Roberts v. Commissioner

T.C. Memo. 1996-225

UNITED STATES TAX COURT

JAMES K. ROBERTS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10322-93. Filed May 16, 1996.

The issues for decision are (1) whether
petitioner failed to report certain items of gross
income, (2) whether he is entitled to certain
disallowed Schedule C and Schedule A deductions, and
(3) whether he is liable for certain additions to tax.

1. Held: Except for one item, P has failed to
prove that the income items in dispute were not gross
income to him.

2. Held, further, P is not entitled to any of the
disputed deductions disallowed by R.

3. Held, further, R’s determination of the
disputed addition to tax under sec. 6651, I.R.C., is
sustained.

4. Held, further, R’s determination of additions
to tax under sec. 6653(a), I.R.C., is sustained.
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5. Held, further, R’s determination of additions
to tax under sec. 6661, I.R.C., is sustained.

Samuel G. Weiss, for petitioner.

Jody Tancer and Mark A. Ericson, for respondent.

MEMORANDUM OPINION

HALPERN, Judge: By notice of deficiency dated February 26,

1993 (the notice of deficiency), respondent determined

deficiencies in income tax and additions to tax as follows:
Additions to Tax
Sec.
Sec. 6653(a)(1) Sec. Sec.
Year Deficiency 6651(a)(1) or (a)(1)(A) 6653(a)(1)(B) 6661

1986 $7,267 $617 $394 50% of interest $1,817
due on $7,267
1987 24,372 1,522 2,127 50% of interest 6,072
due on $24,288
1988 7,632 --- 382 --- 1,908

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.

Each of the parties has conceded certain issues, and the

parties have agreed to the resolution of certain other issues.

The issues remaining for decision are (1) whether petitioner

failed to report certain items of gross income, (2) whether he is

entitled to certain disallowed Schedule C and Schedule A

deductions, and (3) whether he is liable for certain remaining

additions to tax. The parties have stipulated numerous facts,
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which we so find. The stipulations of fact filed by the parties

and attached exhibits are incorporated herein by this reference.

Although the issues remaining for decision are principally

factual, we need find few facts in addition to those stipulated

by the parties. Accordingly, we have not divided our report into

two sections, one comprising our findings of fact and the other

setting forth our opinion. The additional findings we must make

are contained in the discussion that follows. After setting

forth certain background information, we shall address (1) the

adjustments made by respondent that remain in dispute and (2) the

additions to tax that remain in dispute. Petitioner bears the

burden of proof on all questions of fact. Rule 142(a).

I. Background

Petitioner resided in Huntington, New York, at the time the

petition in this case was filed.

During 1986, petitioner was employed as an automobile

salesman by two different automobile dealerships, Sports Imports

Inc. (Sports Imports) and Rallye Motors, Inc. (Rallye Motors).

Petitioner was unemployed from approximately April 1986, when his

employment by Sports Imports ended, until December 1986, when his

employment by Rallye Motors began. During 1987 and 1988,

petitioner was employed as an automobile salesman by Rallye

Motors. During 1987 and 1988, petitioner owned a horse racing

and breeding business. Petitioner is a frequent gambler.
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For all of the years in issue, petitioner made his return of

Federal income tax on the basis of a calendar year. Petitioner

filed his 1987 Federal income tax return on July 6, 1988.

II. Disputed Adjustments

A. Unreported Income

In her notice of deficiency, respondent made adjustments

increasing petitioner's gross income for 1986, 1987, and 1988 on

account of certain unexplained bank deposits and cash

transactions. Petitioner does not dispute that the bank deposits

in question were made to accounts owned by him or that he

received the cash items in question. He claims, however, that

virtually all of those items were either loan repayments or

redeposits of cash carried around by petitioner on his person

and, thus, not items of gross income. We shall address the items

in question year by year.

1. 1986

During 1986, petitioner owned a bank account at North Fork

Bank and Trust Co., Southampton, New York (North Fork), account

No. 141568791 (the North Fork account). On the dates and in the

amounts indicated, petitioner made the following deposits to the

North Fork account:

Date Amount

5/15/86 $5,800
8/25/86 900
10/21/86 3,000
10/29/86 5,000
Total $14,700
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On April 21, 1986, petitioner also deposited a check in the

amount of $3,000 to the North Fork account. That check is dated

April 18, 1986, and was received from "John Ballis Racing

Account".

