Wienke v. Comm'r
| Decision Date | 14 October 2020 |
| Docket Number | Docket No. 15709-17.,Docket No. 15708-17,T.C. Memo. 2020-143 |
| Parties | SHELLEY JOU WIENKE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent EVERGROW INVESTMENTS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
SHELLEY JOU WIENKE, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
EVERGROW INVESTMENTS, INC., Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
T.C. Memo. 2020-143
Docket No. 15708-17
Docket No. 15709-17.1
UNITED STATES TAX COURT
October 14, 2020
Shelley Jou Wienke, pro se in docket No. 15708-17.
Shelley Jou Wienke (an officer), for petitioner in docket No. 15709-17.
Nicholas R. Rosado, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
PUGH, Judge: In these consolidated cases respondent determined the following deficiencies, additions to tax, and penalties in notices of deficiency issued to Ms. Wienke and Evergrow Investments, Inc. (Evergrow), on May 10, 2017:2
Docket No. 15708-17 (Ms. Wienke)
| Year | Deficiency | Addition to tax sec. 6651(a)(1) | Penalty sec. 6662 |
| 2012 | $98,323 | $24,581 | $19,665 |
| 2013 | 5,610 | 1,403 | 1,122 |
Docket No. 15709-17 (Evergrow)
| Year | Deficiency | Addition to tax sec. 6651(a)(1) | Penalty sec. 6662 |
| 2012 | $13,788 | $3,447 | $2,758 |
| 2013 | 17,603 | 7,711 | 3,521 |
| 2014 | 112,169 | 30,805 | 22,434 |
| 2015 | 1,096 | 2,091 | 219 |
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After respondent conceded that petitioners are not liable for accuracy-related penalties under section 6662, the issues for decision are whether: (1) Ms. Wienke properly allocated rental property income between her and her husband (collectively, Wienkes) under California community property law for 2012 and 2013; (2) Ms. Wienke must include in her gross income cancellation of indebtedness of $144,516 and $39,613 for 2012 and 2013, respectively; (3) Ms. Wienke received constructive dividends of $9,707 and $14,593 for 2012 and 2013, respectively;3 (4) Ms. Wienke is entitled to depreciation deductions she claimed on her Schedules E, Supplemental Income and Loss, in amounts greater than those respondent allowed for 2012 and 2013; (5) respondent abused his discretion in changing Ms. Wienke's method of accounting and making a section 481(a) adjustment to include $243,405 in her 2012 gross income; (6) Evergrow failed to report income of $50,572 for 2014; (7) Evergrow is entitled to deduct its business expenses and offset its gross receipts with cost of goods sold (COGS) in amounts greater than those respondent allowed for the years in issue; and (8) petitioners are liable for additions to tax under section 6651(a)(1) for failure to file timely returns.
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Some of the facts have been stipulated and are so found. The stipulated facts are incorporated in our findings by this reference. Ms. Wienke was a resident of California when she timely filed her petition. Evergrow's principal place of business was in California when it timely filed its petition.
I. Background
A. The Wienkes
The Wienkes married in 1994 and lived in California at all relevant times.4
From 1994 through 2008 the Wienkes jointly acquired 28 residential rental properties in areas around Clear Lake, California.5 They owned all 28 properties
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during 2012 and 2013. The record includes several invoices from Piedmont Lumber showing that Mr. Wienke purchased materials for property renovations during the years in issue,6 but the invoices do not indicate any particular property or renovation.
In 2007 Ms. Wienke refinanced the mortgage for one of the rental properties in Kelseyville, California (Kelseyville property). In 2013 the lender, Seterus, Inc. (Seterus), foreclosed on the mortgage and discharged the Kelseyville property's outstanding debt. Seterus issued a Form 1099-C, Cancellation of Debt, to Ms. Wienke in 2013 for $79,226. Seterus checked the box on the form indicating that she was personally liable for repayment of the debt.
The Wienkes jointly owned two other nonrental properties, one in Clearlake, California (Clearlake property), and the other in Upper Lake, California (Upper Lake property), which they acquired in 2004. In 2007 Mr. Wienke refinanced the mortgage for the Clearlake property with the Federal National Mortgage Association (Fannie Mae) and the mortgage for the Upper Lake property with the Federal Home Loan Mortgage Corporation (Freddie Mac). In 2012 Fannie Mae and Freddie Mac foreclosed on their respective mortgages and discharged each property's outstanding debt, issuing Forms 1099-C for 2012
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reflecting discharged amounts of $155,477 and $133,554, respectively. The box indicating Mr. Wienke was personally liable for repayment of the debt was checked on each Form 1099-C as well.
B. Evergrow
The Wienkes also owned Evergrow, a California corporation organized in 2007. Evergrow operated a grocery market and pizza store in San Francisco, California. Mr. and Ms. Wienke each owned a 50% interest in Evergrow during 2012 and 2013, and Ms. Wienke served as its president during the years in issue.
