Bourque v. Commissioner, Docket No. 4507-76

CourtUnited States Tax Court
Citation40 TCM (CCH) 824,1980 TC Memo 286
Docket Number1554-78,Docket No. 4507-76,7125-77,1555-78.
PartiesMarcel and Beverly Bourque v. Commissioner. Cumar Co., Inc. v. Commissioner.
Decision Date31 July 1980

40 TCM (CCH) 824
1980 TC Memo 286

T.C. Memo. 1980-286.

Marcel and Beverly Bourque

Cumar Co., Inc.

Docket Nos. 4507-76, 7125-77, 1554-78, 1555-78.

United States Tax Court.

Filed July 31, 1980.

Moses Kando, for the petitioners. Daniel P. Ehrenreich and Pamela V. Gibson, for the respondent.

Memorandum Findings of Fact and Opinion

RAUM, Judge:

The Commissioner determined deficiencies and additions to tax in respect of petitioners' 1968, 1969, and 1970 income taxes as follows:

 Marcel and Beverly Bourque
                 Addition to Tax
                 Sec. 6653(b)
                 Docket No. Year Deficiency I. R. C. 1954
                 1554-78 1968 $ 62,838.10 $31,419.05
                 4507-76 1969 106,468.41 53,234.20
                 7125-77 1970 6,327.47 3,163.74
                 Cumar Co., Inc., Docket No. 1555-78
                 Additions to Tax, I. R. C. 1954
                 Year Deficiency Sec. 6653(b) Sec. 6655
                 1968 $50,662.43 $25,331.22 $162.59
                 1969 85,547.17 42,773.59 928.55
                 1970 5,714.80 2,857.40

The principal matter in issue in respect of the individual petitioners is whether their taxable income derived from the corporate petitioner was understated during each of the taxable years and whether a portion of any underpayment of tax is attributable to fraud. A threshold question as to the corporate petitioner is whether its petition should be dismissed for lack of jurisdiction by reason of forfeiture of its charter in 1972.

Findings of Fact

Some of the facts have been stipulated. The stipulation of facts and related exhibits are incorporated herein by this reference.

Petitioners Marcel and Beverly Bourque, husband and wife, were residents of Massachusetts when their first petition was filed, and were residents of Rhode Island when their other two petitions were filed. The

40 TCM (CCH) 825
controversy herein relates to the income and expenses of a business conducted either individually or through a corporation by Marcel Bourque, who will sometimes hereinafter be referred to as "petitioner".

Petitioner Cumar Co., Inc. (Cumar), was organized as a Rhode Island corporation on August 7, 1968, for the purpose of "purchasing and selling high purpose alloys and other metallic products". Petitioner and Mrs. Bourque were its sole shareholders, each owning 100 shares. During the taxable years, petitioner was Cumar's president and treasurer, as well as its sole employee. Mrs. Bourque was also an officer of the corporation, but performed no duties. Cumar's principal place of business was Providence, Rhode Island, during the taxable years. On December 31, 1972, Cumar's corporate charter was forfeited to the State of Rhode Island. Marcel Bourque filed Cumar's petition herein on February 15, 1978.

During the taxable years 1968 through 1970, petitioner was engaged in the business of buying and selling scrap precious metals. He started in the business in 1949 as an employee of his father's company, State Line Scrap Co., and received some wages from this company in 1968. The total wages reported on petitioner's 1968 return amounted to $1,225. During the period from May to August 1968, petitioner operated as a sole proprietor under the names of Associated Industrial Sales and Associated Industrial Sales, Inc. After Cumar was incorporated on August 7, 1968, and throughout the remainder of the years involved herein, petitioner conducted his business through Cumar.

In his business as a dealer in precious metals,1 petitioner would bid to purchase the scrap metal remaining from the operations of manufacturers and fabricators of products using precious metals. He occasionally purchased machinery for resale. It was petitioner's custom to pay for purchases in cash, although he sometimes used checks to pay for purchases of scrap. However, petitioner did not always pay for the scrap before he removed it from the seller's premises, since it would at times be necessary to sort, weigh, and identify the scrap. After purchasing the metal, petitioner would sell it to refiners who would then melt and purify the metal for resale.

Since he had no storage facilities, petitioner did not keep an inventory of scrap metals, and attempted to arrange their resale immediately after purchase. Metal refiners would pay petitioner by check, and after the incorporation of Cumar the payee was generally either Cumar or both Cumar and the petitioner. In some instances, petitioner was the only payee. Petitioner frequently cashed these checks, although he sometimes deposited them in Cumar's checking account. Petitioner would then use the proceeds or some portion thereof to purchase more scrap, although he often retained some of the proceeds for his personal use.

