Hosts Demand MIL Replace The Thanksgiving Meal After Her ‘Generous Gesture’; She Agrees, Then Ghosts Them
Robyn Smith and Dominyka Proškėnaitė
ADVERTISEMENT
Ah, Thanksgiving leftovers. It’s at least something to look forward to if you’ve spent hours sweating away in the kitchen to host an elaborate dinner for guests. A few meals sorted for the next few days, meaning you can finally relax and not worry about cooking.
That’s exactly what one couple thought when they hosted 30 people last week. The husband says they spent $1,500 on the feast, which included turkeys, turducken, ham, prime ribs, seafood, appetizers and sides. Imagine their horror when they realized their leftovers were gone. It turns out an entitled mother-in-law had taken it upon herself to give everything away to the guests – without bothering to ask first!
MEMORANDUM FINDINGS OF FACT AND OPINIONLARO, Judge: Respondent determined deficiencies in petitioners’ 2003 and 2004 Federal income tax of $300,324 and $309,547, respectively, and accuracy-related [*2] penalties under section 6662(a) of $60,065 and $61,909, respectively.1 In an amended answer, respondent asserted a $69,278 increase to the 2003 deficiency as well as a $13,856 increase to the corresponding accuracy-related penalty. Both increases stem from a disallowed depreciation deduction for 2003 and recapture of excess depreciation deductions claimed for 1999 through 2002 for an undivided share in an aircraft that petitioner E. Bruce DiDonato (DiDonato) owned through a limited liability company. In DiDonato v. Commissioner, T.C. Memo. 2011-153, 101 T.C.M. (CCH) 1739 (2011), we held through partial summary adjudication that petitioners were not entitled to a $1,870,000 charitable contribution deduction for 2004 relating to the donation of a land conservation easement to Mercer County, New Jersey (Mercer County), because they did not obtain a contemporaneous written acknowledgment of the contribution as required by section 170(f)(8).2
[*3] Following petitioners’ concession that they are not entitled to a dependency exemption deduction for DiDonato’s father for 2003 and 2004 (subject years), we decide the following issues:3 (1) whether petitioners underreported by $52,397 the 2004 gross receipts of DiDonato’s sole proprietorship optometry practice, Campus Eye Group (CEG). We hold they did; (2) whether petitioners are entitled to depreciation expense deductions of $29,058 for 2003 and $7,005 for 2004 for a sport utility vehicle. We hold they are not; (3) whether DiDonato’s wholly owned S corporation, Campus Eye Group, ASC, Inc. (ASC), is entitled to deduct amounts claimed as employee achievement award expenses of $25,000 for 2003 and $21,501 for 2004. We hold it is not; (4) whether ASC may deduct expenses for conferences and meetings of $69,663 for 2003 and $59,117 for 2004. We hold it may not; (5) whether DiDonato’s wholly owned S corporation, Campus Eye Group ASC, Inc. (ASC), is entitled to deductions of $217,518 for 2003 and $262,745 for 2004 for the lease of a fractional interest in an aircraft. We hold it is not; (6) whether petitioners are entitled to deduct rental expenses of $549,203 for 2003 and $477,501 for 2004 relating to two residential properties DiDonato owned. We hold they may to the extent stated herein; (7) whether petitioners are [*4] entitled to deduct losses of $694 for 2003 and $19,994 for 2004 they claim were incurred in connection with a limited liability company’s aircraft leasing activity. We hold they may to the extent stated herein; (8) whether for 2003 petitioners must recapture excess depreciation claimed with respect to their aircraft leasing activity for 1999 through 2002. We hold they must; and (9) whether petitioners are liable for accuracy-related penalties for substantial understatements of income tax. We hold they are.4
FINDINGS OF FACT
I. PreliminariesSome facts were stipulated and are so found. The stipulated facts and the exhibits submitted therewith are incorporated herein by this reference. Petitioners, husband and wife, resided in New Jersey when the petition was filed. They have two children: R.D. (age seven in 2003) and D.D. (age five in 2003).5
[*5] II. PetitionersA. DiDonato
DiDonato completed his undergraduate studies at Widener University, and he holds a doctorate in optometry from the Pennsylvania College of Optometry (now part of Salus University). He interned at the National Naval Medical Center Hospital in Bethesda, Maryland. During the years at issue DiDonato was a practicing optometrist, the owner and operator of an ambulatory surgical center, an investor in stocks and bonds, and the owner of various commercial and residential properties. He frequented many social clubs during the subject years, including the Leash, the Philadelphia Club, and the Nassau Club.
