Berger v. Commissioner

Decision Date22 February 1996
Docket NumberDocket No. 2464-93.,Docket No. 3133-93.,Docket No. 3130-93.
Citation71 T.C.M. 2160
CourtU.S. Tax Court
PartiesAlice Berger, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner.

Richard C. Antonelli, East Brunswick, N.J., for the petitioner in Docket No. 2464-93. John M. McNally, Jersey City, N.J., for the petitioners in Docket Nos. 3130-93 and 3133-93. William F. Halley and Caroline Ades-Pierri, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

BEGHE, Judge:

Respondent determined the following deficiencies in and additions to petitioners' Federal income tax: Howard and Alice Berger (Docket Nos. 3130-93 and 2464-93):

                Addition to
                                                                                       tax
                                                                                 ---------------
                Year                                                Deficiency   Sec. 6653(a)(1)
                1988 ............................................    $155,646         $7,782
                

Alice Berger (Docket No. 2464-93):

                Addition to
                                                                                      tax           Penalty
                                                                                 ---------------   ---------
                Year                                                Deficiency   Sec. 6651(a)(1)   Sec. 6662
                1989 ............................................    $307,202         $76,801       $61,440
                

Howard and Susan Berger (Docket No. 3133-93):

                Addition to
                                                                                       tax
                                                                                 ---------------
                Year                                                Deficiency   Sec. 6651(a)(1)
                1989 ............................................    $68,801        $23,577
                

The cases in the above-mentioned dockets have been consolidated for trial, briefing, and opinion. Following the trial, we granted respondent's motion for leave to file an amended answer asserting the following increased deficiency and addition to tax against Howard and Susan Berger (Docket No. 3133-93):

                Additions to
                                                          tax
                                                      ---------------
                Year                     Deficiency   Sec. 6651(a)(1)
                1989 .................    $237,936        $57,404
                

Petitioners Howard and Susan Berger did not file a reply to respondent's amended answer. However, their opening brief contends that their 1989 return overstated taxable income from mausoleum crypt sales, none of which, they now assert, should have been reported by Howard Berger, and asserts an overpayment of $61,106.

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.

The parties have settled some issues, and respondent has conceded the section 6653(a)(1) addition against Howard and Alice Berger for 1988 and the section 6651(a)(1) addition against Howard and Susan Berger for 1989. The following issues remain to be decided: (1) Evidentiary objections to certain exhibits and testimony; (2) whether Alice Berger signed the 1988 Form 1040 under duress so as to invalidate it as a joint return; (3) Howard Berger's and Alice Berger's respective ownership interests in the assets and business of Woodbine Cemetery (Woodbine) during 1988 and 1989 for purposes of determining their rights to income therefrom; (4)(a) whether petitioners' method of accounting for mausoleum crypt sales and costs should be upheld generally and (b) whether Howard Berger must accrue income or recognize gain on the transfer of his interest in Woodbine to Alice Berger pursuant to their divorce settlement agreement; (5)(a) whether Howard Berger or Alice Berger or both of them are required to recognize gain in 1989 from the sale of Woodbine to their daughter and son-in-law, (b) the adjusted basis of Woodbine at the time of sale, (c) whether a portion of the sale constituted a dealer disposition under section 453(b), which would prohibit use of the installment method for dealer assets, and (d) if so, whether and how an allocation should be made between dealer and nondealer assets in order to determine whether and to what extent the gain on sale is entitled to installment treatment; (6) whether Howard Berger and Alice Berger are liable for additional self-employment tax for 1988 and 1989; and (7) whether Alice Berger is liable for the section 6651(a) addition to tax or section 6662 accuracy-related penalty for 1989.

