Markman v. Commissioner
| Decision Date | 20 August 1987 |
| Docket Number | Docket No. 9506-79,20381-80. |
| Citation | 54 TCM(CCH) 154,1987 TC Memo 407 |
| Parties | Daniel A. Markman and Estate of Iris M. Markman, Daniel A. Markman, Administrator v. Commissioner. |
| Court | U.S. Tax Court |
Marvin Klamen and Henry S. Shaw, 7820 Maryland Ave., Clayton, Mo., for the petitioners. Henry Thomas Schafer, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in Federal individual income taxes and an addition to tax under section 6653(a)1 (negligence, etc.) against petitioners as follows:
Addition to Tax
Docket No. Year Deficiency Sec. 6653(a)
9506-79 1975 $94,136.432 None
20381-80 1976 37,510.00 $1,876.00
These two cases were consolidated for trial, briefs, and opinion. After concessions by both sides, the issues for decision3 are as follows:
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petitions were filed in the instant cases, petitioners5 resided in Illinois.
During 1975 and 1976, Daniel and Iris were parents of the following children: Wayne S. Markman (hereinafter sometimes referred to as "Wayne"), Linda B. Klien (hereinafter sometimes referred to as "Linda"), Ellis B. Markman (hereinafter sometimes referred to as "Ellis"), and Elyse A. Markman. Daniel, a dentist, was awarded a D.D.S. degree from St. Louis University in 1948. After graduation, Daniel worked with the United States Public Health Service until 1949. After leaving the Public Health Service, Daniel bought a dental practice in St. Louis. Daniel has been involved with his practice for at least 32 years.
Before graduation, Daniel had worked as a social worker. When Daniel bought the practice in 1949, St. Louis was changing. People were leaving the inner city. When Daniel bought the practice, the building in which his office was located held more than one hundred doctors, but they were moving out as fast as they could. Daniel's patients came from a low socioeconomic area. Daniel worked many hours each day. During late 1975 the building in which he worked had gone into decay. There were only three or four doctors in the whole building and Daniel's office was the only one open on its floor.
Before September 1975, Daniel's dental practice had no employees. In September 1975, Daniel employed Wayne to work in the practice. Wayne was graduated from the University of Missouri, Kansas City Dental School and was a practicing licensed dentist in Missouri. Wayne first received his license to practice dentistry in September 1975, about the time he began to work as Daniel's employee. Wayne's salary for 1975 was $7,200, and for 1976 was $38,342. Daniel hired dental assistants after Wayne started working for him. Daniel hired an additional dentist, Barry Liebman (hereinafter sometimes referred to as "Liebman"), about October or November 1975. Liebman left Daniel's employ in early 1976, having received $5,112.75 for 1976.
For some time until November 11, 1976, Daniel used the following procedure to record the receipts and maintain the accounts receivable of the dental practice:
When a patient came to Daniel for dental work, Daniel performed the work and then wrote on the back of one of his business cards the total charge for the service. When the patient made a payment, the amount of the payment was deducted from the amount shown on the back of the card. The patient kept the card in his or her possession. Daniel did not keep any record of what any of his patients owed him; the only such record was on the business card that was kept by the patient.
Many of Daniel's patients paid by cash; others paid by check. When money in the form of cash or check was received in Daniel's dental practice office, at a minimum, the date, the payor's name, and the amount of the remittance were recorded on a sheet of paper (hereinafter sometimes referred to as a "patient receipt record") kept in the office for that purpose. Daniel kept the patient receipt records in the ordinary course of his dental business.
Sometimes, Daniel lent money to patients. Repayments of these loans were recorded on the patient receipt records. At times, a patient paid on completion of the dental service, the amount was recorded in the patient receipt record, when the insurance carrier paid Daniel he issued a refund to the patient, but the insurance company's check also was recorded in the patient receipt record. Daniel experienced bad checks. Each bad check, even duplicates, was recorded on the patient receipt records. Daniel also cashed checks for patients or allowed them to write checks for more than the amount of his fee, the excess being remitted in cash. These checks were also recorded on the patient receipt records.
