T.C. Memo. 2001-73
UNITED STATES TAX COURT
ROGELIO R. BALOT and ZENAIDA V. BALOT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19077-98. Filed March 23, 2001.
Ps worked as blackjack and roulette dealers, and P-H
worked as a “pit boss”, at a casino in Prince George’s
County, Maryland. The casino recorded on daily time sheets
the number of hours Ps worked. Also, the casino gathered,
apportioned, and periodically paid to the dealers and pit
bosses the tips from the patrons. R determined deficiencies
based on the casino’s time sheets and other records, and Ps’
bank deposits.
1. Held: Ps are liable for additions to tax for civil
fraud for 1991 and 1992. See sec. 6663, I.R.C. 1986.
2. Held, further, Ps are liable for an addition to tax
for negligence for 1993. See sec. 6662(a), I.R.C. 1986.
3. Held, further, amounts of deficiencies
redetermined.
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Benson S. Goldstein, for petitioners.
Judith C. Cohen, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHABOT, Judge: Respondent determined deficiencies in
individual income tax and additions to tax under sections 66631
(fraud) and 6662(a) (negligence) against petitioners as follows:
Additions to Tax
Year Deficiency Sec. 6662(a) Sec. 6663
1991 $3,910 -- $2,933
1992 7,686 -- 5,765
1993 2,968 $594 --
1
Unless indicated otherwise, all part and section references
are to parts and sections of the Internal Revenue Code of 1986 as
in effect for the years in issue.
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After concessions by respondent2, the issues for decision
are as follows:
(1) Whether petitioners are liable for civil fraud
additions to tax under section 6663 for 1991 and 1992.
(2) Whether petitioners are liable for a negligence
addition to tax under section 6662(a) for 1993.
(3) What is the amount of petitioners’ unreported
income for 1991 through 1993.
FINDINGS OF FACT
Some of the facts have been stipulated; the stipulations and
the stipulated exhibits are incorporated herein by this
reference.
2
In the answer, respondent conceded that the proper amounts
of petitioners’ 1993 deficiency and addition to tax are not more
than $2,800 and $560, respectively. However, on opening brief,
respondent asks us to conclude that petitioners are liable for a
1993 negligence addition to tax “in the amount of $594”. We
regard respondent’s statement on brief as a clerical error and
not an attempt to withdraw part of the concession.
Also, at five places in paragraph 7 of the answer,
respondent stated that at least a part of petitioners’ 1993
underpayment is due to fraud. In the prayer for relief,
respondent asked: “That the additions to tax for the years 1991
through 1993 under the provisions of I.R.C. § 6663, as set forth
in the notice of deficiency, be in all respects approved.” In
the prayer for relief, respondent did not refer to the section
6662(a) addition to tax for negligence. On brief, respondent
deals with fraud for only 1991 and 1992, and deals with
negligence for 1993. We conclude that (1) Respondent did not
intend to assert the fraud addition to tax for 1993, and (2)
respondent did not intend to concede the negligence addition to
tax for 1993, except to the extent indicated in the first
paragraph of this footnote.
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Petitioners Rogelio R. Balot (hereinafter sometimes referred
to as Rogelio) and Zenaida V. Balot (hereinafter sometimes
referred to as Zenaida) filed joint tax returns for the years in
issue, but have since divorced. Petitioners resided at separate
addresses in Fort Washington, Maryland, when they filed their
joint petition.
A. Rogelio’s Background
From 1967 to April 1989, Rogelio served in the United States
Navy as a logistician; that is, a person who is responsible for
logistics. Logisticians attend to the details of acquiring
equipment and other supplies, making sure that these supplies
meet specifications, and making sure that these supplies are sent
to the right place at the right time. During the last 3 years of
his military service, Rogelio was the enlisted supervisor of
about 25 people who dealt with logistics for the Presidential
helicopter in Quantico, Virginia. Rogelio received pension
distributions from the Navy in each of the years in issue.
In 1989, shortly after retiring from the Navy, Rogelio
obtained full-time employment as a logistician with Validity
Corporation, a defense contractor that deals with the Government.
Rogelio attended to the requisitioning of supplies for the
Validity Corporation, a task similar to his Navy duties. He did
not have any supervisory responsibilities in this Validity
Corporation position. Validity Corporation compensated Rogelio
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on a biweekly basis using the direct deposit method of payment
during the years in issue.
Although Rogelio does not hold a college degree, he did
complete 3 years of college course work. Rogelio also completed
several courses in business management, accounting, and business
law at the University of Maryland and Prince George’s Community
College.
B. Zenaida’s Background
During the years in issue, Zenaida was employed full-time as
a branch manager for First American Bank. In this position,
Zenaida was (1) in charge of branch sales, (2) in charge of
branch operations, and (3) responsible for keeping branch
expenditures within budget determinations that were made at
higher levels. She supervised 9 to 10 employees, including bank
tellers and personnel in charge of establishing new accounts with
the bank. First American Bank entrusted Zenaida with
responsibilities such as ordering supplies in accord with the
branch’s operating budget, ensuring the branch had sufficient
cash on hand to transact business for the day, and ensuring the
automated teller machines contained sufficient cash for the
operation thereof. At the time of the trial, Zenaida was a
branch manager for Crestar Bank.
Zenaida earned a Bachelor of Science Degree in Elementary
Education from the University of the Philippines in or about
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1967. Before beginning her career in the banking industry,
Zenaida worked as a schoolteacher.
C. The CIPAA Casino
The Combined International Philippines America Association
(hereinafter sometimes referred to as CIPAA) was organized
sometime in the 1970’s. CIPAA operated a casino (hereinafter
sometimes referred to as the CIPAA Casino) in Prince George’s
County, Maryland, during the years in issue. Proceeds from the
CIPAA Casino were to aid in the construction and operation of a
Philippine cultural center to be located in the Washington, D.C.,
metropolitan area.
The CIPAA Casino employed dealers and pit bosses to operate
the tables at the casino premises. Dealers accepted bets and
received or paid out chips as required by the results of the
bets; they dealt cards, spun wheels, and otherwise interacted
directly with the bettors. Pit bosses supervised dealers.
During the years in issue there generally were about 70 to 80
dealers, and one pit boss for each 6 to 8 dealers.
The CIPAA Casino recorded on daily time sheets the number of
hours each employee worked. Employees generally signed their
names and recorded the times at which they arrived at the casino
premises for work, on the time sheet kept for that particular
day, although pit bosses occasionally recorded the time one or
another employee came to work. If an employee left the casino
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premises before closing time, then that employee recorded the
time at which he or she left. If an employee worked until
closing time, then a pit boss entered the time the CIPAA Casino
closed as the time the employee’s shift ended. The CIPAA
Casino’s Tuesday sessions closed at 11:00 p.m.; the Saturday
sessions closed at 2:00 a.m. Sunday morning.