After addressing the evidentiary questions, we hold that the 1988 return was a valid joint return and that petitioners used a proper method of accounting for mausoleum crypt sales. As a result, neither Howard Berger nor Alice Berger has taxable income from Phase II mausoleum crypt sales for 1988. We allocate cemetery income, including Phase II mausoleum crypt sales income, between Howard and Alice Berger for 1989. We hold that the gain on the sale of Woodbine is attributable in its entirety to Alice Berger. After discussing the rules for determining the bases of the Woodbine assets in the hands of Alice Berger, we use the rule of Cohan v. Commissioner [2 USTC ¶ 489], 39 F.2d 540 (2d Cir. 1930), to determine the portion of Alice Berger's Woodbine sale gain entitled to installment treatment as a nondealer disposition, leaving the details to a Rule 155 computation. We hold that Howard and Alice Berger are both subject to self-employment tax for 1988 and 1989, and that Alice Berger is not liable for the section 6651(a) addition to tax or the section 6662 accuracy-related penalty for 1989.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulations of fact filed by the parties and the accompanying exhibits are incorporated herein by this reference. When petitioners filed their respective petitions, Alice Berger resided in Vermont, and Howard Berger and Susan Berger resided in Florida.

Howard Berger and Alice Berger were married in 1953. During the marriage, Alice Berger was not employed outside the home. Prior to 1979, Howard Berger was an insurance salesman, and he continued to receive renewal commissions through 1989.

In 1979, Howard Berger purchased the Woodbine real property and cemetery business, located in Oceanport, New Jersey, from John and Lois Flock, for $100,000. The Flocks had operated Woodbine as a cemetery for in-ground interments.

Howard Berger continued the business of operating Woodbine as a cemetery for in-ground interments. From 1979 through 1989, the income of Woodbine from the sale of cemetery plots, interment fees, and headstones was reported on the cash basis method of accounting, as were most expenses. However, the cost of grave plots ($23 per plot) was carried in an inventory account and expensed for accounting and tax purposes when plots were sold.

By deed dated October 26, 1983, Howard Berger transferred legal title in the Woodbine land, buildings, and structures into the joint names of Howard Berger and Alice Berger. Howard Berger put the Woodbine real property in their joint names because he believed that Alice Berger already had an interest in the property by reason of their marriage. By the end of 1983, Alice Berger knew that she was a joint owner of Woodbine. After Howard Berger transferred Woodbine into his and Alice Berger's joint names, he thought that they were its joint owners.

Subsequent to the 1983 transfer, Alice Berger's signature, or a copy thereof, appeared on deeds conveying cemetery spaces to customers of Woodbine.

From 1979 through 1986, Howard Berger managed and operated Woodbine and regularly went to work there. During this period, Alice Berger did not participate in the operation of Woodbine. In 1984, Howard Berger hired his son-in-law, Gregg Kunkowski, the husband of his and Alice's daughter Julia, as a salesman for Woodbine.

In 1984 Howard Berger began to construct a mausoleum on the Woodbine property (Phase I) and to solicit customers and receive deposits and installment payments for mausoleum crypts. The deposits and installment payments received prior to completion of Phase I were not recorded as income when received but were recorded as deposits pending completion of the Phase I mausoleum. The costs of construction of Phase I were not deducted as incurred but were instead carried as inventory costs.

In 1986 construction of Phase I was completed. Certificates of occupancy were obtained, and certificates of ownership were issued to all customers who had paid in full. Howard and Alice Berger reported as income for 1986 all deposits and installment payments previously received for this phase. The cost of construction of Phase I was allocated to the total number of crypts, and the allocated cost of unsold crypts was deducted ratably as "cost of sales" as Woodbine issued certificates of ownership to subsequent crypt purchasers at or after completion of construction of the mausoleum.

In June 1986, during a trip to Scotland, Howard Berger became ill with a heart condition, and he and Alice Berger separated. When Howard Berger returned from Scotland, he did not move back to the family home in West Long Branch, New Jersey, but moved instead to Waterboro, Maine. He never resumed day-to-day management or operation of Woodbine.

During Howard Berger's absence, Gregg Kunkowski acted as manager of Woodbine. After it became clear that Howard Berger was not going to return to work, Gregg Kunkowski proposed a contract setting forth the terms for his continuing employment in the Woodbine business. He presented his proposal to Dr. Florence F. Forgotson, Alice Berger's attorney, who drafted an agreement. On December 1, 1986, Howard Berger and Alice Berger (as employers) and Gregg Kunkowski (as employee "General Manager") entered an employment agreement. The employment agreement provided for a 5-year term with an option to renew, compensation equal to 20 percent of "the total gross sales of space in the...

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