Frazier v. Commissioner
| Decision Date | 27 July 1994 |
| Docket Number | Docket No. 704-92.,Docket No. 8699-92. |
| Citation | 68 T.C.M. 253 |
| Parties | John L.D. Frazier and Nancy Frazier v. Commissioner. |
| Court | U.S. Tax Court |
These consolidated cases were assigned to Special Trial Judge Helen A. Buckley pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183.1 The Court agrees with and adopts the Opinion of the Special Trial Judge, which is set forth below.
BUCKLEY, Special Trial Judge:
In these consolidated cases, respondent issued two notices of deficiency to petitioners determining deficiencies in Federal income taxes, additions to tax, and penalties as follows:
Additions to Tax
------------------------------
Year Deficiency Sec. 6653(a)(1)(A) Sec. 6661
1986 ................................ $40,382 $2,0191 $10,096
1987 ................................ 24,890 1,2451 6,223
1 For the years 1986 and 1987, respondent determined that petitioners are liable for 50 percent of the interest due
upon the deficiencies at issue, pursuant to the provisions of sec. 6653(a)(1)(B)
Additions to Tax Penalty
--------------------------- -------
Year Deficiency Sec. 6653(a)(1) Sec. 6661 Sec. 6662(a)
1988 ....................... $26,414 $1,321 $6,604 --
1989 ....................... 27,534 -- -- $5,507
1990 ....................... 33,167 -- -- 6,633
After concessions,2 the issues for decision are: (1) Whether petitioners received constructive dividends from Full Service Beverage Company in the form of its reimbursement to petitioner John L.D. Frazier or payment of various expenditures; (2) whether petitioners may deduct a claimed investment interest expense with respect to their sale of an interest in Salida Coca-Cola; (3) whether petitioners are liable for additions to tax for negligence pursuant to section 6653(a)(1)(A) and (B) for the years 1986 and 1987, and pursuant to section 6653(a)(1) for the taxable year 1988; (4) whether petitioners are liable for additions to tax for substantial understatements of income tax liability pursuant to section 6661 for the taxable years 1986, 1987, and 1988; and (5) whether petitioners are liable for penalties for negligence or for substantial understatements pursuant to section 6662(a) for the taxable years 1989 and 1990.
Some of the facts have been stipulated, and they are so found. The stipulations, together with attached exhibits, are incorporated herein by reference. Petitioners resided in Wichita, Kansas, when they timely filed their petitions herein. Petitioners John L.D. Frazier and Nancy F. Frazier were husband and wife during the years at issue. References to "petitioner" in the singular relate only to John L.D. Frazier. Petitioners filed joint Federal income tax returns during the years at issue.
At trial, the parties addressed the corporate expenditures and reimbursements involved in this case by presenting more than 180 separate "issues". This case presents no substantiation questions regarding the "issues". Petitioners maintained good records. At the conclusion of the trial, the Court requested that the parties present their arguments by arranging these issues into certain broad areas that shared common factual situations. They have done so, and this Opinion reflects that arrangement. We have, however, for purposes of facilitating the Rule 155 computations, included the parties' issues numbers in most instances.
For convenience we have combined our findings of fact and opinion with respect to the issues involved in these cases.
Petitioner was the chairman and chief executive officer of Full Service Beverage Company (FSB) during the years at issue. Its headquarters was in Wichita, Kansas. FSB bottles and distributes a variety of soft drink products, including 7-UP, Dr. Pepper, Orange Crush, and Canada Dry. It also distributes other products such as Evian Water, Mystic, and Snapple.
Mrs. Frazier was not an employee, officer, or director of FSB. In January of 1986, various members of three different families owned the stock of FSB. Petitioner personally owned about 10 percent of the stock.
Petitioner traveled frequently; Mrs. Frazier often accompanied him. Some of their traveling expenses were paid by trade associations or by soft drink manufacturers. On many occasions, however, FSB paid or reimbursed petitioner for such expenses. Petitioner kept detailed records. He would report his expenditures on vouchers that he provided to FSB on a regular basis. His submissions included records of cash and charge payments, as well as receipts for most of these payments. The general ledgers of FSB also detailed expenditures that petitioner had made and that FSB had paid or reimbursed.
