Ferguson v. Commissioner

Decision Date29 March 2004
Docket NumberDocket No. 3276-01.,Docket No. 3275-01.,Docket No. 3277-01.
Citation87 T.C.M. 1189
PartiesVirginia Ferguson, f.k.a. Virginia Del Bosque, and Estate of Armand J. Del Bosque, Deceased, Lori Del Bosque, Special Administrator, et al. v. Commissioner.
CourtU.S. Tax Court

Peter L. Milinkovich, for the petitioners.

David L. Zoss, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION1

JACOBS, Judge:

Respondent determined deficiencies in petitioners' Federal income tax, additions to tax, and a penalty for 1987, 1988, and 1989 as follows:2

                Docket No. 3275-01
                                                                          Additions to Tax
                                                             Sec.              Sec.               Sec
                     Year            Deficiency         6653(b)(1)(A)      6653(b)(1)(B)         6653(b)
                     1987             $20,861             $15,646        50% of the interest       --
                                                                           due on $20,861
                     1988               3,213               --                   --               $2,410
                Docket No. 3276-01
                                                                              Penalty
                     Year          Deficiency                   Sec. 6663
                     1989           $10,494                                    $7,871
                Docket No. 3277-01
                                                                          Additions to Tax
                                                             Sec.               Sec.               Sec
                     Year            Deficiency         6653(b)(1)(A)      6653(b)(1)(B)         6653(b)
                     1987             $12,005             $9,004        50% of the interest        --
                                                                           due on $12,005
                     1988               9,985               --                   --               $7,489
                

The issues remaining to be decided are:3

1. Whether decedent, Armand J. Del Bosque (Mr. Del Bosque), had unreported gross receipts for 1987, 1988, and 1989 in the respective amounts of $67,163, $16,557, and $32,779, computed under the net worth method.

2. Whether Bradley T. Jacobsen (Mr. Jacobsen) had unreported gross receipts of $28,378 in 1987 and $29,747 in 1988, computed under the net worth method.

3. Whether Mr. Jacobsen had additional unreported income of $6,285 in 1987 and $6,309 in 1988, on the basis of Bureau of Labor Statistics figures.

4. Whether Mr. Del Bosque is liable for additions to tax and/or a civil fraud penalty for 1988 and 1989.4

5. Whether Mr. Jacobsen is liable for an addition to tax for fraud for 1988.5

6. Whether the period of limitations on assessment and collection with respect to 1988 and 1989 expired before respondent issued the subject notices of deficiency to petitioners.

FINDINGS OF FACT

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.

Mr. Del Bosque died on April 5, 2003, after the conclusion of the trial in these cases. When the petitions in these cases were filed, Mr. Del Bosque resided in Roseville, Minnesota, Virginia Ferguson (Ms. Ferguson) resided in Fridley, Minnesota, and Mr. Jacobsen and Donna M. Cleare-Jacobsen (Mrs. Jacobsen) resided in Apple Valley, Minnesota. Hereinafter, references to petitioners are to Messrs. Del Bosque and Jacobsen.

On December 31, 1986, petitioners each owned two snowmobiles—a 1987 Polaris Indy 600 and a 1987 Polaris Indy Sport. Petitioners each purchased the 1987 Polaris Indy 600s from Metro-North Sports on October 15, 1986, for the base price of $4,688; two items identified as "north country" were purchased at the same time for $469 each. The record does not disclose when the 1987 Polaris Indy Sports were purchased; however, a receipt from Metro-North Sports shows that, on October 29, 1986, petitioners purchased accessories and parts for two "Indy 600s" and two "Sports". Mr. Jacobsen disposed of his Sport in 1988.

In December 1986, Mrs. Jacobsen made a $2,000 loan to her employer. This loan was repaid in 1987.

Mrs. Jacobsen had a Chase Manhattan "money market with checks" account (the MMWC account). On December 31, 1986, the balance in that account was $8,618.

In 1986, Mrs. Jacobsen received an inheritance of $12,518 plus a one-eighth interest in a contract for deed valued at $1,966.

On December 31, 1986, Mr. Del Bosque had $12,000 in an account with First Bank East. In January 1987, he used funds from that account to open a brokerage account. On January 16, 1987, Mr. Del Bosque purchased 234 shares of Fidelity Growth Fund for $3,320. On April 22, 1987, he sold those shares for $3,756 and purchased 1 share for $16. Mr. Del Bosque reported the $436 gain from the sale of the 234 shares on his 1987 return. On January 22, 1988, he sold the remaining share for $13. On his 1988 return, he erroneously reported a basis of $3,320 in the 1 share and a $3,307 long-term capital loss on the sale of the share.

