Dipierro v. Commissioner

T.C. Memo. 1999-189

UNITED STATES TAX COURT

BEATRICE DIPIERRO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12950-97. Filed June 9, 1999.

R determined deficiencies in P’s income tax
liability on account of petitioner’s failure to account
for certain cash transactions.
Held: P has failed to prove nontaxable sources
for the cash transactions, which is prima facie
evidence of income. See Tokarski v. Commissioner,
87 T.C. 74 (1986).
Held, further, P is liable for tax on self-
employment income.
Held, further, P is liable for sec. 6662(a),
I.R.C., accuracy-related penalty.

B. Gray Gibbs, for petitioner.

Judith C. Winkler and Howard P. Levine, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, Judge: By notice of deficiency dated March 31,

1997 (the deficiency notice), respondent determined deficiencies

in petitioner's Federal income taxes and addition to tax, and

accuracy-related penalties as follows:

Addition to tax Accuracy-related
Year Deficiency Sec. 6651(a)(1) penalty Sec. 6662(a)
1992 $19,276 -- $3,816
1993 5,811 $486 1,162

Unless otherwise indicated, 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 parties have filed a stipulation of settled issues, in

which petitioner concedes certain issues. Those concessions are

accepted. The issues remaining for decision are: (1) Whether

petitioner omitted from gross income $25,000 and $21,250 for 1992

and 1993, respectively, (2) whether those amounts constitute

income from self-employment, and (3) whether petitioner is liable

for accuracy-related penalties for both 1992 and 1993 on account

of negligence or disregard of rules or regulations.
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FINDINGS OF FACT

Introduction

Some facts have been stipulated and are so found. The

Stipulations of Facts filed by the parties, with attached

exhibits, are incorporated herein by this reference.

At the time the petition was filed, petitioner resided in

Belleair, Florida.

Petitioner’s Background

Petitioner moved to the United States from Bogota, Colombia,

in 1959, married Alfred DiPierro in 1960, and was divorced from

him in 1987 (the divorce). Two children were born of that

marriage, a son, Gary, born in 1961, and a daughter, Audrey, born

in 1964.

Petitioner’s Property

In the divorce, petitioner received a condominium apartment

in Belleair, Florida (the Belleair property), in which she

resides, four houses held for rental in California (the

California rental properties), a 15-unit apartment complex in

Dunedin, Florida (the Dunedin property), and $50,000 in cash.

Petitioner sold the Dunedin property in 1989, receiving

$45,000 in cash and a note in the principal amount of $120,000

(the $120,000 note), calling for monthly payments of $2,549.66,

commencing on May 27, 1989. At the end of 1992, petitioner
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received a payment of $30,000 in discharge of the remaining

obligation under the $120,000 note.

At the time of trial, petitioner still owned three of the

California rental properties. During 1992 and 1993, two of those

properties rented for between $675 and $750 a month and one

rented for between $525 and $550 a month. Petitioner sold the

fourth California rental property in October 1992, receiving a

note in the principal amount of $110,000, calling for monthly

payments of $945. Prior to its sale, the fourth California

property rented for between $575 and $625 a month. Most of the

rental payments petitioner received with respect to the

California properties were received in cash, collected by her or

her son, Gary. When Gary collected the rental payments, he

deposited them in a bank account petitioner maintained in

California, and she would write checks on that account.

Petitioner relied on her memory to report her rental receipts to

her accountant (who prepared her Federal income tax return).

In April 1990, petitioner purchased a two-bedroom

condominium apartment in Las Vegas, Nevada (the Las Vegas

property), for $145,000, in cash. She obtained that sum from the

proceeds of the sale of the Dunedin property and a loan of

$110,000 from NCNB National Bank. The Las Vegas property was

held for rental, for between $800 and $1,100 a month.
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In April 1992, petitioner applied for a loan to refinance

the Belleair property. In her loan application, petitioner

represented that her net worth was $933,354.

Petitioner’s Bank Accounts

Petitioner owned the following bank accounts in 1992 and

1993:

Fortune Bank, account No. 002-9072131
NCNB National Bank, account No. 3502977933
NCNB National Bank, account No. 3506708708
NCNB National Bank, account No. 3510298128
NCNB National Bank, account No. 3706446642
Hawthorne Savings and Loan Assoc., account No. 10130059-8
Hawthorne Savings and Loan Assoc., account No. 10133739-2

During the course of respondent’s examination of

petitioner’s 1992 and 1993 returns, petitioner failed to provide

respondent complete information concerning those bank accounts.