"A bank deposit is prima facie evidence of income and

respondent need not prove a likely source of that income."

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Petitioner

seeks to rebut the presumption of income that arises from the

evidence of bank deposits by arguing that the deposits in

question for 1986 were loan repayments or petitioner's own cash:

(1) "The $14,700 in deposits to North Fork Bank represents loan

repayments or redeposits of * * * [petitioner's] own cash."

(2) "The $3,000 check from the John Baylis [sic] racing account

is not unreported income but rather is a repayment of a loan by

Mr. Baylis [sic]."

Petitioner has failed to persuade us that any of the 1986

deposits in question represent either loan repayments or

redeposits. The only evidence that those deposits represent loan

repayments or redeposits is petitioner's testimony to that

effect. We did not, however, find petitioner to be a reliable

witness. For example, with respect to the $900 deposited to the

North Fork account on August 25, 1986, petitioner testified that

he could not specifically remember that deposit but that he

assumed that it was a partial repayment of $14,000 that he had

lent to one Robert Libutti (Libutti) because "it was deposited
 - 6 -

into my checking account." With respect to a deposit of $5,400

made on January 30, 1987, to the North Fork account, petitioner

testified that he could not remember whether it was a partial

repayment of the $14,000 that he testified he lent to Libutti or

a redeposit of a portion of the $5,800 that he had deposited on

May 15, 1986, and then withdrew: "The fact that it's deposited,

as such, is indicative that it is from Mr. Libutty [sic]."

Petitioner did not corroborate his testimony as to loan

repayments with written evidence of any loans. Moreover, he

provided no supporting testimony; he neither called Libutti or

John Ballis to testify nor showed that they were unavailable to

testify. If petitioner had made loans to them and received

repayments from them in 1986, they could have testified to that

effect. We infer from their failure to testify that their

testimony would have been negative to petitioner. McKay v.

Commissioner, 886 F.2d 1237, 1238 (9th Cir. 1989), affg. 89 T.C.

1063 (1987); Wichita Terminal Elevator Co. v. Commissioner,

6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).

We accord no weight to petitioner's testimony that the 1986

deposits were either loan repayments or redeposits of

petitioner's own cash. Petitioner has failed to rebut the

presumption that the 1986 deposits represented items of gross

income. Therefore, we sustain respondent's determination of a

deficiency as it relates to such items.
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2. 1987

During 1987, petitioner continued to own the North Fork

account. On the dates and in the amounts indicated, petitioner

made the following deposits to the North Fork account:

Date Amount

1/30/87 $5,400
3/17/87 1,004
3/24/87 1,700
Total 8,104

During 1987, petitioner owned a bank account at Astoria

Federal Savings, Glen Cove, New York, account No. 651013169 (the

Astoria account). On the dates and in the amounts indicated,

petitioner made the following deposits to the Astoria account:

Date Amount

9/11/87 $7,000
12/28/87 1,000
Total 8,000

On June 26, 1987, North Fork received $4,000 in cash from

petitioner in partial consideration for the issuance of a

cashier’s check to petitioner.

On both June 23 and November 13, 1987, Trump Plaza Hotel and

Casino, Atlantic City, New Jersey (Trump), received chips in the

amount of $5,000 in partial repayment of a loan of $35,000 made

to petitioner on October 5, 1986.

With respect to the deposit of $5,400 to the North Fork

account on January 30, 1987, as related above, petitioner could
 - 8 -

not remember whether that deposit was a partial repayment of the

$14,000 that he testified that he lent to Libutti or a redeposit

of a previous withdrawal. With respect to the deposit of $1,700

to the North Fork account on March 24, 1987, petitioner testified

that he had no specific recollection of that deposit, although it

could be another partial repayment from Libutti. With respect to

the deposit of $1,004 to the North Fork account on March 17,

1987, petitioner testified that he had no recollection as to its

nature. By his testimony, petitioner did not convince us that

the 1987 North Fork deposits were either loan repayments or

redeposits.

