T.C. Memo. 1997-6
UNITED STATES TAX COURT
KENNETH SIEBERT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17154-94. Filed January 2, 1997.
Kenneth Siebert, pro se.
Ann S. O'Blenes and John R. Hunter, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: By notices dated June 28, 1994, respondent
determined deficiencies in and additions to petitioner's Federal
income taxes as follows:
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Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6654
1988 $33,616 $8,404 $330
1989 44,162 10,972 2,966
1990 8,376 2,094 551
1991 8,766 2,192 504
1992 8,815 2,204 384
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
The issues for decision are as follows:
1. Whether petitioner failed to report income for each year
in issue;
2. whether petitioner, pursuant to section 1401, is liable
for self-employment tax;
3. whether petitioner, pursuant to section 6651(a)(1), is
liable for additions to tax for failure to file timely Federal
income tax returns; and
4. whether petitioner, pursuant to section 6654, is liable
for additions to tax for failure to make estimated tax payments.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioner resided in Plano, Texas, at the time his petition was
filed.
I. Petitioner's Tax Consulting Practice
A. In General
During the years in issue, petitioner was a self-employed
tax consultant in Dallas, Texas. Petitioner leased office space
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at the law firm of Hercules & Lavery for approximately $400 per
month, and he referred to the firm approximately a dozen of his
clients who required specialized work. In early 1989, Hercules &
Lavery asked petitioner to vacate the leased premises after they
discovered that he was holding himself out as a member of their
firm.
B. Petitioner's Dealings With James Franz
In January 1987, James Franz hired petitioner to create a
retirement plan. He paid petitioner a $10,000 retainer. On
December 6, 1988, petitioner incorporated Showwalter, Inc.
(Showwalter), under Texas law. Mr. Franz served as Showwalter's
sole shareholder and director. Petitioner subsequently created a
profit-sharing plan for Showwalter and prepared and filed an
application with the Internal Revenue Service (IRS) to determine
whether the profit-sharing plan was a qualified plan under the
Internal Revenue Code.
C. Petitioner's Dealings With Virginia Shaw
In December 1987, Virginia Shaw hired petitioner to prepare
her 1987 tax return. In 1988, she paid him a $5,000 retainer in
five $1,000 monthly installments. On August 12, 1988, petitioner
filed a request for a 2-month extension of time to file Ms.
Shaw's return. Petitioner provided the following reason for his
extension request: "As the preparer, I am behind due to audits
and tax court cases. The taxpayer should not be penalized
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because of my schedule." Petitioner's request was granted, and
the return was eventually prepared by petitioner on December 22,
1989.
D. Petitioner's Dealings with Margaret Boals
In January 1988, Mr. Franz received a telephone call from
his mother, Margaret Boals. She told him that she had received
two notices of deficiency from the IRS demanding a total of
$500,000 in delinquent taxes from her husband's estate. Mr.
Franz contacted petitioner and on April 13, 1988, took him to see
Ms. Boals. During his meeting with Ms. Boals, petitioner
suggested that she withdraw all of her money from her financial
accounts and transfer it to him. Petitioner told Ms. Boals that
the IRS could not seize the money if he held it in his trust
account.
Ms. Boals agreed to pay petitioner $150 per hour for his
services and, over the course of several weeks, gave petitioner
three checks totaling $312,436.05 which petitioner deposited into
a newly opened trust account. Petitioner and Ms. Boals agreed
that petitioner would use the funds only when Ms. Boals so
authorized. Between 1988 and 1989, petitioner wrote, with Ms.
Boals' authorization, checks on the account totaling $109,124.50.
During the same period, however, petitioner also wrote, without
authorization, over $180,000 in checks for a variety of his
personal expenses including: (1) Repairs and parts for his BMW
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and Jaguar, (2) computer equipment, (3) groceries, (4) rent at
Hercules & Lavery, and (5) travel. Petitioner also transferred
some of the funds to his wife and daughter.
On February 4, 1992, petitioner was charged with the felony
offense of misapplication of fiduciary property. The indictment
alleged that petitioner misapplied Ms. Boals' funds for his
personal benefit. In June 1992, petitioner was convicted,
sentenced to 6 years probation, and assessed a $10,000 fine. The
Court of Appeals for the Fifth District of Texas at Dallas upheld
petitioner's conviction on August 2, 1995. Petitioner
subsequently filed a petition for discretionary review with the
Court of Criminal Appeals for the State of Texas.
