Montgomery v. Commissioner
| Decision Date | 18 June 1997 |
| Docket Number | Docket No. 20005-93. |
| Citation | 73 T.C.M. 3095 |
| Parties | Don C. and Judy Montgomery v. Commissioner. |
| Court | U.S. Tax Court |
Don C. Montgomery and Judy Montgomery, pro sese. Cathleen A. Jones, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies in, additions to, and penalty on, petitioners' income tax for the years in issue:
Additions to Tax
---------------------------
Year Deficiency Sec. 6653(a)(1) Sec. 6661 Penalty Sec. 6662
1988 ............................ $23,921 $1,196 $5,980 --
1989 ............................ 10,097 -- -- $1,761
1990 ............................ 615 -- -- --
Unless stated otherwise, all section references are to the Internal Revenue Code as in effect for the years in issue.
After concessions, the issues remaining for decision are: (1) Whether petitioners realized unreported income from their activities in connection with their son-in-law's wholly owned corporation; (2) whether petitioners are liable for the addition to tax for negligence prescribed by section 6653(a)(1) with respect to their 1988 return; (3) whether petitioners are liable for the addition to tax for substantial understatement of liability prescribed by section 6661 with respect to their 1988 return; and (4) whether petitioners are liable for the accuracy-related penalty prescribed by section 6662 with respect to their 1989 return.
Some of the facts have been stipulated and are so found. The stipulation of facts, supplemental stipulation of facts, and exhibits attached to each are incorporated herein by this reference. Petitioners are husband and wife who filed a joint Federal income tax return for each of the years in issue. At the time they filed their joint petition in this case, petitioners resided in Oklahoma City, Oklahoma. All references to petitioner in this opinion are to Mr. Don C. Montgomery.
In 1980, petitioners' son-in-law, Mr. Tom Petty, was engaged in the fuel transportation business. Mr. Petty owned a tractor-trailer suitable for hauling fuel which he leased to an organization in Houston, Texas, referred to as Petroleum Wholesale. In 1982, Mr. Petty and petitioner decided to enter the fuel transportation business together. They formed a company called "Pet-Don" to facilitate that activity. Pet-Don's original capital consisted of one tractor-trailer which was contributed by petitioner. When Mr. Petty terminated his lease agreement with Petroleum Wholesale, he also contributed his tractor-trailer to Pet-Don.
In March 1988, Mr. Petty purchased all of the outstanding capital stock of a going concern called H&B Transport, Inc. (H&B). H&B's primary business activity consisted of transporting fuel for unrelated parties. Mr. Petty hired a former employee of H&B to manage the company's operations in Oklahoma City. Ill feelings soon developed between Mr. Petty and H&B's previous owner, who Mr. Petty felt had failed to honor an agreement to hire H&B to transport freight. Mr. Petty also grew distrustful of H&B's manager, who he felt was closely associated with the previous owner. Because of this, Mr. Petty asked petitioner to oversee the disbursement of H&B's funds. Petitioner agreed, and in April 1988 he began to perform administrative and supervisory services for H&B, including writing and signing checks drawn on H&B's bank accounts. Petitioner never formally received a salary or other compensation for the services he provided to H&B.
H&B's primary checking account was with the First Interstate Bank of Oklahoma (First Interstate). Both petitioner and Mr. Petty were authorized to sign checks drawn on this account. There was a second checking account in H&B's name at Community Bank. Petitioner was the only person authorized to withdraw funds from this account. Petitioner Judy Montgomery was an officer of Community Bank during the years in issue.
Petitioner's former sister-in-law, Ms. Ann MacKall, also performed services for H&B during the years in issue. Ms. MacKall worked in H&B's office performing basic bookkeeping and administrative functions. Ms. MacKall never formally received a salary or other compensation for her services to H&B.
H&B's bookkeeping system involved the use of a "pegboard ledger", a sheet of checks held in place over a permanent ledger by means of pegs along the left side of a board. Information written on a check was transferred to the ledger by means of carbon paper attached to the back of the check. The ledger contained a column in which to enter deposits, a column in which to enter the current balance in the account, and a column in which Ms. MacKall or petitioner would sometimes enter comments about the purposes for which checks were issued.
