TAX COURT OPINION

Case: Estate of Kevin J. Lorenz, Deceased; Elizabeth J. Lorenz, Personal Representative; and Elizabeth J.
Docket Number: 12138-96
Judge: Colvin
Opinion Type: memo
Filed: 07/16/1998
Pages: 6

ADi‰ 3712. T. C. Memo. 1998-262 UNITED STATES TAX COURT ESTATE OF KEVIN J. LORENZ, DECEASED, ELIZABETH J. LORENZ, PERSONAL REPRESENTATIVE AND ELIZABETH J. LORENZ, Petitioners y. COMMISSIONER OF INTERNAL REVENUE, Respondent COMET PRINTING, INC., Petitioner y. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 12138-96, 12140-96.1 Filed July 16, 1998. Charles Henry Hammer, for petitioners. Michelle K. Loesch, Lisa M. Oshiro, and Gregory Hahn, for respondent. MEMORANDUM OPINION COLVIN, Judge: This matter is before the Court on respondent's motions for entry of decision filed in Estate of 1The cases of docket No. 12138-96 and docket No. 12140-96 were consolidated for trial, briefing, and opinion by order of this Court dated Aug. 28, 1996. SERVED JUL 1 6 1998 0 34 - 2 - Lorenz v. Commissioner, docket No. 12138-96, and in Comet Printing, Inc. v. Commissioner, docket No. 12140-96. Petitioners filed objections to respondent's motions, and respondent filed replies to petitioners' responses. No party requested a hearing, and we conclude that none is necessary. When these cases were called for trial, counsel for the parties reported that they had reached a basis of settlement, which they stated for the record. They now ask the Court to construe the basis of settlement on two points: 1. Whether the fraud penalties for Elizabeth Lorenz and for the Estate of Kevin J. Lorenz for 1989 and 1990 should both be computed based on the entire deficiency, as respondent contends, or on one-half of the deficiency, as petitioners contend. We hold that they should both be computed based on the entire deficiency. .2. Whether the depreciation deductions for Comet Printing, Inc., should be increased by $19,432 for 1989 and $22,863 for 1990 from the amounts determined by respondent in the notice of deficiency. We hold that they should not. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue. A. Petitioners Background Elizabeth J. Lorenz (Mrs. Lorenz) lived in Spokane, Washington, when she filed the petition on behalf of herself and - 3 - the Estate of Kevin J. Lorenz (Mr. Lorenz). Mr. Lorenz was Mrs. Lorenz's husband when he died. The principal place of business of Comet Printing, Inc. (Comet), was in Spokane, Washington, when it filed its petition. Mrs. Lorenz owned Comet when it filed its petition. B. Respondent's Determinations Respondent determined a deficiency in income tax for Mr. and Mrs. Lorenz of $31,880 for 1989 and $60,258 for 1990, and determined that they are liable for a fraud penalty of $23,910 • for 1989 and $45,194 for 1990 under section 6663. Respondent determined a deficiency in income tax for Comet of $34,710 for 1989 and $64,915 for 1990, and determined that Comet is liable for a fraud penalty of $26,032 for 1989 and $48,686 for 1990 under section 6663. C. The Settlement Charles Hammer (Mr. Hammer) represented petitioners and Lisa Oshiro (Ms. Oshiro) represented respondent when the cases were called for trial. They told the Court that they had reached a basis of settlement. Respondent's counsel stated the following basis of settlement for the record: MS. OSHIRO: Your Honor, the parties are pleased There's some question as to whether we to announce a basis for settlement has been reached in this case. have the correct starting number. There's an adjustment before the notice of deficiency was sent, and we will need to clarify that. But otherwise, respondent question of whether it was made before the notice went out. it's -- is willing to make the concession; that respondent believes was conceded it's a . The basis for settlement, with question as to - 4 - whether this is the proper starting number for Comet Printing in 1989, starting number is $127,023. Respondent concedes there was a duplication of an income item in the amount of $2,300. Respondent concedes additional cash expenses in the amount of $20,000. the amount of $5,000. Respondent concedes additional cash postage in Respondent also concedes a technical adjustment to take the petitioners from cash basis to accrual basis.in 1989. The adjustment is $8,660. For the tax year 1990 -- oh, a fraud penalty will be asserted in full for the 1989 tax year. With respect to petitioner Comet Printing in the original amount for the notice of deficiency 