Helstoski v. Commissioner

• Court: U.S. Tax Court
• Writing for the Court: Chabot
• Citation: Helstoski v. Commissioner, 60 T.C.M. 233 (T.C. 1990)
• Decision Date: 24 July 1990
• Docket Number: Docket No. 823-83.
• Parties: Robert Helstoski and Margaret Helstoski v. Commissioner.

60 T.C.M. 233

T.C. Memo. 1990-382

Robert Helstoski and Margaret Helstoski v. Commissioner.

Docket No. 823-83.

United States Tax Court.

Filed July 24, 1990.

Sanford Amdur, 186 Paterson Ave., E. Rutherford, N.J., for the petitioners. William S. Garofalo and Daniel K. O'Brien, for the respondent.

Memorandum Findings of Fact and Opinion

CHABOT, Judge:

Respondent determined deficiencies in Federal individual income tax¹ and additions to tax under section 6653(a)² (negligence, etc.) against petitioners as follows:

Additions to Tax
                Year                Deficiency     Sec. 6653(a)
                1976 ............   $95,397           $4,770
                1977 ............    69,916            3,496
                1978 ............    60,102            3,005
                1979 ............    43,191            2,160
                

By amendment to answer, respondent asserts that petitioners are liable for an increased rate of interest under section 6621(c)³, on account of substantial underpayments attributable to tax motivated transactions for 1978 and 1979. The underpayments to which the increased interest would apply are those resulting from the adjustments dealt with in issues (II) and (III) (relating to "literary works" tax shelters and a lithography tax shelter). Also by amendment to answer, respondent asserts that petitioners underreported income for 1976, 1977, 1978, and 1979 from a laundry room concession and claims that this results in increased deficiencies of $4,200 for each of the years in issue.⁴ After concessions by both sides, the issues for decision are as follows:

(1) Whether petitioners are entitled to a casualty loss deduction for 1976 on account of a storm and the loss of a pond and an access road on certain property;

(2) Whether petitioners are entitled to deduct for 1978 and 1979 their cash investments in certain Robin Moore "literary works" tax shelters;

(3) Whether petitioners are entitled to deduct for 1979 their cash investment in a lithography tax shelter;

(4) Whether petitioners must include in their gross income for 1977 and 1978 amounts paid in those years by petitioner husband's 50-percent-owned corporations so that petitioner wife and petitioners' children could visit petitioner husband in prison;

(5) Whether petitioners must include in their gross income for 1976 through 1979 amounts paid by petitioner husband's 50-percent-owned corporations to petitioners, allegedly as reimbursement for amounts which petitioners had spent on repairs and maintenance on behalf of the corporations;

(6) Whether petitioners must include in their gross income for 1977 through 1979 amounts paid by one of petitioner husband's 50-percent-owned corporations for insurance on a duplex, half of which was used as a business office, and the other half of which was petitioners' residence;

(7) Whether petitioners must include in their gross income for 1977 an amount paid by one of petitioner husband's 50-percent-owned corporations for the posting of a recognizance bond in connection with petitioner husband's imprisonment for filing false tax returns;

(8) Whether petitioners had unreported income from the operation of a laundry room concession in 1976 through 1979 and, if so, in what amounts;

(9) Whether petitioners are entitled to deduct, for 1976 through 1979, as interest paid to a bank, amounts in excess of those conceded by respondent on brief;

(10) Whether petitioners are liable for an addition to tax under section 6653(a) for 1976 through 1979; and

(11) Whether petitioners' tax shelter deductions for 1978 and 1979 generated substantial underpayments of tax attributable to a tax motivated transaction within the meaning of section 6621(c).

Findings of Fact

Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.

When the petition was filed in the instant case, petitioners Robert Helstoski and Margaret Helstoski (hereinafter sometimes referred to as "Robert" and "Margaret", respectively), husband and wife, resided in Saddle River, New Jersey. Arnold Freilich (hereinafter sometimes referred to as "Freilich") was petitioners' accountant and prepared petitioners' income tax returns for the years in issue. Robert was born on July 1, 1930. He completed 3 years of college. He is a builder, contractor, and developer by occupation.

