Judges: "Colvin, John O."
Attorneys: T.P. Crigler, pro se. James R. Rich, for respondent.
Filed: Mar. 28, 2003
Latest Update: Nov. 21, 2020
Summary: T.C. Memo. 2003-93 UNITED STATES TAX COURT T.P. AND NAJIEH R. CRIGLER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 9233-99. Filed March 28, 2003. T.P. Crigler, pro se. James R. Rich, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION COLVIN, Judge: Respondent determined a deficiency in petitioners’ Federal income tax of $19,675 and an accuracy- related penalty under section 6662 of $3,935 for 1995. - 2 - The issues for decision are: 1. Whether petitioners may de
Summary: T.C. Memo. 2003-93 UNITED STATES TAX COURT T.P. AND NAJIEH R. CRIGLER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 9233-99. Filed March 28, 2003. T.P. Crigler, pro se. James R. Rich, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION COLVIN, Judge: Respondent determined a deficiency in petitioners’ Federal income tax of $19,675 and an accuracy- related penalty under section 6662 of $3,935 for 1995. - 2 - The issues for decision are: 1. Whether petitioners may ded..
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T.C. Memo. 2003-93
UNITED STATES TAX COURT
T.P. AND NAJIEH R. CRIGLER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9233-99. Filed March 28, 2003.
T.P. Crigler, pro se.
James R. Rich, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined a deficiency in
petitioners’ Federal income tax of $19,675 and an accuracy-
related penalty under section 6662 of $3,935 for 1995.
- 2 -
The issues for decision are:
1. Whether petitioners may deduct an ordinary loss of
$100,000 under section 1244 for loss in value of petitioner’s
FabuGlass stock in 1995. We hold that they may not.
2. Whether petitioners are liable for the accuracy-related
penalty for negligence under section 6662 for 1995. We hold that
they are.
Unless otherwise provided, section references are to the
Internal Revenue Code in effect for 1995, and Rule references are
to the Tax Court Rules of Practice and Procedure. References to
petitioner are to Mr. Crigler.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioners resided in Chapel Hill, North Carolina, when they
filed their petition.
A. FabuGlass, Inc.
1. B.F. Lists, Inc.
In 1981, petitioner incorporated B.F. Lists, Inc. (B.F.
Lists), in Arkansas to obtain, rent, and market mailing lists for
the retail sale of professional uniforms and accessories.
Petitioner converted a rodeo arena in Conway, Arkansas, into a
mail order office, warehouse, and shipping facility (the Conway
premises) at a date not specified in the record.
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2. FabuGlass, Inc. and Crigler & Co.
Petitioner changed the name of B.F. Lists to FabuGlass, Inc.
(FabuGlass), in 1985, and he changed the name of FabuGlass to
Crigler & Co. in 1996.1
Petitioner owned all of the stock of FabuGlass from 1987-98.
The articles of incorporation adopted in 1985 state that
FabuGlass was formed to manufacture, market, and distribute
fiberglass-reinforced plastic products, accessories, and related
items.
3. FabuGlass’ Activities
FabuGlass manufactured fiberglass Jeep tops and related
parts in 1985 and 1986 at the Conway premises. FabuGlass had
serious business problems in 1985 and 1986 which petitioner tried
to correct. In August 1987, FabuGlass agreed to supply Pender
Boat Co. (Pender), a North Carolina company, with fiberglass
molds for Jeep parts, and Pender agreed to furnish Jeep parts to
FabuGlass. FabuGlass bought sixteen fiberglass Jeep parts from
Pender in October and November 1987. Petitioner was not
satisfied with the parts that Pender produced. Drug Enforcement
Administration (DEA) officials in North Carolina apparently
confiscated FabuGlass’ molds from Pender on a date not stated in
the record.
1
For purposes of this opinion, we refer to the entity
originally known as B.F. Lists as FabuGlass for all years.
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FabuGlass reported $0 sales or costs of goods sold in 1989.
It rented the Conway premises to an unidentified tenant for
$66,000 in 1989.
