Judges: "Ruwe, Robert P."
Attorneys: John M. Youngquist , for petitioners. Michael E. Melone, for respondent.
Filed: Mar. 27, 2006
Latest Update: Dec. 05, 2020
Summary: T.C. Memo. 2006-55 UNITED STATES TAX COURT ERIC B. BENSON, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent* Docket Nos. 585-98, 19416-98, Filed March 27, 2006. 19417-98, 19421-98, 12967-00, 14171-01. John M. Youngquist, for petitioners. Michael E. Melone, for respondent. 1 Cases of the following petitioners are consolidated herewith: Brad D. Benson, docket No. 19416-98; Mark D. Benson, docket No. 19417-98; Eric B. Benson, docket No. 19421-98; and Burton O. and Elizabeth C. B
Summary: T.C. Memo. 2006-55 UNITED STATES TAX COURT ERIC B. BENSON, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent* Docket Nos. 585-98, 19416-98, Filed March 27, 2006. 19417-98, 19421-98, 12967-00, 14171-01. John M. Youngquist, for petitioners. Michael E. Melone, for respondent. 1 Cases of the following petitioners are consolidated herewith: Brad D. Benson, docket No. 19416-98; Mark D. Benson, docket No. 19417-98; Eric B. Benson, docket No. 19421-98; and Burton O. and Elizabeth C. Be..
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T.C. Memo. 2006-55
UNITED STATES TAX COURT
ERIC B. BENSON, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket Nos. 585-98, 19416-98, Filed March 27, 2006.
19417-98, 19421-98,
12967-00, 14171-01.
John M. Youngquist, for petitioners.
Michael E. Melone, for respondent.
1
Cases of the following petitioners are consolidated
herewith: Brad D. Benson, docket No. 19416-98; Mark D. Benson,
docket No. 19417-98; Eric B. Benson, docket No. 19421-98; and
Burton O. and Elizabeth C. Benson, docket Nos. 12967-00 and
14171-01.
*
This opinion supplements our previously filed opinion in
Benson v. Commissioner, T.C. Memo. 2004-272.
- 2 -
SUPPLEMENTAL MEMORANDUM OPINION
RUWE, Judge: This case is before the Court on petitioners’
motion for reconsideration of findings and opinion. On November
29, 2004, we issued a Memorandum Opinion holding that the Bensons
received constructive dividends in 1989, 1990, 1993, and 1994.
Benson v. Commissioner, T.C. Memo. 2004-272. In that Memorandum
Opinion, we stated the detailed facts of this case, which we
incorporate herein by this reference.
Section 6501(a)2 generally bars the assessment of a
deficiency after 3 years from the date the return was filed.
Section 6501(e) provides for a 6-year period of limitations if
the taxpayer omits more than 25 percent of the gross income
stated in the return. In our prior opinion, we noted that the
parties agreed in their briefs that our opinion on the merits
would determine whether the section 6501(e) exception to the
period of limitations in section 6501(a) allows assessment of the
deficiencies for 1989, 1990, 1993, and 1994.
As we noted in our prior opinion, section 6501(e)(1)(A)(ii)
provides that in determining the amount omitted from gross
income, there shall not be taken into account any amount omitted
if such amount is disclosed in the return, or in a statement
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
- 3 -
attached to the return in a manner adequate to apprise the
Secretary of the nature and amount of such item. In the briefs
submitted before our opinion at T.C. Memo. 2004-272 was filed,
neither party raised the issue of adequate disclosure under
section 6501(e)(1)(A)(ii).
After our opinion at T.C. Memo. 2004-272, petitioners filed
a motion for reconsideration. Petitioners now for the first time
argue that the prior opinion did not provide a basis to resolve
the question of whether petitioners Burton O. and Elizabeth C.
Benson (the Bensons) disclosed the understatements of gross
income on their returns. Petitioners argue that their failure to
make this argument before our previous opinion was due to the
complexities of the way the case was presented and briefed. On
March 10, 2005, we granted petitioners’ motion for
reconsideration of findings and opinion pursuant to Rule 161 with
respect to the application of section 6501(e).
In Benson v. Commissioner, supra, we found that the Bensons
received items of gross income in 1989, 1990, 1993, and 1994 that
were not reported on their Forms 1040, U.S. Individual Income Tax
Returns, as follows:
Tax Year
Description 1989 1990 1993 1994
1
ERG-Recreation acct. –- $686 $26,000 $2,698
ERG transfers to NPI $483,098 –- 3,600,000 160,063
143 Alice Lane –- 336,500 –- –-
Prop. taxes Alice Ln. –- –- 3,879 8,196
2
Check ref: Carroll 96,749 –- –- –-
Automobile deductions 10,624 23,676 28,308 14,723
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Charitable deduction –- –- 50,000 –-
Excess rent--Stanford –- 40,067 46,560 63,444
Rent--Lowell 29,400 29,400 31,020 41,736
Director’s fees 6,000 23,000 42,000 49,000
Townsend check –- –- –- 15,000
Travel expenses –- –- –- 3,889
Legal expenses –- –- –- 4,033
Life insurance payments 2,404 2,480 -- 4,781
Education payments -- -- 2,599 9,166
Royalty income 709 -- 570 586
Franklin dividend income 193 691 987 1,072
Forgiveness of debt income -- -- -- 88,291
Employee relations expenses -- -- -- 3,035
Total 629,177 456,500 3,831,923 469,713
1
All figures are rounded to the nearest dollar.
2
Respondent conceded that the Bensons are entitled to a deduction of
$77,973 in 1989 with respect to legal expenses.
