Badell v. Commissioner
| Decision Date | 26 September 2000 |
| Docket Number | Docket No. 14830-98.,Docket No. 14831-98. |
| Citation | 80 T.C.M. 422 |
| Parties | Patrick C. Badell and Lillian A. Badell v. Commissioner. Ronald L. Wilson and Donna M. Wilson v. Commissioner. |
| Court | U.S. Tax Court |
Respondent determined deficiencies in petitioners' income tax and determined that petitioners are liable for a penalty as follows:
Patrick C. Badell and Lillian A. Badell
Accuracy related
penalty
Year Deficiency sec. 6662(a)
1994 .............. $10,253 $ 2,050.60
1995 .............. 66,815 13,363.00
1996 .............. 87,210 17,442.00
Ronald L. Wilson and Donna M. Wilson
Accuracy related
penalty
Year Deficiency sec. 6662(a)
1994 .............. $ 9,550 $ 1,910.00
1995 .............. 59,181 11,836.20
1996 .............. 87,650 17,530.00
Petitioners Patrick Badell (Badell) and Ronald Wilson (Wilson) are the sole shareholders of Badell and Wilson, P.C. (B&W), an S corporation. B&W performed legal services for W.R. Kelso Co., Inc. (Kelso), and Kelso constructed a roof on the Badells' residence in B&W's fiscal year 1995.2 Kelso reported $49,000 of income on its 1994 return based on the legal services it received in lieu of payment of $49,000 it billed to B&W for the roof construction. Kelso credited its accounts payable to B&W in the same amount. B&W did not try to collect from Kelso for the legal services B&W had performed in B&W's 1995 fiscal year or report as income the roofing services it received. After concessions, the issues for decision are:
1. Whether B&W received barter income of $49,000 from Kelso in the form of roofing services Kelso provided to Badell in B&W's 1995 fiscal year. We hold that it did.
2. Whether B&W may deduct costs it advanced on behalf of its clients of $24,680 for fiscal year 1995 and $37,799 for fiscal year 1996. We hold that it may not.
3. Whether petitioners Patrick Badell and Lillian Badell (the Badells) and petitioners Ronald Wilson and Donna Wilson (the Wilsons) are liable for the accuracy-related penalty for negligence under section 6662(a) for 1994, 1995, and 1996. We hold that they are.
Section references are to the Internal Revenue Code in effect during the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure. References to Badell and Wilson are to Patrick Badell and Ronald Wilson, respectively.
Some of the facts have been stipulated and are so found.
The Badells lived in Indianapolis, Indiana, when they filed their petition. The Wilsons lived in Rushville, Indiana, when they filed their petition.
Badell and Wilson are attorneys. They each own 50 percent of the stock of B&W, an S corporation incorporated on June 3, 1982. B&W's office is located in Rushville. Badell was B&W's president, and Wilson was its secretary-treasurer during the years in issue. Badell and Wilson were the only attorneys B&W employed during the years in issue.
B&W is engaged in the general practice of law, and is a fiscal year, cash-basis taxpayer. B&W represents clients in minor criminal matters, divorces, bankruptcies, and personal injury cases. B&W also prepares income tax, Federal estate tax, and Indiana inheritance tax returns for its clients. Wilson usually prepares those tax returns.
B&W paid various expenses for its clients during the years in issue such as court fees, fees for court reporter services, witness fees, and charges for medical records and inquiries to the Indiana Bureau of Motor Vehicles. B&W recorded these expenses on its books as "Costs Advanced." B&W also made cash advances during the years in issue to clients whom they believed were destitute.
B&W required its personal injury clients to agree to reimburse B&W for any costs advanced to them and to pay B&W a percentage of any recovery. B&W's personal injury clients agreed to reimburse B&W for any costs it paid on their behalf, regardless of the outcome of their case. B&W expected its clients to reimburse B&W for these advances. However, B&W's clients did not always do so in the taxable year in which B&W paid the expense.
B&W deducted expenses for client costs of $24,680 for fiscal year 1995 and $37,799 for fiscal year 1996.
William Kelso (Mr. Kelso) is the president and owner of Kelso, an Indianapolis construction company. Badell has known Mr. Kelso since before 1992.
Kevin Blume (Blume) has been the secretary/treasurer of Kelso since September 1993. Badell has known Blume since about 1990 when Badell was corporate counsel for another company. Badell and Blume also know each other socially.