FabuGlass purchased $922,370 of securities for investment in
1989. In 1989, FabuGlass also had receivables of $1,015, liquid
assets of $899, and owned a building with a book value of
$248,681 less accumulated depreciation of $125,228.
In 1990-95, FabuGlass derived income from renting real
property and trading stocks and securities. Petitioner operated
FabuGlass as a business consulting company in 1996 and 1997.
FabuGlass was an Arkansas corporation that had filed all
required reports and paid all required fees and taxes as of the
date of trial. It had not liquidated its assets or filed for
bankruptcy protection as of the date of trial.
B. AmRuss, Ltd.
In 1992 or 1993, Raymond Sawyer (Sawyer), petitioners’
accountant, and petitioner attempted to do business in Russia
through AmRuss, Ltd. (AmRuss). FabuGlass was not involved in
petitioner’s efforts to do business in Russia.
In 1991-94, Charles Layman (Layman) owned a company called
Murphy Body Co. Murphy Body Co., AmRuss, and a Russian entity
named Association Vnedrenie agreed to do business converting
vehicles into refrigerated or armored trucks, ambulances, and
other specially used vehicles in 1991-94. The contract between
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Murphy Body Co., AmRuss, and Association Vnedrenie is not in
evidence. An “Addendum to Charter and By-Laws of Vnedrenie-
Murphy” was prepared for petitioner’s signature in his capacity
as chairman of AmRuss.
On December 22, 1994, AmRuss agreed to sell an armored
vehicle to a Russian entity named Bank Baltisky. Petitioner
signed the sales contract as president of AmRuss.
C. Tax Returns for FabuGlass
Sawyer or his employees prepared the Federal corporate
income tax returns for FabuGlass for 1990-93. Petitioner gave
Sawyer information relating to income, expenses, and various
stock transactions to use in preparing the returns. FabuGlass
reported on its returns for 1990-93 that it was an investment
company and that its business activity was investing in financial
securities and real estate.
Petitioner prepared and signed the original 1994 return for
FabuGlass. FabuGlass reported on its 1994 return that its
business activity was investments. Sawyer or his employees
prepared the first amended 1994 return for FabuGlass and added a
net operating loss carryback but did not change other parts of
the return.
FabuGlass reported that its total liabilities exceeded its
assets for the period 1990-94. FabuGlass reported the following
amounts of gross income and deductions for 1990-94:
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FabuGlass’ Reported Gross Income and Deductions for 1990-94
Year Gross income Deductions
1990 $(818,321) $31,227
1991 (1,034,984) 89,818
1992 209,518 --
1993 102,031 --
1994 (13,301) 16,070
Total (1,555,057) 137,115
FabuGlass reported $0 gross receipts or sales in 1990, 1991,
and 1992, $25,220 in 1993, and $0 on the original and first
amended 1994 returns. FabuGlass reported $0 costs of goods sold
on its 1990, 1991, 1992, 1993, and original and first amended
1994 returns. FabuGlass claimed no deductions for salaries,
wages, rents, and advertising on its 1990-94 returns.
FabuGlass reported assets on its returns as follows:
1
Item 1990 1991 1992 1993 1994
Cash –- –- –- 16 –-
Inventories –- –- –- $166,353 166,353
Investments $1,068,279 $144,932 $1,794 22,270 3,075
Buildings and
depreciable
assets 248,681 248,681 248,681 –- --
less accumulated
depreciation (129,842) (134,456) (134,456) –- --
Total assets 1,187,118 259,157 116,019 188,639 169,428
1
FabuGlass reported these amounts on its original and first amended 1994
returns.
