TAX COURT OPINION

Case: Ronald B. & Helen J. Sundrup
Docket Number: 14373-07
Judge: Chiechi
Opinion Type: memo
Filed: 11/16/2010
Pages: 87

T.C. Memo. 2010-249 UNITED STATES TAX COURT RONALD B. AND HELEN J. SUNDRUP, ET AL.,1 Petiti.oners y_. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 14373-07, 14374-07, Filed November 16, 2010. 14379-07. Frank W. Pechacek, Jr., and Jamie L. Cox, for petitioners. Stephen A. Haller and James A. Kutten, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION CHIECHI, Judge: Respondent determined the following defi- ciencies in, and accuracy-related penalties under section Cases of with: Consulting, Sundrup Transfer, the following petitioners are consolidated hereInc., docket No. 14374-07; and Sundrup Inc., docket No. 14379-07. I SERVED NOV 162010 - 2 - 6662(a)2 on, the respective Federal income tax (tax) of (1) Ronald B. and Helen J. Sundrup, (2) Sundrup Transfer, Inc., and (3) Sundrup Consulting, Inc . : Petitioner Taxable Year Deficiency Penalty Under Sec. 6662(a) Accuracy-Related Ronald B. and Helen J. Sundrup Petitioner Sundrup Transfer, Inc . Petitioner ' Sundrup Consulting, Inc. 2003 20 04 2005 $19,129 17, 956 14, 999 $3,825.80 3, 591. 20 2, 999.80 Taxable Year Ended Mar. 31 Deficiency Accuracy-Related Penalty Under Sec. 6662(a) 2004 2005 2006 $2, 361 1, 776 843 $472.20 355 .20 168.60 Taxable Year Ended Mar. 51 Deficiency Accuracy-Related Penalty Under Sec. 6662 (a) 2004 2005 20 06 $10 030 7, 875 8 , 250 $2,006 1, 575 1, 650 In amendments to answers filed in the respective cases at docket Nos. 14373-07 and 14374-07, respondent alleged the follow- ing respective increased def iciencies in, and increased accuracy- related penalties under section 6662 (a) on, the respective taxes of (1) Ronald B. and Helen J. Sundrup and (2) Sundrup Transfer, Inc . : All section references are to the Internal Revenue Code (Code) to the Tax Court Rules of P actice and Procedure. in effect for the yeÅrs .at issue. All Rule references are - 3 - Petitioner Ronald B. and Helen J. Sundrup Petitioner Sundrup Transfer, Inc. Taxable Year Increased Deficiency Increased Accuracy-Related Penalty Under Sec. 6662(a) 2003 2004 2005 $24,897 19,000 15,548 $4,979.40 3,800.00 3,109.60 Taxable Year Ended Mar. 31 Increased Increased Accuracy-Related Deficiency . Penalty Under Sec. 6662(a) 2004 2005 2006 $7,917 6,543 6,218 $1,583.40 1,308.60 1,243.60 The issues remaining for decision are:S (1) Should certain trans,actions during each of petitioners' respective taxable years at issue between (a) Sundrup Transfer, Inc . , and Sundrup Consult ing , Inc . , (b) . Sundrup Leas ing , L . L . C . , and Sundrup Consulting, Inc., and (c) Ronald B. and Helen J. Sundrup and Sundrup Consulting, J·nc., be respected for tax purposes for each of those years? We hold that they should not.' 3In addition to the issues remaining for decision that are there are certain other questions relating to listed in the text, certain determinations in the respective notices of deficiency that respondent issued to petitioners which are computational that their resolution flows from our resolution of certain of issues that we address herein. in the to certain reInc., and *In the light of our holdings with respect (2) Sundrup Leasing, L.L.C., and Inc., Inc., and (3) Ronald B. and Helen J. Sundrup Inc., we need not address certain deter- spective transactions between (1) Sundrup Transfer, Sundrup Consulting, Sundrup Consulting, and Sundrup Consulting, minations that respondent made in the respective notices of deficiency that respondent issued to Ronald B. and Helen J. Sundrup and Sundrup Consulting, cates on brief that respondent' s position with respect other determinations is alternative to respondent's position with respect 75. to those certain transactions. See infra notes 70 and Inc., because respondent indi- to those (2) Is petitioner Sundrup Transfer, Inc., entitled for its taxable year ended March 31,g 2004, to deduct under section 162 (a) certain medical and dental xpenses? We hold that it is. (3) Is Sundrup Transfer, Inc., entitled for each of its táxable years ended March 31, 2004 and 2006, do deduet under section 162 (a) certain miscellaneous expenses? We hold that it is not. (4) Is Sundrup Leasinc , L.L.C., entitled "for each of its taxable years 2003 through 2005 to deduct under section *162 (a) certain amounts that it paid relating to certain real proper- ties?" We hold that it is not. (5) Are petitioners (d) Rånald 'B. and Helen J. Sundrup, (b) Sundrup Transfer, Inc., and (c) Sundrup Consulting, Iric., liable for eac of their re pective taxable years at issue for accuracy-related penalties under section 666:i (a) ? We hold that they are . FINDINGS OF FACT Some of the facts have been stipulated and are so found except as stated .herein. At .all releüant times ince around 1964, including at the time petitioners Ronald B. undrup (Mr. Sundrup) and Heleri J. Sundrup Leasing, L:L.C., was a passthrough entity for tax purposes for each of a result, any deduction that in'effect flowed through to dits members, petitioners Ronald B. and Helen J. Sundrup. its taåable years 2003, 2004, and 2005. See infra note 50. it claimed for each of those years As - 5 - Sundrup (Ms. Sundrup)' filed the petition in the case at docket No. 14373-07 and throughout the years at issue, Mr. and Ms. Sundrup resided at 200 Corning Street, Arcadia, Iowa (Arcadia), which is in Carroll County, Iowa (Carroll County). At all relevant times, including at the time petitioner Sundrup Transfer, Inc. (Transfer), filed the petition in the case at docket No. 14374-07 and throughout the years at issue, Transfer maintained its principal place of business at 200 Corning Street, Arcadia. At all relevant times, including at the time petitioner Sundrup Consulting, Inc. (Consulting), filed the petition in the case at docket No. 14379-07 and throughout the years at issue, Consulting listed as its "business address" 200 Corning Street, Arcadia. Sundrup Residence On June 19, 1964, Mr. and Ms. Sundrup purchased a vacant residential lot at 200 Corning Street, Arcadia, and thereafter built a single-family one-floor house with a finished basement and an unfinished attic (original house) on that lot at a cost of $13,000. They moved into that house and have lived there contin- uously until at least the time of trial in these cases. 'We shall sometimes refer to Mr. Sundrup and Ms. Sundrup as Mr. and Ms. Sundrup or the Sundrups. - 6 - On July 2, 1986, Mr.. arid Ms . Sundrup purchased a strip of land adjacent to 200 Corning Street, Arcadia, in order ,to build an addition to the original+ house. In 1988, they built that addition, which included a two-car garage .that is attached to the original house (Sundrup two car garage) and a small enclosed area on the main floor between that garage and the original house that was approximately 120 square feet (Sundrup -enclosed area) .7 The Sundrup residence,- which is in a residential neighbor- hood consisting of single-fdmily houses, has approximately 1, 028 square feet of space - on -the main floor and approximately 937 square feet sof space in .the basement. The main floor of the Sundrup residence has three bedrooms, a living room, a kitchen with an eat-in dining area; åtwo full bathrooms, a utility room, and the Sundrup enclosed arda. The basement of the Sundrup , residence has a family room, a utility room, a full bathroom, and a safe measuring approximately four cubic feet. -There is an unfinished attic in the Sundrup residence where certain business documents and Christmas ornaments are stored. In addition to the Sundrup two-car garage that is attached to the original house, there is a one-car garage t at is not attached to the original house . 'We shall refer to the ot 1964, that they purchased in 1986 house that they built on thåte lot as the Sundrup residence.. the original house thdt they built on that 'lot, that petitioners purchased in the lot and the addition to the oricjinal - 7 - The Office of the Carroll County Assessor.appraised the Sundrup residence as of January 1, 2008, at $104,800. Trucking Business Starting in 1967, Mr. Sundrup, along with his-spouse Ms. Sundrup, began operating a trucking business.that, inter alia, transported agricultural freight, such as cattle, feedstock, fuel, and liquid fertilizers. " From 1967 until. February 16, 2000, Mr. Sundrup operated that trucking business as a sole proprietorship under the name Ron Sundrup Transfer. Mr. and Ms. Sundrup used certain equipment in operating Ron Sundrup Transfer, including three Kenworth tractor-trailers (tractor-trailers), four corn hoppers, a polar truck tank,.certain shop. tools, certain shop equipment, and a·lawnmower. Although Mr. Sundrupswas the princi- pal driver -for Ron Sundrup Transfer, that business also used certain other drivers. The Sundrups conducted the office operations of Ron Sundrup Transfer, which Ms. Sundrup managed, at 200 Corning Street, Arcadia." As part of Ms. Sundrup's managing the office opera- tions of Ron Sundrup Transfer, she answered the tel-ephone, "After the Sundrups built the addition to the original house they used a portion (Sundrup residence office space) of the small enclosed area between in 1988, the Sundrup enclosed area (i.e., the Sundrup two-car garage and the original house that was approximately 120 square feet), as well as a desk which was in the original house and on which were a computer and a facsimile/ copier machine, Transfer. to conduct the office operations of Ron Sundrup scheduled pickups, monitóre i deliveries, and coordinated jobs - 8 - among its drivers . Division Street On August 2, 1996, Mr. and .Ms. Sundrup purchased a two-acre parcel of land (Division Street property) at 1000-18 Division Street, Arcadia, from Rita undrúp, Mr. Sundrup's mother. The Division Street property ha two houses on it.. (Petitioners, and we shall, refer to those hoËses as the North House and the South House.) After Rita Sundrup sold the Division Street property to the Sundrups until at least the time of the trial in these cases, she continued to live in the North House, where she-had lived.her entire life, but she did noti pay any rent to the Sundrups for the use of that house . Nor did)Rita Sundrup pay rent to the Sundrups for the use of a garage on tihe Division Street property. On a date not disclosed by the record before the years at issue, Mr. and Ms. Sundrup emodeled the South House, and Rick Sundrup, an adult son of Mr 'and Ms. Sundrup, moved intoothat house with- his family. Fro the time Rick Sundrup and his family moved into the South House until at least the time of trial in these cases, they did not p y any rent to the Sundrups for the use of that house. At all relevant times, in addition to the North House and the South House, there were several freestanding structures on - 9 - the Division Street property, including (1) a large maintenance shop and storage building, (2) a large storage building, (3) two small storage sheds, and (4) a garage. (We shall refer to the freestanding structures described in (1) through (3) as the Division Street maintenance and storage structures.) Mr. and Ms. Sundrup used the Division Street maintenance and storage struc- tures in operating Ron Sundrup Transfer. Vehicles and Condominiums In addition¯to the Sundeup residence and the Division Street property that"the Sundrups owned during the times, indicated above, Mr. and'Ms. Sundrup owned the following real property in Branson, Missouri: A condominium described as Thousand Hills, The Legacy, Building 2, Unit 5 (Unit 5), and a condominium described as The Grande Legacy, Building E, Unit 6 (Unit 6)." Mr. and Ms. Sundrup traveled to Branson, Missouri, four times in 2002 in order to make certain repairs and improvements to Unit 5 and/or Unit 6. Mr. and Ms. Sundrup also owned (1) a 1996 Chevrolet pickup truck that they traded on November 26, 1999, for a new 2000 GMC 9Although the record does not establish when the Sundrups the record does establish that the acquired Unit 5 and Unit 6, Sundrups owned Unit 5 at least as early as Apr. 1, 2001. pickup truck (2000 GMC truck and (2) a 1997 Cadillac automobile - 10 - (1997 Cadillac automobile) . Transfer At a time not disclosed by the record before February 16, 20 0 0 , Mr . and Ms . Sundrup re ained 'Frank Pechacek (Mr . Pechacek) , an attorney, who, inter alia advised them regarding the forma- tion of certain entities (discussed below)..R On February 16, 2000, Mr. and Ms. Sundrup, with the assis- tance of Mr. Pechacek, incoOorated Transfer under the laws of the State of Iowa. During the years at issue, Mr. Sundrup owned 349 shares,i Ms. Sundrup own(d-350 shares, and Rick Sundrup, .their son, owned 1 share of Transfer's outstanding stock. At all relevant times, including d ring the years at issue, Mr. Sundrup and Ms. Sundrup were the on]y members of -the board of directors of Trans f er . Throughout the years at is sue , Mr . Sundrup -was the president, Ms. Sundrup was t he vice president, the secretary, and the treasurer, and Rick Sundrup was the assistant secretary of. Transfer. °The record does not e tablish when the Sundrups acquired the 1996 Chevrolet pickup t uck and the 1997 Cadillac automobile. "Mr. Pechacek prepared the respective tax returns of peti- tioners for all of the taxable years at attorney representing them in these cases . Before the commencement of tial conflicts of called as a witness at that trial. the trial in these Šases, petitioners waived any poteninterest Segarding Mr. Pechacek, who was not issue and is the lead - 11 - On the date on which Mr.' and Ms. Sundrup incorporated Transfer, Ron Sundrup Transfer ceased operating, and Transfer began operating, a trucking business. In operating its trucking business, Transfer undertook the same types of business activi- ties that Ron Sundrup Transfer had previously handled." As was true when the Sundrups operated Ron Sundrup Transfer, the Sundrups conducted the office operations of Transfer, .which Ms. Sundrup managed, at 200 Corning Street, Arcadia (i.e., the Sundrup residence)." As was true when Ms.. Sundrup managed the office operations of Ron Sundrup Transfer, as part of Ms. Sundrup's managing the office operations of Transfer, she an- swered the telephone, scheduled pickups, monitored deliveries, and coordinated jobs among its drivers. During each of its taxable years ended March 31, 2004 through 2006, Ms. Sundrup spent approximately 24 hours each week managing the office operations of Transfer. During each of its taxable years ended March 31, 2004 through 2006, Rick Sundrup was a full-time driver, and Mr. "Around the date on which the Sundrups incorporated Transfer, Mr. Sundrup transferred to Transfer certain assets that he had used in the business operations of Ron Sundrup Transfer. "As was true with respect to the office operations of Ron Sundrup Transfer during the period 1988 to Feb. 16, 2000, after the Sundrups incorporated Transfer, they used the Sundrup residence office space, as well as a desk which was in the original house and on which were a computer and a facsimile/copier machine, note 8. the office operations of Transfer. to conduct See supra - 12 - Sundrup also served as a dri er, for Transfer. During each of those years, Mr. Sundrup did work repairing, maintaining, and washing certain vehicles that Transfer used in its trucking business. During each of Transfer's taxable _years ended March 31, 2004 and 2005, Kerry Her enius