Wise v. Commissioner
| Decision Date | 17 March 1997 |
| Docket Number | Docket No. 12079-94.,Docket No. 12080-94. |
| Citation | 73 T.C.M. 2324 |
| Parties | Reginald Maurice Wise and Shannon Rae Wise v. Commissioner. Henry Victor Eicher v. Commissioner. |
| Court | U.S. Tax Court |
Reginald Maurice Wise and Shannon Rae Wise, pro se. Henry Victor Eicher, pro se. Michael A. Pesavento, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in and additions to petitioners' 1988 Federal income tax as follows:
Additions to Tax
------------------------
Petitioners Deficiency Sec. 6653(a) Sec. 6661
Reginald and Shannon Wise1 .................... $33,380 $1,669 $8,345
Henry Eicher2 ................................. 9,909 495 2,477
On December 14, 1995, petitioner Henry Victor Eicher (Eicher) filed a Notice of Agreement to be Bound by the decision in the Wises' case. Most, but not all, of the issues in Eicher's case are the same as the issues in the Wises' case. We accepted Eicher's agreement to be bound, but, because Eicher has the burden of proof on all issues in dispute, Rule 142(a), and because Eicher did not produce evidence, see Rule 149, we deemed Eicher to have conceded all issues in his case that are not in common with issues in the Wises' case.3
At all relevant times, Reginald Maurice Wise (Wise) and Eicher controlled four pass-through entities, Wesco and Hersco, which were partnerships, and Wesco Realty, Inc. (WRI) and Intent, Inc. (Intent), which were S corporations. Several of the issues for decision relate to the tax treatment of payments which were not made and income items which were not received, but which were shown in the books and records of petitioners and these various entities. The specific issues for decision are:
1. Whether Hersco may include in gross income for 1984 $189,014 of capital gain related to the sale of land to WRI, and $100,115 of interest income from WRI related to a mortgage note. We hold that it may not.
2. Whether WRI may deduct, for 1988, $100,138 of interest related to a mortgage note it gave to Hersco and $173,174 for professional services performed by Wise's sole proprietorship, Pro-Ser. We hold that it may not.
3. Whether Wise may include in gross income $231,746 for services Pro-Ser rendered to WRI. We hold that he may not.
4. Whether WRI may deduct $88,825 for services performed by Wise. We hold that it may.
5. Whether WRI's payment of $38,500 to Wise was a nontaxable repayment of a loan. We hold that it was not.
6. Whether $17,197 of expenses reported by Wise on Schedule C of his tax return should be reported on Schedule A. We hold that they should not.
7. Whether Hersco may deduct $73,122 of interest expense related to loans Eicher made to Hersco. We hold that it may not.
8. Whether Eicher may include in gross income $73,122 of interest related to loans he made to Hersco. We hold that he may not.
9. Whether Wise and Eicher had enough basis in WRI on July 31, 1988, to deduct their shares of WRI's net operating loss. We hold that they did not.
10. Whether the Wises are liable for the addition to tax for negligence under section 6653(a). We hold that they are.
11. Whether the Wises are liable for the addition to tax for substantial understatement of tax under section 6661. We hold that they are if they substantially underpaid tax for 1988.
12. Whether Eicher is liable for the addition to tax for substantial understatement of tax under section 6661. We hold that he is if he substantially underpaid tax for 1988.
Section references are to the Internal Revenue Code in effect for the year 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.
The Wises lived in Florida and Eicher lived in Brazil when they filed the petitions in these cases. Eicher is a U.S. citizen, but has lived in Brazil since the early 1950's. He worked for the Unisys Corporation until 1992. Eicher used the address, "c/o 938 Wald Road, Orlando, Florida", on his petition.
Wise has a bachelor's degree in Business Administration from Cleveland State University. He is a licensed Certified Public Accountant (C.P.A.) in Ohio and Florida. Wise worked at Price Waterhouse for 12 or 13 years. He was an audit partner for four of those years.
Wise held a power of attorney from Eicher. At times the power was unlimited and at times the power was specific.
The Wises and Eicher were calendar-year, cash basis taxpayers.
Wesco was a cash basis partnership formed in 1973, with a fiscal year ending April 30. Wise and Eicher used Wesco extensively as a depository or "bank" throughout most of its existence. During Wesco's fiscal years 1988 and 1989, Wise held 40 percent and Eicher held 60 percent of Wesco's income, credits, and deductions.
