HUTCHERSON, JR. v. Commissioner, Docket No. 1337-77
| Decision Date | 02 April 1984 |
| Docket Number | 6661-79.,6659-79,6660-79,Docket No. 1337-77 |
| Parties | George E. Hutcherson, Jr., et al. v. Commissioner. |
| Court | U.S. Tax Court |
Cyril David Kasmir, for the petitioners. William P. Hardeman, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined the following deficiencies in, and additions to, the petitioners' Federal income taxes:
_____________________________________________________________________________________________
Additions to Tax
Taxable Year Sec. 6651(a) Sec. 6653(a) Sec. 6653(b) Sec. 6654
Petitioner Ended Deficiency I. R. C. 19542 I. R. C. 1954 I. R. C. 1954 I. R. C. 1954
_____________________________________________________________________________________________
George E. 12/31/72 $10,075.89 $ 2,417.25 $ 512.14 .........
Hutcherson, Jr
Estate of 12/31/70 7,335.86 ......... ......... $ 3,667.93 $ 234.75
George E. 12/31/71 49,056.99 ......... ......... 24,528.50 1,569.78
Hutcherson, 12/31/72 6,085.72 ......... ......... 3,042.86 194.74
Sr
Juanita 12/31/70 6,797.66 1,699.42 339.88 ......... 217.53
Hutcherson 12/31/71 48,471.99 12,118.00 2,423.60 ......... 1,551.10
12/31/72 5,410.72 1,352.68 270.54 ......... 173.14
_____________________________________________________________________________________________
The Commissioner also determined the following deficiencies in, and additions to, the Federal income taxes of George E. Hutcherson Enterprises, Inc.:
Addition to Tax
Taxable Year Ended Deficiency Sec. 6653(b)
8/31/70 ......... $ 33,812.38 $16,906.19
8/31/71 ......... 109,257.68 54,628.84
Finally, in docket No. 6661-79, the Commissioner determined that George E. Hutcherson, Jr., was liable as a transferee for the deficiencies in, and additions to, the tax of George E. Hutcherson, Sr., Juanita Hutcherson, and George E. Hutcherson Enterprises, Inc., to the extent of assets received by him as follows:
Liability Transferor
$28,200 George E. Hutcherson, Sr., Juanita
Hutcherson3
8,886 B.F. Hardgrave4, transferee of the assets
of George E. Hutcherson, Sr
Juanita Hutcherson3
46,800 George E. Hutcherson Enterprises, Inc.
10,000 B.F. Hardgrave, transferee of the assets
of George E. Hutcherson Enterprises,
Inc.
63,339 Willard Poole, transferee of the assets
of George E. Hutcherson Enterprises,
Inc.
After a concession by the petitioner in docket No. 1337-77, the issues remaining for decision are: (1) Whether George E. Hutcherson, Sr., and Juanita Hutcherson had unreported income for 1970, 1971, and 1972 as determined by the Commissioner; (2) whether George E. Hutcherson, Sr., fraudulently underpaid his income taxes for 1970, 1971, and 1972 (section 6653(b)); (3) whether the Estate of George E. Hutcherson, Sr., and Juanita Hutcherson are liable for the additions to tax for failure to pay estimated taxes for 1970, 1971, and 1972 (section 6654); (4) whether Juanita Hutcherson is liable for the additions to tax for failure to timely file Federal income tax returns for 1970, 1971, and 1972 (section 6651(a)(1)) and for negligence for such years (section 6653(a)); (5) whether George E. Hutcherson, Jr., is liable as a transferee of the assets of George E. Hutcherson, Sr., Juanita Hutcherson, and George E. Hutcherson Enterprises, Inc.; (6) whether assessment and collection of the transferee liabilities are barred by the statute of limitations; and (7) whether George E. Hutcherson, Jr., is liable for the additions to tax for failure to timely file his 1972 Federal income tax return (section 6651(a)(1)) and for negligence for 1972 (section 6653(a)).
Some of the facts have been stipulated, and those facts are so found.
George E. Hutcherson, Sr. (Mr. Hutcherson), had his legal residence in Palestine, Tex., when he filed his petition in this case. Mr. Hutcherson died on April 14, 1979, and the Estate of George E. Hutcherson, Sr., Deceased, George E. Hutcherson, Jr., Independent Administrator, was substituted for him as the petitioner in docket No. 6659-79. Juanita Hutcherson had her legal residence in Palestine, Tex., when she filed her petition. George E. Hutcherson, Jr. (George), had his legal residence in Palestine, Tex., when he filed his petitions.
