OLKEN v. Commissioner
| Decision Date | 30 November 1987 |
| Docket Number | Docket No. 5161-83. |
| Citation | 54 TCM(CCH) 1172,1987 TC Memo 589 |
| Parties | Morton Z. Olken and Esther Olken v. Commissioner. |
| Court | U.S. Tax Court |
Morton Z. Olken, pro se. Dennis Perez, for the respondent.
Memorandum Findings of Fact and Opinion
This case was assigned to Special Trial Judge Helen A. Buckley pursuant to section 7456(d) of the Code (redesignated sec. 7443A(b) by sec. 1556 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2755) and Rules 180, 181 and 183.1 The Court agrees with and adopts her findings of fact and opinion which are set forth below.
BUCKLEY, Special Trial Judge:
By notice of deficiency mailed December 10, 1982, respondent determined deficiencies in and additions to Federal income tax against petitioners as follows:
Tax Additions to Tax
Year Deficiency Sec. 6653(h)
1973 ............$ 41,339 $ 20,670
1974 ............ 469,714 234,856
1976 ............ 3,308 2,035
1977 ............ 39,899 20,806
Respondent also mailed on December 10, 1982, separate notices of deficiency to each petitioner for the 1975 tax year in which he determined deficiencies in and additions to each petitioner's Federal income tax as follows:
Additions to Tax
Petitioner Deficiency Sees. 6653(b) 6654
Morton Z. Olken ............................ $108,182 $54,091 $4,671
Esther Olken............................... 107,068 53,534 4,623
Respondent's deficiency notices are based upon his determinations that petitioners received unreported income as follows:2
Determined Source
of Income 1973 1974 1975 1976 1977
Commissions.................. $97,020 $134,720 -0- -0- -0-
Salary....................... -0- -0- -0- $18,000 $18,000
Embezzlement................ -0- 549,261 $ 71,250 3,829 68,853
Net Rental Income ............ -0- 190,081 209,839 -0- -0-
Partnership Income............ -0- 9,965 47,199 -0- -0-
Net Long-Term Capital Gain..... -0- -0- 119,248 -0- -0-
In addition to that which he determined in his notices of deficiency, respondent, by way of a second amendment to his answer asserted an increased deficiency in tax for 1973 of $2,942.50 together with a corresponding increase in the section 6653(b) addition. This is based upon respondent's assertion that petitioners received an additional unreported commission of $11,700 in 1973. In the same amendment to his answer respondent also recharacterized $1,660.77 of the asserted unreported wage income in 1977 as additional unreported embezzlement income for the same year.3
The issues for decision are as follows:
(1) Whether petitioners received unreported income in the taxable years in issue and, if so, the amounts of such income;
(2) Whether petitioners are liable for the addition to tax under section 6654(a) for failure to pay estimated tax for the 1975 taxable year;
(3) Whether petitioners are liable for the addition to tax under section 6653(b) for fraud for any or all the taxable years in issue;
(4) Whether the statute of limitations operates to bar assessment and collection of any deficiencies in and additions to tax for any of the taxable years in issue;
(5) Whether petitioners are entitled to carry back a loss resulting in a tax year subsequent to those in issue, when that loss is the result of restitution of embezzled funds;4 and
(6) Whether the innocent spouse provisions of section 6013(e) are applicable to petitioner Esther Olken for any or all liability for deficiencies in and/or additions to tax.
Procedural Background. For the years in issue, petitioners filed Federal income tax returns as follows:
Date Consent Form Assessment Time
Tax Year Executed Extended To
1973 ...........May 28, 1981 December 31, 1982
1974 ...........May 28, 1981 December 31, 1982
1975 ...........No Consent Form Executed -0-
1976 ...........June 6, 1980 December 31, 1981
The parties executed Consents to Extend the Time to Assess Tax as follows:
As stated, the notices of deficiency were mailed to petitioners on December 10, 1982. Petitioners timely filed their petition for redetermination with this Court. At the time they filed their petition, petitioners resided at Sherman Oaks, California.