The CIPAA Casino paid its employees an hourly amount for
their services even though the CIPAA Casino management and staff,
including dealers, understood that Maryland gaming laws expressly
prohibited the practice. During the years in issue, pit bosses
and dealers earned compensation of $12 and $10 per hour,
respectively. The CIPAA Casino paid this compensation to its
employees in cash on a weekly basis. Beginning about July of
1993, the CIPAA Casino began to pay its employees by check
instead of cash.
CIPAA Casino employees did not complete Forms W-4, and the
CIPAA Casino did not withhold Social Security taxes or income
taxes, in 1991 and 1992 from any of the compensation it paid to
its employees. The CIPAA Casino recorded the amount of
compensation its employees received in 1991 and 1992 on
individual affidavits executed by each employee. The CIPAA
Casino issued Forms W-2 to its employees for the first time for
1993.
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To create the appearance of compliance with Maryland law,
the CIPAA Casino’s management and staff, including dealers, (1)
characterized all remuneration they received from the CIPAA
Casino as tips, the receipt of which was believed to be legal,
and (2) referred to themselves as volunteers rather than
employees. The CIPAA Casino’s management told the staff that
amounts received from the CIPAA Casino were not to be reported to
the Internal Revenue Service as wages.
CIPAA Casino employees also received tip income through the
CIPAA Casino. On each gaming table at the casino premises were
two boxes: One for cash that bettors exchanged for chips at the
table, and one for chips and cash that the bettors gave to the
dealers as tips. The latter box is sometimes hereinafter
referred to as a tip box. Each hour a “runner” collected both
boxes. The moneys in the tip boxes were then commingled and
distributed to the pit bosses and dealers in proportion to their
hourly compensation; i.e., hourly rate times amount of time
worked. The CIPAA Casino distributed tip income about every 3
weeks.
Some pit bosses and dealers also received tips directly from
casino patrons. These tips were not placed into the table’s tip
box and were not divided in the manner described above. Rather,
the recipient of the tip simply kept it for personal use. The
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record does not show that either petitioner received any such
direct tips.
D. Petitioners’ Involvement With the CIPAA Casino
Rogelio and Zenaida became members of CIPAA to help with the
cultural center project. In 1991, Rogelio and Zenaida applied
for and obtained positions with the CIPAA Casino; each of them
worked for the CIPAA Casino during each of the years in issue.
After receiving extensive training from the CIPAA Casino’s
management, Rogelio became a low-stakes blackjack dealer; Zenaida
became a roulette dealer. Rogelio began working for the CIPAA
Casino on or about March 30, 1991; Zenaida began on or about
November 23, 1991. Rogelio and Zenaida maintained their full-
time positions with Validity Corporation and First American Bank,
respectively, in addition to the positions they held at the CIPAA
Casino.
Each petitioner worked for the CIPAA Casino most Saturdays
and most Tuesdays. For 1991 and 1992, each petitioner typically
worked for the CIPAA Casino 14 hours on Saturdays. Rogelio
typically worked for the CIPAA Casino 11 hours on Tuesdays;
Zenaida typically 6 hours on Tuesdays. (The record does not
include time sheets or equivalent information for 1993.)
Rogelio became a pit boss at some point. (See infra note
3). Rogelio became treasurer of the CIPAA Casino in 1994.
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Zenaida became a pit boss at some point and an assistant to the
president of the CIPAA Casino at a later point.
1. Hourly Compensation
Rogelio worked 882.5 hours at the casino premises in 1991,
for which the CIPAA Casino paid $8,825 of hourly compensation to
him. Zenaida worked 105.5 hours at the casino premises in 1991,
for which the CIPAA Casino paid $1,055 of hourly compensation to
her. Petitioners did not report any of their CIPAA Casino hourly
compensation on their 1991 tax return.
Rogelio worked 947.5 hours in 1992, for which the CIPAA
Casino paid hourly compensation to him.3 Zenaida worked 654.75
hours in 1992, for which the CIPAA Casino paid $6,548 (rounded)
of hourly compensation to her. Petitioners did not report any of
their CIPAA Casino hourly compensation on their 1992 tax return.
The CIPAA Casino paid $8,110.75 of compensation income to
Rogelio for 1993. The CIPAA Casino paid $5,781.79 of
3
On opening brief, respondent asks us to find that Rogelio
was a dealer in 1992, “and in 1993 casino management promoted him
to pit boss.” On the same page of this brief, respondent asks us
to find that Rogelio was paid “$12 an hour as a pit boss in
1992.” Petitioners do not object to either proposed finding.
The parties agree that the CIPAA Casino compensated Rogelio at
the rate of $10 per hour when he was a dealer and $12 per hour
when he was a pit boss. Because each party is on both sides of
the question as to when Rogelio was shifted from $10 per hour to
$12 per hour, the parties are directed to resolve this matter in
the computation under Rule 155.
Unless indicated otherwise, all Rule references are to the
Tax Court Rules of Practice and Procedure.
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compensation income to Zenaida for 1993. The CIPAA Casino issued
Forms W-2 to Rogelio and Zenaida for this 1993 compensation
income, which petitioners reported on their 1993 tax return.4
2. Tip Income
Each petitioner received a share of the tips that bettors
left at the tables in the casino premises during each of the
years in issue. On their 1992 tax return, petitioners reported
that Rogelio received $750 tip income and Zenaida received $480
tip income. Petitioners’ 1991 and 1993 tax returns do not
include any income that is stated to be tip income. Petitioners
did not report any income from the CIPAA Casino on their 1991 tax
return. The income from the CIPAA Casino that petitioners
reported on their 1993 tax return is shown on Forms W-2, but is
not described as including tip income, on either the Forms W-2 or
petitioners’ tax return.
4
The four Forms W-2 attached to petitioners’ 1993 tax return
show “Wages, tips, other compensation” amounts aggregating
$71,146.57. On their tax return, petitioners show $71,237. The
difference is accounted for by (1) rounding and (2) petitioners’
reporting Zenaida’s CIPAA Casino income as $5,872, instead of
$5,781.79, as shown on the Form W-2. This roughly $90
overreporting is to be corrected in the computation under Rule
155, to the extent it has not already been indirectly taken into
account in respondent’s notice of deficiency determination of
“Other Unreported Income”.
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3. Check Cashing
In addition to her other income-producing activities,
Zenaida cashed checks for a $5 fee. She performed this service
about two or three times during the years in issue.
E. Bank Deposits
Petitioners maintained five bank accounts in four separate
institutions during the years in issue.
Table 1 shows petitioners’ aggregate deposits into each
account, by account number, in each year in issue.
Table 1
Account 1991 1992 1993
5-852-706 $57,905.90 $47,971.13 $56,679.69
26-320-93-3 1,449.09 13,029.36 -0-
612-2552-9 3,305.32 44,415.40 32,065.10
0215714-007 9,600.00 9,600.00 9,660.66
75-009-232 11,829.51 29,142.89 21,639.44
Total Deposits 84,089.82 144,158.78 120,044.89
Table 2 shows respondent’s analysis of petitioners’ bank
account deposits for each of the years 1991 through 1994. Except
as indicated otherwise in the notes to table 2, the “Excess
deposits per Appeals” in the table became the notice of
deficiency adjustments labeled “Other Unreported Income”.
