Wallace v. Commissioner

T.C. Memo. 2000-49

UNITED STATES TAX COURT

THOMAS Y. WALLACE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18990-97. Filed February 11, 2000.

Thomas Y. Wallace, pro se.

Charles Pillitteri, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

THORNTON, Judge: Respondent determined deficiencies in and

additions to petitioner’s Federal income taxes as follows:

Additions to Tax
Sec. Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6651(f) 6653(a)(1) 6654

1988 $12,796 $3,199 -– $640 $823
1989 22,254 –- $16,691 –- 1,505
 - 2 -

The issues for consideration are: (1) Whether petitioner

failed to report taxable income for taxable years 1988 and 1989,

as determined by respondent using the net worth method of income

reconstruction; (2) whether petitioner is liable for an addition

to tax for fraudulent failure to file a Federal income tax return

pursuant to section 6651(f) for taxable year 1989; (3) whether

petitioner is liable for an addition to tax for negligence

pursuant to section 6653(a)(1) for taxable year 1988; (4) whether

petitioner is liable for an addition to tax for failure to file a

Federal income tax return pursuant to section 6651(a)(1) for

taxable year 1988; (5) whether petitioner is liable for self-

employment tax pursuant to section 1401 for taxable years 1988

and 1989; and (6) whether petitioner is liable for additions to

tax for failure to pay estimated income tax pursuant to section

6654 for taxable years 1988 and 1989.1

FINDINGS OF FACT

The parties have stipulated some of the facts, which are

herein incorporated by this reference. When he petitioned the

Court, petitioner resided in Cherokee, Alabama.

On November 25, 1987, petitioner purchased an 80-acre farm

(the Carskadon farm) in Clark County, Missouri, for $45,000. A

1
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.
 - 3 -

cash downpayment of $10,000 was made at the time of the purchase,

and the $35,000 balance was payable in five equal annual

installments of $7,000, with interest. During 1988 and 1989,

petitioner made cash payments on the Carskadon farm totaling

$20,300, representing principal and interest on the installment

obligation.

During 1988 and 1989, petitioner made cash purchases of

other real property as follows:

04/22/88 603 Donaldson St.,
Canton, MO $12,480
02/27/89 Williamstown school,
Williamstown, MO 8,500
03/03/89 Dawg Gone Saloon,
Williamstown, MO 1,400
03/25/89 275 acres, Clark County, MO 42,900
05/16/89 20 acres, Clark County, MO 5,200

In addition, during 1988 and 1989, petitioner paid approximately

$9,916 in cash for improvements to these various properties.

During 1988 and 1989, petitioner also made cash purchases of

personal property as follows:

01/04/88 1986 trailer $100
03/22/88 Allis Chalmers tractor 3,000
05/10/88 23-foot fiberglass boat 2,500
05/18/88 1973 International truck 1,500
05/21/88 1967 Chevy pickup 325
07/26/88 1988 Harley-Davidson motorcycle 10,850
07/31/89 1975 Ford pickup 1,000
09/07/88 Tanning bed 3,815
04/05/89 International tractor 1,800
08/09/89 1976 Ford Thunderbird 9002
1989 1966 Ford truck 900

2
Includes a $400 trade-in.
 - 4 -

Ronald Freetly also purchased for petitioner, using

petitioner’s funds, the following assets:

01/18/88 Vermeer used tractor $3,500
02/02/88 1966 Ford pickup 600
02/18/88 Tractor equipment 830

On August 12, 1987, petitioner’s sister purchased a house

trailer for petitioner for $20,884, making a downpayment of

$2,089 and financing the balance. During 1988 and 1989, she made

principal and interest payments on the property totaling $5,964,

in addition to utility payments for telephone, electricity, and

gas for the property. Petitioner lived in the house trailer

throughout 1988 and 1989. He reimbursed his sister for all the

payments she made on the house trailer, sometimes giving her cash

and sometimes endorsing over to her checks that he received from

other sources.

Petitioner did not file Federal income tax returns for

taxable years 1988 and 1989.

The Criminal Proceeding

On April 14, 1995, a Federal grand jury indicted petitioner

with three counts of violating section 7201, attempting to evade

or defeat tax, for taxable years 1988, 1989, and 1990, and three

counts of violating section 7203, willful failure to file a

Federal income tax return, supply information or pay tax, for

taxable years 1988, 1989, and 1990. On June 18, 1996, petitioner

pleaded guilty to violating section 7201 for taxable year 1989.
 - 5 -
The stipulation of facts relative to sentencing, filed June 18,

1996, (the stipulation relative to sentencing) states: “The

total federal income taxes evaded by * * * [petitioner] for the

year 1989 was approximately $16,000". The U.S. District Court

for the Eastern District of Missouri imposed a 9-month jail term

and ordered petitioner to pay an assessment of $50, a fine of

$1,000, and restitution to the Internal Revenue Service in the

amount of $16,000. Petitioner paid these amounts as required.

