Kohout v. Comm'r of Internal Revenue
| Decision Date | 18 April 2022 |
| Docket Number | 11958-17 |
| Parties | TODD KOHOUT AND LISA M. KOHOUT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Allen Buckley, for petitioners.
Daniel K. McClendon, John T. Arthur, and Christopher D. Bradley, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
During the 2013 taxable year, petitioners, Todd and Lisa Kohout were engaged in medical funding and real estate business ventures through Mr. Kohout's wholly owned S corporation Cornerstone Enterprises, Inc. (Cornerstone). The Internal Revenue Service (IRS) mailed the Kohouts a statutory notice of deficiency that determined a deficiency of $923, 280 and an accuracy-related penalty, under section 6662(a), of $184 676 for the 2013 taxable year.[1] The Kohouts timely filed a Petition seeking review of the deficiency. The parties reached a resolution of all substantive tax issues raised by the Kohouts' Petition, as reflected in two Stipulations of Settled Issues. On January 30, 2020, the Kohouts filed an Amendment to Petition, alleging that they overstated the gross receipts of Cornerstone for the 2013 taxable year by $955, 599.[2] The Kohouts also alleged that Cornerstone and Mr. Kohout had sufficient bases in Preferred Medical Funding, LLC (PMF), to deduct pro rata shares of PMF's loss for the 2013 taxable year. For the reasons detailed below, we resolve these issues in respondent's favor.
On November 18, 2020, this case was tried at our Atlanta Georgia, remote trial session (via Zoomgov). Some of the facts are stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. The Kohouts resided in Georgia when they timely filed the Petition.[3]
I. Cornerstone
On August 18, 2004, Mr. Kohout organized Cornerstone, an S corporation during all relevant times, and made himself its sole shareholder.
During the taxable year 2013, Cornerstone operated multiple business ventures directly and indirectly through its subsidiaries.[4]Ariel Dunes, TK Real Estate, 8 Property, and 4 Property were single-member limited liability companies (LLCs), wholly owned by Cornerstone and disregarded for tax purposes. Cornerstone also wholly owned Preferred Capital through its wholly owned subsidiary, 4 Property. During the 2013 taxable year, Preferred Capital was a single-member LLC and was disregarded for tax purposes. Cornerstone was thus required to report the income from these entities on its return. Cornerstone was also required to report the income from its interest in real property on its 2013 return.[5]
In 2012 Cornerstone and Mr. Kohout formed PMF, with Cornerstone and Mr. Kohout owning a 99% and a 1% interest, respectively. PMF was subject to the unified audit and litigation procedures of sections 6221-6234, enacted as part of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, 96 Stat. 324. PMF provided medical funding for plaintiffs in personal injury lawsuits. During the year at issue, PMF owned bank accounts ending in 4479 and 0130. PMF made distributions of $345, 003 to Cornerstone in 2013.
In 2013 Cornerstone owned a 50% interest in Turnkey Investments, LLC (Turnkey), a TEFRA partnership. On a document Mr. Kohout exchanged with respondent during discovery, he represented that Cornerstone also owned an entity named Southern Residential.
Cornerstone was engaged in medical funding and commercial real estate operations during the year at issue. Cornerstone rented properties through Vacation Rentals by Owner (VRBO). Mr. Kohout stated that Cornerstone had an agreement with VRBO, but it is not in the record.
Cornerstone's subsidiary, TK Real Estate, owned property that it rented out. But its rental agreements are also not in the record. Southern Residential purchased properties, collected rents, and managed bank accounts in Atlanta. The record is devoid of any evidence that reflects what income, if any, Cornerstone received from Southern Residential. Similarly, the record does not contain any written agreements regarding medical funding business activities, despite Mr. Kohout's admitting their existence.
The accounting records of Cornerstone and its subsidiaries for the 2013 taxable year were kept with QuickBooks software on Mr. Kohout's personal computer. He handled the day-to-day data entry into the QuickBooks computer files for these entities, including for PMF, with input and advice from Bryan Prewitt. Before the year at issue, Mr. Prewitt worked at PricewaterhouseCoopers and held a license as a certified public accountant (CPA).
Mr. Kohout altered the QuickBooks computer files on multiple occasions after Cornerstone's 2013 returns were prepared. At least one of the instances of him altering the QuickBooks computer files was during an audit of Cornerstone. When the Kohouts' computer crashed in January 2020, the QuickBooks computer files for Cornerstone and its subsidiaries were destroyed and the Kohouts were unable to recover them. The QuickBooks computer files are not in the record.
