MEMORANDUM FINDINGS OF FACT AND OPINION

HAMBLEN, Judge: Respondent determined deficiencies, overpayments of tax, and additions to tax for petitioners in the following amounts:

After concessions, ⁴ the primary issues for determination are (1) whether petitioners Marvin Kamensky, Henry Landan, and Joel Carlins realized ordinary income in 1978 as a result of the discharge of debt owed to Continental Illinois National Bank and Trust Company of Chicago, (2) whether the sales, cost of goods sold, and business deductions of Sinclair Galleries, Ltd., a small business corporation in which Marvin Kamensky and Henry Landan owned stock, should be adjusted in 1979 as determined by respondent, (3) whether petitioners Andrew and Jonathan Landan and Todd, Daniel, and Robert Kamensky were the recipients of income improperly assigned to them during the taxable years 1978 and 1979, and (4) whether petitioners Marvin and Judith Kamensky and Henry and Joy Landan are liable1988 Tax Ct. Memo LEXIS 115">*119 for additions to tax under section 6653(a) for the taxable years 1978 and 1979

1988 Tax Ct. Memo LEXIS 115">*120 For reasons of clarity and ease of discussion, the findings of fact and opinion tied to each of the above issues are presented separately.

FINDINGS OF FACT - GENERAL

Some of the facts have been stipulated and are found accordingly. The stipulation of facts, supplemental stipulations of facts, and attached exhibits are incorporated herein by this reference.

Joel Carlins resided in Chicago, Illinois, when he filed his petition. Marvin and Judith Kamensky, husband and wife, resided in Northbrook, Illinois, when they filed their petition. Their children, Robert, Todd, and Daniel Kamensky, also resided in Northbrook, Illinois, when their petitions were filed. Henry and Joy Landan, husband and wife, resided in Chicago, Illinois, when they filed their petition. Their children, Andrew and Jonathan Landan, also resided in Chicago, Illinois, when their petitions were filed. All petitioners timely filed tax returns with the Internal Revenue Service Center in Kansas City, Missouri.

Andrew and Jonathan Landan were born April 17, 1977. Robert Kamensky was born on October 2, 1969 and Daniel Kamensky was born on December 23, 1972. As such, they are minors. Todd Kamensky's birth1988 Tax Ct. Memo LEXIS 115">*121 date is not revealed in the record. ⁵

Petitioners Joel Carlins, Marvin Kamensky, and Henry Landan are all attorneys. Mr. Carlins was at one time a partner in a law firm in which Mr. Kamensky was a member. In 1977, Mr. Carlins ended his association with this firm. Mr. Kamensky became a certified public accountant in 1961 and received his law degree from DePaul University in 1966. Between 1961 and 1967, Mr. Kamensky worked for the Internal Revenue Service. Afterward, he entered the private practice of law, an occupation in which he has been involved for more than fifteen years. Mr. Landan received his law degree from DePaul University in 1969. He also received an LL.M. in taxation from New York University in 1970. In 1971, Mr. Landan joined the law firm of Carlins and Kamensky. He worked with Mr. Kamensky until April of 1984.

Issue 1. Discharge of Debt

FINDINGS OF FACT

In December of 1976, Marvin Kamensky, Joel Carlins, Henry Landan, and others incorporated Sagtat, Inc. (Sagtat), under Illinois law. ⁶ They formed the company, an electing small business1988 Tax Ct. Memo LEXIS 115">*122 corporation, to exploit the business of developing and marketing computerized data processing systems. Marvin Kamensky acquired 433.33 shares of the company's $ 1 par value stock. He additionally held Sagtat's remaining 566.67 shares of such stock as nominee for the corporation's other shareholders. ⁷ These 1,000 shares represented the corporation's entire capital structure.

1988 Tax Ct. Memo LEXIS 115">*123 Prior to buying Sagtat's stock, Mr. Carlins did not particularly investigate the company and its contemplated deals. He instead noted the general nature of his investment and acted on the recommendation of Marvin Kamensky. At the time, however, Mr. Kamensky knew virtually nothing about the functioning of computers.

In addition to purchasing the stock of Sagtat, Messrs. Carlins, Kamensky, and Landan loaned the fledgling company additional monies. ⁸ Neither notes nor other documentation memorializing these loans and their terms were introduced as evidence, however.

1988 Tax Ct. Memo LEXIS 115">*124 Joel Carlins loans Sagtat a total of $ 56,000. Of this total, $ 7,000 represented Mr. Carlins's own funds while $ 49,000 represented amounts he borrowed from Continental Illinois National Bank and Trust Company ("Continental Bank"). Marvin Kamensky loaned Sagtat $ 104,000 of which $ 13,000 represented his own funds and the remaining $ 91,000 represented funds he borrowed from Continental Bank. Finally, Henry Landan loaned Sagtat $ 40,000 -- $ 5,000 of his funds and $ 35,000 borrowed from Continental Bank. All the above-mentioned sums borrowed from Continental Bank were on a nonrecourse basis and were secured by the borrower's stock in Sagtat. Messrs. Landan and Kamensky never discussed what happened to the money they borrowed from Continental Bank and invested in Sagtat.

On December 31, 1976, Sagtat entered into an agreement with Codon Corporation ("Codon"). Under the terms of this agreement ("the Codon Agreement"), Codon was to provide Sagtat with a time keeping, billing, and accounts receivable data processing system for medium size law firms. ⁹Codon was to deliver the system on or before December 31, 1977. In return for this system, Codon was to receive $ 239,500. Upon1988 Tax Ct. Memo LEXIS 115">*125 completion of the system, Codon also agreed to provide technical assistance and training to Sagtat's employees on the system's use. The assistance and training were to enable Sagtat's employees to successfully market the processing system. Codon was to receive $ 500 for providing this technical assistance and training. At the end of 1976, Codon was paid the total $ 240,000 in advance.

