Olive v. Commissioner, Docket No. 6063-76.
| Decision Date | 11 April 1983 |
| Docket Number | Docket No. 6063-76. |
| Citation | 1983 TC Memo 195,45 TCM (CCH) 1249 |
| Parties | Leon Olive v. Commissioner. |
| Court | U.S. Tax Court |
Lee H. Henkel, Jr., Stanley H. Hackett, and Steven A. Cunningham, 230 Peachtree St., N.W., Atlanta, Ga. 30303, for the petitioner. Charles P. Hanfman, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined the following deficiencies in, and additions to, the petitioner's Federal income taxes:
Addition to Tax
Sec. 6653(b)
Year Deficiency I.R.C. 19541
1969 ...... $ 54,310.69 $27,155.35
1970 ...... 33,645.05 16,822.52
1971 ...... 77,320.14 38,660.07
1972 ...... 134,691.66 67,345.83
After concessions by the parties, the issues for decision are: (1) Whether the petitioner received unreported income in the amount determined by the Commissioner during each of the taxable years 1969 through 1972; (2) whether any part of the underpayment of tax for any of the taxable years 1969 through 1972 was due to fraud within the meaning of section 6653(b); (3) whether the statute of limitations bars the assessment and collection of the deficiency in income tax due from the petitioner, if any, for each of the taxable years 1969, 1970, and 1971; (4) whether the petitioner should be allowed deductions for losses from farming operations with respect to two tracts of South Carolina real estate for each of the taxable years 1969 through 1972 or, in the alternative, deductions for the expenses of maintaining such properties as entertainment facilities; and (5) whether the petitioner is entitled to employ income averaging for the taxable years 1969, 1970, and 1971.
Some of the facts have been stipulated, and those facts are so found.
The petitioner, Leon Olive, was a legal resident of Charlotte, N.C., at the time he filed the petition in this case. He and his then-wife filed joint Federal income tax returns for the taxable years 1969, 1970, and 1971 with the Internal Revenue Service Center, Chamblee, Ga., on or before April 15 of 1970, 1971, and 1972, respectively. Mr. Olive filed his return for the taxable year 1972 as an unmarried head of household with the Internal Revenue Service Center, Memphis, Tenn., on June 18, 1973. On their Federal income tax returns for 1970 and 1971, Mr. Olive and his then-wife elected income averaging.
The petitioner graduated from the University of Alabama with a degree in business administration. In 1954, he graduated from Duke University Law School. After graduating from law school, Mr. Olive spent 2½ years as a management trainee with Allstate Insurance Company. In 1957, he began practicing law in Charlotte in a partnership. The partnership continued approximately 2½ to 3 years, and in 1960 or 1961, the petitioner began to practice by himself.
The petitioner's accountants set up his bookkeeping system while he was in the partnership. Elizabeth Callahan came to work for the partnership as a secretary in 1957 or 1958, and the accountants told her how the books were kept.
In 1966 or 1967, the petitioner began to specialize in the settlement of personal injury cases. During 1969 through 1972, his practice grew rapidly; his firm handled approximately 500 to 700 cases per year. More than 95 percent of the cases were settled during the years in issue. In a settled case, the petitioner charged a contingent fee of 30 percent of the recovery for personal injury; he charged no fee on that portion of a client's recovery representing compensation for property damage.
During 1969 through 1972, Mr. Olive employed at different times four associates, including Carl Howard. The initial fee arrangement with the associates provided that Mr. Olive received two-thirds of each fee over $200 on cases handled by an associate. If the fee in a case was less than $200, Mr. Olive received 50 percent. He paid all office operating expenses from his portion of the fee. He was reimbursed by his associates for their share of parking and group health insurance costs. During 1972, the fee arrangement changed. Thereafter, Mr. Olive received 60 percent of his associates' fees; fees under $200 continued to be split equally, and Mr. Olive continued to pay all firm operating expenses.
During the years in issue, Mr. Olive also employed a bookkeeper and a secretary. Elizabeth Callahan performed some secretarial duties for him during 1969 although by that time her main function was that of bookkeeper. His secretary throughout most of 1969 and all of 1970, 1971, and 1972 was Brenda Sifford. When Mrs. Sifford began to work for Mr. Olive's law firm, Mrs. Callahan instructed her in her secretarial duties, and after Mrs. Sifford was hired, Mrs. Callahan served as a secretary, from time to time, when Mrs. Sifford was unavailable.
