2002 Tax Ct. Memo LEXIS 49 | Tax Ct. | 2002
2002 Tax Ct. Memo LEXIS 49">*49 Respondent's determination sustained. Petitioner failed to report income for years at issue. Petitioner liable for additions to tax under
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined deficiencies in petitioner's Federal income tax and additions to tax and penalties as follows:
Additions to Tax | ||||
Year | Deficiency | Sec. 6653(b) | Sec. 6661 | Sec. 6654 |
1985 | $ 296,275.88 | 1 $ 155,784.40 | $ 74,056.47 | |
1986 | 389,855.00 | 97,463.75 | ||
1987 | 387,838.00 | $ 119.43 |
The issues for decision are: 1
1. Whether petitioner failed to report income of $ 600,515 for 1985, $ 787,080 for 1986, and $ 1,008,325 for 1987. We hold that he did.
2002 Tax Ct. Memo LEXIS 49">*50 2. Whether petitioner is liable for additions to tax under
3. Whether petitioner is liable for the addition to tax under
Section references are to the Internal Revenue Code as amended. Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise specified.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioner resided in Brooklyn, New York, when he filed his petition. He operated an accounting business known as H. Wapnick & Sons, in which he charged fees for accounting services, preparing tax returns, making loans, and cashing checks. Petitioner's clients made checks payable to petitioner, H. Wapnick & Sons, or cash.
Petitioner's office was in the basement of his home. Steven Wolfson (Wolfson) worked for petitioner there, as did petitioner's sons, John Wapnick and Seth Wapnick. Seth Wapnick graduated from the Wharton School at the University of Pennsylvania. 2002 Tax Ct. Memo LEXIS 49">*51 Wolfson graduated from college with a bachelor's degree in accounting in 1979. He worked for petitioner from 1979 through the years in issue.
Petitioner had about 1,200 corporate clients and a number of individual clients during the years in issue. He charged each client $ 125 per quarter to prepare tax returns. Seth Wapnick kept records of the accounting, tax return preparation, and lending businesses by entering data on a personal computer in petitioner's basement.
Petitioner established the following 13 corporations: Best Medicare of Brighton, Big John Cab Corp., Centurion Taxi, Inc., Collie Trans. Corp., Downey Cab Corp., D & S Jewelry Corp., Egret Trans. Corp., Eleemosynary Cab Corp., Juice Taxi Co., Inc., Macar Service Corp., Oxus Taxi Inc., Poodle Trans. Corp., and Tree Top Cab Corp. (the 13 corporations).
Petitioner had accounts at Republic National Bank of New York (Republic Bank) for the 13 corporations. The mailing address for the 13 corporations was petitioner's home. Petitioner was a stockholder in, and officer of, all of them. The 13 corporations did not do business, maintain books and records, hold annual meetings, issue financial2002 Tax Ct. Memo LEXIS 49">*52 statements, pay salaries or dividends, have employees, or file Federal or State corporate tax returns.
When petitioner established the 13 corporations, he used employer identification numbers (EINs) of former clients or numbers that he created. He did not obtain EINs for the 13 corporations from the Federal government. At the time of trial, Wolfson did not know the names of any of the 13 corporations.
Petitioner deposited amounts that he earned into the bank accounts for the 13 corporations. Republic Bank paid interest on the 13 bank accounts totaling $ 46,751 in 1985, $ 86,341 in 1986, and $ 90,694 in 1987. Petitioner did not report the interest that Republic Bank paid to the 13 corporations on his tax returns for 1985 and 1986.
Petitioner received the following amounts of income for cashing checks for customers:
Customer | 1985 | 1986 | 1987 |
S & Z Fashions Corp. | $ 55,963,83 | $ 25,454.17 | $ 9,789.00 |
LVA Corp. | 25,132.43 | ||
McHugh DiVincent | |||
Alessi, Inc. | 4,270.00 | 13,763.48 | 11,919.45 |
E. Chirico, Inc. | 25,786.45 | ||
Call Enterprises, | |||
Inc. | 6,391.65 | ||
Total | $ 60,233.83 | $ 39,217.65 | $ 79,018.98 |
2002 Tax Ct. Memo LEXIS 49">*53 Petitioner did not report the amounts that he received from check cashing on his tax returns.
Petitioner bought a $ 400,000 U.S. Treasury note in the name of Poodle Trans. Corp. and a $ 600,000 U.S. Treasury note in the name of Big John Cab Corp. on April 3, 1985. He sold them on January 14, 1986, for a gain of $ 22,826. The U.S. Government paid total interest on those notes of $ 66,222 in 1985 and $ 20,193 in 1986 to Poodle Trans. Corp. and Big John Cab Corp. Petitioner did not report these amounts on his 1985 and 1986 tax returns.
