86 T.C. 171">*172 Respondent determined a deficiency in the amount of $ 24,943 in petitioner's personal holding company tax for its fiscal year ended January 31, 1978. The only issue to be decided is whether, during that year, petitioner was a personal holding company within the meaning of section 542(a). ¹

FINDINGS OF FACT

Petitioner Kenyatta Corp. was a Washington State corporation with its principal office located in Seattle, Washington, at the time the petition was filed. Petitioner timely filed its corporate Federal income tax return for its fiscal year 1978 with the Internal Revenue Service Center, Ogden, Utah.

Petitioner was incorporated under the laws of the State of Washington on July 9, 1973. However, no organizational meeting was held for petitioner, and no stock certificates were ever issued. Each year from its inception through the close of its 1978 fiscal year, petitioner's president was William F. Russell (hereinafter Russell).

86 T.C. 171">*173 Russell, a former professional basketball player, has long been a well known 1986 U.S. Tax Ct. LEXIS 154">*156 and highly regarded sports personality. Since 1969, following his retirement from professional basketball, Russell has been employed, first by Felton Productions and later by petitioner, to provide a variety of his own personal services. These services included hosting radio talk shows, making personal appearances, lecturing on college campuses, sportscasting, writing newspaper columns, coaching and managing a professional basketball team, speaking on radio and television programs, and performing services for various advertising and promotional efforts.

In 1969, Robert Walsh (hereinafter Walsh), then program director for KABC radio station in Los Angeles, hired Russell as a radio talk show host and television sportscaster. In 1973, Russell moved to Seattle to become the coach and general manager of the Seattle SuperSonics professional basketball team (hereinafter Sonics).

Russell was joined in Seattle by Walsh, who became assistant general manager of the Sonics under Russell, and by Anita Dias (hereinafter Dias), who had been employed in Los Angeles by Felton Productions, the California corporation which provided Russell's personal services from approximately 1970 to 1973. From 1973 1986 U.S. Tax Ct. LEXIS 154">*157 to 1977, Dias worked for the Sonics and provided services to petitioner as administrative assistant and secretary to Russell, handling his calendar, travel arrangements, and banking. She signed most of the documents requiring Russell's signature. Dias ran the day-to-day operations of petitioner's office, kept books for some transactions, and maintained a checking account for petitioner in Seattle.

Petitioner was organized on the advice of Richard Covey (hereinafter Covey), who served as petitioner's secretary from its inception through at least September 6, 1978. In his capacity as secretary, Covey maintained a bank account for petitioner in Los Angeles and kept most of petitioner's books and records with him in Los Angeles during petitioner's 1978 fiscal year. Covey was also Russell's attorney and business agent from 1969 until 1982. During that period, he assisted in developing Russell's career and generating business opportunities and handled legal matters, 86 T.C. 171">*174 such as negotiating and drafting contracts. Covey generally received fees for his legal services and compensation on a percentage basis for his services as Russell's agent.

In addition to providing Russell's services for 1986 U.S. Tax Ct. LEXIS 154">*158 speaking engagements, personal appearances, and the like, petitioner arranged for the services of other sports personalities. Petitioner was asked to provide substitutes when Russell was unavailable or not inclined to make certain types of personal appearances; for example, Russell made it a policy never to sign autographs.

Ken Duncan (hereinafter Duncan), a certified public accountant, was hired in 1977 to prepare both petitioner's corporate Federal income tax return for its 1978 fiscal year and Russell's individual tax return. In preparing petitioner's 1978 return, Duncan used two lists of checks drawn from and deposits made into petitioner's checking accounts -- one handwritten list prepared by Dias and one typewritten list prepared by Covey (bank deposits and disbursements list). ² Duncan never received a cash receipts journal, check register, or canceled checks for fiscal year 1978.

At the request of the revenue agent who examined petitioner's fiscal 1986 U.S. Tax Ct. LEXIS 154">*159 year 1978 income tax return, Duncan prepared a handwritten breakdown of petitioner's cash receipts from its 1978 fiscal year (cash receipts breakdown). The document is dated June 4, 1983, and bears the notation: "Big Rush -- Vacation starts this afternoon for 1 week out of town." Duncan prepared the cash receipts breakdown using "scraps of paper" and whatever information was available at the time.

