Greenway v. Commissioner

• Decision Date: 05 January 1987
• Docket Number: Docket No. 17986-82.
• Citation: 1987 TC Memo 4,52 TCM (CCH) 1283
• Parties: Jerry G. Greenway and Betty R. Greenway, Petitioners v. Commissioner of Internal Revenue, Respondent.
• Court: U.S. Tax Court

52 T.C.M. (CCH) 1283 (1987)

T.C. Memo. 1987-4.

Jerry G. Greenway and Betty R. Greenway, Petitioners v. Commissioner of Internal Revenue, Respondent.

Docket No. 17986-82.

United States Tax Court.

Filed January 5, 1987.

Stanley F. Birch, Jr. for the petitioners. Steven Erie, for the respondent.

Memorandum Findings of Fact and Opinion

WHITAKER, Judge:

Respondent determined deficiencies in, and additions to, petitioners' Federal income tax for the years and in the amounts indicated:

                Additions to Tax Section 6653(b)1
                                                         --------------------------------------
                                                           Liability of Liability of
                Year Deficiency Jerry G. Greenway Betty R. Greenway
                1970 ...................  $  5,278.22      $  2,639.11        $    0
                1971 ...................       488.53         1,101.97          1,101.97
                1972 ...................    73,660.57        44,445.88         44,445.88
                1973 ...................    12,866.90         6,433.45             0
                1974 ...................    62,150.08        31,075.04             0
                1975 ...................     3,127.95            0                 0
                1976 ...................       975.67            0                 0
                

The issues presented for consideration are:

(1) Whether the statute of limitations bars the assessment and collection of deficiencies in income tax and additions to tax for any of the years 1970 through 1976;

(2) whether petitioners received unreported taxable income during each of the years 1970 through 1976 and, if so, in what amounts;

(3) whether petitioners are entitled to deductions and credits as computed by respondent;

(4) whether petitioner Betty R. Greenway is subject to a self-employment tax for the years 1971 and 1972;

(5) whether petitioner Jerry G. Greenway is liable for the civil fraud addition pursuant to section 6653(b) for each of the years 1970 through 1974; and

(6) whether Betty R. Greenway is liable for the civil fraud addition pursuant to section 6653(b) for each of the years 1971 and 1972.

Findings of Fact

Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.

Petitioners Jerry G. Greenway (Greenway) and Betty R. Greenway (Mrs. Greenway), husband and wife, resided in Maysville, Georgia, at the time they filed their petition herein. Petitioners filed a joint Federal income tax return for each of the years 1970 through 1976. Each return was prepared in part by either George Cashin, Jack Donald, or their staff.² Petitioners have three children, each of whom resided with petitioners and was claimed as a dependent on petitioners' Federal income tax return. Greenway is a high school graduate, but Mrs. Greenway is not.

In September 1956, Greenway commenced employment with Home Finance Corporation as a loan adjuster and, later, as a supervisory manager. During 1958, Greenway resigned from Home Finance Corporation and commenced employment with Phelan Finance Corporation, where his duties included the following: making and closing loans, processing loan documents, monitoring currency of accounts, verifying cash receipts and disbursements, and supervising location managers in their operation of branch offices. Greenway left the employ of Phelan Finance Corporation in 1964.

Greenway and Winston Massengale (Massengale) formed a partnership called Jerwin, Inc. (Jerwin) in 1966. Greenway and Massengale each held a 50-percent interest in the partnership.³ On August 28, 1969, Greenway and Massengale formed a corporation entitled University Motor Company, Inc. (UMC) in which each owned 50 percent of the corporate stock. The business of Jerwin and UMC was the sale of used automobiles.

In early 1970, Greenway and Massengale dissolved their joint business dealing. Massengale took Jerwin's corporate name and stock while Greenway took UMC's corporate name and stock. UMC remained a used car dealership after Greenway became its sole shareholder. UMC operated a sales lot in Atlanta, Georgia, from 1970 through 1974 and another lot in Griffen, Georgia, during 1970 and 1971. In February 1974, UMC's entire operation was moved to Gainesville, Georgia, although the Atlanta location did not actually cease business until August 1974.

During the years 1970 through 1976, Greenway was president and sole shareholder, and Mrs. Greenway was secretary-treasurer, of UMC. UMC filed a United States Corporation income tax return for the fiscal years ended July 31, 1970 through July 31, 1975. These returns were prepared in part by either George Cashin, Jack Donald, or their staff.

