Wiltzius v. Commissioner
| Decision Date | 06 March 1997 |
| Docket Number | Docket No. 19235-93.,Docket No. 19344-93. |
| Citation | 73 T.C.M. 2243 |
| Parties | Jeff A. Wiltzius, Transferee v. Commissioner. William Robert Waldorf, Transferee v. Commissioner. |
| Court | U.S. Tax Court |
Jeff A. Wiltzius, pro se. William Robert Waldorf, pro se. Joanne B. Minsky and Stephen Takeuchi, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined that petitioner Jeff A. Wiltzius is liable as a transferee for the unpaid income tax and additions to tax of House of Babes of Fern Park, Inc. (House of Babes), for 1984 and 1985 in the amount of $155,990, and that petitioner William R. Waldorf is liable as a transferee in the amount of $225,319.
We must decide the following issues:
1. Whether petitioners are liable as transferees for the 1984 and 1985 income tax and additions to tax of House of Babes. We hold they are;
2. whether Wiltzius' and Waldorf's interests in a note from the buyer of House of Babes are worth $23,376.15 and $34,783, as petitioners contend; $118,125 and $170,625, as respondent contends; or some other amount. We hold that their interests in the note are worth $88,593.75 and $127,968.75, respectively 3. whether Wiltzius' plea agreement (in which he pled guilty to filing false income tax returns for 1984 and 1985 and agreed to pay $11,329.94 in restitution) limits his liability as a transferee for House of Babes' income taxes for 1984 and 1985. We hold that it does not;
4. whether the doctrines of res judicata, collateral estoppel, and equitable estoppel bar respondent from assessing tax against petitioners as transferees of House of Babes for 1984 and 1985. We hold that they do not;
5. whether the statututory period of limitations bars respondent from assessing transferee tax liability against petitioners for 1984 and 1985. We hold that it does not.
Unless stated otherwise, 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.
Jeff A. Wiltzius (Wiltzius) lived in Casselberry, Florida, and William R. Waldorf (Waldorf) lived in Maitland, Florida, when they filed their petitions in these cases.
Waldorf incorporated House of Babes in Florida on May 1, 1983. House of Babes is a topless bar. Initially, Waldorf was the sole shareholder of House of Babes. He was president of House of Babes from 1984 to 1986.
Seminole County zoning ordinances, regulations, and rules generally did not permit topless bars. However, House of Babes was permitted to operate because it opened before Seminole County prohibited topless bars (i.e., it was grandfathered). Under the terms of the grandfathering, if it were closed as a sanction for violating any county rule or regulation, it could not reopen.
House of Babes received revenue from cover charges, the sale of nonalcoholic beverages, vending machines, video games, and a juke box. Most customers paid in cash, but some used credit cards.
Tom Godby (Godby) bought a 50-percent interest in House of Babes from Waldorf. Nelson Arencibia (Arencibia) bought a 10-percent interest from Waldorf and a 10-percent interest from Godby. Waldorf, Godby, and Arencibia owned House of Babes from January to September 1984. Arencibia owned a 22.5-percent interest in House of Babes in September 1984.
Wiltzius bought Arencibia's 22.5-percent interest on October 1, 1984, for $25,000. Arencibia was making about $1,500 per week from House of Babes when he sold his interest. Wiltzius owned 22.5 percent and Waldorf owned 32.5 percent of the shares of House of Babes from October 1984 to August 1986.
Around May 1984, Waldorf, Godby, and Arencibia agreed to keep two sets of records for House of Babes. Waldorf kept the second set of books to pay less taxes.
Waldorf wrote a memo at a time not stated in the record to the other shareholders explaining how they would skim gross receipts. The memo said that each shareholder's share of the profits would be paid in cash from 50 percent of the gross receipts on the day the receipts were earned; the rest would be paid by check from the accountant after any expenses for that day had been paid. Waldorf asked the other shareholders to destroy the memo after reading it.
House of Babes paid its shareholders their share of the profits in cash before April 1985. Around April 1985, House of Babes began to pay its shareholders half in cash and half by check.
Waldorf, Godby, and Wiltzius agreed to skim receipts of House of Babes and to divert funds for their personal use. They skimmed 50 percent of the gross receipts earned from Monday to Friday.
