Chu v. Commissioner

T.C. Memo. 1996-549

UNITED STATES TAX COURT

JOSEPH AND ANNIE CHU, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 142-95, 22884-95. Filed December 18, 1996.

Ps owned and operated a retail gift store, and
they deposited the stores' proceeds into bank accounts
owned or controlled by them. R determined that the
amounts of these deposits were includable in Ps' gross
income for the year of deposit. R also determined that
Ps did not report certain interest income, and that Ps
were liable for accuracy-related penalties under
sec. 6662(a), I.R.C. Held: R's determinations
sustained to the extent stated herein.

John M. Youngquist, for petitioners.

Allan D. Hill, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Docket Nos. 142-95 and 22884-95 are before the

Court consolidated for purposes of trial, briefing, and opinion.

Joseph Chu and Annie Chu petitioned the Court to redetermine

respondent's determination of the following Federal income tax

deficiencies and additions thereto:

Penalties
Year Deficiency Sec. 6662(a)

1990 $193,739 $38,209
1991 727,937 145,587

In an amendment to answer, respondent alleged that the

deficiency and penalty determined in the notice of deficiency for

1990 should be increased to reflect $9,619 of unreported interest

income that petitioners earned on a foreign bank account.

Petitioners concede the correctness of this allegation.

Upon motion of respondent at the close of trial, the Court

amended the pleadings to conform to the evidence. See Rule

41(b)(1). Respondent alleged that the evidence will show that

petitioners received another $10,000 of gross income in 1990, and

that the deficiency and penalty for that year should be increased

accordingly.
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Following concessions on brief,1 we must decide:

1. Whether petitioners failed to include certain business

receipts in their 1990 and 1991 gross income. We hold they did

to the extent described herein.

2. Whether petitioners failed to report $3,553 of interest

income for 1991.2 We hold they did.

3. Whether petitioners are liable for penalties on their

1990 and 1991 taxes under section 6662(a). We hold they are.

Unless otherwise indicated, section references are to the

Internal Revenue Code applicable to the years in issue. Rule

references are to the Tax Court Rules of Practice and Procedure.

Dollar amounts are rounded to the nearest dollar.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulations and exhibits attached thereto are incorporated

herein by this reference. Petitioners are husband and wife, and

they filed joint Federal income tax returns for the subject

years. They resided in Hillsborough, California, when they

petitioned the Court.

1
Petitioners concede respondent's disallowance of $2,600 of
car and truck expenses and $2,295 of employee benefit program
expenses.
2
Respondent determined that petitioners failed to report
$7,463 of interest income for 1991. Petitioners concede $3,910
of this determination.
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Mr. Chu owns and operates a sole proprietorship in the

Fisherman's Wharf section of San Francisco, California. The

business is a retail gift shop known as "The Oceanfront Co."

(Oceanfront). Oceanfront sells mostly tourist souvenir items

ranging in price from 10 cents to $20. Mr. Chu also operates a

second retail store in the Fisherman's Wharf section. This

store, which is owned by Mr. Chu's wholly owned corporation, is

called "Hsiang Trading Co., Ltd."

During 1990, Mr. Chu owned the following bank accounts,

either individually or jointly with his wife:

Account Name Name of Bank Account Number

Joseph Chu & Annie Chu Bank of America 04127-03056
Joseph Chu or Annie Chu Union Bank 01219669
Joseph Chu United Savings 1-186313-1
Chu de Chien3 Shanghai Commercial Bank 28-28-03604-5
Chu de Chien Shanghai Commercial Bank 69-92-03115-0
Oceanfront Sanwa Bank 0886-06791
Oceanfront Bank of America 02682-09917

Petitioners deposited Oceanfront's receipts into the Sanwa Bank

and Bank of America accounts bearing Oceanfront's name.

Ming Chu Chu (Ming), Mr. Chu's mother, lived with

petitioners during 1990. Ming had power of attorney and

signatory authority over certain accounts at United Savings Bank

which were in the name of "Jenn-Daw Liu" (the Liu accounts).

