T.C. Memo. 1999-159
UNITED STATES TAX COURT
PAUL MIFSUD AND MARIA G. MIFSUD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12569-97. Filed May 12, 1999.
B. Gray Gibbs, for petitioners.
Charles A. Baer, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined the following de-
ficiencies in, and fraud penalties under section 66631 on, peti-
tioners' Federal income tax (tax):
1
All section references are to the Internal Revenue Code
in effect for the years at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
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Fraud
Year Deficiency Penalty
1992 $18,087 $13,565
1993 15,653 11,740
1994 17,073 12,805
In respondent's answer, respondent alleged in the alterna-
tive, inter alia, that petitioners fraudulently and with intent
to evade tax understated their income tax liability for 1992,
1993, and 1994 in the amounts of $26,132, $30,201, and $39,712,
respectively.
The issues remaining for decision are:
(1) Do petitioners have unreported income reconstructed
under the bank deposits method for 1992, 1993, and 1994? We hold
that they do in the amounts of $73,233.69, $80,607, and $103,724,
respectively.2
(2) Are petitioners liable for the fraud penalty under
section 6663 for each of the years 1992, 1993, and 1994? We hold
that they are.
(3) Did the period of limitations for 1992 prescribed by
section 6501 expire? In light of our holding in (2) above, we
hold under section 6501(c)(1) that it did not.
2
During the trial in this case, the parties agreed that
petitioners have unreported income attributable to their personal
use of restaurant goods for each of the years at issue in the
amount of $2,600.
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FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioners, Paul Mifsud
(Mr. Mifsud) and Maria G. Mifsud (Ms. Mifsud), resided in Hudson,
Florida.
Ms. Mifsud emigrated from Malta to the United States around
1952 or 1953, when she was 13 years old. Mr. Mifsud, who was one
of ten children, and his father, also named Paul Mifsud, em-
igrated from Malta to the United States in 1951, when Mr. Mifsud
was around 14 years old and his father was around 47 years old.
One of Mr. Mifsud's brothers and one of his sisters had pre-
viously emigrated to the United States in 1947 and 1950, re-
spectively. Mr. Mifsud's mother and two of his brothers em-
igrated to the United States in 1953, and his other brothers came
to the United States thereafter. At the time of the trial in
this case, Mr. Mifsud's mother, who was still living in the
United States, was 94 years old and very ill. At that time, she
was living on funds that Mr. Mifsud and certain of his siblings
sent to her for her care and on Social Security payments which
she was receiving and which were attributable to the earnings of
her husband from his employment in the United States.
During World War II, Malta was devastated by German air
strikes. Estimates of Maltese national income in the postwar
period ranged from $28.2 million to $44.3 million. In 1951, when
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Mr. Mifsud and his father emigrated from Malta to the United
States, Malta was a country of small shopkeepers, dockworkers,
and bureaucrats, with a small Anglo-Maltese ruling class, and the
median wage for private workers in Malta was about $11 per week,
or $572 per year.
Maltese official records show only two purchases and one
sale of real property by Mr. Mifsud's father and one sale of real
property by Mr. Mifsud and certain of his family members. In
November 1929, Mr. Mifsud's father purchased a house in Malta for
570 British pounds sterling (pounds), which was the official
currency of Malta. In April 1937, he sold that house for 270
pounds. In September 1938, Mr. Mifsud's father purchased another
house in Malta for 350 pounds. In 1966, Mr. Mifsud, along with
his mother, three brothers, and a sister, sold a house in Malta
for 2,600 pounds, or $7,254 at the exchange rate in effect in
1966 of $2.79 per pound.
In 1951, Malta was under English exchange controls which
limited the ability of Maltese persons to bring any form of
currency out of the country. The export in 1951 of currency from
Malta in an amount of pounds or any other form of currency equal
to approximately $500,000 would have had a serious impact on
Malta's economy and the policy of its Government and would have
been required by the English exchange controls to have been
documented. Malta has no official record that an export from
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Malta took place in 1951 of currency in an amount of pounds or
any other form of currency equal to approximately $500,000.
Mr. Mifsud, who lived with his father after he arrived in
the United States in 1951, began working about one year there-
after, when he was around 15 years old. Since that time until
petitioners moved to Florida in 1980, Mr. Mifsud worked at
different times in the kitchens of a few hotels in the Detroit
metropolitan area, in the kitchen of a cafeteria at Ford Motor
Company, in a restaurant in the Detroit metropolitan area, and at
a Ford Motor Company plant. For a period of years during the
1960's, Mr. Mifsud also operated a laundromat. Around 1974,
petitioners purchased a restaurant in the Detroit metropolitan
area, which they operated until they moved to Florida in 1980.
Petitioners, who married in 1960, have two daughters, Diana
Mamo (Ms. Mamo) and Geraldine, who were born in 1962 and 1966,
respectively. Throughout the years at issue, Ms. Mamo was
married to Joe Mamo (Mr. Mamo), and they have children from that
marriage. They divorced in 1995.
In December 1979, while petitioners were living in Michigan,
a robbery occurred at their house during which $40,000 was stolen
from a safe. In 1980, they sold the restaurant that they owned
and operated in Michigan and moved to Florida. When petitioners
first moved to Florida, they rented a house in Embassy township.
Shortly thereafter, they purchased a house in Port Richey,
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Florida. Around 1989 or 1990, petitioners purchased a house in
Hudson, Florida, in which they resided at the time of the trial
in this case.
Shortly after petitioners moved to Florida, they, together
with their daughter Ms. Mamo and her husband Mr. Mamo, organized
Paul & Joe, Inc., an S corporation, for the purpose of acquiring
and operating Spring Hill Family restaurant (Spring Hill res-
taurant). At all relevant times, petitioners owned in the
aggregate 60 percent, and Ms. Mamo and Mr. Mamo owned in the
aggregate 40 percent, of the stock of Paul & Joe, Inc. Spring
Hill restaurant is located near Weehi Wachee Springs, a major
Florida tourist attraction.