The parties agree that the normal 3-year period of
limitations in section 6501(a) would bar assessment of
deficiencies for these years unless the exception in section
6501(e) applies. Thus, we must decide whether the 6-year period
of limitations provided by section 6501(e)(1) applies to the
Bensons’ 1989, 1990, 1993, and 1994 returns.3
Respondent argues that section 6501(e)(1)(A) extended the
period of limitations to 6 years because the Bensons omitted
gross income in excess of 25 percent of their reported gross
income in 1989, 1990, 1993, and 1994. Respondent has the burden
of proving that the Bensons omitted more than 25 percent of gross
income. See Harlan v. Commissioner, 116 T.C. 31, 39 (2001).
3
Respondent had also argued that the exception to the
statute of limitations for fraud applied. See sec. 6501(c). In
Benson v. Commissioner, T.C. Memo. 2004-272, we found that
respondent did not satisfy his burden of proving fraud by clear
and convincing evidence.
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Section 6501(a)4 provides that the Commissioner shall assess
any tax due within 3 years after the taxpayer files a return.
Section 6501(e)(1)(A)5 provides an exception to the general 3-
4
Specifically, sec. 6501(a) provides:
the amount of any tax imposed by this title shall be
assessed within 3 years after the return was filed
(whether or not such return was filed on or after the
date prescribed) * * * and no proceeding in court
without assessment for the collection of such tax shall
be begun after the expiration of such period.
5
Sec. 6501(e) provides in pertinent part:
SEC. 6501(e). Substantial Omission of Items.--
Except as otherwise provided in subsection (c)--
(1) Income taxes.--In the case of any tax
imposed by subtitle A--
(A) General rule.--If the taxpayer omits
from gross income an amount properly
includible therein which is in excess of 25
percent of the amount of gross income stated
in the return, the tax may be assessed, or a
proceeding in court for the collection of
such tax may be begun without assessment, at
any time within 6 years after the return was
filed. For purposes of this subparagraph--
(i) In the case of a trade or
business, the term “gross income” means
the total of the amounts received or
accrued from the sale of goods or
services (if such amounts are required
to be shown on the return) prior to
diminution by the cost of such sales or
services; and
(ii) In determining the amount
omitted from gross income, there shall
not be taken into account any amount
(continued...)
- 6 -
year period of limitations prescribed by section 6501(a).
Section 6501(e)(1)(A) extends the period of limitations to 6
years when the taxpayer omits amounts properly includable in
gross income and the omitted amounts exceed 25 percent of the
reported gross income.
“The test for the extended limitations period under section
6501(e) may be expressed as a fraction.” Harlan v. Commissioner,
supra at 40. In that fraction, the numerator is the amount
properly includable in gross income that the taxpayer omitted
from the return. The denominator is the amount of gross income
stated in the taxpayer’s return. See sec. 6501(e)(1)(A); Harlan
v.
Commissioner, supra.
This Court has found that the section 61 definition of
“gross income” generally applies to section 6501(e)(1)(A). E.g.,
Hoffman v. Commissioner, 119 T.C. 140, 148 (2002); Insulglass
Corp. v. Commissioner,
84 T.C. 203, 210 (1985). In the case of a
trade or business, however, section 6501(e)(1)(A)(i) modifies the
term “gross income” to mean “the total of the amounts received or
accrued from the sale of goods or services (if such amounts are
5
(...continued)
which is omitted from gross income
stated in the return if such amount is
disclosed in the return, or in a
statement attached to the return, in a
manner adequate to apprise the Secretary
of the nature and amount of such item.
- 7 -
required to be shown on the return) prior to diminution by the
cost of such sales or services”.
For a taxpayer who owns an interest in a partnership or an S
corporation, gross income under section 6501(e)(1)(A)(i) includes
the taxpayer’s share of the entity’s reported gross income.
“[W]e have interpreted * * * [section 6501(e)(1)(A)(i)] as
requiring that a taxpayer’s gross income include her share of the
partnership’s gross receipts from the sale of goods or services.”
Hoffman v. Commissioner, supra at 148 (citing Harlan v.
Commissioner, supra); accord Estate of Klein v. Commissioner,
63
T.C. 585, 591 n.6 (1975), affd.
537 F.2d 701 (2d Cir. 1976)).
With respect to S corporations, section 1366(c) provides: “In
any case where it is necessary to determine the gross income of a
shareholder for purposes of this title, such gross income shall
include the shareholder’s pro rata share of the gross income of
the corporation.” When calculating reported gross income under
section 6501(e), taxpayers include their portion of an S
corporation’s gross income. Benderoff v. United States,
398 F.2d
132, 135 (8th Cir. 1968); Roschuni v. Commissioner,
44 T.C. 80,
85-86 (1965); Gmelin v. Commissioner, T.C. Memo. 1988-338, affd.
without published opinion
891 F.2d 280 (3d Cir. 1989).
Furthermore, section 6501(e)(1)(A)(ii) provides that any
amount disclosed in the return, or in a statement attached to the
return, shall not be considered as omitted gross income. These
- 8 -
disclosures must adequately apprise the Commissioner of the
nature and amount of the relevant item. Sec. 6501(e)(1)(A)(ii).
The question of whether the taxpayer adequately disclosed an item
on the return is a factual question. Whitesell v. Commissioner,
90 T.C. 702, 707-708 (1988).
The purpose of extending the period of limitations under
section 6501(e) is to level the playing field when the taxpayer’s
omission of income places the Commissioner at a disadvantage in
discovering errors. Colony, Inc. v. Commissioner, 357 U.S. 28,
36 (1958). Interpreting a prior version of section 6501(e), the
Supreme Court stated that Congress extended the period of
limitations to allow the Commissioner additional time “to
investigate tax returns in cases where, because of a taxpayer’s
omission to report some taxable item, the Commissioner is at a
special disadvantage in detecting errors. In such instances the
return on its face provides no clue to the existence of the
omitted item.”