II. Petitioner's Other Businesses
A. Computers & Stuff, Inc.
On June 13, 1988, petitioner used, without authorization,
some of Ms. Boals' money to incorporate under Texas law Computers
& Stuff, Inc. (Computers & Stuff). Computers & Stuff was created
to sell computer hardware and software to the general public.
Petitioner purchased a quarter-page advertisement for Computers &
Stuff in the 1988-89 Southwestern Bell Yellow Pages. On December
22, 1989, Computers & Stuff forfeited its right to conduct
business in Texas, because it failed to pay Texas franchise
taxes. Its corporate charter was subsequently revoked on June
18, 1990.
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B. Dallas Executive Couriers
In early 1989, petitioner decided to establish a courier
business. To obtain the necessary financing, petitioner
persuaded Mr. Franz on March 23, 1989, to sign a letter of
credit. A letter for ‹60,000 was issued by the Isle of Man Bank
and was secured by the Showwalter pension plan. On April 19,
1989, petitioner incorporated under Texas law Dallas Executive
Couriers, Inc. (Executive Couriers). Executive Couriers operated
out of petitioner's office at Hercules & Lavery. Hercules &
Lavery used, and paid petitioner compensation for, Executive
Courier's services during 1989. On October 17, 1990, Executive
Couriers forfeited its right to conduct business in Texas,
because it failed to pay Texas franchise taxes. Its corporate
charter was subsequently revoked on June 17, 1991.
III. Respondent's Investigation and Determinations
After petitioner was convicted of misappropriating Ms.
Boals' money, the Dallas district attorney's office notified the
IRS of petitioner's conviction and informed it that petitioner
may not have reported the misappropriated funds on his Federal
income tax returns. The IRS assigned petitioner's case to
Revenue Agent Jesse Luna. Agent Luna obtained court records from
the Dallas district attorney's office. Based on these records,
Agent Luna determined that petitioner had unreported income of
$74,000 and $110,000 in 1988 and 1989, respectively.
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During the course of his investigation, Agent Luna
discovered that petitioner had not filed Federal income tax
returns for 1988 through 1992. Agent Luna contacted petitioner
and requested that he produce financial records for those years.
Petitioner stated that he would have to speak with his accountant
and get back to Agent Luna. Petitioner, however, failed to
contact Agent Luna. Agent Luna did not make another attempt to
contact petitioner, and he failed to independently obtain
petitioner's bank records and other financial data.
Agent Luna reconstructed petitioner's income for the years
in issue (in addition to the income for 1988 and 1989 from
misappropriated funds) using the Consumer Price Index (CPI)
Rollover Method as follows:
1988 1989 1990 1991 1992
Base year income-1987 $27,842 $27,842 $27,842 $27,842 $27,842
x CPI increase 1.02834 1.05846 1.10806 1.15855 1.18601
Gross income 28,631 29,470 30,851 32,256 33,021
On June 28, 1994, respondent issued two notices of deficiency to
petitioner. Respondent determined that petitioner was liable for
deficiencies of $33,616, $44,162, $8,376, $8,766, and $8,815 for
1988, 1989, 1990, 1991, and 1992, respectively. The deficiencies
included self-employment tax of $5,859, $5,978, $4,359, $4,558,
and $4,666 for 1988, 1989, 1990, 1991, and 1992, respectively.
OPINION
I. Unreported Income
Generally, the Commissioner's notice of deficiency is
presumed to be correct, and the taxpayer bears the burden of
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proving that it is erroneous. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). Because of this presumption of
correctness, courts will generally not look behind the notice of
deficiency to examine the evidence upon which the determination
was made. Dellacroce v. Commissioner, 83 T.C. 269, 280 (1984).
The Court of Appeals for the Fifth Circuit, to which appeal of
this case would lie, has noted, however, that "a court need not
give effect to the presumption of correctness in a case involving
unreported income if the Commissioner cannot present some
predicate evidence supporting its determination." Portillo v.
