T.C. Memo. 2000-257
UNITED STATES TAX COURT
ROBERT G. BACON AND BARBARA BACON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2993-97. Filed August 15, 2000.
John R. Crayton, for petitioners.
Richard H. Gannon and Linda Love Vines, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
RUWE, Judge: Respondent determined deficiencies in
petitioners’ Federal income taxes, an addition to tax, and
penalties as follows:
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Addition to Tax Penalties
Year Deficiency Sec. 6653(b)(1)1 Sec. 6663(a)
1988 $107,589 $83,609 ---
1989 70,297 --- $52,723
1990 147,326 --- 110,495
1991 77,606 --- 58,205
1992 13,927 --- 10,445
1
In the notice of deficiency, respondent also determined an addition to
tax for 1988 based on 50 percent of the interest due on the underpayment.
However, that addition to tax was improperly determined since the Technical
and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec. 1015(b)(2)(B),
102 Stat. 3568-3569, eliminated that addition to tax.
After concessions,1 the issues for decision are: (1) Whether
petitioners underreported their income for each year in issue;
(2) whether any part of an underpayment for each year in issue is
due to fraud; and (3) whether assessment of the alleged
deficiencies is barred by the statute of limitations.
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. Throughout this opinion, all amounts have been
rounded to the nearest dollar.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. The petitioners, Robert
G. Bacon (Mr. Bacon), and Barbara Bacon (Mrs. Bacon), are husband
1
Respondent has conceded the deficiency for the year 1992.
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and wife. At the time they filed their petition in this case,
they resided in Cinnaminson, New Jersey.
Mr. Bacon is a high school graduate. He briefly attended
college as a part-time student where he completed courses in
Accounting I and II. Mrs. Bacon is a college graduate.
In 1980, Mr. Bacon purchased a bar/restaurant called the Jug
Handle Inn under the name of Radtam, Inc., a corporation
(Radtam). Mr. Bacon was the sole shareholder of Radtam during
the years in issue. The primary source of income for the Jug
Handle Inn during this time period was from the sale of food,
beer, and liquor. The Jug Handle Inn also derived revenue from
lottery sales.
Petitioners timely filed joint Federal income tax returns
for each of the years in issue. Petitioners reported adjusted
gross income on their Federal income tax returns for the years in
issue as follows:2
Adjusted
Year Gross Income
1988 $44,221
1989 90,840
1990 97,478
1991 99,117
Total 331,656
2
See appendix A for details of reported income.
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During the years in issue, petitioner made deposits into
their personal bank accounts in the following amounts:3
Gross
Year Deposits
1988 $843,032
1989 530,188
1990 1,285,386
1991 1,149,802
Total 3,808,408
Some of these deposits were made in the form of cash. Some
of these deposits came from two of Radtam’s bank accounts.4 Cash
deposits and deposits from the Radtam accounts that were made
into petitioners’ personal bank accounts for the years in issue
were as follows:
Cash Deposits from
Deposits Radtam Accounts
1988 $64,372 $503,855
1989 41,202 293,313
1990 90,804 453,688
1991 394,311 227,543
Total 590,689 1,478,399
3
See appendix B for details of deposits to personal
accounts.
4
Account Nos. 600-871255 and 23 856021 3.
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During the years in issue, petitioners purchased
seven parcels of real property in Mrs. Bacon’s name as follows:5
Balance Paid
at Closing Cash paid
Purchase Date Purchase Price Net of Loans at Closing1
2
1. 02/23/88 $412,000 $3,167 $3,167
3
2. 03/04/88 585,000 285,000 ---
3. 03/31/89 195,000 197,017 74,285
4. 06/18/90 425,000 25,000 ---
5. 06/29/90 530,000 152,285 ---
4 5
6. 07/02/90 134,000 131,592 30,591
7. 10/18/90 250,000 35,528 5,528
Total 2,531,000 829,589 113,571
1
Cash amounts are included in the balance paid at closing amounts.
2
During 1988, petitioners paid down a $287,069 first mortgage on this
property by $283,310. See appendix C.
3
Mrs. Bacon executed a $300,000 promissory note secured by a mortgage on
the property. The $300,000 purchase money note and mortgage required 36
monthly payments of $2,518 and a balloon payment of $288,988 at the end of the
36 months. Monthly payments of $2,518 were made by Mrs. Bacon, or on her
behalf, for 36 months and the balloon payment of $288,988 was also paid by
Mrs. Bacon, or on her behalf, at the end of 36 months. See appendix C.
4
Part of the purchase price was paid with a check in the amount of
$55,000 purchased with $17,000 in funds withdrawn from Radtam’s savings
account at Chemical Bank, account No. 600-871255, $28,000 in funds withdrawn
from petitioners’ personal savings account maintained at Chemical Bank,
account No. 623503349, and a check in the amount of $10,000 drawn on
petitioners’ personal checking account at the same institution. Additionally,
$35,000 of the purchase price was paid by a check drawn on petitioners’
personal checking account at Barnett Bank, $5,000 by a check drawn on
petitioners’ personal checking account at First Fidelity Bank, $20,000 by a
check purchased from Security Savings & Loan, in part with $19,000 in cash
tendered to the bank by petitioners on July 2, 1990, and a check in the amount
of $5,000, drawn on the account of Thomas Begley, Jr. Esq., from funds
deposited in the same account earlier in 1990.
5
Includes $10,000 in cash and $1,591 in coin deposited in the account of
Burlington County Abstract Co. at closing and $19,000 in cash tendered to
Security Savings & Loan by petitioners on July 2, 1990, in part, to purchase a
$20,000 check. ($10,000 + $1,591 + $19,000 = $30,591.)
On or about October 19, 1989, petitioners paid Collective
Federal Savings Bank $10,657 to modify the terms of their loan
agreement on property located at 218 E. 18th Street, North Beach
5
See appendix C for details.
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Haven, New Jersey. Petitioners paid with a cashier’s check,
which was paid for with a check drawn on the Radtam lottery
account at Security Savings & Loan.6
During the taxable years in issue, petitioners made the
following expenditures:
Year Item Purchase Price
1
1990 Boston Whaler $15,850
2
1990 Chrysler Voyager 6,500
3
1991 U.S. Savings Bonds 15,000
Total 37,350
1
Paid in cash.
2
Paid in cash.
3
These purchases were made with a personal check written on one of
petitioners’ personal accounts payable to “cash”.
On June 15, 1989, Mr. Bacon’s cousin, Tadeusz Ras, purchased
a residence. Of the total purchase price, $50,220 was paid in
cash. A check in the amount of $16,600 was also part of the
purchase money used to acquire the property. On June 15, 1989,
$16,600 was withdrawn from Radtam’s savings account at Chemical
Bank.7 On June 27, 1989, Tadeusz Ras executed a mortgage on his
residence in favor of Mrs. Bacon for $64,000.
Beginning on or before July 1989, petitioners prepared
monthly summary sheets on behalf of Radtam, which purportedly
listed total deposits into its bank accounts for the month,
breaking down the total by category such as food, sales tax,
6
Account No. 23 856021 3.
7
Account No. 600-871255.
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beer, liquor, etc. These monthly summary sheets were furnished
to petitioners’ accountant who prepared Radtam’s corporate tax
returns.8
In addition to the monthly summary sheets, each month
petitioners provided their accountant with corporate bank
statements and a schedule of corporate disbursements. The bank
statements furnished to the accountant reflected two of Radtam’s
accounts at Security Savings & Loan. However, Radtam also
maintained a savings account at Chemical Bank9 from July 1, 1988,
through June 30, 1992. Before 1991, petitioners’ accountant was
not made aware that Radtam had a bank account with Chemical Bank.
Sometime after 1991, and after the Internal Revenue Service (IRS)
began its investigation, petitioners started providing their
accountant with monthly summary sheets listing deposits into the
Chemical Bank account.
Radtam reported gross receipts and taxable income on its
corporate income tax returns as follows:
FYE FYE FYE FYE FYE
6/30/88 6/30/89 6/30/90 6/30/91 6/30/92
Gross Receipts $453,734 $684,395 $868,601 $901,615 $803,517
1
Taxable Income 18,657 (616) 12,308 (242) 7,331
1
Radtam was an S corporation in 1988 that reported this amount as
ordinary income.
8
The same accountant prepared petitioners’ individual
Federal income tax returns and the corporate Federal income tax
return for another entity owned by petitioners called Bradam.
9
Account No. 600-871255.
