MOORE v. COMMISSIONER

T.C. Memo. 2001-77

UNITED STATES TAX COURT

LESELY J. AND ALJOURNIA MOORE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12656-98. Filed March 30, 2001.

Lesely J. and Aljournia Moore, pro sese.

Jeanne Gramling, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

THORNTON, Judge: By notice of deficiency dated April 8,

1998 (the notice), respondent determined Federal income tax

deficiencies, additions to tax, and penalties for petitioners as

follows:
 - 2 -
Civil Fraud
Additions to Tax Penalty
Sec. Sec. Sec. Sec.
Year Deficiency 6653(b)(1)(A) 6653(b)(1)(B) 6653(b)(1) 6663
1
1987 $15,678 $12,451 --- ---
1988 10,153 --- --- $7,615 ---
1989 4,478 --- --- --- $3,359
1990 11,297 --- --- --- 8,473
1
50 percent of the interest due on $15,678 for taxable year 1987.

After concessions, the primary issues for determination are:

(1) Whether petitioners have unreported income for taxable years

1987, 1988, 1989, and 1990 as determined by respondent; (2)

whether petitioners are liable for self-employment tax on

unreported income for taxable years 1987, 1988, 1989, and 1990;

(3) whether petitioners are liable for additions to tax or

penalties for civil fraud for each of the taxable years 1987,

1988, 1989, and 1990; and (4) whether respondent is time barred

from assessing tax liability against petitioners for any of the

subject years.1

Unless otherwise noted, section references are to the

Internal Revenue Code as in effect for the relevant taxable

years. Rule references are to the Tax Court Rules of Practice

and Procedure.

1
Respondent’s determinations with respect to the recapture
of petitioners’ 1987 claimed earned income credit and with
respect to the reduction of petitioners’ 1989 and 1990 claimed
child care credits are automatic adjustments that will be
resolved by our decision of the primary issues.
 - 3 -

FINDINGS OF FACT

The parties have stipulated some of the facts, which we

incorporate herein by this reference.

Petitioners

When they filed their petition, petitioners were married and

resided in New Bern, North Carolina. Petitioners filed joint

Federal income tax returns for all of the subject years.

Petitioners’ Businesses

During the years at issue, petitioners operated two

businesses: A grocery store known as Shop E-Z Mart and an

automobile dealership known as Moore’s Auto Sales (Moore’s Auto).

Petitioner Aljournia Moore (Aljournia) primarily operated Shop E-

Z Mart, and petitioner Lesely Moore (Lesely) primarily operated

Moore’s Auto.

Petitioners maintained a bank account for Shop E-Z Mart

(Shop E-Z Mart account) and a bank account for Moore’s Auto

(Moore’s Auto account) at Wachovia Bank. During the subject

years, petitioners deposited into the respective accounts

maintained for those businesses all income that they received

from Shop E-Z Mart and Moore’s Auto. The deposits into those

accounts were as follows:
 - 4 -

Year Moore’s Auto Account Shop E-Z Mart Account
1987 $54,737 $45,865
1988 41,517 68,585
1989 50,217 61,923
1990 47,181 70,066

During taxable years 1987 and 1988, petitioners maintained a

savings account at Branch Banking and Trust Company (BB&T

account). Petitioners’ deposits into the BB&T account for the

years 1987 and 1988 were $8,500 and $6,105, respectively.

Lesely’s Disability Compensation

Lesely received disability compensation payments from the

Federal Government for an injury he suffered during previous

employment. During the subject years, Lesely received disability

compensation payments as follows:

Year Total Payments Received
1987 $13,482
1988 12,930
1989 15,342
1990 16,075
Each of these disability compensation payments was deposited into

petitioners’ bank accounts.

Petitioners’ Cash Expenditures

Petitioners made numerous cash expenditures during the

subject years. Those expenditures were for, among other things,

mortgage payments on their residence, two parcels of real

property, a mobile home, payments on a new 1987 Mercedes 560SEL

sedan (purchased in 1988), payments on a new 1987 Lincoln Town
 - 5 -

Car (purchased in 1986 with a $10,026 cash downpayment), payments

on a new 1989 Chevrolet Suburban (purchased in 1990 with a $3,500

cash downpayment), payments on an American Express credit card

and on a bank line of credit, home furnishings, and various other

personal items.