FabuGlass’ tax returns for 1990-94, a real estate contract,
and a stipulated rental receipt show that less than 50 percent of
FabuGlass’ aggregate gross receipts for 1990-94 were from sources
other than royalties, rents, dividends, interest, annuities, and
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sales or exchanges of stock or securities (nonoperating sources)
as follows:
Nonoperating Other
1990 sources sources
Dividends $39,955 --
Rent receipts 27,500 --
Gains from stock transactions 22,117 --
Commissions -- $3,000
Totals 89,572 3,000
1991
Dividends $13,853 --
Rent receipts 2,760 --
Gains from stock transactions 334,916 --
Real estate sale1 -- $5,000
Totals 351,529 5,000
1992
Dividends $10,691 --
Interest 212 --
Rent receipts2 14,779 --
Gains from stock transactions 611 --
Real estate sales -- $250,000
Totals 26,293 250,000
1993
Dividends $504 --
Gains from stock transactions 18,939 --
Sale –- 25,220
Real estate sales -- $102,000
Totals 19,443 127,220
1994
Dividends $304 --
Boat sales -- $22,312
Totals 304 22,312
- 8 -
Total from Total from
nonoperating sources other sources
1990 $89,572 $3,000
1991 351,529 5,000
1992 26,293 250,000
1993 19,443 127,220
1994 304 22,312
Totals 487,141 407,532
1
FabuGlass did not report this item on its 1991 tax return.
However, the parties stipulated to the contract which shows that
FabuGlass received $5,000 in 1991 from a real estate sale.
2
The parties stipulated that FabuGlass received rent
receipts of $14,779 in 1992.
Sawyer prepared FabuGlass’ tax return for 1995. Petitioner
gave Sawyer a summary of income, expenses, and various
transactions (e.g., sales of stock and real property) to use in
preparing the 1995 return. FabuGlass reported that it was an
investment company. FabuGlass reported the following on its 1995
return: Assets and Liabilities
Beginning
Item of year End of year
Cash -- $396
Inventories $166,353 166,353
Depreciable, 3,075 3,075
depletable, and
intangible assets
Total assets 169,428 169,824
Loans from stockholders 2,026,017 2,431,761
Capital stock 430,258 25,000
Retained earnings (2,286,847) (2,286,937)
Total liabilities and 169,428 169,824
stockholders’ equity
- 9 -
On their 1995 return, petitioners reported a $405,238 loss
attributable to petitioner’s FabuGlass stock and claimed a
$100,000 deduction2 under section 1244.
The examination of petitioners’ 1995 income tax return began
in 1997. Respondent issued a notice of deficiency on February
18, 1999, in which respondent determined that petitioners were
not entitled to a $100,000 deduction under section 1244.
On November 8, 1999, petitioner prepared and filed a second
amended return for 1994 for FabuGlass. On it, FabuGlass reported
that its business activity was the manufacture of “Co-Production
Transp. Products” and that its product or service was “vehicle
conversions w/ R.P.” Also on that return, FabuGlass reported
(for the first time) (1) income of $22,312 from the sale of
boats, costs of goods sold of $31,643, and expenses of $16,070
for travel to Russia, and (2) total assets of $139,325,
consisting of $134,710 of inventories (2 boats), $1,540 of export
items consigned to Russia, and $3,075 of investments.
Sawyer prepared petitioners’ individual income tax returns
for 1990-96, but not FabuGlass’ return for 1996.
FabuGlass reported on its 1996 and 1997 returns that its
business activity was consulting.
2
The maximum annual amount that may be deducted under sec.
1244 is $100,000 for a husband and wife filing a joint return for
that year. Sec. 1244(b).
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OPINION
A. Whether Petitioner’s FabuGlass Stock Qualifies as Section
1244 Stock
1. Requirements for Section 1244 Stock
Generally, when corporate stock becomes worthless, the loss
is a capital loss. However, an individual who has what would
otherwise be a capital loss on stock that qualifies as section
1244 stock may treat up to $50,000 ($100,000 in the case of a
joint return) of the loss as an ordinary loss. Sec. 1244(a),
(b), (d)(1)(B). Section 1244 stock is stock of a domestic
corporation if: (1) At the time that stock is issued, the
corporation had not received money or other property in excess of
$1 million for its stock as a contribution to capital or as paid-
in surplus; (2) the stock was issued for money or other property
other than stock or securities; and (3) the corporation, during
its 5 most recent taxable years (or, if less, the period during
which the corporation has been in existence) ending before the
date the loss in question was sustained, derived more than 50
percent of its aggregate gross receipts from sources other than
royalties, rents, dividends, interest, annuities, and sales or
exchanges of stocks or securities. Sec. 1244(c)(1). The gross
receipts requirement does not apply if, for the 5-year period
described above, the amount of deductions allowed by Chapter 1
(other than by sections 172, 243, 244, and 245) exceeds the
amount of the corporation’s gross income. Sec. 1244(c)(2)(C).