Around 1990, petitioners, together with their daughter Ms.
Mamo and her husband Mr. Mamo, organized Nichole & Eric, Inc., an
S corporation, for the purpose of operating a restaurant known as
Breakfast Club of 7 Hills. At all relevant times, petitioners
owned in the aggregate 50 percent, and Ms. Mamo and Mr. Mamo
owned in the aggregate 50 percent, of the stock of Nichole &
Eric, Inc.
Around 1991, petitioners, together with their daughter
Geraldine and her husband, organized Crystal & Ryan, Inc., an S
corporation, for the purpose of operating a restaurant known as
The Breakfast Club. At all relevant times, petitioners owned in
the aggregate 51 percent, and their daughter Geraldine and her
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husband owned in the aggregate 49 percent, of the stock of
Crystal & Ryan, Inc.
In 1994, petitioners organized The Mifsuds, Inc., an S
corporation, for the purpose of operating a restaurant known as
Rams Horn. During that year, petitioners owned 100 percent of
the stock of The Mifsuds, Inc.
When Paul & Joe, Inc., first began operating Spring Hill
restaurant, Mr. Mifsud and Mr. Mamo, his son-in-law, worked
principally as cooks, Ms. Mifsud operated the cash register, and
occasionally Ms. Mamo operated the cash register and served as a
hostess in the dining room of that restaurant.
Around 1983, Mr. Mamo had an automobile accident, was forced
to quit working at Spring Hill restaurant, and did not return to
work there until around 1985 or 1986. When Mr. Mamo returned to
work at Spring Hill restaurant, he worked at the cash register
and served as a host in the dining room. Mr. Mamo stopped
working at Spring Hill restaurant around October 1991 and started
working at Breakfast Club of 7 Hills, which was owned by Nichole
& Eric, Inc. Thereafter, he had no further involvement in the
operations of Spring Hill restaurant, although he and Ms. Mano
continued to own 40 percent of the stock of Paul & Joe, Inc.,
which owned that restaurant.
After Mr. Mamo's accident in 1983, Mr. Mifsud stopped
working as a cook at Spring Hill restaurant and began, and
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continued throughout the years at issue, to work up front at that
restaurant, primarily operating the cash register. Around 1985
or 1986, when Mr. Mamo returned to work at Spring Hill restau-
rant, Mr. Mifsud was running the afternoon shift at that restau-
rant. After Mr. Mamo stopped working at Spring Hill restaurant
in 1991, Mr. Mifsud was solely responsible for running that
restaurant.
During the years at issue, Mr. Mifsud also spent time
working at the cash register and in the dining room of The
Breakfast Club, which was owned by Crystal & Ryan, Inc.
When Paul & Joe, Inc., first began operating Spring Hill
restaurant, it could accommodate approximately 55 customers.
Around 1986, the size of that restaurant was expanded to ac-
commodate approximately 160 customers.
During the years at issue, Spring Hill restaurant was open
for breakfast, lunch, and dinner. At all relevant times, the
peak period during the year for business at Spring Hill res-
taurant lasted from around September until Easter, which was the
peak tourist season in Florida. Business at the Spring Hill
restaurant declined somewhat as peak tourist season in Florida
declined after Easter through around August.
Since Paul & Joe, Inc., first began operating Spring Hill
restaurant, Mr. Mifsud has been the only person who closed out
the cash register at that restaurant. The business records for
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Spring Hill restaurant for the years at issue relating to, inter
alia, that restaurant's gross receipts consisted of sheets of
paper referred to by petitioners as sales sheets (sales sheets).
Mr. Mifsud prepared a sales sheet for each week day during those
years and made entries on each such sheet on each night of each
such week. Each sales sheet contained for each day of the week,
inter alia, a column headed "SALES". During the years at issue,
each night after Mr. Mifsud closed out the cash register at
Spring Hill restaurant, he filled in an amount under that column,
which purported to show that restaurant's total daily gross
receipts reflected on the cash register tape and guest checks for
each day. During the years at issue, each night after Mr. Mifsud
completed the sales sheet for the day, he discarded the cash
register tape and guest checks for that day. During those years,
each night after Mr. Mifsud closed out the cash register at
Spring Hill restaurant, he brought the cash receipts from that
day's restaurant operations to his house.
At all relevant times, Mr. Mifsud, who was knowledgeable
about Federal deposit insurance which insures U.S. deposits of
one person up to $100,000, and Ms. Mifsud maintained multiple
bank accounts. As of December 31, 1991, petitioners had
$220,872.67 on deposit at Barnett Bank, $160,000 of which was in
a certificate of deposit, $55,952.82 of which was in an individ-
ual retirement account, and $4,919.85 of which was in a checking
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account. During the years at issue, petitioners maintained bank
accounts at Barnett Bank, Sun Bank, and Citizens Federal. During
1993 and 1994, petitioners also maintained a bank account at
Great Western Bank. During the years at issue, petitioners made
numerous deposits of cash into their bank accounts, which, for
the most part, were regularly made throughout the year in rela-
tively small amounts (i.e., around $1,000 or less). In 1993,
Great Western Bank issued a cash transaction report with respect
to petitioners because they made two cash deposits on August 20
of that year, which totaled in excess of $10,000.
During the years at issue, petitioners deposited the fol-
lowing aggregate amounts into their bank accounts at the banks
indicated:
1992 1993 1994
Barnett Bank $103,595.40 $118,519 $183,044
Great Western Bank -- 47,863 70,086
Sun Bank 19,691.10 7,610 12,221
Citizens Federal 73,811.19 30,952 23,490
Total Deposits 197,097.69 204,944 288,841
At all relevant times, Mr. Mifsud paid attention to the
economy and to changes in interest rates and how such changes
might affect petitioners. For example, when interest rates fell,
Mr. Mifsud contacted Barnett Bank in order to refinance petition-
ers' house at a lower interest rate. At all relevant times, Mr.
