Heemst v. Commissioner
| Decision Date | 08 July 1996 |
| Docket Number | Docket No. 24253-93.,Docket No. 24252-93. |
| Citation | 72 T.C.M. 26 |
| Parties | John Van Heemst v. Commissioner. |
| Court | U.S. Tax Court |
John Van Heemst, pro se. James F. Kearney, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in, and additions to, petitioner's Federal income tax as follows:
Additions to Tax
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Year Deficiency Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B) Sec. 6661
1987 ........................... $21,182 $15,887 1 $5,296
1 50 percent of the interest payable pursuant to sec. 6601 with respect to the portion of any underpayment that is
due to fraud
Additions to Tax
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Year Deficiency Sec. 6651(f) Sec. 6653(b)(1) Sec. 6654
1988 ........................... $10,300 N/A $7,725 $ 659
1989 ........................... 16,103 $12,077 N/A 1,089
Unless otherwise indicated, all section references are to the Internal Revenue Code as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issues to be decided in the instant case are:
(1) Whether petitioner is entitled to a deduction for home mortgage interest for taxable year 1987 in an amount greater than that allowed by respondent;
(2) whether petitioner failed to report income from a sole proprietorship for each of taxable years 1987, 1988, and 1989 in the amounts determined by respondent;
(3) whether petitioner is liable for self-employment tax for each of taxable years 1987, 1988, and 1989;
(4) whether petitioner is liable for the additions to tax for fraud pursuant to section 6653(b)(1)(A) and (B) for taxable year 1987 and section 6653(b)(1) for taxable year 1988, and for fraudulent failure to file pursuant to section 6651(f) for taxable year 1989;
(5) alternatively, should petitioner not be held liable for the additions to tax for fraud, whether he is liable for the addition to tax for failure to file timely pursuant to section 6651(a)(1) for each of taxable years 1987, 1988, and 1989;
(6) alternatively, should petitioner not be held liable for the additions to tax for fraud, whether he is liable for the additions to tax for negligence pursuant to section 6653(a)(1)(A) and (B) for taxable year 1987 and section 6653(a)(1) for taxable year 1988;
(7) whether petitioner is liable for the addition to tax for a substantial understatement of income tax pursuant to section 6661(a) for taxable year 1987; and
(8) whether petitioner is liable for the addition to tax for failure to pay estimated income tax pursuant to section 6654(a) for each of taxable years 1988 and 1989.
Some of the facts have been stipulated for trial pursuant to Rule 91. The parties' stipulations are incorporated herein by reference and are found accordingly.2
At the time the petitions in the instant case were filed, petitioner resided in Sarasota County, Florida.
Petitioner was born in The Netherlands on November 14, 1938. He immigrated to Canada sometime thereafter and became a citizen of that country. Petitioner was involved in the construction business in Ontario, Canada, until 1976. Petitioner immigrated to the United States during that year.
On April 7, 1977, petitioner married Colleen Murphy, and the marriage continued through the years in issue. Ms. Murphy also goes by the name "Kelly Murphy". During the years in issue, Ms. Murphy used the names Colleen Van Heemst and Kelly Van Heemst. Petitioner and Ms. Murphy were divorced no earlier than April 15, 1991.
In 1978, petitioner started Cape Town Development, Inc. (Cape Town Development), a corporation that built commercial and residential properties, of which he was the president and sole shareholder. The corporation ceased operations, possibly during 1986, and filed for bankruptcy during 1986 or 1987. Ultimately, petitioner and Ms. Murphy satisfied the claims of Cape Town Development's creditors because they were guarantors of all debts incurred by that corporation. Cape Town's bankruptcy proceeding was dismissed in 1988. Petitioner did not have a large amount of assets after that bankruptcy.
During the years in issue, petitioner and Ms. Murphy jointly owned and operated a sole proprietorship known as "Pieces of Eight", which was a retail jewelry store located in Captiva, Florida. In order to hide his assets from creditors, petitioner claimed that Kathleen Murphy owned Pieces of Eight. Kathleen Murphy, the sister of Ms. Murphy, never had an ownership interest in Pieces of Eight and had nothing to do with the business. Petitioner maintained the books for Pieces of Eight. During the years in issue, a checking account was maintained for Pieces of Eight with Citizens and Southern National Bank. During the years in issue, petitioner issued checks on the account of Pieces of Eight to pay personal expenses.
