T.C. Mem o. 2 01 3- 17 9

UNITED STAT ES TAX COURT

CHAD B. HESSING AND KE LLI B. HESSING, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 23 94 9- 10 . Fi le d Au gu st5, 2 01 3.

Je remy D. Deus an d B arb ara Zan zi g Lo ck , forpe ti ti on ers . Kell y Andrew Bl ai ne , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Jud ge : Re sp on de nt , ina no ti ce o f de fic ie nc y m ai le d J ul y

28 , 20 10 , det erm in eda $3 5,2 23 de fic ie nc y inpe ti ti on ers ’ 20 03 in co m e ta x. Th e is su es rem ai ni ng forour co ns id erat io n a re: (1) whet he r pe ti ti on ers m us t re co gn iz e $2 96 ,77 5 i n i nc om e fro m th e sa le of t hr ee p arce ls of r eal ty dur in g 2 00 3; (2)- 2 -

[* 2] whe th er p et it io ne rs are en ti tl edto bu si ne ss ex pe ns e d educ ti on s i n e xc es s o f th os e res po nd en t al lo wedinth e n ot ic e o f de fic ie nc y ; an d (3 ) whe th er the pe rio d o f as se ss m en t o f ta x fo r pe ti ti on ers ’ 20 03 tax y ear e xp ire d o r rem ai ns op enun de r se ct io n 6 50 1( e). 1 FINDINGS OF FACT Pet it io ne rs res id edinBo is e, Id ah o, atth e ti m e th ei r pe ti ti on was fi le d. Ch ad Hes si ng (pe ti ti on er) was 22 y ears ol d dur in g 2 00 3, an d h e in te nd edto pu rs ue a care er i n the co ns tru ct io n b us in es s. Pet it io ne r was ge ne ral ly fam il iar with h is fathe r’s co ns tru ct io n b us in es se s. Fo r two y ears be fo re 2 00 3 a ndaft er the co m pl et io n o f le ss th anon e y ear o f co ll eg e, pe ti ti on er wen t o n arel ig io us m is si on . He ha d a gr eedwith h is fathe r th atup on hi s re turnhe wou ldworkforan d l earn ab ou t h is fathe r’s co ns tru ct io n b us in es se s. Th ei r un de rs tand in g was th atpe ti ti on er wou ldlea rnab ou t the co ns tru ct io n b us in es s b y work in g a s an em

pl oyee an d wo ul d rece iv e a m on th ly sala ry

of $ 2,5 00 . Pet it io ne r’s fathe r’s bu si ne ss es ha d fu ll y ex te nd edcred it , andpe ti ti on ers ha d ago odcred itrat in g. The fa th er as ke d p et it io ne rs to us e th ei r go odcred it 2

Sect io n re fere nc es are t o the Int ern al Rev enue Co de ineffe ctforth e y ear i n 1 is su e. Pet it io ne rs ha d fe w ass et s, b utth ei r cre di t ca rdhi st ory was g oo d. 2- 3 -

[* 3] rat in g a ndactas p ur ch as ers of t hr ee p arce ls of r eal ty so tha t h e co ul d d ev el op m or e p ro pe rti es inhi s co ns tru ct io n b us in es se s. At a ll ti m es du rin g 2 00 3 pe ti ti on er’s fat he r ranth e co ns tru ct io n b us in es se s an d p et it io ne r was anem pl oyee. Pet it io ne r di d n otrece iv e an d/ orret ai n any pro ceed s fr om th e tr an sa ct io ns rel at ed to hi s fa th er’s co ns tru ct io n b us in es se s. An y ch eck s tha t wer e drawnto pe ti ti on er, as pa y ee, i n c on ne ct io n wi th th e rea l p ro pe rty andth e co ns tru ct io n b us in es se s were turne d o ve r to hi s fa th er. Pet it io ne rs act edas aco ndui t fo r pe ti ti on er’s fathe r’s bu si ne ss es co nc ern in g the th ree 2 00 3 re al pro pe rty tran sa ct io ns . Duri ng 20 03 pe ti ti on er re cei ve d the $2 ,50 0 p er m on th sal ary as he an d h is fathe r ha d ag reed . The fir stpa rcel (lo t 5 5) was t o b e u se d t o c on st ru cta ho m e fo r Kip an d Amy Fi fe. Lot55 was p ur ch as edinpe ti ti on ers ’ na m es on Marc h 2 1, 2 00 3, an d t he cl os in g wi th th e Fi fes to okpl ace o n No ve m be r 21 , 20 03 . The Fi fes pa id $1 76 ,19 4, an d a fte r th e p ay of f of th e m ortg ag e lo anon th e p ro pe rty andex pe ns es of sal e, th e n etam ou ntsh own as due pe ti ti on ers was $ 12 ,82 7.0 3. Pe ti ti on ers di d no t re cei ve an y

