T.C. Memo. 1997-94
UNITED STATES TAX COURT
MAURZAL FRIAS AND TERESA FRIAS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4416-95. Filed February 24, 1997.
Maurzal Frias and Teresa Frias, pro sese.
Edith F. Moates, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined deficiencies in,
additions to, and accuracy-related penalties on petitioners'
Federal income taxes as follows:
Additions to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662
1991 $5,002 --- $1,000
1992 9,202 $469 1,840
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All section references are to the Internal Revenue Code in effect
for the years in issue, and all Rules references are to the Tax
Court Rules of Practice and Procedure.
After concessions,1 the issues for decision are:
(1) Whether petitioners underreported their Schedule C gross
receipts for the years 1991 and 1992 in the amounts of $9,733 and
$16,403, respectively;
(2) whether petitioners are entitled to Schedule C
deductions for car and truck expenses for the years 1991 and 1992
in amounts greater than those allowed by respondent; and
(3) whether petitioners are liable for accuracy-related
penalties under section 6662(a) for negligence or disregard of
rules or regulations.
FINDINGS OF FACT
Petitioners, husband and wife, lived in Tulsa, Oklahoma, at
the time the petition was filed in this case.
During 1991 and 1992,2 Mr. Frias was self-employed primarily
as a house painter. He also worked as a musician and magician.
Petitioners reported their gross income and deductions on one
Schedule C; they described their principal business as
"Painting/Music". Petitioners were cash basis taxpayers.
Petitioners' tax returns were prepared by Richard Gardner.
1
On brief, petitioners have conceded the sec. 6651(a)
issue.
2
Unless otherwise indicated, all descriptions refer to the
1991 and 1992 tax years.
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Petitioners maintained four bank accounts, two at the Bank of
Oklahoma, one at the Bank of Tulsa, and one at Sooner Federal
Savings and Loan.
During an audit of petitioners' 1991 and 1992 Federal
individual income tax returns (tax returns), the revenue agent
analyzed petitioners' bank deposits and determined that
petitioners had underreported their gross income. Petitioners
did not report any income from magic shows or band activities on
their tax returns.
After the audit began, Mr. Gardner prepared detailed
schedules of petitioners' bank deposits, including a calculation
of "total income", for the 1991 and 1992 years. Cash withheld
from deposits3 was reflected on Mr. Gardner's schedules but was
not included in the total deposits.
Petitioners maintained check registers. The deposits
recorded in petitioners' check registers do not include cash
withheld from the deposits. A summary of total deposits, as
calculated by the IRS, Mr. Gardner, and petitioners, for 1991
follows:
Respondent's Petitioners'
Audit Mr. Gardner Check Registers
Bank of Oklahoma $18,585 $18,707 $18,711
Withheld cash 2,320 --- ---
Bank of Tulsa 33,226 34,956 35,097
Withheld cash 6,930 --- ---
Sooner Fed. S&L 13,982 13,981 13,571
Withheld cash 1,416 --- ---
3
When petitioners deposited checks, they often withdrew
cash, depositing less than the amount of the check.
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Bank of Oklahoma 5 --- ---
Total 76,464 67,644 67,379
Schedule C gross receipts reported on petitioners' 1991 tax
return were $57,501. "Total Income", as recalculated by Mr.
Gardner after the start of the audit, for 1991 was $64,281.
Petitioners made cash deposits--not to be confused with withheld
cash--during 1991 of $3,090. Mr. Gardner did not consider these
cash deposits as part of petitioners' Schedule C gross receipts.
Respondent determined that petitioners had underreported their
gross receipts for 1991 by $9,733. (Respondent did not consider
all deposits to be gross receipts; her revenue agent backed out
loan proceeds, account transfers, and gifts.)
A summary of total deposits, as calculated by the IRS, Mr.
Gardner, and petitioners, for 1992 follows:
Respondent's Petitioners'
Audit Mr. Gardner Check Registers
Bank of Oklahoma $63 $2,448 $2,492
Withheld cash 520 --- ---
Bank of Tulsa 68,398 68,348 48,886
Withheld cash 4,029 --- ---
Sooner Fed. S&L 11,570 11,115 7,796
Withheld cash 935 --- ---
Total 85,515 81,911 59,174
Schedule C gross receipts reported on petitioners' 1992 tax
return were $61,553. "Total Income", as recalculated by Mr.
Gardner after the start of the audit, for 1992 was $66,345.
Petitioners made cash deposits during 1992 totaling $16,476.
These cash deposits were not considered as part of petitioners'
Schedule C gross receipts as recalculated by Mr. Gardner.
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Respondent determined that petitioners had underreported their
gross receipts for 1992 by $16,403. (Again, respondent did not
consider all deposits to be gross receipts; her revenue agent
backed out loan proceeds, account transfers, and gifts.)
Auto and Truck Expense
Petitioners had three vehicles that they used in conjunction
with their business activities. Petitioners' 1991 Schedule C
shows 28,966 business miles and 4,000 personal miles.
Petitioners did not keep contemporaneous logs of business miles
driven; the mileage numbers on their tax returns were estimates.
At the time of the audit, petitioners reconstructed their
business mileage for 1991. Respondent accepted petitioners'
reconstruction and allowed 25,600 business miles for 1991.
At the time their case was heard by an IRS Appeals officer,
petitioners reconstructed their 1991 mileage to reflect a total
of 29,560 business miles. In their trial memorandum to this
Court, petitioners reconstructed their 1991 mileage to reflect a
total of 36,9204 business miles.
