St. Augustine Trawlers, Inc. v. Commissioner
| Decision Date | 16 March 1992 |
| Docket Number | Docket No. 46843-86.,Docket No. 48350-86. |
| Citation | 63 T.C.M. 2362 |
| Parties | St. Augustine Trawlers, Inc. v. Commissioner. Velton J. O'Neal and Pearl W. O'Neal v. Commissioner. |
| Court | U.S. Tax Court |
James D. O'Donnell and Keith H. Johnson, 1648 Osceola St., Jacksonville, Fla., for the petitioners. Avery B. Cousins III, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases, respondent determined deficiencies in Federal income tax and additions to tax for both the corporate taxpayer and the individual taxpayers as follows:
St. Augustine Trawlers, Inc
(Docket No. 46843-86)
Fiscal Year Addition to Tax
Ending Deficiency Sec. 6653(b)
6/30/75 ............ $ 18,224 --
6/30/76 ............ 7,822 --
6/30/77 ............ 91,360 --
6/30/78 ............ 155,829 --
6/30/79 ............ 455,148 $222,574
6/30/80 ............ 801,864 400,932
On November 30, 1988, respondent filed an Amendment to Answer in which she asserted the following increases in petitioner's taxable income: "cash payments of $400,000.00 from Archie Woody Moore, $400,000.00 from Ken Kiken, $100,000.00 from Gene Culmer, $90,000.00 from Jack Hemingway, $200,000.00 from William Wells, an unknown amount from James Murray, and additional unreported income from scrap metal and vending machine sales." The resulting increased deficiencies and additions asserted by respondent were:
Fiscal Year Addition to Tax
Ending Deficiency Sec. 6653(b)
6/30/79 ............ $ 491,148 $245,574
6/30/80 ............ 1,077,864 538,932
Velton J. and Pearl W. O'Neal
(Docket No. 48350-86)
Taxable Year Addition to Tax
Ending Deficiency Sec. 6653(b)
12/31/74 ........... $ 4,785 $ --
12/31/75 ........... 23,208 --
12/31/76 ........... 74,254 --
12/31/77 ........... 60,992 --
12/31/78 ........... 17,472 --
12/31/79 ........... 432,160 216,080
12/31/80 ........... 536,160 268,080
12/31/81 ........... 1,478 --
On November 30, 1988, respondent filed an Amendment to Answer in which she asserted increases in petitioners' taxable income for all or part of the following: "cash payments of $400,000.00 from Archie Woody Moore, $400,000.00 from Ken Kiken, $100,000.00 from Gene Culmer, $90,000.00 from Jack Hemingway, $200,000.00 from William Wells, an unknown amount from James Murray, and additional unreported income from scrap metal in the amount of $21,000.00." The resulting increased deficiencies and additions asserted by respondent were:
Taxable
Year Addition to Tax
Ending Deficiency Sec. 6653(b)
12/31/79 .............. $579,510 $289,755
12/31/80 .............. 893,510 446,755
After concessions,1 the following issues remain for decision:
1. Whether the corporate taxpayer, St. Augustine Trawlers, Inc., failed to report income for its taxable years ending June 30, 1979, and June 30, 1980;
2. If the corporate taxpayer failed to report income, whether any portion of the understatement of income and resulting underpayment of tax each year was due to fraud on its part;
3. Whether the individual taxpayers, Velton J. and Pearl W. O'Neal, failed to report income they received in 1979 and 1980; and
4. If so, whether the understatement of income and resulting underpayment of tax each year was due to fraud on the part of petitioner Velton J. O'Neal.2
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated and are so found. The stipulation of facts, the first supplemental stipulation of facts, the second supplemental stipulation of facts, and the exhibits attached thereto are incorporated herein by this reference.
The principal place of business of the corporate taxpayer, St. Augustine Trawlers, Inc. (hereinafter Trawlers), at the time it filed its petition was St. Augustine, Florida. Trawlers was in the business of building, maintaining, and repairing shrimp boats and trawlers. After 1978, Trawlers also built dry docks and barges.
Trawlers was incorporated in Florida on September 3, 1971. At the time of incorporation, petitioner Velton J. O'Neal (hereinafter O'Neal) was president, Frank D. Upchurch, Jr., was vice president, and Jerry D. Thompson3 was secretary/treasurer. From December 29, 1971, to June 30, 1976, O'Neal was president, Jerry D. Thompson was secretary, and Joseph T. Thompson4 was treasurer. On June 30, 1976, Joseph T. Thompson also became vice president. During the June 28, 1979, board of directors meeting, O'Neal was elected president and Jerry D. Thompson was elected secretary, treasurer, and executive vice president.
