Turner v. Commissioner
| Citation | 1985 TC Memo 159,49 TCM (CCH) 1107 |
| Decision Date | 02 April 1985 |
| Docket Number | Docket No. 7786-73. |
| Parties | Glenn W. Turner and Alice A. Turner v. Commissioner. |
| Court | United States Tax Court |
Roger V. Barth and Paul S. Richter, for the petitioners. Thomas R. Ascher, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies in and additions to petitioners' Federal income taxes:
Addition to Tax
Sec. 6653(a)
Year Deficiency I. R. C. 1954
1969 .............. $264,792.97 $13,239.65
1970 .............. $123,278.81 $ 6,163.94
1971 .............. $496,671.35 $24,833.57
After concessions by respondent,1 the issues for decision are as follows:
1. Whether petitioner Glenn W. Turner received constructive dividends from his wholly owned corporations, Koscot Interplanetary, Inc., and subsidiaries, as succeeded in reorganization by Glenn W. Turner Enterprises, Inc., and subsidiaries in the amounts and years as determined by respondent and set forth below:
(a) $271,486.07, $53,553.66, and $105,042.51 for the years 1969, 1970, and 1971, respectively, based on advances to or for Glenn W. Turner's behalf by Koscot Interplanetary, Inc., as reflected in Koscot Account No. 11-425 "Advances to Glenn W. Turner";
(b) $73,945.77, $19,730.39, and $10,213.70 for the years 1969, 1970, and 1971, respectively, based on certain credits to Glenn W. Turner's Koscot advance account determined by respondent to be either unsubstantiated or personal expenses of Turner's and not properly chargeable to Koscot business expense;
(c) $4,600 and $8,500 for 1971 based on advances to or for Glenn W. Turner's behalf from Koscot subsidiaries, Intercontinental Credit Rating Corp. and American Line Cosmetics Inc., respectively;
(d) $87,755.50 and $520,568.83 for 1970 and 1971, respectively, based on amounts expended by Koscot for the acquisition of and construction on a tract of land referred to as the "castle property";
(2) Whether petitioners had unreported income in the amount of $296,677.20 for 1971 consisting of bank deposits to a certain Florida National Bank checking account referred to as the "G. W. T. Land Account"; and
(3) Whether, if we find that petitioners underpaid their taxes for any of the years at issue, the underpayment is due to petitioners' negligence or intentional disregard of rules and regulations within the meaning of section 6653(a).2
At the time they filed their petition in this case, petitioners' legal residence was Rural Route 1, Bear Gully Road, Maitland, Florida. Petitioners Glenn W. Turner (Glenn) and Alice A. Turner Flynn (Alice) were married during 1969, 1970, and 1971, and filed joint Federal income tax returns for those years; they were subsequently divorced on February 9, 1979.
Glenn's Work Hstory and Formation of Koscot Interplanetary, Inc.
Glenn, born in Columbia, South Carolina, in 1934, dropped out of school in the eighth grade at age 17. He then joined the U. S. Air Force, but received a medical discharge for a perforated ear drum at age 18. After leaving the Air Force, Glenn attended an adult education school for one year and then went on to a junior college and trade school.
During the period from 1954 to 1966, Glenn performed various jobs. In 1954, at the age of 20, he went to work for Monarch Sewing Center in Greenville, South Carolina, as a door-to-door sewing machine salesman. Unsuccessful and discouraged by this venture, Glenn then performed a series of jobs. He pumped gas, did odd jobs, worked as a carpenter, worked in the Civil Service at an air base, and returned home to help his father with the family farm.
After failing once at an attempt to start his own business, in 1966, Glenn became a partner in a distributorship for Holiday Magic, a California cosmetics company. Successful at this cosmetics venture, Glenn formed his own company on August 22, 1967, Koscot Interplanetary, Inc. (Koscot), in Orlando, Florida, to set up a network of cosmetics distributorships. From the time of Koscot's formation in 1967 until July 31, 1971, Glenn was its sole stockholder. During the period 1969 through 1971, Glenn was Koscot's chairman of the board; he resigned as chairman in early 1972.