1990, was $211,699. Respondent concedes additional cash expenses in the amount of $15,100, and additional cash postage in the amount of $5,000. The civil fraud penalty will be asserted in full with respect to Comet Printing for the year 1990. With respect.to petitioners Kevin -- estate of Kevin Lorenz and Elizabeth Lorenz, per the notice of deficiency for 1989 was $105,019. the starting number Respondent concedes additional capital contributions in the amount of $23,000, additional cash expenses for the corporation -- it's a flowthrough adjustment -- of $20,000, and the additional postage for the corporate expenses of $5,000. The civil fraud penalty will be asserted in full with respect reduced rate of 20 percent with respect Elizabeth Lorenz. to the estate of Kevin Lorenz, and at a to petitioner Petitioners' counsel then said that he had a question and asked to go off the record to clarify it with the revenue agent. When the parties went back on the record, they announced they had answered petitioners' counsel's question but had still not agreed to the "starting number" for Comet; i.e., its gross income for 1989. The parties had agreed to certain adjustments, but had not agreed on whether the amount of gross income to which they should apply those adjustments was the amount in the revenue agent's - 5 - original report or amended report. The following discussion occurred next: MS. OSHIRO: * * * There was a [sic] original In the amended revenue agent's report, a revenue agent's report and an amended revenue agent's report. $15,000 concession was made. The question is whether the statutory notice of deficiency was based upon the original revenue agent's report or upon the amended revenue agent's report. was based upon the original revenue agent's report, then respondent will then concede the $15,000; is based upon the amended revenue agent's report, petitioners agree that conceded again. If the notice of deficiency that number does not get if it then MR. HAMMER: That's correct. Following another recess requested by the parties, respondent's counsel stated that the parties had reached the following basis of settlement for 1989: With respect to Comet Printing, Inc. per the examination, the adjustment was $127,023. Respondent concedes a duplication of in the amount of $2,300. income item Respondent concedes additional cash expenses in the amount of $20,000. the amount of $5,000. Respondent concedes additional cash postage in Respondent concedes an adjustment to the accrual basis of accounting in the amount of $8,660. Respondent concedes additional legal fees in the amount of $4,000. And respondent concedes an equipment loss in the amount of $7,000. The fraud penalty will be imposed in full with respect to petitioner Comet Printing. With respect to petitioners the estate of Kevin Lorenz and Elizabeth Lorenz, for the 1989 tax year for the notice of deficiency is $105,019. the initial adjustment Respondent concedes an additional capital contribution in the amount of $23,000. Respondent concedes additional cash expenses for the corporation in the amount of $20,000. Respondent concedes additional postage for the corporate expense in the amount of $5,000. - 6 - Respondent concedes legal fees, reducing the constructive dividend, in the amount of $4,000. The fraud penalty in full will be asserted the estate of Kevin J. Lorenz, and a reduced against fraud penalty will be asserted against petitioner Elizabeth Lorenz at the amount of 20 percent. Petitioners' counsel then said, "We're in agreement, Your Honor", and said that petitioners agreed to settle the cases on that basis. Respondent's counsel and petitioners' counsel then added: MS. OSHIRO: Yes. settlement with respect read into the record earlier. And for the record, to the 1990 tax year is as was the MR. HAMMER: That's correct, Your Honor. We're in agreement -- full agreement on both 1989 and 1990 as to the corporation and the individual. The Court gave the parties 45 days to prepare and file decision documents. D. Respondent's Proposed Decisions Respondent sent proposed decisions to petitioners which stated that Mrs. Lorenz and the estate of Mr. Lorenz have a deficiency in Federal income tax of $14,720 for 1989 and $54,630 for 1990. The proposed decisions also stated that Mrs. Lorenz is liable for the fraud penalty at the reduced rate of 20 percent and the estate of Mr. Lorenz is liable for the fraud penalty at the rate of 75 percent, as follows: