Cloud v. Comm'r of Internal Revenue

• Decision Date: 09 December 1991
• Docket Number: 8297-89.,31425-88,Docket No. 14973-88
• Citation: 97 T.C. 613,97 T.C. No. 43
• Parties: DOUGLAS CLOUD AND PEGGY CLOUD, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

97 T.C. 613

97 T.C. No. 43

DOUGLAS CLOUD AND PEGGY CLOUD, Petitioners,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

Docket No. 14973-88

31425-88

8297-89.

United States Tax Court

Filed December 9, 1991.

P, an active member of the Democratic Party, was appointed a deputy registrar of the State Bureau of Motor Vehicles in Butler County, Ohio. Deputy registrars operated the State's license bureaus, which charged customers for processing driver's license applications, vehicle registrations, license plates, and license tabs. Deputy registrars in Ohio were appointed pursuant to annual contracts with the Registrar. In order to obtain the appointment and ensure renewal of his contract in following years, P was required to obtain the recommendation of the Democratic Party. In order to get that recommendation, P agreed to pay 10 percent of his bureau receipts to the county Democratic Party. This method of financing political activities was a common practice in Ohio during the years in issue. The county Democratic Party billed P each month based on the number of transactions conducted at his license bureau. One-third of P's payments to the county party were forwarded to the State party. P deducted or otherwise did not include the amount of such payments in his income. R determined that the payments were nondeductible political contributions.

HELD: P's payments to the county Democratic Party constitute nondeductible political contributions.

HELD FURTHER: Ps were not negligent with respect to their tax treatment of the political contributions.

HELD FURTHER: R abused his discretion in not waiving the sec. 6661, I.R.C., addition to tax. Dale O. Lierman, for the petitioner.

Carolyn M. Smith, for the respondent.

RUWE, Judge:

Respondent determined deficiencies and additions to tax in petitioners' Federal income tax as follows:

+-----------------------------------------------------------------------+
                ¦      ¦            ¦Additions to tax                                   ¦
                +------+------------+---------------------------------------------------¦
                ¦Year  ¦Deficiency  ¦Sec. 6653(a)(1) 1  ¦Sec. 6653(a)(2)  ¦Sec. 6661  ¦
                +------+------------+---------------------+-----------------+-----------¦
                ¦1983  ¦$ 3,640.88  ¦$182.04              ¦50 percent of the¦           ¦
                +-----------------------------------------------------------------------+
                

                      interest due on
                                      $3,640.88
                1984 10,341.56 517.08 50 percent of the $2,585.39
                

                interest due on
                                $10,341.56
                1985 10,594.00                  2,649.00
                

 Additions to tax
                Year Deficiency Sec. 6653(a)(1)(A) Sec. 6653(a)(1)(B) Sec. 6661  
                1986   $17,666.90                                             $4,417
                

Following concessions, the issues for decision are: (1) Whether petitioners may deduct amounts paid to a county Democratic Party as business expenses in 1983, 1984, 1985, and 1986; (2) whether petitioners received unreported income of $4,135 during 1984; (3) whether petitioners are liable for additions to tax under section 6653(a)(1) and (2) for negligence or intentional disregard of rules and regulations for 1983 and 1984; and (4) whether petitioners are liable for additions to tax under section 6661 for substantial understatement of income tax for 1984, 1985, and 1986.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference.

Petitioners were husband and wife. They filed joint Federal income tax returns for 1983, 1984, 1985, and 1986. Petitioners resided in Fairfield, Ohio, at the time they filed their petitions in this case. References to petitioner in the singular are to Douglas Cloud.

Petitioner works as a representative for the International Brotherhood of Electrical Workers. He is also an active member of the Democratic Party in Butler County, Ohio, and has been since 1979. As a member of the Butler County Democratic Party, petitioner has taken part in party campaign activities, such as putting up signs and telephoning potential supporters' as well as donating money to the party. Petitioner was also on the party's executive committee. The executive committee had approximately 120 members and was the governing body of the Butler County Democratic Party.

In 1983, the chairman of the Ohio Democratic Party, James Ruvolo, met with the chairpeople of all the county Democratic Parties in the State. At that time, David L. Smith was chairman of the Butler County Democratic Party. At this meeting, Mr. Ruvolo told the county chairpeople that the State party would be requesting recommendations for the positions of deputy registrar of the State Bureau of Motor Vehicles. The State party would, in turn, recommend to the State of Ohio that these people be appointed as deputy registrars.