Mifsud also was concerned with the interest that petitioners were
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able to earn on their bank deposits. If there was a better rate
of interest accruing on certificates of deposits, Mr. Mifsud
transferred funds from one or more of petitioners' checking
accounts and/or savings accounts in order to buy such a certifi-
cate, even though he recognized that a certificate of deposit was
not as liquid an asset as a checking or other similar bank
account. At all relevant times, Mr. Mifsud was aware that he
could not redeem a certificate of deposit before maturity without
incurring a financial penalty, as compared to withdrawing funds
at any time from a checking account or similar bank account. Mr.
Mifsud was not aware of any U.S. bank that had failed and thereby
caused injury to its depositors.
At all relevant times, petitioners financed through loans
the purchases of their residences, businesses, and automotive
vehicles and paid interest on those loans. After petitioners
moved to Florida, they purchased on credit at least the following
automotive vehicles: a 1979 Datsun 240Z, a 1986 Ford Bronco, a
1988 Lincoln Town Car, a 1988 Cadillac Eldorado, a 1990 Lexus LS-
400, a 1983 Datsun 240Z, a 1992 Cadillac Seville, a 1992 Honda
Accord EX, and two 1995 Lincoln Town Cars.
Mr. Mifsud submitted a credit application to Ford Motor
Credit Company, dated July 16, 1993. That application showed,
inter alia, (1) gross monthly salary of $10,833, or $129,996
annually, from Spring Hill restaurant, and (2) income from two
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other restaurants, the amount of which was not stated on that
application. Petitioners submitted to Barnett Bank an applica-
tion, dated October 19, 1993, for a line of credit in the amount
of $75,000. That application showed, inter alia, (1) gross
monthly salary of $9,000 from three restaurants and (2) other
monthly income of $1,800 in the form of interest, or total annual
income of $129,600.
During the years at issue, petitioners did not receive any
inheritances, legacies, or devises.
Petitioners filed joint tax returns (returns) for the years
1992, 1993, and 1994, in which they reported the following
amounts of wages or salaries from the corporate owners of the
restaurants indicated:
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Corporate Owner--
Restaurant Year Mr. Mifsud Ms. Mifsud Total
Nichole & Eric, 1992 $12,100 $12,100 $24,200
Inc.--Breakfast
Club of 7 Hills 1993 11,450 11,450 22,900
1994 8,400 8,400 16,800
Paul & Joe, Inc.-- 1992 11,150 14,600 25,750
Spring Hill
restaurant 1993 8,050 8,050 16,100
1994 8,575 8,500 17,075
Crystal & Ryan, 1992 12,100 12,100 24,200
Inc.--The
Breakfast Club 1993 11,400 11,400 22,800
1994 8,500 8,500 17,000
Total by Year 1992 35,350 38,800 74,150
1993 30,900 30,900 61,800
1994 25,475 25,400 50,875
In their return for each of the years at issue, petitioners
reported a capital loss of $3,000. They also reported subchapter
S losses of $20,002 in their 1992 return, $13,499 in their 1993
return, and $9,392 in their 1994 return. The amounts of total
income reported by petitioners in their returns for 1992, 1993,
and 1994 were $80,130, $74,699, and $62,658, respectively.
Petitioners reported the following amounts of interest
income in Schedule B, Interest and Dividend Income, of their
return for each year indicated:
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Year Amount
1986 $11,995
1987 13,108*
1988 12,067**
1989 25,286
1990 28,988
1991 25,709
1992 28,982
1993 29,398
1994 23,947
* Includes $2,424 in tax-exempt interest.
** Includes $2,452 in tax-exempt interest.
Petitioners reported the following amounts of interest
expense in Schedule A, Itemized Deductions, of their returns for
the years indicated:
Year Amount
1986 $13,688
1987 5,135
1988 6,046
1989 13,570
1990 12,752
1991 9,394
1992 8,040
1993 4,382
1994 4,892
In Forms 1120S, U.S. Income Tax Return for an S Corporation,
for 1992, 1993, and 1994, Paul & Joe, Inc., reported gross
receipts in the amounts of $308,643, $334,427, and $307,478,
respectively. In those forms, Paul & Joe, Inc., reported cost of
goods sold in the amounts of $161,149, $208,999, and $151,120,
respectively, of which $93,478, $117,149, and $90,164, respec-
tively, were reported as "Purchases" and $68,543, $93,125, and
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$62,804, respectively, were reported as "Cost of labor".
During the period 1982 through 1993, interest rates under
section 6621 ranged as follows from a high of 20 percent in 1982
to a low of 7 percent in 1993: Interest rates under section 6621
were 20 percent in 1982, 10 percent in 1986, 8 percent in 1987,
10 percent in 1990, 9 percent in 1991, 8 percent in 1992, and 7
percent in 1993.
In 1992, the collection division of the Internal Revenue
Service (IRS) issued a summons because the IRS did not have a
record that Paul & Joe, Inc., had filed a Form 1120S for any of
the years 1985 through 1991. When the IRS received no response
to the summons, the matter was referred to the examination
division of the IRS and assigned to William Joseph Slater (Mr.
Slater), a revenue agent in that division. Around October 1994,
Mr. Slater wrote a letter to petitioners in which he indicated
that the IRS had no record of having received Forms 1120S for
Paul & Joe, Inc., and requested that they contact Mr. Slater to
discuss the matter. Because petitioners did not respond to Mr.