Bank Transactions

Petitioner deposited $25,000 in cash into NCNB National

Bank, account No. 3502977933 on February 10, 1992 (the NCNB

deposit). Petitioner deposited $10,000 in cash into Fortune

Bank, account No. 002-9072131 on December 8, 1993 (the Fortune

Bank deposit).1 On that same date, petitioner withdrew $10,000

1
That $10,000 deposit is shown in Ex. 13-M, p. 13, the
Fortune Bank statement for account No. 002-9072131 for
Dec. 15, 1993. Ex. 5-E contains a true copy of Internal Revenue
Form 4789, Currency Transaction Report, filed by Fortune Bank,
which shows a $10,000 deposit on Dec. 8, 1993, to petitioner’s
account No. 0029064821. We cannot resolve that discrepancy. The
parties seem satisfied that there was only one cash deposit of
(continued...)
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from that Fortune Bank account. Petitioner purchased a check

with cash at NationsBank (formerly NCNB National Bank) on

December 9, 1993, in the amount of $11,250 (the NationsBank

purchase).

Petitioner’s Returns

Petitioner did not prepare her own Federal income tax

returns for 1992 and 1993. She relied on her accountant.

Respondent’s Adjustments

Among the adjustments made by respondent to petitioner’s

1992 and 1993 gross income are additions in the amounts of

$25,000 and $21,250 for 1992 and 1993, respectively. In the

notice of deficiency, respondent explains those adjustments as

follows: “It is determined that during the taxable years 1992

and 1993, the cash of $25,000 and $21,250, respectively, that you

deposited in various banks was not reported on your income tax

returns.” Respondent identifies the cash deposits in question as

the NCNB deposit, the Fortune Bank deposit, and the NationsBank

purchase.

1
(...continued)
$10,000 to petitioner’s account in Fortune Bank on Dec. 8, 1993,
and we so find.
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OPINION

I. Deficiencies

A. Normal Tax

1. Introduction

Respondent adjusted (increased) petitioner’s gross income

for 1992 and 1993 on account of unexplained cash deposits and an

unexplained cash purchase: $25,000 deposited to NCNB National

Bank, account No. 3502977933 on February 10, 1992 (the NCNB

deposit), $10,000 deposited to Fortune Bank account No.

002-9072131 on December 8, 1993 (the Fortune bank deposit), and

$11,250 expended to purchase a check at NationsBank on

December 9, 1993 (the NationsBank purchase, collectively, the

cash transactions). Petitioner does not dispute the fact of the

cash transactions. Petitioner claims that the NCNB deposit was

of funds received by petitioner as gifts from her children, Gary

and Audrey, and, accordingly, does not represent an item of gross

income. Petitioner claims that the Fortune Bank deposit and the

NationsBank purchase were from amounts reported by petitioner as

gross income for 1993 and, thus, do not represent an item of

unreported gross income. Respondent relies principally on

petitioner’s failure to prove her claims.

2. Respondent’s Examination

Petitioner argues that respondent’s examination in this case

was inadequate: “The auditor in this case did little or nothing
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to determine whether the deposits [cash transactions] were from a

taxable source.” We disagree.

The record contains copies of three Forms 4789, Currency

Transaction Reports, relating to the NCNB deposit, the Fortune

Bank deposit, and the NationsBank purchase, respectively. Those

reports may have triggered respondent’s examination of

petitioner’s 1992 and 1993 Federal income tax returns. Both the

tax auditor and Appeals officer concerned with the examination of

those returns testified. They told of confusing and

contradictory explanations by petitioner concerning the cash

transactions. The Appeals officer testified that petitioner

“could never specifically tell me what the underlying source of

those deposits were for either 1992 or 1993. She could not

recall.” The tax auditor testified that, initially, petitioner’s

representative stated that there had been no sources of

nontaxable income. We interpret petitioner's initial

representations to respondent to be that there were no

unaccounted-for receipts that could be the source of the cash

transactions. Petitioner then told the tax auditor that the NCNB

deposit was proceeds from a loan from her daughter. She then

provided unverifiable statements from both her daughter and son

that each had made a loan to her. Petitioner’s testimony did not

contradict the substance of respondent’s agents’ narrative.
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We said early on: “By design the statute contemplates the

keeping by a taxpayer of accounts and records from which his

correct income can be determined, and in the absence of such

books of account the respondent must determine or verify his

income from the records or sources that are available.” Estate

of Hague v. Commissioner, 45 B.T.A. 104, 109-110 (1941), affd.

