Purcell v. Comm'r of Internal Revenue

• Decision Date: 26 February 1986
• Docket Number: Docket No. 27793-83.
• Citation: 86 T.C. 228,86 T.C. No. 16
• Parties: JOYCE PURCELL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

86 T.C. 228

86 T.C. No. 16

JOYCE PURCELL, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 27793-83.

United States Tax Court

Filed February 26, 1986.

HELD: On the facts of record petitioner is entitled to relief under section 6013(e), I.R.C. 1954, with respect to certain items of omitted income and is not entitled to such relief with respect to another item of omitted income. Petitioner is not entitled to relief under section 6013(e) for disallowed deductions since not contesting respondent's disallowance of the deductions is not sufficient to establish that the deductions were ‘grossly erroneous‘ because they had no basis in fact or law. ALAN L. CATES, for the petitioner.

ROBERT P. CROWTHER, for the respondent.

SCOTT, JUDGE:

Respondent determined deficiencies in petitioner's income tax for the calendar years 1977 and 1978 in the amounts of $82,955.89 and $49,749.21, respectively. The issue for decision is whether petitioner is relieved from liability under section 6013(e) ¹ with respect to the income tax resulting from (1) the inclusion in the income of petitioner and her then husband of (a) dividends resulting from amounts paid by a corporation of which they were stockholders for personal travel and entertainment expenses, and (b) a portion of the sales price of petitioner's stock in another corporation allocated to a covenant not to compete; and (2) the disallowance of claimed bad debt and worthless stock deductions with respect to a third corporation in which both petitioner and her then husband owned stock.

FINDINGS OF FACT

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

Petitioner who resided in Franklin, Tennessee, at the time of the filing of her petition in this case, filed a joint Federal income tax return with her then husband, W. Bruce Purcell for each of the calendar years 1977 and 1978 with the Director, Internal Revenue Service Center, Memphis, Tennessee. For the calendar year 1977, they filed an amended Federal income tax return on Form l040X.

Petitioner and W. Bruce Purcell were married on July 23, 1952, and were divorced in October 1982. W. Bruce Purcell died, by accidental drowning, in July 1983. During the years 1977 and 1978, both W. Bruce Purcell and petitioner were stockholders and employees of Purcell Enterprises, Inc. This company was run primarily by Mr. Purcell, and petitioner's duties were limited to signing checks on the corporation's bank account when Mr. Purcell was out of town and some typing and clerical work when her services were needed in the office. She did not deal with the corporate customers. The company had an American Express account and each of the officers of the company, including Mr. Purcell, had an American Express Card in his name on this account. Petitioner had a company American Express Card in her name, permitting her to make charges to the account of Purcell Enterprises, Inc.

Petitioner occassionally accompanied her husband on trips and at his request charged the cost of the hotel room that she and her husband used and other costs of the trip on the corporate American Express Card issued in her name. Other than the charges made on the card at her husband's request, petitioner made only a few charges on the company American Express Card. Occasionally she made other charges on this card and did not keep a record or diary of the charges she made. Petitioner discussed the use of this card with Mr. Purcell and was told by him that he would take care of the charges she made for personal purposes, because the corporation always owed him money. Petitioner charged a few meals in Nashville to this credit card and charged lodging in Knoxville, where her children were in school, to this credit card. Petitioner also charged a small purchase of foreign currency to this credit card.

In February 1974, a corporation, International Demolition and Salvage Co., Inc. (International Demolition), was formed under the laws of the State of Tennessee. During the years 1977 and 1978, petitioner and W. Bruce Purcell each owned 25 percent of the outstanding stock of International Demolition. Petitioner was the treasurer of International Demolition during 1977 and 1978 and was a corporate director in these years. International Demolition had a sustained history of losses throughout its existence. It was in financial difficulties in 1977 and 1978 and ultimately failed. Petitioner's then husband, W. Bruce Purcell, and other shareholders of International Demolition infused money into the corporation in 1976, 1977 and 1978, which monies were treated on the corporate books as loans to the corporation.