House of Babes' officers gave the accountant incomplete information to prepare House of Babes' tax returns. The accountant used the false records to prepare the 1984 and 1985 corporate income tax returns for House of Babes. Waldorf, as president, signed House of Babes' corporate income tax returns for 1984 and 1985, knowing that they were materially false because the shareholders diverted about 50 percent of the corporation's weekday gross receipts to their personal use. House of Babes did not report to the IRS income of $153,755.50 for 1984 and $200,620.50 for 1985.
Wiltzius was not involved in the operation of House of Babes. He did not establish House of Babes' accounting system or handle cash received by House of Babes. However, he knew about the system House of Babes used to pay shareholders and to keep records. He was not directly responsible for House of Babes' income tax filings and did not give false and incomplete records to House of Babes' accountant, but he knew that Waldorf and Godby were doing so.
Special Agent Brister (Brister) investigated House of Babes and petitioners for tax crimes. Brister investigated the income tax liabilities of House of Babes from skimmed receipts and the income tax liabilities of House of Babes' shareholders from constructive dividends for 1984 and 1985. He interviewed Waldorf on July 24, 1986.
On August 14, 1986, the shareholders sold the assets of House of Babes, i.e., the building, land, fixtures, and equipment, to 6400 HWY. 17-92, Inc. (the buyer), for $999,103. Norman Kagen (Kagen) was a shareholder of the buyer and was its accountant. The buyer assumed a $305,814 mortgage, paid $179,387 in cash, and gave a $525,000 promissory note bearing 10 percent interest per year (the note).1 The buyer agreed to pay $100,000 of the amount due on the note, with interest of $10,000,12 months after the closing date of the agreement. The balance was to be amortized over 10 years and payable in equal monthly installments of $6,598.85. The monthly payments were due on the first of each month. The buyer would be in default if it did not make the monthly payment by the 25th day of the month. If the buyer defaulted, the seller could repossess the property subject to a lien favoring the holder of the mortgage. The buyer was to maintain hazard and liability insurance of $800,000 and name the sellers as additional insureds on the policy.
The contract of sale was signed by Waldorf as president, Godby as vice president, and Wiltzius as secretary.
As part of the contract, the buyer agreed to comply with all Federal, State, and county laws, ordinances, codes, regulations, and rules, including zoning and easement requirements and building, fire, safety, and health codes. The buyer and seller understood that it was important for the buyer to maintain House of Babes' grandfathered status by continuously complying with Seminole County rules and regulations.
Waldorf knew that the IRS was investigating House of Babes, and he knew that House of Babes had corporate tax liability for skimmed gross receipts when he sold its assets on August 14, 1986.
Waldorf's share of the monthly payment on the note was $2,144. The buyer initially made the monthly payment to Waldorf, who paid each shareholder. The buyer later paid each shareholder directly.
House of Babes and the two other adult entertainment businesses that were operating in Seminole County in 1985 were still operating at the time of trial.
The buyer's shareholders believed that they could repay the note if they made $13,000 per week. Waldorf or Godby told the buyer that House of Babes had been making about $13,000 per week before the sale. House of Babes reported gross receipts in the following amounts on its tax returns:
Gross Receipts
-------------------------
Approximate
Year Total Weekly Average
1984 ................ $236,668 $ 4,500
1985 ................ 310,105 6,000
1986 ................ 336,830 10,200
The year after the assets of House of Babes were sold, the buyer reported weekly gross receipts of more than $20,000 per week.
House of Babes was liquidated in August 1986. House of Babes reported on its 1986 corporate income tax return that it was undergoing a complete liquidation under section 337 and that all of its assets were to be distributed to its shareholders within 12 months. The liquidating distribution from House of Babes to its shareholders occurred on August 14, 1986. The State of Florida dissolved House of Babes on August 20, 1987.
The buyer made the $100,000 payment in August 1987 and fully paid the note ahead of schedule.
Waldorf offered to sell his $170,625 ($525,000 × 32.5 percent) interest in the note to the buyer's shareholders for $50,000. They did not buy it. Waldorf also asked five or six friends if they...
To continue reading
Request your trial