1988 Tax Ct. Memo LEXIS 115">*126 As of the end of 1977, the Codon agreement's termination date, Codon had not delivered the system to Sagtat. Nor did Codon deliver the system by the end of 1978, 1979, or 1980. In 1982, or 1982, a number of boxes of computer cards were delivered to Sagtat at the offices of the law firm of Kamensky and Landan. Not knowing what to do with the cards, Marvin Kamensky attempted to contact the people at Codon and Messrs. Pinsky and Wenz, individuals with whom he had dealt while negotiating the Codon agreement. His attempts, nevertheless, proved futile. He was unable to reach anyone at Codon; he had only sporadic communications with Robert Wenz; and his communications with Alex Pinsky resulted in no clear answers.

During this period of time from the end of 1977 through 1982, and, indeed, through the date of the trial of this case, Messrs. Kamensky, Landan, and Carlins never sent or received any oral or written communications to or from Continental Bank, or any person acting or purporting to act on behalf of Continental Bank, concerning payment of the debt each owed to Continental Bank, concerning a release of these petitioners from liability under their respective loans, concerning1988 Tax Ct. Memo LEXIS 115">*127 a transfer or release of the collateral securing each loan, or concerning any modification of each loan's terms. ¹⁰ At no time did these petitioners pay anything on their outstanding loans to Continental Bank or take any action to cause the collateral securing their debts to Continental Bank to be conveyed to the bank.

Tied to their investments in Sagtat, Messrs. Carlins, Kamensky, and Landan received the following flow-through losses for the taxable years 1976 through 1980:

1988 Tax Ct. Memo LEXIS 115">*128 In the notices of deficiency sent to Messrs. Carlins, Kamensky and Landan, respondent required each to recognize income in the following amounts in 1978 from the forgiveness of indebtedness:

OPINION

The first issue we consider is whether petitioners Joel Carlins, Marvin Kamensky, and Henry Landan realized ordinary income in 1978 as a result of the discharge of a nonrecourse debt owed to Continental Bank. ¹⁶ We hold that this issue is governed by Cozzi v. Commissioner,88 T.C. 435">88 T.C. 435 (1987), a case with facts analogous to those of the case before us. ¹⁷

1988 Tax Ct. Memo LEXIS 115">*129 The Cozzi taxpayers formed Hap Production Co. (Hap), a limited partnership for the stated purpose of providing services tied to the production of motion picture films. Later Hap entered into a nonrecourse loan agreement with Sargon Etablissement (Sargon), a Liechtenstein corporation. Under the agreement's terms, Hap promised to repay the loan's principal and interest according to a stated payment schedule ending in 1980. As security for the nonrecourse loan, Sargon retained a first position lien in all proceeds generated under the terms of a motion picture production agreement between Hap and Map Films, Ltd., a movie production company.

Hap never paid Sargon any amounts in accordance with the loan agreement. Furthermore, Hap neither sent nor received any oral or written communication to or from Sargon concerning the loan's payment, concerning a release of Hap's liability under the loan agreement, concerning a transfer or release of the collateral securing the loan, or concerning any modification of the loan agreement.

The Commissioner determined that, as a result of a release of Hap's debt to Sargon, the Cozzi taxpayers had ordinary income in 1980 in the amount of1988 Tax Ct. Memo LEXIS 115">*130 their distributive share of this debt. ¹⁸ In supporting this determination, the Commissioner contended that the underlying security and sole source of loan payments to Sargon, the production agreement between Hap and Map, had become worthless and was abandoned by Hap in 1980.

The Cozzi taxpayers recognized that Hap's abandonment of the security for the debt may result in income from the debt's discharge. They, nevertheless, contended that in 1980 nothing had happened, either overtly or impliedly, which indicated that Hap had abandoned the production agreement because of this securing asset's worthlessness. Cozzi v. Commissioner,88 T.C. 435">88 T.C. at 446.

We upheld the Commissioner's determination1988 Tax Ct. Memo LEXIS 115">*131 that the Cozzi taxpayers had realized income in 1980 and noted the following general rules covering the discharge of a debt:

The moment it becomes clear that a debt will never have to be paid, such debt must be viewed as having been discharged. The test for determining such moment requires a practical assessment of the facts and circumstances relating to the likelihood of payment. * * * Any "identifiable event" which fixes the loss with certainty may be taken into consideration. * * * ¹⁹ [Footnote added; citations omitted; Cozzi v. Commissioner,88 T.C. 435">88 T.C. at 445.]

The abandonment of a worthless collateral which represents a debt's sole payment source is an "identifiable event" which establishes the moment when the underlying debt is discharged. Cozzi v. Commissioner,88 T.C. 435">88 T.C. at 445-447; see also Brountas v. Commissioner,74 T.C. 1062">74 T.C. 1062, 74 T.C. 1062">1074 (1980), supplemental opinion to 73 T.C. 491">73 T.C. 491 (1979),1988 Tax Ct. Memo LEXIS 115">*132 vacated and remanded on other grounds 692 F.2d 152">692 F.2d 152 (1st Cir. 1982), affd. in part and revd. in part on other grounds sub nom. CRC Corp. v. Commissioner,693 F.2d 281">693 F.2d 281 (3d Cir. 1982). To determine the moment when an abandonment of this collateral occurs, the Court must look to

"identifiable events" taken from the circumstances of the case. * * * An overt act may be sufficient to fix the time of the abandonment of an asset, but such an act is not required, and ultimately, it is the actions of the taxpayer in the context of the circumstances of a case which determine whether an abandonment has occurred. * * * [Additionally,] it will often be impossible to find one, and only one, event that clearly establishes the time of abandonment; there is likely to be a range of times, any one of which would be reasonable. [Citations omitted; Cozzi v. Commissioner,88 T.C. 435">88 T.C. at 446-447.]