provided part-time office support for that business ar d did so in the Sundrup residence of f ice space . During Trans f er' s taxable year ended March 31, 2006, Erin Sundrup, Rick Sulidrup' s wife, provided part-time office support for that bus ness and did so in the Sundrup residence office space. Duñing each of its .tax ble years indicated, Transfer paid to the following individuals t1e following amounts of cash'compensa- tion: "Our findings that during each of Transfer's taxable years issue Mr. Sundrup served as a driver for Transfer and did at certain work on certain vehicles that it used in its business are not work for Transfer during eaäh of intended to suggest or imply that Mr. Sundrup did.no other those years. Individual Rick Sundrup Kerry Henkenius Erin Sundrup Ms. Sundrupl - 13 - Taxable Year Ended Mar. 31 ' Cash Compensation 2004 2005 2006 2004 2005 - 2006 2004 $44,032.82 43,197.17 53,199.74 9,520.50 5,123.25 3,428.00 3,600.00 1The record does not establish the,precise nature of the work that Ms. Sundrup did for Transfer during its taxable year ended Mar. 31, 2004, compensation. Our finding that Ms. Sundrup received that cash compensatison during that year for certain ùnexplained work is not intended to suggest or imply that Ms. Sundrup did no other work for Transfer during each of for which Transfer paid her $3,600 of cash its taxable years at issue. Except for the $3,600 of cash compensation that Transfer paid to Ms. Sundrup during its taxable year ended March 31, 2004, Transfer paid no cash compensation to Mr. Sundrup or to Ms. Sundrup during any of its taxable years ended March 31, 2004 through 2006. Certain Payments Made by Transfer for Medical and Dental Expenses On April 1, 2000, Transfer executed a dogument entitled "NONDISCRIMINATORY MEDICAL AND DENTAL REIMBURSEMENT PLAN" (Trans- fer medical and dental plan). That document stated in pertinent part: 1. Purposes of Plan The purposessof the Plan are: (a) To encourage employees to continue their association with the Company. - 14 - (b) To attract ad itional employees. * * * * * * 2. Eligibility. All e ployees who have been with the Company [Transfer] Company was incorporatéd, whichever is shorter, pro- .vided, however, covered by a collective bargaining agreement, or nonresident alien employees shall not be eligible. that seasonal employees, employees for six (6) months, or since the The Comp ny will reimburse all eligible 3. Benefits. employees for all reasonable medical and dental expenses up to the sum of $5,000.00 in any fiscal year (including, but not li ited to the cost of any accia dent, health or medica2 or dental insurance policy) , which the eligible employee and/or members of his immediate family may incur, except such expenses as may be covered and are rei bursable to them from any medical, dental, health and/or accident insuring them. insurance policy On April 1, 2000, Transfer and Mr. Sundrup executed a document entitled "AGREEMEN ", "NONDISCRIMINATORY MEDICAL AND DENTAL REIMBURSEMENT PLAN" (Mr. Sundrup's medical and dental agreement with Transfer), a d Transfer and Ms. Sundrup executed a document with the same title (Ms. Sundrup's medical and dental agreement with Transfer)." Mr. Sundrup signed Mr. Sundrup's medical and dental agreemen( with Transfer both in his individual capacity and as president o Transfer. Ms. Sundrup signed Ms. Sundrup's medical and denta agreement with Transfer in her "Although the record e tablishes that Rick Sundrup, the Sundrups' son, was entitled to benefits under the Transfer medical and dental plan, that purports to be an agreäment between him and Transfer, with respect the record does not contain any document to that plan. 15 - individual capacity, and Mr. Sundrup signed that document as president of Transfer. Except as noted -below; Mr. tSundrup's medical and dental agreement-with Transfer and Ms. tSundrup's¯medical and dental agreement with Transfer contained essentially the same provi- sions. They stated in pertinent part: This will serve to confirm the understanding and agreement between you (Mr. Sundrup in the case of Mr.. Sundrup' s purported medical and dental, agreement, with Trans f er and Ms . Sundrup in the c as e of Ms . Sundrup ' s purported medical ánd dental agreement with Transfer] and the undersigned (hereinafter "Corporation") fer] . [Trans- 1. The Corporatiòn has adopted a -Nondiscrimina tory Medical and Dental Reimbursement Plan. Pursuant to such Plan and for so long as you are employed by the Corporation, the Corporation agrees to reimburse you for all reasonable medical and dentalsexpenses up to the sum of $5, OOO.00 in any fiscal year (including but not limitedato the cost of-any accident, health, medical or dental insurance policy) which you and/or members of your immediate family may incur, except such expenses which are covered and are reimbursable to you from any m~edical'; dental, health and/or accident insurance policy insuring you and/or members of your immediate family. During Transfer' s taxable year ended March 31, 2004, Transfer paid directly, or reimbursed Mr. Sundrup, Ms. Sundrup, and/or Rick Sundrup,, a total of $12,258.65 for ce'rtain of their respective medical and dental expenses. (We shäll refer to the "Tlie record does«not establish that Transfer paid any medical'or dental expenses of Mr. Sundrup, Ms. Sundrup, or Rick Sundrup during each-of 2006. its taxable years ended Mar. 31, 2005 and - 16 - portion of the medical and dental expenses that Transfer paid directly, or reimbursed Mr. Sundrup and/or Ms.« Sundrup, for certain of their respective medical and dental expenses as Transfer's payments of the Sundrups' medical and dental ex- penses.)" Leasing On February 16, 2000, the same.day on which Mr.·and Ms. Sundrup incorporated Transfdr, they, with-the assistance of Mr. Pechacek, organized Sundrup Leasing, L.L.C. (Leasing), as a limited liability company u der the laws of the State of,Iowa and adopted an operating agreem nt for it. The articles of organiza- tion of Leasing showed 200 dorning Street, ,Arcadia (i.e., the Sundrup residence), as its rincipal office. At all relevant times, Mr. Sundrup and Ms. Šundrup were the only members, and the only managers, of Leasing. Sometime between the förmation of LeÈsing.on February 16, 2000, and March 1, 2000, Mrs Sundrup transferred to Leasing The parties stipulateå the natire and the amounts of the respective taxable years at issue. the description that the parties stipulated regarding a various expenses of Mr. Sundrup and/or Ms. Sundrup that Transfer or Consulting, as the case gay be, paid during each of companies' stances, particular expense did not àorrespond to the nature of expense that the parties stipulated. the parties stipulated that a $319.62 e pense was for "Life insurance" but the parties also stipulated9that that expense was a medical expense. cies in the parties' stipul tions. apparent The record does not explain the apparent -inconsisten- inconsistencies inforder to decide the issues presented. those In certain in- the For example, We need not resolve those - '17 - certain of the- assets-that he had been -using in the trucking business of-Ron Sündrup Transfer, inciuding the "three tractor- trailers, four córn hoppere, land a Polar truck tank ön March 1 2000, Leasing entered into tan agreement with - Transfer under which Neasing agreed sto lease the three tractor- trailers to -Transfer for use in- Transfer's trucking business: That agreement provided thataTransfer was to payeLeasing $73,672 each year for the use-of thosè trücks. Tránsfer paid Leasing only $24,000 during~each of its taxable years ended March 31, 2004 through 2006, for the use of-the-three tractor-trailers. On April 1, 2000, Mr. and Ms. Súndfup-transferred the Division Street property to Leasing by quitclaim deed." On the same day Tr'ansfer entered-into an agreement with Leasing under which Leasinè agreëd to' lease the Division Street property to Transfee for'use in Transfer's trucking -business., That agreement provided that,Transfer was to pay Leasing $24,000 each year for the use of the Division Street property. Transfer paid Leasing or ly $20, 000' during each of -its taxable years ended March 31, 2004 and 2005, for the- use of the Division Street property. T ansfer paid Leasing $24 000 'during its taxable year ended March 31, 2006, for the use sof that property.1 "On Jan. 9, 2001, the quitclaim deed transferring the Division Stréét property to Leasing was filed with the Office of the Recorder of Deeds of Carroll County (Carroll County recorder's office). - 18 - On April 1, 2001, Mr. and Ms. Sundrup transferred Unit 5 to Leasing by quitclaim -deed. On the next day, Mr. and Ms. Sundrup, acting in their individual c apacities, executed a management agreement (Unit 5 management agreement) with a company called Thousand Hills Management C$. , Inc . , , ( THMC) . Under that agree - ment, THMC agreed to rent tl at unit nightly to third parties and to make emergency repairs tc that unit when necessary." Although Mr. and Ms. Sundrup had trar sferred Unit 5 to Leasing by . quitclaim deed, they ,were d scribed in the Unit 5 management agreement as "Owner" of Unit 5, and Mr .. and Ms . Sundrup signed that document as "Owner" of that unit . On a date not disclosed by the record, Mr. and Ms. Sundrup transferred Unit 6 to Leasi g.19 On August 25, 2001, Leasing- executed a management agreet ent with "THMC. Under that agreement, THMC agreed to rent that un t nightly to third parties and ,to make emergency repairs to t at unit when necessary. Although Mr. and Ms. Sundrup signed that agreement, they did not indicate whether they had signed it às managers of Leasing or in their individual capac ities . sometime in 2004 befor April 6 Leasing purchased a condo- minium in Branson, Missouri described as Tuscany Placer, Building 1, Unit 4 (Unit 4) . On April 6, 2004, Leasing executed a manage- "The,record does not e tablish how the -Sundrups' transfer of Unit 6 to Leasing was efŠected. - 19 - ment agreement (Unit 4 management ragreement) with THMC.2o Under that agreement, 'THMC agreed to rent that unit nightly to third arties landito make- emergency repairs to that unit wheneneces- sary. Leasing ,was described in the Unit' 4 management agreement as "Owner" of Unit 4. Although Mr: Sundrup signed that sagree- ment, he did not indicate whether he had signed it as a manager of Leasing or in his individual capacity. As was true at-least in 2002, during the years at issue the Sundrups traveled to Branson, Missouri, in order to -make certain repairs and improvements to Unit 5 *and/or Unit 6. .In addition, during- the years atsissue after the datecon which Leasing.had purchased Unit- 4, they traveled to Branson, Missouri., in order to make certain repairs- andtimprovements to Unit 4. They traveled to Branson, Missouri, in order to -make certain repairs and improvements (1) to Unit a and/br-Unit 6 four times in 2003 and (2) to Unit 4, Unit 5, and/or- Unit 6 five times in 2004 four times in 2005, and at least one time in 2006. Consulting On April 24, 2000, Mr. and Ms. Sundrup, with the assistance of Mr. Pechacek, incorporated Consulting under the laws of the zoAlthough the Unit 4 management -agreement was véxecuted on Apr. 6, 2004, it was dated Mar. 18, 2004. The record does not contain evidence Megarding the trips, that the Sundrups made, to sBranson, Missouri, after Feb. if any, 20, 2006. - 20 - State of Iowa. At all relevant times, including during the years at issue, Mr. Sundrup and Ms. Sundrup each owned 50 percent of the outstanding stock of Corsulting. At those times, Mr.1 and Ms. Sundrup were the only members of the board of directors cof Consulting (Consulting board) . During the years :at issue:, Mr . Sundrup was the president, and Ms . Sundrup was the vice presi- dent, the secretary, and th treasurer; of Consulting., -At all relevant times, Consulting did not pay Mr. and Ms. Sundrup any cash dividends. The Purported Management Agreements On May 1, 2000, Consult ing and Transfer executed a document - entitled "MANAGEMENT CONSULTING AGREEMENT" (purported Transfer management agreement) ." Mr Sundrup executed that document as president of Consulting and as president of Transfer. On January 1, 2003, Ledsing and Consulting executed a document entitled "MANAGEMENT CONSULTING AGREEMENT" (purported "The parties stipulated that the purported Transfer management agreement was executed on Apr. 1, 2000, which was more than three weeks before Mr. and Ñs. Sundrup incorporated Consulting on Apr. 24, 2000. That stipulition is clearly contrary to the facts that we have found are estalŠlished by the record, and we shall disregard it . 181,. 195 (1989) . The record establishes, and we have found, the purported Transfer mana0ement agreement was not executed until May 1, 2000. Inc . V . Commiss ioner , 9 3 T . C . that See Cal -MainŠ Foods , 9 a 21 - Leasing management agreement)." Mr. Sundrup executed that document as a manager of Leasing and as presidentsof Consulting. Except as noted below, the purported Transfer management agreement and'the purported Leasing management agreement.con- tained essentially the same provisions. They stated in perti- nent part: 1. Mánagement Services . Corporation [in the case of"Transfer and LLC in the case ofeLeasing]. hereby, contracts with Consulting * and consulting serviceå.in accordance with the terms and conditions set forth in- this.Agreement. * to perform management * Consulting * * * will consult with the officers and employees of Corporation [in the case of Transfer and LLC in the case of Leasing] concerning matters a related 'to the management and operation of Corporation [in the case of Transfer and LLC in the case of Leasing] arising out of the case of Transfer and LLC in the case of Leasing]e The management services shall limited to, advice and services- regarding marketing, accounting technicals and computer msupport, and personThe management services regarding person- its financi'äl policies, and generally any matter the business affairs,of Corporation [in include, but not be - nel- matters. nel, matters shall contfoi, šupervision, 'hiring and discharge of employees and independent contractors- hired by Corporation [in the case of Transfer and LLC in the case of Leasing]. include advice regarding employment The parties stipulated that ,the purported Leasing manage- ment agreement was dxecuted n Apr. 1, 2000i clearly contrary to the, facts that we have found are established by the record, and we shäll disregard it. Inc. v. Commissioner, supra at 195. we have found, was not executed until Jan. 1,, 2003. that the purported Leasing management agreement The record establishes, and See Cal-Maine Foods, That stipulation is "Except for the purported Transfer management agreement with Transfer and the purported Leasing mánagement agreement with Leasing, Consulting did not enter into any other purported management agreements. - 22 - Consulting * * * may provide advice with respect to employee benefits arid enter into negotiations regarding same on behalf of Corporation [in the case of Transfer and LLC in thd case of Leasing] . Consulting * purchase and/or.lease of equipment and supplies relating to Corporation' s in the case of Leasing] business. - * will also provid advice with respect [fn the case of Transfer and LLC' s to the * * * * * * * * * 3. * the sum of $3/000.00 Payment to Cor sulting Company. . Corporation [in,the case of TransfÈr and