T.C. Memo. 1997-383
UNITED STATES TAX COURT
EVA J. MADIGAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20371-94. Filed August 21, 1997.
B. Gray Gibbs, for petitioner.
J. Scot Simpson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WRIGHT, Judge: Respondent determined a deficiency of
$20,238 in petitioner's Federal income tax for taxable year 1991.
Respondent further determined that petitioner is liable for
additions to tax under sections 6651(a)1 and 6654 in the amounts
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect during the year at issue, and
(continued...)
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of $4,999 and $1,148, respectively. After concessions, the sole
issue for decision is whether respondent has connected certain
bank deposits that petitioner made in 1991 to a likely source of
income.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and attached exhibits are incorporated
herein. Petitioner resided in St. Petersburg, Florida, at the
time she filed the petition in this case.
Petitioner failed to file a Federal income tax return for
taxable year 1991. As a result, respondent prepared a substitute
return for petitioner and subsequently issued a corresponding
notice of deficiency on August 9, 1994. Only one issue remains
unresolved, and it involves bank deposits that respondent
identified during an analysis of petitioner's bank accounts.
Respondent raised this issue by asserting an increased deficiency
based on unexplained bank deposits as discussed below.
While conducting the above-mentioned bank deposits analysis,
respondent identified unexplained deposits totaling $30,212.
Respondent subsequently concluded that most of these deposits
were explained and reduced this amount to $2,808.35. The
deposits remaining at issue consist exclusively of checks and
were made to an account entitled "Madigan and Company". The
1
(...continued)
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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following table lists the checks that constitute the disputed
deposits:
DATE PAYEE MAKER AMOUNT NOTATIONS
of CHECK of CHECK of CHECK of CHECK on CHECK
1/21/91 Eva Madigan Nancy Burley $ 50.00 Payroll
Bookkeeping
12/**/901
1/31/91 Madigan & Nancy Burley 50.00 ---
Company
4/15/91 Madigan and Nancy Burley 50.00 1st Quarter
Company Payroll tax
Bookkeeping
5/15/91 Madigan & Nancy Burley 50.00 April 91
Company Payroll
Taxes
6/24/91 Madigan & Nancy Burley 50.00 Payroll Tax
Company Accounting
7/13/91 Madigan and Nancy Burley 50.00 ---
Company
8/31/91 Madigan & Nancy Burley 50.00 Payroll
Company bookkeeping
9/16/91 Madigan & Co. Nancy Burley 50.00 Sept 91
Bookkeeping
11/15/91 Madigan & Co. Nancy Burley 50.00 Bookkeeping
12/6/91 Madigan & Co. Nancy Burley 50.00 Bookkeeping
5/23/91 Eva Madigan Judith A. White 425.00 1990 Tax
Prep.
**/**/91 Eva Madigan Judith A. White 225.00 ---
2/15/91 Eva Madigan Prudential-Bache 858.35 ---
4/5/91 Eva Madigan Vickie Conant 600.00 ---
**/**/** Eva J. Madigan Ted Elcross 200.00 ---
Total $2,808.35
1
Asterisks indicate illegible writing contained in the record.
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OPINION
Section 61(a) defines gross income as "all income from
whatever source derived". Sec. 61(a)(1). This definition
includes all accessions to wealth that are clearly realized and
over which a taxpayer has complete dominion. Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 431 (1955).
The propriety of the bank deposits method of income
reconstruction is well established. Parks v. Commissioner, 94
T.C. 654, 658 (1990); Nicholas v. Commissioner, 70 T.C. 1057,
1064 (1978); Estate of Mason v. Commissioner, 64 T.C. 651,
656-657 (1975), affd. 566 F.2d 2 (6th Cir. 1977); Harper v.
Commissioner, 54 T.C. 1121, 1129 (1970). In general, bank
deposits are prima facie evidence of income, Marcello v.
Commissioner, 380 F.2d 494, 496-497 & n.4 (5th Cir. 1967);
Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason
v. Commissioner, supra, and the taxpayer must normally refute the
Commissioner's determination that such deposits stem from
unreported income. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). However, when the Commissioner has the burden
of proof, bank deposits by themselves do not give rise to a
"logical presumption" that they are income. Armes v.
