Gow v. Commissioner

¶106MEMORANDUM FINDINGS OF FACT AND OPINION

¶107JACOBS, JUDGE: In a notice of deficiency dated August 29, 1996, respondent determined the following deficiencies in, and additions to, petitioners' Federal income taxes:

¶108                     Penalties

¶109               __________________________________

¶110  Year    Deficiency     Sec. 6662(a)¹Sec. 6663(a)

¶111  ____    __________ *115     ________________    ____________

¶112  1989    $ 522,221      $ 104,444       $ 391,666

¶113  1990     334,663        66,933        250,997

¶114  1991     109,047        21,809        81,785

¶115  1992     103,224        20,645        77,418

¶116Subsequently, by an amendment to answer, respondent asserted increased deficiencies and penalties for 1989 and 1991, as follows:

¶117                     Penalties

¶118                ________________________________

¶119 Year    Deficiency      Sec. 6662(a)Sec. 6663(a)

¶120 ____    __________      ____________     ____________

¶121 1989    $ 877,054          ¹        $ 657,791

¶122 1991*116     153,214          1         114,911

¶123After concessions by each party, the issues remaining for decision are: (1) The value of shares of stock of Williamsburg Vacations, Inc. (WVI), awarded to Kay F. Gow (800 shares on February 16, 1989, and 400 shares on February 15, 1990) as bonuses; (2) whether WVI's payments of travel and entertainment expenditures for certain trips taken by petitioners constitute constructive dividends to them; (3) whether WVI's payments of expenditures for the procurement of an animal trophy collection constitute constructive dividends to petitioners; and (4) whether petitioners are liable for fraud penalties pursuant to section 6663(a), or in the alternative, accuracy-related penalties pursuant to section 6662(a).

¶124All section references are to the Internal Revenue Code as in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. *117 All dollar amounts are rounded.

¶125FINDINGS OF FACT

¶126Some of the facts have been stipulated and are so found. The stipulations of facts, stipulations of settled issues, and attached exhibits are incorporated herein by this reference.

¶127BACKGROUND

¶128Petitioners, husband and wife, resided in Norfolk, Virginia, at the time they filed their petition.

¶129Kay F. Gow (Dr. Gow) earned a doctor of education (Ed.D.) degree from Virginia Tech., specializing in business education. As part of her curriculum she took courses in accounting. Before 1983, she taught and supervised a business education program at a public high school in Virginia. At the time of trial, Robert T. Gow (Mr. Gow) was a retired civil service employee.

¶130WILLIAMSBURG VACATIONS, INC. (WVI)

¶131WVI was incorporated under the laws of Virginia on July 21, 1983. In November of 1986, WVI became a partner in a joint venture known as Powhatan Associates. (The other two members of the joint venture were Offsite International (Offsite) and Bush Construction Co. (Bush). None of the joint venturers were related; each held a one-third interest in Powhatan Associates.) During the years in issue, WVI's sole income-producing property was its indirect*118 interest in Powhatan Plantation, a time-share resort project of Powhatan Associates.

¶132WVI was authorized to issue 50,000 shares of common stock. Initially, 650 shares of its stock were issued to Dr. Gow and 350 shares to Horace E. Henderson (Mr. Henderson). Dr. Gow exchanged previously acquired land located in North Carolina for her stock. Mr. Henderson exchanged his note with a face value of $ 192,230. ¹

¶133The initial officers of WVI were: Mr. Henderson, president; Mr. Gow, executive vice president; Robert E. Lee, secretary; and E. Corbell Jones (Mr. Jones), treasurer. During the years in issue, Dr. Gow was president and chairman of the board of directors; Mr. Gow was the secretary and a director of the company.

¶134On September 30, 1983, Dr. Gow*119 sold 200 shares of her WVI stock to Mr. Jones and received in exchange Mr. Jones' agreement to cancel Mr. Gow's note in the amount of $ 119,000. As a condition of sale, Mr. Jones agreed that if during his lifetime he desired to dispose of all or any part of his 200 shares of WVI stock, Dr. Gow would have the right to repurchase the 200 shares, and upon Mr. Jones' death, his estate or successor in interest would sell Dr. Gow the 200 shares for $ 119,000, or $ 595 per share.

¶135Simultaneously with the sale of the 200 shares, Dr. Gow and Mr. Jones executed a voting trust agreement (VTA). Under the terms of the VTA, Dr. Gow and Mr. Jones agreed to, and did, transfer all of their shares in WVI to Mr. Gow, as trustee of the voting trust. The trust was to continue until September 30, 1993. On October 24, 1988, the VTA was amended. Pursuant to this amendment, Dr. Gow agreed to, and did, transfer all stock issued to her since September 30, 1983 (the date the VTA was executed) to Mr. Gow, as trustee. Moreover, Dr. Gow agreed to transfer to the trustee all stock subsequently issued to, or owned by, her.

¶136On October 19, 1983, Dr. Gow, Mr. Henderson, and Mr. Jones signed an agreement to purchase*120 a 256-acre tract of land located 1 mile west of the restored colonial area of Williamsburg, Virginia, known as Powhatan Plantation. (This property was acquired for development as a time-share resort. See infra.) On January 16, 1984, they assigned their rights in Powhatan Plantation to WVI.

¶137By early 1984, WVI was in need of operating funds. In an attempt to provide working capital to WVI, Dr. Gow lent the company $ 120,000. WVI was unable to repay this loan, and on August 1, 1985, Dr. Gow accepted 50 shares of WVI's stock in satisfaction of the company's obligation to her.

¶138On February 16, 1988, WVI's board of directors approved a stock bonus plan for Dr. Gow. Under the terms of the plan, Dr. Gow was entitled to receive as a bonus up to 10,000 shares of WVI stock, at a maximum rate of 1,000 shares per year, for 10 years. The number of shares to be issued annually as a bonus was to be determined by Dr. Gow.

¶139In accordance with the stock bonus plan, on February 16, 1989, WVI issued 800 shares of WVI common stock to Dr. Gow. On February 15, 1990, WVI issued an additional 400 shares of its common stock to her as a bonus. It is the value of these shares at the time of award that is subject*121 to dispute -- the first issue.

¶140FINANCING HISTORY

¶141WVI borrowed $ 100,000 from Central Fidelity Bank. These funds were used to cover startup expenses and other administrative costs. In late 1983, WVI received an acquisition/development loan from First American Savings & Loan (First American) in the amount of $ 1.75 million; it also received a financing commitment from Berkeley Federal Savings (Berkeley) for $ 10 million.

¶142In 1984, Bush began construction of, and Offsite marketed, the time-share project. In early 1985, Berkeley withdrew its loan commitment, making it difficult for WVI to timely meet its financial obligations to Bush for construction and to Offsite for marketing. WVI became delinquent in its payments to Bush, and in May 1985, Bush filed a mechanics lien against the project. The project further became mired in financial difficulties when, in early 1986, over its concern with Bush's mechanics lien, First American threatened to terminate its loan to WVI. Eventually, Security Pacific (a local financial institution) agreed to provide development financing, as well as a bridge loan, to refinance the First American loan. Security Pacific conditioned its financing agreement*122 on WVI's ability to reduce its outstanding debt. Consequently, in order to obtain debt forgiveness and secure additional guarantors, WVI proposed a joint venture with Bush and Offsite.

¶143POWHATAN ASSOCIATES

¶144On November 19, 1986, WVI, Bush, and Offsite formed Powhatan Associates. WVI contributed the development assets (which consisted of the Powhatan Plantation time-share project, land, unsold inventory, and contractual and other rights associated with the project net of project liabilities) as well as its services and expertise as a developer and administrator. Bush and Offsite each agreed to forgive the debt owed them by WVI; they further agreed to guarantee certain liabilities of WVI to repurchase defaulting time- share contracts under several financial agreements. Offsite agreed to continue to provide marketing services to the joint venture in exchange for an allocation of the fees and expenses relating to its marketing operations. Bush agreed to continue to provide construction services to Powhatan Plantation so long as it was allocated the profits and expenses associated with construction. The parties agreed that WVI would receive all of its administration costs (including reasonable*123 salaries), plus 1-

¶145As the administrative partner of Powhatan Associates, WVI was responsible for the strategic planning and day-to-day operation of Powhatan Plantation. WVI's responsibilities included: (1) Reviewing and approving all time-share sales contracts; (2) obtaining financing for the joint venture; (3) preparing all required reports and accountings; (4) servicing and collecting joint venture mortgage portfolios; (5) monitoring product quality and customer satisfaction; and (6) coordinating the construction schedules and inventory availability.

