Pizzarelli v. Commissioner, Docket No. 8407-75
| Decision Date | 14 April 1980 |
| Docket Number | Docket No. 8407-75,12056-78. |
| Citation | 1980 TC Memo 118,40 TCM (CCH) 156 |
| Parties | Anthony G. Pizzarelli and Helen Pizzarelli v. Commissioner. |
| Court | U.S. Tax Court |
Raymond M. Pezzo, for the petitioners. Scott D. Anderson, for the respondent.
Memorandum Findings of Fact and Opinion
The statutory notice of deficiency with respect to calendar years 1969 and 1971 was dated June 16, 1975. The statutory notice concerning calendar year 1970 was dated August 8, 1978. In these statutory notices of deficiency, respondent asserted the following:
Sec. 6653(b)
Year Deficiency Addition to Tax
1969 ........ $12,208.45 $ —0—
1970 ........ 35,397.84 17,698.92
1971 ........ 350.60 —0—
After concessions the remaining issues are: (1) whether the Ulster-Hurley Properties, Inc. checks and property in the amount of $21,500 received by petitioner in his taxable years 1969, 1970 and 1971 constitute ordinary income; and (2) whether the $55,466.52, which petitioner diverted from corporate proceeds of Ulster Tool and Die Corporation in his 1970 taxable year and represented by two checks from Ferroxcube Corporation, constitute ordinary income or nontaxable loans.
Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.
Anthony G. Pizzarelli (petitioner) and Helen Pizzarelli1 resided in West Hurley, New York at the time the petition in docket No. 8407-75 was filed, and in Stuart, Florida at the time the petition in docket No. 12056-78 was filed. Mr. and Mrs. Pizzarelli timely filed their Federal income tax returns for 1969, 1970 and 1971 with the Internal Revenue Service Center, Andover, Massachusetts.
During the period January 1, 1968 to May 15, 1976, petitioner owned a 50 percent interest in the Ulster Tool and Die Corporation (Ulster Tool and Die), a manufacturing company incorporated on September 17, 1946 in the State of New York. During that same period Frank J. Falatyn (Falatyn) owned the remaining 50 percent interest in Ulster Tool and Die. On May 15, 1976 Falatyn purchased all of petitioner's interest in Ulster Tool and Die.
Petitioner was president of Ulster Tool and Die during its fiscal years ended August 31, 1969, 1970, 1971 and 1972. Ulster Tool and Die's business consisted of making tools, dies, jigs, fixtures, gauges, production and development work and automatic equipment to meet customer specifications.
Petitioner managed the corporation's office, sold the services of the company, estimated the cost of performing contracts and handled customer relations. Falatyn ordered materials, managed the company shop, solved engineering and fabrication problems and generally was concerned with the production of the corporation's products.
In the usual conduct of Ulster Tool and Die's business, when checks in payment for work done by the company were received, the corporation's secretary and bookkeeper would place the checks in an unlocked file cabinet drawer. The corporation's receipt checks would be kept in the file drawer for approximately 2 or 3 months before they were deposited in the corporation's checking account. Normally petitioner, and occasionally Falatyn, would deposit the receipt checks in the corporation's checking account when it was determined that the corporation needed funds to pay expenses.
On July 25, 1969 Falatyn began making a record of when checks payable to the corporation were received and when those checks were deposited in the corporation's checking account. Falatyn made this record because he did not trust petitioner to deposit all of Ulster Tool and Die's receipt checks. On October 15, 1969 petitioner received a check from the Ferroxcube Corporation (Ferroxcube) in the amount of $28,090.09. This check was payable to Ulster Tool and Die and was a receipt of that corporation. On January 2, 1970 petitioner negotiated the check and used the proceeds for his personal needs. On November 7, 1969, petitioner received a second check from Ferroxcube in the amount of $27,376.43. This check was also payable to Ulster Tool and Die and was a receipt of that corporation. On February 18, 1970 petitioner deposited the check into his personal checking account and used the proceeds for his personal needs.
Petitioner did not inform Falatyn that he had taken the two Ferroxcube checks and used the proceeds for his own personal benefit until February, 1970 when Falatyn inquired of him why the corporate receipt checks had not been deposited. Petitioner informed Falatyn that he had borrowed the proceeds and that the checks were not lost. At that time Falatyn expressed displeasure with petitioner. Sometime after petitioner took the proceeds of the Ferroxcube checks minutes of a meeting of the board of directors of Ulster Tool and Die were prepared which showed that the board authorized petitioner to borrow $60,000 from the corporation. The minutes were not prepared or signed by Falatyn on October 9, 1969, the date shown thereon, but were prepared sometime after Falatyn's February 1970 confrontation with petitioner with respect to the missing corporate receipt checks.