Slater's letter, Mr. Slater contacted the individual who was
shown in petitioners' returns as their return preparer in order
to obtain an explanation regarding the failure of Paul & Joe,
Inc., to file Forms 1120S. Shortly thereafter, Mr. Slater
received Forms 1120S for Paul & Joe, Inc., for 1991, 1992, and
1993, which were signed by Mr. Mifsud and petitioners' return
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preparer. Those returns showed losses for Spring Hill restau-
rant. Mr. Slater compared petitioners' returns for 1991, 1992,
and 1993 with Forms 1120S for Paul & Joe, Inc., for those years
and ascertained, inter alia, that petitioners' returns for those
years showed significant interest income. Mr. Slater also
determined from IRS records that a currency transaction report
had been filed with respect to petitioners which showed that on
one day in 1993 they deposited more than $10,000 in cash into
their bank account at Great Western Bank.
Mr. Slater decided to audit the restaurant business of Paul
& Joe, Inc., notified petitioners and their return preparer by
letter of that decision, and requested a meeting. Mr. Slater met
with Mr. Mifsud and petitioners' return preparer. At that
meeting, Mr. Slater asked Mr. Mifsud how he operated the res-
taurant business of Paul & Joe, Inc., inquired about the types of
business records that were kept, and similar matters. Mr. Slater
requested, and received, records relating to corporate bank
accounts and other corporate documents. The only business
records for Paul & Joe, Inc., relating to its gross receipts that
were provided to Mr. Slater during his examination of Paul & Joe,
Inc., and of petitioners were the sales sheets that Mr. Mifsud
completed daily during the years under examination. No other
such records were available because each night throughout those
years Mr. Mifsud discarded the daily cash register tapes and
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daily individual guest checks after he completed the sales sheet
for the day.
Mr. Slater decided to expand his examination to petitioners
individually and asked them to provide him with certain informa-
tion, including personal bank statements. Mr. Slater conducted
an analysis under the bank deposits method with respect to
petitioners' bank deposits for the years 1993 and 1994. That
analysis showed that for each of the years 1993 and 1994 pe-
titioners had substantial deposits in excess of the income that
they reported in their return for each of those years. Mr.
Slater requested a meeting with petitioners and their return
preparer whom they had authorized to represent them with respect
to the examination by the IRS of their returns for 1993 and 1994.
At that meeting, Mr. Slater asked for the source of petitioners'
bank deposits. Mr. Mifsud informed Mr. Slater at that meeting
that petitioners had a cash hoard from around 1980 when they
moved from Michigan to Florida. Mr. Mifsud indicated at that
meeting that immediately prior to petitioners' move to Florida
they had $200,000 in cash and $11,000 in a bank in Detroit. When
they moved to Florida they brought that cash with them and
deposited into a Florida bank account the $11,000 that they had
kept in a Detroit Bank. Mr. Mifsud further explained to Mr.
Slater that petitioners kept the cash hoard until the years under
examination by the IRS when, according to Mr. Mifsud, they
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started depositing some of the cash hoard into petitioners' bank
accounts because Ms. Mifsud was insisting that he do that in view
of a robbery that occurred at petitioners' house in 1979.
Upon learning Mr. Mifsud's explanation of the amounts of
cash deposits that petitioners made during 1993 and 1994 in
excess of the income that they reported in their returns for
those years, Mr. Slater asked Mr. Mifsud for any information that
could corroborate their position that they had a cash hoard. In
response, petitioners gave Mr. Slater a copy of a newspaper
article with respect to the robbery that took place in 1979 at
their house in Michigan as well as tax returns for years prior to
1993. However, no other information or documentation was pro-
vided to Mr. Slater in an attempt to corroborate petitioners'
position that their unexplained bank deposits were attributable
to their claimed cash hoard. Mr. Slater expanded his examination
of petitioners to include their taxable year 1992, and he con-
ducted an analysis under the bank deposits method of petitioners'
bank deposits for that year.
In addition to auditing petitioners and Paul & Joe, Inc.,
Mr. Slater also examined Ms. Mamo and Mr. Mamo who owned 40
percent of Paul & Joe, Inc. Mr. Slater did not find any sub-
stantial unexplained cash deposits by them during the years under
examination.
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Respondent issued a notice of deficiency (notice) to pe-
titioners with respect to their taxable years 1992, 1993, and
1994. In the notice, respondent determined, inter alia, that
petitioners had unreported income for 1992, 1993, and 1994 in the
amounts of $60,034, $53,094, and $57,891, respectively, the
likely source of which was Paul & Joe, Inc. In making those
determinations, respondent relied on an analysis under the bank
deposits method of petitioners' bank deposits during the years at
issue, which showed that petitioners had unexplained bank de-
posits during those years. Respondent further determined in the
notice that the cost of goods sold reported by Paul & Joe, Inc.,
for 1993 and 1994 was understated in the amounts of $16,515 and
$19,637, respectively, because Mr. Mifsud made purchases for Paul
& Joe, Inc., during those years, which were not reimbursed by
that company.3 In the notice, respondent determined that pe-
titioners had deficiencies in tax (and underpayments) for 1992,
1993, and 1994 in the amounts of $18,087, $15,653, and $17,073,
respectively. Respondent further determined in the notice that
petitioners are liable for each of the years at issue for the
fraud penalty under section 6663 on the entire amount of each
such underpayment.
3
The notice indicates that no adjustment was made to cost
of goods sold for 1992 because no information was available for
that year.
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In respondent's answer, respondent alleged in the alterna-
tive to the allegations in the answer that were based on the
determinations in the notice that petitioners had increased
deficiencies in tax (and underpayments) for the years at issue
and that such increased underpayments of tax are due to fraud.
OPINION
Except for the fraud penalty and the increased deficiencies
alleged in respondent's answer on which respondent has the burden
of proof, see sec. 7454(a); Rule 142(b) and (a), petitioners have
the burden of establishing that respondent's determinations in
the notice are erroneous, see Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933).
We turn to the fraud penalty under section 6663. That is
because our resolution of that issue is determinative of pe-
titioners' contentions that respondent's deficiency determina-
tions in the notice are erroneous, that respondent has not shown
that petitioners have the increases in such deficiencies that
were alleged as part of respondent's alternative position in the
answer, and that the period of limitations for 1992 has expired.
