Beauchamp v. Commissioner
| Decision Date | 26 August 1997 |
| Docket Number | Docket No. 7683-95. |
| Parties | Kim Beauchamp v. Commissioner. |
| Court | U.S. Tax Court |
John D. Desbrow, for the petitioner. Linette B. Angelastro, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in, an addition to, and penalties with respect to petitioner's Federal income tax as follows:
In the answer, respondent asserted that the additions to tax and the penalties with respect to petitioner's Federal income tax should be as follows:
Additions to Tax Penalties
----------------------- -----------------
Sec. Sec. Sec. Sec
Year 6653(a)(1) 6653(b)(1) 6662(a) 6663(a)
1988 ...................................... $62 $49,424 -- --
1989 ...................................... -- -- $829 $59,879
1990 ...................................... -- -- 368 58,502
All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
After concessions,1 the issues for decision are:
(1) Whether petitioner underreported his medical practice gross receipts for 1988, 1989, and 1990 in the amounts of $50,292, $58,971, and $67,488, respectively;
(2) whether petitioner is entitled to deduct various costs related to real property as ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business;
(3) whether petitioner is liable for the addition to tax for fraud pursuant to section 6653(b)(1) for 1988 and the penalty for fraud pursuant to section 6663(a) for 1989 and 1990; or in the alternative, whether petitioner is liable for the addition to tax for negligence pursuant to section 6653(a)(1) for 1988 and the accuracy-related penalty pursuant to section 6662(a) for 1989 and 1990; and
(4) whether respondent is barred by the statute of limitations from assessing the deficiency and penalty for 1989.
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference.
Petitioner Kim Beauchamp (Dr. Beauchamp) resided in Sun Valley, California, at the time he filed his petition. During the years in issue,2 petitioner was a physician specializing in obstetrics and gynecology, and he operated a medical practice as a sole proprietorship. Petitioner employed various persons in his medical practice and paid them in cash.
Petitioner prepared his own Federal income tax returns for 1988, 1989, and 1990. Petitioner had no formal training in accounting or tax return preparation.
On his Schedules C for 1988, 1989, and 1990, petitioner listed his principal business or profession as "Med. Doctor & Home Construction Co.", "Medicing [sic] & Construction", and "Med. Doctor & Contractor", respectively. On each return there was only one Schedule C.
Petitioner reported $261,269, $270,658, and $317,334 in gross receipts from his medical practice for 1988, 1989, and 1990, respectively. Petitioner determined his gross receipts for the years in issue by totaling the amounts reported to him by Form 1099 payors. During the audit of petitioner in 1991 (the audit), he told Revenue Agent Harold Jung (Mr. Jung) that 99.9 percent of his patients paid for medical services through insurance, Medicare, or Medi-Cal; therefore adding up the Forms 1099 was the most appropriate way to determine his gross receipts.
Petitioner claimed various items on Schedule C of his tax returns. As costs of goods sold3 (COGS) of his medical practice, petitioner claimed expenditures for capital improvements to real property and wages paid in the amounts of $31,176, $38,368, and $34,080 for 1988, 1989, and 1990, respectively.4 Petitioner did not carry medical malpractice insurance, and he had no receipts to show that he paid the $16,101 he claimed for such insurance for 1988. Petitioner did not keep a log for the car and truck expenses he claimed.
For all quarters of 1988, 1989, and 1990, petitioner failed to file employment tax returns and pay employment taxes for his employees. Prior to 1985, petitioner filed employment tax returns for his employees. Petitioner also failed to file information tax returns reporting wages paid to his employees.
Petitioner did not have a bookkeeper or maintain any formal books for his medical practice. Petitioner summarized his expenses for each year on a few sheets of paper. Petitioner provided these papers to Mr. Jung as support for the Schedule C expenses he claimed.
Petitioner kept patient billing records; however, he did not provide these records to Mr. Jung or offer them into evidence at trial.
