Bruno v. Comm'r of Internal Revenue

• Citation: 71 T.C. 191
• Decision Date: 20 November 1978
• Docket Number: Docket No. 7284-76.
• Court: United States Tax Court
• Parties: DOROTHY BRUNO, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT

71 T.C. 191

DOROTHY BRUNO, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 7284-76.

United States Tax Court

Filed November 20, 1978.

Petitioner sought to apply the maximum tax on earned income under sec. 1348 to the entire net profits from her bail bonding business. Held, such profits are subject to the maximum tax on earned income since capital is not a material income-producing factor in petitioner's business within the meaning of sec. 1348. Charles C. Shafer, Jr., for the petitioner.

John Wendell Paul, for the respondent.

FORRESTER, Judge:

Respondent has determined deficiencies in petitioner's Federal income tax for the taxable years 1973 and 1974 in the amounts of $6,890.70, and $10,488.98, respectively. Concessions having been made, purposes of section 1348,¹ petitioner employs capital as a material income-producing factor in the business of writing bail bonds.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Petitioner Dorothy Bruno (petitioner) resided in Kansas City, Mo., at the time the petition was filed herein. Petitioner filed her 1973 and 1974 Federal income tax returns with the Internal Revenue Service Center, Kansas City, Mo.

During the years 1973 and 1974, petitioner operated the Bruno Bonding Co. in Kansas City, Mo., as a sole proprietorship. She was required to meet certain prescribed conditions before she could write bail bonds in State and municipal courts. When writing bonds in a Missouri State court, petitioner had to possess specific qualifications under the rules of criminal procedure, as enacted by the Missouri Supreme Court. Such rules provide, in pertinent part:

32.14 Bonds—-Surety, Individual—-Qualifications

An individual shall not be accepted as a surety on any bail bond taken under these Rules unless he possesses the following qualifications:

1. He shall be a reputable person, at least twenty-one years of age and a bona fide resident of the State of Missouri.

2. He shall not have been convicted of any felony under the laws of any state or of the United States.

3. He shall not be an attorney-at-law, a peace officer, a constable or a deputy constable.

4. He shall not be an elected or appointed official or employee of the State of Missouri or any county or other political subdivision thereof.

5. He shall have no outstanding forfeiture bail bond in any court of this state or of the United States.

32.15 Bonds—-Surety, Individual—-Additional Qualifications

In addition to the qualifications specified in Rule 32.14, an individual shall not be taken as a surety on any bail bond unless he shall be the owner of real estate or personal property having a reasonable market value, in excess of all encumbrances thereon, exemptions and all other liabilities, at least equal to the amount specified in the bond which he proposes to execute. In order to qualify upon the basis of real estate owned, an individual shall be the sole, legal and equitable owner thereof in fee simple and of record. If there are several sureties, the aggregate market value of real estate or personal property owned by them in excess of encumbrances, exemptions and all other liabilities, shall be at least equal to the amount specified in the bond. (Emphasis supplied.)

Petitioner had to file a monthly “general affidavit of qualification” to comply with these rules. In addition to the matters specified in Missouri Supreme Court Rules of Criminal Procedure 32.14 and 32.15, supra, petitioner was also required to furnish the following information in her affidavit, as prescribed by rule 32.16. It states, in relevant part:

32.16 Bonds—-Surety, Individual—-Affidavit ofJustification—-Additional Investigation—-Approval

In addition to the matters specified in Rules 32.14 and 32.15, such affidavit shall contain the following: (1) an accurate legal description of the real estate which the surety proposes to justify as to his sufficiency, together with a description of the improvements located thereon, and the location of the property by street address if it is located in a city or town; (2) the latest assessed value of such property; (3) an accurate description of the personal property which together with a statement as to the reasonable market value thereof; (4) a list of all bail bonds upon which he is surety and upon which his obligation remains undischarged, specifying the amount of each bond, the name of the principal or defendant, the offense charged, and the court in which such bond is pending; and (5) a statement whether or not he or anyone for his use has been promised or has received any consideration or security for his suretyship, and if so, the nature and amount thereof, and the name of the person by whom such promise was made or from whom such security or consideration was received. * * * (Emphasis supplied.)

