Industrial Electrical and Instrumentation, Inc. v. Commissioner of Internal Revenue, T.C. Memo. 2008-84 (U.S.T.C. 4/3/2008)
| Decision Date | 03 April 2008 |
| Docket Number | No. 19355-05.,19355-05. |
| Parties | INDUSTRIAL ELECTRICAL AND INSTRUMENTATION, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
Robert A. Shupack, for petitioner.
W. Robert Abramitis and Justin L. Campolieta, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies in and penalties on petitioner's Federal income tax:
Penalty
Year Deficiency Sec. 6663
1999 $358,153 $268,614.75
2000 709,407 532,055.25
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issues for decision are: (1) Whether petitioner failed to report $1,411,100 in gross receipts for 1999 and $2,406,577 in gross receipts for 2000; (2) whether petitioner is liable for the civil fraud penalty for 1999 and 2000; and (3) whether the periods of limitations for 1999 and 2000 have expired.
Some of the facts have been stipulated and are so found. The stipulation of facts, the supplemental stipulation of facts, the second supplemental stipulation of facts, the third supplemental stipulation of facts, and the attached exhibits are incorporated herein by this reference. At the time petitioner timely filed its petition, petitioner had a mailing address in Boca Raton, Florida.
Petitioner, Industrial Electrical & Instrumentation, Inc. (IEI), was an active Florida corporation during the years at issue. Alfred White (Mr. White), during the years at issue and as of the date of trial, was a Florida State-certified electrical contractor. Mr. White was also the president, secretary, and treasurer of IEI during the years at issue. In 1995 Mr. White qualified petitioner to engage in electrical contracting services.1 During the years at issue, and as of the date of trial, petitioner remained qualified to perform electrical contracting services.2 IEI is the only entity for which Mr. White has submitted an application with the State of Florida to qualify it to perform electrical contracting services.
On July 10, 1997, Mr. White signed an "Agreement to Qualify" with Stewart G. Penny (Stewart), Lance Penny (Lance), and Sean Penny (Sean) (collectively the Pennys)3. The agreement purported to qualify Stewart to obtain permits to perform electrical contracting services through Omni Building Contractors, Inc. (Omni). During the taxable years at issue Mr. White knew that neither Omni nor the Pennys in their own capacities were State-certified electrical contractors in Florida. Omni was administratively dissolved by the State of Florida on August 13, 1993. Pursuant to Fla. Stat. Ann. sec. 607.1421(3) (West 2007): "A corporation administratively dissolved continues its corporate existence but may not carry on any business except that necessary to wind up and liquidate its business". On October 2, 1985, Stewart was enjoined by the Circuit Court of Dade County from engaging in electrical contracting in Florida.
Furthermore, pursuant to the "Agreement to Qualify", Mr. White agreed to transfer 49 percent of IEI's shares to the Pennys as follows: 23 percent to Lance, 23 percent to Sean, and 3 percent to Stewart. Mr. White retained the remaining 51 percent of the shares of IEI. Additionally, a Miami branch of IEI was to be established. On July 10, 1997, the Pennys became officers and shareholders of IEI.4 The board of directors of IEI unanimously adopted resolutions naming the Pennys vice presidents of IEI. The resolutions were signed by Mr. White as secretary of IEI. The resolution naming Stewart vice president also named him general manager of the Miami office of IEI. The three resolutions were titled "Authorize Appointment of Director or Officer".
The Pennys, with the approval of Mr. White, engaged in electrical contracting services during the years at issue under petitioner's name.5 Petitioner maintained a checking account with First Union National Bank (corporate account), and Mr. White had sole signature authority. The Pennys were given a deposit book in order to make deposits into petitioner's account, but they could not withdraw money from the account.
During taxable year 1999 IEI customer checks totaling $1,995,915 were made payable to petitioner. Of that amount $551,815 was deposited by the Pennys into petitioner's corporate account and reported on petitioner's 1999 Form 1120, U.S. Corporation Income Tax Return; checks totaling $1,143,655.10 were cashed by the Pennys or Donna Penny (Donna) at check cashing stores and not reported on petitioner's 1999 tax return; and checks totaling $300,445 were endorsed by the Pennys to Classic Title, Inc. (Classic), deposited into an escrow account, and not reported on petitioner's 1999 tax return. Petitioner's gross receipts for 1999 were $1,962,915 with a taxable income of $1,053,390.6 Petitioner's gross receipts were paid to petitioner for electrical services rendered.
