Proctor v. Commissioner
| Decision Date | 17 August 1981 |
| Docket Number | 11065-78.,11064-78,Docket No. 11063-78 |
| Citation | 1981 TC Memo 436,42 TCM (CCH) 725 |
| Parties | Joseph E. Proctor and Shirley I. Proctor, et al. v. Commissioner. |
| Court | U.S. Tax Court |
William L. Taylor, Robert G. Russell, and Barry L. Hoffman, Blue Cross Bldg., Chattanooga, Tenn., for the petitioners. Isham B. Bradley, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies in petitioners' Federal income taxes and additions to tax:
____________________________________________________________________________________
Addition to tax
Docket No. Petitioner Tax Year Ended Deficiency under sec 6653(a)
11063-78 Joseph E. Proctor Dec. 31, 1972 $29,827.19 $1,491.35
and Shirley I. Dec. 31, 1973 45,349.24 2,267.46
Proctor Dec. 31, 1976 33,443.452 1,672.17
11064-78 Chattanooga Apr. 30, 1972 34,104.74 1,705.24
Products Co., Apr. 30, 1973 62,097.03 3,104.85
Inc. Apr. 30, 1974 76,620.25 3,831.01
11065-78 R & D Products Apr. 30, 1974 12,515.41 625.77
Corporation Apr. 30, 1975 6,361.94 318.10
Apr. 30, 1976 3,345.53 167.28
Apr. 30, 1977 20,076.75 1,003.83
____________________________________________________________________________________
These cases have been consolidated for the purposes of trial, briefing and opinion. After concessions,3 the issues for decision are: (1) whether for the years 1972, 1973 and 1976 petitioners Joseph E. Proctor (Proctor) and Shirley I. Proctor (together, Proctors) must report additional income as determined by respondent from unexplained deposits; (2) whether the Proctors are entitled to any charitable contribution deductions under section 170(a)(1), I.R.C. 1954, for the years 1972, 1973 and 1976; (3) whether Proctor is allowed interest expense deductions under section 163 for a portion of certain payments made by Proctor to Chattanooga Products Co., Inc. (Chattanooga Products) and R & D Products Corporation (R & D) in 1976; (4) whether Proctor realized income from the interest-free use of funds borrowed from Chattanooga Products the years 1972 and 1973; (5)(a) whether Proctor constructively received a dividend from Chattanooga Products for the year 1973 as a result of the corporation's transfer of a 1973 Corvette to David Bowie, and (b) whether the Proctors constructively received a dividend from Chattanooga Products for the years 1972 and 1973 because the corporation paid insurance premiums for the benefit of Mrs. Proctor's brother, Warren E. Cressman; (6) whether for the years ended April 30, 1972, April 30, 1973, April 30, 1974 and April 30, 1976, Chattanooga Products is entitled to automobile expense deductions under section 162 in connection with the use of corporate automobiles by the Proctors in excess of the amounts allowed by respondent, and to what extent each of the Proctors has received dividend income in the calendar years 1972 and 1973 due to their personal use of corporate automobiles; (7) whether Chattanooga Products may deduct under section 162 payments made to Mrs. Proctor's mother, Irene Cressman, during the corporation's fiscal years ended in 1973, 1974 and 1976, and whether the Proctors received constructive dividends during their 1972 and 1973 taxable years in connection with such payments; (8) whether Chattanooga Products is liable for the accumulated earnings tax under section 531 for the years ended April 30, 1972, April 30, 1973 and April 30, 1974; (9) whether R & D is entitled to depreciation deductions under section 167 for its 1975, 1976 and 1977 fiscal years and an investment tax credit under section 38 for its 1975 fiscal year on equipment subject to conditional sales contracts and, if not, the proper tax treatment to be afforded such equipment dealings; (10) whether in connection with its 1975 purchase of a spray washer business R & D has established that it is entitled to a different purchase price allocation than that determined by respondent; and (11) whether any of the petitioners herein are liable for additions to tax prescribed by section 6653(a) for negligence or intentional disregard of rules and regulations for the years under consideration.
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.
Petitioners Joseph E. Proctor and Shirley I. Proctor, husband and wife, resided in Chattanooga, Tennessee at the time of the filing of the petitions herein. They filed joint individual income tax returns with the Internal Revenue Service Center in Memphis, Tennessee for the calendar years 1972, 1973 and 1976. Each return was filed utilizing the cash method of accounting.
