Burke v. Commissioner of Internal Revenue, 122695 FEDTAX, 18772-93
| Opinion Judge | RUWE, Judge |
| Party Name | JOHN J. BURKE AND VIVIAN BURKE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Attorney | Michael N. Balsamo, for petitioner John J. Burke. Vincent R. Barrella, for petitioner Vivian Burke. Catherine Chastanet and Mark A. Ericson, for respondent. |
| Case Date | December 26, 1995 |
| Court | U.S. Tax Court |
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in petitioners' Federal income taxes and additions to tax as follows:
Additions to Tax
Year
Deficiency
Sec. 6653(b)(1)
Sec. 6653(b)(2)
Sec. 6661
1985
$38,140
$36,201
50 percent of the interest due on $23,388
$5,847
Additions to Tax
Year
Deficiency
Sec. 6651(a)(1)
Sec. 6653(b)(1)(A)
Sec. 6653(b)(1)(B)
Sec. 6661
1986
$256,295
$34,692
$88,473
50 percent of the $28,401 interest due on $113,605
$28, 401
1987
$12,973
$12,791
50 percent of the $3,124 interest due on $12,497
$3,124
The issues for decision are: (1) Whether petitioners failed to report income of $59,648, $242,669,1 and $50,746 on delinquent returns filed for the years 1985, 1986, and 1987, respectively; (2) whether petitioners are entitled to deduct embezzlement losses of $21,800 and $215,000 in 1985 and 1986, respectively; (3) whether petitioners are entitled to deductions of $20,253, $141,418, and $37,348 in 1985, 1986, and 1987, respectively, for ordinary losses allegedly incurred by Ard Rhei, Inc., a small business corporation (S corporation) under section 1366;2 (4) whether petitioner John J. Burke is liable for an addition to tax for fraud3 under section 6653(b);4 (5) whether petitioner Vivian Burke tacitly consented to the filing of a joint Federal income tax return for each of the years in issue; and, if so, (6) whether Mrs. Burke is entitled to "innocent spouse" protection pursuant to section 6013(e)(1); (7) whether petitioners are liable for an addition to tax under section 6651(a)(1) for delinquent filing of their Federal income tax returns for 1986; and (8) whether petitioners are liable for an addition to tax for a substantial understatement of income tax under section 6661(a) for each of the taxable years in issue.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. At the time the petition was filed, petitioners resided in Setauket, New York.
I. Background
During the years in issue, Mr. Burke was a licensed insurance agent and the sole owner of two insurance brokerage agencies, John J. Burke & Associates, and Burke-Shepis & Co. (Burke Insurance Agencies).
In 1985, Mr. Burke acquired a 50-percent interest in a restaurant known as Jury's of Setauket (Jury's). Jury's was organized as an S corporation pursuant to section 1366 and operated under the name "Ard Rhei, Inc." (Ard Rhei).5 The remaining 50-percent interest in Jury's was owned by Bernard Hillick. Mr. Burke eventually purchased Mr. Hillick's interest in Jury's.
During the years in issue, Mr. Burke frequently made large wagers at casinos and with bookmakers. In addition, Mr. Burke used cocaine and marijuana.
II. John Burke's Agreement with U.S. Life
A. The Terms of the Agreement
Mr. Burke was an agent for, and sold insurance policies issued by, the U.S. Life Insurance Co. (U.S. Life). In early 1985, Mr. Burke entered into an agreement under which U.S. Life would issue group life insurance policies to the Metropolitan Police Conference (MPC), which represented 38 Long Island Village police departments, police officers' benevolent associations, and other police and transit worker organizations.
Pursuant to his agreement with U.S. Life, Mr. Burke collected premiums from the MPC and deposited the funds into a premium account (MPC premium account) that he had established for the MPC at Marine Midland Bank in Setauket, New York. Under his agreement with U.S. Life, Mr. Burke was entitled to a 15-percent annualized commission, which he was permitted to withdraw from the MPC premium account prior to the receipt of all premiums that were due. Commissions were transferred from the MPC premium account to the expense accounts of the Burke Insurance Agencies. After withdrawing his commission, Mr. Burke was required to remit the balance of the premiums in the MPC premium account to U.S. Life. Mr. Burke had no authority to appropriate U.S. Life premium funds in excess of his commissions. Between May 1985 and May 1987, Mr. Burke collected more than $3 million in premiums from the MPC.
B. Mr. Burke's Misappropriation of MPC Premium Account Funds
During the years at issue, JoAnn Romano was the office manager of the Burke Insurance Agencies. As such, she supervised the administrative staff, managed in-house property and casualty sales, served as a liaison to representatives of police groups and insurance companies, and handled banking matters as well as the payroll, accounts payable and receivable, and premiums that were received in the office.
