T.C. Memo. 1998-95

UNITED STATES TAX COURT

MARGUERITE BARROW AND WILLIAM D. BARROW, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15978-91. Filed March 5, 1998.

William D. Barrow, pro se.

William R. McCants, for respondent. 

MEMORANDUM OPINION

COLVIN, Judge: Respondent determined deficiencies in

petitioners' Federal income tax and additions to tax for 1983,

1984, and 1985 as follows:
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1 Respondent concedes that petitioner Marguerite Barrow is

an innocent spouse as to all adjustments and penalties determined

against her, except for the $3,023 in interest income received in

1983 from her savings accounts, resulting in a deficiency for her

of $704, plus interest as provided by law. Petitioner concedes

all of the other adjustments (such as failure to report in income

legal fees, interest, and stock received as payment for services;

the disallowance of capital gain on the Holiday Isle transaction;

and additions to tax) in this case except whether he was taxable

in 1983 on $175,000 of the $250,000 from the Holiday Isle

transaction.

William D. and Marguerite Barrow

 Additions to tax 

 Sec. Sec. Sec.

Year Deficiency 6651(a)(1) 6653(a)(1) 6661 

1983 $126,082 $31,520 $7,224 $31,521

1984 9,194 n/a 460 2,298

William D. Barrow

 Additions to tax 

 Sec. Sec. Sec.

Year Deficiency 6651(a)(1) 6653(a)(1) 6661 

1985 $18,688 $965 $1,245 $4,672

Respondent also determined that petitioners are liable for

additions to tax of 50 percent of the interest due on the

deficiency under section 6653(a)(2) for each year in issue.

After concessions,1 the sole issue that we must decide is

whether petitioner William D. Barrow is liable for income tax on

$175,000 which he received in 1983 and which he contends is

income of a closely held corporation. We hold that he is.
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2 Petitioners filed joint income tax returns for 1983 and

1984. Petitioner filed his 1985 individual tax return as an

unmarried person. Respondent issued notices of deficiency to

petitioners for 1983 and 1984 and to petitioner for 1985. 

Petitioners filed one petition for 1983, 1984, and 1985.

3 Petitioner was not admitted to practice law in Florida at

the time of trial.

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years in issue. Rule

references are to the Tax Court Rules of Practice and Procedure. 

References to petitioner are to William D. Barrow.

Background

The parties submitted this case fully stipulated under Rule

122.

A. Petitioners

Petitioners were married during 1983 and 1984 and were

divorced in 1985. Petitioner lived in Niceville, Florida, and

Mrs. Barrow lived in Crestview, Florida, when they filed the

petition in this case.2

Petitioner was an attorney licensed to practice in Florida

in the years in issue.3 He practiced law through the law

partnership of Barrow & Holley. He also participated in several

real estate transactions during the years in issue in a capacity

other than as an attorney.

In 1990, petitioner was convicted of violating 18 U.S.C.

sections 2 and 1956(a)(3)(B) and (C) (laundering drug money) and
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31 U.S.C. sections 5322(a) and 5324(3) (structuring a transaction

to avoid a cash transaction report).

B. Dogwood Acres, Inc.

Dogwood Acres, Inc. (Dogwood Acres), was a closely held

Florida corporation and a subchapter C corporation. Petitioner

and his brother each owned 49 percent of its stock. Mrs. Barrow

and petitioner's mother and father owned the other 2 percent.

Dogwood Acres owned a family farm in northern Florida. 

Dogwood Acres' taxable years ended on March 31. Dogwood Acres

did not file an income tax return or report any income or loss

for its taxable year ending on March 31, 1984.

C. The Holiday Isle Property Transaction

George Dana Harris (Harris) was one of petitioner's clients

during the years in issue. Harris bought, sold, and developed

real estate through fictitious business names including Saudi

Corp. and Fujimo Corp. On September 21, 1983, Harris was

convicted of tax evasion under section 7201 and willful failure

to file under section 7203.

