TAX COURT OPINION

Case: Victor D. Raymond Inc.
Docket Number: 236-11S
Judge: Whalen
Opinion Type: bench
Filed: 02/24/2012
Pages: 26

UNITED STATES TAX COURT WASHINGTON, DC 20217 VICTOR D. & JUDITH B. RAYMOND, ET AL., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) Docket No. 234-11S ) 236-11S ) ) ) ) ORDE R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the proceedings in the above case before the undersigned at Seattle, Washington, containing the oral findings of fact and opinion rendered on January 27, 2012. In accordance with the oral findings of fact and opinion, decisions will be entered for respondent. (Signed) Laurence J. Whalen Judge Dated: Washington, D.C. February 24, 2012 SERVED MAR - 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 BENCH OPINION BY SENIOR JUDGE LAURENCE J. WHALEN VICTOR D. & JUDITH B. RAYMOND, ET AL. V. COMMISSIONER 3 DOCKET NOS.: 234-11S and 236-11S JANUARY 27, 2012 I. THE COURT: 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. II. This consolidated proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through:175 of the Tax Court Rules of Practice and Procedure. Hereinafter in this opinion, all section references are to the Internal Revenue Code, as amended and in effect for 2006, 2007, and 2008, the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. The decision to be entered in this case is not reviewable by any other court, and this opinion should not be cited as authority. Sec. 7463(b). III. This bench opinion is made pursuant to the authority granted by section 7459 (b) and Rule 152. 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 IV. Mr. Victor D. Raymond and Mrs. Judith B. Raymond appeared in these proceedings on their own behalf. Connor J. Moran, Esquire, appeared on behalf of respondent. V. The corporation: Respondent determined deficiencies in the income taxes reported by Victor D. Raymond, Inc., for its fiscal years ending June 30, 2007, and June 30, 2008, in the amounts of $15,433 and $5,502, respectively, and further determined that a penalty under section 6662(a) should be added to the tax of the.corporation for fiscal year ending June 30, 2007. In this opinion, references to "the corporation" are references to Victor D. Raymond, Inc., unless stated otherwise. For the subject years, the corporation reported income and expenses for Federal income tax purposes based on a fiscal year ending June 30th. For fiscal year 2007, the corporation claimed a deduction for travel expenses of $109,794. For fiscal year 2008, the corporation claimed travel expenses of $44,539. Most of the travel expenses claimed on the corporation's returns related to payments made by the corporation to an affiliated company, Bison Air, LLC, 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 which owned an aircraft. The amounts of those aircraft expenses totaled $105,287.67 in fiscal year 2007 and $38,001 in fiscal year 2008. In the notice of deficiency issued to the corporation, respondent determined three adjustments in the corporation's returns. First, for fiscal year 2007, respondent allowed $18, 674 of the payments to Bison and disallowed the remainder, $86,613.67. For fiscal year 2008, respondent disallowed all of the payments to Bison, $38, 001. Second, respondent disallowed a net operating loss in the amount of $6,634 that was deducted on the corporation's return .for fiscal year 2008. This is a consequent adjustment. Third, respondent determined that the corporation is liable for the accuracy-related penalty for fiscal year 2007. VI. The individuals: Respondent determined deficiencies in the income taxes reported by Mr. and Mrs. Raymond for taxable years 2006 and 2007 in the amounts of $600 and $17,487.54, respectively, and further determined that a penalty under section 6662(a) should be added to their tax for taxable year 20 0 7 . Mr . and Mr s . Raymond are s omet ime s re f erred to as the individuals. 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 The deficiencies determined in the notice of deficiency issued to the individuals were based upon the following adjustments. First, respondent increased the individuals' taxable income for 2006 by $2,281, the amount of unreported interest paid to the individuals during the year by Western Territory Investments, Inc. Second, respondent disallowed a loss from a limited partnership, Raymond Investments, L.P., claimed on the individuals' 2007 return in the amount of $6,148 on the ground that the loss was a passive loss in excess of passive income. Third, respondent increased the individuals' taxable income for 2007 by $1,725, the proceeds from the sale of photographs to Jackson Hole Mountain Report. Fourth, respondent treated the travel expenses disallowed as a deduction on the corporation's return for fiscal year 2007, $86,613.67, as a constructive distribution to the individuals. Respondent treated $78,013 