¶146Nonroutine matters required the approval of all three members of the joint venture.

¶147The joint venture agreement contained restrictions on the transferability or sale of an interest in the joint venture. In pertinent part, it provided:

¶148RESTRICTIONS ON TRANSFER

¶149   2. TRANSFER OF VENTURE INTEREST AFTER BONA FIDE OFFER

¶150      (a) NOTICE OF OFFER. In the event … [Bush, WVI, or

¶151    Offsite] desires to transfer all or some of its Venture

¶152    Interest after receiving a bona fide offer from an

¶153    independent third party, it must first: (i) obtain the

¶154    express prior written*124 consent of all Venturers, or (ii)

¶155    notify each of the other Venturers … in writing, of all

¶156    of the relevant facts of the proposed transaction and its

¶157    intention with respect to such Venture Interest or any right

¶158    or interest therein … The … [nontransferring partner]

¶159    shall have a right of first refusal to purchase the Subject

¶160    Interest at a price and pursuant to the procedures and

¶161    conditions set forth hereinafter.

¶162      (b) PURCHASE PRICE. The purchase price to be paid to the

¶163    Transferring Venturer for the Subject Interest, if the Non-

¶164    Transferring Venturer(s) exercise their rights of first

¶165    refusal … shall be the price set forth in the Notice of

¶166    Offer, or the appraised value; provided, that if the

¶167    consideration to be paid by the proposed transferee is other

¶168    than the payment of cash in full within thirty (30) days of

¶169    the acceptance of the offer of the proposed transferee by the

¶170    Transferring Venturer, the Joint Venture shall cause an

¶171    independent appraiser*125 … to establish the cash equivalent

¶172    of such other consideration.

¶173In 1997, the joint venture sold Powhatan Plantation and another time-share resort they owned to Signature Resorts, Inc., a publicly traded company now known as Suntera Resorts, Inc., for $ 59.1 million.

¶174POWHATAN PLANTATION RESORT

¶175Powhatan Plantation was part of an original land grant that was conveyed to a prominent colonial family in 1640. Located on the property is a manor house that was built circa 1735 and occupied by Mary Toliver. The manor house, as restored, was the centerpiece of Powhatan Plantation. On the 20 acres surrounding the manor house were formal gardens, numerous outbuildings, indoor and outdoor pools, athletic facilities, meeting rooms, and three food establishments, including a gourmet restaurant. The remaining 236 acres included open lands, a ring of woods, private roads, and the time-share condominiums and townhouses.

¶176The Powhatan Plantation resort has a colonial working plantation theme. It was marketed as a luxury resort suitable for families to discover and explore the history of the surrounding area. The first sale of a time-share unit occurred in late 1984. As of February*126 1989, a total of 106 residential units had been sold; that number increased to 140 the following year.

¶177The time-share program offered by Powhatan Associates conveyed either a

¶178HAWAII AND KEY WEST TRIPS

¶179Petitioners believed that firsthand observation of other vacation resorts was necessary to maintain a competitive edge in the time-share industry. Between 1984 and 1992, on at least seven occasions, WVI's board of directors approved the expenditure of:

¶180   such sums as are necessary in travel and entertainment to visit

¶181   other luxury resorts and hotels in order to keep Powhatan

¶182   Plantation competitive in product, services, and to remain

¶183   knowledgeable about innovations in the resort industry and to

¶184   seek new business opportunities and to engage in or sponsor

¶185   retreats with political or business persons affecting the resort

¶186   industry.

¶187WVI bore all these expenses, with no commitment of reimbursement from Powhatan Associates.

¶188Beginning in 1986, and continuing through the years in issue, petitioners made numerous trips to Hawaii and Key West, Florida. Most of these trips were taken around the Thanksgiving, Christmas, and New Year's holidays*127 and often lasted between 2 and 3 weeks.

¶189During these trips, petitioners conducted "interviews" with guests of the resorts, took tours of the resort facilities and premises, and examined the kitchen amenities and menus for compatibility with Powhatan Plantation. The purpose of the interviews and inspections was to gauge customer service and determine the level and efficiency of those services each resort was providing. Petitioners rarely, if ever, spoke with the management of these resorts.

¶190On a number of occasions, other members of the "WVI management team" accompanied petitioners on these trips. On at least one occasion each, David Legere (president of Offsite) and Senator Stanley Walker, along with their spouses, traveled with petitioners and had their expenses paid by WVI. On these trips, petitioners and their associates stayed at first-class resorts and dined at the finest restaurants. During their December 1990 trip to Hawaii, petitioners stayed at the Halekulani Hotel for $ 850 per night and dined at the La Mer restaurant for meals costing $ 900 or more; the next month they stayed at the Lodge at Koele for $ 900 per night and dined at expensive restaurants, with one meal costing*128 over $ 2,000.

¶191On these trips, petitioners enjoyed room service and many of the local attractions. Over the course of 4 days, petitioners incurred $ 462 in room service charges. During this same period, petitioners visited local tourist attractions such as Sea Life Park, Ala Moana shopping center, and the Waipio Valley historical site.

¶192During the audit for the years in question (discussed infra), Dr. Gow was requested to provide itineraries for the trips to Hawaii and Key West. These itineraries, which purport to summarize petitioners' activities during those trips, were reconstructed by Dr. Gow between 1993 and 1995, on the basis of invoices and "whatever records" petitioners maintained.

¶193The total cost of travel, lodging, meals, and other related expenses WVI incurred for trips to Hawaii during the years in issue were as follows:

¶194        Year      Expenditures

¶195        ____      _____________

¶196        1989       $ 71,700

¶197        1990        67,454

¶198        1991        44,857

¶199        1992        83,929

¶200WVI*129 deducted these amounts, subject to the statutory limits on travel and entertainment expenses.

¶201The total cost of travel, lodging, meals, and other related expenses WVI incurred for trips to Key West during the years in issue were as follows:

¶202        Year      Expenditures

¶203        ____      ____________

¶204        1989       $ 7,536

¶205        1990        14,256

¶206        1991        14,395

¶207        1992        11,281

¶208WVI deducted these amounts, subject to the statutory limits on travel and entertainment expenses.

¶209PROCUREMENT AND USE OF ANIMAL TROPHIES

¶210WVI incurred expenditures for travel, food, lodging, and professional guide fees in connection with the procurement of a world-class animal trophy collection (as well as taxidermy expenses) as follows:

¶211        Year         Expenditures

¶212        ____         ____________

¶213        1989          $ 130,376

¶214        1990           124,803

¶215*130     1991           242,498

¶216        1992           74,696

¶217Under Dr. Gow's direction, Deborah Lee (Ms. Lee), WVI's controller and accountant, recorded these costs in the company's general ledger as an "expense" rather than in an asset account.

¶218The animal trophy collection was to be used purportedly as a marketing strategy for the time-share project; namely, (1) as an amenity at Powhatan Plantation, and (2) as a traveling display to generate time-share leads at State and regional chapter meetings of the Safari Club and the National Rifle Association.

¶219In order to acquire a world-class animal trophy collection, Mr. Gow hunted the animals in their natural habitat, mostly at the Y.O. Ranch. (Y.O. Ranch is a 500,000-acre tract of property located in Texas that housed over 60 species of imported African plains wildlife.) Mr. Gow also traveled to Alaska and other locations within the United States in search of exotic game such as moose, Armenian red sheep, sable, kudu, caribou, and elk. Mr. Gow employed hunting guides on these trips and usually took Dr. Gow along because he "[enjoyed] spending time with her". Also accompanying Mr. *131 Gow on the hunting trips were Louis Schreiner and his wife. (Mr. Schreiner was on the board of the Safari Club and owned the Y.O. Ranch.) Upon returning from these hunting excursions, Mr. Gow would hire a taxidermist to create the animal mounts.

