Tabbi v. Commissioner
| Citation | 70 T.C.M. 836 |
| Decision Date | 28 September 1995 |
| Docket Number | Docket No. 15863-93. |
| Parties | Bruno and Francesca Tabbi v. Commissioner. |
| Court | United States Tax Court |
Gerald J. Carnago, Troy, Mich., for the petitioners. Dennis G. Driscoll, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in petitioners' Federal income tax and additions to tax as follows:
Additions to Tax
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Sec. Sec. Sec. Sec
Year Deficiency 6651(a)(1) 6653(a)(1)(A) 6653(a)(1)(B) 6661
1987 .............................. $108,314 $ 79 $ 232 1 $27,078
1988 .............................. 66,102 -- 3,3052 -- 16,526
1989 .............................. 36,411 8,695 -- -- --
Sec. Sec. Sec. Sec. Sec
Year 6653(b)(1)(A) 6653(b)(1)(B) 6653(b) 6662 6663
1987 .............................. $77,762 3 -- -- --
1988 .............................. -- -- $49,576 -- --
1989 .............................. -- -- -- $2,304 $19,012
1 Fifty Percent of the interest due on $4,632
2 Sec. 6653(a)(1) for 1988
3 Fifty percent of the interest due on $103,682
After concessions, the issues for decision are:
(1) Whether petitioners had unreported income of $47,068 for 1987, $87,711 for 1988, and $30,475 for 1989. We hold that they did, except as discussed below.
(2) Whether petitioners' unreported income is subject to self-employment tax for 1987, 1988, and 1989. We hold that it is, except as conceded by respondent.
(3) Whether petitioners had unreported income of $25,518 from the sale of their residence in 1988. We hold that they did.
(4) Whether petitioners' gains and losses from the sale of real property in 1987, 1988, and 1989 were capital or ordinary. We hold that they were ordinary.
(5) Whether petitioners had unreported capital gains of $2,500 from the sale of their interest in Bagnasco-Tabbi Funeral Home. We hold that they did.
(6) Whether petitioners had unreported interest income of $709 for 1987, $306 for 1988, and $379 for 1989. We hold that they did.
(7) Whether petitioners may deduct advertising, rent, office expenses, utilities and telephone, commissions, supplies, licenses and fees, dues, rental maintenance, and insurance expenses in excess of the amounts allowed by respondent. We hold that they may not, except as discussed below.
(8) Whether petitioners may carry forward a net operating loss of $1,008 for 1988. We hold that they may not.
(9) Whether petitioner Bruno Tabbi is liable for the addition to tax for fraud under section 6653(b) for 1988 and the fraud penalty under section 6663 for 1989. We hold that he is not.
(10) Whether petitioners are liable for additions to tax for: (a) Negligence under section 6653(a) for 1987 and, in the alternative to fraud, for 1988 and the negligence penalty under section 6662 for 1989; (b) substantial understatement of income tax under section 6661 for 1987 and 1988; and (c) late filing under section 6651(a)(1) for 1987 and, in the alternative to fraud, for 1989. We hold that they are liable for the additions to tax for negligence and substantial understatement of tax for 1987 and 1988, the negligence penalty for 1989, and the addition to tax for late filing for 1987, but that they are not liable for the addition to tax for late filing for 1989.
(11) Whether petitioner Francesca Tabbi qualifies as an innocent spouse under section 6013(e). We hold that she does not.
Respondent concedes that petitioners are not liable for the addition to tax for fraud for 1987, and that petitioner Francesca Tabbi is not liable for the addition to tax for fraud for 1988 and 1989.
References to petitioner husband are to Bruno Tabbi. References to petitioner wife are to Francesca (or Frances P.) Tabbi. Section references are to the Internal Revenue Code in effect for the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated and are so found.
Petitioners resided in Clinton Township, Michigan, when they filed the petition.
Petitioner wife worked as a secretary for her father, Salvatore LoChirco (LoChirco), at Oliver Homes, Inc. (Oliver Homes), from 1978 to 1988. She did not work in petitioner husband's office and was not involved in his real estate business.