B. Ms. DiDonato
Petitioner Denise A. Agness DiDonato (Ms. DiDonato) attended St. John Fisher College in Rochester, New York (Rochester), and she graduated from the Pennsylvania College of Optometry with a doctorate in optometry. During the years at issue Ms. DiDonato was a staff optometrist with CEG who oversaw billing and administration for that entity. Ms. DiDonato was also the corporate [*6] secretary for ASC.6 At all relevant times, Ms. DiDonato had family who resided in the greater Rochester area.
III. The Prior AuditDiDonato’s (or petitioners’) 1995 and 1996 Federal income tax returns, neither of which is at issue here, were selected for examination in or about 1997 (prior audit). The Internal Revenue Service (IRS) audited those returns, and in particular, investigated whether DiDonato was a qualifying real estate professional entitled to deduct losses related to his rental real estate activities. The IRS determined in the prior audit, the findings of which are not binding in the instant case, that DiDonato was a qualifying real estate professional during 1995 and 1996. The record does not establish the extent to which (if at all) DiDonato’s real estate activities during the subject years paralleled his real estate activities in 1995 and 1996.
IV. Overview of Petitioners’ Activities Reported on
the 2003 and 2004 ReturnsPetitioners timely filed joint Federal income tax returns for 2003 (2003 return) and 2004 (2004 return). Each of the 2003 and 2004 returns reported items [*7] of income and expense from CEG, ASC, Equipment Leasing, L.L.C. (Equipment Leasing), and Mallard Property Management Group (Mallard).
V. CEG and ASCA. CEG
CEG is a multidisciplinary eye care practice that DiDonato has owned and operated since September 1981. CEG was organized as a sole proprietorship during the subject years, though it was later organized as a limited liability company of which DiDonato was the sole member. For each of the subject years petitioners reported CEG’s income and expenses on Schedule C, Profit or Loss From Business.
During the years at issue CEG used the services of approximately 30 optometrists, 20 independent contractors, and 50 staff employees.7 The optometrists, independent contractors, and employees serviced patients in the areas of neuroophthalmology, eye surgery, cornea service, ocular implants, optometry, and medical management of eye disease, in addition to other services. [*8] The optometrists who associated with CEG owned roughly 52 affiliated offices that used CEG’s offices to see patients.
B. ASC
ASC is an ambulatory surgical center that DiDonato incorporated in 1990. DiDonato is ASC’s sole shareholder and president. Since its inception, ASC has elected to be treated as a small business corporation (S corporation) for Federal income tax purposes and filed for each year at issue Form 1120S, U.S. Income Tax Return for an S Corporation. DiDonato did not receive from ASC a regular biweekly salary, but he received from ASC a cash distribution at the end of each year.8 Petitioners reported DiDonato’s distributive share of income and loss from ASC on Schedules E, Supplemental Income and Loss, attached to the 2003 and 2004 returns.
During the subject years, ASC had, in addition to its employees, between five and seven consulting ophthalmologists staffed as independent contractors. [*9] Each ophthalmologist, a board certified medical doctor, was paid approximately $100,000 annually, supposedly for services he or she performed as a director of ASC.9 Each doctor allegedly handled varying aspects of ASC’s regulatory environment in exchange for the fee, purportedly for ensuring accreditation under the Accreditation Association for Ambulatory Health Care, managing risk, giving testimony at depositions, and overseeing the purchase of new equipment and implantable devices. The record does not establish the extent to which (if at all) the recipients actually performed these functions during the subject years or at any other time.
The ophthalmologists performed patients’ surgeries at ASC’s facilities. The ophthalmologists then billed their patients’ fthird-party payors (i.e., insurance provider or Medicare) for services provided. At the same time, ASC billed the same third-party payor for facility services such as operating room usage, the labor, and implanted devices, in addition to other charges.