On its corporate income tax return for fiscal year 1978, which was signed by Russell as president, petitioner reported gross receipts in the amount of $ 138,895 and taxable income in the amount of $ 44,919. Petitioner reported no reduction for cost of goods sold, and no deductions for 86 T.C. 171">*175 commissions, salaries, and wages paid. ³ On page 3 of the return, item H(2) names Russell as the individual who owned, at the end of the taxable year, 50 percent or more of petitioner's voting stock, and an attached schedule shows that he owned 100 percent of the stock in that year. ^{41986 U.S. Tax Ct. LEXIS 154">*160}

Petitioner's gross receipts from its 1978 fiscal year were derived from various sources, among which were several service contracts here in dispute. The following are our findings with respect to each of those agreements.

1. Seattle SuperSonics

In 1973, the professional basketball franchise known as the Seattle SuperSonics was owned by the Seattle SuperSonics Corp., a wholly owned subsidiary of First Northwest Industries of America, Inc. (FNI). During that year, the Sonics' image and popularity had declined as a result of poor public relations and unfavorable press coverage. The board of directors of FNI discharged the Sonics' coach and made an effort to replace him with the best name in basketball to restore the team's credibility. Consequently, Russell was hired as coach and general manager of the Sonics in July 1973.

The contract negotiations eventually produced two contracts, one between FNI and Russell covering Russell's services as coach and general manager of the Sonics (coaching agreement) and the other between FNI and petitioner covering publicity and public relations services to be provided by petitioner (public 1986 U.S. Tax Ct. LEXIS 154">*161 relations agreement). Both contracts were signed by or on behalf of the parties, ⁵ dated "As of July 1, 1973," and ran for a term of 5 years commencing on that date and terminating on June 30, 1978. ⁶

86 T.C. 171">*176 Under the public relations agreement, petitioner agreed to provide Russell's services in connection with certain public relations work for the Sonics, including a series of 5-minute radio programs to be broadcast prior to the Sonics' games. As consideration for services to be rendered under the public relations agreement, petitioner agreed to accept $ 250,000 payable 1986 U.S. Tax Ct. LEXIS 154">*162 in 60 equal monthly installments commencing July 1, 1973. The public relations agreement provides by its terms in pertinent part:

A. William F. Russell (Russell) has executed a personal services agreement with Kenyatta whereby Russell has granted to Kenyatta all rights to his services, name, image, voice and likeness, with the exception of the basketball coaching and general managing services described in an Employment Agreement executed between Russell and FNI for the coaching and general managing services of Russell, dated "As of July 1, 1973."

B. Russell is a prominent personality with a national reputation as a commentator, entertainer, professional athlete and spokesman; and whose name, likeness and image is of established commercial value.

* * * *

1. Grant of Rights.

Kenyatta hereby grants to FNI, during the term hereof, the following rights:

a. The right, subject to the provision of Paragraph 4, to use Russell's name, image voice and likeness by means of television, radio and publications to 1986 U.S. Tax Ct. LEXIS 154">*163 advertise and exploit the Seattle SuperSonics and its activities.

b. The right to use Russell's services, live or recorded, for a series of five (5) minute radio programs, each episode to be broadcast one time prior to a basketball game played by the Seattle SuperSonics; said services to be contracted and paid for by Radio Station KOMO (or any other radio stations which Sonics contract to carry the broadcast of the games).

As reflected by respondent's Form 1099-Misc. issued by the Seattle SuperSonics Corp. to petitioner and the audit workpapers prepared by the Seattle SuperSonics Corp.'s accountant, petitioner received income in the amount of $ 20,833.30 during its 1978 fiscal year pursuant to the public relations agreement.

86 T.C. 171">*177 2. KIRO-TV

In 1977, KIRO television (KIRO-TV), the CBS affiliate in Seattle, employed Russell, then coach of the Sonics, to perform in a 5-minute pre-game coach's show prior to each of the 15 Sonics games televised on KIRO-TV. Payments for Russell's services were made by checks dated March 15, 1977 and April 12, 1977, payable to Russell in the amounts of $ 3,750 and $ 1,875, respectively. Duncan included these payments on his cash receipts breakdown. The payments 1986 U.S. Tax Ct. LEXIS 154">*164 were not reported on Russell's 1977 individual income tax return.