Commissioner, 932 F.2d 1128, 1133 (5th Cir. 1991), affg. in part
and revg. and remanding in part T.C. Memo. 1990-68. If the
presumption of correctness does not apply, the Commissioner's
determination will be deemed arbitrary, and consequently, she
will bear the burden of proving the correct amount of any taxes
owed. Sealy Power, Ltd. v. Commissioner, 46 F.3d 382, 386 (5th
Cir. 1995), affg. in part and revg. and remanding in part T.C.
Memo. 1992-168.
In her notice of deficiency, respondent determined that
petitioner had embezzlement income. Based on her CPI
calculations, she also determined that petitioner had unreported
self-employment income from his tax consulting practice and other
businesses. We now address the validity of these determinations.
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A. Embezzlement Income
Respondent determined that petitioner had embezzlement
income of $74,000 and $110,000 for 1988 and 1989, respectively.
Gross income includes all income from whatever source derived.
Sec. 61(a). When a taxpayer acquires earnings lawfully or
unlawfully, without recognition of an obligation to repay and
without restriction as to their disposition, taxable income is
deemed to have been received, even though the taxpayer may be
required to repay the money at a later date. James v. United
States, 366 U.S. 213, 219-220 (1961); North Am. Oil Consol. v.
Burnet, 286 U.S. 417, 424 (1932); Mais v. Commissioner, 51 T.C.
494, 498-499 (1968). Therefore, embezzled funds constitute
taxable income to the embezzler in the year of embezzlement.
James v. United States, supra at 220.
Respondent has presented predicate evidence to establish
that petitioner had embezzlement income in 1988 and 1989. In
1988, petitioner persuaded Ms. Boals to transfer $312,436.05 into
his trust account. During 1988 and 1989, petitioner used,
without Ms. Boals' authorization, over $180,000 of these funds
for his personal benefit. He was subsequently convicted of
misappropriating fiduciary property, and his conviction was
upheld on appeal. Therefore, we conclude that respondent has
presented predicate evidence to establish that petitioner
received embezzlement income in 1988 and 1989. Accordingly,
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respondent's determination is presumed correct, and petitioner
bears the burden of proving it erroneous.
Petitioner contends that he earned the embezzled funds as
fees for his services. Alternatively, he contends that he
borrowed $300,000 from Ms. Boals. Petitioner failed to introduce
sufficient evidence to support either contention. Petitioner
also contends that because he has filed a petition for
discretionary review with the Court of Criminal Appeals for the
State of Texas, his conviction is not yet final and may not be
used against him. He is mistaken. To be held liable for tax on
embezzled income, there is no requirement that there be a prior
judicial determination that an embezzlement has occurred. This
Court is permitted to make its own independent determination.
See, e.g., Snavely v. Commissioner, T.C. Memo. 1994-256; Solomon
v. Commissioner, T.C. Memo. 1982-603, affd. 732 F.2d 1459 (6th
Cir. 1984); Beaton v. Commissioner, T.C. Memo. 1980-413, affd.
664 F.2d 315 (1st Cir. 1981). We have reviewed the record and
determined that petitioner embezzled the funds from Ms. Boals.
Accordingly, we conclude that petitioner received embezzlement
income in 1988 and 1989 and sustain the deficiencies resulting
from that income as determined by respondent.
B. CPI Rollover Method Calculations
Every taxpayer is required to maintain adequate records of
taxable income. Sec. 6001. In the absence of such records, the
Commissioner may reconstruct the taxpayer's income by any method
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that clearly reflects income. Sec. 446(b); Meneguzzo v.
Commissioner, 43 T.C. 824, 831 (1965). Because petitioner failed
to produce any records, respondent used the CPI Rollover Method
to reconstruct petitioner's income for the years in issue. Under
this method, income is computed by multiplying the adjusted gross
income reported on the taxpayer's most recently filed return by
the increase in the CPI, as published by the U.S. Department of
Labor, for the year in issue. See Moore v. Commissioner, 722
F.2d 193, 196 (5th Cir. 1984), affg. T.C. Memo. 1983-20. Based
on her CPI calculations, respondent determined that petitioner
had unreported self-employment income of $28,631, $29,470,
$30,851, $32,256, and $33,021 for 1988, 1989, 1990, 1991, and
1992, respectively.
Respondent has established that petitioner engaged in a tax
consulting practice during 1988 and 1989. During these years,
Ms. Boals paid petitioner $150 per hour for his services.