of that amount as qualified dividends and treated the remainder, $8,600.67, as the amount realized from the disposition of a capital asset, such that the individuals realized a capital gain in the amount of $8,501. Fifth, as a consequent adjustment, respondent decreased the individuals' itemized deduction by $45 25 in 2006, and by $1,887.82 in 2007. Sixth, as another 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 consequent adjustment, respondent reduced the individuals' exemptions by $88 in 2006, and by $3,445.33 in 2007. Seventh, respondent determined for taxable year 2007 that the individuals are liable for the accuracy-related penalty under section 6662(a) in the amount of $3,497.51 on the ground that a portion of the underpayment of tax is attributable to (1) negligence or disregard of rules'or regulations, (2) substantial understatement of income tax, or (3) substantial valuation misstatement. VII. The notices of deficiency in these cases raise the following five issues. First, whether the individuals are entitled to include in "non-passive losses" the loss from Raymond Investments, L.P., that is related to the acquisition of a 45-foot sailing yacht owned by Varuna LLC, (of which Raymond Investments, L.P. is the sole member), as claimed on the individuals' Schedule E, Supplemental Income and Loss, for taxable year 2007 in the aggregate amount of $6,148. This loss was disallowed by respondent in the notice of deficiency issued to the individuals. We refer to this as the yacht expense issue. Second, whether the individuals' taxable income for 2007 should be increased by $1,725, 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 amount of the unreported proceeds from the sale of photographs to Jackson Hole Mountain Resort, as determined in the notice of deficiency. We refer to this as the photo proceeds issue. Third, whether the travel expenses deducted by the corporation for fiscal years 2007 and 2008 should be adjusted, as determined in the notice of deficiency and discussed below. We refer to this as the corporate plane issue. Fourth, whether the Raymond Family Trust, and hence the individuals, should be deemed to have received constructive dividends from the corporation for taxable year 2007 in the amount of the travel. expenses that were disallowed as business deductions to the corporation, as determined in the notice of deficiency. We refer to this as the constructive dividend issue. Fifth, whether petitioners are subject to the accuracy-related penalty under section 6662(a) for taxable year 2007 in the amount of $3,497.51, as determined in the notice of deficiency. We refer to this as the accuracy-related penalty issue. VIII. At the outset, we note that the only issue that petitioners addressed at trial was 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 corporation plane issue. At trial, petitioners made no mention of the yacht expense issue, the photo proceeds issue, the constructive dividend issue, or the accuracy-related penalty issue. We also find no mention of those issues in the petitions filed in the two cases at issue. Accordingly, in view of the fact that petitioners have not addressed those issues in these proceedings, we deemed them to be conceded by petitioners. Therefore, the only issue for decision is the corporate plane issue. IX. Facts: Some of the facts have been stipulated by the parties and the stipulation of facts (cid:16)042 and attached exhibits are hereby taken into evidence. The corporation, Victor D. Raymond, Inc1, was incorporated under the laws of the State of Wyoming. Its business was to act as a broker in real estate transactions and its sole source of income during fiscal years 2007 and 2008 was the commission income, including referral fees, that it realized from the sale of real estate owned by others. During the subject years, the corporation did not buy, sell, develop, or rent real estate. During the years in issue, all of the corporation's stock was held by the Raymond Family Heritage Reporting Corporation (202) 628-4888 1. Trust, a revocable trust created by, and for the 10 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 benefit of, Mr. and Mrs. Raymond. The Raymond Family Trust was the sole limited partner in Raymond Investments, L.P., a limited partnership registered in Wyoming, mentioned above. Raymond Investment, L.P. was the sole member of Bison Air, LLC, which owned the airplane involved in this case. Petitioner, Mr. Raymond, was the only person who flew the plane during the years in issue. As we understand it, Mr. Raymond piloted the plane during approximately 24 flights between June 18, 2006, and June 26, 2008. Neither party introduced a log of the flights made by the plane, but Mr. Raymond discussed the nature of each of those flights during his testimony at trial. The following is a.summary of the flights made by the plane: June 18, 2006, to