Fisher v. Commissioner

T.C. Memo. 1997-450

UNITED STATES TAX COURT

ROBERT A. FISHER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15319-96. Filed October 1, 1997.

Robert A. Fisher, pro se.

John R. Mikalchus, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge: Respondent determined deficiencies in

petitioner's Federal income taxes and additions to tax as

follows:
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Additions to tax
Year Deficiency Sec. 6651(a)(1) Sec. 6654(a)

1987 $46,761 $11,690 $2,525
1988 52,610 13,071 3,340
1989 54,367 13,592 3,678
1990 31,418 7,801 2,054
1991 17,883 4,471 1,023
1992 43,839 10,957 1,909

After concessions, the issues for decision are: (1) Whether

bank deposits totaling $574,0941 constitute income to petitioner,

and (2) whether petitioner is liable for additions to tax

pursuant to sections 6651(a)(1) and 6654(a).2

1
Respondent has conceded the following reductions to
petitioner's self-employment income as determined in the notice
of deficiency:

Per Notice of Corrected
Year Deficiency Reduction Amount

1987 $116,177 ($300) $115,877
1988 158,626 (29,099) 129,527
1989 153,169 (14,414) 138,755
1990 88,044 (20,739) 67,305
1991 49,773 (6,781) 42,992
1992 101,022 (21,384) 79,638

Total $666,811 ($92,717) $574,094

Respondent also conceded that petitioner's capital gains, as
determined in the notice of deficiency for 1990, should be
reduced by $765.
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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FINDINGS OF FACT

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

The stipulation of facts is incorporated herein by this

reference. Petitioner resided in Silver Spring, Maryland, at the

time he filed his petition.

Petitioner did not file Federal income tax returns for the

taxable years 1987 through 1992. When respondent's revenue agent

first contacted petitioner, petitioner refused the revenue

agent's request to file the appropriate tax returns and refused

to provide any of his books and records or copies of bank

statements. The revenue agent obtained information reporting

documents (IRP) which had been filed with the Internal Revenue

Service and which reported miscellaneous income paid to

petitioner by third parties. Included in the IRP data were Forms

1099 which reported amounts petitioner received from the sale of

securities. The revenue agent included the proceeds of each

security sale reported on the IRP data in petitioner's income.

Petitioner never provided information to respondent's revenue

agent regarding the cost basis of the sold securities. However,

to the extent respondent's revenue agent was able to obtain

information regarding petitioner's cost basis, gain from the sale

of the securities was reduced by the verifiable cost basis.

Using the IRP information, the revenue agent identified

several bank accounts that were in petitioner's name or in the
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joint names of petitioner and his wife. The revenue agent served

a summons upon each of the banks to produce statements showing

deposit and withdrawal activity for each of petitioner's

accounts. On September 1, 1993, petitioner filed a petition to

quash respondent's summons of his bank records. The petition to

quash alleged that respondent committed fraud and

misrepresentation in obtaining the summons because the summons

itself was not issued by the Secretary. On February 4, 1994, the

U.S. District Court for the District of Columbia held that the

petition to quash was meritless and ordered summary enforcement

of the summons.

After obtaining the bank statements,3 respondent's revenue

agent determined the amount of income received by petitioner

based on the deposits to the various accounts. Included in the

bank deposits made by petitioner were payments he received as a

public insurance adjuster during the years at issue. Also

included in the bank deposits were two checks totaling $38,967,

which petitioner received on April 7, 1989, from the City of

Baltimore for professional services rendered to the city. To the

extent respondent's revenue agent could verify transfers between

petitioner's accounts, the revenue agent reduced the income

calculation by each amount which was transferred between accounts

3
All the monthly bank statements were obtained by the
revenue agent except for the August 1987 statement. Respondent's
revenue agent estimated the amount of August deposits by using a
weighted average of all the deposits in that year.
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to prevent counting of deposits as income twice. Similarly,

amounts that the revenue agent found in the IRP data, and which

were also included in the bank deposit records, were removed from

the bank deposit calculation to prevent double counting.

OPINION

Petitioner contends that respondent's determinations in the

notice of deficiency should not be given a presumption of

correctness because the determinations are arbitrary.

Respondent's determinations are entitled to a presumption of

correctness. Rule 142(a); Welch v. Helvering, 290 U.S. 111

(1933). Petitioner's argument implies that, because respondent

has made a number of errors or concessions, the notice of

deficiency is therefore arbitrary. We find no merit to this

argument. A determination that some part of a deficiency is

erroneous does not necessarily make the deficiency notice

arbitrary. Wells v. Commissioner, T.C. Memo. 1983-788.

