Hall v. Commissioner

Decision Date30 September 1976
Docket Number3521-74,Docket No. 4665-73,4514-74.
Citation1976 TC Memo 311,35 TCM (CCH) 1399
PartiesGeorge S. Hall v. Commissioner.
CourtU.S. Tax Court

George S. Hall, pro se, 546 Gordonia Rd., Palm Beach, Fla. Willard J. Frank and Robert S. Walker, for the respondent.

Memorandum Findings of Fact and Opinion


The Commissioner has determined deficiencies in, and additions to, the petitioner's Federal income taxes as follows:

                                                 Addition Under
                  Year              Deficiency    Sec. 6653(b)1
                  1965 ............ $ 6,014.19     $ 3,007.10
                  1966 ............   6,101.54       3,050.77
                  1967 ............  32,885.48      16,442.74
                  1968 ............   2,521.55       1,260.78
                  1969 ............  20,969.35      10,484.68
                  1970 ............   7,600.72       3,800.36

Some of the issues have been conceded; those remaining for decision are: (1) Whether some part of the petitioner's underpayment for each of the years in issue was due to fraud within the meaning of section 6653(b); (2) whether the assessment and collection of the deficiencies and additions to tax for each or any of the years in issue is barred by the statute of limitations; and (3) whether during the years not so barred the petitioner received unreported rental income or dividends; realized a gain on the sale of certain property, on the surrender of an insurance policy, or upon the liquidation of a certain corporation; owned a bank account on which he should have reported interest; earned certain compensation that was paid to his father; is entitled to deductions for a fire loss and for the payment of alimony; and must recognize gain on the sale of his residence.

General Findings of Fact

Some of the facts have been stipulated, and those facts are so found.

The petitioner, George S. Hall, resided in Naples, Fla., at the time he filed the petitions herein. He filed his Federal income tax returns for 1965 and 1966 with the District Director of Internal Revenue, Boston, Mass., and he filed his Federal income tax returns for 1967, 1968, 1969, and 1970, with the District Director of Internal Revenue, Richmond, Va.

The petitioner contends that the statute of limitations has run on the assessment of any deficiencies for some of the years at issue in this case. The Commissioner takes the position that such statute has not run on any of the years because of the existence of fraud or, with respect to some of the years, because of certain other circumstances. To decide whether the petitioner's conduct was fraudulent, it is first necessary to decide how the transactions at issue should have been treated for tax purposes, and accordingly, we shall first set forth the facts of the case and our opinion with respect to the disputed transactions.

1. Income from Construction Buisness Findings of Fact

The petitioner is a graduate diesel engineer and was employed as an engineer for some years. He has also spent many years in the construction business and as a real estate broker. During 1965, 1966, and the first 6 months of 1967, he was engaged in the business of constructing, remodeling, and selling homes in Massachusetts. The petitioner followed a method of accounting for the sale of the homes he constructed by deducting the cost of labor, materials, and supplies in the year paid, and by deducting the cost of the land of such homes in the year they were sold. With respect to homes the petitioner bought at a foreclosure sale, he followed a method of accounting under which the cost of such homes was deducted in the year of sale, while the costs of labor and supplies incurred in fixing up such homes were deducted when paid. He has never sought or secured the Commissioner's approval to change his accounting method.

The parties now agree that the petitioner's actual gross receipts from such business during 1965, 1966, and 1967 exceeded the amounts reported on his returns. The actual gross receipts and the amounts shown on the returns are as follows:

                                       Gross       Reported
                  Year                Receiptsa   on Return
                  1965 .............. $115,600    $ 86,315
                  1966 ..............  133,600     104,782
                  1967 ..............   54,700      -0-
                  aGross receipts represent total gross sales
                less various discounts given by the petitioner

The Commissioner concedes that for the years 1965, 1966, and 1967, the petitioner is entitled to deduct business expenses in excess of the amounts claimed by him on his returns. The amounts claimed by him and the additional amounts now allowed by the Commissioner are as follows:

                                         Claimed on    Allowable
                   Year                    Return       Expenses
                   1965 ............... $80,202.30    $17,306.25
                   1966 ...............  97,645.50     11,315.90
                   1967 ...............     -0-        14,792.92

The treatment of some items remains in dispute. One such item is a home at 11 Dean Street, Taunton, Mass., which was purchased by the petitioner at a foreclosure sale in 1964 for $10,025. He sold this property in 1965 and did not deduct its cost in 1964 or 1965. The Commissioner has not allowed him a deduction for the cost of such property in either year.