po rti on of t he $1 2,8 27 .03 . The sec on d p arce l (l ot60 ) was pu rch as edinpe ti ti on ers ’ na m es an d t he n o n th e sa m e d ay , May 7, 2 00 3, s ol d o r tr an sf erre d t o o ne of p et it io ne r’s fathe r’s- 4 -

[* 4] bu si ne ss en ti ti es . As pa rt o f th e lo t 6 0 tran sa ct io n c he ck s wer e drawnto pe ti ti on er i n v ari ou s amoun ts whi chpe ti ti on er, i n turn, g av e to hi s fa th er. The pu rch as e an d s al e o f lo t 8 , th e th irdparcel , was s im il ar t o t he lo t 5 5 a nd 60 tra ns act io ns , andth e sa le of l ot8 cl os edat t he en d o f Decem be r 20 03 . Pet it io ne rs ’ nam es ap pe ar i n the tra ns act io n d oc um en ts , bu t p et it io ne rs di d n ot ret ai n a ny of th e ch eck s o r fu nd s tha t the do cu m en ta ti on refl ect edas a ttrib ut ab le to th em . Att ach edto pe ti ti on ers ’ 20 03 joi ntFed eral in co m e ta x re tu rnwas a Sch edul e C, Pro fitor Lo ss Fro m Bu si ne ss , refl ect in g $ 10 4,3 00 ingro ss rece ip ts an d ane t p ro fitor t ax ab le am ou ntof $ 1,5 58 . Peti ti on er’s fat he r pr ep aredth e 2 00 3 return fo r pe ti ti on ers to acco un t fo r th e Fo rm 10 98 , Mo rtg ag e In te res t St at em en t, an d F orm 10 99 -MI SC, Mi sc el lane ou s In co m e, th atwere i ss ue d i n p et it io ne rs ’ na m es inco nn ect io n wi th th e th ree r eal est at e tr an sa ct io ns forwhi chpe ti ti on ers act edas a ge nt s o r co ndui ts forpe ti ti on er’s fat he r. Pet it io ne r ha d n o b ack gr ou ndin bu si ne ss , acco un ti ng , or t ax at io n a ndwas u nf am il iar with t he so ur ce o r fi nanc ia l co ns eque nc es of t he fig ur es hi s fa th er rep orte d o n t he 20 03 return. Pe ti ti on er tru st edhi s fa th er t o p res en t the cir cu m st an ces pro pe rly to t he Gov ern m en t.- 5 -

[* 5] OPINION The seminal qu es ti on inth is cas e is whet he r pe ti ti on ers un de rrep orte d g ro ss in co m e, an d i f th ey

di d, wh ethe r th e am ou ntof u nd erre po rte d g ro ss in co m e was su ffi ci en t t o m eetth e th res ho ldrequi rem en t o f se ct io n 6 50 1( e), p ro vi di ng fora si x- y ear p eri odwithi n wh ic h re sp on de ntm ay ass es s a t ax de fic ie nc y

