66 T.C.M. (CCH) 1148
H.E. BOECKING, Jr. and Sally Boecking, et al., Petitioners,
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Nos. 5897-90, 6269-90, 8489-90, 18404-90.
United States Tax Court
October 27, 1993
Reid E. Robison and Richard D. Craig, Oklahoma City, OK, for petitioners.
Gary L. Bloom, Oklahoma City, OK, for respondent.
Respondent determined deficiencies in petitioners' Federal income tax and additions to tax as follows:
|| Sec. 6653(b)
|| Sec. 6653(a)(1)
|| Sec. 6653(a)(2)
Unless otherwise indicated, 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. All dollar amounts are rounded. H.E. Boecking, Jr. and Sally Boecking, husband and wife, are the parents of H.E. Boecking III who is married to Sharon F. Boecking. Sally and Sharon Boecking are parties by virtue of having filed joint returns with their husbands. The Boeckings (the individual petitioners) resided in Oklahoma City, Oklahoma, at the time they filed their respective petitions. Boecking Machinery, Inc. (the Company), an Oklahoma corporation, had its principal offices in Oklahoma City at the time it filed its petition. It was engaged in selling and servicing construction equipment manufactured by Caterpillar Tractor Company (as an authorized dealership) in the central and western parts of Oklahoma. It commenced business operations in February 1962, and was liquidated on December 31, 1986. At all relevant times, H.E. Boecking, Jr. was directly or indirectly the sole shareholder of the Company, its president, and chairman of its board of directors. Power Leasing, Inc., an Oklahoma corporation, was organized on or about January 1, 1971, for the stated purpose of leasing transportation equipment, including airplanes and automobiles. Prior to January 10, 1985, H.E. Boecking, Jr. and J.D. Koberg (not related to the Boeckings) each owned 50 percent of its stock. From January 10, 1985 to October 31, 1986 (the date Power Leasing, Inc. was liquidated), H.E. Boecking, Jr. owned all the stock of Power Leasing, Inc. Power Leasing, Inc. leased to the Company a model 1121B Aero Commander airplane from May 2, 1979 through September 30, 1981 and a West Wind model 1124 airplane from November 7, 1981 through January 14, 1985. It did not lease equipment to persons or corporations other than the Company. After concessions, the issues for decision are: 1. Whether advances made by Boecking Machinery, Inc. to H.E. Boecking, Jr. during the period 1980-1984 and an advance made by Power Leasing, Inc. to him in 1984 were loans (as contended by petitioners) or constructive dividends (as contended by respondent); 2. whether Boecking Machinery, Inc.'s payment of premiums for insurance on the life of H.E. Boecking, Jr. and payment of airplane leasing costs constituted constructive dividends; 3. whether respondent properly disallowed a portion of the deductions claimed by Boecking Machinery, Inc. for airplane leasing payments to Power Leasing, Inc.; 4. whether H.E. Boecking III's acquisition of shares of stock in Commercial Bank was for the benefit of Boecking Machinery, Inc., so that Boecking Machinery, Inc.'s repayment of a loan taken out by H.E. Boecking III to finance said acquisition would not constitute a constructive dividend; 5. the dollar value of various assets distributed to H.E. Boecking, Jr. upon the liquidation of Boecking Machinery, Inc., and, whether the value of such assets should be reduced to reflect a $9,809,381 proposed corporate income tax deficiency for which H.E. Boecking, Jr. would be liable as a transferee; 6. whether respondent properly terminated Boecking Machinery, Inc.'s election to use the LIFO method of inventory valuation; 7. whether Boecking Machinery, Inc. is liable for the addition to tax for civil fraud; 8. whether both the corporate and individual petitioners are liable for the addition to tax for negligence; 9. whether the individual petitioners are liable for the addition to tax for substantial understatement of income tax; and 10. whether H.E. Boecking III and Sally F. Boecking are liable for the addition to tax for late filing. Some of the facts have been stipulated and are so found. The stipulation of facts and accompanying exhibits are incorporated by this reference. For ease of analysis, our findings of fact and opinion for each issue are combined, and each issue is discussed under a separate heading. Issues 1 and 2. Constructive Dividends-H.E. Boecking, Jr.
Respondent determined that H.E. Boecking, Jr. (sometimes referred to as Mr. Boecking) received benefits from both the Company and Power Leasing, Inc. which constituted constructive dividends. These benefits were: Personal use of corporate assets, payment of Mr. Boecking's personal expenses, distributions to Mr. Boecking classified as " loans", and discriminatory life insurance policies. The parties have resolved their differences with regard to the taxation of some of these benefits. Those benefits, the taxation of which remains in dispute, are:
|| 1 $ 3,458
| Life insurance
|| $ 8,790
|| $ 27,805
|| $ 65,802
| Shareholder loans
A. Life Insurance Policies
The Company paid and deducted life insurance premiums as follows:
The policies insured the lives of the officers and employees of the Company. The Company has conceded that the following amounts claimed as life insurance expenses are not allowable deductions:
On September 1, 1976, the Company amended its group-term life insurance plan in order to increase the life insurance coverage on its president from $40,000 to $1,040,000. The $1,000,000 increase in coverage was accomplished by the Company's purchase of policy number 1660689 from Connecticut General Life Insurance Company. The policy provided permanent benefits to Mr. Boecking. It was surrendered to Connecticut General, effective September 1, 1981, in exchange for its $78,000 cash surrender value. Connecticut General paid the $78,000 to Mr. Boecking on December 21, 1981. Thereafter, on December 23, 1981, Mr. Boecking paid the $78,000 to the Company. The Company credited the $78,000 to Mr. Boecking's shareholder loan account. On May 1, 1981, the Company adopted a Retired Lives Reserve group plan which provided life insurance coverage to its officers and employees in the following amounts:
|| equipment manager
|| Controller and managers
|| All other employees
Class I included only the Company's president (Henry E. Boecking, Jr.) and Class II included only Henry E. Boecking, Jr.'s sons (Curt G. Boecking and Henry E. Boecking III). The beneficiary of the $4,000,000 policy insuring H.E. Boecking, Jr.'s life was the estate of the insured. Respondent determined that the $4,000,000 policy on the life of H.E. Boecking, Jr. grossly discriminated in favor of H.E. Boecking, Jr. (the Company's president and sole shareholder) and that the premiums thereon were not intended as additional compensation to Mr. Boecking. Accordingly, respondent determined that the premiums paid by the Company on the policy were not deductible by the Company and that the Company's payment of the premiums constituted a constructive dividend to H.E. Boecking, Jr. Respondent's determinations are presumptively correct, and petitioners bear the burden of proving otherwise by a preponderance of the evidence. Rule 142(a); Welch v. Helvering, 290 U.S. 111
, 115 (1933). Petitioners introduced no evidence that the premiums paid by the Company were intended to be additional compensation to H.E. Boecking, Jr. Nor did they introduce evidence that respondent's determination in this regard was erroneous or even discuss this item in their briefs. Hence, we deem that petitioners have conceded this issue. Accordingly, respondent's determinations with regard to the Company's payment of premiums on the several policies insuring the life of H.E. Boecking, Jr. are sustained. As such, with respect to the Company, the premium payments are not deductible; and with respect to H.E. Boecking, Jr., the Company's payment of the premiums constitutes a constructive dividend. B. Shareholder Loans
As of the dates indicated, the Company's books reflected (as assets) the following balances due from H.E. Boecking, Jr.: 
|| $ 168,894
|| $ 337,465
|| $ 506,359
H.E. Boecking, Jr. executed four notes in favor of...