The taxpayer bears the burden of proving that the year determined by respondent is unreasonable. Cozzi v. Commissioner,88 T.C. 435">88 T.C. at 440; Welch v. Helvering,290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933); Rule 142(a).

Under the facts of this1988 Tax Ct. Memo LEXIS 115">*133 case, respondent submits that 1978 was the proper year for Messrs. Carlins, Kamensky, and Landan to realize income from the discharge of their Continental Bank debts. To support this, respondent contends that the Sagtat stock represented the sole payment source of the nonrecourse debt each man owed Continental Bank and that this stock became worthless and was abandoned in 1978.

We accept respondent's argument and both underlying contentions. That the Sagtat stock represented the sole payment source for each man's nonrecourse debt is clear. None of these three petitioners testified that he had ever paid any amount on his note's outstanding principal. ²⁰ Moreover, on their returns for the taxable years in issue, these petitioners did not claim an interest deduction tied to interest paid to Continental Bank. This leads us to the conclusion that each of these petitioners paid no such interest. ²¹ Their failure to pay these interest liabilities lends support to the claim that these petitioners never intended Continental Bank to look to each of them as a payment source for the underlying nonrecourse liabilities. The unwillingness of each of these petitioners to be seen as an alternative1988 Tax Ct. Memo LEXIS 115">*134 payment source supports our finding that the Sagtat stock represented the sole source of payment for each note these shares secured.

The facts in the instant case that identify the worthlessness of the Sagtat stock similarly identify the time of this asset's abandonment. The guidelines for a determination of when stock becomes worthless are long established ones. ²² Of particular utility is Morton v. Commissioner,38 B.T.A. 1270">38 B.T.A. 1270, 38 B.T.A. 1270">1278-1279 (1938), affd. 112 F.2d 320">112 F.2d 320 (7th Cir. 1940). There, we stated:

The ultimate value of stock, and conversely its worthlessness, will depend not only on its current liquidating value, but also on what value it may acquire in the future through the foreseeable operations of the corporation. Both factors of value must be wiped out before we can definitely fix the loss. If the assets of the corporation exceed1988 Tax Ct. Memo LEXIS 115">*135 its liabilities, the stock has a liquidating value. If its assets are less than its liabilities but there is a reasonable hope and expectation that the assets will exceed the liabilities of the corporation in the future, its stock, while having no liquidating value, has a potential value and can not be said to be worthless. The loss of potential value, if it exists, can be established ordinarily with satisfaction only by some "identifiable event" in the corporation's life which puts an end to such hope and expectation.

See also Steadman v. Commissioner,50 T.C. 369">50 T.C. 369, 50 T.C. 369">376-377 (1968), affd. 424 F.2d 1">424 F.2d 1 (6th Cir. 1970).

Applying the first of Morton's two-step test to the facts of the instant case, we find that between the years 1976 and1988 Tax Ct. Memo LEXIS 115">*136 1980 the amount of Sagtat's liabilities greatly exceeded the value of its assets. ²³ Thus, during 1978, the stock of Sagtat had no liquidating value whatsoever.

We also find under Morton's second step that, as of the end of 1978, the stock of Sagtat had no potential value. The source of this stock's potential value rested solely on Sagtat's receiving the data processing system for which it had contracted and paid fully in advance. ²⁴ However, Codon failed to deliver the system on or before1988 Tax Ct. Memo LEXIS 115">*137 the initial delivery date of December 31, 1977. By the end of 1978, a full year after the contracted-for delivery date had passed, Sagtat had still not received the system. Of more importance during 1978, however, was the failure on the part of Sagtat's owners and officers to ardently demand delivery of the system or to seek damages from Codon for this latter company's failure to properly deliver the contracted-for product. ²⁵ Except for the contrary, self-serving testimony of Messrs. Kamensky and Landan, the record is noticeably void of any evidence, written or otherwise, suggesting that Sagtat's officers and owners intended to truly enforce the rights of the corporation. ²⁶

1988 Tax Ct. Memo LEXIS 115">*138 No evidence was produced showing that the terms of the Codon agreement were amended to grant Codon an extended date for delivery of the system. No oral testimony from a Codon representative or written evidence was presenting suggesting that representatives from Codon and Sagtat had met to discuss difficulties tied to the system's development. ²⁷ Evidence in the form of minutes, correspondence, or other written documentation showing that the shareholders, board of directors, and officers of Sagtat had expressed concern over the system's nondelivery was not forthcoming.

Petitioners Kamensky and1988 Tax Ct. Memo LEXIS 115">*139 Landan point to a number of facts which they say demonstrate that the Sagtat stock retained a potential value in years after 1978. We, nevertheless, find these facts to be of little evidentiary value in convincing us to reject respondent's choice of 1978 as a reasonable year for income realization.

First, the continued filing of tax returns for Sagtat in years subsequent to 1978 was an empty gesture on which we do not focus. Cf. Aldon Homes, Inc. v. Commissioner,33 T.C. 582">33 T.C. 582, 33 T.C. 582">600 (1959); Kimbrell v. Commissioner,371 F.2d 897">371 F.2d 897, 371 F.2d 897">901-902 (5th Cir. 1967), affg. a Memorandum Opinion of this Court; Steadman v. Commissioner,50 T.C. 369">50 T.C. at 378.

