MJ LAPUTKA AND SONS, INC. v. Commissioner
| Decision Date | 28 December 1981 |
| Docket Number | Docket No. 8093-72,4050-73. |
| Citation | 1981 TC Memo 730,43 TCM (CCH) 177 |
| Parties | M.J. Laputka and Sons, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
John F. Kennedy and Theodore R. Laputka, 605 Citizen Bank Bldg., Hazelton, Pa., for the petitioner. Richard N. Weinstein and Crombie J.D. Garrett, for the respondent.
Memorandum Findings of Fact and Opinion
These cases were tried before former Special Trial Judge Murray H. Falk pursuant to Rule 180, Tax Court Rules of Practice and Procedure. His report was filed with the Clerk of the Court on June 26, 1981, and was served on the parties. Petitioners filed no exceptions to the report, but respondent did file exceptions on August 10, 1981 and the cases were reassigned, pursuant to Rule 182(d) on September 22, 1981.
In particular, respondent has objected to the finding and conclusion of the Special Trial Judge that the petitioner's failure to report income for the taxable year 1966 was without an intent to evade tax and, therefore, was not fraudulent within the meaning of section 6653(b), Internal Revenue Code of 1954. After careful consideration of respondent's exceptions and the evidence presented, the Special Trial Judge's report is adopted, as set forth below, without modification with respect to the addition to tax under section 6653(b) for 1966 because fraud for that year has not been proved by clear and convincing evidence.
FALK, Special Trial Judge:
Respondent determined the following deficiencies and additions to tax in respect of petitioner's Federal income taxes for the taxable years specified:
Taxable Addition to Tax Under
Docket Year Deficiency Sec. 6653(b)1 Sec. 6653(a)
8093-72 1962 ............... $49,286.36 $24,643.18
1963 ............... 62,547.25 31,273.63
1964 ............... 54,501.95 27,250.98
4050-73 1965 ............... 61,773.00 30,886.50
1966 ............... 36,997.14 18,498.57
1967 ............... 6,411.50 3,205.75
1968 ............... 17,024.15 8,512.08
1969 ............... 1,988.66 .......... $99.43
These cases were consolidated for trial, briefing and opinion. The issues presented for decision are: (1) The amount, if any, by which petitioner failed to report its income for each of the years in question; (2) whether (and, if so, to what extent) petitioner is entitled to certain deductions in excess of the amounts allowed by respondent for each of the years in issue; (3) whether petitioner is liable for the 50 percent addition to tax for fraud under section 6653(b) for each of the years 1962 through 1968, inclusive; (4) whether petitioner is liable for the 5 percent addition to tax for negligence or intentional disregard of rules and regulations under section 6653(a) for 1969; and (5) whether petitioner filed a false or fraudulent return with intent to evade tax for each of the taxable years 1962 through 1966, inclusive, with the result that the statute of limitation does not bar the assessment of a deficiency for each of those years.
Many of the facts have been stipulated. They and the exhibits referred to therein are incorporated herein by this reference.
At the time its petitions herein were filed, petitioner's principal place of business was located in Hazelton, Pennsylvania.
Petitioner is a corporation organized under the laws of Pennsylvania. Its taxable year is the calendar year. It filed its federal corporation income tax returns for the years in issue with the District Director of Internal Revenue, Philadelphia, Pennsylvania, on the dates set forth in the following table:
Year Date filed
1962 ........... 3/18/632
1963 ........... 3/18/642
1964 ........... 3/18/652
1965 ........... 10/14/66
1966 ........... 6/28/673
1967 ........... 6/14/68
1968 ........... 6/11/69
1969 ........... 4/13/70
Petitioner and respondent executed written agreements pursuant to the provisions of section 6501(c)(4) effectively to extend the periods of limitation upon assessments of the taxes due for the years 1965 and 1966 to December 31, 1970, and for the years 1967, 1968, and 1969 to June 30, 1973. A notice of deficiencies for the years 1962, 1963, and 1964 was mailed on September 14, 1972, and for the taxable years 1965 through 1969, inclusive, on March 27, 1973. Assessment of a deficiency for each of the years 1962 through 1966, inclusive, is barred by the statute of limitations unless petitioner's return for such year was false or fraudulent with the intent to evade tax. (See sec. 6501(c)(1).)
