Hagaman v. C.I.R.

• Decision Date: 06 March 1992
• Docket Number: No. 91-1458,91-1458
• Citation: 958 F.2d 684
• Parties: -906, 92-1 USTC P 50,141 William S. HAGAMAN, Petitioner-Appellant, Bonnie C. Hagaman, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 684

958 F.2d 684

69 A.F.T.R.2d 92-906, 92-1 USTC P 50,141

William S. HAGAMAN, Petitioner-Appellant, Bonnie C. Hagaman, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 91-1458.

United States Court of Appeals, Sixth Circuit.

Argued Nov. 7, 1991.

Decided March 6, 1992.

William E. Frantz (briefed), Donald B. DeLoach (argued and briefed), Frantz, Sanders & Grattan, Atlanta, Ga., for petitioner-appellant.

Abraham N.M. Shashy, Jr., Chief Counsel, I.R.S., Office of Chief Counsel, Washington, D.C., Gary R. Allen, Acting Chief (briefed), Robert S. Pomerance, Kenneth W. Rosenberg (argued), U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., for respondent-appellee.

Before MERRITT, Chief Judge, GUY, Circuit Judge, and WELLFORD, Senior Circuit Judge.

WELLFORD, Senior Circuit Judge.

We AFFIRM the decision of the Tax Court, cited as 56 T.C.M. (P-H) 2,948 (1987), on this appeal, but REMAND to that court to deal with the issue of the effects of IRC § 312(a). ¹

First, we set out essential stipulated facts for an understanding of the decision reached. William S. Hagaman (Hagaman) and his wife, Bonnie (Mrs. Hagaman), Tennessee residents, filed joint tax returns from 1975 through 1978 (a.k.a., "the years in question") using a cash basis of accounting. Previous to 1975, Hagaman had been in the trucking and real estate development business and then acquired several trucking terminals. In the 1960s, he expanded into construction and sale of petroleum products at truck stops in Tennessee and in Alabama. Mrs. Hagaman, due to financial problems encountered in Hagaman's construction business, acquired the stock of several truck stop operations in Tennessee, each of which operated a restaurant as a separate corporation wholly owned by Hagaman. Effective January 1, 1975, various Hagaman corporate entities merged so that the resulting entity, Hagaman Truck Haven, Inc., owned by Hagaman and Mrs. Hagaman, owned the truck stops at Lebanon, Nashville, and Franklin, Tennessee, and the restaurant operations at these locations.

Both petitioners had been active in their businesses. In June 1977, there was a further merger of Hagaman corporate entities which then operated truck stops and/or restaurants at Lebanon, Knoxville, Nashville, Franklin, and Chattanooga, Tennessee. ² Hagaman was president and principal shareholder of the corporations from 1975 through 1978. During this period, the businesses owned or leased cigarette vending machines and/or pinball machines at the various truck stops, revenues from which were in the form of cash. ³ Each operating corporation (or corporations) used the accrual method of accounting during the period in question.

Vernon Liston, an independent accountant, prepared tax returns for the principal operating corporation, Hagaman Truck Haven, Inc. (hereafter "Truck Haven"). The Hagamans had two children, Deborah H. Hackney and William Hagaman, Jr., both of whom had homes built during 1975 and 1976. William, Jr. ⁴ and Deborah's husband, George Phillip Hackney, both worked for Truck Haven. The corporation paid certain contractors directly for the construction of the children's houses. These amounts were treated as "corporate operating expenses" and claimed by Truck Haven as income tax deductions in 1975 and 1976. Neither Hackney nor William, Jr. reported these amounts as taxable income on their returns.

The Tax Court had before it Truck Haven tax returns for 1974 through 1976, and returns for Superior Trucking Service, Inc. (Superior), into which Truck Haven was merged in June of 1977, for two fiscal periods in 1977 and 1978. ⁵ On their personal joint return, the Hagamans reported taxable income from vending machines of $7,179 in 1975; $5,916 in 1976; $7,924 in 1977; and no vending machine income in 1978.

In June of 1982, Hagaman was charged with two counts of violating IRC § 7201 for the years 1975 and 1976. Hagaman pleaded guilty to one charge of income tax evasion for 1975. He was sentenced for this offense. His plea is conceded to be "conclusive and binding upon him, and as a result, Hagaman is estopped ... under the doctrine of collateral estoppel ... from denying that he willfully filed a false and fraudulent income tax return for ... 1975 with intent to evade and defeat a portion of income tax due." He concedes liability for a fraud penalty for 1975 under IRC § 6653(b). Deficiencies of $191,081, $199,079, $137,029, and $140,937, plus 50% fraud penalties, were sought against petitioners for 1975 through 1978. The Tax Court stated that

[a]fter concessions, the issues remaining for our decision are: (1) Whether the petitioners received dividend income from a corporation controlled by them in the amounts determined by the Commissioner; (2) whether the petitioners are entitled to losses from a small business corporation claimed by them in 1975, 1976, and 1977; (3) whether the petitioners must report as interest income $9,500 which the Commissioner determined was received by them in 1975; and (4) whether petitioner William S. Hagaman is liable for the addition to tax for fraud under section 6653(b) for 1975 through 1978.