Petitioners’ cash expenditures during the subject years

included the following aggregate amounts:

Credit
Card
and Line
of Credit
Year Real Property Automobiles Payments
1987 $3,547 $4,274 $3,716
1988 4,037 5,478 5,003
1989 3,537 11,823 5,609
1990 13,080 19,151 10,696

Petitioners’ Criminal Activities

Lesely was involved in a type of illegal numbers operation

sometimes referred to as a “ham-and-eggs lottery.” In such an

operation, an individual creates and sells lottery tickets,

promising to pay off the purchaser at the odds played if the

number on the ticket matches the winning number in a

predesignated official (legal) State lottery. In his testimony,

Lesely summarized the operation as follows: “People play the

number every day and get the number every night. If they hit,

they get paid.”

Lesely participated in illegal numbers operations beginning

about 1985. Primarily, he worked for himself in this activity,
 - 6 -

although he also worked as a “bagman” carrying lottery slips from

one location to another. In 1986, and again in 1991 and 1994,

Lesely was arrested while working as a bagman. Each arrest

resulted in a conviction for possessing illegal lottery slips.

In 1994, the State of North Carolina Department of Crime

Control and Public Safety, Division of Alcohol Law Enforcement,

commenced an investigation into Lesely’s illegal numbers

operation. That investigation culminated with the March 31,

1994, search of the Moore’s Auto premises as well as petitioners’

residence. The search of Moore’s Auto resulted in the seizure

of, among other things, lottery ticket receipt books, lottery

tickets, an address book containing lottery writers’ numbers,

numerous pieces of lottery information, bank bags containing over

$7,012 in cash, and a double-barrel shotgun. The search of

petitioners’ residence resulted in the seizure of, among other

things, lottery ticket receipt books, lottery tickets, numerous

pieces of lottery information, and approximately $7,452 in

currency.

Petitioners were charged pursuant to section 7201 with four

counts of tax evasion (one count for each of the taxable years

1987, 1988, 1989, and 1990) and pursuant to 18 U.S.C. section

1955 with one count of gambling. Lesely was also charged

pursuant to 18 U.S.C. section 1920 with four counts of making

false statements in applying for Federal employment compensation
 - 7 -

benefits. Aljournia ultimately pleaded guilty to one count of

tax evasion pursuant to section 7201 with respect to taxable

year 1990. Lesely pleaded guilty to one count of tax evasion

pursuant to section 7201 with respect to taxable year 1990, to

one count of gambling from years 1987 through 1994 pursuant to

18 U.S.C. section 1955, and to one count of making false

statements pursuant to 18 U.S.C. section 1920.

Petitioners’ Federal Income Tax Returns

Petitioners employed Ms. Naomi Jenkins (Jenkins), a tax

return preparer who owns an H&R Block franchise in Bayboro,

North Carolina, to prepare their 1987, 1988, 1989, and 1990

Federal income tax returns. For preparation of their 1987 and

1988 Federal income tax returns, Aljournia presented Jenkins

with several boxes of disorganized documents. Jenkins refused

to prepare the returns from the documents presented. Instead,

Jenkins prepared petitioners’ 1987 and 1988 returns using oral

information that petitioners gave her.

For preparation of their 1989 and 1990 Federal income tax

returns, petitioners presented Jenkins with bank statements,

checks, and a paper bag filled with invoices. Jenkins

determined petitioners’ income by reviewing the bank statements,

and she determined petitioners’ expenses by reviewing the checks

and invoices.
 - 8 -

Jenkins discussed with petitioners each tax return she

prepared for them. When Jenkins asked petitioners whether all

of their income was accounted for, petitioners answered

affirmatively. Petitioners did not tell Jenkins about any

income they received from illegal gambling activities.

On their 1987, 1988, 1989, and 1990 Federal income tax

returns, petitioners reported total income (or loss) in the

following amounts:

Total Income
Year (Loss) Reported
1987 $8,403
1988 (5,692)
1989 19,422
1990 20,975

Petitioners filed their 1987, 1988, 1989, and 1990 Federal

income tax returns on November 17, 1989; October 10, 1989; April

19, 1991; and April 15, 1991, respectively.

Respondent’s Income Reconstruction

The Internal Revenue Service audited petitioners’ 1987,

1988, 1989, and 1990 Federal income tax returns. During that

audit, respondent’s revenue agent concluded that petitioners’

records were inadequate. Consequently, the revenue agent

performed a bank deposits plus cash expenditures analysis to

reconstruct petitioners’ income.