July 1, 2006: Trip to New Hope, Pennsylvania, to visit a farm property of 120 acres owned by members of Mr. Raymond's family through a family partnership. Mr. Raymond is the managing director of the partnership. The land was placed under a conservation easement and was subdivided. Two lots were sold on this 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 11 trip. Petitioners also visited Mr. Raymond's mother who lives 15 minutes away from the farm. They also dealt with issues involving a house on the property. They stopped in a town in Iowa on the return flight. July 21, 2006, and August 16, 2006, to August 28, 2006: Two flights to Missoula, Montana, to visit Mrs. Raymond's stepfather who was dying of cancer. Mr. Raymond was forced.to return to Jackson Hole to deal with the sale of a valuable property. September 30, 2006: Trip to Fairfield, Iowa, for a meeting with a real estate developer, Ms. Amy Greenfield, to look at houses for sale. The corporation was not directly involved. October 15, 2006, to October 25, 2006: Trip to Bainbridge Island, Washington, to work on the sale of a lot owned by Mr. Raymond's father, and to visit family members in the area. November 15, 2006: Flight to Iowa to discuss the purchase of lots with Ms. Susan MacGregor. If Mr. Raymond had purchased 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 12 lots, he claims that he would have been able to hire a real estate agent to resell them and, thereby, obtain a referral commission for the corporation. November 28, 2006, to December 1, 2006: Flight to Sequim, Washington, for a meeting with Deborah Norman. Mr. Raymond claims that his mother was looking for property in Sequim. December 1, 2006, to December 3, 2006: Flight to Missoula, Montana. Mrs. Raymond's mother's husband died and petitioners discussed the sale of her house. Ultimately, Mrs. Raymond sold the house but did not charge a 'commission to her mother. . December 5, 2006: Flight to Des Moines, Iowa, for annual maintenance on the plane. December 15, 2006, to December 16, 2006: Flight to Missoula, Montana, to drop off Mrs. Raymond's mother and return to Jackson Hole. January 17, 2007: Flight to Santa Barbara, California, to attend a design exhibition and then fly Mr. Raymond's mother to Sequim, Washington, to look at property for 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 13 purchase. April 27, 2007: Flight to Idaho Falls, Idaho, for maintenance on the electronics of the plane. April 27, 2007: Flight to Sequim, Washington, for a meeting with Deborah Norman to discuss the possible purchase of a property for Mr. Raymond's mother. June 3, 2007: Flight to Iowa where Mrs. Raymond's mother and brother lived to discuss the possible purchase of property. June 30, 2007: Flight to Montana to inspect a large real estate project, the Amea Project, along with another real estate agent. July 14, 2007, to July 20, 2007: Flight to Fairfield, Iowa, to discuss the same project referred to on September 30, 2006. Also visited family. July 20, 2007, to July 25, 2007: Flight to Crain island, Washington, for a meeting of Mr. Raymond's family partnership. August 12, 2007: Flight to Denver, Colorado, to view a wind farm in order to consult with Florida Power and Light. Fuel 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 14 costs for the flight were reimbursed. September 28, 2007, to October 14, 2007: Flight to Santa Barbara, California, to attend a design exhibition. Stopped in Idaho Falls, Idaho, for maintenance on the return trip. November 3, 2007, to November 8, 2007: Flight to New Hope, Pennsylvania, for work regarding the family farm owned by Mr. Raymond's family partnership. November 16, 2007: Flight to Sequim, Washington, to inspect a commercial property for sale. April 19, 2008, to May 5, 2008: Flight to Iowa to inspect a house that was for sale. Mr. and Mrs. Raymond stayed with family during the trip. May 22, 2008: Flight to San Diego, California, to meet with tax attorney and discuss personal and corporate tax returns, the trust return, and estate planning matters. May 25, 2008: Flight to Bellingham, Washington, to review 45-foot yacht owned by Varuna, LLC, mentioned above. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 L3 14 15 16 17 18 19 20 21 22 23 24 25 15 June 26, 2008: Flight to Iowa to inspect property that was purchased and to prepare for leasing of the property. We have previously mentioned that the plane Mr. Raymond piloted on the above flights was owned by Bison Air, LLC, a limited liability company organized under the laws of Montana. Raymond Investments, L.P., was the sole member of Bison Air, LLC. In turn, the Raymond Family Trust was the sole limited partner in Raymond Investments, L.P. The stock of the corporation was held by the Raymond Family Trust. The corporation made regular monthly payments to Bison Air, LLC, to cover its operating costs. The corporation made payments to Bison Air, LLC, in the amount of $105,287.67 in fiscal year 2007 and $38,001 in fiscal year 2008. These payments are the travel expenses at issue in these cases. This was the only income that Bison Air, LLC, received during the years in issue, except for the reimbursement of the flight to inspect a wind farm in Nebraska, on August 12, 2007, discussed above. As discussed above, during the audit of the corporation's and individuals' returns, respondent's agent allowed $18,674 of the travel expenses claimed on the corporation's return for fiscal year 2007. 