¶220The planned animal trophy museum to be located on Powhatan Plantation was never built. Nor was there ever a traveling display of the mounts. Rather, the animal mounts were displayed at both the Y.O. Ranch and Bob's Gun & Tackle Shop (Bob's) in Norfolk, Virginia. (A total of 31 animal mounts were displayed at Bob's and more than 31 others were displayed at the Y.O. Ranch.) Initially, the animal mounts at Bob's were identified with note cards bearing the name of Mr. Gow and certifying the animal mounts' world record status. Approximately a year later, and at the advice of their tax preparers, petitioners sent Bob's a letter indicating that the animal mounts were the property of Powhatan Plantation. Subsequently, the note cards were replaced with formal plaques bearing the name "Powhatan Plantation".

¶221In 1991, Bob's placed 18 of the animal mounts in storage. In 1997, Signature Resorts, Inc., purchased all the assets of WVI, including the animal*132 trophy collection.

¶222In 1989, 1990, and 1992, WVI deducted all costs incurred for the procurement and display of the animal trophy collection, except for $ 220 in 1990 and $ 1,760 in 1992, which were not deducted by virtue of travel and entertainment statutory limitations in effect for those years. In 1991, WVI capitalized $ 137,410 in animal trophy collection expenses and deducted $ 104,175. The remaining $ 913 was not deducted because of the travel and entertainment statutory limitations.

¶223WVI's AND PETITIONERS' AUDITS FOR 1989-92

¶224In July 1991, Revenue Agent Richard Puchaty audited WVI's tax returns. Petitioners' tax returns were included in the audit after Revenue Agent Puchaty noticed an unusual pattern of recording expenses relating to the animal trophy collection across four different accounts in the company's general ledger. Revenue Agent Puchaty concluded that in light of continual mischaracterization of the animal trophy accounts throughout the company's ledger, as well as his difficulty in locating the animal trophy expenses entries, these expenses were intentionally being hidden. In an effort to clarify WVI's ledger system, Revenue Agent Puchaty sought an interview with*133 both Dr. Gow and Ms. Lee; his request was denied.

¶225PETITIONERS' 1989-92 TAX RETURNS

¶226On their 1989 and 1990 returns, petitioners reported the values of the stock awarded to Dr. Gow as $ 40,000 and $ 20,000, respectively. They did not seek an expert valuation of the stock before reporting the aforementioned values on their tax returns. Petitioners reported no dividend income for 1989 and 1990, and reported $ 420 and $ 2,094 of dividend income for 1991 and 1992, respectively. The dividend income reported for 1991 and 1992 was not attributable to any distributions from WVI.

¶227NOTICE OF DEFICIENCY

¶228In the notice of deficiency, respondent determined that the fair market value of the stock awarded to Dr. Gow on February 16, 1989, was $ 1,600,000, and the fair market value of the stock awarded to her on February 15, 1990, was $ 800,000. After the issuance of the notice of deficiency, respondent's valuation experts revalued the stock awards at $ 2,142,313 and $ 597,353 at their respective valuation dates.

¶229Respondent also determined that petitioners received constructive dividends from WVI for 1989, 1990, 1991, and 1992 in the amounts of $ 305,072, $ 395,225, $ 341,521, and $ 323,281, respectively. *134 By amendment to answer, respondent increased the amount for 1991 to $ 479,844. In his posttrial brief, respondent concedes that certain expenses paid by WVI in 1989-92 do not constitute constructive dividends to petitioners.

¶230On the basis of respondent's redetermination of the values of the stock awards and the increase in the amount of the 1991 constructive dividend, the deficiencies asserted for 1989 and 1991 increased to $ 877,054 and $ 153,214, respectively.

¶231OPINION

¶232ISSUE 1. THE FAIR MARKET VALUE OF WVI'S COMMON STOCK

¶233The first issue presented involves the valuation of shares of WVI's stock awarded to Dr. Gow as a bonus. The parties agree that the value of these shares constitutes income to Dr. Gow.

¶234The standard for valuation is fair market value, which is defined as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." United States v. Cartwright, 411 U.S. 546, 551, 36 L. Ed. 2d 528, 93 S. Ct. 1713 (1973); Collins v. Commissioner, 3 F.3d 625, 633 (2d Cir. 1993), affg. T.C. Memo. 1992-478; Estate of Newhouse v. Commissioner, 94 T.C. 193, 217 (1990).*135 This standard is objective, using a purely hypothetical willing buyer and willing seller, each of whom would seek to maximize his or her profit. See Estate of Watts v. Commissioner, 823 F.2d 483, 486 (11th Cir. 1987), affg. T.C. Memo. 1985-595; Estate of Simplot v. Commissioner, 112 T.C. 130, 151-152 (1999); Estate of Mitchell v. Commissioner, T.C. Memo 1997-461. The hypothetical buyer and seller are not specific individuals and their characteristics are not necessarily the same as the personal characteristics of an actual seller or a particular buyer. See Propstra v. United States, 680 F.2d 1248, 1251-1252 (9th Cir. 1982); Estate of Newhouse v. Commissioner, supra at 218. However, the hypothetical sale should not be construed in a factual vacuum. See Estate of Andrews v. Commissioner, 79 T.C. 938, 956 (1982).

¶235The two WVI stock awards are from a private, closely held corporation. There were no arm's-length sales of the stock before the date of the stock award. Accordingly, we determine the value of the stock awarded indirectly by considering the following factors:

¶236   "(a) The nature*136 of the business and the history of the

¶237   enterprise from its inception.

¶238   (b) The economic outlook in general and the condition and

¶239   outlook of the specific industry in particular.

¶240   (c) The book value of the stock and the financial condition of

¶241   the business.

¶242   (d) The earning capacity of the company.

¶243   (e) The dividend-paying capacity ….

¶244   (f) Whether or not the enterprise has goodwill or other

¶245   intangible value.

¶246   (g) … the size of the block of stock to be valued. [and]

¶247   (h) The market price of stocks of corporations engaged in the

¶248   same or similar line of business having their stocks actively

¶249   traded in a free and open market, either on an exchange or over-

¶250   the-counter."

¶251Estate of Simplot v. Commissioner, supra at 153 (quoting Rev. Rul. 59-60, 1959-1 C.B. 237, 238).

¶252Ultimately, valuation is a question of fact; all facts and circumstances are to be examined on the date of valuation without regard to hindsight. See Commissioner v. Scottish Am. Inv. Co., 323 U.S. 119, 123-125, 89 L. Ed. 113, 65 S. Ct. 169 (1994); Estate of Jung v. Commissioner, 101 T.C. 412, 423-424 (1993);*137Skripak v. Commissioner, 84 T.C. 285, 320 (1985). However, future events that are reasonably foreseeable at the valuation date may be considered in determining fair market value. See Estate of Newhouse v. Commissioner, supra at 218.

¶253Both respondent and petitioners rely upon the report and testimony of their respective expert witnesses to establish the value of the shares of WVI's stock awarded to Dr. Gow. We weigh the expert's testimony in light of the expert's qualifications as well as other credible evidence. See Estate of Christ v. Commissioner, 480 F.2d 171, 174 (9th Cir. 1973), affg. 54 T.C. 493 (1970); Estate of Newhouse v. Commissioner, supra at 217. We are not bound by the opinion of any expert witness; we may reach a decision as to the value of property based upon our own analysis of all the evidence in the record, see Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), affg. T.C. Memo. 1974-285, using all of one party's expert analysis, or selectively using any portion of either analysis, see Estate of Simplot v. Commissioner, supra at 155; Parker v. Commissioner, 86 T.C. 547, 562 (1986);*138Buffalo Tool & Die Manufacturing Co. v. Commissioner, 74 T.C. 441, 452 (1980). Additionally, we may derive the fair market value of property from within a permissible range of values that may be arrived at from consideration of all the evidence. See Silverman v. Commissioner, supra; Estate of Simplot v. Commissioner, supra.

A. VALUATION BY PETITIONERS' EXPERT

¶254Petitioners' expert, Peter Gampel (Mr. Gampel), is the director of the Florida and Caribbean valuation services group of Arthur Andersen & Co. In determining the value of the shares of WVI stock awarded to Dr. Gow (800 shares on February 16, 1989, and 400 shares on February 15, 1990), Mr. Gampel first valued WVI's one-third interest in Powhatan Associates, and then adjusted the book values of WVI's assets to their fair market values to determine the equity value of WVI as of the applicable valuation date. Next, Mr. Gampel applied discounts to the shares of stock awarded to Dr. Gow to reflect lack of control and lack of marketability. Mr. Gampel ultimately arrived at a value of $ 685,000 for the 800 shares of WVI stock awarded to Dr. Gow on February 16, 1989, and $ 299,000 for the 400 shares*139 awarded to Dr. Gow on February 15, 1990.