132 F.2d 775 (2d Cir. 1943), affd. sub nom. Commissioner v.

Uniacke, 132 F.2d 781 (2d Cir. 1942). See sec. 6001; sec.

1.6001-1(a), Income Tax Regs. Petitioner did not keep adequate

records of her rent receipts. She failed to provide the Appeals

officer or tax auditor with complete information concerning her

bank accounts. She provided to them unverifiable explanations as

to the claimed gifts from her children. Her explanations to them

of nontaxable sources for the cash transactions were confusing

and contradictory. The records and sources available during the

examination were inadequate to explain the cash transactions as

deriving from nontaxable sources, and respondent adjusted

(increased) petitioner’s gross income to reflect his

determination that no nontaxable sources existed.

3. Burden of Proof

The general rule is that the burden of proof is upon

petitioner, see Rule 142(a), which she must carry by a

preponderance of the evidence, e.g., Schaffer v. Commissioner,

779 F.2d 849, 858 (2d Cir. 1985), affg. in part and remanding in
 - 10 -

part Mandina v. Commissioner, T.C. Memo. 1982-34. Petitioner

argues, however, that this case presents an exception to the

general rule because the notice of deficiency, at least with

respect to the items here in question, is arbitrary and without

foundation. Petitioner cites Llorente v. Commissioner, 649 F.2d

152 (2d Cir. 1981), affg. in part revg. in part, and remanding 74

T.C. 260 (1980). In Llorente, the Commissioner’s notice of

deficiency was based on his reconstruction of the taxpayer’s

income from drug dealing, and in the view of the Court of Appeals

there was inadequate evidence that the taxpayer had actually

purchased or sold cocaine during the period in issue. In

Tokarski v. Commissioner, 87 T.C. 74 (1986), we distinguished

Llorente (which would have applied under the doctrine of Golsen

v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th

Cir. 1971)), on the basis that, in that case (Tokarski), which

involved a bank deposit of $30,000, there was no question that

the taxpayer received that sum: “Under these circumstances, we

hold that there is no requirement that respondent produce

evidence linking petitioner to an income-producing activity as a

precondition to requiring petitioner to meet his burden of

proof.” Tokarski v. Commissioner, 87 T.C. at 76-77 (fn. ref.

omitted). We generalized: “A bank deposit is prima facie

evidence of income and respondent need not prove a likely source

of that income.” Id. at 77. The same holds true for a cash
 - 11 -

expenditure. See Bevan v. Commissioner, T.C. Memo. 1971-312,

affd. 472 F.2d 1381 (6th Cir. 1973); see also Reed v.

Commissioner, T.C. Memo. 1997-388, affd. without published

opinion 155 F.3d 560 (4th Cir. 1998).

Blohm v. Commissioner, 994 F.2d 1542 (11th Cir. 1993), affg.

T.C. Memo. 1991-636, is a decision of the Court of Appeals for

the Eleventh Circuit, which, if it were squarely on point, we

would be bound to follow under the Golsen doctrine. In Blohm,

the Court of Appeals said: “For the presumption [of correctness]

to adhere in cases involving the receipt of unreported income,

however, the deficiency determination must be supported by some

evidentiary foundation linking the taxpayer to the alleged

income-producing activity.” Blohm v. Commissioner, 994 F.2d at

1549 (internal quotation marks omitted). Blohm is

distinguishable for the same reason that Llorente v.

Commissioner, supra, would be distinguishable were this case

appealable to the Court of Appeals for the Second Circuit; viz,

we are here dealing with cash deposits and expenditures, which is

prima facie evidence of income.

Petitioner bears the burden of proof.

4. 1992 Adjustment

Respondent adjusted petitioner’s 1992 gross income on

account of the NCNB deposit ($25,000 deposited into an account of

petitioner’s on February 10, 1992). In the petition, petitioner
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avers that all the cash transactions were from funds accumulated

by petitioner from a 1990 loan to her from NCNB National Bank and

from rental income received by her in prior years. On brief,

petitioner argues that the source of the NCNB deposit was funds

received by petitioner from her children, either as loans or

gifts, as evidenced by the testimony of petitioner and her

children.