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 16 Apparently the agent agreed with petitioners' argument that, as to certain of the flights, there was a relationship to the corporation's trade or.business. As to each of those flights, the agent allowed petitioners the equivalent of a first-class ticket for the flight. The parties have not provided to the Court any information to show the computation of the travel expense that was allowed by the agent in the audit. X. Our legal analysis in this case is necessarily guided by the following fundamental principles of tax litigation. First, deductions are a matter of legislative grace, and the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed. Rule 142(a); Deputy v. ÔuPont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Welch v. Helvering, supra. This includes the burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). Second, the Court is not bound to accept the unverified and undocumented testimony of a taxpayer. Hradesky v. Commissioner, supra; 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 17 Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). See also Lovell & Hart, Inc. v. Commissioner, 456 F.2d 145, 148 (6th Cir. 1972) affg. T.C. Memo. 1970-335; MacGuire v. Commissioner, 450 F.2d 1239, 1244 (5th Cir. 1971), affg. T.C. Memo. 1970-89; Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992). Third, a party's failure to introduce documentary evidence that is within his or her possession or control gives rise to the presumption that, if produced, such evidence would be unfavorable. Recklitis v. Commissioner, 91 T.C. 874, 890 (1988); Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d 409 (5th Cir. 1968); Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947). XI. Discussion: Burden of Proof: The taxpayer generally bears the burden of proving that the Commissioner's determinations are erroneous. Rule 142(a). In particular, the taxpayer bears the burden of substantiating the amount and purpose of each item claimed as a deduction. See Higbee v. Commissioner, 116 T.C. 438, 440 (2001); Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). 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 18 Section 7491(a) (1) provides that if, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the taxpayer's proper táx liability, the Commissioner shall have the burden of proof with respect to that issue. Credible evidence is evidence the Court would find sufficient upon which to base a decision on the issue in the taxpayer's favor, absent any contrary evidence. See Higbee v. Commissioner, supra at 442. Section 7491(a) (1) applies, however, only if the taxpayer complies with all substantiation and recordkeeping requirements under the Code and cooperates with the Commissioner's reasonable requests for witnesses, information, documents, meetings, and interviews. Sec. 7491(a) (2) (A) and (B). As discussed infra, our decision turns primarily on whether the corporation's travel expenses were ordinary and necessary. As to this issue, respondent appears to concede that petitioners substantiated the amounts of the disputed expenses but contends, and we agree, that petitioner has failed to substantiate business purposes independent of substantial personal purposes for the flights. Whether petitioner's failure in this regard be viewed as failure to satisfy the substantiation prerequisite 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 19 of section 7491(a) (2) (A), or as failure to present credible evidence sufficient for the Court to render a decision in his favor, the result is the same, the burden of proof remains with petitioner. We note that section 7491(c) places on the Commissioner the burden of production with respect to a taxpayer's liability for a penalty such as the accuracy-related penalty under section 6662(a). However, the ultimate burden of persuasion as to that issue remains on the taxpayer. Swain v. Commissioner, 118 T.C. 358, 363 (2002); Higbee v. Commissioner, 116 T.C. 438, 446-448 (2001); see Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79,. 