3. ABC Sports

Pursuant to a contract dated "As of September 1, 1977," petitioner agreed to furnish to ABC Sports, Inc. (ABC Sports), the "exclusive personal services of Mr. Russell, * * * [petitioner's] employee, as commentator, host, co-host, expert analyst, interviewer and the like in connection with television sports and news programs * * * for broadcast by ABC." The term of the contract was 3 years commencing September 1, 1977. The parties agree that ABC Sports made the following payments to petitioner pursuant to their agreement during petitioner's 1978 fiscal year:

Covey included these payments from ABC Sports on his bank deposits and disbursements list. ^{71986 U.S. Tax Ct. LEXIS 154">*165}

86 T.C. 171">*178 4. Seattle Times

Pursuant to a contract dated "As of September 1, 1977," petitioner agreed to furnish "the services of William F. Russell ('Russell') to provide material for a weekly newspaper column ('the column') which will appear exclusively in The Seattle Times." In consideration of Russell's services, petitioner contracted to receive $ 250 per column to be paid weekly during the contract term commencing on September 15, 1977, and terminating one year later. The agreement contains the following additional provision:

Russell and * * * [petitioner] acknowledge there is a valid and existing personal services agreement between Russell and Kenyatta Corporation, and Russell agrees to perform all terms and conditions contained in this agreement.

The agreement further provides that petitioner retain the copyright to each column.

Russell was assisted in writing the Seattle Times columns by Taylor Branch and Walt Crowley, both professional writers, Russell's then wife, Didi Anstett Russell (hereinafter Didi Anstett), and Dias. In some instances, the articles were written by Taylor Branch or Didi Anstett from tapes or notes of a group discussion 1986 U.S. Tax Ct. LEXIS 154">*166 with Russell on the weekly topic. These articles were then subject to Russell's approval. A list of the articles compiled by Didi Anstett from a scrapbook she kept revealed that 20 articles were published during petitioner's 1978 fiscal year; the first article was published on September 18, 1977, and the last on January 29, 1978. As reflected in the requests for checks issued to the accounts payable department of the Seattle Times, petitioner received at least 19 payments of $ 250 each for a total of $ 4,750 during its 1978 fiscal year in consideration for the columns. ⁸

5. Cole & Weber

In 1977, petitioner received $ 15,000 from Cole & Weber, an advertising and public relations firm located in Seattle. The payment represented a talent fee for Russell's services 86 T.C. 171">*179 in connection with a series of television commercials for a local dairy company. The commercials featured Russell and Jack Patera, then coach of the Seattle Seahawks professional 1986 U.S. Tax Ct. LEXIS 154">*167 football team, and depicted Russell as Patera's "shape up" coach encouraging him to become physically fit through a combination of exercise and a diet of various dairy products. Covey included the payment from Cole & Weber on his bank deposits and disbursements list.

Using the taxable income figure in petitioner's income tax return for fiscal year 1978, respondent determined the deficiency in personal holding company income tax described above.

OPINION

The only issue to be decided is whether petitioner was a personal holding company within the meaning of section 542(a) during 1978 and is, therefore, subject to the personal holding company tax. ^{91986 U.S. Tax Ct. LEXIS 154">*168} A corporation is a personal holding company if it meets a stock ownership test and a "tainted Oncome" test which are specified in section 542(a). ¹⁰ Before analyzing the evidence in the light of these tests, however, we must dispose of a preliminary argument on which petitioner pins much of its case.

Petitioner contends that respondent has the burden of proving that petitioner was a personal holding company during its fiscal year 1978 because the Commissioner's agents, before issuing the notice of deficiency, did not possess or examine all of the contracts from which petitioner received its income. Petitioner admits that it did not have, or present to the agents, 1986 U.S. Tax Ct. LEXIS 154">*169 the contracts (excepting the 86 T.C. 171">*180 ABC Sports contract) or other records which reflected the nature and source of its income. Because the agents did not obtain the contracts from third party sources by summons or otherwise, the argument goes, the notice of deficiency does not have a proper foundation of substantive evidence, is arbitrary, and is not entitled to the so-called presumption of correctness under the rationale of Weimerskirch v. Commissioner, 596 F.2d 358">596 F.2d 358, 596 F.2d 358">361 (9th Cir. 1979), revg. 67 T.C. 672">67 T.C. 672 (1977), and Llorente v. Commissioner, 649 F.2d 152">649 F.2d 152 (2d Cir. 1981), affg. in part and revg. and remanding in part 74 T.C. 260">74 T.C. 260 (1980).

