Combs v. Comm'r
| Decision Date | 05 August 2019 |
| Docket Number | T.C. Memo. 2019-96,Docket No. 22748-14. |
| Parties | PATRICK COMBS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Patrick Combs, pro se.
Emerald G. Smith and Min Young Chan, for respondent.
THORNTON, Judge: Respondent determined deficiencies in petitioner's Federal income tax, section 6662(a) accuracy-related penalties, and a section 6651(a)(1) addition to tax as follows:1
| Year |
| Deficiency |
| Penalty |
| sec. 6662(a) |
| Addition to tax |
| sec. 6651(a)(1) |
| 2010 |
| $189,453 |
| $37,891 |
| -0- |
| 2011 |
| 32,713 |
| 6,543 |
| $7,546 |
| 2012 |
| 1,589 |
| 318 |
| -0- |
The Court has previously granted respondent's motion for partial summary judgment with respect to petitioner's taxable years 2010 and 2011.2 After concessions, the issues remaining for decision are: (1) whether petitioner received constructive dividends from The Good Thinking Co., Inc. (Good Thinking), during 2010, 2011, and 2012 (years at issue), as respondent determined;3 (2) whether he is liable for the section 6651(a)(1) addition to tax for failure to timely file for 2011; (3) whether he is liable for section 6662(a) accuracy-relatedpenalties for 2010, 2011, and 2012; and (4) whether he should be subject to a penalty pursuant to section 6673(a).
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. When he filed his petition, petitioner resided in California with his significant other Deanna Latson and their two children.
Petitioner is an author, a performer, and a motivational speaker. During the years at issue he performed in "one-person comedy shows" and had various speaking engagements. Compensation for these performances was generally made by checks payable to Good Thinking and deposited into Good Thinking's bank account.
This arrangement grew out of petitioner's dealings with Robert Holcomb.4 Since at least 1999 Mr. Holcomb had promoted to petitioner a tax-avoidance strategy which petitioner refers to as a Private Tax Excepted Self Supporting Ministry (PTESSM). The general concept of this strategy was to shift business income to various entities which would then use the funds to pay petitioner's personal expenses.5
In furtherance of this strategy, on January 1, 1999, Mr. Holcomb arranged for the incorporation of Good Thinking.6 Immediately after Good Thinking'sincorporation, petitioner was its sole stockholder, president, chief executive officer, chief financial officer, sole director, and treasurer. Ms. Latson served as its secretary.7
During the years at issue, in accordance with Mr. Holcomb and petitioner's plan, the fees paid for petitioner's speaking engagements were generally made payable to an account at Bank of America under the account name Good Thinking, account No. xxxxxx2520 (GT 2520 account). Insofar as the record shows, petitioner and Ms. Latson were the only individuals with signature authority over the GT 2520 account. Petitioner and Ms. Latson were also authorized users of Good Thinking's American Express credit card account (GT credit card account).8During the years at issue petitioner and Ms. Latson paid various expenses using the GT credit card account and funds deposited into the GT 2520 account. These expenses included airfare, payments to video rental stores, grocery stores, fast-food restaurants, and payments for other miscellaneous expenses.
Petitioner filed his Forms 1040, U.S. Individual Income Tax Return, for tax years 2010 and 2012 on time but filed his Form 1040 for 2011 (which was due April 17, 2012) on June 24, 2013. On these Forms 1040 he reported wages from Good Thinking of $13,750, $17,019, and $7,862 for 2010, 2011, and 2012, respectively.
For tax years 2010, 2011, and 2012 Good Thinking filed Forms 1120, U.S. Corporation Income Tax Return, reporting the following amounts of income and expenses:
2010
2011 2012 Gross profits $217,789 $65,520 $9,611 Expenses: Salaries and wages 60,288 56,894 7,500 Taxes and licenses 6,294 6,023 952 Advertising 3,359 -0- -0- Employee benefits 3,270 -0- -0- Travel 69,316 -0- -0- Other deductions 78,930 2,603 1,159 Total 221,457 65,520 9,611 Taxable income (3,668)
-0- -0-
The Internal Revenue Service (IRS) selected petitioner's and Good Thinking's returns for examination. By notice of deficiency dated July 3, 2014, the IRS adjusted Good Thinking's taxable income by disallowing, for lack of substantiation, most of the claimed deductions and by adjusting upward its gross profits for 2011 and 2012, as follows:
2010
2011 2012 Gross profits $217,789 $89,710 $47,146 Expenses: Salaries and wages 13,750 17,000 7,500 Taxes and licenses -0- -0- -0- Advertising -0- -0- -0- Employee benefits -0- -0- -0- Travel -0- -0- -0- Other deductions -0- -0- -0- Total 13,750 17,000 7,500 Taxable income 204,039 72,710 39,646
By a separate notice of deficiency, also dated July 3, 2014, respondent determined that petitioner had failed to report constructive dividends attributable to personal expenses that Good Thinking had paid on his behalf of $207,707, $72,710, and $39,646 for 2010, 2011, and 2012, respectively.9 In addition,respondent determined that for each year at issue petitioner was liable for an accuracy-related penalty under section 6662(a) as a result of one or more of (1) negligence or disregard of rules or regulations, (2) a substantial understatement of income tax, or (3) a substantial valuation overstatement.