The Tax Court found that Daugherty, a certified public accountant, worked as controller in the principal corporate office at Chattanooga, the residence of the Hagamans and their children. The Hagamans and Hackney worked at this Chattanooga office as did operations manager, Thomas R. Crooks, who was the overseer of all truck stop operations and reported directly to Hagaman. The truck stops all sold gas and petroleum products, operated repair shops and gift shops, and provided allied services to consumers twenty-four hours a day. Each truck stop had cigarette, pinball, and vending machines. ⁶ Each truck stop had an independent manager or shift manager who compiled daily sales reports of the store's sales and cash position. ⁷ Hagaman himself rarely visited these locations. Daily sales reports and bank deposit receipts were sent "periodically" by each truck stop to the Chattanooga main office and there recorded in a receipts journal. Monthly totals were made and posted to the corporate general ledger.

In the early 1970s, Hagaman began diverting income from pinball and vending machines located at the truck stops. He told the manager of the Knoxville location to report only one-half of the cash income and turn over the other one-half to Crooks for Hagaman. Later, Hagaman instructed the Knoxville manager to deliver all the vending machine income to him (or his agent) and not to report these amounts ($2,000-$4,000 monthly) as corporate income. Usually Crooks picked up this cash for Hagaman. The Knoxville truck stop reported $3,457 in 1975, $753 in 1976, and none in 1977 or 1978 from vending operations.

A similar pattern was followed, beginning in 1974, at the Lebanon truck stop. The Lebanon manager delivered from $700 to $1400 in cigarette vending machine income each month to Crooks. Only ten percent of pinball machine income was reported on the daily sales reports. ⁸ The Lebanon operation reported $12,698 in 1975, $14,255 in 1976, $12,451 in 1977, and $5,824 in vending income from all sources.

The manager of the Franklin truck stop also did not deposit all vending machine income received from 1969 through 1974, and he usually gave the unreported cash to Hagaman directly. Hagaman permitted the Franklin manager to keep some of this unreported cash for himself. There was no evidence about 1975-1978 procedures at the Franklin truck stop concerning vending machine operations, but it reported such vending income of $11,618 in 1975, $8,002 in 1976, $5,264 in 1977, and $2,813 in 1978. There was no explanation for this dramatic decrease in reported income.

The Nashville truck stop manager for the years at issue was the person who had served in this capacity at Franklin until 1974. He also did not report or deposit all cash receipts from vending machines; he delivered this unreported cash to Crooks regularly for Hagaman, keeping $100 per month for himself. From all vending machine sources, Nashville reported $19,043 in 1975, $19,909 in 1976, $17,702 in 1977, and only $7,095 in 1978.

The Chattanooga truck stop during the years in question followed the Knoxville-Lebanon pattern generally, delivering specific quantities of unreported cash to Crooks for Hagaman, but the manager, from 1974 to 1976, retained five percent of the unreported pinball cash receipts (after rent was paid) and $100 per month of cigarette machine revenues for himself. Crooks delivered the cash to Hagaman's office at the corporate headquarters in Chattanooga. The Chattanooga truck stop reported no vending machine revenues at all from 1975 through 1978. It received rental checks of $5,400 in 1975, $21,488 in 1976, $26,820 in 1977, and $28,224 in 1978. These checks were cashed by truck stop employees and delivered, along with vending machine receipts, to the Hagaman corporate main office. On daily sale reports, Chattanooga reflected rental income of $4,000 in 1976, $3,800 in 1977, and $5,500 in 1978 (none in 1975).

The Knoxville truck stop also rented space to truckers who paid $75 to $100 per month in checks during the applicable period. As in Chattanooga, the checks were cashed and placed with vending machine receipts and turned over periodically to Crooks. This rental income was not reported. Hagaman operated a motel and restaurant in Atlanta in 1974 and operated this separately as a small business corporation. We are not concerned with this (Edgemont) operation. In 1975 and 1976, Truck Haven paid individuals to work on a yacht, the "Bilbon," owned by Hagaman. Such wages were $3,736 in 1975 and $1,185 in 1976. The corporation also paid insurance premiums on the yacht in 1975 and certain legal and accounting expenses in 1975, the basis for which was unexplained.

Liston, Hagaman's accountant, prepared tax returns from work papers furnished by Daugherty; work papers were...