Koscot formed a number of subsidiaries including among others, House of Koscot, which set up cosmetics boutique shops; American Line Cosmetics, set up for over-the-counter cosmetics sales; ServKot, a credit card corporation; Dixie Harvesting, a fruit-harvesting company; and Dare To Be Great, which sponsored sales motivational courses for Koscot distributors and salespeople. Koscot and its subsidiaries operated and reported their income on a July 31 fiscal year during the years 1967 through 1971.
Koscot and its subsidiaries grew rapidly during the period 1969-1971, with total sales of $13 million for 1969, $22 million for 1970, and $56 million in 1971. By 1971, Koscot had over 400 employees at the main corporate headquarters in Orlando, Florida, and 100 more employees in other parts of the country. Koscot also had subsidiaries operating in other countries, including Australia, Spain, Mexico, Venezuela, Canada, England, and Germany.
As Koscot's chairman of the board, Glenn was responsible for giving training lectures, motivational and sales talks to Koscot distributors, potential distributors, and people working in various Koscot offices. During the period 1969-1971, Glenn traveled for Koscot a great deal; flying in Koscot's Lear jet, he "hit three states a day, four days a week *** 16 to 18 hours a day *** just a hectic schedule." Glenn usually spent one day per week at the office in Orlando and maybe one day with his family.
On August 1, 1971, there was a reorganization of Koscot's corporate structure. Koscot and its subsidiaries and certain of its affiliates became the subsidiaries of one of Koscot's former subsidiaries, Glenn W. Turner Enterprises, Inc. (Turner Enterprises). Glenn became the sole shareholder of Turner Enterprises which in turn was the sole shareholder of Koscot. Prior to 1973, neither Koscot nor Turner Enterprises ever declared a dividend.
During 1969, 1970, and 1971, the years at issue, partly as a result of Glenn's frenetic business travel schedule, substantial amounts of Koscot funds were used to pay certain personal expenses for Glenn and his family. In addition, Koscot funds were advanced to Glenn so he could purchase various parcels of real property for investment purposes. Brent Wright (Wright), Koscot's first accountant, explained to Glenn, and Glenn agreed, that all such expenditures made on Glenn's behalf by Koscot which could not be properly classified as legitimate business expenses would have to be charged to Glenn as advances, i.e., loans, which Glenn would have to repay. Koscot's accounting department kept a detailed record of all advances to Glenn in Koscot's Account No. 11-425, designated "Advances to Glen sic W. Turner," (the advance account) so that Glenn could repay all such amounts.
At some time after 1969, Koscot hired Gordon Simonds (Simonds), a tax attorney, with whom Glenn also discussed his advances from Koscot. Simonds directed Glenn to execute interest-bearing promissory notes to reflect the advances from Koscot. It was always Simonds, and personnel from the Koscot accounting department, which by 1971 had over 60 employees including bookkeepers and several certified public accountants, not Glenn, who determined which Koscot expenditures should be charged to Glenn's advance account and which others were properly chargeable to business expense. Periodically, adjusting entries were made to the advance account to reflect the proper bookkeeping treatment of items debited to the advance account; some items initially debited to the advance account were credited thereto and redebited to other business expense accounts when it was determined by Simonds or the bookkeeping department that such expenditures were actually Koscot business expenses rather than Glenn's personal expenses.
The year end balances of Glenn's advance account were shown as "Loans to stockholders," i. e., corporate assets, on the balance sheet submitted as part of Koscot's corporate Federal income tax returns for fiscal years ended July 31, 1969, 1970, and 1971 in the respective amounts of $469,249, $638,486, and $348,645. Similarly, the year end balances of Glenn's advance account were shown as corporate assets designated "Due from officer" on Koscot financial statements for 1969, 1970, and 1971 in the respective amounts of $469,249, $638,486, and $372,645. Interest on Glenn's promissory notes was accrued in Koscot's account No. 11-515 designated "Accrued Interest on Bonds and CD's."
Attached to Koscot's Consolidated Financial Report for the fiscal year ended July 31, 1969, is Note 6 which states the following:
Attached to Koscot's consolidated financial statements for the fiscal year ended July 31, 1970, "prepared in conformity with principles of accounting applicable to a going concern" as affirmed by J. K. Lasser & Company (J. K. Lasser), a public accounting firm, is Note 5 which states:
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