Id. To adequately apprise the Commissioner, “The
statement must be sufficiently detailed to alert the Commissioner
and his agents as to the nature of the transaction so that the
decision as to whether to select the return for audit may be a
reasonably informed one.” Estate of Fry v. Commissioner,
88 T.C.
1020, 1023 (1987). While a taxpayer’s disclosure must be more
substantial than supplying the Commissioner with “a ‘clue’ which
would be sufficient to intrigue a Sherlock Holmes”, the
- 9 -
disclosure need not recite every underlying fact. Quick’s Trust
v. Commissioner, 54 T.C. 1336, 1347 (1970), affd.
444 F.2d 90
(8th Cir. 1971). Although a misleading statement may provide a
“clue” to omitted gross income, it does not adequately apprise
the Commissioner of the nature and amount of an item. Phinney v.
Chambers,
392 F.2d 680, 685 (5th Cir. 1968); Estate of Fry v.
Commissioner, supra.
When taxpayers’ individual returns contain references to
other documents or returns, those references provide a clue or
serve as notice to the Commissioner. Reuter v. Commissioner,
T.C. Memo. 1985-607. Specifically, when a return includes a
reference to a partnership return, “partnership returns are
considered together with individual returns to determine the
amount omitted from gross income.” White v. Commissioner, 991
F.2d 657, 661 (10th Cir. 1993), affg. T.C. Memo. 1991-552; see
also Hoffman v.
Commissioner, supra at 147. Similarly, when
taxpayers’ returns include a reference to an S corporation, “the
corporate information return on Form 1120-S must be considered
along with taxpayers’ individual returns in resolving the issue
of adequate disclosure.” Benderoff v. United States, supra at
135; see also Roschuni v.
Commissioner, supra.
In section 6501(e)(1)(A), the word “return” does not include
amended returns. See Houston v. Commissioner, 38 T.C. 486, 489
(1962); Goldring v. Commissioner,
20 T.C. 79, 81 (1953)
- 10 -
(interpreting similar language in section 275(c), the predecessor
to section 6501(e)). The period of limitations starts to run
with the filing of the original return, and the filing of an
amended return does not affect the period of limitations.
Insulglass Corp. v. Commissioner, 84 T.C. 207; Goldring v.
Commissioner, supra at 82.
I. Disclosures Under Section 6501(e)(1)(A)(ii)
ERG was a subchapter C corporation that was a taxable
entity. NPI was a subchapter S corporation and as such was a
passthrough entity that was not taxable. Burton Benson
controlled the operations of both of these entities.
The Bensons first argue that the determinations sustained in
our prior opinion were not omissions of gross income but
reallocations of reported corporate income and expenses to Burton
Benson as the controlling shareholder of ERG. In particular, the
Bensons argue that NPI’s Forms 1120S, U.S. Income Tax Return for
an S Corporation, including amended Forms 1120S, disclosed
royalties, engineering services,6 and rents7 that NPI received
6
In our prior opinion, we found that transfers made by ERG
to NPI of $483,098 in 1989, $3.6 million in 1993, and $160,063 in
1994 constituted constructive dividends to the Bensons. Benson
v. Commissioner, T.C. Memo. 2004-272.
7
In our prior opinion, we held that the Bensons received
constructive dividend income of $40,067 in 1990, $46,560 in 1993,
and $63,444 in 1994 from excess rent paid by ERG for its use of
the Stanford plant. Id. We also held that the Bensons received
constructive dividend income of $29,400 in 1989, $29,400 in 1990,
(continued...)
- 11 -
from ERG that we found to be constructive dividends to the
Bensons. The Bensons also assert that ERG’s Forms 1120 disclosed
deductions for payments, which were found to be constructive
dividends to the Bensons.
Respondent argues that the returns of NPI did not adequately
disclose the nature and amount of the Bensons’ constructive
dividend income. Respondent also argues that disclosures on
amended returns are not relevant to the question of adequate
disclosure. Respondent also argues that the corporate returns of
ERG are not relevant to whether the Bensons made adequate
disclosures on their individual tax returns because ERG was a
taxable entity.
A. Disclosures on Amended Returns and ERG Corporate
Tax Returns Are Not Relevant to the Application of
Section 6501(e)(1)(A)(ii)
The Bensons argue that the amended returns of NPI disclose
items of gross income for purposes of section 6501(e)(1)(A)(ii).
Amended returns do not correct the omission of income from an
original return. Houston v. Commissioner, supra; Goldring v.
Commissioner, supra. Section 6501(e)(1)(A)(ii) requires
respondent to examine only the Bensons’ original returns and the
original returns of the passthrough entities listed on their
returns. Any “clues” to omitted gross income on the amended
7
(...continued)
$31,020 in 1993, and $41,736 in 1994 from ERG’s so-called rent
payments for the Lowell plant. Id.
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returns of NPI will not prevent the 6-year period of limitations
of section 6501(e) from applying to the Bensons’ 1989, 1990,
1993, and 1994 tax years.
Neither section 6501(e)(1)(A)(ii) nor the caselaw
interpreting that section requires respondent to examine the
corporate returns of ERG in search of “clues” that disclose
income. The Bensons have not cited any authority to support
their contention that the returns of a taxable subchapter C
corporation serve as an adjunct to an individual taxpayer’s
return for purposes of section 6501(e)(1)(A)(ii). Instead, the
Bensons rely on Benderoff v. United States, 398 F.2d 132 (8th
Cir. 1968), and Roschuni v. Commissioner,
44 T.C. 80 (1965),
which involve the returns of subchapter S corporations. This
Court has explained that the returns of subchapter S corporations
and partnerships should be examined in conjunction with the
individual taxpayer’s return because these entities are
passthrough entities. See Harlan v. Commissioner,
116 T.C. 54
(“when the taxpayers’ tax returns stated taxable income from
partnerships or S corporations, we declared that the information
returns of these pass-through entities would be treated as
adjuncts to, and part of, the taxpayers’ tax returns”); Roschuni
v.