LLC,in the -case of. Leasing) shall pay Consultfng * Ein the case of TransfŠr and $2,500.00 in the case of Leasing] per month on år before the first day of each month. Corporation [ir the case of Transfer and LLC in the case of Leasing] sl all not be required to pay any other fee or benefit to Consulting * * * for services rendered. Consulting of-pocket expenses frod time to time to Corporation [in the case of Transfer ar d LLC in the case of Leasing], which will be reimbursed only upont Corporation [in the case of Transfer and LLC in the case of Leasing] approval. * * may submit reasonable out- 4 . Duties of Consulting Company . Consult ing * * shall furnish cor sulting and management services * and render advice to Cdrporation [in the case of Transfer and LLC in the caså of Leasing] at all times reasonably requested by Cc(rporation [in the case of Transfer and LLC in the case of Leasing] , to the following conditiions: - subject, however, * b. * * * * * * ransfer and LLC in the case Consulting * * * shall not b'e required to devote fu]l time and attention to providing se vices to corporation [in the case of of Leasing] . Consulting * * day will be control; pro ided, however, sulting * staffed to effectively service the Cor- [in the case of Transfer and poration' s The services and hours ithin Consulting [' s] is to work on any given shall be adequately * * * * * that Con- - 23 - LLC' s in the case of Leasing] needs at all times. * may of fer its services in addition to Corporation Consulting * * to anyone, [in the case of Transfer and LLC in the case of Leasing] , terms and conditions of this Agreement are adhered to by Consulting * * *. for so long as the * * * * * Consulting * to the general public and this Agreement is non-exclusive. * provid s its services * *. * * * * * * I c. f . * * 8 . Amendments . No amendment , modi f icat ion; or termination of, or addition to, valid unless and until executed in,writing by the parties to this Agreement . this Agreement shall be In drafting the purported Transfer management agreement and the purported Leasing management agreement, including in arriving at the $3, 000 amount stated in séction 3 (quoted above) of the purported Transfer management agreement and the $2, 500 amount stated in section 3 (quoted above) of the purported Leasing management agreement, Mr. Sundrup did not consult an accountant, a business adviser, or any other person e cept Mr. Pechacek.2s During none of Transfer's taxable years at issue did Trans- fer pay Consulting $3,000 each month on or before the first day . of the month, as stated in the purported Transfer management agreement. Instead, on the dates indicated, Transfer paid to 2sThe record does not establish what Mr . Pechacek told Mr . Sundrup when he consulted him. - 24 - Consulting the following amounts during each of Transfer' S taxable years ended (TYE) March.31, 2004 through 2006: TYE Mar. - 31, 2004 Date Apr. 2, 2003 Apr. 16, 2003 May 7, 2003 May 21, 20 0 3 June 4 , 2003 June 19, 2003 July 2, 2003 July 23, 2003 Aug. 8, 2003 Aug. 20, 2003 Sept. 3, 2003 Sept. 24, 2003 Oct. 8, 2003 Oct. 29, 2003 Nov. 5, 2003 Nov. 19, 2003 Dec. 3, 2003 Dec. 10, 2003 Dec. 23, 2003 Jan. 7, 2004 9 Jan. 21, 2004 Feb. 4, 2004 e Feb. 13, 2004 al Feb. 26, 2004 Mar. 31, 2004 Total Amount $1,750 1,750 1,750 1, 750 1,750 1, 750 1,750 1,750 1, 750 1,750 1, 750 1,750 - 1,750 1,750 1, 750 1,750 1, 750 1,750 1,750 1,750 1,750 1,750 3,500 1,750 1,750 45, 500 TYE Mar. 31 2005 & e 25 - i Date Apr. 21, 2004 May 4, 2004 May 19, 20 04 June 9, 2004 June 30, 2004 July 13, 2004 July 28, 2004 Aug: 10, 2004 Aug. 25, 2004 Sept. 5, 2004 Sept . 22, 20 04 Ott: 13, 2004 Nov. 3, 2004 Novî 23, 2004 Dec . 7, 20 04 Dec. 29, 2004 Jan. 11, 2005 Jan: 26, - 2005 Feb. 10, 2005 Feb. 23, 2005 Mar . 9, 20 0 5 Mar. 23, 2005 Total Amount $1, 750 1,750 1, 750 1, 750 1,750 1,750 1, 750 1,750 1, 750 1,750 1, 750 1, 750 1,750 1,750 1, 750 1 750 1,750 1, 150 1,750 1/750 1, 750 1,750 38, 500 TYE Mar. 31, 2006 - 26 - Date Apr. 6, 2005 Apr. 20, 2005 May 11, 2005 May 25, 2005 June 8 , 20 05 June 22, 2005 July 5 , 20 0 5 July 20, 2005 Aug. 10, 2005 Aug. 23, 2005 Aug . 31, 20 0 6 Sept . 21, 2005 Oct. 5, 2005 Oct. 19, 2005 Nov. 3, 2005 Nov. 23, 2005 Dec. 13, 2005 Dec. 21, 2005 Jan. 10, 2006 Jan. 26, 2006 Feb. 9, 2006 g Feb . 21, 20 0 6 Mar. 8, 2006 Mar. 21, 2006 Total . . - Amount $1,750 1,750 1, 750 1,'7/50 1, 750 1,750 1, 750 1,750 1,750 1,750 1, 750 1, 750 1,750 1,750 1,750 1,750 1,750 1,750 1,750 1,750 1, 750 1, 750 1,750 1, 750 42, 00 0 (We shall refer to any, some, or all of the above-listed .payments as Transfer's payments to Consulting.) During none of Leasing s taxable years at issue did Leasing pay Consulting $2,500 each nionth on or before the first day of the month, as stated in theipurported Leasing management agree- ment . Instead of making any payments to Consulting during Leasing' s taxable year 2003 Leasing gave Consulting a promissory - 27 - note dated December 30, 2003, in the principal amount of $30,°000 (Leasing's promissory note dated December 30, 2003). On the dates indicated, Leasing -paid to Consulting the following amounts during each of Leasing's taxable years 2004 and 2005: Taxable Year 2004 Date Mar. 10, 2004 Apr. 12, 2004 Total , . Taxable Year 2005 Date Mar. 8, 2005 Apr. 5, 2005 May 3, 2005 May 17, 2005 Oct. 14, 2005 Nov. 3, 2005 Dec. 1, 2005 Total Amount $18,000 12, 000 30 , OOO Amount $1,000 1,000 1,000 4,000 1,000 1, 000 1,000 10,000 - (We shall refer to any, some, or all of the above-listed payments as Leasing's payments to Consulting.) The Purported Employment Agreements On April 1, 2000, more than three weeks before Consulting was incorporated on April 24, 2000," and one month before the purported.Transfer management agreement was executed on May 1, 2000, Consulting'and Mr. Sundrup executed a document entitled "Although the parties stipulated that the date on which the Sundrups executed their respective purported employment agreements with Consulting was Apr. 1, 2000, explain how they could have executed those purported agreements on a date before Consulting was incorporated. the record does not 28 - "EMPLOYMENT AGREEMENT" (Mr. Sundrup's purported employment agreement), .and Consulting nd Ms. Sundrup executed a document entitled. "EMPLOYMENT AGREEMENT" (Ms'. Sundrup' s purported employ- ment agreement) .?? Mr . . Sund up signed Mr . Sundrup' s purported employment agreement both as "employee" and as-president of Consulting, and Ms . Sundrup s igned Ms . Sundrup' s purported employment agreement as "employee", and Mr. Sundrup signed that document as president of Consulting. Except as noted below, Mr. Sundrup's purported employment agreement and Ms . Sundrup' s purporte d employment agreement contained essentially the såme provisions. They stated in pertinent part: An AgŸeement made between Ronald B. Sundrup [in the case of Mr. Sundru)$' s purported employment agreement and Ms . Sundrup in the case of Ms . Sundrup' s purported employment aÿreement] of Arcadia, Iowa, herein referred to as Employee and Sundrup Consulting, Inc . , whose principal ýlace of business is located at 200 Corning St., Arcadia, herein referred to as Employer. Iowa [Sundrup residence) , * * * * * * * SECTION 1. EMPLOYMENT Employer hereby e$ploys, engages, and hires -Employee as an operationil supervisor and monitor of a portion of Employer's usiness, and Employee hereby 27Except for Mr. Sundru 's purported employment agreement and Ms. Sundrup's purported employment agreement, at no time was there a purported employment agreement between Consulting and any other individual. - 29 - accepts and agrees to such hiring, engagement and employment, subject pursuant ployer. to the general supervision and to the orders, advice and direction of Em- Because of certain necessities required for the the duties which the Employee proper performance of must perform for the Employer under this Agreement and because of the benefits and conveniences accruing to the Employer by having the Employee residing on business premises of the Employee shall be required to live in the housing furnished by the Employer on the business premises [Sundrup residence] of the Employer. the Employer, * * * * * * * * * * SECTION 3. TERM OF EMPLOYMENT The term of this Agreement shall be a period of one year, commencing nating prior termination as herein provided. At tion date of shall be considered renewed for regular periods of one year provided neither party submits a notice of termination. , 2001, subject, however, , 2000, and termi- this Agreement the expira- to , 2001, * * * * * * SECTION 6. SPECIFIC DESCRIPTION OF CERTAIN DUTIES While at all times, the Employee will be subject the following are a list of to such additional duties and services as may be required by the Employer, certain specific duties and responsibilities Employee shall have ein performing services for the Employer. The Employee in performing these services shall be on call twenty-four hours a day except for reasonable vacations as the Employer may allow. Duties and responsibilities are to be performed at directed by the Employer above. the location as (1) (2) - (3) (4) (5) (6) - 30 - To constantly be present sponsibility to deter and guard against vandalism and th ft of equipment, tools, buildings and other property of in the area of re- the Employer. tch over the property of the s to discover and report any - To maintain Employer so damage to an of wind, freezing, or other catastrophes and to take any other action if possible to minimize said losses. the Employer's property from fire, To be present3 on the premises so as to immediately detect and report any interruption of electrical s/rvice to the facilities of Employer so és to minimize the possibility of any losses. the 2 To monitor t e per ormance and activities of other Employ es of premises and report their actividies. the Employer working on the to the Employer concerning To provide a sistance to other Employees of the Employer in case of a breakdown or emergency while Šperating on the property of the Employers. To be presen( to alert other designated Employees of shipments of materials being received by Employer. 9 At no time during the Saxable years at issue did (1) Mr. Sundrup and Consulting dete mine the respective dates on which Mr. Sundrup's purported emp oyment agreement commenced and terminated as contemplated únder section 3 of that agreement and (2) Ms. Sundrup and Consult ng determine the respective dates on which Ms. Sundrup's purport d employment agreement commenced and terminated as contemplated nder section 3 of that agreement. - 31 - Mr. Sundrup's purported employment agreement and Ms. Sundrup's purported employment agreement contained a- section entitled "COMPENSATION OF EMPLOYEE". That section in each of those agreements stated: SECTION 4. COMPENSATION OF EMPLOYEE Employer [Consulting] shall pay Employee [Mr. Sundrup in the case of bur. Sundrup's purported employment agreement and Ms. Sundrup ,in the case of Ms. Sundrup's purported employment agreement] and Employee shall accept ployee's services hereunder, minimum compensation at the rate of from Employer,.in full payment for Em- Dollars ($ ) per , payable . Notwithstanding any language to the contrary, Employer, discretion, may pay Employee additional compensation from time to time. in its sole At no time during the taxable years at issue did (1) Mr. Sundrup and Consulting determine a rate of-compensation to be paid to Mr. Sundrup as contemplated under section 4 of Mr. Sundrup's purported employment agreement and (2) Ms. Sundrup and Consulting determine a rate of compensation to be paid to Ms. Sundrup as contemplated under section 4 of Ms. Sundrup's pur- ported employment agreement. At all relevant times, Consulting did- not pay any wages or salary to Mr. Sundrup or Ms. Sundrup. At no time before the trial in these cases did Consulting file (1) Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and (2) Form 941, Employer's Quarterly Federal Tax Return. Nor did Consulting issue at any time before that trial (1) Form W-2, Wage and Tax Statement, or (2) Form 1099-MISC, - 32 - Miscellaneous Income. Consulting' s Board of Directors On May 1, 2000, Consulting held a meeting (May 1, 2000 board meeting) of the Consulting b ard (i.e., Mr. Sundrup and Ms. Sundrup) . The minutes of t t meeting stated, inter alia, that the Consulting board (1) elected for -a one-year term Mr. Sundrup as president of Consulting and Ms. Sundrup as vice president, secretary, and treasurer of Consulting, . (2) adopted the bylaws of Consulting,23 (3) designated Carroll County State Bank as Consulting' s depository inst itution, (4) required that Consult- ing's officers and director use their best efforts tosoperate Consulting in such a manner that sthe stock of Consulting would qualify as stock under sect on 1244, (5) accepted Mr. Sundrup's offer to purchase stock of Consulting and resolved to issue to him a certificate representing the number of shares that he pur- chasèd, (6) made an electior under section 248 with respect to Consulting's organizational expenses, (7/) authorized Mr. Sundrup to pay any expenses resulti g from the organization of Consult- I ing, and (8) adopted a "Nonc iscriminatory Medical and Dental Re imbursement Plan" . 2eAt no time before the trial in these cases werë Consult- ing's bylaws amended. - 33 - The minutes of the May 1, 2000 board meeting did not reflect that the Consulting board discussed at that meeting (1) the pur- ported Transfer management agreement that Consulting and Transfer had executed on the date of that meeting and (2) (a) Mr. Sundrup's purported employment agreement and (b) Ms. Sundrup's purported employment agreement that Consulting and Mr. Sundrup or Ms. Sundrup, as the case may be, executed on April 1, 2000.29 Nor did those minutes reflect that the Consulting board discussed at that meeting the nature or the extent of the services (1) that the purported Transfer management agreement stated Consulting was to provide to Transfer and (2) (a) that Mr. Sundrup's purported employment agreement stated Mr. Sundrup was to provide to Con- sulting and (b) that Ms. Sundrup's purported employment agreement stated Ms. Sundrup was to provide to Consulting. On March 20, 2001, Consulting held a joint meeting (March 20, 2001 joint meeting) of the stockholders of Consulting (i.e., Mr. Sundrup and Ms. Sundrup) and the Consulting board (i.e., Mr. Sundrup and Ms. Sundrup). The minutes of that meeting stated, inter alia, (1) that the stockholders of Consulting elected for a one-year term Mr. Sundrup and Ms. Sundrup as members of the "Mr. Sundrup's purported employment agreement and Ms. Sun- drup's purported employment agreement were executed on Apr. 1, 2000, more than three weeks before Consulting was incorporated. The minutes of Consulting rätified those purported employment agreements at meeting. the May 1, 2000 board meeting do not reflect that that Consulting board.and. (2) thÄt the Consulting -board elected for a one-year term Mr. Sundrup aÉ president of Consulting and Ms. Sundrup as vice president, eecretary, and treasurer of Consult- ing. Those minutes did not state that the Consulting board discussed at the March 20, 001 joint meeting (1) the purported Transfer management agreement and (2) (a) Mr. Sundrup's purported employment agreement and -(b) Ms . Sundrup' s purported employment agreement.. Nor did the min0tes of that meeting state that the Consulting board discussed Åt that meeting the nature or ,the extent of the services (1) dhat the purported Transfer management agreement stated Consulting was to piovide to Transfer and (2) (a) that Mr. Sundrup's purported employment agreement stated Mr. Sundrup was to provide to Consulting and (b) that Ms. Sun- drup' s purported employment dagreement stated Ms . Sundrup was to provide to Consulting. On March 1, 2002, Cons lting held a joint meeting (March 1, 2002 joint meeting) of the tockholders of Consulting (i.e., Mr. Sundrup and Ms . Sundrup ) and the Consult ing board ( i . e . , Mr . Sundrup and Ms . Sundrup) . he minutes of that meeting stated, inter alia, (1) that the st ckholders of Consulting electied for a one-year term Mr. Sundrup and Ms. Sundrup as members of the Consulting board and (2) thàt the Consulting board elected for a one-year term Mr. Sundrup an president of Consulting and Ms. - 35 - Sundrup as vice president, secretary, and treasurer of Consult- ing. - Those minutes did not state that the Consulting board discussed at the March 1, 2002 joint meeting (1) the purported Transfer management agreement and (2) -(a) Mr. Sundrup's purported employment agreement and (b) Ms. Sundrup's purported employment agreement.e Nor did the'minutes of that meeting state that the Consulting board discussed at that meeting the nature or the extent of.the services (1) that the purported.Transfer management agreement stated Consulting was to provide to Transfer and (2) (a) that Mr. Sundrup's purported employment agreement stated Mr. Sundrup was to provide to Consulting and (b) that Ms. Sundrup's purported- employment agreement stated Ms. Sundrup was to provide to Consulting. On March 1, 2003, Consulting held a joint meeting (March 1, 2003 joint meeting) of the stockholders of Consulting (i.e., Mr. Sundrup and Ms. Sundrup) and the Consulting board (i.e., Mr. Sundrup and Ms. Sundrup). The minutes of that meeting stated, inter alia,.