T.C. Memo. 1996-47
UNITED STATES TAX COURT
EMMETT I. AND SHIRLEY SINDIK, Petitioners v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket No. 11487-94. Filed February 12, 1996.
Emmett I. and Shirley Sindik, pro se.
Lisa M. Bernardini, for respondent.
MEMORANDUM OPINION
WRIGHT, Judge: Respondent determined deficiencies,
additions, and penalties with respect to petitioners’ Federal
income tax for taxable years 1988, 1989, and 1990, as follows:
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Additions to Tax and Penalties
Sec. Sec. Sec.
Year Deficiency 6653(a)(1) 6661(a) 6662(a)
1988 $9,864 $493 $2,020 -0-
1989 13,603 -0- -0- $2,603
1990 29,476 -0- -0- 5,895
After concessions by the parties, which will be given effect
in the Rule 1551 computation, the issues for decision are:
(1) Whether petitioners understated gross receipts for
taxable years 1988, 1989, and 1990 in the amounts of $27,678,
$27,016, and $39,219, respectively, as determined by respondent.
We hold that they did.
(2) Whether petitioners overstated business expense
deductions for the taxable years at issue as determined by
respondent. We hold that they did.
(3) Whether petitioners had unreported capital gain for
taxable year 1990 in the amount of $38,700 as determined by
respondent. We hold that they did.
(4) Whether petitioners are liable for an addition to tax
for negligence under section 6653(a)(1) for taxable year 1988 and
accuracy-related penalties for negligence under section 6662(a)
for taxable years 1989 and 1990. We hold that they are.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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(5) Whether petitioners are liable for an addition to tax
under section 6661(a) for a substantial understatement of tax for
taxable year 1988. We hold that they are.
Background
Petitioners resided in New Orleans, Louisiana, at the time
the petition was filed. Petitioners timely filed their joint
Federal income tax returns for the years at issue. References to
petitioner in the singular are to Emmett I. Sindik.
Petitioner is the sole proprietor of an import-export
business. Petitioner has been in the business for more than 25
years acting as the middleman between U.S. and foreign importers
and exporters handling U.S. Customs duties, ocean freight fees,
and trucking fees. Petitioner essentially completes the
paperwork involved and charges a fee to his clients for this
service; he has no monetary interest in the cargo other than his
fee. Petitioner’s clients write checks payable to petitioner as
a customs broker for customs duties and various other fees.
Petitioner deposits these checks into his bank account and
subsequently issues checks to the appropriate agencies. Mrs.
Sindik did not participate in petitioner’s business or in the
preparation of their returns.
Petitioner failed to maintain complete and accurate records
of his income-producing activities and failed to produce complete
and accurate records to respondent in connection with the
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examination of his income tax returns for the taxable years at
issue.
Respondent, using the bank deposits method, determined that
petitioners had understated gross receipts and overstated various
business expense deductions for the years at issue. Respondent
further determined that petitioners had unreported capital gain
in the amount of $38,700 from the sale of stock in 1990.
Petitioners did not stipulate any facts prior to trial,
provided no documentary evidence other than their returns for the
taxable years at issue, and called no witnesses other than Mr.
Sindik, who did testify on behalf of himself and Mrs. Sindik.
Petitioner testified that he knows exactly the amount of money he
makes on every business transaction, but when asked by the Court
if he had any books reflecting these amounts, petitioner stated:
“I don’t keep books”.
Gross Receipts
The first issue for our decision is whether petitioners
understated gross receipts from Mr. Sindik’s business for taxable
years 1988, 1989, and 1990, in the amounts determined by
respondent. Respondent claims that petitioner failed to keep
adequate records and as a result respondent reconstructed
petitioners’ income for the years at issue using the bank
deposits method.
It is well established that where a taxpayer fails to
maintain adequate records, the Commissioner may prove the
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existence and amount of unreported income by any method that will
clearly reflect the taxpayer’s income. Sec. 446(b); Holland v.
United States, 348 U.S. 121, 130-132 (1954); Harper v.
Commissioner, 54 T.C. 1121 (1970). The premise underlying this
method of income reconstruction is, absent some explanation, that
a taxpayer’s bank deposits represent taxable income. The total
of all deposits is determined by the Commissioner to arrive at
the taxpayer’s income. Adjustments are then made to eliminate
deposits that reflect nonincome items such as gifts, loans,
transfers between bank accounts, and redeposits.
Petitioners bear the burden of proving that respondent’s
determinations, including unreported income, are incorrect. Rule
142(a); Nicholas v. Commissioner, 70 T.C. 1057, 1064 (1978).
Petitioners provided no sufficient evidence indicating that the
excess deposits into their bank account during the years at issue
were attributable to nontaxable sources.
Petitioners argue that respondent’s use of the bank deposits
method does not accurately reflect the amount of unreported
income for the years at issue. Without more than petitioner’s
testimony that he believes respondent’s determinations to be
incorrect, however, we have no way of making any adjustments to
respondent’s calculations.
