Solomon v. Commissioner, Docket No. 3055-76.
| Decision Date | 30 January 1978 |
| Docket Number | Docket No. 3055-76. |
| Citation | 1978 TC Memo 41,37 TCM (CCH) 218 |
| Parties | Donna C. Solomon v. Commissioner. |
| Court | U.S. Tax Court |
Gerald Kogan, Suite 500, Security Trust Bldg., 700 Brickell Ave., Miami, Fla., for the petitioner. David M. Berman, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined a deficiency in petitioner's 1971 Federal individual income tax, and additions to tax, as follows:
Additions to Tax, I.R.C. 1954
Year Deficiency Sec. 6651(a) Sec. 6653(a)
1971 ... $32,551.42 $3,255.14 $2,336.65
The petitioner having conceded certain matters, the primary question presented for our decision is whether petitioner sustained an embezzlement loss and, if so, the amount of such loss. Also at issue are the additions to tax for late filing and for negligence pursuant to sections 6651(a) and 6653(a), I.R.C. 1954, respectively.
Some of the facts have been stipulated, The stipulation of facts and accompanying exhibits are incorporated herein by this reference.
Petitioner, Donna C. Solomon, resided in North Miami, Florida, at the time her petition in this case was filed. She filed a Federal individual income tax return for the calendar year 1971 on October 18, 1972, with the Southeast Service Center at Chamblee, Georgia.
Petitioner's father, John H. Solomon, died in July 1968. At the time, petitioner was 17 years of age. She had just completed boarding school in Miami, Florida, and was living with her father in Potomac, Maryland. Her parents had been separated for approximately one year, and her mother and younger brother and sister resided in Tennessee. Rather than going to live with her family in Tennessee after her father's death, petitioner elected to enter the University of Miami as a freshman in the fall of 1968, and went to live with her cousin, Stanley Solomon, who had a home in North Miami.
Prior to his death, John Solomon had established several trusts of which petitioner was a beneficiary. Two such trusts, the "John Solomon Trust A" and the "John H. Solomon Trust", were administered by Loma Linda University as Trustee. During the period from her father's death through 1971, petitioner's sole source of income (save a small amount of bank interest) was the income which she received from these two trusts. In 1971, she reported total income from these two trusts of $99,121.07.1
Petitioner purchased a house in North Miami, Florida, on August 16, 1968, and lived there until April 16, 1971, at which time she sold the property and moved into another house which she had purchased. Petitioner's uncle, James Solomon (her father's brother), her cousin Stanley Solomon (James' son), and Stanley's wife, two children, and mother-in-law all moved into petitioner's new house with her in August 1968. Stanley's family continued to live with petitioner for about two years, during which time petitioner was their major source of financial support. James Solomon lived in petitioner's house until the fall of 1971. Petitioner provided virtually all of James' support, claiming him as a dependent on her 1971 tax return.
Petitioner's father, John Solomon, and her uncle, James Solomon, had been business partners. In the 1940's and 1950's, they had operated a successful real estate business in Florida, but subsequently they split up and John moved out of Florida. James apparently fell on hard times, and was at some point forced into bankruptcy. In the summer of 1968 he was unemployed and had no independent source of income. He may have been holding himself out as a construction and real estate developer, but he was not at that time involved in any actual construction or development. During the period from 1968 through 1971, when James was living in petitioner's house, he did not, to petitioner's knowledge, hold any job, but he did spend considerable amounts of time frequenting bars and race tracks. At least once, on or about February 23, 1971, he was arrested and charged with a criminal activity that may have been related to gambling.
Petitioner felt considerable affection for her uncle James and, after her father's death, allowed him to become something of a "father figure" to her. Not only did she invite him to share her home, but she turned to him for financial advice respecting her trust income. At her uncle's suggestion, on November 19, 1969, she formed the 1865 Corporation for the purpose of investing in real estate. While documents of incorporation were filed with the State of Florida, the 1865 Corporation never issued any stock, nor did it conduct proper corporate meetings or maintain corporate records. It opened checking account number XXX-XXX-X at the Second National Bank of North Miami. James became president of the 1865 Corporation; he and petitioner were the authorized signatories for its checking account.