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For purposes of preparing petitioners’ Federal income tax
returns, Mrs. Bacon prepared annual summaries of personal income
sources and expenses relating to petitioners’ real properties,
which she gave to their accountant. Mrs. Bacon also provided the
accountant with Forms 1099 and settlement sheets from each real
estate purchase.
In 1991, Mr. Bacon purchased a bar/restaurant called the
Whistler’s Inn under the name Bradam, Inc. (Bradam). Mr. Bacon
was the sole shareholder of Bradam in 1991. The primary source
of income for Whistler’s Inn was from the sale of food, beer, and
liquor.
On or about April 17, 1991, Bradam entered into an agreement
to purchase a liquor license, restrictive covenant, and equipment
relating to the Whistler’s Inn. At settlement, Bradam applied a
$50,000 cashier’s check toward the purchase. The cashier’s check
was purchased with amounts withdrawn from Radtam’s savings
account.10
On or about January 6, 1992, Mr. Bacon filed an application
for a VISA card listing his occupation as tavern owner of Radtam
Inc. t/a Jug Handle Inn and stating that his annual salary was
$299,000. Mr. Bacon reported no salary, wages, or dividends from
Radtam on his income tax returns for the years in issue.
10
Account No. 600-871255.
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On July 14, 1992, both petitioners met with and were
interviewed by two special agents from the IRS. During this
interview, Mr. Bacon told the agents that petitioners and their
children had received extensive cash gifts from Mr. Bacon’s
grandfather in $10,000 cash increments. According to Mr. Bacon,
he received a $10,000 cash gift each year since his 18th
birthday, his wife received an annual $10,000 cash gift since
they have been married, and their children each received an
annual $10,000 cash gift since their birth. Mr. Bacon told
respondent’s agents that the gifts were from his grandfather and
were received through a brother-in-law and that neither
petitioners nor their children had ever met their grandfather.
Mr. Bacon told the agents that he was told never to tell anyone
about the gifts and never to put the money in a bank. Mr. Bacon
told the special agents that he may have had as much as $650,000
cash on hand at the beginning of 1988. At trial, petitioners
stipulated that at the beginning of 1988, they had approximately
$35,000 cash on hand. During the years in issue, petitioners did
not receive any gifts, inheritances, legacies, or devises.
OPINION
I. Unreported Income
Respondent determined deficiencies for the years in issue by
using the bank deposit method. Bank deposits are prima facie
evidence of income. See DiLeo v. Commissioner, 96 T.C. 858, 869
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(1991), affd. 959 F.2d 16 (2d Cir. 1992). Of course, when
utilizing this method, all nontaxable sources of deposits must be
taken into account. See id. Under the bank deposits method:
(1) Bank deposits are totaled; (2) nonincome deposits,
redeposits, or transfers are eliminated; (3) an excess of
deposits, as adjusted, over reported income is considered to be
unreported income; (4) cash expenditures that did not come from
deposited funds or nontaxable sources are added to the amount of
underreported income; and (5) deductible expenses not accounted
for in the taxpayer’s return are allowed.11
Using the bank deposit method, respondent determined in the
notice of deficiency that petitioners understated their income
for the years 1988 through 1991 in the following amounts:
1 2 3 4
1988 1989 1990 1991
$362,461 $226,693 $500,851 $236,417
1
See appendix D for details of computations.
2
See appendix E for details of computations.
3
See appendix F for details of computations.
4
See appendix G for details of computations.
The parties have stipulated that if a bank deposit analysis
is to be used, then the following adjustments must be made to
respondent’s bank deposit analysis in the notice of deficiency:12
11
Petitioners have not claimed deductions in addition to
what respondent has allowed.
12
See appendix H for details of these adjustments.
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1988 1989 1990 1991
Mathematical errors: --— $71,907 $78,361 $368,032
Less reductions for
nontaxable items &
credits:1 (284,603) (150,922) (268,424) (434,422)
Plus cash expenditures2
and debits:3 32,467 173,989 49,962 75,387
Net adjustments to
statutory notice: (252,136) 94,974 (140,101) 8,997
1
Items that reduce petitioners’ taxable income. The parties have
stipulated that these adjustments to respondent’s bank deposit analysis are
proper.
2
Including personal items paid by corporation.
3
Items that increase petitioners’ taxable income. The parties have
stipulated that these adjustments to respondent’s bank deposit analysis are
proper.
Respondent has submitted schedules with his brief that show
petitioners’ unreported income for the years in issue is as
follows:
1 2 3 4
1988 1989 1990 1991
Total gross deposits: $843,032 $530,188 $1,285,386 $1,149,802
Less reductions for
nontaxable items, credits,5
& reported income: (740,724) (560,045) (1,067,222) (1,070,042)
Plus cash expenditures6
and debits:7 5,447 351,378 161,451 165,568
Adjustments to taxable income: 8107,755 9
321,521 10
379,615 11
245,328
1
See appendix I for details.
2
See appendix J for details.
3
See appendix K for details.
4
See appendix L for details.
5
Items that reduce petitioners’ taxable income. The parties have
stipulated that these adjustments to respondent’s bank deposit analysis are
proper.
6
Including personal items paid by corporation.
7
In the bank deposit analysis incorporated in the statutory notice,
respondent included net salary deposits of amounts earned by Mrs. Bacon. The
same analysis credits petitioners with the gross amount of her salary rather
than the net salary included in petitioners’ bank deposits. Accordingly,
respondent increased petitioners’ income from bank deposits by the difference
between Mrs. Bacon’s gross salary and her net salary (salary deposited).
8
We note that respondent’s proposed adjustment to petitioners’ 1988
taxable income is $2,570 less than what we arrive at when subtracting the
agreed upon adjustments to the bank deposit analysis from respondent’s initial
computations under the bank deposit analysis. ($362,461 - $252,136 - $107,755
= $2,570)
9
We note that respondent’s proposed adjustment to petitioners’ 1989
taxable income is $146 less than what we arrive at when subtracting the agreed
upon adjustments to the bank deposit analysis from respondent’s initial
computations under the bank deposit analysis. ($226,693 + $94,974 - $321,521 =
$146)
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10
We note that respondent’s proposed adjustment to petitioners’ 1990
taxable income is $18,865 more than what we arrive at when subtracting the
agreed upon adjustments to the bank deposit analysis from respondent’s initial
computations under the bank deposit analysis. ($500,851 - $140,101 - $379,615
= $18,865)
11
We note that respondent’s proposed adjustment to petitioners’ 1991
taxable income is $86 less than what we arrive at when subtracting the agreed
upon adjustments to the bank deposit analysis from respondent’s initial
computations under the bank deposit analysis. ($236,417 + $8,997 - $245,328 =
$86)
With the exceptions noted below (see infra notes 13, 14, and
15), respondent’s final bank deposits analysis, as adjusted
pursuant to the parties’ stipulations, is supported by the facts.
On the basis of stipulated facts and evidence admitted at trial,
we find that petitioners had unreported income of $102,74813 in
1988, $320,66114 in 1989, $358,21515 in 1990, and $245,328 in
1991.
Petitioners argue that respondent’s bank deposit method is
fundamentally flawed. Admittedly, there have been a significant
13
We eliminated a $5,007 item in respondent’s bank deposit
analysis for corporate expenditures on petitioners’ behalf
because the proposed adjustment was not supported by the record.
The omission has the effect of reducing petitioners’ unreported
income by $5,007.
14
We eliminated an $860 item in respondent’s bank deposit
analysis for corporate expenditures on petitioners’ behalf
because the proposed adjustment was not supported by the record.
The omission has the effect of reducing petitioners’ unreported
income by $860.
15
We eliminated a $2,535 item in respondent’s bank deposit
analysis for corporate expenditures on petitioners’ behalf
because the proposed adjustment was not supported by the record.
The omission has the effect of reducing petitioners’ unreported
income by $2,535. We also reduced respondent’s final computation
of unreported income by $18,865. This is the amount by which
respondent’s final unreported income determination exceeds the
amount arrived at pursuant to the stipulated adjustments to the
notice of deficiency. (See supra p.11, table note 10.)
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number of adjustments to respondent’s bank deposit analysis, and
the computations involve considerable detail. Nevertheless, the
facts in the record, most of which were stipulated, support
respondent’s final computations as adjusted. Indeed, on brief,
petitioners focus their factual dispute on only four specific
matters in the bank deposit analysis. We address each of the
specific factual matters that petitioners dispute.