Petitioner filed Federal income tax returns for 1985 and 1986 but not for 1987. He did not report any income from lending or check cashing on those returns. He reported the following amounts of income:
Accounting | Taxable | ||
Year | Interest | business | income |
1985 | $ 100 | $ 10,940 | $ 5,460 |
1986 | 300 | 10,188 | 5,908 |
F. Seizure of Petitioner's Records and Respondent's Determination
Respondent's agents obtained2002 Tax Ct. Memo LEXIS 49">*54 a search warrant and seized the computer and about 260 boxes of records from petitioner's office on December 15, 1988. The U.S. Attorney's Office for the Eastern District of New York hired a computer expert, who downloaded from the computer the records that Seth Wapnick kept. Respondent's agents verified the accuracy of some of the computer records by comparing those records with information that respondent obtained from third parties. Respondent's agents interviewed petitioner's clients and reviewed bank statements, canceled checks, deposit slips, and Forms 1099. Respondent prepared summaries of the computer records, other business records that petitioner had, and records from third parties.
By notice of deficiency issued on October 21, 1993, respondent determined that petitioner had the following amounts of unreported income:
Source of Income | 1985 | 1986 | 1987 |
Accounting fees | $ 225,743 | $ 400,635 | $ 497,289 |
Check cashing fees | 60,234 | 39,217 | 79,018 |
Interest from loans | 201,565 | 217,868 | 341,324 |
Interest from Treasury | |||
notes | 66,222 | 20,193 | |
Interest from banks | 36,751 | 86,341 | 90,694 |
Capital gains | 22,826 | ||
Totals | $ 60,515 | $ 787,080 | $ 1,008,325 |
2002 Tax Ct. Memo LEXIS 49">*55 OPINION
Petitioner contends that respondent bears the burden of proof under
1. Whether
Under
The notice of deficiency, issued in 1993, states that "from records and information available, it has been determined that you received additional income in the amount shown from the sources indicated". It also states that the amounts determined are "per audit". We conclude that2002 Tax Ct. Memo LEXIS 49">*56 the examination commenced before July 22, 1998. Therefore,
2. Whether Respondent's Determination Is Presumed To Be Correct
Petitioner contends that respondent's determination should not be presumed to be correct and that, as a result, respondent bears the burden of proof. We disagree. He points out that in
Petitioner contends that respondent's agents fabricated the records that respondent used to reconstruct petitioner's income. We disagree. There is no evidence that anyone fabricated the computer records.
Petitioner cites
Petitioner contends that respondent's determination is not presumed to be correct because respondent used information to reconstruct his income which would have been inadmissible under the Federal Rules of Evidence if offered as evidence at trial. We disagree. First, respondent used admissible evidence to reconstruct petitioner's income. See par. B-2, below. Second, the Commissioner may determine a deficiency based "on hearsay or other inadmissible evidence".
3. Conclusion Regarding Burden of Proof
We conclude that respondent's determination is presumed to be correct, and petitioner has the burden of proving otherwise.
1. Whether the Computer Records Are Admissible
Petitioner contends that the computer records are hearsay and thus are inadmissible under 2002 Tax Ct. Memo LEXIS 49">*59
2002 Tax Ct. Memo LEXIS 49">*60 Respondent called former Special Agent Mark Gold (Gold) and Revenue Agent Andrew Rosenblatt (Rosenblatt) to testify to establish that the foundation requirements of
Petitioner contends that Gold and Rosenblatt were not qualified to provide foundation testimony under
Gold and Rosenblatt testified2002 Tax Ct. Memo LEXIS 49">*61 that they verified the accuracy of the computer records by: (1) Comparing petitioner's copies of clients' tax returns with the information in the computer records; (2) comparing the names of clients in the computer records to client names petitioner wrote on the bank deposit slips; (3) obtaining copies of clients' canceled checks and comparing them to the computer records; and (4) contacting the clients and comparing their records to the computer records. Gold and Rosenblatt verified the accuracy of the computer records for interest income earned from petitioner's lending activity by reviewing loan files, Forms UCC-1, Financing Statement, Confessions of Judgment, and checks. They compared the checks deposited in the Republic Bank accounts with loan information in the computer records. They compared loan repayment checks, receipts, and deposit slips with information in the computer records. The computer records for the lending activity include the name of the client, principal amount of the loan, the interest rate charged, and the dates payments were due and made. Seth Wapnick worked for petitioner and maintained the computer records. We conclude that Gold and Rosenblatt properly provided2002 Tax Ct. Memo LEXIS 49">*62 foundation testimony related to the admissibility of the computer records. See
Petitioner contends that some of the computer records were fabricated because a witness at his criminal trial said that the type of computer that Seth Wapnick used was first sold to the public on December 9, 1985, which is after most of the first year in issue. We disagree. First, there is no evidence in our record to support petitioner's contention. Second, even if the December 9, 1985, date is correct, after Seth Wapnick obtained the computer he could have entered data relating to periods before he obtained the computer.
