Betson v. Commissioner
| Decision Date | 15 May 1984 |
| Docket Number | Docket No. 2437-78. |
| Citation | 48 TCM (CCH) 113,1984 TC Memo 264 |
| Parties | J.R. Betson, Jr., and Joan Sue Betson v. Commissioner. |
| Court | U.S. Tax Court |
Ronald K. Van Wert, 1301 Dove St., Newport Beach, Calif., for the petitioners. Dennis Brager, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in and additions to petitioners' Federal income tax as follows:
Addition Addition
to Tax to Tax
Section Section
Year Deficiency 6653(a)1 6651(a)
1970 ... $61,492.58 $3,101.54 $3,079.14
1971 ... 81,756.86 4,087.84 —0—
1972 ... 75,280.88 3,797.79 7,195.59
After numerous concessions by both parties, the issues remaining for decision are: (1) whether petitioners are entitled to any deductions on their joint income tax returns for taxable years 1970 to 1972, inclusive, in connection with the operation of four liquor stores in New Mexico, and (2) whether petitioners are liable for additions to tax for negligence under section 6653(a) for taxable years 1970 to 1972, inclusive.
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
The petitioners, J.R. Betson, Jr. and Joan Sue Betson, were husband and wife during calendar years 1970 through 1972 and resided in Newport Beach, California at the time they filed the petition in this case. They filed joint Federal income tax returns for taxable years 1970 through 1972 with the Internal Revenue Service Center in Fresno, California. For convenience, the term petitioner in the singular will hereinafter refer only to J.R. Betson, Jr.
Petitioner is a medical doctor, specializing in obstetrics. He is licensed as a physician in the States of New Mexico, Oklahoma, and California. He is also certified by the American Board of Obstetrics and Gynecology. Although licensed in three states, during the years 1970 through 1972 petitioner restricted his medical practice to the Newport Beach, California area.
Petitioner is also a director of Sunwest Bank (formerly Santiago Bank) in Tustin, California, having accepted such position in 1970. Petitioner was chairman of the board of directors of Sunwest Bank from 1973 to approximately 1976 or 1977. As part of his duties as a director, petitioner, with the aid of the bank's management, routinely reviewed the bank's financial statements.
On October 22, 1966, petitioner purchased a business known as the Wine and Liquor Shoppe. As part of such purchase, petitioner entered into a lease assignment agreement through which he became the lessee of the premises of a liquor store located in the Winrock Shopping Center in Albuquerque, New Mexico. Petitioner was also assigned a leasehold interest in New Mexico liquor license No. 96, under which petitioner's assignor had previously been operating. Liquor license No. 96 was owned by Winrock Enterprises, Inc. A business known as Diamond Jim's was the co-lessee of liquor license No. 96.2 Petitioner originally operated his newly acquired liquor business under the name Winrock Economy Liquors (Winrock). However, this store was also subsequently referred to as Western Wine and Liquor Marts No. I.
At some time prior to 1970, petitioner had purchased in his individual name New Mexico liquor license No. 327. Liquor license No. 327 was used in connection with the operation of the Bellas Hess Liquor Store (Bellas Hess), a retail liquor store located in the Bellas Hess Department Store in Albuquerque, New Mexico. The Bellas Hess Liquor Store was also subsequently known as Western Wine and Liquor Marts No. III.3
Petitioner's legal counsel with respect to the liquor operations was Mr. Turner W. Branch, a licensed attorney practicing in Albuquerque, New Mexico. Petitioner retained Mr. Branch as legal counsel for the liquor operations due to his previous experience as the Director of Alcoholic Beverage Control for the State of New Mexico.
On January 14, 1970, Mr. Branch, pursuant to petitioner's instructions, filed Articles of Incorporation with the New Mexico State Corporation Commission covering an entity to be known as Bethinol Corporation (hereinafter Bethinol). The Articles of Incorporation provided, in part, that:
The Articles of Incorporation were signed by petitioner as the incorporator. The initial board of directors consisted of petitioner, Mr. Branch, Bill Baldwin, and Lewis E. Nance. During all the years at issue herein, petitioner also served as president and chairman of the board of Bethinol. A Certificate of Incorporation for Bethinol was issued on January 14, 1970, by the State Corporation Commission of New Mexico.