Reese Tires, Inc., was a corporation the stock of which was owned by petitioner and Mr. Ira Reese. As of April 15, 1977, petitioner owned 560 shares of the stock of Reese Tires, Inc., and Mr. Reese owned 480 shares of the stock of that corporation. Under date of April 15, 1977, petitioner, W. Bruce Purcell and Ira Reese entered into an agreement to sell petitioner's and Mr. Reese's stock in Reese Tires, Inc., to Universal Tire, Inc., a Tennessee corporation. The sales agreement was negotiated by Mr. Purcell and Mr. Reese. Petitioner did not participate in the negotiation for the sale of the stock of Reese Tires, Inc., to Universal Tire, Inc. However, she did sign the agreement and initialed the agreement in several places where changes were made. One of the changes initialed by petitioner was in a clause agreeing that neither petitioner, Mr. Purcell nor Mr. Reese would compete with Universal Tire, Inc., in the tire business for a period of 3 years in specified locations. One of the changes made in the agreement by pen, which was initialed by petitioner, was changing 5 years to 3 years in this clause of the agreement.

The income tax returns of petitioner and her then husband for the years 1977 and 1978 were prepared by a certified public accountant. Except for certain items of medical expenses and charitable contributions and other types of personal items, none of the information used in the preparation of the returns was furnished to the CPA by petitioner. Most of the information used by the CPA in preparing the joint returns of petitioner and her then husband for the years 1977 and 1978 was obtained by the CPA from a Mr. John H. Moses who was the comptroller of both Purcell Enterprises, Inc., and International Demolition. If the CPA needed additional information or to clarify information he had, generally he would ask a question of the comptroller and if the comptroller could not answer the question, he would attempt to get the information from Mr. Purcell. The CPA very seldom consulted with Mr. Purcell and did not consult at all with petitioner. When the CPA prepared the returns, he was of the opinion that he had sufficient information to prepare the returns correctly. The CPA made no audit of the records of petitioner or Mr. Purcell in preparing their individual income tax returns, but prepared the returns from information furnished to him. Petitioner did not review the returns prepared by the CPA.

Petitioner personally guaranteed certain notes of her then husband, W. Bruce Purcell, to banks in Nashville, Tennessee, for loans made to him.

Petitioner's primary occupation was a housewife. She married Mr. Purcell shortly after she graduated from high school. She worked after they were married to assist Mr. Purcell with his college education. When petitioner signed the guarantees of her husband's loans, he told her that his businesses had sufficient assets to pay off these business debts.

There were problems in connection with petitioner's marriage during 1977 and 1978. Mr. Purcell was away from home during much of the time in these years and was drinking heavily. He also was seeing the woman whom he married after he and petitioner were divorced in 1982.

In the divorce decree a recitation is made that petitioner and Mr. Purcell had lived apart since 1979. In the divorce decree there was incorporated a property settlement agreement between petitioner and Mr. Purcell. In the property settlement agreement, petitioner received the family home, which was free and clear at the time, and the furnishings of that home. She also received an automobile. The agreement provided for certain cash payments by Mr. Purcell to petitioner over a period of 121 months. Paragraph 7 of the agreement provided as follows:

7. That HUSBAND shall keep in full force and effect and pay all necessary premiums for three (3) certain policies of insurance with the New York Life Insurance Company, being Policy Numbers 33-002-776, 36-402-141, and 36-426-995, in the total face amount of Nine Hundred Thousand ($900,000.00) Dollars, which policies of insurance are owned by and payable to WIFE as beneficiary to secure this agreement, and further HUSBAND shall keep in full force and effect and pay any and all necessary premiums for a major medical hospitalization insurance program in at least the amount of Fifty Thousand ($50,000.00) Dollars and both collision and liability insurance for WIFE in the operation of any vehicle or conveyance of any nature whatsoever in at least the amount of Three Hundred Thousand ($300,000.00) Dollars until the death or remarriage of WIFE or for said One Hundred Twenty-One months from July 1, 1982 to July 1, 1992.

The property settlement agreement also transferred to petitioner 15 cemetery lots in Woodlawn Memorial Park in Nashville, Tennessee, and Mr. Purcell's interest in 6 parcels of real estate specifically described in the agreement, some of which were owned jointly by Mr. Purcell and others. The agreement provided that Mr. Purcell would execute a note in the amount of $121,000 to petitioner to secure the payment of the principal sum of $121,000 as periodic alimony in monthly installments of $1,000 each for 121 months, beginning on July 1, 1982, and continuing through July 1, 1992, unless petitioner dies or remarries prior to the date of the...