In order for the fraud penalty to apply, respondent must
prove by clear and convincing evidence that an underpayment
exists and that some portion of such underpayment is attributable
to fraud. See secs. 6663(a), 7454(a); Rule 142(b); Niedringhaus
v. Commissioner, 99 T.C. 202, 210 (1992). If respondent es-
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tablishes that any portion of an underpayment is attributable to
fraud, the entire underpayment is to be treated as attributable
to fraud, except with respect to any portion of such underpayment
which the taxpayer establishes by a preponderance of the evidence
is not attributable to fraud. See sec. 6663(b). In a situation
such as the present case in which the allegations of fraud are
intertwined with unreported and indirectly reconstructed income,
respondent can satisfy the burden of establishing an underpayment
in one of two ways: (1) Where the taxpayer alleges a nontaxable
source for the unreported income reconstructed by respondent, by
disproving that alleged nontaxable source, see Parks v. Com-
missioner, 94 T.C. 654, 661 (1990), or (2) by proving a likely
source of that unreported income, see Parks v. Commissioner,
supra.
The parties stipulated that petitioners made bank deposits
during 1992, 1993, and 1994 totaling $197,097.69, $204,944, and
$288,841, respectively. As part of respondent's alternative
position in the answer, respondent permitted petitioners to
reduce their total bank deposits for 1992, 1993, and 1994 by
$46,644, $49,638, and $122,459, respectively, which were the
amounts of deposits that respondent concluded were attributable
to nontaxable sources.4 Petitioners do not dispute the amounts
4
Under respondent's position in the answer that is based
(continued...)
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of those reductions of petitioners' bank deposits for the years
at issue.5 However, petitioners contend that for each year at
issue the excess of (1) petitioners' bank deposits reduced by
those amounts attributable to nontaxable sources that respondent
allowed over (2) the amount of total income that petitioners
reported in their return for each such year also is attributable
to a nontaxable source, namely, a cash hoard.
Respondent may disprove petitioners' allegation of a cash
hoard by showing that respondent's reconstruction of income under
the bank deposits method is accurate and that petitioners'
allegation of a cash hoard is inconsistent, implausible, and not
supported by objective evidence in the record. See Parks v.
Commissioner, supra. On the record before us, we find that
respondent's reconstruction of petitioners' income under the bank
deposits method, as alleged as part of respondent's alternative
position in the answer, is accurate. Indeed, the only complaint
4
(...continued)
on the notice, respondent reduced petitioners' total deposits for
the years at issue in amounts of such deposits that were greater
than those allowed under respondent's alternative position in the
answer.
5
Respondent also adjusted the total income of Paul & Joe,
Inc., (1) for 1993 in the amounts of $14,515 for corporate
purchases paid for by Mr. Mifsud and $2,000 for checks deposited
to that business for cash and (2) for 1994 in the amounts of
$11,946 for corporate purchases paid for by Mr. Mifsud and $7,691
for checks deposited to that business for cash. Petitioners do
not dispute those adjustments.
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that petitioners have about that reconstruction is that respon-
dent failed to reduce their bank deposits for each of the years
at issue by the total amount of such deposits for each such year
that petitioners claim was attributable to their cash hoard.
To support their position that the source of the unreported
income alleged by respondent under respondent's alternative
position in the answer was their cash hoard, petitioners rely
principally on the testimony of Mr. Mifsud and to a lesser extent
on the testimony of Ms. Mifsud, Ms. Mamo, and Mr. Mamo. We are
not required to, and we do not, accept the self-serving testimony
of petitioners. Nor are we required to, and we do not, accept
any testimony of petitioners' daughter Ms. Mamo or of Mr. Mamo,
the father of two of petitioners' grandchildren and their former
son-in-law, which serves petitioners' interest in this case. See
Boyett v. Commissioner, 204 F.2d 205, 208 (5th Cir. 1953);
Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Hradesky v.
Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976).
We found the testimony of Mr. Mifsud and of Ms. Mifsud that
they had a cash hoard which was the source for each of the years
at issue for the bank deposits at issue to be implausible,
inconsistent with and/or not supported by objective evidence in
the record, and not credible. By way of illustration, we found
Mr. Mifsud's testimony that in 1951 his father brought approxi-
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mately $500,000 from Malta to the United States, large amounts of
which Mr. Mifsud claims his parents gave to him both during his
father's lifetime and after his father died, to be implausible,
inconsistent with and not supported by objective evidence in the
record, and not credible. The record establishes that in 1951
Malta was under English exchange controls which limited the
ability of Maltese persons to bring currency out of the country.
The export of currency from Malta in 1951 in an amount of pounds
or any other form of currency equal to approximately $500,000
would have had a serious impact on Malta's economy and the policy
of its Government and would have been required by the English
exchange controls to have been documented. Malta has no official
record that an export from Malta took place in 1951 of currency
in an amount of pounds or any other form of currency equal to
approximately $500,000. The record also establishes that in
1951, when Mr. Mifsud and his father emigrated from Malta to the
United States, Malta, which had been devastated during World War
II by German air strikes, was a nation of small shopkeepers,
dockworkers, and bureaucrats, with a small Anglo-Maltese ruling
class. Estimates of Maltese national income in the postwar
period ranged from $28.2 million to $48.3 million, and the median
wage for private workers in Malta was about $11 per week, or $572
per year.