Second, the testimony of Messrs. Kamensky and Landan that in years after 1978 contracts were made with Messrs. Pinksy and Wenz concerning the system are uncorroborated, self-serving statements on which we need no rely. See Geigerv. Commissioner,440 F.2d 688">440 F.2d 688, 440 F.2d 688">689-690 (9th Cir. 1971), affg. per curiam a Memorandum Opinion of this Court; Sharwell v. Commissioner,419 F.2d 1057">419 F.2d 1057, 419 F.2d 1057">1060 (6th Cir. 1969), affg. on this issue a Memorandum Opinion of this Court; Tokarski v. Commissioner,87 T.C. 74">87 T.C. 74, 87 T.C. 74">77 (1986).1988 Tax Ct. Memo LEXIS 115">*140

Third, the failure of Continental Bank to demand payment on the nonrecourse liabilities in 1978, while of some evidentiary importance, does not convince us that respondent erred in choosing 1978 as the year of worthlessness and abandonment. We refuse to read into Continental Bank's inaction a finding that the Sagtat stock possessed potential value after 1978; this refusal is supported by our noting that there was no testimony from any Continental Bank representative who could explain this bank's inaction and valuation of the Sagtat stock. ²⁸ Additionally, we find the inaction of Messrs. Kamensky, Landan, and Carlins, individuals who could easily and more readily ascertain and manipulate facts and circumstances tied to the stock's underlying worth, to be far more enlightening to our determination of the stock's 1978 value and abandonment than the inaction of a third-party creditor.

Fourth, the fact that the Illinois Secretary of State dissolved Sagtat in 1983 does not require us to choose that year as the year of worthlessness and abandonment; "the occurrence1988 Tax Ct. Memo LEXIS 115">*141 in a later year of an 'identifiable event' in the corporation's life, such as liquidation [, dissolution,] or receivership, [does] not, * * * determine the worthlessness of the stock, [where] 'its value had [already] become finally extinct.'" Morton v. Commissioner,38 B.T.A. 1270">38 B.T.A. at 1279.

Fifth, the fact that Sagtat received boxes of computer cards in either 1981 or 1982 does not, in this instance, support an argument that the stock of the company retained any potential value after 1978. This statement rests once again on the half-hearted actions of Sagtat's controllers to enforce the corporation's rights under the Codon agreement. Codon's delivery of only the computer cards was clearly a breach of the Codon agreement. ²⁹ However, these controllers took no meaningful action to recover a portion of the funds they had paid for the system or to force Codon to more fully perform in accord with its agreed-to obligations. From this half-hearted response, we can only surmise that Sagtat's controllers knew their venture had soured and, as a result, abandoned their stock in the company, because of worthlessness, in a year prior to 1981 or 1982. Because nothing was1988 Tax Ct. Memo LEXIS 115">*142 done in 1978, the first year that an affirmative response was required, we conclude that that was the yearof worthlessness and abandonment.

Messrs. Kamensky, Landan, and Carlins have failed to rebut the presumption of correctness which accompanies respondent's determination that income was realized in 1978. ³⁰ See Welch v. Helvering,290 U.S. 111">290 U.S. at 115; Steadman v. Commissioner,50 T.C. 369">50 T.C. at 376; Dustin v. Commissioner,53 T.C. 491">53 T.C. 491, 53 T.C. 491">501 (1969), affd. 467 F.2d 47">467 F.2d 47 (9th Cir. 1972); Rule 142(a). These petitioners treated Sagtat as a burned out tax shelter. ³¹ They incurred nonrecourse debt solely for the purpose of generating significant tax benefits for themselves, and then attempted to let their corporation disappear without facing the tax consequences of their scheme. See Cozzi v. Commissioner,88 T.C. 435">88 T.C. at 448. These petitioners, through their inaction in 1978, allowed their Sagtat stock to become worthless. Because of worthlessness, this stock was abandoned in 1978; and the nonrecourse debt which this stock secured1988 Tax Ct. Memo LEXIS 115">*143 was, therefore, discharged. As a result of this discharge, these petitioners must recognize income for 1978 in amounts equal to those sums which they borrowed from Continental Bank on a nonrecourse basis and secured with their Sagtat stock. ³²

1988 Tax Ct. Memo LEXIS 115">*144 Issue 2: Adjustments in the Income of Sinclair Galleries Ltd. for 1979 and 1980

FINDINGS OF FACT

Sinclair Galleries is an electing small business corporation which kept its financial records according to the accrual method of accounting and which was formerly called Art Consultants, Ltd… Art Consultants, Ltd., was incorporated on November 18, 1977. Prior to that date, Art Consultants was a partnership. For the sake of simplicity, Sinclair Galleries, Ltd., and Art Consultants, Ltd., the corporation, will hereafter be referred to as "Sinclair." ³³Sinclair's business consisted of selling original graphics which are multiple artistic reproductions and include the subcategory of lithographs. Many of Sinclair's sales were to individuals on a bulk basis. Sinclair's purchasers received appraisals for the artwork they purchased from various third parties.

1988 Tax Ct. Memo LEXIS 115">*145 Sinclair did not have a warehouse for the storage of art. Most of the art sold by the company was "drop shipped," which means that the art was shipped directly from the publisher or distributor to the individual who purchased it from Sinclair. Prior to the publisher's shipment of the art to the individual purchaser, Sinclair did not own the art.

Sinclair also did not have a gallery for the display of art. The company instead used space within the law offices of Kamensky and Landan for the storage of a few works of art and the maintenance of art files. Services rendered to Sinclair were provided by Messrs. Kamensky and Landan and others on the staff of the law firm. ³⁴

When a supplier to Sinclair shipped art to an individual purchaser, the shipment was documented by an invoice slip sent from the supplier to Sinclair. Sinclair paid the supplier the wholesale price1988 Tax Ct. Memo LEXIS 115">*146 amount shown on the invoice. To evidence the sale to the purchaser, Sinclair sent a sales slip to the buyer, who paid the price reflected on this latter slip. On receiving the buyer's funds, Sinclair deposited the monies in an account at Harris Trust and Savings Bank ("Harris Bank").