(1) that the stockholders of Consulting elected for a one-year term Mr. Sundrup and Ms. Sundrup as members of the Consulting board and (2) that the Consulting board elected for a one-year term-Mr. Sundrup as president of Consulting and Ms. Sundrup as vice president, secretary, and treasurer of- Consult- ing. Those minutes did not state that the Consulting board discussed at,the March -1, 2003 joint meeting (1) the purported - 36 - Leasing management agreemen that Consulting had executed on January 1, 2003, two months before the March 1, 2003 joint - meeting, (2) the purported -Transfer management agreement, and (3) (a) Mr. Sundrup's purported employment agreement and (b) Ms. Sundrup's purported employmènt agreement. .Nor did the minutes of that meeting state that the Consulting board discussed at that meeting the nature or the e tent of the services (1) that the purported Leasing.managemen agreement stated-Consulting,was to provide to Leasing, (2) thad the purported Transfer management agreement stated Consulting was to provide to Transfer, and (3) (a) that Mr. Sündrup's urported employment agreemènt stated Mr. Sundrup was to provide o Consulting and (b) that Ms; 4 Sundrup's purported employm nt agreement stated Ms. Sundrup was to provide to Consulting. On March 2, 2004, Consùlting held a joint meeting (March 2, 2004 joint meeting) of the åtockholders of Consulting (i.e., Mr. Sundrup and Ms. Sundrup) and the Consulting board" (i.e. Mr. Sundrup and Ms. Sundrup). The minutes of that meeting stated, inter alia, (1) that the st ckholders of Consulting elected-for a one-year term Mr. Sundrup aÅd Ms. Sundrup as members of the . Consulting board and (2) thÃt the Consulting board-elected for a one-year term Mr. Sundrup a president of Consulting Ms., Sundrup as vice president, secretary, and treasurer of Consulting, and Rick Sundrup as assistant á cretary of Consulting. «Those minùtes - 37 - did not state that the Consulting board discussed at the March 2, 2004 joint meeting (1) the purported Leasing management agree- ment, (2) the purported Transfer management agreement, and (3) (a) Mr. Sundrup's purported employment agreement and (b) Ms. Sundrup's purported employment agreement. Nor did the minutes of that meeting state that the Consulting board discussed at that meeting the nature or the extent of the services (1) that the purported Leasing management agreement stated Consulting was to provide to Leasing, (2) that the 'purported Transfer management agreement stated Consulting was to provide to Transfer, and (3) (a) that Mr. Sundrup's purported employment agreement stated Mr. Sundrup was to provide to Consulting and (b) that Ms. Sundrup's purported employment agreement stated Ms. Sundrup was to provide to Consulting. The minutes of the March 2, 2004 joint meeting did not state that the Consulting board discussed at that meeting that as of the date of that meeting Leasing had failed to pay to Consulting during Consulting's taxable year that started on April 1, 2003, the $2,500 monthly amount that section 3 of the I purported Leasing management agreement stated Leasing was to pay to Consulting on or before the first day of each month." Nor did those minutes state that the Consulting board discussed at "As of the March 2, 2004 joint meeting, Leasing had not paid anything to Consulting during Consulting's taxable year that began on Apr. 1, 2003. We have found above that Leasing provided to Consulting Leasing's promissory note dated December 30, 2003. 4 , - 38 - the March 2, 2004 joint meet ing that as of the date of that meeting Transfer had failed to .pay to Consulting durings Consult- ing's taxable year that sta ted on April-1, 2003, the $3,000 monthly amount that section 3 of the purported.Transfer manage- ment agreement stated Trans er was .to pay to Consulting on or before the first, day of eacli month." il On March 7, 2005, Consulting held a joint meeting (March 7/, 2005 joint meeting) of the tockholders of Consulting (i.e., Mr. Sundrup and Ms . Sundrup ) and the Consult ing board ( i a e . , Mr . Sundrup and Ms . Sundrup ) . The minut es . of that mee t ing s t at ed, inter alia, (1) that the stockholders of Consulting elected for a one-year term Mr. Sundrup afid-Ms.»Sundrup as members of the a Consulting board and (2) th t the Consulting board elected for a one-year term Mr. Sundrup aš president of Consulting, Ms. Sundrup as vice president, secretary, - and treasurer of Consulting, and Rick Sundrup as assistant s cretary of .Consulting. Those minutes did not state that the Cons lting board discussed at the March 7, 2005 "joint meeting (1) the urported Leasing management agree- ment, (2) the purported Transfer management agreement, and (3) (a)" Mr. Sundrup's purpo ted employment agreement and (b) Ms. Sundrup' s purported employmånt agreement . * Nor «did the minutes of that meeting state that i t he Consulting board discussed at that We have found above the respective amounts and the respective dates on which Transfei made Transfer's payments to Consulting. 39 - meéting the nature or the exteht of the services -(1) that the purported Leasing management agreement -stated Consulting was to provide to Leasing,a (2) that the purported Transfer management agreement stated Consulting was-to provide toaTransfer anda (3) (a) that Mr. Sundrup's purported employment agreement stated Mr . Sundrup was to provide to Consulting and (b) that Ms . Sündrup''s purported employment agreementi 'stated Ms . Sundrup was to provide to Consulting. The minutes ofdhe March 7-, 2005- joint meeting" did- not -state that the Consulting board discussed at that meeting that as of the date "of--that meeting Leasiný· had failed to pay to Consulting at any time since-the Ma~rch 2; 2004 joint meeting, the $2,500 monthly amount that section 3 of the 'pur- þorted Leasing management agreem'ent 'stated Leasing was to pay to Consulting on soi- before the first day÷of each mohth." aNor did thoseeminutes stâte that'the-Consultirig board~discussed at the March 7, 2005 joint meeting that as of^the- daté of that meeting Transfer had failed to pay to Consulting at rany time since the March 2, 2004 joint meeting the $3, 000 monthly amount that section 3 of the purported Transfer management agreement stated We have found above the respective aînounts and the respec- tive dates on which Leasing made Leasing's payments to Consulting. Transfer was to pay to Consu ting on or before the first day. of - 40 - each month. On July 6, 2006, Consulting 'held a .joint meeting, (July 6, 2006 joint meeting) of the -stockholders of Consulting (i.e., Mr. Sundrup and Ms. -Sundrup) an the Consulting.board (i.e., Mr. Sundrup and Ms . Sundrup) . The minutes of that meeting stated, inter alia, (1) that the stc ckholders of Consulting elected for a one-year term Mr. Sundrup ard Ms. Sundrup as members of the Consulting board and (2) that the Consulting board elected for a one-year term Mr. Sundrup as president of Consulting, Ms. Sundrup as vice president, secretar , and treasurer of Consulating, and - Rick Sundrup as assistant secretary of Consulting . Those minutes did not state that the Cons lting board discussed at the July 6; 2006 joint meeting (1) the urported. Leasing management agree, ment, (2) the purported Trar(sfer management agreement, and (3) (a) Mr . Sundrup' s purpo ted employment- agreement and (b) Ms . Sundrup' s purported employment agreement . i Nor did the minutes of that meeting state that the Consulting board discussed at that meeting the nature or the e tent of the services a(1) that the. purported Leasing managemend agreement stated Consulting was to provide to -Leasing, (2) that the purported Transfer management agreement stated Consulting was to provide to Transfer, and We have found above t e respective amounts and the respec- tive dates on which Transfe made Transfer's payments to Consulting. - 41 - (3) (a) that Mr. Sundrup's purported employment agreement stated Mr . Sundrup was to provide to Consulting and (b). that Ms . Sundrup' s purported employment agreement stated Ms . Sundrup was to provide to Consulting. The minutes of the July 6, 2006 joint meeting did not state that the Consulting board discussed at that meeting that as of the date of that meeting Leasing had failed to pay to Consulting at any time since the March 7, 2005 joint meeting the $2, 500 monthly amount that section 3 of the purported Leasing management agreement stated Leasing was to pay to Con- stilting on or before the first day of each month.34 Nor did those minutes state that the Consulting board discussed at the July 6, 2006 joint meeting that as of the date of that meeting Transfer had failed to pay to Consulting at any time since the March 7, 2005 joint meeting the.$3 000 monthly amount that section 3 of the purported Transfer management agreement stated Transfer was to pay to Consulting on or before the first day of each month.35 On January 15, 2007, Consulting held a joint meeting (Janu- ary 15, 2007 joint meeting) of the stockholders of Consulting ( i . e , , Mr . Sundrup and Ms . Sundrup) and the Consulting board 34We have found above the respective amounts and the respec- tive dates on which Leasing made Leasing' s payments to Consulting. "We have found above the respective amounts and the respective dates on which Transfer made Transfer's payments to Consulting. - 4 2 - ( i . e . , Mr . Sundrup and Ms . S ndrup ) . The minut es of that mee t ing stated, inter alia, (1) that the stockholders of Consulting elected for a one-year term Mr. Sundrup and Ms. Sundrup as members of the Consult-ing boård and (2) that Consulting' s board elected for a one-year term vir. Sundrup as president of Consults ing, Ms. Sundrup as vice president, secretary, and treasurer oft Consulting, and Rick Sundrup as assistant secretary of Consult- e ing. Those minutes did not state that the Consulting board discussed at the January 15, 2007 joint meeting (1) the purported Leasing management agreement (2) the purported Transfer manage- ment agreement, and (3) (a) Mr. Sundrup's purported employment" agreement and (b) Ms . Sundrup' s purport ed employment agreement . Nor did the minutes of that meeting state that the Consulting board discussed at that meet ing the nature or the extent of the services (1) that the purpo ted Leasing management agreement stated Consulting was to pr vide to Leasing, (2) that the pur- ported Transfer management greement stated Consulting was to provide-to Transfer, and (3) (a) that Mr. Sundrup's purported employment agreement stated Mr. Sundrup, was to provide to Con- sulting and (b) that Ms . Sur drup' s purported employment agreement stated Ms. Sundrup was to p ovide to Consulting. Certain Payments Made by Consulting - 43 - During the years at issue, Consulting paid directly, or reimbursed Mr. Sundrup and/or Ms. Sundrup, for various ex- penses." Certain Payments Made by Consulting for Expenses Relating to the Sundrup Residence On May 1, 2000, one week after incorporating Consulting on April 24, 2000, Consulting and the Sundrups executed a document entitled "REAL ESTATE CONTRACT-INSTALLMENTS" (real estate in- stallment document), which was filed with the Carroll County recorder's office. That document stated in pertinent part: IT IS AGREED this 1st day of May, 2000, by and between Ronald B. Sundrup and Helen J. Sundrup, husband and wife of ,Sellers; and Sundrup Consulting, Carroll, State of the County of Carroll, State of the County of Iowa, Buyers; Inc. of Iowa, That the Sellers, as in this contract provided, to the Buyers, and the Buyers in considthe premises, hereby agree with the Sellers agree to sell eration of to purchase the following described real estate situated in the County of Carroll, State of wit: Iowa,"" to- All of Lot Twelve (12) and the East Ten Feet Lot Eleven (11), Block Twenty Four Arcadia, Carroll County, (E 10') of (24), Original Plat, Iowa . and "Although Consulting not only paid directly, but also reimbursed Mr. Sundrup and/or Ms. Sundrup, expenses, those expenses. for convenience we shall state that Consulting paid for their various "The real estate described in the real estate installment document is the Sundrup residence. 3 - 44 - The East 15 feet of 24, Town of Arcadia, Ca roll County, thel West 40 feet of Lot 11, Block Iowa * * * upon the terms and conditions following: 1. TOTAL PURCHASE PRICE. The Buyers agree to pay for said property the total of $190,000.00 due and payable * * as follous: * * * * * * * * - Buyer shall pay the - su of $19 , 562 . 