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Table 2
BANK ACCOUNT ANALYSIS
9112 9212 9312 9412
[3]
Total Bank Account Deposits 84,090. 144,149. 120,045. 139,307.
less non-taxable deposits (9,066.) (37,457.) (22,219.) (45,958.)
Income-wages-Net[1] (44,149.) (46,922.)[6](54,638.) (75,164.)
-Retirement T/P-H (15,094.) (15,177.) (17,756.) (23,246.)
-Retirement T/P-W (3,157.)
-IRA Distribution (224.)
-Condo Rent (8,200.) (5,895.) (4,500.) (6,950.)
-Miscellaneous (147.) (675.) (368.) (668.)
-Tips (1,230.)
-Sale of Stock-Net (5,978.) (2,969.)
[4]
Excess Deposits per Exam 4,053. 30,823. 17,595. (12,679.)
Additional Non-Taxable Income
Per Appeals Adjustments -0- (3,396.) (7,576.)
[2] [5] [7]
Excess deposits per Appeals 4,053. 10,629. 10,018. -0-
1
“Net” means net of withheld amounts shown on the Forms W-2.
2
This amount is $19 less than the 1991 $4,072 notice of
deficiency adjustment for Other Unreported Income. In the
absence of an explanation from respondent, we conclude that
the slight preponderance of the evidence of record leans
toward petitioners with respect to this $19. On opening
brief, respondent concedes a $21 amount, which may include
this $19. The parties are directed to resolve this matter
in the computation under Rule 155.
3
This amount is $10 less than the sum of the stipulated
amounts deposited into petitioners’ bank accounts. Compare
supra table 1, column 1992. Respondent attributes the
difference to a clerical error on respondent’s part, and
“concedes the $10 difference.” That is, respondent does not
ask that the 1992 $10,630 notice of deficiency adjustment
for Other Unreported Income be increased to correct this
error.
4
This amount is $8 more than the sum of the items in the 1992
column showing the bank account analysis that respondent
made in determining the amount of the 1992 $10,630 notice of
deficiency adjustment for Other Unreported Income. In the
absence of an explanation from respondent, we conclude that
the slight preponderance of the evidence of record leans
toward petitioners with respect to this $8.
5
In arriving at the 1992 Other Unreported Income adjustment
in the notice of deficiency, respondent subtracted the
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$16,798 adjustment for Unreported Income--Casino.
Respondent did not make a corresponding subtraction of the
1991 $9,880 adjustment for Unreported Income--Casino in
arriving at the 1991 Other Unreported Income. Neither side
has sought to explain, justify, or attack this substantial
difference between the 1991 and 1992 procedures. We leave
the parties as we find them on this matter. See, e.g.,
Thomas v. Commissioner, 92 T.C. 206, 232 (1989), and cases
there cited.
6
This amount includes the $90 by which petitioners overstated
their Forms W-2 income on their 1993 tax return. See infra
table 3, note 2.
7
This amount is $600 less than the amount of the 1993 $10,618
notice of deficiency adjustment for Other Unreported Income.
On brief, respondent asks us to find that the correct amount
of this adjustment is $10,010, which is $608 less than the
notice of deficiency adjustment. It may be that this
discrepancy is what led to respondent’s concession (see
supra note 2) in the answer that the deficiency is $168 less
than the amount determined in the notice of deficiency, and
that the negligence addition to tax is $34 less than the
amount determined in the notice of deficiency. Also, there
is a $1 difference between the $10,018 “excess deposits” and
the sum of the amounts in the 1993 column; we assume that
this difference arises from rounding the amounts to the
nearest dollar. The parties are directed to resolve this
matter in the computation under Rule 155.
F. Tax Returns
On their tax returns for the years in issue, petitioners
reported income and total tax as shown in table 3.
Table 3
Item 1991 1992 1993
1 2
l.7--Wages, etc. (Form W-2) $57,945 $62,339 $71,237
l.8--Interest 129 675 218
l.9--Dividends 18 -- 9
l.10--Taxable refunds -- -- 136
3
l.13--Capital gain or (loss) -- (3,000) 14
l.17--Pensions and annuities 16,413 16,576 17,281
l.18--Rents, etc. (5,081) (3,899) (6,122)
l.23--Total income 69,424 72,691 82,773
l.53--Total tax 7,333 7,362 9,224
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1
The $62,339 total includes petitioners’ Form W-2 income from
First American Bank and Validity Corporation, and
petitioners’ “Unreported Tip Income” from the CIPAA Casino
(Rogelio--$750; Zenaida--$480).
2
Comparison of a schedule attached to petitioners’ 1993 tax
return and the Forms W-2 attached to the same return makes
it clear that a transposition of two digits from Zenaida’s
CIPAA Casino Form W-2 to the schedule resulted in
petitioners overstating their income by $90. See supra
note 4.
3
Petitioners’ 1992 tax return shows a $19,000 capital loss
carryover from 1992 to 1993, stemming primarily from a
$21,688 “Loss in value” on 12,000 shares of PanAm Stock
acquired on November 26, 1990. It does not appear that
petitioners claimed any capital loss carryover on their 1993
tax return.
Petitioners timely filed their tax returns for each of the
years in issue: 1991--mid-April 1992, 1992--mid-August 1993, and
1993--mid-April 1994.
Petitioners’ 1991 and 1992 tax returns were prepared by W.O.
Monroyo & Associates. Petitioners’ 1993 tax return was prepared
by Automated Tax & Financial Services.
____________________________
Petitioners failed to report on their tax returns the hourly
compensation that the CIPAA Casino paid to each of them in 1991
and 1992. Petitioners failed to report on their tax return the
tip income that the CIPAA Casino gathered, apportioned, and
periodically paid to petitioners in 1991. The failures to report
this income resulted in underpayments of tax required to be shown
on petitioners’ tax returns for 1991 and 1992. The failures to
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report this income, and the resulting underpayments for 1991 and
1992, were due to the fraud of each petitioner for each year.
For 1993, petitioners had an underpayment of tax required to
be shown on their tax return, and some part of this underpayment
was due to petitioners’ negligence.
OPINION
I. General Summary
The CIPAA Casino paid $10 or $12 per hour worked to each
petitioner in 1991, 1992, and 1993. As to this hourly
compensation, the CIPAA Casino did not send Forms W-2 to
petitioners for 1991 and 1992, but did for 1993. Petitioners did
not report any of this income on their 1991 (almost $10,000) and
1992 (about $15,000) tax returns; they reported the full W-2
amounts on their 1993 tax return.
The CIPAA Casino gathered, apportioned, and periodically
paid to their employees the tips that patrons paid. Petitioners
did not report any of this tip income on their 1991 tax return;
they reported $1,230 of this income (Rogelio--$750, Zenaida--
$480) on their 1992 tax return.
