Date: 20021010
Docket: 2000-3469-IT-G
BETWEEN:
JOHN DAVID HERRING,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at Toronto, Ontario on September 30, 2002. The Appellant testified and called David Bandel, C.P.A. who practised accounting at Elk Grove, Illinois, U.S.A. at all material times in the firm of Porte Brown L.L.C., accountants for "Metal Supermarkets" ("MS") of Elk Grove in 1996, the year in issue in this case.
[2] Paragraphs 4 to 9 inclusive of the Reply to the Notice of appeal outline the problems in this appeal. They read:
4. With respect to paragraph 2 of the Notice of Appeal, he admits that the appellant claimed $91,188.00 as a business loss for the 1996 taxation year (the "Business Loss".) However, he states that the Appellant did not claim any business loss in his income tax return for the 1996 taxation year filed on April 30, 1997, and that the Appellant made and filed his claim for the Business Loss on September 8, 1998.
5. With respect to paragraph 3 of the Notice of Appeal, he admits that the Minister of National Revenue (the "Minister") reassessed the Appellant for the 1996 taxation year by Notice of reassessment dated May 9, 2000, and states that by so reassessing the Appellant the Minister allowed a deduction for additional carrying charges in the amount of $26,208.00 and denied the Appellant's claim for the Business Loss.
6. With respect to paragraph 4 of the Notice of Appeal, he admits that the Minister forwarded a letter dated May 5, 1999 to the Appellant, denies the remaining allegations of fact in that paragraph and states that the Appellant has not provided any original books, records, invoices and receipts to substantiate his claim for the Business Loss.
7. With respect to paragraph 9 of the Notice of Appeal, he admits that the Appellant has provided a copy of a vehicle lease agreement, and states that the Appellant also provided a guarantee for a lease of premises to the Minister. He otherwise denies the remaining allegations of fact in that paragraph.
8. In so reassessing the Appellant, the Minister made, inter alia, the following assumptions:
a) the Appellant owned 50% of a franchised operation called Metal Supermarkets Inc. located in Chicago, Illinois in the United States of America (the "Company");
b) the Appellant provided to the Minister copies of the Company's financial statements for the fiscal year ended December 31, 1996 prepared by a Certified Public Accountant upon the representation of the Company's management. The financial statements were not audited and the information therein was not reviewed by the Certified Public Accountant;
c) the Company did not sustain any loss for the 1996 calendar year;
d) the Appellant has not provided any original books, records, invoices and receipts to substantiate his claim for the Business Loss; and
e) the Appellant did not incur any business loss in the 1996 taxation year.
B. ISSUES TO BE DECIDED
9. The issue is whether the Appellant is entitled to deduct from his income a business loss with respect to the Company in the amount of $91,188 for the 1996 taxation year.
[3] In essence, the Appellant states that he was a partner in MS and the Respondent states that MS was operated by a corporation. There was also a dispute as to whether the Appellant's partnership interest was 40% or 50%, but the Court finds on the evidence that the Appellant always had a 50% interest in MS, whatever its status was. Part of the reason for this is that the 20% alleged partner does not appear to have either signed any agreement or to have earned his proposed 20% interest. The amount of the loss is also disputed. However the Court accepts David Bandel's evidence respecting MS's 1996 loss and on that basis finds that 50% of MS's total loss in Canadian funds is the sum of $91,188.
[4] Therefore the matter which remains to be decided is the ownership of MS in 1996.
[5] The chronology of facts and findings respecting them is as follows:
1. Late 1994 - The Appellant and Ian McNeill decide to acquire the MS franchise for Elk Grove.
2. December 27, 1994 - Herring, McNeill and Fernando Corral sign a franchise agreement for "A Delaware Corporation to be incorporated, and whose shareholders will be" them, with Metal Supermarkets Corporation to franchise the Elk Grove Illinois store. (Exhibit R-1, Tab 6)
3. Mr. Herring signs leases and guarantees to acquire two Ford vehicles under the name "Metal Supermarkets John D. Herring" with a dealer in Arlington Heights, Illinois. The actual "lease dates" on the forms are unclear, but they show in part "January 30" and "December 29" (Exhibit R-1, Tab 5).
4. June 1, 1995 - Mr. Herring guarantees a lease of premises at 1675 Tonne, Elk Grove, Illinois for the period July 1, 1995 to December 31, 1996, and its rent etc. The name of the "tenant" is not stated in the form. However the guarantee form refers to the "successors and assigns" of the tenant and not to the "heirs and administrators" of the tenant (Exhibit R-1, Tab 5).
5. July 20, 1995 - Messrs. Herring, McNeill and Corral each as a "general partner" sign a business loan agreement and promissory note for $30,000 U.S. for MS with Harris Bank Elk Grove N.A. (Exhibit A-1, Tabs 14 and 15).