¶255In valuing WVI's interest in Powhatan Associates, Mr. Gampel first determined the aggregate value of Powhatan Associates as of February 16, 1989, and February 15, 1990, and in doing so he used the income approach, adopting the discounted cash-flow method. The discounted cash-flow method is based upon the premise that a business is worth the present value of all future benefits it will produce for its owner(s), with each expected future benefit discounted at a rate that reflects the risk that those benefits will not be realized. The discount rate selected is generally based on rates of return available (as of the valuation date) from alternative investments of similar type and quality. Application of this method requires forecasting future benefits from the ownership of the operations as well as future investments required to maintain the level of benefits.

¶256Mr. Gampel determined Powhatan Associates' anticipated income stream by (1) projecting the number of time-share intervals sold as of the respective valuation dates, and (2) estimating the sale price for those intervals. He projected the number of intervals sold by averaging the interval*140 sales for the 2-year period preceding each valuation date. (The interval sales were 1,408 for 1987, 1,754 for 1988, and 1,749 for 1989.) Next, he divided total sales by intervals sold for each of 1987, 1988, and 1989 in order to arrive at the average interval price for each year. By using this methodology, Mr. Gampel determined the average interval price to be $ 11,400 for 1987, $ 13,100 for 1988, and $ 13,300 for 1989, and the average interval price for the 1987-88 period to be $ 12,250, and for the 1988-89 period to be $ 13,200.

¶257Mr. Gampel then considered cost of sales for the intervals, taking into account construction costs, project amenities, sales commissions, and the development fee payable by Powhatan Associates to WVI. He estimated cost of sales to be 71 percent for the 1989 valuation date and 69 percent for the 1990 valuation date. In making this determination, Mr. Gampel considered interest income, interest expense, income taxes, administration costs, and amortization for financing commitments. After estimating Powhatan Associates' net income for both valuation dates, in order to arrive at Powhatan Associates' estimated annual cash-flow stream, Mr. Gampel considered noncash*141 charges, capital expenditures, changes in net working capital, and debt.

¶258Next, Mr. Gampel developed a discount rate through the summation method that combined:

¶259     a risk-free rate of return of     8.93%

¶260     a market risk premium of        3.97

¶261     a small stock risk premium of     9.02

¶262     a company specific risk premium of   10.0

¶263                        ____

¶264      Total                31.92

¶265      Rounded               32.0

¶266The 32-percent discount rate was then applied to Powhatan Associates' estimated cash-flow stream for both valuation dates.

¶267On the basis of his discounted cash-flow analysis, Mr. Gampel opined that (1) the fair market value of Powhatan Associates was approximately $ 11.7 million as of February 16, 1989, and $ 14 million as of February 15, 1990; and (2) WVI's one-third interest in Powhatan Associates (before discounts to reflect lack of control and lack of marketability) was approximately $ 3.9 million as of February 16, 1989, and $ 4.7 million as of February 15, 1990.

¶268*142 Mr. Gampel reduced the value of WVI's one-third interest in Powhatan Associates by two discounts: A minority interest (or lack of control) discount and a lack of marketability discount. These discounts were applied separately. After examining data on control premium studies, Mr. Gampel concluded that a 15-percent minority interest discount was appropriate for both valuation dates. In addition, Mr. Gampel concluded that a 30-percent lack of marketability discount for both valuation dates was appropriate on the basis of the following factors: The lack of "special purchasers" in the time-share industry, the restrictive nature of the buy-sell provision in the joint venture agreement, the overall restrictions placed on transferability of the joint venture's interest, and the size and composition of each partner's one-third interest. Accordingly, after applying discounts to reflect lack of control and lack of marketability, Mr. Gampel opined that the value of WVI's one- third interest in Powhatan Associates was $ 2,321,690 as of February 16, 1989, and $ 2,770,320 as of February 15, 1990.

¶269After determining the value of WVI's one-third interest in Powhatan Associates, Mr. Gampel adjusted*143 the book value of WVI's other assets to fair market value as of February 16, 1989, and February 15, 1990. After making these adjustments, Mr. Gampel determined that WVI's adjusted book value was $ 3,328,707 as of February 16, 1989, and $ 4,040,947 as of February 15, 1990. To these values, Mr. Gampel applied a 15-percent contingency discount that further reduced the adjusted book values of WVI to $ 2,829,401 as of February 16, 1989, and $ 3,434,805 as of February 15, 1990.

¶270Mr. Gampel's final step in valuing the stock bonuses was to apply a second level (at the WVI level) of minority interest and lack of marketability discounts. Mr. Gampel believed that for the February 16, 1989, stock issuance, a 20-percent minority interest discount and a 30-percent lack of marketability discount were appropriate. For the February 15, 1990, stock issuance, Mr. Gampel believed that a 30- percent minority interest discount and a 30- percent lack of marketability discount were appropriate. In determining the extent of the minority interest discount, Mr. Gampel considered the following factors: (1) The size of the stock issuance (800 and 400 shares), which represents only a minority interest in WVI; (2) *144 the existence of the VTA at both valuation dates; (3) a lack of "swing vote" characteristics in each stock issuance; (4) a lack of "special purchasers" in the marketplace; (5) WVI's historical reluctance to distribute dividends; (6) the terms of the buy-sale agreement and other restrictions on the transferability of WVI's stock; (7) the lack of recent sales of similar interests in WVI; and (8) the existence of the ongoing litigation. In determining the marketability discount, Mr. Gampel reviewed a number of empirical studies that were performed in an effort to quantify average levels of discounts for lack of marketability in the marketplace and considered the following factors: (1) The lack of an organized market for the purchasing/selling of interests; (2) lack of sales of similar interests; (3) the remoteness of a sale of Powhatan Associates; and (4) the probability of an event giving rise to a dispute among the venturers.

¶271By applying these discounts, Mr. Gampel concluded that the fair market value of the stock bonus to Dr. Gow was $ 685,000 ($ 856.25 per share) on February 16, 1989, and $ 299,000 ($ 747.50 per share) on February 15, 1990.

¶272B. VALUATION BY RESPONDENT'S EXPERTS

¶273*145 Respondent relied upon two expert witnesses: Diane Maiden (Ms. Maiden) and Deborah Kalmar (Ms. Kalmar), both of whom are employed full time by the Internal Revenue Service. Ms. Maiden, a real estate appraiser, valued Powhatan Associates' inventory of time- share intervals and the land yet to be developed as time-share property. ² Ms. Kalmar, a business valuation expert, used Ms. Maiden's valuations to complete respondent's valuation of the stock bonuses awarded to Dr. Gow.

¶274*146 Ms. Maiden valued the income-producing property of Powhatan Plantation using the discounted cash-flow method because of the income-producing nature of the property. To project the number of time-share sales, she relied on Powhatan Associates' annual reports to the Virginia Department of Professional and Occupational Regulation's real estate board, the public offering statement for the project, and computer printouts of 1989 and 1990 sales provided by petitioners. Ms. Maiden determined that potentially 500 units could be built, and after taking into account the number (5,497) of intervals which had been sold as of February 16, 1989, 20,003 intervals remained for sale. ³ She projected annual sales of 1,800 intervals for 1989 and 1,900 intervals for each of the subsequent years until the total number of intervals (20,003) that remained to be sold as of February 1989 was sold. To determine a weighted average interval sales price, Ms. Maiden used the audited financial statements of Powhatan Associates and a price list for sale in 1997 (the only existing price list), in addition to the information used to project the number of time-share units sold. On the basis of this information, Ms. *147 Maiden determined a weighted average sale price of $ 14,000 for all years in the projection period. The net operating income per interval was then estimated, using Powhatan Associates' financial statements and Powhatan Associates' marketing and construction agreements, as follows:

¶275   Average interval sales price:   $ 14,000

¶276   Expenses:

¶277     Sales/marketing          45.0

¶278     Cost of construction       25.0

¶279     Development fees          1.5

¶280     Reserves for amenities       1.5

¶281                    ______

¶282      Total              73.0

¶283   Net operating income per interval         $ 3,780

¶284   ($ 14,000 - (73% x 14,000 = $ 10,220))

¶285On the basis of the assumptions that (1) as of February 1989, 20,003*148 intervals remained for sale, (2) 1,800 of the 20,003 intervals would be sold in year 1, 1,900 of the intervals would be sold in each of the years 2-10, and 1,103 intervals would be sold in year 11, and (3) the net operating income per interval would be $ 3,780, Ms. Maiden calculated the income stream that could be generated from the sale of Powhatan Plantation's time-share properties to be $ 75,611,340 for 1989 and $ 69,586,020 for 1990.

¶286Ms. Maiden then considered the proper discount rate to be used to bring the estimated future income stream to present value. Ultimately, Ms. Maiden determined that a 25-percent discount rate was appropriate, using "the band of investment" method, which is a "synthesis of mortgage and equity … [yield] rates, which market data discloses as applicable to comparable properties". The method selected is "a weighted average of rates of return by the lender and equity investor". In arriving at the 25-percent discount rate, Ms. Maiden combined the safe rate of return from the 10-year U.S. Treasury bond (9.17 percent and 8.47 percent on the two valuation dates) and the equity rate expected by land and real estate developers (between 15 and 30 percent). *149 Believing that the risk and lack of liquidity inherent in the time-share industry increases the discount rate, Ms. Maiden selected the higher end of the range.

¶287Use of the 25-percent discount rate resulted in Powhatan Associates' inventory of time-share intervals and the land yet to be developed having a fair market value of $ 28,732,000 as of February 16, 1989, and $ 28,402,000 as of February 15, 1990.

¶288Respondent's experts adjusted (increased) Powhatan Associates' yearend audited balance sheet to reflect the fair market values of the inventory and land. Using the first-in first-out (FIFO) method of inventory, they determined the division between inventory and land fair market values to be as follows:

¶289  2/16/89 Inventory on hand -- 1,949 intervals

¶290               (Rounded)

¶291           Number   Net Value  Discounted Value (25%)

¶292           ______   _________  ______________________

¶293Sales (projected)   1,800   $ 3,381     $ 6,085,498

¶294Remaining inventory   149    2,705       403,045

¶295           _____           __________

¶296Value*150 allocated to

¶297inventory of

¶298intervals       1,949            6,488,543

¶299  Total FMV                  28,732,000

¶300                       __________

¶301  Value allocated

¶302   to land                  22,243,457

¶303  2/15/90 Inventory on hand -- 2,905 intervals

¶304               (Rounded)

¶305           Number   Net Value  Discounted Value (25%)

¶306           ______   _________  ______________________

¶307Sales (projected)   1,900   $ 3,381     $ 6,423,581

¶308Remaining inventory  1,005    2,705      2,718,525

¶309           _____           __________

¶310Value allocated to

¶311inventory of

¶312intervals       2,905            9,142,106

¶313  Total FMV                  28,402,000

¶314                       __________

¶315  Value allocated

¶316   to land                *151   19,259,894

¶317Powhatan Associates' balance sheet line items (other than inventory and land devoted to time-share development) were interpolated from the close of the end of the prior year to the applicable valuation date (at a straight-line rate) to reflect the time difference. ⁴ (No provision for taxes was included in determining the overall value of Powhatan Associates on the basis that no tax is paid at the joint venture level.) After making these adjustments, respondent's experts concluded that (1) the venturers' equity in Powhatan Associates was $ 32,866,718 as of February 16, 1989, and $ 35,001,760 as of February 15, 1990, and (2) WVI's one- third pro rata interest in Powhatan Associates (before discounts to reflect lack of control and lack of marketability) was $ 10,955,573 as of February 16, 1989, and $ 11,667,253 as of February 15, 1990.

¶318Next, respondent's experts considered whether*152 discounts (either for lack of marketability or for minority interest, or both) were appropriate. Initially, the experts did not believe a discount for lack of marketability was appropriate at the joint venture level. Subsequently, they concluded that a 10-percent lack of marketability discount was appropriate, stating:

¶319The chief asset of Powhatan Associates is the inventory and land to be developed for time shares, and ample allowance for lack of marketability was taken into account for that asset, both in the projections of income and in the application of a relatively large discount rate. There is judicial precedent for this judgment not to duplicate discounts already taken.

¶320The experts further concluded that at the joint venture level only a

¶321relatively small discount (5 percent) for a minority interest was

¶322appropriate, stating:

¶323The history of the joint venture displays a careful attention to conservative development: inventory was kept low, and areas were built in clusters close to one another and the amenities, to allow for maximum use of the residual acreage should the time

¶324*153 share development slow or cease. This history was taken into account in the real estate appraiser's finding of fair market value of the time share property. There is no reason that these practices should change if another entity stepped into the shoes of WVI as administrator of the project. The exit provisions of the joint venture agreement provide for a purchase (by the other venturers) of a selling venturer's interest at fair market value or at the price offered by a bona fide third party. A purchaser of a 1/3 interest might have the opportunity to purchase the entire entity under those exit provisions. We apply a 5% discount for the WVI minority interest to account for the risk that a purchaser of 1/3 interest might be invited to purchase all of the venture but be unwilling to do so, thus cancelling the 1/3 interest purchase. Because of the profitability of the venture to the other two "partners", this scenario is unlikely.

¶325After application of these two discounts, respondent's experts opined that WVI's one-third pro rata interest in Powhatan Associates was $ 9,367,015 as of February 16, 1989, and $ 9,975,502 as of February 15, 1990.

¶326This discounted value of WVI's interest in Powhatan Associates was incorporated into the balance sheet of WVI. The experts further adjusted WVI's balance sheet (1) to account for the fair market value of a 1-1/2-percent development fee payable to WVI from Powhatan Associates, (2) to apply a provision for the present value of taxes to be paid at the time of the provision for the present value of taxes to be paid at the time of the time-share sales, and (3) to reduce from book to fair market value the interest WVI held in a parcel of undeveloped land in North Carolina. On the basis of these adjustments, the experts determined (1) the fair market value of WVI was $ 6,880,694 as of February 16, 1989, and $ 7,466,913 as of February 15, 1990, and (2) the pro rata value of the 800 shares and the 400 shares was $ 2,975,435 as of February 16, 1989, and $ 1,327,451 as of February 15, 1990.

¶327In arriving at the value of the 1989 and 1990 stock issuance, respondent's experts' final step was to sequentially apply (1) a 20-percent ($ 595,087) minority interest discount and a 10- percent*154 lack of marketability discount ($ 238,035) for 1989, and (2) a 50-percent ($ 663,726) minority interest discount and a 10-percent ($ 66,373) lack of marketability discount for 1990. Having done so, respondent's experts determined that the fair market value of the February 16, 1989, stock issuance to Dr. Gow was $ 2,142,313 ($ 2,678 per share), and the fair market value of the February 15, 1990, stock issuance to Dr. Gow was $ 597,353 ($ 1,493 per share).

¶328In determining the fair market value of the stock bonus, the experts considered the VTA agreement and the fact that Dr. Gow, at her election, could receive within 10 years up to 10,000 shares, at a maximum of 1,000 shares per year. The experts believed that before purchase an informed hypothetical buyer would require protection against the potential dilution effect of the share authorization, as well as the placing of the stock in a voting trust.

C. COURT'S ANALYSIS AND CONCLUSION

¶329For ease of understanding, we have set forth in the appendices hereto a comparison of Mr. Gampel's and Ms. Maiden's-Ms. Kalmar's valuations. Giving due consideration to the totality of the evidence before us, and in particular the testimony and reports*155 of the expert witnesses, we find the analysis and conclusions of respondent's experts more persuasive than those of petitioners' expert. Consequently, we accept, with modifications discussed hereinafter, Ms. Maiden's and Ms. Kalmar's valuations.

¶330We agree with respondent that Mr. Gampel's report contains fatal errors. These errors include: (1) His understatement of Powhatan Associates' anticipated income stream; ⁵ (2) the size of the discount rate (32 percent) he developed through the summation method; and (3) his application of a 15-percent contingency discount to reduce the adjusted book values of WVI as of the valuation dates. We conclude that these errors resulted in an unacceptable understatement of fair market value for the stock bonuses awarded to Dr. Gow. ⁶

¶331*156 We agree with the valuation methodology used by Ms. Maiden and Ms. Kalmar (respondent's experts) but disagree with the quantum of the discounts they determined for lack of control and lack of marketability at both the Powhatan Associates and WVI levels. The discounts they used were as follows:

¶332         At Powhatan Associates Level

¶333         ____________________________

¶334                  1989       1990

¶335                  ____       ____

¶336   Lack of control          5%        5%

¶337   Lack of marketability      10        10

¶338             At WVI Level

¶339             ____________

¶340                  1989       1990

¶341                  ____       ____

¶342   Lack of control         20%       50%

¶343   Lack of marketability      10        10

¶344In contrast to these discounts, Mr. Gampel used the following

¶345discounts:

¶346*157          At Powhatan Associates Level

¶347         ____________________________

¶348                  1989       1990

¶349                  ____       ____

¶350   Lack of control         15%       15%

¶351   Lack of marketability      30        30

¶352             At WVI Level

¶353             ____________

¶354                  1989       1990

¶355                  ____       ____

¶356   Lack of control         20%       30%

¶357   Lack of marketability      30        30

¶358We have duly considered and studied the factors and reasoning used by the experts in determining their respective discount amounts. In this regard, we found Mr. Gampel's reasoning to be well founded and more persuasive than that of Ms. Maiden and Ms. Kalmar. Mr. Gampel used empirical studies and factors (stated supra pp. 24-26) that we believe appropriate in formulating*158 his opinion as to the discount amounts, whereas respondent's experts did not. We are not persuaded by respondent's experts' reasoning in determining the quantum of the discounts. The quantum of the discount for lack of control ranged from a low of 5 percent at the joint venture level to a high of 50 percent at the WVI level. Moreover, we are mindful that initially respondent's experts believed a discount for lack of marketability was not appropriate at the joint venture level, but eventually changed their minds and applied a 10-percent discount. In contrast, Mr. Gampel's discount rates were consistent and uniform, ranging from 15 percent for lack of control at the joint venture level (20 percent for lack of control at the WVI level) to 30 percent for lack of marketability at both levels. Consequently, we adopt the quantum of the discounts for lack of control and lack of marketability at both levels for both valuation dates as determined by Mr. Gampel. Thus, the valuation conclusions of Ms. Maiden and Ms. Kalmar should be adjusted (reduced) to reflect Mr. Gampel's discount amounts. This adjustment can be made by the parties in their Rule 155 computation.

¶359In reaching our conclusions, *159 we have considered all arguments raised by the parties in their posttrial briefs. We reject, as apparently did petitioners' own expert, the argument (which petitioners' counsel alleges was conceded by Ms. Kalmar during her testimony) that the shares of WVI stock awarded to Dr. Gow have no value because of the existence of the voting trust agreement and the potential dilution of WVI stock as a consequence of Dr. Gow's right to have 10,000 shares of WVI stock issued to her.

¶360ISSUES 2 AND 3. CONSTRUCTIVE DIVIDENDS

¶361We next examine whether WVI's payments of petitioners' expenses for trips to Key West and Hawaii, as well as WVI's payments for the acquisition of the animal trophy collection, constitute constructive dividends to petitioners.

¶362The amount of these expenditures is not in dispute. Rather, the dispute centers upon whether these expenditures were made primarily to advance petitioners' personal interests or were for legitimate business interests of WVI. Petitioners maintain that the trips to both Key West and Hawaii generated numerous ideas and concepts that were considered and later incorporated by Powhatan Associates in the time-share resort. Further, petitioners maintain that*160 the amounts expended on the procurement of the animal trophy collection created an amenity intended to attract buyers of the time- share intervals. Respondent, on the other hand, maintains that these expenditures were made primarily to provide a substantial personal benefit to petitioners.

¶363It has long been recognized that when a corporation makes an expenditure or distribution out of its earnings and profits (without an expectation of repayment) primarily to confer a substantial personal benefit to a shareholder, the value of the benefit conferred is taxable as a constructive dividend. See secs. 61(a)(7), 301, 316; Ireland v. United States, 621 F.2d 731, 735 (5th Cir. 1980); Loftin & Woodard, Inc. v. United States, 577 F.2d 1206, 1214 (5th Cir. 1978); Hash v. Commissioner, 273 F.2d 248, 250 (4th Cir. 1959), affg. T.C. Memo. 1959-96; Falsetti v. Commissioner, 85 T.C. 332, 356-357 (1985). A constructive dividend can take the form of either a distribution of corporate funds, the use of corporate property for personal purposes, or paying off a personal expense of the shareholder by the corporation. See Ireland v. United States, supra;*161Wall v. United States, 164 F.2d 462 (4th Cir. 1947); Martin v. Commissioner, T.C. Memo 1997-492; Yarbrough Oldsmobile Cadillac, Inc. v. Commissioner, T.C. Memo 1995-538. Control of a corporation by a shareholder as well as a corporate history of not paying dividends weighs strongly in favor of finding a constructive dividend. See Yarbrough Oldsmobile Caddillac, Inc. v. Commissioner, supra; Thielking v. Commissioner, T.C. Memo 1987-227, affd. 855 F.2d 856 (8th Cir. 1988).

¶364In determining whether or not the expenditure related to the business of the corporation, we must ascertain whether the payment or expenditure has independent and substantial importance to the paying corporation. See T.J. Enters., Inc. v. Commissioner, 101 T.C. 581 (1993). An expenditure generally does not have independent and substantial importance to the distributing corporation if it is not deductible under section 162. See, e.g., P.R. Farms, Inc. v. Commissioner, 820 F.2d 1084, 1089 (9th Cir. 1987), affg. T.C. Memo. 1984-549; Gill v. Commissioner, T.C. Memo 1994-92, affd. 76 F.3d 378 (6th Cir. 1996).*162Thus, our analysis begins by focusing upon whether WVI's expenditures were ordinary and necessary in the context of the time-share resort industry. An expense is ordinary if it is common or frequent in the context of the particular business out of which it arose. See Deputy v. DuPont, 308 U.S. 488, 495, 60 S. Ct. 363, 84 L. Ed. 416 (1940). An expense is necessary if it is appropriate and helpful to the operation of the taxpayer's trade or business. See Carbine v. Commissioner, 83 T.C. 356, 363 (1984), affd. 777 F.2d 662 (11th Cir. 1985).

A. EXPENDITURES FOR THE HAWAII AND KEY WEST TRIPS

¶365Petitioners' evidence substantiating their activities of their Key West and Hawaii trips consisted of their testimony and prepared itineraries. We view petitioners' testimony with caution, as it was self-serving. In addition, the itineraries were prepared by petitioners at least a year after the trips and in response to a tax audit; understandably, we question their reliability. Moreover, we are unable to ascertain from the itineraries the business relevance of many of petitioners' activities. Accordingly, petitioners failed to persuade us that the purpose of these trips was not primarily*163 their personal benefit. See Grossman v. Commissioner, T.C. Memo 1996-452, supplemented by T.C. Memo 1997-451, affd. 182 F.3d 275 (4th Cir. 1999); Fong v. Commissioner, T.C. Memo 1991-180. Respondent, on the other hand, produced numerous billing statements and invoices as well as testimony regarding WVI's expenditures for 1991. We find respondent's evidence persuasive.

¶366According to petitioners, these trips were undertaken to investigate and research Powhatan Plantation's competition in order to incorporate comparable resort features and services that would make them more attractive to potential customers. We view this assertion with skepticism. In our opinion, the innovations and research petitioners sought could have been obtained without the elements of substantial personal pleasure. To illustrate, petitioners spent a large amount of time on these trips enjoying shopping malls, theme parks, and historical locations. Many of these trips were taken around the Thanksgiving, Christmas, or New Year's holidays and were the only time during the year petitioners managed to escape their everyday routine. WVI subsidized many of the incidental*164 expenses incurred by the spouses of members of the "management team". During some of the activities, dinners costing $ 1,000 or more, as well as room service bills of almost $ 500, became the norm. Although it might be ordinary and necessary for Powhatan Plantation to investigate its competition in the same geographic area, it has not been shown to be ordinary and necessary for petitioners to examine resorts that are located in distant areas and are not in direct competition with Powhatan Plantation. In light of petitioners' control of WVI, such expenses become especially suspect. We conclude that the primary purpose of these trips was petitioners' personal enjoyment.