Commissioner, supra at 85-86. As a subchapter C corporation,
ERG is a taxable entity, it does not have the passthrough aspects
of an S corporation, and it files income tax returns, not
- 13 -
information returns. Therefore, the rationale for treating the
returns of passthrough entities as adjuncts to an individual’s
returns is not present in the case of a subchapter C
corporation’s income tax return. Respondent was not required to
examine the returns of ERG, a subchapter C corporation, to
determine whether the Bensons disclosed items of gross income.
B. Disclosures on Returns Were Not Adequate to Apprise the
Secretary of the Nature and Amount of Omitted Income
1. Royalties and Engineering Services
The Bensons argue that the returns of NPI disclosed royalty
and engineering service payments from ERG that we previously
found to be constructive dividends to the Bensons. Quoting
Colony v. Commissioner, 357 U.S. 28 (1958), the Bensons argue
that respondent had “no ‘special disadvantage in detecting
errors’” because these items were disclosed on the corporate
returns. Respondent argues that the returns do not adequately
disclose the transfers and mischaracterized the transfers.
A misleading disclosure on a return is insufficient to
apprise the Commissioner of the nature and amount of an item for
purposes of section 6501(e)(1)(A)(ii). Estate of Fry v.
Commissioner, 88 T.C. 1020 (1987). In our prior opinion, we
stated:
On or about March 10, 1990, Burton executed as
president of both NPI and ERG, a document entitled
“Agreement of Sale and Exclusive License” (exclusive
license agreement). The document had a retroactive
effective date of July 1, 1987, and a 40-year term.
- 14 -
The document purports to sell certain “patent rights”
owned by ERG to NPI and simultaneously grants ERG an
exclusive license to use the patent rights transferred.
* * * [Benson v. Commissioner, T.C. Memo. 2004-272;
fn. refs. omitted.].
We found that “the exclusive licensing agreement was merely a tax
planning tool, completely lacking in economic substance. * * *
As the arbitrators found, the pattern of payment demonstrates
that Burton [Benson] was merely funneling ERG’s profits to NPI.”
Id.
We find that the disclosures of royalties on NPI’s returns
were misleading. The returns of NPI failed to disclose that it
received the royalties from a related corporation, ERG, or that
Burton Benson acted on behalf of both corporations involved in
the transaction. The returns of NPI failed to disclose that ERG
sold patent rights to NPI and simultaneously licensed those
rights back from NPI in the exclusive licensing agreement. Also,
the “royalties” label listed on the returns of NPI was misleading
and inadequate to apprise respondent that the transactions
constituted a tax planning tool completely lacking in economic
substance.8 Because the royalties disclosures in the returns of
NPI were misleading, they fail to satisfy section
6501(e)(1)(A)(ii).
8
With respect to the 1993 royalty payments, Burton Benson
prepared invoices in response to a meeting with a revenue agent--
“these invoices were not created contemporaneously with payment
and/or the receipt of services.” Benson v. Commissioner, T.C.
Memo. 2004-272.
- 15 -
Similarly, the Bensons argue that the NPI returns disclosed
engineering services paid by ERG to NPI. In our prior opinion,
we found:
ERG transferred millions of dollars to NPI for payment
of supposed “engineering services”. However, there is
no evidence of what services Burton performed on behalf
of NPI other than his testimony that he provided ERG
with engineering “know how”. No third party testified
as to what Burton specifically did. There is no
evidence of how much time he devoted to this endeavor
and whether the amounts charged were reasonable and
customary. In fact, we infer from the evidence that in
conjunction with the exclusive licensing agreement, the
label “engineering services” was created to achieve
Burton’s goal of having ERG show a consistent paper
profit of approximately $75,000. * * *
After reviewing the NPI returns, we find that these returns lack
any specific reference to engineering services. Additionally,
like the royalties that NPI purportedly received from ERG, we
find that any characterization of the ERG transfers to NPI as
payments for engineering services was misleading. Burton Benson
caused ERG to make these transfers to NPI for the purpose of
maintaining ERG’s profits at $75,000. He used the “engineering
services” explanation to justify these payments.9 We find that
9
Like the royalty invoices, the 1993 invoices for
engineering services were not created contemporaneously with the
alleged performance of these services: “Burton admitted * * *
that these invoices were created shortly before an audit meeting
with a revenue agent.” Benson v. Commissioner, supra.
- 16 -
this label does not reflect the true nature of these transfers.
For purposes of section 6501(e)(1)(A)(ii), we hold that the NPI
returns failed to adequately disclose the nature and amounts of
these transfers.
2. Rental Income
The Bensons also argue that the returns of NPI disclose the
rents received by NPI, and that the Bensons’ constructive
dividends related to the Lowell and Stanford plants were
adequately disclosed on their returns. Respondent contends that
the disclosures of gross rental income reported on the returns of
NPI did not give respondent a clue as to the nature and amounts
of these payments that we found to be constructive dividends.
We agree with respondent. The returns of NPI reported gross
rental income from “MFG Facilities”; however, these returns do
not specifically identify the properties that generated the
rental income. The Stanford and Lowell plants were identified
only in NPI’s depreciation schedules.
With respect to the Lowell plant, in our prior opinion we
stated:
ERG had no contractual obligation to pay Aker’s rent
obligations. Indeed, it was, as the arbitrators
concluded, Aker’s responsibility to pay NPI for the use
of the Lowell plant, which Glendon ultimately paid by
virtue of the final arbitration decision. This, of
course, is in accord with what the brothers agreed in
the unbundling agreement. Given that these funds were
transferred to NPI, which the Bensons used for their
personal benefit * * * we find and hold that the
Bensons received constructive dividends in the amounts
- 17 -
of the excess rents that ERG paid. [Benson v.
Commissioner, supra].