9 3 per year , commencing with the first payment due on May 1, 2001 and the sum of $19,562.93 oh May 1 of each and every year thereafter until all p incipal and interest is paid in full. annum. Interest shall accrue at * * the rate of 6% per * 4 * * * * * * * 14. DEED AND ABST ACT BILL OF SALE. If all said sums of money and intedest are paid to Sellers during the life of this contr$ct, and all other agreements, for performance by Buyers 1 ave been complied with, Sellers will execute and deliver to Buyers a Warranty Deed conveying said pr mises in fee simple pursuant to and in conformity with this contract and Sellers will at this time deliver t Buyers an abstract showing . merchantable title in onformity with-this contract. The record does not establi h why the blank appeared in paragraph 14 of the real estate installment document or that that blank was completed. At no time before the drial in these cases did petitioners execute a deed in favor of donsulting with respect to the Sundrup residence. Petitioners condinued to reside in the Sundrup residence after Consulting nd they executed the real estate installment document. At no time before the trial in these cases was there a sign on the Sundrup residence indicating that Con- - 45 - sulting engaged in any activity there. The only visible indica- tion at the Sundrup residence of the identity of the owner of that residence was a rock on which appeared the name "Sundrup". Consulting did not pay timely the $19,562.93 that the real estate installment document stated Consulting was to pay to the Sundrups on May 1 of each of the years at issue. Instead, Consulting paid to the Sundrups on the dates indicated the following amounts that it, and they, described as payments of "interest" and "principal": Consulting's Purported Consulting's Purported Date Interest Payments Principal Payments Total May 17, 2003 May 20, 2004 May 18, 2005 $10,391.06 9,840.75 9,257.42, . . $9,171.87 9,722.18 10,305.51 $19,562.93 19,562.93 19,562.93 (We shall refer to any, some, or all of the above-listed (1) purported interest payments as Consulting' s purported inter- est payments, (2) purported principal payments as Consulting's purported principal payments, and (3) Consulting' s total pur- ported interest and principal payments as Consulting' s purported interest and principal payments . ) In addition to Consulting's purported interest and principal payments described above, Consulting paid during each of its taxable years ended March 31, 2004 through 2006, virtually all of the expenses relating to the Sundrup residence, including (1) respective real property taxes of $1,096, $1,116, and $1,126 that Consulting- paid during ts taxable years. ended March 31, 2004., 2005, and 2006," (2) :despective repairs and maintenance of $1,607.09," $2,326.58, and $4;671.28 that Consulting paid during its taxable years ended March 31, 2004, 2005, and 2006,4° (3) respective utilities of $2,939.71, $2,852.21, and-$2,668.77 that Consulting .paid during its taxable years ended March 31, 2004, 2005, and 2006, " and (4) respective homeowner' s and um- brella insurance of $1,097, $1,096, and $1,785 that Consultinge paid during its taxable yea s ended March 31, 2004, 2005, and 2006.42 (We shall refer to ny, some, or all of the above-stated "We shall refer to any 0 some, or all of the abovie-stated payments for real property t axes that Consulting made as Consult ing's payments of the Sundrup residence real property taxes. "The parties made variÙus mathematical errors in stipulat- ing the respective total amdunts of certain types of expenses that Consulting paid during consulting's taxable years endedi Mar. 31, 2004 through 2006. Tho e erroneous stipulations are clearly contrary to the facts that record in these cases. total amounts of expenses tËat Consulting paid during Consulting's taxable years ended Mår. 31, 2004 through 2006, which are established by the record. sioner, 93 T.C. at 195. We have found the correct respective e have s found are established by the See Cal-Maine Foods, Inc. v. Commis- 4°We shall refer to any some, or all of the above-stated payments for repairs and ma ntenance that Consulting made as Consulting' s payments of maint enance . the Sundrup residence repairs and 5 "We shall refer to any some, or all of the above-stated payments made for utilities that Consulting made as Consulting' s payments of the Sundrup residence utilities . 42We shall refer to any the above-stated * payments for homeowner's and umbrella insurance that Consulting . some, or all of ( cont inued . . ) - 47 - amounts that Consulting paid for virtually all of the expenses relating to the Sundrup residence as Consulting's payments of the Sundrup residence expenses.) Certain Payments Made by Consulting for Food During each of Consulting's taxable years ended March 31, 2004 through 2006, Ms., Sundrup purchased food at area grocery stores, which she used to prepare meals for herself and her family and for which Consulting paid." During its taxable years ended March 31, 2004, 2005, and 2006, Consulting paid $4,869.81, $4,149.66, and $5,590.75, respectively, for that food. (We shall refer to any, some, or all of the above-stated amounts that Consulting paid for, food that Ms. Sundrup purchased to prepare meals for herself and her family as Consulting's payments of the Sundrups' food.) Certain Payments Made by Consulting for Medical and Dental Expenses On May 1, 2000, Consulting executed a document entitled "NONDISCRIMINATORY MEDICAL AND DENTAL REIMBURSEMENT PLAN". That document stated in pertinent part "(...continued) - made as Consulting's payments of the Sundrup residence insurance. "In some instances, Ms. Sundrup paid for the food that she purchased using checks drawn on Consulting's checking account, Consulting's credit card, or her personal funds for which Consulting reimbursed her. - 48 - 1.- Purposes -of Plan T e purposes of the Plan are: To encourage þmployees to continue their (a) association with the Company [Consulting] . (b) To attract additional employees. 2. Eligibility. All employees who have been with the Company for six .(6) mor ths, or since the Company was incorporated, whicheveZ is shorter, provided, however, that seasonal employeesi, employees covered by a collective bargaining agreeme*nt, or non-resident alien employees shall not be eligible. The Com any will reimburse all eligible $5,000.00 in any. fiscal year lin ited to the cost of any acci- 3. Benefits. emp]oyees for all reasonable medical and dental expenses up to the sum o (including, but not dent, health or medical or dental which the eligible employee and/or members of his immediate family may irícur, except such expenses as may, be covered and are reinfbursable to them from any medical, dental, health and/or accident insuring them. n insurance policy insurance policy) , On May 1, 2000, Consult(ing and Mr. Sundrup executed a docu- ment entitled "AGREEMENT", 'NONDISCRIMINATORY MEDICAL AND DENTAL REIMBURSEMENT PLAN" (Mr . Su drup' s purported medical and dental agreement) ,. and Consulting nd Ms . Sundrup executed a document with the same title (Ms . Sundrup' s purported medical and dental agreement) . Mr. Sundrup siýned Mr. Sundrup's purported medical and dental agreement both iS his individual capacity and as president of Consulting. Ms. Sundrup signed Ms. Sundrup's purported medical and denta agreement in her individual capac- ity, and Mr. Sundrup signed that document as president of Con- sulting. Except as noted below, Mr. Sundrup's purported medical and dental agreement and Ms. Sundrup's purported medical and dental agreement contained essentially the same provisions. They stated in pertinent part: This will serve to confirm the understanding and agreement between you [Mr. Sundrup in the case of Mr. Sundrup's purported medical and dental agreement and Ms. Sundrup in the case of Ms. Sundrup's purported medical and dental agreement] and the undersigned (hereinafter "Corporation") [Consulting]. 1. The Corporation has adopted a NondiscriminaPursuant the Corporation agrees to reimburse tory Medical and Dental Reimbursement Plan. to such Plan and for so long as -you [Mr. Sundrup in the case of Mr. Sundrup's purported medical and dental agreement and Ms. Sundrup in the case of Ms. Sundrup's purported medical and dental agreement] are employed by the Corporation, you for all reasonable medical and dental expenses up to the sum of $5,000.00 in any fiscal year (including but not medical or dental members of your immediate family may incur; except such expenses which are covered and are reimbursable to you from any medical, dental, health and/or accident insurance policy insuring you and/or members of your immediate family. limited to the cost of any accident, health, insurance policy) which you and/or During each of Consulting's taxable years ended March 31, 2004 through 2006, Consulting paid the following medical and dental expenses of Mr. Sundrup and/or Ms. Sundrup: (1) Premiums for certain health insurance plans, (2) copayments to certain health care providers, and (3) miscellaneous medical and dental expenses. Those payments totaled $4,830.79, $8,838.76, and $11,455.26 during Consulting's taxable years ended March 31, 2004, 2005, and 2006, respectively. (We shall refer to any, - 50 - some, or all of the above-st ted medical and dental expenses of the Sundrups that Consulting paid as Consulting's payments cof the Sundrups' medical and dental expenses.) On June 24, 2004, Consu ting made payments totaling $2,029,.88 on behalf of Mr. a d Ms. Sundrup to a company known as American Federal Assurance f r expenses relating to nursing home care (Consulting' s payments f the Sundrups' expenses relating to nursing home care) . 44 Certain Payments Made by Consulting for Expenses Relating to Certain Vehicles Used by the Sundrups On March 31, 20 0 0 , almc s t two months be f ore Mr . and Ms . Sundrup incorporated Consult ing, Mr. and Ms. Sundrup transferred the 1997 Cadillac automobil(and the 2000 GMC truck to it.45 On September 1, 2000, Consulting traded the 1997 Cadillac automobile for a 2000 Cadil]ac automobile (2000 Cadillac.automo- bile) . During Consulting' s taxable years ended March 31, 2004 through 2006, Ms. Sundrup, ho drove the 2000 Cadillac automobile during those years, used that vehicle to buy food for her family and for other personal purposes. 440n June 24, 2004, Consulting paid $330.75 to the Iowa Motor Truck Association 'for "Annual dues" to the Iowa Motor Truck Assóciation for annual dues). (Consulting' s payment 4sAlthough the parties tipulated that the date on which the Sundrups transferred the tw$ vehicles in question to Consulting was Mar. 31, 2000, have made those transfers tå Consulting" on a date before Consulting was incorporated. the reco$d does not explain how they could 8 - 51 - On February 14, 2004, Consulting traded the 2000 GMC truck for a 2004 GMC Envoy (2004 GMC Envoy)." -During Consulting's - taxable years ended March 31, 2004 through 2006, Mr. Sundrup, who drove the 2004 GMC Envoy during those years, used that vehicle, inter alia, to (1) buy with Ms. Sundfup food for their family, (2) haul parts for Transfer's trucking business,'(3) buy tools for use in Transfer's trucking business, and (4) travel with Ms. Sundrup to Branson, Missouri, in order to make certain repairs and improvements to Unit 4, Unit 5, and/or Unit 6. During each of Consulting's taxable years ended March 31, 2004 through 2006, Consulting paid expenses relating to the respective vehicles that the Sundrups used during those years. Those payments totaled $2,871.73, $1,776.75, and $1,622.08 during Consulting's taxable years ended March 31, 2004, 2005, and 2006, respectively. (We shall refer to any, some, or all of the above- stated expenses that Consulting paid relating to the respective vehicles that the Sundrups used during Consulting's taxable years ended March 31, 2004 through 2006, as Consulting's payments of the Sundrups' vehicle expenses.) Certain Payments Made by Consulting for Office Expenses During each of Consulting's taxable years ended March 31, 2004 through 2006, Consulting paid certain expenses consisting (1) primarily of expenses for subscriptions to periodicals, such as Popular Science, Reader's Digest, and Good Housekeeping, and - 52 - (2) certain suppl~ies . Those payments totaled $821. 05, . $288 . 11, and $476 . 93 during Consultina' s taxable s years ended March 31; 2004, 2005, and 2006, respectively., (We shall refer to-any, some, or all of the above-stated office expenses thatt Consulting paid as Consult ing' s payments of pf f ice expenses . ) . Summary of Certain Amounts That «Consulting Received, Paid, or Clained as Depreciation The following chart summarizes certain amounts that Consult- ing received, paid, or clained as depreciation (discussed belon) :" "The amount sec. 179 expense. listed belòw as ."Depreciation claimed" includes a - 53 - Amounts Received Transfer's payments to Consulting ' Leasing's payments to Consulting Total amounts received by Consulting Taxable Year Ended Mar. 31 2006 2004 2005 $45,500.00 $38,500.00 $42,000.00 9,000.00 18,000.00 13,000.00 63,500.00 51,500.00 51,000.00 Amounts Paid Consulting's purported interest and principal payments Consulting's payments of the Sundrup residence real property taxes Consulting's payments of the Sundrup residence repairs and maintenance - Consulting's payments of the Sundrup residence utilities Consulting's payments of the Sundrup residence insurance Consulting's payments of the Sundrups' food Consulting's payments of the Sundrups' medical and dental expenses Consulting's payments of Sundrups' expenses relating to the nursing home care Consulting's payment to the Iowa Motor Truck Association for annual dues Consulting's payments of the Sundrups' vehicle expenses Consulting's payments of office expenses Total amounts Consulting paid . $19,562.93 $19,562.93 $19,-562.93 1,096.00 1,116.00 1,126.00 - 1,607.09 2,326.58 4,671.28 2,939.71 2,852.21 2,668.77 1,097.00 1,096.00 1,785.00 4,869.81 4,149.66 5,590.75 4,830.79 8,838.76 11,455.26 -- -- 2,029.88 -- 330.75 -- 2,871.73 1,776.75 1,622.08 821.05 288.11 476.93 39,696.11 44,367.63 48,959.00 Amounts Claimed as Depreciation Depreciation claimed $27,374.00 $15,226.00 $12,326.00 Total Amounts Consulting Paid and Claimed as Depreciation 67,070.11 59,593.63 61,285.00 - 54 - (We shall refer collectively to Consulting' s purported interest- and principal payments, Cons lting' s payments of the Sundrup residence expenses, Consulti g' s payments of the Sundrups' foo'd, Consulting' s payments of the Sundrups' medical and dental ex- penses, Consulting' s payment 3 of the Sundrups' expenses relating to nursing home care, Consulting' s payment to the Iowa Motor Truck Association for annual dues, Consulting' s payments of the Sundrups' vehicle expenses, md Consulting's payments of .office expenses as Consulting' s pa ents of the Sundrups' expenses . ) Tax lieturns The Sundrups' Tax Returns For their taxable year 1999 and an undisclosed number of years before that taxable y ar, the Sundrups used an accountant4 (Sundrup accountant) , who w s with the accounting firm Olsen Muhlbauer, to prepare their tax returns . Sometime duking their taxable year 2000, the Sund ups informed the Sundrtip accountant that they intended to incorporate Ron Sundrup Transfer. Sometime after the Sundrups used the Sundrup accountant to prepare their tax return fo their taxable year 1999, they stopped using him to preparé their tax returns. The Sundrup accountant did not prepare ny tax returns for (1) the Sundrups for their taxable years 200 through 2005, (2) Transfer for its taxable years ended March 3 , 2001 through 2006, (3) Consulting 47The record does not i lentify the accountant who prepared petitioners' tax returns fo certain years before 2000 . - 55 - for its taxable years ended March 31, 2001 through 2006, and (4) Leasing for its- taxable years 20'00-through 2005. Mr. and Ms. Sundrup jointly filed Form 1040, U.S. Individual Income Tax Return, for each of their taxable years 2003 (Sundrups' 2003 return), 2004 (Sundrups' 2004 return), and 2005 (Sundrups' 2005 return), which Mr. Pechacek" signed as return preparer. In the Sundrups' 2003 return, Mr. and Ms. Sundrup reported "total income" of $61,454. In calculating that total income, Mr. and Ms. Sundrup claimed (1) $16,737 of "Taxable interest", which included Consulting's purported interest payments of $10,391.06" that