Petitioners had two children born before 1988. Petitioners' son Antonino was born in September 1988 with severe heart problems that led to his death in August 1990. Petitioner wife spent most of the time after Antonino was born caring for him and petitioners' two older children. Antonino was in the hospital frequently from September 1988 to April 1990. He had heart surgery in April 1990, and was hospitalized until late July. Petitioners were at the hospital with him continuously during these 4 months. Antonino died 10 days after he was discharged from the hospital.
Petitioner husband was a real estate broker from 1974 to 1989. Petitioners owned rental properties and investment real estate in 1987, 1988, and 1989.
Petitioner husband was also in the business of buying and selling homes through his company, Americana Investment Corp. (Americana). Because of changes in the Detroit real estate market in 1986 and 1987, petitioner husband could not sell as many houses in the years in issue as he had previously. Petitioner husband rented the houses until he could sell them, and made repairs that were necessary to keep the houses in saleable condition.
Petitioner husband conducted his real estate activities through several business entities. His business operations were disorganized. He did not keep good records. He intermingled assets and funds between his many business and personal bank accounts, and he was thinly capitalized and overextended in credit. Because of his disorganization and lack of records, he did not know and could not accurately reconstruct his income for the years in issue.
In 1987, petitioner husband owned and was president of Americana, a Michigan corporation that used investments to buy certificates of deposit (CD's) and then borrow against them. He used the loan proceeds to buy, sell, and manage residential real estate for investors. Many of Americana's investors were friends and relatives of petitioner husband's family. Americana promised its investors a high rate (i.e., 17 percent) of return. It reported gross sales of homes of $140,718.05 and a $31,149.26 loss for 1987. Americana went out of business in 1987.
In 1987, petitioner husband was a real estate broker and operated rental properties for B.R. Tabbi, Inc., d.b.a. Earl Kiem Realty Bell/Shores Realty, Inc., a Michigan corporation; BRT Mortgage Co. (BRT); and Canta Building Co. (Canta). Petitioner husband was president of Earl Kiem Realty. He sold $116,595 of real property in 1987.
Petitioner husband was a real estate broker and operated rental properties for Canta in 1988. He sold $27,847 of real property in 1988.
Petitioner husband was a real estate broker and operated rental properties in 1989 for Canta, Premiere Financial Services (Premiere), Homeowners Direct Co. (Homeowners), and La Terra Real Estate (La Terra), d.b.a. Soldi Real Estate Co. (Soldi). La Terra was a Michigan corporation owned by petitioner husband, Anthony Duronio, and Joseph Ancona. Petitioner husband owned one-third of La Terra's stock. La Terra's shareholders and nonshareholder employees earned commissions from real estate sales. Each salesperson contributed his or her share of expenses to La Terra. LaTerra's shareholders did not share equally in La Terra's income and were not paid for being shareholders or officers. La Terra leased an office at 38600 Van Dyke, Sterling Heights, Michigan.
On February 7, 1989, petitioner husband incorporated Premiere in Nevada. Petitioner husband was the president of Premiere.
On April 7, 1989, petitioner husband incorporated Canta in Delaware. Petitioner husband was the president, and petitioner wife was the secretary of Canta.
Petitioner husband sold $42,400 of real property in 1989.
On December 2, 1987, petitioner husband filed for bankruptcy under chapter 7 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of Michigan. Petitioner husband was granted a discharge under chapter 7 on March 9, 1988. Petitioner husband's creditors pressed him for payment, both before and after his discharge in bankruptcy.
Before and during the years in issue, petitioner husband transferred real estate without consideration from petitioners to Americana, and from Americana to petitioners. During the years in issue, petitioner husband deposited rental and installment sales income from real estate owned by Americana to the Earl Kiem Bell/Shores escrow account, which petitioner husband controlled.
In 1987, petitioner husband transferred $9,800 to Americana's account. Petitioner husband liquidated Americana in 1987. At that time, he distributed its assets, including financial investments and real estate to himself and assumed its liabilities. In 1987, petitioners paid various expenses relating to real estate owned by petitioners and/or Americana.
From 1987 to 1989, petitioner husband obtained second mortgages on, and rented, real properties owned by petitioners and/or Americana. At the same time, he sold parcels of real...
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