LiButti v. Commissioner
| Decision Date | 26 June 1985 |
| Docket Number | 547-79.,6289-77,Docket No. 5977-75 |
| Parties | Robert LiButti a/k/a Robert Presti and Joan LiButti a/k/a Joan Presti v. Commissioner. |
| Court | U.S. Tax Court |
Steven P. Marshall and Jack Arsenault, for the petitioners. Daniel O'Brien and Matthew Magnone and William Garofolo, for the respondent.
Memorandum Findings of Fact and Opinion
This case was assigned to and heard by Special Trial Judge Peter J. Panuthos pursuant to the provisions of section 7456(c),1 and General Order No. 8 of this Court, 81 T. C. XXIII (1983). After review of the record, we agree with and adopt his opinion which is set forth below.
PANUTHOS, Special Trial Judge:
Respondent determined deficiencies in petitioners' Federal income tax and additions to tax for the taxable years 1968 through 1971 as follows:
Additions to Tax
Year Deficiency Sec. 6653(b)
1968...... $ 4,053.81 $ 2,026.91
1969...... 1,637.85 818.93
1970...... 201,120.18 100,360.09
19712 .... 459,893.01 229,946.51
The issues remaining for decision are as follows:
(1) Whether petitioners failed to report income earned from the sale of, and activities involving racing of, thoroughbred horses during the years 1968 and 1971;
(2) whether petitioners are entitled to claimed business expense deductions in excess of those allowed by respondent;
(3) whether petitioners are entitled to a claimed theft and bad debt loss in 1971;
(4) whether each of the petitioners is liable for the additions to tax for fraud under section 6653(b);
(5) whether the statute of limitations has expired with respect to the taxable years 1968, 1969 and 1970;
(6) whether petitioner Joan LiButti was an innocent spouse within the meaning of section 6013(e) with respect to the taxable year 1971; and
(7) whether the statute of limitations has expired for the taxable years 1968, 1969 or 1970.
Some of the facts have been stipulated and are incorporated herein by this reference. Petitioners, Robert and Joan LiButti, are husband and wife (hereinafter Robert LiButti will be referred to as petitioner). Petitioner was born Rafaele Robert LiButti. His formal education terminated in the ninth grade. Petitioner worked as a truck driver during 1968 and was employed by Buckeye Leasing, a division of Bethlehem Steel.
In addition to his job as a truck driver, petitioner also worked for his uncle, Nicholas Spadea (hereinafter Spadea). Spadea has been involved in various aspects of the horse business since the end of World War II. Spadea had a racing license in New York State where he raced under the name of Goldtree Stables. During 1968 Spadea was in declining health and petitioner increasingly managed the affairs of Spadea's business. Petitioner, having had Spadea's power of attorney since 1957, signed Spadea's name as agent of his uncle.
In 1968 and 1969 petitioner began getting involved in the horse business for his own benefit. He bought and sold horses for himself using either the name Spadea or Presti. In 1969 petitioner began using the name Presti for business. Petitioner adopted the name because, in his opinion, it sounded less Italian and projected the kind of image he was seeking, and because he had an outstanding judgment against him which he did not wish to be discovered by his prospective landlord during a credit check. Petitioner continued to do business under the name Presti in 1970 and 1971.
In 1970 petitioner became fully involved in the thoroughbred horse business. His business involved buying and selling horses, as well as acting as an agent or broker for others who wished to buy or sell horses. The parties agree that petitioners were accrual basis taxpayers with respect to the activities related to the horse business for all the years in issue.
In 1970 and 1971 petitioner enjoyed an improved standard of living. He moved from New Jersey and lived in various homes on Long Island. Petitioner entertained lavishly; he frequently held parties at the Villa Pierre restaurant to which he invited people for whom he hoped to act as an agent. The people whom petitioner entertained at parties were interested in buying or selling horses.
In 1970 petitioner bought his most successful horse, Jim French. Over the course of 1970 and 1971, petitioner sold various interests in Jim French, and he later purchased those interests back. Finally in 1971 petitioner again owned the majority interest in the horse. Petitioner sold Jim French in the fall. In October and November of 1971 various articles appeared in newspapers and sports magazines containing negative publicity about the sale and petitioner's involvement in it.