Petitioner gave Mr. Jung all the Forms 1099 petitioner had for 1989. The Forms 1099 showed that petitioner received $267,614 in gross receipts from insurance companies and other business entities. Mr. Jung reconciled this with the amount petitioner reported as gross receipts on his tax return. Petitioner's reported gross receipts for 1989 ($270,658) were $3,044 more than the total income reported on his Forms 1099 ($267,614).
Mr. Jung asked for petitioner's Forms 1099 for 1988 and 1990; however, petitioner told Mr. Jung that he had misplaced them. Respondent obtained Information Returns Master File Transcripts (IRP transcripts) which were based upon information reported to the Internal Revenue Service (IRS) by payors who filed information returns with the IRS showing that the payors paid certain amounts (such as wages, interest, and other income) to petitioner during 1989 and 1990. For 1990, the IRP transcripts showed that petitioner received $313,735 in gross receipts from insurance companies and other business entities. Petitioner's reported gross receipts for 1990 ($317,334) were $3,$99 more than the total income reported on his Forms 1099 ($313,735).
Without petitioner's Forms 1099 or IRP transcript for 1988, respondent was unable to perform a similar comparison for 1988 of petitioner's reported gross receipts and the amount reported to the IRS as paid to petitioner by Form 1099 payors.
Petitioner told Mr. Jung that he had two bank accounts at American Pacific State Bank: One account (APSB account #1) which he used for both business and personal banking; and another account (APSB account #2) which was a dormant savings account.
Mr. Jung discovered during the audit that petitioner had an additional bank account at Security Pacific Bank (petitioner's SPB account).
Mr. Jung summoned information regarding items deposited into petitioner's three bank accounts. Mr. Jung analyzed petitioner's bank accounts and determined that, in addition to payments from Form 1099 payors, petitioner deposited substantial amounts of personal checks and cash into his three bank accounts.
Mr. Jung prepared schedules of omitted income. Mr. Jung did not include checks from insurance companies and other Form 1099 payors. Mr. Jung included checks from Joyce Choe (Ms. Choe) in the schedules, but subtracted those amounts from the total of unreported income. Mr. Jung excluded all items which he determined were from nontaxable sources. Mr. Jung determined that some deposits from business entities which did not issue Forms 1099 were for medical services—the checks were made payable to "Dr. Beauchamp" or "Dr. Beauchamp, M.D."; the checks had indications in the memo section that they were for medical services; or the checks were payable in amounts petitioner normally charged for office visits—so he included these payments in the schedules.
Respondent determined that petitioner underreported his gross receipts by the following amounts deposited, in the form of checks from patients and cash, into his three bank accounts:
Petitioner's
Year APSB Acct. #1 APSB Acct.#2 SPB Acct. Total
1988 .............................. $34,082 $418 $15,795 $50,292
1989 .............................. 37,037 -- 21,934 58,971
1990 .............................. 53,577 -- 13,911 67,488
Dr. Beauchamp's Real Estate Activity
Ms. Choe was the owner of the following real property (Ms. Choe's properties):
15149 Mission Hills Road, Mission Hills, Cal.
14850 Ryan Street, Sylmar, Cal.
14708 and 14714 Chatsworth Street, Mission Hills, Cal.
14640 Brand Boulevard, Mission Hills, Cal.
11031 and 11038 Burner Avenue, Mission Hills, Cal.
11065 Arleta Avenue, Mission Hills, Cal Petitioner paid the mortgages on Ms. Choe's properties.
Prior to 1988, petitioner entered into an oral agreement with Ms. Choe pertaining to real estate related activities. Under the agreement, petitioner supervised the improvement of Ms. Choe's properties (including the demolition of existing structures and the construction of two family residences).5 In exchange for improving Ms. Choe's properties, petitioner was entitled to receive the return of the money he spent to improve the property and half of any profit on the sale of each improved parcel. Petitioner, however, did not account to Ms. Choe for amounts h...
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