Gleave v. Commissioner
| Decision Date | 18 June 1997 |
| Docket Number | Docket No. 3586-87.,Docket No. 10512-89. |
| Citation | 73 T.C.M. 3066 |
| Parties | Ted W. Gleave v. Commissioner. 747 Kenmore Ave., Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Donald L. Summer, Buffalo, N.Y., for the petitioners. Jerome F. Warner and Matthew I. Root, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in Federal individual and corporate income tax and additions to tax under section 6653(b)1 (fraud) against petitioners as follows:
Additions to tax
--------------------------------------
Sec. Sec
Petitioner Year1 Deficiency2 Sec. 6653(b) 6653(b)(1) 6653(b)(2)
Ted W. Gleave ................ 1980 $ 50,619.25 $ 25,309.63 -- --
Dkt. No. 3586-87 ............. 1981 266,339.71 133,169.86 -- --
1982 52,610.08 -- $26,305.04 3
747 Kenmore .................. 1980 2,972.00 1,486.00 -- --
Ave Inc. ..................... 1981 317,523.17 158,761.59 -- --
Dkt. No. 10512-89 ............ 1982 191,446.02 -- 95,723.01 3
1 Calendar years for the individual petitioner and fiscal years ending Aug. 31 for the corporate petitioner
2 Of these amounts in docket No. 3586-87 $2.097.90 for 1980, $2,762.10 for 1981, and $3,029.40 for 1982 are self-employment
taxes under ch. 2; the remainder are income taxes under ch. 1
3 50 percent of the interest due on the entire deficiency
By answer to the petition of Ted W. Gleave, docket No. 3586-87, respondent asserts as to each of the years in issue, in the alternative to section 6653(b), additions to tax under sections 6651 (), and 6653(a) (negligence, etc.). See secs. 6214(a), 6653(d).
Petitioner Ted W. Gleave is hereinafter sometimes referred to as Gleave. Petitioner 747 Kenmore Ave., Inc., is hereinafter sometimes referred to as Kenmore.
The instant cases have been consolidated for trial, briefing, and opinion.
After concessions by both sides,2 the issues for decision are as follows:
(1) Whether Gleave is liable for civil fraud additions to tax under section 6653(b) (for 1980 and 1981), and under sections 6653(b)(1) and 6653(b)(2) (for 1982) and, as to section 6653(b)(2), in what amount.
(2) Whether Kenmore is liable for civil fraud additions to tax under section 6653(b) (), and under sections 6653(b)(1) and 6653(b)(2) (for its fiscal 1982) and, as to section 6653(b)(2), in what amount.
(3) What the amount is of Gleave's and Kenmore's unreported income.
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the respective petitions were filed in the instant cases, Gleave resided in Grand Island, New York, and Kenmore had its principal place of business in Kenmore, New York, a village adjacent to Buffalo, New York.
Gleave attended school through the tenth grade, and he earned a G.E.D., the equivalent of a high school diploma. Gleave began working when he was 14, about 1956. For the next 10 years or so he held several jobs, including military service and construction work. About 1966 Gleave bought a nursery, called Ted's Nursery, which he operated as a proprietorship. Gleave sold Ted's Nursery about 1978; he took back a purchase-money mortgage of about $75,000, which was paid at the rate of $550 per month.
Kenmore is a New York corporation organized about 1972; at all pertinent times Gleave was Kenmore's president and sole owner. When Kenmore was organized, it was a secondary business to Ted's Nursery. During the years in issue Kenmore operated a retail gasoline station, an automobile repair shop, and a dump truck and construction business, and transported and sold-wholesale bulk fuel. Kenmore was not in business when its petition was filed in the instant cases.
Kenmore's principal business location was in Kenmore, at 747 Kenmore Avenue, hereinafter sometimes he referred to as the Kenmore location. The gasoline station business that Kenmore operated at the Kenmore location will hereinafter sometimes be referred to as the Kenmore station.
Gleave did not file Federal income tax returns for any of the years in issue.4 However, Gleave caused Kenmore to file Federal corporate income tax returns for its fiscal years ending August 31 of 1980, 1981, and 1982. These tax returns were prepared by Kenmore's accountant, Norbert Schechter, C.P.A., hereinafter sometimes referred to as Schechter. Kenmore's 1980 and 1981 tax returns were signed by Gleave.