Petitioner’s testimony and that of her children concerning

the source of the NCNB deposit conflicted on numerous points and

was not credible. Petitioner’s testimony was particularly

unconvincing concerning the actual times, places, manner, and

denominations of the supposed gifts of cash to her. Petitioner

was not able to remember the details of her son's presenting her

with $10,000 in cash or her daughter's presenting her with

$20,000 in cash. Upon questioning by the Court, petitioner was

not certain when she traveled from California to Florida with the

$10,000 her son supposedly gave her and could not recall whether

she received $20,000 in cash from her daughter in November 1991

or February 1992. The children’s testimony seems particularly

incredible given the large sums of money the children supposedly

gave their mother in comparison to their modest reported incomes

for the years at issue. We do not credit Gary’s testimony that

he kept $15,000 in $100 bills under the carpet in the closet in

his apartment nor his sister Audrey’s testimony that she received
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more than $30,000 in cash gifts at her wedding, which she kept at

home, in her closet (in a safe). We observed the demeanor of

petitioner and her children and do not believe that any of them

told the truth with respect to the source of the NCNB deposit.

We may reject testimony that is inherently improbable or

manifestly unreasonable, even where no contradictory testimony is

offered. See, e.g., Boyett v. Commissioner, 204 F.2d 205, 208

(5th Cir. 1953), and the cases cited therein. We accord the

testimony of petitioner and her children no weight with respect

to the source of the NCNB deposit. Petitioner has failed to

prove her claim of a nontaxable source.

5. 1993 Adjustment

Respondent adjusted petitioner’s 1993 gross income on

account of the Fortune Bank deposit ($10,000 deposited into an

account of petitioner’s on December 8, 1993) and the NationsBank

purchase ($11,250 used to purchase a cashier’s check on

December 9, 1993). Petitioner argues that petitioner’s reported

income (principally from real estate) explains those cash

transactions.

Petitioner has attempted to show from known bank deposits

and sources of income that petitioner did not fail to report all

of her income for 1993. Petitioner’s analysis is flawed. There

is in evidence a “Statement of Account Activity” for Hawthorne

Savings and Loan Association account No. 10130059-8 (the first
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Hawthorne account). That statement shows a transfer into that

account from Hawthorne Savings and Loan Association account No.

10133739-2 (the second Hawthorne account) in the amount of $7,627

on August 23, 1993. There is, however, no statement of account

activity in evidence with respect to the second Hawthorne

account. We cannot, therefore, place any confidence in the

completeness of petitioner’s bank deposit analysis because we do

not have confidence that petitioner took into account all

deposits to all of her bank accounts in 1993. Also, petitioner

added as deposits into the first Hawthorne account amounts that

were withdrawals and not deposits. Finally, petitioner failed to

take into account the NationsBank purchase.

Alternatively, petitioner argues that the Fortune Bank

deposit is the proceeds of rental income. Petitioner’s failure

to maintain adequate records of her rental activities gives us no

confidence in that claim. Petitioner also argues that the

Fortune Bank deposit was withdrawn (the Fortune Bank withdrawal),

in cash, on the same day, December 8, 1993, that it was made and

used the next day, December 9, 1993, with additional cash, to

make the NationsBank purchase. However, petitioner's testimony

with regard to those transactions was unclear: petitioner

testified that she did not know what she did with the Fortune

Bank withdrawal and cannot remember why she made the NationsBank

purchase.
 - 15 -

Also, there is no currency transaction report in evidence

with respect to the Fortune Bank withdrawal. Currency

transaction reports are required to be prepared by banking

institutions when customers conduct single cash transactions

(deposits, withdrawals, exchanges of currency, or other payments

or transfers) in amounts of $10,000 or greater. 31 U.S.C. sec.

5313 (1994). We infer from petitioner's failure to offer a

currency transaction report for the alleged withdrawal of $10,000

cash that no such withdrawal of cash occurred.

Petitioner has failed to prove nontaxable sources for either

the Fortune Bank deposit or the NationsBank purchase.