We found that the Lowell rent payments constituted
constructive dividends to the Bensons because ERG made payments
that it had no contractual obligation to make. We further found
that the payment of “rents” by ERG constituted constructive
dividends to the Bensons. The returns of NPI do not provide any
clues that suggest that ERG’s payments for the Lowell plant
exceeded ERG’s legal obligation to make those payments. These
disclosures did not adequately reveal the nature of these
transfers. Therefore, we hold that the Bensons failed to
disclose the constructive dividends received in the form of
purported rent payments for the Lowell plant.
While the returns of NPI disclosed the receipt of rent for
the Stanford plant, these disclosures were misleading because
they did not inform respondent that the payments exceeded ERG’s
contractual rent obligation. In Benson v. Commissioner, supra,
we stated:
The maximum monthly lease amount listed in the
unbundling agreement apparently reflected the product
of an arm’s-length negotiation between the two warring
brothers. Under these circumstances, this is the best
indication of the intent of the parties and the value
of the use of the property at that time. * * * [Fn.
ref. omitted.]
The actual payments exceeded the monthly lease payments as agreed
upon in the unbundling agreement. We think that the disclosure
of the rental payments is misleading because an examiner would
- 18 -
expect that these payments reflected the monthly payments agreed
to during the arm’s-length negotiation. Nothing in the returns
of NPI informed respondent that NPI received rent payments from
ERG that exceeded the amounts that the parties agreed upon in the
unbundling agreement. We hold that the Bensons did not
adequately apprise respondent of the nature of these transactions
for purposes of section 6501(e)(1)(A)(ii).
We hold that the amended returns of NPI and the corporate
returns of ERG are not adjunct returns for purposes of section
6501(e)(1)(A)(ii). We also hold that the Bensons did not
adequately apprise respondent of the nature and amount of the
transfers from ERG to NPI.10
II. Section 6501(e)--Substantial Omissions
In light of our holding on petitioners’ first argument, the
Bensons concede that the 6-year period of limitations applies to
the 1990 and 1993 tax years. The Bensons argue that they did not
omit in excess of 25 percent of reported income in the 1989 and
1994 taxable years. The Bensons and respondent each offered
calculations for the amounts of gross income omitted and reported
on the Bensons’ returns.
10
Even if we considered the amended returns of NPI and the
ERG returns we would draw the same conclusion since the
characterizations of the payments from ERG to NPI were misleading
for the same reasons.
- 19 -
A. 1989
The parties calculated the Bensons’ 1989 omitted gross
income as follows:
Items of omitted Amounts asserted Amounts asserted
gross income by the Bensons by respondent
Payments from ERG to NPI -- $483,098
Check ref: Carroll $96,749 96,749
Automobile expenses 10,624 10,624
Life insurance 2,404 2,404
ERG payment related to -- 29,400
Lowell plant
Director’s fees 6,000 6,000
Franklin dividends 193 193
Interest/dividend (NPI) -- 861
Royalty income (1099) 709 709
1
Reverse royalty income -- (165,481)
recharacterized as
constructive dividends
2
Reverse NPI rental income -- (19,610)
recharacterized as
constructive dividends
Total 116,679 444,947
1
This amount represents a negative number. Respondent
appears to have reduced the $483,098 payment from ERG to NPI by
the amount of NPI’s royalty income reported by the Bensons on
their 1989 return.
2
This amount represents a negative number. NPI’s 1989 Form
1120S reported its income from gross rental real estate
activities and listed Burton O. Benson as a 66.7-percent
shareholder. Respondent appears to have reduced the $29,400 of
omitted gross income from the Lowell plant rent by the Bensons’
pro rata share of the Lowell plant rent ($29,400 x 66.7% =
19,609.8).
The parties assert that the Bensons reported gross income in 1989
as follows:
Items of gross Amounts asserted Amounts asserted
income by the Bensons by respondent
Wages $103,372 $103,372
Interest 2,505 2,505
- 20 -
Rents:
3341 Lucile -- 12,900
3 Arroyo -- 8,550
189 Ivy -- 3,500
Total gross rents 24,950 24,950
Royalties:
Occidental -- 785
Permain -- 124
Texaco -- 355
Phillips -- 59
Exxon -- 5
Walter L. Johnson -- 63
NPI -- 165,481
Total royalties 166,872 166,872
Other income (NPI) 100,000 100,000
Evelyn C. Hermsmeir 137,341 137,342
partnership
1120-S return of NPI:
ERG Hercules payment 483,098 --
Gross rents 119,508 79,712
Total 602,606 79,712
Baden Spiel Haus -- 625
partnership
Total 1,137,646 615,378
The parties calculated the percentage of omitted gross income in
1989 as follows:
The Bensons’ Respondent’s
calculation calculation
Omitted gross income $116,679 $444,947
Reported gross income $1,137,646 $615,377
Percent understated 10.26 72
1. Omitted Gross Income
The parties agree that the Bensons omitted gross income of
$116,679, which consists of: (1) Constructive dividends of
$96,749 from ERG’s payment of legal expenses (Check ref:
Carroll); (2) constructive dividends of $10,624 from automobile
expenses paid by ERG; (3) constructive dividends of $2,404 from
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life insurance payments made by ERG; (4) constructive dividends
of $6,000 from director’s fees; (5) Franklin dividends of $193;
and (6) royalty income of $709.
The parties dispute whether the payments of $483,098 from
ERG to NPI (Hercules payment) constitute omitted gross income.
On their original 1989 return, the Bensons reported royalty
income of $165,48111 received from NPI. Benson v. Commissioner,
T.C. Memo. 2004-272. In our prior opinion, we stated:
On or about November 22, 1989, Hercules and ERG
entered into a memorandum of agreement (MOA), whereby
Hercules agreed to pay $483,098 as an add-on cost to
increase production of the baffle sets delivered by
ERG. The MOA was unique because it called for Hercules
to “facilitize” or fund ERG’s plant and equipment,
the cost of which is normally paid for by the owner of
the plant and equipment. Attached to the MOA is
“schedule 1”, which lists the equipment and their
associated prices as contemplated by the MOA. [Id.;
fn. ref. omitted.]