These accounts were numbered 1-186357-8, 1-186466-7, 1-186533-4,

3
Chu de Chien is Joseph Chu's Chinese name.
 - 5 -

and 6-341787-7. Of these four accounts, the following three were

open during 1991: 1-186357-8, 1-186533-4, and 6-341787-7.

On December 4, 1989, Ming transferred $200,000 to Mr. Chu

from the Liu account number 1-186533-4. On June 29, 1990,

Mr. Chu withdrew $2,275 from his account number 1-186313-1, which

he then closed, and deposited this sum into the Liu account

number 1-186533-4. With respect to petitioners' other six bank

accounts that were open in 1990, all but one of them were open in

1991. Mr. Chu closed his account number 69-92-03115-0 during

1990.

During the subject years, Oceanfront accepted travelers’

checks in denominations of $20, $50, and $100. During 1990,

52 travelers checks in denominations of $50 and $100 were

deposited into the Liu account number 1-186357-8, and 96

travelers checks in denominations of $20, $50, and $100 were

deposited into the Liu account number 6-341787-7.

Oceanfront's records for the subject years consisted

primarily of canceled checks and a check register. Oceanfront

did not maintain a separate cash receipts journal or a sales

journal, and it did not retain the tapes from its cash register.

Respondent reconstructed petitioners' income for the subject

years by way of the bank deposits method. For 1990, respondent

determined that petitioners failed to report $669,128 of

Oceanfront's gross receipts. Respondent has since conceded that

these unreported receipts are no greater than $641,771. For
 - 6 -

1991, respondent determined that petitioners failed to report

gross receipts of $2,292,091. Respondent determined that

$1,989,965 and $302,126 of this amount were attributable to

deposits in petitioners' personal accounts and the Liu accounts,

respectively.

OPINION

Petitioners must prove that respondent's determinations set

forth in her notices of deficiency are incorrect. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). Respondent must

prove any increase in those deficiencies. Rule 142(a); see also

Estate of Bowers v. Commissioner, 94 T.C. 582, 595 (1990);

Price v. Commissioner, T.C. Memo. 1995-187.

Section 61(a) defines gross income as "all income from

whatever source derived." Sec. 61(a)(1). This definition

includes all "accessions to wealth, clearly realized, and over

which the taxpayers have complete dominion." Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 431 (1955); Hawkins v. United

States, 30 F.3d 1077, 1079 (9th Cir. 1994). When a taxpayer

keeps no books or records for his or her business, respondent is

authorized to recompute the taxpayer's income under any method

that respondent determines clearly reflects income. Sec. 446(b);

Commissioner v. Hansen, 360 U.S. 446, 467 (1959); Cole v.

Commissioner, 586 F.2d 747, 749 (9th Cir. 1978), affg. 64 T.C.

1091 (1975); Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965).

Respondent may use any method that is reasonable in light of the
 - 7 -

facts and circumstances of the case. Giddio v. Commissioner,

54 T.C. 1530, 1532-1533 (1970).

When the taxpayer's records are incomplete, the Commissioner

may look to the bank deposits method as evidence of income.

Nicholas v. Commissioner, 70 T.C. 1057, 1064 (1978); Estate of

Mason v. Commissioner, 64 T.C. 651, 656 (1978), affd. 566 F.2d

2 (6th Cir. 1977). The propriety of this method is well

grounded. Parks v. Commissioner, 94 T.C. 654, 658 (1990);

Nicholas v. Commissioner, supra at 1064; see also Estate of Mason

v. Commissioner, supra at 656-657; Harper v. Commissioner,

54 T.C. 1121, 1129 (1970). Although not conclusive, bank

deposits are prima facie evidence of income. Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason v.

Commissioner, supra at 656-657.

Petitioners argue that the questioned deposits in the bank

accounts bearing their names are moneys lent to them from foreign

individuals and a foreign corporation to invest in the United

States. Petitioners claim that they received loans totaling

$280,320 in 1990 and $2,719,680 in 1991. Respondent argues that

petitioners failed to present credible evidence at trial to

support their claim.