- 25 -
By way of further illustration of testimony of Mr. Mifsud
that we found to be implausible, inconsistent with and not
supported by objective evidence in the record, and not credible
Mr. Mifsud testified that his father owned a very large, eight-
bedroom house in Malta, which, according to Mr. Mifsud, his
father sold for 30,000 pounds in 1952, or $146,400 at the then
prevailing exchange rate of $4.88 per pound. Maltese official
records show only two purchases and one sale of real property by
Mr. Mifsud's father and one sale by Mr. Mifsud and certain of his
family members. In November 1929, Mr. Mifsud's father purchased
a house in Malta for 570 pounds. In April 1937, he sold that
house for 270 pounds. In September 1938, Mr. Mifsud's father
purchased another house in Malta for 350 pounds. In 1966, Mr.
Mifsud, along with his mother, three brothers, and a sister sold
a house in Malta for 2,600 pounds, or $7,254 at the exchange rate
in effect in 1966 of $2.79 per pound.
We also found implausible, not supported by objective
evidence in the record, and not credible Mr. Mifsud's testimony
that although his father did not have to work since he brought
with him approximately $500,000 from Malta in 1951, he decided to
take a position about a year after he emigrated to the United
States when he was 48 years old as a head waiter at a hotel in
Detroit because he was bored. We simply do not believe that Mr.
Mifsud's father would have undertaken such physically demanding
- 26 -
work if, as Mr. Mifsud testified, his father did not have to do
so because he brought approximately $500,000 with him to the
United States a year before he started working as a head waiter.
Nor do we believe that Mr. Mifsud's elderly and ill mother would
be living on Social Security benefits and gifts from her children
if, in fact, Mr. Mifsud's father had brought around half a
million dollars to the United States in 1951, which would have
belonged to her upon the death of Mr. Mifsud's father.
To illustrate further why we shall not accept and rely on
the testimony of Mr. Mifsud and Ms. Mifsud relating to petition-
ers' claim that the source of the bank deposits at issue was a
cash hoard which they brought with them when they moved from
Michigan to Florida, Mr. Mifsud testified that petitioners
brought $332,000 in cash and $69,000 in bank deposits to Florida
when they moved there in 1980. However, Ms. Mifsud testified
that petitioners had "over $200,000 cash" when they moved from
Michigan to Florida. Moreover, during the examination of Paul &
Joe, Inc., and of petitioners by the IRS, Mr. Mifsud told Mr.
Slater, the revenue agent responsible for that examination, that
the source of funds that petitioners deposited into their bank
accounts during the years at issue was $200,000 in cash, which
they brought with them when they moved from Michigan to Florida.6
6
Mr. Mifsud also told Mr. Slater during the IRS'
(continued...)
- 27 -
Mr. Mifsud also testified that around 1983 he began depositing
money from petitioners' alleged cash hoard into various bank
accounts in increments of $3,000 to $10,000 usually once a week
or every three weeks. However, Mr. Mifsud told Mr. Slater during
the IRS' examination of Paul & Joe, Inc., and of petitioners that
petitioners began depositing their cash hoard during the years at
issue, and Ms. Mifsud testified that they began depositing their
cash hoard in 1992. Moreover, the amounts of the various bank
deposits that petitioners made throughout the years at issue are
for the most part much smaller than the level of deposits that
Mr. Mifsud testified he made from his cash hoard during those
years (i.e., from $3,000 to $10,000).
Assuming arguendo that, starting in 1983, Mr. Mifsud made 17
deposits of $3,000 a year, a conservative assumption in light of
Mr. Mifsud's testimony that around 1983 petitioners began de-
positing cash in increments of $3,000 to $10,000 usually once a
week or every three weeks, petitioners would have deposited
within six and a half years, or by around 1989 or 1990, all of
the $332,000 in cash that Mr. Mifsud claims petitioners brought
with them in 1980 when they moved from Michigan to Florida.
Furthermore, under the same assumption, petitioners would have
6
(...continued)
examination of petitioners that they brought $11,000 in bank
deposits when they moved to Florida from Michigan.
- 28 -
deposited within four years, or by around 1987, all of the
$200,000 in cash which Mr. Mifsud informed Mr. Slater petitioners
brought with them to Florida in 1980. If the Court were to
accept Mr. Mifsud's testimony as to when petitioners started
making bank deposits from their alleged cash hoard and the
amounts and frequency of such deposits, such alleged cash hoard
would have been fully deposited into petitioners' bank accounts
well before 1992, the first year at issue, regardless whether it
is assumed that petitioners had $332,000 or $200,000 in cash when
they moved from Michigan to Florida in 1980.
Another illustration of the implausibility, inconsistency,
and lack of credibility of Mr. Mifsud's testimony relates to his
claim at trial that he maintained a cash hoard because he was
distrustful of banks, a distrust, according to his testimony,
that he learned from his parents. The record belies Mr. Mifsud's
claim that he was distrustful of banks. At all relevant times,
petitioners maintained multiple bank accounts into which they
deposited in the aggregate large amounts of cash. For example,
petitioners had $220,870.67 on deposit at Barnett Bank on De-
cember 31, 1991. In addition, during 1992, 1993, and 1994, they
made bank deposits totaling $197,097.69, $204,944, and $288,841,
respectively. Furthermore, at all relevant times, Mr. Mifsud was
knowledgeable about Federal deposit insurance, which protects
bank deposits of one person up to $100,000. He also was knowl-
- 29 -
edgeable about interest rates and transferred his bank invest-
ments from deposits in checking and/or savings accounts to one or
more certificates of deposit whenever the applicable interest
rate on such a certificate would yield a greater return for
petitioners. Mr. Mifsud also admitted that he had never heard of
a bank in the United States that had failed and thereby caused
injury to its depositors.
Mr. Mifsud's own testimony belies his testimony that he
learned to distrust banks from his parents. Mr. Mifsud testified
that his mother "made" him open a savings account with Detroit
National Bank. It is implausible to us that his parents were
distrustful of banks and taught Mr. Mifsud to distrust them, and
yet Mr. Mifsud's mother "made" him open a savings account with a
Detroit bank.