We also stated that “Burton testified that the ‘engineering
services’ for which ERG compensated NPI were consulting design
services that he performed to make the Hercules contract ‘work’.”
Id.
However, the Bensons’ return does not refer to the Hercules
payment. The Bensons assert that the Hercules payment is
disclosed on the 1989 amended return of NPI. As we held supra,
the 1989 amended return of NPI is not to be considered as a
11
It appears that respondent has factored this disclosure
into his calculation as the “Reverse Royalty income
recharacterized as constructive dividends”.
- 22 -
disclosure for purposes of section 6501(e). Therefore, we find
that the Hercules payment is omitted gross income for purposes of
section 6501(e).
The parties also dispute whether the Bensons omitted from
their 1989 income tax return $29,400 in constructive dividends
from the ERG payments related to the Lowell plant. As we found
supra, the 1989 return of NPI provided a misleading disclosure
because the return did not reveal that NPI paid rent for the
Lowell plant even though it did not have a contractual obligation
to make any rent payments. NPI’s return failed to adequately
apprise respondent of the nature of this income for purposes of
section 6501(e)(1)(A)(ii); therefore, the $29,400 of constructive
dividends is omitted gross income.12
Respondent’s calculation of the Bensons’ omitted gross
income included “Interest/Dividend (NPI)” income of $861. In his
brief, respondent failed to explain why this amount constituted
omitted gross income. We will not include the $861 of
“interest/dividend (NPI)” income in our calculation of the
Bensons’ omitted gross income.
For purposes of applying section 6501(e), we hold that the
Bensons omitted gross income of $444,086, itemized as follows:
12
In the “reverse rental income recharacterized as
constructive dividends”, it appears that respondent reduced the
omitted gross income in an amount equal to the Bensons’ pro rata
share of the Lowell plant rent.
- 23 -
Items of omitted Amounts omitted
gross income by the Bensons
Payments from ERG to NPI $483,098
Check ref: Carroll 96,749
Automobile expenses 10,624
Life insurance 2,404
ERG payment related to 29,400
Lowell plant
Director’s fees 6,000
Franklin dividends 193
Royalty income (1099) 709
1
Reverse royalty income (165,481)
recharacterized as
constructive dividends
1
Reverse NPI rental income (19,610)
recharacterized as
constructive dividends
Total 444,086
1
This amount represents a negative number.
2. Reported Gross Income
The parties agree that the Bensons reported gross income of
$535,041, which consists of: (1) Wages of $103,372; (2) interest
income of $2,505; (3) rental income totaling $24,950; (4) royalty
income totaling $166,872; (5) other income from NPI of $100,000;
and (6) income from the Evelyn C. Hermsmeir partnership of
$137,342.13 Additionally, respondent concedes that the Bensons
reported income of $625 from the Baden Spiel Haus partnership.
13
The Bensons assert that their 1989 return reported income
of $137,341 from the Evelyn C. Hermsmeir partnership. Respondent
argues that the Bensons reported $137,342 on their return from
the Evelyn C. Hermsmeir partnership. We will calculate the
Bensons’ reported gross income using respondent’s figure, as it
is more favorable to the Bensons than their own calculation.
- 24 -
The parties disagree as to the amount of the Bensons’
reported gross income from NPI’s 1989 Form 1120S. The Bensons
argue that the Hercules payment of $483,098 was reported on NPI’s
amended 1989 Form 1120S, and that the entire $119,508 of gross
rental income reported on the 1989 return of NPI should be
included in the Bensons’ reported gross income. Respondent
argues the Bensons reported only their pro rata share of NPI’s
reported gross income on its original 1989 return.
As we found supra, the Hercules payment was disclosed only
on the amended return of NPI, not the original return. Because
“return” in section 6501(e)(1)(A) does not include amended
returns, see Houston v. Commissioner,
38 T.C. 489; Goldring v.
Commissioner,
20 T.C. 81, the Hercules payment is not included
in the Bensons’ reported gross income.
We also disagree with the Bensons that the entire $119,508
of NPI’s reported income from real estate activities is included
in their reported gross income. For purposes of section
6501(e)(1)(A), taxpayers’ reported gross income includes their
pro rata share of gross income from passthrough entities, such as
an S corporation. Benderoff v. United States, 398 F.2d at 135;
Roschuni v. Commissioner,
44 T.C. 85-86. On its original 1989
Form 1120-S, NPI reported gross income from real estate
activities of $119,508, and listed Burton O. Benson as a 66.7-
percent shareholder of NPI. Therefore, we find that the Bensons’
- 25 -
1989 reported gross income includes their pro rata share of NPI’s
reported gross income, which equals $79,712 (66.7 percent of
$119,508).
For purposes of applying section 6501(e), we hold that the
Bensons’ reported gross income of $615,378 on their 1989 return,
which is itemized as follows:
Items of gross Amounts reported
income by the Bensons
Wages $103,372
Interest 2,505
Rental income 24,950
Royalties 166,872
Other income (NPI Salary) 100,000
Evelyn C. Hermsmeir 137,342
partnership
1120-S return of NPI 79,712
Baden Spiel Haus 625
partnership
Total 615,378
3. 25-Percent Omission
We hold that the Bensons omitted 72 percent14 of their
reported gross income in 1989; therefore, the 6-year period of
limitations applies to their 1989 tax year as provided by section
6501(e)(1)(A).
B. 1994
The parties contend that the Bensons omitted gross income in
1994 as follows:
14
$444,086 / $615,378 equals 71.641 percent.
