Mazzuca v. Commissioner
| Decision Date | 18 March 1991 |
| Docket Number | Docket No. 31874-87. |
| Citation | 61 T.C.M. 2167 |
| Parties | Genaro L. Mazzuca and Tammy S. Delaney, F.K.A. Tammy S. Mazzuca v. Commissioner. |
| Court | U.S. Tax Court |
Edward R. Joyce, 317 N. 11th St., St. Louis, Mo., for the petitioner. James A. Kutten, for the respondent.
Memorandum Findings of Fact and Opinion
In separate notices of deficiency dated June 19, 1987, respondent determined a deficiency of $4,087 in each of petitioner's Federal income tax for 1980. Respondent also determined that an addition to tax of $3,901 under section 6653(b)1 was due from petitioner Genaro L. Mazzuca.2 After concessions the issues remaining for decision are: (1) Whether petitioners failed to report income earned through participation in a pyramid investment scheme; (2) whether petitioners are entitled to deductions for certain payments allegedly made to other participants in the pyramid scheme who did not recover their investments; (3) whether petitioner, Tammy S Delaney, qualifies for relief as an innocent spouse within the meaning of section 6013(e); (4) whether petitioner, Genaro L. Mazzuca, is liable for the addition to tax pursuant to section 6653(b); and (5) whether an assessment for 1980 is barred by the statute of limitations.
Some of the facts have been stipulated and are so found, the stipulation of facts and exhibits associated therewith being incorporated herein by reference. At the time their petition was filed, petitioners were residents of Missouri. Petitioners who were man and wife during 1980 filed a joint Federal income tax return for 1980 on June 22, 1981. They were subsequently divorced. On their 1980 return petitioners reported the receipt of gross income as follows:
Wages ......................... $44,720
State Income Tax Refund ....... 69
Unemployment Compensation ..... 721
Business Men's Venture ........ 500
_______
$46,010
During 1980 petitioner, Genaro L. Mazzuca, who is hereinafter referred to as petitioner in the singular, was part owner of an automobile dealership. He also participated in a pyramid investment program known as Business Men's Venture (BMV) with the objective of making a profit. The activities of BMV during 1980 have been involved in other litigation. See Short v. Commissioner [Dec. 46,735(M)], T.C. Memo. 1990-370; Cima v. Commissioner [Dec. 43,965(M)], T.C. Memo. 1987-284. Its operation was described in its own literature as follows:
Business Men's Venture is a private investment club which offers each member the exact same opportunity to earn a maximum of $64,000. Here's how it works: Each person pays $1,000 to join the club: a $500 membership fee and a $500 sponsor fee. This new club member then sponsors two other persons to join the club and receives a $500 sponsor fee from each of these persons, thus the new member receives back his/her original investment of $1,000. The membership fees of $500 for each of the two other persons are paid by cashier check to a member exactly seven levels above the point at which a new member joins. Each member's name is maintained by a club secretary on a seven level chart. As the membership continues to grow, each member's name will reach the seventh level. At this level, 128 new members will pay their membership fee for $500 ($64,000 Total) to the member. All membership fees are personally collected and distributed by the club secretary. The club secretary is paid $500 by each member at the time the member receives the first of the 128 membership fees.
The club does not promise or guarantee [its] members any considerations for joining the club. Each person pays the same fees and has the same opportunity to earn $64,000, regardless of their position on the chart. The purpose of joining the club is simply to be a member. The opportunity to receive $64,000 is dependent on the members ability to promote memberships and the growth which results.
At trial 45 cashier's checks each in the amount of $500 were admitted into evidence and the parties stipulated that 27 of them (hereinafter referred to as the stipulated checks) constitute income received by petitioner in 1980 from his participation in BMV. Respondent concedes that one of the other 18 checks does not constitute income to petitioner. The remaining 17 cashiers checks are still in dispute. They are hereinafter sometimes referred to as the disputed checks.
The 17 disputed checks fall into four groups. The first group consists of three checks which were cashed at Southwest Bank by petitioner on March 4, 1980, along with 16 of the stipulated checks. The bank's records contain the following information regarding these 19 checks:
Petitioner admits that from the proceeds of BMV checks he purchased from Southwest Bank on March 4, 1980, two cashier's checks each in the amount of $4,500.
The second group of disputed checks consists of two checks which were admittedly deposited into petitioners' personal checking account.
The third group of disputed checks consists of three checks on which petitioner is the last endorser and which were deposited in the bank account of his automobile dealership.
The fourth group of disputed checks consists of nine checks which petitioner cashed and used the proceeds therefrom to make loans to other individuals who wished to invest in BMV but who were unable to purchase cashier's checks for themselves. At some time thereafter these individuals repaid petitioner.
Petitioner made little if any attempt to keep records of his BMV participation because he was told by BMV that at the end of the year each participant would receive a Form 1099 and that all members as well as the Internal Revenue Service would have access to the records of BMV. Petitioner claims that the records he had were destroyed in a flood which occurred at the home of his ex-wife in December of 1982. Rule 6 of the BMV Club Rules stated:
All income resulting from membership in the club is taxable income and should be reported as "other income" by each individual member. Since the club itself has no income nor expenses it does not report. However, the club does maintain duplicate records of all transactions and can compute the income of each member.
During 1980 petitioner made payments to three individuals who invested in BMV at his request and with the understanding that he would reimburse them for any losses. He made these payments in order to reimburse the individuals for the amounts they lost in the scheme. Specifically, he paid $500 to Terry P. Zinser and $1,000 each to Eugene R. O'Donnell and Earnestine Bruns.
Petitioner and Tammy S. Delaney were married in December of 1979. During 1980 she was not aware of his participation in BMV. She also had no knowledge of his participation in the automobile dealership. Petitioner never discussed BMV or the dealership with her or told her that he had invested in BMV. She was aware of BMV's existence in 1980 but did not know that petitioner, other members of his family, or even that her own stepfather were participants in the scheme. Neither petitioner nor the accountant who prepared the joint income tax return for petitioners for 1980 discussed its contents with her. Petitioner merely indicated the place on the return where she should sign.
Opinion(1) Unreported Income
We agree with respondent that the 17 disputed checks constitute taxable income to petitioners for the reasons set forth and discussed below with respect to each of the four groups. The first group, consisting of three BMV checks, were used by petitioner together with 16 other BMV checks, according to respondent, to purchase two cashier's checks from Southwest Bank....
To continue reading
Request your trial