the Sundrups received during their taxable year 2003, and (2) a loss attributable to Leasing of $4,720 (Sundrups' 2003 Schedule E Leasing claimed loss) from Schedule E, Supplemental Income and Loss (Schedule E), that petitioners included with the Sundrups' 2003 return. The Sundrups' 2003 Schedule E Leasing claimed loss of $4,720 was the amount of the loss "from rental real estate activities" that Leasing claimed in Schedule K, Partners' Shares of Income, Credits, Deductions, etc. (2003 Leasing Schedule K claimed loss), "See supra note 11. "The Sundrups, as well as Transfer and Consulting, rounded to the nearest dollar the amounts claimed in the respective tax returns that they filed for their respective taxable years at issue. - 56 - that Leasing included with Form 1065, U.S. Return of Partnership Income (Form 1065) , which 'it filed for its taxable year 2003 and which Mr. Pechacek signed as return preparer.5° In calculating that loss "from rental real state activities", Leasing claimed (1)" ~a deduction of $30,000 f r Leasing's promissory note to Consulting dated December 30 2003 and (2) a deduction for cer, tain expenses (e.g., real pr perty taxes, insurance, repairs, and depreciation) with respect t the North House and the South House (deduction for expenses rela ing to the North House and the South House) .5 Leasing provided to each of the Sundrups Schedule K-1, Partner's Share of Income, Óredits, Deductions, etc. (Schedule K- 1) , for Leasing' s taxable y ar 2003 in which Leasing showed each of their shares of the 2003 Leasing Schedule K claimed loss of $4, 720 . The Sundrups' 2003 Schedule E Leasing claimed loss of $4, 720 that the Sundrups cl imed in calculating "total income" in which it elect d to be taxed as a corporation or Leasing used the cash method of At no time before t-he trial in (1) Form 8832, Entity Classification soAt all relevant times accounting for tax purposes these cases did Leasing fil Election, (2) Form 8893, Election of artnership Level Tax Treatment, or any other election statement under sec. 6231(a) (1) (B) (ii) , which it elected partnershiy-level tax treatment. at all relevant times, Leasing was treated as a paÅsthrough entity for tax purposes. including during the years at issue, in - As a result, siThe record does not ešstablish the amount, if any, that . Leasing paid for expenses rŠlating to the North House and the South House during its taxaßle year 2003. ' 57 - that they reported in the Sundrups' 2003 return was equal to the totalsof the amounts shown in those two 2003 Schedules K-1. In the Sundrups' 2004 return, Mr. and Ms. Sundrup reported "total income" of $38,044. In calculating that total income, Mr. and Ms. Sundrup claimed (1)- $15,344 of "Taxable interest", which included Consulting's purported interest payments of $9,840.¯75 that the Sundrups received-during their taxable year 2004, and (2) a loss'attributable to Leasing of $11,258 (Sundrups' 2004 Schedule E Leasing claimed loss) from Schedule E that petitioners included with the Sundrùps' 2004 return. The Sundrups' 2004 Schedule E Leasing claimed loss of $11,258 was the amount of the loss from "rental real estate" activities that Leasing claimed in Schedule K, Partners' Distrib- utive Share Items (2004 Leasing Schedule K claimed loss), that Leasing included with Form 1065 which it filed for its taxable year 2004 and which- Mr. Pechacek signed as return preparer. In calculating that loss from "rental real estate" activities, Leasing claimed (1) a deduction of $12,000 for Leasing's payments to Consulting that were made in Leasing's taxable year 2004 and (2) a deduction for expenses relating to the North House and- the South House. "The record does not establish the amount, that Leasing paid for expenses relating to the North House and the South House during its taxable year 2004. if any, - 58 - Leasing provided to each of the Sundrups Schedule K-1 for - Leasing's taxable year 2004 n which Leasing showed each.of,their shares of the 2004 Leasing S hedule K claimed loss of $11 258 . The 2004 -Schedule E Leasing blaimed loss of $11, 258 that the Sundrups claimed in calculat ng "total income" that they reported in the Sundrups' 2004 return was equal to the total of the - amounts shown in those two 2004 ,Schedules K-1. In the Sundrups' 2005 return, Mr., and Ms. Sundrup reported "total income" of $82, 605. n calculating that total income, Mr. and Ms. Sundrup claimed (1) $13,687 of "Taxable interest", which included Consulting's purpo ted interest payments of $9,257.42 that the Sundrups -received uring their taxable year 2005, and (2) a loss attributable' to Ieasing of $1,830 (Sundrups' 2005 Schedule E Leasing claimed loss) from «Schedule E that petitioners included with- the Sundrups' 2005 return. The Sundrups's 2005 Sch dule E Leasings claimed loss of $1,,830 was the amount of the loss rom "rental real estate" activities that Leasing claimed in Sch dule K, Partners' Distributive Share Items (2005 Leasing Schedul K claimed loss) , that Leasing -in- cluded with Form 1065 which it -filed for its taxable year 2005 and which Mr. Pechacek sign d as return preparer. In calculating that loss from "rental real estate" activities, Leasing claimed (1) a deduction of $10,000 or Leasing's payments to Consulting - 59 - that were made in Leasing's taxable year 2005 and (2) a deduction for expenses relating to the North House and the South House. Leasing provided to each of the Sundrups Schedule K-1 for Leasing's taxable year 2005 in which Leasing showed each of their shares of the 2005 Leasing Schedule K claimed loss of $1,830. The Sundrups' 2005 Schedule E Leasing claimed loss of $1,830 that the Sundrups claimed in calculating "total income" that they reported in the Sundrups' 2005 return was equal to the total-of the amounts shown in'those two 2005 Schedules K-1. Transfer's Tax Returns - t Transfer filed Form 1120, U.S. Corporation Income Tax Return (Form 1120), for each of its taxable years ended March 31, 2004 (Transfer's TYE 3/31/04 return), March 31, 2005 (Transfer's TYE 3/31/05 return), and March 31, 2006 (Transfer's TYE 3/31/06 return), which Mr. Pechacek signed as return preparer." In Transfer's TYE 3/31/04 return, Transfer claimed "Taxable income" of negative $4,487, or a loss of $4,487. In calculating "The record does not establish the amount, that Leasing paid for expenses relating to the North House and the South House during its taxable year 2005. if any, We shall refer collectively to the respective deductions for expenses relating to the North House and the South House that Leasing claimed for its taxable years 2003, 2004, and 2005 as Leasing's claimed deductions for expenses relating to the North House and the South House. | accounting for tax purposes. "At all relevant times Transfer used the cash method of - 60 - that loss, Transfer claimed i.n Transfer's TYE 3/31/04 return (1) a deduction of $45,32655 for Transfer's payments to Consulting that Transfer made during Tra.nsfer's taxable year -ended March 31, 2004, (2) a deduction of $13 322 for "Employee benefit programs" which included:Transfer's p yments of the Sundrups' medical and dental expenses made during that taxable year, and (3) a deduce tion of $485 for "MISCELLANI OUS" expenses - (miscellaneous ex- - penses) .5 In Transfer' s TYE 3/31 05 return, Transfer claimed zero "Taxable income". In calcu]ating that taxable income, Transfer claimed in Transfer's TŸE 3 31/05 return a deduction of $39,602 for Transfer's payments to onsulting-that Transfer made during Transfer' s taxable year endèd March 31, 2005. In Transfer' s TYE 3/31 06 return, Transfér claimed "Taxable income" of negatiire $4,h48, or a loss of $4,248. In calculating tha't loss, Transfer claimed in Transfer' s 'Ì'YE 3/31/06 return (1) a deduction of $43,639 Eor Transfer's payments- to Consulting ssWe have found above that Transfer made during 2004, totaled $45 500. o Consulting that Transfer' s payments T ansfer's taxable year ended Mar. 31, s'The record does not establish that Transfer paid $485 of miscellaneous expenses duri g Transfer's taxable year ended Mar. 31, 2004. - 61 - that Transfer made during Transfer's taxable year ended March 31, 2006, and (2) a deduction of $696 for miscellaneous expenses." Consulting's Tax Returns Consulting filed Form 1120 for each of its taxable years ended March 31, 2004 (Consulting's TYE 3/31/04 return), March 31, 2005 (Consulting's TYE 3/31/05 return), and March 31, 2006 (Con- sulting's TYE 3/31/06 return), which Mr. Pechacek signed as return preparer. In Consulting's TYE 3/31/04 return, Consulting claimed zero "Taxable incame". In calculating that taxable income, Consulting reported as "Gross receipts or sales" $60,000 of Transfer's payments to Consulting and Leasing's payments to- Consulting that Transfer and Leasing made during Consulting's taxable year ended March 31, 2004.5" In calculating the zero taxable income that Consulting claimed in Consulting's TYE 3/31/04 return, Consulting deducted (1) Consulting's payments of the Sundrups' food of $4,870 that Consulting made during its taxable year ended March "The record does not establish that Transfer paid $696 of miscellaneous expenses during Transfer's taxable year ended Mar. 31, 2006. 58Consulting claimed in Consulting's TYE 3/31/04 return, and that the total amount that Consulting the parties stipulated, received from Transfer and Leasing during Consulting's taxable year ended Mar. 31, 2004, was $60,000. basis of to Consulting during Consulting's taxable year ended Mar. 31, 2004, a total of $63,500. discrepancy. The record does not explain that the parties' stipulations that Transfer and Leasing paid We have found on the - , 62 - 31, 2004, (2) Consulting' s p yments of the Sundrups' medical and dental expenses of $4,830.79 that Consulting made during its taxable year ended March 31, 2004, (3) depreciation of $27,374,59 (4) Consulting' s payments of the Sundrups' vehicle expenses of $2, 872 that Consulting made uring -its, taxable year ended March 31", 2004, (5) Consulting's p yments of office expenses, of $821 that Consulting made during ts taxable -year ended March .31, 2004, (6) $10,391 of "INTERE T ON REK", which was the amount of Consulting' s purported inte est payments that it made to the Sundrups during Consulting' s taxable year ended March 31, 2004, (7) Consulting' s ,payments of the Sundrup residence real property taxes of $1, 096 that Consult ing made during its taxable year ended March 31,,2004, (8) Cånsulting's payments of the Sundrup residence repairs and maint nance of $1, 815 that Consulting made during its taxable year end d March 31, 2004, (9) Consulting' s payments of the Sundrupares dence utilities of $2, 940 that Con- sulting- made during its tax ble year- ended March 31, - 2004, and ' ssConsulting included F rm 4562, Depreciation and Amortiza- In that it claimed (1) the 1997 Cadillac autom bile on Sept. 1, 2000, tion (Form 4562) , with Cons lting' s TYE -3/31/04 return. totalsclepreciation of $5,165 for the 1997 form, Cadillac automobile, 2000 CÅdillac automobile,. 2000 GMC truck, and 2004 GMC Envoy and (2) Nec. 179 expense of $14,500 for the 2004 GMC Envoy. However, w have found that Consulting traded (1) Cadillac automobile and (2) for the 2004 GMC Envoy. recapture with respect to the 2000 GMC truck in Consulting' s TYE 3/31/04 return. 3/31/04" return,. Consulting lso claimed $6, 908 of depreciation with respect for the 2000 the 2000 GMC truck on Feb. 14, 2004, Co sulting did not report depreciation In Form 4562 included with Consulting' s TYE to the Sundrup residence, including the land. - 63 - (10) Consulting's payments of the Sundrup residence insurance of $1,097 that Consulting made during its taxable year ended March 31, 2004." In Consulting's TYE 3/31/05 return, Consulting claimed "Taxable income" of negative $5,654, or a loss of $5,654. In calculating that loss, Consulting reported as "Gross receipts or sales" $51,500, which was the total of Transfer's payments to Consulting and Leasing's payments to Consulting that Transfer and Leasing made during Consulting's taxable year ended March 31, 2005. In calculating the loss of.$5,654 that Consulting claimed in Consulting's TYE 3/31/05 return, Consulting deducted (1) Consulting's payments of the Sundrups' food of $4,072 that Consulting made during its taxable year ended March 31, 2005," (2) Consulting's payments of the Sundrups' medical and dental expenses of $10,904 that Consulting made during its taxable year ended March 31, 2005, (3) depreciation of $15,226," (4) Consult- "In calculating the zero "taxable income" that Consulting claimed in Consulting's TYE 3/31/04 return, Consulting claimed certain additional deductions that respondent determined to disallow. tions. We do not discuss those additional disallowed deduc- is because Consulting does not contest That them. "We have found that Consulting's payments of the Sundrups' food that Consulting made during Consulting's taxable year ended Mar. 31, 2005, totaled $4,149.66. "Consulting included Form 4562 with Consulting's TYE 3/31/05 return. $6,502 for the 1997 Cadillac automobile, 2000 Cadillac automobile, 2000 GMC truck, and 2004 GMC Envoy. However, we have found that Consulting traded (1) In that form, it claimed total depreciation of the 1997 Cadillac automobile on (continued...) - 64 - ing' s payments 'of the Sundru s' vehicle expenses of .$1, 857 that· Consulting made during its taxable year wended March, 31, 2005, (5) Consulting's payments of office expenses of $302 that, Con- sulting made during its taxable year ended March 31, 2005; (6) -$9,841 of "INTERESTá ON R K", which was the amount' of Consult- ing' s purported interest pay nents that it made to the Sundrups during Consulting's taxable ear ended March 31, 2005, (7), Con- sulting' s payments of the S ndrup residence real property taxes of $1,116 that Consulting m de during its taxable year,ended March -31, 2005, (8) Consultïng' s payments of the Sundrup resi- dence repairs and maintenan e of $2, 342 that Consulting made during its taxable year ended March 31, 2005, (9)- Consulting's payments of the Sundrup residence utilities of $2, 852 t-hat Con- sulting made during its taxable year ended March 31, 2005, .and (10) Consulting's payments-af the Sundrup residence insurance of $1,096 that Consulting made during its taxable year ended March 31, 2005. (. .continued) for the 2000 Cadillac automobile Ånd (2) Sept. 1, 2000, GMC truck on Feb. 14, 2004=, included with Consulting' s TYE 3/31/05 return, Consulting alsos claimed $6, 908 of depreciation with re'spect residence, for the 2004 GMC Envoy. including the laNd. to the Sundrup the 2000 , In Form 4562 "In calculating the zero "taxable income" that Consulting claimed in Consulting's TYE 3/31/05 return, Consulting claimed cei-tain additional deductio s that respondent determined to disallow. That We do not discuss t ose additional disallowed deductions. is because Consulting loes not contest them. - 65 - In Consulting's TYE 3/31/06 return, Consulting claimed zero "Taxable income". In calculating that taxable income, Consulting reported as "Gross receipts or sales" $53,000 of Transfer's paymeñts to Consulting and Leasing's payments to Consulting that Transfer and Leasing made during Consulting's taxable year ended March 31, 2006." In calculating the zero taxable income that Consulting claimed in Consulting's TYE 3/31/06 return, Consulting deducted (1) Consulting's payments of the Sundrups' food expenses of $5,491 that Consulting made during its taxable-year ended March 31, 2006," (2) Consulting's payments of the Sundrups' medical and dental expenses of $11,084 that Consulting made during its taxable year ended March 31, 2006," (3) depreciation of $12,326," (4) Consulting's payments of the Sundrups' vehicle "Consulting claimed in Consulting's TYE 3/31/06 return, and that the total amount that Consulting the parties stipulated, received from Transfer and Leasing during Consulting's taxable year ended Mar. 31, 2006, was $53,000. basis of to Consulting during Consulting's taxable year ended Mar. 31, 2006, a total of $51,000. discrepancy. the parties' stipulations that Transfer and Leasing paid The record does not explain that We have found on the "We have found that Consulting's payments of the Sundrups' food that Consulting made during Consulting's taxable year ended Mar. 31, 2006, totaled $5,590.75. "We have found that Consulting's payments of the Sundrups' medical and dental expenses that Consulting made during Consulting's taxable year ended Mar. 31, 2006, totaled $11,455.26. "Consulting included Form 4562 with Consulting's TYE 3/31/06 return. $4,328 for the 1997 Cadillac automobile, 2000 Cadillac automobile, 2000 GMC truck, and 2004 GMC Envoy. However, we have found (continued...) it claimed total depreciation of 'In that form, expenses of $3,151 that Cons lting made during its taxable year ended March 31, 2006, (5) Consulting's payments of office ex- penses of $477 that Consulti ig made during its taxable year ended March 31, 2006; (6) $9,257 of ,"INTEREST ON REK", which was the amount of Consulting' s purpo ted interest payments that it made to s the Sundrups during Cons lting' s taxable year ended March 31, 2006, (7) Consulting' s payments of the Sundrup residence real property taxes of $1,126 th t Consulting made during its taxable year ended March 31, 2006, . 