In the 1970's, petitioner owned an interest in a parcel of

real property in northern Florida known as Holiday Isle. He lost

it to Southeast First National Bank of Miami because of a

foreclosure suit in 1979. In 1981, Harris, acting as Saudi
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4 Petitioner concedes that the $50,000 is income to him.

5 Petitioner did not report the $62,500 as income. 

Petitioner concedes that the $62,500 is income to him.

Corp., bought Holiday Isle in a joint venture with Wallace C.

Yost (Yost).

In March 1983, petitioner received a check for $50,000 from

Harris. Petitioner deposited it in his personal checking account

on March 29, 1983. On March 30, 1983, petitioner wrote a $43,250

personal check payable to Dogwood Acres. He did not report the

$50,000 as income or deduct the $43,250 payment to Dogwood

Acres.4

In July 1983, Saudi Corp. paid petitioner $25,000 by

endorsing to petitioner a third-party check payable to Saudi

Corp.

In August 1983, Lakeco Corp. issued common stock to

petitioner as consideration for various services which petitioner

provided to the corporation and to Harris, its principal. Lakeco

Corp.'s sole asset was a parcel of real property in northern

Florida. In March 1984, Lakeco Corp. sold that property and paid

petitioner $62,500 of the proceeds to redeem his stock.5

In 1983, Yost sold his interest in Holiday Isle to Harris,

acting as Saudi Corp. In September 1983, Harris, acting as Saudi

Corp., sold Holiday Isle to an unrelated party. When the Holiday

Isle transaction closed, the closing agent paid a $250,000
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commission to petitioner. None of the Holiday Isle closing

documents show that Dogwood Acres was involved in the

transaction. Neither petitioner nor Harris told Yost that

petitioner or Dogwood Acres was involved in the Holiday Isle

joint venture.

Petitioner deposited the $250,000 in his personal checking

account on September 22, 1983. Also on that day, he wrote checks

from that account for $100,000 to Dogwood Acres, $75,000 to Saudi

Corp. as a loan, and $60,000 to Valparaiso Bank & Trust Co. 

Saudi Corp. paid $75,000 to Dogwood Acres in December 1983. 

Thus, Dogwood Acres received $100,000 from petitioner and $75,000

from Saudi Corp.

Discussion

A. Contentions of the Parties

Petitioner contends that $175,000 of the $250,000 that he

received as a result of the Holiday Isle transaction is income to

Dogwood Acres and not to him. Petitioner contends that the

$175,000 was Dogwood Acres' share under a joint venture agreement

that it had with petitioner and Saudi Corp.

Respondent contends that the $250,000 is gross income to

petitioner and that petitioner improperly tried to avoid taxation

of the payment by assigning his income to Dogwood Acres. 

Respondent contends that petitioner has not shown that a joint
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venture existed between petitioner and Dogwood Acres, Harris or

Saudi Corp. Respondent contends that petitioner has not shown

that Dogwood Acres (and not petitioner) should be taxed on

$175,000 of the $250,000 commission from the Holiday Isle

transaction.

Petitioner bears the burden of proving that respondent's

determinations are incorrect. Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933). Transactions between related taxpayers

and between a closely held corporation and its shareholders are

subject to close scrutiny. United States v. Ragen, 314 U.S. 513

(1942); Jaques v. Commissioner, 935 F.2d 104, 106 (6th Cir.

1991), affg. T.C. Memo. 1989-673; Tulia Feedlot, Inc. v. United

States, 513 F.2d 800, 805 (5th Cir. 1975); Southeastern Canteen

Co. v. Commissioner, 410 F.2d 615, 619 (6th Cir. 1969), affg. in

part and revg. in part T.C. Memo. 1967-183.