Greenwich Art Consultants, Inc. ("Greenwich") was a joint venture between Sinclair and Preferred Partnerships, Inc. Greenwich was formed for the limited purpose of selling lithographs from the "Sound of Color" and the "Institution de L'Univers" editions by Leonardo Nierman. ³⁵ When a supplier to Greenwich shipped art to a purchaser, the shipment was documented by an invoice slip sent from the supplier to Greenwich. ³⁶ The purchaser paid Greenwich for the art received. Additionally, Greenwich received five checks totalling $ 31,200 from Sinclair; the checks were in the amounts of $ 700 (a check dated November 24, 1978), $ 700 (a check dated December 14, 1978), $ 14,400 ( a check dated January 10, 1979), $ 4,200 (a check dated January 10, 1979), and $ 11,200 (a check dated January 11, 1979). Greenwich filed no tax returns.

1988 Tax Ct. Memo LEXIS 115">*147 An understanding existed among the attorneys and other employees of the law firm of Kamensky and Landan that individuals working for the firm were to provide their services only to the firm. Additionally, Marvin Kamensky, Henry Landan, and three other attorneys of the firm, Michael Firsel, Michael Erens, and Sherwin Rubinstein, signed an agreement on June 8, 1979 ("June 8 Agreement"). ³⁷ A clause in the preamble of the June 8 Agreement mentioned that "by reason of their partnership interest in Kamensky & Landan," Firsel, Erens, and Rubenstein were "to receive income interest in Sinclair Galleries, Ltd. of 7.875%, 9.000%, and 7.875% respectively * * * for the year 1979." ³⁸ As of October 31, 1977 and in accord with a payout schedule prepared by Sinclair's accountant ("payout schedule"), Erens received $ 20,109.56 from the company, and Firsel and Rubinstein each received $ 16,894.58 from the company. ³⁹ A report, entitled Analysis of Profit and Loss - vs - Cash Available and prepared by Sinclair's accountant for the company's taxable year ended October 31, 1979, showed the percentage of Sinclair's profits, based on the company's trial balance, that Erens, Firsel and Rubinstein1988 Tax Ct. Memo LEXIS 115">*148 were to receive. On the same report, the total of these calculated profit amounts was later labelled a legal fee, payable to Kamensky and Landan.

1988 Tax Ct. Memo LEXIS 115">*149 For Sinclair's taxable year ended October 31, 1979, respondent decreased the company's cost of sales by $ 47,106, increased the company's sales income by $ 140,799 ⁴⁰ and denied the company a $ 53,899 professional fee which covered a two and a half to three year period. ⁴¹ All three of these adjustments had the effect of increasing Sinclair's taxable income for that tax year.

OPINION

For Sinclair's taxable year ended October 31, 1979, respondent concedes that his $ 47,106 adjustment to the company's cost of sales was in error and that such cost figures was, therefore, correct as filed. Additionally, he concedes that his $ 98,274 increase in the company's accounts receivable for that taxable year was incorrect and that that year's adjusted sales figure consequently must be reduced by this conceded amount. Based on this1988 Tax Ct. Memo LEXIS 115">*150 latter concession, the Court finds that the remaining $ 42,525 of respondent's initial $ 140,799 increase in Sinclair's sales for the company's taxable year ended in 1979 is still in dispute. ⁴² Of this $ 42,525 increase in sales, $ 41,668.30 is tied to an "exchange" account carried on Sinclair's books. ⁴³Sinclair's shareholders assert that this account's deposits were not taxable income to Sinclair but instead belonged to other entities, particularly Greenwich. ⁴⁴ Respondent, on the other hand, contends that the amounts in the exchange account truly reflect sales income belonging to Sinclair. ⁴⁵

1988 Tax Ct. Memo LEXIS 115">*151 The shareholding petitioners bear the burden of proving that respondent's presumptively correct deficiency notice is erroneous. Welch v. Helvering,290 U.S. 111">290 U.S. at 115; Rule 142(a). A large portion of this disputed exchange account reflects income items transferred from one entity to another, closely-related entity. Because of the affinity shared between Sinclair and Greenwich, we must carefully scrutinize the disputed account and transfers to and from it. Cf. Baumer v. United States,580 F.2d 863">580 F.2d 863, 580 F.2d 863">877 (5th Cir., 1978); United States v. Pomponio,563 F.2d 659">563 F.2d 659, 563 F.2d 659">663 (4th Cir. 1977).

In brief, Sinclair's shareholders attempt to explain and trace the movement of $ 31,200 into their company's exchange account and this amount's eventual transfer out of the account and into Greenwich's bank account. ⁴⁶ They point out that invoices from suppliers to Greenwich clearly show that sales were made by Greenwich to certain purchasers. They then suggest that Sinclair's bank deposit slips reveal that Sinclair deposited into its account at Harris Bank amounts paid by these certain purchasers from Greenwich. Finally, they produced five cancelled1988 Tax Ct. Memo LEXIS 115">*152 checks totalling $ 31,200 payable to Greenwich and drawing on Sinclair's checking account at Harris Bank. This chain from invoice slips to cancelled checks, these petitioners argue, clearly reveals that at least $ 31,200 of the exchange account's $ 41,668.30 total credits represents income properly chargeable to Greenwich and not to Sinclair.