We hold that respondent proved, by clear and convincing
evidence, that (1) petitioners failed to report hourly
compensation that they received in 1991 and 1992, (2) petitioners
failed to report tip income that they received in 1991, (3) these
omissions led to underpayments of tax for 1991 and 1992, and (4)
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each of these underpayments was due to the fraud of both Rogelio
and Zenaida.
We hold that petitioners failed to prove, by a preponderance
of the evidence, that (1) any part of the underpayments for 1991
and 1992 was not due to fraud, (2) any of the deficiency
determinations for 1991, 1992, or 1993 in the notice of
deficiency was excessive, and (3) any part of the 1993
underpayment was not due to petitioners’ negligence.
We consider first 1991 and 1992, the years as to which
respondent determined fraud. We then consider 1993.
II. 1991-1992
Respondent contends (1) that petitioners underpaid their
taxes for 1991 and 1992, and (2) that all of petitioners’ 1991
and 1992 underpayments are due to fraud and thus, petitioners are
liable for the fraud additions to tax under section 6663.
Petitioners contend (1) that they did not underpay their
taxes for 1991 and 1992, and (2) that respondent has not met
respondent’s burden of proof on the fraud issue. Petitioners
maintain (A) that respondent’s use of the bank deposits method of
income reconstruction was not appropriate, and (B) that even if
use of the bank deposits method was appropriate, petitioners’
excess deposits are attributable to nontaxable sources.
Alternatively, petitioners contend that if they have underpaid
their taxes, then any additions to tax are not appropriate
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because (1) petitioners did not act with the requisite fraudulent
intent, and (2) reasonable cause supported their actions.
We agree with respondent’s conclusions and most of
respondent’s contentions.
When respondent seeks to impose the addition to tax under
section 66635, respondent has the burden of proof. To carry this
burden for a year, respondent must prove two elements, as
follows: (1) That petitioners have an underpayment of tax for
that year, and (2) that some part of that underpayment is due to
fraud. See sec. 7454(a)6; Rule 142(b); see, e.g., Carter v.
5
SEC. 6663. IMPOSITION OF FRAUD PENALTY.
(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.
(b) Determination of Portion Attributable to Fraud.--
If the Secretary establishes that any portion of an
underpayment is attributable to fraud, the entire
underpayment shall be treated as attributable to fraud,
except with respect to any portion of the underpayment which
the taxpayer establishes (by a preponderance of the
evidence) is not attributable to fraud.
(c) Special Rule for Joint Returns.--In the case of a
joint return, this section shall not apply with respect to a
spouse unless some part of the underpayment is due to the
fraud of such spouse.
6
SEC. 7454. BURDEN OF PROOF IN FRAUD, FOUNDATION
MANAGER, AND TRANSFEREE CASES.
(a) Fraud.--In any proceeding involving the issue
whether the petitioner has been guilty of fraud with intent
(continued...)
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Campbell, 264 F.2d 930, 936 (5th Cir. 1959); Stone v.
Commissioner, 56 T.C. 213, 220 (1971); Otsuki v. Commissioner, 53
T.C. 96, 105-106 (1969).7 Each of these elements must be proven
by clear and convincing evidence. See DiLeo v. Commissioner, 96
T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Parks v.
Commissioner, 94 T.C. 654, 663-664 (1990); Hebrank v.
Commissioner, 81 T.C. 640, 642 (1983).
For this purpose, respondent need not prove the precise
amount of the underpayment resulting from fraud, but only that
there is some underpayment and that some part of it is
attributable to fraud. See, e.g., Lee v. United States, 466 F.2d
11, 16-17 (5th Cir. 1972); Plunkett v. Commissioner, 465 F.2d
299, 303 (7th Cir. 1972), affg. T.C. Memo. 1970-274. In carrying
this burden, respondent may not rely on petitioners’ failure to
meet their burden of proving error in respondent’s determinations
as to the deficiencies. See, e.g., Petzoldt v. Commissioner, 92
T.C. 661, 700 (1989); Habersham-Bey v. Commissioner, 78 T.C. 304,
312 (1982), and cases cited therein.
6
(...continued)
to evade tax, the burden of proof in respect of such issue
shall be upon the Secretary.
7
The elements of fraud under sec. 6663 are essentially the
same as those we considered under sec. 6653(b) of prior law. See
also Rhone-Poulenc Surfactants v. Commissioner, 114 T.C. 533,
547-548 (2000); Clayton v. Commissioner, 102 T.C. 632, 652-653
(1994); Houser v. Commissioner, 96 T.C. 184, 185 n.1 (1991).
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Where fraud is determined for each of several years,
respondent’s burden applies separately for each of the years.
See Estate of Stein v. Commissioner, 25 T.C. 940, 959-963 (1956),
affd. sub nom. Levine v. Commissioner, 250 F.2d 798 (2d Cir.
1958); McLaughlin v. Commissioner, 29 B.T.A. 247, 249 (1933). A
mere understatement of income does not establish fraud. However,
a pattern of consistent underreporting of income for a number of
years is strong evidence of fraud. See Estate of Mazzoni v.
Commissioner, 451 F.2d 197, 202 (3d Cir. 1971), affg. T.C. Memos.
1970-144 and 1970-37; Adler v. Commissioner, 422 F.2d 63, 66 (6th
Cir. 1970), affg. T.C. Memo. 1968-100; Otsuki v. Commissioner, 53
T.C. at 108.
The issue of fraud is a factual question that is to be
decided on an examination of all the evidence in the record. See
Plunkett v. Commissioner, 465 F.2d at 303; Mensik v.
Commissioner, 328 F.2d 147, 150 (7th Cir. 1964), affg. 37 T.C.
703 (1962); Stone v. Commissioner, 56 T.C. at 224.
In order to establish fraud as to a taxpayer, respondent
must show that that taxpayer intended to evade taxes which that
taxpayer knew or believed were owed, by conduct intended to
conceal, mislead, or otherwise prevent the collection of taxes.
See, e.g., Grossman v. Commissioner, 182 F.3d 275, 277 (4th Cir.
1999), affg. T.C. Memo. 1996-452; Powell v. Granquist, 252 F.2d
56, 60 (9th Cir. 1958); Danenberg v. Commissioner, 73 T.C. 370,
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393 (1979); McGee v. Commissioner, 61 T.C. 249, 256-257 (1973),
affd. 519 F.2d 1121 (5th Cir. 1975). This intent may be inferred
from circumstantial evidence. See Powell v. Granquist, 252 F.2d
at 61; Gajewski v. Commissioner, 67 T.C. 181, 200 (1976), affd.
without published opinion 578 F.2d 1383 (8th Cir. 1978),
including the implausibility of petitioners’ explanations. See
Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986) (and
cases cited therein), affg. T.C. Memo. 1984-601; Boyett v.