During 1987, petitioner informed Thomas Louwers, the accountant who prepared petitioner's and Ms. Murphy's return for that year, that Kathleen Murphy, who Mr. Louwers understood to be Ms. Murphy's sister, owned Pieces of Eight. Petitioner also informed Mr. Louwers that petitioner was only an employee of Pieces of Eight. Petitioner provided Mr. Louwers with an asset purchase agreement (asset purchase agreement) in which Kathleen Murphy purported to sell the assets of Pieces of Eight to Michael Van Heemst, petitioner's son, as of the end of 1987. Michael Van Heemst was then a high school student and part-time employee of Pieces of Eight. Michael Van Heemst signed the asset purchase agreement at the insistence of petitioner. None of the sale price was ever paid. Petitioner informed Mr. Louwers that Michael Van Heemst owned Pieces of Eight for years after 1987, and Mr. Louwers prepared 1988 and 1989 income tax returns for Michael Van Heemst reflecting the income of Pieces of Eight. Petitioner provided Mr. Louwers with the information concerning Pieces of Eight that was used for purposes of preparing financial statements and tax returns.
For taxable year 1987, petitioner filed a joint Federal individual income tax return (1987 return) with Ms. Murphy.3 On the 1987 return, petitioner and Ms. Murphy reported income from the sources and in the amounts shown below:
Source Amount
Form W-2 wages (Ms. Murphy) ............... $10,000
Form W-2 wages (petitioner) ............... 10,000
Taxable interest income ................... 478
Nonpassive income from S corporation
(Pieces of Eight Dive Center, Inc.) ..... 411
_______
Total income reported per return ...... 20,889
The Forms W-2 for both petitioner and Ms. Murphy indicate as employer "Kathleen Murphy, Pieces of Eight, PO Box 1124, Captiva, Fl 33924".
Petitioner and Ms. Murphy claimed one personal exemption for each of themselves and a dependency exemption for petitioner's 17-year-old son, Jason, who lived with them. Additionally, they claimed itemized deductions on Schedule A in the amounts shown below:
Item Amount
Real estate taxes ........................ $ 5,519
Home mortgage interest ................... 25,200
Personal interest
($944 less nondeductible portion) ...... 614
Cash contribution ........................ 70
_______
Total itemized deductions claimed ... 31,403
Consequently, for the taxable year 1987, petitioner and Ms. Murphy reported negative taxable income in the amount of $16,214 and total tax due of zero. None of the activity of Pieces of Eight, except as noted above, was reported on the 1987 return.
The face of the 1987 return is date-stamped received at the Internal Revenue Service Atlanta Service Center on October 24, 1988. Included with the 1987 return is a Form 4368, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, and a Form 2688, Application for Additional Extension of Time to File, both of which were signed by the return preparer, Mr. Louwers. The Form 2688 requested an extension until October 15, 1988, to file the 1987 return and represented that petitioner and Ms. Murphy needed the extension because they were "awaiting K-1 from Subchapter S corporation". The form further indicates that approval for the extension was granted.
Petitioner filed no Federal individual income tax return for taxable years 1988 or 1989. Petitioner, however, was aware of his obligation to file returns. For those years, Ms. Murphy filed delinquent Federal individual income tax returns, claiming the filing status of married, filing separately.
During the initial stage of the audit for the years in issue, which began during or about October 1990, petitioner told respondent's agent that (1) he was merely an employee of Pieces of Eight, (2) the agent was not to ask him any questions about Pieces of Eight, and (3) the agent could not visit its store. Petitioner also represented to respondent's agent that Pieces of Eight had been owned by Kathleen Murphy, a woman he had never seen. Petitioner later told respondent's agent that Kathleen Murphy was an alias used by Ms. Murphy. Petitioner also claimed that Kathleen Murphy had sold the business to Michael Van Heemst, petitioner's 17-year-old son, and showed respondent's agent the asset purchase agreement. Petitioner admitted to respondent's agent that none of the sale price had been paid and that he did not know where Kathleen Murphy lived. Petitioner further claimed during the audit that Pieces of Eight...
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