The revenue agent’s analysis, which is reproduced as the

appendix to this opinion, reflects these four steps: First, the
 - 9 -

revenue agent totaled all deposits from known bank accounts.

Second, to arrive at gross income, the revenue agent totaled all

of petitioners’ known cash expenditures and added that number to

the total known bank deposits. Third, the revenue agent

subtracted from the total bank deposits and cash expenditures

the amount of income that petitioners reported on their Federal

income tax returns. Fourth and finally, the revenue agent

reconciled the totals so derived to adjust for nonincome items,

such as Lesely’s disability compensation.

Based on this analysis, respondent determined in the notice

that petitioners received unreported taxable income during the

subject years in the following amounts:

Unreported
Year Taxable Income
1987 $52,034
1988 49,083
1989 15,744
1990 37,320

OPINION

1. Unreported Income

Taxpayers are required to maintain records sufficient to

show whether they are liable for Federal income taxes. See sec.

6001. If a taxpayer fails to keep records, the Commissioner may

reconstruct the taxpayer’s income. See sec. 446(b); Holland v.

United States, 348 U.S. 121, 130-132 (1954); Parks v.

Commissioner, 94 T.C. 654, 658 (1990). Petitioners made
 - 10 -

numerous bank deposits and cash expenditures from unexplained

sources. The bank deposits plus cash expenditures method is a

recognized method of recomputing income. See Parks v.

Commissioner, supra; Nicholas v. Commissioner, 70 T.C. 1057,

1065 (1978). Petitioners bear the burden of showing that

respondent’s determinations based on his application of the bank

deposits plus cash expenditures method of reconstructing income

are erroneous.2 See Rule 142(a); Parks v. Commissioner, supra

at 658; Nicholas v. Commissioner, supra at 1064.

Petitioners have alleged, and we have discovered, no

infirmity in respondent’s reconstruction of their income using

the bank deposits plus cash expenditures method. Petitioners

produced no credible evidence of any nontaxable sources for the

unexplained funds deposited into their banking accounts or the

2
The Internal Revenue Service Restructuring & Reform Act of
1998 (RRA 1998), Pub. L. 105-206, sec. 3001, 112 Stat. 685, 726,
added sec. 7491, which shifts the burden of proof to the
Commissioner in certain circumstances. Sec. 7491 is applicable
to court proceedings arising in connection with examinations
commencing after July 22, 1998. See RRA 1998 sec. 3001(c).
Because respondent’s examination of petitioners commenced before
July 23, 1998, sec. 7491 is inapplicable here.
 - 11 -

cash used to make payments in any of the subject years.3

Accordingly, petitioners have failed to show error in

respondent’s reconstruction of their taxable income.

As best we can discern, petitioners’ primary defense seems

to be that they believed that their guilty pleas to tax evasion

with respect to taxable year 1990 would relieve them of civil

tax liability for all the subject years. Petitioners’

misapprehensions in this regard afford no basis for relief. In

any event, the judgments in Lesely’s and Aljournia’s respective

criminal cases explicitly state that full restitution was not

ordered in the criminal proceedings because restitution “will be

handled under civil means”.

Accordingly, we sustain respondent’s determinations as to

petitioners’ unreported taxable income.

2. Self-Employment Tax

Section 1401 provides that a tax shall be imposed on the

self-employment income of every individual. Petitioners have

the burden of proving that they are not liable for self-

employment taxes. See Rule 142(a). Petitioners failed to offer

3
Aljournia Moore testified that during the search of
petitioners’ residence in 1994, North Carolina law enforcement
officers seized, among other things, a “bag of buffalo nickels”
given to her by her grandmother. It does not appear, however,
that this currency, or other amounts of currency seized from
petitioners’ residence or from Moore’s Auto in 1994, were
included in respondent’s bank deposits plus cash expenditures
analysis for the years at issue.
 - 12 -

any evidence or make any arguments that they are not liable for

self-employment taxes. Consequently, we hold that petitioners

are liable for self-employment taxes as determined by

respondent.

3. Fraud

Respondent must show by clear and convincing evidence that

a part of each year’s deficiency is due to fraud. See sec.

6653(b)(1)(for taxable years 1987 and 1988); sec. 6663(a) (for

taxable years 1989 and 1990). Fraud is not imputed from one

spouse to the other. In the case of a joint return, respondent

must prove fraud as to each spouse charged with liability for

the addition to tax or penalty for civil fraud. See sec.

