Davis v. Commissioner
| Decision Date | 29 July 1999 |
| Docket Number | Docket No. 5744-92.,Docket No. 25088-96.,Docket No. 4449-92. |
| Citation | 78 T.C.M. 178 |
| Parties | S. Robert Davis v. Commissioner. |
| Court | U.S. Tax Court |
Michael Quigley, Donald C. Alexander, Washington, D. C., and Laura D. Byrne, for the petitioner. John E. Budde and Joseph P. Grant, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies in and additions to petitioner's Federal income taxes:
Additions to Tax
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Year Deficiency Sec. 6653(b) Sec. 6653(b)(1) Sec. 6653(b)(2) Sec. 6661
1976 ....................... $263,353.75 $131,676.88 -- -- --
1984 ....................... 20,255.00 -- $10,113 1 $5,056
1985 ....................... 244,848.00 -- -- --
1987 ....................... 24,986.00 -- -- -- --
1 50 percent of the interest on $20,255
Respondent also determined that increased interest pursuant to section 6621(d) applied to the 1976 deficiency.
By three amendments to answer for the year 1985, respondent (1) increased the deficiency by $367,776 (resulting in a total deficiency of $612,624), (2) asserted additions to tax pursuant to (a) section 6653(b)(1) in the amount of 50 percent of the underpayment, (b) section 6653(b)(2) in the amount of 50 percent of the interest payable with respect to the deficiency attributable to fraud, and (c) section 6659 in the amount of $94,950, and (3) asserted increased interest pursuant to section 6621(d).
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. After concessions, the primary issues for decision are as follows:
(1) Whether petitioner is liable for additions to tax for fraud for 1976, 1984, and 1985;
(2) whether petitioner is entitled to a net operating loss (NOL) carryback from 1988 to 1985 greater than the amount allowed by respondent; and
(3) whether petitioner is entitled to deduct certain expenses incurred in 1987.
If we decide that petitioner's tax returns for 1976, 1984, and 1985 are not fraudulent, we must decide whether the periods of limitations for these years have expired. If we conclude that petitioner's tax returns for 1976, 1984, and 1985 are fraudulent, we must decide the following issues:
(1) The fair market value of Strata Corp. (Strata) stock for 1985;
(2) the fair market value of an 18-acre parcel of real estate located at 1450 Brown Road, Columbus, Ohio (Brown Road property), and a 274+ acre parcel of land in McKean Township, Licking County, Ohio (the Licking County property), for 1976;
(3) whether petitioner is entitled to certain depreciation deductions for 1976;
(4) whether the "Riverview" sales are capital transactions for 1985;
(5) whether petitioner is liable for interest on a substantial understatement attributable to a tax-motivated transaction for 1976 and 1985 pursuant to section 6621(d);
(6) whether petitioner is liable for the addition to tax pursuant to section 6661 for 1984; and
(7) whether petitioner is liable for the addition to tax pursuant to section 6659 for 1985.
Some of the facts have been stipulated and are so found. The stipulations of facts and the attached exhibits are incorporated herein by this reference. At the time he filed his petition in Docket Nos. 4449-92 and 5744-92, petitioner (Mr. Davis) resided in Amlin, Ohio. At the time he filed his petition in Docket No. 25088-96, petitioner resided in Tampa, Florida.
Mr. Davis was born on October 31, 1938, in Columbus, Ohio. In his youth, he often chauffeured his mother, a real estate agent, around Columbus in connection with her business. Mr. Davis observed his mother attentively and learned about real estate. As his knowledge increased, he grew anxious to enter the real estate business. In February 1955, Mr. Davis applied for, and received, a real estate license.
Initially, Mr. Davis actively and successfully sold residential real properties. Soon thereafter, his emphasis shifted from selling real estate to constructing, remodeling, and developing real estate. Originally, this business operated as a sole proprietorship. Gradually, the business expanded, and Mr. Davis formed two corporations — one for residential construction and sales and the other for commercial development and leasing.
During the 1960's, Mr. Davis' corporation that engaged in the commercial development and leasing business was extremely successful and grew substantially. In 1965, he formed a new corporation, S. Robert Davis & Co., Inc. (Davis Co.), to conduct business as a developer and builder of real estate projects.
