Olbres v. Commissioner
| Decision Date | 25 September 1997 |
| Docket Number | Docket No. 27160-93. |
| Citation | 74 T.C.M. 713 |
| Parties | Anthony G. and Shirley A. Olbres v. Commissioner. |
| Court | U.S. Tax Court |
Edward DeFranceschi, for the petitioners. Ronald F. Hood, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies in, and additions to, petitioners' Federal income tax:
Additions to tax
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Sec. Sec. Sec
Year Deficiency 6653(b)(1)(A)1 6653(b)(1)(B) 6653(b)(1) Sec. 6661(a)
1986 ................... $120,353 $ 87,750 * -- $29,250
1987 ................... 336,457 251,203 ** -- 83,734
1988 ................... 122,457 -- -- $91,843 30,614
* 50 percent of the interest due on $117,000
** 50 percent of the interest due on $334,937
The issues remaining for decision are:2
(1) Are petitioners liable for each of the years 1986, 1987, and 1988 for the additions to tax for fraud under section 6653(b)(1)? We hold that they are for 1986 and 1987 and that they are for 1988 to the extent stated herein.
(2) Did respondent make a computational error in determining petitioners' unreported gross receipts for 19887 We hold that respondent did.
(3) Are petitioners liable for each of the years 1986, 1987, and 1988 for the addition to tax for a substantial understatement of income tax under section 6661(a)? We hold that they are for 1986 and 1987 and that they are for 1988 to the extent stated herein.
Some of the facts have been stipulated and are so found. Petitioners resided in Hampton, New Hampshire, at the time the petition was filed.
Petitioners, who were married on June 22, 1968, have three children, Tamara C. Olbres, Jason A. Olbres, and Tyler M. Olbres. Before petitioners were married, petitioner Anthony G. Olbres (Mr. Olbres) attended the Center for Creative Studies in Detroit, Michigan, from which he received a bachelor's degree in transportation design and training in industrial design, and petitioner Shirley A. Olbres (Ms. Olbres) completed three years of college at the University of Vermont, where she studied German and liberal arts. Shortly after petitioners were married, Ms. Olbres took classes in psychology and sociology at a community college. Petitioners have not taken any courses at the college level in accounting or business.
Around 1974, petitioners started a business interchangeably called Design Consultants, A.G. Olbres Design Consultants, and A.G. Olbres Design, in which they engaged in designing and fabricating trade show exhibits (exhibits). (We shall refer to the business in which petitioners engaged as Design Consultants.)
On April 18, 1988, petitioners incorporated Design Consultants under the name White Star Design, Inc. (White Star), and the following numbers of shares of its no-par common stock were issued to the individuals indicated: Mr. Olbres held 55 shares, Ms. Olbres held 35 shares, and Manuel L. Olbres held 10 shares. On May 4, 1988, White Star elected to be taxed as an S corporation. At the time White Star was formed, the following individuals were appointed to the offices indicated: Mr. Olbres as president, Ms. Olbres as treasurer, and Manuel L. Olbres as vice president.
In addition to designing and fabricating the exhibits, Design Consultants and/or White Star arranged for certain businesses to perform auxiliary services (auxiliary services) for their clients including, inter alia, transporting the exhibits, setting up the exhibits, hiring on-site personnel at trade shows, electrical work, floral arranging, and telephone services. During 1986, Design Consultants and/or White Star used, inter alia, Greyhound Exposition Services (Greyhound) for certain auxiliary services, and during 1986, 1987, and 1988, they used, inter alia, Mayflower Transit, Inc. (Mayflower), to perform those services.
From sometime in 1983 through the years at issue, Design Consultants was located in North Berwick, Maine. By around 1985, it had approximately 20 to 24 employees. Mr. Olbres' responsibilities for Design Consultants consisted of designing, ordering materials for, supervising the setting up of, selling, and pricing the exhibits. At all relevant times, Ms. Olbres, who spent time caring for petitioners' children, did all of the bookkeeping for Design Consultants and White Star.