- 26 -
1
Items of omitted Amounts asserted Amounts asserted
gross income by the Bensons by respondent
ERG recreation account $2,698 --
Alice Lane--property taxes 8,196 --
Automobile expenses 14,723 --
Director’s fees 37,000 --
Esther Benson check 12,000 --
Townsend check 15,000 --
2
Travel expenses 6,690 --
3
Legal expenses 4,159 --
4
Employee relation’s fund 4,027 --
Education expenses 9,166 --
Life insurance 4,781 --
Additional dividends 586 --
Total 119,026 $399,826
1
On brief, respondent failed to itemize the Bensons’ 1994
omitted gross income and provided only the total amount of the
Bensons’ omitted gross income.
2
In Benson v. Commissioner, T.C. Memo. 2004-272, we held
that Burton Benson received constructive dividend income of
$3,889 from travel expenses. We will use this amount to
calculate the Bensons’ omitted gross income.
3
In Benson v. Commissioner, supra, we held that Burton
Benson received constructive dividend income of $4,033 from legal
expenses paid by ERG. We will use this amount to calculate the
Bensons’ omitted gross income.
4
In Benson v. Commissioner, supra, we held that the Bensons
received constructive dividend income of $3,035 from amounts paid
by ERG for the employee relation fund. We will use this amount
to calculate the Bensons’ omitted gross income.
The parties argue that the Bensons reported gross income in 1994
as follows:
Items of gross Amounts asserted Amounts asserted
income by the Bensons by respondent
Wages $196,000 $196,000
Interest 7,105 7,105
1
Less: Baden Spiel Haus -- (4)
flowthrough interest
1
Less: Hermsmeir partnership -- (411)
flowthrough interest
Dividends 29,327 62,748
1
Less: NPI flowthrough -- (62,735)
- 27 -
dividend income
Capital gain 492 492
distributions
Taxable refunds -- 29,327
Rents:
3341 Lucile -- 14,976
3 Arroyo -- 12,480
266 Elsie Drive -- 8,700
Total rents 36,156 36,156
Royalties:
Occidental -- 785
Sun -- 363
Scurlock -- 192
2
Total royalties 81,372 1,340
Other income (NPI Salary) 200,000 200,000
Evelyn Hermsmeir 100,620 100,620
partnership
1120-S return of NPI:
Gross sales -- 50
Royalties 160,063 160,063
Gross rents 200,605 200,605
Dividends -- 125,470
Total NPI income 360,668 486,188
Bensons’ share of -- 243,094
NPI income
Bensons’ share of -- 579
Baden Spiel Haus
partnership
Total 1,011,740 814,311
1
This amount represents a negative number.
2
This amount includes royalties received from NPI.
The parties calculated the percentage of omitted gross income in
1994 as follows:
The Bensons’ Respondent’s
calculation calculation
Omitted gross income $119,026 $399,826
Reported gross income $1,011,740 $814,310
Percent understated 11.76 49
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1. Omitted Gross Income
We disagree with the Bensons’ calculation of 1994 omitted
gross income. The Bensons concede that they omitted gross income
of $119,026 from their 1994 return. For the reasons discussed
supra, we also find that the Bensons’ omitted gross income
includes the $160,063 transferred from ERG to NPI, the excess
rent of $63,444 received for the Stanford plant, and the rent of
$41,736 received for the Lowell plant.
Respondent provided only the total figure for the Bensons’
omitted gross income in 1994. In his calculations of omitted
gross income in 1989, 1990, and 1993, respondent reduced the
total omitted gross income by amounts described as “Reverse * * *
income recharacterized as constructive dividends”. In our
calculation, we credit the Bensons with a “reverse” of the
payment from ERG to NPI that is recharacterized as constructive
dividends of $80,032 because the Bensons reported this amount on
their 1994 return.
The 1994 return of NPI included gross rents of $200,605.
Because the return does not itemize the properties that generated
this income, we assume that the rents received from the Lowell
and Stanford plants are included in NPI’s total gross rents. In
calculating omitted gross income, we will credit, or “reverse”,
the Bensons’ pro rata shares of rental income from the Lowell and
Stanford plants. In other words, the “reverse” ensures that the
- 29 -
rental income recharacterized as constructive dividends counts as
omitted gross income of the Bensons only to the extent that this
income exceeds their pro rata share, which was disclosed on the
Bensons’ return. We credit the Bensons with a “reverse” of
$20,868 for the Lowell plant rent15 and $31,722 for the Stanford
plant rent16 that has been recharacterized as a constructive
dividend.
In our prior opinion, we held that the Bensons had
cancellation of indebtedness income of $88,291 in 1994. Benson
v. Commissioner, T.C. Memo. 2004-272. On brief, the Bensons make
no argument that this cancellation of indebtedness income was
disclosed on their 1994 return. Furthermore, in our examination
of the Bensons’ 1994 return, we have not found any statement that
provides a clue to or discloses the cancellation of indebtedness.
For purposes of section 6501(e)(1)(A), we find that the
cancellation of indebtedness income of $88,291 constitutes
omitted gross income to the Bensons in 1994.
Next, we find that the Bensons omitted from gross income
constructive dividends of $1,072 received from the Franklin
account. In our prior opinion, we stated that “on his 1994
return [the Bensons’ son] Eric reported dividend income from
Franklin account #1 of $1,072.” Benson v. Commissioner, supra.
15
$41,736 x 50% = $20,868
16
$63,444 x 50% = $31,722
- 30 -
We held that the Bensons received additional dividend income of
$1,072 in 1994 because “Despite the fact that Eric reported the
amount credited on his 1994 return, the dividends are clearly
attributable to the Bensons and should have been reported by
them.” Id. We find that the disclosure of the 1994 Franklin
dividend on the return of Eric Benson, the Bensons’ son, does not
satisfy the disclosure requirement of section 6501(e)(1)(A)(ii).