[*10] C. Relationship Between CEG and ASC
CEG’s and ASC’s businesses were sizable; in the aggregate they handled roughly 30,000 patients during the subject years. ASC’s patients came to it in one of two ways.10 First, ASC’s ophthalmologists received referrals through CEG. Second, ASC’s ophthalmologists performed surgeries for their patients at ASC’s facility.
Trial testimony made clear that the line of demarcation between CEG’s and ASC’s practices was at times unclear. CEG and ASC mostly (if not entirely) operated out of different suites within the same office complex. In that regard, ASC paid to CEG for each subject year a facility fee for ASC’s use of five office [*11] suites. ASC claimed deductions for rents of $600,944 for 2003 and $668,092 for 2004. In addition, CEG paid, on behalf of ASC, payroll and payroll taxes of $204,650.13. Respondent allowed these payroll and payroll taxes as offsets to CEG’s 2004 gross receipts.11
D. DiDonato’s Attempted Sale of ASC
During the subject years DiDonato investigated the possibility of a sale of a majority of his shares of ASC stock to a venture capital firm or a small cap investor.12 In furtherance of such a stock sale, DiDonato engaged Michael Witter or his firm (among others) to find a suitable buyer. One potential buyer, a public company, had in or around 2003 offered to purchase a 51% stake in ASC for $33 million. DiDonato opted to not sell his shares of ASC stock during the subject years though at trial he testified that he intended to sell his shares of ASC stock for $105 million in the summer of 2013.
[*12] VI. CEG’s Controverted IncomeA. Overview
Petitioners, relying on a trial balance printed at 2:20 p.m. on December 31, 2004 (2004 trial balance), reported gross receipts of $5,161,984 on CEG’s 2004 Schedule C, Profit or Loss from Business.13 Respondent determined on audit of the 2004 return that CEG’s gross receipts for that year should be increased to $5,214,381; i.e., an increase of $52,397. We summarize now the relevant facts related to this adjustment.
B. CEG’s Purchase of Surgical Supplies for Itself and ASC
During the subject years, CEG purchased surgical supplies for its use and that of ASC. From January 1, 2004, through 2:20 p.m. on December 31, 2004, ASC “paid” $1,877,193 to CEG for the use of surgical supplies from January through November 2004. At some point after 2:20 p.m. on December 31, 2004, ASC “paid” $65,364.23 to CEG for the use of surgical supplies during December 2004. The $65,364.23 was not included in CEG’s 2004 gross receipts. The record is not clear whether amounts ASC paid for surgical supplies were actual transfers of cash by check or otherwise or whether the payments were simply bookkeeping entries adjusting intercompany obligations.
[*13] C. General Ledgers and Trial Balances
CEG and ASC at all relevant times employed a full-time in-house accountant to keep the companies’ books and records. During the years at issue, CEG used proprietary software programs from which an individual could generate general ledgers and trial balances and print hard copies thereof. CEG coded accounts for “Contributed Capital — ASC” and “Contributed Capital” with account Nos. 4500 and 4700, respectively. Both contributed capital accounts (i.e., account nos. 4500 and 4700) refer to payments from ASC to CEG for ASC’s use of surgical supplies CEG purchased that were to be included when calculating CEG’s gross receipts. Respondent determined that all amounts credited to account nos. 4500 and 4700 should be included in CEG’s gross receipts. However, DiDonato testified at trial that a portion of those amounts ($65,364.23) was nontaxable capital contributions.
D. Conflicting Trial Balances
The parties have stipulated three CEG trial balances for the 2004 year: the 2004 trial balance, one dated August 21, 2006 (2006 trial balance), and the third dated November 14, 2011 (2011 trial balance). As relevant here, the 2006 and 2011 trial balances each consistently included a credit (charge) to CEG’s account No. 4700 for $65,364.23 relating to ASC’s payment to CEG for the use of surgical [*14] supplies. The 2004 trial balance, on the other hand, omits entirely the $65,364.23 capital contribution recorded under account No. 4700.