During the period in issue, the dollar amounts of checks drawn on the First Interstate account are often greater than the current balance shown in the ledger. In addition, there is no current balance shown for some periods. Thus, checks would often be drawn despite an apparent balance of zero in the account, only to have a sufficient balance entered later without explanation. Approximately once every month, Mr. Petty or his mother, Ms. Melba Petty, would travel to Oklahoma City to collect the bank statements and canceled checks.
H&B's drivers sometimes obtained fuel for their tractors from a tank located on the site where the tractors were parked. On other occasions, the drivers would purchase fuel from unrelated third parties using cash provided by H&B. H&B's drivers also needed to keep cash on hand in case a tractor-trailer required repairs while away from H&B's shop.
H&B required considerable quantities of cash to purchase fuel on behalf of its customers. Fuel distributors generally do not accept checks in payment for fuel unless the purchaser is well known to the distributor. Therefore, H&B was required to pay for the fuel it transported with cash or cashier's checks. H&B would often use its own funds to purchase the fuel it transported on behalf of its customers. H&B would then receive reimbursement when it delivered the fuel to the customer.
On several occasions during the years in issue, H&B transported fuel for a company called Trans State Pavers, Inc. (Trans State). Trans State was an unrelated corporation apparently owned by Mr. Bob White. H&B typically purchased the fuel that it transported for Trans State from Jordan Distributors. H&B generally used cashier's checks to pay for the fuel it purchased from Jordan Distributors. Trans State would then pay H&B's driver for the fuel by giving the driver either cash or a cashier's check at the time the driver delivered the fuel. The driver would give the cash or cashier's check received from Trans State to petitioner. In total, the amount of money petitioner received from Trans State was equal to or exceeded the amount of the cashier's checks he gave to Jordan Distributors from H&B's funds. There were no deposits of cash or cashier's checks from Trans State into H&B's First Interstate account during the years in issue.
Sometime during the period in issue, petitioner learned that the Federal Government was soliciting bids for a contract to haul fuel for the U.S. Department of Defense. Petitioner caused H&B to submit a bid for the contract. H&B was awarded the contract and began hauling fuel for the Department of Defense. After H&B completed the contract, on or about May 1, 1989, the U.S. Government issued a check payable to H&B in the amount of $19,694.92 for H&B's work under the contract.
In June 1989, Mr. Petty moved to Oklahoma City and assumed control of H&B's operations. At that time, petitioner and Ms. MacKall stopped providing services to the company, and neither of them has had any involvement with H&B since then.
From 1988 to the time of trial, petitioner was in possession of a 1988 Lincoln Mark VII automobile. Although the title to the automobile lists Pet-Don as owner, it lists petitioners' residence as the owner's address. Both petitioner and Mr. Petty were present at the time the automobile was purchased. Mr. Petty made a cash downpayment, and the remainder of the purchase price was financed by the proceeds of a loan from Community Bank. Because Pet-Don did not have sufficient credit to support the loan, petitioners cosigned the financing agreement in their individual capacities. Petitioner used the Lincoln Mark VII as his personal vehicle at all times between the date of purchase and the date of trial.
During 1988, petitioner signed six checks totaling $4,017.78 that were drawn on H&B's First Interstate account and made payable to Community Bank. These checks are as follows:
Date Check No. Amount Payee
11/03/88 .............................. 1335 $ 669.76 Community Bank
n/a1 .................................. 1428 669.76 Community Bank
04/01/88 .............................. n/a 669.50 Community Bank
04/28/88 .............................. 1032 669.50 Community Bank
04/31/88 .............................. 1253 669.50 Community Bank
10/04/88 .............................. 1294 669.76 Community Bank
_________
Total ........................................... 4,017.78
1 Not available
Each of these checks bears a notation stating that it was issued as payment for petitioner's "company car". A notation on the pegboard ledger for check No. 1294 also states "car payment". These checks represent monthly payments on the loan used to finance the purchase of the Lincoln Mark VII.
Petitioner signed three additional checks during 1988...
To continue reading
Request your trial