Accordingly, we find that petitioners have failed to meet
their burden of proof, and respondent’s determination with
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respect to petitioners’ unreported gross receipts for the years
at issue is sustained.
Business Expense Deductions
The second issue for our decision is whether petitioners
overstated the amount of their business expense deductions for
the taxable years at issue. Deductions are a matter of
legislative grace, and petitioners bear the burden of proving
their entitlement to any deduction claimed on their returns.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). A
taxpayer is required to maintain records sufficient to establish
the amount of his or her income and deductions. Sec. 6001.
Under certain circumstances, in which a taxpayer establishes his
or her entitlement to a deduction, but does not establish the
amount of the deduction, we are permitted to estimate the amount
allowable. Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).
There must be, however, sufficient evidence in the record to
permit us to conclude that a deductible expense was incurred in
at least the amount allowed. Williams v. United States, 245 F.2d
559, 560 (5th Cir. 1957). In estimating the amount allowable, we
may bear heavily against the taxpayer whose inexactitude is of
his or her own making. Cohan v. Commissioner, supra at 544.
Based upon the record before us in the instant case, we find
that petitioners have failed to meet their burden of proving
entitlement to business expense deductions for the years at issue
in excess of the amounts allowed by respondent. Petitioners have
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provided no sufficient evidence to enable us to estimate the
amount of any business expense in excess of the amounts allowed
by respondent. Accordingly, respondent is sustained on this
issue.
Capital Gain
Respondent determined that petitioners failed to report a
capital gain on the sale of stock in the amount of $38,700 for
taxable year 1990. Petitioners presented no evidence with
respect to this issue. Accordingly, we find that petitioners
have failed to meet their burden of proving that respondent’s
determination is incorrect, and respondent’s determination is
therefore sustained.
Negligence
The next issue for our decision is whether petitioners are
liable for an addition to tax for negligence under section
6653(a)(1) for taxable year 1988 and for an accuracy-related
penalty for negligence under section 6662(a) for taxable years
1989 and 1990.
For taxable year 1988, section 6653(a)(1) imposes an
addition to tax equal to 5 percent of the underpayment if any
part of the underpayment is attributable to negligence or
intentional disregard of rules or regulations. With respect to
taxable years 1989 and 1990, section 6662(a) imposes an accuracy-
related penalty equal to 20 percent of the portion of the
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underpayment attributable to negligence or disregard of rules or
regulations.
Negligence is defined as a lack of due care or failure to do
what a reasonable and ordinarily prudent person would do under
the circumstances. Neely v. Commissioner, 85 T.C. 934, 947
(1985). Negligence includes any failure to make a reasonable
attempt to comply with the law. Secs. 6653(a)(3), 6662(c).
Respondent’s determination that petitioners’ underpayment was due
to negligence is presumptively correct and must stand unless
petitioners can establish that they were not negligent. Hall v.
Commissioner, 729 F.2d 632, 635 (9th Cir. 1984), affg. T.C. Memo.
1982-337.
In the instant case, petitioner admitted that he did not
keep records with respect to his business activities. As stated
earlier, a taxpayer is required to maintain records sufficient to
establish the amount of his or her income and deductions. We
find that in keeping no records of his business activities,
petitioner failed to make any reasonable attempt to comply with
the law. We find further that the underpayment of tax for the
years at issue is due to petitioner’s failure to do what a
reasonable and ordinarily prudent person would do under like
circumstances.
Petitioners presented no sufficient evidence to rebut
respondent’s determination that the underpayment of tax for the
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years at issue was due to negligence. Accordingly, respondent’s
determination is sustained on this issue.
Substantial Understatement
Respondent determined that petitioners are liable for an
addition to tax for a substantial understatement of income tax
under section 6661 for taxable year 1988. The amount of the
section 6661 addition to tax for additions assessed after October
21, 1986, is equal to 25 percent of the amount of any
underpayment attributable to the substantial understatement.
Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, sec.
8002, 100 Stat. 1951; Pallottini v. Commissioner, 90 T.C. 498,
501-503 (1988).
A “substantial understatement” occurs when an understatement
exceeds the greater of $5,000 or 10 percent of the amount of tax
required to be shown on a return. Sec. 6661(b)(1)(A). An
“understatement” means the excess of the amount of the tax
required to be shown on a return over the amount of tax imposed
which is shown on the return. Sec. 6661(b)(2)(A).
Section 6661(b)(2)(B) provides for the reduction of an
understatement by that portion of the understatement which is
attributable to either: (1) The tax treatment of any item by the
taxpayer if there is or was substantial authority for such
treatment; or (2) any item with respect to which the relevant
facts affecting the item’s tax treatment are adequately disclosed
in the return or in a statement attached to the return.
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Petitioners presented no evidence that there was substantial
authority for the treatment of any item or that any item was
adequately disclosed on their returns for the years at issue.
Accordingly, respondent is sustained on this issue.
To reflect the foregoing,
Decision will be
entered under Rule 155.