E. Respondent’s Determination of CEG’s Gross Receipts
Respondent redetermined CEG’s 2004 gross receipts on the basis of the 2006 or 2011 trial balance or both by making three adjustments. Using CEG’s patient fees as a starting point, respondent first increased CEG’s gross receipts by $1,877,193 to reflect payments from ASC for the purchase of surgical supplies through 2:20 p.m. on December 31, 2004. Second, respondent increased CEG’s gross receipts by $65,364.23 to reflect payments from ASC for the purchase of surgical supplies after 2:20 p.m. on December 31, 2004. Third, respondent reduced CEG’s gross receipts by $204,650.13 to reflect payroll and payroll taxes CEG paid for the benefit of ASC. To summarize, respondent determined CEG’s 2004 gross receipts as follows:
Patient fees $3,476,473.98 From ASC (surgical supplies) 1,877,193.00 From ASC (surgical supplies) 65,364.23 Adjusting entries (payroll and payroll taxes)1 (204,650.13) Total 5,214,381.08 _____________________________________________________________________FOOTNOTE TO TABLE1 The adjusting entries relate to CEG’s payment of payroll and payroll taxes for the benefit of ASC.END OF FOOTNOTE TO TABLE
[*15] VII. CEG’s Controverted DeductionsA. Overview
Petitioners claimed depreciation expense deductions of $29,058 and $7,005 for a GMC Yukon Denali (Denali) on CEG’s respective 2003 and 2004 Schedules C. Respondent disallowed each of these deductions because, according to him, petitioners did not establish the vehicle was used in a trade or business.
B. The Denali and CEG’s Transportation Services
CEG and ASC, in addition to offering optometric and surgical services, also provided to patients transportation to and from the companies’ facilities. During the subject years, CEG employed between two and four full-time drivers and a few part-time drivers and sometimes called upon staff or a limousine company to drive patients as needed. CEG and ASC owned multiple vehicles to transport patients, including two vans, one minivan, and the Denali (collectively, transport vehicles). Each of the transport vehicles was kept at ASC’s parking lot when not in use. CEG at all relevant times maintained logs of its patients’ appointments and denoted in the log whether a patient was transported from CEG during a particular visit by inserting a “T” on the comment line of the log. The logs do not indicate which of CEG’s vehicles was used to transport the patient, the patient’s home address, the pickup or dropoff location, or the distance the patient was driven.
[*16] VIII. ASC’s Controverted DeductionsA. Overview
Respondent disallowed various expenses ASC claimed as trade or business expense deductions on its Forms 1120S, including: (1) “employee achievement” awards paid to Mr. Witter and DiDonato Builders/Developers, Inc. (DiDonato Builders), (2) expenses for conferences and meetings, and (3) lease payments to Equipment Leasing.
B. Employee Achievement Awards
1. DiDonato BuildersASC had a relationship with DiDonato Builders, a general contractor business owned by DiDonato’s cousin, Vincent DiDonato (Vincent). On each of September 12 and October 10, 2003, DiDonato Builders invoiced ASC (and ASC paid to Vincent) $12,500 for a “bonus per agreement”. The parties have stipulated that neither petitioners nor ASC has a written agreement purporting to entitle DiDonato Builders to the $12,500 payments, and DiDonato testified at trial that the agreement was oral.
ASC claimed a $44,385 total deduction for employee achievement awards on its 2003 Form 1120S. Respondent disallowed $25,000 of the $44,385 deduction for employee achievement awards paid to Vincent.
[*17] 2. Firearm PurchaseASC claimed a $37,501 deduction for employee achievement awards on its 2004 Form 1120S. Respondent disallowed $21,501 of the $37,501 deduction for a firearm DiDonato purchased in the United Kingdom for £11,250 ($21,501) on February 10, 2004. DiDonato gave the firearm to Mr. Witter in connection with investment advisory services related to the prospective sale of DiDonato’s shares of ASC stock. The parties stipulated that the only document petitioners provided to substantiate ASC’s entitlement to deduct the cost of the firearm was an American Express statement indicating that ASC paid for the firearm.