No stock certificates of Bethinol were ever issued. Very few shareholders' or directors' meetings were held. However, petitioner at all times considered Bethinol to be a separate entity from his own person.
Subsequent to incorporation, Bethinol acquired two other New Mexico liquor licenses under its own name. In May of 1970, Bethinol leased liquor license No. 767 from Fred Harvey, Inc., an Illinois corporation. By a separate security agreement, dated May 25, 1970, petitioner pledged license No. 327 (Bellas Hess) as security for the performance of Bethinol's obligations under this lease with Fred Harvey, Inc. License No. 767 was used in connection with Bethinol's operation of a liquor store at a Pizza Hut store (Pizza Hut) located at 9620 Menaul Boulevard, N.E., Albuquerque, New Mexico. Bethinol was leasing a portion of the Pizza Hut in which to operate a liquor store. The Pizza Hut liquor store was also subsequently referred to as Western Wine and Liquor Marts No. II.
In July of 1970, Bethinol purchased a retail liquor store known as Western Liquors. New Mexico liquor license No. 438 was one of the assets of the purchased business. Bethinol used this license in its operation of a retail liquor store in Hobbs, New Mexico. This liquor store was commonly referred to as the Hobbs Store (Hobbs). The store was also sometimes referred to as Western Wine and Liquor Marts No. IV.
At or about July 1970, petitioner was contemplating transferring to Bethinol liquor license No. 327, used in connection with the Bellas Hess Store, and requested through Mr. Branch that the New Mexico Department of Alcoholic Beverage Control transmit the appropriate documents to execute such transfer. Petitioner had previously represented to Bellas Hess, Inc., the owner of the Bellas Hess Department Store, that license No. 327 was in fact listed in Bethinol's name. Mr. Branch thought that a transfer of that license had been made, but no formal transfer of the license ever took place. Bethinol's accountants carried liquor license No. 327 on the corporate balance sheet as a corporate asset beginning in January 1972.
At this same time petitioner also requested through Mr. Branch the forms that were necessary to designate Bethinol as the "agent-lessee" of license No. 96, in use at the Winrock store.4 However, no such designation was ever formally made.
For the years here in issue, Bethinol was engaged in the trade or business of operating retail liquor stores, with its main office located at 35 Winrock Center, N.E., Albuquerque, New Mexico. The management functions of Bethinol were subsequently transferred to California so that petitioner could more closely scrutinize corporate operations. U.S. Corporation Income Tax Returns (Forms 1120) were filed by Bethinol in each of the taxable years 1970 to 1972, reporting losses of $48,520, $58,644, and $91,923, respectively. Those corporate tax returns were signed by petitioner as the president of the corporation.
Bethinol purchased the alcoholic beverages for all four liquor stores: Bellas Hess, Winrock, Pizza Hut, and Hobbs. Petitioner's stated reason for this practice was to obtain price discounts through volume purchases. The alcoholic beverages were then distributed to the four stores for sale to the public.
In April of 1970, Mr. Branch registered the trademark "Western Wine and Liquor Marts" with the State of New Mexico. This trademark, as well as a "double horseshoe logo," was used by Bethinol on its advertisements and stationery as early as January 1971. The letterhead of that stationery recited that Western Wine and Liquor Marts was "A Division of The Bethinol Corp." Petitioner, Branch, and various employees of Bethinol made numerous representations to customers, business persons, and public officials that the four liquor stores were all being operated by Bethinol, and that Bethinol was doing business as Western Wine and Liquor Marts. The four liquor stores were commonly referred to as Western Wine and Liquor Marts Nos. I through IV. Payroll checks that were written on Bethinol's checking account with First National Bank in Albuquerque also indicated that Bethinol was doing business as Bellas Hess and Winrock Liquors. These payroll checks were cashed at the particular store upon the payee's endorsement. The checks were then restrictively endorsed for deposit only by Bethinol, doing business as Bellas Hess or Winrock Liquors.
Through May 1970, Bellas Hess and Winrock each filed separate gross receipts tax returns with the State of New Mexico, Bureau of Revenue, under identification numbers XX-XXXXXX-XX and XX-XXXXXX-XX, respectively. During 1970, the gross receipts identification numbers were consolidated into identification...
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