When a prospective client contacted Mr. Olive, he interviewed the client and obtained the facts of the case. The client authorized Mr. Olive to obtain the client's medical information and signed a contract of representation. Mr. Olive then dictated a memorandum summarizing the facts of the case, which his secretary transcribed and placed in the file. The secretary called all doctors, hospitals, and insurance companies involved in the case to inform them of Mr. Olive's representation and to request information such as accident reports, hospital records, and bills necessary to assess the value of the case. The firm sometimes incurred expenses on behalf of a client to obtain necessary information. When they were incurred, Mrs. Callahan wrote a check on Mr. Olive's business checking account at the North Carolina National Bank (NCNB) to pay the expense. These payments, which were essentially advances to clients, were entered in a cash disbursements journal as a debit to account 111, accounts receivable unbilled.
When the secretary had obtained all the necessary information, she composed an "analysis sheet" listing the client, the insurance company and the adjuster involved, and the client's expenses. The file with the analysis sheet was sent to Mr. Olive, who inserted a demand amount and began settlement negotiations with the adjuster.
When the petitioner received a settlement offer from the insurance adjuster which he regarded as reasonable, he accepted it without consulting his client and instructed the adjuster to send an insurance company check to him. He then advised his secretary that the case had been settled, gave her the file, and had her call the client to set up an appointment. In such cases, the clients always accepted Mr. Olive's recommendation of settlement. On the other hand, if the petitioner felt the settlement offer was low, he consulted with his client to give the client an opportunity to accept or reject the settlement before telling the adjuster to send the check. However, sometimes, the petitioner instructed the adjuster to send the check even if he felt that the settlement offer was low. In that case, Mr. Olive called the client into his office to see if the client would accept the settlement. In other cases, Mr. Olive discussed the settlement with the client over the phone to see if the client would accept it.
The insurance company checks were made payable to the petitioner and his client jointly. When the check arrived at Mr. Olive's office, his secretary put it in the file and typed a "settlement sheet." This document, prepared for every settled case, listed the client's name, the total recovery, the attorney's fee, expenses advanced for the client, and the client's unpaid medical bills, if any. The attorney's fee, expenses advanced, and unpaid bills were deducted from the total recovery. The amount remaining constituted the client's net recovery. Three copies of each settlement sheet were prepared, one each for the client, the file, and the bookkeeper.
When his firm received the check from the insurance company, Mr. Olive decided whether the client was to receive his net recovery in cash or in a check, and if the client was to receive a check, Mr. Olive directed Mrs. Sifford to give the file to Mrs. Callahan. Using the information from the settlement sheet, Mrs. Callahan drew a check on Mr. Olive's client trust account at Northwestern Bank, Charlotte, N.C., payable to the client in the amount of the net recovery. When the client came in to pick up his check, he and Mr. Olive endorsed the insurance company check. Thereafter, the file was returned to Mrs. Callahan who deposited the insurance company check in the client trust account. At that time, Mrs. Callahan removed a copy of the settlement sheet for her records, and she wrote checks on the trust account in payment of Mr. Olive's fee, the client's expenses advanced by Mr. Olive, and the client's unpaid medical bills. If the file was not returned to Mrs. Callahan for the preparation of such checks, she never received a copy of the settlement sheet.
During the years in issue, Mrs. Callahan maintained the petitioner's books of account. These books consisted of the cash disbursements book, a journal, and a ledger. Mrs. Callahan posted every check she wrote on the trust account and the business account to the cash disbursements book. The entries were posted from check stubs. At the end of each month, Mrs. Callahan posted to the journal the amount of fees, and reimbursement of expenses, for which she had written checks on the trust account during the month. She obtained such information from the settlement sheets that she had accumulated during the month. At that time, she credited account 111, accounts receivable unbilled, for any expenses advanced for clients that had been reimbursed by the deposit of an insurance company check in the client trust account. She then entered a corresponding debit to account 112, accounts receivable billed. Mrs. Callahan also debited account 112 for the amount of the petitioner's fee. If the trust...
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