Commissioner, 448 F.2d 972, 974 (5th Cir. 1971), affg. in part
and remanding in part T.C. Memo. 1969-181. Under this
circumstance, the Commissioner may either connect the bank
deposits to a likely source of income or, where the taxpayer
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alleges a nontaxable source, negate each nontaxable source
alleged by the taxpayer. United States v. Massei, 355 U.S. 595
(1958); Holland v. United States, 348 U.S. 121, 137-138 (1954);
Armes v. Commissioner, supra; Parks v. Commissioner, supra at
661. If the Commissioner connects the bank deposits to a likely
source of income, the finder of fact may properly conclude that
such deposits are income. Holland v. United States, supra; Armes
v. Commissioner, supra.
Respondent has the burden of proof in the instant case
because the issue before us pertains to an increased deficiency.
Rule 142(a). Moreover, because petitioner does not contend that
the deposits at issue stem from a nontaxable source, respondent
must connect the deposits to a likely source of income in order
to satisfy the burden of proof.
Respondent maintains that a preponderance of the evidence
indicates that the deposits at issue stem from a taxable source
of income. Specifically, it is respondent's contention that
petitioner conducted a bookkeeping business during 1991, and that
the deposits were made with checks that petitioner received in
exchange for services that she performed in connection with that
business. As support for this argument, respondent explains that
the checks at issue were deposited into petitioner's "business"
bank account. Respondent also explains that a majority of the
checks at issue were made payable to petitioner's business and
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contain notations that indicate that such checks constitute
payment for services rendered.2
Petitioner's sole argument is that respondent has failed to
carry the burden of proof.3
We agree with respondent but only with respect to the checks
drawn by Nancy Burley (Ms. Burley) and Judith White (Ms. White).
There is little doubt that the bank account involved in this case
was a "business" account. However, establishing that petitioner
deposited the checks at issue into a business account is not
sufficient to satisfy respondent's burden, and it does not
convince us that the deposits were likely made from a taxable
source of income. But the size and frequency of the checks drawn
by Ms. Burley indicate a regular source of cash which is
consistent with the operation of a service-oriented business,
such as a bookkeeping service. Moreover, nine of the checks
drawn by Ms. Burley were made payable to "Madigan and Company,"
or a variation thereof, and not to petitioner personally.
Additionally, eight of the checks drawn by Ms. Burley contain
notations that suggest that such checks were issued as payment
2
Respondent advances several other arguments in support of
the contention that the deposits at issue represent taxable
income to petitioner. However, because these arguments are
significantly less persuasive than respondent's arguments with
respect to the type of account involved, the payee, and the
markings contained on the checks at issue, we decline to discuss
them.
3
Petitioner does not address the individual deposits at
issue and does not contend that such deposits stem from a
nontaxable source.
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for services rendered. When we consider these three additional
facts in conjunction with the fact that petitioner deposited the
checks drawn by Ms. Burley into the above-mentioned business
account, we have little trouble concluding that respondent has
connected these checks to a likely source of taxable income.
Petitioner failed to offer any evidence to the contrary.
We reach the same conclusion with respect to the two checks
drawn by Ms. White. Although the evidence in the record
regarding the checks drawn by Ms. Burley is more convincing than
the evidence in the record regarding the checks drawn by Ms.
White, the latter evidence is sufficiently persuasive, and we
conclude that respondent has adequately linked the checks drawn
by Ms. White to a likely source of taxable income. Petitioner
failed to offer any evidence to the contrary.
We reach a different conclusion, however, with respect to
the checks that petitioner received from Vickie Conant (Ms.
Conant), Ted Elcross (Mr. Elcross), and Prudential-Bache. Each
of these checks was made payable to petitioner personally and
none contains markings that suggest that it was received in
exchange for services rendered. All that is certain is that
petitioner deposited these checks into her business bank account.
As we noted above, however, this alone is not sufficient to
persuade us that these deposits stem from a likely source of
taxable income. The connection proffered by respondent is too
tenuous.
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Accordingly, we conclude that respondent has carried the
burden of proof with respect to the checks issued by Ms. Burley
and Ms. White, but that respondent has not similarly carried the
burden of proof with respect to the checks that petitioner
received from Ms. Conant, Mr. Elcross, and Prudential-Bache.
To reflect the foregoing,
Decision will be
entered under Rule 155.