A. Cash on Hand
Petitioners assert that respondent should reduce their 1988
unreported taxable income under the bank deposit analysis by
$35,000. According to petitioners, the adjustment is necessary
because they had $35,000 cash on hand at the beginning of the
year.
An adjustment to respondent’s bank deposit analysis would be
appropriate if petitioners had less than $35,000 at the end of
the year. If petitioners started with $35,000 cash at the
beginning of the year but had less than $35,000 at the end of the
year, then the difference could have been nontaxable source of
deposits to petitioners’ bank accounts or a nontaxable source of
cash expenditures by petitioners. However, Mr. Bacon testified
that he kept substantial amounts of cash on hand at all times
during the years in issue. Indeed, petitioners prepared a loan
application dated March 8, 1990, which reflected $35,000 cash on
hand. There is no credible evidence that petitioners’ cash on
hand was less than $35,000 at the end of any of the years in
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issue. On the basis of the record, we cannot conclude that an
adjustment to respondent’s bank deposit analysis is justified for
cash on hand.
B. Loan to Tadeusz Ras
Respondent increased petitioners’ 1989 unreported income
under the bank deposit analysis by $64,000 due to an alleged
transfer from Mrs. Bacon to Tadeusz Ras (Mr. Ras). Petitioners
argue that the alleged transfer should be eliminated from the
bank deposit analysis, since no transfer ever took place.
Mr. Ras is Mr. Bacon’s cousin and has been continuously
employed by Radtam since 1991. When Mr. Ras started working for
Mr. Bacon in 1991, he was paid approximately $5 to $6 per hour.
Mr. Ras cared for Mr. Bacon’s grandmother before he was employed
by Radtam.
On June 15, 1989, Mr. Ras purchased a house. According to
the settlement statement, Mr. Ras owed the seller $108,213 and
satisfied this obligation with $50,220 in cash and paid the
remainder with a number of checks. One of the checks used to
purchase the house was in the amount of $16,600. On the day of
Mr. Ras’ purchase, the sum of $16,600 was withdrawn from Radtam’s
savings account at Chemical Bank.16 On June 27, 1989, Mr. Ras
executed a mortgage on his residence in favor of Mrs. Bacon in
the amount of $64,000.
Mr. Ras testified that his grandmother, not Mrs. Bacon,
16
Account No. 600-871255.
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provided him with the money to purchase the house. When he was
asked how his grandmother managed to accumulate $50,220 in cash,
Mr. Ras was unable to provide an answer. When he was asked who
issued the checks for the remainder of the purchase price, Mr.
Ras could not provide a definite answer, nor could he deny that
Mr. Bacon provided him with some of the checks. When he was
asked why he signed a $64,000 mortgage in favor of Mrs. Bacon if
she had not lent him the money, Mr. Ras said that Mr. Bacon told
him to sign and that he would sign anything that Mr. Bacon gave
him.
We do not find Mr. Ras’ explanation to be credible. On the
basis of the facts, we find that petitioners provided Mr. Ras
with $64,000 and that he in turn executed a mortgage on the house
in the amount of $64,000.
C. Real Estate Deposits
Petitioners argue that respondent should reduce their
unreported taxable income under the bank deposit analysis by
$9,000 for 1988 and $4,000 for 1990. According to petitioners,
they issued checks totaling $13,000 to make deposits on
unconsummated real estate transactions. This resulted, according
to petitioners, in the return of $13,000 of nontaxable funds that
were either redeposited or cashed.
Petitioners have not established that these transactions
ever took place or that the amounts in question were returned to
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them. No adjustment to respondent’s bank deposit analysis is
necessary for this item.
D. Loans Payable to Mrs. Bacon
Petitioners argue that respondent should reduce their
unreported taxable income under the bank deposit analysis by
$319,109. Petitioners allege that such an adjustment is
necessary because in 1989 Radtam owed Mrs. Bacon $319,109.
Petitioners argue that, to the extent that the bank deposit
analysis indicates the underreporting of income from Radtam,
petitioners should be given credit for $319,109 as being for the
repayment of previous loans from Mrs. Bacon. Respondent argues
that petitioners have not substantiated that Radtam owed Mrs.
Bacon $319,109 in 1989.
To support petitioners’ contention, petitioners rely on
Radtam’s Federal income tax return for the fiscal year ended June
30, 1989. Page four of the income tax return included a balance
sheet which listed “Mortgages, notes, bonds payable in less than
1 year” (notes payable) of $319,109. The income tax return does
not identify the persons or entities to whom Radtam owed
$319,109. Petitioners’ C.P.A., Jerome Collins, prepared the June
30, 1989, Federal income tax return.17 The income tax return was
filed in March of 1991.
17
Mr. Collins also prepared petitioners’ individual Federal
income tax returns for the years 1988, 1989, 1990, and 1991.
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Mr. Collins testified that he did not ask either Mr. Bacon
or Mrs. Bacon whether the $319,109 entry on the June 30, 1989,
balance sheet was a loan payable to Mrs. Bacon. Furthermore, Mr.
Collins testified that he did not see any documents that would
indicate that the corporation owed Mrs. Bacon $319,109.18
Petitioners did not provide corporate minutes, loan documents,
promissory notes, mortgage documents, or other documents that
would substantiate their assertion.
Mr. O’Malley, petitioners’new C.P.A., testified that he does
not know how Mr. Collins arrived at the loan payable figures that
appeared on Radtam’s Federal income tax return for the fiscal
year ending June 30, 1989. Mr. O’Malley also testified that he
could not obtain any information about the loans payable account.
Radtam’s Federal income tax returns for the fiscal years
ending 1990, 1991, and 1992, were all filed in June of 1996.19
18
Although he never asked petitioners about this, Mr.
Collins testified that he thought the $319,109 was rent that
Radtam owed Mrs. Bacon. If that were true, payments of rental
amounts due from prior years would appear to be income to Mrs.
Bacon in the year received.
19
Mr. Collins testified that Radtam’s Federal income tax
returns were not prepared or filed timely because details
regarding cash disbursements were not available. Each of these
income tax returns contained a Form 8275, Disclosure Statement.
The instructions to Form 8275 provide:
Form 8275 is used by taxpayers and income tax return
preparers to disclose items or positions, except those
taken contrary to a regulation, that are not otherwise
adequately disclosed on a tax return for purposes of
avoiding certain penalties. The form is filed to avoid
the portions of the accuracy-related penalty due to
(continued...)
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None of those income tax returns contained any balance sheet
information.20 The lack of balance sheet information on
subsequent Radtam Federal income tax returns suggests that Mr.
Collins did not have sufficient detail to prepare the balance
sheets and that a note payable to Mrs. Bacon never existed.
The evidence does not support petitioners’ assertion that
Radtam owed Mrs. Bacon $319,109 in 1989, and we do not believe
19
(...continued)
disregard of rules or to a substantial underpayment of
income tax if the return position has a reasonable
basis. It can also be used for disclosures relating to
the preparer penalties for understatements due to
unrealistic positions or disregard of rules.
The description of the items disclosed in Part I, General
Information, of the form was the same for each year. The
description provided was as follows: Gross receipts, Cost of
Sales, Payroll and other Expenses.
The instructions for completing Part II of the form,
Detailed Explanation, provide that a taxpayer’s disclosure must
include:
(1) A description of the relevant facts and the nature
of the controversy affecting the tax treatment of the
item, or
(2) A concise description of the legal issues presented
by these facts.
The detailed explanation provided on Radtam’s Federal income
tax returns for its fiscal years ending 1990, 1991, and 1992 was
the same for each year. The explanation provided was as follows:
“Payroll, Sales and some expenses were established by other
estimates and means. Due to certain records which could not be
reconstructed or documented.”
20
The Federal income tax returns for the fiscal years ending
June 30, 1993 and 1994, also did not contain any balance sheet
information.
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petitioners’ assertion in this regard. Thus, we find that the
bank deposit analysis does not have to be adjusted for this item.
II. Fraud
The next issue is whether any part of the underpayment of
income tax for each year in issue is due to fraud. Respondent’s
notice of deficiency determined that petitioners are liable for
the addition to tax for fraud imposed under section 6653(b)(1)21
for the taxable year 1988 and penalties under section 6663(a)22
for the taxable years 1989, 1990, and 1991. Each section imposes
an addition to tax or penalty equal to 75 percent of the portion
of an underpayment that is attributable to fraud. Additionally,
each section provides that if any portion of an underpayment is
attributable to fraud, the entire underpayment is treated as
attributable to fraud, unless the taxpayer proves that some
portion of the underpayment is not due to fraud. Finally, in the
case of a joint return, the fraud penalty does not apply with
21
Sec. 6653(b) provides, in part:
SEC. 6653(b). Fraud.--
(1) 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.
