T.C. Memo. 2001-161
UNITED STATES TAX COURT
COLIN KELLY AND SHARON K. KAUFMAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12363-99. Filed July 2, 2001.
Colin Kelly Kaufman, for petitioners.
John D. Faucher, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined deficiencies, additions
to tax, and a penalty as follows:
Additions to Tax/Penalty
Sec. Sec. Sec.
Petitioner Year Deficiency 6651(a)(1) 6654(a) 6662(a)
Colin Kelly Kaufman 1992 $25,084 $5,056 $857 -
Sharon K. Kaufman 1992 20,486 3,907 658 -
Colin Kelly & 1993 24,310 - - $4,862
Sharon K. Kaufman
- 2 -
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. After concessions, the issue for decision is whether
certain legal fees received by petitioners were taxable when
received or were unearned “retainers” during the years in issue.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioners resided in Corpus Christi, Texas, at the time that
they filed their petition. During 1992 and 1993, petitioner
Colin Kelly Kaufman (petitioner) practiced bankruptcy law in
Corpus Christi. Petitioner Sharon K. Kaufman worked as the
office supervisor in petitioner’s law practice.
During the years in issue, petitioner received payments from
clients for work that had been performed and “retainers” from
clients for work to be performed in the future. Petitioner did
not enter into written agreements with the clients explaining the
terms under which the retainers were received and applied.
Petitioners did not maintain any books or records that indicated
which payments received by petitioners were for fees earned and
which payments received were retainers or when retainers were
earned. Some retainers were deposited into petitioners’ trust
account, and amounts from the trust account were later
- 3 -
transferred to petitioners’ business or personal accounts. For
example, petitioners transferred $5,000 relating to Del Anderson
from their trust account to their personal joint account in
October 1992, and they transferred $10,000 relating to Allan
Potter from their trust account by check payable to petitioner in
November 1992. In 1993, petitioners transferred a total of
$40,000 relating to Allan Potter from their trust account to
their business account.
Neither petitioner filed a tax return for 1992 until
November 30, 2000, after the petition in this case was filed and
shortly prior to trial. Petitioners filed a timely return for
1993 and filed an amended 1993 return on November 30, 2000. In
June 1996, a revenue agent commenced an audit of petitioners’
income tax liability for 1992 and 1993. The revenue agent
reconstructed petitioners’ income after meeting with petitioners
and their representative. The revenue agent did not include
deposits into the trust account as income in her reconstruction.
She did, however, include transfers from the trust account into
petitioners’ business or personal accounts. The items that were
included as transfers were in many instances identified on
written lists of income items provided to the revenue agent by
petitioners or their representative. In determining the amount
of unreported income, the revenue agent deducted the amounts that
- 4 -
she could identify as reported by petitioners for 1992 (on their
belated return) and for 1993.
OPINION
Petitioners presented no evidence that they are entitled to
deductions beyond those allowed by respondent. Petitioners
stipulated that they do not contest any Schedule C, Profit or
Loss From Business, expenses not mentioned in the stipulation.
Petitioners contend that the amount of the penalty and additions
to tax determined by respondent should be reduced in accordance
with their claims of reduction in their taxable income.
Petitioners presented neither evidence nor argument about the
basis for imposition of the penalty and additions to tax. Thus,
they have conceded these issues. See, e.g., Money v.
Commissioner, 89 T.C. 46, 48 (1987). The issue remaining for
decision is whether certain legal fees received by petitioners
were taxable when received or were unearned “retainers” during
the years in issue.
Petitioners contend that certain rounded dollar amounts
included in respondent’s reconstruction of their income for 1992
and 1993 were unearned retainers rather than taxable income
during the years in issue. The only evidence in support of
petitioners’ contention is petitioner’s testimony. We need not
accept uncontroverted testimony at face value if it is
improbable, unreasonable, or questionable, see, e.g., Lovell &
- 5 -
Hart, Inc. v. Commissioner, 456 F.2d 145, 148 (6th Cir. 1972),
affg. T.C. Memo. 1970-335; Stein v. Commissioner, 322 F.2d 78, 82
(5th Cir. 1963), affg. T.C. Memo. 1962-19, or if the totality of
the evidence conveys a different impression, see Diamond Bros.