6653(b)(3) (for taxable years 1987 and 1988); sec. 6663(c) (for

taxable years 1989 and 1990).

With respect to taxable year 1990, pursuant to guilty

pleas, Lesely and Aljournia were convicted for criminal tax

evasion under section 7201. Consequently, petitioners are

collaterally estopped from challenging that there was an

underpayment of their income tax due to civil fraud under

section 6663 for taxable year 1990. See Gray v. Commissioner,

708 F.2d 243, 246 (6th Cir. 1983), affg. T.C. Memo. 1981-1;

Moore v. United States, 360 F.2d 353, 355-356 (4th Cir. 1965);

Arctic Ice Cream Co. v. Commissioner, 43 T.C. 68, 75-76 (1964);
 - 13 -

Amos v. Commissioner, 43 T.C. 50, 56 (1964), affd. 360 F.2d 358

(4th Cir. 1965).

For taxable years 1987, 1988, and 1989, to satisfy his

burden of proof as to fraud, respondent must establish both that

(1) an underpayment exists for each year, and (2) that 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).

To prove an underpayment, the Commissioner need not prove

the precise amount of the deficiency he has determined, but only

that some portion of the underpayment of tax for each year is

due to fraud. See Niedringhaus v. Commissioner, 99 T.C. 202,

210 (1992). The Commissioner cannot rely simply on the

taxpayer’s failure to prove error in his determination of the

deficiency. See Parks v. Commissioner, supra at 660-661;

Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989).

Respondent has documented petitioners’ bank deposits and

cash expenditures and has established a likely source of

unreported income; i.e., gambling and illegal numbers

operations. See Holland v. United States, 348 U.S. at 138. On

the basis of all the evidence, we conclude that respondent has

shown by clear and convincing evidence that petitioners

underpaid their income taxes for each of the taxable years in

issue. See DiLeo v. Commissioner, supra at 873-874.

Fraud is intentional wrongdoing designed to evade tax
 - 14 -

believed to be owing. See Gajewski v. Commissioner, 67 T.C.

181, 199 (1976), affd. without published opinion 578 F.2d 1383

(8th Cir. 1978). Because fraudulent intent can seldom be

established by direct proof of the taxpayer’s intention, fraud

may be proved by circumstantial evidence. See Clayton v.

Commissioner, 102 T.C. 632, 647 (1994); DiLeo v. Commissioner,

supra at 874. While no single factor is necessarily sufficient

to establish fraud, the existence of several indicia or “badges”

of fraud is persuasive circumstantial evidence of fraud. See

Petzoldt v. Commissioner, supra at 700. Badges of fraud

include, but are not limited to: (a) A substantial and

consistent understatement of income; (b) dealing in cash; (c)

participation in an illegal activity which is the likely source

of income; (d) failure to maintain adequate records; and (e)

failure to furnish the return preparer with accurate

information. See Clayton v. Commissioner, supra at 647;

Petzoldt v. Commissioner, supra at 700; Bacon v. Commissioner,

T.C. Memo. 2000-257.

a. Substantial and Consistent Understatement of Income

Petitioners substantially and consistently understated

their income for each of the years at issue. From 1987 to 1990,

petitioners failed to report approximately $150,000 of income.
 - 15 -

b. Dealing in Cash

Throughout the 4 years at issue, petitioners made numerous

and substantial cash expenditures for, among other things, real

property, new luxury automobiles, payments on credit cards,

mortgages, and a host of other personal items. Petitioners kept

large amounts of cash in both their residence and at Moore’s

Auto. Petitioners’ extensive use of cash supports a reasonable

inference that petitioners were knowingly and willfully

attempting to conceal taxable income. See Clayton v.

Commissioner, supra at 647.

c. Participation in Illegal Activity

Lesely pleaded guilty to one count of engaging in illegal

gambling from 1987 through June 1994 under 18 U.S.C. section

1955. While Aljournia might not have participated in illegal

numbers operations, the evidence indicates that she knew or

should have known of Lesely’s involvement. During the 1994

raid, North Carolina law enforcement officers found both lottery

tickets and large amounts of currency in petitioners’

residence.4 Moreover, Aljournia should have known that the cash

4
In her testimony, Aljournia offered inconsistent and
implausible explanations, conceding at one point that lottery
tickets were found in her residence but contending they were
planted there by the law enforcement officials, and at another
point contending, contrary to the evidence, that only one lottery
ticket was found. With regard to the $7,452 in currency found in
her residence, Aljournia argued that “I should be able to have a
few pennies around my house”, contending unconvincingly that the
(continued...)
 - 16 -

expenditures that petitioners made during the subject years for,

among other things, a new Mercedes, a new Lincoln Town Car, and

a new Chevrolet Suburban, were inconsistent with the income and

losses reported on their joint Federal income tax returns.