James, on behalf of the 1865 Corporation, became involved in a partnership with one John Toppa for the construction of five houses. As late as the fall of 1970, checks were drawn on the 1865 Corporation checking account to pay certain expenses in connection with that construction.2 Thereafter, however, James did not engage in any further real estate ventures on behalf of the 1865 Corporation.
At James' suggestion, petitioner deposited all or a substantial portion of her trust income in the 1865 Corporation's corporate checking account, and those funds were the only funds available for the corporation's operations. As of January 1, 1971, the 1865 Corporation checking account showed a balance of $4,919.43. Between January 1 and October 26, 1971, credits totalling $123,510.86 were made to the account,3 but on October 14, 1971, when petitioner closed out the account, it had a balance of only $341.80. During 1971, James drew 34 checks payable to cash, in a total amount of $14,756; he drew 55 checks payable to himself, or payable to cash and endorsed by himself, in a total amount of $59,800. In addition, petitioner drew 9 checks payable to James, or payable to cash and endorsed by James, in a total amount of $3,940.
From the time of the corporation's formation until October 1971, in addition to paying expenses connected with their real estate venture, both petitioner and James drew checks on the corporate account to make mortgage and car payments, and to pay other living and household expenses. Both James and petitioner also drew checks on the corporate account to obtain cash. Although petitioner anticipated that James would use corporate funds only for real estate ventures and for personal living expenses, she did not formally limit his authority to draw on the corporate account. She was aware that, while living in her house, James ran into heavy debt because of his gambling, and on at least one occasion she signed a corporate check to provide money to post bond after James had been arrested on a criminal charge that she thought might have involved gambling. Nonetheless, petitioner was not aware, prior to October 1971, of the exact amounts being withdrawn by James from the 1865 Corporation checking account. For one thing, after February 1971 James had the bank hold monthly statements for him to pick up, so petitioner did not regularly see them. And James did not keep complete records of the checks which he drew, nor did he draw checks in numerical sequence from the checkbook which both he and petitioner used.
About October 13, 1971, petitioner, at the suggestion of a friend, took the corporate checkbook from her uncle's bedroom, where it was kept, and examined it carefully. She was surprised and angered at the size of her uncle's withdrawals from the account, and at the fact that complete records apparently had not been kept. Immediately, on October 14, she closed out the 1865 Corporation checking account and transferred the remaining funds into a personal account of her own. Thereafter, she confronted her uncle and told him to move out of her house. She did not request an explanation of the large withdrawals, nor did James proffer one. James moved out of the house, and did not return to petitioner's home to live until some months later. Subsequent to the altercation which terminated in James' moving out of petitioner's house, James did offer an explanation for the large withdrawals. He told petitioner that he had invested in certain racing dogs and also in a race track, partly in Florida and partly in the South American nation of Colombia. He further told petitioner that although he did not have records of his investments, he would obtain them for her. At the time, petitioner believed James' explanation and indeed paid for a trip to Colombia for him to obtain the necessary documentation. No documentation was ever obtained.
Petitioner retained a Mr. Howard Neu, an attorney, to prepare her 1971 Federal income tax return. On the return prepared by Mr. Neu, a deduction was claimed for embezzlement losses sustained by petitioner through James' appropriation of funds from the 1865 Corporation checking account. Petitioner refused to sign this return because she accepted her uncle's explanations for the amounts withdrawn from the corporate account, and because she did not want to get her uncle into trouble over his use of the corporate funds.
After refusing to sign the return prepared by Mr. Neu, petitioner had a second return prepared by an accountant, Mr. Philip Paul, who had been recommended to her by her uncle. This return contained a Schedule C showing the following business losses:
Loss
Item Claimed
Training Costs of 3 Race Horses ............... $11,660.00
Training, Feeding & Breeding Costs
in Greyhound Race Dogs — Abandoned ..... 35,000.00
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