We find no flaw in respondent's method of reconstructing

petitioner's income using the bank deposits method. The use of

the bank deposits method for computing income has long been

sanctioned by the courts. When a taxpayer keeps no books or

records and has large bank deposits, the Commissioner is not

arbitrary or capricious in resorting to the bank deposits method.

Mills v. Commissioner, 399 F.2d 744, 749 (4th Cir. 1968), affg.

T.C. Memo. 1967-67; DiLeo v. Commissioner, 96 T.C. 858, 867
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(1991), affd. 959 F.2d 16 (2d Cir. 1992). Because petitioner

failed to produce books and records, respondent reconstructed his

income from bank deposits. Respondent's reconstruction consisted

of adding petitioner's deposits, identifying any deposits which

represented interaccount transfers, and identifying duplications

with the IRP information. At trial, respondent further made

reductions in the bank deposits calculation. Petitioner has

failed to show that respondent improperly reconstructed his gross

income. Indeed, respondent has provided sufficient evidence to

convince this Court that the notice of deficiency was neither

arbitrary nor unreasonable. Therefore, the burden rests with

petitioner to demonstrate that respondent's determinations are

erroneous. Rule 142(a).

Petitioner has introduced no credible evidence that

disproves any element of respondent's deficiency determination.

Petitioner failed to produce books or records. However, we shall

address several issues petitioner raised at trial regarding the

accuracy of respondent's determinations. First, petitioner

testified that while he was employed as a public insurance

adjuster, he deposited funds into his account and later

transferred a portion of the same funds to his clients. However,

petitioner failed to offer any evidence regarding the specifics

of these alleged transfers to alleged clients. He produced no

canceled checks, witnesses, or other records. We find that

petitioner's vague and self-serving testimony does not substitute
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for the requirement that he maintain books and records. Mills v.

Commissioner, supra at 749; Harper v. Commissioner, 54 T.C. 1121,

1129 (1970).

Second, respondent reduced petitioner's income attributable

to the sale of certain securities by the amount of petitioner's

verifiable basis in those securities. With respect to the sale

of other securities, respondent included all the proceeds in

petitioner's income because no information was provided by

petitioner regarding his basis. Petitioner bears the burden of

demonstrating that he is entitled to a basis in the securities in

excess of that determined by respondent. Rule 142(a); Burnet v.

Houston, 283 U.S. 223, 227-228 (1931). Section 1012 provides

that the basis of property shall be the cost of such property.

Under the circumstances present here, "cost", for purposes of the

Code, means the amount paid by petitioner. Detroit Edison Co. v.

Commissioner, 319 U.S. 98, 102 (1943); Borg v. Commissioner, 50

T.C. 257, 263 (1968). Petitioner did not provide respondent with

any evidence regarding the cost to him of any of the sold

securities. We find that petitioner has not met his burden of

proving that he paid any amount in excess of that determined by

respondent.

Third, petitioner asserts that the bank charges that are

recorded on his bank statement should be allowed as deductions in

respondent's calculation of income. Section 162 allows as a

deduction all the ordinary and necessary business expenses paid
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or incurred during the taxable year. Although the bank

statements may be taken as substantiation that bank charges were

paid, petitioner did not offer any evidence that any part of the

bank charges was ordinary and necessary business expenses.

Petitioner's bank accounts appear to be personal in nature, and

there is no indication that the accounts were used in a trade or

business. We find that petitioner has not met his burden of

proving that bank charges are proper deductions.

Respondent also determined additions to tax under section

6651(a)(1) for petitioner's failure to file his 1987 through 1992

returns. Section 6651(a)(1) imposes an addition to tax of 5

percent of the amount of the tax due for each month a return is

delinquent, up to a maximum of 25 percent. The addition to tax

is not applicable if it is shown that such failure is due to

reasonable cause and not willful neglect. Sec. 6651(a)(1);

United States v. Boyle, 469 U.S. 241, 245 (1985). Petitioner has

the burden of proving that his failure to file was due to

reasonable cause and not willful neglect. Niedringhaus v.

Commissioner, 99 T.C. 202, 220-221 (1992).

Petitioner has failed to show that his failure to file

returns for the taxable 1987 through 1992 was due to reasonable

cause and not willful neglect. Petitioner is liable for the

additions to tax under section 6651(a)(1) for the taxable years

1987 through 1992.
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Respondent also determined that petitioner is liable for

additions to tax pursuant to section 6654(a) for failure to pay

estimated income tax. For the years in issue, petitioner had

substantial taxable income but made no estimated tax payments.

Imposition of the addition to tax under section 6654(a) applies

unless petitioner shows that one of the several statutory

exemptions applies. Sec. 6654(a); Niedringhaus v. Commissioner,

supra at 222; Grosshandler v. Commissioner, 75 T.C. 1, 20-21

(1980). Petitioner has made no such showing.

To reflect the foregoing,

Decision will be entered

under Rule 155.