Runkle v. Commissioner
| Citation | 89 T.C.M. 1260 |
| Decision Date | 18 May 2005 |
| Docket Number | Dkt. No. 17192-02. |
| Parties | Dennis E. Runkle and Debra A. Runkle v. Commissioner. |
| Court | United States Tax Court |
Timothy A. Lohrstorfer, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in petitioners' Federal income tax for 1991 through and including 1995 (years at issue) and determined that petitioners were liable for the addition to tax under section 6651(f)1 for fraudulent failure to file a timely income tax return and alternatively under section 6651(a)(1) for failure to file timely. Respondent also determined that petitioners were liable for the years at issue for the penalty under section 6654 for failure to pay estimated taxes. After concessions, the issues to be decided include whether petitioners are liable for the addition to tax under section 6651(f) for fraudulent failure to file a timely income tax return. We hold that petitioners are liable. We therefore do not need to decide alternatively whether petitioners are liable for the addition to tax under section 6651(a)(1).
The second question we are asked to decide is whether petitioner Dennis E. Runkle (Mr. Runkle) is entitled to deduct business expenses in excess of the 19.2-percent deduction ratio of expenses to income that respondent allowed in the notice of deficiency (deficiency notice), dated August 7, 2002, based upon the expenses Mr. Runkle claimed regarding his insurance-related business on the 3 previous years' tax returns. We hold that he is not.
The third issue is whether petitioners are liable for the years at issue for the addition under section 6654 for failure to pay estimated taxes. We hold that petitioners are liable.
Some of the facts have been stipulated. The stipulation of facts and accompanying exhibits are incorporated by this reference, and the facts are so found. Petitioners resided in Fort Wayne, Indiana, when they filed the petition.
Both petitioners were self-employed entrepreneurs with financial and business experience. Mr. Runkle was self-employed in bicycle sales from 1972 to 1985, during which time he hired a bookkeeper or certified public accountant to maintain the books and records for the bicycle sales activity.
Mr. Runkle then became involved in insurance sales as an independent insurance agent in 1986 and has been a self-employed insurance agent since 1986. He has held a Life Underwriters Training Counsel Fellow (LUTCF) certification since at least 1991.
During the years at issue, Mr. Runkle also sold computers and computer equipment, and he obtained a 2-year associate's degree as a paralegal through a correspondence school in the mid-1990s.
Mr. Runkle began operating DR Financial, Inc. in the 1990s to promote the sale of insurance products and annuities. He also served on the financial commission of the Calvary Temple Church.
Mrs. Runkle operated the Canyon Kennel as a sole proprietorship since its inception in 1988 through at least 1995. She provided dog and cat kenneling and grooming services through Canyon Kennel. She maintained a checking account and was responsible for paying the Canyon Kennel's bills and collecting its income.
Petitioners timely filed their Federal income tax returns for all years before 1990 and paid the related taxes due. On February 25, 1991, petitioners applied for a $25,000 home equity loan line of credit with Garrett State Bank to pay their taxes for 1990.2 Petitioners timely filed a joint return for 1990 showing a tax liability of $13,467, which they paid with the loan proceeds from Garrett State Bank.
In the fall of 1991, petitioners attended a seminar sponsored by the American Institute for the Republic (American Institute) at which it promoted its "untaxing" program. The American Institute purported to advise petitioners how to "opt out of the system of paying taxes" and provided petitioners with letters to send to respondent's Service Center and agents in petitioners' effort to "opt out" of the taxing system. Petitioners paid approximately $1,000 to the American Institute and wrote "untaxing service" in the memo section of the checks and "final payment for untaxing."
Petitioners did not file a Federal income tax return for any year after 1990, nor have they made any estimated income tax payments regarding those years with one lone exception. Mr. Runkle made a $1,987 payment towards his Federal income tax for 1991 on April 17, 1991. Mr. Runkle made no payments for 12 years until September 28, 2003, at which time he made separate $100 payments towards each of the years 1998, 1999, 2000, 2001, 2002, and 2003.