Petitioner rented office space from Hercules & Lavery and
referred approximately a dozen of his clients to the firm during
this same period. In 1988, Virginia Shaw paid petitioner a
$5,000 retainer to prepare her 1987 Federal income tax return.
In addition, petitioner requested an extension of time to file
Ms. Shaw's return, because he was behind on audits and Tax Court
cases. Moreover, petitioner testified that he was a tax
consultant during 1988 and 1989, and he knew that he had to file
returns for these years. Therefore, we conclude that respondent
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has provided predicate evidence, corroborated by petitioner's own
testimony, to demonstrate that petitioner received taxable income
in 1988 and 1989 from his consulting practice. Accordingly, the
presumption of correctness applies to respondent's CPI
calculations with respect to these years, and petitioner bears
the burden of proving them erroneous.
Petitioner has failed to provide any credible evidence to
carry his burden of proof with respect to these years.
Consequently, we hold that petitioner is liable for the 1988 and
1989 deficiencies attributable to respondent's CPI calculations.
Respondent has failed to provide predicate evidence,
however, to establish that petitioner received income from his
tax consulting practice, Executive Couriers, or Computers & Stuff
during 1990, 1991, and 1992. Therefore, respondent's
determinations relating to these years are arbitrary, and she
bears the burden of proof. See, e.g., Senter v. Commissioner,
T.C. Memo. 1995-311 (concluding that the Commissioner failed to
provide predicate evidence to support her deficiency
determinations based on CPI calculations). Respondent failed to
present sufficient evidence that petitioner received income in
these years. Accordingly, we conclude that petitioner is not
liable for the alleged deficiencies relating to unreported income
in 1990, 1991, and 1992.
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II. Self-Employment Tax
Respondent determined that petitioner, pursuant to section
1401, is liable for self-employment tax of $5,859, $5,978,
$4,359, $4,558, and $4,666 for 1988, 1989, 1990, 1991, and 1992,
respectively. Section 1401 imposes a tax on self-employment
income. Self-employment income consists of gross income from any
trade or business carried on by an individual less allowable
deductions attributable to the trade or business. Sec. 1402(a).
Respondent's determination that petitioner is liable for self-
employment tax is presumed to be correct, and petitioner bears
the burden of proving that it is erroneous. Rule 142(a); Kasey
v. Commissioner, 33 T.C. 656, 660 (1960).
Petitioner introduced no evidence relating to the self-
employment tax issue. Therefore, petitioner has failed to carry
his burden of proof and is liable for self-employment tax for
1988 and 1989. He is not liable, however, for self-employment
tax with respect to 1990, 1991, and 1992, because we have
concluded that there are no deficiencies for those years.
III. Additions to Tax for Failure To File Timely Returns
Respondent determined that petitioner, pursuant to section
6651(a)(1), was liable for additions to tax for failure to file
timely Federal income tax returns. Section 6651(a)(1) imposes an
addition to tax for failure to file a timely return, unless it is
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shown that such a failure is due to reasonable cause and not due
to willful neglect. Petitioner bears the burden of proving that
his failure to file a timely return was due to reasonable cause
and not due to willful neglect. Rule 142(a); Baldwin v.
Commissioner, 84 T.C. 859, 870 (1985). Petitioner, however, did
not dispute his liability for these additions to tax. As a
result, petitioner has failed to carry his burden of proof and is
liable for the additions to tax for 1988 and 1989. Petitioner is
not liable, however, for the additions to tax with respect to
1990, 1991, and 1992, because we have concluded that there are no
deficiencies for those years.
IV. Additions to Tax for Failure To Make Estimated Tax Payments
Respondent determined that petitioner, pursuant to section
6654, was liable for additions to tax for failure to make
estimated tax payments. Section 6654 imposes an addition to tax
for failure to make estimated income tax payments. Petitioner
bears the burden of proving that he paid estimated tax or that
any of the exceptions apply. Rule 142(a); Grosshandler v.
Commissioner, 75 T.C. 1, 20-21 (1980). Petitioner, however, did
not dispute his liability for these additions to tax. Therefore,
petitioner has failed to carry his burden of proof and is liable
for the additions to tax for 1988 and 1989. Petitioner is not
liable, however, for the additions to tax with respect to 1990,
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1991, and 1992, because we have concluded that there are no
deficiencies for those years.
We have considered the other arguments made by petitioner
and respondent and found them to be either irrelevant or without
merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.