During taxable year 2000 IEI customer checks totaling $3,087,667 were made payable to petitioner. Of that amount $667,809 was deposited by the Pennys into petitioner's corporate account and reported on petitioner's 2000 tax return; checks totaling $1,568,735 were cashed by the Pennys or Donna at check cashing stores and not reported on petitioner's 2000 tax return; and $851,123 was deposited by the Pennys into Bruce M. Harlan's Trust Account (Harlan Trust) and not reported on petitioner's 2000 tax return. The checks cashed at check cashing stores were endorsed with petitioner's name and by Stewart, Lance, or Sean, followed by the initials "V.P.", or by Donna. The checks deposited into the Harlan Trust were endorsed with petitioner's name, Sean's name followed by the initials "V.P.", and Bruce Harlan's name and trust account number. The checks deposited into the Harlan Trust were used to purchase real estate in trust for the Penny family. Petitioner's gross receipts for 2000 were $3,074,385.66 with taxable income of $2,086,491.7
The Pennys, as stockholders and officers of petitioner, negotiated and entered into contracts to perform electrical contracting services under the name of petitioner. The Pennys had business cards with the name and logo of petitioner.8 The business cards also showed Mr. White's State-certified electrical contractor license number, which he obtained and used to qualify petitioner. Additionally, the Pennys, with Mr. White's awareness, used trucks and T-shirts with petitioner's name and logo. In 1999 and 2000 Stewart placed advertisements for petitioner's services in the telephone book under petitioner's name.9 The Pennys issued customers invoices bearing petitioner's name and using Mr. White's license number. IEI's customers paid the invoices with checks made out to petitioner.
The Pennys deposited money into the corporate account when they needed to pay IEI's vendors and suppliers. Vendors and suppliers sent petitioner bills for electrical contracting supplies that the Pennys purchased on credit. Mr. White was aware, and approved, of the Pennys' performing electrical contracting work during the years at issue using petitioner's name and its credit because Stewart did not have good credit. One of the reasons that Mr. White entered into the "Agreement to Qualify" was to allow Stewart to use petitioner's credit rating. When petitioner received bills from a vendor or supplier, Mr. White faxed the bill to the Pennys at the Miami branch office of petitioner. Mr. White wrote checks from petitioner's corporate account to pay petitioner's supply bills with money that petitioner obtained through the performance of electrical contracting services by the Pennys.
Petitioner included the amounts paid to vendors and suppliers in the costs of goods sold it reported on its tax returns for 1999 and 2000. After the expenses were paid, Mr. White wrote checks to Omni for money that was left over in petitioner's corporate account. Before Mr. White made any payments to Omni, Stewart submitted a Form W-9, Request for Taxpayer Identification Number and Certification, on behalf of Omni. Mr. White wrote the checks to Omni because he did not want to have to withhold taxes. Petitioner included the checks drawn on the corporate account and made payable to Omni as subcontracting expenses in the cost of goods sold that petitioner reported on its tax returns for 1999 and 2000.
During the years at issue, the Pennys obtained permits to perform electrical contracting work with Mr. White as the qualifier and using petitioner's name. None of the Pennys put his name on the electrical contracting permits, nor did Omni. The permits were "pulled" with the knowledge and approval of Mr. White. The electrical contracting permits listed petitioner as the contractor.
On November 17, 1997, Stewart, acting on behalf of petitioner, signed a contract with the Presidential Condominium Association, Inc. (Presidential), to perform electrical contracting services. Two days later, Mr. White signed a document authorizing petitioner to perform electrical contracting services at Presidential. Petitioner, and Mr. White personally, helped finance the electrical contracting services performed by the Pennys at Presidential.10
In 1998, petitioner sued Presidential in order to recover payment for services either performed or being performed. Stewart hired Andre Zamorano (Mr. Zamorano), an attorney, to represent petitioner. Lance, acting on behalf of petitioner, filed a claim of lien against Presidential. The claim of lien listed petitioner as the lienor. Mr. Zamorano filed a notice of lis pendens on behalf of petitioner and listed petitioner as plaintiff. Mr. Zamorano never heard of, or had reason to believe that he was representing,...
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