Other facts established by the record further erode the
credibility of petitioners' claim that their cash hoard was the
source for the bank deposits at issue. For example, petitioners
had interest income of $23,947 or more for each of the years at
issue and received interest income in excess of $10,000 during
every year starting in 1986. Petitioners' interest income for
1987 and 1988 included tax-exempt interest. We believe that a
person like Mr. Mifsud, who was sophisticated enough to seek and
receive tax-exempt interest, buy certificates of deposit when
interest rates on such deposits yielded petitioners a greater
- 30 -
return than the interest that they were earning on their checking
and/or savings bank accounts, and refinance the mortgage loan on
their house when interest rates fell below the interest rate
applicable to that loan, would not forgo the ability to earn
interest income on petitioners' alleged cash hoard of $332,000
(or even $200,000), especially considering the high interest
rates available during the 1980's, which peaked at 20 percent in
1982. Considering those high interest rates, petitioners would
have forgone interest income of as much as $60,000 a year by
keeping the alleged cash hoard of $332,000 at home and not
depositing it into banks. That amount of forgone interest income
is more than petitioners reported as total income for any of the
years 1986 through 1991. We do not believe that petitioners
would have forgone such interest income, and we do not believe
that they did. That is because we do not find credible their
claim that their cash hoard of $332,000 (or $200,000) was the
source of the bank deposits at issue.
It is also significant that Mr. Mifsud testified at trial
that he could not recall the amount of petitioners' alleged cash
hoard that they deposited into their bank accounts during each of
the years at issue. We find Mr. Mifsud's claimed inability to
remember those alleged matters to be suspect in view of his
ability to remember with specificity other facts relating to
petitioners' financial situation. For example, Mr. Mifsud was
- 31 -
able to recall the precise amount of the monthly mortgage loan
payment (i.e., $38.55) that was required with respect to the
first house that petitioners purchased in 1960. We believe that
Mr. Mifsud's inability to remember the amount of petitioners'
alleged cash hoard that they deposited into their bank accounts
during each of the years at issue is attributable to the fact
that they did not make such deposits.
Another aspect of Mr. Mifsud's and Ms. Mifsud's testimony
that we found to be implausible and not credible relates to their
assertion at trial that they made bank deposits during the years
at issue from their cash hoard because of Ms. Mifsud's strong
fear that their house in Florida would be burglarized, which fear
was precipitated by the 1979 robbery at their house in Michigan.
Petitioners' testimony rings hollow. If, in fact, Ms. Mifsud's
fear that petitioners' house in Florida would be burglarized were
as strong as petitioners testified, we cannot fathom why they
would have continued to keep large amounts of cash in their house
throughout the 1980's and the years at issue, as they contend
they did.
On the record before us, we find petitioners' contention
that the source of the bank deposits at issue during the years at
issue was their cash hoard to be implausible and inconsistent
with and/or not supported by objective evidence in the record.
- 32 -
Indeed, we find the testimony of both Mr. Mifsud and Ms. Mifsud
regarding such deposits to be patently incredible.
Based on our examination of the entire record in this case,
we find that respondent has established by clear and convincing
evidence that under the bank deposits method petitioners have
unreported income for each of the years 1992, 1993, and 1994 in
the amounts of $70,323.69, $80,607, and $103,724, respectively.
See Parks v. Commissioner, 94 T.C. at 661.7 We further find on
7
Since respondent has disproved petitioners' alleged
nontaxable source of the bank deposits at issue and thereby has
satisfied respondent's burden of establishing an underpayment for
each of the years at issue, see Parks v. Commissioner, 94 T.C.
654, 661 (1990), we need not address whether respondent has
established a likely source of petitioners' unreported income for
those years, see id. We nonetheless note that we find on the
record before us that respondent has shown by clear and con-
vincing evidence a likely source of that unreported income, viz.,
Spring Hill restaurant. We also believe that The Breakfast Club
at which Mr. Mifsud spent time during the years at issue working,
inter alia, at the cash register was a likely source for at least
some of the unreported income of petitioners for those years.
Crystal & Ryan, Inc., owned The Breakfast Club, and petitioners
owned 51 percent of the stock of that S corporation.
The record establishes that Mr. Mifsud admitted in a credit
application that he submitted to Ford Motor Credit Company, dated
July 16, 1993, that he had, inter alia, (1) gross monthly salary
of $10,833, or $129,996 annually, from Spring Hill restaurant,
and (2) income from two other restaurants, the amount of which
was not stated on that application. Petitioners also admitted in
an application for a line of credit in the amount of $75,000,
dated Oct. 19, 1993, which they submitted to Barnett Bank that
they had, inter alia, (1) gross monthly salary of $9,000 from
three restaurants and (2) other monthly income of $1,800 in the
form of interest, or total annual income of $129,600. Even Mr.
Mamo, petitioners' former son-in-law and the father of petition-
ers' grandchildren, admitted at trial that around 1991, the last
year during which Mr. Mamo worked at Spring Hill restaurant,
(continued...)
- 33 -
that record that petitioners have a deficiency in tax for each of
the years 1992, 1993, and 1994 attributable to (1) petitioners'
unreported income that we have found for each of those years and
7
(...continued)
that restaurant was generating as much as approximately $420,000
of gross receipts annually. That amount is well in excess of the
gross receipts of $289,648, $308,643, $334,427, and $307,478 for
1991, 1992, 1993, and 1994, respectively, that Paul & Joe, Inc.,
reported in Forms 1120S for those years.
In an attempt to show that Spring Hill restaurant could not
have been the source of the bank deposits at issue, petitioners
proffered the testimony of Theodore R. Mandigo (Mr. Mandigo) whom
the Court found qualified as an expert in the restaurant busi-
ness. Petitioners' expert acknowledged during his testimony that
he based his opinion that Spring Hill restaurant could not have
been the source of those deposits on data provided to him by
petitioners. For example, petitioners' expert witness assumed
that Paul & Joe, Inc., had gross receipts of $306,000, $334,000,
and $307,000 during 1992, 1993, and 1994, respectively, which
were approximately the amounts that Paul & Joe, Inc., reported as
gross receipts in Forms 1120S for those years. Those amounts of
gross receipts are belied by Mr. Mamo's testimony that during
1991 Spring Hill restaurant generated gross receipts of as much
as approximately $420,000 and by the credit applications that Mr.