Commissioner, 204 F.2d 205, 208 (5th Cir. 1953), affg. a
Memorandum Opinion of this Court dated Mar. 14, 1951. Fraud is
not imputed from one spouse to another; in the case of a joint
tax return, respondent must prove fraud as to each spouse charged
with liability for the addition to tax. See sec. 6663(c); Hicks
Co. v. Commissioner, 56 T.C. 982, 1030 (1971), affd. 470 F.2d 87
(1st Cir. 1972); Stone v. Commissioner, 56 T.C. at 227-228.
A. Underpayment
1. The CIPAA Casino--Hourly Compensation
Time sheets were maintained by the CIPAA Casino for dealers
and others who worked at the casino during each of the years
before the Court. The CIPAA Casino paid compensation of $10 per
hour to dealers and $12 per hour to pit bosses during these
years.
Each petitioner worked at the casino in 1991 and in 1992 and
received, as compensation for his or her services, weekly
- 22 -
payments from the CIPAA Casino, calculated at the appropriate
hourly rate.
Petitioners did not report any of this income on the joint
tax returns that they filed for 1991 and 1992. Petitioners do
not claim for either year that this unreported income is properly
offset by any deductions, etc., in addition to what is shown on
their tax returns.8
Accordingly, petitioners’ failures to report this hourly
compensation on their 1991 and 1992 joint tax returns result in
an underpayment of tax required to be shown on their 1991 tax
return and an underpayment of tax required to be shown on their
1992 tax return. We have so found.
Petitioners agree that both of them worked for the CIPAA
Casino during each of the years before the Court. They also
agree, or at least do not dispute, that the CIPAA Casino paid to
each of them weekly $10 or $12 per hour for each hour petitioners
8
Respondent need not prove that petitioners did not have
offsetting deductions. Once the Commissioner has presented clear
and convincing evidence of unreported gross receipts, the
taxpayer has the burden of coming forward with evidence as to
offsetting deductions claimed by the taxpayer, even in criminal
cases where the Government must prove a deficiency beyond a
reasonable doubt. See, e.g., United States v. Hiett, 581 F.2d
1199, 1202 (5th Cir. 1978); United States v. Campbell, 351 F.2d
336, 338-339 (2d Cir. 1965); Elwert v. United States, 231 F.2d
928, 933 (9th Cir. 1956); see also DiLeo v. Commissioner, 96 T.C.
858, 872 (1991); Reiff v. Commissioner, 77 T.C. 1169, 1175
(1981). This rule is independent of the general rule applicable
to civil cases, in which the taxpayer has the burden of proving
entitlement to deductions before they may be allowed. See Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
- 23 -
worked in the casino. Petitioners’ only contentions with regard
to this hourly “remuneration” (petitioners’ term) are that (1) it
was not “wages”, and (2) “The management of the CIPAA casino
inflated the number of hours worked by casino employees during
the years 1991-1993.”
Firstly, none of this hourly compensation was reported on
petitioners’ tax returns for 1991 and 1992.9 As a result,
petitioners’ allegation that the management of the CIPAA Casino
inflated the number of hours worked by casino employees does not
affect our conclusion that petitioners’ failures to report any of
their hourly compensation result in underpayments of tax for both
1991 and 1992.
Secondly, the CIPAA Casino time sheets appear to conform to
the testimony of each petitioner, both as to the procedures that
were followed and also as to each petitioner’s pattern of
arrivals at and departures from the casino. The variety of
handwritings confirms the testimony that often the entries for
9
Petitioners reported on their 1992 tax return $750 tip
income for Rogelio and $480 tip income for Zenaida. The parties
stipulated that “Petitioners typically worked on Saturdays and at
least one day during the week.” If these tips were the hourly
compensation (as petitioners seem to suggest), and if petitioners
were paid $10 or more per hour (as petitioners concede), then
this would mean that Rogelio worked for an average of less than 1
hour each day he showed up, and Zenaida worked for about ½ hour
each day she showed up. The absurdity of this conclusion
convinces us that petitioners do not seriously contend that their
1992 tip reporting was intended to be a reporting of the hourly
compensation that each petitioner received from the CIPAA Casino.
- 24 -
any individual were made by that individual. Rogelio testified
that his usual Saturday shift was 14 hours--from noon to 2 a.m.
the next morning, confirming the information on the time sheets.
Zenaida testified to her usual 14-hour Saturday shift. As to
Tuesdays, Rogelio’s confusing testimony appears to confirm the
general 11-hour shift shown by the time sheets; Zenaida clearly
testified that her Tuesday shift was generally around 6 hours.
As a result, we are satisfied that the CIPAA Casino time sheets
are accurate as to the number of hours each petitioner worked at
the casino in 1991 and 1992.
Thirdly, as petitioners implicitly conceded by reporting
tips as income on their 1992 tax return, tips are income subject
to tax. See, e.g., Olk v. United States, 536 F.2d 876, 879 (9th
Cir. 1976). So that “he that runs may read”, line 7 of the Form
1040 for each of the years before the Court states “Wages,
salaries, tips, etc.” (Emphasis added.) Whatever label
petitioners would rather we apply to the hourly compensation that
the CIPAA Casino paid to each petitioner in 1991 and 1992, those
payments are income subject to tax. See, e.g., section 61(a)(1).
We hold, for respondent, that respondent has proven by clear
and convincing evidence that petitioners failed to report the
hourly compensation paid to them by the CIPAA Casino in 1991 and
1992, in the amounts determined in the notice of deficiency as
“Unreported Income-Casino”, except to the extent that
- 25 -
respondent’s brief introduces an uncertainty as to the amount of
Rogelio’s 1992 hourly compensation. See supra note 3.
2. The CIPAA Casino--Tip Income
The record is clear that each petitioner also received each
year an appropriate portion of the tips that the casino’s patrons
left in 1991 and 1992.10 Petitioners did not report any tip
income on their 1991 tax return. Petitioners reported 1992 tip
income of $750 for Rogelio and $480 for Zenaida. Apart from
petitioners’ thus-reported 1992 tip income, we do not find
anything in the record that would enable us to quantify
petitioners’ tip income for 1991 or 1992.
Petitioners urge, in both opening brief and answering brief,
that our opinion in Executive Network Club, Inc. v. Commissioner,
T.C. Memo. 1995-21, “highlights the extent to which the IRS’ case
10
On opening brief, respondent asserts that, in addition to
the tips that the CIPAA Casino gathered from patrons and
distributed to the dealers, etc., “Moreover, in each year,
petitioners received cash tips directly from patrons. (Tr. pp.
191-193).” We have found, supra, that “The record does not show
that either petitioner received any such direct tips.” The
transcript pages that respondent cites refer to the testimony of
another person who worked for the CIPAA Casino during at least
part of the period in issue in the instant case. That person
testified that she had received such direct tips. Respondent’s
counsel asked: “Okay. Did other employees earn tips in this
manner as well?” The witness replied: “Probably, I don’t know.”
Later, petitioners’ counsel asked that witness: “Did you ever
see someone on the see [side ?] pay Mr. Balot or Mrs. Balot?”