See Greenway v. Commissioner, T.C. Memo. 1987-4 (“Reporting of
that income on their children’s returns, and petitioners payment
of taxes owed on it, does not satisfy the section
6501(e)(1)(A)(ii) requirement that the omission be ‘disclosed in
the return, or in a statement attached to the return, in a manner
adequate to apprise the Secretary of the nature and amount of
such item.’”).
For purposes of applying section 6501(e), we hold that the
Bensons’ omitted gross income in 1994 equals $337,092, which is
itemized as follows:
Items of omitted Amounts omitted
gross income by the Bensons
ERG recreation fund payments $2,698
Alice Lane--property taxes 8,196
Automobile expenses 14,723
Director’s fees 37,000
Esther Benson check 12,000
Townsend check 15,000
Travel expenses 3,889
Legal expenses 4,033
Employee relation’s expenses 3,035
Education expenses 9,166
Life insurance 4,781
- 31 -
Additional dividends 586
ERG transfers to NPI 160,063
1
Reverse of payments from ERG (80,032)
to NPI income recharacterized as
constructive dividends
ERG payment related to 41,736
Lowell plant
1
Reverse Lowell plant rental (20,868)
income recharacterized as a
constructive dividend
ERG payment related to 63,444
Stanford plant
1
Reverse Stanford plant rental (31,722)
income recharacterized as a
constructive dividend
Cancellation of indebtedness 88,291
income
Franklin account 1,072
Total 337,092
1
This amount represents a negative number.
2. Reported Gross Income and 25-Percent Omission
The parties agree that the Bensons reported gross income of
$533,268 in 1994, which consists of: (1) Wages of $196,000; (2)
capital gain distributions of $492; (3) rental income of $36,156;
(4) $200,000 of “other income” or salary from NPI; and (5) income
of $100,620 from the Evelyn Hermsmeir partnership. In addition,
respondent concedes that the Bensons’ reported a taxable refund
of $29,327 and $579 from their share of Baden Spiel Haus
partnership income. The parties dispute the following items of
reported gross income: (1) Interest income; (2) dividend income;
(3) royalty income; and (4) NPI income.
The parties agree that the Bensons reported interest income
of $7,105 on their 1994 return. However, respondent’s
- 32 -
calculation of the Bensons’ interest income reduces the total
interest income by $4 of interest received from Baden Spiel Haus
and $411 of interest received from the Evelyn Hermsmeir
partnership. We agree with respondent’s calculation. The
Bensons’ reported gross income includes income that they received
from the Baden Spiel Haus and Evelyn Hermsmeir partnerships. If
their interest income were not reduced by the amount of interest
income received from these two partnerships, the Bensons’
reported gross income would include this interest income twice.
We find that the Bensons’ reported interest income of $6,690 for
1994.
On brief, the Bensons assert that they reported dividend
income of $29,327 in 1994.17 Respondent calculated the Bensons’
reported dividend income as totaling $62,748 and reduced this
amount by $62,735, which represents the amount of dividend income
that the Bensons received from NPI. Because their share of NPI
income will be calculated separately, including the NPI dividend
income as a portion of the Bensons’ dividend income would include
this item twice. We agree with respondent and find that the
Bensons reported dividend income of $13 in 1994.
As with the dividend income, the parties dispute the
Bensons’ reported royalty income. The Bensons calculated their
17
The Bensons’ 1994 return reports a taxable refund of
$29,327. It appears that they mistakenly listed the reported
taxable refund as a dividend.
- 33 -
reported royalty income as $81,372, which includes $80,032 of
royalties received from NPI. Respondent asserted that the
Bensons reported royalty income of $1,340; the calculation does
not include the royalties received from NPI. As with the
dividend income, we agree that the NPI royalties should not be
included in the Bensons’ royalty income to avoid the inclusion of
this income twice. We find that the Bensons reported royalty
income of $1,340 in 1994.
With respect to the Bensons’ share of NPI income, we agree
with respondent’s calculation. As we discussed supra, the
Bensons’ reported gross income includes their pro rata share of
gross income from NPI. The 1994 return of NPI reports total
income of $486,188, which consists of: (1) Gross receipts or
sales of $50; (2) royalties of $160,063; (3) gross rents of
$200,605; and (4) dividend income of $125,470. That return also
lists Burton O. Benson as a 50-percent shareholder. Therefore,
we agree with respondent that the Bensons’ reported gross income
includes their share of NPI’s income, which is $243,094.
For purposes of applying section 6501(e), we hold that the
Bensons reported gross income of $814,311 in 1994, which is
itemized as follows:
Items of reported Amount of reported
gross income gross income
Wages $196,000
Interest income 6,690
Dividends 13
- 34 -
Capital gain 492
distributions
Taxable refunds 29,327
Rents 36,156
Royalties 1,340
Other income (NPI Salary) 200,000
Evelyn Hermsmeir 100,620
partnership
Bensons’ share of 243,094
NPI income
Bensons’ share of 579
Baden Spiel Haus
partnership
Total 814,311
The Bensons have omitted more than 25 percent of their reported
gross income in 1994.18
Even assuming that the Bensons correctly calculated the
amount of reported gross income as $1,011,740, they have omitted
more than 25 percent of the reported gross income in 1994.19 We
hold that the 6-year period of limitations applies to the
Bensons’ 1994 tax year as provided by section 6501(e)(1)(A).
III. Conclusion
In conclusion, we hold that the Bensons omitted from gross
income amounts that exceed 25 percent of their reported gross
18
$337,092 / $814,311 equals 41.396 percent.
19
$337,092 / $1,011,740 equals 33.318 percent.
- 35 -
income in 1989, 1990, 1993, and 1994. Therefore, the 6-year
period of limitations provided by section 6501(e)(1)(A) applies
in each of these years.
To reflect the foregoing,
Decisions will be entered
under Rule 155.
