at issue and each of the cash withdrawals at issue
represented the repayment by AHA of certain loans that petitioner had made to
AHA during years prior to 2010.
In support of the contentions that petitioner advances in support of her
position, she relies on her testimony and certain documentary evidence. With
respect to petitioner’s testimony on which she relies, we found her testimony to be
general, conclusory, vague, self-serving, uncorroborated, and/or not credible in
certain material respects. We are not required to, and we shall not, rely on peti-
tioner’s testimony to establish her position or any of the contentions that she
advances in support of her position that none of the purchases from certain third
parties and certain cash withdrawals totaling $6,963.76, $27,232.53, and
$5,299.05, respectively, that she made during 2010, 2011, and 2012 is an excess
benefit transaction, as defined in section 4958(c)(1)(A). See, e.g., Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986).
With respect to certain documentary evidence on which petitioner relies, we
found that evidence to be questionable, not reliable, not credible, and/or otherwise
not persuasive.8 We are not required to, and we shall not, rely on any such
8
Petitioner prepared at least some of the documentary evidence on which
she relies after respondent began an examination of her taxable years 2010, 2011,
(continued...)
- 14 -
[*14] documentary evidence to establish petitioner’s position or any of the
contentions that she advances in support of her position that none of the purchases
from certain third parties and certain cash withdrawals totaling $6,963.76,
$27,232.53, and $5,299.05, respectively, that she made during 2010, 2011, and
2012 is an excess benefit transaction, as defined in section 4958(c)(1)(A).
On the record before us, we find that petitioner has failed to carry her
burden of establishing that none of the purchases from certain third parties and
certain cash withdrawals totaling $6,963.76, $27,232.53, and $5,299.05, respec-
tively, that she made during 2010, 2011, and 2012 is an excess benefit transaction,
as defined in section 4958(c)(1)(A).
Based upon our examination of the entire record before us, we find that
petitioner has failed to carry her burden of establishing error in respondent’s deter-
minations in the notice that there are deficiencies of $1,740.94, $6,808.13, and
$1,324.79 under section 4958(a)(1) for her taxable years 2010, 2011, and 2012,
respectively.
8
(...continued)
and 2012.
- 15 -
[*15] Second-Tier Tax Under Section 4958(b)
Petitioner does not dispute that she has not “corrected within the taxable
period” the “excess benefit involved in” each excess benefit transaction, see sec.
4958(b), in which respondent determined she engaged during each of the years
2010, 2011, and 2012 and as a result of which respondent determined a deficiency
under section 4958(a)(1) for each of those years that we have sustained. We
presume that petitioner does not dispute those matters because it is her position
that she did not engage in any excess benefit transaction with AHA during 2010,
2011, or 2012.
On the record before us, we find that petitioner has not corrected within the
taxable period the excess benefit involved in each excess benefit transaction in
which respondent determined she engaged during each of the years 2010, 2011,
and 2012 and as a result of which respondent determined a deficiency under
section 4958(a)(1) for each of those years that we have sustained.
Based upon our examination of the entire record before us, we find that
petitioner has failed to carry her burden of establishing error in respondent’s deter-
minations in the notice that there are deficiencies of $13,927.52, $54,465.06, and
$10,598.10 under section 4958(b) for her taxable years 2010, 2011, and 2012,
respectively.
- 16 -
[*16] To reflect the foregoing,
Decision will be entered for
respondent.
- 17 -
[*17] APPENDIX
Checks Drawn on AHA’s Checking Account During 2010
Checks Used for Petitioner’s Personal Expenses
Date of Check Check No. Payee Amount
1/4/10 1470 Dillards $119.80
1/7/10 1471 QuikTrip 39.40
1/6/10 1473 Cingular Wireless 26.70
1/13/10 1474 A&A Auto Salvage 134.94
1/14/10 1476 Allstate 368.44