Mr. Hutcherson was the sole shareholder of George E. Hutcherson Enterprises, Inc. (Enterprises). At the time the corporation was formed, almost all of Mr. Hutcherson's property was transferred to it. Sometime prior to November 7, 1975, the corporation was dissolved. Mr. Hutcherson became the successor in interest to the corporation and the beneficial owner of the corporate assets.
Mr. Hutcherson and his wife, Juanita, filed no Federal income tax returns for 1970, 1971, and 1972. Enterprises filed no Federal income tax returns for its taxable years ended August 31, 1970, and August 31, 1971. The Federal income tax return filed by George for 1972 was dated November 8, 1973, and was received by the Internal Revenue Service on November 13, 1973.
At the beginning of the years in issue, Mr. Hutcherson and Enterprises were involved in the retail liquor business. During 1970 and 1971, Mr. Hutcherson operated a liquor store known as George's Package Store. He did not keep tickets or receipts for individual sales. Revenue Agent Joseph Goodin conducted the examination of Mr. Hutcherson's tax liabilities for 1970, 1971, and 1972; during the examination, Agent Goodin was not provided with any books or records, except a few bank statements, concerning Mr. Hutcherson's liquor business. Mr. Goodin determined the Hutchersons' income from the liquor business by applying a profit markup percentage to the cost of liquor and beer sold. The sales and cost figures were determined from invoices which Mr. Goodin obtained from liquor and beer wholesalers in the East Texas area. Mr. Goodin also determined the liquor markup percentage by comparing the liquor cost with the shelf prices which he had obtained from Mr. Hutcherson's store in February 1970 during an examination of Mr. Hutcherson's tax liabilities for 1967, 1968, and 1969. Beer sales were treated as if they had all been made by the case. During the years in issue, Mr. Hutcherson sold beer for between $4.75 and $5.25 per case; the markup on beer sales varied from 25 cents to as much as 50 cents per case. The markup on beer sold by the 6-pack was between 15 cents and 20 cents per 6-pack.
During 1971, Mr. Hutcherson operated two liquor stores in Palestine, Tex. Mr. Hutcherson's liquor licenses, which had been renewed during 1970 by court order, were to expire on August 31, 1971, and he could not renew them. Mr. Hutcherson and Carroll Overton agreed that Mr. Overton would purchase the liquor stores on or about September 1, 1971.
Mr. Overton obtained the necessary liquor licenses from the State of Texas, but he was unable to execute the original purchase agreement because he could not raise the purchase money. Since Mr. Overton had already obtained the liquor licenses, and since Mr. Hutcherson's licenses were about to expire, Mr. Hutcherson decided to continue the liquor store operations in Mr. Overton's name and with Mr. Overton's licenses.
Mr. Overton never paid anything for the two liquor stores, and he never took control of them. Mr. Hutcherson and Dot Hinson, who acted as his bookkeeper, secretary, and sales clerk, supervised the operation of the stores; Mr. Hutcherson usually visited them each day. Mr. Overton rarely visited the stores, had no access to the stores' books and records, had no signature authority over the stores' bank accounts, and never received any income or proceeds from the operation of the stores. However, since the stores were operated in Mr. Overton's name using Mr. Overton's liquor licenses, his attorney advised him to report the income from them on his income tax returns. A bookkeeper in the employ of Mr. Hutcherson provided Mr. Overton with information concerning the liquor business income. On his Federal income tax return for 1971, Mr. Overton reported a loss of approximately $150 from the operation of the stores; for 1972, he reported income of about $6,500. Mr. Overton paid all the tax on the liquor store income that he reported, although Mr. Hutcherson subsequently reimbursed him for a portion of such tax.
On August 10, 1971, Agent Goodin informed Mr. Hutcherson that his examination of Mr. Hutcherson's tax liabilities for 1967, 1968, and 1969 had disclosed a deficiency of approximately $100,000. During 1971, Mr. Hutcherson also owned approximately $80,000 to several liquor wholesalers. Mr. Hutcherson had reached his borrowing limit at a bank. In an attempt to raise money, he conveyed one parcel of real property to Ken Westerman and another to Cliff Mercer, who were both sales representatives of the liquor wholesalers to whom Mr. Hutcherson was indebted. Although such transfers appeared in the local land records as outright sales, they were merely financing arrangements. The salesmen agreed to borrow money from the bank in their names, as record owners of the properties, using the realty as security. The proceeds of such loans were used to pay Mr. Hutcherson's debts to the wholesalers; Mr. Hutcherson made payments on the loans. The bank was unaware that Mr. Hutcherson had...
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