Estate of Ballantyne v. Commissioner
| Decision Date | 24 June 2002 |
| Docket Number | Docket No. 16346-99.,Docket No. 14848-99. |
| Citation | 83 T.C.M. 1896 |
| Parties | Estate of Melvin W. Ballantyne, Deceased, Jean S. Ballantyne, Independent Executrix, and Jean S. Ballantyne v. Commissioner. Russell E. Ballantyne and Clarice Ballantyne v. Commissioner. |
| Court | U.S. Tax Court |
Kevin P. Kennedy, for the petitioners in Docket No. 14848-99.
Jon J. Jensen, Alexander F. Reichert, and Gary A. Pearson, for the petitioners in Docket No. 16346-99.
John C. Schmittdiel and Roberta L. Shumway, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in income tax and a penalty in Docket No. 14848-99 as follows:
Accuracy-Related
Penalty
Taxpayer Year Deficiency Sec. 6662(a)
Jean S. Ballantyne ................1993 $ 4,998 --
Estate of Melvin W. ...............1994 10,735 --
Ballantyne, Jean S
Ballantyne, Surviving Spouse
Estate of Melvin W. ...............1994 172,035 --
Ballantyne, Jean S
Ballantyne, Executrix
Estate of Melvin W. ...............1995 14,562 $2,912
Ballantyne, Jean S
Ballantyne, Executrix
Respondent determined deficiencies in income tax and penalties in Docket No. 16346-99 for Russell E. Ballantyne and Clarice Ballantyne as follows:
Accuracy-Related
Penalty
Year Deficiency Sec. 6662(a)
1993............ $ 77,672 --
1994............ 325,761 $63,646.40
1995............ 47,381 9,476.20
In order to protect the Government from a potential whipsaw, respondent has taken inconsistent positions in these dockets.1
After concessions, the issues for decision are: (1) The proper allocation between the Estate of Melvin W. Ballantyne and petitioner Russell E. Ballantyne of gain from the sale of grain in 1994; (2) whether petitioner Russell E. Ballantyne had additional gain in 1994 in the amount of $751,988 which should have been included in gross income; and (3) whether petitioners Russell E. Ballantyne and Clarice Ballantyne are liable for the accuracy-related penalties pursuant to section 6662(a)2 for 1994 and 1995 with respect to certain adjustments contained in the notice of deficiency.
Some of the facts have been stipulated and are so found. The stipulation of facts, the stipulations of settled issues, and the attached exhibits are incorporated herein by this reference. Petitioner Jean S. Ballantyne (Jean), who is the surviving spouse of Melvin W. Ballantyne (Melvin) and the executrix for the Estate of Melvin W. Ballantyne (the estate), resided in Minot, North Dakota, at the time the petition in Docket No. 14848-99 was filed. At that time, the estate was under the jurisdiction of Probate Court No. 1 in Bexar County, Texas. The business office for the estate is located in San Antonio, Texas. Petitioners Russell E. Ballantyne (Russell) and Clarice Ballantyne (Clarice) resided in Westhope, North Dakota, at the time they filed their petition.
Melvin Ballantyne and Russell Ballantyne were brothers. In 1943, they entered into an oral agreement whereby they formed a general partnership known as Ballantyne Brothers Partnership (BBP). Melvin and Russell were the only partners of BBP during its existence, and a written partnership agreement was never executed.
The partnership was involved in two separate and distinct business operations. Russell primarily conducted a farming activity in North Dakota. Russell's sons, Orlyn and Gary, assisted Russell in conducting the farming activity.4 Melvin primarily conducted an oil and gas exploration and production activity in Canada and various U.S. locations. Melvin employed two of his sons, Stephen and Kab, to assist in conducting the oil and gas activity.5 In general, Melvin and Russell allowed each other to withdraw from the partnership the profits attributable to the respective activity each brother primarily conducted. Melvin and Russell generally paid the expenses related to the respective activity each conducted. Many of the assets used by BBP in its activities were not held in the partnership's name. Rather, these assets were either jointly owned by Melvin and Russell or individually owned by one of them.
In late 1993 or early 1994, Melvin was diagnosed with pancreatic cancer, and he subsequently died on March 4, 1994. The partnership automatically dissolved upon Melvin's death. In the months leading up to Melvin's death, some of the assets of BBP were equally distributed between Melvin (or his children) and Russell. At the time of Melvin's death, Jean, Stephen, Kab, and Todd believed that Melvin and Russell were equal partners in BBP.