Petitioners' 1992 Schedule C reflects total miles of 38,286
with business miles of 34,786 and personal miles of 3,500. At
the time of the audit, petitioners reconstructed their business
mileage for 1992. Respondent accepted petitioners'
reconstruction of 28,909 business miles for 1992 but deducted
4
Petitioners' exhibit incorrectly totals the miles at
30,320.
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5,000 miles for commuting mileage--20 miles a day--in light of
the United States Supreme Court's decision in Commissioner v.
Soliman, 506 U.S. 168 (1993).
At the time they submitted their trial memorandum to this
Court, petitioners reconstructed their 1992 mileage to reflect a
total of 40,045 business miles.
OPINION
A. Additional Income
Section 6001 requires taxpayers to maintain records
sufficient to establish the amount of their gross income and
deductions. Where taxpayers fail to keep adequate records, the
Commissioner is authorized by section 446(b) to reconstruct their
income by any reasonable method. Petzoldt v. Commissioner, 92
T.C. 661, 687, 693 (1989). Use of the bank deposits method for
reconstructing income is well established. DiLeo v.
Commissioner, 96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir.
1992); Estate of Mason v. Commissioner, 64 T.C. 651, 656 (1975),
affd. 566 F.2d 2 (6th Cir. 1977). Under the bank deposits
method, there is a rebuttable presumption that all funds
deposited to a taxpayer's bank account constitute taxable income.
Price v. United States, 335 F.2d 671, 677 (5th Cir. 1964);
Hague Estate v. Commissioner, 132 F.2d 775, 777-778 (2d Cir.
1943), affg. 45 B.T.A. 104 (1941); DiLeo v. Commissioner, supra
at 868. The Commissioner must take into account any nontaxable
sources of deposits of which she is aware in determining the
portion of the deposits that represent taxable income, but she
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is not required to trace deposits to their source. Petzoldt v.
Commissioner, supra at 695-696; Estate of Mason v. Commissioner,
supra at 657.
Respondent's revenue agent analyzed petitioners' bank
accounts. She took the net deposits shown on the bank
statements, added back any cash withheld, and subtracted out any
deposits that were identifiable as nontaxable.
Petitioners argued at trial5 that their check registers show
their gross income. We find the check registers to be unreliable
as they do not tie in with petitioners' bank statements.
Petitioners conceded at trial that they did not report any income
from magic shows or band activities. Petitioners further argue
that the cash deposits into their bank accounts are not income
because the cash came from other bank accounts. Petitioners,
however, have offered no proof to support their claim other than
vague, uncorroborated testimony. Petitioners failed to prove
that respondent's reconstruction of income is incorrect. Rule
142(a). Therefore, we sustain respondent's determination on this
issue.
B. Deduction for Mileage
Petitioners admitted that their auto logs were estimates and
not contemporaneously made, as required by section 1.274-
5(c)(2)(ii)(a), Income Tax Regs. Respondent allowed petitioners'
5
Petitioners' brief consists of a two-page letter in which
they assert that no additional tax is owed. The mileage and
negligence issues are not addressed.
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auto mileage based on their initial reconstructions submitted at
the time of the audit. Petitioners' ever increasing claims for
additional mileage are unsubstantiated. This issue was not
addressed by petitioners on brief. Deductions are a matter of
legislative grace; petitioners have the burden of showing that
they are entitled to any deduction claimed. New Colonial Ice Co.
v. Helvering, 292 U.S. 435, 440 (1934). We find that petitioners
have not proven that they are entitled to mileage expenses in
excess of those allowed by respondent.
C. Section 6662(a) Accuracy-Related Penalty
Section 6662(a) imposes a penalty in an amount equal to 20
percent of the portion of the underpayment of tax attributable to
one or more of the items set forth in section 6662(b), such as
negligence or disregard of rules or regulations. Respondent
determined that the entire underpayment of petitioners' tax was
due to negligence or intentional disregard of rules or
regulations. Sec. 6662(b)(1). As in the case of the predecessor
section covering the addition to tax for negligence, section
6653(a), petitioners bear the burden of proof on the penalties in
issue. Rule 142(a); Neely v. Commissioner, 85 T.C. 934, 947
(1985). Negligence includes a failure to make a reasonable
attempt to comply with the provisions of the internal revenue
laws. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.
Negligence is the failure to exercise due care or the failure to
do what a reasonable and prudent person would do under the
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circumstances. Neely v. Commissioner, supra. Disregard includes
any careless, reckless, or intentional disregard of rules or
regulations. Sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.
The accuracy-related penalties of section 6662 do not apply
with respect to any portion of an underpayment if it is shown
that there was reasonable cause for such portion and the taxpayer
acted in good faith with respect to such portion. Sec.
6664(c)(1). The determination of whether petitioners acted with
reasonable cause and in good faith depends upon the pertinent
facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioners have conceded that they failed to keep accurate
books and records and that they omitted entire sources of income
from their tax returns. Petitioners have offered no evidence
that they were not negligent and do not address the issue on
brief. We cannot be sure that petitioners intended to abandon
this issue, but in any case respondent's determination of the
applicable penalty must be sustained as petitioners have not met
their burden of proof on this issue.
To reflect the foregoing and concessions of the parties,
Decision will be entered
under Rule 155.