Mifsud and petitioners, respectively, submitted during 1993.
Petitioners' expert witness also assumed that the amounts of cost
of goods sold of Spring Hill restaurant for the years at issue
that petitioners provided to him were accurate. However, the
parties stipulated that the cost of goods sold of Paul & Joe,
Inc., was understated for 1993 and 1994 in the amounts of $14,515
and $11,946, respectively, because, for some unexplained reason,
Paul & Joe, Inc., did not claim all of its expenses. Mr. Mandigo
conceded that if the data which petitioners provided to him and
on which his opinion was based were incorrect, his opinion would
change. We conclude that petitioners' expert witness has not
rebutted the evidence in the record establishing that Spring Hill
restaurant was capable of producing the bank deposits at issue.
- 34 -
(2) the $2,600 of unreported income for each of those years to
which the parties agreed at trial.8
We turn now to the requirement of fraudulent intent under
section 6663. To prove fraudulent intent on the part of pe-
titioners for the years at issue, respondent must establish by
clear and convincing evidence that they intended to evade tax for
each such year, which they believed to be owing, by conduct
intended to conceal, mislead, or otherwise prevent the collection
of such tax. See Laurins v. Commissioner, 889 F.2d 910, 913 (9th
Cir. 1989), affg. Norman v. Commissioner, T.C. Memo. 1987-265;
Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968);
Parks v. Commissioner, supra at 661. The existence of fraud is a
question of fact to be resolved upon consideration of the entire
record. See DiLeo v. Commissioner, 96 T.C. 858, 874 (1991),
affd. 959 F.2d 16 (2d Cir. 1992); Recklitis v. Commissioner, 91
T.C. 874, 909 (1988); Gajewski v. Commissioner, 67 T.C. 181, 199
(1976), affd. without published opinion 578 F.2d 1383 (8th Cir.
1978). Fraud is never presumed or imputed and should not be
found in circumstances which create at most only suspicion. See
Toussaint v. Commissioner, 743 F.2d 309, 312 (5th Cir. 1984),
affg. T.C. Memo. 1984-25; Petzoldt v. Commissioner, 92 T.C. 661,
700 (1989); Katz v. Commissioner, 90 T.C. 1130, 1144 (1988).
8
See supra note 2.
- 35 -
Direct evidence of the requisite fraudulent intent is seldom
available. See Petzoldt v. Commissioner, supra at 699; Rowlee v.
Commissioner, 80 T.C. 1111, 1123 (1983). Consequently, respon-
dent may prove fraud by circumstantial evidence. See Toussaint
v. Commissioner, supra at 312; Marsellus v. Commissioner, 544
F.2d 883, 885 (5th Cir. 1977), affg. T.C. Memo. 1975-368; Rowlee
v. Commissioner, supra at 1123.
The courts have identified a number of badges of fraud from
which fraudulent intent may be inferred, including (1) consistent
and substantial understatement of income, (2) inconsistent or
implausible explanations of behavior, (3) lack of credibility of
the taxpayer's testimony, and (4) dealing in cash. See Laurins
v. Commissioner, supra at 913; Bradford v. Commissioner, 796 F.2d
303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Ruark v.
Commissioner, 449 F.2d 311, 312-313 (9th Cir. 1971), affg. per
curiam T.C. Memo. 1969-48; Niedringhaus v. Commissioner, 99 T.C.
at 211; Parks v. Commissioner, supra at 664-665; Miller v.
Commissioner, 94 T.C. 316, 334 (1990); Recklitis v. Commissioner,
supra at 910; Castillo v. Commissioner, 84 T.C. 405, 409 (1985);
Rowlee v. Commissioner, supra at 1125. In addition, the tax-
payer's background and the context of the events in question may
be considered circumstantial evidence of fraud. See Plunkett v.
Commissioner, 465 F.2d 299, 303 (7th Cir. 1972), affg. T.C. Memo.
1970-274; Niedringhaus v. Commissioner, supra at 211. Although
- 36 -
no single factor is necessarily sufficient to establish fraud,
the existence of several indicia constitutes persuasive
circumstantial evidence of fraud. See Bradford v. Commissioner,
supra at 307; Petzoldt v. Commissioner, supra at 700.
The record in this case is replete with indicia of fraud by
petitioners, including the following: Petitioners consistently
failed to report substantial amounts of income for the years
1992, 1993, and 1994. They gave inconsistent and implausible
explanations about the source of the bank deposits at issue. We
did not find the testimony of either Mr. Mifsud or Ms. Mifsud to
be credible in many material respects, including their testimony
that the source of the bank deposits at issue was their alleged
cash hoard. The restaurant business in which petitioners engaged
dealt primarily in cash, and most of the deposits that petition-
ers made during the years at issue were in cash.
Based on our examination of the entire record in this case,
we find that respondent has established by clear and convincing
evidence that petitioners intended to evade tax for each of the
years 1992 through 1994, which they believed to be owing, by
conduct intended to conceal, mislead, or otherwise prevent the
collection of such tax.9 We further find on that record that
9
We have considered all of the contentions and arguments
of petitioners that are not discussed herein, and we find them to
be without merit.
- 37 -
petitioners are liable for the fraud penalty under section 6663
for 1992, 1993, and 1994 on the underpayment attributable to
(1) petitioners' unreported income that we have found for each of
those years and (2) the $2,600 of unreported income for each of
those years to which the parties agreed at trial.10 See sec.
6663(a) and (b).
To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.
10
See supra note 2.