The record includes a Civil Penalty Approval Form, dated May 14, 2014, and signed by the IRS examiner's group manager on May 23, 2014, for the assertion of accuracy-related penalties under section 6662(a) for negligence. There was no formal communication of penalties giving petitioner the right to protest them or challenge them in court before the notice of deficiency.
OPINIONThe Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer generally bears the burden of proving those determinations erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).10
Respondent determined that petitioner received from Good Thinking constructive dividends attributable to personal expenses that Good Thinking paid on his behalf. Respondent's determination of constructive dividends is a determination of unreported income. See Pac. Mgmt. Grp. v. Commissioner, T.C. Memo. 2018-131, at *64. The Court of Appeals for the Ninth Circuit, to which any appeal in this case would ordinarily lie, see sec. 7482(b)(1)(A), has held that the Commissioner must establish "some evidentiary foundation" linking the taxpayer to an alleged income-producing activity, Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir. 1979), rev'g 67 T.C. 672 (1977). Once the Commissioner has established such a foundation, the burden of proof shifts to the taxpayer to prove by a preponderance of the evidence that the IRS' determinations are arbitrary or erroneous. See Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), aff'g T.C. Memo. 1997-97.
Respondent has established a sufficient evidentiary foundation to satisfy any threshold burden. The evidence shows that petitioner owned 100% of Good Thinking and maintained authority over its checking and credit card accounts. He was integrally linked to--apparently the sole source of--its income-producing activity. The record shows that respondent's determination is based on an extensive review of both petitioner's and Good Thinking's activities, bank accounts, and other financial accounts. Respondent introduced evidence to show that Good Thinking made significant expenditures primarily for petitioner's benefit.
Sections 301 and 316 govern the characterization, for Federal income tax purposes, of corporate distributions of property to shareholders. If the distributing corporation has sufficient earnings and profits (E&P), the distribution is a dividend that the shareholder must include in gross income. Secs. 301(c)(1), 316. If the distribution exceeds the corporation's E&P, the excess generally represents a nontaxable return of capital to the extent of the shareholder's basis in the corporation, and any remaining amount is taxable to the shareholder as a gain from the sale or exchange of property. Sec. 301(c)(2) and (3); Truesdell v. Commissioner, 89 T.C. 1280, 1295-1298 (1987).
Petitioner bears the burden of proving that Good Thinking lacked sufficient E&P to support dividend treatment at the shareholder level. See Truesdell v. Commissioner, 89 T.C. at 1295-1296; Fazzio v. Commissioner, T.C. Memo. 1991- 130, aff'd, 959 F.2d 630 (6th Cir. 1992); Zalewski v. Commissioner, T.C. Memo. 1988-340; Delgado v. Commissioner, T.C. Memo. 1988-66. If neither party presents evidence as to the distributing corporation's E&P, the taxpayer has not met his burden of proof. Truesdell v. Commissioner, 89 T.C. at 1295-1296; Vlach v. Commissioner, T.C. Memo. 2013-116, at *33 n.38.
Petitioner produced no evidence concerning Good Thinking's E&P during the years at issue and has thus failed to meet his burden of proving that there were insufficient E&P to support respondent's determinations of constructive dividends to petitioner. See Truesdell v. Commissioner, 89 T.C. at 1295-1296; Pac. Mgmt. Grp. v. Commissioner, at *65-*66. We therefore deem Good Thinking to have had sufficient E&P in each year to support dividend treatment.
Characterization of a distribution as a dividend does not depend upon a formal dividend declaration. See Boulware v. United States, 552 U.S. 421, 429-430 (2008); Truesdell v. Commissioner, 89 T.C. at 1295; see also Noble v. Commissioner, 368 F.2d 439, 442 (9th Cir. 1966), aff'g T.C. Memo. 1965-84. Dividends may be formally declared or constructive. A constructive dividend is an economic benefit conferred upon a shareholder by a corporation without expectation of...
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