Pittman v. Comm'r of Internal Revenue

• Decision Date: 21 November 1996
• Docket Number: No. 96-1162,96-1162
• Citation: 100 F.3d 1308
• Parties: JAMES A. PITTMAN, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1308

100 F.3d 1308

JAMES A. PITTMAN, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 96-1162

United States Court of Appeals

For the Seventh Circuit

ARGUED SEPTEMBER 10, 1996

DECIDED NOVEMBER 21, 1996

Appeal from the United States Tax Court, No. 21518-92, Howard A. Dawson, Jr., Judge.

Robert E. Meldman (argued), Richard A. Petrie, Reinhart, Boerner, Vandeuren, Norris & Rieselbach, Milwaukee, WI, for Petitioner-Appellant.

Gary R. Allen, Bruce R. Ellisen, Sarah K. Knutson (argued), Department of Justice, Tax Division, Appellate Section, Washington, DC, for Respondent-Appellee.

Before CUMMINGS, FLAUM and EASTERBROOK, Circuit Judges.

CUMMINGS, Circuit Judge.

James A. Pittman appeals from a decision of the United States Tax Court finding him liable for taxes on 1986 and 1987 income he diverted from his business, Bee Bus Lines, Inc. ("BBL"), and other items of unreported income. Pittman was president and co-owner of BBL. The Tax Court also determined that Pittman was liable for additions to tax for fraud, 26 U.S.C. sec. 6653(b), and substantial understatement of tax, 26 U.S.C. sec. 6661.¹ In addition to challenging these determinations, Pittman contends that the Tax Court erred by according the presumption of correctness to the Commissioner of Internal Revenue's computation of corporate earnings and profits and by finding that the three-year statute of limitations under 26 U.S.C. sec. 6501(a) did not bar the Commissioner's 1992 assessment of taxes for taxable years 1986 and 1987. This Court has jurisdiction under 26 U.S.C. sec. 7482. For the reasons that follow, we affirm.²

I. BACKGROUND

In late May 1991, agents of the Internal Revenue Service executed a warrant-authorized search of BBL's premises in Milwaukee, Wisconsin, seizing, among other things, its bank records, financial ledgers, and income tax returns. A statutory notice of deficiency was issued to Pittman on June 6, 1992 for the taxable years 1986 and 1987. The deficiency notice alleged that Pittman received the following income that had not been included on his income tax returns: (1) constructive dividends from BBL in the amounts of $67,241 and $79,036 for 1986 and 1987, respectively, based on the diversion of corporate receipts; (2) constructive dividends from BBL in the amount of $8,000 for the year 1987 based on the alleged personal use of corporate funds from BBL's Park State Bank account; (3) constructive dividends from BBL in the amounts of $3,896 and $2,924 for 1986 and 1987, respectively, based on BBL's payment of Pittman's personal expenses (primarily monthly mortgage payments); (4) checks paid to Pittman--and recorded in BBL's records as "Dividends"--in the amounts of $13,928 and $5,000 for 1986 and 1987, respectively; (5) imputed interest income in the amount of $5,439 for 1987 based on loans by Pittman to BBL; and (6) certain other dividend income from various investments totaling $28 for 1986 and $287 for 1987. The notice of deficiency also alleged that Pittman was liable for additions to tax for fraud and substantial understatement of income.

In response to the notice of deficiency, Pittman filed a timely petition with the United States Tax Court. The case proceeded to trial before that court on April 11 and 12, 1994. The Commissioner called one witness, IRS revenue agent Lynette Benham, who testified as to her analysis of BBL's books and records. Pittman called no witnesses. Instead, he simply attacked Benham's calculations and analysis of BBL's records during cross-examination. The following facts are drawn from the parties' joint stipulation of facts submitted to the Tax Court, as well as Benham's testimony and the trial exhibits:

Pittman was president and 50 percent shareholder of BBL during 1986 and 1987, the tax years in issue. Judith A. Boyd held the balance of the stock in BBL and served as its secretary-treasurer. Pittman incorporated BBL in 1979. From its inception in 1979 through 1987, BBL operated a school bus service serving the Milwaukee metropolitan area. During 1986 and 1987, BBL provided busing services to the Milwaukee Public Schools ("MPS") and Heritage Christian Schools ("Heritage"), among others. Both school systems paid for BBL's busing services by checks. The checks from MPS, BBL's principal source of income, totaled $667,015 in 1986 and $429,967 in 1987. The checks from Heritage totaled $67,241 in 1986 and $79,036 in 1987. As explained below, the checks from these two sources were handled quite differently.