8) Consulting' s payments of the Sundrup residence repairs ar d maintenance of $4, 671 that Consult- ing made during . its taxable year ended March 31, 2006, (9) Con- sulting' s, payments of the S ndrup residence utilities of $2, 719 that Consulting made during its taxable year ended, March 31, 2006, and (10) Consulting's payments of the Sundrup residence insurance of $1, 127'" that C0nsulting made during its taxable year ended March 31, 20 0 6 . 6 for the 2000 Cadillac automobile and (2) that Consulting traded (1) 1, 2000, truck on -Feb. 14, 2004, included with Consulting's '['YE 3/31/06 ereturn, Consulting also claimed $6, 908 of depreciation with respect to the Sundru];> residence, he 1997 Cadillac automobile on Sept . including the la d. for the 2004 GMC Envoy. In Form 4562 the 2000 GMC "We have found that Éonsulting's payments of the Sundrup residence insurance that weie made during Consulting' s taxable year ended Mar. 31, 2006, t taled $1,'/85. In calculating the ze o "taxable income" that Consulting claimed in Consulting' s TYE 3/31/06 return, Consulting claimed certain additional deductions that respondent determined to dis- (continued. . . ) l Notices of Deficiency -- 67 - Respondent conducted respective examinations of (1) the Sundrups' taxable years 2003 through 2005, (2) Leasing's taxable years 2003 through 2005, (3) Transfer's taxable years ended March 31, 2004 through 2006, and (4) Consulting's taxable years ended March 31, 2004 through 2006. As a result of those examinations, respondent issued separate notices of deficiency to the Sundrups, Transfer, and Consulting. The Sundrups' Notice Respondent issued to Mr. and Ms. Sundrup a notice of defi- ciency (notice) with respect to their taxable years 2003 through 2005 (Sundrups' notice). In that notice, respondent excluded from the Sundrups' gross income the following amounts of Consult- ing' s purported interest payments that they reported as "Interest Income" for their taxable years indicated: 69 allow. That We do not discuss those additional disallowed deductions. is because Consulting does not contest them. - 68 - Taxable Year Consult ing' s Purported Interest Payt ents Excluded From Gross Income 2003 2004 2005 $10,391 9,841 9,257 In the Sundrups' notice9 respondent also determined that the Sundrups are not entitled t deduct the following amounts of Schedule E claimed losses: Schedule E Claimed Loss Disallowed Sundrups' 2003 Schedule E L asing claimed loss Sundrups' 2004 Schedule E easing claimed loss Sundrups' 2005 Schedule E Ueasing claimed loss Amount $4,.720 11, 258 1,830 In that notice, respondent lso determined that the Sundrups. have the following amounts of Sc edule E "Total income" for their tax- able years indicated: Taxable Year Schedule E "Total incâme" 2003 2004 2005 $7, 056 6, 743 5, 287 Respondent made the Su drups' Schedule E determinations in the Sundrups' notice because respondent determined for the tax- able years indicated (1) that Leasing is not entitled to the following amounts of Schedule IC claimed losses and (2) that Leasing has the following athounts of "Ordinary income (loss) from trade or business activitie " Taxable Year 2003 2004 2005 , Schedule K Claimed Loss Disallowed $4,720 11,258 1,830 - 69 - "Ordinary income (loss) from 'trade ór business activities" $7,056 6,743 5,287 Respondent made the Leasing Schedule K determinations in the Sundrups' notice because respondent determined that Leasing is not entitled to Leasing's claimed deductions relating to the North House and the South House of $11,,776, $18,001, and $7,117 for its taxable years 2003, 2004, and 2005, respectively. In the Sundrups' notice, respondent also determined that the Sundrups are liable for accuracy=related penalties under-section 6662(a) in the respective amounts of $3,825.80, $3,591.20, and $2,999.80 for their taxable years 2003,-'2004, and 2005 because of negligence or disregard of rules or regulations or a substantial understatement of tax.7° Transfer's Notice Respondent issued to Transfer a notice with respect to its taxable years ended March 31, 2004 through 2006 (Transfer's notice). In that notice, respondent determined, inter alia, that Transfer is not entitled to deduct (1) $9,293 of the $13,322 that Transfer claimed as "Employee benefit programs" in Transfer's TYE 3/31/04 return, (2) $426 of the $485 of miscellaneous expenses 7°Respondent made certain other-determinations in the Sun- drups' notice that we do n'ot address because of our holdings with respect See supra note 4 and infra note 75. to certain alternative issues that respondent raised. - 70 - that Transfer deducted in Transfer' s TYE 3/31/04 return, and (3) $215 of the $696 of miscellaneous expenses that Transfer deducted in Transfer's TYE 3/31/06 return. In Transfer's notice, espondent also determined that Trans- fer is liable for accuracy- elated penalties under section 6662 (a), in the respective· at ounts of $472.20, $355.20, and $168.60 for its taxable yeafs ended March 31, 2004 through 2006 because of negligence or disregard of rules or regulations or a substantial understatement of tax. Consulting' s Notice Respondent issued to C nsulting a notice with respect to its taxable years ended March 3 , 2004- through 2006 (Consulting' s notice) . In that notice, r spondent determined, inter alia, that -Consulting is not entitled for the taxable years at issue to the following deductions?1 that t claimed for the payments indicated: 71Respondent also deter ined that Consulting is "not entitled for each of amounts of years . That is because Consulting aloes not contest them. its taxable yeats at issue to certain additional the deductions tEat it claimed for each of those We do not address tl ose additional disallowed .amounts . Claimed Deduction 2004 2005 2006 - 71 - Consulting's payments of the Sundrups' food Consulting's payments of the Sundrups' medical and dental expenses Depreciation and sec. 179 expense Consulting's payments of the Sundrups' vehicle expenses Consulting's payments of office expenses Consulting's purported interest payments Consulting's payments of Sundrup residence real property taxes the Consulting's payments of the Sundrup residence repairs and maintenance Consulting's payments of the Sundrup residence utilities Consulting's payments of the $4,870 $4,072 $5,491 14,831 18,839 11,084 27,374 15,226 12,326 2,872 1,777 11,622 821 288 1477 10,391 19,841 9,257 1,096 1,116 1,126 11,607 12,327 4,671 2,940 2,852 12,669 Sundrup residence insurance 1,127 For convenience we have rounded to the nearest dollar the 1,097 1,096 payments that Consulting made for the items indicated during each of its taxable years at issue. In Consulting's notice, respondent also determined that Consulting is liable for accuracy-related penalties under section 6662(a) in the respective amounts of $2,006, $1,575, and $1,650, for its taxable years ended March 31, 2004 through 2006 because of negligence or disregard of rules or regulations or a substan- tial understatement of tax. - 72 - Amendments to Answers The Sundrups Respondent filed an ame 1dment to answer in the Sundrups' case at docket No. 14373-07. Respondent alleged in that amend- ment to answer that the Sundrups have respective increases of $5,768, $1,044, and $549 in the respective eficiencies that- respondent -determined in th Sundrups' notice for their-taxable years 2003, 2004, and 2005. Respondent made those allegations because respondent alleged in the amendment: to answer that Leas- ing is not entitled to the espective deductions thåt it claimed for its taxable years 2003, 2004, and 2005 for Leasing' s promis- sory note to Consulting dat d December 30, 2003 and for Leasing's payments to Consulting . Re pondent further alleged in that amendment to answer that th Sundrups have respective increases of $1,153.60, $208.80, and $109.80 to the accuracy-related penal- ties under section 6662 (a) t hat respondent determined in the Sundrups' notice for their t axable years 2003, 2004, and 2005. Transfer Respondent filed an am ndment to answer in Transfer' s case at docket No. 14374-07. Re pondent alleged in that amendment to answer that Transfer has re pective increases of $5,556, $4,767, and $5,375 in the respectiv deficiencies that respondent deter- mined in Transfer's notice or its taxable years ended March 31, 2004, March 31, 2005, and M rch 31, 2006. Respondent made those - 73 - allegations because respondent alleged in the amendment to answer that Transfer is not entitled to the respective deductions that it claimed for its taxable years ended March 31, 2004, 2005, and 2006, for Transfer's payments to Consulting. Respondent further alleged in that amendment to answer that Transfer has respective increases of $1,111.20, $953.40, and $1,075 to the accuracy- related penalties under section 6662(a) that respondent deter- mined in Transfer's notice for its taxable years.ended March 31, 2004, 2005, and 2006. OPINION Petitioners bear the burden of proving that the respective determinations in the Sundrups' notice, Transfer's notice, and Consulting's notice that remain at issue are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Respondent bears the burden of proving any new matters that respondent alleged in the respective amendments to answers that respondent filed in the Sundrups' case at docket No. 14373-07 and Transfer's case at docket No. 14374-07. See Rule 142(a). Before turning to the issues presented, we shall comment on the respective testimonies of Mr. Sundrup and Ms. Sundrup, who were the only witnesses at the trial in these cases. We found those testimonies to be in certain material respects question- able, implausible, vague, inconsistent, unpersuasive and/or self- serving. We shall not rely on the respective testimonies of Mr. Sundrup ' and Ms . Sundrup in thos e re spe c t s . See , e . g . , Tokarski v. Commissioner, 87 T.C.a74, 77 (1986) . Certain Transactions at Issue ' It is respondent' s position that the respective transactions between -(1) (a) Transfer an Consulting and (b) Leasing and ~ Consulting, under which Cons lting purported to provide to -each of 'those companies certain 'services, and (2) the Sundrups -and Consulting, under which Con ulting purported to agree to buy the Sundrup residence, should nct be respected for tax-purposes.22 In support of that position, r spondent argues that there was no nontax business purpose for any of those - transactions and that each of them was without ecânomic substance and a sham. Accord- ing tio respoñdent, the evidencë demonstrates that Transfer and When looking beyond thä four corners of petitioners' documents, Leasing's payments [to Consulting] of $63,500:00, $51,500.00, and $51,000.00 in Consulting's fiscal years ending March 31; 2004, March 31, 2005, and March 31, 2006, live a tax-free lifestýle through Consulting's payment of their personal Those payments from Transfer and Leasing t Consulting, a corsporation without any purpose beyond tax avoidance, should not be deductible. respectively, enabled Ronald and Helen Sundrup to living expenses. Mr . and Mrs . Sund up reported interest. income on - their 2003, 2004, and 2005 joint federal returns in the amounts of $10,391.00, $9,841.00, and , income tax 22We shall sometimes refer to the respective transactions betúreen (1) Transfer and Co sulting, and (3) tions at issue . the Sundrups and Co sulting as the respective transac- (2) Leasing and Consulting, - 75 - respectively. Respondent disallowed these $9,257.00, amounts, determining that the alleged sale of 200 Corning St. [the Sundrup residence] was part of a scheme to deduct Mr. & Mrs. Sundrup's personal * living expenses. * * It is the position of petitioners that the respective trans- actions at issue should be respected for tax purposes. In sup- port of that position, petitioners argue: Sundrup Consulting, Sundrup Transfer, and Sundrup Leasing were created primarily for corporate protection in the form of premises liability. a scheme to deduct personal expenses of Mr. and Mrs. Sundrup. The companies were not * * * At trial, Mr. Sundrup claimed that the Sundrups incorporated Consulting after they formed Transfer and Leasing "because I was concerned of the liability against me in case something would happen." At trial, Ms. Sundrup claimed that the Sundrups incor- porated Consulting after they formed Transfer and Leasing in order to "have another pocket of liability protection." As the trier of fact, we are unwilling to rely on the respective testi- monies of Mr. Sundrup and Ms. Sundrup as to why they incorporated Consulting. Based upon our examination of the entire record before us, we find that the only intended objective of the respective trans- actions between (1) (a) Transfer and Consulting and (b) Leasing and Consulting, under which Consulting purported to provide to each of those companies certain services, and (2) the Sundrups and Consulting, under which Consulting purported to agree to buy the Sundrup residence, was the Sundrups' tax-avoidance objective of having Consulting pay- th Sundrups' personal.living expenses with funds which Transfer and Leasing paid to Consulting and for which Transfer and -Leasing laimed tax deductions for their respective taxable years at issue." On that record, we find that the respective transactions at issue were not entered into for nontax business reasons, weie entered into only for tax-avoidance reasons, and did not have economic substance. See Frank Lyon Co. v. United States, 435 U.S. 561 (1978); Gregory v. Helvering, 293 U.S. 465; 467 (1935); Rice's Toyota World, Inc. v. Commissioner, 81 T.C. 184 (1983), affd. i part and revd. in part 752 F.2d 89 (4th Cir. 1985); Van Zandt i.