Petitioners submit that the foregoing transactions supports a finding that $ 31,200 of the exchange account's amount reflects income of Greenwich and not of Sinclair. However, we find under close scrutiny that these petitioners have failed to present us with the substantive foundation necessary to uphold their position. In this respect, we observe that invoices from Greenwich's suppliers provide only those supplier's prices for the listed items; Greenwich's customer1988 Tax Ct. Memo LEXIS 115">*153 price list for the particular period was never presented as evidence. We, thus, are unable to translate an amount appearing on the supplier's invoice into an actual amount paid by Greenwich's customers. ⁴⁷ Further, our examination of invoices from Sinclair's suppliers reveals that customers of Greenwich were also customers of Sinclair. The conclusion we draw from this latter revelation is that amounts appearing on the deposit slips of Sinclair and tied to a particular purchaser from both Greenwich and Sinclair may in fact reflect this purchaser's payment of his obligation to Sinclair and not to Greenwich. ⁴⁸ Our inability to determine whether Sinclair's deposit slip amounts represent payments to Sinclair or Greenwich is compounded by the fact that neither Sinclair's customer price list for the particular period nor the deposit slips to Greenwich's bank account are in evidence.

1988 Tax Ct. Memo LEXIS 115">*154 A more fully developed record would have eased our endeavors to determine the true income recipient of the questioned amounts in the exchange account. Lacking a record containing the necessary information, however, we simply cannot accept Sinclair's five check payments, or any amount in the exchange account, as amounts embodying income earned by an entity other than Sinclair. Our inability to allocate and determine is buttressed by our observance that a likelihood existed for a veiled attempt to shift income from one entity, Sinclair, to its closely-related other, Greenwich. This likelihood is heightened by the fact that Greenwich filed no tax returns.

Petitioners' failure fully to document and justify the movement of sums into and out of the exchange account impels us to conclude that they have neither rebuffed the inference of income shifting nor successfully carried their burden of proof. Welch v. Helvering,290 U.S. 111">290 U.S. at 115; Rule 142(a). Consequently, we find that the exchange account's full amount represents income earned by Sinclair.

Having discussed respondent's adjustments to Sinclair's sales and cost of sales for the company's taxable year ended1988 Tax Ct. Memo LEXIS 115">*155 in 1979, we now examine his disallowance of a $ 53,899 professional fee claimed by the company in that same year. This $ 53,899 professional fee is part of a larger, $ 54,699 professional fee claimed by Sinclair in that same tax year. In his notices of deficiency sent to Sinclair's shareholders, respondent accepted the difference between these two amounts as being a properly deductible professional fee.

Petitioner Kamensky testified that the $ 53,899 professional fee paid by Sinclair represented a payment by the company for rent covering a two and a half to three year period and for substantial services rendered to it over this same time frame by Messers. Kamensky and Landan, other attorneys in the firm of Kamensky and Landan, and the firm's clerical staff. In support of this testimony, Kamensky produced time sheets from the law firm showing that he and Mr. Landan had compiled a substantial number of hours in the service of Sinclair and other art ventures over a period from late 1977 through October of 1978.

Respondent argued that this $ 53,899 amount claimed by Sinclair was not a professional fee but instead represented amounts paid to Erens, Firsel, and Rubinstein as their1988 Tax Ct. Memo LEXIS 115">*156 interest in the company's income as mentioned in the June 8 Agreement's preambulatory language. In support of this argument, respondent pointed to Sinclair's payout schedule.

In upholding respondent's claim that the disputed $ 53,899 does not represent a properly deductible professional fee, we note that the preambulatory language of the June 8 Agreement is quite explicit in its statement that, by reason of their partnership interest in the law firm of Kamensky and Landan, Erens, Firsel, and Rubinstein were entitled to an income interest in Sinclair. ⁴⁹ Additionally, the payout schedule shows that sums were distributed to these three individuals during 1979. However, Sinclair's books and records, appropriate tax return, and this return's attachments reveal that these income payouts were not accounted for as shares of Sinclair's undistributed taxable income. We can only surmise, therefore, that Sinclair attempted to account for the income payouts to these three individuals by labelling the payouts "professional fees." ⁵⁰ To support this labelling, however, Sinclair's shareholders have produced no corroborating evidence that any of these three individuals ever performed services1988 Tax Ct. Memo LEXIS 115">*157 for Sinclair. Without producing such corroboration, these petitioning shareholders have not successfully borne their burden of proof. ⁵¹ See Welch v. Helvering,290 U.S. 111">290 U.S. at 115; Rule 142(a). We, accordingly, deny Sinclair's claim of a professional fee for the company's taxable year ended October 31, 1979, to the extent of $ 53,899. ⁵²

1988 Tax Ct. Memo LEXIS 115">*158 Issue 3. Diversion of Income

FINDINGS OF FACT

For its taxable years ending in its shareholders' 1978 and 1979 taxable years, Sinclair listed on its Statements for Recipients of Miscellaneous Income, Form 1099-MISC, as commissions and fees paid to nonemployees the following amounts:

On its appropriate small business corporation income tax return, Form 1120S, Sinclair reflected the sums of these commission amounts in deductions it subtracted from its total income to derive taxable income. ⁵³

During these two taxable1988 Tax Ct. Memo LEXIS 115">*159 years, Sinclair allocated to each of its stockholders the following amounts of its undistributed taxable income:

Sinclair's shareholders claimed the following Schedule E and additional income amounts ⁵⁵ as being received from the company during the calendar taxable years 1978 and 1979:

On their tax returns for 1978 and 1979, petitioners Andrew and Jonathan Landan labelled the additional income amounts they received from Sinclair "commissions." Additionally, these two petitioners included these amounts as "commissions" 1988 Tax Ct. Memo LEXIS 115">*161 in their calculation of self-employment tax for each of the three years. On his tax returns for 1978 and 1979, petitioner Henry Landan labelled the additional income received from Sinclair as either "commission" or "fees." ⁵⁷