for pe ti ti on ers ’ 20 03 tax y ear. If we d eci de th atpe ti ti on ers were n otrequi redto rep ort ad di ti on al gro ss in co m e, th enth e rem ai ni ng qu es ti on s b eco m e m oo t b ecau se of res po nd en t’s i nabi li ty to as se ss ad di ti on al tax for20 03 . If we de ci de th at pe ti ti on ers were re qu ire d t o re po rt 2 5% o r m or e o f ad di ti on al gro ss in co m e, we m us t the n d eci de whet he r th ey are en ti tl edto de du ct io ns inex ces s o f th os e res po nd en t al lo wedinth e n ot ic e o f de fic ie nc y . Bu rd enof P ro of Pet it io ne rs rai se d the qu es ti on of b ur de n o f pr oo f fo r th e fi rs t t im e in th ei r op en in g b rie f. They con te ndth atun de r se ct io n 7 49 1( a) re sp on de ntbe ars th e bu rd enof p ro of

forgo in g fo rwardwith t he ev id en ce. Res po nd en t ar gu es th at pe ti ti on ers ’ atte m

ptto rai se th e b ur de n o f pr oo f is un ti m el y . At tria l the Co urt as ke d the pa rti es : “ Is th ere any qu es ti oninth is cas e ab ou t who ha s the bu rd enof p ro of an d wh o h as th e b ur de n o f pr oc eed in g wi th th e ev id en ce? ” Co un se l fo r pe ti ti on ers rep li ed“No, y ou r Hon or ”, an d h e p ro ceed edto- 6 -

[* 6] cal l h is fir stwitne ss . The en ti re tria l was co nduc te d und er the pre m is e th at pe ti ti on ers ha d the bu rd enof p ro of . Und er the se cir cu m st an ces , itwou ldbe pr ejud ic ia l an d u nju stto all ow p et it io ne rs to rai se , ina po st tri al bri ef, que st io ns co nc ern in g the bu rd enof p ro of . Accor di ng ly, we ho ldpe ti ti on ers to th ei r tr ia l adm is si on th atth ey

ha d the bu rd enof p ro of

an d d en y th ei r at te m

ptto rai se th e qu es ti on of b ur de n o n b rie f. See Di Leo v. Co m m is si on er, 9 6 T.C. 8 58 , 89 1- 89 2 (1 99 1) , aff’d, 9 59 F.2d16 (2dCir . 19 92 ). Whe th er Pe ti ti on ers Und erre po rte d Gro ss Inc om e fo r 20 03 W e co ns id er thi s i ss ue fir stbe cau se itm ay be de te rm in at iv e o f th e o ut co m e of th is cas e. Norm al ly the Co m m is si on er h as th ree years wi th in whi chto ass es s ta x. Se c. 65 01 (a). Un de r se ct io n 6 50 1( e), h owe ve r, th e Co m m is si on er h as si x y ears withi n wh ic h t o a ss es s t ax wher e a “ ta xp ay er o m it s fr om gro ss in co m e an am ountpro pe rly inc lu di bl e th erei n wh ic h i s i n e xc es s o f 25 pe rcen t o f th e am ou nt of gro ss in co m e st at edinth e return” . See s ec. 6 50 1( e)(1 )(A). Bu t fo r se ct io n 65 01 (e), re sp on de ntwou ldno t b e ab le to ass es s an in co m e ta x d efi ci en cy inth is cas e b ecau se th e n orm al th ree- y ear p eri odha d e xp ire d at the ti m e th atth e n ot ic e o f de fic ie nc y

was m ai le d. Acco rd in gl y , we m us t d eci de whethe r pe ti ti on ers ha d a n om is si on of g ro ss in co m e an d wh ethe r itwas i n e xc es s o f 25 % of t he am ou nt rep orte d.- 7 -