Both Ms. Romano and Mr. Burke had signature authority over the MPC premium account and the Burke Insurance Agencies' expense accounts. When Mr. Burke wanted cash, he would usually arrange for office workers at the Burke Insurance Agencies to cash checks and deliver the cash to him. He would usually instruct Ms. Romano to transfer funds from the MPC premium account to one of the Burke Insurance Agencies' expense accounts. She would then write a check that was drawn on one of these expense accounts made payable to an employee of the Burke Insurance Agencies, John J. Burke, or "cash". Checks payable to employees were cashed by the employee who would deliver the cash to Mr. Burke or a person designated by him. When Mr. Burke needed funds in excess of $10,000, he would usually instruct Ms. Romano to write multiple checks in smaller amounts so that a currency transaction report would not be generated by the bank. On some occasions, Mr. Burke ordered checks to be made payable to a bookmaker with whom Mr. Burke gambled. On several occasions, Mr. Burke instructed Ms. Romano to write a check payable to Don Balsamo who supplied Mr. Burke with cocaine. On other occasions, Mr. Burke directed Ms. Romano to transfer funds to Ard Rhei. Pursuant to Mr. Burke's instructions, Ms. Romano falsely characterized these withdrawals from the Burke Insurance Agencies' accounts as expenses, commissions, or premium refunds.
At some point, Kenneth S. Silver, the accountant for the Burke Insurance Agencies caused Forms 1099 to be issued to employees to whom checks were issued in order to obtain cash for Mr. Burke. Upon realizing this, Mr. Burke had the Forms 1099 withdrawn.
On some occasions, checks were drawn directly on the MPC account and either cashed, made payable to Ard Rhei, or paid to Mr. Burke's bookmaker. The proceeds of cashed checks, which were drawn on the MPC premium account, were delivered to Mr. Burke. Ms. Romano withdrew funds from the MPC premium account and the Burke Insurance Agencies' expense accounts only when instructed to do so by Mr. Burke.
During 1986 and 1987, the following amounts were withdrawn from the MPC premium account by checks payable to the following payees:
1986
Payee
Total Amount Payable
John Burke
$120,297.61
Burke & Associates
432,823.00
Burke & Associates Premium Account
66,000.00
Burke & Associates Expense Account
122,880.00
Burke-Shepis
21,200.00
Burke-Shepis Premium Account
46,573.71
Burke-Shepis Expense Account
720.00
"Cash"
16,000.00
Evelyn Coleman1
550.00
Jury's
12,300.00
Lisa Tobin2
6,000.00
Rex Wyon, Inc.
500.00
Total
$845,844.32
1Ms. Coleman was an employee of the Burke Insurance Agencies during the years in issue.
2Mrs. Tobin was the wife of Steven Tobin, a bookmaker with whom Mr. Burke gambled during the years in issue.
1987
Payee
Total Amount Payable
Burke & Associates
$122,900.00
Burke & Associates Premium Account
40,000.00
Burke & Associates Expense Account
22,000.00
Burke & Associates C.H.I.E. Account
35,000.00
Burke-Shepis
23,100.00
Don Balsamo3
4,000.51
North Island Express Ltd. & Don Balsamo
2,100.00
Total
$249,100.51
3Mr. Balsamo supplied Mr. Burke with cocaine during the years in issue.
Premiums due U.S. Life continued to increase throughout 1986. On April 16, 1986, Felix C. Curcuru, vice president of U.S. Life, wrote to Mr. Burke regarding premium payments of $542,894, which were overdue from the MPC. Mr. Burke had previously advised U.S. Life that the MPC premium account was in arrears because the Burke Insurance Agencies' administrative billing procedures had not been fully developed. At a meeting in May 1986, Mr. Burke informed U.S. Life that MPC premium payments were late due to billing system problems and a misunderstanding as to the length of the "drag"6 that U.S. Life had extended to several of the police units. In the original agreement between U.S. Life and the MPC, U.S. Life granted several of the police units a 3-month drag.
In an October 15, 1986, letter to Mr. Burke, Mr. Curcuru summarized the matters that were discussed at an October 9, 1986, meeting, including an MPC premium reconciliation presented by Mr. Burke that showed $681,079 due and unpaid to U.S. Life through October 31, 1986. At this meeting, Mr. Burke agreed to pay the amount owed by October 31, 1986, but he failed to do so. On December 15, 1986, Mr. Curcuru again wrote to Mr. Burke to demand payment in the amount of $843,670 by December 22, 1986, for unpaid MPC premiums owing from Mr. Burke through December 31, 1986. The letter further stated that if full payment were not received by December 22, 1986, U.S. Life would commence legal action to collect the unpaid premiums.
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