Respondent’s Examination and Determination

As part of the criminal investigation of petitioner,

respondent’s special agent searched county records and bank

records, and interviewed third parties. Respondent found that

petitioner did not have a bank account. Respondent used the net

worth method to reconstruct petitioner’s income. Respondent

determined that petitioner had received unreported income of

$40,237 and $67,708 for taxable years 1988 and 1989,

respectively, resulting in taxable income of $35,287 and $62,609

for taxable years 1988 and 1989, respectively.

The following is respondent’s computation of petitioner’s

increase in net worth plus living expenses for 1988 and 1989:

ASSETS 12/31/88 12/31/89

PROPERTIES

Carskadon 80 acre farm $45,000.00 $45,000.00
Schaller/603 Donaldson 12,480.00 12,480.00
Williamstown School –- 8,500.00
Dawg Gone Saloon –- 1,400.00
 - 6 -

12/31/88 12/31/89

Lake of Oaks 275 Acres –- 42,900.00
Lake of Oaks 20 Acres –- 5,200.00
Improvements 603 Donaldson 5,586.09 5,586.09
Road Improvements 500.06 1,520.50
Improvements Dawg Gone Saloon –- 1,321.83

OTHER

House Trailer 20,876.64 20,876.64

VEHICLES

Harley Davidson Motorcycle 1988 10,850.00 10,850.00
MG 1974 400.00 400.00
Ford station wagon 1981 300.00 300.00
Chevy truck 1978 600.00 600.00
Homemade Trailer 1977 –- –-
Trailer 1986 100.00 100.00
Chrysler 23ft boat 1968 2,500.00 2,500.00
International truck 1973
and trailer 1,500.00 1,500.00
Chevy 1967 325.00 –-
Ford truck 1966 600.00 600.00
Ford truck 1975 –- 1,000.00
Ford T-Bird 1976 -- 900.00
Ford truck 1966 –- 900.00
18ft Goose Neck Trailer 1977 –- –-

EQUIPMENT

M-470 Vermeer Tractor w/trencher
& b[ackhoe] 3,500.00 3,500.00
Boring Equipment 830.00 830.00
D-17 Allis Chalmers Tractor 3,000.00 3,000.00
Tanning bed 3,814.65 3,814.65
B-414 International Tractor –- 1,800.00

TOTAL ASSETS 112,762.44 177,379.71

LIABILITIES

PROPERTIES

Loan-Carskadon 80 Acre Farm 28,000.00 21,000.00
Accum. Depr. Carskadon Farm 8,098.06 12,070.95
 - 7 -
12/31/88 12/31/89

Accum. Depr. 603 Donaldson 339.79 902.86
Accum. Depr. Dawg Gone Saloon –- –-

OTHER

Loan-House Trailer 18,284.71 17,839.27
Accum. Depr. Road 25.00 123.53

VEHICLES AND EQUIPMENT

Accum. Depr. 179 Deduction 10,000.00 13,700.00
Accum. Depr. Dehicles 440.00 1,144.00
Accum. Depr. Equipment 163.52 443.83

TOTAL LIABILITIES 65,351.08 67,224.44

NET WORTH (Assets-Liabilities) 47,411.36 110,155.27

INCREASE IN NET WORTH

NET WORTH 47,411.36 110,155.27

PRIOR YEAR NET WORTH 10,587.36 47,411.36

INCREASE IN NET WORTH 36,824.00 62,743.91

PLUS PERSONAL EXPENDITURES[1] 4,582.55 5,946.97

LESS: NON-TAXABLE ITEMS (1,170.00) (982.80)

CORRECTED AGI 40,236.55 67,708.08
1
In estimating petitioner’s personal expenditures for 1988
and 1989, respondent took a conservative approach by including
only certain documented expenses for utilities, vacations,
personal interest and license fees, totaling $4,583 and $5,947,
for 1988 and 1989, respectively. Respondent did not attempt to
estimate other living expenses such as food, clothing, furniture,
and entertainment.
 - 8 -
OPINION

Taxpayers are required to keep adequate books or records

from which their correct tax liability can be determined. See

sec. 6001. In the absence of adequate books and records, the

Commissioner may reconstruct a taxpayer’s taxable income by any

reasonable method. See Holland v. United States, 348 U.S. 121,

131 (1954). The courts have long recognized the net worth method

as a reasonable method. See id.; Manzoli v. Commissioner, 904

F.2d 101 (1st Cir. 1990), affg. T.C. Memo. 1989-94 and T.C. Memo.

