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.
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.
J.T.C.C.
Email this Content