The witness replied: “I don’t recall, sir, because it was done
secretly.” Thus the only evidence to which respondent directs
our attention, or that our examination has turned up, is a
disclaimer of knowledge. Respondent’s assertion on this point is
unfounded on the record in the instant case.
- 26 -
regarding the Petitioners is distorted.” Our findings of fact in
Executive Network Club, Inc. describe some of the operations of a
charitable organization’s casino operation in Prince George’s
County, with a focus on how tips from patrons were collected by
the casino and “were ultimately distributed to the workers in
cash.” We held that the casino operation constituted an
unrelated trade or business. However, we held that the tips that
came from the patrons and were distributed to the casino workers
did not constitute income to the exempt organization. In the
course of our opinion, we noted as follows:
4
The fact that the tips were shared does not preclude a
finding that the payments by the patrons were tips. Similar
pooling or tip-splitting arrangements have been held to
constitute tip income to those participating in the pooling
or tip-splitting arrangement. See Allen v. United States,
976 F.2d 975, 976 (5th Cir. 1992); Olk v. United States, 536
F.2d 876, 877 (9th Cir. 1976); Catalano v. Commissioner, 81
T.C. 8, 11-13 (1983), affd. without published opinion sub
nom. Knoll v. Commissioner, 735 F.2d 1370 (9th Cir. 1984);
Armeno v. United States, 6 Cl. Ct. 521 (1984). In
respondent’s regulations, respondent describes such pooling
arrangements. Secs. 31.3121(a)-1(c), 31.6053-3(j)(12)-(13),
and 31.6053-4(a)(2), Employment Tax Regs.; see also Guadron
v. Commissioner, T.C. Memo. 1994-553; Tech. Adv. Mem. 81-46-
001 (Sept. 21, 1978) [Executive Network Club, Inc. v.
Commissioner, T.C. Memo 1995-21.]
We agree with petitioners (as does respondent) that the
process of gathering tips, apportioning them, and periodically
paying them out to the workers in Executive Network Club, Inc. is
quite similar to the process followed by the CIPAA Casino during
the years in issue in the instant case.
- 27 -
However--
(1) As we note in Executive Network Club, Inc. such
tips are income to those workers who ultimately receive the
money, but in the instant case petitioners did not report
any of this tip income on their 1991 tax return.
(2) Such tips are separate from the hourly compensation
that each petitioner received in each year; the hourly
compensation also is income; and petitioners did not report
any of this hourly compensation on their 1991 and 1992 tax
returns.
Thus our opinion in Executive Network Club, Inc. v.
Commissioner, supra, does not support any of petitioners’
relevant contentions, but rather is consistent with, and
supports, respondent’s position in the instant case.
We hold that respondent has proven by clear and convincing
evidence that each petitioner received taxable tip income in 1991
and 1992, and that petitioners failed to report their 1991 tip
incomes. However, we also hold that respondent failed to prove,
by even a preponderance of the evidence, (a) the amount of either
petitioner’s unreported 1991 tip income and (b) whether
petitioners failed to report any 1992 tip income.11
11
On opening brief, respondent asserts that “these tips
clearly accounted for a large part, if not virtually all, of the
‘other unreported income.’” Respondent has not favored us with
citations to evidence of record that would support this assertion
(continued...)
- 28 -
B. Fraudulent Intent
Each day that either petitioner worked in the casino, that
petitioner earned $10 (or $12) per hour for the time worked.
Each week, the CIPAA Casino paid to each petitioner (and to their
coworkers at the casino) the hourly compensation. These hourly
compensation amounts paid to petitioners totaled almost $10,000
in 1991 and around $15,000 in 1992. Petitioners failed to report
any part of this hourly compensation on their 1991 and 1992 tax
returns. They also failed to report any of their 1991 tip
income. The foregoing omitted income amounts to about 15 percent
in comparison to the total income they reported on their 1991 tax
return, and about 20 percent for 1992. See supra table 3. Based
on the record as a whole, including our observations of each
petitioner at trial (both testified) and our evaluation of their
educational backgrounds and the sort of full-time jobs each of
them had during 1991 and 1992, we conclude that each petitioner
knew that this hourly compensation and tip income were subject to
tax and that their failures to report any part of this income on
either of their tax returns for 1991 and 1992 were due to fraud.
Thus the underpayments resulting from these failures to report
were due to fraud. We have so found.
11
(...continued)
or any quantification of petitioners’ tip income.
- 29 -
Petitioners’ own testimony confirms their having received
this hourly compensation and tip income. Petitioners have not
explained their total failure to report these amounts.
Petitioners’ explanations of why fraud penalties should not be
imposed lack coherence; if anything, these explanations’
implausibility confirms our conclusions as to fraud.
Petitioners acknowledge that they earned the compensation
computed on an hourly rate for the hours they worked, but insist
that these amounts were not “wages”. Petitioners contend that
these amounts were “tips”. When confronted at trial with the
unlikelihood that the amount of patrons’ tips precisely matched
their hourly rate times hours worked, they lapsed into
unresponsiveness. On opening brief and again on answering brief,
petitioners contend that they “should not be subject to any civil
fraud penalties on the tip income received from the casino as
they have reasonable cause for their actions”; yet, they do not
tell us what is this “reasonable cause”.
On opening brief and again on answering brief, petitioners
contend as follows:
With respect to the audit examination involving the
Balots, the IRS has failed to establish--through clear and
convincing evidence--that there is an intentional wrongdoing
on the part of the taxpayer. [Sic.] First, the Balots were
never at any time involved with the managerial operations of
the casino as they worked part-time. Therefore, they were
never in any position to commit any fraudulent acts
pertaining to their work in the casino.
- 30 -
Petitioners’ fraud is their own omissions to report on their own
tax returns their own receipts of the hourly compensation that
the CIPAA Casino paid to them. Thus, their not being “involved
with the managerial operations of the casino” is not a relevant
defense to the civil tax fraud with which petitioners are
charged.
In our analysis of underpayment (supra part II. A.) we
concluded that respondent proved by clear and convincing evidence
that petitioners failed to report what clearly was tip income
(i.e., petitioners’ shares of the patrons’ tips) that was
gathered, apportioned, and periodically paid to them in 1991.
The foregoing evaluation of petitioners’ fraudulent intentions as
to hourly compensation applies with even greater force to the
1991 tip income.
We conclude, and we have found, that respondent has shown by
clear and convincing evidence that the underpayments of tax that
result from petitioners’ failure to report (a) their hourly
compensation paid to each of them by the CIPAA Casino in 1991 and
1992, and (b) their shares of the patrons’ tips that the CIPAA
Casino gathered, apportioned, and periodically paid to
petitioners in 1991, all are due to the fraud of each petitioner.
We so hold.
- 31 -
C. Amounts of Deficiencies; Nonfraudulent Causes
In parts II. A. and II. B. of this opinion, respondent had
the burden of proving, by clear and convincing evidence, that
there were underpayments of tax, some part of which was due to
fraud; respondent carried this burden.
In this part of the opinion, petitioners have the burden of
proving, by a preponderance of the evidence, that the
deficiencies12 are less than the amounts respondent determined in
the notice of deficiency. See Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933).