1/14/10 1478 Dr. Scott Landes 24.00
1/14/10 1481 Dillons 162.40
1/14/10 1482 Dillons 39.80
1/19/10 1488 Hollister 69.10
1/21/10 1493 QuikTrip 41.71
1/28/10 1497 Dillons 21.00
1/27/10 1500 Kountry Kupboard 10.42
2/10/10 1501 Gary Shawalter 150.00
2/2/10 1502 Kwik Shop 53.20
2/8/10 1504 Dillons 32.80
2/9/10 1505 Kwik Shop 45.40
2/11/10 1506 Dillons 60.53
2/18/10 1508 QuikTrip 39.81
2/16/10 1509 WalMart 21.37
- 18 -
[*18] Date of Check Check No. Payee Amount
2/19/10 1510 Derby Quick Lube 34.37
2/19/10 1511 WalMart 16.35
2/19/10 1512 Kwik Shop 42.64
3/1/10 1514 USAA Credit Card 29.90
3/15/10 1515 Dillons 35.20
3/15/10 1517 Rods 30.00
3/17/10 1518 WalMart 41.48
Total 1,690.76
Checks Used To Obtain Cash for Petitioner
Date of Check Check No. Payee Amount
1/11/10 1480 Verus Bank $300.00
2/19/10 1513 Verus Bank 4,900.00
3/18/10 1519 Verus Bank 40.00
4/16/10 1520 Joan Heffington 33.00
Total 5,273.00
Grand total 6,963.76
- 19 -
[*19] Checks Drawn on AHA’s Checking Account During 2011
Checks Used for Petitioner’s Personal Expenses
Date of Check Check No. Payee Amount
6/20/11 1522 Dillons $10.12
6/24/11 1523 Stamps & Misc 65.37
7/9/11 1524 QuikTrip 34.08
8/10/11 --- Westar Energy 112.42
8/16/11 1530 WalMart 90.25
8/15/11 1533 Improv 100.00
8/18/11 1534 Slumberland 339.07
8/17/11 1535 DRC 30.00
8/22/11 1537 WalMart 118.66
8/22/11 1538 WalMart 41.28
8/19/11 1539 Penny’s 31.00
8/23/11 1540 WalMart 71.25
8/23/11 1541 Walgreens 9.12
8/24/11 1542 QuikTrip 76.08
8/4/11 1543 Dillons 30.00
8/25/11 1544 WalMart 315.96
8/24/11 1545 USAA Credit Card 399.11
8/30/11 1547 QuikTrip 59.61
8/26/11 1548 St. John’s Military
School 7,750.00
- 20 -
[*20] Date of Check Check No. Payee Amount
8/30/11 1550 T&S Tree Service 350.00
8/30/11 1551 Gene’s Stump
Grinding Service 50.00
9/2/11 1552 Dillons 50.00
9/8/11 1553 El Paso Animal
Clinic 189.50
9/13/11 1554 WalMart 22.11
9/10/11 1555 Dutch’s 251.06
9/10/11 1556 Great Clips 35.87
9/19/11 1557 WalMart 100.91
9/20/11 1559 WalMart 34.01
9/20/11 1561 Kohls 31.25
9/19/11 1562 Hollister 65.87
10/2/11 1564 Rollins 900.00
10/12/11 1565 Echostar Dish 50.43
10/6/11 1566 Ryan Lawn & Tree 175.08
10/8/11 1568 Lowes 117.35
10/13/11 1570 WalMart 27.77
10/11/11 1571 Sedgwick Co.
Treasurer 485.10
10/14/11 1572 Meineke Car Care 393.66
10/15/11 1573 St. John’s Military
School 100.00
10/18/11 1574 WalMart 31.33
- 21 -
[*21] Date of Check Check No. Payee Amount
10/19/11 1575 Central Mississippi
Crematory, Inc. 35.00
10/19/11 1601 Medscreens, Inc. 1,300.00
11/3/11 1602 Dillons 50.00
11/8/11 --- Perfect Memorials 17.95
11/18/11 --- Joel Osteen 18.00
11/1/11 --- Subway 11.05
11/7/11 1604 Dillons 72.36
11/10/11 1607 Penny’s 96.56
11/11/11 1609 Dish 50.43
11/15/11 1612 K-15 Auto Salvage 30.00
11/15/11 1613 WalMart 78.23
12/13/11 1615 Lowes 59.30
12/28/11 --- O’reilly Auto 17.24
12/16/11 --- Braums 10.80
12/23/11 1617 AT&T Solutions 40.00
--- 1618 Lowes 26.93
Total 15,058.53
Checks Used To Obtain Cash for Petitioner
Date of Check Check No. Payee Amount
8/4/11 --- Verus Bank $10,350.00
8/8/11 1526 Joan Heffington 300.00
8/11/11 1529 Cash 100.00
- 22 -
[*22] Date of Check Check No. Payee Amount
8/15/11 1532 Joan Heffington 200.00
8/17/11 1536 Joan Heffington 150.00
8/26/11 1549 Joan Heffington 234.00
9/19/11 1560 Joan Heffington 420.00
3/18/10 1567 Joan Heffington 420.00
Total 12,174.00
Grand total 27,232.53
- 23 -
[*23] Checks Drawn on AHA’s Checking Account During 2012
Checks Used for Petitioner’s Personal Expenses
Date of Check Check No. Payee Amount
1/5/12 --- Motor Mint Cars $19.90
1/13/12 1619 My Construction 1,050.00
1/17/12 1621 Roberts Overdoors,
Inc. 1,610.53
1/18/12 1623 Lusco Brick &
Stone 526.53
1/19/12 1624 Star Lumber &
Supply 1,251.98
1/25/12 1625 Dillons 44.00
1/27/12 1626 Lowes 38.60
2/14/12 --- QuikTrip 20.00
2/15/12 1630 WalMart 183.51
9/10/12 --- QuikTrip 9.00
9/12/12 --- Kwik Shop 5.00
Total 4,759.05
Checks Used To Obtain Cash for Petitioner
Date of Check Check No. Payee Amount
1/24/12 --- Cash $120.00
1/30/12 1628 Joan Heffington 220.00
2/12/12 --- Cash 60.00
2/9/12 1629 Joan Heffington 70.00
8/7/12 --- Joan Heffington 20.00
- 24 -
[*24] Date of Check Check No. Payee Amount
9/7/12 --- Cash from deposit
slip 10.00
10/15/12 --- Joan Heffington 40.00
Total 540.00
Grand total 5,299.05