During 1986 and 1987, clients of Design Consultants paid it $800,4614 and $1,865,499, respectively, as payment for services rendered, products sold, and/or certain of the auxiliary services. During 1988, clients of Design Consultants and White Star paid them a total of $1,018,772 as payment for services rendered, products sold, and/or certain of the auxiliary services. When Design Consultants and/or White Star arranged to have certain businesses perform the auxiliary services for their clients, at least some of those businesses, such as Greyhound for 1986 and Mayflower for 1986, 1987, and 1988, paid them commissions. Greyhound and Mayflower paid Design Consultants and/or White Star commissions that equaled approximately 15 percent of the payments received by Greyhound and/or Mayflower from clients of Design Consultants and/or White Star. Design Consultants and/or White Star billed their clients for any auxiliary services that those clients received from various businesses, including Greyhound and Mayflower; those clients paid Design Consultants and/or White Star for those services billed; and Design Consultants and/or White Star paid those businesses for the auxiliary services that they provided to clients of Design Consultants and/or White Star. During 1986, Design Consultants received commissions of $4,725 from Greyhound, and during 1986, 1987, and 1988, Design Consultants and/or White Star received commissions of $58,464, $96,671, and $70,060, respectively, from Mayflower. (We shall sometimes refer collectively to payments from clients of Design Consultants and/or White Star and commissions from Greyhound and Mayflower as Design Consultants' and/or White Star's receipts.)
During 1986, 1987, and 1988, petitioners maintained the following personal and business bank accounts (bank accounts) at Indian Head Bank and Trust Co. (Indian Head), Kennebunk Savings Bank (Kennebunk), and The Exeter Banking Company (Exeter):5
Type of Account
Bank Account Name of Account Number
Indian Head Checking A.G. Olbres Design, Design Consultants 281-01619
Indian Head Checking Anthony G. Olbres and Shirley A. Olbres 351-00369
Indian Head Savings A.G. Olbres, Design Consultants 30-002583-0
Indian Head Savings Anthony G. Olbres and Shirley A. Olbres 015-000289-7
Kennebunk Checking A.G. Olbres, Gary Rohm, d/b/a Design Consultants 33-802452
Kennebunk Checking Design Consultants, A.G. Olbres 56-868352
Kennebunk Savings Anthony G. Olbres 20-004393
(We shall refer to (1) Indian Head checking account number 281-01619 as the Indian Head business checking account, (2) Indian Head checking account number 351-00369 as the Indian Head personal checking account, (3) Indian Head savings account number 30-002583-0 as the Indian Head business savings account, (4) Indian Head savings account number 015-000289-7 as the Indian Head personal savings account, (5) Kennebunk checking account number 33-802452 as the Kennebunk Olbres-Rohm business checking account, (6) Kennebunk checking account number 56-868352 as the Kennebunk business checking account, (7) Kennebunk savings account number 20-004393 as the Kennebunk personal savings account, and (8) Exeter checking account number 201-474-7300 as the Seabrook Properties account.)
On April 22, 1988, petitioners closed the Indian Head business savings account, which had a closing balance of $464,409. On the same date, petitioners opened another business savings account at Indian Head, account number 015-002290-3, under the name "A.G. Olbres Design Consultants; Anthony or Shirley Olbres" (1988 Indian Head business savings account) into which they deposited $464,409.6
During 1988, petitioners also maintained the following business bank accounts at Kennebunk:
Bank Type of Account
Account Name of Account Number
Kennebunk Checking White Star Design, Inc. 66-910252
Kennebunk Checking White Star Design, Inc., Exhibit Design and 66-110152
Fabrication
(We shall refer to (1) Kennebunk checking account number 66-910252 as the first Kennebunk White Star checking account and (2) Kennebunk checking account number 66-110152 as the second Kennebunk White Star checking account.)
Petitioners deposited Design Consultants' and/or White Star's receipts into the Indian Head business checking account, the Indian Head business savings account, and various other bank accounts that they maintained.7 Petitioners made the following total deposits into the following bank accounts during the years indicated:
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