Petitioner contends Rosenblatt and Gold's testimony about the computer records was not credible. We disagree. Rosenblatt and Gold testified credibly and in detail. In contrast, petitioner's testimony was vague and unconvincing on this point.
Petitioner points out that a document entitled "Declaration of Andrew Rosenblatt", an exhibit in his criminal case and attached as part of Exhibit 44-P in this case, had many handwritten markings on it. We2002 Tax Ct. Memo LEXIS 49">*63 admitted another copy of the document without markings as Exhibit 30-R. Rosenblatt did not know who made the handwritten markings on the attachment to Exhibit 44-P, and he could not explain why they were made. Petitioner contends that Rosenblatt's testimony on these points shows that his testimony is not credible. We disagree. Rosenblatt's inability to explain handwritten markings on petitioner's exhibit does not show that his testimony was not credible.
Petitioner contends that records that he kept by hand would show that the computer records are untrustworthy and not reliable. There is no evidence to support petitioner's contention. Petitioner did not offer any handwritten records into evidence.
We conclude that the computer records are admissible under
2. Whether Summaries That Respondent Prepared Are Admissible
Respondent's agents used data from the computer records and documents related to petitioner's business to prepare summaries of income from interest from banks and loans, check cashing fees, and accounting fees. Petitioner contends that the summaries are inadmissible because respondent's agents prepared2002 Tax Ct. Memo LEXIS 49">*64 them as evidence for use in the trial of this case. We disagree.
Summaries prepared for litigation are admissible if the underlying documents have been admitted into evidence or reasonably have been made available to the opposing party for inspection.
Petitioner points out that respondent has previously filed motions in this case requesting that facts be deemed established. Petitioner objected to those requests in part because he contended that the summaries did not comply with
Petitioner2002 Tax Ct. Memo LEXIS 49">*65 relies on
1. Bank and U.S. Treasury Note Interest, Capital Gains, and Check Cashing Income
Petitioner does not dispute respondent's determination of the amounts of the bank interest, Treasury note interest, capital gains, and check cashing income. Instead, he disputes to whom it is taxable. Petitioner contends that the unreported interest, capital gains, and check cashing income are taxable to the 13 corporations. Petitioner contends that interest and capital gains earned with2002 Tax Ct. Memo LEXIS 49">*66 respect to the U.S. Treasury notes are taxable to 2 of those 13 corporations; namely, Poodle Trans. Corp. and Big John Cab Corp. We disagree.
A corporation is recognized for Federal income tax purposes if it was formed for a legitimate business purpose, or, if after formation, it conducted legitimate business.
For reasons discussed next, we do not recognize the 13 corporations for Federal income tax purposes. Petitioner used false EINs when forming the corporations. The 13 corporations did not follow any corporate formalities such as maintaining2002 Tax Ct. Memo LEXIS 49">*67 books and records, issuing stock, holding annual meetings, electing officers, or issuing financial statements. They did not have employees, they paid no salaries or dividends, and they did not conduct any legitimate business. They did not file tax returns. Petitioner did not treat the 13 corporations as separate business entities. He often lent money from one corporate account and deposited repayments for that loan in other corporate accounts.
Petitioner contends that the 13 corporations provided tax preparation, money lending, and check cashing services. We disagree. There are no documents in evidence that show there were any business transactions between a client and any of the corporations. No checks payable to any of the 13 corporations were produced at trial. Petitioner's clients made checks for services payable to petitioner, H. Wapnick & Sons, or cash.
Petitioner testified and contends that he did not own all of the stock of the 13 corporations. He contends that John Wapnick and Seth Wapnick bought Centurion Taxi, Inc., at the end of 1987; he did not own Macar Service Corp.; and Ruth Wapnick bought Oxus Taxi, Inc. in 1986. We disagree. There is no evidence corroborating his2002 Tax Ct. Memo LEXIS 49">*68 assertions. He did not call his wife or sons as witnesses. We conclude that the 13 corporations were shams, and we disregard them for tax purposes.
