Beck v. Commissioner
| Decision Date | 09 October 2001 |
| Docket Number | Docket No. 12215-99.,Docket No. 12217-99.,Docket No. 12216-99. |
| Citation | 82 T.C.M. 738 |
| Parties | Eugene A. Beck, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
FINDINGS OF FACT ............................................................................. 740
I. Background ................................................................................ 740
A. Formation and Titling of Stock in Beck's Liquors ....................................... 740
B. Purchases of Condominiums .............................................................. 741
C. Officers ............................................................................... 741
D. Operation of the Business .............................................................. 741
II. Audit of Returns ......................................................................... 743
OPINION ...................................................................................... 746
Issues 1, 2, & 3: Whether Beck's Liquors Is Liable for the Fraud Penalty Under Section 6663(a)
for Each of the Years at Issue, and Whether Mr. Beck Is Liable for the Fraud Penalty
Under Section 6663(a) for Fraudulently Understating His Income on His 1991 Federal
Income Tax Return and Under Section 6651(f) for Fraudulently Failing To File Federal
Income Tax Returns for 1992 and 1993 ...................................................... 746
I. Underpayment of Tax ....................................................................... 746
A. Gross Receipts of Beck's Liquors ....................................................... 746
1. State Bank Deposits ................................................................. 746
2. Cash Payments ....................................................................... 747
a. Cash From Till ................................................................... 747
b. Gambling Losses .................................................................. 747
c. Insurance Payment ................................................................ 747
d. Remaining Cash Payments .......................................................... 747
3. Nonincome Items ..................................................................... 748
B. Disallowed Expenses .................................................................... 748
1. Payments in Lieu of Wages ........................................................... 748
2. Vehicle Expenses and Depreciation ................................................... 748
3. Annual Meeting Expenses ............................................................. 749
4. Travel Expenses and Entertainment Expenses .......................................... 749
a. Las Vegas Expenses ............................................................... 749
b. Other Meal and Entertainment Expenses ............................................ 749
c. Cost of Tickets To Various Sporting Events ....................................... 750
5. Insurance, Condominium Fees, Utilities, and Property Taxes Paid for Residences
of Mr. Beck, Michael, and/or Michelle ............................................... 750
6. Charges on the Corporate Visa Card for Mr. Beck's Personal Expenses ................. 750
7. Mrs. Beck's Memorials, Funeral, and Medical Expenses ................................ 750
C. Conclusion ............................................................................. 750
II. Intent To Evade Taxes .................................................................... 750
A. Badges of Fraud ........................................................................ 751
1. Failure To Report Income Over an Extended Period of Time ............................ 751
2. Failure To File a Tax Return ........................................................ 751
3. Concealment of Bank Accounts From Internal Revenue Agent, Failure To Furnish
the Government With Access To His Records, and Failure To Cooperate With Tax
Authorities ......................................................................... 752
4. Failure To Keep Adequate Books and Records .......................................... 752
5. Dealing in Cash ..................................................................... 752
6. Taxpayer's Experience and Knowledge, Especially Knowledge of Tax Laws ............... 752
7. Taxpayer's Implausible Explanations of Conduct Given at Trial ....................... 752
8. Participation in Illegal Activities or Concealment of an Illegal Activity ........... 752
B. Conclusion ............................................................................. 752
Issue 4. Whether Petitioner Mr. Beck Received Constructive Dividends From Beck's Liquors in
1992 and 1993 in the Respective Amounts of $151,448 and $117,641 .......................... 753
I. Ownership of Stock of Beck's Liquors ...................................................... 753
II. Constructive Dividends ................................................................... 753
A. Diverted Corporate Income .............................................................. 753
B. Remaining Expenses ..................................................................... 754
Respondent determined deficiencies and penalties in petitioners' Federal income taxes for 1991, 1992, and 1993 as follows:
Eugene A. Beck
Docket Nos. 12215-99, 12216-99
Penalty
Year Deficiency Sec. 6663(a)
1991 ................................................... $28,517.92 $21,388.44
1992 ................................................... 41,509.00 31,131.75
1993 ................................................... 30,649.00 22,986.75
Beck's Village West Liquors, Ltd
Docket No. 12217-99
Penalty
Year Deficiency Sec. 6663(a)
1991 ................................................... $44,274.16 $32,127.00
1992 ................................................... 23,047.49 17,285.62
1993 ................................................... 37,064.66 26,407.50
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issues for decision are as follows:2
1. Whether Beck's Village West Liquors, Ltd. (Beck's Liquors or the corporation) is liable for the fraud penalty under section 6663(a) for each of the years at issue. We hold that it is not, and, therefore, the period for assessing a deficiency has expired.
2. Whether Eugene A. Beck (Mr. Beck) is liable for the fraud penalty under section 6663(a) for fraudulently understating his income tax on his 1991 Federal income tax return. We hold that he is not, and, therefore, the period for assessing a deficiency has expired.
3. Whether Mr. Beck is liable for the penalty under section 6651(f) for fraudulently failing to file Federal income tax returns for 1992 and 1993.3 We hold that he is not.
4. Whether Mr. Beck received constructive dividends from Beck's Liquors in 1992 and 1993 in the respective amounts of $151,448, and $117,641.4 We hold that he received constructive dividends in lesser amounts to be computed under Rule 155 in accordance with the Court's finding and conclusions.
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.
At the time the petitions in these cases were filed, Mr. Beck resided in Fargo, North Dakota, and Beck's Liquors had its principal place of business in Fargo, North Dakota. At the time of the trial in this case, Mr. Beck was 73 years old.
In 1977, Mr. Beck and his then wife, Gretchen Beck (Mrs. Beck), started a liquor store business in Fargo, North Dakota, known as Village West Liquors.5 Mr. Beck also had another liquor store/bar known as Vega Ltd. Because Mr. Beck owned Vega Ltd., the Becks treated Mrs. Beck as the owner of Village West Liquors.
For liability purposes, the Becks decided to incorporate the liquor store business. On January 14, 1981, the Becks incorporated Beck's Liquors. Mrs. Beck transferred the business of Village West Liquors with a net value of $30,000 to Beck's Liquors in exchange for 30,000 shares of the common stock of Beck's Liquors.
The Becks have two children, Michael and Michelle. Every year from 1983 to 1987, Mrs. Beck transferred title to 3,000 shares of the stock of Beck's Liquors to each of her children. By July 1987, Michael and Michelle each held title to 15,000 shares of the common stock of Beck's Liquors.
In 1988, Michelle and her husband were having marital difficulties. In order to avoid a claim by Michelle's husband to the shares of Beck's Liquors stock titled in Michelle's name, title to the shares was transferred to Michael for $1. The corporate minutes specify that the corporation would issue 30,000 new shares of stock to Michelle after Mr. and Mrs. Beck had died.
Although the stock of Beck's Liquors was originally titled in Mrs. Beck's name and then transferred to the children, the Becks did not intend for the children to have...
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