Petitioner met the State requirement that a surety's bond must be supported by real or personal property by listing all of her solely owned real estate. This listing notwithstanding, petitioner is free to alienate or sell the real property without endangering her State qualification, provided such property is deleted from the inventory listed on subsequent monthly affidavits.

Furthermore, no limitation is imposed upon the volume of State bonds written if petitioner has listed real estate with a reasonable market value at least equal to the amount specified in the bond which she proposes to execute. In addition to the estimate of the real property's present market value, petitioner must also list on the monthly affidavit the property's assessed value as of the last assessment. For example, in April 1973, petitioner listed on her monthly affidavit an inventory of all real estate that she solely owned, consisting of 10 tracts of real estate including her personal residence. The estimated present market value of the properties was $313,950 and the assessed value was $56,440. Petitioner attached to this affidavit a listing of all bail bonds, amounting to $239,000, with the maximum bail bond written at a value of $10,000.

According to rule 32.12, a breach in a condition of a bond written by petitioner before a State court could result in a judgment of default and execution upon the bond without the necessity of an independent action. In the by the State court and petitioner fails to pay the requisite amount of the forfeiture, any real estate listed on her monthly affidavit will be subject to such execution. However, petitioner has never lost any real estate because of a State bond forfeiture.

In addition to the State requirements, a bondsman must also comply with local ordinances governing appearances before the municipal court. To comply, petitioner must deposit cash, negotiable securities, or some combination thereof, with the director of finance in the amount of $15,000. No limit is imposed upon the amount of bonds that can be written once such a deposit has been made. Upon the forfeiture of a bail bond in municipal court, petitioner must either pay the amount of the forfeiture or lose the deposit, unless the accused is located within a 30-day period and returned to the court's jurisdiction.

Petitioner wrote State court bonds of $1,085,240 and $1,010,950 in 1973 and 1974, respectively. During the respective years of 1973 and 1974, she also wrote municipal during the years in issue was from fees collected from petitioner's clients based on a stated percentage of the bond's face amount. This was set at 10 percent for State court bonds and at 15 percent for municipal court bonds.

Petitioner's 1973 gross income, expenses, and net profits were, respectively, $199,704, $110,062.30, and $89,641.70. Similarly, in 1974, petitioner had gross income, expenses, and net profits in the respective amounts of $210,158.25, $106,163.81, and $103,994.44. Of the sums expensed, $40,213.09 in 1973, and $26,122.95 in 1974, represented expenditures that consisted solely of bond forfeitures. The percentage of bond forfeitures to total bonds written was 2.43 percent in 1973 and 1.57 percent in 1974.

To ensure a low percentage of bond forfeitures, petitioner maintains certain investigative standards developed over several decades of operation. She has an extensive master card file that identifies all former clients for whom she has acted as surety. These records serve as a source of information when investigating an accused.

In addition, petitioner prepares State and city docket sheets which contain identifying information about the accused individuals. On the day prior to the accused's trial or appearance, petitioner or her employees will contact each such accused on the docket sheet to remind him of his upcoming court date. If the accused is not located, then petitioner and her employees will begin a thorough search by contacting the accused's attorney, friends, and relatives. When it appears that the accused has absconded or “skipped bail,” petitioner must then pursue and return the recalcitrant party to the jurisdiction of the proper court or risk forfeiture of the bail.

Petitioner is able to attract clients to her business through the reputation she has established over the years. It is the nature of petitioner's bail bond business that the hours of operation are 24 hours a day, 7 days a week. To provide such service to her clients, petitioner employs seven individuals. She also has a telephone extension in her home that receives calls from the office in her absence. Such attentiveness to clients and expeditious service fosters much goodwill for petitioner's business.

The same duties are performed by petitioner as by her employees; that is, performing investigations on persons requesting bail bonds, furnishing bail bonds for acceptable risks, preparing docket sheets, calling the accused prior to their court date and, on occasion, pursuing recalcitrant accused who have absconded from petitioner's custody. Petitioner performs these duties from a single office. Tangible...