Chattanooga Products is a corporation organized in 1967 under the laws of the State of Tennesee with its principal place of business in Chattanooga, Tennessee. Chattanooga Products, an accrual method taxpayer, filed corporate income tax returns (Forms 1120) for the taxable years ended April 30, 1972, April 30, 1973, and April 30, 1974 and filed a small business corporation tax return (Form 1120S) for the taxable year ended April 30, 1976 with the Internal Revenue Service Center in Memphis, Tennessee. At all times material to these cases, Proctor owned 50 percent of Chattanooga Products' outstanding stock and Mrs. Proctor owned the remaining 50 percent interest. At all times material to these cases, the Proctors were members of the board of directors and Proctor was president of Chattanooga Products.
R & D is a corporation organized in 1968 under the laws of the State of Tennessee with its principal place of business in Chattanooga, Tennessee. For the taxable years ended April 30, 1972 and April 30, 1973, R & D filed small business corporation tax returns (Forms 1120S) with the Internal Revenue Service Center in Memphis, Tennessee. For the taxable years ended April 30, 1974, April 30, 1975, April 30, 1976, and April 30, 1977, R & D filed corporation income tax returns (Forms 1120) with the Internal Revenue Service Center in Memphis, Tennessee. R & D filed its returns on the accrual method of accounting. At all times material to these cases, R & D was wholly-owned by Proctor.
During the years in issue, the business operations of Chattanooga Products and R & D, for the most part, consisted of retail and wholesale sales of industrial chemicals, industrial and commercial cleaning supplies and related products, commercial cleaning equipment and sanitary supplies, solvents, scouring and cleaning materials, deodorants, disinfectants and insecticides. R & D was formed to market the products manufactured by Chattanooga Products in geographic areas outside of Chattanooga, Tennessee. During the years in issue, R & D acquired all of its salable products from Chattanooga Products.
Jepco Warehousing, Inc. (Jepco) is a corporation that was organized under the laws of the State of Tennessee on September 25, 1973. Jepco was organized by Proctor for the purpose of building and operating warehouses to store glass containers for Chattanooga Glass Co. (Chattanooga Glass). Chattanooga Glass and the owners thereof are unrelated to the petitioners herein. However, a substantial portion of Chattanooga Products' sales were made to Chattanooga Glass. At all times material to these cases, Proctor owned 100 percent of the outstanding stock of Jepco.
Fort-Lake Skating, Inc. (Fort-Lake) is a corporation that was formed to operate and manage a roller skating rink owned by Chattanooga Products. At all times material to these cases, Proctor owned 50 percent of the outstanding stock of Fort-Lake and an unrelated individual, Ken Gravit, owned the remaining 50-percent interest.
Issue 1. Unexplained Deposits. During the years in issue, the Proctors each received payroll and expense checks from Chattanooga Products and R & D. Generally, Mrs. Proctor either deposited the full amount of her payroll check into her own separate checking account or deposited a portion thereof and retained the remainder for personal needs. Proctor, on the other hand, was not so predictable. Proctor occassionally would deposit the full amount of his payroll check into one of his bank accounts. At other times he would deposit a portion of his check and retain the remainder. Still other times, he would cash and retain the full amount of his check. Generally, Proctor would cash his expense check and use the cash to pay his business expenses. Also, Proctor paid his personal expenses with cash.
Proctor had a history of borrowing significant sums of money from Chattanooga Products and R & D. The following schedule shows the balance of Proctor's loan accounts with such corporations as of the close of the corporations' fiscal years indicated below:
____________________________________________
Fiscal year ended Chattanooga
April 30, Products R & D
1972 ............... $42,699 —
1973 ............... 13,222 $11,420
1974 ............... 11,082 —
1975 ............... 42,109 23,903
1976 ............... 22,543 24,718
____________________________________________
For the calendar years 1972, 1973 and 1976, the examining agent reviewed Proctor's personal bank accounts in an attempt to identify the sources of the various deposits to these accounts. Although Proctor was able to identify the sources of a majority of the deposits, there were a number of deposits for which sources could not be identified. Proctor was unable to identify...
To continue reading
Request your trial