During the year 1965, the petitioner paid commissions of $1,602.50 to a realtor, Wilford J. Menoche, in connection with the sale of homes in such year. In 1966, he paid Mr. Menoche additional commissions of $3,261.00. The petitioner did not deduct such payments when he made them, and the Commissioner has not allowed him any deductions for such expenditures.

The petitioner claims additional deductions in 1965 and 1966 for repairs that he claims to have made to two properties acquired by foreclosure — 118 Winthrop Street and 34 Highland Street, Taunton, Mass. He admits that the repairs on the Winthrop property may have occurred in 1964. He estimates that the costs for such repairs amounted to $1,000 for each property, but he offered no records to support such claim, because he asserts that such records were destroyed by fire.

In February 1966, the petitioner took a promissory note for $700 from James R. and Carolyn L. Daley, who had purchased property from the petitioner. Under the terms of the note, the obligors were to make monthly payments of $50 for 15 months beginning in February 1967. Shortly after the note was executed, the Daleys separated, and the petitioner does not know their whereabouts, although he has made no effort to locate them or otherwise attempt to collect on the note. He has received no payments on the note, and he has not previously written off the note as a bad debt.

In 1965, the petitioner purchased land from Mr. and Mrs. Costa for $14,000. The petitioner had this property surveyed at a cost of $1,000, and then he developed the land into 15 homesites in a subdivision called Bay Acres. The petitioner allocated his $15,000 costs equally among them so that each homesite had a cost basis of $1,000. He constructed homes on each of these sites and sold 4 of them in 1965, 8 of them in 1966, and the remaining 3 in 1967.

In his notice of deficiency for 1966, the Commissioner allowed the petitioner, as an additional business expense, $14,031.25 for the cost of the property purchased in 1965 from Mr. and Mrs. Costa. However, after the trial of this case, the Commissioner was granted leave to file an amended answer. In such amended answer, the Commissioner pleaded that the petitioner should not be allowed a deduction of $14,031.25 in 1966 for the cost of such property because, for the years 1965 and 1966 he deducted an allocable portion of such cost when each lot was sold. Consequently, the Commissioner seeks to increase the deficiency and the fraud penalty in 1966.

The petitioner did not file a Schedule C (relating to profit from business or profession) for 1967, and on the Employer's Quarterly Federal Tax Return (Form 941), covering the period January 1 through March 31, 1967, he wrote, "Final Out of Business." However, he was still in the business of selling homes during the first 6 months of that year. During 1967, he sold 4 homes, which had been paid for and constructed in 1966 at a cost of $37,870.84. He offered no evidence to establish that he did not deduct such construction costs in 1966 in accordance with his accounting method, but he now claims that such construction costs are allowable deductions in 1967.

During 1967, the petitioner paid or incurred the following expenses in connection with his business of selling homes which have not been allowed by the Commissioner:

                  Telephone (6 months @ $12) ..................  $ 72.00
                  Electricity (6 months @ $10) ................    60.00
                  Office supplies—postage, etc. ...............   100.00
                  Advertising—Taunton Gazette .................    50.00
                  Insurance ...................................   100.00
                  Depreciation on office for 6 months .........   250.00
                     Total ....................................  $632.00

To compute the petitioner's income from his construction business, we must decide the matters still at issue:

a. The Cost of 11 Dean Street The petitioner has the burden of persuading us that he did not deduct the cost of the Dean Street foreclosure property, and he has carried that burden. Interstate Transit Lines v. Commissioner 43-1 USTC ¶ 9486, 319 U.S. 590, 593 (1943). On this issue, we found the testimony of the petitioner to be credible and consistent with his general method of accounting for such costs. Accordingly, we hold that he is entitled to an additional business deduction in 1965 in the amount of $10,025.

b. Commissions to Mr. Menoche in 1965 and 1966 The Commissioner stipulated that the commissions were paid to Mr. Menoche in 1965 and 1966 in connection with the sale of homes on behalf of the petitioner, and ...

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