Wright v. Commissioner
| Decision Date | 26 July 1993 |
| Docket Number | Docket No. 27968-90.,Docket No. 1000-90.,Docket No. 26402-91.,Docket No. 18407-90. |
| Citation | 66 T.C.M. 214 |
| Court | U.S. Tax Court |
| Parties | William T. Wright and Lynne L. Wright, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
Stephen H. Boyle, 1430 Truxtun Ave., Bakersfield, Calif., Norman H. Lane, and Frank E. Merideth, Jr., for the petitioners.
Terri A. Merriam and Christopher D. Hatfield, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases, respondent determined deficiencies in and additions to petitioners' Federal income taxes as follows:
Additions to Tax
----------------------------------------------------
Docket No. Year Deficiency Section 6621(c) Negligence Fraud2 Section 6661
Increased
interest on
26402-91 1983 $ 30,558 $ 30,558 -- $ 15,279 $ 7,640
26402-91 1984 194,098 194,098 -- 97,049 48,525
1000-90 1985 414,891 393,246 -- 207,446 103,723
27968-90 1986 383,958 383,958 $8,2801 163,768 95,990
26402-91 1987 49,067 49,067 -- 36,800 12,267
1 Not an alternative adjustment. Addition to tax is imposed on portion of deficiency upon which no fraud has been
determined
2 Fraud is not determined against petitioner Lynne L. Wright
Additions to tax
------------------------------------
Year Ended Deficiency Negligence Fraud Section 6661
8/31/86 ........................................ $255,202 -- $127,601 $63,801
8/31/87 ........................................ 236,737 $8,2421 53,930 59,184
1 Not an alternative adjustment. Addition to tax is imposed on portion of deficiency upon which no fraud has been
determined
In addition, for 1983 through 1987, respondent determined additions to tax equal to 50 percent of the interest due on the portions of the deficiencies attributable to fraud or negligence. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
After concessions, the issues presented for decision are:
(1) Whether income from the sale of insurance policies by automobile dealerships owned by William T. Wright (Wright), which petitioners allocated to First Interstate Re, Ltd. (FIR), should be allocated to petitioners, or whether Wright is deemed to have received constructive dividends from FIR;
(2) whether overpayments made by the Wright dealerships to service contract administrators, which were forwarded to FIR and which petitioners concede should be allocated to the Wright dealerships under section 482, are taxable to petitioners;
(3) whether the interest earned on overpayments placed in the FIR bank account is taxable to petitioners;
(4) whether amounts placed in annuities were owned by the Wright dealerships, and whether such amounts plus interest thereon are taxable to petitioners;
(5) whether the amounts deducted by W-T-W, Inc. (W-T-W), as compensation paid to Wright for the years ended August 31, 1986, and August 31, 1987, exceeded a reasonable allowance for compensation;
(6) whether W-T-W may deduct estimated warranty expenses in the amount of $100,419 for the taxable year ended August 31, 1987;
(7) whether respondent has proven that Wright is liable for additions to tax for fraud under section 6653(b) with respect to underpayments in all of the taxable years at issue in connection with certain of the transactions at issue, or whether additions to tax for negligence are applicable;
(8) whether respondent has proven that W-T-W is liable for additions to tax for fraud under section 6653(b) in connection with the underpayments of tax for the taxable years ended August 31, 1986, and August 31, 1987, or whether additions to tax for negligence are applicable;
(9) whether Wright and Lynne L. Wright (the Wrights) are liable for an addition to tax for negligence for 1986 on certain amounts not determined to be fraudulent;
(10) whether W-T-W is liable for an addition to tax for negligence for the taxable year ended August 31, 1987, on certain amounts not determined to be fraudulent;
(11) whether the Wrights are liable for additions to tax under section 6661 for 1983 through 1987;
(12) whether W-T-W is liable for additions to tax under section 6661 for the taxable years ended August 31, 1986, and August 31, 1987; and
(13) whether the Wrights had substantial underpayments of tax attributable to tax-motivated transactions under section 6621(c) for 1983 through 1987.
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference.
The Wrights resided in Bakersfield, California, when they filed their petition. W-T-W was a Washington corporation with its principal office located in Bakersfield, California, when it filed its petition.
