Carlins v. Commissioner
| Decision Date | 25 February 1988 |
| Docket Number | 6102-83,Docket No. 5418-82,6103-83.,6101-83,5935-83,5769-83,5772-83,5771-83 |
| Citation | 55 TCM (CCH) 228,1988 TC Memo 79 |
| Parties | Joel M. Carlins, et al., v. Commissioner. |
| Court | U.S. Tax Court |
Michael A. Moss and Steven B. Wolf, Suite 3740, 55 East Monroe, Chicago, Ill., for the petitioner in Docket No. 5418-82. Paul C. Arshonsky and Michael A. Sandberg, 120 S. LaSalle St., Chicago, Ill., for the petitioners in Docket Nos. 5769-83, 5771-83, 5772-83, 5935-83, 6101-83, 6102-83, and 6103-83. Judy Jacobs, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies, overpayments of tax, and additions to tax for petitioners in the following amounts:
Deficiency Addition to Tax
Petitioner (Overpayment)2 Year Sec. 6653(a)3
Joel M. Carlins $ 32,232 1978 --
Marvin Kamensky
and Judith N. 161,033 1978 $8,052
Kamensky 118,580 1979 5,929
Daniel B. Kamensky
Minor, Marvin (2,661) 1978 --
Kamensky, 14,453 1979 --
Guardian (8,138) 1980 --
Robert N. Kamensky
Minor, Marvin (4,501) 1978 --
Kamensky, 14,282 1979 --
Guardian (8,001) 1980 --
Todd L. Kamensky (5,845) 1978 --
Minor, Marvin 14,513 1979 --
Kamensky, Guardian (9,256) 1980 --
Henry S. Landan
and Joy M. 64,630 1978 3,232
Landan 59,003 1979 2,950
Andrew S. Landan
Minor, Henry S. (1,318) 1978 __
Landan, 431 1979 __
Guardian (6,162) 1980 __
Jonathan B
Landan, Minor, (1,318) 1978 __
Henry S. Landan, 431 1979 __
Guardian (6,162) 1980 __
After concessions,4 the primary issues for determination are (1) whether petitioners Marvin Kamensky, Henry Landan, and Joel Carlins realized ordinary income in 1978 as a result of the discharge of debt owed to Continental Illinois National Bank and Trust Company of Chicago, (2) whether the sales, cost of goods sold, and business deductions of Sinclair Galleries, Ltd., a small business corporation in which Marvin Kamensky and Henry Landan owned stock, should be adjusted in 1979 as determined by respondent, (3) whether petitioners Andrew and Jonathan Landan and Todd, Daniel, and Robert Kamensky were the recipients of income improperly assigned to them during the taxable years 1978 and 1979, and (4) whether petitioners Marvin and Judith Kamensky and Henry and Joy Landan are liable for additions to tax under section 6653(a) for the taxable years 1978 and 1979.
For reasons of clarity and ease of discussion, the findings of fact and opinion tied to each of the above issues are presented separately.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts, supplemental stipulations of facts, and attached exhibits are incorporated herein by this reference.
Joel Carlins resided in Chicago, Illinois, when he filed his petition. Marvin and Judith Kamensky, husband and wife, resided in Northbrook, Illinois, when they filed their petition. Their children, Robert, Todd, and Daniel Kamensky, also resided in Northbrook, Illinois, when their petitions were filed. Henry and Joy Landan, husband and wife, resided in Chicago, Illinois, when they filed their petition. Their children, Andrew and Jonathan Landan, also resided in Chicago, Illinois, when their petitions were filed. All petitioners timely filed tax returns with the Internal Revenue Service Center in Kansas City, Missouri.
Andrew and Jonathan Landan were born April 17, 1977. Robert Kamensky was born on October 2, 1969 and Daniel Kamensky was born on December 23, 1972. As such, they are minors. Todd Kamensky's birth date is not revealed in the record.5
Petitioners Joel Carlins, Marvin Kamensky, and Henry Landan are all attorneys. Mr. Carlins was at one time a partner in a law firm in which Mr. Kamensky was a member. In 1977, Mr. Carlins ended his association with this firm. Mr. Kamensky became a certified public accountant in 1961 and received his law degree from DePaul University in 1966. Between 1961 and 1967, Mr. Kamensky worked for the Internal Revenue Service. Afterward, he entered the private practice of law, an occupation in which he has been involved for more than fifteen years. Mr. Landan received his law degree from DePaul University in 1969. He also received an LL.M. in taxation from New York University in 1970. In 1971, Mr. Landan joined the law firm of Carlins and Kamensky. He worked with Mr. Kamensky until April of 1984.