As cash and checks were received, a pool of funds was created out of which various disbursements were made. Some of the checks that Daniel received were endorsed over to third parties, such as dental suppliers and dental laboratories, in payment of amounts due to them. Cash was used to buy lunches, used to pay Daniel's employees, used to pay suppliers, or kept by Daniel. The balance of cash and checks remaining after these transactions would usually be deposited that night or at noon. These deposits were made to one of two bank accounts maintained at the Mercantile Commerce Trust Company (hereinafter sometimes collectively referred to as "the practice receipts account").6 In 1976, the total deposits to the practice receipts account from the dental practice were $105,935.28.
In 1976, Daniel regularly checked or reviewed the patient receipt records. If there appeared to be an error, then Daniel brought the error to the attention of the employee whose error it appeared to be. In 1976, Daniel made a nightly reconciliation between the cash and checks on hand at the end of the day and the total of the day's entries as reflected on the patient receipts records. Any difference between the two totals would usually be resolved through discussions between Daniel and the employees. Certified public accountants hired by Daniel in November 1976 (hereinafter sometimes referred to as "the CPAs") were unable to reconcile the receipts shown on the patient receipt records with the deposits made to the practice receipts account. Daniel determined how much he drew as "salary" based on how much cash was left after the dental practice's bills were paid.
For 1975, the patient receipt records were kept in a wire-bound notebook. For 1976, receipts for January and part of February were recorded in the same wire-bound notebook, and the remainder of the 1976 receipts through November 11 were recorded on looseleaf paper.
In November of 1976, on the recommendation of the CPAs, Daniel installed a "one-write" bookkeeping system to record receipts and disbursements. Under the "one-write" bookkeeping system, all of Daniel's dental practice receipts were deposited into the practice receipts account. The "one-write" records reflect accurately the dental practice receipts by Daniel in the amounts shown in table 1.
Table 1
Period Amount
11-12-76to 11-30-76 ........$11,888.60
12-01-76to 12-31-76 ........$19,483.35
In preparing their joint 1975 Federal individual income tax return, Daniel and Iris totaled the patient receipt records for 1975. Daniel and Iris elected cash basis reporting and reported the total from the patient receipt records for 1975 of $114,823.07 as gross receipts from the dental practice. Daniel's patient receipt records for 1975 show receipts in the amounts set forth in table 2.
Table 2
Month Amount Month Amount
January ...........$ 6,096.60 July..................$ 7,899.67
February ............ 10,080.25 August ...............8,942.30
March................ 8,306.32 September...............9,155.30
April................ 9,576.75 October .............. 15,066.72
May................. 8,080.85 November.............. 12,386.21
June................. 8,078.51 December..............11,153.59
Total................$114,823.07
Daniel and Iris claimed Ellis as a dependent on their 1975 tax return. In 1975, Ellis was 21 years old. Daniel and Iris paid their children's school tuition and much of their children's living expenses while the children were in school.
Beginning in the 1950's, respondent audited Daniel's and Iris' tax returns every few years. For 1972, 1973, and 1974, Daniel and Iris reported on their tax returns the amounts shown in table 3.
Tablec 3
Adjusted Gross Net Denial
Year Income Practice Income
1972 .......... $ 9,381 ($ 3,394)
1973 .......... 17,001 496
1974 .......... 26,202 10,138
The patient receipt records for 1972, 1973, and 1974 were maintained in a format similar to those for 1975. Table 4 shows the total receipts per the patient receipt records for each of these years.
Table 4
Year Total Receipts
1972 .......... $ 39,525.63
1973 .......... 52,039.87
1974 .......... 74,201.20
1975 .......... 114,823.07
In early 1975, respondent began to audit Daniel's and Iris' 1972 and 1973 tax returns. By March 24, 1976, the audit had been...
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