Evergrow's books for the years in issue reflected purchases of $908,363, $1,081,714, $1,042,515, and $1,049,669, respectively. The Wienkes "consumed" approximately $75 to $100 of those purchases per week for their personal use. Evergrow's books for 2013 and 2014 also reflected irregular payments to the Wienkes in the forms of draws and payments of their personal expenses that totaled $25,346 and $26,638, respectively. Evergrow did not file employment tax returns or issue Forms W-2, Wage and Tax Statement, with respect to any of those payments.
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II. Petitioners' Tax Returns
A. Ms. Wienke
Ms. Wienke filed tax returns separately from her husband for each year in issue, electing the "married filing separately" option. She untimely filed Forms 1040, U.S. Individual Income Tax Return, for 2012 and 2013 on March 24, 2014, and February 2, 2015, respectively.
Ms. Wienke reported 18 rental properties on her 2012 return and 17 rental properties on her 2013 return; Mr. Wienke reported the remaining properties on his returns.7 The Wienkes reported total rents received of $336,312 and $251,495 for 2012 and 2013, respectively. They also claimed rental expense deductions of $322,934 and $335,893 for 2012 and 2013, respectively, with $76,836 and $67,445 of those expense deductions on Ms. Wienke's returns claimed as depreciation deductions. Ms. Wienke did not report any wage income on either return.
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B. Evergrow
For the years in issue Evergrow filed Forms 1120, U.S. Corporation Income Tax Return, on a fiscal year basis (ending March 31). Ms. Wienke was responsible for Evergrow's tax reporting and signed its tax returns.
1. 2012
Evergrow untimely filed its Form 1120 for 2012 on May 2, 2013. It reported $1,303,065 of gross receipts and $934,928 of COGS for a gross profit of $368,137. It offset this profit in part with business expense deductions of $33,889 for taxes and licenses and $23,750 for interest and other business expense deductions.
2. 2013
Evergrow untimely filed its Form 1120 for 2013 on December 29, 2015. It reported $1,612,096 of gross receipts and $1,087,539 of COGS for a gross profit of $524,557. It offset this profit with deductions for officers' compensation totaling $25,346 and other business expense deductions.
3. 2014
Evergrow untimely filed its Form 1120 for 2014 on December 29, 2015. It reported $1,917,386 of gross receipts and $1,081,935 of COGS for a gross profit of $835,451. It offset this profit in part with deductions for officers' compensation
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totaling $242,638. Of this amount Evergrow did not pay $216,000. Ms. Wienke included a deduction for the entire amount when she prepared Evergrow's Form 1120 to reflect her view of Evergrow's 2014 earnings.
4. 2015
Evergrow untimely filed its Form 1120 for 2015 on January 21, 2016. It reported $1,492,710 of gross receipts and $1,055,598 of COGS for a gross profit of $437,112.
III. Petitioners' Audit
A. Ms. Wienke
Respondent determined that the Wienkes had incorrectly reported income from the rental properties on their returns. He calculated the Wienkes' total income and expenses for all 28 properties and reallocated half of the income and expenses to Ms. Wienke. He did not make any adjustments to the rental income reported or expense deductions claimed other than the depreciation deductions. He used county property tax records to calculate each rental property's cost basis starting when it was placed in service and then determined the proper depreciation deduction schedule for each property. Respondent reduced Ms. Wienke's collective depreciation deductions by $56,558 and $39,803 for 2012 and 2013, respectively, on the basis of these schedules.
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Respondent further determined that the Wienkes had together claimed $1,026,746 of depreciation deductions for the rental properties from 1994 to 2011 but were entitled to only $539,935. He made a section 481(a) adjustment to the Wienkes' total 2012 income to include the $486,811 of disallowed depreciation deductions for all 28 rental properties for those prior years and allocated half of that amount ($243,405) to Ms. Wienke.
Respondent also determined that Ms. Wienke failed to report income from several sources. First, she failed to report her share of cancellation of debt income, which totaled $144,516 and $39,612 for 2012 and 2013, respectively. Second, respondent characterized Evergrow's officers' compensation as constructive dividends and determined that Ms. Wienke failed to report as income her portion, which totaled $9,707 and $14,593 for 2012 and 2013, respectively.
B. Evergrow
Respondent also audited Evergrow's Forms 1120 for the years in issue. Evergrow was unable to provide the examining agent with an income summary for the pizza store for September 2013. To determine that month's gross receipts, respondent averaged the pizza store's August and October 2013 gross receipts. Petitioners did not object to this method of reconstructing the missing receipts
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during the audit. Respondent determined that Evergrow failed to report gross receipts of $50,572 from September 2013 as income.
Respondent adjusted Evergrow's COGS for the years in issue by $28,775, $23,726, $5,000, and $5,000,...
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