Whyte v. Commissioner, Docket No. 7953-83

Decision Date29 September 1986
Docket NumberDocket No. 7953-83,7954-83.
Citation1986 TC Memo 486,52 TCM (CCH) 677
PartiesHerbert G. Whyte and Almaz M. Whyte v. Commissioner. Herbert G. Whyte Associates, Inc. v. Commissioner.
CourtU.S. Tax Court

Nathaniel Ruff, 521 E. 86th Ave., Merrillville, Ind., for the petitioners. Luanne S. DiMauro, for the respondent.

Memorandum Findings of Fact and Opinion

KÖRNER, Judge:

Respondent determined deficiencies in Federal income tax and additions to tax against petitioners Herbert G. Whyte, Almaz M. Whyte, and Herbert G. Whyte Associates, Inc. as follows:

Tax YearAdditions to TaxPetitionersDocket No.EndedDeficiencySec. 6653(b)2
                  Herbert G. Whyte
                  & Almaz M. Whyte      7953-83       12/31/75      $ 6,789.77         $ 3,394.89
                                                      12/31/76        5,719.00           2,859.50
                                                      12/31/77       46,542.21          23,271.11
                                                      12/31/78       30,795.90          20,572.68
                  Herbert G. Whyte
                  Associates, Inc.      7954-83        8/31/75      $ 1,011.12         $   505.56
                                                       8/31/76        5,919.28           2,959.643
                                                       8/31/77          647.01             323.51
                                                       8/31/78       77,653.63          38,826.82
                

After concessions,4 the issues remaining for decision are: (1) Whether petitioner Almaz M. Whyte incurred an allowable expropriation loss during 1975, and if so, whether said loss may be deducted for that year and carried forward to the remaining years in issue; (2) whether petitioner Herbert G. Whyte Associates, Inc. is entitled, pursuant to section 162, to deduct certain expenses allegedly incurred in Jamaica during the years in issue; (3) whether petitioner Herbert G. Whyte or petitioner Herbert G. Whyte Associates, Inc., or both, are liable for additions to tax pursuant to section 6653(b) for each of the years in issue; and (4) whether respondent is barred from the assessment and collection of the deficiencies herein, due to the expiration of the applicable period of limitations.

Findings of Fact

Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

General Background

Petitioners Herbert G. Whyte ("petitioner") and Almaz M. Whyte ("Almaz") (collectively referred to as "petitioners"), husband and wife, resided in Gary, Indiana, at the time the petition in docket No. 7953-83 was filed. Petitioners filed joint Federal income tax returns (Forms 1040) for each of the calendar years 1975 through 1978, using the cash method of accounting. For each of these years, the address shown on the returns was Gary, Indiana. The returns for each year claimed exemptions for petitioner, Almaz, and two children (with the exception of the 1978 return, which claimed an exception for only one child), and claimed deductions for state and local income taxes, real estate taxes, state and local gasoline taxes, general sales taxes, and home mortgage interest payments. Petitioners each had social security numbers which were used on these returns, and for the years in issue they had a joint checking account. Each of the returns was timely filed, with the exception of the return for 1978, which was filed on May 31, 1979. A notice of deficiency covering each of these years was issued by respondent to petitioners on January 24, 1983.

Almaz was born and raised in Ethiopia. She left Ethiopia in 1960, at the age of 16, to obtain schooling in England and the United States. While in the United States, she received a bachelor's degree in political science and she is currently on a leave of absence from the University of Chicago, where she is working on her master's degree. She returned to Ethiopia in 1967 and remained there for the next five years. Almaz reentered the United States as a visitor on October 25, 1972. She was married to petitioner on October 1, 1973, and from that date until the time her Ethiopian properties were expropriated,5 she did not return to Ethiopia. On June 25, 1975, Almaz applied to become a lawful permanent resident and she was granted that status on July 20, 1976. She remained in this capacity until her naturalization as a United States citizen on September 28, 1982. Though she was primarily a housewife during the years in issue, she was also employed by the Gary, Indiana, Manpower Administration during 1975. Almaz was a resident of the United States throughout 1975.

