Lerch v. Commissioner
| Decision Date | 15 June 1987 |
| Docket Number | 26729-85,26730-85,26731-85.,24683-84,Docket No. 28299-83 |
| Citation | 1987 TC Memo 295,53 TCM (CCH) 1101 |
| Parties | Ronald L. Lerch and Dalene Lerch, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Merwin D. Grant, for the petitioners. Reid M. Huey and Elsie Hall, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases, respondent determined deficiencies in and additions to petitioners' Federal income tax as follows:
By Amendment to Answer filed December 23, 1985, and pursuant to section 6214(a), respondent asserted increased deficiencies and additions to petitioners' Federal income tax as follows:
Increased Additions
Increased to Tax
Docket No. Petitioners Year Deficiency 6653(a)(1) 6653(b)
24683-84 Ronald and
Dalene Lerch 1977 $11,215.25 $5,608.12
1980 27,729.85 $1,386.84
By Amendment to Answer filed March 21, 1986, and pursuant to section 6214(a), respondent asserted an increased deficiency in petitioners' 1979 tax in the amount of $50,649.67. In addition, respondent asserted that a part of the underpayment of tax for such year was due to petitioners' fraud and, in lieu of the section 6653(a) addition, determined a section 6653(b) addition to tax in the amount of $35,049.49.
After concessions,4 the issues remaining for decision are:
(1) Whether petitioners understated their taxable income each year as determined by respondent;
(2) Whether petitioners are entitled to various deductions, exemptions, and tax credits in any amounts in excess of those allowed by respondent;
(3) Whether petitioners are liable for the addition to tax under section 6653(a) for the taxable year 1980 and whether petitioner Dalene A. Lerch is liable for additions to tax under sections 6653(a)(1) and (a)(2) for the taxable year 1981;
(4) Whether petitioner Ronald L. Lerch is liable for additions to tax under section 6653(b) for fraud for the taxable years 1977, 1978, 1979, and 1981; and
(5) Whether the assessment and collection of any tax and additions to tax is barred by the statute of limitations for the taxable years 1977 and 1978.
Petitioners Ronald L. Lerch (Mr. Lerch) and Dalene A. Lerch (Mrs. Lerch), husband and wife, resided in Fort Wayne, Indiana, at the time each petition was filed in each of these consolidated cases. Petitioners filed joint Federal income tax returns (Forms 1040) for the taxable years 1977, 1978, 1979, and 1980. For the taxable year 1981, Mr. and Mrs. Lerch filed individual Federal tax returns (Forms 1040) with each claiming the filing status of married filing separately.
Mr. and Mrs. Lerch were married in December of 1957. Mr. Lerch attended Indiana University and graduated with a bachelor's degree in 1958. He has a background in marketing and took two basic accounting courses in college. Petitioners have three children, a daughter and two sons. After graduating from high school, the children left home to attend college. The daughter began college in 1977 and the two sons began college in 1980 and 1981, respectively.
Petitioner Dalene A. Lerch's educational background includes a high school diploma and one year of college. During the years 1977, 1978, and 1980, she was employed by Glenway Bargain Center, Inc., and petitioners reported her wages from this employment on their joint Federal tax returns for those years.
During the years in issue, petitioners maintained a joint checking account at the Anthony Wayne Bank in Fort Wayne, Indiana.5 Mrs. Lerch occasionally made deposits to this account, but most deposits were made by Mr. Lerch. Mrs. Lerch received $150 a week from Mr. Lerch, usually on Mondays, to purchase groceries and other items she needed for the week. Occasionally, she needed more money to carry her through the week. When this occurred, she simply asked Mr. Lerch for more money. However, during the year 1979, Mrs. Lerch frequently overdrafted their joint checking account. In fact, she thinks she probably set a record for overdrafts in that year. Mr. Lerch made the necessary deposits to cover her overdrafts. Mrs. Lerch also had access to a Master Card from the Anthony Wayne Bank, on which Mr. Lerch made the monthly payments.
Mrs. Lerch made annual trips to Florida, usually in March, to pick up her grandmother and bring her back to northern Indiana. In addition, each October Mrs. Lerch usually took her grandmother to Pennsylvania to visit relatives. During 1979, Mrs. Lerch had access to and drove a new Oldsmobile Delta 88. In 1981, she had access to and drove a new Chrysler New Yorker. These cars were used for both personal and business purposes. Mrs. Lerch did not know how these cars were titled and was not involved with licensing or insuring either of these cars.