Wright completed the 10th grade and dropped out of high school before completing his junior year. Wright began selling cars in 1949, holding various positions, and became an automobile dealer in 1961. Wright was not a dealer from 1964 through 1969, but he became a dealer again in 1970.
During all relevant periods, Wright owned directly or indirectly all or a majority of the following dealerships (the Wright dealerships): (1) Bill Wright Toyota, Inc., a California corporation (Bill Wright Toyota), since 1977; (2) W-T-W, a Washington corporation (formerly Tom Chapman Ford, Inc.), doing business as Totem Lake Ford/Toyota (referred to as either W-T-W or Totem Lake Ford/Toyota), since 1982; (3) Sierra Toyota, Inc. (originally called Taylaurel Motors, Inc., until its name was changed to Sierra Toyota, Inc., in 1985), a California corporation (Sierra Toyota), since its incorporation in 1984; (4) West Seattle Nissan, Inc., a Washington corporation (West Seattle Nissan), since its incorporation in 1985; (5) R&W Chevrolet, Inc., a Washington corporation (R&W Chevrolet), since its incorporation in 1985; and (6) Totem Lake Suzuki, Inc., a Washington corporation (Totem Lake Suzuki), since its incorporation in 1986. As used herein, the term "the Wright dealerships" does not necessarily include all of the above dealerships.
In 1985, both Bill Wright Toyota and Totem Lake Ford/Toyota were among the top Toyota dealerships in the United States based upon sales volume. In that same year, the Ford dealership that was part of Totem Lake Ford/Toyota was also one of the most profitable Ford dealerships in the United States.
Wright was very involved in all aspects of the operations of the Wright dealerships, including the financial aspects of the business. Policies were set and management decisions were ultimately made by Wright personally.
From 1983 through 1987, the Finance and Insurance (F&I) departments of the Wright dealerships sold credit life and credit accident and health insurance (credit insurance) in connection with loans extended by the Wright dealerships for car purchases. Credit insurance was sold to fulfill a borrower's loan obligation in the event the borrower died or became disabled. In the case of the credit accident and health (sometimes referred to as credit disability) policies, the insurance would provide a monthly payment, during the term of coverage, while the insured was disabled. The term of the coverage was the same as the term of the loan. During the years at issue, Commercial Bankers Life Insurance Company (CBL) was the direct insurer of the credit insurance sold by the Wright dealerships.
The credit insurance sold by the Wright dealerships was virtually all single premium insurance. When a single premium is charged for credit insurance, as is true in these cases, the insurer collects the full premium at the time the policy is issued.
During 1983 through 1987, the F&I department of each of the Wright dealerships also sold extended warranty service contracts (service contracts) to vehicle purchasers. The service contracts were between car purchasers and the Wright dealerships. The service contracts were administered by Kelley Blue Book (Kelley), Mechanical Insurance Associates, Inc. (MIA), and Northwest Underwriters, Inc. (Northwest) (collectively referred to as the administrators). Wright decided which company would administer the service contracts for the dealerships.
The administrators provided the dealerships with "dealer cost schedules", which established administrative fees to be remitted to the administrators for various contract terms and classes of vehicles. The fees were changed from time to time by the administrators. The difference between the actual price paid by the customer and the amount remitted to the administrator was retained by the selling dealership. The actual sales price of service contracts was subject to negotiation between the dealership and the customer, and the prices varied accordingly. A portion of the amount paid to the administrators was used to purchase insurance related to service contract claims.
As directed by Wright, on April 20, 1983, Fred Winger (Winger), comptroller for the Wright dealerships and FIR, forwarded $2,500 to John Steven Mailho (Mailho) to form a reinsurance company called N.B.I., Ltd. (NBI), which later became FIR.
On May 4, 1983, a meeting was held in the Red Carpet Room at the Los Angeles airport (the Red Carpet Room meeting). Mailho, Wright, James F. Wright (Wright's son), Eugene Murphy and William T. Matlock (Matlock) from CBL, and Robert Eads from Kelley attended the Red Carpet Room meeting. The purpose of the meeting was to discuss whether Wright was interested...
To continue reading
Request your trial