6. August 4, 1995 - Messrs. Herring and McNeil (Fernando Corral, shown on the agreement, but not signing) sign a shareholders' agreement with "Combat Industrial Batteries & Chargers Inc. (a corporation incorporated under the laws of the State of Delaware)" ("Combat Industrial"). Mr. Herring signs for Combat Industrial; no corporate seal is affixed (Exhibit A-2, Tab 13). Mr. Herring testified that Combat Industrial was not incorporated on August 4, 1995, and that Mr. Corral never signed any copy of this document.
7. August 7, 1995 - On "Metal Supermarkets" of "1675 Tonne Road, Elk Grove Village, IL 60007" letterhead, Ian McNeill signs a letter of support for a petition by Combat Industrial for a U.S. work permit for Mr. Corral. This is addressed to:
"Immigration & Naturalization Service
Northern Service Center
P. O. Box 87129
Lincoln, Nebraska
68501 - 7129"
(Exhibit A-2, Tab 14)
8. October 3, 1995 - Mr. Herring signed an affidavit respecting Mr. Corrall's qualifications (Exhibit A-2, Tab 15).
9. October 1, 1995 - MS starts business in Elk Grove. The "US Partnership Return of Income" for calendar 1995 shows this and describes the business as
"Combat Industrial Batteries Metal Supermarkets
1675 Tonne Road
Elk Grove Village, IL 60007-5123"
Mr. Corral is described as the "Tax Matters Partner" (Exhibit A-1, Tab 1). This form was prepared and filed by a different CPA than Mr. Bandel.
[6] In 1997 Mr. Bandel was instructed by Harris Bank to compile year end financial statements of MS for Harris Bank because MS was applying for a line of credit. Mr. Bandel began his work on August 7, 1997. He investigated MS thoroughly. By this time Mr. Corral had left MS which had losses every month but one. The staff told Mr. Bandel that MS was a corporation. After a thorough investigation in which, as in this trial, important documents, such as a proper partnership agreement, or incorporation documents, were not presented, Mr. Bandel concluded that MS was operated by a corporation, not a partnership. It should be noted that the Harris Bank documents showed an I.R.S. partnership number, but that the I.R.S. did not have a federal identification number ("ID"). Mr. Bandel applied for and received a US federal ID corporate number and filed MS's 1996 income tax return. It shows
- January 1, 1996 - Date incorporated. The name shown is
"Metal Supermarkets Combat Industrial Batteries
1675 Tonne Road
Elk Grove Village, IL 60007".
The loss claimed is $133,747 U.S., which the Court finds to be the 1996 loss of MS.
[7] There is some evidence that Mr. Herring sold out his interest by May 30, 1996. Mr. Herring testified that the sale was completed on January 7, 1997 and that he was paid on January 31, 1997. The sale agreement is not in evidence.
[8] Mr. Herring is a highly experienced and a highly trained manager. He appears to have been in his 50's when these events occurred. He and Messrs. McNeill and Corral were Canadian residents who proposed to do business in the United States. There is a franchise agreement in a corporate form (unsigned by Mr. Corral), an alleged partnership without a written agreement for a foreign business, immigration documents alleging a corporation, individual appearing vehicle lease agreements signed by Mr. Herring, a premise lease guarantee implying a corporate lease without the lease agreement, the departure of Mr. Corral without any release or sale agreement in evidence, unsigned U.S. income tax returns, and Mr. Herring's sale of some kind of business interest without a written agreement in evidence. Cumulatively, these occurrences respecting someone with Mr. Herring's maturity, experience and training bring his credibility into question. As a result his testimony is not accepted.
[9] The Court finds that in 1996 MS was being carried on as a trade name business by Combat Industrial Batteries & Chargers Inc. This was stated to be the case on August 4, 1995 and Mr. Herring signed for the corporation (Exhibit A-2, Tab 13). It is confirmed by Metal Supermarkets letter of August 7, 1995 to the U.S. Immigration and Naturalization Service, a U.S. government entity (Exhibit A-2, Tab 14). It is further confirmed by Mr. Bandel's investigation, findings and decision to file a U.S. corporate income tax return for calendar 1996.
[10] The appeal is dismissed. The Respondent is awarded party and party costs.
Signed at Edmonton, Alberta, this 10th day of October, 2002.
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"D. W. Beaubier" |
J.T.C.C.COURT FILE NO.: 2000-3469(IT)G
STYLE OF CAUSE: John David Herring v. The Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: September 30, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge D. W. Beaubier
DATE OF JUDGMENT: October 10, 2002
APPEARANCES:
Counsel for the Appellant: John David Buote
Counsel for the Respondent: Eleanor H. Thorn
COUNSEL OF RECORD:
For the Appellant:
Name: John David Buote
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3469(IT)G
BETWEEN:
JOHN DAVID HERRING,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 30, 2002 at Toronto, Ontario, by
the Honourable Judge D. W. Beaubier
Appearances
Counsel for the Appellant: John David Buote
Counsel for the Respondent: Eleanor H. Thorn
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1996 taxation year is dismissed in accordance with the attached Reasons for Judgment.
Signed at Edmonton, Alberta, this 10th day of October, 2002.
|
"D. W. Beaubier" |
J.T.C.C.