22
Sec. 6663(a) provides:
SEC. 6663(a). Imposition of Penalty.--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.
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respect to a spouse unless some part of the underpayment is due
to fraud of such spouse. See secs. 6653(b)(3) for 1988 and
6663(c) for the years 1989, 1990, and 1991.
Respondent has the burden of proving by clear and convincing
evidence that an underpayment exists for the years in issue and
that some portion of the underpayment is due to fraud. See sec.
7454(a); Rule 142(b); Niedringhaus v. Commissioner, 99 T.C. 202,
210 (1992). Consequently, respondent must establish: (1)
Petitioners have underpaid their taxes for each year, and (2)
some part of the underpayment is due to fraud. See DiLeo v.
Commissioner, 96 T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir.
1992).
Respondent need not prove the precise amount of the
underpayment resulting from fraud but only that some portion of
the underpayment of tax for each year is due to fraud. See
Niedringhaus v. Commissioner, supra at 210.
A. Understatement of Income
Where allegations of fraud are intertwined with unreported
and indirectly reconstructed income, respondent is required to
establish a likely taxable source for alleged unreported income
or to disprove nontaxable sources alleged by the taxpayer. See
DiLeo v. Commissioner, supra at 873.
The evidence clearly establishes that the Jug Handle Inn was
a likely source of unreported income. The evidence also
establishes that petitioners had no nontaxable sources that could
- 21 -
account for the unreported income. Mr. Bacon originally claimed
to have had $650,000 in nontaxable cash gifts on hand at the
beginning of 1988, which would have been a potential nontaxable
source. However, at trial petitioners stipulated that they only
had $35,000 cash on hand at the beginning of 1988. Petitioners
stipulated that they did not receive any gifts, inheritances,
legacies, or devises.
Respondent’s final bank deposit analysis is based primarily
on stipulated facts. The record contains clear and convincing
affirmative evidence that petitioners underpaid their 1988, 1989,
1990, and 1991 Federal income taxes.
B. Fraudulent Intent
Respondent must prove that a portion of the underpayment is
attributable to the fraudulent intent of petitioners. Fraud is
the intentional wrongdoing motivated by a specific purpose to
evade a tax known or believed to be owing. See Stoltzfus v.
United States, 398 F.2d 1002, 1004 (3d Cir. 1968). The existence
of fraud is a question of fact to be resolved upon consideration
of the entire record. See Gajewski v. Commissioner, 67 T.C. 181,
199 (1976), affd. without published opinion 578 F.2d 1383 (8th
Cir. 1978).
Fraudulent intent can seldom be established by a single act
or by direct proof of the taxpayer’s intention. It is usually
found by surveying the taxpayer’s whole course of conduct and is
to be proven as any other fact from all the evidence of record
- 22 -
and reasonable inferences properly to be drawn therefrom. See
Otsuki v. Commissioner, 53 T.C. 96, 106 (1969). Any conduct, the
likely effect of which would be to mislead or to conceal may
establish an affirmative act of evasion. See Spies v. United
States, 317 U.S. 492, 499 (1943).
The courts have relied upon a number of indicia of fraud in
deciding whether an underpayment of tax is due to fraud. While
no single factor is necessarily sufficient to establish fraud,
the existence of several indicia is persuasive circumstantial
evidence of fraud. See Petzoldt v. Commissioner, 92 T.C. 661,
700 (1989).
Respondent argues that the following factors or “badges” of
fraud are present in this case: (1) A substantial and consistent
understatement of income; (2) false statements made by
petitioners during their interview with respondent’s agents; (3)
extensive dealings in cash; (4) failure to maintain adequate
records; and (5) failure to furnish their return preparer with
accurate information.
1. Substantial and Consistent Understatement of
Income
The consistent failure to report substantial amounts of
income over a number of years, standing alone, is effective
evidence of fraudulent intent. See Schwarzkopf v. Commissioner,
246 F.2d 731, 734 (3d Cir. 1957), affg. and remanding on another
issue T.C. Memo. 1956-155. In this case, there is a substantial
- 23 -
underpayment of tax for each of the years in issue. Over the 4-
year period in issue, petitioners failed to report approximately
$1 million dollars of income.
2. False Statements
Respondent argues that false statements made at the time
petitioners were interviewed by respondent’s agents are evidence
of fraudulent intent. The Supreme Court has stated that an
"affirmative willful attempt may be inferred from * * * any
conduct, the likely effect of which would be to mislead or to
conceal." Spies v. United States, supra at 499. Making false
statements to a revenue agent is evidence of fraud. See United
States v. Beacon Brass Co., 344 U.S. 43, 45 (1952).
When petitioners first met with respondent’s special agents
regarding the years in question, Mr. Bacon told them that
petitioners and their children had received extensive cash gifts
from Mr. Bacon’s grandfather in $10,000 cash increments.
According to Mr. Bacon, he received a $10,000 cash gift each year
since his 18th birthday, his wife received an annual $10,000 cash
gift since they have been married, and their children each
received an annual $10,000 cash gift since their birth. Mr.
Bacon told respondent’s agents that he received the cash gifts
through a brother-in-law, that neither petitioners nor their
children had ever met their grandfather, that they were told
never to tell anyone about the gifts, and that they were never to
put the money in the bank. Mr. Bacon told the agents that
- 24 -
petitioners had as much as $650,000 cash on hand at the beginning
of 1988. Mr. Bacon’s statement about cash on hand was false.
Petitioners stipulated that at the beginning of 1988, they had
approximately $35,000 cash on hand. Had Mr. Bacon’s statements
about cash on hand at the beginning of 1988 been true,
petitioners would have had a nontaxable source from which to make
deposits during the years in issue. We can conceive of no reason
for such a false statement other than to mislead the agents.
We find that Mr. Bacon’s statements about cash on hand
during this interview were intended to mislead the agents.
3. Extensive Dealings in Cash
Dealing in cash to avoid scrutiny of one’s finances is a
badge of fraud. See Bradford v. Commissioner, 796 F.2d 303, 307-
308 (9th Cir. 1986), affg. T.C. Memo. 1984-601. Petitioners made
numerous and substantial cash transactions during the 4 years in
issue. During this period, $590,689 in cash was deposited into
petitioners’ personal bank accounts and $113,571 in cash was used
in the purchase of real estate.23 All real estate purchases were
in Mrs. Bacon’s name, and she attended some, if not most, of the
property settlements. A boat and a personal van were also
purchased for $22,350 in cash.
Petitioners’ extensive use of cash supports a reasonable
inference that petitioners were knowingly and willfully
attempting to understate their taxable income.
23
See appendix C.
- 25 -
4. Failure To Maintain Adequate Records
Taxpayers are required to keep such records as are necessary
for the determination of tax. See sec. 6001. The failure to
keep adequate records is a badge of fraud. See Bradford v.
Commissioner, supra at 307.
During the years in issue, petitioners transferred
$1,478,399 from two Radtam accounts into their personal bank
accounts. Despite the significant transfers between Radtam’s
accounts and personal accounts, petitioners appear to have
maintained no records of these transactions. Rather, they argue
that they were unaware of the accounting problems being created
and that they lacked the technical ability to keep corporate
books or prepare tax returns.
Petitioners also deposited $590,689 in cash into their
personal bank accounts. At trial, Mr. Bacon testified he did not
know the source of these significant cash deposits.
While Mr. Bacon testified that he was unaware of the
problems created by commingling funds, his testimony is self-
serving, and we do not find him to be credible. Mr. Bacon
appears to us to be an astute businessman and investor. It would
have required relatively little, if any, technical ability to
maintain, or hire a bookkeeper to maintain, a record of transfers
between corporate and individual accounts or records of the
source of petitioners’ substantial cash deposits to their
personal accounts.
- 26 -
Mrs. Bacon also had a working knowledge of Radtam’s books
and records. Mrs. Bacon testified about the “settling” of daily
cash register receipts and the recording of Radtam’s income
during the years in issue. Mrs. Bacon prepared disbursement
summaries from Radtam’s account at Security Savings & Loan, which
were furnished to petitioners’ accountant. While Mr. Bacon
handled most of the deposits, Mrs. Bacon handled some deposits
and testified that she may have handled some large cash deposits.
