William W. Howard, Petitioner

F CORDID T. C. Memo. 1997-473 - - --- UNITED STATES TAX COURT WILLIAM W. HOWARD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 24572-95.

Filed October 16, 1997.

William W. Howard, pro se.

Michael A. Pesavento, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

BEGHE, Judge: Respondent determined the following deficiencies in and additions to petitioner's Federal income tax:

Year 1987 1988 Deficiency $102,525 46,332 Additions to Tax Sec. 6651(a)(1) $25,631 11,583 Sec. 6654 $5,537 2,964

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6 997 Petitioner drafted Mrs. Putman's will, which left her entire estate to her three daughters in equal shares.

The will also named petitioner sole personal representative of Mrs. Putman's estate.

On April 20, 1987, Mrs. Putman died in a house fire in Winter Haven, Florida.

The fair market value of all assets owned by Mrs. Putman at the time of her death was approximately $518,000.

On April 30, 1987, petitioner was appointed by the Circuit Court of Polk County to serve as the personal representative of her estate.

. On May 1, 1987, petitioner opened an estate trust account at the Barnett Bank of Polk County in Winter Haven, Florida, for Mrs. Putman's estate. Petitioner deposited into this account the proceeds from the sale of estate assets.

Petitioner was the sole authorized signatory on the estate trust account.

Jesse Putman, Mrs. Putman's husband, was not a named beneficiary of the will, and he relinquished his statutory elective share in his wife's estate. However, he was entitled to receive and retain life insurance and homeowner's insurance proceeds in the amount of $170,900, less $51,500 to be paid to the daughters. Petitioner advised Mr. Putman that marshaling all assets into a "gross" cash estate would be in the best interest of the beneficiaries and would simplify computation of the estate taxes due the Internal Revenue Service. Mr. Putman agreed and Management. Petitioner was the sole shareholder, officer, and director of Heartland Management, a corporation which held title to real property that was used by petitioner as a personal residence and did not generate any income during 1987 and 1988.

William Howard P.A. was a Florida professional services corporation, of which petitioner was the sole shareholder, officer and director. Neither petitioner nor William Howard P.A.

• nor Heartland Management filed Federal income tax returns for the years 1987 and 1988.

During 1987 and 1988, petitioner wrote large checks from these three accounts for his personal benefit, spending the bulk of the Putmans' inheritance.

Among other things, petitioner used estate proceeds of approximately $132,000 to pay down the mortgage loan on his personal residence, approximately $47,000 to pay his personal tax obligations, and approximately $25,000 to settle a lawsuit unrelated to Mrs. Putman's estate. Petitioner also made other expenditures, including the construction of a boathouse and Jacuzzi, as well as paying himself and his secretaries salaries from the estate proceeds. All these expenditures were made without the knowledge and consent of the Putmans.

The record includes 28 promissory notes in varying amounts totaling in excess of the amounts of income charged to petitioner in the statutory notice, dated from June 30, 1987, through June 10, 1988, with stated interest of 10 percent, "To be paid at the time the Estate of Zelda Willey Putman is closed", signed embezzlement or whether they are loan proceeds.³ To the extent petitioner embezzled money from the estate, he has income for those years under section 61(a).

It is well established that gross income under section 61 includes income earned from illegal activity, such as the proceeds of embezzlement.

James v. United States, 366 U.S. 213, 219 (1961); Collins v. Commissioner, T.C.

Memo. 1992-478, affd.

Petitioner maintains that amounts he appropriated from the Putman estate are loans and are not proceeds of embezzlement.

He proffers 28 promissory notes i·n support.

We are entirely unpersuaded. Whether the transactions between petitioner and the estate were loans depends ultimately on whether the beneficiaries of the estate were aware of and consented to the distributions at the times they were made.

In order for a distribution of estate funds to be a loan, there must be evidence of a "consensual recognition, express or implied, of an obligation to repay".

James v. United States, supra at 219; Katz v. Commissioner, T.C.

Memo. 1990-533 (attorney's withdrawal of funds from an.estate he

they were received by persons other than himself.

Petitioner's engaging in the solitary activity of writing up promissory notes did not create loans between him and the estate.

The promissory notes evidence no more than an inchoate intention to repay the amounts petitioner withdrew from the estate.

Such an intention, even if there was one, cannot transform misappropriations into loans. Moore v. United States, 412 F.2d 974, 978-980 (5th Cir. 1969).

As the court stated:

The reasoning of James is that while an embezzler has a legal obligation to repay and may intend to repay, his legal obligation and intent are not actual agreement between lendor and borrower entailing "consensual recognition" of an obligation to repay and exact conditions of repayment. consensual agreement between the party providing the money and the party receiving it is fatal Trustee's contention that the money should be excluded from gross income on a loan theory. Therefore, be treated as income. supra.]

[Id.; Katz v. Commissioner, * The absence of a the same as an it must to the * * Petitioner's writing up of promissory notes was insufficient to create a consensual relationship between him and the beneficiaries of the estate. Petitioner's stipulation that the beneficiaries of the estate were unaware of his withdrawals requires the conclusion that no consensual relationship was formed. Petitioner's withdrawals constitute embezzlement income and are not proceeds of loans.'

In either event, no loans between inasmuch as the essential estate proceeds for personal use, such proceeds are the "property of another". Consequently, Mr. Howard was not merely borrowing money from himself, and he did need consents from the beneficiaries to create legitimate loans between the estate and himself.

We also hold that petitioner is liable for the additions to tax under sections 6651(a)(1) and 6654.

If a taxpayer fails to file a return by the due date and cannot show that the failure is due to reasonable cause and not willful neglect, then section 6651(a)(1) imposes an addition equal to 5 percent of the underpayment of tax for each month such failure continues, not to exceed 25 percent in the aggregate. Petitioner bears the burden of proving that his failure to file a timely return was due to reasonable cause and not willful neglect. Rule 142(a); United States v. Boyle, 469 U.S. 241, 245 (1985). Petitioner did not file income tax returns for 1987 and 1988.

He has offered no evidence or argument in explanation or mitigation. Accordingly, we hold him liable for additions to tax under section 6651(a)(1).

Section 6654 imposes an addition to tax for failure to pay estimated.income tax. When there has been a failure to pay estimated tax, the addition under section 6654 is mandatory and no inquiry is made as to possible reasonable cause or lack of willful neglect. Grimes v. Commissioner, 82 T.C. 235, 237 (1984). Petitioner also has the burden of proving that he is not liable for this addition to tax. Rule 142(a); Habersham-Bey v.

Commissioner, 78 T.C. 304, 319-320 (1982). Petitioner has failed

3. F.3d 625 (2d Cir. 1993).
5. The parties unnecessarily argue over the timing of the writing up of the promissory notes. Whether they were prepared contemporaneously with the withdrawals, as petitioner maintains, or simultaneously in preparation for trial, as respondent maintains, is irrelevant. petitioner and the estate resulted, consensual relationship was lacking.