Pappas v. Commissioner
| Decision Date | 23 May 2002 |
| Docket Number | Docket No. 24593-95. |
| Citation | 83 T.C.M. 1713 |
| Parties | Zabetti A. Pappas v. Commissioner. |
| Court | U.S. Tax Court |
Zabetti A. Pappas, pro se.
Lyle B. Press and David A. Williams, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies and additions to tax in petitioner's Federal income taxes as follows:
Additions to Tax
Year Deficiency Sec. 6651(f)1 Sec. 6654(a)
1989 ............... $21,867 $16,400 $1,478
1990 ............... 19,575 14,681 1,287
1991 ............... 3,873 2,905 224
1992 ............... 4,017 3,013 175
1 Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure
After concessions,2 the issues for decision are as follows: (1) Whether amounts paid to or received by Real Services, Inc., during 1989 and 1990 are properly treated as petitioner's taxable income; (2) whether petitioner failed to report income received in connection with an "escort" business during 1989 and 1990; (3) whether petitioner failed to report income she received through embezzlement and/or fraudulent loan transactions during 1989 and 1990; (4) whether petitioner failed to report sales and rental income she received during 1989 and 1990; (5) whether petitioner may deduct business expenses in excess of those allowed by respondent for 1989 and 1990; (6) whether respondent properly reconstructed petitioner's 1991 and 1992 taxable income through the use of Bureau of Labor Statistics data; (7) whether petitioner is liable for the additions to tax under section 6651(f) or, in the alternative, for the additions to tax under section 6651(a) for the years at issue; and (8) whether petitioner is liable for the additions to tax under section 6654(a) for the years at issue.
In connection with the pretrial proceedings in this case, respondent was deemed to have conceded his determinations that petitioner had unreported income of $4,640 in 1990 as a result of a transaction with an individual identified as Harvey K. and unreported income of $1,500 as a result of a transaction with one Dennis T. Additionally, on brief, respondent has conceded his determination that petitioner had unreported income of $1,030 as a result of a transaction with an individual identified as Ricardo S.
Petitioner Zabetti A. Pappas was a resident of New York, New York, at the time the petition herein was filed. She did not file Federal income tax returns for the taxable years at issue, nor did she make estimated tax payments for those years.
Petitioner attended Vassar College from 1976 through approximately 1978. Thereafter, she held a variety of jobs, including operating a business known as "Disco Queen". She was known to her associates and clientele in New York as "Z" or "Betty" or "Angel". Petitioner was actively involved in a number of income-producing activities. She operated a prostitution business, in which she arranged for other women or herself to engage in sexual activities with individuals who paid her for such services. The parties have referred to such arrangements as the provision of "escort" services, and we shall do so in this opinion. Petitioner also sold electronic equipment, lighting equipment, theater tickets, and music tapes. She earned money for designing apartment interiors and installing entertainment systems; she also engaged in obtaining loans; and she dabbled in her family's real estate activities in Hawaii and Ohio.
Petitioner formed Real Services, Inc. (Real Services), in New York State on September 29, 1988. Petitioner was its president and sole shareholder. She signed a preprinted document, filling in the blanks, which indicated that she was an employee of Real Services. Her associate and companion, Laura C., agreed to serve as vice president of Real Services but performed no meaningful activities in that role. Ms. C. was elected vice president of Real Services several months after using that title to attest to petitioner's employment contract.
Two individuals named Ted P. and Michael S. were business associates of petitioner but were not actively involved in the operation of the corporation. Real Services did not file Federal corporation income tax returns, Federal payroll tax returns, or New York State tax returns covering any of the years at issue.
Petitioner maintained sketchy and incomplete records for Real Services. She did, however, have signature authority over a checking account at Chemical Bank in the name of Real Services. At the request of Chemical Bank, her lawyer obtained an employer identification number (EIN) for Real Services.
Petitioner gave the name "Real Services" for use on the sales slips she received when she purchased electronic equipment for resale. Instead of giving an identifying number for Real Services, however, petitioner used her own Social Security number when requesting exemptions from State sales tax for these purchases.
