T.C. Memo. 2000-111
UNITED STATES TAX COURT
DELWIN D. HOUSER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 13202-97, 20120-97. Filed March 30, 2000.
Delwin D. Houser, pro se.
Linda K. West, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: In these consolidated cases, respondent
determined deficiencies in petitioner’s Federal income taxes and
additions to tax as follows:
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Additions to Tax
Year Deficiency Sec. 6651(f) Sec. 6654
1993 $192,457 $144,343 $8,064
1994 181,722 136,291 9,430
1995 122,177 91,633 6,625
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 issues for decision involve the amount of unreported
income that should be charged to petitioner, petitioner’s
liability under section 6651(f) for fraudulent failure to file
income tax returns, and petitioner’s liability under section 6654
for failure to make estimated income tax payments.
FINDINGS OF FACT
Because petitioner failed to respond to respondent's
requests for admission, factual matter set forth in respondent's
requests for admission is deemed admitted. See Rule 90(c).
When the petition was filed, petitioner resided in Greenwell
Springs, Louisiana. Petitioner and his stepdaughter and her
husband, Rebecca and Richard Adair, operate a roofing business
under the name H & H Sheet Metal (the roofing business). The
evidence does not establish how ownership of the roofing business
is divided between petitioner and the Adairs.
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Payments were received by the roofing business for roofing
services rendered for various general contractors, including Roof
Technologies and Vaughn Roofing.
In 1993, 1994, and 1995, Roof Technologies and Vaughn
Roofing were billed by the roofing business the following total
amounts for roofing services rendered to them:
Year Amount
1993 $490,009
1994 426,843
1995 197,965
Roof Technologies and Vaughn Roofing issued checks in favor
of petitioner that cumulatively total the above amounts billed to
them by the roofing business. The checks were received and
deposited into a checking account (the checking account) on which
petitioner, petitioner’s wife, and Rebecca Adair were
signatories.
For 1993, 1994, and 1995, the following schedule reflects
monthly and annual total deposits into the above checking
account:
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Month Total Deposits Into Checking Account
1993 1994 1995
January -0- $ 21,346 $ 10,533
February $ 28,154 34,950 19,056
March 25,824 12,150 23,104
April 37,400 53,022 18,000
May 20,131 44,211 21,372
June 48,870 55,007 61,050
July 34,149 37,700 49,146
August 33,038 17,577 670
September 52,000 53,619 24,465
October 91,020 51,219 51,946
November 72,000 56,580 17,492
December 65,150 40,450 34,500
Total $507,736 $477,903 $331,334
For 1993, 1994, and 1995, petitioner did not file Federal
income tax returns.
During respondent’s audit, petitioner did not cooperate with
respondent’s agents, and petitioner did not provide to
respondent’s agents the books and records relating to the roofing
business. Also, petitioner mailed to respondent letters
reflecting frivolous tax protester arguments.
On audit and in the notices of deficiency for the years in
issue, using the bank deposits method of proof and the specific
item method of proof for interest income earned on the checking
account balance, respondent determined that petitioner received
unreported taxable income in the following total amounts:
Year Amount
1993 $517,236
1994 477,903
1995 333,780
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Because of lack of documentation provided during the audit,
respondent did not allow petitioner any deductions for expenses
relating to the roofing business, and respondent charged
petitioner with the above total amounts for each year as
unreported taxable income.
For each year, respondent also determined that petitioner
was liable for the fraudulent failure to file addition to tax
under section 6651(f). In the alternative, for each year,
respondent determined that petitioner was liable for the
negligent failure to file addition to tax under section
6651(a)(1).
As a protective measure, on audit of Rebecca and Richard
Adair for 1993, 1994, and 1995, respondent charged to the Adairs
the same total amounts of unreported income relating to the bank
deposits that were charged to petitioner.
OPINION
Under section 61, gross income includes all income from
whatever source derived. See Commissioner v. Glenshaw Glass Co.,
348 U.S. 426, 431 (1955). Taxpayers are required to maintain
sufficient records to allow respondent to determine their correct
Federal income tax liability. See sec. 6001. Taxpayers with
income above the exemption amount are required to file Federal
income tax returns. See sec. 6012.
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Generally, respondent’s determinations are presumed correct,
and taxpayers have the burden of proving that respondent’s
determinations are erroneous. See Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933).
Generally, bank deposits are treated as prima facie evidence
of taxable income. See Woodall v. Commissioner, 964 F.2d 361,
364 (5th Cir. 1992), affg. T.C. Memo. 1991-15; Parks v.
Commissioner, 94 T.C. 654, 658 (1990); Tokarski v. Commissioner,
87 T.C. 74, 77 (1986).
Where taxpayers fail to present evidence regarding the
proper division between them of income received from a jointly
operated business, respondent and the courts may approximate the
amount of income to be charged to each taxpayer. See Arouth v.