1988-299; United States v. Sorrentino, 726 F.2d 876 (1st Cir.

1984); Estate of Mazzoni v. Commissioner, 451 F.2d 197 (3d Cir.

1971), affg. T.C. Memo. 1970-144 and T.C. Memo. 1970-37.

Under the net worth method, taxable income is computed by

reference to the change in the taxpayer’s net worth during a

year, increased for nondeductible expenses such as living

expenses, and decreased for items attributable to nontaxable

sources such as gifts and loans. The resulting figure may be

considered to represent taxable income, provided: (1) The

Commissioner establishes the taxpayer’s opening net worth with

reasonable certainty; and (2) the Commissioner either shows a

likely source of unreported income or negates possible nontaxable

sources. See Holland v. United States, supra at 132-138; United

States v. Massei, 355 U.S. 595, 595-596 (1958); Brooks v.
 - 9 -
Commissioner, 82 T.C. 413, 431-432 (1984), affd. without

published opinion 772 F.2d 910 (9th Cir. 1985).

Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving by a

preponderance of evidence that those determinations are

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

115 (1933).

Petitioner has not alleged any error in respondent’s

determination of his opening net worth, except as relates to

$10,000 that respondent treated petitioner as having paid as a

downpayment for the Carskadon farm in 1987. Petitioner argues

that he borrowed the $10,000 from a friend, thus suggesting that

this sum should not be included in his net worth computation (or

else the computation should reflect a corresponding decrease for

his outstanding liability). The evidence in the record–-

consisting of two conflicting statements from the now-deceased

friend–-is inconclusive as to whether petitioner made the down-

payment with borrowed funds. Any error by respondent in this

regard, however, was harmless. Since the farm was bought in 1987

and the treatment of the downpayment remained unchanged

throughout the years in issue, the final result of the net worth

computation was unaffected by this item. Cf. United States v.

Scrima, 819 F.2d 996, 999 (11th Cir. 1987). We conclude and hold
 - 10 -
that respondent determined petitioner’s opening net worth with

reasonable certainty.

In the stipulation relative to sentencing, petitioner

stipulated that with respect to taxable year 1989, he had income

from various taxable sources, including income from farm

property, sales of farming equipment, and payments for hunting

leases. Given that petitioner owned similar types of assets in

taxable year 1988, it is a fair inference that these assets

constituted a likely source of income for taxable year 1988 as

well.

At trial, petitioner sought to establish a nontaxable source

for the income reflected in respondent’s net worth analysis,

arguing generally that “I purchased the properties with other

people’s money. The majority of the money was somebody else’s”.

During the examination, respondent investigated these claims by

petitioner, interviewing persons from whom petitioner claimed to

have borrowed the money, and determined that petitioner’s claims

were not valid. Similarly, we do not find petitioner’s

uncorroborated testimony to be credible. The totality of the

evidence, including the stipulation relative to sentencing,

clearly establishes that petitioner made currency payments to

purchase ownership interests in the various properties in

question, often concealing his ownership interests in order to

avoid detection by tax and other law enforcement authorities.
 - 11 -
Accordingly, we find that respondent’s reconstruction

correctly determined petitioner’s taxable income.

Fraudulent Failure To File for 1989

Section 6651(f) generally provides that if any failure to

file any return is fraudulent, there shall be added to the amount

required to be shown as tax on the return 15 percent of the

amount of such tax if the failure to file is for less than a

month, with an additional 15 percent for each additional month or

fraction thereof during which the failure continues, not

exceeding 75 percent in the aggregate. Respondent bears the

burden of proving fraud under section 6651(f) by clear and

convincing evidence. See sec. 7454(a); Rule 142(b); Parks v.

Commissioner, 94 T.C. 654, 660-661 (1990).

Respondent argues that petitioner is collaterally estopped

from denying liability for the addition to tax under section

6651(f) because petitioner pleaded guilty to a violation of

section 7201 in taxable year 1989.

The doctrine of collateral estoppel is intended to avoid

repetitious litigation by precluding the relitigation of any

issue of fact or law that was actually litigated and that

resulted in a final judgment. See Montana v. United States, 440

U.S. 147, 153 (1979). “Under the doctrine of collateral estoppel

a party is precluded from litigating an issue if (1) the

identical issue has been (2) actually litigated in a prior suit
 - 12 -
which (3) could not have been decided without resolving the

issue.” In re Raiford, 695 F.2d 521, 523 (11th Cir. 1983); see

Williams v. Bennett, 689 F.2d 1370, 1381 (11th Cir. 1982). “The

use of a criminal conviction as conclusive of an issue in

subsequent civil litigation, though not universally accepted, is

well established today.” In re Raiford, 695 F.2d at 523. For

purposes of applying collateral estoppel, there is no difference

between a judgment of conviction based upon a guilty plea and a

judgment of conviction rendered after a trial on the merits. See

Arctic Ice Cream Co. v. Commissioner, 43 T.C. 68, 75 (1964); see

also United States v. Killough, 848 F.2d 1523, 1528 (11th Cir.