Petitioners also have the burden of proving, by a
preponderance of the evidence, that some part of the 1991 or 1992
underpayment is not due to fraud. See sec. 6663(b).
In the absence of adequate records, respondent may employ
reasonable methods of reconstructing petitioners’ taxable income
in a manner which clearly reflects income. See sec. 446(b);
Holland v. United States, 348 U.S. 121 (1954); Parks v.
Commissioner, 94 T.C. at 658.
Although the notice of deficiency does not so state, it is
evident from the record herein that respondent’s notice of
deficiency determinations of “Other Unreported Income” are based
12
For purposes of the instant case, “deficiency” is the same
as “underpayment”. Compare sec. 6211(a) with sec. 6664(a).
- 32 -
on use of the bank deposits method to reconstruct petitioners’
income. See supra table 2.
It is well established that bank deposits are evidence of
income where the deposits were made by the party charged with the
income or to an account controlled by the party charged with the
income. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
The premise underlying the bank deposits method of income
reconstruction is that, absent some explanation, a taxpayer’s
bank deposits represent income subject to tax. See DiLeo v.
Commissioner, 96 T.C. at 868. The use of the bank deposits
method of income reconstruction has long been sanctioned by the
courts. See id.; Tokarski v. Commissioner, 87 T.C. at 77; Estate
of Mason v. Commissioner, 64 T.C. 651, 656 (1975)(and cases cited
therein), affd. 566 F.2d 2 (6th Cir. 1977). When this method is
used, respondent must take into account any nontaxable deposits
or deductible expenses of which respondent has knowledge. See
DiLeo v. Commissioner, 96 T.C. at 868.
We have held that, where respondent has the burden of proof
in a bank deposits case, e.g., where respondent has determined
that a taxpayer has committed tax fraud, then--
Respondent can satisfy * * * [the] burden of proving
the first prong of the fraud test, i.e., an underpayment,
when the allegations of fraud are intertwined with
unreported and indirectly reconstructed income in one of two
ways. Parks v. Commissioner, 94 T.C. at 661. Respondent
may prove an underpayment by proving a likely source of the
unreported income. Holland v. United States, 348 U.S. 121
(1954); Parks v. Commissioner, supra at 661; Nicholas v.
- 33 -
Commissioner, 70 T.C. [1057,] * * * 1066 [(1978)].
Alternatively, where the taxpayer alleges a nontaxable
source, respondent may satisfy * * * [the] burden by
disproving the nontaxable source so alleged. United States
v. Massei, 355 U.S. 595 (1958); Parks v. Commissioner, supra
at 661. * * * [DiLeo v. Commissioner, 96 T.C. at 873.]
Table 2, supra, summarizes respondent’s revenue agent’s
conclusions in analyzing petitioners’ bank deposits. On its
face, respondent’s calculations seem reasonable. But see our
notes to table 2. Petitioners contend that the bank deposits
method “is not appropriate for use in the Petitioners’ case”, and
also “that the alleged excess bank deposits are from sources
representing traditional inter-family [intra-family?] and friend
transfers.”
Petitioners assert as follows:
According to a review of the various court cases involving
the bank deposit method, it is clear that the bank deposit
method is most prevalently used to determine “unreported
income” of professionals, shopkeepers, and others whose
income arise largely from receipts of a business.
Petitioners stress that they “were never self-employed during tax
years 1991, 1992 and 1993;” and that they “did not operate a
business during tax years 1991-1993, nor were they ever in the
business of being ‘gamblers.’”
Firstly, we are not aware of any doctrine that the
Commissioner may appropriately use the bank deposits method to
reconstruct income only where the taxpayer is operating a
business, nor do petitioners suggest any reason why there should
be such a doctrine.
- 34 -
Secondly, each petitioner testified that petitioners did not
keep track of their tip income and that they should have kept
records.13 Clearly, there was unreported tip income for 1991 and
13
On answering brief, petitioners “object to the statement
claiming they failed to keep adequate books and records.” They
overlook their own trial testimony, as follows:
Q [Cohen] Can you tell the Court the amount of tips
that you earned from the casino during the tax years at
issue? And that would be 1991 through 1993.
A [Rogelio] What I earned?
Q Tips.
A Tips. I don’t know.
Q You don’t know? Well, didn’t you keep any records
of the tips?
A I should have because the management was telling
us, you know, it’s up to you to make sure, you know, to keep
a record of what you receive.
Q You said you should have, but you didn’t is that
what you said? I don’t want to put words in your mouth.
A Yes.
* * * * * * *
Q [Cohen] Did you tell your return preparer that you
worked at the casino during 1991 through 1993?
A [Rogelio] Did I tell my lawyer?
Q No, no, no. The return preparer, the person who
did your tax return.
A Yes, they’re aware of it.
Q You told them you worked there in 1991 through
1993?
(continued...)
- 35 -
there may have been unreported income for later years. This,
alone, is sufficient to warrant the use of the bank deposits
method to determine how much 1991 income was unreported and to
test the comprehensiveness of petitioners’ income reporting for
later years.
13
(...continued)
A Uh-huh.
Q Okay. Did you tell them how much income you
earned at the casino?
A As far as my recollection, as far as ‘91 because
we were just talking about it, I remember I told him that
these are tips.
Q You told him what?
A When -- in 1991, I remember I was -- you know, I
don’t know. Best of my recollection, I thought I told my
accountant or the tax preparer that this is how much money I
made in the casino.
Q But you didn’t provide that return preparer with
any books and records reflecting the amount of tips and
wages that you earned at the casino during 1991 through
1993, right?
A No. We just -- just like I said, I never kept a
record.
* * * * * * *
Q [Cohen] Did you keep any books and records related
to the income that you earned with the casino back in the
years at issue?
A [Zenaida] No, I did not. I should have, but I did
not.
- 36 -
Thirdly, from the testimony of the IRS revenue agent and
from petitioners’ trial memorandum it appears that, during the
years in issue, petitioners went to Atlantic City, New Jersey,
“about 4-5 times a year”, and that they gambled while in Atlantic
City. Petitioners did not report gambling winnings and did not
deduct gambling losses. Since 1934, the Federal tax laws have
required that nonbusiness gamblers--petitioners strenuously
insist that they are not in the business of being gamblers--must
report their winnings “above the line” and may deduct their
losses only “below the line”. See discussion in Gajewski v.
Commissioner, 84 T.C. at 982-983. This bifurcation of gambling
winnings, and losses for nonbusiness gamblers has been mandated
even when it is clear that the taxpayers’ losses exceed their
winnings and they are not entitled to itemize their deductions--
in effect, taxing the nonbusiness taxpayers on their gross
winnings. See Johnston v. Commissioner, 25 T.C. 106 (1955).
Thus, petitioners’ acknowledgment that they did some nonbusiness
gambling in each of the years in issue is another basis for the
IRS revenue agent’s belief that petitioners may have some
unreported income that may be reconstructed by the bank deposits
method.