UMC Operations. In addition to his responsibilities as president of UMC, Greenway maintained the corporation's daily sales and receipt records. At any given time, Greenway had one or two employees working for him at UMC. The employees would perform office duties and clean, repair, and sell cars.

Jimmy Raines (Raines) was employed as an office manager at UMC from December 1970 to July 1971. Raines' duties included receiving payments from customers, recording the payments on daily collection and sales sheets, collecting on accounts, and running customer credit applications. Each Saturday, Raines turned over to Greenway all the cash and sales records of UMC for that week. Greenway thereafter provided sales and receipt records to UMC's bookkeepers on a monthly basis.

William Murray (Murray) was a salesman for UMC at the time Raines was the office manager. Murray worked on a commission basis. When he made a sale, a check would be made out to him in the appropriate amount. At Murray's request, Greenway would occasionally make checks out to a fictitious body shop, repair shop, or garage and the check would then be endorsed by Murray. In the event that sufficient funds were on hand, the check would be cashed for Murray by Raines at UMC's cashier window. Murray frequently asked Greenway for advances on Monday against pay to be received by him on Friday or Saturday.

Gregory S. Bailey (Bailey) worked as a salesman at UMC on two or three different occasions during the period 1969 through 1971. Bailey also worked on a commission basis, making approximately $150 in a good week. In 1969, Bailey endorsed "several checks" that were made out to fictitious payees. From some of these checks he received a portion of the proceeds and from some he did not. Bailey was told that the funds retained by Greenway or his bookkeeper were used to pay UMC's out-of-pocket expenses.⁴ The checks were written by Greenway and cashed by Raines. Bailey did not want his commission checks made out in his name because he did not want to pay taxes on the income, nor did he want his previous wife to trace him through the records. Bailey knew of no other UMC employees who endorsed checks in a similar fashion.

Loan from Charlie Greenway. On December 24, 1969, Greenway executed a deed to secure debt in favor of his father, Charlie Greenway. The conveyance was made to secure a note in the amount of $25,000 executed on the same date. The note was payable on demand, with an interest rate of 7 percent per annum. The real estate conveyed was Greenway's house in Stone Mountain, Georgia. The deed was subject to a first mortgage in favor of DeKalb County Federal Savings and Loan Association for an unspecified amount. The deed was filed on August 6, 1970, with the DeKalb County Superior Court and was entered as satisfied on September 19, 1977. No explanation was provided for the approximately 8-month delay between execution of the deed and its recordation. Petitioners had received loans from Charlie Greenway on several occasions prior to the loan at issue, but the filing of a deed reflecting the loan to them was exceptional. The deed was executed to ensure that Charlie Greenway would be reimbursed for the loan in the event of Greenway's death. Greenway invested the $25,000 in UMC.

Charlie Greenway did not testify at the trial due to his incompetence and senility. At the time the loan was made, Charlie Greenway had a bank account with Commerce First National Bank. There was no showing as to whether Charlie Greenway's account at the Commerce First National Bank was debited for $25,000 in 1969.

Mobile Home Rentals. In July 1970, Greenway approached Jane Braswell (Braswell) regarding the rental of a mobile home. Braswell and her husband owned and operated Country Park Estates, a mobile home trailer park located in Athens, Georgia. Greenway requested that Braswell rent a trailer for him. Braswell agreed to place the trailer in Country Park Estates, select the tenants, and collect the monthly rents thereon. Greenway had no personal involvement in the day-to-day activities associated with renting the trailer.

Pursuant to their agreement, Braswell collected the monthly rental checks, and sent those checks to Greenway at UMC. Braswell would make needed repairs to the trailers, and would subtract the costs of these repairs from the monthly rental payments remitted to Greenway. Greenway would then endorse and cash the checks submitted to him. Braswell understood the rental trailer to be owned by Greenway. During the calendar years 1970 through 1974 Braswell mailed the following net rental proceeds to Greenway:

                Year Amount
                1970..................................... $   532.05
                1971.....................................   1,010.60
                1972.....................................     966.35
                1973.....................................     988.57
                1974.....................................     306.03
                

Petitioners did not report any of these amounts on their Federal income tax returns for the calendar years 1970 through 1974. Petitioners' relationship with Braswell ended in May 1974.

Stolen Property. On January 29, 1971, Greenway pleaded guilty in Fulton Superior Court to the felony of theft by receiving stolen property. Greenway's conviction involved the sale of 45 dinette tables, 212 dinette chairs, and 2 quilted furniture...