At the end of 1987, Mr. Del Bosque owed $3,921 to Larson Quinn Motor Co. He repaid the loan in 1988.

During the years at issue, petitioners purchased leather goods (mostly leather jackets) for resale. In both 1987 and 1988, Mr. Jacobsen purchased $3,770 of leather goods for resale. Mr. Del Bosque purchased $13,298 of leather goods for resale in 1987, $3,862 for resale in 1988, and $2,375 for resale in 1989. Petitioners did not keep any records of their sales of leather goods.

During the years at issue, petitioners each owned 50 percent of the stock of Top Play, Inc. (Top Play), an S corporation doing business as Twin Star Limousine Service.

In 1987, 1988, and 1989, petitioners were employed by, and received wages from, Top Play.6 Also during those years, Mr. Jacobsen was employed by, and received wages from, Chinook, Inc. (Chinook), doing business as Five Corners Saloon.

In 1987, Top Play purchased a mobile telephone system for $1,797. This purchase was charged to Mr. Jacobsen's credit card. Top Play paid the credit card company $1,300 in 1987 and $763 in 1988 for the purchase of the mobile telephone system.

Some of the limousine runs generated cash for which no run sheets were prepared, and petitioners often paid drivers in cash. Petitioners did not maintain accurate records of Top Play's cash receipts and cash payroll. They did not inform Top Play's accountant of the cash receipts and payroll items. As a result, Top Play's 1987 and 1988 income tax returns and financial statements did not reflect those items.

In February of 1990, petitioners sold the assets of the limousine service to Susan Pavlak for approximately $350,000. After a few months, Ms. Pavlak compared Top Play's operating performance in 1989 to its performance in 1990, as indicated in the financial records she had reviewed before purchasing the limousine business. She concluded that the limousine business was producing less revenue.

Ms. Pavlak believed that petitioners had misrepresented the profitability of the limousine business on the Top Play income tax returns that she had reviewed and relied upon in purchasing Top Play. On July 8, 1990, she met with petitioners and proposed that they repurchase Top Play for $340,000. Petitioners did not respond to her proposal. Thereafter, Ms. Pavlak sued petitioners for fraud and misrepresentation with respect to her purchase of Top Play. She received a judgment in the amount of $95,000.

Because Ms. Pavlak believed that a portion of Top Play's cash receipts in 1989 had likely been derived from illegal activities, she contacted the U.S. Drug Enforcement Administration (DEA). The DEA referred Ms. Pavlak to the Criminal Investigation Division of the Internal Revenue Service (IRS).

In July of 1990, Tom Fisher, an IRS special agent assigned to the Federal narcotics task force, began investigating petitioners' business activities. Agent Fisher determined that petitioners had unreported income. He believed that narcotics and/or gambling activities were the possible sources for this income.

Agent Fisher reconstructed petitioners' incomes using the net worth method. Agent Fisher chose the net worth method to compute petitioners' incomes because (1) excessive cash had been deposited into Top Play's accounts, (2) petitioners used cash for personal expenditures, and (3) there were no specific items of unreported income.

To compute petitioners' incomes, Agent Fisher identified petitioners' assets, liabilities, and expenses. Agent Fisher used information obtained from third parties, searches of petitioners' residences, and Top Play's records. For some items, Agent Fisher used financial statements prepared by petitioners in 1986 and 1987. Agent Fisher determined petitioners' net worths as of December 31, 1986 through 1989. (Reference to petitioners' 1986, 1987, 1988, and 1989 net worths are to their respective net worths on December 31 of the referenced year.) Agent Fisher reconstructed petitioners' incomes by comparing changes in their net worths from one year to the next for the years in issue.

In February 1993, Mr. Del Bosque was arrested for purchasing anabolic steroids.7 On March 3, 1993, a four-count indictment was filed in the U.S. District Court for the District of Minnesota, charging Mr. Del Bosque with conspiring to import, and to possess with the intent to distribute, controlled substances (anabolic steroids), and with aiding and abetting the importing, and possessing with the intent to distribute, controlled substances (anabolic steroids).

In April 1993, Mr. Del Bosque became ill and was diagnosed with cardiomyopathy. He was hospitalized in a coronary intensive care unit for 9 days.

On June 23, 1993, a five-count criminal information was filed in the U.S. District Court for the District of Minnesota (the criminal tax proceeding) naming petitioners codefendants. Counts I, II, and III charged Mr. Del Bosque with tax evasion for 1987, 1988, and 1989 in violation of section 7201. Counts IV and V charged Mr. Jacobsen...

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