Commissioner, T.C. Memo. 1992-679. An equal division of income
may be appropriate where taxpayers fail to provide any evidence
of a more appropriate division of the income. See Cannon v.
Commissioner, 533 F.2d 959, 960 (5th Cir. 1976), affg. Ash v.
Commissioner, T.C. Memo. 1974-219; Puppe v. Commissioner, T.C.
Memo. 1988-311.
Where evidence exists that taxpayers incurred expenses
relating to their business, it may be appropriate to allow an
estimate of the business expenses. See Cohan v. Commissioner, 39
F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85
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T.C. 731, 743 (1985); Sherrer v. Commissioner, T.C. Memo. 1999-
122.
For 1993, 1994, and 1995, IRS Publication 1136, Statistics
of Income Bulletin, reflected the following average net profit
margin for roofing contractors:
Average
Net Profit
Year Margin
1993 20%
1994 25%
1995 18%
As indicated, respondent’s tax deficiencies against
petitioner are based on deposits to the checking account with no
allowance for labor and material costs which obviously were
incurred in the roofing business. We conclude that for each year
it is appropriate to apply to the checking account deposits that
are specifically identifiable as gross receipts of the roofing
business (namely, those deposits that represent the checks
received from Roof Technologies and Vaughn Roofing) the average
net profit margin established by respondent for roofing
contractors and to allow estimated business expense deductions
for the business expenses so calculated.
Petitioner has presented no evidence as to how income from
the roofing business should be divided between himself and
Rebecca and Richard Adair. We conclude that one-half of the
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income determined under the bank deposits method of proof is
taxable to petitioner.
In the related case of Adair v. Commissioner, T.C. Memo.
2000-110, docket Nos. 12103-97 and 20465-97, also filed this
date, we charge the Adairs with the other half of the income of
the roofing business relating to deposits into the checking
account.
For each year in issue, our calculations of petitioner’s
taxable income are set forth below. The bank deposits that are
identified as gross receipts of the roofing business are
multiplied by the average net profit margin for roofing
contractors, producing a partial taxable income figure for the
roofing business. Added to this partial net income figure are
the unidentified bank deposits to calculate total taxable income
relating to the deposits to the checking account, one-half of
which is then charged to petitioner.
Bank Deposits Net Income
Identified as of Roofing
Gross Receipts Average Business on Unidentified One-half
of Roofing Net Profit Identified Bank Taxable Charged to
Year Business Margin Bank Deposits Deposits Income* Petitioner
1993 $490,009 20% $ 98,002 $ 17,727 $115,875 $57,938
1994 426,843 25% 106,711 51,061 157,939 78,970
1995 197,965 18% 35,634 133,369 169,032 84,516
* As indicated, also included in the taxable income for each year is interest
income relating to the checking account in the respective amounts of $146,
$167, and $29.
Under section 6651(f), an addition to tax of up to 75
percent applies where the failure to file a Federal income tax
return is due to fraudulent conduct. See DiLeo v. Commissioner,
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959 F.2d 16 (2d Cir. 1992), affg. 96 T.C. 858, 873 (1991).
Respondent has the burden of proving fraud by clear and
convincing evidence. See sec. 7454(a); Rule 142(b); Bagby v.
Commissioner, 102 T.C. 596, 607 (1994).
Indicia of fraud include: (1) Understatements of income;
(2) inadequate books and records; (3) failure to file tax
returns; (4) implausible or inconsistent explanations; and
(5) lack of cooperation with tax authorities. See Bradford v.
Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.
Memo. 1984-601; Clayton v. Commissioner, 102 T.C. 632, 647
(1994); Petzoldt v. Commissioner, 92 T.C. 661, 699-700 (1989);
Recklitis v. Commissioner, 91 T.C. 874, 910 (1988).
Petitioner has not alleged any nontaxable sources of
income, and the roofing business constitutes the likely taxable
source of the deposits into the checking account.
With regard to fraudulent intent, the evidence establishes
for each year in issue that petitioner realized significant
income that he failed to report, that petitioner failed to
provide to respondent’s agents books and records relating to the
roofing business, that petitioner failed to file income tax
returns, that petitioner failed to pay significant tax
liabilities that he owed, that petitioner did not cooperate with
respondent, and that petitioner made erroneous tax protester
objections to the tax laws. The evidence establishes that
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petitioner fraudulently failed to file his Federal income tax
returns for 1993, 1994, and 1995.
Section 6654(a) provides for an addition to tax for failure
to make timely estimated income tax payments. Petitioner has not
proven that an exception applies, and for each year in issue,
petitioner is liable for the section 6654 addition to tax.
To reflect the foregoing,
Decisions will be entered
under Rule 155.