Hersco was a calendar-year, cash basis partnership formed in 1973. During 1987 and 1988, Hersco did not have a bank account or any recurring sources of liquid funds. During 1988, Wise held 37.5 percent and Eicher held 62.5 percent of Hersco's income, credits, and deductions.
Intent, an S corporation on the accrual basis with a fiscal year ending March 31, was formed in 1972. During fiscal years 1988 and 1989, Wise held 31.25 percent and Eicher held 68.75 percent of Intent's income, credits, and deductions.
WRI, an S corporation on the accrual basis with a fiscal year ending July 31, was formed in 1973. Wise was president of WRI at all times relevant here. WRI initially engaged in real estate brokerage activities, but was essentially inactive from 1978 to 1985. WRI owned and operated a resort near Kissimmee, Florida, during its fiscal year 1988. Wise and Eicher each were entitled to 50 percent of WRI's income, credits, and deductions during WRI's fiscal years 1988 and 1989.
Hersco owned 35 acres of unimproved land in Osceola County, Florida, which it bought for about $134,000 in 1973. In 1984, an independent appraiser valued the land at $1,468,000. On August 14, 1984, Hersco sold the land to WRI for $1,468,000. At the closing, WRI paid Hersco $88,000 in cash and gave Hersco a $1,380,000 mortgage on the land (the Hersco mortgage). Hersco sold the land to WRI so Wise and Eicher could develop it in corporate form and thereby limit their personal liability.
On August 21, 1984, WRI obtained a $2.5 million construction loan from Huntington Mortgage Co. (HMC). The loan was secured by a mortgage (the HMC mortgage) on the improved land. Wise and Eicher personally guaranteed the HMC loan. WRI made payments on the HMC loan to HMC.' WRI did not default on the HMC loan from 1984 to 1990. The loan was renewed five times and remained payable to HMC by WRI.
The Hersco mortgage was subordinated to the HMC mortgage. WRI made no payments in cash or property on the Hersco mortgage from 1984 to 1990. At all times relevant, WRI did not have enough funds to make principal and interest payments on the Hersco mortgage. Journal entries were made in the books and records of WRI and Hersco, stating that there had been payment and simultaneous "loan backs" to WRI. No evidence regarding the terms of "loan backs" was offered. WRI claimed a $100,138 interest deduction relating to the Hersco mortgage for its fiscal year 1988. Hersco never sued WRI to collect mortgage payments.
On December 12, 1986, Westfield Financial Corp. (Westfield) lent $1.1 million to Intent. The loan was secured by a mortgage on land owned by Intent in Pasco County, Florida. Wise and Eicher guaranteed the loan. On December 16, 1986, Intent disbursed $797,344 of the Westfield loan to WRI in exchange for a note (the WRI note) in which WRI promised to pay Intent $1.5 million or so much thereof as might be advanced and outstanding from time to time, plus interest. The WRI note states that it is secured by a mortgage on real estate; however, no mortgage was recorded in Osceola or Orange County record books.
Intent did not default on the Westfield mortgage from 1986 to 1990.
Wesco lent some operating capital to WRI WRI recorded its receipt of those funds by increasing its loans payable account. Wesco correspondingly increased its loans receivable account. WRI made no repayments in cash or property to Wesco during WRI's fiscal year 1988. As of July 31, 1987, WRI's books stated that it had a $980,690 loan payable to Wesco.
Wise, as president of WRI, was responsible for WRI's daily operations including planning, accounting, and financing. On its fiscal year 1988 tax return, WRI deducted professional management and accounting fees in the amount of $173,974 for services Wise rendered to WRI through Wise's sole proprietorship, Pro-Ser. WRI accrued expenses for management and accounting fees even though WRI generally did not pay the fees to Wise in cash or property. Wise recorded that he immediately made "loan backs" to WRI and reported the income on his tax return in the year WRI took the deduction. Yearend adjusting journal entries on the books and records of WRI stated that these transactions had occurred. No evidence was offered regarding the terms of these "loan backs".
Wise and Eicher claimed additional basis in WRI of (1) $340,277 and $567,130 in 1984, respectively, as a result of WRI's purchase of land from Hersco in 1984, and (2) $1.25 million each as of July 31, 1987, as a result of their personal guarantees of the HMC loan. In 1986, Wise and Eicher claimed increases in their...
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