- 11 -
Congress intended section 1244 to encourage taxpayers to
invest new funds in small businesses, rather than provide
favorable tax treatment for losses suffered by investment and
holding companies. H. Rept. 2198, 85th Cong., 1st Sess. (1958),
1959-2 C.B. 709, 711; Bates v. United States, 581 F.2d 575, 580
(6th Cir. 1978); Davenport v. Commissioner,
70 T.C. 922, 926
(1978).
The Secretary is authorized to prescribe regulations needed
to carry out the purposes of section 1244. Sec. 1244(e).
Pursuant to that authority, the Secretary issued regulations
which provide that the taxpayer must show that the corporation
was “largely an operating company”3 during the 5-year period
described above even if the gross receipts requirement does not
3
Congress intended to limit application of sec. 1244 to
companies which are largely operating companies. The legislative
history states in pertinent part:
III. GENERAL EXPLANATION
* * * * * * *
Section 2. Losses on Small-Business Stock
* * * * * * *
Your committee also has imposed a restriction designed
to limit this tax benefit to companies which are
largely operating companies. Thus, the corporation, in
the 5 years before the taxpayer incurs the loss on the
stock, must have derived more than half of its gross
receipts from sources other than royalties, rents,
dividends, interest, annuities, and the sale of stock
or securities. [H. Rept. 2198, 85th Cong., 1st Sess.
(1958), 1959-2 C.B. 709, 711; emphasis added.]
- 12 -
apply because the corporation’s deductions exceeds its net
income. Sec. 1.1244(c)-1(e)(2), Income Tax Regs.; Davenport v.
Commissioner, supra at 928-929. This provision of the
regulations is valid. Davenport v. Commissioner, supra.
2. Contentions of the Parties
Petitioners contend that petitioner’s FabuGlass stock
qualifies as section 1244 stock and that they may deduct $100,000
as an ordinary loss under section 1244(a) in 1995. Respondent
contends that petitioner’s FabuGlass stock does not qualify as
section 1244 stock because: (a) FabuGlass derived less than 50
percent of its aggregate gross receipts from sources other than
nonoperating sources, and FabuGlass’ gross income exceeded its
deductions for 1990-94; and (b) FabuGlass was not largely an
operating company during 1990-94. Petitioners contend that
FabuGlass’s deductions exceeded its gross income for 1990-94 and
that FabuGlass was largely an operating company during 1990-94.
Petitioners bear the burden of proving that petitioner’s
FabuGlass stock qualifies as section 1244 stock. Rule
142(a)(1).4
4
Sec. 7491 applies to court proceedings arising in
connection with examinations commencing after July 22, 1998.
Sec. 7491(a) does not apply here because the examination of
petitioners’ 1995 return began in 1997.
- 13 -
3. Whether FabuGlass Was Largely an Operating Company in
1990-94
a. Whether FabuGlass Had Operating Assets, Sales, or
Paid Salaries in 1990-94
FabuGlass reported on its returns for 1990-94 that it had no
operating assets and paid no salaries. This suggests that
FabuGlass was not an operating company. FabuGlass reported total
sales of $30,312 on its 1990-94 returns. That amount is
insignificant compared to the $1,555,057 it reported as net
losses from stock transactions for those years.
b. Whether FabuGlass’ Tax Returns Establish That It
Was an Investment Company
FabuGlass reported on its 1990-95 returns and its first
amended 1994 return that it was an investment company.
Petitioners contend that we should disregard references to
FabuGlass as an investment company on those returns because
FabuGlass was not authorized by its articles of incorporation to
engage in investment activities.