B. Whether $175,000 of the $250,000 Holiday Isle Commission Was

Income to Petitioner

1. Petitioner's Affidavit

The only evidence that petitioner had a joint venture with

Dogwood Acres is an affidavit by petitioner. Petitioner did not

testify. The parties stipulated that the statements in the

affidavit would have been petitioner's testimony if he had

testified at trial. In the affidavit, petitioner stated that the

Holiday Isle transaction was a joint venture among himself,
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Dogwood Acres, and Saudi Corp. He also stated that the

transaction was originally a joint venture between Saudi Corp.

and Dogwood Acres; however, on the advice of his certified public

accountants, with whom he had done business for more than 25

years, that he and Dogwood Acres could become joint venturers

with no adverse tax consequences, he included himself with

Dogwood Acres in the transaction because he needed money for

living expenses. Petitioner's affidavit states that Dogwood

Acres was a joint venturer in the transaction but does not

explain why Dogwood Acres was entitled to the $250,000

commission.

Petitioner's affidavit is vague and uncorroborated. 

Petitioner's affidavit did not identify the Holiday Isle

transaction by name; he referred to it as "the property which was

the subject of the William D. Barrow/Dogwood Acres, Inc, joint

venture with Saudi Corporation". Petitioner's claim that Dogwood

Acres participated in the Holiday Isle transaction is not

credible because neither petitioner nor Harris told Yost about

any involvement by petitioner or Dogwood Acres in the

transaction. We do not give much weight to petitioner's

affidavit because we find it incredible and it is unsupported by

the record, and because petitioner was convicted in 1990 of

violating 18 U.S.C. sections 2 and 1956(a)(3)(B) and (C)

(laundering drug money), and 31 U.S.C. sections 5322(a) and

5324(3) (structuring a money transaction to avoid a cash
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transaction report), both punishable by imprisonment in excess of

1 year. Fed. R. Evid. 609; see Lovell & Hart, Inc. v.

Commissioner, 456 F.2d 145, 148 (6th Cir. 1972), affg. per curiam

T.C. Memo. 1970-335; Tokarski v. Commissioner, 87 T.C. 74, 77

(1986) (we need not rely on uncorroborated testimony).

2. Lack of Corroboration for Petitioner's Claim That

He and Dogwood Acres Had a Joint Venture

The closing agent paid $250,000 to petitioner as a

commission for the Holiday Isle transaction. None of the Holiday

Isle transaction documents refer to Dogwood Acres. Petitioner

offered no documents to corroborate his affidavit or details

about the alleged joint venture. There is no other evidence that

Dogwood Acres was involved in the Holiday Isle transaction. None

of the parties to the Holiday Isle transaction (except

petitioner) thought that Dogwood Acres was involved. Dogwood

Acres did not report any of the $250,000 commission as income.

Petitioner contends that the alleged joint venture between

him and Dogwood Acres was an arm's-length transaction in which he

engaged with the advice of tax professionals. There is no

evidence that petitioner's dealings with Dogwood Acres were at

arm's length. All of the owners of the stock of Dogwood Acres

were members of petitioner's family.

Petitioner contends that Dogwood Acres received $175,000

($100,000 from petitioner and $75,000 from Saudi Corp.) of the

$250,000 as part of the consideration for services that he
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provided to the parties to the Holiday Isle transaction. We are

not convinced because petitioner does not allege nor is there any

evidence that Dogwood Acres provided any services or that

petitioner provided any services as an agent of Dogwood Acres.

3. Conclusion

Gross income includes all income from whatever source

derived unless excluded by law. Sec. 61. Income is taxed to the

individual who earns it; the incidence of taxation cannot be

shifted by an anticipatory arrangement. Lucas v. Earl, 281 U.S.

111, 114-115 (1930). We do not recognize petitioner's transfer

to Dogwood Acres for Federal income tax purposes. Moline

Properties, Inc. v. Commissioner, 319 U.S. 436, 439 (1943);

Kimbrell v. Commissioner, 371 F.2d 897, 901-902 (5th Cir. 1967),

affg. T.C. Memo. 1965-115. We conclude that the $250,000

commission that petitioner received for his services in the

Holiday Isle transaction was taxable to him. Helvering v. Horst,

311 U.S. 112, 119-120 (1940); Lucas v. Earl, supra at 115. We

sustain respondent's determination that the unreported commission

income is attributable to petitioner.

To reflect concessions (e.g., relating to Mrs. Barrow's tax

liability, see supra note 1) and the foregoing,

Decision will be entered

under Rule 155.