Petitioner has not directed us to any testimony (or other

evidence) with respect to the source of the deposit of $7,000 to

the Astoria account on September 11, 1987, or the payment of

$4,000 to North Fork on June 26, 1987. Petitioner has failed to

convince us that either item is either a loan repayment or a

redeposit of a previously withdrawn sum.

Petitioner has convinced us, however, that the deposit of

$1,000 to the Astoria account on December 28, 1987, is the

redeposit of $1,000 withdrawn from the North Fork account, and we

so find.

With respect to (1) all of the 1987 deposits to the North

Fork account, (2) the September 11, 1987, deposit to the Astoria

account, and (3) the June 26, 1987, payment to North Fork,
 - 9 -

petitioner has failed to rebut the presumption that such items

represented items of gross income. See Tokarski v. Commissioner,

supra at 77. Therefore, we sustain respondent’s determination of

a deficiency as it relates to such items. We sustain no

deficiency with respect to the deposit of $1,000 to the Astoria

account on December 28, 1987.

Petitioner’s position with respect to the June 23 and

November 13, 1987, chip payments to Trump is unclear. In her

notice of deficiency, respondent included those items as

unreported income and described them as “Unexplained advances -

Libutti”. Petitioner testified that the chip payments, which

repaid a loan made to petitioner by Trump, were made by Libutti.

On brief, petitioner argues that the transactions do not evidence

unreported income because there is no allegation of unreported

gambling winnings. Petitioner’s argument is somewhat beside the

point. These are not items that result from a reconstruction of

petitioner’s income where there is no evidence that petitioner

actually received anything during the period at issue. If this

were such a situation, then petitioner might argue that, until

respondent links petitioner to an income-producing activity,

petitioner does not have the burden of proving he had no income.

See Llorente v. Commissioner, 649 F.2d 152 (2d Cir. 1981), affg.

in part, revg. in part, and remanding in part 74 T.C. 260 (1980)

(we would follow Llorente because it is likely that any appeal in
 - 10 -

this case will be to the Second Circuit Court of Appeals; see

Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985

(10th Cir. 1971)); Jackson v. Commissioner, 73 T.C. 394 (1979).

This, however, is not a situation where there is no evidence of

any receipts. Petitioner as much as concedes that Libutti paid a

debt on his behalf. Moreover, there is no question that a

taxpayer can realize income when another pays his debt. See,

e.g., Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 729

(1929) (“The discharge by a third person of an obligation to him

is equivalent to receipt by the person taxed.”). Respondent

bears no burden here to show a taxable source for the payments

made on petitioner’s behalf by Libutti. Tokarski v.

Commissioner, 87 T.C. at 76-77. Petitioner bears the burden of

proving facts from which we could draw the conclusion that the

payments in question did not constitute gross income to

petitioner. That, petitioner has failed to do. Petitioner

having failed to carry his burden of proof, we sustain

respondent’s determination to the extent attributable to the

$10,000 in payments made to Trump by Libutti on petitioner’s

behalf.

3. 1988

During 1986, petitioner owned a bank account at Chase

Manhattan Bank, Roslyn, New York, account No. 061485 (the Chase

account). On July 1, 1988, petitioner deposited to the Chase
 - 11 -

account a check in the amount of $2,870 received from Cutlass

Reality Syndication (Cutlass). The check is annotated: “For

Phone”.

Petitioner testified that the check was to reimburse him for

having a cellular phone installed in an automobile purchased by

Cutlass, a customer of Rallye Motors. Petitioner testified that,

in 1988, it was hard to find the specific type of phone that

Cutlass wanted, he knew where to get one, Cutlass gave him a

check for the approximate amount of the phone, and he got Cutlass

the phone. Petitioner’s testimony was uncorroborated.

Petitioner provided no receipt for his purchase of a phone, nor

did he provide any evidence of the work to install the phone.

Moreover, petitioner neither called anyone from Cutlass to

testify nor explained his failure to do so. We infer from those

failures that any testimony from Cutlass would have been negative

to petitioner. McKay v. Commissioner, 886 F.2d at 1238; Wichita

Terminal Elevator Co. v. Commissioner, 6 T.C. at 1165.

Petitioner has failed to prove that the $2,870 deposit to the

Chase account was a reimbursement for an amount expended on

account of Rallye, and we so find. The deposit remains

unexplained and, thus, is an item of gross income to petitioner.