1988).

It is well settled that a conviction under section 7201

collaterally estops a taxpayer from denying fraud for purposes of

former section 6653(b).3 See Blohm v. Commissioner, 994 F.2d

1542, 1554 (11th Cir. 1993), affg. T.C. Memo. 1991-636; Amos v.

3
The substance of sec. 6653(b), before amendment by sec.
7721(a) of the Omnibus Budget Reconciliation Act of 1989 (OBRA
1989), Pub. L. 101-239, 103 Stat. 2106, 2395, now appears in
secs. 6651(f) and 6663, which are effective generally for returns
the due date of which is after Dec. 31, 1989. Before amendment
by OBRA 1989, sec. 6653(b)(1) provided:

In General.--If any part of any underpayment * * * of
tax required to be shown on a return is due to fraud, there
shall be added to the tax an amount equal to 75 percent of
the portion of the underpayment which is attributable to
fraud.
 - 13 -
Commissioner, 43 T.C. 50, 54-56 (1964), affd. 360 F.2d 358 (4th

Cir. 1965). There is substantive identity between the elements

that we consider in determining the imposition of additions to

tax for fraud under former section 6653(b)(1) and under current

sections 6651(f) and 6663. See Clayton v. Commissioner, 102 T.C.

632, 653 (1994). Accordingly, a conviction (or guilty plea)

under section 7201 collaterally estops a taxpayer from denying

fraud for purposes of section 6651(f). We conclude and hold that

petitioner is collaterally estopped from denying liability for

the addition to tax under section 6651(f).

Negligence for 1988

As in effect with respect to petitioner’s 1988 taxable year,

section 6653(a) imposes an addition to tax equal to 5 percent of

any underpayment, any part of which is attributable to

negligence. “Negligence is lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances.” Neely v. Commissioner, 85 T.C. 934, 947

(1985). A taxpayer’s failure to file a return is prima facie

evidence of negligence. See Emmons v. Commissioner, 92 T.C. 342,

349-350 (1989), affd. 898 F.2d 50 (5th Cir. 1990). Petitioner

has not challenged the addition to tax under section 6653(a), and

the evidence does not establish any adequate or reasonable excuse

or justification for petitioner’s failure to file. Accordingly,

we sustain respondent’s determination that petitioner is liable
 - 14 -
for an addition to tax pursuant to section 6653(a) for taxable

year 1988.

Failure To File for 1988

Section 6651(a)(1) imposes an addition to tax for failure to

file a timely return, unless the taxpayer can establish that such

failure “is due to reasonable cause and not due to willful

neglect”. It is undisputed that petitioner did not file a 1988

Federal income tax return. Petitioner has not argued, and the

evidence does not establish, that there was reasonable cause for

his failure to file his 1988 return. We sustain respondent’s

determination on this issue.

Self-Employment Taxes

Section 1401 generally provides that a tax shall be imposed

on a specified percentage of the self-employment income of every

individual. Petitioner failed to address respondent’s

determination that he is liable for self-employment taxes. We

sustain respondent’s determination on this issue.

Failure To Pay Estimated Taxes

Respondent determined an addition to tax under section 6654

for taxable years 1988 and 1989 based on petitioner’s failure to

pay estimated income tax. Section 6654(a) provides for an

addition to tax “in the case of any underpayment of estimated tax

by an individual”. An addition to tax under section 6654 is

mandatory absent the application of one of the exceptions
 - 15 -
contained in that section. See In re Sanford v. Commissioner,

979 F.2d 1511, 1514 (11th Cir. 1992); Niedringhaus v.

Commissioner, 99 T.C. 202, 222 (1992). Petitioner does not argue

that any of the exceptions contained in section 6654 apply, nor

does he argue that respondent erred in determining an addition to

tax under section 6654. Accordingly, we sustain respondent’s

determination.

To reflect the foregoing,

Decision will be

entered for respondent.4

4
It is undisputed that petitioner has paid to respondent
$16,000 in restitution, this sum corresponding to the amount
stated in the stipulation relative to sentencing as being the
total Federal income taxes evaded by petitioner with respect to
taxable year 1989. Neither at trial nor on brief has respondent
addressed the merits of petitioner’s claim that he should be
given credit for this $16,000 payment against his 1989
deficiency. We expect petitioner to be given credit for his
$16,000 restitution payment for taxable year 1989. Cf. M.J. Wood
Associates, Inc. v. Commissioner, T.C. Memo. 1998-375.