[* 7] Peti ti on ers arg ue th atth ey were ac ti ng as a n a ge ntor c on du itforpe ti ti on er’s fathe r an d tha t the ass ig nm en t o f in co m e d oc tri ne requi res th atth e p rin ci pa l re po rt th e in co m e, ci ti ng Bri tt in gh am v. Co m m is si on er, 5 7 T.C. 9 1 (1 97 1) . Res po nd en t do es no t que st io n o r di sa gr ee wi th th e le ga l fo un da ti on forpe ti ti on ers ’ arg um en t. In st ead , res po nd en t ar gu es th atth e rec or d i n t hi s ca se do es no t s up po rt t he ir arg um en t tha t the y

were ag en ts forpe ti ti on er’s fat he r. Res po nd en t ar gu es th at pe ti ti on er was inth e co ns tru ct io n b us in es s an d t ha t h is in co m e was un de rs ta te d. The de ed s an d c on ve y an ci ng do cum en ts co nc ern in g t he th ree r eal est at e tra ns act io ns be ar p et it io ne rs ’ na m es , andvario us un de rlyin g d oc um en ts , in cl ud in g ch eck s, al so be ar p et it io ne rs ’ na m es . On th e o th er h an d p et it io ne r’s an d h is fathe r’s te st im on y

co nt rad ic t the form

of t he se tra ns act io ns . Taken at f ace, the te st im on y pre se nt s a young m anwho acce de d t o h is fathe r’s reque stto len d h is cred itrep ut at io n t o fa ci li ta te th e acqui si ti on of r eal est at e to be us edinhi s fa th er’s co ns tru ct io n b us in es se s. Ult im at el y , we fin d p et it io ne r’s an d h is fathe r’s 3 te st im on y to be cred ib le an d, o n t ha t b as is , ho ldth atpe ti ti on ers di d n otha ve un rep orte d g ro ss in co m e. See Di az v . Comm is si on er, 5 8 T.C. 5 60 , 56 4 (1 97 2) .

The re were m

ul ti pl e b us in es s en ti ti es , andwe ha ve no t d et ai le d t he ir 3 in te rrel at io ns hi p b ecau se itis of n o c on se qu en ce t o t he ba si c que st io n o f whe th er pe ti ti on ers act edas a ge nt s o r co ndui ts forpe ti ti on er’s fat he r.- 8 -

[* 8] The pri m ary cas e p rece de ntpe ti ti on ers rel y up onis a 19 71 cas e d eci de d b y th is Co urt i n s im il ar ci rcu m st an ces . See Bri tt in gh am v. Co m m is si on er, 5 7 T.C. 91 . Thatcas e in vo lv eda hu sb an d a ndwife who ex cl ud edfro m th ei r gr os s i nc om e a d ep os itin to th e hus ba nd ’s ban k a cco un t. The de po si t re pr es en te d the pro ceed s of th e sa le of M ex ic anbo nd s the hu sb an d’s m ot he r own ed . At th e hus ba nd ’s in st ru ct io n h is ba nkpu rch as edU.S. bo nd s wi thth e fu nd s, an d h is nam e was sh own on th e p ur ch as e o rd er. The hu sb an d i m m ed ia te ly ins tru ct edth e b an k t o ch an ge th e n am e o n the ord er t o h is m ot he r’s nam e. The C omm is si on er de te rm in eda de fic ie nc y

inth e ta xp ay ers ’ Fed eral in co m e ta x fo r th e am ou ntof t he de po si t. Thi s C ourt h el d tha t the de po si t was m ad e in to th e hus ba nd ’s acco un t i n hi s capa ci ty as anag en t fo r hi s m ot he r an d was no t i nc om e to hi m . Lik e th e hus ba nd ’s nam e in Bri tt in gh am , pet it io ne rs ’ na m es ap pe ar o n tra ns act io na l d oc um en ts , bu t the y were i n n o o th er re sp ect“ own ers ” o f th e pr op ert ie s an d/ oren ti tl edto th e b en efi ts or s ub ject t o t he bu rd en s o f th e p ro pe rti es . See a ls o Di am on d v . Comm is si on er, 5 6 T.C. 5 30 , 54 1 (1 97 1) , aff’d, 4 92 F.2d28 6 (7 th Cir . 19 74 ). W e fi nditso m ewh atpro bl em at ic th atpe ti ti on ers ha d aSch edul e C ref le ct in g i nc om e fro m