Co. v. Commissioner, 322 F.2d 725, 731 (3d Cir. 1963), affg. T.C.
Memo. 1962-132.
Petitioners argue that respondent erroneously included funds
deposited into their trust account as income during the years in
issue. The revenue agent testified in detail that only transfers
from the trust account and other deposits into petitioners’
business or personal accounts were included in respondent’s
reconstruction. We accept this testimony, which is not
controverted in any way.
Petitioners concede that they did not maintain books that
would distinguish between earned fees and unearned retainers.
They belatedly claim that the schedules provided to the revenue
agent during the audit were lists of all receipts, rather than
lists of income received. They argue that the requirement of
Texas law that they maintain retainers in a separate trust
account somehow excuses their failure to keep the amounts
segregated or to provide written agreements to their clients.
Their arguments assume, contrary to the evidence, that identified
amounts were shown to be clients’ funds.
- 6 -
Petitioner’s testimony was that he thought it “probable”
that the rounded dollar amounts were not income during the years
in which they were received and transferred from the trust
account to another account. In petitioners’ brief, they argue:
b. Large Rounded Off Numbers. Mr. Kaufman has
always contended that bills for work and expenses
already done typically total up to odd dollars and
cents; and that large rounded off amounts (such as
$40,000) are much more likely to be retainers for
future work than they are to be bills for work and
expenses already done. Paragraph 6 of the petitioners’
pre-trial memorandum. And common sense tells you
that’s true; and that the petitioners’ position is
inherently probable. And the reason why you would get
three checks from the company to make up the $40,000
amount is that different investors and reinsurers are
responsible for different levels of risk at many of
these companies, so that different (typically
reinsurer) authorizations are required to get money in
excess of a certain level (say, $20,000).
Petitioners further show their tendency to rely on
speculative afterthought in the following passage from their
brief:
51. The $50,000 Heggen Mistake. The night before
trial, Mr. Kaufman discovered he was been [sic]
mistaken about a $50,000 Heggen item in 1992. * * *
So he admitted that to the Court. But it now occurs to
the petitioners, after further thought, that this
mistake did not require the $50,000 to be INCOME.
Getting it and putting it into the TRUST account would
mean it still was NOT INCOME, though received.
Respondent had a burden to show that it was EARNED that
year as well as received into the trust account.
Petitioner’s uncorroborated testimony is patently unreliable. We
are not persuaded by petitioner’s belated rationalizations and
attempts to exclude from taxable income amounts that he received
- 7 -
during the years in issue without any evidence of limitation on
their use. We are not persuaded by petitioner’s belated attempts
to disavow the lists of income items provided to respondent’s
agent during the audit of petitioners’ returns for 1992 and 1993.
Petitioners’ inability to prove their contentions is undoubtedly
of their own making.
Petitioners are required to maintain records from which
their tax liability may be ascertained; in the absence of
adequate books and records, respondent may use a reasonable
method, such as a bank deposits analysis, to reconstruct
petitioners’ income. See Estate of Mason v. Commissioner, 64
T.C. 651, 656, 658-659 (1975), affd. 566 F.2d 2 (6th Cir. 1977).
Respondent did so in this case. Contrary to petitioners’
contention, respondent does not have to show that legal fees
received during a taxable year were “earned” during the same
year. See Miller v. Commissioner, T.C. Memo. 1989-128, affd.
without published opinion 909 F.2d 509 (8th Cir. 1990). That
burden is on petitioners, and they have failed to meet it.
Section 7491(a), cited by petitioners, does not apply
because the examination was begun in 1996, prior to the effective
date of the burden of proof rule provided by the section. In any
event, the provisions of section 7491(a) would not help
petitioners’ case. See Higbee v. Commissioner, 116 T.C. __
(June 6, 2001).
- 8 -
To reflect stipulated adjustments,
Decision will be entered
under Rule 155.