The deputy registrars were responsible for establishing and operating the State's license bureaus. These bureaus processed applications for motor vehicle registrations and driver's licenses. They also sold license plates, license plate renewal tabs, and laminated driver's licenses. Each of the services was provided at a charge of $1.50.

It was the practice of previous administrations in Ohio that the deputy registrars would make contributions to the political party in power that had recommended their appointment. That practice consisted of the deputy registrars' contributing 10 percent of their receipts or $.15 for each transaction conducted at the respective license bureaus.

At the time Mr. Ruvolo met with the county chairpeople in 1983, it was made known that each person appointed as a deputy registrar would “donate” to the county party 10 percent of receipts ($.15) on each transaction conducted at his license bureau. The deputy registrar was to make payment directly to the county party. The county party was then to forward $.05 of each $.15 to the Ohio Democratic Party. The bylaws of the State party provided for assessment of the county parties to help fund the State party's expenses. Transactions of the deputy registrar's office had traditionally been perceived as a sound basis for that assessment.

Mr. Smith relayed information to the rest of the Butler County Democratic Party that four deputy registrar positions were available in their county. As there were many more interested individuals than available positions, the Butler County Democratic Party formed a committee consisting of seven party members to screen the applicants. Petitioner applied to the committee seeking recommendation for the position.

The requirements for recommendation were determined by the executive committee. Some of the qualities sought in an applicant were good business sense, a reputation for trustworthiness, past service to the party, and willingness to pay 10 percent of receipts to the party. Consequently, as part of the screening process it was made clear to all the applicants that a condition of being appointed was the applicant's willingness to pay a $.15 fee per transaction. All applicants understood that a commitment to make these payments was a prerequisite to recommendation. It was generally believed that failure to pay the transaction fee would result in loss of the appointment or nonrenewal of a registrar's contract the following year.

The screening committee ultimately decided on four individuals, petitioner and three other members of the executive committee, Mr. David L. Smith, Mr. Joe Schwartz, and Mr. Phillip Morrical, Jr., to fill the available positions in Butler County. This decision was ratified by the executive committee, and the names forwarded to the chairman of the State party, Mr. Ruvolo. The recommendation was followed, and all four were appointed deputy registrars.

A total of 244 deputy registrars were appointed in 1983 in Ohio's 88 counties. The registrar of motor vehicles appointed 262 deputy registrars in 1984, 267 in 1985, and 273 in 1986. Once appointed, an individual entered into a contract with the State to act as deputy registrar. These contracts were renewable on a yearly basis.

For the years 1983, 1984, 1985, and 1986, petitioner entered into written contracts with the State of Ohio to act as a deputy registrar. He operated two license bureaus in the city of Hamilton, Ohio. Petitioner, Peggy Cloud, worked in the bureaus and handled all the day-to-day bookkeeping and record keeping.

Once the deputy registrars had been appointed, the Ohio Democratic Party began sending invoices to the Butler County Democratic Party each month. The invoices stated the total number of transactions conducted in each of the county's license bureaus for the month and assessed the amount due from the county party for the State party's share of the transaction fee. The treasurer of the Butler County Democratic Party billed each of the deputy registrars based on the number of transactions contained in the State invoice. If the deputy registrar overpaid his bill, the difference was refunded. If he underpaid it, the difference was added to the next bill.

Mr. Morrical, one of the deputy registrars appointed along with petitioner in 1983, operated a bureau in Oxford, a small town near the border of Ohio and Indiana. Due to its location the bureau had a low traffic volume. In 1985, Mr. Morrical, in order to maintain a satisfactory work force, increased the compensation of his bureau manager. As a result, the license bureau could no longer generate sufficient revenue to cover both the overhead and the 10-percent transaction fee. Consequently, Mr. Morrical discontinued paying the transaction fee to the party. Despite Mr. Morrical's failure to maintain payment of the transaction fee, his contract was renewed for the following 3 years.

Petitioner made payments to the Butler County Democratic Party, in accordance with the invoices, during the entire time he served as deputy registrar. Petitioner paid the following...