5. Failure To Furnish Their Tax Return Preparer With
Accurate Information
The duty of filing accurate returns cannot be avoided by
placing responsibility upon an agent. See American Properties,
Inc. v. Commissioner, 28 T.C. 1100, 1116 (1957), affd. 262 F.2d
150 (9th Cir. 1958).
Beginning on or before July 1989, petitioners prepared a
monthly summary sheet on behalf of Radtam, which purportedly
listed total deposits into its bank accounts for that month.
These monthly summary sheets were furnished to petitioners’
accountant who prepared Radtam’s corporate tax returns24. In
addition to the monthly summary sheets, each month petitioners
provided their accountant with corporate bank statements and a
schedule of corporate disbursements.
24
The same accountant prepared petitioners’ individual
Federal income tax returns and Bradam’s corporate Federal income
tax returns.
- 27 -
The bank statements provided to petitioners’ accountant were
primarily for two accounts at Security Savings & Loan. Yet
Radtam maintained a savings account at Chemical Bank25 from July
1, 1988, through June 30, 1992. It was not until after the
commencement of the examination by respondent that petitioners’
accountant learned that Radtam had a savings account with
Chemical Bank.
Mrs. Bacon prepared annual summaries of personal income
sources and expenses relating to petitioners’ real estate, which
she gave to their accountant. Mrs. Bacon also provided the
accountant with Forms 1099 and settlement sheets from each real
estate purchase.
During the years in issue, petitioners transferred
$1,478,399 from two Radtam accounts and deposited $590,689 in
cash into their personal accounts. Despite the significant
deposits into petitioners’ personal accounts, Mrs. Bacon did not
disclose these deposits or provide personal bank statements to
their accountant.
On or about January 6, 1992, Mr. Bacon filed an application
for a VISA card listing his occupation as tavern owner of Radtam
Inc. t/a Jug Handle Inn and listed his annual salary as $299,000.
However, Mr. Bacon never reported receiving any salary or
25
Account No. 600-871255.
- 28 -
dividends from Radtam on his individual Federal income tax
returns.26
After considering the entire record, we hold that respondent
has met his burden of proving that some portion of petitioners’
underpayment for each year in issue is attributable to fraud on
the part of both Mr. and Mrs. Bacon.
III. Statute of Limitations
Section 6501(a) provides, generally, for a 3-year period of
limitations. However, in the case of a false or fraudulent
return with the intent to evade tax, the tax may be assessed, or
a proceeding in court for collection of such tax may be begun
without assessment, at any time. See sec. 6501(c)(1). Where a
joint Federal income tax return was filed, a finding that fraud
was committed by either spouse keeps the period of limitations on
assessment open with respect to both spouses. See Vannaman v.
Commissioner, 54 T.C. 1011, 1018 (1970).
Since we have already found that the returns for the years
in issue were fraudulent, it follows that the exception found in
26
Mr. Bacon testified that he did not want to confuse the
credit card company with the fact that he did not draw a salary
but instead had substantial rental income. On their 1991 income
tax return, petitioners reported $135,000 gross rents from
property located at Route 73, Cinnaminson, N.J. (the property
rented to Radtam on which the Jug Handle Inn is located).
Petitioners’ total net rental income reported for 1991 was
$65,277. Petitioners reported gross rental receipts of $368,930,
rental expenses, other than depreciation of $221,217, and
depreciation of $82,435 on their Schedule E, Supplemental Income
and Loss Schedule.
- 29 -
section 6501(c)(1) applies, and the assessment of taxes for the
years in issue is not barred.
After concessions by respondent,
Decision will be entered
under Rule 155.
- 30 -
APPENDIX A
Income Reported on Tax Returns by Year
1988 1989 1990 1991
Wage/salary1 $3,196 $3,008 $2,840 $3,003
Interest income 3,286 4,631 9,426 21,522
Dividend income 1,357 1,123 1,170 1,202
Sch. D income 1,088 -0- -0- -0-
Pension/annuities 4,060 4,263 4,263 4,263
Social Security 5,094 4,710 5,544 5,850
2 3 4 5
Rents 28,140 75,105 76,485 65,277
IRA deduction (2,000) (2,000) (2,250) (2,000)
Adjusted gross income 44,221 90,840 97,478 99,117
1
During the years in issue, the only wage or salary income
from Bradam and Radtam reported by petitioners on their Federal
income tax returns consisted of wages reported by Mrs. Bacon.
2
Petitioners reported on Schedule E gross rental income of
$136,000, rental expenses of $93,600, depreciation or depletion
expenses of $32,917, and Radtam S earnings of $18,657. ($136,000
- $93,600 - $32,917 + $18,657 = $28,140)
3
Petitioners reported on Schedule E gross rental income of
$232,000, rental expenses of $115,388, and depreciation or
depletion expenses of $41,507. ($232,000 - $115,388 - $41,507 =
$75,105).
4
Petitioners reported on Schedule E gross rental income of
$311,700, rental expenses of $172,150, and depreciation or
depletion expenses of $63,065. ($311,700 - $172,150 - $63,065 =
$76,485)
5
Petitioners reported on Schedule E gross rental income of
$368,930, rental expenses of $221,217, and depreciation or
depletion expenses of $82,436. ($368,930 - $221,217 - $82,436 =
65,277)
- 31 -
APPENDIX B
Deposits Made to Personal Bank Accounts
Bank Account 1988 1989 1990 1991
1
Energy People Federal Credit Union $5,000 --- --- ---
Savings account No. 11195-004
Barnett Bank
Checking account No. 1672684397 16,316 $27,523 $125,640 $59,702
Horizon Bank2
3
Checking account No. 00506140-3 270,674 250,835 395,039 340,750
Security Savings & Loan
Checking account No. XX-XXXXXXX-1 182,947 142,400 219,001 343,915
Security Savings & Loan
Passbook account No. XX-XXXXXXX 89,748 --- 15,575 6,400
First Fidelity Bank
Money Market account No. 0010186161 278,347 32,867 176,807 63,395
Chemical Bank
Savings account No. 623-503-349 --- 76,051 57,137 13,802
Collective Federal Bank
Savings account No. 36-6-750909 --- 512 18,922 7,119
(continued...)
- 32 -
(Appendix B continued...)
Bank Account 1988 1989 1990 1991
Barnett Bank
Money Market account No. 1679177650 --- --- 277,265 24,719
Barnett Bank
Certificates of Deposit
account No. 0031756406 --- --- --- 97,000
Barnett Bank
Certificates of Deposit
account No. 0031760714 --- --- --- 96,000
Barnett Bank
Certificates of Deposit
account No. 0031760659 --- --- --- 97,000
Total Gross Deposits: 843,032 530,188 1,285,386 1,149,802
1
A single cash deposit made on Dec. 28, 1988.
2
Subsequent to the years in question, Horizon was acquired by Chemical Bank. Thus,
the terms “Horizon” and “Chemical” refer to the same institution.
3
The notice of deficiency incorrectly shows 1988 deposits in this account as
$239,218.
- 33 -
APPENDIX C
Property Payments Terms and Payments Made
1. 211 E. 17th Street, The contract sales price was $412,000
Long Beach Township, and the gross amount due from Mrs.
New Jersey -- Bacon was $415,167. To finance the
Purchased 2/23/88 purchase, Mrs. Bacon paid $3,167 in
cash, assumed a $287,0691 first mortgage
on the property, and secured a $124,931
second mortgage on the property. During
1988, petitioners paid down the $287,070
first mortgage by $283,310. The
payments were made over an 8-month
period of time, consisted of five
payments,2 all drawn on petitioners’
personal bank accounts. The $124,931
second mortgage required a single
payment of $124,931 in 1 year.3
2. Lots 7, 8, 13, and Mrs. Bacon put down 10 percent or
14, Block 304, Marco $58,500 as a deposit, executed a
Beach Unit 9 located $300,000 promissory note secured by a
in Collier County, mortgage on the property, and paid the
Florida. -- balance on or before the closing.4
Purchased 3/4/88 The $300,000 purchase money note and
mortgage required 36 monthly payments of
$2,518 and a balloon payment of $288,988
at the end of the 36 months. Payments
on the purchase money note and mortgage
were made in accordance with the terms.