Badell has performed legal services, involving mostly contracts and collection matters, for Kelso since 1992 or 1993. B&W billed Kelso monthly for legal services rendered. B&W billed Kelso $43,998.86 for legal services provided from June 1994 to October 31, 1996. Kelso made four payments totaling $1,224.50 to B&W for legal services provided from October 25, 1994, to October 14, 1996.
B&W usually sues clients whose payments are in arrears if it believes the bill is collectible. B&W did not try to collect from Kelso from June 30, 1994, to October 31, 1996.
In 1994, Badell hired Kelso to construct a slate roof on the Badells' residence. Kelso usually gives estimates to customers before beginning to work on projects. However, it did not give B&W or the Badells an estimate of the cost of constructing the roof on the Badells' residence. Kelso began to construct the roof in 1994.
Kelso billed B&W $49,000 on December 31, 1994, for constructing the roof on the Badell residence. B&W made no payments to Kelso until September 1997. Kelso did not try to collect that amount for an extended period of time because its personnel believed B&W was "working off" B&W's charges for legal services by constructing the roof on the Badell residence. Kelso reported the $49,000 as income on its 1994 return, and on its gross profit report for 1994. Kelso credited its accounts payable to B&W for legal services by $49,000 as of December 31, 1994.
Kelso worked on the Badell residence from 1994 to 1999, for which it billed B&W as follows:
Date of bill Amount billed Work performed
12/31/94 $49,000.00 First house billing
12/31/95 4,668.00 Second year bill
1/22/97 4,222.86 1996 annual work
3/ 9/99 1,640.63 Roof & gutter repairs
3/17/99 288.75 Replace damaged slate; clean gutters
Kelso performed roofing work on B&W's office building, for which it billed B&W $1,572.18 in 1997 and $765.27 in 1999. Kelso had billed B&W $53,668 as of December 31, 1995, and $62,157.69 as of March 17, 1999, for the work performed on the Badell residence and the B&W roof from 1994 to 1999.
B&W used a computer program to prepare its Forms 1120S, U.S. Income Tax Return for an S Corporation, for fiscal years 1995 and 1996. Wilson gathered the information for the return and reviewed the return when it was completed. Badell signed B&W's returns as B&W's president.
A revenue agent began examining B&W's returns in July 1996. The revenue agent also examined the returns of B&W's shareholders, Badell and Wilson, and met with them separately in July 1996.
The revenue agent met with Mr. Kelso and Blume on October 21, 1996, to discuss the roofing job on the Badell residence. Mr. Kelso and Blume told the revenue agent that B&W intended to "work off" the cost of the roofing job.
Kelso paid B&W $30,000 on October 31, 1996, $20,000 on September 11, 1997, $25,000 on August 14, 1998, and $10,000 on December 17, 1998.
Kelso began trying to collect the amount owed from B&W after the audit of B&W (discussed at paragraph F, above) began, and after the revenue agent spoke to Mr. Kelso and Blume in October 1996. B&W paid Kelso $10,000 on September 10, 1997, and $52,157.69 on August 4, 1998, for the work done on the Badells' residence and on B&W's office building.
OPINIONWe must decide whether, as respondent contends, B&W received barter income of $49,000 from Kelso in fiscal year 1995 in the form of roofing services Kelso provided for the Badell residence.
Gross income includes the fair market value of property or services received in exchange for other services. See sec. 61(a); Baker v. Commissioner [Dec. 43,923], 88 T.C. 1282, 1288 (1987); sec. 1.61-2(d)(1), Income Tax Regs. The fair market value of goods and services is normally the amount charged by the providers of the goods and services. See Rooney v. Commissioner [Dec. 43,748], 88 T.C. 523, 527-528 (1987).
Petitioners contend that B&W did not receive barter income in fiscal year 1995 because Kelso and B&W paid each other in full after B&W's fiscal year 1995.
Badell testified that he did not tell Mr. Kelso or Blume that he would work off the cost of the roofing services. Badell testified that B&W did not try to collect the debt Kelso owed it because B&W expected that Kelso would pay B&W eventually. Badell also testified that he did not know whether the work Kelso did on his roof was a large or small project and that he did not remember seeing roofing equipment or materials at his home because he was not home during the day when the roofers were there. We disagree. We decide whether a witness...
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