Instead of filing tax returns and making payments, petitioners began sending correspondence typical of other "untaxing" programs to respondent's Cincinnati Service Center in March 1992. Specifically, petitioners sent a letter dated March 24, 1992, in which they stated that they "hold the sincere belief that the federal income tax laws do not apply to [them]" and they "firmly believe that the IRS is operating under secret jurisdiction and, as such, is operating unlawfully." In a second letter of the same date, petitioners stated that they recently found that the IRS was operating under color of law and that the IRS was attempting to extort money from them. "This is a formal demand that the [IRS] cease and desist from such activity at once." Petitioners then sent an additional letter on May 27, 1993, to respondent's Cincinnati Service Center advancing other frivolous, tax-protester type arguments. In this letter, petitioners declared that they were not taxpayers under the Code and dismissed the sections cited by respondent as not being "positive law."
Petitioners did not conduct any independent research to support the statements in petitioners' letters to respondent.
Petitioners maintained contact with the American Institute from March 1992 through at least 1995. In the course of petitioners' dealings with respondent, both administratively and judicially, the American Institute provided petitioners with rebuttal arguments to respondent's positions.
Sometime between 1990 and 1993, Mr. Runkle met certified public accountant William Boeykens (Mr. Boeykens) for what Mr. Runkle characterized as "mainstream tax planning" using partnerships, living trusts, and "pour-over" wills. Mr. Runkle and Mr. Boeykens3 promoted and sold these partnership packages as an income tax and estate tax planning program to their clients during 1992 through 1995. Mr. Runkle used his knowledge of income, gift, and estate tax law to promote and sell these programs to his clients. Mr. Runkle failed to maintain records of his income and expenses for this income and estate tax planning activity.
Mr. Runkle also did not maintain books and records of his income and expenses for his insurance sales activities, nor did he maintain books and records for his computer sales activities for the years at issue. Although he maintained a check register for the years at issue, Mr. Runkle threw away his check registers after he balanced his checking account. Mrs. Runkle destroyed her books and records for the Canyon Kennel for the years at issue, threw away the check registers she briefly maintained for Canyon Kennel, and threw away the bank statements after she balanced the bank account during the years at issue.
Petitioners formed the Elknur4 Family Limited Partnership on August 19, 1994.5
Petitioners have been the general partners of the Elknur Family Limited Partnership, each holding a 2-percent interest as general partner and a 4.5-percent interest as limited partner. Petitioners' children, Daniel J. Runkle, Dustin S. Runkle, and Dawn A. Runkle, each held 29-percent interests as limited partners in the Elknur Family Limited Partnership from its formation through at least December 31, 1995.
Petitioners transferred title to their personal residence to the Elknur Family Limited Partnership by quitclaim deed, dated October 18, 1994, in accordance with their partnership agreement. Petitioners received no consideration in exchange for their transfer of their personal residence to the Elknur Family Limited Partnership. The quitclaim deed referenced the consideration as "one dollar and other valuable consideration." Moreover, despite their contribution to the partnership, petitioners remained obligated to pay the outstanding obligations on the residence.
Petitioners opened a business checking account for the Elknur Family Limited Partnership on September 14, 1994, and Mr. Runkle deposited insurance commission checks into the business checking account for the Elknur Family Limited Partnership during 1994 and 1995. Petitioners used the partnership's checking account to pay personal expenses, including doctor bills and loan payments. Petitioners caused the Elknur Family Limited Partnership to file Form 1065, U.S. Partnership Return of Income, for 1994 and every year thereafter.
Petitioners submitted a purchase order to the R.V. Center, Inc., on behalf of the Elknur Family Limited Partnership, for the purchase of a 1995 Coachman recreational vehicle for $46,0006 on April 27, 1995. Petitioners caused the 1995 Coachman to be titled in the name of the Elknur Family Limited Partnership, although petitioners personally borrowed $32,320 from the Three Rivers Federal Credit Union and traded in a 1994 Starcraft they owned. In the loan application with the credit union, petitioners showed Mr. Runkle's annual "take home pay" as $37,500 and Mrs. Runkle's as $30,000. Petitioners provided the credit union selected information returns (Forms 1099) for 1993 and 1994 regarding income Mr. Runkle received. Petitioners presented no expense...
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