Petitioner knew that Paul Schatzel (Schatzel) determined the gross receipts of Ulster Tool and Die from an analysis of deposits to the corporation's checking account. However, petitioner never informed Schatzel that the corporation had received the two Ferroxcube checks. Nor was he informed that petitioner and Falatyn had agreed that the proceeds of the checks would be considered as a loan from Ulster Tool and Die to petitioner. Schatzel did not have access to the corporation's minutes sheets when he prepared its tax returns.
The failure of Ulster Tool and Die to report the income received from the two Ferroxcube checks on the corporate income tax return was first brought to Schatzel's attention by an Internal Revenue agent during an audit of the corporation that commenced in the fall of 1972. Sometime after November 1973 Falatyn informed Schatzel that the $55,466.52, which petitioner received from the proceeds of the Ferroxcube checks, should be treated as a loan to petitioner on the books and records and the income tax returns of Ulster Tool and Die.
Petitioner carefully reviewed Ulster Tool and Die's corporate tax returns for the fiscal year ended August 31, 1970, but did not call Schatzel's attention to the omission of the $55,466.52 received from Ferroxcube as income on the corporation's tax returns for that fiscal year. Nor did he, or Falatyn, call Schatzel's attention to the fact that the alleged loan to petitioner in the amount of $55,466.52 was not reflected as a loan to a shareholder on Ulster Tool and Die's tax returns for fiscal years ended August 31, 1970, 1971, 1972 and 1973. A loan from Ulster Tool and Die to petitioner in the amount of the Ferroxcube checks was first reflected in the books and records and on the corporate income tax returns after the close of the corporation's August 31, 1974 fiscal year.
On October 6, 1971 petitioner borrowed $25,000 from Ulster Tool and Die. This loan was distributed to petitioner in the form of a check written on the corporate bank account. Petitioner repaid the loan on July 18, 1972. The loan and repayment of the $25,000 was reflected in the books and records and on the corporate income tax returns of Ulster Tool and Die in the years in which the loan and repayment occurred. Petitioner and Falatyn borrowed money from Ulster Tool and Die from time-to-time; in each instance they received the loan by means of a check written on the account of Ulster Tool and Die.
By personal checks petitioner, between December 24, 1974 and October 30, 1975, repaid Ulster Tool and Die $50,000 of the diverted Ferroxcube payments. The balance of the Ferroxcube payments "loan" was paid when petitioner sold his share of Ulster Tool and Die to Falatyn. Most, if not all, of the "loan" payments were made after petitioner was informed by the Internal Revenue Service that he was under criminal investigation for his failure to report the proceeds of the Ferroxcube checks as income.
During the period from January 1, 1969 until September 13, 1979 petitioner owned a 50 percent interest in Ulster-Hurley Properties, Inc. (Ulster-Hurley Properties), a real estate investment company incorporated on December 31, 1968. Prior to the incorporation of Ulster-Hurley Properties, the company operated as a subchapter R partnership with petitioner and Falatyn each having a 50 percent interest. Falatyn is, and was, a 50 percent owner of Ulster-Hurley Properties and its predecessor partnership.
Ulster-Hurley Properties is on a fiscal year ending April 30. Its corporate income tax returns reported retained earnings in excess of $50,000 and no dividend distribution during fiscal years ended April 30, 1969, 1970 and 1971.
Petitioner and Falatyn each received corporate checks in the total amounts of $9,500, $2,000 and $1,000 from Ulster-Hurley Properties in 1969, 1970 and 1971, respectively. The distributions received in calendar years 1969 and 1971 were charged on the books and records of Ulster-Hurley Properties as advances and shown on the corporate tax returns for fiscal years ended April 30, 1969, 1970 and 1972 as loans to shareholders. The 1970 calendar year distributions were charged on the books and records of the corporation as advances and shown as compensation to officers on the corporation's tax return for fiscal year ended April 30, 1971. The 1970 distributions were reflected as loans to shareholders on Ulster-Hurley Properties' amended income tax return for fiscal year ended April 30, 1971, which was filed by the corporation on September 5, 1972. Petitioner did not report as gross income the distributions he received from Ulster-Hurley Properties in 1969, 1970 or 197...
To continue reading
Request your trial