¶367Petitioners' visits were, at best, of marginal benefit to WVI and the joint venture. As we have previously stated:

¶368    a trip that is primarily for the taxpayer's individual pleasure

¶369   is not converted into a business trip merely because some short

¶370   portions of the trip involve business activities, even when it

¶371   is clear that the asserted business activities actually occurred

¶372   and that those business activities actually affected the cost of

¶373   the trip.

¶374Grossman v. Commissioner, *165 supra (citing George R. Holswade, M.D., P.C. v. Commissioner, 82 T.C. 686 (1984)).

¶375In Grossman, a case whose facts are similar to those in this case, we found that corporate expenses for trips taken by the taxpayer and his wife that had a slight business component constituted constructive dividends. In Grossman, the taxpayer and his wife, the two principal owners in a closely held corporation, took multiple trips to resort locations across North America, ostensibly to conduct discussions regarding corporate business. The taxpayers subsequently caused their corporation to reimburse them for their expenses. Relying solely upon the taxpayer's assurances that there were no personal expenses involved, the corporation's accountant claimed deductions for travel and entertainment expenses. In finding that the corporation made constructive dividends to the taxpayer, we disagreed with the taxpayer's characterization of the trips as relating to business, and held that the predominant purpose of most of the trips, despite having an incidental business purpose, was personal pleasure. We find no reason or distinction that compels a different result in the case before us. Petitioners*166 have failed to persuade us that the expenditures were predominantly for business purposes. Accordingly, we sustain respondent's determination that for the years in issue, the total amounts expended by WVI for petitioners' entertainment expenses to Hawaii and Key West constitute constructive dividends to petitioners.

B. EXPENDITURES FOR THE ANIMAL TROPHY COLLECTION

¶376We now turn our attention to WVI's expenditures for the procurement of the animal trophy collection. Once again, our factual analysis focuses upon whether the expenditures have an independent and substantial importance to the payor corporation. See Gill v. Commissioner, T.C. Memo 1994-92. Although amounts spent advancing a personal interest of a taxpayer may constitute constructive dividends, amounts expended for the legitimate improvement of a corporation's trade or business do not.

¶377Petitioners suggest that because the expenditures for the animal trophy collection constitute capital expenditures, they should receive different treatment than deductible expenses with regard to constructive dividend treatment. We disagree. Even if we were to accept the premise that these expenses otherwise were amortizable*167 under section 263, capital expenditures, if made for the personal benefit of the shareholder, can constitute constructive dividends. See, e.g., Challenge Manufacturing Co. v. Commissioner, 37 T.C. 650, 663 (1962); Gill v. Commissioner, supra.

¶378The expenses incurred for the animal trophy collection were composed mainly of costs associated with the acquisition and display of the animal trophy mounts; i.e., acquisition and mounting costs. Petitioners contend that the animal trophy collection was to be used both as a marketing tool and as an amenity of Powhatan Plantation. They allege the collection was to tour selected sites around the country as well as to be placed in a "museum" located on Powhatan Plantation. Petitioners assert that such displays would attract potential buyers of the time-share intervals. However, most of the animal trophy mounts were put on display at Bob's and the Y.O. Ranch.

¶379We find petitioners' argument unconvincing. Powhatan Plantation had a colonial working plantation theme, emphasizing the history of the Williamsburg-Jamestown, Virginia, area. The "world- class" animal trophy mounts collection was designed to be composed of exotic*168 animals whose natural habitat did not include the tidewater area of Virginia. We do not believe the display of exotic animals such as elk, caribou, or Armenian red sheep furthers the historical colonial theme that was in place as a marketing strategy. In this respect we are mindful that notably absent from the marketing brochure created by Offsite to highlight the salient amenities of the time-share resort was the mention of an animal trophy collection. Also revealing is the fact that the other members of the joint venture were unaware of the acquisition of an animal trophy collection, which is of significance in view of the fact that the joint venture agreement required a majority of the venturers to decide nonroutine matters.

¶380In acquiring the animal trophy collection, Mr. Gow personally hunted the animals and made numerous trips to Y.O. Ranch and Alaska. On several occasions he took his wife along as a traveling companion. He used a customized handgun and spent many hours practicing his shooting skills at a range. He obviously enjoyed hunting. Although the mere enjoyment of one's work may not alone transform a work assignment into a hobby, see Sanitary Farms Dairy, Inc. v. Commissioner, 25 T.C. 463, 468 (1955),*169 petitioners' enjoyment, along with the questionable business purpose, strongly suggests the hunting activities were for Mr. Gow's personal benefit.

¶381In viewing the entire record, we are convinced that all expenditures incurred for the animal trophy collection were primarily for the personal benefit of petitioners and thus should be treated as a constructive dividend. In an attempt to convince us otherwise, petitioners cite Sanitary Farms Dairy, Inc., as support that costs associated with hunting trips can have a legitimate business purpose. In Sanitary Farms Dairy, Inc., we found that "The cost of a big game hunt in Africa does not sound like an ordinary and necessary expense of a dairy business in Erie, Pennsylvania, but the evidence in this case shows clearly that it was and was so intended." Id. at 467. Unlike here, in Sanitary Farms Dairy, Inc., we were satisfied from the evidence in the record that costs associated with the safari actually assisted in the marketing of the product line of the business. Thus, Sanitary Farms Dairy, Inc., is distinguishable from this case and offers no support to petitioners' cause.

¶382In sum, we hold that WVI's payments of petitioners' *170 expenses for trips to Key West and Hawaii, as well as WVI's payments for the acquisition of the animal trophy collection, constitute constructive dividends to petitioners.

¶383ISSUE 4. IMPOSITION OF THE FRAUD OR ACCURACY-RELATED PENALTY

¶384We now address whether petitioners are liable for the fraud penalty under section 6663(a) or alternatively the accuracy- related penalty under section 6662(a). Section 6662(a) imposes an accuracy-related penalty in an amount equal to 20 percent of the portion of the underpayment attributable to negligence or disregard of rules or regulations or to a substantial understatement of tax. However, if section 6663(a) is applicable, a penalty in an amount equal to 75 percent of the underpayment is imposed. Respondent relies primarily on the record in its entirety and concludes that petitioners engaged in a pattern of conduct that illustrates their intent fraudulently to evade payment of Federal income tax. Petitioners obviously disagree.

¶385Fraud is defined as an intentional act of a taxpayer to evade the payment of tax that is believed to be owing by conduct that conceals, misleads, or otherwise prevents the collection of such tax. See Sadler v. Commissioner, 113 T.C. 99, 102 (1999);*171McGee v. Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d 1121 (5th Cir. 1975); Snavely v. Commissioner, T.C. Memo 1994-256. The Commissioner has the burden of proving fraud by clear and convincing evidence. See sec. 7454(a); Rule 142(b); Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983); Beddow v. Commissioner, T.C. Memo 1999-232. To satisfy this burden, the Commissioner must show: (1) That an underpayment exists; and (2) that the taxpayer intended to evade taxes known to be owing by engaging in conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. See Parks v. Commissioner, 94 T.C. 654, 660-661 (1990).

¶386The existence of fraud is a question of fact to be resolved from the entire record and can be proven by circumstantial evidence. See Recklitis v. Commissioner, 91 T.C. 874, 909 (1988); Grosshandler v. Commissioner, 75 T.C. 1, 19 (1980); Gajewski v. Commissioner, 67 T.C. 181, 199 (1976), affd. 578 F.2d 1383 (1978). But fraud is not presumed; it is required to be shown through affirmative evidence. See Beaver v. Commissioner, 55 T.C. 85, 92 (1970).*172

¶387Courts have developed various factors or badges which tend to establish fraud. These include: (1) A pattern of understatement of income; (2) inadequate records; (3) concealment of assets; (4) income from illegal activities; (5) attempting to conceal illegal activities; (6) implausible or inconsistent explanations of behavior; and (7) dealings in cash. See McGee v. Commissioner, supra 61 T.C. at 260; Snavely v. Commissioner, supra. In addition, the taxpayer's sophistication, education, and intelligence may also be considered in determining the existence of fraud. See Sadler v. Commissioner, supra.No single factor or any combination of factors will necessarily lead us to the conclusion that fraud exists. We must examine whether a pattern of fraudulent intent was established on the basis of an examination of the entire record.