Tokarski v. Commissioner, 87 T.C. at 77. Accordingly, we

sustain respondent's determination of a deficiency as it relates

to that item.
 - 12 -

B. Schedule A Deductions

1. 1987

a. Interest

In her notice of deficiency, respondent included an

adjustment disallowing an interest deduction in the amount of

$726. Although petitioner has assigned error with respect to

that adjustment, petitioner has failed to address that adjustment

on brief. Therefore, we conclude that petitioner has abandoned

the interest issue, and we sustain so much of respondent’s

determination as relates thereto. See Bernstein v. Commissioner,

22 T.C. 1146, 1152 (1954) (holding against the taxpayer with

respect to an issue because, among other things, the taxpayer did

not press the issue on brief), affd. 230 F.2d 603 (2d Cir. 1956);

Lime Cola Co. v. Commissioner, 22 T.C. 593, 606 (1954)

("Petitioners in their brief do not argue anything about * * *

[the issue]; and, although they do not expressly abandon the

issue * * * we presume they no longer press it.").

b. Contribution

In her notice of deficiency, respondent included an

adjustment disallowing a charitable contribution deduction in the

amount of $3,175. That amount is reflected as a cash

contribution on Schedule A, Itemized Deductions, attached to

petitioner’s Form 1040, U.S. Individual Income Tax Return 1987.

Petitioner testified that he had no specific recollection of cash

contributions except for change he put into a collection cup when
 - 13 -

he purchased his morning coffee. Petitioner has failed to

convince us that he made a charitable contribution in cash of

$3,175, or, indeed, that he made any charitable contributions of

cash, during 1987. Petitioner has failed to carry his burden of

proof on this issue, and we sustain so much of respondent’s

determination as relates thereto.

2. 1988

a. Contribution

In her notice of deficiency, respondent included an

adjustment disallowing a charitable contribution deduction in the

amount of $2,760. That amount is reflected as a cash

contribution on Schedule A, Itemized Deductions, attached to

petitioner’s Form 1040, U.S. Individual Income Tax Return 1988.

Petitioner’s testimony with respect to cash contributions was the

same for 1988 as it was for 1987. Petitioner has failed to

convince us that he made a charitable contribution in cash of

$2,760, or, indeed, that he made any charitable contributions of

cash during 1988 beyond what, already, has been allowed by

respondent. Petitioner has failed to carry his burden of proof

on this issue, and we sustain so much of respondent’s

determination as relates thereto.

b. Miscellaneous Deductions

In her notice of deficiency, respondent included an

adjustment disallowing a miscellaneous deduction in the amount of

$2,760. Petitioner testified that, during his employment at
 - 14 -

Rallye Motors, he incurred expenses incident to that employment

for which he did not feel it was proper to claim reimbursement.

Petitioner has provided no detail of any expenses he may have

incurred. Petitioner has failed to convince us that, during

1988, he incurred any unreimbursed, business-related expenses.

Petitioner has failed to carry his burden of proof on this issue,

and we sustain so much of respondent’s determination as relates

thereto.

3. Schedule C Deductions

In her notice of deficiency, respondent included adjustments

disallowing “Schedule C Expenses” for 1987 and 1988 in the

amounts of $5,331 and $4,745, respectively. After taking into

account concessions by the parties, only the following expenses

remain in dispute:

1987 1988

Car & truck $687 $815
Dues 185 122
Office, rent & utilities 1,651 1,691
Supplies 68 263

Those expenses were claimed by petitioner on Schedules C, Profit

or Loss From Business, attached to petitioner’s Forms 1040 for

1987 and 1988, respectively. Those Schedules C identify the

trade or business in question as horse racing and breeding.

Respondent has allowed substantial amounts as deductions in

connection with petitioner’s horse racing and breeding business.

Petitioner has not convinced us that he incurred deductible
 - 15 -

expenses beyond what respondent already has allowed. For

instance, in support of the disputed car and truck expense for

1987, petitioner introduced into evidence a $300 invoice for the

installation of a car phone in a new Mercedes automobile.