84 (1992); Welch v. Helvering, 290 U.S. 111, 115 (1933). In this case, respondent satisfied his burden of production under section 7491(c) because the record convincingly demonstrates that the individuals substantially understated their income tax for 2007, and that the corporation substantially understated its income tax for fiscal year ending 2007. In contrast, petitioners failed to raise this issue at trial and, accordingly, failed to show any reason to conclude that they acted with reasonable cause or in good faith. See sec. 6664 (c) (1). For those reasons, we hereby sustain respondent's determination that 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 20 petitioner is liable for the accuracy-related penalty. General Legal Principles: Unless expressly provided in the Code, no deduction is allowed for personal expenses. Sec. 262(a). Section 162(a) allows a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." To be deductible under section 162(a), expenses must be ordinary and necessary. This means that the expenses must be reasonable in amount and must bear a proximate and direct relationship to the taxpayer's trade or business. E.g., Kornhauser v. United States, 276 U.S- 145, 153 (1928), and Carroll v. Commissioner, 51 T.C. 213, 218 (1968), affd. 418 F.2d 91 (7th Cir. 1969)·. As an aside, we note that, pursuant to sec. 274 (d) (4), stringent substantiation is required for deductions with respect to "listed property," which includes passenger automobiles and "any other property used as a means of transportation"; e.g., airplanes. Sec. 280F(d) (4) (A) (i) and (ii). These rules require the taxpayer to maintain adequate records or sufficient corroborating evidence to establish each element of an expenditure, including business purpose. See sec. 274 (d); sec. 1.274-5T (b) (6), (c) (2) (i), 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 21 Temporary Income Tax Regs., 50 Fed.Reg. 46016, 46017 (Nov. 6, 1985). If the listed property is used for both personal and business purposes, no deduction is allowed unless the taxpayer establishes the business purpose. Kinney v. Commissioner, T.C. Memo. 2008-287; sec. 1.274-5T(b) (6) (i) (B), Temporary Income Tax Reg.., 50 Fed.Reg. 46016 (Nov. 6, 1985). Although these rules would seem germane to the deductibility of A l_ þ the corporation's airplane expenses, respondent has not cited or relied upon the sec. 274(d) substantiation rules. Accordingly, we likewise do not rely upon them in our analysis. A constructive dividend arises when a corporation confers an economic benefit upon a shareholder without expectation o·f repayment, assuming that the corporation has sufficient earnings and profits. See Loftin & Woodard, Inc., v. United States, 577 F.2d 1206, 1214 (5th Cir. 1978); Crosby v. United States, 496 F.2d 1384, 1388 (5th Cir. 1974); Truesdell v. Commissioner, 89 T.C. 1280, 1295 (1987). Under section 301, funds (or other property) distributed by a corporation to a shareholder with respect to its stock are taxable under section 301(c). Under sections 301(c) and 316, a distribution is taxed to the distributee shareholder as a dividend to 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 22 extent of the distributor corporation's earnings and profits. Any excess is considered to be a nontaxable return of capital to the extent of the shareholder's basis in the corporation, and any remaining amount is then taxable to the shareholder as a gain from the sale or exchange of property. See sec. 301(c) (2) and (3); Truesdell v. Commissioner, 89 T.C. 1280, 1295- 1298 (1987). Section 301 characterizes a distribution as a dividend regardless of whether the distribution is formally declared to be a dividend. See Boulware v. United States, 552 U.S. 421, 429 (2008); Truesdell v. Commissioner, supra at 1295; see also Noble v. Commissioner, 368 F.2d.439, 442 (9th Cir. 1966), affg. T.C. ÜÊmo. 1965-84. Corporate funds that a controlling shareholder diverts to personal use are generally characterized as constructive distributions to the shareholder for tax purposes. See Erickson v. Commissioner, 598 F.2d 525, 531 (9th Cir. 1979), affg. in part and revg. in part T.C. Memo. 1976-147; Strong v. Commissioner, T.C. Memo. 2005-125. Such a diversion may occur, for example, where a corporation makes a distribution to a controlling shareholder that serves no legitimate corporate purpose and the distribution results in an economic benefit to 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 23 shareholder. See Strong v. Commissioner, supra; see also Meridian Wood Prods. Co. v. United States, 725 F.2d 1183, 1191 (9th Cir. 1984). Such a diversion also may occur where a controlling shareholder causes a corporation to pay his or her personal expense and the payment primarily benefits the shareholder and is made without expectation of repayment or without a bona fide intent that it be in repayment of a shareholder loan. See Hood v. Commissioner, 115 T.C. 172, 179-180 (2000); see also Noble v. Commissioner, supra at 443; Clark v. Commissioner, 266 F.2d 698, 710-711 (9th Cir. 1959), affg. in part, revg. in