6. Conclusion

Because petitioner has failed to prove nontaxable sources

for the cash transactions, respondent’s determination of

deficiencies with respect to his adjustments made with respect to

the cash transactions is sustained.

B. Tax on Self-Employment Income

Section 1401 imposes a two-part tax on the self-employment

income of every individual. An individual’s self-employment

income depends on his “net earnings from self-employment”. See

sec. 1402(b). In relevant part, the term “net earnings from

self-employment” means the gross income derived by an individual

from any trade or business carried on by the individual less

allowable deductions attributable to the trade or business. Sec.
 - 16 -

1402(a). Respondent determined that petitioner failed to pay

self-employment taxes of $3,533 and $3,002 for 1992 and 1993,

respectively. Respondent based his determination on petitioner’s

lack of adequate records establishing that she was not subject to

self-employment taxes with respect to the cash transactions.

Petitioner argues that she is not liable for self-employment

taxes because she did not carry on any trade or business.

Petitioner has failed to prove that the cash transactions

involved proceeds from a nontaxable source. She has failed to

prove that such proceeds did not arise in connection with a trade

or business. We sustain respondent’s determinations of

deficiencies to the extent allocable to the taxes on self-

employment income.

II. Section 6662(a) Accuracy-Related Penalties

Section 6662 provides for an accuracy-related penalty in the

amount of 20 percent of the portion of any underpayment

attributable to, among other things, negligence or intentional

disregard of rules or regulations (hereafter, simply,

negligence). Respondent determined section 6662 penalties

against petitioner for her negligence with respect to the total

underpayment for 1992 and 1993. Petitioner contests the section

6662 penalties only to the extent that they relate to the cash

transactions. Negligence has been defined as the failure to

exercise the due care of a reasonable and ordinarily prudent
 - 17 -

person under like circumstances. See Neely v. Commissioner,

85 T.C. 934, 947 (1985). In the petition, petitioner assigns

error to respondent’s determination of section 6662 penalties

with respect to the cash transactions. However, petitioner does

not aver any specific facts in support of her assignment of

error. On brief, petitioner claims that she relied on her

accountant properly to prepare her Federal income tax returns for

1992 and 1993.

A taxpayer acts reasonably when she provides her accountant

or attorney with all relevant information necessary to prepare

her tax return, and she relies, in good faith, on the advice of

her attorney or accountant regarding a matter of substantive tax

law. See Jaques v. Commissioner, T.C. Memo. 1989-673, affd.

935 F.2d 104 (6th Cir. 1991); see also United States v. Boyle,

469 U.S. 241, 251 (1985). The taxpayer, however, bears the

ultimate responsibility for the correctness of her income tax

return, and good faith reliance on professional advice is not a

substitute for compliance with an unambiguous statute that

requires no special training or effort to understand and apply.

See United States v. Boyle, supra at 251-252. Accordingly, where

the taxpayer delegates the preparation of her income tax return

to a tax return preparer, the taxpayer has a duty to provide the

tax return preparer with all relevant information necessary to

prepare the return, see Pessin v. Commissioner, 59 T.C. 473, 489
 - 18 -

(1972); Jaques v. Commissioner, supra, and to review her

completed tax return before signing it. See Biederstadt v.

Commissioner, T.C. Memo. 1989-235; see also Pervier v.

Commissioner, T.C. Memo. 1989-344.

We are not convinced that petitioner provided all relevant

information necessary for her accountant properly to prepare her

returns. Respondent’s tax auditor testified that petitioner’s

representative (who prepared her returns) initially told him that

there were no sources of nontaxable income. That conflicts with

petitioner’s position in this case, at least with respect to the

NCNB deposit, that the NCNB deposit was the proceeds of loans or

gifts from her children. Petitioner failed to call her

accountant or show that he was unavailable, from which we draw

the inference that his testimony would have been adverse to

petitioner. See Wichita Terminal Elevator Co. v. Commissioner,

6 T.C. 1158, 1165 (1946)(“the failure of a party to introduce

evidence within his possession and which, if true, would be

favorable to him, gives rise to the presumption that if produced

it would be unfavorable”), affd. 162 F.2d 513 (10th Cir. 1947).

Petitioner has failed to carry her burden of proving

that she was not negligent with respect to her 1992 and 1993

returns. See Rule 142(a).

Decision will be entered

for respondent.
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