Michael Laputka (hereinafter referred to as Michael) began an insurance brokerage business in about 1930 as a sole proprietor. His son George Laputka (hereinafter referred to as George) joined the business in 1931 and from 1933 until its incorporation in 1950 the agency was operated as a partnership between Michael and George under the name "M.J. Laputka and Son." Theodore Laputka (hereinafter referred to as Ted), another of Michael's sons, started to work for the agency in the 1930s. Upon the formation of petitioner in 1950, 1,000 shares of its capital stock were issued; 395 to Michael, 395 to George, 100 to Ted, and 110 to T.R. Laputka Trust (which shares were to be voted by Michael). From 1950 until Michael's death in 1964, Michael was president of the corporation, Ted was vice-president, and George was its seceretary and treasurer.
In November of 1954, Michael, George, and Ted executed an agreement whereby Michael agreed to sell most of his shares of petitioner's capital stock to George and Ted in consideration of certain monthly payments to be made by them. The written agreement recited that Michael would retain 10 shares for his lifetime. Voting power was to be vested equally between George and Ted. The agreement also recited that Michael would be entitled, during his lifetime, to 40 percent of the renewal commissions with respect to insurance previously written by him for Lackawanna Casualty Insurance Company and Old Republic Insurance Company (hereinafter referred to as Lackawanna and Old Republic, respectively).
In 1960, petitioner's stock book was changed to reflect a stock ownership of 600 shares by George and his wife and 400 shares by Ted and his wife, the latter subject to a voting trust in respect of 110 shares to be voted by Michael.
Notwithstanding the agreement and modifications, Michael continued to dominate the operations of petitioner's business until about 1962. He often intermingled petitioner's funds with funds in his personal bank accounts, depositing or redepositing money into petitioner's account when and as needed. No formal directors' meetings were held. Routine matters were handled by George and Michael and important decisions were made upon consultation with Ted. Michael and George depended for their livelihoods upon the income they derived from the business of petitioner, whereas Ted was also engaged in an active law practice. In about 1962, Michael went into semi-retirement. George began to conduct the day-to-day operations of petitioner's business, although Michael still played a prominent role in making decisions regarding the business. Michael died in November, 1964, whereupon George became petitioner's president and chief operating officer and Ted became its treasurer.
In spite of the November, 1954, agreement that Michael would be entitled to 40 percent of the Lackawanna and Old Republic renewal commissions during his lifetime, Lackawanna, with petitioner's concurrence, continued to make its checks payable to "M.J. Laputka" for the full amount of renewal commissions due from it. Those checks were negotiated by Michael or for his benefit during the years in question until his death in 1964. Old Republic's checks for the full amount of its renewal commissions were made payable to petitioner or to "M.J. Laputka & Sons Insurance" and were cashed by Michael or for his benefit during that same period. After Michael's death, the proceeds of most of the Lackawanna and Old Republic renewal commission checks (still being made payable as described above) were given by George or Ted to Michael's widow. The amounts thus paid by Lackawanna and Old Republic during the calendar years 1962 through 1967, inclusive, were as follows:
Year Lackawanna Old Republic
1962 ............ $5,192.11 $1,246.12
1963 ............ 5,701.57 924.25
1964 ............ 4,777.23 631.64
1965 ............ 5,248.21 701.36
1966 ............ 5,143.33 720.36
1967 ............ 1,239.73 123.07
Those payments were not recorded on petitioner's books of account and were not reported on its federal income tax returns. Under the 1954 agreement and modifications made to it, the right to receive these renewal commissions never became an asset of petitioner.
George had graduated from high school and attended several institutes and seminars on insurance and bonding. Otherwise, he received no formal higher education. Ted graduated from the Boston University school of business administration in 1941 and the Dickinson school of law in 1948. Ted's law practice consumed the majority of his time. He started his law practice at a desk in petitioner's office and, later, when he formed a law firm with several other attorneys, his law office was adjacent to petitioner's office and they shared common entrances. Ted served as legal counsel for petitioner and for petitioner's largest group of accounts, the Correale companies.4 Ted's major contribution to the insurance agency was to bring in new accounts. However, inasmuch as he was physically...
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