We disagree. First, petitioner, as the sole owner of
FabuGlass stock in 1990-95 and preparer of FabuGlass’ original
1994 return, cannot now disavow those returns without cogent
proof that they are incorrect. Waring v. Commissioner, 412 F.2d
800, 801 (3d Cir. 1969), affg. per curiam T.C. Memo. 1968-126;
Lare v. Commissioner,
62 T.C. 739, 750 (1974), affd. without
published opinion
521 F.2d 1399 (3d Cir. 1975); Kaltreider v.
Commissioner,
28 T.C. 121 (1957), affd.
255 F.2d 833 (3d Cir.
- 14 -
1958). Second, the Instructions to Forms 1120 and 1120-A, U.S.
Corporation Income Tax Return, Codes for Principal Business
Activity, for 1990-95 require a corporation to report on its tax
return its business activity from which it derives its largest
percentage of total receipts, not the business activity
authorized in its articles of incorporation.
We conclude that FabuGlass correctly reported that it was an
investment company in 1990-95.
c. Whether FabuGlass Operated in Russia in 1990-94
Petitioners contend that FabuGlass was largely an operating
company in 1990-94 because it operated in Russia in those years.
Petitioner testified that FabuGlass tried to sell armored
vehicles and refrigeration trucks to Russian companies. However,
his testimony on this point was vague. The record shows that
AmRuss, and not FabuGlass, tried to do business in Russia.
Sawyer, who prepared FabuGlass’ original income tax returns for
1990-95, testified that he did not know that FabuGlass was trying
to do business in Russia, but that AmRuss did try to do business
there. He testified that he and petitioner considered doing
business in Russia in 1992 or 1993 on behalf of a company called
AmRuss.
Petitioners contend that Exhibit 39-P, a contract dated
December 22, 1994, shows that FabuGlass was operating in Russia
in 1994. We disagree. Exhibit 39-P is a contract in which Bank
Baltisky agreed to buy an armored vehicle from AmRuss. FabuGlass
- 15 -
was not a party to that contract. Petitioner signed the contract
as president of AmRuss.
Layman testified that Murphy Body Co. and petitioner, on
behalf of FabuGlass, tried to do business in Russia in 1991-94
with an entity named Association Vnedrenie. We believe that
Layman’s testimony that FabuGlass was involved in Russia was
mistaken because the documentary evidence refers to AmRuss, not
FabuGlass. No contract between Murphy Body Co. and Association
Vnedrenie is in evidence. The record contains an “Addendum to
Charter and By-Laws of Vnedrenie-Murphy” that lists Murphy Body
Co., AmRuss, and Association Vnedrenie as parties to that
addendum and refers to petitioner as chairman of AmRuss. No
documentary evidence shows that FabuGlass did business in Russia.
Petitioners point out that FabuGlass claimed deductions for
doing business in Russia on its second amended return for 1994.
Petitioners contend that petitioner was merely correcting errors
on the original and first amended returns for 1994 and that the
second amended return is correct. We disagree. Petitioner filed
FabuGlass’ second amended return for 1994 on November 8, 1999,
almost 9 months after respondent issued the notice of deficiency.
This suggests that FabuGlass claimed those deductions simply to
support petitioners’ claim that FabuGlass was an operating
company in 1990-94 because it operated in Russia.
Respondent contends in the alternative that, if we find that
FabuGlass was active in Russia in 1990-94, then the FabuGlass
- 16 -
stock did not become worthless in 1995 because those alleged
activities continued after 1994. Petitioners argue that
respondent’s contention is a concession that FabuGlass was
largely an operating company in Russia in 1990-94. We disagree.
Respondent’s contention was contingent on our finding that
FabuGlass operated in Russia in 1990-94. We have not so found.
d. Whether FabuGlass Stopped Doing Fiberglass-Related
Business in 1995
Petitioner contends that FabuGlass stopped doing fiberglass-
related business in 1995 when he decided that FabuGlass would no
longer conduct any fiberglass-related business. We disagree.
There is no evidence that FabuGlass did business related to
fiberglass production or sales after November 1987.
The record shows no activity by FabuGlass in 1988 except for
petitioner’s letter to the U.S. Attorney to try to retrieve the
FabuGlass molds that the DEA had seized. FabuGlass reported no
sales or costs of goods sold in 1989. In 1989, it rented out its
Conway premises for $66,000 and invested $922,370 in securities.
