TAX COURT OPINION

Case: Shaun & Summer Dornstadter
Docket Number: 13504-10
Judge: Kroupa
Opinion Type: bench
Filed: 05/31/2012
Pages: 8

)Û CLC UNITED STATES TAX COURT WASHINGTON, DC 20217 SHAUN AND SUMMER DORNSTADTER, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, ) ) ) ) ) Docket No. 13504-10. ) ) Respondent. ) ORDE R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it it ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of the pages of the transcript of the proceedings of this case before Judge Diane L. Kroupa at Mobile, Alabama on May 9, 2012, containing her oral findings of fact and opinion. In accordance with the oral findings of fact and opinion, decision will be entered for petitioner husband for 2002 and 2003 and a decision will be entered under Rule 155 for 2006 and 2007. (Signed) Diane L. Kroupa Judge Dated: Washington, D.C. May 31, 2012 SERVED MAY 3 1 2012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion by Judge Diane L. Kroupa Shaun & Summer Dornstadter Docket No. 13504-10 May 9, 2012 BENCH OPINION THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THESE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This bench opinion is made pursuant to the authority granted in section 7459(b) and Rule 152. All section references are to the Internal Revenue Code as amended and in effect for 2002, 2003, 2006 and 2007, and all Rule references are to the Tax Court Rules of Practice and Procedure. Shaun and Summer Dornstadter appeared on their own behalf and Horace Crump appeared on behalf of Respondent. FINDINGS OF FACT Some of the facts have been stipulated are A so found. We incorporate the stipulation of facts and the accompanying exhibits by this reference. Petitioners resided in Alabama at the time they filed the petition. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 Petitioner husband is a self-employed construction worker. Petitioner husband builds, frames and renovates residential and commercial property. Petitioner wife is a stay-at-home mom. Petitioner husband owned a house located at 32054 Bartel Street in Elberta, Alabama (the 54 Bartel Street house). Petitioner husband refinanced the mortgage on the 54 Bartel Street house in 2002. Treasures in a Field Investments, an irrevocable trust for Federal tax purposes (the Trust), designated Petitioner husband its Executive Trustee. The Trust sold a house located at 32210 Bartel Street in Elberta, Alabama (the 210 Bartel Street house) during 2003. Petitioner husband failed to file Federal income tax returns for 200 and 2003. Petitioners filed joint Federal income tax returns for 2006 and 2007, reporting income and claiming various expenses relating to Petitioner husband's construction business on Schedule C, Profit or Loss From Business. Respondent issued Petitioner husband a deficiency notice for 2002 and 2003. The deficiency notice determined Petitioner husband received unreported income from the purported sale of the 54 Bartel Street house during 2002 and the sale of the Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 210 Bartel Street house on June 9*, 2003. The deficiency notice also determined additions to tax against Petitioner husband, including a fraudulent failure-to-file-a-return under section 6651(f) with respect to 2002 and 2003. Respondent has since conceded Petitioner husband is not liable for the fraudulent failure-to-file a return additions for 200ß DL and 2003. Respondent issued another deficiency notice. This time it was issued to both Petitioners and covered 2006 and 2007. This deficiency notice disallowed reported costs of goods sold and other expenses Petitioners claimed on Schedule C. Respondent also determine in the deficiency notice that Petitioners are liable for a failure-to-file addition to tax under section 6651(a) (1) for 2006 and a fraud penalty under section 6663 for 2006 and 2007. Respondent has since conceded Petitioners have substantiated most of the costs of goods sold, contract labor expenses, car and truck expenses and other expenses Petitioners claimed on Schedule C. Respondent has also since conceded Petitioners are not liable for the fraud penalty for either year. Petitioners concede any Schedule C expenses that Respondent did not allow and concede an es other Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 adjustments Respondent did not concede. These concessions resolve all issues for 2006 and 2007, and a decision must be entered under Rule 155 for 2006 and 2007. Petitioners timely filed a petition to contest the determinations in both deficiency notices. OPINION The only two substantive issues left for us to decide is whether Petitioner husband recognized any income from the purported sale of the 54 Bartel Street house in 2002 and the sale of the 210 Bartel Street house in 2003. We address each transaction in turn. Respondent contends that Petitioner husband received income from the purported sale of the 54 Bartel Street house in 2002. We disagree. Petitioner husband credibly testified that the relevant house was refinanced, and not sold, during 2002. In addition, Petitioner husband provided documentation, including a settlement statement, establishing that the 54 Bartel Street house was refinanced in 2002. Based on the record as a whole, we find that Petitioner husband did not sell the 54 Bartel Street house during 2002 and therefore did not realize any income from this transaction in 2002. Respondent also contends that Petitioner Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 husband received income from the sale of the 210 Bartel Street house in 2003. Again we disagree. Petitioner husband produced documentation that proceeds of the sale were deposited into the Trust's banking account. In addition, title to the 210 Bartel Street house was in the name of the Trust, not in Petitioner husband's name. Petitioner husband was simply the trustee of the Trust. The trust, an irrevocable trust, was the owner, not Petitioner husband. As an irrevocable trust, the income from the sale in 2003 was taxable to it, not Petitioner. Moreover, Petitioner husband being designated the Executive Trustee of the Trust, did not confer upon him any ownership or other rights that would affect the irrevocable status of the Trust. We therefore hold that Petitioner husband did not realize income from the sale of the 210 Bartel Street house in 2003. The parties agree that all other adjustments for 2002 and 2003 are computational except for certain additions to tax for which Respondent bears the burden of production. See Sec. 7941(c), Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). We find that Petitioner husband is not liable for any of the remaining additions to tax because our other findings result in no deficiencies for 2002 and 2003. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 We have reviewed the thick file in this case and are troubled by what appears to have been frivolous arguments Petitioners made regarding 2006 and 2007 and Petitioner husband made regarding 2002 and 2003. During trial, however, we found Petitioners to be credible and forthcoming with explanations and documentation. We suspect and hope that they have found the error of their ways and that they will not make such arguments to this or any other Court in the future. We also suspect that Respondent has similarly come to the same conclusion based upon allowing Petitioners the lion's share of the claimed Schedule C expenses for 2006 and 2007 and conceding the fraud penalty for the four years at issue. We warn Petitioners, however, that the Court may impose a penalty against them under section 6673 if the Court finds they are making frivolous arguments and/or delaying the collection of tax due. To reflect the foregoing, decision will be entered for Petitioner husband for 2002 and 2003 and a decision will be entered under Rule 155 for 2006 and 2007. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. // Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Whereupon, at 1:14 p.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888