Harker v. Commissioner
| Decision Date | 01 December 1994 |
| Docket Number | Docket No. 15092-92. |
| Citation | 68 T.C.M. 1272 |
| Parties | Dennis W. Harker and Mary Harker v. Commissioner. |
| Court | U.S. Tax Court |
Larry E. McKibben and Michael R. Horn, 302 Masonic Temple Bldg., Marshalltown, Iowa, for the petitioners. Mary Ann Waters and Jeffrey A. Schlei, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies and additions to tax for petitioners as follows:
Additions to Tax
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Year Deficiency Sec. 6653(b)(1) Sec. 6653(b)(2) Sec. 6661
---- ---------- --------------- --------------- ---------
1985 .......................... $12,947.92 $7,968.96 1 $3,984.00
Additions to Tax
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Year Deficiency Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B) Sec. 6661
---- ---------- ------------------ ------------------ ---------
1986 .......................... 134,334.53 126,743.65 2 42,248.00
1987 .......................... -- 184,392.34 3 61,464.00
1 Fifty percent of the interest due on $15,937.92
2 Fifty percent of the interest due on $168,991.53
3 Fifty percent of the interest due on $245,856.45
In the amended answer, respondent asserted the following deficiencies and additions to tax:
Additions to Tax
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Year Deficiency Sec. 6653(b)(1) Sec. 6653(b)(2) Sec. 6661
---- ---------- --------------- --------------- ---------
1985 .......................... $17,080 $10,035 1 $5,018
Additions to Tax
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Year Deficiency Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B) Sec. 6661
---- ---------- ------------------ ------------------ ---------
1986 .......................... 159,214 145,403.65 2 48,468
1987 .......................... -- 199,257.00 3 66,419
1 Fifty percent of the interest due on $20,070
2 Fifty of the interest due on $193,871
3 Fifty percent of the interest due on $265,676.
After concessions, the following issues remain to be decided:
1. Whether Jeffrey Schlei and the attorneys in the office of the Des Moines, Iowa, District Counsel should be disqualified because of a conflict of interest. We hold that they should not.
2. Issues relating to respondent's use of a net worth analysis to calculate petitioners' income:
(a) Whether respondent properly calculated the value of petitioners' (i) guns, (ii) coins, and (iii) net deferred gain on real estate contracts. We hold that respondent did.
(b) Whether respondent established a likely source of income and sufficiently investigated and negated leads. We hold that respondent did.
3. Whether petitioners are liable for additions to tax for fraud for tax year 1985 under section 6653(b)(1) and (2), and for tax years 1986 and 1987 under section 6653(b)(1)(A) and (B). We hold that they are.
4. Whether petitioners are liable for additions to tax for substantial understatement of tax for the years 1985, 1986, and 1987 under section 6661. We hold that they are.
References to petitioner in the singular are to Dennis Harker. Section references are to the Internal Revenue Code in effect for the years in issue. Unless otherwise indicated, Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated and are so found.
Petitioners lived in Des Moines, Iowa, when the petition was filed. Petitioners lived in Laredo, Texas, when they filed their 1985 and 1986 joint Federal income tax returns. Petitioners lived in Coral Gables, Florida, when they filed their 1987 joint Federal income tax return.
Petitioners' standard of living was modest. Petitioner was employed as a special agent of the Drug Enforcement Administration (DEA) during each of the years in issue. Petitioner received instruction in net worth analysis in 1982 as part of his DEA training.
Mary Harker was not employed from 1985 to 1987. She attended the Laredo Junior College Nursing School in 1986 and 1987. She worked at a Laredo hospital as part of her training.
Mary Harker sometimes used her maiden name, Mary Tyler or Mary Ann Tyler, during the years in issue. She used her maiden name when she worked at the hospital because she feared for her safety due to petitioner's drug law enforcement activities. She had a checking account in the name of Mary Ann Tyler at the First National Bank of West Des Moines in 1986. She used her Social Security number to open this account. Mary Harker held some partnership interests and bank accounts in her married name.
Before moving to Laredo, petitioner worked for the DEA in St. Louis, Missouri. In 1973, while petitioners were living in St. Louis, petitioner was sued in civil court for actions he and some of his coworkers allegedly took during a drug raid. Petitioner was suspended without pay. He was later reinstated and received backpay for the time he was suspended.
Petitioners bought their home in Laredo for $58,783.55 in 1979. In 1987 petitioners sold their Laredo home for $85,000 and bought a home in Coral Gables, Florida, for $166,000. The houses in Laredo and Coral Gables were recorded in the names of Dennis and Mary Harker.
In January 1987, petitioners bought a farm in Boone, Iowa, for $155,000 (Boone farm). The Boone farm was recorded in the name of Mary Tyler. The mortgage on the Boone farm was in the name of Dennis Harker and Mary Ann Tyler (a.k.a. Mary Harker). Petitioners paid for the farm in full by the end of 1987.
In April 1987, petitioners bought a farm near Fort Madison, Iowa (Fort Madison farm), for $49,440. The Fort Madison farm was recorded in petitioner's name. Petitioners paid for the Fort Madison farm in full by the end of 1987.
Petitioner's salary from the DEA was $50,225 for 1985, $48,909 for 1986, and $66,133 for 1987. Petitioners also had income from the sources discussed below in those years.
Petitioner bought and sold guns, coins, and electronic equipment. Petitioners had so many electronic products in their family room that it frequently was uninhabitable. Petitioner usually conducted the merchandise sales. Mary Harker knew that petitioner had income from the sale of guns, coins, and electronic products, and she was often home when petitioner made sales. She sometimes sold guns for petitioner when he was not home. Petitioners did business with both Mexican and United States citizens.
Petitioners were licensed by the Bureau of Alcohol, Tobacco and Firearms (ATF) as firearms dealers. Licensed dealers must fill out an ATF Form 4473 for each firearm sale. Petitioners called their gun selling activity "D&M Police Supplies". D&M stood for Dennis and Mary. Mary Harker conducted some sales, but she did not buy guns or record any of the sales she made.
Petitioner bought and sold coins. He began collecting coins when he was a teenager. Petitioner collected coins such as old nickels and dimes, silver dollars, and gold coins. Petitioner bought silver dollars from a coworker in 1985 and resold them in the same year. Petitioner sold all of his nickels and dimes in 1987 for $500.
In a book in which petitioner put information his family would need if something happened to him, petitioner wrote "Profit from gold coins does not have to be reported because there are no records."
Petitioner periodically sold electronic products such as computers. He began selling electronic products in 1983 when he bought the inventory of a store that was going out of business.
Petitioners built and sold seven houses in Laredo in 1986 and 1987. They hired Juan Gomez (Gomez) to build the houses and paid him commissions for helping them sell the houses. The houses were recorded in the name of Mary Tyler/Mary Ann Tyler. Mary Harker used cash and bought money orders to pay for the lots and signed her name to the financing documents they sent to buyers. She was listed as the seller of all of the houses. Her name was on most of the receipts from Gomez. Petitioner went to the construction sites and his name was on one receipt from Gomez.
On August 1, 1987, petitioners sold the house they built at 104 Fairway Lane to Eligio and Betzabe Gonzales for $77,000.
Petitioners financed some of the house sales. On some of the house sales they financed, petitioners gave the buyers loan payment books with preaddressed envelopes and sent the buyers yearly statements which showed interest and principal paid, outstanding mortgage balances, and real estate taxes. Petitioners sent notices to the buyers if their payments were late. Mary Tyler was the only seller listed on the sales contracts and financing documents. Mary Tyler often deposited payments she received on the sale of the houses in bank accounts in Texas and Florida, both of which were in the name of Dennis Harker and Mary Tyler.
Petitioner was a partner in several partnerships during the years in issue, including the Harker-Terry Properties partnership. Susan Terry (Terry), petitioner's partner, deposited $75,000 in the partnership in April...
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