Since the 1960's, apart from his real estate activities, Mr. Davis has started and promoted various companies. In the 1960's, Mr. Davis acquired Kentucky Fried Chicken (KFC) franchises in Manhattan and Westchester County, New York.
In 1968, Mr. Davis and three other individuals formed National Diversified Corp. (National Diversified). Mr. Davis was elected chief executive officer (CEO). KFC was National Diversified's first national account.
In 1969, National Diversified changed its name to National Fast Food Corp. National Fast Food Corp. formed a wholly owned subsidiary named Arthur Treacher's Fish & Chips (Arthur Treacher's). Arthur Treacher's grew from an entity owning one restaurant to an entity owning more than 700 restaurants. Mr. Davis was an employee and the chairman of Arthur Treacher's.
In the early 1970's, National Fast Food Corp. changed its name to NFF Corp. In 1971, NFF Corp. purchased the stock of Lake Hamilton Citrus Co. (LHCC). LHCC owned large citrus groves in Florida and produced citrus products. Around 1972 or 1973, NFF Corp. changed its name to Orange Co., Inc. (Orange Co.), and changed LHCC's name to Orange Co. of Florida, Inc. In 1976, Orange Co. was listed on the New York Stock Exchange. In 1978, Orange Co. sold the Arthur Treacher's chain.
By 1985, Orange Co. had revenues approximating $70 to $80 million a year. During Mr. Davis' involvement with Orange Co., it produced approximately 5 percent of the orange juice consumed in the United States.
In 1970, Mr. Davis, R. David Thomas (Dave Thomas), and Len Imke started Wendy's International, Inc. (Wendy's). Mr. Davis was a board member, adviser, and investor of Wendy's. Mr. Davis held more than 20 percent of the stock of Wendy's at its inception, and he facilitated financing for the company. He built the first freestanding building used by a Wendy's restaurant and, during the company's first year of operation, raised $1 million. Two years later, Mr. Davis raised an additional $3 million and facilitated additional financing.
In 1976, Buckeye Federal Savings & Loan (Buckeye) was contemplating a public offering. Mr. Davis decided to make a substantial investment in Buckeye. He went to separate brokerage firms and informed them that he wished to acquire their allotment of Buckeye shares. Through these firms, Mr. Davis acquired 20 percent of Buckeye's shares. Sometime thereafter, he was elected chairman of the board of Buckeye.
In 1981, Mr. Davis (and others) founded Big Bite, Inc. (Big Bite), to promote fast food franchises serving pita sandwiches. Mr. Davis was a primary investor in Big Bite. In 1983, he was elected to Big Bite's board of directors. By 1982 or 1983, Big Bite expanded to a chain of approximately 30 restaurants. In the mid-1980's, Big Bite's restaurants fell out of favor with consumers.
Mr. Davis also was instrumental in the formation and financing of other corporations traded on the national over-the-counter market. One of these corporations was Strata. Strata was in the oil and gas exploration and drilling business. Mr. Davis was the first chairman of the board of Strata and one of its three majority shareholders.
Over the years, Mr. Davis solicited investments in the various entities he promoted from a large group of potential investors. Mr Davis gave away shares he personally held in the promoted entities (1) to ensure important potential investors would be enthusiastic to invest in the next venture/entity he promoted and (2) in the hope that these investors would help Mr. Davis in his promotion of certain businesses.
Petitioner held a substantial number of shares in the entities he promoted with a zero basis in those shares. Thus, he felt it cost him nothing to give away his shares (which he did) to potential investors or people who could refer potential investors.
In 1985, Mr. Davis resigned from all positions he held in public entities and prominent charitable organizations in which he had been involved to direct his attention to defending himself in various governmental proceedings that were underway. Mr. Davis was under investigation by the Immigration and Naturalization Service, the Environmental Protection Agency, and the Securities and Exchange Commission (SEC). He also was under investigation for criminal mail fraud. The Internal Revenue Service (IRS) was conducting a "TCMP" audit, and State and city officials also were conducting income tax audits.
These various proceedings garnered Mr. Davis a lot of unfavorable local publicity on radio and television and in newspapers and magazines. During this time, Mr. Davis' ability to generate income from the public entities he was associated with was limited.
In 1964, Jean Davis began working for Mr. Davis as a secretary.1 In the early 1970's, her duties expanded to include bookkeeping. Since the early 1970's, Jean Davis has maintained Mr. Davis' books and records including his invoice,...
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