There is no merit in petitioner's argument. A trial in this Court with respect to a deficiency determination is a de novo proceeding; it does not involve a review of the evidence in the hands of the Internal Revenue Service when the notice of deficiency was issued. Only in limited circumstances, not present here, will the Court go behind the notice of deficiency. Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324">62 T.C. 324, 62 T.C. 324">327-328 (1974); see Crowther v. Commissioner, 269 F.2d 292">269 F.2d 292, 269 F.2d 292">293 (9th Cir. 1959), affg. on this issue 28 T.C. 1293">28 T.C. 1293 (1957). Petitioner's status 1986 U.S. Tax Ct. LEXIS 154">*170 under the personal holding company tax provisions thus does not turn on what evidence the Internal Revenue Service agents had in their files when the notice was issued but on the evidence presented in this Court.

The Weimerskirch-Llorente line of cases has nothing to do with the issue here presented. In those cases, the Commissioner determined that the taxpayers had substantial income from the illegal sale of narcotics. The Commissioner offered no evidence showing that the taxpayers received income from such source or otherwise linking the taxpayers to illegal narcotics dealing from which income was derived, and the taxpayers offered no credible evidence rebutting the charge that they did so. In these circumstances, the appellate courts held that the so-called presumption of correctness, usually applied to support a deficiency determination, did not attach and would not sustain the determined deficiencies. ¹¹ Furthermore, those cases were decided on the 86 T.C. 171">*181 trial record, not on what was contained in the Internal Revenue Service files when the notice of deficiency was issued. ^{121986 U.S. Tax Ct. LEXIS 154">*172} Respondent in the instant case does not rely upon any presumption of correctness but at the trial offered 1986 U.S. Tax Ct. LEXIS 154">*171 much of the evidence reflected in our findings of fact. Moreover, the deficiency in the instant case is based on the figures in petitioner's own income tax return; no form of income reconstruction is involved. The only issue is the character of the income -- whether it was personal holding company income. We hold that the burden of proof rests with petitioner. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933).

The stock ownership test prescribed by section 542(a)(2) is satisfied if, at any time during the last half of the taxable year, more than 50 percent in value of the corporation's outstanding stock is owned, directly or indirectly, by or for not more than five individuals. Petitioner argues that because no stock certificates were issued, the corporation does not meet the requirements of the stock ownership test. However, the issuance of stock certificates is not determinative of stock 1986 U.S. Tax Ct. LEXIS 154">*173 ownership for purposes of section 542(a)(2). Sec. 1.542-3(b), Income Tax Regs.; Collateral Equities Trust v. Commissioner, 39 B.T.A. 834">39 B.T.A. 834, 39 B.T.A. 834">839-840 (1939). Furthermore, Covey, the attorney responsible for organizing petitioner, testified that Russell was intended to be the majority stockholder in the corporation and that the majority 86 T.C. 171">*182 of the equity in petitioner belonged to Russell in "some unfocused way."

More important, petitioner's articles of incorporation show that it had only one class of stock, and its 1978 tax return designated Russell as holder of 100 percent of petitioner's voting stock. ¹³ This sworn statement of voting stock ownership is an admission to which we give substantial weight. Waring v. Commissioner, 412 F.2d 800">412 F.2d 800, 412 F.2d 800">801 (3d Cir. 1969), affg. per curiam a Memorandum Opinion of this Court; Times Tribune Co. v. Commissioner, 20 T.C. 449">20 T.C. 449, 20 T.C. 449">452 (1953). Finally, nothing in the record establishes that anyone other than Russell owned any of petitioner's outstanding stock at any time during its 1978 fiscal year.

In light of petitioner's admission under oath and its failure to carry its burden of proving that someone other than Russell owned the majority of 1986 U.S. Tax Ct. LEXIS 154">*174 petitioner's outstanding stock, we find that at least 50 percent of the value of petitioner's outstanding stock was owned by not more than five individuals within the meaning of section 542(a)(2).

The tainted income test provided by section 542(a)(1) is met if at least 60 percent of the corporation's "adjusted ordinary gross income" for the taxable year constitutes "personal holding company income." ¹⁴Section 543(a), which defines personal holding company income, provides in pertinent part:

SEC. 543(a). General Rule. -- For purposes of this subtitle, the term "personal holding company income" means the portion of the adjusted ordinary gross income which consists of:

* * * *

(7) Personal service contracts. --

This paragraph shall apply with 1986 U.S. Tax Ct. LEXIS 154">*175 respect to amounts received for services under a particular contract only if at some time during the taxable year 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description) as the one to perform, such services. ^{151986 U.S. Tax Ct. LEXIS 154">*176}