Rutherford Park, Inc., Rutherford Heights, Inc., and Rutherford East, Inc. (hereinafter sometimes collectively referred to as "the Corporations") are New Jersey corporations. The Corporations were formed in the 1960's for the purpose of constructing and operating a garden apartment complex of about 250 units (hereinafter sometimes referred to as "the Apartments") in East Rutherford, New Jersey. During the years in issue, the Corporations owned the Apartments. The Corporations operated the Apartments through a partnership, Rutherford Management Co. (hereinafter sometimes referred to as "Management"). Each of the Corporations used a taxable year ending on March 31 and reported its income on the cash basis. Three corporations were formed rather than just one because (1) Robert and the other investors estimated that it would cost $2,400,000 to build the Apartments, and (2) the mortgage companies did not want to lend more than $1,000,000 to any one corporation.

The original investors in the Corporations were Robert, Frank Racioppi (hereinafter sometimes referred to as "Racioppi"), Michael Sadin (hereinafter sometimes referred to as "Sadin"), and Harry and Joseph Wilf (hereinafter sometimes referred to as "the Wilfs"). Robert has been president and 50-percent shareholder of the Corporations since the dates of incorporation; Racioppi and Sadin were secretary and treasurer, respectively. Initially, Racioppi and Sadin each owned 15 percent of the Corporations and the Wilfs each owned 10 percent. The Wilfs disposed of their interests in the Corporations in the mid-1970's, and Racioppi and Sadin each became 25-percent shareholders. Sadin died on or about April 15, 1981. Robert was the general contractor for the construction of the Apartments, the subcontractor for the needed concrete work, and the purchaser of most of the materials used by the other subcontractors. Racioppi and Sadin were in the lumber business, and obtained inexpensive lumber for the Corporations. The Apartments were 16 two-story garden apartment buildings with no common halls.

The Corporations' principal place of business was in one-half of a building at 19 Grant Street (hereinafter sometimes referred to as "19 Grant Street") in East Rutherford, New Jersey. Petitioners lived in the other half of 19 Grant Street. The 19 Grant Street duplex was located within four blocks of the Apartments.

Management is a partnership which was formed in 1967 for the purpose of managing the day-to-day operations of the Apartments. The partners in Management and their respective partnership interests were Robert (50 percent), Racioppi (25 percent), and Sadin (25 percent). Management maintained its office in 19 Grant Street.

Margaret was an employee of the Corporations during the years in issue; she did the corporate bookkeeping, collected and deposited rents, and answered the telephones. Margaret has a B.S. degree in Education and is a former elementary school teacher; however, she did not have any accounting background. Robert worked full-time for the Corporations during the years in issue, except when he was in prison (see 4. Travel Expenses—1977 and 1978, infra). Robert and Margaret received salaries from the Corporations during the years in issue.

Both Julian Sadej and Maria Sadej (hereinafter sometimes referred to as "Julian" and "Maria", respectively) were employed by the Corporations; Julian was the Apartments' superintendent during most of the years in issue; Maria opened the laundry rooms and did odd jobs around the Apartments. In the summer of 1979, Alex Giedrys took over as superintendant. Julian hired local Polish immigrants as needed to do work for the Corporations. The Polish immigrants were not on the corporate payroll and had "limited" immigration status.

1. Casualty Loss (Dam)—1976

On April 19, 1976, petitioners bought about 25 acres of land in Saddle River, New Jersey, from Joseph and Marcia Beisler (hereinafter sometimes referred to as "the Beislers") for $400,000. Saddle River is about a one-half hour auto trip from East Rutherford.

A stream known as Saddle Brook, a tributary of the Saddle River, flows through the property that petitioners bought from the Beislers (hereinafter sometimes referred to as "the Saddle Brook property"). The Beislers had a concrete dam built on the stream around 1968 at a cost of somewhat more than $7,000. The dam resulted in a pond on the upstream side of the dam. The pond was somewhat triangular in shape, covering an area of about 6,500 square feet or about .15 of an acre, and about 8 feet deep in the center. The dam is at about the center of the Saddle Brook property. There was an access road on one side of the pond.

The dam is about 60 feet across; the footings were about 1 to 2 feet deep. In the center of the top of the dam, there is a cut-out, or indentation, which is 6 inches lower than the rest of the dam. The Beislers also had a roadway built near the dam, and installed a culvert over part of the stream. Around 1975, the Beislers added wing-walls to the dam to keep water from running around the dam. During the period when the Beislers owned the Saddle Brook property, and after they had the dam built (1968-1976), water from Saddle Brook flowed over the indented part of the dam except during periods of drought. While the Beislers owned the Saddle Brook property, there were occasional problems with the dam. In the spring or after a heavy rain, water would flow over the entire length of the dam, and not just over the indentation. Occasionally, the stream flowed around one or both ends of the dam and the soil washed away. On these occasions, the Beislers had the pond drained and the soil...