1
The settlement statement indicates that the existing loan assumed is
$287,069, while the stipulation indicates that the existing loan assumed was
$287.070 (after rounding). We assume that the stipulation contained a
typographical error.
2
From petitioners’ First Fidelity account, No. 0186161, a payment of
$76,509 was made on Apr. 1, 1988; a $94,950 payment on May 1, 1988; and a
$40,035 payment on June 1, 1988. From petitioners’ Security Savings & Loan
account, No. 238351019, a payment of $64,311 was made on Nov. 27, 1988, and a
$7,504 payment was made on Nov. 30, 1988.
3
The payment was satisfied on Feb. 21, 1989, in part by a $60,931
cashier’s check drawn on petitioners’ First Fidelity account and $64,000 in
funds withdrawn from Radtam’s savings account at Chemical bank, account No.
600-871255.
4
A portion of the payments, $158,375, was financed from $338,097 in
loan proceeds secured by property located at Block D-32, Lot 8, 216 E. 18th
Street, North Beach Haven, NJ. The remaining $179,722 of the loan proceeds
was deposited in Radtam’s account No. 23-835065-6.
- 34 -
3. 212 West Broad St., The contract sale price was $195,000.
and Palmyra, New Jersey, At closing, $197,017, consisting of
Purchased 3/31/89 $74,285 in cash and three checks
totaling $122,732, was deposited with
the settlement agent. The individual
check amounts are: $82,000, $21,000,
and $19,732.
The source of funds, in part, for the
$82,000 check was obtained in the form
of cash withdrawals from Radtam’s
general and lottery accounts at the
Security Savings & Loan. Additionally,
$21,000 was withdrawn from Radtam’s
savings account at Chemical Bank5 and
used to purchase a cashier’s check,
which was used to pay a portion of the
purchase price.
4. Lot 26, Block 388, The property was purchased with $25,000
Unit 12, located in in personal funds and a $400,000
Collier County, purchase money mortgage was incurred.
Florida --
Purchased 6/18/90
5. Lot 4, Block 304, The purchase price was $530,000 and the
Unit 9, located in total amount due from buyer was
Collier County, $533,896. At closing, Mrs. Bacon
Florida -- provided $152,285, and the principal
Purchased 6/29/90 amount of the new loan was $380,000.
6. 610 South Reed St., The property was paid for with $10,000
Cinnaminson, New Jersey, in cash, $1,592 in coin, and five
Purchased 7/2/90 checks totaling $120,000. Mr. Bacon, as
president of Radtam, Inc., was the
source of the $11,592 in cash and coin.
The source of the five checks are as
follows: First, a check for $55,000 was
purchased with $17,000 in funds
withdrawn from the Radtam 600 account,
$28,000 in funds withdrawn from
petitioners’ personal savings account
maintained at the same institution,6 and
a $10,000 check drawn on petitioners’
personal checking account at the same
institution. Second, $35,000 of the
- 35 -
5
Account No. 600-871255.
6
Account No. 623503349.
purchase price was paid by check drawn
on petitioners’ personal checking
account at Barnett Bank. Third, $5,000
of the purchase price was paid by check
drawn on petitioners’ personal checking
account at First Fidelity Bank. Fourth,
a $20,000 check purchased from Security
Savings & Loan, in part with $19,000 in
cash tendered to the bank by petitioners
on July 2, 1990, and a $5,000 check,
drawn on the account of Thomas Begley,
Jr., Esq., from funds deposited in the
same account earlier in the year.
7. 407 North Canal St., Mrs. Bacon deposited $35,528 at
Cinnaminson, New Jersey, closing for the property. The deposit
Purchased 10/18/90 consisted of $5,528 in cash and a check
for $30,000. The $30,0007 cashier’s
check was purchased with a check drawn
on petitioners’ Chemical Bank account.8
7
The stipulation incorrectly refers to property located at 417 North
Canal Avenue when, in fact, the property is located at 407 North Canal Avenue.
8
Account No. 00506140-3.
- 36 -
APPENDIX D
1988
Bank deposits to personal accounts:
Bank Account Number Deposit
Energy People
Federal Credit Union 11195-004 $5,000
Barnett Bank 1672684397 16,316
Chemical Bank 00506140-3 239,218
Security Savings
& Loan XX-XXXXXXX-1 182,947
Security Savings
& Loan XX-XXXXXXX 89,748
First Fidelity 0010186161 278,347
Total gross deposits 811,576
Less:
a. Redeposited items, transfers, checks
to cash (221,947)
b. Nontaxable items (5,094)
c. Repayment to corporation (73,000)
Equals: Net deposits 511,535
Less:
a. Wages/salary per return (3,196)
b. Interest income per return (3,286)
c. Dividend income per return (1,357)
d. Schedule D per return (1,088)
e. Pension/annuities (4,060)
f. Social Security (tax) (5,094)
g. Rents (gross) (136,000)
Equals: Total deposits in excess of reported 357,454
income
Plus:
a. Corporate checks written for personal
benefit of taxpayers 5,007
Equals: Unreported income for 1988 362,461
- 37 -
APPENDIX E
1989
Bank deposits to personal accounts:
Bank Account Number Deposit
Energy People
Federal Credit Union 11195-004 ---
Barnett Bank 1672684397 $27,523
Chemical Bank 00506140-3 250,835
Security Savings
& Loan XX-XXXXXXX-1 142,400
Security Savings
& Loan XX-XXXXXXX 72,000
First Fidelity 0010186161 27,867
Chemical Bank 623-503-349 76,051
Collective Federal 36-6-750909 512
Total bank deposits - 1989 597,188
Cash expenditures:
a. Note receivable (Ras) 64,000
b. Purchase 212 W. Broad Street (3/31/89) 74,285
Rental income checks paid by Radtam, Inc. to
taxpayer and not deposited into taxpayer’s
bank accounts used in above analysis. 41,000
Rental income checks paid to taxpayer by
managing agent(s) of taxpayer’s Marco Island,
FL rental properties and not deposited into
taxpayers’ bank accounts used in above analysis.
Agent: Horizon by Sea 3,250
Total gross income - 1989 779,723
Less nontaxable deposits/items:
a. Paybacks to corp. from personal account (55,925)
b. Social Security benefits (nontaxable) (4,710)
c. Transfer between accounts (173,000)
Receipts per return:
a. Wages/salary per return (4,631)
b. Interest income per return (3,008)
c. Dividend income per return (1,123)
d. Pension/annuities (4,263)
e. Social Security (tax) (4,710)
f. Rents (gross) (232,000)
Equals: Total nontaxable deposits/items (483,370)
Total gross income unreported 296,353
Taxable income per return (71,907)
Total income unreported 224,446
Personal items paid by corporation 2,247
Total unreported income - 1989 226,693
- 38 -
APPENDIX F
1990
Bank deposits to personal accounts:
Bank Account Number Deposit
Energy People
Federal Credit Union 11195-004 ---
Barnett Bank 1672684397 $125,640
Chemical Bank 00506140-3 395,039
Security Savings
& Loan XX-XXXXXXX-1 219,001
Security Savings
& Loan XX-XXXXXXX 15,575
First Fidelity 0010186161 176,807
Chemical Bank 623-503-349 57,137
Collective Federal 36-6-750909 18,922
Barnett Bank 1679177650 277,265
Total bank deposits - 1990 1,285,386
Cash expenditures:
a. Purchase 10/18/90 - 407 Canal Street 5,258
b. Purchase 7/2/90 - 610 Reed Street 11,592
c. Purchase 6/18/90 - Lot 26 B 388 Unit 12 25,000
d. 1990 Plymouth Voyager 10/9 6,500
e. Boston Whaler boat 7/26 15,850
Rental income checks paid by Radtam, Inc., to
taxpayer and not deposited into taxpayer’s bank
accounts used in above analysis. 44,000
Rental income checks paid to taxpayer by managing
agent of taxpayer’s Marco Island, FL rental
properties and not deposited into taxpayer’s bank
accounts used in above analysi.
Agents: Harborview Realty, Inc. 1,000
Horizon by Sea Realty 8,809
Rental income checks paid to taxpayer by managing
agent of taxpayer’s New Jersey rental properties
and not deposited into taxpayer’s bank accounts
used in analysis.
