                               T.C. Memo. 2012-335



                         UNITED STATES TAX COURT



      ACM ENVIRONMENTAL SERVICES, INC., ET AL.,1 Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 21125-10, 21126-10,              Filed December 3, 2012.
                  21127-10.



      Patrick T. Griffin and Liah R. Griffin, pro sese.

      Angela B. Friedman, for respondent.




      1
       Cases of the following petitioners are consolidated herewith: ACM
Engineering & Environmental Services, Inc., docket No. 21126-10; and Patrick T.
and Liah R. Griffin, docket No. 21127-10.
                                         -2-

[*2]         MEMORANDUM FINDINGS OF FACT AND OPINION


       FOLEY, Judge: After concessions, the issues for decision, relating to

petitioners’ 2005, 2006, and 2007 Federal income tax returns, are whether Mr. and

Mrs. Griffin’s transfers to ACM Environmental Services, Inc.2 (ACM) were loans

or capital contributions and whether the Griffins are liable for section 6662(a)3

accuracy-related penalties.

                                FINDINGS OF FACT

       In 1988 Mr. Griffin, an electrical engineer, incorporated ACM, which

specialized in environmental catastrophe remediation, mold inspection, and asbestos

testing. ACM had two officers: Mr. Griffin, who was president and sole

shareholder, and a treasurer, who was responsible for approving corporate debt. In

2004, 2006, and 2007, respectively, the Griffins transferred $40,000, $39,600, and

$167,000 to ACM.

       In 2005, 2006, and 2007 (years in issue) the Griffins used their credit cards

to make personal and ACM purchases. During the years in issue ACM paid credit

       2
       The corporation was later renamed ACM Engineering & Environmental
Services, Inc.
       3
       Unless otherwise indicated, all section references are to the Internal Revenue
Code in effect during the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
                                            -3-

[*3] card expenses totaling $872,770. Neither the Griffins nor ACM maintained

records which differentiated ACM’s business expenses from the Griffins’ personal

expenses.

         With respect to the years in issue, the Griffins timely filed self-prepared

Forms 1040, U.S. Individual Income Tax Return, and ACM timely filed Forms

1120, U.S. Corporation Income Tax Return, which were prepared with the

assistance of an accountant. On each of its returns, ACM claimed business expense

deductions relating to its credit card payments.

         Respondent subsequently selected for audit ACM’s and the Griffins’ tax

returns. During audit, revenue agents informed Mr. Griffin that ACM was not

entitled to business expense deductions relating to its payments of personal

expenses and that these payments were includible in the Griffins’ gross income.

Mr. Griffin, in response, told the agents that the transfers to ACM were loans and

ACM’s payments of personal expenses were loan repayments. Mr. Griffin also told

the agents that he did not have formal loan documents or documentation identifying

which transactions were personal expenses and “that information was kept in his

head.”

         On July 28, 2010, respondent sent ACM and the Griffins statutory notices of

deficiency relating to the years in issue. Respondent determined that ACM paid
                                         -4-

[*4] $139,002 (i.e., $36,744, $58,755, and $43,503, relating to 2005, 2006, and

2007, respectively) of the Griffins’ personal expenses, the payments were not

deductible by ACM, and the payments should be treated as qualified dividends

received by the Griffins. Respondent further determined that the Griffins were

liable for accuracy-related penalties.4 On September 22, 2010, ACM, whose

principal place of business was Indiana, and the Griffins, while residing in Indiana,

filed their respective petitions with the Court. On August 25, 2011, the Court

granted respondent’s motion to consolidate for trial, briefing, and opinion.

                                      OPINION

      ACM concedes that it may not deduct, as business expenses, its payments of

the Griffins’ personal expenses. The Griffins contend, however, that their transfers

to ACM were loans and ACM’s payments of their personal expenses were loan

repayments.5




      4
       Respondent determined that ACM was liable for accuracy-related penalties
but has conceded this issue.
      5
       Pursuant to sec. 7491(a), petitioners have the burden of proof unless they
introduce credible evidence relating to the issue that would shift the burden to
respondent. See Rule 142(a). Our conclusions, however, are based on a
preponderance of the evidence, and thus the allocation of the burden of proof is
immaterial. See Martin Ice Cream Co. v. Commissioner, 110 T.C. 189, 210 n.16
(1998).
                                         -5-

[*5] We conclude that the Griffins’ transfers to ACM were capital contributions

and not loans.6 ACM and the Griffins did not intend to create a debtor-creditor

relationship. See Frierdich v. Commissioner, 925 F.2d 180, 182-184 (7th Cir.

1991), aff’g T.C. Memo. 1989-393; Calumet Indus., Inc. v. Commissioner, 95 T.C.

257, 286 (1990). The transfers to ACM were not made at arm’s length, did not

comport with normal business practices, and were not treated as loans by either the

Griffins or ACM. See Frierdich v. Commissioner, 925 F.2d at 182-184; Calumet

Indus., Inc. v. Commissioner, 95 T.C. at 285, 287 (stating that it would be difficult

to find that transfers were bona fide debt when the parties “treated the * * *

[transfers] in the same fashion as the capital contributions”). In addition, ACM

did not pay interest to the Griffins, ACM’s treasurer was not asked to approve the

Griffins’ transfers, and ACM’s financial statements do not reflect any shareholder

loans. At trial the Griffins introduced documents in support of their contention

that the transfers were loans. These documents, however, were not adhered to,

credible, contemporaneous, or consistent with Mr. Griffin’s previous assertions to

revenue agents (i.e., that there were no such documents and loan “information was

kept in his head”). Thus, we reject the Griffins’ contention that ACM’s payments

      6
        Because these transfers are not loans, interest relating to the purported loans
is not includible in the Griffins’ gross income and ACM is not entitled to interest
expense deductions.
                                          -6-

[*6] of their personal expenses were loan repayments and hold that these payments

are qualified dividends (i.e., to the extent of ACM’s earnings and profits). See secs.

1(h)(11), 316(a).

      Respondent further determined that the Griffins are liable for section 6662(a)

accuracy-related penalties relating to the years in issue. Respondent bears, and has

met, the burden of production relating to these penalties. See sec. 7491(c); Higbee

v. Commissioner, 116 T.C. 438, 446 (2001). There is no credible evidence that the

Griffins took reasonable efforts to assess their proper tax liabilities or believed in

good faith that their Federal income tax liabilities were accurately reported. See

sec. 6664(c); sec. 1.6664-4(b)(1), Income Tax Regs. Accordingly, we sustain

respondent’s determination.

      Contentions we have not addressed are irrelevant, moot, or meritless.

      To reflect the foregoing,


                                                Decisions will be entered under

                                         Rule 155.