Petitioner made deposits into the Real Services' checking account totaling $46,242.81 in 1989 and $73,351.08 in 1990. In October 1989, petitioner wrote a check on this account for $500 to her brother and another for $250 to her sister as birthday presents. The next month petitioner wrote a check on this account for $900 to pay private school tuition for the daughter of her companion, Laura C., and another check to pay for Ms. C.'s contact lenses. In 1990, petitioner paid $100 for an exercise class with a check drawn on the same account. The account was closed in December 1990.
Petitioner also maintained two accounts at Chemical Bank in her own name. She deposited $2,500.00 and $2,452.61 into one such account in 1989 and 1990, respectively. Into the other personal account, she deposited $12,711.48 in 1989 and $12,373.85 in 1990.
During the years in issue, petitioner's principal residence was an apartment at 500 E. 77th Street in New York. She took over the lease of that apartment in the early 1980s from an individual named Joy C. but continued to use Ms. C.'s name on documents regarding that lease. She did not use her own name or that of Real Services. Petitioner shared the apartment with Laura C., who occasionally used Joy C.'s name instead of her own. After 1986, Laura C.'s infant daughter also lived in the E. 77th Street apartment.
In July 1989, petitioner arranged to take over an apartment, located at 320 E. 65th Street in New York, rented by another individual named Jane M. Ms. M. was allowed to live at the E. 77th Street apartment while the apartment on E. 65th Street was renovated. Ms. M.'s name remained on the lease for the E. 65th Street apartment; Real Services was not identified on the lease document.
For petitioner's 1989 and 1990 taxable years, respondent determined unreported income in a number of categories. For convenience, we discuss the issues presented in each of these categories in the order they were presented in the deficiency notice.
Petitioner arranged for the provision of escort services during 1989 and 1990 out of the two apartments noted above, as well as an apartment on W. 58th Street in New York during the latter year. She received cash and checks in payment for those services. At her request, many of the checks were drawn to the order of Real Services.
Dennis T. engaged escort services at least six times at petitioner's E. 77th Street apartment. Mr. T. received escort services from Laura C. In terms of his direct dealings with petitioner, however, he engaged only in legitimate business activities. These included a loan to petitioner for $4,000, which she repaid with a mixture of checks from the Real Services' account and from her personal accounts.
A business associate of petitioner, Michael S., paid for escort services received at either petitioner's E. 77th or E. 65th Street apartment, approximately six times during 1989 through 1990. However, the arrangements were made by, and the money was paid to, Laura C.
Paul G. paid petitioner $1,500 in 1989 and $500 in 1990 for arranging escort services for him with other women. Mr. G. also provided investment advisory services for one of the women providing escort services to him pursuant to petitioner's arrangement, but none of the amounts he paid petitioner constituted a fee for introducing him to that woman.
Over a 10-year period that included 1989 and 1990, Jeffrey F. paid between $5,000 and $15,000 to petitioner for procuring escort services for his business clients. He wrote a $200 check to cash in September 1989 that petitioner deposited into the Real Services' checking account. Mr. F. dealt with at least one other escort service in addition to petitioner's during this period. He paid $1,500 to petitioner for escort services in 1989 and $1,500 in 1990.
Alexander K. issued a check for $1,200 that was made out to Real Services and dated October 12, 1989. Petitioner deposited this check in the Real Services' checking account. Petitioner had in her possession Alexander K.'s business card.
Between 1989 and 1992, an individual named Richard S. availed himself of petitioner's escort services "maybe once a month but not necessarily for all that period of time." He paid $200 per visit. Petitioner received $2,700 in 1989 and $2,700 in 1990 from Mr. S. for escort services. Mr. S. abused alcohol during the period that he used petitioner's escort services.
Meyer S. wrote 10 checks to cash during the first half of 1990 as payment to petitioner for escort services she arranged. Petitioner deposited the checks into the Real Services' checking account. The 10 checks totaled $1,450. However, these 10 checks included checks totaling $460 that were dishonored, as well as...
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