Petitioner contends that the interest income paid to Oxus Taxi, Inc. is not taxable to him because his wife reported all of it. We disagree. After the criminal investigation began, petitioner's wife filed an income tax return on which she reported a gain on the 1988 sale of Oxus Taxi, Inc., stock. There is no evidence that she reported any interest income paid to Oxus Taxi, Inc. in the years in issue. Petitioner has not carried his burden of proving that he is not taxable for income generated in the name of Oxus Taxi, Inc., in the years in issue.
We conclude that petitioner is taxable on income that he received from cashing checks, and on the interest and capital gains with respect to the $ 400,000 and $ 600,000 U.S. Treasury notes.
2. Income From Loans
Petitioner contends that he had no income from lending money because many of the loans he made were not repaid. A taxpayer may deduct a bad debt in the year it becomes wholly or partially worthless.
Petitioner contends that he is entitled to carry back a net operating loss of $ 1,006,000 from 1988 to 1987 and to carry forward a net operating loss of $ 1,594,000 from 1988 to 1989 and later years. We disagree. Petitioner's vague testimony is the only evidence supporting his claim.
Petitioner attached to his answering brief a document which states that a judgment was entered on October 9, 1992, in the Supreme Court of the State of New York, County of Kings, in favor of Ruth Wapnick against the Estate of Joseph Elashvili in the amount of $ 153,015. Petitioner contends that this document shows that loans to the Estate of Joseph Elashvili were worthless. This document was not offered or admitted into evidence. Even if it had been admitted, there is no evidence that the debt described in the document became worthless during the years in issue, that the judgment is uncollectible, or that the judgment related to a loan made by petitioner which is at issue in this case.
Petitioner lent $ 40,000 to Alberto, Inc., and contends that Alberto, Inc., repaid only $ 11,000. Petitioner contends that his2002 Tax Ct. Memo LEXIS 49">*70 loan to Alberto, Inc., resulted in a $ 29,000 loss. We are not convinced that petitioner lost $ 29,000 as a result of his loan to Alberto, Inc., because petitioner's only evidence supporting his contention was his vague and uncorroborated testimony.
Petitioner contends that all of the bad debts from the lending activity became totally worthless on December 15, 1988, the date that the search warrant was executed and respondent took all of his documents. We disagree. The mere fact that notes and records which were evidence of the loans are not immediately available to petitioner does not show that the loans were worthless. See
Petitioner contends that respondent's agents told the parties to whom he lent money to pay respondent instead of him. There is no credible evidence to support that contention.
Petitioner contends that he received2002 Tax Ct. Memo LEXIS 49">*71 less income from loans than respondent determined. However, petitioner's vague and uncorroborated testimony is less convincing than the documentary and other evidence provided by respondent. We conclude that petitioner had unreported income from loans to third parties of $ 201,565 in 1985, $ 217,868 in 1986, and $ 341,324 in 1987.
3. Alleged Brokerage Account Losses
Petitioner contends that respondent failed to account for margin charges and large losses that he allegedly sustained in his Brown & Co. brokerage account in 1985, 1986, and 1987. There is no evidence to support petitioner's claim.
4. Conclusion Regarding Unreported Income
We sustain respondent's determination that petitioner had unreported income of $ 600,515 for 1985, $ 787,080 for 1986, and $ 1,008,325 for 1987.
Respondent determined that petitioner is liable for the addition to tax under
Petitioner offered no evidence and made2002 Tax Ct. Memo LEXIS 49">*72 no argument on this issue. We conclude that petitioner is liable for the addition to tax for failure to pay estimated tax under
E. Whether Petitioner Is Liable for the Addition to Tax for Substantial Understatement of Income
Petitioner contended in the petition that he is not liable for the addition to tax for substantial understatement of income tax under
1. Whether Time To Assess Taxes Had Expired
Petitioner contends that the time to assess the taxes at issue expired before respondent issued the notice of deficiency. We disagree. The Commissioner may assess tax at any time if the taxpayer files a fraudulent return or fails2002 Tax Ct. Memo LEXIS 49">*73 to file a return.
2. Summary Judgment
Petitioner contends that he is entitled to summary judgment based on his contention that the 13 corporations are not shams, that he had more than $ 3 million in bad debts in 1988, and that he was wrongly convicted in his criminal case. We disagree. Summary judgment is not appropriate here because material facts are in dispute. We have found that petitioner's 13 corporations are shams and that he did not show that he had bad debts in 1998. Petitioner's arguments for summary judgment lack merit.