BBL maintained two checking accounts at Bank One (formerly Marine Bank) and a third checking account at Park State Bank. Pittman maintained two personal savings accounts at Columbia Savings and Loan Association. BBL did not maintain any accounts at Columbia. During 1986 and 1987, BBL recorded the checks from MPS on ledger sheets labeled "Accounts Receivable" and deposited them into its checking account at Bank One. BBL treated the checks it received from MPS in 1984 and 1985 in the same manner. Consistent with its treatment of the MPS checks, BBL included the MPS checks as gross receipts on its corporate income tax returns for 1984 and 1985, and BBL included the checks as gross receipts on its prepared, but unfiled, corporate income tax returns for 1986 and 1987.³ Indeed, the gross receipts reported on BBL's corporate tax returns for 1984 and 1985 matched within a few hundred dollars the receipts listed on BBL's accounts receivable ledgers. The gross receipts entry on BBL's 1987 prepared but unfiled tax return matches identically its accounts receivable ledger reflecting 1987 payments from MPS. The gross receipts entry on BBL's 1986 prepared but unfiled tax return differs from its 1986 accounts receivable ledger by $228.

The checks from Heritage were handled in a much different fashion. BBL did not deposit the Heritage checks into BBL's Bank One checking account and did not record them in its ledger along with the MPS entries. Instead, Pittman endorsed all the checks from Heritage as "Bee Bus Line/James A. Pittman" (or a variation thereof) and then either cashed or deposited⁴ the checks at Columbia, where he maintained personal bank accounts.

During the relevant years, BBL received checks totaling thousands of dollars for busing services provided to a number of other schools and deposited these checks into its Park State Bank account. Like the Heritage checks, these checks were not reflected on BBL's books and records, and they were not reported as gross receipts on BBL's prepared but unfiled tax returns for 1986 and 1987. Also, checks drawn on BBL's Park State Bank account were not reflected in BBL's records nor on its prepared but unfiled returns for 1986 and 1987. In June 1987, BBL issued a check payable to Pittman in the amount of $7,000. The check was drawn by Pittman on behalf of BBL on its Park State Bank account. In November 1987, BBL issued a check payable to cash in the amount of $1,000. The check was drawn by Pittman on BBL's Park State Bank account. Pittman later endorsed the check and negotiated it at Columbia. In March 1987, Pittman drew a check on BBL's Park State Bank account in the amount of $500 payable to his personal Visa charge account with Bank Card Associates.

During 1986 and 1987, BBL made 20 separate mortgage payments of $269.37 on Pittman's personal residence.⁵ Also during 1986 and 1987, BBL paid actual dividends to Pittman in the amount of $13,928 and $10,000, respectively. The dividends were paid by check from BBL's Bank One account. Boyd received like distributions on the same dates.

Pittman did not report any of the foregoing distributions (i.e., the Heritage checks, Park State Bank checks totaling $8,000, actual dividends, personal expenses paid by BBL) as income on his individual tax returns for 1986 and 1987.⁶ On June 26, 1992, the Commissioner issued a notice of deficiency to Pittman determining income tax deficiencies in the amounts of $35,488 and $32,818 for 1986 and 1987, respectively. Among other things not relevant here, the Commissioner determined that Pittman received but failed to report constructive dividends from BBL based upon: (1) his diversion of corporate receipts from Heritage in the amounts of $67,241 and $79,036 during 1986 and 1987, respectively; (2) his receipt of checks totaling $8,000 from BBL's Park State Bank account during 1987; and (3) BBL's payment of Pittman's personal expenses including mortgage payments in the amount of $2,963 in 1986 and $2,424 in 1987, as well as $933 in 1986 real estate taxes and a $500 Visa charge card payment in 1987. The Commissioner also determined that Pittman received but failed to report actual dividends from BBL in the amounts of $13,928 and $5,000 in 1986 and 1987, respectively. Last, the Commissioner determined that Pittman was liable for additions to tax for fraud and substantial understatement of income tax liability for these years. The Tax Court sustained the Commissioner's determinations in all material respects.

II. ANALYSIS

The standards governing review of a decision by the Tax Court are the same as those governing review of district court determinations in a civil bench trial. 26 U.S.C sec. 7482(a); Eyler v. Commissioner, 88 F.3d 445, 448 (7th Cir. 1996); Fruit of the Loom, Inc. v. Commissioner, 72 F.3d 1338, 1343 (7th Cir. 1996). Questions of law are reviewed de novo; the Tax Court's factual determinations, as well as the application of legal principles to those factual determinations, are reviewed only for clear error. Eyler, 88 F.3d at 448; Fruit of the Loom, 72 F.3d at 1343. "A finding of fact can be reversed as clearly erroneous only when the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Coleman v. Commissioner, 16 F.3d 821, 825 (7th Cir. 1994) (internal quotation marks omitted); Cline v. Commissioner, 34 F.3d 480, 485 (7th Cir. 1994). Moreover, "this court, in...