For at least the taxable years 1980 through 1994, BBP filed Forms 1065, U.S. Partnership Return of Income. Jules Feldmann (Mr. Feldmann), a certified public accountant, prepared BBP's Federal income tax returns for those years.6 Melvin, Stephen, and Kab provided Mr. Feldmann with financial information about the oil and gas activity. Russell, Orlyn, and Gary provided Mr. Feldmann with financial information about the farming activity. The Forms 1065 for 1980 through 1994 reported that Melvin and Russell each were general partners in BBP and that they each held a 50-percent interest in the profit sharing, loss sharing, and ownership of capital of the partnership. Additionally, Melvin and Russell each reported 50-percent of BBP's income, gain, loss, deduction, and credit on their individual Federal income tax returns.
For the taxable year 1994, BBP's gross income from the farming activity totaled $1,503,976.58. This amount was attributable to grain sales by BBP to Bottineau Farmers Elevator (Bottineau). The grain sold in 1994 was grown in prior years and was an asset of BBP. The following schedule lists the payments made by Bottineau in 1994 for the grain:
Date Payee Amount
1/03/94 Ballantyne Bros. $ 821,565.32
1/17/94 Ballantyne Bros. 250,000.00
2/28/94 Russell Ballantyne 104,181.18
3/04/94 Russell Ballantyne 59,238.79
3/18/94 Ballantyne Bros. 121,816.80
10/18/94 Ballantyne Bros. 73,993.25
10/18/94 Jean Ballantyne 73,181.24
____________
Total 1,503,976.58
On the Schedule F, Profit or Loss from Farming, attached to its 1994 Form 1065, BBP reported depreciation and other farm expenses of $371,294, resulting in a net farm profit of $1,132,681. On its Form 1065, BBP reported additional income of $144,046 from oil revenues, resulting in total income of $1,276,727. After accounting for miscellaneous deductions, BBP reported ordinary income of $1,242,710 from trade or business activities. BBP also reported net oil royalty income from Canada of $300,115 and foreign taxes paid in the amount of $182,608. The Schedules K-1, Partner's Share of Income, Credits, Deductions, Etc., issued to the estate and Russell allocated to each, as distributive share items, one-half of partnership ordinary income, gross farming income, oil revenue income, and oil royalty income from Canada.7
On a Schedule E, Supplemental Income and Loss, attached to his 1994 Form 1040, U.S. Individual Income Tax Return, Russell reported ordinary income of $584,122 from BBP.8 On a Schedule E attached to its 1994 Form 1041, U.S. Income Tax Return for Estates and Trusts, the estate reported ordinary income of $616,423 from BBP.9
During its existence, BBP did not maintain a general ledger, a balance sheet, a sales journal, or a purchases journal. BBP did not always maintain a cash disbursements journal or a cash receipts journal. Mr. Feldmann was never provided with a complete listing of BBP's assets and liabilities, and he never prepared a balance sheet for the partnership.10 Neither the partnership nor Mr. Feldmann prepared yearend trial balances. Partnership capital accounts for BBP were never maintained. The 1993 and 1994 Forms 1065 reported that Melvin and Russell had balances of "0" in their respective capital accounts at both the beginning and the end of those taxable years.11 On the 1993 and 1994 Forms 1065, BBP reported on the Schedules L, Balance Sheet, that the total assets and total liabilities of the partnership at the beginning and the end of those taxable years were "None".12 A calculation of each partner's capital contributions to the partnership cannot be made given the state of BBP's records. Additionally, a calculation of the distributions made to each partner cannot be made. The partnership tax returns for the years 1980 through 1994 reflect that the oil and gas activity was more profitable overall than the farming activity during that period.
After Melvin's death, a dispute arose concerning BBP. On April 19, 1995, Jean, individually and in her capacity as independent executrix of the estate, filed suit against Russell and other parties. The original and amended petitions sought, among other things, an accounting of the assets and liabilities of BBP in order to establish the value of BBP's assets and liabilities and the respective interests of Melvin and Russell as of the date of Melvin's death. The dispute was also outlined in the estate's 1994 Form 1041. On a Form 4684, Casualties and Thefts, attached to the 1994 Form 1041, the estate reported a casualty/theft loss of $560,900. In an attachment to the Form 4684, the estate alleged that Russell had embezzled cash from BBP bank accounts and transferred it to his own business and personal accounts, resulting in a casualty/theft loss of $560,900. The estate further alleged:
A portion of the amount of cash embezzled from the partnership in 1994 has been ascertained from the partnership tax return. The estate received its 50% portion of the income distributions for oil...
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