Shortly after trial in this matter commenced, petitioners, who were represented by Morton Olken,8 orally moved for leave to file an amendment to their petition. The motion was granted and the amendment was filed raising a new issue.
At the close of trial the Court ordered that simultaneous opening briefs be filed. Petitioners did not file an opening brief, despite the fact that they were granted extensions of time to do so. We allowed petitioners to file a brief in reply to respondent's brief because of their unrepresented status.9 Respondent timely filed his reply thereto.
There have been extensive stipulations of facts (both written and oral) and these facts are so found. The stipulations of facts10 and exhibits attached thereto are incorporated herein by this reference.
Most of the activities of concern in this matter are those of petitioner Morton Z. Olken. Henceforth, reference to petitioner in the singular will be to petitioner Morton Z. Olken.
Petitioner's Background. Petitioner attended various colleges and universities. He attended Roosevelt University for two years where he majored in Business Administration. He also spent three years at the University of Illinois, where he majored in Architectural Engineering. At about the time of trial he was attending classes in accounting at the University of California at Los Angeles, Extension Division.
In 1947, petitioner was licensed by the State of Illinois as a real estate broker and his license appears to have been effective through the time of trial. During the late 1950's through 1960, petitioner was a Junior Real Estate Appraiser and also attended and completed Casualty Property Underwriters School. During the early 1960's, petitioner served as a member of loan committees for several banks. Sometime after this, but prior to 1973, petitioner worked in the insurance business with his father administering a large casualty insurance business in which he dealt with many large corporations.
Although not entirely clear, the record seems to indicate that during the entire aforementioned time period, petitioner resided in or around Chicago, Illinois. One thing that is clear from the record is that petitioner has much experience and is sophisticated in matters pertaining to real estate, real estate financing and various aspects of the insurance business.
Sometime prior to the summer of 1973, petitioners relocated to southern California. It is not clear what petitioner's occupation was when he first relocated, but apparently he was involved in some aspect of the real estate business.
The facts in this matter cover a significant time frame and generate from numerous activities in which petitioner engaged. For the sake of simplicity, we have outlined the discussion of the facts according to the type and source of income involved.
A. 16200 Ventura Boulevard Building Transaction. During the summer of 1973, petitioner began negotiations for the purchase of an office building in Encino, California, known as the 16200 Ventura Boulevard Building (hereinafter "the 16200 Building"), which was owned by Dr. and Mrs. Seymour Matanky (hereinafter the Matankys). Since the 16200 Building was not profitable at that time the Matankys were quite interested in selling it. The parties negotiated throughout the summer. During the negotiations petitioner represented to the Matankys that he was a licensed real estate broker in Illinois and had a reciprocal license in California. This was not true. Petitioner acted as the broker for the sale, represented both himself and the Matankys, and structured the entire transaction. The building was purchased for $1,214,007, net of a $49,500 commission transaction. Petitioner received a commission on this transaction of $49,500 in 1973 which amount was used as a credit by him in the purchase of the building. It was, in effect, his down payment.
Petitioner contends that he did not purchase the building for his own account, that the actual buyer of the 16200 Building was a fictitious Illinois corporation formed and entirely controlled by petitioners named Great Northern Industries (hereinafter "GNI-Ill.").11 Petitioner claims that he acted as the broker in the transaction representing the buyer GNI-Ill. but Mrs. Matanky, a very credible witness, testified that petitioner made no representations that he was representing any corporation and that she and her husband were operating under the assumption that the Olkens were purchasing the 16200 Building as individuals. At no time did petitioner hold himself out as a representative of a corporation. Petitioners were the purchasers of the building in their individual capacity. The record does not indicate that GNI-Ill. was in existence in 1973.
As a result of the negotiations, the Matankys became very impressed with petitione...
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