Petitioner has failed to convince us that that expense did not

have substantial, if not exclusive, personal attributes. He has

failed to convince us that his 1988 car and truck expense related

to a vehicle used in his business. Also, he has failed to

provide any detail or supporting documents concerning the

category “Office, Rent, & Utilities”. He testified that the

category “Dues” included magazine subscriptions. Petitioner has

not proven that any of the disallowed expenses were incurred in

connection with his business of horse racing and breeding.

Accordingly, we sustain so much of respondent’s determination as

relates thereto.

III. Disputed Additions to Tax

A. Failure To File--1987

By her notice of deficiency, respondent determined an

addition to tax against petitioner under section 6651(a)(1) for

1987. Section 6651(a)(1) provides that, in the case of a failure

to file an income tax return by the due date, there shall be

imposed an addition to tax for such failure of 5 percent of the

amount of tax, reduced by timely payments and credits under

section 6651(b)(1), for each month or portion thereof during

which the failure continues, not exceeding 25 percent in the
 - 16 -

aggregate unless such failure is due to reasonable cause and not

due to willful neglect.

Although petitioner assigned error to that determination,

petitioner has failed to propose any findings of fact with

respect thereto or advance any arguments in support of that

assignment. Petitioner is a calender-year taxpayer.

Petitioner’s 1987 return was filed on July 6, 1988, which is

prima facie untimely. See sec. 6072(a). Petitioner has failed

to prove that his untimely return was due to reasonable cause and

not due to willful neglect. Respondent’s determination of an

addition to tax under section 6651(a)(1) for 1987 is sustained.

B. Negligence

By her notice of deficiency, respondent determined additions

to tax against petitioner for negligence for all of the years in

issue. Section 6653(a) imposes one or more additions to tax

where an underpayment of tax is due to negligence or intentional

disregard of rules or regulations (hereafter, without

distinction, negligence). Section 6653(a)(1), for returns due in

1989, and section 6653(a)(1)(A), for returns due in 1987 and

1988, impose an addition to tax equal to 5 percent of the entire

underpayment if any portion of such underpayment is due to

negligence. Section 6653(a)(1)(B), for returns due in 1987 and

1988, imposes an addition to tax equal to 50 percent of the

interest payable under section 6601 with respect to the portion

of the underpayment due to negligence. "Negligence is lack of
 - 17 -

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) (quoting Marcello v.

Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. in part

and remanding in part 43 T.C. 168 (1964)).

Although petitioner assigned error to respondent’s

determinations of additions to tax for negligence, petitioner has

failed to propose any findings of fact with respect thereto or

advance any persuasive arguments in support of that assignment.

On brief, petitioner simply states: “The statutory addition will

apply only if Petitioner is shown to be negligent or in

intentional disregard, and clearly that is not the case with

Petitioner.” Petitioner has the burden of proving that he was

not negligent. Rule 142(a). He has failed to carry that burden.

Respondent’s determinations of additions to tax under section

6653(a) are sustained, except to the extent necessary to reflect

concessions or agreements of the parties.

C. Substantial Understatement

By her notice of deficiency, respondent has determined

additions to tax under section 6661 for all of the years in

issue. For returns due before January 1, 1990, section 6661

provides for an addition to tax equal to 25 percent of the amount

of any underpayment attributable to a substantial understatement.

An understatement is "substantial" when the understatement for

the taxable year exceeds the greater of (1) 10 percent of the tax
 - 18 -

required to be shown or (2) $5,000. The understatement is

reduced to the extent that the taxpayer has (1) adequately

disclosed his or her position, or (2) has substantial authority

for the tax treatment of an item. Sec. 6661; sec. 1.6661-6(a),

Income Tax Regs.

Petitioner has averred no facts in support of his assignment

that respondent erred in determining an addition to tax under

section 6661. Moreover, on brief, petitioner makes no argument

disputing respondent's section 6661 determinations except:

“Petitioner believes that the understatement penalty will not

apply when the understatement amount is recalculated.” Because

of concessions and settled issues, we cannot determine whether

petitioner’s understatements are substantial. We sustain

respondent’s determinations of additions to tax under section

6661 to the extent that petitioner’s understatements are

substantial. For no year has petitioner proven that he

(1) adequately disclosed his position or (2) has substantial

authority for the tax treatment of an item.

Decision will be entered

under Rule 155.