Gow v. Commissioner
| Decision Date | 20 March 2000 |
| Docket Number | Docket No. 25651-96. |
| Citation | 79 T.C.M. 1680 |
| Parties | Robert T. and Kay F. Gow v. Commissioner. |
| Court | U.S. Tax Court |
Craig D. Bell, Richmond, Virginia, and James C. Roberts, for the petitioners. William Henck and Timothy B. Heavner, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
In a notice of deficiency dated August 29, 1996, respondent determined the following deficiencies in, and additions to, petitioners' Federal income taxes:
Penalties
-----------------------
Sec
Year Deficiency 6662(a)1 Sec. 6663(a)
1989 ..................................... $522,221 $104,444 $391,666
1990 ..................................... 334,663 66,933 250,997
1991 ..................................... 109,047 21,809 81,785
1992 ..................................... 103,224 20,645 77,418
1 The sec. 6662(a) accuracy-related penalties were determined as an alternative to the sec. 6663(a) fraud
penalties
Subsequently, by an amendment to answer, respondent asserted increased deficiencies and penalties for 1989 and 1991, as follows:
Penalties
---------------------------
Year Deficiency Sec. 6662(a) Sec. 6663(a)
1989 ..................................... $877,054 1 $657,791
1991 ..................................... 153,214 1 114,911
1 20 percent of the underpayment to which this section applies
After concessions by each party, the issues remaining for decision are: (1) The value of shares of stock of Williamsburg Vacations, Inc. (WVI), awarded to Kay F. Gow (800 shares on February 16, 1989, and 400 shares on February 15, 1990) as bonuses; (2) whether WVI's payments of travel and entertainment expenditures for certain trips taken by petitioners constitute constructive dividends to them; (3) whether WVI's payments of expenditures for the procurement of an animal trophy collection constitute constructive dividends to petitioners; and (4) whether petitioners are liable for fraud penalties pursuant to section 6663(a), or in the alternative, accuracy-related penalties pursuant to section 6662(a).
All section references are to the Internal Revenue Code as in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts are rounded.
Some of the facts have been stipulated and are so found. The stipulations of facts, stipulations of settled issues, and attached exhibits are incorporated herein by this reference.
Petitioners, husband and wife, resided in Norfolk, Virginia, at the time they filed their petition.
Kay F. Gow (Dr. Gow) earned a doctor of education (Ed.D.) degree from Virginia Tech., specializing in business education. As part of her curriculum she took courses in accounting. Before 1983, she taught and supervised a business education program at a public high school in Virginia. At the time of trial, Robert T. Gow (Mr. Gow) was a retired civil service employee.
Williamsburg Vacations, Inc. (WVI)
WVI was incorporated under the laws of Virginia on July 21, 1983. In November of 1986, WVI became a partner in a joint venture known as Powhatan Associates. During the years in issue, WVI's sole income-producing property was its indirect interest in Powhatan Plantation, a time-share resort project of Powhatan Associates.
WVI was authorized to issue 50,000 shares of common stock. Initially, 650 shares of its stock were issued to Dr. Gow and 350 shares to Horace E. Henderson (Mr. Henderson). Dr. Gow exchanged previously acquired land located in North Carolina for her stock. Mr. Henderson exchanged his note with a face value of $192,230.1
The initial officers of WVI were: Mr. Henderson, president; Mr. Gow, executive vice president; Robert E. Lee, secretary; and E. Corbell Jones (Mr. Jones), treasurer. During the years in issue, Dr. Gow was president and chairman of the board of directors; Mr. Gow was the secretary and a director of the company.
On September 30, 1983, Dr. Gow sold 200 shares of her WVI stock to Mr. Jones and received in exchange Mr. Jones' agreement to cancel Mr. Gow's note in the amount of $119,000. As a condition of sale, Mr. Jones agreed that if during his lifetime he desired to dispose of all or any part of his 200 shares of WVI stock, Dr. Gow would have the right to repurchase the 200 shares, and upon Mr. Jones' death, his estate or successor in interest would sell Dr. Gow the 200 shares for $119,000, or $595 per share.