Section 301(a) and (c)(1) requires the inclusion in a taxpayer's gross income of amounts received as dividends. Section 316(a) defines a dividend as "any distribution of property made by a corporation to its shareholders—(1) out of its earnings and profits accumulated after February 28, 1913, or (2) out of its earnings and profits of the taxable year".3 It is not necessary that the corporation intend a dividend, or that the distribution be termed a dividend or recorded as such. Dolese v. United States [79-2 USTC ¶ 9540], 605 F.2d 1146, 1148 (10th Cir. 1979).
Thus, dividends may be either formally declared or they may be "constructive". Ireland v. United States [80-2 USTC ¶ 9556], 621 F.2d 731 (5th Cir. 1980). A constructive dividend is paid when a corporation confers an economic benefit on a shareholder without expectation of repayment. Wortham Machinery Co. v. United States [75-2 ustc ¶ 9665], 521 F.2d 160, 164 (10th Cir. 1975). The mere fact that expenditures are not deductible by the corporation as business expenses does not make them automatically taxable to the shareholder. To be taxable, the expenditures must represent some direct benefit to the shareholder and have no more than incidental benefit to the corporation. Dolese v. United States, supra at 1152 (citing Palo Alto Town & Country Village, Inc. v. Commissioner [78-1 ustc ¶ 9200], 565 F.2d 1388 (9th Cir. 1977)). In order for a company-provided benefit to be treated as income to the taxpayer-shareholder, the item "must primarily benefit taxpayer's personal interests as opposed to the business interests of the corporation." Ireland v. United States, supra at 735.
Petitioners bear the burden of proving that the amounts in issue were not expended for personal benefit or in discharge of personal obligations. Rule 142(a); Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111 (1933); Challenge Manufacturing Co. v. Commissioner [Dec. 25,304], 37 T.C. 650 (1962); Arnold v. Commissioner [Dec. 49,710(M)], T.C. Memo. 1994-97. In general, when the record does not permit an accurate determination of the amount of such dividends, we may apply our best judgment to approximate that amount. Falsetti v. Commissioner [Dec. 42,330], 85 T.C. 332, 357-358 (1985).4 Our standard, in reviewing these many expenditures, is whether the expense primarily benefited FSB or petitioners.
In each instance, the amounts we have designated as "personal expenses" constitute constructive dividends to petitioners.
In the years 1986 through 1988, petitioner, while president of FSB, also served as chairman of the National Soft Drink Association (NSDA), a national organization of the soft drink industry companies. Petitioner, and often Mrs. Frazier, attended various NSDA functions during the years in issue. Petitioner's NSDA activities were to the direct benefit of FSB in general. Respondent agrees. Some of his expenses, however, were personal.
[Issue 8] In May 1986, petitioners attended a convention of the Canadian Soft Drink Association (CSDA). Petitioner attended as chairman of the NSDA. Petitioners flew in a chartered airplane to Lexington, Kentucky, where they picked up Mr. and Mrs. Webber. Mr. Webber was then the president of the NSDA. Petitioners then went to Springfield, Massachusetts, where they visited with their relatives, the Fassetts, and attended the graduation of petitioner's relative, Nancy Fassett. The Webbers, on the other hand, had dinner in Northhampton, Massachusetts, with Al Griggs, who was being courted to be a future chairman of the NSDA. Petitioners and the Webbers then went to Canada. The CSDA paid for petitioner's hotel room and for some of the meals at the convention. Following the Canadian part of the trip, petitioners proceeded to Camden, Maine, where they visited petitioner's sister, and the Webbers proceeded to their summer house.
FSB reimbursed petitioner for $3,401.95 in expenses related to the trip, not including the costs of some office furniture and a small NSDA reimbursement. The FSB reimbursement included $188.70 for 2 nights for Mrs. Frazier's separate hotel room in Canada, plus Mrs. Frazier's and petitioners' son Lloyd's share of meals in the amount of $56.67. FSB also paid the $1,860.00 cost of renting a "bed and breakfast" house for 2 nights in Maine for petitioners, the Webbers, some relatives, and the pilots of the private aircraft that transported them. A portion of this amount, $797.15, was a personal expense. FSB also paid $722.30 for meal expenses for the "whole group" on May 27 and 28, 1986. Some $401.27 of this amount was personal. FSB additionally paid personal...
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