Cumar never formally declared any dividends, nor did it purport to pay petitioner any wages or salary for his services. However, petitioner did receive "commissions" from Cumar. Such commissions were not based on a percentage of sales, nor were they computed on the basis of any fixed formula. Instead, petitioner would simply withdraw cash from the corporation from time to time, and would call such withdrawals "commissions". Petitioner would also occasionally write checks on Cumar's bank account for personal expenses, and these payments were sometimes accounted for as "commissions". At other times petitioner used corporate funds for his own purposes and drew checks on the corporate bank account for personal reasons without designating such amounts as commissions.

On December 3, 1964, petitioner was discharged in bankruptcy. The Bourques had a 1965 Federal income tax liability in the amount of $682.33, which was discharged in part by a series of $50 payments over the period October 1966 to August 1967, and finally paid in full in July and August 1968. The Bourques' 1966 joint Federal income tax return disclosed "total income" of $4,330.18, and claimed five exemptions. Their 1967 joint Federal income tax return disclosed "total income" of $5,837.54, and again claimed five exemptions.

During the taxable years petitioner did not receive any gifts or inheritance or any large loans, with the exception of a $25,000 mortgage loan. This loan was obtained in October of 1968 when the Bourques purchased a new home in Barrington, Rhode Island. The $7,000 balance of the purchase price was paid by them at the time of the purchase, $1,000 of which was paid by a check drawn on Cumar's bank account.

40 TCM (CCH) 826

Mr. and Mrs. Bourque were also involved in the operation of at least two other business entities during some of the taxable years. Petitioner is president and Mrs. Bourque is treasurer of a corporation called Crayle Realty Corp. Mrs. Bourque opened a checking account for Crayle Realty Corp. on December 5, 1969, with an initial currency deposit of $2,000. As of December 31, 1970, petitioners' capital investment in this corporation amounted to $21,500. Also, on May 11, 1970, petitioner formed the Winthrop Investment Corporation, of which Mr. and Mrs. Bourque were the sole shareholders. Petitioner invested $30,000 in this corporation, which purchased an ocean front motel complex on May 28, 1970. The purchase price of the motel was $72,000; $30,000 was paid in cash, and payment of the balance was secured by a mortgage held by the sellers.

Mr. and Mrs. Bourque and Cumar utilized the services of professionals in preparing their income tax returns. Cumar filed no returns for its taxable years 1968 and 1969. At some time prior to April 12, 1971, petitioner retained Mr. Frank DeAngelis, a revenue agent for the State of Rhode Island and part-time public accountant, to prepare 1969 and 1970 returns for Cumar. Mr. DeAngelis also prepared the Bourques' 1970 individual income tax return. Mr. DeAngelis prepared such returns and gave them to petitioner, who filed the 1970 Cumar return, but failed to file the 1969 Cumar return.

In preparing the returns, Mr. DeAngelis was supplied with Cumar's bank statements, bank deposit slips, checks, and checkbook stubs. He inquired of petitioner as to the existence of any other records, and was told that there were none. Petitioner did keep a "Dome" record book from May of 1968 through March of 1969 which recorded some disbursements by check and listed various receipts; this book was not given to Mr. DeAngelis. Furthermore, the book does not provide an adequate record of petitioner's receipts as a sole proprietor or of Cumar's receipts; the total receipts shown in the "Dome" book are less than the stipulated receipts. In preparing the returns, Mr. DeAngelis determined Cumar's receipts and disbursements solely on the basis of activity in the corporation's checking accounts. He was not supplied with any purchase invoices for scrap purchases. Mr. DeAngelis classified Cumar's expenses on the basis of notations made by petitioner on most of the check stubs, which are in the record. From these notations, which purported to identify the purposes for the issuance of the corresponding checks, he determined the amounts allocable to petitioner as commissions and also classified the other expenditures by the corporation into various categories of deductible expenses. Mr. DeAngelis also classified the receipts of Cumar by reference to similar notations made by petitioner on Cumar's deposit slips. These notations identified deposits, most of which were made in currency, as "loan" or proceeds from the sale of "scrap". However, the record contains only the deposit slips for 1970; deposit slips for 1968 and 1969 are not in the record.

On its 1970 corporate income tax return, Cumar reported the following income and expenses for that year:


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