On their respective individual Federal income tax returns, petitioners Marvin, Daniel, Robert, and Todd Kamensky did not label any of the additional amounts received from Sinclair as "commissions." In referring to these amounts, these petitioners instead either mentioned Sinclair as the source of the income or referenced Sinclair's 1099-MISCC forms. Petitioners Daniel, Robert, and Todd Kamensky did not file self-employment tax returns for the years 1978 and 1979. Petitioner Marvin Kamensky did file self-employment tax returns in 1978 and 1979; however, on neither of these returns did he specifically list the additional amounts received from Sinclair as "commission" income. Marvin Kamensky also filed a Form 4726, Maximum Tax on Personal Service Income, for each of the years 1978 and 1979. On these1988 Tax Ct. Memo LEXIS 115">*162 forms, he listed the additional income he received from Sinclair as personal service income.

None of these petitioners had their returns prepared by a paid preparer. Henry Landan and his wife, Joy Landan, signed their joint tax returns for 1978 and 1979. Additionally, Joy Landan signed the 1978 and 1979 returns of this couple's two children, Jonathan and Andrew. Marvin and Judy Kamensky signed their joint returns for 1978 and 1979. The returns of Todd, Daniel, and Robert Kamensky, their children, were either unsigned or signed by Marvin Kamensky.

Although petitioner Todd Kamensky performed only minor services for Sinclair, the other four children, Robert and Daniel Kamensky and Jonathan and Andrew Landan, performed no services for the company during the years 1978 and 1979. Alternatively, over this same two-year period, petitioners Marvin Kamensky and Henry Landan performed substantial services for Sinclair.

In his notices of deficiency to petitioners Todd, Daniel, and Robert Kamensky and to petitioners Andrew and Todd Landan, respondent determined that the commission income reported by the taxpayers was not earned by them and that these taxpayers had been assigned their1988 Tax Ct. Memo LEXIS 115">*163 reported income for the sole purpose of the assignor's avoiding the payment of taxes. Having made this determination, he reduced each of these five petitioners additional income received from Sinclair in years 1978 and 1979 to zero. In conjunction with these reductions, respondent increased Henry Landan's additional income received from Sinclair by $ 14,560.00 in 1978 and by $ 28,266.00 in 1979, ⁵⁸ and increased Marvin Kamensky's additional income received from Sinclair by $ 49,777.00 in 1978 and by $ 64,819.00 in 1979.

In their petitions filed with this Court, petitioners1988 Tax Ct. Memo LEXIS 115">*164 Todd, Daniel, and Robert Kamensky and petitioners Andrew and Jonathan Landan pled that "During the calendar years 1978, 1979, and 1980 [Sinclair] determined that the shareholders should receive commissions. The corporation distributed the commissions based upon the ownership percentage of the shareholders." They continued on to assert that "the commission[s] [they] received [were] earned * * *" and asked this Court to so find. In their petitions filed with this Court, petitioners Harry Landan and Marvin Kamensky described the additional income received from Sinclair as "commissions."

OPINION

In attacking respondent's claim that the amounts of additional income paid by Sinclair to the children of Marvin Kamensky and Henry Landan were not income amounts taxable to these two parents, the shareholders of Sinclair argued in their brief that these additional amounts did not in the least represent commissions paid by Sinclair. They instead contended that these amounts represented further divisions of the company's undistributed taxable income for the tax years involved. Having contended such, they noted that respondent did not challenge the bona fides of the Landan and Kamensky1988 Tax Ct. Memo LEXIS 115">*165 children's stock ownership in Sinclair and, therefore, concluded that, as a further division of the company's undistributed taxable income, this additional income paid the children should remain the income of the children.

We, however, reject the conclusion of these petitioners. We find that the additional amounts do in fact represent a payment for services rendered to Sinclair and consequently hold that those additional amounts paid the Kamensky and Landan children are in actuality amounts of reported income which had been erroneously assigned to these children by their respective fathers. We premise our holding that the children's additional Sinclair income is actually income of their respective fathers on the well-grounded principle that a taxpayer who assigns or transfers compensation for personal services to another individual fails to be relieved of Federal income tax liability, regardless of the motivation behind the transfer. See Lucas v. Earl,281 U.S. 111">281 U.S. 111 (1930); Helvering v. Horst,311 U.S. 112">311 U.S. 112 (1940); Helvering v. Eubank,311 U.S. 122">311 U.S. 122 (1940).

We first focus on our finding that the additional amounts paid by Sinclair1988 Tax Ct. Memo LEXIS 115">*166 in fact represent commission payments for services rendered the company. In doing so, we look to the substance underlying Sinclair's payment of these additional amounts. This substance is best revealed through an examination of Sinclair's claimed deductions for the taxable year ended October 31, 1979.

In that year, Sinclair claimed a $ 54,699 professional fee to the firm of Kamensky and Landan. ⁵⁹ We have, however, found that the payment of $ 53,899 of this professional fee did not include an amount for the substantial services provided to Sinclair. The payment was actually a payment of the company's income to Erens, Firsel, and Rubinstein. Accepting this finding, we conclude that, in substance, the commissions paid by Sinclair are that company's payments for the substantial services rendered in its behalf.