3. Review Jeopardy Assessments
Petitioner in essence asks us to reconsider orders of this Court dated June 2 and July 27, 1995, denying his motions to review respondent's jeopardy assessments. Petitioner contends that the jeopardy assessments are invalid because, to make them, respondent used data which would have been inadmissible under the Federal Rules of Evidence if offered as evidence at trial. We disagree for reasons stated at2002 Tax Ct. Memo LEXIS 49">*74 paragraphs A-2 and B-2, above.
4. Reconsideration of Order Deeming Matters Stipulated Under Rule 91(f)
In his posttrial brief, petitioner requested that we reconsider our pretrial order deeming certain documents and facts stipulated. Respondent had moved to compel stipulation of facts under Rule 91(f) on February 16, 2001. Respondent requested that we should deem stipulated copies of the notice of deficiency, petitioner's income tax returns for 1985 and 1986, documents from the U.S. Treasury and Republic Bank, schedules showing petitioner's income from accounting services, loans and check cashing based on the computer records, on petitioner's other records, and on records from third parties, and the judgment from petitioner's criminal case. Respondent also requested that we deem stipulated that petitioner did not file an income tax return for 1987, the 13 corporations did not file Federal or State corporate tax returns, and petitioner used false EINs for the 13 corporations.
We ruled on respondent's motion following a pretrial hearing. At the hearing, respondent showed sources, reasons, and bases for facts and exhibits that we deemed stipulated, and showed that2002 Tax Ct. Memo LEXIS 49">*75 petitioner had reasonable access to those sources or bases for stipulation. Petitioner did not show any sources, reasons, or bases for refusing to stipulate to those exhibits and facts. We granted respondent's motion in large part, but we denied it to the extent that respondent had not produced underlying documents relating to summaries. Summaries not deemed stipulated were later admitted at trial after respondent provided those underlying documents. See paragraph B-2, above.
Petitioner contends that we should reconsider our order partially granting respondent's motion to compel stipulation of facts under Rule 91(f). We disagree. Petitioner's reasons to oppose stipulation are the same as those that he raised in his request for summary judgment and review of the jeopardy assessment, and in his post-trial briefs. We rejected those arguments in paragraphs F-2 and F-3, above. We conclude that reconsideration is not warranted here.
5. Conform Pleadings to Evidence
Petitioner contends that the pleadings in this case should be conformed to the evidence under Rule 41(b). However, petitioner does not state how the pleadings should be changed or state what evidence supports his request. See2002 Tax Ct. Memo LEXIS 49">*76 Rule 41. Petitioner's request to conform pleadings to the evidence lacks merit.
6. Petitioner's Request for Admissions
Petitioner contends that respondent did not respond to his request for admissions. We do not address this contention further because there is no evidence that petitioner served respondent with a request for admissions under Rule 90.
For the foregoing reasons, we sustain respondent's determination. To reflect the foregoing,
Decision will be entered for respondent.
Footnotes
1. Plus 50 percent of the interest due on the portion of the underpayment due to fraud under
sec. 6654(b)(2)↩ for 1985 and sec. 6653(b)(1)(B) for 1986 and 1987.1. We previously held that petitioner is collaterally estopped from denying that he is liable for the addition to tax for fraud under sec. 6653(b) for 1985, 1986, and 1987 because he was convicted of attempting to evade or defeat tax in violation of sec. 7201 for those years.
Wapnick v. Commissioner, T.C. Memo 1997-133">T.C. Memo 1997-133 ; seeUnited States v. Wapnick, 60 F.3d 948">60 F.3d 948 (2d Cir. 1995). In its opinion, the U.S. Court of Appeals for the Second Circuit indicated that petitioner and his associates at one time prepared the tax returns for an estimated 13 percent of New York City's taxi drivers.United States v. Wapnick, supra 60 F.3d at 950↩ .2.
Fed. R. Evid. 803(6) provides as follows:(6) Records of regularly conducted activity. A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record, or data compilation, all as shown by the testimony of the custodian or other qualified witness, * * * unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness. The term "business" as used in this paragraph includes business, institution, association, profession, occupation, and calling of every kind, whether or not conducted for profit.↩
3. Petitioner contends that Rosenblatt's testimony at the criminal trial violated
Fed. R. Evid 702↩ for expert testimony. We need not here consider petitioner's contentions about his criminal trial.