At all times pertinent to this case, Mr. Lerch was president of Power-Hose Couplings, Inc., (hereinafter referred to as Power-Hose).6 Power-Hose was a distributing and light manufacturing company, primarily dealing in electric motors, V drives, hydraulic fittings and hose assemblies, pulleys, sprockets, gears, bearings, power units, and conveyors. During the years in issue, Power-Hose employed between eight and twelve employees. As president, Mr. Lerch controlled the day-to-day operations of Power-Hose and approximately 35 to 40 percent of the company's sales were directly attributable to his efforts. Power-Hose filed 1979, 1980, and 1981 U.S. Corporation Federal Income Tax Returns (Forms 1120), with the Internal Revenue Service. These corporate returns wee signed by Mr. Lerch as president of Power-Hose.
During the years in issue, both Mr. and Mrs. Lerch were officers of Power-Hose. In addition, petitioners were shareholders of Power-Hose during the years 1978, 1979, 1980, and 1981, and also served as directors during those years.7 Except for serving as an officer and director during the years in issue and occasionally running errands for her husband, Mrs. Lerch had no other involvement with Power-Hose. She was never an employee of Power-Hose during any of the years in issue.
During the years 1977 through 1981, apart from his activity with Power-Hose, Mr. Lerch operated a business known as 20th Century Products, a manufacturer's representative for power transmissions, belts and pulleys, essentially the same kind of items sold by Power-Hose. Originally, 20th Century Products began as a partnership but no partnership returns were ever filed on its behalf. At least by 1979, Mr. Lerch was operating 20th Century Products as a sole proprietorship. At first, 20th Century Products' business location was the personal residence of Mr. Lerch's business associate. However, after the business associates split up, Mr. Lerch began conducting business for 20th Century Products from his office at Power-Hose. Petitioners reported a net profit of $1,947 from 20th Century Products on Schedule C of their joint 1980 Federal income tax return. Mr. Lerch reported a net profit of $11,845 from 20th Century Products on Schedule C of his individual 1981 Federal income tax return. Petitioners did not file a Schedule C for 20th Century Products for 1977, 1978, or 1979. Apparently, no employees worked for Mr. Lerch in connection with 20th Century Products.
Mr. Lerch incurred various automobile, travel and entertainment expenses in connection with his employment with Power-Hose. Power-Hose reimbursed Mr. Lerch for these and other expenses. Mr. Lerch simply wrote a memo to the accounting department listing his expenses for the month and a check was issued to cover the listed expenses. Mr. Lerch never provided any receipts to the accounting department for these expenses, because he did not want his employees to know the nature of his expenses.8 Mr. Lerch failed to produce any of these receipts at trial.
From 1979 through 1981, Power-Hose paid Mr. Lerch's expenses incurred on duck hunting trips when he was accompanied by customers. Power-Hose also paid for newspapers delivered to his residence and for magazine subscriptions that Mr. Lerch considered business related.9
During the years in issue, petitioners owned various rental properties. Petitioners originally managed these properties under the name R.L. Lerch and Sons but later changed the name to Fort Wayne Property Management. During 1979, Bonnie Brotherton, an employee of Power-Hose, maintained the checking account for Fort Wayne Property Management. She was not, however, separately compensated by petitioners for this service.10 During the years 1979, 1980, and 1981, all rents collected by Fort Wayne Property Management were derived exclusively from Power-Hose.
William Andorfer, a Certified Public Accountant since 1958, was at all times pertinent to this case employed by and was the treasurer of the accounting firm of Leonard J. Andorfer & Company, Inc., a professional corporation that employed approximately 12 accountants. Mr. Lerch and Mr. Andorfer had known each other since grade school and Mr. Andorfer had done a considerable amount of accounting and tax work for Mr. Lerch beginning in the early sixties. Mr. Andorfer prepared petitioners' Federal income tax returns for all the years in issue. He also prepared the corporate tax returns for Power-Hose, and occasionally prepared Federal tax returns for petitioners' children. Mr. Andorfer prepared Federal tax returns for Chris and Tracey Lerch, petitioners' sons, for the taxable...
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