part and remanding T.C. Memo. 1957-129. Analysis of' the Corporate Plane Issue: We have closely reviewed the summary of the flights given by Mr. Raymond during his testimony at trial, and have considered his explanation of the relationship of each of those flights to the business of the corporation. We agree with respondent that Mr. and Mrs. Raymond have shown little or no relationship of the flights to the corporation's trade or business. For example, we see nothing to justify charging the corporation for flights to maintain the aircraft.. The plane was owned by Bison Air, LLC, and petitioners have shown no agreement between the two entities or 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 24 anything that places an obligation on the corporation to maintain the aircraft. Similarly, we see no justification for charging the corporation for the flights to Santa Barbara, California, to attend a design exhibition, or for the flight to San Diego for a meeting between Mr. and Mrs. Raymond and their tax attorneys, or for the flight to Bellingham, Washington, to inspect the yacht that was purchased by Varuna, LLC, or for the flights to Missoula, Montana, to visit Mrs. Raymond's stepfather who was dying of cancer. Petitioners attempt to justify charging the corporation for many of the flights with the suggestion that the purpose of the flight was related to the possibility of purchasing or selling real estate. In this category, we include (1) the flight to Fairfield on September 30, 2006, to visit Amy Greenfield, (2) the flights to Iowa on November 28, 2006, to meet Susan MacGregor and on June 3, 2007, July 14, 2007, April 19, 2008, and June 26, 2008, to discuss the possible purchase of property, (3) the flights to Sequim, Washington, on November 28, 2006, and April 27, 2007, to meet with Deborah Norman, and on November 16, 2007, to inspect a commercial property, (4) the flight to Montana on June 30, 2007, 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 25 to inspect the Amea project, and (5) the flights to various places to permit Mr. Raymond to attend meetings of his family partnership. We agree with respondent that the connection of those flights to the business of the corporation, even taking the possibility of referral fees into account, is tenuous at best. Furthermore, Mr. Raymond's testimony is too vague and speculative to provide adequate substantiation of the business purpose of these flights as related to the business of the corporation. Moreover, most of the flights included visits to family members. Even if we were to accept petitioners' assertion that there was a relationship of the flight to the corporation's trade or business, Mr. Raymond's testimony provides no basis on which to make an allocation between the business aspects and the personal aspects of the trip. Based upon the above, we would have sustained respondent's determination if all of the travel expenses of the corporation had been disallowed. Respondent, however, has disallowed only $86,613.67 of the $105,287.67 travel expenses relating to the plane that were claimed by the corporation for fiscal year 2007 and allowed the rest, $18,674. Petitioners have certainly failed to show that more 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 26 than $18,674 of subject travel expenses were ordinary and necessary expenses of the corporation. Analysis of the Constructive Dividend Issue: At trial, petitioners focused all of their efforts on their contention that the subject flights were ordinary and necessary business expenses of the corporation, such that the payments made by the corporation to Bison Air, LLC, were deductible by the corporation. They did not address the issue whether such payments should be treated as constructive dividends to the extent that the Court finds that the payments are not ordinary and necessary expenses of the corporation. Accordingly, petitioners conceded this issue. Nevertheless, it is apparent that Mr. and Mrs. Raymond used their positions as president and vice-president, respectively, of the corporation, and as grantors of the Raymond Family Trust which held all of the corporation's stock, to obtain an economic benefit from the corporation in the form of the use of the plane. We agree with respondent that such economic benefit is taxable to Mr. and Mrs. Raymond as a constructive dividend, as determined in the notice of deficiency and they have given us no reason to hold otherwise. 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 XII. 27 In order to give effect to the foregoing, we shall enter an order and decision sustaining respondent's determinations regarding the deficiency in income tax and the accuracy-related penalty under section 6662(a). XIII. This concludes the court's oral findings of fact and opinion in this case. (Whereupon, at 9:12 a.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888