Petitioner's income tax returns for the years 1968 through 1971 were prepared by his cousin John Manzi (hereinafter Manzi), a licensed public accountant in New Jersey. As a basis for preparing the returns from 1968 to 1971 Manzi used petitioner's W-2 forms which were given to him by petitioner's mother. Manzi did not discuss the return preparation with petitioner nor did he sign the forms as preparer. For the years 1968, 1969, and 1970 the returns indicated petitioner's address as 687 Third Street, Seacaucus, New Jersey, which was the home of petitioner's parents.
Manzi also prepared petitioner's 1971 return but petitioner participated more actively in the preparation of this return. Petitioner and Manzi met between fifteen and twenty times (at petitioner's home at 1 Ripley Lane, Muttontown, New York) during 1971 and 1972 to work on the return. On the return, however, petitioner's address was listed as 271 Elsmere Place, Fort Lee, New Jersey; the home of petitioner's aunt and uncle. To prepare the 1971 return Manzi used papers supplied by petitioner and a business associate's accountant, including sales tax receipts, bills, checks, contracts, and work papers. If Manzi did not have any documentation of cash purchases or disbursements he did not include them on the return. In September of 1971 petitioner made an estimated tax payment for 1971 in the amount of $50,000.
In 1972 Manzi prepared an amended return for 1971 for petitioner. Manzi prepared this return as a result of notification by the Internal Revenue Service that petitioner was under investigation.
Since this is primarily a factual case which requires lengthy analyses of various transactions, we will incorporate our findings of fact and opinion separately for each of the years involved3
Income: Factual Background. During the year petitioner and his family lived at 689 Dorchester Lane, New Milford, New Jersey. Petitioner adopted the name Nicholas Spadea to transact certain purchases and sales of horses. Using the name Spadea, petitioner purchased Sweet Music from Fasig-Tipton Company in February of 1968 for $4,000 and sold it through the same company in May of 1968 for $5,500. In addition, using the name Spadea petitioner also purchased three other horses from Fasig-Tipton Company in 1968. Those horses were Round Table Pet, Taste of It, and Stake Queen. The Fasig-Tipton Company ultimately received promissory notes in an aggregate amount of $14,017.50 from petitioner who used the name Nick Spadea.
In addition petitioner used the name Spadea to purchase jewelry at a jewelry store owned in part by Jerry Marsh (hereinafter Marsh). Petitioner purchased the jewelry with checks drawn on the account of Nicholas and Joanne Spadea, Dorchester Lane, New Milford, New Jersey. The total of the checks was $6,800. Petitioner asked Marsh to hold the checks for three weeks until petitioner could redeem them for cash. After the three week period passed, Marsh deposited the checks and they eventually were returned unpaid. Petitioner ultimately made restitution to Marsh in 1971 in the amount of $5,200.
Petitioner in 1968 also used the name Nicholas Spadea to purchase two horses from Lillian Morrissey (hereinafter Morrissey). The two horses, Purple Velvet and Anchored, cost $12,000 each and were paid for with 24 postdated $1,000 checks. As the first six checks became due, a woman purporting to be Mrs. Spadea came to Morrissey's house and gave her $1,000 in cash. Morrissey received $6,000 in this fashion. Thereafter Morrissey deposited into her bank account the checks she had in her possession. The checks were returned with "account closed" stamped on them. Morrissey's attorney then filed an action to collect the balance due Morrissey on the sale of the two horses. She was awarded a judgment. Nevertheless, she never collected on the judgment. At trial Morrissey identified petitioner as Nicholas Spadea. Subsequently, in 1971, Morrissey again sued petitioner on the unpaid checks. This suit was settled by payment of $2,250 from petitioner to Morrissey.
In mid-August of 1968 petitioner, again using the name Spadea, encouraged Edward Draves (hereinafter Draves), a tavern owner, to hand over to petitioner two personal checks in the respective amounts of $10,000 and $13,000. The checks were payable to Nicholas Spadea. Petitioner promised that the checks would be used to help buy horses for him and Draves. He also promised that the checks would not be cashed but used merely to inspire confidence in potential horse sellers that the two men could afford to purchase horses. At the time Draves gave petitioner the checks there were insufficient funds in Draves' checking account to cover the checks. Eventually these checks were cashed. Draves reached a settlement with the bank on which the checks were drawn; he agreed to pay $8,000 to the bank. Draves never received any reimbursement from petitioner or any interest in any horses.
Analysis. Respondent asserts that for the year 1968 petitioner sold the following horses and failed to report on his income tax return the gain on the sales:
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