Agents: Van Dyk Group, Inc. 3,080
Newbern Realty 9,774
Rental income checks paid to taxpayer directly
by tenants for rental of Marco Island or New
Jersey properties and not deposited into
taxpayer’s bank accounts used in above analysis. 16,761
Total gross income 1990 1,433,010
Less nontaxable deposits/items:
a. Transfer between accounts (487,811)
b. Social Security benefits (nontaxable) (5,544)
c. Check to cash 611 account 00506140 (30,000)
Receipts Per Return:
a. Wages/salary per return (2,840)
b. Interest income per return (9,426)
c. Dividend income per return (1,170)
d. Social Security (tax) (5,544)
e. Rents (Gross) (311,700)
f. Pension/annuities (4,263)
Equals: Total nontaxable deposit/items (858,298)
Total gross income unreported 574,712
Taxable income per return (73,861)
Total income unreported - 1990 500,851
- 39 -
APPENDIX G
1991
Bank deposits to personal accounts:
Bank Account Number Deposit
Energy People
Federal Credit Union 11195-004 ---
Barnett Bank 1672684397 $59,702
Chemical Bank 00506140-3 340,750
Security Savings
& Loan XX-XXXXXXX-1 343,915
Security Savings
& Loan XX-XXXXXXX 6,400
First Fidelity 0010186161 63,395
Chemical Bank 623-503-349 13,802
Collective Federal 36-6-750909 7,119
Barnett Bank 1679177650 24,719
Barnett Bank C.D. 0031756406 97,000
Barnett Bank C.D. 0031760714 96,000
Barnett Bank C.D. 0031760659 97,000
Total bank deposit - 1991 1,149,802
Cash expenditures:
a. Purchase 3 Savings Bonds at face
value of $10,000 15,000
Rental income checks paid by Radtam, Inc., to
taxpayer and not deposited into taxpayer’s bank
accounts used in above analysis. 56,000
Rental income checks paid to taxpayer by managing
agent(s) of taxpayer’s Marco Island, FL rental
properties and not deposited into taxpayer’s bank
accounts used in above analysis.
Agent(s): Horizon By Sea Inc. 9,951
Rental income checks paid to taxpayer by managing
agent of taxpayer’s New Jersey rental properties
and not deposited into taxpayer’s bank accounts
used in above analysis.
Agent(s): Bayshore Realty 3,816
Newbern Realty 13,710
Rental income checks paid to taxpayer directly
by tenants for rental of Marco Island or New
Jersey properties and not deposited into
taxpayer’s bank accounts used in above analysis. 31,790
Total gross income 1,280,069
Less nontaxable deposits/items:
a. Paybacks to corp. from personal account (87,500)
b. Social Security benefits (nontaxable) (5,850)
c. Transfer between accounts (177,500)
Receipts per return:
a. Wages/salary per return (3,003)
b. Interest income per return 21,522)
c. Dividend income per return (1,202)
d. Pension/annuities (4,263)
e. Social Security (tax) (5,850)
f. Rents (gross) (368,930)
g. Barnett CD (3) (290,000)
Equals: Total nontaxable deposit/items (965,620)
Total gross income unreported 314,449
Taxable income per return (78,032)
Total income unreported - 1991 236,417
- 40 -
APPENDIX H
1988 1989 1990 1991
Mathematical errors:
Reported taxable income allowed twice --- 71,907 73,861 78,032
CD purchases deducted as reported receipts --- --- --- 290,000
Transfer1 included as $5,000.10. Should be
$500.10 --- --- 4,500 ---
Distributive share Radtam “S” Corp. income
reported and included in deposits from corp. (38,341) --- --- ---
Salary withholding - gross is taxable but only
net was deposited 440 326 292 301
Transfers used to purchase CD’s not in
statutory notice --- --- --- (214,500)
Transfers between accounts - not in statutory
notice of deficiency:
To First Fidelity2 Bank --- --- (25,000) ---
To Barnett3 Bank --- --- (85,000) ---
To Barnett4 Bank --- --- (50,000) ---
To Chemical5 Bank --- --- --- (22,000)
To Chemical6 Bank from Commerce Bank --- --- --- (17,000)
To Chemical7 Bank --- --- --- (26,000)
To Chemical8 Bank --- --- --- (8,255)
Refund of advance to Radtam --- (5,425) --- ---
Corp. funds used to purchase 610 S. Reed --- --- 17,000 ---
Radtam funds9 used to pay King Mortgage on
personal real estate --- 64,000 --- ---
Cash expenditure/Lot 26 B 388 Unit 12 --- --- (25,000) ---
Specific rental income checks deposited to
corporate bank accounts - added separately
in statutory notice of deficiency --- (44,250) (83,424) (115,267)
Additional identified paybacks to corporations:
Chemical10 Bank (10,000) --- --- ---
Chemical11 Bank (10,000) --- --- ---
Barnett12 Bank (100) --- --- ---
Barnett13 Bank (100) --- --- ---
Barnett14 Bank --- (11,000) --- ---
Chemical15 Bank --- (16,000) --- ---
Barnett16 Bank --- --- --- (2,400)
- 41 -
(continued...)
(Appendix H continued...)
1988 1989 1990 1991
Deposits from bank statements originally missing:
Chemical17
2/17/88 deposit 20,000 --- --- ---
2/22/88 deposit 339 --- --- ---
Radtam withdrawals 11,118 --- --- ---
First Fidelity18 Bank --- 5,000 --- ---
Insurance claim - nondeposit refund - 4/29/92
property settlement refund 9/30/91 Cinnaminson
Sewer Authority --- --- --- (14,000)
Corporate withdrawal 2/1/91 used to purchase
$68,000 cashier’s check.19 (Cashier’s check from
personal account included as transfer
in statutory notice) --- --- --- 25,000
Corporate funds - purchase for Bradtam --- --- --- 50,000
Check No. 611 to cash - to Boatworks for
purchase 407 Canal Street given as cash
withdrawal in statutory notice. --- --- 30,000 ---
Savings bond purchases not with cash. --- --- --- (15,000)
Radtam check - points to refinance personal
mortgage. --- 10,657 --- ---
Interest income Commerce Bank - not in deposits --- --- 135 86
Interest income, Security Savings & Loan20 not
included in deposits 435 146 --- ---
Interest income, Energy People Federal Credit Union 135 --- --- ---
Deposits to Security Savings & Loan --- (72,000) --- ---
Corporate checks used to purchase cashier’s check
at Security Savings & Loan21 for purchase of 212
W. Broad Street Property --- 72,000 --- ---
Proceeds mortgage refinance - deposit to Radtam
savings account (2/29/88) (179,722) --- --- ---
Personal funds deposited to corporate bank
account on 2/1/88 (46,340) --- --- ---
Corporate funds used to purchase 212 W. Broad
(3/31/89) --- 21,000 --- ---
Personal items paid by corporation:
Per statutory notice --- (2,247) --- ---
22 23
Corrections to statutory notice --- 860 2,535 ---
Net adjustments to statutory notice (252,136) 94,974 (140,101) 8,997
(continued...)
- 42 -
(Appendix H continued...)
1
Check No. 622, Chemical Bank.
2
Account No. 6161 (2/12/90)
3
Account No. 2684-397 (6/18/90)
4
Account No. 177650 (6/25/90)
5
Account No. 506-140-3 (1/31/91)
6
Account No. 506-140-3 (1/31/91)
7
Account No. 506-140-3 (1/31/91)
8
Account No. 506-140-3 (2/04/91)
9
Account No. 600-871255 (2/21/89)
10
Account No. 506140-3 (2/16/88), Check No. 157.
11
Account No. 506140-3 (2/16/88), Check No. 158.
12
Account No. 2684-397 (6/22/88), Check No. 114.
13
Account No. 2684-397 (10/4/88), Check No. 115.
14
Account No. 2684-397 (2/27/89), Check No. 118.
15
Account No. 506140-3 (2/27/89), Check No. 278.
16
Account No. 84397 (2/26/91), Check No. 157.
17
Account No. 506140-3.
18
Account No. 10186161.
19
On Feb. 1, 1991, Mr. Bacon purchased a cashier’s check in the amount of $68,000 from Chemical Bank
made payable to himself. Mr. Bacon obtained $25,000 of the cost of the cashier’s check with a $25,000
withdrawal from Radtam’s savings account at Chemical Bank, account No. 600-871255, and the remaining $43,000
from petitioners’ savings account at Chemical Bank, account No. 623 503 349. The $68,000 was included as a
nontaxable transfer in the bank deposits listed in respondent’s bank deposit analysis, as incorporated in
the statutory notice.
20
Account No. 23-100672.
21
Account No. 23-100672.
22
The record is unclear on how the parties arrived at this number.