During the years in issue Gleave did not have a checking account in his own name in any financial institution in the United States, and it appears that Gleave did not keep personal records. During the years in issue Kenmore had a checking account in its name at M & T Bank. This account will hereinafter sometimes be referred to as Kenmore's Account. Gleave used Kenmore's Account for his personal banking. Many (if not all) of Gleave's personal expenses were paid out of Kenmore's Account.
Kenmore began as a retail gasoline station about 1972. By June of 1980 Kenmore had expanded into an automobile repair shop, and a dump truck and construction business. In late 1980 or early 1981 Kenmore further expanded into the transporting and wholesaling of bulk fuel. On July 1, 1981, Kenmore began to operate a second retail gasoline station, at 1066 Sheridan Drive, Tonawanda, New York, hereinafter sometimes referred to as the Sheridan location. The gasoline station business that Kenmore operated at the Sheridan location will hereinafter sometimes be referred to as the Sheridan station. Gleave bought the Sheridan location from an unrelated party on June 30, 1981. The Sheridan location is within 5 miles of the Kenmore location.
Gleave was often at the Kenmore location around 6 a.m. each day. However, Gleave was usually away from this location during most of the day. Gleave often worked "out on the road" — for example, driving and fixing Kenmore's trucks. Also, at one point during the years in issue Gleave spent some time in Indiana helping a brother run a construction business.
Joe Heintz (hereinafter sometimes referred to as Heintz) ran Kenmore's daily operations. Although Heintz was not a bookkeeper, he did some bookkeeping for Kenmore. Shirley Bohn (hereinafter sometimes referred to as Bohn) assisted Heintz with Kenmore's bookkeeping and secretarial work from January 1981 to March 1983.
Kenmore used the "one-write" system of bookkeeping, a "pegboard" accounting system, in which each check that was written on Kenmore's Account was simultaneously recorded as a disbursement. If desired, notations could be made on the one-write record. (See the description in Safeguard Business Sys. v. New England Bus. Sys., 696 F.Supp. 1041, 1042 (E.D. Pa. 1988).) In addition to disbursements, deposits were recorded on Kenmore's one-write system. During the years in issue Bohn and Heintz made all (or substantially all) of the bookkeeping entries on Kenmore's one-write system.
Each disbursement listed in Kenmore's one-write system had a corresponding notation in one of several columns, which explained the purpose for which the disbursement was made. One of these columns, headed "Gleave account", was used as a catch-all for all the disbursements that Bohn and Heintz did not know how to classify. Neither Bohn nor Heintz was trained in accounting. Bohn understood that, when Schechter received the one-write ledgers each month from Kenmore, then he would determine the purpose of, and classify the items listed under the "Gleave account" heading. It is unclear what determinations and classifications Schechter actually made about the "Gleave account" items.5
At times, Heintz, Bohn, Gleave, and Clifford Pixley (hereinafter sometimes referred to as Pixley) all signed Gleave's name as maker on Kenmore's checks.6 Pixley is Gleave's half-brother. Pixley worked at the Kenmore location for Kenmore; he also drove trucks for Robert Broskin, hereinafter sometimes referred to as Broskin.
Kenmore's expansion into the wholesale fuel business occurred together with the expansion of Broskin's trucking business into the wholesale fuel business. Broskin and Gleave met in 1980 while both were working on a rapid-transit underground rail project in Buffalo. At that time both Kenmore and Broskin were operating dump trucks for this project. A few months after they met, Gleave suggested to Broskin that Broskin park his trucks at the Kenmore location, and Broskin did so. At or around this time Broskin began operating his business out of Kenmore's office, and Broskin took over some of the responsibility of dispatching Kenmore's trucks. After the Sheridan station opened, Broskin parked his trucks at the Sheridan location because there was more space. Until Broskin moved his trucks to the Sheridan location, Broskin spent 1 to 2 hours each day at the Kenmore location. Thereafter, Broskin mostly worked out of the Sheridan location and did not appear very often at the Kenmore location.
During the years in issue although Broskin had his own checking account at Marine Midland Bank, Broskin sometimes used Kenmore's Account when he needed Kenmore's lines of credit. When Heintz or Bohn recognized that Broskin used Kenmore's Account, these transactions were recorded under the "Gleave account" heading on the one-write system. Broskin used Kenmore's lines of credit to buy fuel in order to resell it at wholesale. Kenmore had lines of credit at two on more refineries. Broskin charged the purchase price of fuel at the refineries to Kenmore's Account. Kenmore paid the refineries for this fuel, and Broskin...
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