We agree with respondent. In an attempt to support their

claim, petitioners elicited testimony from themselves, Mr. Chu's

mother and father, and various friends of the family to the

effect that the disputed deposits were loans. We find none of
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this testimony to be credible. Much of their testimony is vague,

uncorroborated, and/or inconsistent. Under the circumstances, we

are not required to, and we do not, rely on that testimony to

support petitioners' positions herein. See Ruark v.

Commissioner, 449 F.2d 311, 312 (9th Cir. 1971), affg. per curiam

T.C. Memo. 1969-48; Clark v. Commissioner, 266 F.2d 698, 708-709

(9th Cir. 1959), affg. in part and remanding T.C. Memo. 1957-129;

Tokarski v. Commissioner, supra at 77.

Petitioners have not persuaded us that the disputed deposits

in their personal accounts were loans rather than taxable income.

Thus, we sustain respondent's determinations as reflected in her

notices of deficiency and as adjusted by her concession. With

respect to the $10,000 deposit that was not included in the

notice of deficiency, however, we hold for petitioners.

Respondent must prove that this deposit is income. See, e.g.,

Price v. Commissioner, T.C. Memo. 1995-187; Collins v.

Commissioner, T.C. Memo. 1994-409. She has failed to do so.

Respondent also determined that the deposits in the Liu

accounts were includable in petitioners' gross income.

Petitioners argue that the Liu accounts were not owned by them,

and that they did not receive any of the underlying funds in 1990

or 1991. Respondent argues that petitioners failed to prove that

they did not have an interest in the Liu accounts during the

subject years.
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We agree with respondent. The true owner of

income-producing property, such as the Liu accounts, is the one

with beneficial ownership, rather than mere legal title.

Serianni v. Commissioner, 80 T.C. 1090, 1104 (1983), affd.

765 F.2d 1051 (11th Cir.1985); Hook v. Commissioner, 58 T.C.

267, 273, 276 (1972). It is the ability to command the property,

or enjoy its economic benefits, that marks a true owner. Hang v.

Commissioner, 95 T.C. 74, 80 (1990). The Liu accounts are owned

by the person or persons who derive "readily realizable economic

value" from these accounts, and a person derives the requisite

value when he or she has the freedom to dispose of the accounts'

funds at will. Rutkin v. United States, 343 U.S. 130, 137

(1952).

We are unable to find that petitioners were not the true

owners of the Liu accounts.4 Although petitioners elicited

testimony at trial in an attempt to establish that they did not

own these accounts, we are unpersuaded by this testimony. For

the same reasons stated above, we find that none of this

testimony is credible. Because petitioners failed to disprove

respondent's determination on this issue, we sustain it. We also

sustain respondent's determination that petitioners are taxable

on the interest on these accounts. Petitioners had argued that

4
To the contrary, the record indicates that Mr. Chu
controlled the Liu accounts and that he had the ability to
dispose of the funds contained therein at will.
 - 10 -

the interest was not taxable to them because they did not own the

Liu accounts.

Respondent also determined that petitioners were liable for

the following penalties under section 6662(a): (1) Substantial

understatement (1990) and (2) negligence (1991). Section 6662(a)

imposes an accuracy-related penalty equal to 20 percent of the

portion of an underpayment that is attributable either to

negligence or to a substantial understatement of tax. See also

sec. 6662(b)(1) and (2).

Petitioners contend that neither of these penalties applies

to this case because they did not have a deficiency in either

year. We have sustained respondent's determinations of the

deficiencies. The record does not otherwise disprove

respondent's determination as to these penalties. We also

sustain her determination of them.

With respect to each issue in this case, we have considered

all arguments made by petitioners, and, to the extent not

addressed above, find them to be irrelevant or without merit.

To reflect the foregoing,

Decisions will be

entered under Rule 155.