The fact that FabuGlass invested nearly $1 million in 1989
suggests that it did not need those funds to pay operating costs.
The fact that FabuGlass rented out its Conway premises suggests
that FabuGlass was no longer using the Conway premises for
manufacturing or other business activities in 1990-94 because it
was no longer an operating company.
- 17 -
Petitioner testified that FabuGlass correctly reported on
its second amended return for 1994 that its business activity was
the production of reinforced plastic materials. We are not
convinced by that testimony because, as discussed above, the
weight of the evidence shows that FabuGlass was an investment
company and had stopped doing fiberglass-related business before
1990.
e. FabuGlass Was Not Largely an Operating Company in
1990-94
We conclude that FabuGlass was not largely an operating
company in 1990-94.
4. Conclusion
We conclude that petitioner’s FabuGlass stock was not
section 1244 stock,5 and thus, petitioners may not deduct an
ordinary stock loss of $100,000 under section 1244 in 1995.6
5
In light of our conclusion, we need not decide
respondent’s contentions that petitioners have not established
(1) that the stock was issued for money or other property (other
than stock or securities), (2) that FabuGlass satisfied the 50
percent gross receipts test, and (3) whether FabuGlass stock
became worthless in 1995.
6
Petitioners may not deduct any losses under sec. 165(g)
relating to the worthlessness of petitioner’s FabuGlass stock
because the record does not contain sufficient information to
compute petitioner’s basis in that stock in 1995. Petitioner’s
testimony leaves many unanswered questions about his basis. The
only documents in the record to support petitioners’ computation
of basis are the contract showing the 1980 purchase price of real
property ($225,000) that petitioner contributed to FabuGlass in
1985 and bank statements showing transfers from petitioner
totaling $111,000 which petitioners contend were to the First
National Bank of Conway. Petitioners have not shown that the
(continued...)
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B. Whether Petitioners Are Liable for the Accuracy-Related
Penalty for 1995
Petitioners contend that they are not liable for the
accuracy-related penalty for negligence for 1995 because they
relied on Sawyer’s advice. We disagree.
A taxpayer may be relieved of liability for the accuracy-
related penalty if the taxpayer shows that he or she had
reasonable cause for the understatement and acted in good faith.
Reliance on the advice of a qualified tax professional may
constitute reasonable cause if that reliance was reasonable and
the taxpayer acted in good faith. Sec. 6664(c); sec. 1.6664-
4(a), Income Tax Regs. To establish good faith reliance on the
advice of a competent adviser, a taxpayer must show that he or
she provided the return preparer with complete and accurate
information and an incorrect return resulted from the preparer’s
mistake. Sec. 6662; DeCleene v. Commissioner, 115 T.C. 457, 477
(2000); Neonatology Associates, P.A. v. Commissioner,
115 T.C.
43, 99 (2000), affd.
299 F.3d 221 (3d Cir. 2002); sec. 1.6662-
3(a), Income Tax Regs.
Petitioners contend that they gave Sawyer complete and
accurate information to prepare their returns properly. We
6
(...continued)
amount of the mortgage and depreciation on the property at the
time of the transfer were less than the $225,000 purchase price.
Petitioners also have not shown why transfers to a bank add to
petitioner’s basis in his FabuGlass stock. We conclude that the
record contains insufficient information from which to compute
petitioner’s basis.
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believe petitioners have not proved this. There is no evidence
that petitioners gave Sawyer information showing that
petitioner’s FabuGlass stock qualified under section 1244, i.e.,
information showing that FabuGlass derived more than 50 percent
of its aggregate gross receipts from sources other than
royalties, rents, dividends, interest, annuities, and sales or
exchanges of stocks or securities for 1990-94, that its
deductions exceeded its income for 1990-94, or that it was
largely an operating company in 1990-94. Thus, we conclude that
petitioners are liable for the accuracy-related penalty for 1995.
To reflect the foregoing,
Decision will be
entered for respondent.