a co ns tru ct io n b us in es s. Pet it io ne rs , ho wev er, d o n ot as k the Co urt t o i gn or e th e Fo rm 10 98 an d 1 09 9- MIS C in co m e th atpe ti ti on er’s fathe r cau se d the m

to rep ort o n the ir S ch edul e C. Pet it io ne rs arg ue th atth e- 9 -

[* 9] in co m e th atwas n otrep orte d i n F orm 10 98 or 1 09 9- MIS C s ho ul d n otbe at tri bu te d t o the m . Res po nd en t ar gu es th atpe ti ti on ers were i n t he co ns tru ct io n 4 bu si ne ss an d tha t al l g ro ss in co m e co nn ect edwith t he th ree p arce ls of r eal ty sh ou ldbe att rib ut edto th em . Res po nd en t i s i n the un ique po si ti on of a rg ui ng th atpe ti ti on er’s fat he r was no t the tru e rec ip ie nt , eve n tho ug h i t ap pe ars th athe was the op erat orof t he bu si ne ss es . Norm al ly, in a si tu at io n l ik e th is wher e th e in di vi du al s n am edinth e do cu m en ta ti on do no t ap pe ar t o b e th e true parti es inin te res t, the Co m m is si on er ha s co nt en de d tha t the ass ig nm en t o f in co m e d oc tri ne wou ldap pl y to attrib ut e th e in co m e to th e p arty

inin te res t. Res po nd en t i s n otina po si ti on inth is cas e to do so , bec au se th e th ree- y ear p eri odforass es sm en t h as expi red . So i t ap pe ars th at res po nd en t’s o nl y

reco ur se he re i s t o a tt em ptto att rib ut e th e una cco un te d- fo r in co m e to pe ti ti on ers . Res po nd en t as ks th e Co urt t o app ly spe ci al scrut in y to pe ti ti on er’s an d h is fathe r’s te st im on y

be cau se of t he ir f

am il ia l re la ti on sh ip . W e h av e car efu ll y sc ru ti ni zedth e te st im on y an d o th er ev id en ce i n t he reco rdinth is cas e, an d t he y do no t s up po rt r es po nd en t’s ar gu m en t. Pet it io ne r an d h is fathe r cre di bl y tes ti fie d t o W e n ot e th ata ta xp ay er i s n otli mit edto arg ui ng th e p os it io n t ak enon hi s 4 ta x re turn , alt ho ug h i t i s a f act or to be co ns id ered . Cas ey v. Co m m is si on er, 3 8 T.C. 35 7, 3 84 (19 62 ).- 10 -

[* 10 ] th e co nt rary. Altho ug h o n i ts face pe ti ti on ers ’ Sch edul e C s up po rts res po nd en t’s p os it io n, the rem ai nd er o f th e rec or d o ve rwh el m in gl y do es no t. Pet it io ne rs are i n n o way pri nc ip al s o r th e o pe rat or s o f th e v ari ou s co ns tru ct io n bu si ne ss en ti ti es . Oth er tha n the Fo rm 10 98 an d 1 09 9- MIS C in co m e th atwas rep orte d o n p et it io ne rs ’ 20 03 return, the re i s l it tl e o r no ne xu s t o p et it io ne r’s fathe r’s bu si ne ss en ti ti es th atwou ldpro vi de th is Co urt wi th a fo un da ti on to ho ld th atpe ti ti on ers ha d u nr ep orte d i nc om e. Whe refo re, we h ol d tha t p et it io ne rs di d n otha ve un rep orte d g ro ss in co m e an d tha t the pe rio d fo r as se ss m en t o f ta x fo r pe ti ti on ers ’ 20 03 tax y ear h as expi red . It i s ac co rd in gl y

un ne ces sa ry

to co ns id er o th er i ss ue s ra is edby the pa rti es . To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor pe ti ti on ers .