Issue 1. Discharge of Debt
In December of 1976, Marvin Kamensky, Joel Carlins, Henry Landan, and others incorporated Sagtat, Inc. (Sagtat), under Illinois law.6 They formed the company, an electing small business corporation, to exploit the business of developing and marketing computerized data processing systems. Marvin Kamensky acquired 433.33 shares of the company's $1 par value stock. He additionally held Sagtat's remaining 566.67 shares of such stock as nominee for the corporation's other shareholders.7 These 1,000 shares represented the corporation's entire capital structure.
Prior to buying Sagtat's stock, Mr. Carlins did not particularly investigate the company and its contemplated deals. He instead noted the general nature of his investment and acted on the recommendation of Marvin Kamensky. At the time, however, Mr. Kamensky knew virtually nothing about the functioning of computers.
In addition to purchasing the stock of Sagtat, Messrs. Carlins, Kamensky, and Landan loaned the fledging company additional monies.8 Neither notes nor other documentation memorializing these loans and their terms were introduced as evidence, however.
Joel Carlins loaned Sagtat a total of $56,000. Of this total, $7,000 represented Mr. Carlin's own funds while $49,000 represented amounts he borrowed from Continental Illinois National Bank and Trust Company ("Continental Bank"). Marvin Kamensky loaned Sagtat $104,000 of which $13,000 represented his own funds and the remaining $91,000 represented funds he borrowed from Continental Bank. Finally, Henry Landan loaned Sagtat $40,000 — $5,000 of his funds and $35,000 borrowed from Continental Bank. All the above-mentioned sums borrowed from Continental Bank were on a nonrecourse basis and were secured by the borrowers' stock in Sagtat. Messrs. Landan and Kamensky never discussed what happened to the money they borrowed from Continental Bank and invested in Sagtat.
On December 31, 1976, Sagtat entered into an agreement with Codon Corporation ("Codon"). Under the terms of this agreement ("the Codon agreement"), Codon was to provide Sagtat with a time keeping, billing, and accounts receivable data processing system for medium size law firms.9 Codon was to deliver the system on or before December 31, 1977. In return for this system, Codon was to receive $239,500. Upon completion of the system, Codon also agreed to provide technical assistance and training to Sagtat's employees on the system's use. The assistance and training were to enable Sagtat's employees to successfully market the processing system. Codon was to receive $500 for providing this technical assistance and training. At the end of 1976, Codon was paid the total $240,000 in advance.
As of the end of 1977, the Codon agreement's termination date, Codon had not delivered the system to Sagtat. Nor did Codon deliver the system by the end of 1978, 1979, or 1980. In 1981 or 1982, a number of boxes of computer cards were delivered to Sagtat at the offices of the law firm of Kamensky and Landan. Not knowing what to do with the cards, Marvin Kamensky attempted to contact the people at Codon and Messrs. Pinsky and Wenz, individuals with whom he had dealt while negotiating the Codon agreement. His attempts, nevertheless, proved futile. He was unable to reach anyone at Codon; he had only sporadic communications with Robert Wenz; and his communications with Alex Pinsky resulted in no clear answers.
During this period of time from the end of 1977 through 1982, and, indeed, through the date of the trial of this case, Messrs. Kamensky, Landan, and Carlins never sent or received any oral or written communications to or from Continental Bank, or any person acting or purporting to act on behalf of Continental Bank, concerning payment of the debt each owed to Continental Bank, concerning a release of these petitioners from liability under their respective loans, concerning a transfer or release of the collateral securing each loan, or concerning any modification of each loan's terms.10 At no time did these petitioners pay anything on their outstanding loans to Continental Bank or take any action to cause the collateral securing their debts to Continental Bank to be conveyed to the bank.
Tied to their investments in Sagtat, Messrs. Carlins, Kamensky, and Landan received the following flow-through losses for the taxable years 1976 through 1980:
Year J. Carlins M. Kamensky H. Landan
1976 11 ................................. ($55,999.64) ($104,000.00) ($40,001.12)
1977 12 ................................. (46 22) (85.83) (33.00)
1978 13 ................................. (24.00) (44.50) (17.00)
1979 14 ................................. (5.30) (9.84)...To continue reading
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