1988 Tax Ct. Memo LEXIS 115">*167 The intent of Sinclair and its shareholders, as expressed through their actions, also comports with this substance. ⁶⁰ We begin by pointing out that Messrs. Kamensky and Landan and their children each alleged in the petition each filed that the amounts were "commissions." On their tax returns, the Landans labelled their received additional amounts "commissions" and, for the most part, reflected these commission amounts in their calculations of self-employment tax. Marvin Kamensky labelled his received commission income as personal service income on his Forms 4726. ⁶¹ Though his children did not specifically refer to the additional amounts they received from Sinclair as "commissions," they, at times, referenced Sinclair's Forms 1099-MISC which did label the amounts "commissions." Finally, Sinclair itself treated these additional amounts it paid its shareholders as if these amounts were payments for services performed on its behalf. ⁶²

1988 Tax Ct. Memo LEXIS 115">*168 Having decided that the "commissions" are payments for services provided Sinclair, we next determine whether those commissions paid the children of Marvin Kamensky and Henry Landan are taxable to the children. In 1978 and 1979, Sinclair fully valued the services provided it and claimed appropriate deductions. ⁶³ In valuing these services, the company attributed an amount in each year to the total services provided by the Kamenskys and the total services provided by the Landans. However, the facts bear out that among the Kamenskys and the Landans only the fathers performed substantial services for Sinclair which would justify the company's payment of these yearly total amounts. ⁶⁴ With this information before us, we find that these commissions paid the Kamensky and Landan children in fact represent amounts taxable to these children's respective fathers. ⁶⁵

1988 Tax Ct. Memo LEXIS 115">*169 In their briefs, these shareholding petitioners argued that the children's commissions should not be included in the income of the fathers because this inclusion would result in Sinclair's paying the two gentlemen amounts which were unreasonable. ⁶⁶ We reject this argument. There are not sufficient facts in the record to support such a contention. ⁶⁷ Furthermore, the reasonableness of the commissions tagged to the fathers was not raised as an issue; hence their reasonableness is conceded. ⁶⁸ Rule 34(b)(4).

1988 Tax Ct. Memo LEXIS 115">*170 Issue 4. Addition to Tax - Section 6653(a) ⁶⁹

1988 Tax Ct. Memo LEXIS 115">*171 FINDINGS OF FACT AND OPINION

Petitioners Marvin Kamensky and Henry Landan were actively involved in the management and day-to-day operations of Sinclair. Both were also attorneys. Each of their past experiences reveals that they both possessed a thorough, working knowledge of the tax law. ⁷⁰ Respondent determined that, pursuant to section 6653(a), both petitioners are liable for the following additions to tax for 1978 and 1979:

Section 6653(a) provides for additions to tax if any part of the underpayment is due to negligence of intentional disregard of rules or regulations. Under section 6653(a), negligence is a lack of due care or a failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner,85 T.C. 934">85 T.C. 934, 85 T.C. 934">947 (1985). Petitioners Kamensky and Landan argue on brief that, because the deficiencies1988 Tax Ct. Memo LEXIS 115">*172 tied to their dockets involve adjustments and issues of a highly technical and complex nature in which honest differences of opinion can exist, the addition for negligence must not be sustained. As their authority, they cite Marcello v. Commissioner,43 T.C. 168">43 T.C. 168 (1964), affd. on this issue and remanded on another issue 380 F.2d 499">380 F.2d 499 (5th Cir. 1967).

In Marcello we, nevertheless, held that the addition to tax for negligence was properly determined even though that case involved "a rather complex legal determination." Marcello v. Commissioner,43 T.C. 168">43 T.C. at 182. We reached this result on the grounds that the Marcello taxpayer had been negligent in his failure to maintain expense records. Having found this ground, we further stated, "Inasmuch as part of the underpayment of tax is due to negligence, the addition to tax under section 6653(a) must be imposed on the entire amount of such underpayment." Marcello v. Commissioner,43 T.C. 168">43 T.C. at 182.

In this case we likewise find that though complex issues are present, Marvin Kamensky and Henry Landan, nevertheless, have been negligent. Their negligence is most apparent in1988 Tax Ct. Memo LEXIS 115">*173 the manner with which they allowed their commission income to be assigned to children who performed either minor or no services for Sinclair and allowed the profit distributions to Erens, Firsel, and Rubinstein to be reported by Sinclair as "professional fees." These two men may not fall back on an excuse that the misassigning and misreporting of income was the fault of Sinclair's accountant. Both men were actively involved in the operations of Sinclair; and, more importantly, both men were knowledgeable tax lawyers. Therefore, inasmuch as part of the underpayment of tax is due to negligence, the additions to tax under section 6653(a) are sustained.

In sum, we believe it is appropriate to relate what became obvious to us during the course of the trial and upon review of the record in the process of our writing our factual findings and opinion. We found the documentation of Sagtat issues was slim from the least demanding point of view. In effect, there was no substantive evidence of the "loans" from Continental Bank to the Sagtat shareholders, and there was no indication that Sagtat actually engaged in business activity. We have seen mostly facades which were constructed by knowledgeable1988 Tax Ct. Memo LEXIS 115">*174 tax lawyers and which provided obstructions and stumbling blocks to our findings. We opine that these tax lawyers were the architects of obfuscating tactics which produced a trail of examination barriers that inhibited a clear view by us of the transactions. In this respect, we are impelled to state that the testimony of petitioner Marvin Kamensky, a former IRS agent and a lawyer-CPA, was equivocal and vague; and we, consequently, afforded it little substantive weight. Window dressing is one thing -- but the obfuscation and obscurantism we have viewed and heard in this case goes beyond that. The unresolved mysteries and lack of substance in the record before us confirm our conclusion.

Finally, were it not for concessions made by respondent at trial and on brief, we would further conclude that the trial of this case was mostly a dilatory tactic by petitioners to delay their day of reckoning with the tax collector.

Decision will be entered under Rule 155 in docket Nos. 5418-82; 5769-83; 5771-83; 6101-83; 6102-83; and 6103-83.

⁷¹

1988 Tax Ct. Memo LEXIS 115">*175