Cornerstone made and received various money transfers to and from its subsidiaries, which are at issue in this case. The Kohouts argue that all transfers to and from the accounts ending in 1337 (Cornerstone), 1386 (TKR), and 0130 (PMF), and any capital contributions from Mr. Kohout, should be eliminated for purposes of calculating taxable income.
At issue are transactions from Cornerstone's account ending in 1337 to accounts ending in 9496, 1352, 0180, 2795, 1626, 4602, 4081, and one titled "Alexandria Savings." There is no evidence in the record of who owned these accounts. For example, Cornerstone's bank records reflect that it transferred money to a checking account ending in 0180 on March 7, 2013, July 5, 2013, and August 20, 2013. The description entry for July 5, 2013, is "transfer to [redacted]-0180 per T Kohout." There is no evidence in the record as to who owned the account ending in 0180 at the time of the transfers. Furthermore, on March 27, 2013, Cornerstone transferred money to an account ending in 2795, but the Kohouts did not present any evidence regarding who owns that account.
Also at issue is a single transfer from Cornerstone to PMF. On December 9, 2013, Mr. Kohout transferred $172, 626 from his personal money market account ending in 1252 to Cornerstone's account ending in 1337. On the same day, Cornerstone transferred the exact same amount to PMF's account ending in 0130. PMF then transferred $172, 626 to David Mimms on the same day. Also at issue is a transfer reflected in PMF's bank statements for $2, 015 on March 11, 2013, with the description of "Miscellaneous Credit Check #99999 Transfer per T. Kohout."
There are numerous payments from PMF's account 0130 labeled "withdrawal" to the credit card company American Express (AMEX). For example, on September 12, 2013, there was a $55, 830 withdrawal from PMF's account with the description, "AMEX EPayment ACH PMT." On December 5, 2013, there was a $21, 553 withdrawal from PMF's account with the same description. The Kohouts did not produce records of these accounts or explain what these payments were for.
Cornerstone timely filed its Form 1120S, U.S. Income Tax Return for an S Corporation, for the 2013 taxable year. On this return, Cornerstone reported gross receipts of $1, 829, 524. Cornerstone was a cash method taxpayer.
The record is unclear as to who prepared Cornerstone's 2013 tax return. Initially, the parties stipulated that Mr. Kohout prepared it. Cornerstone's 2013 return indicates that it was "self-prepared." The parties then stipulated that Mr. Kohout prepared Cornerstone's return and the Kohouts' personal return, with the assistance of Mr. Prewitt. At trial Mr. Kohout represented that Mr. Prewitt alone prepared the returns. He also represented that he had provided Mr. Prewitt with Cornerstone's profit and loss statement but did not provide him with the electronic QuickBooks files.
Regardless, Mr. Kohout signed Cornerstone's return and the Kohouts' personal return for the 2013 taxable year. He was unaware of how Cornerstone's gross receipts were calculated as reported on its 2013 tax return. He likewise was unaware whether a basis calculation was prepared for PMF. Nonetheless, Mr. Kohout believed that Cornerstone's income was overstated when he signed and filed Cornerstone's and their personal returns.
The IRS issued a statutory notice of deficiency to the Kohouts on February 27, 2017, determining that they had a deficiency of $923, 380 and an accuracy-related penalty under section 6662(a) of $184, 676 for the 2013 taxable year. The Kohouts timely filed their Petition on May 30, 2017.
In August 2019 the Kohouts hired Mr. William Fricke, a CPA with extensive experience, to reconstruct Cornerstone's books and records.[6] As part of his services, Mr. Fricke prepared summaries of bank statements in Exhibits 66-P, 67-P, 68-P, and 69-P. Mr. Fricke characterized certain deposits as gross receipts, rental income, and loan proceeds, yet these characterizations were based on Mr. Kohout's instructions to Mr. Fricke. Mr. Fricke did not have access to the electronic QuickBooks files.
The parties filed two Stipulations of Settled Issues resolving all of the issues in the case. On January 30, 2020, the Kohouts amended their Petition and alleged that Cornerstone overstated its gross receipts by $955, 599 for the 2013 taxable year. The Kohouts also claimed that Cornerstone and Mr. Kohout had sufficient bases in PMF to respectively deduct pro rata shares of a PMF...
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