Petitioner was born and raised in Jamaica, and stayed there until the age of 21. He obtained a University of Cambridge School Certificate from Waulgrove College in Jamaica in 1954, a Bachelors Degree in Civil Engineering from Howard University in Washington, D.C., in 1962, and thereafter, he received a Masters Degree in Civil Engineering from Catholic University in Washington, D.C. In 1966, he received a scholarship from the British Government to attend Britton College of Technology, where he earned a post graduate diploma in traffic and highway engineering. While in England, petitioner attended the University of London, the University of Slough, and the Road Research Laboratory in Slough.

After he completed his education, petitioner returned to Jamaica to work in the engineering field. Several years later he decided to seek employment in the United States. He entered the United States as a lawful permanent resident on March 21, 1969, and has remained in this capacity ever since. He worked at various engineering firms in this country until 1974, when he founded his own engineering firm, Herbert G. Whyte Associates, Inc.

Petitioner Herbert G. Whyte Associates, Inc. (hereinafter referred to as the "Corporation") had its principal place of business in Gary, Indiana, at the time the petition was filed in docket No. 7954-83, and filed returns for the years in issue as follows:

                Taxable Year Ended Filed
                  August 31, 1975 ................ November 17, 1975
                  August 31, 1976 ................ December 13, 1976
                  August 31, 1977 ................ November 17, 1977
                  August 31, 1978 ................  January 29, 1980
                

A notice of deficiency was issued to the Corporation for each of these years on January 24, 1983. During the years in issue, petitioner was the sole shareholder and manager/president of the Corporation.

Unreported Income and Improperly Claimed Deductions

The individual income tax returns for petitioners during the years in issue were prepared by Sylvester Goodson, an experienced public accountant. Goodson also prepared the income tax returns for the Corporation for the fiscal years ended August 31, 1975, August 31, 1976, and August 31, 1977. The return for the fiscal year ended August 31, 1978, was prepared by Terrence Bronowski.

The accounting system for the Corporation was set up by Goodson. He established a cash disbursements journal, a payroll ledger, a general ledger, and a general journal. He also gave instructions on setting up an accounts receivable ledger. This system was designed so that the corporate tax returns would be prepared using the cash receipts and disbursements method of accounting.

Goodson examined the deposits shown on the Corporation's bank statements in order to determine corporate income for each of the years in issue. Accurate depictions of income in this manner necessarily depended on whether checks received by the Corporation were deposited into the corporate bank accounts. Though Goodson directed petitioner to deposit all of the corporate checks into the accounts, the following amounts were not deposited and were instead taken by petitioner for his own personal use:

                Tax Year Ended Amount
                  August 31, 1975 .................. $ 4,892.13
                  August 31, 1976 ..................  26,738.48
                  August 31, 1977 ..................  15,366.01
                  August 31, 1978 ..................  92,091.40
                

Corporate expenses were determined from check stubs, canceled checks, and invoices. The following amounts were deducted as either consulting expenses, education and seminar expenses, or repair expenses in the Corporation's returns, but were actually personal expenses of petitioner:

                Tax Year Ended Amount
                  August 31, 1976 .................. $ 1,300.00
                  August 31, 1977 ..................   5,130.00
                  August 31, 1978 ..................  52,365.006
                

As a result of the above transactions the Corporation underreported its income as follows:

                Tax Year Ended
                8/31/75 8/31/76 8/31/77 8/31/78
                  Unreported Gross receipts .............  $4,892.13    $26,738.48    $15,366.01   $ 92,091.40
                  Personal Expenses Improperly Claimed as
                    Business Deductions .................          0      1,300.00      5,130.00     52,365.00
                                                           _________    __________    __________   ___________
                      Total7 ........................ $4,892.13    $28,038.48    $20,496.01   $144,456.40
                                                           =========    ==========    ==========   ===========
                

Based upon the Corporation's failure to report the above income, as well as the false deductions claimed, respondent determined that petitioner received the following amounts of taxable dividend income:

Tax Year EndedAmount8
                  December 31, 1975 .............$ 19,529.139
                  December 31, 1976 .............  16,944.499
                  December 31, 1977 ............. 106,457.809
                  December 31, 1978 .............  56,754.569
                

Petitioner is the same person who was the defendant in the criminal case of United States of America v. Herbert G. Whyte (N.D. Ind., docket No. H CR 81-00045). In that case, petitioner was charged with filing false Federal income tax returns for each of the years 1975 through 1978, in violation of section 7206(1). On March 22, 1982, a jury returned a guilty verdict on all of the charges against petitioner. On May 6, 1982, the United States District Court entered its judgment pursuant to the guilty verdict. This...

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