23
The record is unclear on how the parties arrived at this number.
- 43 -
APPENDIX I
1988
Bank deposits to personal accounts:
Bank Account Number Deposit
Energy People Federal
Credit Union 11195-004 $5,000
Barnett Bank 1672684397 16,316
Chemical Bank 00506140-3 270,674
Security Savings
& Loan XX-XXXXXXX-1 182,947
Security Savings
& Loan XX-XXXXXXX 89,748
First Fidelity 0010186161 278,347
Total gross deposits 843,032
Less:
Per statutory notice
a. Redeposited items, transfers, checks
to cash (221,947)
b. Nontaxable items (5,094)
c. Repayment to corporation (73,000)
Additional repayments to corporation (22,200)
Proceeds of personal mortgage deposited in
corporate account (179,722)
Repayment of loan to petitioners deposited
in corporate account (46,339)
Reduction to income - Subchapter S income (38,341)
Equals: Net deposits 256,389
Less:
a. Wages/salary per return (3,196)
b. Interest income per return (3,286)
c. Dividend income per return (1,357)
d. Schedule D per return (1,088)
e. Pension/annuities (4,060)
f. Social Security (tax) (5,094)
g. Rents (gross) (136,000)
Equals: Gross income per tax return (154,081)
Difference between gross salary and
actual salary deposited 440
Plus corporate expenditures on petitioners’
behalf 5,007
Total unreported income from bank deposits 107,755
- 44 -
APPENDIX J
1989
Bank deposits to personal accounts:
Bank Account Number Deposit
Energy People Federal
Credit Union 11195-004 ---
Barnett Bank 1672684397 $27,523
Chemical Bank 00506140-3 250,835
Security Savings
1
& Loan XX-XXXXXXX-1 142,400
Security Savings
& Loan XX-XXXXXXX ---
First Fidelity 0010186161 32,867
Chemical Bank 623-503-349 76,051
Collective Federal 36-6-750909 512
Total bank deposits 530,188
Cash expenditures:
a. Notes receivable (Ras) 64,000
b. Purchase 212 W. Broad Street (3/31/89) 74,285
c. Radtam check - Points paid to refinance
personal mortgage 10,657
d. Corporate funds2 used to purchase 212
West Broad Street 93,000
e. Corporate funds used to pay mortgage on
211 East 17th 64,000
3
305,942
Rental income checks paid by Radtam, Inc., to
taxpayer and not deposited into taxpayer’s
bank accounts used in above analysis. 41,000
Rental income checks paid to taxpayer by
managing agent(s) of taxpayer’s Marco Island,
Fl., rental properties and not deposited into
taxpayers’ bank accounts used in above analysis.
Agent: Horizon by Sea 3,250
Total gross income 880,380
Less nontaxable deposits/items per statutory notice:
a. Paybacks to corp. from personal account (55,925)
b. Social Security benefits (nontaxable) (4,710)
c. Transfer between accounts (173,000)
Additional repayments and transfers:
a. Refund of advance to Radtam (5,425)
b. Personal rental income deposited to
corporate accounts (44,250)
c. Additional paybacks to corporation (27,000)
Total reductions to bank deposits (310,310)
Receipts per return:
a. Wages/salary per return (4,631)
b. Interest income per return (3,008)
c. Dividend income per return (1,123)
d. Pension/annuities (4,263)
e. Social Security (tax) (4,710)
f. Rents (gross) (232,000)
Equals: Gross receipts per return (249,735)
Difference between gross salary and
actual salary deposited 326
Plus personal items paid by corporation 860
4
Total unreported income from bank deposits: 321,521
1
Because of a typographical error, respondent incorrectly reflected gross
deposits of “$142,000”. The correct figure is “$142,400”.
2
Corporate funds were drawn from two accounts: $72,000 from the Security
Savings account and $21,000 from Radtam’s savings account at Chemical Bank (account
No. 600-871255).
3
Because of a computational error, respondent incorrectly reflected total cash
expenditures of “$306,482”. The correct figure is “$305,942”.
4
The net effect of respondent’s typographical and computational errors is a
$140 reduction in petitioners’ unreported income.
- 45 -
APPENDIX K
1990
Bank deposits to personal accounts:
Bank Account Number Deposit
Energy People
Federal Credit Union 11195-004 ---
Barnett Bank 1672684397 $125,640
Chemical Bank 00506140-3 395,039
Security Savings
& Loan XX-XXXXXXX-1 219,001
Security Savings
& Loan XX-XXXXXXX 15,575
First Fidelity 0010186161 176,807
Chemical Bank 623-503-349 57,137
Collective Federal 36-6-750909 18,922
Barnett Bank 1679177650 277,265
Total bank deposits - 1990 1,285,386
Cash expenditures:
a. Purchase 10/18/90 407 Canal Street 5,258
b. Purchase 7/2/90 610 Reed Street 47,592
c. 1990 Plymouth Voyager 10/9 6,500
1
d. Boston Whaler boat 7/26 15,850
Gross income deposited to corporate account:
Personal rental income treated as income in Statutory Notice
of Deficiency 83,424
Difference between gross salary and actual salary deposited 292
Personal items paid by corporation 2,535
Total increase in bank deposits: 161,451
Less nontaxable deposits/items:
a. Transfer between accounts (487,811)
b. Social Security benefits (nontaxable) (5,544)
c. Check to cash 611 account 00506140 (30,000)
Additional repayments and transfers:
a. Corrections to statutory notice of deficiency
for check to cash 30,000
b. Correction of transfer listed in statutory notice of
deficiency 4,500
c. Personal rental income deposited to corporate accounts (83,424)
d. Additional transfers not listed in statutory notice of
deficiency (160,000)
Receipts Per Return:
a. Wages/salary per return (2,840)
b. Interest income per return (9,426)
c. Dividend income per return (1,170)
d. Social Security (tax) (5,544)
e. Rents (gross) (311,700)
f. Pension/annuities (4,263)
Total reductions: (1,067,222)
Total gross income unreported: 379,615
1
Because of a typographical error in respondent’s bank deposit analysis,
“$15,580” should be “$15,850”. As a result, petitioners’ total unreported gross
income is increased by $270.
- 46 -
APPENDIX L
1991
Bank deposits to personal accounts:
Bank Account Number Deposit
Energy People
Federal Credit Union 11195-004 ---
Barnett Bank 1672684397 $59,702
Chemical Bank 00506140-3 340,750
Security Savings
& Loan XX-XXXXXXX-1 343,915
Security Savings
& Loan XX-XXXXXXX 6,400
First Fidelity 0010186161 63,395
Chemical Bank 623-503-349 13,802
Collective Federal 36-6-750909 7,119
Barnett Bank 1679177650 24,719
Barnett Bank C.D. 0031756406 97,000
Barnett Bank C.D. 0031760714 96,000
Barnett Bank C.D. 0031760659 97,000
Total bank deposit - 1991 1,149,802
Cash expenditures:
a. Purchase 3 savings bonds at face
value of $10,000 15,000
b. Less: Correction - $15,000 paid by check (15,000)
c. Use of Radtam funds to purchase assets for Bratam 50,000
Gross income deposited to corporate account:
Personal rental income treated as income in statutory notice
1
of deficiency 115,267
Difference between gross salary and actual salary deposited 301
Total increase in bank deposits: 165,568
Less nontaxable deposits/items:
a. Paybacks to corp. from personal account (87,500)
b. Social Security benefits (nontaxable) (5,850)
c. Transfer between accounts (177,500)
Additional repayments, transfers and nontaxable items:
a. Transfers from personal accounts used to purchase Barnett
Bank certificates of deposit (214,500)
b. Personal rental income deposited to corporate accounts (115,267)
c. Additional transfers not listed in statutory notice of
deficiency (73,255)
d. Additional payback to corporation (2,400)
e. Nontaxable refund from sewer authority (14,000)
f. Withdrawal from corporate account treated as a transfer
in statutory notice of deficiency 25,000
Receipts per return:
a. Wages/salary per return (3,003)
b. Interest income per return (21,522)
c. Dividend income per return (1,202)
d. Pension/annuities (4,263)
e. Social Security (tax) (5,850)
f. Rents (gross) (368,930)
Total reductions: (1,070,042)
Total gross income unreported: 245,328
1
Because of a typographical error in respondent’s bank deposit analysis,
“$115,627" should be “$115,267". As a result, petitioners’ total unreported gross
income is decreased by $360.