At the organizational meeting on September 6, 1971, Trawlers had issued 563 shares of stock to O'Neal and 375 shares to Joseph T. Thompson. Shortly thereafter, Jerry D. Thompson became a shareholder, with the result that O'Neal and Joseph T. Thompson each owned 37.5 percent of the Trawlers stock and Jerry D. Thompson owned 25 percent. In 1976, O'Neal acquired Joseph T. Thompson's interest and sold an additional 8.33 percent interest to Jerry D. Thompson (hereinafter Thompson). Thompson gave O'Neal a promissory note, but made payments only for the first and second years. From 1976 until the sale of Trawlers on January 6, 1981, O'Neal owned 66.67 percent and Thompson owned 33.33 percent of the stock.
In December of 1980, O'Neal and Thompson negotiated with David L. Smeaton for the sale of Trawlers stock. The negotiated terms were $5 million, plus an additional $2 million to O'Neal and an additional $1 million to Thompson. On January 6, 1981, O'Neal and Thompson sold their stock in Trawlers to Smeaton. The sales agreement reflected a sales price of only $5 million, but O'Neal and Thompson also received notes for the additional amounts. The additional amounts were to be paid to a bank in the Cayman Islands. O'Neal told Thompson that they would not have to pay taxes on the $3 million portion of the purchase price that was paid in the Cayman Islands.
Between January 6, 1981, and May 6, 1981, when he reacquired the corporation, O'Neal held the stock pursuant to a pledge agreement. Immediately after the sale in January 1981, Fernando A. Hernandez was appointed president of Trawlers and Robert E. Luedke was appointed vice president, chief executive officer, and secretary. O'Neal and Thompson were retained to assist in the transition of ownership. In February of 1981, however, Smeaton and Luedke discharged Thompson, first giving him a 30-day suspension letter and then terminating his employment during that 30-day period.
At that time, Bruce Hoover, an independent certified public accountant and consultant to Smeaton, became suspicious when he discovered large credit memos that were being used to offset Trawlers' accounts receivable. He asked the accounting firm of Peat, Marwick, Mitchell & Co. (hereinafter Peat, Marwick) to perform an independent review of Trawlers' credit memos, boat sales contracts, accounts receivable, checks, and other records. On March 5, 1981, Hoover and Smeaton met with O'Neal. When Hoover informed O'Neal of the accounting discrepancies, O'Neal told Hoover that he and Thompson had split some of the cash coming into Trawlers.
The conclusions reached by Peat, Marwick essentially confirmed those reached by Hoover. On March 23, 1981, Peat, Marwick reported several problems to Luedke, including a $1.2 million overstatement in accounts receivable and Trawlers' use of double (inflated) boat contracts, which will be discussed below. These double boat contracts resulted in a fraud on the banks that financed the boat purchases. Accordingly, Luedke reported the matter to the Federal Bureau of Investigation (FBI), which initiated an investigation, particularly since one of the transactions was financed by an agency of the United States Government.
During this same time period, the Internal Revenue Service (IRS), independently and as a result of computer selection for audit, began a civil examination of Trawlers' corporate tax returns. By May of 1981, Smeaton was trying to renegotiate the January purchase agreement for Trawlers' stock. Since Smeaton had made only the first payment due on the notes, O'Neal brought suit to reacquire the shares and regain control of Trawlers. Pursuant to a local court order, the Trawlers shares were returned to O'Neal and Thompson in the spring of 1981.
In October of 1981, O'Neal purchased Thompson's interest in Trawlers. In return for his stock, O'Neal paid Thompson $100,000 and gave him a $500,000 promissory note. However, he stopped payments on the note after 5 or 6 months. Thompson then sued O'Neal because of the default on the note. O'Neal counterclaimed against Thompson. By letter dated October 12, 1981, Thompson tendered his resignation as secretary and director of Trawlers. However, Thompson had not been involved in the active operation of Trawlers at any time after January or early February of 1981.
Until 1980, O'Neal lived in Key West, Florida, where he operated a shrimping business. O'Neal was only present at the Trawlers shipyard for about four or five days a month. After moving to St. Augustine, Florida in early 1980, O'Neal was regularly present at the shipyard. During the years in issue, Thompson was the general manager of Trawlers. Virginia Weatherly was the bookkeeper from...
To continue reading
Request your trial