Simultaneously with the sale of the 200 shares, Dr. Gow and Mr. Jones executed a voting trust agreement (VTA). Under the terms of the VTA, Dr. Gow and Mr. Jones agreed to, and did, transfer all of their shares in WVI to Mr. Gow, as trustee of the voting trust. The trust was to continue until September 30, 1993. On October 24, 1988, the VTA was amended. Pursuant to this amendment, Dr. Gow agreed to, and did, transfer all stock issued to her since September 30, 1983 (the date the VTA was executed) to Mr. Gow, as trustee. Moreover, Dr. Gow agreed to transfer to the trustee all stock subsequently issued to, or owned by, her.
On October 19, 1983, Dr. Gow, Mr. Henderson, and Mr. Jones signed an agreement to purchase a 256-acre tract of land located 1 mile west of the restored colonial area of Williamsburg, Virginia, known as Powhatan Plantation. On January 16, 1984, they assigned their rights in Powhatan Plantation to WVI.
By early 1984, WVI was in need of operating funds. In an attempt to provide working capital to WVI, Dr. Gow lent the company $120,000. WVI was unable to repay this loan, and on August 1, 1985, Dr. Gow accepted 50 shares of WVI's stock in satisfaction of the company's obligation to her.
On February 16, 1988, WVI's board of directors approved a stock bonus plan for Dr. Gow. Under the terms of the plan, Dr. Gow was entitled to receive as a bonus up to 10,000 shares of WVI stock, at a maximum rate of 1,000 shares per year, for 10 years. The number of shares to be issued annually as a bonus was to be determined by Dr. Gow.
In accordance with the stock bonus plan, on February 16, 1989, WVI issued 800 shares of WVI common stock to Dr. Gow. On February 15, 1990, WVI issued an additional 400 shares of its common stock to her as a bonus. It is the value of these shares at the time of award that is subject to dispute — the first issue.
WVI borrowed $100,000 from Central Fidelity Bank. These funds were used to cover startup expenses and other administrative costs. In late 1983, WVI received an acquisition/development loan from First American Savings & Loan (First American) in the amount of $1.75 million; it also received a financing commitment from Berkeley Federal Savings (Berkeley) for $10 million.
In 1984, Bush began construction of, and Offsite marketed, the time-share project. In early 1985, Berkeley withdrew its loan commitment, making it difficult for WVI to timely meet its financial obligations to Bush for construction and to Offsite for marketing. WVI became delinquent in its payments to Bush, and in May 1985, Bush filed a mechanics lien against the project. The project further became mired in financial difficulties when, in early 1986, over its concern with Bush's mechanics lien, First American threatened to terminate its loan to WVI. Eventually, Security Pacific (a local financial institution) agreed to provide development financing, as well as a bridge loan, to refinance the First American loan. Security Pacific conditioned its financing agreement on WVI's ability to reduce its outstanding debt. Consequently, in order to obtain debt forgiveness and secure additional guarantors, WVI proposed a joint venture with Bush and Offsite.
On November 19, 1986, WVI, Bush, and Offsite formed Powhatan Associates. WVI contributed the development assets (which consisted of the Powhatan Plantation time-share project, land, unsold inventory, and contractual and other rights associated with the project net of project liabilities) as well as its services and expertise as a developer and administrator. Bush and Offsite each agreed to forgive the debt owed them by WVI; they further agreed to guarantee certain liabilities of WVI to repurchase defaulting timeshare contracts under several financial agreements. Offsite agreed to continue to provide marketing services to the joint venture in exchange for an allocation of the fees and expenses relating to its marketing operations. Bush agreed to continue to provide construction services to Powhatan Plantation so long as it was allocated the profits and expenses associated with construction. The parties agreed that WVI would receive all of its administration costs (including reasonable salaries), plus 1 1/2 percent of the gross proceeds after a certain level of development had been reached. This development fee was designed to equalize the estimated profit margins among Offsite, Bush, and WVI.
As the administrative partner of Powhatan Associates, WVI was responsible for the strategic planning and day-today operation of Powhatan Plantation. WVI's responsibilities included: (1) Reviewing and approving all time-share sales contracts; (2) obtaining financing for the joint venture; (3) preparing all required reports and accountings; (4) servicing and collecting joint venture mortgage portfolios; (5) monitoring product...
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