¶388Respondent argues that the record is replete with indicia of fraud by petitioners, including the following: (1) Gross undervaluation of the 1989 and 1990 stock bonus awards; (2) the hiding of the animal trophy collection expenditures by recording them in different accounts in the company's general ledger at the direction of Dr. *173 Gow; (3) lack of petitioners' credibility in statements made both at audit and at trial; and (4) charging of personal items as business expenses. Moreover, respondent claims that petitioners' knowledge of tax and accounting issues supports a conclusion that they structured their dealings in WVI and Powhatan Associates in such a way as to purposely evade the payment of taxes. We disagree.

¶389We do not find petitioners to be tax sophisticated. Although marginally experienced in business matters, neither Dr. nor Mr. Gow had substantial knowledge or training in tax law. Dr. Gow's advanced degrees were in the field of education, not business. Before the formation of WVI, her experience and training dealt more in the operational management and planning side of business than with the accounting or economic side. Several courses in tax do not make one an expert. Additionally, we draw no inferences regarding Dr. Gow's tax sophistication from a letter she wrote to her personal accountant (Mr. Bielat) regarding her entitlement to specific deductions.

¶390Although we find petitioners' testimony self-serving, we do not necessarily find their testimony untruthful or devious. Nor are we convinced that*174 petitioners deliberately caused their travel and entertainment expenses to be hidden in the company's books in a way designed to avoid taxes. The fact that Revenue Agent Puchaty could not find the expenses in the accounts where he expected them to be does not persuade us that petitioners intentionally "hid them".

¶391Respondent cites Grossman v. Commissioner, T.C. Memo 1996-452, for the proposition that in circumstances similar to those presented here, we upheld the imposition of the fraud penalty under section 6663(a). Within the fraud context, we find the situation in Grossman distinguishable from that involved herein. The taxpayer in Grossman was a practicing lawyer specializing in Federal income taxation. He held an LL.M. in taxation from New York University and had previously worked for the Internal Revenue Service. He obviously possessed a substantial level of sophistication in the area of tax law. Here, petitioners, although highly intelligent, do not possess the same level of tax expertise.

¶392We recognize that petitioners have grossly undervalued the stock bonus awards and charged personal items as business expenses. We have no doubt that petitioners' conduct in this*175 case comes close to the line that separates a conscious "disregard of rules or regulations" from an "intent to evade taxes believed to be owing". However, even where there is a strong suspicion of an intent to evade taxes, we are hesitant to impose the section 6663(a) penalty unless we are convinced that the Commissioner satisfied his burden of proof. See Toussaint v. Commissioner, 743 F.2d 309, 312 (5th Cir. 1984), affg. T.C. Memo. 1984-25; Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989). Here, a complete review of the record has convinced us that respondent has failed to do so. Accordingly, we decline to impose the fraud penalty upon petitioners.

¶393Petitioners, however, have failed to prove that they acted with reasonable cause and in good faith. Evidence in the record persuades us that petitioners negligently disregarded rules or regulations. See Neely v. Commissioner, 85 T.C. 934, 947 (1985); sec. 1.6662-3(b)(1), Income Tax Regs. Accordingly, we hold petitioners liable for the accuracy-related penalty on the entire underpayment for the years in issue pursuant to section 6662(a).

¶394In reaching our conclusions*176 herein, we have considered all of the arguments presented and, to the extent not discussed above, find them to be irrelevant or without merit.

¶395To reflect the foregoing and concessions of the parties,

¶396Decision will be entered under Rule 155.

¶397               APPENDIX A

¶398         COMPARISON OF EXPERTS' VALUATION OF

¶399         WILLIAMSBURG VACATIONS, INC. STOCK

¶400            AS OF FEBRUARY 16, 1989

¶401VALUATION OF POWHATAN ASSOCIATES

¶402                   Petitioners'    Respondent's

¶403                     Expert       Experts

¶404                     ______       _______

¶405"Pre-tax" value of Powhatan      $ 18,817,787    $ 32,866,718

¶406"Post-tax" value of Powhatan       11,704,663

¶407Pro-rata value of

¶408  Fair market value of Powhatan

¶409                   Petitioners'    Respondent's

¶410                     Expert       Experts

¶411*177                      ______       _______

¶412Shareholders' equity, 12/31/88      $ 840,100      $ 840,086

¶413Estimated earnings to 2/16/89        359,324

¶414Fair market value of Powhatan       2,321,690      9,367,015

¶415Fair market value of development

¶416fee income                 697,000      1,596,262

¶417FMV promissory note from shareholder     19,223

¶418Land held for investment           10,000       10,000

¶419Other changes to assets                    22,127

¶420Cost basis of Powhatan joint venture    (369,400)      (369,421)

¶421Book amount of promissory note       (192,230)

¶422Land held for investment at cost      (357,000)      (357,000)

¶423Tax adjustment                       (4,228,419)

¶424Other changes to liabilities                   207

¶425                    _________      __________

¶426*178   3,328,707      6,880,857

¶427Contingency discount         15%   (499,306)       ---

¶428                     _________     _________

¶429  Fair market value of Williamsburg

¶430    Vacations, Inc.          2,829,401      6,880,857

¶431                    =========      =========

¶432VALUATION OF THE SHAREHOLDINGS

¶433                   Petitioners'    Respondent's

¶434                     Expert       Experts

¶435                     ______       _______

¶436Per share pro-rata value          $ 1,529       $ 3,719

¶437Pro-rata value of 800 shares       1,223,525      2,975,506

¶438Discount for lack of control     20%   (244,705)   20%   (595,101)

¶439Discount for lack of

¶440  marketability           30%   (293,646)   10%   (238,040)

¶441                     ________      __________

¶442*179   Fair market value of 800

¶443   shares in WVI             685,174      2,142,364

¶444                     =======      =========

¶445  Rounded                 685,000

¶446                     =======

¶447  Per share                856.25        2,678

¶448                      ======        =====

¶449               APPENDIX B

¶450         COMPARISON OF EXPERTS' VALUATION OF

¶451         WILLIAMSBURG VACATIONS, INC. STOCK

¶452            AS OF FEBRUARY 15, 1990

¶453VALUATION OF POWHATAN ASSOCIATES

¶454                   Petitioners'    Respondent's

¶455                     Expert       Experts

¶456                     ______       _______

¶457"Pre-tax" value of Powhatan      $ 22,456,921    $ 35,001,760

¶458"Post-tax" *180 value of Powhatan       13,968,205

¶459Pro-rata value of

¶460  Fair market value of Powhatan

¶461VALUATION OF WVI

¶462                   Petitioners'    Respondent's

¶463                     Expert      Experts  n

¶464Shareholders' equity, 12/31/89     $ 1,189,400     $ 1,189,397

¶465Estimated earnings to 2/15/90        348,794

¶466Fair market value of Powhatan       2,770,320      9,975,502

¶467Fair market value of development

¶468fee income                 799,000      1,557,915

¶469FMV promissory note from shareholder     19,223

¶470Land held for investment           10,000        10,000

¶471Other changes to assets                     22,126

¶472Cost basis of Powhatan joint venture    (546,560)      (546,556)

¶473Book amount of promissory note       (192,230)

¶474Land held for investment at cost      (357,000)      (357,000)

¶475Tax adjustment                       (4,391,591)

¶476Other*181 changes to liabilities                  (12,881)

¶477                    __________     ___________

¶478                    4,040,947      7,466,912

¶479Contingency discount         15%   (606,142)        ---

¶480                    __________     ___________

¶481  Fair market value of Williamsburg

¶482    Vacations, Inc.          3,434,805       7,466,912

¶483                    =========       =========

¶484VALUATION OF THE SHAREHOLDINGS

¶485                    Petitioners'    Respondent's

¶486                     Expert       Experts

¶487                     ______       _______

¶488Per share pro-rata value          $ 1,527       $ 3,319

¶489Pro-rata value of 400 shares        610,632      1,327,451

¶490Discount for lack of control*182     30%  (183,190)   50%   (663,725)

¶491Discount for lack of

¶492  marketability           30%  (128,233)   10%   (66,373)

¶493                     _________     __________

¶494  Fair market value of 400

¶495   Shares in WVI             299,210       597,353

¶496                     =======       =======

¶497  Rounded                 299,000

¶498                     =======

¶499  Per share                747.50        1,493

¶500                      ======        =====