Accordingly, we conclude that respondent was justified in
using the bank deposits method to reconstruct petitioners’
income.
- 37 -
Petitioners’ oft-voiced contention that the excess bank
deposits are from “traditional inter-family [intra-family?] and
friend transfers”, was not supported by evidence of record.
Where there was evidence presented to respondent during the
audit, respondent treated the transactions as nontaxable, as is
shown in Exhibits 26-R and 39-R. Before the Court, petitioners
neither provided particulars, nor presented the testimony of
relatives or friends, nor explained why those witnesses were not
available. See Wichita Terminal Elevator Co. v. Commissioner, 6
T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).
Petitioners have failed to carry their burden of proving
that they are entitled to nontaxable treatment for any deposits
(or parts of any deposits) in excess of what respondent already
allowed.
Finally, petitioners contend as follows:
In fact, the Taxpayers should not be subject to any
civil tax penalties on the tip income received from the
casino as they have reasonable cause for their actions.
However, should the Tax Court determine that a civil tax
penalty should be assessed against the Taxpayers based on
their receipt of tip income, a fair reading of recent case
law clearly establishes that the Petitioners should (at the
most) only be subject to the negligence penalty under Code
Section 6662.
Neither petitioner testified why he or she thought that the
income (whether hourly compensation or tip income) was not
subject to tax. For that matter, neither petitioner even
testified that he or she thought any category or specific item of
- 38 -
omitted income was not subject to tax. The record is devoid of
evidence that petitioners, or either of them, asked any tax
adviser or tax-return preparer about any of the omitted items.
Petitioners do not even take the trouble to describe to us what
they claim to be the “reasonable cause for their actions.”
We have ignored Zenaida’s check-cashing activities because
(1) the amounts of her fees for any year are uncertain and
trivial, and (2) they may in any event be adequately dealt with
under respondent’s use of the bank deposits method.14
We hold, for respondent, that petitioners failed to show by
a preponderance of the evidence that the deficiency for 1991 or
1992 is less than what respondent determined, as modified by
respondent’s concessions and our observations in the footnotes to
table 2, supra.
We hold, for respondent, that petitioners failed to show by
a preponderance of the evidence that any part of the underpayment
for 1991 or 1992 was not due to fraud.
III. 1993
For 1993, respondent determined that (1) petitioners have a
tax deficiency resulting from their failure to report $10,618 of
income, and (2) petitioners are liable for 20-percent negligence
14
We assume that the cashed checks have been properly
accounted for under the instant case’s application of the bank
deposits method. See supra table 2. Petitioners have not
suggested otherwise.
- 39 -
penalty based on a determination that the entire amount of the
deficiency is due to petitioners’ negligence.
A. Amounts of Deficiency
The 1993 deficiency that respondent determined is due
entirely to application of the bank deposits method. Supra table
2, especially notes 6 and 7. Our comments and conclusions in the
course of our analysis of the bank deposits method in Part II.
C., supra, apply equally to 1993.
We hold that, except as to respondent’s concessions and our
comments in supra table 2, notes 6 and 7, petitioners have failed
to show that respondent’s determination of omitted income was
excessive.
B. Negligence
Respondent determined that petitioners are liable for a 20-
percent negligence addition to tax on the entire underpayment for
1993. Respondent contends petitioners’ failure to maintain and
furnish adequate records of their 1993 income-producing
activities “thwarted respondent’s attempt to examine petitioners’
tax liability for that year.” Petitioners maintain that section
6662 does not apply because reasonable cause excuses their
failure to report all of their taxable income for 1993.
- 40 -
Section 666215 imposes an accuracy-related penalty of 20
15
Sec. 6662 provides, in pertinent part, as follows:
SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY.
(a) Imposition of Penalty.--If this section applies to
any portion of an underpayment of tax required to be shown
on a return, there shall be added to the tax an amount equal
to 20 percent of the portion of the underpayment to which
this section applies.
(b) Portion of Underpayment to Which Section Applies.
--This section shall apply to the portion of any
underpayment which is attributable to 1 or more of the
following:
(1) Negligence or disregard of rules or
regulations.
* * * * * * *
(c) Negligence.--For purposes of this section, the
term “negligence” includes any failure to make a reasonable
attempt to comply with the provisions of this title, [title
26, the Internal Revenue Code] and the term “disregard”
includes any careless, reckless or intentional disregard.
Sec. 6664 provides, in pertinent part, as follows:
SEC. 6664. DEFINITIONS AND SPECIAL RULES.
* * * * * * *
(c) Reasonable Cause Exception.--
(1) In general.--No penalty shall be imposed
under this part [part II, relating to accuracy-related
and fraud penalties] with respect to any portion of an
underpayment if it is shown that there was reasonable
cause for such portion and that the taxpayer acted in
good faith with respect to such portion.
- 41 -
percent of any portion of an underpayment that is attributable to
the taxpayer’s negligence.
Broadly speaking, for purposes of the provision, negligence
is the lack of due care or failure to do what a reasonable and
ordinarily prudent person would do under the circumstances to
determine that person’s income tax liability. See ASAT, Inc. v.
Commissioner, 108 T.C. 147, 175 (1997); Cluck v. Commissioner,
105 T.C. 324, 339 (1995). Negligence includes any failure to
keep adequate books and records. See sec. 1.6662-3(b)(1), Income
Tax Regs. Petitioners have the burden of proving error in
respondent’s determination that the addition to tax should be
imposed against them.16 See Little v. Commissioner, 106 F.3d
1445, 1449-1450 (9th Cir. 1997), affg. T.C. Memo. 1993-281;
Korshin v. Commissioner, 91 F.3d 670, 671 (4th Cir. 1996), affg.
T.C. Memo. 1995-46; ASAT, Inc. v. Commissioner, 108 T.C. at 175.
Petitioners have failed to introduce any evidence or offer
any relevant argument supporting their contention that respondent
erred in determining that the addition to tax under section
6662(a) applies. The following sentence represents the extent of
16
Section 7491(c), relating to burden of proof with respect
to additions to tax, as enacted by sec. 3001 of the Internal
Revenue Service Restructuring and Reform Act of 1998 (1998 Act),
Pub. L. 105-206, 112 Stat. 685, 726, does not apply in the
instant case because the examination in petitioners’ case began
before July 22, 1998, the effective date of sec. 7491(c). See
the 1998 Act, sec. 3001(c)(1), 112 Stat. 727.
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petitioners’ argument in support of their contention that
reasonable cause excuses their 1993 underpayment: “In fact, the
Taxpayers should not be subject to any civil tax penalties on the
tip income received from the Casino as they have reasonable cause
for their actions.” Petitioners have not favored us with any
statement as to what is the “reasonable cause for their actions.”
In the absence of any explanation and any evidence that, on our
inspection, might constitute reasonable cause, we conclude that
section 6662(a) applies.
To take account of respondent’s concessions and the
foregoing,
Decision will be
entered under Rule 155.