-Commissioner, 40 T.C. 824 (1963), affd. 341 F.2d 440 (5th Ciri 1965). Based upon our examination of the entire record before us, we hold that the respective transactions between (1) Transfer and Consulting, (2) Leasing and Consulting, and 7(3) the Sundrups and Consulting should not be re pected for tax purposes. As a re- sult, we hold that (1) Tran fer is not entitled for each of its "In order to bolster the chances that they would succeed in the purported Transfer management the purported Legsing management agreement, Mr. achieving their tax-avoidanåe objective, petitioners, created a paper trail consisting of agreement, Sundrup's purported employmënt agreement, Ms. Sundrup's purported employment agreement, and the real estate installment document. Those documents are nothinggmore than self-serving attempts by petitioners to create a paper trail that they hoped would increase the chances that the½ would succeed in achieving the Sundrups' find that none of beyond tax planning. the documents in question has economic reality tax-avoidance objective. On the record before us, we - 77 - taxable years at issue to deduct under section 162(a) Transfer's payments to Consulting during-each of those years; (2) Leasing is not entitled for each of its taxable;years at issue to deduct under section 162(a) Leasing's payments to Consulting during each of those yëa à; anda (3) the Sundrups do not have for each of their taxable years at issue interest income because sof Consult- ing's purported interest payments to them during each of those years.9 ¯+ Transfer's Claimed:Deduction for Transfer's Payments of Sundrups' Medical and Dental"Expenses the In Transfer's TYE 3/31/04 return, Transfer~ claimed a'deduc- tion of $9,2Š3'for Transfer'is payments of the Sundrups' medical and dental expenses during that year. In Transfer's notice, respondentedetermined to disallow that deduction." Respondent sa'rgues that Transfer is not entitled to the deduction-claieed for its taxable year ended March 31, 2004, for Transfer's payménts of Ithe Sundrups' medical and dental expenses See supra note 50. "In the light of our holdings with respect to the respec- issue, we need not address respondent's tives transactions at alternative position that Consulting's payments of expenses during each of ible payments that constitute constructive dividends to the Sundrups. See supra note-4. its taxable -years at issue are nondeduct- the Sundrups' Atitrial, respondent's counsel indicated that respondent the $13,322 did not disallow in Transfer's notice the portion of claimed as "Employee benefit programs" in Transfer's TYE 3/31/04 return that was for medical and dental expenses of Rick Sundrup, the Sundrups' son. - 78 - because ."Ronald Sundrup was not ans employee [of Transfer] and - cannot claim benefits under the plan. * * * Mrs. Sundruponever established that she was an employee of Transfer." Mr.. Sundrup testified inconsistently that during Transfer's taxable years at issue he w s not an employee of Transfer and that he was an employee of ransfer. Ms. Sundrup claimed at trial that she was an emplo ee of Transfer during at least spart of its taxable year ended M rch 31, 2004. We are unwilling to rely on the respective test monies of Mr. Sundrup and Ms. Sundrup regarding whether they were employees of Transfer during its taxable gear ended March 31 2004. Respondent acknowledge that Mr . Sundrup and Ms . Sundrup "were in fact performing th daily work of Transfer" throughout its taxable years at issue including its taxable year ended March 31, 2004 . -Respondent s contention is consistent with various findings that we ha e made. We have found that, as was true when the Sundrups 'oper ted Ron Sundrup Transfer, the Sundrups conducted the offi e operations of Transfer, which Ms. Sundrup managed, at the Sundrup residence. We have also found that, as was true when Ms. undrup managed the office operations of Ron Sundrup Transfer, as part of her managing the office operations of Transfer she nswered the telephone, scheduled pickups, monitored deliveriés, and coordinated jobs among the drivers. In addition, we háve found that Mr.- Sundrup served as a driver for Transfer during its taxable years at issue. He also did work during those years repairing, maintaining, and washing certain vehicles that Transfer used in its trucking business. Moreover, we have found that the transaction between Transfer and Consulting, under which Consulting purported to provide certain services to Transfer, should not be respected for tax purposes. Based upon our examination of the entire record before us, we find that Mr. Sundrup and Ms. Sundrup each were employees of Transfer during its taxable year ended March 31, 2004. On that record, we further find that Transfer is entitled for its taxable year ended March 31, 2004, to deduct under section 162(a) Trans- fer's payments of the Sundrups' medical and dental expenses during that year of $9,293. Transfer's Claimed Deductions for Miscellaneous Expenses In Transfer's TYE 3/31/04 return and Transfer's TYE 3/31/06 return, Transfer claimed respective deductions of $485 and $696 for miscellaneous expenses." In!Transfer's notice, respondent determined to disallow $426 and $215 of those respective deduc- tions. | Transfer presented no evidence at trial, and makes no argu- ment on brief, with respect to the respective deductions of $426 and $215 for miscellaneous expenses that Transfer claimed in Transfer's TYE 3/31/04 return and Transfer's TYE 3/31/06 return "See supra notes 56 and 57. and that respondent disallo ed. On the record before us, we - find - 80 - that Transfer is not entitled to those deductions. Leas ing' s Claimed DeductionË Relating to the North House and the South House In the respectiVe Form 1065 that it filed for its taxable years 2003, 2004, 2005, Lea ing claimed deductions for expenses relating to the North House and the South House of $11, 776, $18,001, and $7,117, respectively.?" In the Sundrups' noticer, respondent determined to disallow those deductions . The Sundrups present-ed no evidence at trial, and make no argument on brief, with respect to Leasing's claimed dedlictions for expenses relating to th North House and the South House. On the record before us, we fi d that Leasing is not entitled to thos e deduc t ions . 79 Accuracy-Related Penalties In the respective notiåes that respondent issued to the Sundrups, Transfer, and Con ulting, respondent determined that they are liable for each of their respective taxable years at issue for accuracy-related enalties under section 6662(a) be cause of (1) negligence or isregard of rules or regulations under section 6662 (b) (1) or (2) a substantial understatement of tax under section 6662 (b) (2) . In the respective amendments to answers that- respondent fil d in the Sundrups' case at docket No. 7"See supra notes 51, 52, and 53. 79See supra note 50 . - 81 - 14373-07 and Transfer's case at docket No. 14374-07, respondent alleged that the Sundrups and,Transfer are liable for increased accuracy-related penalties under section 6662(a) for each of their respective taxable years at issue. Section 6662 (a) imposes an accuracy-related penalty equal to 20 percent of the underpayment of tax attributable tog inter alia, (1) negligence or disregard of rules or regulations, sec. 6662(b) (1), or (2) .a substantial understatement .of tax, sec. 6662 (b) (2) . The term "negligence" in section 6662 (b) (1) includes any failure to make a reasonable attempt to comply with the Code. I Sec. 6662(c) . " Negligence has also been defined as a failure to do what a reasonable person would do under the circumstances. See Leuhsler v. Commissi¯oner, 963 F.2d 907, 910 (6th Cir. 1992) , affg.' T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C. 686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990). The,term "disregard" includes any careless, reckless, or intentional disregard. Sec. 6662(c). For purposes of section 6662(b) (2), an understatement is equal to the excess of the amount of tax required to be shown in the -tax return over the amount of the tax shown in the tax re- turn. Sec. 6662(d) (2) (A) . In the case of an individual, an understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown in the tax return for the 9 - 82 - taxable year or $5,000. Sec. 6662(d) (1) (A) . As pertinent here, in the case of a corporatior other than"an S corporation, an understatement is substanti 1 (1) for taxable years that began on or before October 22, 2004, if it exceeds the greater=of 10 - percent of the - tax required to be shown in the tax return for the taxable year or $10, 000, se . 6662 (d) (1).(B) , and (2) for taxable years that began'after October 22, 2004, if it exceeds the lesser of (a) 10 percent of the tax -required to be shown in the tax return for the taxable year or $10,000 or (b) $10 million, sec. 6662 (d) (1) (B) . The accuracy-related pénalty under section 6662(a) does not apply -to any portion of an underpayment if it -is shown" that there was reasonable cause for, and that the taxpayer acted in good faith with respect to, such portion.- Sec. 6664 (c) (1) . The deteräin'ation of whether the taxpayer acted with reasonable cause ahd in good faith depends o the pertinent facts and circum- stances, including the taxpayer's efforts to assess such tax- payer's proper tax liability, the knowledge and experience of the taxpayer, -and the reliance n the advice of a professional, such as an accountant. Sec. 1.6064-4(b) (1), Income Tax Regs. Relie ance on the' advice of a pro essional does not necessarily demon- strate reasonable cause and good faith unless, under all the circumstances, such relianc was reasonable and the taxpayer acted in good faith. Id. - 83 - Respondent bears the burden of'production with respect to the accuracy-related penalties at issue. See sec. 7491(c). To meet respondent's burden of production, respondent must come forward with sufficient evidence showing that it is appropriate to impose the accuracy-related penalty. See Higbee v. Commis- sioner, 116 T.C. 438,-446 (2001). With respect to the accuracy- related penalties that respondent determined in the respective notices that respondent issued to the Sundrups, Transfer, and Consulting, respondent "need not introduce evidence regarding reasonable cause, substantial authority, or similar provisions. * * * the taxpayer-bears the burden of proof with regard to those issues." Id. We have held that the respective transactions between (1) Transfer and Consulting, (2) Leasing and Consulting, and (3) the Sundrups and Consulting shoùld not be respected for tax purposes. As a result, we have further held that Transfer is not entitled for each of its taxable years.at issue to deduct Trans- fer's payments to Consulting, that Leasing is not entitled for each of its taxable years at issue to deduct Leasing's payments to Consulting, and that the Sundrups do-not have for each of their taxable years at issue interest income attributable to Consulting's purported interest payments to them." We have also held that Transfer is not entitled for each of its taxable years "See 'supra note 75. - 84 - ended March 31, 2004 and 2006, to deduct claimed miscellaneous expenses . In addition, we ave held that Leasing is not entitled for its taxable years 2003, 2004, and 2005 to Leasing's claimed deductions for expenses relating to the North House .and the -South House. 'Moreover, in the stipulation of settled issues filed on September 15, 2008 (stipulat ion of settled issues) , Transfer conceded certain determinat ons that respondent made ein Trans- fer's notice, and Consultin conceded one of the determinations that respondent made in Con ulting's notice." In the light of our ho] dings stated above and the respective concessions of Transfer and Consulting in the stipulation of settled issues, the Sundrups, Transfer, and Consulting have respective underpayments of tax for their respective taxable years at issue. We conclud that respondent has satisfied re- spondent's burden of produc ion under section 7491(c) / Petitioners argue that the Sundrups, Transfer,- and Consul-t- ing are not liable for any òf their respective taxable years at issue for accuracy-related benalties under section 6662 (a) . That is because, according to petitioners, they • did not substantially ùnderstate income tax and did not act negligently or diskegard rules or regulations . Petitioners had reasonâble cause and acted in good faith. Petitioners haUe shown their transactions were legitimate business activities and not a scheme to deduct personal expenses. * * * "At trial, petitioner made certain additional concessions. - 85 - On the record before us, we reject petitioners' claim that they had reasonable cause and acted in good faith in taking the tax return positions that they did with respect to the issues on which we have held against them and the respective issues that Transfer and Consulting conceded in the stipulation of settled issues. With respect to the respective transactions at issue, we have held that those transactions should not be respected for tax purposes and that Transfer and Leasing are not entitled for their respective taxable years at issue to the respective deductions that they claimed as a result of those transactions. With re- spect to Transfer'.s claimed respective deductions for miscella- I neous expenses for its taxable years ended March 31, 2004 and 2006, we have held that Transfer is not entitled to those deduc- tions. With respect to Leasing's claimed deductions for expenses relating to the North House and the South House for its taxable years 2003, 2004, and 2005, we have held that Leasing is not entitled to those deductions." With respect to the respective determinations of respondent that Transfer and Consulting con- ceded in -the stipulation-of settled issues, those companies presented no evidence, and make no-argument, with respect to the respective tax return positions that they took with respect to "See supra note 50. - 86 - the respective items that- r spondent determined are wrong and that they conceded.83 On the record before un, we find that the Sundrups, Trans- fer, and Consulting were neeligent and disregarded rules or regulations, or otherwise did not do what a reasonable-person would do, with -respect to the respective items that resulted in their respective underpayme ts for each of their respective taxable years at issue. On the record before us, we find that there was not reason- able cause for, and ,that- the Sundrups, Transfer, .and Consulting did not act in good faith with respect to, any portion of the respective underpayments of tax for each of their respective taxable years at issue. 3 - Based upon our examination of the entire record before us, we find that the Sundrups, Transfer, and Consulting are liable for each of their respectiv taxable years at issue for accuracy- related penalties under section 6662 (a) with respect to their , respective underpayments ofßtax for each of those years." We have considered all of the contentions and arguments of the parties that are not diåcussed herein, and we find them to be without merit, irrelevant, and/or moot. 83See supra note 81. "See supra note 75. To reflect the foregoing and the parties' respective conces- - 87 - sions, Decisions will be entered under Rule 155.