Furthermore, both Lesely and Aljournia pleaded guilty to

one count of income tax evasion pursuant to section 7201 for

taxable year 1990. A taxpayer’s criminal conviction, pursuant

to section 7201, for tax evasion in the years immediately

subsequent to the year in issue is a badge of fraud. See Tipton

v. Commissioner, T.C. Memo. 1994-624.

d. Failure To Maintain Adequate Records

During the years in issue, petitioners made numerous

deposits into accounts and various transfers between and among

accounts. Petitioners failed, however, to maintain adequate

records as to income and expenses, including any records

reflecting the income earned by Lesely from illegal gambling or

numbers operations.

e. Failure To Furnish Their Tax Return Preparer With
Accurate Information

By failing to inform Jenkins of the income received from

Lesely’s participation in illegal numbers operations,

4
(...continued)
money represented coins collected by her children, a bag of
buffalo nickels that she had received from her grandmother, and
coins from her store.
 - 17 -

petitioners failed to give Jenkins accurate information for the

preparation of their Federal income tax returns.

On the basis of all the evidence, we conclude and 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 Lesely and Aljournia.

4. Statute of Limitations

At trial, petitioners argued that the period of limitations

has run for the years at issue. Petitioners’ argument is

without merit.

Generally the amount of any tax must be assessed within 3

years after a return is filed. See sec. 6501(a). If the

Commissioner proves that the taxpayer’s return was false or

fraudulent with the intent to evade tax, however, tax may be

assessed “at any time”. Sec. 6501(c)(1). We have held that

respondent proved by clear and convincing evidence that

petitioners’ Federal income tax returns for taxable years 1987

through 1990 were filed with the fraudulent intent to evade

taxes. Accordingly, respondent is not time barred from

assessing tax liability against petitioners for any of the

subject years.

To reflect the foregoing and respondent’s concessions,

Decision will be entered

under Rule 155.
 - 18 -
Appendix

1987 1988 1989 1990
__________________________________________________
BANK DEPOSITS:
SHOP E-Z MART $45,865.41 $68,584.84 $61,922.90 $70,066.38
MOORE’S AUTO SALES 54,736.96 41,516.61 50,216.62 47,181.46
BB&T SAVINGS 8,500.00 6,104.59
PLUS CASH EXPENDITURES:
AMERICAN EXPRESS 1,638.42 3,527.00 4,988.53 9,302.74
REAL ESTATE PURCHASED 9,408.77
HOUSE PAYMENT 2,076.00 2,076.00 1,903.00 2,200.00
MERCEDES 1,269.24 7,615.44 7,615.44
WACHOVIA (350.65 MO) 4,273.69 4,207.80 4,207.80 4,361.58
WACHOVIA (408.19) 4,081.90
BANKLINE 116.00 400.00
WACHOVIA (163.44 MO) 2,131.26 1,961.28 1,634.40 1,470.96
SUBURBAN - DOWNPAY 3,500.00
LESS:
DISABILITY CHECKS (13,481.54) (12,930.08) (15,342.36) (16,075.32)
INCOME PER RETURN (52,000.00) (53,000.00) (93,649.00) (91,681.00)
1099 - CHARLES TOWN (1,173.00)
CHECKS TO CASH (3,900.00) (1,064.00) (7,000.00)
SETTLEMENT-ACCIDENT (4,104.58)
Additional purchases (12,486.00) (7,360.00) (6,349.00)
Additional personal
withdraws 3,417.00 4,646.00 3,622.00
Payment by check,
not cash (408.00)
Line of Credit Advance (2,275.00)
Line of Credit
Payments 2,078.00 1,476.00 620.00 1,393.00
Expense-gambling books (3,096.00)
Federal tax refund
received (2,615.14)
Additional checks cash (300.00) (749.00)
Additional transfers (2,695.00)
_________ __________ _________ _________
Additional Income 52,034.00 49,083.00 15,744.00 37,320.00
(Rounded)